-----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, MQujsXJzvXd/At9brTAZ/ahPkkMgCuMIogwutjDNNrA3rruekmNRonjz/H3x1pSC tqEUUNLsEsiMOm368psYGg== 0000916641-98-000632.txt : 19980518 0000916641-98-000632.hdr.sgml : 19980518 ACCESSION NUMBER: 0000916641-98-000632 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 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: SEC FILE NUMBER: 001-07083 FILM NUMBER: 98625435 BUSINESS ADDRESS: STREET 1: 919 E MAIN ST STREET 2: PO BOX 26665 CITY: RICHMOND STATE: VA ZIP: 23261 BUSINESS PHONE: 8047825000 MAIL ADDRESS: STREET 1: 919 EAST MAIN STREET STREET 2: P O BOX 26665 CITY: RICHMOND STATE: VA ZIP: 23261-6665 FORMER COMPANY: FORMER CONFORMED NAME: UNITED VIRGINIA BANKSHARES INC DATE OF NAME CHANGE: 19871115 10-Q 1 CRESTAR 10-Q United States Securities And Exchange Commission Washington, DC 20549 Form 10-Q (Mark One) (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended March 31, 1998 ( ) 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, 1998 - ------------------------------------------ ---------------------------------- Common Stock, $5 par value 112,111,670 1 Crestar Financial Corporation And Subsidiaries Form 10-Q For The Quarter Ended March 31, 1998 Part I. Financial Information Item 1. Financial Statements:
Page Consolidated Balance Sheets 3 Consolidated Statements Of Income 4 Consolidated Statements Of Cash Flows 5 Consolidated Statements Of Changes In Shareholders' Equity 6 Notes To Consolidated Financial Statements 7-12 Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations: Financial Commentary 13-32 Part II. Other Information Item 6. Exhibits And Reports On Form 8-K: There was one report on Form 8-K filed during the three months ended March 31, 1998. The Form 8-K was filed on January 30, 1998 in order to file as exhibits, with the Securities and Exchange Commission, the underwriting agreement and other information relating to Crestar Financial Corporation's issuance of $150 million in 6 1/2% subordinated notes, due on January 15, 2018.
2 Consolidated Balance Sheets Crestar Financial Corporation And Subsidiaries
Dollars in thousands, except share data March 31, December 31, Assets 1998 1997 1997 Cash and due from banks $ 974,866 $ 938,417 $ 1,175,314 Securities held to maturity (note 2) 604,415 818,199 626,716 Securities available for sale (note 3) 4,492,665 3,918,514 3,839,006 Money market investments (note 4) 1,052,792 578,664 1,431,790 Mortgage loans held for sale 1,479,077 543,177 964,697 Loans (note 5): Business Loans: Commercial 4,787,852 4,021,873 4,666,505 Real estate - income property 1,196,235 1,267,867 1,254,079 Real estate - construction 386,921 328,856 381,413 Consumer Loans: Instalment 5,218,940 4,092,264 4,846,857 Bank card 1,120,479 1,259,193 1,153,937 Real estate - mortgage 3,435,504 3,244,002 3,374,199 - --------------------------------------------------------------------------------------------------------------------------- Total Loans 16,145,931 14,214,055 15,676,990 Less: Allowance for loan losses (note 6) (280,969) (268,870) (281,394) - --------------------------------------------------------------------------------------------------------------------------- Loans - net 15,864,962 13,945,185 15,395,596 Premises and equipment - net 487,947 440,667 486,111 Intangible assets - net 191,648 176,366 197,420 Foreclosed properties - net (notes 5 and 7) 20,542 25,140 25,731 Other assets 912,564 598,403 786,135 - --------------------------------------------------------------------------------------------------------------------------- Total Assets $26,081,478 $21,982,732 $24,928,516 =========================================================================================================================== Liabilities Demand deposits $ 3,583,630 $ 3,256,506 $ 3,540,340 Interest-bearing demand deposits 6,729,016 5,924,437 6,257,114 Regular savings deposits 1,438,185 1,597,757 1,448,589 Domestic time deposits 4,004,661 4,354,406 4,191,151 Certificates of deposit $100,000 and over 1,257,624 682,318 932,058 - --------------------------------------------------------------------------------------------------------------------------- Total deposits 17,013,116 15,815,424 16,369,252 Short-term borrowings (note 8) 5,439,901 3,002,574 4,789,045 Other liabilities 535,444 496,791 879,073 Long-term debt (note 9) 962,834 850,596 831,383 - --------------------------------------------------------------------------------------------------------------------------- Total Liabilities 23,951,295 20,165,385 22,868,753 Shareholders' Equity Preferred stock. Authorized 2,000,000 shares; none issued - - - Common stock, $5 par value. Authorized 200,000,000 shares; outstanding 111,938,056 and 110,299,785 at March 31,1998 and 1997, respectively; 111,420,187 at December 31, 1997 559,690 551,499 557,101 Capital surplus 362,870 252,892 340,623 Retained earnings 1,210,416 1,070,523 1,162,767 Accumulated other comprehensive income (note 3) (2,793) (57,567) (728) - --------------------------------------------------------------------------------------------------------------------------- Total Shareholders' Equity 2,130,183 1,817,347 2,059,763 Commitments and contingencies (note 11) - --------------------------------------------------------------------------------------------------------------------------- Total Liabilities And Shareholders' Equity $26,081,478 $21,982,732 $24,928,516 ===========================================================================================================================
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 1998 1997 Interest and fees on loans $324,339 $295,546 Interest on securities held to maturity 8,955 13,092 Interest and dividends on securities available for sale 62,411 63,849 Income on money market investments 9,032 4,664 Interest on mortgage loans held for sale 20,571 11,640 - --------------------------------------------------------------------------------------------------------------------------- Total income from earning assets 425,308 388,791 Interest Expense Interest-bearing demand deposits 50,296 41,814 Regular savings deposits 8,126 9,964 Domestic time deposits 50,501 55,063 Certificates of deposit $100,000 and over 16,974 6,878 - --------------------------------------------------------------------------------------------------------------------------- Total interest on deposits 125,897 113,719 Short-term borrowings 55,328 39,797 Long-term debt 17,123 15,615 - --------------------------------------------------------------------------------------------------------------------------- Total interest expense 198,348 169,131 Net Interest Income 226,960 219,660 Provision for loan losses (note 6) 23,096 29,698 - --------------------------------------------------------------------------------------------------------------------------- Net Credit Income 203,864 189,962 - --------------------------------------------------------------------------------------------------------------------------- Noninterest Income Service charges on deposit accounts 33,067 30,163 Trust and investment advisory income 20,119 17,453 Bank card-related income 8,810 12,648 Other income 44,054 39,139 Gains from sale of securities 2,613 4,064 - --------------------------------------------------------------------------------------------------------------------------- Total noninterest income 108,663 103,467 Net Credit And Noninterest Income 312,527 293,429 Noninterest Expense Personnel expense 100,855 99,342 Occupancy expense - net 13,154 16,158 Equipment expense 10,802 9,819 Other expense 56,175 54,686 - --------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 180,986 180,005 Income Before Income Taxes 131,541 113,424 Income tax expense (note 10) 46,668 41,644 - --------------------------------------------------------------------------------------------------------------------------- Net Income $ 84,873 $ 71,780 =========================================================================================================================== Earnings Per Share Basic $ .76 $ .65 Diluted .75 .64 ===========================================================================================================================
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, -------------------------------- 1998 1997 Operating Net Income $ 84,873 $ 71,780 Activities Adjustments to reconcile net income to net cash provided (used) by operating activities: Provisions for loan losses, foreclosed properties and other losses 23,096 29,698 Depreciation and amortization of premises and equipment 12,052 10,896 Amortization of intangible assets 4,793 4,227 Deferred income tax expense (benefit) 8,693 (1,408) Net gain on sales of securities, loans and other assets (8,470) (17,026) Origination and purchase of loans held for sale (1,994,817) (784,068) Proceeds from sales of loans held for sale 1,480,437 899,729 Net decrease in accrued interest receivable, prepaid expenses and other assets 57,304 56,081 Net increase in accrued interest payable, accrued expenses and other liabilities 56,065 22,624 Other, net 5,270 6,818 ------------------------------------------------------------------------------------------------ Net cash provided (used) by operating activities (270,704) 299,351 - -------------------------------------------------------------------------------------------------------------- Investing Proceeds from maturities and calls of securities held to maturity 30,396 154,961 Activities Proceeds from maturities and calls of securities available for sale 170,948 106,655 Proceeds from sales of securities available for sale 1,141,096 1,496,848 Purchases of securities held to maturity (8,275) (3,679) Purchases of securities available for sale (2,543,542) (1,149,597) Net increase in money market investments 382,392 160,726 Principal collected on non-bank subsidiary loans 20,982 50,193 Loans originated by non-bank subsidiaries (26,473) (51,362) Proceeds from sales of loans 146,422 - Net increase in other loans (96,030) (220,587) Purchases of premises and equipment (13,262) (17,051) Proceeds from sales of foreclosed properties and mortgage servicing rights 16,432 17,531 Purchases of loans and loan portfolios (538,039) - Proceeds from sales of premises - 6,625 Other, net (24,334) (3,467) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by investing activities (1,341,287) 547,796 - --------------------------------------------------------------------------------------------------------------------------- Financing Net increase (decrease) in demand, interest-bearing demand Activities and regular savings deposits 504,788 (108,519) Net increase in certificates of deposit 139,076 252,733 Net increase (decrease) in short-term borrowings 650,856 (1,113,477) Proceeds from issuance of long-term debt 152,695 - Principal payments on long-term debt (21,268) (8,765) Cash dividends paid (32,312) (29,665) Common stock purchased and retired (5,412) (29,739) Proceeds from the issuance of common stock 23,236 23,830 Other, net (116) (164) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities 1,411,543 (1,013,766) - --------------------------------------------------------------------------------------------------------------------------- Cash And Decrease in cash and cash equivalents (200,448) (166,619) Cash Cash and cash equivalents at beginning of year 1,175,314 1,105,036 - --------------------------------------------------------------------------------------------------------------------------- Equivalents Cash and cash equivalents at end of quarter $ 974,866 $ 938,417 ===========================================================================================================================
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
Dollars in thousands Capital Accumulated Shares of Surplus and Other Common Common Retained Comprehensive Stock Stock Earnings Income Total Balance, January 1, 1998 111,420,187 $557,101 $1,503,390 $ (728) $2,059,763 Comprehensive Income: Net Income - - 84,873 - 84,873 Net unrealized loss on securities available for sale, net of reclassification adjustment (note 3) - - - (2,065) (2,065) - --------------------------------------------------------------------------------------------------------------------------- Comprehensive Income - - 84,873 (2,065) 82,808 Cash dividends declared on common stock - - (32,312) - (32,312) Common stock purchased and retired (100,000) (500) (4,912) - (5,412) Common stock issued: For dividend reinvestment plan 153,278 766 7,296 - 8,062 For thrift and profit sharing plan 207,939 1,040 10,283 - 11,323 For other stock compensation plans 2,604 13 88 - 101 Upon exercise of stock options (including tax benefit of $1,999) 254,048 1,270 4,580 - 5,850 - --------------------------------------------------------------------------------------------------------------------------- Balance, March 31, 1998 111,938,056 $559,690 $1,573,286 $(2,793) $2,130,183 =========================================================================================================================== Balance, January 1, 1997 109,869,886 $549,350 $1,251,444 $(21,284) $1,779,510 Comprehensive Income: Net Income - - 71,780 - 71,780 Net unrealized loss on securities available for sale, net of reclassification adjustment (note 3) - - - (36,283) (36,283) - --------------------------------------------------------------------------------------------------------------------------- Comprehensive Income - - 71,780 (36,283) 35,497 Cash dividends declared on common stock - - - - - Common stock purchased and retired (823,566) (4,118) (25,621) - (29,739) Cash paid in lieu of fractional shares (4,736) (24) (140) - (164) Common stock issued: For dividend reinvestment plan 169,730 849 5,110 - 5,959 For thrift and profit sharing plan 181,919 910 5,647 - 6,557 For other stock compensation plans 53,679 268 1,578 - 1,846 Upon exercise of stock options (including tax benefit of $6,567) 852,873 4,264 13,617 - 17,881 - --------------------------------------------------------------------------------------------------------------------------- Balance, March 31, 1997 110,299,785 $551,499 $1,323,415 $(57,567) $1,817,347 ===========================================================================================================================
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 1998 presentation. The notes included herein should be read in conjunction with the notes to the consolidated financial statements included in the Corporation's 1997 Annual Report and Form 10-K. On January 1, 1998, Crestar adopted the provisions of Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130 requires the disclosure of an amount that represents total comprehensive income, and the related components, in a consolidated financial statement. Balances and components of Crestar's comprehensive income for the three months ended March 31, 1998 and 1997 are disclosed in Crestar's Consolidated Statements of Changes in Shareholders' Equity. The adoption of SFAS 130 had no impact on the Corporation's financial position or results of operations. Intangible assets consisted of goodwill and deposit based intangibles, having a combined balance of $191.2 million and $176.0 million at March 31, 1998 and 1997, respectively, and favorable lease rights of $358,000 and $413,000, respectively. Capitalized mortgage servicing rights of $74.2 million and $48.3 at March 31, 1998 and 1997, respectively, were included in other assets in the consolidated financial statements. Mortgage servicing rights of approximately $24 million and $4 million were capitalized during the first three months of 1998 and 1997, respectively. At March 31, 1998 and 1997, mortgage servicing rights were net of a related valuation allowance of $538,000. The activity in such valuation allowance was not material to the consolidated financial statements for the three months ended March 31, 1998 and 1997. The fair value of capitalized mortgage servicing rights was approximately $90 million at March 31, 1998. Amortization of capitalized mortgage servicing rights was approximately $5 million and $3 million in the first three months of 1998 and 1997, respectively. During the first three months of 1998 and 1997, Crestar capitalized interest of $1.2 million and $486,000, respectively, associated with construction in progress. (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 1998 1997 --------------------------- ------------------------- Amortized Market Amortized Market Cost Value Cost Value U.S. Treasury and Federal agencies $196,611 $197,109 $208,155 $204,943 Mortgage-backed obligations of Federal agencies 358,703 361,868 546,421 542,480 Other taxable securities 2,840 2,836 13,075 13,052 States and political subdivisions 46,261 47,219 50,548 50,809 - --------------------------------------------------------------------------------------------------------------------------- Total securities held to maturity $604,415 $609,032 $818,199 $811,284 ===========================================================================================================================
7 (3) Securities Available For Sale The amortized cost and estimated market values (carrying values) of securities available for sale at March 31 follow:
In thousands 1998 1997 ------------------------ ------------------------- Amortized Market Amortized Market Cost Value Cost Value U.S. Treasury and Federal agencies $ 195,675 $ 195,194 $ 616,634 $ 604,989 Mortgage-backed obligations of Federal agencies 3,189,258 3,181,025 2,587,259 2,515,503 Other taxable securities 906,303 909,371 579,728 573,725 Common and preferred stocks 206,193 207,075 223,857 224,297 - --------------------------------------------------------------------------------------------------------------------------- Total securities available for sale $4,497,429 $4,492,665 $4,007,478 $3,918,514 ===========================================================================================================================
The period-end net unrealized loss on securities available for sale, net of tax, is reflected in the Consolidated Balance Sheet and the Consolidated Statement of Changes in Shareholders' Equity as "Accumulated other comprehensive income." For the three months ended March 31, 1998 and 1997, the net unrealized loss on securities available for sale reflected in the Statement of Changes in Shareholders' Equity is net of reclassification adjustments for gains from sale of securities, net of tax, as included in net income. Gains from the sale of securities during the first quarter of 1998 totaled $2.6 million. Net of income tax expense of approximately $0.9 million, the gain resulted in a $1.7 million reclassification adjustment. Gains from sale of securities during the first quarter of 1997 totaled $4.1 million. Net of income tax expense of $1.4 million, the gain resulted in a reclassification adjustment of $2.7 million for the first quarter of 1997. At March 31, 1998, 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 $1.75 billion, have a cost basis of $11.0 million and a market value of $751,000 at March 31, 1998. The cost basis of the interest rate caps is being amortized as a reduction of interest income on securities available for sale. Amortization of the cost basis of the interest rate caps totaled $1.3 million during each of the three month periods ended March 31, 1998 and 1997. (4) Money Market Investments Money market investments at March 31 included:
In thousands 1998 1997 Securities purchased under agreements to resell $ 800,000 $150,500 Federal funds sold 225,000 301,590 Time deposits - 100,000 U.S. Treasury 8,362 6,034 Trading account securities 10,233 1,281 Other 9,197 19,259 - --------------------------------------------------------------------------------------------------------------------------- Total money market investments $1,052,792 $578,664 ===========================================================================================================================
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 $67.0 million and $76.0 million at March 31, 1998 and 1997, respectively.
In thousands 1998 1997 Nonaccrual loans $65,528 $ 75,635 Foreclosed properties - net 20,542 25,140 - -------------------------------------------------------------------------------------- Total nonperforming assets $86,070 $100,775 ======================================================================================
Transfers from nonperforming loans to foreclosed properties (non-cash additions) were $1.3 million in the first three months of 1998. 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, 1998 and 1997 were $13.6 million with an allowance of $2.2 million and $24.8 million with an allowance of $4.6 million, respectively. All impaired loans had an allocated valuation allowance at March 31, 1998 and 1997. Collateral dependent loans, which were measured at the fair value of the collateral, constituted 100% of impaired loans at March 31, 1998. The average recorded investment in impaired loans for the three months ended March 31, 1998 and 1997 was $13.9 million and $27.3 million, respectively. There was no material interest income recognized on impaired loans in the first three months of 1998 and 1997. (6) Allowance For Loan Losses Transactions in the allowance for loan losses for the three months ended March 31 were:
In thousands Three Months ------------------------- 1998 1997 Beginning balance $281,394 $268,868 - -------------------------------------------------------------------------------------- Charge-offs (31,248) (37,075) Recoveries 6,196 7,379 - -------------------------------------------------------------------------------------- Net charge-offs (25,052) (29,696) Provision for loan losses 23,096 29,698 Allowance from acquisitions and other activity - net 1,531 - - -------------------------------------------------------------------------------------- Net increase (decrease) (425) 2 Ending balance $280,969 $268,870 ======================================================================================
(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 ------------------------ 1998 1997 Beginning balance $13,191 $18,449 - ------------------------------------------------------------------------------- Provision for foreclosed properties (1,100) - Write-downs (7,742) (373) - ------------------------------------------------------------------------------- Ending balance $ 4,349 $18,076 ===============================================================================
9 (8) Short-Term Borrowings Short-term borrowings, exclusive of deposits, with maturities of less than one year at March 31 were:
In thousands 1998 1997 Federal funds and term Federal funds purchased $3,509,390 $1,564,130 Securities sold under repurchase agreements 841,422 683,018 Federal Home Loan Bank borrowings 521,500 525,000 U.S. Treasury demand notes 318,138 - Notes payable 247,788 228,297 Other 1,663 2,129 - --------------------------------------------------------------------------------------------------------------------------- Total short-term borrowings $5,439,901 $3,002,574 ===========================================================================================================================
The Corporation paid $174.2 million and $143.1 million in interest on deposits and short-term borrowings in the first three months of 1998 and 1997, respectively. (9) Long-Term Debt Long-term debt at March 31 included:
In thousands 1998 1997 4 - 8% Federal Home Loan Bank obligations payable through 2017 $264,186 $302,513 61/2% Subordinated notes due 2018 152,695 - 83/4% Subordinated notes due 2004 149,742 149,703 81/4% Subordinated notes due 2002 125,000 125,000 85/8% Subordinated notes due 1998 50,000 49,989 77/8 - 111/4% Collateralized mortgage obligation bonds maturing through 2019 11,795 14,042 81/4% Mortgage indebtedness maturing through 2009 7,774 8,372 81/8 - 143/8% Capital lease obligations maturing through 2006 1,642 977 Crestar Capital Trust I preferred stock 200,000 200,000 - --------------------------------------------------------------------------------------------------------------------------- Total long-term debt $962,834 $850,596 ===========================================================================================================================
The Corporation paid $9.4 million and $9.9 million in interest on long-term debt in the first three months of 1998 and 1997, respectively. In the first quarter of 1998, Crestar completed the sale of $150 million of 61/2% subordinated notes due January 15, 2018, but putable or callable January 15, 2008. The put and call options embedded in the notes could require Crestar to repurchase the notes at face value on January 15, 2008. Otherwise, the interest rate on the notes will reset based on the terms of the underlying debt agreement for the period remaining until final maturity on January 15, 2018. Net of underwriting discounts, the notes resulted in net proceeds to the Corporation of $152.7 million. Proceeds from the sale were used for general corporate purposes, including funding for the April 15, 1998 maturity of $50 million of 8 5/8% subordinated debentures. 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 --------------------------- 1998 1997 Current: Federal $37,318 $39,582 State and local 657 3,470 - ---------------------------------------------------------------------------------------- Total current tax expense 37,975 43,052 Deferred: Federal 8,021 (1,132) State and local 672 (276) - ---------------------------------------------------------------------------------------- Total deferred tax expense (benefit) 8,693 (1,408) Total income tax expense $46,668 $41,644 ========================================================================================
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 -------------------------------------- 1998 1997 -------------------------------------- Amount % Amount % Income before income taxes $131,541 $113,424 Tax expense at statutory rate 46,039 35.0 39,698 35.0 - ----------------------------------------------------------------------------------------------------------- Increase (decrease) in taxes resulting from: Tax-exempt interest and dividends (2,145) (1.6) (1,702) (1.5) Nondeductible interest expense 636 .5 429 .4 Amortization of goodwill 1,234 .9 1,045 .9 State income taxes 864 .7 2,076 1.8 Other - net 40 - 98 .1 - ----------------------------------------------------------------------------------------------------------- Total increase in taxes 629 .5 1,946 1.7 Total income tax expense $ 46,668 35.5 $41,644 36.7 ===========================================================================================================
The Corporation made income tax payments of $207,000 and $6.6 million during the first three months of 1998 and 1997, respectively. At March 31, 1998, the Corporation had a net deferred income tax asset of $115.0 million. 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 (11) Commitments And Contingencies Legally binding, unfunded commitments to extend credit were $12.1 billion and $9.7 billion at March 31, 1998 and 1997, respectively. Standby letters of credit, which are conditional commitments that guarantee the performance of customers to a third party, were $465 million at March 31, 1998. Recourse obligations on mortgage loans serviced of $1.7 billion at March 31, 1998 included $1.1 billion which was insured by agencies of the Federal government or private insurance companies. Recourse obligations also included $104 million of contractual recourse liability accepted by Crestar on mortgage loan sales to Federal agencies and $130 million on certain mortgage loan sales to private investors. Crestar maintained an allowance of $309,000 at March 31, 1998 based on estimates of future losses on this contractual recourse liability. For interest rate risk management purposes at March 31, 1998, Crestar was using interest rate (fixed receive) swaps with notional balances of $1.325 billion 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 $1.75 billion and $200 million to hedge the market value of fixed rate securities available for sale and real estate income property loans, respectively, and $560 million to minimize interest rate risk associated with rising rates on floating rate money market deposits. The carrying value and net unrealized loss on these swaps and caps were $20.4 million and $801,000, respectively, at March 31, 1998. As a financial intermediary for customers, Crestar had $89.8 million in offsetting swap, $23.8 million in offsetting cap and $8 million in offsetting collar agreements at March 31, 1998. The notional amount of these over-the-counter traded interest rate swaps, caps and collars does not fully represent Crestar's credit and market exposure, which the Corporation believes is a combination of current replacement cost of approximately $21.9 million, less collateral held of approximately $14.6 million, plus an amount for prospective market movement. Two counterparties constituted 16% each and one counterparty 10% of the estimated credit and market exposure of $58.3 million at March 31, 1998. Crestar also had forward agreements outstanding at March 31, 1998, 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 loss on such forward agreements was $4.2 million at March 31, 1998. Certain litigation is pending or threatened against Crestar. Management, in consultation with legal counsel, is of the opinion that there is no 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 Information in the following "Financial Commentary," 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, changes in management's strategies, 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. Overview (Tables 1, 2 and 11) Crestar Financial Corporation (Crestar or the Corporation) reported net income of $84.9 million for the quarter ended March 31, 1998, an increase of $13.1 million or 18% over net income reported in the first quarter of 1997. These increases reflect the positive effects of growth in earning assets and noninterest income, and management of controllable expenses. Diluted earnings per share were $.75 for the first quarter of 1998, compared to $.64 in 1997. The predominant items affecting the change in earnings per share are given in Table 2. Each item is net of applicable federal income taxes. 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. Mergers And Acquisitions On April 15, 1998, Crestar completed the acquisition of Executive Auto Leasing, Inc. (Executive), a privately-held auto leasing company based in Beltsville, Maryland. Executive, with total assets of approximately $21 million, is expected to expand Crestar's ability to offer commercial and consumer auto leasing to customers. Profitability Measures And Capital Resources (Table 1) Crestar's increased earnings in the first quarter of 1998 resulted in improvements in key profitability measures when compared to the same period of 1997. Return on average assets was 1.41% in the first three months of 1998, up from the 1.33% reported for the first three months of 1997. Return on average equity was 16.41% for the quarter ended March 31, 1998, compared to 16.06% for the first quarter of 1997. Average equity to assets was 8.61% for the first quarter of 1998, compared to 8.26% for the first quarter of 1997. Period-end equity to assets of 8.17% at March 31, 1998 compared to a March 31, 1997 ratio of 8.27%. Risk-based capital ratios are another measure of capital adequacy. At March 31, 1998, Crestar's consolidated risk-adjusted capital ratios were 10.0% for Tier 1 and 13.1% for total capital, well above the required minimums of 4.0% and 8.0%, respectively. The Tier 1 leverage ratio of 9.0% at March 31, 1998 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, 1998. Under Federal Deposit Insurance Corporation (FDIC) rules, Crestar's sole subsidiary bank (Crestar Bank) was considered "well-capitalized" as of March 31, 1998, 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 $175 million in subordinated debt securities, preferred stock or common stock, or any combination thereof. 13 Net Interest Margin And Net Interest Income (Tables 3 and 12) Crestar's net interest margin for the first quarter of 1998 was 4.18%, representing a decline of 33 basis points from the net interest margin of 4.51% recorded in the first quarter of 1997. The decline was attributable to unfavorable changes in both the balance sheet mix of earning assets and funding sources, and in the interest yields impacting the Corporation's earning assets. These factors offset the impact of favorable changes in rates paid on funding sources, in comparison to market movements in short-term funding sources, and favorable changes in off-balance sheet hedges on the Corporation's net interest margin. Crestar's yield on average total loans during the first three months of 1998 decreased 21 basis points from the first quarter of 1997, to 8.45%, reflecting lower yields on consumer loan categories. Crestar's net interest margin was detrimentally impacted by declines in the average yield on bank card loans, which have historically been Crestar's highest yielding loan type. Indicative of a competitive environment, yields on bank card loans fell from 14.47% in the first quarter of 1997 to 13.90% for the first quarter of 1998. Yields on securities held to maturity exhibited a 16 basis point increase in yield, while the yield on the larger securities available for sale portfolio decreased 1 basis point in the first quarter of the current year, compared to first quarter 1997 results. During the same time period, yields on money market investments experienced increases in average rates earned, reflecting higher federal funds rates and short-term investment rates for the current period. Yields on mortgage loans held for sale, however, were down 94 basis points for the first quarter of 1998 versus the same period of 1997. The average rate earned on total earning assets was down 14 basis points, to 7.84% in the first quarter of 1998, in comparison to first quarter 1997 results. Reflecting an environment of higher short-term interest costs, a competitive environment for consumer deposits, and the introduction of new consumer deposit products with rates tied to national money market yields, the average rate paid on total interest-bearing liabilities increased by 22 basis points during this period. Average rates paid on interest-bearing demand deposits increased from 3.00% in the first quarter of 1997 to 3.17% in the first three months of 1998. Average rates paid on domestic time deposits edged up 5 basis points from the first quarter of 1997, while average rates paid on regular savings deposits fell 21 basis points during the same time period. During the first quarter of 1998, average rates paid on certificates of deposit of $100,000 and over increased by 31 basis points, to 5.72%, from the levels of first quarter 1997. Crestar's average rate paid on total savings and time deposits rose from 3.78% in the first quarter of 1997 to 3.89% in the first quarter of 1998. Because this increase was less than the average increase in rates paid for short-term borrowings for the same time period, Crestar experienced a favorable impact from deposit funding sources on the net interest margin for the first quarter of 1998, in comparison to the net interest margin of 1997's first quarter. Average rates paid on short-term borrowings increased by 19 basis points from the first three months of 1997 to the same period of 1998. Interest rates paid on long-term debt also edged upward, by 7 basis points, during the first quarter of 1998 in comparison to the same period of 1997, reflecting scheduled reductions in lower-rate Federal Home Loan Bank obligations. Excluding the impact of derivative instruments utilized as hedges, the change in the Corporation's interest rate spreads had a negative impact of 18 basis points on Crestar's first quarter 1998 net interest margin, when compared to the first quarter of 1997. Average rates paid on funding sources increased at a lower level than short-term interest rates, contributing to a favorable impact of 8 basis points for the Corporation's net interest margin for the first quarter of 1998. This was offset by unfavorable changes in yields on earning assets during the same period, which caused an unfavorable impact of 26 basis points on the net interest margin for the first three months of 1998, in comparison to the same period of 1997. Overall changes in the average balances of earning assets resulted in a negative impact to the first quarter 1998 net interest margin of 4 basis points, in comparison to first quarter 1997 results. Within the loan portfolio, average balances of bank card loans fell by $208 million, or 16%, from average levels of the first quarter of 1997. Bank card loans have exhibited declining average balances during the past two years, as marketing efforts directed to new accounts have been curtailed from previous levels. Also, as lower promotional interest rates on selected bank card loans have expired, some customers have elected to pay-off or pay-down outstanding balances. Total 14 business loans exhibited a 14% increase in average balances outstanding, due to substantial growth in commercial and real estate - construction loans. Real estate - income property loan average balances were down 2% from the first quarter of 1997. Consumer instalment loans increased 17% in the first quarter of 1998, or $704 million, compared to first quarter 1997 average balances, reflecting strong marketing efforts, and some purchases of individual loan portfolios. Consumer real estate - mortgage loans, which has historically been Crestar's lowest yielding loan category, increased $464 million or 15% from first quarter 1997 to first quarter 1998. Average balances of total securities decreased by $385 million, or 8%, from first quarter 1997 to first quarter 1998. Average balances of money market investments increased by $290 million during the same period. Reflecting record volumes of mortgage loan originations during the first quarter of 1998, average balances of mortgage loans held for sale were up $570 million, or 98%, over balances for the first quarter of 1997. Unfavorable changes in Crestar's funding sources resulted in a negative impact to the first quarter 1998 net interest margin of 15 basis points, in comparison to first quarter 1997 results. Average total deposits for the first quarter of 1998 increased by $900 million, to $16.4 billion, a 6% increase over first quarter 1997 average balances. Average balances of domestic time deposits, which are primarily composed of consumer certificates of deposit, decreased by $411 million or 9% from first quarter 1997 to first quarter 1998. Regular savings deposits also exhibited lower average balances, decreasing 11% from the first quarter of 1997. Average balances of certificates of deposits $100,000 and over increased by $688 million during the same time period, and represented 7% of average total deposits during the first quarter of 1998. Demand deposits, a noninterest bearing source of funds, exhibited an increase in average balances of $166 million, or 5%, during the first quarter of 1998, in comparison to the same period of 1997. Average balances of short-term borrowings increased $1.1 billion, or 34%, during the first quarter of 1998, in comparison to the first quarter of 1997. Average balances of long-term debt totaled $927 million for the first three months of 1998, representing an increase of $74 million over average balances of the same period of 1997. Short-term borrowings and long-term debt represented 19% and 4%, respectively, of total funding sources for the first quarter of 1998. Total off-balance sheet interest rate hedges had a positive impact on net interest income of $785 thousand during the first quarter of 1998, which was composed of a $596 thousand increase in interest income and a $189 thousand decrease in interest expense, based on the underlying asset or liability being hedged. The positive impact on the first quarter 1998 net interest margin equated to 1 basis point. In the first quarter of 1997, the comparable impact of hedging activity was a decrease to Crestar's total interest income of approximately $660 thousand and an increase to interest expense of $380 thousand, resulting in a negative impact of 2 basis points to that quarter's net interest margin. On a comparative basis, derivative instruments utilized as hedges contributed to a 3 basis point increase to Crestar's net interest margin in the first quarter of 1998, compared to the first quarter of 1997. Lower levels of nonperforming assets resulted in a favorable impact of 1 basis point to the Corporation's net interest margin for the first quarter of 1998, versus the same period of 1997. 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. Despite the decline in net interest margin, Crestar's net interest income for the first quarter of 1998 increased 3% over the first quarter of 1997. Tax-equivalent net interest income similarly increased by 3% during this period. The increase reflects an 11% increase in average earning assets from the quarter ended March 31, 1997, which offset the Corporation's lower net interest margin realized during the first quarter of 1998. Risk Exposures And Credit Quality (Tables 4 and 5) Crestar's allowance for loan losses totaled $281 million at March 31, 1998, representing 1.74% of period-end loans, 326% of period-end nonperforming assets, and a 429% 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 $67.0 million at March 31, 1998, with consumer loans representing 95% of this balance. 15 At March 31, 1998, nonperforming assets of $86.1 million were down $14.7 million or 15% from March 31, 1997, and also down slightly from the December 31, 1997 balance of $86.2 million. The ratio of nonperforming assets to loans and foreclosed properties-net at March 31, 1998 was 0.53%, compared to 0.55% at December 31, 1997 and 0.71% at March 31, 1997. Future operating results could show increases in the total balance of nonperforming assets due to loan growth, future acquisitions of the assets of financial institutions, or adverse changes in credit quality. The provision for loan losses was $23.1 million for the first quarter of 1998, a decrease of $6.6 million from the $29.7 million provision expense recorded in the first quarter of 1997. Provision expense in the fourth quarter of 1997 was $23.3 million. Net charge-offs totaled $25.1 million in the first three months of 1998, compared to $29.7 million in the comparable period of 1997. Net charge-offs as a percentage of average loans were 0.64% for the first quarter of 1998, compared to 0.86% in the same period of 1997, and 0.64% for the fourth quarter of 1997. Business loans experienced net recoveries of $237 thousand during the first quarter of 1998, compared to net recoveries of $32 thousand in the comparable quarter of 1997. Consumer loan net charge-offs totaled $25.3 million in the first quarter of 1998, compared to net charge-offs of $24.9 million in the fourth quarter of 1997 and $29.7 million in the first quarter of 1997. The largest proportion of net loan charge-offs during the first quarter of 1998 occurred in the bank card loan portfolio. Net charge-offs for bank card loans were $20.5 million in the first three months of 1998, compared to $23.4 million in 1997's first quarter and $19.5 million in the fourth quarter or 1997. Net bank card loan charge-offs as a percentage of bank card loans (on an annualized basis) were 7.26% for the first quarter of 1998, compared to 6.86% in the fourth quarter of 1997, and 6.98% in the first quarter of 1997. In Crestar's experience, the delinquency and loss performance of newly underwritten bank card loans typically do not reach their highest levels until after 24 months from origination. Crestar's bank card loss rates have been higher than originally expected due to an unanticipated decline in consumer payment performance, influenced by a substantive increase in consumer bankruptcy filings. Crestar's experience is similar to many others in the credit card business. The increase in the net charge-off ratio for the first quarter of 1998, in comparison to both the first quarter of 1997 and the fourth quarter of 1997, is a result of a more seasoned portfolio, higher than expected bankruptcies and the moderation of new bank card marketing programs. Moderating new marketing programs has contributed to a declines in outstanding bank card loan balances since 1996. Average outstanding balances of bank card loans have declined from $1.63 billion in the first quarter of 1996 to $1.13 billion for the first quarter of 1998, a decline of 31%. At March 31, 1998, bank card loans totaled $1.12 billion and represented 7% of Crestar's total loan portfolio. Net instalment loan charge-offs of $4.5 million were recorded in the first quarter of 1998, compared to $5.0 million in the fourth quarter of 1997 and $5.5 million for the first quarter of 1997. Real estate - mortgage net loan charge-offs totaled $260 thousand for the first quarter of 1998, compared to $328 thousand for the fourth quarter of 1997 and $813 thousand for the first quarter of 1997. 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 stable and totaled $1.8 billion at March 31, 1998. This balance represented 11% of the total loan portfolio at that date. At December 31, 1997, REDI loans also represented 11% of the total loan portfolio. REDI nonperforming assets were $36.2 million at March 31, 1998, compared to $53.6 million at March 31, 1997 and $40.3 million at December 31, 1997. 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, 1998, not included in Table 5, totaled approximately $75 million. Commercial or real estate-income property related loans constitute over 90% of this balance. 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 $77 million at December 31, 1997 and $153 million at March 31, 1997. 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 $16.1 billion at March 31, 1998. 16 Noninterest Income And Expense (Table 6) Noninterest income totaled $108.7 million in the first quarter of 1998, a $5.2 million or 5% increase over the first quarter of 1997. Excluding securities gains and losses, noninterest income increased $6.6 million or 7% over the results for the first three months of 1997. This increase reflects growth in the noninterest income categories of deposit account income, trust and investment advisory income, and mortgage origination income. Deposit account income, in part reflecting higher average balances of transaction-based deposit accounts, increased by $2.9 million or 10% from the first quarter of 1997. Trust and investment advisory income increased $2.7 million or 15% from 1997 levels. Mortgage origination income, net of expenses, totaled $15.1 million for the first quarter of 1998, compared to $0.9 million for the first quarter of 1997, reflecting record levels of real estate - mortgage loan originations by Crestar's mortgage banking subsidiary. Lower interest rates on home mortgage loans have led to high origination volumes, especially in comparison to the first quarter of 1997. Noninterest income for the first quarter of 1997 reflects gains on the sale of mortgage servicing rights of $6.5 million; there were no sales of servicing rights in the first quarter of 1998. Miscellaneous noninterest income increased by $3.9 million over the first quarter of 1997, primarily attributable to a first quarter 1998 gain arising from sale of loans. Increases in securities brokerage fees, mutual fund and insurance income were also experienced 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 in the Citizens Bancorp merger. Noninterest expense increased $1.0 million, or 1%, in the first quarter of 1998 compared to the same period of 1997. Excluding foreclosed properties expense, noninterest expense also increased 1% in the quarter. Total personnel costs, Crestar's largest expense category, were $100.9 million in the first quarter of 1998, a 2% increase over the same period of 1997. Advertising and marketing costs for the first quarter of 1998 reflect expanded marketing efforts within Crestar's marketplace, and in part soliciting new customers in a period of interstate banking mergers within Crestar's marketplace. FDIC deposit insurance expense totaled $0.4 million in the first quarter of 1998, versus $1.1 million in the first quarter of 1997. A net recovery of $0.5 million was recorded for foreclosed properties expense for the quarter ended March 31, 1998, compared to an expense of $0.7 million in the quarter ended March 31, 1997. Included in first quarter 1997 results are approximately $2.0 million in one-time expenses associated with the Citizens Bancorp merger, which was consummated on December 31, 1996. Noninterest expense for the three months ended March 31, 1998 includes $3.0 million of costs incurred in preparing the Corporation's data processing systems to be "Year 2000" compatible. The total cost for this conversion and testing process is estimated to be between $22 and $27 million, with the majority of costs expected to be incurred during 1998. This estimate includes some costs, such as the purchase of computer hardware, that will qualify as depreciable assets for accounting purposes, with the related depreciation expense recognized over the estimate lives of the applicable assets. However, the majority of costs will be expensed as incurred. Through March 31, 1998, Crestar had incurred approximately $8.3 million of noninterest expense associated with the Year 2000 conversion project. The effective tax rate for the first quarter of 1998 was 35.5%, compared to 36.7% in the first quarter of 1997. Lower state income tax provisions contributed to the lower tax rate for 1998. Financial statement note 10 contains additional information concerning income taxes. Financial Condition (Table 7) Crestar's assets totaled $26.1 billion at March 31, 1998, compared to $24.9 billion in assets at December 31, 1997, and $22.0 billion at March 31, 1997. Loan balances totaled $16.1 billion at March 31, 1998 compared to $15.7 billion at December 31, 1997 and $14.2 billion at March 31, 1997. Total deposits were $17.0 billion at the end of the first quarter of 1998, compared to $16.4 billion at December 31, 1997 and $15.8 billion at March 31, 1997. Excluding certificates of deposit of $100,000 or more, deposits totaled $15.8 billion at March 31, 1998, 17 compared to $15.4 billion at December 31, 1997 and $15.1 billion at March 31, 1997. With respect to the securities held to maturity portfolio, market value exceeded the carrying value at March 31, 1998 by $4.6 million, consisting of $5.9 million in unrealized gains and $1.3 million of unrealized losses. At March 31, 1998, the amortized cost of securities available for sale exceeded the fair value of such securities by $4.8 million, consisting of $18.2 million in unrealized gains and $23.0 million in unrealized losses. Shareholders' equity at March 31, 1998 reflects a $2.8 million reduction for the excess, net of tax, of amortized cost of securities available for sale over the fair value at quarter-end, compared to an decrease of $0.7 million at December 31, 1997. At March 31, 1997, Crestar's shareholders' equity reflected a $57.6 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 is recorded as a component of shareholders' equity, and is classified as "accumulated other comprehensive income" on the consolidated balance sheet. Net unrealized gain or loss on securities available for sale 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. Similarly, prepayment risks exists within the company's loan portfolio. Home equity instalment loans and real estate mortgage loans are particularly susceptible to increased prepayments in a declining interest rate environment. The interest rate and prepayment risk associated with mortgage-backed securities and consumer loans 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 71% (market value) of Crestar's available for sale portfolio, and 59% (amortized cost) of the Corporation's securities held to maturity portfolio, was composed of mortgage-backed obligations of Federal agencies as of March 31, 1998. This category includes mortgage-backed securities of Federal agencies, 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 obligations, and corporate obligations securitized by credit card or instalment loans. Other taxable securities classified as available for sale at March 31, 1998 included $901 million (market value) of non-government CMO obligations. During the first quarter of 1998, Crestar sold approximately $1.1 billion of securities classified as available for sale, generating net securities gains of $2.6 million. Such sales were consummated in conjunction with the overall management of interest rate and credit risk for the Corporation. Securities gains recorded in the first quarter of 1997 totaled $4.1 million. Also during the first quarter of 1998, Crestar issued $150 million in subordinated notes, having a stated interest rate of 6.5% and due on January 15, 2018. The notes were issued with embedded put and call options which could require Crestar to repurchase the notes at face value on January 15, 2008. If the debt is not repurchased by Crestar, the interest rate on the notes will be reset in January 2008 based on guidelines within the debt agreement. Proceeds from this long-term debt issuance were used for general corporate purposes, including funding for the maturity of $50 million in subordinated long-term notes in April 1998. Crestar purchased and retired 100,000 shares of common stock during the first quarter of 1998, at an average price of $54 per share. The purpose of these transactions was to retire shares previously issued in the November 1997 purchase of American National Bancorp, Inc. 18 A common stock dividend of $.29 per share was declared and paid to shareholders during the first quarter of 1998. In April 1998, Crestar announced a common stock dividend increase, effective with the dividend to be paid on May 21, 1998, to $.33 per share. This represented a 14% increase from the previous quarterly dividend rate. The Corporation's objective is to pay dividends of at least 30% to 45% of earnings to common shareholders, with a current bias towards the higher end of this range, given the Corporation's strong capital position. Liquidity, Market Risk And Interest Sensitivity (Tables 8 - 10) 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 this objective 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 significant source of liquidity. Crestar's interest-bearing core deposits represented 51% of total funding sources at March 31, 1998 and 53% at December 31, 1997, compared to 59% at March 31, 1997. As an additional indication of strong liquidity, securities available for sale represented 19%, and money market investments an additional 4%, of Crestar's total earning assets at March 31, 1998. Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates or equity prices. Like many financial institutions, Crestar's principal market risk is interest rate risk. Interest rate risk can be measured by looking at the volatility of projected net income as a result of possible changes in interest rates over a given period of time. Crestar's goal is to limit interest rate exposure to prudent levels as determined by the Corporation's ALCO committee. The committee establishes limits on the earnings at risk for a current planning period, usually defined as either the current calendar year or the remainder of the current year plus the next calendar year. Established limits are subject to change, but have typically been 10% or less of projected net income for the planning period. Actions that can be taken to manage interest rate risk include changing the mix of floating rate versus fixed rate earning assets and funding sources, changes in average maturities within the securities available for sale portfolio through sales and purchases, the use of derivative instruments for interest rate conversions or to hedge interest risk, and marketing and product development efforts to attract new loans and deposits. The level of interest rate risk taken is based on management's assessment of the market environment, and will vary from period to period. A significant tool used by Crestar in assessing interest rate exposure is net interest income simulations. A net income forecast is prepared regularly based on a current interest rate forecast, in addition to numerous high and low interest rate scenarios involving changes in interest rates of up to and including 300 basis points from current interest rates. 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 prepayment levels. Prepayment assumptions are based on the expertise of management along with input from external financial market sources. 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. 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. 19 The high rate and low rate estimates generated by this simulation process are compared to the estimate generated under a current interest rate scenario. Based on the most recent simulations as of March 31, 1998, Crestar's projected 9-month after-tax net income under the current interest rate scenario would decrease by approximately $6.1 million in a high interest rate scenario, and would remain relatively unchanged in a low interest rate scenario, if nothing else changed and no management actions were taken. These projections were based on interest rate increases of 225 basis points under a 9-month high interest rate scenario, and interest rate decreases of 110 basis points under a low interest rate scenario, from market interest rates in effect at March 31, 1998. Changes in interest rates under these simulations were projected at 25 basis points per month. The results of 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 current interest rate scenarios. Another management tool for assessing interest rate risk is the quantification of the economic fair value of shareholders' equity. Economic value of equity consists of the present value of all future cash flows from assets, liabilities and off-balance sheet items. Potential changes in the economic value of equity are calculated by projecting cash flows and then computing present values under a series of different interest rate scenarios. The economic value calculations include the valuation of instruments with option characteristics, using numerous interest rate path valuations and mathematical rate simulation techniques. Crestar has incorporated this tool as a significant component of its management of interest rate risk. Economic value measurement results at March 31, 1998 were within Crestar's internal guidelines. Each of the tools used to assess interest rate risk have strengths and weaknesses. While Crestar believes that its 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. Assumptions can be inherently uncertain: actual results will differ from projected results due to changes in market conditions, management strategies and the timing and magnitude of interest rate changes. As noted, Crestar incurs a degree of interest rate risk as a provider of banking services to its customers. This risk can be reduced through derivative interest rate contracts, such as interest rate swaps, caps and floors. Crestar's outstanding interest rate swap instruments at March 31, 1998 are utilized to convert certain variable rate assets to fixed rates as part of the Corporation's interest risk management strategy. Interest rate caps are utilized to minimize interest rate risk associated with rising rates on floating rate money market deposits, fixed rate securities and fixed rate real estate loans. Because financial derivatives typically do not have actual principal dollars transferred between parties, notional principal amounts are used to express the volume of such transactions. However, the notional amount of derivative contracts does not represent direct credit exposure, which the Corporation believes is a combination of current replacement cost of those instruments with a positive market value plus an amount for prospective market movement. Crestar has established policies governing derivative activities, and the counterparties used by Crestar are considered high quality credits. In addition, Crestar may demand collateral from a counterparty to further minimize credit risk. There were no past due amounts or reserves for possible derivative losses at March 31, 1998, nor has Crestar ever experienced any charge-offs related to the credit risk of derivative transactions. Interest rate simulation techniques are used by Crestar to assess and monitor market risk in the Corporation's derivative portfolio. Interest rate swaps with a notional value of $300 million, used for interest rate risk management activities, were terminated prior to maturity during the first quarter of 1998; no material gains or losses were recognized on these terminations. At March 31, 1998 Crestar had a deferred gain of $4.0 million included in other assets, arising from the termination prior to maturity of interest rate floors during 1997. The deferred gain is being amortized over the remaining contractual life of the underlying hedging instruments. Terminations of derivative instruments prior to maturity may occur in the future in response to modifications of interest rate risk management strategies. 20 The notional amount of Crestar's interest rate swaps and caps (excluding customer positions where Crestar acts as an intermediary) was $4.1 billion at March 31, 1998. Forward contracts with a notional amount of $2.3 billion, utilized to hedge lending commitments of Crestar's mortgage banking subsidiary, were also outstanding at March 31, 1998, bringing the total notional value of derivative financial instruments related to interest rate risk management activities to $6.4 billion at March 31, 1998. Tables 8, 9, and 10 present information regarding fair values, maturity, average rates, and activity as of and for the three month period ending March 31, 1998 for these off-balance sheet derivative instruments. Net unrealized losses on these instruments totaled $5.0 million as of March 31, 1998. Financial statement note 11 contains additional information pertaining to these types of agreements. New Accounting Standards On January 1, 1998, Crestar adopted the provisions of Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income," as issued by the Financial Accounting Standards Board (FASB). SFAS 130 established standards for reporting and presentation of comprehensive income and its components within the Corporation's consolidated financial statements. SFAS 130 requires the disclosure of an amount that represents total comprehensive income, and the components of comprehensive income, in a consolidated financial statement. Balances and components of Crestar's comprehensive income for the three months ended March 31, 1998 and 1997 are disclosed within Crestar's Consolidated Statements of Changes in Shareholders' Equity. The component's of Crestar's comprehensive income are net income and net unrealized gain or loss on securities available for sale, net of reclassification adjustment. Period-end net unrealized gain or loss on securities available for sale is reflected in the Consolidated Balance Sheet, and the Consolidated Statement of Changes in Shareholders' Equity, as "Accumulated other comprehensive income." The adoption of SFAS 130 had no impact on the Corporation's financial position or results of operations. During the first quarter of 1998, the FASB issued Statement of Financial Accounting Standards No. 132 (SFAS 132), "Employers' Disclosures about Pensions and Other Postretirement Benefits". SFAS 132 revises employer's disclosures about pension and other postretirement benefit plans, and standardizes certain disclosures for both types of benefit plans. The disclosure requirements of SFAS 132 will be effective for financial statements for the year ending December 31, 1998. Application of SFAS 132 will have no impact on the results of operations of Crestar. 21 Table 1 Financial Highlights Dollars in millions, except per share data Three Months ------------------------- % For the Period Ended March 31 1998 1997 Change Net Income $84.9 $71.8 18 Basic Earnings Per Share: Net Income $ .76 $ .65 17 Average Shares Outstanding (000s) 111,704 110,290 1 Diluted Earnings Per Share: Net Income $ .75 $ .64 17 Average Shares Outstanding (000s) 113,222 111,579 1 Dividends Paid Per Common Share $ .29 $ .27 7 ================================================================================ Key Ratios Return on Average Assets 1.41% 1.33% Return on Average Equity 16.41 16.06 Average Equity to Average Assets 8.61 8.26 Net Interest Margin 4.18 4.51 At March 31 Book Value Per Share $19.03 $16.48 15 Equity to Assets 8.17% 8.27% Risk Adjusted Capital Ratios: Tier I 10.0 10.6 Total 13.1 13.4 Common Shares Outstanding (000s) 111,938 110,300 ================================================================================ Table 2 Analysis Of Diluted Earnings Per Share 1st Qtr. 1998 1st Qtr. 1998 vs. vs. 1st Qtr. 1997 4th Qtr. 1997 Diluted Earnings Per Share - prior period $ .64 $ .74 - -------------------------------------------------------------------------------- Interest income .21 .09 Interest expense (.17) (.06) Provision for loan losses .04 - Securities gains (.01) .01 Other noninterest income .04 (.02) Foreclosed properties expense .01 .01 Other noninterest expense (.01) - Change in effective income tax rate .01 (.01) Increase in shares outstanding (.01) (.01) - -------------------------------------------------------------------------------- Net increase .11 .01 Diluted Earnings Per Share - current period $ .75 $ .75 ================================================================================ 22 Table 3 Average Balances, Net Interest Income And Rate/Volume Analysis(1) Dollars in thousands
1st Qtr. ------------------------------------ Average Balance 4th Qtr. ---------------- Average Increase Balance 1998 1997 (Decrease) 1997 ---- ---- ---------- ---- $ $ % $ 4,540,123 3,811,305 19 4,233,553 Commercial 1,222,918 1,244,956 (2) 1,267,652 Real estate - income property 381,702 311,353 23 369,721 Real estate - construction 4,809,541 4,105,535 17 4,848,092 Instalment 1,130,487 1,338,742 (16) 1,137,318 Bank card 3,515,622 3,051,743 15 3,330,084 Real estate - mortgage - --------------------------------------------------------------------------------------------------------------------------- 15,600,393 13,863,634 13 15,186,420 Total loans - net of unearned income(2) 616,117 908,787 (32) 641,735 Securities held to maturity 3,978,423 4,071,188 (2) 3,390,360 Securities available for sale 647,881 357,462 81 545,397 Money market investments 1,150,140 580,563 98 875,246 Mortgage loans held for sale - --------------------------------------------------------------------------------------------------------------------------- 21,992,954 19,781,634 11 20,639,158 Total earning assets =========================================================================================================================== 6,429,487 5,796,084 11 6,013,541 Interest-bearing demand deposits 1,432,363 1,609,952 (11) 1,455,579 Regular savings deposits 4,091,130 4,501,822 (9) 4,116,515 Domestic time deposits - --------------------------------------------------------------------------------------------------------------------------- 11,952,980 11,907,858 - 11,585,635 Total interest-bearing core deposits 5,376,486 3,627,747 48 4,697,174 Purchased liabilities 927,180 853,204 9 811,621 Long-term debt - --------------------------------------------------------------------------------------------------------------------------- 18,256,646 16,388,809 11 17,094,430 Total interest-bearing liabilities 3,736,308 3,392,825 10 3,544,728 Other sources - net - --------------------------------------------------------------------------------------------------------------------------- 21,992,954 19,781,634 11 20,639,158 Total sources of funds Net Interest Income ===========================================================================================================================
23
1st Qtr. ----------------------------------------------------- 1998 vs. 1997 -------------------------------- Income/Expense(3) Change due to(4) ----------------- Increase --------------- 1998 1997 (Decrease) Rate5 Volume ---- ---- ---------- ----- ------ $ $ $ $ $ Commercial 90,862 75,382 15,480 1,099 14,381 Real estate - income property 26,393 27,283 (890) (420) (470) Real estate - construction 8,431 7,072 1,359 (187) 1,546 Instalment 95,308 81,450 13,858 (199) 14,057 Bank card 38,117 46,939 (8,822) (1,210) (7,612) Real estate - mortgage 67,597 59,321 8,276 (740) 9,016 - --------------------------------------------------------------------------------------------------- Total loans - net of unearned income2 326,708 297,447 29,261 9,929 19,332 Securities held to maturity 9,533 13,708 (4,175) 239 (4,414) Securities available for sale 62,411 63,849 (1,438) 17 (1,455) Money market investments 9,049 4,687 4,362 554 3,808 Mortgage loans held for sale 20,571 11,640 8,931 (2,760) 11,691 - --------------------------------------------------------------------------------------------------- Total earning assets 428,272 391,331 36,941 (6,990) 43,931 =================================================================================================== Interest-bearing demand deposits 50,296 41,814 8,482 2,799 5,683 Regular savings deposits 8,126 9,964 (1,838) (739) (1,099) Domestic time deposits 50,501 55,063 (4,562) 485 (5,047) - --------------------------------------------------------------------------------------------------- Total interest-bearing core deposits 108,923 106,841 2,082 1,676 406 Purchased liabilities 72,302 46,675 25,627 3,169 22,458 Long-term debt 17,123 15,615 1,508 154 1,354 - --------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 198,348 169,131 29,217 9,903 19,314 Other sources - net - --------------------------------------------------------------------------------------------------- Total sources of funds 198,348 169,131 29,217 10,273 18,944 Net Interest Income 229,924 222,200 7,724 (17,263) 24,987 ===================================================================================================
1st Qtr. 1998 vs. 4th Qtr. 1997 4th Qtr. Income/ Change due to(4) Expense(3) Increase 1997 (Decrease) Rate(5) Volume $ $ $ $ Commercial 85,710 5,152 (1,033) 6,185 Real estate - income property 28,505 (2,112) (1,134) (978) Real estate - construction 8,294 137 (132) 269 Instalment 98,156 (2,848) (2,065) (783) Bank card 38,920 (803) (560) (243) Real estate - mortgage 64,779 2,818 (791) 3,609 - ----------------------------------------------------------------------------------------- Total loans - net of unearned income2 324,364 2,344 (6,521) 8,865 Securities held to maturity 9,942 (409) (12) (397) Securities available for sale 53,946 8,465 (892) 9,357 Money market investments 7,828 1,221 (250) 1,471 Mortgage loans held for sale 16,222 4,349 (785) 5,134 - ----------------------------------------------------------------------------------------- Total earning assets 412,302 15,970 (11,138) 27,108 ========================================================================================= Interest-bearing demand deposits 47,142 3,154 (592) 3,746 Regular savings deposits 8,927 (801) (659) (142) Domestic time deposits 51,546 (1,045) (721) (324) - ----------------------------------------------------------------------------------------- Total interest-bearing core deposits 107,615 1,308 (2,121) 3,429 Purchased liabilities 65,134 7,168 (2,250) 9,418 Long-term debt 15,502 1,621 (586) 2,207 - ----------------------------------------------------------------------------------------- Total interest-bearing liabilities 188,251 10,097 (2,736) 12,833 Other sources - net - ----------------------------------------------------------------------------------------- Total sources of funds 188,251 10,097 (2,284) 12,381 Net Interest Income 224,051 5,873 (8,854) 14,727 =========================================================================================
(1) Tax-equivalent basis. (2) Nonaccrual loans are included in the average loan balances and income on such loans is recognized on a cash basis. (3) Includes tax-equivalent net loan fees (costs) of $310,000 and $(48,000) for the first quarter of 1998 and 1997, respectively, and $144,000 for the fourth quarter of 1997. (4) Variances are computed on a line-by-line basis and are non-additive. (5) Variances caused by the change in rate times the change in balances are allocated to rate. 24 Table 4 Allowance For Loan Losses Dollars in thousands First Quarter 1998 1997 Beginning balance $281,394 $268,868 - -------------------------------------------------------------------------------- Allowance from acquisitions and other activities, net 1,531 - - -------------------------------------------------------------------------------- Provision for loan losses 23,096 29,698 Net charge-offs (recoveries): Commercial (202) 526 Real estate - income property (396) (462) Real estate - construction 361 (96) Instalment 4,521 5,545 Bank card 20,508 23,370 Real estate - mortgage 260 813 - -------------------------------------------------------------------------------- Total net charge-offs 25,052 29,696 - -------------------------------------------------------------------------------- Balance, March 31 $280,969 $268,870 ================================================================================ Allowance for loan losses to period-end loans 1.74% 1.89 Annualized net charge-offs to average loans .64 .86 ================================================================================ 25
Table 5 Nonperforming Assets(1) And Past Due Loans Dollars in thousands March 31, December 31, -------------------------- Nonaccrual loans: 1998 1997 1997 Commercial $ 9,549 $15,921 $11,247 Real estate - income property 7,212 12,612 6,412 Real estate - construction 13,906 17,302 14,239 Instalment 8,043 2,987 3,292 Real estate - mortgage 26,818 26,813 25,310 - ---------------------------------------------------------------------------------------------------------- Total nonperforming loans1 65,528 75,635 60,500 Foreclosed properties - net 20,542 25,140 25,731 - ---------------------------------------------------------------------------------------------------------- Total nonperforming assets1 $86,070 $100,775 $86,231 ========================================================================================================== Nonperforming assets1 to: Loans and foreclosed properties - net .53% .71% .55% Total assets .33 .46 .35 Allowance for loan losses to: Nonperforming assets1 326 267 326 Nonperforming loans1 429 355 465 Allowance for loan losses plus shareholders' equity to nonperforming assets1 28.01x 20.70x 27.15x ========================================================================================================== Accruing loans past due 90 days: Commercial $ 3,286 $12,137 $ 3,524 Real estate - income property 63 1,451 1,750 Real estate - construction 259 - 216 Instalment Student 30,715 26,475 25,742 Other 6,123 5,326 6,886 Bank card 20,971 23,404 24,126 Real estate - mortgage 5,543 7,179 6,023 - ---------------------------------------------------------------------------------------------------------- Total accruing loans past due 90 days $66,960 $75,972 $68,267 ==========================================================================================================
(1) Loans 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. 26
Table 6 Noninterest Income And Expense In thousands First Quarter Fourth Quarter Noninterest Income 1998 1997 1997 Service charges on deposit accounts $ 33,067 $ 30,163 $ 33,318 Trust and investment advisory 20,119 17,453 19,773 Bank card-related 8,810 12,648 10,317 Other service charges and fees 9,653 8,443 10,356 Mortgage origination - net 15,102 902 9,116 Mortgage servicing - net 2,352 5,131 3,403 Trading account activities 1,345 947 1,505 Commissions on letters of credit 1,356 1,114 1,334 Gain on sale of mortgage servicing rights - 6,450 - Gain on sale of premises - 5,807 360 Gain on securitization of student loans - - 9,305 Miscellaneous 14,246 10,345 10,829 Securities gains 2,613 4,064 1,231 - ---------------------------------------------------------------------------------------------------------- Total noninterest income $108,663 $103,467 $110,847 ========================================================================================================== Noninterest Expense Salaries $ 81,046 $ 78,388 $ 78,895 Benefits 19,759 20,954 20,728 - ---------------------------------------------------------------------------------------------------------- Total personnel 100,855 99,342 99,623 Occupancy - net 13,154 16,158 15,216 Equipment 10,802 9,819 10,149 Communications 9,970 8,845 9,865 Outside data services 6,962 6,222 7,207 Professional fees and services 6,327 7,035 5,083 Advertising and marketing 5,709 4,530 5,711 Amortization of purchased intangibles 4,793 4,227 4,434 Stationery, printing and supplies 3,608 2,713 2,746 Loan expense 2,883 2,815 3,503 Transportation 1,855 1,725 1,826 FDIC premiums - net 430 1,107 661 Foreclosed properties (net recoveries) (517) 715 1,053 Miscellaneous 14,155 14,752 14,934 - ---------------------------------------------------------------------------------------------------------- Total noninterest expense $180,986 $180,005 $182,011 ========================================================================================================== Table 7 Debt And Other Security Ratings (as of April 30, 1998) Standard Thomson Security Moody's & Poor's BankWatch 61/2% Subordinated Notes due 2018 Baa1 BBB+ A- 83/4% Subordinated Notes due 2004 Baa1 BBB+ A- 81/4% Subordinated Notes due 2002 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 ===========================================================================================================
27
Table 8 Off-Balance Sheet Derivative Financial Instruments(1) March 31, 1998 Average Weighted Fixed Estimated Dollars in thousands Notional Average Receive Fair Balance Maturity Rate Value Comments ------- -------- ---- ----- -------- Interest Rate Conversions Generic interest rate swaps $1,575,000 3.5 yrs. 6.20% Notional amounts of $1.33 Carrying amount(2) $ 2,066 billion and $250 million convert Commercial loan program floating rate commercial and Unrealized gains 14,446 instalment loans, respectively, Unrealized losses (1,066) to fixed rate. Floating rates paid Instalment loan program tied to LIBOR. Unrealized gains 582 ------ Estimated fair value 16,028 ------ Interest rate caps 560,000 3.0 yrs. 6.85%(3) Notional amount of $560 million Carrying amount(2) 6,669 hedges the interest rate risk Money market deposit program associated with rising interest Unrealized gains 2 rates on floating rate money Unrealized losses (3,834) market deposits (strike rate tied Estimated fair value ------ to LIBOR). 2,837 Market Value Hedges ------ Interest rate caps 1,950,000 2.0 yrs. 7.56%(3) Notional amount of $1.75 billion Carrying amount(2) 11,685 hedges the market value of fixed Securities available for sale program(4) rate securities available for sale Unrealized losses (10,268) in a rising rate environment (strike Real estate income property loan program rate for $800 million tied to 5 year Unrealized losses (663) CMT; strike rate for $950 million tied to LIBOR). Notional amount of $200 million hedges the market value of fixed rate real ------ estate income property loans Estimated fair value 754 (strike rate tied to LIBOR). ------- Hedges of Lending Commitments Forward contracts 2,278,339 .2 yrs. n/a Hedges of residential mortgage Unrealized gains 1,813 lending commitments. Unrealized losses (5,994) ------- Estimated fair value (4,181) Total derivatives $6,363,339 $15,438 =======
(1)Includes only off-balance sheet derivative financial instruments related to interest rate risk management activities. (2)Includes any accrued interest receivable and or payable balances, and unamortized premiums paid for interest rate caps. (3)Represents average strike rate. For interest rate caps purchased, Crestar will receive interest if a specified market index rate rises above a fixed strike rate during the term of the contract. Any interest received is based on the difference between a higher index interest rate and the contractual cap rate, applied to the underlying notional balance. No interest payments are received if the index rate remains below the cap rate. (4)The fair value of derivative interest rate caps hedging securities classified as available for sale is included in the total fair value of the securities available for sale portfolio. The unamortized premiums paid for such interest rate caps are included in the amortized cost basis of securities available for sale, with any unrealized gain or loss (net of tax) pertaining to these interest rate caps included in shareholders' equity as "Accumulated other comprehensive income." n/a - Not applicable LIBOR - London Interbank Offered Rates 5 year CMT - Yield on 5 year constant maturity U.S. Treasury securities 28 Table 9 Off-Balance Sheet Derivatives--Expected Maturities(1)
March 31, 1998 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 $ - $ 600,000 $ 725,000 $250,000 $1,575,000 Average fixed receive rate - 5.93% 6.23% 6.74% 6.20% Carrying amount $ - $ 132 $ 1,067 $ 867 $ 2,066 Net unrealized gain - 94 5,278 8,590 13,962 Interest rate caps Notional amount $ 10,000 $ 250,000 $ 300,000 $ - $ 560,000 Average strike rate 6.25% 7.50% 6.33% - 6.85% Carrying amount $ - $ 1,084 $ 5,585 $ - $ 6,669 Unrealized gain (loss) 2 (1,022) (2,812) - (3,832) Market Value Hedges Interest rate caps Notional amount $ - $1,950,000 $ - $ - $1,950,000 Average strike rate - 7.56% - - 7.56% Carrying amount $ - $ 11,685 $ - $ - $ 11,685 Unrealized loss - (10,931) - - (10,931) Hedges of Lending Commitments Forward contracts:(2) Notional amount $2,278,339 $ - $ - $ - $2,278,339 Net unrealized loss (4,181) - - - (4,181) Total derivatives: Notional amount $2,288,339 $2,800,000 $1,025,000 $250,000 $6,363,339 Carrying amount $ - $ 12,901 $ 6,652 $ 867 $ 20,420 Net unrealized gain (loss) (4,179) (11,859) 2,466 8,590 (4,982) Estimated fair value $ (4,179) $ 1,042 $ 9,118 $ 9,457 $ 15,438 ===========================================================================================================================
(1)Includes only off-balance sheet derivative financial instruments related to interest rate risk management activities. (2)Hedges of residential mortgage lending commitments. Table 10 Off-Balance Sheet Derivatives Activity(1) In thousands
Interest Rate Conversions Market Value Hedges of ------------------------- Interest Interest Hedges Lending ------------ Rate Rate Interest Commit- Swaps Caps Rate Caps ments(2) Total ----- ---- --------- ------- ----- Balance, January 1, 1998 $1,675,000 $460,000 $1,950,000 $1,459,888 $5,544,888 Additions 200,000 100,000 - 2,568,820 2,868,820 Terminations (300,000) - - - (300,000) Maturities - - - (1,750,369) (1,750,369) - ----------------------------------------------------------------------------------------------------------- Balance, March 31, 1998 $1,575,000 $560,000 $1,950,000 $2,278,339 $6,363,339 ===========================================================================================================
(1)Includes only off-balance sheet derivative financial instruments related to interest rate risk management activities. (2)Forward contracts hedging residential mortgage lending commitments; maturities represent contracts delivered. 29 Table 11 Selected Quarterly Financial Information Dollars in thousands, except per share data
1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. -------- -------- -------- -------- -------- Results of operations: 1998 1997 1997 1997 1997 Net interest income(1) $229,924 $224,051 $220,041 $221,160 $222,200 Provision for loan losses 23,096 23,300 19,099 36,000 29,698 - ---------------------------------------------------------------------------------------------------------- Net credit income 206,828 200,751 200,942 185,160 192,502 Securities gains (losses) 2,613 1,231 124 (91) 4,064 Other noninterest income 106,050 109,616 95,985 111,107 99,403 - ---------------------------------------------------------------------------------------------------------- Net credit and noninterest income 315,491 311,598 297,051 296,176 295,969 Noninterest expense 180,986 182,011 173,231 179,010 180,005 - ---------------------------------------------------------------------------------------------------------- Income before taxes 134,505 129,587 123,820 117,166 115,964 Tax-equivalent adjustment 2,964 2,860 2,903 2,851 2,540 Book tax expense 46,668 44,032 41,374 38,525 41,644 - ---------------------------------------------------------------------------------------------------------- Income tax expense 49,632 46,892 44,277 41,376 44,184 Net Income $ 84,873 $ 82,695 $ 79,543 $ 75,790 $ 71,780 ========================================================================================================== Basic Earnings per share $ .76 $ .75 $ .71 $ .69 $ .65 Average shares outstanding (000s) 111,704 110,916 110,760 110,496 110,290 Diluted Earnings per share $ .75 $ .74 $ .71 $ .68 $ .64 Average shares outstanding (000s) 113,222 112,423 112,069 111,602 111,579 Dividends paid .29 .29 .29 .29 .27 ========================================================================================================== Selected ratios and other data: Return on average assets 1.41% 1.46% 1.47% 1.42% 1.33% Return on average equity 16.41 16.70 16.60 16.48 16.06 Net interest margin(1) 4.18 4.35 4.47 4.58 4.51 Net charge-offs as % of average loans .64 .64 .55 .73 .86 Allowance as % of period-end loans 1.74 1.79 1.90 1.96 1.89 Overhead ratio 53.45 54.35 54.79 53.89 55.27 Average equity to assets 8.61 8.74 8.87 8.64 8.26 Average equity leverage 11.61x 11.45x 11.28x 11.57x 12.11x Full-time equivalent employees (period-end) 8,170 8,215 7,934 7,960 7,992 ==========================================================================================================
(1)Tax-equivalent basis. 30 Table 12 Consolidated Average Balances/Net Interest Income/Rates(1)
Three Months Ended March 31, ----------------------------------------------------------- 1998 1997 ------------------------------------------------------------ Dollars in thousands Income/ Yield/ Income/ Yield/ Balance Expense Rate Balance Expense Rate ------- ------- ---- ------- ------- ---- Assets $ $ % $ $ % Securities held to maturity(2) 616,117 9,533 6.21 908,787 13,708 6.05 Securities available for sale(2) 3,978,423 62,411 6.28 4,071,188 63,849 6.29 Money market investments(2) 647,881 9,049 5.66 357,462 4,687 5.32 Mortgage loans held for sale(2) 1,150,140 20,571 7.22 580,563 11,640 8.16 - ---------------------------------------------------------------------------------------------------------- Commercial 4,540,123 90,862 8.09 3,811,305 75,382 8.01 Real estate - income property 1,222,918 26,393 8.69 1,244,956 27,283 8.71 Real estate - construction 381,702 8,431 8.95 311,353 7,072 8.98 Instalment 4,809,541 95,308 7.95 4,105,535 81,450 7.99 Bank card 1,130,487 38,117 13.90 1,338,742 46,939 14.47 Real estate - mortgage 3,515,622 67,597 7.68 3,051,743 59,321 7.77 - ---------------------------------------------------------------------------------------------------------- Total loans(2),(3) 15,600,393 326,708 8.45 13,863,634 297,447 8.66 Allowance for loan losses (280,800) (269,094) - ---------------------------------------------------------------------------------------------------------- Loans - net 15,319,593 13,594,540 Cash and due from banks 882,916 863,561 Premises and equipment - net 494,547 443,699 Intangible assets - net 193,335 178,388 Foreclosed properties - net 20,002 28,503 Other assets 723,180 621,980 - ---------------------------------------------------------------------------------------------------------- Total Assets 24,026,134 21,648,671 Total Earning Assets 21,992,954 428,272 7.84 19,781,634 391,331 7.98 Liabilities And Shareholders' Equity Interest-bearing demand deposits 6,429,487 50,296 3.17 5,796,084 41,814 3.00 Regular savings deposits 1,432,363 8,126 2.30 1,609,952 9,964 2.51 Domestic time deposits 4,091,130 50,501 5.04 4,501,822 55,063 4.99 Certificates of deposit $100,000 and over 1,203,860 16,974 5.72 515,895 6,878 5.41 - ---------------------------------------------------------------------------------------------------------- Total savings and time deposits(2) 13,156,840 125,897 3.89 12,423,753 113,719 3.78 Demand deposits 3,289,652 3,123,006 - ---------------------------------------------------------------------------------------------------------- Total deposits 16,446,492 15,546,759 Short-term borrowings(2) 4,172,626 55,328 5.37 3,111,852 39,797 5.18 Long-term debt(2) 927,180 17,123 7.39 853,204 15,615 7.32 Other liabilities 410,387 348,684 - ---------------------------------------------------------------------------------------------------------- Total liabilities 21,956,685 19,860,499 - ---------------------------------------------------------------------------------------------------------- Total shareholders' equity 2,069,449 1,788,172 Total Liabilities And Shareholders' Equity 24,026,134 21,648,671 Total interest-bearing liabilities 18,256,646 198,348 4.41 16,388,809 169,131 4.19 Other sources - net 3,736,308 3,392,825 - ---------------------------------------------------------------------------------------------------------- Total Sources Of Funds 21,992,954 198,348 3.66 19,781,634 169,131 3.47 Net Interest Spread 3.43 3.79 Net Interest Income/Margin 229,924 4.18 222,200 4.51 ==========================================================================================================
31 Three Months Ended December 31, ------------------------------- 1997 ---- Dollars in thousands Income/ Yield/ Balance Expense Rate ------- ------- ---- [S] [C] Assets $ $ % Securities held to maturity(2) 641,735 9,942 6.18 Securities available for sale(2) 3,390,360 53,946 6.36 Money market investments(2) 545,397 7,828 5.69 Mortgage loans held for sale(2) 875,246 16,222 7.46 - ----------------------------------------------------------------------------- Commercial 4,233,553 85,710 8.01 Real estate - income property 1,267,652 28,505 8.73 Real estate - construction 369,721 8,294 8.90 Instalment 4,848,092 98,156 8.11 Bank card 1,137,318 38,920 14.11 Real estate - mortgage 3,330,084 64,779 7.78 - ----------------------------------------------------------------------------- Total loans(2),(3) 15,186,420 324,364 8.53 Allowance for loan losses (283,442) - ----------------------------------------------------------------------------- Loans - net 14,902,978 Cash and due from banks 888,770 Premises and equipment - net 479,998 Intangible assets - net 183,461 Foreclosed properties - net 25,350 Other assets 736,356 - ----------------------------------------------------------------------------- Total Assets 22,669,651 ========== Total Earning Assets 20,639,158 412,302 7.98 ========== ======= ==== Liabilities And Shareholders' Equity Interest-bearing demand deposits 6,013,541 47,142 3.11 Regular savings deposits 1,455,579 8,927 2.43 Domestic time deposits 4,116,515 51,546 5.01 Certificates of deposit $100,000 and over 1,258,737 18,292 5.77 - ----------------------------------------------------------------------------- Total savings and time deposits2 12,844,372 125,907 3.90 Demand deposits 3,208,940 - ----------------------------------------------------------------------------- Total deposits 16,053,312 Short-term borrowings(2) 3,438,437 46,842 5.40 Long-term debt(2) 811,621 15,502 7.64 Other liabilities 385,846 - ----------------------------------------------------------------------------- Total liabilities 20,689,216 - ----------------------------------------------------------------------------- Total shareholders' equity 1,980,435 Total Liabilities And Shareholders' Equity 22,669,651 Total interest-bearing liabilities 17,094,430 188,251 4.38 Other sources - net 3,544,728 - ----------------------------------------------------------------------------- Total Sources Of Funds 20,639,158 188,251 3.63 Net Interest Spread 3.60 Net Interest Income/Margin 224,051 4.35 ============================================================================= (1)Income and yields are computed on a tax-equivalent basis using the statutory federal income tax rate exclusive of the alternative minimum tax and nondeductible interest expense. (2)Indicates earning asset or interest-bearing liability. (3)Nonaccrual loans are included in the average loan balances and income on such loans is recognized on a cash basis. 32 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Crestar Financial Corporation ------------------------------------ Registrant Date May 15, 1998 /s/ James D. Barr ----------------- ------------------------------------ James D. Barr Executive Vice President, Controller and Treasurer EX-27 2 FINANCIAL DATA SCHEDULE NO. 1
9 0000101880 FDS 27.1 1,000 3-MOS DEC-31-1998 MAR-31-1998 974,856 13,429,486 1,025,000 10,233 4,492,665 604,415 609,032 16,145,931 280,969 26,081,478 17,013,116 5,439,901 535,444 962,834 0 0 559,690 1,570,493 26,081,478 324,339 71,366 29,603 425,308 125,897 198,348 226,960 23,096 2,613 180,988 131,541 84,873 0 0 84,873 0.76 0.75 4.18 65,528 66,960 0 75,000 281,394 31,248 6,196 280,969 0 0 0 Basic EPS per Statement of Financial Accounting Standards No. 128 Diluted EPS per Statement of Financial Accounting Standards No. 128
EX-27 3 FINANCIAL DATA SCHED. # 2
9 0000101880 FDS 27.2 1,000 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 938,417 974,362 885,956 12,558,918 12,463,142 12,789,883 452,090 1,258,806 1,139,023 1,281 11,706 4,909 3,918,514 3,518,420 3,333,777 818,199 715,516 662,517 811,284 715,316 666,339 14,214,055 14,258,715 14,678,573 268,870 279,190 278,331 21,982,732 22,809,803 23,188,437 15,815,424 15,846,459 16,109,680 3,002,574 3,841,043 3,755,235 496,791 403,161 584,570 850,596 819,071 799,375 0 0 0 0 0 0 551,499 553,191 550,940 1,265,848 1,346,878 1,388,637 21,982,732 22,809,803 23,188,437 295,546 597,537 905,922 76,941 147,698 210,497 16,304 29,170 49,723 388,791 774,405 1,166,142 113,719 231,484 352,559 169,131 336,436 511,035 219,660 437,969 655,107 29,698 65,698 84,797 4,064 3,973 4,097 180,005 359,015 532,246 113,424 227,739 348,656 71,780 147,570 227,113 0 0 0 0 0 0 71,780 147,570 227,113 0.65 1.34 2.05 0.64 1.32 2.03 4.51 4.54 4.51 75,635 57,813 61,407 75,972 58,713 62,960 0 0 0 153,000 123,000 103,000 268,868 268,868 268,868 37,075 70,416 98,327 7,379 15,040 22,993 268,870 279,190 278,331 0 0 0 0 0 0 0 0 0 Basic EPS per Statement of Financial Accounting Standards No. 128 Diluted EPS per Statement of Financial Accounting Standards No. 128
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