10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 For the quarterly period ended June 30, 2002 or [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 For the transition period from __________ to ________ Commission File Number: 1-10646 RBC CENTURA BANKS, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) North Carolina 56-1688522 -------------------------------------------------------------------------------- (State of Incorporation) (IRS Employer Identification No.) 1417 Centura Highway, Rocky Mount, North Carolina 27804 -------------------------------------------------------------------------------- (Address of principal executive office) (Zip Code) (252) 454-4400 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [_] No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. COMMON STOCK, NO PAR VALUE 2,219,614,882 /(1)/ -------------------------------------------------------------------------------- (Class of Stock) (Shares outstanding as of July 31, 2002) (1) One hundred percent owned directly or indirectly by Royal Bank of Canada. The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Report with the reduced disclosure format. RBC CENTURA BANKS, INC. FORM 10-Q INDEX

Item 2. Management's Discussion and Analysis of Financial Condition 2 and Results of Operations 29-38 Item 3. Quantitative and Qualitative Disclosure About Market Risk 39 Part II. OTHER INFORMATION Item 1. Legal Proceedings 39 Item 2. Change in Securities and Use of Proceeds 39 Item 3. Defaults Upon Senior Securities 39 Item 4. Submission of Matters to a Vote of Security Holders 39 Item 5. Other Information 39 Item 6. Exhibits and Reports on Form 8-K 39 SIGNATURES 40

3 RBC CENTURA BANKS, INC. PART I. FINANCIAL INFORMATION Item 1. (a) RBC Centura Banks, Inc. Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statement of Shareholder's Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements 4 CONSOLIDATED BALANCE SHEETS RBC CENTURA BANKS, INC. AND SUBSIDIARIES (Unaudited)

See accompanying notes to consolidated financial statements. 5 CONSOLIDATED STATEMENTS OF OPERATIONS RBC CENTURA BANKS, INC. AND SUBSIDIARIES (Unaudited)

See accompanying notes to consolidated financial statements. 6 CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY RBC CENTURA BANKS, INC. AND SUBSIDIARIES (Unaudited) Six months ended June 30, 2002

See accompanying notes to consolidated financial statements. 7 CONSOLIDATED STATEMENTS OF CASH FLOWS RBC CENTURA BANKS, INC. AND SUBSIDIARIES (Unaudited)

See accompanying notes to consolidated financial statements. 8 RBC CENTURA BANKS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002 (Unaudited) Note 1: Summary of Significant Accounting Policies Basis of Presentation As previously disclosed, at the close of business on June 5, 2001, Rock Merger Subsidiary, Inc., a wholly owned subsidiary of Royal Bank of Canada ("Royal Bank"), a Canadian chartered bank, merged with and into Centura Banks, Inc. ("Predecessor") and the surviving corporation was Predecessor, which was renamed RBC Centura Banks, Inc. ("RBC Centura"). As a result of the transaction, RBC Centura became a wholly owned subsidiary of Royal Bank. Each share of Rock Merger Subsidiary, Inc. common stock issued and outstanding immediately prior to the effective time of the merger was converted into one share of common stock of RBC Centura. There are 2,219,614,882 shares of common stock currently outstanding, all of which are owned directly or indirectly by Royal Bank. The common stock is registered under Section 12(g) of the Securities Exchange Act of 1934, as amended. On June 1, 2002, RBC Centura Bank, a wholly owned subsidiary of RBC Centura completed a merger with Security First Network Bank ("SFNB"), herein referred to as the SFNB Merger. SFNB was a financial institution wholly owned by Royal Bank. RBC Centura issued approximately 53.1 million shares to an indirect wholly owned subsidiary of Royal Bank to effect the combination and acquired $66.0 million in assets ($51.2 million in loans) along with deposits of $17.4 million. SFNB offered traditional banking services over the Internet and was acquired by Royal Bank on September 30, 1998 for a purchase price of approximately $13 million, which resulted in goodwill of $2.3 million being recorded and pushed down to SFNB. Due to the fact that RBC Centura and SFNB were under common control at the time of the SFNB Merger, the transfer of the assets and liabilities of SFNB has been accounted for at historical cost in a manner similar to a pooling of interests. For financial accounting purposes, the SFNB Merger resulted in a change in reporting entity and the restatement of the financial statements for all periods prior to June 1, 2002. This restatement reflects SFNB as being the historical accounting entity and only includes the assets and results of operations of RBC Centura from the date of its acquisition by Royal Bank on June 5, 2001. The merger of SFNB with RBC Centura Bank was the second phase of the consolidation of Royal Bank's U.S. retail banking operations with the first phase involving the sale of certain banking assets and the assumption of certain deposits by RBC Centura Bank from SFNB on August 17, 2001. As previously disclosed, that transaction involved the acquisition of approximately $184 million in deposits and $95 million in loans. Reference herein to RBC Centura relates to the financial condition and the results of operations for the restated periods as discussed above. Predecessor historical results are presented separately for periods prior to and including June 5, 2001 in which common control did not exist in Item 1., Section (b). As previously discussed, Royal Bank's basis in both RBC Centura and SFNB was "pushed down" to each respective entity and is therefore reflected in the combined balance sheet and results of operations. The accompanying unaudited consolidated financial statements include the accounts of RBC Centura and its wholly owned subsidiaries, RBC Centura Bank (named Centura Bank prior to October 30, 2001, the "Bank"), Centura Capital Trust I, Triangle Capital Trust, and NCS Mortgage Lending Company ("NCS"). Until the divestiture of the interest in the third quarter of 2001, RBC Centura also had a 49 percent ownership interest in First Greensboro Home Equity, Inc. ("FGHE"), a home equity mortgage company, that was accounted for under the equity method. The interim financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") for interim financial statements and with instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Because the accompanying consolidated financial statements do not include all of the information and 9 footnotes required by GAAP, they should be read in conjunction with the audited financial statements and accompanying footnotes in RBC Centura's Annual Report on Form 10-K for the year ended December 31, 2001. Operating results for the six months ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year. All significant intercompany transactions are eliminated in consolidation. In the opinion of RBC Centura, all adjustments considered necessary for a fair statement of the results for the interim periods presented have been included (such adjustments are normal and recurring in nature). Accounting policies followed in the presentation of interim financial results are presented on pages 36 to 42 of RBC Centura's Annual Report on Form 10-K for the year ended December 31, 2001. See discussion below for changes to existing accounting policy subsequent to December 31, 2001 for financial information by segment and goodwill and other intangibles. Certain items reported in prior periods have been reclassified to conform to current period presentation. Such reclassifications had no impact on net income or shareholder's equity. Recently Issued Accounting Pronouncements In June 2001, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method of accounting. The new standard also requires intangible assets acquired in a business combination to be recognized as an asset apart from goodwill if they meet certain criteria. SFAS No. 142 applies to all goodwill and intangible assets acquired in a business combination. Under the new standard, all goodwill, including goodwill acquired before initial application of the standard, is not amortized but must be tested for impairment at least annually at the reporting unit level, as defined in the standard. Intangible assets other than goodwill are to be amortized over their useful lives and reviewed for impairment. As required by the standard, goodwill currently carried on the balance sheet was subject to an initial assessment for impairment. RBC Centura completed its initial assessment review and determined that there was no impairment of goodwill as of January 1, 2002. RBC Centura has evaluated the lives of intangible assets as required by SFAS No. 142 and no change was made regarding lives upon adoption. Based on goodwill of $1.2 billion, RBC Centura would have, under previous accounting guidance, recorded approximately $62 million annually of goodwill amortization. With the adoption of this statement this goodwill amortization will no longer be charged to earnings but rather the intangible goodwill asset will be evaluated periodically for impairment as noted above. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144 was effective for financial statements issued for fiscal years beginning after December 15, 2001. The standard addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 became effective for RBC Centura on January 1, 2002. The adoption of this pronouncement had no significant impact on RBC Centura's results of operations or financial condition. Financial Information by Segment SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") requires public companies to report certain financial information about operating segments for which such information is available and utilized by the chief operating decision maker in determining the allocation of resources and also in assessing performance. Historically, RBC Centura presented financial information for Retail, Treasury, and Other in accordance with SFAS 131. As a result of the acquisition of RBC Centura by Royal Bank and as part of the continued integration, management has re-evaluated its reportable operating segments and determined that it no longer has any distinct operating segments based on the requirements of SFAS 131. The chief operating decision maker includes certain members of Royal Bank's management and committees and no significant, discrete financial information, other than the results of RBC Centura consolidated, is being reviewed by the chief operating decision maker. 10 Goodwill and Other Intangibles Net assets of companies acquired in purchase transactions are recorded at fair value at the date of acquisition and as such, the historical cost basis of individual assets and liabilities are adjusted to reflect their fair value. Identified intangibles are amortized on an accelerated or straight-line basis over the period benefited. Goodwill is not amortized, but is reviewed for potential impairment on an annual basis at the reporting unit level. The impairment test is performed in two phases. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired; however, if the carrying amount of the reporting unit exceeds its fair value an additional procedure must be performed. That additional procedure compares the implied fair value of the reporting unit's goodwill (as defined in SFAS 142) with the carrying amount of that goodwill. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. Other intangible assets are evaluated for impairment if events and circumstances indicate a possible impairment. Such evaluation of other intangibles is based on various analyses, including undiscounted cash flow projections. Note 2: Mergers and Acquisitions Predecessor incurred $91.5 million in merger-related expenses upon being acquired by Royal Bank during the second quarter of 2001. These expenses are no longer reflected in the historical results of operations due to the change in reporting entity for financial statement purposes discussed in Note 1. However, these expenses are discussed in further detail in Predecessor's financial statements included in Item 1. Section (b) included herein and in the 2001 RBC Centura Form 10-K. As of June 30, 2002, approximately $11.0 million in reserves remained, primarily relating to change in control and other contractual-related costs. For the period from January 1, 2001 through June 30, 2001, SFNB recorded a restructuring charge of approximately $38.6 million. This restructuring related to Royal Bank's decision to consolidate its U.S. retail banking operations by completing the sale of certain SFNB assets and liabilities to the Bank on August 17, 2001, consolidating the operations of SFNB into the Bank, and selling SFNB's credit card portfolio. In conjunction with the restructuring substantially all of the employees of SFNB were terminated. As a result of the expected merger with the Bank, SFNB conducted a balance sheet review that identified assets whose carrying amounts were not recoverable. As a result of the review, $29.1 million of the total $38.6 million restructuring charge was recorded in asset impairment charges. These charges include the write-off of goodwill of $1.9 million (due to SFNB's restructuring of its Internet banking platform) and the write-off of unamortized software costs and equipment of $27.2 million (for capitalized costs associated with projects that were subsequently abandoned). The majority of the remaining components of the $38.6 million restructuring charge were severance and employee related costs of $7.2 million. Note 3: Goodwill and Other Intangibles In accordance with SFAS 142, no goodwill amortization was recorded for the six months ended June 30, 2002. RBC Centura recognized $5.2 million in goodwill amortization expense for the six months ended June 30, 2001. Excluding goodwill amortization, RBC Centura would have recognized a net loss of $27.2 million for the six months ending June 30, 2001. At June 30, 2002, the gross carrying value and accumulated amortization related to core deposits and other intangibles was $264.0 million and $29.1 million, respectively. At December 31, 2001, the gross carrying value and accumulated amortization related to core deposits and other intangibles was $264.1 million and $15.7 million, respectively. Amortization expense on core deposits and other intangibles was $13.0 million for the six months ended June 30, 2002 and $2.2 million for the six months ended June 30, 2001. RBC Centura estimates that aggregate amortization expense (exclusive of that for mortgage servicing rights and intangibles acquired as part of the transaction discussed in Note 6 of the Notes to Consolidated Financial Statements) will be $26.9 million for 2002, $26.9 million for 2003, $26.9 million for 2004, $26.9 million for 2005 and $26.3 million for 2006. 11 Note 4: Commitments and Contingencies Various legal proceedings against RBC Centura and its subsidiaries have arisen from time to time in the normal course of business. RBC Centura believes liabilities arising from these proceedings, if any, will have no material adverse effect on the financial position or results of operations of RBC Centura or its subsidiaries, taken as a whole. Note 5: Related Party Transactions During 2002, RBC Centura began purchasing Adjustable Rate Mortgage loans ("ARMs") from RBC Mortgage, an indirect, wholly owned subsidiary of Royal Bank. Loans purchased during the first six months of 2002 amounted to $120.9 million and were purchased at market prices prevailing at the time of sale. Note 6: Subsequent Events (Unaudited) On July 22, 2002 RBC Centura acquired 100% of the common shares of Eagle Bancshares, Inc. ("Eagle"). The cash consideration paid with respect to the acquisition amounted to approximately $149 million. As of acquisition date, Eagle had $1.2 billion in assets ($684.7 million of which were loans), $821.7 million in deposits, and $70.8 million in stockholder's equity. The excess of the purchase price over the estimated fair value of the net tangible assets acquired was first allocated to core deposit intangibles of approximately $14 million, with the residual of approximately $84 million allocated to goodwill. The goodwill is not tax-deductible. The core deposit intangible will be amortized on a straight-line basis over the estimated useful life of 10 years. 12 RBC CENTURA BANKS, INC. AND PREDECESSOR PART I. FINANCIAL INFORMATION Item 1. (b) RBC Centura Banks, Inc. and Predecessor Historical Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets Consolidated Statement of Operations Consolidated Statement of Shareholder's Equity Consolidated Statement of Cash Flows Notes to Consolidated Financial Statements 13 CONSOLIDATED BALANCE SHEETS RBC CENTURA BANKS, INC. AND SUBSIDIARIES (Unaudited)

See accompanying notes to consolidated financial statements. 14 CONSOLIDATED STATEMENT OF OPERATIONS RBC CENTURA BANKS, INC. AND SUBSIDIARIES (Unaudited)

See accompanying notes to consolidated financial statements. 15 CONSOLIDATED STATEMENT OF OPERATIONS RBC CENTURA BANKS, INC. AND SUBSIDIARIES (Unaudited)

See accompanying notes to consolidated financial statements. 16 CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY RBC CENTURA BANKS, INC. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements. 17

See accompanying notes to consolidated financial statements. 18 RBC CENTURA BANKS, INC. AND SUBSIDIARIES AND PREDECESSOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001 (Unaudited) Note 1: Basis of Presentation As noted in the Notes to Consolidated Financial Statements included herein in Item 1. Section (a), the common control merger of RBC Centura Banks, Inc. and Security First Network Bank ("SFNB") was consummated on June 1, 2002. As a result of this merger, the historical financial statements of RBC Centura have been restated to reflect the change in reporting entity. The historical financial statements described within this section are of Predecessor (as defined below) and RBC Centura but the statements only relate to periods prior to June 30, 2001 and have been included for information purposes only. These financial statements have been combined with the restated financial information in Item 1. Section (a) for purposes of Management's Discussion and Analysis. At the close of business on June 5, 2001, Royal Bank of Canada ("Royal Bank"), a Canadian chartered bank, acquired all of the outstanding common stock of Centura Banks, Inc. ("Predecessor"). As a result of the transaction, Predecessor became a wholly owned subsidiary of Royal Bank. Rock Merger Subsidiary, Inc., a wholly owned subsidiary of Royal Bank merged with and into Predecessor and the surviving corporation was Predecessor, which was re-named RBC Centura Banks, Inc. ("RBC Centura"). Reference herein to RBC Centura relates to the period subsequent to and including June 6, 2001, while reference to the Predecessor relates to periods prior to and including June 5, 2001. Royal Bank's basis in RBC Centura was "pushed down" to RBC Centura and is therefore reflected in RBC Centura's balance sheet and results of operations. See Note 2 for information regarding this acquisition. The accompanying unaudited consolidated financial statements include the accounts of RBC Centura and its wholly owned subsidiaries, Centura Bank (the "Bank"), Centura Capital Trust I, Triangle Capital Trust, and NCS Mortgage Lending Company ("NCS"). Centura Bank also has various wholly owned subsidiaries. The interim financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") for interim financial statements and with instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Because the accompanying consolidated financial statements do not include all of the information and footnotes required by GAAP, they should be read in conjunction with the audited financial statements and accompanying footnotes in Predecessor's Annual Report on Form 10-K for the year ended December 31, 2000. Operating results for the periods from January 1, 2001 through June 5, 2001 and June 6, 2001 through June 30, 2001 are not necessarily indicative of the results that may be expected for the year. All significant intercompany transactions are eliminated in consolidation. In the opinion of RBC Centura, all adjustments considered necessary for a fair statement of the results for the interim periods presented have been included (such adjustments are normal and recurring in nature). Accounting policies followed in the presentation of interim financial results are presented on pages 40 to 45 of Predecessor's Annual Report on Form 10-K for the year ended December 31, 2000. Goodwill recorded as a result of the acquisition by Royal Bank is being amortized over 20 years in compliance with Royal Bank's accounting policy. See the Recent Accounting Developments section in Management's Discussion and Analysis for accounting changes related to goodwill. Certain items reported in prior periods have been reclassified to conform to current period presentation. Such reclassifications had no impact on net income or shareholder's equity. 19 Note 2: Mergers and Acquisitions At the close of business on June 5, 2001, Royal Bank acquired all of the outstanding common stock of Predecessor. As a result of the transaction, Predecessor became a wholly owned subsidiary of Royal Bank. Rock Merger Subsidiary, Inc., a wholly owned subsidiary of Royal Bank, merged with and into Predecessor and the surviving corporation was Predecessor, which was re-named RBC Centura. Each share of Predecessor's outstanding common stock was converted into the right to receive 1.684 common shares of Royal Bank. The value of the transaction was approximately $2.2 billion. The business combination was accounted for as a purchase with Royal Bank's basis being "pushed down" to RBC Centura. The purchase price was allocated to the estimated fair values of RBC Centura's tangible and intangible assets and liabilities with the remainder allocated to goodwill. As a result of the application of purchase accounting, RBC Centura recorded premiums of $11.6 million and $70.8 million on the investment and loan portfolios, respectively, and discounts of $32.3 million and $5.5 million on deposits and long-term debt, respectively, which will be amortized over the average life of the respective instruments. In connection with the acquisition RBC Centura recorded $1.2 billion and $259.1 million in goodwill and core deposit intangibles, respectively, and issued 2,166,517,536 shares to Royal Bank. The period for goodwill amortization is 20 years and the core deposit intangible will be amortized over 10 years. In connection with the transaction, RBC Centura incurred merger-related and other significant charges of $91.8 million, before tax. Merger-related charges include termination of employment contracts, change of control payments, costs of the transaction including legal, accounting, and investment banking fees, cash settlement of the Predecessor's outstanding stock options, and certain other expenses. Also included is a $1.9 million pension plan curtailment loss resulting from the Predecessor discontinuing accruing benefits under its pension plan for all participants except for certain groups of employees. The following table summarizes activity for merger-related accruals for the period ended June 30, 2001 related to the June 5, 2001 acquisition by Royal Bank:

On February 18, 2000, Predecessor merged with Triangle Bancorp, Inc. ("Triangle"), a Raleigh, North Carolina based bank holding company in a transaction accounted for as a pooling-of-interests. Predecessor issued approximately 11.4 million shares to effect the combination. Each Triangle shareholder received 0.45 shares of Predecessor common stock in exchange for each Triangle share. In connection with this combination, Predecessor incurred merger-related charges of $26.8 million. As of June 30, 2001 $1.2 million of merger-related liabilities remained on the balance sheet. Note 3: Commitments and Contingencies All claims against Centura Bank in an action filed in 1999 by Ingeborg Staton, Mercedes Staton and trusts created by Ingeborg Staton and Mercedes Staton were dismissed in March 2001. All claims against Centura Bank in two related actions filed in 1996 by Philip A.R. Staton, Ingeborg Staton, Mercedes Staton, and trusts created by Ingeborg Staton and Mercedes Staton were settled in April 2001 for an aggregate amount that Predecessor and Centura Bank consider immaterial to their financial condition. In the aggregate, Predecessor recorded $19.1 million in litigation provisions for the period ended June 5, 2001 for the settled cases and certain other legal proceedings. 20 In addition, various other legal proceedings against RBC Centura and its subsidiaries have arisen from time to time in the normal course of business. RBC Centura believes liabilities arising from these proceedings, if any, will have no material adverse effect on the financial position or results of operations of RBC Centura or its subsidiaries, taken as a whole. Note 4: Segment Information Refer to Predecessor's Annual Report on Form 10-K for the year ended December 31, 2000 for information with respect to RBC Centura's policies for defining and accounting for its segments. Royal Bank acquired RBC Centura on June 5, 2001, and in accordance with "push-down" accounting established a new basis of accounting in RBC Centura's financial statements. It is generally not appropriate to combine pre and post "push down" periods; however, to make this presentation more meaningful the following information is presented for the full three months ended June 30, 2001. RBC Centura's measure of profitability is a non-GAAP measure and excludes all merger-related charges. Financial information by segment for the three months ended June 30, 2001 and 2000 is as follows:

21 (A) Reconciling item reflects adjustments that are necessary to reconcile to consolidated totals, including merger-related charges. (B) Reconciling item relates to the elimination of funds transfer pricing credits and charges. (C) Reconciling item adjusts balances from cash basis to accrual method of accounting. (D) Reconciling item relates to assets not allocated to segments including premises and equipment, cash and due from banks, and certain other assets. Note 5: Derivative Instruments and Hedging Activities RBC Centura adopted Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by Statement of Financial Accounting Standards No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, an amendment of FASB Statement No. 133, and Statement of Financial Accounting Standards No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133 (referred to hereafter as "SFAS 133"), on January 1, 2001. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, depending on the type of hedge transaction. For fair value hedge transactions hedging changes in the fair value of an asset, liability, or firm commitment, changes in the fair value of the derivative instrument will generally be offset in the income statement by changes in the hedged item's fair value. For cash flow hedge transactions hedging the variability of cash flows related to a variable-rate asset, liability, or a forecasted transaction, changes in the fair value of the derivative instrument will be reported in other comprehensive income. The gains and losses on the derivative instrument that are reported in other comprehensive income will be reclassified to earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. The ineffective portion of all hedges will be recognized in current period earnings. The amount of hedge ineffectiveness recorded for the six months ended June 30, 2001 was not considered significant. Derivatives that do not meet the hedge accounting criteria and, therefore, do not qualify for hedge accounting, will be accounted for at fair value with changes in fair value recorded in other noninterest income in the income statement. Refer to the Predecessor's March 31, 2001 Form 10-Q for additional disclosures regarding derivative instruments and hedging activities. Note 6: Investment Securities As part of the application of purchase accounting, a premium of $11.6 million was recorded as a fair value adjustment and will be amortized based on the effective yield method over the remaining life of the securities. In connection with the acquisition, RBC Centura transferred approximately $44 million of investment securities from the held to maturity portfolio to available for sale in order to align RBC Centura's interest rate risk position and credit risk policy with those of Royal Bank. A summary of investment securities by type at June 30, 2001 follows:

22 Other securities .................................... 113,126 1,423 1 114,548 ----------- -------- ------- ----------- Total available for sale ............................ $ 3,219,248 $ 19,151 $ 1,819 $ 3,236,580 =========== ======== ======= ===========

The following is a summary of investment securities by contractual maturity at June 30, 2001:

At June 30, 2001 investment securities with a book value of approximately $1.4 billion were pledged to secure public funds on deposit and for other purposes required by law or contractual arrangements. During 2001, the sale of securities generated gross realized gains and losses of $70.1 million and $42.6 million, respectively, by the Predecessor and gross realized gains and losses of $2.6 million and $635,000, respectively, by RBC Centura. Note 7: Loans As part of the application of purchase accounting, a premium of $70.8 million was recorded as a fair value adjustment to the loan portfolio and will be amortized on a straight-line basis over the average life of the loans. A summary of loans at June 30, 2001 follows: (thousands) Commercial, financial, and agricultural .......................... $ 2,233,051 Consumer ......................................................... 590,762 Real estate-- mortgage ........................................... 3,593,977 Real estate-- construction and land development .................. 1,064,882 Leases ........................................................... 223,747 Other ............................................................ 99,423 ----------- Total loans, net of unearned income .............................. $ 7,805,842 =========== Included in the above: Nonaccrual loans ................................................. $ 57,997 Accruing loans past due ninety days or more ...................... 8,508 23 Note 8: Allowance for Loan Losses A summary of changes in the allowance for loan losses ("AFLL") follows:

The following tables summarize individually impaired loan information as of June 30, 2001: (thousands) Individually impaired loans with related allowance ............. $ 19,771 Individually impaired loans with no related allowance .......... 15,930 ------------- Total individually impaired loans .............................. $ 35,701 ============= Allowance on individually impaired loans ....................... $ 6,891 ============= Note 9: Long-Term Debt As part of the application of purchase accounting, a discount of $5.5 million was recorded as a fair value adjustment to long-term debt and will be amortized on a straight-line basis over the average life of the debt. Long-term debt consisted of the following at June 30, 2001: (thousands) Federal Home Loan Bank advances ................................ $ 1,322,484 Capital Securities ............................................. 122,738 Bank notes ..................................................... 119,539 Obligations under capitalized leases ........................... 598 Other .......................................................... --- ----------- 24 Total long-term debt .............................................. $ 1,565,359 =========== Refer to the Predecessor's Annual Report on form 10-K for details regarding RBC Centura's borrowing obligations, interest rates, and maturities. 25 Note 10: Income Taxes The components of income tax expense were:

Income tax expense is reconciled to the amount computed by applying the federal statutory rate to income before income taxes as follows:

26 The tax effects of temporary differences which give rise to significant portions of the deferred tax assets and liabilities at June 30, 2001 and December 31, 2000 are summarized as follows:

A valuation allowance for deferred tax assets was not required as of June 30, 2001 or December 31, 2001. Management has determined that it is more likely than not that the deferred tax assets could be realized by carrybacks to federal taxable income in the federal carryback period or offset against deferred tax liabilities. As part of the application of purchase accounting, the deferred tax liability was increased by the amount of $87.9 million due to fair value adjustments of the balance sheet, decreased by $ 6.4 million due to fair value adjustments required under SFAS 115 for securities available for sale and decreased due to other adjustments totaling $1.3 million. Note 11: Strategic Repositioning of Mortgage Business During the second quarter of 2001, Predecessor made an assessment of its mortgage business with an emphasis on current and prospective interest rate and macroeconomic conditions. Predecessor decided to reevaluate its participation in making consumer mortgages available to individuals with less than prime-rated credit profiles. Specifically, Predecessor had a 49 percent equity interest in First Greensboro Home Equity, Inc. ("FGHE"). Predecessor also had a wholly owned subsidiary, NCS. Both FGHE and NCS are primarily in the business of making mortgages available to consumers with less than prime-rated credit profiles. As a result of this assessment, Predecessor decided to take actions to no longer provide credit support to these mortgage companies. Predecessor also purchased an outstanding FGHE debenture from an unaffiliated third party for which Predecessor was providing backup credit support. This purchase did not change the Predecessor's credit exposure. In the second quarter of 2001, based on FGHE's inability to access the securitization market and FGHE's limited success in selling loans in the whole-loan market, management informed FGHE of management's intention to not further extend credit support or financing activities. Management estimated the cash flows to be received from FGHE in future periods to be inadequate for the full recovery of its investment in the equity of FGHE and the debentures discussed above. A charge to earnings totaling $42.2 million, pre-tax, for other than temporary impairment was recorded as loss on 27 equity investment in the income statement. In addition, $2.3 million of unsecured loans to FGHE were charged off, and a $2.1 million provision for loan losses was recorded related to these loans. Certain fixed assets of NCS were sold during the second quarter of 2001. The purchaser also assumed a majority of the employees. Predecessor retained the loan portfolio of approximately $75 million existing at sale date with the intention to sell the loans. A provision for credit losses of $300,000 was recorded prior to the transfer of these loans to held for sale. In addition, a charge of $1.9 million was classified in merger-related and other significant charges on the income statement, which included severance, goodwill associated with NCS, and the loss on the fixed assets sold. 28 RBC CENTURA BANKS, INC. PART I. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations For the Six Months Ended June 30, 2002 The information below in response to Item 2 of Form 10-Q, Part 1, is provided pursuant to General Instruction H. (2)(a) of Form 10-Q, which permits the omission of the information required by such item so long as a narrative analysis such as that set forth below is provided. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS A number of statements in this Form 10-Q concerning RBC Centura Banks, Inc. ("RBC Centura" or the "Company") and its principal, wholly owned subsidiary, RBC Centura Bank (named Centura Bank prior to October 30, 2001, the "Bank") are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding the financial conditions, results of operations and businesses of RBC Centura, RBC Centura's plans, goals, objectives, expectations, projections, estimates, and intentions. One can identify these forward-looking statements by the use of words such as "expects," "plans," "believes," "will," "estimates," "intends," "projects," "goals," and other words of similar meaning. One can also identify them by the fact that they do not relate strictly to historical or current facts. By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks exist that predictions, forecasts, projections and other forward-looking statements will not be achieved. RBC Centura cautions readers not to place undue reliance on these statements as a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements. Factors that might cause such a change include, but are not limited to (i) customer and deposit attrition or loss of revenue following completed mergers may be greater than expected; (ii) competitive pressure in the banking industry may increase significantly; (iii) changes in the interest rate, currency exchange rate and inflation rate may reduce margins; (iv) general economic conditions, globally, nationally or regionally, may be less favorable than expected, resulting in, among other things, credit quality deterioration and the possible impairment of collectibility of loans; (v) the impact of changes in monetary and fiscal policies, laws, rules and regulations; (vi) the impact of the Gramm-Leach-Bliley Act of 1999; (vii) changes in business conditions and inflation; (viii) the impact to revenue and expenses in the event that announced mergers are not consummated as anticipated; (ix) the failure to realize expected benefits from the acquisition of Centura Banks, Inc. ("Predecessor") by Royal Bank of Canada ("Royal Bank"); and (x) other risks and factors identified in Predecessor's and RBC Centura's other past and future filings with the Securities and Exchange Commission and other regulatory bodies. RBC Centura cautions that the foregoing list of important factors is not exhaustive. When relying on forward-looking statements to make decisions with respect to RBC Centura, investors and others should carefully consider the foregoing factors and other uncertainties and events. Additional information with respect to factors that may cause actual results to differ materially from those contemplated by such forward-looking statements is included in Predecessor's and RBC Centura's current and subsequent filings with the Securities and Exchange Commission. RBC Centura does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of RBC Centura. GENERAL The following discussion and analysis is presented to assist in the understanding and evaluation of the financial condition and results of operations of RBC Centura. RBC Centura is a bank holding company operating primarily in North Carolina, South Carolina and Virginia. RBC Centura currently provides a full range of personal and commercial banking products and services, investment services and certain insurance services. These products and services are delivered through our customers' channel of preference. At June 30, 2002, RBC Centura served its customers through 229 financial stores located throughout North Carolina, South Carolina, and Virginia. RBC Centura also serves its customers through RBC Centura Highway, its multifaceted customer access system that includes telephone banking, personal computer banking, online bill payment and a suite of Internet products and 29 services that can be found at centura.com. The contents of RBC Centura's website are not part of this Form 10-Q and such contents are not incorporated by reference herein. As discussed in RBC Centura's Form 10-K for the year ended December 31, 2001, during the fourth quarter of 2001 and the first quarter of 2002, RBC Centura filed applications with the Board of Governors of the Federal Reserve System and other applicable regulatory authorities to acquire Prism Mortgage Company (renamed RBC Mortgage Company as of April 8, 2002, "Prism") and RBC Trade Finance (USA), Inc. ("TFI"), two indirect, wholly owned subsidiaries of Royal Bank. Prism is primarily engaged in the business of originating, selling and brokering the sale of residential mortgage loans while its Builder Finance Group is involved in originating and servicing commercial residential real estate loans. TFI provides financing to U.S. subsidiaries of clients of Royal Bank. Management received approval of all applications associated with these acquisitions during the second quarter of 2002 and expects to acquire these entities prior to December 31, 2002. Percentage calculations contained herein have been calculated based upon actual, not rounded, results. As a result of the acquisition by Royal Bank, Predecessor became a wholly owned subsidiary of Royal Bank, and was renamed RBC Centura Banks Inc. The business combination was accounted for as a purchase with Royal Bank's accounting basis being "pushed down" to RBC Centura. In order to consolidate the U.S. retail banking operations of Royal Bank, RBC Centura acquired Security First Network Bank ("SFNB") from an indirect wholly owned subsidiary of Royal Bank on June 1, 2002. As further discussed in Note 1 to these consolidated financial statements, the SFNB merger resulted in a change in reporting entity for financial statement purposes and restatement of certain historical financial information giving consideration as to when RBC Centura and SFNB were under common control of Royal Bank. It is generally not appropriate to combine pre and post "push down" periods when analyzing results of operations. In addition, due to the restatement as noted above, the historical results of RBC Centura have been restated to only include SFNB prior to June 5, 2001, the date that RBC Centura was acquired by Royal Bank. However, for purposes of comparison only and to facilitate discussion and analysis of results of operations, the following pro-forma income statement combines RBC Centura's results of operations from January 1, 2001 through June 30, 2001(which actually represents the historical results for SFNB for the six months ended June 30, 2001 and the results of RBC Centura for the period June 6, 2001 through June 30, 2001) with those of the Predecessor for the period January 1, 2001 through June 5, 2001. All discussion of the six month period ending June 30, 2001 refers to proforma results including Predecessor activity during the period from January 1, 2001 through June 5, 2001.

30 Summary of Significant Accounting Policies RBC Centura's accounting policies are fundamental to understanding Management's Discussion and Analysis of Results of Operations and Financial Condition. Many of RBC Centura's accounting policies require significant judgment regarding valuation of assets and liabilities and/or significant interpretation of the specific accounting guidance. RBC Centura's significant accounting policies are discussed in detail in Note One of the Notes to Consolidated Financial Statements on pages 36 to 42 of RBC Centura's Annual Report on Form 10-K for the year ended December 31, 2001. The following is a summary of the more judgmental and complex accounting policies of RBC Centura. Many of RBC Centura's assets and liabilities are recorded using various valuation techniques that require significant judgment as to recoverability. The collectibility of loans is reflected through RBC Centura's estimate of the allowance for credit losses, RBC Centura performs periodic and systematic detailed reviews of its lending portfolio to assess overall collectibility. In addition, certain assets and liabilities are reflected at their estimated fair value in the consolidated financial statements. Such amounts are based on either quoted market prices or estimated values derived by RBC Centura utilizing dealer quotes, market comparisons or internally generated modeling techniques. RBC Centura's internal models generally involve present value of cash flow techniques. RBC Centura adopted SFAS 142 during the first quarter of 2002. A discounted cash flow model was used to determine the fair value of its reporting units as required by the Standard. Cash flow estimates require judgement and RBC Centura believes that assumptions used in determining the cash flows are consistent with assumptions marketplace participants would use in estimates of their fair value. The various valuation techniques are discussed in greater detail elsewhere in Management's Discussion and Analysis and in the Notes to Consolidated Financial Statements on pages 36 to 42 of RBC Centura's Annual Report on Form 10-K for the year ended December 31, 2001. The remainder of Management's Discussion and Analysis of RBC Centura's Results of Operations and Financial Condition should be read in conjunction with the consolidated financial statements and related notes presented on pages 4 through 28. EARNINGS SUMMARY Net income for the six months ended June 30, 2002 totaled $50.7 million, compared with a pro forma net loss of $83.6 million for the comparable period in 2001. Key factors responsible for RBC Centura's results of operations are discussed throughout Management's Discussion and Analysis below. INTEREST-EARNING ASSETS Interest-earning assets, net, consisting primarily of loans and investment securities, averaged $11.8 billion for the six months ended June 30, 2002, an increase of $472.2 million or 4.2 percent over the pro forma average balance for the six months ended June 30, 2001. Period-end interest-earning assets were $12.0 billion at June 30, 2002, an increase of $264.2 million over December 31, 2001's balance of $11.8 billion. As discussed below, most of the growth experienced took place in the investment portfolio, offset by decreases in the loan portfolio. For additional information on average interest-earning assets, refer to the discussion below, Table 3, "Net Interest Income Analysis-Taxable Equivalent Basis" and Table 7, "Net Interest Income and Volume/Rate Analysis, Taxable Equivalent Basis." Loans Loans represent the largest component of interest-earning assets. Loans ended the period at $7.8 billion, decreasing slightly by $13.7 million from the balance as of December 31, 2001. Table 1, "Loan Portfolio" provides a summary of the loan portfolio and mix percentages as of June 30, 2002, June 30, 2001 and December 31, 2001. Loans averaged $7.7 billion during the six months ended June 30, 2002, a decrease of $249.6 million over the year-earlier period (pro forma). Most of this fluctuation occurred within commercial loans, which exhibited a decline of $174.3 million predominantly due to the economic slowdown. The remaining components of the loan portfolio demonstrated counterbalancing changes from the year-earlier period with consumer loans (equity lines, installment loans, and other credit line loans) increasing by $127.1 million and mortgage loans decreasing by $144.8 million. The decrease in mortgage loans was principally the result of the expected payoffs within the SFNB portfolio. Taxable equivalent interest earned on the loan portfolio for the six months ended June 30, 2002 and 2001 (pro forma) totaled $221.7 million and $339.6 million, respectively. The declining rate environment resulted in a $107.5 million decrease in interest income while decreasing loan volume generated a $10.3 million interest income reduction. Overall, the loan portfolio yielded 5.79 percent for the first six months of 2002 compared with 8.59 percent during the first six months of 2001 (pro forma), mainly due to the declining rate environment that prevailed during 2001 and 2002. Also contributing 58 basis points to the decline was the amortization of loan premiums recorded as a result of the acquisition of Predecessor by Royal Bank. Investment Securities The investment portfolio provides RBC Centura with a source of earnings and liquidity. The investment portfolio consists predominantly of securities of the US Government and its agencies and other high grade, fixed income securities. The investment portfolio ended the second quarter of 2002 at $4.0 billion, an increase of 6.3 percent from a December 31, 2001 balance of $3.8 billion. For the six month period ended June 30, 2002, the investment portfolio, gross, averaged $3.8 billion compared with an average of $3.0 billion during the six month period ended June 30, 2001 (pro forma). The investment portfolio growth provided an additional means of leveraging capital while experiencing relatively consistent loan volume. The available for sale ("AFS") investment portfolio is used as a part of RBC Centura's asset/liability management strategy and may be sold in response to changes in interest rates, changes in prepayment risk, the need to manage regulatory capital and also to provide bank liquidity. This portfolio is carried at fair value with unrealized gains or losses recorded, net of tax, in accumulated other comprehensive income. At June 30, 2002, AFS investments had a market value of $4.0 billion, up $238.6 million compared to December 31, 2001. Included in the market value of the AFS portfolio as of June 30, 2002 are unrealized gains of $92.3 million, $56.5 million net of tax, compared with unrealized gains of $48.6 million, $29.8 million net of tax as of December 31, 2001. The change in 31 unrealized gains/losses was mainly due to an overall decrease in interest rates subsequent to December 31, 2001 that served to increase the market value of fixed income securities. FUNDING SOURCES Total funding includes deposits, short-term borrowings and long-term debt and averaged $11.4 billion for the six-month period ended June 30, 2002, increasing $353.3 million or 3.2 percent over the $11.0 billion average experienced during the six months ended June 30, 2001 (pro forma). The cost of interest bearing liabilities during the first six months of 2002 was 2.33 percent compared with 4.62 percent during the comparable period in 2001 (pro forma). The 229 basis point drop was predominantly due to the decreasing interest rate environment, but also reflects a 21 basis point decrease resulting from the accretion of discounts recorded as a result of the acquisition of Predecessor by Royal Bank. Deposits Total deposits, whose major categories include money market accounts, savings accounts, individual retirement accounts, certificates of deposit ("CDs") and transaction accounts, ended the period at $7.3 billion, down $125.2 million from the December 31, 2001 balance of $7.4 billion. A decrease of $309.1 million in CDs was partially offset by an overall increase in the remaining components of the deposit portfolio. The decline in CDs was principally attributable to the attrition of single-service CD accounts, acquired in a previous merger, with which RBC Centura was unable to establish multiple service relationships. Total deposits averaged $7.2 billion for the first six months of 2002 as compared to the $7.7 billion averaged for the first six months of 2001 (pro forma). This decline occurred almost exclusively in CDs as the average balance of the remaining deposit account types increased by $315.9 million. Table 2, "Average Deposit Mix" details average balances for the deposit portfolio and the mix of deposits for the six months ended June 30, 2002 and 2001 (pro forma). The annualized average cost of total interest-bearing deposits for the first six months of 2002 was 2.08 percent, a decrease of 227 basis points compared to the year-earlier period (pro forma), influenced by the accretion of time deposit discounts, the rate environment, and product mix. The accretion of the purchase accounting discount accounted for 32 basis points of the overall decrease in the cost of interest bearing deposits. Other Funding Sources Management utilizes alternative funding sources in addition to traditional deposits to fund balance sheet growth. Alternative short-term borrowed funds principally include federal funds purchased, securities sold under repurchase agreements and master notes. On average, short-term borrowed funds decreased by $111.0 million from the six months ended June 30, 2001 (pro forma) to average $1.9 billion for the six months ended June 30, 2002. The cost of funds incurred during the six months ended June 30, 2002(pro forma) for short-term borrowings declined 322 basis points from the year-earlier period to a rate of 1.61 percent. The decline was mainly the result of the decreasing interest rate environment that prevailed during 2001 and 2002. As depicted in Table 7, "Net Interest Income and Volume/Rate Analysis, Taxable Equivalent Basis" interest expense on short-term borrowed funds decreased by $32.7 million between periods (pro forma), as the effect of lower interest rates accounted for $30.2 million of the decline while the remaining fluctuation was driven by volume variance. Long-term debt consists predominantly of Federal Home Loan Bank ("FHLB") advances, capital securities and subordinated bank notes and ended the period at $2.3 billion compared to $2.2 billion as of December 31, 2001. Long-term debt averaged $2.3 billion for the six months ended June 30, 2002 compared with $1.3 billion during the six months ended June 30, 2001 (pro forma). Additional FHLB borrowings accounted for $396.0 million of the increase while the remaining increase was due to the issuance of $500 million of LIBOR based 5-year subordinated debt to an affiliate. When compared with the year-earlier period (pro forma), the cost of funds for long-term debt decreased by 208 basis points to 3.57 percent during the six months ended June 30, 2002. The decline was mainly the result of the decreasing interest rate environment that prevailed during 2001 and 2002. As shown in Table 7, "Net Interest Income and Volume/Rate Analysis, Taxable Equivalent Basis" interest expense on long-term debt increased by $2.4 32 million as the $19.6 million increase generated by increasing volume exceeded the $17.2 million decrease resulting from declining interest rates. NET INTEREST INCOME AND NET INTEREST MARGIN Net interest income for the six months ended June 30, 2002 was $216.4 million compared to pro forma net interest income of $221.2 million for June 30, 2001. On a taxable equivalent basis, net interest income during the first six months of 2002 decreased $4.5 million over the year earlier period (pro forma) to total $221.9 million. As shown in Table 7, "Net Interest Income and Volume/Rate Analysis, Taxable Equivalent Basis" the decrease in net interest income, taxable equivalent, was driven by rate variances, which contributed $14.7 million to the decrease, offset by an increase of $10.2 million due to volume variances. The net interest margin for the first six months of 2002 was 3.82 percent, a 24 basis point decrease from the net interest margin of 4.06 experienced during the first six months of 2001 (pro forma). The decline was predominantly due to the amortization of purchase price premiums recorded in association with the acquisition of Predecessor by Royal Bank, as well as the investment portfolio restructuring performed in the second quarter of 2001. ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES (AFLL) As of June 30, 2002 and December 31, 2001, the AFLL was $107.1 million and $103.8 million, respectively, or 1.38 percent and 1.33 percent, respectively, of total loans outstanding. The increase in the AFLL on an absolute basis and relative to total loans outstanding reflects an increase in the allowance in response to an increasing trend in non-performing assets resulting from a slowing economy. Refer to Table 5 "Nonperforming Assets and Past Due Loans" and Table 4 "Analysis of Allowance for Loan Losses" for additional asset quality information. Total nonperforming assets ("NPA's") were $103.4 million at June 30, 2002, an increase of $22.4 million over the December 31, 2001 balance of $81.0 million. NPA's as a percentage of total assets were 0.73 percent and 0.58 percent at June 30, 2002 and December 31, 2001, respectively. The increase principally occurred in the residential mortgage and commercial loan portfolios. A commercial relationship of $15.6 million, for which a specific allowance was established, was moved to nonperforming status during the second quarter while residential mortgages in foreclosure increased by $9.7 million. The AFLL provides coverage at 1.16 times and 1.54 times the nonperforming loan balance at June 30, 2002 and December 31, 2001, respectively. See Table 5, "Nonperforming Assets and Past Due Loans" for further information. Net charge-offs for the first six months of 2002 were $18.6 million, compared to $29.8 million for the same period in 2001 (pro forma). As a percentage of average loans, net charge-offs were 0.48 percent and 0.75 percent for the first six months of 2002 and 2001 (pro forma), respectively. Chargeoffs in 2001 principally occurred in the commercial loan portfolio and in non-strategic lines of business, including leasing and sub-prime lending. A majority of loans charged-off in the current year were commercial credits, $6.2 million of which related to four relationships. The provision for loan losses decreased $6.9 million from the first six months of 2001 (pro forma) to $22.0 million during the first six months of 2002 as a result of a substantial decrease in net-chargeoffs recognized from period to period. Management believes the AFLL is adequate based upon its current judgment, evaluation, and analysis of the loan portfolio. RBC Centura continuously monitors overall credit quality and manages its credit processes, including loans in past due and nonaccrual status. The AFLL represents management's estimate of an amount adequate to provide for probable incurred losses in the loan portfolio. However, there are risks of additional losses that cannot be quantified precisely or attributed to particular loans or classes of loans. Because those risks include general economic trends as well as conditions affecting individual borrowers, management's judgment of the AFLL is necessarily approximate and imprecise. No assurances can be given that the ongoing evaluation of the loan portfolio in light of economic conditions and other factors then prevailing will not require significant future additions to the AFLL, thus adversely affecting the operating results of RBC Centura. 33 NONINTEREST INCOME AND EXPENSE Noninterest income for the six months ended June 30, 2002, excluding gains and losses on sales of investment securities, totaled $76.0 million, down $11.1 million from the $87.1 million pro forma amount for the six months ended June 30, 2001. As a percentage of total revenues (defined as the sum of net interest income, plus noninterest income excluding securities gains and losses), noninterest income was 26.0 percent and 28.2 percent for the six months ended June 30, 2002 and 2001 (pro forma), respectively. Including gains and losses on sales of investment securities, noninterest income was $78.4 million and $116.2 million for the six months periods ended June 30, 2002 and 2001 (pro forma), respectively. Service charges on deposit accounts, comprising approximately 43.4 percent of noninterest income before gains and losses on sales of investment securities, continues to be the largest component of noninterest income. Service charges on deposits for the current year remained relatively consistent on an absolute dollar basis at $33.0 million when compared with the pro forma amount of $33.2 million during the first six months of 2001. Brokerage commissions were down $3.3 million during the six month period ended June 30, 2002 when compared to the year earlier period pro forma amount due to the slowing economy and other market conditions. Insurance commissions also declined by $1.7 million from the first two quarters of 2001 (pro forma) to the first two quarters of 2002 as a result of the divestiture of the personal and commercial insurance business lines during 2001. The decline in noninterest income from the first two quarters of 2001 (pro forma) to the first two quarters of 2002 was also the result of the recognition of a $2.8 million gain during the first quarter of 2001 resulting from the sale of an interest held in a private company. Mortgage income for the first six months of 2002 was $10.0 million, a decrease of approximately $613,000 over the first six months of 2001 (pro forma). This decline was mainly driven by mortgage loan sale income, which was down $463,000 as a result of the sale of the mortgage loan production facilities of NCS Mortgage Lending Company ("NCS") during the second quarter of 2001. Growth in the amount of capitalized mortgage servicing rights resulted in an increase of $1.5 million in mortgage servicing rights amortization during the first quarter of 2002. The effect of decreasing mortgage loan sale income and increasing mortgage servicing rights amortization was partially mitigated by an increase of $760,000 in servicing commissions generated by the increase in the amount of loans serviced. An additional mitigating factor was the $390,000 increase in origination fees that resulted from the lower mortgage lending rates that prevailed during the first six months of 2002 as compared to the first six months of 2001 (pro forma). Noninterest expense excluding merger-related and other significant charges and the loss on an equity investment totaled $196.6 million during the first half of 2002, a decrease of $35.2 million over the first six months of 2001 (pro forma). The main driver of the decrease was $19.1 million in litigation provisions during the six months ended June 30, 2001 (recorded by Predecessor), a significant portion of which related to previously disclosed litigation. Personnel expenses accounted for $8.9 million of the decrease between comparable periods as significant cost savings were realized once the operations of SFNB were combined into those of RBC Centura. Another significant contributor was occupancy expense, down $4.8 million, relating to reduced depreciation expense as a result of the write-off of fixed assets previously used to support the operations of SFNB. The remaining increase in noninterest expense was spread across various other operating expense categories. INCOME TAX EXPENSE Income tax expense recorded for the six months ended June 30, 2002 was $25.5 million compared to a pro forma $12.1 million benefit in the year earlier period. The increase in income tax expense during 2002 was mainly the result of lower reported income during 2001 due to merger-related and other significant charges and operating losses generated by SFNB. See Note 2 of the Notes to Consolidated Financial Statements for more details regarding the merger-related and other significant charges. EQUITY AND CAPITAL RESOURCES Shareholder's equity amounted to $2.4 billion as of June 30, 2002 compared with a balance of $2.3 billion at December 31, 2001. The growth was the result of an increase in retained earnings due to income realized during 2002 in addition to an increase in the amount of unrealized gains on available for sale securities. Unrealized gains on available for sale securities, net of tax, were $56.5 million as of June 30, 2002 compared with unrealized gains of $30.0 million as of December 31, 2001. 34 RBC Centura's capital ratios are greater than minimums required by regulatory guidelines. It is RBC Centura's intent to maintain an optimal capital and leverage mix within the regulatory framework while providing a basis for future growth. At June 30, 2002, RBC Centura had the required capital levels to qualify as well capitalized. See Table 6, "Capital Ratios" for a summary of capital ratios. CURRENT ACCOUNTING ISSUES See Note 1 of the Notes to Consolidated Financial Statements for discussion concerning adoption of new accounting standards including SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets."

* Denotes less than ** Denotes greater than 35 TABLE 3 -------------------------------------------------------------------------------- NET INTEREST INCOME ANALYSIS - TAXABLE EQUIVALENT BASIS (Pro forma)

36 TABLE 4 -------------------------------------------------------------------------------- ANALYSIS OF ALLOWANCE FOR LOAN LOSSES (Pro forma)

(1) All periods presented exclude $6 million in nonperforming loans transferred to held for sale in fourth quarter 2000 and sold in third quarter 2001. TABLE 5 -------------------------------------------------------------------------------- NONPERFORMING ASSETS AND PAST DUE LOANS

(1) All periods presented exclude $6 million in nonperforming loans transferred to held for sale in fourth quarter 2000 and sold in third quarter 2001. 37 TABLE 6 CAPITAL RATIOS Tier I Capital Total Capital Tier I Leverage -------------- ------------- --------------- June 30, 2002 11.4 % 18.1 % 8.6 % December 31, 2001 10.2 16.5 7.8 June 30, 2001 9.9 12.3 7.5 Minimum requirement 4.0 8.0 4.0 TABLE 7 NET INTEREST INCOME AND VOLUME/RATE ANALYSIS TAXABLE EQUIVALENT BASIS (Pro forma)

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. 38 Item 3. Quantitative and Qualitative Disclosure About Market Risk Omitted Pursuant to General Instruction H. (2)(c) of Form 10-Q. RBC CENTURA BANKS, INC. PART II. OTHER INFORMATION Item 1. Legal Proceedings Various legal proceedings against RBC Centura and its subsidiaries have arisen from time to time in the normal course of business. RBC Centura believes liabilities arising from these proceedings, if any, will have no material adverse effect on the financial position or results of operations of RBC Centura or its subsidiaries, taken as a whole. Item 2. Changes in Securities and Use of Proceeds Omitted Pursuant to General Instruction H. (2)(b) of Form 10-Q. Item 3. Defaults Upon Senior Securities Omitted Pursuant to General Instruction H. (2)(b) of Form 10-Q. Item 4. Submission of Matters to a Vote of Security Holders Omitted Pursuant to General Instruction H. (2)(b) of Form 10-Q. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: None (b) Reports on Form 8-K: None 39 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized: RBC CENTURA BANKS, INC. ----------------------- Registrant Date: August 14, 2002 By: /s/ Charles A. Caswell ---------------------- Charles A. Caswell Chief Financial Officer 40

RBC CENTURA BANKS INC 10-Q