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
<PAGE>
Crestar Financial Corporation And Subsidiaries
Form 10-Q
For The Quarter Ended June 30, 1998
Part I. Financial Information
<TABLE>
<S> <C>
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:
</TABLE>
There were no reports on Form 8-K filed during the three months ended June 30,
1998.
2
<PAGE>
Consolidated Balance Sheets
Crestar Financial Corporation And Subsidiaries
<TABLE>
<CAPTION>
Dollars in thousands, except share data June 30,
---------------------- December 31,
1998 1997 1997
<S> <C>
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
===========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
Consolidated Statements Of Income
Crestar Financial Corporation And Subsidiaries
<TABLE>
<CAPTION>
In thousands, except per share data Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
<S> <C>
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
===========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
Consolidated Statements Of Changes In Shareholders' Equity
Crestar Financial Corporation And Subsidiaries
For the three months ended June 30, 1998 and 1997
In thousands
<TABLE>
<CAPTION>
Capital Accumulated
Shares of Surplus and Other
Common Common Retained Comprehensive
Stock Stock Earnings Income Total
<S> <C>
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
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
Consolidated Statements Of Changes In Shareholders' Equity
Crestar Financial Corporation And Subsidiaries
For the six months ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
In thousands Capital Accumulated
Shares of Surplus and Other
Common Common Retained Comprehensive
Stock Stock Earnings Income Total
<S> <C>
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
===========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
Consolidated Statements Of Cash Flows
Crestar Financial Corporation And Subsidiaries
<TABLE>
<CAPTION>
In thousands Six Months Ended June 30,
----------------------------
1998 1997
<S> <C>
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
===========================================================================================================
</TABLE>
Cash and cash equivalents consist of cash and due from banks; see accompanying
notes to consolidated financial statements.
7
<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
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:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
In thousands 1998 1997
----------------------- -----------------------
Amortized Market Amortized Market
Cost Value Cost Value
<S> <C>
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
==========================================================================================================
</TABLE>
8
<PAGE>
(3) Securities Available For Sale
The amortized cost and estimated market values (carrying values) of securities
available for sale at June 30 follow:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
In thousands 1998 1997
----------------------- -----------------------
Amortized Market Amortized Market
Cost Value Cost Value
<S> <C>
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
==========================================================================================================
</TABLE>
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
<PAGE>
(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:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
In thousands Three Months Six Months
---------------------- ----------------------
1998 1997 1998 1997
<S> <C>
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
===========================================================================================================
</TABLE>
(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:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
In thousands Three Months Six Months
-------------------- ---------------------
1998 1997 1998 1997
<S> <C>
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
===========================================================================================================
</TABLE>
10
<PAGE>
(8) Short-Term Borrowings
Short-term borrowings, exclusive of deposits, with maturities of less than one
year at June 30 were:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
In thousands 1998 1997
<S> <C>
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
===========================================================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
In thousands 1998 1997
<S> <C>
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
==========================================================================================================
</TABLE>
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
<PAGE>
(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:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
In thousands Three Months Six Months
--------------------- ----------------------
1998 1997 1998 1997
<S> <C>
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
===========================================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
In thousands Three Months Six Months
--------------------------------- ---------------------------------
1998 1997 1998 1997
-------------- --------------- -------------- --------------
Amount % Amount % Amount % Amount %
<S> <C>
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
===========================================================================================================
</TABLE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
Table 1 Financial Highlights
<TABLE>
<CAPTION>
Dollars in millions, except per share data Three Months Six Months
-------------------------- ---------------------------
% %
For the Period Ended June 30 1998 1997 Change 1998 1997 Change
<S> <C>
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>
Table 2 Changes In Diluted Earnings Per Share
<TABLE>
<CAPTION>
2nd Qtr. 1998 2nd Qtr. 1998
vs. vs.
2nd Qtr. 1997 1st Qtr. 1998
<S> <C>
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
============================================================================================================
</TABLE>
25
<PAGE>
Table 3 Average Balances, Net Interest Income And Rate/Volume Analysis(1)
Dollars in thousands
<TABLE>
<CAPTION>
2nd Qtr.
- --------------------------- 1st Qtr.
Average Balance Average
- --------------------------- Increase Balance
1998 1997 (Decrease) 1998
---- ---- ---------- -------
$ $ % $
<S> <C>
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
==========================================================================================================
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
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
---- ---- ---------- ------- ------ -------- -------- ------- ------
$ $ $ $ $ $ $ $ $
<S> <C>
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
=========================================================================================================
</TABLE>
(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
<PAGE>
Table 4 Allowance For Loan Losses
<TABLE>
<CAPTION>
Dollars in thousands Second Quarter Six Months Ended June 30,
--------------------- -------------------------
1998 1997 1998 1997
<S> <C>
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>
Table 5 Nonperforming Assets(1) And Past Due Loans
<TABLE>
<CAPTION>
Dollars in thousands June 30,
------------------------- December 31,
1998 1997 1997
<S> <C>
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
===========================================================================================================
</TABLE>
(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
<PAGE>
Table 6 Noninterest Income And Expense
<TABLE>
<CAPTION>
In thousands Six Months Ended
Second Quarter First June 30,
-------------------- Quarter -------------------
1998 1997 1998 1998 1997
<S> <C>
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>
Table 7 Debt And Other Security Ratings
(as of July 31, 1998)
<TABLE>
<CAPTION>
Standard Thomson
Security Moody's & Poor's BankWatch
<S> <C>
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
===============================================================================
</TABLE>
29
<PAGE>
Table 8 Off-Balance Sheet Derivative Financial Instruments(1)
<TABLE>
<CAPTION>
June 30, 1998 Average
Weighted Fixed Estimated
Dollars in thousands Notional Average Receive Fair
Balance Maturity Rate Value Comments
<S> <C>
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
======================================================================================================================
</TABLE>
(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
<PAGE>
Table 9 Off-Balance Sheet Derivatives--Expected Maturities(1)
<TABLE>
<CAPTION>
June 30, 1998
Dollars in thousands Within One to Three to Over
One Year Three Years Five Years Five Years Total
<S> <C>
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
==========================================================================================================
</TABLE>
(1) Includes only off-balance sheet derivative financial instruments related
to interest rate risk management activities.
(2) Hedges of residential mortgage lending commitments.
31
<PAGE>
Table 10 Off-Balance Sheet Derivatives Activity-Notional Balances(1)
In thousands
<TABLE>
<CAPTION>
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
<S> <C>
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
===========================================================================================================
</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.
32
<PAGE>
Table 11 Selected Quarterly Financial Information
Dollars in thousands, except per share data
<TABLE>
<CAPTION>
2nd Qtr. 1st Qtr. 4th Qtr.(3) 3rd Qtr.(2) 2nd Qtr.
Results of operations: 1998 1998 1997 1997 1997
<S> <C>
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
===========================================================================================================================
</TABLE>
(1) Tax-equivalent basis.
33
<PAGE>
Table 12 Consolidated Average Balances/Net Interest Income/Rates(1)
<TABLE>
<CAPTION>
Three Months Ended June 30,
--------------------------------------------------------------
1998 1997
----------------------------- ---------------------------
Dollars in thousands Income/ Yield/ Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ------ ------- ------- ------
Assets $ $ % $ $ %
<S> <C>
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
==========================================================================================================
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
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 $ $ % $ $ % $ $ %
<S> <C>
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
===================================================================================================================================
</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.
35
<PAGE>
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
<TABLE>
<S> <C>
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.
</TABLE>
"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
<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 August 12, 1998 /s/ James D. Barr
----------------- ------------------------------------------
James D. Barr
Executive Vice President,
Controller and Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 939,382
<INT-BEARING-DEPOSITS> 14,104,151
<FED-FUNDS-SOLD> 752,700
<TRADING-ASSETS> 13,351
<INVESTMENTS-HELD-FOR-SALE> 4,210,810
<INVESTMENTS-CARRYING> 578,813
<INVESTMENTS-MARKET> 584,660
<LOANS> 15,950,911
<ALLOWANCE> 246,017
<TOTAL-ASSETS> 26,161,173
<DEPOSITS> 17,870,181
<SHORT-TERM> 4,639,407
<LIABILITIES-OTHER> 498,281
<LONG-TERM> 947,704
0
0
<COMMON> 561,099
<OTHER-SE> 1,644,501
<TOTAL-LIABILITIES-AND-EQUITY> 26,161,173
<INTEREST-LOAN> 661,392
<INTEREST-INVEST> 148,557
<INTEREST-OTHER> 61,325
<INTEREST-TOTAL> 871,274
<INTEREST-DEPOSIT> 258,791
<INTEREST-EXPENSE> 410,880
<INTEREST-INCOME-NET> 460,394
<LOAN-LOSSES> 44,907
<SECURITIES-GAINS> 5,155
<EXPENSE-OTHER> 372,666
<INCOME-PRETAX> 267,994
<INCOME-PRE-EXTRAORDINARY> 172,301
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 172,301
<EPS-PRIMARY> 1.54<F1>
<EPS-DILUTED> 1.52<F2>
<YIELD-ACTUAL> 4.13
<LOANS-NON> 59,329
<LOANS-PAST> 51,811
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 81,000
<ALLOWANCE-OPEN> 281,394
<CHARGE-OFFS> 58,766
<RECOVERIES> 11,925
<ALLOWANCE-CLOSE> 246,017
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Basic EPS per Statement of Financial Accounting Standards No. 128
<F2>Diluted EPS per Statement of Financial Accounting Standards No. 128
</FN>
</TABLE>
