UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarter Ended March 31, 1995
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 1-7083.
Crestar Financial Corporation
(Exact name of registrant as specified in its charter)
Virginia 54-0722175
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
919 E. Main Street, P.O. Box 26665, Richmond, Virginia 23261-6665
(Address of principal executive offices) (Zip Code)
(804)782-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X. No____.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at April 30, 1995
Common Stock, $5 par value 37,866,015
1
<PAGE>
CRESTAR FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1995
PART I. Financial Information
ITEM 1. Financial Statements:
Page
Consolidated Balance Sheets . . . . . . . . . . . . . . . . 3
Consolidated Statements Of Income . . . . . . . . . . . . . 4
Consolidated Statements Of Cash Flows . . . . . . . . . . . 5
Consolidated Statements Of Changes In Shareholders'
Equity . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes To Consolidated Financial Statements . . . . . . . . 7-12
ITEM 2. Management's Discussion And Analysis Of Financial
Condition And Results Of Operations:
Financial Commentary . . . . . . . . . . . . . . . . . . .13-32
PART II. Other Information
ITEM 6. Exhibits And Reports On Form 8-K:
There were no reports on Form 8-K filed during the
three months ended March 31, 1995.
2
<PAGE>
CONSOLIDATED BALANCE SHEETS
Crestar Financial Corporation And Subsidiaries
Dollars in thousands
<TABLE>
March 31, December 31,
ASSETS 1995 1994 1994
<S> <C> <C> <C>
Cash and due from banks $ 693,848 $ 736,254 $ 907,627
Securities held to maturity (note 2) 875,669 1,065,347 907,368
Securities available for sale (note 3) 1,413,765 2,382,586 1,621,973
Money market investments (note 4) 654,993 846,486 452,556
Mortgage loans held for sale 220,470 417,360 209,525
Loans - net of unearned income (note 5):
Business Loans:
Commercial 3,067,476 2,867,295 3,093,122
Real estate - income property 815,346 809,429 744,888
Real estate - construction 183,761 229,310 184,583
Consumer Loans:
Instalment 1,948,373 1,692,627 1,810,038
Bank card 1,540,940 991,811 1,477,285
Real estate - mortgage 2,197,019 1,644,770 1,975,721
Loans - net of unearned income of $1,108 and
$2,324 at March 31, 1995 and 1994,
respectively; $1,369
at December 31, 1994 9,752,915 8,235,242 9,285,637
Less: Allowance for loan losses (note 6) (222,702) (226,577) (219,189)
Loans - net 9,530,213 8,008,665 9,066,448
Premises and equipment - net 332,762 315,364 316,896
Customers' liability on acceptances 10,984 13,740 6,464
Intangible assets - net (note 7) 180,041 140,184 122,953
Foreclosed properties - net (notes 5 and 8) 21,690 24,471 18,629
Other assets 492,450 430,010 379,591
TOTAL ASSETS $14,426,885 $14,380,467 $14,010,030
LIABILITIES
Demand deposits $ 2,084,914 $ 2,088,875 $ 2,238,399
Interest checking deposits 1,890,967 1,882,099 1,916,411
Money market deposit accounts 2,450,983 2,392,430 2,342,222
Regular savings deposits 1,354,493 1,420,459 1,394,146
Domestic time deposits 3,202,595 3,264,086 2,955,756
Certificates of deposit $100,000 and over 71,348 45,027 66,218
Total deposits 11,055,300 11,092,976 10,913,152
Short-term borrowings (note 9) 1,540,525 1,372,014 1,380,806
Liability on acceptances 10,984 13,740 6,464
Other liabilities 218,721 602,164 216,581
Long-term debt (note 10) 385,767 217,134 366,962
TOTAL LIABILITIES 13,211,297 13,298,028 12,883,965
SHAREHOLDERS' EQUITY
Preferred stock. Authorized 2,000,000 shares; none issued -- -- --
Common stock, $5 par value. Authorized 100,000,000 shares;
outstanding 38,397,409 and 37,482,661 at March 31,
1995 and 1994, respectively; 37,331,213 at
December 31, 1994 191,987 187,413 186,656
Capital surplus 338,002 257,009 281,207
Retained earnings 703,006 644,282 694,757
Net unrealized loss on securities available for sale (17,407) (6,265) (36,555)
TOTAL SHAREHOLDERS' EQUITY 1,215,588 1,082,439 1,126,065
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $14,426,885 $14,380,467 $14,010,030
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Crestar Financial Corporation And Subsidiaries
In thousands, except per share data Three Months Ended Mar. 31,
INCOME FROM EARNING ASSETS 1995 1994
Interest and fees on loans $206,029 $154,964
Interest on taxable securities held to maturity 13,272 8,900
Interest on tax-exempt securities held to maturity 1,004 1,384
Interest and dividends on securities available for sale 23,607 40,249
Income on money market investments 6,541 4,109
Interest on mortgage loans held for sale 3,810 7,424
Total income from earning assets 254,263 217,030
INTEREST EXPENSE
Interest checking deposits 10,453 9,741
Money market deposit accounts 22,610 13,749
Regular savings deposits 9,461 8,321
Domestic time deposits 33,379 29,205
Certificates of deposit $100,000 and over 857 485
Total interest on deposits 76,760 61,501
Short-term borrowings 17,958 10,613
Long-term debt 7,861 4,250
Total interest expense 102,579 76,364
NET INTEREST INCOME 151,684 140,666
Provision for loan losses (note 6) 10,100 10,032
NET CREDIT INCOME 141,584 130,634
NONINTEREST INCOME
Trust and investment advisory income 13,538 15,003
Service charges on deposit accounts 21,591 20,779
Bank card-related income 11,058 7,728
Other income 20,887 21,663
Securities losses (2,410) (1,718)
Total noninterest income 64,664 63,455
NET CREDIT AND NONINTEREST INCOME 206,248 194,089
NONINTEREST EXPENSE
Personnel expense 76,316 74,797
Occupancy expense - net 10,960 10,794
Equipment expense 7,012 5,928
Other expense 43,544 42,491
Total noninterest expense 137,832 134,010
INCOME BEFORE INCOME TAXES 68,416 60,079
Income tax expense(note 11) 23,330 19,597
NET INCOME $ 45,086 $ 40,482
EARNINGS PER COMMON SHARE $ 1.18 $ 1.07
See accompanying notes to consolidated financial statements.
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Crestar Financial Corporation And Subsidiaries
<TABLE>
In thousands Three Months Ended March 31,
1995 1994
<S> <C> <C> <C>
OPERATING Net Income $ 45,086 $ 40,482
ACTIVITIES Adjustments to reconcile net income to net cash provided
by operating activities:
Provisions for loan losses, foreclosed properties and
other losses 9,850 9,076
Depreciation and amortization of premises and equipment 8,751 7,992
Securities losses 2,410 1,718
Amortization of intangible assets 4,081 4,829
Deferred income tax expense 2,200 2,214
Loss (gain) on foreclosed properties (1,275) 260
Gain on sale of mortgage servicing rights (5,900) (3,102)
Net increase in trading account (4,677) (3,891)
Origination of loans held for sale (346,002) (846,257)
Proceeds from sales of loans held for sale 335,057 1,035,271
Net decrease (increase) in accrued interest receivable,
prepaid expenses and other assets 13,221 (55,700)
Net increase (decrease) in accrued interest payable,
accrued expenses and other liabilities (14,956) 45,222
Other, net 3,066 4,090
Net cash provided by operating activities 50,912 242,204
INVESTING Proceeds from maturities and calls of securities
ACTIVITIES held to maturity 31,220 76,436
Proceeds from maturities and calls of securities available
for sale 85,269 140,336
Proceeds from sales of securities available for sale 579,440 1,079,257
Purchases of securities held to maturity -- (262,038)
Purchases of securities available for sale (289,729) (387,328)
Net increase in money market investments (197,760) (164,437)
Principal collected on non-bank subsidiary loans 6,773 7,311
Loans originated by non-bank subsidiaries (61,323) (44,101)
Net decrease (increase) in other loans (1,726) 111,899
Purchases of premises and equipment (19,442) (14,228)
Proceeds from sales of foreclosed properties 7,461 12,976
Proceeds from sales of mortgage servicing rights 8,201 5,291
Aquisitions of net assets of financial institutions (12,190) (119,480)
Other, net (1,345) (3,234)
Net cash provided by investing activities 134,849 438,660
FINANCING Net decrease in demand, interest checking, money market
ACTIVITIES and regular savings deposits (360,460) (83,542)
Net increase (decrease) in short-term borrowings 57,617 (446,831)
Net decrease in time deposits (62,544) (117,054)
Proceeds from issuance of long-term debt -- 158
Principal payments on long-term debt (10,945) (432)
Cash dividends paid (15,292) (12,383)
Common stock purchased and retired (20,284) (10,392)
Proceeds from the issuance of common stock 12,368 9,214
Net cash used by financing activities (399,540) (661,262)
CASH AND Increase (decrease) in cash and cash equivalents (213,779) 19,602
CASH Cash and cash equivalents at beginning of quarter 907,627 716,652
EQUIVALENTS CASH AND CASH EQUIVALENTS AT END OF QUARTER $ 693,848 $ 736,254
</TABLE>
Cash and cash equivalents consist of cash and due from banks. See
accompanying notes to consolidated financial statements.
5
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Crestar Financial Corporation And Subsidiaries
<TABLE>
In thousands Shareholders' Equity Shares of Common Stock
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Balance, January 1 $1,126,065 $1,062,477 37,331,213 37,515,671
Net Income 45,086 40,482 -- --
Cash dividends declared on common stock (15,292) (12,383) -- --
Cumulative effect of change in accounting
for securities available for sale -- 32,209 -- --
Change in net unrealized gain or loss on securities
available for sale 19,148 (38,474) -- --
Common stock purchased and retired (24,482) (11,169) (587,200) (269,700)
Common stock issued:
For acquisition of financial institutions 52,617 -- 1,317,396 --
For dividend reinvestment plan 2,956 2,515 75,083 60,144
For thrift and profit sharing plan 8,263 4,993 207,272 115,770
For directors' stock compensation plan 78 78 2,067 1,859
Upon exercise of stock options (including tax
benefit of $246 in 1995; $291 in 1994) 1,149 1,706 51,578 58,377
Upon conversion of debentures -- 5 -- 540
Balance, March 31 $1,215,588 $1,082,439 38,397,409 37,482,661
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Crestar Financial Corporation And Subsidiaries
(1) GENERAL
The consolidated financial statements conform to generally accepted
accounting principles and to general practices within the banking
industry. The accompanying interim statements are unaudited; however, in
the opinion of management, all adjustments necessary for a fair
presentation of the consolidated financial statements, including
adjustments related to completed acquisitions, have been included. All
adjustments are of a normal nature. Certain reclassifications have been
made to the prior years' consolidated financial statements to conform to
the 1995 presentation. The notes included herein should be read in
conjunction with the notes to consolidated financial statements included
in the Corporation's 1994 Annual Report and Form 10-K.
During the first quarter of 1995, Crestar completed three
acquisitions previously announced in 1994. On January 20, 1995 Crestar
completed two of these acquisitions, Independent Bank (Independent),
Manassas, Virginia and Jefferson Savings and Loan (Jefferson),
Warrenton, Virginia. The acquisitions of Independent and Jefferson were
each for a combination of cash and Crestar stock, valued at
approximately $12 million for Independent, including 198,000 shares of
Crestar stock, and $23 million for Jefferson, including 471,000 shares
of Crestar stock. The excess of the cost over the estimated fair value
of the tangible net assets acquired was approximately $9.4 million and
$23.7 million for Independent and Jefferson, respectively. Independent
and Jefferson had total assets of approximately $85 million and $300
million, respectively, and total deposits of $70 million and $250
million, respectively, at acquisition date.
On March 24, 1995 Crestar completed its acquisition of TideMark
Bancorp, Inc. (TideMark), Newport News, Virginia. The acquisition of
TideMark was for a combination of cash and Crestar stock valued at
approximately $40 million, including 648,000 shares of Crestar stock.
The excess of the cost over the estimated fair value of the tangible net
assets acquired was approximately $31.5 million. TideMark had total
assets and deposits of approximately $400 million and $240 million,
respectively, at acquisition date.
The above acquisitions were accounted for as purchases and,
accordingly, the results of their operations were included in the
accompanying consolidated financial statements since their respective
acquisition dates. The results of operations of the above acquisitions
for the periods prior to their respective acquisition dates were not
material to the results of operations of Crestar. The excess of cost
over the estimated fair value of the tangible assets and liabilities
acquired is recorded as intangible assets on the accompanying
consolidated balance sheet. Intangible assets include goodwill, which is
amortized on a straight-line basis over 15 years, and mortgage servicing
rights, which are amortized in proportion to, and over the period of,
estimated net servicing income to be derived from the servicing
activities, ranging from 5 to 14 years. Crestar expects the three
acquisitions completed during the first quarter of 1995 to have a
positive contribution of earnings within the first twelve months
following completion.
(2) SECURITIES HELD TO MATURITY
The amortized cost (carrying values) and estimated market values of
securities held to maturity at March 31 follow:
<TABLE>
In thousands 1995 1994
Amortized Market Amortized Market
Cost Value Cost Value
<S> <C> <C> <C> <C>
U.S. Treasury and Federal agencies $ 10,252 $ 10,090 $ 10,465 $ 10,415
Mortgage-backed obligations of Federal agencies 579,852 565,308 706,861 704,256
Other taxable securities 221,126 213,759 266,791 262,372
States and political subdivisions 64,439 64,703 81,230 81,778
Total securities held to maturity $875,669 $853,860 $1,065,347 $1,058,821
</TABLE>
7
<PAGE>
(3) SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated market values (carrying values) of securities
available for sale at March 31 follow:
<TABLE>
In thousands 1995 1994
Amortized Market Amortized Market
Cost Value Cost Value
<S> <C> <C> <C> <C>
U.S. Treasury and Federal agencies $ 478,391 $ 469,549 $1,369,024 $1,365,499
Mortgage-backed obligations of Federal agencies 699,030 682,829 772,282 766,457
Other mortgage-backed obligations 184,203 181,776 223,576 223,200
Other taxable securities 5,625 5,623 10,514 10,581
Common and preferred stocks 73,961 73,988 16,891 16,849
Total securities available for sale $1,441,210 $1,413,765 $2,392,287 $2,382,586
</TABLE>
(4) MONEY MARKET INVESTMENTS
Money market investments at March 31 included:
In thousands 1995 1994
Trading account securities $ 8,250 $ 8,951
Federal funds sold 457,985 79,935
Securities purchased under agreements to resell 182,000 727,250
Domestic time deposits -- 25,138
U.S. Treasury 6,758 5,212
Total money market investments $654,993 $846,486
(5) NONPERFORMING ASSETS AND IMPAIRED LOANS
Nonperforming assets at March 31 were:
In thousands 1995 1994
Nonaccrual loans $72,990 $ 89,476
Restructured loans -- 34
Total nonperforming loans 72,990 89,510
Foreclosed properties - net 21,690 24,471
Total nonperforming assets $94,680 $113,981
Noncash additions to foreclosed properties were $800 thousand and $1.0
million in the first three months of 1995 and 1994, respectively.
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan" (SFAS 114) in 1993. SFAS 114 was further amended by the FASB in 1994
through the issuance of Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures" (SFAS 118). Effective January 1, 1995, SFAS 114, as amended by SFAS
118, requires that an impaired loan be measured and reported on the basis of the
present value of expected cash flows discounted at the loan's effective interest
rate, or at the fair value of the loan's collateral if the loan is deemed
"collateral dependent." Impaired loans are specifically reviewed loans for which
it is probable that the creditor will be unable to collect all amounts due
according to the terms of the loan agreement. A loan is not impaired during a
period of delay in payment if the ultimate collectibility of all amounts due is
expected. SFAS 118 allows a creditor to use existing methods for recognizing
interest income on an impaired loan. For Crestar's nonaccrual loans and impaired
loans, interest receipts are recognized as interest revenue or are applied to
principal when management believes the ultimate collectibility of principal is
in doubt.
At March 31, 1995, impaired loans of $40 million were included in the
nonaccrual loan balances of Crestar. The balance of impaired loans at January 1,
1995 also totaled approximately $40 million. Because the majority of loans
deemed impaired during the first quarter were collateral dependent, valuations
of impaired loans did not vary materially from the values previously assigned to
this population of loans. The initial adoption of the new accounting standard
did not require an increase to Crestar's allowance for loan losses. The impact
of adopting SFAS 114, as amended by SFAS 118, was therefore immaterial to the
financial condition and operations of Crestar as of and for the three month
period ended March 31, 1995. In accordance with SFAS 114 and SFAS 118, no
retroactive application of the accounting standard has been made to consolidated
financial statements for periods prior to January 1, 1995.
8
<PAGE>
(6) ALLOWANCE FOR LOAN LOSSES
Transactions in the consolidated allowance for loan losses for the three months
ended March 31 were:
In thousands Three Months
1995 1994
Beginning balance $219,189 $210,958
Charge-offs (18,988) (18,753)
Recoveries 6,770 8,711
Net charge-offs (12,218) (10,042)
Provision for loan losses 10,100 10,032
Allowance from acquisitions 5,631 15,629
Net increase 3,513 15,619
Ending balance $222,702 $226,577
(7) INTANGIBLE ASSETS
Intangible assets at March 31 included:
In thousands 1995 1994
Goodwill and deposit base intangibles $162,872 $115,387
Mortgage servicing rights 16,619 24,150
Favorable lease rights 550 647
Total intangible assets - net $180,041 $140,184
Accumulated amortization of goodwill was $25,526,000 and $17,921,000 for
1995 and 1994, respectively.
(8) ALLOWANCE FOR FORECLOSED PROPERTIES
Transactions in the allowance for losses on foreclosed properties for the three
months ended March 31 were:
In thousands Three Months
1995 1994
Beginning balance $7,180 $ 5,574
Provision for foreclosed properties (500) (1,302)
Write-downs (902) (255)
Allowance from acquisitions 3,194 1,416
Net increase (decrease) 1,792 (141)
Ending balance $8,972 $ 5,433
(9) SHORT-TERM BORROWINGS
Short-term borrowings, exclusive of deposits, with maturities of less than one
year at March 31 were:
In thousands 1995 1994
Federal funds purchased $ 847,487 $ 726,491
Securities sold under repurchase agreements 533,913 527,734
Notes payable 153,895 114,578
U.S. Treasury demand notes 3,326 503
Other 1,904 2,708
Total short-term borrowings $1,540,525 $1,372,014
The Corporation paid $96,698,000 and $71,227,000 in interest on deposits and
short-term borrowings in the first three months of 1995 and 1994, respectively.
9
<PAGE>
(10) LONG-TERM DEBT
Long-term debt at March 31 included:
<TABLE>
In thousands 1995 1994
<S> <C> <C>
8 3/4% Subordinated notes due 2004 $149,625 $ --
8 1/4% Subordinated notes due 2002 125,000 125,000
8 5/8% Subordinated notes due 1998 49,968 49,958
7-8 1/4% Mortgage indebtedness maturing through 2009 9,923 12,872
8 5/8 14 3/8% Capital lease obligations maturing through
2006 1,303 3,293
4 3/8-8% Federal Home Loan Bank obligations payable through
2008 18,813 11,122
6 1/4-11 1/4% Collateralized mortgage obligation bonds
maturing through 2019 31,135 14,760
5% Convertible subordinated debentures due 1994 -- 129
Total long-term debt $385,767 $217,134
</TABLE>
The Corporation made payments of $5,931,000 and $5,749,000 in interest
on long-term debt in the first three months of 1995 and 1994,
respectively. There were no new capital lease agreements in the first
quarter of 1995. Crestar assumed $14.0 million and $15.7 million of
collateralized mortgage obligation bonds and Federal Home Loan Bank
obligations, respectively, through acquisitions completed in the first
quarter of 1995.
(11)INCOME TAXES
The current and deferred components of income tax expense allocated to
continuing operations in the accompanying consolidated statements of income for
the three months ended March 31 were:
In thousands Three Months
1995 1994
Current:
Federal $19,953 $16,245
State and local 1,177 1,138
Total current tax expense 21,130 17,383
Deferred:
Federal 2,308 2,640
State and local (108) (426)
Total deferred tax expense 2,200 2,214
Total income tax expense $23,330 $19,597
The differences between the amounts computed by applying the statutory
federal income tax rate to income before income taxes and the actual
income tax expense allocated to operations for the three months ended
March 31 were:
In thousands Three Months
1995 1994
Income before income taxes $68,416 $60,079
Tax expense at statutory rate 23,946 21,028
Increase (decrease) in taxes resulting from:
Tax-exempt interest and dividends (1,949) (1,715)
Nondeductible interest expense 148 105
Amortization of goodwill 710 287
State income taxes 694 462
Other - net (219) (570)
Total decrease in taxes (616) (1,431)
Total income tax expense $23,330 $19,597
Effective tax rate 34.1% 32.6%
10
<PAGE>
The Corporation made income tax payments of $264,000 and $4,207,000
during the first three months of 1995 and 1994, respectively. At March
31, 1995, the Corporation had a net deferred income tax asset of
$102,747,000. There was no valuation allowance relating to the net
deferred income tax asset. Crestar has sufficient taxable income in the
available carryback periods and future taxable income from reversing
taxable differences to realize substantially all of its deferred income
tax assets. Management believes, based on the Corporation's history of
generating significant earnings and expectations of future earnings,
that it is more likely than not that all recorded deferred income tax
assets will be realized.
(12) CONDENSED CRESTAR FINANCIAL CORPORATION (PARENT) INFORMATION
The Parent's Condensed Balance Sheets at March 31 were:
<TABLE>
In thousands 1995 1994
<S> <C> <C>
Cash in banks $ 37,476 $ 35,515
Securities held to maturity 10,520 11,619
Securities available for sale 42,907 1,300
Securities purchased from subsidiary under agreements to
resell 450 366
Other money market investments 181,968 110,981
Notes receivable from subsidiaries 224,000 176,000
Investments in subsidiaries:
Bank subsidiaries 1,240,029 1,070,099
Non-bank subsidiaries 8,622 6,019
Other assets 14,894 12,392
Total Assets $1,760,866 $1,424,291
Securities sold to subsidiary under repurchase agreements $ 10,135 $ 1,699
Other short term borrowings 143,934 109,871
Other liabilities 66,616 55,195
Long-term debt 324,593 175,087
Total shareholders' equity 1,215,588 1,082,439
Total Liabilities and Shareholders' Equity $1,760,866 $1,424,291
</TABLE>
The Parent's Condensed Statements of Income for the three months ended
March 31 were:
<TABLE>
In thousands Three Months
1995 1994
<S> <C> <C>
Cash dividends from bank subsidiaries $16,426 $13,618
Interest from subsidiaries 4,738 3,651
Interest on securities held to maturity and available for
sale 819 197
Income on money market investments 2,792 1,022
Other income -- 9
Total income 24,775 18,497
Interest on short-term borrowings 1,893 684
Interest on long-term debt 6,950 3,660
Other expense 110 121
Total expense 8,953 4,465
Income before income taxes and equity in undistributed net
income of subsidiaries 15,822 14,032
Income tax expense (benefit) (481) 85
Income before equity in undistributed net income of
subsidiaries 16,303 13,947
Equity in undistributed net income of subsidiaries 28,783 26,535
Net Income $45,086 $40,482
</TABLE>
11
<PAGE>
(13) COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding commitments,
contingent liabilities and other financial instruments that are not
reflected in the accompanying consolidated financial statements. These
include commitments to extend credit, standby letters of credit,
interest rate caps, floors and collars, swaps, and forward contracts.
These items involve varying degrees of credit and interest rate risk in
excess of amounts recorded in the consolidated balance sheets.
Commitments to extend credit are legally binding agreements to lend
to a customer which typically contain clauses that permit cancellation
of the commitment in the event of credit deterioration of the borrower.
Similar to direct lending, these commitments are subject to the
Corporation's loan approval and review procedures and policies. Based
upon management's review, Crestar may require the customer to provide
various types of collateral as security for the agreement, including
balances on deposit, investment securities, real estate and inventory.
Crestar receives a commitment fee for entering into such agreements.
Standby letters of credit, which are conditional commitments to
extend credit, guarantee the performance of customers to a third party.
Crestar's outstanding standby letters of credit were $358.5 million and
$374.0 million at March 31, 1995 and 1994, respectively. At March 31,
1995, approximately $15.0 million of the standby letters of credit were
participated to other financial institutions.
The Corporation services mortgage loans other than those included in
the accompanying consolidated financial statements and, in some cases,
accepts a recourse liability on the serviced loans. At March 31, 1995
Crestar serviced a total of $975.0 million of loans for which it had
accepted a recourse liability. Of this amount, approximately $585.9
million was insured by agencies of the Federal government or private
insurance companies.
As a financial institution, Crestar entails a degree of interest
rate risk as a provider of banking services to its customers. This risk
can be managed through derivative interest rate contracts, such as
interest rate swaps, caps and floors. Changes in the fair value of such
derivatives are generally offset by changes in the implied fair value of
the underlying hedged asset or liability. As hedges against interest
rate risk at March 31, 1995, Crestar was participating in interest rate
swaps of $1.2 billion which were used to convert certain floating rate
commercial and real estate loans to fixed rates. Unrealized gains and
unrealized losses on such swaps were $39 thousand and $49.5 million,
respectively, at March 31, 1995. Notional balances of $858.5 million of
such swaps were indexed amortizing swaps, whose notional values amortize
more slowly as rates rise.
Crestar also had $245 million of interest rate cap and $250 million
of interest rate floor agreements outstanding at March 31, 1995, which
were used to minimize interest rate risk associated with certain
floating rate deposits and loans, respectively. Unrealized gains and
losses on such caps and floors were $1.4 million and $0.3 million,
respectively, at March 31, 1995. In addition, Crestar serves as a
financial intermediary in interest rate swap, cap, floor and collar
agreements, providing risk management services to customers, and at
March 31, 1995 had $132.9 million in offsetting swap, $100.3 million in
offsetting cap, and $37.6 million in offsetting collar agreements.
The notional amount of these over-the-counter traded interest rate
swaps, caps, floors and collars does not fully represent Crestar's
credit exposure, which the Corporation believes is a combination of
current replacement cost of approximately $2.2 million plus an amount
for additional market movement. Three counterparties constituted 25%,
16% and 13% of the estimated credit and market exposure of $48.6 million
at March 31, 1995.
Crestar also had $305.4 million of forward agreements outstanding at
March 31, 1995, which are primarily utilized to reduce the interest rate
risk arising from changes in market rates from the time residential
mortgage lending commitments are made until those commitments are
funded.
Certain litigation is pending against Crestar. Management, after
reviewing this litigation with legal counsel, is of the opinion that
these matters, when resolved, will not have a material effect on the
accompanying consolidated financial statements.
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FINANCIAL COMMENTARY
Crestar Financial Corporation And Subsidiaries
OVERVIEW
(Tables 1, 2 and 16)
Crestar Financial Corporation (Crestar) reported net income of $45.1
million for the quarter ended March 31, 1995, an increase of $4.6
million or 11% over net income reported in the first quarter of 1994.
These increases reflected the continued positive effects of improved net
interest margins, growth in earning assets and noninterest income, and
management of controllable expenses. Earnings per share were $1.18 for
the first quarter of 1995, compared to $1.07 in 1994. The predominant
items affecting the change in earnings per share are given in Table 2.
Each item is net of applicable federal income taxes.
MERGERS AND ACQUISITIONS
Crestar continued to enhance its presence in current markets through the
completion of three acquisitions during the first quarter of 1995.
Crestar also recently announced a major pending acquisition.
On January 20, 1995, Crestar completed the previously announced
acquisitions of Jefferson Savings and Loan Association, F.A. (Jefferson
Savings) and Independent Bank (Independent). Jefferson Savings, a
Warrenton, Virginia based thrift institution, represents Crestar's first
operations in Warrenton, Culpeper, Front Royal and Luray, while further
strengthening Crestar's market position in Charlottesville and Loudon
County. The acquisition was for $5 million in cash and 471 thousand
shares of Crestar stock, for a combined value of approximately $23
million. The purchase of Independent Bank, a Manassas-based commercial
bank added two branches in Prince William County, enhancing Crestar's
leading market position in one of Virginia's fastest growing areas. The
acquisition was valued at $12 million, based on a payment of $5 million
in cash and 198 thousand shares of Crestar common stock.
Crestar's acquisition of TideMark Bancorp, Inc. (TideMark) was
completed on March 24, 1995. The acquisition was for a combination of
648 thousand shares of Crestar stock and $13 million in cash, having a
total value of approximately $40 million. At the time of the
acquisition, TideMark was the oldest and largest financial institution
headquartered in the Virginia Peninsula area of eastern Virginia. Upon
acquisition, three of TideMark's 12 branches were converted to Crestar
offices; the remaining TideMark branches were consolidated into nearby
Crestar branches.
Each of the three acquisitions completed in the first quarter of
1995 have been accounted for under the purchase method of accounting,
whereby the purchase price has been allocated to the underlying assets
acquired and liabilities assumed based on their respective fair values
at the date of acquisition. Crestar's first quarter 1995 results include
the results of operations of the acquired institutions from the date of
their respective purchase. Financial results for 1994 do not include the
results of the three 1995 purchase method acquisitions.
On April 28, Crestar announced the signing of a binding letter
agreement to acquire Loyola Capital Corporation (Loyola), a $2.5
billion-asset thrift institution headquartered in Baltimore, Maryland.
Loyola operates 35 branches, primarily in central Maryland and
Maryland's Eastern Shore, including 15 branches in the Baltimore
metropolitan area, with total deposits of approximately $1.5 billion.
Under terms of the binding letter agreement, Loyola shareholders will
receive Crestar common stock in exchange for their Loyola holdings. The
total value of the transaction will approximate $259 million, and is
expected to be completed in late 1995 or early 1996. The acquisition of
Loyola is subject to the signing of a definitive agreement as well as
regulatory and Loyola shareholder approval.
PROFITABILITY MEASURES AND CAPITAL RESOURCES
(Table 1)
Crestar's increased earnings in the first quarter of 1995 resulted in
improvements in key profitability measures when compared to the same
period of 1994. Return on average assets was 1.30% in the first three
months of 1995, up from the 1.22% reported for the first three months of
1994. Return on average equity was 15.43% for the quarter ended March
31, 1995, compared to the 14.83% reported in the first quarter of 1994.
Average equity to assets of 8.44% for the first quarter of 1995
increased 24 basis points from 8.20% in the first quarter of 1994,
reflecting higher retained earnings and the impact of common stock
issued for first quarter 1995 acquisitions. Period-end equity to assets
of 8.43% at March 31, 1995 was 90 basis points above March 31, 1994
ratio of 7.53%, also reflecting higher earnings and stock issued for
acquisitions.
Risk-based capital ratios are another measure of capital adequacy.
At March 31, 1995, Crestar's consolidated risk-adjusted capital ratios
were 9.2% for Tier 1 and 13.0% for total capital, well above the
required minimums of 4.0% and 8.0%, respectively. The Tier 1 leverage
ratio of 7.9% at March 31, 1995 also was significantly above the
regulatory minimum of 3.0%. Crestar's tangible leverage ratio, defined
as total equity less all intangibles divided by total assets less all
intangibles, was 7.3% at March 31, 1995. Under Federal Deposit Insurance
Corporation (FDIC)
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rules, each of Crestar's three subsidiary banks was
considered "well- capitalized" as of March 31, 1995, the highest
category of capitalization defined by regulatory authorities, allowing
for the lowest level of FDIC insurance premium payments. At March 31,
1995, approximately 62% of Crestar's deposits were insured by the Bank
Insurance Fund (BIF) of the FDIC, with the remainder insured by the
Savings Association Insurance Fund (SAIF) of the FDIC.
NET INTEREST MARGIN AND NET INTEREST INCOME
(Tables 3 and 17)
Crestar's net interest margin for the first quarter of 1995 was 4.92%,
an improvement of 14 basis points from the margin recorded in the first
quarter of 1994. The improvement was due to favorable changes in the
composition and yield of balance sheet earning assets, which offset
higher rates paid on deposits and declines in interest income arising
from off-balance sheet hedge transactions. The net interest margin in
the fourth quarter of 1994 was 4.81%.
Positive influences on the first quarter 1995 margin include
favorable changes in the composition of balance sheet earning assets and
their respective interest rate yields. Changes in the earning asset mix
increased the first quarter 1995 net interest margin by approximately 29
basis points when compared to the first quarter of 1994. Reflecting the
impact of strong marketing efforts, increased demand and completed bank
and thrift acquisitions, loans as a percentage of total earning assets
increased from an average of 63% during the first three months of 1994
to 76% for the same period of 1995. Average bank card loans experienced
significant growth, with first quarter 1995 average balances up $527
million, or 55%, versus the same period of 1994. The growth in bank card
balances reflects Crestar's strong marketing emphasis, including
promotional efforts outside of Virginia, Maryland and Washington, D.C.
Average consumer real estate loans were up $853 million, or 68%, from
first quarter 1994, with average instalment loan balances increasing 16%
during this period. Average business loans for the first quarter were up
6% from prior year balances, despite reductions in construction and
income property loans, as average commercial loans increased 11%.
Funding for loan growth came in part from reductions in the average
balances of securities available for sale, which declined $1.5 billion
when compared to 1994 first quarter average balances. With regards to
funding sources, the rate of growth in certificates of deposits and
money market deposit accounts was higher than the rate of growth in net
demand deposits and interest checking balances, resulting in a negative
impact to the first quarter 1995 net interest margin of five basis
points, in comparison to first quarter 1994 results. When included with
the impact of changes to Crestar's earning asset mix, this resulted in a
net 24 basis point improvement in the first quarter 1995 net interest
margin arising from changes in Crestar's total balance sheet mix.
Average total deposits for first quarter 1995 increased $459 million, to
$10.8 billion, a 4% increase over first quarter 1994 average balances.
Short-term borrowings were down 12% from the average for the first three
months of 1994, reflecting the growth in deposit balances.
The yield on average loans increased 48 basis points from the first
quarter of 1994, to 8.80%, as higher yields obtained on commercial,
commercial and consumer real estate and instalment loans offset declines
in average rates on a growing credit card loan portfolio. Higher rates
on securities available for sale, which earned 6.60% in first quarter
1995 versus 5.54% in the same period of 1994, were partially offset by
lower yields on securities held to maturity, which were 6.67% during the
first quarter of 1995 versus 8.32% in the same period of 1994. Yields on
money market investments, reflecting steps taken by the Federal Reserve
Bank to increase rates during 1994, were 5.80% for the first quarter of
1995 versus 3.57% for the first three months of 1994. Also reflecting
the higher rate environment, the average rate paid on deposits increased
in each category of interest-bearing deposits. The average rate paid on
total interest bearing deposits increased from 2.99% in the first
quarter of 1994 to 3.56% in 1995, or an increase of 57 basis points.
Increases to rates paid on deposits, however, have lagged the increases
to yields on variable rate assets, such as prime-rate based loans and
money market investments. This has presented a favorable interest rate
environment for many financial institutions. In total, interest rate
spreads had a positive impact of 27 basis points on Crestar's first
quarter 1995 net interest margin, when compared to the first quarter of
1994.
Off-balance sheet hedge transactions, which had a favorable impact
on the net interest margin in 1994, experienced net negative interest
rate spreads between rates paid and rates received during the first
quarter of 1995. In comparison to first quarter 1994, such off-balance
sheet transactions had a negative impact of 37 basis points on first
quarter 1995's net interest margin, partially offsetting the combined
favorable impact on Crestar's net interest margin of 24 basis points
from changes in balance sheet mix and 27 basis points from changes in
interest rates. The impact of nonperforming assets on first quarter
1995's net interest margin, in comparison to the same period of 1994,
was not significant.
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The extent to which Crestar will be able to maintain its current,
historically high net interest margin is significantly influenced by the
economic environment in our markets and the economic policy of the
Federal Reserve Board, in addition to competitive market conditions for
both loans and deposits. Competitive pressures, especially with regard
to deposit rates, may lead to decreases in net interest margin in future
periods. A higher rate environment often results in many deposit
customers, over time, shifting their funds from more liquid, lower
yielding deposit products, such as interest checking and regular savings
deposit accounts, to higher yielding certificates of deposit.
As a result of the increase in the net interest margin and a four
percent increase in average earning assets, net interest income for the
first quarter of 1995 increased 8% over the first quarter of 1994.
Tax-equivalent net interest income similarly increased by 8% during this
period. Acquisitions completed during the first quarter of 1995 added
less than $3 million to Crestar's net interest income for the quarter
ended March 31, 1995. The impact on Crestar's net interest margin for
the quarter from the three acquisitions, while negative, was not
significant.
RISK EXPOSURES AND CREDIT QUALITY
(Tables 4 - 9)
Crestar's financial results for the first quarter of 1995 continued to
exhibit strong credit quality trends. The provision for loan losses was
$10.1 million for the first quarter of 1995, up slightly from the $10.0
million provision expense recorded in the first quarter of 1994. Net
charge-offs totaled $12.2 million in the first three months of 1995,
compared to $10.0 million in the comparable period of 1994. Net
charge-offs as a percentage of average loans were 0.52% for the first
quarter of 1995, compared to 0.53% in the same period of 1994.
In addition to other loan categories, Crestar closely manages its
portfolio of loans to real estate developers and investors (REDI). Table
5 provides the property type and geographic diversification of the
current REDI portfolio. As shown in Table 4, despite additions to REDI
loans caused by acquisitions of financial institutions, REDI outstanding
balances remained fairly constant and totaled $1.1 billion at March 31,
1995. This balance represented 11% of the total loan portfolio at that
date. At March 31, 1994, REDI loans represented 14% of the total loan
portfolio. REDI nonperforming assets were $58.8 million at March 31,
1995, compared to $72.2 million at March 31, 1994.
The largest proportion of net loan charge-offs during the first
quarter of 1995 occurred in the bank card loan portfolio. Net
charge-offs for bank card loans were $9.9 million in the first three
months of 1995, compared to $4.6 million in 1994's first quarter. This
increase in bank card net charge-offs is largely attributable to the
significant growth of Crestar's bank card loan portfolio. Crestar's
expectations are that the ratio of net charge-offs to average total
loans for the full year 1995 will increase from the level achieved in
1994, but remain below 1993's results. This expectation is based upon
assumptions regarding the general economic climate in Crestar's
principal markets and the performance characteristics of the loan
portfolio, including Crestar's continued success in resolving remaining
nonperforming loans. Changes in these conditions may produce different
results.
The allowance for loan losses was $223 million at March 31, 1995,
representing 2.28% of period-end loans, 235% of period-end nonperforming
assets, and a 305% coverage of nonperforming loans. Based on current
expectations relative to portfolio characteristics and performance
measures including loss projections, management considers the level of
the allowance adequate.
At March 31, 1995, nonperforming assets of $94.7 million were down
$19.3 million or 17% from March 31, 1994, and down $0.2 million from
December 31, 1994. These reductions were recorded despite over $15
million in acquisition- related balances acquired during the first
quarter of 1995. The ratio of nonperforming assets to loans and
foreclosed properties at March 31, 1993 was 0.97%, down from 1.02% at
December 31, 1994 and 1.38% at March 31, 1994. In addition to
nonperforming assets, Table 7 also discloses past due loans, excluding
nonaccrual loans, at March 31, 1995. Tables 8 and 9 provide details of
how nonperforming loans and foreclosed properties have changed on a
quarterly basis since the first quarter of 1994. Based on current
portfolio trends, and barring an unexpected deterioration in the
economy, management does not expect the ratio of nonperforming assets to
loans and foreclosed properties to change significantly during the
remainder of 1995. However, interim periods in 1995 could show increases
in the total balance of nonperforming assets due to loan growth, future
acquisitions of financial institutions, and the impact of higher
interest rates on borrowers.
Potential problem loans consist of loans that are currently
performing in accordance with contractual terms but for which potential
operating or financial concerns of the obligors have caused management
to have serious doubts regarding the ability of such obligors to
continue to comply with present repayment terms. At March 31, 1995,
potential problem
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loans, not included in Table 7, amounted to
approximately $217 million. Potential problem loans were $210 million at
December 31, 1994 and $197 million at March 31, 1994. Increases in
potential problem loans, which are primarily commercial credits, should
be viewed in the context of Crestar's 7% increase in commercial loans
outstanding from March 31, 1994 to March 31, 1995.
NONINTEREST INCOME AND EXPENSE
(Table 10)
Noninterest income totaled $64.7 million in the first quarter of 1995, a
$1.2 million or 2% increase over 1994. Excluding securities losses,
noninterest income increased $1.9 million or 3% over 1994. This increase
reflects growth in the noninterest income categories of bank
card-related fee income and service charges on deposit accounts,
partially offset by declines in trust and investment advisory income and
mortgage income. Reflecting promotional activities and increased
merchant fee volume, bank card-related fee income increased by $3.3
million, or 43%, in comparison to the first quarter of 1994. Service
charges on deposit accounts increased 4%, or $0.8 million, from 1994
levels. Trust and investment advisory income decreased $1.5 million or
10% from 1994, due to an increasingly competitive environment for trust
services. Also, the impact of a declining bond market during the latter
part of 1994 had an unfavorable impact on fees earned based on the value
of assets under management. A rising interest rate environment also
negatively impacted mortgage origination and servicing income. Mortgage
income for the first quarter of 1995 totaled $10.3 million, or $1.7
million less than the results reported in the first quarter of 1994.
Noninterest expense increased $3.8 million, or 3%, in the first
quarter of 1995 compared to the same period of 1994. These results stem
in part to beneficial comparisons in Crestar's foreclosed properties
expense, reflecting an improved credit environment in Crestar's market
area. Excluding foreclosed properties expense, noninterest expense
increased 4% in the quarter, primarily due to acquisition-related costs.
Additional expenses arising from the first quarter 1995 acquisitions of
Jefferson Savings, Independent and TideMark approximated $3.1 million.
Additional expenses incurred in the first quarter of 1995 related to
Crestar's seven acquisitions completed in 1994 approximated $6.5
million. In the first quarter of 1994, Crestar consummated four purchase
acquisitions, which led to incremental noninterest expenses in that
quarter of approximately $3.1 million. Excluding these merger related
costs from first quarter 1995 and 1994 results, noninterest expenses
excluding foreclosed properties expense demonstrated a 1% decline for
the three month period ended March 31, 1995 in comparison to the same
period of 1994.
Reflecting improved credit conditions and real estate markets,
foreclosed properties expense for the quarter ended March 31, 1995 was a
net credit of $1.5 million, compared to a $9 thousand expense in the
quarter ended March 31, 1994. The net credit is primarily a result of
gains on sale of foreclosed properties exceeding foreclosed property
operating expenses during the quarter ended March 31, 1995.
The effective tax rate for the first quarter of 1995 was 34.1%,
compared to 32.6% in the first quarter of 1994. Increased provisions for
state income taxes and higher levels of nondeductible expenses
contributed to the higher effective tax rate for 1995. Financial
statement note 11 contains additional information concerning income
taxes.
FINANCIAL CONDITION
(Table 11)
Crestar's assets totaled $14.4 billion at March 31, 1995, compared to
$14.0 billion in assets at December 31, 1994, and $14.4 billion at March
31, 1994. The increase from year-end 1994 is primarily due to
acquisitions completed during the first quarter of 1995. Loans net of
unearned income increased $467 million, or 5%, from year-end 1994
levels, reflecting growth from a combination of acquisitions and
internally generated lending. Loan balances that arose from first
quarter 1995 acquisitions approximated $420 million at March 31, 1995.
Total deposits increased $142 million or one percent over December 31,
1994 balances. Despite the impact of the Jefferson Savings, Independent
and TideMark purchase transactions, total deposits were up only
marginally from year-end 1994, as a higher interest rate environment and
seasonal factors resulted in declines in demand, interest checking and
regular savings deposits.
With respect to the securities held to maturity portfolio, amortized
cost exceeded the market value at March 31, 1995 by $21.8 million,
consisting of $2.5 million in unrealized gains and $24.3 million of
unrealized losses. At March 31, 1995, the amortized cost of securities
available for sale exceeded the market value of such securities by $27.4
million, consisting of $4.4 million in unrealized gains and $31.8
million in unrealized losses. Shareholders' equity at March 31, 1995
reflects a $17.4 million reduction for the excess, net of tax, of
amortized cost of securities available for sale over the fair value at
quarter-end, compared to reductions of $36.6 million and $6.3 million
at December 31, 1994 and March 31, 1994,
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respectively. The net unrealized gain or loss on securities available
for sale, which is recorded as a component of shareholders' equity, will
continue to be subject to change in future periods due to fluctuations
in market value, acquisition activities, and sales, purchases,
maturities and calls of securities classified as available for sale.
During the first quarter of 1995, Crestar sold approximately $580
million of securities classified as available for sale, generating
securities losses of $2.4 million. Such sales were consummated in
conjunction with the overall management of interest rate risk for the
Corporation. The level of security sales also reflects the re-balancing
of the securities portfolio in view of the investment securities
acquired in the Jefferson Savings, Independent and TideMark
acquisitions. Securities losses recorded in the first quarter of 1994
were $1.7 million.
Crestar purchased and retired 587,200 shares of common stock during
the first quarter of 1995, at an average price of $41.69 per share. Such
purchases were primarily made to offset the issuances of common stock
made relating to the completed acquisitions during the quarter. As of
March 31, 1995, Crestar had a remaining authorization to purchase and
retire up to 1.4 million shares of common stock in order to meet the
needs of the dividend reinvestment plan, thrift and profit sharing plan
and the first quarter 1995 issuances related to acquisitions.
Crestar announced a common stock dividend increase on April 28,
1995, effective with the dividend payable on May 19, 1995, to $.45 per
share. This represents a 12.5% increase over the previous quarterly rate
of $.40 per share.
LIQUIDITY AND INTEREST SENSITIVITY
(Tables 12-15)
Bank liquidity is a measure of the ability to generate and maintain
sufficient cash flows to fund operations and to meet financial
obligations to depositors and borrowers promptly and in a cost-effective
manner. Liquidity is provided through securities available for sale,
money market investments, maturing loans and securities, and the ability
to generate new deposits or borrowings as needed. Crestar's liquidity
position is actively managed on a daily basis, and monitored regularly
by the Asset/Liability Management Committee (ALCO). ALCO's overall
objective is to optimize net interest income within the constraints of
prudent capital adequacy, liquidity needs, the interest rate and
economic outlook, market opportunities, and customer requirements.
General strategies to accomplish this objective include maintaining a
strong balance sheet, achieving solid core deposit growth, accepting
manageable interest rate risk, adhering to conservative financial
management principles and practicing prudent dividend policies.
Core deposits provide a typically stable source of liquidity.
Crestar's interest-bearing core deposits represented 69% of total
funding sources at both March 31, 1995 and March 31, 1994. As an
additional indication of strong liquidity, money market investments
represented 5%, and securities available for sale represented 11%, of
Crestar's total earning assets at March 31, 1995.
Interest sensitivity refers to the volatility of net interest income
as a result of changes in interest rates. Crestar's goal is to limit
interest rate exposure to prudent levels as determined by the
Corporation's ALCO committee. ALCO establishes limits on the earnings at
risk for a twenty-four month period. The level of exposure taken is
based on an assessment of the market environment, and will vary from
period to period.
The primary tool used by ALCO in assessing interest rate exposure is
net interest income simulations. The committee establishes limits on net
interest income at risk for a twenty-four month period. A two year net
interest income forecast is prepared regularly based on flat, high, low
and most likely interest rate scenarios. The high and low interest rate
scenarios are based upon an assessment of the historic volatility of
interest rates. The expected dynamics of the balance sheet under each
scenario, including shifts in loans and deposits, are included in the
simulations. By its nature, this simulation process includes numerous
assumptions, for both long-term and short-term timeframes, including
assumptions on average balances and yields. Many of the assumptions are
both highly qualitative and subjective. The high rate and low rate
estimates generated by this process are then compared to the flat
scenario. At March 31, 1995, Crestar's projection of unmanaged pre-tax
earnings at risk, as a percentage of the next twenty-four month's
projected net interest income under a flat scenario, is approximately
4.0%. The net interest income at risk percentage does not consider
future discretionary actions, including hedging activity, that may be
entered into to manage future earnings volatility.
A second interest sensitivity tool is the quantification of market
value changes for all assets and liabilities given an increase or
decrease in interest rates. This approach provides a longer term view of
interest rate risk, capturing predominantly all expected future cash
flows. Assets and liabilities with option characteristics are valued
based on numerous interest rate path valuations using Monte Carlo rate
simulation techniques. The banking industry and its
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regulatory authorities are moving toward a market value method of interest
sensitivity assessment. Crestar has been developing this tool and is
incorporating it as another component of interest rate risk management
to supplement the results achieved through net interest income
simulation.
Another interest rate risk tool used by Crestar is the interest rate
"gap," or mismatch in repricing between interest-sensitive assets and
liabilities, which provides a general indication of interest sensitivity
at a specific point in time. A gap schedule is shown in Table 12, and
reflects the earlier of the maturity or repricing dates for various
assets and liabilities at March 31, 1995. At that point in time, Crestar
had a cumulative negative six-month gap with $3.9 billion excess of
interest-sensitive sources of funds over uses of funds. This generally
indicates that earnings should improve in a declining interest rate
environment as liabilities reprice more quickly than assets. The
opposite would be true of a positive, or asset-sensitive, gap.
In addition to the traditional gap measurement presentation, Table
12 also presents interest sensitivity on an adjusted basis. The first of
these adjustments is made through the use of beta factors, which are
based on a ratio of actual changes in consumer deposit rates to changes
in the prime rate during interest rate cycles for the last several
years. Essentially, the beta factors recognize that certain consumer
deposit rates are less interest-sensitive than market-based rates such
as commercial paper. In addition to a beta adjustment, the table also
incorporates an adjustment to reflect the sensitivity of much of the
Corporation's commercial demand deposit balances to the level of
interest rates. On a cumulative six-month basis, Crestar had a liability
sensitive "adjusted gap" at March 31, 1995, with $87 million excess of
interest-sensitive sources of funds over uses of funds. The static gap
and adjusted gap do not include $250 million (notional amount) of
interest rate floors which Crestar has added to potentially offset the
effect that falling interest rates would have on $250 million of
floating rate loans, or $245 million (notional amount) of interest rate
caps to potentially offset the effect of rising interest rates on
floating rate deposits.
Each of the above three tools used to assess interest rate risk have
strengths and weaknesses. While Crestar believes that the above
methodologies provide a meaningful representation of the Corporation's
interest rate sensitivity, the methodologies do not necessarily take
into account all business developments which can have an impact on net
interest income, such as changes in credit quality or changes in the
amount and composition of earning assets and sources of funds.
As noted, Crestar incurs a degree of interest rate risk as a
provider of banking services to its customers. This risk can be reduced
through derivative interest rate contracts, such as interest rate swaps,
caps and floors. The majority of Crestar's outstanding derivative
instruments at March 31, 1995 are utilized to convert certain variable
rate assets to fixed rates in order to lock in a profitable interest
spread based on the underlying fixed rate funding sources. Because
financial derivatives typically do not have actual principal dollars
transferred between parties, notional principal amounts are used to
express the volume of such transactions. However, the notional amount of
derivative contracts does not represent direct credit exposure, which
the Corporation believes is a combination of current replacement cost of
those instruments with a positive market value plus an amount for
additional market movement. Crestar has established policies governing
derivative activities, and the counterparties used by Crestar are
considered high quality credits. In addition, Crestar may demand
collateral from a counterparty to further minimize credit risk. There
were no past due amounts or reserves for possible derivative credit
losses at March 31, 1995, nor has Crestar ever experienced any charge-
offs related to the credit risk of derivative transactions. No interest
rate swaps, floors or caps used as hedges against interest rate risk
were sold or terminated prior to maturity during the first quarter of
1995, and at March 31, 1995 there were no deferred gains or losses
arising from termination of hedged transactions prior to maturity. The
notional amount of Crestar's interest rate swaps, caps and floors
(excluding customer positions where Crestar acts as an intermediary) was
$1.7 billion at March 31, 1995. Forward contracts with a notional amount
of $305 million , primarily utilized to hedge lending commitments of
Crestar's mortgage banking subsidiary, were also outstanding at March
31, 1995, bringing the total notional value of derivative financial
instruments related to interest rate risk management activities to $2.0
billion at March 31, 1995. Tables 13, 14, and 15 present information
regarding fair values, maturity, average rates, and activity as of and
for the three month period ending March 31, 1995 for these off-balance
sheet derivative instruments. Net unrealized losses on these instruments
totaled $49.4 million as of March 31, 1995. Financial statement note 13
contains additional information pertaining to these types of agreements.
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NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan" (SFAS 114) in 1993. SFAS 114 was further amended
by the FASB in 1994 through the issuance of Statement of Financial
Accounting Standards No. 118, "Accounting by Creditors for Impairment of
a Loan - Income Recognition and Disclosures" (SFAS 118). Effective
January 1, 1995, SFAS 114, as amended by SFAS 118, required that an
impaired loan be measured and reported on the basis of the present value
of expected cash flows discounted at the loan's effective interest rate,
or at the fair value of the loan's collateral if the loan is deemed
"collateral dependent." Impaired loans are specifically reviewed loans
for which it is probable that the creditor will be unable to collect all
amounts due according to the terms of the loan agreement. SFAS 118
allows a creditor to use existing methods for recognizing interest
income on an impaired loan. For Crestar's nonaccrual loans and impaired
loans, interest receipts are recognized as interest revenue or are
applied to principal when management believes the ultimate
collectibility of principal is in doubt.
At March 31, 1995, impaired loans of $40 million were included in
the nonaccrual loan balances of Crestar. The balance of impaired loans
at January 1, 1995 also totaled approximately $40 million. Because the
majority of loans deemed impaired during the first quarter were
collateral dependent, valuations of impaired loans did not vary
materially from the values previously assigned to this population of
loans. The initial adoption of the new accounting standard did not
require an increase to Crestar's allowance for loan losses. The impact
of adopting SFAS 114, as amended by SFAS 118, was therefore immaterial
to the financial condition and operations of Crestar as of and for the
three month period ended March 31, 1995.
Statement of Financial Accounting Standards No. 121 (SFAS 121),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," was issued by the Financial Accounting
Standards Board in March 1995. The Statement requires that long-lived
assets and certain identifiable intangibles to be held and used by a
company be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review for recoverability, the company
should estimate the future cash flows expected to result from the use of
the asset and its eventual disposition. An impairment loss would be
recognized if the sum of the expected future cash flows, undiscounted,
is less than the carrying amount of the asset. Measurement of an
impairment loss would be based on the fair value of the asset. The
Statement also establishes standards for recording an impairment loss
for certain assets that are subject to disposal. The Statement excludes
financial instruments, long-term customer relationships of financial
institutions, mortgage and other servicing rights, and deferred tax
assets. Adoption of the new accounting standard is expected to occur on
January 1, 1996. At this time, Crestar does not expect any impact to the
Corporation's net income upon implementation of SFAS 121.
19
<PAGE>
TABLE 1 FINANCIAL HIGHLIGHTS
Dollars in millions, except per share data
Three Months
%
FOR THE PERIOD ENDED MARCH 31 1995 1994 Change
Net Income $ 45.1 $ 40.5 11
Dividends Declared on Common Stock 15.3 12.4 23
Per Common Share:
Net Income $ 1.18 $ 1.07 10
Dividends Declared .40 .33 21
Book Value 31.66 28.88 10
Average Shares Outstanding (000s) 38,097 37,835 1
KEY RATIOS
Return on Average Assets 1.30% 1.22%
Return on Average Equity 15.43 14.83
Average Equity to Average Assets 8.44 8.20
Net Interest Margin 4.92 4.78
AT MARCH 31
Equity to Assets 8.43% 7.53%
Risk Adjusted Capital Ratios:
Tier I 9.2 9.5
Total 13.0 12.3
Common Shares Outstanding (000s) 38,397 37,483
TABLE 2 ANALYSIS OF PRIMARY EARNINGS PER SHARE
1st Qtr. 1995 1st Qtr. 1995
vs. vs.
1st Qtr. 1994 4th Qtr. 1994
Earnings Per Share - prior period $1.07 $1.13
Interest income .64 .22
Interest expense (.45) (.14)
Provision for loan losses -- (.13)
Securities gains or losses (.01) .11
Other noninterest income .03 .01
Foreclosed properties expense .03 .01
Other noninterest expense (.09) (.02)
Income taxes (.03) --
Increased shares outstanding (.01) (.01)
Net increase .11 .05
Earnings Per Share - current period $1.18 $1.18
20
<PAGE>
TABLE 3 AVERAGE BALANCES, NET INTEREST INCOME AND RATE/VOLUME ANALYSIS(1)
Dollars in thousands
1st Qtr. 4th Qtr.
Average
Average Balance Increase Balance
1995 1994 (Decrease) 1994
$ $ % $
2,999,159 2,701,886 11 2,892,283 Commercial
764,086 790,402 (3) 748,296 Real estate - income property
187,239 220,881 (15) 214,209 Real estate - construction
1,891,141 1,625,825 16 1,783,039 Instalment
1,492,890 966,242 55 1,350,448 Bank card
2,113,239 1,260,380 68 1,879,890 Real estate - mortgage
9,447,754 7,565,616 25 8,868,165 Total loans - net of
unearned income(2)
887,414 528,507 68 920,755 Securities held to maturity
1,449,623 2,948,914 (51) 1,765,770 Securities available for sale
457,579 468,907 (2) 486,068 Money market investments
191,346 467,598 (59) 258,332 Mortgage loans held for sale
12,433,716 11,979,542 4 12,299,090 Total earning assets
1,874,912 1,817,810 3 1,861,152 Interest checking deposits
2,432,572 2,301,992 6 2,388,715 Money market deposit accounts
1,369,262 1,316,111 4 1,427,051 Regular savings deposits
3,042,769 2,886,010 5 3,016,182 Domestic time deposits
8,719,515 8,321,923 5 8,693,100 Total interest-bearing core
deposits
1,329,862 1,474,084 (10) 1,297,473 Purchased liabilities
368,133 203,376 81 294,644 Long-term debt
10,417,510 9,999,383 4 10,285,217 Total interest-bearing
liabilities
2,016,206 1,980,159 2 2,013,873 Other sources - net
12,433,716 11,979,542 4 12,299,090 Total sources of funds
Net Interest Income
(1) Tax-equivalent basis.
(2) Nonaccrual loans are included in the average loan balances and
income on such loans is recognized on a cash basis.
(3) Includes tax-equivalent net loan fees of $0.4 million and $0.7
million for the first quarter of 1995 and 1994, respectively, and
$0.5 million for the fourth quarter of 1994.
<PAGE> 21
<TABLE>
1st Qtr.
1995 vs. 1994 4th Qtr. 1st Qtr. 1995 vs. 4th Qtr. 1994
Income/
Income/ Expense(3) Increase Change due to(4) Expense(3) Increase Change due to(4)
1995 1994 (Decrease) Rate(5) Volume 1994 (Decrease) Rate(5) Volume
$ $ $ $ $ $ $ $ $
<S> <C> <C> <C> <C> <C> <C> <C> <C>
61,829 50,993 10,836 5,242 5,594 57,398 4,431 2,316 2,115
16,294 15,194 1,100 1,601 (501) 15,694 600 270 330
4,497 3,956 541 1,144 (603) 4,874 (377) 235 (612)
42,751 33,892 8,859 3,342 5,517 39,114 3,637 1,291 2,346
43,077 30,569 12,508 (4,025) 16,533 38,482 4,595 649 3,946
39,825 22,336 17,489 2,429 15,060 34,507 5,318 1,053 4,265
208,273 156,940 51,333 12,462 38,871 190,069 18,204 5,903 12,301
14,805 10,992 3,813 (2,739) 6,552 15,225 (420) 131 (551)
23,607 40,249 (16,642) 4,452 (21,094) 27,196 (3,589) 1,280 (4,869)
6,544 4,126 2,418 2,518 (100) 6,398 146 521 (375)
3,810 7,424 (3,614) 772 (4,386) 5,010 (1,200) 99 (1,299)
257,039 219,731 37,308 29,008 8,300 243,898 13,141 10,492 2,649
10,453 9,741 712 406 306 10,544 (91) (169) 78
22,610 13,749 8,861 8,081 780 20,193 2,417 2,046 371
9,461 8,321 1,140 804 336 9,930 (469) (67) (402)
33,379 29,205 4,174 2,551 1,623 31,645 1,734 1,467 267
75,903 61,016 14,887 11,960 2,927 72,312 3,591 3,370 221
18,815 11,098 7,717 8,803 (1,086) 15,789 3,026 2,632 394
7,861 4,250 3,611 168 3,443 6,108 1,753 230 1,523
102,579 76,364 26,215 23,011 3,204 94,209 8,370 7,154 1,216
102,579 76,364 26,215 23,310 2,905 94,209 8,370 7,335 1,035
154,460 143,367 11,093 5,698 5,395 149,689 4,771 3,157 1,614
</TABLE>
(4) Variances are computed on a line-by-line basis and are non-additive.
(5) Variances caused by the change in rate times the change in balances are
allocated to rate.
22
<PAGE>
TABLE 4 LOANS TO REAL ESTATE DEVELOPERS AND INVESTORS (REDI)
In millions
March 31, December 31,
1995 1994 1994
Commercial - developer lines $ 91.4 $ 81.5 $ 98.7
Commercial - other 64.7 79.9 67.7
Real estate - income property 815.3 809.4 744.9
Real estate - construction 145.8 194.7 152.0
Total REDI loans $1,117.2 $1,165.5 $1,063.3
TABLE 5 LOANS TO REAL ESTATE DEVELOPERS AND INVESTORS-
GEOGRAPHIC DISTRIBUTION AND PROPERTY TYPE
March 31, 1995
In millions
<TABLE>
Region
Total Greater
Corporation Washington Eastern Western Capital
<S> <C> <C> <C> <C> <C>
Land acquisition and development $ 93.3 $ 54.7 $ 27.6 $ 5.0 $ 6.0
Residential developments 261.5 133.4 81.0 40.7 6.4
Commercial projects:
Office buildings 153.7 94.2 31.5 13.3 14.7
Retail stores and malls 210.4 149.7 45.0 8.2 7.5
Hotels and motels 118.8 43.9 46.1 21.0 7.8
Industrial buildings 132.7 99.8 14.0 4.2 14.7
Total commercial projects 615.6 387.6 136.6 46.7 44.7
Special use 53.3 22.0 14.8 13.6 2.9
Other 93.5 62.5 19.7 2.1 9.2
Total REDI loans $1,117.2 $660.2 $279.7 $108.1 $69.2
</TABLE>
TABLE 6 ALLOWANCE FOR LOAN LOSSES
Dollars in thousands
First Quarter
1995 1994
Beginning balance $219,189 $210,958
Allowance from acquisitions 5,631 15,629
Provision for loan losses 10,100 10,032
Net charge-offs (recoveries):
Commercial 648 875
Real estate - income property 359 4,534
Real estate - construction (563) (844)
Instalment 1,645 620
Bank card 9,949 4,573
Real estate - mortgage 180 284
Total net charge-offs 12,218 10,042
Balance, March 31 $222,702 $226,577
Allowance for loan losses to period-end loans 2.28% 2.75%
Annualized net charge-offs to average loans .52 .53
23
<PAGE>
TABLE 7 NONPERFORMING ASSETS AND PAST DUE LOANS
Dollars in thousands
March 31, December 31,
1995 1994 1994
Nonaccrual loans:
Commercial $27,038 $38,669 $28,708
Real estate - income property 26,879 34,430 21,872
Real estate - construction 7,710 7,100 7,279
Instalment 3,001 1,069 3,408
Real estate - mortgage 8,362 8,208 8,139
Total nonaccrual loans 72,990 89,476 69,406
Restructured loans -- 34 6,878
Total nonperforming loans 72,990 89,510 76,284
Foreclosed properties - net 21,690 24,471 18,629
Total nonperforming assets $94,680 $113,981 $94,913
Past due loans:
Commercial $ 1,514 $ 533 $ 1,608
Real estate - income property 1,110 691 1,071
Real estate - construction 989 -- 198
Instalment
Student 10,879 5,607 14,705
Other 1,846 1,994 1,368
Bank card 11,685 6,583 10,831
Real estate - mortgage 9,349 5,554 5,920
Total past due loans $37,372 $ 20,962 $35,701
Nonperforming assets to:
Loans and foreclosed properties - net .97% 1.38% 1.02%
Total assets .66 .79 .68
Allowance for loan losses to:
Nonperforming assets 235 199 231
Nonperforming loans 305 253 287
Allowance for loan losses plus
shareholders' equity to
nonperforming assets 15.19x 11.48x 14.17x
24
<PAGE>
TABLE 8 NONPERFORMING LOANS-QUARTERLY ACTIVITY
In millions
Three Months Ended
1995 1994
Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
Beginning balance $ 76.3 $ 62.9 $ 77.4 $ 89.5 $ 79.8
Acquisition additions 8.7 -- -- 4.0 8.1
Other additions 12.3 27.6 20.9 19.2 27.4
Payments, sales and
reductions (8.5) (10.0) (18.9) (22.1) (15.0)
Charge-offs (4.7) (2.7) (4.8) (6.6) (7.1)
Reinstatements to accrual
status (10.3) (0.8) (5.5) (4.1) (2.7)
Transfers to foreclosed
properties (0.8) (0.7) (6.2) (2.5) (1.0)
Net increase (decrease) (3.3) 13.4 (14.5) (12.1) 9.7
Ending balance $ 73.0 $ 76.3 $ 62.9 $ 77.4 $ 89.5
TABLE 9 FORECLOSED PROPERTIES-QUARTERLY ACTIVITY
In millions
Three Months Ended
1995 1994
Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
Beginning balance $18.6 $23.6 $25.0 $24.5 $ 17.0
Acquisition additions - net 6.7 -- -- 6.1 15.8
Other additions 2.0 1.5 7.4 2.7 3.8
Market write-downs -- (0.2) (0.1) (0.2) --
Reductions (6.1) (6.3) (7.7) (8.1) (13.4)
Provision for losses 0.5 -- (1.0) -- 1.3
Net increase (decrease) 3.1 (5.0) (1.4) .5 7.5
Ending balance $21.7 $18.6 $23.6 $25.0 $ 24.5
25
<PAGE>
TABLE 10 SUMMARY OF NONINTEREST INCOME AND EXPENSE
In thousands
Fourth
First Quarter Quarter
NONINTEREST INCOME 1995 1994 1994
Service charges on deposit accounts $ 21,591 $ 20,779 $ 20,316
Trust and investment advisory 13,538 15,003 12,921
Bank card-related 11,058 7,728 12,233
Mortgage servicing 4,442 4,799 4,238
Mortgage origination - net (45) 4,047 1,387
Trading account activities 624 94 624
Commissions on letters of credit 1,274 1,398 1,511
Gain on sale of mortgage servicing rights 5,900 3,102 4,600
Miscellaneous 8,692 8,223 8,474
Securities losses (2,410) (1,718) (9,021)
Total noninterest income $ 64,664 $ 63,455 $ 57,283
NONINTEREST EXPENSE
Salaries $ 61,196 $ 59,190 $ 61,137
Benefits 15,120 15,607 14,023
Total personnel 76,316 74,797 75,160
Occupancy - net 10,960 10,794 10,278
Equipment 7,012 5,928 6,972
Communications 7,214 6,011 6,717
Stationery, printing and supplies 2,106 1,844 2,121
Professional fees and services 3,375 2,489 4,269
Loan expense 1,843 2,748 2,219
FDIC premiums 6,369 5,885 6,491
Advertising and marketing 4,360 3,858 5,226
Transportation 1,491 1,428 1,493
Outside data services 5,008 4,460 4,946
Amortization of purchased intangibles 4,081 4,829 959
Miscellaneous 9,246 8,930 11,109
Subtotal 139,381 134,001 137,960
Foreclosed properties (1,549) 9 (1,099)
Total noninterest expense $137,832 $134,010 $136,861
TABLE 11 DEBT RATINGS
(AS OF APRIL 28, 1995)
Standard Thomson
Security Moody's & Poor's Bankwatch
8 3/4% Subordinated Notes due 2004 Baa1 BBB+ BBB+
8 1/4% Subordinated Notes due 2002 Baa1 BBB+ BBB+
8 5/8% Subordinated Notes due 1998 Baa1 BBB+ BBB+
Commercial Paper P-2 Not rated TBW-1
Crestar Bank Deposit Notes:
Long-Term A2 A Not rated
Short-Term P-1 A-1 TBW-1
26
<PAGE>
TABLE 12 INTEREST SENSITIVITY ANALYSIS
March 31, 1995
In millions
<TABLE>
Maturity/Rate Sensitivity
within 2-3 4-6 7-12 over
USES OF FUNDS one month months months months one year Total
<S> <C> <C> <C> <C> <C> <C>
Loans:
Commercial $ 2,264.0 $ 51.2 $ 68.4 $ 63.2 $ 620.7 $ 3,067.5
Real estate - income property 378.5 25.3 28.9 40.2 342.4 815.3
Real estate - construction 142.6 .6 3.1 5.1 32.4 183.8
Instalment 441.3 79.8 583.7 190.2 653.4 1,948.4
Bank card 409.7 41.9 84.7 179.6 825.0 1,540.9
Real estate - mortgage 122.6 109.2 262.4 761.5 941.3 2,197.0
Securities held to maturity 30.0 40.5 35.9 81.8 687.5 875.7
Securities available for sale 269.3 67.6 69.6 65.5 941.8 1,413.8
Money market investments 655.0 -- -- -- -- 655.0
Mortgage loans held for sale 220.5 -- -- -- -- 220.5
Total earning assets 4,933.5 416.1 1,136.7 1,387.1 5,044.5 12,917.9
Interest sensitivity hedges on assets (850.0) (351.1) 177.2 97.0 926.9 --
Total uses $ 4,083.5 $ 65.0 $ 1,313.9 $ 1,484.1 $5,971.4 $12,917.9
SOURCES OF FUNDS
Interest checking deposits $ 1,891.0 $ -- $ -- $ -- $ -- $ 1,891.0
Money market deposit accounts 2,451.0 -- -- -- -- 2,451.0
Regular savings deposits 1,354.5 -- -- -- -- 1,354.5
Domestic time deposits 388.8 388.6 559.6 913.4 952.2 3,202.6
Certificates of deposit $100,000
and over 25.5 16.1 13.9 10.0 5.8 71.3
Short-term borrowings 1,540.4 .1 -- -- -- 1,540.5
Long-term debt .1 .3 5.3 .6 379.5 385.8
Total interest-bearing liabilities 7,651.3 405.1 578.8 924.0 1,337.5 10,896.7
Other sources - net 759.8 -- -- -- 1,261.4 2,021.2
Total sources $ 8,411.1 $ 405.1 $ 578.8 $ 924.0 $2,598.9 $12,917.9
Cumulative maturity/
rate sensitivity gap $ (4,327.6) $ (4,667.7) $ (3,932.6) $ (3,372.5) $ -- $ --
ADJUSTMENTS
Beta adjustments:
Interest checking (beta factor .18) $ 1,550.6
Money market accounts
(beta factor .55) 1,102.9
Regular savings (beta factor .12) 1,192.0
Cumulative adjusted maturity/
rate sensitivity gap $ (482.1) $ (822.2) $ (87.1) $ 473.0 $ -- $ --
</TABLE>
27
<PAGE>
TABLE 13 OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS(1)
March 31, 1995
Dollars in thousands
<TABLE>
Weighted Average
Average Fixed Estimated
Notional Expected Receive Fair
Balance Maturity Rate Value Comments
<S> <C> <C> <C> <C> <C>
ASSET RATE CONVERSIONS
Generic interest rate swaps $ 300,000 2.6 yrs. 5.85% Convert floating rate
Unrealized gross gains $ -- loans to fixed rate.
Unrealized gross losses (11,040)
Net unrealized loss (11,040)
Amortizing interest rate swaps 858,519 2.0 yrs. 5.25% Convert floating rate
Unrealized gross gains 39 loans to fixed rate.
Unrealized gross losses (38,420)
Net unrealized loss (38,381)
Interest rate caps 245,000 2.1 yrs. 7.49%(2) Minimize interest rate
Unrealized gross gains 389 risk associated with
Unrealized gross losses (198) rising rates on floating
Net unrealized gain 191 rate deposits. Tied to
London Interbank
Offered Rate (LIBOR).
Interest rate floors 250,000 3.0 yrs. 6.80%(3) Minimize interest rate
Unrealized gross gains 997 risk associated with
Unrealized gross losses (110) falling rates on floating
Net unrealized gain 887 rate loans. Tied to
London Interbank
Offered Rate (LIBOR).
HEDGES OF LENDING COMMITMENTS
Forward contracts 305,374 .1 yrs. n/a Hedges of residential
Unrealized gross gains 548 mortgage lending
Unrealized gross losses (1,654) commitments.
Net unrealized loss (1,106)
Total hedges against
interest rate risk $1,958,893 $ (49,449)
</TABLE>
(1) Includes only off-balance sheet derivative financial instruments
related to interest rate risk management activities.
(2) Represents average strike rate. For interest rate caps purchased,
Crestar will receive interest if a specified market index interest
rate rises above a fixed strike rate during the term of the
contract. Any interest received is based on the difference between a
higher index interest rate and the contractual cap rate, applied to
the underlying notional balance. No interest payments are received
if the index rate remains below the cap rate.
(3) Represents average strike rate. For interest rate floors purchased,
Crestar will receive interest if a specified market index interest
rate falls below a fixed strike rate during the term of the
contract. Any interest received is based on the difference between a
lower index interest rate and the contractual floor rate, applied to
the underlying notional balance. No interest payments are received
if the index rate remains above the floor rate.
n/a - Not applicable.
28
<PAGE>
TABLE 14 OFF-BALANCE SHEET DERIVATIVES-EXPECTED MATURITIES(1)
<TABLE>
March 31, 1995
Dollars in thousands Within One to Three to
One Year Three Years Five Years Total
<S> <C> <C> <C> <C>
ASSET RATE CONVERSIONS
Generic interest rate swaps:
Notional amount $100,000 $ -- $ 200,000 $ 300,000
Average fixed receive rate 6.32% -- 5.61% 5.85%
Estimated fair value $ (310) $ -- $ (10,730) $ (11,040)
Amortizing interest rate swaps:
Notional amount $ 4,416 $ 754,103 $ 100,000 $ 858,519
Average fixed receive rate 8.48% 5.12% 6.10% 5.25%
Estimated fair value $ 15 $ (32,736) $ (5,660) $ (38,381)
Interest rate caps:
Notional amount $ 5,000 $ 230,000 $ 10,000 $ 245,000
Average strike rate 5.00% 7.60% 6.25% 7.49%
Estimated fair value $ 38 $ 148 $ 5 $ 191
Interest rate floors:
Notional amount $ -- $ 150,000 $ 100,000 $ 250,000
Average strike rate -- 7.17% 6.25% 6.80%
Estimated fair value $ -- $ 750 $ 137 $ 887
HEDGES OF LENDING COMMITMENTS
Forward contracts:(2)
Notional amount $305,374 $ -- $ -- $ 305,374
Estimated fair value (1,106) -- -- (1,106)
Total hedges against
interest rate risk:
Notional amount $414,790 $1,134,103 $ 410,000 $1,958,893
Estimated fair value (1,363) (31,838) (16,248) (49,449)
</TABLE>
(1) Includes only off-balance sheet derivative financial instruments
related to interest rate risk management activities.
(2) Hedges of residential mortgage lending commitments.
TABLE 15 OFF-BALANCE SHEET DERIVATIVES ACTIVITY(1)
<TABLE>
In thousands Asset Rate Conversions Liability Rate
Interest Rate Swaps Conversions Hedges of
Generic Amortizing Interest Interest Lending
Receive Receive Rate Rate Commit-
Fixed Fixed Floors Caps ments(2) Total
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $ 600,000 $860,166 $ 200,000 $ -- $ 266,439 $1,926,605
Additions from acquisitions -- -- -- 45,000 -- 45,000
Other additions -- -- 250,000 200,000 381,860 831,860
Maturities/Amortizations (300,000) (1,647) (200,000) -- (342,925) (844,572)
Balance, March 31, 1995 $ 300,000 $858,519 $ 250,000 $245,000 $ 305,374 $1,958,893
</TABLE>
(1) Includes only off-balance sheet derivative financial instruments
related to interest rate risk management activities.
(2) Forward contracts hedging residential mortgage lending commitments;
maturities represent contracts delivered.
29
<PAGE>
TABLE 16 SELECTED QUARTERLY FINANCIAL INFORMATION
Dollars in thousands, except per share data
<TABLE>
1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
Results of operations: 1995 1994 1994 1994 1994
<S> <C> <C> <C> <C> <C>
Net interest income(1) $154,460 $149,689 $152,020 $147,667 $143,367
Provision for loan losses 10,100 2,700 8,100 8,850 10,032
Net credit income 144,360 146,989 143,920 138,817 133,335
Securities gains (losses) (2,410) (9,021) 12 (49) (1,718)
Other noninterest income 67,074 66,304 65,377 68,192 65,173
Net credit and noninterest income 209,024 204,272 209,309 206,960 196,790
Noninterest expense 137,832 136,861 140,104 140,733 134,010
Income before taxes 71,192 67,411 69,205 66,227 62,780
Tax-equivalent adjustment 2,776 2,746 2,742 2,738 2,701
Book tax expense 23,330 22,280 22,859 20,881 19,597
Income tax expense 26,106 25,026 25,601 23,619 22,298
Net Income $ 45,086 $ 42,385 $ 43,604 $ 42,608 $ 40,482
Per common share:
Net income $ 1.18 $ 1.13 $ 1.15 $ 1.12 $ 1.07
Dividends declared .40 .40 .40 .40 .33
Average shares outstanding (000s) 38,097 37,637 38,063 37,930 37,835
Selected ratios and other data:
Return on average assets 1.30% 1.24% 1.26% 1.25% 1.22%
Return on average equity 15.43 15.22 15.70 15.79 14.83
Net interest margin(1) 4.92 4.81 4.82 4.76 4.78
Net charge-offs as % of average loans .52 .42 .42 .43 .53
Allowance as % of period-end loans 2.28 2.36 2.61 2.64 2.75
Overhead ratio 62.90 66.13 64.44 65.21 64.79
Average total equity to assets 8.44 8.14 8.02 7.90 8.20
Equity leverage 11.84x 12.29x 12.47x 12.66x 12.19x
Full-time equivalent employees (period end) 6,623 6,747 6,817 6,868 6,733
</TABLE>
(1) Tax-equivalent basis.
30
<PAGE>
TABLE 17 CONSOLIDATED AVERAGE BALANCES/NET INTEREST INCOME/RATES(1)
<TABLE>
Three Months Ended March 31,
1995 1994
Dollars in thousands Income/ Yield/ Income/ Yield/
Balance Expense Rate Balance Expense Rate
ASSETS $ $ % $ $ %
<S> <C> <C> <C> <C> <C> <C>
Securities held to maturity(2) 887,414 14,805 6.67 528,507 10,992 8.32
Securities available for sale(2) 1,449,623 23,607 6.60 2,948,914 40,249 5.54
Money market investments(2) 457,579 6,544 5.80 468,907 4,126 3.57
Mortgage loans held for sale(2) 191,346 3,810 7.96 467,598 7,424 6.35
Commercial 2,999,159 61,829 8.26 2,701,886 50,993 7.64
Real estate - income property 764,086 16,294 8.58 790,402 15,194 7.74
Real estate - construction 187,239 4,497 9.71 220,881 3,956 7.26
Instalment 1,891,141 42,751 9.03 1,625,825 33,892 8.34
Bank card 1,492,890 43,077 11.45 966,242 30,569 12.58
Real estate - mortgage 2,113,239 39,825 7.50 1,260,380 22,336 7.07
Total loans - net of unearned(2,3) 9,447,754 208,273 8.80 7,565,616 156,940 8.32
Allowance for loan losses (222,852) (218,583)
Loans - net 9,224,902 7,347,033
Cash and due from banks 738,970 718,741
Premises and equipment - net 325,480 308,012
Customers' liability on acceptances 9,165 13,839
Intangible assets - net 147,023 106,165
Foreclosed properties - net 21,767 23,792
Other assets 392,082 377,732
TOTAL ASSETS 13,845,351 13,309,240
TOTAL EARNING ASSETS 12,433,716 257,039 8.27 11,979,542 219,731 7.37
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Checking Deposits 1,874,912 10,453 2.26 1,817,810 9,741 2.17
Money market deposit accounts 2,432,572 22,610 3.77 2,301,992 13,749 2.42
Regular savings deposits 1,369,262 9,461 2.80 1,316,111 8,321 2.56
Domestic time deposits 3,042,769 33,379 4.50 2,886,010 29,205 4.13
Certificates of deposit $100,000 and over 68,550 857 5.08 48,376 485 4.07
Total savings and time deposits(2) 8,788,065 76,760 3.56 8,370,299 61,501 2.99
Demand deposits 2,056,184 2,014,697
Total deposits 10,844,249 10,384,996
Short-term borrowings(2) 1,261,312 17,958 5.75 1,425,708 10,613 3.02
Long-term debt(2) 368,133 7,861 8.54 203,376 4,250 8.36
Liability on acceptances 9,165 13,839
Other liabilities 193,583 189,609
Total liabilities 12,676,442 12,217,528
Total shareholders' equity 1,168,909 1,091,712
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY 13,845,351 13,309,240
Total interest-bearing liabilities 10,417,510 102,579 4.00 9,999,383 76,364 3.10
Other sources - net 2,016,206 1,980,159
TOTAL SOURCES OF FUNDS 12,433,716 102,579 3.35 11,979,542 76,364 2.59
NET INTEREST SPREAD 4.27 4.27
NET INTEREST INCOME/MARGIN 154,460 4.92 143,367 4.78
</TABLE>
31
<PAGE>
<TABLE>
Three Months Ended December 31,
1994
Income/ Yield
Balance Expense Rate
$ $ %
Dollars in thousands
ASSETS
<S> <C> <C> <C>
Securities held to maturity(2) 920,755 15,225 6.61
Securities available for sale(2) 1,765,770 27,196 6.11
Money market investments(2) 486,068 6,398 5.22
Mortgage loans held for sale(2) 258,332 5,010 7.76
Commercial 2,892,283 57,398 7.86
Real estate - income property 748,296 15,694 8.30
Real estate - construction 214,209 4,874 9.02
Instalment 1,783,039 39,114 8.69
Bank card 1,350,448 38,482 11.16
Real estate - mortgage 1,879,890 34,507 7.32
Total loans - net of unearned(2,3) 8,868,165 190,069 8.48
Allowance for loan losses (227,461)
Loans - net 8,640,704
Cash and due from banks 754,773
Premises and equipment - net 318,638
Customers' liability on acceptances 5,651
Intangible assets - net 126,832
Foreclosed properties - net 22,137
Other assets 393,280
TOTAL ASSETS 13,692,940
TOTAL EARNING ASSETS 12,299,090 243,898 7.86
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest checking deposits 1,861,152 10,544 2.25
Money market deposit accounts 2,388,715 20,193 3.35
Regular savings deposits 1,427,051 9,930 2.76
Domestic time deposits 3,016,182 31,645 4.20
Certificates of deposit $100,000 and over 68,785 810 4.68
Total savings and time deposits(2) 8,761,885 73,122 3.32
Demand deposits 2,083,474
Total deposits 10,845,359
Short-term borrowings(2) 1,228,688 14,979 4.84
Long-term debt(2) 294,644 6,108 8.29
Liability on acceptances 5,651
Other liabilities 204,354
Total liabilities 12,578,696
Total shareholders' equity 1,114,244
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY 13,692,940
Total interest-bearing liabilities 10,285,217 94,209 3.65
Other sources - net 2,013,873
TOTAL SOURCES OF FUNDS 12,299,090 94,209 3.05
NET INTEREST SPREAD 4.21
NET INTEREST INCOME/MARGIN 149,689 4.81
</TABLE>
(1) Income and yields are computed on a tax-equivalent basis using the
statutory federal income tax rate exclusive of the alternative minimum
tax and nondeductible interest expense.
(2) Indicates earning asset or interest-bearing liability.
(3) Nonaccrual loans are included in the average loan balances and
income on such loans is recognized on a cash basis.
32
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Crestar Financial Corporation
Registrant
Date May 15, 1995 /s/ James D. Barr
James D. Barr
Executive Vice President,
Controller and Treasurer
33
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