-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ggb+vZ1aXrY+XYwsaHmNTIaq7pTRMuQjiP4xPr1u+gpB6gWghtJUvAkqm03V8bKD L1C4PyhVtfMynmvIr0o32w== 0000916641-96-000378.txt : 19960517 0000916641-96-000378.hdr.sgml : 19960517 ACCESSION NUMBER: 0000916641-96-000378 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 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: 96567094 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 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, 1996 ( ) 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) 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, 1996 Common Stock, $5 par value 43,048,773 CRESTAR FINANCIAL CORPORATION AND SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 PART I. Financial Information ITEM 1. Financial Statements: PAGE Consolidated Balance Sheets................................. Consolidated Statements Of Income........................... Consolidated Statements Of Cash Flows....................... Consolidated Statements Of Changes In Shareholders' Equity.. Notes To Consolidated Financial Statements.................. ITEM 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations: Financial Commentary........................................ PART II. Other Information ITEM 6. Exhibits And Reports On Form 8-K: During the first quarter of 1996, Crestar filed a Form 8-K, amended by Form 8-K/A, relating to the consummation on December 31, 1995 of the pooling of interests business combination with Loyola Capital Corporation. The filing included financial statements and applicable pro forma financial information pertaining to the business combination. CONSOLIDATED BALANCE SHEETS Crestar Financial Corporation And Subsidiaries
Dollars in thousands March 31, December 31, ASSETS 1996 1995 1995 Cash and due from banks $ 703,078 $ 715,953 $ 1,084,047 Securities held to maturity (note 2) 81,328 1,161,245 85,368 Securities available for sale (note 3) 3,459,546 1,449,716 3,231,389 Money market investments (note 4) 355,738 685,089 516,268 Mortgage loans held for sale 758,848 254,683 688,218 Loans (note 5): Business Loans: Commercial 3,084,572 3,101,059 3,102,156 Real estate - income property 903,111 947,674 874,396 Real estate - construction 253,985 273,026 262,340 Consumer Loans: Instalment 2,744,665 2,314,865 2,732,557 Bank card 1,587,114 1,540,940 1,686,765 Real estate - mortgage 2,950,506 3,586,828 3,148,214 - ------------------------------------------------------------------------------------------------------------------- Total Loans 11,523,953 11,764,392 11,806,428 Less: Allowance for loan losses (note 6) (238,847) (236,498) (240,285) - ------------------------------------------------------------------------------------------------------------------- Loans - net 11,285,106 11,527,894 11,566,143 - ------------------------------------------------------------------------------------------------------------------- Premises and equipment - net 355,070 356,783 357,159 Customers' liability on acceptances 20,963 10,984 5,143 Intangible assets - net 181,819 167,543 186,732 Foreclosed properties - net (notes 5 and 7) 19,175 32,449 17,655 Other assets 696,335 558,859 564,563 - ------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $17,917,006 $16,921,198 $18,302,685 =================================================================================================================== LIABILITIES Demand deposits $ 2,448,085 $ 2,136,405 $ 2,665,888 Interest checking deposits 1,933,776 1,972,010 1,984,569 Money market deposit accounts 3,045,520 2,828,090 2,991,141 Regular savings deposits 1,307,549 1,517,379 1,310,903 Domestic time deposits 4,065,032 4,060,468 4,184,703 Certificates of deposit $100,000 and over 142,792 71,348 116,211 - ------------------------------------------------------------------------------------------------------------------- Total deposits 12,942,754 12,585,700 13,253,415 Short-term borrowings (note 8) 2,186,975 1,976,696 2,227,338 Liability on acceptances 20,963 10,984 5,143 Other liabilities 622,653 243,617 694,096 Long-term debt (note 9) 704,045 715,829 671,296 - ------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 16,477,390 15,532,826 16,851,288 - ------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Preferred stock. Authorized 2,000,000 shares; none issued - - - Common stock, $5 par value. Authorized 100,000,000 shares; outstanding 42,971,213 and 43,586,369 at March 31, 1996 and 1995, respectively; 42,809,761 at December 31, 1995 214,856 217,932 214,049 Capital surplus 384,343 357,579 371,075 Retained earnings 864,585 830,268 855,195 Net unrealized gain (loss) on securities available for sale (24,168) (17,407) 11,078 - ------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 1,439,616 1,388,372 1,451,397 - ------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $17,917,006 $16,921,198 $18,302,685 ===================================================================================================================
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF INCOME Crestar Financial Corporation And Subsidiaries
In thousands, except per share data Three Months Ended March 31, INCOME FROM EARNING ASSETS 1996 1995 Interest and fees on loans $252,945 $245,444 Interest on taxable securities held to maturity 234 17,920 Interest on tax-exempt securities held to maturity 863 1,004 Interest and dividends on securities available for sale 49,283 24,298 Income on money market investments 2,787 6,919 Interest on mortgage loans held for sale 14,294 4,375 - ----------------------------------------------------------------------------------- Total income from earning assets 320,406 299,960 - ----------------------------------------------------------------------------------- INTEREST EXPENSE Interest checking deposits 9,519 10,933 Money market deposit accounts 27,530 26,632 Regular savings deposits 8,464 10,577 Domestic time deposits 54,841 43,825 Certificates of deposit $100,000 and over 1,449 857 - ----------------------------------------------------------------------------------- Total interest on deposits 101,803 92,824 Short-term borrowings 26,877 24,918 Long-term debt 12,713 12,495 - ----------------------------------------------------------------------------------- Total interest expense 141,393 130,237 - ----------------------------------------------------------------------------------- NET INTEREST INCOME 179,013 169,723 Provision for loan losses (note 6) 20,300 10,301 - ----------------------------------------------------------------------------------- NET CREDIT INCOME 158,713 159,422 - ----------------------------------------------------------------------------------- NONINTEREST INCOME Service charges on deposit accounts 21,610 21,908 Trust and investment advisory income 15,562 13,124 Bank card-related income 11,014 11,097 Other income 29,494 22,826 Securities gains (losses) 2,355 (2,410) - ----------------------------------------------------------------------------------- Total noninterest income 80,035 66,545 - ----------------------------------------------------------------------------------- Net Credit And Noninterest Income 238,748 225,967 - ----------------------------------------------------------------------------------- Noninterest Expense Personnel expense 84,231 82,667 Occupancy expense - net 12,754 12,201 Equipment expense 7,698 7,901 Other expense 47,522 47,141 - ----------------------------------------------------------------------------------- Total noninterest expense 152,205 149,910 - ----------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 86,543 76,057 Income tax expense (note 10) 31,121 26,398 - ----------------------------------------------------------------------------------- NET INCOME $ 55,422 $ 49,659 =================================================================================== EARNINGS PER COMMON SHARE $ 1.27 $ 1.14 ===================================================================================
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS Crestar Financial Corporation And Subsidiaries
In thousands Three Months Ended March 31, 1996 1995 OPERATING Net Income $ 55,422 $ 49,659 ACTIVITIES Adjustments to reconcile net income to net cash provided (used) by operating activties: Provisions for loan losses, foreclosed properties and other losses 18,400 10,347 Depreciation and amortization of premises and equipment 9,633 9,793 Securities losses (gains) (2,355) 2,410 Amortization of intangible assets 4,047 2,974 Deferred income tax expense 2,220 1,836 Gain on foreclosed properties (27) (1,403) Gain on sales of mortgage servicing rights (4,000) (5,900) Net decrease (increase) in trading account 3,368 (4,677) Origination and purchase of loans held for sale (869,828) (426,724) Proceeds from sales of loans held for sale 799,198 412,487 Net decrease (increase) in accrued interest receivable, prepaid expenses and other assets (65,717) 12,716 Net decrease in accrued interest payable, accrued expenses and other liabilities (413,911) (11,509) Other, net (4,413) 5,576 - ------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities (467,963) 57,585 - ------------------------------------------------------------------------------------------------------------------- INVESTING Proceeds from maturities and calls of securities held ACTIVITIES to maturity 4,456 95,232 Proceeds from maturities and calls of securities available for sale 117,428 85,269 Proceeds from sales of securities available for sale 1,513,238 579,440 Purchases of securities held to maturity (761) (3,926) Purchases of securities available for sale (1,612,265) (289,729) Net decrease (increase) in money market investments 157,162 (225,297) Principal collected on non-bank subsidiary loans 5,409 6,773 Loans originated by non-bank subsidiaries (41,037) (61,323) Net decrease (increase) in other loans 293,453 (54,761) Purchases of premises and equipment (11,306) (19,798) Proceeds from sales of foreclosed properties 2,983 8,127 Proceeds from sales of mortgage servicing rights 8,447 8,201 Purchases of net assets of financial institutions - (12,190) Other, net (7,626) (1,859) - ------------------------------------------------------------------------------------------------------------------- Net cash provided by investing activities 429,581 114,159 - ------------------------------------------------------------------------------------------------------------------- FINANCING Net decrease in demand, interest checking, money market ACTIVITIES and regular savings deposits (215,920) (403,868) Net increase (decrease) in certificates of deposit (86,930) 7,657 Net increase in short-term borrowings 12,837 44,857 Proceeds from issuance of long-term debt 63 - Principal payments on long-term debt (20,562) (10,945) Cash dividends paid (19,480) (16,264) Common stock purchased and retired (29,187) (20,284) Proceeds from the issuance of common stock 16,592 12,457 - ------------------------------------------------------------------------------------------------------------------- Net cash used by financing activities (342,587) (386,390) - ------------------------------------------------------------------------------------------------------------------- CASH AND Decrease in cash and cash equivalents (380,969) (214,646) CASH Cash and cash equivalents at beginning of year 1,084,047 930,599 EQUIVALENTS CASH AND CASH EQUIVALENTS AT END OF QUARTER $ 703,078 $ 715,953 ===================================================================================================================
Cash and cash equivalents consist of cash and due from banks; see accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Crestar Financial Corporation And Subsidiaries
Dollars in thousands Shareholders' Equity Shares of Common Stock 1996 1995 1996 1995 Balance, January 1 $1,451,397 $1,295,159 42,809,761 42,509,900 Net Income 55,422 49,659 - - Cash dividends declared on common stock (19,480) (16,264) - - Change in net unrealized gain or loss on securities available for sale (35,246) 19,148 - - Common stock purchased and retired (29,101) (24,482) (510,000) (587,200) Cash paid in lieu of fractional shares (86) - (1,484) - Common stock issued: For acquisition of financial institutions - 52,617 - 1,317,396 For dividend reinvestment plan 4,154 2,956 75,469 75,083 For thrift and profit sharing plan 6,300 8,263 110,526 207,272 For other stock compensation plans 118 78 2,128 2,067 Upon exercise of stock options (including tax benefit of $4,373 in 1996; $246 in 1995) 6,138 1,238 484,813 61,851 - ------------------------------------------------------------------------------------------------------------------- BALANCE, MARCH 31 $1,439,616 $1,388,372 42,971,213 43,586,369 ===================================================================================================================
See accompanying notes to consolidated financial statements. 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 business combinations, 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 1996 presentation. The notes included herein should be read in conjunction with the notes to the consolidated financial statements included in the Corporation's 1995 Annual Report and Form 10-K. On December 31, 1995 Crestar Financial Corporation (Crestar) merged with Loyola Capital Corporation (Loyola), a Maryland savings bank holding company, in a transaction accounted for as a pooling of interests. Accordingly, historical financial data for periods before the merger, including the first quarter of 1995, have been restated to include the combined results of Crestar and Loyola. The Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121) became effective on January 1, 1996. SFAS 121 requires that long-lived assets and certain identifiable intangibles to be held and used by a company be reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, a 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 assets subject to disposal. Crestar adopted this accounting standard in the first quarter of 1996; there was no impact to the Corporation's net income or balance sheet upon implementation of SFAS 121. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), as issued by the FASB in 1995, also became effective on January 1, 1996. SFAS 123 establishes financial accounting and reporting standards for stock-based employee compensation plans, including stock option plans. While SFAS 123 defines a fair value based method of accounting for an employee stock option or similar equity instrument, it also allows a company to continue to measure compensation cost for those plans using the intrinsic value method of accounting previously prescribed by Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." Crestar has elected to continue to measure the costs of its stock-based compensation plans under the intrinsic value method of APB 25. Accordingly, Crestar's compliance with SFAS 123, effective January 1, 1996, had no impact on the Corporation's net income or balance sheet. Intangible assets consisted of goodwill and deposit based intangibles, having a combined balance of $181,350,000 and $166,993,000 at March 31, 1996 and 1995, respectively, and favorable lease rights of $469,000 and $550,000, respectively. Capitalized mortgage servicing rights of $30,574,000 and $21,445,000 at March 31, 1996 and 1995, respectively, were included in other assets in the consolidated financial statements. Mortgage servicing rights of approximately $10 million were capitalized during the first three months of 1996. At March 31, 1996 and 1995, mortgage servicing rights were net of a related valuation allowance of $305,000 and $213,000, respectively. The activity in such valuation allowance was not material to the consolidated financial statements for the three months ended March 31, 1996 and 1995. The fair value of capitalized mortgage servicing rights was approximately $44 million at March 31, 1996. Such fair value was estimated using a discounted cash flow method, with discount rates based on secondary market sources, adjusted for prepayment estimates and differences in servicing and credit costs. Amortization of capitalized mortgage servicing rights was $2 million in the first three months of 1996. (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 1996 1995 Amortized Market Amortized Market Cost Value Cost Value U.S. Treasury and Federal agencies $ - $ - $ 71,924 $ 70,035 Mortgage-backed obligations of Federal agencies 22,308 23,604 803,756 775,270 Other taxable securities 2,250 2,250 221,126 213,759 States and political subdivisions 56,770 57,521 64,439 64,703 - ------------------------------------------------------------------------------------------------------------- Total securities held to maturity $81,328 $83,375 $1,161,245 $1,123,767 =============================================================================================================
(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 1996 1995 Amortized Market Amortized Market Cost Value Cost Value U.S. Treasury and Federal agencies $ 428,447 $ 423,845 $ 478,391 $ 469,549 Mortgage-backed obligations of Federal agencies 2,288,976 2,259,078 699,030 682,829 Other taxable securities 626,581 623,547 189,828 187,399 Common and preferred stocks 152,951 153,076 109,912 109,939 - ------------------------------------------------------------------------------------------------------------ Total securities available for sale $3,496,955 $3,459,546 $1,477,161 $1,449,716 ============================================================================================================
At March 31, 1996, the amortized cost and market value of Mortgage-backed obligations of Federal agencies includes the amortized cost and market value, respectively, of interest rate caps purchased to hedge the market value of fixed rate securities available for sale in a rising interest rate environment. The interest rate caps, which have a notional balance of $1.0 billion, have a cost basis of $11.8 million and a market value of $11.7 million at March 31, 1996. The cost basis of the interest rate caps is being amortized as a reduction of interest income on securities available for sale. (4) MONEY MARKET INVESTMENTS Money market investments at March 31 included: In thousands 1996 1995 Federal funds sold $ 97,800 $487,985 Securities purchased under agreements to resell 117,388 182,000 Time deposits 125,000 - U.S. Treasury 10,562 6,758 Trading account securities 3,771 8,250 Other 1,217 96 - ------------------------------------------------------------------------------- Total money market investments $355,738 $685,089 =============================================================================== (5) NONPERFORMING ASSETS AND IMPAIRED LOANS Nonperforming assets at March 31 are shown below. Loans that are both (a) past due 90 days or more and (b) not deemed nonaccrual due to an assessment of collectibility are specifically excluded from the definition of nonperforming assets. Such accruing loans past due 90 days or more not shown below totaled $65.3 million and $37.4 million at March 31, 1996 and 1995, respectively. In thousands 1996 1995 Nonaccrual loans $68,353 $ 79,301 Restructured loans - 1,458 - ----------------------------------------------------------------------- Total nonperforming loans 68,353 80,759 Foreclosed properties - net 19,175 32,449 - ----------------------------------------------------------------------- Total nonperforming assets $87,528 $113,208 ======================================================================= Non-cash additions to foreclosed properties were $3.6 million and $1.4 million in the first three months of 1996 and 1995, respectively. Included in Crestar's non-performing loans above are certain impaired loans. Impaired loans and the allocated valuation allowances at March 31 were:
In thousands 1996 1995 Loan Valuation Loan Valuation Balance Allowance Balance Allowance Impaired with valuation allowance $31,620 $5,140 $40,290 $9,080 Impaired without valuation allowance - - - - - ---------------------------------------------------------------------------------------------------------- Total impaired loans $31,620 $5,140 $40,290 $9,080 ==========================================================================================================
Collateral dependent loans, which were measured at the fair value of the collateral, constituted $27.7 million or 88% of impaired loans at March 31, 1996. The remaining impaired loan of $3.9 million was measured based on the present value of expected cash flows. The allocated valuation allowance for impaired loans and activity related thereto is included in the allowance for loan losses. The average recorded investment in impaired loans, the amount of interest income recognized, and the amount of interest income recognized on a cash basis for the three months ended March 31 were: In thousands 1996 1995 Average recorded investment in impaired loans $29,790 $40,440 Interest income recognized during impairment - - Interest income recognized on a cash basis during impairment - - ================================================================================ (6) ALLOWANCE FOR LOAN LOSSES Transactions in the allowance for loan losses for the three months ended March 31 were: In thousands Three Months 1996 1995 Beginning balance $240,285 $232,922 - ------------------------------------------------------------------------------ Charge-offs (27,720) (19,660) Recoveries 6,370 7,304 - ------------------------------------------------------------------------------ Net charge-offs (21,350) (12,356) Provision for loan losses 20,300 10,301 Allowance from acquisitions - net (388) 5,631 - ------------------------------------------------------------------------------ Net increase (decrease) (1,438) 3,576 - ------------------------------------------------------------------------------ Ending balance $238,847 $236,498 ============================================================================== (7) 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 1996 1995 Beginning balance $7,512 $16,188 - ---------------------------------------------------------------- Provision for foreclosed properties - (182) Write-downs (22) (1,762) Allowance from acquisitions - net (471) 3,194 - ---------------------------------------------------------------- Net increase (decrease) (493) 1,250 - ---------------------------------------------------------------- Ending balance $7,019 $17,438 ================================================================ (8) SHORT-TERM BORROWINGS Short-term borrowings, exclusive of deposits, with maturities of less than one year at March 31 were: In thousands 1996 1995 Federal funds purchased $1,414,763 $ 847,487 Securities sold under repurchase agreements 359,094 597,884 Federal Home Loan Bank borrowings 249,000 372,200 Notes payable 162,140 153,895 Other 1,978 5,230 - ------------------------------------------------------------------------------- Total short-term borrowings $2,186,975 $1,976,696 =============================================================================== The Corporation paid $124,523,000 and $119,821,000 in interest on deposits and short-term borrowings in the first three months of 1996 and 1995, respectively. (9) LONG-TERM DEBT Long-term debt at March 31 included:
In thousands 1996 1995 4 3/8-7 3/8% Federal Home Loan Bank obligations payable through 2015 $351,569 $348,875 8 3/4% Subordinated notes due 2004 149,664 149,625 8 1/4% Subordinated notes due 2002 125,000 125,000 8 5/8% Subordinated notes due 1998 49,979 49,968 7 7/8-11 1/4% Collateralized mortgage obligation bonds maturing through 2019 17,569 31,135 7-8 1/4% Mortgage indebtedness maturing through 2009 9,177 9,923 8 5/8-14 3/8% Capital lease obligations maturing through 2006 1,087 1,303 - ------------------------------------------------------------------------------------------------------------ Total long-term debt $704,045 $715,829 ============================================================================================================
The Corporation paid $11,835,000 and $10,508,000 in interest on long-term debt in the first three months of 1996 and 1995, respectively. There were no new capital lease agreements in the first quarter of 1996. (10) INCOME TAXES The current and deferred components of income tax expense allocated to continuing operations for the three months ended March 31 in the accompanying consolidated statements of income were: In thousands Three Months 1996 1995 Current: Federal $27,320 $22,731 State and local 1,581 1,831 - ------------------------------------------------------------------------ Total current tax expense 28,901 24,562 - ------------------------------------------------------------------------ Deferred: Federal 1,898 2,015 State and local 322 (179) - ------------------------------------------------------------------------ Total deferred tax expense 2,220 1,836 - ------------------------------------------------------------------------ Total income tax expense $31,121 $26,398 ======================================================================== 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 1996 1995 Income before income taxes $86,543 $76,057 - ---------------------------------------------------------------------------- Tax expense at statutory rate 30,290 26,620 - ---------------------------------------------------------------------------- Increase (decrease) in taxes resulting from: Tax-exempt interest and dividends (1,645) (1,949) Nondeductible interest expense 163 148 Amortization of goodwill 1,003 710 State income taxes 1,237 1,073 Other - net 73 (204) - ---------------------------------------------------------------------------- Total increase (decrease) in taxes 831 (222) - ---------------------------------------------------------------------------- Total income tax expense $31,121 $26,398 - ---------------------------------------------------------------------------- Effective tax rate 36.0% 34.7% ============================================================================ The Corporation made income tax payments of $7,338,000 and $1,764,000 during the first three months of 1996 and 1995, respectively. At March 31, 1996, the Corporation had a net deferred income tax asset of $98,889,000. There was no valuation allowance relating to the net deferred income tax asset. Crestar has sufficient taxable income in the available carryback period to realize all of its deferred income tax assets. (11) 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, swaps and forward contracts. These instruments involve varying degrees of credit and interest rate risk in excess of the 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, securities, real estate and inventory. Crestar receives a commitment fee for entering into such agreements. Legally binding, unfunded commitments to extend credit were $7.2 billion and $5.9 billion at March 31, 1996 and 1995, respectively. 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 $407 million at March 31, 1996. 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. Recourse obligations of $1.3 billion at March 31, 1996 include $193 million of contractual recourse liability accepted by Crestar on mortgage loan sales to the Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC). For the period extending over the life of the loans, FNMA and FHLMC have the right to sell any loans which become delinquent back to Crestar. Crestar maintained an allowance included in other liabilities of $307,000 at March 31, 1996 based on estimates of future losses on this contractual recourse liability. The remaining notional balance of recourse obligations of $1.1 billion results from the origination and acquisition by Crestar of mortgage servicing rights on Federal Housing Association and Veterans' Association loans, which are serviced under programs of the Government National Mortgage Association (GNMA). Approximately $801 million of this notional balance was insured by agencies of the Federal government or private insurance companies at March 31, 1996. 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 and caps. 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, 1996, Crestar was participating in interest rate (fixed receive) swaps of $1.3 billion, of which $850 million, $250 million and $200 million were used to convert certain floating rate commercial, instalment and real estate mortgage loans, respectively, to fixed rates. Unrealized gross gains and gross losses on such swaps were $43,000 and $12.4 million, respectively, at March 31, 1996. Crestar also had interest rate cap agreements outstanding at March 31, 1996, $1 billion of which were used to hedge the market value of securities available for sale. The remaining $40 million of interest rate caps were used to minimize interest rate risk associated with rising rates on floating rate money market deposits. Unrealized gross gains and gross losses on such caps were $670,000 and $580,000, respectively, at March 31, 1996. In addition, Crestar serves as a financial intermediary in interest rate swap, cap and collar agreements, providing risk management services to customers. At March 31, 1996, Crestar had $113.4 million in offsetting swap, $50 million in offsetting cap, and $30.8 million in offsetting collar agreements. The notional amount of these over-the-counter traded interest rate swaps, caps and collars does not fully represent Crestar's credit and market exposure, which the Corporation believes is a combination of current replacement cost (any unrealized gain plus accrued receivable) of approximately $13.3 million, less collateral held of approximately $5.9 million, plus an amount for additional market movement. Four counterparties constituted 16%, 16%, 12% and 10% of the estimated credit and market exposure of $144 million at March 31, 1996. Crestar had forward agreements of $979.0 million outstanding at March 31, 1996, which are primarily used 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. Legislative efforts to resolve the undercapitalization of the Savings Association Insurance Fund (SAIF) of the FDIC, and the disparity between deposit insurance premiums for SAIF-insured deposits and deposits insured under the Bank Insurance Fund (BIF), may result in a one-time special assessment on SAIF-insured deposits. Earnings in 1996 may be impacted if a legislatively proposed one-time assessment of approximately 80 basis points (0.80%) on SAIF-insured deposits is enacted. Any one-time assessment on SAIF-insured deposits would impact each of Crestar's three bank subsidiaries and its savings bank subsidiary. Approximately 45% of Crestar's current deposit base is SAIF-insured. An 80 basis point assessment, on an after-tax basis, would result in a one-time charge to Crestar of approximately $25 million. As a consequence of the one-time assessment, future earnings are expected to be augmented by a substantial reduction in ongoing SAIF assessment rates. The estimated $25 million charge for Crestar reflects a proposed 20% reduction in the assessments on certain SAIF-insured deposits (known as Oakar deposits) acquired by banks in certain thrift acquisitions. Crestar would accrue such a liability if and when such legislation is enacted into law. 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. Financial Commentary Crestar Financial Corporation And Subsidiaries OVERVIEW (Tables 1, 2 and 14) Crestar Financial Corporation (Crestar) reported net income of $55.4 million for the quarter ended March 31, 1996, an increase of $5.8 million or 12% over net income reported in the first quarter of 1995. This increase reflects 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 $1.27 for the first quarter of 1996, compared to $1.14 in 1995. The predominant items affecting the change in earnings per share are given in Table 2. Each item is net of applicable federal income taxes. On December 31, 1995 Crestar merged with Loyola Capital Corporation (Loyola), a Maryland savings bank holding company, in a transaction accounted for as a pooling of interests. Accordingly, historical financial data for periods before the merger, including the first quarter and fourth quarter of 1995, have been restated to include the combined results of Crestar and Loyola. Crestar's net income for the fourth quarter of 1995 was reduced by $29.3 million in one-time merger expenses associated with the merger with Loyola. Excluding the non-recurring charges, net income for the fourth quarter of 1995 was $55.6 million, or $1.28 per share. Crestar's subsidiaries provide banking and non-banking services throughout Virginia, Maryland and Washington, DC, which compose Crestar's primary market area. This market is characterized as economically diverse and stable. Crestar's market area is characterized by active competition in all principal areas where the Corporation provides services. In addition to banks, other firms competing in the market area include savings associations, consumer finance companies, national credit card companies, securities brokerage firms, credit unions and mortgage banking companies. MERGERS AND ACQUISITIONS Crestar announced two pending acquisitions during the first quarter. In February, Crestar announced an agreement to purchase the deposits and customer accounts, plus selected loans, of ten branches of Mellon Bank (MD), a bank operating in the Maryland suburbs of the metropolitan Washington, DC area. The purchase, which is expected to be completed during the second quarter of this year, will add approximately $150 million in deposits to Crestar's Maryland bank subsidiary. Also in February, Crestar Mortgage Corporation announced an agreement to purchase, in a cash transaction, Ryland Funding Group, a wholesale mortgage banker. Ryland Funding Group operates out of four offices, and originated approximately $750 million in real estate mortgages in 1995. PROFITABILITY MEASURES AND CAPITAL RESOURCES (Table 1) Crestar's increased earnings in the first quarter of 1996 resulted in improvements in key profitability measures when compared to the same period of 1995. Return on average assets was 1.28% in the first three months of 1996, up from a ratio of 1.22% for the first three months of 1995. Return on average equity was 15.41% for the quarter ended March 31, 1996, compared to 14.81% for the first quarter of 1995. Average equity to assets of 8.31% for the first quarter of 1996 increased 10 basis points from 8.21% in the first quarter of 1995, reflecting higher average levels of retained earnings. Period-end equity to assets of 8.04% at March 31, 1996 was down slightly from a March 31, 1995 ratio of 8.20%. Total assets increased by 6% from March 31, 1995 to March 31, 1996; growth in period-end stockholders' equity was 4% during this period. Risk-based capital ratios are another measure of capital adequacy. At March 31, 1996, Crestar's consolidated risk-adjusted capital ratios were 9.0% for Tier 1 and 12.2% for total capital, well above the required minimums of 4.0% and 8.0%, respectively. The Tier 1 leverage ratio of 7.5% at March 31, 1996 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 7.1% at March 31, 1996. Under Federal Deposit Insurance Corporation (FDIC) rules, each of Crestar's three subsidiary banks and Crestar's savings bank subsidiary were considered "well-capitalized" as of March 31, 1996, the highest category of capitalization defined by regulatory authorities, allowing for the lowest level of FDIC insurance premium payments. At March 31, 1996, approximately 45% 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. Crestar has filed shelf registration statements with the Securities and Exchange Commission pertaining to the possible future issuance of securities. Under currently effective registration statements, Crestar may issue in the future up to $324 million in subordinated debt securities, preferred stock or common stock, or any combination thereof. NET INTEREST MARGIN AND NET INTEREST INCOME (Tables 3 and 15) Crestar's net interest margin for the first quarter of 1996 was 4.63%, an improvement of 4 basis points from the margin recorded in the first quarter of 1995. The improvement was primarily due to favorable changes in the composition of earning assets and to increased net interest income arising from off-balance sheet hedge transactions. These factors served to offset the impact of higher interest rates paid on domestic time deposits and changes in the composition of funding sources. The net interest margin in the fourth quarter of 1995 was 4.55%. Positive influences on the first quarter 1996 margin include favorable changes in the composition of balance sheet earning assets. Changes in the earning asset mix increased the first quarter 1996 net interest margin by approximately 4 basis points when compared to the first quarter of 1995. A key factor was the significant growth of consumer instalment and bank card loans, reflecting Crestar's strong marketing efforts. Average balances of consumer instalment loans increased 22% in the first quarter of 1996, or $488 million, compared to first quarter 1995 average balances. Average bank card loans increased $134 million, or 9%, during the same time period. Consumer real estate-mortgage loans, which have historically been Crestar's lowest yielding loan category, decreased $429 million or 12% from first quarter 1995 to first quarter 1996. This reduction reflects efforts to re-balance the Corporation's loan portfolio, through selected sales of residential mortgage loans, following the 1995 acquisitions of three savings and loan institutions. Average business loans for the first quarter were down $33 million, or 1% from prior year balances. Average balances of total securities increased $421 million, or 16%, from first quarter 1995 to first quarter 1996. This increase was funded in part from decreases in lower yielding money market investments during the same time period. Average balances of securities classified as available for sale constituted the majority of average total securities during first quarter of 1996, reflecting the transfer during the fourth quarter of 1995 of $963 million (market value) of securities from the held to maturity classification to the available for sale classification. Mortgage loans held for sale also exhibited growth in average balances, increasing from $224 million in the first quarter of 1995 to $778 million in the first quarter of 1996, reflecting increased origination volume at the Corporation's mortgage banking subsidiaries, and transfers of selected mortgage loans from the loan portfolio to mortgage loans held for sale. Overall changes in the average balances of funding sources resulted in a negative impact to the first quarter 1996 net interest margin of 4 basis points, in comparison to first quarter 1995 results. Average total deposits for the first quarter of 1996 increased by $491 million, to $12.8 billion, a 4% increase over first quarter 1995 average balances. Significant increases in average balances during this time period occurred in high-yielding certificate of deposit balances and money market deposit balances. Average balances of domestic time deposits, which are primarily composed of consumer certificates of deposit, increased by $255 million or 7% from first quarter 1995 to first quarter 1996. Other deposit categories exhibiting higher average balances were money market deposit accounts, up 7%, and demand deposits, up 11% from the first quarter of 1995. Average balances of regular savings deposits declined $217 million during the same time period. Average short-term borrowings increased 20% from the first three months of 1995, in part reflecting the use of such borrowings to fund higher levels of mortgage loans held for sale. The yield on average total loans during the first three months of 1996 increased 15 basis points from the first quarter of 1995, to 8.83%, as higher yields obtained on consumer loans and on real estate-income property business loans offset declines in average rates on commercial and real estate-construction loan portfolios. On a combined basis, yields on securities held to maturity and securities available for sale increased 6 basis points in the first quarter of the current year, compared to first quarter 1995 results. During the same time period, yields on money market investments and mortgage loans held for sale experienced declines in average rates earned. The average rate earned on total earning assets was up 8 basis points, to 8.26% in the first quarter of 1996, in comparison to first quarter 1995 results. Also reflecting a higher interest rate environment, the average rate paid on time deposits increased during this period. Average rates on domestic time deposits increased 72 basis points from first quarter 1995, to 5.37%. This was partially offset by lower average rates on transaction oriented accounts such as interest checking and money market deposit accounts. The average rate paid on total interest bearing liabilities increased, however, from 4.19% in the first quarter of 1995 to 4.30% in the first quarter of 1996, or an increase of 11 basis points. Excluding the impact of derivative instruments utilized as hedges, changes in interest rate spreads had a negative impact of 3 basis points on Crestar's first quarter 1996 net interest margin, when compared to the first quarter of 1995. Off-balance sheet interest rate hedges made a positive contribution to net interest income of $703 thousand during the first quarter of 1996, which was composed of a $694 thousand increase in interest income and a $9 thousand decrease in interest expense, based on the underlying asset or liability being hedged. The positive impact on the first quarter 1996 net interest margin equated to 2 basis points. In the first quarter of 1995, the comparable impact of hedging activity was a decrease to Crestar's total interest income of $1.6 million and an increase to interest expense of $10 thousand, resulting in a negative impact of 4 basis points to that quarter's net interest margin. On a comparative basis, derivative instruments utilized as hedges contributed 6 basis points to Crestar's net interest margin in the first quarter of 1996, compared to the same quarter of 1995. Declines in the average balances of nonperforming assets contributed to a 1 basis point increase in net interest margin for the first three months of 1996, compared to the same period of 1995. The extent to which Crestar will be able to maintain its current 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. Competition among financial institutions, in addition to acquisition strategies, may lead to further pressures on the Corporation's net interest margin in future periods. As a result of the increase in the net interest margin and a 6% increase in average earning assets, net interest income for the first quarter of 1996 increased 5% over the first quarter of 1995. Tax-equivalent net interest income similarly increased by 5% during this period. RISK EXPOSURES AND CREDIT QUALITY (TABLES 4-7) Crestar's financial condition continues to exhibit strong overall credit quality. The allowance for loan losses was $239 million at March 31, 1996, representing 2.07% of period-end loans, 273% of period-end nonperforming assets, and a 349% 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. Under the Corporation's criteria for classification of nonperforming loans, loans that are both (a) past due 90 days or more and (b) not deemed nonaccrual due to an assessment of collectibility are specifically excluded from the definition of nonperforming assets. Accruing loans past due 90 days or more, and excluded from classification as nonperforming assets, totaled $65.3 million at March 31, 1996, with consumer loans representing 95% of this amount. At March 31, 1996, nonperforming assets of $87.5 million were down $25.7 million or 23% from March 31, 1995, and down $5.8 million from December 31, 1995. The ratio of nonperforming assets to loans and foreclosed properties-net at March 31, 1996 was 0.76%, down from 0.79% at December 31, 1995 and 0.96% at March 31, 1995. 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 1996. However, interim periods in 1996 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. The provision for loan losses was $20.3 million for the first quarter of 1996, an increase of $10.0 million from the $10.3 million provision expense recorded in the first quarter of 1995. Provision expense in the fourth quarter of 1995 was $21.3 million. Net charge-offs totaled $21.4 million in the first three months of 1996, compared to $12.4 million in the comparable period of 1995. Net charge-offs as a percentage of average loans were 0.74% for the first quarter of 1996, compared to 0.43% in the same period of 1995, and 0.64% for the fourth quarter of 1995. Business loans experienced net recoveries of $2.0 million in the first quarter of 1996, compared to net charge-offs of $444 thousand in the comparable quarter of 1995. Consumer loan net charge-offs totaled $23.3 million in the first quarter of 1996, compared to net charge-offs of $21.0 million in the fourth quarter of 1995 and $11.9 million in the first quarter of 1995. The largest proportions of net loan charge-offs during the first quarter of 1996 and 1995 occurred in the bank card loan portfolio. Net charge-offs for bank card loans were $18.0 million in the first three months of 1996, compared to $10.0 million in 1995's first quarter. Net bank card loan charge-offs as a percentage of bank card loans (on an annualized basis) were 4.42% for the first quarter of 1996, compared to 2.67% in the first quarter of 1995. The ratio was 4.05% for the fourth quarter of 1995. A primary reason for the increase in net bank card loan charge-offs is the significant growth of Crestar's bank card portfolio experienced during 1993 through 1995. In addition, increases in the net bank card loan charge-off ratio (net bank card loan charge-offs as a percentage of average bank card loans) reflect an industry-wide trend of adverse payment performance by consumers, as evidenced by a nationwide rise in consumer loan delinquencies. Crestar's recent bank card loan charge-off experience is comparable to current industry-wide measurements. The delinquency and loss characteristics of newly underwritten bank card portfolios typically do not reach their highest levels until after 24 months from origination. Crestar's bank card outstandings, which experienced considerable growth from 1993 through mid-1995, are expected to produce higher net charge-off levels as the newer portfolios "season." Consequently, Crestar believes that in the current economic environment the ratio of net charge-offs to average total loans for the full year 1996 will increase from the level achieved during 1995, when net charge-offs averaged 0.52% of average loans. This expectation recognizes that a sizable percentage of Crestar's consumer loans, particularly in the bank card loan portfolio, is reaching an average maturity that should see loss rates peak. This expectation is based upon assumptions regarding the general economic climate in Crestar's principal markets, the performance characteristics of the loan portfolio, and moderate growth in consumer loan portfolios. Changes in these conditions could produce different results. In addition to other loan categories, Crestar closely manages its portfolio of loans to real estate developers and investors (REDI). As shown in Table 4, REDI outstanding balances remained fairly constant and totaled $1.3 billion at March 31, 1996. This balance represented 11% of the total loan portfolio at that date. At March 31, 1995 and December 31, 1995, REDI loans also represented 11% of the total loan portfolio. REDI nonperforming assets were $51.2 million at March 31, 1996, compared to $50.1 million at December 31, 1995. Table 5 provides the property type and geographic diversification of the current REDI portfolio. 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. Potential problem loans at March 31, 1996, not included in Table 7, totaled approximately $182 million. Over 90% of this balance represents commercial or real estate-income property related loans. Depending on changes in the economy and other future events, these loans and others not presently identified as problem loans could be classified as nonperforming assets in the future. Potential problem loans were $151 million at December 31, 1995 and $226 million at March 31, 1995. Fluctuations in potential problem loan balances from quarter to quarter should be viewed in the context of the size of Crestar's total loan portfolio, which was $11.5 billion at March 31, 1996. NONINTEREST INCOME AND EXPENSE (Table 8) Noninterest income totaled $80.0 million in the first quarter of 1996, a $13.5 million or 20% increase over the first quarter of 1995. Excluding securities gains and losses, noninterest income increased $8.7 million or 13% over the results for the first three months of 1995. This increase reflects growth in the noninterest income categories of mortgage origination income and trust and investment advisory income. Trust and investment advisory income increased $2.4 million or 19% from 1995. Mortgage income for the first quarter of 1996 totaled $5.7 million, compared to $0.7 million in the first quarter of 1995. These results for the first quarter of 1996 reflect a higher level of gains recorded on the sale of mortgage loans originated through Crestar's mortgage banking operations. Noninterest income from service charges on deposit accounts and from bank card-related income experienced slight declines. Miscellaneous noninterest income, however, increased by $3.9 million over the first quarter of 1995. Gains recorded from sale of selected branch assets and liabilities, and selected consumer real estate mortgage loans, contributed $2.1 million of this increase. Automated teller machine revenue, securities brokerage fees, mutual fund and insurance income also experienced gains during this period. Noninterest expense increased $2.3 million, or 2%, in the first quarter of 1996 compared to the same period of 1995. Excluding foreclosed properties expense, noninterest expense increased 1% in the quarter. Total personnel costs, Crestar's largest expense category, were $84.2 million in the first quarter of 1996, a 2% increase over the same period of 1995. Management continues to emphasize prudent control of noninterest expenses and assimilation of acquisitions in a cost effective manner. Decreases in FDIC insurance premium rates, instituted in the third quarter of 1995 for most bank depository accounts, led to a lower FDIC premium expense compared to first quarter 1995 results. Reflecting improved credit conditions and real estate markets, foreclosed properties expense for the quarter ended March 31, 1996 was a net recovery of $1.3 million, compared to a net recovery of $1.5 million in the quarter ended March 31, 1995. The net recoveries are primarily a result of gains recorded from sales of foreclosed properties exceeding foreclosed property operating expenses during the periods presented. The effective tax rate for the first quarter of 1996 was 36.0%, compared to 34.7% in the first quarter of 1995. Reduced proportions of tax-exempt interest and dividends, increased provisions for state income taxes and higher levels of nondeductible goodwill contributed to the higher effective tax rate for 1996. Financial statement note 10 contains additional information concerning income taxes. FINANCIAL CONDITION (Table 9) Crestar's assets totaled $17.9 billion at March 31, 1996, compared to $18.3 billion in assets at December 31, 1995, and $16.9 billion at March 31, 1995. Loans net of unearned income totaled $11.5 billion at March 31, 1996 compared to $11.8 billion at both December 31, 1995 and March 31, 1995. Total deposits were $12.9 billion at the end of the first quarter of 1996, compared to $13.3 billion at December 31, 1995 and $12.6 billion at March 31, 1995. Total deposits were down slightly from year-end 1995, as a higher interest rate environment and increased competition for deposits resulted in declines in several deposit categories. In the fourth quarter of 1995, Crestar transferred selected securities from the held to maturity portfolio to the available for sale securities portfolio. At the time of transfer, the securities reclassified had a fair market value of approximately $963 million. The transfer further strengthened the liquidity position of Crestar by increasing the balance of securities available for sale. With respect to the securities held to maturity portfolio, market value exceeded the carrying value at March 31, 1996 by $2.0 million, consisting of $2.5 million in unrealized gains and $0.5 million of unrealized losses. At March 31, 1996, the amortized cost of securities available for sale exceeded the fair value of such securities by $37.4 million, consisting of $7.1 million in unrealized gains and $44.5 million in unrealized losses. Shareholders' equity at March 31, 1996 reflects a $24.2 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 an increase of $11.1 million at December 31, 1995 arising from net unrealized gains on securities available for sale. At March 31, 1995, Crestar's shareholders' equity reflected a $17.4 million reduction for the excess, net of tax, of amortized cost of securities available for sale over fair value. 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. Net unrealized losses in the securities available for sale portfolio primarily reflect ongoing interest rate volatility, which is inherent in the securities marketplace. Based on current market conditions, net unrealized losses on securities are not expected to have a significant impact on the future operating results or liquidity of Crestar. All mortgage-backed securities in the securities available for sale and securities held to maturity portfolios are subject to prepayment risk, since the mortgage loans underlying these securities can prepay at any time without penalty. This risk becomes apparent during periods of declining interest rates, when refinancing of existing mortgage loans can accelerate. During these periods, the expected maturity of mortgage-backed securities shortens due to prepayments, reducing the expected stream of future interest payments to be received. The interest rate and prepayment risk associated with mortgage-backed securities is considered by management in assessing the overall asset/liability structure of the Corporation. All investment securities, including mortgage backed pass-through securities, collateralized mortgage obligation (CMO) securities, and securitized credit card receivables, are also managed with respect to their credit risk. Credit risk arises because payments of interest and principal can be dependent on the payment of the underlying mortgage or receivable payment where applicable, in addition to the contractual obligation of the issuer to collect and remit such payments to the individual security owners. The Corporation monitors credit risk by assessing, and monitoring on an ongoing basis, the financial strength and performance of the issuers of such securities. The "Other taxable securities" classification of Crestar's securities available for sale portfolio (see footnote 3 to the consolidated financial statements) at March 31, 1996 is primarily composed of CMO securities with a fair value of approximately $406 million, and pass-through securities backed by credit card receivables of approximately $78 million (fair value). During the first quarter of 1996, Crestar sold approximately $1.5 billion of securities classified as available for sale, generating securities gains of $2.4 million. Such sales were consummated in conjunction with the overall management of interest rate risk for the Corporation. Securities losses recorded in the first quarter of 1995 were $2.4 million. Crestar purchased and retired 510,000 shares of common stock during the first quarter of 1996, at an average price of $57.06 per share, for the ongoing needs of its employee benefit plans. In April of this year, Crestar's Board of Directors authorized the purchase and retirement of up to 1.0 million shares of common stock in order to continue to meet the recurring needs of the Corporation's dividend reinvestment plan, thrift and profit sharing plans and other benefit programs. Also in April, Crestar announced a common stock dividend increase, effective with the dividend payable on May 21, 1996, to $.52 per share. This represents a 15.6% increase from the previous quarterly dividend rate of $.45 per share. The increased dividend is intended to raise the Corporation's ratio of dividends paid to shareholders as a percentage of net income to the higher end of the Corporation's targeted range of 30% to 40%. LIQUIDITY AND INTEREST SENSITIVITY (Tables 10-13) 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 after giving consideration to capital adequacy, liquidity needs, interest rate risk, the economic outlook, market opportunities, and customer needs. General strategies to accomplish these objectives include maintaining a strong balance sheet, maintaining adequate core deposit levels, taking an acceptable level of 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 64% of total funding sources at both March 31, 1996 and December 31, 1995, compared to 68% at March 31, 1995. As an additional indication of strong liquidity, securities available for sale represented 21%, and money market investments an additional 2%, of Crestar's total earning assets at March 31, 1996. 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. The committee establishes a limit on the net interest income at risk for the current planning period, generally either the current calendar year or the remainder of the current year plus the next calendar year. The level of risk 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. A 9 to 24 month net interest income forecast is prepared regularly based on a consensus interest rate forecast, in addition to numerous high and low interest rate scenarios of up to and including 300 basis points from current interest rates. The time period evaluated is linked to the current planning horizon. The various interest rate scenarios represent a reasonable range of interest rates. By its nature the simulation process includes numerous assumptions, including assumptions on changes in average balances and yields, changes in deposit and loan mix, and forecasts of interest rate movements and speeds. The expected dynamics of the balance sheet, including shifts in loans and deposits, are included in the simulations. Also taken into account are the assumed effects of interest rate caps and floors, and variances in the level of prepayment rates on loans and securities as a function of interest rates. Prepayment assumptions are based on the expertise of management along with input from external financial market sources. While the simulation process is a powerful tool in analyzing interest sensitivity, many of the assumptions used in the simulation process are both highly qualitative and subjective, and subject to the risk that past historical activity may not generate accurate predictions of future results. The high rate and low rate estimates generated by this simulation process are compared to the estimate generated under the consensus interest rate scenario. At March 31, 1996, Crestar's projected net interest income under a consensus interest rate scenario for the remainder of 1996 would decrease by 0.9% in a high interest rate scenario, and would increase by 2.9% in a low interest rate scenario. These projections were well within Crestar's tolerance for risk, and indicate a sufficient liquidity position, and acceptable operating environment, under the high, low and consensus interest rate scenarios. 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 statistical rate simulation techniques. The banking industry and its regulatory authorities are considering 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. The Corporation's measurement and interpretation process for market valuation models is in a developmental stage. 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 10, and reflects the earlier of the maturity or repricing dates for various assets and liabilities at March 31, 1996. At that point in time, Crestar had a cumulative net liability sensitive twelve-month gap with $3.2 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, interest rate gap. While most assets and liabilities reprice either at maturity or in accordance with their contractual terms, some demonstrate characteristics that require adjustments to more accurately reflect their repricing behavior or value to the Corporation. Table 10 presents interest sensitivity on an adjusted basis to reflect these characteristics. The first of these adjustments is made through the use of beta factors, which are based on a ratio of actual changes in interest rates on consumer deposits with no stated maturity (interest checking, money market and regular savings deposits) 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 other funding sources, such as short-term borrowings, to movements in market interest rates. For example, the beta adjustment for interest checking in Table 10 demonstrates that for any given increase or decrease in the prime loan rate, Crestar expects the interest rates paid on interest checking deposits will reprice much slower, in both a rising and falling rate environment, than the prime rate. This is an industry wide characteristic of interest checking deposits that Crestar must address for a more accurate gap analysis. The beta adjustments, therefore, are used to quantify these deposits as sources of funds that are less sensitive to interest rate changes than indicated by their variable rate characteristics. In addition to the beta adjustments, the table also incorporates an adjustment to reflect the sensitivity of much of the Corporation's demand deposit balances to the level of interest rates. In periods of rising interest rates, average balances of non-interest bearing demand deposits will decrease (all other factors being constant) as customers become more sensitive to reducing debt or converting demand deposit balances to interest bearing accounts. On a cumulative twelve-month basis, Crestar had a liability sensitive "adjusted gap" at March 31, 1996, with $109 million excess of interest-sensitive sources of funds over uses of funds. This generally indicates a relatively neutral interest sensitivity, in comparison to the level of total earning assets of $16.2 billion. The static gap and adjusted gap do not include $1.0 billion (notional amount) of interest rate caps which Crestar has added to potentially offset the effect that rising interest rates would have on the market value of $1.0 billion of fixed-rate securities classified as securities available for sale. No interest payments are received on interest rate caps if the applicable interest index rate remains below the interest cap rate (see Table 11). 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. 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. Crestar's outstanding interest rate swap instruments at March 31, 1996 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. The majority of Crestar's outstanding interest rate cap instruments at March 31, 1996 are utilized to mitigate the declines in market value that can be experienced by fixed rate securities in a rising interest rate environment. 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 in a gain position. Crestar has established policies governing derivative activities, and the counterparties used by Crestar are considered an acceptable credit risk. 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 losses at March 31, 1996. 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 1996, and at March 31, 1996 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 and caps (excluding customer positions where Crestar acts as an intermediary) was $2.3 billion at March 31, 1996. Forward contracts with a notional amount of $979 million, utilized to hedge lending commitments of Crestar's mortgage banking subsidiary, were also outstanding at March 31, 1996, bringing the total notional value of derivative financial instruments related to interest rate risk management activities to $3.3 billion at March 31, 1996. Tables 11, 12, and 13 present information regarding fair values, maturity, average rates, and activity as of and for the three month period ending March 31, 1996 for these off-balance sheet derivative instruments. Net unrealized gains on these instruments totaled $4.0 million as of March 31, 1996. Financial statement note 11 contains additional information pertaining to these types of agreements. NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" in 1995. Effective January 1, 1996, SFAS 121 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, a 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. SFAS 121 also established standards for recording an impairment loss for certain assets that are subject to disposal. The statement does not impact or change the accounting for financial instruments, long-term customer relationships of financial institutions, mortgage servicing rights and deferred income tax assets. Crestar adopted this accounting standard in the first quarter of 1996; there was no impact to the Corporation's net income or balance sheet upon implementation of SFAS No. 121. The FASB also issued Statement of Financial Accounting Standards No 123, "Accounting for Stock-Based Compensation" (SFAS 123), in 1995. This Standard establishes financial accounting and reporting standards for stock-based employee compensation plans, including stock option plans. While SFAS 123 defines a fair value based method of accounting for an employee stock option or similar equity instrument, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." Crestar has evaluated SFAS 123 and elected to continue to measure the costs of its stock-based compensation plans under the intrinsic value method of APB 25, and believes that this will be consistent with a majority of public companies. Accordingly, Crestar's compliance with SFAS 123, effective January 1, 1996, had no impact on the reported net income or earnings per share of the Corporation. DEPOSIT INSURANCE RECAPITALIZATION PROPOSAL Legislative efforts to resolve the undercapitalization of the Savings Association Insurance Fund (SAIF) of the Federal Deposit Insurance Corporation (FDIC), and the disparity between deposit insurance premiums for SAIF-insured deposits and deposits insured under the Bank Insurance Fund (BIF), may result in a one-time special assessment on SAIF-insured deposits. Future earnings may be impacted by a legislatively proposed one-time assessment of approximately 80 basis points (0.80%) on SAIF-insured deposits. Any one-time assessment on SAIF-insured deposits would impact each of Crestar's three bank subsidiaries and its savings bank subsidiary. Approximately 45% of Crestar's current deposit base is SAIF-insured. An 80 basis point assessment, on an after-tax basis, would result in a one-time charge to Crestar of approximately $25 million. As a consequence of any one-time assessment, future earnings would be expected to be augmented by a reduction in ongoing SAIF deposit insurance assessment rates. The estimated $25 million charge for Crestar reflects a proposed 20% reduction in the assessments on certain SAIF-insured deposits (known as Oakar deposits) acquired by banks in certain thrift acquisitions. Crestar would accrue such a liability if and when such legislation is enacted into law. TABLE 1 FINANCIAL HIGHLIGHTS Dollars in millions, except per share data Three Months % FOR THE PERIOD ENDED MARCH 31 1996 1995 CHANGE Net Income $ 55.4 $ 49.7 12 Dividends Declared on Common Stock 19.5 16.3 20 Per Common Share: Net Income $ 1.27 $ 1.14 12 Dividends Declared .45 .40 13 Average Shares Outstanding (000s) 43,607 43,641 - ============================================================================== KEY RATIOS Return on Average Assets 1.28% 1.22% Return on Average Equity 15.41 14.81 Average Equity to Average Assets 8.31 8.21 Net Interest Margin 4.63 4.59 AT MARCH 31 Book Value Per Share $ 33.50 $ 31.85 5 Equity to Assets 8.04% 8.20% Risk Adjusted Capital Ratios: Tier I 9.0 9.2 Total 12.2 12.7 Common Shares Outstanding (000s) 42,971 43,586 ============================================================================== TABLE 2 ANALYSIS OF EARNINGS PER COMMON SHARE 1st Qtr. 1996 1st Qtr. 1996 vs. vs. 1st Qtr. 1995 4th Qtr. 1995 Earnings Per Common Share - prior period $1.14 $ .61 - -------------------------------------------------------------------------------- Interest income .30 .05 Interest expense (.17) .04 Provision for loan losses (.15) (.05) Securities gains or losses .07 .01 Other noninterest income .13 (.01) Loyola one-time merger costs - .67 Other noninterest expense (.03) (.02) Income taxes (.02) (.03) - ------------------------------------------------------------------------------- Net increase .13 .66 - ------------------------------------------------------------------------------- Earnings Per Common Share - current period $1.27 $1.27 =============================================================================== TABLE 3 AVERAGE BALANCES, NET INTEREST INCOME AND RATE/VOLUME ANALYSIS(1)
Dollars in thousands 1st Qtr. 4th Qtr. Average Balance Average Increase Balance 1996 1995 (Decrease) 1995 $ $ % $ Commercial 3,000,689 3,024,523 (1) 2,991,304 Real estate - income property 903,330 895,594 1 911,154 Real estate - construction 252,562 269,533 (6) 263,736 Instalment 2,741,657 2,254,019 22 2,619,528 Bank card 1,626,601 1,492,890 9 1,624,399 Real estate - mortgage 3,050,951 3,480,302 (12) 3,382,392 - ----------------------------------------------------------------------------------------------------------- Total loans - net of unearned income(2) 11,575,790 11,416,861 1 11,792,513 - ----------------------------------------------------------------------------------------------------------- Securities held to maturity 83,039 1,214,448 (93) 739,775 Securities available for sale 3,040,679 1,488,270 104 2,169,769 Money market investments 203,278 479,863 (58) 279,302 Mortgage loans held for sale 777,637 224,039 247 491,094 - ----------------------------------------------------------------------------------------------------------- Total earning assets 15,680,423 14,823,481 6 15,472,453 =========================================================================================================== Interest checking deposits 1,931,893 1,955,738 (1) 1,886,810 Money market deposit accounts 3,031,642 2,828,365 7 2,971,862 Regular savings deposits 1,298,559 1,515,826 (14) 1,321,318 Domestic time deposits 4,114,545 3,859,741 7 4,122,028 - ----------------------------------------------------------------------------------------------------------- Total interest-bearing core deposits 10,376,639 10,159,670 2 10,302,018 - ----------------------------------------------------------------------------------------------------------- Purchased liabilities 2,152,087 1,775,402 21 2,061,027 Long-term debt 716,142 705,703 1 671,661 - ----------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 13,244,868 12,640,775 - 13,034,706 Other sources - net 2,435,555 2,182,706 12 2,437,747 - ----------------------------------------------------------------------------------------------------------- Total sources of funds 15,680,423 14,823,481 6 15,472,453 - ----------------------------------------------------------------------------------------------------------- Net Interest Income ===========================================================================================================
1st Qtr. 1996 vs. 1995 Income/Expense(3) Increase Change due to(4) 1996 1995 (Decrease) Rate(5) Volume $ $ $ $ $ Commercial 60,360 62,105 (1,745) (1,261) (484) Real estate - income property 20,266 18,861 1,405 1,244 161 Real estate - construction 6,420 6,971 (551) (113) (438) Instalment 60,857 50,086 10,771 (38) 10,809 Bank card 48,196 43,077 5,119 1,303 3,816 Real estate - mortgage 58,541 66,588 (8,047) 133 (8,180) - --------------------------------------------------------------------------------------------------------- Total loans - net of unearned income(2) 254,640 247,688 6,952 3,529 3,423 - --------------------------------------------------------------------------------------------------------- Securities held to maturity 1,890 19,453 (17,563) 1,427 (18,990) Securities available for sale 49,283 24,298 24,985 611 24,374 Money market investments 2,800 6,922 (4,122) (132) (3,990) Mortgage loans held for sale 14,294 4,375 9,919 (892) 10,811 - --------------------------------------------------------------------------------------------------------- Total earning assets 322,907 302,736 20,171 2,772 17,399 ========================================================================================================= Interest checking deposits 9,519 10,933 (1,414) (1,281) (133) Money market deposit accounts 27,530 26,632 898 (1,016) 1,914 Regular savings deposits 8,464 10,577 (2,113) (597) (1,516) Domestic time deposits 54,841 43,825 11,016 8,150 2,866 - --------------------------------------------------------------------------------------------------------- Total interest-bearing core deposits 100,354 91,967 8,387 6,405 1,982 - --------------------------------------------------------------------------------------------------------- Purchased liabilities 28,326 25,775 2,551 (2,893) 5,444 Long-term debt 12,713 12,495 218 33 185 - --------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 141,393 130,237 11,156 4,897 6,259 Other sources - net - --------------------------------------------------------------------------------------------------------- Total sources of funds 141,393 130,237 11,156 3,584 7,572 - --------------------------------------------------------------------------------------------------------- Net Interest Income 181,514 172,499 9,015 (812) 9,827 =========================================================================================================
4th Qtr. 1st Qtr. 1996 vs. 4th Qtr. 1995 Income/ Expense(3) Increase Change due to(4) 1995 (Decrease) Rate(5) Volume $ $ $ $ Commercial 62,546 (2,186) (2,383) 197 Real estate - income property 19,923 343 513 (170) Real estate - construction 6,671 (251) 30 (281) Instalment 58,730 2,127 (626) 2,753 Bank card 44,383 3,813 3,752 61 Real estate - mortgage 66,836 (8,295) (1,758) (6,537) - ------------------------------------------------------------------------------------------ Total loans - net of unearned income2 259,089 (4,449) 324 (4,773) - ------------------------------------------------------------------------------------------ Securities held to maturity 11,940 (10,050) 550 (10,600) Securities available for sale 35,348 13,935 (253) 14,188 Money market investments 4,227 (1,427) (277) (1,150) Mortgage loans held for sale 9,164 5,130 (228) 5,358 - ------------------------------------------------------------------------------------------ Total earning assets 319,768 3,139 (1,168) 4,307 ========================================================================================== Interest checking deposits 9,910 (391) (628) 237 Money market deposit accounts 28,470 (940) (1,513) 573 Regular savings deposits 8,793 (329) (178) (151) Domestic time deposits 56,041 (1,200) (1,102) (98) - ------------------------------------------------------------------------------------------ Total interest-bearing core deposits 103,214 (2,860) (3,610) 750 - ------------------------------------------------------------------------------------------ Purchased liabilities 29,128 (802) (2,086) 1,284 Long-term debt 12,067 646 (153) 799 - ------------------------------------------------------------------------------------------ Total interest-bearing liabilities 144,409 (3,016) (5,349) 2,333 Other sources - net - ------------------------------------------------------------------------------------------ Total sources of funds 144,409 (3,016) (4,961) 1,945 - ------------------------------------------------------------------------------------------ Net Interest Income 175,359 6,155 3,793 2,362 ==========================================================================================
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 $641,000 and $918,000 for the first quarter of 1996 and 1995, respectively, and $1.2 million for the fourth quarter of 1995. 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. TABLE 4 LOANS TO REAL ESTATE DEVELOPERS AND INVESTORS (REDI) In millions March 31, December 31, 1996 1995 1995 Commercial - developer lines $ 118.1 $ 89.9 $ 105.2 Commercial - other 52.0 66.0 51.5 Real estate - income property 905.1 949.5 910.2 Real estate - construction 176.8 235.1 182.7 - ------------------------------------------------------------------------------- Total REDI loans $1,252.0 $1,340.5 $1,249.6 =============================================================================== TABLE 5 LOANS TO REAL ESTATE DEVELOPERS AND INVESTORS-- GEOGRAPHIC DISTRIBUTION AND PROPERTY TYPE
March 31, 1996 Region In millions Total Greater Corporation Washington Maryland Eastern Western Capital Land acquisition and development $ 87.4 $ 37.3 $ 19.0 $ 24.0 $ 2.8 $ 4.3 Residential developments 327.0 120.5 91.2 62.7 34.1 18.5 Commercial projects: Office buildings 188.8 91.6 46.6 31.3 8.1 11.2 Retail stores and malls 217.0 131.9 37.0 26.1 10.8 11.2 Hotels and motels 118.8 35.9 12.6 40.0 17.3 13.0 Industrial buildings 132.5 70.8 27.7 13.4 5.7 14.9 - ------------------------------------------------------------------------------------------------------------ Total commercial projects 657.1 330.2 123.9 110.8 41.9 50.3 - ------------------------------------------------------------------------------------------------------------ Special use 65.6 24.1 16.2 16.7 7.6 1.0 Other 114.9 71.1 11.0 13.2 2.3 17.3 - ------------------------------------------------------------------------------------------------------------ Total REDI loans $1,252.0 $583.2 $261.3 $227.4 $88.7 $91.4 ============================================================================================================
TABLE 6 ALLOWANCE FOR LOAN LOSSES Dollars in thousands First Quarter 1996 1995 Beginning balance $240,285 $232,922 - ------------------------------------------------------------------------------- Allowance from acquisitions - net (388) 5,631 Provision for loan losses 20,300 10,301 Net charge-offs (recoveries): Commercial (640) 699 Real estate - income property (1,255) 308 Real estate - construction (78) (563) Instalment 4,563 1,674 Bank card 17,980 9,949 Real estate - mortgage 780 289 - ------------------------------------------------------------------------------- Total net charge-offs 21,350 12,356 - ------------------------------------------------------------------------------- Balance, March 31 $238,847 $236,498 =============================================================================== Allowance for loan losses to period-end loans 2.07% 2.01% Annualized net charge-offs to average loans .74 .43 =============================================================================== TABLE 7 NONPERFORMING ASSETS(1) AND PAST DUE LOANS
Dollars in thousands March 31, December 31, Nonaccrual loans: 1996 1995 1995 Commercial $21,774 $ 27,037 $21,731 Real estate - income property 22,855 26,879 23,913 Real estate - construction 6,267 7,710 4,712 Instalment 2,775 4,855 5,425 Real estate - mortgage 14,682 12,820 19,925 - -------------------------------------------------------------------------------------------------------------- Total nonaccrual loans 68,353 79,301 75,706 Restructured loans - 1,458 - - -------------------------------------------------------------------------------------------------------------- Total nonperforming loans(1) 68,353 80,759 75,706 Foreclosed properties - net 19,175 32,449 17,655 - -------------------------------------------------------------------------------------------------------------- Total nonperforming assets(1) $87,528 $113,208 $93,361 ============================================================================================================== Nonperforming assets(1) to: Loans and foreclosed properties - net .76% .96% .79% Total assets .49 .67 .51 Allowance for loan losses to: Nonperforming assets(1) 273 209 257 Nonperforming loans(1) 349 293 317 Allowance for loan losses plus shareholders' equity to nonperforming assets(1) 19.18x 14.35x 18.12x ============================================================================================================== Accruing loans past due 90 days: Commercial $ 3,220 $ 1,514 $ 5,992 Real estate - income property 59 1,110 19 Real estate - construction 16 989 926 Instalment Student 19,379 10,879 9,101 Other 7,318 1,846 3,448 Bank card 21,364 11,685 20,430 Real estate - mortgage 13,974 9,349 10,304 - -------------------------------------------------------------------------------------------------------------- Total accruing loans past due 90 days $65,330 $ 37,372 $50,220 ==============================================================================================================
1\ Loans which are both past due 90 days or more and not deemed nonaccrual due to an assessment of collectibility are specifically excluded form the definition of nonperforming. TABLE 8 SUMMARY OF NONINTEREST INCOME AND EXPENSE In thousands First Quarter Fourth Quarter NONINTEREST INCOME 1996 1995 1995 Service charges on deposit accounts $ 21,610 $ 21,908 $ 22,143 Trust and investment advisory 15,562 13,124 15,877 Bank card-related 11,014 11,097 12,387 Mortgage servicing - net 4,459 4,236 4,132 Mortgage origination - net 5,654 721 4,368 Trading account activities 52 624 833 Commissions on letters of credit 1,470 1,367 1,019 Gain on sale of mortgage servicing rights 4,000 5,900 5,100 Miscellaneous 13,859 9,978 7,026 Securities gains (losses) 2,355 (2,410) 1,316 - ------------------------------------------------------------------------------ Total noninterest income $ 80,035 $ 66,545 $ 74,201 ============================================================================== NONINTEREST EXPENSE Salaries $ 66,376 $ 66,192 $ 73,939 Benefits 17,855 16,475 18,700 - ------------------------------------------------------------------------------ Total personnel 84,231 82,667 92,639 Occupancy - net 12,754 12,201 12,805 Equipment 7,698 7,901 7,879 Communications 8,152 7,685 7,904 Stationery, printing and supplies 2,286 2,462 3,489 Professional fees and services 4,224 3,962 8,246 Loan expense 2,268 1,900 2,457 FDIC premiums - net 3,378 7,207 4,066 Advertising and marketing 5,190 4,938 2,703 Transportation 1,569 1,674 1,665 Outside data services 5,724 5,967 7,544 Amortization of purchased intangibles 4,047 2,974 3,756 Miscellaneous 12,029 9,833 17,565 - ------------------------------------------------------------------------------- Subtotal 153,550 151,371 172,718 Foreclosed properties (net recoveries) (1,345) (1,461) (3,851) - ------------------------------------------------------------------------------- Total noninterest expense $152,205 $149,910 $168,867 =============================================================================== TABLE 9 DEBT RATINGS (AS OF APRIL 30, 1996) Standard Thomson Security Moody's & Poor's BankWatch 8 3/4% Subordinated Notes due 2004 Baa1 BBB+ A- 8 1/4% Subordinated Notes due 2002 Baa1 BBB+ A- 8 5/8% Subordinated Notes due 1998 Baa1 BBB+ A- 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 ================================================================================ TABLE 10 INTEREST SENSITIVITY ANALYSIS
March 31, 1996 In millions Maturity/Rate Sensitivity 0-3 3-6 6-12 one to over USES OF FUNDS months months months five years five years Total Loans: Commercial $ 2,140.6 $ 51.1 $ 76.5 $ 88.0 $ 728.4 $ 3,084.6 Real estate - income property 493.5 .4 .6 1.1 407.5 903.1 Real estate - construction 228.8 .5 1.5 3.5 19.7 254.0 Instalment 1,170.2 139.0 243.5 313.6 878.4 2,744.7 Bank card 570.1 132.3 204.3 430.2 250.2 1,587.1 Real estate - mortgage 156.6 348.6 481.2 668.9 1,295.2 2,950.5 Securities held to maturity 3.0 2.4 3.0 4.6 68.3 81.3 Securities available for sale 565.8 59.6 90.3 156.7 2,587.1 3,459.5 Money market investments 350.8 4.9 - - - 355.7 Mortgage loans held for sale 758.8 - - - - 758.8 - ------------------------------------------------------------------------------------------------------------- Total earning assets 6,438.2 738.8 1,100.9 1,666.6 6,234.8 16,179.3 Interest sensitivity hedges on assets (450.0) (850.0) - - 1,300.0 - - ------------------------------------------------------------------------------------------------------------- Total uses $ 5,988.2 $ (111.2) $ 1,100.9 $ 1,666.6 $7,534.8 $16,179.3 ============================================================================================================= SOURCES OF FUNDS Interest checking deposits $ 1,933.8 $ - $ - $ - $ - $ 1,933.8 Money market deposit accounts 3,045.5 - - - - 3,045.5 Regular savings deposits 1,307.5 - - - - 1,307.5 Domestic time deposits 369.5 496.3 753.1 1,117.3 1,328.8 4,065.0 Certificates of deposit $100,000 and over 41.5 36.5 29.1 30.8 4.9 142.8 Short-term borrowings 2,187.0 - - - - 2,187.0 Long-term debt 6.3 8.2 19.5 36.1 633.9 704.0 - ------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 8,891.1 541.0 801.7 1,184.2 1,967.6 13,385.6 Other sources - net - - - - 2,793.7 2,793.7 Interest sensitivity hedges on liabilities - (40.0) - - 40.0 - - ------------------------------------------------------------------------------------------------------------- Total sources $ 8,891.1 $ 501.0 $ 801.7 $ 1,184.2 $4,801.3 $16,179.3 ============================================================================================================= Cumulative maturity/rate sensitivity gap $(2,902.9) $(3,515.1) $(3,215.9) $(2,733.5) $ - $ - ============================================================================================================= ADJUSTMENTS Beta adjustments: Interest checking (beta factor .23) $ 1,489.0 Money market accounts (beta factor .50) 1,522.8 Regular savings (beta factor .13) 1,139.0 Demand deposit sensitivity (1,043.6) - ------------------------------------------------------------------------------------------------------------- Cumulative adjusted maturity/rate sensitivity gap $ 204.3 $ (407.9) $ (108.7) $ 373.7 $ - $ - =============================================================================================================
TABLE 11 OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS(1)
March 31, 1996 Average Weighted Fixed Estimated Dollars in thousands Notional Average Receive Fair Balance Maturity-bate Value Comments INTEREST RATE CONVERSIONS Generic interest rate swaps $1,300,000 3.3 yrs. 5.83% Notional amounts of Carrying amount(2) $ 514 $850 million, $250 Commercial loan program million and $200 million Unrealized gross gains 43 convert floating rate Unrealized gross losses (9,345) commercial, instalment Instalment loan program and real estate mortgage Unrealized gross losses (2,007) loans, respectively, to Real estate mortgage loan fixed rate. Floating rates program paid tied to LIBOR. Unrealized gross losses (1,018) Estimated fair value (11,813) Interest rate caps 1,040,000 3.9 yrs. 7.44%(3) Notional balance of $1 Carrying amount(2) 11,845 billion hedges the market Securities available for sale value of fixed rate program(4) securities available for sale Unrealized gross gains 467 (strike rate tied to yield on Unrealized gross losses (580) 5 year constant maturity Money market deposit program U.S. Treasury security). Unrealized gross gains 203 Notional balance of $40 Estimated fair value 11,935 million hedging interest rate risk associated with rising interest rates on floating rate money market deposits (strike rate tied to LIBOR). HEDGES OF LENDING COMMITMENTS Forward contracts 979,010 .1 yrs. n/a Hedges of residential Unrealized gross gains 16,283 mortgage lending Estimated fair value 16,283 commitments. - ------------------------------------------------------------------------------------------------------------------- Total hedges against interest rate risk $3,319,010 $16,405 ===================================================================================================================
1\ Includes only off-balance sheet derivative financial instruments related to interest rate risk management activities. 2\ Includes any accrued interest receivable and or payable balances, and unamortized premiums paid for interest rate caps. 3\ Represents average strike rate. For interest rate caps purchased, Crestar will receive interest if a specified market index 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. 4\ The fair value of derivative interest rate caps hedging securities classified as available for sale is included in the total fair value of the securities available for sale portfolio. The unamortized premiums paid for such interest rate caps are included in the amortized cost basis of securities available for sale, with any unrealized gain or loss (net of tax) pertaining to these interest rate caps included in shareholders' equity as "Net unrealized gain (loss) on securities available for sale." n/a - Not applicable LIBOR - London Interbank Offered Rates TABLE 12 OFF-BALANCE SHEET DERIVATIVES--EXPECTED MATURITIES(1)
March 31, 1996 Dollars in thousands Within One to Three to One Year Three Years Five Years Total INTEREST RATE CONVERSIONS Generic interest rate swaps: Notional amount $ - $600,000 $ 700,000 $1,300,000 Average fixed receive rate - 5.69% 5.94% 5.83% Estimated fair value $ - $ (4,256) $ (7,557) $ (11,813) Interest rate caps Notional amount $ 5,000 $ 35,000 $1,000,000 $1,040,000 Average strike rate 5.50% 5.93% 7.50% 7.44% Estimated fair value $ 7 $ 198 $ 11,730 $ 11,935 HEDGES OF LENDING COMMITMENTS Forward contracts:(2) Notional amount $979,010 $ - $ - $ 979,010 Estimated fair value 16,283 - - 16,283 Total hedges against interest rate risk: Notional amount $984,010 $635,000 $1,700,000 $3,319,010 Estimated fair value 16,290 (4,058) 4,173 16,405 =============================================================================================================
1\ Includes only off-balance sheet derivative financial instruments related to interest rate risk management activities. 2\ Hedges of residential mortgage lending commitments. TABLE 13 OFF-BALANCE SHEET DERIVATIVES ACTIVITY(1)
In thousands Liability Rate Asset Rate Conversions Conversions Hedges of Interest Interest Interest Lending Rate Rate Rate Commit- Swaps Caps Caps ments(2) Total Balance, January 1, 1996 $1,200,000 $ - $40,000 $ 547,790 $1,787,790 Additions 200,000 1,000,000 - 997,232 2,197,232 Maturities (100,000) - - (566,012) (666,012) - ------------------------------------------------------------------------------------------------------------ Balance, March 31, 1996 $1,300,000 $1,000,000 $40,000 $ 979,010 $3,319,010 ============================================================================================================
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. TABLE 14 SELECTED QUARTERLY FINANCIAL INFORMATION
Dollars in thousands, except per share data 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. Results of operations: 1996 1995 1995 1995 1995 Net interest income(1) $181,514 $175,359 $172,475 $173,744 $172,499 Provision for loan losses 20,300 21,302 14,231 13,736 10,301 - ------------------------------------------------------------------------------------------------------------- Net credit income 161,214 154,057 158,244 160,008 162,198 Securities gains (losses) 2,355 1,316 (69) (1,050) (2,410) Other noninterest income 77,680 72,885 75,044 73,871 68,955 - ------------------------------------------------------------------------------------------------------------- Net credit and noninterest income 241,249 228,258 233,219 232,829 228,743 Noninterest expense 152,205 168,867 148,570 152,087 149,910 - ------------------------------------------------------------------------------------------------------------- Income before taxes 89,044 59,391 84,649 80,742 78,833 - ------------------------------------------------------------------------------------------------------------- Tax-equivalent adjustment 2,501 2,568 3,198 2,719 2,776 Book tax expense 31,121 30,526 29,375 26,258 26,398 - ------------------------------------------------------------------------------------------------------------- Income tax expense 33,622 33,094 32,573 28,977 29,174 - ------------------------------------------------------------------------------------------------------------- Net Income $ 55,422 $ 26,297 $ 52,076 $ 51,765 $ 49,659 ============================================================================================================= Per common share: Net income $ 1.27 $ .61 $ 1.19 $ 1.18 $ 1.14 Dividends declared .45 .45 .45 .45 .40 Average shares outstanding (000s) 43,607 43,634 43,686 43,782 43,641 ============================================================================================================= Selected ratios and other data: Return on average assets 1.28% .62% 1.25% 1.25% 1.22% Return on average equity 15.41 7.28 14.74 14.98 14.81 Net interest margin1 4.63 4.55 4.57 4.61 4.59 Net charge-offs as % of average loans .74 .64 .58 .42 .43 Allowance as % of period-end loans 2.07 2.04 2.00 2.01 2.01 Overhead ratio 58.19 67.67 60.04 61.68 62.71 Average equity to assets 8.31 8.46 8.51 8.36 8.21 Equity leverage 12.04x 11.82x 11.75x 11.96x 12.17x Full-time equivalent employees (period end) 6,705 6,712 7,018 7,172 7,385 =============================================================================================================
1\ Tax-equivalent basis. Table 15 Consolidated Average Balances/Net Interest Income/Rates(1)
Three Months Ended March 31, Three Months Ended December 31, 1996 1995 1995 Dollars in thousands Income/ Yield/ Income/ Yield/ Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate Assets $ $ % $ $ % $ $ % Securities held to maturity(2) 83,039 1,890 9.11 1,214,448 19,453 6.72 739,775 11,940 6.46 Securities available for sale(2) 3,040,679 49,283 6.48 1,488,270 24,298 6.31 2,169,769 35,348 6.51 Money market investments(2) 203,278 2,800 5.54 479,863 6,922 5.85 279,302 4,227 6.00 Mortgage loans held for sale(2) 777,637 14,294 7.37 224,039 4,375 7.81 491,094 9,164 7.48 - ------------------------------------------------------------------------------------------------------------------------------------ Commercial 3,000,689 60,360 8.09 3,024,523 62,105 8.27 2,991,304 62,546 8.32 Real estate - income property 903,330 20,266 9.00 895,594 18,861 8.48 911,154 19,923 8.64 Real estate - construction 252,562 6,420 10.21 269,533 6,971 10.46 263,736 6,671 10.00 Instalment 2,741,657 60,857 8.92 2,254,019 50,086 8.89 2,619,528 58,730 9.00 Bank card 1,626,601 48,196 11.94 1,492,890 43,077 11.45 1,624,399 44,383 10.99 Real estate - mortgage 3,050,951 58,541 7.67 3,480,302 66,588 7.63 3,382,392 66,836 7.89 - ------------------------------------------------------------------------------------------------------------------------------------ Total loans(2),(3) 11,575,790 254,640 8.83 11,416,861 247,688 8.68 11,792,513 259,089 8.78 Allowance for loan losses (240,615) (236,693) (236,412) - ------------------------------------------------------------------------------------------------------------------------------------ Loans - net 11,335,175 11,180,168 11,556,101 Cash and due from banks 811,209 754,073 800,770 Premises and equipment - net 355,684 349,986 358,426 Customers' liability on acceptances 14,264 9,165 7,085 Intangible assets - net 184,172 135,177 175,393 Foreclosed properties - net 17,592 33,014 18,796 Other assets 489,561 456,806 487,158 - ------------------------------------------------------------------------------------------------------------------------------------ Total Assets 17,312,290 16,325,009 17,083,669 Total Earning Assets 15,680,423 322,907 8.26 14,823,481 302,736 8.18 15,472,453 319,768 8.26 Liabilities and Shareholders' Equity Interest checking deposits 1,931,893 9,519 1.98 1,955,738 10,933 2.27 1,886,810 9,910 2.08 Money market deposit accounts 3,031,642 27,530 3.65 2,828,365 26,632 3.82 2,971,862 28,470 3.80 Regular savings deposits 1,298,559 8,464 2.62 1,515,826 10,577 2.83 1,321,318 8,793 2.64 Domestic time deposits 4,114,545 54,841 5.37 3,859,741 43,825 4.65 4,122,028 56,041 5.39 Certificates of deposit $100,000 and over 109,364 1,449 5.33 68,550 857 5.08 84,504 1,180 5.55 - ------------------------------------------------------------------------------------------------------------------------------------ Total savings and time deposits2 10,486,003 101,803 3.90 10,228,220 92,824 3.70 10,386,522 104,394 3.99 Demand deposits 2,355,997 2,123,067 2,330,684 - ------------------------------------------------------------------------------------------------------------------------------------ Total deposits 12,842,000 12,351,287 12,717,206 Short-term borrowings2 2,042,723 26,877 5.28 1,706,852 24,918 5.90 1,976,523 27,948 5.60 Long-term debt2 716,142 12,713 7.10 705,703 12,495 7.08 671,661 12,067 7.19 Liability on acceptances 14,264 9,165 7,085 Other liabilities 258,982 210,661 265,696 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 15,874,111 14,983,668 15,638,171 - ------------------------------------------------------------------------------------------------------------------------------------ Total shareholders' equity 1,438,179 1,341,341 1,445,498 - ------------------------------------------------------------------------------------------------------------------------------------ Total Liabilities and Shareholders' Equity 17,312,290 16,325,009 17,083,669 Total interest-bearing liabilities 13,244,868 141,393 4.30 12,640,775 130,237 4.19 13,034,706 144,409 4.41 Other sources - net 2,435,555 2,182,706 2,437,747 - ------------------------------------------------------------------------------------------------------------------------------------ Total Sources of Funds 15,680,423 141,393 3.63 14,823,481 130,237 3.59 15,472,453 144,409 3.71 Net Interest Spread 3.96 3.99 3.85 Net Interest Income/Margin 181,514 4.63 172,499 4.59 175,359 4.55 ====================================================================================================================================
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. 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, 1996 /s/ JAMES D. BARR James D. Barr Executive Vice President, Controller and Treasurer EX-27 2 FDS --
9 1,000 3-MOS 3-MOS DEC-31-1996 DEC-31-1995 MAR-31-1996 MAR-31-1995 703,078 715,953 10,494,669 10,449,295 215,188 669,985 3,771 8,250 3,459,546 1,449,716 81,328 1,161,245 83,375 1,123,767 11,523,953 11,764,392 238,847 236,498 17,917,006 16,921,198 12,942,754 12,585,700 2,186,975 1,976,696 643,616 254,601 704,045 715,829 0 0 0 0 214,856 217,932 1,224,760 1,170,440 17,917,006 16,921,198 252,945 245,444 50,380 43,222 17,081 11,294 320,406 299,960 101,803 92,824 141,393 130,237 179,013 169,723 20,300 10,301 2,355 (2,410) 152,205 149,910 86,543 76,057 55,422 49,659 0 0 0 0 55,422 49,659 1.27 1.14 1.27 1.14 4.63 4.59 68,353 80,759 65,330 37,372 0 1,458 182,000 226,000 240,285 232,922 27,720 19,660 6,370 7,304 238,847 236,498 0 0 0 0 0 0
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