United States Securities And Exchange Commission
Washington, DC 20549
Form 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarter Ended March 31, 1998
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-7083 .
Crestar Financial Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 54-0722175
- ------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
919 E. Main Street, P.O. Box 26665, Richmond, Virginia 23261-6665
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(804)782-5000
- ------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X . No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 1998
- ------------------------------------------ ----------------------------------
Common Stock, $5 par value 112,111,670
1
<PAGE>
Crestar Financial Corporation And Subsidiaries
Form 10-Q
For The Quarter Ended March 31, 1998
Part I. Financial Information
Item 1. Financial Statements:
<TABLE>
<CAPTION>
Page
<S> <C>
Consolidated Balance Sheets 3
Consolidated Statements Of Income 4
Consolidated Statements Of Cash Flows 5
Consolidated Statements Of Changes In Shareholders' Equity 6
Notes To Consolidated Financial Statements 7-12
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations:
Financial Commentary 13-32
Part II. Other Information
Item 6. Exhibits And Reports On Form 8-K:
There was one report on Form 8-K filed during the three
months ended March 31, 1998. The Form 8-K was filed on January 30,
1998 in order to file as exhibits, with the Securities and Exchange
Commission, the underwriting agreement and other information relating
to Crestar Financial Corporation's issuance of $150 million in
6 1/2% subordinated notes, due on January 15, 2018.
</TABLE>
2
<PAGE>
Consolidated Balance Sheets
Crestar Financial Corporation And Subsidiaries
<TABLE>
<CAPTION>
Dollars in thousands, except share data March 31,
December 31,
Assets 1998 1997 1997
<S> <C>
Cash and due from banks $ 974,866 $ 938,417 $ 1,175,314
Securities held to maturity (note 2) 604,415 818,199 626,716
Securities available for sale (note 3) 4,492,665 3,918,514 3,839,006
Money market investments (note 4) 1,052,792 578,664 1,431,790
Mortgage loans held for sale 1,479,077 543,177 964,697
Loans (note 5):
Business Loans:
Commercial 4,787,852 4,021,873 4,666,505
Real estate - income property 1,196,235 1,267,867 1,254,079
Real estate - construction 386,921 328,856 381,413
Consumer Loans:
Instalment 5,218,940 4,092,264 4,846,857
Bank card 1,120,479 1,259,193 1,153,937
Real estate - mortgage 3,435,504 3,244,002 3,374,199
- ---------------------------------------------------------------------------------------------------------------------------
Total Loans 16,145,931 14,214,055 15,676,990
Less: Allowance for loan losses (note 6) (280,969) (268,870) (281,394)
- ---------------------------------------------------------------------------------------------------------------------------
Loans - net 15,864,962 13,945,185 15,395,596
Premises and equipment - net 487,947 440,667 486,111
Intangible assets - net 191,648 176,366 197,420
Foreclosed properties - net (notes 5 and 7) 20,542 25,140 25,731
Other assets 912,564 598,403 786,135
- ---------------------------------------------------------------------------------------------------------------------------
Total Assets $26,081,478 $21,982,732 $24,928,516
===========================================================================================================================
Liabilities
Demand deposits $ 3,583,630 $ 3,256,506 $ 3,540,340
Interest-bearing demand deposits 6,729,016 5,924,437 6,257,114
Regular savings deposits 1,438,185 1,597,757 1,448,589
Domestic time deposits 4,004,661 4,354,406 4,191,151
Certificates of deposit $100,000 and over 1,257,624 682,318 932,058
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits 17,013,116 15,815,424 16,369,252
Short-term borrowings (note 8) 5,439,901 3,002,574 4,789,045
Other liabilities 535,444 496,791 879,073
Long-term debt (note 9) 962,834 850,596 831,383
- ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities 23,951,295 20,165,385 22,868,753
Shareholders' Equity
Preferred stock. Authorized 2,000,000 shares; none issued - - -
Common stock, $5 par value. Authorized 200,000,000 shares;
outstanding 111,938,056 and 110,299,785 at March 31,1998
and 1997, respectively; 111,420,187 at December 31, 1997 559,690 551,499 557,101
Capital surplus 362,870 252,892 340,623
Retained earnings 1,210,416 1,070,523 1,162,767
Accumulated other comprehensive income (note 3) (2,793) (57,567) (728)
- ---------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 2,130,183 1,817,347 2,059,763
Commitments and contingencies (note 11)
- ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities And Shareholders' Equity $26,081,478 $21,982,732 $24,928,516
===========================================================================================================================
</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 March 31,
Income From Earning Assets 1998 1997
<S> <C>
Interest and fees on loans $324,339 $295,546
Interest on securities held to maturity 8,955 13,092
Interest and dividends on securities available for sale 62,411 63,849
Income on money market investments 9,032 4,664
Interest on mortgage loans held for sale 20,571 11,640
- ---------------------------------------------------------------------------------------------------------------------------
Total income from earning assets 425,308 388,791
Interest Expense
Interest-bearing demand deposits 50,296 41,814
Regular savings deposits 8,126 9,964
Domestic time deposits 50,501 55,063
Certificates of deposit $100,000 and over 16,974 6,878
- ---------------------------------------------------------------------------------------------------------------------------
Total interest on deposits 125,897 113,719
Short-term borrowings 55,328 39,797
Long-term debt 17,123 15,615
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense 198,348 169,131
Net Interest Income 226,960 219,660
Provision for loan losses (note 6) 23,096 29,698
- ---------------------------------------------------------------------------------------------------------------------------
Net Credit Income 203,864 189,962
- ---------------------------------------------------------------------------------------------------------------------------
Noninterest Income
Service charges on deposit accounts 33,067 30,163
Trust and investment advisory income 20,119 17,453
Bank card-related income 8,810 12,648
Other income 44,054 39,139
Gains from sale of securities 2,613 4,064
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest income 108,663 103,467
Net Credit And Noninterest Income 312,527 293,429
Noninterest Expense
Personnel expense 100,855 99,342
Occupancy expense - net 13,154 16,158
Equipment expense 10,802 9,819
Other expense 56,175 54,686
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 180,986 180,005
Income Before Income Taxes 131,541 113,424
Income tax expense (note 10) 46,668 41,644
- ---------------------------------------------------------------------------------------------------------------------------
Net Income $ 84,873 $ 71,780
===========================================================================================================================
Earnings Per Share
Basic $ .76 $ .65
Diluted .75 .64
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
Consolidated Statements Of Cash Flows
Crestar Financial Corporation And Subsidiaries
<TABLE>
<CAPTION>
In thousands Three Months Ended March 31,
--------------------------------
1998 1997
<S><C>
Operating Net Income $ 84,873 $ 71,780
Activities Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Provisions for loan losses, foreclosed properties and
other losses 23,096 29,698
Depreciation and amortization of premises and equipment 12,052 10,896
Amortization of intangible assets 4,793 4,227
Deferred income tax expense (benefit) 8,693 (1,408)
Net gain on sales of securities, loans and other assets (8,470) (17,026)
Origination and purchase of loans held for sale (1,994,817) (784,068)
Proceeds from sales of loans held for sale 1,480,437 899,729
Net decrease in accrued interest receivable,
prepaid expenses and other assets 57,304 56,081
Net increase in accrued interest payable, accrued
expenses and other liabilities 56,065 22,624
Other, net 5,270 6,818
------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities (270,704) 299,351
- --------------------------------------------------------------------------------------------------------------
Investing Proceeds from maturities and calls of securities held to maturity 30,396 154,961
Activities Proceeds from maturities and calls of securities available for sale 170,948 106,655
Proceeds from sales of securities available for sale 1,141,096 1,496,848
Purchases of securities held to maturity (8,275) (3,679)
Purchases of securities available for sale (2,543,542) (1,149,597)
Net increase in money market investments 382,392 160,726
Principal collected on non-bank subsidiary loans 20,982 50,193
Loans originated by non-bank subsidiaries (26,473) (51,362)
Proceeds from sales of loans 146,422 -
Net increase in other loans (96,030) (220,587)
Purchases of premises and equipment (13,262) (17,051)
Proceeds from sales of foreclosed properties and mortgage
servicing rights 16,432 17,531
Purchases of loans and loan portfolios (538,039) -
Proceeds from sales of premises - 6,625
Other, net (24,334) (3,467)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (1,341,287) 547,796
- ---------------------------------------------------------------------------------------------------------------------------
Financing Net increase (decrease) in demand, interest-bearing demand
Activities and regular savings deposits 504,788 (108,519)
Net increase in certificates of deposit 139,076 252,733
Net increase (decrease) in short-term borrowings 650,856 (1,113,477)
Proceeds from issuance of long-term debt 152,695 -
Principal payments on long-term debt (21,268) (8,765)
Cash dividends paid (32,312) (29,665)
Common stock purchased and retired (5,412) (29,739)
Proceeds from the issuance of common stock 23,236 23,830
Other, net (116) (164)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 1,411,543 (1,013,766)
- ---------------------------------------------------------------------------------------------------------------------------
Cash And Decrease in cash and cash equivalents (200,448) (166,619)
Cash Cash and cash equivalents at beginning of year 1,175,314 1,105,036
- ---------------------------------------------------------------------------------------------------------------------------
Equivalents Cash and cash equivalents at end of quarter $ 974,866 $ 938,417
===========================================================================================================================
</TABLE>
Cash and cash equivalents consist of cash and due from banks; see accompanying
notes to consolidated financial statements.
5
<PAGE>
Consolidated Statements Of Changes In Shareholders' Equity
Crestar Financial Corporation And Subsidiaries
<TABLE>
<CAPTION>
Dollars in thousands Capital Accumulated
Shares of Surplus and Other
Common Common Retained Comprehensive
Stock Stock Earnings Income Total
<S><C>
Balance, January 1, 1998 111,420,187 $557,101 $1,503,390 $ (728) $2,059,763
Comprehensive Income:
Net Income - - 84,873 - 84,873
Net unrealized loss on securities
available for sale, net of
reclassification adjustment (note 3) - - - (2,065) (2,065)
- ---------------------------------------------------------------------------------------------------------------------------
Comprehensive Income - - 84,873 (2,065) 82,808
Cash dividends declared on
common stock - - (32,312) - (32,312)
Common stock purchased and retired (100,000) (500) (4,912) - (5,412)
Common stock issued:
For dividend reinvestment plan 153,278 766 7,296 - 8,062
For thrift and profit sharing plan 207,939 1,040 10,283 - 11,323
For other stock compensation plans 2,604 13 88 - 101
Upon exercise of stock options
(including tax benefit of $1,999) 254,048 1,270 4,580 - 5,850
- ---------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1998 111,938,056 $559,690 $1,573,286 $(2,793) $2,130,183
===========================================================================================================================
Balance, January 1, 1997 109,869,886 $549,350 $1,251,444 $(21,284) $1,779,510
Comprehensive Income:
Net Income - - 71,780 - 71,780
Net unrealized loss on securities
available for sale, net of
reclassification adjustment (note 3) - - - (36,283) (36,283)
- ---------------------------------------------------------------------------------------------------------------------------
Comprehensive Income - - 71,780 (36,283) 35,497
Cash dividends declared on
common stock - - - - -
Common stock purchased and retired (823,566) (4,118) (25,621) - (29,739)
Cash paid in lieu of fractional shares (4,736) (24) (140) - (164)
Common stock issued:
For dividend reinvestment plan 169,730 849 5,110 - 5,959
For thrift and profit sharing plan 181,919 910 5,647 - 6,557
For other stock compensation plans 53,679 268 1,578 - 1,846
Upon exercise of stock options
(including tax benefit of $6,567) 852,873 4,264 13,617 - 17,881
- ---------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1997 110,299,785 $551,499 $1,323,415 $(57,567) $1,817,347
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
Notes To Consolidated Financial Statements
Crestar Financial Corporation And Subsidiaries
(1) General
The consolidated financial statements conform to generally accepted accounting
principles and to general practices within the banking industry. The
accompanying interim statements are unaudited; however, in the opinion of
management, all adjustments necessary for a fair presentation of the
consolidated financial statements, including adjustments related to completed
business combinations, have been included. All adjustments are of a normal
nature. Certain reclassifications have been made to the prior years'
consolidated financial statements to conform to the 1998 presentation. The notes
included herein should be read in conjunction with the notes to the consolidated
financial statements included in the Corporation's 1997 Annual Report and Form
10-K.
On January 1, 1998, Crestar adopted the provisions of Statement of Financial
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS
130 requires the disclosure of an amount that represents total comprehensive
income, and the related components, in a consolidated financial statement.
Balances and components of Crestar's comprehensive income for the three months
ended March 31, 1998 and 1997 are disclosed in Crestar's Consolidated Statements
of Changes in Shareholders' Equity. The adoption of SFAS 130 had no impact on
the Corporation's financial position or results of operations.
Intangible assets consisted of goodwill and deposit based intangibles, having
a combined balance of $191.2 million and $176.0 million at March 31, 1998 and
1997, respectively, and favorable lease rights of $358,000 and $413,000,
respectively.
Capitalized mortgage servicing rights of $74.2 million and $48.3 at March 31,
1998 and 1997, respectively, were included in other assets in the consolidated
financial statements. Mortgage servicing rights of approximately $24 million and
$4 million were capitalized during the first three months of 1998 and 1997,
respectively. At March 31, 1998 and 1997, mortgage servicing rights were net of
a related valuation allowance of $538,000. The activity in such valuation
allowance was not material to the consolidated financial statements for the
three months ended March 31, 1998 and 1997. The fair value of capitalized
mortgage servicing rights was approximately $90 million at March 31, 1998.
Amortization of capitalized mortgage servicing rights was approximately $5
million and $3 million in the first three months of 1998 and 1997, respectively.
During the first three months of 1998 and 1997, Crestar capitalized interest
of $1.2 million and $486,000, respectively, associated with construction in
progress.
(2) Securities Held To Maturity
The amortized cost (carrying values) and estimated market values of securities
held to maturity at March 31 follow:
<TABLE>
<CAPTION>
In thousands 1998 1997
--------------------------- -------------------------
Amortized Market Amortized Market
Cost Value Cost Value
<S><C>
U.S. Treasury and Federal agencies $196,611 $197,109 $208,155 $204,943
Mortgage-backed obligations of Federal agencies 358,703 361,868 546,421 542,480
Other taxable securities 2,840 2,836 13,075 13,052
States and political subdivisions 46,261 47,219 50,548 50,809
- ---------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity $604,415 $609,032 $818,199 $811,284
===========================================================================================================================
</TABLE>
7
<PAGE>
(3) Securities Available For Sale
The amortized cost and estimated market values (carrying values) of securities
available for sale at March 31 follow:
<TABLE>
<CAPTION>
In thousands 1998 1997
------------------------ -------------------------
Amortized Market Amortized Market
Cost Value Cost Value
<S><C>
U.S. Treasury and Federal agencies $ 195,675 $ 195,194 $ 616,634 $ 604,989
Mortgage-backed obligations of Federal agencies 3,189,258 3,181,025 2,587,259 2,515,503
Other taxable securities 906,303 909,371 579,728 573,725
Common and preferred stocks 206,193 207,075 223,857 224,297
- ---------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $4,497,429 $4,492,665 $4,007,478 $3,918,514
===========================================================================================================================
</TABLE>
The period-end net unrealized loss on securities available for sale, net of tax,
is reflected in the Consolidated Balance Sheet and the Consolidated Statement of
Changes in Shareholders' Equity as "Accumulated other comprehensive income." For
the three months ended March 31, 1998 and 1997, the net unrealized loss on
securities available for sale reflected in the Statement of Changes in
Shareholders' Equity is net of reclassification adjustments for gains from sale
of securities, net of tax, as included in net income. Gains from the sale
of securities during the first quarter of 1998 totaled $2.6 million. Net of
income tax expense of approximately $0.9 million, the gain resulted in a $1.7
million reclassification adjustment. Gains from sale of securities during the
first quarter of 1997 totaled $4.1 million. Net of income tax expense of $1.4
million, the gain resulted in a reclassification adjustment of $2.7 million for
the first quarter of 1997.
At March 31, 1998, the amortized cost and market value of Mortgage-backed
obligations of Federal agencies includes the amortized cost and market value,
respectively, of interest rate caps purchased to hedge the probable market value
decline in a rising interest rate environment. The interest rate caps, which
have a notional balance of $1.75 billion, have a cost basis of $11.0 million and
a market value of $751,000 at March 31, 1998. The cost basis of the interest
rate caps is being amortized as a reduction of interest income on securities
available for sale. Amortization of the cost basis of the interest rate caps
totaled $1.3 million during each of the three month periods ended March 31, 1998
and 1997.
(4) Money Market Investments
Money market investments at March 31 included:
<TABLE>
<CAPTION>
In thousands 1998 1997
<S><C>
Securities purchased under agreements to resell $ 800,000 $150,500
Federal funds sold 225,000 301,590
Time deposits - 100,000
U.S. Treasury 8,362 6,034
Trading account securities 10,233 1,281
Other 9,197 19,259
- ---------------------------------------------------------------------------------------------------------------------------
Total money market investments $1,052,792 $578,664
===========================================================================================================================
</TABLE>
8
<PAGE>
(5) Nonperforming Assets And Impaired Loans
Nonperforming assets at March 31 are shown below. Loans that are both (a) past
due 90 days or more and (b) not deemed nonaccrual due to an assessment of
collectibility are specifically excluded from the definition of nonperforming
assets. Such accruing loans past due 90 days or more not shown below totaled
$67.0 million and $76.0 million at March 31, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
In thousands 1998 1997
<S><C>
Nonaccrual loans $65,528 $ 75,635
Foreclosed properties - net 20,542 25,140
- --------------------------------------------------------------------------------------
Total nonperforming assets $86,070 $100,775
======================================================================================
</TABLE>
Transfers from nonperforming loans to foreclosed properties (non-cash additions)
were $1.3 million in the first three months of 1998. There were no non-cash
additions to foreclosed properties in the first three months of 1997. Included
in Crestar's non-performing loans above are certain impaired loans. Impaired
loans and their allocated valuation allowances at March 31, 1998 and 1997 were
$13.6 million with an allowance of $2.2 million and $24.8 million with an
allowance of $4.6 million, respectively. All impaired loans had an allocated
valuation allowance at March 31, 1998 and 1997. Collateral dependent loans,
which were measured at the fair value of the collateral, constituted 100% of
impaired loans at March 31, 1998. The average recorded investment in impaired
loans for the three months ended March 31, 1998 and 1997 was $13.9 million and
$27.3 million, respectively. There was no material interest income recognized on
impaired loans in the first three months of 1998 and 1997.
(6) Allowance For Loan Losses
Transactions in the allowance for loan losses for the three months ended March
31 were:
<TABLE>
<CAPTION>
In thousands Three Months
-------------------------
1998 1997
<S><C>
Beginning balance $281,394 $268,868
- --------------------------------------------------------------------------------------
Charge-offs (31,248) (37,075)
Recoveries 6,196 7,379
- --------------------------------------------------------------------------------------
Net charge-offs (25,052) (29,696)
Provision for loan losses 23,096 29,698
Allowance from acquisitions and other activity - net 1,531 -
- --------------------------------------------------------------------------------------
Net increase (decrease) (425) 2
Ending balance $280,969 $268,870
======================================================================================
</TABLE>
(7) Allowance For Foreclosed Properties
Transactions in the allowance for losses on foreclosed properties for the three
months ended March 31 were:
<TABLE>
<CAPTION>
In thousands Three Months
------------------------
1998 1997
<S><C>
Beginning balance $13,191 $18,449
- -------------------------------------------------------------------------------
Provision for foreclosed properties (1,100) -
Write-downs (7,742) (373)
- -------------------------------------------------------------------------------
Ending balance $ 4,349 $18,076
===============================================================================
</TABLE>
9
<PAGE>
(8) Short-Term Borrowings
Short-term borrowings, exclusive of deposits, with maturities of less than one
year at March 31 were:
<TABLE>
<CAPTION>
In thousands 1998 1997
<S><C>
Federal funds and term Federal funds purchased $3,509,390 $1,564,130
Securities sold under repurchase agreements 841,422 683,018
Federal Home Loan Bank borrowings 521,500 525,000
U.S. Treasury demand notes 318,138 -
Notes payable 247,788 228,297
Other 1,663 2,129
- ---------------------------------------------------------------------------------------------------------------------------
Total short-term borrowings $5,439,901 $3,002,574
===========================================================================================================================
</TABLE>
The Corporation paid $174.2 million and $143.1 million in interest on deposits
and short-term borrowings in the first three months of 1998 and 1997,
respectively.
(9) Long-Term Debt
Long-term debt at March 31 included:
<TABLE>
<CAPTION>
In thousands 1998 1997
<S><C>
4 - 8% Federal Home Loan Bank obligations payable through 2017 $264,186 $302,513
61/2% Subordinated notes due 2018 152,695 -
83/4% Subordinated notes due 2004 149,742 149,703
81/4% Subordinated notes due 2002 125,000 125,000
85/8% Subordinated notes due 1998 50,000 49,989
77/8 - 111/4% Collateralized mortgage obligation bonds maturing through 2019 11,795 14,042
81/4% Mortgage indebtedness maturing through 2009 7,774 8,372
81/8 - 143/8% Capital lease obligations maturing through 2006 1,642 977
Crestar Capital Trust I preferred stock 200,000 200,000
- ---------------------------------------------------------------------------------------------------------------------------
Total long-term debt $962,834 $850,596
===========================================================================================================================
</TABLE>
The Corporation paid $9.4 million and $9.9 million in interest on long-term debt
in the first three months of 1998 and 1997, respectively.
In the first quarter of 1998, Crestar completed the sale of $150 million of
61/2% subordinated notes due January 15, 2018, but putable or callable January
15, 2008. The put and call options embedded in the notes could require Crestar
to repurchase the notes at face value on January 15, 2008. Otherwise, the
interest rate on the notes will reset based on the terms of the underlying debt
agreement for the period remaining until final maturity on January 15, 2018. Net
of underwriting discounts, the notes resulted in net proceeds to the Corporation
of $152.7 million. Proceeds from the sale were used for general corporate
purposes, including funding for the April 15, 1998 maturity of $50 million of 8
5/8% subordinated debentures.
10
<PAGE>
(10) Income Taxes
The current and deferred components of income tax expense allocated to
continuing operations for the three months ended March 31 in the accompanying
consolidated statements of income were:
<TABLE>
<CAPTION>
In thousands Three Months
---------------------------
1998 1997
<S><C>
Current:
Federal $37,318 $39,582
State and local 657 3,470
- ----------------------------------------------------------------------------------------
Total current tax expense 37,975 43,052
Deferred:
Federal 8,021 (1,132)
State and local 672 (276)
- ----------------------------------------------------------------------------------------
Total deferred tax expense (benefit) 8,693 (1,408)
Total income tax expense $46,668 $41,644
========================================================================================
</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 ended March 31 were:
<TABLE>
<CAPTION>
In thousands Three Months
--------------------------------------
1998 1997
--------------------------------------
Amount % Amount %
<S><C>
Income before income taxes $131,541 $113,424
Tax expense at statutory rate 46,039 35.0 39,698 35.0
- -----------------------------------------------------------------------------------------------------------
Increase (decrease) in taxes resulting from:
Tax-exempt interest and dividends (2,145) (1.6) (1,702) (1.5)
Nondeductible interest expense 636 .5 429 .4
Amortization of goodwill 1,234 .9 1,045 .9
State income taxes 864 .7 2,076 1.8
Other - net 40 - 98 .1
- -----------------------------------------------------------------------------------------------------------
Total increase in taxes 629 .5 1,946 1.7
Total income tax expense $ 46,668 35.5 $41,644 36.7
===========================================================================================================
</TABLE>
The Corporation made income tax payments of $207,000 and $6.6 million during the
first three months of 1998 and 1997, respectively. At March 31, 1998, the
Corporation had a net deferred income tax asset of $115.0 million. There was no
valuation allowance relating to the net deferred income tax asset. Crestar has
sufficient taxable income in the available carryback period to realize all of
its deferred income tax assets.
11
<PAGE>
(11) Commitments And Contingencies
Legally binding, unfunded commitments to extend credit were $12.1 billion and
$9.7 billion at March 31, 1998 and 1997, respectively. Standby letters of
credit, which are conditional commitments that guarantee the performance of
customers to a third party, were $465 million at March 31, 1998.
Recourse obligations on mortgage loans serviced of $1.7 billion at March 31,
1998 included $1.1 billion which was insured by agencies of the Federal
government or private insurance companies. Recourse obligations also included
$104 million of contractual recourse liability accepted by Crestar on mortgage
loan sales to Federal agencies and $130 million on certain mortgage loan sales
to private investors. Crestar maintained an allowance of $309,000 at March 31,
1998 based on estimates of future losses on this contractual recourse liability.
For interest rate risk management purposes at March 31, 1998, Crestar was
using interest rate (fixed receive) swaps with notional balances of $1.325
billion and $250 million to convert floating rate commercial and instalment
loans, respectively, to fixed rates. Crestar was using purchased interest rate
caps with notional balances of $1.75 billion and $200 million to hedge the
market value of fixed rate securities available for sale and real estate income
property loans, respectively, and $560 million to minimize interest rate risk
associated with rising rates on floating rate money market deposits. The
carrying value and net unrealized loss on these swaps and caps were $20.4
million and $801,000, respectively, at March 31, 1998. As a financial
intermediary for customers, Crestar had $89.8 million in offsetting swap, $23.8
million in offsetting cap and $8 million in offsetting collar agreements at
March 31, 1998.
The notional amount of these over-the-counter traded interest rate swaps,
caps and collars does not fully represent Crestar's credit and market exposure,
which the Corporation believes is a combination of current replacement cost of
approximately $21.9 million, less collateral held of approximately $14.6
million, plus an amount for prospective market movement. Two counterparties
constituted 16% each and one counterparty 10% of the estimated credit and market
exposure of $58.3 million at March 31, 1998.
Crestar also had forward agreements outstanding at March 31, 1998, which are
primarily used to reduce the interest rate risk arising from changes in market
rates from the time residential mortgage lending commitments are made until
those commitments are funded. The net unrealized loss on such forward agreements
was $4.2 million at March 31, 1998.
Certain litigation is pending or threatened against Crestar. Management, in
consultation with legal counsel, is of the opinion that there is no pending or
threatened litigation that could, individually or in the aggregate, have a
material impact on the Corporation's financial condition or financial statements
beyond liabilities established for this purpose.
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Financial Commentary
Crestar Financial Corporation And
Subsidiaries
Information in the following "Financial Commentary," other than historical
information, may contain forward-looking statements that involve risks and
uncertainties, including, but not limited to, the Corporation's interest rate
risk position, credit and economic trends on both a regional and national basis,
technological change, the number and size of competitors in the Corporation's
market, changes in management's strategies, and the impact of future legal and
regulatory actions, including the establishment of federal deposit insurance
rates. It is important to note that the Corporation's actual results may differ
materially from those projected in forward-looking statements.
Overview
(Tables 1, 2 and 11)
Crestar Financial Corporation (Crestar or the Corporation) reported net income
of $84.9 million for the quarter ended March 31, 1998, an increase of $13.1
million or 18% over net income reported in the first quarter of 1997. These
increases reflect the positive effects of growth in earning assets and
noninterest income, and management of controllable expenses. Diluted earnings
per share were $.75 for the first quarter of 1998, compared to $.64 in 1997. The
predominant items affecting the change in earnings per share are given in Table
2. Each item is net of applicable federal income taxes.
Crestar's subsidiaries provide banking and non-banking services throughout
Virginia, Maryland and Washington, D.C., which compose Crestar's primary market
area. This market is characterized as economically diverse. Crestar's market
area is also characterized by active competition in all principal areas where
the Corporation provides services. In addition to banks, other firms competing
in the market area include savings associations, consumer finance companies,
national credit card companies, securities brokerage firms, insurance companies,
credit unions and mortgage banking companies.
Mergers And Acquisitions
On April 15, 1998, Crestar completed the acquisition of Executive Auto Leasing,
Inc. (Executive), a privately-held auto leasing company based in Beltsville,
Maryland. Executive, with total assets of approximately $21 million, is expected
to expand Crestar's ability to offer commercial and consumer auto leasing to
customers.
Profitability Measures And Capital Resources
(Table 1)
Crestar's increased earnings in the first quarter of 1998 resulted in
improvements in key profitability measures when compared to the same period of
1997. Return on average assets was 1.41% in the first three months of 1998, up
from the 1.33% reported for the first three months of 1997. Return on average
equity was 16.41% for the quarter ended March 31, 1998, compared to 16.06% for
the first quarter of 1997.
Average equity to assets was 8.61% for the first quarter of 1998, compared to
8.26% for the first quarter of 1997. Period-end equity to assets of 8.17% at
March 31, 1998 compared to a March 31, 1997 ratio of 8.27%.
Risk-based capital ratios are another measure of capital adequacy. At March
31, 1998, Crestar's consolidated risk-adjusted capital ratios were 10.0% for
Tier 1 and 13.1% for total capital, well above the required minimums of 4.0% and
8.0%, respectively. The Tier 1 leverage ratio of 9.0% at March 31, 1998 also was
significantly above the regulatory minimum of 3.0%. Crestar's tangible leverage
ratio, defined as total equity less all intangibles divided by total assets less
all intangibles, was 7.5% at March 31, 1998. Under Federal Deposit Insurance
Corporation (FDIC) rules, Crestar's sole subsidiary bank (Crestar Bank) was
considered "well-capitalized" as of March 31, 1998, the highest category of
capitalization defined by regulatory authorities, allowing for the lowest level
of FDIC insurance premium payments.
Crestar has filed shelf registration statements with the Securities and
Exchange Commission pertaining to the possible future issuance of securities.
Under currently effective registration statements, Crestar may issue in the
future approximately $175 million in subordinated debt securities, preferred
stock or common stock, or any combination thereof.
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Net Interest Margin And Net Interest Income
(Tables 3 and 12)
Crestar's net interest margin for the first quarter of 1998 was 4.18%,
representing a decline of 33 basis points from the net interest margin of 4.51%
recorded in the first quarter of 1997. The decline was attributable to
unfavorable changes in both the balance sheet mix of earning assets and funding
sources, and in the interest yields impacting the Corporation's earning assets.
These factors offset the impact of favorable changes in rates paid on funding
sources, in comparison to market movements in short-term funding sources, and
favorable changes in off-balance sheet hedges on the Corporation's net interest
margin.
Crestar's yield on average total loans during the first three months of 1998
decreased 21 basis points from the first quarter of 1997, to 8.45%, reflecting
lower yields on consumer loan categories. Crestar's net interest margin was
detrimentally impacted by declines in the average yield on bank card loans,
which have historically been Crestar's highest yielding loan type. Indicative of
a competitive environment, yields on bank card loans fell from 14.47% in the
first quarter of 1997 to 13.90% for the first quarter of 1998. Yields on
securities held to maturity exhibited a 16 basis point increase in yield, while
the yield on the larger securities available for sale portfolio decreased 1
basis point in the first quarter of the current year, compared to first quarter
1997 results. During the same time period, yields on money market investments
experienced increases in average rates earned, reflecting higher federal funds
rates and short-term investment rates for the current period. Yields on mortgage
loans held for sale, however, were down 94 basis points for the first quarter of
1998 versus the same period of 1997. The average rate earned on total earning
assets was down 14 basis points, to 7.84% in the first quarter of 1998, in
comparison to first quarter 1997 results.
Reflecting an environment of higher short-term interest costs, a competitive
environment for consumer deposits, and the introduction of new consumer deposit
products with rates tied to national money market yields, the average rate paid
on total interest-bearing liabilities increased by 22 basis points during this
period. Average rates paid on interest-bearing demand deposits increased from
3.00% in the first quarter of 1997 to 3.17% in the first three months of 1998.
Average rates paid on domestic time deposits edged up 5 basis points from the
first quarter of 1997, while average rates paid on regular savings deposits fell
21 basis points during the same time period. During the first quarter of 1998,
average rates paid on certificates of deposit of $100,000 and over increased by
31 basis points, to 5.72%, from the levels of first quarter 1997. Crestar's
average rate paid on total savings and time deposits rose from 3.78% in the
first quarter of 1997 to 3.89% in the first quarter of 1998. Because this
increase was less than the average increase in rates paid for short-term
borrowings for the same time period, Crestar experienced a favorable impact from
deposit funding sources on the net interest margin for the first quarter of
1998, in comparison to the net interest margin of 1997's first quarter. Average
rates paid on short-term borrowings increased by 19 basis points from the first
three months of 1997 to the same period of 1998. Interest rates paid on
long-term debt also edged upward, by 7 basis points, during the first quarter of
1998 in comparison to the same period of 1997, reflecting scheduled reductions
in lower-rate Federal Home Loan Bank obligations.
Excluding the impact of derivative instruments utilized as hedges, the change
in the Corporation's interest rate spreads had a negative impact of 18 basis
points on Crestar's first quarter 1998 net interest margin, when compared to the
first quarter of 1997. Average rates paid on funding sources increased at a
lower level than short-term interest rates, contributing to a favorable impact
of 8 basis points for the Corporation's net interest margin for the first
quarter of 1998. This was offset by unfavorable changes in yields on earning
assets during the same period, which caused an unfavorable impact of 26 basis
points on the net interest margin for the first three months of 1998, in
comparison to the same period of 1997.
Overall changes in the average balances of earning assets resulted in a
negative impact to the first quarter 1998 net interest margin of 4 basis points,
in comparison to first quarter 1997 results. Within the loan portfolio, average
balances of bank card loans fell by $208 million, or 16%, from average levels of
the first quarter of 1997. Bank card loans have exhibited declining average
balances during the past two years, as marketing efforts directed to new
accounts have been curtailed from previous levels. Also, as lower promotional
interest rates on selected bank card loans have expired, some customers have
elected to pay-off or pay-down outstanding balances. Total
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business loans exhibited a 14% increase in average balances outstanding, due to
substantial growth in commercial and real estate - construction loans. Real
estate - income property loan average balances were down 2% from the first
quarter of 1997. Consumer instalment loans increased 17% in the first quarter of
1998, or $704 million, compared to first quarter 1997 average balances,
reflecting strong marketing efforts, and some purchases of individual loan
portfolios. Consumer real estate - mortgage loans, which has historically been
Crestar's lowest yielding loan category, increased $464 million or 15% from
first quarter 1997 to first quarter 1998.
Average balances of total securities decreased by $385 million, or 8%, from
first quarter 1997 to first quarter 1998. Average balances of money market
investments increased by $290 million during the same period. Reflecting record
volumes of mortgage loan originations during the first quarter of 1998, average
balances of mortgage loans held for sale were up $570 million, or 98%, over
balances for the first quarter of 1997.
Unfavorable changes in Crestar's funding sources resulted in a negative
impact to the first quarter 1998 net interest margin of 15 basis points, in
comparison to first quarter 1997 results. Average total deposits for the first
quarter of 1998 increased by $900 million, to $16.4 billion, a 6% increase over
first quarter 1997 average balances. Average balances of domestic time deposits,
which are primarily composed of consumer certificates of deposit, decreased by
$411 million or 9% from first quarter 1997 to first quarter 1998. Regular
savings deposits also exhibited lower average balances, decreasing 11% from the
first quarter of 1997. Average balances of certificates of deposits $100,000 and
over increased by $688 million during the same time period, and represented 7%
of average total deposits during the first quarter of 1998. Demand deposits, a
noninterest bearing source of funds, exhibited an increase in average balances
of $166 million, or 5%, during the first quarter of 1998, in comparison to the
same period of 1997.
Average balances of short-term borrowings increased $1.1 billion, or 34%,
during the first quarter of 1998, in comparison to the first quarter of 1997.
Average balances of long-term debt totaled $927 million for the first three
months of 1998, representing an increase of $74 million over average balances of
the same period of 1997. Short-term borrowings and long-term debt represented
19% and 4%, respectively, of total funding sources for the first quarter of
1998.
Total off-balance sheet interest rate hedges had a positive impact on net
interest income of $785 thousand during the first quarter of 1998, which was
composed of a $596 thousand increase in interest income and a $189 thousand
decrease in interest expense, based on the underlying asset or liability being
hedged. The positive impact on the first quarter 1998 net interest margin
equated to 1 basis point. In the first quarter of 1997, the comparable impact of
hedging activity was a decrease to Crestar's total interest income of
approximately $660 thousand and an increase to interest expense of $380
thousand, resulting in a negative impact of 2 basis points to that quarter's net
interest margin. On a comparative basis, derivative instruments utilized as
hedges contributed to a 3 basis point increase to Crestar's net interest margin
in the first quarter of 1998, compared to the first quarter of 1997.
Lower levels of nonperforming assets resulted in a favorable impact of 1
basis point to the Corporation's net interest margin for the first quarter of
1998, versus the same period of 1997.
The extent to which Crestar will be able to maintain its current net interest
margin is significantly influenced by the economic environment in our markets
and the economic policy of the Federal Reserve Board, in addition to competitive
market conditions for both loans and deposits. Competition among financial
institutions, in addition to acquisition strategies, may lead to further
pressures on the Corporation's net interest margin in future periods.
Despite the decline in net interest margin, Crestar's net interest income for
the first quarter of 1998 increased 3% over the first quarter of 1997.
Tax-equivalent net interest income similarly increased by 3% during this period.
The increase reflects an 11% increase in average earning assets from the quarter
ended March 31, 1997, which offset the Corporation's lower net interest margin
realized during the first quarter of 1998.
Risk Exposures And Credit Quality
(Tables 4 and 5)
Crestar's allowance for loan losses totaled $281 million at March 31, 1998,
representing 1.74% of period-end loans, 326% of period-end nonperforming assets,
and a 429% coverage of nonperforming loans. Based on current expectations
relative to portfolio characteristics and performance measures including loss
projections, management considers the level of the allowance adequate. Under the
Corporation's criteria for classification of nonperforming loans, loans that are
both (a) past due 90 days or more and (b) not deemed nonaccrual due to an
assessment of collectibility are specifically excluded from the definition of
nonperforming assets. Accruing loans past due 90 days or more, and excluded from
classification as nonperforming assets, totaled $67.0 million at March 31, 1998,
with consumer loans representing 95% of this balance.
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At March 31, 1998, nonperforming assets of $86.1 million were down $14.7
million or 15% from March 31, 1997, and also down slightly from the December 31,
1997 balance of $86.2 million. The ratio of nonperforming assets to loans and
foreclosed properties-net at March 31, 1998 was 0.53%, compared to 0.55% at
December 31, 1997 and 0.71% at March 31, 1997. Future operating results could
show increases in the total balance of nonperforming assets due to loan growth,
future acquisitions of the assets of financial institutions, or adverse changes
in credit quality.
The provision for loan losses was $23.1 million for the first quarter of
1998, a decrease of $6.6 million from the $29.7 million provision expense
recorded in the first quarter of 1997. Provision expense in the fourth quarter
of 1997 was $23.3 million. Net charge-offs totaled $25.1 million in the first
three months of 1998, compared to $29.7 million in the comparable period of
1997. Net charge-offs as a percentage of average loans were 0.64% for the first
quarter of 1998, compared to 0.86% in the same period of 1997, and 0.64% for the
fourth quarter of 1997. Business loans experienced net recoveries of $237
thousand during the first quarter of 1998, compared to net recoveries of $32
thousand in the comparable quarter of 1997. Consumer loan net charge-offs
totaled $25.3 million in the first quarter of 1998, compared to net charge-offs
of $24.9 million in the fourth quarter of 1997 and $29.7 million in the first
quarter of 1997.
The largest proportion of net loan charge-offs during the first quarter of
1998 occurred in the bank card loan portfolio. Net charge-offs for bank card
loans were $20.5 million in the first three months of 1998, compared to $23.4
million in 1997's first quarter and $19.5 million in the fourth quarter or 1997.
Net bank card loan charge-offs as a percentage of bank card loans (on an
annualized basis) were 7.26% for the first quarter of 1998, compared to 6.86% in
the fourth quarter of 1997, and 6.98% in the first quarter of 1997.
In Crestar's experience, the delinquency and loss performance of newly
underwritten bank card loans typically do not reach their highest levels until
after 24 months from origination. Crestar's bank card loss rates have been
higher than originally expected due to an unanticipated decline in consumer
payment performance, influenced by a substantive increase in consumer bankruptcy
filings. Crestar's experience is similar to many others in the credit card
business. The increase in the net charge-off ratio for the first quarter of
1998, in comparison to both the first quarter of 1997 and the fourth quarter of
1997, is a result of a more seasoned portfolio, higher than expected
bankruptcies and the moderation of new bank card marketing programs. Moderating
new marketing programs has contributed to a declines in outstanding bank card
loan balances since 1996. Average outstanding balances of bank card loans have
declined from $1.63 billion in the first quarter of 1996 to $1.13 billion for
the first quarter of 1998, a decline of 31%. At March 31, 1998, bank card loans
totaled $1.12 billion and represented 7% of Crestar's total loan portfolio.
Net instalment loan charge-offs of $4.5 million were recorded in the first
quarter of 1998, compared to $5.0 million in the fourth quarter of 1997 and $5.5
million for the first quarter of 1997. Real estate - mortgage net loan
charge-offs totaled $260 thousand for the first quarter of 1998, compared to
$328 thousand for the fourth quarter of 1997 and $813 thousand for the first
quarter of 1997.
In addition to other loan categories, Crestar closely manages its portfolio
of loans to real estate developers and investors (REDI). REDI outstanding
balances remained fairly stable and totaled $1.8 billion at March 31, 1998. This
balance represented 11% of the total loan portfolio at that date. At December
31, 1997, REDI loans also represented 11% of the total loan portfolio. REDI
nonperforming assets were $36.2 million at March 31, 1998, compared to $53.6
million at March 31, 1997 and $40.3 million at December 31, 1997.
Potential problem loans consist of loans that are currently performing in
accordance with contractual terms but for which potential operating or financial
concerns of the obligors have caused management to have serious doubts regarding
the ability of such obligors to continue to comply with present repayment terms.
Potential problem loans at March 31, 1998, not included in Table 5, totaled
approximately $75 million. Commercial or real estate-income property related
loans constitute over 90% of this balance. Depending on changes in the economy
and other future events, these loans and others not presently identified as
problem loans could be classified as nonperforming assets in the future.
Potential problem loans were $77 million at December 31, 1997 and $153 million
at March 31, 1997. Fluctuations in potential problem loan balances from quarter
to quarter should be viewed in the context of the size of Crestar's total loan
portfolio, which was $16.1 billion at March 31, 1998.
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Noninterest Income And Expense
(Table 6)
Noninterest income totaled $108.7 million in the first quarter of 1998, a $5.2
million or 5% increase over the first quarter of 1997. Excluding securities
gains and losses, noninterest income increased $6.6 million or 7% over the
results for the first three months of 1997. This increase reflects growth in the
noninterest income categories of deposit account income, trust and investment
advisory income, and mortgage origination income. Deposit account income, in
part reflecting higher average balances of transaction-based deposit accounts,
increased by $2.9 million or 10% from the first quarter of 1997. Trust and
investment advisory income increased $2.7 million or 15% from 1997 levels.
Mortgage origination income, net of expenses, totaled $15.1 million for the
first quarter of 1998, compared to $0.9 million for the first quarter of 1997,
reflecting record levels of real estate - mortgage loan originations by
Crestar's mortgage banking subsidiary. Lower interest rates on home mortgage
loans have led to high origination volumes, especially in comparison to the
first quarter of 1997.
Noninterest income for the first quarter of 1997 reflects gains on the sale
of mortgage servicing rights of $6.5 million; there were no sales of servicing
rights in the first quarter of 1998. Miscellaneous noninterest income increased
by $3.9 million over the first quarter of 1997, primarily attributable to a
first quarter 1998 gain arising from sale of loans. Increases in securities
brokerage fees, mutual fund and insurance income were also experienced during
this period. Included in noninterest income for the first quarter of 1997 was a
non-recurring gain of $5.8 million (pre-tax) arising from the sale of two
properties acquired in the Citizens Bancorp merger.
Noninterest expense increased $1.0 million, or 1%, in the first quarter of
1998 compared to the same period of 1997. Excluding foreclosed properties
expense, noninterest expense also increased 1% in the quarter. Total personnel
costs, Crestar's largest expense category, were $100.9 million in the first
quarter of 1998, a 2% increase over the same period of 1997. Advertising and
marketing costs for the first quarter of 1998 reflect expanded marketing efforts
within Crestar's marketplace, and in part soliciting new customers in a period
of interstate banking mergers within Crestar's marketplace. FDIC deposit
insurance expense totaled $0.4 million in the first quarter of 1998, versus $1.1
million in the first quarter of 1997. A net recovery of $0.5 million was
recorded for foreclosed properties expense for the quarter ended March 31, 1998,
compared to an expense of $0.7 million in the quarter ended March 31, 1997.
Included in first quarter 1997 results are approximately $2.0 million in
one-time expenses associated with the Citizens Bancorp merger, which was
consummated on December 31, 1996.
Noninterest expense for the three months ended March 31, 1998 includes $3.0
million of costs incurred in preparing the Corporation's data processing systems
to be "Year 2000" compatible. The total cost for this conversion and testing
process is estimated to be between $22 and $27 million, with the majority of
costs expected to be incurred during 1998. This estimate includes some costs,
such as the purchase of computer hardware, that will qualify as depreciable
assets for accounting purposes, with the related depreciation expense recognized
over the estimate lives of the applicable assets. However, the majority of costs
will be expensed as incurred. Through March 31, 1998, Crestar had incurred
approximately $8.3 million of noninterest expense associated with the Year 2000
conversion project.
The effective tax rate for the first quarter of 1998 was 35.5%, compared to
36.7% in the first quarter of 1997. Lower state income tax provisions
contributed to the lower tax rate for 1998. Financial statement note 10 contains
additional information concerning income taxes.
Financial Condition
(Table 7)
Crestar's assets totaled $26.1 billion at March 31, 1998, compared to $24.9
billion in assets at December 31, 1997, and $22.0 billion at March 31, 1997.
Loan balances totaled $16.1 billion at March 31, 1998 compared to $15.7 billion
at December 31, 1997 and $14.2 billion at March 31, 1997. Total deposits were
$17.0 billion at the end of the first quarter of 1998, compared to $16.4 billion
at December 31, 1997 and $15.8 billion at March 31, 1997. Excluding certificates
of deposit of $100,000 or more, deposits totaled $15.8 billion at March 31,
1998,
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compared to $15.4 billion at December 31, 1997 and $15.1 billion at March 31,
1997.
With respect to the securities held to maturity portfolio, market value
exceeded the carrying value at March 31, 1998 by $4.6 million, consisting of
$5.9 million in unrealized gains and $1.3 million of unrealized losses. At March
31, 1998, the amortized cost of securities available for sale exceeded the fair
value of such securities by $4.8 million, consisting of $18.2 million in
unrealized gains and $23.0 million in unrealized losses. Shareholders' equity at
March 31, 1998 reflects a $2.8 million reduction for the excess, net of tax, of
amortized cost of securities available for sale over the fair value at
quarter-end, compared to an decrease of $0.7 million at December 31, 1997. At
March 31, 1997, Crestar's shareholders' equity reflected a $57.6 million
reduction for the excess, net of tax, of amortized cost of securities available
for sale over fair value. The net unrealized gain or loss on securities
available for sale is recorded as a component of shareholders' equity, and is
classified as "accumulated other comprehensive income" on the consolidated
balance sheet. Net unrealized gain or loss on securities available for sale will
continue to be subject to change in future periods due to fluctuations in market
value, acquisition activities, and sales, purchases, maturities and calls of
securities classified as available for sale. Net unrealized losses in the
securities available for sale portfolio primarily reflect ongoing interest rate
volatility, which is inherent in the securities marketplace. Based on current
market conditions, net unrealized losses on securities are not expected to have
a significant impact on operating results or liquidity of Crestar.
All mortgage-backed securities in the securities available for sale and
securities held to maturity portfolios are subject to prepayment risk, since the
mortgage loans underlying these securities can prepay at any time without
penalty. This risk becomes apparent during periods of declining interest rates,
when refinancing of existing mortgage loans can accelerate. During these
periods, the expected maturity of mortgage-backed securities shortens due to
prepayments, reducing the expected stream of future interest payments to be
received. Similarly, prepayment risks exists within the company's loan
portfolio. Home equity instalment loans and real estate mortgage loans are
particularly susceptible to increased prepayments in a declining interest rate
environment. The interest rate and prepayment risk associated with
mortgage-backed securities and consumer loans is considered by management in
assessing the overall asset/liability structure of the Corporation.
All investment securities, including mortgage backed pass-through securities,
collateralized mortgage obligation (CMO) securities, and securitized credit card
receivables, are also managed with respect to their credit risk. Credit risk
arises because payments of interest and principal can be dependent on the
payment of the underlying mortgage or receivable payment where applicable, in
addition to the contractual obligation of the issuer to collect and remit such
payments to the individual security owners. The Corporation monitors credit risk
by assessing, and monitoring on an ongoing basis, the financial strength and
performance of the issuers of such securities. Approximately 71% (market value)
of Crestar's available for sale portfolio, and 59% (amortized cost) of the
Corporation's securities held to maturity portfolio, was composed of
mortgage-backed obligations of Federal agencies as of March 31, 1998. This
category includes mortgage-backed securities of Federal agencies, as CMO
securities guaranteed by Federal agencies such as the Federal Home Loan Mortgage
Corporation. Securities classified as "Other taxable securities" can include
non-government CMO securities, corporate debt obligations, and corporate
obligations securitized by credit card or instalment loans. Other taxable
securities classified as available for sale at March 31, 1998 included $901
million (market value) of non-government CMO obligations.
During the first quarter of 1998, Crestar sold approximately $1.1 billion of
securities classified as available for sale, generating net securities gains of
$2.6 million. Such sales were consummated in conjunction with the overall
management of interest rate and credit risk for the Corporation. Securities
gains recorded in the first quarter of 1997 totaled $4.1 million.
Also during the first quarter of 1998, Crestar issued $150 million in
subordinated notes, having a stated interest rate of 6.5% and due on January 15,
2018. The notes were issued with embedded put and call options which could
require Crestar to repurchase the notes at face value on January 15, 2008. If
the debt is not repurchased by Crestar, the interest rate on the notes will be
reset in January 2008 based on guidelines within the debt agreement. Proceeds
from this long-term debt issuance were used for general corporate purposes,
including funding for the maturity of $50 million in subordinated long-term
notes in April 1998.
Crestar purchased and retired 100,000 shares of common stock during the first
quarter of 1998, at an average price of $54 per share. The purpose of these
transactions was to retire shares previously issued in the November 1997
purchase of American National Bancorp, Inc.
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A common stock dividend of $.29 per share was declared and paid to
shareholders during the first quarter of 1998. In April 1998, Crestar announced
a common stock dividend increase, effective with the dividend to be paid on May
21, 1998, to $.33 per share. This represented a 14% increase from the previous
quarterly dividend rate. The Corporation's objective is to pay dividends of at
least 30% to 45% of earnings to common shareholders, with a current bias towards
the higher end of this range, given the Corporation's strong capital position.
Liquidity, Market Risk And Interest Sensitivity
(Tables 8 - 10)
Bank liquidity is a measure of the ability to generate and maintain sufficient
cash flows to fund operations and to meet financial obligations to depositors
and borrowers promptly and in a cost-effective manner. Liquidity is provided
through securities available for sale, money market investments, maturing loans
and securities, and the ability to generate new deposits or borrowings as
needed. Crestar's liquidity position is actively managed on a daily basis, and
monitored regularly by the Asset/Liability Management Committee (ALCO). ALCO's
overall objective is to optimize net interest income after giving consideration
to capital adequacy, liquidity needs, interest rate risk, the economic outlook,
market opportunities and customer needs. General strategies to accomplish this
objective include maintaining a strong balance sheet, maintaining adequate core
deposit levels, taking an acceptable level of interest rate risk, adhering to
conservative financial management principles and practicing prudent dividend
policies.
Core deposits provide a significant source of liquidity. Crestar's
interest-bearing core deposits represented 51% of total funding sources at March
31, 1998 and 53% at December 31, 1997, compared to 59% at March 31, 1997. As an
additional indication of strong liquidity, securities available for sale
represented 19%, and money market investments an additional 4%, of Crestar's
total earning assets at March 31, 1998.
Market risk is the risk of loss arising from adverse changes in the fair
value of financial instruments due to changes in interest rates, exchange rates
or equity prices. Like many financial institutions, Crestar's principal market
risk is interest rate risk. Interest rate risk can be measured by looking at the
volatility of projected net income as a result of possible changes in interest
rates over a given period of time. Crestar's goal is to limit interest rate
exposure to prudent levels as determined by the Corporation's ALCO committee.
The committee establishes limits on the earnings at risk for a current planning
period, usually defined as either the current calendar year or the remainder of
the current year plus the next calendar year. Established limits are subject to
change, but have typically been 10% or less of projected net income for the
planning period. Actions that can be taken to manage interest rate risk include
changing the mix of floating rate versus fixed rate earning assets and funding
sources, changes in average maturities within the securities available for sale
portfolio through sales and purchases, the use of derivative instruments for
interest rate conversions or to hedge interest risk, and marketing and product
development efforts to attract new loans and deposits. The level of interest
rate risk taken is based on management's assessment of the market environment,
and will vary from period to period.
A significant tool used by Crestar in assessing interest rate exposure is net
interest income simulations. A net income forecast is prepared regularly based
on a current interest rate forecast, in addition to numerous high and low
interest rate scenarios involving changes in interest rates of up to and
including 300 basis points from current interest rates. The various interest
rate scenarios represent a reasonable range of interest rates. By its nature,
the simulation process includes numerous assumptions, including assumptions on
changes in average balances and yields, changes in deposit and loan mix, and
forecasts of interest rate movements and prepayment levels. Prepayment
assumptions are based on the expertise of management along with input from
external financial market sources. The expected dynamics of the balance sheet,
including shifts in loans and deposits, are included in the simulations. Also
taken into account are the assumed effects of interest rate caps and floors.
While the simulation process is a powerful tool in analyzing interest
sensitivity, many of the assumptions used in the simulation process are both
highly qualitative and subjective, and subject to the risk that past historical
activity may not generate accurate predictions of future results.
19
<PAGE>
The high rate and low rate estimates generated by this simulation process are
compared to the estimate generated under a current interest rate scenario. Based
on the most recent simulations as of March 31, 1998, Crestar's projected 9-month
after-tax net income under the current interest rate scenario would decrease by
approximately $6.1 million in a high interest rate scenario, and would remain
relatively unchanged in a low interest rate scenario, if nothing else changed
and no management actions were taken. These projections were based on interest
rate increases of 225 basis points under a 9-month high interest rate scenario,
and interest rate decreases of 110 basis points under a low interest rate
scenario, from market interest rates in effect at March 31, 1998. Changes in
interest rates under these simulations were projected at 25 basis points per
month. The results of these projections were within Crestar's tolerance for
interest rate risk, and indicate a sufficient liquidity position and acceptable
operating environment under the high, low and current interest rate scenarios.
Another management tool for assessing interest rate risk is the
quantification of the economic fair value of shareholders' equity. Economic
value of equity consists of the present value of all future cash flows from
assets, liabilities and off-balance sheet items. Potential changes in the
economic value of equity are calculated by projecting cash flows and then
computing present values under a series of different interest rate scenarios.
The economic value calculations include the valuation of instruments with option
characteristics, using numerous interest rate path valuations and mathematical
rate simulation techniques. Crestar has incorporated this tool as a significant
component of its management of interest rate risk. Economic value measurement
results at March 31, 1998 were within Crestar's internal guidelines.
Each of the tools used to assess interest rate risk have strengths and
weaknesses. While Crestar believes that its methodologies provide a meaningful
representation of the Corporation's interest rate sensitivity, the methodologies
do not necessarily take into account all business developments which can have an
impact on net interest income, such as changes in credit quality or changes in
the amount and composition of earning assets and sources of funds. Assumptions
can be inherently uncertain: actual results will differ from projected results
due to changes in market conditions, management strategies and the timing and
magnitude of interest rate changes.
As noted, Crestar incurs a degree of interest rate risk as a provider of
banking services to its customers. This risk can be reduced through derivative
interest rate contracts, such as interest rate swaps, caps and floors. Crestar's
outstanding interest rate swap instruments at March 31, 1998 are utilized to
convert certain variable rate assets to fixed rates as part of the Corporation's
interest risk management strategy. Interest rate caps are utilized to minimize
interest rate risk associated with rising rates on floating rate money market
deposits, fixed rate securities and fixed rate real estate loans. Because
financial derivatives typically do not have actual principal dollars transferred
between parties, notional principal amounts are used to express the volume of
such transactions. However, the notional amount of derivative contracts does not
represent direct credit exposure, which the Corporation believes is a
combination of current replacement cost of those instruments with a positive
market value plus an amount for prospective market movement. Crestar has
established policies governing derivative activities, and the counterparties
used by Crestar are considered high quality credits. In addition, Crestar may
demand collateral from a counterparty to further minimize credit risk. There
were no past due amounts or reserves for possible derivative losses at March 31,
1998, nor has Crestar ever experienced any charge-offs related to the credit
risk of derivative transactions. Interest rate simulation techniques are used by
Crestar to assess and monitor market risk in the Corporation's derivative
portfolio. Interest rate swaps with a notional value of $300 million, used for
interest rate risk management activities, were terminated prior to maturity
during the first quarter of 1998; no material gains or losses were recognized on
these terminations. At March 31, 1998 Crestar had a deferred gain of $4.0
million included in other assets, arising from the termination prior to maturity
of interest rate floors during 1997. The deferred gain is being amortized over
the remaining contractual life of the underlying hedging instruments.
Terminations of derivative instruments prior to maturity may occur in the future
in response to modifications of interest rate risk management strategies.
20
<PAGE>
The notional amount of Crestar's interest rate swaps and caps (excluding
customer positions where Crestar acts as an intermediary) was $4.1 billion at
March 31, 1998. Forward contracts with a notional amount of $2.3 billion,
utilized to hedge lending commitments of Crestar's mortgage banking subsidiary,
were also outstanding at March 31, 1998, bringing the total notional value of
derivative financial instruments related to interest rate risk management
activities to $6.4 billion at March 31, 1998. Tables 8, 9, and 10 present
information regarding fair values, maturity, average rates, and activity as of
and for the three month period ending March 31, 1998 for these off-balance sheet
derivative instruments. Net unrealized losses on these instruments totaled $5.0
million as of March 31, 1998. Financial statement note 11 contains additional
information pertaining to these types of agreements.
New Accounting Standards
On January 1, 1998, Crestar adopted the provisions of Statement of Financial
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income," as
issued by the Financial Accounting Standards Board (FASB). SFAS 130 established
standards for reporting and presentation of comprehensive income and its
components within the Corporation's consolidated financial statements. SFAS 130
requires the disclosure of an amount that represents total comprehensive income,
and the components of comprehensive income, in a consolidated financial
statement. Balances and components of Crestar's comprehensive income for the
three months ended March 31, 1998 and 1997 are disclosed within Crestar's
Consolidated Statements of Changes in Shareholders' Equity. The component's of
Crestar's comprehensive income are net income and net unrealized gain or loss on
securities available for sale, net of reclassification adjustment. Period-end
net unrealized gain or loss on securities available for sale is reflected in the
Consolidated Balance Sheet, and the Consolidated Statement of Changes in
Shareholders' Equity, as "Accumulated other comprehensive income." The adoption
of SFAS 130 had no impact on the Corporation's financial position or results of
operations.
During the first quarter of 1998, the FASB issued Statement of Financial
Accounting Standards No. 132 (SFAS 132), "Employers' Disclosures about Pensions
and Other Postretirement Benefits". SFAS 132 revises employer's disclosures
about pension and other postretirement benefit plans, and standardizes certain
disclosures for both types of benefit plans. The disclosure requirements of SFAS
132 will be effective for financial statements for the year ending December 31,
1998. Application of SFAS 132 will have no impact on the results of operations
of Crestar.
21
<PAGE>
Table 1 Financial Highlights
Dollars in millions, except per share data Three Months
-------------------------
%
For the Period Ended March 31 1998 1997 Change
Net Income $84.9 $71.8 18
Basic Earnings Per Share:
Net Income $ .76 $ .65 17
Average Shares Outstanding (000s) 111,704 110,290 1
Diluted Earnings Per Share:
Net Income $ .75 $ .64 17
Average Shares Outstanding (000s) 113,222 111,579 1
Dividends Paid Per Common Share $ .29 $ .27 7
================================================================================
Key Ratios
Return on Average Assets 1.41% 1.33%
Return on Average Equity 16.41 16.06
Average Equity to Average Assets 8.61 8.26
Net Interest Margin 4.18 4.51
At March 31
Book Value Per Share $19.03 $16.48 15
Equity to Assets 8.17% 8.27%
Risk Adjusted Capital Ratios:
Tier I 10.0 10.6
Total 13.1 13.4
Common Shares Outstanding (000s) 111,938 110,300
================================================================================
Table 2 Analysis Of Diluted Earnings Per Share
1st Qtr. 1998 1st Qtr. 1998
vs. vs.
1st Qtr. 1997 4th Qtr. 1997
Diluted Earnings Per Share - prior period $ .64 $ .74
- --------------------------------------------------------------------------------
Interest income .21 .09
Interest expense (.17) (.06)
Provision for loan losses .04 -
Securities gains (.01) .01
Other noninterest income .04 (.02)
Foreclosed properties expense .01 .01
Other noninterest expense (.01) -
Change in effective income tax rate .01 (.01)
Increase in shares outstanding (.01) (.01)
- --------------------------------------------------------------------------------
Net increase .11 .01
Diluted Earnings Per Share - current period $ .75 $ .75
================================================================================
22
<PAGE>
Table 3 Average Balances, Net Interest Income And Rate/Volume Analysis(1)
Dollars in thousands
<TABLE>
<CAPTION>
1st Qtr.
------------------------------------
Average Balance 4th Qtr.
---------------- Average
Increase Balance
1998 1997 (Decrease) 1997
---- ---- ---------- ----
<S> <C>
$ $ % $
4,540,123 3,811,305 19 4,233,553 Commercial
1,222,918 1,244,956 (2) 1,267,652 Real estate - income property
381,702 311,353 23 369,721 Real estate - construction
4,809,541 4,105,535 17 4,848,092 Instalment
1,130,487 1,338,742 (16) 1,137,318 Bank card
3,515,622 3,051,743 15 3,330,084 Real estate - mortgage
- ---------------------------------------------------------------------------------------------------------------------------
15,600,393 13,863,634 13 15,186,420 Total loans - net of unearned income(2)
616,117 908,787 (32) 641,735 Securities held to maturity
3,978,423 4,071,188 (2) 3,390,360 Securities available for sale
647,881 357,462 81 545,397 Money market investments
1,150,140 580,563 98 875,246 Mortgage loans held for sale
- ---------------------------------------------------------------------------------------------------------------------------
21,992,954 19,781,634 11 20,639,158 Total earning assets
===========================================================================================================================
6,429,487 5,796,084 11 6,013,541 Interest-bearing demand deposits
1,432,363 1,609,952 (11) 1,455,579 Regular savings deposits
4,091,130 4,501,822 (9) 4,116,515 Domestic time deposits
- ---------------------------------------------------------------------------------------------------------------------------
11,952,980 11,907,858 - 11,585,635 Total interest-bearing core deposits
5,376,486 3,627,747 48 4,697,174 Purchased liabilities
927,180 853,204 9 811,621 Long-term debt
- ---------------------------------------------------------------------------------------------------------------------------
18,256,646 16,388,809 11 17,094,430 Total interest-bearing liabilities
3,736,308 3,392,825 10 3,544,728 Other sources - net
- ---------------------------------------------------------------------------------------------------------------------------
21,992,954 19,781,634 11 20,639,158 Total sources of funds
Net Interest Income
===========================================================================================================================
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
1st Qtr.
-----------------------------------------------------
1998 vs. 1997
--------------------------------
Income/Expense(3) Change due to(4)
----------------- Increase ---------------
1998 1997 (Decrease) Rate5 Volume
---- ---- ---------- ----- ------
<S><C>
$ $ $ $ $
Commercial 90,862 75,382 15,480 1,099 14,381
Real estate - income property 26,393 27,283 (890) (420) (470)
Real estate - construction 8,431 7,072 1,359 (187) 1,546
Instalment 95,308 81,450 13,858 (199) 14,057
Bank card 38,117 46,939 (8,822) (1,210) (7,612)
Real estate - mortgage 67,597 59,321 8,276 (740) 9,016
- ---------------------------------------------------------------------------------------------------
Total loans - net of unearned income2 326,708 297,447 29,261 9,929 19,332
Securities held to maturity 9,533 13,708 (4,175) 239 (4,414)
Securities available for sale 62,411 63,849 (1,438) 17 (1,455)
Money market investments 9,049 4,687 4,362 554 3,808
Mortgage loans held for sale 20,571 11,640 8,931 (2,760) 11,691
- ---------------------------------------------------------------------------------------------------
Total earning assets 428,272 391,331 36,941 (6,990) 43,931
===================================================================================================
Interest-bearing demand deposits 50,296 41,814 8,482 2,799 5,683
Regular savings deposits 8,126 9,964 (1,838) (739) (1,099)
Domestic time deposits 50,501 55,063 (4,562) 485 (5,047)
- ---------------------------------------------------------------------------------------------------
Total interest-bearing core deposits 108,923 106,841 2,082 1,676 406
Purchased liabilities 72,302 46,675 25,627 3,169 22,458
Long-term debt 17,123 15,615 1,508 154 1,354
- ---------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 198,348 169,131 29,217 9,903 19,314
Other sources - net
- ---------------------------------------------------------------------------------------------------
Total sources of funds 198,348 169,131 29,217 10,273 18,944
Net Interest Income 229,924 222,200 7,724 (17,263) 24,987
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1st Qtr. 1998 vs. 4th Qtr. 1997
4th Qtr.
Income/ Change due to(4)
Expense(3) Increase
1997 (Decrease) Rate(5) Volume
<S><C>
$ $ $ $
Commercial 85,710 5,152 (1,033) 6,185
Real estate - income property 28,505 (2,112) (1,134) (978)
Real estate - construction 8,294 137 (132) 269
Instalment 98,156 (2,848) (2,065) (783)
Bank card 38,920 (803) (560) (243)
Real estate - mortgage 64,779 2,818 (791) 3,609
- -----------------------------------------------------------------------------------------
Total loans - net of unearned income2 324,364 2,344 (6,521) 8,865
Securities held to maturity 9,942 (409) (12) (397)
Securities available for sale 53,946 8,465 (892) 9,357
Money market investments 7,828 1,221 (250) 1,471
Mortgage loans held for sale 16,222 4,349 (785) 5,134
- -----------------------------------------------------------------------------------------
Total earning assets 412,302 15,970 (11,138) 27,108
=========================================================================================
Interest-bearing demand deposits 47,142 3,154 (592) 3,746
Regular savings deposits 8,927 (801) (659) (142)
Domestic time deposits 51,546 (1,045) (721) (324)
- -----------------------------------------------------------------------------------------
Total interest-bearing core deposits 107,615 1,308 (2,121) 3,429
Purchased liabilities 65,134 7,168 (2,250) 9,418
Long-term debt 15,502 1,621 (586) 2,207
- -----------------------------------------------------------------------------------------
Total interest-bearing liabilities 188,251 10,097 (2,736) 12,833
Other sources - net
- -----------------------------------------------------------------------------------------
Total sources of funds 188,251 10,097 (2,284) 12,381
Net Interest Income 224,051 5,873 (8,854) 14,727
=========================================================================================
</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 $310,000 and $(48,000) for
the first quarter of 1998 and 1997, respectively, and $144,000 for the
fourth quarter of 1997.
(4) Variances are computed on a line-by-line basis and are non-additive.
(5) Variances caused by the change in rate times the change in balances are
allocated to rate.
24
<PAGE>
Table 4 Allowance For Loan Losses
Dollars in thousands First Quarter
1998 1997
Beginning balance $281,394 $268,868
- --------------------------------------------------------------------------------
Allowance from acquisitions and other activities, net 1,531 -
- --------------------------------------------------------------------------------
Provision for loan losses 23,096 29,698
Net charge-offs (recoveries):
Commercial (202) 526
Real estate - income property (396) (462)
Real estate - construction 361 (96)
Instalment 4,521 5,545
Bank card 20,508 23,370
Real estate - mortgage 260 813
- --------------------------------------------------------------------------------
Total net charge-offs 25,052 29,696
- --------------------------------------------------------------------------------
Balance, March 31 $280,969 $268,870
================================================================================
Allowance for loan losses to period-end loans 1.74% 1.89
Annualized net charge-offs to average loans .64 .86
================================================================================
25
<PAGE>
<TABLE>
<CAPTION>
Table 5 Nonperforming Assets(1) And Past Due Loans
Dollars in thousands March 31, December 31,
--------------------------
<S> <C>
Nonaccrual loans: 1998 1997 1997
Commercial $ 9,549 $15,921 $11,247
Real estate - income property 7,212 12,612 6,412
Real estate - construction 13,906 17,302 14,239
Instalment 8,043 2,987 3,292
Real estate - mortgage 26,818 26,813 25,310
- ----------------------------------------------------------------------------------------------------------
Total nonperforming loans1 65,528 75,635 60,500
Foreclosed properties - net 20,542 25,140 25,731
- ----------------------------------------------------------------------------------------------------------
Total nonperforming assets1 $86,070 $100,775 $86,231
==========================================================================================================
Nonperforming assets1 to:
Loans and foreclosed properties - net .53% .71% .55%
Total assets .33 .46 .35
Allowance for loan losses to:
Nonperforming assets1 326 267 326
Nonperforming loans1 429 355 465
Allowance for loan losses plus shareholders'
equity to nonperforming assets1 28.01x 20.70x 27.15x
==========================================================================================================
Accruing loans past due 90 days:
Commercial $ 3,286 $12,137 $ 3,524
Real estate - income property 63 1,451 1,750
Real estate - construction 259 - 216
Instalment
Student 30,715 26,475 25,742
Other 6,123 5,326 6,886
Bank card 20,971 23,404 24,126
Real estate - mortgage 5,543 7,179 6,023
- ----------------------------------------------------------------------------------------------------------
Total accruing loans past due 90 days $66,960 $75,972 $68,267
==========================================================================================================
</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.
26
<PAGE>
<TABLE>
<CAPTION>
Table 6 Noninterest Income And Expense
In thousands
First Quarter Fourth
Quarter
<S> <C>
Noninterest Income 1998 1997 1997
Service charges on deposit accounts $ 33,067 $ 30,163 $ 33,318
Trust and investment advisory 20,119 17,453 19,773
Bank card-related 8,810 12,648 10,317
Other service charges and fees 9,653 8,443 10,356
Mortgage origination - net 15,102 902 9,116
Mortgage servicing - net 2,352 5,131 3,403
Trading account activities 1,345 947 1,505
Commissions on letters of credit 1,356 1,114 1,334
Gain on sale of mortgage servicing rights - 6,450 -
Gain on sale of premises - 5,807 360
Gain on securitization of student loans - - 9,305
Miscellaneous 14,246 10,345 10,829
Securities gains 2,613 4,064 1,231
- ----------------------------------------------------------------------------------------------------------
Total noninterest income $108,663 $103,467 $110,847
==========================================================================================================
Noninterest Expense
Salaries $ 81,046 $ 78,388 $ 78,895
Benefits 19,759 20,954 20,728
- ----------------------------------------------------------------------------------------------------------
Total personnel 100,855 99,342 99,623
Occupancy - net 13,154 16,158 15,216
Equipment 10,802 9,819 10,149
Communications 9,970 8,845 9,865
Outside data services 6,962 6,222 7,207
Professional fees and services 6,327 7,035 5,083
Advertising and marketing 5,709 4,530 5,711
Amortization of purchased intangibles 4,793 4,227 4,434
Stationery, printing and supplies 3,608 2,713 2,746
Loan expense 2,883 2,815 3,503
Transportation 1,855 1,725 1,826
FDIC premiums - net 430 1,107 661
Foreclosed properties (net recoveries) (517) 715 1,053
Miscellaneous 14,155 14,752 14,934
- ----------------------------------------------------------------------------------------------------------
Total noninterest expense $180,986 $180,005 $182,011
==========================================================================================================
Table 7 Debt And Other Security Ratings
(as of April 30, 1998)
Standard Thomson
Security Moody's & Poor's BankWatch
61/2% Subordinated Notes due 2018 Baa1 BBB+ A-
83/4% Subordinated Notes due 2004 Baa1 BBB+ A-
81/4% Subordinated Notes due 2002 Baa1 BBB+ A-
Commercial Paper P-2 Not rated TBW-1
Crestar Bank Deposits:
Long-Term A2 A Not rated
Short-Term P-1 A-1 TBW-1
Crestar Capital Trust 1
Preferred Stock Baa1 BBB Not rated
===========================================================================================================
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Table 8 Off-Balance Sheet Derivative Financial Instruments(1)
March 31, 1998 Average
Weighted Fixed Estimated
Dollars in thousands Notional Average Receive Fair
Balance Maturity Rate Value Comments
------- -------- ---- ----- --------
<S> <C>
Interest Rate Conversions
Generic interest rate swaps $1,575,000 3.5 yrs. 6.20% Notional amounts of $1.33
Carrying amount(2) $ 2,066 billion and $250 million convert
Commercial loan program floating rate commercial and
Unrealized gains 14,446 instalment loans, respectively,
Unrealized losses (1,066) to fixed rate. Floating rates paid
Instalment loan program tied to LIBOR.
Unrealized gains 582
------
Estimated fair value 16,028
------
Interest rate caps 560,000 3.0 yrs. 6.85%(3) Notional amount of $560 million
Carrying amount(2) 6,669 hedges the interest rate risk
Money market deposit program associated with rising interest
Unrealized gains 2 rates on floating rate money
Unrealized losses (3,834) market deposits (strike rate tied
Estimated fair value ------ to LIBOR).
2,837
Market Value Hedges ------
Interest rate caps 1,950,000 2.0 yrs. 7.56%(3) Notional amount of $1.75 billion
Carrying amount(2) 11,685 hedges the market value of fixed
Securities available for sale program(4) rate securities available for sale
Unrealized losses (10,268) in a rising rate environment (strike
Real estate income property loan program rate for $800 million tied to 5 year
Unrealized losses (663) CMT; strike rate for $950 million
tied to LIBOR). Notional amount
of $200 million hedges the
market value of fixed rate real
------ estate income property loans
Estimated fair value 754 (strike rate tied to LIBOR).
-------
Hedges of Lending Commitments
Forward contracts 2,278,339 .2 yrs. n/a Hedges of residential mortgage
Unrealized gains 1,813 lending commitments.
Unrealized losses (5,994)
-------
Estimated fair value (4,181)
Total derivatives $6,363,339 $15,438
=======
</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.
(3)Represents average strike rate. For interest rate caps purchased, Crestar
will receive interest if a specified market index rate rises above a fixed
strike rate during the term of the contract. Any interest received is based on
the difference between a higher index interest rate and the contractual cap
rate, applied to the underlying notional balance. No interest payments are
received if the index rate remains below the cap rate.
(4)The fair value of derivative interest rate caps hedging securities classified
as available for sale is included in the total fair value of the securities
available for sale portfolio. The unamortized premiums paid for such interest
rate caps are included in the amortized cost basis of securities available for
sale, with any unrealized gain or loss (net of tax) pertaining to these
interest rate caps included in shareholders' equity as "Accumulated other
comprehensive income."
n/a - Not applicable
LIBOR - London Interbank Offered Rates
5 year CMT - Yield on 5 year constant maturity U.S. Treasury securities
28
<PAGE>
Table 9 Off-Balance Sheet Derivatives--Expected Maturities(1)
<TABLE>
<CAPTION>
March 31, 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 $ - $ 600,000 $ 725,000 $250,000 $1,575,000
Average fixed receive rate - 5.93% 6.23% 6.74% 6.20%
Carrying amount $ - $ 132 $ 1,067 $ 867 $ 2,066
Net unrealized gain - 94 5,278 8,590 13,962
Interest rate caps
Notional amount $ 10,000 $ 250,000 $ 300,000 $ - $ 560,000
Average strike rate 6.25% 7.50% 6.33% - 6.85%
Carrying amount $ - $ 1,084 $ 5,585 $ - $ 6,669
Unrealized gain (loss) 2 (1,022) (2,812) - (3,832)
Market Value Hedges
Interest rate caps
Notional amount $ - $1,950,000 $ - $ - $1,950,000
Average strike rate - 7.56% - - 7.56%
Carrying amount $ - $ 11,685 $ - $ - $ 11,685
Unrealized loss - (10,931) - - (10,931)
Hedges of Lending Commitments
Forward contracts:(2)
Notional amount $2,278,339 $ - $ - $ - $2,278,339
Net unrealized loss (4,181) - - - (4,181)
Total derivatives:
Notional amount $2,288,339 $2,800,000 $1,025,000 $250,000 $6,363,339
Carrying amount $ - $ 12,901 $ 6,652 $ 867 $ 20,420
Net unrealized gain (loss) (4,179) (11,859) 2,466 8,590 (4,982)
Estimated fair value $ (4,179) $ 1,042 $ 9,118 $ 9,457 $ 15,438
===========================================================================================================================
</TABLE>
(1)Includes only off-balance sheet derivative financial instruments related to
interest rate risk management activities.
(2)Hedges of residential mortgage lending commitments.
Table 10 Off-Balance Sheet Derivatives Activity(1)
In thousands
<TABLE>
<CAPTION>
Interest Rate Conversions Market Value Hedges of
-------------------------
Interest Interest Hedges Lending
------------
Rate Rate Interest Commit-
Swaps Caps Rate Caps ments(2) Total
----- ---- --------- ------- -----
<S> <C>
Balance, January 1, 1998 $1,675,000 $460,000 $1,950,000 $1,459,888 $5,544,888
Additions 200,000 100,000 - 2,568,820 2,868,820
Terminations (300,000) - - - (300,000)
Maturities - - - (1,750,369) (1,750,369)
- -----------------------------------------------------------------------------------------------------------
Balance, March 31, 1998 $1,575,000 $560,000 $1,950,000 $2,278,339 $6,363,339
===========================================================================================================
</TABLE>
(1)Includes only off-balance sheet derivative financial instruments related to
interest rate risk management activities.
(2)Forward contracts hedging residential mortgage lending commitments;
maturities represent contracts delivered.
29
<PAGE>
Table 11 Selected Quarterly Financial Information
Dollars in thousands, except per share data
<TABLE>
<CAPTION>
1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
-------- -------- -------- -------- --------
<S> <C>
Results of operations: 1998 1997 1997 1997 1997
Net interest income(1) $229,924 $224,051 $220,041 $221,160 $222,200
Provision for loan losses 23,096 23,300 19,099 36,000 29,698
- ----------------------------------------------------------------------------------------------------------
Net credit income 206,828 200,751 200,942 185,160 192,502
Securities gains (losses) 2,613 1,231 124 (91) 4,064
Other noninterest income 106,050 109,616 95,985 111,107 99,403
- ----------------------------------------------------------------------------------------------------------
Net credit and noninterest income 315,491 311,598 297,051 296,176 295,969
Noninterest expense 180,986 182,011 173,231 179,010 180,005
- ----------------------------------------------------------------------------------------------------------
Income before taxes 134,505 129,587 123,820 117,166 115,964
Tax-equivalent adjustment 2,964 2,860 2,903 2,851 2,540
Book tax expense 46,668 44,032 41,374 38,525 41,644
- ----------------------------------------------------------------------------------------------------------
Income tax expense 49,632 46,892 44,277 41,376 44,184
Net Income $ 84,873 $ 82,695 $ 79,543 $ 75,790 $ 71,780
==========================================================================================================
Basic
Earnings per share $ .76 $ .75 $ .71 $ .69 $ .65
Average shares outstanding (000s) 111,704 110,916 110,760 110,496 110,290
Diluted
Earnings per share $ .75 $ .74 $ .71 $ .68 $ .64
Average shares outstanding (000s) 113,222 112,423 112,069 111,602 111,579
Dividends paid .29 .29 .29 .29 .27
==========================================================================================================
Selected ratios and other data:
Return on average assets 1.41% 1.46% 1.47% 1.42% 1.33%
Return on average equity 16.41 16.70 16.60 16.48 16.06
Net interest margin(1) 4.18 4.35 4.47 4.58 4.51
Net charge-offs as % of average loans .64 .64 .55 .73 .86
Allowance as % of period-end loans 1.74 1.79 1.90 1.96 1.89
Overhead ratio 53.45 54.35 54.79 53.89 55.27
Average equity to assets 8.61 8.74 8.87 8.64 8.26
Average equity leverage 11.61x 11.45x 11.28x 11.57x 12.11x
Full-time equivalent employees (period-end) 8,170 8,215 7,934 7,960 7,992
==========================================================================================================
</TABLE>
(1)Tax-equivalent basis.
30
<PAGE>
Table 12 Consolidated Average Balances/Net Interest Income/Rates(1)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------------------
1998 1997
------------------------------------------------------------
Dollars in thousands Income/ Yield/ Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
<S> <C>
Assets $ $ % $ $ %
Securities held to maturity(2) 616,117 9,533 6.21 908,787 13,708 6.05
Securities available for sale(2) 3,978,423 62,411 6.28 4,071,188 63,849 6.29
Money market investments(2) 647,881 9,049 5.66 357,462 4,687 5.32
Mortgage loans held for sale(2) 1,150,140 20,571 7.22 580,563 11,640 8.16
- ----------------------------------------------------------------------------------------------------------
Commercial 4,540,123 90,862 8.09 3,811,305 75,382 8.01
Real estate - income property 1,222,918 26,393 8.69 1,244,956 27,283 8.71
Real estate - construction 381,702 8,431 8.95 311,353 7,072 8.98
Instalment 4,809,541 95,308 7.95 4,105,535 81,450 7.99
Bank card 1,130,487 38,117 13.90 1,338,742 46,939 14.47
Real estate - mortgage 3,515,622 67,597 7.68 3,051,743 59,321 7.77
- ----------------------------------------------------------------------------------------------------------
Total loans(2),(3) 15,600,393 326,708 8.45 13,863,634 297,447 8.66
Allowance for loan losses (280,800) (269,094)
- ----------------------------------------------------------------------------------------------------------
Loans - net 15,319,593 13,594,540
Cash and due from banks 882,916 863,561
Premises and equipment - net 494,547 443,699
Intangible assets - net 193,335 178,388
Foreclosed properties - net 20,002 28,503
Other assets 723,180 621,980
- ----------------------------------------------------------------------------------------------------------
Total Assets 24,026,134 21,648,671
Total Earning Assets 21,992,954 428,272 7.84 19,781,634 391,331 7.98
Liabilities And Shareholders' Equity
Interest-bearing demand deposits 6,429,487 50,296 3.17 5,796,084 41,814 3.00
Regular savings deposits 1,432,363 8,126 2.30 1,609,952 9,964 2.51
Domestic time deposits 4,091,130 50,501 5.04 4,501,822 55,063 4.99
Certificates of deposit $100,000 and over 1,203,860 16,974 5.72 515,895 6,878 5.41
- ----------------------------------------------------------------------------------------------------------
Total savings and time deposits(2) 13,156,840 125,897 3.89 12,423,753 113,719 3.78
Demand deposits 3,289,652 3,123,006
- ----------------------------------------------------------------------------------------------------------
Total deposits 16,446,492 15,546,759
Short-term borrowings(2) 4,172,626 55,328 5.37 3,111,852 39,797 5.18
Long-term debt(2) 927,180 17,123 7.39 853,204 15,615 7.32
Other liabilities 410,387 348,684
- ----------------------------------------------------------------------------------------------------------
Total liabilities 21,956,685 19,860,499
- ----------------------------------------------------------------------------------------------------------
Total shareholders' equity 2,069,449 1,788,172
Total Liabilities And Shareholders' Equity 24,026,134 21,648,671
Total interest-bearing liabilities 18,256,646 198,348 4.41 16,388,809 169,131 4.19
Other sources - net 3,736,308 3,392,825
- ----------------------------------------------------------------------------------------------------------
Total Sources Of Funds 21,992,954 198,348 3.66 19,781,634 169,131 3.47
Net Interest Spread 3.43 3.79
Net Interest Income/Margin 229,924 4.18 222,200 4.51
==========================================================================================================
</TABLE>
31
<PAGE>
Three Months Ended December 31,
-------------------------------
1997
----
Dollars in thousands Income/ Yield/
Balance Expense Rate
------- ------- ----
[S] [C]
Assets $ $ %
Securities held to maturity(2) 641,735 9,942 6.18
Securities available for sale(2) 3,390,360 53,946 6.36
Money market investments(2) 545,397 7,828 5.69
Mortgage loans held for sale(2) 875,246 16,222 7.46
- -----------------------------------------------------------------------------
Commercial 4,233,553 85,710 8.01
Real estate - income property 1,267,652 28,505 8.73
Real estate - construction 369,721 8,294 8.90
Instalment 4,848,092 98,156 8.11
Bank card 1,137,318 38,920 14.11
Real estate - mortgage 3,330,084 64,779 7.78
- -----------------------------------------------------------------------------
Total loans(2),(3) 15,186,420 324,364 8.53
Allowance for loan losses (283,442)
- -----------------------------------------------------------------------------
Loans - net 14,902,978
Cash and due from banks 888,770
Premises and equipment - net 479,998
Intangible assets - net 183,461
Foreclosed properties - net 25,350
Other assets 736,356
- -----------------------------------------------------------------------------
Total Assets 22,669,651
==========
Total Earning Assets 20,639,158 412,302 7.98
========== ======= ====
Liabilities And Shareholders' Equity
Interest-bearing demand deposits 6,013,541 47,142 3.11
Regular savings deposits 1,455,579 8,927 2.43
Domestic time deposits 4,116,515 51,546 5.01
Certificates of deposit $100,000 and over 1,258,737 18,292 5.77
- -----------------------------------------------------------------------------
Total savings and time deposits2 12,844,372 125,907 3.90
Demand deposits 3,208,940
- -----------------------------------------------------------------------------
Total deposits 16,053,312
Short-term borrowings(2) 3,438,437 46,842 5.40
Long-term debt(2) 811,621 15,502 7.64
Other liabilities 385,846
- -----------------------------------------------------------------------------
Total liabilities 20,689,216
- -----------------------------------------------------------------------------
Total shareholders' equity 1,980,435
Total Liabilities And Shareholders' Equity 22,669,651
Total interest-bearing liabilities 17,094,430 188,251 4.38
Other sources - net 3,544,728
- -----------------------------------------------------------------------------
Total Sources Of Funds 20,639,158 188,251 3.63
Net Interest Spread 3.60
Net Interest Income/Margin 224,051 4.35
=============================================================================
(1)Income and yields are computed on a tax-equivalent basis using the statutory
federal income tax rate exclusive of the alternative minimum tax and
nondeductible interest expense.
(2)Indicates earning asset or interest-bearing liability.
(3)Nonaccrual loans are included in the average loan balances and income on such
loans is recognized on a cash basis.
32
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Crestar Financial Corporation
------------------------------------
Registrant
Date May 15, 1998 /s/ James D. Barr
----------------- ------------------------------------
James D. Barr
Executive Vice President,
Controller and Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000101880
<NAME> FDS 27.1
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 974,856
<INT-BEARING-DEPOSITS> 13,429,486
<FED-FUNDS-SOLD> 1,025,000
<TRADING-ASSETS> 10,233
<INVESTMENTS-HELD-FOR-SALE> 4,492,665
<INVESTMENTS-CARRYING> 604,415
<INVESTMENTS-MARKET> 609,032
<LOANS> 16,145,931
<ALLOWANCE> 280,969
<TOTAL-ASSETS> 26,081,478
<DEPOSITS> 17,013,116
<SHORT-TERM> 5,439,901
<LIABILITIES-OTHER> 535,444
<LONG-TERM> 962,834
0
0
<COMMON> 559,690
<OTHER-SE> 1,570,493
<TOTAL-LIABILITIES-AND-EQUITY> 26,081,478
<INTEREST-LOAN> 324,339
<INTEREST-INVEST> 71,366
<INTEREST-OTHER> 29,603
<INTEREST-TOTAL> 425,308
<INTEREST-DEPOSIT> 125,897
<INTEREST-EXPENSE> 198,348
<INTEREST-INCOME-NET> 226,960
<LOAN-LOSSES> 23,096
<SECURITIES-GAINS> 2,613
<EXPENSE-OTHER> 180,988
<INCOME-PRETAX> 131,541
<INCOME-PRE-EXTRAORDINARY> 84,873
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 84,873
<EPS-PRIMARY> 0.76<F1>
<EPS-DILUTED> 0.75<F2>
<YIELD-ACTUAL> 4.18
<LOANS-NON> 65,528
<LOANS-PAST> 66,960
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 75,000
<ALLOWANCE-OPEN> 281,394
<CHARGE-OFFS> 31,248
<RECOVERIES> 6,196
<ALLOWANCE-CLOSE> 280,969
<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>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000101880
<NAME> FDS 27.2
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 938,417 974,362 885,956
<INT-BEARING-DEPOSITS> 12,558,918 12,463,142 12,789,883
<FED-FUNDS-SOLD> 452,090 1,258,806 1,139,023
<TRADING-ASSETS> 1,281 11,706 4,909
<INVESTMENTS-HELD-FOR-SALE> 3,918,514 3,518,420 3,333,777
<INVESTMENTS-CARRYING> 818,199 715,516 662,517
<INVESTMENTS-MARKET> 811,284 715,316 666,339
<LOANS> 14,214,055 14,258,715 14,678,573
<ALLOWANCE> 268,870 279,190 278,331
<TOTAL-ASSETS> 21,982,732 22,809,803 23,188,437
<DEPOSITS> 15,815,424 15,846,459 16,109,680
<SHORT-TERM> 3,002,574 3,841,043 3,755,235
<LIABILITIES-OTHER> 496,791 403,161 584,570
<LONG-TERM> 850,596 819,071 799,375
0 0 0
0 0 0
<COMMON> 551,499 553,191 550,940
<OTHER-SE> 1,265,848 1,346,878 1,388,637
<TOTAL-LIABILITIES-AND-EQUITY> 21,982,732 22,809,803 23,188,437
<INTEREST-LOAN> 295,546 597,537 905,922
<INTEREST-INVEST> 76,941 147,698 210,497
<INTEREST-OTHER> 16,304 29,170 49,723
<INTEREST-TOTAL> 388,791 774,405 1,166,142
<INTEREST-DEPOSIT> 113,719 231,484 352,559
<INTEREST-EXPENSE> 169,131 336,436 511,035
<INTEREST-INCOME-NET> 219,660 437,969 655,107
<LOAN-LOSSES> 29,698 65,698 84,797
<SECURITIES-GAINS> 4,064 3,973 4,097
<EXPENSE-OTHER> 180,005 359,015 532,246
<INCOME-PRETAX> 113,424 227,739 348,656
<INCOME-PRE-EXTRAORDINARY> 71,780 147,570 227,113
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 71,780 147,570 227,113
<EPS-PRIMARY> 0.65<F1> 1.34<F1> 2.05<F1>
<EPS-DILUTED> 0.64<F2> 1.32<F2> 2.03<F2>
<YIELD-ACTUAL> 4.51 4.54 4.51
<LOANS-NON> 75,635 57,813 61,407
<LOANS-PAST> 75,972 58,713 62,960
<LOANS-TROUBLED> 0 0 0
<LOANS-PROBLEM> 153,000 123,000 103,000
<ALLOWANCE-OPEN> 268,868 268,868 268,868
<CHARGE-OFFS> 37,075 70,416 98,327
<RECOVERIES> 7,379 15,040 22,993
<ALLOWANCE-CLOSE> 268,870 279,190 278,331
<ALLOWANCE-DOMESTIC> 0 0 0
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 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>
