10-K405 1 CRESTAR 10-K FORM 10-K CRESTAR FINANCIAL CORPORATION AND SUBSIDIARIES FORM 10-K-ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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, 1994 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file Number 1-7083 Crestar Financial Corporation (Exact name of registrant as specified in its charter) State of Virginia 54-0722175 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 919 East Main Street, Post Office Box 26665, Richmond, VA 23261-6665 (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code (804)782-5000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered Common Stock $5 Par Value New York Stock Exchange 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. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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. [ ] The aggregate market value (average of the high and low prices) of Crestar Financial Corporation voting stock held by non-affiliates as of January 31, 1995 was $1,445,137,000. As of January 31, 1995, Crestar Financial Corporation had 38,029,923 shares of Common Stock $5 Par Value outstanding. The Proxy Statement of the annual meeting of shareholders to be held April 28, 1995 is incorporated by reference in Part III of this Form 10-K. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION CRESTAR FINANCIAL CORPORATION AND SUBSIDIARIES This commentary provides an overview of Crestar Financial Corporation's (Crestar or the Corporation) financial condition, changes in financial condition and results of operations for the years 1992 through 1994. The following discussion should assist readers in their analysis of the accompanying consolidated financial statements and supplemental financial information. EARNINGS OVERVIEW Crestar Financial Corporation reported net income of $169.1 million in 1994, an increase of $28.6 million or 20% over 1993 results. Net income for 1993 of $140.5 million represented an increase of 76% over net income recorded in 1992. These increases reflected the continued positive effects of lower credit costs, improved net interest margins, growth in earning assets and noninterest income, and management of controllable expenses. The key profitability measures of return on average assets (ROA) and return on average total shareholders' equity (ROE) improved in 1994 over 1993 as a result of the significantly increased earnings. These ratios, along with other selected earnings and balance sheet information for each of the years in the five-year period ended December 31, 1994, are shown in Table 1. Primary earnings per share of $4.47 in 1994 increased 21% over 1993 following an increase of 59% in 1992. Significant items affecting the change in primary earnings per share for 1994 and 1993 are TABLE 1 SELECTED FINANCIAL INFORMATION DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
RESULTS OF OPERATIONS (FOR THE YEAR): 1994 1993 1992 1991 1990 Income from earning assets $ 926,034 $ 832,629 $ 863,677 $ 979,146 $ 1,097,824 Net interest income 581,816 527,012 482,144 421,135 414,179 Provision for loan losses 29,682 48,775 99,242 209,522 131,055 Net income 169,079 140,491 79,801 33,761 61,145 Preferred dividend requirements - 2,221 2,475 2,576 2,661 Income applicable to common shares 169,079 138,270 77,326 31,185 58,484 EARNINGS PER SHARE Primary: Net Income $ 4.47 $ 3.68 $ 2.32 $ .98 $ 1.87 Average shares outstanding (000s) 37,864 37,587 33,286 31,921 31,218 Fully diluted: Net Income $ 4.47 $ 3.67 $ 2.32 $ .98 $ 1.87 Average shares outstanding (000s) 37,867 37,665 33,369 31,946 31,238 Dividends declared per common share $ 1.53 $ 1.14 $ .80 $ .86 $1.32 FINANCIAL CONDITION (AT DECEMBER 31): Total assets $14,010,030 $13,286,947 $12,674,717 $ 11,828,261 $11,881,150 Long-term debt 366,962 191,156 210,430 161,865 168,424 Total equity 1,126,065 1,062,477 958,905 794,922 771,306 SELECTED RATIOS (FOR THE YEAR): Return on average assets 1.24% 1.12% .67% .30% .52% Equity leverage 12.40x 12.12x 14.20x 14.50x 15.03x Return on average total equity 15.38% 13.53% 9.50% 4.28% 7.87% Return on average common equity 15.38 13.90 9.73 4.19 7.99 Net interest margin 4.83 4.78 4.67 4.29 4.22 Dividend payout ratio: On common stock 33.99 30.56 34.46 87.98 70.46 On common and preferred stock 33.99 31.66 36.49 88.90 71.75 Equity formation rate 10.15 9.24 6.04 0.47 2.22 Based on averages: Total equity to total assets 8.06 8.25 7.04 6.90 6.65 Net loans to total equity 7.56x 6.57x 8.01x 9.22x 10.00x
11 summarized in Table 2. Each applicable item is net of federal income taxes computed using a 35% rate for 1994 and 1993, and a 34% rate for 1992. MERGERS AND ACQUISITIONS Crestar continued to enhance its presence in current markets through the completion of seven acquisitions in 1994, and the announcement of three additional acquisitions, two of which were completed in January 1995, all accounted for by the purchase method. On January 11, 1994, Crestar Mortgage Corporation acquired Mortgage Capital Corporation, a privately held wholesale mortgage production company based in St. Paul, Minnesota, for a purchase price of $5.2 million. Under terms of the purchase agreement, an additional $2.4 million may be paid to the former owners, depending on the future performance of Mortgage Capital Corporation's operations through 1999. With production offices in Illinois, Colorado, Florida and Ohio, the purchase expands Crestar Mortgage Corporation's national wholesale mortgage production operations. Crestar Financial Corporation's additional six acquisitions in 1994, two acquisitions completed in January 1995, and one pending acquisition are summarized in the following chart: (DOLLARS IN MILLIONS) BANKING OFFICES QUARTER ACQUIRED: ADDED FINANCIAL INSTITUTION LOANS DEPOSITS (NET) PRICE 1st Quarter 1994: Virginia Federal $ 550 $ 500 10 $ 52 Providence 250 300 6 27 NVR Federal 210 340 2 42 2nd Quarter 1994: Piedmont Federal - 150 - 10 Annapolis Bancorp 210 250 9 16 3rd Quarter 1994: Second National - 17 1 - 1st Quarter 1995: Independent Bank 50 70 4 12 Jefferson Savings 210 250 5 23 Pending: TideMark Bancorp 170 270 3 38 Total $1,650 $ 2,147 40 On January 20, 1995, Crestar completed the previously announced acquisitions of Jefferson Savings and Loan Association, F.A. (Jefferson Savings) and Independent Bank. Jefferson Savings, a Warrenton, Virginia based thrift institution, represents Crestar's first operations in Warrenton, Culpeper, Front Royal and Luray, while further strengthening Crestar's market position in Charlottesville and Loudon County. The purchase of Independent Bank, a Manassas-based commercial bank, added four banking offices in Prince William County, enhancing Crestar's leading market position in one of Virginia's fastest growing areas. Crestar's acquisition of TideMark Bancorp, Inc. (TideMark) is expected to be completed in March 1995. TideMark, based in Newport News, Virginia, had 12 branches in the Hampton Roads metropolitan area and total assets of $394 million at December 31, 1994. TideMark was the oldest and largest financial institution headquartered in the Virginia Peninsula area of eastern Virginia. Each of the seven acquisitions completed in 1994 have been accounted for under the purchase method of accounting, whereby the purchase price has been allocated to the underlying assets acquired and liabilities assumed based on their respective fair values at the date of acquisition. Crestar's 1994 results include the results of operations of the acquired institutions from the date of their respective purchase. Financial results for 1994 do not include the results of the three 1995 purchase method acquisitions (Jefferson Savings, Independent Bank and TideMark). Financial statement note 2 contains additional information concerning mergers and acquisitions. COMMON STOCK AND DIVIDENDS On December 31, 1994, Crestar's common stock price was $37 5/8, down 10% from the December 31, 1993 closing price of $41 7/8. Declines were noted in many financial institution stocks during 1994, as increases in interest rates led many investors to make stock portfolio changes. The Keefe Index of bank stocks TABLE 2 ANALYSIS OF PRIMARY EARNINGS PER SHARE 1994 1993 VS. VS. 1993 1992 Earnings Per Share - prior period $ 3.68 $2.32 Interest income 1.58 (.60) Interest expense (.66) 1.31 Provision for loan losses .33 .87 Securities gains or losses (.22) (.02) Other noninterest income .33 .54 Foreclosed properties expense .55 .47 Other noninterest expense (1.05) (.83) Income taxes (.10) (.11) Increased shares outstanding (.03) (.27) Preferred dividends .06 - Net increase .79 1.36 Earnings Per Share - current period $ 4.47 $3.68 12 ($ per share)(Common Stock Price & Book Value Graph) Price range High Low Book value 1990 29 5/8 12 1/8 $23.15 1991 25 11 1/4 23.23 1992 39 3/4 17 1/4 25.24 1993 46 1/2 35 1/8 28.32 1994 49 3/4 36 1/8 30.16 (Percent)(Return On Average Assets Bar Graph) 1990 1991 1992 1993 1994 .52 .30 .67 1.12 1.24 (Percent)(Return On Average Common Equity Bar Graph) 1990 1991 1992 1993 1994 7.99 4.19 9.73 13.90 15.38 decreased 3% during 1994, while the S&P 500 posted a decline of 2%. The Keefe Index is a composite of bank stocks tracked by Keefe, Bruyette and Woods, Inc., a widely known banking industry analyst and investment banking company. Book value per common share was $30.16 at December 31, 1994, and represented a 6% increase over Crestar's December 31, 1993 book value per share. The ratio of year-end market value to book value was 1.25x at December 31, 1994. Total market capitalization at December 31, 1994 was $1.4 billion. On the basis of 1994 earnings per share of $4.47 and the year-end market price of $37 5/8, the December 31, 1994 price/earnings ratio was 8.4x. Dividends declared in 1994 were $1.53 per common share, an increase of 34% when compared with dividends declared of $1.14 per share in 1993. Reflecting improved earnings, the common dividend was increased during the second quarter of 1994. The current quarterly dividend of $.40 represents an annualized dividend of $1.60, equating to a yield of 4.25% based on the year-end market price. The Corporation's objective is to pay dividends of approximately 30% to 40% of earnings to common shareholders. Common dividends declared in 1994 were 34% of net income available to common shareholders compared with 31% in 1993. CAPITAL RESOURCES AND ADEQUACY Crestar's capital position continued to strengthen as evidenced by significant equity growth and strong capital ratios. Average shareholders' equity grew 6%, 24% and 6% in 1994, 1993, and 1992, respectively. Equity growth in 1994 is attributable to the record earnings of the Corporation, partially offset by Crestar's purchase and retirement of 1.1 million shares of common stock and by the negative impact of reflecting net unrealized losses on securities available for sale as a component of shareholders' equity (further discussion of this accounting change is included in "Liquidity and Interest Sensitivity" and in financial statement note 1). In addition, in December 1993, $45 million in preferred stock was redeemed. During 1994, Crestar purchased and retired 1,120,300 shares of common stock at an average price of $43.25 per share, primarily to meet the needs of the dividend reinvestment plan and thrift and profit sharing plan, the June 1994 Annapolis Bancorp, Inc. acquisition, and in anticipation of common stock to be issued for acquisitions occurring in the first quarter of 1995. The 1993 increase in average shareholders' equity was primarily attributable to higher earnings, the issuance of common stock in connection with the CFS Financial Corporation acquisition, and the October 1992 public issuance of 3.5 million common shares which was not fully reflected in average shareholders' equity until 1993. The Corporation purchased and retired 522,300 shares of common stock at an average price of $40.31 per share during 1993. The Consolidated Statements of Changes in Shareholders' Equity provide details of these and other equity transactions. Crestar's equity to assets ratio at December 31, 1994 was 8.04%, compared to a ratio of 8.00% at December 31, 1993. The average equity to assets ratio was 8.06% for 1994, compared to 8.25% for 1993. The year-end equity leverage ratio (defined as average total assets divided by average total shareholders' equity) increased slightly, from 12.12x in 1993 to 12.40x in 1994. Other capital ratios for 1994 and 13 ($ In Millions)(Net Interest Income *Bar Graph) 1990 1991 1992 1993 1994 $442 443 498 540 593 *Tax Equivalent Basis (Percent)(Net Interest Margin *Bar Graph) 1990 1991 1992 1993 1994 4.22 4.29 4.67 4.78 4.83 *Tax Equivalent Basis ($ In Millions)(Sources Of Funds-Averages Stacked Bar Graph) Interest- Long-Term Other Purchased Bearing Debt Sources-Net Liabilities Core Deposits 1990 $170 $1,223 3,372 $5,703 1991 163 1,285 2,260 6,613 1992 186 1,492 1,252 7,733 1993 215 1,856 1,502 7,711 1994 235 2,013 1,271 8,753 TABLE 3 CAPITAL ADEQUACY DOLLARS IN THOUSANDS
RISK-ADJUSTED CAPITAL AT DECEMBER 31 1994 1993 Tier 1 Capital: Shareholders' equity $ 1,126,065 $ 1,062,477 Goodwill and other adjustments (58,518) (48,260) Total Tier 1 capital 1,067,547 1,014,217 Tier 2 Capital: Allowable long-term debt 304,595 164,964 Allowable allowance for loan losses net of other adjustments 140,794 120,691 Total Tier 2 capital 445,389 285,655 Total risk-adjusted capital 1,512,936 1,299,872 Risk-adjusted assets, net of allowance 11,345,655 9,623,545 Fourth quarter average assets, net of adjustments 13,599,856 12,874,009 Risk-adjusted capital ratios: Tier 1 9.4% 10.5% Total 13.3 13.5 Tier 1 leverage ratio 7.9 7.9 OTHER CAPITAL RATIOS Average equity to: Average total assets 8.06 8.25 Average loans, net of unearned income 13.23 15.19 Equity leverage 12.40x 12.12x Equity formation rate 10.15% 9.24% Period-end equity to assets 8.04 8.00 Tangible leverage ratio 7.2 7.3
14 ($ In Millions)(Uses Of Funds-Averages Stacked Bar Graph) Securities Held To Maturity and Mortgage Money Securities Loans Held Market Available For Sale Investments For Sale Loans 1990 $121 $219 $2,362 $7,767 1991 157 738 2,151 7,275 1992 368 989 2,581 6,725 1993 368 676 3,404 6,836 1994 325 604 3,037 8,305 1993 are shown in Table 3. A key measure of equity's ability to absorb losses is the ratio of average equity to average loans. Despite significant loan growth and the Corporation's common stock repurchase program, this measure continued to reflect Crestar's capital strength, totaling 13.23% for 1994, compared to 15.19% for 1993 and 12.48% for 1992. The equity formation rate (calculated as net income less dividends declared divided by average total equity) increased to 10.15% in 1994 from 9.24% in 1993. Risk-based capital ratios are another measure of capital adequacy. At December 31, 1994, Crestar's consolidated risk-adjusted capital ratios were 9.4% for Tier 1 and 13.3% for total capital, well above the required minimums of 4.0% and 8.0%, respectively. These ratios are calculated using regulatory capital (either Tier 1 or total capital) as the numerator and both on- and off-balance sheet risk-weighted assets as the denominator. Tier 1 capital consists primarily of common equity less goodwill and certain other intangible assets. Total capital adds certain qualifying debt instruments and a portion of the allowance for loan losses to Tier 1 capital. One of four risk weights, primarily based on credit risk, is applied to both on- and off-balance sheet assets to determine the asset denominator. Under Federal Deposit Insurance Corporation (FDIC) rules, each of Crestar's three subsidiary banks was considered "well-capitalized," the highest category of capitalization defined by the regulators allowing for the lowest level of FDIC insurance premium rates, as of December 31, 1994. Additional regulatory capital measures include the Tier 1 leverage ratio and the tangible leverage ratio. The Tier 1 leverage ratio is defined as Tier 1 capital divided by average total assets less goodwill and certain other intangibles and has a regulatory minimum of 3.0%, with most institutions required to maintain a ratio of at least 4.0% to 5.0%, depending primarily upon risk profiles. At December 31, 1994, Crestar's Tier 1 leverage ratio was 7.9%. The tangible leverage ratio is calculated by excluding intangibles from both assets and capital and is utilized by the Federal Reserve Board in evaluating proposals for expansion or acquisitions. At December 31, 1994, Crestar's tangible leverage ratio was 7.2%, well within accepted Federal Reserve Board ranges. A double leverage ratio of over 100% measures the extent to which the equity capital of subsidiaries is supported by Parent Company debt rather than equity. Calculated as the investment in its subsidiaries divided by its own equity accounts, Crestar Financial Corporation's double leverage was 99.9% at December 31, 1994, compared to 96.8% at December 31, 1993. Financial statement note 21 contains Parent Company financial statements. In November 1994, Crestar sold $150 million of 8 3/4% subordinated notes due November 15, 2004. Net of underwriting discounts, the notes resulted in proceeds of $148.6 million to the Corporation at an effective interest rate of 8.79%. Proceeds from the sale of the notes have been utilized for general corporate purposes, including the cash requirements for first quarter 1995 acquisitions. The subordinated notes, which qualify as a component of total capital for the Corporation's risk-adjusted capital ratios, were issued under a shelf registration statement with the Securities and Exchange Commission. Under the remaining terms of the shelf registration, the Corporation may issue in the future up to $150 million in subordinated debt securities, preferred stock or common stock, or any combination thereof. NET INTEREST INCOME AND NET INTEREST MARGIN The fundamental source of Crestar's earnings, net interest income, is defined as the difference between income on earning assets and the cost of funds supporting those assets. Significant categories of earning assets are loans and securities while deposits and short-term borrowings represent the major portion of interest-bearing liabilities. The level of net interest income is impacted primarily by variations in the volume and mix of these assets and liabilities, as well as changes in the levels of interest rates. Net interest income in Table 4 is presented on a tax-equivalent basis to enhance the comparability of assets with different tax attributes. This comparability is achieved through increasing interest income on tax-exempt assets by an amount equal to the Federal income taxes which would have been paid had the income been fully taxable. This tax-equivalent adjustment is based on the applicable statutory federal corporate income tax rate and resulted in an increase to pre-tax income from earning assets in 1994, 1993 and 1992 of $10.9 million, $12.6 million and $16.0 million, respectively. On a tax-equivalent basis, net interest income increased $53.1 million or 10% in 1994 following a $41.5 million or 8% rise in 1993. 15 TABLE 4 AVERAGE BALANCES, NET INTEREST INCOME AND RATE/VOLUME ANALYSIS(1) DOLLARS IN MILLIONS AVERAGE BALANCE YIELD/RATE 1994 1993 1992 1994 1993 1992 $ $ $ % % % 2,590 2,459 2,717 7.70 7.62 8.16 Commercial loans 215 263 309 9.59 8.53 8.86 Tax-exempt loans 1,710 1,450 1,373 8.44 8.78 10.73 Instalment loans 1,144 701 538 11.94 13.67 15.12 Bank card loans 2,424 1,734 1,442 7.51 7.77 8.87 Real estate loans 222 229 346 8.21 7.06 6.54 Construction loans 8,305 6,836 6,725 8.44 8.54 9.34 Total loans - net of unearned income(2) 768 1,684 2,351 6.45 6.83 6.98 Taxable securities held to maturity 74 100 132 9.79 10.28 10.66 Tax-exempt securities held to maturity - 29 33 - 6.17 8.61 Common and preferred stocks 842 1,813 2,516 6.74 7.01 7.19 Total securities held to maturity 2,195 1,591 65 5.91 5.36 6.49 Securities available for sale 605 676 989 4.35 3.49 3.81 Money market investments 325 368 368 7.10 6.85 7.75 Mortgage loans held for sale 12,272 11,284 10,663 7.63 7.49 8.25 Total earning assets 1,862 1,630 1,444 2.21 2.33 3.07 Interest checking deposits 2,378 2,280 2,316 2.84 2.57 3.28 Money market deposit accounts 1,419 1,103 781 2.66 2.82 3.42 Regular savings deposits 628 571 754 3.17 3.13 4.66 Money market certificates 2,466 2,127 2,439 4.36 4.55 5.59 Other domestic time deposits 8,753 7,711 7,734 3.13 3.14 4.12 Total interest-bearing core deposits 59 44 116 4.44 4.46 6.59 Certificates of deposit $100,000 and over - 2 4 3.10 2.88 3.28 Deposits in foreign offices 1,212 1,456 1,132 3.97 3.01 3.37 Short-term borrowings 1,271 1,502 1,252 4.00 3.05 3.66 Purchased liabilities 235 215 186 8.30 8.12 9.25 Long-term debt 10,259 9,428 9,172 3.36 3.24 4.16 Total interest-bearing liabilities 2,013 1,856 1,491 Other sources - net 12,272 11,284 10,663 2.80 2.71 3.58 Total sources of funds 4.83 4.78 4.67 Net Interest Margin/Income
(1) Income and yields are computed on a tax-equivalent basis using the statutory federal income tax rate, exclusive of the alternative minimum tax and nondeductible interest expense, and the tax-equivalent adjustment to interest income was $10.9 million, $12.6 million and $16.0 million for 1994, 1993 and 1992, respectively (2) Nonaccrual loans are included in the average loan balances and income on such loans is recognized on a cash basis These increases reflect an increase in average earning assets of 9% in 1994 and 6% in 1993. The net interest margin is calculated as tax-equivalent net interest income divided by average earning assets and represents the Corporation's net yield on its earning assets. In 1994, the net interest margin of 4.83% improved five basis points from 4.78% in 1993. Significant items affecting the change in the net interest margin from 1993 to 1994 are summarized in Table 5. Positive influences on the 1994 margin include favorable changes in the composition of balance sheet earning assets and lower levels of nonperforming assets. Changes in balance sheet mix increased the 1994 net interest margin by approximately 22 basis points. Loans as a percentage of total earning assets increased from an average of 61% in 1993 to 68% in 1994, as growth in loans were partially funded from declining levels of investment securities. On the funding side, reduced short-term borrowings coupled with growth in free sources of funds (primarily shareholders' equity and net demand deposits) provided a two basis point benefit to the 16 In Thousands 1994 vs. 1993 1993 vs. 1992 Income/Expense(3) Increase Change due to(4) Increase Change due to(4) 1994 1993 1992 (Decrease) Rate(5) Volume (Decrease) Rate(5) Volume $ $ $ $ $ $ $ $ $ 199,399 187,463 221,732 11,936 2,055 9,881 (34,269) (13,302) (20,967) 20,578 22,418 27,414 (1,840) 2,270 (4,110) (4,996) (879) (4,117) 144,364 127,332 147,307 17,032 (5,807) 22,839 (19,975) (28,229) 8,254 136,631 95,923 81,409 40,708 (18,531) 59,239 14,514 (10,046) 24,560 181,963 134,666 127,868 47,297 (6,055) 53,352 6,798 (18,984) 25,782 18,185 16,171 22,591 2,014 2,531 (517) (6,420) 1,173 (7,593) 701,120 583,973 628,321 117,147 (7,233) 124,380 (44,348) (54,692) 10,344 49,545 115,118 164,058 (65,573) (2,974) (62,599) (48,940) (2,554) (46,386) 7,258 10,233 14,047 (2,975) (363) (2,612) (3,814) (378) (3,436) - 1,803 2,863 (1,803) - (1,803) (1,060) (716) (344) 56,803 127,154 180,968 (70,351) (2,285) (68,066) (53,814) (3,391) (50,423) 129,666 85,331 4,234 44,335 11,994 32,341 81,097 (17,929) 99,026 26,288 23,580 37,630 2,708 5,197 (2,489) (14,050) (2,144) (11,906) 23,084 25,191 28,522 (2,107) 807 (2,914) (3,331) (3,311) (20) 939,961 845,229 879,675 91,732 18,228 73,504 (34,446) (85,445) (50,999) 41,234 38,001 44,278 3,233 (2,194) 5,427 (6,277) (11,959) 5,682 67,530 58,496 75,936 9,034 6,521 2,513 (17,440) (16,275) (1,165) 37,821 31,091 26,749 6,730 (2,207) 8,937 4,342 (6,661) 11,003 19,915 17,861 35,137 2,054 290 1,764 (17,276) (8,776) (8,500) 107,442 96,849 136,344 10,593 (4,794) 15,387 (39,495) (22,090) (17,405) 273,942 242,298 318,444 31,644 (1,258) 32,902 (76,146) (75,216) (930) 2,589 1,975 7,651 614 (11) 625 (5,676) (944) (4,732) 11 68 145 (57) - (57) (77) (9) (68) 48,169 43,787 38,096 4,382 11,716 (7,334) 5,691 (5,190) 10,881 50,769 45,830 45,892 4,939 4,947 (8) (62) (9,210) 9,148 19,507 17,489 17,197 2,018 434 1,584 292 (2,435) 2,727 344,218 305,617 381,533 38,601 11,593 27,008 (75,916) (86,644) 10,728 344,218 305,617 381,533 38,601 11,757 26,844 (75,916) (98,224) 22,308 592,743 539,612 498,142 53,131 6,471 46,660 41,470 12,779 28,691
(3) Includes tax-equivalent net loan fees of $2.7, $3.1 and $4.4 million in 1994, 1993 and 1992, respectively (4) Variances are computed on a line-by-line basis and are non-additive (5) Variances caused by the change in rate times the change in balances are allocated to rate 1994 net interest margin. As nonperforming assets continued to decline, a corresponding decrease occurred in their negative impact on the net interest margin. The lower levels of nonperforming assets in 1994 had a favorable impact on the net interest margin of approximately five basis points. Additional income of approximately $12.8 million for 1994 and $9.3 million for 1993 would have been realized had all nonperforming assets performed as originally expected. The benefits from off-balance sheet hedging activities (primarily interest rate swaps) declined in 1994 compared with 1993 as the notional principal balance on favorable swaps was reduced, due to maturities and amortization in 1994, and due to an environment of rising interest rates during the year. Off-balance sheet hedging activities contributed $18.3 million to net interest income in 1994, compared with $34.3 million in 1993. The reduction equated to a 16 basis point negative impact on the 1994 net interest 17 TABLE 5 ANALYSIS OF NET INTEREST MARGIN PERCENT OF AVERAGE NET INTEREST MARGIN MARGIN CHANGE EARNING ASSETS 1994 1993 1994 VS. 1993 1994 1993 Earning Asset Mix: 22 bp Loans - net of unearned income 67.7% 60.5% Securities held to maturity and securities available for sale 24.7 30.2 Money market investments 4.9 6.0 Mortgage loans held for sale 2.7 3.3 Funding Mix: 2 Interest-bearing core deposits 71.3 68.3 Purchased liabilities 10.4 13.3 Long-term debt 1.9 1.9 Other sources - net 16.4 16.5 Decreased nonperforming assets 5 Off-balance sheet hedges (16) Interest rate changes (7) Other (1) Net Interest Margin 4.83% 4.78% 5 bp
margin as compared to 1993 results. An additional negative impact on the net interest margin for 1994 stemmed from changes in interest rates received on earning assets and paid on funding sources. Such changes in interest rates contributed a negative impact of seven basis points in comparison to 1993 average interest rates. Driving this impact were declines in average rates earned on real estate mortgages and instalment loans, and the maturity of higher-yielding fixed rate securities during 1994. Competitive marketing programs have also resulted in a decline in the average rate earned on bank card loans, from 13.67% in 1993 to 11.94% in 1994. The average rate paid on total savings and time deposits was 3.13% in 1994, compared to 3.14% for 1993. Rate increases on money market deposit accounts and money market certificates were offset by declines in average rates paid on interest checking deposits, regular savings deposits and other domestic time deposits during the year. Acquisitions completed during 1994 added over $25 million to Crestar's 1994 net interest income. While these seven acquisitions, in the aggregate, were accretive to the Corporation's earnings per share for 1994, they negatively impacted Crestar's net interest margin for the year. This is primarily due to their aggregate concentrations of residential real estate mortgage loans and short-term investments as earning assets, when compared to Crestar's overall earning asset composition. The impact of the acquisitions on Crestar's 1994 net interest margin was a reduction of approximately 30 basis points. From 1992 to 1993, the net interest margin improved from 4.67% to 4.78%, reflecting the benefit of changes in the mix of earning assets and lower levels of nonperforming assets. PROVISION AND ALLOWANCE FOR LOAN LOSSES Both the amount of the provision and the level of the allowance for loan losses are impacted by many factors, including general economic conditions, actual and prospective credit losses, loan performance measures, historical trends and other circumstances, both internal and external. The amount of the provision for loan losses is established based on evaluations of the adequacy of the allowance for loan losses. Individual loan-by-loan reviews are performed on large commercial and real estate exposures in the lower quality regulatory risk ratings. Smaller commercial and real estate credits are analyzed utilizing a formula-based approach that encompasses the risk factors detailed above. Loan loss allowances for the various consumer credit portfolios are based on historical and anticipated losses and the current and projected characteristics of the various portfolios. Management's evaluation and resulting provision and allowance decisions are reviewed by the Board of Directors on a quarterly basis. Crestar's credit quality continued to reflect significant improvement in 1994. Total credit costs, including the provision for loan losses and foreclosed properties expense, were $30.3 million in 1994, a reduction of $51.5 million or 63% from $81.8 million in 1993. Crestar made provisions for loan losses of $29.7 million in 1994, down $19.1 million or 39% from 1993. This followed a 51% decrease in the provision for loan losses in 1993 from 1992. A 18 TABLE 6 ALLOWANCE FOR LOAN LOSSES DOLLARS IN THOUSANDS 1994 1993 1992 1991 1990 Beginning balance $ 210,958 $ 205,017 $ 210,004 $ 149,375 $ 93,160 Allowance from acquisitions 15,687 22,000 9,700 1,850 2,012 Provision for loan losses 29,682 48,775 99,242 209,522 131,055 Loans charged off: Commercial 14,138 28,491 44,224 68,512 31,007 Instalment 9,396 9,289 11,031 14,307 13,505 Bank card 28,573 21,064 24,458 26,078 18,465 Real estate 12,280 25,182 21,285 24,549 9,753 Construction 817 5,307 29,664 32,735 16,095 Total loans charged off 65,204 89,333 130,662 166,181 88,825 Recoveries: Commercial 8,630 9,827 5,348 4,856 3,481 Instalment 5,308 4,851 5,330 5,909 5,463 Bank card 4,676 4,882 4,707 3,612 2,624 Real estate 5,063 847 328 1,029 400 Construction 4,389 4,092 1,020 32 5 Total recoveries 28,066 24,499 16,733 15,438 11,973 Net charge-offs 37,138 64,834 113,929 150,743 76,852 Allowance, December 31: Commercial 61,004 63,008 86,017 97,500 68,000 Instalment 13,500 14,000 13,000 9,000 7,500 Bank card 27,000 20,000 12,000 11,500 10,000 Real estate 42,000 50,000 48,000 41,000 27,500 Construction 15,000 16,000 16,000 34,000 25,500 Unallocated 60,685 47,950 30,000 17,004 10,875 Balance, December 31 $ 219,189 $ 210,958 $ 205,017 $ 210,004 $ 149,375 Loans: Total at year end $9,285,637 $7,287,122 $6,581,721 $7,065,786 $7,680,210 Average during year 8,305,287 6,836,478 6,725,311 7,275,301 7,767,200 Net charge-offs to: Average total loans .45% .95% 1.69% 2.07% .99% Provision for loan losses 125.12 132.92 114.80 71.95 58.64 Allowance for loan losses to: Year-end loans 2.36 2.89 3.11 2.97 1.94 Net charge-offs 5.90x 3.25x 1.80x 1.39x 1.94x Net charge-offs earnings coverage 7.66 3.89 1.74 1.65 2.63
lingering recessionary climate and its impact on the quality of the commercial and real estate loan portfolios necessitated a provision for loan losses of $99.2 million in 1992. As a result of the continued improved credit quality, 1994 net charge-offs of $37.1 million were down $27.7 million or 43% from 1993. In the years of 1990 through 1993, charge-offs related to real estate developers and investors (REDI) contributed disproportionately to total net charge-offs, as the REDI portfolio was the primary source of weaker credit quality during this recessionary period. The REDI designation is based on borrower type and encompasses non-owner occupied real estate and construction loans as well as other forms of credit extended to real estate developers or investors. REDI net charge-offs comprised 49% of total net charge-offs of $64.8 million in 1993. In comparison, REDI charge-offs in 1994 comprised 16% of total net charge-offs of $37.1 million. As a percent of average REDI loans, REDI net charge-offs were 0.5% in 1994, 2.8% in 1993 and 5.0% in 1992. Net charge-offs as a percentage of average loans were 0.45% in 1994, compared to 0.95% in 1993 and 1.69% in 1992. The declines in this ratio during 1994 and 1993 reflect the improved credit quality trends and economic conditions noted above. With improvements in commercial and REDI loan net charge-off 19 TABLE 7 NONINTEREST INCOME IN THOUSANDS 1994 1993 1992 1991 1990 Service charges on deposit accounts $ 82,851 $ 79,419 $ 73,944 $ 57,953 $ 45,946 Trust and investment advisory 55,609 57,440 51,007 48,322 45,169 Bank card-related 39,529 27,500 23,141 22,694 22,072 Mortgage servicing 18,986 15,371 13,637 13,363 12,918 Mortgage origination - net 8,495 20,631 16,631 9,504 6,331 Automated teller machine fees 10,605 9,355 7,925 5,463 4,073 Trading account activities 1,069 4,415 6,880 8,295 4,222 Commissions on letters of credit 5,135 7,272 5,081 5,899 5,651 Safe deposit box rental 3,537 2,239 3,282 3,033 2,318 Annuities 6,087 4,347 1,816 869 703 Mutual funds 2,666 3,379 1,104 224 173 Insurance 2,337 2,234 2,190 2,236 2,205 Gain on sale of mortgage servicing rights 18,732 3,600 1,761 - 281 Gain on pension settlement - - - 2,236 - Miscellaneous 9,408 8,826 6,429 5,573 2,530 Securities gains (losses) (10,776) 2,237 3,563 48,165 12,216 Total noninterest income $254,270 $248,265 $218,391 $233,829 $166,808
levels, the largest proportion of net loan charge-offs during 1994 occurred in the bank card loan portfolio. Net charge-offs for bank card loans were $23.9 million in 1994, compared to $16.2 million in 1993. This increase in bank card net charge-offs is largely attributable to growth in the bank card loan portfolio. Current expectations are that the ratio of net charge-offs to average total loans for the full year 1995 will increase from the level achieved in 1994, but remain below 1993's results. This expectation is based upon assumptions regarding the general economic climate in Crestar's principal markets and the performance characteristics of the loan portfolio, including Crestar's continued success in resolving remaining nonperforming loans. Changes in these conditions may produce different results. The allowance for loan losses at December 31, 1994 was $219 million, representing 2.36% of year-end loans, 231% of total nonperforming assets and 287% of total nonperforming loans. Comparative measures at the end of 1993 were $211 million or 2.89% of loans, 218% coverage of total nonperforming assets and 264% coverage of total nonperforming loans. Improvement in the two coverage ratios was due to a reduction in nonperforming assets, despite additions of $34.0 million in nonperforming assets during 1994 arising from the Corporation's seven acquisitions of financial institutions. Detail of the activity in the allowance for loan losses for the past five years is shown in Table 6. Based on current expectations relative to portfolio characteristics and performance measures including loss projections, management considers the level of the allowance adequate. Although the allowance for loan losses is a general allowance applicable to all loan categories, the allocation provided in Table 6 is made to provide an indication of the relative risk assessment of the components of the loan portfolio. NONINTEREST INCOME Noninterest income increased 2% in 1994, following a 14% increase in 1993. Excluding securities gains and losses, noninterest income increased $19.0 million or 8% over 1993, compared with a 1993 increase of $31.2 million or 15% over 1992. The 1994 increase arose from growth in the noninterest income categories of bank card-related fee income, mortgage income, and service charges on deposit accounts. Reflecting promotional activities and increased merchant fee volume, bank card-related fee income increased by $12.0 million, or 44%, during 1994. Mortgage income increased $6.6 million, or 17%, in 1994, as increased servicing income and gains on sale of servicing rights offset declines in mortgage origination fees. While a higher interest rate environment reduced origination fees from refinancing activity, there was reduced run-off in Crestar's mortgage servicing portfolio. Crestar's loan servicing portfolio was $7.8 billion at December 31, 1994, compared to $6.7 billion at year-end 1993 and $4.8 billion at year-end 1992. Service charges on deposit accounts increased 4%, or $3.4 million, from 1993 levels. Trust and investment advisory income decreased $1.8 million or 3% from 1993, due to an increasingly competitive environment for trust services. In addition, 1994's declining bond market impacted fees earned based on the value of assets under management. At year-end 1994, trust assets held by Crestar's Trust and Investment Management Group approximated $29 billion, and assets under management 20 TABLE 8 NONINTEREST EXPENSE IN THOUSANDS 1994 1993 1992 1991 1990 Salaries $243,717 $216,248 $195,089 $176,113 $167,028 Benefits 59,863 46,378 38,749 32,908 31,131 Total personnel 303,580 262,626 233,838 209,021 198,159 Occupancy - net 42,231 38,359 35,654 32,683 31,293 Equipment 25,339 24,122 24,011 22,916 23,797 Communications 25,484 21,136 19,334 18,149 17,798 Stationery, printing and supplies 8,239 7,133 6,451 6,086 7,885 Professional fees and services 12,819 13,487 15,898 13,244 9,769 Loan expense 9,786 9,034 8,409 5,797 6,105 FDIC premiums 25,207 22,847 21,003 17,806 10,057 Advertising and marketing 19,906 13,709 8,137 7,866 11,608 Transportation 5,861 5,388 5,357 5,610 5,866 Outside data services 18,805 14,879 11,769 11,923 10,533 Bank franchise tax 3,199 2,810 2,845 3,330 3,201 Amortization of purchased intangibles 12,279 21,926 13,630 12,338 10,154 Miscellaneous 38,321 32,511 35,279 27,019 29,508 Subtotal 551,056 489,967 441,615 393,788 375,733 Foreclosed properties 652 33,055 60,188 11,833 3,106 Total noninterest expense $551,708 $523,022 $501,803 $405,621 $378,839
totaled $9.0 billion. Other miscellaneous income for 1994 fell $1.2 million from 1993 levels, due primarily to reduced trading account income. NONINTEREST EXPENSE Noninterest expense increased $28.7 million or 5% in 1994 following an increase of $21.2 million or 4% in 1993. Excluding foreclosed properties expense, noninterest expense increased 12% in 1994 and 11% in 1993. The 1994 increase reflects acquisition-related costs and expenses incurred in expanding bank card lending. Additional expenses arising from the seven acquisitions completed in 1994 were approximately $26.3 million. Bank card expense increases, arising from promotional expenditures and volume-driven staffing increases, amounted to approximately $15.7 million over 1993 expense levels. Excluding these direct expenses and the impact of foreclosed properties expense, noninterest expense increased 4% in 1994. Reflecting improved credit conditions and real estate markets, foreclosed properties expense declined from $33.1 million in 1993 to only $652 thousand in 1994. Operating expenses related to foreclosed properties were down 82%, falling from $13.2 million in 1993 to $2.4 million in 1994. Market write-downs on foreclosed properties were $0.5 million in 1994 compared to $5.8 million in 1993. Crestar recorded a net gain of $3.0 million on the sale of foreclosed properties in 1994. In the previous year, the Corporation recorded net losses on the sale of foreclosed properties of $4.9 million. A $6.4 million provision for losses on foreclosed properties was also recorded in 1993. Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" (SFAS 112) was adopted by Crestar on January 1, 1994. Under SFAS 112, benefits provided to inactive or former employees before retirement are accrued during the period of active employment, rather than being expensed as paid. For Crestar, such benefits consist principally of short-term disability benefits. Adoption of SFAS 112 resulted in a pre-tax charge to employee benefit expense, recorded in the first quarter of 1994, of $1.8 million. Total capital expenditures for 1994, 1993 and 1992 were approximately $53 million, $55 million and $46 million, respectively. The 1994 figure included expenditures for branch and office refurbishments, new branch computer technology, and initial construction outlays for a new headquarters building for Crestar Mortgage Corporation. Expenditures in 1995 are anticipated to approximate $91 million. Of this amount, approximately $20 million will be expenditures for the new five-story building to house Crestar Mortgage Corporation and for the purchase of an additional office building currently being leased. INCOME TAXES In 1994, Crestar's income tax expense was $85.6 million, up from $63.0 million in 1993 and $19.7 million in 1992. The effective tax rates for 1994, 1993 and 1992 were 33.6%, 31.0% and 19.8%, respectively. The 1994 increase in the effective tax rate was attributable to reduced proportions of tax-exempt interest and dividends, higher provisions for state income taxes, and a favorable deferred tax adjustment recorded in 1993, which reflected an increase in net 21 deferred tax assets due to provisions of the Omnibus Budget Reconciliation Act of 1993. The increase in Crestar's effective tax rate from 1992 to 1993 was attributable to higher earnings in 1993, and due to the utilization of available alternative minimum tax credit carryforwards in 1992. In 1993, Crestar adopted the asset and liability method of accounting for income taxes as required by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under this method, deferred tax assets and liabilities are based on the differences between financial statement and tax basis of assets and liabilities. The tax effects of these differences are measured using enacted tax rates that will be effective for the period during which the differences are expected to reverse. A valuation allowance is provided against deferred tax assets if, and to the extent, it is more likely than not that the deferred tax assets will not be fully realized. In management's judgment, no valuation allowance was necessary at December 31, 1994 and 1993. Deferred tax expense is measured by the change in the net deferred tax assets or liabilities for the period. LIQUIDITY AND INTEREST SENSITIVITY Bank liquidity is a measure of the ability to generate and maintain sufficient cash flows to fund operations and to meet financial obligations to depositors and borrowers promptly and in a cost-effective manner. Liquidity is provided through securities available for sale, money market investments, maturing loans and investments, and the ability to generate new deposits or borrowings as needed. Core deposits provide a typically stable source of liquidity. Interest-bearing core deposits represented 69% of total funding sources at December 31, 1994 compared with 65% at December 31, 1993. Core deposits are supplemented by additional sources of liquidity in the form of short-term borrowings and large CDs, normally available from both national and local markets. While Crestar's short-term borrowings include local funds, national sources are also utilized to acquire funds. Crestar's liquidity position is actively managed on a daily basis, monitored regularly by the Asset/Liability Management Committee (ALCO) and reviewed periodically with the Board of Directors. ALCO's overall objective is to optimize net interest income within the constraints of prudent capital adequacy, liquidity needs, the interest rate and economic outlook, market opportunities, and customer requirements. General strategies to accomplish this objective include maintaining a strong balance sheet, achieving solid core deposit growth, accepting manageable interest rate risk, adhering to conservative financial management principles and practicing prudent dividend policies. Interest sensitivity refers to the volatility of profitability as a result of changes in interest rates. Crestar's goal is to limit interest rate exposure to prudent levels as determined by the Corporation's ALCO committee. The level of exposure taken is based on an assessment of the market environment, and will vary from period to period. The primary tool used by ALCO in assessing interest rate exposure is net interest income simulations. The committee establishes limits on net interest income at risk for a twenty-four month period. A two year net interest income forecast is prepared regularly based on flat, high, low and most likely interest rate scenarios. The high and low interest rate scenarios are based upon an assessment of the historic volatility of interest rates. The expected dynamics of the balance sheet under each scenario, including shifts in loans and deposits, are included in the simulations. By its nature, this simulation process includes numerous assumptions, for both long-term and short-term timeframes, including assumptions on average balances and yields. Many of the assumptions are both highly qualitative and subjective. The high rate and low rate estimates generated by this process are then compared to the flat scenario. At year-end 1994, Crestar's projection of pre-tax net interest income at risk, as a percentage of the next twenty-four month's net interest income under a flat scenario, was 3.4% for a high interest rate scenario, and 4.4% for a falling interest rate scenario. The net interest income at risk percentage does not consider future discretionary actions, including hedging activity, that may be entered into to manage future earnings volatility. A second interest sensitivity tool is the quantification of market value changes for all assets and liabilities given an increase or decrease in interest rates. This approach provides a longer term view of interest rate risk, capturing predominantly all expected future cash flows. Assets and liabilities with option characteristics are valued based on numerous interest rate path valuations using Monte Carlo rate simulation techniques. The banking industry and its regulatory authorities are moving toward a market value method of interest sensitivity assessment. Crestar has been developing this tool and is incorporating it as another component of interest rate risk management to supplement the results achieved through net interest income simulation. Another interest rate risk tool used by Crestar is the interest rate "gap," or mismatch in repricing between interest-sensitive assets and liabilities, which provides a general indication of interest sensitivity at a specific point in time. Table 9 reflects the earlier of the maturity or repricing dates for various assets and liabilities at December 31, 1994. At that point in time, Crestar had a cumulative negative six-month gap with 22 TABLE 9 INTEREST SENSITIVITY ANALYSIS
DECEMBER 31, 1994 IN MILLIONS MATURITY/RATE SENSITIVITY WITHIN 2-3 4-6 7-12 OVER USES OF FUNDS ONE MONTH MONTHS MONTHS MONTHS ONE YEAR TOTAL Loans: Commercial $ 2,169.0 $ 49.5 $ 56.3 $ 62.9 $ 554.5 $ 2,892.2 Tax-exempt 149.8 0.7 6.1 3.6 40.7 200.9 Instalment 508.5 74.6 118.4 513.2 595.3 1,810.0 Bank card 224.1 57.3 102.5 229.5 863.9 1,477.3 Real estate 528.5 264.1 321.5 588.9 1,017.6 2,720.6 Construction 136.1 0.7 2.3 5.8 39.7 184.6 Securities held to maturity 10.1 23.2 29.7 88.9 755.5 907.4 Securities available for sale 318.3 15.8 68.3 115.4 1,104.2 1,622.0 Money market investments 447.6 0.1 4.9 - - 452.6 Mortgage loans held for sale 209.5 - - - - 209.5 Total earning assets 4,701.5 486.0 710.0 1,608.2 4,971.4 12,477.1 Interest sensitivity hedges on assets (700.0) (254.4) (102.2) 39.3 1,017.3 - Total uses $ 4,001.5 $ 231.6 $ 607.8 $ 1,647.5 $5,988.7 $12,477.1 SOURCES OF FUNDS Interest checking deposits $ 1,916.4 $ - $ - $ - $ - $ 1,916.4 Money market deposit accounts 2,342.2 - - - - 2,342.2 Regular savings deposits 1,394.1 - - - - 1,394.1 Money market certificates and other domestic time deposits 331.1 411.0 613.2 713.1 887.4 2,955.8 Certificates of deposit $100,000 and over 24.2 11.9 15.2 7.4 7.5 66.2 Short-term borrowings 1,380.8 - - - - 1,380.8 Long-term debt 0.1 0.3 0.3 10.6 355.7 367.0 Total interest-bearing liabilities 7,388.9 423.2 628.7 731.1 1,250.6 10,422.5 Other sources - net - - - - 2,054.6 2,054.6 Total sources $ 7,388.9 $ 423.2 $ 628.7 $ 731.1 $3,305.2 $12,477.1 Cumulative maturity/rate sensitivity gap $ (3,387.4) $ (3,579.0) $ (3,599.9) $ (2,683.5) $ - $ - ADJUSTMENTS Beta adjustments: Interest checking (beta factor .21) $ 1,514.0 Money market accounts (beta factor .57) 1,007.2 Regular savings (beta factor .13) 1,212.9 Demand deposit sensitivity (724.9) Cumulative adjusted maturity/rate sensitivity gap $ (378.2) $ (569.8) $ (590.7) $ 325.7 $ - $ -
$3.6 billion excess of interest-sensitive sources of funds over uses of funds. This generally indicates that earnings should improve in a declining interest rate environment as liabilities reprice more quickly than assets. The opposite would be true of a positive, or asset-sensitive, gap. In addition to the traditional gap measurement presentation, Table 9 also presents interest sensitivity on an adjusted basis. The first of these adjustments is made through the use of beta factors, which are based on a ratio of actual changes in consumer deposit rates to changes in the prime rate during interest rate cycles for the last several years. Essentially, the beta factors recognize that certain consumer deposit rates are less interest-sensitive than market-based rates such as commercial paper. In addition to a beta adjustment, the table also incorporates an adjustment to reflect the sensitivity of much of the Corporation's commercial 23 TABLE 10 OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (1) DECEMBER 31, 1994 WEIGHTED AVERAGE DOLLARS IN THOUSANDS AVERAGE FIXED ESTIMATED NOTIONAL EXPECTED RECEIVE FAIR BALANCE MATURITY RATE VALUE COMMENTS ASSET RATE CONVERSIONS Generic interest rate swaps $ 600,000 1.5 yrs. 6.35% Convert floating rate Unrealized gross gains $ 169 assets to fixed rate. Unrealized gross losses (20,738) Net unrealized loss (20,569) Amortizing interest rate swaps 860,166 2.4 yrs. 5.26% Convert floating rate Unrealized gross gains 3 assets to fixed rate. Unrealized gross losses (74,581) Net unrealized loss (74,578) Interest rate floors 200,000 .1 yrs. 5.50%(2) Minimize interest rate Unrealized gross gains - risk associated with Unrealized gross losses (83) falling rates on variable Net unrealized loss (83) rate assets. Tied to London Interbank Offered Rate (LIBOR). HEDGES OF LENDING COMMITMENTS Forward contracts 266,439 .2 yrs. n/a Hedges of residential Unrealized gross gains 265 mortgage lending Unrealized gross losses (241) commitments. Net unrealized gain 24 Total hedges against interest rate risk $1,926,605 $ (95,206)
(1) Includes only off-balance sheet derivative financial instruments related to interest rate risk management activities; carrying amounts not material (2) Average strike rate for interest rate floors demand deposit balances to the level of interest rates. On a cumulative six-month basis, Crestar had a liability sensitive "adjusted gap" at December 31, 1994, with $591 million excess of interest-sensitive sources of funds over uses of funds. Each of the above three tools used to assess interest rate risk have strengths and weaknesses. While Crestar believes that the above methodologies provide a meaningful representation of the Corporation's interest rate sensitivity, the methodologies do not necessarily take into account all business developments which can have an impact on net interest income, such as changes in credit quality or changes in the amount and composition of earning assets and sources of funds. As noted, Crestar incurs a degree of interest rate risk as a provider of banking services to its customers. This risk can be reduced through derivative interest rate contracts, such as interest rate swaps, caps and floors. The majority of Crestar's outstanding derivative instruments at December 31, 1994 are utilized to convert certain variable rate assets to fixed rates in order to lock in a profitable interest spread based on the underlying fixed rate funding sources. Because financial derivatives typically do not have actual principal dollars transferred between parties, notional principal amounts are used to express the volume of such transactions. However, the notional amount of derivative contracts does not represent direct credit exposure. Crestar's direct credit exposure is generally limited to the estimated replacement cost of those instruments with a positive market value. Crestar has established policies governing derivative activities, and the counterparties used by Crestar are considered high quality credits. In addition, Crestar may demand collateral from a counterparty to further minimize credit risk. There were no past due amounts or reserves for possible derivative credit losses at December 31, 1994, nor has Crestar ever experienced any charge-offs related to the credit risk of derivative transactions. No interest rate swaps, floors or caps used as hedges against interest rate risk were sold or terminated prior to maturity during 1994, and at December 31, 1994 there were no deferred gains or 24 TABLE 11 OFF-BALANCE SHEET DERIVATIVES-EXPECTED MATURITIES (1) DECEMBER 31, 1994 DOLLARS IN THOUSANDS WITHIN ONE TO ONE YEAR FIVE YEARS TOTAL ASSET RATE CONVERSIONS Generic interest rate swaps: Notional amount $300,000 $ 300,000 $ 600,000 Average fixed receive rate 6.86% 5.83% 6.35% Estimated fair value $ 169 $ (20,738) $ (20,569) Amortizing interest rate swaps: Notional amount $ 5,351 $ 854,815 $ 860,166 Average fixed receive rate 8.48% 5.24% 5.26% Estimated fair value $ 3 $ (74,581) $ (74,578) Interest rate floors: Notional amount $200,000 - $ 200,000 Average strike rate 5.50% - 5.50% Estimated fair value $ (83) - $ (83) HEDGES OF LENDING COMMITMENTS Forward contracts: (2) Notional amount $266,439 - $ 266,439 Estimated fair value 24 - 24 Total hedges against interest rate risk: Notional amount $771,790 $1,154,815 $1,926,605 Estimated fair value 113 (95,319) (95,206) 1 Includes only off-balance sheet derivative financial instruments related to interest rate risk management activities 2 Hedges of residential mortgage lending commitments losses arising from termination of hedged transactions prior to maturity. The notional amount of Crestar's interest rate swaps, caps and floors (excluding customer positions where Crestar simply acts as an intermediary) was $1.7 billion at December 31, 1994. Forward contracts with a notional amount of $266 million, utilized to hedge lending commitments of Crestar's mortgage banking subsidiary, were also outstanding at December 31, 1994, bringing the total notional value of derivative financial instruments related to interest rate risk management activities to $1.927 million at year-end 1994. Tables 10, 11 and 12 present information regarding fair values, maturity, average rates, and activity during 1994 for these off-balance sheet derivative instruments. Net unrealized losses on these instruments totaled $95.2 million as of year-end 1994. These derivatives have maturities ranging from one month to 4.5 years. Financial statement note 22 contains additional information pertaining to these types of agreements. Estimated fair values of financial instruments held at December 31, 1994 and 1993 are presented in financial statement note 23. Management is concerned about the comparability of fair value estimates between financial institutions due to the wide range of valuation techniques utilized and the numerous estimates and assumptions that must be made, given the absence of active secondary markets for many financial instruments. This is particularly true for estimated fair values computed for loan portfolios and deposit liabilities. Lack of uniform valuation methodologies introduces a great degree of subjectivity to such fair value estimates. A brief description of the methodologies used in computing fair value estimates, and the resulting estimated fair values, are provided in financial statement note 23. Crestar's loan portfolio, which constitutes the Corporation's largest financial instrument asset category, had an estimated fair value of approximately 99.7% of recorded book value at December 31, 1994. The effects of a rising interest rate environment, partially offset by improved credit quality trends, were major factors in the determination of the estimated fair value for net loans. Deposit liabilities payable on short notice or demand, which constituted 72% of Crestar's total deposits at December 31, 1994, were assigned an estimated fair value equal to the balance payable on demand, in accordance with mandatory accounting standards. However, recent purchase transactions of bank deposits have generally reflected premiums of approximately 4% to 10% of recorded book value, 25 TABLE 12 OFF-BALANCE SHEET DERIVATIVES ACTIVITY (1)
IN THOUSANDS 1994 ASSET RATE CONVERSIONS LIABILITY RATE CONVERSIONS INTEREST RATE SWAPS INTEREST RATE SWAPS HEDGES OF GENERIC AMORTIZING INTEREST GENERIC INTEREST LENDING RECEIVE RECEIVE RATE PAY PAY RATE COMMIT- FIXED FIXED FLOORS VARIABLE FIXED CAPS MENTS(2) TOTAL Beginning balance $ 650,000 $812,089 $200,000 $ 55,000 $ 4,000 $ 400,000 $ 943,330 $ 3,064,419 Additions 100,000 100,000 - - - - 8,448,201 8,648,201 Maturities/ Amortizations (150,000) (51,923) - (55,000) (4,000) (400,000) (9,125,092) (9,786,015) Ending balance $ 600,000 $860,166 $200,000 $ - $ - $ - $ 266,439 $ 1,926,605
1 Includes only off-balance sheet derivative financial instruments related to interest rate risk management activities 2 Forward contracts hedging residential mortgage lending commitments; maturities represent contracts delivered reflecting the relationship value of such deposits over their projected life and their value as a low cost source of funds. In general, the rising interest rate environment of 1994 increased the fair values of both non-interest bearing and fixed rate deposit liabilities, while decreasing the fair values of fixed rate loan balances, investment securities and off-balance sheet derivative instruments. Effective January 1, 1994, Crestar adopted Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities." In accordance with SFAS 115, securities are classified as either securities held to maturity, securities available for sale or trading account securities. Securities held to maturity are carried at amortized cost on the Corporation's Consolidated Balance Sheets, as Crestar has the ability and positive intent to hold these securities to maturity. Trading account securities are carried at fair value as they are intended to be sold in the near term. Securities available for sale are carried at fair value and represent securities not classified as held to maturity TABLE 13 DEBT RATINGS (AS OF JANUARY 31, 1995) STANDARD SECURITY MOODY'S & POOR'S BANKWATCH 8 3/4% Subordinated Notes due 2004 Baa1 BBB+ BBB+ 8 1/4% Subordinated Notes due 2002 Baa1 BBB+ BBB+ 8 5/8% Subordinated Notes due 1998 Baa1 BBB+ BBB+ Commercial Paper P-2 Not rated TBW-1 Crestar Bank Deposit Notes: Long-Term A2 A Not rated Short-Term P-1 A-1 TBW-1 or trading account securities. With the adoption of SFAS 115, unrealized holding gains or losses on securities available for sale are excluded from the Consolidated Statement of Income and reported, net of tax, as a separate component of shareholder's equity. In accordance with SFAS 115, the Corporation's consolidated financial statements for periods prior to January 1, 1994 have not been retroactively changed to conform to current securities classifications. Prior to January 1, 1994, investment securities which management intended to sell as part of its asset/ liability management strategy, or that may have been sold in response to changes in interest rates, prepayment risk or other similar factors, were classified as securities held for sale, and were stated at the lower of aggregate amortized cost or market value. All other investment securities were accounted for in a manner similar to securities held to maturity or trading account securities. At December 31, 1994, the amortized cost of securities available for sale, net of tax, exceeded the fair value of such securities by $36.6 million. The net unrealized gain or loss on securities available for sale, recorded as a component of shareholders' equity, will continue to be subject to change in future periods due to fluctuations in market values, acquisition activities, and sales, purchases, maturities and calls of securities classified as available for sale. Securities held to maturity at December 31, 1994 had an amortized cost of $907.4 million and a market value of $860.8 million. Unrealized pre-tax losses on such securities at year-end 1994 were $48.2 million, with unrealized pre-tax gains of $1.6 million. No sales of investments classified as securities held to maturity occurred during 1994. The Corporation's debt ratings are presented in Table 13. In the second quarter of 1994, Moody's raised its ratings on Crestar's subordinated notes from Baa2 to Baa1. In the fourth quarter of 1994, Standard 26 TABLE 14 ANALYSIS OF SECURITIES HELD TO MATURITY (1)
DECEMBER 31, 1994 AVERAGE AVERAGE EXPECTED STATED PAR AMORTIZED MARKET AVERAGE MATURITY MATURITY DOLLARS IN THOUSANDS VALUE COST VALUE YIELD(2) (YRS/MOS) (YRS/MOS) U.S. Treasury and Federal agencies: One to five years $ 10,000 $ 10,307 $ 9,987 5.0% 01/00 01/00 Mortgage-backed obligations of Federal agencies: Within one year 1,652 1,684 1,675 6.2 One to five years 79,797 80,966 75,988 6.2 Five to ten years 312,712 315,604 298,534 6.5 After ten years 200,289 200,422 190,037 7.3 Total mortgage-backed obligations of Federal agencies 594,450 598,676 566,234 6.7 06/03 08/03 States and political subdivisions: Within one year 2,575 2,575 2,605 9.8 One to five years 18,790 18,885 19,189 10.4 Five to ten years 12,100 12,115 11,719 7.9 After ten years 34,305 33,789 32,053 9.0 Total states and political subdivisions 67,770 67,364 65,566 9.2 08/03 10/03 Other taxable securities: Within one year 1,005 1,005 1,005 5.4 One to five years 130,575 130,622 126,736 5.5 Five to ten years 65,035 64,890 58,975 5.5 After ten years 34,602 34,504 32,268 6.3 Total other taxable securities 231,217 231,021 218,984 5.6 02/10 06/04 Total securities held to maturity $903,437 $ 907,368 $860,771 6.6% 05/04 07/11
1 Maturity line classifications are based on stated maturity 2 Tax-equivalent basis, based on amortized cost & Poor's raised its ratings on Crestar's subordinated notes from BBB to BBB+. In their announcements regarding these debt rating upgrades, both agencies cited Crestar's strong financial condition and rising profitability. SOURCES OF FUNDS Crestar's largest and most important funding source is core deposits, which totaled $10.8 billion at December 31, 1994, an increase of $729 million, or 7%, over December 31, 1993 balances. Average core deposits increased by $1.2 billion, or 12% from 1993 to 1994. Of this increase, approximately $950 million was attributable to the acquisitions consummated during 1994. While money market certificates displayed relatively low growth, other domestic time deposits increased by $308 million, or 15%, from year-end 1993 levels. Savings accounts increased $153 million or 12% during 1994. Transaction accounts, which include demand, interest checking and money market deposit accounts, grew $257 million or 4% over year-end 1993 levels. These increases reflect successful promotional efforts during 1994, including "Welcome Aboard" campaigns aimed at welcoming customers of acquired financial institutions to Crestar. Crestar's purchase of three financial institutions during the first quarter of 1995, as discussed in financial statement note 2, is expected to initially add approximately $590 million in deposits. Purchased liabilities are composed of certificates of deposit of $100,000 and over (large CDs), deposits in foreign offices, and short-term borrowings. Total TABLE 15 SECURITIES OF STATES AND POLITICAL SUBDIVISIONS BY QUALITY RATING DECEMBER 31, 1994 AMORTIZED PERCENT DOLLARS IN THOUSANDS COST OF TOTAL Moody's Ratings: Aaa $ 49,382 73.3% Aa 9,494 14.1 A 3,776 5.6 Baa 285 .4 Not rated by Moody's 4,427 6.6 Total $ 67,364 100.0% 27 purchased liabilities decreased $217 million or 13% from December 31, 1993, reflecting both growth in core deposits and management strategies in a rising interest rate environment. At December 31, 1994, approximately 49% of Crestar's purchased funds consisted of funds invested by local customers and, as such, are less volatile than other categories of purchased funds. National sources accounted for 51% of purchased liabilities. At December 31, 1994, Crestar had $1.2 billion in market value of unpledged marketable securities. Long-term debt increased $176 million during 1994, primarily reflecting the issuance of $150 million in subordinated ten-year notes in November 1994 (see "Capital Resources and Adequacy"). USES OF FUNDS Total earning assets at December 31, 1994 increased $426 million or 4% from year-end 1993, compared with a 6% increase in the prior year. Average earning (Average Core Deposit Mix Stacked Bar Graph) (Percent) Interest Checking & Money Regular Other Demand Market Savings Consumer Deposits Deposits Deposits Deposits 1990 21 32 5 42 1991 19 33 5 43 1992 18 40 8 34 1993 20 41 11 28 1994 19 39 13 29 assets for 1994 increased $987 million or 9% above the average level of earning assets in 1993. This increase was attributable to the seven financial institution acquisitions completed during 1994. In 1994, higher levels of securities available for sale and loans were partially offset by a decline in securities classified as held to maturity. Total securities (classified as either held to maturity or available for sale) as of December 31, 1994 decreased $992 million or 28% from December 31, 1993, as funds from maturities and sales were utilized to fund some loan portfolio growth and to reduce short-term borrowings. This followed a $293 million or 9% increase in 1993. The composition of Crestar's securities portfolio along with related yield and maturity information as of December 31, 1994 is presented in Tables 14 and 16. Both average expected maturity and actual stated maturity are shown. The average expected maturity considers prepayments and TABLE 16 ANALYSIS OF SECURITIES AVAILABLE FOR SALE (1)
December 31, 1994 AVERAGE AVERAGE EXPECTED STATED PAR AMORTIZED MARKET AVERAGE MATURITY MATURITY DOLLARS IN THOUSANDS VALUE COST VALUE YIELD(2) (YRS/MOS) (YRS/MOS) U.S. Treasury and Federal agencies: Within one year $ 175,000 $ 177,126 $ 176,539 5.8% One to five years 539,800 534,688 515,091 4.9 Five to ten years 4,500 4,616 4,074 5.8 Total U.S. Treasury and Federal agencies 719,300 716,430 695,704 5.1 01/06 01/06 Mortgage-backed obligations of Federal agencies: Five to ten years 67,098 70,307 68,580 7.6 After ten years 604,811 612,270 581,027 7.0 Total mortgage-backed obligations of Federal agencies 671,909 682,577 649,607 7.1 08/07 12/07 Other taxable securities: One to five years 13,871 13,881 13,718 5.6 Five to ten years 9,154 9,134 9,039 6.4 After ten years 158,664 156,375 152,880 6.3 Total other taxable securities 181,689 179,390 175,637 6.3 05/08 23/01 Total interest-earning investments 1,572,898 1,578,397 1,520,948 6.1 05/01 08/06 Common and preferred stocks 101,032 101,032 101,025 6.7 Total securities available for sale $1,673,930 $1,679,429 $1,621,973 6.1%
(1) Maturity line classifications are based on stated maturity (2) Tax-equivalent basis, based on amortized cost 28 (Earning Asset Mix Pie Chart) ($ In Millions) Securities Held To Maturity and Mortgage Money Securities Loans Held Market Available For Sale Investments For Sale Loans December 31, 1994 $209.5 $452.6 $2,529.4 $9,285.6 2% 4% 20% 74% Total $12,477.1 (Funding Mix Pie Chart) ($ In Millions) Interest- Other Bearing Long-Term Sources- Purchased Core Debt Net Funds Deposits December 31, 1994 $367.0 $2,054.6 $1,447.0 $8,608.5 3% 16% 12% 69% Total $12,477.1 amortization, resulting in a more realistic measure of maturities than actual stated maturity. The "Other taxable securities" category consists largely of collateralized mortgage obligations and certificates of automobile collateralized receivables. Crestar's holdings of tax-exempt securities have declined over the past five years and management expects that trend to continue as maturities occur within the portfolio. Table 15 presents the distribution of tax-exempt securities by investment grade as determined by Moody's Investors Service. All of the $4.4 million of securities shown as not rated by Moody's at year end are rated A or better by Standard & Poor's. None of Crestar's securities holdings by individual issuer (excluding U.S. Treasury and Federal agencies) exceeded 10% of total shareholders' equity at December 31, 1994. During 1994, approximately $1.7 billion of securities were sold, generating securities losses of $10.8 million. The majority of such securities losses were incurred in the fourth quarter of 1994, when Crestar sold approximately $300 million in lower-yielding U.S. Treasury securities in conjunction with the overall management of interest rate risk for the Corporation. All securities sold in 1994 were from the Corporation's securities available for sale portfolio. In 1993, over $350 million in U.S. Treasury securities and almost $15 million in adjustable rate preferred stock were sold for net gains of $2.2 million. Money market investments decreased by $198 million or 30% from December 31, 1993 to $453 million at December 31, 1994. Average balances of money market investments declined from $676 million in 1993 to $605 million in 1994, while Crestar's average short-term borrowings declined $244 million during this same time period. Year-end money market investment levels reflect an appropriate level of money market investments given liquidity needs and balance sheet management strategies. Declines in mortgage origination and refinancing activity, attributable to a rising interest rate environment, contributed to a lower level of mortgage loans held for sale, which decreased from $591 million at December 31, 1993 to $210 million at December 31, 1994. Year-end total loans net of unearned income increased $2.0 billion or 27% in 1994, compared to an increase of 11% in 1993. Period-end loans attributable to 1994 acquisitions were approximately $1.0 billion. Reflecting the economic rebound in Crestar's market area, commercial loans increased by 11% in 1994 following a 1% decrease in 1993. While commercial loans continued to be Crestar's largest loan category, the percentage of commercial loans to total loans at year-end declined from 36% in 1993 to 31% in 1994. This reduction is the result of strong consumer lending growth in 1994 and the impact of acquisition activity. Tax-exempt loans continued to decline, primarily due to loan maturities, decreasing 13% in 1994. Bank card loans increased $501 million or 51% in 1994, and totaled $1.48 billion at December 31, 1994. This growth arises from a continuation of strong promotional activities, including efforts outside Virginia, Maryland and Washington, DC, that had previously resulted in an increase of $412 million, or 73%, in bank card loans during 1993. Instalment loans increased 18% in 1994, reflecting both acquisitions and internally generated growth in both direct and indirect loans. In 1993, instalment loans increased 29 TABLE 17 LOAN PORTFOLIO ANALYSIS
DECEMBER 31, DOLLARS IN MILLIONS 1994 1993 1992 1991 1990 $ % $ % $ % $ % $ % Commercial 2,892 31 2,609 36 2,635 40 3,048 43 3,442 45 Tax-exempt 201 2 231 3 289 4 343 5 399 5 Instalment 1,810 20 1,533 21 1,360 21 1,367 19 1,415 18 Bank card 1,477 16 976 13 564 9 567 8 546 7 Real estate: Residential 1,976 21 945 13 776 12 594 8 553 7 Income property 745 8 769 11 744 11 674 10 645 9 Total real estate 2,721 29 1,714 24 1,520 23 1,268 18 1,198 16 Construction 185 2 224 3 214 3 473 7 680 9 Total loans - net of unearned income 9,286 100 7,287 100 6,582 100 7,066 100 7,680 100
TABLE 18 LOANS TO REAL ESTATE DEVELOPERS AND INVESTORS- GEOGRAPHIC DISTRIBUTION AND PROPERTY TYPE DECEMBER 31, 1994 REGION TOTAL GREATER IN MILLIONS CORPORATION WASHINGTON EASTERN WESTERN CAPITAL Land acquisition and development $ 92.6 $ 56.3 $ 26.2 $ 4.4 $ 5.7 Residential developments 244.5 128.0 72.0 38.6 5.9 Commercial projects: Office buildings 146.5 88.4 31.9 11.0 15.2 Retail stores and malls 202.0 144.3 42.6 7.2 7.9 Hotels and motels 81.2 44.0 23.1 14.1 - Industrial buildings 147.3 101.6 17.3 4.3 24.1 Total commercial projects 577.0 378.3 114.9 36.6 47.2 Special use 52.3 20.0 12.1 18.3 1.9 Other 96.9 57.4 15.7 3.9 19.9 Total REDI loans $1,063.3 $640.0 $240.9 $101.8 $80.6
TABLE 19 LOANS TO REAL ESTATE DEVELOPERS AND INVESTORS (REDI) DECEMBER 31, IN MILLIONS 1994 1993 Commercial - Developer lines $ 98.7 $ 101.1 Tax-exempt: Income property mortgage 67.5 82.0 Construction .1 .2 Real estate - Income property 745.0 769.0 Construction 152.0 191.0 Total REDI loans $1,063.3 $1,143.3 30 TABLE 20 NONPERFORMING ASSETS AND PAST DUE LOANS
DECEMBER 31, DOLLARS IN THOUSANDS 1994 1993 1992 1991 1990 Nonaccrual loans: Commercial $28,708 $37,788 $ 87,121 $144,830 $ 81,876 Instalment 3,408 902 930 1,440 2,230 Real estate 30,011 33,548 45,422 48,247 69,724 Construction 7,279 5,843 8,506 48,745 48,614 Total nonaccrual loans 69,406 78,081 141,979 243,262 202,444 Restructured loans 6,878 1,733 249 27,005 18,244 Total nonperforming loans 76,284 79,814 142,228 270,267 220,688 Foreclosed properties - net 18,629 16,951 78,584 79,692 16,516 Total nonperforming assets $94,913 $96,765 $220,812 $349,959 $237,204 Past due loans: Commercial $ 1,608 $ 2,089 $ 3,252 $ 3,364 $ 8,046 Instalment: Student loan 14,705 7,879 9,057 11,456 33,860 Other 1,368 1,049 2,562 1,701 1,354 Bank card 10,831 6,216 7,266 7,935 7,805 Real estate 6,991 7,758 3,779 4,587 4,237 Construction 198 197 46 3,760 528 Total past due loans $35,701 $25,188 $ 25,962 $ 32,803 $ 55,830 Nonperforming assets to: Loans and foreclosed properties - net 1.02% 1.32% 3.32% 4.90% 3.08% Total assets .68 .73 1.74 2.96 2.00 Allowance for loan losses to: Nonperforming assets 231 218 93 60 63 Nonperforming loans 287 264 144 78 68 Allowance for loan losses plus shareholders' equity to nonperforming assets 14.17x 13.16x 5.27x 2.87x 3.88x
13%. Real estate mortgage loans increased $1.0 billion or 59% over 1993, and totaled $2.7 billion at December 31, 1994. Merger activity in 1994 centered on thrift institutions, and these acquisitions had a significant percentage of residential real estate mortgage loans as a percentage of total loans. This acquisition activity created a majority of Crestar's increase in real estate mortgage loans in 1994. Residential real estate mortgage loans represented 21% of the Corporation's total loan portfolio at December 31, 1994, up from 13% at year-end 1993. Based upon Standard Industrial Classification codes used for bank regulatory reporting purposes, the Corporation had no aggregate loan concentrations of 10% or more of total loans in any particular industry at year-end 1994. Under an internal classification of borrower type, Crestar does have a concentration of loans to real estate developers and investors (REDI). Crestar had $1.06 billion in REDI loans outstanding at year-end 1994, compared to $1.14 billion at year-end 1993 (see Tables 18 and 19). While REDI loan balances fell slightly in 1994, other types of loans, including consumer loan balances, increased significantly. Together, these two factors led to a decline in REDI loans as a percentage of total loans from 16% at December 31, 1993 to 11% at December 31, 1994. The reduction in REDI balances occurred despite Crestar's 1994 acquisitions, which added approximately $150 million in REDI balances (at time of acquisition) during the year. REDI balances have shown a downward trend over the past several years due to declining levels of commercial development, sales of projects, paydowns and pay-outs of construction and income property projects, and migration into foreclosed properties, charge-offs and write-downs. Diversification of the REDI portfolio by geographic region and by project type is detailed in Table 18. Crestar's Greater Washington region comprises the largest portion of this portfolio, followed by the Eastern region. The primary REDI loan exposure in both regions relate to commercial projects. 31 TABLE 21 NONPERFORMING LOANS-QUARTERLY ACTIVITY
IN MILLIONS THREE MONTHS ENDED 1994 1993 DEC. 31 SEPT. 30 JUNE 30 MAR. 31 DEC. 31 SEPT. 30 JUNE 30 MAR. 31 Beginning balance $ 62.9 $ 77.4 $ 89.5 $ 79.8 $ 100.1 $ 117.8 $ 118.9 $ 142.2 Acquisition additions - - 4.0 8.1 - - 9.5 - Other additions 27.6 20.9 19.2 27.4 24.7 11.7 23.4 20.8 Payments, sales and reductions (10.0) (18.9) (22.1) (15.0) (22.8) (15.8) (10.8) (10.1) Charge-offs (2.7) (4.8) (6.6) (7.1) (7.6) (9.5) (10.3) (15.4) Reinstatements to accrual status (0.8) (5.5) (4.1) (2.7) (10.3) (2.8) (9.4) (10.5) Transfers to foreclosed properties (0.7) (6.2) (2.5) (1.0) (4.3) (1.3) (3.5) (8.1) Net increase (decrease) 13.4 (14.5) (12.1) 9.7 (20.3) (17.7) (1.1) (23.3) Ending balance $ 76.3 $ 62.9 $ 77.4 $ 89.5 $ 79.8 $ 100.1 $ 117.8 $ 118.9
RISK ELEMENTS Nonperforming assets consist of foreclosed properties, formally restructured loans and nonaccrual loans. Properties are considered foreclosed if acquired through traditional legal procedures or in settlement of loans, or when the customer has abandoned the property to Crestar. Loans may be restructured as to rate, maturity or other terms as determined on an individual credit basis. Generally, loans are placed in nonaccrual status when principal or interest is 90 days or more past due, or earlier if it is known or expected that interest will not be paid or collection of all principal and interest is unlikely. Any loan past due 90 days or more and, based on a determination of collectibility, is not classified as nonaccrual, is classified as a past due loan. Table 20 presents the level of these assets for the past five years, and Tables 21 and 22 summarize quarterly activity in nonperforming loans and foreclosed properties for 1994 and 1993. At December 31, 1994, nonperforming assets of $94.9 million were down $1.9 million or 2% from December 31, 1993, despite $34.0 million in acquisition-related balances acquired during 1994. At year-end 1994, approximately $14.1 million of nonperforming assets were attributable to acquisitions completed in 1994. REDI nonperforming assets totaled $59.1 million and comprised 62% of total nonperforming assets and 5.6% of total REDI loans at December 31, 1994. The REDI nonperforming asset balance reflects a decrease of $3.2 million from December 31, 1993. Apart from the REDI portfolio, commercial and residential real estate nonperforming assets declined during the year, while increases of $2.5 million were noted in instalment nonperforming assets. Reflecting additions from 1994 acquisitions, foreclosed properties increased $1.7 million or 10% from December 31, 1993 to December 31, 1994. The December 31, 1994 balance of $18.6 million is net of a $7.2 million valuation allowance to address exposure to prevailing market and economic conditions and the potential impact of such conditions on the marketability of the portfolio. The ratio of nonperforming assets to loans and foreclosed properties-net at December 31, 1994 was 1.02%, compared to 1.32% at December 31, 1993 and 3.32% at December 31, 1992. Based on current portfolio trends, and barring an unexpected deterioration in the economy, management does not expect the ratio of nonperforming assets to loans and foreclosed properties to change significantly during 1995. However, interim periods in 1995 could show increases in the total balance of nonperforming assets due to future acquisitions of financial institutions, the impact of higher interest rates on borrowers, and loan growth. Potential problem loans consist of loans that are currently performing in accordance with contractual terms but for which potential operating or financial concerns of the obligors have caused management to have serious doubts regarding the ability of such obligors to continue to comply with present repayment terms. At December 31, 1994, potential problem loans that are not included in Table 20 as nonperforming or past due loans amounted to approximately $210 million, compared to $205 million at December 31, 1993. Of the year-end 1994 balance, 67% consisted of commercial loan balances, with an additional 27% representing commercial real estate loans. In addition, $17 million of standby letters of credit in various industries were being monitored at December 31, 1994. Depending on changes in the 32 TABLE 22 FORECLOSED PROPERTIES-QUARTERLY ACTIVITY
IN MILLIONS THREE MONTHS ENDED 1994 1993 DEC. 31 SEPT. 30 JUNE 30 MAR. 31 DEC. 31 SEPT. 30 JUNE 30 MAR. 31 Beginning balance $23.6 $25.0 $24.5 $17.0 $ 34.7 $ 45.0 $ 75.0 $ 78.6 Acquisition additions - net - - 6.1 15.8 - - 8.9 - Additions 1.5 7.4 2.7 3.8 4.3 3.4 7.7 11.0 Market write-downs (0.2) (0.1) (0.2) - - (0.1) (2.8) (2.9) Reductions (6.3) (7.7) (8.1) (13.4) (23.1) (13.6) (36.3) (11.7) Provision for losses - (1.0) - 1.3 1.1 - (7.5) - Net increase (decrease) (5.0) (1.4) 0.5 7.5 (17.7) (10.3) (30.0) (3.6) Ending balance $18.6 $23.6 $25.0 $24.5 $ 17.0 $ 34.7 $ 45.0 $ 75.0
TABLE 23 NONACCRUAL LOANS AS A PERCENT OF LOAN CATEGORY DECEMBER 31, 1994 1993 1992 1991 1990 Commercial .9% 1.3% 3.0% 4.3% 2.1% Instalment .2 .1 .1 .1 .1 Real estate 1.1 2.0 3.0 3.8 5.8 Construction 3.9 2.6 4.0 10.3 7.2 Total .7% 1.1% 2.2% 3.4% 2.6% economy and other future events, these loans and others not presently identified could be classified as nonperforming assets in the future. There are no loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been disclosed above, that either (i) represent or result from trends or uncertainties that management reasonably expects will materially impact future operating results, liquidity or capital resources or (ii) represent material credits about which management is aware of any information that causes management to have serious doubts as to the ability of such borrowers to comply with loan repayment terms. FUTURE ACCOUNTING CHANGES The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114) in May 1993. SFAS 114 was further amended by the FASB in October 1994 through the issuance of Statement of Financial Accounting Standards No. 118. Effective January 1, 1995, SFAS 114, as amended by SFAS 118, requires that impaired loans within the scope of the statements be measured and reported on the basis of the present value of expected cash flows discounted at the loan's effective interest rate, or at the fair value of the loan's collateral if the loan is deemed "collateral dependent." The impact of adopting SFAS 114, as amended by SFAS 118, is expected to be immaterial to the financial condition and operations of Crestar. INFLATION The effect of changing prices on financial institutions is typically different than on non-banking companies since virtually all of a bank's assets and liabilities are monetary in nature. In particular, interest rates are significantly affected by inflation, but neither the timing nor magnitude of the changes are directly related to price level indices. Therefore, the Corporation can best counter inflation over the long term by managing net interest income and controlling net increases in noninterest income and expenses. 33 Consolidated Balance Sheets Crestar Financial Corporation And Subsidiaries
DOLLARS IN THOUSANDS DECEMBER 31, 1994 1993 ASSETS Cash and due from banks (NOTE 16) $ 907,627 $ 716,652 Securities held to maturity (NOTE 3) 907,368 1,824,617 Securities available for sale (NOTE 4) 1,621,973 1,697,000 Money market investments (NOTE 5) 452,556 650,633 Mortgage loans held for sale 209,525 591,233 Loans - net of unearned income (NOTES 6, 16 AND 22): Commercial 2,892,180 2,608,798 Tax-exempt 200,942 230,852 Instalment 1,810,038 1,532,936 Bank card 1,477,285 976,200 Real estate 2,720,609 1,713,876 Construction 184,583 224,460 Loans - net of unearned income of $1,369 in 1994; $2,988 in 1993 9,285,637 7,287,122 Less: Allowance for loan losses (NOTE 7) (219,189) (210,958) Loans - net 9,066,448 7,076,164 Premises and equipment - net (NOTES 8 AND 12) 316,896 302,704 Customers' liability on acceptances 6,464 11,578 Intangible assets - net (NOTE 9) 122,953 96,152 Foreclosed properties - net (NOTES 6 AND 10) 18,629 16,951 Other assets 379,591 303,263 TOTAL ASSETS (NOTE 23) $14,010,030 $13,286,947 LIABILITIES Demand deposits $ 2,238,399 $ 2,234,536 Interest checking deposits 1,916,411 1,791,100 Money market deposit accounts 2,342,222 2,214,537 Regular savings deposits 1,394,146 1,241,592 Money market certificates 550,596 538,869 Other domestic time deposits 2,405,160 2,097,448 Certificates of deposit $100,000 and over 66,218 45,914 Deposits in foreign offices - 1,782 Total deposits 10,913,152 10,165,778 Short-term borrowings (NOTE 11) 1,380,806 1,616,743 Liability on acceptances 6,464 11,578 Other liabilities 216,581 239,215 Long-term debt (NOTE 12) 366,962 191,156 Total Liabilities (NOTE 23) 12,883,965 12,224,470 SHAREHOLDERS' Preferred stock. Authorized 2,000,000 shares; none issued - - EQUITY Common stock, $5 par value. Authorized 100,000,000 shares; outstanding 37,331,213 in 1994; 37,515,671 in 1993 186,656 187,578 Capital surplus 281,207 248,896 Retained earnings 694,757 626,003 Net unrealized loss on securities available for sale (NOTE 4) (36,555) - Total Shareholders' Equity (NOTES 12, 14, 16 AND 18) 1,126,065 1,062,477 Commitments and contingencies (NOTES 8 AND 22) TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $14,010,030 $13,286,947
See accompanying notes to consolidated financial statements. 34 Consolidated Statements of Income Crestar Financial Corporation And Subsidiaries
IN THOUSANDS, EXCEPT PER SHARE DATA YEARS ENDED DECEMBER 31, 1994 1993 1992 INCOME Interest and fees on loans $692,710 $575,085 $617,686 FROM Interest and dividends on taxable securities EARNING held to maturity 49,546 116,676 166,322 ASSETS Interest on tax-exempt securities held to maturity 4,785 6,820 9,346 Interest and dividends on securities available for sale 129,666 85,331 4,234 Income on money market investments 26,243 23,526 37,567 Interest on mortgage loans held for sale 23,084 25,191 28,522 Total income from earning assets 926,034 832,629 863,677 INTEREST Interest checking deposits 41,234 38,001 44,278 EXPENSE Money market deposit accounts 67,530 58,496 75,936 Regular savings deposits 37,821 31,091 26,749 Money market certificates 19,915 17,861 35,137 Other domestic time deposits 107,442 96,849 136,344 Certificates of deposit $100,000 and over 2,589 1,975 7,651 Deposits in foreign offices 11 68 145 Total interest on deposits 276,542 244,341 326,240 Short-term borrowings 48,169 43,787 38,096 Long-term debt 19,507 17,489 17,197 Total interest expense 344,218 305,617 381,533 NET CREDIT Net interest income 581,816 527,012 482,144 INCOME Provision for loan losses (NOTE 7) 29,682 48,775 99,242 Net credit income 552,134 478,237 382,902 NONINTEREST Trust and investment advisory income 55,609 57,440 51,007 INCOME Service charges on deposit accounts 82,851 79,419 73,944 Bank card-related income 39,529 27,500 23,141 Other income (NOTE 15) 87,057 81,669 66,736 Securities gains (losses) (NOTES 3 AND 4) (10,776) 2,237 3,563 Total noninterest income 254,270 248,265 218,391 NET CREDIT AND NONINTEREST INCOME 806,404 726,502 601,293 NONINTEREST Personnel expense (NOTES 17 AND 18) 303,580 262,626 233,838 EXPENSE Occupancy expense - net 42,231 38,359 35,654 Equipment expense 25,339 24,122 24,011 Other expense (NOTE 19) 180,558 197,915 208,300 Total noninterest expense 551,708 523,022 501,803 NET INCOME Income before income taxes 254,696 203,480 99,490 Income tax expense (NOTE 13) 85,617 62,989 19,689 Net income 169,079 140,491 79,801 Preferred dividend requirements (NOTE 14) - 2,221 2,475 Net income applicable to common shares $169,079 $138,270 $ 77,326 EARNINGS PER SHARE (NOTE 14): Primary $ 4.47 $ 3.68 $ 2.32 Fully diluted 4.47 3.67 2.32
See accompanying notes to consolidated financial statements. 35 Consolidated Statements Of Cash Flows Crestar Financial Corporation and Subsidiaries
IN THOUSANDS YEARS ENDED DECEMBER 31, 1994 1993 1992 OPERATING Net Income $ 169,079 $ 140,491 $ 79,801 ACTIVITIES Adjustments to reconcile net income to net cash provided (used) by operating activities: Provisions for loan losses, foreclosed properties and other losses 30,436 57,995 116,781 Depreciation and amortization of premises and equipment 33,285 31,460 28,910 Securities losses (gains) 10,776 (2,237) (3,563) Amortization of intangible assets 12,279 21,926 13,630 Deferred income tax expense (benefit) 5,274 9,291 (19,654) Loss (gain) on foreclosed properties (2,517) 11,026 28,825 Gain on sale of mortgage servicing rights (18,732) (3,600) (1,761) Net decrease in trading account 1,486 14,834 159,277 Origination of loans held for sale (2,453,007) (3,239,014) (2,510,021) Proceeds from sale of loans held for sale 2,849,856 3,015,016 2,586,124 Net decrease (increase) in accrued interest receivable, prepaid expenses and other assets 30,328 (4,183) 51,274 Net decrease in accrued interest payable, accrued expenses and other liabilities (51,781) (106,713) (31,302) Other, net 11,882 (1,200) (9,809) Net cash provided (used) by operating activities 628,644 (54,908) 488,512 INVESTING Proceeds from maturities and calls of securities ACTIVITIES held to maturity 246,916 792,455 609,485 Proceeds from maturities and calls of securities available for sale 549,581 79,820 - Proceeds from sales of securities held to maturity - - 6,473 Proceeds from sales of securities available for sale 1,739,244 376,493 237,961 Purchases of securities held to maturity (568,336) (813,753) (1,865,861) Purchases of securities available for sale (664,022) (571,454) - Net decrease (increase) in money market investments 238,321 522,815 (276,056) Principal collected on non-bank subsidiary loans 11,284 26,189 45,731 Loans originated by non-bank subsidiaries (459,856) (91,945) (355,384) Net decrease (increase) in other loans (380,789) (67,536) 630,973 Purchases of premises and equipment (35,735) (37,048) (28,694) Proceeds from sales of foreclosed properties 38,480 75,983 86,302 Proceeds from sales of mortgage servicing rights 32,198 7,625 2,687 Aquisitions of net assets of financial institutions 23,703 26,419 1,996,067 Other, net (7,583) (12,031) (7,697) Net cash provided by investing activities 763,406 314,032 1,081,987 FINANCING Net increase (decrease) in demand, interest checking, ACTIVITIES money market and regular savings deposits (188,404) 378,894 655,594 Net decrease in short-term borrowings (442,145) (33,773) (91,615) Net decrease in certificates of deposit (631,758) (474,560) (2,390,537) Proceeds from issuance of long-term debt 152,743 972 124,529 Principal payments on long-term debt (9,796) (71,072) (76,721) Cash dividends paid (57,477) (45,091) (29,121) Common stock purchased and retired (48,450) (21,054) - Proceeds from the issuance of common stock 24,212 14,979 108,918 Redemption of preferred stock - (46,350) - Net cash used by financing activities (1,201,075) (297,055) (1,698,953) CASH AND Increase (decrease) in cash and cash equivalents 190,975 (37,931) (128,454) CASH Cash and cash equivalents at beginning of year 716,652 754,583 883,037 EQUIVALENTS CASH AND CASH EQUIVALENTS AT END OF YEAR $ 907,627 $ 716,652 $ 754,583
Cash and cash equivalents consist of cash and due from banks. See accompanying notes to consolidated financial statements. 36 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY CRESTAR FINANCIAL CORPORATION AND SUBSIDIARIES NET UNREALIZED GAIN (LOSS) ON PREFERRED SECURITIES STOCK COMMON STOCK CAPITAL RETAINED AVAILABLE IN THOUSANDS (NOTE 14) SHARES AMOUNT SURPLUS EARNINGS FOR SALE TOTAL Balance, December 31, 1991 $ 45,000 32,228 $161,142 $ 98,820 $489,960 $ - $ 794,922 Net Income - - - - 79,801 - 79,801 Cash dividends declared on: Preferred stock ($2.75 per share) - - - - (2,475) - (2,475) Common stock ($.80 per share) - - - - (26,647) - (26,647) Change in valuation allowance for marketable equity securities - - - - 4,369 - 4,369 Common stock issued: For dividend reinvestment plan - 284 1,420 6,208 - - 7,628 For thrift and profit sharing plan - 51 254 886 - - 1,140 Upon exercise of stock options (net of tax benefit of $444) - 142 708 2,318 - - 3,026 Upon conversion of debentures (NOTES 12 AND 14) - 2 9 8 - - 17 In public offering (NOTE 14) - 3,450 17,250 79,874 - - 97,124 Balance, December 31, 1992 $ 45,000 36,157 $180,783 $188,114 $545,008 $ - $ 958,905 Net Income - - - - 140,491 - 140,491 Cash dividends declared on: Preferred stock ($2.46 per share) - - - - (2,221) - (2,221) Common stock ($1.14 per share) - - - - (42,252) - (42,252) Change in valuation allowance for marketable equity securities - - - - 4,769 - 4,769 Common stock purchased and retired (NOTE 14) - (522) (2,612) - (18,442) - (21,054) Common stock issued: For acquisition of financial institution - 1,411 7,057 48,151 - - 55,208 For dividend reinvestment plan - 235 1,173 7,720 - - 8,893 Upon exercise of stock options (net of tax benefit of $1,198) - 235 1,176 4,910 - - 6,086 Upon conversion of debentures (NOTES 12 AND 14) - - 1 1 - - 2 Redemption of preferred stock (45,000) - - - (1,350) - (46,350) Balance, December 31, 1993 $ - 37,516 $187,578 $248,896 $626,003 $ - $1,062,477 Net Income - - - - 169,079 - 169,079 Cash dividends declared on common stock ($1.53 per share) - - - - (57,477) - (57,477) Cumulative effect of change in accounting for securities available for sale (NOTE 4) - - - - - 32,209 32,209 Change in net unrealized gain (loss) on securities available for sale (NOTE 4) - - - - - (68,764) (68,764) Common stock purchased and retired - (1,120) (5,602) - (42,848) - (48,450) Common stock issued: For acquisition of financial institution - 264 1,321 11,267 - - 12,588 For dividend reinvestment plan - 266 1,330 9,842 - - 11,172 For thrift and profit sharing plan - 160 803 5,940 - - 6,743 For directors' stock compensation plan - 2 9 69 - - 78 Upon exercise of stock options (net of tax benefit of $1,193) - 231 1,156 5,141 - - 6,297 Upon conversion of debentures (NOTES 12 AND 14) - 12 61 52 - - 113 BALANCE, DECEMBER 31, 1994 $ - 37,331 $186,656 $281,207 $694,757 $(36,555) $1,126,065
See accompanying notes to consolidated financial statements. 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CRESTAR FINANCIAL CORPORATION AND SUBSIDIARIES (1) ACCOUNTING POLICIES The accounting and reporting policies of Crestar Financial Corporation and Subsidiaries conform to generally accepted accounting principles and to general practice within the banking industry. Certain reclassifications have been made to the prior years' consolidated financial statements to conform to the 1994 presentation. The following is a summary of the more significant policies: (a) PRINCIPLES OF CONSOLIDATION The consolidated financial statements of Crestar Financial Corporation and Subsidiaries (Crestar or the Corporation) include the accounts of all wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. In the condensed financial statements of Crestar Financial Corporation (Parent), the investments in subsidiaries are stated at equity in the net assets of such subsidiaries (note 21). Business combinations accounted for as purchases are included from their respective dates of acquisition. The excess of cost over the estimated fair value of the tangible assets and liabilities acquired is recorded as intangible assets and amortized over the periods estimated to be benefited. Assets held in an agency or fiduciary capacity are not assets of Crestar and are not included in the accompanying consolidated balance sheets. (b) SECURITIES Effective January 1, 1994, Crestar prospectively adopted Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities." In accordance with SFAS 115, securities are classified as either securities held to maturity, securities available for sale, or trading securities. Securities held to maturity are carried at amortized cost, as the Corporation has the positive intent and ability to hold these securities to maturity. Trading securities are carried at estimated fair value as they are intended to be sold in the near term: trading securities are classified as money market investments on the accompanying consolidated balance sheets. Securities not classified as held to maturity or trading are classified as available for sale. Available for sale securities are stated at estimated fair value, with the unrealized gains and losses, net of tax, reported in a separate component of shareholders' equity. Quoted market prices are used to determine estimated fair value. In accordance with SFAS 115, the Corporation's consolidated financial statements for periods prior to January 1, 1994 have not been retroactively changed to conform to current securities classifications. Prior to January 1, 1994, investment securities which management intended to sell as a part of its asset/liability management strategy, or that may have been sold in response to changes in interest rates, prepayment risk or other similar factors, were classified as securities held for sale, and were stated at the lower of aggregate amortized cost or estimated market value. All other investment securities were accounted for in a manner similar to securities held to maturity or trading securities. The amortized cost of securities classified as held to maturity or available for sale is adjusted for amortization of premiums and accretion of discounts to maturity, or earlier call date if appropriate, using the level yield method. Such amortization is included in interest income from securities. Realized gains and losses, and declines in value judged to be other than temporary are included in securities gains (losses) in the accompanying consolidated statements of income. Realized gains and losses are computed using the specific identification method. (c) MONEY MARKET INVESTMENTS Money market investments are stated at cost, which approximates market value, except for trading account securities, which are carried at market value. Securities held for trading purposes are classified as trading account securities. Trading securities primarily include U.S. Treasury and municipal debt obligations. Trading securities may include from time to time positions in certain derivative financial instruments such as futures contracts and purchased options (see related discussion in note 22). Adjustments to market and trading account gains and losses are classified as other income in the accompanying consolidated statements of income. Trading account interest and dividend income is included in income on money market investments. (d) MORTGAGE LOANS HELD FOR SALE Mortgage loans held for sale are carried at the lower of aggregate cost or market value. Adjustments to market and realized gains and losses are classified as other income in the accompanying consolidated statements of income. (e) LOANS Loans are stated at the principal amount outstanding net of unearned income. Interest on some instalment loans and some second mortgage loans is accrued using the sum-of-the-months-digits method (78ths method), which does not produce results materially different from the level yield method. Interest on other loans is accrued by multiplying the applicable rates by the principal amounts outstanding. Most equipment leases, included in the commercial loan category, are accounted for using the direct financing method for financial reporting purposes. 38 Interest receipts on nonaccrual loans are recognized as interest revenue or are applied to principal when management believes the ultimate collectibility of principal is in doubt. Loans generally are placed in nonaccrual status when the collection of principal or interest is 90 days or more past due, or earlier if collection is uncertain based upon an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Instalment loans are placed in nonaccrual status when past due 120 days and are charged off when past due 180 days. Generally, bank card loans are not placed in nonaccrual status, but are charged off at the earlier of when past due 180 days or notification of bankruptcy. Loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount is amortized as an adjustment of the related loan's yield. Crestar amortizes these amounts over the contractual life of the related loans or over the commitment period. (f) ALLOWANCE FOR LOAN LOSSES The determination of the balance of the allowance for loan losses is based upon a review and analysis of the loan portfolio. The allowance reflects an amount that, in management's judgment, is adequate to provide for losses inherent in the portfolio. Management's review includes monthly analyses of past due, problem and nonaccrual loans and a detailed periodic classification report. Estimates of future losses involve the exercise of judgment and the use of assumptions. The principal factors considered in determining the adequacy of the allowance are the composition of the loan portfolio, historical loss experience, anticipated losses, economic conditions, the value and adequacy of collateral, and the current level of the allowance. Accrued interest receivable is generally charged against the allowance for loan losses when deemed uncollectible. (g) PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization charges are computed under the straight-line method. Premises and equipment are depreciated over the estimated useful lives of the assets, except for leasehold improvements which are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Certain noncancelable leases have been capitalized and are classified as premises and equipment in the accompanying consolidated balance sheets. Related amounts representing capital lease obligations are classified as long-term debt in the accompanying consolidated balance sheets and are amortized using the interest method to allocate payments between principal and interest. The initial carrying amounts represent the present value of the future rental payments, discounted at the incremental borrowing rate of the lessee. Most of these capital lease assets are amortized over the lease term. Estimated lives of the principal items of premises and equipment are: buildings and improvements - 3 to 50 years; and furniture, fixtures and equipment - 3 to 12 years. The costs of major renovations are capitalized, while the costs of ordinary maintenance and repairs are expensed as incurred. (h) INTANGIBLE ASSETS Goodwill is amortized on a straight-line basis over 15 years. Deposit base intangibles are amortized over the estimated lives of the related deposit relationships, ranging from 4 to 15 years. Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing income to be derived from the servicing activities. The period of amortization ranges from 5 to 14 years, depending on the expected life of the mortgages being serviced. (i) FORECLOSED PROPERTIES Property acquired through legal foreclosure proceedings, abandonment of the property, acceptance of deed in lieu of foreclosure or transfer in exchange for an outstanding loan is initially recorded at estimated fair value less estimated selling costs at the date of foreclosure, establishing a new cost basis. At the time of foreclosure, any excess of cost over the estimated fair value is charged to the allowance for loan losses, and estimated selling costs are expensed as foreclosed properties expense. After foreclosure, valuations are routinely performed by management and the property is carried at the lower of cost or fair value less estimated selling costs. Write-downs are charged against current earnings or any applicable foreclosed property valuation allowance. (j) INCOME TAXES The Parent and its subsidiaries file a consolidated federal income tax return. The provision for income taxes for each company is recorded on the basis of filing separate income tax returns, after adjustments relating to consolidated income tax regulations and signed tax sharing agreements. Income taxes currently payable or receivable by each subsidiary are paid to or received from the Parent. In 1993, the Corporation changed its method of accounting for income taxes (note 13) and, accordingly, records a provision for income taxes based on the amounts of current and deferred taxes payable (or refundable) for the year. The deferred tax expense or benefit represents the change in the net deferred tax 39 asset or liability during the period. Deferred tax assets and liabilities are recognized for the tax effects of differing carrying values of assets and liabilities for tax and financial statement reporting purposes that will reverse in future periods. In 1992 and prior years, a provision for deferred income taxes was made for revenue and expenses in the consolidated financial statements that were reported in different periods for tax purposes than for financial reporting purposes. (k) EARNINGS PER SHARE Primary earnings per share are computed by dividing net income applicable to common shares by the weighted average number of common shares outstanding during the period, including average common equivalent shares attributable to dilutive stock options. Fully diluted earnings per common share are computed using average common shares, including the maximum dilutive effect of average common equivalent shares, increased by the number of shares that would result from assuming that the 5% convertible subordinated debentures were converted into common stock at the beginning of the applicable period and using net income increased by interest and amortization of debt issuance expense, net of tax effect, relating to those debentures. Net income for 1993 and 1992 was further reduced by the dividends applicable to the Series B preferred stock. (l) INTEREST RATE SWAPS, CAPS, COLLARS AND FLOORS Crestar uses interest rate swaps, caps, collars and floors for interest rate risk management and in connection with interest rate risk management services provided to customers (note 22). Interest rate swaps, caps and floors used to achieve interest rate risk management objectives are accounted for on an accrual basis and the net interest differential, including premiums paid, if any, is recognized as an adjustment to the interest income or expense of the related asset or liability. Upon early termination of these derivative instruments, the net proceeds received or paid are deferred and amortized over the lesser of the remaining contract life or the maturity of the related asset or liability. At December 31, 1994 and 1993 there were no deferred gains or losses arising from termination of hedged transactions prior to maturity. Fee income from matched arrangements for which Crestar serves as a financial intermediary is recognized over the lives of the related agreements and is classified as other income in the consolidated statements of income. (m) RETIREMENT, POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS Substantially all employees are covered by a pension plan. The net periodic pension expense includes a service cost component, a component reflecting the actual return on plan assets, an interest cost component, and the effect of deferring and amortizing certain actuarial gains and losses and the unrecognized net transition asset over 15 years. On January 1, 1993, Crestar adopted Statement of Financial Accounting Standards No. 106 (SFAS 106), "Employers' Accounting for Postretirement Benefits Other Than Pensions." Under SFAS 106, costs of retiree benefits other than pensions are accrued in a manner similar to pension costs. Prior to 1993, these other retiree benefit costs were expensed when paid. Statement of Financial Accounting Standards No. 112 (SFAS 112), "Employers' Accounting for Postemployment Benefits," was adopted by Crestar on January 1, 1994. Under SFAS 112, benefits provided to inactive or former employees before retirement are accrued during the period of active employment, rather than being expensed as paid. Adoption of SFAS 112 resulted in a pre-tax charge to employee benefit expense of $1.8 million in the first quarter of 1994. Postemployment benefits expense for periods prior to 1994 has not been restated. (2) MERGERS AND ACQUISITIONS On January 11, 1994, Crestar Mortgage Corporation, a subsidiary of Crestar, acquired the stock of Mortgage Capital corporation ("Mortgage Capital"), a wholesale mortgage loan production company, with an initial purchase payment of $5.2 million. Under the terms of the purchase agreement, an additional $2.4 million may be paid to the former owners depending on the future performance of Mortgage Capital's operations over the next five years. On January 28, 1994, Crestar acquired Virginia Federal Savings Bank (Virginia Federal), for a purchase price of $52 million. The excess of the cost over the estimated fair value of the tangible net assets acquired was approximately $3.0 million. On March 18, 1994, Crestar completed the acquisitions of Providence Savings and Loan Association ("Providence") and NVR Federal Savings Bank ("NVR"). Crestar acquired the stock of Providence for a purchase price of $27 million. Crestar acquired the assets and assumed certain liabilities of NVR for a purchase price of $42 million. The excesses of the costs over the estimated fair values of tangible net 40 assets acquired were approximately $19.9 million and $11.2 million for Providence and NVR, respectively. On May 14, 1994, Crestar acquired the deposits of Piedmont Federal Savings Association, which had been operating under Resolution Trust Corporation (RTC) conservatorship. In connection with this acquisition, Crestar paid a $10 million premium to the RTC. On June 10, 1994, Crestar completed the acquisition of Annapolis Bancorp, Inc. (Annapolis), a holding company for Annapolis Federal Savings Bank. Crestar acquired the stock of Annapolis for a purchase price of approximately $16 million, which included 264,200 shares of Crestar stock and $2.9 million in cash. The excess of the cost over the estimated fair value of the tangible net assets acquired was approximately $18.3 million. On September 16, 1994, Crestar Bank acquired from the RTC approximately $17 million in deposits related to two branches of Second National Federal Savings Association located in Fairfax and Woodbridge, Virginia. In connection with this acquisition, Crestar paid a $112 thousand premium to the RTC. The above acquisitions were accounted for as purchases and, accordingly, the results of their operations are included in the accompanying consolidated financial statements since their respective acquisition dates. The results of operations of the above acquisitions for the periods prior to their respective acquisition dates were not material to the results of operations of Crestar. The seven acquisitions completed during 1994 are summarized as follows: DOLLARS IN MILLIONS 1994 PRIMARY ACQUISITION AT ACQUISITION DATE NAME LOCATION DATE ASSETS DEPOSITS Second National Savings Salisbury, MD September 16 $ - $ 17 Annapolis Bancorp, Inc. Annapolis, MD June 10 300 250 Piedmont Federal Savings Manassas, VA May 14 - 150 NVR Federal Savings Bank McLean, VA March 18 425 340 Providence Savings and Loan Vienna, VA March 18 375 300 Virginia Federal Savings Bank Richmond, VA January 28 700 500 Mortgage Capital Corporation St. Paul, MN January 11 18 -
Also during 1994, Crestar announced three acquisitions to be completed during 1995. On January 20, 1995 Crestar completed two of these acquisitions, Independent Bank (Independent), Manassas, Virginia and Jefferson Savings and Loan (Jefferson), Warrenton, Virginia. The acquisitions of Independent and Jefferson were each for a combination of cash and Crestar stock, valued at approximately $12 million for Independent, including 198,400 shares of Crestar stock, and $23 million for Jefferson, including 471,400 shares of Crestar stock. Independent and Jefferson had total assets of approximately $80 million and $280 million, respectively, and total deposits of $70 million and $250 million, respectively, at acquisition date. Each of these acquisitions was accounted for as a purchase. Crestar's financial statements for 1994 do not include these acquisitions. Crestar expects to complete its acquisition of TideMark Bancorp, Inc. (TideMark), Newport News, Virginia, in March 1995. The acquisition of TideMark is for a combination of cash and Crestar stock valued at approximately $38 million, to be accounted for as a purchase. TideMark had total assets and deposits of approximately $394 million and $270 million at December 31, 1994, respectively. Crestar expects the ten acquisitions completed or announced in 1994 to have a positive contribution to earnings within the first twelve months following completion. 41 (3) SECURITIES HELD TO MATURITY The amortized cost (carrying values) and approximate market values of securities held to maturity at December 31 follow: AMORTIZED UNREALIZED UNREALIZED MARKET IN THOUSANDS COST GAINS LOSSES VALUE 1994 U.S. Treasury and Federal agencies $ 10,307 $ - $ 320 $ 9,987 Mortgage-backed obligations of Federal agencies 598,676 846 33,288 566,234 Other taxable securities 231,021 20 12,057 218,984 States and political subdivisions 67,364 755 2,553 65,566 Total $ 907,368 $ 1,621 $48,218 $ 860,771 1993 U.S. Treasury and Federal agencies $ 45,857 $ 166 $ 146 $ 45,877 Mortgage-backed obligations of Federal agencies 1,437,519 18,906 1,452 1,454,973 Other taxable securities 231,509 1,106 365 232,250 States and political subdivisions 84,121 2,935 53 87,003 Common and preferred stocks 25,611 - - 25,611 Total $1,824,617 $ 23,113 $ 2,016 $1,845,714
The stated maturities of securities held to maturity at December 31, 1994 follow: IN THOUSANDS AMORTIZED MARKET COST VALUE 1994 Due in one year or less $ 5,264 $ 5,285 Due after one year through five years 240,780 231,900 Due after five years through ten years 392,609 369,228 Due after ten years 268,715 254,358 Total $907,368 $860,771 At December 31, 1994 and 1993, securities held to maturity with an aggregate carrying value of $442,406,000 and $635,298,000, respectively, were pledged to secure deposits and for other purposes. Gross gains of $1.0 million and gross losses of $2.2 million were realized on sales of securities held to maturity in 1992. (4) SECURITIES AVAILABLE FOR SALE The amortized cost and approximate market values of securities available for sale at December 31 follow: AMORTIZED UNREALIZED UNREALIZED MARKET IN THOUSANDS COST GAINS LOSSES VALUE 1994 U.S. Treasury and Federal agencies $ 716,430 $ 69 $20,795 $ 695,704 Mortgage-backed obligations of Federal agencies 682,577 1,430 34,400 649,607 Other taxable securities 179,390 116 3,869 175,637 Common and preferred stocks 101,032 18 25 101,025 Total $1,679,429 $ 1,633 $59,089 $1,621,973 1993 U.S. Treasury and Federal agencies $1,512,596 $32,554 $ 1,081 $1,544,069 Mortgage-backed obligations of Federal agencies 17,312 24 5 17,331 Other taxable securities 167,092 1,304 - 168,396 Total $1,697,000 $33,882 $ 1,086 $1,729,796
42 The stated maturities of securities available for sale at December 31, 1994 follow: AMORTIZED MARKET IN THOUSANDS COST VALUE Due in one year or less $ 177,126 $ 176,539 Due after one year through five years 548,569 528,809 Due after five years through ten years 84,057 81,693 Due after ten years 768,645 733,907 1,578,397 1,520,948 Common and preferred stocks 101,032 101,025 Total $1,679,429 $1,621,973 At December 31, 1994 and 1993, securities available for sale with an aggregate carrying value of $790,827,000 and $573,787,000 respectively, were pledged to secure deposits and for other purposes. Proceeds from sales of securities available for sale were $1.7 billion in 1994, $376 million in 1993 and $238 million in 1992. Gross gains of $6.2, $4.1 and $4.9 million and gross losses of $17.0 million, $1.9 million and $141 thousand were realized on such sales during 1994, 1993 and 1992, respectively. As a result of Crestar's adoption of SFAS 115 as discussed in note 1(b), securities having an amortized cost of $2.932 billion, and an estimated market value of $2.983 billion, were classified as securities available for sale on January 1, 1994. The initial effect of adoption of SFAS 115 was an increase in shareholders' equity of $32.2 million, which was the amount by which the fair value of securities available for sale, net of a deferred tax liability of $19 million, exceeded the amortized cost of such securities on January 1, 1994. (5) MONEY MARKET INVESTMENTS Money market investments at December 31 included: IN THOUSANDS 1994 1993 Trading account securities $ 3,574 $ 5,060 Federal funds sold 268,155 3,815 Securities purchased under agreements to resell 175,500 609,805 Domestic time deposits 138 25,128 U.S. Treasury 5,189 6,825 Total money market investments $452,556 $650,633 (6) NONPERFORMING ASSETS Nonperforming assets include nonperforming loans and foreclosed properties. Nonperforming loans consist of loans on which income is recognized on the cash basis (nonaccrual loans) and loans which meet the accounting definition of a troubled debt restructuring (restructured loans). Nonaccrual loans are classified as loans in the accompanying consolidated balance sheets. There were no material commitments to lend additional funds to customers whose loans were classified as nonaccrual at December 31, 1994. At December 31, 1994 and 1993, loans accounted for as restructured loans, included in nonaccrual loans, totaled $7.9 million and $20.1 million, respectively. In addition to the loans classified as nonaccrual at December 31, 1994 and 1993, there were $35.7 million and $25.2 million, respectively, that were past due 90 days or more, the majority of which were collateralized or in the process of collection. Instalment and bank card past due loans are subject to established charge-off procedures as discussed in note 1(e). Non-cash additions to foreclosed properties were $10.4 million, $17.2 million and $114.1 million in 1994, 1993 and 1992, respectively. The amounts of nonperforming assets at December 31 follow: IN THOUSANDS 1994 1993 Nonaccrual loans $69,406 $ 78,081 Restructured loans 6,878 1,733 Total nonperforming loans 76,284 79,814 Foreclosed properties - net 18,629 16,951 Total nonperforming assets $94,913 $ 96,765 Average nonperforming loans for the year $75,528 $116,613 Average nonperforming assets for the year $98,452 $170,869 43 The aggregate recorded investment in nonperforming loans outstanding at December 31, 1994, 1993 and 1992, the pro forma interest income that would have been earned in 1994, 1993 and 1992 if such loans had not been classified as nonperforming, and the amount of interest income actually included in net interest income for such years follows: IN THOUSANDS NONPERFORMING LOAN CATEGORY 1994 COMMERCIAL CONSTRUCTION REAL ESTATE ALL OTHER TOTAL RECORDED INVESTMENT $28,708 $7,279 $36,889 $3,408 $ 76,284 PRO FORMA INTEREST 4,041 769 4,082 133 9,025 INTEREST EARNED 156 - 181 - 337 1993 Recorded investment $39,487 $5,843 $33,582 $ 902 $ 79,814 Pro forma interest 4,990 948 1,706 78 7,722 Interest earned 421 - - - 421 1992 Recorded investment $87,120 $8,506 $45,671 $ 931 $142,228 Pro forma interest 7,790 3,362 1,872 103 13,127 Interest earned 377 - 2 - 379
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," (SFAS 114), as amended, will be adopted prospectively by Crestar on January 1, 1995. In future reporting periods, impaired loans within the scope of the statement will be measured and valued on the basis of the present value of expected cash flows discounted at the loan's effective interest rate, or at the fair value of the loan's collateral if the loan is deemed collateral dependent. The 1995 impact on Crestar's results of operations and financial position of adopting SFAS 114 is expected to be immaterial. (7) ALLOWANCE FOR LOAN LOSSES Transactions in the consolidated allowance for loan losses for the years ended December 31 were: IN THOUSANDS 1994 1993 1992 Beginning balance $210,958 $205,017 $ 210,004 Charge-offs (65,204) (89,333) (130,662) Recoveries 28,066 24,499 16,733 Net charge-offs (37,138) (64,834) (113,929) Provision for loan losses 29,682 48,775 99,242 Allowance from acquisitions - net 15,687 22,000 9,700 Net increase (decrease) 8,231 5,941 (4,987) Ending balance $219,189 $210,958 $ 205,017 Foreign activities represented less than 1 percent of total assets, revenues, income before income taxes and net income for all years presented. Allowance from acquisitions for 1994 is net of a $4.2 million reduction in the allowance for loan losses initially recorded upon the purchase of CFS Financial Corporation (CFS) in May 1993. This reduction in the initial valuation of the acquired allowance was based on subsequent and more detailed analysis of the creditworthiness of the CFS loan portfolio as of the date of acquisition. The impact of this reduction on the other values assigned to the assets acquired and liabilities assumed in the CFS purchase was to decrease goodwill by $2.7 million and to decrease the deferred income tax asset by $1.5 million. 44 (8) PREMISES AND EQUIPMENT Premises and equipment at December 31 included: IN THOUSANDS 1994 1993 Land $ 55,745 $ 53,611 Buildings and improvements 273,816 262,992 Furniture, fixtures and equipment 249,612 224,978 Capitalized leases: Land and buildings 3,947 4,072 Equipment 518 518 Less: Accumulated depreciation and amortization (284,238) (261,449) 299,400 284,722 Construction in progress 17,496 17,982 Total premises and equipment - net $ 316,896 $ 302,704 At December 31, 1994, future minimum lease payments under noncancelable capital and operating leases that have an initial term in excess of one year follow: OPERATING CAPITAL IN THOUSANDS LEASES LEASES 1995 $ 15,953 $ 417 1996 14,215 265 1997 11,812 257 1998 9,380 253 1999 7,115 188 Later years 25,544 1,038 Total minimum lease payments $ 84,019 $ 2,418 Imputed interest (rates ranging from 8 5/8-14 3/8%) (1,048) Present value of net minimum lease payments (included in long-term debt) $ 1,370 Total minimum lease payments included in the preceding table have not been reduced by future minimum sublease rentals of $1.4 million. There were no new capital lease obligations incurred in 1994, 1993 or 1992. Crestar owns and, along with its subsidiaries, is the principal tenant of the corporate headquarters building in Richmond, Virginia, an operations center in Richmond, and regional office buildings in Roanoke and Norfolk, Virginia and Washington, DC. At December 31, 1994, Crestar had 336 banking locations, the majority of which were located in bank owned facilities. Management considers these properties to be suitable and adequate for current operations. Lease expense relating to both cancelable and noncancelable operating lease agreements (including month-to-month rental agreements) is shown below. Customarily, these leases provide that the lessee pay taxes, maintenance, insurance and certain other operating expenses applicable to the leased property. IN THOUSANDS 1994 1993 1992 Buildings $18,515 $16,598 $17,309 Equipment 1,977 1,639 1,559 Total lease expense $20,492 $18,237 $18,868 (9) INTANGIBLE ASSETS Intangible assets at December 31 included: IN THOUSANDS 1994 1993 Goodwill and deposit base intangibles $106,639 $74,104 Mortgage servicing rights 15,742 21,378 Favorable lease rights 572 670 Total intangible assets - net $122,953 $96,152 Accumulated amortization of goodwill was $23,421,000 and $17,320,000 for 1994 and 1993, respectively. During 1994, goodwill and deposit base intangibles were reduced by $13.1 million due to recognition of an income tax benefit arising from an IRS settlement of issues related to the tax treatment of intangible assets. Additionally, a $7.0 million reduction in goodwill and deposit base intangibles was recorded in 1994 due to recognition of an income tax benefit from reclassifications of goodwill and deposit base intangible assets recorded for specific acquisitions. 45 (10) ALLOWANCE FOR FORECLOSED PROPERTIES Transactions in the allowance for losses on foreclosed properties for the years ended December 31 were: IN THOUSANDS 1994 1993 1992 Beginning balance $ 5,574 $ 10,264 $ - Provision for foreclosed properties (323) 6,400 12,000 Write-downs (3,610) (13,136) (1,736) Allowance from acquisitions 5,539 2,046 - Net increase (decrease) 1,606 (4,690) 10,264 Ending balance $ 7,180 $ 5,574 $10,264 (11) SHORT-TERM BORROWINGS Short-term borrowings outstanding as of December 31 and their related weighted average interest rates were: IN THOUSANDS 1994 1993 1992 AMOUNT RATE AMOUNT RATE AMOUNT RATE Federal funds purchased $ 742,672 6.29% $ 670,407 3.23% $ 443,467 3.28% Securities sold under repurchase agreements 481,938 5.93 819,132 2.76 1,006,219 3.18 Commercial paper 230 4.81 319 2.63 7,435 2.99 Notes payable 153,976 5.42 110,792 2.64 119,019 2.70 U.S. Treasury demand notes - - 13,487 2.64 17,886 2.45 Other 1,990 3.63 2,606 2.75 13,990 3.73 Total short-term borrowings $1,380,806 $1,616,743 $1,608,016
Federal funds purchased generally mature daily. Securities sold under repurchase agreements generally mature within 1 to 365 days or are due upon demand. Commercial paper matures within 270 days, and master notes, the principal component of notes payable, are due upon demand. At December 31, 1994, the Parent's unused committed lines of credit totaled $30 million. The Corporation paid $319,139,000, $296,483,000 and $383,986,000 in interest on deposits and short-term borrowings in 1994, 1993 and 1992, respectively. (12) LONG-TERM DEBT Long-term debt at December 31 included: IN THOUSANDS 1994 1993 Parent: 8 3/4% Subordinated notes due 2004 $149,615 $ - 8 1/4% Subordinated notes due 2002 125,000 125,000 8 5/8% Subordinated notes due 1998 49,966 49,955 5% Convertible subordinated debentures due 1994 - 134 Total Parent 324,581 175,089 7-8 1/4% Mortgage indebtedness maturing through 2009 10,101 13,130 8 5/8-14 3/8% Capital lease obligations maturing through 2006 1,370 1,965 4 1/8-8% Federal Home Loan Bank obligations payable through 2008 13,099 972 6 1/4-9 1/2% Collateralized mortgage obligation bonds maturing through 2019 17,811 - Total consolidated long-term debt $366,962 $191,156
In 1994, Crestar completed the sale of $150 million of 8 3/4% subordinated notes due November 15, 2004. Net of underwriting discounts, the notes resulted in net proceeds to the Corporation of $148.6 million. Proceeds from the sale of the notes will be used for general corporate purposes, including cash requirements for pending acquisitions discussed in note 2. Neither the 8 3/4% nor the 8 1/4% subordinated notes are redeemable prior to maturity. The 8 5/8% subordinated notes may not be exchanged or redeemed prior to maturity, except upon the occurrence of certain events relating to the federal income tax treatment of the notes to the Corporation. The 8 3/4%, 8 1/4% and 8 5/8% subordinated notes all qualify as Tier 2 capital 46 for federal bank regulatory purposes. Expenses relating to the issuance of the 8 3/4%, 8 1/4% and 8 5/8% notes are being amortized to maturity on a straight-line basis. Outstanding debt agreements at December 31, 1994 place restrictions upon the disposal of subsidiaries' common stock. During 1994, all remaining 5% convertible subordinated debentures were converted into 12,210 common shares of Crestar. Upon conversion to common stock, the unamortized expense attributable to the 5% debentures was charged to capital surplus. During 1994, $23,174,000 of collateralized mortgage obligation bonds were assumed in the acquisitions of Virginia Federal and Annapolis discussed in note 2. Federal Home Loan Bank obligations of $10,000,000 were assumed in the acquisition of NVR Savings. Mortgage indebtedness consists of the debt relating to two pledged facilities owned by Crestar Bank which have an aggregate carrying value of $21,903,000 at December 31, 1994. Mortgage payments in 1994, including interest, were $4,066,000; payments in 1995 are expected to be $1,528,000. The Corporation made payments of $17,662,000, $17,928,000 and $13,534,000 in interest on long-term debt in 1994, 1993 and 1992, respectively. The combined maturities of all long-term debt for the years 1995 through 1999 follow: IN THOUSANDS 1995 1996 1997 1998 1999 Parent $ - $ - $ - $49,966 $ - Consolidated 24,094 2,132 1,801 1,325 1,179 (13) INCOME TAXES The current and deferred components of income tax expense allocated to continuing operations in the accompanying consolidated statements of income were: IN THOUSANDS 1994 1993 1992 Current: Federal $78,352 $54,060 $ 37,996 State and local 1,991 (362) 1,347 Total current tax expense 80,343 53,698 39,343 Deferred: Federal 4,918 9,975 (17,886) State and local 356 (684) (1,768) Total deferred tax expense (benefit) 5,274 9,291 (19,654) Total income tax expense $85,617 $62,989 $ 19,689 In addition to the state and local income tax expenses above, which pertain to the non-bank affiliates and to the non-Virginia banks, Crestar Bank incurred Virginia bank franchise taxes of $3,199,000 in 1994, $2,810,000 in 1993 and $2,845,000 in 1992. This tax is imposed on banks in Virginia in lieu of income and personal property taxes. Crestar Bank remits 80 percent of the tax to the Virginia municipalities in which it does business and the remaining 20 percent to the Commonwealth of Virginia. The differences between the amounts computed by applying the statutory federal income tax rate to income before income taxes and the actual income tax expense allocated to operations were: 47 IN THOUSANDS 1994 1993 1992 Income before income taxes $254,696 $203,480 $ 99,490 Tax expense at statutory rate 89,144 71,218 33,826 Increase (decrease) in taxes resulting from: Tax-exempt interest and dividends (7,296) (8,355) (10,573) Nondeductible interest expense 459 531 790 Alternative minimum tax (carryforward used) - - (6,457) Amortization of goodwill 2,141 1,075 872 Amortization of deposit base intangibles - - 1,073 State income taxes 1,525 292 (278) Adoption of SFAS 109 - (540) - Deferred tax effect of 1993 tax rate change - (1,593) - Other - net (356) 361 436 Total decrease in taxes (3,527) (8,229) (14,137) Total income tax expense $ 85,617 $ 62,989 $ 19,689 Effective tax rate 33.6% 31.0% 19.8%
The Corporation made income tax payments of $79,708,000, $52,234,000 and $37,371,000 during 1994, 1993 and 1992, respectively. Effective January 1, 1993, Crestar adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" as discussed in note 1(j). The sources and tax effects of temporary differences that gave rise to significant portions of deferred income tax assets (liabilities) at December 31 were: IN THOUSANDS 1994 1993 Deferred Income Tax Assets: Allowance for loan losses $ 64,816 $ 71,113 Intangible assets 13,983 - Foreclosed properties 8,827 4,743 Compensation and employee benefits 19,435 12,646 Unrealized loss on securities available for sale 20,901 - Other 11,892 5,240 Total Deferred Income Tax Assets 139,854 93,742 Deferred Income Tax Liabilities: Premises and equipment (12,867) (15,838) Intangible assets - (11,979) Securities (4,440) (3,109) Deferred loan fees and costs (5,358) (2,442) Loans (790) (5,326) Lease receivables (1,477) (2,591) Other (11,535) (3,740) Total Deferred Income Tax Liabilities (36,467) (45,025) Net Deferred Income Tax Asset $103,387 $ 48,717 The net deferred income tax asset is included in other assets in the accompanying consolidated balance sheets. There was no valuation allowance relating to the net deferred income tax asset at December 31, 1994 and 1993. The net deferred income tax asset at January 1, 1993, included a valuation allowance of $1.1 million representing a capital loss carryforward expiring in 1998. This allowance was reduced to zero during 1993 as a result of a decrease in the corresponding temporary difference. Crestar has sufficient taxable income in the available carryback periods and future taxable income from reversing taxable differences to realize substantially all of its deferred income tax assets. Management believes, based on the Corporation's history of generating significant earnings and expectations of future earnings, that it is more likely than not that all recorded deferred income tax assets will be realized. The primary timing differences and the resulting deferred income tax benefit for the year ended December 31, 1992, were: 48 IN THOUSANDS Deduction for loan losses on tax returns greater than the provision charged to operating expense $ 4,840 Financial statement AMT less than tax return AMT (6,457) Depreciation (1,420) Amortization of acquired intangible assets 1,351 Accretion of discount on securities (1,801) Deferral and amortization of loan fees and costs (449) Unrealized losses on foreclosed properties (12,782) Other - net (2,936) Total deferred income tax benefit $(19,654) The tax returns through 1990 have either been examined or are no longer subject to examination by the Internal Revenue Service (IRS). During 1994, the IRS completed an examination of the tax returns for 1988 through 1990. There was no material effect on consolidated earnings. Also during 1994, the IRS began an examination of the tax returns for 1991 through 1993. Management believes that any deficiency that may be determined will not have a material effect on consolidated earnings. (14) SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE During 1994 and 1993 the Corporation purchased and retired 1,120,300 and 522,300 shares of common stock at an average cost of $43.25 and $40.31 per share, respectively. There were no shares of common stock purchased and retired in 1992. During 1994, all remaining subordinated debentures were converted to shares of common stock as discussed in note 12. During 1993 and 1992, $2,000 and $17,000 of subordinated debentures were converted to 216 and 1,837 shares of common stock, respectively. At December 31, 1994, common stock was reserved for issuance to directors, officers or employees, with respect to stock options granted from 1987 through 1994 as explained in note 18. There were 2,300,000 shares reserved for the Performance Equity Plan and the 1993 Stock Incentive Plan, which provide awards to key executives based upon attainment of specific long-term corporate goals. No shares were beneficially owned by a subsidiary. In December 1993, all 900,000 shares of the Adjustable Rate Cumulative Preferred Stock Series B were redeemed at 103% of the stock's stated value, or a price per share of $51.50, plus accrued and unpaid dividends. In 1992, Crestar completed the public offering and sale of 3,450,000 shares of common stock at $29.25 per share, providing a net addition of $97.1 million to shareholders' equity. Average common and common equivalent shares used in the determination of earnings per share were: IN THOUSANDS 1994 1993 1992 Primary 37,864 37,587 33,286 Plus assumed conversion of debentures - 15 15 Other 3 63 68 Fully diluted 37,867 37,665 33,369 Fully diluted earnings per common share are calculated using net income increased by interest and amortization of debt issuance expense, net of tax effect, relating to the outstanding 5% convertible subordinated debentures. Net income for 1993 and 1992 is further reduced by the dividends applicable to the Series B preferred stock. The adjustments are as follows: IN THOUSANDS 1994 1993 1992 Interest and amortization of debt issuance expense $ 2 $ 7 $ 7 Tax effect (1) (2) (2) Preferred dividends, Series B - (2,221) (2,475) Net adjustment to net income $ 1 $ (2,216) $ (2,470) 49 (15) OTHER INCOME Other income in the consolidated statements of income includes: IN THOUSANDS 1994 1993 1992 Mortgage servicing $18,986 $15,371 $13,637 Mortgage origination - net 8,495 20,631 16,631 Automated teller machine fees 10,605 9,355 7,925 Trading account activities 1,069 4,415 6,880 Commissions on letters of credit 5,135 7,272 5,081 Safe deposit box rental 3,537 2,239 3,282 Gain on sale of mortgage servicing rights 18,732 3,600 1,761 Miscellaneous 20,498 18,786 11,539 Total other income $87,057 $81,669 $66,736 (16) REGULATORY REQUIREMENTS AND RESTRICTIONS Crestar Bank, Crestar Bank N.A. and Crestar Bank MD (Banks) are subject to certain requirements imposed by state and federal banking statutes and regulations. These requirements, among other things, establish minimum levels for capital and restrict the amount of dividends that may be distributed and the amount of loans that may be made by the Banks to the Parent and require that the Banks maintain a minimum reserve balance with the Federal Reserve Bank. Under the current supervisory practices of the Banks' regulatory agencies, prior approval from those agencies is required if cash dividends declared in any given year exceed net income for that year plus retained earnings of the two preceding years. The amount of dividends available to the Parent from the Banks at January 1, 1995, without prior approval, was approximately $132.0 million. Cash dividends paid by the Banks to the Parent in 1994, 1993 and 1992 were $95.2 million, $93.8 million and $30.1 million, respectively. Section 23A of the Federal Reserve Act imposes limitations on the amount of credit that may be extended to the Parent by the Banks. Generally, up to 10% of the Banks' regulatory capital, surplus, undivided profits, allowance for loan losses and contingency reserves may be loaned by the Banks to the Parent. As of December 31, 1994, $127.3 million of credit was available to the Parent under this limitation, although no extensions of credit were outstanding. For the reserve maintenance period in effect at December 31, 1994 and 1993, the Banks were required to maintain average daily balances totaling approximately $343.0 million and $339.6 million, respectively, with the Federal Reserve Bank. The average amount of reserve balances for the year ended December 31, 1994 totaled approximately $431.1 million. As of January 1, 1994, aggregate loans to directors and executive officers and their associates were $10,854,000. Additions and repayments totaled $228,000 and $1,957,000 respectively, during 1994 and the balance was $9,125,000 at year end. These loans were made in the ordinary course of business and were arms-length in terms of credit risk, interest rates and collateral requirements prevailing at the time for comparable transactions. These loans do not represent more than a normal credit risk. None of these loans were nonaccrual, past due or restructured at December 31, 1994. (17) PENSION PLANS As of December 31, 1994, the Corporation had various non-contributory defined benefit pension plans. Benefits under the plans are based on length of service and a percentage of qualifying compensation during the final years of employment. The Corporation's funding policy is to contribute annually the maximum amount that can be contributed for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. Net periodic pension expense in 1994, 1993 and 1992 includes: IN THOUSANDS 1994 1993 1992 Service cost - benefits earned during the year $ 6,539 $ 4,949 $ 4,906 Interest expense on projected benefit obligation 9,072 6,784 6,244 Actual return on plan assets (1,185) (18,906) (9,859) Net amortization and deferral (9,854) 9,167 1,175 Net periodic pension expense $ 4,572 $ 1,994 $ 2,466 50 The following table sets forth the Plans' funded status and amounts recognized in the Corporation's consolidated balance sheets at December 31, 1994 and 1993, based on a measurement date of September 30 for each respective year: IN THOUSANDS 1994 1993 Accumulated benefit obligation, including vested benefits of $73,579 in 1994; $81,540 in 1993 $ (75,514) $ (82,621) Projected benefit obligation for service rendered to date (108,153) (121,416) Plan assets at fair value, primarily listed stocks and U.S. Treasury bonds 122,952 123,480 Plan assets in excess of projected benefit obligation 14,799 2,064 Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions (22,282) (324) Unrecognized net asset (obligation) at October 1, being recognized over 15 years 2,221 (2,614) Accrued pension expense $ (5,262) $ (874) The weighted average discount rate and the rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 8.5% and 5.0%, respectively, in 1994 and 7.25% and 5.0%, respectively, in 1993. The expected long-term rate of return on assets was 9.0% and 8.5% for 1994 and 1993, respectively. (18) OTHER EMPLOYEE BENEFIT PLANS The Corporation maintains a stock incentive plan which allows for the granting of incentive and non-qualified stock options to all employees on a discretionary basis. The Corporation also maintains a stock option plan under which no future options will be granted, but under which previously granted options were outstanding at December 31, 1994. Stock options are granted at prices equal to the fair market value of the stock on the date of grant. Options are exercisable starting one year from the date of grant, or upon retirement, disability or death; options expire seven years from the date of grant for options granted prior to 1989 and ten years from the date of grant for options granted in 1989 and thereafter. Effective in January 1992, all stock appreciation rights (SARs), which had previously been granted in tandem with options, were canceled. No new grants of SARs have been made since that time. Summarized activity relating to options and SARs follows: 1994 1993 1992 OPTIONS OPTIONS OPTIONS SARS Outstanding, January 1 1,053,301 1,120,800 931,000 481,521 Granted 215,200 207,730 363,550 - Canceled or retired (1,200) (4,350) (7,400) (481,521) Exercised ($14.75 to $40.38 per share) (239,784) (270,879) (166,350) - Outstanding, December 31 ($14.75 to $48.25 per share) 1,027,517 1,053,301 1,120,800 - Exercisable, December 31 815,017 885,151 762,750 -
The Corporation provides postretirement life and contributory health insurance benefit plans for eligible retirees. Since 1993, the cost of such benefits have been accrued in a manner similar to pension costs. Prior to 1993, such costs were expensed when paid. Postretirement benefits expense for periods prior to 1993 have not been restated. The projected status of Crestar's postretirement life and contributory health insurance benefit plans for eligible retirees as of December 31 follow: 51 IN THOUSANDS 1994 1993 Accumulated postretirement benefit obligations (other than pensions): Retirees $ (29,155) $ (27,821) Eligible active plan participants (7,786) (5,599) Ineligible active participants (8,400) (7,740) Total (45,341) (41,160) Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions 6,627 5,512 Unrecognized transition obligation to be recognized over 20 years 30,780 32,490 Accrued postretirement benefit expense $ (7,934) $ (3,158) Postretirement benefit expense for the years ended December 31 included:
IN THOUSANDS 1994 1993 Service cost $ 873 $ 573 Interest cost 2,977 2,131 Amortization of transition obligation 1,710 1,710 Net postretirement benefit expense $ 5,560 $ 4,414
The weighted average annual assumed rate of increase in the per capita cost of covered benefits for health insurance is 12% for 1995 and is assumed to decrease gradually to 7% in 1999 and remain at that level thereafter. Increasing the assumed health care trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation for the medical plan by approximately $3.8 million, and would increase the aggregate of the service and interest components of net postretirement benefit expense by approximately $350 thousand for 1994. The weighted average discount rate used in projecting the accumulated plan benefit obligation was 8.5% for 1994, and the average rate of annual compensation increase was 5%. The Corporation maintains a grantor trust to pay certain employee benefits as they become due. Assets of the trust are restricted to use for applicable employee benefit plans, including deferred compensation and medical benefit plans. Such trust assets of approximately $62 million and $63 million at December 31, 1994 and 1993, respectively, are included in the Corporation's total assets. The Corporation has thrift and profit-sharing plans covering substantially all full-time employees beginning January 1 after date of hire. The Corporation makes matching contributions of 50 cents for every $1 of employee contributions to the thrift plan, up to 6 percent of base pay. Employer profit-sharing contributions are determined by applying a formula based on return on equity to covered compensation. Thrift and profit-sharing plan expenses totaled $16.5 million, $11.0 million and $8.3 million in 1994, 1993 and 1992, respectively. (19) OTHER EXPENSE Other expense in the consolidated statements of income includes: IN THOUSANDS 1994 1993 1992 Communications $ 25,484 $ 21,136 $ 19,334 Stationery, printing and supplies 8,239 7,133 6,451 Professional fees and services 12,819 13,487 15,898 Loan expense 9,786 9,034 8,409 FDIC premiums 25,207 22,847 21,003 Advertising and marketing 19,906 13,709 8,137 Transportation 5,861 5,388 5,357 Outside data services 18,805 14,879 11,769 Amortization of purchased intangibles 12,279 21,926 13,630 Foreclosed properties 652 33,055 60,188 Miscellaneous 41,520 35,321 38,124 Total other expense $180,558 $197,915 $208,300 52 (20) CONDENSED BANK INFORMATION Condensed Consolidated Balance Sheets for Crestar Bank, Crestar Bank N.A. and Crestar Bank MD at December 31, 1994 follow:
IN THOUSANDS CRESTAR BANK CRESTAR BANK N.A. CRESTAR BANK MD Cash and due from banks $ 804,122 $ 149,381 $ 49,527 Securities held to maturity 629,832 88,903 176,091 Securities available for sale 1,010,578 421,661 91,280 Money market investments 291,153 366,040 89,000 Mortgage loans held for sale 209,525 - - Loans - net of unearned income 8,224,408 425,475 635,754 Less: Allowance for loan losses (192,501) (15,187) (11,501) Loans - net 8,031,907 410,288 624,253 Premises and equipment - net 252,894 46,272 16,044 Customers' liability on acceptances 6,464 - - Intangible assets 88,817 10,078 24,058 Other assets 345,204 38,367 22,113 Total Assets $11,670,496 $1,530,990 $1,092,366 Deposits $ 8,819,064 $1,285,145 $ 959,034 Short-term borrowings 1,576,861 84,038 18,656 Notes payable to Parent 213,000 10,000 - Liability on acceptances 6,464 - - Other liabilities 147,362 5,800 8,711 Long-term debt 32,261 3,099 7,021 Total liabilities 10,795,012 1,388,082 993,422 Common stock 210,000 5,258 12,210 Capital surplus 135,713 87,801 69,061 Retained earnings 558,530 55,564 19,754 Net unrealized loss on securities available for sale (28,759) (5,715) (2,081) Total Shareholder's Equity 875,484 142,908 98,944 Total Liabilities and Shareholder's Equity $11,670,496 $1,530,990 $1,092,366
Condensed Consolidated Statements of Income for Crestar Bank, Crestar Bank N.A. and Crestar Bank MD for the year ended December 31, 1994 follow:
IN THOUSANDS CRESTAR BANK CRESTAR BANK N.A. CRESTAR BANK MD Income from earning assets $ 794,246 $ 76,931 $ 61,287 Interest expense 301,156 28,722 23,082 Net interest income 493,090 48,209 38,205 Provision for loan losses 27,565 (4,000) 1,850 Net credit income 465,525 52,209 36,355 Noninterest income 214,972 24,691 21,268 Securities gains (losses) (10,649) 49 (4) Net credit and noninterest income 669,848 76,949 57,619 Noninterest expense 442,685 57,229 44,622 Income before income taxes 227,163 19,720 12,997 Applicable income tax expense 76,483 6,414 5,539 Net income $ 150,680 $ 13,306 $ 7,458
53 (21) CONDENSED PARENT INFORMATION The Parent's Condensed Balance Sheets at December 31 were:
IN THOUSANDS DECEMBER 31, 1994 1993 Cash in banks $ 33,143 $ 31,276 Securities held to maturity 11,544 12,967 Securities available for sale 81,200 - Money market investments 4,898 31,940 Securities purchased under agreements to resell 173,630 109,000 Notes receivable from subsidiaries 223,000 173,000 Investments in subsidiaries: Bank subsidiaries 1,117,336 1,020,943 Non-bank subsidiaries 7,843 8,038 Other assets 13,565 11,735 Total Assets $1,666,159 $1,398,899 Commercial paper $ 230 $ 320 Master notes 153,976 110,792 Securities sold to subsidiary under repurchase agreements 4,565 2,706 Other liabilities 56,742 47,515 Long-term debt 324,581 175,089 Total shareholders' equity 1,126,065 1,062,477 Total Liabilities and Shareholders' Equity $1,666,159 $1,398,899
The Parent's retained earnings were $694,757,000 and $626,003,000 as of December 31, 1994 and 1993, respectively, and were comprised primarily of the undistributed earnings of its subsidiaries. The Parent's Condensed Statements of Income for each of the last three fiscal years ended December 31 were: IN THOUSANDS 1994 1993 1992 Cash dividends from bank subsidiaries $ 95,229 $ 93,834 $30,100 Interest from subsidiaries 14,777 14,844 11,418 Interest on securities held to maturity and available for sale 1,742 1,634 2,536 Income on money market investments 398 1,762 - Income on securities purchased under agreements to resell 5,208 3,014 6,184 Other income 35 36 28 Securities losses (145) (1,859) (979) Total income 117,244 113,265 49,287 Interest on short-term borrowings 4,782 3,021 4,046 Interest on long-term debt 16,318 15,754 15,628 Other expense 2,146 1,099 1,269 Interest on note payable to subsidiary - - 99 Total expense 23,246 19,874 21,042 Income before income taxes and equity in undistributed net income of subsidiaries 93,998 93,391 28,245 Income tax benefit (1,050) (1,451) (1,529) Income before equity in undistributed net income of subsidiaries 95,048 94,842 29,774 Equity in undistributed net income of subsidiaries 74,031 45,649 50,027 Net Income $169,079 $140,491 $79,801
54 The Parent's Condensed Statements of Cash Flows for each of the last three fiscal years ended December 31 were: IN THOUSANDS YEARS ENDED DECEMBER 31, OPERATING ACTIVITIES 1994 1993 1992 Net Income $ 169,079 $ 140,491 $ 79,801 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiaries (74,031) (45,649) (50,027) Depreciation and amortization of premises and equipment 51 52 51 Securities losses 145 1,859 979 Amortization and accretion, net 259 248 314 Net decrease (increase) in accrued interest receivable, prepaid expenses and other assets (1,222) (3,780) 1,104 Net increase (decrease) in accrued interest payable, accrued expenses and other liabilities 7,364 (3,899) 12,266 Net cash provided by operating activities 101,645 89,322 44,488 INVESTING ACTIVITIES Proceeds from maturities of securities held to maturity - - 1,015 Proceeds from maturities of securities available for sale 108,500 - - Proceeds from sales of securities held to maturity - - 6,175 Proceeds from sales of securities available for sale 606 22,191 - Purchases of securities held to maturity - (749) - Purchases of securities available for sale (189,700) - - Net decrease (increase) in securities purchased under agreements to resell (64,630) 105,441 (69,441) Net decrease (increase) in other money market investments 27,042 (31,940) - Net increase in notes receivable from subsidiaries (50,000) - (65,000) Decrease in payable to subsidiary - (45,000) - Increase in investments in subsidiaries (8,000) (2,500) (15,750) Net cash paid for acquisitions (28,877) (5,524) - Net cash provided (used) by investing activities (205,059) 41,919 (143,001) FINANCING ACTIVITIES Net increase (decrease) in short-term borrowings 37,381 (12,636) (31,058) Principal payments on long-term debt - (19,349) (70,000) Proceeds from issuance of long-term debt 149,615 - 124,529 Redemption of preferred stock - (46,350) - Cash dividends paid (57,477) (45,091) (29,121) Common stock purchased and retired (48,450) (21,054) - Proceeds from the issuance of common stock 24,212 14,979 108,918 Net cash provided (used) by financing activities 105,281 (129,501) 103,268 Increase in cash and cash equivalents 1,867 1,740 4,755 Cash and cash equivalents at beginning of year 31,276 29,536 24,781 Cash and cash equivalents at end of year $ 33,143 $ 31,276 $ 29,536
(22) COMMITMENTS, CONTINGENCIES AND OTHER FINANCIAL INSTRUMENTS In the normal course of business, Crestar is a party to commitments, contingent liabilities and other financial instruments that are not reflected in the accompanying consolidated financial statements. Commitments to extend credit, standby letters of credit, interest rate caps, floors and collars, swaps, and forward contracts are some of the vehicles used by Crestar in meeting the financing needs of its customers and managing its own exposure to fluctuations in interest rates. These items involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. Any losses which may result from these transactions are not expected to have a material effect on the accompanying consolidated financial statements. Notional principal amounts often are used to express the volume of the transaction, but the amounts potentially subject to credit risk are much 55 smaller. The contract or notional amount, the estimated fair value and the credit risk amount of each class of such instruments at December 31 was: IN THOUSANDS 1994 1993 ESTIMATED ESTIMATED FAIR VALUE CONTRACT/ FAIR VALUE CONTRACT/ ASSET NOTIONAL CREDIT RISK ASSET NOTIONAL CREDIT RISK (LIABILITY) AMOUNT AMOUNT (LIABILITY) AMOUNT AMOUNT Financial instruments whose notional or contract amounts equaled maximum credit risk: Legally binding unfunded commitments to extend credit $ (4,660) $5,532,943 $5,532,943 $ (12,900) $4,521,484 $4,521,484 Standby letters of credit - 372,113 372,113 - 394,156 394,156 Commercial and similar letters of credit - 92,439 92,439 - 75,913 75,913 Recourse obligations - 890,005 890,005 - 710,415 710,415 Other - - - - 12,890 12,890 Total $ (4,660) $6,887,500 $6,887,500 $ (12,900) $5,714,858 $5,714,858 Financial instruments whose notional or contract amounts exceeded the amount of credit risk: Interest rate risk management Interest rate swaps Asset rate conversions: Receive fixed $(95,147) $1,460,166 $ 30,869 $ 18,234 $1,462,089 $ 52,488 Liability rate conversions: Pay variable - - - 1,355 55,000 1,805 Pay fixed - - - (394) 4,000 80 Interest rate floors (83) 200,000 1,000 2,208 200,000 6,208 Interest rate caps - - - (232) 400,000 2,000 Forward contracts 24 266,439 265 3,400 943,330 4,115 As a financial intermediary Interest rate swaps - 133,682 3,532 695 193,616 7,189 Interest rate floors - 7,000 18 10 50,000 260 Interest rate collars 31 37,688 1,408 41 82,051 1,678 Interest rate caps 18 113,104 1,113 18 59,600 667 Total $(95,157) $2,218,079 $ 38,205 $ 25,335 $3,449,686 $ 76,490
Commitments to extend credit are legally binding agreements to lend to a customer which typically contain clauses that permit cancellation of the commitment in the event of credit deterioration of the borrower. Standby letters of credit are conditional commitments issued by Crestar to guarantee the performance of customers to a third party. Crestar receives a commitment fee for entering into such agreements. The credit risk associated with commitments to extend credit and standby letters of credit is similar to direct lending; therefore, all of these items are subject to the Corporation's loan approval and review procedures and policies. Based upon management's credit evaluation of the customer, Crestar may require the customer to provide various types of collateral as security for the agreement, including balances on deposit, investment securities, real estate and inventory. The maximum credit risk associated with commitments to extend credit and standby letters of credit assumes that the counterparty defaults and the collateral proves to be worthless. The total contract amounts do not necessarily represent future cash requirements, since many of 56 these items are expected to expire without being drawn upon. At December 31, 1994, approximately $15.0 million of the standby letters of credit and $20.1 million of the commercial and similar letters of credit were participated to other financial institutions. A geographic concentration exists within Crestar's loan portfolio since most of Crestar's business activity is with customers located in Virginia, Maryland or Washington, DC. Based upon Standard Industrial Classification codes used for regulatory purposes, the Corporation had no aggregate loan concentration of 10% or more of total loans in any particular industry at December 31, 1994. However, under a broader view of the portfolio, Crestar had $1.1 billion in loans outstanding to real estate developers and investors at year-end 1994. These loans are diversified by geographic region within Crestar's market and by project type and are made in accordance with the Corporation's normal credit and underwriting guidelines and risk management policies. The Corporation services mortgage loans other than those included in the accompanying consolidated financial statements and, in some cases, accepts a recourse liability on the serviced loans. At December 31, 1994, approximately $531.2 million of the balance of these loans serviced with recourse was insured by agencies of the Federal government or private insurance companies. As a financial institution, Crestar entails a degree of interest rate risk as a provider of banking services to its customers. This risk can be managed through derivative interest rate contracts, such as interest rate swaps, caps and floors. Changes in the fair value of such derivatives are generally offset by changes in the implied fair value of the underlying hedged asset or liability. As hedges against interest rate risk at December 31, 1994, Crestar was participating in interest rate (fixed receive) swaps, $1.31 billion of which were used to convert certain variable rate commercial and real estate loans to fixed rates, and $150 million were used to convert variable rate securities to fixed rates. Crestar also had interest rate floor agreements outstanding on December 31, 1994, which the Corporation uses to minimize interest rate risk associated with variable rate assets. In addition, Crestar serves as a financial intermediary in interest rate swap, cap, collar and floor agreements, providing risk management services to customers. As an intermediary, Crestar typically becomes a principal in the exchange of interest payments between parties and, therefore, is exposed to loss should one of the parties default. The Corporation performs normal credit review on each counterparty and minimizes its exposure to the interest rate risk inherent in these items by entering into offsetting positions or by using hedging techniques to minimize risk. The notional amount of these over-the-counter traded interest rate swaps, caps, collars and floors does not represent Crestar's credit exposure, which the Corporation believes is a combination of current replacement cost (approximately $2.2 million at December 31, 1994) plus an amount for additional market movement (approximately $35.7 million at December 31, 1994). Three counterparties constituted 35%, 16% and 12% of the estimated credit exposure at December 31, 1994. Crestar has also entered into $266.4 million (contract amount) of forward agreements to reduce the interest rate risk arising from changes in market rates from the time residential mortgage lending commitments are made until those commitments are funded. Crestar may, from time to time, enter into certain derivative contracts, such as purchased futures or options contracts, for trading purposes as discussed in note 1(c). Such contract amounts were not material in 1994. The fair values of commitments to extend credit, standby letters of credit and commercial and similar letters of credit were estimated based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and creditworthiness of counterparties. Unfunded loan commitments are generally priced at market at the time of funding and are subject to certain credit standards. The fair values of forward agreements are estimated based on current settlement values. The fair values of interest rate swaps, caps and floors are estimated based on the amount the Corporation would receive or pay to terminate the contracts or agreements. Such amounts are determined using a valuation model which considers current market yields, counterparty credit risk and other relevant variables. The carrying value of interest rate swaps, caps and floors, and other off-balance sheet financial instruments was not material at December 31, 1994 and 1993. Certain litigation is pending against Crestar. Management, after reviewing this litigation with legal counsel, is of the opinion that these matters, when resolved, will not have a material effect on the accompanying consolidated financial statements. 57 (23) FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107 (SFAS 107), "Disclosures about Fair Value of Financial Instruments," defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. As the majority of Crestar's financial instruments lack an available trading market, significant estimates, assumptions and present value calculations are required to determine estimated fair value. Comparability among financial institutions is difficult due to the wide range of acceptable valuation techniques and the subjectivity of required assumptions. Crestar's remaining assets and liabilities, not considered financial instruments, have not been valued differently than customary, historical cost accounting, nor have lines of business been separately valued. Information regarding the estimated fair values of Crestar's financial instruments at December 31 follows: IN THOUSANDS ESTIMATED FAIR VALUE CARRYING VALUE ASSETS (LIABILITIES) ASSETS (LIABILITIES) 1994 1993 1994 1993 Cash and due from banks $ 907,627 $ 716,652 $ 907,627 $ 716,652 Securities held to maturity 860,771 1,845,714 907,368 1,824,617 Securities available for sale 1,621,973 1,729,796 1,621,973 1,697,000 Money market investments 452,556 650,633 452,556 650,633 Net loans, including loans held for sale 9,247,000 7,878,000 9,275,973 7,667,397 Other financial instrument assets 174,118 180,111 174,159 179,086 Deposits with no stated maturities (7,891,178) (7,481,765) (7,891,178) (7,481,765) Deposits with stated maturities (2,961,000) (2,707,000) (3,021,974) (2,684,013) Short-term borrowings (1,380,806) (1,616,743) (1,380,806) (1,616,743) Long-term debt (363,730) (211,401) (366,962) (191,156) Other financial instrument liabilities (177,184) (200,230) (177,168) (200,276) Off-balance sheet financial instruments - net (99,817) 12,435 - -
The carrying amounts in the table are included in the consolidated balance sheets under the indicated captions, except for off balance sheet financial instruments which are discussed in note 22. The carrying value of cash and due from bank balances and money market investments approximates fair value. Financial instruments actively traded in a secondary market, such as securities, were valued using available quoted market prices. The Corporation's loan portfolio was valued based on estimated future cash flows, discounted at various rates. The discount rates used were commensurate with rates paid on U.S. Treasury securities with various maturity dates, adjusted for noninterest operating costs, anticipated credit losses and prepayment risk. The estimated fair value of the loan portfolio excludes the intangible value attributable to account relationships, including bank card, home equity line or similar revolving line of credit arrangements. Other financial instrument assets consist largely of customers' liability on acceptances and accrued interest receivable, for which carrying amount approximates fair value. The fair value of other financial instruments included in other assets was based on estimates of the present value of future net cash flows. The carrying value of demand deposits, interest checking deposits, money market deposit accounts and regular savings deposits is defined by SFAS 107 to approximate fair value. Deposits with stated maturities were valued based on estimated future cash flows, discounted at various rates. The discount rates used were commensurate with rates paid on U.S. Treasury securities, adjusted for factors such as operating expenses and prepayment risk. The estimated fair value of deposits excludes the intangible value attributable to long-term relationships with depositors. The carrying value of short-term borrowings approximates fair value. Long-term debt was valued based on interest rates currently available to Crestar for debt with similar terms and remaining maturities. Other financial instrument liabilities consist largely of liability on acceptances, interest payable on deposits and balances due upon settlement of securities purchases, for which carrying value approximates fair value. The fair value of other financial instrument liabilities was estimated based on estimates of the present value of future net cash payments. 58 (24) QUARTERLY FINANCIAL RESULTS (UNAUDITED) Consolidated quarterly results of operations for the years ended December 31 were: DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA FIRST SECOND THIRD FOURTH 1994 QUARTER QUARTER QUARTER QUARTER Income from earning assets $217,030 $228,372 $239,480 $241,152 Net interest income 140,666 144,929 149,278 146,943 Provision for loan losses 10,032 8,850 8,100 2,700 Securities gains (losses) (1,718) (49) 12 (9,021) Other noninterest income 65,173 68,192 65,377 66,304 Net credit and noninterest income 194,089 204,222 206,567 201,526 Noninterest expense 134,010 140,733 140,104 136,861 Income before income taxes 60,079 63,489 66,463 64,665 Net Income 40,482 42,608 43,604 42,385 Earnings Per Share Primary: Net Income $ 1.07 $ 1.12 $ 1.15 $ 1.13 Average shares outstanding (000s) 37,835 37,930 38,063 37,637 Fully diluted: Net Income $ 1.07 $ 1.12 $ 1.15 $ 1.13 Average shares outstanding (000s) 37,850 37,931 38,063 37,637 Dividends declared on common stock .33 .40 .40 .40 1993 Income from earning assets $202,125 $204,928 $213,119 $212,457 Net interest income 124,602 128,805 135,646 137,959 Provision for loan losses 18,500 3,006 13,769 13,500 Securities gains (losses) 1,111 1,511 (385) - Other noninterest income 59,259 61,364 61,739 63,666 Net credit and noninterest income 166,472 188,674 183,231 188,125 Noninterest expense 123,084 140,547 129,148 130,243 Income before income taxes 43,388 48,127 54,083 57,882 Net Income 30,894 33,710 37,153 38,734 Earnings Per Share Primary: Net Income $ .83 $ .88 $ .96 $ 1.01 Average shares outstanding (000s) 36,678 37,440 38,154 38,063 Fully diluted: Net Income $ .83 $ .88 $ .96 $ 1.00 Average shares outstanding (000s) 36,710 37,479 38,174 38,088 Dividends declared on common stock .25 .28 .28 .33
59 CRESTAR FINANCIAL CORPORATION THE BOARD OF DIRECTORS AND SHAREHOLDERS We have audited the accompanying consolidated balance sheets of Crestar Financial Corporation and subsidiaries as of December 31, 1994 and 1993 and the related consolidated statements of income, cash flows and changes in shareholders' equity for each of the years in the three-year period ended December 31, 1994. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Crestar Financial Corporation and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles. Effective January 1, 1994, the Corporation changed its method of accounting to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." /s/ KPMG Peat Marwick LLP Richmond, Virginia January 12, 1995 STATEMENT ON CORPORATE RESPONSIBILITY The financial statements on pages 34 to 59 have been prepared by management in accordance with generally accepted accounting principles and include some amounts that are necessarily based on our best estimates and judgments. We are responsible for the accuracy, integrity, objectivity, consistency and fair presentation of the financial statements and all other financial information contained in this Annual Report. One way we fulfill these responsibilities is by relying on a system of internal controls, which has been designed to ensure that transactions are properly authorized and recorded in our financial records. Included in the system is an internal auditing function that independently assesses the effectiveness of internal controls and recommends possible improvements thereto. Because of inherent limitations in any system of controls, there can be no absolute assurance that errors or irregularities will not occur. Nevertheless, we believe that our system of internal controls provides reasonable assurance as to the integrity and reliability of our financial records. Some of the financial information in this Annual Report is presented on a tax-equivalent basis to improve comparative analysis. In addition, some of the business segment information incorporates allocation methods for which there is no generally accepted accounting principles. However, in all other respects, it is consistent with the audited financial statements. Through its Audit committee, which is composed of directors who are not officers or employees of the Corporation, the Board of Directors fulfills its oversight responsibility for determining that the accounting policies employed by management in preparing the Corporation's financial statements are appropriate and that our system of internal controls is adequately reviewed and maintained. The Committee periodically reviews, with management and the internal auditors, accounting policies, control procedures, and audit and regulatory examination reports of the Corporation and its subsidiaries. In addition, our independent auditors meet regularly with and have full and free access to the Committee, privately and with management present, to discuss the results of their audits and other auditing, accounting and financial reporting matters. The Committee reports to the full Board after each of its meetings. KPMG Peat Marwick LLP have audited the accompanying consolidated financial statements. Their report, located above, represents their judgment as to whether our consolidated financial statements present fairly our financial position and results of operations and cash flows in conformity with generally accepted accounting principles. We are committed to ensure that corporate affairs are conducted in accordance with consistently applied standards of conduct applicable to all officers and associates. In essence, everyone is expected to manage their responsibilities with integrity. Our standards provide guidance on general business conduct, political activities, community involvement, outside employment and business activities, conflict of interests, personal finances, and the use and safeguard of confidential information. Crestar Financial Corporation 60 BOARD OF DIRECTORS OF CRESTAR FINANCIAL CORPORATION CRESTAR FINANCIAL CORPORATION AND SUBSIDIARIES RICHARD M. BAGLEY President Bagley Investment Company Hampton, Virginia Real Estate Investments AUDIT COMMITTEE J. CARTER FOX Chairman & Chief Executive Officer Chesapeake Corporation Richmond, Virginia Paper and Forest Products Manufacturer EXECUTIVE COMMITTEE PATRICK D. GIBLIN Vice Chairman & Chief Financial Officer Crestar Financial Corporation and Crestar Bank BONNIE GUITON HILL Dean of the McIntire School Of Commerce University Of Virginia Charlottesville, Virginia AUDIT COMMITTEE GENE A. JAMES President & Chief Executive Officer Southern States Cooperative, Inc. Richmond, Virginia Farm Supply Cooperative HUMAN RESOURCES AND COMPENSATION COMMITTEE H. GORDON LEGGETT, JR. Executive Vice President Leggett Stores Lynchburg, Virginia Retail Department Store HUMAN RESOURCES AND COMPENSATION COMMITTEE CHARLES R. LONGSWORTH Chairman Emeritus The Colonial Williamsburg Foundation Williamsburg, Virginia Educational Museum, Hotels and Restaurants EXECUTIVE COMMITTEE AND HUMAN RESOURCES AND COMPENSATION COMMITTEE (CHAIRMAN) PATRICK J. MAHER Chairman & Chief Executive Officer Washington Gas Washington, DC Natural Gas Utility AUDIT COMMITTEE FRANK E. MCCARTHY Executive Vice President National Automobile Dealers Association McLean, Virginia EXECUTIVE COMMITTEE G. GILMER MINOR III Chairman, President & Chief Executive Officer Owens & Minor, Inc. Richmond, Virginia Medical/Surgical Supply Distributor HUMAN RESOURCES AND COMPENSATION COMMITTEE GORDON F. RAINEY, JR. Partner, Chairman of the Executive Committee Hunton & Williams Richmond, Virginia Attorneys AUDIT COMMITTEE FRANK S. ROYAL Member & President Frank S. Royal, M.D., P.C. Richmond, Virginia Family Medicine EXECUTIVE COMMITTEE RICHARD G. TILGHMAN Chairman & Chief Executive Officer Crestar Financial Corporation and Crestar Bank EXECUTIVE COMMITTEE (CHAIRMAN) EUGENE P. TRANI President Virginia Commonwealth University Richmond, Virginia AUDIT COMMITTEE WILLIAM F. VOSBECK President Vosbeck Associates, Inc. Alexandria, Virginia Architectural Planning and Development EXECUTIVE COMMITTEE AND AUDIT COMMITTEE (CHAIRMAN) L. DUDLEY WALKER Chairman Bassett-Walker, Inc. Martinsville, Virginia Textile and Apparel Manufacturer AUDIT COMMITTEE JAMES M. WELLS III President Crestar Financial Corporation and Crestar Bank EXECUTIVE COMMITTEE KAREN HASTIE WILLIAMS Partner Crowell & Moring Washington, DC Attorneys HUMAN RESOURCES AND COMPENSATION COMMITTEE 61 PRINCIPAL OFFICERS OF CRESTAR FINANCIAL CORPORATION CRESTAR FINANCIAL CORPORATION AND SUBSIDIARIES RICHARD G. TILGHMAN, 54 Chairman & Chief Executive Officer 28 years of service, Elected President and Chief Executive Officer in 1985 and Chairman in 1986. JAMES M. WELLS III, 48 President 26 Years of service. Elected Executive Vice President of Corporate Banking in 1985 and of the Banking Group in 1986 and to current position in 1988. PATRICK D. GIBLIN, 62 Vice Chairman & Chief Financial Officer 21 years of service. Elected Executive Vice President- Finance in 1976 and to current position in 1985 C. GARLAND HAGEN, 49 Corporate Executive Vice President- Investment Bank 22 years of service. Elected Executive Vice President in 1985 and to current position in 1987. WILLIAM C. HARRIS, 57 Corporate Executive Vice President & President-Greater Washington Banking 31 years of service. Elected President-Northern Region in 1983 and to current position in 1986. ROBERT F. NORFLEET, JR., 55 Corporate Executive Vice President & Senior Credit Officer 28 years of service. Elected President-Capital Region & Executive Vice President-Corporate Banking in 1987 and to current position in 1994. O.H. PARRISH, JR., 52 Corporate Executive Vice President & President-Virginia Banking 29 years of service. Elected Executive Vice President & Senior Credit Officer in 1985 and to current position in 1994. WILLIAM K. BUTLER II, 48 President-Eastern Region 22 years of service. Elected President-Norfolk in 1984 and to current position in 1985. F. EDWARD HARRIS, 53 President-Western Region 30 years of service. Elected Executive Vice President- Western Region in 1982 and to current position in 1985. C.T. HILL, 44 President-Capital Region 24 years of service. Elected Senior Vice President- Commercial Banking in 1983, Executive Vice President-Capital Region Commercial Division in 1990 and to current position in 1994. WILLIAM M. GINTHER, 48 Group Executive Vice President-Technology & Operations 24 years of service. Elected Executive Vice President in 1987 and to current position in 1994. JAMES J. KELLEY, 50 Group Executive Vice President-Management Resources Group 21 years of service. Elected Senior Vice President in 1986 and to current position in 1995. 62 STATEMENT OF BUSINESS CRESTAR FINANCIAL CORPORATION AND SUBSIDIARIES Crestar Financial Corporation (Crestar) is the holding company for Crestar Bank (Virginia), Crestar Bank N.A. (Washington, DC), and Crestar Bank MD (Maryland). At December 31, 1994, Crestar Financial Corporation had $10.9 billion in total deposits, and $1.1 billion in total shareholders' equity. In 1963, six Virginia banks combined to form United Virginia Bankshares Incorporated (UVB), a Virginia stock corporation and registered bank holding company. During the 1960s and 1970s, UVB acquired 18 other Virginia banks and formed one de novo bank. On December 31, 1979, all of the UVB banks were merged into United Virginia Bank. During the 1980s, nine more banks were acquired, including NS&T Bank, N.A. in the District of Columbia in 1985 and Bank of Bethesda in Maryland in 1986. In September 1987, UVB changed its name to Crestar Financial Corporation and its bank subsidiaries adopted their present names, all using the common identifier "Crestar." Since 1990, Crestar Financial Corporation has acquired 15 banks and thrifts in Virginia, Maryland and Washington, DC. Crestar Financial Corporation is supervised and examined by the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956 (BHCA). The BHCA Act requires Federal Reserve approval for bank acquisitions and regulates nonbanking activities of bank holding companies. Deposits of Crestar's three subsidiary banks are insured by the Federal Deposit Insurance Corporation (FDIC). At December 31, 1994, approximately 65% of Crestar's deposits were insured by the Bank Insurance Fund (BIF) of the FDIC, with the remainder insured by the Savings Association Insurance Fund (SAIF) of the FDIC. Each subsidiary has a different group of regulators: Crestar Bank, the lead bank located in Virginia, is regulated by the State Corporation Commission of Virginia and the Federal Reserve Bank of Richmond; Crestar Bank N.A. of Washington, DC is regulated by the Comptroller of the Currency; and Crestar Bank MD of Maryland is regulated by the Maryland Bank Commissioner and the Federal Reserve Bank of Richmond. The BHCA currently prohibits acquisition of a bank located outside the state in which the operations of a holding company's banking subsidiaries are principally conducted unless the acquisition is specifically authorized by a statute of the state in which the target bank is located. Under recently enacted federal legislation, the restriction on interstate acquisitions will be abolished effective September 1995, and thereafter bank holding companies from any state will be able to acquire banks and bank holding companies located in any other state, subject to certain conditions, including nationwide and state imposed concentration limits. Banks also will be able to branch across state lines by acquisition, merger or de novo, effective June 1, 1997 (unless state law permits interstate branching at an earlier date), if state law expressly permits interstate branching. A fundamental principle underlying the Federal Reserve's supervision and regulation of bank holding companies is that bank holding companies should be a source of managerial and financial strength to their subsidiary banks. Subsidiary banks in turn are to be operated in a manner that protects the overall soundness of the institution and the safety of deposits. Bank regulators can take various remedial measures to deal with banks and bank holding companies that fail to meet legal and regulatory standards. The 1989 Financial Reform, Recovery, and Enforcement Act (FIRREA) expanded federal regulatory enforcement powers. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) created five capital-based supervisory levels for banks and requires bank holding companies to guarantee compliance with capital restoration plans of under-capitalized insured depository affiliates. All three Crestar banks were considered "well-capitalized" under regulatory definitions in effect at December 31, 1994, the highest rating presently available. Crestar serves customers through a network of 336 banking offices and 278 automated teller machines as of December 31, 1994. The Crestar banks offer a broad range of banking services, including various types of deposit accounts and instruments, commercial and consumer loans, trust and investment management services, bank credit cards, and international banking services. Services also are provided through non-bank subsidiaries. Crestar Insurance Agency, Inc. offers a variety of personal and business insurance products. Securities brokerage and investment banking services are offered by Crestar Securities Corporation. Mortgage loan origination, servicing, and wholesale lending are offered by Crestar Mortgage Corporation, and Capitoline Investment Services Incorporated provides investment advisory services. Both Crestar Mortgage and Capitoline are subsidiaries of Crestar Bank. The mission of Crestar Financial Corporation is to provide a broad array of financial products and services at a price that represents the best value for our customers' money, and, by doing so, to provide a superior return for our shareholders. Crestar's executive offices are located at Crestar Center, 919 East Main Street, Richmond, Virginia. Regional headquarters are located in Norfolk and Roanoke, Virginia and in Washington, DC. Crestar's Operations Center is located in Richmond. 63 FORM 10-K CROSS-REFERENCE INDEX CRESTAR FINANCIAL CORPORATION AND SUBSIDIARIES PART I Item I Business 63 Guide 3 Disclosures 16-17, 19-21, 27-33, 38-40, 42, 44, 46, 65, 68-70 Item 2 Properties 45, 63 Item 3 Legal Proceedings None Item 4 Submission of Matters to a Vote of Security Holders None PART II Item 5 Market for the Registrant's Common Equity and Related Shareholder Matters 50, 70, Back Cover Item 6 Selected Financial Data 11 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 11-33 Item 8 Financial Statements and Supplementary Data Consolidated Financial Statements: Crestar Financial Corporation and Subsidiaries Consolidated Balance Sheets 34 Consolidated Statements of Income 35 Consolidated Statements of Cash Flows 36 Consolidated Statements of Changes in Shareholders' Equity 37 Notes to Consolidated Financial Statements 38-59 Independent Auditors' Report 60 Condensed Financial Information of Registrant 46, 47, 50, 54-55 Selected Quarterly Financial Data 59 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None PART III Item 10 Directors(1) and Executive Officers of the Registrant 61, 62 Item 11 Executive Compensation(1) Item 12 Security Ownership of Certain Beneficial Owners and Management(1) Item 13 Certain Relationships and Related Transactions(1) PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K: See Item 8 for a listing of all Financial Statements and Supplementary Data Reports on Form 8-K: There was one report on Form 8-K filed during the three month period ended December 31, 1994. Information relating to Crestar Financial Corporation's consolidated financial condition and results of operations as of and for the three month period ended September 30, 1994 was included in a Form 8-K filed on November 9, 1994. The Form 8-K was filed solely to permit incorporation by reference of the financial information into a registration statement on Form S-3, filed November 10, 1994, relating to the issuance by Crestar Financial Corporation of $150 million in 8 3/4% subordinated debentures, due November 15, 2004. Exhibits(2) Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf on February 24, 1995 by the undersigned, thereunto duly authorized. CRESTAR FINANCIAL CORPORATION, /s/ John C. Clark III JOHN C. CLARK III, Registrant Corporate Senior Vice President, General Counsel and Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on February 24, 1995 by the following persons in the capacities indicated. /s/ Richard G. Tilghman /s/ James D. Barr RICHARD G. TILGHMAN, JAMES D. BARR, Group Executive Chairman and Chief Executive Vice President, Controller and officer Treasurer /s/ James M. Wells III JAMES M. WELLS III, President A MAJORITY OF THE DIRECTORS OF THE REGISTRANT whose names appear on page 61. /s/ Patrick D. Giblin PATRICK D. GIBLIN, Vice Chairman and Chief Financial Officer
(1) This information is omitted pursuant to Instruction G of Form 10-K since the Registrant intends to file with the Commission a definitive Proxy Statement, pursuant to Regulation 14A, not later than 120 days after December 31, 1994. (2) A list of Exhibits was filed separately. Copies of any Exhibits not contained herein may be obtained by writing to John C. Clark III, Secretary, Crestar Financial Corporation, 919 East Main Street, Richmond, VA 23261-6665. NOTE: Any information not included herein has been omitted because it is not applicable. 64 SUPPLEMENTAL FINANCIAL INFORMATION CRESTAR FINANCIAL CORPORATION AND SUBSIDIARIES MATURITY AND RATE SENSITIVITY OF SELECTED LOANS DECEMBER 31, 1994 IN MILLIONS MATURITY WITHIN 1 YEAR 1-5 YEARS OVER 5 YEARS TOTAL Commercial $1,829.4 $777.0 $285.8 $2,892.2 Tax-exempt 23.5 32.9 144.5 200.9 Construction 132.1 47.7 4.8 184.6 1,985.0 857.6 435.1 3,277.7 Less: Loans with predetermined rates 378.2 422.7 196.6 997.5 Loans with adjustable rates $1,606.8 $434.9 $238.5 $2,280.2
TIME DEPOSITS $100,000 AND OVER DECEMBER 31, 1994 IN MILLIONS MATURITY WITHIN 3 MOS. 4-6 MOS. 7-12 MOS. OVER 1 YR. TOTAL Certificates of deposit $100,000 and over $36.1 $15.2 $ 7.4 $ 7.5 $ 66.2 Other domestic time deposits 22.1 18.5 26.5 39.2 106.3 Money market certificates 13.6 11.0 6.4 - 31.0 Total $71.8 $44.7 $40.3 $46.7 $203.5
MAXIMUM SHORT-TERM BORROWINGS IN THOUSANDS MAXIMUM OUTSTANDING AT ANY MONTH END 1994 1993 1992 Federal funds purchased $1,522,138 $ 699,202 $ 495,139 Securities sold under repurchase agreements 785,452 1,144,303 1,006,219 Commercial paper 454 677 7,435 Notes payable 163,731 112,365 244,883 Term federal funds purchased - 50,000 - U.S. Treasury demand notes 1,571 24,147 27,765 Other 2,635 14,494 15,074
SHORT-TERM BORROWINGS-AVERAGE BALANCES AND RATES 1994 1993 1992 DOLLARS IN THOUSANDS AMOUNT RATE AMOUNT RATE AMOUNT RATE Federal funds purchased $ 595,390 4.23% $ 525,956 3.28% $ 456,383 3.76% Securities sold under repurchase agreements 481,899 3.75 803,558 2.90 439,980 3.02 Commercial paper 304 3.41 503 2.75 1,861 3.32 Notes payable 131,562 3.67 108,200 2.48 209,757 3.26 Term federal funds purchased - - 4,658 3.21 - . - U.S. Treasury demand notes 713 6.81 7,781 2.76 15,934 3.72 Other 2,149 6.54 4,999 4.11 7,972 2.02 Total $1,212,017 3.97% $1,455,655 3.01% $1,131,887 3.37%
65 CONSOLIDATED STATEMENTS OF INCOME (SIX YEARS) AND SUPPLEMENTARY DATA CRESTAR FINANCIAL CORPORATION AND SUBSIDIARIES IN THOUSANDS, EXCEPT PER SHARE DATA INCOME FROM EARNING ASSETS 1994 1993 Interest and fees on loans $692,710 $575,085 Interest and dividends on taxable securities held to maturity 49,546 116,676 Interest on tax-exempt securities held to maturity 4,785 6,820 Interest and dividends on securities available for sale 129,666 85,331 Income on money market investments 26,243 23,526 Interest on mortgage and other loans held for sale 23,084 25,191 Total income from earning assets 926,034 832,629 INTEREST EXPENSE Interest checking deposits 41,234 38,001 Money market deposit accounts 67,530 58,496 Regular savings deposits 37,821 31,091 Money market certificates 19,915 17,861 Other domestic time deposits 107,442 96,849 Certificates of deposit $100,000 and over 2,589 1,975 Deposits in foreign offices 11 68 Total interest on deposits 276,542 244,341 Short-term borrowings 48,169 43,787 Long-term debt 19,507 17,489 Total interest expense 344,218 305,617 NET INTEREST INCOME 581,816 527,012 Provision for loan losses 29,682 48,775 Net credit income 552,134 478,237 NONINTEREST INCOME Trust and investment advisory income 55,609 57,440 Service charges on deposit accounts 82,851 79,419 Bank card-related income 39,529 27,500 Gain on pension settlement - - Other income 87,057 81,669 Securities gains (losses) (10,776) 2,237 Total noninterest income 254,270 248,265 Net credit and noninterest income 806,404 726,502 NONINTEREST EXPENSE Personnel expense 303,580 262,626 Occupancy expense - net 42,231 38,359 Equipment expense 25,339 24,122 Other expense 180,558 197,915 Total noninterest expense 551,708 523,022 INCOME BEFORE INCOME TAXES 254,696 203,480 Income tax expense 85,617 62,989 Net Income $169,079 $140,491 EARNINGS PER SHARE Primary $ 4.47 $ 3.68 Fully diluted 4.47 3.67 SUPPLEMENTARY DATA Average shares outstanding (000s): Primary 37,864 37,587 Fully diluted 37,867 37,665
66 YEARS ENDED DECEMBER 31, 1992 1991 1990 1989 $617,686 $735,128 $ 850,467 $ 871,317 166,322 156,216 194,486 123,093 9,346 11,751 13,564 17,803 4,234 18,987 9,239 - 37,567 42,621 17,609 8,455 28,522 14,443 12,459 9,565 863,677 979,146 1,097,824 1,030,233 44,278 47,164 45,102 44,226 75,936 90,174 87,253 81,995 26,749 19,823 19,375 21,724 35,137 62,692 61,714 68,291 136,344 185,207 181,900 149,328 7,651 33,927 90,907 135,833 145 1,209 539 741 326,240 440,196 486,790 502,138 38,096 101,614 179,883 130,616 17,197 16,201 16,972 17,289 381,533 558,011 683,645 650,043 482,144 421,135 414,179 380,190 99,242 209,522 131,055 44,846 382,902 211,613 283,124 335,344 51,007 48,322 45,169 42,043 73,944 57,953 45,946 37,146 23,141 22,694 22,072 21,971 - 2,236 - 1,072 66,736 54,459 41,405 45,067 3,563 48,165 12,216 1,052 218,391 233,829 166,808 148,351 601,293 445,442 449,932 483,695 233,838 209,021 198,159 193,684 35,654 32,683 31,293 28,767 24,011 22,916 23,797 23,749 208,300 141,001 125,590 116,594 501,803 405,621 378,839 362,794 99,490 39,821 71,093 120,901 19,689 6,060 9,948 17,053 $ 79,801 $ 33,761 $ 61,145 $ 103,848 $ 2.32 $ .98 $ 1.87 $ 3.28 2.32 .98 1.87 3.25 33,286 31,921 31,218 30,739 33,369 31,946 31,238 31,110
67 CONSOLIDATED AVERAGE BALANCES/NET INTEREST INCOME/RATES (1) CRESTAR FINANCIAL CORPORATION AND SUBSIDIARIES 1994 1993 INCOME(4)/ YIELD/ INCOME(4)/ YIELD/ DOLLARS IN THOUSANDS BALANCE EXPENSE RATE BALANCE EXPENSE RATE $ $ % $ $ $ ASSETS Taxable securities held to maturity 768,241 49,545 6.45 1,684,418 115,118 6.83 Tax-exempt securities held to maturity 74,136 7,258 9.79 99,548 10,233 10.28 Common and preferred stocks - - - 29,247 1,803 6.17 Total securities held to maturity (2) 842,377 56,803 6.74 1,813,213 127,154 7.01 Securities available for sale (2) 2,194,513 129,666 5.91 1,591,366 85,331 5.36 Money market investments (2) 604,472 26,288 4.35 675,801 23,580 3.49 Mortgage and other loans held for sale (2) 325,047 23,084 7.10 367,564 25,191 6.85 Commercial loans 2,590,100 199,399 7.70 2,458,893 187,463 7.62 Tax-exempt loans 214,588 20,578 9.59 262,838 22,418 8.53 Instalment loans 1,710,460 144,364 8.44 1,450,394 127,332 8.78 Bank card loans 1,144,186 136,631 11.94 701,669 95,923 13.67 Real estate loans 2,424,380 181,963 7.51 1,733,753 134,666 7.77 Construction loans 221,573 18,185 8.21 228,931 16,171 7.06 Total loans-net of unearned (2,3) 8,305,287 701,120 8.44 6,836,478 583,973 8.54 Allowance for loan losses (226,461) (215,974) Loans-net 8,078,826 6,620,504 Cash and due from banks 723,896 689,968 Premises and equipment-net 317,438 293,796 Customers' liability on acceptances 8,537 16,260 Intangible assets-net 129,109 94,860 Foreclosed properties-net 22,924 54,149 Other assets 384,876 367,933 TOTAL ASSETS 13,632,015 12,585,414 TOTAL EARNING ASSETS 12,271,696 936,961 7.63 11,284,422 845,229 7.49 LIABILITIES AND SHAREHOLDERS' EQUITY Interest checking deposits 1,862,445 41,234 2.21 1,629,692 38,001 2.33 Money market deposit accounts 2,378,068 67,530 2.84 2,280,096 58,496 2.57 Regular savings deposits 1,419,422 37,821 2.66 1,102,510 31,091 2.82 Money market certificates 627,634 19,915 3.17 571,215 17,861 3.13 Other domestic time deposits 2,465,470 107,442 4.36 2,127,471 96,849 4.55 Certificates of deposit $100,000 and over 58,313 2,589 4.44 44,302 1,975 4.46 Deposits in foreign offices 358 11 3.10 2,348 68 2.88 Total savings and time deposits (2) 8,811,710 276,542 3.14 7,757,634 244,341 3.15 Demand deposits 2,064,497 1,925,211 Total deposits 10,876,207 9,682,845 Short-term borrowings (2) 1,212,017 48,169 3.97 1,455,655 43,787 3.01 Long-term debt (2) 234,886 19,507 8.30 215,375 17,489 8.12 Liability on acceptances 8,537 16,260 Other liabilities 201,217 176,582 Total liabilities 12,532,864 11,546,717 Preferred stock - 43,890 Common shareholders' equity 1,099,151 994,807 Total shareholders' equity 1,099,151 1,038,697 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 13,632,015 12,585,414 Total interest-bearing liabilities 10,258,613 344,218 3.36 9,428,664 305,617 3.24 Other sources - net 2,013,083 1,855,758 TOTAL SOURCES OF FUNDS 12,271,696 344,218 2.80 11,284,422 305,617 2.71 NET INTEREST SPREAD 4.27 4.25 NET INTEREST INCOME/MARGIN 592,743 4.83 539,612 4.78
(1) Income and yields are computed on a tax-equivalent basis using the statutory federal income tax rate exclusive of the alternative minimum tax and nondeductible interest expense (2) Indicates earning asset or interest-bearing liability 68 1992 1991 1990 1989 INCOME(4)/ YIELD/ INCOME(4)/ YIELD INCOME(4)/ YIELD INCOME(4)/ YIELD/ BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE $ $ % $ $ % $ $ % $ $ 2,351,260 164,058 6.98 1,754,747 153,793 8.76 2,056,062 191,935 9.34 1,334,945 120,772 9.05 131,789 14,047 10.66 159,466 17,680 11.09 182,601 20,412 11.18 242,112 26,808 11.07 33,241 2,863 8.61 29,500 3,168 10.74 29,976 3,346 11.16 29,150 3,040 10.43 2,516,290 180,968 7.19 1,943,713 174,641 8.98 2,268,639 215,693 9.51 1,606,207 150,620 9.38 65,258 4,234 6.49 207,042 18,987 9.17 93,115 9,238 9.92 - - - 988,604 37,630 3.81 738,457 42,755 5.79 218,532 17,795 8.14 96,371 8,658 8.98 367,827 28,522 7.75 156,608 14,443 9.22 120,861 12,459 10.31 94,020 9,565 10.17 2,717,387 221,732 8.16 3,170,906 300,781 9.49 3,510,961 370,981 10.57 3,379,598 373,326 11.04 309,366 27,414 8.86 372,095 39,245 10.55 428,430 52,960 12.36 503,573 65,927 13.09 1,373,268 147,307 10.73 1,399,952 158,596 11.33 1,393,160 155,938 11.19 1,398,379 153,498 10.98 538,324 81,409 15.12 526,442 82,223 15.62 488,666 79,694 16.31 464,440 76,896 16.56 1,441,535 127,868 8.87 1,186,230 118,679 10.00 1,208,042 128,542 10.64 1,180,336 132,022 11.19 345,431 22,591 6.54 619,676 50,875 8.21 737,941 82,486 11.18 755,806 92,996 12.30 6,725,311 628,321 9.34 7,275,301 750,399 10.31 7,767,200 870,601 11.21 7,682,132 894,665 11.65 (224,143) (198,805) (114,580) (92,264) 6,501,168 7,076,496 7,652,620 7,589,868 652,023 622,989 667,243 664,186 276,930 275,561 271,421 267,868 20,991 26,416 24,451 25,931 84,831 92,405 93,204 89,846 101,562 39,582 11,362 6,465 344,927 261,435 252,256 218,598 11,920,411 11,440,704 11,673,704 10,659,360 10,663,290 879,675 8.25 10,321,121 1,001,225 9.70 10,468,347 1,125,786 10.75 9,478,730 1,063,508 11.22 1,444,359 44,278 3.07 1,025,073 47,164 4.60 919,726 45,102 4.90 870,860 44,226 5.08 2,315,630 75,936 3.28 1,683,227 90,174 5.36 1,364,589 87,253 6.39 1,189,857 81,995 6.89 781,185 26,749 3.42 404,831 19,823 4.90 394,349 19,375 4.91 443,595 21,724 4.90 753,500 35,137 4.66 942,716 62,692 6.65 782,073 61,714 7.89 845,467 68,291 8.08 2,438,795 136,344 5.59 2,557,439 185,207 7.24 2,242,642 181,900 8.11 1,792,679 149,328 8.33 116,065 7,651 6.59 463,007 33,927 7.33 1,080,842 90,907 8.41 1,466,998 135,833 9.26 4,417 145 3.28 18,222 1,209 6.63 6,792 539 7.94 8,185 741 9.05 7,853,951 326,240 4.15 7,094,515 440,196 6.20 6,791,013 486,790 7.17 6,617,641 502,138 7.59 1,686,673 1,502,404 1,505,796 1,525,986 9,540,624 8,596,919 8,296,809 8,143,627 1,131,887 38,096 3.37 1,778,336 101,614 5.71 2,284,596 179,883 7.87 1,457,820 130,616 8.96 185,894 17,197 9.25 162,838 16,201 9.95 170,106 16,972 9.98 175,052 17,289 9.88 20,991 26,416 24,451 25,931 201,394 87,108 121,074 137,239 11,080,790 10,651,617 10,897,036 9,939,669 45,000 45,000 45,000 49,227 794,621 744,087 731,668 670,464 839,621 789,087 776,668 719,691 11,920,411 11,440,704 11,673,704 10,659,360 9,171,732 381,533 4.16 9,035,689 558,011 6.18 9,245,715 683,645 7.39 8,250,513 650,043 7.88 1,491,558 1,285,432 1,222,632 1,228,217 10,663,290 381,533 3.58 10,321,121 558,011 5.41 10,468,347 683,645 6.53 9,478,730 650,043 6.86 4.09 3.52 3.36 3.34 498,142 4.67 443,214 4.29 442,141 4.22 413,465 4.36
(3) Nonaccrual loans are included in the average loan balances and income on such loans is recognized on a cash basis (4) The tax-equivalent adjustment to net interest income was $10.9 million in 1994, $12.6 million in 1993, $16.0 million in 1992, $22.1 million in 1991, $28.0 million in 1990 and $33.3 million in 1989 69 SELECTED RATIOS AND OTHER DATA CRESTAR FINANCIAL CORPORATION AND SUBSIDIARIES RATIOS 1994 1993 1992 1991 1990 1989 Net interest margin (1) 4.83% 4.78% 4.67% 4.29% 4.22% 4.36% Noninterest expense to: Net interest income (1) and noninterest income 65.14 66.38 70.03 59.91 62.21 64.58 Average assets 4.05 4.16 4.21 3.55 3.25 3.40 Net Income to net interest and noninterest income 20.22 18.12 11.39 5.15 10.52 19.65 Average earning assets to average total assets 90.02 89.66 89.45 90.21 89.67 88.92 Net Income to: Average earning assets 1.38 1.24 .75 .33 .58 1.10 Average assets 1.24 1.12 .67 .30 .52 .97 Average total equity 15.38 13.53 9.50 4.28 7.87 14.43 Income applicable to common shares to average common equity 15.38 13.90 9.73 4.19 7.99 15.06 Average total equity to: Average loans 13.23 15.19 12.48 10.85 10.00 9.37 Average assets 8.06 8.25 7.04 6.90 6.65 6.75 Dividend payout ratio: On common stock 33.99 30.56 34.46 87.98 70.46 36.19 On common and preferred stock 33.99 31.66 36.49 88.90 71.75 37.96 Equity formation rate 10.15 9.24 6.04 .47 2.22 8.95 Long-term debt at year end to: Total equity at year end 32.59 17.99 21.94 20.36 21.84 22.68 Total equity and long-term debt at year end 24.58 15.25 18.00 16.92 17.92 18.48 Net charge-offs to: Average total loans .45 .95 1.69 2.07 .99 .55 Provision for loan losses 125.12 132.92 114.80 71.95 58.64 94.28 Allowance for loan losses to year-end loans 2.36 2.89 3.11 2.97 1.94 1.20 Nonperforming assets to year- end loans and foreclosed properties - net 1.02 1.32 3.32 4.90 3.08 .97 Net charge-offs earnings coverage 7.66x 3.89x 1.74x 1.65x 2.63x 3.92x Equity leverage 12.40 12.12 14.20 14.50 15.03 14.81 OTHER DATA Cash dividends declared per common share $ 1.53 $ 1.14 $ .80 $ .86 $ 1.32 $ 1.20 Number of average primary shares (000s) 37,864 37,587 32,286 31,921 31,218 30,739 Market price of common stock: High $49 3/4 $46 1/2 $39 3/4 $ 25 $29 5/8 $34 1/8 Low 36 1/8 35 1/8 17 1/4 11 1/4 12 1/8 23 1/2 Last 37 5/8 41 7/8 39 17 3/4 13 3/4 28 3/4 At year end: Book value per common share 30.16 28.32 25.24 23.23 23.15 22.73 Fully diluted price/earnings multiple 8.42x 11.41x 16.81x 18.11x 7.35x 8.85x Dividend yield on common stock 4.07% 2.72% 2.05% 4.85% 9.60% 4.17% Number of common shareholders of record 12,708 12,769 12,139 12,637 12,545 12,536 Number of banking offices 336 302 289 266 263 252 Number of employees 7,169 6,576 6,122 5,771 6,175 6,180 Full-time equivalent employees 6,747 6,279 5,891 5,581 6,029 6,029
(1) Tax-equivalent basis 70 GENERAL INFORMATION CRESTAR FINANCIAL CORPORATION AND SUBSIDIARIES CORPORATE HEADQUARTERS Crestar Center 919 East Main Street, P.O. Box 26665 Richmond, Virginia 23261-6665 (804)782-5000 TELEX: 827420 ANNUAL MEETING The 1995 Annual Meeting of Shareholders will be held at 10:00 a.m. on Friday, April 28, 1995 in our Corporate Headquarters auditorium. COMMON STOCK Crestar's common stock is traded on the New York Stock Exchange where our symbol is CF. Dividends are customarily paid on the 21st of February, May, August and November. QUARTERLY COMMON STOCK PRICES AND DIVIDENDS The high, low and last price of Crestar's common stock for each quarter of 1994 and 1993 and the dividends declared per share are shown below. QUARTER MARKET PRICE DIVIDENDS ENDED HIGH LOW LAST DECLARED 1994 March 31 $46 $39 3/8 $42 5/8 $.33 June 30 49 1/2 40 3/4 45 1/2 .40 September 30 49 3/4 44 5/8 45 5/8 .40 December 31 45 5/8 36 1/8 37 5/8 .40 1993 March 31 $46 1/2 $35 3/4 $42 5/8 $.25 June 30 46 1/2 35 1/8 41 3/4 .28 September 30 45 39 7/8 42 3/4 .28 December 31 46 1/8 37 1/4 41 7/8 .33 In January 1995, a quarterly dividend on common stock of $.40 per share was declared. FINANCIAL INFORMATION To obtain financial information on Crestar, contact Eugene S. Putnam, Jr., Senior Vice President-Investor Relations and Corporate Finance, at the Corporate Headquarters, (804)782-5619. CORPORATE PUBLICATIONS Crestar's Annual Report and Form 10-K, Quarterly Reports and other corporate publications are available on request by writing or calling our Investor Relations Department at the Corporate Headquarters, (804)782-7152. SHAREHOLDER INFORMATION In you have questions about a specific stock owner- ship account, write or call our Investor Relations Department at the Corporate Headquarters, (804)782-7933. DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN Common shareholders receive a 5% discount from market price when they reinvest their Crestar dividends in additional shares. Shareholders partici- pating in the Plan can also make optional cash purchases of common stock at market price and pay no brokerage commissions. To obtain our Plan prospectus and enrollment card, write or call our Investor Relations Department at the Corporate Headquarters, (804)782-7933. CASH DIVIDEND DIRECT DEPOSIT Shareholders may elect to have their Crestar dividends directly deposited to a checking, savings or money market account. This service provides a convenient and safe method of receiving dividends and is offered at no cost to shareholders. To obtain additional information and an enrollment form, write or call our Investor Relations Department at the Corporate Headquarters, (804)782-7933. Exhibits The following exhibits are filed with this form or are incorporated by reference in response to Item 14(c). Those exhibits not included herein have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or the notes thereto. 3 (a) Restated Articles of Incorporation (filed as Exhibit 3(a) to Registrant's 1993 Form 10-K and incorporated by reference herein). 3 (b) Bylaws as amended through February 26, 1993 (filed as Exhibit 3(b) to Registrant's 1993 Form 10-K and incorporated by reference herein). 4 (a) Indenture dated as of September 1, 1993 for subordinated debt securities (filed as Exhibit 4.1 to Registration Statement No. 33-50387 and incorporated by reference herein). Pursuant to this Indenture, a series of $150,000,000 of 8 3/4% subordinated Notes due 2004 have been issued, the terms of which are described in 4(g) below. 4 (b) Indenture dated as of February 1, 1985 for subordinated debt securities (filed as Exhibit 4(c) to Registrant's 1995 for 10-K and incorporated by reference herein). Pursuant to this Indenture, a series of $50,000,000 of 8 5/8% Subordinated Notes Due 1998 and a series of $125,000,000 of 8 1/4% Subordinated Notes Due 2002 have been issued, the terms of which are described in 4(c) and 4(e) below. 4 (c) First Supplemental Indenture dated as of march 1, 1986 covering $50,000,000 of 8-5/8% Subordinated Notes Due 1998 (filed as Exhibit 4(b) to Registration Statement No. 33-4332 and incorporated by reference herein). 4 (d) Second Supplemental Indenture dated as of September 1, 1986 (filed as Exhibit 4.1 to Registrant's Form 8-K current Report dated July 16, 1992 and incorporated by reference herein). 4 (e) Third Supplemental Indenture dated as of July 1, 1992 covering $125,000,000 of 8 1/4% Subordinated Notes Due 2002 (filed as Exhibit 4(c) to Registrant's 1992 Form 10-K and incorporated by reference herein). 4 (f) Rights Agreement dated June 23, 1989, between the Registrant and Mellon Bank, NA, as Rights Agent (filed as Exhibit 4.1 to the Registrant's Form 8-K current Report dated June 23, 1989, and incorporated by reference herein). 4 (g) Board of Directors Resolutions approving issuance of $150,000,000 of 8 3/4% Subordinated Notes due 2004 (filed herewith). 10 (a) Performance Equity Plan of United Virginia Bankshares Incorporated (filed as Exhibit 10(a) to Registrant's 1987 Form 10-K and incorporated by reference herein). 10 (b) Management Incentive Compensation plan of Crestar Financial Corporation (filed as Exhibit 10(b) to Registrant's 1989 Form 10-K and incorporated by reference herein). 10 (c) Executive Life Insurance Plan (filed as Exhibit 10(d) to Registrant's 1985 Form 10-K and incorporated by reference herein). 10 (d) Crestar Financial Corporation Executive Life Insurance Plan as amended and restated effective January 1, 1991 (filed as Exhibit 10(d) to Registrant's 1993 Form 10-K and incorporated by reference herein). 10 (e) Crestar Financial Corporation Executive Welfare Plan (filed as Exhibit 10(d) to Registrant's 1990 Form 10-K and incorporated by reference herein). 10 (f) Amendments (effective December 18, 1992) to Crestar Financial Corporation Executive Welfare Plan (filed as Exhibit 10(e) to Registrant's 1992 Form 10-K and incorporated by reference herein). 10 (g) 1981 Stock Option Plan of Crestar Financial Corporation and Affiliated Corporations as amended through January 25, 1991 (filed as Exhibit 10(e) to Registrant's 1991 Form 10-K and incorporated by reference herein). 10 (h) Severance Agreement between the Corporation and Richard G. Tilghman (filed as Exhibit 10(g) to Registrant's 1992 Form 10-K and incorporated by reference herein); as amended by letter agreement dated March 27, 1995 (filed herewith). 10 (i) Severance Agreement between the Corporation and Patrick D. Giblin (filed as Exhibit 10(h) to Registrant's 1992 Form 10-K and incorporated by reference herein); as amended by letter agreement dated March 27, 1995 (filed herewith). 10 (j) Severance Agreement between the Corporation and Oscar H. Parrish (filed as Exhibit 10(i) to Registrant's 1992 Form 10-K and incorporated by reference herein); as amended by letter agreement dated March 27, 1995 (filed herewith). 10 (k) Severance Agreement between the Corporation and James M. Wells (filed as Exhibit 10(j) to Registrant's 1992 Form 10-K and incorporated by reference herein); as amended by letter agreement dated March 27, 1995 (filed herewith). 10 (l) Severance Agreement between the Corporation and William C. Harris (filed as Exhibit 10(k) to Registrant's 1992 Form 10-K and incorporated by reference herein); as amended by letter agreement dated March 27, 1995 (filed herewith). 10 (m) Crestar Financial Corporation Excess Benefit Plan (filed as Exhibit 10-K to Registrant's Form 1990 10-K and incorporated by reference herein). 10 (n) Amendments (effective December 18, 1992) to Crestar Financial Corporation Excess Benefit Plan (filed as Exhibit 10(m) to Registrant's 1992 form 10-K and incorporated by reference herein). 10 (o) United Virginia Bankshares Incorporated Deferred Compensation Program Under Incentive Compensation Plan of United Virginia Bankshares Incorporated and Affiliated Corporations (filed as Exhibit 10(m) to Registrant's 1988 Form 10-K and incorporated by reference herein). 10 (p) Crestar Financial Corporation deferred Compensation Plan for Outside Directors of Crestar Financial corporation and Crestar Bank (filed as Exhibit 10(n) to Registrant's 1988 10-K and incorporated by reference herein). 10 (q) Amendments (effective April 24, 1991) to Crestar Financial Corporation Deferred Compensation Plan for Outside Directors of Crestar Financial Corporation and crestar Bank (filed as Exhibit 10(p) to Registrant's 1992 Form 10-K and incorporated by reference herein). 10 (r) Crestar Financial Corporation Additional Nonqualified Executive Plan (filed as Exhibit 10(n) to Registrant's 1990 Form 10-K and incorporated by reference herein). 10 (s) Amendments (effective December 18, 1992) to Crestar Financial Corporation Additional Nonqualified Executive Plan (filed as Exhibit 10(r) to Registrant's 1992 Form 10-K and incorporated by reference herein). 10 (t) Crestar Financial Corporation Executive Severance Plan (filed as Exhibit 10(o) to Registrant's 1990 Form 10-K and incorporated by reference herein). 10 (u) Amendments (effective September 15, 1992 October 23, 1992 and December 18, 1992 to Crestar Financial Corporation Executive Severance Plan (filed as Exhibit 10 (t) to Registrant's 1992 Form 10-K and incorporated by reference herein). 10 (v) Crestar Financial Corporation Benefit Assurance Plan (filed as Exhibit 10(p) to Registrant's 1990 Form 10-K and incorporated by reference herein). 10 (w) Amendments (effective December 18, 1992) to Crestar Financial Corporation Benefit Assurance Plan (filed as Exhibit 10(v) to registrant's 1992 Form 10-K and incorporated by reference herein). 10 (x) Crestar Financial Corporation Supplemental Benefit Plan (filed as Exhibit 10(q) to Registrant's 1990 Form 10-K and incorporated by reference herein). 10 (y) Amendments (effective December 18, 1992) to Crestar Financial Corporation Supplemental Benefit Plan (filed as Exhibit 10(x) to Registrant's 1992 Form 10-K and incorporated by reference herein). 10 (z) United Virginia Bankshares Incorporated Deferred Compensation Plan for Selected Employees of United Virginia Bankshares Incorporated and Affiliated Corporations (filed as Exhibit 10(r) to Registrant's 1990 Form 10-K and incorporated by reference herein). 10 (aa) Amendment (effective January 1, 1987) to United Virginia Bankshares Incorporated Deferred Compensation Plan for Selected Employees of United Virginia Bankshares Incorporated and Affiliated Corporations (filed as Exhibit 10(z) to Registrant's 1992 Form 10-K and incorporated by reference herein). 10 (ab) Crestar Financial Corporation Premium Assurance Plan (filed as Exhibit 10(s) to Registrant's 1991 Form 10-K and incorporated by reference herein). 10 (ac) Amendments (effective December 18, 1992) to Crestar Financial Corporation Premium Assurance Plan (filed as Exhibit 10(ab) to Registrant's 1992 Form 10-K and incorporated by reference herein). 10 (ad) Crestar Financial Corporation 1993 Stock Incentive Plan (filed as Exhibit 10(ad) to Registrant's 1993 Form 10-K and incorporated by reference herein). 10 (ae) Crestar Financial Corporation Directors' Stock Compensation Plan (filed as Exhibit 10(ae) to Registrant's 1993 Form 10-K and incorporated by reference herein). 10 (af) Crestar Financial Corporation Temporary Executive Benefit Plan as amended through December 18, 1992 (filed as Exhibit 10(af) to Registrant's 1993 Form 10-K and incorporated by reference herein). 10 (ag) Crestar Financial Corporation Permanent Executive Benefit Plan as amended through December 18, 1992 (filed as Exhibit 10(ag) to Registrant's 1993 Form 10-K and incorporated by reference herein). 10 (ah) Approval and Summary of Supplemental Executive Retirement Plan (filed herewith). 21 Subsidiaries (filed herewith). 23 Consent of KPMG Peat Marwick LLP (filed herewith). Note: All item 10 documents represent Executive Compensation Plans or Arrangements, or Amendments thereto. EX-4 2 EXHIBIT 4G Exhibit 4(g) CRESTAR FINANCIAL CORPORATION BOARD OF DIRECTORS MEETING Friday, September 23, 1994 RESOLUTIONS AUTHORIZING THE ISSUANCE OF UP TO $150 MILLION IN DEBT SECURITIES UPON TERMS DETERMINED BY THE PRICING COMMITTEE: WHEREAS, the Board of Directors of Crestar Financial Corporation on September 24, 1993 authorized the filing of a shelf registration for $300,000,000 of securities and appointed a Pricing Committee to establish the terms of any subordinated Debt Securities to be issued in connection with the shelf registration; and, WHEREAS, The Board of Directors has determined, upon the advice and recommendation of management, that there is a current need to raise capital to fund the Corporation's ongoing mergers and acquisitions program. NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors of Crestar Financial Corporation hereby authorizes the sale and issuance of up to $150 million in Debt Securities at such time and upon such terms and provisions as may be determined by the Pricing Committee in accordance with resolutions adopted by the board of Directors on September 24, 1993; and, BE IT FURTHER RESOLVED,that the Pricing Committee and other officers of the Corporation are authorized to take any and all actions necessary or advisable to effectuate the authorized sale and issuance of Debt Securities. CRESTAR FINANCIAL CORPORATION PRICING COMMITTEE OF THE BOARD OF DIRECTORS RESOLUTIONS NOVEMBER 9, 1994 RESOLVED, that the Company shall issue its subordinated notes registered pursuant to Registration Statement No. 33-50387 (the "Notes") with the following terms: (1) the Notes shall be designated "8 3/4 Subordinated Notes Due November 15, 2004", (2) the Notes shall have a maximum aggregate principal amount of $150,000,000, (3) the Notes shall mature and the principal thereon shall be due on November 15, 2004, (4) the Notes shall bear interest at the rate of 8 3/4% per annum from November 15, 1994, and the Company shall pay interest on the principal amount of the Notes semi-annually on May 15 and November 15 of each year to the persons in whose names the Notes are registered at the close of business on April 30 and October 31, as the case may be, next preceding such May 15 and November 15, (5) principal and interest on the Notes shall be payable at the office or agency of the Company in the Borough of Manhattan, the City and State of New York or the City of Richmond, Virginia or at any other office of the Company maintained by the Company for such purpose; provided, however, that the Company may, at its option, make interest payments by mailing a check to the address of the person entitled thereto as such address shall appear in the Note register, (6) the Notes shall be issued in denominations of $1,000 and integral multiples thereof, (7) the Notes shall be issued in whole in the form of a global security, and the depositary of the Notes shall be The Depository Trust Company, (8) Crestar Bank shall be appointed to serve as authenticating agent for the Notes, (9) Crestar Bank and Chemical Bank each shall be appointed to act as paying agent for the Notes; provided, however, as long as the Notes are in the form of a global security the Notes shall be paid in accordance with the provisions of the applicable letter of representations and (10) the Notes shall have other terms as set forth in the form of certificate for such Notes attached hereto as Exhibit A; and further RESOLVED, that the form, terms and provisions of the proposed underwriting agreement (the "Underwriting Agreement") between the Company and Morgan Stanley & Co. Incorporated, as representative of the underwriters named therein, in the form attached hereto as Exhibit B, including pricing and other terms and conditions of the sale of the Notes, is hereby approved; and further RESOLVED, that the form of Note attached hereto as Exhibit A is hereby approved; and further RESOLVED, that the Authorized Officers hereby are authorized and directed to execute and deliver, on behalf of the Company, under its corporate seal, and attested by its Secretary or one of its Assistant Secretaries the Underwriting Agreement with such changes, amendments, additions, deletions and modifications as the officer so acting may deem necessary; and further RESOLVED, that all actions heretofore taken by officers, employees and agents of the Company in furtherance of the transactions contemplated by these resolutions are hereby ratified, adopted and approved; and further RESOLVED, that all officers, employees and agents of the Company are hereby authorized and directed to take any actions they deem necessary to implement the intent of the foregoing resolutions. -2- Exhibit A THIS NOTE IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (THE "DEPOSITARY") OR A NOMINEE OF THE DEPOSITARY. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY TO THE COMPANY (AS DEFINED BELOW) OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE TO BE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY AND ANY AMOUNT PAYABLE THEREUNDER IS MADE PAYABLE TO CEDE & CO. OR SUCH OTHER NAME, ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. UNLESS AND UNTIL THIS NOTE IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN DEFINITIVE REGISTERED FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO THE NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. CRESTAR FINANCIAL CORPORATION 8 3/4% SUBORDINATED NOTE DUE NOVEMBER 15, 2004 No. 1 CUSIP 226 091 AC0 Crestar Financial Corporation, a corporation duly organized and existing under the laws of the Commonwealth of Virginia (hereinafter called the "Company," which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to CEDE & CO. or registered assigns the principal sum of $150,000,000 (ONE HUNDRED AND FIFTY MILLION DOLLARS) at the office or agency of the Company in the Borough of Manhattan, the City and State of New York or the City of Richmond, Virginia, on November 15, 2004, in such coin or currency of the United States of America as at the time shall be legal tender for the payment of public and private debts, and to pay interest semi-annually on May 15 and November 15 of each year on said principal sum, commencing May 15, 1995, at the rate of 8 % per annum, at said offices or agencies, in like coin or currency, from November 15, 1994, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, until payment of such principal sum has been made or duly provided for. The interest so payable on any May 15 or November 15 will, subject to certain exceptions provided in the Indenture referred to herein, be paid to the person in whose name this Note is registered at the close of business on the April 30 or October 31, as the case may be, next preceding such May 15 or November 15 and may, at the option of the Company, be paid by check mailed to the registered address of such person. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may be paid by the Company, at its election, either to the person in whose name this Note is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof to be given to the Holder of this Note not less than 10 days prior to such Special Record Date, or at any time in any other lawful manner, all as more fully provided in said Indenture. Additional provisions of this Note are set forth on the reverse hereof including, without limitation, provisions subordinating the payment of principal and interest on the Notes to the prior payment in full of Senior Indebtedness as defined in the Indenture. Such provisions shall for all purposes have the same effect as though fully set forth at this place. This Note shall not be valid or become obligatory for any purpose until the certificate of authentication hereof shall have been signed by the Trustee or a duly appointed authenticating agent under the Indenture referred to herein. IN WITNESS WHEREOF, Crestar Financial Corporation has caused this instrument to be duly executed under its corporate seal. Dated: November 16, 1994 CRESTAR FINANCIAL CORPORATION ATTEST: BY:_______________________________ Vice Chairman of the Board ___________________________________ Secretary [SEAL] TRUSTEE'S CERTIFICATE OF AUTHENTICATION THIS IS ONE OF THE SECURITIES OF THE SERIES DESIGNATED THEREIN REFERRED TO IN THE WITHIN-MENTIONED INDENTURE. CHEMICAL BANK, AS TRUSTEE BY:____________________________________ AUTHORIZED OFFICER This Note is one of a duly authorized issue of securities of the Company (herein called the "Securities"), all issued or to be issued in one or more series under and pursuant to an Indenture, dated as of September 1, 1993 (herein called the "Indenture"), duly executed and delivered by the Company to Chemical Bank, a New York corporation, as Trustee (herein called the "Trustee," which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Trustee, the Company, and the Holders of the Securities and of the termsupon which the Securities are, and are to be, authenticated and delivered. This Note is one of the series designated on the face hereof, limited in aggregate principal amount to $150,000,000 (the "Notes"). The Notes will mature on November 15, 2004, and are not redeemable prior to maturity. The payment of principal of and interest on this Note is expressly subordinated and subject in right of payment, as provided in the Indenture, to the prior payment of any and all Senior Indebtedness of the Company, as defined in the Indenture. This Note is issued subject to such provisions, and each holder of this Note, by accepting the same, agrees, expressly for the benefit of the present and future holders of Senior Indebtedness, whether now or hereafter outstanding, to and shall be bound by such provisions. If an Event of Default (defined in the Indenture as certain events involving the bankruptcy, insolvency or reorganization of the Company) shall occur and be continuing, the principal of all the Notes may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee with the consent of the Holders of not less than a majority in aggregate principal amount of the Securities at the time Outstanding, as defined in the Indenture, of each series to be affected, provided, however, that no such supplemental indenture shall change the Stated Maturity of any Security, or reduce the principal amount thereof, or reduce the rate or change the time of payment of interest thereon,or make the principal thereof or interest thereon payable in any coin or currency other than that hereinbefore provided, or change the place of payment thereof, or impair or affect the right of any Holder of a Security to institute suit for payment thereof, or reduce the aforesaid percentage of Securities, the consent of the Holders of which is required for any such supplemental indenture, without the consent of the Holder of each Outstanding Security affected thereby. It is also provided in the Indenture that the Holders of not less than a majority in aggregate principal amount of the Notes at the time Outstanding may on behalf of the Holders of all of the Notes waive compliance by the Company with certainprovisions of the Indenture and any past default under the Indenture with respect to the Notes and its consequences, except a default in the payment of the principal of or interest on any of the Notes or a default with respect to any provision of the Indenture that cannot be modified or amended without the consent of the Holder of each Outstanding Note. Subject to the rights of the Holders of Senior Indebtedness of the Company set forth in this Note and as provided in the Indenture, no reference herein to the Indenture and no provision of this Note or of the Indenture shall alter orimpair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Note at the times, place and rates, and in the coin or currency as herein prescribed. The Notes are issuable in registered form without coupons and will be sold in denominations of $1,000 and integral multiples of $1,000 in excess thereof. Upon due presentment for registration of transfer of this Note at the office or agency of the Company in the Borough of Manhattan, the City and State of New York or the City of Richmond, Virginia, or any other location as may be provided for pursuant to the Indenture, a new Note or Notes of authorized denominations foran equal aggregate principal amount will be issued to the transferee in exchange herefor, subject to the limitations provided in the Indenture, without charge except for any tax or other governmental charge imposed in connection therewith. This Note may be exchanged for certificated securities registered in the names of the various beneficial owners hereof only if (a) the Depositary is at any time unwilling or unable to continue as Depositary or is ineligible to actas Depositary under the Indenture and a successor Depositary is not appointed by the Company within 90 days, or (b) the Company elects to issue certificated securities to all beneficial owners (as certified to the Company by the Depositary or a successor Depositary) of the Notes. The Company, the Trustee and any agent of the Company or the Trustee may treat the person in whose name this Note is registered as the owner of this Note, for the purpose of receiving payment of or on account of the principal hereof and, subject to the provisions on the face hereof, interest hereon, and for all other purposes, whether or not this Noteshall be overdue and neither the Company nor the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. This Note shall be deemed to be a contract made under the laws of the Commonwealth of Virginia and for all purposes shall be governed by and construed in accordance with the laws of said Commonwealth, provided, however, that the rights, duties, immunities and standard of care of the Trustee under the Indenture shall be governed by the laws of the State of New York. All terms used in this Note which are defined in the Indenture shall have the meanings assigned to them in the Indenture. ABBREVIATIONS The following abbreviations, when used in the inscription on the face of this Note, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM-- as tenants in common UNIT GIFT MIN ACT--........Custodian.... TEN ENT-- as tenants by the (Cus) (Minor) entireties Under Uniform Gifts to Minors JT TEN-- as joint tenants with Act........................... rights of survivor- (State) ship and not as Tenants in Common Additional abbreviations may also be used though not in the above list. FORM OF TRANSFER FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE (Please print or typewrite name and address of assignee) the within Note and does hereby irrevocably constitute and appoint _______________ (Attorney) to transfer the said Note in the Security Register of the Company, with full power of substitution in the premises. Dated: _________________ _________________________ NOTICE: The signature to this assignment must correspond with the name as written upon the face of this Note in every particular without alteration or enlargement or any change whatever. ______________________________________ SIGNATURE GUARANTEED: The signature must be guaranteed by a commercial bank or trust company or by a member firm of the New York Stock Exchange or another national securities exchange. Notarized or witnessed signatures are not acceptable. EX-10 3 EXHIBIT 10H (Crestar Logo and Letterhead) March 27, 1995 Mr. Richard G. Tilghman Crestar Financial Corporation 919 East Main Street Richmond, VA 23219 Dear Richard: This letter is to advise you of two changes to your severance agreement with Crestar Financial Corporation dated January 1, 1990 (the "Agreement"). On December 16, 1994, the Board of Directors approved a one-year extension of the Agreement - until December 31, 1997. In addition, the Board passed a resolution amending your Agreement to remove any reference to reduction in benefits due to income earned during the term of the Agreement. Accordingly, paragraph 6(B) of your Agreement is revised to read as follows: (B) Neither you nor any Record Owner is required to mitigate the amount of any payment provided for in Section 5. In addition, you are not required to mitigate the amount of your benefit entitlement under the Plan, nor, despite any provision of the Plan to the contrary, may the amount of your benefit entitlement under the Plan be reduced or adjusted by any compensation or benefits received by you that are Mitigation Amounts. If you consent to these modifications to your Agreement, please sign and return to me the enclosed copy of this letter. Sincerely, CRESTAR FINANCIAL CORPORATION By Group Executive Vice President and Human Resources Director ACCEPTED AND AGREED TO: Chief Executive Officer Date: Employee Date: EX-10 4 EXHIBIT 10I (Crestar Logo and Letterhead) March 27, 1995 Mr. Patrick D. Giblin Crestar Financial Corporation 919 East Main Street Richmond, VA 23219 Dear Pat: This letter is to advise you of two changes to your severance agreement with Crestar Financial Corporation dated January 1, 1990 (the "Agreement"). On December 16, 1994, the Board of Directors approved a one-year extension of the Agreement - until December 31, 1997. In addition, the Board passed a resolution amending your Agreement to remove any reference to reduction in benefits due to income earned during the term of the Agreement. Accordingly, paragraph 6(B) of your Agreement is revised to read as follows: (B) Neither you nor any Record Owner is required to mitigate the amount of any payment provided for in Section 5. In addition, you are not required to mitigate the amount of your benefit entitlement under the Plan, nor, despite any provision of the Plan to the contrary, may the amount of your benefit entitlement under the Plan be reduced or adjusted by any compensation or benefits received by you that are Mitigation Amounts. If you consent to these modifications to your Agreement, please sign and return to me the enclosed copy of this letter. Sincerely, CRESTAR FINANCIAL CORPORATION By Group Executive Vice President and Human Resources Director ACCEPTED AND AGREED TO: Chief Executive Officer Date: Employee Date: EX-10 5 EXHIBIT 10J (Crestar Logo and Letterhead) March 27, 1995 Mr. O. H. Parrish, Jr. Crestar Financial Corporation 919 East Main Street Richmond, VA 23219 Dear O.H. This letter is to advise you of two changes to your severance agreement with Crestar Financial Corporation dated January 1, 1990 (the "Agreement"). On December 16, 1994, the Board of Directors approved a one-year extension of the Agreement - until December 31, 1997. In addition, the Board passed a resolution amending your Agreement to remove any reference to reduction in benefits due to income earned during the term of the Agreement. Accordingly, paragraph 6(B) of your Agreement is revised to read as follows: (B) Neither you nor any Record Owner is required to mitigate the amount of any payment provided for in Section 5. In addition, you are not required to mitigate the amount of your benefit entitlement under the Plan, nor, despite any provision of the Plan to the contrary, may the amount of your benefit entitlement under the Plan be reduced or adjusted by any compensation or benefits received by you that are Mitigation Amounts. If you consent to these modifications to your Agreement, please sign and return to me the enclosed copy of this letter. Sincerely, CRESTAR FINANCIAL CORPORATION By Group Executive Vice President and Human Resources Director ACCEPTED AND AGREED TO: Chief Executive Officer Date: Employee Date: EX-10 6 EXHIBIT 10K (Crestar Logo and Letterhead) March 27, 1995 Mr. James M. Wells, III Crestar Financial Corporation 919 East Main Street Richmond, VA 23219 Dear Jim: This letter is to advise you of two changes to your severance agreement with Crestar Financial Corporation dated January 1, 1990 (the "Agreement"). On December 16, 1994, the Board of Directors approved a one-year extension of the Agreement - until December 31, 1997. In addition, the Board passed a resolution amending your Agreement to remove any reference to reduction in benefits due to income earned during the term of the Agreement. Accordingly, paragraph 6(B) of your Agreement is revised to read as follows: (B) Neither you nor any Record Owner is required to mitigate the amount of any payment provided for in Section 5. In addition, you are not required to mitigate the amount of your benefit entitlement under the Plan, nor, despite any provision of the Plan to the contrary, may the amount of your benefit entitlement under the Plan be reduced or adjusted by any compensation or benefits received by you that are Mitigation Amounts. If you consent to these modifications to your Agreement, please sign and return to me the enclosed copy of this letter. Sincerely, CRESTAR FINANCIAL CORPORATION By Group Executive Vice President and Human Resources Director ACCEPTED AND AGREED TO: Chief Executive Officer Date: Employee Date: EX-10 7 EXHIBIT 10L (Crestar Logo and Letterhead) March 27, 1995 Mr. Richard G. Tilghman Crestar Financial Corporation 919 East Main Street Richmond, VA 23219 Dear Richard: This letter is to advise you of two changes to your severance agreement with Crestar Financial Corporation dated January 1, 1990 (the "Agreement"). On December 16, 1994, the Board of Directors approved a one-year extension of the Agreement - until December 31, 1997. In addition, the Board passed a resolution amending your Agreement to remove any reference to reduction in benefits due to income earned during the term of the Agreement. Accordingly, paragraph 6(B) of your Agreement is revised to read as follows: (B) Neither you nor any Record Owner is required to mitigate the amount of any payment provided for in Section 5. In addition, you are not required to mitigate the amount of your benefit entitlement under the Plan, nor, despite any provision of the Plan to the contrary, may the amount of your benefit entitlement under the Plan be reduced or adjusted by any compensation or benefits received by you that are Mitigation Amounts. If you consent to these modifications to your Agreement, please sign and return to me the enclosed copy of this letter. Sincerely, CRESTAR FINANCIAL CORPORATION By Group Executive Vice President and Human Resources Director ACCEPTED AND AGREED TO: Chief Executive Officer Date: Employee Date: EX-10 8 EXHIBIT 10AH BOARD OF DIRECTORS MEETING, OCTOBER 28, 1994 APPROVAL OF SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN BOARD APPROVAL REQUIRED RESOLVED, The the appropriate officers of the Corporation are hereby authorized and directed to design, adopt and implement a Supplemental Executive Retirement Plan as described in the attached exhibit, and with such other terms as such officers may deem appropriate or necessary to carry out the actions required by this resolution. BOARD OF DIRECTORS, OCTOBER 28, 1994 PROPOSED SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN PURPOSE: Retirement benefits payable to Crestar's senior executive offers under qualified and nonqualified plans are not competitive with other banks in our peer group. A supplemental executive retirement plan can meet this competitive need and also promote flexibility in retirement planning for executives and the Corporation. ELIGIBILITY: Officers in grades 41 and above BENEFIT: Annual benefit based single life annuity providing 50% of executive s average 3 year total compensation (base salary plus bonus) reduced by benefits payable under Retirement Plan, Additional Nonqualified Executive Plan and Excess Plan, commencing at age 60 with 20 years of service; payment options same as annuity options available under the Retirement Plan. Early retirement benefit payable at ages 55 through 59, with 5% reduction per year prior to age 60. VESTING: Fully vested at age 55 with 20 years of service FUNDING: Payable from general assets AMENDMENT & Board may amend or terminate at any time, provided that TERMINATION consent must be obtained from (a) any participant who has reached age 55 and has 20 years of service, and (b) any participant or beneficiary who is in pay status if any such amendment or termination would reduce the participant's or beneficiary's benefit. CHANGE Agreement is binding on Crestar's successor. Any IN Control: participant whose employment terminates following a change in control and who has 20 years of service (with Crestar and its successor) may elect to begin receiving plan benefits prior to age 55, provided that such benefit is proportionately reduced. EX-21 9 EXHIBIT 21 Exhibit 21 All subsidiaries of the Registrant included in the Consolidated Financial Statements as of December 31, 1994 are listed below: Description Jurisdiction of Subsidiary of Activity Incorporation Crestar Bank (1) Banking Virginia Crestar Mortgage Mortgage Banking Corporation (2) Services Virginia Crestar Mortgage (3) Mortgage Origination Capital Corporation Virginia CMC OREO, Inc. (3) Real Estate Holding Virginia Crestar Leasing Equipment Leasing Corporation (2) Virginia Capitoline Investment Investment Advisory Virginia Services Incorporated (2) Services Southern Finance Investment Securities Virginia Corporation (2) Holding Southern Hotel Service, Inc. (2) Real Estate Holding Virginia (Inactive) Southern Service Corporation (2) Real Estate Holding Virginia (Inactive) Crestar Securities Discount Brokerage Virginia Corporation (1) Services Crestar Insurance Agency, Insurance Incorporated (1) Virginia Crestar Bank, N.A. (1) Banking National Banking Association Crestar Bank MD (1) Banking Maryland Annapolis Federal Funding Investment Securities Maryland Corporation I (4) Holding Commonwealth Investment Real Estate Holding Virginia Services Corp. (2) (Inactive) First Arlington Service Corp. (2) Trustee on Acquired Bank's Virginia Deeds of Trusts River Properties, Inc. (2) Real Estate Holding Virginia CRPC, Inc. (2) Real Estate Holding Virginia The Plaza Company of Virginia (2) Real Estate Holding Virginia Hampton Industrial, Inc. (2) Real Estate Holding Virginia Capital REFG, Inc. (2) Real Estate Holding Virginia Eastern REFG, Inc. (2) Real Estate Holding Virginia Second Eastern REFG, Inc. (2) Real Estate Holding Virginia Mortage Investment OREO, Inc. (2) Real Estate Holding Virginia GWR REFG, Inc. (2) Real Estate Holding Virginia Second GWR REFG, Inc. (2) Real Estate Holding Virginia Third GWR REFG, Inc. (2) Real Estate Holding Virginia Fourth GWR REFG, Inc. Real Estate Holding Virginia Fifth GWR REFG, Inc. Real Estate Holding Virginia Capital OREO, Inc. (2) Real Estate Holding Virginia Eastern OREO, Inc. (2) Real Estate Holding Virginia Palisades Condominium Owners Real Estate Holding Virginia Association (6) GWR OREO, Inc. (2) Real Estate Holding Virginia Western OREO, Inc. (2) Real Estate Holding Virginia Corporate OREO, Inc. (2) Real Estate Holding Virginia Villiages Of KC Properties, Inc. (2) Real Estate Holding Virginia Hilltop of Virginia, Inc. (2) Real Estate Holding Virginia CFG Vessels, Inc. (2) Real Estate Holding Virginia MDRP, Inc. (2) Real Estate Holding Maryland MD Oreo, Inc. (4) Real Estate Holding Maryland DCRP, Inc. (5) Real Estate Holding District of Columbia DC OREO, Inc. (5) Real Estate Holding District of Columbia
(1) Wholly-owned by Crestar Financial Corporation (2) Wholly-owned by Crestar Bank (3) Wholly-owned by Crestar Mortgage Corporation (4) Wholly-owned by Crestar Bank MD (5) Wholly-owned by Crestar Bank N.A. (6) Wholly-owned by Eastern OREO, Inc. Note: In addition to the subsidiaries enumerated above, Crestar Bank, Crestar Bank N.A. and Crestar Bank MD may, in the ordinary course of business, hold as collateral a majority of the capital stock of other companies and, as a result of realizing such control, companies may constitute subsidiaries within the definition contained in the instructions for the preparation of this report. Detail of any such transactions are not known to the Registrant, but if any exist, such companies are not deemed to be subsidiaries by the Registrant and are not believed to be of material importance as such. EX-23 10 EXHIBIT 23 Exhibit 23 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Crestar Financial Corporation We consent to incorporation by reference in Registration Statement No. 33-57710 on Form S-3, in Registration Statement No. 33-50387 on Form S-3, in Registration Statement No. 33-50921 on Form S-8, in Registration Statement No. 33-63606 on Form S-8 and in Registration Statement No. 33-54523 on Form S-8 of Crestar Financial Corporation of our report dated January 12, 1995, relating to the consolidated balance sheets of Crestar Financial Corporation and Subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, cash flows and changes in shareholders' equity for each of the years in the three-year period ended December 31, 1994, which report appears in the December 31, 1994 annual report on Form 10-K of Crestar Financial Corporation. Our report refers to a change in accounting for certain investments in debt and equity securities in 1994. /s/ KPMG Peat Marwick LLP Richmond, Virginia March 29, 1995 EX-27 11 EXHIBIT 27
9 YEAR DEC-31-1994 DEC-31-1994 907,627 8,674,753 443,655 3,574 1,621,973 907,368 860,771 9,285,637 219,189 14,010,030 10,913,152 1,380,806 216,581 366,962 186,656 0 0 939,409 14,010,030 692,710 183,997 49,327 926,034 276,542 344,218 581,816 29,682 (10,776) 551,708 254,696 169,079 0 0 169,079 4.47 4.47 4.83 69,406 35,701 6,878 210,000 210,958 65,204 28,066 219,189 158,504 0 60,685