-----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, O6nApI/OO6sR3gCh9W+oaY582bynSom1oNxYqnKzN1YLyTWT+a7Dh/+cjpact6fE UTNDz0tZI2BzwgAMk2hGqg== 0000916641-98-000894.txt : 19980813 0000916641-98-000894.hdr.sgml : 19980813 ACCESSION NUMBER: 0000916641-98-000894 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980812 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: 98683964 BUSINESS ADDRESS: STREET 1: 919 E MAIN ST STREET 2: PO BOX 26665 CITY: RICHMOND STATE: VA ZIP: 23261 BUSINESS PHONE: 8047825000 MAIL ADDRESS: STREET 1: 919 EAST MAIN STREET STREET 2: P O BOX 26665 CITY: RICHMOND STATE: VA ZIP: 23261-6665 FORMER COMPANY: FORMER CONFORMED NAME: UNITED VIRGINIA BANKSHARES INC DATE OF NAME CHANGE: 19871115 10-Q 1 CRESTAR FINANCIAL CORPORATION 10-Q United States Securities And Exchange Commission Washington, DC 20549 Form 10-Q (Mark One) (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended June 30, 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 July 31, 1998 - --------------------------------- ---------------------------------------- Common Stock, $5 par value 112,279,966 Crestar Financial Corporation And Subsidiaries Form 10-Q For The Quarter Ended June 30, 1998 Part I. Financial Information Item 1. Financial Statements: Page Consolidated Balance Sheets 3 Consolidated Statements Of Income 4 Consolidated Statements Of Changes In Shareholders' Equity 5-6 Consolidated Statements Of Cash Flows 7 Notes To Consolidated Financial Statements 8-13 Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations: Financial Commentary 14-35 Part II. Other Information Item 4. Submission Of Matters To A Vote Of Security Holders 36 Item 6. Exhibits And Reports On Form 8-K:
There were no reports on Form 8-K filed during the three months ended June 30, 1998. 2 Consolidated Balance Sheets Crestar Financial Corporation And Subsidiaries
Dollars in thousands, except share data June 30, ---------------------- December 31, 1998 1997 1997 Assets Cash and due from banks $ 939,382 $ 974,362 $ 1,175,314 Securities held to maturity (note 2) 578,813 715,516 626,716 Securities available for sale (note 3) 4,210,810 3,518,420 3,839,006 Money market investments (note 4) 887,979 1,364,741 1,431,790 Loans held for sale 2,176,670 643,080 964,697 Loans (note 5): Business Loans: Commercial 5,136,230 4,028,852 4,666,505 Real estate - income property 1,176,314 1,289,423 1,254,079 Real estate - construction 402,670 328,459 381,413 Consumer Loans: Instalment 5,385,873 4,093,346 4,846,857 Bank card 507,245 1,210,242 1,153,937 Real estate - mortgage 3,342,579 3,308,393 3,374,199 - ----------------------------------------------------------------------------------------------------------- Total Loans 15,950,911 14,258,715 15,676,990 Less: Allowance for loan losses (note 6) (246,017) (279,190) (281,394) - ----------------------------------------------------------------------------------------------------------- Loans - net 15,704,894 13,979,525 15,395,596 - ----------------------------------------------------------------------------------------------------------- Premises and equipment - net 479,759 459,275 486,111 Intangible assets - net 199,447 172,280 197,420 Foreclosed properties - net (notes 5 and 7) 16,652 34,243 25,731 Other assets 966,767 948,361 786,135 - ----------------------------------------------------------------------------------------------------------- Total Assets $26,161,173 $22,809,803 $24,928,516 =========================================================================================================== Liabilities Demand deposits $ 3,766,030 $ 3,383,317 $ 3,540,340 Interest-bearing demand deposits 6,918,653 5,748,638 6,257,114 Regular savings deposits 1,397,567 1,552,860 1,448,589 Domestic time deposits 3,919,809 4,317,373 4,191,151 Certificates of deposit $100,000 and over 1,868,122 844,271 932,058 - ----------------------------------------------------------------------------------------------------------- Total deposits 17,870,181 15,846,459 16,369,252 Short-term borrowings (note 8) 4,639,407 3,841,043 4,789,045 Other liabilities 498,281 403,161 879,073 Long-term debt (note 9) 947,704 819,071 831,383 - ----------------------------------------------------------------------------------------------------------- Total Liabilities 23,955,573 20,909,734 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 112,219,738 and 110,638,161 at June 30, 1998 and 1997, respectively; 111,420,187 at December 31, 1997 561,099 553,191 557,101 Capital surplus 382,180 261,789 340,623 Retained earnings 1,255,891 1,114,028 1,162,767 Accumulated other comprehensive income (note 3) 6,430 (28,939) (728) - ----------------------------------------------------------------------------------------------------------- Total Shareholders' Equity 2,205,600 1,900,069 2,059,763 Commitments and contingencies (note 11) - ----------------------------------------------------------------------------------------------------------- Total Liabilities And Shareholders' Equity $26,161,173 $22,809,803 $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 June 30, Six Months Ended June 30, --------------------------- ------------------------- 1998 1997 1998 1997 Income From Earning Assets Interest and fees on loans $337,053 $301,991 $661,392 $597,537 Interest on securities held to maturity 8,400 10,882 17,355 23,974 Interest and dividends on securities available for sale 68,791 59,875 131,202 123,724 Income on money market investments 3,180 2,248 12,212 6,912 Interest on mortgage loans held for sale 28,542 10,618 49,113 22,258 - ----------------------------------------------------------------------------------------------------------- Total income from earning assets 445,966 385,614 871,274 774,405 - ----------------------------------------------------------------------------------------------------------- Interest Expense Interest-bearing demand deposits 55,182 42,939 105,478 84,753 Regular savings deposits 8,168 9,768 16,294 19,732 Domestic time deposits 49,482 53,450 99,983 108,513 Certificates of deposit $100,000 and over 20,062 11,608 37,036 18,486 - ----------------------------------------------------------------------------------------------------------- Total interest on deposits 132,894 117,765 258,791 231,484 Short-term borrowings 63,038 33,949 118,366 73,746 Long-term debt 16,600 15,591 33,723 31,206 - ----------------------------------------------------------------------------------------------------------- Total interest expense 212,532 167,305 410,880 336,436 - ----------------------------------------------------------------------------------------------------------- Net Interest Income 233,434 218,309 460,394 437,969 Provision for loan losses (note 6) 21,811 36,000 44,907 65,698 - ----------------------------------------------------------------------------------------------------------- Net Credit Income 211,623 182,309 415,487 372,271 - ----------------------------------------------------------------------------------------------------------- Noninterest Income Service charges on deposit accounts 34,860 31,731 67,927 61,894 Trust and investment advisory income 20,950 17,887 41,069 35,340 Bank card-related income 9,360 9,771 18,170 22,419 Other income 48,798 51,718 92,852 90,857 Gains (losses) from sale of securities 2,542 (91) 5,155 3,973 - ----------------------------------------------------------------------------------------------------------- Total noninterest income 116,510 111,016 225,173 214,483 - ----------------------------------------------------------------------------------------------------------- Net Credit And Noninterest Income 328,133 293,325 640,660 586,754 - ----------------------------------------------------------------------------------------------------------- Noninterest Expense Personnel expense 102,123 96,547 202,978 195,889 Occupancy expense - net 13,893 13,685 27,047 29,843 Equipment expense 10,962 11,462 21,764 21,281 Other expense 64,702 57,316 120,877 112,002 - ----------------------------------------------------------------------------------------------------------- Total noninterest expense 191,680 179,010 372,666 359,015 - ----------------------------------------------------------------------------------------------------------- Income Before Income Taxes 136,453 114,315 267,994 227,739 Income tax expense (note 10) 49,025 38,525 95,693 80,169 - ----------------------------------------------------------------------------------------------------------- Net Income $ 87,428 $ 75,790 $172,301 $147,570 =========================================================================================================== Earnings Per Share Basic $ .78 $ .69 $ 1.54 $ 1.34 Diluted .77 .68 1.52 1.32 ===========================================================================================================
See accompanying notes to consolidated financial statements. 4 Consolidated Statements Of Changes In Shareholders' Equity Crestar Financial Corporation And Subsidiaries For the three months ended June 30, 1998 and 1997 In thousands
Capital Accumulated Shares of Surplus and Other Common Common Retained Comprehensive Stock Stock Earnings Income Total Balance, April 1, 1998 111,938 $559,690 $1,573,286 $(2,793) $2,130,183 Comprehensive Income: Net Income - - 87,428 - 87,428 Net unrealized gain on securities available for sale, net of reclassification adjustment (note 3) - - - 9,223 9,223 - --------------------------------------------------------------------------------------------------------------------------- Comprehensive Income - - 87,428 9,223 96,651 Cash dividends declared on common stock - - (36,977) - (36,977) Common stock purchased and retired (95) (475) (4,976) - (5,451) Common stock issued: For acquisition of financial institution 124 621 8,322 - 8,943 For dividend reinvestment plan 146 727 7,468 - 8,195 For thrift and profit sharing plan 28 141 1,493 - 1,634 Upon exercise of stock options (including tax benefit of $811) 79 395 2,027 - 2,422 - --------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1998 112,220 $561,099 $1,638,071 $6,430 $2,205,600 =========================================================================================================================== Balance, April 1, 1997 110,300 $551,499 $1,323,415 $(57,567) $1,817,347 Comprehensive Income: Net Income - - 75,790 - 75,790 Net unrealized gain on securities available for sale, net of reclassification adjustment (note 3) - - - 28,628 28,628 - --------------------------------------------------------------------------------------------------------------------------- Comprehensive Income - - 75,790 28,628 104,418 Cash dividends declared on common stock - - (32,309) - (32,309) Common stock issued: For dividend reinvestment plan 212 1,062 6,526 - 7,588 For thrift and profit sharing plan 3 14 91 - 105 For other stock compensation plans 19 96 325 - 421 Upon exercise of stock options (including tax benefit of $780) 104 520 1,979 - 2,499 - --------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1997 110,638 $553,191 $1,375,817 $(28,939) $1,900,069 ===========================================================================================================================
See accompanying notes to consolidated financial statements. 5 Consolidated Statements Of Changes In Shareholders' Equity Crestar Financial Corporation And Subsidiaries For the six months ended June 30, 1998 and 1997
In thousands Capital Accumulated Shares of Surplus and Other Common Common Retained Comprehensive Stock Stock Earnings Income Total Balance, January 1, 1998 111,420 $557,101 $1,503,390 $ (728) $2,059,763 Comprehensive Income: Net Income - - 172,301 - 172,301 Net unrealized gain on securities available for sale, net of reclassification adjustment (note 3) - - - 7,158 7,158 - ----------------------------------------------------------------------------------------------------------- Comprehensive Income - - 172,301 7,158 179,459 Cash dividends declared on common stock - - (69,289) - (69,289) Common stock purchased and retired (195) (975) (9,888) - (10,863) Common stock issued: For acquisition of financial institution 124 621 8,322 - 8,943 For dividend reinvestment plan 299 1,493 14,764 - 16,257 For thrift and profit sharing plan 236 1,181 11,776 - 12,957 For other stock compensation plans 3 13 88 - 101 Upon exercise of stock options (including tax benefit of $2,810) 333 1,665 6,607 - 8,272 - ----------------------------------------------------------------------------------------------------------- Balance, June 30, 1998 112,220 $561,099 $1,638,071 $ 6,430 $2,205,600 =========================================================================================================== Balance, January 1, 1997 109,870 $549,350 $1,251,444 $(21,284) $1,779,510 Comprehensive Income: Net Income - - 147,570 - 147,570 Net unrealized loss on securities available for sale, net of reclassification adjustment (note 3) - - - (7,655) (7,655) - ----------------------------------------------------------------------------------------------------------- Comprehensive Income - - 147,570 (7,655) 139,915 Cash dividends declared on common stock - - (32,309) - (32,309) Common stock purchased and retired (824) (4,118) (25,621) - (29,739) Cash paid in lieu of fractional shares (5) (24) (140) - (164) Common stock issued: For dividend reinvestment plan 382 1,911 11,636 - 13,547 For thrift and profit sharing plan 185 924 5,738 - 6,662 For other stock compensation plans 73 364 1,903 - 2,267 Upon exercise of stock options (including tax benefit of $7,347) 957 4,784 15,596 - 20,380 - ----------------------------------------------------------------------------------------------------------- Balance, June 30, 1997 110,638 $553,191 $1,375,817 $(28,939) $1,900,069 ===========================================================================================================
See accompanying notes to consolidated financial statements. 6 Consolidated Statements Of Cash Flows Crestar Financial Corporation And Subsidiaries
In thousands Six Months Ended June 30, ---------------------------- 1998 1997 Operating Net Income $ 172,301 $ 147,570 Activities Adjustments to reconcile net income to net cash provided (used) by operating activities: Provisions for loan losses, foreclosed properties and other losses 43,806 65,698 Depreciation and amortization of premises and equipment 25,319 23,361 Amortization of intangible assets 9,769 8,433 Deferred income tax expense (benefit) 22,490 (6,727) Net gain on sales of securities, loans and other assets (10,824) (20,230) Gain on sale of merchant card processing - (17,325) Origination and purchase of loans held for sale (4,765,519) (1,218,769) Proceeds from sales of loans held for sale 4,121,546 1,234,527 Net decrease (increase) in accrued interest receivable, prepaid expenses and other assets (57,805) 15,350 Net increase in accrued interest payable, accrued expenses and other liabilities 42,472 18,442 Other, net 19,519 759 ------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities (376,926) 251,089 - ----------------------------------------------------------------------------------------------------------- Investing Proceeds from maturities and calls of securities held to maturity 63,786 265,758 Activities Proceeds from maturities and calls of securities available for sale 399,360 213,309 Proceeds from sales of securities available for sale 2,254,547 1,939,142 Purchases of securities held to maturity (16,343) (11,957) Purchases of securities available for sale (3,451,693) (1,557,756) Net decrease (increase) in money market investments 550,323 (614,926) Principal collected on non-bank subsidiary loans 57,037 58,504 Loans originated by non-bank subsidiaries (96,227) (60,282) Proceeds from sales of loans 149,018 27,269 Net increase in other loans (572,838) (7,124) Purchases of premises and equipment (28,681) (60,937) Proceeds from the sales of foreclosed properties, mortgage servicing rights and merchant card processing 32,355 49,026 Purchases of net assets of financial institutions 1,437 - Purchases of loans and loan portfolios (560,021) (420,063) Proceeds from sales of premises - 7,945 Other, net (63,083) (10,963) ------------------------------------------------------------------------------------------- Net cash used by investing activities (1,281,023) (183,055) - ----------------------------------------------------------------------------------------------------------- Financing Net increase (decrease) in demand, interest-bearing demand Activities and regular savings deposits 836,207 (202,404) Net increase in certificates of deposit 664,722 377,653 Net decrease in short-term borrowings (149,638) (275,008) Proceeds from issuance of long-term debt 202,695 - Principal payments on long-term debt (86,344) (40,314) Cash dividends paid (69,289) (61,974) Common stock purchased and retired (10,863) (29,739) Proceeds from the issuance of common stock 34,676 33,242 Other, net (149) (164) ------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities 1,422,017 (198,708) - ----------------------------------------------------------------------------------------------------------- Cash And Decrease in cash and cash equivalents (235,932) (130,674) Cash Cash and cash equivalents at beginning of year 1,175,314 1,105,036 Equivalents ------------------------------------------------------------------------------------------- Cash and cash equivalents at end of quarter $ 939,382 $ 974,362 ===========================================================================================================
Cash and cash equivalents consist of cash and due from banks; see accompanying notes to consolidated financial statements. 7 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 and first quarter 1998 Form 10-Q. On April 15, 1998, Crestar acquired Executive Auto Leasing, Inc. (Executive), a privately-held auto leasing company based in Maryland with total assets of approximately $21 million at date of acquisition. The acquisition of Executive has been accounted for under the purchase method of accounting, whereby the purchase price has been allocated to the underlying assets acquired and liabilities assumed based on their respective fair values at date of acquisition. Crestar's second quarter 1998 financial statements include the results of operations of the assets purchased and liabilities assumed from Executive from the date of purchase. Results of operations of Executive did not have a material impact on Crestar's consolidated operating results for the second quarter of 1998. Intangible assets consisted of goodwill and deposit based intangibles, having a combined balance of $199.1 million and $171.9 million at June 30, 1998 and 1997, respectively, and favorable lease rights of $344,000 and $400,000, respectively. Capitalized mortgage servicing rights of $105.2 million and $45.9 at June 30, 1998 and 1997, respectively, were included in other assets in the consolidated financial statements. Mortgage servicing rights of approximately $73 million and $11 million were capitalized during the first six months of 1998 and 1997, respectively. The fair value of capitalized mortgage servicing rights was approximately $126 million at June 30, 1998. Amortization of capitalized mortgage servicing rights was approximately $12 million and $6 million in the first six months of 1998 and 1997, respectively. During the first six months of 1998 and 1997, Crestar capitalized interest of $1.6 million and $1.2 million, 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 June 30 follow:
- ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- In thousands 1998 1997 ----------------------- ----------------------- Amortized Market Amortized Market Cost Value Cost Value U.S. Treasury and Federal agencies $190,708 $191,560 $197,788 $196,323 Mortgage-backed obligations of Federal agencies 339,638 343,668 464,173 464,524 Other taxable securities 2,792 2,791 3,034 3,025 States and political subdivisions 45,675 46,641 50,521 51,444 - ---------------------------------------------------------------------------------------------------------- Total securities held to maturity $578,813 $584,660 $715,516 $715,316 ==========================================================================================================
8 (3) Securities Available For Sale The amortized cost and estimated market values (carrying values) of securities available for sale at June 30 follow:
- ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- In thousands 1998 1997 ----------------------- ----------------------- Amortized Market Amortized Market Cost Value Cost Value U.S. Treasury and Federal agencies $ 239,872 $ 239,820 $ 604,863 $ 599,569 Mortgage-backed obligations of Federal agencies 2,882,361 2,885,909 2,164,126 2,125,494 Other taxable securities 878,137 883,351 546,437 544,686 Common and preferred stocks 201,018 201,730 247,983 248,671 - ---------------------------------------------------------------------------------------------------------- Total securities available for sale $4,201,388 $4,210,810 $3,563,409 $3,518,420 ==========================================================================================================
The period-end net unrealized gain or 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 and six months ended June 30, 1998 and 1997, the net unrealized gain or 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 three months and six months ended June 30, 1998 totaled $2.5 million and $5.2 million, respectively. Net of income tax expense of approximately $0.9 million, and $1.8 million for the three months and six months ended June 30, 1998, the gains resulted in reclassification adjustments of $1.6 million and $3.4 million, respectively. Gains (losses) from sale of securities during the three months and six months ended June 30, 1997 totaled $(0.1) million and $4.0 million, respectively. Net of income tax expense (benefit) of approximately $(40) thousand and $1.4 million for the three months and six months ended, June 30, 1997, the gains (losses) resulted in reclassification adjustments of $(60) thousand and $2.6 million, respectively. At June 30, 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 $9.7 million and a market value of $297,000 at June 30, 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 and $2.7 million for the three month and six month periods ended March 31, 1998, respectively. (4) Money Market Investments Money market investments at June 30 included: - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ In thousands 1998 1997 Federal funds sold $752,700 $ 163,506 Securities purchased under agreements to resell - 1,095,300 Time deposits 100,042 75,042 U.S. Treasury 8,624 8,263 Trading account securities 13,351 11,706 Other 13,262 10,924 - ------------------------------------------------------------------------------ Total money market investments $887,979 $1,364,741 ============================================================================== 9 (5) Nonperforming Assets And Impaired Loans Nonperforming assets at June 30 are shown below. Loans that are past due 90 days or more and continue to accrue interest, due to an assessment of collectibility, are excluded from the definition of nonperforming assets. Such loans totaled $51.8 million and $58.7 million at June 30, 1998 and 1997, respectively. - -------------------------------------------------------------- - -------------------------------------------------------------- In thousands 1998 1997 Nonaccrual loans $59,329 $57,813 Foreclosed properties - net 16,652 34,243 - -------------------------------------------------------------- Total nonperforming assets $75,981 $92,056 ============================================================== Transfers from nonperforming loans to foreclosed properties (non-cash additions) were $2.3 million and $7.5 million in the first six months of 1998 and 1997, respectively. Included in Crestar's non-performing loans above are certain impaired loans. Impaired loans and their allocated valuation allowances at June 30, 1998 and 1997 were $15.8 million with an allowance of $2.8 million and $12.1 million with an allowance of $2.2 million, respectively. All impaired loans had an allocated valuation allowance at June 30, 1998 and 1997. Collateral dependent loans, which were measured at the fair value of the collateral, constituted 100% of impaired loans at June 30, 1998. The average recorded investment in impaired loans for the six months ended June 30, 1998 and 1997 was $14.3 million and $22.8 million, respectively. There was no material interest income recognized on impaired loans in the three months and six months ended June 30, 1998 and 1997. (6) Allowance For Loan Losses Transactions in the allowance for loan losses for the three months and six months ended June 30 were:
- ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- In thousands Three Months Six Months ---------------------- ---------------------- 1998 1997 1998 1997 Beginning balance $280,969 $268,870 $281,394 $268,868 - ----------------------------------------------------------------------------------------------------------- Charge-offs (27,518) (33,341) (58,766) (70,416) Recoveries 5,729 7,661 11,925 15,040 - ----------------------------------------------------------------------------------------------------------- Net charge-offs (21,789) (25,680) (46,841) (55,376) Provision for loan losses 21,811 36,000 44,907 65,698 Allowance of loans transferred to loans held for sale (35,000) - (35,000) - Allowance from acquisitions and other activity - net 26 - 1,557 - - ----------------------------------------------------------------------------------------------------------- Net increase (decrease) (34,952) 10,320 (35,377) 10,322 - ----------------------------------------------------------------------------------------------------------- Ending balance $246,017 $279,190 $246,017 $279,190 ===========================================================================================================
(7) Allowance For Foreclosed Properties Transactions in the allowance for losses on foreclosed properties for the three months and six months ended June 30 were:
- ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- In thousands Three Months Six Months -------------------- --------------------- 1998 1997 1998 1997 Beginning balance $4,349 $18,076 $13,191 $18,449 Provision for foreclosed properties - - (1,100) - Write-downs (1,946) (91) (9,688) (464) - ----------------------------------------------------------------------------------------------------------- Ending balance $2,403 $17,985 $ 2,403 $17,985 ===========================================================================================================
10 (8) Short-Term Borrowings Short-term borrowings, exclusive of deposits, with maturities of less than one year at June 30 were:
- --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- In thousands 1998 1997 Federal funds and term Federal funds purchased $2,278,547 $1,463,056 Securities sold under repurchase agreements 979,052 1,053,541 Federal Home Loan Bank borrowings 366,500 575,000 U.S. Treasury demand notes 749,538 499,401 Notes payable 263,643 247,911 Other 2,127 2,134 - --------------------------------------------------------------------------------------------------------------------------- Total short-term borrowings $4,639,407 $3,841,043 ===========================================================================================================================
The Corporation paid $366.3 million and $286.1 million in interest on deposits and short-term borrowings in the first six months of 1998 and 1997, respectively. (9) Long-Term Debt Long-term debt at June 30 included:
- ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- In thousands 1998 1997 4-8% Federal Home Loan Bank obligations payable through 2017 $299,960 $271,601 6 1/2% Subordinated notes due 2018 152,626 - 8 3/4% Subordinated notes due 2004 149,751 149,712 8 1/4% Subordinated notes due 2002 125,000 125,000 8 5/8% Subordinated notes due 1998 - 49,992 7 7/8-11 1/4% Collateralized mortgage obligation bonds maturing through 2019 11,088 13,661 8 1/4% Mortgage indebtedness maturing through 2009 7,672 8,162 8 1/8-14 3/8% Capital lease obligations maturing through 2006 1,607 943 Crestar Capital Trust I preferred stock 200,000 200,000 - ---------------------------------------------------------------------------------------------------------- Total long-term debt $947,704 $819,071 ==========================================================================================================
The Corporation paid $30.1 million and $31.2 million in interest on long-term debt in the first six months of 1998 and 1997, respectively. 11 (10) Income Taxes The current and deferred components of income tax expense allocated to continuing operations for the three months and six months ended June 30 in the accompanying consolidated statements of income were:
- ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- In thousands Three Months Six Months --------------------- ---------------------- 1998 1997 1998 1997 Current: Federal $38,852 $41,917 $72,359 $81,499 State and local 312 1,927 844 5,397 - ----------------------------------------------------------------------------------------------------------- Total current tax expense 39,164 43,844 73,203 86,896 =========================================================================================================== Deferred: Federal 8,578 (5,287) 20,410 (6,419) State and local 1,283 (32) 2,080 (308) - ----------------------------------------------------------------------------------------------------------- Total deferred tax expense (benefit) 9,861 (5,319) 22,490 (6,727) - ----------------------------------------------------------------------------------------------------------- Total income tax expense $49,025 $38,525 $95,693 $80,169 ===========================================================================================================
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 and six months ended June 30 were:
- ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- In thousands Three Months Six Months --------------------------------- --------------------------------- 1998 1997 1998 1997 -------------- --------------- -------------- -------------- Amount % Amount % Amount % Amount % Income before income taxes $136,453 $114,315 $267,994 $227,739 - ----------------------------------------------------------------------------------------------------------- Tax expense at statutory rate 47,759 35.0 40,011 35.0 93,798 35.0 79,709 35.0 - ----------------------------------------------------------------------------------------------------------- Increase (decrease) in taxes resulting from: Tax-exempt interest and dividends (2,201) (1.7) (2,198) (1.9) (4,346) (1.6) (3,900) (1.8) Nondeductible interest expense 766 .6 447 .4 1,402 .5 876 .4 Amortization of goodwill 1,262 .9 1,035 .9 2,496 .9 2,080 .9 State income taxes 1,037 .8 1,232 1.1 1,901 .7 3,308 1.5 Other - net 402 .3 (2,002) (1.8) 442 .2 (1,904) (.8) - ----------------------------------------------------------------------------------------------------------- Total increase (decrease) in taxes 1,266 .9 (1,486) (1.3) 1,895 .7 460 .2 - ----------------------------------------------------------------------------------------------------------- Total income tax expense $ 49,025 35.9 $ 38,525 33.7 $ 95,693 35.7 $ 80,169 35.2 ===========================================================================================================
The Corporation made income tax payments of $71.2 million and $77.2 million during the first six months of 1998 and 1997, respectively. At June 30, 1998, the Corporation had a net deferred income tax asset of $95.2 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. 12 (11) Commitments And Contingencies Legally binding, unfunded commitments to extend credit were $12.1 billion and $9.7 billion at June 30, 1998 and 1997, respectively. Standby letters of credit, which are conditional commitments that guarantee the performance of customers to a third party, were $431 million at June 30, 1998. Recourse obligations on mortgage loans serviced of $1.8 billion at June 30, 1998 included $1.1 billion which was insured by agencies of the Federal government or private insurance companies. Recourse obligations also included $94 million of contractual recourse liability accepted by Crestar on mortgage loan sales to Federal agencies and $141 million on certain mortgage loan sales to private investors. For interest rate risk management purposes at June 30, 1998, Crestar was using interest rate (fixed receive) swaps with notional balances of $1.575 billion to convert floating rate commercial and instalment loans to fixed rates. Crestar was using purchased interest rate caps with notional balances of $1.95 billion to hedge the market value of fixed rate securities available for sale and real estate income property loans, and $1.055 billion to minimize interest rate risk associated with rising rates on floating rate money market deposits. Crestar was using purchased interest rate floors with notional balances of $100 million and $150 million to hedge the fair value of fixed rate domestic time deposits and the prepayment risk associated with fixed rate real estate mortgage loans, respectively. The carrying value and net unrealized gain on these swaps, caps and floors were $22.2 million and $5.4 million, respectively, at June 30, 1998. As a financial intermediary for customers, Crestar had $236.6 million in offsetting swap, $23.7 million in offsetting cap and $8 million in offsetting collar agreements at June 30, 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 $29.5 million, less collateral held of approximately $17.1 million, plus an amount for prospective market movement. Two counterparties constituted 17% and 10% of the estimated credit and market exposure of $61.4 million at June 30, 1998. Crestar also had forward agreements outstanding at June 30, 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 $3.5 million at June 30, 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) Subsequent Events On July 20, 1998 Crestar and Suntrust Banks, Inc. (SunTrust) announced the signing of a definitive agreement to merge. The terms of the merger call for a tax-free exchange of 0.96 shares of SunTrust common stock for each outstanding share of Crestar common stock. The pooling-of-interests combination is expected to be completed during the fourth quarter of 1998, and is subject to the approval of regulatory authorities, in addition to shareholders of both companies. Upon completion of the merger, Crestar will become a wholly-owned subsidiary of SunTrust, and will operate under its current name and management as one of SunTrust's four locally-focused bank holding companies. SunTrust expects to incur pre-tax merger charges of approximately $250 million in the fourth quarter of 1998. In July 1998, Crestar announced that Fleet Financial Group had agreed to purchase approximately $576 million of Crestar's outstanding bank card loans. The accounts and balances represent performing bank card loans to borrowers located outside of Crestar's primary market. Under terms of the transaction, Crestar anticipates recognizing a pre-tax gain, during the third quarter of 1998, of approximately $54 million. Crestar's noninterest expenses are also expected to be higher in the third quarter of 1998, in comparison to prior quarters, in recognition of certain incremental expenses. The consolidated balance sheet as of June 30, 1998 reflects the transfer of $603 million in bank card loans from the loan portfolio to loans held for sale. In addition to the principal balance of the bank card loans, $35 million in allowance for loan losses specifically related to the bank card loans held for sale was transferred. 13 Financial Commentary Crestar Financial Corporation And Subsidiaries Information contained in the "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, compliance with year 2000 data processing standards, the Corporation's proposed merger with SunTrust Banks, Inc., and the impact of future legal and regulatory actions, including the establishment of federal deposit insurance rates. Such statements are provided to assist the reader in understanding anticipated future financial operations, and are made pursuant to the safe harbor provisions of the Private Litigation Reform Act of 1995. 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) reported net income of $87.4 million for the quarter ended June 30, 1998, an increase of $11.6 million or 15% over net income earned in the second quarter of 1997. For the first six months, earnings were $172.3 million in 1998, an increase of 17% from the $147.6 million earned in 1997. These increases reflect continued growth in noninterest income and net interest income, lower credit-related costs, and management of controllable expenses. Diluted earnings per common share were $.77 for the second quarter of 1998, compared to $.68 in 1997, representing an increase of 13%. For the first six months of 1998, diluted earnings per common share were $1.52, an increase of 15% from the $1.32 per share recorded in the first six months of 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 comprise 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, credit unions and mortgage banking companies. On April 15, 1998, Crestar acquired Executive Auto Leasing, Inc. (Executive), a privately-held auto leasing company based in Beltsville, Maryland. Executive, with total assets of approximately $21 million at date of acquisition, will expand Crestar's ability to offer commercial and consumer auto leasing to customers. The acquisition of Executive has been accounted for under the purchase method of accounting, whereby the purchase price has been allocated to the underlying assets acquired and liabilities assumed based on their respective fair values at date of acquisition. Crestar's second quarter 1998 financial statements include the results of operations of the assets purchased and liabilities assumed from Executive from the date of purchase. Results of operations of Executive did not have a material impact on Crestar's consolidated operating results for the second quarter of 1998. Merger With SunTrust Announced On July 20, 1998 Crestar and Suntrust Banks, Inc. (SunTrust) announced the signing of a definitive agreement to merge. The terms of the merger call for a tax-free exchange of 0.96 shares of SunTrust common stock for each outstanding share of Crestar common stock. The pooling-of-interests combination is expected to be completed during the fourth quarter of 1998, and is subject to the approval of regulatory authorities, and shareholders of both companies. Upon completion of the merger, Crestar will become a wholly-owned subsidiary of SunTrust, and will operate under its current name and management as one of SunTrust's four locally-focused bank holding companies. The merger will create the tenth largest bank holding company in the United States, based on total assets of approximately $88 billion, and will provide a full line of consumer and commercial banking services to customers in Florida, Georgia, Tennessee, Alabama, Virginia, Maryland and the District of Columbia. SunTrust expects to incur pre-tax merger charges of approximately $250 million in the fourth quarter of 1998. Sale Of Selected Bank Card Loans In July 1998, Crestar announced that Fleet Financial Group had agreed to purchase approximately $576 million of Crestar's outstanding bank card loans. The accounts and balances represent performing bank card loans to borrowers located outside of Crestar's primary market. The sale of the bank card loans is consistent with Crestar's strategy of focusing on providing a range of financial services to customers in the Virginia, Maryland and Washington, D.C. market. 14 Under terms of the transaction, Crestar anticipates recognizing a pre-tax gain, during the third quarter of 1998, of approximately $54 million. Crestar's noninterest expenses are also expected to be higher in the third quarter of 1998, in comparison to prior quarters, in recognition of certain incremental expenses. The consolidated balance sheet as of June 30, 1998 reflects the transfer of $603 million in bank card loans from the loan portfolio to loans held for sale. In addition to the principal balance of the bank card loans, $35 million in allowance for loan losses specifically related to the bank card loans held for sale was transferred. Loans held for sale as of June 30, 1998 therefore included bank card loans with a cost basis of $568 million, with the remaining balance representing real estate - mortgage loans originated and held for sale by Crestar's mortgage banking subsidiary. Profitability Measures And Capital Resources (Table 1) Key profitability measures reflect Crestar's strong operating performance during the first six months of 1998. Return on average assets was 1.39% in the second quarter, and 1.40% for the first six months of 1998, compared to 1.42% and 1.37%, respectively, for both the second quarter and first six months of 1997. Return on average equity was 16.46% for the second quarter of 1998, compared to 16.48% for the second quarter of 1997. For the first six months of 1998, return on average equity was 16.43%, compared to 16.27% for the first six months of the previous year. Average equity to assets of 8.42% for the second quarter of 1998, compared to 8.64% in the second quarter of 1997. Average equity to assets for the first six months of 1998 was 8.51%, compared to 8.45% for the same period of 1997. The period-end equity to assets ratio was 8.43% at June 30, 1998, compared to a June 30, 1997 ratio of 8.33%. Risk-based capital ratios are another measure of capital adequacy. At June 30, 1998, Crestar's consolidated risk-adjusted capital ratios were 10.1% 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 8.8% at June 30, 1998 also was significantly above Crestar's regulatory minimum of 3.0%. Crestar's tangible leverage ratio, defined as total equity less intangible assets divided by total assets less intangible assets, was 7.73% at June 30, 1998. Under Federal Deposit Insurance Corporation (FDIC) rules, Crestar's sole subsidiary bank (Crestar Bank) was considered "well-capitalized" as of June 30, 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. Net Interest Margin And Net Interest Income (Tables 3 and 12) Crestar's net interest margin for the second quarter of 1998 was 4.06%, a decrease of 52 basis points from the margin recorded in the second quarter of 1997. The decrease was primarily due to unfavorable changes in both the composition of earning assets and funding sources, and in the interest yields impacting the Corporation's earning assets. These factors served to offset the impact of favorable changes in the 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 loans decreased 30 basis points from the second quarter of 1997, to 8.35% for the second quarter of 1998. Reflecting a lower long-term interest rate environment, all categories of loans experienced a decline in average rates earned, in comparison to second quarter 1997 results. Average rates on bank card loans decreased from 14.39% in the second quarter of 1997 to 13.79% in the second quarter of 1998. Lower long-term interest rates and a competitive marketing environment for most consumer loans in the second quarter of 1998, compared to the second quarter of 1997, also resulted in lower yields on instalment and real estate-mortgage loan balances. Average yields on business loans also demonstrated declines in the second quarter of 1998, with yields on real estate-income property and real estate-construction loans decreasing 12 basis points and 15 basis points, respectively, from second 15 quarter 1997 results. Yields on commercial loans declined 19 basis points during the same time period, and yielded 7.87% for the second quarter of 1998. Yields on money market investments were 5.37% for the second quarter of 1998 versus 5.65% for the second quarter of 1997, in part reflecting lower average federal funds rates on overnight deposits. Average rates on securities available for sale were 6.23% in second quarter 1998, versus 6.32% in the same period of 1997. Average yields increased on the smaller securities held to maturity portfolio, which earned an average rate of 6.20% in the second quarter of 1998, reflecting the maturity of lower-yielding securities. In total, interest rate spreads for earning assets had a negative impact of 42 basis points on Crestar's second quarter 1998 net interest margin, when compared to the second quarter of 1997. Reflecting a competitive environment for consumer deposits, and growth in new consumer deposit products with rates tied to national money market yields, the average rate paid on total interest-bearing liabilities increased by 24 basis points from the second quarter of 1997 to the second quarter of 1998. Rates paid on interest-bearing deposits averaged 3.93% during the second quarter of 1998, an increase of 16 basis points from the second quarter of 1997. This increase was primarily driven by an increase of 27 basis points on average rates paid on interest-bearing demand deposits, which increased from 2.97% in the second quarter of 1997 to 3.24% in the second quarter of 1998. While rates paid on regular savings deposits decreased from the second quarter of 1997 by 18 basis points, the average rates paid on domestic time deposits and on certificates of deposits $100,000 and over increased by 10 basis points and 9 basis points, respectively, when compared to the second quarter of 1997. Rates paid on average short-term borrowings rose from 5.26% in the second quarter of 1997 to 5.44% in the second quarter of 1998. Rates paid on long-term debt, in part reflecting the impact of a new issuance of $150 million in subordinated notes during January 1998, decreased from 7.47% in the second quarter of 1997 to 7.19% for the second quarter of 1998. The average rate paid on Crestar's total sources of funds in the second quarter of 1998 was 3.69%, reflecting an increase of 22 basis points from the same period of 1997. Excluding the impact of derivative instruments utilized as hedges, the change in the Corporation's interest rate spreads had a negative impact of 29 basis points on Crestar's second quarter 1998 net interest margin, compared to the second 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 13 basis points for the Corporation's second quarter 1998 net interest margin. Changes in the earning asset mix decreased the second quarter 1998 net interest margin by approximately 9 basis points when compared to the second quarter of 1997. Loans as a percentage of total earning assets decreased from an average of 73% during the second quarter of 1997 to 70% for the same period of 1998. Average total loans were $16.2 billion during the second quarter of 1998, compared to $14.1 billion during the second quarter of 1997. However, changes in the composition of average loan balances also negatively impacted net interest margins. Average bank card loans, the highest yielding loan category, experienced a decline of $134 million, or 11%, during the second quarter of 1998 when compared to the same period of 1997. Marketing efforts directed to new accounts have been curtailed from previous levels, in light of higher industry-wide delinquency statistics. Account balances have also declined as a result of the expiration of introductory low interest rates on some bank card products; Crestar's transfer of $603 million in bank card loans to the loans held for sale classification, as of June 30, 1998, did not impact average bank card loans balances for the second quarter of 1998. Lower yielding secured consumer loans (instalment and real estate mortgage loans) experienced growth during the second quarter of 1998. Average instalment loan balances increased by $1.2 billion or 29% during this period, with average real estate-mortgage loans increasing $65 million, or 2%, from second quarter of 1997. Average business loans for the second quarter experienced a 19% increase. The average balance of commercial loans increased by $1.1 billion, from $3.8 billion for the second quarter of 1997 to $4.9 billion for the second quarter of 1998. Average money market investments increased, from $161 million in the second quarter of 1997 to $238 million for the same quarter of 1998. Significant increases in average balances of loans held for sale reflect record levels of origination volume by Crestar's mortgage banking subsidiary. Average balances in the second quarter of 1998 were $1.7 billion, representing 7% of average total earning assets during this period. Average balances for loans held for sale during the second quarter of 1997 totaled $551 million, or 3% of average total earning assets. 16 Changes in the composition of Crestar's funding sources resulted in a negative impact to the second quarter 1998 net interest margin of 17 basis points, in comparison to second quarter 1997 results. Total sources of funding needed to support earning assets levels increased by $3.8 billion, or 20% from second quarter of 1997 to the second quarter of 1998, in part reflecting Crestar's growth in average loan balances during this period. Average total deposits for the second quarter of 1998 grew by $1.4 billion, a 9% increase over second quarter 1997 average balances. Interest-bearing demand deposits averaged $6.8 billion during the second quarter of 1998, an increase of $1.0 billion or 18% over the second quarter of 1997. Average balances of domestic time deposits, which include consumer certificates of deposits, declined $395 million or 9% from the levels of the second quarter of 1997. Balances of regular savings deposits were also lower in comparison to second quarter 1997 balances, while certificates of deposits of $100,000 and over were higher by approximately $586 million. The Corporation experienced growth in average balances of non-interest bearing demand deposits and in shareholders equity during the second quarter of 1998. Net non-interest bearing sources of funds represented 17% of total funding sources in the second quarter of 1998, versus 18% during the second quarter of 1997. Interest-bearing deposits represented 59% of total funding sources in the second quarter of 1998 and 65% in the second quarter of 1997. Average balances of short-term borrowings increased by $2.1 billion during the second quarter of 1998, in comparison to the second quarter of 1997, and totaled $4.6 billion for the most recent quarter. Average balances of long-term debt totaled $923 million for the second quarter of 1998. Short-term borrowings and long-term debt represented 20% and 4%, respectively, of total funding sources for the second quarter of 1998. Off-balance sheet hedge transactions resulted in a negligible impact to net interest income during the second quarter of 1998. In the second quarter of 1997 the comparable impact of hedging activity was a decrease to Crestar's net interest income of $1.3 million, which consisted of a $0.8 million decrease in interest income and a $0.5 million increase in interest expense. In comparison to second quarter 1997, off-balance sheet hedging transactions had a positive impact of 3 basis points on the net interest margin for the second quarter of 1998. 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 second quarter of 1998 increased 7% over the second quarter of 1997. Tax-equivalent net interest income similarly increased by 7% during this period. The increase reflects the 20% growth in average earning assets for the second quarter of 1998, versus the same period of 1997, which offset the lower net interest margin realized during the second quarter of 1998. For the first six months of 1998, tax equivalent net interest income increased 5% over 1997 as a result of a $3.0 billion or 15% increase in average earning assets, which more than offset a 41 basis point decline in the net interest margin. The net interest margin for the first six months of 1998 was 4.13%, versus 4.54% for the same period of 1997. Most factors contributing to the decrease in the year-to-date margin mirror those previously discussed. Changes to the earning assets mix for the year-to-date period had an unfavorable impact of 6 basis points, while changes to the funding mix resulted in a 15 basis point negative impact to the year-to-date margin. Unfavorable changes in interest rate spreads for the comparable six month period decreased the net interest margin by 23 basis points, in part reflecting a 25 basis point decline in average yields on the Corporation's loan portfolio. Off-balance sheet hedge transactions had a positive impact on the margin, in comparison to year-to-date 1997 results, of approximately 3 basis points. Off-balance sheet hedge transactions resulted in an increase to net interest income of approximately $0.5 million during the first six months of 1998, which was composed of an approximately $1.2 million increase in interest income and a $0.7 million increase in interest expense, based on the underlying asset or liability being hedged. In the first six months of 1997 the comparable impact of hedging activity was a decrease to Crestar's total interest income of approximately $2.3 million, which consisted of a $1.4 million decrease in interest income and a $0.9 million increase in interest expense. 17 Risk Exposures And Credit Quality (Tables 4 and 5) Crestar's allowance for loan losses was $246 million at June 30, 1998, representing 1.54% of period-end loans, 324% of period-end nonperforming assets, and a 415% 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 $51.8 million at June 30, 1998. Of this balance, $31.7 million represented student loan balances under Federal government loan programs, which can carry a substantial guarantee (in excess of 98%) as to principal loan balance. At June 30, 1998, nonperforming assets of $76.0 million were down $16.1 million or 17% from June 30, 1997, and down $10.3 million or 12% from December 31, 1997. The ratio of nonperforming assets to loans and foreclosed properties at June 30, 1998 was 0.48%, compared to 0.55% at December 31, 1997 and 0.64% at June 30, 1997. Future operating results could show increases in the total balance of nonperforming assets due to loan growth, future acquisitions of financial institutions, or adverse changes in credit quality. The provision for loan losses was $21.8 million for the second quarter of 1998, a decrease of $14.2 million from the $36.0 million provision expense recorded in the second quarter of 1997. Provision expense in the first quarter of 1998 was $23.1 million. Net charge-offs totaled $21.8 million in the second quarter of 1998, compared to $25.7 million in the comparable period of 1997. Net charge-offs as a percentage of average loans were 0.54% for the second quarter of 1998, compared to 0.73% in the same period of 1997, and 0.64% for the first quarter of 1998. Business loans experienced net recoveries of $0.4 million in the second quarter of 1998, compared to net recoveries of $1.0 million in the comparable quarter of 1997. Consumer loan net charge-offs totaled $22.2 million in the second quarter of 1998, compared to consumer loan net charge-offs of $25.3 million in the first quarter of 1998 and $26.7 million in the second quarter of 1997. The largest proportion of net loan charge-offs during the second quarter of 1998, and for the first six months of 1998, occurred in the bank card loan portfolio. Net charge-offs for bank card loans were $18.6 million in the second quarter of 1998, compared to $20.5 million in the first quarter of 1998 and $22.9 million in 1997's second quarter. Net bank card loan charge-offs as a percentage of bank card loans (on an annualized basis) were 6.78% in the second quarter of 1998, 7.26% for the first quarter of 1998, and 7.45% in the second quarter of 1997. During 1997 and the first six months of 1998, Crestar's bank card loss rates were higher than in previous periods, due to an unanticipated decline in consumer payment performance, influenced by substantive increases in consumer bankruptcy filings. Crestar's experience during this time period has been similar to many other financial institutions with credit card operations. The historically high charge-off ratio for the bank card portfolio was a factor in the loan provision expense of $36.0 million incurred during the second quarter of 1997. As previously noted, Crestar transferred $603 million in bank card loans to the loans held for sale classification as of June 30, 1998; approximately $576 million of such loans were subsequently sold in July 1998. The transferred loans, which were composed of bank card loans to borrowers outside of Crestar's primary market of Virginia, Maryland and Washington, D.C., represented approximately 54% of Crestar's total bank card loans outstanding at time of transfer. It is anticipated that total bank card loan charge-offs will decline in future periods, from the levels experienced in the first six months of 1998, in part reflecting the sale of a substantial part of the bank card portfolio and the resulting decline in bank card loans outstanding. Excluding balances classified as loans held for sale, Crestar had $507 million of bank card loans at June 30, 1998, representing 3% of Crestar's total loan portfolio of $16.0 billion. Net charge-offs of instalment loans totaled $3.3 million versus $4.5 million in the first quarter of 1998 and $3.0 million in the second quarter of 1997. Net charge-offs for real estate-mortgage loans were $0.4 million for the second quarter of 1998, compared to $0.8 million in the second quarter of 1997. In addition to other loan categories, Crestar closely manages its portfolio of loans to real estate developers and investors (REDI). The REDI designation is based on borrower type and encompasses non-owner occupied real estate and construction loans as well as other forms of credit extended to real estate developers and investors. REDI outstanding balances have remained fairly stable during 1998, and totaled $1.8 billion at June 30, 1998. This balance represented 18 11% of the total loan portfolio at that date. At both December 31, 1997 and at March 31, 1998, REDI loan balances also constituted approximately 11% of the total loan portfolio. REDI nonperforming assets were $35.3 million at June 30, 1998, compared to $40.3 million at December 31, 1997 and $46.0 million at June 30, 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 June 30, 1998, not included in Table 5, totaled approximately $81 million. Over 90% of this balance represents commercial or real estate-income property related loans. Depending on changes in the economy and other future events, these loans and others not presently identified as problem loans could be classified as nonperforming assets in the future. Potential problem loans were approximately $123 million at June 30, 1997 and $77 million at December 31, 1997. Fluctuations in potential problem loans balances from quarter to quarter are normal and should be viewed in the context of the size of Crestar's total loan portfolio, which totaled $16.0 billion at June 30, 1998. Noninterest Income And Expense (Table 6) Noninterest income totaled $116.5 million in the second quarter of 1997, a $5.5 million or 5% increase over the second quarter period of 1997. Excluding securities gains and losses, noninterest income increased $2.9 million or 3% over second quarter 1997 results. Significantly impacting a quarter-to-quarter comparison of results is a gain of $17.3 million (pre-tax) recorded by Crestar during the second quarter of 1997, arising from the sale of merchant bank card processing operations. Excluding the impact of the 1997 gain on sale of the merchant bank card processing operations, and excluding securities gains and losses from both periods, noninterest income increased by $20.2 million, or 22%, from $93.8 million in the second quarter of 1997 to $114.0 million in the second quarter of 1998. Significant growth was experienced in several noninterest income categories. Deposit account fee income for the three months ended June 30, 1998 was up $3.1 million, or 10%, from the results of the second quarter of 1997. Trust and investment advisory income increased 17% from second quarter 1997 levels, and totaled $21.0 million for the second quarter of 1998, reflecting growth in assets under trust. Other service charges and fees totaled $11.6 million for the second quarter of 1998, representing an increase of 33% over second quarter 1997 results, in part due to growth in automated teller machine (ATM) fee income. Reflecting a significant increase in overall levels of mortgage originations within the mortgage banking industry, driven by declines in residential home mortgage interest rates, Crestar's mortgage income (mortgage origination and mortgage servicing income, net of expenses) for the second quarter of 1998 totaled $18.9 million, or $13.0 million greater than the results reported in the second quarter of 1997. The increase reflects record levels of mortgage originations during the second quarter of 1998 by Crestar's mortgage banking subsidiary, Crestar Mortgage Corporation. Gains on sale of mortgage servicing rights totaled $4.0 million in the second quarter of 1997; there were no such sales in the quarter ended June 30, 1998. Bank card-related noninterest income declined to $9.4 million in the second quarter of 1998, down slightly from the $9.8 million recognized in the same period of 1997. The decline is primarily attributable to the sale of Crestar's bank card processing operations, effective May 1, 1997. Miscellaneous income for the second quarter of 1998 includes a gain of $3.3 million recognized on the sale of selected real estate-mortgage loans; a comparable gain of $4.6 million was recorded in the second quarter of 1997. Noninterest expense increased $12.7 million, or 7%, in the second quarter of 1998 when compared to the same period of 1997. Total personnel costs, Crestar's largest expense category, were $102.1 million in the three month period ended June 30, 1998, an increase of 6% in comparison to the same period of 1997. Commission expenses, related to strong growth in fee-based business lines, were significantly higher during the second quarter of 1998, in part reflecting the high levels of mortgage loan originations at Crestar Mortgage Corporation. Strong growth in other fee-based business lines, such as stock brokerage, mutual fund and insurance 19 annuity sales, also resulted in higher commission-related personnel costs. Noninterest expense in the quarter included $2.7 million of costs incurred in the ongoing project to prepare Crestar's data processing systems for "Year 2000" compatibility; comparable expenses in the second quarter of 1997 totaled $4.3 million. Crestar is implementing changes to its information systems so that they will be fully operable for date recognition and data processing when the year 2000 begins. 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 fiscal 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 estimated lives of the related assets. However, the majority of costs will be expensed as incurred. Through June 30, 1998, Crestar had incurred approximately $11.0 million in noninterest expense associated with the Year 2000 conversion process, of which $5.7 million was incurred during the first six months of 1998. The effective tax rate for the second quarter and first six months of 1998 was 35.9% and 35.7%, respectively, compared to 33.7% and 35.2% for the comparable periods of 1997. Crestar's effective tax rate for the second quarter of 1997 was favorably impacted by the recognition of tax benefits upon the resolution of certain federal tax filing positions taken in prior years. Financial statement note 10 contains additional information concerning income taxes. Financial Condition (Table 7) Crestar's assets totaled $26.2 billion at June 30, 1998, compared to $24.9 billion in assets at December 31, 1997, and $22.8 billion at June 30, 1997. Loans totaled $16.0 billion at June 30, 1998, compared to $15.7 billion at year-end 1997 and $14.3 billion at June 30, 1997. Total deposits were $17.9 billion at June 30, 1998, compared to $16.4 billion at December 31, 1997 and $15.8 billion at June 30, 1997. Excluding certificates of deposit of $100,000 or more, deposits totaled $16.0 billion at June 30, 1998, versus $15.4 billion at December 31, 1997 and $15.0 billion at June 30, 1997. With respect to the securities held to maturity portfolio, market value exceeded the carrying value at June 30, 1998 by $5.8 million, consisting of approximately $6.4 million in unrealized gains and $0.6 million in unrealized losses. At June 30, 1998, the fair value of securities available for sale exceeded the amortized cost of such securities by $9.4 million, consisting of $20.2 million in unrealized gains and $10.8 million in unrealized losses. Shareholders' equity at June 30, 1998 reflects a $6.4 million increase for the excess, net of tax, of the fair value of securities available for sale over the amortized cost at quarter-end. At June 30, 1997, Crestar's shareholders' equity reflected a $28.9 million reduction for the excess, net of tax, of amortized cost of securities available for sale over the fair value of such securities. 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 gains or 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 gains on securities available for sale are not expected to have a significant impact on the future operating results or liquidity of Crestar. All mortgage-backed securities in the securities available for sale and securities held to maturity portfolios are subject to prepayment risk, since the mortgage loans underlying these securities can prepay at any time without penalty. This risk becomes apparent during periods of declining interest rates, when refinancing of existing mortgage loans can accelerate. During these periods, the expected maturity of mortgage-backed securities shortens due to prepayments, reducing the expected stream of future interest payments to be received. Similarly, prepayment risks exist 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. 20 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 69% (market value) of Crestar's securities 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 June 30, 1998. This category includes mortgage-backed securities of Federal agencies, as well as CMO securities guaranteed by Federal agencies such as the Federal Home Loan Mortgage Corporation. Securities classified as "Other taxable securities" can include non-government CMO securities, corporate debt securities, and corporate obligations securitized by credit card or instalment loans. Other taxable securities classified as available for sale at June 30, 1998 included $852 million (market value) of non-government CMO obligations. During the second quarter of 1998, Crestar sold approximately $1.1 billion of securities classified as available for sale, generating net securities gains of $2.5 million. Such sales were consummated in conjunction with the overall management of interest rate risk for the Corporation. In the second quarter of 1997, Crestar incurred securities losses from sales of securities of $0.1 million. For the first six months of 1998 and 1997, Crestar recognized net gains on the sale of securities available for sale of $5.2 million and $4.0 million, respectively. During the second quarter of 1998, Crestar announced a common stock dividend increase, effective with the dividend paid on May 21, 1998, to $.33 per share. This represents a 14% increase from the previous quarterly dividend rate of $.29 per share. Also during the second quarter, Crestar purchased and retired 95,000 shares of common stock, at an average price of $57 per share. The purpose of these transactions was to retire shares previously issued for the purchase of a financial institution. 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 these objectives include maintaining a strong balance sheet, maintaining adequate core deposit levels, taking an acceptable level of interest rate risk, adhering to conservative financial management principles and practicing prudent dividend policies. Core deposits provide a significant source of liquidity. Crestar's interest-bearing core deposits represented 51% of total funding sources at June 30, 1998, compared to 53% of total funding sources at December 31, 1997 and 57% at June 30, 1997. As an additional indication of adequate liquidity, securities available for sale represented 18%, and money market investments an additional 4%, of Crestar's total earning assets at June 30, 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 measuried 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 21 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. The high rate and low rate estimates generated by this simulation process are compared to the estimate generated under the consensus interest rate scenario. Based on the most recent simulations as of June 30, 1998, Crestar's projected after-tax net income under the consensus interest rate scenario for the 12 month period ending June 30, 1999 would decrease by approximately $16 million in a high interest rate scenario, and would increase by approximately $3 million 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 approximately 240 basis points under a 12 month high interest rate scenario, and interest rate decreases of approximately 120 basis points under a 12 month low interest rate scenario, from market interest rates in effect at June 30, 1998. Interest rates under these simulations were projected to change 25 basis points per month until the interest rate targets were met. 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 June 30, 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 June 30, 1998 are utilized to convert certain variable rate assets to fixed rates as part of the Corporation's 22 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 mortgage 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 June 30, 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. At June 30, 1998 Crestar had a deferred gain of approximately $3.6 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 original contractual life of the underlying derivative instruments, which range from approximately two to six years. Terminations of derivative instruments prior to maturity may occur in the future in response to modifications of interest rate risk management strategies. The notional amount of Crestar's interest rate swaps, caps and floors (excluding customer positions where Crestar acts as an intermediary) was $4.9 billion at June 30, 1998. Forward contracts with a notional amount of $2.8 billion, utilized to hedge lending commitments of Crestar's mortgage banking subsidiary, were also outstanding at June 30, 1998, bringing the total notional value of derivative financial instruments related to interest rate risk management activities to $7.7 billion at June 30, 1998. Tables 8, 9, and 10 present information regarding fair values, maturity, average rates, and activity as of and for the six month period ending June 30, 1998 for these off-balance sheet derivative instruments. Net unrealized gains on these instruments totaled $1.9 million as of June 30, 1998. Financial statement note 11 contains additional information pertaining to these types of agreements. Year 2000 Issue As previously noted, Crestar is implementing changes to its information systems so that they will be fully operable for date recognition and data processing before the year 2000 begins. The Corporation's Year 2000 plans are subject to guidelines promulgated by the Federal Financial Institutions Examination Council (FFIEC). The Federal Reserve Bank of Richmond periodically measures the status of Crestar's plans and progress, as outlined in the FFIEC guidelines. Accordingly, Crestar completed a thorough assessment of each of the Corporation's computer systems in 1997. The Corporation expects to have substantially completed necessary changes to its computer systems by the end of the current year, and to further test its computer systems during 1999 to confirm compliance with "Year 2000" data processing standards. The Corporation considers its current state of readiness in addressing the Year 2000 issue to be adequate, and fully expects to meet the above timetable regarding Year 2000 compliance. 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 estimated lives of the related assets. However, the majority of costs will be expensed as incurred. Through June 30, 1998, Crestar had incurred approximately $11.0 million in noninterest expense associated with the Year 2000 conversion process. As part of its planning process, the Corporation continues to develop contingency plans based on possible scenarios, and their likelihood of occurrence, which may impact Crestar's operations. Crestar's contingency plans address operational issues, including communication links with other entities, utility and transportation services, and the availability of alternative services among key vendor relationships. Crestar expects to complete its contingency plans in various stages, during 1998 and 1999. At this time, Crestar believes the most likely worst case Year 2000 scenario would not have a material effect on the Corporation's results of operations, liquidity, and financial condition for the year ending December 31, 2000. The Corporation does not 23 foresee a material loss of revenue due to the Year 2000 issue. As noted however, Crestar's contingency plans are based on assessments of the likelihood of occurrence of possible scenarios; the Corporation believes that no entity can address the virtually unlimited possible circumstances relating to Year 2000 issues, including risks outside Crestar's current primary marketplace of Virginia, Maryland, and the District of Columbia. While unlikely, it is acknowledged that failure by the Corporation to successfully implement its Year 2000 plan, its modifications and conversions, or to adequately assess the likelihood of various events relating to the Year 2000 issue, could have a material impact on Crestar's operations. Therefore, this could potentially result in a material adverse effect on the Corporation's results of operations and financial condition. The projections of total costs of Crestar's Year 2000 project and the expected completion dates are based on Crestar's best estimates, which are necessarily based in part on assumptions of future events including the continued availability of adequate resources and completion of third party modification plans. There can be no guarantee that these estimates will be achieved; actual results could differ from the Corporation's current estimates. Specific risk factors that might cause material differences include, but are not limited to, the availability and cost of personnel with adequate programming skills and the ability to locate and correct all relevant computer codes. The inability to control the actions and plans of vendors and suppliers, customers, government entities and other third parties with respect to Year 2000 issues are associated risks. New Accounting Standard In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), which establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that a company recognize all derivative instruments as either assets or liabilities in the consolidated balance sheet, and measure those instruments at fair value. The accounting for a derivative depends on the intended use of the derivative and the resulting designation. For companies with a fiscal year ending on December 31, SFAS 133 is effective as of January 1, 2000. Earlier adoption, as of the beginning of a fiscal quarter, is encouraged but is not mandatory. The statement can not be applied retroactively to the financial statements of periods prior to adoption. Crestar is evaluating the statement; the impact of adopting SFAS 133 will be dependent on the specific derivative instruments in place at date of adoption. At this time, Crestar does not anticipate adopting SFAS 133 before January 1, 2000. 24 Table 1 Financial Highlights
Dollars in millions, except per share data Three Months Six Months -------------------------- --------------------------- % % For the Period Ended June 30 1998 1997 Change 1998 1997 Change Net Income $87.4 $75.8 15 $172.3 $147.6 17 Basic Earnings Per Share: Net Income $.78 $.69 13 $1.54 $1.34 15 Average Shares Outstanding (000s) 112,150 110,496 1 111,928 110,394 1 Diluted Earnings Per Share: Net Income $.77 $.68 13 $1.52 $1.32 15 Average Shares Outstanding (000s) 113,547 111,602 2 113,354 111,573 2 Dividends Paid Per Common Share $.33 $.29 14 $.62 $ .56 11 ========================================================================================================== Key Ratios Return on Average Assets 1.39% 1.42% 1.40% 1.37% Return on Average Equity 16.46 16.48 16.43 16.27 Average Equity to Average Assets 8.42 8.64 8.51 8.45 Net Interest Margin 4.06 4.58 4.13 4.54 At June 30 Book Value Per Share $19.65 $17.17 14 Equity to Assets 8.43% 8.33% Risk Adjusted Capital Ratios: Tier I 10.1 10.7 Total 13.1 13.4 Common Shares Outstanding (000s) 112,220 110,638 ==========================================================================================================
Table 2 Changes In Diluted Earnings Per Share
2nd Qtr. 1998 2nd Qtr. 1998 vs. vs. 2nd Qtr. 1997 1st Qtr. 1998 Diluted Earnings Per Share - prior period $ .68 $ .75 - ------------------------------------------------------------------------------------------------------------ Interest income .35 .12 Interest expense (.27) (.08) Provision for loan losses .08 .01 Securities gains or losses .02 - Other noninterest income .02 .05 Foreclosed properties expense - (.01) Other noninterest expense (.07) (.05) Change in effective income tax rate (.03) (.02) Increase in shares outstanding (.01) - - ------------------------------------------------------------------------------------------------------------ Net increase .09 .02 - ------------------------------------------------------------------------------------------------------------ Diluted Earnings Per Share - current period $ .77 $ .77 ============================================================================================================
25 Table 3 Average Balances, Net Interest Income And Rate/Volume Analysis(1) Dollars in thousands
2nd Qtr. - --------------------------- 1st Qtr. Average Balance Average - --------------------------- Increase Balance 1998 1997 (Decrease) 1998 ---- ---- ---------- ------- $ $ % $ 4,917,937 3,833,655 28 4,540,123 Commercial 1,171,884 1,270,639 (8) 1,222,918 Real estate - income property 386,861 334,572 16 381,702 Real estate - construction 5,273,448 4,099,809 29 4,809,541 Instalment 1,094,608 1,228,168 (11) 1,130,487 Bank card 3,398,345 3,333,024 2 3,515,622 Real estate - mortgage - ------------------------------------------------------------------------------------------------------------ 16,243,083 14,099,867 15 15,600,393 Total loans - net of unearned income(2) - ------------------------------------------------------------------------------------------------------------ 594,342 771,671 (23) 616,117 Securities held to maturity 4,415,174 3,778,013 17 3,978,423 Securities available for sale 238,260 160,914 48 647,881 Money market investments 1,676,327 551,352 204 1,150,140 Loans held for sale - ---------------------------------------------------------------------------------------------------------- 23,167,186 19,361,817 20 21,992,954 Total earning assets ========================================================================================================== 6,829,500 5,805,429 18 6,429,487 Interest-bearing demand deposits 1,418,043 1,573,048 (10) 1,432,363 Regular savings deposits 3,942,134 4,336,813 (9) 4,091,130 Domestic time deposits - ---------------------------------------------------------------------------------------------------------- 12,189,677 11,715,290 4 11,952,980 Total interest-bearing core deposits - ---------------------------------------------------------------------------------------------------------- 6,071,099 3,419,958 78 5,376,486 Purchased liabilities 922,961 834,761 11 927,180 Long-term debt - ---------------------------------------------------------------------------------------------------------- 19,183,737 15,970,009 20 18,256,646 Total interest-bearing liabilities 3,983,449 3,391,808 17 3,736,308 Other sources - net - ---------------------------------------------------------------------------------------------------------- 23,167,186 19,361,817 20 21,992,954 Total sources of funds - ---------------------------------------------------------------------------------------------------------- Net Interest Income ==========================================================================================================
26
2nd Qtr. ----------------------------------------------------- 1998 vs. 1997 2nd Qtr. 1998 vs. 1st Qtr. 1998 ---------------------------------- ------------------------------- 1st Qtr. Income/Expense(3) Change due to(4) Income/ Change due to(4) ----------------- Increase ----------------- Expense(3) Increase ------------------- 1998 1997 (Decrease) Rate(5) Volume 1998 (Decrease) Rate(5) Volume ---- ---- ---------- ------- ------ -------- -------- ------- ------ $ $ $ $ $ $ $ $ $ 96,593 77,406 19,187 (2,562) 21,749 90,862 5,731 (1,799) 7,530 26,091 27,847 (1,756) (2,941) 1,185 26,393 (302) 788 (1,090) 8,840 7,586 1,254 3,413 (2,159) 8,431 409 295 114 106,078 84,012 22,066 (2,004) 24,070 95,308 10,770 1,561 9,209 36,786 43,145 (6,359) (1,515) (4,844) 38,117 (1,331) (72) (1,259) 65,110 64,068 1,042 (212) 1,254 67,597 (2,487) (235) (2,252) - --------------------------------------------------------------------------------------------------------- 339,498 304,064 35,434 (10,908) 46,342 326,708 12,790 (711) 13,501 - --------------------------------------------------------------------------------------------------------- 9,202 11,642 (2,440) 235 (2,675) 9,533 (331) 6 (337) 68,791 59,875 8,916 (1,182) 10,098 62,411 6,380 (471) 6,851 3,192 2,266 926 (163) 1,089 9,049 (5,857) (136) (5,721) 28,542 10,618 17,924 (4,454) 22,378 20,571 7,971 (1,553) 9,524 - --------------------------------------------------------------------------------------------------------- 449,225 388,465 60,760 (15,818) 76,578 428,272 20,953 (1,980) 22,933 ========================================================================================================= 55,182 42,939 12,243 2,992 9,251 50,296 4,886 1,151 3,735 8,168 9,768 (1,600) (637) (963) 8,126 42 123 (81) 49,482 53,450 (3,968) 919 (4,887) 50,501 (1,019) 833 (1,852) - --------------------------------------------------------------------------------------------------------- 112,832 106,157 6,675 2,358 4,317 108,923 3,909 1,743 2,166 - --------------------------------------------------------------------------------------------------------- 83,100 45,557 37,543 2,317 35,226 72,302 10,798 1,465 9,333 16,600 15,591 1,009 (638) 1,647 17,123 (523) (445) (78) - --------------------------------------------------------------------------------------------------------- 212,532 167,305 45,227 11,490 33,737 198,348 14,184 4,090 10,094 - --------------------------------------------------------------------------------------------------------- 212,532 167,305 45,227 12,277 32,950 198,348 14,184 3,572 10,612 - --------------------------------------------------------------------------------------------------------- 236,693 221,160 15,533 (28,095) 43,628 229,924 6,769 (5,552) 12,321 =========================================================================================================
(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 $(172,000) and $(68,000) for the second quarter of 1998 and 1997, respectively, and $310,000 for the first quarter of 1998. (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. 27 Table 4 Allowance For Loan Losses
Dollars in thousands Second Quarter Six Months Ended June 30, --------------------- ------------------------- 1998 1997 1998 1997 Beginning balance $280,969 $268,870 $281,394 $268,868 - ----------------------------------------------------------------------------------------------------------- Allowance from acquisitions and other activities, net 27 - 1,558 - Allowance of loans transferred to loans held for sale (35,000) - (35,000) - Provision for loan losses 21,810 36,000 44,906 65,698 - ----------------------------------------------------------------------------------------------------------- Net charge-offs (recoveries): Commercial (613) (58) (815) 468 Real estate - income property 209 (433) (187) (895) Real estate - construction - (515) 361 (611) Instalment 3,276 3,038 7,797 8,583 Bank card 18,565 22,865 39,073 46,235 Real estate - mortgage 352 783 612 1,596 - ----------------------------------------------------------------------------------------------------------- Total net charge-offs 21,789 25,680 46,841 55,376 - ----------------------------------------------------------------------------------------------------------- Balance, June 30 $246,017 $279,190 $246,017 $279,190 =========================================================================================================== Allowance for loan losses to period-end loans 1.54% 1.96% 1.54% 1.96% Annualized net charge-offs to average loans .54 .73 .59 .79 ===========================================================================================================
Table 5 Nonperforming Assets(1) And Past Due Loans
Dollars in thousands June 30, ------------------------- December 31, 1998 1997 1997 Nonaccrual loans: Commercial $ 9,850 $11,990 $11,247 Real estate - income property 9,887 7,303 6,412 Real estate - construction 13,165 10,243 14,239 Instalment 5,613 3,115 3,292 Real estate - mortgage 20,814 25,162 25,310 - ----------------------------------------------------------------------------------------------------------- Total nonperforming loans(1) 59,329 57,813 60,500 Foreclosed properties - net 16,652 34,243 25,731 - ----------------------------------------------------------------------------------------------------------- Total nonperforming assets(1) $75,981 $92,056 $86,231 =========================================================================================================== Nonperforming assets(1) to: Loans and foreclosed properties - net .48% .64% .55% Total assets .29 .40 .35 Allowance for loan losses to: Nonperforming assets(1) 324 303 326 Nonperforming loans(1) 415 483 465 Allowance for loan losses plus shareholders' equity to nonperforming assets(1) 32.27x 23.67x 27.15x =========================================================================================================== Accruing loans past due 90 days: Commercial $ 4,081 $ 2,014 $ 3,524 Real estate - income property 461 1,800 1,750 Real estate - construction 2 500 216 Instalment Student 31,700 25,168 25,742 Other 5,771 4,953 6,886 Bank card 4,884 19,484 24,126 Real estate - mortgage 4,912 4,794 6,023 - ----------------------------------------------------------------------------------------------------------- Total accruing loans past due 90 days $51,811 $58,713 $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. 28 Table 6 Noninterest Income And Expense
In thousands Six Months Ended Second Quarter First June 30, -------------------- Quarter ------------------- 1998 1997 1998 1998 1997 Noninterest Income Service charges on deposit accounts $ 34,860 $ 31,731 $ 33,067 $ 67,927 $ 61,894 Trust and investment advisory 20,950 17,887 20,119 41,069 35,340 Bank card-related 9,360 9,771 8,810 18,170 22,419 Other service charges and fees 11,592 8,730 9,653 21,245 17,173 Mortgage origination - net 18,488 2,359 15,102 33,590 3,261 Mortgage servicing - net 458 3,582 2,352 2,810 8,713 Trading account activities 1,570 1,162 1,345 2,915 2,109 Commissions on letters of credit 1,161 1,299 1,356 2,517 2,413 Gain on sale of mortgage servicing rights - 4,000 - - 10,450 Gain on sale of premises - - - - 5,807 Gain on sale of merchant card processing - 17,325 - - 17,325 Miscellaneous 15,529 13,261 14,246 29,775 23,606 Securities gains (losses) 2,542 (91) 2,613 5,155 3,973 - ----------------------------------------------------------------------------------------------------------- Total noninterest income $116,510 $111,016 $108,663 $225,173 $214,483 =========================================================================================================== Noninterest Expense Salaries $ 81,932 $ 75,914 $ 81,096 $163,028 $154,302 Benefits 20,191 20,633 19,759 39,950 41,587 - ----------------------------------------------------------------------------------------------------------- Total personnel 102,123 96,547 100,855 202,978 195,889 Occupancy - net 13,893 13,685 13,154 27,047 29,843 Equipment 10,962 11,462 10,802 21,764 21,281 Communications 10,433 9,278 9,970 20,403 18,123 Outside data services 7,693 6,837 6,962 14,655 13,059 Professional fees and services 6,840 8,333 6,327 13,167 15,368 Advertising and marketing 5,773 5,345 5,709 11,482 9,875 Amortization of purchased intangibles 4,976 4,206 4,793 9,769 8,433 Stationery, printing and supplies 3,220 2,615 3,608 6,828 5,328 Loan expense 4,826 2,783 2,883 7,709 5,598 Transportation 1,894 1,774 1,855 3,749 3,499 FDIC premiums - net 747 682 430 1,177 1,789 Foreclosed properties (net recoveries) 914 645 (517) 397 1,360 Miscellaneous 17,386 14,818 14,155 31,541 29,570 - ----------------------------------------------------------------------------------------------------------- Total noninterest expense $191,680 $179,010 $180,986 $372,666 $359,015 ===========================================================================================================
Table 7 Debt And Other Security Ratings (as of July 31, 1998)
Standard Thomson Security Moody's & Poor's BankWatch 6 1/2% Subordinated Notes due 2018 Baa1 BBB+ A- 8 3/4% Subordinated Notes due 2004 Baa1 BBB+ A- 8 1/4% 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 ===============================================================================
29 Table 8 Off-Balance Sheet Derivative Financial Instruments(1)
June 30, 1998 Average Weighted Fixed Estimated Dollars in thousands Notional Average Receive Fair Balance Maturity Rate Value Comments Interest Rate Conversions Generic interest rate swaps $1,675,000 3.3 yrs. 6.19% Notional amounts of $1.33 Carrying amount(2) $ 1,468 billion and $350 million Commercial loan program convert floating rate commercial Unrealized gains 17,307 and instalment loans, respectively, Unrealized losses (554) to fixed rate. Floating rates paid Instalment loan program tied to LIBOR. Unrealized gains 2,067 -------- Estimated fair value 20,288 -------- Interest rate caps 1,055,000 2.9 yrs. 6.55%(3) Notional amount of $1.06 million Carrying amount(2) 8,855 hedges the interest rate risk Money market deposit program associated with rising interest Unrealized losses (4,216) rates on floating rate money market deposits (strike rate tied -------- to LIBOR). Estimated fair value 4,639 -------- Market Value Hedges Interest rate caps 1,950,000 1.7 yrs. 7.56%3 Notional amount of $1.75 billion Carrying amount(2) 10,229 hedges the market value of fixed Securities available for sale program(5) rate securities available for sale Unrealized losses (9,379) in a rising rate environment (strike Real estate income property loan program rate for $800 million tied to 5 year Unrealized losses (545) 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 -------- (strike rate tied to LIBOR). Estimated fair value 305 -------- Interest rate floors 250,000 3.7 yrs. 5.26%4 Notional amount of $150 million Carrying amount(2) 1,620 hedges the prepayment risk Real estate mortgage loan program associated with fixed rate Unrealized gains 509 mortgage loans in a declining rate Domestic time deposit program environment (strike rate tied to Unrealized gains 202 5 year CMT). Notional amount of $100 million hedges the fair value of fixed rate domestic time deposits -------- (strike rate tied to 3 year CMT). Estimated fair value 2,331 -------- Hedges of Lending Commitments Forward contracts 2,813,321 .2 yrs. n/a Hedges of residential mortgage Unrealized gains 3,065 lending commitments. Unrealized losses (6,590) --------- Estimated fair value (3,525) ---------- --------- Total derivatives $7,743,321 $24,038 ======================================================================================================================
(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 and floors. (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) Represents average strike rate. For interest rate floors purchased, Crestar will receive interest if a specified market index rate falls below a fixed strike rate during the term of the contract. Any interest received is based on the difference between a lower index interest rate and the contractual floor rate, applied to the underlying notional balance. No interest payments are received if the index rate remains above the floor rate. (5) The fair value of derivative interest rate caps hedging securities classified as available for sale is included in the total fair value of the securities available for sale portfolio. The unamortized premiums paid for such interest rate caps are included in the amortized cost basis of securities available for sale, with any unrealized gain or loss (net of tax) pertaining to these interest rate caps included in shareholders' equity as "Net unrealized gain (loss) on securities available for sale." n/a - Not applicable LIBOR - London Interbank Offered Rates 3 year CMT - Yield on 3 year constant maturity U.S. Treasury securities 5 year CMT - Yield on 5 year constant maturity U.S. Treasury securities 30 Table 9 Off-Balance Sheet Derivatives--Expected Maturities(1)
June 30, 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 $ - $ 665,000 $ 760,000 $250,000 $1,675,000 Average fixed receive rate - 5.95% 6.21% 6.74% 6.19% Carrying amount $ - $ 137 $ 898 $ 433 $ 1,468 Net unrealized gain - 1,527 7,612 9,681 18,820 Interest rate caps Notional amount $ 5,000 $ 550,000 $ 500,000 $ - $1,055,000 Average strike rate 6.00% 6.68% 6.40% - 6.55% Carrying amount $ - $ 2,745 $ 6,110 $ - $ 8,855 Unrealized loss - (944) (3,272) - (4,216) Market Value Hedges Interest rate caps Notional amount $ - $1,950,000 $ - $ - $1,950,000 Average strike rate - 7.56% - - 7.56% Carrying amount $ - $ 10,229 $ - $ - $ 10,229 Unrealized loss - (9,924) - - (9,924) Interest rate floors Notional amount $ - $ - $ 250,000 $ - $ 250,000 Average strike rate - - 5.26% - 5.26% Carrying amount $ - $ - $ 1,620 $ - $ 1,620 Unrealized gain - - 711 - 711 Hedges of Lending Commitments Forward contracts:(2) Notional amount $2,813,321 $ - $ - $ - $2,813,321 Net unrealized loss (3,525) - - - (3,525) Total derivatives: Notional amount $2,818,321 $3,165,000 $1,510,000 $250,000 $7,743,321 Carrying amount $ - $ 13,111 $ 8,628 $ 433 $ 22,172 Net unrealized gain (loss) (3,525) (9,341) 5,051 9,681 1,866 ---------- ---------- ---------- -------- ---------- Estimated fair value $ (3,525) $ 3,770 $ 13,679 $ 10,114 $ 24,038 ==========================================================================================================
(1) Includes only off-balance sheet derivative financial instruments related to interest rate risk management activities. (2) Hedges of residential mortgage lending commitments. 31 Table 10 Off-Balance Sheet Derivatives Activity-Notional Balances(1) In thousands
Interest Rate Conversions Market Value Hedges ------------------------- --------------------- Hedges of Interest Interest Interest Interest Lending Rate Rate Rate Rate Commit- Swaps Caps Caps Floors ments(2) Total Balance, April 1, 1998 $1,575,000 $ 560,000 $1,950,000 $ - $2,278,339 $6,363,339 Additions 100,000 500,000 - 250,000 3,399,044 4,249,044 Maturities - (5,000) - - (2,864,062) (2,869,062) - ----------------------------------------------------------------------------------------------------------- Balance, June 30, 1998 $1,675,000 $1,055,000 $1,950,000 $250,000 $2,813,321 $7,743,321 =========================================================================================================== Balance, January 1, 1998 $1,675,000 $ 460,000 $1,950,000 $ - $1,459,888 $5,544,888 Additions 300,000 600,000 - 250,000 5,967,864 7,117,864 Terminations (300,000) - - - - (300,000) Maturities - (5,000) - - (4,614,431) (4,619,431) - ----------------------------------------------------------------------------------------------------------- Balance, June 30, 1998 $1,675,000 $1,055,000 $1,950,000 $250,000 $2,813,321 $7,743,321 ===========================================================================================================
(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. 32 Table 11 Selected Quarterly Financial Information Dollars in thousands, except per share data
2nd Qtr. 1st Qtr. 4th Qtr.(3) 3rd Qtr.(2) 2nd Qtr. Results of operations: 1998 1998 1997 1997 1997 Net interest income(1) $236,693 $229,924 $224,051 $220,041 $221,160 Provision for loan losses 21,811 23,096 23,300 19,099 36,000 - ----------------------------------------------------------------------------------------------------------- Net credit income 214,882 206,828 200,751 200,942 185,160 Securities gains (losses) 2,542 2,613 1,231 124 (91) Other noninterest income 113,968 106,050 109,616 95,985 111,107 - ----------------------------------------------------------------------------------------------------------- Net credit and noninterest income 331,392 315,491 311,598 297,051 296,176 Noninterest expense 191,680 180,986 182,011 173,231 179,010 - ----------------------------------------------------------------------------------------------------------- Income before taxes 139,712 134,505 129,587 123,820 117,166 - ----------------------------------------------------------------------------------------------------------- Tax-equivalent adjustment 3,259 2,964 2,860 2,903 2,851 Book tax expense 49,025 46,668 44,032 41,374 38,525 - ----------------------------------------------------------------------------------------------------------- Income tax expense 52,284 49,632 46,892 44,277 41,376 - ----------------------------------------------------------------------------------------------------------- Net Income $ 87,428 $ 84,873 $ 82,695 $ 79,543 $ 75,790 =========================================================================================================== Basic Earnings per share $ .78 $ .76 $ .75 $ .71 $ .69 Average shares outstanding (000s) 112,150 111,704 110,916 110,760 110,496 Diluted Earnings per share $ .77 $ .75 $ .74 $ .71 $ .68 Average shares outstanding (000s) 113,547 113,222 112,423 112,069 111,602 Dividends paid .33 .29 .29 .29 .29 =========================================================================================================================== Selected ratios and other data: Return on average assets 1.39% 1.41% 1.46% 1.47% 1.42% Return on average equity 16.46 16.41 16.70 16.60 16.48 Net interest margin(1) 4.06 4.18 4.35 4.47 4.58 Net charge-offs as % of average loans .54 .64 .64 .55 .73 Allowance as % of period-end loans 1.54 1.74 1.79 1.90 1.96 Overhead ratio 54.27 53.45 54.35 54.79 53.89 Average equity to assets 8.42 8.61 8.74 8.87 8.64 Average equity leverage 11.88x 11.61x 11.45x 11.28x 11.57x Full-time equivalent employees (period-end) 8,125 8,170 8,215 7,934 7,960 ===========================================================================================================================
(1) Tax-equivalent basis. 33 Table 12 Consolidated Average Balances/Net Interest Income/Rates(1)
Three Months Ended June 30, -------------------------------------------------------------- 1998 1997 ----------------------------- --------------------------- Dollars in thousands Income/ Yield/ Income/ Yield/ Balance Expense Rate Balance Expense Rate ------- ------- ------ ------- ------- ------ Assets $ $ % $ $ % Securities held to maturity(2) 594,342 9,202 6.20 771,671 11,642 6.04 Securities available for sale(2) 4,415,174 68,791 6.23 3,778,013 59,875 6.32 Money market investments(2) 238,260 3,192 5.37 160,914 2,266 5.65 Loans held for sale(2) 1,676,327 28,542 6.84 551,352 10,618 7.89 - ---------------------------------------------------------------------------------------------------------- Commercial 4,917,937 96,593 7.87 3,833,655 77,406 8.06 Real estate - income property 1,171,884 26,091 8.65 1,270,639 27,847 8.77 Real estate - construction 386,861 8,840 8.94 334,572 7,586 9.09 Instalment 5,273,448 106,078 8.01 4,099,809 84,012 8.21 Bank card 1,094,608 36,786 13.79 1,228,168 43,145 14.39 Real estate - mortgage 3,398,345 65,110 7.66 3,333,024 64,068 7.68 - ---------------------------------------------------------------------------------------------------------- Total loans(2,3) 16,243,083 339,498 8.35 14,099,867 304,064 8.65 Allowance for loan losses (283,650) (269,823) - ---------------------------------------------------------------------------------------------------------- Loans - net 15,959,433 13,830,044 Cash and due from banks 847,408 876,737 Premises and equipment - net 494,425 452,803 Intangible assets - net 195,933 174,283 Foreclosed properties - net 19,447 29,107 Other assets 792,090 669,267 - ---------------------------------------------------------------------------------------------------------- Total Assets 25,232,839 21,294,191 ========================================================================================================== Total Earning Assets 23,167,186 449,225 7.75 19,361,817 388,465 8.05 ========================================================================================================== Liabilities And Shareholders' Equity Interest-bearing demand deposits 6,829,500 55,182 3.24 5,805,429 42,939 2.97 Regular savings deposits 1,418,043 8,168 2.31 1,573,048 9,768 2.49 Domestic time deposits 3,942,134 49,482 5.08 4,336,813 53,450 4.98 Certificates of deposit $100,000 and over 1,422,465 20,062 5.66 836,682 11,608 5.57 - ---------------------------------------------------------------------------------------------------------- Total savings and time deposits(2) 13,612,142 132,894 3.93 12,551,972 117,765 3.77 Demand deposits 3,499,735 3,124,043 - ---------------------------------------------------------------------------------------------------------- Total deposits 17,111,877 15,676,015 Short-term borrowings(2) 4,648,634 63,038 5.44 2,583,276 33,949 5.26 Long-term debt(2) 922,961 16,600 7.19 834,761 15,591 7.47 Other liabilities 425,086 360,040 - ---------------------------------------------------------------------------------------------------------- Total liabilities 23,108,558 19,454,092 - ---------------------------------------------------------------------------------------------------------- Total shareholders' equity 2,124,281 1,840,099 - ---------------------------------------------------------------------------------------------------------- Total Liabilities And Shareholders' Equity 25,232,839 21,294,191 ========================================================================================================== Total interest-bearing liabilities 19,183,737 212,532 4.45 15,970,009 167,305 4.21 Other sources - net 3,983,449 3,391,808 - ---------------------------------------------------------------------------------------------------------- Total Sources Of Funds 23,167,186 212,532 3.69 19,361,817 167,305 3.47 ========================================================================================================== Net Interest Spread 3.30 3.84 Net Interest Income/Margin 236,693 4.06 221,160 4.58 ==========================================================================================================
34
Three Months Ended March 31, Six Months Ended June 30, ------------------------------ -------------------------------------------------- 1998 1998 1997 ------------------------------ ------------------------ ----------------------- Dollars in thousands Income/ Yield/ Income/ Yield/ Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate ------- ------- ------ ------- ------- ------ ------- ------- ------ Assets $ $ % $ $ % $ $ % Securities held to maturity(2) 616,117 9,533 6.21 605,169 18,735 6.21 839,850 25,350 6.05 Securities available for sale(2) 3,978,423 62,411 6.28 4,198,005 131,202 6.25 3,923,791 123,724 6.31 Money market investments(2) 647,881 9,049 5.66 441,939 12,241 5.59 258,645 6,953 5.42 Loans held for sale(2) 1,150,140 20,571 7.22 1,414,687 49,113 6.97 565,877 22,258 7.98 - ----------------------------------------------------------------------------------------------------------------------------------- Commercial 4,540,123 90,862 8.09 4,730,074 187,455 7.98 3,822,540 152,788 8.04 Real estate - income property 1,222,918 26,393 8.69 1,197,260 52,484 8.72 1,257,868 55,130 8.78 Real estate - construction 381,702 8,431 8.95 384,296 17,271 8.98 323,027 14,658 9.07 Instalment 4,809,541 95,308 7.95 5,042,775 201,386 7.99 4,102,657 165,462 8.09 Bank card 1,130,487 38,117 13.90 1,112,448 74,903 13.84 1,283,150 90,084 14.31 Real estate - mortgage 3,515,622 67,597 7.68 3,456,660 132,707 7.67 3,193,160 123,389 7.73 - ----------------------------------------------------------------------------------------------------------------------------------- Total loans(2,3) 15,600,393 326,708 8.45 15,923,513 666,206 8.40 13,982,402 601,511 8.65 Allowance for loan losses (280,800) (282,233) (269,460) - ----------------------------------------------------------------------------------------------------------------------------------- Loans - net 15,319,593 15,641,280 13,712,942 Cash and due from banks 882,916 865,064 870,186 Premises and equipment - net 494,547 494,485 448,276 Intangible assets - net 193,335 194,641 176,324 Foreclosed properties - net 20,002 19,723 28,807 Other assets 723,180 757,826 645,754 - ----------------------------------------------------------------------------------------------------------------------------------- Total Assets 24,026,134 24,632,819 21,470,452 =================================================================================================================================== Total Earning Assets 21,992,954 428,272 7.84 22,583,313 877,497 7.80 19,570,565 779,796 8.01 =================================================================================================================================== Liabilities And Shareholders' Equity Interest-bearing demand deposits 6,429,487 50,296 3.17 6,630,599 105,478 3.21 5,800,783 84,753 2.95 Regular savings deposits 1,432,363 8,126 2.30 1,425,164 16,294 2.31 1,591,398 19,732 2.50 Domestic time deposits 4,091,130 50,501 5.04 4,016,221 99,983 5.05 4,418,860 108,513 4.98 Certificates of deposit $100,000 and over 1,203,860 16,974 5.72 1,313,767 37,036 5.69 677,175 18,486 5.51 - ----------------------------------------------------------------------------------------------------------------------------------- Total savings and time deposits(2) 13,156,840 125,897 3.89 13,385,751 258,791 3.91 12,488,216 231,484 3.75 Demand deposits 3,289,652 3,395,274 3,123,526 - ----------------------------------------------------------------------------------------------------------------------------------- Total deposits 16,446,492 16,781,025 15,611,742 Short-term borrowings(2) 4,172,626 55,328 5.37 4,411,945 118,366 5.41 2,846,104 73,746 5.22 Long-term debt(2) 927,180 17,123 7.39 925,059 33,723 7.29 843,932 31,206 7.40 Other liabilities 410,387 417,773 354,395 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities 21,956,685 22,535,802 19,656,173 - ----------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 2,069,449 2,097,017 1,814,279 - ----------------------------------------------------------------------------------------------------------------------------------- Total Liabilities And Shareholders' Equity 24,026,134 24,632,819 21,470,452 =================================================================================================================================== Total interest-bearing liabilities 8,256,646 198,348 4.41 18,722,755 410,880 4.43 16,178,252 336,436 4.19 Other sources - net 3,736,308 3,860,558 3,392,313 - ----------------------------------------------------------------------------------------------------------------------------------- Total Sources Of Funds 21,992,954 198,348 3.66 22,583,313 410,880 3.67 19,570,565 336,436 3.47 =================================================================================================================================== Net Interest Spread 3.43 3.37 3.82 Net Interest Income/Margin 229,924 4.18 466,617 4.13 443,360 4.54 ===================================================================================================================================
(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. 35 Item 4. Submission Of Matters To A Vote Of Security Holders The Annual Meeting of Shareholders of Crestar Financial Corporation was held on April 24, 1998 for the purpose of electing five Class II directors for a term of three years. Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and there were no solicitations in opposition to the recommendation of the Board of Directors on the matter voted on. Five Class II directors were elected for three-year terms, each having a minimum of 92,216,087 shares voted "for" election, with no more than 814,541 shares voted "withheld." The five Class II directors elected were: Class II - three-year term: Frank E. McCarthy Eugene P. Trani G. Gilmer Minor III James M. Wells III Jeffrey R. Springer The following Class III directors' terms expire in 1999: The following Class I directors' terms expire in 2000: Charles R. Longsworth Richard G. Tilghman J. Carter Fox Alfred H. Smith, Jr. Paul D. Miller L. Dudley Walker Patrick J. Maher Robert C. Wilburn Frank S. Royal Karen Hastie Williams Gordon F. Rainey, Jr.
"Broker non-votes" were not included in determining the number of votes cast in the election of directors. The matter voted on was considered "routine" under New York Stock Exchange rules. 36 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 August 12, 1998 /s/ James D. Barr ----------------- ------------------------------------------ James D. Barr Executive Vice President, Controller and Treasurer EX-27 2 EXHIBIT 27
9 1,000 6-MOS DEC-31-1998 JUN-30-1998 939,382 14,104,151 752,700 13,351 4,210,810 578,813 584,660 15,950,911 246,017 26,161,173 17,870,181 4,639,407 498,281 947,704 0 0 561,099 1,644,501 26,161,173 661,392 148,557 61,325 871,274 258,791 410,880 460,394 44,907 5,155 372,666 267,994 172,301 0 0 172,301 1.54 1.52 4.13 59,329 51,811 0 81,000 281,394 58,766 11,925 246,017 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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