-----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, MZpBZS0l6SB9/EmvRmxF58b6U1AzlmPaPlbMjUNaQf3ypZQi+76WxoZU34UXNPq0 aXeRHR9nHOG2z8istLTPCA== 0000916641-97-000526.txt : 19970520 0000916641-97-000526.hdr.sgml : 19970520 ACCESSION NUMBER: 0000916641-97-000526 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CRESTAR FINANCIAL CORP CENTRAL INDEX KEY: 0000101880 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] 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: 97609224 BUSINESS ADDRESS: STREET 1: 919 E MAIN ST STREET 2: PO BOX 26665 CITY: RICHMOND STATE: VA ZIP: 23261 BUSINESS PHONE: 8047825000 MAIL ADDRESS: STREET 1: 919 EAST MAIN STREET STREET 2: P O BOX 26665 CITY: RICHMOND STATE: VA ZIP: 23261-6665 FORMER COMPANY: FORMER CONFORMED NAME: UNITED VIRGINIA BANKSHARES INC DATE OF NAME CHANGE: 19871115 10-Q 1 CRESTAR FINANCIAL CORP. 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, 1997 ( ) 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, 1997 Common Stock, $5 par value 110,330,098 1 Crestar Financial Corporation And Subsidiaries Form 10-Q For The Quarter Ended March 31, 1997 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 1997, Crestar filed a Form 8-K dated January 14, 1997, amended by Form 8-K/A dated March 14, 1997, relating to the consummation on December 31, 1996 of the pooling of interests business combination with Citizens Bancorp. The filing included financial statements and applicable pro forma financial information pertaining to the business combination. 2 Consolidated Balance Sheets Crestar Financial Corporation And Subsidiaries
Dollars in thousands, except share data March 31, December 31, Assets 1997 1996 1996 Cash and due from banks $ 938,417 $ 903,783 $ 1,105,036 Securities held to maturity (note 2) 818,199 1,046,027 967,510 Securities available for sale (note 3) 3,918,514 4,000,411 4,318,349 Money market investments (note 4) 578,664 366,738 745,672 Mortgage loans held for sale 543,177 758,848 658,838 Loans (note 5): Business Loans: Commercial 4,021,873 3,717,594 4,002,574 Real estate - income property 1,267,867 1,250,535 1,242,097 Real estate - construction 328,856 392,732 314,016 Consumer Loans: Instalment 4,092,264 3,684,277 4,060,174 Bank card 1,259,193 1,598,375 1,422,934 Real estate - mortgage 3,244,002 3,127,768 3,007,910 - -------------------------------------------------------------------------------------------------------------------- Total Loans 14,214,055 13,771,281 14,049,705 Less: Allowance for loan losses (note 6) (268,870) (273,957) (268,868) - -------------------------------------------------------------------------------------------------------------------- Loans - net 13,945,185 13,497,324 13,780,837 - -------------------------------------------------------------------------------------------------------------------- Premises and equipment - net 440,667 410,778 435,316 Customers' liability on acceptances 3,889 20,963 3,186 Intangible assets - net 176,366 182,736 180,420 Foreclosed properties - net (notes 5 and 7) 25,140 39,761 27,515 Other assets 594,514 737,606 639,262 - -------------------------------------------------------------------------------------------------------------------- Total Assets $21,982,732 $21,964,975 $22,861,941 ==================================================================================================================== Liabilities Demand deposits $ 3,256,506 $ 3,105,290 $ 3,352,921 Interest-bearing demand deposits 5,924,437 5,899,733 5,913,373 Regular savings deposits 1,597,757 1,736,130 1,620,925 Domestic time deposits 4,354,406 5,187,643 4,643,409 Certificates of deposit $100,000 and over 682,318 142,792 140,582 - -------------------------------------------------------------------------------------------------------------------- Total deposits 15,815,424 16,071,588 15,671,210 Short-term borrowings (note 8) 3,002,574 2,752,676 4,116,051 Liability on acceptances 3,889 20,963 3,186 Other liabilities 492,902 635,744 432,648 Long-term debt (note 9) 850,596 704,045 859,336 - -------------------------------------------------------------------------------------------------------------------- Total Liabilities 20,165,385 20,185,016 21,082,431 - -------------------------------------------------------------------------------------------------------------------- Shareholders' Equity Preferred stock. Authorized 2,000,000 shares; none issued - - - Common stock, $5 par value. Authorized 200,000,000 shares at March 31, 1997 and December 31, 1996; 100,000,000 at March 31, 1996;outstanding 110,299,785 and 55,575,728 at March 31, 1997 and 1996, respectively; 109,869,886 at December 31, 1996 551,499 277,879 549,350 Capital surplus 252,892 480,221 227,079 Retained earnings 1,070,523 1,044,085 1,024,365 Net unrealized loss on securities available for sale (57,567) (22,226) (21,284) - -------------------------------------------------------------------------------------------------------------------- Total Shareholders' Equity 1,817,347 1,779,959 1,779,510 - -------------------------------------------------------------------------------------------------------------------- Total Liabilities And Shareholders' Equity $21,982,732 $21,964,975 $22,861,941 ====================================================================================================================
See accompanying notes to consolidated financial statements. 3 Consolidated Statements Of Income Crestar Financial Corporation And Subsidiaries
In thousands, except per share data Three Months Ended March 31, Income From Earning Assets 1997 1996 Interest and fees on loans $295,546 $296,616 Interest on taxable securities held to maturity 12,035 14,188 Interest on tax-exempt securities held to maturity 1,057 1,383 Interest and dividends on securities available for sale 63,849 56,505 Income on money market investments 4,664 2,840 Interest on mortgage loans held for sale 11,640 14,294 - -------------------------------------------------------------------------------------------------------------------- Total income from earning assets 388,791 385,826 - -------------------------------------------------------------------------------------------------------------------- Interest Expense Interest-bearing demand deposits 41,814 43,725 Regular savings deposits 9,964 11,402 Domestic time deposits 55,063 70,411 Certificates of deposit $100,000 and over 6,878 1,449 - -------------------------------------------------------------------------------------------------------------------- Total interest on deposits 113,719 126,987 Short-term borrowings 39,797 34,455 Long-term debt (note 9) 15,615 12,731 - -------------------------------------------------------------------------------------------------------------------- Total interest expense 169,131 174,173 - -------------------------------------------------------------------------------------------------------------------- Net Interest Income 219,660 211,653 Provision for loan losses (note 6) 29,698 22,230 - -------------------------------------------------------------------------------------------------------------------- Net Credit Income 189,962 189,423 - -------------------------------------------------------------------------------------------------------------------- Noninterest Income Service charges on deposit accounts 30,163 26,635 Trust and investment advisory income 17,453 15,892 Bank card-related income 12,648 11,825 Other income 39,139 30,826 Securities gains 4,064 2,373 - -------------------------------------------------------------------------------------------------------------------- Total noninterest income 103,467 87,551 - -------------------------------------------------------------------------------------------------------------------- Net Credit And Noninterest Income 293,429 276,974 - -------------------------------------------------------------------------------------------------------------------- Noninterest Expense Personnel expense 99,342 95,775 Occupancy expense - net 16,158 16,124 Equipment expense 9,819 9,482 Other expense 54,686 53,737 - -------------------------------------------------------------------------------------------------------------------- Total noninterest expense 180,005 175,118 - -------------------------------------------------------------------------------------------------------------------- Income Before Income Taxes 113,424 101,856 Income tax expense (note 10) 41,644 36,745 - -------------------------------------------------------------------------------------------------------------------- Net Income $ 71,780 $ 65,111 ==================================================================================================================== Earnings Per Share Primary $ .64 $ .58 Fully diluted .64 .58 ====================================================================================================================
See accompanying notes to consolidated financial statements. 4 Consolidated Statements Of Cash Flows Crestar Financial Corporation And Subsidiaries
In thousands Three Months Ended March 31, 1997 1996 Operating Net Income $ 71,780 $ 65,111 Activities Adjustments to reconcile net income to net cash provided (used) by operating activities: Provisions for loan losses, foreclosed properties and other losses 29,698 20,392 Depreciation and amortization of premises and equipment 10,896 11,470 Securities gains (4,064) (2,373) Amortization of intangible assets 4,227 4,171 Deferred income tax expense (benefit) (1,408) 2,160 Gain on sales of mortgage servicing rights (6,450) (4,000) Loss (gain) on sale and disposal of branches and other properties (5,807) 354 Net increase in trading account 6,282 3,368 Origination and purchase of loans held for sale (784,068) (922,033) Proceeds from sales of loans held for sale 899,729 840,121 Net decrease (increase) in accrued interest receivable, prepaid expenses and other assets 56,081 (34,179) Net increase (decrease) in accrued interest payable, accrued expenses and other liabilities 22,624 (404,956) Other, net (169) 2,042 - -------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities 299,351 (418,352) - -------------------------------------------------------------------------------------------------------------------- Investing Proceeds from maturities and calls of securities held Activities to maturity 154,961 74,266 Proceeds from maturities and calls of securities available for sale 106,655 204,914 Proceeds from sales of securities available for sale 1,496,848 1,513,238 Purchases of securities held to maturity (3,679) (15,845) Purchases of securities available for sale (1,149,597) (1,769,062) Net decrease in money market investments 160,726 146,162 Principal collected on non-bank subsidiary loans 50,193 5,409 Loans originated by non-bank subsidiaries (51,362) (41,037) Net decrease (increase) in other loans (220,587) 274,459 Purchases of premises and equipment (17,051) (13,363) Proceeds from sales of foreclosed properties 4,872 4,123 Proceeds from sales of mortgage servicing rights 12,659 8,447 Proceeds from sales of premises and equipment 6,625 2,827 Other, net (3,467) (10,807) - -------------------------------------------------------------------------------------------------------------------- Net cash provided by investing activities 547,796 383,731 - -------------------------------------------------------------------------------------------------------------------- Financing Net decrease in demand, interest-bearing demand and Activities regular savings deposits (108,519) (175,430) Net increase (decrease) in certificates of deposit 252,733 (45,890) Net increase in short-term borrowings (1,113,477) (65,245) Principal payments on long-term debt (8,764) (20,562) Cash dividends paid (29,665) (23,883) Common stock purchased and retired (29,739) (29,101) Proceeds from the issuance of common stock 23,829 13,293 Other, net (164) (23) - -------------------------------------------------------------------------------------------------------------------- Net cash used by financing activities (1,013,766) (346,841) - -------------------------------------------------------------------------------------------------------------------- Cash And Decrease in cash and cash equivalents (166,619) (381,462) Cash Cash and cash equivalents at beginning of year 1,105,036 1,285,245 - -------------------------------------------------------------------------------------------------------------------- Equivalents Cash and cash equivalents at end of quarter $ 938,417 $ 903,783 ====================================================================================================================
Cash and cash equivalents consist of cash and due from banks; see accompanying notes to consolidated financial statements. 5 Consolidated Statements Of Changes In Shareholders' Equity Crestar Financial Corporation And Subsidiaries
In thousands, except per share data Shareholders' Equity Shares of Common Stock 1997 1996 1997 1996 Balance, January 1 $1,779,510 $1,785,588 109,869,886 55,382,341 Net Income 71,780 65,111 - - Cash dividends declared on common stock - (23,883) - - Change in net unrealized gain or loss on securities available for sale (36,282) (35,454) - - Common stock purchased and retired (29,739) (29,101) (823,566) (510,000) Cash paid in lieu of fractional shares (164) (86) (4,736) (1,484) Common stock issued: For dividend reinvestment plan 5,958 4,811 169,730 92,500 For thrift and profit sharing plan 6,557 6,505 181,919 116,767 For other stock compensation plans 1,846 118 53,679 2,128 Upon exercise of stock options (including tax benefit of $6,567 in 1997; $4,373 in 1996) 17,881 6,350 852,873 493,476 - -------------------------------------------------------------------------------------------------------------------- Balance, March 31 $1,817,347 $1,779,959 110,299,785 55,575,728 ====================================================================================================================
See accompanying notes to consolidated financial statements. 6 Notes To Consolidated Financial Statements Crestar Financial Corporation And Subsidiaries (1) General The consolidated financial statements conform to generally accepted accounting principles and to general practices within the banking industry. The accompanying interim statements are unaudited; however, in the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial statements, including adjustments related to completed 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 1997 presentation. The notes included herein should be read in conjunction with the notes to the consolidated financial statements included in the Corporation's 1996 Annual Report and Form 10-K. On December 31, 1996 Crestar Financial Corporation (Crestar) merged with Citizens Bancorp (Citizens), a Maryland 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 1996, have been restated to include the combined results of Crestar and Citizens. During the fourth quarter of 1996, Crestar recorded a $50.0 million (pre-tax) charge in connection with the December 31, 1996 merger with Citizens. The charge consisted of $11.3 million in severance and other personnel costs, $18.2 million for facilities consolidations and branch closures, professional fees of approximately $5.4 million, and $15.1 million related to cancellation of contractual obligations and other merger-related expenses. An additional $2.0 million in merger-related charges was accrued during the first quarter of 1997. Total cash payments of merger-related charges have totaled $23.0 million through March 31, 1997. The balance of accrued merger-related charges totaled $29.0 million as of March 31, 1997, the majority of which is expected to be disbursed within the remaining nine months of 1997. Intangible assets consisted of goodwill and deposit based intangibles, having a combined balance of $175,953,000 and $182,267,000 at March 31, 1997 and 1996, respectively, and favorable lease rights of $413,000 and $469,000, respectively. Capitalized mortgage servicing rights of $44,191,000 and $30,574,000 at March 31, 1997 and 1996, respectively, were included in other assets in the consolidated financial statements. Mortgage servicing rights of approximately $3 million were capitalized during the first three months of 1997. At March 31, 1997 and 1996 mortgage servicing rights were net of a related valuation allowance of $305,000. The activity in such valuation allowance was not material to the consolidated financial statements for the three months ended March 31, 1997 and 1996. The fair value of capitalized mortgage servicing rights was approximately $77 million at March 31, 1997. Amortization of capitalized mortgage servicing rights was $2 million in the first three months of 1997. During the first quarter of 1997, Crestar capitalized interest of $486,000 associated with construction in progress. 7 (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 1997 1996 Amortized Market Amortized Market Cost Value Cost Value U.S. Treasury and Federal agencies $208,155 $204,943 $ 210,308 $ 207,686 Mortgage-backed obligations of Federal agencies 546,421 542,480 737,561 733,511 Other taxable securities 13,075 13,052 13,309 13,357 States and political subdivisions 50,548 50,809 84,849 85,865 - -------------------------------------------------------------------------------------------------------------------- Total securities held to maturity $818,199 $811,284 $1,046,027 $1,040,419 ====================================================================================================================
(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 1997 1996 Amortized Market Amortized Market Cost Value Cost Value U.S. Treasury and Federal agencies $ 616,634 $ 604,989 $ 597,664 $ 592,453 Mortgage-backed obligations of Federal agencies 2,587,259 2,515,503 2,638,408 2,612,122 Other taxable securities 579,728 573,725 626,581 623,547 Common and preferred stocks 223,857 224,297 172,164 172,289 - -------------------------------------------------------------------------------------------------------------------- Total securities available for sale $4,007,478 $3,918,514 $4,034,817 $4,000,411 ====================================================================================================================
At March 31, 1997, 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 probable market value decline in a rising interest rate environment. The interest rate caps, which have a notional balance of $1.55 billion, have a cost basis of $15.7 million and a market value of $15.1 million at March 31, 1997. 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 1997 1996 Federal funds sold $301,590 $108,800 Securities purchased under agreements to resell 150,500 117,388 Time deposits 100,000 125,000 U.S. Treasury 6,034 10,562 Trading account securities 1,281 3,771 Other 19,259 1,217 - -------------------------------------------------------------------------------------------------------------------- Total money market investments $578,664 $366,738 ====================================================================================================================
8 (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 $76.0 million and $67.0 million at March 31, 1997 and 1996, respectively.
- -------------------------------------------------------------------------------------------------------------------- In thousands 1997 1996 Nonaccrual loans $ 75,635 $ 82,445 Foreclosed properties - net 25,140 39,761 - -------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $100,775 $122,206 ====================================================================================================================
Transfers from nonperforming loans to foreclosed properties (non-cash additions) were $3.6 million in the first three months of 1996. There were no non-cash additions to foreclosed properties in the first three months of 1997. Included in Crestar's non-performing loans above are certain impaired loans. Impaired loans and their allocated valuation allowances at March 31, 1997 and 1996 were $24.8 million with an allowance of $4.6 million and $31.6 million with an allowance of $5.1 million, respectively. All impaired loans had an allocated valuation allowance at March 31, 1997 and 1996. Collateral dependent loans, which were measured at the fair value of the collateral, constituted 100% of impaired loans at March 31, 1997. The average recorded investment in impaired loans for the three months ended March 31, 1997 and 1996 was $27.3 million and $31.7 million, respectively. There was no material interest income recognized on impaired loans in the first three months of 1997 and 1996. (6) Allowance For Loan Losses Transactions in the allowance for loan losses for the three months ended March 31 were:
- -------------------------------------------------------------------------------------------------------------------- In thousands Three Months 1997 1996 Beginning balance $268,868 $274,430 - -------------------------------------------------------------------------------------------------------------------- Charge-offs (37,075) (29,259) Recoveries 7,379 6,944 - -------------------------------------------------------------------------------------------------------------------- Net charge-offs (29,696) (22,315) Provision for loan losses 29,698 22,230 Allowance from acquisitions and other activity - net - (388) - -------------------------------------------------------------------------------------------------------------------- Net increase (decrease) 2 (473) - -------------------------------------------------------------------------------------------------------------------- Ending balance $268,870 $273,957 ====================================================================================================================
(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 1997 1996 Beginning balance $18,449 $13,574 - -------------------------------------------------------------------------------------------------------------------- Provision for foreclosed properties - 62 Write-downs (373) (62) Allowance from acquisitions - net - (471) - -------------------------------------------------------------------------------------------------------------------- Net decrease (373) (471) - -------------------------------------------------------------------------------------------------------------------- Ending balance $18,076 $13,103 ==================================================================================================================== 9 (8) Short-Term Borrowings Short-term borrowings, exclusive of deposits, with maturities of less than one year at March 31 were: - -------------------------------------------------------------------------------------------------------------------- In thousands 1997 1996 Federal funds purchased $1,564,130 $1,729,063 Securities sold under repurchase agreements 666,244 586,992 Federal Home Loan Bank borrowings 525,000 249,000 Notes payable 228,297 185,643 Other 18,903 1,978 - -------------------------------------------------------------------------------------------------------------------- Total short-term borrowings $3,002,574 $2,752,676 ====================================================================================================================
The Corporation paid $143,051,000 and $158,823,000 in interest on deposits and short-term borrowings in the first three months of 1997 and 1996, respectively. (9) Long-Term Debt Long-term debt at March 31 included:
- -------------------------------------------------------------------------------------------------------------------- In thousands 1997 1996 43/8-73/8% Federal Home Loan Bank obligations payable through 2015 $302,513 $351,569 83/4% Subordinated notes due 2004 149,703 149,664 81/4% Subordinated notes due 2002 125,000 125,000 85/8% Subordinated notes due 1998 49,989 49,979 77/8-111/4% Collateralized mortgage obligation bonds maturing through 2019 14,042 17,569 7-81/4% Mortgage indebtedness maturing through 2009 8,372 9,177 85/8-143/8% Capital lease obligations maturing through 2006 977 1,087 Crestar Capital Trust I preferred stock 200,000 - - -------------------------------------------------------------------------------------------------------------------- Total long-term debt $850,596 $704,045 ====================================================================================================================
The Corporation paid $13,945,000 and $11,835,000 in interest on long-term debt in the first three months of 1997 and 1996, respectively. There were no new capital lease agreements in the first quarter of 1997. Crestar Capital Trust I (the Trust) is a wholly-owned special purpose finance subsidiary of the Parent Company, Crestar Financial Corporation (Crestar), operating in the form of a grantor trust. The trust was created solely to issue capital securities and remit the proceeds to Crestar. Crestar is the sole owner of the common stock securities of the Trust. On December 31, 1996, the Trust issued 200,000 shares of Preferred Stock capital securities (Trust Preferred Stock) with a stated value of $1,000 per share, and a fixed dividend yield of 8.16% of the stated value. The stated value of the Trust Preferred Stock is unconditionally guaranteed on a subordinated basis by Crestar. The securities have a mandatory redemption date of December 15, 2026, and are subject to varying call provisions at the option of Crestar beginning in December 2006. Shares of the Trust Preferred Stock are capital securities which are distinct from the common stock or preferred stock of Crestar, and the dividends thereon are tax-deductible. Dividends accrued for payment by the Trust are classified as interest expense on long-term debt in the consolidated income statement of Crestar. 10 (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 1997 1996 Current: Federal $39,582 $32,695 State and local 3,470 1,890 - -------------------------------------------------------------------------------------------------------------------- Total current tax expense 43,052 34,585 - -------------------------------------------------------------------------------------------------------------------- Deferred: Federal (1,132) 1,841 State and local (276) 319 - -------------------------------------------------------------------------------------------------------------------- Total deferred tax expense (benefit) (1,408) 2,160 - -------------------------------------------------------------------------------------------------------------------- Total income tax expense $41,644 $36,745 ====================================================================================================================
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 1997 1996 Amount % Amount % Income before income taxes $113,424 $101,856 - -------------------------------------------------------------------------------------------------------------------- Tax expense at statutory rate 39,698 35.0 35,650 35.0 - -------------------------------------------------------------------------------------------------------------------- Increase (decrease) in taxes resulting from: Tax-exempt interest and dividends (1,702) (1.5) (1,827) (1.8) Nondeductible interest expense 429 .4 212 .2 Amortization of goodwill 1,045 .9 1,046 1.0 State income taxes 2,076 1.8 1,436 1.5 Other - net 98 .1 228 .2 - -------------------------------------------------------------------------------------------------------------------- Total increase in taxes 1,946 1.7 1,095 1.1 - -------------------------------------------------------------------------------------------------------------------- Total income tax expense $41,644 36.7 $ 36,745 36.1 ====================================================================================================================
The Corporation made income tax payments of $6,618,000 and $7,638,000 during the first three months of 1997 and 1996, respectively. At March 31, 1997, the Corporation had a net deferred income tax asset of $130,423,000. 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 $9.7 billion and $8.0 billion at March 31, 1997 and 1996, respectively. 11 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 $409 million at March 31, 1997. Recourse obligations on mortgage loans serviced of $1.5 billion at March 31, 1997 included $728 million which was insured by agencies of the Federal government or private insurance companies. Recourse obligations also included $113 million of contractual recourse liability accepted by Crestar on mortgage loan sales to Federal agencies and $139.0 million on certain mortgage loan sales to private investors. Crestar maintained an allowance of $309,000 at March 31, 1997 based on estimates of future losses on this contractual recourse liability. For interest rate risk management purposes at March 31, 1997, Crestar was using interest rate (fixed receive) swaps with notional balances of $750 million and $250 million to convert floating rate commercial and instalment loans, respectively, to fixed rates. Crestar was using purchased interest rate caps with notional balances of $1.55 billion and $200 million to hedge the market value of fixed rate securities available for sale and real estate income property loans, respectively, and $485 million to minimize interest rate risk associated with rising rates on floating rate money market deposits. Crestar was using interest rate floors with notional balances of $1 billion and $250 million to hedge the fair value of fixed rate domestic time deposits and the prepayment risk associated with fixed real estate mortgage loans, respectively. The carrying value and net unrealized loss on these swaps, caps and floors were $32.6 million and $19.4 million at March 31, 1997. Crestar also serves as a financial intermediary in interest rate swap, cap and collar agreements, providing interest rate risk management services to customers. As a financial intermediary, Crestar had $107.2 million in offsetting swap, $33.9 million in offsetting cap and $10 million in offsetting collar agreements at March 31, 1997. The notional amount of these over-the-counter traded interest rate swaps, caps, floors and collars does not fully represent Crestar's credit and market exposure, which the Corporation believes is a combination of current replacement cost of approximately $32.3 million, less collateral held of approximately $8 million, plus an amount for prospective market movement. Three counterparties constituted 13% each and one counterparty 11% of the estimated credit and market exposure of $77.9 million at March 31, 1997. Crestar also had forward agreements outstanding at March 31, 1997, 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. The net unrealized gain on such forward agreements was $8.5 million at March 31, 1997. In November 1996, a purported class action lawsuit was brought against Crestar Mortgage Corporation (CMC), an affiliated subsidiary of the Corporation, alleging that compensation paid to mortgage brokers in the form of "yield spread premium" violates the Real Estate Settlement Procedures Act (RESPA) prohibition on referral fees. The suit is similar to a number of other suits pending nationwide against mortgage lenders. The suit seeks three times the amount of all settlement charges paid by CMC to mortgage brokers for settlement services on mortgage loans closed since November 12, 1995, plus interest, court costs, attorney fees and other litigation expenses. Although the potential for liability is open-ended because of the ongoing nature of the suit, CMC estimates that yield spread premiums paid to mortgage brokers in the one year period prior to the filing of the suit totaled between $14 million and $17 million, an amount that could be trebled under RESPA. Management believes, however, that its industry-accepted method of compensating mortgage brokers is entirely legal and is vigorously contesting all aspects of the suit. Management, in consultation with legal counsel, is of the opinion that there is no other pending or threatened litigation that could, individually or in the aggregate, have a material impact on the Corporation's financial condition or financial statements beyond liabilities established for this purpose. 12 Financial Commentary Crestar Financial Corporation And Subsidiaries Overview (Tables 1, 2 and 12) Crestar Financial Corporation (Crestar) reported net income of $71.8 million for the quarter ended March 31, 1997, an increase of $6.7 million or 10% over net income reported in the first quarter of 1996. These increases reflect the positive effects of improved net interest margins, growth in earning assets and noninterest income, and management of controllable expenses. Earnings per share were $.64 for the first quarter of 1997, compared to $.58 in 1996. 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, 1996 Crestar merged with Citizens Bancorp (Citizens), a Maryland 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 1996, have been restated to include the combined results of both Crestar and Citizens. Crestar's net income for the fourth quarter of 1996 was reduced by $32.5 million in one-time after-tax merger expenses associated with the merger with Citizens. Excluding the non-recurring charges, net income for the fourth quarter of 1996 was $70.7 million, or $.63 per fully diluted share. During the first quarter of 1997, the former banking subsidiaries of Citizens Bancorp (Citizens Bank of Maryland and Citizens Bank of Washington, N.A.) were merged into Crestar Bank. In December 1996, Crestar's Board of Directors declared a two-for-one stock split, in the form of a common stock dividend. The two-for-one split was distributed on January 24, 1997. For all periods presented in these financial statements, average shares outstanding and per common share data have been adjusted to reflect the common stock split. Crestar's subsidiaries provide banking and non-banking services throughout Virginia, Maryland and Washington, D.C., which compose Crestar's primary market area. This market is characterized as economically diverse. Crestar's market area is also 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, insurance companies, credit unions and mortgage banking companies. Profitability Measures And Capital Resources (Table 1) Crestar's increased earnings in the first quarter of 1997 resulted in improvements in key profitability measures when compared to the same period of 1996. Return on average assets was 1.33% in the first three months of 1997, up from the 1.22% reported for the first three months of 1996. Return on average equity was 16.06% for the quarter ended March 31, 1997, compared to 14.66% for the first quarter of 1996. Average equity to assets was 8.26% for the first quarter of 1997, compared to 8.35% for the first quarter of 1996. Period-end equity to assets of 8.27% at March 31, 1997 reflected an increase from the March 31, 1996 ratio of 8.10%. Total assets were relatively unchanged from March 31, 1996 to March 31, 1997; growth in period-end stockholders' equity was 2% during this period. Risk-based capital ratios are another measure of capital adequacy. At March 31, 1997, Crestar's consolidated risk-adjusted capital ratios were 10.7% for Tier 1 and 13.5% for total capital, well above the required minimums of 4.0% and 8.0%, respectively. The Tier 1 leverage ratio of 8.8% at March 31, 1997 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 7.5% at March 31, 1997. Under Federal Deposit Insurance Corporation (FDIC) rules, Crestar's sole subsidiary bank (Crestar Bank) was considered "well-capitalized" as of March 31, 1997, the highest category of capitalization defined by regulatory authorities, allowing for the lowest level of FDIC insurance premium payments. 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 approximately $300 million in subordinated debt securities, preferred stock or common stock, or any combination thereof. Net Interest Margin And Net Interest Income (Tables 3 and 13) Crestar's net interest margin for the first quarter of 1997 was 4.51%, an improvement of 9 basis points from the margin recorded in the first quarter of 1996. The improvement was attributable to favorable changes in interest rates 13 impacting the Corporation's earning assets and funding sources. These favorable changes offset the impact of unfavorable changes in the composition of earning assets and funding sources, and the effect of off-balance sheet hedges on the Corporation's net interest margin. The net interest margin in the fourth quarter of 1996 was 4.47%. The yield on average total loans during the first three months of 1997 decreased 3 basis points from the first quarter of 1996, to 8.66%, as higher yields obtained on bank card and consumer real estate - mortgage loans were offset by declines in average yields earned on the business and consumer instalment loan portfolios. While yields on securities held to maturity exhibited a 1 basis point increase in yield, the yield on the larger securities available for sale portfolio decreased 12 basis points in the first quarter of the current year, compared to first quarter 1996 results. During the same time period, yields on money market investments experienced declines in average rates earned, reflecting lower federal funds rates and short-term investment rates for the current year period. Yields on mortgage loans held for sale, however, were up 79 basis points for the first quarter of 1997 versus the same period of 1996. The average rate earned on total earning assets was down 6 basis points, to 7.98% in the first quarter of 1997, in comparison to first quarter 1996 results. Also reflecting an overall lower interest rate environment, the average rate paid on total interest-bearing liabilities decreased by 13 basis points during this period. Average rate decreases were experienced in all categories of savings and time deposits, with the exception of certificates of deposit $100,000 and over. The largest decrease came in domestic time deposits, where average rates fell from 5.45% in the first quarter of 1996 to 4.99% in the first three months of 1997. Average rates paid on interest-bearing demand and regular savings deposit accounts fell 8 basis points and 15 basis points, respectively, from first quarter 1996 levels. Also reflecting a lower short-term rate environment, interest rates paid on short-term borrowings were 10 basis points lower during the first three months of 1997, versus the same period of 1996. Interest rates paid on long-term debt edged upward during the first quarter of 1997, in comparison to the same period of 1996, reflecting the December 1996 issuance of trust preferred debt securities by a subsidiary of the Corporation. Such securities have been included in long-term debt for purposes of balance sheet classification. Excluding the impact of derivative instruments utilized as hedges, the total change in the Corporation's interest rate spreads had a positive impact of 32 basis points on Crestar's first quarter 1997 net interest margin, when compared to the first quarter of 1996. Unfavorable changes in the earning asset mix decreased the first quarter 1997 net interest margin by approximately 19 basis points when compared to the first quarter of 1996. Within the loan portfolio, average balances of bank card loans fell by $299 million, or 18%, from average levels of the first quarter of 1996. Bank card loans, which have typically been Crestar's highest yielding earning asset category, have exhibited lower average balances, as marketing efforts directed to new accounts were curtailed from previous levels, in light of higher than desired delinquency statistics. Also, as lower promotional interest rates on selected bank card loans expired, some customers elect to pay-off or pay-down outstanding balances. Total business loans exhibited a 2% increase in average balances outstanding, due to growth in commercial loans. Real estate - construction and income property loan balances were down from the first quarter of 1996. Consumer instalment loans increased 12% in the first quarter of 1997, or $428 million, compared to first quarter 1996 average balances, reflecting strong marketing efforts. Consumer real estate - mortgage loans, which has historically been Crestar's lowest yielding loan category, decreased $142 million or 4% from first quarter 1996 to first quarter 1997. This reduction reflects efforts to re-balance the Corporation's loan portfolio, through selected sales of residential mortgage loans, during 1996. Average balances of total securities increased $365 million, or 8%, from first quarter 1996 to first quarter 1997. This growth came from increased average balances of securities classified as available for sale, which rose 15% from the first three months of 1996. Average balances of money market investments also increased during this time period, with average balances of $357 million for the first quarter of 1997 reflecting an increase of $150 million from the same period of 1996. Average balance of mortgage loans held for sale exhibited a decrease from the first quarter of 1996, due to lower mortgage loan origination volumes at the Corporation's mortgage banking subsidiary. 14 Unfavorable changes in Crestar's funding sources resulted in a negative impact to the first quarter 1997 net interest margin of 2 basis points, in comparison to first quarter 1996 results. Average total deposits for the first quarter of 1997 decreased by $327 million, to $15.5 billion, a 2% decrease over first quarter 1996 average balances. Average balances of domestic time deposits, which are primarily composed of consumer certificates of deposit, decreased by $721 million or 14% from first quarter 1996 to first quarter 1997. Other deposit categories exhibiting lower average balances were interest-bearing demand deposits and regular savings deposits, which decreased 1% and 7%, respectively, from the first quarter of 1996. Average balances of certificates of deposits $100,000 and over increased by $407 million during the same time period, and represented 3% of average total deposits during the first quarter of 1997. Demand deposits, a noninterest bearing source of funds, exhibited an increase in average balances of $153 million, or 5%, during the first quarter of 1997, in comparison to the same period of 1996. Total off-balance sheet interest rate hedges had a negative impact on net interest income of $1.0 million during the first quarter of 1997, which was composed of a $660 thousand decrease in interest income and a $380 thousand increase in interest expense, based on the underlying asset or liability being hedged. The negative impact on the first quarter 1997 net interest margin equated to 2 basis points. In the first quarter of 1996, the comparable impact of hedging activity was an increase to Crestar's total interest income of approximately $700 thousand and an immaterial increase to interest expense, resulting in a positive impact of 1 basis point to that quarter's net interest margin. On a comparative basis, derivative instruments utilized as hedges contributed to a 3 basis point decrease to Crestar's net interest margin in the first quarter of 1997, compared to the first quarter of 1996. Lower levels of average nonperforming assets during the first quarter of 1997, versus the same period of 1996, contributed to a 1 basis point improvement in Crestar's net interest margin during this period. 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 2% increase in average earning assets, net interest income for the first quarter of 1997 increased 4% over the first quarter of 1996. Tax-equivalent net interest income similarly increased by 4% during this period. Risk Exposures And Credit Quality (Tables 4 and 5) The allowance for loan losses was $269 million at March 31, 1997, representing 1.89% of period-end loans, 267% of period-end nonperforming assets, and a 355% 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 $76.0 million at March 31, 1997, with consumer loans representing 82% of this balance. At March 31, 1997, nonperforming assets of $100.8 million were down $21.4 million or 18% from March 31, 1996, and down $8.2 million from December 31, 1996. The ratio of nonperforming assets to loans and foreclosed properties-net at March 31, 1997 was 0.71%, down from 0.77% at December 31, 1996 and 0.88% at March 31, 1996. Interim periods in 1997 could show increases in the total balance of nonperforming assets due to loan growth, future acquisitions of financial institutions, and adverse changes in credit quality. The provision for loan losses was $29.7 million for the first quarter of 1997, an increase of $7.5 million from the $22.2 million provision expense recorded in the first quarter of 1996. Provision expense in the fourth quarter of 1996 was $24.1 million. Net charge-offs totaled $29.7 million in the first three months of 1997, compared to $22.3 million in the comparable period of 1996. Net charge-offs as a percentage of average loans were 0.86% for the first quarter of 1997, compared to 0.65% in the same period of 1996, and 0.84% for the fourth quarter of 1996. Business loans experienced net recoveries of $32 thousand during the first quarter of 1997, compared to net recoveries of $1.3 million in the comparable quarter of 1996. Consumer loan net charge-offs totaled 15 $29.7 million in the first quarter of 1997, compared to net charge-offs of $28.3 million in the fourth quarter of 1996 and $23.6 million in the first quarter of 1996. The largest proportion of net loan charge-offs during the first quarter of 1997 occurred in the bank card loan portfolio. Net charge-offs for bank card loans were $23.4 million in the first three months of 1997, compared to $18.0 million in 1996's first quarter. Net bank card loan charge-offs as a percentage of bank card loans (on an annualized basis) were 6.98% for the first quarter of 1997, compared to 6.54% in the fourth quarter of 1996, and 4.39% in the first quarter of 1996. This increase in the bank card net charge-off rate is attributable to both a decrease in outstanding loan balances and the industry-wide trend of adverse payment performance by consumers, as evidenced by a nationwide rise in delinquencies. The increase also reflects the prior growth of Crestar's bank card loan portfolio, especially during the 1994 and 1995. The delinquency and loss characteristics of newly underwritten bank card loans typically do not reach their highest levels until after 24 months from origination. A bank card portfolio will, therefore, generally produce higher net charge-off levels as the newer loans "season." Higher net charge-offs were also recorded in consumer instalment and residential real estate loan portfolios in the first quarter of 1997 compared to the fourth quarter of 1996. In addition to other loan categories, Crestar closely manages its portfolio of loans to real estate developers and investors (REDI). REDI outstanding balances remained fairly constant and totaled $1.7 billion at March 31, 1997. This balance represented 12% of the total loan portfolio at that date. At December 31, 1996, REDI loans also represented 12% of the total loan portfolio. REDI nonperforming assets were $53.6 million at March 31, 1997, compared to $61.8 million at December 31, 1996. 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, 1997, not included in Table 5, totaled approximately $153 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 $153 million at December 31, 1996 and $194 million at March 31, 1996. 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 $14.2 billion at March 31, 1997. Noninterest Income And Expense (Table 6) Noninterest income totaled $103.5 million in the first quarter of 1997, a $15.9 million or 18% increase over the first quarter of 1996. Excluding securities gains and losses, noninterest income increased $14.2 million or 17% over the results for the first three months of 1996. This increase reflects growth in the noninterest income categories of deposit account income, trust and investment advisory income, and bank card income. Deposit account income, in part reflecting higher average balances of transaction-based deposit accounts, increased by $3.5 million or 13% from the first quarter of 1996. Trust and investment advisory income increased $1.6 million or 10% from 1996 levels. Mortgage servicing income for the first quarter of 1997 totaled $5.1 million, compared to $4.5 million in the first quarter of 1996. Mortgage origination income, net of expenses, was down $2.1 million from levels achieved in the first quarter of 1996, reflecting lower levels of originations and competitive industry pricing. Results for the first quarter of 1997 reflect gains on the sale of mortgage servicing rights of $6.5 million, compared to $4.0 million in the same period of 1996. Automated teller machine revenue, securities brokerage fees, mutual fund and annuity income experienced gains during this period. Included in noninterest income for the first quarter of 1997 was a non-recurring gain of $5.8 million (pre-tax) arising from the sale of two properties acquired during the Citizens Bancorp merger. 16 Noninterest expense increased $4.9 million, or 3%, in the first quarter of 1997 compared to the same period of 1996. Excluding foreclosed properties expense, noninterest expense increased 2% in the quarter. Included in first quarter 1997 results are approximately $2.0 million in one-time expenses associated with the Citizens merger. Total personnel costs, Crestar's largest expense category, were $99.3 million in the first quarter of 1997, a 4% increase over the same period of 1996. Management continues to emphasize prudent control of noninterest expenses and assimilation of acquisitions in a cost effective manner. Decreases in FDIC insurance premium rates effective in the fourth quarter of 1996 led to lower FDIC premium expense compared to first quarter 1996 results. FDIC deposit insurance expense totaled $1.1 million in the first quarter of 1997, versus $3.4 million in the first quarter of 1996. Foreclosed properties expense for the quarter ended March 31, 1997 totaled $715 thousand, compared to a net recovery of $1.3 million in the quarter ended March 31, 1996. The effective tax rate for the first quarter of 1997 was 36.7%, compared to 36.1% in the first quarter of 1996. Financial statement note 10 contains additional information concerning income taxes. Financial Condition (Table 7) Crestar's assets totaled $22.0 billion at March 31, 1997, compared to $22.9 billion in assets at December 31, 1996, and $22.0 billion at March 31, 1996. Loan balances totaled $14.2 billion at March 31, 1996 compared to $14.0 billion at December 31, 1996 and $13.8 billion at March 31, 1996. Total deposits were $15.8 billion at the end of the first quarter of 1997, compared to $15.7 billion at December 31, 1996 and $16.1 billion at March 31, 1996. Some consumer deposit accounts were down slightly from year-end 1996, reflecting increased competition for deposits. With respect to the securities held to maturity portfolio, carrying value exceeded the market value at March 31, 1997 by $6.9 million, consisting of $1.5 million in unrealized gains and $8.4 million of unrealized losses. At March 31, 1997, the amortized cost of securities available for sale exceeded the fair value of such securities by $89.0 million, consisting of $4.4 million in unrealized gains and $93.4 million in unrealized losses. Shareholders' equity at March 31, 1997 reflects a $57.6 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 a decrease of $21.3 million at December 31, 1996. At March 31, 1996, Crestar's shareholders' equity reflected a $22.2 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 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. Approximately 64% (market value) of Crestar's securities available for sale portfolio, and 67% (amortized cost) 17 of the Corporation's securities held to maturity portfolio, was composed of mortgage-backed obligations of Federal agencies as of March 31, 1997. This category includes mortgage-backed securities of Federal agencies, as well as CMO securities guaranteed by Federal agencies such as the Federal Home Loan Mortgage Corporation. Securities classified as "Other taxable securities" can include non-government CMO securities, corporate debt securities, and corporate obligations securitized by credit card and instalment loans. During the first quarter of 1997, Crestar sold approximately $1.1 billion of securities classified as available for sale, generating securities gains of $4.1 million. Such sales were consummated in conjunction with the overall management of interest rate risk for the Corporation. Securities gains recorded in the first quarter of 1996 were $2.4 million. Crestar purchased and retired approximately 824 thousand shares of common stock during the first quarter of 1997, at an average price of $36.11 per share. The purpose of these transactions is to meet the needs of the Corporation's dividend reinvestment plan, employee stock options and thrift and profit sharing plan. In February 1997, Crestar's Board of Directors authorized the purchase and retirement of up to 2.0 million shares of common stock in order to meet the needs of the Corporation's dividend reinvestment plan, thrift and profit sharing plans and other benefit programs. At March 31, 1997, Crestar had a remaining authorization to purchase and retire up to 1.8 million shares of common stock in order to meet the needs of the dividend reinvestment plan, thrift and profit sharing plan and other stock-based plans. In December 1996, Crestar announced a common stock dividend increase, effective with the dividend paid on February 21, 1997, to $.27 per share (on a post-split basis). This represented a 4% increase from the previous quarterly dividend rate of $.26 per share (on a post-split basis). 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%. Because the dividend paid in the first quarter of 1997 was announced and declared by the Board in December 1996, there were no dividends declared in the first quarter of 1997. In the prior year, a common stock dividend of $.225, on a post-split basis, was declared and paid during the first quarter. Liquidity And Interest Sensitivity (Tables 8 - 11) 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 59% of total funding sources at both March 31, 1997 and December 31, 1996, compared to 64% at March 31, 1996. As an additional indication of strong liquidity, securities available for sale represented 20%, and money market investments an additional 3%, of Crestar's total earning assets at March 31, 1997. Interest sensitivity refers to the volatility of earnings and capital 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 and Interest Rate Risk committees. The committees establish limits on the earnings at risk for a current planning period, generally either the current calendar year or the remainder of the current year plus the next calendar year. The level of exposure taken is based on an assessment of the market environment, and will vary from period to period. The primary tool used to assess the interest rate exposure of capital is the quantification of a fair value of shareholders' equity. Fair value of equity 18 consists of the present value of all future cash flows from assets, liabilities and off-balance sheet items. Potential changes in the fair value of equity are calculated by projecting cash flows and then computing present values under numerous interest rate scenarios. The fair value calculations include the valuation of instruments with option characteristic, using numerous interest rate path valuations and mathematical rate simulation techniques. Crestar has been developing this tool and is incorporating it as its primary component of interest rate risk management. However, the Corporation's measurement and interpretation process for market valuation models continues to be in a developmental stage. Another tool used by Crestar in assessing interest rate exposure is net interest income simulations. The ALCO committee establishes limits on net income at risk for a relevant planning period of 9 to 24 months. A net 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. Based on the most recent simulations as of March 31, 1997, Crestar's projected net income under the consensus interest rate scenario for the remaining nine months of 1997 would decrease by approximately 6% in a high interest rate scenario, and would increase by 8% in a low interest rate scenario. These projections were within Crestar's tolerance for interest rate risk, and indicate a sufficient liquidity position and acceptable operating environment, under the high, low and consensus interest rate scenarios. A third interest rate risk tool 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 8, and reflects the earlier of the maturity or repricing dates for various assets and liabilities at March 31, 1997. At that point in time, Crestar had a cumulative net liability sensitive twelve-month gap with $4.9 billion excess of interest-sensitive sources of funds over uses of funds. This generally indicates that earnings should improve in a declining interest rate environment as liabilities reprice more quickly than assets. The opposite would be true of a positive, or asset-sensitive, interest rate gap. In addition to the traditional gap measurement presentation, Table 8 presents interest sensitivity on a beta adjusted basis. These beta adjustments are based on a ratio of actual changes in consumer deposit rates to changes in the prime interest rate during interest rate cycles for the last several years. Essentially, the beta factors recognize that certain consumer deposit rates are less interest-sensitive than market-based rates, such as rates paid on short-term commercial notes. In addition to a beta adjustment, the table also incorporates an adjustment to reflect the sensitivity of the Corporation's commercial demand deposit balances to the level of interest rates. The adjustment, based on historical trends and estimated as a percentage of commercial interest bearing demand deposits, reflects a greater sensitivity on the part of commercial demand deposits to fluctuating interest rates than experienced with consumer deposits. On a cumulative twelve-month basis, Crestar had a liability sensitive "adjusted gap" at March 31, 1997, with $0.6 billion excess of interest-sensitive sources of funds over uses of funds. In comparison, the level of total earning assets at March 31, 1997 was $20.1 billion. The static gap and adjusted gap do not include $1.25 billion (notional amount) of interest rate floors that would potentially offset the effect of falling interest rates on the fair value of fixed rate domestic time deposits and on prepayment risk within the Corporation's fixed rate real estate - mortgage loan portfolio. In addition, the static and adjusted gap do not include $2.23 billion 19 (notional amount) of interest rate caps that would potentially offset the impact of rising rates on various earning assets and funding sources (see Table 9). 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, or unusual market relationships for financial instruments. 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, 1997 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, 1997 are utilized to mitigate the declines in market value that can be experienced by mortgage backed 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 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, 1997. Interest rate simulation techniques are used by Crestar to assess and monitor market risk in the Corporation's derivative portfolio. 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 1997, and at March 31, 1997 there were no deferred gains or losses arising from termination of hedged transactions prior to maturity. The notional amount of Crestar's interest rate swaps, caps and floors (excluding customer positions where Crestar acts as an intermediary) was $4.5 billion at March 31, 1997. Forward contracts with a notional amount of $774 million ,utilized to hedge lending commitments of Crestar's mortgage banking subsidiary, were also outstanding at March 31, 1997, bringing the total notional value of derivative financial instruments related to interest rate risk management activities to $5.3 billion at March 31, 1997. Tables 9, 10, and 11 present information regarding fair values, maturity, average rates, and activity as of and for the three month period ending March 31, 1997 for these off-balance sheet derivative instruments. Net unrealized losses on these instruments totaled $10.9 million as of March 31, 1997. 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. 128, "Earnings per Share" (SFAS 128) in February 1997. SFAS 128 simplifies the standards for computing earnings per share, and replaces the presentation of primary earnings per share with a presentation of basic earnings per share. SFAS 128 also requires dual presentation of basic and diluted earnings per share in the financial statements. Basic earnings per share excludes dilution, and is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential for dilution that could occur if stock options outstanding or other stock-related contracts were exercised or converted into common stock. Diluted earnings per share is computed similarly to the Corporation's current computations for fully-diluted earnings per share. Generally, computations of basic earnings per share will always be equal to or greater than the current computations for primary earnings per share. As required by the FASB, Crestar will be adopting the accounting required under SFAS 128 in the fourth quarter of 1997, with all prior period earnings per share data (including interim periods) being restated. The adoption of SFAS 128 will have no material adverse impact on the Corporation's earnings per share results. 20 Subsequent Event In April, Crestar announced it had reached an agreement to sell its merchant bank card processing portfolio to Nova Information Systems, Inc. (Nova). Crestar also announced it had formed an exclusive marketing alliance with Nova, through which the Corporation's commercial and small business customers will benefit from access to Nova's card acceptance products and technology. Crestar's bank card processing business processes credit and debit card sales for approximately 7,500 customers. The sale is expected to be consummated in the second quarter of the current year; Crestar expects to recognize an after-tax gain of approximately $12 million at time of sale. The impact of the sale of Crestar's merchant card processing segment on the ongoing operations of the Corporation will not be material. Information in the above "Management's Discussion and Analysis of operations and Financial Condition," other than historical information, may contain forward-looking statements that involve risks and uncertainties, including, but not limited to, the Corporation's interest rate risk position, credit and economic trends on both a regional and national basis, technological change, the number and size of competitors in the Corporation's market, and the impact of future legal and regulatory actions, including the establishment of federal deposit insurance rates. It is important to note that the Corporation's actual results may differ materially from those projected in forward-looking statements. 21 Table 1 Financial Highlights
Dollars in millions, except per share data Three Months % For the Period Ended March 31 1997 1996 Change Net Income $71.8 $65.1 10 Primary Earnings Per Share: Net Income $ .64 $ .58 10 Average Shares Outstanding (000s) 111,579 112,405 (1) Fully Diluted Earnings Per Share: Net Income $ .64 $ .58 10 Average Shares Outstanding (000s) 111,580 112,413 (1) Dividends Paid Per Common Share .27 .225 20 ==================================================================================================================== Key Ratios Return on Average Assets 1.33% 1.22% Return on Average Equity 16.06 14.66 Average Equity to Average Assets 8.26 8.35 Net Interest Margin 4.51 4.42 At March 31 Book Value Per Share $16.48 $16.01 Equity to Assets 8.27% 8.10% Risk Adjusted Capital Ratios: Tier I 10.6 9.5 Total 13.4 12.5 Common Shares Outstanding (000s) 110,300 111,151 ====================================================================================================================
Table 2 Analysis Of Earnings Per Common Share
1st Qtr. 1997 1st Qtr. 1997 vs. vs. 1st Qtr. 1996 4th Qtr. 1996 Primary Earnings Per Share - prior period $.58 $.34 - -------------------------------------------------------------------------------------------------------------------- Interest income .02 (.04) Interest expense .03 .03 Provision for loan losses (.04) (.03) Securities gains .01 .02 Other noninterest income .08 .05 Foreclosed properties expense (.01) .02 Citizens Bancorp one-time merger costs - .29 Other noninterest expense (.02) (.01) Change in effective income tax rate (.01) (.03) - -------------------------------------------------------------------------------------------------------------------- Net increase .06 .30 - -------------------------------------------------------------------------------------------------------------------- Primary Earnings Per Share - current period $.64 $.64 ====================================================================================================================
22 Table 3 Average Balances, Net Interest Income And Rate/Volume Analysis1 Dollars in thousands
1st Qtr. 4th Qtr. Average Balance Average Increase Balance 1997 1996 (Decrease) 1996 $ $ % $ 3,815,837 3,631,192 5 3,771,838 Commercial 1,244,956 1,257,113 (1) 1,246,853 Real estate - income property 311,353 390,242 (20) 321,782 Real estate - construction 4,101,003 3,672,525 12 3,728,351 Instalment 1,338,742 1,637,792 (18) 1,418,891 Bank card 3,051,743 3,193,672 (4) 2,990,599 Real estate - mortgage - -------------------------------------------------------------------------------------------------------------------- 13,863,634 13,782,536 1 13,478,314 Total loans - net of unearned income2 - -------------------------------------------------------------------------------------------------------------------- 908,787 1,085,189 (16) 1,028,706 Securities held to maturity 4,071,188 3,529,792 15 4,132,502 Securities available for sale 357,462 207,607 72 606,419 Money market investments 580,563 777,637 (25) 744,534 Mortgage loans held for sale - -------------------------------------------------------------------------------------------------------------------- 19,781,634 19,382,761 2 19,990,475 Total earning assets ==================================================================================================================== 5,796,084 5,849,192 (1) 5,768,025 Interest-bearing demand deposits 1,609,952 1,723,395 (7) 1,632,096 Regular savings deposits 4,501,822 5,222,554 (14) 4,741,020 Domestic time deposits - -------------------------------------------------------------------------------------------------------------------- 11,907,858 12,795,141 (7) 12,141,141 Total interest-bearing core deposits - -------------------------------------------------------------------------------------------------------------------- 3,627,747 2,729,376 33 3,800,234 Purchased liabilities 853,204 716,186 19 667,062 Long-term debt - -------------------------------------------------------------------------------------------------------------------- 16,388,809 16,240,703 1 16,608,437 Total interest-bearing liabilities 3,392,825 3,142,058 8 3,382,038 Other sources - net - -------------------------------------------------------------------------------------------------------------------- 19,781,634 19,382,761 2 19,990,475 Total sources of funds - -------------------------------------------------------------------------------------------------------------------- Net Interest Income ====================================================================================================================
23
1st Qtr. 1997 vs. 1996 4th Qtr. Income/Expense3 Change due to4 Income/ Increase Expense3 1997 1996 (Decrease) Rate5 Volume 1996 $ $ $ $ $ $ Commercial 75,382 73,942 1,440 (2,317) 3,757 76,149 Real estate - income property 27,283 27,766 (483) (215) (268) 27,397 Real estate - construction 7,072 9,523 (2,451) (527) (1,924) 7,243 Instalment 81,450 76,935 4,515 (4,499) 9,014 78,252 Bank card 46,939 48,577 (1,638) 7,319 (8,957) 48,719 Real estate - mortgage 59,321 61,567 (2,246) 486 (2,732) 58,184 - --------------------------------------------------------------------------------------------------------------------------- Total loans - net of unearned income2 297,447 298,310 (863) (2,622) 1,759 295,944 - --------------------------------------------------------------------------------------------------------------------------- Securities held to maturity 13,708 16,365 (2,657) 3 (2,660) 16,063 Securities available for sale 63,849 56,505 7,344 (1,323) 8,667 63,994 Money market investments 4,687 2,853 1,834 (225) 2,059 8,221 Mortgage loans held for sale 11,640 14,294 (2,654) 983 (3,637) 14,073 - --------------------------------------------------------------------------------------------------------------------------- Total earning assets 391,331 388,327 3,004 (5,000) 8,004 398,295 =========================================================================================================================== Interest-bearing demand deposits 41,813 43,725 (1,912) (1,665) (247) 42,547 Regular savings deposits 9,964 11,402 (1,438) (687) (751) 10,507 Domestic time deposits 55,064 70,411 (15,347) (5,602) (9,745) 59,896 - --------------------------------------------------------------------------------------------------------------------------- Total interest-bearing core deposits 106,841 125,538 (18,697) (9,964) (8,733) 112,950 - --------------------------------------------------------------------------------------------------------------------------- Purchased liabilities 46,675 35,904 10,771 (1,026) 11,797 50,400 Long-term debt 15,615 12,731 2,884 448 2,436 11,968 - --------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 169,131 174,173 (5,042) (6,633) 1,591 175,318 Other sources - net - --------------------------------------------------------------------------------------------------------------------------- Total sources of funds 169,131 174,173 (5,042) (8,633) 3,591 175,318 - --------------------------------------------------------------------------------------------------------------------------- Net Interest Income 222,200 214,154 8,046 3,633 4,413 222,977 ===========================================================================================================================
1st Qtr. 1997 vs. 4th Qtr. 1996 Change due to4 Increase (Decrease) Rate5 Volume $ $ $ Commercial (767) (1,645) 878 Real estate - income property (114) (73) (41) Real estate - construction (171) 64 (235) Instalment 3,198 (4,649) 7,847 Bank card (1,780) 1,006 (2,786) Real estate - mortgage 1,137 (59) 1,196 - -------------------------------------------------------------------------------- Total loans - net of unearned income2 1,503 (6,962) 8,465 - -------------------------------------------------------------------------------- Securities held to maturity (2,355) (482) (1,873) Securities available for sale (145) 804 (949) Money market investments (3,534) (159) (3,375) Mortgage loans held for sale (2,433) 701 (3,134) - -------------------------------------------------------------------------------- Total earning assets (6,964) (2,800) (4,164) ================================================================================ Interest-bearing demand deposits (734) (896) 162 Regular savings deposits (543) (400) (143) Domestic time deposits (4,832) (1,809) (3,023) - -------------------------------------------------------------------------------- Total interest-bearing core deposits (6,109) (3,931) (2,178) - -------------------------------------------------------------------------------- Purchased liabilities (3,725) (1,446) (2,279) Long-term debt 3,647 307 3,340 - -------------------------------------------------------------------------------- Total interest-bearing liabilities (6,187) (3,865) (2,322) Other sources - net - -------------------------------------------------------------------------------- Total sources of funds (6,187) (4,353) (1,834) - -------------------------------------------------------------------------------- Net Interest Income (777) 1,553 (2,330) ================================================================================
1Tax-equivalent basis. 2Nonaccrual loans are included in the average loan balances and income on such loans is recognized on a cash basis. 3Includes tax-equivalent net loan fees (costs) of $(48,000) and $(323,000) for the first quarter of 1997 and 1996, respectively, and $247,000 for the fourth quarter of 1996. 4Variances are computed on a line-by-line basis and are non-additive. 5Variances caused by the change in rate times the change in balances are allocated to rate. 24 Table 4 Allowance For Loan Losses
Dollars in thousands First Quarter 1997 1996 Beginning balance $268,868 $274,430 - -------------------------------------------------------------------------------------------------------------------- Allowance from acquisitions - (388) - -------------------------------------------------------------------------------------------------------------------- Provision for loan losses 29,698 22,230 - -------------------------------------------------------------------------------------------------------------------- Net charge-offs (recoveries): Commercial 526 (354) Real estate - income property (462) (824) Real estate - construction (96) (78) Instalment 5,545 4,811 Bank card 23,370 17,980 Real estate - mortgage 813 780 - -------------------------------------------------------------------------------------------------------------------- Total net charge-offs 29,696 22,315 - -------------------------------------------------------------------------------------------------------------------- Balance, March 31 $268,870 $273,957 ==================================================================================================================== Allowance for loan losses to period-end loans 1.89% 1.99% Annualized net charge-offs to average loans .86 .65 ====================================================================================================================
Table 5 Nonperforming Assets1 And Past Due Loans
Dollars in thousands March 31, December 31, Nonaccrual loans: 1997 1996 1996 Commercial $15,921 $30,089 $20,348 Real estate - income property 12,612 27,078 22,624 Real estate - construction 17,302 7,651 10,368 Instalment 2,987 2,945 2,895 Real estate - mortgage 26,813 14,682 25,208 - -------------------------------------------------------------------------------------------------------------------- Total nonperforming loans1 75,635 82,445 81,443 Foreclosed properties - net 25,140 39,761 27,515 - -------------------------------------------------------------------------------------------------------------------- Total nonperforming assets1 $100,775 $122,206 $108,958 ==================================================================================================================== Nonperforming assets1 to: Loans and foreclosed properties - net .71% .88% .77% Total assets .46 .56 .48 Allowance for loan losses to: Nonperforming assets1 267 224 247 Nonperforming loans1 355 332 330 Allowance for loan losses plus shareholders' equity to nonperforming assets1 20.70x 16.81x 18.80x ==================================================================================================================== Accruing loans past due 90 days: Commercial $ 12,137 $ 3,337 $ 9,480 Real estate - income property 1,451 59 503 Real estate - construction - 16 - Instalment Student 26,475 19,379 21,614 Other 5,326 7,500 7,587 Bank card 23,404 21,441 25,573 Real estate - mortgage 7,179 15,302 7,117 - -------------------------------------------------------------------------------------------------------------------- Total accruing loans past due 90 days: $ 75,972 $ 67,034 $71,874 ====================================================================================================================
1Loans which are both past due 90 days or more and not deemed nonaccrual due to an assessment of collectibility are specifically excluded from the definition of nonperforming. 25 Table 6 Noninterest Income And Expense
In thousands First Quarter Fourth Quarter Noninterest Income 1997 1996 1996 Service charges on deposit accounts $ 30,163 $ 26,635 $ 29,919 Trust and investment advisory 17,453 15,892 17,399 Bank card-related 12,648 11,825 13,559 Mortgage servicing - net 5,131 4,517 4,578 Mortgage origination - net 902 3,047 2,981 Trading account activities 947 346 1,044 Commissions on letters of credit 1,114 1,470 1,141 Gain on sale of mortgage servicing rights 6,450 4,000 3,518 Gain (loss) on sale and disposal of branches and other properties - net 5,807 354 (18,249) Miscellaneous 18,788 17,092 17,187 Securities gains 4,064 2,373 655 - -------------------------------------------------------------------------------------------------------------------- Total noninterest income $103,467 $ 87,551 $ 73,732 ==================================================================================================================== Noninterest Expense Salaries $ 78,388 $ 75,348 $ 90,807 Benefits 20,954 20,427 16,045 - -------------------------------------------------------------------------------------------------------------------- Total personnel 99,342 95,775 106,852 Occupancy - net 16,158 16,124 17,533 Equipment 9,819 9,482 10,053 Communications 8,845 9,186 10,285 Stationery, printing and supplies 2,713 2,932 3,845 Professional fees and services 7,035 4,824 14,243 Loan expense 2,815 2,503 3,392 FDIC premiums - net 1,107 3,381 (2,941) Advertising and marketing 4,530 6,593 6,734 Transportation 1,725 1,737 1,855 Outside data services 6,222 5,904 11,023 Amortization of purchased intangibles 4,227 4,171 4,222 Miscellaneous 14,752 13,820 18,067 - -------------------------------------------------------------------------------------------------------------------- Subtotal 179,290 176,432 205,163 Foreclosed properties (net recoveries) 715 (1,314) 7,302 - -------------------------------------------------------------------------------------------------------------------- Total noninterest expense $180,005 $175,118 $212,465 ====================================================================================================================
Table 7 Debt And Other Security Ratings (as of April 30, 1997)
Standard Thomson Security Moody's & Poor's BankWatch 83/4% Subordinated Notes due 2004 Baa1 BBB+ A- 81/4% Subordinated Notes due 2002 Baa1 BBB+ A- 85/8% Subordinated Notes due 1998 Baa1 BBB+ A- Commercial Paper P-2 Not rated TBW-1 Crestar Bank Deposits: Long-Term A2 A Not rated Short-Term P-1 A-1 TBW-1 Crestar Capital Trust 1 Preferred Stock Baa1 BBB Not rated ====================================================================================================================
26 Table 8 Interest Sensitivity Analysis
March 31, 1997 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 $2,872.3 $ 211.2 $ 89.0 $ 109.3 $ 740.1 $ 4,021.9 Real estate - income property 525.9 37.0 16.4 39.2 649.4 1,267.9 Real estate - construction 263.1 1.1 5.5 5.7 53.5 328.9 Instalment 1,804.7 86.7 120.7 177.5 1,902.7 4,092.3 Bank card 394.5 107.4 166.2 591.1 - 1,259.2 Real estate - mortgage 120.8 289.1 393.3 702.7 1,738.1 3,244.0 Securities held to maturity 17.6 13.6 17.3 32.6 737.1 818.2 Securities available for sale 223.7 80.2 112.3 347.0 3,155.3 3,918.5 Money market investments 573.6 5.1 - - - 578.7 Mortgage loans held for sale 543.2 - - - - 543.2 - ---------------------------------------------------------------------------------------------------------------------- Total earning assets 7,339.4 831.4 920.7 2,005.1 8,976.2 20,072.8 Interest sensitivity hedges on assets (450.0) (550.0) - - 1,000.0 - - ---------------------------------------------------------------------------------------------------------------------- Total uses $6,889.4 $ 281.4 $ 920.7 $2,005.1 $9,976.2 $20,072.8 ====================================================================================================================== Sources of Funds Interest-bearing demand deposits $5,924.4 $ - $ - $ - $ - $ 5,924.4 Regular savings deposits 1,597.8 - - - - 1,597.8 Domestic time deposits 448.0 557.5 928.7 1,262.7 1,157.5 4,354.4 Certificates of deposit $100,000 and over 289.0 161.1 198.5 28.3 5.4 682.3 Short-term borrowings 2,599.3 186.3 117.0 100.0 - 3,002.6 Long-term debt 3.3 8.0 19.3 30.6 789.4 850.6 - ---------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 10,861.8 912.9 1,263.5 1,421.6 1,952.3 16,412.1 Other sources - net - - - - 3,660.7 3,660.7 Interest sensitivity hedges on liabilities - (5.0) - 5.0 - - - ---------------------------------------------------------------------------------------------------------------------- Total sources $10,861.8 $ 907.9 $1,263.5 $1,426.6 $5,613.0 $20,072.8 ====================================================================================================================== Cumulative asset (liability) sensitivity gap $(3,972.4) $(4,598.9) $(4,941.7) $(4,363.2) $ - $ - ====================================================================================================================== Adjustments Beta adjustments: Interest-bearing demand deposits (beta factor .30) $ 4,162.9 Regular savings (beta factor .11) 1,422.0 Demand deposit sensitivity (1,242.9) - ------------------------------------------------------------------------------------ -------------------------------- Cumulative adjusted asset (liability) sensitivty gap $ 369.6 $ (256.9) $ (599.7) $ (21.2) $ - $ - ==================================================================================== ================================
27 Table 9 Off-Balance Sheet Derivative Financial Instruments1
March 31, 1997 Average Weighted Fixed Estimated Dollars in thousands Notional Average Receive Fair Balance Maturity bate Value Comments Interest Rate Conversions Generic interest rate swaps $1,000,000 2.7 yrs. 5.93% Notional amounts of $750 Carrying amount2 $ 420 million and $250 million Commercial loan program convert floating rate commercial Unrealized losses (13,547) and instalment loans, respectively, Instalment loan program to fixed rate. Floating rates paid Unrealized losses (4,616) tied to LIBOR. ----------- Estimated fair value (17,743) ----------- Interest rate caps 485,000 3.6 yrs. 6.87%3 Notional amount of $485 million Carrying amount2 7,381 hedges the interest rate risk Money market deposit program associated with rising interest Unrealized gains 2,736 rates on floating rate money market deposits (strike rate tied to LIBOR). Estimated fair value 10,117 Market Value Hedges Interest rate caps 1,750,000 3.0 yrs. 7.57%3 Notional amount of $1.55 billion Carrying amount2 16,845 hedges the market value of fixed Securities available for sale program5 rate securities available for sale Unrealized gains 1,616 in a rising rate environment (strike Unrealized losses (2,206) rate for $1 billion tied to 5 year Real estate income property loan program CMT; strike rate for $550 million Unrealized losses (486) tied to LIBOR). Notional amount of $200 million hedges the market value of fixed rate real estate income property loans (strike rate tied to LIBOR). Estimated fair value 15,769 Interest rate floors 1,250,000 3.9 yrs. 5.68%4 Notional amount of $250 million Carrying amount2 7,960 million hedges the prepayment risk Real estate mortgage loan program associated with fixed rate first Unrealized losses (663) mortgage loans in a declining rate Domestic time deposit program environment (strike rate tied to Unrealized losses (2,199) 10 year CMT). Notional amount of $1.0 billion hedges the fair value of fixed rate domestic time deposits (strike rate tied to 5 year CMT). Estimated fair value 5,098 Hedges of Lending Commitments Forward contracts 774,380 .2 yrs. n/a Hedges of residential mortgage Unrealized gains 8,506 lending commitments. Unrealized losses (9) ---------- Estimated fair value 8,497 Total hedges against interest rate risk $5,259,380 $21,738 ================================================================================
1Includes only off-balance sheet derivative financial instruments related to interest rate risk management activities. 2Includes any accrued interest receivable and or payable balances, and unamortized premiums paid for interest rate caps and floors. 3Represents average strike rate. For interest rate caps purchased, Crestar will receive interest if a specified market index raterises 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. 4Represents average strike rate. For interest rate floors purchased, Crestar will receive interest if a specified market index rate falls below a fixed strike rate during the term of the contract. Any interest received is based on the difference between a lower index interest rate and the contractual floor rate, applied to the underlying notional balance. No interest payments are received if the index rate remains above the floor rate. 5The 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 5 year CMT - Yield on 5 year constant maturity U.S. Treasury securities 10 year CMT - Yield on 10 year constant maturity U.S. Treasury securities 28 Table 10 Off-Balance Sheet Derivatives--Expected Maturities1
March 31, 1997 Dollars in thousands Within One to Three to Over One Year Three Years Five Years Five Years Total Interest Rate Conversions Generic interest rate swaps: Notional amount $ - $ 550,000 $ 450,000 $ - $1,000,000 Average fixed receive rate - 5.91% 5.96% - 5.93% Carrying amount $ - $ 117 $ 303 $ - $ 420 Unrealized losses - (6,795) (11,368) - (18,163) Interest rate caps Notional amount $ 25,000 $ 260,000 $ 100,000 $100,000 $ 485,000 Average strike rate 5.80% 7.45% 6.00 6.50 6.87% Carrying amount $ 4 $ 1,532 $ 3,450 $ 2,395 $ 7,381 Unrealized gains 48 301 1,241 1,146 2,736 Market Value Hedges Interest rate caps Notional amount $ - $1,200,000 $ 550,000 $ - $1,750,000 Average strike rate - 7.54% 7.64% - 7.57% Carrying amount $ - $ 10,497 $ 6,348 $ - $ 16,845 Net unrealized gain (loss) - 1,064 (2,140) - (1,076) Interest rate floors Notional amount $ - $ 300,000 $ 850,000 $100,000 $1,250,000 Average strike rate - 5.63% 5.69% 5.75% 5.68% Carrying amount $ - $ 915 $ 5,774 $ 1,271 $ 7,960 Unrealized losses - (535) (2,043) (284) (2,862) Hedges of Lending Commitments Forward contracts:2 Notional amount $774,380 $ - $ - $ - $ 774,380 Net unrealized gain 8,497 - - - 8,497 Total hedges against interest rate risk: Notional amount $799,380 $2,310,000 $1,950,000 $200,000 $5,259,380 Carrying amount 4 13,061 15,875 3,666 32,606 Net unrealized gain (loss) 8,545 (5,965) (14,310) 862 (10,868) Estimated fair value $ 8,549 $ 7,096 $ 1,565 $ 4,528 $ 21,738 ====================================================================================================================
1Includes only off-balance sheet derivative financial instruments related to interest rate risk management activities. 2Hedges of residential mortgage lending commitments. Table 11 Off-Balance Sheet Derivatives Activity1
In thousands Interest Rate Conversions Market Value Hedges Hedges of Interest Interest Interest Interest Lending Rate Rate Rate Rate Commit- Swaps Caps Caps Floors ments2 Total Balance, January 1, 1997 $ 900,000 $ 35,000 $1,750,000 $1,000,000 $ 706,731 $4,391,731 Additions 100,000 450,000 - 250,000 1,371,377 2,171,377 Maturities - - - - (1,303,728) (1,303,728) - -------------------------------------------------------------------------------------------------------------------- Balance, March 31, 1997 $1,000,000 $485,000 $1,750,000 $1,250,000 $ 774,380 $5,259,380 ====================================================================================================================
1Includes only off-balance sheet derivative financial instruments related to interest rate risk management activities. 2Forward contracts hedging residential mortgage lending commitments; maturities represent contracts delivered. 29 Table 12 Selected Quarterly Financial Information
Dollars in thousands, except per share data 1st Qtr. 4th Qtr.3 3rd Qtr.2 2nd Qtr. 1st Qtr. Results of operations: 1997 1996 1996 1996 1996 Net interest income1 $222,200 $222,977 $218,046 $221,084 $214,154 Provision for loan losses 29,698 24,130 25,100 24,430 22,230 - -------------------------------------------------------------------------------------------------------------------- Net credit income 192,502 198,847 192,946 196,654 191,924 Securities gains 4,064 655 96 270 2,373 Other noninterest income 99,403 73,077 80,225 91,318 85,178 - -------------------------------------------------------------------------------------------------------------------- Net credit and noninterest income 295,969 272,579 273,267 288,242 279,475 Noninterest expense 180,005 212,465 212,046 180,728 175,118 - -------------------------------------------------------------------------------------------------------------------- Income before taxes 115,964 60,114 61,221 107,514 104,357 - -------------------------------------------------------------------------------------------------------------------- Tax-equivalent adjustment 2,540 2,510 2,476 2,460 2,501 Book tax expense 41,644 19,438 10,627 38,178 36,745 - -------------------------------------------------------------------------------------------------------------------- Income tax expense 44,184 21,948 13,103 40,638 39,246 - -------------------------------------------------------------------------------------------------------------------- Net Income $ 71,780 $ 38,166 $ 48,118 $ 66,876 $ 65,111 ==================================================================================================================== Primary Earnings per share $ .64 $ .34 $ .43 $ .60 $ .58 Average shares outstanding (000s) 111,579 111,447 111,101 111,923 112,405 Fully diluted Earnings per share $ .64 $ .33 $ .43 $ .60 $ .58 Average shares outstanding (000s) 111,580 111,647 111,141 111,923 112,413 Dividends paid .27 .26 .26 .26 .225 ==================================================================================================================== Selected ratios and other data: Return on average assets 1.33% .70% .89% 1.23% 1.22% Return on average equity 16.06 8.42 10.94 15.20 14.66 Net interest margin1 4.51 4.47 4.44 4.48 4.42 Net charge-offs as % of average loans .86 .84 .74 .73 .65 Allowance as % of period-end loans 1.89 1.91 2.01 1.99 1.99 Overhead ratio 55.27 71.61 71.07 57.80 58.04 Average equity to assets 8.26 8.29 8.18 8.10 8.35 Equity leverage 12.11x 12.06x 12.23x 12.35x 11.98x Full-time equivalent employees (period end) 7,992 8,720 8,600 8,616 8,423 ====================================================================================================================
1Tax-equivalent basis. 2During the third quarter of 1996 Crestar recorded a one-time after-tax charge of $21.5 million, or $.19 per share, associated with congressional legislation regarding the recapitalization of the Savings Association Insurance Fund. Also in the third quarter of 1996, a nonrecurring tax benefit of $10.6 million, or $.09 per share, was recorded in connection with the repeal of thrift bad debt tax legislation. 3During the fourth quarter of 1996, nonrecurring merger costs totaling $32.5 million (after-tax basis), or $.29 per share, were recorded as part of the pooling-of-interests merger with Citizens Bancorp. 30 Table 13 Consolidated Average Balances/Net Interest Income/Rates1
Three Months Ended March 31, 1997 1996 Dollars in thousands Income/ Yield/ Income/ Yield/ Balance Expense Rate Balance Expense Rate Assets $ $ % $ $ % Securities held to maturity2 908,787 13,708 6.05 1,085,189 16,365 6.04 Securities available for sale2 4,071,188 63,849 6.29 3,529,792 56,505 6.41 Money market investments2 357,462 4,687 5.32 207,607 2,853 5.53 Mortgage loans held for sale2 580,563 11,640 8.16 777,637 14,294 7.37 - -------------------------------------------------------------------------------------------------------------------- Commercial 3,815,837 75,382 8.00 3,631,192 73,942 8.19 Real estate - income property 1,244,956 27,283 8.71 1,257,113 27,766 8.87 Real estate - construction 311,353 7,072 8.98 390,242 9,523 9.81 Instalment 4,101,003 81,450 8.00 3,672,525 76,935 8.41 Bank card 1,338,742 46,939 14.47 1,637,792 48,577 11.95 Real estate - mortgage 3,051,743 59,321 7.77 3,193,672 61,567 7.70 - -------------------------------------------------------------------------------------------------------------------- Total loans2,3 13,863,634 297,447 8.66 13,782,536 298,310 8.69 Allowance for loan losses (269,094) (275,421) - -------------------------------------------------------------------------------------------------------------------- Loans - net 13,594,540 13,507,115 Cash and due from banks 863,561 974,855 Premises and equipment - net 443,699 411,180 Customers' liability on acceptances 4,250 14,264 Intangible assets - net 178,388 185,150 Foreclosed properties - net 28,503 38,999 Other assets 617,730 539,739 - -------------------------------------------------------------------------------------------------------------------- Total Assets 21,648,671 21,271,527 ========== ========== Total Earning Assets 19,781,634 391,331 7.98 19,382,761 388,327 8.04 ========== ======= ==== ========== ======= ==== Liabilities And Shareholders' Equity Interest-bearing demand deposits 5,796,084 41,813 2.93 5,849,192 43,725 3.01 Regular savings deposits 1,609,952 9,964 2.51 1,723,395 11,402 2.66 Domestic time deposits 4,501,822 55,064 4.99 5,222,554 70,411 5.45 Certificates of deposit $100,000 and over 515,895 6,878 5.41 109,364 1,449 5.33 - -------------------------------------------------------------------------------------------------------------------- Total savings and time deposits2 12,423,753 113,719 3.73 12,904,505 126,987 3.97 Demand deposits 3,123,006 2,969,722 - -------------------------------------------------------------------------------------------------------------------- Total deposits 15,546,759 15,874,227 Short-term borrowings2 3,111,852 39,797 5.18 2,620,012 34,455 5.28 Long-term debt2 853,204 15,615 7.32 716,186 12,731 7.11 Liability on acceptances 4,250 14,264 Other liabilities 344,434 270,732 - -------------------------------------------------------------------------------------------------------------------- Total liabilities 19,860,499 19,495,421 - -------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 1,788,172 1,776,106 - -------------------------------------------------------------------------------------------------------------------- Total Liabilities And Shareholders' Equity 21,648,671 21,271,527 ========== ========== Total interest-bearing liabilities 16,388,809 169,131 4.19 16,240,703 174,173 4.32 Other sources - net 3,392,825 3,142,058 - -------------------------------------------------------------------------------------------------------------------- Total Sources Of Funds 19,781,634 169,131 3.47 19,382,761 174,173 3.62 ========== ======= ==== ========== ======= ==== Net Interest Spread 3.79 3.72 Net Interest Income/Margin 222,200 4.51 214,154 4.42 ====================================================================================================================
Three Months Ended December 31, 1996 Dollars in thousands Income/ Yield/ Balance Expense Rate Assets $ $ % Securities held to maturity2 1,028,706 16,063 6.24 Securities available for sale2 4,132,502 63,994 6.19 Money market investments2 606,419 8,221 5.39 Mortgage loans held for sale2 744,534 14,073 7.62 - ---------------------------------------------------------------------------------------------------------------------- Commercial 3,771,838 76,149 7.97 Real estate - income property 1,246,853 27,397 8.70 Real estate - construction 321,782 7,243 8.95 Instalment 3,728,351 78,252 8.41 Bank card 1,418,891 48,719 13.86 Real estate - mortgage 2,990,599 58,184 7.82 - ---------------------------------------------------------------------------------------------------------------------- Total loans2,3 13,478,314 295,944 8.77 Allowance for loan losses (273,696) - ---------------------------------------------------------------------------------------------------------------------- Loans - net 13,204,618 Cash and due from banks 888,689 Premises and equipment - net 430,574 Customers' liability on acceptances 3,175 Intangible assets - net 182,479 Foreclosed properties - net 35,571 Other assets 588,578 - ---------------------------------------------------------------------------------------------------------------------- Total Assets 21,845,845 ========== Total Earning Assets 19,990,475 398,295 7.96 ========== ======= ==== Liabilities And Shareholders' Equity Interest-bearing demand deposits 5,768,025 42,547 2.93 Regular savings deposits 1,632,096 10,507 2.56 Domestic time deposits 4,741,020 59,896 5.05 Certificates of deposit $100,000 and over 1,343,960 18,589 5.50 - ---------------------------------------------------------------------------------------------------------------------- Total savings and time deposits2 13,485,101 131,539 3.89 Demand deposits 3,114,639 - ---------------------------------------------------------------------------------------------------------------------- Total deposits 16,599,740 Short-term borrowings2 2,456,274 31,811 5.13 Long-term debt2 667,062 11,968 7.18 Liability on acceptances 3,175 Other liabilities 307,527 - ---------------------------------------------------------------------------------------------------------------------- Total liabilities 20,033,778 - ---------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 1,812,067 - ---------------------------------------------------------------------------------------------------------------------- Total Liabilities And Shareholders' Equity 21,845,845 =========== Total interest-bearing liabilities 16,608,437 175,318 4.21 Other sources - net 3,382,038 - ---------------------------------------------------------------------------------------------------------------------- Total Sources Of Funds 19,990,475 175,318 3.49 ========== ======== ===== Net Interest Spread 3.75 Net Interest Income/Margin 222,977 4.47 =======================================================================================================================
1Income 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. 2Indicates earning asset or interest-bearing liability. 3Nonaccrual loans are included in the average loan balances and income on such loans is recognized on a cash basis. 32 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Crestar Financial Corporation Registrant Date May 15, 1997 /s/ JAMES D. BARR -------------------------- James D. Barr Executive Vice President, Controller and Treasurer EX-27 2 EXHIBIT 27
9 3-MOS 3-MOS DEC-31-1997 DEC-31-1996 MAR-31-1997 MAR-31-1996 938,417 903,783 12,558,918 12,966,298 452,090 226,188 1,281 3,771 3,918,514 4,000,411 818,199 1,046,027 811,284 1,040,419 14,214,055 13,771,281 268,870 273,957 21,982,732 21,964,975 15,815,424 16,071,588 3,002,574 2,752,676 496,791 656,707 850,596 704,045 0 0 0 0 551,499 277,879 1,265,848 1,502,080 21,982,732 21,964,975 295,546 296,616 76,941 72,076 16,304 17,134 388,791 385,826 113,719 126,987 169,131 174,173 219,660 211,653 29,698 22,230 4,064 2,373 180,005 175,118 113,424 101,856 71,780 65,111 0 0 0 0 71,780 65,111 0.64 0.58 0.64 0.58 4.51 4.42 75,635 82,445 75,972 67,034 0 0 153,000 194,000 268,868 274,430 37,075 29,259 7,379 6,944 268,870 273,957 0 0 0 0 0 0
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