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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER: 1-10646
CENTURA BANKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
North Carolina 56-1688522
(STATE OR OTHER JURISDICTION OF INCORPORATION OR
ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
134 North Church Street, Rocky Mount, North Carolina 27804
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (919) 977-4400
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, No Par Value New York Stock Exchange
(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [x] No
Indicate by check mark if the 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 the Registrant'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, 1997, there were 25,745,290 shares outstanding of the
Registrant's common stock, no par value. The aggregate market value of the
Registrant's common stock held by those persons deemed by the Registrant to be
nonaffiliates was approximately $1.0 billion. Portions of the Proxy Statement of
the Registrant for the Annual Meeting of Shareholders to be held on April 16,
1997, are incorporated by reference in Part III of this report.
II-1
CROSS REFERENCE INDEX
PART I ITEM 1 BUSINESS PAGE II-
Description of Business 5-11
Average Balance Sheets 17
Net Interest Income Analysis -- Taxable Equivalent Basis 17
Net Interest Income and Volume/Rate Variance -- Taxable Equivalent Basis 20
Interest Sensitivity Analysis 27
Summary of Results of Operations 12
Investment Securities 17-19, 42, 43
Loans 14-16, 43, 44
Asset Quality and Allowance for Loan Losses 20-23, 44
Funding Sources 19, 45-46
Equity and Capital Resources 24-25, 49, 58
Net Interest Income and Net Interest Margin 17, 19-20
Noninterest Income and Noninterest Expense 23, 24, 50
ITEM 2 PROPERTIES 11, 45, 52
ITEM 3 LEGAL PROCEEDINGS
On May 13, 1994, seven individuals claiming to have been depositors of First
Savings Bank of Forest City, SSB ("First Savings") filed suit in Wake County,
North Carolina, Superior Court against the Registrant, Centura Bank, the
North Carolina Savings Institutions Division ("NCSID"), and six individuals
who were directors of First Savings at the time of the acquisition of that
institution by the Registrant and Centura Bank through a merger/conversion
transaction in October 1993 (the "Acquisition"). Plaintiffs' complaint
alleges, among other things, that the individual defendants violated their
fiduciary duties as directors of First Savings in connection with the
Acquisition by allegedly receiving excessive benefits as part of that
transaction; that the Registrant and Centura Bank acted in concert with the
individual defendants in that regard, as a result of which it is alleged that
"the assets of First Savings were wrongfully transferred"; and that the NCSID
acted in violation of law in approving the Acquisition. Plaintiffs sought (i)
certification of the suit as a class action; (ii) a judgment ordering the
individual defendants, the Registrant, and Centura Bank to pay to plaintiffs
and members of the class the difference between the fair market value of
First Savings as of the date of the Acquisition and the value of benefits
paid to depositors in the Acquisition; (iii) punitive damages in an
unspecified amount; and (iv) in the event damages are not awarded, entry of
an order declaring the Acquisition to be "illegal, void and reversed."
On March 2, 1995, claims against NCSID were severed from claims against the
six individuals who were directors of First Savings, the Registrant and
Centura Bank, and accordingly, such claims are now the subject of two
separate proceedings.
On October 31, 1995, the Wake County Superior Court reversed the decision of
the NCSID Administrator denying plaintiffs' request for a hearing on the
issue of whether the NCSID should have approved the Acquisition and remanded
the action to the NCSID for such a hearing. The Registrant and NCSID appealed
this decision, which appeal was dismissed by the North Carolina Court of
Appeals. A hearing has not yet been scheduled by the NCSID.
The civil damage action was certified as a class action on March 4, 1996, and
on March 26, 1996, was assigned to the Special Superior Court for Complex
Business Litigation. Registrant, and the former First Savings directors moved
for summary judgment, which motion was heard by the court on January 8, 1997.
Management is of the view that the Registrant should have no financial
liability as a result of this litigation and, accordingly, no liability has
been recorded.
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PAGE II-
Various other legal proceedings against the Registrant and its subsidiary
have arisen from time to time in the normal course of business. Management
believes liabilities arising from these proceedings, if any, will have no
material adverse effect on the financial position or results of operations of
the Registrant or its subsidiary.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There has been no submission of matters to a vote of shareholders during the
quarter ended December 31, 1996.
PART II ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 8, 9, 24, 25, 49,
50, 58
ITEM 6 SELECTED FINANCIAL DATA 12
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 13-29
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report 31
Consolidated Balance Sheets at December 31, 1996 and 1995 32
Consolidated Statements of Income for each of the years in the three-year
period ended December 31, 1996 33
Consolidated Statements of Shareholders' Equity for each of the years in the
three-year period ended December 31, 1996 34
Consolidated Statements of Cash Flows for each of the years in the three-year
period ended December 31, 1996 35
Notes to Consolidated Financial Statements 36-58
Quarterly Financial Summary for 1996 and 1995 28
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There has been no disagreement with accountants on accounting and financial
disclosure.
PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT *
ITEM 11 EXECUTIVE COMPENSATION *
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT *
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS *
PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements (See Item 8 for reference)
(2) 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.
(3) Exhibits have been filed separately with the Commission and are available
upon written request. 59-60
(b) Reports on Form 8-K:
On October 4, 1996, the Registrant filed a Form 8-K announcing earnings for
the nine months ended September 30, 1996 and announcing the completion of
its purchase of 49 percent interest in First Greensboro Home Equity, Inc., a
privately owned company specializing in alternative lending for homeowners
and homebuyers.
On October 11, 1996, the Registrant filed a Form 8-K announcing that the
shareholders of FirstSouth Bank ("FirstSouth") approved the merger of
FirstSouth with Registrant.
On October 25, 1996, the Registrant filed a Form 8-K announcing the
completion of its merger with FirstSouth Bank in Burlington, North Carolina.
The merger was consummated through the issuance of .55 shares of Centura
common stock for each share of FirstSouth common stock.
II-3
PAGE II-
On November 26, 1996, the Registrant filed a Form 8-K/A to provide pro forma
financial information to security holders and investors. The unaudited pro
forma combined condensed balance sheet as of June 30, 1996 and unaudited pro
forma combined condensed financial statements for the year ended December
31, 1995 and for the six months ended June 30, 1996, give effect to the
affiliation with Registrant of First Community Bank, Gastonia North
Carolina, and the purchase of 49 percent interest in First Greensboro Home
Equity, Inc. presented under the purchase method of accounting.
Additionally, the unaudited pro forma combined condensed balance sheet as of
June 30, 1996, and the unaudited pro forma combined condensed income
statements for the six months ended June 30, 1996 and for each of the years
in the three-year period ended December 31, 1995, combine the historical
financial statements of the Registrant with FirstSouth Bank, Burlington,
North Carolina and CLG, Inc., Raleigh, North Carolina, after giving effect
to the merger of both entities using the pooling-of-interests method of
accounting. This filing was made as an amendment to and replacement for the
8-K dated and signed as of September 4, 1996.
* Information called for by Part III (Items 10 through 13) is incorporated by
reference to the Registrant's Proxy Statement for the 1997 Annual Meeting of
Shareholders filed with the Securities and Exchange Commission.
II-4
DESCRIPTION OF BUSINESS
REGISTRANT
Centura Banks, Inc. (the "Registrant" or "Centura") is a bank holding
company registered with the Board of Governors of the Federal Reserve System
(the "Federal Reserve") and operating under the Bank Holding Company Act of
1956, as amended (the "BHC Act"). The Registrant owns all of the outstanding
shares of its sole, wholly-owned subsidiary, Centura Bank (the "Bank"), a North
Carolina chartered bank. The Registrant and the Bank are collectively referred
to as "Centura". The Registrant provides services and assistance to the Bank and
the Bank's subsidiaries in the areas of strategic planning, administration, and
general corporate activities. In return, the Registrant receives income and
dividends from the Bank, where most of the operations of the Registrant are
carried on. During 1996, the Registrant acquired a 49 percent equity interest in
First Greensboro Home Equity, Inc., a home equity mortgage company headquartered
in Greensboro, North Carolina ("First Greensboro") (discussed further in Note 2
of the notes to consolidated financial statements). The Registrant receives
income from First Greensboro as a result of its ownership interest. The majority
of the Registrant's executive officers, who are also officers of the Bank,
receive their entire salaries from the Registrant. The executive offices of the
Registrant and the Bank are located at 134 North Church Street, Rocky Mount,
Nash County, North Carolina. At December 31, 1996, the Registrant had
consolidated assets of $6.3 billion.
The Bank is a North Carolina banking corporation and Federal Reserve member
bank with deposits insured by the Bank Insurance Fund (the "BIF") and the
Savings Association Insurance Fund (the "SAIF") of the Federal Deposit Insurance
Corporation (the "FDIC"). As of December 31, 1996, the Bank had 2,110 full-time
and 412 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.
Centura's strategic intent is to become the primary provider of financial
services for each of its customers. Therefore, Centura offers: full-service
commercial and consumer banking services, including bill paying services; retail
securities brokerage services; insurance brokerage services covering a full line
of personal and commercial lines; commercial and retail leasing; trust
department activities for individual estates and for various types of employee
benefit plans; and mortgage banking activities.
Another component of the strategic intent is the convenient delivery of
financial products and services to each customer. At December 31, 1996, Centura
serviced its customers through 166 financial stores, including 11 supermarket
locations, and through more than 255 automated teller machines throughout North
Carolina. Alternatively, Centura offers Centura Highway, a centralized telephone
operation which handles a full line of financial services; a home page on the
Internet; and home banking through a telephone network operated by a third party
and connected to the personal computers of customers.
In keeping with its strategic intent Centura concentrates on expanding its
customer knowledge through the use of a customer database and sales tracking
system that combines financial, demographic, behavioral and psychographic data.
The information supports decision making about services offered, delivery
channels, locations, staffing, and marketing. In order to take its services
where the consumer shops, Centura is also expanding its in-store banking
strategy which during 1997 includes opening 14 additional in-store locations
throughout North Carolina and the Tidewater Virginia region. Management
anticipates it will continue to refine Centura's product and service offerings
and related delivery systems and technologies in order to achieve Centura's
strategic intent.
Centura's growth plan continues to include acquisitions that create
strategic market entry or enhancement opportunities. During 1996, Centura
completed mergers with three North Carolina commercial banking institutions, a
merger with a technology leasing company, a deposit assumption transaction, and
the acquisition of a 49 percent interest in a commercial finance company. These
transactions are described further in management's discussion and analysis of
financial condition and results of operations and in Note 2 of the notes to
consolidated financial statements.
COMPETITION
The financial services industry is highly competitive. Centura, through the
Bank, competes for all types of loans, deposits, and financial services with
other bank and nonbank institutions located within the State. Since the amount
of money a state bank may lend to a single borrower, or to a group of related
borrowers, is limited to a percentage of the bank's shareholders' equity, the
Bank's larger competitors for commercial loan customers have higher lending
limits than does the Bank. Centura was the sixth largest bank holding company in
North Carolina based on its assets at December 31, 1996.
II-5
Centura also competes with out-of-state banks and bank holding companies
serving North Carolina, various savings and loan associations, money market and
other mutual funds, brokerage houses, and various other financial institutions.
Additionally, Centura competes with insurance companies, leasing companies,
regulated small loan companies, credit unions, governmental agencies and
commercial entities offering financial services products.
SUPERVISION AND REGULATION
GENERAL. The Registrant is a bank holding company, registered with the
Federal Reserve under the BHC Act and with the North Carolina Commissioner of
Banks (the "Commissioner") under the North Carolina Bank Holding Company Act of
1984, as amended (the "North Carolina Act"). As such, the Registrant and its
subsidiary are subject to the supervision, examination, and reporting
requirements of the BHC Act and the North Carolina Act and the regulations of
the Federal Reserve and the Commissioner.
The BHC Act requires every bank holding company to obtain the prior
approval of the Federal Reserve before (i) it may acquire direct or indirect
ownership or control of any voting shares of any bank if, after such
acquisition, the bank holding company will directly or indirectly own or control
more than 5 percent of the voting shares of the bank, (ii) it or any of its
subsidiaries, other than a bank, may acquire all or substantially all of the
assets of the bank, or (iii) it may merge or consolidate with any other bank
holding company.
The BHC Act further provides that the Federal Reserve may not approve any
transaction that would result in a monopoly or would be in furtherance of any
combination or conspiracy to monopolize or attempt to monopolize the business of
banking in any section of the United States, or the effect of which may be
substantially to lessen competition or to tend to create a monopoly in any
section of the country, or that in any other manner would be in restraint of
trade, unless the anticompetitive effects of the proposed transaction are
clearly outweighed by the public interest in meeting the convenience and needs
of the community to be served. The Federal Reserve is also required to consider
the financial and managerial resources and future prospects of the bank holding
companies and banks concerned and the convenience and needs of the community to
be served. Consideration of financial resources generally focuses on capital
adequacy and consideration of convenience and needs issues includes the parties'
performance under the Community Reinvestment Act of 1977 (the "CRA"). Both
capital adequacy and the CRA are discussed below.
The BHC Act, as amended by the interstate banking provisions of the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Interstate
Banking Act"), which became effective on September 29, 1995, repealed the prior
statutory restrictions on interstate acquisitions of banks by bank holding
companies, such that Centura and any other bank holding company located in North
Carolina may now acquire a bank located in any other state, and any bank holding
company located outside North Carolina may lawfully acquire any North
Carolina-based bank, regardless of state law to the contrary, in either case
subject to certain deposit-percentage limitations, aging requirements, and other
restrictions. The Interstate Banking Act also generally provides that, after
June 1, 1997, national and state-chartered banks may branch interstate through
acquisitions of banks in other states. By adopting legislation prior to that
date, a state has the ability either to "opt in" and accelerate the date after
which interstate branching is permissible or "opt out" and prohibit interstate
branching altogether. North Carolina has enacted "opt in" legislation that
permits interstate branching in North Carolina on a reciprocal basis through
June 1, 1997, and on an unlimited basis thereafter. Accordingly, the Bank is
currently able to establish and operate branches in other states that have also
enacted "opt in" legislation.
It is anticipated that the Interstate Banking Act will increase competition
within the markets in which the Bank now operates, although the extent to which
such competition will increase in such markets or the timing of such increase
cannot be predicted.
The BHC Act generally prohibits the Registrant from engaging in activities
other than banking or managing or controlling banks or other permissible
subsidiaries and from acquiring or retaining direct or indirect control of any
company engaged in any activities other than those activities determined by the
Federal Reserve to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. In determining whether a particular
activity is permissible, the Federal Reserve must consider whether the
performance of such an activity reasonably can be expected to produce benefits
to the public, such as greater convenience, increased competition, or gains in
efficiency, that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interest, or unsound
banking practices. For example, factoring accounts receivable, acquiring or
servicing loans, leasing personal property, conducting discount securities
brokerage activities, performing certain data processing services, acting as
agent or broker in selling credit life insurance and certain other types of
insurance in connection with credit transactions, and performing certain
insurance underwriting activities all have been determined by the Federal
Reserve to be permissible activities of bank holding
II-6
companies. The BHC Act does not place territorial limitations on permissible
bank-related activities of bank holding companies. Despite prior approval, the
Federal Reserve has the power to order a holding company or its subsidiaries to
terminate any activity or to terminate its ownership or control of any
subsidiary when it has reasonable cause to believe that continuation of such
activity or such ownership or control constitutes a serious risk to the
financial safety, soundness, or stability of any bank subsidiary of that bank
holding company.
The Bank is a member of the FDIC, and as such, its deposits are insured by
the FDIC to the extent provided by law. The Bank is also subject to numerous
state and federal statutes and regulations that affect its business, activities,
and operations, and the Bank, as a North Carolina bank and member of the Federal
Reserve, is supervised and examined by the Federal Reserve and the Commissioner,
and is also subject to the backup supervisory authority of the FDIC. Such
agencies regularly examine the operations of the Bank and are given authority to
approve or disapprove mergers, consolidations, the establishment of branches,
and similar corporate actions. Such agencies also have the power to prevent the
continuance or development of unsafe or unsound banking practices or other
violations of law.
COMMUNITY REINVESTMENT ACT. The Bank is subject to the provisions of the
CRA. Under the terms of the CRA, the appropriate federal bank regulatory agency
is required, in connection with its examination of a bank, to assess such bank's
record in meeting the credit needs of the community served by that bank,
including low and moderate-income neighborhoods. The regulatory agency's
assessment of the bank's record is made available to the public. Further, such
assessment is required of any bank which has applied to (i) charter a national
bank, (ii) obtain deposit insurance coverage for a newly chartered institution,
(iii) establish a new branch office that will accept deposits, (iv) relocate an
office, or (v) merge or consolidate with, or acquire the assets or assume the
liabilities of, a federally regulated financial institution. In the case of a
bank holding company applying for approval to acquire a bank or other bank
holding company, the Federal Reserve will assess the records of each subsidiary
bank of the applicant bank holding company, and such records may be the basis
for denying the application.
Under CRA regulations jointly adopted by all federal bank regulatory
agencies, the former process-based CRA assessment factors were replaced with a
new evaluation system that rates institutions based on their actual performance
in meeting community credit needs. The evaluation system used to judge an
institution's CRA performance consists of three tests: a lending test; an
investment test; and a service test. Each of these tests will be applied by the
institution's federal regulator in an assessment context that would take into
account such factors as: (i) demographic data about the community; (ii) the
institution's capacity and constraints; (iii) the institution product offerings
and business strategy; and (iv) data on the prior performance of the institution
and similarly-situated lenders. The new lending test -- the most important of
the three tests for all institutions other than wholesale and limited purpose
(e.g. credit card) banks -- will evaluate an institution's lending activities as
measured by its home mortgage loans, small business and farm loans, community
development loans, and, at the option of the institution, its consumer loans.
The institution's regulator will weigh each of these lending categories to
reflect its relative importance to the institution's overall business and, in
the case of community development loans, the characteristics and needs of the
institution's service area and the opportunities available for this type of
lending. Assessment criteria for the lending test will include: (i) geographic
distribution of the institution's lending; (ii) distribution of the
institution's home mortgage and consumer loans among different economic segments
of the community; (iii) the number and amount of small business and small farm
loans made by the institution; (iv) the number and amount of community
development loans outstanding; and (v) the institution's use of innovative or
flexible lending practices to meet the needs of low-to-moderate income
individuals and neighborhoods. At the election of an institution, or if
particular circumstances so warrant, the banking agencies will take into account
in making their assessments lending by the institution's affiliates as well as
community development loans made by the lending consortia and other lenders in
which the institution has invested. All financial institutions will be required
to report data on their small business and small farm loans as well as their
home mortgage loans.
The joint agency CRA regulations provide that an institution evaluated
under a given test would receive one of five ratings for that test: outstanding;
high satisfactory; low satisfactory; needs to improve; or substantial
non-compliance. The ratings for each test would then be combined to produce an
overall composite rating of either outstanding, satisfactory (including both
high and low satisfactory), needs to improve, or substantial non-compliance. In
the case of a retail-oriented institution, its lending test rating would form
the basis for its composite rating. That rating would then be increased by up to
two levels in the case of outstanding or high satisfactory investment
performance, increased by one level in the case of outstanding service, and
decreased by one level in the case of substantial non-compliance in service. An
institution found to have engaged in illegal lending discrimination would be
rebuttably presumed to have a less-than-satisfactory composite CRA rating. The
Bank's current CRA rating is Satisfactory.
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PAYMENT OF DIVIDENDS. The Registrant is a legal entity separate and
distinct from the Bank. The principal source of cash flow of the Registrant,
including cash flow to pay dividends to its shareholders, is dividends from the
Bank. There are statutory and regulatory limitations on the payment of dividends
by the Bank to the Registrant as well as the Registrant to its shareholders.
Under North Carolina law, the Bank may pay cash dividends only out of
undivided profits and only if the Bank has surplus of a specified level. If a
bank having capital stock of $15,000 or more has surplus of less than 50 percent
of its paid-in capital stock, no cash dividend may be declared until the bank
has transferred from undivided profits to surplus 25 percent of its undivided
profits or any lesser percentage sufficient to raise the bank surplus to an
amount equal to 50 percent of its paid-in capital. Furthermore, if, in the
opinion of the federal regulatory agencies, a bank under its jurisdiction is
engaged in or is about to engage in an unsafe or unsound practice (which,
depending on the financial condition of the bank, could include the payment of
dividends), such authority may require, after notice and hearing, that such bank
cease and desist from such practice. The Federal Reserve and the FDIC have
indicated that paying dividends that deplete a bank's capital base to an
inadequate level would be an unsafe and unsound banking practice. Under the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), an
insured bank may not pay any dividend if payment would cause it to become
undercapitalized or once it is undercapitalized. See "Prompt Corrective Action."
Moreover, the Federal Reserve and the FDIC have issued policy statements which
provide that bank holding companies and insured banks should generally only pay
dividends out of current operating earnings. See Note 18 of the notes to
consolidated financial statements for amounts available for dividends.
The payment of dividends by the Registrant and the Bank may also be
affected or limited by other factors, such as the requirement to maintain
adequate capital above regulatory guidelines.
CAPITAL ADEQUACY. The Registrant and the Bank are required to comply with
the capital adequacy standards established by the Federal Reserve. There are two
basic measures of capital adequacy: a risk-based measure and a leverage measure.
All applicable capital standards must be satisfied for an institution 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 banks 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. 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 ("Risk Based Capital Ratio") of total
capital ("Total Capital") to risk-weighted assets (including certain
off-balance-sheet items, such as standby letters of credit) is 8.0 percent. At
least half of the Total Capital must be composed of common equity, retained
earnings, minority interests in the equity accounts of consolidated
subsidiaries, noncumulative perpetual preferred stock, and a limited amount of
cumulative perpetual preferred stock, less goodwill and certain other intangible
assets ("Tier 1 Capital"). The remainder may consist of subordinated debt, other
preferred stock, and a limited amount of loan loss reserves ("Tier II Capital").
At December 31, 1996, the Registrant and the Bank were in compliance with the
total capital ratio and the Tier I capital ratio requirements. Note 18 of the
notes to consolidated financial statements presents Centura's and the Bank's
capital ratios.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio of Tier 1 Capital to average assets, less goodwill and certain other
intangible assets (the "Leverage Ratio") of 3.0 percent 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 Leverage Ratio of at least 3.0 percent plus an additional cushion of
100 to 200 basis points. The Registrant was in compliance with the minimum
Leverage Ratio requirement as of December 31. The guidelines also provide that
bank holding companies experiencing internal growth or making acquisitions will
be expected to maintain strong capital positions substantially above the minimum
supervisory levels without significant reliance on intangible assets.
Furthermore, the Federal Reserve has indicated that it will consider a "tangible
Tier 1 Capital leverage ratio" (deducting all intangibles) and other indicia of
capital strength in evaluating proposals for expansion or new activities.
The Bank is subject to risk-based and leverage capital requirements adopted
by the Federal Reserve and was in compliance with applicable minimum capital
requirements as of December 31, 1996. Neither the Registrant nor the Bank has
been advised by any federal banking agency of any specific minimum Leverage
Ratio requirement applicable to it.
Failure to meet capital guidelines could subject a bank to a variety of
enforcement remedies, including the termination of deposit insurance by the
FDIC, and to certain restrictions on its business. See "Prompt Corrective
Action."
II-8
The federal bank regulators continue to indicate their desire to raise
capital requirements applicable to banking organizations beyond their current
levels. In this regard, the federal banking agencies have, pursuant to FDICIA,
proposed an amendment to the risk-based capital standards that would calculate
the change in an institution's net economic value attributable to increases and
decreases in market interest rates and would require banks with excessive
interest rate risk exposure to hold additional amounts of capital against such
exposures.
SUPPORT OF SUBSIDIARY BANK. Under Federal Reserve policy, the Registrant is
expected to act as a source of financial strength to, and to commit resources to
support, the Bank. This support may be required at times when, absent such
Federal Reserve policy, the Registrant may not be inclined to provide it. In
addition, any capital loans by a bank holding company to its subsidiary bank are
subordinate in right of payment to deposits and to certain other indebtedness of
the subsidiary bank. 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 subsidiary bank will be assumed by the bankruptcy
trustee and entitled to a priority of payment.
PROMPT CORRECTIVE ACTION. FDICIA establishes a system of prompt corrective
action to resolve the problems of undercapitalized institutions. Under this
system the federal banking regulators are required to rate supervised
institutions on the basis of five capital categories ("well-capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
and "critically undercapitalized") and to take certain mandatory supervisory
actions, and are authorized to take other discretionary actions, with respect to
institutions in the three undercapitalized categories, the severity of which
will depend upon the capital category in which the institution is placed.
Generally, subject to a narrow exception, FDICIA requires the banking regulator
to appoint a receiver or conservator for an institution that is critically
undercapitalized. The federal banking agencies have specified by regulation the
relevant capital level for each category.
Under the Federal Reserve rule implementing the prompt corrective action
provisions, a bank that (i) has a Total Capital ratio of 10.0 percent or
greater, a Tier 1 Capital ratio of 6.0 percent or greater, and a Leverage Ratio
of 5.0 percent or greater, and (ii) is not subject to any written agreement,
order, capital directive, or prompt corrective action directive issued by the
Federal Reserve, is deemed to be "well-capitalized." An institution with a Total
Capital ratio of 8.0 percent or greater, a Tier 1 Capital ratio of 4.0 percent
or greater and a Leverage Ratio of 4.0 percent or greater (or 3.0 percent or
greater in the case of an institution rated composite 1 under the CAMEL rating
system) is considered to be "adequately capitalized." A bank that has a Total
Capital ratio of less than 8.0 percent or a Tier 1 Capital ratio of less than
4.0 percent or a Leverage Ratio that is less than 4.0 percent (or less than 3.0
percent in the case of a bank rated composite 1 under the CAMEL rating system)
is considered to be "undercapitalized." A bank that has a Total Capital ratio of
less than 6.0 percent, a Tier 1 Capital ratio of less than 3 percent, or a
Leverage Ratio that is less than 3.0 percent is considered to be "significantly
undercapitalized" and an institution that has a tangible equity capital to
assets ratio equal to or less than 2.0 percent is deemed to be "critically
undercapitalized." For purposes of the regulation, the term "tangible equity"
includes core capital elements counted as Tier 1 capital for purposes of the
risk-based capital standards plus the amount of outstanding cumulative perpetual
preferred stock (including related surplus), minus all intangible assets with
certain exceptions. A bank may be deemed to be in a capitalization category that
is lower than is indicated by its actual capital position if it receives an
unsatisfactory examination rating.
In the case of a bank that is categorized as undercapitalized,
significantly undercapitalized, or critically undercapitalized, the institution
is required to submit an acceptable capital restoration plan to its appropriate
federal banking agency. An undercapitalized institution is also generally
prohibited from increasing its average total assets, making acquisitions,
establishing any branches, or engaging in any new line of business except in
accordance with an accepted capital restoration plan or with the approval of the
FDIC. In addition, the appropriate federal banking agency is given authority
with respect to any undercapitalized depository institution to take any of the
actions it is required to or may take with respect to a significantly
undercapitalized institution as described below if it determines "that those
actions are necessary to carry out the purposes" of FDICIA.
At December 31, 1996, the Bank had the requisite capital levels to qualify
as well-capitalized.
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, which went into effect January 1,
1994, assigns an institution to one of three capital categories: (i)
well-capitalized; (ii) adequately capitalized; and (iii) undercapitalized. These
three categories are substantially similar to the prompt corrective action
categories described above, with the "undercapitalized" category including
institutions that are undercapitalized, significantly undercapitalized, and
critically undercapitalized for prompt corrective action purposes. An
institution is also assigned by the FDIC to one of three supervisory subgroups
within each capital group. The supervisory subgroup to which an institution is
assigned is based on a supervisory evaluation provided to the FDIC by the
institution's
II-9
primary federal regulator and information which the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance funds (which may include, if applicable, information provided
by the institution's state supervisor). An institution's insurance assessment
rate is then determined based on the capital category and supervisory category
to which it is assigned.
Under the final risk-based assessment system there are nine assessment risk
classifications (i.e., combinations of capital groups and supervisory subgroups)
to which different assessment rates are applied. Assessment rates for members of
both the BIF and the SAIF for the first half of 1995, as they had been during
1994, ranged from 23 basis points (0.23 percent of deposits) for an institution
in the highest category (i.e., "well-capitalized" and "healthy") to 31 basis
points (0.31percent of deposits) for an institution in the lowest category
(i.e., "undercapitalized" and "substantial supervisory concern"). These rates
were established for both funds to achieve a designated ratio of reserves to
insured deposits (i.e., 1.25 percent) within a specified period of time.
Once the designated ratio for the BIF was reached in May 1995, the FDIC
reduced the assessment rate applicable to BIF deposits in two stages, so that,
beginning in 1996, the deposit insurance premiums for 92 percent of all BIF
members in the highest capital and supervisory categories were set at $2,000 per
year, regardless of deposit size. The FDIC elected to retain the assessment rate
range of 23 to 31 basis points for SAIF members given the undercapitalized
nature of that insurance fund.
Recognizing that the disparity between the SAIF and BIF premium rates have
adverse consequences for SAIF-insured institutions and other banks with
SAIF-assessed deposits, including reduced earnings and an impaired ability to
raise funds in capital markets and to attract deposits, in July 1995, the FDIC,
the Treasury Department, and the OTS released statements outlining a proposed
plan to recapitalize the SAIF, the principal feature of which was a special
one-time assessment on depository institutions holding SAIF-insured deposits,
which was intended to recapitalize the SAIF at a reserve ratio of 1.25 percent.
This proposal contemplated elimination of the disparity between the assessment
rates on BIF and SAIF deposits following recapitalization of the SAIF.
A variation of this proposal designated the Deposit Insurance Funds Act of
1996 (the "Funds Act") was enacted by Congress as part of omnibus budget
legislation and signed into law on September 30, 1996. As directed by the Funds
Act, the FDIC implemented a special one-time assessment of approximately 65.7
basis points (0.657 percent) on a depository institution's SAIF-insured deposits
held as of March 31, 1995 (or approximately 52.6 basis points on SAIF deposits
acquired by banks in certain qualifying transactions). The Bank recorded a
pre-tax charge against earnings for the special assessment in the quarter ended
September 30, 1996 in the amount of approximately $7.3 million.
In addition, on December 24, 1996, in order to avoid collecting more than
needed to maintain the SAIF's capitalization rate at 1.25 percent of aggregate
insured deposits, the FDIC revised the SAIF assessment rate schedule, which
retroactively resulted in, as of December 11, 1996, (i) a widening in the
assessment rate spread among institutions in the different capital and risk
assessment categories, (ii) an overall reduction of the assessment rate range
assessable on SAIF deposits of from 0 to 27 basis points, and (iii) a special
interim assessment rate range for the last quarter of 1996 of from 18 to 27
basis points on institutions subject to Financing Corporation ("FICO")
assessments. Effective January 1, 1997, FICO assessments are imposed on both
BIF- and SAIF-insured deposits in annual amounts presently estimated at 1.29
basis points and 6.44 basis points, respectively. The Bank anticipates that the
net effect of the decrease in the premium assessment rate on SAIF deposits will
result in a reduction in its total deposit insurance premium assessments for the
years 1997 through 1999, assuming no further changes in announced premium
assessment rates.
Under the Federal Deposit Insurance Act, ("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.
SAFETY AND SOUNDNESS STANDARDS. The FDIA, as amended by FDICIA and the
Riegle Community Development and Regulatory Improvement Act of 1994, requires
the federal bank regulatory agencies to prescribe standards, by regulations or
guidelines, relating to internal controls, information systems and internal
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, asset quality, earnings, stock valuation and
compensation, fees and benefits and such other operational and managerial
standards as the agencies deem appropriate. The federal bank regulatory agencies
have adopted a set of guidelines prescribing safety and soundness standards
pursuant to FDICIA, as amended. The guidelines establish general standards
relating to internal controls and information systems, internal audit systems,
loan documentation, credit underwriting, interest rate exposure, asset growth
and compensation, fees, and benefits. In general, the guidelines require, among
other things, appropriate systems and practices to identify and manage the risks
and exposures specified in the guidelines. The guidelines prohibit excessive
compensation as an unsafe and unsound practice and describe compensation as
II-10
excessive when the amounts paid are unreasonable or disproportionate to the
services performed by an executive officer, employee, director, or principal
stockholders. The federal banking agencies determined that stock valuation
standards were not appropriate. In addition, the agencies adopted regulations
that authorize, but do not require, an agency to order an institution that has
been given notice by an agency that it is not satisfying any of such safety and
soundness standards to submit a compliance plan. If, after being so notified, an
institution fails to submit an acceptable compliance plan, the agency must issue
an order directing action to correct the deficiency and may issue an order
directing other actions of the types to which an undercapitalized association is
subject under the prompt correction action provisions of FDICIA. See "Prompt
Corrective Action." If an institution fails to comply with such an order, the
agency may seek to enforce such order in judicial proceedings and to impose
civil money penalties. The federal bank regulatory agencies also proposed
guidelines for asset quality and earnings standards.
DEPOSITOR PREFERENCE. Legislation enacted by Congress establishes a
nationwide depositor preference rule in the event of a bank failure. Under this
arrangement, all deposits and certain other claims against a bank, including the
claim of the FDIC as subrogee of insured depositors, would receive payment in
full before any general creditor of the bank would be entitled to any payment in
the event of an insolvency or liquidation of the bank.
PROPERTIES
The main executive offices of the Registrant and the Bank are located in
Rocky Mount, North Carolina. The Bank operates 166 financial stores, the
majority of which are owned by the Bank.
II-11
TABLE 1
SELECTED FINANCIAL DATA
FIVE-YEAR
COMPOUNDED
GROWTH
1996 1995 1994 1993 1992 RATE
SUMMARY OF OPERATIONS
(thousands, except per share)
Interest income........................................ $469,760 $417,635 $324,950 $282,819 $274,442 10.1%
Interest expense....................................... 219,676 192,990 123,657 112,306 124,296 6.6
Net interest income.................................... 250,084 224,645 201,293 170,513 150,146 13.8
Provision for loan losses.............................. 9,596 7,904 7,220 9,151 17,293 (15.6)
Noninterest income..................................... 100,847 80,110 63,756 66,642 56,706 18.3
Noninterest expense.................................... 233,981 195,777 170,207 157,040 139,459 12.2
Income taxes........................................... 39,203 36,421 31,849 26,688 16,593 46.8
Net income............................................. $ 68,151 $ 64,653 $ 55,773 $ 44,276 $ 33,507 36.2
Net interest income, taxable equivalent................ $256,109 $229,827 $207,033 $176,610 $156,419 13.2
Cash dividends paid.................................... $ 24,001 $ 18,731 $ 15,874 $ 12,833 $ 10,012 21.6
PER COMMON SHARE
Net income -- primary.................................. $ 2.61 $ 2.46 $ 2.20 $ 1.90 $ 1.52 30.5%
Net income -- fully diluted............................ 2.61 2.46 2.20 1.87 1.50 30.5
Cash dividends......................................... 1.00 .85 .74 .69 .63 10.6
Book value............................................. 18.51 17.19 14.95 14.09 12.22 10.7
SELECTED AVERAGE BALANCES
(millions)
Assets................................................. $ 5,956 $ 5,178 $ 4,478 $ 3,937 $ 3,475 13.4%
Earning assets......................................... 5,485 4,754 4,118 3,614 3,170 13.8
Loans.................................................. 4,014 3,638 3,005 2,650 2,385 12.6
Investment securities.................................. 1,436 1,083 1,083 905 708 18.3
Core deposits.......................................... 4,102 3,646 3,445 3,058 2,721 11.1
Total deposits......................................... 4,505 4,036 3,718 3,334 2,977 10.6
Shareholders' equity................................... 454 425 360 301 255 14.2
SELECTED YEAR-END BALANCES
(millions)
Assets................................................. $ 6,294 $ 5,785 $ 4,658 $ 4,518 $ 3,647 13.6%
Earning assets......................................... 5,720 5,274 4,230 4,091 3,280 13.8
Loans.................................................. 4,109 3,898 3,244 2,834 2,472 12.9
Investment securities.................................. 1,578 1,329 966 1,201 731 17.8
Core deposits.......................................... 4,387 3,948 3,428 3,538 2,837 11.1
Total deposits......................................... 4,733 4,444 3,736 3,854 3,115 10.4
Shareholders' equity................................... 475 443 369 351 266 14.5
SELECTED RATIOS
Return on average assets............................... 1.14% 1.25% 1.25% 1.12% .96%
Return on average equity............................... 15.02 15.22 15.48 14.73 13.16
Average equity to average assets....................... 7.62 8.21 8.04 7.64 7.32
Dividend payout ratio.................................. 35.22 28.97 28.46 28.98 29.88
II-12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS IS PRESENTED TO ASSIST IN THE
UNDERSTANDING AND EVALUATION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CENTURA BANKS, INC. ("CENTURA"). IT SHOULD BE READ IN CONJUNCTION
WITH THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND FOOTNOTES PRESENTED ON
PAGES 32-58 AND THE SUPPLEMENTAL FINANCIAL DATA APPEARING THROUGHOUT THIS
REPORT. CENTURA IS A BANK HOLDING COMPANY OPERATING IN NORTH CAROLINA. NOTE 1 OF
THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DISCUSSES ITS WHOLLY-OWNED
SUBSIDIARY, CENTURA BANK (THE "BANK").
MUCH OF THE FINANCIAL DISCUSSION THAT FOLLOWS REFERS TO THE IMPACT OF
CENTURA'S MERGER AND ACQUISITION ACTIVITY. THE FOLLOWING TABLE PROVIDES A
SUMMARY OF MERGER AND ACQUISITION ACTIVITY FOR THE THREE-YEAR PERIOD ENDING
DECEMBER 31, 1996. THERE WERE NO MERGERS OR ACQUISITIONS COMPLETED IN 1994. ALL
OF THE INSTITUTIONS ACQUIRED WERE IN NORTH CAROLINA, ALLOWING CENTURA TO
LEVERAGE UPON ITS EXISTING MARKET PRESENCE, AS WELL AS EXPAND INTO ADJACENT AND
COMPLIMENTARY MARKETS.
TABLE 2
MERGERS AND ACQUISITIONS, COMPLETED
INSTITUTION ACQUISITION DATE TOTAL ASSETS
ACQUISITIONS ACCOUNTED FOR AS PURCHASES:
(Dollars in millions)
Essex Savings Bank, deposit assumption ("Essex")................................................ 7/26/96 $ 71
First Community Bank, Gastonia ("First Community").............................................. 8/16/96 121
First Greensboro Home Equity, Inc., Greensboro, 49% purchase ("FGHE")........................... 10/01/96 --
Total 1996 Purchase Acquisitions.............................................................. $ 192
Cleveland Federal Bank, A Savings Bank, Shelby ("Cleveland").................................... 3/30/95 86
First Southern Bancorp, Inc., Asheboro ("First Southern")....................................... 6/02/95 325
Total 1995 Purchase Acquisitions.............................................................. $ 411
MERGERS ACCOUNTED FOR AS POOLINGS OF INTERESTS:
First Commercial Holding Corp., Asheville ("FCHC").............................................. 2/27/96 $ 172
FirstSouth Bank, Burlington ("FirstSouth")...................................................... 10/25/96 170
CLG, Inc., Raleigh ("CLG")...................................................................... 11/01/96 126
Total 1996 Mergers............................................................................ $ 468
AS THE 1996 MERGERS WERE ACCOUNTED FOR AS POOLINGS-OF-INTERESTS, ALL
FINANCIAL DATA PREVIOUSLY REPORTED PRIOR TO THE DATES OF MERGER HAVE BEEN
RESTATED AS THOUGH THE ENTITIES HAD BEEN COMBINED FOR ALL THE PERIODS PRESENTED.
FOR THE COMPLETED ACQUISITIONS ACCOUNTED FOR UNDER THE PURCHASE METHOD OF
ACCOUNTING, 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.
CENTURA HAD NO MERGERS OR ACQUISITIONS PENDING AS OF DECEMBER 31, 1996.
CENTURA WILL CONTINUE SEEKING TO ACQUIRE HEALTHY THRIFT AND BANKING INSTITUTIONS
OR REGULATOR-ASSISTED TRANSACTIONS OR OTHER COMPANIES THAT FIT STRATEGIC INTENT.
II-13
SUMMARY
Centura recorded net earnings of $68.2 million for the year ended December
31, 1996, an increase of $3.5 million or 5.4 percent from the year ended
December 31, 1995. Earnings per fully diluted share were $2.61 compared to $2.46
for the prior year. Excluding the special SAIF assessment (described in more
detail under "Equity and Capital Resources"), net income rose 12.0 percent to
$72.4 million, or $2.77 per fully diluted share. Specific results of note for
1996 and key factors responsible for such results follow:
(Bullet) Taxable equivalent net interest income increased by $26.3 million,
or 11.4 percent, to $256.1 million in 1996, primarily due to a
$731 million increase in average earning asset volume, which
outpaced the $667 million increase in interest-bearing liabilities
volume, producing an increase of $24.3 million to net interest
income. The net impact of the rate environment brought net
interest income up $2 million, despite a 16 basis point decline in
the net interest margin to 4.66 percent for 1996 compared to last
year.
(Bullet) The mix of average interest-earning assets and interest-bearing
funding sources changed between 1996 and 1995. Loans declined to
73.2 percent of average earning assets for 1996 compared to 76.5
percent last year, having a negative impact on the margin.
Interest-bearing deposits, with a lower cost of funds in the
aggregate than external funding sources, also declined to 81.0
percent of interest-bearing liabilities versus 84.5 percent last
year, increasing the overall cost of funds.
(Bullet) Nonperforming assets, continuing at low levels, were $22.9 million
at December 31, 1996, representing only .36 percent of total
assets, compared to $22.1 million, or .38 percent of total assets
last year.
(Bullet) The allowance for loan losses was $58.7 million, representing 1.43
percent of outstanding loans at December 31, 1996, compared to
$55.1 million, or 1.41 percent of loans, the previous year. Net
charge-offs were 0.18 percent of average loans, compared to 0.12
percent of average loans for the year ended December 31, 1995.
(Bullet) Noninterest income, before securities transactions, for 1996
increased $18.3 million to $99.0 million compared to $80.7 million
last year. Insurance and brokerage commissions and service charges
on deposit accounts accounted for the majority of the increase.
The 1996 rate environment and economic conditions were conducive
to mortgage loan production and secondary-marketing activities,
increasing mortgage income 61.7 percent to $11.5 million.
(Bullet) Noninterest expense for 1996 increased over the previous year by
19.5 percent to $234.0 million. Total noninterest expenses were
impacted by the one-time special SAIF assessment of $7.3 million,
and almost $13 million in expenses to further support the
development of alternative technologies, products and services and
delivery channels.
INTEREST-EARNING ASSETS
For the year ended December 31, 1996, average interest-earning assets
increased to $5.5 billion, an increase of $731.1 million, or 15.4 percent, over
the balance of $4.8 billion for 1995.
LOANS
Loans at December 31, 1996, were $4.1 billion, an increase of $211.0
million, compared to $3.9 billion last year. Loans of approximately $83 million
were acquired in connection with the 1996 First Community purchase acquisition,
predominantly in loans secured by real estate. Table 3 summarizes total loans
outstanding and the mix of loans being held. The real estate-mortgage loans
category in Table 3 can be divided into two broad groups, residential and
commercial. Residential mortgages accounted for $1.3 billion of the loans
secured by real estate for December 31, 1996, representing 31.4 percent of total
loans in 1996, versus 37.7 percent in 1995. Residential mortgages declined as a
percent of total loans primarily due to the securitization of approximately $242
million during 1996. Commercial mortgage loans accounted for 19.6 percent of
total loans in 1996, versus 19.1 percent in 1995. Leases continue to gain ground
in the mix of loans, increasing $150.6 million over 1995, to represent 10.2
percent of total loans at December 31, 1996 compared to 6.9 percent last year.
Internal loan growth for 1996 was 9.5 percent excluding the effect of the First
Community acquisition and the securitization of the mortgages.
Credit is extended by the Bank almost exclusively to customers in its
market areas of North Carolina. The Bank's loan policies prohibit engaging in
foreign lending activities, exposure in newly established ventures such as high
technology start-up companies or highly speculative real estate development
projects, and also restricts participation in highly leveraged transactions. The
loan portfolio is reviewed on an on-going basis to maintain diversification by
industry, geography, type of loan, collateral, and borrower.
II-14
Real estate residential mortgages ended the year at $1.3 billion versus
$1.5 billion at December 31, 1995. As previously described, Centura securitized
approximately $242 million residential mortgages during 1996. The volume of
originations decreased slightly during 1996 to $426 million versus $464 million
during 1995. Sales of residential mortgage loans held for sale during 1996 of
$424 million indicate a steady turnover of loans originated for sale. Sales
during 1995 were approximately $443 million. The mortgage loan portfolio
serviced for others grew to $2.2 billion compared to $1.7 billion at December
31, 1995.
Mortgage loan activity also impacts noninterest income. Major components of
mortgage income are servicing fees, origination fees, servicing release
premiums, and net marketing gains or losses on the sales. Mortgage income in
total increased $4.4 million, or 61.7 percent, to $11.5 million for 1996
compared to last year. The increase in the mortgage loan portfolio serviced for
others during 1996 contributed to the $896,000 or 23.1 percent growth in net
servicing revenue which totaled $4.8 million compared to $3.9 million for last
year. With increased competition for mortgage business and given that fewer
mortgages are sold with servicing-released, sales activity generated $2.8
million in origination fees and servicing release premiums, compared to $3.3
million during 1995. In addition sales activity during 1996 generated $3.9
million in net marketing gains, while 1995 resulted in $310,000 of net marketing
losses.
The commercial loan portfolio (commercial mortgage; commercial, industrial
and agricultural; and real estate construction) comprised 50.6 percent of the
loan portfolio at December 31, 1996, compared to 47.4 percent last year. Over 90
percent of these loans are secured. Unsecured commercial loans are generally
seasonal in nature (to be repaid in one year or less) and, like secured loans,
are supported by current financial statements and cash flow analyses. Commercial
loans secured by commercial real estate are supported by appraisals prepared by
independent appraisers approved by the Bank in accordance with regulatory
guidelines and by current financial statements, cash flow analyses, and such
other information deemed necessary by the Bank to evaluate each proposed credit.
All loans of $500,000 or more require complete and thorough financial and
nonfinancial analyses, including in-depth credit memos and ratio analyses. In
all cases, borrowers are visited at their places of business and all collateral
must be inspected by a lending officer. Systematic reviews ensure proper
monitoring of post-closing compliance. Weaknesses in credit and noncompliance
with terms, conditions and loan agreements are promptly reported and reviewed.
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."
Average loan volume increased to $4.0 billion during 1996, up $376.3
million, or 10.3 percent, over 1995. During 1996, loans as a percent of average
earning assets began declining, falling to 73.2 percent, compared to 76.5
percent last year. This recent turn had a negative effect on interest income
earned and the net interest margin, as loans earn higher yields than
investments. Taxable equivalent interest income generated by loans increased
$30.1 million or 8.6 percent during 1996 to $379.4 million compared to $349.3
million for the prior year. As illustrated in Table 7, "Net Interest Income and
Volume/Rate Variance -- Taxable Equivalent Basis," increased loan volume
accounted for $35.6 million of the net increase in taxable equivalent interest
income. As shown in Table 5, "Net Interest Income Analysis -- Taxable Equivalent
Basis," the yield on the total loan portfolio decreased 15 basis points to 9.45
percent during 1996 compared to 9.60 percent earned in 1995. The decline in the
average loan yield during 1996 negatively impacted taxable equivalent interest
income by $5.5 million. Approximately 80 percent of the commercial loan
portfolio is affected by changes in the prime rate or other indices.
II-15
TABLE 3
TYPES OF LOANS
1996 1995 1994 1993
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT
(THOUSANDS)
Commercial,
financial
and
agricultural...... $ 743,477 18.09 % $ 671,803 17.23 % $ 591,317 18.23 % $ 493,021
Consumer............ 274,733 6.69 270,889 6.95 234,438 7.23 208,001
Real estate --
mortgage(1)....... 2,097,757 51.05 2,211,607 56.73 1,843,423 56.82 1,712,254
Real estate --
construction
and land
development....... 524,246 12.76 434,014 11.13 336,889 10.38 246,781
Leases.............. 420,240 10.23 269,677 6.92 199,982 6.16 141,383
Other............... 49,001 1.18 40,446 1.04 38,106 1.18 32,924
Total loans......... $ 4,109,454 100.00 % $ 3,898,436 100.00 % $ 3,244,155 100.00 % $ 2,834,364
1992
% OF % OF
TOTAL AMOUNT TOTAL
Commercial,
financial
and
agricultural...... 17.39 % $ 498,881 20.18 %
Consumer............ 7.34 226,716 9.17
Real estate --
mortgage(1)....... 60.41 1,386,979 56.11
Real estate --
construction
and land
development....... 8.71 203,359 8.23
Leases.............. 4.99 124,843 5.05
Other............... 1.16 31,151 1.26
Total loans......... 100.00 % $ 2,471,929 100.00 %
(1) Real estate -- mortgage represents loans secured by real estate, which
includes loans secured by multifamily residential property, residential
mortgage loans, residential mortgage loans held for sale, loans secured by
farmland, and loans secured by other commercial property.
TABLE 4
MATURITY SCHEDULE OF SELECTED LOANS
AS OF DECEMBER 31, 1996
ONE
WITHIN THROUGH OVER
ONE YEAR FIVE YEARS FIVE YEARS
(THOUSANDS)
Commercial, financial and agricultural:
Fixed interest rates.............................................................. $ 51,820 $ 74,699 $ 8,427
Floating interest rates........................................................... 286,851 285,622 36,058
Total........................................................................... $338,671 $360,321 $ 44,485
Real estate -- construction and land development:
Fixed interest rates.............................................................. $ 36,780 $ 30,894 $ 4,300
Floating interest rates........................................................... 252,726 175,394 24,152
Total........................................................................... $289,506 $206,288 $ 28,452
TOTAL
Commercial, financial and agricultural:
Fixed interest rates.............................................................. $ 134,946
Floating interest rates........................................................... 608,531
Total........................................................................... $ 743,477
Real estate -- construction and land development:
Fixed interest rates.............................................................. $ 71,974
Floating interest rates........................................................... 452,272
Total........................................................................... $ 524,246
II-16
TABLE 5
NET INTEREST INCOME ANALYSIS -- TAXABLE EQUIVALENT BASIS
1996 1995
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
(THOUSANDS)
ASSETS
Loans............................. $ 4,014,391 $ 379,411 9.45 % $3,638,129 $349,301 9.60 %
Taxable securities................ 1,394,307 90,374 6.48 1,041,994 66,956 6.43
Tax-exempt securities............. 47,450 4,211 8.87 50,765 4,418 8.70
Short-term investments............ 34,368 1,789 5.20 33,022 2,142 6.49
Interest-earning assets,
gross......................... 5,490,516 475,785 8.67 4,763,910 422,817 8.88
Net unrealized losses on available
for sale securities............. (5,542) (10,064)
Other assets, net................. 471,316 424,005
Total assets.................. $ 5,956,290 $5,177,851
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest checking................. $ 611,342 $ 11,085 1.81 % $ 567,764 $ 12,866 2.27 %
Money market...................... 489,281 17,093 3.49 396,841 12,833 3.23
Savings........................... 306,772 6,311 2.06 329,877 8,057 2.44
Time.............................. 2,450,809 134,556 5.49 2,169,535 120,151 5.54
Total interest-bearing
deposits...................... 3,858,204 169,045 4.38 3,464,017 153,907 4.44
Borrowed funds.................... 588,008 30,427 5.17 364,293 21,144 5.80
Long-term debt.................... 319,634 20,204 6.32 270,269 17,939 6.64
Interest-bearing liabilities...... 4,765,846 219,676 4.61 4,098,579 192,990 4.71
Demand, noninterest-bearing....... 647,245 571,606
Other liabilities................. 89,453 82,789
Shareholders' equity.............. 453,746 424,877
Total liabilities and
shareholders' equity........ $ 5,956,290 $5,177,851
Interest rate spread.............. 4.06 % 4.17 %
Net yield on interest-earning
assets, gross................... $ 5,490,516 $ 256,109 4.66 % $4,763,910 $229,827 4.82 %
Taxable equivalent adjustment..... $ 6,025 $ 5,182
1994
INTEREST AVERAGE
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE
ASSETS
Loans............................. $3,005,015 $263,078 8.75 %
Taxable securities................ 1,031,970 60,673 5.88
Tax-exempt securities............. 62,239 5,741 9.22
Short-term investments............ 30,443 1,198 3.94
Interest-earning assets,
gross......................... 4,129,667 330,690 8.01
Net unrealized losses on available
for sale securities............. (11,705)
Other assets, net................. 359,782
Total assets.................. $4,477,744
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest checking................. $ 558,139 $ 11,747 2.10 %
Money market...................... 488,768 12,606 2.58
Savings........................... 350,863 8,231 2.35
Time.............................. 1,793,634 74,519 4.15
Total interest-bearing
deposits...................... 3,191,404 107,103 3.36
Borrowed funds.................... 190,110 7,724 4.06
Long-term debt.................... 137,687 8,830 6.41
Interest-bearing liabilities...... 3,519,201 123,657 3.51
Demand, noninterest-bearing....... 526,200
Other liabilities................. 72,119
Shareholders' equity.............. 360,224
Total liabilities and
shareholders' equity........ $4,477,744
Interest rate spread.............. 4.50 %
Net yield on interest-earning
assets, gross................... $4,129,667 $207,033 5.01 %
Taxable equivalent adjustment..... $ 5,740
(1) Nonaccrual loans are included in average balances for yield computations.
(2) Yields related to loans and securities exempt from both federal and state
income taxes, federal income taxes only, or state income taxes only are
stated on a taxable equivalent basis assuming statutory tax rates for 1996
of 35% and 7.75%, for 1995 of 35% and 7.75%, and for 1994 of 35% and 7.83%
for federal and state purposes, respectively.
(3) Average balances of taxable and tax-exempt securities available for sale do
not include the unrealized gains (losses) recorded on such securities. Such
amounts, net of taxes, are included in the average balances of shareholders'
equity.
INVESTMENT SECURITIES
The investment portfolio at year-end 1996 was $1.6 billion, up 18.8 percent
from the $1.3 billion at the end of 1995, and represented 25.1 percent and 23.0
percent of total assets at December 31, 1996 and 1995, respectively. On average,
investments increased 32.7 percent or $354 million to $1.4 billion for 1996
versus $1.1 billion for 1995. As a percentage of average earning assets,
investments gained ground during 1996, representing 26.2 percent of average
earnings assets compared to 22.8 percent for the prior year. Approximately 63
percent of the total investment portfolio was in fixed rate investments for the
years ended December 31, 1996 and 1995.
The investment portfolio consists primarily of securities for which an
active market exists. Centura's policy is to invest primarily in securities of
the U.S. Government and its agencies and in high grade municipals so as to
minimize any credit risk in the investment portfolio. At the end of 1996, over
99 percent of the investment portfolio consisted of obligations of the U.S.
Government and its agencies or investment grade state, county and municipal
securities. At December 31, 1996, the average duration of the investment
portfolio was 2.34 years, compared to 2.09 years at year-end 1995. The duration
of a financial instrument is the weighted average maturity of the instrument's
total cash flows in present value terms. See Table 6,
II-17
"Investment Securities -- Maturity/Yield Schedule," for a more detailed analysis
of the investment portfolio's remaining contractual maturities.
TABLE 6
INVESTMENT SECURITIES -- MATURITY/YIELD SCHEDULE
AS OF DECEMBER 31, 1996
REMAINING MATURITIES
WITHIN 1 YEAR 1 TO 5 YEARS 6 TO 10 YEARS OVER 10 YEARS TOTAL
TAXABLE TAXABLE TAXABLE TAXABLE
AMORTIZED EQUIVALENT AMORTIZED EQUIVALENT AMORTIZED EQUIVALENT AMORTIZED EQUIVALENT AMORTIZED
COST YIELD (1) COST YIELD (1) COST YIELD (1) COST YIELD (1) COST
(THOUSANDS)
Held to Maturity:
U.S. Treasury........... $14,417 6.34% $ 61,956 5.85% $ -- -- % $ -- -- % $ 76,373
U.S. Government agencies
and
corporations.......... 31,369 7.21 88,889 7.38 19,494 7.11 -- -- 139,752
State and municipal..... 5,108 7.94 19,959 9.96 10,403 8.75 5,199 7.95 40,669
Other securities........ 946 5.21 66 10.25 -- -- -- -- 1,012
Total held to
maturity.............. $51,840 7.00% $170,870 7.13% $29,897 7.68% $ 5,199 7.95% $257,806
TAXABLE
EQUIVALENT
YIELD (1)
Held to Maturity:
U.S. Treasury........... 5.94%
U.S. Government agencies
and
corporations.......... 7.30
State and municipal..... 9.14
Other securities........ 5.54
Total held to
maturity.............. 7.19%
REMAINING MATURITIES
WITHIN 1 YEAR 1 TO 5 YEARS 6 TO 10 YEARS OVER 10 YEARS TOTAL
TAXABLE TAXABLE TAXABLE TAXABLE
CARRYING EQUIVALENT CARRYING EQUIVALENT CARRYING EQUIVALENT CARRYING EQUIVALENT CARRYING
VALUE YIELD (1) VALUE YIELD (1) VALUE YIELD (1) VALUE YIELD (1) VALUE
(THOUSANDS)
Available for Sale:
U.S. Treasury.............. $57,089 5.57% $135,080 5.78% $ -- -- % $ -- -- % $ 192,169
U.S. Government agencies
and corporations......... 14,227 6.31 153,516 6.48 149,722 6.94 712,147 7.35 1,029,612
State and municipal........ 629 5.85 767 6.77 1,929 7.14 -- -- 3,325
Other securities........... 6,946 6.43 2,003 6.00 -- -- 86,019 6.41 94,968
Total available for sale... $78,891 5.78% $291,366 6.15% $151,651 6.94% $798,166 7.25% $1,320,074
TAXABLE
EQUIVALENT
YIELD (1)
Available for Sale:
U.S. Treasury.............. 5.72%
U.S. Government agencies
and corporations......... 7.14
State and municipal........ 6.81
Other securities........... 6.40
Total available for sale... 6.87%
(1) 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% for federal and 7.75% for state
purposes.
The classification of securities as held to maturity ("HTM") or available
for sale ("AFS") is determined at the time of purchase. At December 31, 1996, 16
percent of the total investment portfolio, compared to 24 percent last year, was
classified as investment securities held to maturity (the "HTM portfolio"),
which are stated at net amortized cost. As allowed under the provisions of the
implementation guide published by the Financial Accounting Standards Board
("FASB"), $243 million of the HTM portfolio was transferred to the AFS portfolio
during 1995. The guide permitted a one-time opportunity for companies to
reconsider their ability and intent to hold securities accounted for under SFAS
No. 115 to maturity. This is further discussed in Note 1 of the notes to
consolidated financial statements. Centura intends and has the ability to hold
its HTM portfolio until maturity. At December 31, 1996, the fair value of the
HTM portfolio exceeded its amortized cost by $246,000.
Investment securities available for sale (the "AFS portfolio"),
representing the remainder of the investment portfolio, are reported at fair
value and will be used as a part of Centura's asset/liability management
strategy and may be sold in response to changes in interest rates, changes in
prepayment risk, the need to increase regulatory capital and other factors. At
December 31, 1996, the recorded fair value of the AFS portfolio was greater than
cost by $2.6 million, which has been recorded, net of tax, as a separate
component of shareholders' equity. Because Centura's liquidity position is
strong, alternative funding sources are abundant, and maturities in the AFS and
HTM portfolios are staggered, there is no immediate need to sell AFS
investments. This offers Centura the flexibility to continue to hold much of the
AFS investments, if necessary, and to invest and reinvest funds to increase the
overall yield earned on investments. Refer to Note 3 of the notes to
consolidated financial statements for a summary of investment securities as of
December 31, 1996, 1995 and 1994.
II-18
Net gains of $1.8 million on investment securities were realized during
1996, compared to $614,000 of net losses during 1995. Losses were incurred
principally to take advantage of reinvesting the resultant proceeds from sales
in higher yielding investments.
Taxable equivalent interest income contributed in 1996 from investment
securities increased to $94.6 million, representing 19.9 percent of total
taxable equivalent interest income, compared to $71.4 million, representing 16.9
percent in 1995. As calculated in Table 7, taxable equivalent interest income on
securities increased between 1996 and 1995 by $23.2 million, of which $22.5
million is attributable to increased average investment volume during 1996. The
average yield on the investment portfolio remained relatively flat, favorably
impacting the taxable equivalent interest income by $673,000. As supported by
Table 5, the taxable equivalent yield on the total investment portfolio
increased to 6.56 percent, or 3 basis points over the 6.53 percent earned in
1995.
FUNDING SOURCES
Total funding sources averaged $5.4 billion during 1996, a $742.9 million
or 15.9 percent increase from the average volume in 1995. Funding sources
include deposits, short-term borrowings and long-term borrowings.
DEPOSITS
On average, total deposits increased $469.8 million in 1996 to $4.5
billion, or 11.6 percent over 1995. The average mix of deposits remained
relatively unchanged for 1996 as compared to 1995. Transaction account balances
(interest checking and noninterest-bearing demand deposits) on average increased
10.5 percent, while holding steady at approximately 28.0 percent of average
total deposits. Money market accounts increased 23.3 percent, savings decreased
7.0 percent over the prior year, and time deposits increased 13.0 percent.
Average time deposits were 54 percent of total deposits for both years. Time
deposits with denominations of $100,000 or greater averaged $403.7 million
during 1996 and $389.2 million during 1995.
The deposit base since year-end 1995 increased $289.3 million to $4.7
billion at December 31, 1996, compared to $4.4 billion at December 31, 1995. The
acquisition of First Community added approximately $99 million in deposits,
predominantly in savings and time deposits and the purchase of deposits from
Essex provided $71 million of deposits, primarily time deposits. Excluding the
First Community and Essex purchases, total deposits increased 2.7 percent over
the prior year. Core deposits increased $438.3 million to $4.4 billion
representing 92.7 percent of total deposits compared to $3.9 billion for
December 31, 1995 and 88.9 percent of total deposits. As shown in Table 5, "Net
Interest Income Analysis -- Taxable Equivalent Basis," the cost of
interest-bearing deposits declined 6 basis points to average 4.38 percent for
1996.
Interest expense on deposits increased $15.1 million to $169.0 million for
1996 compared to $153.9 million for 1995. The change in rates paid on deposits
was responsible for a decrease of $3.9 million in interest expense. The
increased volume of interest-bearing deposits caused interest expense to
increase by $19.0 million as detailed in Table 7.
OTHER FUNDING SOURCES
With average earning assets growing faster than deposits, other funding
sources have been utilized to a greater extent to support the growth.
Consequently, short-term borrowed funds, consisting principally of federal funds
purchased, securities sold under agreements to repurchase, and master notes,
averaged $588.0 million in 1996, representing a 61.4 percent increase over the
1995 average volume of $364.3 million. Interest expense on short-term borrowings
increased by $9.3 million, of which $11.8 million was due to higher volume with
a 63 basis point decline in the rates paid offsetting the unfavorable volume
impact by $2.5 million. The average rate paid for these funds for 1996 was 5.17
percent for 1996 and 5.80 percent for 1995. The average volume of long-term
debt, consisting predominantly of Federal Home Loan Bank ("FHLB") advances,
increased $49.4 million to $319.6 million during 1996, compared to $270.3
million last year. The average rate paid on long-term debt declined 32 basis
points to 6.32 percent in 1996 from 6.64 percent in 1995.
NET INTEREST INCOME AND NET INTEREST MARGIN
Taxable equivalent net interest income in 1996 increased by $26.3 million,
or 11.4 percent, to $256.1 million from $229.8 million in 1995. This growth was
primarily due to a $731 million increase in average earning asset volume, which
outpaced the $667 million increase in interest-bearing liabilities volume,
producing an increase of $24.3 million to net interest income as shown in Table
7. Average earning assets as a percentage of total average assets was 91.81
percent during 1995 and rose slightly to 92.09 percent during 1996. Although the
earning asset yield declined during 1996, the impact of the rate
II-19
environment decreased the cost of interest-bearing liabilities greater,
producing a net increase to net interest income of $2.0 million in 1996.
The net interest margin decreased 16 basis points to 4.66 percent in 1996
from 4.82 percent in 1995 as depicted in detail in Table 5. While average
earning assets grew 15.4 percent, the mix of the components of earning assets
impacted the margin negatively. Average loans grew 10.3 percent during 1996,
earning an average of 9.45 percent in 1996, 15 basis points lower than in 1995.
Loans represented 73.2 percent of earning assets, compared to 76.5 percent for
1995. Investment securities and liquid investments, representing the remainder
of average earning assets, grew 31.9 percent and earned 6.53 percent for both
1996 and 1995. The net result was a 21 basis point decline in the earning asset
rate to 8.67 percent for 1996 compared to 8.88 percent last year. The declining
rate environment decreased the cost of all interest-bearing liabilities
categories, bringing the total cost of funds down 10 basis points to 4.61
percent for 1996. Consequently, the interest rate spread for 1996 decreased 11
basis points to 4.06 percent.
TABLE 7
NET INTEREST INCOME AND VOLUME/RATE VARIANCE -- TAXABLE EQUIVALENT BASIS
1996-1995 1995-1994
INCOME/ VARIANCE INCOME/ VARIANCE
EXPENSE ATTRIBUTABLE TO EXPENSE ATTRIBUTABLE TO
VARIANCE VOLUME RATE VARIANCE VOLUME RATE
(THOUSANDS)
INTEREST INCOME
Loans....................................................... $30,110 $35,635 $(5,525) $86,223 $59,100 $27,123
Taxable securities.......................................... 23,418 22,831 587 6,283 595 5,688
Tax-exempt securities....................................... (207) (293) 86 (1,323) (1,013) (310)
Short-term investments...................................... (354) 84 (438) 944 109 835
Total interest income.................................. 52,967 58,257 (5,290) 92,127 58,791 33,336
INTEREST EXPENSE
Interest-bearing deposits:
Interest checking......................................... $(1,781) 933 (2,714) $ 1,119 205 914
Money market.............................................. 4,260 3,168 1,092 227 (2,627) 2,854
Savings deposits.......................................... (1,746) (537) (1,209) (174) (504) 330
Time deposits............................................. 14,405 15,451 (1,046) 45,632 17,626 28,006
Total interest-bearing deposits........................ 15,138 19,015 (3,877) 46,804 14,700 32,104
Borrowed funds.............................................. 9,283 11,788 (2,505) 13,420 9,143 4,277
Long-term debt.............................................. 2,264 3,153 (889) 9,109 8,790 319
Total interest expense................................. 26,685 33,956 (7,271) 69,333 32,633 36,700
Net interest income.................................... $26,282 $24,301 $ 1,981 $22,794 $26,158 $(3,364)
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
Total nonperforming assets were $22.9 million at December 31, 1996,
increasing by only $726,000 from the previous year, reflecting a continued
emphasis on asset quality. As a percent of total assets, nonperforming assets
declined to 0.36 percent from the 0.38 percent recorded at year-end December 31,
1995. Table 10, "Nonperforming Assets and Past Due Loans," discloses the
components and balances of nonperforming assets over the past five years.
The increase in nonperforming assets is due to additional foreclosed
properties which ended December 31, 1996 at $3.7 million, up $791,000 from
year-end December 31, 1995. Accordingly, the expenses associated with the
maintenance of foreclosed real estate and related losses increased from the
prior year by $74,000 to $756,000 for 1996. Net charge-offs were only 0.18
percent of average loans for 1996 although the volume of net charge-offs
increased $2.7 million to $7.2 million. In addition, to ensure the adequacy of
the loan loss reserve, the provision for loan losses exceeded net charge-offs by
$2.4 million during 1996. The allowance for loan losses ("AFLL") grew by 6.6
percent to $58.7 million at December 31, 1996,
II-20
compared to $55.1 million last year. As of year-end 1996, the AFLL to total
loans was 1.43 percent and covered 306 percent of nonperforming loans, compared
to 1.41 percent and 286 percent, respectively, at December 31, 1995. For
additional information with respect to the activity in the AFLL, see Tables 8
and 9, "Analysis of Allowance for Loan Losses" and "Allocation of the Allowance
for Loan Losses," respectively.
The AFLL represents management's estimate of an amount adequate to provide
for potential losses inherent in the loan portfolio. Management's evaluation of
the adequacy of the AFLL is based on management's ongoing review and grading of
the loan portfolio, and consideration of past loan loss experience, trends in
past due and nonperforming loans, risk characteristics of the various
classifications of loans, current economic conditions, the fair value of
underlying collateral and other factors which affect potential credit losses.
Based on the current loan portfolio and levels of current problem assets and
potential problem loans, management believes the AFLL to be adequate. While
management uses available information to recognize losses on loans, future
additions to the AFLL may be necessary based on changes in economic conditions
and the impact of such change on the Bank's borrowers. As an integral part of
their examination process, various regulatory agencies also review the AFLL.
Such agencies may require that changes in the AFLL be recognized when their
credit evaluations differ from those of management, based on their judgments
about information available to them at the time of their examination.
Loans past due ninety or more days were $8.9 million at December 31, 1996,
compared to $6.1 million at December 31, 1995. The increase was principally in
leasing which experienced significant growth between the periods. Accrual of
interest on loans is discontinued when management has serious doubts that such
interest will be collected in a reasonable period of time. Generally, open-end
credit lines that reach 120 days or more past due and substantially all other
loans that reach 90 days or more past due are placed on nonaccrual status and
recorded accrued interest is reversed or charged off. When borrowers
demonstrate, over an extended period, the ability to repay a loan Centura has
classified as nonaccrual in accordance with its contractual terms, such loan is
returned to accrual status.
The growth of the average loan portfolio (12.6 percent compounded over five
years) opens opportunity for new problems to develop. There are still exposures
and remaining nonperforming assets may prove to be more stubborn to resolve.
Finally, the impact of ever-changing economic conditions and changes to interest
rates and/or inflation on the operations of Centura's customers is unknown, but
gives opportunity for increased nonperforming asset levels.
II-21
TABLE 8
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
1996 1995 1994 1993 1992
(THOUSANDS)
Allowance for loan losses at beginning of year......................... $ 55,070 $48,164 $43,430 $35,344 $30,740
Allowance from acquired financial institutions......................... 1,240 3,460 170 4,670 --
Provision for loan losses.............................................. 9,596 7,904 7,220 9,151 17,293
Loans charged off:
Real estate loans.................................................... 1,024 1,526 2,525 3,078 8,168
Commercial and industrial loans...................................... 3,900 2,893 1,189 3,080 4,030
Agricultural loans (excluding real estate)........................... 70 229 61 46 62
Consumer loans....................................................... 4,690 3,226 1,971 1,596 2,914
Leases............................................................... 668 381 245 232 310
Other................................................................ 56 51 30 40 57
Total............................................................. 10,408 8,306 6,021 8,072 15,541
Recoveries on loans previously charged off:
Real estate loans.................................................... 543 641 659 725 1,056
Commercial and industrial loans 1,391 2,166 1,867 631 580
Agricultural loans (excluding real estate)........................... 10 -- 8 2 146
Consumer loans....................................................... 1,195 1,019 766 963 968
Leases............................................................... 78 22 65 16 102
Total............................................................. 3,217 3,848 3,365 2,337 2,852
Net loans charged off.................................................. 7,191 4,458 2,656 5,735 12,689
Allowance for loan losses at end of year............................... $ 58,715 $55,070 $48,164 $43,430 $35,344
Allowance for loan losses to loans at year-end......................... 1.43% 1.41% 1.48% 1.53% 1.43%
Net charge-offs to average loans....................................... .18 .12 .09 .22 .53
Allowance for loan losses to nonperforming loans....................... 3.06x 2.86x 2.59x 2.07x 1.56x
TABLE 9
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
1996 1995 1994 1993 1992
(THOUSANDS)
Commercial, financial and agricultural................................. $ 13,255 $12,442 $ 7,163 $ 7,320 $10,862
Consumer............................................................... 8,249 8,572 8,684 6,241 5,608
Real estate -- mortgage................................................ 15,663 17,851 12,700 13,088 10,013
Real estate -- construction and land development....................... 7,267 6,561 4,810 3,808 3,818
Leases................................................................. 2,142 1,060 921 366 534
Unallocated............................................................ 12,139 8,584 13,886 12,607 4,509
Allowance for loan losses at end of year............................... $ 58,715 $55,070 $48,164 $43,430 $35,344
The allocation of the allowance for loan losses to the respective loan
classifications is not necessarily indicative of future losses or future
allocations. Refer to Table 3 for percentages of loans in each category to total
loans.
II-22
TABLE 10
NONPERFORMING ASSETS AND PAST DUE LOANS
1996 1995 1994 1993 1992
(THOUSANDS)
Nonaccrual loans................................................. $18,713 $18,321 $18,375 $20,261 $22,459
Restructured loans............................................... 497 954 222 745 195
Nonperforming loans............................................ 19,210 19,275 18,597 21,006 22,654
Foreclosed property.............................................. 3,663 2,872 2,907 5,803 12,688
Total nonperforming assets....................................... $22,873 $22,147 $21,504 $26,809 $35,342
Accruing loans past due ninety days.............................. $ 8,916 $ 6,132 $ 3,700 $ 4,250 $ 5,789
Nonperforming assets to:
Loans and total foreclosed property............................ .56% .57% .66% .94% 1.42%
Total assets................................................... .36 .38 .46 .59 .97
POTENTIAL NONPERFORMING AND PAST DUE LOANS
In addition to the nonperforming assets and past due loans shown in Table
10, management believes that an estimated $10 to $15 million of additional
nonperforming and past due loans may exist, depending upon economic conditions
generally and the particular situations of various borrowers whose loans are
currently "performing" in accordance with their contractual terms.
There are certain loans classified for regulatory purposes as substandard
or special mention that have not been disclosed in the potential problem loan
amounts above or in Table 10. Such loans do not represent or result from trends
or uncertainties which management reasonably expects will materially impact
future operating results, liquidity, or capital resources. Such loans do not
represent material credits about which management is aware of any information
which causes management to have serious doubts as to the ability of such
borrowers to comply with the loan repayment terms.
NONINTEREST INCOME AND EXPENSE
Traditionally, Centura has generated most of its revenue from net interest
income. While that is still true today, noninterest income revenues are growing
as a percentage of total revenues (defined as the sum of taxable equivalent net
interest income and noninterest income). Noninterest income grew to represent
28.3 percent of total revenues during 1996 compared to 25.8 percent during 1995.
Reflecting the initiatives to diversify revenue sources, total noninterest
income increased $20.7 million, or 25.9 percent, to $100.8 million for 1996.
Deposit fees increased $5.1 million, or 17.1 percent, to $34.8 million,
principally as a result of increased deposit volume. Although deposit fees are
still the largest single component of total noninterest income, their percentage
of the total continues to decline. Deposit fees comprised 34.5 percent of total
noninterest income during 1996, which is less than the 37.1 percent of the total
during the previous year. Insurance and brokerage revenue increased $4.1 million
to $11.1 million during 1996 through the delivery of a broad range of mutual
fund, insurance and annuity services offered by the Bank's broker-dealer and
insurance services subsidiaries. Income from mortgage activities increased $4.4
million to $11.5 million. The rate environment of 1996 was conducive to steady
mortgage loan production and beneficial to secondary marketing activities, as
further discussed under "Interest-Earning Assets -- Loans." CLG's operating
lease activity added a new revenue source, contributing $12.7 million in
operating lease fees, an 8.2 percent increase over the prior year. Income from
credit cards and related fees increased $759,000, principally as a function of
increased credit card volume. Other service charges, commissions and fees
increased $2.5 million to $5.9 million, reflecting increases in the volume of
letters of credit fees, plus ATM and debit card fees.
Noninterest expense increased 19.5 percent to $234.0 million for year-end
1996, compared to $195.8 million for 1995. Excluding the third quarter special
SAIF assessment of $7.3 million, total noninterest expense increased only 15.8
percent to $226.7 million. During 1996, the efficiency ratio, an important
productivity measure, increased to 65.55 percent (63.51 percent without the
special SAIF assessment) from 63.17 percent the previous year. Total operating
revenues increased by $47 million, while noninterest expenses increased $31
million, excluding SAIF, putting pressure on the efficiency ratio. While Centura
strives for cost efficiencies, it is also committed to investments in
alternative technologies and expanded products, services and delivery channels
("reinvention costs"). The expenses to implement these efforts increase current
noninterest expenses, while the full incremental revenues and savings related to
these investments are derived in later years. During
II-23
1996, there was almost $13 million, compared to $14 million during 1995, of
current expense incurred due to reinvention costs. Much of this expense, $9
million, is reflected in equipment costs and professional fees related to the
rollout of Sellstation automation and customer profitability database efforts.
The start-up of the supermarket locations added almost $2 million of current
expenses, while the incremental revenues from these stores will not be realized
until 1997 and later years.
Personnel costs continue to be the single largest component of noninterest
expense, increasing $13.9 million to $109.7 million during 1996, but improved to
represent 48.37 percent of total noninterest expense (excluding the SAIF
assessment) versus 48.93 percent during 1995. The increase reflects the addition
of personnel related to the 1996 purchase acquisitions, increased costs related
to the reinvention costs noted above, increased bonus accruals and commissions
from the sales force incentive system as a result of loan, deposit and financial
services growth. Equipment expense increased $5.1 million to $19.6 million,
primarily as a function of the reinvention efforts noted above. Legal and
professional fees were $14.6 million, an increase of $5.2 million over 1995, due
to a) the greater number of acquisitions completed in 1996 over 1995, b)
increased use of information systems professionals related to the reinvention
efforts noted above, and c) the outsourcing of our items processing function.
Intangibles amortization increased $886,000 as a function of the timing of the
1996 and 1995 purchase acquisitions. Marketing, other administrative
(principally training), and office supplies, postage and telephone expense
categories all increased in light of the start-up of the supermarket locations
and the increased 1996 acquisition activity. FDIC insurance expense is discussed
in detail under "Equity and Capital Resources."
INCOME TAX EXPENSE
The amount of income tax expense for 1996 was $39.2 million compared to
$36.4 million in 1995. The 1996 and 1995 effective tax rates were comparable at
36.52 percent and 36.03 percent, respectively.
EQUITY AND CAPITAL RESOURCES
Shareholders' equity increased to $475 million at the end of 1996, compared
to $443 million and $369 million at December 31, 1995 and 1994, respectively.
The ratio of shareholders' equity to year-end assets was 7.6 percent, 7.7
percent, and 7.9 percent for 1996, 1995 and 1994, respectively. The growth in
shareholders' equity over the last two years has been a function of the
retention of earnings and the issuance of new common stock in connection with
Centura's acquisition activity, curbed by dividends paid and by the repurchase
of common stock relative to acquisition activity. The ratio of shareholders'
equity to assets has declined as a result of changes in shareholders' equity and
of Centura's efforts to better leverage the balance sheet.
Centura's common stock is traded on the New York Stock Exchange under the
symbol CBC. At December 31, 1996, Centura had approximately 13,215 shareholders
and 25,668,524 shares outstanding. Annual cash dividends have increased
consistently and have been paid without interruption over the past 30 years.
Generally, dividends are paid on or about the 15th day of the final month in the
quarter. Cash dividends paid were $24.0 million, $18.7 million and $15.9 million
during 1996, 1995 and 1994, respectively, which represents $1.00, $.85, and $.74
on a per share basis, respectively. Of the cash dividends paid during 1996, $5.4
million were declared and accrued during the fourth quarter of 1995. During the
fourth quarter of 1996, Centura declared and accrued $6.4 million in dividends,
or $.25 per share, for the first quarter of 1997 cash dividend.
In November 1994 the board of directors of Centura authorized and approved
a plan pursuant to which Centura may, from time to time, repurchase shares of
Centura common stock. Under the plan, Centura's board of directors approved the
repurchase of up to 100 percent of the shares issued in connection with its
purchase acquisitions (Cleveland, First Southern, and First Community) and up to
9.9 percent of the shares in connection with two of its pooling acquisitions
(FCHC and FirstSouth). Since inception of the plan in November 1994, Centura has
repurchased approximately 3.6 million shares at an average of $31.39 per share
for a total of $111.5 million. For 1996, Centura repurchased 1.2 million shares
at an average price of $36.77 per share for a total of $45.5 million. As of
December 31, 1996, Centura had repurchased all shares available to be
repurchased under its outstanding repurchase actions.
Unrealized net gains or losses, net of tax, on securities available for
sale held by Centura are included as a component of shareholders' equity. At
December 31, 1996 and 1995, the unrealized gains net of tax were $1.6 million
and $631,000, respectively. The unrealized losses net of tax on securities
available for sale were $12.2 million at December 31, 1994.
Centura maintains higher capital ratios than the minimum required by
regulatory guidelines. While Centura and the Bank are committed to maintaining
the "well-capitalized" classification for regulatory capital purposes, it is
Centura's intent
II-24
to maintain an optimal capital and leverage mix. An institution may be deemed to
be in a capitalization category that is lower than is indicated by its actual
capital position if it receives an unsatisfactory examination rating. At
December 31, 1996, Centura had the requisite capital levels to qualify as
well-capitalized. At December 31, 1996, Tier I capital was $402.7 million and
total capital was $426.0 million. Centura and the Bank's capital ratios are
presented in Note 18 of the notes to consolidated financial statements.
TABLE 11
CAPITAL RATIOS OF CENTURA
TIER I TOTAL TIER I
CAPITAL CAPITAL LEVERAGE
1996........................................................................................ 9.48% 10.02% 6.56%
1995........................................................................................ 9.95 11.20 6.94
Minimum requirement......................................................................... 4.00 8.00 3.00-5.00
Regulatory agencies have generally taken the position not to include SFAS
No. 115 net unrealized gains or losses on investment securities in calculating
Tier 1 capital.
As a result of its well-capitalized status, the Bank will be assessed at
the lowest FDIC insurance premium rates available for financial institutions
under each insurance fund. Centura has deposits insured under both of the FDIC's
insurance funds, the BIF and the SAIF. On September 30, 1996, legislation was
enacted to recapitalize the SAIF, which consisted of a one-time special
assessment on financial institutions that had or had acquired SAIF-insured
deposits in recent years. The special SAIF assessment for Centura of $7.3
million, or $4.2 million after tax, was expensed on September 30, 1996.
LIQUIDITY AND INTEREST RATE RISK MANAGEMENT
Liquidity is the ability to raise funds through attracting new deposits,
borrowing funds, issuing new capital or selling assets. Liquidity is managed
through the selection of the asset mix and the maturity mix of liabilities. As
part of this process, funding needs and alternatives are continually evaluated.
Centura's liquidity is provided by its portfolio of investment securities,
interest income from investment securities, principal and interest payments on
loans, turnover of mortgage loans held for sale, core deposits generated through
the normal customer base or through acquisitions, brokered certificates of
deposit, the retention of earnings, and the borrowing of additional funds if the
need arises. Deposits and other funding sources are used to fund loans and
investments, meet deposit withdrawals and maintain reserve requirements.
The Bank has multiple funding sources that could be used to increase
liquidity and provide additional financial flexibility. These sources consist
primarily of established federal funds lines with major banks totaling
approximately $1.2 billion, and the ability to borrow approximately $500 million
from the FHLB ($229 million and $194 million outstanding to FHLB at December 31,
1996 and 1995, respectively). The Bank also has the ability to issue debt up to
a maximum of $300 million under an offering by the Bank to institutional
investors of unsecured bank notes due from 30 days to 15 years from the date of
issue. Each bank note would be a direct, unconditional and unsecured general
obligation solely of the Bank and would not be an obligation of or guaranteed by
Centura. Interest rate and maturity terms would be negotiated between the Bank
and the purchaser, within certain parameters set forth in the offering circular.
The bank note program began to be used in the first quarter of 1995. At December
31, 1996 and 1995, there was $16 million and $23 million, respectively,
outstanding under the bank notes.
Centura has an unsecured line of credit of $60 million bearing a variable
interest rate, used to assist in funding the share repurchase actions related to
the 1995 and 1996 acquisitions. There was $60 million and $26 million
outstanding under this line of credit at December 31, 1996 and 1995,
respectively.
The investment and loan portfolios are the primary types of earning assets
for Centura. While the investment portfolio is structured with minimum credit
exposure to Centura, the loan portfolio is the primary asset subject to credit
risk. Credit risk is controlled and monitored through the use of lending
standards, thorough review of potential borrowers and on-going review of
performing loans.
Centura's Asset/Liability Management Committee's objective is to control
Centura's interest rate risk. The Committee monitors and adjusts Centura's
exposure to interest rates based on corporate policy and market conditions and
utilizes a computer simulation model to determine the effect on Centura's net
interest income and the effect on the market value of
II-25
Centura's equity under various interest rate assumptions. Traditional interest
sensitivity gap analyses do not adequately measure a corporation's exposure to
changes in interest rates as those analyses do not incorporate the
interrelationships between interest rates charged or paid, balance sheet trends,
changes in prepayments and management actions. Each of these factors can affect
Centura's actual earnings. Centura's computer simulation model incorporates
these factors and projects income over a 12-month horizon under a variety of
higher and lower interest rate environments. This analysis shows that as
interest rates increase, Centura will experience an increase in net interest
income.
Using the market value of equity approach, a change in interest rates
should have very little effect on the market value of Centura's equity. Centura
is operating within the exposure guidelines approved by management, which
prescribes that changes in net interest income after tax should approximate
changes in the cost of capital and the market value of equity should not be
materially affected by a change in interest rates. Management of Centura
believes that Centura is currently positioned to react quickly to changes in
interest rates.
Table 13, "Interest Sensitivity Analysis," represents the balance sheet
structure as of year-end 1996, but does not fully reflect the complexities of
the interest sensitivity of Centura as reflected in its simulation modeling
process. As mentioned above, this type of gap analysis is appropriate only for
review of Centura's interest rate sensitivity at a point in time, and the
indicated results on the net interest margin should not be projected into the
future.
Off-balance sheet derivative financial instruments, such as interest rate
swaps, interest rate floor and cap arrangements and interest rate futures and
option contracts ("swaps, floors, caps, futures and options," respectively), are
available to Centura to assist in managing interest rate risks and in locking in
advantageous funding costs. Centura has principally utilized interest rate
swaps. Swaps are used to reduce interest rate risk with the objective of
managing net interest income relative to changes in the cost of capital. Swaps
may also be utilized to lock in funding costs. Floors are used to protect
certain designated variable rate financial instruments from the downward effects
of their repricing in the event of a decreasing rate environment. Caps are used
to protect certain designated financial instruments from the negative repricing
effects of an increasing rate environment. Options provide the right, but not
obligation, to put or call securities back to another third party at an agreed
upon price under the specific terms of each agreement. A summary of Centura's
off-balance sheet derivative financial instruments at December 31, 1996, is
indicated in Table 12. Refer to Note 15 of the notes to consolidated financial
statements for a comparative summary at December 31, 1996 and 1995 and for a
detailed discussion of related risks.
Management is not aware of any events that are reasonably likely to have a
material effect on Centura's liquidity, capital resources or operations. In
addition, management is not aware of any regulatory recommendations which, if
implemented, would have a material effect on Centura.
TABLE 12
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS
WEIGHTED AVERAGE
REMAINING ESTIMATED
NOTIONAL CONTRACTUAL CARRYING FAIR
DECEMBER 31, 1996 AMOUNT RATES TERM IN YEARS VALUE VALUE
(DOLLARS IN THOUSANDS)
INTEREST RATE SWAPS
Corporation pays fixed rates.................... $225,000 5.57%(1) 6.43%(2) 1.4 $ -- $(2,296)
Corporation pays variable rates................. 70,000 6.73(1) 5.41(2) 4.4 -- (222)
TOTAL INTEREST RATE SWAPS.................... $295,000 $ -- $(2,518)
INTEREST RATE FLOORS............................ $180,000 5.86(3) 5.56(4) 2.8 $821 $ 2,114
INTEREST RATE CAPS.............................. $ 26,000 7.38(3) 5.56(4) 6.1 $775 $ 645
INTEREST RATE OPTIONS (5)....................... $ 19,500 -- -- .2 $ 97 $ 75
(1) Weighted average rate received.
(2) Weighted average rate paid.
(3) Average rate representing the average of the strike rates above or below
which Centura will receive payments on the outstanding cap or floor
agreements.
(4) Current index rate.
(5) Represents put options on 195 ten-year Treasury futures contracts.
II-26
TABLE 13
INTEREST SENSITIVITY ANALYSIS
AS OF DECEMBER 31, 1996 (2)
1-30 31-60 61-90 91-180 181-365 TOTAL UNDER TOTAL OVER
DAYS DAYS DAYS DAYS DAYS ONE YEAR ONE YEAR
(THOUSANDS)
INTEREST-EARNING ASSETS
Loans............................ $2,338,118 $ 111,728 $ 111,911 $ 251,005 $ 428,949 $3,241,711 $ 867,743
Investment securities............ 83,378 80,963 78,552 156,828 291,979 691,700 886,180
Other short-term investments..... 32,667 -- -- -- -- 32,667 --
Total interest-earning assets.... 2,454,163 192,691 190,463 407,833 720,928 3,966,078 1,753,923
Notional amount of interest rate
swaps.......................... 75,000 40,000 70,000 40,000 -- 225,000 70,000
Total interest-earning assets and
off-balance sheet derivative
financial instruments.......... $2,529,163 $ 232,691 $ 260,463 $ 447,833 $ 720,928 $4,191,078 $1,823,923
INTEREST-BEARING LIABILITIES
Time deposits over $100.......... $ 68,020 $ 44,201 $ 27,982 $ 50,612 $ 109,446 $ 300,261 $ 46,192
All other deposits (1)........... 1,360,164 241,070 136,194 358,384 568,840 2,664,652 1,000,935
Short-term borrowed funds........ 594,520 25,000 -- 65,771 -- 685,291 --
Long-term debt................... 146,884 63,100 73,952 3,000 14,794 301,730 9,072
Total interest-bearing
liabilities.................... 2,169,588 373,371 238,128 477,767 693,080 3,951,934 1,056,199
Notional amount of interest rate
swaps.......................... 10,000 50,000 30,000 40,000 50,000 180,000 115,000
Total interest-bearing
liabilities and off-balance
sheet derivative financial
instruments.................... $2,179,588 $ 423,371 $ 268,128 $ 517,767 $ 743,080 $4,131,934 $1,171,199
Interest sensitivity gap per
period......................... $ 349,575 $(190,680) $ (7,665) $ (69,934) $ (22,152) $ 59,144
Cumulative interest
sensitivity gap................ 349,575 158,895 151.230 81,296 59,144
Cumulative ratio of interest-
sensitive assets to
interest-sensitive
liabilities.................... 1.16x 1.06x 1.05x 1.02x .1.01x
TOTAL
INTEREST-EARNING ASSETS
Loans............................ $4,109,454
Investment securities............ 1,577,880
Other short-term investments..... 32,667
Total interest-earning assets.... 5,720,001
Notional amount of interest rate
swaps.......................... 295,000
Total interest-earning assets and
off-balance sheet derivative
financial instruments.......... $6,015,001
INTEREST-BEARING LIABILITIES
Time deposits over $100.......... $ 346,453
All other deposits (1)........... 3,665,587
Short-term borrowed funds........ 685,291
Long-term debt................... 310,802
Total interest-bearing
liabilities.................... 5,008,133
Notional amount of interest rate
swaps.......................... 295,000
Total interest-bearing
liabilities and off-balance
sheet derivative financial
instruments.................... $5,303,133
Interest sensitivity gap per
period.........................
Cumulative interest
sensitivity gap................
Cumulative ratio of interest-
sensitive assets to
interest-sensitive
liabilities....................
(1) To be consistent with simulation modeling, 50 percent of NOW, money market,
and regular savings accounts are assumed to reprice immediately and 50
percent are assumed to reprice in over one year. Noninterest-bearing deposit
accounts are excluded.
(2) Expected maturities may differ from contractual maturities because borrowers
may have the right to prepay obligations with or without call or prepayment
penalties. The aging of mortgage-backed securities is based on their
weighted average maturities at December 31, 1996, and median market
prepayment rates.
FOURTH QUARTER RESULTS
Net income for the fourth quarter of 1996 was up $1.9 million over the
prior year fourth quarter. Primary factors for the increases in earnings were
increased net interest income and noninterest income. Average earning assets for
the fourth quarter of 1996 were $5.7 billion, up $563,000 from the quarter
ending December 31, 1995. This increase in earning asset volumes contributed
$11.6 million to the $9.8 million increase recorded in taxable equivalent
interest income for the three months ended December 31, 1996. A 19 basis point
decline in the average earning asset yield for the last quarter of 1996
unfavorably affected taxable equivalent interest income by $1.8 million. Average
interest-bearing liabilities increased 11.3 percent over the prior year fourth
quarter with the rates paid for these funds declining 30 basis points. Interest
expense for the three months ended December 31, 1996 was $57.0 million, an
increase of $2.3 million over the prior year quarter, with $5.3 million
additional interest expense due to greater volume and $3.0 million attributed to
the decline in rates paid. Responding to increased earning asset volume and more
favorable funding costs, the net interest margin improved 6 basis points to 4.66
percent for fourth quarter 1996 compared to 4.60 percent for fourth quarter
1995. Total noninterest income increased to $27.3 million for fourth quarter
1996, $3.9 million over the comparable quarter last year. Noninterest revenue
sources showing improvement were service charges on deposit accounts, credit
card and related fees, and other financial services income sources. Noninterest
expense increased to $61.9 million, $7.1 million greater than the comparable
quarter last year. The
II-27
efficiency ratio improved to 65.09 percent compared to the prior year fourth
quarter of 65.60 percent. Timing of new product promotions contributed to the
$1.1 million increase in marketing expenses between the two periods. Centura
continues to develop its alternative delivery channels such as grocery in-stores
and to enhance sales efforts through employee education and new technologies.
Accordingly, equipment and personnel expenses increased $4.3 million over the
fourth quarter of 1995. Nonperforming assets increased slightly to $22.9 million
at the end of 1996 compared to $22.1 million at the end of 1995.
Table 14, "Quarterly Financial Summary," presents the quarterly results of
operations, selected average balances and certain other selected data for the
years ended December 31, 1996 and 1995.
TABLE 14
QUARTERLY FINANCIAL SUMMARY
1996 1995
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
SUMMARY OF OPERATIONS
(thousands, except per share)
Interest income...................... $123,095 $118,995 $114,366 $113,304 $113,539 $110,646 $101,641 $91,809
Interest expense..................... 57,011 55,201 53,188 54,276 54,749 53,096 46,377 38,768
Net interest income.................. 66,084 63,794 61,178 59,028 58,790 57,550 55,264 53,041
Provision for loan losses............ 2,746 2,400 2,385 2,065 1,968 1,947 2,115 1,874
Noninterest income................... 27,303 25,132 23,833 24,579 23,381 20,779 17,779 18,171
Noninterest expense.................. 61,860 63,573 55,086 53,462 54,806 49,676 46,823 44,472
Income taxes......................... 10,246 8,237 10,281 10,439 8,797 9,737 8,781 9,106
Net income........................... $ 18,535 $ 14,716 $ 17,259 $ 17,641 $ 16,600 $ 16,969 $ 15,324 $15,760
PER COMMON SHARE
Net income -- primary................ $ .70 $ .57 $ .67 $ .67 $ .62 $ .62 $ .59 $ .63
Net income -- fully diluted.......... .70 .57 .67 .67 .62 .62 .59 .63
Cash dividends paid.................. .25 .25 .25 .25 .23 .23 .20 .19
SELECTED AVERAGE BALANCES
(millions)
Assets............................... $ 6,198 $ 6,024 $ 5,848 $ 5,751 $ 5,597 $ 5,454 $ 4,996 $ 4,652
Loans................................ 4,182 4,098 3,955 3,820 3,867 3,816 3,570 3,291
Deposits............................. 4,723 4,593 4,349 4,354 4,346 4,251 3,889 3,647
Shareholders' equity................. 472 457 438 447 451 455 418 374
MARKET PRICES
High............................... $ 47.000 $ 40.125 $ 37.500 $ 36.750 $ 35.500 $ 33.375 $ 27.875 $25.375
Low................................ 38.000 35.125 36.000 33.875 33.125 27.250 25.000 22.500
Close.............................. 44.625 38.625 36.750 36.750 35.125 33.250 27.875 25.250
1995 COMPARED TO 1994
Centura recorded net earnings of $64.7 million for the year ended December
31, 1995, an increase of $8.9 million or 15.9 percent from the year ended
December 31, 1994. Earnings per fully diluted share were $2.46 compared to $2.20
for the prior year. Specific results of note for 1995 and key factors
responsible for such results follow.
Taxable equivalent net interest income increased by $22.8 million, or 11.0
percent, to $229.8 million in 1995, principally as a function of the growth in
earning assets. This increase in volume compensated for the decline in the net
interest spread earned. The net interest margin decreased to 4.82 percent during
1995 from 5.01 percent during 1994.
The mix of average interest-earning assets and interest-bearing funding
sources changed dramatically between 1995 and 1994. Loans grew to comprise 76.5
percent of average earning assets for 1995 compared to 73.0 percent for 1994,
increasing earning power. Interest-bearing deposits, with a lower cost of funds
in the aggregate than external funding sources, declined to represent only 84.5
percent of interest-bearing liabilities for 1995 versus 90.7 percent the prior,
increasing the overall cost of funds.
II-28
Nonperforming assets, continuing at low levels, were $22.1 million at
December 31, 1995, representing only 0.38 percent of total assets, compared to
$21.5 million, or 0.46 percent of total assets, last year. The allowance for
loan losses was $55.1 million, representing 1.41 percent of outstanding loans at
December 31, 1995, compared to $48.2 million, or 1.48 percent of loans, the
previous year. Net charge-offs, also continuing at low levels, were .12 percent
of average loans, compared to 0.09 percent of average loans for the year ended
December 31, 1994.
Noninterest income, before securities transactions, for 1995 increased
$16.1 million to $80.7 million compared to $64.6 million last year. Insurance
and brokerage commissions and service charges on deposit accounts accounted for
the majority of the increase. Recognized gains of approximately $1.0 million
were related to four branch offices sold during 1995. Additionally, the adoption
of the mortgage servicing rights accounting pronouncement, effective July 1,
1995, increased mortgage income by $1.3 million.
Noninterest expense for 1995 increased over the previous year by 15.0
percent to $195.8 million. While noninterest expense benefited from a $1.5
million refund on FDIC insurance received in the third quarter of 1995 and lower
insurance premium rates, it also supported expenses to further the progress of
technological, delivery channel and product initiatives, principally recorded in
equipment, phone and personnel expenses. Occupancy and equipment increased $5.6
million to $26.2 million in support of Centura's enhancing the value of its
franchise. Personnel expenses increased $9.8 million to $95.8 million,
reflecting the addition of personnel related to the 1995 purchase acquisitions
and increased commissions from the sales force incentive system responding to
loan, deposit and financial services growth. Centura's direct banking center,
Centura Highway, impacted current expense by $2 million, primarily reflected in
telephone and personnel costs.
CURRENT ACCOUNTING ISSUES
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities. Those standards are based on
the consistent application of a financial-components approach that focuses on
control. After a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and liabilities it has incurred and
derecognizes financial assets it no longer controls and liabilities that have
been extinguished. The statement provides the guidance for distinguishing sales
of financial assets from transfers that are secured borrowings. The statement is
effective for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996 and is to be applied
prospectively. In December 1996, the FASB issued SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125, an amendment of
FASB Statement No. 125". For repurchase agreements, dollar-roll, securities
lending and similar transactions, SFAS No. 127 defers the effective date of SFAS
125 to transfers occurring after December 31, 1997. Earlier or retroactive
adoption of either Statement is not permitted. Transfers that fall under the
SFAS No. 125 guidelines will be reviewed and they could have a material impact
on Centura's consolidated financial statements in future periods.
In July 1996, the Emerging Issues Task Force provided guidance concerning
the costs for modifications to computer software to accommodate the year of
2000. The costs of the modifications should be treated as regular maintenance
and repair and be charged to expense as incurred. Centura's computer systems are
generally based on two digit years and will need this additional programming to
recognize the start of a new century. Management has not quantified the costs of
this additional programming.
The FASB also issues exposure drafts for proposed statements of financial
accounting standards. Such exposure drafts are subject to comment from the
public, to revisions by the FASB and to final issuance by the FASB as statements
of financial accounting standards. Management considers the effect of the
proposed statements on the consolidated financial statements of Centura and
monitors the status of changes to issued exposure drafts and to proposed
effective dates.
II-29
STATEMENT OF MANAGEMENT RESPONSIBILITY
THE BOARD OF DIRECTORS AND SHAREHOLDERS
CENTURA BANKS, INC.
Management of Centura Banks, Inc. and its subsidiary has prepared the
consolidated financial statements and other information in the annual report in
accordance with generally accepted accounting principles and is responsible for
its accuracy.
In meeting its responsibility, management relies on internal accounting and
related control systems, which include selection and training of qualified
personnel, establishment and communication of accounting and administrative
policies and procedures, appropriate segregation of responsibilities and
programs of internal audits. These systems 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 any internal control system.
Management also recognizes its responsibility to foster a climate in which
corporate affairs are conducted with the highest ethical standards. Centura's
Code of Ethics, furnished to each employee and director, addresses the
importance of open internal communications, potential conflicts of interest,
compliance with applicable laws, including those related to financial
disclosure, the confidentiality of proprietary information and other items.
There is an ongoing program to assess compliance with these policies.
The Audit Committee of Centura's Board of Directors consists solely of
outside directors. The Audit Committee meets periodically with management and
the independent accountants to discuss audit, financial reporting and related
matters. KPMG Peat Marwick LLP and the Corporation's internal auditors have
direct access to the Audit Committee.
/s/ Cecil W. Sewell, Jr. /s/ Steven J. Goldstein
Cecil W. Sewell, Jr.
Chairman of the Board and Steven J. Goldstein
Chief Executive Officer Chief Financial Officer
II-30
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
CENTURA BANKS, INC.
We have audited the accompanying consolidated balance sheets of Centura
Banks, Inc. and subsidiary (the "Corporation") as of December 31, 1996 and 1995,
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on the
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Centura
Banks, Inc. and subsidiary as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Raleigh, North Carolina
January 6, 1997
II-31
CENTURA BANKS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
1996 1995
(THOUSANDS, EXCEPT SHARE
DATA)
ASSETS
Cash and due from banks........................................................................ $ 283,224 $ 269,742
Due from banks, interest-bearing............................................................... 11,254 12,917
Investment securities:
Available for sale (cost of $1,317,449 and $1,008,576, respectively)......................... 1,320,074 1,009,520
Held to maturity (market value of $258,052 and $321,895, respectively)....................... 257,806 319,105
Federal funds sold............................................................................. 21,413 33,558
Loans.......................................................................................... 4,109,454 3,898,436
Less allowance for loan losses............................................................... 58,715 55,070
Net loans................................................................................. 4,050,739 3,843,366
Premises and equipment......................................................................... 112,198 103,306
Other assets................................................................................... 237,264 193,034
Total assets................................................................................... $6,293,972 $5,784,548
LIABILITIES
Deposits:
Demand, noninterest-bearing.................................................................. $ 721,029 $ 656,592
Interest-bearing............................................................................. 3,665,587 3,291,733
Time deposits over $100...................................................................... 346,453 495,466
Total deposits............................................................................ 4,733,069 4,443,791
Borrowed funds................................................................................. 685,291 497,717
Long-term debt................................................................................. 310,802 306,586
Other liabilities.............................................................................. 89,575 93,143
Total liabilities.............................................................................. 5,818,737 5,341,237
SHAREHOLDERS' EQUITY
Preferred stock, no par value, 25,000,000 shares authorized; none issued....................... -- --
Common stock, no par value, 50,000,000 shares authorized; shares issued and outstanding of
25,668,524 and 25,785,370, respectively...................................................... 187,563 199,292
Common stock acquired by ESOP.................................................................. (395) (539)
Unrealized securities gains, net............................................................... 1,568 631
Retained earnings.............................................................................. 286,499 243,927
Total shareholders' equity..................................................................... 475,235 443,311
Total liabilities and shareholders' equity..................................................... $6,293,972 $5,784,548
See accompanying notes to consolidated financial statements.
II-32
CENTURA BANKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
1996 1995 1994
(THOUSANDS, EXCEPT SHARE AND PER
SHARE DATA)
INTEREST INCOME
Loans, including fees.................................................................... $379,044 $348,823 $262,618
Investment securities:
Taxable................................................................................ 86,162 63,672 57,297
Tax-exempt............................................................................. 2,766 2,998 3,837
Short-term investments................................................................... 1,788 2,142 1,198
Total interest income.................................................................... 469,760 417,635 324,950
INTEREST EXPENSE
Deposits................................................................................. 169,046 153,907 107,103
Borrowed funds........................................................................... 30,427 21,144 7,724
Long-term debt........................................................................... 20,203 17,939 8,830
Total interest expense................................................................... 219,676 192,990 123,657
NET INTEREST INCOME...................................................................... 250,084 224,645 201,293
Provision for loan losses................................................................ 9,596 7,904 7,220
Net interest income after provision for loan losses...................................... 240,488 216,741 194,073
NONINTEREST INCOME
Service charges on deposit accounts...................................................... 34,758 29,686 26,188
Credit card and related fees............................................................. 4,979 4,220 3,439
Other service charges, commissions and fees.............................................. 17,023 10,416 7,439
Fees for trust services.................................................................. 6,841 6,108 5,574
Mortgage income.......................................................................... 11,486 7,104 5,868
Other noninterest income................................................................. 23,962 23,190 16,139
Securities gains (losses), net........................................................... 1,798 (614) (891)
Total noninterest income................................................................. 100,847 80,110 63,756
NONINTEREST EXPENSE
Personnel................................................................................ 109,667 95,786 85,972
Occupancy................................................................................ 12,657 11,732 10,297
Equipment................................................................................ 19,556 14,478 10,307
Foreclosed real estate losses and related operating expense, net......................... 756 682 927
Other operating expense.................................................................. 91,345 73,099 62,704
Total noninterest expense................................................................ 233,981 195,777 170,207
Income before income taxes............................................................... 107,354 101,074 87,622
Income taxes............................................................................. 39,203 36,421 31,849
NET INCOME............................................................................... $ 68,151 $ 64,653 $ 55,773
NET INCOME PER COMMON SHARE
Primary.................................................................................. $2.61 $2.46 $2.20
Fully diluted............................................................................ 2.61 2.46 2.20
AVERAGE COMMON SHARES OUTSTANDING
Primary.................................................................................. 26,117,437 26,262,643 25,294,831
Fully diluted............................................................................ 26,139,034 26,324,791 25,363,961
See accompanying notes to consolidated financial statements.
II-33
CENTURA BANKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
UNREALIZED
COMMON SECURITIES
STOCK GAINS TOTAL
COMMON STOCK ACQUIRED (LOSSES), RETAINED SHAREHOLDERS'
SHARES AMOUNT BY ESOP NET EARNINGS EQUITY
(THOUSANDS, EXCEPT SHARE DATA)
December 31, 1993, as originally reported....... 20,782,536 $156,084 $(826) $ 1,630 $154,446 $311,334
Adjustments for poolings-of-interests........... 4,104,963 28,363 -- -- 11,044 39,407
December 31, 1993, restated..................... 24,887,499 184,447 (826) 1,630 165,490 350,741
Net income...................................... -- -- -- -- 55,773 55,773
Common stock issued:
Stock option plans............................ 145,581 1,620 -- -- -- 1,620
Restricted stock plans........................ 1,800 36 -- -- -- 36
Redemption of common stock...................... (329,400) (7,177) -- -- -- (7,177)
Net equity adjustment of merged entity.......... -- -- -- -- (1,619) (1,619)
Unrealized securities losses, net............... -- -- -- (13,868) -- (13,868)
Cash dividends.................................. -- -- -- -- (15,874) (15,874)
Other........................................... -- 10 143 -- (354) (201)
December 31, 1994............................... 24,705,480 178,936 (683) (12,238) 203,416 369,431
Net income...................................... -- -- -- -- 64,653 64,653
Common stock issued:
Stock option plans............................ 245,481 3,209 -- -- -- 3,209
Restricted stock plans........................ 7,338 175 -- -- -- 175
Acquisitions.................................. 2,812,271 75,794 -- -- -- 75,794
Redemption of common stock...................... (1,985,200) (58,822) -- -- -- (58,822)
Unrealized securities gains, net................ -- -- -- 12,869 -- 12,869
Cash dividends.................................. -- -- -- -- (24,142) (24,142)
Other........................................... -- -- 144 -- -- 144
December 31, 1995............................... 25,785,370 199,292 (539) 631 243,927 443,311
NET INCOME...................................... -- -- -- -- 68,151 68,151
COMMON STOCK ISSUED:
STOCK OPTION PLANS............................ 344,550 5,523 -- -- -- 5,523
ACQUISITIONS.................................. 776,441 28,261 -- -- -- 28,261
REDEMPTION OF COMMON STOCK...................... (1,237,837) (45,513) -- -- -- (45,513)
NET EQUITY ADJUSTMENT OF MERGED ENTITY.......... -- -- -- -- (818) (818)
UNREALIZED SECURITIES GAINS, NET................ -- -- -- 937 -- 937
CASH DIVIDENDS.................................. -- -- -- -- (25,005) (25,005)
OTHER........................................... -- -- 144 -- 244 388
DECEMBER 31, 1996............................... 25,668,524 $187,563 $(395) $ 1,568 $286,499 $475,235
See accompanying notes to consolidated financial statements.
II-34
CENTURA BANKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
1996 1995 1994
(THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................................. $ 68,151 $ 64,653 $ 55,773
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses.............................................................. 9,596 7,904 7,220
Depreciation and amortization.......................................................... 29,148 21,029 16,141
Deferred income taxes.................................................................. 493 (10,476) (6,439)
Loan fees deferred..................................................................... (7,496) (3,618) 2,996
Bond premium amortization and discount accretion, net.................................. 2,966 1,709 2,955
(Gain) loss on sales of investment securities.......................................... (1,798) 614 891
Loss on sales of foreclosed real estate................................................ 176 27 597
Gain on sales of equipment used in leasing activities.................................. (3,075) (3,815) (1,111)
Proceeds from sales of mortgage loans held for sale.................................... 424,039 443,281 492,305
Originations, net of principal repayments, of mortgage loans held for sale............. (425,622) (464,139) (411,788)
Increase in accrued interest receivable................................................ (2,030) (8,791) (5,316)
Increase (decrease) in accrued interest payable........................................ (4,004) 10,687 184
Net (increase) decrease in other....................................................... (12,570) 8,731 (13,254)
Net cash provided by operating activities.............................................. 77,974 67,796 141,154
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans.................................................................. (373,177) (441,298) (510,957)
Purchases of:
Securities available for sale........................................................ (594,186) (542,684) (176,972)
Securities held to maturity.......................................................... (213,023) (142,250) (98,164)
Premises and equipment............................................................... (26,177) (17,772) (13,296)
Other................................................................................ (29,250) -- --
Proceeds from:
Sales of securities available for sale............................................... 398,139 215,112 241,079
Maturities and issuer calls of securities available for sale......................... 167,318 50,993 55,600
Maturities and issuer calls of securities held to maturity........................... 258,238 167,016 187,053
Sales of foreclosed real estate...................................................... 3,216 2,214 4,769
Dispositions of premises and equipment............................................... 4,412 6,214 3,808
Dispositions of equipment utilized in leasing activities............................. 4,689 18,002 6,455
Net decrease in federal funds sold..................................................... 22,020 43,757 35,337
Cash acquired, net of cash paid, in purchase acquisitions.............................. 3,496 14,131 --
Net cash used by investing activities.................................................. (374,285) (626,565) (265,288)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits.................................................... 190,132 367,770 (121,560)
Net increase in short-term borrowings.................................................. 152,854 202,518 163,533
Proceeds from issuance of long-term debt............................................... 218,298 163,938 75,000
Repayment of long-term debt............................................................ (188,082) (62,454) (4,169)
Cash dividends paid.................................................................... (24,001) (18,731) (15,874)
Proceeds from issuance of common stock, net............................................ 4,442 3,209 1,620
Redemption of common stock............................................................. (45,513) (58,822) (7,177)
Net cash provided by financing activities.............................................. 308,130 597,428 91,373
Increase (decrease) in cash and cash equivalents....................................... 11,819 38,659 (32,761)
Cash and cash equivalents, beginning of year........................................... 282,659 244,000 276,761
Cash and cash equivalents, end of year................................................. $ 294,478 $ 282,659 $ 244,000
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest............................................................................. $ 223,680 $ 182,304 $ 123,419
Income taxes......................................................................... 29,073 43,039 41,151
Noncash transactions:
Net equity adjustment of merged entity............................................... 818 -- 1,619
Stock issued for acquisitions and other stock issuances, net......................... 28,649 76,113 165
Unrealized securities gains (losses), net............................................ 1,681 21,274 (23,029)
Dividends declared, but not yet paid................................................. 6,415 5,411 --
Transfer of securities between portfolios............................................ -- 243,195 --
Loans securitized into mortgage-backed securities.................................... 242,729 56,971 --
Loans transferred to foreclosed property............................................. 4,183 1,574 3,710
See accompanying notes to consolidated financial statements.
II-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Centura Banks, Inc. ("Centura") and its wholly-owned subsidiary, Centura Bank
(the "Bank"). The Bank also has various wholly-owned subsidiaries which in the
aggregate represent less than 10 percent of total assets. All significant
intercompany transactions are eliminated in consolidation.
Prior year consolidated financial statements have been restated to include
the accounts of companies combined and accounted for as poolings of interests as
discussed in Note 2. In addition, certain amounts for prior years have been
reclassified to conform with statement presentations for 1996. The
reclassifications have no effect on shareholders' equity or net income as
previously reported.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheets
and income and expenses 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
and the valuation of real estate acquired in connection with foreclosure or in
satisfaction of loans. In connection with the determination of the allowance for
loan losses and the valuation of real estate owned, management obtains
independent appraisals for significant properties.
BUSINESS
The Bank, either directly or through its subsidiaries, provides a wide
range of financial services, including: full-service commercial and consumer
banking services; retail securities brokerage services; insurance brokerage
services covering a full line of personal and commercial lines; mortgage banking
services; commercial and retail leasing; and trust activities. The Bank
principally offers its services through its branch and automated teller network
located throughout North Carolina and through alternative delivery channels that
include a centralized telephone operation offering a full line of financial
services, and home banking through a telephone network operated by a third party
and connected to the personal computers of customers. The Bank is subject to
competition from other depository institutions and numerous other non-depository
institutions offering financial services products. The Bank is further subject
to the regulations of certain Federal and state agencies and undergoes periodic
examinations by those regulatory authorities.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and due from banks and
interest-bearing balances in other banks.
INVESTMENT SECURITIES
Centura's investments are classified in three categories and accounted for
as follows: (1) debt securities that the entity has the positive intent and the
ability to hold to maturity are classified as held to maturity ("HTM") and
reported at amortized cost; (2) 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; and (3) debt and equity securities not classified
as either held to maturity securities or trading securities are classified as
available for sale ("AFS") securities and reported at fair value, with net
unrealized gains or losses excluded from earnings and reported as a separate
component of shareholders' equity.
The classification of securities is determined at the time of purchase.
Investment securities HTM are stated at cost, net of the amortization of premium
and the accretion of discount. Centura intends and has the ability to hold such
securities until maturity. Investment securities AFS will be used as a part of
Centura's asset/liability management strategy and may be sold in response to
changes in interest rates, changes in prepayment risk, the need to increase
regulatory capital and other factors.
The cost of securities sold is determined on a specific identification,
trade-date basis. Premiums and discounts are amortized or accreted into income
using the level-yield method.
II-36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
In November 1995 the Financial Accounting Standards Board ("FASB")
published an implementation guide for Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". The FASB stated that the transition provisions included in
this guide permit a one-time opportunity for companies to reconsider their
ability and intent to hold securities accounted for under SFAS No. 115 to
maturity, allowing entities to transfer securities from the HTM category without
"tainting" their remaining HTM securities. The FASB emphasized that this would
be a one-time event where entities would have until December 31, 1995 to make
any transfers from the HTM category under this provision. Management transferred
$243 million of investment securities from the HTM category to the AFS category
as allowed under the provisions of the implementation guide. On the date of the
transfer, the HTM investment securities were recorded as AFS investment
securities at their current fair value, which resulted in the recognition of an
unrealized loss of $1.3 million that was recorded net of tax as a component of
shareholders' equity.
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.
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. Expenditures for maintenance and repairs are charged to expense as
incurred and gains or losses on disposal of assets are reflected in current
operations.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses ("AFLL") is established through provisions
for losses charged against income. Loans deemed to be uncollectible are charged
against the AFLL, and subsequent recoveries, if any, are credited to the AFLL.
The AFLL represents management's estimate of the amount necessary to provide for
potential future losses in the loan portfolio. Management believes that the AFLL
is adequate. Management's periodic evaluation of the adequacy of the allowance
is based on individual loan reviews, the loan loss experience of prior years,
economic conditions in the Bank's market areas, the fair value and adequacy of
underlying collateral, and the growth and risk composition of the loan
portfolio. This evaluation is inherently subjective as it requires material
estimates, including the amounts and timing of future cash flows expected to be
received on impaired loans, that may be susceptible to significant change. Thus,
future additions to the AFLL may be necessary based on the impact of changes in
economic conditions on the Bank's borrowers. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's AFLL. Such agencies may require the Bank to recognize additions to
the AFLL based on their judgments about information available to them at the
time of their examination.
Under the provisions of SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan -- Income Recognition and Disclosures" (collectively
referred to hereafter as "SFAS No. 114"), the AFLL related to loans that are
identified for evaluation in accordance with SFAS No. 114 is based on discounted
cash flows using the loans' initial effective interest rates or the fair value
of the collateral for certain collateral-dependent loans.
NONACCRUAL LOANS AND OTHER REAL ESTATE
A loan (including a loan impaired under SFAS No. 114) is generally
classified as a nonaccrual loan and the accrual of interest (including accretion
of unearned income) is discontinued when management has doubts that principal
and interest will be collected in a reasonable period of time. Generally,
open-end credit lines that reach 120 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. Recorded
accrued interest is reversed or charged off. Interest received on nonaccrual
loans and impaired 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 is included in other assets and is comprised of property
acquired through a foreclosure proceeding or acceptance of a deed-in-lieu of
foreclosure and loans classified as in-substance foreclosure. In accordance with
SFAS No.
II-37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
114, a loan is classified as in-substance foreclosure when the Bank has taken
possession of the collateral regardless of whether formal foreclosure
proceedings take place. Loans previously classified as in-substance foreclosure
but for which the Bank had not taken possession of the collateral have been
reclassified to nonperforming loans for all periods presented. This
reclassification does not impact Centura's financial condition or results of
operations. At December 31, 1996 and 1995, the net book value of other real
estate properties was $3,663,000 and $2,872,000, respectively.
LOANS
Substantially all loans accrue interest using the level-yield method based
on the principal amount outstanding.
Centura originates certain residential mortgage loans with the intent to
sell. Such loans held for sale are included in loans in the accompanying
consolidated balance sheets and are carried at the lower of cost or fair value
on an aggregate loan basis as determined by outstanding commitments from
investors or current quoted market prices.
MORTGAGE SERVICING RIGHTS
Effective July 1, 1995, Centura adopted the provisions of SFAS No. 122,
"Accounting for Mortgage Servicing Rights, an amendment of SFAS No. 65." The
statement provides guidance for recognition of mortgage servicing rights as an
asset when a mortgage loan is sold or securitized and servicing rights retained,
however those servicing rights are acquired. Prior to the adoption of the
statement, the allocated costs of originated mortgage servicing rights were not
capitalized.
The rights to service mortgage loans for others ("mortgage servicing
rights" or "MSRs") are included in other assets on the consolidated balance
sheet. Capitalization of the allocated cost of MSRs occurs when the underlying
loans are sold or securitized. 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. Additionally, capitalized MSRs are
evaluated periodically for impairment based on the excess of the carrying amount
of such rights over their fair value. For purposes of measuring impairment,
capitalized MSRs are stratified on the basis of one or more of the predominant
risk characteristics of the underlying loans, including loan type, term and
interest rate. Fair value is estimated using current commitment prices from
investors or current quoted market prices to sell similar products.
OTHER ASSETS AND OTHER LIABILITIES
Intangibles are principally comprised of core deposit intangibles and
goodwill and are included in other assets. Core deposit intangibles represent
the present value of the difference in costs between the acquired core deposits
and market alternative funding sources and are generally being amortized on an
accelerated basis determined by related valuation studies. The excess of cost
over the fair value of net assets of purchase acquisitions, goodwill, is being
amortized generally over 15 years.
Negative goodwill, included in other liabilities, represents the excess of
fair value of net assets acquired over cost after recording the liability for
recaptured tax bad debt reserve and reducing the basis in bank premises and
equipment and other noncurrent assets acquired to zero. Negative goodwill is
being accreted into earnings on a straight-line basis over a period of ten
years, the period estimated to be benefited.
At December 31, 1996 and 1995, $12.3 million and $15.1 million,
respectively, of assets under operating lease, net of depreciation, were
included in other assets. During 1996 and 1995, $12.7 million and $11.8 million,
respectively, of operating lease rental income was recorded in other noninterest
income.
In March 1995, the FASB issued SFAS No. 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for those to be disposed of. This statement requires that
long-lived assets and certain intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. An impairment loss should be 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 to be reported at the lower of the carrying
amount or fair value less costs to sell. As required, Centura adopted the
provisions of this statement in the first quarter of 1996, but the impact of
such adoption was immaterial. However, this statement could have a
II-38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
material impact on Centura's consolidated financial statements in future periods
should an event or changes in circumstances occur in such future periods,
requiring a review by management for impairment.
INCOME TAXES
Centura uses the asset and liability method to account for income taxes.
The objective of the asset and liability method is to establish deferred tax
assets and liabilities for the temporary differences between the financial
reporting basis and the income tax basis of Centura's assets and liabilities at
enacted tax rates expected to be in effect when such amounts are realized or
settled.
NET INCOME PER SHARE
Primary net income per common share is based upon the average number of
shares of common stock outstanding and common stock equivalents consisting of
dilutive stock options. Fully diluted net income per common share reflects the
maximum dilutive effect of common stock issuable upon exercise of stock options.
STOCK-BASED EMPLOYEE COMPENSATION
Most of Centura's stock-based employee compensation plans provide for the
deferral of compensation for stock options. As allowed under SFAS No. 123
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), Centura measures
stock-based compensation cost using APB Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). See Note 11.
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS
Off-balance sheet derivative financial instruments, such as interest rate
swaps, interest rate floor and cap arrangements, and interest rate futures and
options contracts, are available to Centura to assist in managing its exposure
to changes in interest rates. Centura has principally utilized interest rate
swaps and interest rate floor and cap arrangements. Interest rate swaps, floors
and caps are accounted for on an accrual basis, and the net interest
differential, including premiums paid, if any, is recognized as an adjustment to
interest income or interest expense of the related hedged asset or liability. If
early termination of these instruments occurs, the net proceeds received or paid
are deferred and amortized over the shorter of the remaining contract life or
the maturity of the related asset or liability. The fair value of these
instruments is based on dealer quotes and third party financial models.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by Centura in estimating
the fair value disclosures for financial instruments in 1996 and 1995.
Cash and Due From Banks, Federal Funds Sold, and Accrued Interest
Receivable -- The carrying amounts for cash and due from banks, federal funds
sold and accrued interest receivable are equal to the fair values due to the
short-term nature of these financial instruments.
Investment Securities -- The fair value of investment securities is
estimated based on bid quotations received from securities dealers.
Loans -- For disclosure purposes, loans are segregated into performing and
nonperforming loan categories. Each performing loan category is further
segmented into fixed and adjustable rate interest terms. The fair value of
performing loans is calculated by discounting scheduled cash flows through the
loan's estimated maturity using estimated market discount rates that reflect the
credit and interest rate risk inherent in the loan. The estimate of maturity,
except for residential mortgage loans, is based on the stated term of the loan
or Centura's estimates of prepayments for each loan classification considering
current economic and lending conditions. For residential mortgage loans,
maturity is estimated using the contractual term adjusted for prepayment
estimates based on secondary market sources. The fair value of nonperforming
loans is based on the book value of each loan less an applicable reserve for
credit losses. This reserve for credit losses is determined on a loan by loan
basis based on one or a combination of the following: external appraisals,
internal assessments using available market information and specific borrower
information, or discounted cash flow analysis.
II-39
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, is considered to be equal to the amount payable on demand at year-end.
The fair value of individual retirement accounts and time deposits are 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 carrying
amounts for borrowed funds and accrued interest payable are equal to their fair
values due to the short-term nature of these financial instruments. The fair
value of Centura's long-term debt is estimated based on the quoted market prices
for the same or similar issues or on the current rates offered to Centura for
debt of the same remaining maturities.
NOTE 2 -- MERGERS AND ACQUISITIONS
Centura consummated the following mergers and acquisitions of North
Carolina financial institutions during 1996 and 1995. There were no mergers or
acquisitions completed in 1994.
DOLLARS IN MILLIONS
ACQUISITION
INSTITUTION DATE ASSETS LOANS DEPOSITS
ACQUISITIONS ACCOUNTED FOR AS PURCHASES:
Essex Savings Bank, FSB ("Essex"), deposit assumption 7/26/96 $ 71 $-- $ 71
First Community Bank ("First Community") 8/16/96 121 83 99
Total 1996 Purchase Acquisitions $192 $ 83 $170
MERGERS ACCOUNTED FOR AS POOLINGS OF INTERESTS:
First Commercial Holding Company ("FCHC") 2/27/96 172 120 140
FirstSouth Bank ("FirstSouth") 10/25/96 170 132 150
CLG, Inc. ("CLG") 11/01/96 126 85 --
Total 1996 Mergers $468 $337 $290
Total 1996 Acquisitions and Mergers $660 $420 $460
ACQUISITIONS ACCOUNTED FOR AS PURCHASES:
Cleveland Federal Bank, A Savings Bank ("Cleveland") 3/30/95 86 69 74
First Southern Bancorp, Inc. ("First Southern") 6/02/95 325 224 266
Total 1995 Purchase Acquisitions $411 $293 $340
INSTITUTION SHARES ISSUED
ACQUISITIONS ACCOUNTED FOR AS PURCHASES:
Essex Savings Bank, FSB ("Essex"), deposit assumption --
First Community Bank ("First Community") 776,441
Total 1996 Purchase Acquisitions 776,441
MERGERS ACCOUNTED FOR AS POOLINGS OF INTERESTS:
First Commercial Holding Company ("FCHC") 1,607,564
FirstSouth Bank ("FirstSouth") 1,075,559
CLG, Inc. ("CLG") 1,661,970
Total 1996 Mergers 4,345,093
Total 1996 Acquisitions and Mergers 5,121,534
ACQUISITIONS ACCOUNTED FOR AS PURCHASES:
Cleveland Federal Bank, A Savings Bank ("Cleveland") 645,719
First Southern Bancorp, Inc. ("First Southern") 2,166,552
Total 1995 Purchase Acquisitions 2,812,271
On February 27, 1996, Centura consummated its acquisition of FCHC, a
Delaware bank holding company with its principal offices in Asheville, North
Carolina, with and into Centura. In addition, First Commercial Bank, FCHC's
wholly-owned North Carolina state bank subsidiary, was merged with and into the
Bank. The merger was consummated through the issuance of .63 shares of Centura's
common stock for each share of outstanding common stock of FCHC, or 1,607,564
shares.
On July 26, 1996, Centura consummated its assumption of deposit liabilities
and the acquisition of certain deposit-related loans of the Wilmington, Raleigh,
and Greensboro locations of Essex Savings Bank, F.S.B. of Virginia Beach,
Virginia. Centura Bank did not purchase the physical branch offices of Essex,
but consolidated the deposits into existing banking facilities. Centura recorded
as an other asset a $712,000 core deposit intangible which represents the
present value of the difference in costs between the acquired core deposits and
market alternative funding sources.
On August 16, 1996, Centura consummated its acquisition of First Community,
a North Carolina bank corporation with its principal headquarters in Gastonia,
North Carolina, with and into the Bank. Pursuant to the agreement, shareholders
of First Community received .96 shares of Centura common stock for each share of
First Community outstanding common stock resulting in the issuance of 776,441
shares. The purchase price exceeded the fair value of net assets acquired by
approximately $16 million, which amount was recorded as goodwill, included in
other assets on the consolidated balance sheet.
II-40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 2 -- MERGERS AND ACQUISITIONS -- Continued
On October 25, 1996, Centura consummated its merger with FirstSouth, a
state-chartered commercial bank with its headquarters in Burlington, North
Carolina, with and into Centura Bank. Centura issued 1,075,559 shares of Centura
common stock, or .55 shares of Centura common stock for each outstanding share
of FirstSouth common stock.
On November 1, 1996, Centura completed its merger with CLG, a privately
owned company that specializes in leasing computer equipment to companies
throughout the United States. Based in Raleigh, North Carolina, CLG has offices
in Charlotte and Wilmington, North Carolina, Columbus, Georgia, and Dallas,
Texas. The transaction provided for the issuance of 1,661,970 shares of Centura
common stock. CLG operates as a wholly-owned subsidiary of Centura Bank.
In 1995, Centura completed the acquisitions of Cleveland and First
Southern. Cleveland was consummated under an exchange ratio of 3.381 shares of
Centura common stock for each outstanding share of Cleveland, while First
Southern was consummated under an exchange ratio of 1.25. Both acquisitions were
accounted for as purchases. The purchase price exceeded the fair value of net
assets acquired for each transaction. Accordingly, Centura recorded $6.9 million
of goodwill relative to the Cleveland purchase and $18.8 million related to the
First Southern transaction. The unamortized goodwill is recorded in other assets
on the consolidated balance sheet.
For the mergers accounted for under the pooling-of-interests method, all
financial data previously reported prior to the date of acquisition has been
restated as though the entities had been combined for the periods presented. CLG
was on a January 31 fiscal year and accordingly, the balance sheets of CLG as of
January 31, 1996 and 1995 and for all prior periods presented have been combined
with the consolidated balance sheets of Centura as of December 31, 1995 and
1994, respectively. The statements of income, shareholders' equity, and
cashflows of CLG for the years ended January 31, 1996 and 1995 have been
combined with the consolidated statements of income and shareholders' equity and
cash flows of Centura for the years ended December 31, 1995 and 1994,
respectively. The results of operations of CLG for the one-month period ended
January 31, 1996 are included in Centura's consolidated statement of income for
the year ended December 31, 1996 and are recorded as an adjustment to retained
earnings in the consolidated statement of stockholders' equity for the period
ended December 31, 1996. Total income, noninterest expenses, and net income of
CLG for the month of January 1996 were $3,703,000, $2,336,000, and $818,000,
respectively.
The respective contributions of the pooled entities to consolidated total
income, net interest income and net income for 1996 prior to the dates of their
respective mergers and for the years ended December 31, 1995 and 1994 were as
follows:
1996 1995 1994
(THOUSANDS)
TOTAL INCOME
Centura.................................................................................. $532,431 $439,613 $341,714
FCHC..................................................................................... 2,511 15,921 13,524
FirstSouth............................................................................... 12,299 13,543 10,374
CLG...................................................................................... 23,366 28,668 23,094
Combined................................................................................. $570,607 $497,745 $388,706
NET INTEREST INCOME
Centura.................................................................................. $238,801 $204,236 $182,304
FCHC..................................................................................... 1,391 9,002 8,241
FirstSouth............................................................................... 6,553 6,791 5,783
CLG...................................................................................... 3,339 4,616 4,965
Combined................................................................................. $250,084 $224,645 $201,293
NET INCOME
Centura.................................................................................. $ 63,739 $ 58,038 $ 49,561
FCHC..................................................................................... 376 1,676 2,578
FirstSouth............................................................................... 1,350 1,813 1,411
CLG...................................................................................... 2,686 3,126 2,223
Combined................................................................................. $ 68,151 $ 64,653 $ 55,773
II-41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 2 -- MERGERS AND ACQUISITIONS -- Continued
For the acquisitions accounted for under the purchase method, the results
of their operations prior to their respective consummation dates are not
included in the accompanying consolidated financial statements. The pro forma
results of operations as though Centura had consummated each of the 1996 and
1995 purchase acquisitions at the beginning of the periods presented are
considered immaterial.
On October 1, 1996, Centura completed the cash transaction to purchase 49
percent of First Greensboro Home Equity, Inc. ("First Greensboro"). First
Greensboro, headquartered in Greensboro, North Carolina, is a mortgage and
finance company, operating over 30 offices in 10 states, specializing in
alternative equity lending for homeowners whose borrowing needs are generally
not met by traditional financial institutions. First Greensboro retains the
controlling interest of the company. Centura recorded this investment as an
other asset and recognizes 49 percent of the net income of First Greensboro into
the earnings stream as required under the equity method of accounting for
investments. The excess of the purchase price over the net assets acquired is
amortized over 20 years as a charge against earnings of future periods.
NOTE 3 -- INVESTMENT SECURITIES
A summary of amortized cost, fair values, and unrealized gains and losses
of investment securities by type at December 31, follows:
1996 1995 1994
AMORTIZED COST FAIR VALUE AMORTIZED COST FAIR VALUE AMORTIZED COST FAIR VALUE
(THOUSANDS)
Held to maturity:
U.S. Treasury..................... $ 76,373 $ 76,019 $ 127,405 $ 127,593 $194,231 $ 185,346
U.S. Government agencies and
corporations................... 139,752 138,947 143,625 144,018 337,619 317,485
State and municipal............... 40,669 42,074 47,992 50,201 47,347 47,769
Other securities.................. 1,012 1,012 83 83 100 100
Total held to maturity............ $ 257,806 $ 258,052 $ 319,105 $ 321,895 $579,297 $ 550,700
Available for sale:
U.S. Treasury..................... $ 193,577 $ 192,169 $ 156,600 $ 155,515 $103,935 $ 95,493
U.S. Government agencies and
corporations................... 1,025,570 1,029,612 800,549 802,650 260,492 248,584
State and municipal............... 3,334 3,325 10,000 10,000 8,921 8,964
Other securities.................. 94,968 94,968 41,427 41,355 33,185 33,162
Total available for sale.......... $1,317,449 $1,320,074 $1,008,576 $1,009,520 $406,533 $ 386,203
1996 1995 1994
UNREALIZED UNREALIZED UNREALIZED UNREALIZED UNREALIZED
GAINS LOSSES GAINS LOSSES GAINS
(THOUSANDS)
Held to maturity:
U.S. Treasury...................................... $ 81 $ 435 $ 588 $ 400 $ 157
U.S. Government agencies and corporations.......... 278 1,083 858 465 302
State and municipal................................ 1,452 47 2,239 30 1,114
Total held to maturity............................. $ 1,811 $1,565 $3,685 $ 895 $1,573
Available for sale:
U.S. Treasury...................................... $ 99 $1,507 $ 369 $1,454 $ 2
U.S. Government agencies and corporations.......... 9,999 5,957 6,312 4,211 750
State and municipal................................ 2 11 -- -- 46
Other securities................................... -- -- -- 72 --
Total available for sale........................... $ 10,100 $7,475 $6,681 $5,737 $ 798
LOSSES
UNREALIZED
Held to maturity:
U.S. Treasury...................................... $ 9,042
U.S. Government agencies and corporations.......... 20,436
State and municipal................................ 692
Total held to maturity............................. $ 30,170
Available for sale:
U.S. Treasury...................................... $ 8,444
U.S. Government agencies and corporations.......... 12,658
State and municipal................................ 3
Other securities................................... 23
Total available for sale........................... $ 21,128
II-42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 3 -- INVESTMENT SECURITIES -- Continued
Following is a summary of investment securities by maturity at December 31,
1996:
DECEMBER 31, 1996
HELD TO MATURITY AVAILABLE FOR SALE
AMORTIZED COST FAIR VALUE AMORTIZED COST FAIR VALUE
(THOUSANDS)
Remaining maturities:
Within one year................................................. $ 51,840 $ 51,778 $ 79,120 $ 78,891
One to five years............................................... 170,870 171,167 292,415 291,366
Six to ten years................................................ 29,897 29,882 154,025 151,651
Over ten years.................................................. 5,199 5,225 791,889 798,166
Total........................................................... $257,806 $ 258,052 $1,317,449 $1,320,074
Maturities of mortgage-backed securities have been allocated to the various
maturity groups based on the estimated repayment dates of principal.
At December 31, 1996 and 1995, investment securities with book values of
approximately $612 million and $348 million, respectively, were pledged to
secure public funds on deposit and for other purposes required by law or
contractual arrangements. Sales of debt securities during 1996 generated gross
realized gains of $3,212,000 and losses of $1,414,000. Gross gains of $1,432,000
and $2,771,000 and gross losses of $2,046,000 and $3,662,000 were realized
during 1995 and 1994, respectively.
NOTE 4 -- LOANS
A summary of loans at December 31 follows:
1996 1995
(THOUSANDS)
Commercial, financial and agricultural............................................................ $ 743,477 $ 671,803
Consumer.......................................................................................... 274,885 271,067
Real estate -- mortgage........................................................................... 2,097,757 2,211,607
Real estate -- construction and land development.................................................. 524,246 434,014
Leases............................................................................................ 420,240 269,677
Other............................................................................................. 49,001 40,446
Gross loans....................................................................................... 4,109,606 3,898,614
Less unearned income on loans..................................................................... 152 178
Total loans....................................................................................... $4,109,454 $3,898,436
Included in the above:
Nonaccrual loans................................................................................ $ 18,713 $ 18,321
Restructured loans.............................................................................. 497 954
Accruing loans past due ninety days............................................................. $ 8,916 $ 6,132
Loans classified as real estate -- mortgage include mortgage loans held for
sale of $53.6 million and $50.7 million in 1996 and 1995, respectively. Most of
Centura's loan business is with customers located within North Carolina.
Interest income that would have been recorded on nonaccrual and
restructured loans for the year ended December 31, 1996, had they performed in
accordance with the original terms, amounted to approximately $1.7 million.
Interest income on all such loans included in the results of operations amounted
to approximately $624,000 for the year ended December 31, 1996. During 1996 and
1995, approximately $4,183,000 and $1,574,000, respectively, in loans were
transferred to in-substance foreclosed and foreclosed property.
II-43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 4 -- LOANS -- Continued
The Bank makes loans to executive officers and directors of Centura and the
Bank and to their associates. It is management's opinion that such loans are
made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with unrelated
persons and do not involve more than normal risk of collectibility. A summary of
the loan transactions with related parties is as follows:
BEGINNING NEW ENDING
BALANCE LOANS REPAYMENTS BALANCE
(THOUSANDS)
Year ended December 31, 1996.................................................... $23,129 $1,861 $(1,542) $23,448
NOTE 5 -- ALLOWANCE FOR LOAN LOSSES
A summary of changes in the allowance for loan losses follows:
1996 1995 1994
(THOUSANDS)
Balance at beginning of year................................................................. $55,070 $48,164 $43,430
Provision for loan losses.................................................................... 9,596 7,904 7,220
Allowance from acquired financial institutions............................................... 1,240 3,460 170
Loans charged off............................................................................ (10,408) (8,306) (6,021)
Recoveries on loans previously charged off................................................... 3,217 3,848 3,365
Net loans charged off........................................................................ (7,191) (4,458) (2,656)
Balance at end of year....................................................................... $58,715 $55,070 $48,164
At December 31, 1996, the recorded investment in loans that are considered
to be impaired under SFAS No. 114 was $10.9 million (of which $10.8 million were
on a nonaccrual basis). Included in this amount is $6.1 million of impaired
loans for which the related AFLL determined in accordance with SFAS No. 114 is
$2.0 million, and $4.8 million of impaired loans for which there is no related
allowance determined in accordance with this statement. The average recorded
investment in impaired loans during the year ended December 31, 1996 was
approximately $12.2 million. For the year ended December 31, 1996, Centura
recognized interest income on those impaired loans of approximately $50,000.
At December 31, 1995, the recorded investment in loans that are considered
to be impaired under SFAS No. 114 was $13.8 million (of which $13.3 million were
on a nonaccrual basis). Included in this amount is $7.2 million of impaired
loans for which the related AFLL determined in accordance with SFAS No. 114 is
$2.6 million, and $6.6 million of impaired loans for which there is no related
allowance determined in accordance with this statement. The average recorded
investment in impaired loans during the year ended December 31, 1995 was
approximately $13.5 million. For the year ended December 31, 1995, Centura
recognized interest income on those impaired loans of approximately $111,000.
NOTE 6 -- MORTGAGE SERVICING RIGHTS
A summary of capitalized MSRs follows:
1996 1995
(THOUSANDS)
Balance at beginning of year................................................................. $ 8,021 $2,900
MSRs capitalized during the year............................................................. 8,522 6,037
MSRs amortized during the year............................................................... (2,659) (916)
Balance at end of year....................................................................... $13,884 $ 8,021
The fair value of capitalized MSRs at December 31, 1996 and 1995 was
approximately $20.7 million and $14.4 million, respectively. No valuation
allowance for capitalized MSRs was required during the years ended December 31,
1996 and 1995.
II-44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 7 -- PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized as follows:
1996 1995
(THOUSANDS)
Land.................................................................................................. $ 17,369 $ 17,952
Buildings............................................................................................. 64,686 61,124
Buildings and equipment under capital lease........................................................... 890 1,318
Leasehold improvements................................................................................ 10,750 8,987
Furniture, fixtures and equipment..................................................................... 85,795 73,052
Construction in progress.............................................................................. 8,636 3,264
Total................................................................................................. 188,126 165,697
Less accumulated depreciation and amortization........................................................ 75,928 62,391
Premises and equipment................................................................................ $112,198 $103,306
Depreciation and amortization on premises and equipment, included in
operating expenses, amounted to $15,312,000, $11,296,000, and $7,146,000 in
1996, 1995 and 1994, respectively.
NOTE 8 -- BORROWED FUNDS
At December 31, 1996 and 1995, borrowed funds consisted of the following:
1996 1995
(THOUSANDS)
Federal funds purchased and securities sold under agreements to repurchase............................ $435,470 $362,654
Master notes.......................................................................................... 141,649 101,178
U.S. Treasury demand note............................................................................. 32,402 15,885
Federal Home Loan Bank ("FHLB") advances.............................................................. -- 18,000
Bank note............................................................................................. 15,770 --
Line of credit........................................................................................ 60,000 --
Total borrowed funds.................................................................................. $685,291 $497,717
Federal funds purchased and securities sold under agreements to repurchase
generally mature within one to 30 days from the transaction date. Master notes
are issued by Centura under a master agreement with a term not to exceed 270
days and mature on a daily basis and at December 31, 1996, carried a weighted
average interest rate of 4.68 percent. The bank's treasury tax and loan
depository note account 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, 1995 the FHLB advance
outstanding had a 2 month maturity and a 5.86 percent interest rate. There were
no FHLB advances with original maturities less than one year outstanding as of
December 31, 1996.
The Bank has the ability to borrow up to a maximum of $300 million under an
offering by the Bank to institutional investors only of unsecured bank notes due
from 30 days to 15 years from the date of issue. Each bank note would be a
direct, unconditional and unsecured general obligation solely of the Bank and
would not be an obligation of or guaranteed by Centura. Interest rate and
maturity terms would generally be negotiated between the Bank and the purchaser,
within certain parameters set forth in the offering circular. At December 31,
1996, $15.8 million was outstanding under one note bearing a fixed interest rate
and an April 1997 maturity date. Long-term funding as of December 31, 1995
included $23 million outstanding under one fixed interest rate note which
matured during 1996.
Centura obtained a two-year unsecured line of credit of $60 million bearing
a variable interest rate (1 month LIBOR+ 25 basis points), used to assist in
funding the share repurchase actions discussed in Note 11. On December 31, 1996,
the line was refinanced and assigned a December 1997 maturity. There is $60
million outstanding under this line at December 31, 1996. As of December 31,
1995, long-term debt included $26 million outstanding under this line.
II-45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- BORROWED FUNDS -- Continued
The following table presents certain information for Federal funds
purchased and securities sold under agreements to repurchase:
FEDERAL FUNDS PURCHASED AND
SECURITIES SOLD UNDER AGREEMENTS
TO REPURCHASE
1996 1995 1994
(THOUSANDS)
Amount outstanding at December 31..................................................... $435,470 $362,654 $190,764
Average outstanding balance........................................................... 405,373 224,616 117,374
Maximum amount outstanding at end of any month during the year........................ 554,699 364,773 197,587
Approximate weighted average interest rate:
During the year..................................................................... 5.28% 5.82% 4.30%
End of year......................................................................... 4.67 5.66 6.20
Interest expense...................................................................... $ 21,385 $ 13,068 $ 5,049
NOTE 9 -- LONG-TERM DEBT
At December 31, 1996 and 1995, long-term debt consisted of the following:
1996 1995
(THOUSANDS)
Federal Home Loan Bank advances....................................................................... $228,918 $176,389
Obligations under capitalized leases.................................................................. 531 593
Line of credit........................................................................................ -- 26,000
Bank note............................................................................................. -- 23,169
Notes payable secured by lease rentals................................................................ 80,811 79,720
Other................................................................................................. 542 715
Total long-term debt.................................................................................. $310,802 $306,586
Centura has a blanket collateral agreement with the FHLB whereby Centura
maintains, free of other encumbrances, qualifying mortgages (as defined) with
unpaid principal balances at least equal to, when discounted at 75 percent of
the unpaid principal balance, 100 percent of the FHLB advances. At December 31,
1996, FHLB advances had maturities of up to 3.5 years and were at rates ranging
from 5.00 percent to 8.90 percent. At December 31, 1995, FHLB advances had
maturities of up to 4.5 years and were at rates ranging from 4.54 percent to
8.90 percent.
To finance some of the equipment utilized in its leasing activities,
Centura has fixed rate debt secured by the future lease rentals to be received
under the leasing contracts and first liens on the related equipment. Generally,
the terms of these obligations are equal to the terms of the underlying
contracts. At December 31, 1996, the weighted average rate and maturity for the
notes payable secured by lease rentals were 7.98 percent and 2.7 years,
respectively. At December 31, 1995, the weighted average rate and maturity for
the notes payable secured by lease rentals were 8.37 percent and 2.9 years,
respectively.
At December 31, 1996, maturities of long-term debt are as follows (in
thousands):
1997...................................................................................... $ 85,345
1998...................................................................................... 90,823
1999...................................................................................... 125,365
2000...................................................................................... 7,495
2001...................................................................................... 1,685
Thereafter................................................................................ 89
$310,802
II-46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 10 -- PENSION AND OTHER BENEFIT PLANS
Centura has a noncontributory, qualified defined benefit pension plan (the
"Pension Plan") covering substantially all full-time employees. Benefits are
determined by applying a benefit ratio to the employees' average compensation
for each year of participation. The plan is funded using the Projected Unit
Credit method. Annual contributions consist of a normal service cost amount and
an amortization amount of prior service costs.
Centura also has an Omnibus Supplemental Executive Retirement Plan ("SERP")
which provides various officers with certain benefits in excess of the Centura's
standard pension plan. One of the benefits offered under the Omnibus Plan are
Supplemental Pension Contracts ("SPCs") which are nonqualified pension plans
providing benefits payable upon retirement, death or disability of an eligible
participant. Insurance policies on the lives of the covered employees have been
purchased and are intended to be adequate to fund future benefits plus full
recovery of any corporate paid premiums.
The following table sets forth the plans' funded status and amounts
recognized in Centura's consolidated financial statements:
PENSION PLAN SPCS-SERP
DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
(THOUSANDS)
Actuarial present value of accumulated benefit obligation ("ABO"):
Vested benefits................................................................ $ 26,760 $ 24,716 $ 5,380 $ 2,873
Nonvested benefits............................................................. 1,360 942 3,008 1,700
$ 28,120 $ 25,658 $ 8,388 $ 4,573
Projected benefit obligation ("PBO") for services rendered to date............... $(34,432) $(30,884) $(9,584) $(5,414)
Plan assets at fair value, primarily listed stocks and U.S. Government
securities..................................................................... 27,516 24,492 -- --
Plan assets under the PBO........................................................ (6,916) (6,392) (9,584) (5,414)
Unrecognized net loss............................................................ 6,004 5,389 1,164 588
Unrecognized prior service cost.................................................. 3,374 3,005 2,663 1,136
Additional liability related to unfunded ABO..................................... (2,643) (2,639) (2,631) (883)
Unrecognized net (asset) liability............................................... (423) (529) -- --
Accrued pension cost included in other liabilities............................... $ (604) $ (1,166) $(8,388) $(4,573)
PENSION PLAN SPCS-SERP
1996 1995 1994 1996 1995 1994
(THOUSANDS)
Net periodic pension expense includes the following
components:
Service cost -- benefits earned during the period........... $ 1,965 $ 1,369 $ 1,654 $ 475 $ 310 $ 233
Interest cost on PBO........................................ 2,394 1,987 1,922 587 366 253
Actual loss (return) on plan assets......................... (2,480) (4,220) 1,566 -- -- --
Net amortization and deferral............................... 680 2,691 (3,284) 1,123 683 476
Net periodic pension expense included in personnel expense.... $ 2,559 $ 1,827 $ 1,858 $ 2,185 $ 1,359 $ 962
Assumptions:
Weighted average discount rate at end of fiscal year........ 7.5% 7.5% 8.5% 7.5% 7.5% 8.0%
Rate of increase in future compensation levels used in
determining the actuarial present value of PBO........... 5.5 5.5 5.5 5.5 5.5 5.5
Expected long-term rate of return on assets................. 8.5 8.5 8.5 -- -- --
II-47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 10 -- PENSION AND OTHER BENEFIT PLANS -- Continued
In addition to providing pension benefits, Centura provides other employee
benefit plans; the amounts expensed for these are as follows:
1996 1995 1994
(THOUSANDS)
Thrift (401-k)................................................................................ $ 2,016 $ 1,522 $1,137
Sales commissions............................................................................. 8,320 7,394 4,596
EVA-based incentive compensation.............................................................. 5,612 3,500 3,557
Other......................................................................................... 340 296 362
$16,288 $12,712 $9,652
The Thrift Plan permits eligible employees to make contributions, with the
Bank matching 50 percent of contributions up to 6 percent of the employees' base
compensation. The plan is available for full-time employees after completion of
six months consecutive service or for part-time employees after completion of
1,000 hours of service during a consecutive 12-month period.
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. This amount
is earned monthly and paid annually. The Economic Value Added ("EVA") incentive
program provides for a total EVA incentive pool for all non-sales employees
based upon meeting a specific EVA target. Calculation of the target incorporates
the ability of current net operating profits after tax to cover the annual cost
of capital utilized. The program also incorporates the use of bonus banking of a
defined percentage of incentives earned that are then placed at risk dependent
upon future performance plus the granting of leveraged stock options to specific
members of management. Other miscellaneous bonus and incentive awards are made
primarily under individual contracts.
Centura accounts for retiree health benefits and other retiree welfare
benefits, under the provisions of SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The statement requires that a
liability for such benefits be accrued and the projected costs of providing
these benefits be recognized currently as an expense rather than when paid.
Centura's Postretirement Health Care and Death Benefits Program is for all
employees who work at least 30 hours per week and who retire at age 55 or later
with ten or more years of service. The program provides a catastrophic
postretirement health care plan to pre-age 65 retirees and a postretirement
health care benefit consisting of a fixed dollar cash payment for post-age 65
retirees. The program is funded as benefits are paid.
The following table presents the plan's funded status reconciled with the
amounts recognized in Centura's consolidated financial statements:
DECEMBER 31
1996 1995
(THOUSANDS)
Postretirement benefit obligation:
Retirees and beneficiaries............................................................................. $ 2,285 $ 2,212
Dependents of retirees................................................................................. 26 44
Fully eligible active employees........................................................................ 895 945
Other active employees................................................................................. 2,798 2,724
Less future service obligation......................................................................... (1,442) (1,319)
Accumulated postretirement benefit obligation (APBO)..................................................... 4,562 4,606
Plan assets at fair value................................................................................ -- --
Funded status............................................................................................ 4,562 4,606
Unrecognized net gain.................................................................................... 447 324
Unrecognized transition obligation....................................................................... (3,551) (3,773)
Accrued postretirement benefit cost included in other liabilities........................................ $ 1,458 $ 1,157
II-48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 10 -- PENSION AND OTHER BENEFIT PLANS -- Continued
The net periodic postretirement benefit cost includes the following
components:
DECEMBER 31,
1996 1995 1994
(THOUSANDS)
Service cost.......................................................................................... $161 $135 $185
Interest cost......................................................................................... 322 328 320
Actual return on plan assets.......................................................................... -- -- --
Unrecognized net gain................................................................................. (3) (21) --
Amortization of transition obligation over 20 years................................................... 222 222 222
Net periodic postretirement benefit cost.............................................................. $702 $664 $727
Assumptions:
Weighted average discount rate used in determining APBO............................................. 7.5% 7.5% 8.5%
Annual health care cost trend rate.................................................................. 7.0 8.0 9.0
Ultimate medical trend rate......................................................................... 5.5 5.5 6.5
Medical trend rate select period (in years)......................................................... 1 2 3
Effect of 1% increase in assumed medical trend rate on:
Service and interest cost........................................................................ 0% 1.0% 1.0%
APBO............................................................................................. 0 1.0 1.0
NOTE 11 -- STOCK OPTIONS, AWARDS AND SHAREHOLDERS' EQUITY
At December 31, 1996 and 1995, Centura had approximately 2,487,000 and
2,445,000 shares, respectively, of its authorized but unissued common stock
reserved for its incentive, nonqualified and deferred compensation stock option
plans (the "Plans").
A summary of stock option transactions under these plans follows:
OPTION OPTION PRICE WEIGHTED AVERAGE
SHARES PER SHARE EXERCISE PRICE
Outstanding at December 31, 1994........................................... 1,293,700 $ 3-$25 $14.21
Assumed through purchase acquisition....................................... 181,000 9 9.00
Granted.................................................................... 345,000 5- 37 23.65
Exercised.................................................................. 242,900 3- 22 14.45
Forfeited.................................................................. 9,800 14- 20 18.95
Outstanding at December 31, 1995........................................... 1,567,000 $ 3-$37 14.38
Assumed through purchase acquisition....................................... 61,600 13- 19 16.00
Granted.................................................................... 85,200 9- 32 26.59
Exercised.................................................................. 351,900 5- 26 12.58
Forfeited.................................................................. 1,300 14- 21 14.40
Outstanding at December 31, 1996........................................... 1,360,600 $ 3-$37 15.24
Exercisable at December 31, 1996........................................... 898,100 $ 3-$26 $13.29
The weighted-average fair values of options granted during 1996 and 1995
were $20.61 and $16.28, respectively. The weighted-average remaining contractual
life of options outstanding at December 31, 1996 was 4.21 years. During 1995,
Centura granted a stock award of 60,000 shares, which vests over three years and
had a weighted average fair value of $33.33 on the date of grant.
Prior to January 1, 1996, Centura accounted for the Plans in accordance
with the provisions of APB 25. As such, compensation expense would be recorded
on the date of grant only if the current market price of the underlying stock
exceeded the exercise price. On January 1, 1996, as required, Centura adopted
SFAS No. 123, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively,
II-49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 11 -- STOCK OPTIONS, AWARDS AND SHAREHOLDERS' EQUITY -- Continued
SFAS No. 123 allows entities to continue to apply the provisions of APB 25 and
provide pro forma net income and pro forma earnings per share disclosures for
employee stock awards and stock option grants made in 1995 and future years as
if the fair-value-based method defined in SFAS No. 123 had been applied. Centura
elected to continue to apply the provisions of APB 25 for expense recognition.
Centura, under APB 25, expensed approximately $730,700 in 1995 and
$2,883,300 in 1996 for employee stock awards and stock option grants. The
expense that would have been recognized under the fair value based method of
SFAS 123 is not materially different from the amounts that were expensed by
Centura under APB 25 for 1996 and 1995. The effects of applying Statement 123
for 1996 and 1995 may not be representative of the effects on reported net
income for future years.
Centura has a Dividend Reinvestment Stock Purchase Plan which allows
shareholders to invest dividends and optional cash payments in additional shares
of common stock. Shareholders of record are automatically eligible to
participate in the plan.
Generally, cash dividends are paid quarterly on or about the 15th day of
the final month in the quarter. Cash dividends paid were $24.0 million, $18.7
million and $15.9 million during 1996, 1995 and 1994, respectively, which
represented $1.00, $.85 and $.74 on a per share basis, respectively. During the
fourth quarter of 1996, Centura declared and accrued $6.4 million, or $.25 per
share, for the first quarter of 1997 cash dividend.
In November 1994 the board of directors of Centura authorized and approved
a plan pursuant to which Centura may, from time to time, repurchase shares of
Centura's common stock. For the year ended December 31, 1996, Centura had
repurchased 1,237,837 shares at an average price of $36.77 per share for a total
of $45.5 million. For 1995, Centura had repurchased 1,985,200 shares at an
average price of $29.63 per share for a total of $58.8 million. As of December
31, 1996, Centura had repurchased all shares available to be repurchased under
its outstanding repurchase actions.
NOTE 12 -- OTHER OPERATING EXPENSE
Other operating expense consisted of the following:
1996 1995 1994
(THOUSANDS)
Marketing, advertising and public relations.................................................. $ 7,549 $ 6,195 $ 5,328
Stationery, printing and supplies............................................................ 6,712 5,458 5,024
Postage...................................................................................... 2,798 2,502 2,204
Telephone.................................................................................... 6,678 5,492 4,129
FDIC insurance............................................................................... 10,197 5,727 7,859
Service and licensing fees................................................................... 4,323 3,307 3,155
Legal and professional fees.................................................................. 14,589 9,432 7,031
Other administrative......................................................................... 8,544 7,930 6,327
Intangible amortization...................................................................... 5,034 4,148 3,255
Depreciation on equipment under operating lease.............................................. 7,944 7,192 6,015
Other........................................................................................ 16,977 15,716 12,377
Total other operating expense................................................................ $91,345 $73,099 $62,704
On September 30, 1996, the Federal Deposit Insurance Corporation ("FDIC")
levied a one-time special assessment to recapitalize the Savings Association
Insurance Fund ("SAIF"). The assessment was levied on SAIF-insured deposits and
Centura recognized $7.3 million of FDIC expense relative to this assessment for
the year ended December 31, 1996. The after tax assessment totaled approximately
$4.2 million.
II-50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 13 -- INCOME TAXES
The components of income tax expense for the years ended December 31 were:
1996 1995 1994
(THOUSANDS)
Current expense:
Federal.................................................................................... $34,347 $40,242 $33,467
State...................................................................................... 4,363 6,655 4,821
38,710 46,897 38,288
Deferred expense/ (benefit):
Federal.................................................................................... 645 (8,114) (5,189)
State...................................................................................... (152) (2,362) (1,250)
493 (10,476) (6,439)
Total income tax expense..................................................................... $39,203 $36,421 $31,849
Income tax expense is reconciled to the amount computed by applying the
federal statutory rate to income before income taxes as follows:
1996 1995 1994
Federal statutory rate....................................................................... 35.00% 35.00% 35.00%
Tax exempt income............................................................................ (.98) (1.24) (1.8)
Goodwill amortization (accretion), net....................................................... .54 .08 (.36)
Merger expenses.............................................................................. .39 .09 .14
State income tax, net of federal benefit..................................................... 2.55 2.73 2.68
Other, net................................................................................... (.98) (.63) .69
Effective tax rate........................................................................... 36.52% 36.03% 36.35%
The tax effects of temporary differences which give rise to significant
portions of the net deferred tax asset at December 31, 1996 and 1995, are
summarized as follows:
1996 1995
(THOUSANDS)
Deferred tax assets:
Loan loss reserve.................................................................................... $(19,852) $(16,839)
Other reserves....................................................................................... (2,416) (2,677)
Deferred compensation................................................................................ (10,920) (8,541)
Deferred loan and lease fees......................................................................... (435) --
Other assets......................................................................................... (3,423) (2,911)
Gross deferred tax assets............................................................................ (37,046) (30,968)
Deferred tax liabilities:
Premises and equipment............................................................................... 2,830 2,256
Employee retirement plans............................................................................ 1,420 1,398
Investment securities................................................................................ 939 851
Leasing activities................................................................................... 15,294 10,168
Other liabilities.................................................................................... 13,952 14,233
Unrealized securities gains.......................................................................... 1,056 311
Gross deferred tax liabilities....................................................................... 35,491 29,217
Net deferred tax asset............................................................................... $ (1,555) $ (1,751)
No valuation allowance for deferred tax assets was required at December 31,
1996 or 1995. Management has determined that it is more likely than not that the
net deferred tax asset can be supported by carrybacks to federal taxable income
in the three-year federal carryback period. During 1996, the net deferred tax
asset decreased approximately $700,000 due to
II-51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 13 -- INCOME TAXES -- Continued
fair value adjustments required under SFAS No. 115 for securities available for
sale, increased $700,000 for acquisition adjustments and increased due to other
adjustments totaling $300,000.
NOTE 14 -- LEASE COMMITMENTS
At December 31, 1996, Centura was obligated under a number of noncancelable
leases for bank premises. In addition, obligations under short-term equipment
leases are generally cancelable upon thirty to ninety days written notice. Most
of the leases for bank premises provide that Centura pay taxes, maintenance,
insurance, and other expenses. It is expected that in the normal course of
business, leases that expire will be renewed or replaced by other leases.
Certain lease agreements contain options to renew for additional periods of one
to twenty years.
At December 31, 1996, future minimum lease payments under noncancelable
operating leases are as follows
(in thousands):
OPERATING
LEASES
1997............................................................................................................... $ 3,832
1998............................................................................................................... 3,405
1999............................................................................................................... 2,622
2000............................................................................................................... 2,397
2001............................................................................................................... 1,870
Thereafter......................................................................................................... 5,317
Total minimum lease payments....................................................................................... $19,443
Rent expense charged to operations was as follows:
1996 1995 1994
(THOUSANDS)
Bank premises.................................................................................... $3,445 $3,146 $2,466
Equipment........................................................................................ 2,247 2,601 3,088
Rent expense..................................................................................... $5,692 $5,747 $5,554
NOTE 15 -- COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES
COMMITMENTS AND OFF-BALANCE SHEET RISK
The following is a discussion of Centura's commitments and financial
instruments with off-balance sheet risk. At December 31, 1996 and 1995, Centura
had commitments to extend credit of $1.2 billion and $1.0 billion, respectively,
and standby letters of credit of $75.8 million and $74.2 million, respectively.
These instruments at December 31, 1996, have no carrying value. With the
exception of commitments to originate residential mortgage loans which are
discussed below, these financial instruments are exercisable at the market rate
prevailing at the date the underlying transaction will be completed, and thus
are deemed to have no current fair value.
Commitments to extend credit are agreements to lend to customers at
predetermined interest rates as long as there is no violation of any condition
established in the contracts. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. These
commitments are subject to Centura's standard credit approval and monitoring
process. Centura's exposure to credit risk is represented by the contractual
amount of the commitment to extend credit. In the opinion of management, there
are no material commitments to extend credit that represent unusual risks.
Standby letters of credit are conditional commitments issued by Centura to
guarantee the performance of a customer to a third party. The risks and credit
approval process involved in issuing standby letters of credit are essentially
the same as that involved in commitments to extend credit.
II-52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 15 -- COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES -- Continued
Centura evaluates the collateral required for each extension of credit on a
case-by-case basis following the same guidelines set forth in normal lending
policy. The majority of commitments to extend credit and letters of credit are
secured, primarily with liquid financial instruments such as certificates of
deposit or income-producing assets. With the exception of guarantees for
approximately $23.3 million which extend for a period in excess of one year,
most guarantees in the form of commitments and letters of credit expire in less
than one year. If these commitments are drawn, Centura will obtain collateral if
it is deemed necessary based on management's credit evaluation of the
counterparty. Collateral held varies, but may include accounts receivable,
inventory, and commercial or residential real estate. Management expects that
these commitments can be funded through normal operations.
Included in commitments to extend credit are commitments issued by the Bank
to originate residential mortgage loans held for sale ("pipeline loans") of
approximately $32.2 million and $40.9 million at December 31, 1996 and 1995,
respectively, with terms generally not exceeding 90 days. As discussed in Note
4, mortgage loans held for sale ("MLHFS"), which are carried at the lower of
cost or fair value and are included in total loans, were $53.6 million and $50.7
million at December 31, 1996 and 1995, respectively. In connection with these
MLHFS and pipeline loans, management entered into forward commitments to sell
residential mortgage loans totaling $58.5 million and $59.6 million at December
31, 1996 and 1995, respectively. Such forward commitments are entered into to
reduce the Bank's exposure to market risk arising from potential changes in
interest rates, which could alter the underlying market value of MLHFS and
pipeline loans. The forward commitments are at fixed prices and are scheduled to
settle at specified dates which generally do not exceed 90 days. MLHFS and
pipeline loans are valued utilizing the fixed prices of the forward commitments.
MLHFS and pipeline loans not covered by existing forward commitments are valued
using quoted market prices appropriate for the associated loan characteristics
and interest rate levels. Commitments not fully satisfied by MLHFS and pipelines
loans are valued based on what it would cost to purchase loans in the open
market to fulfill the commitments. The net result of this valuation process is
used in recording the carrying value of MLHFS at the lower of cost or fair
value. At December 31, 1996 and 1995, cost exceeded fair value by approximately
$380,000, requiring a valuation allowance which was reflected in the carrying
value of MLHFS.
Centura enters into commitments for the forward settlement of the purchase
or sale of securities at a specified future date (generally less than 90 days)
at a specified price. Risks arise from the possible inability of counterparties
to meet the terms of their contracts and from movements in securities values and
interest rates. At December 31, 1996, Centura had commitments to purchase $24.4
million of securities to be held in the investment portfolio as AFS. At December
31, 1995, Centura had $21.1 million of commitments to purchase securities. The
outstanding commitments at December 31, 1996 and 1995 had unrealized gains of
$11,000 and $152,000, respectively. The average of these commitments to purchase
and to sell securities during the year ended December 31, 1996, were
approximately $22.9 million and $8.8 million, respectively, and were
approximately $64.0 million and $600,000, respectively, during 1995. These
commitments resulted in the realization of net gains of $212,000 and $215,000
for the years ended December 31, 1996 and 1995, respectively, which amounts are
included in noninterest income in the consolidated statements of income.
In connection with its asset/liability management program, Centura has
entered into interest rate swap, cap, and floor arrangements with other
counterparties. Centura is not a dealer nor does it make a market in interest
rate exchange, cap, floor, or collar agreements. Centura does not trade the
instruments, and Centura's policy governing the use of these instruments, as
approved by Centura's board of directors, strictly forbids speculation of any
kind.
Interest rate swap agreements ("swaps") are used to reduce interest rate
risk with the objective of stabilizing Centura's net interest income over time.
Centura enters into swaps entirely as a risk management tool. 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) in order to improve the interest rate sensitivity of these
financial instruments in various interest rate environments. Typically, Centura
pays a fixed rate of interest for a fixed period of time and receives a variable
rate of interest indexed to the London Interbank Offered Rate ("LIBOR") or vice
versa. The difference between the rate paid and the rate received is recorded in
the consolidated statements of income as a component of interest income or
interest expense, depending upon the financial instrument hedged. Unrealized
fair values of the swaps are not recorded in the consolidated statements of
income because the swap agreements are being treated as a hedge of the
designated assets or liabilities.
II-53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 15 -- COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES -- Continued
Centura's interest rate swap agreements at December 31, 1996 and 1995, are
summarized below:
ESTIMATED
NOTIONAL FAIR VALUE
AMOUNT GAIN (LOSS)
(THOUSANDS)
DECEMBER 31, 1996
Corporation pays fixed rates......................................................................... $225,000 $(2,296)
Corporation pays variable rates...................................................................... 70,000 (222)
Total interest rate swaps.......................................................................... $295,000 $(2,518)
DECEMBER 31, 1995
Corporation pays fixed rates......................................................................... $270,000 $(6,001)
Corporation pays variable rates...................................................................... 25,000 (141)
Total interest rate swaps.......................................................................... $295,000 $(6,142)
At December 31, 1996, Centura had interest rate floor arrangements
("floors") and interest rate cap arrangements ("caps"). The floors are being
used to protect certain designated variable rate loans from the downward effects
of their repricing in the event of a decreasing rate environment. The caps are
being used to protect certain designated floating rate debt securities from the
negative effects of an increasing rate environment. Unrealized fair values of
the floors and caps are not recorded in the consolidated statements of income
because the floors and caps are being treated as a hedge of the designated
assets or liabilities.
Interest rate cap and floor agreements at December 31 are summarized as
follows:
ESTIMATED
NOTIONAL CARRYING FAIR VALUE
AMOUNT VALUE GAIN (LOSS)
(THOUSANDS)
DECEMBER 31, 1996
Interest rate caps........................................................................ $ 26,000 $775 $ (645)
Interest rate floors...................................................................... 180,000 821 2,114
DECEMBER 31, 1995
Interest rate caps........................................................................ $ 20,000 $525 $ 413
Interest rate floors...................................................................... 150,000 444 4,014
Centura also utilizes financial futures contracts and exchange traded
options on financial futures contracts to reduce interest rate risk in the AFS
portfolio. Futures contract price changes settle on a daily basis whereby
Centura either makes or receives a cash payment. Such cash receipt or cash
payment is recorded against the change in the value of the securities held in
the AFS portfolio. At December 31, 1996 Centura had put options on 195 ten-year
Treasury futures contracts. Each contract represents the notional amount of
$100,000 and gives Centura the right but not the obligation to exercise the
respective Treasury futures contracts. Cumulatively at December 31, 1996, the
options have a carrying value of $97,000 and an estimated fair value of $75,000.
The risks generally associated with these derivative financial instruments
are the risk that the counterparty in the agreement may default ("credit risk");
the risk that at the time of any such default, interest rates may have moved
unfavorably from the perspective of the nondefaulting party ("market risk"); and
the risk that amounts due to Centura previously reflected in the consolidated
balance sheets may not be received as a result of the default. Centura's
derivative financial instruments have been entered into with nationally
recognized commercial and investment banking firms. As such, Centura does not
anticipate non-performance by the counterparties.
II-54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 15 -- COMMITMENTS, OFF-BALANCE SHEET RISK AND CONTINGENCIES -- Continued
CONTINGENCIES
In May 1994, a suit was filed against Centura, the Bank, the North Carolina
Savings Institutions Division ("NCSID"), and six individuals who were directors
of First Savings Bank of Forest City, SSB ("First Savings") at the time of the
acquisition of that institution by Centura and the Bank through a
merger/conversion transaction in October 1993 (the "Acquisition"). The
plaintiffs' complaint alleges, among other things, that the individual
defendants violated their fiduciary duties as directors of First Savings in
connection with the Acquisition by allegedly receiving excessive benefits as
part of that transaction; that Centura and the Bank acted in concert with the
individual defendants in that regard, as a result of which it is alleged that
"the assets of First Savings were wrongfully transferred"; and that the NCSID
acted in violation of law in approving the Acquisition. The plaintiffs seek (i)
certification of the suit as a class action; (ii) a judgment ordering the
individual defendants, Centura and the Bank to pay to the plaintiffs and members
of the class the difference between the fair market value of First Savings as of
the date of the Acquisition and the value of benefits paid to depositors in the
Acquisition; (iii) punitive damages in an unspecified amount; and (iv) in the
event damages are not awarded, entry of an order declaring the Acquisition to be
"illegal, void and reversed." On March 2, 1995, claims against NCSID were
severed from claims against the six individuals who were directors of First
Savings, Centura and the Bank, and accordingly, such claims are now the subject
of two separate proceedings. On October 31, 1995, the Wake County Superior Court
reversed the decision of the NCSID Administrator denying the plaintiff's request
on the issue of whether the NCSID should have approved the Acquisition and
remanded the action to the NCSID for such a hearing. Centura and the NCSID
appealed this decision, which appeal was dismissed by the North Carolina Court
of Appeals. A hearing has not yet been scheduled in this matter. The civil
damage action was certified as a class action on March 4, 1996, and on March 26,
1996, was assigned to the Special Superior Court for Complex Business
Litigation. Centura and the former First Savings directors moved for summary
judgment, which motion was heard by the court on January 8, 1997. No loss is
currently probable or reasonably estimable, and accordingly, no liability has
been recorded.
Various other legal proceedings against Centura and the Bank have arisen
from time to time in the normal course of business. Management believes
liabilities arising from these proceedings, if any, will have no material
adverse effect on the financial position or results of operations of Centura or
the Bank.
NOTE 16 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made by management at a specific point in time,
based on relevant information about the financial instrument and the market.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time Centura's entire holdings of a particular
financial instrument nor are potential taxes and other expenses that would be
incurred in an actual sale considered. Because no market exists for a
significant portion of Centura's financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions and/or the methodology used could
significantly affect the estimates disclosed. Similarly, the fair values
disclosed could vary significantly from amounts realized in actual transactions.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For example, Centura has a substantial trust department
that contributes net fee income annually. The trust department is not considered
a financial instrument, and its value has not been incorporated into the fair
value estimates. Other significant assets and liabilities that are not
considered financial assets or liabilities include premises and equipment and
intangibles. In addition, tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of the estimates.
II-55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 16 -- FAIR VALUE OF FINANCIAL INSTRUMENTS -- Continued
The following table presents the carrying values and estimated fair values
of Centura's financial instruments at December 31:
1996 1995
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
(THOUSANDS)
FINANCIAL ASSETS:
Cash and due from banks, including interest-bearing.................. $ 294,478 $ 294,478 $ 282,659 $ 282,659
Federal funds sold................................................... 21,413 21,413 33,558 33,558
Investment securities................................................ 1,577,880 1,578,126 1,328,625 1,331,415
Accrued interest receivable.......................................... 42,729 42,729 40,697 40,697
Net loans............................................................ 4,050,739 4,176,237 3,843,366 3,857,903
FINANCIAL LIABILITIES:
Deposits............................................................. 4,733,069 4,732,011 4,443,791 4,454,551
Accrued interest payable............................................. 15,877 15,877 19,882 19,882
Borrowed funds....................................................... 685,291 685,291 497,717 497,717
Long-term debt....................................................... $ 310,802 $ 310,724 $ 306,586 $ 306,634
See Note 15 for information regarding the fair value of Centura's
off-balance sheet financial instruments at December 31, 1996 and 1995 and see
Note 6 for information regarding the fair value of Centura's capitalized
mortgage servicing rights.
NOTE 17 -- PARENT COMPANY FINANCIAL DATA
Centura's principal asset is its investment in the Bank; its primary source
of income is dividends and management fees from the Bank. Condensed financial
statements for the parent company are as follows:
DECEMBER 31,
1996 1995
(THOUSANDS)
BALANCE SHEETS
Cash and deposits in banks............................................................................ $158,076 $103,731
Loans................................................................................................. 5,722 --
Investment in subsidiary.............................................................................. 491,877 475,332
Other assets.......................................................................................... 35,774 3,528
Total assets.......................................................................................... $691,449 $582,591
Liabilities........................................................................................... $216,214 $139,280
Shareholders' equity.................................................................................. 475,235 443,311
Total liabilities and shareholders' equity............................................................ $691,449 $582,591
II-56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 17 -- PARENT COMPANY FINANCIAL DATA -- Continued
YEARS ENDED DECEMBER 31,
1996 1995 1994
(THOUSANDS)
INCOME STATEMENTS
Income:
Dividends from subsidiary............................................................... $ 81,251 $ 18,731 $ 25,875
Other................................................................................... 21,550 13,456 8,644
Total income.............................................................................. 102,801 32,187 34,519
Expenses:
Interest................................................................................ 8,473 4,458 1,713
Other................................................................................... 13,139 9,583 8,128
Total expenses............................................................................ 21,612 14,041 9,841
Income before income tax and equity in undistributed net income of subsidiary............. 81,189 18,146 24,678
Income tax benefit........................................................................ (68) (76) (195)
Income before equity in undistributed net income of subsidiary............................ 81,257 18,222 24,873
Equity in undistributed net income of subsidiary.......................................... (13,106) 46,431 30,900
Net income................................................................................ $ 68,151 $ 64,653 $ 55,773
YEARS ENDED DECEMBER 31,
1996 1995 1994
(THOUSANDS)
STATEMENTS OF CASH FLOWS
Operating activities:
Net income................................................................................ $ 68,151 $ 64,653 $ 55,773
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization........................................................... 634 276 259
(Increase) decrease in equity in undistributed net income of subsidiary................. 13,106 (46,431) (30,900)
Other, net.............................................................................. (1,829) 3,098 (1,921)
Net cash provided by operating activities................................................. 80,062 21,596 23,211
Investing activities:
Net decrease in investment in subsidiary................................................ -- -- 880
Net decrease in receivables from the Bank............................................... -- 11,000 --
Net increase in loans................................................................... (5,722) -- --
Other................................................................................... (29,250) -- --
Cash acquired, net of cash paid, in purchase acquisition................................ -- 7,739 --
Net cash provided (used) by investing activities.......................................... (34,972) 18,739 880
Financing activities:
Net increase in borrowings.............................................................. 74,327 78,374 13,527
Issuance of common stock, net........................................................... 4,442 3,209 1,620
Redemption of common stock.............................................................. (45,513) (58,822) (7,177)
Cash dividends paid..................................................................... (24,001) (18,730) (15,875)
Net cash provided (used) by financing activities.......................................... 9,255 4,031 (7,905)
Increase in cash.......................................................................... 54,345 44,366 16,186
Cash at beginning of year................................................................. 103,731 59,365 43,179
Cash at end of year....................................................................... $158,076 $103,731 $ 59,365
Noncash transactions:
Net equity adjustment of merged entity.................................................. $ 818 $ -- $ 1,619
Stock issued for acquisitions and other stock issuances, net............................ 28,649 76,113 165
Unrealized securities gains (losses), net............................................... 1,681 21,274 (23,029)
Dividends declared, but not yet paid.................................................... 6,415 5,411 --
II-57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 18 -- REGULATORY MATTERS
Centura and the Bank are subject to certain requirements imposed by state
and federal banking statutes and regulations. These regulations require the
maintenance of a noninterest-bearing reserve balance at the Federal Reserve
Bank, restrict Bank dividend payments, and establish guidelines for minimum
capital levels. The total of the required Federal Reserve Bank reserve balances
at December 31, 1996 was $14,252,000. Subject to the regulatory restrictions,
the Bank had $51.4 million available from its retained earnings at December 31,
1996 for the payment of dividends from the Bank to Centura without obtaining
prior regulatory approval. The Bank is prohibited by law from paying dividends
from its capital stock account which totaled $78,207,000 at December 31, 1996.
Management believes that as of December 31, 1996, the Bank and Centura meet all
capital adequacy requirements to which they are subject and was not aware of any
conditions or events that would change the capital categories.
Centura and the Bank are required to comply with capital adequacy standards
established by the Board of Governors of the Federal Reserve System. In
addition, the Bank is required to comply with prompt corrective action
provisions established by the Federal Deposit Insurance Corporation Improvement
Act. Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, there are minimum ratios of capital to risk-weighted assets.
The capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly discretionary actions by regulators that, if undertaken
could have a material effect on Centura's consolidated financial statements.
Regulatory capital amounts and ratios are set forth in the table below.
Tier I capital consists of common stock, retained earnings, minority interests
in the equity accounts of consolidated subsidiaries less goodwill and certain
other intangible assets. The remainder of Total Capital is Tier II capital and
includes subordinated debt or other allowed equity equivalents and a limited
amount of loan loss reserves. 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.
The Bank is well-capitalized under the regulatory framework for prompt
corrective action. To be categorized as well-capitalized the Bank must meet
minimum total risk-based, Tier I risk-based, and Tier I leverage ratio as set
forth in the table below.
FOR CAPITAL
ADEQUACY PURPOSES
CAPITAL AMOUNT RATIO RATIO
AS OF DECEMBER 31: 1996 1995 1996 1995
(THOUSANDS)
Total Capital (to Risk-Weighted Assets)
Centura.............................. $ 426,025 $ 433,443 10.02% 11.20% >=8.00%
Bank................................. $ 474,220 $ 467,242 11.18% 12.08% >=8.00%
Tier I Capital (to Risk Weighted
Assets)
Centura.............................. $ 402,687 $ 394,995 9.48% 9.95% >=4.00%
Bank................................. $ 421,146 $ 418,825 9.93% 10.83% >=4.00%
Tier I Capital (to Average Assets)
Centura.............................. $ 402,687 $ 394,995 6.56% 6.94% >=4.00%
Bank................................. $ 421,146 $ 418,825 6.91% 7.55% >=4.00%
TO BE WELL CAPITALIZED
UNDER PROMPT CORRECTIVE
ACTION PROVISIONS
RATIO
AS OF DECEMBER 31:
Total Capital (to Risk-Weighted Assets)
Centura.............................. NA
Bank................................. >=10.00%
Tier I Capital (to Risk Weighted
Assets)
Centura.............................. NA
Bank................................. >=6.00%
Tier I Capital (to Average Assets)
Centura.............................. NA
Bank................................. >=5.00%
II-58
DESCRIPTION OF EXHIBITS
Restated Articles of Incorporation of Centura Banks, Inc.
Bylaws of Centura Banks, Inc., as amended
Excerpts from Centura's Articles of Incorporation and Bylaws relating to rights
of holders of Centura capital stock
Specimen certificate of Centura common stock
Centura Banks, Inc. Omnibus Equity Compensation Plan, as amended and restated
effective April 21, 1993
Centura Banks, Inc. Directors' Deferred Compensation Plan, as amended and
restated effective February 15, 1995
Agreement, dated December 1996, by and between Centura Banks, Inc. and J.
Richard Futrell, Jr.
Executive Employment Agreement, dated November 15, 1995, between Robert R.
Mauldin and Centura Banks, Inc.
Centura Banks, Inc. Omnibus Equity Compensation Plan Nonqualified Stock Option
Award Agreement, dated
November 15, 1995, between Centura Banks, Inc. and Robert R. Mauldin
Stock Grant Agreement Pursuant to Article X of Centura Banks, Inc. Omnibus
Equity Compensation Plan, dated November 20, 1996, between Centura Banks, Inc.
and Robert R. Mauldin
Amendment Agreement, dated November 15, 1995, between Centura Banks, Inc. and
Robert R. Mauldin
Supplemental Executive Retirement Agreement, dated May 13, 1996, between Centura
Banks, Inc. and Frank L. Pattillo
Supplemental Executive Retirement Agreement, dated May 14, 1996, between Centura
Banks, Inc. and Cecil W.
Sewell, Jr.
Supplemental Executive Retirement Agreement, dated May 14, 1996, between Centura
Banks, Inc. and William H. Wilkerson
Supplemental Executive Retirement Agreement, as amended, dated October 23, 1996,
between Centura Banks, Inc. and Frank L. Pattillo
Supplemental Executive Retirement Agreement, as amended, dated October 23, 1996,
between Centura Banks, Inc. and Cecil W. Sewell, Jr.
Supplemental Executive Retirement Agreement, as amended, dated October 23, 1996,
between Centura Banks, Inc. and William H. Wilkerson
Centura Banks, Inc. Omnibus Supplemental Executive Retirement Plan
First Charlotte Financial Corporation 1984 Incentive Stock Option Plan
(including 1988 amendments), as assumed by Centura Banks, Inc.
Agreement of Assumption of Retirement Payment Agreement, dated as of June 2,
1995, by and between Centura Banks, Inc., First Southern Savings Bank, Inc.
SSB, and William H. Redding, Jr.
Agreement of Assumption of Agreement for Deferred Fees, dated as of June 2,
1995, by and between Centura Banks, Inc., First Southern Bancorp, Inc., and
William H. Redding, Jr.
Centura Banks, Inc. Directors' Retirement Pay Plan
The Planters Corporation Deferred Compensation Plan, as assumed by Centura
Banks, Inc.
The Planters Corporation 1986 Incentive Stock Option Plan, as assumed by Centura
Banks, Inc.
The Planters Corporation 1988 Incentive Stock Option Plan, as assumed by Centura
Banks, Inc.
The Planters Corporation Non-qualified Stock Option Plan, as assumed by Centura
Banks, Inc.
Centura Banks, Inc. Split-Dollar Life Insurance Plan
Centura Banks, Inc. Dividend Reinvestment Stock Purchase Plan, as amended and
restated effective October 3, 1994
Peoples Bancorporation 1987 Stock Option Plan, as assumed by Centura Banks, Inc.
Orange Federal Savings and Loan Association Nonstatutory Stock Option Plan for
Directors, as assumed by Centura Banks, Inc.
1995 Outside Directors Stock Option Plan of First Commercial, as assumed by
Centura Banks, Inc.
First Community Bank Stock Option Plan, as assumed by Centura Banks, Inc.
II-59
First Community Bank Omnibus Stock Plan of 1994, as assumed by Centura Banks,
Inc.
Amended and Restated FirstSouth Bank Stock Option Plan for Key Employees, as
assumed by Centura Banks, Inc.
FirstSouth Bank 1988 Stock Option Plan for Directors, as assumed by Centura
Banks, Inc.
First Southern Bancorp, Inc. Employee Stock Option Plan, as assumed by Centura
Banks, Inc.
First Southern Bancorp, Inc. Nonqualified Stock Option Plan for Directors, as
assumed by Centura Banks, Inc.
Subsidiary of Centura Banks, Inc.
Consent of KPMG Peat Marwick LLP
Financial Data Schedule included in the electronically filed document as
required
COPIES OF EXHIBITS ARE AVAILABLE UPON WRITTEN REQUEST TO STEVEN J. GOLDSTEIN,
CHIEF FINANCIAL OFFICER OF CENTURA BANKS, INC.
II-60
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Centura Banks, Inc. has duly caused this report to be signed on
the 19th day of February, 1997, on its behalf by the undersigned, thereunto
duly authorized.
CENTURA BANKS, INC.
/s/ Cecil W. Sewell, Jr. /s/ Steven J. Goldstein
Cecil W. Sewell, Jr. Steven J. Goldstein
Chairman of the Board and Chief Executive Officer Principal Financial and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this has
been signed below by the following persons on behalf of Centura Bank, Inc. and
in the capacities indicated on the 19th day of February, 1997.
/s/ Cecil W. Sewell, Jr. Chairman of the Board and Chief Executive Officer
Cecil W. Sewell, Jr.
/s/ Richard H. Barnhardt Director
Richard H. Barnhardt
/s/ C. Wood Beasley Director
C. Wood Beasley
/s/ Thomas A. Betts, Jr. Director
Thomas A. Betts, Jr.
/s/ H. Tate Bowers Director
H. Tate Bowers
/s/ Ernest L. Evans Director
Ernest L. Evans
/s/ J. Richard Futrell, Jr. Director
J. Richard Futrell, Jr.
/s/ John H. High Director
John H. High
/s/ Michael K. Hooker Director
Michael K. Hooker
/s/ William D. Hoover Director
William D. Hoover
/s/ Robert L. Hubbard Director
Robert L. Hubbard
/s/ William H. Kincheloe Director
William H. Kincheloe
/s/ Charles T. Lane Director
Charles T. Lane
/s/ Robert R. Mauldin Director
Robert R. Mauldin
/s/ Jack A. Moody Director
Jack A. Moody
/s/ Joseph H. Nelson Director
Joseph H. Nelson
/s/ Dean E. Painter, Jr. Director
Dean E. Painter, Jr.
/s/ D. Earl Pardue Director
D. Earl Pardue
/s/ O. Tracy Parks, III Director
O. Tracy Parks, III
/s/ Frank L. Patillo Director, Group Executive Officer
Frank L. Patillo
/s/ William H. Redding, Jr. Director
William H. Redding, Jr.
/s/ Charles M. Reeves, III Director
Charles M. Reeves, III
/s/ George T. Stronach, III Director
George T. Stronach, III
/s/ A. P. Thorpe, III Director
A. P. Thorpe, III
/s/ Joseph L. Wallace, Jr. Director
Joseph L. Wallace, Jr.
/s/ William H. Wilkerson Director, Group Executive Officer
William H. Wilkerson
/s/ Charles P. Wilkins Director
Charles P. Wilkins
CENTURA BANKS, INC.
EXHIBIT LIST
Exhibit Description of Exhibit Sequential Page No.
No.
- ---------- ---------------------------------------------------------------------------- --------------------
3.1 Restated Articles of Incorporation of Centura Banks, Inc. *(2)
3.2 Bylaws of Centura Banks, Inc., as amended *(13)
4.1 Excerpts from Centura's Articles of Incorporation and Bylaws relating to *(1)
the rights of holders of Centura capital stock
4.2 Specimen certificate of Centura common stock *(2)
10.1 Centura Banks, Inc. Omnibus Equity Compensation Plan, as amended and *(13)
restated effective April 21, 1993
10.2 Centura Banks, Inc. Directors' Deferred Compensation Plan, as amended and *(15)
restated effective February 15, 1995
10.3 Agreement, dated December 1996, by and between Centura Banks, Inc. and J.
Richard Futrell, Jr.
10.4 Centura Banks, Inc. Omnibus Supplemental Executive Retirement Plan *(13)
10.5 First Charlotte Financial Corporation 1984 Incentive Stock Option Plan *4.2 (9)
(including 1988 amendments), as assumed by Centura Banks, Inc.
10.6 Stock Grant Agreement Pursuant to Article X of Centura Banks, Inc. Omnibus
Equity Compensation Plan, dated November 20, 1996, between Centura Banks,
Inc. and Robert R. Mauldin
10.7 Centura Banks, Inc. Directors' Retirement Pay Plan (previously referred to *(4)
as Directors Retirement Pay Plan of the Board of Directors of Planters),
as assumed by Centura Banks, Inc.
10.8 The Planters Corporation Deferred Compensation Plan, as assumed by Centura *(5)
Banks, Inc.
10.9 Supplemental Executive Retirement Agreement dated May 14, 1996, between
Centura Banks, Inc. and Cecil W. Sewell, Jr.
10.10 Supplemental Executive Retirement Agreement as amended dated October 23,
1996, between Centura Banks, Inc. and Cecil W. Sewell, Jr.
10.11 The Planters Corporation 1986 Incentive Stock Option Plan, as assumed by *(7)
Centura Banks, Inc.
10.12 The Planters Corporation 1988 Incentive Stock Option Plan, as assumed by *(6)
Centura Banks, Inc.
10.13 The Planters Corporation Non-qualified Stock Option Plan, as assumed by *(4)
Centura Banks, Inc.
10.14 Centura Banks, Inc. Split-Dollar Life Insurance Plan (previously referred *(5)
to as Split-Dollar Life Insurance Plan of The Planters Corporation), as
assumed by Centura Banks, Inc.
10.15 Centura Banks, Inc. Dividend Reinvestment Stock Purchase Plan, as amended *4.2 (12)
and restated effective October 3, 1994
10.16 Supplemental Executive Retirement Agreement dated May 14, 1996, between
Centura Banks, Inc. and William H. Wilkerson
10.17 Peoples Bancorporation 1987 Stock Option Plan, as assumed by Centura *(8)
Banks, Inc.
10.18 Orange Federal Savings and Loan Association Nonstatutory Stock Option Plan *4.3 (3)
for Directors, as assumed by Centura Banks, Inc.
10.19 Supplemental Executive Retirement Agreement, as amended dated October 23,
1996, between Centura Banks, Inc. and William H. Wilkerson
10.20 Executive Employment Agreement, dated November 15, 1995, between Robert R. *10.20 (10)
Mauldin and Centura Banks, Inc.
10.21 Centura Banks, Inc. Omnibus Equity Compensation Plan Nonqualified Stock *10.21 (10)
Option Award Agreement, dated November 15, 1995, between Centura Banks,
Inc. and Robert R. Mauldin
10.22 Supplemental Executive Retirement Agreement dated May 13, 1996 between
Centura Banks, Inc. and Frank L. Pattillo
10.23 Amendment Agreement, dated November 15, 1995, between Centura Banks, Inc. *10.23 (10)
and Robert R. Mauldin
10.24 Supplemental Executive Retirement Agreement as amended, dated October 23,
1996 between Centura Banks, Inc. and Frank L. Pattillo
10.25 Agreement of Assumption of Retirement Payment Agreement, dated as of June *10.25 (10)
2, 1995, by and between Centura Banks, Inc., First Southern Savings Bank,
Inc. SSB, and William H. Redding, Jr.
10.26 Agreement of Assumption of Agreement for Deferred Fees, dated as of June *10.26 (10)
2, 1995, by and between Centura Banks, Inc., First Southern Bancorp, Inc.,
and William H. Redding, Jr.
10.27 1995 Outside Directors Stock Option Plan of First Commercial Holding *(17)
Corporation, as assumed by Centura Banks, Inc.
10.28 First Community Bank Stock Option Plan, as assumed by Centura Banks, Inc. *4.2 (16)
10.29 First Community Bank Omnibus Stock Plan of 1994, as assumed by Centura *4.3 (16)
Banks, Inc.
10.30 Amended and Restated FirstSouth Bank Stock Option Plan for Key Employees, *4.2 (18)
as assumed by Centura Banks, Inc.
10.31 FirstSouth Bank 1988 Stock Option Plan for Directors, as assumed by *4.3 (18)
Centura Banks, Inc.
10.32 First Southern Bancorp, Inc. Employee Stock Option Plan, as assumed by *4.2 (11)
Centura Banks, Inc.
10.33 First Southern Bancorp, Inc. Nonqualified Stock Option Plan for Directors, *4.2 (11)
as assumed by Centura Banks, Inc.
21 Subsidiary of Centura Banks, Inc.
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
* Incorporation by reference from the following document as noted:
(1) Included as the identified exhibit in Centura Banks, Inc. Form S-4 dated
March 8, 1990, as amended by Amendment No. 1 dated May 14, 1990.
(2) Included as the identified exhibit in Centura Banks, Inc. Annual Report on
Form 10-K for the year ended December 31, 1990.
(3) Included as the identified exhibit in Centura Banks, Inc. Form S-8
Registration Statement filed as Post-Effective Amendment No. 1 to Form S-4
Registration Statement (Registration No. 33-52160) filed on December 31,
1992.
(4) Included as the identified exhibit in Planters Corporation Form 10-K (File
No. 0-11061) dated March 20, 1984.
(5) Included as the identified exhibit in Planters Corporation Form 10-K (File
No. 0-11061) dated March 21, 1989.
(6) Included as the identified exhibit in Planters Corporation Form 10-K (File
No. 0-11061) dated March 15, 1988.
(7) Included as the identified exhibit in Planters Corporation Form 10-K (File
No. 0-11061) dated March 17, 1987.
(8) Included as the identified exhibit in Peoples Bancorporation Form 10-K (File
No. 0-10866) dated March 15, 1989.
(9) Included as the identified exhibit in Centura Banks, Inc. Form S-4
Registration Statement (No. 33-71198) filed on February 1, 1994.
(10) Included as the identified exhibit in Centura Banks, Inc. Annual Report on
Form 10-K for the year ended December 31, 1995.
(11) Included as the identified exhibit to Centura Banks, Inc. Form S-8
Registration Statement filed as Post-Effective Amendment No. 1 to Form S-4
Registration Statement (Registration No. 33-90568) filed on June 12, 1995.
(12) Included as the identified exhibit in Centura Banks, Inc. Post-Effective
Amendment No. 1 to Form S-3 Registration Statement filed as Post-Effective
Amendment No. 3 to Form S-4 Registration Statement (Registration No.
33-33773) filed on September 2, 1994.
(13) Included as the identified exhibit in Centura Banks, Inc. Annual Report on
Form 10-K for the year ended December 31, 1993.
(14) Included as the identified exhibit in Centura Banks, Inc. Current Report on
Form 8-K dated November 28, 1995.
(15) Included as the identified exhibit in Centura Banks, Inc. Annual Report on
Form 10-K for the year ended December 31, 1994.
(16) Included as the identified exhibit to Centura Banks, Inc. Form S-8
Registration Statement filed as Post-Effective Amendment No. 1 to Form S-4
Registration Statement (Registration No. 333-04949) filed on August 26,
1996.
(17) Included as the identified exhibit to Centura Banks, Inc. Form S-8
Registration Statement filed as Post-Effective Amendment No. 1 to Form S-4
Registration Statement (Registration No. 33-80989) filed on March 21, 1996.
(18) Included as the identified exhibit to Centura Banks, Inc. Form S-8
Registration Statement filed as Post-Effective Amendment No. 1 to Form S-4
Registration Statement (Registration No. 333-08503) filed on October 20,
1996.