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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, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
For the transition period from ______________ to ________________
Commission File Number: 1-10646
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RBC CENTURA BANKS, INC.
(Exact Name of Registrant as Specified in its Charter)
North Carolina 56-1688522
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1417 Centura Highway, 27804
Rocky Mount, North Carolina (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code:
(252) 454-4400
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
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Indicate by check mark whether RBC 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 RBC
Centura was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
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 RBC 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 28, 2002, there were 2,166,517,536 shares outstanding of RBC
Centura's common stock, no par value. Royal Bank of Canada owns one hundred
percent of RBC Centura's common stock.
The registrant meets the conditions set forth in General Instruction I(1)(a)
and (b) of Form 10-K and is therefore filing this Report with the reduced
disclosure format.
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CROSS REFERENCE
Page
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PART I Item 1 Business............................................................................. 4
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 RBC Centura's Common Equity and Related Shareholder Matters............... 13
Item 6 Selected Financial Data.............................................................. 13
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 13
Item 7A Quantitative and Qualitative Disclosures About Market Risk........................... 29
Item 8 Financial Statements and Supplementary Data.......................................... 29
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 65
PART III Item 10 Directors and Executive Officers of RBC Centura...................................... 66
Item 11 Executive Compensation............................................................... 66
Item 12 Security Ownership of Certain Beneficial Owners and Management....................... 66
Item 13 Certain Relationships and Related Transactions....................................... 66
PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................... 67
Information contained in or otherwise accessible through the websites
mentioned in this report does not form a part of this report. All references in
this report to web sites are inactive textual references and are for your
information reference only.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
A number of statements in this Form 10-K concerning RBC Centura Banks, Inc.
("RBC Centura" or the "Company") and its three principal, wholly-owned
subsidiaries, RBC Centura Bank (named Centura Bank prior to October 31, 2001,
the "Bank"), Centura Capital Trust I ("CCT1") and Triangle Capital Trust
("TCT"), are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, including statements regarding the
financial conditions, results of operations and businesses of RBC Centura, RBC
Centura's plans, goals, objectives, expectations, projections, estimates, and
intentions. One can identify these forward-looking statements by the use of
words such as "expects," "plans," "believes," "will," "estimates," "intends,"
"projects," "goals," and other words of similar meaning. One can also identify
them by the fact that they do not relate strictly to historical or current
facts. By their very nature, forward-looking statements involve inherent risks
and uncertainties, both general and specific, and risks exist that predictions,
forecasts, projections and other forward-looking statements will not be
achieved. RBC Centura cautions readers not to place undue reliance on these
statements as a number of important factors could cause actual results to
differ materially from the plans, objectives, expectations, estimates and
intentions expressed in such forward-looking statements. Factors that might
cause such a change include, but are not limited to (i) customer and deposit
attrition or loss of revenue following completed mergers may be greater than
expected; (ii) competitive pressure in the banking industry may increase
significantly; (iii) changes in the interest rate, currency exchange rate and
inflation rate may reduce margins; (iv) general economic conditions, globally,
nationally or regionally, may be less favorable than expected, resulting in,
among other things, credit quality deterioration and the possible impairment of
collectibility of loans; (v) the impact of changes in monetary and fiscal
policies, laws, rules and regulations; (vi) the impact of the
Gramm-Leach-Bliley Act of 1999; (vii) changes in business conditions and
inflation; (viii) the impact to revenue and expenses in the event that
announced mergers are not consummated as anticipated; (ix) the failure to
realize expected benefits from the acquisition of Centura Banks, Inc.
("Predecessor") by Royal Bank of Canada ("Royal Bank"); and (x) other risks and
factors identified in Predecessor's and RBC Centura's other past and future
filings with the Securities and Exchange Commission and other regulatory bodies.
RBC Centura cautions that the foregoing list of important factors is not
exhaustive. When relying on forward-looking statements to make decisions with
respect to RBC Centura, investors and others should carefully consider the
foregoing factors and other uncertainties and events. Additional information
with respect to factors that may cause actual results to differ materially from
those contemplated by such forward-looking statements is included in
Predecessor and RBC Centura's current and subsequent filings with the
Securities and Exchange Commission. RBC Centura does not undertake to update
any forward-looking statement that may be made from time to time by or on
behalf of RBC Centura.
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PART I
Item 1. Business
The information below in response to Item 1 is provided pursuant to General
Instruction I. (2) (d) of Form 10-K, which permits the omission of the
information required by such item so long as a brief description of the
business such as that set forth below is provided.
Registrant
As previously disclosed, at the close of business on June 5, 2001, Rock
Merger Subsidiary, Inc., a wholly-owned subsidiary of Royal Bank, a Canadian
chartered bank, merged with and into Predecessor and the surviving corporation
was Predecessor, which was renamed RBC Centura Banks, Inc. As a result of the
transaction, Predecessor became a wholly-owned subsidiary of Royal Bank. Each
share of Predecessor's outstanding common stock was converted into the right to
receive 1.684 common shares of Royal Bank. Each share of Rock Merger
Subsidiary, Inc. common stock issued and outstanding immediately prior to the
effective time of the merger was converted into one share of common stock of
RBC Centura. There are 2,166,517,536 shares of common stock currently
outstanding, all of which are owned by Royal Bank. The common stock is
registered under Section 12(g) of the Securities Exchange Act of 1934, as
amended. The business combination was accounted for as a purchase with Royal
Bank's basis being "pushed down" to RBC Centura, meaning that the equity basis
for RBC Centura became the transaction value of approximately $2.2 billion. See
Note 3 of the Notes to Consolidated Financial Statements for additional
information regarding this business combination.
RBC 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"). RBC Centura has three
principal wholly-owned subsidiaries, RBC Centura Bank (the "Bank"), Centura
Capital Trust I ("CCTI") and Triangle Capital Trust ("TCT"). RBC Centura
provides services and assistance to its wholly-owned subsidiaries and the
Bank's subsidiaries in the areas of strategic planning, administration, and
general corporate activities. In return, RBC Centura receives income and
dividends from the Bank, where most of RBC Centura's operations take place. The
majority of RBC Centura's executive officers, who are also officers of the
Bank, receive their entire salaries from RBC Centura. At December 31, 2001, RBC
Centura had total consolidated assets of $13.9 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, 2001, the Bank had 3,200 full-time and
279 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 and TCT are statutory business trusts established to facilitate the
issuance of trust preferred capital securities, a component of long-term debt.
During the fourth quarter of 2001 and the first quarter of 2002, RBC Centura
filed applications to the Federal Reserve and other applicable regulatory
authorities to acquire Prism Mortgage Company ("Prism"), RBC Trade Finance
(USA), Inc. ("TFI") and Security First Network Bank ("SFNB"), three indirect,
wholly-owned subsidiaries of Royal Bank. Prism is primarily engaged in the
business of originating, selling and brokering the sale of residential mortgage
loans while its Builder Finance Group is involved in originating and servicing
residential construction real estate loans. TFI provides financing to U.S.
subsidiaries of clients of Royal Bank. SFNB is a federal savings bank with
assets of approximately $102 million at December 31, 2001. Management expects
to complete these acquisitions by the end of the third quarter of 2002.
RBC Centura serves as the focal point for Royal Bank's personal and
commercial banking businesses in the United States. In doing so, RBC Centura's
mission is to be the primary provider of financial services to each of our
customers. To achieve our mission, RBC Centura provides a full range of
personal and commercial banking products and services, investment services and
certain insurance products. These products and services are delivered through
our customers' channel of preference. At December 31, 2001, RBC Centura served
its customers through 239 retail locations, and through
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254 automated teller machines ("ATMs") located throughout North Carolina, South
Carolina, and Virginia. RBC Centura also serves its customers through RBC
Centura Highway, its multifaceted customer access system that includes
telephone banking, PC banking, online bill payment and a suite of Internet
products and services that can be found at centura.com.
To support its efforts to achieve its mission, RBC Centura concentrates on
expanding its customer knowledge through the use of a customer database that
combines financial, demographic, and behavioral data, while preserving client
privacy. This information supports decision making about services offered,
delivery channels, locations, staffing, and marketing. Management anticipates
it will continue to use this information along with other tools to improve
sales effectiveness, encourage cross-sell opportunities, and to refine product
and service offerings and related delivery systems.
Segment Information
RBC Centura has two reportable segments: retail banking and treasury. These
segments represent business units that are managed separately. 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 RBC
Centura's 239 banking centers and are also offered through the RBC Centura
Highway. Treasury is responsible for RBC Centura's asset/liability management
including managing RBC Centura's investment portfolio.
Business lines which do not fall within the two categories mentioned above
are classified as "other." They include the asset management division, leasing
division, RBC Centura Securities, Inc., and insurance products. RBC Centura's
asset management division provides trust and fiduciary services as well as
retirement plan design and administration. RBC Centura's leasing division
offers equipment leasing products while RBC Centura Securities, Inc. offers a
competitive line of brokerage services. RBC Centura divested its personal and
commercial insurance business lines in 2001 and now offers credit related and
life insurance products, primarily through affiliates. The 49 percent equity
interest in First Greensboro Home Equity ("FGHE"), a mortgage and finance
company, was also included in "other" until the interest was divested in the
third quarter of 2001. See Note 21 of the Notes to Consolidated Financial
Statements for a description of the divestiture of this interest and the
resulting impact upon RBC Centura.
Competition
The financial services industry is highly competitive. RBC 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 such as the Bank may lend to a single borrower, or to a
group of related borrowers, is limited to a percentage of a Bank's
shareholder's equity, competitors larger than RBC Centura will have higher
lending limits than does the Bank.
RBC 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, RBC 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 a brief description of certain laws that relate
to the regulation and supervision of RBC Centura and its banking and
non-banking subsidiaries. The description does not purport to be complete and
is qualified in its entirety by reference to the applicable laws and
regulations.
General
RBC Centura is a bank holding company. As such, RBC Centura and its non-bank
subsidiaries are subject to the supervision, examination, and reporting
requirements of the Bank Holding Company Act of 1956 ("BHC Act") and various
regulations promulgated by the Federal Reserve Board. RBC Centura Bank is a
North Carolina state chartered banking corporation and a Federal Reserve System
member bank, with deposits insured by the FDIC's insurance funds: the Bank
Insurance Fund and Savings Association Insurance Fund. The Bank is subject to
extensive state and federal regulation and examination by the office of the
North Carolina Commissioner of Banks (the "NC Commissioner") under the
direction and
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supervision of the North Carolina State Banking Commission (the "NC Banking
Commission"), by the Federal Reserve Board, as its primary federal regulator,
and by the FDIC, which insures its deposits to the maximum extent permitted by
law.
As a general rule the federal and state laws and regulations applicable to
banks regulate, among other things, the scope of their business, their
investments, the reserves required to be kept against deposits, dealings with
officers, directors and affiliates, the timing of the availability of deposited
funds and the nature and amount of and collateral for certain loans. The laws
and regulations governing the Bank generally have been promulgated to protect
depositors and not for the purpose of protecting shareholders. This regulatory
structure also gives the federal and state banking agencies extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate capital and loan loss reserves for
regulatory purposes. Any change in such regulation, whether by the NC Banking
Commission, the Federal Reserve Board, the FDIC or the United States Congress,
could have a material impact on RBC Centura, the Bank and their operations.
The following discussion summarizes part of the regulatory framework
applicable to banks and bank holding companies and provides certain specific
information related to RBC Centura.
Regulation of Bank Holding Companies
Bank holding companies are required to obtain the prior approval of the
Federal Reserve Board before they may:
. Acquire direct or indirect ownership or control of more than 5 percent of
the voting shares of any bank or bank holding company;
. Acquire all or substantially all of the assets of any bank or bank holding
company; or
. Merge or consolidate with any other bank holding company.
The Federal Reserve Board is required to consider the effect on competition
of an acquisition and 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.
In addition, the BHC Act prohibits a bank holding company that has not
declared its intent to become a "financial holding company" or does not qualify
as a "financial holding company" under the Gramm-Leach-Bliley Act ("GLBA"), as
more fully discussed below, from:
. Engaging in activities other than banking and managing or controlling
banks; and
. Acquiring or retaining direct or indirect control of more than 5 percent
of the voting shares of any company engaged in any activities other than
those activities determined by the Federal Reserve Board to be so closely
related to banking or managing or controlling banks as to be a proper
incident thereto.
Despite prior approval, the Federal Reserve Board 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.
As a bank holding company, RBC Centura is subject to these regulations of
the Federal Reserve Board.
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. As of December 31, 2001, the Bank was subject to this cross-guaranty
liability with respect to SFNB, a federal savings bank subsidiary of Royal
Bank, the common parent company of RBC Centura, the Bank and SFNB. The Bank
plans to merge SFNB into itself by the third quarter of 2002.
Interstate Banking
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
permits bank holding companies, with Federal Reserve Board approval, to acquire
banks located in states other than the holding company's home state, generally
6
without regard to whether the transaction is prohibited under state law. In
addition, national and state banks with different home states are permitted to
merge across state lines, with approval of the appropriate federal banking
agency, unless the home state of a participating bank passed legislation that
expressly prohibits interstate bank mergers.
Financial Services Modernization Legislation
The GLBA, which was enacted in November 1999 and most provisions of which
became effective in March 2000, permits greater affiliation among banks,
securities firms, insurance companies, and other companies under a new type of
financial services company known as a "financial holding company." A financial
holding company essentially is a bank holding company with significantly
expanded powers. Financial holding companies are authorized by statute to
engage in a number of financial activities previously impermissible or subject
to regulatory limitations for bank holding companies, including securities
underwriting, dealing and market making; sponsoring mutual funds and investment
companies; insurance underwriting and agency activities; and merchant banking
activities. A bank holding company may become a financial holding company if
each of its subsidiary banks is well-capitalized, well managed, and has at
least a "satisfactory" rating under the Community Reinvestment Act of 1977
("CRA").
RBC Centura has not yet elected to become a financial holding company. RBC
Centura believes that the GLBA will not have a material adverse effect on its
operations in the near term. RBC Centura was acquired on June 5, 2001 by Royal
Bank. Royal Bank is a financial holding company and does conduct many of the
activities permissible for financial holding companies in affiliates of RBC
Centura. For Royal Bank to maintain its status as a financial holding company,
the Bank will have to maintain its well-capitalized status, as described below.
Capital Adequacy
RBC Centura is required to comply with the minimum capital adequacy
standards established by the Federal Reserve Board. 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. This
portion of total capital is known as "Tier 1 capital". The minimum guideline
for the ratio of tier 1 capital to total risk-weighted assets is 4.0 percent.
The remainder, "tier 2 capital," may consist of subordinated debt, other
preferred stock, and a limited amount of loan loss reserves, and unrealized
gains on equity securities subject to limitations. At December 31, 2001 RBC
Centura was in compliance with the total capital ratio and the tier 1 capital
ratio requirements. Note 20 of the Notes to Consolidated Financial Statements
presents RBC Centura'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 4.0 percent. RBC Centura was in compliance with the minimum
tier 1 leverage ratio requirement as of December 31, 2001.
The Bank is also subject to risk-based and leverage capital requirements
adopted by the Federal Reserve Board. These requirements are similar to those
adopted by the Federal Reserve Board for bank holding companies as discussed
above. The Bank was in compliance with these minimum capital requirements as of
December 31, 2001 and the Bank's capital ratios are also presented in Note 20
of the Notes to Consolidated Financial Statements.
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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.
In January, the federal bank regulators adopted rules, effective April 1,
2002, governing the regulatory capital treatment of equity investments in
nonfinancial companies. The federal rules require a series of marginal capital
charges on covered equity investments that increase with the level of those
investments as a percentage of RBC Centura's Tier 1 capital. RBC Centura does
not expect the rule will have a material effect on the capital requirements or
strategic plans of RBC Centura or the Bank.
The U.S. federal bank regulatory agencies' risk-capital guidelines are based
upon the 1988 Capital Accord of the Basel Committee on Banking Supervision (the
"BIS"). The BIS is a committee of central banks and bank supervisors/regulators
from the major industrialized countries that develops broad policy guidelines
that each country's supervisors can use to determine the supervisory policies
they apply. In January 2001 the BIS released a proposal to replace the 1988
Capital Accord with a new capital accord that would set capital requirements
for operational risk and refine the existing capital requirements for credit
risk and market risk exposures. The 1988 Capital Accord does not include
separate capital requirements for operational risk. The BIS has stated that its
objective is to finalize a new capital accord in 2002 and for member countries
to implement the new accord in 2005. The ultimate timing for a new accord, and
the specifics of capital assessments for addressing operational risk, are
uncertain. However, RBC Centura expects that a new capital accord addressing
operational risk will eventually be adopted by the BIS and implemented by the
U.S. federal bank regulatory agencies. RBC Centura cannot determine whether new
capital requirements that may arise out of a new BIS capital accord will
increase or decrease minimum capital requirements applicable to RBC Centura and
the Bank, as well as Royal Bank.
Support of Subsidiary Bank
Under Federal Reserve Board policy, RBC Centura and Royal Bank, as bank
holding companies, are expected to act as sources of financial strength for,
and commit their resources to support, the Bank. This support may be required
at times when RBC Centura or Royal Bank 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
RBC Centura is a legal entity separate and distinct from its banking and
other subsidiaries. The principal sources of cash flow for RBC Centura are
dividends from its subsidiary depository institution, the Bank. There are
statutory and regulatory limitations on the payment of dividends by the Bank to
RBC Centura.
As to the payment of dividends, the Bank is subject to the laws and
regulations of the State of North Carolina, and to the regulations of the
Federal Reserve Board as the Bank's primary federal regulator. If the Federal
Reserve Board 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. 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. In furtherance of these policy
statements, the Bank, as a member of the Federal Reserve System, must obtain
the approval of the Federal Reserve Board for any dividend if the total of all
dividends declared by the member bank in any calendar year would exceed the
total of its net profits, as defined by the Federal Reserve Board, for that
year, combined with its retained net profits for the preceding two years.
The banking law of North Carolina (the "NC Banking Law") further provides
that, for a state chartered bank having a capital stock of $15,000 or more,
when its surplus is less than 50% of its paid-in capital stock, the bank shall
not declare any dividend until it has transferred from undivided profits to
surplus 25% of the undivided profits, or any lesser percentage that may be
required to restore the surplus to an amount equal to 50% of the paid-in
capital stock. Under the North Carolina Business Corporation Act state
chartered banks are prohibited from making dividends if after the distribution
the bank would
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not be able to pay its debts as they become due in the usual course of
business, or the bank's total assets would be less than the sum of its total
liabilities plus the amount that would be needed, if the corporation were to be
dissolved at the time of the distribution, to satisfy the preferential rights
upon dissolution of shareholders whose preferential rights are superior to
those receiving the distribution.
At December 31, 2001, under dividend restrictions imposed by federal and
state laws, the Bank, without obtaining governmental approvals, could declare
aggregate dividends to RBC Centura of approximately $30.9 million.
The payment of dividends by RBC Centura and its bank subsidiary may also be
affected or limited by other factors, such as the requirement to maintain
adequate capital.
Well Capitalized
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 relevant capital measures are the total capital ratio, the tier 1
capital ratio and the leverage ratio, each as described above. Under the
regulations, a bank will be:
. "well capitalized" if it has a total capital ratio of 10% or greater, a
tier 1 capital ratio of 6% or greater and a leverage ratio of 5% or
greater and is not subject to any order or written directive by any such
regulatory authority to meet and maintain a specific capital level for any
capital measure;
. "adequately capitalized" if it has a total capital ratio of 8% or greater,
a tier 1 capital ratio of 4% or greater and a leverage ratio of 4% or
greater (3% in certain circumstances) and is not "well capitalized";
. "undercapitalized" if it has a total capital ratio of less than 8%, a tier
1 capital ratio of less than 4% or a leverage ratio of less than 4% (3% in
certain circumstances);
. "significantly undercapitalized" if it has a total capital ratio of less
than 6%, a tier 1 capital ratio of less than 3% or a leverage ratio of
less than 3%; or
. "critically undercapitalized" if its tangible equity is equal to or less
than 2% of average quarterly tangible assets.
An institution may be downgraded to, or deemed to be in, a capital category
that is lower than is indicated by its capital ratios if it is determined to be
in an unsafe or unsound condition or if it receives an unsatisfactory
examination rating with respect to certain matters.
"Undercapitalized" depository institutions are subject to growth limitations
and restrictions on borrowing from the Federal Reserve System and are required
to submit a capital restoration plan. The federal banking agencies may not
accept a capital plan without determining, among other things, that the plan is
based on realistic assumptions and is likely to succeed in restoring the
depository institution's capital. In addition, for a capital restoration plan
to be acceptable, the depository institution's parent holding company must
guarantee that the institution will comply with such capital restoration plan.
The aggregate liability of the parent holding company is limited to the lesser
of (i) an amount equal to 5% of the depository institution's total assets at
the time it became "undercapitalized" and (ii) the amount which is necessary
(or would have been necessary) to bring the institution into compliance with
all capital standards applicable with respect to such institution as of the
time it fails to comply with the plan. If a depository institution fails to
submit an acceptable plan, it is treated as if it is "significantly
undercapitalized".
"Significantly undercapitalized" depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become "adequately capitalized", requirements to reduce total
assets and cessation of receipt of deposits from correspondent banks.
"Critically undercapitalized" institutions are subject to the appointment of
a receiver or conservator.
At December 31, 2001, RBC Centura and the Bank were well capitalized.
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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, with the "undercapitalized" category including institutions
that are undercapitalized, significantly undercapitalized, and critically
undercapitalized for prompt corrective action purposes.
Under the final risk-based assessment system there are nine assessment risk
classifications (i.e., 3 supervisory subgroups within each capital group) to
which different assessment rates are applied. Assessment rates for deposit
insurance currently range from zero basis points to 27 basis points per $100.00
of deposits. 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
the Bank. The assessment rates may be different for deposits insured under the
BIF and deposits insured under the SAIF. At December 31, 2001, the Bank had a
BIF deposit assessment base of approximately $5.1 billion and a SAIF deposit
assessment base of approximately $2.2 billion.
New legislation and regulatory initiatives may be introduced as early as the
second half of 2002, which may impact premium deposit insurance, even for well
capitalized and well managed banks. The amount of any such premiums will depend
on the outcome of legislative and regulatory initiatives as well as the BIF
loss experience and other factors, none of which RBC Centura is in a position
to predict at this time.
The Deposit Insurance Funds Act of 1996 also separated the Financing
Corporation ("FICO") assessment to service the interest on its bond obligations
from the BIF and SAIF assessments. The amount assessed on individual
institutions by the FICO is in addition to the amount, if any, paid for deposit
insurance. The current FICO annual assessment rate is 1.76 cents per $100 of
deposits.
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 of RBC Centura and the Bank do not know of any practice, condition,
or violation that might lead to termination of deposit insurance.
Transactions with Related Parties
Federal laws strictly limit the ability of banks to engage in certain
transactions with their affiliates, including their bank holding companies. For
the Bank, this applies to transactions with both RBC Centura and Royal Bank and
each of their respective direct or indirect subsidiaries. Transactions covered
by the federal laws between a subsidiary bank and its parent company or the
nonbank subsidiaries of the bank holding company are limited to 10 percent of a
bank subsidiary's capital and surplus and, with respect to such parent company
and all such nonbank subsidiaries, to an aggregate of 20 percent of the bank
subsidiary's capital and surplus. Further, loans and extensions of credit by
the subsidiary bank generally are required to be secured by eligible collateral
in specified amounts. Federal law also requires that all transactions between a
bank and its affiliates be on terms as favorable to the bank as transactions
with non-affiliates.
Federal law also limits a bank's authority to extend credit to its
directors, executive officers and 10 percent shareholders, as well as to
entities controlled by such persons. Among other things, extensions of credit
to insiders are required to 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 may 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 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
10
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.
North Carolina Banking Law
In addition to provisions previously discussed herein, the NC Banking Law
also contains detailed provisions governing the organization, establishment and
location of branches, deposit insurance requirements, power and duties of
banks, limitations on loans, investment operations, officers and directors and
transactions therewith, business combinations and change of control, as well as
other aspects of the Bank and its affairs. The NC Banking Law delegates
extensive rule-making power and administrative discretion to the NC Banking
Commissioner and the NC Banking Commission so that the supervision and
regulation of state chartered banks may be flexible and readily responsive to
changes in economic conditions and in deposit and lending practices.
The NC Banking Law provides state chartered banks with liberal powers and
authorizes such banks to invest in subsidiary entities that conduct all of the
activities conducted by federal banking entities, subject in each case to the
further requirements of law and regulation by the NC Banking Commissioner. The
FDIA, however, prohibits state chartered banks from making new investments,
loans, or becoming involved in activities as principal and equity investments
which are not permitted for national banks unless (i) the FDIC determines the
activity or investment does not pose a significant risk of loss to the SAIF and
(ii) the bank meets all applicable capital requirements. Accordingly, the
operating authority provided to the Bank by the NC Banking Law is restricted by
the FDIA.
The NC Banking Law also provides that a bank may invest, in the aggregate,
subject to the approval of the NC Banking Commissioner, up to 75% of its
unimpaired capital fund in the stock or assets of other corporations, firms,
partnerships, or companies.
Other State and Federal Regulations
RBC Centura is subject to extensive federal consumer privacy legislation and
regulations. The applicable legislative and regulatory requirements include,
among other things, full disclosure of RBC Centura's privacy policy to
consumers, and mandate offering the consumer the ability to "opt out" of having
non-public customer information disclosed to unaffiliated third parties. In
addition, the applicable federal statute and regulations permit the states to
adopt more extensive privacy protections through legislation or regulation.
Numerous other federal and state laws also affect RBC Centura's earnings and
activities including federal and state insurance, securities and consumer
protection laws. Legislation may be enacted or regulation imposed to further
regulate banking and financial services or to limit finance charges or other
fees or charges earned in such activities. There can be no assurance whether
any such legislation or regulation will place additional limitations on RBC
Centura's operations or adversely affect its earnings.
On October 26, 2001, the President signed into law comprehensive
anti-terrorism legislation known as the USA Patriot Act. Title III of the USA
Patriot Act requires financial institutions, including RBC Centura's bank and
broker-dealer subsidiaries, to help prevent, detect and prosecute international
money laundering and the financing of terrorism. RBC Centura's bank and
broker-dealer subsidiaries are in the process of augmenting their systems and
procedures to accomplish this. The Secretary of the Treasury has proposed
additional regulations to further implement Title III. Although we cannot
predict when and in what form these regulations will be adopted, we believe
that the cost of compliance with Title III of the USA Patriot Act is not likely
to be material to us.
Canadian Supervision and Regulation of Royal Bank
Royal Bank is a federally regulated financial institution governed by the
Bank Act (Canada). The Superintendent of Financial Institutions (Canada) is
responsible to the Minister of Finance (Canada) for the supervision of Royal
Bank and its Canadian loan and trust company and insurance subsidiaries.
Activities in which RBC Centura, the Bank and their subsidiaries engage and
investments by RBC Centura, the Bank and their subsidiaries can affect
compliance by Royal Bank with requirements of the Bank Act (Canada).
11
Item 2. Properties
The information below in response to Item 2 of Form 10-K is provided
pursuant to General Instruction I. (2) (d) of Form 10-K, which permits the
omission of the information required by such item so long as a brief
description of the material properties such as that set forth below is provided.
The main executive offices of RBC Centura and the Bank are located at 1417
Centura Highway, Rocky Mount, Nash County, North Carolina. The Bank operates
239 banking centers, of which 210 are located in North Carolina. The Bank also
operates 9 banking centers in South Carolina and 20 in the Hampton Roads region
of Virginia.
Item 3. Legal Proceedings
All claims against the Bank in an action filed in 1999 by Ingeborg Staton,
Mercedes Staton and trusts created by Ingeborg Staton and Mercedes Staton were
dismissed in March 2001. All claims against the Bank in two related actions
filed in 1996 by Philip A.R. Staton, Ingeborg Staton, Mercedes Staton, and
trusts created by Ingeborg Staton and Mercedes Staton were settled in April
2001 for an aggregate amount that Predecessor and the Bank consider immaterial
to their financial condition. In the aggregate, Predecessor recorded $19.1
million in litigation provisions for the period ended June 5, 2001 for the
settled cases and certain other legal proceedings.
In addition, various other legal proceedings against RBC Centura and its
subsidiaries have arisen from time to time in the normal course of business.
RBC Centura believes liabilities arising from these proceedings, if any, will
have no material adverse effect on the financial position or results of
operations of RBC Centura or its subsidiaries, taken as a whole.
Item 4. Submission of Matters to a Vote of Shareholders
Omitted Pursuant to General Instruction I. (2) (c) of Form 10-K.
12
PART II
Item 5. Market for RBC Centura's Common Equity and Related Shareholder Matters
See pages 8-9, 25, 54-55, and 63 of the Form 10-K for information regarding
the market for RBC Centura's common equity and related shareholder matters.
There is no established trading market for the common stock of RBC Centura.
All of the outstanding common stock of RBC Centura is owned by Royal Bank.
Prior to being acquired, Predecessor paid quarterly dividends. Although RBC
Centura has not paid any dividends to Royal Bank during 2001, under certain
conditions, RBC Centura may pay dividends to Royal Bank in future periods. For
a discussion of restrictions on RBC Centura's ability to pay dividends, please
see "Item 1--Business-- Supervision and Regulation--Payment of Dividends",
beginning on page 8.
Item 6. Selected Financial Data
The information called for by Item 6 has been omitted pursuant to General
Instruction I. (2) (a) of Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information below in response to Item 7 of Form 10-K is provided
pursuant to General Instruction I. (2) (a) of Form 10-K, which permits the
omission of the information required by such item so long as a narrative
analysis such as that set forth below is provided.
The following discussion and analysis is presented to assist in the
understanding and evaluation of the financial condition and results of
operations of RBC Centura. It should be read in conjunction with the audited
consolidated financial statements and footnotes presented on pages 29-65 and
the supplemental financial data appearing throughout this report. RBC Centura
is a bank holding company operating primarily in North Carolina, South
Carolina, and Virginia. Note 1 of the Notes to Consolidated Financial
Statements discusses its principal, wholly-owned subsidiaries, the Bank, CCTI
and TCT.
There have been no changes in accounting principles, practices or methods of
application during 2001 that would have a material impact on RBC Centura's
results of operations. See Note 1 of the Notes to Consolidated Financial
Statements for a description of RBC Centura's significant accounting policies.
Percentage and variance calculations contained herein have been calculated
based upon actual, not rounded, results.
SEGMENT INFORMATION
RBC Centura has two reportable segments: retail banking and treasury. These
segments represent business units that are managed separately. 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. RBC Centura
offers a wide array of products to individuals, small businesses, and
commercial customers. These products are primarily offered through RBC
Centura's 239 banking centers and are also offered through the RBC Centura
Highway. Treasury is responsible for RBC Centura's asset/liability management
activities including managing RBC Centura's investment portfolio.
Business lines which do not fall within the two categories mentioned above
are classified as "other." They include the asset management division, leasing
division, RBC Centura Securities, Inc., and insurance products. RBC Centura's
asset management division provides trust and fiduciary services as well as
retirement plan design and administration. RBC Centura's leasing division
offers equipment leasing products while RBC Centura Securities, Inc. offers a
competitive line of brokerage services. RBC Centura divested its personal and
commercial insurance business lines in 2001 and now offers credit related and
life insurance products, primarily through affiliates. The 49 percent equity
interest in FGHE was also included in "other" until the interest was divested
in the third quarter of 2001. See Note 21 of the Notes to Consolidated
Financial Statements for a description of the divestiture of this interest and
the resulting impact upon RBC Centura.
13
SUMMARY
As previously disclosed, at the close of business on June 5, 2001, Rock
Merger Subsidiary, Inc., a wholly-owned subsidiary of Royal Bank, merged with
and into Predecessor and the surviving corporation was Predecessor, which was
renamed RBC Centura Banks, Inc. As a result of the transaction, Predecessor
became a wholly-owned subsidiary of Royal Bank. Each share of Predecessor's
outstanding common stock was converted into the right to receive 1.684 common
shares of Royal Bank. Each share of Rock Merger Subsidiary, Inc. common stock
issued and outstanding immediately prior to the effective time of the merger
was converted into one share of common stock of RBC Centura. There are
2,166,517,536 shares of common stock currently outstanding, all of which are
owned by Royal Bank. The common stock is registered under Section 12(g) of the
Securities Exchange Act of 1934, as amended. The value of the transaction was
approximately $2.2 billion. The business combination was accounted for as a
purchase with Royal Bank's basis being "pushed down" to RBC Centura. The
purchase price was allocated to the estimated fair values of RBC Centura's
tangible and intangible assets and liabilities with the remainder allocated to
goodwill. As a result of the application of purchase accounting, RBC Centura
recorded premiums of $11.6 million and $70.8 million on the investment and loan
portfolios, respectively, and discounts of $32.3 million and $5.5 million on
deposits and long-term debt, respectively, which are appropriately being
amortized over the average life of the respective instruments.
In connection with the acquisition, RBC Centura recorded $1.2 billion and
$259.1 million in goodwill and core deposit intangibles, respectively. Goodwill
was assigned a life of 20 years while the core deposit intangible is being
amortized over a 10 year life. Under new accounting guidance discussed in Note
1 of the Notes to Consolidated Financial Statements, goodwill is considered to
have an infinite life and will no longer be amortized beginning in January of
2002, but rather will be subject to impairment evaluation at least annually. In
connection with the transaction, RBC Centura incurred merger-related and other
significant charges of $91.5 million, before tax. These merger-related charges
include termination of employment contracts, change of control payments, costs
of the transaction including legal, accounting, and investment banking fees,
cash settlement of the Predecessor's outstanding stock options, and certain
other expenses. Also included is a $1.9 million pension plan curtailment loss
resulting from the Predecessor discontinuing accruing benefits under its
pension plans for all participants except for certain groups of employees. See
Note 3 of the Notes to Consolidated Financial Statements for additional details
of amounts accrued, amounts utilized, and the remaining merger accrual balance.
For the year ended December 31, 2001, RBC Centura reported net income of
$86.2 million, excluding the after-tax loss on an equity investment of $26.7
million, and merger-related charge and other significant charges of $74.4
million, after-tax, incurred mainly as a result of the acquisition by Royal
Bank. Net income for the year ended December 31, 2000 was $134.6 million,
excluding $35.8 million of after-tax, merger-related and other significant
charges, the majority of which were associated with the acquisition of Triangle
Bancorp, Inc. ("Triangle"). Included in merger-related and other significant
charges during 2000 were $1.7 million of fixed asset write-offs resulting from
the Hannaford in-store closings in addition to $22.1 million in pre-tax losses
on securities sales incurred as a result of restructuring Triangle's investment
portfolio. See Table 1 for a combining schedule of the results of operations
for 2001. It is generally not appropriate to combine pre and post "push down"
periods; however, for purposes of comparison only, the following table combines
RBC Centura's results of operations from June 6, 2001 through December 31, 2001
with those of Predecessor for the period January 1, 2001 through June 5, 2001.
The combined results will generally serve as comparable amounts to the year
ended December 31, 2000 and will be utilized for purposes of providing
discussion and analysis of results of operations.
14
TABLE 1
Combining Schedule For Results Of Operations (thousands)
RBC Centura Predecessor Combined Predecessor
------------ ------------ ------------ ------------
June 6, 2001
through January 1, Year ended Year ended
December 31, 2001 through December 31, December 31,
2001 June 5, 2001 2001 2000
------------ ------------ ------------ ------------
Net interest income................................ $253,144 $181,767 $434,911 $420,078
Provision for loan losses.......................... 24,382 25,420 49,802 31,815
-------- -------- -------- --------
Net interest income after provision for loan losses 228,762 156,347 385,109 388,263
Noninterest income................................. 96,858 72,086 168,944 182,579
Securities gains (losses), net..................... 8,003 27,454 35,457 (36,859)
Loss on equity investment.......................... -- 42,203 42,203 --
Merger-related and other significant charges....... -- 91,502 91,502 28,516
Noninterest expense................................ 263,755 172,929 436,684 350,616
-------- -------- -------- --------
Income (loss) before income taxes.................. 69,868 (50,747) 19,121 154,851
Income tax expense................................. 33,633 435 34,068 56,096
-------- -------- -------- --------
Net income (loss).................................. $ 36,235 $(51,182) $(14,947) $ 98,755
-------- -------- -------- --------
Other items of significance occurring as of and for the year ended December
31, 2001 are highlighted below:
. During the second quarter of 2001, Predecessor reevaluated its
participation in making consumer mortgages to individuals with less than
prime-rated credit profiles. Specifically, Predecessor had a 49 percent
equity interest in FGHE and a wholly-owned subsidiary, NCS Mortgage
Lending Company ("NCS"), that were primarily engaged in the business of
originating mortgage loans to consumers with less than prime-rated credit
profiles. As a result of this assessment, the investment in FGHE was sold
and the operations of NCS were divested. Predecessor recognized a charge
to earnings of $42.2 million, pre-tax, upon determining that the cash
flows to be received from FGHE in the future were inadequate for the full
recovery of its investment. A charge of $1.9 million for the actions
involved in terminating the activities of NCS was included in the
merger-related and other significant charges total of $91.5 million. See
Note 21 of the Notes to Consolidated Financial Statements for further
discussion.
. During the second quarter of 2001, Predecessor performed a restructuring
of its investment portfolio in order to mitigate the risk of declining
interest rates, resulting in $26.8 million in net securities gains.
. Total loans displayed little change and were $7.7 billion at both December
31, 2000 and December 31, 2001. Total deposits decreased in the current
year from $7.7 billion at December 31, 2000 to $7.4 billion at December
31, 2001.
. As a result of the application of purchase accounting during the second
quarter of 2001, RBC Centura recorded premiums of $11.6 million and $70.8
million on the investment and loan portfolios, respectively, a discount of
$32.3 million on deposits and a discount of $5.5 million on long-term
debt, which are being amortized over the average life of the respective
instruments. The amortization of the premiums served to reduce interest
income, while the accretion of the discounts served to lower interest
expense.
. The allowance for loan losses was $103.4 million at December 31, 2001,
representing 1.34 percent of outstanding loans compared to $104.3 million,
or 1.36 percent of outstanding loans at year-end 2000. Net charge-offs
amounted to $50.1 million or 0.65 percent of average loans for the year
ended December 31, 2001, compared with $22.7 million and 0.30 percent,
respectively for the year ended December 31, 2000. The large increase in
net charge-offs principally occurred in the commercial loan portfolio and
in non-strategic lines of business, including leasing and sub-prime
lending.
15
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 2001, average interest-earning assets were $11.2 billion
compared with $10.3 billion averaged during 2000, an increase of $862.9 million
or 8.4 percent. Period-end interest earning assets were $11.7 billion at
December 31, 2001, an increase of $1.2 billion from the balance of $10.5
billion at December 31, 2000. As discussed below, most of the growth
experienced took place within the investment portfolio.
Loans
Loans, excluding loans held for sale, represent the largest component of
interest-earning assets for RBC Centura and ended the period at $7.7 billion.
As a result of the acquisition by Royal Bank and the associated application of
purchase accounting, RBC Centura marked the loan portfolio to its fair value,
which resulted in a $70.8 million loan premium, $44.8 million of which remained
at December 31, 2001. Also included within the loan balance as of December 31,
2001 were loans of approximately $79.3 million acquired from SFNB. See Note 3
of the Notes to Consolidated Financial Statements for a description of the
transaction with SFNB. Excluding the premium recorded and loans acquired, loans
ended the period at $7.6 billion, a decrease of $75.9 million when compared to
the balance as of December 31, 2000.
Exclusive of the premium recorded in connection with the Royal Bank
acquisition, commercial loans (commercial mortgage, commercial, industrial and
agricultural, and real estate construction), which represent the largest
component of the loan portfolio, decreased by $69.2 million from the December
31, 2000 balance of $5.0 billion. The economic slowdown that occurred during
2001 was a significant contributor to this decrease. Consumer loans, consisting
of equity lines, residential mortgages, installment loans, and other credit
line loans, increased modestly by $58.1 million, or 2.4 percent, to total $2.6
billion at December 31, 2001 exclusive of the remaining purchase price premium
and the $79.3 million in loans acquired from SFNB. The leasing portfolio
(excluding the premium recorded) declined $61.5 million driven by the continued
decreased emphasis on the product line and normal amortization. See Note 5 of
the Notes to Consolidated Financial Statements for a detail of loan portfolio
composition. Table 2 also details the breakdown of construction/development and
other loans among fixed and floating rate pricing arrangements.
On average, loans increased $137.8 million or 1.8 percent over 2000,
averaging $7.7 billion for 2001. The year-to-year growth was predominantly
driven by a $161.2 million increase in commercial loans and a $95.6 million
increase in variable consumer loans. These increases were counterbalanced by
modest decreases in the remaining components of the loan portfolio.
For the year ended December 31, 2001, loans generated taxable equivalent
interest income, including fee income, of $594.7 million compared with $710.7
million in the prior year. Interest income earned on loans is dependent on
interest rates, credit spreads, and product mix. As shown in Table 5, "Net
Interest Income and Volume/Rate Variance-Taxable Equivalent Basis," volume
increases generated additional interest income on loans of $12.7 million while
interest rate decreases resulted in a significant decline of $128.7 million.
The average loan yield during 2001 dropped 166 basis points from 2000 to yield
7.68 percent. Amortization of the purchase accounting premium recognized in
connection with the Royal Bank acquisition accounted for 37 basis points ($26.0
million) of this drop while the remaining decline was a direct result of the
decreasing interest rate environment that prevailed during 2001.
Inherent in lending is the risk of loss due to the failure of a borrower to
repay amounts due. To minimize this risk, approximately 92.2 percent of the
commercial loan portfolio outstanding at December 31, 2001 was secured. RBC
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 advance. 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 investigated.
16
In connection with commercial lending activities, RBC Centura had $147.1
million of standby letters of credit outstanding at December 31, 2001 compared
to $165.0 million at December 31, 2000. These letters of credit are subject to
the same credit approval and monitoring process as commercial loans.
The Bank extends credit principally to customers in its market areas of
North Carolina, South Carolina, and the Hampton Roads region of Virginia. RBC
Centura utilizes a standard credit scoring system to assess borrower risk when
extending credit on consumer loans. Although not a significant part of RBC
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."
TABLE 2
Maturity Schedule Of Selected Loans
As of December 31, 2001
-----------------------------------------
One Year One Through Over Five
or Less Five Years Years Total
-------- ----------- --------- ----------
(thousands)
Commercial, financial, and agricultural:
Fixed interest rates........................ $170,116 $ 420,900 $ 92,459 $ 683,475
Floating interest rates..................... 803,096 622,283 100,624 1,526,003
-------- ---------- -------- ----------
Total................................... $973,212 $1,043,183 $193,083 $2,209,478
======== ========== ======== ==========
Real estate--construction and land development:
Fixed interest rates........................ $ 41,855 $ 32,065 $ 16,258 $ 90,178
Floating interest rates..................... 696,568 266,430 12,803 975,801
-------- ---------- -------- ----------
Total................................... $738,423 $ 298,495 $ 29,061 $1,065,979
======== ========== ======== ==========
Investment Securities
The investment portfolio, comprised primarily of mortgage-backed securities,
agencies and treasuries, ended 2001 at $3.8 billion, an increase of $1.1
billion as compared with the 2000 year-end balance of $2.7 billion. For 2001,
the investment portfolio averaged $3.3 billion compared with an average of $2.6
billion during 2000. The investment portfolio growth provided an additional
means of leveraging capital while experiencing modest loan growth.
The investment portfolio consists primarily of securities for which an
active market exists. RBC 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 2001, substantially all securities in RBC Centura's
investment portfolio consisted of these types of securities. Refer to Note 4 of
the Notes to Consolidated Financial Statements for a summary of investment
securities. The effective duration of the investment portfolio was 2.8 years at
December 31, 2001 and 2000. Table 3 summarizes the investment portfolio by
contractual maturity date with original contractual lives that range from one
day to 33 years. Mortgage-backed and asset-backed securities, by nature,
typically have lives that are shorter than their contractual life due to
volatility in the monthly returns of principal.
17
TABLE 3
Investment Securities-Maturity/Yield Schedule
Remaining Maturities as of December 31, 2001
-------------------------------------------------------------------------------
1 Year or Less 1 to 5 Years 6 to 10 Years Over 10 Years No Maturity Total
-------------- -------------- -------------- --------------- -------------- ---------------
Amortized Amortized Amortized Amortized Amortized Amortized
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield
--------- ----- --------- ----- --------- ----- ---------- ----- --------- ----- ---------- -----
(dollars in thousands)
Available For Sale:
U.S. Treasury............... $ 81,573 4.97% $ -- -- % $ -- -- % $ -- -- % $ -- -- % $ 81,573 4.97%
U.S. government agencies and
corporations............... 4,320 6.09 883,164 6.18 -- -- -- -- -- -- 887,484 6.18
State and municipal......... 1,481 4.67 6,912 5.40 15,798 4.57 11,178 4.05 -- -- 35,369 4.57
Mortgage-backed and asset-
backed securities.......... -- -- 20,906 6.73 112,357 6.34 2,120,030 6.27 -- -- 2,253,293 6.28
Common stock................ -- -- -- -- -- -- -- -- 139,606 6.05 139,606 6.05
Other securities............ 49,349 1.74 50,004 5.71 43,282 7.22 198,140 6.19 -- -- 340,775 5.60
-------- -------- -------- ---------- -------- ----------
Total available for sale.... $136,723 3.83 $960,986 6.16 $171,437 6.40 $2,329,348 6.26 $139,606 6.05 $3,738,100 6.14
======== ======== ======== ========== ======== ==========
- --------
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 35.0% and 6.9% 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. RBC Centura currently
classifies all of its investment purchases as available for sale. This is
consistent with RBC Centura's investment philosophy of maintaining flexibility
to manage the securities portfolio. In connection with the acquisition of RBC
Centura by Royal Bank approximately $44 million of investment securities were
transferred from the held to maturity portfolio to available for sale in order
to align RBC Centura's interest rate risk position and credit risk policy with
those of Royal Bank.
The AFS portfolio is used as a part of RBC Centura's liquidity and
asset/liability management strategy and securities in it may be sold in
response to changes in interest rates, changes in prepayment risk, the need to
manage regulatory capital and also to provide bank liquidity. At June 5, 2001
all unrealized gains and losses were transferred to the related securities'
basis in accordance with purchase accounting. This portfolio is carried at fair
value with unrealized gains or losses recorded, net of tax, in accumulated
other comprehensive income. At December 31, 2001, AFS investments had a market
value of $3.8 billion, up $1.1 billion compared to December 31, 2000. Included
in the market value of the AFS portfolio as of December 31, 2001 were net
unrealized gains of $48.6 million, $29.8 million net of tax, compared with net
unrealized gains of $32.5 million, $18.9 million net of tax as of December 31,
2000. The increase in unrealized gains was principally the result of a
declining interest rate environment. The year-to-year increase would have been
larger had RBC Centura not engaged in multiple portfolio restructurings during
2000 and 2001 as described in the Noninterest Income and Expense section.
Taxable equivalent interest income on investment securities was $212.4
million for 2001, up $27.7 million from the $184.6 million earned in 2000.
Changes in interest rates, product mix, and credit spreads decreased interest
income by $9.7 million while volume variances caused an increase of $37.4
million. The average yield on investments was 6.56 percent in 2001 versus 6.92
percent in 2000. The combination of declining interest rates and the portfolio
restructurings mentioned above contributed to the 36 basis points decrease in
the investment yield. For additional information see Table 4, "Net Interest
Income Analysis--Taxable Equivalent Basis" and Table 5, "Net Interest Income
and Volume/Rate Variance--Taxable Equivalent Basis."
18
FUNDING SOURCES
Total funding includes deposits, short-term borrowings, and long-term debt
and averaged $10.9 billion during 2001, up $664.2 million or 6.5 percent from
the $10.3 billion average during 2000. The cost of interest bearing liabilities
for 2001 was 3.82 percent compared with 5.19 percent during 2000. The 137 basis
point drop was predominantly due to the decreasing interest rate environment,
but also reflects a 25 basis point decrease resulting from the accretion of
discounts recorded as a result of the acquisition of Predecessor by Royal Bank.
Deposits
Total deposits, whose major categories include money market accounts,
savings accounts, individual retirement accounts, certificates of deposit
("CDs") and transaction accounts, ended the period at $7.4 billion, down $324.1
million from the December 31, 2000 balance of $7.7 billion. The outstanding
balance of the discount recorded as a result of the acquisition by Royal Bank
was $9.7 million at December 31, 2001. Excluding this discount, deposits would
have decreased $333.8 million, primarily within the CD portfolio. This decline
in CDs was principally attributable to the attrition of single-service CD
accounts, acquired in the merger with Triangle, with which RBC Centura was
unable to establish multiple service relationships. This decline was partially
mitigated by an overall increase of $336.0 million in savings, money market,
and interest checking accounts.
Total deposits averaged $7.4 billion during 2001, which was a $292.6 million
decrease from the 2000 average balance of $7.7 billion. Interest expense on
deposits decreased $88.0 million to total $223.3 million for 2001 when compared
with the $311.3 million in interest expense recognized during 2000. As shown in
Table 4, "Net Interest Income Analysis --Taxable Equivalent Basis," the cost of
interest-bearing deposits decreased 119 basis points from 2000 to yield 3.56
percent during 2001. The decrease in deposit interest expense was driven
primarily by changes in the portfolio mix and the interest rate environment,
decreasing interest expense from 2000 by $68.9 million. Volume changes also
served to decrease interest expense, contributing $19.1 million to the overall
reduction. In addition to volume and rate effects, an additional factor
generating the decreasing yield was the accretion of the deposit discount
recorded in the acquisition by Royal Bank. The accretion of this purchase
accounting discount resulted in a 37 basis point ($22.6 million) decrease in
the cost of interest bearing deposits from 2000 to 2001. Management anticipates
that the discount accretion will decrease the 2002 cost of interest bearing
deposits by only 15 basis points as the discount will be fully accreted by the
end of the first quarter of 2002.
Other Funding Sources
Management utilizes short-term borrowed funds, consisting principally of
federal funds purchased, securities sold under agreements to repurchase, and
master notes. Short-term borrowed funds were $1.8 billion at December 31, 2001
and averaged $1.9 billion for the year. For comparison, short-term borrowed
funds at December 31, 2000 were $1.6 billion and also averaged $1.6 billion
during the year. Short-term borrowed funds represented 17.5 percent of RBC
Centura's total average funding sources for 2001 compared with 15.4 percent
during 2000. The growth in average short-term borrowings principally stemmed
from the growth in interest-earning assets and the overall decline in deposits.
The average interest rate paid on short-term borrowed funds decreased by 226
basis points from the 6.11 percent paid in 2000. The decline was mainly the
result of the decreasing interest rate environment that prevailed during 2001.
Interest expense on short-term borrowed funds decreased by $23.1 million
between periods, as the effect of lower interest rates decreased expense by
$40.7 million, counterbalancing the increase of $17.7 million caused by
increasing volume.
Long-term debt consists predominantly of Federal Home Loan Bank ("FHLB")
advances, subordinated notes and capital securities and ended the period at
$2.1 billion compared to $1.1 billion as of December 31, 2000. The increase was
a result of additional FHLB borrowings and the issuance by RBC Centura to an
affiliate of $500 million of LIBOR based 5-year subordinated debt. Long-term
debt averaged $1.6 billion during 2001 compared with $1.0 billion during the
year earlier period. In addition to the new funding received from an affiliate,
a substantial contributor to the increasing average long-term debt balance was
FHLB borrowings, which grew on average $478.2 million from 2000. The cost of
funds for long-term debt during 2000 decreased by 175 basis points to 4.77
percent for the year ended December 31, 2001. Interest expense generated by
long-term debt increased from $66.0 million in 2000 to $78.0 million in 2001 as
the $33.0 million impact of a substantial increase in the average balance
outweighed the $21.0 million effect of decreasing rates upon expense
recognition. As part of the application of purchase accounting, a discount of
$5.5 million was recorded during the second quarter of 2001 as a fair value
adjustment to long-term debt and is being accreted on a straight line basis
over the average life of the debt. Accretion of this discount amounted to $1.2
million during 2001 and reduced the funding cost of long-term debt by 8 basis
points. The anticipated decrease in funding cost for 2002 is 10 basis points.
19
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income for 2001 and 2000 was $434.9 million and $420.1 million,
respectively. On a taxable equivalent basis, net interest income increased
$14.7 million to $444.7 million from the $430.0 million reported in 2000. As
shown in Table 5, volume variances were the main driver of the growth,
increasing net interest income by $23.8 million while interest rate variances
reduced net interest income by $9.1 million.
Net interest margin measures 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 income divided by
average interest-earning assets, declined 15 basis points to 3.99 percent for
2001 predominantly due to the amortization of purchase price premiums and
accretion of purchase price discounts, as well as the investment portfolio
restructuring performed in the second quarter of 2001. The amortization of loan
premiums reduced interest income and therefore reduced the margin, while the
accretion of the discount on deposits lowered interest expense and therefore
increased the margin. During 2001, the negative impact of the loan portfolio
premium amortization on the net interest margin was greater than the benefit
from the accretion of the discounts associated with the deposit base. At the
end of the first quarter of 2002 it is expected that the benefit from the
accretion of the deposit discount will end. The ending deposit discount
accretion is expected to generate an additional decline of 25 to 35 basis
points in the 2002 net interest margin compared with 2001. By the end of the
first quarter of 2003 the loan premium is expected to be fully amortized,
ending any associated effect on the margin.
Table 4 and Table 5 provides additional information related to net interest
income on a taxable equivalent basis and the net interest margin.
TABLE 4
Net Interest Income Analysis--Taxable Equivalent Basis /(1) (2)/
2001 2000 1999
--------------------------- ---------------------------- ----------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
----------- -------- ------- ----------- -------- ------- ----------- -------- -------
(dollars in thousands)
ASSETS
Loans, including fees................ $ 7,744,007 $594,680 7.68% $ 7,606,163 $710,726 9.34% $ 7,258,979 $634,837 8.75%
Taxable securities................... 3,200,478 209,816 6.56 2,616,856 180,150 6.88 2,628,693 167,111 6.36
Tax-exempt securities................ 36,958 2,543 6.88 53,106 4,497 8.47 114,093 8,965 7.86
Short-term investments............... 26,627 1,118 4.19 53,781 3,139 5.84 47,037 2,589 5.92
Mortgage loans held for sale......... 136,588 11,621 8.51 59,003 5,634 9.55 99,815 7,992 8.01
----------- -------- ----------- -------- ----------- --------
Interest-earning assets, gross....... 11,144,658 819,778 7.36 10,388,909 904,146 8.70 10,148,617 821,494 8.10
Net unrealized gains (losses) on
available for sale securities....... 58,606 (48,585) (23,721)
Other assets, net.................... 1,702,253 932,110 913,716
----------- ----------- -----------
Total assets......................... $12,905,517 $11,272,434 $11,038,612
=========== =========== ===========
LIABILITIES AND
SHAREHOLDER'S EQUITY
Interest checking.................... $ 1,008,216 $ 11,082 1.10% $ 895,404 $ 12,805 1.43% $ 955,370 $ 11,671 1.22%
Money market......................... 1,849,252 56,065 3.03 1,719,112 79,642 4.63 1,598,658 62,117 3.89
Savings deposits..................... 214,122 2,234 1.04 250,810 3,351 1.34 340,044 5,286 1.55
Time deposits........................ 3,206,697 153,968 4.80 3,682,618 215,550 5.85 3,706,959 189,790 5.12
----------- -------- ----------- -------- ----------- --------
Total interest-bearing deposits...... 6,278,287 223,349 3.56 6,547,944 311,348 4.75 6,601,031 268,864 4.07
Borrowed funds....................... 1,916,282 73,707 3.85 1,582,687 96,758 6.11 1,406,390 69,671 4.95
Long-term debt....................... 1,635,543 78,039 4.77 1,012,329 66,009 6.52 867,641 51,896 5.98
----------- -------- ----------- -------- ----------- --------
Interest-bearing liabilities......... 9,830,112 375,095 3.82 9,142,960 474,115 5.19 8,875,062 390,431 4.40
-------- -------- --------
Demand, noninterest-bearing.......... 1,089,250 1,112,189 1,146,657
Other liabilities.................... 254,659 127,661 152,932
Shareholder's equity................. 1,731,496 889,624 863,961
----------- ----------- -----------
Total liabilities and shareholder's
equity.............................. $12,905,517 $11,272,434 $11,038,612
=========== =========== ===========
Interest rate spread................. 3.54% 3.51% 3.70%
Net yield on interest-earning assets,
gross............................... $11,144,658 $444,683 $3.99% $10,388,909 $430,031 $4.14% $10,148,617 $431,063 4.25%
=========== ======== =========== ======== =========== ========
Taxable equivalent adjustment........ $ 9,772 $ 9,953 $ 12,338
======== ======== ========
- --------
(1) Nonperforming 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 2001
of 35.0% and 6.9%, for 2000 of 35.0% and 6.9%, and for 1999 of 35.0% and
7.0% for federal and state purposes, respectively.
20
TABLE 5
Net Interest Income and Volume/Rate Variance--Taxable Equivalent Basis
2001-2000 2000-1999
----------------------------------- ---------------------------------
Income/ Variance attributable to: Income/ Variance attributable to:
Expense ------------------------ Expense ------------------------
Variance Volume Rate Variance Volume Rate
--------- -------- --------- -------- ------- -------
(thousands)
INTEREST INCOME
Loans, including fees.......... $(116,046) $ 12,665 $(128,711) $75,889 $31,218 $44,671
Taxable securities............. 29,666 38,599 (8,933) 13,039 (756) 13,795
Tax-exempt securities.......... (1,954) (1,209) (745) (4,468) (5,117) 649
Short-term investments......... (2,021) (1,298) (723) 550 387 163
Mortgage loans held for sale... 5,987 6,663 (676) (2,358) (3,696) 1,338
--------- -------- --------- ------- ------- -------
Total interest income....... (84,368) 55,420 (139,788) 82,652 22,036 60,616
INTEREST EXPENSE
Interest checking.............. (1,723) 1,482 (3,205) 1,134 (766) 1,900
Money market................... (23,577) 5,655 (29,232) 17,525 4,934 12,591
Savings deposits............... (1,117) (447) (670) (1,935) (1,260) (675)
Time deposits.................. (61,582) (25,763) (35,819) 25,760 (1,254) 27,014
--------- -------- --------- ------- ------- -------
Total interest-bearing deposits (87,999) (19,073) (68,926) 42,484 1,654 40,830
Borrowed funds................. (23,051) 17,654 (40,705) 27,087 9,447 17,640
Long-term debt................. 12,030 33,045 (21,015) 14,113 9,161 4,952
--------- -------- --------- ------- ------- -------
Total interest expense...... (99,020) 31,626 (130,646) 83,684 20,262 63,422
--------- -------- --------- ------- ------- -------
Net interest income......... $ 14,652 $ 23,794 $ (9,142) $(1,032) $ 1,774 $(2,806)
========= ======== ========= ======= ======= =======
- --------
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.
ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES
The investment and loan portfolios are the primary types of interest-earning
assets for RBC Centura. While the investment portfolio is structured with
minimum credit exposure, 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, ongoing review of loan
payment performance, and modeling incurred and probable losses.
Nonperforming Assets
Loans on nonaccrual, meaning that interest is not being accrued on these
instruments, are generally classified as nonaccrual under the circumstances
described in Note 1 of the Notes to Consolidated Financial Statements. Accrual
of interest on loans is discontinued when management believes that such
interest will not be collected in a reasonable period of time and the 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.
Total nonperforming assets, including nonperforming loans and foreclosed
properties, were $81.0 million at December 31, 2001 compared with $54.4 million
at December 31, 2000. Nonaccrual loans at year-end 2001 increased $19.1 million
over year-end 2000 while assets acquired through foreclosure and repossession
increased $7.5 million over the prior year. Growth in the amount of residential
mortgage nonaccrual accounts represented approximately $9.4 million of the
overall increase in nonaccrual loans. The increase in mortgage nonaccruals was
principally due to the repurchase of certain loans in accordance with the
contractual obligations related to the third quarter 2000 sale of mortgage
servicing. The remainder of the increase in nonaccruals was split evenly
between commercial and consumer loans with no concentration in any one
industry. Nonperforming assets as a percentage of total assets were 0.58
percent and 0.47 percent at December 31, 2001 and 2000, respectively.
21
During the fourth quarter of 2000, RBC Centura reclassified approximately
$6.0 million of nonaccrual loans to other assets due to management's intent to
sell these loans. The loans were transferred to other assets at the lower of
cost or market resulting in a $1.4 million charge to other noninterest income.
The loans were sold to an unaffiliated third party in the third quarter of 2001
with no material gain or loss recognized. These loans have been excluded from
the year-end 2000 nonperforming assets totals and related ratios. Table 8,
"Nonperforming Assets and Past Due Loans," discloses the components and
balances of nonperforming assets over the past five years.
Accruing loans past due ninety or more days were $10.4 million at December
31, 2001, down $1.9 million from the prior year.
In addition to nonperforming assets and past due loans discussed above,
management has identified approximately $45.0 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.
Allowance for Loan Losses
The allowance for loan and lease losses ("AFLL") is the amount considered
adequate to cover probable incurred credit losses in RBC Centura's loan
portfolio existing at the balance sheet date. The allowance is evaluated on a
quarterly basis with an emphasis on problem accounts, recent loss experience,
and changes in other factors including economic conditions and regulatory
requirements. The allowance for loan losses ended 2001 at $103.4 million,
representing 1.34 percent of outstanding loans compared to $104.3 million, or
1.36 percent of outstanding loans at year-end 2000.
A provision for loan losses is charged against earnings in order to maintain
the AFLL at a level that reflects management's assessment of the risk inherent
in the loan portfolio. The amount provided for loan losses during 2001 totaled
$49.8 million as compared to $31.8 million for 2000. The increased provision
during 2001 was to cover higher net charge-offs while maintaining an AFLL
adequate to absorb losses inherent in the loan portfolio at balance sheet date.
Net charge-offs totaled $50.1 million and $22.7 million for the year ended
December 31, 2001 and 2000, respectively, an increase of $27.4 million. Net
charge-offs were .65 percent of average loans in 2001 compared to .30 percent
for 2000. The increase in net charge-offs principally occurred in the
commercial loan portfolio and in non-strategic lines of businesses, including
leasing and sub prime lending, for which collection prospects have been
significantly diminished. The slowing economy in 2001 also played a part in the
increased charge-off activity.
Management believes the AFLL to be adequate based upon its current judgment,
evaluation, and analysis of the loan portfolio. The AFLL is comprised of three
components: specific reserves, general reserves, and unallocated reserves.
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. A loan is considered
impaired when, based on current information, it is probable that RBC Centura
will not receive all amounts due in accordance with the contractual terms of
the loan agreement. Once a loan has been identified as impaired, management
measures impairment in accordance with SFAS 114 "Accounting By Creditors for
Impairment of a Loan" ("SFAS 114"). When the measure of the impaired loan is
less than the recorded investment in the loan, the amount of the impairment is
recorded as a specific reserve. These specific reserves are determined on an
individual loan basis based on management's current evaluation of RBC Centura's
loss exposure for each credit, given the payment status, financial condition of
the borrower, and value of any underlying collateral. Loans for which specific
reserves are provided are excluded from the general allowance calculations as
described below.
The general allowance reflects the best estimate of probable losses that
exist within the portfolios of loans that have not been specifically
identified. The general allowance 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. Commercial loans are assigned a loan
grade and the loss percentages assigned for each loan grade 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,
including the average term of the portfolio. The AFLL for consumer loans,
mortgage loans, and leases is determined based on past due levels and
historical and projected loss rates relative to each portfolio.
The unallocated allowance is determined through management's assessment of
probable losses that are in the portfolio but are not adequately captured by
the other two components of the allowance, including consideration of current
economic and business conditions and regulatory requirements. The unallocated
allowance also reflects management's acknowledgement of the imprecision and
subjectivity that underlie the modeling of credit risk.
22
Although management attempts to use the best information available to
determine the AFLL, significant future additions to the AFLL may be necessary
if actual conditions differ from the modeling assumptions and estimates used by
management, thus adversely affecting the operating results of RBC Centura. Such
revisions of estimates and assumptions are made in the period in which the
supporting factors indicate that loss levels may vary from the previous
estimates.
For additional information with respect to the activity in the AFLL, see
Tables 6 and 7, "Analysis of Allowance for Loan Losses" and "Allocation of
Allowance for Loan Losses," respectively.
TABLE 6
Analysis of Allowance for Loan Losses
2001 2000 1999 1998 1997
-------- -------- ------- ------- -------
(dollars in thousands)
Allowance for loan losses at beginning of year.............. $104,275 $ 95,500 $91,894 $86,373 $77,917
Allowance related to loans transferred or sold.............. (549) (368) (556) -- --
Allowance for acquired loans................................ -- -- 605 2,068 4,338
Provision for loan losses................................... 49,802 31,815 40,828 20,759 18,764
Charge-offs:
Real estate loans........................................ 8,694 2,811 2,322 1,469 1,931
Commercial and industrial loans.......................... 25,339 7,594 22,862 6,700 6,339
Agricultural loans (excluding real estate)............... 1,040 670 760 95 256
Consumer loans........................................... 15,366 12,352 10,934 9,247 7,772
Leases................................................... 6,040 4,717 4,132 3,503 2,164
Other.................................................... 469 17 34 249 935
-------- -------- ------- ------- -------
Total charge-offs.................................... 56,948 28,161 41,044 21,263 19,397
-------- -------- ------- ------- -------
Recoveries on loans previously charged-off:
Real estate loans........................................ 181 153 230 193 751
Commercial and industrial loans.......................... 3,923 2,777 1,398 1,462 2,635
Agricultural loans (excluding real estate)............... 23 4 9 -- 45
Consumer loans........................................... 1,931 2,257 1,846 2,088 1,206
Leases................................................... 803 298 290 214 114
-------- -------- ------- ------- -------
Total recoveries on loans previously charged-off..... 6,861 5,489 3,773 3,957 4,751
-------- -------- ------- ------- -------
Net charge-offs............................................. 50,087 22,672 37,271 17,306 14,646
-------- -------- ------- ------- -------
Allowance for loan losses at end of year.................... $103,441 $104,275 $95,500 $91,894 $86,373
======== ======== ======= ======= =======
Allowance and loss ratios:
Allowance for loan losses to total loans.................... 1.34% 1.36% 1.28% 1.30% 1.38%
Net charge-offs to average loans............................ 0.65 0.30 0.51 0.26 0.25
Allowance for loan losses to nonperforming loans............ 1.53x 2.15x 3.25x 2.47x 2.66x
TABLE 7
Allocation of Allowance for Loan Losses
2001 2000 1999 1998 1997
-------- -------- ------- ------- -------
(thousands)
Commercial, financial, and agricultural....... $ 31,017 $ 30,089 $23,795 $22,137 $20,605
Consumer...................................... 23,345 20,571 16,277 14,287 13,296
Real estate--mortgage......................... 19,990 20,812 20,780 25,260 21,904
Real estate--construction and land development 10,238 10,481 6,430 7,830 7,252
Leases........................................ 2,445 4,182 3,893 8,961 6,114
Unallocated................................... 16,406 18,140 24,325 13,419 17,202
-------- -------- ------- ------- -------
Allowance for loan losses at end of year...... $103,441 $104,275 $95,500 $91,894 $86,373
======== ======== ======= ======= =======
23
The allocation of the allowance for loan losses to the respective loan
classifications is not necessarily indicative of future losses or future
allocations.
TABLE 8
Nonperforming Assets and Past Due Loans
2001 2000* 1999 1998 1997
------- ------- ------- ------- -------
(dollars in thousands)
Nonaccrual loans........................... $67,615 $48,475 $29,415 $37,238 $32,466
Foreclosed property........................ 13,427 5,897 6,421 7,913 7,131
------- ------- ------- ------- -------
Total nonperforming assets................. $81,042 $54,372 $35,836 $45,151 $39,597
======= ======= ======= ======= =======
Accruing loans past due ninety days or more $10,410 $12,338 $14,366 $14,777 $13,130
Nonperforming Assets To:
Loans and foreclosed property........... 1.05% 0.71% 0.48% 0.64% 0.63%
Total assets............................ 0.58 0.47 0.31 0.41 0.41
- --------
* Excludes $6.0 million of nonaccrual loans classified as held for accelerated
disposition.
NONINTEREST INCOME AND EXPENSE
Noninterest income ("NII") includes service charges on deposit accounts,
credit card and related fees, insurance and brokerage commissions, trust
revenues, mortgage income, operating lease income, and other commissions and
fees derived from banking related activities.
NII for 2001, excluding gains and losses on sales of investment securities,
totaled $168.9 million, down $13.6 million from the $182.6 million earned
during 2000. As a percentage of total revenues (defined as the sum of net
interest income, taxable equivalent plus noninterest income excluding
securities gains and losses), NII decreased by 2.3 percent from 2000 to 27.5
percent. Sales of investment securities resulted in net realized gains of $35.5
million during 2001 compared with net realized losses of $36.9 million during
2000. RBC Centura performed a restructuring of its investment portfolio during
the second quarter of 2001 in order to mitigate interest rate risk, which
resulted in gains of $26.8 million. Included in the 2000 net realized losses of
$36.9 million were $22.1 million of securities losses related to the
restructuring of the investment portfolio acquired in the Triangle merger. In
the third quarter of 2000, RBC Centura restructured portions of its investment
portfolio, taking advantage of the interest rate environment to replace lower
yielding securities, which resulted in realized losses of $13.1 million.
Service charges, comprising approximately 39.9 percent of NII excluding
gains and losses on sales of investment securities, continue to be the largest
component of noninterest income. Service charges for the current period
increased $4.6 million to $67.4 million in 2001 as compared to $62.8 million
during 2000. The main driver of the increase was service fees on checking
accounts, which were up $4.7 million from 2000 to 2001. This increase was the
result of a change to RBC Centura's price structure made in order to bring
pricing in line with the current market. The other components of service
charges on deposit accounts varied by insignificant amounts. Brokerage
commissions were down $3.0 million during 2001 from the year earlier period due
to a slow down in investment activity in response to the economic downturn.
Mortgage income during 2001 was $21.1 million, a decrease of $12.8 million
from the amount realized during 2000. Mortgage income is primarily comprised of
mortgage loan sale income, origination fees, and servicing income. This large
variance was primarily the result of a $13.1 million gain recognized in the
prior year, from the sale of $2.1 billion of the mortgage servicing portfolio.
Excluding this one-time gain, mortgage loan sale income decreased only slightly
by $500,000 while origination fees, a significant component of mortgage income,
were up $4.0 million, favorably impacted by an increase in mortgage origination
volume and refinancings in a declining rate environment. Servicing commissions,
net of the amortization of mortgage servicing rights, decreased $4.5 million
during 2001, a direct result of the sale of approximately $2.1 billion of the
mortgage servicing portfolio during 2000.
24
Noninterest expense ("NIE") during 2001, excluding merger-related and other
significant charges of $91.5 million and the loss on an equity investment of
$42.2 million, totaled $436.7 million, an increase of $86.1 million over 2000.
A key driver of the increase was a charge of $19.1 million in litigation
provisions recorded during the second quarter of 2001, a significant portion of
which related to previously disclosed litigation. Personnel expenses accounted
for $17.7 million of the increase between comparable periods, due in large part
to additional incentive-based compensation incurred as current year results met
defined targets. The remainder of the increase in personnel expenses was a
result of other personnel costs, including fringe benefits, relocation costs,
and retention bonuses.
Contributing $43.5 million to the increase in NIE was additional goodwill
and intangible amortization recorded as a result of Royal Bank's acquisition of
Predecessor. An additional factor in the overall increase in NIE was fees for
outsourced services, which were up $4.1 million principally due to increased
volume for item processing and service fees for internet banking activities.
Also contributing to the increase in NIE was $1.2 million in nonrecurring costs
related to the integration of SFNB customers. See Note 3 of the Notes to
Consolidated Financial Statements for information regarding SFNB. The remainder
of the difference was spread across the various NIE expense categories. For a
description of the merger-related and other significant charges of $91.5
million and the loss on equity investment of $42.2 million see Notes 3 and 21,
respectively, of the Notes to Consolidated Financial Statements.
INCOME TAX EXPENSE
Income tax expense for 2001, 2000, and 1999 was $34.1 million, $56.1
million, and $66.1 million, respectively. The 2001, 2000, and 1999 effective
tax rates were 48.1 percent, 36.2 percent, and 33.7 percent, respectively. The
effective tax rate for both 2001 and 2000 was impacted by certain non tax
deductible merger-related items while 1999's effective tax rate was reduced 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 35.0 percent to the effective tax rates
for the periods presented.
EQUITY AND CAPITAL RESOURCES
Shareholder's equity as of December 31, 2001 and 2000 was $2.3 billion and
$956.4 million, respectively, and represented 16.2 percent and 8.3 percent of
year-end assets, respectively. The large growth in shareholder's equity during
2001 was primarily a result of the application of push-down accounting
associated with the acquisition of Predecessor by Royal Bank, but was also
impacted by the current year loss, dividends declared by Predecessor, the
exercise of stock options issued by Predecessor and the change in unrealized
gains and losses on available for sale securities. Upon conversion of
Predecessor's common stock to the common stock of Royal Bank at a ratio of one
to 1.684 shares at the close of business on June 5, 2001, shareholder's equity
increased from $886.0 million to $2.2 billion. See the Consolidated Statements
of Shareholder's Equity for actual quantification of all factors upon
shareholder's equity.
RBC Centura's capital ratios are greater than the minimums required by
regulatory guidelines. RBC Centura intends to maintain an optimal capital and
leverage mix that it considers optimal in light of various factors including
product mix, forecasted growth, scheduled maturities of loans and deposits, and
economic conditions. At December 31, 2001, RBC 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.
Note 20 in the Notes to Consolidated Financial Statements presents the capital
ratios for RBC Centura and the Bank for 2001 and 2000. As discussed in the
"Liquidity" section, capital securities are a component of tier 1 capital.
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
RBC 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 RBC 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 RBC Centura is able to take advantage of new business
opportunities as well as meet the demands of its customers.
25
Investment securities are an important tool to RBC Centura's liquidity
management objective. Securities classified as available for sale represent an
accessible source of liquidity through either repurchase agreements or
liquidation. Repurchase agreements involve the selling of securities to a
counterparty, and a concurrent agreement to buy back the securities at a
specified price and date. This activity is similar to pledging collateral to
borrow funds.
The Bank's traditional funding sources consist primarily of core deposits,
established federal funds lines with major banks, proceeds from matured
investments, contracts to repurchase investment securities and principal and
interest repayments on loans. At December 31, 2001, the Bank had $2.8 billion
in total federal funds lines available. In addition, the Bank has the ability
to borrow from the FHLB up to 21 percent of the Bank's total assets. The amount
outstanding to the FHLB at December 31, 2001 amounted to $1.4 billion.
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 is a direct, unconditional, and unsecured general
obligation solely of the Bank and is not an obligation of or guaranteed by RBC
Centura. Interest rate and maturity terms are negotiated between the Bank and
the purchaser, within certain parameters set forth in an offering circular. As
of December 31, 2001 and 2000, there were $125.0 million of 6.5 percent, 10
year, subordinated bank notes outstanding. In addition, RBC Centura also
accepts Eurodeposits, has a master note commercial paper facility, and offers
brokered certificates of deposit.
In September of 2001, RBC Centura issued $500 million of LIBOR based 5-year
subordinated debt to an affiliate. Under applicable regulatory guidelines, this
funding source bolsters RBC Centura's tier II capital, improving the associated
regulatory capital ratio. RBC Centura also has the ability to draw from an
unsecured line of credit of up to $30.0 million from a nonaffiliated bank. At
December 31, 2001 and 2000 this line had $5.0 million and $10.0 million
outstanding, respectively.
Management is not aware of any events that are reasonably likely to have a
material negative effect on RBC Centura's liquidity, capital resources or
operations. In addition, management is not aware of any regulatory
recommendations regarding liquidity, which, if implemented, would have a
material negative effect on RBC Centura.
For information on the required financial support of the Bank from RBC
Centura and from Royal Bank, please see "Item 1--Business--Supervision and
Regulation--Support of Subsidiary Bank", beginning on page 8.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. RBC 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. As discussed in the
Asset/Liability and Interest Rate Risk Management section, RBC Centura's market
risk resulting from interest rate risk has not changed significantly since
2000. RBC 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 while optimizing profit potential. RBC Centura's trading activities are
minimal and RBC Centura is not subject to significant currency exchange risk or
commodity price risk.
The table below illustrates the scheduled maturity of selected financial
instruments and their estimated fair values at December 31, 2001. 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 the probability of customers prepaying their loans at various interest rate
levels. For deposits without contractual maturities, including interest
checking, savings, and money market accounts, cashflows are separated into
"core" and "non-core" components. The non- core cashflows are scheduled to
mature in 2002 while the core cashflows are presented based on management's
assessment of runoff.
26
TABLE 9
Rate Sensitive On-Balance Sheet Financial Instruments
Principal Maturing In:
---------------------------------------------------------
Fair Value
December 31,
2002 2003 2004 2005 2006 Thereafter Total 2001
---------- -------- -------- -------- -------- ---------- ---------- ------------
(dollars in thousands)
Rate Sensitive Assets:
Loans, gross
Fixed rate...................... $1,671,894 $593,609 $301,997 $163,807 $ 83,530 $254,067 $3,068,904 $3,132,582
Average rate (%)................ 7.26 8.15 8.21 8.38 7.60 7.90 7.65
Variable rate................... 2,811,944 852,365 488,158 346,879 42,507 109,116 4,650,969 4,665,586
Average rate (%)................ 5.27 7.73 9.03 9.45 8.82 9.09 6.55
Investment securities
Fixed rate...................... 633,012 537,891 416,877 493,304 465,799 958,136 3,505,019 3,554,736
Average rate (%)................ 5.99 6.62 5.58 6.40 5.88 6.29 6.16
Variable rate................... 31,029 24,516 35,398 81,418 11,853 48,867 233,081 231,967
Average rate (%)................ 4.34 5.38 6.20 5.61 6.63 7.63 5.98
Rate Sensitive Liabilities:
Interest-bearing checking, savings,
money market..................... $1,767,871 $254,356 $254,356 $254,356 $254,356 $508,712 $3,294,007 $3,294,007
Average rate (%)................ 1.45 1.98 2.60 2.70 2.75 2.86 2.00
Time deposits...................... 2,280,356 412,718 101,822 37,803 33,463 20,031 2,886,193 2,915,328
Average rate (%)................ 4.56 5.43 4.73 6.33 5.08 6.58 4.73
Borrowed funds..................... 1,830,065 -- -- -- -- -- 1,830,065 1,830,065
Average rate (%)................ 1.37 -- -- -- -- -- 1.37
Long-term debt..................... 589,117 552,249 102,068 41 500,240 393,711 2,137,426 2,199,252
Average rate (%)................ 2.76 4.07 5.87 8.90 6.92 6.89 4.98
ASSET/LIABILITY AND INTEREST RATE RISK MANAGEMENT
RBC Centura's Asset/Liability Management Committee seeks to maintain a
general balance between interest-sensitive assets and liabilities to insulate
net interest income and shareholder's 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 RBC
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.
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 RBC Centura's interest rate risk management activities. RBC
Centura has principally utilized interest rate swaps, floors and caps. Swaps
are used to manage interest rate risk, reduce funding costs, and allow RBC
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 the obligation, to put or call securities back to a third party at an
agreed upon price under the specific terms of each agreement. Refer to Note 16
of the Notes to Consolidated Financial Statements for a comparative summary of
RBC Centura's derivative financial instruments at December 31, 2001 and 2000
and for a detailed discussion of related risks. Also, refer to Note 1 of the
Notes to Consolidated Financial Statements for discussion of the accounting
policy for these instruments.
27
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, 2001 shows RBC Centura's interest rate risk position to be
relatively neutral: net interest income would not vary by more than 1.0 percent
and the estimated market value of equity would not vary by more than
approximately 4.2 percent. This is consistent with the interest rate risk
position that prevailed at December 31, 2000. RBC Centura seeks a reasonable
balance between a satisfactorily high and stable return on average
shareholder's equity and a satisfactorily high and stable estimated market
value of equity.
An interest rate gap analysis is shown in Table 10 as of December 31, 2001.
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, 2001, RBC Centura had a
negative one-year cumulative interest sensitivity gap of approximately $750.0
million. The interest rate gap analysis is a static indicator that does not
reflect various repricing characteristics and may not necessarily indicate the
sensitivity of net interest income in a changing interest rate environment.
TABLE 10
Interest Sensitivity Analysis
As of December 31, 2001/(2)/
-----------------------------------------------------------------------
31-60 61-90 Total Under
1-30 days Days Days 91-180 Days 181-365 Days One Year
---------- ---------- --------- ----------- ------------ -----------
(dollars in thousands)
Interest-Earning Assets
Loans........................................... $4,744,591 $ 205,179 $ 175,474 $ 429,353 $ 631,087 $6,185,684
Investment securities........................... 263,948 95,249 82,641 172,875 196,948 811,661
Other short-term investments.................... 32,656 -- -- -- -- 32,656
Mortgage loans held for sale.................... 114,966 -- -- -- -- 114,966
---------- ---------- --------- --------- --------- ----------
Total interest-earning assets................... 5,156,161 300,428 258,115 602,228 828,035 7,144,967
Notional amount of interest rate swaps.......... 21,781 107,228 21,197 20,000 -- 170,206
---------- ---------- --------- --------- --------- ----------
Total interest-earning assets and derivative
financial instruments.......................... $5,177,942 $ 407,656 $ 279,312 $ 622,228 $ 828,035 $7,315,173
========== ========== ========= ========= ========= ==========
Interest-Bearing Liabilities
Time deposits over $100......................... $ 90,464 $ 49,573 $ 52,681 $ 83,602 $ 85,038 $ 361,358
All other deposits /(1)/........................ 2,450,671 474,728 406,273 618,736 663,035 4,613,443
Borrowed funds.................................. 1,780,065 -- -- 50,000 -- 1,830,065
Long-term debt.................................. 103,164 745,236 100,237 714 239,765 1,189,116
---------- ---------- --------- --------- --------- ----------
Total interest-bearing liabilities.............. 4,424,364 1,269,537 559,191 753,052 987,838 7,993,982
Notional amount of interest rate swaps.......... 20,602 48 20,075 30,157 333 71,215
---------- ---------- --------- --------- --------- ----------
Total interest-bearing liabilities and
derivative financial instruments............... $4,444,966 $1,269,585 $ 579,266 $ 783,209 $ 988,171 $8,065,197
========== ========== ========= ========= ========= ==========
Interest sensitivity gap per period............. $ 732,976 $ (861,929) $(299,954) $(160,981) $(160,136) $ (750,024)
Cumulative interest sensitivity gap............. 732,976 (128,953) (428,907) (589,888) (750,024)
Cumulative ratio of interest-sensitive assets to
interest-sensitive liabilities................. 1.17x 0.98x 0.93x 0.92x 0.91x
Total Over
One Year Total
---------- -----------
Interest-Earning Assets
Loans........................................... $1,534,189 $ 7,719,873
Investment securities........................... 2,926,439 3,738,100
Other short-term investments.................... -- 32,656
Mortgage loans held for sale.................... -- 114,966
---------- -----------
Total interest-earning assets................... 4,460,628 11,605,595
Notional amount of interest rate swaps.......... 50,570 220,776
---------- -----------
Total interest-earning assets and derivative
financial instruments.......................... $4,511,198 $11,826,371
========== ===========
Interest-Bearing Liabilities
Time deposits over $100......................... $ 92,128 $ 453,486
All other deposits /(1)/........................ 2,316,132 6,929,575
Borrowed funds.................................. -- 1,830,065
Long-term debt.................................. 948,309 2,137,425
---------- -----------
Total interest-bearing liabilities.............. 3,356,569 11,350,551
Notional amount of interest rate swaps.......... 149,562 220,777
---------- -----------
Total interest-bearing liabilities and
derivative financial instruments............... $3,506,131 $11,571,328
========== ===========
Interest sensitivity gap per period............. $1,005,067 $ 255,043
Cumulative interest sensitivity gap.............
Cumulative ratio of interest-sensitive assets to
interest-sensitive liabilities.................
- --------
(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.
28
Item 7A. Quantitative And Qualitative Disclosures About Market Risk
See pages 26-28 of this Form 10-K for quantitative and qualitative
disclosures about market risk.
Item 8. Financial Statements And Supplementary Data
STATEMENT OF MANAGEMENT RESPONSIBILITY
THE BOARD OF DIRECTORS AND SHAREHOLDER OF
RBC CENTURA BANKS, INC.
Management of RBC Centura Banks, Inc. and its subsidiaries ("RBC Centura")
has prepared the consolidated financial statements and other information in the
annual report on Form 10-K 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. RBC
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 RBC 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. PricewaterhouseCoopers LLP and RBC Centura's internal auditors have
direct access to the Audit Committee.
/s/ JAMES T. RAGER
By: _________________________________
James T. Rager
Chairman of the Board
/s/ H. KEL LANDIS, III
By: _________________________________
H. Kel Landis, III
Chief Executive Officer
/s/ CHARLES A. CASWELL
By: ________________________
Charles A. Caswell
Chief Financial Officer
29
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF RBC CENTURA BANKS, INC.:
In our opinion, the accompanying consolidated balance sheet at December 31,
2001 and the related consolidated statements of operations, of shareholder's
equity and of cash flows present fairly, in all material respects, the
financial position of RBC Centura Banks, Inc. and its subsidiaries, at December
31, 2001 and the results of their operations and their cash flows for the
period June 6, 2001 through December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
By: _________________________________
PricewaterhouseCoopers LLP
Charlotte, North Carolina
January 18, 2002
30
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF RBC CENTURA BANKS, INC.:
In our opinion, the accompanying consolidated balance sheet at December 31,
2000 and the related consolidated statements of operations, of shareholder's
equity and of cash flows present fairly, in all material respects, the
financial position of RBC Centura Banks, Inc. (formerly Centura Banks, Inc.)
and its subsidiaries, at December 31, 2000 and the results of their operations
and their cash flows for the period January 1, 2001 through June 5, 2001 and
for the years ended December 31, 2000 and December 31, 1999 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
By: _________________________________
PricewaterhouseCoopers LLP
Charlotte, North Carolina
January 18, 2002
31
RBC CENTURA BANKS, INC. AND SUBSIDIARIES AND PREDECESSOR
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------
2001 2000
----------- -----------
RBC Centura Predecessor
----------- -----------
(thousands, except share data)
Assets
Cash and due from banks........................................................... $ 289,595 $ 356,602
Due from banks, interest-bearing.................................................. 16,197 14,928
Federal funds sold................................................................ 16,459 7,547
Investment securities:
Available for sale (cost of $3,738,100 and $2,623,159, respectively)........... 3,786,703 2,655,612
Held to maturity (fair value of $0 and $50,298, respectively).................. -- 49,493
Loans, net of unearned income..................................................... 7,719,873 7,671,691
Less allowance for loan losses................................................. 103,441 104,275
----------- -----------
Net loans.................................................................. 7,616,432 7,567,416
Mortgage loans held for sale...................................................... 114,966 56,907
Premises and equipment............................................................ 163,202 157,959
Goodwill and intangibles.......................................................... 1,459,126 146,445
Other assets...................................................................... 449,905 469,100
----------- -----------
Total assets...................................................................... $13,912,585 $11,482,009
=========== ===========
Liabilities
Deposits:
Demand, noninterest-bearing.................................................... $ 1,202,860 $ 1,131,121
Interest-bearing............................................................... 5,726,714 5,871,582
Time deposits over $100........................................................ 453,486 704,437
----------- -----------
Total deposits............................................................. 7,383,060 7,707,140
Borrowed funds.................................................................... 1,830,065 1,566,611
Long-term debt.................................................................... 2,137,426 1,084,762
Other liabilities................................................................. 308,349 167,071
----------- -----------
Total liabilities................................................................. 11,658,900 10,525,584
=========== ===========
Commitments and contingencies (Note 16)........................................... -- --
Shareholder's Equity:
Common stock, no par value, 2,500,000,000 shares authorized; shares issued and
outstanding of 2,166,517,536 and 39,427,056, respectively.................... 2,187,684 272,119
Accumulated other comprehensive income......................................... 29,766 18,939
Unearned compensation.......................................................... -- (4,084)
Retained earnings.............................................................. 36,235 669,451
----------- -----------
Total shareholder's equity........................................................ 2,253,685 956,425
----------- -----------
Total liabilities and shareholder's equity........................................ $13,912,585 $11,482,009
=========== ===========
See accompanying notes to consolidated financial statements.
32
RBC CENTURA BANKS, INC. AND SUBSIDIARIES AND PREDECESSOR
CONSOLIDATED STATEMENTS OF OPERATIONS
RBC Centura Predecessor
----------------- ------------------------------------
June 6, 2001 January 1, Years Ended December 31,
through 2001 through -----------------------
December 31, 2001 June 5, 2001 2000 1999
----------------- ------------ -------- --------
(thousands)
Interest Income
Loans, including fees........................................... $310,577 $282,986 $709,294 $633,179
Investment securities:
Taxable...................................................... 117,290 84,734 173,181 159,605
Tax-exempt................................................... 802 878 2,945 5,791
Short-term investments.......................................... 514 604 3,139 2,589
Mortgage loans held for sale.................................... 8,355 3,266 5,634 7,992
-------- -------- -------- --------
Total interest income........................................... 437,538 372,468 894,193 809,156
Interest Expense
Deposits........................................................ 104,305 119,044 311,348 268,864
Borrowed funds.................................................. 32,559 41,148 96,758 69,671
Long-term debt.................................................. 47,530 30,509 66,009 51,896
-------- -------- -------- --------
Total interest expense.......................................... 184,394 190,701 474,115 390,431
-------- -------- -------- --------
Net Interest Income............................................. 253,144 181,767 420,078 418,725
Provision for loan losses....................................... 24,382 25,420 31,815 40,828
-------- -------- -------- --------
Net interest income after provision for loan losses............. 228,762 156,347 388,263 377,897
Noninterest Income
Service charges on deposit accounts............................. 40,580 26,847 62,783 63,761
Credit card and related fees.................................... 6,462 3,656 8,993 9,008
Other service charges, commissions, and fees.................... 18,401 15,582 37,938 37,924
Fees for trust services......................................... 5,573 4,181 10,005 10,340
Mortgage income................................................. 12,502 8,641 33,945 25,304
Other noninterest income........................................ 13,340 13,179 28,915 25,160
Securities gains (losses), net.................................. 8,003 27,454 (36,859) (600)
-------- -------- -------- --------
Total noninterest income........................................ 104,861 99,540 145,720 170,897
Noninterest Expense
Personnel....................................................... 116,487 80,265 179,003 171,364
Occupancy....................................................... 15,019 10,563 23,975 24,688
Equipment....................................................... 15,433 11,441 24,887 27,404
Foreclosed real estate losses and related operating expense, net 1,081 971 2,358 1,697
Loss on equity investment....................................... -- 42,203 -- --
Merger-related and other significant charges.................... -- 91,502 28,516 6,858
Goodwill and intangible amortization............................ 51,010 6,284 13,843 13,601
Other operating expense......................................... 64,725 63,405 106,550 106,711
-------- -------- -------- --------
Total noninterest expense....................................... 263,755 306,634 379,132 352,323
-------- -------- -------- --------
Income (loss) before income taxes............................... 69,868 (50,747) 154,851 196,471
Income taxes.................................................... 33,633 435 56,096 66,134
-------- -------- -------- --------
Net Income (Loss)............................................... $ 36,235 $(51,182) $ 98,755 $130,337
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
33
RBC CENTURA BANKS, INC. AND SUBSIDIARIES AND PREDECESSOR
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
Accumulated Other
Comprehensive Income
Common Stock (Loss)
------------------------- -----------------------
Common
Stock Unearned Unrealized Minimum
Acquired Retained Compen- Gains/(Losses) Pension
(thousands, except share data) Shares Amount By ESOP Earnings sation on Securities Liability
- ------------------------------ ------------- ---------- -------- --------- -------- -------------- ---------
Predecessor
- -----------
Balance, December 31, 1998............. 39,650,845 $ 291,786 $(107) $ 539,128 $ -- $ 8,507 $(82)
Comprehensive Income:
Net income............................. -- -- -- 130,337 -- -- --
Minimum pension liability adjustment... -- -- -- -- -- -- 80
Unrealized losses on available for sale
securities, net of tax................ -- -- -- -- -- (51,301) --
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 $ -- $(42,794) $ (2)
Comprehensive income:
Net income............................. -- -- -- 98,755 -- -- --
Minimum pension liability adjustment... -- -- -- -- -- -- 2
Unrealized gains on available for sale
securities, net of tax................ -- -- -- -- -- 61,733 --
Comprehensive income...................
Common stock issued:
Stock option plans and stock
awards............................. 339,240 6,082 -- -- -- -- --
Restricted stock, net............... 128,049 5,291 -- -- (4,084) -- --
Repurchases of common stock............ (551,800) (20,806) -- -- -- -- --
Cash dividends declared................ -- -- -- (53,189) -- -- --
Other.................................. 15,157 2,863 28 15 -- -- --
------------- ---------- ----- --------- ------- -------- ----
Balance, December 31, 2000............. 39,427,056 $ 272,119 $ -- $ 669,451 $(4,084) $ 18,939 $ --
Comprehensive income:
Net loss, January 1 to June 5, 2001.... -- -- -- (51,182) -- -- --
Unrealized losses on available for sale
securities, net of tax................ -- -- -- -- -- (11,436) --
Comprehensive income................... -- -- -- -- -- -- --
Common stock issued:
Stock option plans and stock
awards............................. 495,997 13,285 -- -- -- -- --
Restricted stock, net............... -- -- -- -- 4,084 -- --
Cash dividends declared................ -- -- -- (27,761) -- -- --
Other.................................. 49,984 2,549 -- -- -- -- --
------------- ---------- ----- --------- ------- -------- ----
Balance June 5, 2001................... 39,973,037 $ 287,953 $ -- $ 590,508 $ -- $ 7,503 $ --
Elimination of balances due to
acquisition........................... (39,973,037) (287,953) -- (590,508) -- (7,503) --
------------- ---------- ----- --------- ------- -------- ----
Balance June 5, 2001................... -- $ -- $ -- $ -- $ -- $ -- $ --
RBC Centura
- -----------
Common Stock on June 6, 2001........... 2,166,517,536 $2,187,684 $ -- $ -- $ -- $ -- $ --
Comprehensive income:
Net Income, June 6 to December 31,
2001.................................. -- -- -- 36,235 -- -- --
Unrealized gains on available for sale
securities, net of tax................ -- -- -- -- -- 29,766 --
Comprehensive income................... -- -- -- -- -- -- --
------------- ---------- ----- --------- ------- -------- ----
Balance December 31, 2001.............. 2,166,517,536 $2,187,684 $ -- $ 36,235 $ -- $ 29,766 $ --
============= ========== ===== ========= ======= ======== ====
Total
Shareholder's
(thousands, except share data) Equity
- ------------------------------ -------------
Predecessor
- -----------
Balance, December 31, 1998............. $ 839,232
Comprehensive Income:
Net income............................. 130,337
Minimum pension liability adjustment... 80
Unrealized losses on available for sale
securities, net of tax................ (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............. $ 859,735
Comprehensive income:
Net income............................. 98,755
Minimum pension liability adjustment... 2
Unrealized gains on available for sale
securities, net of tax................ 61,733
----------
Comprehensive income................... 160,490
Common stock issued:
Stock option plans and stock
awards............................. 6,082
Restricted stock, net............... 1,207
Repurchases of common stock............ (20,806)
Cash dividends declared................ (53,189)
Other.................................. 2,906
----------
Balance, December 31, 2000............. $ 956,425
Comprehensive income:
Net loss, January 1 to June 5, 2001.... (51,182)
Unrealized losses on available for sale
securities, net of tax................ (11,436)
----------
Comprehensive income................... (62,618)
Common stock issued:
Stock option plans and stock
awards............................. 13,285
Restricted stock, net............... 4,084
Cash dividends declared................ (27,761)
Other.................................. 2,549
----------
Balance June 5, 2001................... $ 885,964
Elimination of balances due to
acquisition........................... (885,964)
----------
Balance June 5, 2001................... $ --
RBC Centura
- -----------
Common Stock on June 6, 2001........... $2,187,684
Comprehensive income:
Net Income, June 6 to December 31,
2001.................................. 36,235
Unrealized gains on available for sale
securities, net of tax................ 29,766
----------
Comprehensive income................... 66,001
----------
Balance December 31, 2001.............. $2,253,685
==========
See accompanying notes to consolidated financial statements.
34
RBC CENTURA BANKS, INC. AN SUBSIDIARIES AND PREDECESSOR
CONSOLIDATED STATEMENTS OF CASH FLOWS
RBC Centura
------------
June 6, 2001
through
December 31,
2001
------------
Cash Flows From Operating Activities
Net income (loss)................................................................ $ 36,235
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses........................................................ 24,382
Depreciation on assets under operating lease..................................... 2,172
Depreciation and amortization, excluding depreciation on assets under operating
lease........................................................................... 66,524
Amortization of purchase accounting adjustments.................................. 47,604
Deferred income taxes............................................................ 11,200
Loan fees deferred, net.......................................................... 772
Loss on equity investment........................................................ --
Bond premium amortization and (discount accretion), net.......................... 4,719
(Gains) losses on sales of investment securities................................. (8,003)
Loss on sales of foreclosed real estate.......................................... 187
Gain on sales of equipment under lease........................................... --
Gain on sale of subsidiary....................................................... --
Gain on sale of mortgage servicing rights........................................ --
Proceeds from sales of mortgage loans held for sale.............................. 585,195
Originations, net of principal repayments, of mortgage loans held for sale....... (536,020)
Decrease (increase) in accrued interest receivable............................... 3,819
(Decrease) increase in accrued interest payable.................................. (11,948)
Net change in other assets and other liabilities................................. (60,432)
-----------
Net cash provided by operating activities........................................ 166,406
-----------
Cash Flows From Investing Activities
Net decrease (increase) in loans................................................. 135,127
Purchases of:
Securities available for sale.................................................. (1,422,767)
Securities held to maturity.................................................... --
Premises and equipment......................................................... (16,874)
Other.......................................................................... --
Proceeds from:
Sales of securities available for sale......................................... 500,992
Maturities and issuer calls of securities available for sale................... 372,705
Maturities and issuer calls of securities held to maturity..................... --
Sales of foreclosed real estate................................................ 4,504
Dispositions of premises and equipment......................................... 731
Dispositions of equipment utilized in leasing activities....................... --
Sale of mortgage servicing rights.............................................. --
Net cash received in mergers, acquisitions, and divestitures..................... 68,395
-----------
Net cash (used) provided by investing activities................................. (357,187)
-----------
Cash Flows From Financing Activities
Net (decrease) increase in deposits.............................................. (175,165)
Net (decrease) increase in borrowed funds........................................ (281,521)
Proceeds from issuance of long-term debt......................................... 755,500
Repayment of long-term debt...................................................... (133,594)
Cash dividends paid.............................................................. --
Proceeds from issuance of common stock, net...................................... --
Repurchase of common stock....................................................... --
Other............................................................................ --
-----------
Net cash provided (used) by financing activities................................. 165,220
-----------
(Decrease) increase in cash and cash equivalents................................. (25,561)
Cash and cash equivalents, beginning of year..................................... 347,812
-----------
Cash and cash equivalents, end of year........................................... $ 322,251
===========
Supplemental Disclosures Of Cash Flow Information
Cash paid during the year for:
Interest....................................................................... $ 196,342
Income taxes................................................................... 11,047
Noncash transactions:
Stock issued for acquisitions and other stock issuances, net................... --
Unrealized securities gains (losses), net...................................... 48,602
Loans transferred to foreclosed property....................................... 9,574
Loans transferred to other assets.............................................. --
Income tax benefit from stock options.......................................... --
Predecessor
----------------------------------------
January 1, 2001 Years Ended December 31,
through ------------------------
June 5, 2001 2000 1999
--------------- ----------- -----------
Cash Flows From Operating Activities
Net income (loss)................................................................ $ (51,182) $ 98,755 $ 130,337
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses........................................................ 25,420 31,815 40,828
Depreciation on assets under operating lease..................................... 2,192 7,238 13,320
Depreciation and amortization, excluding depreciation on assets under operating
lease........................................................................... 20,508 40,193 46,302
Amortization of purchase accounting adjustments.................................. -- -- --
Deferred income taxes............................................................ (10,802) 15,048 8,742
Loan fees deferred, net.......................................................... (134) 882 2,798
Loss on equity investment........................................................ 42,203 -- --
Bond premium amortization and (discount accretion), net.......................... (3,644) (2,211) 4,872
(Gains) losses on sales of investment securities................................. (27,454) 36,859 600
Loss on sales of foreclosed real estate.......................................... 371 521 442
Gain on sales of equipment under lease........................................... -- -- (2,821)
Gain on sale of subsidiary....................................................... -- -- (4,893)
Gain on sale of mortgage servicing rights........................................ -- (14,776) (3,392)
Proceeds from sales of mortgage loans held for sale.............................. 375,348 458,303 845,602
Originations, net of principal repayments, of mortgage loans held for sale....... (475,771) (468,808) (774,640)
Decrease (increase) in accrued interest receivable............................... 10,800 (6,720) (2,704)
(Decrease) increase in accrued interest payable.................................. (3,911) (1,561) 9,009
Net change in other assets and other liabilities................................. 96,575 6,338 (70,943)
----------- ----------- -----------
Net cash provided by operating activities........................................ 519 201,876 243,459
----------- ----------- -----------
Cash Flows From Investing Activities
Net decrease (increase) in loans................................................. (116,700) (221,763) (409,196)
Purchases of:
Securities available for sale.................................................. (1,872,595) (1,510,224) (1,032,587)
Securities held to maturity.................................................... -- -- (26,777)
Premises and equipment......................................................... (18,060) (38,276) (20,770)
Other.......................................................................... -- (80,000) (20,000)
Proceeds from:
Sales of securities available for sale......................................... 1,199,303 1,337,096 206,765
Maturities and issuer calls of securities available for sale................... 201,026 364,495 581,581
Maturities and issuer calls of securities held to maturity..................... 5,647 10,584 69,425
Sales of foreclosed real estate................................................ 2,531 8,521 10,197
Dispositions of premises and equipment......................................... 602 12,169 7,409
Dispositions of equipment utilized in leasing activities....................... -- -- 7,369
Sale of mortgage servicing rights.............................................. -- 13,417 8,295
Net cash received in mergers, acquisitions, and divestitures..................... -- 107,146 3,105
----------- ----------- -----------
Net cash (used) provided by investing activities................................. (598,246) 3,165 (615,184)
----------- ----------- -----------
Cash Flows From Financing Activities
Net (decrease) increase in deposits.............................................. (387,657) (328,242) 155,680
Net (decrease) increase in borrowed funds........................................ 544,975 (34,627) 136,618
Proceeds from issuance of long-term debt......................................... 550,500 535,500 253,637
Repayment of long-term debt...................................................... (126,880) (355,064) (83,441)
Cash dividends paid.............................................................. (27,761) (53,189) (44,556)
Proceeds from issuance of common stock, net...................................... 13,285 6,083 8,340
Repurchase of common stock....................................................... -- (20,806) (36,385)
Other............................................................................ -- -- (161)
----------- ----------- -----------
Net cash provided (used) by financing activities................................. 566,462 (250,345) 389,732
----------- ----------- -----------
(Decrease) increase in cash and cash equivalents................................. (31,265) (45,304) 18,007
Cash and cash equivalents, beginning of year..................................... 379,077 424,381 406,374
----------- ----------- -----------
Cash and cash equivalents, end of year........................................... $ 347,812 $ 379,077 $ 424,381
=========== =========== ===========
Supplemental Disclosures Of Cash Flow Information
Cash paid during the year for:
Interest....................................................................... $ 194,612 $ 475,676 $ 381,422
Income taxes................................................................... 5,868 38,476 71,408
Noncash transactions:
Stock issued for acquisitions and other stock issuances, net................... 6,631 8,259 14,647
Unrealized securities gains (losses), net...................................... (20,148) 99,617 (81,062)
Loans transferred to foreclosed property....................................... 2,004 8,518 9,029
Loans transferred to other assets.............................................. -- 6,007 --
Income tax benefit from stock options.......................................... 1,843 1,661 3,310
See accompanying notes to consolidated financial statements.
35
RBC CENTURA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
The accompanying consolidated financial statements include the accounts of
RBC Centura Banks, Inc. ("RBC Centura") and its wholly-owned subsidiaries, RBC
Centura Bank (named Centura Bank prior to October 30, 2001, the "Bank"),
Centura Capital Trust I ("CCTI"), Triangle Capital Trust ("TCT"), and NCS
Mortgage Lending Company ("NCS"). Until the divestiture of the interest in the
third quarter of 2001, RBC Centura also had a 49 percent ownership interest in
First Greensboro Home Equity, Inc. ("FGHE"), a home equity mortgage company,
that was accounted for under the equity method.
Basis of Financial Statement Presentation
As previously disclosed, at the close of business on June 5, 2001, Rock
Merger Subsidiary, Inc., a wholly-owned subsidiary of Royal Bank of Canada
("Royal Bank"), a Canadian chartered bank, merged with and into Centura Banks,
Inc. ("Predecessor") and the surviving corporation was Predecessor, which was
renamed RBC Centura Banks, Inc. As a result of the transaction, Predecessor
became a wholly-owned subsidiary of Royal Bank. Each share of Rock Merger
Subsidiary, Inc. common stock issued and outstanding immediately prior to the
effective time of the merger was converted into one share of common stock of
RBC Centura. There are 2,166,517,536 shares of common stock currently
outstanding, all of which is owned by Royal Bank. The common stock is
registered under Section 12(g) of the Securities Exchange Act of 1934, as
amended.
Reference herein to RBC Centura relates to the period subsequent to and
including June 6, 2001, while reference to Predecessor relates to periods prior
to and including June 5, 2001. Royal Bank's basis in RBC Centura was "pushed
down" to RBC Centura and is therefore reflected in RBC Centura's balance sheet
and results of operations. See Note 3 for information regarding this
acquisition.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. All significant intercompany
transactions are eliminated in consolidation. All prior period financial
information has been restated to include historical information for companies
acquired in transactions accounted for as pooling-of-interests. 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, valuation of retained interests and the valuation of
mortgage servicing rights ("MSRs").
Certain items reported in prior periods have been reclassified to conform to
current period presentation. Such reclassifications had no impact on net income
or shareholder's equity.
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; life and credit related
insurance products; 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. Refer to Note 18 for additional information
concerning RBC Centura's lines of business.
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.
36
RBC CENTURA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
CCTI and TCT were established to facilitate the issuance of capital
securities, a component of long-term debt, as described in detail in Note 11.
NCS specialized in the origination of non-conforming mortgages through
independent mortgage brokers and sold the production. As discussed in Note 21,
Predecessor sold the production activities of NCS and liquidated substantially
all of the remaining portfolio.
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
RBC 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 RBC 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 shareholder's 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 RBC 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.
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 ongoing 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, the growth and risk composition of the loan portfolio,
and other information including individual valuations on nonperforming loans in
accordance with SFAS 114 "Accounting By Creditors for Impairment of a Loan"
("SFAS 114"). 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, which 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.
37
RBC CENTURA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Impaired Loans, Nonaccrual Loans, and Other Real Estate Owned
A loan is considered to be impaired when, based on current information, it
is probable RBC Centura will not receive all amounts due in accordance with the
contractual terms of a loan agreement. Once a loan has been identified as
impaired, management measures impairment in accordance with SFAS 114. 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. If
the recorded investment in impaired loans exceeds the measure of estimated fair
value, a valuation allowance is established as a component of AFLL. 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. If this
uncertainty is eliminated, 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. Other real estate owned is carried at the lower of
the recorded amount of the loan or lease for which the property previously
served as collateral, or the fair value of the property less estimated costs to
sell. At December 31, 2001 and 2000, the net book value of other real estate
properties was $13.4 million and $5.9 million, respectively.
Mortgage Loans Held for Sale
RBC Centura originates certain residential mortgage loans with the intent to
sell. Mortgage loans held for sale are reported at the lower of cost or market
value on an aggregate loan portfolio basis. Gains or losses realized on the
sales of loans are recognized at the time of sale and are determined by the
difference between the net sales proceeds and the carrying value of the loans
sold, adjusted for any servicing asset or liability. Gains and losses on sales
of loans are included in noninterest income.
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
based on the relative fair value 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 certain risk 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.
38
RBC CENTURA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Loan Securitizations
During 2000, RBC Centura sold loans to FGHE, which were then securitized and
sold to third parties. Upon securitization, RBC Centura received a portion of
the beneficial interests in the securitized assets in the form of a
subordinated interest (interest-only strips) as partial payment for the loan
sale. These interest-only strips are carried in the investment portfolio as
available for sale securities. The gain or loss recorded on the sale of the
loans and the initial recorded value of the retained interest were calculated
based on the allocated cost of the loans and the retained interest based upon
the relative fair values of these instruments. RBC Centura no longer sells
loans to FGHE.
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.
Goodwill and Other Intangibles
Goodwill and other intangibles are principally comprised of goodwill and
core deposit premiums. Goodwill, recorded in connection with the acquisition of
Predecessor by Royal Bank, represents the excess of cost over the fair value of
net assets and was assigned a life of 20 years. Under new accounting guidance
discussed in the "Current Accounting Matters" section, goodwill is considered
to have an infinite life and will no longer be amortized beginning in January
of 2002, but rather will be subject to impairment evaluation at least annually.
Core deposit premiums are amortized over 10 years. At December 31, 2001 and
2000, goodwill, net of accumulated amortization, was $1.2 billion and $117.1
million, respectively. Core deposit premiums, net of accumulated amortization,
were $244.0 million and $22.8 million at December 31, 2001 and December 31,
2000, respectively.
Other Assets and Other Liabilities
RBC Centura has included as other assets, equipment under operating lease
contracts. For the years ended December 31, 2001, 2000, and 1999, $1.2 million,
$2.4 million, and $6.2 million, respectively, of net operating lease rental
income was recorded in other noninterest income.
Also included in other assets during a portion of 2001 and all of 2000 was
RBC Centura's investment in FGHE, which was accounted for using the equity
method of accounting. At December 31, 2000, the investment in FGHE, net of
accumulated amortization, was $26.0 million. Included in retained earnings at
December 31, 2000 were undistributed losses from FGHE totaling $2.3 million.
See Note 21 for discussion of Predecessor's decision to no longer provide
credit support to FGHE and the resulting impact upon the financial position and
results of operations of both Predecessor and RBC Centura.
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
RBC 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
39
RBC CENTURA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
and the income tax basis of RBC Centura's assets and liabilities at enacted tax
rates expected to be in effect when such amounts are realized or settled.
Derivative Financial Instruments
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 RBC Centura
to assist in managing its exposure to changes in interest rates. RBC Centura
has principally utilized swaps, floors and caps. The fair value of these
derivatives are based on dealer quotes, third party financial models, and
internal pricing analytics. RBC Centura records all derivative instruments on
the balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, depending on the type of hedge transaction. For fair value hedge
transactions hedging changes in the fair value of an asset, liability, or firm
commitment, changes in the fair value of the derivative instrument will
generally be offset in the income statement by changes in the hedged item's
fair value. For cash flow hedge transactions hedging the variability of cash
flows related to a variable-rate asset, liability, or a forecasted transaction,
changes in the fair value of the derivative instrument will be reported in
other comprehensive income. The gains and losses on the derivative instrument
that are reported in other comprehensive income will be reclassified to
earnings in the periods in which earnings are impacted by the variability of
the cash flows of the hedged item. The ineffective portion of all hedges will
be recognized in current period earnings. The amount of hedge ineffectiveness
recorded during 2001 was not considered significant. Derivatives that do not
meet the hedge accounting criteria and, therefore, do not qualify for hedge
accounting, will be accounted for at fair value with changes in fair value
recorded in other noninterest income in the income statement.
Upon implementation of Statement of Financial Accounting Standards ("SFAS")
No. 133, "Accounting for Derivative Instruments and Hedging Activities," on
January 1, 2001, RBC Centura recorded certain transition adjustments as
required by SFAS 133. The impact of such transition adjustments to net income
was a gain of approximately $27,000. Further, the initial application of SFAS
133 resulted in RBC Centura recognizing $2.6 million of derivative assets and
$2.4 million of derivative liabilities in the consolidated balance sheet. The
implementation did not result in any adjustments to accumulated other
comprehensive income. The adoption of SFAS 133 may increase the volatility of
reported earnings and other comprehensive income in any given reporting period.
The amount of volatility is based on amounts, positions and market conditions
that exist as of and during any reporting period.
Fair Value of Financial Instruments
The following describes the methods and assumptions used by RBC Centura to
estimate the fair value of financial instruments.
Cash and Due From Banks (including 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.
40
RBC CENTURA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
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 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all
business combinations initiated after June 30, 2001 be accounted for using the
purchase method of accounting. The new standard also requires intangible assets
acquired in a business combination to be recognized as an asset apart from
goodwill if they meet certain criteria.
SFAS No. 142 applies to all goodwill and intangible assets acquired in a
business combination. Under the new standard, all goodwill, including goodwill
acquired before initial application of the standard, will not be amortized but
must be tested for impairment at least annually at the reporting unit level, as
defined in the standard. Intangible assets other than goodwill are to be
amortized over their useful lives and reviewed for impairment in accordance
with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", which was superseded by SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" as discussed
below. Within six months of initial application of the new standard, a
transitional impairment test must be performed on all goodwill. Any impairment
loss recognized as a result of the transitional impairment test should be
reported as a change in accounting principle. The Company has not yet
determined what effect this impairment test will have on the Company's earnings
and financial position. In addition to the transitional impairment test, the
required annual impairment test should be performed in the year of adoption of
the standard.
SFAS No. 142 is effective for fiscal years beginning after December 15,
2001, and must be adopted as of the beginning of a fiscal year and retroactive
application is not permitted. RBC Centura adopted the standard on January 1,
2002. Based on goodwill of $1.2 billion, RBC Centura would have, under previous
accounting guidance, recorded approximately $62 million annually of goodwill
amortization. With the adoption of this Statement this goodwill amortization
will no longer be charged to earnings but rather the intangible goodwill asset
will be evaluated periodically for impairment as noted above.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", which addresses the financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. This statement requires that obligations
associated with the retirement of a tangible long-lived asset be recorded as a
liability when those obligations are incurred, with the amount of the liability
initially measured at fair value. Upon initially recognizing a liability for an
asset retirement obligation, an entity must capitalize the cost by recognizing
an increase in the carrying amount of the related long-lived asset. Over time,
the liability is accreted to its present value each period, and the capitalized
cost is depreciated over the useful life of the related asset. Upon settlement
of the liability, an entity either settles the obligation for its recorded
amount or incurs a gain or loss upon settlement. The new standard is effective
for fiscal years beginning after June 15, 2002 and earlier application is
encouraged. Management plans to adopt this standard on January 1, 2003 and is
in the process of evaluating the impact on RBC Centura.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", which supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of". This statement develops one accounting model (based on the model
in FAS 121) for long-lived assets that are to be disposed of by sale, as well
as addresses the principal implementation issues. SFAS No. 144 requires that
long-lived assets that are to be disposed of by sale be measured at the lower
of book value or fair value less cost to sell. That requirement eliminates
Accounting Principles Board ("APB") 30's requirement that discontinued
operations be measured at
41
RBC CENTURA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
net realizable value or that entities include under "discontinued operations"
in the financial statements amounts for operating losses that have not yet
occurred. Additionally, SFAS No. 144 expands the scope of discontinued
operations to include all components of an entity with operations that (1) can
be distinguished from the rest of the entity and (2) will be eliminated from
the ongoing operations of the entity in a disposal transaction. This statement
also amends Accounting Research Bulletin ("ARB") No. 51, Consolidated Financial
Statements, to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. The provisions of this statement are
effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years, with early
application encouraged. The provisions of this statement generally are to be
applied prospectively. Adoption of this standard occurred on January 1, 2002
with no associated material impact.
NOTE 2 -- OTHER COMPREHENSIVE INCOME OR LOSS
The components of other comprehensive income or loss are summarized below
for the years ended December 31:
RBC Centura Predecessor
------------------------------ -----------------------------
June 6 to December 31, 2001 January 1 to June 5, 2001
------------------------------ -----------------------------
Tax Tax
Before-Tax (Expense) After-Tax Before-Tax (Expense) After-Tax
Amount Benefit Amount Amount Benefit Amount
---------- --------- --------- ---------- --------- ---------
(thousands)
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during period.... $56,606 $(21,964) $34,642 $ 7,306 $ (1,885) $ 5,421
Less: Reclassification for realized gains (losses). 8,003 (3,127) 4,876 27,454 (10,597) 16,857
------- -------- ------- -------- -------- --------
Unrealized gains (losses), net of reclassification. 48,603 (18,837) 29,766 (20,148) 8,712 (11,436)
------- -------- ------- -------- -------- --------
Other comprehensive income (loss)..................... $48,603 $(18,837) $29,766 $(20,148) $ 8,712 $(11,436)
======= ======== ======= ======== ======== ========
Predecessor
------------------------------------------------------------
Year Ended December 31, 2000 Year Ended December 31, 1999
----------------------------- -----------------------------
Tax Tax
Before-Tax (Expense) After-Tax Before-Tax (Expense) After-Tax
Amount Benefit Amount Amount Benefit Amount
---------- --------- --------- ---------- --------- ---------
(thousands)
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during period.... $ 62,758 $(24,173) $ 38,585 $(81,662) $30,054 $(51,608)
Less: Reclassification for realized (losses) gains. (36,859) 13,711 (23,148) (600) 293 (307)
-------- -------- -------- -------- ------- --------
Unrealized gains (losses), net of reclassification. 99,617 (37,884) 61,733 (81,062) 29,761 (51,301)
Minimum pension liability adjustment.................. 3 (1) 2 132 (52) 80
-------- -------- -------- -------- ------- --------
Other comprehensive income (loss)..................... $ 99,620 $(37,885) $ 61,735 $(80,930) $29,709 $(51,221)
======== ======== ======== ======== ======= ========
NOTE 3 -- MERGERS, ACQUISITIONS AND DIVESTITURES
As discussed in Note 1, at the close of business on June 5, 2001, Rock
Merger Subsidiary, Inc., a wholly-owned subsidiary of Royal Bank, a Canadian
chartered bank, merged with and into Predecessor and the surviving corporation
was Predecessor, which was renamed RBC Centura Banks, Inc. As a result of the
transaction, Predecessor became a wholly-owned subsidiary of Royal Bank. The
value of the transaction was approximately $2.2 billion and the business
combination was accounted for as a purchase with Royal Bank's basis being
"pushed down" to RBC Centura. The purchase price was allocated to the estimated
fair values of RBC Centura's tangible and intangible assets and liabilities
with the remainder allocated to goodwill. As a result of the application of
purchase accounting during the second quarter of 2001, RBC Centura recorded
premiums of $11.6 million and $70.8 million on the investment and loan
portfolios, respectively, a discount of $32.3 million on deposits and a
discount of $5.5 million on long-term debt, which are being amortized over the
average life of the respective instruments.
In connection with the acquisition by Royal Bank, RBC Centura recorded $1.2
billion and $259.1 million in goodwill and core deposit intangibles,
respectively. Goodwill was assigned a life of 20 years while the core deposit
intangible has been
42
RBC CENTURA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 3 -- MERGERS, ACQUISITIONS AND DIVESTITURES--Continued
assigned a life of 10 years. Under new accounting guidance discussed in Note 1,
goodwill is considered to have an infinite life and will no longer be amortized
beginning in January of 2002, but rather will be subject to impairment
evaluation at least annually.
In connection with the transaction, RBC Centura incurred merger-related and
other significant charges of $91.5 million, before tax. Merger-related charges
include termination of employment contracts, change of control payments, costs
of the transaction including legal, accounting, and investment banking fees,
cash settlement of Predecessor's outstanding stock options, and certain other
expenses. Also included is a $1.9 million pension plan curtailment loss
resulting from Predecessor discontinuing accruing benefits under its pension
plan for all participants except for certain groups of employees.
The following table summarizes activity for merger-related accruals for the
period ended December 31, 2001 related to the June 5, 2001 acquisition by Royal
Bank:
Amount
Initial utilized
Liability during Remaining
accrued 2001 Balance
--------- -------- ---------
(in thousands)
Severance, change in control, other employee-related costs, and director-related costs $70,335 $62,888 $ 7,447
Write-off of unrealizable assets...................................................... 650 650 --
Non-employee related contract terminations............................................ 1,776 935 841
Professional costs.................................................................... 17,204 14,204 3,000
Other merger-related expenses......................................................... 1,555 1,555 --
------- ------- -------
Merger-related expenses............................................................... $91,520 $80,232 $11,288
======= ======= =======
RBC Centura consummated the following mergers and acquisitions during 2001,
2000, and 1999:
Acquisition Shares
Date Assets Loans Deposits Issued
----------- ------ ------ -------- ----------
(millions, except shares)
Acquisitions accounted for as purchases:
Security First Network Bank ("SFNB"), asset purchase and deposit
assumption, Atlanta, GA........................................... 8/17/01 $ 184 $ 95 $ 184 --
NCS Mortgage Services, LLC, ("NCS"), Atlanta, GA.................... 3/24/00 $ 1 $ -- $ -- --
Wachovia Bank ("Wachovia"), deposit assumption...................... 9/21/00 6 6 138 --
Capital Advisors.................................................... 1/07/99 $ 1 $ -- $ -- 122,865
Scotland Bancorp, Inc. ("Scotland"), Laurinburg, NC................. 2/05/99 57 41 40 --
Mergers accounted for as pooling-of-interests:
Triangle Bancorp, Inc. ("Triangle"), Raleigh, NC.................... 2/18/00 $2,317 $1,536 $1,654 11,388,734
First Coastal Bankshares, Inc. ("First Coastal"), Virginia Beach, VA 3/26/99 $ 527 $ 433 $ 380 1,706,875
For combinations accounted for under the pooling-of-interests method, all
financial data previously reported prior to the date of merger has been
restated as though the entities had been combined for the periods presented.
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. The pro forma results of operations as though RBC Centura had
consummated each of the acquisitions accounted for as purchases as of the
beginning of the periods presented are not presented due to immateriality.
Acquisitions Accounted for as Purchases
On August 17, 2001, RBC Centura purchased, at book value, certain banking
assets, including loans and extensions of credit, and assumed certain deposits
of SFNB, an entity under the common control of Royal Bank. The transactions
involved the acquisition of approximately $184 million in deposits, $95 million
in loans, and $20 million in mortgage-backed securities.
43
RBC CENTURA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 3 -- MERGERS, ACQUISITIONS AND DIVESTITURES--Continued
On March 24, 2000, Predecessor acquired the loan origination operations of
NCS, based in Atlanta, Georgia. Assets acquired with the acquisition totaled
approximately $1.0 million and approximately $1.1 million of goodwill was
recorded. The business activities were conducted within a subsidiary of RBC
Centura, NCS Mortgage Lending Company. NCS specialized in the origination of
non-conforming mortgages through independent mortgage brokers and sold the
production. As discussed in Note 21, Predecessor sold the operations of NCS and
a majority of the associated loan portfolio during 2001.
On September 21, 2000, Predecessor purchased four branches from Wachovia,
enhancing Predecessor's presence in western North Carolina, a vibrant tourist
and resort market. Predecessor assumed approximately $5.9 million in loans and
$138.3 million in deposits. Goodwill and core deposit premiums of approximately
$21.5 million were recorded as a result of the acquisition.
On January 7, 1999, Predecessor acquired Capital Advisors of North Carolina,
LLC, Capital Advisors of South Carolina, Inc., Capital Advisors of Mississippi,
Inc., Selken, Inc., and Capital Advisors, Inc., which were merged to form
Capital Advisors, Inc. ("Capital Advisors"). With this transaction, Capital
Advisors became a wholly-owned subsidiary of the 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. Approximately $14.8
million of goodwill was recorded in other assets on the consolidated balance
sheet as a result of this purchase.
On February 5, 1999, Predecessor completed the acquisition of Scotland,
based in Laurinburg, North Carolina. Goodwill of approximately $6.6 million was
recorded in other assets on the consolidated balance sheet.
Mergers Accounted for as Pooling-of-Interests
On February 18, 2000, Predecessor merged with Triangle, a Raleigh, North
Carolina based bank holding company. Predecessor issued approximately 11.4
million shares to effect the combination and each Triangle shareholder received
0.45 shares of Predecessor common stock in exchange for each Triangle share.
Triangle had assets of approximately $2.3 billion and operated 71 locations
throughout North Carolina. In connection with this combination, Predecessor
incurred pre-tax, merger-related charges of $26.8 million. As of December 31,
2001, $856,000 of merger-related liabilities remained on the balance sheet, a
majority of which relate to remaining contractual obligations. Historical
financial information presented in these consolidated financial statements has
been restated to include the accounts and results of operations of Triangle.
On March 26, 1999, Predecessor merged with First Coastal, headquartered in
Virginia Beach, Virginia. Each share of First Coastal common stock was
exchanged for 0.34 shares of Predecessor common stock. This combination
increased Predecessor's presence in the Hampton Roads region of Virginia by 18
banking centers. In connection with the merger, Predecessor recorded pre-tax,
merger-related charges of $8.4 million.
The following table presents the historical results of operations for
Predecessor 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 actual consummation:
Historical
--------------------
Predecessor and Triangle
Predecessor Triangle Proforma Combined
----------- -------- ------------------------
(In thousands)
Year ended December 31, 1999
Net interest income, after provision for loan losses. $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*
- --------
* Reflects intercompany eliminations and adjustments made to conform
accounting policies between the combined entities.
44
RBC CENTURA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 3 -- MERGERS, ACQUISITIONS AND DIVESTITURES--Continued
On September 30, 1999, Predecessor sold its technology leasing subsidiary,
CLG, Inc. The pretax net gain recorded on this sale was $4.9 million.
On September 29, 2001, RBC Centura divested its interest in FGHE. See Note
21 for further discussion of the impact upon RBC Centura.
NOTE 4 -- INVESTMENT SECURITIES
A summary of investment securities by type at December 31 follows:
2001 2000
------------------------------------------- -------------------------------------------
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Held to maturity:
U.S. Treasury............... $ -- $ -- $ -- $ -- $ 24,944 $ 265 $ -- $ 25,209
U.S. government agencies and
corporations............... -- -- -- -- 3,932 120 -- 4,052
State and municipal......... -- -- -- -- 20,000 421 1 20,420
Other securities............ -- -- -- -- 617 -- -- 617
---------- ------- ------- ---------- ---------- ------- ------- ----------
Total held to maturity...... $ -- $ -- $ -- $ -- $ 49,493 $ 806 $ 1 $ 50,298
========== ======= ======= ========== ========== ======= ======= ==========
Available for sale:
U.S. Treasury............... $ 81,573 $ 532 $ -- $ 82,105 $ 103,225 $ 750 $ 7 $ 103,968
U.S. government agencies and
corporations............... 887,484 24,307 1,805 909,986 514,750 17,173 -- 531,923
Mortgage-backed securities.. 2,130,172 24,112 5,538 2,148,746 1,124,234 19,469 2,484 1,141,219
Asset-backed securities..... 123,121 3,020 -- 126,141 112,556 908 212 113,252
State and municipal......... 35,369 41 12 35,398 16,018 70 46 16,042
Common stock................ 139,606 -- 11 139,595 67,786 318 1,642 66,462
Other securities............ 340,775 7,325 3,368 344,732 684,590 9,117 10,961 682,746
---------- ------- ------- ---------- ---------- ------- ------- ----------
Total available for sale.... $3,738,100 $59,337 $10,734 $3,786,703 $2,623,159 $47,805 $15,352 $2,655,612
========== ======= ======= ========== ========== ======= ======= ==========
The following is a summary of investment securities by contractual maturity
at December 31, 2001:
Available for Sale
---------------------
Amortized
Cost Fair Value
---------- ----------
(thousands)
Due in one year or less.................... $ 136,723 $ 134,359
Due after one year through five years...... 940,081 963,224
Due after five years through ten years..... 59,080 60,755
Due after ten years........................ 209,317 213,883
Mortgage-backed and asset-backed securities 2,253,293 2,274,887
Common stock............................... 139,606 139,595
---------- ----------
Total...................................... $3,738,100 $3,786,703
========== ==========
As part of the application of purchase accounting, a premium of $11.6
million was recorded during the second quarter of 2001 as a fair value
adjustment and is being amortized based on the effective yield method over the
remaining life of the securities. In connection with the acquisition by Royal
Bank, RBC Centura transferred approximately $44 million of investment
securities from the held to maturity portfolio to available for sale in order
to align RBC Centura's interest rate risk position and credit risk policy with
those of Royal Bank.
45
RBC CENTURA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4 -- INVESTMENT SECURITIES--Continued
At December 31, 2001 and 2000, investment securities with book values of
approximately $1.5 billion and $1.3 billion, 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 2001, the sale of securities generated gross realized gains and
losses of $44.7 million and $17.3 million, respectively, by the Predecessor and
gross realized gains and losses of $8.8 million and $756,000 respectively, by
RBC Centura. Gross realized gains of $5.1 million and $3.6 million and gross
realized losses of $42.0 million and $4.2 million were realized during 2000 and
1999, respectively. Predecessor restructured the investment portfolio during
the second quarter of 2001, which resulted in $26.8 million in realized gains.
Predecessor performed two restructurings of its investment portfolio during
2000. In the second quarter of 2000, Predecessor incurred losses of $22.1
million related to the restructuring of Triangle's investment portfolio,
undertaken to conform the interest rate risk position of the Triangle
investment portfolio to the overall risk position of Predecessor. During the
third quarter of 2000, Predecessor restructured portions of its own investment
portfolio, taking advantage of the current interest rate environment to replace
lower yielding securities.
During the fourth quarter of 2000, Predecessor sold a portion of its
residential mortgage loans servicing released to FGHE, and such loans were
included in a securitization transaction whereby Predecessor received a
retained interest as part of the proceeds from the loan sale. As a result,
Predecessor recognized a gain of approximately $720,000. The amount of the
retained interests (based on the allocation of the previous carrying amounts)
recorded on the date of sale amounted to $12.6 million. The fair value of the
retained interest at December 31, 2001 and December 31, 2000 amounted to $6.2
million and $12.8 million, respectively. As of the valuation date of December
31, 2001, the prepayment speed utilized to measure the retained interests was
35 CPR ("conditional prepayment rate") for approximately 25 percent of the
portfolio securitized and 20 CPR for the remaining 75 percent of the portfolio.
Other key economic assumptions used to measure the retained interests as of
December 31, 2001 were:
Weighted-average life 2.16 years
Expected credit losses Ranging between 0.2% and
20.0% per year
Residual cash flows
discount rate 14.0 %
RBC Centura performed a shock analysis upon the value of the retained
interest to identify the impact upon the valuation of the residual of a 10 and
a 20 percent adverse change in the assumptions used for prepayment speed,
expected credit losses, and the discount rate. These changes were determined
not to have a material impact upon the carrying value of the retained interest.
NOTE 5 -- LOANS
As part of the application of purchase accounting, a premium of $70.8
million was recorded during the second quarter of 2001 as a fair value
adjustment to the loan portfolio and is being amortized on a straight line
basis over the average life of the loans. Most of RBC Centura's loans are with
customers located in North Carolina, South Carolina and the Hampton Roads
region of Virginia. A summary of loans at December 31 follows:
2001 2000
---------- ----------
(thousands)
Commercial, financial, and agricultural....... $2,209,478 $2,067,962
Consumer...................................... 566,450 571,375
Real estate--mortgage......................... 3,564,239 3,646,786
Real estate--construction and land development 1,065,979 1,025,597
Leases........................................ 193,962 254,858
Other......................................... 119,765 105,113
---------- ----------
Total loans, net of unearned income........... $7,719,873 $7,671,691
========== ==========
Included in the above:
Nonaccrual loans.............................. $ 67,615 $ 48,475
Accruing loans past due ninety days or more... 10,410 12,338
46
RBC CENTURA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 5 -- LOANS--Continued
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balance of these loans at
December 31, 2001, 2000 and 1999 amounted to $965 million, $2.9 billion and
$3.1 billion, respectively.
During the fourth quarter of 2000, Predecessor transferred approximately
$6.0 million in nonaccrual loans to other assets as management intended to sell
such loans. These loans were subsequently sold during July of 2001 with no
material gain or loss recognized.
For the years ended December 31, 2001, 2000, and 1999, the interest income
that would have been recorded on nonaccrual loans had they performed in
accordance with their original terms amounted to approximately $3.8 million,
$2.6 million and $2.3 million, respectively. Interest income on all such loans
included in the results of operations amounted to approximately $1.1 million,
$901,000, and $668,000 during 2001, 2000, and 1999, respectively.
In the normal course of business, RBC Centura previously extended credit to
FGHE at prevailing interest rates and at terms similar to those granted in
arms-length transactions. At December 31, 2000, total loans outstanding to FGHE
were $43.6 million and are included in the consolidated balance sheets. See
Note 21 for further discussion of FGHE.
The Bank makes loans to executive officers and directors of RBC 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:
RBC Centura Predecessor
-------------------- -------------------------------------------------------
June 6, 2001 through January 1, 2001 Year Ended Year Ended
December 31, 2001 through June 5, 2001 December 31, 2000 December 31, 1999
-------------------- -------------------- ----------------- -----------------
(thousands)
AFLL at beginning of year................. $103,044 $104,275 $ 95,500 $ 91,894
AFLL related to loans transferred or sold. (549) -- (368) (556)
Allowance for acquired loans.............. -- -- -- 605
Provision for loan losses................. 24,382 25,420 31,815 40,828
Charge-offs............................... (28,091) (28,857) (28,161) (41,044)
Recoveries on loans previously charged-off 4,655 2,206 5,489 3,773
-------- -------- -------- --------
Net Charge-offs........................... (23,436) (26,651) (22,672) (37,271)
-------- -------- -------- --------
AFLL at end of year....................... $103,441 $103,044 $104,275 $ 95,500
======== ======== ======== ========
The following tables summarize individually impaired loan information as of
December 31:
2001 2000
------- -------
(thousands)
Individually impaired loans with related allowance... $27,387 $22,553
Individually impaired loans with no related allowance 13,558 10,327
------- -------
Total individually impaired loans.................... $40,945 $32,880
======= =======
Allowance on individually impaired loans............. $ 7,022 $11,659
2001 2000 1999
------- ----------- -------
(thousands)
Cash basis interest income... $ 143 $ 155 $ 141
Average impaired loan balance 38,259 24,109 24,160
47
RBC CENTURA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 7 -- MORTGAGE SERVICING RIGHTS
A summary of capitalized MSRs follows:
RBC Centura Predecessor
-------------------- -------------------------------------
June 6, 2001 through January 1, 2001 Year ended
December 31, 2001 through June 5, 2001 December 31, 2000
-------------------- -------------------- -----------------
(thousands)
Balance at beginning of period..... $ 8,228 $6,517 $ 35,916
Purchase price premium amortization (260) -- --
MSRs capitalized................... 6,676 767 4,354
MSRs amortized..................... (1,673) (328) (4,243)
Sale of MSRs....................... -- -- (29,510)
------- ------ --------
Balance at end of period........... $12,971 $6,956 $ 6,517
======= ====== ========
As part of the application of purchase accounting, a premium of $1.3 million
was recorded during the second quarter of 2001 as a fair value adjustment and
is being amortized based on the rate at which the underlying mortgage loans
paydown. The fair value of capitalized MSRs at December 31, 2001 and 2000 was
approximately $14.9 million and $10.7 million, respectively. No valuation
allowance for capitalized MSRs was required at December 31, 2001 and 2000.
During the third quarter of 2000 Predecessor sold a portion of its mortgage
servicing portfolio, realizing a net gain of $13.1 million. The unpaid
principal balance of the mortgage servicing portfolio sold amounted to
approximately $2.1 billion. Predecessor continued to subservice these loans
until April of 2001, at which time the subservicing was transferred.
NOTE 8 -- PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized as follows:
2001 2000
-------- --------
(thousands)
Land........................................... $ 25,042 $ 23,002
Buildings...................................... 95,842 92,009
Buildings and equipment under capital lease.... 2,017 2,017
Leasehold improvements......................... 29,054 19,536
Furniture, fixtures and equipment.............. 151,187 145,872
Construction in progress....................... 10,294 9,820
-------- --------
Total....................................... 313,436 292,256
Less: accumulated depreciation and amortization 150,234 134,297
-------- --------
Total premises and equipment................ $163,202 $157,959
======== ========
During 2001, depreciation and amortization on premises and equipment,
included in operating expenses, amounted to $9.2 million for Predecessor and
$12.9 million for RBC Centura. Predecessor recognized depreciation and
amortization of $20.5 million, and $20.9 million in 2000 and 1999, respectively.
RBC Centura is obligated under a number of noncancelable operating leases
for banking premises with termination dates that extend up to seventeen years.
RBC 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 RBC 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.
48
RBC CENTURA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 8 -- PREMISES AND EQUIPMENT--Continued
At December 31, 2001, future minimum lease payments under noncancelable
operating leases were as follows (thousands):
2002........................ $10,335
2003........................ 8,829
2004........................ 8,290
2005........................ 7,589
2006........................ 6,467
Thereafter.................. 28,325
-------
Total minimum lease payments $69,835
=======
NOTE 9 -- DEPOSITS
At December 31, 2001, the scheduled maturities of time deposits were
(thousands):
2002............... $2,280,355
2003............... 412,718
2004............... 101,822
2005............... 37,803
2006 and thereafter 53,495
----------
Total time deposits $2,886,193
==========
NOTE 10 -- BORROWED FUNDS
At December 31, borrowed funds consisted of the following:
2001 2000
---------- ----------
(thousands)
Federal funds purchased and securities sold under agreements to repurchase $1,404,242 $1,174,981
Master notes.............................................................. 369,742 324,893
Federal Home Loan Bank ("FHLB") Advances.................................. -- 25,000
U.S. Treasury demand note................................................. 51,081 31,737
Other..................................................................... 5,000 10,000
---------- ----------
Total borrowed funds...................................................... $1,830,065 $1,566,611
========== ==========
At December 31, 2001, the Bank had $2.8 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 RBC 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, 2001, $25 million of unused borrowings under an unsecured
line of credit from a nonaffiliated bank was available to RBC Centura to
provide for general liquidity needs. The rate on this line was 2.37 percent at
year-end. This line is renewed on an annual basis.
49
RBC CENTURA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 10 -- BORROWED FUNDS--Continued
The following table presents certain information for federal funds purchased
and securities sold under agreements to repurchase:
2001 2000 1999
---------- ---------- ----------
(thousands)
Federal Funds Purchased and Securities Sold Under Agreements To
Repurchase:
Amount outstanding at December 31.............................. $1,404,242 $1,174,981 $1,149,038
Average outstanding balance.................................... 1,528,251 1,199,143 1,028,347
Highest balance at any month-end............................... 1,837,594 1,317,542 1,232,305
Interest expense............................................... 62,429 75,675 51,781
Approximate Weighted-Average Interest Rate:
During the year................................................ 4.08% 6.31% 5.04%
End of year.................................................... 1.49 6.13 5.09
NOTE 11 -- LONG-TERM DEBT
As part of the application of purchase accounting, a discount of $5.5
million was recorded during the second quarter of 2001 as a fair value
adjustment to long-term debt and is being amortized on a straight line basis
over the average life of the debt.
Long-term debt consisted of the following at December 31:
2001 2000
---------- ----------
(thousands)
Federal Home Loan Bank ("FHLB") advances $1,396,819 $ 839,111
Subordinated notes held by an affiliate. 500,000 --
Capital securities...................... 117,351 119,955
Bank notes.............................. 119,884 125,000
Obligations under capitalized leases.... 504 696
Other................................... 2,868 --
---------- ----------
Total long-term debt.................... $2,137,426 $1,084,762
========== ==========
RBC Centura's maximum borrowing capacity with the FHLB is limited to 21
percent of the Bank's total assets. At December 31, 2001, advances from the
FHLB amounted to $1.4 billion, all of which were classified as long-term debt.
At December 31, 2001, FHLB advances had maturities of up to 18 years with
interest rates ranging between 1.0 percent and 6.2 percent. At December 31,
2000, FHLB advances had maturities of up to 19 years with interest rates
ranging between 1.0 percent and 6.7 percent. RBC Centura has a blanket
collateral agreement with the FHLB whereby RBC 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, RBC 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, 2001 and 2000, RBC Centura
owned 705,177 shares and 431,745 shares, respectively, of $100 par value FHLB
stock. This stock is pledged as collateral against any advances extended to RBC
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 is a direct, unconditional, and unsecured general obligation
solely of the Bank and is not an obligation of or guaranteed by RBC Centura.
Interest rate and maturity terms are negotiated between the Bank and the
purchaser, within certain parameters set forth in an offering circular. As of
December 31, 2001 and 2000, there were $125.0 million of 6.5 percent, 10 year
subordinated bank notes outstanding.
50
RBC CENTURA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 11 -- LONG-TERM DEBT--Continued
In June 1997, CCTI, a wholly-owned statutory business trust of RBC Centura,
issued $100.0 million of capital securities maturing June 2027 bearing an
interest rate of 8.845 percent. CCTI also issued $3.1 million of common
securities to Predecessor. 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 Predecessor, which upon consolidation are eliminated.
The junior debentures, with a maturity date in June 2027, are the primary
assets of CCTI. With respect to the capital securities, RBC Centura has
irrevocably and unconditionally guaranteed CCTI's obligations.
Also in June 1997, TCT, a wholly-owned statutory business trust of RBC
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 Predecessor, which upon consolidation are eliminated. The
junior debentures are the sole assets of TCT. As with the capital securities
described above, RBC Centura has irrevocably and unconditionally guaranteed the
obligations of TCT.
In September of 2001, RBC Centura issued $500 million in subordinated
debentures to RBUS, LLC, an Illinois limited liability company and an indirect
subsidiary of Royal Bank. The loan is LIBOR based, subordinated debt and is due
to mature in September of 2006. The interest rate on these subordinated
debentures at December 31, 2001 was 2.35 percent and RBC Centura recorded $5.2
million in interest expense during 2001.
The trust preferred capital securities discussed above are included in tier
1 capital for regulatory capital adequacy requirements.
At December 31, 2001, maturities of long-term debt were as follows
(thousands):
2002...... $ 436,551
2003...... 93
2004...... 256,573
2005...... 41
2006...... 602,638
Thereafter 841,530
----------
Total..... $2,137,426
==========
NOTE 12 -- BENEFIT PLANS
RBC Centura sponsors a noncontributory, qualified defined benefit pension
plan (the "Pension Plan"), a postretirement benefit plan, and defined
contribution plans (401(k)) for the benefit of its employees. RBC Centura also
has an Omnibus Supplemental Executive Retirement Plan ("SERP") that provides
various officers with certain benefits in excess of RBC Centura's standard
pension plan.
The Pension Plan was amended to cease benefit accruals effective April 30,
2001 for all participants except those who satisfy certain "grandfather" rules.
As of April 30, 2001, no additional employees were to become eligible to
participate in the Pension Plan. As a result of the merger with Royal Bank, the
Pension Plan was merged into the corresponding frozen pension plan of Royal
Bank on December 31, 2001. Costs associated with the merged plan will be
allocated to RBC Centura as if the plan continued to operate on a stand-alone
basis.
51
RBC CENTURA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 12 -- BENEFIT PLANS--Continued
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:
Postretirement
Pension Plan Benefits Benefits SERP Benefits
-------------------- ---------------- ------------------
2001 2000 2001 2000 2001 2000
-------- ------- ------- ------- -------- --------
(thousands)
Reconciliation of Benefit Obligation
Net benefit obligation, January 1........... $ 44,063 $41,570 $ 6,701 $ 6,291 $ 13,374 $ 13,207
Service cost................................ 1,332 2,695 297 240 1,830 1,109
Interest cost............................... 2,878 3,119 485 461 2,056 976
Participant contributions................... -- -- 290 260 -- --
Plan curtailment due to benefit freeze...... (8,596) -- -- -- -- --
Plan amendments............................. -- -- -- -- 13,128 (4,250)
Actuarial loss/(gain)....................... 4,554 464 78 44 (519) 3,194
Benefits paid............................... (4,130) (3,785) (645) (595) (743) (862)
-------- ------- ------- ------- -------- --------
Net benefit obligation, December 31......... $ 40,101 $44,063 $ 7,206 $ 6,701 $ 29,126 $ 13,374
======== ======= ======= ======= ======== ========
Reconciliation of Fair Value of Plan Assets*
Fair value, January 1....................... $ 36,450 $36,529 $ -- $ -- $ -- $ --
Actual return on plan assets................ (3,983) (260) -- -- -- --
Employer contributions...................... 125 3,966 355 335 743 862
Participant contributions................... -- -- 290 260 -- --
Benefits paid............................... (4,130) (3,785) (645) (595) (743) (862)
-------- ------- ------- ------- -------- --------
Fair value, December 31..................... $ 28,462 $36,450 $ -- $ -- $ -- $ --
======== ======= ======= ======= ======== ========
Funded Status...............................
Funded status, December 31.................. $(11,639) $(7,613) $(7,206) $(6,701) $(29,126) $(13,374)
Unrecognized net transition obligation...... -- 1 -- 2,663 -- --
Unrecognized prior service cost............. -- 2,168 -- 143 -- (3,200)
Unrecognized actuarial loss/(gain).......... 3,800 7,727 102 342 (519) 4,383
-------- ------- ------- ------- -------- --------
Net amount recognized....................... $ (7,839) $ 2,283 $(7,104) $(3,553) $(29,645) $(12,191)
======== ======= ======= ======= ======== ========
- --------
* The assets of the pension plan are invested primarily in mutual funds and
corporate bonds and debentures.
The following table sets forth amounts recognized in the consolidated
financial statements for the years ended December 31:
Postretirement
Pension Plan Benefits Benefits SERP Benefits
--------------------- ---------------- ------------------
2001 2000 2001 2000 2001 2000
------- ------ ------- ------- -------- --------
(thousands)
Accrued benefit liability $(7,839) $ -- $(7,104) $(3,553) $(29,645) $(12,284)
Prepaid benefit cost..... -- 2,283 -- -- -- --
Intangible asset......... -- -- -- -- -- 93
------- ------ ------- ------- -------- --------
Net amount recognized.... $(7,839) $2,283 $(7,104) $(3,553) $(29,645) $(12,191)
======= ====== ======= ======= ======== ========
52
RBC CENTURA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 12 -- BENEFIT PLANS--Continued
The components of net periodic pension cost for the years ended December 31
are as follows:
Postretirement
Pension Plan Benefits Benefits SERP Benefits
------------------------- -------------- ---------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
------- ------- ------- ---- ---- ---- ------ ------ ------
(thousands)
Service cost.......................... $ 1,332 $ 2,695 $ 2,884 $297 $240 $282 $1,830 $1,109 $ 906
Interest cost......................... 2,878 3,119 3,061 485 461 420 2,056 976 909
Expected return on assets............. (2,822) (3,193) (3,166) -- -- -- -- -- --
Amortization of:
Transition asset................... 62 (105) (107) 93 222 222 -- -- --
Prior service cost................. -- 238 239 7 16 15 -- (701) 95
Actuarial loss/(gain).............. 128 -- 158 -- -- -- -- 1,279 (19)
------- ------- ------- ---- ---- ---- ------ ------ ------
Net periodic benefit cost............. $ 1,578 $ 2,754 $ 3,069 $882 $939 $939 $3,886 $2,663 $1,891
======= ======= ======= ==== ==== ==== ====== ====== ======
In accounting for the above plans, the following assumptions were used:
Pension Plan Benefits Postretirement Benefits SERP Benefits
-------------------- ---------------------- ----------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
---- ---- ---- ----- ---- ---- ---- ---- ----
Weighted-average discount rate........ 7.25% 7.50% 7.50% 7.25% 7.50% 7.50% 7.25% 7.50% 7.50%
Expected return on plan assets........ 9.00 8.50 8.50 -- -- -- -- -- --
Rate of compensation increase......... 5.50 5.50 5.50 -- -- -- 5.50 5.50 5.50
Assumed health care cost trend rate... -- -- -- 10.00* 5.50 5.50 -- -- --
- --------
* A 10% annual rate of increase was assumed for 2001 with the rate gradually
decreasing to 5% in 2006 and remaining level thereafter.
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:
1% Increase 1% Decrease
----------- -----------
(thousands)
Effect on:
Service and interest cost components
of net periodic postretirement
benefit cost........................ $ 119 $ (109)
Accumulated postretirement benefit
obligation.......................... 1,578 (1,454)
In addition to the expense incurred with the above plans, RBC Centura also
incurs expense for other employee benefit plans. The amounts expensed for these
plans for the years ended December 31 are as follows:
2001 2000 1999
------- ------- -------
(thousands)
401(k) plans.......................... $ 5,324 $ 3,965 $ 2,958
Sales commissions..................... 15,339 14,646 14,348
EVA-based incentive compensation...... 7,387 2,956 --
------- ------- -------
Total................................. $28,050 $21,567 $17,306
======= ======= =======
RBC 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(R)/1/") 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. This plan was
eliminated at the end of 2001 and replaced with other incentive arrangements.
Other miscellaneous bonus and incentive awards are made primarily under
individual contracts.
- --------
1 EVA is a registered trademark of Stern, Stewart & Co.
53
RBC CENTURA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 13 -- STOCK OPTIONS, STOCK AWARDS AND SHAREHOLDER'S EQUITY
In connection with the acquisition of Predecessor by Royal Bank all shares
of Predecessor were converted into 1.684 common shares of Royal Bank. The value
of the transaction amounted to $2.2 billion and resulted in a corresponding
shareholder's equity balance at the close of business on June 5, 2001. The
acquisition by Royal Bank resulted in the immediate vesting of 1.5 million
options. All options were either cashed out or forfeited as a result of the
merger, with the related expense recognized by Predecessor of $25.0 million for
stock option payouts included within the overall merger accrual, as detailed in
Note 3.
Predecessor previously offered various stock based compensation plans to
select employees. At December 31, 2000 and 1999 Predecessor had approximately
280,000 and 1.2 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").
A summary of stock option transactions occurring in prior years under these
plans follows:
2000 1999
------------------ ------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------- -------- --------- --------
Outstanding at January 1.. 2,602,190 $43.06 2,337,843 $31.74
Granted................... 1,447,374 35.72 833,116 60.96
Exercised................. 351,976 16.42 459,366 15.40
Forfeited................. 471,353 60.56 109,403 53.67
--------- ---------
Outstanding at December 31 3,226,235 39.13 2,602,190 43.06
========= =========
Exercisable at December 31 1,321,060 $31.19 1,315,680 $25.99
Under APB 25, Predecessor expensed approximately $1.1 million in 2000 and
$3.1 million in 1999 for employee stock awards and stock option grants. If
Predecessor 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:
2000 1999
--------------------- ---------------------
Pro Forma As Reported Pro Forma As Reported
--------- ----------- --------- -----------
(thousands)
Net income $95,168 $98,755 $129,184 $130,337
The weighted-average fair values of options granted during 2000 and 1999
were $10.26 and $17.67 per share, respectively. In determining the pro forma
disclosure of net income, the fair value of options granted was estimated using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
Directors/Employee EV A Leveraged
Deferred Options Other
------------------ -------------- -----
2000
Risk free interest rates.. 6.03% 5.94% 5.94%
Dividend yield............ 3.38 3.38 3.38
Volatility................ 26.00 26.00 26.00
Expected lives (in years). 3.21 5.57 5.57
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
54
RBC CENTURA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 13 -- STOCK OPTIONS, STOCK AWARDS AND SHAREHOLDER'S EQUITY--Continued
The effects of applying SFAS 123 in the pro forma disclosures are not
indicative of future amounts.
Cash dividends paid by Predecessor were $0.70, $1.34, and $1.25 on a per
share basis during 2001, 2000, and 1999, respectively, before giving effect to
mergers accounted for as pooling-of-interests.
NOTE 14 -- OTHER OPERATING EXPENSE
Other operating expense consisted of the following:
RBC Centura Predecessor
-------------------- --------------------------------------------------------
June 6, 2001 through January 1, 2001 Year Ended Year Ended
December 31, 2001 through June 5, 2001 December 31, 2000 December 31, 1999
-------------------- -------------------- ----------------- -----------------
(thousands)
Marketing, advertising, and public relations $ 4,090 $ 3,996 $ 7,478 $ 7,827
Stationery, printing, and supplies.......... 3,743 2,872 7,521 7,891
Postage..................................... 2,485 1,814 4,477 4,487
Telephone................................... 6,637 5,693 12,720 11,950
FDIC insurance.............................. 794 602 1,313 1,593
Fees for outsourced services................ 13,772 9,718 19,026 17,009
Legal and professional fees................. 9,930 7,522 14,284 14,544
Other administrative........................ 6,448 4,975 11,967 11,880
Other....................................... 16,826 26,213 27,764 29,530
------- ------- -------- --------
Total other operating expense............... $64,725 $63,405 $106,550 $106,711
======= ======= ======== ========
NOTE 15 -- INCOME TAXES
The components of income tax expense (benefit) for the years ended December
31 were:
RBC Centura Predecessor
-------------------- --------------------------------------------------------
June 6, 2001 through January 1, 2001 Year Ended Year Ended
December 31, 2001 through June 5, 2001 December 31, 2000 December 31, 1999
-------------------- -------------------- ----------------- -----------------
(thousands)
Current:
Federal.............. $30,725 $(4,275) $36,314 $52,830
State................ 202 463 4,734 4,562
------- ------- ------- -------
30,927 (3,812) 41,048 57,392
Deferred:
Federal.............. 1,465 4,160 15,768 7,461
State................ 1,241 87 (720) 1,281
------- ------- ------- -------
2,706 4,247 15,048 8,742
------- ------- ------- -------
Total income tax expense $33,633 $ 435 $56,096 $66,134
======= ======= ======= =======
Income tax expense is reconciled to the amount computed by applying the
federal statutory rate to income before income taxes as follows:
RBC Centura Predecessor
-------------------- -------------------------------------------------------
June 6, 2001 through January 1, 2001 Year Ended Year Ended
December 31, 2001 through June 5, 2001 December 31, 2000 December 31, 1999
-------------------- -------------------- ----------------- -----------------
Federal statutory rate.................. 35.00% 35.00% 35.00% 35.00%
Non-taxable income...................... (4.91) 5.71 (4.06) (2.41)
Acquisition adjustments, net............ 18.20 (27.59) 2.47 1.12
State income tax, net of federal benefit 1.33 (0.70) 1.67 2.12
Other, net.............................. (1.48) (13.28) 1.15 (2.17)
----- ------ ----- -----
Effective tax rate...................... 48.14% (0.86)% 36.23% 33.66%
===== ====== ===== =====
55
RBC CENTURA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 15 -- INCOME TAXES--Continued
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.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31 are
summarized as follows:
RBC Centura Predecessor
----------- -----------
2001 2000
----------- -----------
(thousands)
Deferred Tax Assets:
Loan loss reserve..................... $ 39,879 $ 41,176
Other reserves........................ 14,763 6,475
Deferred compensation................. 23,590 15,002
Other assets.......................... 10,549 7,167
--------- --------
Gross deferred tax assets............. 88,781 69,820
Deferred Tax Liabilities:
Premises and equipment................ 5,144 3,379
Deposits.............................. 69,286 --
Employee retirement plans............. -- 1,018
Investment securities................. 12,160 3,167
Leasing activities.................... 87,663 65,280
Lending activities.................... 17,656 --
Other liabilities..................... 17,493 35,614
Unrealized investment securities gains 18,837 13,514
--------- --------
Gross deferred tax liabilities........ 228,239 121,972
--------- --------
Net deferred tax liability............ $(139,458) $(52,152)
========= ========
A valuation allowance for deferred tax assets was not required at December
31, 2001 or 2000. Management has determined that it is more likely than not
that the deferred tax assets could be realized by carrybacks to federal taxable
income in the federal carryback period or offset against deferred tax
liabilities. As part of the application of purchase accounting, the deferred
tax liability was increased by the amount of $80.6 million due to fair value
adjustments of the balance sheet, increased by $5.8 million due to fair value
adjustments required under SFAS 115 for securities available for sale and
decreased due to other adjustments totaling $0.3 million.
NOTE 16 -- DERIVATIVES, COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES
Derivatives
RBC 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 $115.0 million and $53.0 million
outstanding at December 31, 2001 and 2000, respectively. These forward
commitments are set at fixed prices and are scheduled to settle at specified
dates that generally do not exceed 90 days. These forward commitments have been
determined to be derivatives under SFAS 133 and therefore recorded on the
balance sheet at fair value. The value of these commitments was $1.1 million at
December 31, 2001 and was recorded in other assets. 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 $144.5 million and $34.7 million at December 31, 2001 and
2000, respectively. The market value of the pipeline loans was also recorded
onto the balance sheet during 2001 in accordance with SFAS 133. Pipeline loans
are valued at fair value, which amounted to approximately $643,000 at December
31, 2001 and was recorded within other liabilities.
56
RBC CENTURA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 16 -- DERIVATIVES, COMMITMENTS, OFF-BALANCE SHEET RISK AND
CONTINGENCIES--Continued
In connection with its asset/liability management program, RBC Centura has
entered into interest rate swap, cap, and floor arrangements with other
counterparties. RBC Centura does not trade the instruments, and RBC Centura's
policy governing the use of these instruments, as approved by RBC 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 RBC
Centura to utilize diversified funding sources, and manage interest rate risk
with the objective of stabilizing RBC 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). RBC 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.
During 2000, Predecessor terminated certain derivative contracts and
deferred the resulting net gains amounting to $3.2 million. The net gains are
being amortized over the shorter of the life of the derivative instrument or
the hedged item. See discussion with respect to adoption of SFAS 133 in the
Derivative Financial Instruments section of Note 1.
Interest rate swap agreements are summarized below:
RBC Centura Predecessor
------------------- -------------------
2001 2000
------------------- -------------------
Estimated Estimated
Notional Fair Value Notional Fair Value
Amount Gain/(Loss) Amount Gain/(Loss)
-------- ----------- -------- -----------
(Thousands)
Corporation pays fixed/receives variable $150,205 $(4,763) $ 43,145 $(1,020)
Corporation pays variable/receives fixed 70,570 2,814 297,000 1,204
-------- ------- -------- -------
Total interest rate swaps............... $220,775 $(1,949) $340,145 $ 184
======== ======= ======== =======
Swaps are carried on the balance sheet as components of other asset and
other liabilities.
RBC 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, 2001, RBC 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 RBC Centura previously reflected in
the consolidated balance sheets may not be received as a result of the default.
RBC Centura's derivative financial instruments have been entered into with
nationally recognized commercial and investment banking firms. As such, RBC
Centura does not currently anticipate nonperformance by the counterparties.
Additionally, to mitigate credit risks, RBC Centura's derivative contracts are
generally governed by master netting agreements and, where appropriate, RBC
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.
Commitments and Off-Balance Sheet Risk
In the normal course of business, RBC 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 and
letters of credit.
At December 31, 2001 and 2000, RBC Centura had commitments to extend credit
of $3.0 billion, and standby letters of credit of $147.1 million and $165.0
million, respectively. With the exception of commitments to originate
residential mortgage loans which are discussed above, 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.
57
RBC CENTURA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 16 -- DERIVATIVES, COMMITMENTS, OFF-BALANCE SHEET RISK AND
CONTINGENCIES--Continued
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 RBC Centura's standard credit approval and
monitoring process. RBC 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. See the derivatives section above for discussion of commitments
to extend credit to mortgage borrowers.
Standby letters of credit are conditional commitments issued by RBC 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. During
2000, Predecessor issued an irrevocable letter of credit in the amount of $23.5
million, supporting payments of principal and interest, for subordinated notes
issued by FGHE. As of December 31, 2001 this letter of credit no longer existed
as a result of the repurchase by Predecessor of the subordinated notes from the
unaffiliated third party as described in Note 21.
RBC 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, RBC 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.
Contingencies
All claims against Centura Bank in an action filed in 1999 by Ingeborg
Staton, Mercedes Staton and trusts created by Ingeborg Staton and Mercedes
Staton were dismissed in March 2001. All claims against Centura Bank in two
related actions filed in 1996 by Philip A.R. Staton, Ingeborg Staton, Mercedes
Staton, and trusts created by Ingeborg Staton and Mercedes Staton were settled
in April 2001 for an aggregate amount that Predecessor and Centura Bank
consider immaterial to their financial condition. In the aggregate, Predecessor
recorded $19.1 million in litigation provisions for the period ended June 5,
2001 for the settled cases and certain other legal proceedings.
In addition, various other legal proceedings against RBC Centura and its
subsidiaries have arisen from time to time in the normal course of business.
RBC Centura believes liabilities arising from these proceedings, if any, will
have no material adverse effect on the financial position or results of
operations of RBC Centura or its subsidiaries, taken as a whole.
NOTE 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 RBC 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 RBC 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 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, RBC 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
58
RBC CENTURA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 17 -- FAIR VALUE OF FINANCIAL INSTRUMENTS--Continued
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 RBC Centura's financial instruments as of December 31 for those financial
instruments whose fair values do not approximate their carrying value:
RBC Centura Predecessor
--------------------- ---------------------
2001 2000
--------------------- ---------------------
Carrying Estimated Carrying Estimated
Value Value Fair Value Fair Value
---------- ---------- ---------- ----------
(thousands)
Loans, net.... $7,616,432 $7,694,727 $7,567,416 $7,741,968
Deposits...... 7,383,060 7,412,195 7,707,140 7,735,098
Long-term debt 2,137,426 2,199,252 1,084,762 1,131,281
See Note 16 for information regarding the fair value of RBC Centura's
derivative financial instruments at December 31, 2001 and 2000, Note 7 for
information regarding the fair value of RBC Centura's capitalized mortgage
servicing rights and Note 4 for investment securities fair values.
NOTE 18 -- SEGMENT INFORMATION
RBC Centura has two reportable segments: retail banking and treasury. These
segments represent business units that are managed separately. 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 RBC
Centura's 239 banking centers and are also offered through the RBC Centura
Highway, the bank's multifaceted customer access system that includes telephone
banking, an extensive ATM network, PC banking, online bill payment and the
Bank's suite of Internet products and services. Treasury is responsible for RBC
Centura's asset/liability management including managing RBC Centura's
investment portfolio.
Business lines which do not fall within the two categories mentioned above
are classified as "other." They include the asset management division, leasing
division, RBC Centura Securities, Inc., and insurance products. RBC Centura's
asset management division provides trust and fiduciary services as well as
retirement plan design and administration. RBC Centura's leasing division
offers equipment leasing products while RBC Centura Securities, Inc. offers a
competitive line of brokerage services. RBC Centura divested its personal and
commercial insurance business lines in 2001 and now offers credit related and
life insurance products, primarily through affiliates. The 49 percent equity
interest in FGHE was also included in "other" until the interest was divested
in the third quarter of 2001. See Note 21 for further discussion of the
divestiture of the 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.
Royal Bank acquired RBC Centura on June 5, 2001, and in accordance with
"push-down" accounting established a new basis of accounting in RBC Centura's
financial statements. It is generally not appropriate to combine pre and post
"push down" periods; however, to make this presentation more meaningful the
following information is presented for the year ended December 31, 2001.
Financial information by segment as of and for the years ended December 31
follows:
59
RBC CENTURA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 18 -- SEGMENT INFORMATION--Continued
2001
------------------------------------------------------------------------
Retail Treasury Other Total Adjustments Consolidated
---------- ---------- -------- ----------- ----------- ------------
(thousands)
Interest income.................................... $ 546,846 $ 225,112 $ 26,725 $ 798,683 $ 11,323 (A) $ 810,006
Interest expense................................... 250,914 126,065 5,587 382,566 (7,471)(A) 375,095
Funds transfer pricing allocation.................. 51,307 (43,704) (11,508) (3,905) 3,905 (B) --
---------- ---------- -------- ----------- ---------- -----------
Net interest income................................ 347,239 55,343 9,630 412,212 22,699 434,911
Provision for loan losses.......................... 43,676 -- 5,948 49,624 178 (C) 49,802
---------- ---------- -------- ----------- ---------- -----------
Net interest income after provision for loan losses 303,563 55,343 3,682 362,588 22,521 385,109
Noninterest income................................. 127,122 676 47,075 174,873 29,528 (A) 204,401
Noninterest expense................................ 298,158 9,733 89,607 397,498 172,891 (A) 570,389
---------- ---------- -------- ----------- ---------- -----------
Income before income taxes......................... 132,527 46,286 (38,850) 139,963 (120,842) 19,121
Income tax expense/(benefit)....................... 49,590 4,665 3,219 57,474 (23,406)(C) 34,068
---------- ---------- -------- ----------- ---------- -----------
Net income......................................... $ 82,937 $ 41,621 $(42,069) $ 82,489 $ (97,436) $ (14,947)
========== ========== ======== =========== ========== ===========
Period-end assets.................................. $6,950,486 $3,975,120 $410,324 $11,335,930 $2,576,655 (D) $13,912,585
2000
-------------------------------------------------------------------------
Retail Treasury Other Total Adjustments Consolidated
---------- ---------- -------- ----------- ----------- ------------
(thousands)
Interest income.................................... $ 625,391 $ 228,585 $ 29,478 $ 883,454 $ 10,739 (A) $ 894,193
Interest expense................................... 318,112 132,436 3,610 454,158 19,957 (A) 474,115
Funds transfer pricing allocation.................. 62,502 (73,302) (12,672) (23,472) 23,472 (B) --
---------- ---------- -------- ----------- ---------- -----------
Net interest income................................ 369,781 22,847 13,196 405,824 14,254 420,078
Provision for loan losses.......................... 18,582 -- 4,066 22,648 9,167 (C) 31,815
---------- ---------- -------- ----------- ---------- -----------
Net interest income after provision for loan losses 351,199 22,847 9,130 383,176 5,087 388,263
Noninterest income................................. 122,072 807 42,046 164,925 (19,205)(A) 145,720
Noninterest expense................................ 284,849 11,091 36,215 332,155 46,977 (A) 379,132
---------- ---------- -------- ----------- ---------- -----------
Income before income taxes......................... 188,422 12,563 14,961 215,946 (61,095) 154,851
Income tax expense/(benefit)....................... 54,954 (3,348) 2,401 54,007 2,089 (C) 56,096
---------- ---------- -------- ----------- ---------- -----------
Net income......................................... $ 133,468 $ 15,911 $ 12,560 $ 161,939 $ (63,184) $ 98,755
========== ========== ======== =========== ========== ===========
Period-end assets.................................. $6,838,848 $3,285,359 $207,722 $10,331,929 $1,150,080 (D) $11,482,009
1999
------------------------------------------------------------------------
Retail Treasury Other Total Adjustments Consolidated
---------- ---------- -------- ----------- ----------- ------------
(thousands)
Interest income.................................... $ 545,815 $ 204,414 $ 40,497 $ 790,726 $ 18,430 (A) $ 809,156
Interest expense................................... 277,450 101,837 3,470 382,757 7,674 (A) 390,431
Funds transfer pricing allocation.................. 71,997 (64,138) (22,664) (14,805) 14,805 (B) --
---------- ---------- -------- ----------- -------- -----------
Net interest income................................ 340,362 38,439 14,363 393,164 25,561 418,725
Provision for loan losses.......................... 35,492 -- 3,668 39,160 1,668 (C) 40,828
---------- ---------- -------- ----------- -------- -----------
Net interest income after provision for loan losses 304,870 38,439 10,695 354,004 23,893 377,897
Noninterest income................................. 120,609 1,671 49,325 171,605 (708)(A) 170,897
Noninterest expense................................ 265,970 20,479 34,975 321,424 30,899 (A) 352,323
---------- ---------- -------- ----------- -------- -----------
Income before income taxes......................... 159,509 19,631 25,045 204,185 (7,714) 196,471
Income tax expense/(benefit)....................... 44,256 3,576 4,712 52,544 13,590 (C) 66,134
---------- ---------- -------- ----------- -------- -----------
Net income......................................... $ 115,253 $ 16,055 $ 20,333 $ 151,641 $(21,304) $ 130,337
========== ========== ======== =========== ======== ===========
Period-end assets.................................. $6,677,039 $3,349,402 $397,548 $10,423,989 $962,693 (D) $11,386,682
- --------
(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, other assets and goodwill.
60
RBC CENTURA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 19 -- PARENT COMPANY FINANCIAL DATA
RBC 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
RBC
Centura Predecessor
---------- -----------
December 31,
----------------------
2001 2000
---------- -----------
(thousands)
Assets
Cash and deposits in banks............................................................ $ 269,911 $ 211,770
Investment securities available for sale (cost of $151,656 and $137,733, respectively) 157,466 138,163
Loans to affiliate.................................................................... 5,544 74,752
Investment in wholly-owned subsidiary, bank........................................... 2,314,444 950,744
Investment in wholly-owned subsidiary, other.......................................... 4,890 6,387
Other assets.......................................................................... 26,410 48,754
---------- ----------
Total assets.......................................................................... $2,778,665 $1,430,570
========== ==========
Liabilities and Shareholder's Equity
Junior subordinated debentures with affiliate......................................... $ 123,929 $ 123,666
Other liabilities..................................................................... 401,051 350,479
Shareholder's equity.................................................................. 2,253,685 956,425
---------- ----------
Total liabilities and shareholder's equity............................................ $2,778,665 $1,430,570
========== ==========
Income Statements
RBC Centura Predecessor
-------------------- -------------------------------------------------------
June 6, 2001 through January 1, 2001 Year Ended Year Ended
December 31, 2001 through June 5, 2001 December 31, 2000 December 31, 1999
-------------------- -------------------- ----------------- -----------------
(thousands)
Income
Dividends from subsidiaries.................. $ 274 $ 27,761 $153,457 $ 91,541
Other........................................ 21,409 23,535 39,933 29,688
------- -------- -------- --------
Total income................................. 21,683 51,296 193,390 121,229
Expense
Interest..................................... 9,951 9,700 27,042 23,699
Provision for loan losses.................... -- 2,300 -- --
Loss on equity investment.................... -- 26,277 -- --
Merger-related and other significant changes. -- 76,101 -- --
Other........................................ 10,420 6,784 14,735 12,452
------- -------- -------- --------
Total expenses............................... 20,371 121,162 41,777 36,151
------- -------- -------- --------
Income before income taxes and equity in
undistributed net income of subsidiaries... 1,312 (69,866) 151,613 85,078
Income tax (benefit)/expense................. (3,335) (20,196) 105 (2,753)
------- -------- -------- --------
Income before equity in undistributed net
income of subsidiaries..................... 4,647 (49,670) 151,508 87,831
Equity in undistributed net income of wholly-
owned subsidiaries......................... 31,588 (1,512) (52,753) 42,506
------- -------- -------- --------
Net income................................... $36,235 $(51,182) $ 98,755 $130,337
======= ======== ======== ========
61
RBC CENTURA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 19 -- PARENT COMPANY FINANCIAL DATA--Continued
The loss on equity investment does not include the loss of $15.9 million
incurred by the Bank on the FGHE debenture for other than temporary impairment.
Refer to Note 21 for a description of the divestiture of the interest in FGHE.
Statements of Cash Flows
RBC Centura Predecessor
-------------------- -------------------------------------------------------
June 6, 2001 through January 1, 2001 Year Ended Year Ended
December 31, 2001 through June 5, 2001 December 31, 2000 December 31, 1999
-------------------- -------------------- ----------------- -----------------
(thousands)
Cash Flows From Operating Activities
Net income...................................... $ 36,235 $ (51,182) $ 98,755 $130,337
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses with affiliate........ -- 2,300 -- --
Depreciation and amortization................... (102) 129 2,655 1,630
Losses/(gains) on sales of investment securities 212 (4,635) (713) 1,725
(Increase)/decrease in equity in undistributed
net income of subsidiary...................... (33,542) 1,701 50,023 (42,506)
Other........................................... (35,459) 69,339 8,244 (371)
-------- --------- --------- --------
Net cash (used)/provided by operating
activities.................................... (32,656) 17,652 158,964 90,815
-------- --------- --------- --------
Cash Flows From Investing Activities
Net (increase)/decrease in investment in non-
bank subsidiary............................... (2,084) -- 1,730 --
Net decrease/(increase) in loan with affiliate.. 113,857 (46,949) (27,905) 24,461
Purchases of securities available for sale...... (17,563) (123,711) (108,350) --
Sales, maturities and issuer calls of securities
available for sale............................ 22,074 111,907 3,452 15,775
Investment in FGHE.............................. -- -- (170) (490)
Net cash paid in mergers, acquisitions and
divestitures.................................. -- -- -- (25,716)
Other........................................... (8,571) -- (10,042) --
-------- --------- --------- --------
Net cash provided/(used) by investing
activities.................................... 107,713 (58,753) (141,285) 14,030
-------- --------- --------- --------
Cash Flows From Financing Activities
Net increase in borrowings...................... 34,489 4,835 9,064 24,625
Issuance of common stock, net................... -- 12,622 6,083 8,340
Repurchase of common stock...................... -- -- (20,806) (36,385)
Cash dividends paid............................. -- (27,761) (53,189) (44,556)
Other........................................... -- -- 9 --
-------- --------- --------- --------
Net cash provided/(used) by financing
activities.................................... 34,489 (10,304) (58,839) (47,976)
-------- --------- --------- --------
Increase/(decrease) in cash..................... 109,546 (51,405) (41,160) 56,869
Cash, beginning of period....................... 160,365 211,770 252,930 196,061
-------- --------- --------- --------
Cash, end of period............................. $269,911 $ 160,365 $ 211,770 $252,930
======== ========= ========= ========
Supplemental Disclosures Of Cash Flow
Information
Stock issued for acquisitions and other stock
issuances, net................................ $ -- $ 6,631 $ 8,259 $ 14,647
Unrealized securities gains (losses), net of
parent and subsidiary......................... 48,602 (20,148) 99,617 (81,062)
62
RBC CENTURA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 20 -- REGULATORY MATTERS
RBC 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, 2001, RBC Centura was required to
maintain a minimum balance with the FRB in the amount of $28.4 million. Subject
to the regulatory restrictions, the Bank had $30.9 million available from its
retained earnings at December 31, 2001 for the payment of dividends from the
Bank to RBC 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, 2001.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, there are minimum ratios of capital to risk-weighted assets
to which RBC 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 RBC
Centura's consolidated financial statements.
Regulatory capital amounts and ratios are set forth in the table below. Tier
1 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 RBC Centura, tier 1 capital also consists of
capital securities described in Note 11. The remainder of total capital is tier
2 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, 2001, RBC 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 1 risk-based, and tier 1 leverage ratios as set forth in the
table below which presents the capital ratios for RBC Centura and its bank
subsidiary:
To Be Well
Capital Amount Ratio For Capital Capitalized Under
--------------------- ---------- Adequacy Prompt Corrective
2001 2000 2001 2000 Purposes Action Provisions
---------- ---------- ---- ---- ----------- -----------------
(thousands)
Total Capital (to Risk-Weighted Assets)
RBC Centura............................. $1,547,330 $1,123,190 16.5% 12.7% 8.0% Not Applicable
RBC Centura Bank........................ 1,460,476 1,022,849 15.7 11.8 8.0 10.0%
Tier I Capital (to Risk-Weighted Assets)
RBC Centura............................. $ 961,226 $ 919,483 10.2% 10.4% 4.0% Not Applicable
RBC Centura Bank........................ 905,283 793,625 9.7 9.1 4.0 6.0%
Tier I Leverage (to Average Assets)
RBC Centura............................. $ 961,226 $ 919,483 7.8% 8.1% 4.0% Not Applicable
RBC Centura Bank........................ 905,283 793,625 7.5 7.2 4.0 5.0%
NOTE 21 -- STRATEGIC EXITING OF CERTAIN MORTGAGE BUSINESSES
During the second quarter of 2001, Predecessor made an assessment of its
mortgage business with an emphasis on current and prospective interest rate and
macroeconomic conditions. Predecessor reevaluated its participation in making
consumer mortgages to individuals with less than prime-rated credit profiles.
Specifically, Predecessor had a 49 percent equity interest in FGHE and also had
a wholly-owned subsidiary, NCS. Both FGHE and NCS are primarily in the business
of making mortgages to consumers with less than prime-rated credit profiles. As
a result of this assessment, Predecessor decided to take actions to no longer
provide credit support to these mortgage companies. The 49 percent equity
interest in FGHE was accounted for under the equity method of accounting.
63
RBC CENTURA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 21 -- STRATEGIC EXITING OF CERTAIN MORTGAGE BUSINESSES--Continued
During the second quarter of 2001, Predecessor also purchased an outstanding
FGHE debenture from an unaffiliated third party for which Predecessor was
providing backup credit support. This purchase did not change Predecessor's
credit exposure.
In the second quarter, based on FGHE's inability to access the
securitization market and FGHE's limited success in selling loans in the
whole-loan market, management informed FGHE of management's intention to not
further extend credit support or financing activities. Management estimated the
cash flows to be received from FGHE in future periods to be inadequate for the
full recovery of its investment and the debentures discussed above. During the
second quarter of 2001, a charge to earnings totaling $42.2 million, pre-tax,
for other than temporary impairment was recorded as a loss on equity investment
in the statement of operations. In addition, $2.3 million of unsecured loans to
FGHE were charged off, and a $2.1 million provision for loan losses was
recorded related to these loans. During the third quarter of 2001, RBC Centura
recognized a recovery of $1.6 million for FGHE loans previously charged off and
sold the FGHE equity interest resulting in no gain or loss.
Certain fixed assets of NCS were sold during the second quarter of 2001. The
purchaser also assumed a majority of the employees. A charge of $1.9 million
was classified in merger-related and other significant charges on the statement
of income, which included severance, goodwill associated with NCS, and the loss
on the fixed assets sold. Predecessor retained the loan portfolio of
approximately $75 million existing at sale date and recorded a provision for
credit losses of $300,000 prior to the transfer of these loans to held for
sale. Substantially all of the NCS loans were sold in 2001 with no associated
gain or loss recognized.
NOTE 22 -- RELATED PARTY TRANSACTIONS
In September of 2001, the Bank issued $500 million in subordinated
debentures to RBUS, LLC, an Illinois limited liability company and an indirect
subsidiary of Royal Bank. The loan is LIBOR based, subordinated debt and is due
to mature in September of 2006. The interest rate on these subordinated
debentures at December 31, 2001 was 2.35 percent and RBC Centura recorded $5.2
million in interest expense during 2001.
The Pension Plan, prior to the acquisition of Predecessor by Royal Bank, was
amended to cease benefit accruals effective April 30, 2001 for all participants
except those who satisfy certain "grandfather" rules. As of April 30, 2001 no
additional employees were to become eligible to participate in the Pension
Plan. As a result of the merger with Royal Bank, the Pension Plan was merged
into the corresponding frozen pension plan of Royal Bank on December 31, 2001.
Costs associated with the merged plan will be allocated to RBC Centura as if
the plan continued to operate on a stand-alone basis.
RBC Centura entered into certain contracts during 2001 with Royal Bank to
receive operational assistance. RBC Centura offers telephonic banking through
its multifaceted customer access system, RBC Centura Highway. Royal Bank offers
assistance to RBC Centura in administering this service by providing support
for all calls requiring agent assistance. RBC Centura pays Royal Bank a set
monthly fee for these support services, the total of which amounted to $561,000
during 2001. Royal Bank also provides assistance to RBC Centura in the
provision of services relating to RBC Centura's retail credit card lending.
Under this agreement, services provided by Royal Bank to RBC Centura include
account servicing, operational strategy consultation, and customer service.
Expenses incurred during 2001 for services provided under this agreement
amounted to $451,000.
The Builder Finance Group ("Builder Finance"), a division of Prism Mortgage
Company ("Prism"), an indirect, wholly-owned subsidiary of Royal Bank, provides
loan servicing to RBC Centura for certain commercial construction loans.
Builder Finance is compensated at a market rate, which is applied to the total
committed loan value at the end of each month. Expenses generated by the
provision of this servicing activity during 2001 amounted to $717,000.
During the fourth quarter of 2001 and the first quarter of 2002, RBC Centura
filed applications with the Board of Governor's of the Federal Reserve System
and other applicable regulatory authorities to acquire Prism, RBC Trade Finance
(USA), Inc. ("TFI") and SFNB, three indirect, wholly-owned subsidiaries of
Royal Bank. RBC Centura previously acquired
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RBC CENTURA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 22 -- RELATED PARTY TRANSACTIONS--Continued
assets and liabilities from SFNB as described in Note 3. Prism is primarily
engaged in the business of originating, selling and brokering the sale of
residential mortgage loans while its Builder Finance Group is involved in
originating and servicing commercial residential real estate loans. TFI
provides financing to U.S. subsidiaries of clients of Royal Bank. Management
expects approval of all applications associated with these acquisitions by the
third quarter of 2002.
NOTE 23 -- SUBSEQUENT EVENTS (UNAUDITED)
On March 26, 2002, Royal Bank and RBC Centura announced that they executed a
merger agreement (the "Merger Agreement") relating to the acquisition of Eagle
Bancshares, Inc. ("Eagle"). The Merger Agreement provides for a direct or
indirect wholly-owned subsidiary of RBC Centura to merge with and into Eagle.
Eagle has assets totaling approximately $1.2 billion and is headquartered in
Atlanta, Georgia. Under the terms of the agreement, each outstanding share of
Eagle common stock will be converted into the right to receive $26.00 upon
consummation of the merger. The estimated value of the transaction is
approximately $153 million. The acquisition is subject to regulatory and Eagle
shareholder approvals and other customary closing conditions. The transaction
is expected to be completed by third quarter 2002.
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.
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PART III
Item 10. Directors and Executive Officers of RBC Centura
Omitted Pursuant to General Instruction I. (2) (c) of Form 10-K.
Item 11. Executive Compensation
Omitted Pursuant to General Instruction I. (2) (c) of Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Omitted Pursuant to General Instruction I. (2) (c) of Form 10-K.
Item 13. Certain Relationships and Related Transactions
Omitted Pursuant to General Instruction I. (2) (c) of Form 10-K.
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PART IV
Item 14. Exhibits, Financial Statement Schedules, And Reports On Form 8-K
(a)(1) Financial Statements
See item 8 for reference
(a)(2) Financial Statement Schedules
Financial statement schedules normally required on Form 10-K are omitted
since they are not applicable or because the required information is
included in the Consolidated Financial Statements or related Notes to
Consolidated Financial Statements.
(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- None
(c) Exhibits
Restated Articles of Incorporation of RBC Centura Banks, Inc.
Amended and Restated Bylaws of RBC Centura Banks, Inc.
Specimen certificate of RBC Centura common stock
Amended and Restated Trust Agreement between Centura Banks, Inc., dated
as of June 2, 1997, as Depositor, State Street Bank and Trust Company, as
Property Trustee, Delaware Trust Capital Management, as Trustee, and the
Administrative Trustees named therein relating to $100 million Centura
Capital Trust I, 8.845% Capital Securities, Series A (the "Capital
Securities")
Guarantee Agreement, dated June 2, 1997, between Centura Banks, Inc.,
Guarantor, and State Street Bank and Trust Company, as Guarantee Trustee,
relating to the Capital Securities
Junior Subordinated Indenture, dated June 2, 1997, between Centura Banks,
Inc. and State Street Bank and Trust Company, as Trustee relating to
$103.1 million of 8.845% Junior Subordinated Deferred Interest Debentures
of the Corporation
Agreement and Plan of Merger, dated as of January 26, 2001 by and between
Centura Banks, Inc. and Royal Bank of Canada
Stock Option Agreement, dated as of January 26, 2001, by and between
Centura Banks, Inc. and Royal Bank of Canada
COPIES OF EXHIBITS ARE AVAILABLE UPON WRITTEN REQUEST TO CHARLES A.
CASWELL, CHIEF FINANCIAL OFFICER OF RBC CENTURA BANKS, INC.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, RBC Centura Banks, Inc. has duly caused this report to be
signed on the 21/st day of March, 2002, on its behalf by the undersigned,
thereunto duly authorized. /
RBC CENTURA BANKS, INC.
/S/ JAMES T. RAGER /S/ CHARLES A. CASWELL
By: _________________ By: ___________________
James T. Rager Charles A. Caswell
Chairman of the Board 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 RBC Centura
Banks, Inc. and in the capacities indicated on the 21st day of March, 2002.
Name Title
---- -----
/S/ JAMES T. RAGER Chairman of the Board, Director
----------------------------
James T. Rager
/S/ H. KEL LANDIS III Chief Executive Officer, Director
----------------------------
H. Kel Landis III
/S/ SHAUNEEN BRUDER President, Director
----------------------------
Shauneen Bruder
/S/ PETER W. CURRIE Director
----------------------------
Peter W. Currie
/S/ SCOTT M. CUSTER Director
----------------------------
Scott M. Custer
/S/ HAROLD A. DAWSON JR. Director
----------------------------
Harold A. Dawson Jr.
/S/ PAUL S. MUSGROVE Controller
----------------------------
Paul S. Musgrove
/S/ O. TRACY PARKS, III Director
----------------------------
O. Tracy Parks, III
/S/ WILLIAM H. REDDING, JR. Director
----------------------------
William H. Redding, Jr.
/S/ CECIL W. SEWELL, JR. Director
----------------------------
Cecil W. Sewell, Jr.
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RBC CENTURA BANKS, INC.
EXHIBIT LIST
Sequential
Exhibit Page
Number Description of Exhibit Number
- ------ ---------------------- ------
3.1 Restated Articles of Incorporation of RBC Centura Banks, Inc. Page 70
3.2 Amended and Restated Bylaws of RBC Centura Banks, Inc. Page 71
4.1 Specimen certificate of RBC Centura common stock Page 85
4.2 Amended and Restated Trust Agreement between RBC Centura Banks, Inc., dated as of Depositor,
State Street Bank and Trust Company, as Property Trustee, Delaware Trust Capital Management,
as Trustee, and the Administrative Trustees named therein relating to $100 million Centura Capital
Trust I, 8.845% Capital Securities, Series A (the "Capital Securities") *4.3(1)
4.3 Guarantee Agreement between RBC Centura Banks, Inc., Guarantor, and State Street Bank and Trust
Company, as Guarantee Trustee, relating to the Capital Securities *4.4(1)
4.4 Junior Subordinated Indenture between RBC Centura Banks, Inc. and State Street Bank and Trust
Company, as Trustee relating to $103.1 million of 8.845% Junior Subordinated Deferred Interest
Debentures of the Corporation *4.5(1)
10.1 Agreement and Plan of Merger, dated as of January 26, 2001, by and between RBC Centura Banks,
Inc. and Royal Bank of Canada *99.1(2)
10.2 Stock Option Agreement, dated as of January 26, 2001, by and between RBC Centura Banks, Inc. and
Royal Bank of Canada *99.2(2)
- --------
* Incorporation by reference from the following document as noted:
(1) Included as the identified exhibit to RBC Centura Banks, Inc. Annual Report
on Form 10-K for the year ended December 31, 1997.
(2) Included as the identified exhibit to RBC Centura Banks, Inc. Form 8-K
filed February 2, 2001.
69