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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
For the transition period from to
Commission File Number: 1-10646
CENTURA BANKS, INC.
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(Exact Name of Registrant as Specified in its Charter)
North Carolina 56-1688522
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
134 North Church Street,
Rocky Mount, North Carolina 27804
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(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (252) 454-4400
Securities registered pursuant to Section 12(b) of the Act:
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Common Stock, No Par Value New York Stock Exchange
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(Title of each class) (Name of each exchange on which registered)
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Securities registered pursuant to Section 12(g) of the Act:
None
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Indicate by check mark whether Centura (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that Centura was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Centura's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
As of February 29, 2000, there were 39,615,508 shares outstanding of
Centura's common stock, no par value. The aggregate fair value of Centura's
common stock held by those persons deemed by Centura to be nonaffiliates was
approximately $1.3 billion. Portions of the Proxy Statement of Centura for the
Annual Meeting of Shareholders to be held on April 19, 2000, are incorporated
by reference in Part III of this report.
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CROSS REFERENCE
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PART I Item 1 Business 3
Item 2 Properties 12
Item 3 Legal Proceedings 12
Item 4 Submission of Matters to a Vote of Shareholders 12
PART II Item 5 Market for Centura's Common Equity and Related Shareholder Matters 12
Item 6 Selected Financial Data 13
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations 14
Item 7A Quantitative and Qualitative Disclosures About Market Risk 35
Item 8 Financial Statements and Supplementary Data 36
Supplemental Consolidated Financial Statements 70
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 104
PART III Item 10 Directors and Executive Officers of Centura 104
Item 11 Executive Compensation 104
Item 12 Security Ownership of Certain Beneficial Owners and Management 104
Item 13 Certain Relationships and Related Transactions 104
PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 104
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PART I
ITEM 1 BUSINESS
Registrant
Centura Banks, Inc. ("Centura") is a bank holding company registered with
the Board of Governors of the Federal Reserve System ("Federal Reserve") and
operating under the Bank Holding Company Act of 1956, as amended ("BHC Act").
Centura has two wholly-owned subsidiaries, Centura Bank (the "Bank"), a North
Carolina chartered bank, and Centura Capital Trust I ("CCTI"). Centura provides
services and assistance to the Bank and the Bank's subsidiaries in the areas of
strategic planning, administration, and general corporate activities. In
return, Centura receives income and dividends from the Bank, where most of the
operations of Centura take place. Centura also receives income from its 49
percent ownership interest in First Greensboro Home Equity, Inc. ("FGHE"), a
home equity mortgage company headquartered in Greensboro, North Carolina. The
majority of Centura's executive officers, who are also officers of the Bank,
receive their entire salaries from Centura. At December 31, 1999, Centura had
total consolidated assets of $9.1 billion.
The Bank is a North Carolina banking corporation and Federal Reserve
member bank with deposits insured by the Bank Insurance Fund ("BIF") and the
Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC"). As of December 31, 1999, the Bank had 2,657 full-time and
436 part-time employees. The Bank is not a party to any collective bargaining
agreements, and, in the opinion of management, the Bank enjoys good relations
with its employees. The Bank, either directly or through its wholly-owned
subsidiaries, provides a wide range of financial services through a variety of
delivery channels.
CCTI is a statutory business trust created under the laws of the State of
Delaware. In June 1997, CCTI issued $100 million of fixed-rate 8.845 percent
Capital Securities, Series A ("Capital Securities"). The proceeds from the
Capital Securities issuance and from the common stock issued to Centura were
invested in Junior Subordinated Deferrable Interest Debentures ("junior
debentures") issued by Centura. The junior debentures are the primary assets of
CCTI. Centura has guaranteed the obligations of CCTI under the Capital
Securities.
Centura's strategic intent is to become the primary provider of financial
services for each of its customers. Therefore, Centura offers: full-service
commercial and consumer banking services, including bill paying services;
retail securities brokerage services; insurance brokerage services covering a
full line of personal and commercial products; commercial and retail leasing;
asset management services and mortgage banking products.
Another component of the strategic intent is the convenient delivery of
financial products and services to help each customer achieve their financial
goals. At December 31, 1999, Centura served its customers through 228 financial
stores, including 42 supermarket and retail locations, and through 227
automated teller machines ("ATMs") located throughout North Carolina, South
Carolina, and Virginia. Centura also offers Centura Highway, a centralized
telephone operation which handles a broad range of financial services; a home
page on the Internet; and home banking through a telephone network operated by
a third party and connected to the personal computers of customers.
In keeping with its strategic intent, Centura concentrates on expanding
its customer knowledge through the use of a customer database and sales
tracking system that combines financial, demographic, behavioral, and
psychographic data. This information supports decision making about services
offered, delivery channels, locations, staffing, and marketing. Management
anticipates it will continue to refine Centura's product and service offerings
and related delivery systems and technologies in order to achieve Centura's
strategic intent.
Centura's growth plan continues to include acquisitions that create
strategic market entry or enhancement opportunities. These transactions are
described further in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and in Note 3 of the Notes to Consolidated
Financial Statements.
Segment Information
Centura has two reportable segments: retail banking and treasury. These
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 a wide array of products to individuals, small businesses,
and commercial customers. These products are primarily offered
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through Centura's 228 financial stores and are also offered through the Centura
Highway. 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. 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 which together 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.
Competition
The financial services industry is highly competitive. Centura, through
the Bank and its subsidiaries, competes for all types of loans, deposits, and
financial services with other bank and non-bank institutions. Since the amount
of money a state bank may lend to a single borrower, or to a group of related
borrowers, is limited to a percentage of the bank's shareholders' equity,
competitors larger than Centura will have higher lending limits than does the
Bank. Based on total consolidated assets as of December 31, 1999, Centura was
the sixth largest bank holding company in North Carolina.
Centura also competes with out-of-state banks and bank holding companies
serving North Carolina, various savings and loan associations, money market and
other mutual funds, brokerage houses, and various other financial institutions.
Additionally, Centura competes with insurance companies, leasing companies,
regulated small loan companies, credit unions, governmental agencies, and
commercial entities offering financial services products.
Supervision and Regulation
The following discussion is intended to be a summary of the material
regulations and policies applicable to Centura and its subsidiaries and does
not purport to be a comprehensive discussion.
General
Centura is a bank holding company registered with the Federal Reserve. As
such, Centura and its non-bank subsidiaries are subject to the supervision,
examination, and reporting requirements of the BHC Act and the regulations of
the Federal Reserve. The following discussion summarizes the regulatory
framework applicable to banks and bank holding companies and provides certain
specific information related to Centura.
Regulation of Bank Holding Companies
Bank holding companies are required to obtain the prior approval of the
Federal Reserve before they may:
o acquire direct or indirect ownership or control of more than 5 percent
of the voting shares of any bank;
o acquire all or substantially all of the assets of any bank; or
o merge or consolidate with any other bank holding company.
The Federal Reserve generally may not approve any transaction that would
result in a monopoly or that would further a combination or conspiracy to
monopolize (or attempt to monopolize) banking in the United States. Nor can the
Federal Reserve approve a transaction that would substantially lessen
competition in any section of the country, that would tend to create a monopoly
or otherwise restrain trade unless it determines that the probable effects of
the transaction in meeting the convenience and needs of the community served
clearly outweigh in the public interest the anticompetitive effects of the
proposed transaction. The Federal Reserve is also required to consider the
financial and managerial resources and future prospects of the bank holding
companies and banks concerned, as well as the convenience and needs of the
community to be served. Consideration of financial resources generally focuses
on capital adequacy (and levels of indebtedness), which is discussed below, and
consideration of convenience and needs includes the parties' performance under
the Community Reinvestment Act of 1977 ("CRA").
In addition, the BHC Act prohibits a bank holding company that does not
qualify as a financial holding company under the Gramm-Leach-Bliley Financial
Services Modernization Act of 1999 ("GLBA"), as more fully discussed below,
from:
o engaging in activities other than banking, managing, or controlling banks
or other permissible subsidiaries; and
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o acquiring or retaining direct or indirect control of any company
engaged in any activities other than those activities determined by the
Federal Reserve to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto.
In determining whether a particular activity is permissible, the Federal
Reserve must consider whether the performance of such an activity reasonably
can be expected to produce benefits to the public that outweigh possible
adverse effects. Possible benefits the Federal Reserve considers include
greater convenience, increased competition, or gains in efficiency. Possible
adverse effects include undue concentration of resources, decreased or unfair
competition, conflicts of interest, or unsound banking practices. Activities
that the Federal Reserve has permitted for bank holding companies include:
o factoring accounts receivable;
o acquiring or servicing loans;
o leasing personal or real property;
o conducting discount securities brokerage activities;
o performing certain data processing services;
o acting as agent or broker in selling credit life insurance and certain
other types of insurance in connection with credit transactions;
o acting as a fiduciary, investment or financial advisor;
o making investments in corporations or projects designed primarily to
promote community welfare;
o acquiring a savings and loan association; and
o performing certain insurance underwriting activities.
There are no territorial limitations on permissible non-banking activities
of bank holding companies. Despite prior approval, the Federal Reserve has the
power to order a holding company or its subsidiaries to terminate any activity
or to terminate its ownership or control of any subsidiary when it has
reasonable cause to believe that a serious risk to the financial safety,
soundness, or stability of any bank subsidiary of that bank holding company may
result from such activity.
The Bank is a member of the FDIC and as a member, its deposits are insured
by the FDIC to the extent provided by law. The Bank must pay the quarterly
assessment the FDIC imposes on such banks. See the "FDIC Insurance Assessments"
section. Under the Federal Deposit Insurance Act ("FDIA"), depository
institutions are liable to the FDIC for losses suffered or anticipated by the
FDIC in connection with the default of a commonly controlled depository
institution or any assistance provided by the FDIC to such an institution in
danger of default. The Bank is also subject to numerous state and federal
statutes and regulations that affect its business, activities, and operations,
and is supervised and examined by one or more state or federal bank regulatory
agencies.
The Federal Reserve also supervises Centura Bank, in connection with which
it regularly examines the operations of the Bank. The Federal Reserve has the
authority to approve or disapprove mergers, consolidations, the establishment
of branches, and similar corporate actions. Federal and state banking
regulators also have the power to prevent the continuance or development of
unsafe or unsound banking practices or other violations of law.
Financial Services Modernization Legislation
On November 12, 1999, President Clinton signed into law the GLBA, federal
legislation intended to modernize the financial services industry by
establishing a comprehensive framework to permit affiliations among commercial
banks, insurance companies, securities firms and other financial service
providers. Generally, the GLBA:
o repeals the historical restrictions and eliminates many federal and state
law barriers to affiliations among banks, securities firms, insurance
companies and other financial service providers;
o provides a uniform framework for the functional regulation of the
activities of banks, savings institutions and their holding companies;
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o broadens the activities that may be conducted by national banks, banking
subsidiaries of bank holding companies and their financial subsidiaries;
o provides an enhanced framework for protecting the privacy of consumer
information;
o adopts a number of provisions related to the capitalization, membership,
corporate governance and other measures designed to modernize the Federal
Home Loan Bank system;
o modifies the laws governing the implementation of the Community
Reinvestment Act; and
o addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions.
Bank holding companies will be permitted to engage in a wider variety of
financial activities than permitted under prior law, particularly with respect
to insurance and securities activities. In addition, in a change from prior
law, bank holding companies will be in a position to be owned, controlled or
acquired by any company engaged in financially-related activities.
Centura believes that the GLBA will not have a material adverse effect on
its operations in the near-term. However, to the extent that it permits banks,
securities firms and insurance companies to affiliate, the financial services
industry may experience further consolidation. This could result in a growing
number of larger financial institutions that offer a wider variety of financial
services than Centura currently offers and that can aggressively compete in the
markets that Centura currently serves.
Centura has not determined whether it will elect financial holding company
status when the election becomes available under the provisions of the GLBA.
Capital Adequacy
Centura is required to comply with the minimum capital adequacy standards
established by the Federal Reserve. There are two basic measures of capital
adequacy for bank holding companies and the depository institutions that they
own: a risk-based measure and a leverage measure. All applicable capital
standards must be satisfied for a bank holding company to be considered in
compliance.
The risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profile among depository
institutions and bank holding companies, to account for off-balance sheet
exposure, and to minimize disincentives for holding liquid assets. Assets and
off-balance sheet items are assigned to broad risk categories, each with
appropriate weights based on relative risks. The resulting capital ratios
represent capital as a percentage of total risk-weighted assets and off-balance
sheet items. The minimum guideline for the ratio of total capital to
risk-weighted assets, including certain off-balance sheet items such as standby
letters of credit ("total capital ratio") is 8.0 percent. At least half of
total capital must be composed of common equity, undivided profits, minority
interests in the equity accounts of consolidated subsidiaries, noncumulative
perpetual preferred stock, and a limited amount of cumulative perpetual
preferred stock, less goodwill and certain other intangible assets ("Tier 1
capital"). The remainder may consist of subordinated debt, other preferred
stock, a limited amount of loan loss reserves, and unrealized gains on equity
securities subject to limitations ("Tier 2 capital"). At December 31, 1999,
Centura and the Bank were in compliance with the total capital ratio and the
Tier I capital ratio requirements. Note 20 of the Notes to Consolidated
Financial Statements presents Centura's and the Bank's capital ratios.
The leverage ratio guidelines provide for a 3.0 percent minimum ratio of
Tier 1 capital to average assets, less goodwill and certain other intangible
assets ("Tier 1 leverage ratio") for bank holding companies that meet certain
specified criteria, including having the highest regulatory rating. All other
bank holding companies generally are required to maintain a minimum Tier 1
leverage ratio of 3.0 percent, plus an additional cushion of 100 to 200 basis
points. Centura was in compliance with the minimum Tier 1 leverage ratio
requirement as of December 31, 1999. The guidelines also provide that bank
holding companies experiencing growth, either internally or through
acquisitions, will be expected to maintain strong capital positions
substantially above the minimum supervisory levels without significant reliance
on intangible assets. The Federal Reserve will consider a "tangible Tier 1
leverage ratio" (deducting all intangibles from Tier 1 capital and average
assets) and other indicia of capital strength in evaluating proposals for
expansion or new activities.
The Bank is also subject to risk-based and leverage capital requirements
adopted by the Federal Reserve. These requirements are similar to those adopted
by the Federal Reserve for bank holding companies as discussed above. The Bank
was
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in compliance with these minimum capital requirements as of December 31, 1999.
No federal banking agency has advised Centura or the Bank of any specific
minimum capital ratio requirement applicable to it.
A bank that fails to meet its capital guidelines may be subject to a
variety of enforcement remedies and certain other restrictions on its business.
Remedies could include the issuance of a capital directive, the termination of
deposit insurance by the FDIC, and a prohibition on the taking of brokered
deposits. As described below, substantial additional restrictions can be
imposed upon FDIC-insured depository institutions that fail to meet their
capital requirements. See "Prompt Corrective Action."
The federal bank regulators continue to indicate their desire to amend
bank capital requirements to reflect interest rate risk. The Federal Reserve,
the FDIC, and the Office of the Comptroller of the Currency have proposed an
amendment to the risk-based capital standards that would calculate the change
in a bank's net economic value attributable to increases and decreases in
market interest rates and would require banks with excessive interest rate risk
exposure to hold additional amounts of capital against such exposures. The
Office of Thrift Supervision has already included an interest rate risk
component in its risk-based capital guidelines for savings associations that it
regulates.
Support of Subsidiary Bank
Under Federal Reserve policy, Centura is expected to act as a source of
financial strength for, and commit its resources to support Centura Bank. This
support may be required at times when Centura may not be inclined to provide
it. In addition, any capital loans by a bank holding company to any of its bank
subsidiaries are subordinate to the payment of deposits and to certain other
indebtedness. In the event of a bank holding company's bankruptcy, any
commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a bank subsidiary will be assumed by the bankruptcy
trustee and entitled to a priority of payment.
Payment of Dividends
Centura is a legal entity separate and distinct from its banking and other
subsidiaries. The principal sources of cash flow for Centura, including cash
flow to pay dividends to its shareholders, are dividends from its subsidiary
depository institution. There are statutory and regulatory limitations on the
payment of dividends by the subsidiary depository institution to Centura, as
well as by Centura to its shareholders.
As to the payment of dividends, Centura Bank is subject to the laws and
regulations of the State of North Carolina, and to the regulations of the
Federal Reserve as Centura Bank's primary federal regulator. If the Federal
Reserve determines that a depository institution under its jurisdiction is
engaged in or is about to engage in an unsafe or unsound practice, the
regulator may require, after notice and hearing, that the institution cease and
desist from such practice. Depending on the financial condition of the
depository institution, an unsafe or unsound practice could include the payment
of dividends. The federal banking agencies have indicated that paying dividends
that deplete a depository institution's capital base to an inadequate level
would be an unsafe and unsound banking practice. Under the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), a depository
institution may not pay any dividend if payment would cause it to become
undercapitalized or if it already is undercapitalized. The federal agencies
have also issued policy statements that provide that bank holding companies and
insured banks should generally only pay dividends out of current operating
earnings.
At December 31, 1999, under dividend restrictions imposed under federal
and state laws, Centura Bank, without obtaining governmental approvals, could
declare aggregate dividends to Centura of approximately $163.3 million.
The payment of dividends by Centura and its bank subsidiary may also be
affected or limited by other factors, such as the requirement to maintain
adequate capital above regulatory guidelines.
Community Reinvestment Act
The Bank is subject to the provisions of the CRA. Under the terms of the
CRA, the appropriate federal bank regulatory agency is required, in connection
with its examination of a bank, to assess such bank's record in meeting the
credit needs of the communities served by that bank, including low and moderate
income neighborhoods. The regulatory agency's assessment of the bank's record
is made available to the public. Further, such assessment is required of any
bank which has applied to (i) charter a national bank, (ii) obtain deposit
insurance coverage for a newly chartered institution, (iii) establish a new
branch office that will accept deposits, (iv) relocate an office, or (v) merge
or consolidate with, or acquire the assets or assume the liabilities of, a
federally regulated financial institution. In the case of a bank holding
company applying for approval to acquire a bank or other bank holding company,
the Federal Reserve will assess the records of each subsidiary bank of the
applicant bank holding company, and such records may be the basis for denying
the application.
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Under CRA regulations jointly adopted by all federal bank regulatory
agencies, institutions are rated based on their actual performance in meeting
community credit needs. The evaluation system used to judge an institution's
CRA performance consists of three tests:
o a lending test, to evaluate the institution's record of making loans in
its service areas;
o an investment test, to evaluate the institution's record of investing in
community development projects, affordable housing, and programs
benefiting low or moderate income individuals and businesses; and
o a service test, to evaluate the institution's delivery of services
through its branches, ATMs and other offices.
The joint agency CRA regulations provide that an institution evaluated
under a given test will receive one of five ratings for that test: outstanding,
high satisfactory, low satisfactory, needs to improve, or substantial
non-compliance. The ratings for each test are then combined to produce an
overall composite rating of either outstanding, satisfactory (including both
high and low satisfactory), needs to improve, or substantial non-compliance. In
the case of a retail-oriented institution, its lending test rating would form
the basis for its composite rating. That rating would then be increased by up
to two levels in the case of outstanding or high satisfactory investment
performance, increased by one level in the case of outstanding service, and
decreased by one level in the case of substantial non-compliance in service. An
institution found to have engaged in illegal lending discrimination would be
rebuttably presumed to have a less-than-satisfactory composite CRA rating. The
Bank's current CRA rating is satisfactory.
Prompt Corrective Action
FDICIA established a system of prompt corrective action to resolve the
problems of undercapitalized institutions. Under this system, the federal
banking regulators have established five capital categories: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized. The federal banking agencies have specified the
relevant capital level for each category.
An institution will be treated as "well capitalized" if:
o its ratio of total capital to risk-weighted assets is at least 10%;
o its ratio of Tier 1 capital to risk-weighted assets is at least 6%;
o its leverage ratio is at least 5%; and
o it is not subject to any order or directive by the FDIC to meet a
specific capital level.
An institution will be treated as "adequately capitalized" if:
o its ratio of total capital to risk-weighted assets is at least 8%;
o its ratio of Tier 1 capital to risk-weighted assets is at least 4%; and
o its leverage ratio is at least 4% (3% if the bank receives the highest
rating under the Uniform Financial Institutions Rating System) and it is
not a well capitalized institution.
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An institution will be treated as "undercapitalized" if:
o its total risk-based capital ratio is less than 8%;
o its Tier 1 risk-based capital ratio is less than 4%; or
o its leverage ratio is less than 4% (or less than 3% if the institution is
rated a composite "1" under the Uniform Financial Institutions Rating
System).
An institution will be treated as "significantly undercapitalized" if:
o its total risk-based capital ratio is less than 6%; or
o its Tier 1 capital ratio is less than 3% or a leverage ratio is less than
3%.
An institution that has a tangible equity capital to assets ratio equal to
or less than 2 percent is deemed to be critically undercapitalized. "Tangible
equity" includes core capital elements counted as Tier 1 capital for purposes
of the risk-based capital standards, plus the amount of outstanding cumulative
perpetual preferred stock (including related surplus), minus all intangible
assets, with certain exceptions. A depository institution may be deemed to be
in a capitalization category that is lower than is indicated by its actual
capital position if it receives an unsatisfactory examination rating.
An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency.
In addition, a bank holding company must guarantee that a subsidiary bank meets
its capital restoration plan. This obligation to fund a capital restoration
plan is limited to the lesser of 5 percent of an undercapitalized subsidiary's
assets or the amount required to meet regulatory capital requirements. Except
in accordance with an accepted capital restoration plan or with the approval of
the FDIC, an undercapitalized institution is also generally prohibited from
increasing its average total assets, making acquisitions, establishing any
branches, or engaging in any new line of business. In addition, its federal
banking agency is given authority with respect to any undercapitalized
institution to take any of the actions it is required to or may take with
respect to a significantly undercapitalized institution if it determines that
those actions are necessary to carry out the purpose of FDICIA.
For those institutions that are undercapitalized or significantly
undercapitalized and either fail to submit an acceptable capital restoration
plan or fail to implement an approved capital restoration plan, its federal
banking agency must require the institution to:
o sell enough shares, including voting shares, to become adequately
capitalized;
o merge with, or be sold to another institution, but only if grounds exist
for appointing a conservator or receiver;
o restrict certain transactions with its banking affiliates;
o restrict transactions with bank or non-bank affiliates;
o restrict interest rates that the institution pays on deposits to
"prevailing rates" in the institution's "region";
o restrict asset growth or reduce total assets;
o alter, reduce, or terminate activities;
o hold a new election of directors;
o dismiss any director or senior executive officer who held office for more
than 180 days immediately before the institution became undercapitalized,
provided that in requiring dismissal of a director or senior officer, the
agency must comply with certain procedural requirements, including the
opportunity for an appeal in which the director or officer will have the
burden of proving his or her value to the institution;
o employ "qualified" senior executive officers;
o cease accepting deposits from correspondent depository institutions;
o divest certain nondepository affiliates which pose a danger to the
institution; or
o be divested by a parent holding company.
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In addition, without the prior approval of its federal banking agency, a
significantly undercapitalized institution may not pay any bonus to any senior
executive officer or increase the rate of compensation for such officer.
FDIC Insurance Assessments
Pursuant to FDICIA, the FDIC adopted a risk-based assessment system for
insured depository institutions that takes into account the risks attributable
to different categories and concentrations of assets and liabilities. The
risk-based system assigns an institution to one of three capital categories:
(i) well capitalized, (ii) adequately capitalized, or (iii) undercapitalized.
These three categories are substantially similar to the prompt corrective
action categories described above, with the "undercapitalized" category
including institutions that are undercapitalized, significantly
undercapitalized, and critically undercapitalized for prompt corrective action
purposes. An institution is also assigned by the FDIC to one of three
supervisory subgroups within each capital group. The supervisory subgroup to
which an institution is assigned is based on an evaluation provided to the FDIC
by the institution's primary federal regulator and information which the FDIC
determines to be relevant to the institution's financial condition and the risk
posed to the deposit insurance funds (which may include, if applicable,
information provided by the institution's state supervisor). An institution's
insurance assessment rate is then determined based on the capital category and
supervisory category to which it is assigned.
Under the final risk-based assessment system there are nine assessment
risk classifications (i.e., combinations of capital groups and supervisory
subgroups) to which different assessment rates are applied. Assessment rates
for deposit insurance currently range from zero basis points to 27 basis
points. The capital and supervisory subgroup to which an institution is
assigned by the FDIC is confidential and may not be disclosed. A bank's rate of
deposit insurance assessments will depend upon the category and subcategory to
which the bank is assigned by the FDIC. Any increase in insurance assessments
could have an adverse effect on the earnings of insured institutions, including
Centura Bank.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe and unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order, or condition imposed by the FDIC.
Management does not know of any practice, condition, or violation that might
lead to termination of deposit insurance.
Safety and Soundness Standards
The FDIA, as amended by FDICIA and the Riegle Community Development and
Regulatory Improvement Act of 1994, requires the federal bank regulatory
agencies to prescribe standards, by regulations or guidelines, relating to
internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate risk exposure, asset growth,
asset quality, earnings, stock valuation and compensation, fees and benefits,
and such other operational and managerial standards as the agencies deem
appropriate. The federal bank regulatory agencies have adopted a set of
guidelines prescribing safety and soundness standards pursuant to FDICIA, as
amended. The guidelines establish general standards relating to internal
controls and information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth and compensation,
fees, and benefits. In general, the guidelines require, among other things,
appropriate systems and practices to identify and manage the risks and
exposures specified in the guidelines. The guidelines prohibit excessive
compensation as an unsafe and unsound practice and describe compensation as
excessive when the amounts paid are unreasonable or disproportionate to the
services performed by an executive officer, employee, director, or principal
shareholder.
In addition, the agencies adopted regulations that authorize, but do not
require, an agency to order an institution that has been given notice by an
agency that it is not satisfying any of such safety and soundness standards to
submit a compliance plan. If, after being so notified, an institution fails to
submit an acceptable compliance plan, the agency must issue an order directing
action to correct the deficiency and may issue an order directing other actions
of the types to which an undercapitalized institution is subject under the
prompt corrective action provisions of FDICIA. If an institution fails to
comply with such an order, the agency may seek to enforce such order in
judicial proceedings and to impose civil money penalties.
Technology Risk Management
Federal banking regulators have issued various policy statements
emphasizing the importance of technology risk management and supervision in
evaluating the safety and soundness of depository institutions. A fundamental
change in the banking business has been brought on by advances in technology.
Notably, banks are contracting increasingly with outside vendors to provide
data processing and core banking functions. Furthermore, the use of
technology-related products, services, delivery channels, and processes expose
a bank to various risks, particularly operational, strategic, reputation, and
II-10
<PAGE>
compliance risk. Banks are generally expected to successfully manage
technology-related risks with all other risks to ensure that a bank's risk
management is integrated and comprehensive, primarily through identifying,
measuring, monitoring, and controlling risks associated with the use of
technology.
Centura and the Bank are engaged in an active program of risk management
related to technology. Management has adopted, and the Audit Committee of the
Board of Directors has reviewed and approved, an Information Security Policy
for Centura and its subsidiaries, covering (i) information security generally,
(ii) end user computing, (iii) electronic mail, (iv) the Internet, and (v)
remote access to corporate systems. In addition, Centura has retained an
independent auditing firm to audit the information technology systems of
Centura on all platforms, including the security of such systems. Audits have
been completed and have found the systems of control to be acceptable. The
audit reports contained suggested improvements that management has reviewed
with the Audit Committee. Management continues to work on system security as a
matter of priority among corporate goals.
Transactions with Related Parties
The Bank's authority to engage in transactions with its "affiliates" is
limited by Sections 23A and 23B of the Federal Reserve Act ("FRA") and the
regulations of the Federal Reserve thereunder. In general, an affiliate of the
Bank is any company that controls the Bank or any other company that is under
common control with the Bank, excluding the Bank's subsidiaries. At present,
the provisions of Sections 23A and 23B apply to extensions of credit by the
Bank to Centura, CCTI, and FGHE. Section 23A limits the aggregate amount of
transactions with any individual affiliate to 10 percent of capital and surplus
and also limits the aggregate amount of transactions with all affiliates to 20
percent of capital and surplus. Extensions of credit to affiliates are required
to be secured by collateral in an amount of a type described in Section 23A and
purchase of low quality assets from affiliates is generally prohibited. Section
23B provides that certain transactions with affiliates, including loan and
asset purchases, must be on terms and under circumstances, including credit
standards that are substantially the same or at least as favorable to the Bank
as those prevailing at the time for comparable transactions with nonaffiliated
companies.
The Bank's authority to extend credit to its directors, executive officers
and 10 percent shareholders, as well as to entities controlled by such persons,
is currently governed by the requirements of Sections 22(g) and 22(h) of the
FRA and Regulation O of the Federal Reserve Board thereunder. Among other
things, these provisions require that extensions of credit to insiders (i) be
made on terms that are substantially the same as, and follow credit
underwriting procedures that are not less stringent than, those prevailing for
comparable transactions with unaffiliated persons and that do not involve more
than the normal risk of repayment or present other unfavorable features and
(ii) do not exceed certain limitations on the amount of credit extended to such
persons, individually and in the aggregate, which limits are based, in part, on
the amount of the Bank's capital.
Prohibitions Against Tying Arrangements
Banks are subject to the prohibitions of 12 U.S.C. ss.1972 on certain
tying arrangements. A depository institution is prohibited, subject to some
exceptions, from extending credit to or offering any other service, or fixing
or varying the consideration for such extension of credit or service, on the
condition that the customer obtain some additional service from the institution
or its affiliates or not obtain services of a competitor of the institution.
Federal Securities Law
Centura's common stock is registered with the Securities and Exchange
Commission under Section 12(g) of the Securities Exchange Act of 1934, as
amended ("Exchange Act"). Centura is subject to information, proxy
solicitation, insider trading restrictions and other requirements under the
Exchange Act.
Year 2000 ("Y2K") Compliance
As of the date of this report, Centura has not experienced any material
effects related to the Year 2000 readiness problem. Although Centura has not
been informed of any material risks associated with the Year 2000 problem from
third parties, there can be no assurance that Centura will not be impacted in
the future. Centura will continuously monitor its business applications and
maintain contact with its third party vendors and key business partners to
resolve any Year 2000 problems that may arise in the future.
See the "Year 2000" section of "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for other information related to
the Year 2000.
II-11
<PAGE>
ITEM 2 PROPERTIES
The main executive offices of Centura and the Bank are located at 134
North Church Street, Rocky Mount, Nash County, North Carolina. The Bank
operates 228 financial stores, of which 195 are located in North Carolina. The
Bank also operates 7 financial stores in South Carolina and 26 in the Hampton
Roads region of Virginia.
ITEM 3 LEGAL PROCEEDINGS
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.
Various other legal proceedings against Centura and its subsidiaries have
arisen from time to time in the normal course of business. Management believes
liabilities arising from these proceedings, if any, will have no material
adverse effect on the financial position or results of operations of Centura or
its subsidiaries.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
There has been no submission of matters to a vote of shareholders during
the quarter ended December 31, 1999.
PART II
ITEM 5 MARKET FOR CENTURA'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
See pages 7, 28-29, 33, 57-58 and 67-68 of the Form 10-K for information
regarding the market for Centura's common equity and related shareholder
matters.
II-12
<PAGE>
ITEM 6 SELECTED FINANCIAL DATA
Table 1
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Five-Year
Compounded
Growth
1999 1998 1997 1996 1995 Rate
------------- ------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
(thousands)
Interest income ............................. $ 646,559 $ 621,718 $ 563,688 $ 518,105 $ 469,921 11.6%
Interest expense ............................ 307,093 303,627 276,821 251,305 230,262 14.0
--------- --------- --------- --------- ---------
Net interest income ......................... 339,466 318,091 286,867 266,800 239,659 9.6
Provision for loan losses ................... 32,977 15,644 13,643 9,746 8,079 34.5
Noninterest income .......................... 152,693 140,521 112,268 94,630 76,951 20.0
Noninterest expense ......................... 302,063 290,397 253,357 243,439 205,650 10.7
Income taxes ................................ 53,091 52,257 44,974 39,525 37,062 11.3
--------- --------- --------- --------- ---------
Net income .................................. $ 104,028 $ 100,314 $ 87,161 $ 68,720 $ 65,819 13.5
========= ========= ========= ========= =========
Net interest income, taxable equivalent ..... $ 346,773 $ 325,391 $ 294,594 $ 272,825 $ 244,841 9.5%
Cash dividends paid ......................... $ 34,980 $ 31,322 $ 28,349 $ 24,796 $ 19,520 16.0%
PER COMMON SHARE
Net income -- basic ......................... $ 3.66 $ 3.57 $ 3.17 $ 2.52 $ 2.39 12.1%
Net income -- diluted ....................... 3.62 3.50 3.11 2.46 2.35 12.2
Cash dividends .............................. 1.25 1.11 1.03 0.91 0.71 14.6
Book value .................................. 24.53 23.88 21.14 18.86 17.63 9.8
SELECTED AVERAGE BALANCES
(millions)
Assets ...................................... $ 8,821 $ 8,185 $ 7,209 $ 6,573 $ 5,874 11.2%
Earning assets .............................. 8,073 7,471 6,640 6,077 5,421 11.0
Loans ....................................... 5,869 5,377 4,766 4,442 4,076 11.4
Investment securities ....................... 2,146 2,059 1,839 1,586 1,311 9.7
Core deposits ............................... 5,438 5,378 4,904 4,541 4,126 6.8
Total deposits .............................. 6,036 5,889 5,300 4,965 4,536 7.5
Shareholders' equity ........................ 696 640 552 494 464 11.8
SELECTED YEAR-END BALANCES
(millions)
Assets ...................................... $ 9,123 $ 8,796 $ 7,742 $ 6,900 $ 6,484 11.2%
Earning assets .............................. 8,372 8,034 7,050 6,307 5,937 11.3
Loans ....................................... 5,979 5,834 5,048 4,558 4,344 10.2
Investment securities ....................... 2,265 2,161 1,958 1,712 1,548 13.2
Long-term debt .............................. 761 614 428 407 318 40.7
Core deposits ............................... 5,491 5,549 5,293 4,792 4,421 7.0
Total deposits .............................. 6,168 6,069 5,772 5,157 4,938 7.8
Shareholders' equity ........................ 690 676 582 516 484 11.2
SELECTED RATIOS
Return on average assets .................... 1.18% 1.23% 1.21% 1.05% 1.12%
Return on average equity .................... 14.96 15.68 15.79 13.90 14.19
Average equity to average assets ............ 7.89 7.82 7.66 7.52 7.90
Dividend payout ratio ....................... 34.53 31.71 33.12 36.99 30.21
</TABLE>
II-13
<PAGE>
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This document contains forward-looking statements about Centura Banks,
Inc. ("Centura"). These statements can be identified by the use of words such
as "expect," "may," "could," "intend," "estimate," or "anticipate." These
forward-looking statements reflect current views, but are based on assumptions
and are subject to risks, uncertainties and other factors. Those factors
include, but are not limited to, the following: (i) expected cost savings from
pending mergers may not be fully realized or costs or difficulties related to
the integration of the businesses of Centura and merged institutions may be
greater than expected, (ii) deposit attrition, customer loss, or revenue loss
following pending mergers may be greater than expected, (iii) competitive
pressure in the banking industry may increase significantly, (iv) changes in
the interest rate environment may reduce margins, (v) general economic
conditions, either nationally or regionally, may be less favorable than
expected, resulting in, among other things, credit quality deterioration, (vi)
changes may occur in the regulatory environment, (vii) changes may occur in
business conditions and inflation, and (viii) changes may occur in the
securities markets.
The following discussion and analysis is presented to assist in the
understanding and evaluation of the financial condition and results of
operations of Centura. It should be read in conjunction with the audited
consolidated financial statements and footnotes presented on pages 36-69 and
the supplemental financial data appearing throughout this report. Centura is a
bank holding company operating in North Carolina, South Carolina, and Virginia.
Note 1 of the Notes to Consolidated Financial Statements discusses its
wholly-owned subsidiaries, Centura Bank (the "Bank") and Centura Capital Trust
I ("CCTI").
SEGMENT INFORMATION
The Bank has two reportable segments: retail banking and treasury. These
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 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.
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 First
Greensboro Home Equity ("FGHE"). 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") and 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 the Notes to Consolidated Financial Statements) 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.
SUMMARY
Centura reported net income for 1999 of $104.0 million, or $3.62 per
diluted share compared with $100.3 million or $3.50 per diluted share reported
in 1998. 1999 earnings include $8.4 million of nonrecurring expenses incurred
as a result of the March 1999 merger with First Coastal Bankshares, Inc.
("First Coastal"). Excluding these merger-related charges,
II-14
<PAGE>
diluted EPS would have been $3.81 per share. Other items of significance
occurring as of and for the year ended December 31,1999 are highlighted below:
o During 1999, Centura announced its plans to merge with Triangle
Bancorp, Inc. ("Triangle"), a Raleigh, North Carolina based bank holding
company with assets of $2.4 billion. The merger was consummated on
February 18, 2000, significantly expanding Centura's market share in key
metropolitan areas throughout North Carolina.
o Centura successfully integrated three mergers during 1999: First
Coastal, Scotland Bancorp, Inc. and Capital Advisors. Combined, these
mergers increased Centura's asset base by $585.0 million, expanded its
market share in Virginia, and complemented Centura's strategy to be the
primary provider of financial services to its customers.
o Total loans and deposits were $6.0 billion and $6.2 billion,
respectively, at December 31, 1999 compared to $5.8 billion and $6.1
billion at December 31, 1998.
o The allowance for loan losses ended 1999 at $73.5 million, representing
1.25* percent of outstanding loans compared to $72.3 million, or 1.27*
percent of outstanding loans at year-end 1998. Net charge-offs,
reflecting an $11.8 million isolated charge-off for the Pluma credit,
were 0.55* percent of average loans for 1999 compared to 0.26* percent
of average loans for 1998.
o Noninterest income, before securities transactions, increased $13.4
million or 9.6 percent to total $153.2 million for 1999 compared to
$139.8 million earned in 1998.
o Excluding merger-related expenses of $6.9 million that were included in
noninterest expense, noninterest expenses increased only $4.8 million or
1.7 percent. The efficiency ratio for 1999 was 59.10 percent, excluding
merger-related expenses.
Much of the financial discussion that follows refers to the impact of
Centura's merger and acquisition activity. The following table provides a
summary of merger and acquisition activity for the three-year period ended
December 31, 1999. These transactions allowed Centura to leverage upon existing
market presence in North Carolina as well as expand into adjacent and
complementary markets in South Carolina and Virginia.
Table 2
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(millions) Acquisition Date Total Assets
- -------------------------------------------------------------------------- ------------------ -------------
<S> <C> <C>
ACQUISITIONS ACCOUNTED FOR AS PURCHASES:
Capital Advisors ......................................................... 1/07/99 $ 1
Scotland Bancorp, Inc. ("Scotland"), Laurinburg, NC ...................... 2/05/99 57
Moore & Johnson, Inc. ("M & J"), insurance agency ........................ 1/30/98 $ 3
NBC Bank, FSB ("NBC"), deposit assumption ................................ 7/24/98 17
Clyde Savings Bank, A Division of the Hometown Bank ("Clyde"), deposit
assumption .............................................................. 10/15/98 6
Branch Banking and Trust Company and United Carolina Bank, deposit
assumption .............................................................. 8/15/97 $313
Betts & Company, insurance agency ........................................ 11/03/97 1
NationsBank, N.A., deposit assumption .................................... 11/13/97 86
First Union National Bank, deposit assumption ............................ 12/05/97 16
MERGERS ACCOUNTED FOR AS POOLINGS-OF-INTERESTS:
First Coastal Bankshares, Inc. ("First Coastal"), Virginia Beach, VA ..... 3/26/99 $527
Pee Dee Bankshares, Inc. ("Pee Dee"), Timmonsville, SC ................... 3/27/98 $138
</TABLE>
For combinations accounted for under the pooling-of-interests method, all
financial data previously reported prior to the dates of merger have been
restated as though the entities had been combined for all the periods
presented, with the exception of the Pee Dee transaction. Although the
transaction was accounted for as a pooling-of-interests, the merger with Pee
Dee was not material and accordingly, prior period financial statements have
not been restated. For acquisitions accounted
- ---------
* Calculation excludes mortgage loans held for sale.
II-15
<PAGE>
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.
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.
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 the remaining liability at December 31, 1999:
<TABLE>
<CAPTION>
Utilized Remaining Balance
Merger-Related Charges Pre-tax in 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>
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. 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. Historical financial information presented in this report has not
been restated to include the accounts and results of operations of Triangle.
Supplemental consolidated financial statements restated to reflect the merger
with Triangle are included in Item 8 of this report.
II-16
<PAGE>
The following table presents the historical results of operations for
Centura, First Coastal and Triangle and the consolidated results of operations
after giving effect to the merger to assume that the respective mergers
consummated on the last day in the year prior to the year of the actual
consummation:
<TABLE>
<CAPTION>
Historical Proforma
---------------------------------------------------------- ------------------
Centura and Centura,
First Coastal First Coastal and
Centura First Coastal Combined Triangle Triangle Combined
------------- --------------- --------------- ------------ ------------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999
Net interest income, after provision . $ 306,489 $ -- $ 306,489 $ 71,408 $ 377,897
Noninterest income ................... 152,693 -- 152,693 20,221 170,897*
Noninterest expense .................. 302,063 -- 302,063 51,619 352,323*
Net income ........................... 104,028 -- 104,028 26,707 130,337*
Net income per common share:
Basic ................................ $ 3.66 $ -- $ 3.66 $ 1.06 $ 3.28
Diluted .............................. 3.62 -- 3.62 1.04 3.23
Year ended December 31, 1998
Net interest income, after provision . $ 284,174 $ 18,273 $ 302,447 $ 69,515 $ 371,962
Noninterest income ................... 134,700 5,821 140,521 18,456 157,596*
Noninterest expense .................. 271,689 18,708 290,397 54,896 343,912*
Net income ........................... 96,871 3,443 100,314 21,858 122,172
Net income per common share:
Basic ................................ $ 3.67 $ 0.69 $ 3.57 $ 0.87 $ 3.10
Diluted .............................. 3.60 0.67 3.50 0.84 3.03
Year ended December 31, 1997
Net interest income, after provision . $ 254,487 $ 18,737 $ 273,224 $ 63,269 $ 336,493
Noninterest income ................... 108,367 3,901 112,268 16,922 128,155*
Noninterest expense .................. 237,376 15,981 253,357 50,125 302,446*
Net income ........................... 83,058 4,103 87,161 19,526 106,687
Net income per common share:
Basic ................................ $ 3.22 $ 0.82 $ 3.17 $ 0.79 $ 2.76
Diluted .............................. 3.15 0.81 3.11 0.76 2.70
</TABLE>
- ---------
* Reflects intercompany eliminations and adjustments made to conform accounting
policies between the combined entities.
On September 30, 1999, Centura sold its technology leasing subsidiary,
CLG. The pretax net gain recorded on this sale was $4.9 million.
INTEREST-EARNING ASSETS
Interest-earning assets consist primarily of loans and investment
securities. These assets are subject to credit risk and interest rate risk,
which are discussed in detail in the "Asset Quality and Allowance for Loan
Losses," "Market Risk," and "Asset/Liability and Interest Rate Risk Management"
sections. During 1999, average interest-earning assets were $8.1 billion
compared with the $7.5 billion averaged during 1998, an increase of $602.0
million or 8.1 percent.
Loans
Loans represent the largest component of interest-earning assets for
Centura. Centura's loan and lease portfolio (collectively referred to as
"loans") grew $145.7 million over 1998 to total $6.0 billion at year-end 1999.
Commercial loans (commercial mortgage, commercial, industrial and agricultural,
and real estate construction) comprised the largest portion of total loans
representing 57.2 percent of outstanding loans at December 31, 1999, up from
53.2 percent at December 31, 1998. The consumer loan and leasing portfolios
represented 38.5 percent and 4.3 percent of total outstanding loans at December
31, 1999, respectively, versus 39.3 percent and 7.5 percent at December 31,
1998. The leasing portfolio declined as a result of the third quarter 1999 sale
of Centura's technology leasing subsidiary, CLG, as well as due to decreased
emphasis on the product and normal amortization. Refer to Table 3 for a summary
of loans outstanding and mix percentages.
II-17
<PAGE>
Inherent in lending is the risk of loss due to the failure of a borrower
to repay amounts due. To minimize this risk, over 92 percent of the $3.4
billion commercial loan portfolio outstanding at December 31, 1999 is secured.
Centura, by preference, is a secured lender. Unsecured commercial loans are
generally seasonal in nature (to be repaid in one year or less) and, like
secured loans, are supported by current financial statements and cash flow
analyses. Commercial loans secured by commercial real estate are supported by
appraisals prepared by independent appraisers approved by the Bank in
accordance with regulatory guidelines and by current financial statements, cash
flow analyses, and such other information deemed necessary by the Bank to
evaluate each proposed credit. All loans of $500,000 or more require complete
and thorough financial and nonfinancial analyses, including in-depth credit
memos and ratio analyses. In some cases, borrowers are visited at their places
of business and most collateral is inspected by a lending officer. Systematic
independent credit reviews ensure proper monitoring of post-closing compliance.
Weaknesses in credit and non-compliance with terms, conditions, and loan
agreements are promptly reported to the credit review area and reviewed.
In connection with commercial lending activities, Centura had $186.1
million of standby letters of credit outstanding at December 31, 1999. These
letters of credit are subject to the same credit approval and monitoring
process as commercial loans.
Consumer loans consist of equity lines, residential mortgages, installment
loans, and other credit line loans. Combined, these loans increased $7.9
million to $2.3 billion at December 31, 1999. Equity lines and other credit
lines increased $25.7 million while residential mortgage loans decreased $17.9
million from the prior year. The increase in equity lines and other credit
lines was in response to sale campaigns held during 1999. To help assess
borrower risk when extending credit on consumer loans, Centura utilizes a
standard credit scoring system. All new lines opened under the sales campaign
mentioned above were subject to Centura's standard credit approval process.
Credit is extended by the Bank principally to customers in its market
areas of North Carolina, South Carolina, and the Hampton Roads region of
Virginia. Although not a significant part of Centura's lending activities,
foreign credit is extended on a case by case basis and is subject to the same
credit and approval process as other commercial loans including an assessment
of country risk. The loan portfolio is reviewed on an on-going basis to
maintain diversification by industry, geography, type of loan, collateral, and
borrower.
Loans and other assets which were not performing in accordance with their
original terms and past due loans are discussed under the section "Asset
Quality and Allowance for Loan Losses."
On average, loans were up $492.2 million or 9.2 percent over 1998,
averaging $5.9 billion for 1999. Average loans as a percent of average-interest
earning assets increased slightly to 72.7 percent compared with 72.0 percent
for the prior year.
For the year ended December 31, 1999, loans generated additional taxable
equivalent interest income, including fee income, of $18.6 million, an increase
of 3.8 percent over the prior year. Without the taxable equivalent adjustment,
interest income earned on loans increased $18.2 million to $510.2 million.
Interest income earned on loans is dependent on interest rates, credit spreads,
and product mix. Loans repricing in a lower rate environment throughout the
first half of the year accompanied by tighter credit spreads contributed to a
45 basis point decline in the average loan yield between 1998 and 1999. Refer
to Table 7, "Net Interest Income Analysis and Volume/Rate Variance-Taxable
Equivalent Basis."
II-18
<PAGE>
Table 3
- --------------------------------------------------------------------------------
TYPES OF LOANS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
% of % of
Amount Total Amount Total
------------- ----------- ------------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Commercial, financial, and
agricultural .................. $1,528,839 25.57% $1,126,721 19.31%
Consumer ....................... 463,523 7.75 437,815 7.50
Real estate -- mortgage(1) ..... 2,906,877 48.61 2,997,746 51.39
Real estate -- construction
and land development .......... 739,374 12.37 750,156 12.86
Leases ......................... 255,149 4.27 434,556 7.45
Other .......................... 85,621 1.43 86,676 1.49
---------- ------ ---------- ------
Total loans .................... $5,979,383 100.00% $5,833,670 100.00%
========== ====== ========== ======
<CAPTION>
1997 1996 1995
------------------------- ------------------------- -------------------------
% of % of % of
Amount Total Amount Total Amount Total
------------- ----------- ------------- ----------- ------------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial, and
agricultural .................. $ 870,824 17.25% $ 754,191 16.55% $ 676,110 15.56%
Consumer ....................... 341,935 6.78 291,373 6.39 283,293 6.52
Real estate -- mortgage(1) ..... 2,672,017 52.94 2,475,315 54.31 2,594,085 59.72
Real estate -- construction
and land development .......... 626,625 12.41 551,104 12.09 473,339 10.90
Leases ......................... 470,376 9.32 420,240 9.22 269,677 6.21
Other .......................... 65,746 1.30 65,454 1.44 47,542 1.09
---------- ------ ---------- ------ ---------- ------
Total loans .................... $5,047,523 100.00% $4,557,677 100.00% $4,344,046 100.00%
========== ====== ========== ====== ========== ======
</TABLE>
- ---------
(1) Real estate -- mortgage represents loans secured by real estate, which
includes loans secured by multifamily residential property, residential
mortgage loans, residential mortgage loans held for sale, loans secured by
farmland, and loans secured by other commercial property.
Table 4
- --------------------------------------------------------------------------------
MATURITY SCHEDULE OF SELECTED LOANS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
As of December 31, 1999
------------------------------------------------------
One One
Year Through Over
Or Five Five
Less Years Years Total
----------- ----------- ---------- -------------
(thousands)
<S> <C> <C> <C> <C>
Commercial, financial, and agricultural:
Fixed interest rates ........................... $291,091 $227,830 $ 77,912 $ 596,833
Floating interest rates ........................ 412,542 464,948 54,516 932,006
-------- -------- -------- ----------
Total .......................................... $703,633 $692,778 $132,428 $1,528,839
======== ======== ======== ==========
Real estate -- construction and land development:
Fixed interest rates ........................... $ 51,044 $ 63,137 $ 7,350 $ 121,531
Floating interest rates ........................ 330,397 250,324 37,122 617,843
-------- -------- -------- ----------
Total .......................................... $381,441 $313,461 $ 44,472 $ 739,374
======== ======== ======== ==========
</TABLE>
Investment Securities
The investment portfolio, comprised primarily of mortgage-backed
securities, increased to $2.3 billion, an increase of $103.8 million or 4.8
percent over 1998's $2.2 billion portfolio. For 1999, the investment portfolio
averaged $2.1 billion, up 4.2 percent over 1998's average. Investment
securities as a percentage of average interest-earning assets were 26.6 percent
and 27.6 percent at December 31, 1999 and 1998, respectively. Refer to Note 4
of the Notes to Consolidated Financial Statements for a summary of investment
securities as of December 31, 1999, 1998 and 1997.
The investment portfolio consists primarily of securities for which an
active market exists. Centura's policy is to invest primarily in securities of
the U.S. Government and its agencies and in other high grade fixed income
securities. At the end of 1999, substantially all securities in Centura's
investment portfolio consisted of these types of securities. The effective
duration of the investment portfolio at December 31, 1999 was 2.9 years
compared with 2.1 years at year-end 1998. Table 5 summarizes the investment
portfolio by contractual maturity date with original contractual lives that
range from one day to 30 years. Mortgage-backed and asset-backed securities, by
nature, have lives that are shorter than their contractual life due to
volatility in the monthly returns of principal.
II-19
<PAGE>
Table 5
- --------------------------------------------------------------------------------
INVESTMENT SECURITIES -- MATURITY/YIELD SCHEDULE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Remaining Maturities as of December 31, 1999
----------------------------------------------------------------
1 Year or Less 1 to 5 Years 6 to 10 Years
--------------------- ---------------------- -------------------
Amortized Amortized Amortized
Cost Yield Cost Yield Cost Yield
----------- --------- ----------- ---------- ----------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Held to Maturity:
U.S. Treasury ................ $ -- --% $ 24,900 6.72% $ -- --%
U.S. government agencies
and corporations ............ -- -- 3,678 -- -- --
State and municipal .......... 1,456 9.91 13,259 9.47 7,576 7.73
Other securities ............. 16 10.25 -- -- -- --
------- -------- --------
Total held to maturity ....... $ 1,472 9.91 $ 41,837 7.00 $ 7,576 7.73
======= ======== ========
Available for Sale:
U.S. Treasury ................ $ -- --% $103,387 6.77% $ -- --%
U.S. government agencies
and corporations ............ 33,497 5.58 149,207 5.90 -- --
State and municipal .......... -- -- 957 7.66 886 8.63
Mortgage-backed and
asset-backed securities ..... -- -- 84,483 6.13 156,874 6.23
Common stock ................. -- -- -- -- -- --
Other securities ............. 15,217 5.11 -- -- 73,754 6.46
------- -------- --------
Total available for sale ..... $48,714 5.43 $338,034 6.23 $231,514 6.31
======= ======== ========
<CAPTION>
Remaining Maturities as of December 31,
1999
-----------------------------------------
Over 10 Years No Maturity Total
--------------------- ------------------- -----------------------
Amortized Amortized Amortized
Cost Yield Cost Yield Cost Yield
------------- ------- ----------- ------- ------------ ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Held to Maturity:
U.S. Treasury ................ $ -- --% $ -- --% $ 24,900 6.72%
U.S. government agencies
and corporations ............ -- -- -- -- 3,678 --
State and municipal .......... 3,282 8.79 -- -- 25,573 8.89
Other securities ............. -- -- -- -- 16 10.25
---------- ------- ----------
Total held to maturity ....... $ 3,282 8.79 $ -- -- $ 54,167 7.29
========== ======= ==========
Available for Sale:
U.S. Treasury ................ $ -- --% $ -- --% $ 103,387 6.77%
U.S. government agencies
and corporations ............ -- -- -- -- 182,704 5.85
State and municipal .......... 1,620 9.81 -- -- 3,463 8.91
Mortgage-backed and
asset-backed securities ..... 1,280,501 6.34 -- -- 1,521,858 6.32
Common stock ................. -- -- 48,678 7.28 48,678 7.28
Other securities ............. 307,709 6.54 -- -- 396,680 6.47
---------- ------- ----------
Total available for sale ..... $1,589,830 6.39 $48,678 7.28 $2,256,770 6.35
========== ======= ==========
</TABLE>
- ---------
Yields are based on amortized cost, and yields related to securities exempt
from federal and/or state income taxes are stated on a taxable equivalent basis
assuming statutory tax rates of 35.00% and 7.00% for federal and state
purposes, respectively.
The classification of securities as held to maturity ("HTM") or available
for sale ("AFS") is determined at the time of purchase. Centura classifies most
of its investment purchases as available for sale. This is consistent with
Centura's investment philosophy of maintaining flexibility to manage the
securities portfolio. For those investments classified as HTM, Centura has the
intent and ability to hold them until maturity. At December 31, 1999 and 1998,
the amortized cost of the HTM portfolio amounted to $54.2 million and $103.8
million, respectively, decreasing as a result of scheduled maturities within
the portfolio. At December 31, 1999 and 1998, the fair value of the HTM
portfolio exceeded its amortized cost by $449,000 and $2.7 million,
respectively. The HTM portfolio is carried at amortized cost.
The AFS portfolio, representing the remainder of the investment portfolio,
is reported at estimated fair value. These securities are used as a part of
Centura's asset/liability 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. At December 31, 1999, the AFS portfolio
was $2.2 billion compared with $2.1 billion at year-end 1998. Rising interest
rates during the second half of 1999 unfavorably impacted the fair market value
of the AFS portfolio resulting in unrealized losses of $41.9 million being
recorded, net of tax, as a separate component of other comprehensive income
compared to unrealized gains of $2.8 million, net of tax, recorded during 1998.
Sales of AFS securities resulted in realized net losses of $533,000 and
realized net gains of $686,000 for the years ended December 31, 1999 and 1998,
respectively. The net losses incurred during 1999 were a result of management's
decision to restructure portions of the investment portfolio in an attempt to
optimize yields in the future.
Taxable equivalent interest income on investment securities was $139.5
million for 1999, up $4.9 million from the $134.6 million earned in 1998.
Changes in interest rates, product mix, and credit spreads reduced taxable
equivalent interest income on investments by $2.5 million while volume
increases contributed $7.4 million. The average yield on investments was 6.47
percent in 1999 versus 6.60 percent in 1998. For additional information see
Table 6, "Net Interest Income Analysis -- Taxable Equivalent Basis" and Table
7, "Net Interest Income and Volume/Rate Variance -- Taxable Equivalent Basis."
Interest income on investment securities, as recorded in the consolidated
income statement, was $133.3 million for 1999 versus $128.0 million for 1998.
FUNDING SOURCES
Funding sources, which include deposits, short-term borrowings, and
long-term borrowings, averaged $8.0 billion during 1999, up $575.4 million or
7.8 percent from 1998's level of $7.4 billion.
II-20
<PAGE>
Deposits
Total deposits, whose major categories include money market accounts,
savings accounts, individual retirement accounts, certificates of deposit
("CD's") and transaction accounts, increased $99.2 million to $6.2 billion at
December 31, 1999 when compared with December 31, 1998. This increase is
primarily due to internal growth and deposits acquired through acquisitions.
Centura acquired $39.6 million in deposits as a result of the acquisition of
Scotland in the first quarter. On average, total deposits increased $146.9
million in 1999 to $6.0 billion, a 2.5 percent increase over 1998's average of
$5.9 billion.
On average, the deposit mix experienced some migration between categories
during 1999. The largest shift occurred between money market accounts and CD's
less than $100,000, which represented 22.8 percent and 28.7 percent of total
deposits at December 31, 1999, respectively, compared to 19.4 percent and 32.7
percent at December 31, 1998. Money market accounts, on average, continued to
outpace the growth in all other deposit products in 1999, increasing $237.0
million to total $1.4 billion. Centura's money market accounts offer
competitive rates and provide greater customer flexibility. The largest
component of deposits, CD's less than $100,000, averaged $1.7 billion for 1999,
a decrease of $189.8 million from 1998's average of $1.9 billion. CD's with
denominations of $100,000 or greater averaged $581.1 million during 1999 and
$470.2 million during 1998. Transaction account balances (interest checking and
noninterest-bearing demand deposits) on average increased 4.8 percent or $78.1
million over the prior year and represented 28.1 percent of total deposits at
December 31, 1999.
Core deposits, which provide a stable source of low cost of funds, include
noninterest-bearing demand, interest checking, money market, CD's with balances
less than $100,000, and savings accounts. Core deposits, on average, grew $60.2
million between periods. For the years ended December 31, 1999 and 1998,
average core deposits constituted 90.1 percent and 91.3 percent of total
average deposits, respectively.
Interest expense on deposits declined $14.4 million to $202.8 million for
1999 compared with $217.2 million for 1998. As shown in Table 6, "Net Interest
Income Analysis -- Taxable Equivalent Basis," the cost of interest-bearing
deposits declined 35 basis points to 3.97 percent for 1999. The decline in
deposit interest expense was driven primarily by the rate environment which
favorably impacted interest expense by $17.2 million offset $2.8 million due to
volume changes. The lower rate environment during the first half of 1999,
changes in the portfolio mix as described above, and an emphasis on more
efficient and competitive product pricing improved the cost of funds for
deposits.
Other Funding Sources
Management utilizes short-term borrowed funds, consisting principally of
federal funds purchased, securities sold under agreements to repurchase, and
master notes. Borrowed funds were $1.4 billion at period-end 1999 and averaged
$1.2 billion for the year. For comparison, 1998 period-end borrowed funds were
$1.3 billion and $1.0 billion on average. On average, borrowed funds
represented 15.5 percent of Centura's total average funding sources for 1999
compared with 13.8 percent in 1998. The average interest rate paid on borrowed
funds declined 30 basis points to 4.94 percent at December 31, 1999. The change
in mix of short-term debt from higher to lower cost debt in combination with
falling interest rates during the first half of 1999 contributed to this
decline. Interest expense on borrowed funds increased by $7.5 million between
periods, primarily a result of increased volume during 1999.
Long-term debt at December 31, 1999 was $760.9 million, increasing $146.6
million over year-end 1998. Long-term debt includes $100 million of fixed-rate,
thirty-year Capital Securities issued in June 1997 by CCTI. CCTI 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 fixed-rate Junior Subordinated Deferrable Interest Debentures ("junior
debentures") issued by Centura. The junior debentures, scheduled to mature in
June 2027, are the primary assets of CCTI. Centura has guaranteed the
obligations of CCTI under the Capital Securities. For risk-based capital
calculations, the Capital Securities are included as a component of Tier I
capital. Also included in long-term debt at year-end are advances from the
Federal Home Loan Bank of $534.9 million and $125.0 million of 6.5 percent
subordinated bank notes that were issued during the first quarter of 1999. For
the years ended December 31, 1999 and 1998, long-term debt averaged $724.2
million and $509.3 million, respectively. Interest expense on long-term debt
increased $10.3 million over 1998, of which $6.3 million was directly
attributable to the bank note issuance. The average rates paid on long-term
debt were 5.97 percent and 6.46 percent for 1999 and 1998, respectively.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest margin measures how effectively a company manages the
difference between the yield on earning assets and the rate paid on funds used
to support those assets. The net interest margin, defined as taxable equivalent
net interest
II-21
<PAGE>
income divided by average interest-earning assets, declined 8 basis points to
4.29 percent for 1999 compared to 4.37 percent for 1998. The margin was
unfavorably impacted by slightly tighter credit spreads for loans in
increasingly competitive markets and the partial reliance of funding these
loans with market-rate sensitive liabilities.
Net interest income for 1999 was $339.5 million compared to $318.1 million
in the prior year. On a taxable equivalent basis, net interest income increased
$21.4 million to $346.8 million from the $325.4 million reported in 1998.
Table 6 and Table 7 provide additional information related to net interest
income and the net interest margin.
Table 6
- --------------------------------------------------------------------------------
NET INTEREST INCOME ANALYSIS -- TAXABLE EQUIVALENT BASIS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------------------------------- -------------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Yield/Rate Balance Expense Yield/Rate
------------- ---------- ------------ ------------- ---------- ------------
(thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans, including fees ............... $5,869,276 $511,309 8.71% $5,377,042 $492,748 9.16%
Taxable securities .................. 2,127,406 136,887 6.43 2,004,495 131,423 6.56
Tax-exempt securities ............... 30,275 2,656 8.77 36,272 3,181 8.77
Short-term investments .............. 54,414 3,014 5.54 31,797 1,666 5.24
---------- -------- ---------- --------
Interest-earning assets, gross ...... 8,081,371 653,866 8.09 7,449,606 629,018 8.44
Net unrealized gains (losses) on
available for sale securities ...... (12,076) 18,482
Other assets, net ................... 751,739 717,256
---------- ----------
Total assets ....................... $8,821,034 $8,185,344
========== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest checking ................... $ 770,106 $ 8,221 1.07% $ 755,789 $ 10,280 1.36%
Money market ........................ 1,378,795 54,453 3.95 1,141,811 48,741 4.27
Savings deposits .................... 273,238 4,061 1.49 327,408 6,512 1.99
Time deposits ....................... 2,685,670 136,075 5.07 2,799,622 151,683 5.42
---------- -------- ---------- --------
Total interest-bearing deposits ..... 5,107,809 202,810 3.97 5,024,630 217,216 4.32
Borrowed funds ...................... 1,235,317 61,038 4.94 1,021,744 53,502 5.24
Long-term debt ...................... 724,188 43,245 5.97 509,276 32,909 6.46
---------- -------- ---------- --------
Interest-bearing liabilities ........ 7,067,314 307,093 4.35 6,555,650 303,627 4.63
-------- ---------- --------
Demand, noninterest-bearing ......... 928,097 864,354
Other liabilities ................... 130,066 125,553
Shareholders' equity ................ 695,557 639,787
---------- ----------
Total liabilities and
shareholders' equity .............. $8,821,034 $8,185,344
========== ==========
Interest rate spread ................ 3.74% 3.81%
Net yield on interest-earning
assets, gross ...................... $8,081,371 $346,773 4.29% $7,449,606 $325,391 4.37%
========== ======== ========== ========
Taxable equivalent adjustment ....... $ 7,307 $ 7,300
======== ========
<CAPTION>
1997
-------------------------------------
Interest
Average Income/ Average
Balance Expense Yield/Rate
------------- ----------- -----------
(thousands)
<S> <C> <C> <C>
ASSETS
Loans, including fees ............... $4,766,390 $446,523 9.37%
Taxable securities .................. 1,792,053 119,265 6.66
Tax-exempt securities ............... 42,272 3,782 8.93
Short-term investments .............. 33,606 1,845 5.51
---------- --------
Interest-earning assets, gross ...... 6,634,321 571,415 8.61
Net unrealized gains (losses) on
available for sale securities ...... 4,426
Other assets, net ................... 570,261
----------
Total assets ....................... $7,209,008
==========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest checking ................... $ 668,027 $ 11,162 1.67%
Money market ........................ 838,071 35,369 4.22
Savings deposits .................... 332,150 7,177 2.16
Time deposits ....................... 2,723,629 149,961 5.51
---------- --------
Total interest-bearing deposits ..... 4,561,877 203,669 4.46
Borrowed funds ...................... 841,193 45,193 5.37
Long-term debt ...................... 424,982 27,959 6.58
---------- --------
Interest-bearing liabilities ........ 5,828,052 276,821 4.75
--------
Demand, noninterest-bearing ......... 737,666
Other liabilities ................... 91,190
Shareholders' equity ................ 552,100
----------
Total liabilities and
shareholders' equity .............. $7,209,008
==========
Interest rate spread ................ 3.86%
Net yield on interest-earning
assets, gross ...................... $6,634,321 $294,594 4.44%
========== ========
Taxable equivalent adjustment ....... $ 7,727
========
</TABLE>
- ---------
(1) Nonaccrual loans are included in average balances for yield computations.
(2) Yields related to loans and securities exempt from both federal and state
income taxes, federal income taxes only, or state income taxes only are
stated on a taxable equivalent basis assuming statutory tax rates for 1999
of 35.00% and 7.00%, for 1998 of 35.00% and 7.25%, and for 1997 of 35.00%
and 7.50% for federal and state purposes, respectively.
II-22
<PAGE>
Table 7
- --------------------------------------------------------------------------------
NET INTEREST INCOME AND VOLUME/RATE VARIANCE -- TAXABLE EQUIVALENT BASIS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999-1998 1998-1997
---------------------------------------- ---------------------------------------
Variance Variance
Income/ Attributable to Income/ Attributable to
Expense -------------------------- Expense -------------------------
Variance Volume Rate Variance Volume Rate
----------- ---------- ------------- ----------- ---------- ------------
(thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees ................... $ 18,561 $ 43,661 $ (25,100) $46,225 $56,141 $ (9,916)
Taxable securities ...................... 5,464 7,949 (2,485) 12,158 13,952 (1,794)
Tax-exempt securities ................... (525) (526) 1 (601) (527) (74)
Short-term investments .................. 1,348 1,248 100 (179) (97) (82)
--------- -------- --------- ------- ------- ---------
Total interest income .................. 24,848 52,332 (27,484) 57,603 69,469 (11,866)
INTEREST EXPENSE
Interest checking ....................... (2,059) 191 (2,250) (882) 1,354 (2,236)
Money market ............................ 5,712 9,560 (3,848) 13,372 12,961 411
Savings deposits ........................ (2,451) (970) (1,481) (665) (101) (564)
Time deposits ........................... (15,608) (6,020) (9,588) 1,722 4,142 (2,420)
--------- -------- --------- ------- ------- ---------
Total interest-bearing deposits ......... (14,406) 2,761 (17,167) 13,547 18,356 (4,809)
Borrowed funds .......................... 7,536 10,687 (3,151) 8,309 9,480 (1,171)
Long-term debt .......................... 10,336 12,994 (2,658) 4,950 5,456 (506)
--------- -------- --------- ------- ------- ---------
Total interest expense ................. 3,466 26,442 (22,976) 26,806 33,292 (6,486)
--------- -------- --------- ------- ------- ---------
Net interest income .................... $ 21,382 $ 25,890 $ (4,508) $30,797 $36,177 $ (5,380)
========= ======== ========= ======= ======= =========
</TABLE>
- ---------
The change in interest due to both rate and volume has been allocated
proportionately to volume variance and rate variance based on the relationship
of the absolute dollar change in each.
II-23
<PAGE>
ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES
The investment and loan portfolios are the primary types of
interest-earning assets for Centura. While the investment portfolio is
structured with minimum credit exposure to Centura, the loan portfolio is the
primary asset subject to credit risk. Credit risk is controlled and monitored
through the use of lending standards, thorough review of potential borrowers,
and ongoing review of loan payment performance.
Total nonperforming assets, including nonperforming loans and foreclosed
properties, were $31.8 million at December 31, 1999 compared with $38.1 million
at December 31, 1998. Nonperforming assets as a percentage of total assets were
0.35 percent and 0.43 percent at December 31, 1999 and 1998, respectively.
Declines in the loans secured by real estate, commercial and industrial and
other real estate owned categories of $2.6 million, $1.9 million and $1.8
million, respectively, were primarily responsible for this improvement. Table
10, "Nonperforming Assets and Past Due Loans," discloses the components and
balances of nonperforming assets over the past five years.
During the third quarter of 1999, Centura charged off $11.8 million of
loans outstanding to Pluma, Inc. ("Pluma"), an Eden, North Carolina based
manufacturer and distributor of fleece and jersey sportswear. Including this
credit, 1999 year-to-date net charge-offs were 0.55* percent of average loans
versus 0.26* percent for 1998. Gross charge-offs were $34.7 million for 1999
compared with $17.4 million in the prior year. Recoveries were down $519,000,
totaling $2.9 million for 1999. Had Pluma remained a performing loan, net
charge-offs would have been approximately $20.0 million or 0.35* percent of
average loans. Commercial and industrial net charge-offs, experiencing the
largest increase, rose $15.6 million over 1998, primarily a result of the $11.8
million Pluma charge-off. The remaining increase in net charge-offs was spread
across the remaining loan categories.
The allowance for loan and lease losses ("AFLL") is the amount considered
adequate to cover probable incurred credit losses in Centura's loan portfolio
existing at the balance sheet date. The AFLL grew by $1.2 million to total
$73.5 million at December 31, 1999, compared to $72.3 million last year. At
December 31, 1999, Centura's AFLL as a percentage of total outstanding loans
was 1.25* percent compared to 1.27* percent at December 31, 1998. The amount
provided for loan losses during 1999 totaled $33.0 million as compared to $15.6
million for 1998.
For additional information with respect to the activity in the AFLL, see
Tables 8 and 9, "Analysis of Allowance for Loan Losses" and "Allocation of
Allowance for Loan Losses," respectively.
The allocated portion of the allowance of $55.0 million as of December 31,
1999 includes both a specific and general allocation. The AFLL for the
commercial loan portfolio is established considering several factors including:
current loan grades, historical loss rates, expected future cash flows, and the
results of individual loan reviews and analyses. The AFLL for consumer loans,
mortgage loans, and leases is determined based on past due levels and
historical and projected loss rates. Loss percentages assigned for each loan
grade used to develop the general allowance are determined based on periodic
evaluation of actual loss experience over a period of time and management's
estimate of probable incurred losses as well as other factors that are known at
the time when the appropriate level for the AFLL is assessed. Generally, all
loans with outstanding balances of $100,000 or greater that have been
identified as impaired are reviewed on a quarterly basis in order to determine
whether a specific allowance is required. Included in the AFLL is an
unallocated amount that represents the result of analyzing less quantifiable
factors such as economic trends and other risk factors that are inherent in the
loan portfolio. During 1999, Centura management adjusted the risk factors used
for general allocation of the allowance among the respective loan categories.
The risk factors were revised primarily in consideration of the trend in
historical charge-off levels, enhanced loan underwriting procedures and an
evaluation of current economic trends and market conditions. A combination of
the risk factor adjustments and growth in the loan portfolio accounted for the
$965,000 and $1.7 million increases in the allowance allocated to the
commercial (including financial and agricultural) and consumer portfolios,
respectively. However, as a percentage of the AFLL, commercial and consumer
allocations were relatively unchanged from the prior year at 23.7 percent and
18.9 percent, respectively, at December 31, 1999 compared with 22.8 percent and
16.8 percent, respectively, at December 31, 1998. Approximately one-half of
Centura's loan portfolio consists of real estate mortgage loans. Accordingly,
the $5.1 million decline in the AFLL allocated to these loans was primarily
attributable to the adjustments in the risk factors. The $5.1 million decline
in the AFLL allocated to leases is primarily the result of lower volumes due to
Centura's decreased emphasis on the auto leasing product line which had failed
to meet target objectives. The increase in the unallocated amount was
influenced by the decline in the leasing portfolio, the impact of the
instability within the tobacco and other agricultural industries, the continued
assessment of the First Coastal portfolio, and the effects of the flooding from
Hurricane Floyd on the consumer portfolios.
- ---------
* Calculation excludes mortgage loans held for sale.
II-24
<PAGE>
Loans past due ninety or more days were $7.4 million at December 31, 1999,
down $1.7 million from the prior year. Accrual of interest on loans is
discontinued when management has serious doubts that such interest will be
collected in a reasonable period of time. Generally, open-end credit lines that
reach 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. 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.
In addition to nonperforming assets and past due loans, management has
identified approximately $25.0 million in loans that are currently performing
in accordance with their contractual terms that management believes may become
nonperforming during the remaining term of the loan.
Management believes the AFLL to be adequate based upon its current
judgment, evaluation, and analysis of the loan portfolio. Centura continuously
monitors overall credit quality and manages its credit processes, including
loans in past due and nonaccrual status. The AFLL represents management's
estimate of an amount adequate to provide for probable incurred current losses
in the loan portfolio. However, there are additional risks of future losses
that cannot be quantified precisely or attributed to particular loans or
classes of loans. Because those risks include general economic trends as well
as conditions affecting individual borrowers, management's judgment of the AFLL
is necessarily approximate and imprecise. The AFLL is also subject to
regulatory examinations and determinations as to adequacy, which may take into
account such factors as the methodology used to calculate the AFLL and the size
of the AFLL in comparison to peer banks identified by the regulatory agencies.
No assurances can be given that the ongoing evaluation of the loan portfolio in
light of economic conditions and other factors then prevailing will not require
significant future additions to the AFLL, thus adversely affecting the
operating results of Centura.
II-25
<PAGE>
Table 8
- --------------------------------------------------------------------------------
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
----------- ------------ ------------ ------------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at beginning of year .......... $72,310 $ 68,576 $ 63,105 $ 59,038 $ 52,492
Allowance related to loans sold and subsidiary sale ..... (556) -- -- -- --
Allowance for acquired loans ............................ 605 2,068 3,133 1,240 3,460
Provision for loan losses ............................... 32,977 15,644 13,643 9,746 8,079
Charge-offs:
Real estate loans ...................................... 1,921 1,469 1,888 1,024 2,061
Commercial and industrial loans ........................ 20,056 4,644 4,674 3,900 2,893
Agricultural loans (excluding real estate) ............. 260 95 256 70 229
Consumer loans ......................................... 8,516 7,547 5,628 4,690 3,226
Leases ................................................. 3,892 3,503 2,164 668 381
Other .................................................. 34 100 133 56 51
------- -------- -------- -------- --------
Total charge-offs .................................... 34,679 17,358 14,743 10,408 8,841
------- -------- -------- -------- --------
Recoveries on loans previously charged-off:
Real estate loans ...................................... 147 162 699 815 641
Commercial and industrial loans ........................ 998 1,193 1,640 1,391 2,166
Agricultural loans (excluding real estate) ............. 2 -- 45 10 --
Consumer loans ......................................... 1,483 1,851 1,007 1,195 1,019
Leases ................................................. 231 174 47 78 22
------- -------- -------- -------- --------
Total recoveries on loans previously charged-off ..... 2,861 3,380 3,438 3,489 3,848
------- -------- -------- -------- --------
Net charge-offs ......................................... 31,818 13,978 11,305 6,919 4,993
------- -------- -------- -------- --------
Allowance for loan losses at end of year ................ $73,518 $ 72,310 $ 68,576 $ 63,105 $ 59,038
======= ======== ======== ======== ========
Allowance and loss ratios:
Allowance for loan losses to total loans* ............... 1.25% 1.27% 1.37% 1.40% 1.38%
Net charge-offs to average loans* ....................... 0.55 0.26 0.24 0.16 0.12
Allowance for loan losses to nonperforming loans ........ 2.64x 2.24x 2.29x 2.70x 2.56x
</TABLE>
- ---------
* Calculation excludes mortgage loans held for sale.
II-26
<PAGE>
Table 9
- --------------------------------------------------------------------------------
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial, and agricultural ......... $17,443 $16,478 $14,601 $13,255 $12,442
Consumer ........................................ 13,874 12,146 10,925 8,249 8,675
Real estate -- mortgage ......................... 14,777 19,912 17,180 15,663 17,851
Real estate -- construction and land development 5,523 7,022 6,429 7,267 6,561
Leases .......................................... 3,363 8,489 5,865 2,142 1,060
Unallocated ..................................... 18,538 8,263 13,576 16,529 12,449
------- ------- ------- ------- -------
Allowance for loan losses at end of year ........ $73,518 $72,310 $68,576 $63,105 $59,038
======= ======= ======= ======= =======
</TABLE>
The allocation of the allowance for loan losses to the respective loan
classifications is not necessarily indicative of future losses or future
allocations. Refer to Table 3 for percentages of loans in each category to
total loans.
Table 10
- --------------------------------------------------------------------------------
NONPERFORMING ASSETS AND PAST DUE LOANS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans .............................. $ 27,824 $ 32,293 $ 29,969 $ 22,839 $ 22,116
Restructured loans ............................ -- -- -- 497 954
-------- -------- -------- -------- --------
Nonperforming loans .......................... 27,824 32,293 29,969 23,336 23,070
Foreclosed property ........................... 4,012 5,812 6,537 5,709 8,639
-------- -------- -------- -------- --------
Total nonperforming assets .................... $ 31,836 $ 38,105 $ 36,506 $ 29,045 $ 31,709
======== ======== ======== ======== ========
Accruing loans past due ninety days or more ... $ 7,391 $ 9,095 $ 7,052 $ 8,916 $ 6,132
Nonperforming assets to:
Loans and foreclosed property* ............... 0.54% 0.67% 0.73% 0.64% 0.74%
Total assets ................................. 0.35 0.43 0.47 0.42 0.49
</TABLE>
- ---------
* Calculation excludes mortgage loans held for sale.
NONINTEREST INCOME AND EXPENSE
Noninterest income ("NII") for 1999 totaled $152.7 million compared to
$140.5 million for 1998, an increase of $12.2 million or 8.7 percent. As a
percentage of total revenues, defined as the sum of taxable equivalent net
interest income and noninterest income, NII grew 41 basis points to 30.6
percent.
The increase in NII for 1999 was primarily driven by growth in income
received from service charges on deposits, brokerage commissions, credit card
related fees, and other noninterest income. Service charges on deposit
accounts, the largest component of NII, increased $5.1 million to $54.3
million, with changes to the fee structure for checking account products and
NSF fee increases in the beginning of 1999 accounting for the increase.
Brokerage commissions, supported by favorable market conditions during the
year, were up $3.1 million. Credit card related fees increased $1.9 million
over 1998, reflecting greater volume and the restructuring of the Travelsmart
credit card product. Other noninterest income includes a gain of $4.9 million
recorded as a result of the sale of Centura's technology leasing subsidiary,
CLG. Operating lease income, directly impacted by this sale, was down $1.3
million for the year.
Mortgage income for 1999 was $23.1 million, $514,000 greater than 1998.
During 1999, Centura sold its Ginnie Mae servicing portfolio, resulting in a
gain of $3.4 million. The sale was driven by the value inherent in the rate
environment at the time of the sale combined with the increased operating
efficiencies expected from selling the labor intensive portfolio. Excluding the
gain from this sale, mortgage income, affected by rising interest rates causing
origination volume to slow, declined $2.9 million from prior year.
II-27
<PAGE>
The acquisition of Capital Advisors in the first quarter of 1999 increased
broker loan fees, another component of NII, by $3.0 million. Unfavorably
impacting NII were $1.2 million relating to securities sales, reflecting
management's decision to restructure portions of the investment portfolio in an
attempt to optimize yields in the future and $3.9 million in losses from sales
of fixed assets.
Excluding non-recurring merger-related expenses of $6.9 million,
noninterest expense ("NIE") totaled $295.2 million, a 1.7 percent increase over
1998 and produced an efficiency ratio of 59.10 percent. Including the
merger-related expenses, NIE increased $11.7 million or 4.0 percent to $302.1
million for 1999, compared to 1998 NIE of $290.4 million. Personnel costs are
the single largest component of NIE and increased 3.9 percent or $5.7 million
over 1998. Normal salary growth in combination with higher fringe benefit costs
were primarily responsible for this increase. Offsetting the rise in personnel
costs was management's decision not to pay certain incentive-based bonuses as a
result of Centura not achieving established targets. Occupancy expenses and
equipment expenses increased $1.3 million and decreased $1.9 million,
respectively, compared to 1998. Fees for outsourced services, i.e., the
outsourcing of various functions such as items processing, property management,
and call processing generated from Centura's telephone banking center, all of
which are heavily volume based, were up $1.9 million for the year ended
December 31, 1999. The increase is attributed to greater volumes associated
with growth in the customer base and the integration of new customers gained
through acquisitions and new locations. As expected, the 1999 acquisitions
contributed to an increase in intangibles amortization of $1.5 million for
total intangibles amortization of $10.4 million for the year. Telephone
expenses increased $830,000 over 1998.
Marketing expense, office supply costs and losses other than loans
decreased, $2.5 million, $873,000 and $1.6 million, respectively. Marketing
expenses dropped as a result of decreased emphasis on marketing campaigns.
As discussed below in the "Year 2000" section, Centura incurred additional
expense related to Year 2000 remediation efforts. Direct and indirect expenses
for 1999 and 1998, which are included throughout the various components of
noninterest expense, were approximately $4.8 million and $5.0 million,
respectively.
INCOME TAX EXPENSE
Income tax expense for 1999, 1998 and 1997 was $53.1 million, $52.3
million and $45.0 million, respectively. The 1999, 1998 and 1997 effective tax
rates were 33.79 percent, 34.25 percent, and 34.04 percent, respectively. The
effective tax rate was reduced in 1999 as a result of adjustments to expected
recoverable amounts. Refer to the Notes to Consolidated Financial Statements,
Note 15, for a reconciliation of the statutory federal income tax rate of 35.00
percent to the effective tax rates for the periods presented.
EQUITY AND CAPITAL RESOURCES
Shareholders' equity as of December 31, 1999 and 1998 was $689.7 million
and $676.2 million, respectively, and represented 7.6 percent and 7.7 percent
of year-end assets, respectively. The growth in shareholders' equity has been a
function of the retention of earnings, the issuance of common stock in
connection with acquisitions and the exercise of stock options. Offsetting
increases to shareholders' equity are repurchases of common stock, which
Centura executes from time to time, unrealized gains and losses on available
for sale securities and dividends to shareholders. For the year ended December
31, 1999, Centura repurchased 650,000 shares of its common stock for an
aggregate cost of $32.3 million.
Centura's common stock is traded on the New York Stock Exchange under the
symbol "CBC". At December 31, 1999, Centura had approximately 13,233
shareholders and had 28,117,897 shares outstanding. Annual cash dividends have
consistently increased and have been paid without interruption over the past 33
years. Generally, dividends are paid on or about the 15th day of the final
month in the quarter. For 1999 and 1998, cash dividends paid were $35.0 million
and $31.3 million, respectively, representing $1.25 and $1.14 on a per share
basis, respectively, before restatement for the merger with First Coastal. On a
restated basis, per share dividends were $1.25 and $1.11 for 1999 and 1998,
respectively.
Centura's capital ratios are greater than the minimums required by
regulatory guidelines. Centura intends to maintain an optimal capital and
leverage mix. At December 31, 1999, Centura and the Bank had the requisite
capital levels to qualify as well capitalized. As a result of its well
capitalized status, the Bank is assessed at the lowest FDIC insurance premium
rates available for financial institutions under each insurance fund. The Bank
has deposits insured under both of the FDIC's insurance funds, the BIF and the
SAIF. Centura's total capital and Tier I capital were $874.1 million and $703.7
million, respectively at the end of 1999. Note 20 in the consolidated financial
statements presents the capital ratios for Centura and the Bank for 1999 and
1998. As discussed in the "Liquidity" section, Capital Securities are a
component of Tier I capital.
II-28
<PAGE>
Table 11
- --------------------------------------------------------------------------------
CAPITAL RATIOS OF CENTURA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total Tier I Tier I
Capital Capital Leverage
----------- ----------- ---------
<S> <C> <C> <C>
1999 ........................ 12.83% 10.33% 7.92%
1998 ........................ 10.79 10.18 7.79
Minimum requirement .........(> or = ) 8.00 (> or =) 4.00 (> or =) 4.00
------ ------ ------
</TABLE>
Regulatory agencies have generally taken the position not to include net
unrealized gains or losses on available for sale investment securities in
calculating Tier 1 capital.
LIQUIDITY
Centura's liquidity management objective is to meet maturing debt
obligations, fund loan commitments and deposit withdrawals, and manage
operations on a cost effective basis. Management believes that sufficient
resources are available to meet Centura's liquidity objective through its debt
maturity structure, holdings of liquid assets, and access to the capital
markets through a variety of funding vehicles. Proper liquidity management is
crucial to ensure that Centura is able to take advantage of new business
opportunities as well as meet the demands of its customers.
Investment securities are an important tool to Centura's liquidity
management objective. Securities classified as available for sale represent an
accessible source of liquidity through either repurchase programs or
liquidation.
The Bank's traditional funding sources consist primarily of established
federal funds lines with major banks, proceeds from matured investments,
contracts to repurchase investment securities, principal repayments on loans,
and core deposit growth. At December 31, 1999, the Bank had $2.0 billion in
total federal funds lines available. In addition, the Bank had the ability to
borrow up to $693.2 million from the FHLB, of which $634.9 million was
outstanding at year-end 1999.
The Bank also 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 addition, Centura also accepts Eurodeposits,
has a master note commercial paper facility, and offers brokered certificates
of deposit.
Finally, Centura has the ability to draw from an unsecured line of credit
of up to $60.0 million. At both December 31, 1999 and 1998, $10.0 million was
outstanding under this line.
Management is not aware of any events that are reasonably likely to have a
material effect on Centura's liquidity, capital resources or operations. In
addition, management is not aware of any regulatory recommendations, which if
implemented, would have a material effect on Centura.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. Centura's market risk primarily stems from interest rate risk, the
potential economic loss due to future changes in interest rates, which is
inherent in lending and deposit gathering activities. Centura's objective is to
manage the mix of interest-sensitive assets and liabilities to minimize
interest rate risk and stabilize the net interest margin and the market value
of equity while optimizing profit potential. Centura does not maintain a
trading account nor is it subject to currency exchange risk or commodity price
risk.
The table below illustrates the scheduled maturity of selected on-balance
sheet financial instruments and their estimated fair values at December 31,
1999. For loans, investment securities, and long-term debt obligations,
principal cashflows are presented by expected maturity date including the
weighted-average interest rate by exposure category. Weighted-average variable
rates are based on implied forward rates in the yield curve at year-end.
Prepayment assumptions are based on rates evolving along the implied forward
yield curve at year-end and reflect market conventional prepayment behavior.
For deposits without contractual maturities, including interest checking,
savings, and money market accounts, cashflows are separated
II-29
<PAGE>
into "core" and "non-core" components. The non-core cashflows are scheduled to
mature in 2000 while the core cashflows are presented based on management's
assessment of runoff.
Centura utilizes off-balance sheet derivative financial instruments as one
means of managing its interest rate risk associated with on-balance sheet
financial instruments. Refer to Table 13 for a summary of market risk
information relative to off-balance sheet financial instruments and to the
"Asset/Liability and Interest Rate Risk Management" section for further
information on how Centura manages its interest rate risk.
Table 12
- --------------------------------------------------------------------------------
RATE SENSITIVE ON-BALANCE SHEET FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Maturing in:
-----------------------------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter
--------------- ------------- ------------- ------------- ------------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Rate Sensitive Assets:
Loans, gross
Fixed rate ................... $ 1,381,859 $ 543,162 $ 336,416 $ 199,283 $ 92,804 $ 182,676
Average rate (%) ............. 8.13 8.53 8.49 8.42 7.86 8.25
Variable rate ................ 1,920,954 599,251 320,320 241,675 51,110 109,873
Average rate (%) ............. 9.25 10.29 10.35 10.45 9.70 9.52
Investment securities
Fixed rate ................... 291,078 371,667 422,432 258,941 149,507 560,016
Average rate (%) ............. 6.37 6.18 6.07 5.99 6.28 6.47
Variable rate ................ 29,407 80,590 18,685 29,873 22,645 76,096
Average rate (%) ............. 6.62 7.07 7.78 7.66 7.46 8.53
Rate Sensitive Liabilities:
Interest-bearing checking,
savings, money market ........ $ 1,432,105 $ 172,837 $ 172,837 $ 172,837 $172,837 $ 345,671
Average rate (%) ............. 3.65 2.64 2.61 2.61 2.63 2.68
Time deposits ................. 2,095,212 237,251 265,147 32,507 64,544 79,891
Average rate (%) ............. 5.09 5.21 5.98 6.04 6.44 7.27
Borrowed funds ................ 1,400,247 -- -- -- -- --
Average rate (%) ............. 4.96 -- -- -- -- --
Long-term debt ................ 285,744 154,516 80,400 10,124 128 229,988
Average rate (%) ............. 5.86 7.19 6.57 5.30 2.54 7.48
<CAPTION>
Fair Value
December 31,
Total 1999
--------------- -------------
(dollars in thousands)
<S> <C> <C>
Rate Sensitive Assets:
Loans, gross
Fixed rate ................... $ 2,736,200 $2,742,781
Average rate (%) ............. 8.27
Variable rate ................ 3,243,183 3,316,262
Average rate (%) ............. 9.66
Investment securities
Fixed rate ................... 2,053,641 2,009,921
Average rate (%) ............. 6.25
Variable rate ................ 257,296 255,393
Average rate (%) ............. 7.61
Rate Sensitive Liabilities:
Interest-bearing checking,
savings, money market ........ $ 2,469,124 $2,469,124
Average rate (%) ............. 3.23
Time deposits ................. 2,774,552 2,769,215
Average rate (%) ............. 5.29
Borrowed funds ................ 1,400,247 1,400,247
Average rate (%) ............. 4.96
Long-term debt ................ 760,900 759,829
Average rate (%) ............. 6.69
</TABLE>
ASSET/LIABILITY AND INTEREST RATE RISK MANAGEMENT
Centura's Asset/Liability Management Committee seeks to maintain a general
balance between interest-sensitive assets and liabilities to insulate net
interest income and shareholders' equity from significant adverse changes in
market interest rates. Mismatches in interest rate repricings of assets and
liabilities arise from the interaction of customer business needs and Centura's
discretionary asset and liability management activities. Exposure to changes in
the level and direction of interest rates is managed by adjusting the
asset/liability mix through the use of various interest rate risk management
products, including derivative financial instruments.
Off-balance sheet derivative financial instruments, such as interest rate
swaps, interest rate floor and cap arrangements, and interest rate futures and
option contracts ("swaps, floors, caps, futures and options," respectively),
are an integral part of Centura's interest rate risk management activities.
Centura has principally utilized interest rate swaps, floors and caps. Swaps
are used to manage interest rate risk, reduce funding costs, and allow Centura
to utilize diversified funding sources. Floors are used to protect certain
designated variable rate financial instruments from the downward effects of
their repricing in the event of a decreasing rate environment. Caps are used to
protect certain designated financial instruments from the negative repricing
effects of an increasing rate environment. Options provide the right, but not
obligation, to put or call securities back to a third party at an agreed upon
price under the specific terms of each agreement. Table 13 summarizes Centura's
off-balance sheet derivative financial instruments at December 31, 1999.
Notional amounts represent the amount on which calculations of interest
payments to be exchanged are based. Refer to Note 16 of the Notes to
Consolidated Financial Statements for a comparative summary of Centura's
off-balance sheet instruments at December 31, 1999 and 1998 and for a detailed
discussion of related risks and to Note 1 of the Notes to Consolidated
Financial Statements for discussion of the accounting policy for these
off-balance sheet financial instruments. On-balance sheet and off-balance sheet
financial
II-30
<PAGE>
instruments are managed on an integrated basis as part of Centura's overall
asset/liability management function. The value of any single component of the
on-balance sheet or off-balance sheet position should not be viewed
independently.
Table 13
- --------------------------------------------------------------------------------
RATE SENSITIVE DERIVATIVE FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Notional Amounts Maturing In:
---------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter Total
------------- ------------- ------------- ------------ ----------- ------------ -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Corporation pays fixed
rates/receives variable ......... $ 118,000 $ 165,000 $ 110,000 $ 45,000 $ -- $ 44,219 $ 482,219
Average rate paid (%) ........... 6.05 5.92 5.85 4.95 -- 6.10 5.86
Average rate received (%) ....... 6.23 6.10 6.15 6.10 -- 5.95 6.13
Corporation pays variable
rates/receives fixed ............ 93,000 218,000 -- 40,000 40,000 165,000 556,000
Average rate paid (%) ........... 6.18 6.13 -- 6.06 6.06 5.91 6.06
Average rate received (%) ....... 5.67 5.99 -- 5.96 5.94 6.37 6.04
Corporation pays variable
rates/receives variable ......... 50,000 -- -- -- -- -- 50,000
Average rate paid (%) ........... 6.51 -- -- -- -- -- 6.51
Average rate received (%) ....... 6.12 -- -- -- -- -- 6.12
Interest rate floors (LIBOR) ..... 50,000 30,000 50,000 -- -- -- 130,000
Average strike rate (%) ......... 6.00 6.00 5.50 -- -- -- 5.81
Interest rate floors (CMS) ....... -- -- -- 125,000 -- -- 125,000
Average strike rate (%) ......... -- -- -- 5.20 -- -- 5.20
Interest rate caps (LIBOR) ....... -- -- 10,000 -- 12,000 -- 22,000
Average strike rate (%) ......... -- -- 7.00 -- 7.00 -- 7.00
Interest rate caps (CMS) ......... -- -- -- 125,000 -- -- 125,000
Average strike rate (%) ......... -- -- -- 6.94 -- -- 6.94
<CAPTION>
Weighted
Average
Fair Value Carrying Remaining
December Value Contractual
31, 1999 December Term
Gain/(Loss) 31, 1999 (Years)
------------- ---------- ------------
(dollars in thousands)
<S> <C> <C> <C>
Corporation pays fixed
rates/receives variable ......... $ 10,209 $ -- 2.6
Average rate paid (%) ...........
Average rate received (%) .......
Corporation pays variable
rates/receives fixed ............ (12,788) -- 4.4
Average rate paid (%) ...........
Average rate received (%) .......
Corporation pays variable
rates/receives variable ......... (8) -- 0.2
Average rate paid (%) ...........
Average rate received (%) .......
Interest rate floors (LIBOR) ..... 110 366 1.3
Average strike rate (%) .........
Interest rate floors (CMS) ....... 127 -- 3.8
Average strike rate (%) .........
Interest rate caps (LIBOR) ....... 418 374 3.8
Average strike rate (%) .........
Interest rate caps (CMS) ......... (3,554) -- 3.8
Average strike rate (%) .........
</TABLE>
Asset/liability simulation models are utilized to evaluate the dynamics of
the balance sheet and to estimate earnings volatility under different interest
rate environments. These simulations include calculating the impact of
significant fluctuations in interest rates, both increases and decreases, on
net interest income and the estimated fair value of assets and liabilities.
Based on a 100 basis point rate shock in either direction, this simulation as
of December 31, 1999 shows Centura's interest rate risk position to be
relatively neutral: net interest income would not vary by more than
approximately 2 percent and the estimated market value of equity would not vary
by more than approximately 3.5 percent. Centura seeks a reasonable balance
between a satisfactorily high and stable return on average shareholders' equity
and a satisfactorily high and stable estimated market value of equity.
An interest rate gap analysis is shown in Table 14 as of December 31,
1999. Gap analysis is generally based on the timing of contractual maturities
and repricing opportunities of interest-sensitive assets and liabilities
including management's assumptions relative to financial instruments subject to
prepayment and indeterminate life deposits. A gap is considered positive when
the amount of interest-sensitive assets exceeds the amount of
interest-sensitive liabilities. At December 31, 1999, Centura had a negative
one-year cumulative interest sensitivity gap of approximately $930.3 million.
The interest rate gap analysis is a static indicator which does not reflect
various repricing characteristics and may not necessarily indicate the
sensitivity of net interest income in a changing interest rate environment.
II-31
<PAGE>
Table 14
- --------------------------------------------------------------------------------
INTEREST SENSITIVITY ANALYSIS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
As of December 31, 1999 (2)
---------------------------------------------
1-30 31-60 61-90
Days Days Days
--------------- -------------- --------------
(dollars in thousands)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans .............................................. $ 3,327,293 $ 177,875 $ 129,978
Investment securities .............................. 104,763 20,504 33,673
Other short-term investments ....................... 127,988 -- --
----------- ---------- ----------
Total interest-earning assets ...................... 3,560,044 198,379 163,651
Notional amount of interest rate swaps ............. 133,838 107,425 280,956
----------- ---------- ----------
Total interest-earning assets and off-balance sheet
derivative financial instruments .................. $ 3,693,882 $ 305,804 $ 444,607
=========== ========== ==========
INTEREST-BEARING LIABILITIES
Time deposits over $100............................. $ 155,031 $ 76,074 $ 88,810
All other deposits (1) ............................. 1,591,410 382,320 400,409
Borrowed funds ..................................... 1,225,247 175,000 --
Long-term debt ..................................... 50,126 204,104 200,076
----------- ---------- ----------
Total interest-bearing liabilities ................. 3,021,814 837,498 689,295
Notional amount of interest rate swaps ............. 178,000 145,000 253,000
----------- ---------- ----------
Total interest-bearing liabilities and off-balance
sheet derivative financial instruments ............ $ 3,199,814 $ 982,498 $ 942,295
=========== ========== ==========
Interest sensitivity gap per period ................ $ 494,068 $ (676,694) $ (497,688)
Cumulative interest sensitivity gap ................ $ 494,068 $ (182,626) $ (680,314)
Cumulative ratio of interest-sensitive assets to
interest-sensitive liabilities .................... 1.15x 0.96x 0.87x
<CAPTION>
As of December 31, 1999 (2)
-------------------------------------------------------------------------
Total Total
91-180 181-365 Under Over
Days Days One Year One Year Total
---------------- -------------- ------------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans .............................................. $ 342,635 $ 510,342 $4,488,123 $1,491,260 $5,979,383
Investment securities .............................. 94,941 220,430 474,311 1,836,626 2,310,937
Other short-term investments ....................... -- -- 127,988 -- 127,988
------------ ---------- ---------- ---------- ----------
Total interest-earning assets ...................... 437,576 730,772 5,090,422 3,327,886 8,418,308
Notional amount of interest rate swaps ............. 65,000 38,000 625,219 463,000 1,088,219
------------ ---------- ---------- ---------- ----------
Total interest-earning assets and off-balance sheet
derivative financial instruments .................. $ 502,576 $ 768,772 $5,715,641 $3,790,886 $9,506,527
============ ========== ========== ========== ==========
INTEREST-BEARING LIABILITIES
Time deposits over $100............................. $ 147,674 $ 117,579 $ 585,168 $ 91,871 $ 677,039
All other deposits (1) ............................. 684,648 413,038 3,471,825 2,018,971 5,490,796
Borrowed funds ..................................... -- -- 1,400,247 -- 1,400,247
Long-term debt ..................................... 5,231 5,207 464,744 296,156 760,900
------------ ---------- ---------- ---------- ----------
Total interest-bearing liabilities ................. 837,553 535,824 5,921,984 2,406,998 8,328,982
Notional amount of interest rate swaps ............. 85,000 63,000 724,000 364,219 1,088,219
------------ ---------- ---------- ---------- ----------
Total interest-bearing liabilities and off-balance
sheet derivative financial instruments ............ $ 922,553 $ 598,824 $6,645,984 $2,771,217 $9,417,201
============ ========== ========== ========== ==========
Interest sensitivity gap per period ................ $ (419,977) $ 169,948 $ (930,343)
Cumulative interest sensitivity gap ................ $ (1,100,291) $ (930,343)
Cumulative ratio of interest-sensitive assets to
interest-sensitive liabilities .................... 0.82x 0.86x
</TABLE>
- ---------
(1) To be consistent with simulation modeling, checking, regular money market,
and regular savings accounts are separated into core and non-core
components. The non-core component is repriced evenly over the first 3
months. The core component is spread evenly over a 7 year period.
(2) Expected maturities may differ from contractual maturities because
borrowers have the right to prepay obligations with or without call or
prepayment penalties. Mortgages and mortgage-backed securities' principal
cash flows are modeled by aggregating similar coupon and age instruments
and applying the appropriate median prepayment speeds.
FOURTH QUARTER RESULTS
Net income for 1999's fourth quarter was $29.9 million or $1.05 per
diluted share, up from the $25.4 million or $0.88 per diluted share earned for
the comparable 1998 period.
Average interest-earning assets for 1999's fourth quarter were $8.2
billion compared to $7.8 billion in the prior year, up $399.6 million. Average
interest-bearing liabilities also increased, up $375.5 million over prior years
fourth quarter. The average rate earned and paid on interest-earning assets and
interest-bearing liabilities was 8.16 percent and 4.51 percent, respectively,
for fourth quarter 1999 compared to 8.13 percent and 4.41 percent,
respectively, for fourth quarter 1998. Taxable equivalent net interest income
increased $4.4 million over 1998, principally due to the growth in average
interest-earning asset volume. Interest expense for the three months ended
December 31, 1999 was $82.2 million, an increase of $6.1 million over the prior
year quarter. This variance was attributable primarily to volume growth which
added $5.6 million to interest expense. The net interest margin declined 3
basis points to 4.23 percent.
Noninterest income declined $2.3 million when compared to fourth quarter
1998 to total $34.2 million. Mortgage income declined $3.2 million between
quarters, a result of slower loan volume in a rising interest rate environment.
The third quarter 1999 sale of CLG caused operating lease income to drop $1.4
million when comparing fourth quarter 1999 with fourth quarter 1998. Increases
of $1.2 million, $575,000, and $387,000 were realized in brokerage commissions,
service charges on deposits, and credit card related fees, respectively.
Securities gains and losses were up $651,000 over 1998, reflecting gains
realized on the sale of Centura's investment in Triangle stock.
Noninterest expense declined 7.0 percent from the fourth quarter of 1998
to total $69.7 million for the fourth quarter of 1999. Personnel expenses were
down $2.2 million, reflecting 95 fewer FTE's. Higher fringe benefit costs
offset these
II-32
<PAGE>
savings. Decreased emphasis on marketing campaigns favorably impacted marketing
expenses by $1.2 million. Equipment costs were down $1.1 million, primarily the
result of equipment coming off lease. Losses other than loans were down
$897,000.
The efficiency ratio for the fourth quarter of 1999 improved 532 basis
points over 1998's fourth quarter to 56.93 percent.
Table 15, "Quarterly Financial Summary," presents the quarterly results of
operations, selected average balances and certain other selected data by
quarter for the years ended December 31, 1999 and 1998.
Table 15
- --------------------------------------------------------------------------------
QUARTERLY FINANCIAL SUMMARY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999
-------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
(thousands)
Interest income ............... $ 168,540 $ 162,465 $ 157,982 $ 157,572
Interest expense .............. 82,249 76,183 73,877 74,784
--------- --------- --------- ---------
Net interest income ........... 86,291 86,282 84,105 82,788
Provision for loan losses ..... 5,900 14,400 6,411 6,266
Noninterest income ............ 34,243 41,459 38,758 38,233
Noninterest expense ........... 69,675 75,602 73,968 82,818
Income taxes .................. 15,040 12,996 13,695 11,360
--------- --------- --------- ---------
Net income .................... $ 29,919 $ 24,743 $ 28,789 $ 20,577
========= ========= ========= =========
PER COMMON SHARE
Net income -- basic ........... $ 1.06 $ .87 $ 1.01 $ .72
Net income -- diluted ......... 1.05 .86 1.00 .71
Cash dividends paid ........... .32 .32 .32 .29
SELECTED AVERAGE BALANCES
(millions)
Assets ........................ $ 8,962 $ 8,776 $ 8,774 $ 8,770
Loans ......................... 5,891 5,864 5,872 5,850
Deposits ...................... 6,109 6,012 6,015 6,006
Shareholders' equity .......... 691 702 696 693
MARKET PRICES
High .......................... $ 52.938 $ 58.125 $ 62.000 $ 73.875
Low ........................... 41.375 39.625 54.938 58.188
Close ......................... 44.125 41.375 56.375 58.188
<CAPTION>
1998
-------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
(thousands)
Interest income ............... $ 158,137 $ 158,560 $ 156,045 $ 148,976
Interest expense .............. 76,185 77,186 76,758 73,498
--------- --------- --------- ---------
Net interest income ........... 81,952 81,374 79,287 75,478
Provision for loan losses ..... 4,575 4,041 3,635 3,393
Noninterest income ............ 36,564 37,018 34,625 32,314
Noninterest expense ........... 74,919 74,391 72,425 68,662
Income taxes .................. 13,625 13,613 12,770 12,249
--------- --------- --------- ---------
Net income .................... $ 25,397 $ 26,347 $ 25,082 $ 23,488
========= ========= ========= =========
PER COMMON SHARE
Net income -- basic ........... $ .90 $ .93 $ .89 $ .85
Net income -- diluted ......... .88 .92 .87 .83
Cash dividends paid ........... .29 .28 .28 .26
SELECTED AVERAGE BALANCES
(millions)
Assets ........................ $ 8,561 $ 8,226 $ 8,149 $ 7,798
Loans ......................... 5,591 5,433 5,358 5,120
Deposits ...................... 5,985 5,965 5,860 5,742
Shareholders' equity .......... 673 652 630 603
MARKET PRICES
High .......................... $ 74.375 $ 71.125 $ 75.500 $ 72.188
Low ........................... 60.250 56.000 61.313 64.688
Close ......................... 74.375 63.000 62.500 71.250
</TABLE>
II-33
<PAGE>
1998 COMPARED TO 1997
Centura reported net income of $100.3 million or $3.50 per diluted share
for the year ended December 31, 1998 compared with $87.2 million or $3.11 per
diluted share reported in 1997. Items of significance are discussed below.
Net interest income on a taxable equivalent basis increased by $30.8
million, or 10.5 percent, to $325.4 million in 1998, primarily due to the
impact of average interest-earning asset growth which exceeded the growth in
interest-bearing liabilities. Average interest-earning assets increased $831.2
million while interest-bearing liabilities increased $727.6 million. The net
interest margin decreased to 4.37 percent during 1998 from 4.44 percent during
1997. The margin was influenced by the interest rate environment, tighter
credit spreads, increased competition and changes in the product mix. Net
interest income, excluding the taxable equivalent adjustment, was $318.1
million in 1998 compared to $286.9 million in 1997.
Nonperforming assets were $38.1 million at December 31, 1998, representing
0.43 percent of total assets, compared with $36.5 million or 0.47 percent of
total assets at year-end 1997, with nonaccrual leases accounting for a majority
of the increase. The allowance for loan losses represented 1.27* percent of
total loans at year-end 1998 compared with coverage of 1.37* percent at
year-end 1997. The decline in the allowance was the result of substantial loan
growth during the fourth quarter of 1998, a portion of which were mortgage
loans held for sale that were sold during the first quarter of 1999. Net
charge-offs increased 2 basis points to 0.26* percent of average loans.
Noninterest income for 1998 increased $28.3 million to $140.5 million
compared to $112.3 million for 1997. Service charges on deposits increased $7.8
million, primarily as a result of new deposits and the impact of a mid-1997 fee
increase for NSF transactions. Other service charges, commissions and fees were
up $8.1 million, driven by growth of $4.8 million in insurance commissions and
$617,000 in securities commissions. The addition of M&J in 1998 and Betts &
Company in 1997 supported the growth in insurance commissions. Mortgage income,
benefiting from 1998's low interest rate environment, added an additional $8.1
million to noninterest income over 1997. Heavier volume contributed to
increases of $2.9 million, $1.3 million, and $1.6 million in net operating
lease income, credit card fees and trust fees, respectively.
Noninterest expense for 1998 when compared to 1997 increased by $37.0
million to total $290.4 million. Personnel costs were up $22.1 million driven
by additional full time equivalents. Occupancy and equipment expenses combined
increased $2.0 million, impacted by the additions of financial stores through
the Pee Dee acquisition and the opening of 7 supermarket locations. Other
noninterest expenses, up $13.2 million over 1997, represented increases in fees
for outsourced services, intangibles amortization and telephone expenses which
were partially offset by savings for marketing expenses and legal and
professional fees.
YEAR 2000
As of the date of this report, Centura has not experienced any material
effects related to the Year 2000 readiness problem. Although Centura has not
been informed of any material risks associated with the Year 2000 problem from
third parties, there can be no assurance that Centura will not be impacted in
the future. Centura will continuously monitor its business applications and
maintain contact with its third party vendors and key business partners to
resolve any Year 2000 problems that may arise in the future.
Monitoring and managing the Year 2000 project resulted in additional
nonrecurring expenditures. Direct costs included charges by third party
software vendors for product enhancements, costs involved in testing software
products for Year 2000 compliance, and any resulting costs for developing and
implementing contingency plans for critical software products which were not
enhanced. In addition to the direct costs, indirect costs were also incurred.
These indirect costs consisted principally of the time devoted by existing
employees in monitoring software vendor progress, testing enhanced software
products, and implementing any necessary contingency plans. The Emerging Issues
Task Force provided guidance concerning the accounting for the costs related to
Year 2000 modification. The costs of the modifications were treated as regular
maintenance and repair and charged to expense as incurred.
These direct and indirect costs did not have a material effect on
Centura's results of operations. Including direct and indirect expenditures,
Centura expensed approximately $4.8 million and $5.0 million related to Year
2000 compliance efforts during 1999 and 1998, respectively.
- ---------
* Calculation excludes mortgage loans held for sale.
II-34
<PAGE>
CURRENT ACCOUNTING MATTERS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 cashflows 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 Activitie -- 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. Centura 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.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See pages 29-32 of the Form 10-K for quantitative and qualitative
disclosures about market risk.
II-35
<PAGE>
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
STATEMENT OF MANAGEMENT RESPONSIBILITY
THE BOARD OF DIRECTORS AND SHAREHOLDERS
CENTURA BANKS, INC.
Management of Centura Banks, Inc. and its subsidiaries has prepared the
consolidated financial statements and other information in the annual report in
accordance with generally accepted accounting principles and is responsible for
their accuracy.
In meeting its responsibility, management relies on internal controls,
which include selection and training of qualified personnel, establishment and
communication of accounting and administrative policies and procedures, and
appropriate segregation of responsibilities and programs of internal audits.
These controls are designed to provide reasonable assurance that financial
records are reliable for preparing financial statements and maintaining
accountability for assets and that assets are safeguarded against unauthorized
use or disposition. Such assurance cannot be absolute because of inherent
limitations in internal controls.
Management also recognizes its responsibility to foster a climate in which
corporate affairs are conducted with the highest ethical standards. Centura's
Code of Ethics, furnished to each employee and director, addresses the
importance of open internal communications, potential conflicts of interest,
compliance with applicable laws, including those related to financial
disclosure, the confidentiality of proprietary information and other items.
There is an ongoing program to assess compliance with these policies.
The Audit Committee of Centura's Board of Directors consists solely of
outside directors. The Audit Committee meets periodically with management and
the independent accountants to discuss audit, financial reporting, and related
matters. KPMG LLP and the Corporation's internal auditors have direct access to
the Audit Committee.
/S/Michael S. Patterson
Michael S. Patterson
Chairman of the Board
/S/Cecil W. Sewell, Jr.
Cecil W. Sewell, Jr.
Chief Executive Officer
/S/Steven J. Goldstein
Steven J. Goldstein
Chief Financial Officer
II-36
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
CENTURA BANKS, INC.
We have audited the accompanying consolidated balance sheets of Centura
Banks, Inc. and subsidiaries (the "Corporation") as of December 31, 1999 and
1998, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the years in the three-year period ended December
31, 1999. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Centura
Banks, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Raleigh, North Carolina
January 11, 2000
II-37
<PAGE>
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 .................................................................. $ 285,468 $ 289,230
Due from banks, interest-bearing ......................................................... 12,302 21,963
Federal funds sold ....................................................................... 115,686 17,646
Investment securities:
Available for sale (cost of $2,256,770 and $2,036,707, respectively) .................... 2,210,698 2,057,270
Held to maturity (fair value of $54,616 and $106,432, respectively) ..................... 54,167 103,767
Loans, net of unearned income ............................................................ 5,979,383 5,833,670
Less allowance for loan losses .......................................................... 73,518 72,310
---------- ----------
Net loans ............................................................................ 5,905,865 5,761,360
Premises and equipment ................................................................... 116,764 120,405
Other assets ............................................................................. 422,298 423,919
---------- ----------
Total assets ............................................................................. $9,123,248 $8,795,560
========== ==========
LIABILITIES
Deposits:
Demand, noninterest-bearing ............................................................. $ 924,159 $ 979,346
Interest-bearing ........................................................................ 4,566,637 4,569,243
Time deposits over $100 ................................................................. 677,039 520,060
---------- ----------
Total deposits ....................................................................... 6,167,835 6,068,649
Borrowed funds ........................................................................... 1,400,247 1,299,337
Long-term debt ........................................................................... 760,900 614,284
Other liabilities ........................................................................ 104,541 137,085
---------- ----------
Total liabilities ........................................................................ 8,433,523 8,119,355
---------- ----------
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
28,117,897 and 28,318,226, respectively ................................................. 192,536 205,237
Common stock acquired by ESOP ............................................................ (28) (107)
Retained earnings ........................................................................ 526,384 458,375
Accumulated other comprehensive (loss) income ............................................ (29,167) 12,700
---------- ----------
Total shareholders' equity ............................................................... 689,725 676,205
---------- ----------
Total liabilities and shareholders' equity ............................................... $9,123,248 $8,795,560
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
II-38
<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 ............................................. $ 510,210 $ 492,020 $ 446,115
Investment securities:
Taxable .......................................................... 131,591 125,933 113,244
Tax-exempt ....................................................... 1,744 2,099 2,484
Short-term investments ............................................ 3,014 1,666 1,845
----------- ----------- -----------
Total interest income ............................................. 646,559 621,718 563,688
INTEREST EXPENSE
Deposits .......................................................... 202,810 217,216 203,669
Borrowed funds .................................................... 61,038 53,502 45,193
Long-term debt .................................................... 43,245 32,909 27,959
----------- ----------- -----------
Total interest expense ............................................ 307,093 303,627 276,821
----------- ----------- -----------
NET INTEREST INCOME ............................................... 339,466 318,091 286,867
Provision for loan losses ......................................... 32,977 15,644 13,643
----------- ----------- -----------
Net interest income after provision for loan losses ............... 306,489 302,447 273,224
NONINTEREST INCOME
Service charges on deposit accounts ............................... 54,291 49,184 41,431
Credit card and related fees ...................................... 8,237 6,358 5,036
Other service charges, commissions, and fees ...................... 34,650 30,910 22,787
Fees for trust services ........................................... 10,340 9,304 7,737
Mortgage income ................................................... 23,074 22,560 14,413
Other noninterest income .......................................... 22,634 21,519 20,713
Securities (losses) gains, net .................................... (533) 686 151
----------- ----------- -----------
Total noninterest income .......................................... 152,693 140,521 112,268
NONINTEREST EXPENSE
Personnel ......................................................... 149,093 143,440 121,356
Occupancy ......................................................... 19,720 18,410 15,957
Equipment ......................................................... 20,279 22,225 22,702
Foreclosed real estate losses and related operating expense, net .. 1,611 1,258 1,470
Merger-related expenses ........................................... 6,858 -- --
Other operating expense ........................................... 104,502 105,064 91,872
----------- ----------- -----------
Total noninterest expense ......................................... 302,063 290,397 253,357
----------- ----------- -----------
Income before income taxes ........................................ 157,119 152,571 132,135
Income taxes ...................................................... 53,091 52,257 44,974
----------- ----------- -----------
NET INCOME ........................................................ $ 104,028 $ 100,314 $ 87,161
=========== =========== ===========
NET INCOME PER COMMON SHARE
Basic ............................................................. $ 3.66 $ 3.57 $ 3.17
Diluted ........................................................... 3.62 3.50 3.11
AVERAGE COMMON SHARES OUTSTANDING
Basic ............................................................. 28,397,523 28,115,907 27,489,803
Diluted ........................................................... 28,764,663 28,674,665 28,058,427
</TABLE>
See accompanying notes to consolidated financial statements.
II-39
<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 .............. 27,358,428 $ 196,949 $ (395) $ 318,056
Comprehensive income:
Net income ............................. -- -- -- 87,161
Minimum pension liability
adjustment ............................ -- -- -- --
Unrealized gains on securities,
net of tax ............................ -- -- -- --
Comprehensive income ..................
Common stock issued:
Stock option plans and stock awards 327,912 5,572 -- --
Acquisitions ........................... 44,443 2,528 -- --
Repurchases of common stock ............. (175,000) (10,289) -- --
Cash dividends declared ................. -- -- -- (28,915)
Other ................................... -- 2,190 144 (252)
---------- --------- ------ ---------
Balance, December 31, 1997 .............. 27,555,783 $ 196,950 $ (251) $ 376,050
Comprehensive income:
Net income ............................. -- -- -- 100,314
Minimum pension liability
adjustment ............................ -- -- -- --
Unrealized gains on securities,
net of tax ............................ -- -- -- --
Comprehensive income ..................
Common stock issued:
Stock option plans and stock awards 181,459 3,888 -- --
Acquisitions ........................... 625,984 6,179 -- 6,353
Repurchases of common stock ............. (45,000) (3,041) -- --
Cash dividends declared ................. -- -- -- (24,342)
Other ................................... -- 1,261 144 --
---------- --------- ------ ---------
Balance, December 31, 1998 .............. 28,318,226 $ 205,237 $ (107) $ 458,375
Comprehensive income:
Net income ............................. -- -- -- 104,028
Minimum pension liability
adjustment ............................ -- -- -- --
Unrealized losses on securities,
net of tax ............................ -- -- -- --
Comprehensive income ..................
Common stock issued:
Stock option plans and stock awards 326,806 7,546 -- --
Acquisitions ........................... 122,865 8,512 -- (301)
Repurchases of common stock ............. (650,000) (32,291) -- --
Cash dividends declared ................. -- -- -- (34,980)
Other ................................... -- 3,532 79 (738)
---------- --------- ------ ---------
Balance, December 31, 1999 .............. 28,117,897 $ 192,536 $ (28) $ 526,384
========== ========= ====== =========
<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 .............. $ 1,529 $ (77) $ 516,062
Comprehensive income:
Net income ............................. -- -- 87,161
Minimum pension liability
adjustment ............................ -- (203) (203)
Unrealized gains on securities,
net of tax ............................ 8,488 -- 8,488
---------
Comprehensive income .................. 95,446
Common stock issued:
Stock option plans and stock awards -- -- 5,572
Acquisitions ........................... -- -- 2,528
Repurchases of common stock ............. -- -- (10,289)
Cash dividends declared ................. -- -- (28,915)
Other ................................... -- -- 2,082
--------- ------ ---------
Balance, December 31, 1997 .............. $ 10,017 $ (280) $ 582,486
Comprehensive income:
Net income ............................. -- -- 100,314
Minimum pension liability
adjustment ............................ -- 198 198
Unrealized gains on securities,
net of tax ............................ 2,765 -- 2,765
---------
Comprehensive income .................. 103,277
Common stock issued:
Stock option plans and stock awards -- -- 3,888
Acquisitions ........................... -- -- 12,532
Repurchases of common stock ............. -- -- (3,041)
Cash dividends declared ................. -- -- (24,342)
Other ................................... -- -- 1,405
--------- ------ ---------
Balance, December 31, 1998 .............. $ 12,782 $ (82) $ 676,205
Comprehensive income:
Net income ............................. -- 104,028
Minimum pension liability
adjustment ............................ -- 80 80
Unrealized losses on securities,
net of tax ............................ (41,947) -- (41,947)
---------
Comprehensive income .................. 62,161
Common stock issued:
Stock option plans and stock awards -- -- 7,546
Acquisitions ........................... -- -- 8,211
Repurchases of common stock ............. -- -- (32,291)
Cash dividends declared ................. -- -- (34,980)
Other ................................... -- -- 2,873
--------- ------ ---------
Balance, December 31, 1999 .............. $ (29,165) $ (2) $ 689,725
========= ====== =========
</TABLE>
See accompanying notes to consolidated financial statements.
II-40
<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 ............................................................................. $ 104,028
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses .............................................................. 32,977
Depreciation on assets under operating lease ........................................... 13,320
Depreciation and amortization, excluding depreciation on assets under operating lease .. 38,030
Deferred income taxes .................................................................. 5,977
Loan fees deferred, net ................................................................ 2,798
Bond premium amortization and discount accretion, net .................................. 78
Losses (gains) on sales of investment securities ....................................... 533
Loss on sales of foreclosed real estate ................................................ 380
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)
Proceeds from sales of mortgage loans held for sale .................................... 786,208
Originations, net of principal repayments, of mortgage loans held for sale ............. (711,464)
Increase in accrued interest receivable ................................................ (1,256)
Increase in accrued interest payable ................................................... 6,155
Net change in other assets and other liabilities ....................................... (56,019)
-----------
Net cash provided (used) by operating activities ....................................... 210,639
-----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans .................................................................. (241,055)
Purchases of:
Securities available for sale ......................................................... (785,341)
Securities held to maturity ........................................................... --
Premises and equipment ................................................................ (19,385)
Other ................................................................................. --
Proceeds from:
Sales of securities available for sale ................................................ 162,665
Maturities and issuer calls of securities available for sale .......................... 403,792
Maturities and issuer calls of securities held to maturity ............................ 49,851
Sales of foreclosed real estate ....................................................... 8,642
Dispositions of premises and equipment ................................................ 6,421
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 .................................................. (395,641)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits ............................................................... 59,604
Net increase in borrowed funds ......................................................... 101,407
Proceeds from issuance of long-term debt ............................................... 253,637
Repayment of long-term debt ............................................................ (83,441)
Cash dividends paid .................................................................... (34,980)
Proceeds from issuance of common stock, net ............................................ 5,683
Repurchases of common stock ............................................................ (32,291)
Other .................................................................................. --
-----------
Net cash provided by financing activities .............................................. 269,619
-----------
Increase (decrease) in cash and cash equivalents ....................................... 84,617
Cash and cash equivalents, beginning of year ........................................... 328,839
-----------
Cash and cash equivalents, end of year ................................................. $ 413,456
===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest .............................................................................. $ 300,938
Income taxes .......................................................................... 56,086
Noncash transactions:
Stock issued for acquisitions and other stock issuances, net .......................... 13,607
Unrealized securities (losses) gains, net ............................................. (66,635)
Dividends declared, but not yet paid .................................................. --
Loans transferred to foreclosed property .............................................. 7,222
<CAPTION>
Years ended December 31,
-------------------------------
1998 1997
--------------- ---------------
(thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................................................. $ 100,314 $ 87,161
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses .............................................................. 15,644 13,643
Depreciation on assets under operating lease ........................................... 13,030 7,247
Depreciation and amortization, excluding depreciation on assets under operating lease .. 37,047 38,609
Deferred income taxes .................................................................. 9,468 15,976
Loan fees deferred, net ................................................................ 815 (583)
Bond premium amortization and discount accretion, net .................................. 2,148 561
Losses (gains) on sales of investment securities ....................................... (686) (151)
Loss on sales of foreclosed real estate ................................................ 96 601
Gain on sales of equipment under lease ................................................. (5,550) (3,534)
Gain on sale of subsidiary ............................................................. -- --
Gain on sale of mortgage servicing rights .............................................. -- --
Proceeds from sales of mortgage loans held for sale .................................... 937,159 487,060
Originations, net of principal repayments, of mortgage loans held for sale ............. (1,039,284) (503,208)
Increase in accrued interest receivable ................................................ (1,862) (2,525)
Increase in accrued interest payable ................................................... 5,590 382
Net change in other assets and other liabilities ....................................... (87,528) (42,151)
------------- -------------
Net cash provided (used) by operating activities ....................................... (13,599) 99,088
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans .................................................................. (608,127) (267,611)
Purchases of:
Securities available for sale ......................................................... (1,069,878) (1,505,519)
Securities held to maturity ........................................................... -- (52,222)
Premises and equipment ................................................................ (15,511) (19,906)
Other ................................................................................. -- (50,136)
Proceeds from:
Sales of securities available for sale ................................................ 220,549 578,767
Maturities and issuer calls of securities available for sale .......................... 577,013 646,579
Maturities and issuer calls of securities held to maturity ............................ 101,533 99,410
Sales of foreclosed real estate ....................................................... 7,306 6,354
Dispositions of premises and equipment ................................................ 2,917 1,858
Dispositions of equipment utilized in leasing activities .............................. 22,570 4,016
Sale of mortgage servicing rights ..................................................... -- --
Net cash received in mergers, acquisitions and divestitures ............................ 32,610 149,315
------------- -------------
Net cash used by investing activities .................................................. (729,018) (409,095)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits ............................................................... 148,035 200,368
Net increase in borrowed funds ......................................................... 451,916 119,919
Proceeds from issuance of long-term debt ............................................... 294,281 128,665
Repayment of long-term debt ............................................................ (109,892) (107,364)
Cash dividends paid .................................................................... (31,322) (28,349)
Proceeds from issuance of common stock, net ............................................ 2,953 4,403
Repurchases of common stock ............................................................ (3,041) (10,289)
Other .................................................................................. (577) (1,469)
------------- -------------
Net cash provided by financing activities .............................................. 752,353 305,884
------------- -------------
Increase (decrease) in cash and cash equivalents ....................................... 9,736 (4,123)
Cash and cash equivalents, beginning of year ........................................... 319,103 323,226
------------- -------------
Cash and cash equivalents, end of year ................................................. $ 328,839 $ 319,103
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest .............................................................................. $ 298,037 $ 276,439
Income taxes .......................................................................... 24,123 28,385
Noncash transactions:
Stock issued for acquisitions and other stock issuances, net .......................... 13,467 3,697
Unrealized securities (losses) gains, net ............................................. 4,322 13,675
Dividends declared, but not yet paid .................................................. -- 6,981
Loans transferred to foreclosed property .............................................. 6,545 7,746
</TABLE>
See accompanying notes to consolidated financial statements.
II-41
<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") 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 nine percent of
total assets. All significant intercompany transactions are eliminated in
consolidation.
Certain amounts reported in prior years have been reclassified to conform
with current year presentation. The reclassifications have no effect on
shareholders' equity or net income as previously reported.
Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the
balance sheets and income statements for the periods presented. Actual results
could differ significantly from those estimates. Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses ("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 was established to facilitate the issuance of the Capital Securities
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.
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.
II-42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
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 $4.0 million and $5.8 million,
respectively.
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
II-43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
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 $114.9 million and $102.9 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.
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
II-44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
of stock options which totaled 367,140, 558,758, and 568,624 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.
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.
II-45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
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.
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 .............................. $(67,168) $24,908 $ (42,260) $5,008 $ (1,824) $3,184
Less: Reclassification for realized
(losses) gains ............................. (533) 220 (313) 686 (267) 419
-------- ------- --------- ------ -------- ------
Unrealized (losses) gains, net of
reclassification ........................... (66,635) 24,688 (41,947) 4,322 (1,557) 2,765
Minimum pension liability adjustment ......... 132 (52) 80 328 (130) 198
-------- ------- --------- ------ -------- ------
Other comprehensive (loss) income ............ $(66,503) $24,636 $ (41,867) $4,650 $ (1,687) $2,963
======== ======= ========= ====== ======== ======
<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 .............................. $13,826 $ (5,246) $8,580
Less: Reclassification for realized
(losses) gains ............................. 151 (59) 92
------- -------- ------
Unrealized (losses) gains, net of
reclassification ........................... 13,675 (5,187) 8,488
Minimum pension liability adjustment ......... (338) 135 (203)
------- -------- ------
Other comprehensive (loss) income ............ $13,337 $ (5,052) $8,285
======= ======== ======
</TABLE>
II-46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
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 $313 $171 $313 --
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
</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.
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.
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.
II-47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 3 -- MERGERS, ACQUISITIONS, AND DIVESTITURES -- Continued
The following table summarizes these merger-related charges as well as the
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>
The following table presents the historical results of operations for
Centura and First Coastal and the consolidated results of operations after
giving effect to the merger:
<TABLE>
<CAPTION>
Centura and
First Coastal
Centura First Coastal Combined
------------- --------------- --------------
(in thousands, except share data)
<S> <C> <C> <C>
Year ended December 31, 1998
Net interest income, after provision ......... $ 284,174 $ 18,273 $ 302,447
Noninterest income ........................... 134,700 5,821 140,521
Noninterest expense .......................... 271,689 18,708 290,397
Net income ................................... 96,871 3,443 100,314
Net income per common share:
Basic ...................................... $ 3.67 $ 0.69 $ 3.57
Diluted .................................... 3.60 0.67 3.50
Year ended December 31, 1997
Net interest income, after provision ......... $ 254,487 $ 18,737 $ 273,224
Noninterest income ........................... 108,367 3,901 112,268
Noninterest expense .......................... 237,376 15,981 253,357
Net income ................................... 83,058 4,103 87,161
Net income per common share:
Basic ...................................... $ 3.22 $ 0.82 $ 3.17
Diluted .................................... 3.15 0.81 3.11
</TABLE>
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 was
recorded.
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 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 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 August 15, 1997, Centura consummated its assumption of deposit
liabilities and acquisition of certain loans from BB&T. Centura acquired
thirteen offices located in ten communities in eastern and southeastern North
Carolina. The purchase price exceeded the fair value of net assets acquired
which resulted in $35.0 million recorded as goodwill, included in other assets
on the consolidated balance sheet.
II-48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 3 -- MERGERS, ACQUISITIONS, AND DIVESTITURES -- Continued
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.
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 ............ 3,678 54 -- 3,732
Mortgage-backed
securities .................. -- -- -- --
State and municipal .......... 25,573 317 46 25,844
Other securities ............. 16 -- -- 16
---------- ------- ------- ----------
Total held to maturity ....... $ 54,167 $ 495 $ 46 $ 54,616
========== ======= ======= ==========
Available for sale:
U.S. Treasury ................ $ 103,387 $ 24 $ 199 $ 103,212
U.S. government agencies
and corporations ............ 182,704 3,950 4,143 182,511
Mortgage-backed
securities .................. 1,306,507 1,296 33,771 1,274,032
Asset-backed securities ...... 215,351 49 2,978 212,422
State and municipal .......... 3,463 7 167 3,303
Common stock ................. 48,678 10,641 236 59,083
Other securities ............. 396,680 -- 20,545 376,135
---------- ------- ------- ----------
Total available for sale ..... $2,256,770 $15,967 $62,039 $2,210,698
========== ======= ======= ==========
<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 ............ 20,912 247 -- 21,159 68,316
Mortgage-backed
securities .................. 14,858 -- 108 14,750 24,369
State and municipal .......... 30,115 1,225 7 31,333 38,464
Other securities ............. 1,033 17 -- 1,050 1,850
---------- ------- ------ ---------- ----------
Total held to maturity ....... $ 103,767 $ 2,780 $ 115 $ 106,432 $ 223,931
========== ======= ====== ========== ==========
Available for sale:
U.S. Treasury ................ $ 113,508 $ 4,421 $ -- $ 117,929 $ 187,499
U.S. government agencies
and corporations ............ 166,642 1,691 3,211 165,122 179,229
Mortgage-backed
securities .................. 1,255,326 15,594 2,852 1,268,068 1,063,590
Asset-backed securities ...... 178,258 2,965 223 181,000 93,875
State and municipal .......... 3,906 92 -- 3,998 2,143
Common stock ................. 37,137 -- -- 37,137 36,739
Other securities ............. 281,930 5,056 2,970 284,016 155,228
---------- ------- ------ ---------- ----------
Total available for sale ..... $2,036,707 $29,819 $9,256 $2,057,270 $1,718,303
========== ======= ====== ========== ==========
</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 .................... $ 1,472 $ 1,481 $ 48,714 $ 52,590
Due after one year through five years ...... 41,837 42,247 253,551 249,313
Due after five years through ten years ..... 7,576 7,616 74,640 69,400
Due after ten years ........................ 3,282 3,272 309,329 293,858
Mortgage-backed and asset-backed securities -- -- 1,521,858 1,486,454
Common stock ............................... -- -- 48,678 59,083
------- ------- ---------- ----------
Total ...................................... $54,167 $54,616 $2,256,770 $2,210,698
======= ======= ========== ==========
</TABLE>
II-49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 4 -- INVESTMENT SECURITIES -- Continued
At December 31, 1999 and 1998, investment securities with book values of
approximately $1.0 billion and $702.0 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 $4.1
million, respectively, were generated from sales of securities. Gross gains of
$1.3 million and $3.6 million and gross losses of $564,000 and $3.5 million
were realized during 1998 and 1997, respectively.
NOTE 5 -- LOANS
A summary of loans at December 31 follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
(thousands)
<S> <C> <C>
Commercial, financial, and agricultural .................. $1,528,839 $1,126,721
Consumer ................................................. 463,523 437,815
Real estate -- mortgage .................................. 2,906,877 2,997,746
Real estate -- construction and land development ......... 739,374 750,156
Leases ................................................... 255,149 434,556
Other .................................................... 85,621 86,676
---------- ----------
Total loans, net of unearned income ...................... $5,979,383 $5,833,670
========== ==========
Included in the above:
Nonaccrual loans ......................................... $ 27,824 $ 32,293
Accruing loans past due ninety days or more .............. 7,391 9,095
</TABLE>
Loans classified as real estate -- mortgage include mortgage loans held
for sale of $84.1 million and $158.8 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 $2.7 billion, $2.9 billion, and
$3.0 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 $2.2 million,
$2.4 million and $2.0 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.
II-50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
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 ............................ $ 72,310 $ 68,576 $ 63,105
AFLL related to loans sold and subsidiary sale ....... (556) -- --
Allowance for acquired loans ......................... 605 2,068 3,133
Provision for loan losses ............................ 32,977 15,644 13,643
Charge-offs .......................................... (34,679) (17,358) (14,743)
Recoveries on loans previously charged-off ........... 2,861 3,380 3,438
--------- --------- ---------
Net Charge-offs ...................................... (31,818) (13,978) (11,305)
--------- --------- ---------
AFLL at end of year .................................. $ 73,518 $ 72,310 $ 68,576
========= ========= =========
</TABLE>
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 ......... $ 33,464 $ 28,526
MSRs capitalized ..................... 11,903 12,759
MSRs amortized ....................... (8,728) (7,821)
Sale of MSRs ......................... (4,336) --
-------- --------
Balance at end of year ............... $ 32,303 $ 33,464
======== ========
</TABLE>
The fair value of capitalized MSRs at December 31, 1999 and 1998 was
approximately $58.6 million and $41.0 million, respectively. No valuation
allowance for capitalized MSRs was required during the years ended December 31,
1999 and 1998.
II-51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 8 -- PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(thousands)
<S> <C> <C>
Land .................................................... $ 17,687 $ 18,065
Buildings ............................................... 76,596 76,635
Buildings and equipment under capital lease ............. 2,017 2,017
Leasehold improvements .................................. 20,449 20,199
Furniture, fixtures, and equipment ...................... 91,460 106,094
Construction in progress ................................ 3,309 1,031
-------- --------
Total ................................................... 211,518 224,041
Less: Accumulated depreciation and amortization ......... 94,754 103,636
-------- --------
Premises and equipment .................................. $116,764 $120,405
======== ========
</TABLE>
Depreciation and amortization on premises and equipment, included in
operating expenses, amounted to $16.7 million, $18.2 million, and $17.5 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, 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 ................................. $ 9,306
2001 ................................. 6,917
2002 ................................. 5,396
2003 ................................. 3,865
2004 ................................. 2,843
Thereafter ........................... 15,255
-------
Total minimum lease payments ......... $43,582
=======
</TABLE>
Rent expense charged to operations was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(thousands)
<S> <C> <C> <C>
Bank premises ......... $ 7,857 $ 7,297 $5,928
Equipment ............. 2,563 3,266 3,152
------- ------- ------
Rent expense .......... $10,420 $10,563 $9,080
======= ======= ======
</TABLE>
NOTE 9 -- DEPOSITS
At December 31, 1999, the scheduled maturities of time deposits are as
follows (in thousands):
<TABLE>
<S> <C>
2000 ........................ $2,095,212
2001 ........................ 237,251
2002 ........................ 265,147
2003 ........................ 32,507
2004 and thereafter ......... 144,435
----------
Total ....................... $2,774,552
==========
</TABLE>
II-52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
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 $ 987,530 $1,021,099
Master notes .............................................................. 276,758 262,740
Federal Home Loan Bank ("FHLB") Advances .................................. 100,000 --
U.S. Treasury demand note ................................................. 25,959 5,498
Other ..................................................................... 10,000 10,000
---------- ----------
Total borrowed funds ...................................................... $1,400,247 $1,299,337
========== ==========
</TABLE>
At December 31, 1999, the Bank had $2.0 billion in total federal funds
lines available. Federal funds purchased have maturities that range between one
day and 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.
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 ......................................... $ 987,530 $ 1,021,099 $ 574,357
Average outstanding balance ............................................... 891,830 768,304 595,108
Highest balance at any month-end .......................................... 1,204,819 1,078,672 761,252
Interest expense .......................................................... 45,127 41,514 33,350
Approximate weighted-average interest rate:
During the year ........................................................... 5.06% 5.40% 5.60%
End of year ............................................................... 4.99 5.13 5.39
Master notes:
Amount outstanding at December 31 ......................................... $ 276,758 $ 262,740 $ 195,391
Average outstanding balance ............................................... 273,153 224,253 169,215
Highest balance at any month-end .......................................... 282,353 271,813 204,709
Interest expense .......................................................... 11,347 10,382 8,117
Approximate weighted-average interest rate:
During the year ........................................................... 4.15% 4.63% 4.80%
End of year ............................................................... 4.50 4.00 4.82
</TABLE>
II-53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
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 ................ $534,897 $477,553
Capital Securities ............................. 100,000 100,000
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 ........................... $760,900 $614,284
======== ========
</TABLE>
At December 31, 1999, Centura's maximum borrowing capacity with the FHLB
was $693.2 million, of which $634.9 million was advanced at year-end 1999. Of
the amount advanced at year-end, $534.9 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 317,461 shares and 221,101 shares,
respectively, of $100 par value FHLB stock. This stock is pledged as collateral
against any advances extended to Centura by the FHLB.
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.
On June 2, 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. The Capital Securities 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.
II-54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 11 -- LONG-TERM DEBT -- Continued
At December 31, 1999, contractual maturities of long-term debt are as
follows (in thousands):
<TABLE>
<S> <C>
2000 ............... $185,613
2001 ............... 154,195
2002 ............... 181,164
2003 ............... 10,093
2004 ............... 107
Thereafter ......... 229,728
--------
Total .............. $760,900
========
</TABLE>
NOTE 12 -- BENEFIT PLANS
Centura sponsors a noncontributory, qualified defined benefit pension
plan, a postretirement benefit plan, and a defined contribution plan 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:
<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.
II-55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 12 -- BENEFIT PLANS -- Continued
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>
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) ................................... $ 2,106 $ 2,210 $ 1,896
Sales commissions ........................ 14,348 15,059 10,209
EVA-based incentive compensation ......... -- 4,756 6,840
------- ------- -------
Total .................................... $16,454 $22,025 $18,945
======= ======= =======
</TABLE>
II-56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 12 -- BENEFIT PLANS -- Continued
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.
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.
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 ......... 1,680,034 $ 36.06 1,324,517 $ 21.79 1,434,373 $ 17.45
Granted .......................... 706,805 65.39 572,802 63.92 239,234 36.69
Exercised ........................ 332,340 15.94 183,033 16.08 331,590 13.99
Forfeited ........................ 89,067 59.61 34,252 56.64 17,500 13.78
--------- --------- ---------
Outstanding at December 31 ....... 1,965,432 48.97 1,680,034 36.06 1,324,517 21.79
========= ========= =========
Exercisable at December 31 ....... 945,359 $ 29.14 1,032,455 $ 22.95 967,010 $ 18.79
</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 ......... 423,131 4.29 years $ 13.27 421,550 $ 13.32
$21.69 to 37.00 .......... 357,420 3.70 32.28 309,738 32.18
$37.13 to $69.89 ......... 356,812 7.17 55.66 132,594 47.61
$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 ................... 404,913 9.05 72.69 -- --
------- -------
1,965,432 6.51 48.97 945,359 29.14
========= =======
</TABLE>
II-57
<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 .......... $ 102,324 $ 104,028 $ 98,558 $ 100,314 $ 86,080 $ 87,161
Basic EPS ........... 3.60 3.66 3.51 3.57 3.13 3.17
Diluted EPS ......... 3.56 3.62 3.44 3.50 3.07 3.11
</TABLE>
The weighted-average fair values of options granted during 1999, 1998, and
1997 were $20.05, $23.61, and $16.12 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 .................... 2.20 2.20 2.20
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 .................... 1.69 1.69 1.69
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 .................... 1.97 1.97 1.97
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 $1.25, $1.11, and $1.03 on a per share basis
during 1999, 1998, and 1997, respectively.
II-58
<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 .. $ 6,520 $ 9,024 $ 9,739
Stationery, printing, and supplies ............ 6,559 7,432 6,246
Postage ....................................... 3,762 3,892 3,324
Telephone ..................................... 10,320 9,490 7,833
FDIC insurance ................................ 1,169 1,619 1,637
Fees for outsourced services .................. 14,964 13,058 8,219
Service and licensing fees .................... 5,300 6,147 5,211
Legal and professional fees ................... 13,643 13,380 16,452
Other administrative .......................... 10,036 10,124 8,950
Intangible amortization ....................... 10,443 8,948 6,520
Other ......................................... 21,786 21,950 17,741
-------- -------- -------
Total other operating expense ................. $104,502 $105,064 $91,872
======== ======== =======
</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 ......................... $42,569 $39,387 $27,822
State ........................... 4,545 3,402 1,176
------- ------- -------
47,114 42,789 28,998
Deferred expense:
Federal ......................... 4,924 8,283 14,080
State ........................... 1,053 1,185 1,896
------- ------- -------
5,977 9,468 15,976
------- ------- -------
Total income tax expense ......... $53,091 $52,257 $44,974
======= ======= =======
</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 ............................... (1.87) ( 2.70) ( 3.30)
Mergers & acquisitions amortization, net ......... 0.77 0.54 0.54
Acquisition adjustments .......................... 0.61 0.09 0.17
State income tax, net of federal benefit ......... 2.55 1.95 1.39
Other, net ....................................... ( 3.27) ( 0.63) 0.24
------ ------ ------
Effective tax rate ............................... 33.79% 34.25% 34.04%
====== ====== ======
</TABLE>
Included in the Other category for 1999 are adjustments reducing the
effective tax rate by approximately 2.8 percent resulting from adjustments to
expected recoverable amounts.
II-59
<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 liability at December 31 are summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(thousands)
<S> <C> <C>
Deferred tax assets:
Loan loss reserve ............................... $28,289 $27,197
Other reserves .................................. 3,991 2,624
Deferred compensation ........................... 12,958 13,798
Unrealized investment securities losses ......... 16,907 --
Other assets .................................... 4,717 3,621
------- -------
Gross deferred tax assets ....................... 66,862 47,240
Deferred tax liabilities:
Premises and equipment .......................... 3,173 2,801
Employee retirement plans ....................... 2,106 1,939
Investment securities ........................... 1,731 1,146
Leasing activities .............................. 52,020 42,889
Other liabilities ............................... 21,742 25,565
Unrealized investment securities gains .......... -- 7,781
------- -------
Gross deferred tax liabilities .................. 80,772 82,121
------- -------
Net deferred tax liability ...................... $13,910 $34,881
======= =======
</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 $25.0 million due to fair value adjustments required under SFAS
115 for securities available for sale and decreased due to other adjustments
totaling approximately $2.0 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
$2.4 billion and $2.3 billion, respectively, and standby letters of credit of
$186.1 million and $141.8 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.
II-60
<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 $29.8 million and $155.4 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 $84.1 million and $158.8
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 $49.5 million and $104.8 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)
------------- ------------- ---------- ------------
(thousands)
<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.
II-61
<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 ......... 255,000 366 237
December 31, 1998
Interest rate caps ........... $147,000 $472 $ (892)
Interest rate floors ......... 305,000 633 4,301
</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.
II-62
<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 $ 297,770 $ 297,770 $ 311,193 $ 311,193
Federal funds sold ................................. 115,686 115,686 17,646 17,646
Investment securities .............................. 2,264,865 2,265,314 2,161,037 2,163,702
Accrued interest receivable ........................ 53,906 53,906 52,649 52,649
Loans, net ......................................... 5,905,865 5,985,525 5,761,360 5,983,021
FINANCIAL LIABILITIES:
Deposits ........................................... $6,167,835 $6,162,498 $6,068,649 $5,982,270
Accrued interest payable ........................... 28,985 28,985 22,830 22,830
Borrowed funds ..................................... 1,400,247 1,400,247 1,299,337 1,299,337
Long-term debt ..................................... 760,900 759,829 614,284 634,078
</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
II-63
<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 Total Adjustments Consolidated
------------- -------------- ------------ -------------- ------------------ -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income ....................... $ 418,733 $ 172,779 $ 36,617 $ 628,129 $ 18,430(A) $ 646,559
Interest expense ...................... 211,394 84,555 3,470 299,419 7,674 (A) 307,093
Funds transfer pricing allocation ..... 71,446 (61,154) (16,230) (5,938) 5,938 (B) --
---------- ---------- --------- ---------- --------- ----------
Net interest income ................... 278,785 27,070 16,917 322,772 16,694 339,466
Provision for loan losses ............. 27,641 -- 3,668 31,309 1,668 (C) 32,977
---------- ---------- --------- ---------- --------- ----------
Net interest income after provision
for loan losses ...................... 251,144 27,070 13,249 291,463 15,026 306,489
Noninterest income .................... 107,221 788 45,392 153,401 (708)(A) 152,693
Noninterest expense ................... 227,324 10,103 33,737 271,164 30,899 (A) 302,063
---------- ---------- --------- ---------- --------- ----------
Income before income taxes ............ 131,041 17,755 24,904 173,700 (16,581) 157,119
Income tax expense .................... 33,946 1,170 4,393 39,509 13,582 (C) 53,091
---------- ---------- --------- ---------- --------- ----------
Net income ............................ $ 97,095 $ 16,585 $ 20,511 $ 134,191 $ (30,163) $ 104,028
========== ========== ========= ========== ========= ==========
Period-end assets ..................... $5,169,847 $2,858,894 $ 279,189 $8,307,930 $ 815,318(D) $9,123,248
</TABLE>
II-64
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 18 -- SEGMENT INFORMATION -- Continued
<TABLE>
<CAPTION>
1998
-----------------------------------------
Retail Treasury Other
------------- -------------- ------------
(thousands)
<S> <C> <C> <C>
Interest income ........................... $ 409,643 $ 161,376 $ 40,482
Interest expense .......................... 220,762 74,470 5,840
Funds transfer pricing allocation ......... 70,563 (63,872) (19,753)
---------- ---------- ---------
Net interest income ....................... 259,444 23,034 14,889
Provision for loan losses ................. 11,076 83 3,398
---------- ---------- ---------
Net interest income after provision for
loan losses .............................. 248,368 22,951 11,491
Noninterest income ........................ 110,912 2,331 44,795
Noninterest expense ....................... 230,027 10,058 36,378
---------- ---------- ---------
Income before income taxes ................ 129,253 15,224 19,908
Income tax expense/(benefit) .............. 42,901 (5,456) 5,847
---------- ---------- ---------
Net income ................................ $ 86,352 $ 20,680 $ 14,061
========== ========== =========
Period-end assets ......................... $4,512,317 $2,907,231 $ 548,486
<CAPTION>
1998
-----------------------------------------------
Total Adjustments Consolidated
-------------- ------------------ -------------
(thousands)
<S> <C> <C> <C>
Interest income ........................... $ 611,501 $ 10,217(A) $ 621,718
Interest expense .......................... 301,072 2,555 (A) 303,627
Funds transfer pricing allocation ......... (13,062) 13,062 (B) --
---------- ---------- ----------
Net interest income ....................... 297,367 20,724 318,091
Provision for loan losses ................. 14,557 1,087 (C) 15,644
---------- ---------- ----------
Net interest income after provision for
loan losses .............................. 282,810 19,637 302,447
Noninterest income ........................ 158,038 (17,517)(A) 140,521
Noninterest expense ....................... 276,463 13,934 (A) 290,397
---------- ---------- ----------
Income before income taxes ................ 164,385 (11,814) 152,571
Income tax expense/(benefit) .............. 43,292 8,965 (C) 52,257
---------- ---------- ----------
Net income ................................ $ 121,093 $ (20,779) $ 100,314
========== ========== ==========
Period-end assets ......................... $7,968,034 $ 827,526(D) $8,795,560
</TABLE>
<TABLE>
<CAPTION>
1997
-----------------------------------------
Retail Treasury Other
------------- -------------- ------------
(thousands)
<S> <C> <C> <C>
Interest income ........................... $ 362,852 $ 149,512 $ 48,054
Interest expense .......................... 206,542 65,372 7,267
Funds transfer pricing allocation ......... 93,410 (60,956) (23,559)
---------- ---------- ---------
Net interest income ....................... 249,720 23,184 17,228
Provision for loan losses ................. 8,942 91 2,149
---------- ---------- ---------
Net interest income after provision for
loan losses .............................. 240,778 23,093 15,079
Noninterest income ........................ 81,977 986 40,303
Noninterest expense ....................... 210,032 11,080 38,223
---------- ---------- ---------
Income before income taxes ................ 112,723 12,999 17,159
Income tax expense ........................ 27,547 3,806 4,368
---------- ---------- ---------
Net income ................................ $ 85,176 $ 9,193 $ 12,791
========== ========== =========
Period-end assets ......................... $4,210,003 $2,311,006 $ 537,225
<CAPTION>
1997
---------------------------------------------
Total Adjustments Consolidated
------------- ----------------- -------------
(thousands)
<S> <C> <C> <C>
Interest income ........................... $ 560,418 $ 3,270(A) $ 563,688
Interest expense .......................... 279,181 (2,360)(A) 276,821
Funds transfer pricing allocation ......... 8,895 (8,895)(B) --
---------- ---------- ----------
Net interest income ....................... 290,132 (3,265) 286,867
Provision for loan losses ................. 11,182 2,461 (C) 13,643
---------- ---------- ----------
Net interest income after provision for
loan losses .............................. 278,950 (5,726) 273,224
Noninterest income ........................ 123,266 (10,998)(A) 112,268
Noninterest expense ....................... 259,335 (5,978)(A) 253,357
---------- ---------- ----------
Income before income taxes ................ 142,881 (10,746) 132,135
Income tax expense ........................ 35,721 9,253 (C) 44,974
---------- ---------- ----------
Net income ................................ $ 107,160 $ (19,999) $ 87,161
========== ========== ==========
Period-end assets ......................... $7,058,234 $ 683,384(D) $7,741,618
</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.
II-65
<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 ............................................................ $ 190,393 $ 187,741
Investment securities available for sale (cost of $26,232 and $39,715, respectively) .. 35,713 39,963
Loans to affiliate .................................................................... 34,047 55,908
Investment in wholly-owned subsidiary, bank ........................................... 788,613 731,548
Investment in wholly-owned subsidiary, other .......................................... 3,117 3,116
Other assets .......................................................................... 37,455 42,582
---------- ----------
Total assets .......................................................................... $1,089,338 $1,060,858
========== ==========
Liabilities and Shareholders' Equity
Junior subordinated debentures with affiliate ......................................... $ 103,093 $ 103,093
Other liabilities ..................................................................... 296,520 281,560
Shareholders' equity .................................................................. 689,725 676,205
---------- ----------
Total liabilities and shareholders' equity ............................................ $1,089,338 $1,060,858
========== ==========
</TABLE>
INCOME STATEMENTS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1999 1998 1997
------------ ---------- ----------
(thousands)
<S> <C> <C> <C>
Income
Dividends from subsidiaries ...................................................... $ 39,154 $ 31,955 $48,770
Other ............................................................................ 28,326 35,514 33,657
-------- -------- -------
Total income ..................................................................... 67,480 67,469 82,427
Expense
Interest ......................................................................... 20,360 19,559 15,795
Other ............................................................................ 12,345 13,413 13,754
-------- -------- -------
Total expenses ................................................................... 32,705 32,972 29,549
-------- -------- -------
Income before income taxes and equity in undistributed net income of subsidiaries 34,775 34,497 52,878
Income tax (benefit) expense ..................................................... (1,912) 106 589
-------- -------- -------
Income before equity in undistributed net income of subsidiaries ................. 36,687 34,391 52,289
Equity in undistributed net income of wholly-owned subsidiaries .................. 67,341 65,923 34,872
-------- -------- -------
Net income ....................................................................... $104,028 $100,314 $87,161
======== ======== =======
</TABLE>
II-66
<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 .......................................................................... $ 104,028 $ 100,314 $ 87,161
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ...................................................... 1,607 1,612 1,724
Losses (gains) on sales of investment securities ................................... 1,067 (78) (232)
Increase in equity in undistributed net income of subsidiary ....................... (67,341) (65,923) (34,872)
Net change in other assets and other liabilities ................................... (491) (3,018) (5,712)
--------- --------- ----------
Net cash provided by operating activities ........................................... 38,870 32,907 48,069
--------- --------- ----------
Cash flows from investing activities
Net increase in investment in non-bank subsidiary .................................. -- -- (3,093)
Net decrease (increase) in loan with affiliate ..................................... 21,861 (41,735) (8,451)
Purchases of securities available for sale ......................................... -- (8,750) (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) -- --
Additional investment in First Greensboro Home Equity .............................. (490) -- --
--------- --------- ----------
Net cash provided (used) by investing activities .................................... 11,430 (42,224) (117,842)
--------- --------- ----------
Cash flows from financing activities
Net increase in borrowings ......................................................... 13,940 37,205 136,691
Issuance of common stock, net ...................................................... 5,683 2,953 4,403
Repurchase of common stock ......................................................... (32,291) (3,041) (10,289)
Cash dividends paid ................................................................ (34,980) (31,322) (28,349)
--------- --------- ----------
Net cash (used) provided by financing activities .................................... (47,648) 5,795 102,456
--------- --------- ----------
Increase (decrease) in cash ......................................................... 2,652 (3,522) 32,683
Cash, beginning of year ............................................................. 187,741 191,263 158,580
--------- --------- ----------
Cash, end of year ................................................................... $ 190,393 $ 187,741 $ 191,263
========= ========= ==========
Supplemental Disclosures of Cash Flow Information
Stock issued for acquisitions and other stock issuances, net ....................... $ 13,607 $ 13,467 $ 3,697
Unrealized securities (losses) gains, net of parent and subsidiary ................. (66,635) 4,322 13,675
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 $102.7 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.
II-67
<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.
<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 12.83% 10.79% (> or =)8.00% Not Applicable
Bank ................................... $907,372 $687,438 13.45% 10.83% (> or =)8.00% (> or =)10.00%
Tier I Capital (to Risk-Weighted Assets)
Centura ................................ $703,696 $656,654 10.33% 10.18% (> or =)4.00% Not Applicable
Bank ................................... $708,854 $614,658 10.51% 9.69% (> or =)4.00% (> or =)6.00%
Tier I Leverage (to Average Assets)
Centura ................................ $703,696 $656,654 7.92% 7.79% (> or =)4.00% Not Applicable
Bank ................................... $708,854 $614,658 8.08% 7.44% (> or =)4.00% (> or =)5.00%
</TABLE>
NOTE 21 -- SUBSEQUENT EVENTS (UNAUDITED)
On February 18, 2000, Centura merged with Triangle Bancorp, Inc.
("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. 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. Historical financial information
presented in this report has not been restated to include the accounts and
results of operations of Triangle. Supplemental consolidated financial
statements restated to reflect the merger with Triangle are included in Item 8
of this report.
II-68
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 21 -- SUBSEQUENT EVENTS (UNAUDITED) -- Continued
The following table presents the historical results of operations for
Centura and Triangle and the consolidated results of operations giving effect
to the merger:
<TABLE>
<CAPTION>
Historical
--------------------------
Centura and
Triangle Proforma
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 20,221 170,897*
Noninterest expense .......................... 302,063 51,619 352,323*
Net income ................................... 104,028 26,707 130,337*
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 18,456 157,596*
Noninterest expense .......................... 290,397 54,896 343,912*
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 16,922 128,155*
Noninterest expense .......................... 253,357 50,125 302,446*
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>
- ---------
* Reflects intercompany eliminations and adjustments made to conform accounting
policies between the combined entities.
II-69
<PAGE>
ITEM 8 -- CONTINUED
On February 18, 2000, Centura merged with Triangle Bancorp, Inc.
("Triangle") in a transaction accounted for as a pooling-of-interests. Because
the merger occurred subsequent to December 31, 1999, the financial statements
and Management's Discussion and Analysis of Financial Condition and Results of
Operations included in this Form 10-K do not give effect to the restatement to
include the historical financial information for Triangle. The following
Supplemental Consolidated Financial Statements restate the 1999 audited
financial statements for Centura to give effect to the merger with Triangle.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
CENTURA BANKS, INC.
We have audited the accompanying supplemental consolidated balance sheets
of Centura Banks, Inc. and subsidiaries (the "Corporation") as of December 31,
1999 and 1998, and the related supplemental consolidated statements of income,
of shareholders' equity, and of cash flows for each of the three years in the
period ended December 31, 1999. These supplemental consolidated financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these supplemental consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The supplemental consolidated financial statements give retroactive effect
to the merger of Centura Banks, Inc. and Triangle Bancorp, Inc. on February 18,
2000, which has been accounted for as a pooling-of-interests as described in
Notes 1 and 3 to the supplemental consolidated financial statements. Accounting
principles generally accepted in the United States proscribe giving effect to a
consummated business combination accounted for by the pooling-of-interests
method in financial statements that do not include the date of consummation.
These financial statements do not extend through the date of consummation;
however, they will become the historical consolidated financial statements of
Centura Banks, Inc. and subsidiaries after financial statements covering the
date of consummation of the business combination are issued.
In our opinion, the supplemental consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Centura Banks, Inc. and its subsidiaries as of December 31, 1999
and 1998, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
March 6, 2000
II-70
<PAGE>
CENTURA BANKS, INC. AND SUBSIDIARIES
SUPPLEMENTAL 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 supplemental consolidated financial statements.
II-71
<PAGE>
CENTURA BANKS, INC. AND SUBSIDIARIES
SUPPLEMENTAL 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 supplemental consolidated financial statements.
II-72
<PAGE>
CENTURA BANKS, INC. AND SUBSIDIARIES
SUPPLEMENTAL 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 supplemental consolidated financial statements.
II-73
<PAGE>
CENTURA BANKS, INC. AND SUBSIDIARIES
SUPPLEMENTAL 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 supplemental consolidated financial statements.
II-74
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The accompanying supplemental 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 supplemental 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. Although
these financial statements do not extend through the date of consummation, they
will become the historical consolidated financial statements of Centura after
financial statements covering the date of consummation of the business
combination are issued.
Basis of Financial Statement Presentation
The supplemental 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 supplemental 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.
II-75
<PAGE>
NOTES TO SUPPLEMENTAL 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.
II-76
<PAGE>
NOTES TO SUPPLEMENTAL 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.
II-77
<PAGE>
NOTES TO SUPPLEMENTAL 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.
II-78
<PAGE>
NOTES TO SUPPLEMENTAL 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 supplemental consolidated financial
statements of Centura and monitors the status of changes to exposure drafts and
to proposed effective dates.
II-79
<PAGE>
NOTES TO SUPPLEMENTAL 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 supplemental
consolidated financial statements until the consummation date of the
transaction.
II-80
<PAGE>
NOTES TO SUPPLEMENTAL 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 supplemental 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.
II-81
<PAGE>
NOTES TO SUPPLEMENTAL 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>
II-82
<PAGE>
NOTES TO SUPPLEMENTAL 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 supplemental 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 supplemental 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.
II-83
<PAGE>
NOTES TO SUPPLEMENTAL 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.
II-84
<PAGE>
NOTES TO SUPPLEMENTAL 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>
II-85
<PAGE>
NOTES TO SUPPLEMENTAL 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,
II-86
<PAGE>
NOTES TO SUPPLEMENTAL 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.
II-87
<PAGE>
NOTES TO SUPPLEMENTAL 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.
II-88
<PAGE>
NOTES TO SUPPLEMENTAL 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:
II-89
<PAGE>
NOTES TO SUPPLEMENTAL 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 supplemental
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>
II-90
<PAGE>
NOTES TO SUPPLEMENTAL 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.
II-91
<PAGE>
NOTES TO SUPPLEMENTAL 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.
II-92
<PAGE>
NOTES TO SUPPLEMENTAL 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.
II-93
<PAGE>
NOTES TO SUPPLEMENTAL 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.
II-94
<PAGE>
NOTES TO SUPPLEMENTAL 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.
II-95
<PAGE>
NOTES TO SUPPLEMENTAL 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.
II-96
<PAGE>
NOTES TO SUPPLEMENTAL 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.
II-97
<PAGE>
NOTES TO SUPPLEMENTAL 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
II-98
<PAGE>
NOTES TO SUPPLEMENTAL 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>
II-99
<PAGE>
NOTES TO SUPPLEMENTAL 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.
II-100
<PAGE>
NOTES TO SUPPLEMENTAL 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>
II-101
<PAGE>
NOTES TO SUPPLEMENTAL 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 supplemental consolidated financial statements.
II-102
<PAGE>
NOTES TO SUPPLEMENTAL 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>
II-103
<PAGE>
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Information is incorporated by reference to Form 8-K dated December 22,
1999 as filed with the Securities and Exchange Commission.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF CENTURA
Information is incorporated by reference to Centura's Proxy Statement
relating to the 2000 Annual Meeting of Shareholders filed with the Securities
and Exchange Commission.
ITEM 11 EXECUTIVE COMPENSATION
Information is incorporated by reference to Centura's Proxy Statement
relating to the 2000 Annual Meeting of Shareholders filed with the Securities
and Exchange Commission.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information is incorporated by reference to Centura's Proxy Statement
relating to the 2000 Annual Meeting of Shareholders filed with the Securities
and Exchange Commission.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information is incorporated by reference to Centura's Proxy Statement
relating to the 2000 Annual Meeting of Shareholders filed with the Securities
and Exchange Commission.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following financial information is included in Part II, Item 8 of this
report:
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Consolidated Financial Statements:
Report of KPMG LLP, Independent Auditors ............................................ 37
Consolidated Balance Sheets as of December 31, 1999 and 1998 ........................ 38
Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and
1997 ................................................................................... 39
Consolidated Statements of Shareholders' Equity for the Years Ended December 31,
1999, 1998 and 1997 .................................................................... 40
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998
and 1997 ............................................................................... 41
Notes to Consolidated Financial Statements .......................................... 42
Supplemental Consolidated Financial Statements:
Report of PricewaterhouseCoopers LLP, Independent Accountants ....................... 70
Supplemental Consolidated Balance Sheets as of December 31, 1999 and 1998 ........... 71
Supplemental Consolidated Statements of Income for the Years Ended December 31,
1999, 1998 and 1997 ...................................................................... 72
Supplemental Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997.......................................................... 73
Supplemental Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997 ...................................................................... 74
Notes to Supplemental Consolidated Financial Statements ............................. 75
</TABLE>
(a)(2) Financial Statement Schedules
(a)(3) Management Contracts or Compensatory Plan Arrangements
Exhibits have been filed separately with the Commission and are available
upon written request.
(b) Current Reports on Form 8-K
On October 8, 1999, Centura filed a current report on Form 8-K announcing
earnings for the nine months ended September 30, 1999. A press release
dated October 8, 1999 was included as an exhibit.
II-104
<PAGE>
On December 22, 1999, Centura filed a current report on Form 8-K
announcing a change in the registrant's certifying accountants.
(c) Exhibits
Restated Articles of Incorporation of Centura Banks, Inc.
Bylaws of Centura Banks, Inc., as amended
Excerpts from Centura's Articles of Incorporation and Bylaws relating to
the rights of holders of Centura capital stock
Specimen certificate of Centura common stock
Amended and Restated Trust Agreement between Centura Banks, Inc., as
Depositor, State Street Bank and Trust Company, as Property Trustee,
Delaware Trust Capital Management, as Delaware Trustee, and the
Administrative Trustees named therein relating to $100,000,000 Centura
Capital Trust I, 8.845% Capital Securities, Series A
Guarantee Agreement between Centura Banks, Inc., Guarantor, and State
Street Bank and Trust Company, as Guarantee Trustee, relating to the
Capital Securities
Junior Subordinated Indenture between Centura Banks, Inc. and State Street
Bank and Trust Company, as Trustee relating to $103,093,000 8.845% Junior
Subordinated Deferred Interest Debentures of the Corporation
Centura Banks, Inc. Omnibus Equity Compensation Plan, as amended and
restated effective April 16, 1997
Centura Banks, Inc. Directors' Deferred Compensation Plan, as amended and
restated effective February 15, 1995
Second Addendum and Amendment dated December 24, 1998 to the Supplemental
Executive Retirement Agreement between Centura Banks, Inc. and Cecil W.
Sewell, Jr.
Centura Banks, Inc. Omnibus Supplemental Executive Retirement Plan
Executive Employment agreement, dated February 18, 2000, between Centura
Banks, Inc., Centura Bank and Michael S. Patterson
Second Addendum and Amendment dated December 24, 1998 to the Supplemental
Executive Retirement Agreement between Centura Banks, Inc. and William H.
Wilkerson
Second Addendum and Amendment dated December 24, 1998 to the Supplemental
Executive Retirement Agreement between Centura Banks, Inc. and Frank L.
Pattillo
The Planters Corporation Deferred Compensation Plan, as assumed by Centura
Banks, Inc.
Supplemental Executive Retirement Agreement dated May 14, 1996, between
Centura Banks, Inc. and Cecil W. Sewell, Jr.
Supplemental Executive Retirement Agreement as amended dated October 23,
1996 between Centura Banks, Inc. and Cecil W. Sewell, Jr.
Supplemental Executive Retirement Agreement, dated February 18, 2000,
between Centura Banks, Inc. and Michael S. Patterson
Executive Employment Agreement, dated February 18, 2000, between Centura
Banks, Inc., Centura Bank and Cecil W. Sewell, Jr.
Agreement and Plan of Reorganization by and between Triangle Bancorp, Inc.
and Centura Banks, Inc. dated August 22, 1999.
Centura Banks, Inc. Split-Dollar Life Insurance Plan (previously referred
to as Split Dollar Life Insurance Plan of The Planters Corporation) as
assumed by Centura Banks, Inc.
Centura Banks, Inc. Dividend Reinvestment Stock Purchase Plan, as amended
and restated effective October 3, 1994
Supplemental Executive Retirement Agreement dated May 14, 1996, between
Centura Banks, Inc. and William H. Wilkerson
II-105
<PAGE>
Virginia Beach Federal Savings and Loan Association 1981 Stock Option
Plan, as amended, as assumed by Centura Banks, Inc.
Orange Federal Savings and Loan Association Nonstatutory Stock Option Plan
for Directors, as assumed by Centura Banks, Inc.
Supplemental Executive Retirement Agreement, as amended dated October 23,
1996, between Centura Banks, Inc. and William H. Wilkerson
Supplemental Executive Retirement Agreement dated April 5, 1994 between
Centura Banks, Inc. and H. Kel Landis III
Virginia Beach Federal Savings Bank 1991 Stock Option Plan, as amended, as
assumed by Centura Banks, Inc.
Supplemental Executive Retirement Agreement dated May 13, 1996 between
Centura Banks, Inc. and Frank L. Pattillo
Amended and Restated Supplemental Omnibus Supplemental Executive
Retirement Plan, dated October 1, 1998
Supplemental Executive Retirement Agreement as amended, dated October 23,
1996 between Centura Banks, Inc. and Frank L. Pattillo
Agreement of Assumption of Retirement Payment Agreement, dated as of June
2, 1995, by and between Centura Banks, Inc., First Southern Savings Bank,
Inc. SSB, and William H. Redding, Jr.
Agreement of Assumption of Agreement for Deferred Fees, dated as of June
2, 1995, by and between Centura Banks, Inc., First Southern Bancorp, Inc.,
and William H. Redding, Jr.
Virginia Beach Federal Financial Corporation 1997 Directors Stock
Compensation Plan, as assumed by Centura Banks, Inc.
First Community Bank Omnibus Stock Plan of 1994, as assumed by Centura
Banks, Inc.
Virginia Beach Federal Financial Corporation 1998 Stock Option Plan, as
assumed by Centura Banks, Inc.
Agreement and Plan of Merger dated October 28, 1998 between First Coastal
Bankshares, Inc. and Centura Banks, Inc.
First Southern Bancorp, Inc. Employee Stock Option Plan, as assumed by
Centura Banks, Inc.
First Southern Bancorp, Inc. Nonqualified Stock Option Plan for Directors,
as assumed by Centura Banks, Inc.
Executive Employment Agreement, dated November 1, 1996, between Dean E.
Painter, Jr. and CLG, Inc.
Executive Employment Agreement, dated November 3, 1997, between Thomas A.
Betts, Jr. and Centura Insurance Services, Inc.
Letter re: Change in Certifying Accountant
Subsidiaries of Centura Banks, Inc.
Financial Data Schedule included in the electronically filed document as
required
COPIES OF EXHIBITS ARE AVAILABLE UPON WRITTEN REQUEST TO STEVEN J.
GOLDSTEIN, CHIEF FINANCIAL OFFICER OF CENTURA BANKS, INC.
II-106
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Centura Banks, Inc. has duly caused this report to be
signed on the 16th day of February, 2000, on its behalf by the undersigned,
thereunto duly authorized.
CENTURA BANKS, INC.
/S/ MICHAEL S. PATTERSON
----------------------------------------
Michael S. Patterson
Chairman of the Board
/S/ STEVEN J. GOLDSTEIN
----------------------------------------
Steven J. Goldstein
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Centura
Banks, Inc. and in the capacities indicated on the 16th day of February, 2000.
<TABLE>
<S> <C>
/S/MICHAEL S. PATTERSON Chairman of the Board,Director
----------------------------------
Michael S. Patterson
/S/CECIL W. SEWELL, JR. Chief Executive Officer, Director
----------------------------------
Cecil W. Sewell, Jr.
/S/RICHARD H. BARNHARDT Director
----------------------------------
Richard H. Barnhardt
/S/THOMAS A. BETTS, JR. Director
----------------------------------
Thomas A. Betts, Jr.
/S/H. TATE BOWERS Director
----------------------------------
H. Tate Bowers
/S/DAVID T. CLANCY Director
----------------------------------
David T. Clancy
/S/ERNEST L. EVANS Director
----------------------------------
Ernest L. Evans
/S/BERNARD W. FRANKLIN Director
----------------------------------
Bernard W. Franklin
/S/W. CAROL FULGHUM Principal Accounting Officer
----------------------------------
W. Carol Fulghum
/S/SUSAN E. GRAVELY Director
----------------------------------
Susan E. Gravely
/S/ROBERT L. GUTHRIE Director
----------------------------------
Robert L. Guthrie
/S/JOHN H. HIGH Director
----------------------------------
John H. High
</TABLE>
II-107
<PAGE>
<TABLE>
<S> <C>
/S/ROBERT L. HUBBARD Director
----------------------------------
Robert L. Hubbard
/S/WILLIAM H. KINCHELOE Director
----------------------------------
William H. Kincheloe
/S/CHARLES T. LANE Director
----------------------------------
Charles T. Lane
Director
----------------------------------
Wendell H. Murphy
/S/JOSEPH H. NELSON Director
----------------------------------
Joseph H. Nelson
/S/DEAN E. PAINTER, JR. Director
----------------------------------
Dean E. Painter, Jr.
/S/O. TRACY PARKS, III Director
----------------------------------
O. Tracy Parks, III
/S/FRANK L. PATTILLO Director, Vice Chairman
----------------------------------
Frank L. Pattillo
/S/PATRICK H. POPE Director
----------------------------------
Patrick H. Pope
/S/WILLIAM H. REDDING, JR. Director
----------------------------------
William H. Redding, Jr.
/S/CHARLES M. REEVES, III Director
----------------------------------
Charles M. Reeves, III
/S/GEORGE T. STRONACH, III Director
----------------------------------
George T. Stronach, III
/S/ALEXANDER P. THORPE, III Director
----------------------------------
Alexander P. Thorpe, III
/S/SYDNOR M. WHITE, JR. Director
----------------------------------
Sydnor M. White, Jr.
/S/WILLIAM H. WILKERSON Director, President
----------------------------------
William H. Wilkerson
/S/CHARLES P. WILKINS Director
----------------------------------
Charles P. Wilkins
/S/J. BLOUNT WILLIAMS Director
----------------------------------
J. Blount Williams
</TABLE>
II-108
<PAGE>
CENTURA BANKS, INC.
EXHIBIT LIST
<TABLE>
<CAPTION>
Sequential
Exhibit No. Description of Exhibit Page No.
- ----------- ---------------------- --------
<S> <C> <C>
3.1 Restated Articles of Incorporation of Centura Banks, Inc. * (2)
3.2 Bylaws of Centura Banks, Inc., as amended
4.1 Excerpts from Centura's Articles of Incorporation and Bylaws relating to the rights of holders of * (1)
Centura capital stock
4.2 Specimen certificate of Centura common stock * (2)
4.3 Amended and Restated Trust Agreement between Centura Banks, Inc., as Depositor, State Street * (11)
Bank and Trust Company, as Property Trustee, Delaware Trust Capital Management, as Delaware
Trustee, and the Administrative Trustees named therein relating to $100,000,000 Centura Capital
Trust I, 8.845% Capital Securities, Series A (the "Capital Securities")
4.4 Guarantee Agreement between Centura Banks, Inc., Guarantor, and State Street Bank and Trust * (11)
Company, as Guarantee Trustee, relating to the Capital Securities
4.5 Junior Subordinated Indenture between Centura Banks, Inc. and State Street Bank and Trust * (11)
Company, as Trustee relating to $103,093,000 8.845% Junior Subordinated Deferred Interest
Debentures of the Corporation
10.1 Centura Banks, Inc. Omnibus Equity Compensation Plan, as amended and restated effective * (11)
April 16, 1997
10.2 Centura Banks, Inc. Directors' Deferred Compensation Plan, as amended and restated effective * (8)
February 15, 1995
10.3 Second Addendum and Amendment dated December 24, 1998 to the Supplemental Executive * (13)
Retirement Agreement between Centura Banks, Inc. and Cecil W. Sewell, Jr.
10.4 Centura Banks, Inc. Omnibus Supplemental Executive Retirement Plan * (8)
10.5 Executive Employment Agreement, dated February 18, 2000, between Centura Banks, Inc.,
Centura Bank and Michael S. Patterson
10.6 Second Addendum and Amendment dated December 24, 1998 to the Supplemental Executive * (13)
Retirement Agreement between Centura Banks, Inc. and William H. Wilkerson
10.7 Second Addendum and Amendment dated December 24, 1998 to the Supplemental Executive * (13)
Retirement Agreement between Centura Banks, Inc. and Frank L. Pattillo
10.8 The Planters Corporation Deferred Compensation Plan, as assumed by Centura Banks, Inc. * (4)
10.9 Supplemental Executive Retirement Agreement dated May 14, 1996, between Centura Banks, * (10)
Inc. and Cecil W. Sewell, Jr.
10.10 Supplemental Executive Retirement Agreement as amended dated October 23, 1996 between * (10)
Centura Banks, Inc. and Cecil W. Sewell, Jr.
10.11 Supplemental Executive Retirement Agreement, dated February 18, 2000, between Centura
Banks, Inc. and Michael S. Patterson
10.12 Executive Employment Agreement, dated February 18, 2000, between Centura Banks, Inc.,
Centura Bank and Cecil W. Sewell, Jr.
10.13 Agreement and Plan of Reorganization by and between Triangle Bancorp, Inc. and Centura * (15)
Banks, Inc. dated August 22, 1999
10.14 Centura Banks, Inc. Split-Dollar Life Insurance Plan (previously referred to as Split Dollar Life * (4)
Insurance Plan of The Planters Corporation), as assumed by Centura Banks, Inc.
10.15 Centura Banks, Inc. Dividend Reinvestment Stock Purchase Plan, as amended and restated * 4.2(7)
effective October 3, 1994
10.16 Supplemental Executive Retirement Agreement dated May 14, 1996, between Centura Banks, * (10)
Inc. and William H. Wilkerson
10.17 Virginia Beach Federal Savings and Loan Association 1981 Stock Option Plan, as amended, as
assumed by Centura Banks, Inc.
10.18 Orange Federal Savings and Loan Association Nonstatutory Stock Option Plan for Directors, as * 4.3 (3)
assumed by Centura Banks, Inc.
10.19 Supplemental Executive Retirement Agreement, as amended dated October 23, 1996 between * (10)
Centura Banks, Inc. and William H. Wilkerson
10.20 Supplemental Executive Retirement Agreement dated April 5, 1994 between Centura Banks, Inc. * (13)
and H. Kel Landis III
10.21 Virginia Beach Federal Savings bank 1991 Stock Option Plan, as amended, as assumed by
Centura Banks, Inc.
</TABLE>
II-109
<PAGE>
<TABLE>
<CAPTION>
Sequential
Exhibit No. Description of Exhibit Page No.
- ----------- ---------------------- --------
<S> <C> <C>
10.22 Supplemental Executive Retirement Agreement dated May 13, 1996 between Centura Banks, Inc. * (10)
and Frank L. Pattillo
10.23 Amended and Restated Omnibus Supplemental Executive Retirement Plan, dated October 1, * (13)
1998
10.24 Supplemental Executive Retirement Agreement as amended, dated October 23, 1996 between * (10)
Centura Banks, Inc. and Frank L. Pattillo
10.25 Agreement of Assumption of Retirement Payment Agreement, dated as of June 2, 1995, by * (5)
and between Centura Banks, Inc., First Southern Savings Bank, Inc. SSB, and William H.
Redding, Jr.
10.26 Agreement of Assumption of Agreement for Deferred Fees, dated as of June 2, 1995, by and * (5)
between Centura Banks, Inc., First Southern Bancorp, Inc., and William H. Redding, Jr.
10.27 Virginia Beach Federal Financial Corporation 1997 Directors Stock Compensation Plan, as
assumed by Centura Banks, Inc.
10.28 First Community Bank Omnibus Stock Plan of 1994, as assumed by Centura Banks, Inc. * 4.3 (9)
10.29 Virginia Beach Federal Financial Corporation 1998 Stock Option Plan, as assumed by Centura
Banks, Inc.
10.30 Agreement and Plan of Merger dated October 28, 1998 between First Coastal Bankshares, Inc. * (12)
and Centura Banks, Inc.
10.31 First Southern Bancorp, Inc. Employee Stock Option Plan, as assumed by Centura Banks, Inc. * 4.2 (6)
10.32 First Southern Bancorp, Inc. Nonqualified Stock Option Plan for Directors, as assumed by * 4.2 (6)
Centura Banks, Inc.
10.33 Executive Employment Agreement, dated November 1, 1996, between Dean E. Painter, Jr. and * (11)
CLG, Inc.
10.34 Executive Employment Agreement, dated November 3, 1997, between Thomas A. Betts, Jr. and * (11)
Centura Insurance Services, Inc.
16 Letter re: Change in Certifying Accountant * (14)
21 Subsidiaries of Centura Banks, Inc.
27 Financial Data Schedule
</TABLE>
- ---------
* Incorporation by reference from the following document as noted:
(1) Included as the identified exhibit in Centura Banks, Inc. Form S-4 dated
March 8, 1990, as amended by Amendment No. 1 dated May 14, 1990.
(2) Included as the identified exhibit in Centura Banks, Inc. Annual Report on
Form 10-K for the year ended December 31, 1990.
(3) Included as the identified exhibit in Centura Banks, Inc. Form S-8
Registration Statement filed as Post-Effective Amendment No. 1 to Form S-4
Registration Statement (Registration No. 33-52160) filed on December 31,
1992.
(4) Included as the identified exhibit in Planters Corporation Form 10-K (File
No. 0-11061) dated March 21, 1989.
(5) Included as the identified exhibit in Centura Banks, Inc. Annual Report on
Form 10-K for the year ended December 31, 1995.
(6) Included as the identified exhibit to Centura Banks, Inc. Form S-8
Registration Statement filed as Post-Effective Amendment No. 1 to Form S-4
Registration Statement (Registration No. 33-90568) filed on June 12, 1995.
(7) Included as the identified exhibit in Centura Banks, Inc. Post-Effective
Amendment No. 1 to Form S-3 Registration Statement filed as Post-Effective
Amendment No. 3 to Form S-4 Registration Statement (Registration No.
33-33773) filed on September 2, 1994.
(8) Included as the identified exhibit in Centura Banks, Inc. Annual Report on
Form 10-K for the year ended December 31, 1994.
(9) Included as the identified exhibit to Centura Banks, Inc. Form S-8
Registration Statement filed as Post-Effective Amendment No. 1 to Form S-4
Registration Statement (Registration No. 333-04949) filed on August 26,
1996.
(10) Included as the identified exhibit to Centura Banks, Inc. Annual Report on
Form 10-K for the year ended December 31, 1996.
(11) Included as the identified exhibit to Centura Banks, Inc. Annual Report on
Form 10-K for the year ended December 31, 1997.
(12) Included as the identified exhibit in Centura Banks, Inc. Form S-4
Registration Statement (Registration No. 333-69283) filed on February 4,
1999.
(13) Included as the identified exhibit to Centura Banks, Inc. Annual Report on
Form 10-K for the year ended December 31, 1998.
(14) Information is incorporated by reference to Form 8-K dated December 22,
1999.
(15) Included as the identified exhibit in Centura Banks, Inc. Form S-4
Registration Statement (Registration No. 333-92195) filed on December 6,
1999.
II-110
EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
CENTURA BANKS, INC.
ARTICLE I
OFFICES
SECTION 1. PRINCIPAL OFFICE: The principal office of Centura Banks,
Inc. (the "CORPORATION") shall be located at 131 North Church Street, Rocky
Mount, Nash County, North Carolina 27802, or at such other place as may be
determined from time to time by the directors.
SECTION 2. REGISTERED OFFICE: The registered office of the Corporation
shall be located at 131 North Church Street, Rocky Mount, Nash County, North
Carolina 27802.
SECTION 3. OTHER OFFICES: The Corporation may have offices at such
other places, either within or without the State of North Carolina, as the board
of directors may from time to time determine, or as the affairs of the
Corporation may require.
ARTICLE II
MEETINGS OF SHAREHOLDERS
SECTION 1. PLACE OF MEETINGS: All meetings of shareholders shall be
held at the principal office of the Corporation, or at such other place, either
within or without the State of North Carolina, as shall be designated in the
notice of the meeting or as may be agreed upon by a majority of the shareholders
entitled to vote at the meeting.
SECTION 2. ANNUAL MEETING: The annual meeting of shareholders for the
election of directors and the transaction of other business shall be held
annually at 10:00 a.m. on the third Wednesday in April, or at such other place,
time, and date as the board of directors may designate.
SECTION 3. SUBSTITUTE ANNUAL MEETING: If the annual meeting shall not
be held on the day designated by these bylaws, a substitute annual meeting may
be called by the board of directors, the chairman of the board, or the
president. A meeting so called shall be designated and treated for all purposes
as the annual meeting.
SECTION 4. SPECIAL MEETINGS: Special meetings of the shareholders may
be called at any time by the board of directors, the chairman of the board, the
chief executive officer, or the president. Only business within the purpose or
purposes described in the meeting notice specified in ARTICLE II, SECTION 5 may
be conducted at a special meeting of shareholders.
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SECTION 5. NOTICE OF MEETINGS:
(a) Written or printed notice stating the time and place of the meeting
shall be delivered not less than ten (10) nor more than sixty (60) days
before the date of any shareholders' meeting, either personally, by
mail, by telegraph, by teletype, or by facsimile transmission, by or at
the direction of the chairman of the board, the chief executive
officer, the president, the secretary, or other person calling the
meeting to each shareholder of record entitled to vote at such meeting.
If mailed, such notice shall be deemed to be delivered when deposited
in the United States mail, addressed to the shareholder at his address
as it appears on the record of the shareholders of the Corporation,
with postage thereon prepaid.
(b) In the case of a special meeting, the notice of meeting shall
specifically state the purpose or purposes for which the meeting is
called. In the case of an annual or substitute annual meeting, the
notice of meeting need not specifically state the business to be
transacted unless such a statement is required by the North Carolina
Business Corporation Act as codified in Chapter 55 of the North
Carolina General Statutes effective July 1, 1990, and as amended from
time to time (the "ACT").
(c) When an annual or special meeting is adjourned to a different date,
time, and place, it is not necessary to give any notice of the
adjourned meeting other than by announcement at the meeting at which
the adjournment is taken; provided, however, that if a new record date
for the adjourned meeting is or must be set, notice of the adjourned
meeting must be given to persons who are shareholders as of the new
record date.
(d) The record date for determining the shareholders entitled to notice
of and to vote at an annual or special meeting shall be fixed as
provided in ARTICLE VII, SECTION 3.
SECTION 6. WAIVER OF NOTICE: A shareholder may waive notice of any
meeting either before or after such meeting. Such waiver shall be in writing,
signed by the shareholder, and filed with the minutes or corporate records. A
shareholder's attendance at a meeting: (i) waives objection to lack of notice or
defective notice of the meeting, unless the shareholder at the beginning of the
meeting objects to holding the meeting or transacting business at the meeting;
and (ii) waives objection to consideration of a particular matter at the meeting
that is not within the purpose or purposes described in the meeting notice,
unless the shareholder objects to considering the matter before it is voted
upon.
SECTION 7. SHAREHOLDER LIST: Commencing two (2) business days after
notice of a meeting of shareholders is given and continuing through such
meeting, the secretary of the Corporation shall maintain at the principal office
of the Corporation an alphabetical list of the shareholders entitled to vote at
such meeting, arranged by voting group (as defined herein), with the address of
and number of units into which the proprietary interests in the Corporation are
divided ("SHARES") held by each. This list shall be subject to inspection by any
shareholder or his agent or attorney at any time during usual business hours and
may be copied at the shareholder's expense. For purposes of these bylaws,
"VOTING GROUP" shall mean all shares of one or more classes or series that under
the articles of incorporation or the Act are entitled to vote and be
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counted together collectively on a matter at a meeting of shareholders. All
shares entitled by the articles of incorporation or the Act to vote generally on
a matter are for that purpose a single voting group.
SECTION 8. QUORUM:
(a) A majority of the votes entitled to be cast on a matter by any
voting group, represented in person or by proxy, shall constitute a
quorum of that voting group for action on that matter. The shareholders
present at a duly organized meeting may continue to transact business
until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum.
(b) In the absence of a quorum at the opening of any meeting of
shareholders, such meeting may be adjourned from time to time by a
majority of the votes voting on the motion to adjourn; and at any
adjourned meeting at which a quorum is present, any business may be
transacted which might have been transacted at the original meeting.
SECTION 9. PROXIES: A shareholder may vote his shares in person or by
proxy. A shareholder may appoint one or more proxies to vote or otherwise act
for him by signing an appointing form, either personally or by his
attorney-in-fact. A photocopy, telegram, cablegram, facsimile transmission or
equivalent reproduction of a writing appointing one or more proxies, shall be
deemed a valid appointment form within the meaning of this section. In addition,
a shareholder may appoint one or more proxies (i) by an electronic mail message
or other form of electronic, wire, or wireless communication that provides a
written statement appearing to have been sent by the shareholder, or (ii) by any
kind of electronic or telephonic transmission, even if not accompanied by
written communication, under circumstances or together with information from
which the Corporation can reasonably assume that the appointment was made or
authorized by the shareholder. An appointment of a proxy is effective when
received by the secretary or other officer or agent authorized to tabulate
votes. An appointment is valid for eleven (11) months unless a different period
is expressly provided in the appointment form.
SECTION 10. VOTING OF SHARES:
(a) Subject to the provisions of the Corporation's articles of
incorporation, including amended and restated articles of incorporation
and articles of merger (the "ARTICLES OF INCORPORATION"), ARTICLE III,
SECTION 4, and the Act, each outstanding share, regardless of class,
shall be entitled to one vote on each matter submitted to a vote at a
meeting of shareholders.
(b) Except for the election of directors, which is governed by the
provisions of ARTICLE III, SECTION 3, if a quorum is present, action on
a matter by a voting group is approved if the votes cast within the
voting group favoring the action exceed the votes cast against the
action, unless the vote of a greater number is required by the Act, the
articles of incorporation, or these bylaws.
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(c) Shares of the Corporation are not entitled to vote if: (i) they are
owned, directly or indirectly, by the Corporation, unless they are held
by it in a fiduciary capacity; (ii) they are owned, directly or
indirectly, by a second corporation in which the Corporation owns a
majority of the shares entitled to vote for directors of the second
corporation; or (iii) they are redeemable shares and (x) notice of
redemption has been given and (y) a sum sufficient to redeem the shares
has been deposited with a bank, trust company, or other financial
institution under an irrevocable obligation to pay the holders the
redemption price upon surrender of the shares.
SECTION 11. INFORMAL ACTION BY SHAREHOLDERS: Any action which may be
taken at a meeting of the shareholders may be taken without a meeting if a
consent in writing, setting forth the action so taken, is signed by all of the
persons who would be entitled to vote upon such action at a meeting and is
delivered to the Corporation to be included in the minutes or to be kept as part
of the corporate records.
SECTION 12. CORPORATION'S ACCEPTANCE OF VOTES:
(a) If the name signed on a vote, consent, waiver, or proxy appointment
corresponds to the name of a shareholder, the Corporation is entitled
to accept the vote, consent, waiver, or proxy appointment and to give
it effect as the act of the shareholder.
(b) If the name signed on a vote, consent, waiver, or proxy appointment
does not correspond to the name of its shareholder, the Corporation is
nevertheless entitled to accept the vote, consent, waiver, or proxy
appointment and to give it effect as the act of the shareholder if: (i)
the shareholder is an entity and the name signed purports to be that of
an officer or agent of the entity; (ii) the name signed purports to be
that of an administrator, executor, guardian, or conservator
representing the shareholder and, if the Corporation requests, evidence
of fiduciary status acceptable to the Corporation has been presented
with respect to the vote, consent, waiver, or proxy appointment; (iii)
the name signed purports to be that of a receiver or trustee in
bankruptcy of the shareholder and, if the Corporation requests,
evidence of its status acceptable to the Corporation has been presented
with respect to the vote, consent, waiver, or proxy appointment; (iv)
the name signed purports to be that of a beneficial owner or
attorney-in-fact of the shareholder and, if the Corporation requests,
evidence acceptable to the Corporation of the signatory's authority to
sign for the shareholder has been presented with respect to the vote,
consent, waiver, or proxy appointment; or (v) two or more persons are
the shareholder as co-tenants or fiduciaries and the name signed
purports to be the name of at least one of the co-owners and the person
signing appears to be acting on behalf of all the co-owners.
(c) The Corporation is entitled to reject a vote, consent, waiver, or
proxy appointment if the secretary or other officer or agent authorized
to tabulate votes has a reasonable basis for doubt about the validity
of the signature on it or about the signatory's authority to sign for
the shareholder.
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SECTION 13. NUMBER OF SHAREHOLDERS: The following persons or entities
identified as a shareholder in the Corporation's current record of shareholders
constitute one shareholder for purposes of these bylaws: (i) all co-owners of
the same shares; (ii) a corporation, partnership, trust, estate, or other
entity; (iii) the trustees, guardians, custodians, or other fiduciaries of a
single trust, estate, or account. Shareholdings registered in substantially
similar names constitute one shareholder if it is reasonable to believe that the
names represent the same person.
ARTICLE III
BOARD OF DIRECTORS
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SECTION 1. GENERAL POWERS: All corporate powers shall be exercised by
or under the authority of, and the business and affairs of the Corporation shall
be managed under the direction of, its board of directors.
SECTION 2. NUMBER, TERM AND QUALIFICATIONS: The number constituting the
board of directors shall be thirty (30), divided into three (3) classes as
provided for in the articles of incorporation. The board of directors may by
resolution amend this bylaw to change the number of directors, so long as the
number is within the range specified in the articles of incorporation. Each
director shall hold office until his death, resignation, retirement, removal,
disqualification, or until his successor is elected and qualified. Directors
need not be residents of the State of North Carolina. No person shall be elected
as a director nor serve as a director who is not the holder of record of at
least two hundred (200) shares of the Corporation's capital stock that are
subject to no liens or encumbrances. No person shall be elected as a director
nor serve as a director after the end of the month in which that person reaches
the age of 65 years; provided, however, that a director who was born before
January 15, 1935, may serve as a director until such person reaches the age of
70 years.
SECTION 3. NOMINATION AND ELECTION OF DIRECTORS:
(a) Nominations to the board of directors may be made by the board of
directors or by a committee of the board to which such duty is
delegated. No nominations to the board of directors may be made from
the floor at the annual shareholders meeting.
(b) Except as provided in ARTICLE III, SECTION 5 and in the articles of
incorporation, the directors shall be elected at the annual meeting of
shareholders and those persons who receive the highest number of votes
shall be deemed to have been elected; PROVIDED, HOWEVER, that the
number of persons deemed elected shall not exceed the number of
positions on the board of directors for which votes are cast, and that
no person shall gain election to the board of directors without
obtaining at least a majority of the votes cast.
SECTION 4. REMOVAL: Any director, or the entire board of directors, may
be removed from office at any time, with or without cause, but only by the
affirmative vote of the holders of at least sixty-six and two-thirds percent
(66-2/3%) of the voting power of all shares then entitled to vote generally in
the election of directors. If a director is elected by a voting group of
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shareholders, only members of that voting group may participate in the vote to
remove him. A director may not be removed by the shareholders at a meeting
unless the notice of the meeting specifies such removal as one of its purposes.
If any directors are removed, new directors may be elected at the same meeting.
SECTION 5. VACANCIES: Any vacancy occurring in the board of directors,
including, without limitation, a vacancy resulting from an increase in the
number of directors or from the failure by the shareholders to elect the full
number of directors authorized by these bylaws, shall be filled only by the
board of directors or, if the directors remaining in office constitute fewer
than a quorum of the board, by the affirmative vote of a majority of the
remaining directors or by the sole remaining director. If the vacant office was
held by a director elected by a voting group of shareholders, only the remaining
director or directors elected by that voting group are entitled to fill the
vacancy. A director elected to fill a vacancy shall be elected for the unexpired
term of his predecessor in office.
SECTION 6. COMPENSATION. The board of directors may compensate
directors for their services as such and may provide for the payment of all
expenses incurred by directors in attending regular and special meetings of the
board.
SECTION 7. COMMITTEES: The board of directors may create one or more
committees of the board, each of which shall have at least two (2) members, all
of whom shall be directors. The creation of a committee and the appointment of
members to it must be approved by a majority of all the directors in office when
the action is taken. Each committee may, as specified by the board of directors,
exercise some or all of the authority of the board except that a committee may
not: (i) authorize Distributions; (ii) approve or propose to shareholders action
that the Act requires be approved by shareholders; (iii) fill vacancies on the
board of directors or on any of its committees; (iv) amend the articles of
incorporation pursuant to N.C. Gen. Stat. Section 55-10-02 or its successor; (v)
adopt, amend, or repeal bylaws; (vi) approve a plan of merger not requiring
shareholder approval; (vii) authorize or approve a reacquisition of shares,
except according to a formula or method prescribed by the board of directors; or
(viii) authorize or approve the issuance or sale or contract for sale of shares,
or determine the designation and relative rights, preferences, and limitations
of a class or series of shares, except that the board of directors may authorize
a committee to do so within limits specifically prescribed by the board of
directors. The provisions of ARTICLE IV, which govern meetings of the board of
directors, shall likewise apply to meetings of any committee of the board. For
purposes of these bylaws, the term "DISTRIBUTION" shall mean any direct or
indirect transfer of money or other property (except the Corporation's own
shares) or incurrence of indebtedness by the Corporation to or for the benefit
of its shareholders in respect of any of its shares, which Distribution may be
in the form of a declaration or payment of a dividend, a purchase, redemption,
or other acquisition of shares, a distribution of indebtedness, or otherwise.
SECTION 8. EXECUTIVE COMMITTEE:
(a) In accordance with ARTICLE III, SECTION 7, the board of directors
shall designate an executive committee. The chairman of the executive
committee shall be appointed in
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accordance with the provisions of ARTICLE IV, and he shall appoint a
secretary of the committee, who need not be from among its own members.
(b) Subject to the provisions of ARTICLE III, SECTION 7, the executive
committee may exercise all of the power of the board of directors
during intervals between meetings thereof, including but not limited to
the power to authorize the execution of contracts, deeds, leases, and
other agreements respecting real or personal property. Without limiting
the generality of the foregoing, it may fill vacancies occurring in any
offices between meetings of the board of directors and may create new
offices and elect persons to fill such offices, provided that vacancies
in the offices of chairman of the board, president, and senior
executive vice president may be filled only by action of the board of
directors. It shall consider and act upon any matters submitted to it
by the board of directors and shall advise the board of directors in
writing at the next regular meeting of the board in regard to its acts.
(c) In the event of the death, prolonged absence, or the inability to
act of the chairman of the executive committee, as determined by a
majority of the remaining executive committee members, the executive
committee shall appoint an acting chairman of the of the executive
committee who shall assume the duties and have the powers of the
chairman until the board of directors elects a new chairman of the
executive committee. The executive committee shall meet upon the call
of the chairman of the executive committee or any two (2) of its
members. The person or persons calling the meeting shall cause
reasonable notice to be given to all committee members.
SECTION 9. AUDIT COMMITTEE:
(a) In accordance with ARTICLE III, SECTION 7, the board of directors
shall designate an audit committee, which shall be composed of
directors who are not active officers or employees of the corporation.
A chairman of the committee shall be designated by the board of
directors.
(b) The audit committee shall assure that there exist viable auditing
processes, both internal and independent, for the Corporation and its
subsidiary or affiliated companies. The committee shall recommend to
the board of directors the appointment of the independent auditors. The
committee shall maintain open lines of communication with internal
auditors, external auditors, and regulatory examiners, for the purposes
of satisfying the committee that the audit scope and program are not
restricted; that management takes appropriate and timely action on
recommendations made by auditors or examiners; and that corporate
personnel cooperate with auditors and examiners. The audit committee
shall also be responsible for performing such other duties as are
required by applicable law.
(c) The audit committee shall meet on call of the chairman of the
committee as the nature of business warrants and shall review and
consider reports of examination of regulatory agencies, management
letters or other comments of external auditors, reports of the general
auditor, and any other audit related business it considers appropriate.
The
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chairman of the committee shall report to the board of directors on any
recommendations made by the committee and on action taken by management
on such recommendations.
SECTION 10. COMPENSATION AND BENEFITS COMMITTEE:
(a) In accordance with ARTICLE III, SECTION 7, the board of directors
shall designate a compensation and benefits committee. The chairman of
the board and the chief executive officer of the Corporation shall be
non-voting members of this committee; all other members shall be
directors who are not also active officers or employees of the
Corporation.
(b) The compensation and benefits committee shall oversee the
compensation and benefits of executive officers of the company and such
other compensation and benefits matters as it deems appropriate. The
committee may delegate the administration of compensation and benefits
programs to such person or persons as it may deem appropriate.
ARTICLE IV
MEETINGS OF DIRECTORS
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SECTION 1. REGULAR MEETINGS: A regular meeting of the board of
directors shall be held immediately after, and at the same place as, the annual
meeting of the shareholders. In addition, the board of directors may provide, by
resolution, the time and place, either within or without the State of North
Carolina, for the holding of additional regular meetings.
SECTION 2. SPECIAL MEETINGS: Special meetings of the board of directors
may be called by or at the request of the chairman of the board, the chief
executive officer, the president, or any four (4) directors. Such meetings may
be held either within or without the State of North Carolina, as fixed by the
person or persons calling the meeting.
SECTION 3. NOTICE OF MEETINGS Regular meetings of the board of
directors may be held without notice. The person or persons calling a special
meeting of the board of directors shall, at least one (1) day before the
meeting, give notice of the meeting by any usual means of communication,
including by telephone, telegraph, teletype, mail, private carrier, facsimile
transmission, or other form of wire or wireless communication, including,
without limitation, by electronic mail. Such notice may be oral and need not
specify the purpose for which the meeting is called.
SECTION 4. WAIVER OF NOTICE: Any director may waive notice of any
meeting either before or after such meeting. Such waiver shall be in writing,
signed by the director, and filed with the minutes or corporate records;
PROVIDED, HOWEVER, that a director's attendance at or participation in a meeting
waives any required notice to him unless the director at the beginning of the
meeting (or promptly upon his arrival) objects to holding the meeting or
transacting business at the meeting and does not thereafter vote for or assent
to action taken at the meeting.
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SECTION 5. QUORUM: A majority of the directors fixed by these bylaws
shall constitute a quorum for the transaction of business at any meeting of the
board of directors.
SECTION 6. MANNER OF ACTING: The act of a majority of the directors
present at a meeting at which a quorum is present shall be the act of the board
of directors, unless a greater number is required by the articles of
incorporation or these bylaws.
SECTION 7. PRESUMPTION OF ASSENT: A director of the Corporation who is
present at a meeting of the board of directors or a committee of the board of
directors when corporate action is taken is deemed to have assented to the
action taken unless: (i) he objects at the beginning of the meeting (or promptly
upon his arrival) to holding it or transacting business at the meeting; (ii) his
dissent or abstention from the action taken is entered in the minutes of the
meeting; or (iii) he files written notice of his dissent or abstention with the
presiding officer of the meeting before its adjournment or with the Corporation
immediately after adjournment of the meeting. This right of dissent or
abstention is not available to a director who votes in favor of the action
taken.
SECTION 8. PARTICIPATION IN MEETINGS: Any or all of the directors may
participate in a regular or special meeting by, or conduct the meeting through
the use of, any means of communication by which all directors participating may
simultaneously hear each other during the meeting.
SECTION 9. ACTION WITHOUT MEETING. Action which may be taken at a board
of directors meeting may be taken without a meeting if the action is taken by
all members of the board and is evidenced by one or more written consents signed
by each director before or after such action, which describes the action taken
and is included in the minutes or filed with the corporate records. Such action
is effective when the last director signs the consent, unless the consent
specifies a different effective date.
ARTICLE V
OFFICERS
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SECTION 1. OFFICERS OF THE CORPORATION: The officers of the Corporation
shall consist of a chairman of the board, one or more vice chairmen of the
board, a chairman of the executive committee, a president, one or more vice
presidents, a general auditor, a secretary, one or more assistant secretaries, a
treasurer, one or more assistant treasurers, and such other officers as the
board of directors may from time to time appoint. Any two or more offices may be
held by the same person, but no officer may act in more than one capacity where
action of two or more officers is required.
SECTION 2. APPOINTMENT AND TERM: The officers of the corporation shall
be appointed by the board of directors. Each officer shall hold office until his
death, resignation, retirement, removal, disqualification or until his successor
is appointed and qualifies. The appointment of an officer does not itself create
contract rights for either the officer or the corporation.
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SECTION 3. COMPENSATION OF OFFICERS: Except as otherwise provided in
these bylaws, the compensation of and other benefits provided to officers of the
Corporation shall be fixed by the compensation and benefits committee of the
board of directors or by such persons or persons to whom such duty has been
delegated by such committee; provided, however, that the compensation and
benefits of those officers who are members of the executive or compensation and
benefits committee of the board and of the general auditor shall be fixed by the
board of directors.
SECTION 4. RESIGNATION AND REMOVAL: An officer may resign at any time
by communicating his resignation to the Corporation. A resignation is effective
when it is communicated unless it specifies in writing a later date. If a
resignation is made effective as of a later date and the Corporation accepts the
future effective date, the board of directors may fill the pending vacancy
before the effective date if the board provides that the successor does not take
office until the effective date. An officer's resignation does not affect the
Corporation's contract rights, if any, with the officer. Any officer or agent
appointed by the board of directors may be removed by the board at any time,
with or without cause, but such removal shall be without prejudice to the
contract rights, if any, of the person so removed.
SECTION 5. BONDS: The board of directors may by resolution require any
officer, agent, or employee of the corporation to give bond to the Corporation,
with sufficient sureties, conditioned on the faithful performance of the duties
of his respective office or position, and to comply with such other conditions
as may from time to time be required by the board of directors.
SECTION 6. CHIEF EXECUTIVE, CHIEF OPERATING. AND CHIEF FINANCIAL
OFFICERS:
(a) The board of directors may designate a chief executive officer. The
chief executive officer shall be responsible for carrying out the
policies adopted by the board of directors. The chief executive officer
shall have general authority and supervision over the management of the
Corporation and shall perform such other duties as may be prescribed
from time to time by the board of directors.
(b) The board of directors may also designate a chief operating
officer. The chief operating officer shall have general authority and
supervision over the operations of the Corporation.
(c) The board of directors shall designate a chief financial officer.
The chief financial officer shall have general authority and
supervision over financial and accounting matters.
SECTION 7. CHAIRMAN OF THE BOARD: The chairman of the board shall be
elected by the board of directors. The chairman of the board shall preside at
all meetings of the board of directors and the shareholders and shall perform
such other duties as may be prescribed from time to time by the board of
directors. In the interim between meetings of the board of directors, he may
make appointments PRO TEM to offices below the level of president, either for
the purpose
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of filling a vacancy or increasing the number of offices, such appointees to
hold office until the next succeeding regular or special meeting of the
directors who may, at that time, confirm or revoke such appointments. The
chairman of the board shall have the power to execute on behalf of the
Corporation certificates for shares, as well as any deeds, mortgages, contracts,
or other instruments which the board of directors has authorized to be executed,
except in cases where the signing and execution of such documents or instruments
shall be expressly delegated by the board of directors or by these bylaws to
some other officer or agent of the Corporation or shall be required by the Act
to be otherwise signed or executed. The chairman of the board shall make a
report of the Corporation's condition to the shareholders at their annual
meeting and to the board of directors at their regular meetings. He shall be an
EX OFFICIO member of all committees of the board of directors except the audit
committee.
SECTION 8. VICE CHAIRMEN OF THE BOARD: Vice chairmen of the board, if
such officers are appointed by the board of directors, shall have such authority
and shall perform such duties as may be prescribed from time to time by the
board of directors or the chairman of the board.
SECTION 9. CHAIRMAN OF THE EXECUTIVE COMMITTEE: The chairman of the
executive committee shall preside at all meetings of the executive committee of
the board of directors and shall have such other powers and shall perform such
other duties as may be prescribed from time to time by the board of directors.
The chairman of the executive committee shall be such director as the board of
directors shall designate from time to time.
SECTION 10. PRESIDENT: The president shall have general authority and
supervision over the officers and employees of the Corporation and shall perform
such other duties as may be prescribed from time to time by the board of
directors. He shall have the authority to sign certificates for shares, as well
as any deeds, mortgages, contracts, or other instruments which the board of
directors has authorized to be executed, except in cases where the signing and
execution of such contracts or instruments shall be expressly delegated by the
board of directors or by these bylaws to some other officer or agent of the
Corporation, or shall be required by the Act to be otherwise signed or executed.
SECTION 11. GENERAL AUDITOR: The general auditor shall have access to
all books and records of the Corporation and shall be responsible for auditing
all financial records of the Corporation. He shall also perform such other
duties as may be prescribed from time to time by the chairman of the board, the
president, or the board of directors. With respect to the scope, manner, extent,
and result of the audit, the general auditor shall be responsible only to the
board of directors, but in all other respects he shall be under the general
supervision and direction of the chairman of the board or such other officer
designated by the chairman of the board.
SECTION 12. VICE PRESIDENTS: Vice presidents shall be designated as
senior executive vice presidents, executive vice presidents, senior vice
presidents and assistant vice presidents. In the absence of the president, the
vice presidents in the order determined by the board of directors, or in the
absence thereof, in the order of seniority of senior executive vice presidents,
executive vice presidents, senior vice presidents and assistant vice presidents,
respectively, shall perform the duties of the president, and when so acting
shall have all the powers of and be subject to all the restrictions upon that
office. Any vice president may sign certificates for shares, as well as
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any deeds, mortgages, contracts, or other instruments which the board of
directors has authorized to be executed, except in cases where the signing and
execution of such documents or instruments shall be expressly delegated by the
board of directors or these bylaws to some other officer or agent of the
Corporation or shall be required by the Act to be otherwise signed or executed.
A vice president shall perform such other duties as from time to time may be
assigned to him by the chairman of the board, the president, or the board of
directors.
SECTION 13. SECRETARY: The secretary shall: (i) keep the minutes of the
meetings of shareholders, of the board of directors, and of all committees of
the board in one or more books provided for that purpose; (ii) see that all
notices are duly given in accordance with the provisions of these bylaws or as
required by law; (iii) be custodian of the seal of the corporation and see that
the seal of the corporation is affixed to all documents the execution of which
on behalf of the corporation under its seal is duly authorized; (iv) keep a
register of the mailing address of each shareholder which shall be furnished to
the secretary by such shareholder; (v) sign, with the chairman of the board, the
president, or a vice president, certificates for shares, the issuance of which
shall have been authorized by resolution of the board of directors; (vi) have
general charge of the stock transfer books of the Corporation; (vii) keep or
cause to be kept in the State of North Carolina at the Corporation's principal
office a record of the Corporation's shareholders, giving the names and
addresses of all shareholders and the number and class of shares held by each,
and prepare or cause to be prepared a shareholder list prior to each meeting of
shareholders as required by the Act; (viii) maintain and authenticate the books
and records of the Corporation; (ix) with the assistance of the treasurer and
other officers, prepare and deliver to the Corporation's shareholders such
financial statements, notices, and reports as may be required by N.C. Gen. Stat.
Sections 55-16-20 and 55-16-21 (or their successors); (x) prepare and file with
the North Carolina Secretary of State the annual report required by N.C. Gen.
Stat. Section 55-16-22 (or its successor); and (xi) in general perform all
duties incident to the office of secretary and such other duties as from time to
time may be assigned to him by the chairman of the board, the president, or the
board of directors.
SECTION 14. ASSISTANT SECRETARIES: In the absence of the secretary, any
assistant secretary may perform the duties of the secretary, and when so acting
shall have all the powers of and be subject to all the restrictions upon the
secretary. They shall perform such other duties as may be assigned to them by
the secretary, the chairman of the board, the president, or the board of
directors. Any assistant secretary may sign, with the chairman of the board, the
president, or a vice president, certificates for shares.
SECTION 15. TREASURER: The treasurer shall: (i) have charge and custody
of and be responsible for all funds and securities of the corporation; (ii)
receive and give receipts for monies due and payable to the corporation from any
source whatsoever, and deposit all such monies in accordance with the provisions
of ARTICLE VI, SECTION 4; (iii) prepare, or cause to be prepared, an annual
financial statement in accordance with ARTICLE VIII, SECTION 3; and (iv) in
general, perform all of the duties incident to the office of treasurer and such
other duties as from time to time may be assigned to him by the chairman of the
board, the president, or the board of directors. The treasurer may sign, with
the chairman of the board, the president, or a vice president, certificates for
shares.
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SECTION 16. ASSISTANT TREASURER: In the absence of the treasurer, any
assistant treasurer may perform the duties of the treasurer, and when so acting
shall have all the powers of and be subject to all the restrictions upon the
treasurer. They shall perform such other duties as may be assigned to them by
the treasurer, the chairman of the board, the president, or the board of
directors. Any assistant treasurer may sign, with the chairman of the board, the
president, or a vice president, certificates for shares.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
-------------------------------------
SECTION 1. CONTRACTS: The board of directors may authorize any officer
or agent to enter into any contract or to execute and deliver any instrument on
behalf of the Corporation, and such authority may be general or confined to
specific instances.
SECTION 2. LOANS: No loans shall be contracted on behalf of the
Corporation and no evidences of indebtedness shall be issued in its name unless
authorized by resolution of the board of directors. Such authority may be
general or confined to specific instances.
SECTION 3. CHECKS AND DRAFTS: All checks, drafts or orders for payment
of money issued in the name of the Corporation shall be signed by such officers
or agents of the Corporation and in such manner as shall from time to time be
determined by resolution of the board of directors.
SECTION 4. DEPOSITS: All funds of the Corporation otherwise employed
shall be deposited from time to time to the credit of the Corporation in such
depositories as the board of directors shall direct.
ARTICLE VII
CERTIFICATES FOR SHARES AND THEIR TRANSFERS
-------------------------------------------
SECTION 1. CERTIFICATES FOR SHARES: Shares may, but need not, be
represented by certificates. If certificates are issued, they shall be in such
form as the board of directors shall determine; provided that, at a minimum,
each certificate shall state on its face: (i) the name of the Corporation and
that it is organized under the laws of North Carolina; (ii) the name of the
person to whom issued; and (iii) the number and class of shares and the
designation of the series, if any, the certificate represents. If the
corporation issues certificates for shares of preferred stock, the designations,
relative rights, preferences, and limitations applicable to that class, and the
variations in rights, preferences, and limitations for each series within that
class (and the authority of the board of directors to determine variations for
future series) must be summarized on the front or back of each certificate;
alternatively, each certificate may state conspicuously on its front or back
that the Corporation will furnish the shareholder this information in writing
and without charge. These certificates shall be signed, either manually or in
facsimile, by the chairman of the board, the president, or any vice president,
and the secretary, any assistant secretary, the treasurer or any assistant
treasurer. They shall be consecutively numbered or
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otherwise identified and the name and address of the persons to whom they are
issued, with the number of shares and date of issue, shall be entered on the
stock transfer books of the Corporation.
SECTION 2. TRANSFER OF SHARES: Transfer of shares of the corporation
shall be made only on the stock transfer books of the Corporation by the holder
of record, by his legal representative (who shall furnish proper evidence of
authority to transfer) or by his attorney (whose authority shall be evidenced by
a power of attorney duly executed and filed with the secretary), and only upon
surrender for cancellation of the certificates for such shares.
SECTION 3. FIXING RECORD DATE:
(a) For the purpose of determining shareholders entitled to receive
notice of a shareholders meeting, to demand a special meeting, to vote,
to take any other action, or to receive payment, or for any other
purpose, the board of directors may fix in advance a date as the record
date for any such determination of shareholders, such record date in
any case to be not more than seventy (70) days, and, in case of a
meeting of shareholders, not less than ten (10) days, before the date
on which the particular action requiring such determination of
shareholders is to be taken. If no record date is fixed for the
determination of shareholders entitled to notice of or to vote at a
meeting of shareholders, or of shareholders entitled to receive a
distribution, the day before the first notice of the meeting is mailed
or the day on which the board of directors authorize the distribution,
as the case may be, shall be the record date for such determination of
shareholders.
(b) When a determination of shareholders entitled to notice of or to
vote at any meeting of shareholders has been made as provided in this
section, such determination shall apply to any adjournment of such
meeting unless the board of directors fixes a new record date, which it
must do if the meeting is adjourned to a date more than 120 days after
the date fixed for the original meeting.
SECTION 4. LOST CERTIFICATES: The board of directors may authorize the
issuance of a new share certificate in place of a certificate claimed to have
been lost or destroyed, upon receipt of an affidavit of such fact from the
person claiming the loss or destruction. When authorizing the issuance of a new
certificate, the board may require the claimant to give the Corporation a bond
in such sum as it may direct to indemnify the Corporation against loss from any
claim with respect to the certificate claimed to have been lost or destroyed; or
the board may, by resolution reciting that the circumstances justify such
action, authorize the issuance of the new certificate without requiring such a
bond.
SECTION 5. REACQUIRED SHARES: A corporation may acquire its own shares
and shares so acquired constitute authorized but unissued shares.
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ARTICLE VIII
GENERAL PROVISIONS
------------------
SECTION 1. DISTRIBUTIONS: The board of directors may from time to time
declare, and the Corporation may make, distributions on its outstanding shares
in the manner and subject to the terms and conditions provided by the Act and by
the articles of incorporation.
SECTION 2. SEAL: The corporate seal of the Corporation shall consist of
two concentric circles between which is the name of the Corporation and in the
center of which is inscribed "CORPORATE SEAL" or "SEAL," and which shall have
such other characteristics as the board of directors may determine.
SECTION 3. RECORDS AND REPORTS:
(a) All of the Corporation's records shall be maintained in written
form or in another form capable of conversion into written form within
a reasonable time.
(b) The corporation shall keep as permanent records minutes of all
meetings of its incorporators, shareholders, and board of directors, a
record of all actions taken by the shareholders or board of directors
without a meeting, and a record of all actions taken by a committee of
the board of directors in place of the board of directors.
(c) The Corporation shall keep a copy of the following records at its
principal office: (i) the articles of incorporation and all amendments
to them currently in effect; (ii) these bylaws and all amendments to
them currently in effect; (iii) resolutions adopted by the board of
directors of the corporation creating one or more classes or series of
shares and fixing their relative rights, preferences, and limitations
(if shares issued pursuant to those resolutions are outstanding); (iv)
the minutes of all shareholders meetings and records of all actions
taken by shareholders without a meeting during the past three years;
(v) all written communications to shareholders generally within the
past three years; (vi) the annual financial statements described below,
prepared during the past three years; (vii) a list of the names and
business addresses of its current directors and officers; and (viii)
its most recent annual report delivered to the North Carolina Secretary
of State.
(d) The Corporation shall prepare and make available to its
shareholders annual financial statements for the Corporation and its
subsidiaries that: (i) include a balance sheet as of the end of the
fiscal year, an income statement for that year, and a statement of cash
flows for the year; and (ii) are accompanied by either (x) a report of
a public accountant on the annual financial statements, or (y) a
statement by the chief financial officer or treasurer stating his
reasonable belief whether the annual financial statements were prepared
on the basis of generally accepted accounting principles (and, if not,
describing the basis of preparation) and describing any respects in
which the statements were not prepared on a basis of accounting
consistent with the statements prepared for the preceding year. These
annual financial statements, or a written notice of their availability,
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shall be mailed to each shareholder within 120 days after the close of
each fiscal year of the Corporation. On written request from a
shareholder who was not mailed the annual financial statements, the
Corporation shall mail to him the latest such statements.
(e) The Corporation shall also prepare and file with the North Carolina
Secretary of State an annual report in such form as required by N.C.
Gen. Stat.ss.55-16-22, or its successor.
SECTION 4. INDEMNIFICATION:
(a) Any person who at any time serves or has served as a director or
officer of the Corporation, or at the request of the Corporation is or
was serving as an officer, director, agent, partner, trustee,
administrator, member, manager or employee for any other foreign or
domestic corporation, partnership, joint venture, trust, employee
benefit plan, limited liability company or other enterprise, shall be
indemnified by the Corporation to the fullest extent from time to time
permitted by law in the event he is made, or is threatened to be made,
a party to any threatened, pending or completed civil, criminal,
administrative, investigative or arbitrative action, suit or proceeding
and any appeal therein (and any inquiry or investigation that could
lead to such action, suit or proceeding), whether or not brought by or
on behalf of the Corporation, seeking to hold him liable by reason of
the fact that he is or was acting in such capacity. In addition, the
board may provide such indemnification for the employees and agents of
the Corporation as it deems appropriate.
(b) The rights of those receiving indemnification hereunder shall, to
the fullest extent from time to time permitted by law, cover (i)
reasonable expenses, including without limitation all attorney's fees
actually and necessarily incurred by him in connection with any such
action, suit or proceeding; (ii) all reasonable payments made by him in
satisfaction of any judgment, money decree, fine (including an excise
tax assessed with respect to an employee benefit plan), penalty, or
settlement for which he may have become liable in such action, suit or
proceeding; and (iii) all reasonable expenses incurred in enforcing the
indemnification rights provided herein.
(c) Expenses incurred by anyone entitled to receive indemnification
under this section in defending a proceeding may be paid by the
Corporation in advance of the final disposition of such proceeding as
authorized by the board of directors in the specific case or as
authorized or required under any provisions in the bylaws or by any
applicable resolution or contract upon receipt of an undertaking by or
on behalf of the director to repay such amount unless it shall
ultimately be determined that he is entitled to be indemnified by the
corporation against such expenses.
(d) The board of directors of the Corporation shall take all such
action as may be necessary and appropriate to authorize the Corporation
to pay the indemnification required by this bylaw, including without
limitation, to the extent needed, making a good faith evaluation of the
manner in which the claimant for indemnity acted and of the reasonable
amount of indemnity due him.
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(e) Any person who at any time serves or has served in any of the
aforesaid capacities for or on behalf of the corporation shall be
deemed to be doing or to have done so in reliance upon, and as
consideration for, the right of indemnification provided herein. Any
repeal or modification of these indemnification provisions shall not
affect any rights or obligations existing at the time of such repeal or
modification. The rights provided for herein shall inure to the benefit
of the legal representatives of any such person and shall not be
exclusive of any other rights to which such person may be entitled
apart from the provisions of this bylaw.
(f) The rights granted herein shall not be limited by any provisions
contained in the Act, unless such limitations are required by law.
SECTION 5. FISCAL YEAR: The fiscal year of the Corporation shall be
fixed by the board of directors.
SECTION 6. AMENDMENTS:
(a) The board of directors may amend or repeal these bylaws, except to
the extent otherwise provided in the Act.
(b) The corporation's shareholders may amend or repeal these bylaws;
provided that, in addition to any requirements of the Act (and
notwithstanding the fact that a lesser percentage may be specified in
the Act), the affirmative vote of the holders of at least sixty-six and
two-thirds percent (66-2/3%) of the voting power of all shares then
entitled to vote generally in the election of directors, voting
together as a single class, shall be required for the shareholders to
amend or repeal any of these bylaws.
(c) A bylaw that fixes a greater quorum or voting requirement for the
board of directors may be amended or repealed: (i) if originally
adopted by the shareholders, only by the shareholders, unless the bylaw
permits amendment or repeal by the board of directors; or (ii) if
originally adopted by the board of directors, either by the
shareholders or by the board of directors.
(d) A bylaw referred to in ARTICLE VIII, SECTION 6(C): (i) may not be
adopted by the board of directors by a vote of less than a majority of
the directors then in office; and (ii) may not itself be amended by a
quorum or vote of the directors less than the quorum or vote therein
prescribed or prescribed by a bylaw adopted or amended by the
shareholders.
SECTION 7. EMERGENCIES:
(a) In anticipation of or during a catastrophic event which prevents a
quorum of the board of directors from being readily assembled (an
"EMERGENCY"), the board of directors may: (i) modify lines of
succession to accommodate the incapacity of any director, officer,
employee, or agent; and. (ii) relocate the principal office or
designate alternative principal or regional offices, or authorize the
officers to do so.
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(b) During an emergency: (i) notice of a meeting of the board of
directors need be given only to those directors whom it is practicable
to reach and may be given in any practicable manner, including by
publication and radio; and (ii) one or more officers present at a
meeting of the board of directors may be deemed to be directors for the
meeting, in order of rank and within the same rank in order of
seniority, as necessary to achieve a quorum.
SECTION 8. SEVERABILITY. Should any provision of these bylaws become
ineffective or be declared to be invalid for any reason, such provision shall be
severable from the remainder of these bylaws and all other provisions of these
bylaws shall continue to be in full force and effect.
ATTESTED:
/s/ Joseph A. Smith, Jr. February 16, 2000
______________________ Date: ________________________
Secretary
18
EXHIBIT 10.5
Employment Agreement dated Feb. 18, 2000
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into
this 18th day of February, 2000 by and among Centura Banks, Inc., a North
Carolina corporation ("Centura"); Centura Bank, a wholly owned subsidiary of
Centura (the "Bank"); and Michael S. Patterson (hereinafter, "Executive"), to be
effective as of the Effective Date, as defined in Section 1.
BACKGROUND
----------
Executive currently serves as the President and Chief Executive Officer
of Triangle Bancorp, Inc. ("Triangle") and of Triangle Bank and Trust, a
subsidiary of Triangle Bancorp ("Triangle Bank"), pursuant to the terms of that
certain Employment Agreement, dated as of December 28, 1993, among Triangle,
Triangle Bank and Executive, as the same may have been amended (the "Prior
Agreement"). From and after the Effective Date, the Prior Agreement will be
superseded in its entirety by this Agreement.
Centura and Triangle have entered into that certain Agreement and Plan
of Reorganization, dated as of August 22, 1999 (the "Merger Agreement"),
pursuant to which the Triangle will be acquired by Centura, pursuant to the
merger of Triangle into a subsidiary of Centura (the "Merger").
Centura desires to retain Executive as the Chairman of the Boards of
Directors of Centura and the Bank from and after the Merger, in accordance with
the terms of this Agreement. Executive is willing to serve as such in accordance
with the terms and conditions of this Agreement.
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. Effective Date. The effective date of this Agreement (the "Effective
Date") will be the date on which the effective time of the Merger occurs.
2. Positions.
(a) Director Position. Subject to all legal limitations and
conditions applicable to service as a director of Centura and the Bank, (i) the
Boards of Directors of Centura and the Bank shall nominate and use their best
efforts to secure the election of Executive as a director of Centura and of the
Bank during the term of this Agreement, and (ii) if so elected, Executive shall
serve as member of Executive Committee of the Board of Directors of Centura.
<PAGE>
(b) Officer Position. Executive will be employed as Chairman
of the Boards of Directors of Centura and of the Bank. Executive's
responsibilities under this Agreement shall be in accordance with the policies
and objectives established by such Boards, and shall be consistent with the
responsibilities of similarly situated executives of comparable banks and bank
holding companies. In each such capacity, Executive will report directly to the
applicable Board of Directors of Centura.
3. Employment Period. Unless earlier terminated herein in accordance
with Section 6 hereof, Executive's employment shall be for a term (the
"Employment Period") beginning on the Effective Date and extending through the
90th day following the Executive's 58th birthday (the "Expiration Date").
4. Extent of Service. During the Employment Period, and excluding any
periods of vacation and sick leave to which Executive is entitled, Executive
agrees to devote reasonable business time and attention during normal business
hours to the performance of his duties hereunder; provided, however, that it
shall not be a violation of this Agreement for Executive to (i) devote
reasonable periods of time to charitable and community activities and, with the
approval of Centura, industry or professional activities, and/or (ii) manage
personal business interests and investments, so long as such activities do not
materially interfere with the performance of Executive's responsibilities under
this Agreement.
5. Compensation and Benefits.
(a) Base Salary. During the Employment Period, Centura will pay
to Executive a base salary equal to the base salary payable to the Chief
Executive Officer of Centura during such period and not less than $550,000 per
year ("Base Salary"), less normal withholdings, payable in equal monthly or more
frequent installments as are customary under Centura's payroll practices from
time to time. On the Effective Date, Centura shall pay to Executive a lump-sum
cash payment equal to the difference between (i) the amount of Base Salary
Executive would have earned under this Agreement between January 1, 2000 and the
Effective Date and (ii) the amount of base salary Executive received from
Triangle between January 1, 2000 and the Effective Date.
(b) Incentive, Savings and Retirement Plans. During the
Employment Period, Executive shall be entitled to participate in all bonus,
incentive (including but not limited to stock options, other stock-based awards
and performance awards), savings and retirement plans, practices, policies and
programs applicable generally to senior executive officers of Centura and the
Bank ("Peer Executives"), and such participation shall be on a basis at least as
favorable as that of the Chief Executive Officer of Centura. Without limiting
the foregoing:
(i) during the Employment Period, Executive will be
granted, under Centura's incentive plans, stock options to acquire common stock
of Centura and other incentive awards in amounts and having terms that are at
least as favorable as such awards made to the Chief Executive Officer of
Centura. All bonus, incentive and other
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awards to be provided to Executive for 2000 shall be made on the basis of
Executive having been employed by Centura all of calendar year 2000; and
(ii) during the Employment Period, Executive shall be a
participant in a Supplemental Executive Retirement Agreement with Centura (the
"Centura SERP") having substantially the same terms as that certain Supplemental
Executive Retirement Agreement between Centura and Cecil W. Sewell, Jr., dated
as of May 14, 1996, as amended on October 2, 1996 and December 24, 1998, or, if
more favorable, any subsequent supplemental executive retirement plan or
agreement between Centura or the Chief Executive Officer of Centura.
(c) Welfare Benefit Plans. During the Employment Period,
Executive and Executive's family shall be eligible for participation in, and
shall receive all benefits under, the welfare benefit plans, practices, policies
and programs provided by Centura and its affiliated companies (including,
without limitation, medical, prescription, dental, disability, employee life,
group life, accidental death and travel accident insurance plans and programs)
("Welfare Plans") to the extent applicable to the Chief Executive Officer of
Centura. Without limiting the foregoing, Centura shall (i) expressly assume the
obligations of Triangle under that certain Split Dollar Life Insurance Agreement
and that certain Triangle Bancorp, Inc. Deferred Compensation Agreement, both
dated as of January 1, 1996, by and between Executive and Triangle (together,
the "Split Dollar Contracts") and, to the extent necessary to fulfill such
obligations, shall maintain in effect the Triangle Bancorp, Inc. Split Dollar
Life Insurance Plan referred to in the Split Dollar Contracts and (ii) continue
in effect the disability policies maintained by Triangle and Triangle Bank for
Executive immediately prior to the Effective Date (unless Centura otherwise
provides Executive with disability benefit coverage that is at least as
favorable to Executive as that provided under such disability policies).
Notwithstanding the foregoing, upon the written notice from Executive to
Centura, Executive shall be deemed for purposes of the Split Dollar Life
Insurance Agreement to have terminated employment (other than by reason of
death, disability or after age 65) as of a date specified by Executive in such
notice (which specified date shall be at least six months after the date of the
notice), notwithstanding the Executive's continued employment by Centura. Upon
such deemed termination of employment, Executive shall have such rights and be
entitled to such payments as are provided for in the Split Dollar Contracts in
the event of Executive's actual termination of employment (other than by reason
of death, disability or after age 65) as of the date of deemed termination of
employment.
(d) Expenses. During the Employment Period, Executive shall be
entitled to receive prompt reimbursement for all reasonable expenses incurred by
Executive in accordance with the policies, practices and procedures of Centura
and its affiliated companies to the same extent applicable to the Chief
Executive Officer of Centura.
(e) Fringe Benefits. During the Employment Period, Executive
shall be entitled to fringe benefits in accordance with the plans, practices,
programs and policies of Centura and its affiliated companies in effect for Peer
Executives and, in particular, Executive shall be provided fringe benefits no
less favorable than those provided to the
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Chief Executive Officer of Centura. In all events, Executive shall be entitled
to fringe benefits at least as favorable as those he was receiving immediately
prior to the Effective Date. Without limiting the foregoing, in the event that
Executive relocates from Raleigh, North Carolina to Rocky Mount, North Carolina,
Executive shall be entitled to reimbursement for all moving expenses incurred by
Executive and, at Executive's request, Centura shall purchase Executive's
residence at fair market value, as determined by an appraiser selected by
Executive and reasonably acceptable to Centura.
(f) Vacation. During the Employment Period, Executive will be
entitled to six weeks of paid vacation, or, if greater, the amount of paid
vacation to which the Chief Executive Officer of Centura is entitled.
(g) Offices. For two years following the Effective Date, Centura
(i) shall maintain offices and provide secretarial support for Executive in both
Raleigh, North Carolina and Rocky Mount, North Carolina and (ii) shall not
require Executive to work in the Rocky Mount office more than three days per
week (unless Executive has relocated from Raleigh, North Carolina to Rocky
Mount, North Carolina).
(h) Past Service Credit. Executive shall be given full credit for
Executive's years of service with Triangle and its predecessors for all purposes
(other than for benefit accrual purposes, except as hereinafter provided) under
the plans, programs, policies, agreements and practices covering Executive
pursuant to this Section 5; provided, however, that Executive shall receive
prior service credit for all purposes (including benefit accrual purposes) under
the Centura SERP. Centura shall cause the Welfare Plans to (i) waive, with
respect to Executive, any waiting period and restrictions and limitations for
preexisting conditions or insurability, and (ii) credit Executive with any
deductible, co-payment, co-insurance, or maximum out-of-pocket payments made by
Executive under the Welfare Plans so as to reduce the amount of any deductible,
co-payment, co-insurance or maximum out-of-pocket payments payable by Executive
under the Welfare Plans.
6. Termination of Employment.
(a) Death or Disability. Executive's employment shall terminate
automatically upon Executive's death during the Employment Period. If Centura
determines in good faith that the Disability of Executive has occurred during
the Employment Period (pursuant to the definition of Disability set forth
below), it may give to Executive written notice of its intention to terminate
Executive's employment. In such event, Executive's employment with Centura shall
terminate effective on the 30th day after receipt of such written notice by
Executive (the "Disability Effective Date"), provided that, within the 30 days
after such receipt, Executive shall not have returned to full-time performance
of Executive's duties. For purposes of this Agreement, "Disability" shall have
the meaning assigned such term in the Centura SERP. In all events, the
determination of Disability shall be made by a physician selected by Executive
and reasonably acceptable to Centura.
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(b) Termination by Centura or the Bank. Centura or the Bank may
terminate Executive's employment during the Employment Period with or without
Cause. For purposes of this Agreement, "Cause" shall mean:
(i) the willful and continued failure of Executive to
perform substantially Executive's duties with Centura or the Bank (other than
any such failure resulting from incapacity due to physical or mental illness,
and specifically excluding any failure by Executive, after reasonable efforts,
to meet performance expectations), after a written demand for substantial
performance is delivered to Executive by the Board of Directors of Centura or
the Bank , as applicable, which specifically identifies the manner in which such
Board believes that Executive has not substantially performed Executive's
duties, or
(ii) the willful engaging by Executive in illegal conduct
or gross misconduct which is materially and demonstrably injurious to Centura or
the Bank.
For purposes of this provision, no act or failure to act, on the part of
Executive, shall be considered "willful" unless it is done, or omitted to be
done, by Executive in bad faith and without reasonable belief that Executive's
action or omission was in the best interests of Centura or the Bank, as the case
may be. Any act, or failure to act, based upon authority given pursuant to a
resolution duly adopted by the applicable Board of Directors or based upon the
advice of counsel for Centura or the Bank shall be conclusively presumed to be
done, or omitted to be done, by Executive in good faith and in the best
interests of Centura or the Bank, as the case may be. The cessation of
employment of Executive shall not be deemed to be for Cause unless and until
there shall have been delivered to Executive a copy of a resolution duly adopted
by the affirmative vote of not less than two-thirds of the entire membership of
the applicable Board of Directors (excluding Executive) at a meeting of such
Board called and held for such purpose (after reasonable notice is provided to
Executive and Executive is given an opportunity, together with counsel, to be
heard before such Board), finding that, in the good faith opinion of such Board,
Executive is guilty of the conduct described in subparagraph (i) or (ii) above,
and specifying the particulars thereof in detail.
(c) Termination by Executive. Executive's employment may be
terminated by Executive for Good Reason or no reason. For purposes of this
Agreement, "Good Reason" shall mean:
(i) without the written consent of Executive, the
assignment to Executive of any duties inconsistent in any material respect with
Executive's position (including status, offices, titles and reporting
requirements), authority, duties or responsibilities as in effect on the
Effective Date, or any other action by Centura or the Bank which results in a
diminution in such position, authority, duties or responsibilities, excluding
for this purpose an isolated, insubstantial and inadvertent action not taken in
bad faith and which is remedied by Centura or the Bank promptly after receipt of
notice thereof given by Executive;
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<PAGE>
(ii) Centura or the Bank requiring Executive to be based
at a location that is more than 35 miles from Raleigh, North Carolina or Rocky
Mount, North Carolina;
(iii) a reduction in Executive's Base Salary and benefits
as in effect on the Effective Date or as the same may be increased from time to
time;
(iv) the failure by Centura or the Bank (a) to continue in
effect any compensation plan in which Executive participates as of the Effective
Date that is material to Executive's total compensation, unless an equitable
arrangement (embodied in an ongoing substitute or alternative plan) has been
made with respect to such plan, or (b) to continue Executive's participation
therein (or in such substitute or alternative plan) on a basis not materially
less favorable, both in terms of the amount of benefits provided and the level
of Executive's participation relative to other participants; or
(v) the material breach of this Agreement by Centura or
the Bank.
(d) Notice of Termination. Any termination by Centura or the Bank
for Cause, or by Executive for Good Reason, shall be communicated by Notice of
Termination to the other party hereto given in accordance this Agreement. For
purposes of this Agreement, a "Notice of Termination" means a written notice
which (i) indicates the specific termination provision in this Agreement relied
upon, (ii) to the extent applicable, sets forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated and (iii) specifies the termination
date (which date shall be not less than 60 days after the giving of such
notice). If a dispute exists concerning the provisions of this Agreement that
apply to Executive's termination of employment, the parties shall pursue the
resolution of such dispute with reasonable diligence. Within five (5) days of
such a resolution, any party owing any payments pursuant to the provisions of
this Agreement shall make all such payments together with interest accrued
thereon at the rate provided in Section 1274(b)(2)(B) of the Internal Revenue
Code of 1986, as amended (the "Code"). The failure by either party to set forth
in the Notice of Termination any fact or circumstance which contributes to a
showing of Good Reason or Cause shall not waive any right of such party
hereunder or preclude such party from asserting such fact or circumstance in
enforcing such party's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if
Executive's employment is terminated other than by reason of death or
Disability, the date of receipt of the Notice of Termination, or any later date
specified therein (which shall not be less than 60 days after the date of
delivery of the Notice of Termination), or (ii) if Executive's employment is
terminated by reason of death or Disability, the Date of Termination will be the
date of death or the Disability Effective Date, as the case may be.
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<PAGE>
(f) Board Resignations. Termination of Executive's employment for
any reason whatsoever shall constitute Executive's resignation from the Boards
of Directors of Centura and the Bank.
7. Obligations of Centura upon Termination.
(a) Termination by Executive for Good Reason; Disability;
Termination by Centura Other Than for Cause. If, during the Employment Period,
Centura shall terminate Executive's employment other than for Cause, Executive
shall terminate employment for Good Reason, or Executive's employment shall
terminate by reason of Disability:
(i) Centura shall pay to Executive in a lump sum in cash
within 30 days after the Date of Termination the sum of (1) Executive's Base
Salary through the Date of Termination to the extent not theretofore paid, (2)
the product of (x) Executive's highest annual bonus from Centura or Triangle,
including any bonus or portion thereof which has been earned but deferred, for
any of the last three full fiscal years prior to the Date of Termination (such
amount being referred to as the "Highest Annual Bonus") and (y) a fraction, the
numerator of which is the number of days in the current fiscal year through the
Date of Termination, and the denominator of which is 365, (3) any accrued
vacation pay to the extent not theretofore paid, and (4) unless Executive has
elected a different payout date in a prior deferral election, any compensation
previously deferred by Executive (together with any accrued interest or earnings
thereon) to the extent not theretofore paid (the sum of the amounts described in
clauses (1), (2), (3) and (4) shall be hereinafter referred to as the "Accrued
Obligations"); and
(ii) beginning on the last day of the month in which the
Date of Termination occurs and ending on the last day of the month in which the
Expiration Date occurs, Centura shall pay Executive a monthly amount equal to
the sum of (i) his monthly Base Salary as in effect on the Date of Termination,
and (ii) one-twelfth of the Highest Annual Bonus; provided, however, that in the
case of Executive's termination of employment due to Disability, amounts paid
under this section 7(a)(ii) shall be offset by the amount of disability benefits
paid pursuant to the disability policy maintained for Executive; and
(iii) after the Date of Termination, unless the Date of
Termination occurs by reason of death or Disability, Centura shall enter into a
consulting arrangement with Executive such that he will be eligible to receive
stock options or other incentive awards under Centura's incentive plans and
during the period from the Date of Termination through the Expiration Date,
Centura shall grant to Executive stock options, or other incentive awards, in
the same amounts and having the same terms as such awards made to Chief
Executive Officer of Centura during such period (the "Continuing Incentive
Grants"); and
(iv) from the Date of Termination through the Expiration
Date, or such longer period as may be provided by the terms of the appropriate
plan, program,
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<PAGE>
practice or policy, Centura shall continue benefits to Executive and/or
Executive's family that are at least equal, on an after-tax basis, to those
which would have been provided to them in accordance with the Welfare Plans
described in Section 5(c) of this Agreement if Executive's employment had not
been terminated or, if more favorable to Executive, as in effect generally at
any time thereafter with respect to the Chief Executive Officer of Centura and
his family, provided, however, that if Executive becomes re-employed with
another employer and is eligible to receive medical or other welfare benefits
under another employer provided plan, the medical and other welfare benefits
described herein shall be secondary to those provided under such other plan
during such applicable period of eligibility;
(v) to the extent not theretofore paid or provided,
Centura shall timely pay or provide to Executive any other amounts or benefits
required to be paid or provided or which Executive is eligible to receive under
any plan, program, policy or practice or contract or agreement of Centura and
its affiliated companies (such other amounts and benefits shall be hereinafter
referred to as the "Other Benefits"); and
(vi) all stock options and any other stock-based awards
outstanding immediately prior to the Date of Termination shall remain
outstanding and shall be treated for all purposes (except that in the event of
Executive's death, his estate or other beneficiary or successor shall be
entitled to exercise Executive's rights) as if Executive continued to be
employed by Centura until the Expiration Date; and
(vii) for purposes of the Centura SERP, (and unless the
termination of employment was due to Executive's death) Executive shall be
deemed to continue to be employed and receive his Base Salary (as in effect
immediately prior to his Termination Date) and his Highest Annual Bonus
(calculated as of the day before the Termination Date) for each year until the
Expiration Date.
(b) Death. If Executive's employment shall be terminated by
reason of his death during the Employment Period, Executive's estate or legal
representative shall have the option of selecting either (i) the payment and
benefits described in Section 7 hereof (but excluding the Death Benefits, as
hereinafter defined), or (ii) the Accrued Obligations, the Other Benefits and
the Death Benefits. For purposes of this Section 7(b), "Death Benefits" means
the death benefits payable with respect to Executive under such plans, programs,
practices and policies of Centura and its affiliates relating to death benefits
(including without limitation the Centura SERP) as apply to Executive, which
death benefits shall be provided in amounts and on a basis at least as favorable
to Executive as those provided to the Chief Executive Officer of Centura and
which in no event shall be less favorable to Executive than those applicable to
Executive immediately prior to the Effective Date.
(d) Cause or Voluntary Termination without Good Reason. If
Executive's employment shall be terminated for Cause during the Employment
Period, or if Executive voluntarily terminates employment during the Employment
Period without Good Reason, this Agreement shall terminate without further
obligations to Executive, other than for
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<PAGE>
payment of Accrued Obligations (excluding the pro-rata bonus described in clause
2 of Section 7(a)(i)) and the timely payment or provision of Other Benefits.
(e) Expiration of Employment Period. If Executive's employment
shall be terminated due to the normal expiration of the Employment Period, this
Agreement shall terminate without further obligations to Executive, other than
for payment of Accrued Obligations and the timely payment or provision of Other
Benefits.
(g) Board Resignations. Termination of Executive's employment for
any reason whatsoever shall constitute Executive's resignation from the Boards
of Directors of Centura and the Bank.
8. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
limit Executive's continuing or future participation in any plan, program,
policy or practice provided by Centura or its affiliated companies and for which
Executive may qualify, nor, subject to Section 16(d), shall anything herein
limit or otherwise affect such rights as Executive may have under any contract
or agreement with Centura or its affiliated companies. Amounts which are vested
benefits or which Executive is otherwise entitled to receive under any plan,
policy, practice or program of or any contract or agreement with Centura or any
of its affiliated companies at or subsequent to the Date of Termination shall be
payable in accordance with such plan, policy, practice or program or contract or
agreement except as explicitly modified by this Agreement.
9. Gross-Up Payment.
(a) Anything in this Agreement to the contrary notwithstanding
and except as set forth below in this Section 9, in the event it shall be
determined that any payment or distribution by Centura to or for the benefit of
Executive (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise, but determined without regard to any
additional payments required under this Section 9) (a "Payment") would be
subject to the excise tax imposed by Section 4999 of the Code or any interest or
penalties are incurred by Executive with respect to such excise tax (such excise
tax, together with any such interest and penalties, are hereinafter collectively
referred to as the "Excise Tax"), then Executive shall be entitled to receive an
additional payment (a "Gross-Up Payment") in an amount such that after payment
by Executive of all taxes (including any interest or penalties imposed with
respect to such taxes), including, without limitation, any income taxes (and any
interest and penalties imposed with respect thereto) and Excise Tax imposed upon
the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal
to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 9(c), all determinations
required to be made under this Section 9, including whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the assumptions
to be utilized in arriving at such determination, shall be made by a certified
public accounting firm selected by Executive and reasonably acceptable to
Centura as may be designated by
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Executive (the "Accounting Firm") which shall provide detailed supporting
calculations both to Centura and Executive within 15 business days of the
receipt of notice from Executive that there has been a Payment, or such earlier
time as is reasonably requested by Centura. All fees and expenses of the
Accounting Firm shall be borne solely by Centura. Any Gross-Up Payment, as
determined pursuant to this Section 9, shall be paid by Centura to Executive
within five days of the receipt of the Accounting Firm's determination. Any
determination by the Accounting Firm shall be binding upon Centura and
Executive. As a result of the uncertainty in the application of Section 4999 of
the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Gross-Up Payments will not have been made by
Centura that should have been made ("Underpayment"), consistent with the
calculations required to be made hereunder. In the event that Centura exhausts
its remedies pursuant to Section 9(c) and Executive thereafter is required to
make a payment of any Excise Tax, the Accounting Firm shall determine the amount
of the Underpayment that has occurred and any such Underpayment shall be
promptly paid by Centura to or for the benefit of Executive.
(c) The Executive shall notify Centura in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
Centura of a Gross-Up Payment (or an additional Gross-Up Payment). Such
notification shall be given as soon as practicable but no later than ten
business days after Executive is informed in writing of such claim and shall
apprise Centura of the nature of such claim and the date on which such claim is
requested to be paid. The Executive shall not pay such claim prior to the
expiration of the 30-day period following the date on which it gives such notice
to Centura (or such shorter period ending on the date that any payment of taxes
with respect to such claim is due). If Centura notifies Executive in writing
prior to the expiration of such period that it desires to contest such claim,
Executive shall:
(i) give Centura any information reasonably requested by
Centura relating to such claim,
(ii) take such action in connection with contesting such
claim as Centura shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with respect to
such claim by an attorney reasonably selected by Centura and reasonably
acceptable to Executive,
(iii) cooperate with Centura in good faith in order
effectively to contest such claim, and
(iv) permit Centura to participate in any proceedings
relating to such claim;
provided, however, that Centura shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation of the
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<PAGE>
foregoing provisions of this Section 9(c), Centura shall control all proceedings
(to the extent applicable to the Excise Tax and Gross-Up Payment) taken in
connection with such contest and, at its sole option, may pursue or forgo any
and all administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its sole option, either
direct Executive to pay the tax claimed and sue for a refund or contest the
claim in any permissible manner, and Executive agrees to prosecute such contest
to a determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as Centura shall reasonably
determine; provided, however, that if Centura directs Executive to pay such
claim and sue for a refund, Centura shall advance the amount of such payment to
Executive, on an interest-free basis and shall indemnify and hold Executive
harmless, on an after-tax basis, from any Excise Tax or income tax (including
interest or penalties with respect thereto) imposed with respect to such advance
or with respect to any imputed income with respect to such advance; and further
provided that any extension of the statute of limitations relating to payment of
taxes for the taxable year of Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested amount.
Furthermore, Centura's control of the contest shall be limited to issues with
respect to which a Gross-Up Payment would be payable hereunder and Executive
shall be entitled to settle or contest, as the case may be, any other issue
raised by the Internal Revenue Service or any other taxing authority.
(d) If, after the receipt by Executive of an amount advanced by
Centura pursuant to Section 9(c), Executive becomes entitled to receive any
refund with respect to such claim, Executive shall (subject to Centura's
complying with the requirements of Section 9(c)) promptly pay to Centura the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by Executive of an amount
advanced by Centura pursuant to Section 9(c), a determination is made that
Executive shall not be entitled to any refund with respect to such claim and
Centura does not notify Executive in writing of its intent to contest such
denial of refund prior to the expiration of 30 days after such determination,
then such advance shall be forgiven and shall not be required to be repaid and
the amount of such advance shall offset, to the extent thereof, the amount of
Gross-Up Payment required to be paid.
10. Costs of Enforcement. In any action taken in good faith relating to
the enforcement of this Agreement or any provision herein, Executive shall be
entitled to be paid any and all costs and expenses incurred by him in enforcing
or establishing his rights thereunder, including, without limitation, reasonable
attorneys' fees, whether suit be brought or not, and whether or not incurred in
trial, bankruptcy or appellate proceedings. Executive shall also be entitled to
be paid all reasonable legal fees and expenses, if any, incurred in connection
with any tax audit or proceeding to the extent attributable to the application
of Section 4999 of the Internal Revenue Code to any payment or benefit
hereunder. Such payments shall be made within five (5) business days after
delivery of Executive's respective written requests for payment accompanied with
such evidence of fees and expenses incurred as Centura reasonably may require.
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<PAGE>
11. Representations and Warranties. Executive hereby represents and
warrants to Centura that Executive is not a party to, or otherwise subject to,
any covenant not to compete with any person or entity, and Executive's execution
of this Agreement and performance of his obligations hereunder will not violate
the terms or conditions of any contract or obligation, written or oral, between
Executive and any other person or entity.
12. Confidential Information. Executive shall hold in a fiduciary
capacity for the benefit of Centura and the Bank all secret or confidential
information, knowledge or data relating to Centura or any of its affiliated
companies, and their respective businesses, which shall have been obtained by
Executive during Executive's employment by Centura or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by Executive or representatives of Executive in violation of this Agreement).
After termination of Executive's employment with Centura or such affiliated
companies, Executive shall not, without the prior written consent of Centura or
as may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than Centura and those
designated by it.
13. Assignment and Successors.
(a) This Agreement is personal to the Executive and without the
prior written consent of Centura shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's legal
representatives.
(b) This Agreement shall inure to the benefit of and be binding
upon Centura and its successors and assigns.
(c) Centura will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of Centura to assume expressly
and agree to perform this Agreement in the same manner and to the same extent
that Centura would be required to perform it if no such succession had taken
place. As used in this Agreement, "Company" shall mean Centura as hereinbefore
defined and any successor to its business and/or assets as aforesaid which
assumes and agrees to perform this Agreement by operation of law, or otherwise.
14. Miscellaneous.
(a) Waiver. Failure of either party to insist, in one or more
instances, on performance by the other in strict accordance with the terms and
conditions of this Agreement shall not be deemed a waiver or relinquishment of
any right granted in this Agreement or of the future performance of any such
term or condition or of any other term or condition of this Agreement, unless
such waiver is contained in a writing signed by the party making the waiver.
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<PAGE>
(b) Severability. If any provision or covenant, or any part
thereof, of this Agreement should be held by any court to be invalid, illegal or
unenforceable, either in whole or in part, such invalidity, illegality or
unenforceability shall not affect the validity, legality or enforceability of
the remaining provisions or covenants, or any part thereof, of this Agreement,
all of which shall remain in full force and effect.
(c) Other Agents. Nothing in this Agreement is to be interpreted as
limiting Centura from employing other personnel on such terms and conditions as
may be satisfactory to it.
(d) Entire Agreement. Except as provided herein, this Agreement
contains the entire agreement between Centura, the Bank and Executive with
respect to the subject matter hereof and, from and after the Effective Date,
this Agreement shall supersede any other agreement between or among the parties
with respect to the subject matter hereof, including without limitation, the
Prior Agreement.
(e) Governing Law. Except to the extent preempted by federal law,
and without regard to conflict of laws principles, the laws of the State of
North Carolina shall govern this Agreement in all respects, whether as to its
validity, construction, capacity, performance or otherwise.
(f) Notices. All notices, requests, demands and other
communications required or permitted hereunder shall be in writing and shall be
deemed to have been duly given if delivered or three days after mailing if
mailed, first class, certified mail, postage prepaid:
To Centura or the Bank: Centura Banks, Inc.
134 North Church Street
Rocky Mount, North Carolina 27804
Attention: Chief Executive Officer
To Executive: Michael S. Patterson
405 Lake Boone Trail
Raleigh, NC 27608
Any party may change the address to which notices, requests, demands and other
communications shall be delivered or mailed by giving notice thereof to the
other party in the same manner provided herein.
(g) Amendments and Modifications. This Agreement may be amended
or modified only by a writing signed by both parties hereto, which makes
specific reference to this Agreement.
(signatures on following page)
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Employment Agreement as of the date first above written.
CENTURA BANKS, INC.
By: /s/ Frank L. Pattillo
---------------------------
Frank L. Pattillo
Title: Vice Chairman
CENTURA BANK
By: /s/ Frank L. Pattillo
---------------------------
Frank L. Pattillo
Title: Vice Chairman
EXECUTIVE:
/s/ Michael S. Patterson
------------------------------
Michael S. Patterson
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EXHIBIT 10.11
CENTURA BANKS, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT
UNDER THE
CENTURA BANKS, INC. OMNIBUS SUPPLEMENTAL EXECUTIVE
RETIREMENT PLAN
THIS AGREEMENT, made effective this 18th day of February, 2000, by and
among Centura Banks, Inc., a North Carolina corporation having its principal
place of business in Rocky Mount, North Carolina ("Centura"), Centura Bank (the
"Bank"), a subsidiary of Centura, and Michael S. Patterson ("Participant"), an
employee of the Bank.
W I T N E S S E T H:
WHEREAS, Participant has been a valued employee of Triangle Bank and
has performed his duties in a capable and efficient manner, resulting in
substantial growth and progress to Triangle Bank; and
WHEREAS, Triangle Bank has been acquired by the Bank and the
Participant is expected to perform valuable services in the future which shall
be of special importance to the Bank and for which it would be difficult for the
Bank to find a suitable replacement; and
WHEREAS, Centura has established the Centura Banks, Inc. Omnibus
Supplemental Executive Retirement Plan (the "Omnibus SERP"), the terms of which
Omnibus SERP are incorporated herein by reference; and
WHEREAS, Centura now deems it advisable to offer to Participant certain
rights and benefits under the Omnibus SERP and this Agreement;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants contained herein, the parties hereto hereby agree as follows:
1. RETIREMENT BENEFITS. Participant may elect Early Retirement at
any time during the ninety (90) day period beginning on his
58th birthday (the "Election Period"). Participant shall not
be entitled to Retirement benefits hereunder unless he elects
Early Retirement and actually retires during the Election
Period.
Subject to the provisions of this Agreement and the Omnibus
SERP, upon Participant's Early Retirement during the Election
Period, Participant shall receive a monthly Retirement benefit
equal to (a) minus (b) minus (c) minus (d) below:
(a) An amount equal to seventy percent (70%) of
Participant's Final Average Monthly Compensation.
"Final Average Monthly Compensation" means 1/12th of
the Annual Compensation payable to Participant as of
his termination of employment. "Annual Compensation"
means Participant's
<PAGE>
total compensation to be reported on his Form W-2,
annualized on the basis of rate of pay as of
Participant's termination of employment, including
bonuses and salary reduction contributions to
deferred compensation or other plans maintained by
Centura; less
(b) An amount equal to Participant's monthly pension
benefit under the Qualified Plan. For this purpose,
Participant's monthly pension benefit under the
Qualified Plan shall be calculated in accordance with
the terms of the Qualified Plan as in effect on
Participant's Retirement Date, in the form of a life
annuity, payable monthly commencing at the same time
as the Retirement Benefits hereunder; less
(c) An amount equal to Participant's monthly supplemental
pension benefit under Article VII of the Omnibus SERP
and Section 4 of this Agreement. For this purpose,
Participant's monthly supplemental pension benefit
shall be calculated in the same manner as his monthly
pension benefit under the Qualified Plan; less
(d) Commencing on Participant's 62nd birthday, an
amount equal to Participant's primary Social Security
benefit payable monthly under the Old Age Survivors
and Disability Insurance (Social Security Act). For
this purpose, it shall be assumed that Participant's
Social Security benefit payments commence at age 62,
notwithstanding any election by Participant to delay
such payments. Notwithstanding the foregoing, if
Participant dies after retirement benefits commence
hereunder but prior to attaining age 62, the
reduction required under this subsection (d), if any,
shall be applied beginning with the first payment
subsequent to the date Social Security benefits are
first payable to the surviving spouse or other
beneficiary notwithstanding any elections by the
surviving spouse or other beneficiary to delay such
payments and shall be in the amount equal to
Participant's primary Social Security benefit payable
monthly to the surviving spouse or other beneficiary
under the Social Security Act. Once a reduction for
Social Security is first determined under this
subsection (d), the amount of the reduction shall
remain fixed for all subsequent retirement payments
under this Section 1.
Participant's Retirement benefit shall commence as of the
first day of the month coinciding with or next following his
Retirement Date, and shall continue for two hundred and forty
(240) months.
2. DEATH BENEFITS. If a Participant dies at any time before
electing Early Retirement under Section 1 and while actively
employed as a full-time officer of the Bank, Participant's
beneficiary shall receive a monthly death benefit equal to (a)
minus (b) minus (c) minus (d) below:
(a) An amount equal to seventy percent (70%) of
Participant's Final Average Monthly Compensation.
"Final Average Monthly
2
<PAGE>
Compensation" means 1/12th of the Annual Compensation
payable to Participant as of the date of his death.
"Annual Compensation" means Participant's total
compensation to be reported on his Form W-2,
annualized on the basis of rate of pay as of the date
of Participant's death, including bonuses and salary
reduction contributions to deferred compensation or
other plans maintained by Centura; less
(b) An amount equal to the surviving spouse's monthly
pension benefit, if any, under the Qualified Plan.
For this purpose, the surviving spouse's monthly
pension benefit under the Qualified Plan shall be
calculated in accordance with the terms of the
Qualified Plan as in effect on Participant's date of
death, in the form of a life annuity, payable monthly
commencing at the same time as the death benefits
hereunder; less
(c) An amount equal to the surviving spouse's monthly
supplemental pension benefit, if any, under Article
VII of the Omnibus SERP and Section 4 of this
Agreement. For this purpose, the surviving spouse's
monthly supplemental pension benefit shall be
calculated in the same manner as his monthly pension
benefit under the Qualified Plan; less
(d) An amount equal to Participant's primary Social
Security benefit payable to the surviving spouse or
other beneficiary under the Old Age Survivors and
Disability Insurance (Social Security Act). For this
purpose, it shall be assumed that the spouse or other
beneficiary's Social Security benefit payments
commence at the later of (1) the time death benefits
commence hereunder, and (2) the date Social Security
benefits are first payable to the surviving spouse or
other beneficiary, notwithstanding any election by
the surviving spouse or other beneficiary to delay
such payments. Once a reduction for Social Security
is first determined under this subsection (d), the
amount of the reduction shall remain fixed for all
subsequent death benefit payments under this Section
2.
Participant's death benefit shall commence as of the first day
of the month coinciding with or next following his date of
death, and shall continue for two hundred and forty (240)
months.
Participant's beneficiary will not be entitled to any death
benefits under this Agreement if Participant dies by
committing suicide within two years from the date of this
Agreement. If Participant's beneficiary predeceases
Participant and Participant does not thereafter designate a
new beneficiary, the death benefits payable pursuant to this
Section 2 shall be paid to Participant's estate.
3
<PAGE>
3. DISABILITY BENEFITS. If, prior to Participant's electing Early
Retirement under Section 1 and after Participant has completed
at least ten (10) years of continuous employment with the Bank
(including employment with Triangle Bank prior to February 18,
2000), Participant's employment with the Bank is terminated as
a result of Disability, Participant shall receive a monthly
Disability benefit hereunder, payable for a period of two
hundred and forty (240) months. The monthly Disability benefit
shall equal (a) minus (b) minus (c) minus (d) minus (e) below:
(a) Seventy percent (70%) of Participant's Final Average
Monthly Compensation; less ----
(b) An amount equal to Participant's monthly pension
benefit under the Qualified Plan. For this purpose,
Participant's monthly pension benefit under the
Qualified Plan shall be calculated in accordance with
the terms of the Qualified Plan as in effect on the
date Participant commences receiving benefits under
the Qualified Plan, in the form of a life annuity,
payable monthly commencing at the same time as
Participant commences receiving any benefits under
the Qualified Plan; less
(c) An amount equal to Participant's monthly supplemental
pension benefit under Article VII of the Omnibus SERP
and Section 4 of this Agreement. For this purpose,
Participant's monthly supplemental pension benefit
shall be calculated in the same manner as his monthly
pension benefit under the Qualified Plan; less
(d) An amount equal to Participant's primary Social
Security benefit payable under the Old Age Survivors
and Disability Insurance (Social Security Act). For
this purpose, it shall be assumed that Participant's
Social Security benefit payments commence at the time
Disability benefits commence hereunder,
notwithstanding any election by Participant to delay
such payments. Once a reduction for Social Security
is first determined under this subsection (d), the
amount of the reduction shall remain fixed for all
subsequent disability benefit payments under this
Section 3; less
(e) The amount of any monthly disability benefit payable
to the Participant under any group or individual
disability income policy sponsored by the Bank or
Centura.
In the event Disability benefit payments terminate pursuant to
subsections (a), (b) or (c) of Section 6.3 of the Omnibus SERP
and before Participant has received two hundred and forty
(240) monthly payments under this Section 3, the remaining
payments shall be recharacterized as Retirement or death
benefits and shall be paid to Participant (or his beneficiary
or estate in accordance with Section 1 or 2 of this Agreement,
as the case may be) provided that the amount of each payment
to Participant shall continue to be governed by this Section
3, and
4
<PAGE>
provided further that the amount of any payment
recharacterized as a death benefit shall be equal to the last
payment made to Participant before his death.
4. EXCESS BENEFITS. Participant shall be entitled to Excess
Benefits pursuant to Article VII of the Omnibus SERP.
5. DESIGNATION OF BENEFICIARIES. The Participant shall designate
his or her beneficiary(ies) on the Beneficiary Designation
Form attached hereto and made a part hereof.
6. CHANGE IN CONTROL. Upon a change in control, as defined in
Section 8.3 of the Omnibus SERP, the Participant's rights and
accrued benefits under the Omnibus SERP and this Agreement
shall be fully vested. Accordingly:
(a) for purposes of Section 1 of this Agreement, if
Participant is no longer employed by Bank as of his
58th birthday, he shall nevertheless be entitled to
elect during the Election Period to begin receiving
his Retirement Benefit. Participant's Final Average
Monthly Compensation shall be determined by reference
to his Annual Compensation as of his actual
termination of employment;
(b) for purposes of Section 2 of this Agreement, the
requirement that Participant be actively employed as
a full-time officer of Bank shall be disregarded.
Participant's Final Average Monthly Compensation
shall be determined by reference to his Annual
Compensation as of his actual termination of
employment; and
(c) for purposes of Section 3 of this Agreement,
Participant shall be deemed to have completed ten
(10) years of employment with Bank. If Participant is
no longer employed by Bank at the time of his
Disability, he shall nevertheless be entitled to
Disability Benefits under Section 3. Participant's
Final Average Monthly Compensation shall be
determined by reference to his Annual Compensation as
of his actual termination of employment.
7. TERMINATION OF EMPLOYMENT AND FORFEITURE. Centura or the Bank
may terminate the Participant's employment with Cause. For
purposes of this Agreement, "Cause" shall mean:
(a) the willful and continued failure of Executive to
perform substantially Executive's duties with Centura
or the Bank (other than any such failure resulting
from incapacity due to physical or mental illness,
and specifically excluding any failure by Executive,
after reasonable efforts, to meet performance
expectations), after a written demand for substantial
performance is delivered to Executive by the Board of
Directors of Centura or the Bank, as applicable,
which specifically identifies the
5
<PAGE>
manner in which such Board believes that Executive
has not substantially performed Executive's duties,
or
(b) the willful engaging by Executive in illegal conduct
or gross misconduct which is materially and
demonstrably injurious to Centura or the Bank.
For purposes of this provision, no act or failure to act, on
the part of Executive, shall be considered "willful" unless it
is done, or omitted to be done, by Executive in bad faith and
without reasonable belief that Executive's action or omission
was in the best interests of Centura or the Bank, as the case
may be. Any act, or failure to act, based upon authority given
pursuant to a resolution duly adopted by the applicable Board
of Directors or based upon the advice of counsel for Centura
or the Bank shall be conclusively presumed to be done, or
omitted to be done, by Executive in good faith and in the best
interests of Centura or the Bank, as the case may be. The
cessation of employment of Executive shall not be deemed to be
for Cause unless and until there shall have been delivered to
Executive a copy of a resolution duly adopted by the
affirmative vote of not less than two-thirds of the entire
membership of the applicable Board of Directors (excluding
Executive) at a meeting of such Board called and held for such
purpose (after reasonable notice is provided to Executive and
Executive is given an opportunity, together with counsel, to
be heard before such Board), finding that, in the good faith
opinion of such Board, Executive is guilty of the conduct
described in subparagraph (a) or (b) above, and specifying the
particulars thereof in detail.
Upon such termination, Participant shall forfeit all rights
and benefits under this Agreement, except those benefits
provided pursuant to Section 4 above and Article VII of the
Omnibus SERP.
8. PLAN TERMINATION. In the event of the termination of the Plan,
pursuant to Section 14.6 of the Plan, prior to the
Participant's death, Retirement or Disability under Sections
1, 2 or 3 hereof, the Participant shall become fully vested in
his Retirement Benefits under Section 1 of this Agreement, and
shall become entitled to payment in a single sum of the
actuarial equivalent of his Retirement Benefits under Section
1 and his Excess Benefits under Section 4, determined using
the Discount Rate and payable as soon as administratively
possible after the termination of the Plan. In the event of
the termination of the Plan, pursuant to Section 14.6 of the
Plan, after benefit payments have commenced hereunder, the
Participant (or his beneficiaries) shall become entitled to
payment in a single sum of the actuarial equivalent of the
remaining payments due hereunder, determined using the
Discount Rate and payable as soon as administratively possible
after the termination of the Plan.
9. GENERAL PROVISIONS.
(a) This Agreement, together with the Omnibus SERP, the
terms of which are incorporated herein by reference,
set forth all of the promises, agreements,
conditions, understandings, warranties, and
representations between the
6
<PAGE>
parties with respect to the benefits described
hereunder, and there are no promises, agreements,
conditions, understandings, warranties, or
representations, oral or written, express or implied
with respect to the benefits hereunder other than as
set forth in the Omnibus SERP and this Agreement. Any
modifications or any waivers of any provision
contained in this Agreement shall not be valid unless
made in writing and signed by the person or persons
sought to be bound by such waiver or modification.
(b) All benefits hereunder shall be payable from the
general assets of the Bank. All costs or expenses in
connection with the administration of this Agreement
shall be borne by the Bank.
(c) The provisions of this Agreement are severable and if
any one or more of the provisions are determined to
be illegal or otherwise unenforceable, in whole or in
part, the remaining provisions, and any partially
unenforceable provision to the extent enforceable in
any jurisdiction, shall nevertheless be binding and
enforceable.
(d) The waiver by Centura or the Bank of a breach by the
Participant of any provision of this Agreement shall
not operate or be construed as a waiver of any
subsequent breach by the Participant.
(e) The terms and provisions of this Agreement shall be
binding upon and shall inure to the benefit of the
parties hereto and their successors and assigns,
including, without limitation, Participant's
beneficiary, the estate of Participant, as well as
the executors, administrators, and trustees of such
estate.
(f) Participant acknowledges that he has received, read,
and is familiar with the Omnibus SERP, which contains
certain additional provisions governing the benefits
granted hereunder.
(g) The provisions of this Agreement shall be construed
in accordance with the laws of the State of North
Carolina to the extent not pre-empted by the laws of
the United States of America, including ERISA.
(h) Capitalized terms used in this Agreement and not
otherwise defined herein shall have the meaning set
forth in the Omnibus SERP.
(i) For purposes of this Agreement, the term "Discount
Rate" means the interest rate used from time to time
for determining single sum distributions under the
Qualified Plan for the month in which a determination
is being made.
(j) This Agreement and all benefits provided hereunder
shall expire on the 91st day after Participant's 58th
birthday unless Participant has elected Early
Retirement within the Election Period or
Participant's benefits have otherwise commenced under
Sections 2 or 3.
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<PAGE>
(k) Any amounts withdrawn from the cash surrender values
of insurance policies by the Owner thereof, and any
amounts paid to the Owner or the Owner's beneficiary
by reason of the Participant's death, pursuant to and
in accordance with the Split Dollar Agreement between
Centura Banks, Inc. and its Subsidiaries and the
Participant, and dated as of February 18, 2000, as
the same may hereafter be amended from time to time
(the "Split Dollar Agreement"), shall offset and
reduce, dollar for dollar, amounts payable hereunder
including amount payable under Section 4, above.
Participant acknowledges that any policies obtained
under the above-referenced Split Dollar Agreement do
not fund any of the benefits to which he or his
beneficiary may become entitled under this Agreement
and that any such policy shall not be held or deemed
to be held under any trust for the benefit of the
Participant, or his beneficiary, or to be collateral
security for the performance of the obligations of
Centura or the Bank, but shall be and remain subject
to the claims of the general creditors of Centura
and/or the Bank.
(l) To the extent benefits upon the Participant's death
are payable under this Agreement in a form other than
a single sum payment, the offset and reduction
required by subsection 9(k) above shall be based on
the single sum actuarial equivalent of any remaining
installment or annuity payments due hereunder,
determined using the Discount Rate. The Owner's death
benefits paid to the Owner or the Owner's beneficiary
under the terms of the Split Dollar Agreement shall
offset and reduce the amount of each remaining
installment or annuity payment due hereunder, in
direct proportion to the offset and reduction to the
single sum actuarial equivalent.
(m) In accordance with Section 3.3 of the Omnibus SERP,
the Committee shall have the exclusive right to
interpret, construe and administer the Omnibus SERP
and this Agreement. The Committee's authority and
responsibility shall include, and shall not be
limited to, the calculation of any offsets provided
under the terms of Sections 1, 2, 3 or 4 hereunder.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
CENTURA BANKS, INC.
By: /s/ Frank L. Pattillo
----------------------
Frank L. Pattillo
Authorized Officer
ATTEST:
/s/ Marcia M. Davis
- -------------------
Marcia M. Davis
Assistant Secretary
(Corporate Seal)
CENTURA BANK
By: /s/ Frank L. Pattillo
----------------------
Frank L. Pattillo
Authorized Officer
ATTEST:
/s/ Marcia M. Davis
- -------------------
Marcia M. Davis
Assistant Secretary
(Corporate Seal)
PARTICIPANT
/s/ Michael S. Patterson (SEAL)
-------------------------------
Michael S. Patterson
9
EXHIBIT 10.12
EMPLOYMENT AGREEMENT
This EMPLOYMENT Agreement (this "Agreement") is made and entered into
this 18th day of February, 2000 by and among Centura Banks, Inc., a North
Carolina corporation ("Centura"); Centura Bank, a wholly owned subsidiary of
Centura (the "Bank"); and Cecil W. Sewell, Jr. (hereinafter, "Executive"), to be
effective as of the Effective Date, as defined in Section 1.
BACKGROUND
----------
Executive currently serves as the Chief Executive Officer of Centura
and the Bank. The parties desire to memorialize the terms of such employment in
accordance with the terms of this Agreement.
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. Effective Date. The effective date of this Agreement (the "Effective
Date") is February 18, 2000.
2. Positions.
(a) Director Position. Subject to all legal limitations and
conditions applicable to service as a director of Centura and the Bank, (i) the
Boards of Directors of Centura and the Bank shall nominate and use their best
efforts to secure the reelection of Executive as a director of Centura and of
the Bank during the term of this Agreement, and (ii) if so reelected, Executive
shall serve as member of Executive Committee of the Board of Directors of
Centura.
(b) Officer Position. Executive is employed as Chief Executive
Officer of Centura and of the Bank. Executive's responsibilities under this
Agreement shall be in accordance with the policies and objectives established by
the Boards of Directors of Centura and the Bank, and shall be consistent with
the responsibilities of similarly situated executives of comparable banks and
bank holding companies. In each such capacity, Executive will report directly to
the applicable Board of Directors.
3. Employment Period. Unless earlier terminated herein in accordance
with Section 6 hereof, Executive's employment shall be for a term (the
"Employment Period") beginning on the Effective Date and extending through the
90th day following the Executive's 58th birthday (the "Expiration Date").
<PAGE>
4. Extent of Service. During the Employment Period, and excluding any
periods of vacation and sick leave to which Executive is entitled, Executive
agrees to devote reasonable business time and attention during normal business
hours to the performance of his duties hereunder; provided, however, that it
shall not be a violation of this Agreement for Executive to (i) devote
reasonable periods of time to charitable and community activities and, with the
approval of Centura, industry or professional activities, and/or (ii) manage
personal business interests and investments, so long as such activities do not
materially interfere with the performance of Executive's responsibilities under
this Agreement.
5. Compensation and Benefits.
(a) Base Salary. During the Employment Period, Centura will pay
to Executive a base salary of not less than $550,000 per year ("Base Salary"),
less normal withholdings, payable in equal monthly or more frequent installments
as are customary under Centura's payroll practices from time to time. The
Compensation Committee of the Board of Directors of Centura shall review
Executive's Base Salary annually and in its sole discretion, subject to approval
of the Board of Directors of Centura, may increase Executive's Base Salary from
year to year. The annual review of Executive's salary by the Board will
consider, among other things, Executive's own performance and the performance of
Centura and the Bank.
(b) Incentive, Savings and Retirement Plans. During the
Employment Period, Executive shall be entitled to participate in all bonus,
incentive (including but not limited to stock options, other stock-based awards
and performance awards), savings and retirement plans, practices, policies and
programs applicable generally to the most senior executive officers of Centura
and the Bank ("Peer Executives"). Without limiting the foregoing:
(i) during the Employment Period, Executive will be
granted, under Centura's incentive plans, stock options to acquire common stock
of Centura and other incentive awards in amounts and having terms that are at
least as favorable such awards made to the Chairman of the Board of Centura; and
(ii) during the Employment Period, Executive shall be a
participant in that certain Supplemental Executive Retirement Agreement between
Centura and Executive, dated as of May 14, 1996, as amended on October 2, 1996
and December 24, 1998, or, if more favorable, any subsequent supplemental
executive retirement plan or agreement between Centura or the Chairman of the
Board of Centura (the "Centura SERP").
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<PAGE>
(c) Welfare Benefit Plans. During the Employment Period,
Executive and Executive's family shall be eligible for participation in, and
shall receive all benefits under, the welfare benefit plans, practices, policies
and programs provided by Centura and its affiliated companies (including,
without limitation, medical, prescription, dental, disability, employee life,
group life, accidental death and travel accident insurance plans and programs)
("Welfare Plans") to the extent applicable to Peer Executives.
(d) Expenses. During the Employment Period, Executive shall be
entitled to receive prompt reimbursement for all reasonable expenses incurred by
Executive in accordance with the policies, practices and procedures of Centura
and its affiliated companies to the same extent applicable to the Chairman of
the Board of Centura.
(e) Fringe Benefits. During the Employment Period, Executive
shall be entitled to fringe benefits in accordance with the plans, practices,
programs and policies of Centura and its affiliated companies in effect for Peer
Executives.
(f) Vacation. During the Employment Period, Executive will
be entitled to six weeks of paid vacation.
6. Change of Control. Upon the occurrence of a Change in Control, all of
Executive's outstanding stock options and other incentive awards from Centura in
the nature of rights that may be exercised shall become fully exercisable and
all restrictions on Executive's outstanding awards shall lapse. For the purposes
of this Agreement, a "Change of Control" shall mean the occurrence of any of the
following events:
(a) individuals who, at the Effective Date, constitute the Board
of Directors of Centura (the "Incumbent Directors") cease for any reason to
constitute at least a majority of such Board, provided that any person becoming
a director after the Effective Date and whose election or nomination for
election was approved by a vote of at least a majority of the Incumbent
Directors then on the Board (either by a specific vote or by approval of the
proxy statement of Centura in which such person is named as a nominee for
director, without written objection to such nomination) shall be an Incumbent
Director; provided, however, that no individual initially elected or nominated
as a director of Centura as a result of an actual or threatened election contest
(as described in Rule 14a-11 under the 1934 Act ("Election Contest") or other
actual or threatened solicitation of proxies or consents by or on behalf of any
"person" (as such term is defined in Section 3(a)(9) of the 1934 Act and as used
in Section 13(d)(3) and 14(d)(2) of the 1934 Act) other than the Board ("Proxy
Contest"), including by reason of any agreement intended to avoid or settle any
Election Contest or Proxy Contest, shall be deemed an Incumbent Director;
(b) any person is or becomes a "beneficial owner" (as defined in
Rule 13d-3 under the 1934 Act), directly or indirectly, of securities of Centura
representing 25% or more of the combined voting power of Centura's then
outstanding securities eligible to
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<PAGE>
vote for the election of the Board (the "Company Voting Securities"); provided,
however, that the event described in this paragraph (b) shall not be deemed to
be a Change in Control of Centura by virtue of any of the following
acquisitions: (A) any acquisition by a person who is on the Effective Date the
beneficial owner of 25% or more of the outstanding Company Voting Securities,
(B) an acquisition by Centura which reduces the number of Company Voting
Securities outstanding and thereby results in any person acquiring beneficial
ownership of more than 25% of the outstanding Company Voting Securities;
provided, that if after such acquisition by Centura such person becomes the
beneficial owner of additional Company Voting Securities that increases the
percentage of outstanding Company Voting Securities beneficially owned by such
person, a Change in Control of Centura shall then occur, (C) an acquisition by
any employee benefit plan (or related trust) sponsored or maintained by Centura
or any Parent or Subsidiary, (C) an acquisition by an underwriter temporarily
holding securities pursuant to an offering of such securities, (D) an
acquisition pursuant to a Non-Qualifying Transaction (as defined in paragraph
(c) below), or (E) a transaction (other than the one described in paragraph (c)
below) in which Company Voting Securities are acquired from Centura, if a
majority of the Incumbent Directors approve a resolution providing expressly
that the acquisition pursuant to this clause (E) does not constitute a Change in
Control of Centura under this paragraph (b);
(c) the consummation of a reorganization, merger, consolidation,
statutory share exchange or similar form of corporate transaction involving
Centura that requires the approval of Centura's stockholders, whether for such
transaction or the issuance of securities in the transaction (a
"Reorganization"), or the sale or other disposition of all or substantially all
of Centura's assets to an entity that is not an affiliate of Centura (a "Sale"),
unless immediately following such Reorganization or Sale: (A) more than 50% of
the total voting power of (x) the corporation resulting from such Reorganization
or the corporation which has acquired all or substantially all of the assets of
Centura (in either case, the "Surviving Corporation"), or (y) if applicable, the
ultimate parent corporation that directly or indirectly has beneficial ownership
of 100% of the voting securities eligible to elect directors of the Surviving
Corporation (the "Parent Corporation"), is represented by Centura Voting
Securities that were outstanding immediately prior to such Reorganization or
Sale (or, if applicable, is represented by shares into which such Company Voting
Securities were converted pursuant to such Reorganization or Sale), and such
voting power among the holders thereof is in substantially the same proportion
as the voting power of such Company Voting Securities among the holders thereof
immediately prior to the Reorganization or Sale, (B) no person (other than (x)
Centura, (y) any employee benefit plan (or related trust) sponsored or
maintained by the Surviving Corporation or the Parent Corporation, or (z) a
person who immediately prior to the Reorganization or Sale was the beneficial
owner of 25% or more of the outstanding Company Voting Securities) is the
beneficial owner, directly or indirectly, of 25% or more of the total voting
power of the outstanding voting securities eligible to elect directors of the
Parent Corporation (or, if there is no Parent Corporation, the Surviving
Corporation), and (C) at least a majority of the members of the board of
directors of the
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<PAGE>
Parent Corporation (or, if there is no Parent Corporation, the Surviving
Corporation) following the consummation of the Reorganization or Sale were
Incumbent Directors at the time of the Board's approval of the execution of the
initial agreement providing for such Reorganization or Sale (any Reorganization
or Sale which satisfies all of the criteria specified in (A), (B) and (C) above
shall be deemed to be a "Non-Qualifying Transaction"); or
(d) approval by the stockholders of Centura of a complete
liquidation or dissolution of Centura.
7. Termination of Employment.
(a) Death or Disability. Executive's employment shall terminate
automatically upon Executive's death during the Employment Period. If Centura
determines in good faith that the Disability of Executive has occurred during
the Employment Period (pursuant to the definition of Disability set forth
below), it may give to Executive written notice of its intention to terminate
Executive's employment. In such event, Executive's employment with Centura shall
terminate effective on the 30th day after receipt of such written notice by
Executive (the "Disability Effective Date"), provided that, within the 30 days
after such receipt, Executive shall not have returned to full-time performance
of Executive's duties. For purposes of this Agreement, "Disability" shall have
the meaning assigned such term in the Centura SERP. In all events, the
determination of Disability shall be made by a physician selected by Executive
and reasonably acceptable to Centura.
(b) Termination by Centura or the Bank. Centura or the Bank may
terminate Executive's employment during the Employment Period with or without
Cause. For purposes of this Agreement, "Cause" shall mean:
(i) the willful and continued failure of Executive to
perform substantially Executive's duties with Centura or the Bank (other than
any such failure resulting from incapacity due to physical or mental illness,
and specifically excluding any failure by Executive, after reasonable efforts,
to meet performance expectations), after a written demand for substantial
performance is delivered to Executive by the Board of Directors of Centura or
the Bank, as applicable, which specifically identifies the manner in which such
Board believes that Executive has not substantially performed Executive's
duties, or
(ii) the willful engaging by Executive in illegal conduct
or gross misconduct which is materially and demonstrably injurious to Centura or
the Bank.
For purposes of this provision, no act or failure to act, on the part of
Executive, shall be considered "willful" unless it is done, or omitted to be
done, by Executive in bad faith and without reasonable belief that Executive's
action or omission was in the best
-5-
<PAGE>
interests of Centura or the Bank, as the case may be. Any act, or failure to
act, based upon authority given pursuant to a resolution duly adopted by the
applicable Board of Directors or based upon the advice of counsel for Centura or
the Bank shall be conclusively presumed to be done, or omitted to be done, by
Executive in good faith and in the best interests of Centura or the Bank, as the
case may be. The cessation of employment of Executive shall not be deemed to be
for Cause unless and until there shall have been delivered to Executive a copy
of a resolution duly adopted by the affirmative vote of not less than two-thirds
of the entire membership of the applicable Board of Directors (excluding
Executive) at a meeting of such Board called and held for such purpose (after
reasonable notice is provided to Executive and Executive is given an
opportunity, together with counsel, to be heard before such Board), finding
that, in the good faith opinion of such Board, Executive is guilty of the
conduct described in subparagraph (i) or (ii) above, and specifying the
particulars thereof in detail.
(c) Termination by Executive. Executive's employment may be
terminated by Executive for Good Reason or no reason. For purposes of this
Agreement, "Good Reason" shall mean:
(i) without the written consent of Executive, the
assignment to Executive of any duties inconsistent in any material respect with
Executive's position (including status, offices, titles and reporting
requirements), authority, duties or responsibilities as in effect on the
Effective Date, or any other action by Centura or the Bank which results in a
diminution in such position, authority, duties or responsibilities, excluding
for this purpose an isolated, insubstantial and inadvertent action not taken in
bad faith and which is remedied by Centura or the Bank promptly after receipt of
notice thereof given by Executive;
(ii) Centura or the Bank requiring Executive to be based
at a location that is more than 35 miles from Rocky Mount, North Carolina;
(iii) a reduction in Executive's Base Salary and benefits
as in effect on the Effective Date or as the same may be increased from time to
time;
(iv) the failure by Centura or the Bank (a) to continue in
effect any compensation plan in which Executive participates as of the Effective
Date that is material to Executive's total compensation, unless an equitable
arrangement (embodied in an ongoing substitute or alternative plan) has been
made with respect to such plan, or (b) to continue Executive's participation
therein (or in such substitute or alternative plan) on a basis not materially
less favorable, both in terms of the amount of benefits provided and the level
of Executive's participation relative to other participants;
(v) the material breach of this Agreement by Centura or
the Bank; or
(vi) the occurrence of a Change in Control.
-6-
<PAGE>
(d) Notice of Termination. Any termination by Centura or the Bank
for Cause, or by Executive for Good Reason, shall be communicated by Notice of
Termination to the other party hereto given in accordance this Agreement. For
purposes of this Agreement, a "Notice of Termination" means a written notice
which (i) indicates the specific termination provision in this Agreement relied
upon, (ii) to the extent applicable, sets forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated and (iii) specifies the termination
date (which date shall be not less than 60 days after the giving of such
notice). If a dispute exists concerning the provisions of this Agreement that
apply to Executive's termination of employment, the parties shall pursue the
resolution of such dispute with reasonable diligence. Within five (5) days of
such a resolution, any party owing any payments pursuant to the provisions of
this Agreement shall make all such payments together with interest accrued
thereon at the rate provided in Section 1274(b)(2)(B) of the Internal Revenue
Code of 1986, as amended (the "Code"). The failure by either party to set forth
in the Notice of Termination any fact or circumstance which contributes to a
showing of Good Reason or Cause shall not waive any right of such party
hereunder or preclude such party from asserting such fact or circumstance in
enforcing such party's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if
Executive's employment is terminated other than by reason of death or
Disability, the date of receipt of the Notice of Termination, or any later date
specified therein, or (ii) if Executive's employment is terminated by reason of
death or Disability, the Date of Termination will be the date of death or the
Disability Effective Date, as the case may be.
(f) Board Resignations. Termination of Executive's employment for
any reason whatsoever shall constitute Executive's resignation from the Boards
of Directors of Centura and the Bank.
8. Obligations of Centura upon Termination.
(a) Termination by Executive for Good Reason; Disability;
Termination by Centura Other Than for Cause. If, during the Employment Period,
Centura shall terminate Executive's employment other than for Cause, Executive
shall terminate employment for Good Reason, or Executive's employment shall
terminate by reason of Disability:
(i) Centura shall pay to Executive in a lump sum in cash
within 30 days after the Date of Termination the sum of (1) Executive's Base
Salary through the Date of Termination to the extent not theretofore paid, (2)
the product of (x) Executive's highest annual bonus from Centura, including any
bonus or portion thereof which has been earned but deferred, for any of the last
three full fiscal years prior to the Date of Termination (such amount being
referred to as the "Highest Annual Bonus") and (y) a fraction, the numerator of
which is the number of days in the current fiscal year through
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<PAGE>
the Date of Termination, and the denominator of which is 365, (3) any accrued
vacation pay to the extent not theretofore paid, and (4) unless Executive has
elected a different payout date in a prior deferral election, any compensation
previously deferred by Executive (together with any accrued interest or earnings
thereon) to the extent not theretofore paid (the sum of the amounts described in
clauses (1), (2), (3) and (4) shall be hereinafter referred to as the "Accrued
Obligations"); and
(ii) beginning on the last day of the month in which the
Date of Termination occurs and ending on the last day of the month in which the
Expiration Date occurs, Centura shall pay Executive a monthly amount equal to
the sum of (i) his monthly Base Salary as in effect on the Date of Termination,
and (ii) one-twelfth of the Highest Annual Bonus; provided, however, that in the
case of Executive's termination of employment due to Disability, amounts paid
under this Section 8(a)(ii) shall be offset by the amount of disability benefits
paid pursuant to the disability policy maintained for Executive; and
(iii) from the Date of Termination through the Expiration
Date, or such longer period as may be provided by the terms of the appropriate
plan, program, practice or policy, Centura shall continue benefits to Executive
and/or Executive's family that are at least equal, on an after-tax basis, to
those which would have been provided to them in accordance with the Welfare
Plans described in Section 5(c) of this Agreement if Executive's employment had
not been terminated; provided, however, that if Executive becomes re-employed
with another employer and is eligible to receive medical or other welfare
benefits under another employer provided plan, the medical and other welfare
benefits described herein shall be secondary to those provided under such other
plan during such applicable period of eligibility;
(iv) to the extent not theretofore paid or provided,
Centura shall timely pay or provide to Executive any other amounts or benefits
required to be paid or provided or which Executive is eligible to receive under
any plan, program, policy or practice or contract or agreement of Centura and
its affiliated companies (such other amounts and benefits shall be hereinafter
referred to as the "Other Benefits"); and
(v) all stock options and any other stock-based awards
outstanding immediately prior to the Date of Termination shall remain
outstanding and shall be treated for all purposes (except that in the event of
Executive's death, his estate or other beneficiary or successor shall be
entitled to exercise Executive's rights) as if Executive continued to be
employed by Centura until the Expiration Date; and
(vi) for purposes of the Centura SERP (and unless the
termination of employment was due to Executive's death), Executive shall be
deemed to continue to be employed and receive his Base Salary (as in effect
immediately prior to his Termination Date) and his Highest Annual Bonus
(calculated as of the day before the Termination Date) for each year until the
Expiration Date.
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<PAGE>
(b) Death. If Executive's employment is terminated by reason of
Executive's death during the Employment Period, this Agreement shall terminate
without further obligations to Executive's legal representatives under this
Agreement, other than for payment of Accrued Obligations and the timely payment
or provision of Other Benefits. Accrued Obligations shall be paid to Executive's
estate or beneficiary, as applicable, in a lump sum in cash within 30 days of
the Date of Termination. With respect to the provision of Other Benefits, the
term Other Benefits as used in this Section 8(b) shall include, without
limitation, and Executive's estate and/or beneficiaries shall be entitled to
receive, benefits under such plans, programs, practices and policies relating to
death benefits, if any, as are applicable to Executive on the date of his death.
(d) Cause or Voluntary Termination without Good Reason. If
Executive's employment shall be terminated for Cause during the Employment
Period, or if Executive voluntarily terminates employment during the Employment
Period without Good Reason, this Agreement shall terminate without further
obligations to Executive, other than for payment of Accrued Obligations
(excluding the pro-rata bonus described in clause 2 of Section 8(a)(i)) and the
timely payment or provision of Other Benefits.
(e) Expiration of Employment Period. If Executive's employment
shall be terminated due to the normal expiration of the Employment Period, this
Agreement shall terminate without further obligations to Executive, other than
for payment of Accrued Obligations and the timely payment or provision of Other
Benefits.
(f) Board Resignations. Termination of Executive's employment for
any reason whatsoever shall constitute Executive's resignation from the Boards
of Directors of Centura and the Bank.
9. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
limit Executive's continuing or future participation in any plan, program,
policy or practice provided by Centura or its affiliated companies and for which
Executive may qualify, nor, subject to Section 15(d), shall anything herein
limit or otherwise affect such rights as Executive may have under any contract
or agreement with Centura or its affiliated companies. Amounts which are vested
benefits or which Executive is otherwise entitled to receive under any plan,
policy, practice or program of or any contract or agreement with Centura or any
of its affiliated companies at or subsequent to the Date of Termination shall be
payable in accordance with such plan, policy, practice or program or contract or
agreement except as explicitly modified by this Agreement.
10. Gross-Up Payment.
(a) Anything in this Agreement to the contrary notwithstanding
and except as set forth below in this Section 10, in the event it shall be
determined that any payment or distribution by Centura to or for the benefit of
Executive (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise, but
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<PAGE>
determined without regard to any additional payments required under this Section
10) (a "Payment") would be subject to the excise tax imposed by Section 4999 of
the Code or any interest or penalties are incurred by Executive with respect to
such excise tax (such excise tax, together with any such interest and penalties,
are hereinafter collectively referred to as the "Excise Tax"), then Executive
shall be entitled to receive an additional payment (a "Gross-Up Payment") in an
amount such that after payment by Executive of all taxes (including any interest
or penalties imposed with respect to such taxes), including, without limitation,
any income taxes (and any interest and penalties imposed with respect thereto)
and Excise Tax imposed upon the Gross-Up Payment, Executive retains an amount of
the Gross-Up Payment equal to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 10(c), all
determinations required to be made under this Section 10, including whether and
when a Gross-Up Payment is required and the amount of such Gross-Up Payment and
the assumptions to be utilized in arriving at such determination, shall be made
by a certified public accounting firm selected by Executive and reasonably
acceptable to Centura as may be designated by Executive (the "Accounting Firm")
which shall provide detailed supporting calculations both to Centura and
Executive within 15 business days of the receipt of notice from Executive that
there has been a Payment, or such earlier time as is reasonably requested by
Centura. All fees and expenses of the Accounting Firm shall be borne solely by
Centura. Any Gross-Up Payment, as determined pursuant to this Section 10, shall
be paid by Centura to Executive within five days of the receipt of the
Accounting Firm's determination. Any determination by the Accounting Firm shall
be binding upon Centura and Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the initial determination
by the Accounting Firm hereunder, it is possible that Gross-Up Payments will not
have been made by Centura that should have been made ("Underpayment"),
consistent with the calculations required to be made hereunder. In the event
that Centura exhausts its remedies pursuant to Section 9(c) and Executive
thereafter is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by Centura to or for the benefit of
Executive.
(c) The Executive shall notify Centura in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
Centura of a Gross-Up Payment (or an additional Gross-Up Payment). Such
notification shall be given as soon as practicable but no later than ten
business days after Executive is informed in writing of such claim and shall
apprise Centura of the nature of such claim and the date on which such claim is
requested to be paid. The Executive shall not pay such claim prior to the
expiration of the 30-day period following the date on which it gives such notice
to Centura (or such shorter period ending on the date that any payment of taxes
with respect to such claim is due). If Centura notifies Executive in writing
prior
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<PAGE>
to the expiration of such period that it desires to contest such claim,
Executive shall:
(i) give Centura any information reasonably requested by
Centura relating to such claim,
(ii) take such action in connection with contesting such
claim as Centura shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with respect to
such claim by an attorney reasonably selected by Centura and reasonably
acceptable to Executive,
(iii) cooperate with Centura in good faith in order
effectively to contest such claim, and
(iv) permit Centura to participate in any proceedings
relating to such claim;
provided, however, that Centura shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation of the foregoing provisions of
this Section 10(c), Centura shall control all proceedings (to the extent
applicable to the Excise tax and Gross-Up Payment) taken in connection with such
contest and, at its sole option, may pursue or forgo any and all administrative
appeals, proceedings, hearings and conferences with the taxing authority in
respect of such claim and may, at its sole option, either direct Executive to
pay the tax claimed and sue for a refund or contest the claim in any permissible
manner, and Executive agrees to prosecute such contest to a determination before
any administrative tribunal, in a court of initial jurisdiction and in one or
more appellate courts, as Centura shall reasonably determine; provided, however,
that if Centura directs Executive to pay such claim and sue for a refund,
Centura shall advance the amount of such payment to Executive, on an
interest-free basis and shall indemnify and hold Executive harmless, on an
after-tax basis, from any Excise Tax or income tax (including interest or
penalties with respect thereto) imposed with respect to such advance or with
respect to any imputed income with respect to such advance; and further provided
that any extension of the statute of limitations relating to payment of taxes
for the taxable year of Executive with respect to which such contested amount is
claimed to be due is limited solely to such contested amount. Furthermore,
Centura's control of the contest shall be limited to issues with respect to
which a Gross-Up Payment would be payable hereunder and Executive shall be
entitled to settle or contest, as the case may be, any other issue raised by the
Internal Revenue Service or any other taxing authority.
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<PAGE>
(d) If, after the receipt by Executive of an amount advanced by
Centura pursuant to Section 9(c), Executive becomes entitled to receive any
refund with respect to such claim, Executive shall (subject to Centura's
complying with the requirements of Section 9(c)) promptly pay to Centura the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by Executive of an amount
advanced by Centura pursuant to Section 9(c), a determination is made that
Executive shall not be entitled to any refund with respect to such claim and
Centura does not notify Executive in writing of its intent to contest such
denial of refund prior to the expiration of 30 days after such determination,
then such advance shall be forgiven and shall not be required to be repaid and
the amount of such advance shall offset, to the extent thereof, the amount of
Gross-Up Payment required to be paid.
11. Costs of Enforcement. In any action taken in good faith relating to
the enforcement of this Agreement or any provision herein, Executive shall be
entitled to be paid any and all costs and expenses incurred by him in enforcing
or establishing his rights thereunder, including, without limitation, reasonable
attorneys' fees, whether suit be brought or not, and whether or not incurred in
trial, bankruptcy or appellate proceedings. Executive shall also be entitled to
be paid all reasonable legal fees and expenses, if any, incurred in connection
with any tax audit or proceeding to the extent attributable to the application
of Section 4999 of the Internal Revenue Code to any payment or benefit
hereunder. Such payments shall be made within five (5) business days after
delivery of Executive's respective written requests for payment accompanied with
such evidence of fees and expenses incurred as Centura reasonably may require.
12. Representations and Warranties. Executive hereby represents and
warrants to Centura that Executive is not a party to, or otherwise subject to,
any covenant not to compete with any person or entity, and Executive's execution
of this Agreement and performance of his obligations hereunder will not violate
the terms or conditions of any contract or obligation, written or oral, between
Executive and any other person or entity.
13. Confidential Information. Executive shall hold in a fiduciary
capacity for the benefit of Centura and the Bank all secret or confidential
information, knowledge or data relating to Centura or any of its affiliated
companies, and their respective businesses, which shall have been obtained by
Executive during Executive's employment by Centura or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by Executive or representatives of Executive in violation of this Agreement).
After termination of Executive's employment with Centura or such affiliated
companies, Executive shall not, without the prior written consent of Centura or
as may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than Centura and those
designated by it.
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<PAGE>
14. Assignment and Successors.
(a) This Agreement is personal to the Executive and without the
prior written consent of Centura shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's legal
representatives.
(b) This Agreement shall inure to the benefit of and be binding
upon Centura and its successors and assigns.
(c) Centura will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of Centura to assume expressly
and agree to perform this Agreement in the same manner and to the same extent
that Centura would be required to perform it if no such succession had taken
place. As used in this Agreement, "Company" shall mean Centura as hereinbefore
defined and any successor to its business and/or assets as aforesaid which
assumes and agrees to perform this Agreement by operation of law, or otherwise.
15. Miscellaneous.
(a) Waiver. Failure of either party to insist, in one or more
instances, on performance by the other in strict accordance with the terms and
conditions of this Agreement shall not be deemed a waiver or relinquishment of
any right granted in this Agreement or of the future performance of any such
term or condition or of any other term or condition of this Agreement, unless
such waiver is contained in a writing signed by the party making the waiver.
(b) Severability. If any provision or covenant, or any part
thereof, of this Agreement should be held by any court to be invalid, illegal or
unenforceable, either in whole or in part, such invalidity, illegality or
unenforceability shall not affect the validity, legality or enforceability of
the remaining provisions or covenants, or any part thereof, of this Agreement,
all of which shall remain in full force and effect.
(c) Other Agents. Nothing in this Agreement is to be interpreted
as limiting Centura from employing other personnel on such terms and conditions
as may be satisfactory to it.
(d) Entire Agreement. Except as provided herein, this Agreement
contains the entire agreement between Centura, the Bank and Executive with
respect to the subject matter hereof and this Agreement shall supersede any
other agreement between or among the parties with respect to the subject matter
hereof.
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<PAGE>
(e) Governing Law. Except to the extent preempted by federal law,
and without regard to conflict of laws principles, the laws of the State of
North Carolina shall govern this Agreement in all respects, whether as to its
validity, construction, capacity, performance or otherwise.
(f) Notices. All notices, requests, demands and other
communications required or permitted hereunder shall be in writing and shall be
deemed to have been duly given if delivered or three days after mailing if
mailed, first class, certified mail, postage prepaid:
To Centura or the Bank: Centura Banks, Inc.
134 North Church Street
Rocky Mount, North Carolina 27804
Attention: Chairman of the Board
To Executive: Cecil W. Sewell, Jr.
325 Iron Horse Road
Rocky Mount, NC 27804
Any party may change the address to which notices, requests, demands and other
communications shall be delivered or mailed by giving notice thereof to the
other party in the same manner provided herein.
(g) Amendments and Modifications. This Agreement may be amended
or modified only by a writing signed by both parties hereto, which makes
specific reference to this Agreement.
(signatures on following page)
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Employment Agreement as of the date first above written.
CENTURA BANKS, INC.
By: /s/ Frank L. Pattillo
---------------------------
Frank L. Pattillo
Title: Vice Chairman
CENTURA BANK
By: /s/ Frank L. Pattillo
---------------------------
Frank L. Pattillo
Title: Vice Chairman
EXECUTIVE:
/s/ Cecil W. Sewell, Jr.
------------------------------
Cecil W. Sewell, Jr.
Exhibit 10.17
VIRGINIA BEACH FEDERAL SAVINGS AND LOAN ASSOCIATION
1981 STOCK OPTION PLAN
AS AMENDED
1.PURPOSE OF THE PLAN. The Plan shall be known as the Virginia Beach
Federal Savings and Loan Association 1981 Stock Option Plan (the "Plan"). The
purpose of the Plan is to attract and retain the best available personnel for
positions of substantial responsibility and to provide additional incentive to
all employees of Virginia Beach Federal Savings and Loan (the "Association") or
any present or future parent or subsidiary of the Association to promote the
success of the business. It is intended that options issued pursuant to this
Plan shall constitute incentive stock options within the meaning of Section 422A
of the Internal Revenue Code of 1954, as amended.
2. DEFINITIONS. As used herein, the following definitions shall apply.
a. "Association" shall mean the Virginia Beach Federal Savings and Loan
Association.
b. "Board" shall mean the Board of Directors of the Association.
c. "Common Stock" shall mean Common Stock, par value $.01 per share, of the
Association.
d. "Code" shall mean the Internal Revenue Code of 1954, as amended.
e. "Committee," shall mean the Stock Option Committee appointed by the
Board in accordance with paragraph 4(a) of the Plan.
f. "Continuous Employment" or "Continuous Status as an Employee" shall mean
the absence of any interruption or termination of employment by the Association
or any present or future Parent or Subsidiary of the Association. Employment
shall not be considered interrupted in the case of sick leave, military leave or
any other leave of absence approved by the Association or in the case of
transfers between payroll locations of the Association or between the
Association, its Parent, its Subsidiaries or a successor.
g. "Effective Date" shall mean the date specified in paragraph 12 hereof.
h. "Employee" shall mean any person employed on a full-time basis by the
Association or any present or future Parent or Subsidiary of the Association.
<PAGE>
i. "Option" shall mean a stock option granted pursuant to this Plan.
j. "Optioned Stock" shall mean stock subject to an Option granted pursuant
to this Plan.
k. "Optionee" shall mean an Employee who receives an Option.
l. "Parent" shall mean any present or future corporation which would be a
"parent corporation" as defined in Subsection 425(e) and (g) of the Code.
m. "Plan" shall mean the Virginia Beach Federal Savings and Loan
Association 1981 Stock Option Plan.
n. "Share" shall mean one share of common stock.
o. "Subsidiary" shall mean any present or future corporation, which would
be a "subsidiary corporation" as defined in Subsection 425(f) and (g) of the
Code.
3.SHARED SUBJECT TO THE PLAN. Except as otherwise required by the
provisions of Paragraph 10 hereof, the aggregate number of shares of Common
Stock deliverable upon the exercise of Options pursuant to the Plan shall not
exceed 98,750 shares. Such shares may either be authorized but unissued or
treasury shares.
If an option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased shares which were subject thereto
shall, unless the Plan shall have been terminated, be available for the grant of
other Options under the Plan.
4. ADMINISTRATION OF THE PLAN.
a. Composition of Option Committee. The Plan shall be administered by an
Option Committee (the "Committee") consisting of not less than three Directors
of the Association appointed by the Board. Employees who are designated by the
committee as key executives shall be eligible to receive an Option under the
Plan, and all persons designated as members of the Option Committee shall be
"disinterested persons" within the meaning of Rule 16b-3 under the Securities
and Exchange Act of 1934.
b. Powers of the Option Committee. The Committee is authorized (but only to
the extent not contrary to the express provisions of the Plan or to the
resolutions adopted by the Board) to interpret the Plan, to prescribe, amend and
rescind rules and regulations relating to the Plan, to determine the form and
content of Options to be issued under the Plan and to make other determinations
necessary or advisable for the administration of the Plan, and shall have and
may exercise such other power and authority as may be delegated to it by the
Board from time to time. A majority of the entire Committee shall
<PAGE>
constitute a quorum and the action of a majority of the members present at any
meeting at which a quorum is present shall be deemed the action of the
Committee.
The president of the Association is hereby authorized to execute
instruments evidencing Options on behalf of the Association and to cause them to
be delivered to the Optionees.
c. Effect of Committee's Decision. All decisions, determinations and
interpretations of the Committee shall be final and conclusive on all persons
affected thereby.
5. ELIGIBILITY. Options may be granted only to Employees of the
Association, or any present or future Parent or Subsidiary. An employee who has
been granted an Option may, if otherwise eligible, be granted an additional
Option or Options.
The aggregate fair market value (determined as of the date the Option is
granted) of the Shares for which any Employee may be granted Options in any
calendar year (under all Incentive Stock Option Plans, as defined in Section
422A of the Code, of the Association or any present or future Parent or
Subsidiary of the Association) shall not exceed $100,000 plus any unused limit
carryover to such year as defined in Section 422A(c) of the code.
No Option (for purposes of this paragraph 5 called "New Option") shall be
exercisable while there is outstanding any Incentive Stock Option (as defined in
Section 422A of the Code) which was granted, before the granting of the New
Option, to the Employee to whom the New Option is granted, to purchase stock in
the Association or any present or future Parent or Subsidiary of the
Association. A previously granted Incentive Stock Option shall be treated as
outstanding until such prior option is exercised in full or expires by reason of
lapse in time.
6. TERM OF PLAN; TERM OF OPTIONS.
a. The Plan shall continue in effect for a term of ten (10) years from its
Effective Date, unless sooner terminated pursuant to paragraph 14. No Option
shall be granted under the Plan after ten (10) years from the Effective Date.
b. The term of each Option granted under the Plan shall be established by
the Committee, but shall not exceed 10 years, provided however that in the case
of an Employee who owns Stock representing more than ten (10) percent of the
Association's outstanding Common Stock at the time the Option is granted, the
term of such Option shall not exceed five years.
7. OPTION PRICE. The price per shares at which each Option granted under
the Plan may be exercised shall not, as to any particular Option, be less than
the fair market value of the stock at the time such Option is granted. In the
case of an Employee who owns Stock representing more than ten (10) percent of
the Association's outstanding Common Stock at the time the Option is granted,
the Option price shall not be less than 110% of
<PAGE>
the fair market value of the stock at the time the Option is granted. If the
Common Stock is traded otherwise than on a national securities exchange at the
time of the granting of an Option, then the price per share shall be not less
than the mean between the bid and asked price on the date the Option is granted
or, if there is no bid and asked price on said date, then on the next prior
business day on which there was a bid and asked price. If the Common Stock is
listed on a national securities exchange at the time of granting an Option, then
the price per share shall be no less than the average of the highest and lowest
selling price on such exchange on the date such Option is granted or if there
were no sales on said date, then the price shall be not less than the mean
between the bid and asked price on such date.
8. EXERCISE OF OPTION.
a. Procedure for Exercise. Any Option hereunder shall be exercisable at
such times and under such conditions as shall be permissible under the terms of
the Plan and of the Option granted to an Optionee. An Option may not be
exercised for a fractional Share.
b. An Option granted pursuant to the Plan may be exercised, subject to
provisions relative to its termination and limitations on its exercise, from
time to time only by (a) written notice of intent to exercise the Option with
respect to a specified number of shares, and (b) payment to the Association
(contemporaneously with delivery of each such notice), in cash, of the amount of
the Option price of the number of Shares with respect to which the Option is
then being exercised. Each such notice and payment shall be delivered or mailed
by prepaid registered or certified mail, addressed to the Treasurer of the
Association at the Association's executive offices, until the total number of
shares then subject to the Option has been purchased.
c. Exercise During Employment or Following Death or Disability. Unless
otherwise provided in the terms of an Option, an Option may be exercised by an
Optionee only while he is an Employee and has maintained Continuous Status as an
Employee since the date of the grant of the Option, except if his Continuous
Employment is terminated by reason of death, such Option of the deceased
Optionee may be exercised within ninety (90) days from the date of his death by
the person or persons (including his estate) to whom his rights under such
Option shall have passed by will or by the laws of descent and distribution.
d. The Committee's determination whether an Optionee's employment has
ceased and the effective date thereof, shall be final and conclusive on all
persons affected thereby.
9. NON-TRANSFERABILITY OF OPTION. Options granted under the Plan may not be
sold, pledged, assigned, hypothecated, transferred or disposed of in any manner
other than by will or by the laws of descent and distribution. An Option may be
exercised, during the lifetime of the Optionee, only by the Optionee.
<PAGE>
10. EFFECT OF CHANGE IN STOCK SUBJECT TO THE PLAN. In the event that each
of the outstanding shares of Common Stock (other than shares held by dissenting
shareholders) shall be changed into or exchanged for a different number or kind
of shares of stock of the Association or of another corporation (whether by
reason of merger, consolidation, recapitalization, reclassification, stock
dividend, split-up, combination of shares, or otherwise), then there shall be
substituted for each share of Common Stock then under Option or available for
Option the number and kind of shares of stock into which each outstanding share
of Common Stock (other than shares held by dissenting shareholders) shall be so
changed or for which each such share shall be so exchanged.
In the event there shall be any other change in the number of, or kind of
issued shares of Common Stock, or of any capital stock or other securities into
which such Common Stock shall have been changed, or for which it shall have been
exchanged, then if the Board shall in its sole discretion, determine that such
change equitably requires an adjustment in the number, or kind, or Option price
of shares then subject to an Option or available for Option, such adjustment
shall be made by the Board and shall be effective and binding for all purposed
of the Plan.
11. TIME OF GRANTING OF OPTION. The date of grant of an Option under the
Plan shall, for all purposes, be the date on which the Committee makes the
determination of granting such Option. Notice of the determination shall be
given to each Employee to whom an Option is so granted within a reasonable time
after the date of such grant.
12. EFFECTIVE DATE. The Plan shall become effective upon its adoption by
the Board and shall be subject to ratification by a vote of the holders of a
majority of the outstanding shares of the Association present in person or by
proxy at the legal meeting. The Plan shall continue in effect for a term of ten
(10) years from the Effective Date, unless sooner terminated under paragraph 15
of the Plan.
13. APPROVAL BY STOCKHOLDERS. The Plan shall be ratified by stockholders of
the Association within twelve (12) months before or after the date it is
adopted.
14. MODIFICATION OF OPTIONS. At any time and from time to time the Board
may authorize the Committee to direct execution of an instrument providing for
the modification of any outstanding Option, provided no such modification,
extension, or renewal shall confer on the holder of said Option any right or
benefit which could not be conferred on him by the grant of a new Option at such
time, or impair the Option without the consent of the holder of the Option.
16. AMENDMENT AND TERMINATION OF THE PLAN. The Board may alter, suspend or
discontinue the Plan except that no action of the Board may increase (other than
as provided in Section 10) the maximum number of shares permitted to be optioned
under the Plan, or reduce the minimum Option price, or extend the period within
which Options
<PAGE>
may be exercised, unless such action of the Board shall be subject to approval
or ratification by the shareholders of the Association.
No action of the Board may, without the consent of the holder of the
Option, impair any then outstanding Option.
17. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with
respect to any Option granted under the Plan unless the issuance and delivery of
such Shares shall comply with all relevant provision of law, including, without
limitation, the Securities and Exchange Act of 1933, as amended, the rules and
regulation promulgated thereunder, any applicable state securities law, and the
requirements of any stock exchange upon which the Shares may then be listed.
Inability of the Association to obtain from any regulatory body or
authority deemed by the Association's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder shall relieve the Association of any
liability in respect to the non-issuance or sale of such shares.
As a condition to the exercise of an Option, the Association may require
the person exercising the Option to make such representations and warranties as
may be necessary to assure the availability of an exemption from the
registration requirements of federal or state securities law.
18. RESERVATION OF SHARES. The Association during the term of the Plan,
will reserve and keep available a number of Shares sufficient to satisfy the
requirements of the Plan.
EXHIBIT 10.21
VIRGINIA BEACH FEDERAL SAVINGS BANK
1991 STOCK OPTION PLAN
1. Purpose of the Plan.
The Plan shall be known as the Virginia Beach Federal Savings Bank 1991
Stock Option Plan (the "Plan"). The purpose of the Plan is to attract and
retain the best available personnel for positions of substantial
responsibility and to provide additional incentive to officers and key
employees of Virginia Beach Federal Savings Bank (the "Bank") or any present
or future parent or subsidiary of the Bank to promote the success of the
business. It is intended that options issued pursuant to this Plan may
constitute either incentive stock options within the meaning of Section 422A
of the Internal Revenue Code of 1986, as amended, or options that do not so
qualify.
2. Definitions
As used herein, the following definitions shall apply.
(a) "Bank" shall mean the Virginia Beach Federal Savings Bank.
(b) "Board" shall mean the Board of Directors of the Bank or any Parent
thereof.
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(d) "Committee" shall mean the Stock Option Committee appointed by the
Board in accordance with paragraph 4(a) of the Plan.
(e) "Common Stock" shall mean Common Stock, par value $.01 per share, of
the Bank.
(f) "Continuous Employment" or "Continuous Status as an Employee" shall
mean the absence of any interruption or termination of employment by the Bank
or any present or future Parent or Subsidiary of the Bank. Employment shall
not be considered interrupted in the case of sick leave, military leave or any
other leave of absence approved by the Bank or in the case of transfers
between payroll locations of the Bank or between the Bank, its Parent, its
Subsidiaries or a successor.
(g) "Director" shall mean a member of the Board of the Bank.
(h) "Effective Date" shall mean the date specified in paragraph 11 hereof.
(i) "Employee" shall mean any person employed by the Bank or any present or
future Parent or Subsidiary of the Bank.
(j) "Option" shall mean an option to purchase Common Stock granted pursuant
to this Plan.
(k) "Optioned Shares" shall mean Common Stock subject to an Option granted
pursuant to this Plan.
(l) "Optionee" shall mean any person who receives an Option pursuant to the
Plan.
(m) "Parent" shall mean any present or future corporation which would be a
"parent corporation" as defined in Subsections 425(e) and (g) of the Code.
(n) "Plan" shall mean Virginia Beach Federal Savings Bank 1991 Stock Option
Plan.
(o) "Share" shall mean one share of the Common Stock.
<PAGE>
(p) "Subsidiary" shall mean any present or future corporation which would
be a "subsidiary corporation" as defined in Subsections 425 (f) and (g) of the
Code.
3. Shares Subject to the Plan.
Except as otherwise required by the provisions of Paragraph 11 hereof, the
aggregate number of shares of Common Stock deliverable upon the exercise of
Options pursuant to the Plan shall not exceed 499,432 Shares. Such Shares may
either be authorized but unissued Shares or treasury Shares.
If Options should expire, become unexercisable or be forfeited for any
reason without having been exercised in full, the Shares which were subject to
such Options thereto shall, unless the Plan shall have been terminated, be
available for the grant of other Options under the Plan.
4. Administration of the Plan.
(a) Composition of Committee. The Plan shall be administered by the
Committee which shall consist of not less than three Directors appointed by
the Board. All persons designated as members of the Committee shall be
"disinterested persons" within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934, as amended.
(b) Powers of the Committee. The Committee is authorized (but only to the
extent not contrary to the express provisions of the Plan or to resolutions
adopted by the Board) to interpret the Plan, to prescribe, amend and rescind
rules and regulations relating to the Plan, to determine the form and content
of Options to be issued under the Plan and to make other determinations
necessary or advisable for the administration of the Plan, and shall have and
may exercise such other power and authority as may be delegated to it by the
Board from time to time. A majority of the entire Committee shall constitute a
quorum and the action of a majority of the members present at any meeting at
which a quorum is present shall be deemed the action of the Committee.
(c) Effect of Committee's Decision. All decisions, determinations and
interpretations of the Committee shall be final and conclusive on all persons
affected thereby.
5. Eligibility.
Options may be granted to each such Employees of the Bank, or any present
or future Parent or Subsidiary, as shall be designated by the Committee. An
Optionee who has been granted an Option may, if otherwise eligible, be granted
an additional Option or Options.
The aggregate fair market value (determined pursuant to Paragraph 7 hereof
as of the date the Option is granted) of the Shares with respect to which
incentive stock options are exercisable for the first time by an Employee
during any calendar year (under all incentive stock option plans, as defined
in Section 422A of the Code, of the Bank or any present or future Parent or
Subsidiary of the Bank) shall not exceed $100,000. Notwithstanding the prior
provisions of this paragraph, the Committee may grant Options in excess of the
foregoing limitations, in which case such Options granted in excess of such
limitation shall be Options which are not incentive stock options, as defined
in Section 422A of the Code, pursuant to Section 422A(d) of the Code.
6. Term of Plan; Term of Options.
(a) The Plan shall continue in effect for a term of ten years from its
Effective Date, unless sooner terminated pursuant to Paragraph 16. No Option
shall be granted under the Plan after ten years from the Effective Date.
(b) The term of each Option granted under the Plan shall be established by
the Committee, but shall not exceed 10 years; provided, however, that in the
case of an Employee who owns Shares representing
<PAGE>
more than 10% of the outstanding Common Stock at the time the Option is
granted, the term of such Option shall not exceed five (5) years.
7. Option Price.
The price per share at which each Option granted under the Plan may be
exercised shall not, as to any particular Option, be less than the fair market
value of the Optioned Shares at the time such Option is granted. In the case
of an Employee who owns Shares representing more than 10% of the Bank's
outstanding Shares of Common Stock at the time the Option is granted, the
Option price shall not be less than 110% of the fair market value of the
Optioned Shares at the time the Option is granted. If the Common Stock is
traded otherwise than on a national securities exchange at the time of the
granting of an Option, then the Option price per Share shall be not less than
the mean between the bid and asked price on the date the Option is granted or,
if there is no bid and asked price on said date, then on the next prior
business day on which there was a bid and asked price. If no such bid and
asked price is available, then the Option price per Share shall be determined
by the Committee. If the Common Stock is listed on a national securities
exchange (including the NASDAQ National Market System) at the time of granting
an Option, then the price per share shall be not less than the average of the
highest and lowest selling price on such exchange on the date such Option is
granted or if there were no sales on said date, then the Option price shall be
not less than the mean between the bid and asked price on such date.
Notwithstanding anything herein to the contrary, the Committee shall have
the authority to cancel outstanding Options with the consent of the Optionee
and to reissue new Options at a lower exercise price equal to the then fair
market value per share of Common Stock in the event that the fair market value
per share of Common Stock at any time prior to the date of exercise of
outstanding Options falls below the exercise price of such Options.
8. Exercise of Option.
(a) Procedure for Exercise. Any Option granted hereunder shall be
exercisable at such times and under such conditions as shall be permissible
under the terms of the Plan and of the Option granted to an Optionee. An
Option may not be exercised for a fractional Share.
An Option granted pursuant to the Plan may be exercised, subject to
provisions relative to its termination and limitations on its exercise, from
time to time, only (1) written notice of intent to exercise the Option with
respect to a specified number of shares, and (2) Payment to the Bank
(contemporaneously with delivery of such notice), in cash, in Common Stock, or
a combination of cash and Common Stock, of the amount of the Option price for
the number of Shares with respect to which the Option is then being exercised.
Each such notice and payment shall be delivered, or mailed by prepaid
registered or certified mail, addressed to the Treasurer of the Bank at the
Bank's executive offices. Common Stock utilized in full or partial payment of
the exercise price shall be valued at its fair market value at the date of
exercise.
(b) Exercise During Employment or Following Death or Disability. Except as
may be specifically provided for by the terms of an Option as may be
authorized by the Committee at the time of such grant, an Option may be
exercised by an Optionee only while he is an Employee and has maintained
Continuous Status as an Employee since the date of the grant of the Option or
within three months after termination of status as an Employee(but not later
than the date on which the Option would otherwise expire), except if his
Continuous Employment is terminated by reason of (1) "Cause" (which for
purposes hereof shall have the same meaning as defined in the then existing
employment agreement between the Optionee and the Bank or any of its Parent or
Subsidiaries and , in the absence of any such agreement, shall have the
meaning defined in 12 C.F.R. 563.39(b)(1) as in effect on the Effective Date
of the Plan), then the Optionee's rights to exercise such Option shall expire
on the date of such termination; (2) death, then to the extent that the
Optionee would have been entitled to exercise the Option immediately prior to
his death, such Option of the deceased Optionee my be exercised within two
years from the date of his death (but not later than the date on which the
Option would otherwise expire) by the personal representatives of his estate
or person or persons to whom his rights under such Option shall have passed by
will or by laws of descent and distribution; or (3) Permanent and Total
Disability (as such term is defined in Section
<PAGE>
22(e)(3) of the Code), then to the extent that the Optionee would have been
entitled to exercise the Option immediately prior to his Permanent and Total
Disability, such Option may be exercised within one year from the date of such
Permanent and Total Disability, but not later than the date on which the
Option would otherwise expire. Notwithstanding the provisions of any Option
which provides for its exercise in installments as designated by the
Committee, such Option shall become immediately exercisable upon death or
Permanent and Total Disability, as defined herein, of the Optionee.
The Committee's determination whether an Optionee's employment has ceased,
and the effective date thereof shall be final and conclusive on all persons
affected thereby.
(c) Notwithstanding anything herein to the contrary, in no event shall any
Option granted pursuant to the Plan be exercisable for six months from the
date of grant, except in the event of the death or disability of the Optionee.
9. Change of Control
Notwithstanding the provisions of any Option or other award which provides
for its exercise in installments as designated by the Committee, such Option
shall become immediately exercisable in the event of a change in control or
offer to effect a change in control. At such time, the Optionee shall, at the
discretion of the Committee, be entitled to receive cash in an amount equal to
the excess of the fair market value of the Common Stock (determined in
accordance with Paragraph 7) subject to such Option over the Option price of
such shares, in exchange for the surrender of such Options by the Optionee.
For purposes of this Paragraph, "change in control" shall mean the acquisition
of the beneficial ownership (as that term is defined in Rule 13d-3 of the
General Rules and Regulations under the Securities Exchange Act of 1934) of
25% or more of the voting securities of the Bank by any person or by persons
acting as a group within the meaning of Section 13(d) of the Securities
Exchange Act of 1934; and "offer" shall refer to every offer to buy or
acquire, solicitation of an offer to sell, tender offer for, or request of
invitation for tenders of, the voting securities of the Bank for value, as
such term is defined under 12 C.F.R. 563b.3(i). A change in control shall not
be deemed to have occurred with respect to a transaction in which the Bank
forms a holding company without change in the respective beneficial ownership
interests of its stockholders other than pursuant to the exercise of any
dissenter and appraisal rights or the purchase of shares by underwriters in
connection with a public offering. The term "person" refers to an individual
or a corporation, partnership, trust, association, joint venture, pool,
syndicate, sole proprietorship, unincorporated organization or any other form
of entity not specifically listed herein. The decision of the Committee as to
whether a change in control, or offer to effect a change in control, has
occurred shall be conclusive and binding.
10. Non-Transferability of Options.
Options granted under the Plan may not be sold, pledged, assigned,
hypothecated, transferred or disposed of in any manner other than by will or
by the laws of descent and distribution. An Option may be exercised, during
the lifetime of the Optionee, only by the Optionee.
11. Effect of Change in Common Stock Subject to the Plan.
In the event that each of the outstanding Shares of Common Stock (other
than Shares held by dissenting shareholders) shall be changed into or
exchanged for a different number or kind of shares of capital stock of the
Bank or of another corporation (whether by reason of merger, consolidation,
recapitalization, reclassification, stock dividend, split-up, combination of
shares, or otherwise), then there shall be substituted for each share of
Common Stock then under Option or available for Option the number and kind of
shares of capital stock into which each outstanding Share of Common Stock
(other than Shares held by dissenting stockholders) shall be so changed or for
which each such share shall be so exchanged, together with an appropriate
adjustment of the Option price.
In the event there shall be any change in the number of, or kind of,
issued shares of Common Stock, or of any capital stock or other securities
into which such Common Stock shall have been changed, or for which it shall
have been exchanged,
<PAGE>
then if the Committee shall, in its discretion, determine that such change
equitably requires an adjustment in the number, or kind, or Option price of
Shares then subject to an Option or available for Option, such adjustment
shall be made by the Board and shall be effective and binding for all purposes
of the Plan.
12. Time of Granting Options.
The date of grant of an Option under the Plan shall, for all purposes, be
the date on which the Committee makes the determination of granting such
Option. Notice of the determination shall be given to each Optionee to whom an
Option is so granted within a reasonable time after the date of such grant.
13. Effective Date.
The Plan shall become effective upon adoption by the Board. Options may be
granted prior to ratification of the Plan by the stockholders of the Bank if
the exercise of such Options is subject to such stockholder ratification. The
Plan shall continue in effect for a term of ten years from the Effective Date,
unless sooner terminated under Paragraph 16 of the Plan.
14. Approval by Stockholders.
The Plan shall be approved by stockholders of the Bank within twelve (12)
months before or after the Effective Date.
15. Modification of Options.
At any time, and from time to time, the Board may authorize the Committee
to direct execution of an instrument providing for the modification of any
outstanding Option, provided no such modification, extension or renewal shall
confer on the holder of said Option any right or benefit which could not be
conferred on him by the grant of a new Option at such time, or impair the
Option without the consent of the holder of the Option.
16. Amendment and Termination of the Plan.
The Board may amend, modify or terminate the Plan, except that no action of
the Board may materially increase (other than as provided in Paragraph 11) the
maximum number of Shares permitted to be optioned or become available for the
granting of Options under the Plan, materially increase the benefits accruing
to Optionees, or materially modify the requirements for eligibility for
participation in the Plan, unless such action of the Board shall be subject to
approval or ratification by the stockholders of the Bank.
No action of the Board may, without the consent of the holder of the
Option, impair any then outstanding Option.
17. Conditions Upon Issuance of Shares.
Shares of Common Stock shall not be issued with respect to any Option
granted under the Plan unless the issuance and delivery of such Shares shall
comply with all relevant provisions of law, including, without limitation, the
Securities Act of 1933, as amended, the rules and regulations promulgated
thereunder, any applicable state securities law, and the requirements of any
stock exchange upon which the Shares may then be listed.
<PAGE>
Inability of the Bank to obtain approval from any regulatory body or
authority deemed by the Bank's counsel to be necessary to the lawful issuance
and sale of any Shares hereunder shall relieve the Bank of any liability in
respect of the non-issuance or sale of such Shares. As a condition to the
exercise of an Option, the Bank may require the person exercising the Option
to make such representations and warranties as may be necessary to assure the
availability of an exemption from the registration requirements of federal or
state securities law.
18. Reservation of Shares.
The Bank, during the term of the Plan, will reserve and keep available a
number of Shares sufficient to satisfy the requirements of the Plan.
19. Withholding Tax.
Where an Optionee or other person is entitled to receive Shares pursuant to
the exercise of an Option pursuant to the Plan, the Bank shall have the right
to require the Optionee or such other person to pay the Bank the amount of any
taxes which the Bank is required to withhold with respect to such Shares, or,
in lieu thereof, to retain, or sell without notice, a number of such Shares
sufficient to cover the amount required to be withheld.
20. Governing Law.
The Plan shall be governed by and construed in accordance with the laws of
the Commonwealth of Virginia, except to the extent that Federal law shall be
deemed to apply.
<PAGE>
Amendment
to the
Virginia Beach Federal Financial Corporation
1991 Stock Option Plan
1. Revision to the Plan by addition of a new Section 21 to read as follows:
21. Options Granted to Directors.
(a) Options will be granted to each Director of the Company who is not
otherwise an employee of the Company, or any subsidiary thereof, as follows:
Effective February 25, 1993, each such director shall be granted Options to
purchase 10,000 shares of Common Stock at an exercise price equal to the
closing price of such Common Stock on the date of stockholder ratification of
this Section 21. Options granted pursuant to this Section shall not be deemed
incentive stock options within the meaning of Section 422 of the Code, will be
exercisable immediately upon the date it is granted subject to stockholder
ratification of the Plan and will remain exercisable for up to ten years from
such date of grant. For such purposes, if the Common Stock is traded otherwise
than on a national securities exchange at the time of stockholder ratification
of the Options, then the price per Share of the Optioned Stock shall be not
less than the mean between the bid and asked price on the date of stockholder
ratification or, if there is no bid and asked price on said date, then on the
next prior business day on which there was a bid and asked price. If no such
bid and asked price is available, then the price per Share shall be determined
by the Committee. If the Common Stock is listed on a national securities
exchange at the time of stockholder ratification, then the price per Share
shall be not less than the average of the highest and lowest selling price on
such exchange on such date, or if there were no sales on said date, then the
price shall be not less than the mean between the bid and asked price on such
date. Such Options may be exercised only while the Optionee is a Director of
the company, or within three (3) years after termination of the Optionee's
status as a Director but not later than the date on which such Options would
otherwise expire, or in the event of such person's death during the term of
his directorship, by the personal representative of such person's estate or
person or persons to whom his rights under such Option shall have passed by
will or by the laws of descent and distribution. Such Options of the deceased
Director may be exercised within three (3) years from the date of such
person's death, but not later than the date on which the Option would
otherwise expire. Unless otherwise inapplicable, or inconsistent with the
provisions of this paragraph, the Options to be granted to directors hereunder
shall be subject to all other provisions of this Plan. Notwithstanding
anything herein to the contrary, Options granted pursuant to this Section
shall not be exercisable for a period of six months from the date of
stockholder ratification of this Section, except in the event of death or
disability.
(b) Additional grants of Options shall be awarded to Directors of the
Company who are not otherwise employees as follows: At the first meeting of
the Board following the 1994 Annual Meeting, and annually thereafter for the
next four years, each such director then serving shall be granted additional
Options to purchase 2,000 shares of Common Stock at the fair market value of
such Common Stock on the date of grant. Such Options shall be subject to the
other related terms and conditions specified at Section 21(a), herein.
Notwithstanding the foregoing, a maximum of 160,000 Options to purchase Common
Stock shall be awarded to such directors pursuant to the terms of the Section
21. An annual grant of Options to directors shall be reduced pro rata to the
extent that such number of Options available for grant shall be limited.
EXHIBIT 10.27
VIRGINIA BEACH FEDERAL FINANCIAL CORPORATION
1997 DIRECTORS STOCK COMPENSATION PLAN
1. PURPOSE OF THE PLAN. The Plan shall be known as the Virginia Beach
Federal Financial Corporation ("Company") 1997 Directors Stock Compensation
Plan (the "Plan"). The purpose of the Plan is to retain and reward qualified
personnel for positions of substantial responsibility as members of the Board
of Directors of the Company or any present or future parent or subsidiary of
the Company to promote the success of the business. The Plan is intended to
provide for the grant of Stock Options that are not "incentive Stock Options,"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code").
2. DEFINITIONS. The following words and phrases when used in this Plan with
an initial capital letter, unless the context clearly indicates otherwise,
shall have the meaning as set forth below. Wherever appropriate, the masculine
pronoun shall include the feminine pronoun and the singular shall include the
plural.
(a) "Award" means the grant by the Committee or in accordance with the
terms of the Plan of a Stock Option.
(b) "Board" shall mean the Board of Directors of the Company, or any
successor or parent corporation thereto.
(c) "Change in Control" shall mean: (i) the sale of all, or a material
portion, of the assets of the Company; (ii) the merger or recapitalization of
the Company whereby the Company is not the surviving entity; (iii) a change in
control of the Company, as otherwise defined or determined by the Office of
Thrift Supervision or regulations promulgated by it; or (iv) the acquisition,
directly of indirectly, of the beneficial ownership (within the meaning of
that term as it is used in Section 13(d) of the Securities Exchange Act of
1934 and the rules and regulations promulgated thereunder) of twenty-five
percent (25%) or more of the outstanding voting securities of the Company by
any person, trust, entity or group. This limitation shall not apply to the
purchase of shares by underwriters in connection with a public offering of
Company stock, or the purchase of shares of up to 25% of any class of
securities of the Company by a tax-qualified employee stock benefit plan. The
term "person" refers to an individual or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship,
unincorporated organization or any other form of entity not specifically
listed herein. The decision of the Committee as to whether a Change in Control
has occurred shall be conclusive and binding.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended, and
regulations promulgated thereunder.
(e) "Committee" shall mean the Board or the Stock Option Committee
appointed by the Board in accordance with Section 5(a) of the Plan.
(f) "Common Stock" shall mean the common stock of the Company, or any
successor or parent corporation thereto.
(g) "Company" shall mean the Virginia Beach Federal Financial Corporation,
the parent corporation of the Savings Bank, or any successor or Parent
thereof.
(h) "Director" shall mean a member of the Board of the Company, or any
successor or parent corporation thereto.
<PAGE>
(i) "Director Emeritus" shall mean a person serving as a director emeritus,
advisory director, consulting director, or other similar position as may be
appointed by the Board of Directors of the Savings Bank or the Company from
time to time.
(j) "Disability" means any physical or mental impairment which renders the
Participant incapable of continuing in the employment or service of the
Savings Association or the Parent in his then current capacity as determined
by the Committee.
(k) "Effective Date" shall mean December 11, 1997.
(l) "Employee" shall mean any person employed by the Company or any present
or future Parent or subsidiary of the Company. "Non-Employee" shall mean an
individual not employed by the Company or any present or future Parent or
Subsidiary of the Company.
(m) "Fair Market Value" shall mean: (i) if the Common Stock is traded
otherwise than on a national securities exchange, then the Fair Market Value
per Share shall be equal to the mean between the last bid and ask price of
such Common Stock on such date or, if there is no bid and ask price on said
date, then on the immediately prior business day on which there was a bid and
ask price. If no such bid and ask price is available, then the Fair Market
Value shall be determined by the Committee in good faith; or (ii) if the
Common Stock is listed on a national securities exchange (including the NASDAQ
National Market System), then the Fair Market Value per Share shall be not
less than the average of the highest and lowest selling price of such Common
Stock on such exchange on such date, or if there were no sales on said date,
then the Fair Market Value shall be not less than the mean between the last
bid and ask price on such date.
(n) "Option", or "Stock Option" shall mean an Award granted pursuant to
this Plan providing the holder of such Option with the right to purchase
Common Stock.
(o) "Optioned Stock" shall mean stock subject to an Option granted pursuant
to the Plan.
(p) "Optionee" shall mean any person who received an Option or Award
pursuant to the Plan.
(q) "Parent" shall mean any present or future corporation which would be a
"parent corporation" as defined in Sections 424(e) and (g) of the Code.
(r) "Participant" means any director of the Company or any Parent or
Subsidiary of the Company or any other person providing a service to the
Company who is selected by the Committee to receive an Award, or who by the
express terms of the Plan is granted an Award.
(s) "Plan" shall mean the Virginia Beach Federal Financial Corporation 1997
Directors Stock Compensation Plan.
(t) "Savings Bank" shall mean First Coastal Bank, Virginia Beach, Virginia,
or any successor corporation thereto.
(u) "Share" shall mean one share of the Common Stock.
(v) "Subsidiary" shall mean any present or future corporation which
constitutes a "subsidiary corporation" as defined in Sections 424(f) and (g)
of the Code.
3. SHARES SUBJECT TO THE PLAN. Except as otherwise required by the
provisions of Section 11 hereof, the aggregate number of Shares with respect
to which Awards may be made pursuant to the Plan shall not exceed 25,000
Shares. Such Shares may either be from authorized but unissued shares or
shares purchased in the market for Plan purposes. If an Award shall expire,
become unexercisable, or be forfeited for any reason prior to its exercise,
new Awards may be granted under the Plan with respect to the number of Shares
as to which such expiration has occurred.
<PAGE>
4. SIX MONTH HOLDING PERIOD.
Except in the event of the death or disability of the Optionee or a Change
in Control of the Company, a minimum of six months must elapse between the
date of the grant of an Option and the date of the sale of the Common Stock
received through the exercise of such Option.
5. ADMINISTRATION OF THE PLAN.
(A) COMPOSITION OF THE COMMITTEE. The Plan shall be administered by the
Board of Directors of the Company or a Committee which shall consist of not
less than two Directors of the Company appointed by the Board and serving at
the pleasure of the Board. All persons designated as members of the Committee
shall meet the requirements of a "Non-Employee Director" within the meaning of
Rule 16b-3 under the Securities Exchange Act of 1934, as amended, as found at
17 CFRss.240.16b-3.
(B) POWERS OF THE COMMITTEE. The Committee is authorized (but only to the
extent not contrary to the express provisions of the Plan or to resolutions
adopted by the Board) to interpret the Plan, to prescribe, amend and rescind
rules and regulations relating to the Plan, to determine the form and content
of Awards to be issued under the Plan and to make other determinations
necessary or advisable for the administration of the Plan, and shall have and
may exercise such other power and authority as may be delegated to it by the
Board from time to time. A majority of the entire Committee shall constitute a
quorum and the action of a majority of the members present at any meeting at
which a quorum is present shall be deemed the action of the Committee. In no
event may the Committee revoke outstanding Awards without the consent of the
Participant.
The President of the Company and such other officers as shall be designated
by the Committee are hereby authorized to execute written agreements
evidencing Awards on behalf of the Company and to cause them to be delivered
to the Participants. Such agreements shall set forth the Option exercise
price, the number of shares of Common Stock subject to such Option, the
expiration date of such Options, and such other terms and restrictions
applicable to such Award as are determined in accordance with the Plan or the
actions of the Committee.
(C) EFFECT OF COMMITTEE'S DECISION. All decisions, determinations and
interpretations of the Committee shall be final and conclusive on all persons
affected thereby.
6. ELIGIBILITY FOR AWARDS AND LIMITATIONS.
(a) The Committee shall from time to time determine the Participants who
shall be granted Awards under the Plan and the number of Awards to be granted
to each such persons. In selecting Participants and in determining the number
of Shares of Common Stock to be granted to each such Participant, the
Committee may consider the nature of the prior and anticipated future services
rendered by each such Participant, each such Participant's current and
potential contribution to the Company and such other factors as the Committee
may, in its sole discretion, deem relevant. Participants who have been granted
an Award may, if otherwise eligible, be granted additional Awards.
(b) In no event shall Shares subject to Options granted to any Participant
exceed more than 12.5% of the total number of Shares authorized for delivery
under the Plan.
7. TERM OF THE PLAN. The Plan shall continue in effect for a term of ten
(10) years from the Effective Date, unless the Plan is terminated by the Board
in accordance with the Plan.
8. TERMS AND CONDITIONS OF STOCK OPTIONS. Stock Options may be granted or
awarded only to Participants. Each Stock Option granted pursuant to the Plan
shall be evidenced by an instrument in such form as the Committee shall from
time to time approve. Each Stock Option granted pursuant to the Plan shall
comply with, and be subject to, the following terms and conditions:
<PAGE>
(A) OPTION PRICE. The price per Share at which each Stock Option granted by
the Committee under the Plan may be exercised shall not, as to any particular
Stock Option, be less than the Fair Market Value of the Common Stock on the
date that such Stock Option is granted.
(B) PAYMENT. Full payment for each Share of Common Stock purchased upon the
exercise of any Stock Option granted under the Plan shall be made at the time
of exercise of each such Stock Option and shall be paid in cash (in United
States Dollars), Common Stock or a combination of cash and Common Stock.
Common Stock utilized in full or partial payment of the exercise price shall
be valued at the Fair Market Value at the date of exercise. The Company shall
accept full or partial payment in Common Stock only to the extent permitted by
applicable law. No Shares of Common Stock shall be issued until full payment
has been received by the Company, and no Optionee shall have any of the rights
of a stockholder of the Company until Shares of Common Stock are issued to the
Optionee.
(C) TERM OF STOCK OPTION. The term of exercisability of each Stock Option
granted pursuant to the Plan shall be not more than ten (10) years from the
date each such Stock Option is granted.
(D) EXERCISE GENERALLY. Except as otherwise provided by the terms of the
Plan or by action of the Committee at the time of the grant of the Options,
the Options granted will be first exercisable as of the date of grant of such
options and shall remain exercisable during such periods of service as a
Director or Director Emeritus.
(E) CASHLESS EXERCISE. Subject to vesting requirements, if applicable, an
Optionee who has held an Stock Option for at least six months may engage in
the "cashless exercise" of the Option. Upon a cashless exercise, an Optionee
shall give the Company written notice of the exercise of the Option together
with an order to a registered broker-dealer or equivalent third party, to sell
part or all of the Optioned Stock and to deliver enough of the proceeds to the
Company to pay the Option exercise price and any applicable withholding taxes.
If the Optionee does not sell the Optioned Stock through a registered
broker-dealer or equivalent third party, the Optionee can give the Company
written notice of the exercise of the Option and the third party purchaser of
the Optioned Stock shall pay the Option exercise price plus any applicable
withholding taxes to the Company.
(F) TRANSFERABILITY. An Stock Option granted pursuant to the Plan shall be
exercised during an Optionee's lifetime only by the Optionee to whom it was
granted and shall not be assignable or transferable otherwise than by will or
by the laws of descent and distribution.
9. AWARDS TO DIRECTORS
As of December 11, 1997, Stock Options to purchase 3,125 shares of Common
Stock shall be granted to each Director of the Company that is not on that
date an employee of the Company or the Savings Bank. Such Options shall be
exercisable at a price equal to the Fair Market Value of the Common Stock as
of the date of grant of such Options. Such Options will be first exercisable
as of the Date of Grant. Such Options shall continue to be exercisable for a
period of ten years following the date of grant without regard to the
continued services of such Director as an Employee, Director or Director
Emeritus. In the event of the Optionee's death, such Options may be exercised
by the personal representative of his estate or person or persons to whom his
rights under such Option shall have passed by will or by the laws of descent
and distribution. Unless otherwise inapplicable, or inconsistent with the
provisions of this paragraph, the Options to be granted to Directors hereunder
shall be subject to all other provisions of this Plan.
10. WITHHOLDING TAX. The Company shall have the right to deduct from all
amounts paid in cash with respect to the cashless exercise of Options under
the Plan any taxes required by law to be withheld with respect to such cash
payments. Where a Participant or other person is entitled to receive Shares
pursuant to the exercise of an Option, the Company shall have the right to
require the Participant or such other person to pay the Company the amount of
any taxes which the Company is required to withhold with respect to such
Shares, or, in lieu thereof, to retain, or to sell without notice, a number of
such Shares sufficient to cover the amount required to be withheld.
<PAGE>
11. RECAPITALIZATION, MERGER, CONSOLIDATION, CHANGE IN CONTROL AND OTHER
TRANSACTIONS.
(A) ADJUSTMENT. Subject to any required action by the stockholders of the
Company, within the sole discretion of the Committee, the aggregate number of
Shares of Common Stock for which Options may be granted hereunder, the number
of Shares of Common Stock covered by each outstanding Option, and the exercise
price per Share of Common Stock of each such Option, shall all be
proportionately adjusted for any increase or decrease in the number of issued
and outstanding Shares of Common Stock resulting from a subdivision or
consolidation of Shares (whether by reason of merger, consolidation,
recapitalization, reclassification, split-up, combination of shares, or
otherwise) or the payment of a stock dividend (but only on the Common Stock)
or any other increase or decrease in the number of such Shares of Common Stock
effected without the receipt or payment of consideration by the Company (other
than Shares held by dissenting stockholders).
(B) CHANGE IN CONTROL. All outstanding Awards shall become immediately
exercisable in the event of a Change in Control of the Company, as determined
by the Committee. In the event of such a Change in Control, the Committee and
the Board of Directors will take one or more of the following actions to be
effective as of the date of such Change in Control:
(i) provide that such Options shall be assumed, or equivalent options shall
be substituted, ("Substitute Options") by the acquiring or succeeding
corporation (or an affiliate thereof), provided that: the shares of stock
issuable upon the exercise of such Substitute Options shall constitute
securities registered in accordance with the Securities Act of 1933, as
amended, ("1933 Act") or such securities shall be exempt from such
registration in accordance with Sections 3(a)(2) or 3(a)(5) of the 1933 Act,
(collectively, "Registered Securities"), or in the alternative, if the
securities issuable upon the exercise of such Substitute Options shall not
constitute Registered Securities, then the Optionee will receive upon
consummation of the Change in Control transaction a cash payment for each
Option surrendered equal to the difference between (1) the Fair Market Value
of the consideration to be received for each share of Common Stock in the
Change in Control transaction times the number of shares of Common Stock
subject to such surrendered Options, and (2) the aggregate exercise price of
all such surrendered Options, or
(ii) in the event of a transaction under the terms of which the holders of
the Common Stock of the Company will receive upon consummation thereof a cash
payment (the "Merger Price") for each share of Common Stock exchanged in the
Change in Control transaction, to make or to provide for a cash payment to the
Optionees equal to the difference between (A) the Merger Price times the
number of shares of Common Stock subject to such Options held by each Optionee
(to the extent then exercisable at prices not in excess of the Merger Price)
and (B) the aggregate exercise price of all such surrendered Options in
exchange for such surrendered Options.
(C) EXTRAORDINARY CORPORATE ACTION. Notwithstanding any provisions of the
Plan to the contrary, subject to any required action by the stockholders of
the Company, in the event of any Change in Control, recapitalization, merger,
consolidation, exchange of Shares, spin-off, reorganization, tender offer,
partial or complete liquidation or other extraordinary corporate action or
event, the Committee, in its sole discretion, shall have the power, prior or
subsequent to such action or event to:
(i) appropriately adjust the number of Shares of Common Stock subject to
each Option, the Option exercise price per Share of Common Stock, and the
consideration to be given or received by the Company upon the exercise of
any outstanding Option;
(ii) cancel any or all previously granted Options, provided that
appropriate consideration is paid to the Optionee in connection therewith;
and/or
(iii)make such other adjustments in connection with the Plan as the
Committee, in its sole discretion, deems necessary, desirable, appropriate
or advisable.
(D) ACCELERATION. The Committee shall at all times have the power to
accelerate the exercise date of Options previously granted under the Plan.
<PAGE>
(E) NON-RECURRING DIVIDENDS. Upon the payment of a special or non-recurring
cash dividend that has the effect of a return of capital to the stockholders,
the Option exercise price per share shall be adjusted proportionately and in
an equitable manner.
Except as expressly provided in Sections 11(a), 11(b) and 11(e) hereof, no
Optionee shall have any rights by reason of the occurrence of any of the
events described in this Section 11.
12. TIME OF GRANTING OPTIONS. The date of grant of an Option under the Plan
shall, for all purposes, be the date specified in accordance with the Plan or
the date on which the Committee makes the determination of granting such
Option. Notice of the grant of an Option shall be given to each individual to
whom an Option is so granted within a reasonable time after the date of such
grant in a form determined by the Committee.
13. MODIFICATION OF OPTIONS. At any time and from time to time, the Board
may authorize the Committee to direct the execution of an instrument providing
for the modification of any outstanding Option, provided no such modification,
extension or renewal shall confer on the holder of said Option any right or
benefit which could not be conferred on the Optionee by the grant of a new
Option at such time, or shall not materially decrease the Optionee's benefits
under the Option without the consent of the holder of the Option, except as
otherwise permitted under Section 14 hereof.
14. AMENDMENT AND TERMINATION OF THE PLAN.
(A) ACTION BY THE BOARD. The Board may alter, suspend or discontinue the
Plan.
(B) CHANGE IN APPLICABLE LAW. Notwithstanding any other provision contained
in the Plan, in the event of a change in any federal or state law, rule or
regulation which would make the exercise of all or part of any previously
granted Option unlawful or subject the Company to any penalty, the Committee
may restrict any such exercise without the consent of the Optionee or other
holder thereof in order to comply with any such law, rule or regulation or to
avoid any such penalty.
15. CONDITIONS UPON ISSUANCE OF SHARES: LIMITATIONS ON OPTION EXERCISE:
CANCELLATION OF OPTION RIGHTS.
(a) Shares shall not be issued with respect to any Option granted under the
Plan unless the issuance and delivery of such Shares shall comply with all
relevant provisions of applicable law, including, without limitation, the
Securities Act of 1933, as amended, the rules and regulations promulgated
thereunder, any applicable state securities laws and the requirements of any
stock exchange upon which the Shares may then be listed.
(b) The inability of the Company to obtain any necessary authorizations,
approvals or letters of non-objection from any regulatory body or authority
deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares issuable hereunder shall relieve the Company of any
liability with respect to the non-issuance or sale of such Shares.
(c) As a condition to the exercise of an Option, the Company may require
the person exercising the Option to make such representations and warranties
as may be necessary to assure the availability of an exemption from the
registration requirements of federal or state securities law.
(d) Notwithstanding anything herein to the contrary, upon the termination
of employment or service of an Optionee by the Company or its Subsidiaries for
"cause" within the sole discretion of the Board, all Options held by such
Participant shall cease to be exercisable as of the date of such termination
of employment or service.
(e) Upon the exercise of an Option by an Optionee (or the Optionee's
personal representative), the Committee, in its sole and absolute discretion,
may make a cash payment to the Optionee, in whole or in
<PAGE>
part, in lieu of the delivery of shares of Common Stock. Such cash payment to
be paid in lieu of delivery of Common Stock shall be equal to the difference
between the Fair Market Value of the Common Stock on the date of the Option
exercise and the exercise price per share of the Option. Such cash payment
shall be in exchange for the cancellation of such Option. Such cash payment
shall not be made in the event that such transaction would result in liability
to the Optionee or the Company under Section 16(b) of the Securities Exchange
Act of 1934, as amended, and regulations promulgated thereunder.
16. RESERVATION OF SHARES. During the term of the Plan, the Company will
reserve and keep available a number of Shares sufficient to satisfy the
requirements of the Plan.
17. UNSECURED OBLIGATION. No Participant under the Plan shall have any
interest in any fund or special asset of the Company by reason of the Plan or
the grant of any Option under the Plan. No trust fund shall be created in
connection with the Plan or any grant of any Option hereunder and there shall
be no required funding of amounts which may become payable to any Participant.
18. NO EMPLOYMENT RIGHTS. No Director, Employee or other person shall have
a right to be selected as a Participant under the Plan. Neither the Plan nor
any action taken by the Committee in administration of the Plan shall be
construed as giving any person any rights of employment retention as an
Employee, Director or in any other capacity with the Company, the Savings
Association or other Subsidiaries.
19. GOVERNING LAW. The Plan shall be governed by and construed in
accordance with the laws of the State of Virginia, except to the extent that
federal law shall be deemed to apply.
EXHIBIT 10.29
VIRGINIA BEACH FEDERAL FINANCIAL CORPORATION
1998 STOCK OPTION PLAN
1. Purpose of the Plan. The Plan shall be known as the Virginia Beach Federal
Financial Corporation ("Company") 1998 Stock Option Plan (the "Plan"). The
purpose of the Plan is to attract and retain qualified personnel for
positions of substantial responsibility and to provide additional incentive
to officers, directors, key employees and other persons providing services
to the Company, or any present or future parent or subsidiary of the
Company to promote the success of the business. The Plan is intended to
provide for the grant of "Incentive Stock Options,"within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code")
and Non-Incentive Stock Options, options that do not so qualify. The
provisions of the Plan relating to Incentive Stock Options shall be
interpreted to conform to the requirements of Section 422 of the Code.
2. Definitions. The following words and phrases when used in this Plan with an
initial capital letter, unless the context clearly indicates otherwise,
shall have the meaning as set forth below. Wherever appropriate, the
masculine pronoun shall include the feminine pronoun and the singular shall
include the plural.
(a) "Award" means the grant by the Committee of an Incentive Stock Option
or a Non-Incentive Stock Option, or any combination thereof, as
provided in the Plan.
(b) "Board" shall mean the Board of Directors of the Company, or any
successor or parent corporation thereto.
(c) "Change in Control" shall mean: (i) the sale of all, or a material
portion, of the assets of the Company; (ii) the merger or
recapitalization of the Company whereby the Company is not the
surviving entity; (iii) a change in control of the Company, as
otherwise defined or determined by the Office of Thrift Supervision or
regulations promulgated by it; or (iv) the acquisition, directly or
indirectly, of the beneficial ownership (within the meaning of that
term as it is used in Section 13(d) of the Securities Exchange Act of
1934 and the rules and regulations promulgated thereunder) of
twenty-five percent (25%) or more of the outstanding voting securities
of the Company by any person, trust, entity or group. This limitation
shall not apply to the purchase of shares by underwriters in connection
with a public offering of Company stock, or the purchase of shares of
up to 25% of any class of securities of the Company by a tax-qualified
employee stock benefit plan which is exempt from the approval
requirements, set forth under 12 C.F.R.ss.574.3 (c) (1) (vi) as now in
effect or as may hereafter be amended. The term "person" refers to an
individual or a corporation, partnership, trust, association, joint
venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed
herein. The decision of the Committee as to whether a Change in Control
has occurred shall be conclusive and binding.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended, and
regulations promulgated thereunder.
(e) "Committee" shall mean the Board or the Stock Option Committee
appointed by the Board in accordance with Section 5 (a) of the Plan.
(f) "Common Stock" shall mean the common stock of the Company, or any
successor or parent corporation thereto.
<PAGE>
(g) "Company" shall mean the Virginia Beach Federal Financial Corporation,
the parent corporation of the Savings Bank, or any successor or Parent
thereof.
(h) "Continuous Employment" or "Continuous Status as an Employee" shall
mean the absence of any interruption or termination of employment with
the Company or any present or future Parent or Subsidiary of the
Company. Employment shall not be considered interrupted in the case of
sick leave, military leave or any other leave of absence approved by
the Company or in the case of transfers between payroll locations, of
the Company or between the Company, its Parent, its Subsidiaries or a
successor.
(i) "Director shall mean a member of the Board of the Company, or any
successor or parent corporation thereto.
(j) "Director Emeritus" shall mean a person serving as a director emeritus,
advisory director, consulting director, or other similar position as
may be appointed by the Board of Directors of the Savings Bank or the
Company from time to time.
(k) "Disability" means (a) with respect to Incentive Stock Options, the
"permanent and total disability" of the Employee as such term is
defined at Section 22 (e) (3) of the Code; and (b) with respect to
Non-Incentive Stock Options, any physical or mental impairment which
renders the Participant incapable of continuing in the employment or
service of the Savings Bank or the Parent in his then current capacity
as determined by the Committee.
(l) "Dividend Equivalent Rights" shall mean the rights to receive a cash
payment in accordance with Section 12 of the Plan.
(m) "Effective Date" shall mean the date specified in Section 15 hereof.
(n) "Employee" shall mean any person employed by the Company or any present
or future Parent or Subsidiary of the Company.
(o) "Fair Market Value" shall mean: (i) if the Common Stock is traded
otherwise than on a national securities exchange, then the Fair Market
Value per Share shall be equal to the mean between the last bid and ask
price of such Common Stock on such date or, if there is no bid and ask
price on said date, then on the immediately prior business day on which
there was a bid and ask price. If no such bid and ask price is
available, then the Fair Market Value shall be determined by the
Committee in good faith; or (ii) if the Common Stock is listed on a
national securities exchange (including the NASDAQ National Market),
then the Fair Market Value per Share shall be not less than the average
of the highest and lowest selling price of such Common Stock on such
exchange on such date, or if there were no sales on said date, then the
Fair Market Value shall be not less than the mean between the last bid
and ask price on such date.
(p) "Incentive Stock Option" or "ISO" shall mean an option to purchase
Shares granted by the Committee pursuant to Section 8 hereof which is
subject to the limitations and restrictions of Section 8 hereof and is
intended to qualify as an incentive stock option under Section 422 of
the Code.
(q) "Non-Incentive Stock Option" or "Non-ISO" shall mean an option to
purchase Shares granted pursuant to Section 9 hereof, which option is
not intended to qualify under Section 422 of the Code.
(r) "Option" shall mean an Incentive Stock Option or Non-Incentive Stock
Option granted pursuant to this Plan providing the holder of such
Option with the right to purchase Common Stock.
(s) "Optioned Stock" shall mean stock subject to an Option granted pursuant
to the Plan.
<PAGE>
(t) "Optionee" shall mean any person who received an Option or Award
pursuant to the Plan.
(u) "Parent" shall mean any present or future corporation which would be a
"parent corporation" as defined in Sections 424 (e) and (g) of the
Code.
(v) "Participant" means any director, officer or key employee of the
Company or any Parent or Subsidiary of the Company or any other person
providing a service to the Company who is selected by the Committee to
receive an Award, or who by the express terms of the Plan is granted an
Award.
(w) "Plan" shall mean the Virginia Beach Federal Financial Corporation 1998
Stock Option Plan.
(x) "Retirement" shall mean termination of service in all capacities as an
Employee, Director and Director Emeritus following attainment of not
less than age 55 and completion of not less than ten years of service
to the Company or the Savings Bank. Service to the Company or the
Savings Bank rendered prior to the Effective Date shall be recognized
in determining eligibility to meet the requirements of Retirement under
the Plan.
(y) "Savings Bank" shall mean First Coastal Bank, Virginia Beach, Virginia,
or any successor corporation thereto.
(z) "Share" shall mean one share of the Common Stock.
(aa)"Subsidiary" shall mean any present or future corporation which
constitutes a "subsidiary corporation" as defined in Sections 424 (f)
and (g) of the Code.
3. Shares Subject to the Plan. Except as otherwise required by the
provisions of Section 13 hereof, the aggregate number of Shares with
respect to which Awards may be made pursuant to the Plan shall not
exceed *490,500 Shares. Such Shares may either be from authorized but
unissued shares or shares purchased in the market for Plan purposes. If
an Award shall expire, become unexercisable, or be forfeited for any
reason prior to its exercise, new Awards may be granted under the Plan
with respect to the number of Shares as to which such expiration has
occurred.
4. Six Month Holding Period.
Subject to vesting requirements, if applicable, except in the event of
death or Disability of the Optionee or a Change in Control of the
Company, a minimum of six months must elapse between the date of the
grant of an Option and the date of the sale of the Common Stock
received through the exercise of such Option.
5. Administration of the Plan.
(a) Composition of the Committee. The Plan shall be administered by
the Board of Directors of the Company or a Committee which shall
consist of not less than two Directors of the Company appointed by
the Board and serving at the pleasure of the Board. All persons
designated as members of the Committee shall meet the requirements
of a "Non-Employee Director" within the meaning of Rule 16b-3
under the Securities Exchange Act of 1934, as amended, as found at
17 CFR ss.240.16b-3.
================================================================================
*Approximately 10% of shares outstanding as of date of Board adoption.
<PAGE>
(b) Powers of the Committee. The Committee is authorized (but only to
the extent not contrary to the express provisions of the Plan or
to resolutions adopted by the Board) to interpret the Plan, to
prescribe, amend and rescind rules and regulations relating to the
Plan, to determine the form and content of Awards to be issued
under the Plan and to make other determinations necessary or
advisable for the administration of the Plan, and shall have and
may exercise such other power and authority as may be delegated to
it by the Board from time to time. A majority of the entire
Committee shall constitute a quorum and the action of a majority
of the members present at any meeting at which a quorum is present
shall be deemed the action of the Committee. In no event may the
Committee revoke outstanding Awards without the consent of the
Participant.
The President of the Company and such other officers as shall be
designated by the Committee are hereby authorized to execute written
agreements evidencing Awards on behalf of the Company and to cause them
to be delivered to the Participants. Such agreements shall set forth
the Option exercise price, the number of shares of Common Stock subject
to such Option, the expiration date of such Options, and such other
terms and restrictions applicable to such Award as are determined in
accordance with the Plan or the actions of the Committee.
(c) Effect of Committee's Decision. All decisions, determinations and
interpretations of the Committee shall be final and conclusive on
all persons affected thereby.
6. Eligibility for Awards and Limitations.
(a) The Committee shall from time to time determine the officers,
Directors, key employees and other persons who shall be granted
Awards under the Plan, the number of Awards to be granted to each
such persons, and whether Awards granted to each such Participant
under the Plan shall be Incentive and/or Non-Incentive Stock
Options. In selecting Participants and in determining the number
of Shares of Common Stock to be granted to each such Participant,
the Committee may consider the nature of the prior and anticipated
future services rendered by each such Participant, each such
Participant's current and potential contribution to the Company
and such other factors as the Committee may, in its sole
discretion, deem relevant. Participants who have been granted an
Award may, if otherwise eligible, be granted additional Awards.
(b) The aggregate Fair Market Value (determined as of the date the
Option is granted) of the Shares with respect to which Incentive
Stock Options are exercisable for the first time by each Employee
during any calendar year (under all Incentive Stock Option plans,
as defined in Section 422 of the Code, of the Company or any
present or future Parent or Subsidiary of the Company) shall not
exceed $100,000. Notwithstanding the prior provisions of this
Section 6, the Committee may grant Options in excess of the
foregoing limitations, provided said Options shall be clearly and
specifically designated as not being Incentive Stock Options.
(c) In no event shall Shares subject to Options granted to any
individual Participant exceed more than 50% of the total number of
Shares authorized for delivery under the Plan.
7. Term of the Plan. The Plan shall continue in effect for a term of ten (10)
years from the Effective Date, unless sooner terminated pursuant to Section 18
hereof. No Option shall be granted under the Plan after ten (10) years from the
Effective Date.
8 Terms and Conditions of Incentive Stock Options. Incentive Stock Options may
be granted only to Participants who are Employees. Each Incentive Stock Option
granted pursuant to the Plan shall be evidenced by an instrument in such form as
the Committee shall from time to time approve. Each Incentive Stock Option
granted pursuant to the Plan shall comply with, and be subject to, the following
terms and conditions:
<PAGE>
(a) Option Price.
(i) The price per Share at which each Incentive Stock Option granted
by the Committee under the Plan may be exercised shall not, as to
any particular Incentive Stock Option, be less than the Fair
Market Value of the Common Stock on the date that such Incentive
Stock Option is granted.
(ii) In the case of an Employee who owns Common Stock representing more
than ten percent (10%) of the outstanding Common Stock at the time
the Incentive Stock Option is granted, the Incentive Stock Option
exercise price shall not be less than one hundred and ten percent
(110%) of the Fair Market Value of the Common Stock on the date
that the Incentive Stock Option is granted.
(b) Payment. Full payment for each Share of Common Stock purchased upon the
exercise of any Incentive Stock Option granted under the Plan shall be
made at the time of exercise of each such Incentive Stock Option and
shall be paid in cash (in United States Dollars), Common Stock or a
combination of cash and Common Stock. Common Stock utilized in full or
partial payment of the exercise price shall be valued at the Fair
Market Value at the date of exercise. The Company shall accept full or
partial payment in Common Stock only to the extent permitted by
applicable law. No Shares of Common Stock shall be issued until full
payment has been received by the Company, and no Optionee shall have
any of the rights of a stockholder of the Company until Shares of
Common Stock are issued to the Optionee.
(c) Term of Incentive Stock Option. The term of exercisability of each
Incentive Stock Option granted pursuant to the Plan shall be not more
than ten (10) years from the date each such Incentive Stock Option is
granted, provided that in the case of an Employee who owns stock
representing more than ten percent (10%) of the Common Stock
outstanding at the time the Incentive Stock Option is granted, the term
of exercisability of the Incentive Stock Option shall not exceed five
(5) years.
(d) Exercise Generally. Except as otherwise provided in Section 10 hereof,
no Incentive Stock Option may be exercised unless the Optionee shall
have been in the employ of the Company at all times during the period
beginning with the date of grant of any such Incentive Stock Option and
ending on the date three (3) months prior to the date of exercise of
any such Incentive Stock Option. The Committee may impose additional
conditions upon the right of an Optionee to exercise any Incentive
Stock Option granted hereunder which are not inconsistent with the
terms of the Plan or the requirements for qualification as an Incentive
Stock Option. Except as otherwise provided by the terms of the Plan or
by action of the Committee at the time of the grant of the Options, all
Options granted will be first exercisable as of the date of grant.
(e) Cashless Exercise. Subject to vesting requirements, if applicable, an
Optionee who has held an Incentive Stock Option for at least six months
may engage in the "cashless exercise" of the Option. Upon a cashless
exercise, an Optionee shall give the Company written notice of the
exercise of the Option together with an order to a registered
broker-dealer or equivalent third party, to sell part or all of the
Optioned Stock and to deliver enough of the proceeds to the Company to
pay the Option exercise price and any applicable withholding taxes. If
the Optionee does not sell the Optioned Stock through a registered
broker-dealer or equivalent third party, the Optionee can give the
Company written notice of the exercise of the Option and the third
party purchaser of the Optioned Stock shall pay the Option exercise
price plus any applicable withholding taxes to the Company.
(f) Transferability. An Incentive Stock Option granted pursuant to the Plan
shall be exercised during an Optionee's lifetime only by the Optionee
to whom it was granted and shall not be assignable or transferable
otherwise than by will or by the laws of descent and distribution.
<PAGE>
9. Terms and Conditions of Non-Incentive Stock Options. Each Non-Incentive
Stock Option granted pursuant to the Plan shall be evidenced by an
instrument in such form as the Committee shall from time to time
approve. Each Non-Incentive Stock Option granted pursuant to the Plan
shall comply with and be subject to the following terms and conditions.
(a) Option Price. The exercise price per Share of Common Stock for
each Non-Incentive Stock Option granted pursuant to the Plan shall
be at such price as the Committee may determine in its sole
discretion, but in no event less than the Fair Market Value of
such Common Stock on the date of grant as determined by the
Committee in good faith.
(b) Payment. Full payment for each Share of Common Stock purchased
upon the exercise of any Non-Incentive Stock Option granted under
the Plan shall be made at the time of exercise of each such
Non-incentive Stock Option and shall be paid in cash (in United
States Dollars), Common Stock or a combination of cash and Common
Stock. Common Stock utilized in full or partial payment of the
exercise price shall be valued at its Fair Market Value at the
date of exercise. The Company shall accept full or partial payment
in Common Stock only to the extent permitted by applicable law. No
Shares of Common Stock shall be issued until full payment has been
received by the Company and no Optionee shall have any of the
rights of a stockholder of the Company until the Shares of Common
Stock are issued to the Optionee.
(c) Term. The term of exercisability of each Non-Incentive Stock
Option granted pursuant to the Plan shall be not more than ten
(10) years from the date each such Non-Incentive Stock Option is
granted.
(d) Exercise Generally. The Committee may impose additional conditions
upon the right of any Participant to exercise any Non-Incentive
Stock Option granted hereunder which is not inconsistent with the
terms of the Plan. Except as otherwise provided by the terms of
the Plan or by action of the Committee at the time of the grant of
the Options, the Options will be first exercisable as of the date
of grant.
(e) Cashless Exercise. Subject to vesting requirements, if applicable,
an Optionee who has held a Non-Incentive Stock Option for at least
six months may engage in the "cashless exercise" of the Option.
Upon a cashless exercise, an Optionee shall give the Company
written notice of the exercise of the Option together with an
order to a registered broker-dealer or equivalent third party, to
sell part or all of the Optioned Stock and to deliver enough of
the proceeds to the Company to pay the Option exercise price and
any applicable withholding taxes. If the Optionee does not sell
the Optioned Stock through a registered broker-dealer or
equivalent third party, the Optionee can give the Company written
notice of the exercise of the Option and the third party purchaser
of the Optioned Stock shall pay the Option exercise price plus any
applicable withholding taxes to the Company.
(f) Transferability. Any Non-Incentive Stock Option granted pursuant
to the Plan shall be exercised during an Optionee's lifetime only
by the Optionee to whom it was granted and shall not be assignable
or transferable otherwise than by will or by the laws of descent
and distribution.
<PAGE>
10. Effect of Termination of Employment, Disability, Death and Retirement
on Incentive Stock Options.
(a) Termination of Employment. In the event that any Optionee's
employment with the Company shall terminate for any reason, other
than Disability or death, all of any such Optionee's Incentive
Stock Options, and all of any such Optionee's rights to purchase
or receive Shares of Common Stock pursuant thereto, shall
automatically terminate on (A) the earlier of (i) or (ii): (i) the
respective expiration dates of any such Incentive Stock Options,
or (ii) the expiration of not more than three (3) months after the
date of such termination of employment; or (B) at such later date
as is determined by the Committee at the time of the grant of such
Award based upon the Optionee's continuing status as a Director or
Director Emeritus of the Savings Bank or the Company, but only if,
and to the extent that, the Optionee was entitled to exercise any
such Incentive Stock Options at the date of such termination of
employment, and further that such Award shall thereafter be deemed
a Non-Incentive Stock Option. In the event that a Subsidiary
ceases to be a Subsidiary of the Company, the employment of all of
its employees who are not immediately thereafter employees of the
Company shall be deemed to terminate upon the date such Subsidiary
so ceases to be a Subsidiary of the Company.
(b) Disability. In the event that any Optionee's employment with the
Company shall terminate as the result of the Disability of such
Optionee, such Optionee may exercise any Incentive Stock options
granted to the Optionee pursuant to the Plan at any time prior to
the earlier of (I) the respective expiration dates of any such
Incentive Stock Options or (ii) the date which is one (1) year
after the date of such termination of employment, but only if, and
to the extent that, the Optionee was entitled to exercise any such
Incentive Stock Options at the date of such termination of
employment.
(c) Death. In the event of the death of an Optionee, any Incentive
Stock Options granted to such Optionee may be exercised by the
person or persons to whom the Optionee's rights under any such
Incentive Stock Options pass by will or by the laws of descent and
distribution (including the Optionee's estate during the period of
administration) at any time prior to the earlier of (I) the
respective expiration dates of any such Incentive Stock Options or
(ii) the date which is two (2) years after the date of death of
such Optionee but only if, and to the extent that, the Optionee
was entitled to exercise any such Incentive Stock Options at the
date of death. For purposes of this Section 10(c), any Incentive
Stock Option held by an Optionee shall be considered exercisable
at the date of his death if the only unsatisfied condition
precedent to the exercisability of such Incentive Stock Option at
the date of death is the passage of a specified period of time. At
the discretion of the Committee, upon exercise of such Options the
Optionee may receive Shares or cash or a combination thereof. If
cash shall be paid in lieu of Shares, such cash shall be equal to
the difference between the Fair Market Value of such Shares and
the exercise price of such Options on the exercise date.
(d) Incentive Stock Options Deemed Exercisable. For purposes of
Sections 10(a), 10(b) and 10(c) above, any Incentive Stock Option
held by any Optionee shall be considered exercisable at the date
of termination of employment if any such Incentive Stock Option
would have been exercisable at such date of termination of
employment without regard to the Disability or death of the
Participant.
<PAGE>
(e) Termination of Incentive Stock Options; Vesting Upon Retirement.
Except as may be specified by the Committee at the time of grant
of an Option, to the extent that any Incentive Stock Option
granted under the Plan to any Optionee whose employment with the
Company terminates shall not have been exercised within the
applicable period set forth in this Section 10, any such Incentive
Stock Option, and all rights to purchase or receive Shares of
Common Stock pursuant thereto, as the case may be, shall terminate
on the last day of the applicable period. Notwithstanding the
foregoing, the Committee may authorize at the time of the grant of
an Option that such Award shall be immediately 100% exercisable
upon the Retirement of the Optionee.
11. Effect of Termination of Employment, Disability, Death or Retirement on
Non-Incentive Stock Options. The terms and conditions of Non-Incentive
Stock Options relating to the effect of the Retirement or other
termination of an Optionee's employment or service, Disability of an
Optionee or his death shall be such terms and conditions as the
Committee shall, in its sole discretion, determine at the time of
termination of service, unless specifically provided for by the terms
of the Agreement at the time of grant of the Award.
12. Dividend Equivalent Rights. The committee, in its sole discretion, may
include as a term of any Option, the right of the Optionee to receive
Dividend Equivalent Rights. Such rights shall provide that upon the
payment of a cash dividend on the Common Stock, the holder of such
Options shall receive payment of compensation in an amount equivalent
to the dividend payable as if such Options had been exercised and such
Common Stock held as of the dividend record date. Such rights shall
expire upon the expiration or exercise of such underlying Options. Such
rights are non-transferable and shall attach to Options whether or not
such Options are immediately exercisable. The dividend equivalent
payments associated with Options shall be paid to the Option holder
within 30 days of the dividend payment date of the Common Stock.
13. Recapitalization, Merger, Consolidation, Change in Control and Other
Transactions.
(a) Adjustment. Subject to any required action by the stockholders of
the Company, within the sole discretion of the Committee, the
aggregate number of Shares of Common Stock for which Options may
be granted hereunder, the number of Shares of Common Stock covered
by each outstanding Option, and the exercise price per Share of
Common Stock of each such Option, shall all be proportionately
adjusted for any increase or decrease in the number of issued and
outstanding Shares of Common Stock resulting from a subdivision or
consolidation of Shares (whether by reason of merger,
consolidation, recapitalization, reclassification, split-up,
combination of shares, or otherwise) or the payment of a stock
dividend (but only on the Common Stock) or any other increase or
decrease in the number of such Shares of Common Stock effected
without the receipt or payment of consideration by the Company
(other than Shares held by dissenting stockholders).
(b) Change in Control. All outstanding Awards shall become immediately
exercisable in the event of a Change in Control of the Company. In
the event of such a Change in Control, the Committee and the Board
of Directors will take one or more of the following actions to be
effective as of the date of such Change in Control:
(i) provide that such Options shall be assumed, or equivalent
options shall be substituted, ("Substitute Options") by the
acquiring or succeeding corporation (or an affiliate
thereof), provided that: (A) any such Substitute Options
exchanged for Incentive Stock Options shall meet the
requirements of Section 424(a) of the Code, and (B) the
shares of
<PAGE>
stock issuable upon the exercise of such Substitute Options
shall constitute securities registered in accordance with the
Securities Act of 1933, as amended, ("1933 Act") or such
securities shall be exempt from such registration in
accordance with Sections 3(a) (2) or 3(a) (5) of the 1933
Act, (collectively, "Registered Securities"), or in
alternative, if the securities issuable upon the exercise of
such Substitute Options shall not constitute Registered
Securities, then the Optionee will receive upon consummation
of the Change in Control transaction a cash payment for each
Option surrendered equal to the difference between (1) the
Fair Market Value of the consideration to be received for
each share of Common Stock in the Change in Control
transaction times the number of shares of Common Stock
subject to such surrendered Options, and (2) the aggregate
exercise price of all such surrendered Options, or
(ii) in the event of a transaction under the terms of which the
holders of the Common Stock of the Company will receive upon
consummation thereof a cash payment (the "Merger Price") for
each share of Common Stock exchanged in the Change in Control
transaction, to make or to provide for a cash payment to the
Optionees equal to the difference between (A) the Merger
Price times the number of shares of Common Stock subject to
such Options held by each Optionee (to the extent then
exercisable at prices not in excess of the Merger Price and
(B) the aggregate exercise price of all such surrendered
Options in exchange for such surrendered Options.
(c) Extraordinary Corporate Action. Notwithstanding any provisions of
the Plan to the contrary, subject to any required action by the
stockholders of the Company, in the event of any Change in
Control, recapitalization, merger, consolidation, exchange of
Shares, spin-off, reorganization, tender offer, partial or
complete liquidation or other extraordinary corporate action or
event, the Committee, in its sole discretion, shall have the
power, prior or subsequent to such action or event to:
(i) appropriately adjust the number of Shares of Common Stock
subject to each Option, the Option exercise price per Share
of Common Stock, and the consideration to be given or
received by the Company upon the exercise of any outstanding
Option;
(ii) cancel any or all previously granted Options, provided that
appropriate consideration is paid to the Optionee in
connection therewith; and/or
(iii) make such other adjustments in connection with the Plan as
the Committee, in its sole discretion, deems necessary,
desirable, appropriate or advisable; provided, however, that
no action shall be taken by the Committee which would cause
Incentive Stock Otpions granted pursuant to the Plan to fail
to meet the requirements of Section 422 of the Code without
the consent of the Optionee.
(d) Acceleration. The Committee shall at all times have the power to
accelerate the exercise date of Options previously granted under
the Plan.
Except as expressly provided in Sections 13(a) or 13(b) hereof, no
Optionee shall have any rights by reason of the occurrence of any of the events
described in this Section 13.
14. Time of Granting Options. The date of grant of an Option under the Plan
shall, for all purposes, be the date on which the Committee makes the
determination of granting such Option. Notice of the grant of an Option
shall be given to each individual to whom an Option is so granted
within a reasonable time after the date of such grant in a form
determined by the Committee.
<PAGE>
15. Effective Date. The Plan shall become effective upon the date of
approval of the Plan by the stockholders of the Company. The Committee
may make a determination related to Awards prior to the Effective Date
with such Awards to be effective upon the date of stockholder approval
of the Plan.
16. Approval by Stockholders. The Plan shall be approved by stockholders of
the Company within twelve (12) months before or after the date the Plan
is approved by the Board.
17. Modification of Options. At any time and from time to time, the Board
may authorize the Committee to direct the execution of an instrument
providing for the modification of any outstanding Option, provided no
such modification, extension or renewal shall confer on the holder of
said Option any right or benefit which could not be conferred on the
Optionee by the grant of a new Option at such time, or shall not
materially decrease the Optionee's benefits under the Option without
the consent of the holder of the Option, except as otherwise permitted
under Section 18 hereof.
18. Amendment and Termination of the Plan.
(a) Action by the Board. The Board may alter, suspend or discontinue
the Plan, except that no action of the Board may increase (other
than as provided in Section 13 hereof) the maximum number of
Shares permitted to be optioned under the Plan, materially
increase the benefits accruing to Participants under the Plan or
materially modify the requirements for eligibility for
participation in the Plan unless such action of the Board shall be
subject to approval or ratification by the stockholders of the
Company.
(b) Change in Applicable Law. Notwithstanding any other provision
contained in the Plan, in the event of a change in any federal or
state law, rule or regulation which would make the exercise of all
or part of any previously granted Option unlawful or subject the
Company to any penalty, the Committee may restrict any such
exercise without the consent of the Optionee or other holder
thereof in order to comply with any such law, rule or regulation
or to avoid any such penalty.
19. Conditions Upon Issuance of Shares; Limitations on Option Exercise;
Cancellation of Option Rights.
(a) Shares shall not be issued with respect to any Option granted
under the Plan unless the issuance and delivery of such Shares
shall comply with all relevant provisions of applicable law,
including, without limitation, the Securities Act of 1933, as
amended, the rules and regulations promulgated thereunder, any
applicable state securities laws and the requirements of any stock
exchange upon which the Shares may then be listed.
(b) The inability of the Company to obtain any necessary
authorizations, approvals or letters of non-objection from any
regulatory body or authority deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares issuable
hereunder shall relieve the Company of any liability with respect
to the non-issuance or sale of such Shares.
(c) As a condition to the exercise of an Option, the Company may
require the person exercising the Option to make such
representations and warranties as may be necessary to assure the
availability of an exemption from the registration requirements of
federal or state securities law.
<PAGE>
(d) Notwithstanding anything herein to the contrary, upon the
termination of employment or service of an Optionee by the Company
or its Subsidiaries for "cause" as defined at 12 C.F.F. 563.39(b)
(1) as determined by the Board of Directors, all Options held by
such Participant shall cease to be exercisable as of the date of
such termination of employment or service.
(e) Upon the exercise of an Option by an Optionee (or the Optionee's
personal representative), the Committee, in its sole and absolute
discretion, may make a cash payment to the Optionee, in whole or
in part, in lieu of the delivery of shares of Common Stock. Such
cash payment to be paid in lieu of delivery of Common Stock shall
be equal to the difference between the Fair Market Value of the
Common Stock on the date of the Option exercise and the exercise
price per share of the Option. Such cash payment shall be in
exchange for the cancellation of such Option. Such cash payment
shall not be made in the event that such transaction would result
in liability to the Optionee or the Company under Section 16(b) of
the Securities Exchange Act of 1934, as amended, and regulations
promulgated thereunder.
20. Reservation of Shares. During the term of the Plan, the Company will
reserve and keep available a number of Shares sufficient to satisfy the
requirements of the Plan.
21. Unsecured Obligation. No Participant under the Plan shall have any
interest in any fund or special asset of the Company by reason of the
Plan or the grant of any Option under the Plan. No trust fund shall be
created in connection with the Plan or any grant of any Option
hereunder and there shall be no required funding of amounts which may
become payable to any Participant.
22. Withholding Tax. The Company shall have the right to deduct from all
amounts paid in cash with respect to the cashless exercise of Options
and Dividend Equivalent Rights under the Plan any taxes required by law
to be withheld with respect to such cash payments. Where a Participant
or other person is entitled to receive Shares pursuant to the exercise
of an Option, the Company shall have the right to require the
Participant or such other person to pay the Company the amount of any
taxes which the Company is required to withhold with respect to such
Shares, or, in lieu thereof, to retain, or to sell without notice, a
number of such Shares sufficient to cover the amount required to be
withheld.
23. No Employment Rights. No Director, Employee or other person shall have
a right to be selected as a Participant under the Plan. Neither the
Plan nor any action taken by the Committee in administration of the
Plan shall be construed as giving any person any rights of employment
or retention as an Employee, Director or in any other capacity with the
Company, the Savings Bank or other Subsidiaries.
24. Governing Law. The Plan shall be governed by and construed in
accordance with the laws of the Commonwealth of Virginia, except to the
extent that federal law shall be deemed to apply.
EXHIBIT 21
CENTURA BANKS, INC.
SUBSIDIARIES OF CENTURA BANKS, INC.
Subsidiary Name Location Percent Ownership
- --------------------------------------------------------------------------------
Centura Bank North Carolina 100%
Centura Capital Trust I Delaware 100%
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