-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, cmWGQLD508DkV/vwEZYdJ3mrdZQh+i1FPApjfRq8MKXZWwc0vRssm85RnMvOwFQJ +RFCcdzn4cRUernmPcGNCw== 0000916641-95-000168.txt : 19950516 0000916641-95-000168.hdr.sgml : 19950516 ACCESSION NUMBER: 0000916641-95-000168 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950331 FILED AS OF DATE: 19950515 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CRESTAR FINANCIAL CORP CENTRAL INDEX KEY: 0000101880 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 540722175 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07083 FILM NUMBER: 95539854 BUSINESS ADDRESS: STREET 1: 919 E MAIN ST STREET 2: PO BOX 26665 CITY: RICHMOND STATE: VA ZIP: 23261 BUSINESS PHONE: 8047825000 MAIL ADDRESS: STREET 1: 919 EAST MAIN STREET STREET 2: P O BOX 26665 CITY: RICHMOND STATE: VA ZIP: 23261-6665 FORMER COMPANY: FORMER CONFORMED NAME: UNITED VIRGINIA BANKSHARES INC DATE OF NAME CHANGE: 19871115 10-Q 1 CRESTAR FINANCIAL CORPORATION 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended March 31, 1995 ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 1-7083. Crestar Financial Corporation (Exact name of registrant as specified in its charter) Virginia 54-0722175 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 919 E. Main Street, P.O. Box 26665, Richmond, Virginia 23261-6665 (Address of principal executive offices) (Zip Code) (804)782-5000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X. No____. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at April 30, 1995 Common Stock, $5 par value 37,866,015 1 CRESTAR FINANCIAL CORPORATION AND SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1995 PART I. Financial Information ITEM 1. Financial Statements: Page Consolidated Balance Sheets . . . . . . . . . . . . . . . . 3 Consolidated Statements Of Income . . . . . . . . . . . . . 4 Consolidated Statements Of Cash Flows . . . . . . . . . . . 5 Consolidated Statements Of Changes In Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . 6 Notes To Consolidated Financial Statements . . . . . . . . 7-12 ITEM 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations: Financial Commentary . . . . . . . . . . . . . . . . . . .13-32 PART II. Other Information ITEM 6. Exhibits And Reports On Form 8-K: There were no reports on Form 8-K filed during the three months ended March 31, 1995. 2 CONSOLIDATED BALANCE SHEETS Crestar Financial Corporation And Subsidiaries Dollars in thousands March 31, December 31, ASSETS 1995 1994 1994 Cash and due from banks $ 693,848 $ 736,254 $ 907,627 Securities held to maturity (note 2) 875,669 1,065,347 907,368 Securities available for sale (note 3) 1,413,765 2,382,586 1,621,973 Money market investments (note 4) 654,993 846,486 452,556 Mortgage loans held for sale 220,470 417,360 209,525 Loans - net of unearned income (note 5): Business Loans: Commercial 3,067,476 2,867,295 3,093,122 Real estate - income property 815,346 809,429 744,888 Real estate - construction 183,761 229,310 184,583 Consumer Loans: Instalment 1,948,373 1,692,627 1,810,038 Bank card 1,540,940 991,811 1,477,285 Real estate - mortgage 2,197,019 1,644,770 1,975,721 Loans - net of unearned income of $1,108 and $2,324 at March 31, 1995 and 1994, respectively; $1,369 at December 31, 1994 9,752,915 8,235,242 9,285,637 Less: Allowance for loan losses (note 6) (222,702) (226,577) (219,189) Loans - net 9,530,213 8,008,665 9,066,448 Premises and equipment - net 332,762 315,364 316,896 Customers' liability on acceptances 10,984 13,740 6,464 Intangible assets - net (note 7) 180,041 140,184 122,953 Foreclosed properties - net (notes 5 and 8) 21,690 24,471 18,629 Other assets 492,450 430,010 379,591 TOTAL ASSETS $14,426,885 $14,380,467 $14,010,030 LIABILITIES Demand deposits $ 2,084,914 $ 2,088,875 $ 2,238,399 Interest checking deposits 1,890,967 1,882,099 1,916,411 Money market deposit accounts 2,450,983 2,392,430 2,342,222 Regular savings deposits 1,354,493 1,420,459 1,394,146 Domestic time deposits 3,202,595 3,264,086 2,955,756 Certificates of deposit $100,000 and over 71,348 45,027 66,218 Total deposits 11,055,300 11,092,976 10,913,152 Short-term borrowings (note 9) 1,540,525 1,372,014 1,380,806 Liability on acceptances 10,984 13,740 6,464 Other liabilities 218,721 602,164 216,581 Long-term debt (note 10) 385,767 217,134 366,962 TOTAL LIABILITIES 13,211,297 13,298,028 12,883,965 SHAREHOLDERS' EQUITY Preferred stock. Authorized 2,000,000 shares; none issued -- -- -- Common stock, $5 par value. Authorized 100,000,000 shares; outstanding 38,397,409 and 37,482,661 at March 31, 1995 and 1994, respectively; 37,331,213 at December 31, 1994 191,987 187,413 186,656 Capital surplus 338,002 257,009 281,207 Retained earnings 703,006 644,282 694,757 Net unrealized loss on securities available for sale (17,407) (6,265) (36,555) TOTAL SHAREHOLDERS' EQUITY 1,215,588 1,082,439 1,126,065 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $14,426,885 $14,380,467 $14,010,030
See accompanying notes to consolidated financial statements. 3 CONSOLIDATED STATEMENTS OF INCOME Crestar Financial Corporation And Subsidiaries In thousands, except per share data Three Months Ended Mar. 31, INCOME FROM EARNING ASSETS 1995 1994 Interest and fees on loans $206,029 $154,964 Interest on taxable securities held to maturity 13,272 8,900 Interest on tax-exempt securities held to maturity 1,004 1,384 Interest and dividends on securities available for sale 23,607 40,249 Income on money market investments 6,541 4,109 Interest on mortgage loans held for sale 3,810 7,424 Total income from earning assets 254,263 217,030 INTEREST EXPENSE Interest checking deposits 10,453 9,741 Money market deposit accounts 22,610 13,749 Regular savings deposits 9,461 8,321 Domestic time deposits 33,379 29,205 Certificates of deposit $100,000 and over 857 485 Total interest on deposits 76,760 61,501 Short-term borrowings 17,958 10,613 Long-term debt 7,861 4,250 Total interest expense 102,579 76,364 NET INTEREST INCOME 151,684 140,666 Provision for loan losses (note 6) 10,100 10,032 NET CREDIT INCOME 141,584 130,634 NONINTEREST INCOME Trust and investment advisory income 13,538 15,003 Service charges on deposit accounts 21,591 20,779 Bank card-related income 11,058 7,728 Other income 20,887 21,663 Securities losses (2,410) (1,718) Total noninterest income 64,664 63,455 NET CREDIT AND NONINTEREST INCOME 206,248 194,089 NONINTEREST EXPENSE Personnel expense 76,316 74,797 Occupancy expense - net 10,960 10,794 Equipment expense 7,012 5,928 Other expense 43,544 42,491 Total noninterest expense 137,832 134,010 INCOME BEFORE INCOME TAXES 68,416 60,079 Income tax expense(note 11) 23,330 19,597 NET INCOME $ 45,086 $ 40,482 EARNINGS PER COMMON SHARE $ 1.18 $ 1.07 See accompanying notes to consolidated financial statements. 4 CONSOLIDATED STATEMENTS OF CASH FLOWS Crestar Financial Corporation And Subsidiaries In thousands Three Months Ended March 31, 1995 1994 OPERATING Net Income $ 45,086 $ 40,482 ACTIVITIES Adjustments to reconcile net income to net cash provided by operating activities: Provisions for loan losses, foreclosed properties and other losses 9,850 9,076 Depreciation and amortization of premises and equipment 8,751 7,992 Securities losses 2,410 1,718 Amortization of intangible assets 4,081 4,829 Deferred income tax expense 2,200 2,214 Loss (gain) on foreclosed properties (1,275) 260 Gain on sale of mortgage servicing rights (5,900) (3,102) Net increase in trading account (4,677) (3,891) Origination of loans held for sale (346,002) (846,257) Proceeds from sales of loans held for sale 335,057 1,035,271 Net decrease (increase) in accrued interest receivable, prepaid expenses and other assets 13,221 (55,700) Net increase (decrease) in accrued interest payable, accrued expenses and other liabilities (14,956) 45,222 Other, net 3,066 4,090 Net cash provided by operating activities 50,912 242,204 INVESTING Proceeds from maturities and calls of securities ACTIVITIES held to maturity 31,220 76,436 Proceeds from maturities and calls of securities available for sale 85,269 140,336 Proceeds from sales of securities available for sale 579,440 1,079,257 Purchases of securities held to maturity -- (262,038) Purchases of securities available for sale (289,729) (387,328) Net increase in money market investments (197,760) (164,437) Principal collected on non-bank subsidiary loans 6,773 7,311 Loans originated by non-bank subsidiaries (61,323) (44,101) Net decrease (increase) in other loans (1,726) 111,899 Purchases of premises and equipment (19,442) (14,228) Proceeds from sales of foreclosed properties 7,461 12,976 Proceeds from sales of mortgage servicing rights 8,201 5,291 Aquisitions of net assets of financial institutions (12,190) (119,480) Other, net (1,345) (3,234) Net cash provided by investing activities 134,849 438,660 FINANCING Net decrease in demand, interest checking, money market ACTIVITIES and regular savings deposits (360,460) (83,542) Net increase (decrease) in short-term borrowings 57,617 (446,831) Net decrease in time deposits (62,544) (117,054) Proceeds from issuance of long-term debt -- 158 Principal payments on long-term debt (10,945) (432) Cash dividends paid (15,292) (12,383) Common stock purchased and retired (20,284) (10,392) Proceeds from the issuance of common stock 12,368 9,214 Net cash used by financing activities (399,540) (661,262) CASH AND Increase (decrease) in cash and cash equivalents (213,779) 19,602 CASH Cash and cash equivalents at beginning of quarter 907,627 716,652 EQUIVALENTS CASH AND CASH EQUIVALENTS AT END OF QUARTER $ 693,848 $ 736,254
Cash and cash equivalents consist of cash and due from banks. See accompanying notes to consolidated financial statements. 5 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Crestar Financial Corporation And Subsidiaries In thousands Shareholders' Equity Shares of Common Stock 1995 1994 1995 1994 Balance, January 1 $1,126,065 $1,062,477 37,331,213 37,515,671 Net Income 45,086 40,482 -- -- Cash dividends declared on common stock (15,292) (12,383) -- -- Cumulative effect of change in accounting for securities available for sale -- 32,209 -- -- Change in net unrealized gain or loss on securities available for sale 19,148 (38,474) -- -- Common stock purchased and retired (24,482) (11,169) (587,200) (269,700) Common stock issued: For acquisition of financial institutions 52,617 -- 1,317,396 -- For dividend reinvestment plan 2,956 2,515 75,083 60,144 For thrift and profit sharing plan 8,263 4,993 207,272 115,770 For directors' stock compensation plan 78 78 2,067 1,859 Upon exercise of stock options (including tax benefit of $246 in 1995; $291 in 1994) 1,149 1,706 51,578 58,377 Upon conversion of debentures -- 5 -- 540 Balance, March 31 $1,215,588 $1,082,439 38,397,409 37,482,661
See accompanying notes to consolidated financial statements. 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Crestar Financial Corporation And Subsidiaries (1) GENERAL The consolidated financial statements conform to generally accepted accounting principles and to general practices within the banking industry. The accompanying interim statements are unaudited; however, in the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial statements, including adjustments related to completed acquisitions, have been included. All adjustments are of a normal nature. Certain reclassifications have been made to the prior years' consolidated financial statements to conform to the 1995 presentation. The notes included herein should be read in conjunction with the notes to consolidated financial statements included in the Corporation's 1994 Annual Report and Form 10-K. During the first quarter of 1995, Crestar completed three acquisitions previously announced in 1994. 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 198,000 shares of Crestar stock, and $23 million for Jefferson, including 471,000 shares of Crestar stock. The excess of the cost over the estimated fair value of the tangible net assets acquired was approximately $9.4 million and $23.7 million for Independent and Jefferson, respectively. Independent and Jefferson had total assets of approximately $85 million and $300 million, respectively, and total deposits of $70 million and $250 million, respectively, at acquisition date. On March 24, 1995 Crestar completed its acquisition of TideMark Bancorp, Inc. (TideMark), Newport News, Virginia. The acquisition of TideMark was for a combination of cash and Crestar stock valued at approximately $40 million, including 648,000 shares of Crestar stock. The excess of the cost over the estimated fair value of the tangible net assets acquired was approximately $31.5 million. TideMark had total assets and deposits of approximately $400 million and $240 million, respectively, at acquisition date. The above acquisitions were accounted for as purchases and, accordingly, the results of their operations were 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 excess of cost over the estimated fair value of the tangible assets and liabilities acquired is recorded as intangible assets on the accompanying consolidated balance sheet. Intangible assets include goodwill, which is amortized on a straight-line basis over 15 years, and mortgage servicing rights, which are amortized in proportion to, and over the period of, estimated net servicing income to be derived from the servicing activities, ranging from 5 to 14 years. Crestar expects the three acquisitions completed during the first quarter of 1995 to have a positive contribution of earnings within the first twelve months following completion. (2) SECURITIES HELD TO MATURITY The amortized cost (carrying values) and estimated market values of securities held to maturity at March 31 follow: In thousands 1995 1994 Amortized Market Amortized Market Cost Value Cost Value U.S. Treasury and Federal agencies $ 10,252 $ 10,090 $ 10,465 $ 10,415 Mortgage-backed obligations of Federal agencies 579,852 565,308 706,861 704,256 Other taxable securities 221,126 213,759 266,791 262,372 States and political subdivisions 64,439 64,703 81,230 81,778 Total securities held to maturity $875,669 $853,860 $1,065,347 $1,058,821
7 (3) SECURITIES AVAILABLE FOR SALE The amortized cost and estimated market values (carrying values) of securities available for sale at March 31 follow: In thousands 1995 1994 Amortized Market Amortized Market Cost Value Cost Value U.S. Treasury and Federal agencies $ 478,391 $ 469,549 $1,369,024 $1,365,499 Mortgage-backed obligations of Federal agencies 699,030 682,829 772,282 766,457 Other mortgage-backed obligations 184,203 181,776 223,576 223,200 Other taxable securities 5,625 5,623 10,514 10,581 Common and preferred stocks 73,961 73,988 16,891 16,849 Total securities available for sale $1,441,210 $1,413,765 $2,392,287 $2,382,586
(4) MONEY MARKET INVESTMENTS Money market investments at March 31 included: In thousands 1995 1994 Trading account securities $ 8,250 $ 8,951 Federal funds sold 457,985 79,935 Securities purchased under agreements to resell 182,000 727,250 Domestic time deposits -- 25,138 U.S. Treasury 6,758 5,212 Total money market investments $654,993 $846,486 (5) NONPERFORMING ASSETS AND IMPAIRED LOANS Nonperforming assets at March 31 were: In thousands 1995 1994 Nonaccrual loans $72,990 $ 89,476 Restructured loans -- 34 Total nonperforming loans 72,990 89,510 Foreclosed properties - net 21,690 24,471 Total nonperforming assets $94,680 $113,981 Noncash additions to foreclosed properties were $800 thousand and $1.0 million in the first three months of 1995 and 1994, respectively. 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 1993. SFAS 114 was further amended by the FASB in 1994 through the issuance of Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" (SFAS 118). Effective January 1, 1995, SFAS 114, as amended by SFAS 118, requires that an impaired loan 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." Impaired loans are specifically reviewed loans for which it is probable that the creditor will be unable to collect all amounts due according to the terms of the loan agreement. A loan is not impaired during a period of delay in payment if the ultimate collectibility of all amounts due is expected. SFAS 118 allows a creditor to use existing methods for recognizing interest income on an impaired loan. For Crestar's nonaccrual loans and impaired loans, interest receipts are recognized as interest revenue or are applied to principal when management believes the ultimate collectibility of principal is in doubt. At March 31, 1995, impaired loans of $40 million were included in the nonaccrual loan balances of Crestar. The balance of impaired loans at January 1, 1995 also totaled approximately $40 million. Because the majority of loans deemed impaired during the first quarter were collateral dependent, valuations of impaired loans did not vary materially from the values previously assigned to this population of loans. The initial adoption of the new accounting standard did not require an increase to Crestar's allowance for loan losses. The impact of adopting SFAS 114, as amended by SFAS 118, was therefore immaterial to the financial condition and operations of Crestar as of and for the three month period ended March 31, 1995. In accordance with SFAS 114 and SFAS 118, no retroactive application of the accounting standard has been made to consolidated financial statements for periods prior to January 1, 1995. 8 (6) ALLOWANCE FOR LOAN LOSSES Transactions in the consolidated allowance for loan losses for the three months ended March 31 were: In thousands Three Months 1995 1994 Beginning balance $219,189 $210,958 Charge-offs (18,988) (18,753) Recoveries 6,770 8,711 Net charge-offs (12,218) (10,042) Provision for loan losses 10,100 10,032 Allowance from acquisitions 5,631 15,629 Net increase 3,513 15,619 Ending balance $222,702 $226,577 (7) INTANGIBLE ASSETS Intangible assets at March 31 included: In thousands 1995 1994 Goodwill and deposit base intangibles $162,872 $115,387 Mortgage servicing rights 16,619 24,150 Favorable lease rights 550 647 Total intangible assets - net $180,041 $140,184 Accumulated amortization of goodwill was $25,526,000 and $17,921,000 for 1995 and 1994, respectively. (8) ALLOWANCE FOR FORECLOSED PROPERTIES Transactions in the allowance for losses on foreclosed properties for the three months ended March 31 were: In thousands Three Months 1995 1994 Beginning balance $7,180 $ 5,574 Provision for foreclosed properties (500) (1,302) Write-downs (902) (255) Allowance from acquisitions 3,194 1,416 Net increase (decrease) 1,792 (141) Ending balance $8,972 $ 5,433 (9) SHORT-TERM BORROWINGS Short-term borrowings, exclusive of deposits, with maturities of less than one year at March 31 were: In thousands 1995 1994 Federal funds purchased $ 847,487 $ 726,491 Securities sold under repurchase agreements 533,913 527,734 Notes payable 153,895 114,578 U.S. Treasury demand notes 3,326 503 Other 1,904 2,708 Total short-term borrowings $1,540,525 $1,372,014 The Corporation paid $96,698,000 and $71,227,000 in interest on deposits and short-term borrowings in the first three months of 1995 and 1994, respectively. 9 (10) LONG-TERM DEBT Long-term debt at March 31 included: In thousands 1995 1994 8 3/4% Subordinated notes due 2004 $149,625 $ -- 8 1/4% Subordinated notes due 2002 125,000 125,000 8 5/8% Subordinated notes due 1998 49,968 49,958 7-8 1/4% Mortgage indebtedness maturing through 2009 9,923 12,872 8 5/8 14 3/8% Capital lease obligations maturing through 2006 1,303 3,293 4 3/8-8% Federal Home Loan Bank obligations payable through 2008 18,813 11,122 6 1/4-11 1/4% Collateralized mortgage obligation bonds maturing through 2019 31,135 14,760 5% Convertible subordinated debentures due 1994 -- 129 Total long-term debt $385,767 $217,134
The Corporation made payments of $5,931,000 and $5,749,000 in interest on long-term debt in the first three months of 1995 and 1994, respectively. There were no new capital lease agreements in the first quarter of 1995. Crestar assumed $14.0 million and $15.7 million of collateralized mortgage obligation bonds and Federal Home Loan Bank obligations, respectively, through acquisitions completed in the first quarter of 1995. (11)INCOME TAXES The current and deferred components of income tax expense allocated to continuing operations in the accompanying consolidated statements of income for the three months ended March 31 were: In thousands Three Months 1995 1994 Current: Federal $19,953 $16,245 State and local 1,177 1,138 Total current tax expense 21,130 17,383 Deferred: Federal 2,308 2,640 State and local (108) (426) Total deferred tax expense 2,200 2,214 Total income tax expense $23,330 $19,597 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 for the three months ended March 31 were: In thousands Three Months 1995 1994 Income before income taxes $68,416 $60,079 Tax expense at statutory rate 23,946 21,028 Increase (decrease) in taxes resulting from: Tax-exempt interest and dividends (1,949) (1,715) Nondeductible interest expense 148 105 Amortization of goodwill 710 287 State income taxes 694 462 Other - net (219) (570) Total decrease in taxes (616) (1,431) Total income tax expense $23,330 $19,597 Effective tax rate 34.1% 32.6% 10 The Corporation made income tax payments of $264,000 and $4,207,000 during the first three months of 1995 and 1994, respectively. At March 31, 1995, the Corporation had a net deferred income tax asset of $102,747,000. There was no valuation allowance relating to the net deferred income tax asset. 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. (12) CONDENSED CRESTAR FINANCIAL CORPORATION (PARENT) INFORMATION The Parent's Condensed Balance Sheets at March 31 were: In thousands 1995 1994 Cash in banks $ 37,476 $ 35,515 Securities held to maturity 10,520 11,619 Securities available for sale 42,907 1,300 Securities purchased from subsidiary under agreements to resell 450 366 Other money market investments 181,968 110,981 Notes receivable from subsidiaries 224,000 176,000 Investments in subsidiaries: Bank subsidiaries 1,240,029 1,070,099 Non-bank subsidiaries 8,622 6,019 Other assets 14,894 12,392 Total Assets $1,760,866 $1,424,291 Securities sold to subsidiary under repurchase agreements $ 10,135 $ 1,699 Other short term borrowings 143,934 109,871 Other liabilities 66,616 55,195 Long-term debt 324,593 175,087 Total shareholders' equity 1,215,588 1,082,439 Total Liabilities and Shareholders' Equity $1,760,866 $1,424,291
The Parent's Condensed Statements of Income for the three months ended March 31 were: In thousands Three Months 1995 1994 Cash dividends from bank subsidiaries $16,426 $13,618 Interest from subsidiaries 4,738 3,651 Interest on securities held to maturity and available for sale 819 197 Income on money market investments 2,792 1,022 Other income -- 9 Total income 24,775 18,497 Interest on short-term borrowings 1,893 684 Interest on long-term debt 6,950 3,660 Other expense 110 121 Total expense 8,953 4,465 Income before income taxes and equity in undistributed net income of subsidiaries 15,822 14,032 Income tax expense (benefit) (481) 85 Income before equity in undistributed net income of subsidiaries 16,303 13,947 Equity in undistributed net income of subsidiaries 28,783 26,535 Net Income $45,086 $40,482
11 (13) COMMITMENTS AND CONTINGENCIES In the normal course of business, there are outstanding commitments, contingent liabilities and other financial instruments that are not reflected in the accompanying consolidated financial statements. These include commitments to extend credit, standby letters of credit, interest rate caps, floors and collars, swaps, and forward contracts. These items involve varying degrees of credit and interest rate risk in excess of amounts recorded in the consolidated balance sheets. 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. Similar to direct lending, these commitments are subject to the Corporation's loan approval and review procedures and policies. Based upon management's review, 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. Crestar receives a commitment fee for entering into such agreements. Standby letters of credit, which are conditional commitments to extend credit, guarantee the performance of customers to a third party. Crestar's outstanding standby letters of credit were $358.5 million and $374.0 million at March 31, 1995 and 1994, respectively. At March 31, 1995, approximately $15.0 million of the standby letters of credit were participated to other financial institutions. 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 March 31, 1995 Crestar serviced a total of $975.0 million of loans for which it had accepted a recourse liability. Of this amount, approximately $585.9 million 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 March 31, 1995, Crestar was participating in interest rate swaps of $1.2 billion which were used to convert certain floating rate commercial and real estate loans to fixed rates. Unrealized gains and unrealized losses on such swaps were $39 thousand and $49.5 million, respectively, at March 31, 1995. Notional balances of $858.5 million of such swaps were indexed amortizing swaps, whose notional values amortize more slowly as rates rise. Crestar also had $245 million of interest rate cap and $250 million of interest rate floor agreements outstanding at March 31, 1995, which were used to minimize interest rate risk associated with certain floating rate deposits and loans, respectively. Unrealized gains and losses on such caps and floors were $1.4 million and $0.3 million, respectively, at March 31, 1995. In addition, Crestar serves as a financial intermediary in interest rate swap, cap, floor and collar agreements, providing risk management services to customers, and at March 31, 1995 had $132.9 million in offsetting swap, $100.3 million in offsetting cap, and $37.6 million in offsetting collar agreements. The notional amount of these over-the-counter traded interest rate swaps, caps, floors and collars does not fully represent Crestar's credit exposure, which the Corporation believes is a combination of current replacement cost of approximately $2.2 million plus an amount for additional market movement. Three counterparties constituted 25%, 16% and 13% of the estimated credit and market exposure of $48.6 million at March 31, 1995. Crestar also had $305.4 million of forward agreements outstanding at March 31, 1995, which are primarily utilized 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. 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. 12 FINANCIAL COMMENTARY Crestar Financial Corporation And Subsidiaries OVERVIEW (Tables 1, 2 and 16) Crestar Financial Corporation (Crestar) reported net income of $45.1 million for the quarter ended March 31, 1995, an increase of $4.6 million or 11% over net income reported in the first quarter of 1994. These increases reflected the continued positive effects of improved net interest margins, growth in earning assets and noninterest income, and management of controllable expenses. Earnings per share were $1.18 for the first quarter of 1995, compared to $1.07 in 1994. The predominant items affecting the change in earnings per share are given in Table 2. Each item is net of applicable federal income taxes. MERGERS AND ACQUISITIONS Crestar continued to enhance its presence in current markets through the completion of three acquisitions during the first quarter of 1995. Crestar also recently announced a major pending acquisition. On January 20, 1995, Crestar completed the previously announced acquisitions of Jefferson Savings and Loan Association, F.A. (Jefferson Savings) and Independent Bank (Independent). 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 acquisition was for $5 million in cash and 471 thousand shares of Crestar stock, for a combined value of approximately $23 million. The purchase of Independent Bank, a Manassas-based commercial bank added two branches in Prince William County, enhancing Crestar's leading market position in one of Virginia's fastest growing areas. The acquisition was valued at $12 million, based on a payment of $5 million in cash and 198 thousand shares of Crestar common stock. Crestar's acquisition of TideMark Bancorp, Inc. (TideMark) was completed on March 24, 1995. The acquisition was for a combination of 648 thousand shares of Crestar stock and $13 million in cash, having a total value of approximately $40 million. At the time of the acquisition, TideMark was the oldest and largest financial institution headquartered in the Virginia Peninsula area of eastern Virginia. Upon acquisition, three of TideMark's 12 branches were converted to Crestar offices; the remaining TideMark branches were consolidated into nearby Crestar branches. Each of the three acquisitions completed in the first quarter of 1995 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 first quarter 1995 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. On April 28, Crestar announced the signing of a binding letter agreement to acquire Loyola Capital Corporation (Loyola), a $2.5 billion-asset thrift institution headquartered in Baltimore, Maryland. Loyola operates 35 branches, primarily in central Maryland and Maryland's Eastern Shore, including 15 branches in the Baltimore metropolitan area, with total deposits of approximately $1.5 billion. Under terms of the binding letter agreement, Loyola shareholders will receive Crestar common stock in exchange for their Loyola holdings. The total value of the transaction will approximate $259 million, and is expected to be completed in late 1995 or early 1996. The acquisition of Loyola is subject to the signing of a definitive agreement as well as regulatory and Loyola shareholder approval. PROFITABILITY MEASURES AND CAPITAL RESOURCES (Table 1) Crestar's increased earnings in the first quarter of 1995 resulted in improvements in key profitability measures when compared to the same period of 1994. Return on average assets was 1.30% in the first three months of 1995, up from the 1.22% reported for the first three months of 1994. Return on average equity was 15.43% for the quarter ended March 31, 1995, compared to the 14.83% reported in the first quarter of 1994. Average equity to assets of 8.44% for the first quarter of 1995 increased 24 basis points from 8.20% in the first quarter of 1994, reflecting higher retained earnings and the impact of common stock issued for first quarter 1995 acquisitions. Period-end equity to assets of 8.43% at March 31, 1995 was 90 basis points above March 31, 1994 ratio of 7.53%, also reflecting higher earnings and stock issued for acquisitions. Risk-based capital ratios are another measure of capital adequacy. At March 31, 1995, Crestar's consolidated risk-adjusted capital ratios were 9.2% for Tier 1 and 13.0% for total capital, well above the required minimums of 4.0% and 8.0%, respectively. The Tier 1 leverage ratio of 7.9% at March 31, 1995 also was significantly above the regulatory minimum of 3.0%. Crestar's tangible leverage ratio, defined as total equity less all intangibles divided by total assets less all intangibles, was 7.3% at March 31, 1995. Under Federal Deposit Insurance Corporation (FDIC) 13 rules, each of Crestar's three subsidiary banks was considered "well- capitalized" as of March 31, 1995, the highest category of capitalization defined by regulatory authorities, allowing for the lowest level of FDIC insurance premium payments. At March 31, 1995, approximately 62% 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. NET INTEREST MARGIN AND NET INTEREST INCOME (Tables 3 and 17) Crestar's net interest margin for the first quarter of 1995 was 4.92%, an improvement of 14 basis points from the margin recorded in the first quarter of 1994. The improvement was due to favorable changes in the composition and yield of balance sheet earning assets, which offset higher rates paid on deposits and declines in interest income arising from off-balance sheet hedge transactions. The net interest margin in the fourth quarter of 1994 was 4.81%. Positive influences on the first quarter 1995 margin include favorable changes in the composition of balance sheet earning assets and their respective interest rate yields. Changes in the earning asset mix increased the first quarter 1995 net interest margin by approximately 29 basis points when compared to the first quarter of 1994. Reflecting the impact of strong marketing efforts, increased demand and completed bank and thrift acquisitions, loans as a percentage of total earning assets increased from an average of 63% during the first three months of 1994 to 76% for the same period of 1995. Average bank card loans experienced significant growth, with first quarter 1995 average balances up $527 million, or 55%, versus the same period of 1994. The growth in bank card balances reflects Crestar's strong marketing emphasis, including promotional efforts outside of Virginia, Maryland and Washington, D.C. Average consumer real estate loans were up $853 million, or 68%, from first quarter 1994, with average instalment loan balances increasing 16% during this period. Average business loans for the first quarter were up 6% from prior year balances, despite reductions in construction and income property loans, as average commercial loans increased 11%. Funding for loan growth came in part from reductions in the average balances of securities available for sale, which declined $1.5 billion when compared to 1994 first quarter average balances. With regards to funding sources, the rate of growth in certificates of deposits and money market deposit accounts was higher than the rate of growth in net demand deposits and interest checking balances, resulting in a negative impact to the first quarter 1995 net interest margin of five basis points, in comparison to first quarter 1994 results. When included with the impact of changes to Crestar's earning asset mix, this resulted in a net 24 basis point improvement in the first quarter 1995 net interest margin arising from changes in Crestar's total balance sheet mix. Average total deposits for first quarter 1995 increased $459 million, to $10.8 billion, a 4% increase over first quarter 1994 average balances. Short-term borrowings were down 12% from the average for the first three months of 1994, reflecting the growth in deposit balances. The yield on average loans increased 48 basis points from the first quarter of 1994, to 8.80%, as higher yields obtained on commercial, commercial and consumer real estate and instalment loans offset declines in average rates on a growing credit card loan portfolio. Higher rates on securities available for sale, which earned 6.60% in first quarter 1995 versus 5.54% in the same period of 1994, were partially offset by lower yields on securities held to maturity, which were 6.67% during the first quarter of 1995 versus 8.32% in the same period of 1994. Yields on money market investments, reflecting steps taken by the Federal Reserve Bank to increase rates during 1994, were 5.80% for the first quarter of 1995 versus 3.57% for the first three months of 1994. Also reflecting the higher rate environment, the average rate paid on deposits increased in each category of interest-bearing deposits. The average rate paid on total interest bearing deposits increased from 2.99% in the first quarter of 1994 to 3.56% in 1995, or an increase of 57 basis points. Increases to rates paid on deposits, however, have lagged the increases to yields on variable rate assets, such as prime-rate based loans and money market investments. This has presented a favorable interest rate environment for many financial institutions. In total, interest rate spreads had a positive impact of 27 basis points on Crestar's first quarter 1995 net interest margin, when compared to the first quarter of 1994. Off-balance sheet hedge transactions, which had a favorable impact on the net interest margin in 1994, experienced net negative interest rate spreads between rates paid and rates received during the first quarter of 1995. In comparison to first quarter 1994, such off-balance sheet transactions had a negative impact of 37 basis points on first quarter 1995's net interest margin, partially offsetting the combined favorable impact on Crestar's net interest margin of 24 basis points from changes in balance sheet mix and 27 basis points from changes in interest rates. The impact of nonperforming assets on first quarter 1995's net interest margin, in comparison to the same period of 1994, was not significant. 14 The extent to which Crestar will be able to maintain its current, historically high net interest margin is significantly influenced by the economic environment in our markets and the economic policy of the Federal Reserve Board, in addition to competitive market conditions for both loans and deposits. Competitive pressures, especially with regard to deposit rates, may lead to decreases in net interest margin in future periods. A higher rate environment often results in many deposit customers, over time, shifting their funds from more liquid, lower yielding deposit products, such as interest checking and regular savings deposit accounts, to higher yielding certificates of deposit. As a result of the increase in the net interest margin and a four percent increase in average earning assets, net interest income for the first quarter of 1995 increased 8% over the first quarter of 1994. Tax-equivalent net interest income similarly increased by 8% during this period. Acquisitions completed during the first quarter of 1995 added less than $3 million to Crestar's net interest income for the quarter ended March 31, 1995. The impact on Crestar's net interest margin for the quarter from the three acquisitions, while negative, was not significant. RISK EXPOSURES AND CREDIT QUALITY (Tables 4 - 9) Crestar's financial results for the first quarter of 1995 continued to exhibit strong credit quality trends. The provision for loan losses was $10.1 million for the first quarter of 1995, up slightly from the $10.0 million provision expense recorded in the first quarter of 1994. Net charge-offs totaled $12.2 million in the first three months of 1995, compared to $10.0 million in the comparable period of 1994. Net charge-offs as a percentage of average loans were 0.52% for the first quarter of 1995, compared to 0.53% in the same period of 1994. In addition to other loan categories, Crestar closely manages its portfolio of loans to real estate developers and investors (REDI). Table 5 provides the property type and geographic diversification of the current REDI portfolio. As shown in Table 4, despite additions to REDI loans caused by acquisitions of financial institutions, REDI outstanding balances remained fairly constant and totaled $1.1 billion at March 31, 1995. This balance represented 11% of the total loan portfolio at that date. At March 31, 1994, REDI loans represented 14% of the total loan portfolio. REDI nonperforming assets were $58.8 million at March 31, 1995, compared to $72.2 million at March 31, 1994. The largest proportion of net loan charge-offs during the first quarter of 1995 occurred in the bank card loan portfolio. Net charge-offs for bank card loans were $9.9 million in the first three months of 1995, compared to $4.6 million in 1994's first quarter. This increase in bank card net charge-offs is largely attributable to the significant growth of Crestar's bank card loan portfolio. Crestar's 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 was $223 million at March 31, 1995, representing 2.28% of period-end loans, 235% of period-end nonperforming assets, and a 305% coverage of nonperforming loans. Based on current expectations relative to portfolio characteristics and performance measures including loss projections, management considers the level of the allowance adequate. At March 31, 1995, nonperforming assets of $94.7 million were down $19.3 million or 17% from March 31, 1994, and down $0.2 million from December 31, 1994. These reductions were recorded despite over $15 million in acquisition- related balances acquired during the first quarter of 1995. The ratio of nonperforming assets to loans and foreclosed properties at March 31, 1993 was 0.97%, down from 1.02% at December 31, 1994 and 1.38% at March 31, 1994. In addition to nonperforming assets, Table 7 also discloses past due loans, excluding nonaccrual loans, at March 31, 1995. Tables 8 and 9 provide details of how nonperforming loans and foreclosed properties have changed on a quarterly basis since the first quarter of 1994. 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 the remainder of 1995. However, interim periods in 1995 could show increases in the total balance of nonperforming assets due to loan growth, future acquisitions of financial institutions, and the impact of higher interest rates on borrowers. 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 March 31, 1995, potential problem 15 loans, not included in Table 7, amounted to approximately $217 million. Potential problem loans were $210 million at December 31, 1994 and $197 million at March 31, 1994. Increases in potential problem loans, which are primarily commercial credits, should be viewed in the context of Crestar's 7% increase in commercial loans outstanding from March 31, 1994 to March 31, 1995. NONINTEREST INCOME AND EXPENSE (Table 10) Noninterest income totaled $64.7 million in the first quarter of 1995, a $1.2 million or 2% increase over 1994. Excluding securities losses, noninterest income increased $1.9 million or 3% over 1994. This increase reflects growth in the noninterest income categories of bank card-related fee income and service charges on deposit accounts, partially offset by declines in trust and investment advisory income and mortgage income. Reflecting promotional activities and increased merchant fee volume, bank card-related fee income increased by $3.3 million, or 43%, in comparison to the first quarter of 1994. Service charges on deposit accounts increased 4%, or $0.8 million, from 1994 levels. Trust and investment advisory income decreased $1.5 million or 10% from 1994, due to an increasingly competitive environment for trust services. Also, the impact of a declining bond market during the latter part of 1994 had an unfavorable impact on fees earned based on the value of assets under management. A rising interest rate environment also negatively impacted mortgage origination and servicing income. Mortgage income for the first quarter of 1995 totaled $10.3 million, or $1.7 million less than the results reported in the first quarter of 1994. Noninterest expense increased $3.8 million, or 3%, in the first quarter of 1995 compared to the same period of 1994. These results stem in part to beneficial comparisons in Crestar's foreclosed properties expense, reflecting an improved credit environment in Crestar's market area. Excluding foreclosed properties expense, noninterest expense increased 4% in the quarter, primarily due to acquisition-related costs. Additional expenses arising from the first quarter 1995 acquisitions of Jefferson Savings, Independent and TideMark approximated $3.1 million. Additional expenses incurred in the first quarter of 1995 related to Crestar's seven acquisitions completed in 1994 approximated $6.5 million. In the first quarter of 1994, Crestar consummated four purchase acquisitions, which led to incremental noninterest expenses in that quarter of approximately $3.1 million. Excluding these merger related costs from first quarter 1995 and 1994 results, noninterest expenses excluding foreclosed properties expense demonstrated a 1% decline for the three month period ended March 31, 1995 in comparison to the same period of 1994. Reflecting improved credit conditions and real estate markets, foreclosed properties expense for the quarter ended March 31, 1995 was a net credit of $1.5 million, compared to a $9 thousand expense in the quarter ended March 31, 1994. The net credit is primarily a result of gains on sale of foreclosed properties exceeding foreclosed property operating expenses during the quarter ended March 31, 1995. The effective tax rate for the first quarter of 1995 was 34.1%, compared to 32.6% in the first quarter of 1994. Increased provisions for state income taxes and higher levels of nondeductible expenses contributed to the higher effective tax rate for 1995. Financial statement note 11 contains additional information concerning income taxes. FINANCIAL CONDITION (Table 11) Crestar's assets totaled $14.4 billion at March 31, 1995, compared to $14.0 billion in assets at December 31, 1994, and $14.4 billion at March 31, 1994. The increase from year-end 1994 is primarily due to acquisitions completed during the first quarter of 1995. Loans net of unearned income increased $467 million, or 5%, from year-end 1994 levels, reflecting growth from a combination of acquisitions and internally generated lending. Loan balances that arose from first quarter 1995 acquisitions approximated $420 million at March 31, 1995. Total deposits increased $142 million or one percent over December 31, 1994 balances. Despite the impact of the Jefferson Savings, Independent and TideMark purchase transactions, total deposits were up only marginally from year-end 1994, as a higher interest rate environment and seasonal factors resulted in declines in demand, interest checking and regular savings deposits. With respect to the securities held to maturity portfolio, amortized cost exceeded the market value at March 31, 1995 by $21.8 million, consisting of $2.5 million in unrealized gains and $24.3 million of unrealized losses. At March 31, 1995, the amortized cost of securities available for sale exceeded the market value of such securities by $27.4 million, consisting of $4.4 million in unrealized gains and $31.8 million in unrealized losses. Shareholders' equity at March 31, 1995 reflects a $17.4 million reduction for the excess, net of tax, of amortized cost of securities available for sale over the fair value at quarter-end, compared to reductions of $36.6 million and $6.3 million at December 31, 1994 and March 31, 1994, 16 respectively. The net unrealized gain or loss on securities available for sale, which is recorded as a component of shareholders' equity, will continue to be subject to change in future periods due to fluctuations in market value, acquisition activities, and sales, purchases, maturities and calls of securities classified as available for sale. During the first quarter of 1995, Crestar sold approximately $580 million of securities classified as available for sale, generating securities losses of $2.4 million. Such sales were consummated in conjunction with the overall management of interest rate risk for the Corporation. The level of security sales also reflects the re-balancing of the securities portfolio in view of the investment securities acquired in the Jefferson Savings, Independent and TideMark acquisitions. Securities losses recorded in the first quarter of 1994 were $1.7 million. Crestar purchased and retired 587,200 shares of common stock during the first quarter of 1995, at an average price of $41.69 per share. Such purchases were primarily made to offset the issuances of common stock made relating to the completed acquisitions during the quarter. As of March 31, 1995, Crestar had a remaining authorization to purchase and retire up to 1.4 million shares of common stock in order to meet the needs of the dividend reinvestment plan, thrift and profit sharing plan and the first quarter 1995 issuances related to acquisitions. Crestar announced a common stock dividend increase on April 28, 1995, effective with the dividend payable on May 19, 1995, to $.45 per share. This represents a 12.5% increase over the previous quarterly rate of $.40 per share. LIQUIDITY AND INTEREST SENSITIVITY (Tables 12-15) 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 securities, and the ability to generate new deposits or borrowings as needed. Crestar's liquidity position is actively managed on a daily basis, and monitored regularly by the Asset/Liability Management Committee (ALCO). 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. Core deposits provide a typically stable source of liquidity. Crestar's interest-bearing core deposits represented 69% of total funding sources at both March 31, 1995 and March 31, 1994. As an additional indication of strong liquidity, money market investments represented 5%, and securities available for sale represented 11%, of Crestar's total earning assets at March 31, 1995. Interest sensitivity refers to the volatility of net interest income 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. ALCO establishes limits on the earnings at risk for a twenty-four month period. 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 March 31, 1995, Crestar's projection of unmanaged pre-tax earnings at risk, as a percentage of the next twenty-four month's projected net interest income under a flat scenario, is approximately 4.0%. 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 17 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. A gap schedule is shown in Table 12, and reflects the earlier of the maturity or repricing dates for various assets and liabilities at March 31, 1995. At that point in time, Crestar had a cumulative negative six-month gap with $3.9 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 12 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 demand deposit balances to the level of interest rates. On a cumulative six-month basis, Crestar had a liability sensitive "adjusted gap" at March 31, 1995, with $87 million excess of interest-sensitive sources of funds over uses of funds. The static gap and adjusted gap do not include $250 million (notional amount) of interest rate floors which Crestar has added to potentially offset the effect that falling interest rates would have on $250 million of floating rate loans, or $245 million (notional amount) of interest rate caps to potentially offset the effect of rising interest rates on floating rate deposits. 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 March 31, 1995 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, which the Corporation believes is a combination of current replacement cost of those instruments with a positive market value plus an amount for additional market movement. 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 March 31, 1995, 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 the first quarter of 1995, and at March 31, 1995 there were no deferred gains or 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 acts as an intermediary) was $1.7 billion at March 31, 1995. Forward contracts with a notional amount of $305 million , primarily utilized to hedge lending commitments of Crestar's mortgage banking subsidiary, were also outstanding at March 31, 1995, bringing the total notional value of derivative financial instruments related to interest rate risk management activities to $2.0 billion at March 31, 1995. Tables 13, 14, and 15 present information regarding fair values, maturity, average rates, and activity as of and for the three month period ending March 31, 1995 for these off-balance sheet derivative instruments. Net unrealized losses on these instruments totaled $49.4 million as of March 31, 1995. Financial statement note 13 contains additional information pertaining to these types of agreements. 18 NEW ACCOUNTING STANDARDS 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 1993. SFAS 114 was further amended by the FASB in 1994 through the issuance of Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" (SFAS 118). Effective January 1, 1995, SFAS 114, as amended by SFAS 118, required that an impaired loan 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." Impaired loans are specifically reviewed loans for which it is probable that the creditor will be unable to collect all amounts due according to the terms of the loan agreement. SFAS 118 allows a creditor to use existing methods for recognizing interest income on an impaired loan. For Crestar's nonaccrual loans and impaired loans, interest receipts are recognized as interest revenue or are applied to principal when management believes the ultimate collectibility of principal is in doubt. At March 31, 1995, impaired loans of $40 million were included in the nonaccrual loan balances of Crestar. The balance of impaired loans at January 1, 1995 also totaled approximately $40 million. Because the majority of loans deemed impaired during the first quarter were collateral dependent, valuations of impaired loans did not vary materially from the values previously assigned to this population of loans. The initial adoption of the new accounting standard did not require an increase to Crestar's allowance for loan losses. The impact of adopting SFAS 114, as amended by SFAS 118, was therefore immaterial to the financial condition and operations of Crestar as of and for the three month period ended March 31, 1995. Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," was issued by the Financial Accounting Standards Board in March 1995. The Statement requires that long-lived assets and certain identifiable intangibles to be held and used by a company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the company should estimate the future cash flows expected to result from the use of the asset and its eventual disposition. An impairment loss would be recognized if the sum of the expected future cash flows, undiscounted, is less than the carrying amount of the asset. Measurement of an impairment loss would be based on the fair value of the asset. The Statement also establishes standards for recording an impairment loss for certain assets that are subject to disposal. The Statement excludes financial instruments, long-term customer relationships of financial institutions, mortgage and other servicing rights, and deferred tax assets. Adoption of the new accounting standard is expected to occur on January 1, 1996. At this time, Crestar does not expect any impact to the Corporation's net income upon implementation of SFAS 121. 19 TABLE 1 FINANCIAL HIGHLIGHTS Dollars in millions, except per share data Three Months % FOR THE PERIOD ENDED MARCH 31 1995 1994 Change Net Income $ 45.1 $ 40.5 11 Dividends Declared on Common Stock 15.3 12.4 23 Per Common Share: Net Income $ 1.18 $ 1.07 10 Dividends Declared .40 .33 21 Book Value 31.66 28.88 10 Average Shares Outstanding (000s) 38,097 37,835 1 KEY RATIOS Return on Average Assets 1.30% 1.22% Return on Average Equity 15.43 14.83 Average Equity to Average Assets 8.44 8.20 Net Interest Margin 4.92 4.78 AT MARCH 31 Equity to Assets 8.43% 7.53% Risk Adjusted Capital Ratios: Tier I 9.2 9.5 Total 13.0 12.3 Common Shares Outstanding (000s) 38,397 37,483 TABLE 2 ANALYSIS OF PRIMARY EARNINGS PER SHARE 1st Qtr. 1995 1st Qtr. 1995 vs. vs. 1st Qtr. 1994 4th Qtr. 1994 Earnings Per Share - prior period $1.07 $1.13 Interest income .64 .22 Interest expense (.45) (.14) Provision for loan losses -- (.13) Securities gains or losses (.01) .11 Other noninterest income .03 .01 Foreclosed properties expense .03 .01 Other noninterest expense (.09) (.02) Income taxes (.03) -- Increased shares outstanding (.01) (.01) Net increase .11 .05 Earnings Per Share - current period $1.18 $1.18 20 TABLE 3 AVERAGE BALANCES, NET INTEREST INCOME AND RATE/VOLUME ANALYSIS(1) Dollars in thousands 1st Qtr. 4th Qtr. Average Average Balance Increase Balance 1995 1994 (Decrease) 1994 $ $ % $ 2,999,159 2,701,886 11 2,892,283 Commercial 764,086 790,402 (3) 748,296 Real estate - income property 187,239 220,881 (15) 214,209 Real estate - construction 1,891,141 1,625,825 16 1,783,039 Instalment 1,492,890 966,242 55 1,350,448 Bank card 2,113,239 1,260,380 68 1,879,890 Real estate - mortgage 9,447,754 7,565,616 25 8,868,165 Total loans - net of unearned income(2) 887,414 528,507 68 920,755 Securities held to maturity 1,449,623 2,948,914 (51) 1,765,770 Securities available for sale 457,579 468,907 (2) 486,068 Money market investments 191,346 467,598 (59) 258,332 Mortgage loans held for sale 12,433,716 11,979,542 4 12,299,090 Total earning assets 1,874,912 1,817,810 3 1,861,152 Interest checking deposits 2,432,572 2,301,992 6 2,388,715 Money market deposit accounts 1,369,262 1,316,111 4 1,427,051 Regular savings deposits 3,042,769 2,886,010 5 3,016,182 Domestic time deposits 8,719,515 8,321,923 5 8,693,100 Total interest-bearing core deposits 1,329,862 1,474,084 (10) 1,297,473 Purchased liabilities 368,133 203,376 81 294,644 Long-term debt 10,417,510 9,999,383 4 10,285,217 Total interest-bearing liabilities 2,016,206 1,980,159 2 2,013,873 Other sources - net 12,433,716 11,979,542 4 12,299,090 Total sources of funds Net Interest Income (1) Tax-equivalent basis. (2) Nonaccrual loans are included in the average loan balances and income on such loans is recognized on a cash basis. (3) Includes tax-equivalent net loan fees of $0.4 million and $0.7 million for the first quarter of 1995 and 1994, respectively, and $0.5 million for the fourth quarter of 1994. 21 1st Qtr. 1995 vs. 1994 4th Qtr. 1st Qtr. 1995 vs. 4th Qtr. 1994 Income/ Income/ Expense(3) Increase Change due to(4) Expense(3) Increase Change due to(4) 1995 1994 (Decrease) Rate(5) Volume 1994 (Decrease) Rate(5) Volume $ $ $ $ $ $ $ $ $ 61,829 50,993 10,836 5,242 5,594 57,398 4,431 2,316 2,115 16,294 15,194 1,100 1,601 (501) 15,694 600 270 330 4,497 3,956 541 1,144 (603) 4,874 (377) 235 (612) 42,751 33,892 8,859 3,342 5,517 39,114 3,637 1,291 2,346 43,077 30,569 12,508 (4,025) 16,533 38,482 4,595 649 3,946 39,825 22,336 17,489 2,429 15,060 34,507 5,318 1,053 4,265 208,273 156,940 51,333 12,462 38,871 190,069 18,204 5,903 12,301 14,805 10,992 3,813 (2,739) 6,552 15,225 (420) 131 (551) 23,607 40,249 (16,642) 4,452 (21,094) 27,196 (3,589) 1,280 (4,869) 6,544 4,126 2,418 2,518 (100) 6,398 146 521 (375) 3,810 7,424 (3,614) 772 (4,386) 5,010 (1,200) 99 (1,299) 257,039 219,731 37,308 29,008 8,300 243,898 13,141 10,492 2,649 10,453 9,741 712 406 306 10,544 (91) (169) 78 22,610 13,749 8,861 8,081 780 20,193 2,417 2,046 371 9,461 8,321 1,140 804 336 9,930 (469) (67) (402) 33,379 29,205 4,174 2,551 1,623 31,645 1,734 1,467 267 75,903 61,016 14,887 11,960 2,927 72,312 3,591 3,370 221 18,815 11,098 7,717 8,803 (1,086) 15,789 3,026 2,632 394 7,861 4,250 3,611 168 3,443 6,108 1,753 230 1,523 102,579 76,364 26,215 23,011 3,204 94,209 8,370 7,154 1,216 102,579 76,364 26,215 23,310 2,905 94,209 8,370 7,335 1,035 154,460 143,367 11,093 5,698 5,395 149,689 4,771 3,157 1,614
(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. 22 TABLE 4 LOANS TO REAL ESTATE DEVELOPERS AND INVESTORS (REDI) In millions March 31, December 31, 1995 1994 1994 Commercial - developer lines $ 91.4 $ 81.5 $ 98.7 Commercial - other 64.7 79.9 67.7 Real estate - income property 815.3 809.4 744.9 Real estate - construction 145.8 194.7 152.0 Total REDI loans $1,117.2 $1,165.5 $1,063.3 TABLE 5 LOANS TO REAL ESTATE DEVELOPERS AND INVESTORS- GEOGRAPHIC DISTRIBUTION AND PROPERTY TYPE March 31, 1995 In millions Region Total Greater Corporation Washington Eastern Western Capital Land acquisition and development $ 93.3 $ 54.7 $ 27.6 $ 5.0 $ 6.0 Residential developments 261.5 133.4 81.0 40.7 6.4 Commercial projects: Office buildings 153.7 94.2 31.5 13.3 14.7 Retail stores and malls 210.4 149.7 45.0 8.2 7.5 Hotels and motels 118.8 43.9 46.1 21.0 7.8 Industrial buildings 132.7 99.8 14.0 4.2 14.7 Total commercial projects 615.6 387.6 136.6 46.7 44.7 Special use 53.3 22.0 14.8 13.6 2.9 Other 93.5 62.5 19.7 2.1 9.2 Total REDI loans $1,117.2 $660.2 $279.7 $108.1 $69.2
TABLE 6 ALLOWANCE FOR LOAN LOSSES Dollars in thousands First Quarter 1995 1994 Beginning balance $219,189 $210,958 Allowance from acquisitions 5,631 15,629 Provision for loan losses 10,100 10,032 Net charge-offs (recoveries): Commercial 648 875 Real estate - income property 359 4,534 Real estate - construction (563) (844) Instalment 1,645 620 Bank card 9,949 4,573 Real estate - mortgage 180 284 Total net charge-offs 12,218 10,042 Balance, March 31 $222,702 $226,577 Allowance for loan losses to period-end loans 2.28% 2.75% Annualized net charge-offs to average loans .52 .53 23 TABLE 7 NONPERFORMING ASSETS AND PAST DUE LOANS Dollars in thousands March 31, December 31, 1995 1994 1994 Nonaccrual loans: Commercial $27,038 $38,669 $28,708 Real estate - income property 26,879 34,430 21,872 Real estate - construction 7,710 7,100 7,279 Instalment 3,001 1,069 3,408 Real estate - mortgage 8,362 8,208 8,139 Total nonaccrual loans 72,990 89,476 69,406 Restructured loans -- 34 6,878 Total nonperforming loans 72,990 89,510 76,284 Foreclosed properties - net 21,690 24,471 18,629 Total nonperforming assets $94,680 $113,981 $94,913 Past due loans: Commercial $ 1,514 $ 533 $ 1,608 Real estate - income property 1,110 691 1,071 Real estate - construction 989 -- 198 Instalment Student 10,879 5,607 14,705 Other 1,846 1,994 1,368 Bank card 11,685 6,583 10,831 Real estate - mortgage 9,349 5,554 5,920 Total past due loans $37,372 $ 20,962 $35,701 Nonperforming assets to: Loans and foreclosed properties - net .97% 1.38% 1.02% Total assets .66 .79 .68 Allowance for loan losses to: Nonperforming assets 235 199 231 Nonperforming loans 305 253 287 Allowance for loan losses plus shareholders' equity to nonperforming assets 15.19x 11.48x 14.17x 24 TABLE 8 NONPERFORMING LOANS-QUARTERLY ACTIVITY In millions Three Months Ended 1995 1994 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31 Beginning balance $ 76.3 $ 62.9 $ 77.4 $ 89.5 $ 79.8 Acquisition additions 8.7 -- -- 4.0 8.1 Other additions 12.3 27.6 20.9 19.2 27.4 Payments, sales and reductions (8.5) (10.0) (18.9) (22.1) (15.0) Charge-offs (4.7) (2.7) (4.8) (6.6) (7.1) Reinstatements to accrual status (10.3) (0.8) (5.5) (4.1) (2.7) Transfers to foreclosed properties (0.8) (0.7) (6.2) (2.5) (1.0) Net increase (decrease) (3.3) 13.4 (14.5) (12.1) 9.7 Ending balance $ 73.0 $ 76.3 $ 62.9 $ 77.4 $ 89.5 TABLE 9 FORECLOSED PROPERTIES-QUARTERLY ACTIVITY In millions Three Months Ended 1995 1994 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31 Beginning balance $18.6 $23.6 $25.0 $24.5 $ 17.0 Acquisition additions - net 6.7 -- -- 6.1 15.8 Other additions 2.0 1.5 7.4 2.7 3.8 Market write-downs -- (0.2) (0.1) (0.2) -- Reductions (6.1) (6.3) (7.7) (8.1) (13.4) Provision for losses 0.5 -- (1.0) -- 1.3 Net increase (decrease) 3.1 (5.0) (1.4) .5 7.5 Ending balance $21.7 $18.6 $23.6 $25.0 $ 24.5 25 TABLE 10 SUMMARY OF NONINTEREST INCOME AND EXPENSE In thousands Fourth First Quarter Quarter NONINTEREST INCOME 1995 1994 1994 Service charges on deposit accounts $ 21,591 $ 20,779 $ 20,316 Trust and investment advisory 13,538 15,003 12,921 Bank card-related 11,058 7,728 12,233 Mortgage servicing 4,442 4,799 4,238 Mortgage origination - net (45) 4,047 1,387 Trading account activities 624 94 624 Commissions on letters of credit 1,274 1,398 1,511 Gain on sale of mortgage servicing rights 5,900 3,102 4,600 Miscellaneous 8,692 8,223 8,474 Securities losses (2,410) (1,718) (9,021) Total noninterest income $ 64,664 $ 63,455 $ 57,283 NONINTEREST EXPENSE Salaries $ 61,196 $ 59,190 $ 61,137 Benefits 15,120 15,607 14,023 Total personnel 76,316 74,797 75,160 Occupancy - net 10,960 10,794 10,278 Equipment 7,012 5,928 6,972 Communications 7,214 6,011 6,717 Stationery, printing and supplies 2,106 1,844 2,121 Professional fees and services 3,375 2,489 4,269 Loan expense 1,843 2,748 2,219 FDIC premiums 6,369 5,885 6,491 Advertising and marketing 4,360 3,858 5,226 Transportation 1,491 1,428 1,493 Outside data services 5,008 4,460 4,946 Amortization of purchased intangibles 4,081 4,829 959 Miscellaneous 9,246 8,930 11,109 Subtotal 139,381 134,001 137,960 Foreclosed properties (1,549) 9 (1,099) Total noninterest expense $137,832 $134,010 $136,861 TABLE 11 DEBT RATINGS (AS OF APRIL 28, 1995) Standard Thomson 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 26 TABLE 12 INTEREST SENSITIVITY ANALYSIS March 31, 1995 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 $ 2,264.0 $ 51.2 $ 68.4 $ 63.2 $ 620.7 $ 3,067.5 Real estate - income property 378.5 25.3 28.9 40.2 342.4 815.3 Real estate - construction 142.6 .6 3.1 5.1 32.4 183.8 Instalment 441.3 79.8 583.7 190.2 653.4 1,948.4 Bank card 409.7 41.9 84.7 179.6 825.0 1,540.9 Real estate - mortgage 122.6 109.2 262.4 761.5 941.3 2,197.0 Securities held to maturity 30.0 40.5 35.9 81.8 687.5 875.7 Securities available for sale 269.3 67.6 69.6 65.5 941.8 1,413.8 Money market investments 655.0 -- -- -- -- 655.0 Mortgage loans held for sale 220.5 -- -- -- -- 220.5 Total earning assets 4,933.5 416.1 1,136.7 1,387.1 5,044.5 12,917.9 Interest sensitivity hedges on assets (850.0) (351.1) 177.2 97.0 926.9 -- Total uses $ 4,083.5 $ 65.0 $ 1,313.9 $ 1,484.1 $5,971.4 $12,917.9 SOURCES OF FUNDS Interest checking deposits $ 1,891.0 $ -- $ -- $ -- $ -- $ 1,891.0 Money market deposit accounts 2,451.0 -- -- -- -- 2,451.0 Regular savings deposits 1,354.5 -- -- -- -- 1,354.5 Domestic time deposits 388.8 388.6 559.6 913.4 952.2 3,202.6 Certificates of deposit $100,000 and over 25.5 16.1 13.9 10.0 5.8 71.3 Short-term borrowings 1,540.4 .1 -- -- -- 1,540.5 Long-term debt .1 .3 5.3 .6 379.5 385.8 Total interest-bearing liabilities 7,651.3 405.1 578.8 924.0 1,337.5 10,896.7 Other sources - net 759.8 -- -- -- 1,261.4 2,021.2 Total sources $ 8,411.1 $ 405.1 $ 578.8 $ 924.0 $2,598.9 $12,917.9 Cumulative maturity/ rate sensitivity gap $ (4,327.6) $ (4,667.7) $ (3,932.6) $ (3,372.5) $ -- $ -- ADJUSTMENTS Beta adjustments: Interest checking (beta factor .18) $ 1,550.6 Money market accounts (beta factor .55) 1,102.9 Regular savings (beta factor .12) 1,192.0 Cumulative adjusted maturity/ rate sensitivity gap $ (482.1) $ (822.2) $ (87.1) $ 473.0 $ -- $ --
27 TABLE 13 OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS(1) March 31, 1995 Dollars in thousands Weighted Average Average Fixed Estimated Notional Expected Receive Fair Balance Maturity Rate Value Comments ASSET RATE CONVERSIONS Generic interest rate swaps $ 300,000 2.6 yrs. 5.85% Convert floating rate Unrealized gross gains $ -- loans to fixed rate. Unrealized gross losses (11,040) Net unrealized loss (11,040) Amortizing interest rate swaps 858,519 2.0 yrs. 5.25% Convert floating rate Unrealized gross gains 39 loans to fixed rate. Unrealized gross losses (38,420) Net unrealized loss (38,381) Interest rate caps 245,000 2.1 yrs. 7.49%(2) Minimize interest rate Unrealized gross gains 389 risk associated with Unrealized gross losses (198) rising rates on floating Net unrealized gain 191 rate deposits. Tied to London Interbank Offered Rate (LIBOR). Interest rate floors 250,000 3.0 yrs. 6.80%(3) Minimize interest rate Unrealized gross gains 997 risk associated with Unrealized gross losses (110) falling rates on floating Net unrealized gain 887 rate loans. Tied to London Interbank Offered Rate (LIBOR). HEDGES OF LENDING COMMITMENTS Forward contracts 305,374 .1 yrs. n/a Hedges of residential Unrealized gross gains 548 mortgage lending Unrealized gross losses (1,654) commitments. Net unrealized loss (1,106) Total hedges against interest rate risk $1,958,893 $ (49,449)
(1) Includes only off-balance sheet derivative financial instruments related to interest rate risk management activities. (2) Represents average strike rate. For interest rate caps purchased, Crestar will receive interest if a specified market index interest rate rises above a fixed strike rate during the term of the contract. Any interest received is based on the difference between a higher index interest rate and the contractual cap rate, applied to the underlying notional balance. No interest payments are received if the index rate remains below the cap rate. (3) Represents average strike rate. For interest rate floors purchased, Crestar will receive interest if a specified market index interest rate falls below a fixed strike rate during the term of the contract. Any interest received is based on the difference between a lower index interest rate and the contractual floor rate, applied to the underlying notional balance. No interest payments are received if the index rate remains above the floor rate. n/a - Not applicable. 28 TABLE 14 OFF-BALANCE SHEET DERIVATIVES-EXPECTED MATURITIES(1) March 31, 1995 Dollars in thousands Within One to Three to One Year Three Years Five Years Total ASSET RATE CONVERSIONS Generic interest rate swaps: Notional amount $100,000 $ -- $ 200,000 $ 300,000 Average fixed receive rate 6.32% -- 5.61% 5.85% Estimated fair value $ (310) $ -- $ (10,730) $ (11,040) Amortizing interest rate swaps: Notional amount $ 4,416 $ 754,103 $ 100,000 $ 858,519 Average fixed receive rate 8.48% 5.12% 6.10% 5.25% Estimated fair value $ 15 $ (32,736) $ (5,660) $ (38,381) Interest rate caps: Notional amount $ 5,000 $ 230,000 $ 10,000 $ 245,000 Average strike rate 5.00% 7.60% 6.25% 7.49% Estimated fair value $ 38 $ 148 $ 5 $ 191 Interest rate floors: Notional amount $ -- $ 150,000 $ 100,000 $ 250,000 Average strike rate -- 7.17% 6.25% 6.80% Estimated fair value $ -- $ 750 $ 137 $ 887 HEDGES OF LENDING COMMITMENTS Forward contracts:(2) Notional amount $305,374 $ -- $ -- $ 305,374 Estimated fair value (1,106) -- -- (1,106) Total hedges against interest rate risk: Notional amount $414,790 $1,134,103 $ 410,000 $1,958,893 Estimated fair value (1,363) (31,838) (16,248) (49,449)
(1) Includes only off-balance sheet derivative financial instruments related to interest rate risk management activities. (2) Hedges of residential mortgage lending commitments. TABLE 15 OFF-BALANCE SHEET DERIVATIVES ACTIVITY(1) In thousands Asset Rate Conversions Liability Rate Interest Rate Swaps Conversions Hedges of Generic Amortizing Interest Interest Lending Receive Receive Rate Rate Commit- Fixed Fixed Floors Caps ments(2) Total Balance, January 1, 1995 $ 600,000 $860,166 $ 200,000 $ -- $ 266,439 $1,926,605 Additions from acquisitions -- -- -- 45,000 -- 45,000 Other additions -- -- 250,000 200,000 381,860 831,860 Maturities/Amortizations (300,000) (1,647) (200,000) -- (342,925) (844,572) Balance, March 31, 1995 $ 300,000 $858,519 $ 250,000 $245,000 $ 305,374 $1,958,893
(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. 29 TABLE 16 SELECTED QUARTERLY FINANCIAL INFORMATION Dollars in thousands, except per share data 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. Results of operations: 1995 1994 1994 1994 1994 Net interest income(1) $154,460 $149,689 $152,020 $147,667 $143,367 Provision for loan losses 10,100 2,700 8,100 8,850 10,032 Net credit income 144,360 146,989 143,920 138,817 133,335 Securities gains (losses) (2,410) (9,021) 12 (49) (1,718) Other noninterest income 67,074 66,304 65,377 68,192 65,173 Net credit and noninterest income 209,024 204,272 209,309 206,960 196,790 Noninterest expense 137,832 136,861 140,104 140,733 134,010 Income before taxes 71,192 67,411 69,205 66,227 62,780 Tax-equivalent adjustment 2,776 2,746 2,742 2,738 2,701 Book tax expense 23,330 22,280 22,859 20,881 19,597 Income tax expense 26,106 25,026 25,601 23,619 22,298 Net Income $ 45,086 $ 42,385 $ 43,604 $ 42,608 $ 40,482 Per common share: Net income $ 1.18 $ 1.13 $ 1.15 $ 1.12 $ 1.07 Dividends declared .40 .40 .40 .40 .33 Average shares outstanding (000s) 38,097 37,637 38,063 37,930 37,835 Selected ratios and other data: Return on average assets 1.30% 1.24% 1.26% 1.25% 1.22% Return on average equity 15.43 15.22 15.70 15.79 14.83 Net interest margin(1) 4.92 4.81 4.82 4.76 4.78 Net charge-offs as % of average loans .52 .42 .42 .43 .53 Allowance as % of period-end loans 2.28 2.36 2.61 2.64 2.75 Overhead ratio 62.90 66.13 64.44 65.21 64.79 Average total equity to assets 8.44 8.14 8.02 7.90 8.20 Equity leverage 11.84x 12.29x 12.47x 12.66x 12.19x Full-time equivalent employees (period end) 6,623 6,747 6,817 6,868 6,733
(1) Tax-equivalent basis. 30 TABLE 17 CONSOLIDATED AVERAGE BALANCES/NET INTEREST INCOME/RATES(1) Three Months Ended March 31, 1995 1994 Dollars in thousands Income/ Yield/ Income/ Yield/ Balance Expense Rate Balance Expense Rate ASSETS $ $ % $ $ % Securities held to maturity(2) 887,414 14,805 6.67 528,507 10,992 8.32 Securities available for sale(2) 1,449,623 23,607 6.60 2,948,914 40,249 5.54 Money market investments(2) 457,579 6,544 5.80 468,907 4,126 3.57 Mortgage loans held for sale(2) 191,346 3,810 7.96 467,598 7,424 6.35 Commercial 2,999,159 61,829 8.26 2,701,886 50,993 7.64 Real estate - income property 764,086 16,294 8.58 790,402 15,194 7.74 Real estate - construction 187,239 4,497 9.71 220,881 3,956 7.26 Instalment 1,891,141 42,751 9.03 1,625,825 33,892 8.34 Bank card 1,492,890 43,077 11.45 966,242 30,569 12.58 Real estate - mortgage 2,113,239 39,825 7.50 1,260,380 22,336 7.07 Total loans - net of unearned(2,3) 9,447,754 208,273 8.80 7,565,616 156,940 8.32 Allowance for loan losses (222,852) (218,583) Loans - net 9,224,902 7,347,033 Cash and due from banks 738,970 718,741 Premises and equipment - net 325,480 308,012 Customers' liability on acceptances 9,165 13,839 Intangible assets - net 147,023 106,165 Foreclosed properties - net 21,767 23,792 Other assets 392,082 377,732 TOTAL ASSETS 13,845,351 13,309,240 TOTAL EARNING ASSETS 12,433,716 257,039 8.27 11,979,542 219,731 7.37 LIABILITIES AND SHAREHOLDERS' EQUITY Interest Checking Deposits 1,874,912 10,453 2.26 1,817,810 9,741 2.17 Money market deposit accounts 2,432,572 22,610 3.77 2,301,992 13,749 2.42 Regular savings deposits 1,369,262 9,461 2.80 1,316,111 8,321 2.56 Domestic time deposits 3,042,769 33,379 4.50 2,886,010 29,205 4.13 Certificates of deposit $100,000 and over 68,550 857 5.08 48,376 485 4.07 Total savings and time deposits(2) 8,788,065 76,760 3.56 8,370,299 61,501 2.99 Demand deposits 2,056,184 2,014,697 Total deposits 10,844,249 10,384,996 Short-term borrowings(2) 1,261,312 17,958 5.75 1,425,708 10,613 3.02 Long-term debt(2) 368,133 7,861 8.54 203,376 4,250 8.36 Liability on acceptances 9,165 13,839 Other liabilities 193,583 189,609 Total liabilities 12,676,442 12,217,528 Total shareholders' equity 1,168,909 1,091,712 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 13,845,351 13,309,240 Total interest-bearing liabilities 10,417,510 102,579 4.00 9,999,383 76,364 3.10 Other sources - net 2,016,206 1,980,159 TOTAL SOURCES OF FUNDS 12,433,716 102,579 3.35 11,979,542 76,364 2.59 NET INTEREST SPREAD 4.27 4.27 NET INTEREST INCOME/MARGIN 154,460 4.92 143,367 4.78
31 Three Months Ended December 31, 1994 Income/ Yield Balance Expense Rate $ $ % Dollars in thousands ASSETS Securities held to maturity(2) 920,755 15,225 6.61 Securities available for sale(2) 1,765,770 27,196 6.11 Money market investments(2) 486,068 6,398 5.22 Mortgage loans held for sale(2) 258,332 5,010 7.76 Commercial 2,892,283 57,398 7.86 Real estate - income property 748,296 15,694 8.30 Real estate - construction 214,209 4,874 9.02 Instalment 1,783,039 39,114 8.69 Bank card 1,350,448 38,482 11.16 Real estate - mortgage 1,879,890 34,507 7.32 Total loans - net of unearned(2,3) 8,868,165 190,069 8.48 Allowance for loan losses (227,461) Loans - net 8,640,704 Cash and due from banks 754,773 Premises and equipment - net 318,638 Customers' liability on acceptances 5,651 Intangible assets - net 126,832 Foreclosed properties - net 22,137 Other assets 393,280 TOTAL ASSETS 13,692,940 TOTAL EARNING ASSETS 12,299,090 243,898 7.86 LIABILITIES AND SHAREHOLDERS' EQUITY Interest checking deposits 1,861,152 10,544 2.25 Money market deposit accounts 2,388,715 20,193 3.35 Regular savings deposits 1,427,051 9,930 2.76 Domestic time deposits 3,016,182 31,645 4.20 Certificates of deposit $100,000 and over 68,785 810 4.68 Total savings and time deposits(2) 8,761,885 73,122 3.32 Demand deposits 2,083,474 Total deposits 10,845,359 Short-term borrowings(2) 1,228,688 14,979 4.84 Long-term debt(2) 294,644 6,108 8.29 Liability on acceptances 5,651 Other liabilities 204,354 Total liabilities 12,578,696 Total shareholders' equity 1,114,244 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 13,692,940 Total interest-bearing liabilities 10,285,217 94,209 3.65 Other sources - net 2,013,873 TOTAL SOURCES OF FUNDS 12,299,090 94,209 3.05 NET INTEREST SPREAD 4.21 NET INTEREST INCOME/MARGIN 149,689 4.81
(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. (3) Nonaccrual loans are included in the average loan balances and income on such loans is recognized on a cash basis. 32 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Crestar Financial Corporation Registrant Date May 15, 1995 /s/ James D. Barr James D. Barr Executive Vice President, Controller and Treasurer 33 EX-27 2 EXHIBIT 27
9 1,000 3-MOS DEC-31-1995 MAR-31-1995 693848 8970386 639985 8250 1413765 875669 853860 9752915 222702 14426885 11055300 1540525 229705 385767 191987 0 0 1023601 14426885 206029 37883 10351 254263 76760 102579 151684 10100 (2410) 137832 68416 68416 0 0 45086 1.18 1.18 4.92 72990 37372 0 217000 219189 18988 6770 222702 0 0 0
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