TRANSMITTAL LETTER
Central Fidelity Banks, Inc.
1021 East Cary Street
Richmond, Virginia 23219
(804) 782-4000
March 18, 1997
BY EDGAR SYSTEM
- ----------------------------
Securities and Exchange Commission
450 Fifth Street
Washington, D.C. 20549-1004
Attn: Filing Desk
Re: Central Fidelity Banks, Inc. Form 10-K Filing
-----------------------------------------------------------
Ladies and Gentlemen:
On behalf of Central Fidelity Banks, Inc., I enclose for filing
the Company's Annual Report on Form 10-K with exhibits for the year
ended December 31, 1996.
This report was prepared on the integrated basis and meets the
requirements of Exchange Act Rules 14a-3 as to the furnishing of annual
report to security holders. Accordingly, these copies are also
submitted to satisfy the 14-a3(c) requirements under said rules.
Sincerely yours,
/s/ Vivian Y. Woo
Vivian Y. Woo
Vice President and Assistant Controller
Enclosures
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEET
- -----------------------------------------------------------------------
Central Fidelity Banks, Inc. and Subsidiaries
(In Thousands, except share date) December 31,
<CAPTION>
1996 1995
<S> <C> <C>
- -----------------------------------------------------------------------
Assets
- -----------------------------------------------------------------------
Cash and due from banks (note 4) $304,661 $338,580
Temporary investments:
Federal funds sold and securities purchased
under agreements to resell 96,515 157,734
Other money market investments 50,000 75,000
Trading account securities 4,061 422
- ------------------------------------------ ---------------------------
Total temporary investments 150,576 233,156
- ------------------------------------------ ---------------------------
Assets available for sale:
Securities (note 5):
U.S. Government and agencies 1,957,748 2,342,541
States and political subdivisions 104,933 124,380
Other 1,006,943 1,162,966
- ------------------------------------------ ---------------------------
Total securities available for sale 3,069,624 3,629,887
- ------------------------------------------ ---------------------------
Loans 26,085 15,653
- ------------------------------------------ ---------------------------
Total assets available for sale 3,095,709 3,645,540
- ------------------------------------------ ---------------------------
Loans (note 6):
Commercial and commercial real estate 2,117,874 1,984,393
Construction 304,974 290,184
Residential real estate 1,614,561 1,609,998
Consumer second mortgage 761,212 613,097
Installment 1,047,508 1,046,536
Bank card 844,622 756,952
- ------------------------------------------ ---------------------------
Total loans 6,690,751 6,301,160
Allowance for loan losses (note 7) (110,000) (110,000)
- ------------------------------------------ ---------------------------
Net loans 6,580,751 6,191,160
- ------------------------------------------ ---------------------------
Accrued interest receivable 61,819 67,436
Premises and equipment, net (note 8) 157,119 152,879
Due from customers on acceptances 11,009 18,741
Other assets (notes 6, 9 and 12) 178,716 163,482
- ------------------------------------------ ---------------------------
Total assets $10,540,360 $10,810,974
- ------------------------------------------ ============ ============
Liabilities 1996 1995
- -----------------------------------------------------------------------
Deposits:
Demand $1,189,808 $1,037,906
Interest checking 729,233 687,505
Regular savings 724,264 727,951
Consumer certificates 3,944,228 4,134,031
Money market accounts 995,695 1,050,158
Certificates of deposit $100,000 and over 488,226 348,347
- ------------------------------------------ ---------------------------
Total deposits 8,071,454 7,985,898
- ------------------------------------------ ---------------------------
Borrowings:
Federal funds purchased and securities sold
under agreements to repurchase (note 10) 907,875 1,041,951
Other short-term borrowings (note 10) 72,274 88,045
Medium-term notes (note 11) -- 252,250
Federal Home Loan Bank borrowings (note 11) 400,080 350,700
Long-term debt (note 11) 150,324 150,386
Capitalized lease obligations (note 8) 7,334 7,746
- ------------------------------------------ ---------------------------
Total borrowings 1,537,887 1,891,078
- ------------------------------------------ ---------------------------
Dividends payable 13,059 12,052
Accrued interest payable 29,160 37,911
Bank acceptances outstanding 11,009 18,741
Accounts payable and accrued liabilities
(note 14) 31,292 38,747
- ------------------------------------------ ---------------------------
Total liabilities 9,693,861 9,984,427
- ------------------------------------------ ---------------------------
Shareholders' Equity
- -----------------------------------------------------------------------
Preferred stock, none issued (note 13) -- --
Common stock, par value $5 per share,
authorized 100,000,000 shares, shares
issued 1996 - 59,378,319: 1995 -
40,192,879 (notes 13 and 15) 296,892 200,964
Capital surplus 171,926 195,151
Retained earnings (note 2) 368,457 406,567
Unrealized gains on securities available for
sale, net of income taxes 9,224 23,865
- ------------------------------------------ ---------------------------
Total shareholders' equity (note 19) 846,499 826,547
- ------------------------------------------ ---------------------------
Commitments and contingent liabilities (notes 8, 14 and 17)
Total liabilities and shareholders'
equity $10,540,360 $10,810,974
- ------------------------------------------ ============ ============
- -----------------------------------------------------------------------
The notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF CONSOLIDATED INCOME
- ------------------------------------------------------------------------------------
- -
Central Fidelity Banks, Inc. and Subsidiaries
(In Thousands, except share and per share data) Year Ended December 31,
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------
- -
Income From Earning Assets
- ------------------------------------------------------------------------------------
- -
Interest and fees on loans $570,615 $526,896 $440,691
Interest on securities available for sale:
U.S. Government and agencies 134,709 166,436 160,822
States and political subdivisions 5,678 7,430 8,205
Other 71,551 64,741 48,486
Interest on loans available for sale 937 403 432
Interest on money market investments 4,924 5,951 6,120
Interest on trading account securities 206 63 41
- ------------------------------------------------------------------------------------
- -
Total income from earning assets 788,620 771,920 664,797
- ------------------------------------------------------------------------------------
- -
Interest Expense
- ------------------------------------------------------------------------------------
- -
Interest on deposits (note 16) 322,187 319,725 243,632
Interest on federal funds purchased and securities
sold under agreements to repurchase 47,801 57,678 44,171
Interest on other short-term borrowings 3,449 3,359 1,663
Interest on medium-term notes 3,841 19,311 25,403
Interest on Federal Home Loan Bank borrowings 25,268 20,539 6,406
Interest on long-term debt 10,139 10,978 8,681
Interest on capitalized lease obligations 668 705 735
- ------------------------------------------------------------------------------------
- -
Total interest expense 413,353 432,295 330,691
- ------------------------------------------------------------------------------------
- -
Net interest income 375,267 339,625 334,106
Provision for loan losses (note 7) 43,865 26,713 24,359
- ------------------------------------------------------------------------------------
- -
Net income from earning assets 331,402 312,912 309,747
- ------------------------------------------------------------------------------------
- -
Noninterest Income
- ------------------------------------------------------------------------------------
- -
Trust income 16,780 14,943 13,926
Deposit fees and charges 37,832 35,150 34,557
Profits (losses) on securities available for sale
and trading account securities, net (note 5) 99 3,253
(25,984)
Other income (note 16) 31,204 26,329 36,739
- ------------------------------------------------------------------------------------
- -
Total noninterest income 85,915 79,675 59,238
- ------------------------------------------------------------------------------------
- -
Noninterest Expense
- ------------------------------------------------------------- ----------------------
- -
Personnel expense (note 14) 142,347 133,186 127,683
Occupancy and equipment expense 46,147 42,979 41,653
FDIC insurance expense 2,287 11,164 14,910
Other real estate expense 2,006 1,500 11,786
Special SAIF assessment 4,028 -- --
Other expense (note 16) 55,126 49,336 49,033
- ------------------------------------------------------------------------------------
- -
Total noninterest expense 251,941 238,165 245,065
- ------------------------------------------------------------------------------------
- -
Earnings
- ------------------------------------------------------------- ----------------------
- -
Income before income taxes 165,376 154,422 123,920
Income tax expense (note 12) 52,674 49,052 39,056
- ------------------------------------------------------------------------------------
- -
Net income $112,702 $105,370 $84,864
- -------------------------------------------------- ======== ======== ========
Earnings Per Share
- ------------------------------------------------------------------------------------
- -
Net income $1.89 $1.77 $1.45
Average shares outstanding 59,736,817 59,673,709 58,741,982
- ------------------------------------------------------------------------------------
- -
The notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF CONSOLIDATED CASH FLOWS
- ------------------------------------------------------------------------------------
- --
Central Fidelity Banks, Inc. and Subsidiaries
(In Thousands) Year Ended December 31,
<CAPTION>
1996 1995 1994
<S> <C> <C>
<C>
- ------------------------------------------------------------------------------------
- --
Operating Activities
- ------------------------------------------------------------------------------------
- --
Net income $112,702 $105,370
$84,864
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 43,865 26,713
24,359
Depreciation of premises and equipment 16,304 15,792
15,248
Net amortization of premium and accretion of discount on
securities available for sale (847) (5,860)
1,132
(Gains) losses on securities available for sale (852) (3,822)
25,292
Deferred income taxes (911) 2,024
1,272
(Increase) decrease in trading account securities (3,639) 995
88
Originations of loans available for sale (122,916) (71,511)
(24,220)
Purchases of loans available for sale (85,953) (54,528)
(24,510)
Proceeds from sales of loans available for sale 198,244 112,646
84,164
(Increase) decrease in accrued interest
receivable 5,617 (7,503)
5,821
Increase (decrease) in accrued interest payable (8,751) 892
11,063
Other, net (15,649) (38,234)
(77,235)
- ------------------------------------------------------------------------------------
- --
Net cash provided by operating activities 137,214 82,974
127,338
- ------------------------------------------------------------------------------------
- --
Investing Activities
- ------------------------------------------------------------------------------------
- --
Purchases of securities available for sale
(366,109)(1,033,292)(2,426,679)
Proceeds from sales of securities available for sale 218,876 582,085
2,266,537
Proceeds from maturities and repayments of securities available
for sale 686,670 486,370
529,629
Net increase in loans (442,105)
(561,865)(1,020,589)
Purchases of premises and equipment (21,431) (19,725)
(16,548)
Proceeds from the disposition of premises and
equipment 1,256 539
960
Proceeds from the disposition of foreclosed
properties 10,228 13,743
26,917
Net cash received in acquisitions -- 413,022 -
- -
- ------------------------------------------------------------------------------------
- --
Net cash provided (used) by investing
activities 87,385 (119,123)
(639,773)
- ------------------------------------------------------------------------------------
- --
Financing Activities
- ------------------------------------------------------------------------------------
- --
Net increase (decrease) in demand, interest checking and regular
savings deposits 189,943 79,733
(79,038)
Net increase (decrease) in consumer certificates (189,803) 51,227
874,145
Net increase (decrease) in money market accounts (54,463) 73,970
(33,389)
Net increase (decrease) in certificates of deposit
$100,000 and over 139,879 101,151
(190,490)
Net increase (decrease) in short-term borrowings (149,847) 27,128
(381,386)
Proceeds from medium-term notes and FHLB borrowings 143,280 114,200
386,500
Payments on medium-term notes and FHLB borrowings (346,150) (309,250) -
- -
Proceeds from long-term debt -- --
100
Payments on long-term debt and capitalized lease
obligations (474) (433)
(1,396)
Proceeds from issuance of common stock 11,619 19,036
4,044
Common stock purchased (38,368) -- -
- -
Cash in lieu of fractional shares for stock split (78) -- -
- -
Cash dividends (50,275) (45,971)
(42,645)
- ------------------------------------------------------------------------------------
- --
Net cash provided (used) by financing
activities (344,737) 110,791
536,445
- ------------------------------------------------------------------------------------
- --
Increase (decrease) in cash and cash equivalent (120,138) 74,642
24,010
Cash and cash equivalents at beginning of year 571,314 496,672
472,662
- ------------------------------------------------------------------------------------
- --
Cash and cash equivalents at end of year $451,176 $571,314
$496,672
- ----------------------------------------------------- ======== ========
========
- ------------------------------------------------------------------------------------
- --
The notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF CHANGES IN CONSOLIDATED SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------
- -------
Central Fidelity Banks, Inc. and Subsidiaries
(In Thousands)
<CAPTION>
Unrealized
Gains (Losses)
on Securities
Total
Common Stock Capital Retained Available
Shareholders
Shares Amount Surplus Earnings for Sale
Equity
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------
- -------
Year Ended December 31, 1994
- ------------------------------------------------------------------------------------
- -------
Balance at beginning of year 39,023 $195,114 $177,921 $307,249 $45,853
$726,137
Net income -- -- -- 84,864 --
84,864
Common stock issued under Plans 301 1,507 2,537 -- --
4,044
Cash dividends declared on
common stock ($.76 per share) -- -- -- (43,894) --
(43,894)
Change in unrealized gains on securities
available for sale, net of income taxes of
$79,735 -- -- -- -- (148,079)
(148,079)
- ------------------------------------------------------------------------------------
- -------
Balance at end of year 39,324 196,621 180,458 348,219 (102,226)
623,072
- ------------------------------------------------------------------------------------
- -------
Year ended December 31, 1995
- ------------------------------------------------------------------------------------
- -------
Net income -- -- -- 105,370 --
105,370
Common stock issued under Plans 869 4,343 14,693 -- --
19,036
Cash dividends declared on
common stock ($.79 per share) -- -- -- (47,022) --
(47,022)
Change in unrealized losses on securities
available for sale, net of income taxes
of $67,895 -- -- -- -- 126,091
126,091
- ------------------------------------------------------------------------------------
- -------
Balance at end of year 40,193 200,964 195,151 406,567 23,865
826,547
- ------------------------------------------------------------------------------------
- -------
Year ended December 31, 1996
- ------------------------------------------------------------------------------------
- -------
Net income -- -- -- 112,702 --
112,702
Common stock issued under Plans 594 2,977 8,642 -- --
11,619
Common stock purchased (1,299) (6,501) (31,867) -- --
(38,368)
Cash dividends declared on
common stock ($.86 per share) -- -- -- (51,282) --
(51,282)
Common stock issued for 3-for-2
stock split 19,890 99,452 -- (99,530)
(78)
Change in unrealized gains on securities
available for sale, net of income taxes
of $7,883 -- -- -- -- (14,641)
(14,641)
- ------------------------------------------------------------------------------------
- -------
Balance at end of year 59,378 $296,892 $171,926 $368,457 $9,224
$846,499
- ---------------------------------====== ======== ======== ======== ========
========
- ------------------------------------------------------------------------------------
- -------
The notes are an integral part of the financial statements.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------
- ---------------------------------------------
Central Fidelity Banks, Inc. and Subsidiaries
NOTE 1. Nature of Operations and Significant Accounting Policies
Central Fidelity Banks, Inc. ("Central Fidelity" or the "Company")
and its subsidiaries operate within the commercial banking industry.
The Company serves the marketplace primarily through its wholly-owned
banking subsidiary, Central Fidelity National Bank, a national banking
association (the "Bank"). The Company, through the Bank and its other
subsidiaries, provides a wide range of financial services, including
a variety of deposit accounts, as well as commercial, consumer and
mortgage lending. The Company also engages in limited international
banking activities, primarily in connection with foreign trade financing
for Virginia-based companies. In addition to commercial activities, the
Company generates noninterest income by sales of trust and fiduciary
services, and other investment services.
The consolidated financial statements include the accounts and
results of operations of Central Fidelity and its subsidiaries, all of
which are wholly-owned. The Consolidated Bank Balance Sheet includes
the accounts of the bank subsidiary only.
The accounting and reporting policies used in preparing these
financial statements conform to generally accepted accounting principles
and to general practices within the industry. Of necessity, certain
amounts in the financial statements are based upon management's estimates
and assumptions. Actual results could differ from those estimates.
CASH FLOW INFORMATION - For purposes of the Statement of Consolidated
Cash Flows, the Company considers amounts due from banks and money market
investments which have original maturities of three months or less to be
cash equivalents. During the years ended December 31, 1996, 1995 and 1994,
cash paid for interest was $422,104,000, $430,595,000 and $319,628,000,
and cash paid for income taxes was $50,672,000, $36,569,000 and $41,372,000,
respectively. During 1996, 1995 and 1994, other assets increased as a
result of loan foreclosures in the amount of $8,649,000, $5,659,000 and
$6,059,000, respectively, representing non-cash investing activities for
purposes of the Statement of Consolidated Cash Flows.
MONEY MARKET INVESTMENTS - Money market investments are carried at cost,
which approximates fair value. These assets are highly liquid short-term
investments generally maturing within one year which arise from Central
Fidelity's and its subsidiary bank's money market activities. They include
the overnight investment of excess reserves, securities purchased under
agreements to resell, and the investment in certificates of deposit of
unrelated banks.
TRADING ACCOUNT SECURITIES - Trading account securities are intended to
be sold in the near term and are carried at fair value. Gains and losses
arising from the sale of trading account securities and market adjustments
are included in "Profits (losses) on securities available for sale and
trading account securities, net."
SECURITIES AVAILABLE FOR SALE - The Company's securities are classified
as available for sale and are accounted for at fair value. Unrealized
gains and losses are reported in a separate component of shareholders'
equity in the Consolidated Balance Sheet. Securities are used as part
of the Company's asset/liability strategy and may be sold in response
to changes in interest rates, prepayment risk, the need or desire to
increase capital, satisfy regulatory requirements or other similar
factors. Gains and losses arising from the sale of securities available
for sale and declines in values determined to be other than temporary
are included in "Profits (losses) on securities available for sale and
trading account securities, net."
LOANS AVAILABLE FOR SALE - Loans available for sale are carried at the
lower of aggregate cost or fair value. Realized gains and losses and
adjustments to market are classified as "Other income."
LOANS - Interest on loans is credited to income based on the principal
amounts outstanding during the period. Origination and commitment fees
and all related costs are deferred, and the net amount is amortized
over the contractual or estimated life of the loans, if shorter.
The policy with respect to interest accruals on commercial,
construction and real estate loans specifies that interest will stop
being accrued on any loan that is 90 days past due if such loans are
not well secured and in the process of collection or if there appears
to be no reasonable expectation that the borrower will be able to pay
the interest up to date within a reasonable time period and the value
of the collateral is not at least equal to the amount at which the loan
plus all interest accrued is recorded. Interest income is recognized on
these loans only when received in cash. Notwithstanding, any loans that
reach 180 days past due are immediately placed in nonaccrual status. A
loan will remain on a nonaccrual status until the loan is current, as
to payment of both interest and principal, and the borrower demonstrates
the ability to pay and remain current. The policy with respect to
installment loans requires that a loan be charged off when it is over
120 days past due unless the collateral securing the loan has been
repossessed and is in the process of liquidation. The policy with
respect to bank card loans requires that a loan be charged off when
it reaches 180 days past due. Generally, accrual of interest on
these consumer loans is not discontinued prior to charge-off unless
the collateral has been repossessed or notice of bankruptcy, death
or fraud has been received on an unsecured debt.
On January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan" (SFAS 114), as amended by SFAS 118, "Accounting by Creditors
for Impairment of a Loan--Income Recognition and Disclosures,"
collectively SFAS 114. SFAS 114 requires that impaired loans within
the scope of the statements be presented in the financial statements
at the present value of expected future cash flows or at the fair
value of the loan's collateral. A valuation allowance is required to
the extent that such measurement is less than the recorded investment.
Under this standard a loan is considered impaired based on current
information and events if it is probable that the Company will be
unable to collect the scheduled payments of principal and interest
when due under the contractual terms of the loan agreement.
Charge-offs for impaired loans occur when the loan, or portion of
the loan is determined to be uncollectible, as is the case for all
loans. The effect of the adoption of SFAS 114 was not material to
the Company's consolidated financial statements as of and for the
year ended December 31, 1995.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses consists
of the cumulative effect of the provision for loan losses, less net
loans charged off. The provision for loan losses charged to operating
expense is the amount necessary, in management's judgment, to maintain
the allowance at a level it believes sufficient to cover losses in
collections of loans. The provision is based on such factors that,
in management's judgment, warrant current recognition in providing
an adequate allowance. Principal factors in management's analysis
of the adequacy of the allowance are: specific knowledge and
historical relationships among loans outstanding, loan loss
experience and the current level of the allowance; a continuing
evaluation of the present and anticipated future economic environment
for the nation and for the various business sectors of the Company's
trade area; evaluation of concentrations by credit, industry or
geography; nature and volume of the loan portfolio and reviews of the
loan portfolio quality by the Company's loan review staff, the
regulatory authorities and external auditors.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost
less accumulated depreciation and amortization. Additions, major
replacements and improvements to buildings and equipment are added
to the asset accounts at cost.
Certain noncancellable leases, for the financing of premises
and equipment, have been capitalized and are classified as premises
and equipment in the accompanying balance sheets. Related amounts
representing capitalized lease obligations are included in the
accompanying balance sheets as a separate liability and are amortized
using the interest method to allocate payments between principal
reduction and interest expense. The initial carrying amounts represent
the present value of the future rental payments, discounted at the
lower of the incremental borrowing rate of the lessee or the interest
rate implicit in the lease.
Depreciation and amortization are computed and charged to expense
over the estimated useful lives of the assets, principally on a
straight-line method. Rates of depreciation are based on the following
lives: buildings, twenty to fifty years; leasehold improvements, five to
twenty years; and furniture and equipment, three to fifteen years.
Capital leases and leasehold improvements are amortized to expense
over the terms of their respective leases or the estimated useful
lives of the improvements, whichever is shorter. Gains and losses on
dispositions are reflected in operations. Maintenance, repairs and
minor replacements are charged to expense.
FORECLOSED PROPERTIES - Foreclosed properties, classified in "Other
assets" in the accompanying Consolidated Balance Sheet, consist
primarily of real estate held for resale which was acquired through
foreclosure on loans secured by real estate. Foreclosed properties
are carried at the lower of cost or appraised market value less
estimated disposal costs. Writedowns to market value at the date
of foreclosure are charged to the allowance for loan losses.
Subsequent declines in market value are charged to expense.
DEPOSIT INTANGIBLES AND GOODWILL - Deposit base intangibles and
goodwill are amortized over the expected periods of benefit on a
straight-line basis, and classified as "Other assets" in the
accompanying Consolidated Balance Sheet.
MORTGAGE SERVICING RIGHTS - During the fourth quarter of 1995,
the Company prospectively adopted Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights"
(SFAS 122).Upon adoption of SFAS 122, the cost of mortgage loans
originated or purchased with a definitive plan to sell the loans
and retain the mortgage servicing rights is allocated between the
loans and the servicing rights based on their estimated fair values
at the date of origination, purchase or sale. Mortgage servicing
rights are amortized in proportion to, and over the period of,
estimated net servicing income, and classified as "Other assets"
in the accompanying Consolidated Balance Sheet. Impairment is
evaluated and measured based on a stratification of the mortgage
servicing rights in accordance with the risk characteristics of
the underlying loans, including loan type, location, term and
date of origination.
DERIVATIVE FINANCIAL INSTRUMENTS - The Company mainly utilizes
interest rate swaps to manage its interest rate exposure. Income
or expense associated with interest rate swap agreements is
recognized on the accrual basis over the life of the swap agreement
as a component of interest income or interest expense. Gains and
losses on early terminations of interest rate swap agreements are
recognized over the remaining life of the underlying asset or
liability. In 1996, a swap was terminated resulting in a loss of
$380,000. The loss will be amortized over the remaining life of
the underlying hedged asset. The Company did not terminate any
interest rate swap agreements prior to contractual maturity in
1995 and 1994.
INCOME TAXES - Central Fidelity accounts for certain income and
expense items differently for income tax purposes than for financial
reporting purposes. Provisions for deferred taxes are made in
recognition of these timing differences. Central Fidelity and its
subsidiaries file consolidated federal income tax returns.
PENSION AND POSTRETIREMENT PLANS - The pension plan covers
substantially all employees. Costs of the plan are determined
by independent actuaries using the projected unit credit method.
The plan is funded on a current basis to the extent deductible
under existing federal tax regulations.
The Company provides Medicare carve-out health insurance
coverage to its qualifying retirees. Participants in this plan
are retired employees and active employees who are age 45 and
have completed 10 full years of service. Benefits provided to
retired employees before retirement are accrued during the period
of employment.
STOCK OPTIONS - The Company applies APB Opinion 25 and related
interpretations in accounting for its stock options. At the
time options are exercised, the par value of the shares is
credited to common stock, and the excess of the proceeds over
the par value is credited to capital surplus. No charges or
credits to income have been made with respect to the options
since the option price was the same as fair value at the date
of grant.
EARNINGS PER SHARE - Earnings per share have been computed on
the basis of the weighted average number of shares outstanding
during the year. The assumed exercise of stock options has not
been included in the computations because the resulting dilution
is not material.
On May 8, 1996, the Board of Directors of the Company declared
a 3-for-2 stock split in the form of a dividend payable on June 14,
1996 to shareholders of record May 20, 1996.
DIVIDENDS - Dividends are paid to the Company by its bank subsidiary
in amounts sufficient to cover corporate expenses and dividends paid
to shareholders. Dividends are subject to the financial condition of
the subsidiary, regulatory limitations and management's judgment as
to the desirability of utilizing alternative sources of funds.
TRUST ASSETS AND INCOME - Assets held by the bank subsidiary in a
fiduciary, agency or safekeeping capacity for customers are not
included as assets in the accompanying Consolidated Balance Sheet.
At December 31, 1996, such assets amounted to $8.5 billion. Trust
service income is recognized primarily on the accrual basis.
RECLASSIFICATIONS - Certain previously reported amounts have been
reclassified to conform to current presentations.
<PAGE>
<TABLE>
NOTE 2. Parent Company Financial Information
Condensed financial information of Central Fidelity Banks, Inc.
(Parent Company) is presented below:
Balance Sheet
(In Thousands)
December 31,
<CAPTION>
1996 1995
<S> <C> <C>
- ------------------------------------------------------------------------------
Assets:
Cash $27 $21
Securities purchased under agreements to resell
and other money market investments 64,608 51,514
Securities available for sale 6,705 10,785
Investments in subsidiaries, at equity:
Bank 803,535 787,600
Bank-related 4,065 3,978
Note receivable from subsidiary 150,000 150,000
Other assets 23,631 21,276
- -----------------------------------------------------------------------------------
Total assets $1,052,571 $1,025,174
- ------------------------------------------------------- ========= =========
Liabilities:
Commercial paper (note 10) $32,873 $33,082
Securities sold under agreements to repurchase 4,104 1,260
Long-term debt (note 11) 150,000 150,000
Other liabilities 19,095 14,285
- -----------------------------------------------------------------------------------
Total liabilities 206,072 198,627
Shareholders' equity (note 19) 846,499 826,547
- -----------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,052,571 $1,025,174
- ------------------------------------------------------- ========= =========
- ------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
Statement of Income
(In Thousands)
Year Ended December 31,
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Income:
Dividends from subsidiary bank $83,200 $24,000 $45,000
Other 15,321 15,683 14,581
- -------------------------------------------------------------------------------
Total income 98,521 39,683 59,581
- -------------------------------------------------------------------------------
Expense:
Interest 13,763 13,910 13,085
Other 3,112 4,233 4,850
- -------------------------------------------------------------------------------
Total expense 16,875 18,143 17,935
- -------------------------------------------------------------------------------
Income before income taxes and equity in
undistributed net income of subsidiaries 81,646 21,540 41,646
Income tax benefit (357) (712) (1,143)
- -------------------------------------------------------------------------------
Income before equity in undistributed
net income of subsidiaries 82,003 22,252 42,789
Equity in undistributed net income of
subsidiaries 30,699 83,118 42,075
- -------------------------------------------------------------------------------
Net income $112,702 $105,370 $84,864
- ----------------------------------------------======== ======== =======
- ------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
Statement of Cash Flows
(In Thousands)
Year Ended December 31,
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------
- ---
Operating activities:
Net income $112,702 $105,370
$84,864
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed net income of
subsidiaries (30,699) (83,118)
(42,075)
(Increase) decrease in other assets (2,355) 7,554
(6,340)
Other, net 3,839 (885)
(362)
- ------------------------------------------------------------------------------------
- ---
Net cash provided by operating activities 83,487 28,921
36,087
- ------------------------------------------------------------------------------------
- ---
Investing activities:
Purchase of securities available for sale (21,976) (63,232)
(11,479)
Proceeds from sales of securities available for sale 16,075 9,145
10,965
Proceeds from maturities and repayments of securities
available for sale 9,981 49,066
425
Repayment of note receivable from subsidiary -- 500
- --
- ------------------------------------------------------------------------------------
- ---
Net cash provided (used) by investing
activities 4,080 (4,521)
(89)
- ------------------------------------------------------------------------------------
- ---
Financing activities:
Net increase in short-term borrowings 2,635 7,685
7,822
Proceeds from issuance of common stock 11,619 19,036
4,044
Common stock purchased (38,368) --
- --
Cash in lieu of fractional shares for stock split (78) --
- --
Cash dividends (50,275) (45,971)
(42,645)
- ------------------------------------------------------------------------------------
- ---
Net cash used by financing activities (74,467) (19,250)
(30,779)
- ------------------------------------------------------------------------------------
- ---
Increase in cash and cash equivalents 13,100 5,150
5,219
Cash and cash equivalents at beginning of year 51,535 46,385
41,166
- ------------------------------------------------------------------------------------
- ---
Cash and cash equivalents at end of year $64,635 $51,535
$46,385
- ------------------------------------------------------- ======== ========
========
- ------------------------------------------------------------------------------------
- ---
Central Fidelity and each of its subsidiaries are affiliates within the meaning
of Section 23A of the Federal Reserve Act. Accordingly, they are subject to the
limitations specified in such section on the making of loans or extension of credit
to, or purchase of securities under repurchase agreement from, any of the
subsidiaries within the affiliate group. Therefore, substantially all of the net
assets of the affiliate group are restricted from use by the Company in the form of
loans or advances. Dividends, however, may be paid to the Company by its bank
subsidiary under formulas established by the appropriate regulatory authorities.
These formulas contemplate that the current year earnings and earnings retained for
the two preceding years may be paid to the Parent Company without said regulatory
approval. In 1997, the subsidiary bank can initiate dividend payments without said
regulatory approvals of $113,479,000, plus an additional amount equal to their net
earnings for 1997 up to the date of any such dividend declaration. In addition, the
limitations on dividends paid by the Company on common stock to shareholders for the
current and two immediately preceding years may not exceed consolidated net income
of the Company and its subsidiaries for the same period.
Substantially all of the retained earnings of the Parent Company are
represented by undistributed earnings of subsidiaries.
</TABLE>
<PAGE>
NOTE 3. ACQUISITIONS
On June 9, 1995, the Bank acquired core deposits, other miscellaneous
assets and liabilities of Household Bank, f.s.b. ("Household"), a Virginia
subsidiary of Household International, Inc., a Chicago, Illinois based
financial services company. Total deposits of approximately $453 million
and a total of fourteen branch offices in Northern Virginia were acquired.
The offices are located in the city of Alexandria, and counties of Arlington
and Fairfax. The $36,272,000 excess of the fair value of liabilities assumed
over the fair value of assets acquired and cash received from Household is
classified as deposit intangibles in "Other assets" in the Consolidated
Balance Sheet and is being amortized over fifteen years.
<PAGE>
NOTE 4. RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The Company is required to maintain average reserve balances with
the Federal Reserve Bank. The average amount of those reserve balances
for the years ended December 31, 1996 and 1995 was $30,708,000 and
$58,129,000, respectively.
<PAGE>
<TABLE>
NOTE 5. Securities Available for Sale
The following table shows amortized cost, fair value and gross unrealized gains
and losses of securities available for sale as of December 31, 1996 and 1995:
(In Thousands)
<CAPTION>
- -------------------------------------------------------------------------
U.S. States &
Government Political
& Agencies Subdivision Other Total
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------
December 31, 1996:
Amortized cost $1,948,130 $102,610 $1,004,693 $3,055,433
Fair value 1,957,748 104,933 1,006,943 3,069,624
Gross unrealized gains 20,431 2,432 5,482 28,345
Gross unrealized losses (10,813) (109) (3,232) (14,154)
December 31, 1995:
Amortized cost $2,319,928 $120,886 $1,152,358 $3,593,172
Fair value 2,342,541 124,380 1,162,966 3,629,887
Gross unrealized gains 30,906 3,635 13,650 48,191
Gross unrealized losses (8,293) (141) (3,042) (11,476)
- -------------------------------------------------------------------------
Securities available for sale having a fair value of $1,295,224,000
were pledged to secure deposits and to meet other legal requirements.
</TABLE>
<PAGE>
<TABLE>
The amortized cost and fair value of securities available for sale
are shown below by maturity. The classification of mortgage-backed securities
was based on expected maturities, while contractual maturities were used for
other debt securities. Expected maturities differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
(In Thousands)
<CAPTION>
- -------------------------------------------------------------------------
Amortized Fair
Cost Value
<S> <C> <C>
- -------------------------------------------------------------------------
Due in one year or less $384,852 $385,287
Due after one year through five years 1,915,443 1,927,148
Due after five years through ten years 645,418 646,649
Due after ten years 17,445 18,307
Common and preferred stocks
with no contractual maturity 92,275 92,233
- -------------------------------------------------------------------------
Total $3,055,433 $3,069,624
- ---------------------------------------------------========== ==========
- -------------------------------------------------------------------------
Proceeds from sales of securities available for sale were $218,876,000 for
1996, $582,085,000 for 1995 and $2,266,537,000 for 1994. Gross gains realized
on those sales were $874,000, $6,039,000 and $11,555,000 for 1996, 1995 and
1994, respectively. In 1996, 1995 and 1994, there were $22,000, $2,217,000
and $36,847,000 of gross losses realized on the sales of securities available
for sale, respectively.
</TABLE>
<PAGE>
<TABLE>
NOTE 6. LOANS
Nonaccrual loans (principally commercial and construction loans) totalled
$38,572,000 at December 31, 1996 and $48,763,000 at December 31, 1995.
Interest on nonaccrual loans not recognized was $3,837,000 in 1996,
$5,066,000 in 1995 and $6,171,000 in 1994. Interest collected and included in
the results of operations on such loans amounted to $2,293,000 in 1996,
$1,582,000 in 1995, and $596,000 in 1994.
At December 31, 1996 and 1995, the recorded investment in loans
which have been identified as impaired, in accordance with SFAS 114, totalled
$44,542,000 and $47,893,000, respectively. SFAS 114 does not apply to
larger groups of homogeneous loans such as mortgage, installment and
bank card loans, as such loans are collectively evaluated for impairment.
The Company, therefore, applies SFAS 114 to commercial and construction
loans on a loan-by-loan basis in accordance with its ongoing credit review
procedures.
Impaired loans are comprised of:
(In Thousands)
December 31, 1996 1995
<CAPTION>
<S> <C> <C>
- ---------------------------------------------------------------
Commercial and commercial real estate $28,783 $27,064
Construction 15,759 20,829
- ---------------------------------------------------------------
Total impaired loans $44,542 $47,893
- --------------------------------------------- ======= =======
- ---------------------------------------------------------------
At December 31, 1996, impaired loans totalling $29,298,000 had no valuation
allowance and $15,244,000 had a corresponding valuation allowance
of $2,973,000. At December 31, 1995, $18,232,000 related to loans with no
valuation allowance and $29,661,000 related to loans with a corresponding
valuation allowance of $7,316,000. All impaired loans were measured based on
the fair value of the collateral.
For the year ended December 31, 1996 and 1995, the average recorded
investment in impaired loans was approximately $50,949,000 and $53,999,000,
respectively. Total interest income recognized on impaired loan was $3,308,000
for 1996 and $1,679,000 for 1995, of which $1,014,000 was recognized on a cash
basis for 1996 and $1,582,000 was recognized on a cash basis for 1995.
In the ordinary course of business, the Company and its subsidiaries grant
loans to directors and executive officers of the Company and to their
affiliates. These loans are made on substantially the same credit terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons, and do not involve more than
the normal risk of collectibility. The aggregate dollar amount of these loans was
$7,152,000 and $6,687,000 at December 31, 1996 and 1995, respectively. During
1996, $2,061,000 of new loans were made and repayments totalled $1,596,000.
As discussed in note 1, the Company adopted SFAS 122, "Accounting for
Mortgage Servicing Rights," during 1995. The carrying amount and fair value of
mortgage servicing rights at December 31, 1996 was $10,972,000 and
$13,991,000, respectively, and $1,610,000 and $2,300,000 at December 31, 1995,
respectively. The fair value was determined using a discounted cash flow
method. Mortgage servicing rights are carried at cost, and classified as "Other
assets" in the accompanying Consolidated Balance Sheet. Based on
management's impairment analysis as of December 31, 1996 and 1995, no
valuation allowance was deemed necessary.
Mortgage servicing rights of $10,499,000 and $821,000 were capitalized during
1996 and 1995, respectively. Amortization of mortgage servicing rights in 1996 and
1995 was $1,137,000 and $165,000, respectively.
</TABLE>
<PAGE>
<TABLE>
NOTE 7. Allowance for Loan Losses
Following is a summary of the activity in the allowance for loan losses:
(In Thousands)
Year Ended December 31,
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
- --------------------------------------------------------------------
Balance at January 1 $110,000 $110,000 $105,000
Provision for loan losses 43,865 26,713 24,359
- --------------------------------------------------------------------
153,865 136,713 129,359
Loans charged off 61,316 46,281 34,397
Recoveries of loans previously
charged off 17,451 19,568 15,038
- --------------------------------------------------------------------
Net charge-offs 43,865 26,713 19,359
- --------------------------------------------------------------------
Balance at December 31 $110,000 $110,000 $110,000
- ---------------------------------- ======== ======== ========
- --------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
NOTE 8. Premises and Equipment
Premises and equipment included in the Consolidated Balance Sheet are:
(In Thousands)
December 31,
<CAPTION>
1996 1995
<S> <C> <C>
- ------------------------------------------------------------------------
Capital leases $11,827 $11,827
Land 24,084 23,938
Buildings 88,467 83,008
Furnishings and equipment 164,858 153,269
Leasehold improvements 33,913 32,679
Work-in-progress 7,998 7,492
- ------------------------------------------------------------------------
Total cost 331,147 312,213
Accumulated depreciation and amortization (174,028)(159,334)
- ------------------------------------------------------------------------
Premises and equipment, net $157,119 $152,879
- ----------------------------------------------------- ======== ========
- ------------------------------------------------------------------------
The Company has entered into long-term leases for certain premises and
equipment used by the Company and its subsidiaries. These leases expire at various
date to 2025, and most of the leases contain renewal options for periods ranging
from 5 to 30 years. In addition, certain leases provide that the Company may elect
to purchase the leased property at the expiration of the initial lease term. Some
leases also contain escalation clauses whereby the Company's rental payments are
adjusted proportionately with increases in the consumer price index.
Premises and equipment include the following amounts for leases that have been
capitalized:
(In Thousands)
December 31,
<CAPTION>
1996 1995
<S> <C> <C>
- ------------------------------------------------------------------------
Land $868 $868
Buildings 10,959 10,959
- ------------------------------------------------------------------------
Total cost 11,827 11,827
Accumulated amortization (5,822) (5,538)
- ------------------------------------------------------------------------
Capitalized leases, net $6,005 $6,289
- ----------------------------------------------------- ====== ======
- ------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
Future minimum lease payments, by year and in the aggregate, for capital and
noncancellable operating leases with initial or remaining terms of one year or more
consisted of the following at December 31, 1996:
(In Thousands)
<CAPTION>
Capital Operating
<S> <C> <C>
- ------------------------------------------------------------------------
1997 $1,090 $13,379
1998 1,102 13,006
1999 1,104 11,783
2000 1,106 10,252
2001 1,109 9,579
Later years 8,584 21,380
- ------------------------------------------------------------------------
Total minimum lease payments 14,095 $79,379
- ----------------------------------------------------- =======
Imputed interest (rates ranging from 8.0% to 14.3%) (6,761)
- -----------------------------------------------------------------
Present value of net minimum lease payments $7,334
- ----------------------------------------------------- =======
- ------------------------------------------------------------------------
Minimum future rentals receivable from subleases under the Company' capital
leases at December 31, 1996 amounted to $621,000. This amount is not included in the
preceding table.
Rental expense for all operating leases (cancellable and noncancellable)
consisted of:
(In Thousands)
Year Ended December 31,
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
- ------------------------------------------------------------------------
Minimum rentals $14,788 $13,647 $12,664
Sublease rental income (243) (250) (237)
- ------------------------------------------------------------------------
Net rental expense for operating leases $14,545 $13,397 $12,427
- ------------------------------------------- ======= ======= =======
- ------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
NOTE 9. Foreclosed Properties
Following is a summary of the activity in foreclosed properties and the
allowance for foreclosed properties:
(In Thousands)
Year Ended December 31,
<CAPTION> 1996 1995 1994
<S> <C> <C> <C>
- ---------------------------------------------------------------------------
Foreclosed properties, at January 1 $25,409 $30,845 $49,552
Additions 8,649 5,659 6,059
Sales (9,821) (11,029) (24,696)
Paydowns (91) (66) (70)
- ---------------------------------------------------------------------------
Foreclosed properties, at December 31 24,146 25,409 30,845
- ---------------------------------------------------------------------------
Allowance for foreclosed properties, at
January 1 8,273 8,085 10,806
Provision 1,070 2,149 13,687
Writedowns (653) (1,961) (16,408)
- ---------------------------------------------------------------------------
Allowance for foreclosed properties, at
December 31 8,690 8,273 8,085
- ---------------------------------------------------------------------------
Foreclosed properties, net (included in
other assets) $15,456 $17,136 $22,760
- ----------------------------------------- ======= ======= =======
- ---------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
NOTE 10. Short-Term Borrowings
Short-term borrowings are comprised of:
(In Thousands)
December 31,
<CAPTION>
1996 1995
<S> <C> <C>
- -----------------------------------------------------------------------------------
Federal funds purchased $405,820 $408,670
Securities sold under agreements to repurchase 502,055 633,281
- -----------------------------------------------------------------------------------
Total federal funds purchased and securities
sold under agreements to repurchase 907,875 1,041,951
- -----------------------------------------------------------------------------------
Commercial paper 32,873 33,082
Other 39,401 54,963
- -----------------------------------------------------------------------------------
Total other short-term borrowings 72,274 88,045
- -----------------------------------------------------------------------------------
Total $980,149 $1,129,996
- -----------------------------------------------------------========== ==========
The following tabulation is a summary of amounts and weighted average rates
applicable to the various categories of short-term borrowings:
(In Thousands)
<CAPTION>
- -----------------------------------------------------------------------------------
Average Annual Daily Average Maximum
Rate Interest Amount Month-End
December Rate Outstanding Balance
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------
Federal funds purchased:
1996 5.40 % 5.35 % $246,605 $405,820
1995 5.73 5.94 249,149 408,670
1994 5.56 3.94 227,194 410,848
Securities sold under agreements to repurchase:
1996 4.95 5.01 691,024 836,004
1995 5.40 5.72 750,098 1,000,269
1994 5.47 4.06 868,338 1,118,881
Commercial paper:
1996 4.46 4.36 31,085 34,783
1995 4.74 4.97 30,542 35,367
1994 4.80 3.61 19,598 28,418
Other:
1996 9.06 5.23 40,013 74,955
1995 5.77 5.70 32,323 61,639
1994 5.35 4.13 23,150 50,001
Total:
1996 5.16 % 5.08 % $1,008,727
1995 5.50 5.75 1,062,111
1994 5.46 4.03 1,138,280
- -----------------------------------------------------------------------------------
Federal funds purchased and securities sold under agreements to repurchase
generally mature daily or on demand.
Commercial paper, in the form of short-term variable rate notes, matures no
later than six months from date of issuance.
Other short-term borrowings consist principally of U.S. Treasury tax and loan
deposit notes payable on demand, and Federal Home Loan Bank borrowings callable 90
days from date of issuance.
</TABLE>
<PAGE>
<TABLE>
NOTE 11. MEDIUM-TERM AND LONG-TERM DEBT
Medium-term and long-term debt consist of:
(In Thousands)
December 31,
<CAPTION>
1996 1995
<S> <C> <C>
- ------------------------------------------------------------------------------------
Medium-term debt:
Subsidiary bank:
Bank notes:
4.785%, due February 15, 1996 $-- $150,000
5.00%, due June 17, 1996 -- 102,250
- -------------------------------------------------------------- --------------------
Total bank notes $-- 252,250
- -------------------------------------------------------------- --------------------
Federal Home Loan Bank borrowings:
6.025%, due May 3, 1996 -- 47,700
7.54%, due November 27, 1996 -- 46,200
7.686%, due February 3, 1997 26,800 26,800
6.51%, due May 12, 1997 4,000 4,000
6.44%, due June 6, 1997 18,500 18,500
Floating rate, due June 6, 1997 25,000 25,000
6.39%, due June 10, 1997 25,000 25,000
Floating rate, due June 23, 1997 25,000 25,000
6.57%, due August 8, 1997 46,600 46,600
7.69%, due November 10, 1997 2,500 2,500
8.31%, due January 2, 1998 1,500 1,500
8.05%, due January 5, 1998 4,800 4,800
Floating rate, due February 6, 1998 50,000 --
Floating rate, due May 7, 1998 43,800 --
6.63%, due May 12, 1998 19,600 19,600
Floating rate, due November 29, 1999 42,280 --
5.924%, due June 5, 2000 50,000 50,000
5.63%, due January 22, 2001 7,200 --
5.95%, due December 11, 2003 7,500 7,500
- -------------------------------------------------------------- --------------------
Total Federal Home Loan Bank borrowings 400,080 350,700
- -------------------------------------------------------------- --------------------
Total medium-term debt 400,080 602,950
- -------------------------------------------------------------- --------------------
Long-term debt:
Central Fidelity Banks, Inc. (Parent Company):
Subordinated notes due November 15, 2002 150,000 150,000
Subsidiary bank:
Mortgage notes at various interest rates 324 386
- -------------------------------------------------------------- --------------------
Total long-term debt 150,324 150,386
- -------------------------------------------------------------- --------------------
Total $550,404 $753,336
- -------------------------------------------------------------- ======== ========
- ------------------------------------------------------------------------------------
The interest payments on fixed rate Federal Home Loan Bank borrowings are
payable monthly. The floating interest rate is determined quarterly, based on 3-
month LIBOR minus a spread, and interest payments are due quarterly.
The subordinated notes due November 15, 2002 are subordinated to all existing
and future senior indebtedness of the Company. The notes bear interest at 8.15% per
annum, payable semi-annually on May 15 and November 15. The notes are not redeemable
prior to maturity.
Scheduled principal payments of the medium-term and long-term debt at December
31, 1996 are:
(In Thousands)
<CAPTION>
<S> <C>
- ------------------------------------------------------------------------------------
1997 $173,467
1998 119,774
1999 42,360
2000 50,081
2001 7,211
Later years 157,511
- ------------------------------------------------------------------------- ---------
Total $550,404
- ------------------------------------------------------------------------- ========
- ------------------------------------------------------------------------------------
</Table
<PAGE>
</TABLE>
<TABLE>
NOTE 12. Income Taxes
The components of income tax expense (benefit) are:
(In Thousands)
Year Ended December 31,
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------
Current taxes - federal $53,585 $47,028 $37,784
Deferred taxes - federal (911) 2,024 1,272
- ---------------------------------------------------------------------------------
Income tax expense $52,674 $49,052 $39,056
- ------------------------------------------------------ ======= ======= =======
- ---------------------------------------------------------------------------------
The differences between income tax computed by applying the federal statutory
rate to income before income taxes and the actual tax provision are shown below:
(In Thousands)
Year Ended December 31,
<CAPTION>
1996 1995 1994
<C> <C> <C> <C>
- ---------------------------------------------------------------------------------
Income tax at federal statutory rate 35.0% 35.0% 35.0%
Increase (decrease) in taxes resulting from:
Tax-exempt interest (2.1) (2.6) (3.7)
Other, net (1.0) (0.6) 0.2
- ---------------------------------------------------------------------------------
Net decrease in taxes (3.1) (3.2) (3.5)
- ---------------------------------------------------------------------------------
Income tax expense 31.9% 31.8% 31.5%
- ------------------------------------------------------ ====== ====== ======
- ---------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1996 and
1995 are presented below:
(In Thousands)
December 31,
<CAPTION>
1996 1995
<S> <C> <C>
- ---------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan and other real estate losses $36,977 $36,831
Employee benefit liabilities 8,823 8,822
Other 5,208 3,127
- ---------------------------------------------------------------------------------
Total deferred tax assets 51,008 48,780
- ---------------------------------------------------------------------------------
Deferred tax liabilities:
Securities transactions 6,957 6,485
Deferred loan fees and costs 1,295 494
Leases 840 641
Prepaid expenses 1,367 1,284
Unrealized gains on securities available for sale, net 4,967 12,850
Other 986 1,224
- ---------------------------------------------------------------------------------
Total deferred tax liabilities 16,412 22,978
- ---------------------------------------------------------------------------------
Net deferred tax asset (included in other assets) $34,596 $25,802
- --------------------------------------------------------------- ======= =======
- ---------------------------------------------------------------------------------
Management has determined, based on the Company's history of earnings, its
expectation of earnings in future years, its taxable income in the available
carryback period and future taxable income from reversing taxable temporary
differences, that it is more likely than not that all of the deferred tax asset
will be realized. Accordingly, no valuation allowance has been established.
</TABLE>
<PAGE>
NOTE 13. PREFERRED AND COMMON STOCK
The Company is authorized to issue two classes of preferred stock:
200,000 shares of preferred stock, par value $100 per share; and
4,000,000 shares of 1983 preferred stock, par value $25 per share.
Both classes are issuable in series, and have such rights, including
voting and conversion rights, preferences and terms as determined by
the Board of Directors at the time of issuance. As of December 31,
1996, no shares of either class were outstanding.
The Company is authorized to issue 100,000,000 shares of common
stock, par value $5 per share, of which 59,378,319 shares were
outstanding as of December 31, 1996. Each share of common stock also
represents one preferred share purchase right ("Right") under the terms
of the Company's Rights Agreement dated May 3, 1989, as amended and
restated in its entirety on November 9, 1994 (the "Rights Agreement").
Each Right entitles its registered holder to purchase from the Company,
after the Distribution Date (as defined in the Rights Agreement), one
one-hundredth of a share of Series A Junior Participating Preferred
Stock, par value $25 per share, for $110 (the "Purchase Price"). The
Purchase Price and the number of Rights outstanding, or in certain
circumstances the securities purchasable upon exercise of the Rights,
are subject to adjustment from time to time to prevent dilution in the
event of a common stock dividend on or a subdivision or a combination
into a smaller number of shares of common stock, or the issuance or
distribution of any securities or assets in respect of, in lieu of or
in exchange for common stock.
On January 10, 1996, the Company's Board of Directors authorized
the purchase of up to 2,000,000 shares of its common stock,
approximately 5% of its outstanding shares, over an 18 to 24 month
period. On May 8, 1996, the remaining shares available for purchase
under the repurchase program were adjusted to reflect the 3-for-2
stock split-up in the form of a stock dividend declared by the Board.
The repurchased shares may be used for general corporate purposes.
Purchases under the repurchase program may be discontinued or
interrupted at any time. During 1996, a total of 1,299,000 pre-split
and post-split shares were repurchased by the Company under the program.
On May 8, 1996, the Board of Directors of the Company declared a
3-for-2 stock split in the form of a dividend payable on June 14, 1996 to
shareholders of record May 20, 1996.
<PAGE>
<TABLE>
NOTE 14. Employee Benefit Plans
Central Fidelity has a noncontributory defined benefit pension plan covering
substantially all full-time employees. The plan provides pension benefits that
are based on the employee's compensation during the five years before retirement.
The Company's funding policy is to contribute annually the maximum amount that
can be deducted for federal income tax purposes.
The following table sets forth the plan's funded status and amount recognized
in the Company's Consolidated Balance Sheet:
(In Thousands)
December 31,
<CAPTION>
1996 1995
<S> <C> <C>
- -----------------------------------------------------------------------
Accumulated and vested benefit obligation ($53,758) ($45,968)
- ------------------------------------------------- ======= =======
Projected benefit obligation ($72,961) ($63,820)
Plan assets at fair value 75,824 59,829
- ----------------------------------------------------------- ----------
Plan assets over (under) projected benefit
obligation 2,863 (3,991)
Unrecognized net loss from past experience 8,679 12,059
Prior service cost not yet recognized (411) (497)
Unrecognized net asset being recognized
over 15 years (811) (1,014)
- ----------------------------------------------------------- ----------
Prepaid pension cost $10,320 $6,557
- ------------------------------------------------- ====== ======
- -----------------------------------------------------------------------
Net pension cost included the following components:
(In Thousands)
Year Ended December 31,
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
- -----------------------------------------------------------------------
Service cost $3,317 $2,582 $2,679
Interest cost 4,874 4,189 3,525
Actual (return) loss on plan assets (11,151) (10,044) 705
Net amortization and deferral 5,755 6,045 (4,635)
- ----------------------------------------------------------- ----------
Total pension expense $2,795 $2,772 $2,274
- --------------------------------------- ====== ====== ======
- -----------------------------------------------------------------------
In determining the actuarial present value of the projected benefit obligation,
the weighted-average discount rate used was 7.75% for 1996 and 1995,
and rate of increase in future compensation levels used was 4.00% for 1996
and 5.50% for 1995. The expected long-term rate of return on assets was 9.25% for
1996 and 9.00% for1995.
The plan assets at December 31, 1996 included 310,519 shares of the common
stock of the Company having a market value of approximately $7,996,000 or 11%
of the total market value of the plan assets at that date. The plan received
$261,000 in dividends on these shares during 1996.
The Company's pension plan provides that the benefits payable to retirees are
based on years of service and levels of compensation. The Internal Revenue Code
contains limits on the annual benefits that a retiree may receive from a qualified
defined benefit plan. For 1997 the maximum amount that a qualified plan may pay out
to a retiree is $125,000.
The Company maintains an unfunded nonqualified plan that enables retirees to
receive pension benefits in accordance with the computational terms of the plan when
those terms provide benefits in excess of the amounts payable under the IRS
qualified rules. In addition, there is an unfunded Executive Supplemental Retirement
Plan which provides a benefit equal to 25% of the participating executive's salary.
Benefits are payable for 20 years to the executive or to his estate upon his death.
The table below sets forth these plans' funded status and amounts recognized
in the Company's Consolidated Balance Sheet.
(In Thousands)
December 31,
<CAPTION>
1996 1995
<S> <C> <C>
- -----------------------------------------------------------------------
Accumulated and vested benefit obligation ($14,559) ($11,755)
- ------------------------------------------------- ======= =======
Projected benefit obligation ($17,933) ($14,241)
Plan assets at fair value -- --
- -----------------------------------------------------------------------
Plan assets under projected benefit obligation (17,933) (14,241)
Unrecognized net (gain) loss from past experience 2,702 (264)
Prior service cost not yet recognized 1,107 1,299
Unrecognized net asset being recognized
over 15 years 4,770 5,219
- -----------------------------------------------------------------------
Accrued pension cost ($9,354) ($7,987)
- ------------------------------------------------- ====== ======
- -----------------------------------------------------------------------
Net pension cost for this supplemental plan included the following components:
(In Thousands)
Year Ended December 31,
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
- -----------------------------------------------------------------------
Service cost $436 $353 $282
Interest cost 1,070 1,000 957
Net amortization and deferral 664 488 659
- -----------------------------------------------------------------------
Total pension expense $2,170 $1,841 $1,898
- --------------------------------------- ====== ====== ======
- -----------------------------------------------------------------------
In determining the actuarial present value of the projected benefit obligation,
the weighted-average discount rate used was 7.75% for 1996 and 1995, and the
rate of increase in future compensation levels used was 4.00% for 1996 and 5.50% for
1995.
Under the provisions of its Stock and Thrift Plan, the Company matches at least
50% of employee contributions to the plan. Additional matching contributions are
made by the Company based upon attainment of defined earnings levels. There were
no additional matching contributions made in 1996, 1995 or 1994. The Company
contributed $2,657,000, $2,581,000 and $2,429,000 in 1996, 1995 and 1994,
respectively, as its matching share.
The Company provides the Medicare carve-out health insurance coverage to its
qualifying retirees (the "Plan"). Participants in this Plan are retired employees
and active employees who are age 45 and have completed 10 full years of service.
The following table sets forth the Plan's funded status and amount recognized
in the Company's Consolidated Balance Sheet:
(In Thousands)
December 31,
<CAPTION>
1996 1995
<S> <C> <C>
- -----------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees and spouses ($13,287) ($12,670)
Eligible active participants (3,144) (2,741)
Other active participants (4,437) (3,349)
- -----------------------------------------------------------------------
Total accumulated postretirement benefit
obligation (20,868) (18,760)
Plan assets at fair value -- --
Total unrecognized loss (1,135) (1,905)
Unrecognized transition obligation 13,242 14,070
- -----------------------------------------------------------------------
Net postretirement benefit liability ($8,761) ($6,595)
- ------------------------------------------------- ======= =======
- -----------------------------------------------------------------------
The net postretirement benefit cost included the following components:
(In Thousands)
Year Ended December 31,
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
- -----------------------------------------------------------------------
Service cost $1,054 $667 $1,031
Interest cost 1,408 1,649 1,434
Net amortization and deferral 825 828 828
- -----------------------------------------------------------------------
Total postretirement benefit
expense $3,287 $3,144 $3,293
- --------------------------------------- ====== ====== ======
- -----------------------------------------------------------------------
The assumed health care cost trend rates used to measure the expected cost of
benefits under the Plan for 1996 and 1997 are 8.40% and 8.20%, respectively. This
rate gradually declines to 6.03% for the year 2005 and remains at that level
thereafter. The discount rate used in determining the accumulated postretirement
benefit obligation was 7.75% In 1996 and 1995. The Plan is not compensation based,
accordingly, changes in participants' compensation have no effect upon the Plan.
Should the health care cost trend increase by 1%, the service and interest cost and
the accumulated benefit obligation would increase by $482,000 and $2,775,000,
respectively.
</TABLE>
<PAGE>
<TABLE>
NOTE 15. Stock Option and Stock Incentive Plans
The Company has five stock option plans which provide for the granting of
options to key executives and employees of the Company and its subsidiaries to
purchase shares of the Company's common stock at the fair value at date of grant.
The 1986 Incentive Stock Option Plan ("1986 Plan"), 1988 Incentive Stock Option Plan
("1988 Plan"), 1991 Incentive Stock Option Plan ("1991 Plan"), 1993 Incentive Stock
Option Plan ("1993 Plan"), and the 1995 Stock Incentive Plan ("1995
Plan"), provide for the granting of stock options for 675,000 shares each for the
1986 Plan, 1988 Plan and 1991 Plan, 750,000 shares for the 1993 Plan, and 2,625,000
shares for the 1995 Plan, of the Company's common stock.
Under the terms of the 1995 Plan, all present and future employees are
eligible to receive awards under the 1995 Plan in the form of incentive stock
options, nonqualified stock options, stock appreciation rights, restricted stock,
performance awards and other stock unit awards.
Each option granted is exercisable within ten years from date of grant. The
1986 Plan, 1988 Plan, 1991 Plan, 1993 Plan and 1995 Plan will terminate February 4,
1996, February 2, 1998, March 12, 2001, March 12, 2003, and May 9, 2005,
respectively.
A summary of activity in the stock option plans follows:
<CAPTION>
Options Weighted-
Available Options Average
for Grant Outstanding Exercise Price
<S> <C> <C> <C>
- --------------------------------------------------------
Balance, December 31, 754,508 3,187,070 $12.08
Granted (706,050) 706,050 17.50
Exercised -- (436,926) 8.60
Cancelled 14,025 (14,025) 16.89
- -----------------------------------------------
Balance, December 31,
1994 62,483 3,442,169 $13.80
Adoption of 1995
Plan 2,625,000 -- --
Granted (60,375) 60,375 17.68
Exercised -- (561,846) 9.38
Cancelled 27,075 (27,075) 17.81
- -----------------------------------------------
Balance, December 31,
1995 2,654,183 2,913,623 $14.76
Granted (709,475) 709,475 21.55
Exercised -- (520,594) 12.71
Cancelled 14,850 (14,850) 17.72
- -----------------------------------------------
Balance, December 31,
1996 1,959,558 3,087,654 $16.67
- ----------------------========= =========
- --------------------------------------------------------
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
<CAPTION>
Options Outstanding and Exercisable
----------------------------------
Number Weighted- Weighted-
Of Average Average
Range of Exercise Shares Contractual Exercise Price
Prices
<S> <C> <C> <C>
- --------------------------------------------------------
$7 to $10 614,974 3 $8.56
$14 to $20 1,734,105 6 17.39
$21 to $26 738,575 9 21.53
----------
$7 to $26 3,087,654 6 $16.67
==========
- --------------------------------------------------------
The Company applies APB Opinion 25 and related interpretations in accounting
for its plans. Accordingly, no compensation cost has been recognized. Had
compensation cost for the Company's stock option plans been determined based
on the fair value at the grant dates consistent with the methods of SFAS 123, the
Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated below. In accordance with the transition provisions of
SFAS 123, the pro forma amounts reflect options with grant dates subsequent to
January 1, 1995. The pro forma disclosures shown may not be representative
of the effects on reported net income in future years.
(In Thousands, except per share)
Year Ended December 31,
<CAPTION>
1996 1995
<S> <C> <C>
- --------------------------------------------------------
Net income:
As reported $112,702 $105,370
Pro forma 110,218 105,160
Earnings per share:
As reported $1.89 $1.77
Pro forma 1.85 1.76
- --------------------------------------------------------
The purposes of computing the pro forma amounts indicated above, the fair value
of each option on the date of grant is estimated using the Black-Scholes option-
pricing model with the following weighted-average assumptions for the 1996 and 1995
grants, respectively: dividend yields of 3.5% for 1996 and 1995, expected volatility
of 38% and 42%, risk free interest rates of 5.7% and 5.4%, and expected lives of 5.1
years and 5.2 years. The weighted average fair value at the date of grant of each
option granted in 1996 and 1995 was $7.15 and $7.04, respectively.
</TABLE>
<PAGE>
<TABLE>
NOTE 16. Other Information
The principal components of "Interest on deposits," "Other income" and "Other
expense" in the Statement of Consolidated Income are:
(In Thousands)
Year Ended December 31,
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
- -------------------------------------------------------------------------
Interest on deposits:
Interest checking $14,066 $15,163 $15,802
Regular savings 19,637 20,666 23,723
Consumer certificates 229,535 225,832 156,610
Money market accounts 41,105 43,300 33,133
Certificates of deposit $100,000 and
over 17,844 14,764 14,364
- ------------------------------------- --------- --------- ---------
Total $322,187 $319,725 $243,632
- ------------------------------------- ========= ========= =========
Other income:
Gain on sale of out-of-state bank card
portfolio $-- $-- $11,400
Other (includes no items in excess of 1%
of total revenue) 31,204 26,329 25,339
- ------------------------------------- --------- --------- ---------
Total $31,204 $26,329 $36,739
- ------------------------------------- ========= ========= =========
Other expense:
Telecommunications and postage expense $10,422 $9,623 $8,708
Other (includes no items in excess of 1%
of total revenue) 44,704 39,713 40,325
- ------------------------------------- --------- --------- ---------
Total $55,126 $49,336 $49,033
- ------------------------------------- ========= ========= =========
- -------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTE 17. Off-Balance-Sheet Items, Commitments and Contingent
Liabilities
In the normal course of business, there are outstanding various
financial instruments which involve elements of credit and interest
rate risk, to varying degrees, that are not recognized in the
Consolidated Balance Sheet. These financial instruments include
commitments to extend credit, standby letters of credit, interest
rate swaps, options and forward and exchange rate contracts.
At December 31, 1996 and 1995, the Company had outstanding loan
commitments of $2,964,951,000 and $1,271,035,000, and standby
letters of credit approximating $223,415,000 and $218,208,000,
respectively. To meet the financing needs of its customers, the
Company controls and monitors the credit risk of these financial
instruments through credit approvals, limits, and the same credit
policy procedures as it does for on-balance-sheet instruments.
No material losses are anticipated as a result of these
transactions. The Company's loan portfolio is comprised of
credit extensions principally to customers in the Commonwealth
of Virginia.
The notional value of total interest rate swaps at December 31, 1996
and 1995 approximated $331,150,000 and $554,800,000, respectively. To
hedge against interest rate risk, the Company's swap portfolio consists
of $250,000,000 of receive fixed-pay variable swaps which were used
primarily to convert fixed rate borrowings to a variable rate and variable
rate commercial loans to fixed rate, and $72,150,000 of pay fixed-receive
variable swaps used to lock in certain fixed rate funding costs and convert
certain fixed rate commercial loans to variable rate. In addition, the
Company has also entered into interest rate swap agreements to accommodate
the needs of commercial customers. In order to offset the interest rate
risk of customer swaps, the Company has executed offsetting transactions
with third parties. The notional amount of customer-related swap transactions
was $9,000,000 and $8,000,000 at December 31, 1996 and 1995, respectively.
The fair value of total interest rate swaps was an unrealized gain of
approximately $3,000,000 and $6,600,000 at December 31, 1996 and 1995,
respectively.
Financial derivatives may expose the Company to credit risk to the
extent of the fair value gain of an instrument should the counterparty
default on its obligation to perform. The Company seeks to reduce credit
risk by dealing only with highly rated counterparties and by setting
exposure limits based on independent industry ratings from the major
rating agencies and other relevant criteria. Furthermore, the Company
uses bilateral netting agreements and collateral arrangements to reduce
credit risk. Collateral is delivered by either party when the fair
value of the transaction exceeds established thresholds of credit risk.
At year-end 1996, the Company had net credit risk of $3.9 million to
one counterparty. This exposure was below the threshold for receiving
collateral. Of the transactions that had negative fair values at
year-end 1996, none were above threshold levels requiring the Company
to deliver collateral.
The Company also periodically enters into options, forwards and
exchange rate contracts. Such amounts were not material in 1996 or 1995.
There are also legal proceedings from time to time pending against
the Company and its subsidiaries arising during the normal course of
business. In the opinion of management, after consultation with legal
counsel, liabilities arising from these proceedings, if any, would not
have a material adverse effect on the consolidated financial position
or results of operations.
<PAGE>
<TABLE>
NOTE 18. Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and due from banks and temporary investments
The carrying amount of cash and due from bank balances and temporary
investments is a reasonable estimate of fair value.
Securities available for sale and trading account securities
Fair values of securities are based on quoted market prices or dealer quotes. If
a quoted market price is not available, fair value is estimated using quoted
market prices for similar securities.
Loans
The fair value of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities, taking into consideration the
credit risk in various loan categories.
Deposits
The fair value of demand, interest checking, regular savings and money
market deposits is the amount payable on demand at the reporting date. The
fair value of fixed maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
Short-term borrowings
The carrying values of federal funds purchased and securities sold under
agreements to repurchase and other short-term borrowings are reasonable
estimates of fair value.
Medium-term notes, FHLB borrowings, long-term debt and capitalized
lease obligations
The fair values for these borrowings are determined based on interest rates
currently available for debt with similar terms and remaining maturities.
Off-Balance-Sheet Items
The fair value of interest rate swaps is the estimated amount that the Company
would receive or pay to terminate the swap agreements at the reporting date,
taking into account current interest rates and the current creditworthiness of the
swap counterparties.
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates.
The fair value of standby letters of credit is based on fees currently charged for
similar agreements or on the estimated cost to terminate them or otherwise
settle the obligations with the counterparties at the reporting date.
The carrying amount and fair value of commitments and standby letters of
credit were not material at December 31, 1996 and December 31, 1995.
The carrying amount and fair value of financial instruments as of December 31,
1996 and December 31, 1995 are as follows:
(In Thousands) Carrying Fair
<CAPTION> Amount Value
<S> <C> <C>
- ---------------------------------------------------------------
December 31, 1996:
Financial assets:
Cash and due from banks $304,661 $304,661
Temporary investments 150,576
Securities available for sale 3,069,624
Loans, net 6,606,836 6,565,771
Financial liabilities:
Deposits 8,071,454 8,115,019
Short-term borrowings 980,149
Medium-term notes and FHLB borrowings 400,080 399,911
Long-term debt and capitalized lease
obligations 157,658 170,628
Interest rate swaps -- 3,045
December 31, 1995:
Financial assets:
Cash and due from banks $338,580 $338,580
Temporary investments 233,156
Securities available for sale 3,629,887
Loans, net 6,206,813 6,198,405
Financial liabilities:
Deposits 7,985,898 8,044,645
Short-term borrowings 1,129,996
Medium-term notes and FHLB borrowings 602,950 610,356
Long-term debt and capitalized lease
obligations 158,132 172,216
Interest rate swaps -- 6,564
- ---------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
Note 19. Capital Requirements
Central Fidelity National Bank (the "Bank"), the principal subsidiary of
Central Fidelity Banks, Inc., is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct material effect on
the Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for Prompt Corrective Action ("PCA"), the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum ratios (set forth in the table below) of total
and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as
defined),
and of Tier 1 capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1996, that the Bank meets all capital adequacy
requirements to which it is subject.
The most recent notification from the Office of the Comptroller of the
Currency, the Bank's primary regulator, categorized the Bank as well capitalized
under the regulatory framework for PCA. To be categorized as well capitalized the
Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage
ratios as set forth in the table. The Bank's category is determined solely for the
purposes of applying PCA and that category may not constitute an accurate
representation of the Bank's overall financial condition or prospects. There are no
conditions or events since that notification that management believes have changed
the Bank's capital adequacy category.
The regulatory framework for PCA is applicable only to banks and not to bank
holding companies and their non-bank subsidiaries.
<CAPTION> Minimum Ratio
To Be Considered
For Capital Well Capitalized
(In Thousands) Actual Adequacy Under
December 31, 1996 Amount Ratio Purposes PCA Provisions
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------
Total risk-weighted assets:
Consolidated $7,708,300 -- -- --
Subsidiary bank $7,708,408 -- -- --
Total average assets:
Consolidated $10,278,396 -- -- --
Subsidiary bank $10,244,113 -- -- --
Total capital (to risk-weighted assets):
Consolidated $1,024,735 13.29% 8.0% N/A
Subsidiary bank $995,337 12.91% 8.0% 10.0%
Tier 1 capital (to risk-weighted assets):
Consolidated $778,213 10.09% 4.0% N/A
Subsidiary bank $748,814 9.71% 4.0% 6.0%
Tier 1 capital (to average assets):
Consolidated $778,213 7.57% 4.0% N/A
Subsidiary bank $748,814 7.31% 4.0% 5.0%
- ---------------------------------------------------------------------------
December 31, 1995
- ---------------------------------------------------------------------------
Total risk-weighted assets:
Consolidated $7,488,748 -- -- --
Subsidiary bank $7,477,783 -- -- --
Total average assets:
Consolidated $10,458,004 -- -- --
Subsidiary bank $10,413,711 -- -- --
Total capital (to risk-weighted assets):
Consolidated $982,658 13.12% 8.0% N/A
Subsidiary bank $955,613 12.78% 8.0% 10.0%
Tier 1 capital (to risk-weighted assets):
Consolidated $738,846 9.87% 4.0% N/A
Subsidiary bank $711,936 9.52% 4.0% 6.0%
Tier 1 capital (to average assets):
Consolidated $738,846 7.06% 4.0% N/A
Subsidiary bank $711,936 6.84% 4.0% 5.0%
- ---------------------------------------------------------------------------
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
KPMG Peat Marwick LLP
Certified Public Accountants
Suite 1900
1021 East Cary Street
Richmond, Virginia 23219-4023
The Board of Directors and Shareholders
Central Fidelity Banks, Inc.:
We have audited the accompanying consolidated balance sheet of
Central Fidelity Banks, Inc. and subsidiaries as of December 31, 1996
and 1995, and the related statements of consolidated income,
consolidated cash flows and changes in consolidated shareholders'
equity for each of the years in the three-year period ended December
31, 1996, and the consolidated bank balance sheet of the subsidiary
bank of Central Fidelity Banks, Inc. as of December 31, 1996 and 1995.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Central Fidelity Banks, Inc. and subsidiaries as of
December 31, 1996 and 1995, the results of their operations and
their cash flows for each of the years in the three-year period
ended December 31, 1996, and the consolidated bank balance sheet
referred to above presents fairly, in all material respects, the
financial position of the subsidiary bank of Central Fidelity
Banks, Inc. as of December 31, 1996 and 1995, all in conformity
with generally accepted accounting principles.
January 15, 1997
<PAGE>
<TABLE>
1996 GRAPH MATERIAL
CENTRAL FIDELITY BANKS, INC.
<CAPTION>
1992 1993 1994 1995
1996
<S> <C> <C> <C> <C>
<C>
--------- --------- --------- ---------
- ---------
Average Earning Assets (In Millions of Dollars)
Average Securities and Other Earning
Assets 3,206 4,139 3,699 3,715
3,367
Average Loans 3,731 4,250 5,322 5,999
6,486
Total Average Earning Assets 6,937 8,389 9,021 9,714
9,853
Net Interest Margin
Yield on Earning Assets 8.51% 7.43% 7.46% 8.03%
8.08%
Rate on Interest-bearing Liabilities
(Relative to Earning Assets) 4.11% 3.45% 3.67% 4.45%
4.20%
Net Interest Margin 4.40% 3.98% 3.79% 3.58%
3.88%
Average Loans (In Millions of Dollars) 3,731 4,250 5,322 5,999
6,486
Loan Yields 9.52% 8.56% 8.35% 8.85%
8.86%
Loan Loss Coverage (In Millions of Dollars)
Provision for Loan Losses 99.8 79.5 24.4 26.7
43.9
Net Loan Charge-offs 59.0 76.3 19.4 26.7
43.9
Allowance for Loan Losses (In Millions of
Dollars) 101.8 105.0 110.0 110.0
110.0
Allowance for Loan Losses as a Percentage
of Net Loans 2.58% 2.18% 1.91% 1.74%
1.64%
Year-End Securities Mix
U.S. Treasury and Agency Securities -- -- 14.0% 11.0%
12.0%
Mortgage-Backed Securities -- -- 40.0% 36.0%
37.0%
CMOs -- -- 27.0% 27.0%
24.0%
Asset-Backed Securities -- -- 13.0% 21.0%
21.0%
Other Securities -- -- 6.0% 5.0%
6.0%
Year-End Funding Mix
Deposits -- -- 78.0% 81.0%
84.0%
Short-term Borrowings -- -- 12.0% 11.0%
10.0%
Medium-term Borrowings -- -- 9.0% 6.0%
4.0%
Long-term Debt -- -- 1.0% 2.0%
2.0%
Interest-Bearing Deposit Rates 4.87% 4.09% 4.11% 4.81%
4.71%
Average Deposits (In Millions of Dollars)
Interest-bearing Deposits 5,181 5,846 5,921 6,644
6,836
Noninterest-bearing Deposits 734 840 903 929
1,038
Total 5,915 6,686 6,824 7,573
7,874
Net Income (In Millions of Dollars) 78.5 102.9 84.9 105.4
112.7
Earnings and Dividends Per Share
Earnings Per Share $1.50 $1.77 $1.45 $1.77
$1.89
Dividends Per Share $0.55 $0.68 $0.76 $0.79
$0.86
Book Value Per Share 10.44 12.41 10.56 13.71
14.26
Average Shareholders' Equity (In Millions
of Dollars) 503.3 646.8 667.2 753.4
819.9
</TABLE>
<PAGE>
Summary
Net income for 1996 was $112.7 million, an increase of 7.0%
from the $105.4 million reported for 1995. On a per share basis, net
income was $1.89, a 6.8% increase from $1.77 for 1995.
Net interest income, on a taxable equivalent basis, was $382.4
million, an increase of 10.1% from $347.3 million in 1995. Noninterest
income was $85.9 million compared to $79.7 million in 1995, an increase
of 7.8%. Noninterest expense increased 5.8% to $251.9 million compared
to $238.2 million in 1995. The increase in noninterest expense for 1996
was impacted by the special Savings Association Insurance Fund (SAIF)
assessment in the amount of $4.0 million, or $.04 per share for the
year. The assessment was a one-time charge by the Federal Deposit
Insurance Corporation (FDIC) to recapitalize the SAIF, and was
assessed on deposits acquired from SAIF-insured entities. Another
contributing factor was a $2.3 million charge associated with certain
severance arrangements. As a result of higher consumer loan
charge-offs during 1996, the provision for loan losses was $43.9
million, representing an increase of 64.2% from $26.7 million in 1995.
Earning assets averaged $9.9 billion, compared to $9.7 billion
in 1995, an increase of 1.4%. Total loans increased $486.2 million,
or 8.1% from 1995, averaging $6.5 billion. Consumer loan categories
accounted for the majority of the loan growth. Securities available
for sale declined 9.4% to an average of $3.3 billion in 1996. Trading
account securities averaged $1.9 million, reflecting an increase of
72.7%. Money market investments declined 7.6% to an average of $95.9
million.
Interest-bearing liabilities averaged $8.5 billion, down $31.3
million from 1995. Interest-bearing deposits increased 2.9% to an
average of $6.8 billion. Certificates of deposit $100,000 and over
contributed the largest growth to total average interest-bearing
deposits, up 26.7%. Federal Home Loan Bank and other short-term
borrowings also contributed to the growth in funding sources, up
28.2% and 13.0%, respectively. Medium-term notes, capitalized
lease obligations and federal funds purchased and repos all
registered declines for 1996, down 79.8%, 6.3% and 6.2%,
respectively. The 79.8% decline in medium-term notes was a
result of notes maturing during 1996.
Shareholders' equity grew 8.8% to an average of $819.9
million in 1996 from $753.4 million in 1995. The return on
average shareholders' equity of 13.75% declined from 13.99%
in 1995. The book value of common stock per share was $14.26
at December 31, 1996, compared to $13.71 at year-end 1995,
representing an increase of 4.0%. As of December 31, 1996,
the closing price of the Company's common stock was $25.75,
which represents a market to book value ratio of 181%.
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------
TABLE 1 Changes in Earnings Per Share
<CAPTION>
1996/1995 1995/1994 1994/199
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------
Net income for 1995, 1994 and 1993, respectively $1.77 $1.45 $1.77
Increase (decrease) attributable to:
Net interest income 0.60 0.09 0.18
Provision for loan losses (0.29) (0.04) 0.98
Noninterest income 0.10 0.36 (1.17)
Noninterest expense (0.23) 0.12 (0.38)
Income taxes (0.06) (0.18) 0.10
Average shares outstanding -- (0.03) (0.03)
- ----------------------------------------------------------------------------------
Net increase (decrease) 0.12 0.32 (0.32)
- ----------------------------------------------------------------------------------
Net income for 1996, 1995 and 1994, respectively $1.89 $1.77 $1.45
- ------------------------------------------------- ======= ======= =======
- ----------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
- -------------------------------------------------------------------------
TABLE 2 Selected Ratios
Year Ended December 31,
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
- -------------------------------------------------------------------------
Percentage of net income to:
Average shareholders' equity 13.75 % 13.99 % 12.72 %
Average total assets 1.09 1.03 0.89
Percentage of dividends per share
to net income per share 45.50 44.63 52.41
Percentage of average total shareholders' equity
to average total assets 7.91 7.36 7.01
- -------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------
- ------------------------
TABLE 3 Selected Financial Data
(In Thousands, except share and per share data)
Percent
Change
<CAPTION>
- --------------------
1996 1995 1994 1993 1992
1996/1995 1995/1994
<S> <C> <C> <C> <C> <C>
<C> <C>
- ------------------------------------------------------------------------------------
- ------------------------
Results of Operations (Taxable
Equivalent Basis)
Interest income $795,787 $779,626 $672,694 $623,504
$590,087 2.1 % 15.9 %
Interest expense 413,353 432,295 330,691 289,731
285,697 (4.4) 30.7
- ------------------------------------------------------------------------------------
- --
Net interest margin 382,434 347,331 342,003 333,773
304,390 10.1 1.6
Provision for loan losses 43,865 26,713 24,359 79,509
99,757 64.2 9.7
- ------------------------------------------------------------------------------------
- --
Net income from earning
assets 338,569 320,618 317,644 254,264
204,633 5.6 0.9
Noninterest income 85,915 79,675 59,238 125,920
116,411 7.8 34.5
Noninterest expense 251,941 238,165 245,065 223,274
200,833 5.8 (2.8)
- ------------------------------------------------------------------------------------
- -------
Income before income taxes 172,543 162,128 131,817 156,910
120,211 6.4 23.0
Income tax expense 59,841 56,758 46,953 53,993
41,695 5.4 20.9
- ------------------------------------------------------------------------------------
- -------
Net income $112,702 $105,370 $84,864 $102,917
$78,516 7.0 % 24.2 %
- ----------------------------- ========= ========= ========= =========
=========
Per Share
Net income $1.89 $1.77 $1.45 $1.77
$1.50 6.8 % 22.1 %
Cash dividends declared $0.86 $0.79 $0.76 $0.68
$0.55 8.9 % 3.9 %
Average common shares
outstanding 59,736,817 59,673,709 58,741,982 58,102,754
52,440,425 0.1 1.6
Daily Averages for the Year
Total assets $10,370,441 $10,230,710 $9,512,447 $8,900,247
$7,416,919 1.4 % 7.6 %
Loans 6,485,538 5,999,371 5,321,848 4,250,089
3,730,625 8.1 12.7
Earning assets 9,852,500 9,713,659 9,021,290 8,389,175
6,937,150 1.4 7.7
Deposits 7,874,193 7,572,851 6,823,793 6,685,916
5,914,733 4.0 11.0
Shareholders' equity 819,858 753,411 667,150 646,826
503,313 8.8 12.9
- ------------------------------------------------------------------------------------
- ------------------------
</TABLE>
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------
- ----------
TABLE 4 Analysis of Changes in the Components of Net Interest Earnings (Taxable
Equivalent Basis)
Interest income and expense are affected by fluctuations in interest rates, by
changes in the volumes of earning assets and interest-bearing liabilities, by the
interaction of rate and volume factors, and by the mix of the categories of earning
assets and interest-bearing liabilities. The following analysis shows the direct
causes of the year-to-year changes in the components of net interest earnings on a
taxable equivalent basis. The rate and volume variances are calculated by a formula
prescribed by the Securities and Exchange Commission. Rate/volume variances, a third
element in the calculation, are not shown separately, but are allocated to the rate
and volume variances according to their relative size. The details of rate and
volume variances do not sum to the rate and volume variances on total interest
earnings or total interest expense because of changes in the mix of interest-earning
assets and
interest-bearing liabilities from year to year.
(In Thousands) 1996 Compared to 1995 1995
Compared to 1994
<CAPTION> Increase (Decrease) due to Increase
(Decrease) due to
Volume Rate Total Volume Rate
Total
<S> <C> <C> <C> <C> <C>
<C>
- ------------------------------------------------------------------------------------
- ----------
Interest-earning assets:
Loans:
Commercial and commercial real
estate $12,698 ($5,698) $7,000 $5,778 $12,874
$18,652
Construction (1,397) (1,142) (2,539) 1,152 4,904
6,056
Residential real estate 1,556 3,347 4,903 14,326 459
14,785
Consumer second mortgage 9,841 (744) 9,097 6,653 2,436
9,089
Installment 5,768 2,484 8,252 16,879 5,533
22,412
Bank card 19,360 (2,835) 16,525 15,483
(10) 15,473
- ------------------------------------ -------------
- ---------
Total loans 42,498 740 43,238 58,991 27,476
86,467
Assets available for sale:
Securities:
U.S. Government and agencies (28,988) (2,739) (31,727) (7,273) 12,887
5,614
States and political
subdivisions (2,291) (99) (2,390) (2,233) 830
(1,403)
Other 9,029 (1,527) 7,502 13,334 2,922
16,256
- ------------------------------------ -------------
- ---------
(22,511) (4,104) (26,615) 3,372 17,095
20,467
Loans 529 5 534 (81) 52
(29)
- ------------------------------------ -------------
- ---------
Total assets available for
sale (22,085) (3,996) (26,081) 3,303 17,135
20,438
Money market investments (454) (679) (1,133) (1,989) 1,985
(4)
Trading account securities 86 51 137 27 3
30
- ------------------------------------ -------------
- ---------
Total interest-earning asset $11,193 $4,968 $16,161 $53,604 $53,327
$106,931
- ------------------------------------ -------------
- ---------
Interest-bearing liabilities:
Interest checking $771 ($1,868) ($1,097) ($79)
($560) ($639)
Regular savings (247) (782) (1,029) (2,823)
(234) (3,057)
Consumer certificates 5,322 (1,619) 3,703 47,314 21,907
69,221
Money market accounts 185 (2,380) (2,195) 947 9,220
10,167
Certificates of deposit $100,000
and over 3,783 (703) 3,080 (2,929) 3,329
400
Federal funds purchased and repos (3,413) (6,464) (9,877) (4,166) 17,673
13,507
Other short-term borrowings 416 (326) 90 946 751
1,697
Medium-term notes (15,171) (299) (15,470) (11,720) 5,628
(6,092)
Federal Home Loan Bank borrowings 5,599 (870) 4,729 13,400 734
14,134
Long-term debt (4) (835) (839) (34) 2,331
2,297
Capitalized lease obligations (39) 2 (37) (33) 2
(31)
- ------------------------------------ -------------
- ---------
Total interest-bearing
liabilities ($1,585)($17,357)($18,942) $28,289 $73,315
$101,604
- ------------------------------------ -------------
- ---------
Net interest earnings $5,025 $30,078 $35,103 $25,391
($20,064) $5,327
- ------------------------------------ =======
=======
- ------------------------------------------------------------------------------------
- ----------
</TABLE>
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------
- -----------------------
TABLE 5 Average Balances and Interest Rates (Taxable Equivalent Basis)
The following table shows the average balance sheets for each of the years ended
December 31, 1996, 1995 and 1994. In addition, the amounts of interest earned on
earning assets, with related yields, and the interest paid on interest-bearing
liabilities, together with the rates, are shown. Loans placed on a nonaccrual status
are included in the balances and were included in the computation of yields, upon
which they had an immaterial effect. Interest on earning assets is on a taxable
equivalent basis, which was computed using the federal corporate income tax rate of
35% for all three years.
(In Millions)
<CAPTION>
1996 1995
1994
<S> <C> <C> <C> <C> <C> <C>
<C> <C> <C>
- ------------------------------------------------------------------------------------
- -----------------------
Average Yield/ Average Yield/
Average Yield/
Balance Interest Rate Balance Interest Rate
Balance Interest Rate
- ------------------------------------------------------------------------------------
- -----------------------
Assets
- ------------------------------------------------------------------------------------
- -----------------------
Interest-earning assets:
Loans:
Commercial and commercial
real estate $2,054.2 $171.6 8.35 % $1,903.8 $164.6 8.65 %
$1,833.1 $146.0 7.96 %
Construction 293.7 27.8 9.46 308.2 30.3 9.84
294.7 24.3 8.24
Residential real estate 1,605.6 118.3 7.37 1,584.1 113.4 7.16
1,383.9 98.6 7.13
Consumer second mortgage 680.5 65.5 9.62 578.3 56.4 9.75
509.2 47.3 9.28
Installment 1,039.8 89.1 8.57 971.9 80.8 8.32
764.8 58.4 7.64
Bank card 799.9 101.5 12.69 647.9 85.0 13.12
529.9 69.5 13.12
- ----------------------------------------------------- -------------------- -
- ------------------
6,473.7 573.8 8.86 5,994.2 530.5 8.85
5,315.6 444.1 8.35
Assets available for sale:
Securities:
U.S. Government and
agencies 2,081.9 134.7 6.47 2,529.2 166.4 6.58
2,645.6 160.8 6.08
States and political
subdivisions 105.5 8.7 8.27 133.2 11.1 8.35
160.4 12.5 7.80
Other 1,081.8 72.3 6.68 947.1 64.8 6.84
750.1 48.5 6.46
- ----------------------------------------------------- -------------------- -
- ------------------
3,269.2 215.7 6.60 3,609.5 242.3 6.71
3,556.1 221.8 6.24
Loans 11.8 0.9 7.96 5.1 0.4 7.87
6.2 0.4 6.95
- ----------------------------------------------------- -------------------- -
- ------------------
3,281.0 216.6 6.60 3,614.6 242.7 6.71
3,562.3 222.2 6.24
Money market investments 95.9 5.2 5.39 103.8 6.3 6.07
142.6 6.3 4.42
Trading account securities 1.9 0.2 12.09 1.1 0.1 8.37
0.8 0.1 7.98
- ----------------------------------------------------- -------------------- -
- ------------------
Total interest-earning
assets 9,852.5 $795.8 8.08 % 9,713.7 $779.6 8.03 %
9,021.3 $672.7 7.46 %
- -------------------------------------------====== ----------====== -
- --------======
Noninterest-earning assets:
Cash and due from banks 251.2 278.4
270.7
Premises and equipment, net 154.5 149.0
145.7
Other assets 222.2 199.6
184.7
Allowance for loan losses (110.0) (110.0)
(110.0)
- ------------------------------------------- ---------- -
- --------
Total assets $10,370.4 $10,230.7
$9,512.4
- ---------------------------------========= =========
=======
</TABLE>
<PAGE>
<TABLE>
Liabilities and Shareholders' Equity
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
<C> <C> <C>
- ------------------------------------------------------------------------------------
- -----------------------
Interest-bearing liabilities:
Interest checking $694.9 $14.1 2.02 % $660.1 $15.2 2.30 %
$663.4 $15.8 2.38 %
Regular savings 733.6 19.6 2.68 742.5 20.7 2.78
843.9 23.7 2.81
Consumer certificates 4,039.9 229.5 5.68 3,946.4 225.8 5.72
3,088.7 156.6 5.07
Money market accounts 1,040.4 41.1 3.95 1,035.9 43.3 4.18
1,007.8 33.1 3.29
Certificates of deposit $100,00
and over 327.5 17.9 5.45 258.5 14.8 5.71
316.9 14.4 4.53
Federal funds purchased and
repos 937.6 47.8 5.10 999.3 57.7 5.77
1,095.5 44.2 4.03
Other short-term borrowings 71.1 3.5 4.85 62.9 3.3 5.34
42.7 1.7 3.89
Medium-term notes 65.4 3.8 5.87 323.5 19.3 5.97
537.7 25.4 4.72
Federal Home Loan Bank
borrowings 399.1 25.3 6.33 311.2 20.5 6.60
107.2 6.4 5.98
Long-term debt 150.4 10.1 6.74 150.4 11.0 7.30
151.0 8.7 5.75
Capitalized lease obligations 7.5 0.7 8.88 8.0 0.7 8.85
8.3 0.7 8.82
- ----------------------------------------------------- -------------------- -
- ------------------
Total interest-bearing
liabilities 8,467.4 $413.4 4.88 % 8,498.7 $432.3 5.09 %
7,863.1 $330.7 4.21 %
- -------------------------------------------====== ----------====== -
- --------======
Noninterest-bearing liabilities:
Demand deposits 1,037.9 929.4
903.2
Other 45.2 49.2
78.9
- ------------------------------------------------ --------------- -
- ------------
1,083.1 978.6
982.1
Shareholders' equity 819.9 753.4
667.2
- ------------------------------------------------ --------------- -
- ------------
Total liabilities and
shareholders' equity $10,370.4 $10,230.7
$9,512.4
- ---------------------------------========= =========
=======
Net interest earnings $382.4 $347.3
$342.0
- --------------------------------- ====== ======
======
Net interest spread 3.20 % 2.94 %
3.25 %
- --------------------------------- ==== ====
====
Net interest margin 3.88 % 3.58 %
3.79 %
- --------------------------------- ==== ====
====
Fees included in loan income $9.3 $10.4
$13.1
- --------------------------------- ====== ======
======
Taxable equivalent adjustment $7.2 $7.7
$7.9
- --------------------------------- ====== ======
======
- ------------------------------------------------------------------------------------
- -----------------------
</TABLE>
<PAGE>
Net Interest Income
Net interest income, the primary source of the Company's earnings,
is the amount by which interest and fee income earned on earning assets
exceeds interest paid on interest-bearing liabilities. Earning assets
are comprised of loans, securities available for sale, money market
investments and trading account securities. Interest-bearing liabilities
consist of deposits and borrowings. Net interest income is impacted by
the volume, mix and the general level of interest rates among earning
assets and interest-bearing liabilities.
On a taxable equivalent basis, net interest income for 1996 was
$382.4 million, representing a 10.1% increase over 1995. The net interest
margin was 3.88% for 1996, up 30 basis points from 3.58% in 1995. The
growth in net interest income and net interest margin during 1996 were
impacted by the higher yield on average earning assets and a reduced cost
of average interest-bearing liabilities. For 1996, average earning assets
grew $138.8 million, or 1.4%. Interest earned on average earning assets
increased $16.2 million to $795.8 million, an increase of 2.1% from 1995.
The yield on average earning assets increased a modest 5 basis points.
Average interest-bearing liabilities and interest expense declined $31.3
million and $18.9 million, respectively, as compared to 1995. The cost
on average interest-bearing liabilities declined 21 basis points during
1996.
During 1996, the Company's interest rate swap activities resulted
in declines in interest income of $1.9 million and interest expense of
$1.5 million compared to a $2.2 million decrease in interest income and
an increase of $1.7 million in interest expense for 1995. The Company's
interest rate swap activities resulted in reductions of net interest
income of $395,000 during 1996 and $3.9 million for 1995.
In 1996, total loans grew $486.2 million, or 8.1% to an average
of $6.5 billion. The consumer loan portfolio accounted for the
majority of the increase. Bank card loans rose $152.0 million, an
increase of 23.5% to an average of $799.9 million. Consumer second
mortgage loans increased 17.7%, averaging $680.5 million. Installment
loans averaged $1.0 billion, reflecting growth of 7.0% compared to 1995.
Commercial and commercial real estate loans increased 7.9%, averaging
$2.1 billion when compared to $1.9 billion in 1995. Residential real
estate loans rose a modest 1.8%, or $28.2 million, averaging $1.6
billion. Construction loans averaged $293.7 million, registering a
decline of 4.7%, or $14.5 million. Securities available for sale
averaged $3.3 billion, reflecting a decrease of 9.4% over 1995. Money
market investments, consisting primarily of federal funds sold and
securities purchased under agreements to resell, declined 7.6% to an
average of $95.9 million. Trading account securities gained 72.7%,
averaging $1.9 million In 1996.
In 1996, core deposits increased $232.4 million to an average
of $7.5 billion, an increase of 3.2%. Interest checking increased
5.3%, averaging $694.9 million. Consumer certificates increased
$93.5 million to $4.0 billion on average, or 2.4% from 1995, and
money market accounts grew a modest .4% to an average of $1.0
billion. Regular savings declined 1.2%, averaging $733.6 million.
Certificates of deposit $100,000 and over increased 26.7% to an
average of $327.5 million compared to $258.5 million in 1995.
Federal Home Loan Bank borrowings and other short-term borrowings
increased 28.2% and 13.0% to averages of $399.1 million and $71.1
million, respectively. As a result of notes maturing during 1996
and the use of other lower cost funding sources, medium-term notes
declined 79.8%, averaging $65.4 million. Federal funds purchased
and repos averaged $937.6 million, showing a 6.2% decline over
1995. Long-term debt and capitalized lease obligations declined
1996. slightly to an average of $157.9 million.
Table 5 presents the components of net interest income on
a taxable equivalent basis. Interest earned on certain tax-exempt
loans and securities available for sale has been increased by an
amount equivalent to the taxes that would have been paid on
taxable assets at the federal statutory rate.
<PAGE>
Loans
Loans represent the highest yielding and largest component of
earning assets. In 1996, total loans grew 8.1% to an average of
$6.5 million compared to $6.0 billion in 1995. The average yield
on the loan portfolio remained flat at 8.86% in 1996 from 8.85% in
1995. The average prime rate was 8.27% in 1996 compared to 8.69%
1996. in 1995.
Commercial and commercial real estate loans averaged $2.1
billion, a 7.9% increase from $1.9 billion in 1995. The average
yield was down 30 basis points to 8.35% compared to 1995.
Construction loans declined 4.7%, or $14.5 million to an average
of $293.7 million. The average yield of 9.46%, was down 38 basis
points from 1995. The lower yields on commercial and commercial
real estate and construction loans in 1996 are reflective of the
lower average prime rate during 1996.
Residential first mortgage loans averaged $1.6 billion, a
slight increase of 1.8% compared to 1995. The average yield on
the residential first mortgage loan portfolio increased to 7.37%
from 7.16% in 1995.
Consumer second mortgage loans, which consist of second
mortgage loans and home equity lines of credit, registered a
17.7% increase over 1995, averaging $680.5 million. The average
yield was 9.62%, down from 9.75% in 1995. Installment loans
averaged $1.0 billion, representing growth of 7.0%. The average
yield on installment loans was up 25 basis points to 8.57% in
1996. Bank card loans grew 23.5%, or $152.0 million to an average
of $799.9 million. The average yield declined 43 basis points
to 12.69% compared to 13.12% in 1995, and is indicative of the
competitiveness in the bank card industry.
At December 31, 1996, total commercial and construction
loans due after one year were $1,069,168,000. These are fixed
or predetermined interest rate loans and are categorized
according to interest rate sensitivity.
There are no foreign loans within the portfolio or credits
to finance leveraged buyouts or other highly leveraged transactions.
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------
- ---------------------
TABLE 6 Average Loans
(In Thousands) Year Ended December 31,
<CAPTION>
Percent
Change
1996 1995 1994 1993
1992 1996/1995
<S> <C> <C> <C> <C>
<C> <C>
- ------------------------------------------------------------------------------------
- ---------------------
Commercial and commercial real
estate $2,054,173 $1,903,759 $1,833,077 $1,585,135
$1,542,712 7.9 %
Construction 293,735 308,239 294,753 331,162
422,029 (4.7)
Residential real estate 1,617,404 1,589,223 1,390,149 839,496
397,512 1.8
Consumer second mortgage 680,546 578,316 509,173 433,552
394,024 17.7
Installment 1,039,792 971,878 764,778 619,172
559,588 7.0
Bank card 799,888 647,956 529,918 441,572
414,760 23.5
- -------------------------------------------------------------------- ----------- -
- -----------------
Total loans $6,485,538 $5,999,371 $5,321,848 $4,250,089
$3,730,625 8.1 %
- -------------------------------========== ========== ========== ==========
==========
- ------------------------------------------------------------------------------------
- ---------------------
</TABLE>
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------
- ----
TABLE 7 Loan Maturities
Scheduled principal repayments of loans outstanding for commercial and
construction loans at December 31, 1996 are as follows:
(In Thousands)
<CAPTION>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------
- ----
One
One Year Through Over Five
or Less Five Years Years
Total
- ------------------------------------------------------------------------------------
- ----
Commercial and commercial real estate $1,090,133 $742,989 $284,752
$2,117,874
Construction 263,547 21,661 19,766
304,974
- ------------------------------------------------------------------------------------
- ----
Total $1,353,680 $764,650 $304,518
$2,422,848
- ----------------------------------------========== ========== ==========
==========
- ------------------------------------------------------------------------------------
- ----
As is common in the banking industry, the timing of actual principal repayments is
expected to vary significantly from the scheduled repayments due to renewal of
certain loans at their maturities.
</TABLE>
<PAGE>
Allowance/Provision for Loan Losses
The allowance for loan losses represents management's estimate of
an amount adequate to absorb potential future losses inherent in the
loan portfolio. In assessing the adequacy of the allowance, management
relies predominately on its ongoing review of the lending process and
the risk characteristics of the portfolio in the aggregate. Among other
factors, management considers the Company's loan loss experience, the
amount of past-due and nonperforming loans, current and anticipated
economic conditions, and the estimated current values of collateral
securing loans in assessing the level of the allowance for loan losses.
While it is the Company's policy to charge off in the current
period loans for which a loss is considered probable, there are
additional risks of future losses which cannot be quantified precisely
or attributed to particular loans or classes of loans. Because these
risks include the state of the economy as well as conditions affecting
individual borrowers, management's judgment of the allowance is
necessarily approximate and imprecise. It is also subject to
regulatory examinations and determinations as to its adequacy.
The allowance for loan losses at December 31, 1996 was $110.0
million, the same as year-end 1995. At December 31, 1996, the
allowance for loan losses was 1.64% of loans, compared to 1.74%
at December 31, 1995. The provision for loan losses totalled $43.9
million for 1996, an increase of $17.2 million compared to $26.7
million in 1995. The increase in the provision for 1996 was
prompted by a higher level of net charge-offs when compared to
year-end 1995, which resulted principally from a continued trend
of consumer bankruptcies in both the bank card and installment
loan portfolios. Net charge-offs amounted to $43.9 million for
1996, compared with $26.7 million for 1995. The ratio of net
charge-offs to average loans increased from .45% to .68%. Table
8 provides an analysis of the allowance for loan losses for the
years 1992 through 1996, including gross charge-offs and
recoveries for the five-year period.
Nonperforming assets as of December 31, 1996 were $54.0
million, or .51% of total assets compared to $65.9 million, or
.61% of total assets a year ago. At December 31, 1996,
nonperforming assets were .80% of loans and foreclosed properties,
compared to 1.04% at December 31, 1995. The lower level of
nonperforming assets was the result of overall improved quality
in the loan portfolio. At December 31, 1996, the allowance for
loan losses to nonperforming assets was 203.6% compared to 166.9%
at December 31, 1995. Table 12 shows the distribution of
nonperforming assets by geographic region and loan category.
Higher consumer loan delinquencies resulted in increased
charge-offs in 1996, a trend which is expected to continue into
1997. This is, in part, a reflection of conditions in consumer
1998. banking throughout our industry, as well as increased
1999. volume. In response, our underwriting criteria have been
2000. further strengthened and collection efforts have been enhanced.
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------
- ---------------------
TABLE 8 Selected Loan Loss Data
(In Thousands) Year Ended December 31,
<CAPTION>
1996 1995 1994
1993 1992
<S> <C> <C> <C>
<C> <C>
- ------------------------------------------------------------------------------------
- ---------------------
Balance at beginning of year $110,000 $110,000 $105,000
$101,800 $61,000
Provision charged to expense 43,865 26,713 24,359
79,509 99,757
- ------------------------------------------------------------------------------------
- ---------------------
153,865 136,713 129,359
181,309 160,757
Loans charged off:
Commercial and commercial real estate 4,696 5,101 8,288
27,995 17,091
Construction 1,123 735 4,744
39,031 27,793
Residential real estate 555 344 173
64 4
Installment 20,165 14,983 5,989
5,841 6,273
Bank card 34,777 25,118 15,203
13,797 16,408
- ------------------------------------------------------------------------------------
- ---------------------
Total charge-offs 61,316 46,281 34,397
86,728 67,569
- ------------------------------------------------------------------------------------
- ---------------------
Recoveries of loans previously charged off
Commercial and commercial real estate 4,457 8,962 4,281
3,162 1,967
Construction 1,426 3,171 4,425
392 1,557
Residential real estate 13 18 20
23 3
Installment 8,005 4,429 3,456
3,508 2,656
Bank card 3,550 2,988 2,856
3,334 2,429
- ------------------------------------------------------------------------------------
- ---------------------
Total recoveries 17,451 19,568 15,038
10,419 8,612
- ------------------------------------------------------------------------------------
- ---------------------
Net charge-offs 43,865 26,713 19,359
76,309 58,957
- ------------------------------------------------------------------------------------
- ---------------------
Balance at end of year $110,000 $110,000 $110,000
$105,000 $101,800
- ------------------------------------------ ======== ======== =======
======= =======
Average loans $6,485,538 $5,999,371 $5,321,848
$4,250,089 $3,730,625
Loans at year-end $6,716,836 $6,316,813 $5,772,093
$4,812,509 $3,953,354
Ratio of provision for loan losses to
average loans 0.68% 0.45% 0.46%
1.87% 2.67%
Ratio of net charge-offs to average loans 0.68% 0.45% 0.36%
1.80% 1.58%
Ratio of allowance for loan losses to loans
at year-end 1.64% 1.74% 1.91%
2.18% 2.58%
- ------------------------------------------------------------------------------------
- ---------------------
</TABLE>
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------
- ------------------------------------
TABLE 9 Allocated Allowance for Loan Losses
The allowance for loan losses is a general allowance applicable to all loan
categories; however, management has allocated the allowance to provide an indication
of the relative risk characteristics of the loan portfolio. The allocation is based
on the same judgmental criteria discussed earlier in determining the level of the
allowance and should not be interpreted as an indication that charge-offs in 1997
will occur in these amounts or proportions, or that the allocation indicates future
trends. The allocation of the allowance at December 31 for the years indicated and
the ratio of the related outstanding loan balances to total loans are as follows:
(In Thousands)
December 31,
<CAPTION>
1996 1995 1994
1993 1992
<S> <C> <C> <C> <C> <C> <C> <C>
<C> <C> <C>
- ------------------------------------------------------------------------------------
- ------------------------------------
Ratio of Ratio of Ratio of
Ratio of Ratio of
Loans to Loans to Loans to
Loans to Loans to
Total Loans Total Loans Total Loans
Total Loans Total Loans
Allowance Outstanding Allowance Outstanding Allowance Outstanding
Allowance Outstanding Allowance Outstanding
- ------------------------------------------------------------------------------------
- ------------------------------------
Commercial and
commercial
real estate $37,638 31.5 % $47,194 31.4 % $62,724 32.5 %
$61,956 35.5 % $40,166 39.9 %
Construction 6,297 4.5 11,896 4.6 17,835 5.3
18,803 6.0 36,184 8.8
Residential
real estate 2,832 24.4 2,733 25.7 1,789 27.0
1,318 24.4 1,018 14.9
Installment 19,632 21.7 14,917 22.3 5,917 20.6
5,497 19.0 6,108 20.3
Bank card 43,601 17.9 33,260 16.0 21,735 14.6
17,426 15.1 18,324 16.1
- ------------------------------------------------------------------------------------
- ------------------------------------
Total $110,000 100.0 % $110,000 100.0 % $110,000 100.0 %
$105,000 100.0 % $101,800 100.0 %
- --------------======== ======== ======== ======== ======== ========
======== ======== ======== ========
- ------------------------------------------------------------------------------------
- ------------------------------------
</TABLE>
<PAGE>
<TABLE>
- --------------------------------------------------------------------------
TABLE 10 Nonaccrual, Past-Due and Restructured Loans
The following table presents information concerning: loans in a nonaccrual status;
other loans which are contractually past due as to interest or principal payments;
and loans whose terms have been renegotiated to provide a reduction or deferral of
interest or a deferral of principal because of a deterioration in the financial
position of the borrower. Past-due loans are those loans contractually past due for
90 days or more.
- --------------------------------------------------------------------------
(In Thousands) December 31,
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------
Nonaccrual loans $38,572 $48,763 $67,534 $93,349 $84,401
Past-due loans (not including
nonaccrual loans):
Commercial and construction 2,451 1,159 1,195 1,887 9,369
Residential real estate 7,692 7,941 2,255 670 134
Installment 5,795 4,028 2,028 681 2,271
Bank card 10,008 7,855 5,562 3,104 3,413
- --------------------------------------------------------------------------
25,946 20,983 11,040 6,342 15,187
Restructured loans (in
accrual status) -- -- -- 606 260
- --------------------------------------------------------------------------
Total $64,518 $69,746 $78,574 $100,297 $99,848
- ----------------------------- ======= ======= ======= ======== =======
- --------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------
- ----------------
TABLE 11 Loan Distribution
(In Thousands) December 31,
<CAPTION>
Percent
Change
1996 1995 1994 1993 1992
1996/1995
<S> <C> <C> <C> <C> <C>
<C>
- ------------------------------------------------------------------------------------
- ----------------
Commercial and commercial real
estate $2,117,874 $1,984,393 $1,879,499 $1,711,092
$1,576,744 6.7 %
Construction 304,974 290,184 305,457 289,199
347,685 5.1
Residential real estate 1,640,646 1,625,651 1,558,429 1,174,051
589,133 0.9
Consumer second mortgage 761,212 613,097 552,301 458,294
411,708 24.2
Installment 1,047,508 1,046,536 871,115 670,487
593,065 0.1
Bank card 844,622 756,952 605,292 509,386
435,019 11.6
- ------------------------------------------------------------------------------------
- ---------
Total loans $6,716,836 $6,316,813 $5,772,093 $4,812,509
$3,953,354 6.3 %
- -------------------------------- ========== ========== ========= =========
=========
- ------------------------------------------------------------------------------------
- ----------------
</TABLE>
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------
- -------
TABLE 12 Distribution of Loan Portfolio and Nonperforming Assets by Region
(In Thousands) December 31, 1996
<CAPTION> Capital Eastern Northern Commonwealth
Region Region Region Region
Consolidated
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------
- -------
Commercial and commercial real
estate $356,129 $785,137 $359,438 $617,170
$2,117,874
Construction 63,017 95,127 67,254 79,576
304,974
Residential real estate 387,410 298,259 312,057 642,920
1,640,646
Consumer second mortgage 145,074 146,549 99,652 369,937
761,212
Installment 258,051 189,263 130,597 469,597
1,047,508
Bank card 265,042 170,408 231,985 177,187
844,622
- ------------------------------------------------------------------------------------
- -------
Loans* $1,474,723 $1,684,743 $1,200,983 $2,356,387
$6,716,836
- ------------------------------- ========= ========= ========= =========
==========
Nonaccrual loans $2,075 $8,820 $17,794 $9,883
$38,572
Foreclosed properties 942 5,459 8,090 965
15,456
- ------------------------------------------------------------------------------------
- -------
Nonperforming assets $3,017 $14,279 $25,884 $10,848
$54,028
- ------------------------------- ========= ========= ========= =========
=========
Ratio of nonperforming assets to
loans and foreclosed
properties 0.20% 0.84% 2.14% 0.46%
0.80%
- ------------------------------------------------------------------------------------
- -------
* Includes nonaccrual loans.
</TABLE>
<PAGE>
Securities Available for Sale
The Company classifies substantially all of its securities
as available for sale and reports them at fair market
value. Unrealized gains or losses are reported on the
balance sheet as a separate component of shareholders' equity,
net of any deferred tax provision. At December 31, 1996, the
Company had $3.1 billion in securities available for sale,
compared with $3.6 billion at year-end 1995. The decrease is
attributable to the Company's balance sheet strategy of allocating
a greater portion of earning assets to loans. Sources of funds
from maturities, scheduled repayments of principal and prepayments
of mortgage-backed securities were used largely to fund loan
growth instead of being reinvested in securities. At year-end
1996, the fair value of securities available for sale exceeded
amortized cost by $14.2 million, resulting in a $9.2 million
after-tax addition to shareholders' equity. The composition
of the portfolio continued to emphasize mortgage-backed
pass-through securities, collateralized mortgage obligations
and asset-backed securities. Securities available for sale
are generally of high credit quality and highly liquid.
The average yield on securities available for sale in 1996 was
6.60%, compared with 6.71% in 1995. The expected weighted
average life of the portfolio shortened to 3.1 years, compared
with 3.7 years at year-end 1995. Going forward, the Company
expects that maturities and cash flows from the investment
portfolio will be used primarily to fund loan growth.
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------
- ---
TABLE 13 Securities Available for Sale
The carrying value of securities available for sale at the dates indicated was:
(In Thousands) December 31,
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------
- ---
U.S. Government and agencies $1,957,748 $2,342,541
$2,516,781
States and political subdivisions 104,933 124,380
142,530
Other 1,006,943 1,162,966
802,070
- ------------------------------------------------------------------------------------
- ---
Total $3,069,624 $3,629,887
$3,461,381
- --------------------------------------------------- ========== =========
=========
- ------------------------------------------------------------------------------------
- ---
</TABLE>
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------
- -------------------
TABLE 14 Securities Maturities, Expected Principal Repayments, and Expected Yields
The table below shows the weighted average expected yields, maturities and
expected principal repayments, at carrying value, of securities available for sale
at December 31, 1996:
(In Thousands)
<CAPTION>
Maturity or Expected Principal
Repayment
<S> <C> <C> <C> <C> <C> <C> <C> <C>
<C> <C>
- ------------------------------------------------------------------------------------
- -------------------
After One But After Five But
Within One Year Within Five Year Within Ten Year After Ten
Years Total
Amount Yield Amount Yield Amount Yield Amount Yield
Amount Yield
- ------------------------------------------------------------------------------------
- -------------------
U.S. Government and
agencies:
U.S. Treasury $50,047 5.35 % $222,797 6.36 % $-- -- % $-- --
% $272,844 6.18 %
Federal
agencies -- -- 97,980 4.80 -- -- -- --
97,980 4.80
Mortgage-backed
obligations 111,587 5.82 858,259 6.79 617,078 6.61 -- --
1,586,924 6.65
---------------- ---------------- ---------------- --------------
- -------------------
161,634 5.68 1,179,036 6.55 617,078 6.61 -- --
1,957,748 6.49
---------------- ---------------- ---------------- --------------
- -------------------
States and political
subdivisions 15,855 8.09 41,200 8.04 29,571 8.02 18,307 9.69
104,933 8.33
---------------- ---------------- ---------------- --------------
- -------------------
Other:
Whole loan
mortgage-
backed 40,893 7.18 235,664 6.90 -- -- -- --
276,557 6.94
Asset-backed 166,905 6.75 471,248 6.53 -- -- -- --
638,153 6.59
Common and
preferred stocks
with no contractual
maturity -- -- -- -- -- -- -- --
92,233 7.29
---------------- ---------------- ---------------- --------------
- -------------------
207,798 6.83 706,912 6.65 -- -- -- --
1,006,943 6.75
---------------- ---------------- ---------------- --------------
- -------------------
Total $385,287 6.40 % $1,927,148 6.62 % $646,649 6.67 % $18,307 9.69
% $3,069,624 6.64 %
- -----------------========= ========= ========= =========
==========
- ------------------------------------------------------------------------------------
- -------------------
</TABLE>
<PAGE>
Asset/Liability Management
The purpose of the Asset/Liability process is the effective
control of interest rate risk (IRR) through the proper supervision
of lending, investment, funding and off-balance-sheet activities.
The Asset/Liability Committee meets regularly to review the
following topics: current and predicted economic conditions,
interest rate trends, loan strategies, investment strategies,
funding strategies, interest rate risk, liquidity, off-balance-sheet
positions and earnings forecasts.
The primary tool for IRR measurement is an earnings
simulation model which has been used and refined over many years.
The model projects changes to the balance sheet and earnings over
two twelve-month periods using ten standard interest rate
scenarios which are grouped as follows: 1) a base case
scenario which is management's expected path of interest rates,
2) up rate scenarios that measure the Company's exposure to
increasing rates up to 200 basis points in increments
of 50 basis points occurring over the first three months of
the forecast period, 3) down rate scenarios of 200 basis points
as described in 2 above, and 4) no change in rates. Policy requires
that projected earnings not vary more than 10% from the flat rate
scenario over the first twelve-month horizon from rate changes in
either direction. At year-end 1996, the Company's exposure to either
increasing or declining rates was well within the Company's
prescribed policy guideline.
In addition to earnings simulation, the Company also uses a
static gap report to measure its general exposure to repricing
risk at a point in time. The one year cumulative gap was a
negative 7.20% of earning assets at year-end 1996 versus a
negative of 2.00% at year-end 1995 as shown in Table 19.
<PAGE>
Off-Balance-Sheet Derivatives
In the context of its asset/liability management, the Company
is a limited end-user of off-balance-sheet financial derivatives as a
cost-efficient vehicle for managing interest rate sensitivity.
Interest rate swaps have been the main derivative instrument used
to modify the repricing characteristics of various balance sheet
assets and liabilities. The interest rate swaps entered into by
the Company are essentially commitments to participate in cash
settlements with a counterparty at various future dates as agreed
to in the swap contract. These cash settlements result from movements
in interest rates and are based on differences in specific rate
indexes as applied to the notional principal amount of the contract.
The notional amount of the Company's off-balance-sheet swap
portfolio, at December 31, 1996 was $322.2 million, down from
$546.8 million at year-end 1995. The related fair value, or
unrecognized gains, of these derivative financial instruments
was $3.0 million and $6.6 million at December 31, 1996 and 1995,
respectively. As shown on Table 16, the swap portfolio consists
principally of contracts wherein the Company receives a fixed rate
of interest and pays a variable rate, typically three-month LIBOR.
Market values of derivatives transactions fluctuate based
upon movements in the underlying financial indices such as interest
rates. Market values are monitored on a monthly basis through
external pricing mechanisms and then tested by using internal
calculations. The Company's objective measurement system together
with risk limits and timely reporting to senior management help to
mitigate the possibility of any gain or loss recognition on the
Company's interest rate swaps. Any change in market value
fluctuation generally correspond to market fluctuation in the
underlying asset or liability being hedged. In the event that a
derivative product were terminated prior to its contractual
maturity, it is the Company's policy to recognize the resulting
gain or loss over the remaining life of the underlying hedged
asset or liability.
Financial derivatives may expose the Company to credit
risk to the extent of the fair value gain of an instrument
should the counterparty default on its obligation to perform.
The Company seeks to reduce credit risk by dealing only
with highly rated counterparties and by setting exposure limits
based on independent industry ratings from the major rating
agencies and other relevant criteria. Furthermore, the
Company uses bilateral netting agreements and collateral
arrangements to reduce credit risk. Collateral is delivered
by either party when the fair value of the transaction
exceeds established thresholds of credit risk. At year-end
1996, the Company had net credit risk of $3.9 million to one
counterparty. This exposure was below the threshold for
receiving collateral. Of the transactions that had negative
fair values at year-end 1996, none were above threshold levels
requiring the Company to deliver collateral.
The Company has also entered into a limited number
of interest rate swap agreements to accommodate the needs of
commercial customers. In order to offset the interest rate
risk of customer swaps, the Company has executed offsetting
transactions with third parties. The notional amount of
customer-related swap transactions was $9.0 million and $8.0
million at December 31, 1996 and 1995, respectively. No
customer swaps were terminated in 1996. In 1995, at the
request of the customer, the Company terminated a $5.0 million
notional swap. As a result, the offsetting swap with a
third party was also terminated for a total notional amount
terminated during the year of $10.0 million.
The Company intends to continue using off-balance-sheet
financial derivatives as a limited end-user in the prudent
management of interest rate sensitivity.
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------
- -----------------
TABLE 15 Expected Maturities of Interest Rate Swaps
<CAPTION>
Due After One After Two After Three After
Four
Within Through Through Through Through
After
(In Thousands) December 31, 1996 One Year Two Years Three Years Four Years Five
Years Five Years Total
<S> <C> <C> <C> <C> <C>
<C> <C>
- ------------------------------------------------------------------------------------
- -----------------
Company Hedging Swaps
- ------------------------------------------------------------------------------------
- -----------------
Pay fixed/receive variable:
Notional amount $55,958 $936 $13,890 $1,366 --
- -- $72,150
Weighted average pay rate 6.47% 6.83% 6.82% 7.03% --
- -- 6.55%
Weighted average receive rate:
Contractual rate* 5.55% 5.54% 5.53% 5.50% --
- -- 5.54%
Forward yield curve** 5.67% 5.88% 6.06% 6.21% --
- -- 5.76%
Receive fixed/pay variable:
Notional amount $100,000 -- -- -- --
$150,000 $250,000
Weighted average pay rate:
Contractual rate* 5.56% -- -- -- --
5.50% 5.53%
Forward yield curve** 5.67% -- -- -- --
6.44% 6.13%
Weighted average receive rate 4.77% -- -- -- --
7.10% 6.17%
- ------------------------------------------------------------------------------------
- -----------------
Customer Hedging Swaps
- ------------------------------------------------------------------------------------
- -----------------
Pay fixed/receive variable:
Notional amount -- $4,500 -- -- --
- -- $4,500
Weighted average pay rate -- 9.11% -- -- --
- -- 9.11%
Weighted average receive rate:
Contractual rate* -- 5.57% -- -- --
- -- 5.57%
Forward yield curve** -- 7.38% -- -- --
- -- 7.38%
Receive fixed/pay variable:
Notional amount -- $4,500 -- -- --
- -- $4,500
Weighted average pay rate:
Contractual rate* -- 5.56% -- -- --
- -- 5.56%
Forward yield curve** -- 7.33% -- -- --
- -- 7.33%
Weighted average receive rate -- 9.20% -- -- --
- -- 9.20%
- ------------------------------------------------------------------------------------
- -----------------
* The weighted average variable rates are based upon the contractual rates in
effect at December 31, 1996.
** The weighted average variable rates are projected based upon the implied forward
yield curve from date of analysis through maturity.
</TABLE>
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------
- -------------------
TABLE 16 Summary of Interest Rate Swaps
The weighted average variable rates are based upon the contractual rates in effect
at December 31, 1996:
(In Thousands) December 31, 1996
<CAPTION>
Average
Unrecognized
Notional Weighted Average Rate Maturity
Interest Gains
Amount Receive Pay In Year
Income/(Expense)(Losses)
<S> <C> <C> <C> <C
<C> <C>
- ------------------------------------------------------------------------------------
- -------------------
Company Hedging Swaps
- ------------------------------------------------------------------------------------
- -------------------
Pay fixed/receive variable:
Variable rate medium-term
borrowings $50,000 5.55 % (1) 6.42 % 0.46
($279) ($197)
Securities available for sale -- -- -- --
(813)
Fixed rate commercial loans 22,150 5.53 (1) 6.84 2.68
(282) (409)
- ------------------------------------------------ ------
- -------- ----------
Total pay fixed/receive
variable 72,150 5.54 6.55 1.14
(1,374) (606)
- ------------------------------------------------ ------
- -------- ----------
Receive fixed/pay variable:
Fixed rate subordinated debt 150,000 7.10 5.50 (1) 5.88
2,219 3,874
Fixed rate medium-term borrowings -- -- -- --
(427)
Variable rate commercial loans 100,000 4.77 5.56 (1) 0.06
(813) (228)
- ------------------------------------------------ ------
- -------- ----------
Total receive fixed/pay
variable 250,000 6.17 5.53 3.55
979 3,646
- ------------------------------------------------ ------
- -------- ----------
Total company hedging swaps $322,150 6.03 % 5.75 % 3.01
($395) $3,040
- ----------------------------------========
======== ========
- ------------------------------------------------------------------------------------
- -------------------
Customer Hedging Swaps
- ------------------------------------------------------------------------------------
- -------------------
Pay fixed/receive variable $4,500 5.57 % (1) 9.11 % 1.31
$662 ($215)
Receive fixed/pay variable 4,500 9.20 5.56 (1) 1.31
(658) 220
- ------------------------------------------------ ------
- -------- ----------
Total customer hedging swaps $9,000 7.38 % 7.33 % 1.31
$4 $5
- ----------------------------------========
======== ========
The weighted average variable rates are based upon the contractual rates in effect
at December 31, 1995:
(In Thousands) December 31, 1995
- ------------------------------------------------------------------------------------
- -------------------
Company Hedging Swaps
- ------------------------------------------------------------------------------------
- -------------------
Pay fixed/receive variable:
Variable rate medium-term
borrowings $50,000 5.75 % (1) 6.42 % 1.46
($148) ($794)
Variable rate deposits -- -- -- --
232
Securities available for sale 21,228 6.35 (2) 9.00 3.74
(170) (1,099)
Fixed rate commercial loans 25,586 5.91 (1) 6.83 3.68
(211) (944)
- ------------------------------------------------ ------
- -------- ----------
Total pay fixed/receive
variable 96,814 5.92 7.10 2.54
(297) (2,837)
- ------------------------------------------------ ------
- -------- ----------
Receive fixed/pay variable:
Fixed rate subordinated debt 150,000 7.10 5.88 (1) 6.88
1,391 11,155
Fixed rate medium-term
borrowings 200,000 5.14 5.88 (1) 1.3
(3,204) (1,079)
Variable rate commercial loans 100,000 4.77 5.63 (1) 1.06
(1,804) (679)
- ------------------------------------------------ ------
- -------- ----------
Total receive fixed/pay
variables 450,000 5.71 5.82 3.11
(3,617) 9,397
- ------------------------------------------------ ------
- -------- ----------
Total company hedging swaps $546,814 5.75 % 6.05 % 3.01
($3,914) $6,560
- ----------------------------------========
======== ========
- ------------------------------------------------------------------------------------
- -------------------
Customer Hedging Swaps
- ------------------------------------------------------------------------------------
- ------------------
Pay fixed/receive variable $4,000 5.85 % (1) 9.57 % 2.34
$916 ($384)
Receive fixed/pay variable 4,000 9.62 5.85 (1) 2.34
(910) 388
- ------------------------------------------------ ------
- -------- ---------
Total customer hedging swaps $8,000 7.74 % 7.71 % 2.34
$6 $4
- ----------------------------------========
======== ========
- ------------------------------------------------------------------------------------
- -------------------
(1) Variable rate is tied to London Inter-Bank Offered Rate (LIBOR) with designated
3-month maturity.
(2) Variable rate is tied to London Inter-Bank Offered Rate (LIBOR) with designated
1-month maturity plus 60 basis points.
</TABLE>
<PAGE>
Deposits
Total deposits averaged $7.9 billion in 1996, representing a 4.0%
increase compared to $7.6 billion in 1995.
The Company's asset funding strategy focuses primarily on core
deposit growth. In 1996, interest checking represented the largest
increase in core deposits, a 5.3% or $34.8 million increase, averaging
$694.9 million compared to $660.1 million in 1995. Consumer certificates
increased $93.5 million to an average of $4.0 billion, representing a 2.4%
increase over 1995. Money market accounts showed a modest .4% increase as
compared to 1995, averaging $1.0 billion. Regular savings declined 1.2% to
an average of $733.6 million. Table 17 shows the components of total
average deposits for the past five years.
During 1996, certificates of deposit $100,000 and over increased
26.7%, or $69.0 million, averaging $327.5 million compared to $258.5
million in 1995. Table 18 shows a maturity schedule for certificates
of deposit $100,000 and over at year-end 1996.
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------
- --------------
TABLE 17 Average Deposits
(In Thousands) Year Ended December 31,
<CAPTION>
Percent
Change
1996 1995 1994 1993 1992
1996/1995
<S> <C> <C> <C> <C> <C>
<C>
- ------------------------------------------------------------------------------------
- --------------
Noninterest-bearing $1,037,907 $929,378 $903,164 $840,070
$733,716 11.7 %
Interest-bearing:
Interest checking 694,937 660,090 663,405 632,429
520,062 5.3
Regular savings 733,573 742,518 843,867 816,783
557,220 (1.2)
Consumer certificates 4,039,906 3,946,396 3,088,651 2,781,417
2,603,656 2.4
Money market accounts 1,040,394 1,035,942 1,007,847 1,091,764
1,181,713 0.4
Certificates of deposit
$100,000 and over 327,476 258,527 316,859 523,453
318,366 26.7
- ------------------------------------------------------------------------------------
- ---------
Total interest-bearing 6,836,286 6,643,473 5,920,629 5,845,846
5,181,017 2.9
- ------------------------------------------------------------------------------------
- ---------
Total $7,874,193 $7,572,851 $6,823,793 $6,685,916
$5,914,733 4.0 %
- ---------------------------------========== ========== ========= =========
=========
- ------------------------------------------------------------------------------------
- --------------
</TABLE>
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------
TABLE 18 Certificates of Deposit $100,000 and Over
(In Thousands) December 31,
<CAPTION>
1996
<S> <C>
- ----------------------------------------------------------------------------
Time remaining to maturity:
Less than three months $389,686
Three through six months 78,008
Six through twelve months 14,086
More than twelve months 6,446
- ----------------------------------------------------------------------------
Total $488,226
- ---------------------------------------------------------------- =========
- ----------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------
- -------------------
Table 19 Interest Sensitivity Analysis
Interest sensitivity management is the process of developing objectives, goals
and strategies to manage the Company's assets and liabilities. Its purpose is to
maintain a managed balance in interest sensitive assets and liabilities, those which
either mature within a certain time period or where the related interest rate can be
adjusted or repriced within a specified time period prior to maturity. The objective
of interest sensitivity management is to provide flexibility in controlling the
response of both rate sensitive assets and liabilities to wide and frequent
fluctuations in market rates of interest so that the effect of such swings on net
interest income is minimized. The most important part of this objective is to
maximize earnings while keeping risks within defined limits.
The interest sensitivity position is indicated by the volume of rate sensitive
assets, less rate sensitive liabilities. This difference is generally referred to as
the interest sensitivity gap. The nature of the gap indicates how future interest
rate changes may affect net interest income. Depending on the perception as to
whether interest rates will rise or fall, the objective is to maintain the gap
within a designated range. A negative gap, for example, should generally have a
favorable impact on net interest income when interest rates are declining, as more
liabilities than assets would be repriced at lower interest rates. The table below
shows the Company's interest sensitivity position at December 31, 1996.
(In Thousands)
<CAPTION>
1-30 Day 1-90 Day 1-180 Day 1-365 Day
Beyond One Year
Sensitivity Sensitivity Sensitivity Sensitivity
Or Insensitive Total
<S> <C> <C> <C> <C>
<C> <C>
- ------------------------------------------------------------------------------------
- -------------------
Uses of Funds
- ------------------------------------------------------------------------------------
- -------------------
Earning assets:
Securities available for sale and
trading account securities $397,088 $637,016 $900,591 $1,245,937
$1,827,748 $3,073,685
Federal funds sold, repos and other
money market investments 120,113 145,113 146,515 146,515
- -- 146,515
Loans and loans available for
sale 1,812,580 2,086,236 2,517,393 3,339,046
3,377,790 6,716,836
Interest rate swaps 10,724 20,849 18,870 14,809
(14,809)
- ------------------------------------------------------------------------------------
- -------------------
Total earning assets 2,340,505 2,889,214 3,583,369 4,746,307
5,190,729 9,937,036
Nonearning assets -- 515 1,287 2,830
600,494 603,324
- ------------------------------------------------------------------------------------
- -------------------
Total uses of funds $2,340,505 $2,889,729 $3,584,656 $4,749,137
$5,791,223 $10,540,360
- -------------------------------========== ========== ========== ==========
========== ===========
Sources of Funds
- ------------------------------------------------------------------------------------
- -------------------
Interest-bearing liabilities:
Savings and interest-bearing
demand accounts $-- $-- $-- $--
$1,453,497 $1,453,497
Certificates and other time
deposits 1,057,855 1,445,592 1,898,282 2,904,883
2,035,040 4,939,923
Certificates of deposit
$100,000 and over 124,683 389,686 467,694 481,780
6,446 488,226
Federal funds purchased and securities
sold under agreements to
repurchase 905,148 907,558 907,808 907,808
67 907,875
Other borrowings 72,274 285,154 332,654 381,754
90,600 472,354
Long-term debt and capitalized
lease obligations -- -- -- --
157,658 157,658
Interest rate swaps -- 100,000 150,000 150,000
(150,000)
- ------------------------------------------------------------------------------------
- -------------------
Total interest-bearing
liabilities 2,159,960 3,127,990 3,756,438 4,826,225
3,593,308 8,419,533
Noninterest-bearing sources 159,499 637,982 637,982 637,982
1,482,845 2,120,827
- ------------------------------------------------------------------------------------
- -------------------
Total sources of funds $2,319,459 $3,765,972 $4,394,420 $5,464,207
$5,076,153 $10,540,360
- ------------------------------------------------------------------------------------
- -------------------
Interest sensitivity gap $21,046 ($876,243) ($809,764) ($715,070)
$715,070 $--
- -------------------------------========== ========== ========== ==========
========== ===========
Interest sensitivity gap as a percentage
of earning assets 0.21 % (8.82)% (8.15)% (7.20)%
7.20 %
Uses of funds as a percentage
of sources of funds 100.91 % 76.73 % 81.57 % 86.91 %
114.09 %
- ------------------------------------------------------------------------------------
- -------------------
</TABLE>
<PAGE>
Noninterest Income
Noninterest income was $85.9 million for 1996, representing an
increase of 7.8%, or $6.2 million compared to $79.7 million in 1995.
Trust income increased 12.3% to $16.8 million over 1995, while deposit
fees and charges grew $2.7 million to $37.8 million, representing a
7.6% increase compared to 1995. Profits on securities available for
sale and trading account securities declined from $3.3 million in 1995
to $99,000 in 1996. Other income grew $4.9 million, an 18.5% increase
when compared to $26.3 million in 1995. The increase in other income
was due primarily to higher fees and a $1.2 million gain on the sale
of certain credit card receivables.
Table 20 shows the major categories of noninterest income for the
past five years.
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------
- ----
TABLE 20 Noninterest Income
(In Thousands) Year Ended December 31,
Percent
<CAPTION> Change
1996 1995 1994 1993 1992
1996/1995
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------
- ----
Trust income $16,780 $14,943 $13,926 $13,621 $12,208
12.3 %
Deposit fees and charges 37,832 35,150 34,557 33,898 29,792
7.6
Profits (losses) on securities available for
sale and trading account
securities, net 99 3,253 (25,984) 3,695 52,827
(97.0)
Investment securities gains, net -- -- -- 50,680 -- -
- -
Other income 31,204 26,329 36,739 24,026 21,584
18.5
- ---------------------------------------------------------------------------------
Total $85,915 $79,675 $59,238 $125,920 $116,411
7.8 %
- -------------------------------- ======= ======= ======= ======= =======
- ------------------------------------------------------------------------------------
- ----
</TABLE>
<PAGE>
Noninterest Expense
Noninterest expense was $251.9 million for 1996, a 5.8% or $13.8
million increase from 1995. The increase was due partly to a special
Savings Association Insurance Fund (SAIF) assessment of $4.0 million
and a $2.3 million charge associated with certain severance
arrangements. The assessment was a one-time charge by the Federal
Deposit Insurance Corporation (FDIC) to recapitalize the SAIF, and
was assessed on deposits acquired from SAIF-insured entities.
Excluding the effects of these $6.3 million charges, noninterest
expense was $245.6 million for 1996, representing a 3.1% increase,
or $7.4 million over 1995.
Personnel expense was up 6.9% to $142.3 million in 1996. The
previously mentioned severance charge combined with higher salary
and benefit costs were the contributing factors to the increase.
Occupancy and equipment expense for 1996 increased $3.2 million,
or 7.4% to $46.1 million. FDIC insurance expense declined $8.9
million from $11.2 million in 1995 to $2.3 million in 1996. Other
real estate expense increased 33.7% to $2.0 million in 1996. Other
expense was $55.1 million, an 11.7% increase compared to 1995. For
the year, the efficiency ratio was 53.38%, down 247 basis points
compared to 55.85% for 1995.
Table 21 shows the major categories of noninterest expense for
the past five years.
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------
- ----
TABLE 21 Noninterest Expense
(In Thousands) Year Ended December 31,
Percent
<CAPTION> Change
1996 1995 1994 1993 1992
1996/1995
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------
- ----
Personnel expense $142,347 $133,186 $127,683 $115,917 $104,060
6.9 %
Occupancy and equipment expense 46,147 42,979 41,653 38,752 38,313
7.4
FDIC insurance expense 2,287 11,164 14,910 14,612 11,886
(79.5)
Other real estate expense 2,006 1,500 11,786 15,108 4,715
33.7
Special SAIF assessment 4,028 -- -- -- -- -
- -
Other expense 55,126 49,336 49,033 38,885 41,859
11.7
- ----------------------------------------------------------------------------------
Total $251,941 $238,165 $245,065 $223,274 $200,833
5.8 %
- --------------------------------========================== ======== ========
- ------------------------------------------------------------------------------------
- ----
</TABLE>
<PAGE>
Liquidity
Central Fidelity's liquidity sources include core deposits,
money market assets, wholesale funding, and securities available for
sale. Cash flows are managed to ensure availability of funds to support
loan growth or unanticipated declines in deposits or borrowings.
Liquidity is measured by comparing expected cash flows to available
sources under anticipated and stress-imposed scenarios to confirm that
adequate reserves are available to meet unforeseen events.
Concentrations are also monitored for significant dependence on single
sources of funds.
The two primary sources of asset liquidity are money market
assets and expected paydowns and maturities from securities available
for sale. These portfolios are expected to generate $841 million in
cash flows for 1997. Maturing loans are a secondary funding source to
meet the Company's liquidity requirements.
Funds management policy guidelines require a diversified
approach to the participation in various markets based on relative
costs and term structures. Federal funds purchased, repurchase
agreements, and large denomination certificates of deposit provide
the primary sources of short-term wholesale funding. Medium-term
funding is provided by Federal Home Loan Bank borrowings and the bank
note program. As of December 31, 1996, the Federal Home Loan Bank
borrowings were $400.1 million. The bank note program matured $252.3
million during 1996 and had no issues outstanding as of year-end,
1996. Over $1 billion remains available under these programs.
<PAGE>
Capital Resources
Total shareholders' equity was $846.5 million at December 31,
1996, a 2.4% increase compared with $826.5 million for the same
period in 1995. Factors contributing to the equity increase were
$112.7 million in earnings, net of cash dividends of $51.3 million,
the issuance of common stock through various Plans totalling $11.6
million, and $9.2 million unrealized gains on securities available
for sale in 1996. During 1996, the Company purchased and retired
1,299,000 shares of its common stock under a stock repurchase
program for a total of $38.4 million. After taking into account
adjustment for the 3-for-2 stock split in May, 1996, the average
per share cost of repurchased shares was $23.15. The repurchased
shares may be used for general corporate purposes. Purchases under
the program may be discontinued or interrupted at any time. In 1996,
cash dividends declared on common stock at an annual rate of $.86
per share represented a payout ratio of 45.5%.
At year-end 1992, the Federal Reserve Board adopted final
risk-based capital guidelines for bank holding companies and banks
to assist in the assessment of capital adequacy. The risk-based
capital guidelines significantly revised the definition of capital
and established minimum capital standards in relation to assets and
off-balance-sheet exposures, as adjusted for credit risks. The final
minimum guideline for the ratio of total capital to risk-weighted
assets is 8%. At least 4% of the total risk-based capital is to be
composed of common equity net of goodwill and other intangibles
("Tier 1 capital"). The remainder may consist of subordinated debt,
other preferred stock and an allowable portion of allowance for
loan losses ("Tier 2 capital"). Table 22 shows the components of
risk-based capital at December 31, 1996 and 1995.
In addition, the Federal Reserve established minimum leverage
ratio guidelines for bank holding companies. These guidelines
provided for a minimum ratio of Tier 1 capital to total average
quarterly assets, less goodwill and other intangibles of 3% for
bank holding companies that meet certain specified criteria,
including having the highest regulatory rating. All other bank
holding companies generally are required to maintain a leverage
ratio of at least 3% plus an additional cushion of 100 to 200
basis points. Furthermore, the Federal Reserve has proposed a
"tangible Tier 1 leverage ratio" in evaluating proposals for
expansion or new activities. The tangible Tier 1 leverage ratio
is the ratio of Tier 1 capital less all intangibles, to total
tangible assets.
At December 31, 1996, Central Fidelity's risk-based capital
and leverage ratios exceeded the Federal Reserve's minimum
guidelines. The Federal Reserve's minimum guidelines are noted
in Note 19. Central Fidelity's Tier 1 and total risk-based
capital were $778.2 million and $1.0 billion at December 31,
1996, as compared to $738.8 million and $982.7 million at
year-end 1995. At December 31, 1996, the ratios of Tier 1 and
total risk-based capital to risk-weighted assets were 10.09%
and 13.29%, compared to 9.87% and 13.12%, at December 31, 1995.
The leverage ratio was 7.57% at December 31, 1996, compared to
7.06% at December 31, 1995.
Based upon the risk-based capital and leverage requirements,
Central Fidelity's capital structure places it well above the
Federal Reserve Board's minimum guidelines and in the well
capitalized category when measured against FDIC criteria. The
Company will continue to review and monitor the asset mix and
pricing, and other areas determined to be most affected by these
capital requirements.
<PAGE>
<TABLE>
- ---------------------------------------------------------------------
TABLE 22 Risk-Based Capital
(In Thousands) December 31,
<CAPTION>
1996 1995
<S> <C> <C>
- ---------------------------------------------------------------------
Tier 1 capital:
Common shareholders' equity $846,499 $826,547
Exclude unrealized losses with readily
determinable fair value (27) --
Less unrealized gains on
securities available for sale (9,224) (23,865)
- ---------------------------------------------------------------------
837,248 802,682
Less goodwill (8,673) (9,356)
Less deposit intangibles (50,362) (54,480)
- ---------------------------------------------------------------------
Tier 1 capital 778,213 738,846
- ---------------------------------------------------------------------
Tier 2 capital:
Allowable allowance for loan losses 96,522 93,812
Allowable long-term debt 150,000 150,000
- ---------------------------------------------------------------------
Tier 2 capital 246,522 243,812
- ---------------------------------------------------------------------
Total capital $1,024,735 $982,658
- --------------------------------------------- ========== ========
Risk-weighted assets $7,708,300 $7,488,748
Quarterly average assets $10,337,431 $10,521,840
Risk-based capital ratios:
Tier 1 capital 10.09% 9.87%
Total capital 13.29% 13.12%
Leverage ratio 7.57% 7.06%
- ---------------------------------------------------------------------
</TABLE>
<PAGE>
Recent Accounting Pronouncement
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125 (SFAS 125), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," in June, 1996. SFAS 125 prescribes accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. The new standard requires companies
to recognize the financial and servicing assets it controls and the
liabilities it has incurred after a transfer of financial assets, and
derecognize financial assets when control has been surrendered, and
derecognize liabilities when extinguished. In addition, a transfer of
financial assets in which the transferor surrenders control over those
assets is accounted for as a sale to the extent that consideration
other than beneficial interests in the transferred assets is received
in exchange. The Company will implement the new standard in 1997 as
required. Management believes the adoption of SFAS 125 will not
materially impact the financial condition or results of operations
of the Company.
<PAGE>
Forward-Looking Statements
Certain statements in this discussion may constitute
"forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks including, but not
limited to, changes in general economic and business conditions,
interest rate fluctuations, competition within and from outside
the banking industry, new products and services in the banking
industry, risks inherent in making loans such as repayment risks
and fluctuating collateral values, changing trends in customer
profiles and changes in laws and regulations applicable to the
Company. Although the Company believes that its expectations with
respect to the forward-looking statements are based upon reasonable
assumptions within the bounds of its knowledge of its business and
operations, there can be no assurance that actual results,
performance or achievements of the Company will not differ
materially from any future results, performance or achievements
expressed or implied by such forward-looking statements.
<PAGE>
Earnings and Balance Sheet Analysis
1995 Compared to 1994
Net Interest Income
On a tax-equivalent basis, net interest income for 1995 was
$347.3 million, an increase of 1.5% from 1994. This moderate growth
resulted primarily from higher levels of average earning assets.
Higher funding costs during 1995 resulted in the Company's net
interest margin declining 21 basis points from 3.79% to 3.58%.
Average earning assets for 1995 grew $692.4 million, or 7.7%. This
growth produced $106.9 million additional income, an increase of
15.9% from 1994. Average interest-bearing liabilities increased
$635.6 million, or 8.1% from 1994, and interest expense increased
$101.6 million or 30.7% over 1994. The yield on average earning
assets increased 57 basis points during 1995 but was offset by an
increase of 88 basis points on the cost of interest-bearing liabilities.
During 1995, the Company's interest rate swap activities resulted
in a decline in interest income of $2.2 million and an increase in
interest expense of $1.7 million compared to a $1.6 million increase
in interest income and a decrease of $3.5 million in interest expense
for 1994. The Company's interest rate swap activities resulted in a
reduction of net interest income of $3.9 million during 1995 and an
increase of net interest income of $5.1 million for 1994.
In 1995, total loans grew $677.5 million, or 12.7% to an average
of $6.0 billion. Residential real estate and all categories of
consumer loans accounted for the majority of the increase. Residential
real estate loans rose 14.3% to an average of $1.6 billion, following
a 65.6% growth in 1994. Consumer second mortgage loans increased 13.6%,
averaging $578.3 million. Installment loans averaged $971.9 million,
reflecting growth of 27.1% compared to 1994. Bank card loans rose
$118.0 million, an increase of 22.3%, and averaged $647.9 million.
When compared with the 1994 levels, commercial and commercial real
estate and construction loans registered increases of 3.9% and 4.6%,
respectively. Securities available for sale averaged $3.6 billion,
reflecting an increase of 1.5%. This follows a decline of 9.6% in
1994 due to the sale of fixed rate securities in an effort by the
Company to reduce its exposure to changes in interest rates. Money
market investments, consisting primarily of federal funds sold and
securities purchased under agreements to resell, declined 37.2% to
an average of $78.8 million. In 1995, the yield on average earning
assets gained 57 basis points to 8.03%, due primarily to higher
yields on most categories of earning assets.
In 1995, core deposits increased $807.3 million to an average
of $7.3 billion, an increase of 12.4%, following a 5.6% increase in
1994. Deposit growth was impacted by the acquisition, on June 9,
1995, of fourteen branches and approximately $453 million of core
deposits from Household Bank, f.s.b. Other deposit categories
contributing to 1995 growth were consumer certificates, which
increased $857.7 million to $3.9 billion, or 27.8% from 1994, and
money market accounts which grew 2.8% to an average of $1.0 billion.
Regular savings and interest checking showed declines of 12.0% and
.5%, averaging $742.5 million and $660.1 million, respectively.
Certificates of deposit $100,000 and over declined 18.4%, on average,
compared to 1994. Federal Home Loan Bank borrowings and other
short-term borrowings increased 190.3% and 47.3% to averages of
$311.2 million and $62.9 million, respectively. The decline in
medium-term notes of 39.8%, averaging $323.5 million, resulted from
notes maturing during 1995 and the use of other lower cost funding
sources. Federal funds purchased and repos showed an 8.8% decline
over 1994. Long-term debt and capitalized lease obligations
declined slightly to an average of $158.4 million. In 1995, the
cost of interest-bearing liabilities increased 88 basis points
to 5.09%, due primarily to the higher interest rate environment.
Loans
In 1995, total loans grew 12.7% to an average of $6.0 billion
compared to $5.3 billion from the prior year. This growth reflected
an increased demand in consumer lending activities. The average yield
on the loan portfolio increased 50 basis points to 8.87% from 8.37%
in 1994. The average prime rate was 8.69% in 1995 compared to 7.08%
in 1994.
Commercial and commercial real estate loans averaged $1.9 billion,
a 3.9% increase from $1.8 billion in 1994. The average yield was up 69
basis points to 8.65% compared to 1994, reflective of the higher average
prime rate during 1995. Construction loans grew 4.6%, or $13.5 million,
to an average of $308.2 million, following an 11.0% decline in 1994.
The average yield of 9.84%, was up 160 basis points over 1994.
Residential first mortgage loans averaged $1.6 billion, an increase
of 14.3% compared to 1994, following an increase of 65.6% in 1994.
During 1995, higher mortgage interest rates negatively impacted new
first mortgage loan originations as well as refinancing activity. The
average yield on the residential first mortgage loan portfolio
increased slightly to 7.23% from 7.20% in 1994.
Consumer second mortgage loans, which consist of second mortgage
loans and home equity lines of credit, averaged $578.3 million, a 13.6%
increase over 1994. The average yield was up 47 basis points to 9.75%.
Installment loans averaged $971.9 million, representing growth of 27.1%.
The average yield on installment loans was 8.32%, up 68 basis points
from 7.64% in 1994. Bank card loans grew 22.3% to an average of $647.9
million. The average yield remained flat at 13.12%, and is indicative
of the competitiveness in the bank card industry.
Allowance/Provision for Loan Losses
The allowance for loan losses at December 31, 1995 was $110.0
million, the same as year-end 1994. At December 31, 1995, the
allowance for loan losses was 1.74% of loans, compared to 1.91% at
December 31, 1994. The provision for loan losses totalled $26.7 million
for 1995, an increase of $2.3 million compared to $24.4 million in
1994. The increase in the provision is consistent with comparable
increases in charge-offs from year to year. Net charge-offs
amounted to $26.7 million for 1995, compared with $19.4 million
for 1994. The ratio of provision for loan losses declined
slightly from .46% to .45% for 1995, and the ratio of net
charge-offs to average loans increased from .36% to .45%.
Nonperforming assets as of December 31, 1995 were $65.9
million or .61% of total assets compared to $90.3 million or
.90% of total assets a year ago. At December 31, 1995, nonperforming
assets were 1.04% of loans and foreclosed properties, compared to
1.56% at December 31, 1994. The lower level of nonperforming assets
was the result of improved real estate markets across the
Commonwealth of Virginia and continued success in problem loan
resolution. At December 31, 1995, the allowance for loan losses to
nonperforming assets was 166.9% compared to 121.8% at December 31,
1994. Asset quality continued to improve in the commercial,
commercial real estate and construction loan portfolios during
1995. Higher consumer loan delinquencies, however, resulted in
increased charge-offs, a trend expected to continue into 1996.
This is, in part, a reflection of conditions in consumer banking
throughout our industry, as well as increased volume. In response,
our underwriting criteria have been strengthened and collection
efforts enhanced.
Securities Available for Sale
At December 31, 1995, the Company had $3.6 billion in
securities available for sale, compared with $3.5 billion at
year-end 1994.
The fair value of securities available for sale, at year-end
1995, exceeded amortized cost by $36.7 million, resulting in a
$23.9 million after-tax addition to shareholders' equity. This
represents a significant reversal from year-end 1994, when the
portfolio had an unrealized loss of $157.3 million, resulting in
a $102.2 million after-tax reduction of shareholders' equity.
The change in the composition of the portfolio in 1995
reflects the emphasis on asset-backed securities, which grew to
21% of the portfolio, compared to 13% at the end of 1994.
Mortgage-backed securities decreased slightly to 36% of the
portfolio following the sale of certain adjustable rate securities
during the fourth quarter. Collateralized mortgage obligations
remained at 27% of securities.
The average yield on securities available for sale in 1995 was
6.71%, compared with 6.24% in 1994. The expected weighted average
life of the portfolio shortened to 3.7 years, compared with 4.4 years
at year-end 1994. This shortening is attributed to the aging of the
securities held in the portfolio as well as faster prepayment
assumptions.
Asset/Liability Management
The Company uses a static gap report to measure its general
exposure to repricing risk at a point in time. As a result of the
Company's acquisition of the Virginia deposits of Household Bank,
f.s.b. and other steps to reduce its exposure to rising rates,
the one year cumulative gap was reduced from a negative 11.96% of
earning assets at year-end 1994 to negative 2.00% at year-end 1995.
Off-Balance-Sheet Derivatives
The notional amount of the Company's off-balance-sheet swap
portfolio, at December 31, 1995, was $546.8 million, down from
$976.5 million at year-end 1994. The related fair value, or
unrecognized gains (losses), of these derivative financial
instruments was $6.6 million and ($29.5) million at December 31,
1995 and 1994, respectively. The swap portfolio consists
principally of contracts wherein the Company receives a fixed
rate of interest and pays a variable rate, typically three-month LIBOR.
In the event that a derivative product was terminated prior to
its contractual maturity, it is the Company's policy to recognize the
resulting gain or loss over the remaining life of the underlying
hedged asset or liability. In 1995 and 1994, the Company did not
terminate any derivatives transactions prior to contractual maturity.
At year-end 1995, the Company had net credit risk of $11.0 million
to one counterparty. This exposure was below the threshold for
receiving collateral. Of the transactions that had negative fair values
at year-end 1995, none were above threshold levels requiring the Company
to deliver collateral.
The Company also entered into a limited number of interest rate
swap agreements to accommodate the needs of commercial customers. In
order to offset the interest rate risk of customer swaps, the Company
executed offsetting transactions with third parties. The notional
amount of customer-related swap transactions was $8.0 million and $18.0
million at December 31, 1995 and 1994, respectively. In 1995, at the
request of the customer, the Company terminated a $5.0 million notional
swap. As a result, the offsetting swap with a third party was also
terminated for a total notional amount terminated during the year of
$10.0 million. No customer swaps were terminated in 1994.
Deposits
Total deposits increased 11.0%, averaging $7.6 billion in 1995,
as compared to $6.8 billion in 1994. Total core deposits of
approximately $453 million and a total of fourteen branch offices
in Northern Virginia were acquired on June 9, 1995 from Household Bank,
f.s.b., a Virginia subsidiary of Household International, Inc., a
Chicago, Illinois based financial services company. The offices are
located in the city of Alexandria, and counties of Arlington and Fairfax.
In 1995, consumer certificates accounted for the largest increase
in core deposits, averaging $3.9 billion compared to $3.1 billion in
1994, representing a 27.8%, or $857.7 million increase. Money market
accounts averaged $1.0 billion, showing a 2.8% increase from the prior
year. Regular savings and interest checking declined 12.0% and .5% in
1995, averaging $742.5 million and $660.1 million, respectively.
Central Fidelity's share of total core deposits in the Commonwealth
of Virginia was 12.56% as of September 30, 1995, ranking it third in
market share. During 1995, certificates of deposit $100,000 and over
decreased 18.4% to an average of $258.5 million.
Noninterest Income
Noninterest income was $79.7 million for 1995, representing an
increase of $20.4 million, or 35.0% compared to $59.2 million in 1994.
Trust income grew 7.3% to $14.9 million, while deposit fees and charges
increased 1.7% over 1994. Profits on securities available for sale and
trading account securities amounted to $3.3 million in 1995, as compared
to $26.0 million in securities losses in 1994. These securities losses
were largely due to a major restructuring of the securities portfolio
in 1994 to lessen the future exposure to interest rate changes. Other
income was $26.3 million, a 28.3% decrease when compared to $36.7
million in 1994. The decline in other income was due primarily to an
$11.4 million profit recognized from the sale of an affinity bank card
portfolio in 1994.
Excluding the effects of securities transactions in 1995 and 1994
and the $11.4 million gain on the sale of bank card assets in 1994,
noninterest income was $76.4 million for 1995, representing an increase
of $2.6 million, or 3.5% over $73.8 million for 1994.
Noninterest Expense
Noninterest expense totalled $238.2 million for 1995, a decline of
2.8%, or $6.9 million from $245.1 million in 1994. Lower FDIC deposit
insurance premiums and other real estate expense were the primary
factors contributing to this reduction. FDIC insurance expense declined
25.1% to $11.2 million for 1995, and other real estate expense was down
87.3% from $11.8 million in 1994. This decline in other real estate
expense was due primarily to charges in 1994 to appropriately reflect
appraised current values of other real estate owned.
Personnel expense was up 4.3%, due largely to expenses associated
with the acquisition of the Household branches and recognition of charges
relating to the announced closing of 10 branches. Occupancy and equipment
expense for 1995 increased 3.2% to $43.0 million. Other expense of $49.3
million in 1995 remained flat compared to 1994. For the year, the
efficiency ratio was 55.85%, up 125 basis points compared to 54.60%
for 1994.
Liquidity
Federal funds purchased, repurchase agreements, and large
denomination certificates of deposit provide the primary sources of
short-term wholesale funding. Medium-term funding is provided by the
bank note program and Federal Home Loan Bank borrowings. As of December
31, 1995, $252.3 million in bank notes and $350.7 million Federal Home
Loan Bank borrowings were outstanding with over $700.0 million remaining
available under these programs.
Capital Resources
Total shareholders' equity was $826.5 million at December 31, 1995,
a 32.7% increase compared with $623.1 million for the same period in
1994. Factors contributing to the equity increase were $58.3 million in
earnings, after dividends, and the issuance of common stock through
various Plans totalling $19.0 million, and $23.9 million was
attributable to unrealized gains on securities available for sale in
1995 compared to $102.2 million in unrealized losses on securities
available for sale in 1994 . During 1995, cash dividends declared on
common stock at an annual rate of $1.18 per share represented a payout
ratio of 44.5%.
At December 31, 1995, Central Fidelity's risk-based capital and
leverage ratios exceeded the Federal Reserve's minimum guidelines.
Central Fidelity's Tier 1 and total risk-based capital were $738.8
million and $982.7 million at December 31, 1995, as compared to
$694.3 million and $928.4 million at year-end 1994. At December 31,
1995, the ratios of Tier 1 and total risk-based capital to
risk-weighted assets were 9.87% and 13.12%, compared to 10.36% and
13.85%, at December 31, 1994. The leverage ratio was 7.06% at December
31, 1995, compared to 7.04% at December 31, 1994.
<PAGE>
<TABLE>
Quarterly Results of Operations
The following is a tabulation of the quarterly results of operations for each of
the four quarters in 1996 and 1995:
(In Thousands, except per share data)
<CAPTION>
March 31 June 30 Sept. 30 Dec. 31
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------
1996
Total income from earning
assets $197,498 $194,885 $197,035 $199,202
Net interest income 91,175 92,028 94,422 97,642
Provision for loan losses 10,307 10,644 11,062 11,852
Income before income taxes 41,039 42,258 36,597 45,482
Net income 27,981 28,809 25,132 30,780
Net income per share 0.47 0.48 0.42 0.52
1995
Total income from earning
assets $185,201 $190,896 $196,570 $199,253
Net interest income 82,861 83,561 85,501 87,702
Provision for loan losses 5,304 3,344 8,704 9,361
Income before income taxes 37,524 38,015 40,554 38,329
Net income 25,720 26,024 27,552 26,074
Net income per share 0.43 0.44 0.46 0.44
- -----------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
Common Stock Performance and Dividends
Central Fidelity Banks, Inc. common stock is traded on the national over
under NASDAQ symbol CFBS. A comparative summary of the prices for such stock for
1996 and 1995 is as follows:
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------
Common Stock Prices
-------------------------------------- Dividends
1996 1995 Per Share
------------------ ------------------ --------------
High Low High Low 1996 1995
- --------------------------------------------------------------------------
First Quarter $23.00 $21.09 $18.17 $16.17 $0.20 $0.19
Second Quarter 23.67 22.00 20.33 16.83 0.22 0.20
Third Quarter 25.38 21.50 22.33 19.50 0.22 0.20
Fourth Quarter 27.50 24.00 22.83 20.33 0.22 0.20
- --------------------------------------------------------------------------
On May 8, 1996, the Board of Directors of the Company declared a 3-for-2 stock
split in the form of a dividend payable on June 14, 1996 to shareholders of record
May 20, 1996.
Please read "Dividends" in note 1 and "Parent Company Financial Information" in
note 2 of the notes to financial statements for information on the Company's sources
of funds for dividends and restrictions on the payment thereof. At December 31,
1996, there were 15,254 holders of record of the Company's outstanding common stock.
</TABLE>
<PAGE>
<TABLE>
FORM 10-K
- ------------------------------------------------------------------------------------
- ----
Central Fidelity Banks, Inc. and Subsidiaries
Cross Reference Index
This Annual Report to Shareholders and Form 10-K incorporates into a single
document the requirements of the Securities and Exchange Commission for both.
<CAPTION>
<S> <C>
Part One Page
Item 1 Business
Item 2 Properties
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders None
Part Two
Item 5 Market for the Registrant's Common Stock and Related Shareholder Matters
Item 6 Selected Financial Data
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 8 Financial Statements and Supplementary Data
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure None
Part Three
Item 10 Directors and Executive Officers of the Registrant*
Item 11 Executive Compensation*
Item 12 Security Ownership of Certain Beneficial Owners and Management*
Item 13 Certain Relationships and Related Transactions*
Part Four
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
* Included in this report is a listing of the names of the directors and executive
officers of the Company. However, the specific information called for by the
instructions to Form 10-K with respect to Items 10 through 13 as listed above is
hereby incorporated by reference to the Company's definitive Proxy Statement for use
at the Annual Meeting of Shareholders on May 14, 1997.
</TABLE>
<PAGE>
FORM 10-K
- ----------------------------------------------------------------------------
- ------------------------
Central Fidelity Banks, Inc. and Subsidiaries
Business
Central Fidelity Banks, Inc. ("Central Fidelity" or the "Company"),
a Virginia corporation headquartered in Richmond, Virginia, is a bank
holding company. The Company owns, except for bank directors' qualifying
shares, all of the stock of its commercial bank. At December 31, 1996,
Central Fidelity and its subsidiaries had approximately 3,700 full-time
employees.
The Company is registered with, and supervised by, the Board of
Governors of the Federal Reserve System under the Bank Holding Company
Act of 1956. Under this Act, it may only engage in the business of
managing or controlling banks or furnishing services to its subsidiaries
and certain other activities which, in the opinion of the Federal Reserve
Board, are closely related to banking.
The Company serves the marketplace primarily through its
wholly-owned banking subsidiary, Central Fidelity National Bank, a
national banking association (the "Bank"), which is supervised and
examined by the Comptroller of the Currency. At year-end 1996, the Bank
operated 244 branch offices, including 27 full-service supermarket
locations and 221 automated teller machines throughout the Commonwealth
of Virginia. The Company, through the Bank and its other subsidiaries,
provides a wide variety of financial services to a broad customer base
of individuals, corporations, institutions and governments, primarily
located in Virginia. The Bank is an issuer of MasterCard and VISA
credit cards. Through the use of reciprocally shared automated teller
machines, the Company can deliver services through its membership in the
Internet/MOST regional and PLUS national networks of automated teller
machines. The Company also engages in limited international banking
activities, primarily in connection with foreign trade financing for
Virginia-based companies. In addition to commercial activities, through
its Financial Services Group, the Company generates noninterest income
by sales of trust and fiduciary services, and other investment services.
On September 18, 1995, the Company's other national bank
subsidiary, Central Fidelity Bank, N.A., organized in 1986, was merged
with the Company's principal bank subsidiary, Central Fidelity National
Bank.
Bank-related subsidiaries, all of which are wholly owned, are engaged
in insurance and other bank-related services. Such subsidiaries, of which
there are eleven, have made only a nominal contribution to revenues for
each of the past five years. The bank-related companies are examined by
the Federal Reserve.
Central Fidelity conducts its commercial banking business under a
variety of federal and state laws and regulations, some of which relate
to interest rates, required reserves, transactions between the Company
and its subsidiaries, restrictions on loans to officers, the use of
correspondent balances, the establishment of branches and the
acquisition of subsidiaries. In addition, the Federal Reserve Board
has statutory authority to issue "cease and desist" orders to bank
holding companies and their bank-related subsidiaries with respect to
actions deemed to constitute a serious threat to the safety, soundness
or stability of a subsidiary bank. In 1991, Congress enacted the
Federal Deposit Insurance Corporation Improvement Act ("FDICIA"),
which substantially revised the bank regulatory and funding provisions
of the Federal Deposit Insurance Act and made revisions to several
other federal banking statutes. FDICIA requires that insured depository
institutions maintain certain minimum capital standards and that federal
bank regulatory authorities take prompt corrective action against those
institutions that fail to meet these standards. FDICIA establishes five
capital tiers. Central Fidelity's bank subsidiary ranks in the highest
of those tiers, which is "well capitalized." FDICIA also contains a
variety of other provisions that affect the operations of the Company's
bank subsidiary, including reporting requirements and regulatory
standards for real estate lending.
The earnings and business of Central Fidelity are affected by
general economic conditions, both domestic and foreign, and by the
monetary and fiscal policies of the United States Government and its
various agencies, particularly the Federal Reserve Board. Important
functions of the Federal Reserve Board, in addition to those
enumerated above, are to regulate the supply of credit and to deal
with general economic conditions within the United States. The
instruments of monetary policy employed by the Federal Reserve Board
for these purposes influence in various ways the overall level of
investments, loans, other extensions of credit and deposits and the
interest rates paid on liabilities and received on earning assets.
The Company cannot accurately predict the impact of changes in
monetary policy.
The Company experiences keen competition in all aspects of
its business from each of the other major bank holding companies
in the state. Additionally, the Company encounters competition from
smaller banks or bank holding companies and other financial service
organizations. Finance companies and credit unions compete with
banks in the important area of consumer lending and deposit gathering.
Among commercial banks, the principal method of competition is
the efficient delivery of quality financial services at competitive
prices. Central Fidelity believes its delivery of financial services
is equivalent or superior to that of its competitors and that its loan,
deposit and service prices are competitive.
On September 29, 1994, the Riegel-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Banking Act"), which
eliminated the federal restrictions on interstate banking, was enacted.
This legislation generally authorizes interstate acquisitions of banks
by bank holding companies without geographic limitations commencing
September 29, 1995, and authorizes interstate mergers of banks after May
31, 1997 subject to the ability of states to opt-out. In addition, the
Interstate Banking Act recognizes state legislation which accelerates the
implementation of interstate branching and mergers under certain
circumstances. During 1995 the Virginia legislature adopted such
legislation which became effective on July 1, 1995. The elimination
of interstate banking restrictions will have no immediate effect on the
Company's long-standing strategy to serve only Virginia markets. It is
uncertain at this time what effect the elimination of interstate banking
restrictions will have on the competitive environment in Virginia in the1
future.
The Company is not dependent upon any single customer, or group of
customers, nor is the Company significantly affected by seasonal changes.
<PAGE>
FORM 10-K
- ------------------------------------------------------------------------
Central Fidelity Banks, Inc. and Subsidiaries
Properties
The executive offices of Central Fidelity are located in the
headquarters office of Central Fidelity National Bank, 1021 East Cary
Street, Richmond, Virginia 23219. The Central Fidelity National Bank
Building is in the James Center complex located in the heart of
Richmond's business and financial district. The headquarters building
consists of a 22 story office building and garage, approximately half of
which is leased by the Company from a third party with an initial lease
term that expires 2002.
The Company's subsidiaries generally own their offices and
facilities. However, either because of escalating property costs or
statutes limiting the amount of a bank's investment in banking premises
in relation to its capital, the Company has entered into operating
leases for certain of its locations.
As of December 31, 1996, the Company and its subsidiaries had
consolidated net premises and equipment, including land, buildings,
furnishings and equipment, leasehold improvements and capitalized
leases of $157.1 million. For additional information, refer to notes
8 and 11 of the notes to financial statements.
<PAGE>
FORM 10-K
- -----------------------------------------------------------------------------
- ---------------------------
Central Fidelity Banks, Inc. and Subsidiaries
Legal Proceedings
There are legal proceedings from time to time pending against
the Company and its subsidiaries arising during the normal course of
business. In the opinion of management, after consultation with legal
counsel, liabilities arising from these proceedings, if any, would not
have a material adverse effect on the consolidated financial position
or results of operations.
<PAGE>
FORM 10-K
- ------------------------------------------------------------------------------
- ----------------------------
Central Fidelity Banks, Inc. and Subsidiaries
Directors and Executive Officers of the Registrant
Information with respect to the Directors of the Registrant is
hereby incorporated by reference to the Registrant's definitive
Proxy Statement for use at the Annual Meeting of Shareholders on May
14, 1997.
The names and ages of the executive officers of the Registrant
together with their areas of responsibility are set forth herein.
Except as otherwise indicated, each executive officer holds the same
office in the Company and in the Bank. All of said officers were
elected to their positions by the Board of Directors and will hold
office until their successors are elected. All of said officers,
except for Ms. Eberhardt and Master and Messrs. Baird, Foster,
Plymale and Mapp, have served in executive positions for more than
five years with the Registrant and or its subsidiaries. Ms. Master
joined the Bank in 1988 as Human Resources manager. For several years
prior thereto she was Human Resources manager for BDM Corporation, a
Northern Virginia company that provided professional technical
services for the defense industry. Ms. Master manages the Human
Resources Division and was elected executive officer in 1991. Mr.
Baird joined the Bank in 1992 in its mortgage banking division.
Just prior to joining the Bank, Mr. Baird was President and Chief
Executive Officer of C&S/Sovran Mortgage Corporation and its
predecessors for more than ten years. Mr. Baird was elected
executive officer in 1992. After having served in various senior
officer positions with the Bank for more than five years, Messrs.
Foster and Mapp were elected executive officers in 1993, and Ms.
Eberhardt and Mr. Plymale were elected in 1994 as executive officers.
There are no family relationships between any of the officers nor
are there any arrangements or understandings between them or any
other person pursuant to which they were elected as an officer.
Lewis N. Miller, Jr., 53, Chairman of
the Board of Directors and President
Jay O. Livingston, 50, Corporate Executive
Vice President and Chief Administrative
Officer
Deborah J. Brooks, 45, Corporate Executive
Vice President, Retail Banking
Philip G. Hug, 54, Corporate
Executive Vice President, Commercial
James W. Koeniger, 50, Corporate Executive
Vice President, Financial Services
Maryann Master, 48, Corporate Executive
Vice President, Human Resources
John T. Percy, Jr., 51, Corporate
Executive Vice President, Investments
William H. Pruitt, 49, Corporate Executive
Vice President, Loan Administration
Jane D. Sorah, 49, Corporate Executive
Vice President, Retail Lending
William N. Stoyko, 50, Corporate Executive
Vice President, Secretary and Senior
Corporate Counsel, Legal Administration
Charles W. Tysinger, 48, Corporate Executive
Vice President and Treasurer, Finance
Nancy K. Eberhardt, 43, Corporate
Executive Officer and President,
Northern Region
Rodger W. Fauber, 55, Corporate
Executive Officer and President,
Western Region*
William I. Foster, III, 41, Corporate
Executive Officer and President,
Eastern Region
Stephen W. Mapp, 45, Corporate Executive
Officer and President, Capital Region
Monty W. Plymale, 50, Corporate
Executive Officer and President,
Commonwealth Region
Bryant W. Baird, Jr., 60, President,
Central Fidelity Mortgage Division
of Central Fidelity National Bank
James F. Campbell, 58, Senior Vice
President and Controller
John S. Moore, 45, Senior Vice
President and Auditor
* Retired effective December 31, 1996.
<PAGE>
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
- ------------------------------------------------------------------------------
- ----------------------------
Central Fidelity Banks, Inc. and Subsidiaries
The following documents are filed as part of this report:
(a)1. Financial Statements:
Consolidated Balance Sheet -
December 31, 1996 and 1995
Statement of Consolidated Income -
Years ended December 31, 1996, 1995 and 1994
Statement of Consolidated Cash Flows -
Years ended December 31, 1996, 1995 and 1994
Statement of Changes in Consolidated Shareholders' Equity -
Years ended December 31, 1996, 1995 and 1994
Notes to Financial Statements
Independent Auditors' Report
2. Schedules:
Schedules specified in the applicable regulations of the
Securities and Exchange Commission pertain to items which do not
appear in the consolidated financial statements, to items which are
insignificant or to items as to which the required disclosures have
been made elsewhere in the consolidated financial statements and
notes thereto. These schedules have therefore been omitted.
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K during the fourth
quarter ended December 31, 1996.
(c) Exhibits **
** A list of Exhibits was filed separately. Copies of any Exhibits
not contained herein may be obtained by writing to William N. Stoyko,
Corporate Secretary, Central Fidelity Banks, Inc., Post Office Box
27602, Richmond, Virginia 23261-7602.
<PAGE>
SIGNATURES
- ----------------------------------------------------------------------------
- ----------------------------
Central Fidelity Banks, Inc. and Subsidiaries
Pursuant to the requirements of Section 13 or 15(d) 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.
Central Fidelity Banks, Inc.
Lewis N. Miller, Jr.
Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
Charles W. Tysinger
Corporate Executive Vice President and Treasurer
(Principal Financial Officer)
James F. Campbell
Senior Vice President and Controller
(Principal Accounting Officer)
Date: March 5, 1997
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed on March 5, 1997 by a majority of
the Registrant's Board of Directors as follows:
Robert L. Freeman, T. Justin Moore, III, Jack H. Ferguson,
Kenneth S. White, G. Bruce Miller, William G. Reynolds, Jr.,
James F. Betts, Lloyd U. Noland, III, Alvin R. Clements,
Richard L. Morrill and Phyllis L. Cothran
<PAGE>
Exhibit Index
Exhibit No. Document
- -------------- --------------
3(i) Articles of Incorporation
Restated Articles of Incorporation, adopted and effective
March 14, 1990, incorporated by reference to Exhibit 3.1
to Form 8, dated May 22, 1992, File No. 0-8829. Articles
of Amendment to Restated Articles of Incorporation, dated
May 18, 1993, incorporated by reference to Exhibit 4.4 to
Form S-3 Registration Statement, dated August 31, 1994,
File No. 33-55311.
3(ii) By-Laws
Restated By-Laws, effective March 14, 1990, as amended
September 13, 1995, incorporated by reference to Exhibit
3.2 to Form 8-K, dated September 21, 1995, File No.
0-8829.
4 Instruments defining the rights of security holders,
including indentures
Amended and Restated Rights Agreement, dated as of
November 9, 1994, between Central Fidelity Banks, Inc. and
Central Fidelity National Bank, as Rights Agent,
incorporated by reference to Exhibit 1 to Amendment No. 1
to Registration Statement on Form 8-A, dated November 18,
1994, File No. 0-8829.
11 Statement re: computation of per share earnings - filed
herewith.
21 Subsidiaries of the Registrant - filed herewith.
23 Consent of independent accountants - filed herewith.
<PAGE>
<TABLE>
EXHIBIT 11
Exhibit No. 11 to Annual Report on Form 10-K
Central Fidelity Banks, Inc.
Commission File No. 0-8829
Statement Re Computation of Per Share Earnings
(In Thousands, except per share data)
<CAPTION>
Year Ended December 31,
---------------------------
1996 1995 1994
<S> <C> <C> <C>
---------------------------
Net income $112,702 $105,370 $84,864
========= ======= =======
Shares:
Weighted average number of common shares
outstanding used in computing primary
earnings per share 59,737 59,674 58,742
Dilutive stock options - based on
treasury stock method 1,021 899 1,119
---------------------------
Weighted average number of common shares
used in computing fully diluted
earnings per share 60,758 60,573 59,861
================== =======
Earnings per share:
Primary earnings per share $1.89 $1.77 $1.45
Fully diluted earnings per share $1.85 $1.74 $1.42
</TABLE>
<PAGE>
<TABLE>
EXHIBIT 21
Exhibit No. 21 to Annual Report on Form 10-K
Central Fidelity Banks, Inc.
Commission File No. 0-8829
Subsidiaries of the Registrant
The list below shows all of the subsidiaries of Central Fidelity Banks, Inc.,
their relationship by percentage of stock owned and the state of incorporation.
All are included in the consolidated financial statements at December 31, 1996,
which are incorporated in this report.
<CAPTION>
Percentage
Owned by State of
Registrant Incorporation
<S> <C> <C>
Registrant
--------------------- ---------- ----------------
Central Fidelity Banks, Inc. --- Virginia
Subsidiaries
--------------
Central Fidelity National
Bank 100 National Banking
Richmond, Virginia
CFB Insurance Agency, Inc. 100 Virginia
Richmond, Virginia
Central Fidelity Services,
Inc. 100 Virginia
Lynchburg, Virginia
Central Fidelity Properties,
Inc. 100 Virginia
Richmond, Virginia
Mulberry Corporation * Virginia
Richmond, Virginia
S. Brooke Corporation * Virginia
Richmond, Virginia
S. Hill, Inc. * Virginia
Richmond, Virginia
North Hart Run, Inc. ** Virginia
Richmond, Virginia
North Hart Run Joint Venture *** Virginia
Richmond, Virginia
Oakton Hills Estates Joint
Venture *** Virginia
Richmond, Virginia
Cedar Run Joint Venture *** Virginia
Richmond, Virginia
G. C. Leasing, Inc. ** Virginia
Richmond, Virginia
* 100% owned by Central Fidelity National Bank, the Registrant's principal
subsidiary.
** 100% owned by Mulberry Corporation, a subsidiary of the Registrant's principal
subsidiary, Central Fidelity National Bank.
*** 100% owned by North Hart Run, Inc., a subsidiary of Mulberry Corporation, a
subsidiary of the Registrant's principal subsidiary, Central Fidelity National
Bank.
</TABLE>
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Central Fidelity Banks, Inc.:
We consent to incorporation by reference in (1) Registration Statement
No. 2-86240 on Form S-8, (2) Registration Statement No. 33-51393 on
Form S-8, (3) Registration Statement No. 33-61694 on Form S-3, (4)
Registration Statement No. 33-55311 on Form S-3, (5) Registration
Statement No. 33-61039 on Form S-8, (6) Registration Statement No.
33-61933 on Form S-8, (7) Registration Statement No. 33-62989 on
Form S-8, and (8) Registration Statement No. 333-01749 on Form S-3
of Central Fidelity Banks, Inc. of our report dated January 15, 1997
relating to the consolidated balance sheet of Central Fidelity Banks,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related statements of consolidated income, consolidated cash flows
and changes in consolidated shareholders' equity for each of the
years in the three-year period ended December 31, 1996, which report
appears on page 33 of this 1996 annual report on Form 10-K of Central
Fidelity Banks, Inc.
KPMG PEAT MARWICK LLP
Richmond, Virginia
March 17, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000276235
<NAME> CENTRAL FIDELITY BANKS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 304,661
<INT-BEARING-DEPOSITS> 50,000
<FED-FUNDS-SOLD> 96,515
<TRADING-ASSETS> 4,061
<INVESTMENTS-HELD-FOR-SALE> 3,069,624
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 6,716,836
<ALLOWANCE> 110,000
<TOTAL-ASSETS> 10,540,360
<DEPOSITS> 8,071,454
<SHORT-TERM> 980,149
<LIABILITIES-OTHER> 84,520
<LONG-TERM> 557,738
0
0
<COMMON> 296,892
<OTHER-SE> 549,607
<TOTAL-LIABILITIES-AND-EQUITY> 10,540,360
<INTEREST-LOAN> 571,552
<INTEREST-INVEST> 211,938
<INTEREST-OTHER> 5,130
<INTEREST-TOTAL> 788,620
<INTEREST-DEPOSIT> 322,187
<INTEREST-EXPENSE> 413,353
<INTEREST-INCOME-NET> 375,267
<LOAN-LOSSES> 43,865
<SECURITIES-GAINS> 99
<EXPENSE-OTHER> 251,941
<INCOME-PRETAX> 165,376
<INCOME-PRE-EXTRAORDINARY> 165,376
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 112,702
<EPS-PRIMARY> 1.89
<EPS-DILUTED> 1.85
<YIELD-ACTUAL> 3.78
<LOANS-NON> 38,572
<LOANS-PAST> 25,946
<LOANS-TROUBLED> 160
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 110,000
<CHARGE-OFFS> 61,316
<RECOVERIES> 17,451
<ALLOWANCE-CLOSE> 110,000
<ALLOWANCE-DOMESTIC> 110,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
