Consolidated Balance Sheets
Crestar Financial Corporation And Subsidiaries
Dollars in thousands, except share data
December 31,
-----------------------------
1997 1996
Assets Cash and due from banks $ 1,175,314 $ 1,105,036
Securities held to maturity (note 3) 626,716 967,510
Securities available for sale (note 4) 3,839,006 4,318,349
Money market investments (note 5) 1,431,790 745,672
Mortgage loans held for sale 964,697 658,838
Loans (notes 6, 11, 13, 20):
Business Loans:
Commercial 4,666,505 4,002,574
Real estate - income property 1,254,079 1,242,097
Real estate - construction 381,413 314,016
Consumer Loans:
Instalment 4,846,857 4,060,174
Bank card 1,153,937 1,422,934
Real estate - mortgage 3,374,199 3,007,910
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Total Loans 15,676,990 14,049,705
Less: Allowance for loan losses (note 7) (281,394) (268,868)
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Loans - net 15,395,596 13,780,837
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Premises and equipment - net (notes 8 and 12) 486,111 435,316
Intangible assets - net 197,420 180,420
Foreclosed properties - net (notes 6 and 9) 25,731 27,515
Other assets 786,135 642,448
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Total Assets (note 21) $24,928,516 $22,861,941
==========================================================================================================
Liabilities Demand deposits $ 3,540,340 $ 3,352,921
Interest-bearing demand deposits 6,257,114 5,913,373
Regular savings deposits 1,448,589 1,620,925
Domestic time deposits 4,191,151 4,643,409
Certificates of deposit $100,000 and over 932,058 140,582
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Total deposits 16,369,252 15,671,210
Short-term borrowings (note 11) 4,789,045 4,116,051
Other liabilities 879,073 435,834
Long-term debt (note 12) 831,383 859,336
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Total Liabilities (note 21) 22,868,753 21,082,431
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Shareholders' Preferred stock. Authorized 2,000,000 shares; none issued - -
Equity Common stock, $5 par value. Authorized 200,000,000 shares;
outstanding 111,420,187 in 1997; 109,869,886 in 1996 557,101 549,350
Capital surplus 340,623 227,079
Retained earnings 1,162,767 1,024,365
Net unrealized loss on securities available for sale
(notes 4 and 10) (728) (21,284)
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Total Shareholders' Equity (notes 12, 13, and 15) 2,059,763 1,779,510
Commitments and contingencies (notes 8 and 20)
------------------------------------------------------------------------------------------
Total Liabilities And Shareholders' Equity $24,928,516 $22,861,941
=============================================================================================================
See accompanying notes to consolidated financial statements.
Consolidated Statements Of Income
Crestar Financial Corporation And Subsidiaries
In thousands, except per share data Years Ended December 31,
---------------------------------------------
1997 1996 1995
Income Interest and fees on loans $1,228,108 $1,178,236 $1,181,048
From Interest on securities held to maturity 43,088 61,770 129,242
Earning Interest and dividends on securities available
Assets for sale 230,628 242,486 133,290
Income on money market investments 21,682 17,875 20,178
Interest on mortgage loans held for sale 52,078 63,012 28,145
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Total income from earning assets 1,575,584 1,563,379 1,491,903
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Interest Interest-bearing demand deposits 176,488 171,109 180,600
Expense Regular savings deposits 37,997 43,850 51,368
Domestic time deposits 212,480 259,971 257,418
Certificates of deposit $100,000 and over 51,501 27,843 3,915
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Total interest on deposits 478,466 502,773 493,301
Short-term borrowings 158,819 144,797 133,709
Long-term debt 62,001 49,499 50,038
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Total interest expense 699,286 697,069 677,048
- ----------------------------------------------------------------------------------------------------------
Net Credit Net Interest Income 876,298 866,310 814,855
Income Provision for loan losses (note 7) 108,097 95,890 66,265
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Net Credit Income 768,201 770,420 748,590
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Noninterest Service charges on deposit accounts 126,105 114,249 109,264
Income Trust and investment advisory income 74,421 65,939 59,841
Bank card-related income 41,972 52,088 49,935
Other income (note 17) 173,613 97,516 103,095
Securities gains (losses) (note 4) 5,328 3,393 (2,067)
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Total noninterest income 421,439 333,185 320,068
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Net Credit And Noninterest Income 1,189,640 1,103,605 1,068,658
- ----------------------------------------------------------------------------------------------------------
Noninterest Personnel expense (notes 14, 15 and 16) 390,646 397,448 388,542
Expense Occupancy expense - net 60,016 64,450 62,851
Equipment expense 41,400 38,479 37,916
Other expense (note 18) 222,195 279,969 228,890
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Total noninterest expense 714,257 780,346 718,199
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Net Income Income before income taxes 475,383 323,259 350,459
Income tax expense (note 10) 165,575 104,988 134,572
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Net income $ 309,808 $ 218,271 $ 215,887
=============================================================================================================
Earnings Per Share
Basic $ 2.80 $ 1.97 $ 1.95
Diluted 2.77 1.95 1.92
=============================================================================================================
See accompanying notes to consolidated financial statements.
Consolidated Statements Of Cash Flows
Crestar Financial Corporation And Subsidiaries
In thousands Years Ended December 31,
---------------------------------------------
1997 1996 1995
Operating Net Income $ 309,808 $ 218,271 $ 215,887
Activities Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provisions for loan losses, foreclosed
properties and other losses 108,097 100,540 65,068
Depreciation and amortization of premises
and equipment 48,472 46,719 46,948
Amortization of intangible assets 17,147 16,673 15,416
Deferred income tax expense (benefit) 13,705 (4,826) 8,363
Gain on sale of merchant card processing (17,325) - -
Net gain on sales of loans and other assets (42,189) (18,739) (11,561)
Origination and purchase of loans held for
sale (4,019,616) (4,204,696) (2,854,956)
Proceeds from sales of loans held for sale 3,714,462 4,234,076 2,392,666
Net increase in accrued interest receivable,
prepaid expenses and other assets (71,906) (56,105) (13,998)
Net increase in accrued interest payable,
accrued expenses and other liabilities 50,175 77,350 18,190
Other, net 16,915 8,434 1,884
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Net cash provided (used) by operating activities 127,745 417,697 (116,093)
- ----------------------------------------------------------------------------------------------------------
Investing Proceeds from maturities and calls of securities
Activities held to maturity 354,860 413,760 443,674
Proceeds from maturities and calls of securities
available for sale 463,671 2,110,023 550,384
Proceeds from sales of securities available for
sale 3,735,373 4,349,327 1,937,661
Purchases of securities held to maturity (12,587) (276,492) (70,242)
Purchases of securities available for sale (3,101,100) (7,207,722) (2,709,418)
Net increase in money market investments (686,583) (228,980) (60,053)
Principal collected on non-bank subsidiary loans 42,373 71,013 21,636
Loans originated by non-bank subsidiaries (88,417) (286,615) (164,147)
Proceeds from sales of loans 805,662 199,038 73,306
Net increase in other loans (614,871) (307,758) (157,961)
Purchases of premises and equipment (98,695) (72,861) (57,617)
Proceeds from sales of foreclosed properties, mortgage
servicing rights and merchant card processing 67,141 37,325 64,620
Purchases of net assets of financial institutions (11,598) 138,628 144,875
Purchases of loans and loan portfolios (1,611,867) - -
Proceeds from sales of branch deposits and premises - (7,837) (91,861)
Other, net (35,536) (28,747) (16,864)
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Net cash used by investing activities (792,174) (1,097,898) (92,007)
- ----------------------------------------------------------------------------------------------------------
Financing Net increase (decrease) in demand, interest-bearing
Activities demand and regular savings deposits 261,902 (140,758) (214,450)
Net increase (decrease) in certificates of deposit 126,326 (626,637) 427,435
Net increase in short-term borrowings 570,894 1,297,730 345,552
Proceeds from issuance of long-term debt 3,389 63 8,626
Proceeds from issuance of preferred stock by subsidiary - 200,000 -
Principal payments on long-term debt (69,817) (65,374) (82,447)
Cash dividends paid (130,671) (98,660) (87,031)
Common stock purchased and retired (84,845) (98,823) (82,144)
Proceeds from the issuance of common stock 57,693 34,537 30,428
Other, net (164) (2,086) -
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Net cash provided by financing activities 734,707 499,992 345,969
- ----------------------------------------------------------------------------------------------------------
Cash And Increase (decrease) in cash and cash equivalents 70,278 (180,209) 137,869
Cash Cash and cash equivalents at beginning of year 1,105,036 1,285,245 1,147,376
- -------------------------------------------------------------------------------------------------------------
Equivalents Cash and cash equivalents at end of year $ 1,175,314 $ 1,105,036 $ 1,285,245
=============================================================================================================
Cash and cash equivalents consist of cash and due from banks; see accompanying
notes to consolidated financial statements.
Consolidated Statements Of Changes In Shareholders' Equity
Crestar Financial Corporation And Subsidiaries
Net Unrealized
Common Stock Gain (Loss) On
------------------ Securities
Capital Retained Available
In thousands, except per share data Shares Amount Surplus Earnings For Sale Total
Balance, December 31, 1994 54,978 $274,890 $392,169 $ 973,872 $(39,393) $1,601,538
Net Income - - - 215,887 - 215,887
Cash dividends declared on
common stock ($.875 per share) - - - (87,031) - (87,031)
Change in net unrealized loss on securities
available for sale (notes 4, 10) - - - - 52,621 52,621
Common stock purchased and
retired (1,765) (8,825) - (73,319) - (82,144)
Common stock issued:
For acquisition of financial
institutions 1,318 6,589 45,973 - - 52,562
For dividend reinvestment plan 376 1,881 14,792 - - 16,673
For thrift and profit sharing plan 231 1,156 7,967 - - 9,123
For other stock compensation plans 10 50 387 - - 437
Upon exercise of stock options
(including tax benefit of $1,290) 234 1,171 4,751 - - 5,922
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 55,382 $276,912 $466,039 $1,029,409 $13,228 $1,785,588
Net Income - - - 218,271 - 218,271
Cash dividends declared on
common stock ($1.275 per share) - - - (133,002) - (133,002)
Change in net unrealized gain on
securities available for sale (notes 4, 10)- - - - (34,512) (34,512)
Common stock purchased and
retired (1,702) (8,510) - (90,313) - (98,823)
Cash paid in lieu of fractional shares (1) (8) (78) - - (86)
Common stock issued:
For dividend reinvestment plan 357 1,783 17,799 - - 19,582
For thrift and profit sharing plan 119 593 6,010 - - 6,603
For other stock compensation plans 19 97 868 - - 965
For two-for-one split
in the form of a stock dividend 54,935 274,675 (274,675) - - -
Upon exercise of stock options
(including tax benefit of $6,572) 761 3,808 11,116 - - 14,924
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 109,870 $549,350 $227,079 $1,024,365 $(21,284) $1,779,510
Net Income - - - 309,808 - 309,808
Cash dividends declared on
common stock ($.87 per share) - - - (96,329) - (96,329)
Change in net unrealized loss on
securities available for sale (notes 4, 10)- - - - 20,556 20,556
Common stock purchased and
retired (1,954) (9,768) - (75,077) - (84,845)
Cash paid in lieu of fractional shares (5) (24) (140) - - (164)
Common stock issued:
For acquisition of financial
institution 1,236 6,179 56,453 - - 62,632
For dividend reinvestment plan 733 3,665 25,820 - - 29,485
For thrift and profit sharing plan 295 1,474 10,573 - - 12,047
For other stock compensation plans 73 364 1,907 - - 2,271
Upon exercise of stock options
(including tax benefit of $8,631) 1,172 5,861 18,931 - - 24,792
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 111,420 $557,101 $340,623 $1,162,767 $ (728) $2,059,763
=============================================================================================================
See accompanying notes to consolidated financial statements.
Notes To Consolidated Financial Statements
Crestar Financial Corporation and Subsidiaries
(1) Nature Of Operations, Use Of
Estimates And Accounting Policies
Crestar Financial Corporation and Subsidiaries (Crestar or the Corporation)
provide banking and non-banking financial services throughout Virginia, Maryland
and Washington, DC, which compose Crestar's primary market area. Through a
network of 566 banking locations and 613 automated teller machines, Crestar
provides a broad range of banking services, including various types of deposit
accounts and instruments, commercial and consumer loans, trust and investment
management services, bank credit cards and international banking services. These
services are offered through a single bank subsidiary. Other financial services
are provided through non-bank subsidiaries. Mortgage loan origination, servicing
and wholesale mortgage lending are offered by Crestar Mortgage Corporation, and
Crestar Asset Management Company provides asset management investment advisory
services. Crestar Insurance Agency, Inc. offers a variety of personal and
business insurance products. Crestar Leasing Corporation provides equipment
leasing services. Securities brokerage and investment banking services are
offered by Crestar Securities Corporation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying footnotes. Actual results could differ from those estimates.
The accounting and reporting policies of Crestar conform to generally accepted
accounting principles and to general practice within the banking and financial
institutions industry. Certain reclassifications have been made to prior years'
consolidated financial statements to conform to the 1997 presentation. The
following is a summary of significant policies:
(a) Principles Of Consolidation
The consolidated financial statements of Crestar include the accounts of all
wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. In the condensed financial
statements of Crestar Financial Corporation (Parent), the investments in
subsidiaries are stated at equity in the net assets of such subsidiaries (note
19).
On December 31, 1996 Crestar merged with Citizens Bancorp (Citizens), a
multi-bank holding company, in a transaction accounted for as a pooling of
interests. Accordingly, historical financial data for periods before the merger
have been restated to include the combined results of both Crestar and Citizens.
Business combinations accounted for as purchases are included only from their
respective dates of acquisition. The excess of cost over the estimated fair
value of the tangible assets and liabilities acquired is recorded as intangible
assets and amortized over the periods estimated to be benefited (generally 15
years).
Assets held in an agency or fiduciary capacity are not assets of Crestar and are
not included in the accompanying consolidated balance sheets.
(b) Stock Split
On December 20, 1996, the Corporation's Board of Directors declared a
two-for-one split of its common stock in the form of a 100% stock dividend,
effective January 24, 1997. Average common shares outstanding and per common
share data in the consolidated financial statements have been retroactively
adjusted to reflect the common stock split.
(c) Securities
Securities are classified as either securities held to maturity, securities
available for sale or trading securities. Securities held to maturity are
carried at amortized cost, as the Corporation has the positive intent and
ability to hold these securities to maturity. Trading securities are carried at
estimated fair value as they are intended to be sold in the near term; trading
securities are classified as money market investments on the accompanying
consolidated balance sheets. Securities not classified as held to maturity or
trading are classified as available for sale. Available for sale securities are
stated at estimated fair value, with the unrealized gains and losses, net of
tax, reported in a separate component of shareholders' equity. Quoted market
prices are used to determine estimated fair value.
The amortized cost of securities classified as held to maturity or available for
sale is adjusted for amortization of premiums and accretion of discounts to
maturity, or earlier call date if appropriate, using the level yield method.
Such amortization is included in interest income from securities. Realized gains
and losses, and declines in value judged to be other than temporary are included
in securities gains (losses) in the accompanying consolidated statements of
income. Realized gains and losses are computed using the specific identification
method.
(d) Money Market Investments
Money market investments are stated at cost, which approximates market value,
except for trading securities, which are carried at market value. Trading
securities primarily include U.S. Treasury and municipal debt obligations.
Trading securities may include positions in derivative financial instruments
such as futures contracts and purchased options. Adjustments to market and
trading account gains and losses are classified as other income in the
accompanying consolidated statements of income. Trading account interest and
dividend income are included in income on money market investments.
(e) Mortgage Loans Held For Sale
Mortgage loans held for sale are carried at the lower of aggregate cost or
market value. Adjustments to market and realized gains and losses are classified
as other income in the accompanying consolidated statements of income.
(f) Loans
Loans are stated at the principal amounts outstanding net of unearned income.
Interest on loans is accrued by multiplying the applicable rates by the
principal amounts outstanding.
Interest receipts on nonaccrual loans are recognized as interest revenue or are
applied to principal when management believes the ultimate collectibility of
principal is in doubt. Generally, business and consumer real estate-mortgage
loans are placed in nonaccrual status when principal or interest is 90 days or
more past due, or earlier if it is known or expected that interest will not be
paid, or full collection of all principal and interest is unlikely, based upon
an evaluation of the financial strength of the borrower and the net realizable
value of the collateral. Bank card loans are not placed in nonaccrual status,
but are generally charged off when past due 180 days. If notification of
bankruptcy has been received during the 180 day period, Crestar will seek
repayment (reaffirmation) of the bank card loan through applicable bankruptcy
laws. Any loan balance not specifically reaffirmed within 60 days of
notification of bankruptcy is charged off. Instalment loans are generally placed
in nonaccrual status when past due 120 days, with balances not supported by an
assessment of collateral charged-off at that time. If well secured, loans may be
restructured as to rate, maturity or other terms as determined on an individual
credit basis. Past due loans are loans which are delinquent 90 days or more but
which are currently not in nonaccrual status based on accounting and
collectibility criteria.
Loan origination and commitment fees and certain direct loan origination costs
are deferred and the net amount is amortized as an adjustment of the related
loan's yield. Crestar amortizes these amounts over the contractual life of the
related loans or over the commitment period. Foreign activities represent less
than 1 percent of total assets, revenues, income before income taxes and net
income for all years presented.
(g) Impaired Loans Effective January 1, 1995, Crestar adopted Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan" (SFAS 114), and No. 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures" (SFAS 118). In accordance with SFAS
114, impaired loans are measured and reported based on the present value of
expected cash flows discounted at the loan's effective interest rate, or at the
fair value of the loan's collateral if the loan is deemed "collateral
dependent." A valuation allowance is required to the extent that the measure of
the impaired loans is less than the recorded investment.
Impaired loans are specifically reviewed loans for which it is probable that the
creditor will be unable to collect all amounts due according to the terms of the
loan agreement. The specific factors that influence management's judgment in
determining when a loan is impaired include evaluation of the financial strength
of the borrower and the fair value of the collateral. A specifically reviewed
loan is not impaired during a period of "minimum delay" in payment, regardless
of the amount of shortfall, if the ultimate collectibility of all amounts due is
expected. Crestar defines "minimum delay" as past due less than 90 days.
SFAS 114 does not apply to larger groups of homogeneous loans such as consumer
instalment, bank card and real estate mortgage loans, which are collectively
evaluated for impairment. Impaired loans are therefore primarily business loans,
which include commercial loans and income property and construction real estate
loans. Crestar applies the measurement methods described above to these loans on
a loan-by-loan basis. Smaller balance populations of business loans, which are
not specifically reviewed in accordance with Crestar's normal credit review
procedures, are also excluded from the application of SFAS 114. Crestar's
impaired loans are nonaccrual loans, as generally loans are placed in nonaccrual
status on the earlier of the date that principal or interest amounts are past
due 90 days or more, or the date that collection of such amounts is judged
uncertain based on evaluation of the financial strength of the borrower and the
fair value of the collateral. Restructured loans are impaired loans in the year
of restructuring; thereafter, such loans are subject to management's evaluation
of impairment based on the restructured terms. Crestar's charge-off policy for
impaired loans is consistent with its policy for loan charge-offs to the
allowance: impaired loans are charged-off when an impaired loan, or a portion
thereof, is considered uncollectible or is transferred to foreclosed properties.
Notes To Consolidated Financial Statements
Crestar Financial Corporation And Subsidiaries
SFAS 118 allows a creditor to use existing methods for recognizing interest
income on an impaired loan. Consistent with Crestar's method for nonaccrual
loans, interest receipts on impaired loans are recognized as interest income or
are applied to principal when the ultimate collectibility of principal is in
doubt.
(h) Allowance For Loan Losses
Both the amount of the provision and the level of the allowance for loan losses
are effected by many factors, including general economic conditions, actual and
expected credit losses, loan performance measures, historical trends and other
circumstances, both internal and external. The amount of the provision for loan
losses is established based on evaluation of the current level of the allowance.
Individual loan-by-loan reviews are performed quarterly on large commercial and
real estate exposures in the lower quality risk ratings categories. For the
remainder of the portfolio, a formula-based approach is utilized. The formula is
designed to cover inherent loss in that portion of the loan portfolio not
subject to specific review. The formula may be adjusted for changes in the
subjective factors listed above. Loan loss allowances for the consumer loan
portfolio are also based on historical and anticipated losses and the current
and projected characteristics of the different types of consumer loans.
Management's evaluation and resulting provision and allowance decisions are
reviewed by the Board of Directors on a quarterly basis.
Loan charge-offs to the allowance are made when a loan, or a portion thereof, is
considered uncollectible or is transferred to foreclosed properties.
(i) Premises And Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization charges are computed using the
straight-line method. Premises and equipment are depreciated over the estimated
useful lives of the assets, except for leasehold improvements which are
amortized over the terms of the respective leases or the estimated useful lives
of the improvements, whichever is shorter. Certain noncancelable leases have
been capitalized and are classified as premises and equipment in the
accompanying consolidated balance sheets. Related amounts representing capital
lease obligations are classified as long-term debt in the accompanying
consolidated balance sheets and are amortized using the interest method to
allocate payments between principal and interest. The initial carrying amounts
represent the present value of the future rental payments, discounted at the
incremental borrowing rate of the lessee. Capital lease assets are amortized
over the lease term.
Estimated lives of the principal items of premises and equipment are: 3 to 50
years for buildings and improvements, and 3 to 12 years for furniture, fixtures
and equipment. The costs of major renovations are capitalized, while the costs
of ordinary maintenance and repairs are expensed as incurred. Interest costs are
capitalized based on a rate representative of the Corporation's long term cost
of funds and the average balance of construction in progress during the period.
(j) Intangible Assets
Intangible assets consisted of goodwill and deposit based intangibles, having a
combined balance of $197,049,000 and $179,993,000 at December 31, 1997 and 1996,
respectively, and favorable lease rights of $371,000 and $427,000, respectively.
Accumulated amortization of goodwill was $81,302,000 and $67,174,000 at December
31, 1997 and 1996, respectively. Goodwill is amortized on a straight-line basis
over 15 years. Deposit base intangibles are amortized over the estimated lives
of the related deposit relationships, ranging from 8 to 15 years.
(k) Capitalized Mortgage Servicing Rights
Mortgage servicing rights are accounted for under the provisions of Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" (SFAS 125), which became
effective January 1, 1997. SFAS 125, which is applied prospectively from its
effective date, does not significantly change Crestar's accounting for mortgage
loan servicing rights. The cost of mortgage loans sold, with servicing rights
retained, is allocated between the loans and the servicing rights based on their
estimated fair values at time of loan sale. The estimated fair value of mortgage
servicing rights is determined by reference to recent trades of comparable
servicing rights, or is determined based on expected future cash flows
discounted at an interest rate commensurate with the servicing risks involved.
For the purpose of evaluating and measuring impairment, capitalized mortgage
servicing rights are stratified according to the predominant risk
characteristics of the underlying loans. Impairment is recognized through a
valuation allowance for each stratum based on any excess of the amount
capitalized, net of amortization, over fair value. Fair value in excess of the
amount capitalized, net of amortization, is not recognized. Crestar performs an
impairment analysis based on whether the mortgage servicing rights relate to
conventional or government guaranteed residential mortgage loans, fixed or
floating rate residential mortgage loans, and loans stratified between below
market rates and all other interest rates.
Capitalized mortgage servicing rights of $63,864,000 and $53,392,000 at December
31, 1997 and 1996, respectively, were included in other assets in the
accompanying consolidated balance sheets. Mortgage servicing rights of $50
million and $38 million were purchased or originated during 1997 and 1996,
respectively. At December 31, 1997, capitalized mortgage servicing rights were
net of a related valuation allowance of $538,000. The activity in such valuation
allowance, which was unchanged from December 31, 1996 had a balance of $456,000
at December 31, 1995, was not material to the consolidated financial statements
for 1997, 1996 and 1995. The fair value of capitalized mortgage servicing rights
was approximately $89 million at December 31, 1997. Such fair value was
estimated using a discounted cash flow method, with discount rates based on
secondary market sources, adjusted for prepayment estimates and differences in
serving and credit costs. Amortization expense for capitalized mortgage
servicing rights totaled $13.1 million, $10.2 million and $6.7 million in 1997,
1996 and 1995, respectively.
(l) Foreclosed Properties
Property acquired through legal foreclosure proceedings, abandonment of the
property, acceptance of deed in lieu of foreclosure or transfer in exchange for
an outstanding loan is initially recorded at estimated fair value less estimated
selling costs at the date of foreclosure, establishing a new cost basis. At the
time of foreclosure, any excess of cost over the estimated fair value is charged
to the allowance for loan losses, and estimated selling costs are expensed as
foreclosed properties expense. After foreclosure, valuations are routinely
performed by management and the property is carried at the lower of cost or fair
value less estimated selling costs. Write-downs are charged against any
applicable foreclosed property valuation allowance or current earnings.
(m) Income Taxes
The Parent and its subsidiaries file a consolidated federal income tax return.
The provision for income taxes for each company is recorded on the basis of
filing separate income tax returns, after adjustments relating to consolidated
income tax regulations and signed tax sharing agreements. Income taxes currently
payable or receivable by each subsidiary are paid to or received from the
Parent.
The Corporation records a provision for income taxes based on the amounts of
current and deferred taxes payable (or refundable) for the year. The deferred
tax expense or benefit represents the change in the net deferred tax asset or
liability during the period. Deferred tax assets and liabilities are recognized
for the tax effects of differing carrying values of assets and liabilities for
tax and financial statement reporting purposes that will reverse in future
periods.
(n) Shareholders' Equity
During December 1996, the Corporation's Board of Directors increased the common
stock authorization from 100,000,000 to 200,000,000 shares.
During 1997, 1996 and 1995 the Corporation purchased and retired 1,954,000,
3,404,000 and 3,530,200 shares of common stock at an average cost of $43.43,
$29.03 and $23.27 per share, respectively. No shares were beneficially owned by
a subsidiary.
(o) Earnings Per Share
Effective December 31, 1997 Crestar adopted Statement of Financial Accounting
Standards No. 128 (SFAS 128), "Earnings Per Share." This Statement supersedes
APB Opinion No. 15 (Opinion 15), "Earnings Per Share," and replaces the
presentation of primary earnings per share (EPS) with a presentation of basic
EPS. SFAS 128 requires dual presentation of basic and diluted EPS on the face of
the income statement. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Contingently issuable shares are included in
the computation of basic EPS as of the date that all necessary conditions have
been satisfied. Diluted EPS reflects the potential dilution that could occur if
options to issue common stock were exercised. Contingently issuable shares are
included in the computation of diluted EPS based on the number of shares, if
any, that would be issuable if the end of the reporting period were the end of
the contingency period. Diluted EPS is computed similarly to fully diluted EPS
pursuant to Opinion 15. All prior-period EPS data has been restated to reflect
the provisions of SFAS 128.
Average common and common equivalent shares used in the determination of
earnings per share were:
==================================================
In thousands 1997 1996 1995
- --------------------------------------------------
Weighted average
common shares 110,591 110,537 110,986
Basic shares
contingently issuable 27 23 -
- --------------------------------------------------
Basic common
shares 110,618 110,560 110,986
Dilutive shares
contingently issuable 35 71 -
Dilutive stock
options 1,276 1,406 1,446
- --------------------------------------------------
Diluted common
shares 111,929 112,037 112,432
(p) Fee Revenue
Crestar generally records mortgage loan servicing income as payments are
collected, based on a percentage of the principal balance of loans serviced.
Loan servicing expenses are charged to operations when incurred. Trust and
investment advisory revenues are recorded on an accrual basis, with income
recognized when earned. Fee income from matched swap, cap and floor arrangements
for which Crestar serves as a financial intermediary is recognized over the
lives of the related agreements and is classified as other income in the
consolidated statements of income.
(q) Risk Management Instruments
Interest rate swaps, caps and floors used to achieve interest rate risk
management objectives are accounted for in a manner consistent with the
accounting basis of the related asset or liability. An instrument designated to
hedge an asset or liability carried at historical cost is accounted for on an
accrual basis, whereby the interest income or expense of the related asset or
liability is adjusted for the net amount of any interest receivable or payable
generated by the hedging instrument during the reporting period. For such
instruments, no amounts other than any accrued interest receivable or payable,
or any deferred premiums paid, are included in the accompanying consolidated
balance sheets.
Interest rate swaps involve the exchange of payments between counterparties
based on the interest differential between a fixed and a floating interest rate
applied to a notional balance. Under accrual accounting, this interest
differential is recognized as an adjustment to the interest income or expense of
the related asset or liability in the accompanying statements of income. In
exchange for a premium paid, purchased interest rate caps and floors provide for
a payment to Crestar based on the difference between an index interest rate and
the contractual cap or floor rate. Under accrual accounting, this payment is
recognized as an increase to the interest income or as a decrease to the
interest expense of the related asset or liability, respectively. The premium
paid for interest rate caps or floors is amortized over the life of the
instrument as a decrease to the interest income or as an increase to the
interest expense of the related asset or liability, respectively.
To qualify for accrual accounting, these derivative instruments are required to
meet an identified risk management objective, to be designated to specific pools
of assets or liabilities in the consolidated balance sheets, and to have
underlying indices that highly correlate (i.e., move concurrently and are of the
same relative duration) with the indices of the designated assets or
liabilities. In addition to establishing expected index and balance correlation
at inception, management performs a periodic assessment to demonstrate ongoing
correlation. Should these derivative instruments fail to meet the accrual
criteria at inception or over the life of the instruments, the instruments would
be marked to market as trading securities (note 1(c)). Crestar has had no
derivative instruments used for risk management purposes which have failed to
meet accrual criteria over the life of the instruments.
Upon early termination of derivative instruments which otherwise meet accrual
criteria, the net proceeds received or paid are deferred, if material, and
amortized to the interest income or expense of the related asset or liability
over the lesser of the remaining contractual life of the instrument or the
maturity of the related asset or liability. At December 31, 1997 Crestar had a
deferred gain of $4.2 million included in other assets in the accompanying
consolidated balance sheets arising from the early termination of interest rate
floors in the fourth quarter of 1997. At termination, such floors qualified for
accrual accounting and had a weighted-average remaining maturity of
approximately 3.4 years, which represents the amortization period of the
resulting deferred gain. Approximately 47% of this deferred gain is being
amortized as an increase to interest income on real estate mortgage loans:
approximately 53% is being amortized as a reduction of interest expense on
domestic time deposits. At December 31, 1996 there were no deferred gains or
losses in the accompanying consolidated balance sheets arising from the early
termination of instruments otherwise qualifying for accrual accounting.
Forward contracts are used to hedge interest rate exposure on mortgage loan
commitments and mortgage loans held for sale. Unrealized gains and losses on the
contracts are included in the cost basis used in adjusting the carrying value of
mortgage loans held for sale to the lower of cost or market value. Realized
gains and losses and adjustments to the lower of cost or market value are
included in mortgage loan origination income in the accompanying consolidated
statements of income.
(r) Retirement, Postretirement
And Postemployment Benefits
Substantially all employees are covered by a pension plan. The net periodic
pension expense includes a service cost component, a component reflecting the
actual return on plan assets, an interest cost component, and the effect of
deferring and amortizing certain actuarial gains and losses and the unrecognized
net transition asset over 15 years. Costs of retiree benefits other than
pensions are accrued in a manner similar to pension costs.
(2) Mergers And Acquisitions
On November 13, 1997, Crestar acquired American National Bancorp, Inc. (American
National) for a purchase price of $14 million in cash and 1.236 million shares
of common stock having a combined value of $77 million. American National, which
operated American National Savings Bank with headquarters in Baltimore,
Maryland, had approximately $500 million in assets, $340 million in loans and
$310 million in deposits at date of acquisition. The excess of cost over the
estimated fair value of the tangible net assets acquired was approximately $33
million. The acquisition of American National was accounted for as a purchase
and, accordingly, the results of operations since the date of acquisition are
included in the accompanying consolidated financial statements. The results of
operations of American National for the periods prior to the purchase were not
material to the results of Crestar.
On December 31, 1996 Crestar merged with Citizens Bancorp (Citizens), a bank
holding company based in Laurel, Maryland, in a transaction accounted for as a
pooling of interests business combination. Accordingly, historical financial
data for periods before the merger have been restated to include the combined
results of both Crestar and Citizens. Approximately 25.3 million shares of
common stock were issued by Crestar to the former shareholders of Citizens.
Citizens had total assets of approximately $4.1 billion at the date of
acquisition. Excluding the impact of $32.5 million (after-tax) in merger related
expenses, Citizens had net income of $43.4 million, and Crestar had net income
of $207.4 million, on a pre-merger basis for the year ended December 31, 1996.
Net interest income for the year ended December 31, 1996, on a pre-merger basis,
was $142.3 million for Citizens and $724.0 million for Crestar.
Net interest income, net income and net income per share amounts for Crestar and
Citizens for the year ended December 31, 1995, prior to restatement for the
pooling of interests merger, are presented below:
====================================================
In millions, except per share amounts
Year ended December 31,1995
Crestar Financial Corporation
Net interest income $679.4
Net income 179.8
Net income per common share 2.06
Citizens Bancorp 135.5
Net income 36.1
Net income per
Citizens common share 2.40
Combined Crestar
Financial Corporation
Net interest income 814.9
Net income 215.9
Net income per diluted
common share 1.92
=====================================================
On December 31, 1995 Crestar merged with Loyola Capital Corporation (Loyola), a
savings bank holding company based in Baltimore, Maryland. The merger with
Loyola was also accounted for as pooling of interests business combination, and
historical financial data for periods before the merger were restated at that
time to include the combined results of Crestar and Loyola. Approximately 10.4
million shares of common stock were issued by Crestar to the former shareholders
of Loyola. Loyola had total assets of approximately $2.5 billion at the date of
merger. Excluding the impact of $29.3 million (after-tax) in merger related
expenses, and the subsequent restatement of results for the Citizens pooling of
interests merger, Loyola had net income of approximately $19.1 million and
Crestar had net income of approximately $189.9 million, on a pre-merger basis,
for the year ended December 31, 1995. Net interest income for the year ended
December 31, 1995, on a pre-merger basis, was $71.3 million for Loyola and
$608.1 million for Crestar.
Notes To Consolidated Financial Statements
Crestar Financial Corporation And Subsidiaries
(3) Securities Held To Maturity
The amortized cost (carrying values) and estimated fair values of securities
held to maturity at December 31 follow:
=============================================================================================================
Amortized Unrealized Unrealized Market
In thousands Cost Gains Losses Value
1997
U.S. Treasury and Federal agencies $197,006 $1,045 $ 727 $197,324
Mortgage-backed obligations of Federal agencies 380,207 4,523 1,241 383,489
Other taxable securities 2,938 4 7 2,935
States and political subdivisions 46,565 1,206 28 47,743
- ----------------------------------------------------------------------------------------------------------
Total $626,716 $6,778 $2,003 $631,491
- ----------------------------------------------------------------------------------------------------------
1996
U.S. Treasury and Federal agencies $237,942 $733 $2,300 $236,375
Mortgage-backed obligations of Federal agencies 638,843 3,529 3,602 638,770
Other taxable securities 13,119 37 11 13,145
States and political subdivisions 77,606 1,018 164 78,460
- ----------------------------------------------------------------------------------------------------------
Total $967,510 $5,317 $6,077 $966,750
==========================================================================================================
The stated maturities of securities held to maturity at December 31, 1997
follow:
==========================================================================================================
Amortized Market
In thousands Cost Value
Due in one year or less $105,070 $104,779
Due after one year through five years 122,506 123,733
Due after five years through ten years 155,498 157,662
Due after ten years 243,642 245,317
- ----------------------------------------------------------------------------------------------------------
Total $626,716 $631,491
==========================================================================================================
At December 31, 1997 and 1996 securities held to maturity with an aggregate
carrying value of $572.7 million and $418.5 million, respectively, were pledged
to secure deposits and for other purposes.
(4) Securities Available For Sale
The amortized cost and estimated fair values (carrying values) of securities
available for sale at December 31 follow:
===========================================================================================================
Amortized Unrealized Unrealized Market
In thousands Cost Gains Losses Value
1997
U.S. Treasury and Federal agencies $ 217,241 $ 938 $ 1,063 $ 217,116
Mortgage-backed obligations of Federal agencies 2,594,911 11,946 17,667 2,589,190
Other taxable securities 785,872 3,962 1,000 788,834
Common and preferred stocks 242,566 1,300 - 243,866
- -----------------------------------------------------------------------------------------------------------
Total $3,840,590 $18,146 $19,730 $3,839,006
- -----------------------------------------------------------------------------------------------------------
1996
U.S. Treasury and Federal agencies $ 823,118 $ 203 $ 5,141 $ 818,180
Mortgage-backed obligations of Federal agencies 2,849,724 12,310 39,808 2,822,226
Other taxable securities 468,094 1,953 2,347 467,700
Common and preferred stocks 210,203 40 - 210,243
- -----------------------------------------------------------------------------------------------------------
Total $4,351,139 $14,506 $47,296 $4,318,349
===========================================================================================================
The stated maturities of securities available for sale at December 31, 1997
follow:
===========================================================================================================
Amortized Market
In thousands Cost Value
Due in one year or less $ 285,563 $ 286,479
Due after one year through five years 473,157 471,280
Due after five years through ten years 1,052,443 1,057,073
Due after ten years 1,786,861 1,780,308
- -----------------------------------------------------------------------------------------------------------
3,598,024 3,595,140
Common and preferred stocks 242,566 243,866
- -----------------------------------------------------------------------------------------------------------
Total $3,840,590 $3,839,006
===========================================================================================================
At December 31, 1997 and 1996, securities available for sale with an aggregate
carrying value of $1.8 billion and $1.9 billion, respectively, were pledged to
secure deposits and for other purposes.
Proceeds from sales of securities available for sale were $3.7 billion in 1997,
$4.3 billion in 1996 and $1.9 billion in 1995. Gross gains of approximately $9.9
million, $12.7 and $5.3 million and gross losses of approximately $4.6 million,
$9.3 million and $7.4 million were realized on such sales during 1997, 1996 and
1995, respectively.
(5) Money Market Investments
Money market investments at December 31 included:
==========================================================================================================
In thousands 1997 1996
Federal funds sold $ 257,440 $178,120
Securities purchased under agreements to resell 990,000 417,000
Time deposits 150,042 125,041
U.S. Treasury 8,363 5,802
Trading account securities 6,839 7,563
Other 19,106 12,146
- ----------------------------------------------------------------------------------------------------------
Total money market investments $1,431,790 $745,672
==========================================================================================================
(6) Nonperforming Assets And Impaired Loans
Nonperforming assets at December 31 are shown below. Nonperforming assets
include nonaccrual loans, loans which meet the accounting definition of a
troubled debt restructuring (restructured loans) and foreclosed properties.
Loans that are both (a) past due 90 days or more and (b) not deemed nonaccrual
due to an assessment of collectibility are specifically excluded from the
definition of nonperforming assets. Such accruing loans past due 90 days or
more, excluded from the amounts shown below, totaled $68.3 million and $71.9
million at December 31, 1997 and 1996, respectively.
========================================================================
In thousands 1997 1996
Nonaccrual loans $60,500 $ 81,443
Foreclosed properties - net 25,731 27,515
- ------------------------------------------------------------------------
Total nonperforming assets $86,231 $108,958
========================================================================
Average nonperforming loans for the year $66,400 $ 82,700
========================================================================
Average nonperforming assets for the year $95,200 $117,700
========================================================================
Notes To Consolidated Financial Statements
Crestar Financial Corporation And Subsidiaries
Transfers from nonaccrual loans to foreclosed properties (non-cash additions)
were $8.4 million, $7.9 million and $14.6 million in 1997, 1996 and 1995,
respectively. At December 31, 1997 and 1996 loans accounted for as restructured
loans, included in nonaccrual loans, totaled $1.2 million and $17.4 million,
respectively. Nonaccrual loans are classified as loans in the accompanying
consolidated balance sheets.
The aggregate recorded investment in nonperforming loans outstanding at December
31, 1997, 1996 and 1995, the pro forma interest income that would have been
earned in 1997, 1996 and 1995 if such loans had not been classified as
nonperforming, and the amount of interest income actually included in net
interest income for such years follows:
=============================================================================================================
In thousands Nonperforming Loan Category
-------------------------------------------------------------------------------
Real Estate- Real Estate-
1997 Commercial Income Property Construction All Other Total
Recorded investment $11,247 $6,412 $14,239 $28,602 $60,500
Pro forma interest 5,510 3,331 1,350 286 10,477
Interest earned 166 - - 87 253
- -------------------------------------------------------------------------------------------------------------
1996
Recorded investment $20,348 $22,624 $10,368 $28,103 $81,443
Pro forma interest 4,460 3,621 1,412 258 9,751
Interest earned 279 583 - 38 900
- -------------------------------------------------------------------------------------------------------------
1995
Recorded investment $29,714 $28,366 $ 6,096 $25,808 $89,984
Pro forma interest 6,411 6,059 1,206 1,255 14,931
Interest earned 58 240 7 221 526
=============================================================================================================
Included in Crestar's nonperforming loans above are certain impaired loans.
Impaired loans and the allocated valuation allowance at December 31, 1997 and
1996 were $14.2 million with an allowance of $3.0 million and $29.8 million with
an allowance of $5.4 million, respectively. All impaired loans had an allocated
valuation allowance at December 31, 1997 and 1996. The allocated valuation
allowance for impaired loans, and activity related thereto, is included in the
allowance for loan losses (note 7).
Collateral dependent loans, which were measured at the fair value of the
collateral, constituted 100% of impaired loans at December 31, 1997 and 1996.
The average recorded investment in impaired loans for the years ended December
31, 1997, 1996 and 1995 was $16.3 million, $34.4 million and $37.6 million,
respectively. There was no material interest income recognized on impaired loans
in 1997, 1996 and 1995.
(7) Allowance For Loan Losses
Transactions in the allowance for loan losses for the years ended December 31
were:
============================================================================================================
In thousands 1997 1996 1995
Beginning balance $268,868 $274,430 $265,171
- ------------------------------------------------------------------------------------------------------------
Charge-offs (129,773) (132,085) (96,801)
Recoveries 30,094 31,521 31,442
- ------------------------------------------------------------------------------------------------------------
Net charge-offs (99,679) (100,564) (65,359)
Provision for loan losses 108,097 95,890 66,265
Allowance from acquisitions and other activity - net 4,108 (888) 8,353
- ------------------------------------------------------------------------------------------------------------
Net increase (decrease) 12,526 (5,562) 9,259
- ------------------------------------------------------------------------------------------------------------
Ending balance $281,394 $268,868 $274,430
============================================================================================================
(8) Premises And Equipment
Premises and equipment at December 31 included:
=====================================================
In thousands 1997 1996
Land $ 64,646 $ 67,136
Buildings and improvements 372,305 386,215
Furniture, fixtures and
equipment 286,541 331,655
Capitalized leases
Land and buildings 2,869 1,942
Equipment - -
Less: Accumulated deprecia-
tion and amortization (346,468) (399,311)
- -----------------------------------------------------
379,893 387,637
Construction in progress 106,218 47,679
- -----------------------------------------------------
Total premises and
equipment - net $486,111 $435,316
=====================================================
At December 31, 1997, future minimum lease payments under noncancelable capital
and operating leases that have an initial term in excess of one year follow:
===================================================
Operating Capital
In thousands Leases Leases
1998 $ 25,722 $ 885
1999 22,071 350
2000 17,708 337
2001 13,934 321
2002 9,684 249
Later years 43,096 616
- ---------------------------------------------------
Total minimum lease
payments $132,215 $2,758
Imputed interest (rates
of 8 1/8 - 14 3/8%) (1,010)
- ---------------------------------------------------
Present value of net
minimum lease payments
(included in long-term debt) $1,748
===================================================
Total minimum lease payments included in the preceding table have not been
reduced by future minimum sublease rentals of $705,000.
Crestar owns and, along with its subsidiaries, is the principal tenant of the
corporate headquarters building in Richmond, Virginia, the Crestar Mortgage
Corporation headquarters building in Richmond, an operations center in Richmond,
and regional office buildings in Roanoke and Norfolk, Virginia, Washington, DC,
and Baltimore, Maryland. At December 31, 1997, Crestar had 566 banking
locations, of which approximately 55% were owned facilities with the remainder
as leased properties. Management considers these properties suitable and
adequate for current operations.
During 1997, 1996 and 1995, Crestar capitalized interest of $3.1 million,
$485,000, and $1.4 million, respectively, associated with construction in
progress. Such capitalized interest is included as a reduction of interest
expense on short-term borrowings in the consolidated statements of income. Lease
expense relating to both cancelable and noncancelable operating lease agreements
(including month-to-month rental agreements) is shown below. Customarily, these
leases provide that the lessee pay taxes, maintenance, insurance and certain
other operating expenses applicable to the leased property.
===================================================
In thousands 1997 1996 1995
Buildings $26,815 $25,867 $26,414
Equipment 2,394 4,699 4,172
Total lease expense $29,209 $30,566 $30,586
===================================================
Notes To Consolidated Financial Statements
Crestar Financial Corporation And Subsidiaries
(9) Allowance For Foreclosed Properties
Transactions in the allowance for losses on foreclosed properties for the years
ended December 31 were:
==========================================================================================================
In thousands 1997 1996 1995
Beginning balance $18,449 $13,574 $22,463
- ----------------------------------------------------------------------------------------------------------
Provision for foreclosed properties - 6,550 (2,119)
Write-downs (5,359) (1,204) (9,464)
Allowance from acquisitions - net 101 (471) 2,694
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) (5,258) 4,875 (8,889)
- ----------------------------------------------------------------------------------------------------------
Ending balance $13,191 $18,449 $13,574
==========================================================================================================
(10) Income Taxes
The current and deferred components of income tax expense allocated to
continuing operations for the years ended December 31 in the accompanying
consolidated statements of income were:
==========================================================================================================
In thousands 1997 1996 1995
Current:
Federal $145,790 $107,402 $118,226
State and local 6,080 2,412 7,983
- ----------------------------------------------------------------------------------------------------------
Total current tax expense 151,870 109,814 126,209
- ----------------------------------------------------------------------------------------------------------
Deferred:
Federal 10,832 (6,290) 6,391
State and local 2,873 1,464 1,972
- ----------------------------------------------------------------------------------------------------------
Total deferred tax expense (benefit) 13,705 (4,826) 8,363
- ----------------------------------------------------------------------------------------------------------
Total income tax expense $165,575 $104,988 $134,572
==========================================================================================================
In addition to the state and local income tax expense above, Crestar incurred
Virginia bank franchise tax expense of $5.5 million, $6.1 million and $3.9
million in 1997, 1996 and 1995, respectively. This tax is imposed on banks in
Virginia in lieu of income and personal property taxes. Crestar remits 80% of
this tax to the Virginia municipalities in which it does business and the
remaining 20% to the Commonwealth of Virginia.
The differences between the amounts computed by applying the statutory federal
income tax rate to income before income taxes and the actual income tax expense
allocated to operations for the years ended December 31 were:
==========================================================================================================
In thousands 1997 1996 1995
----------------- ------------------ ---------------
Amount % Amount % Amount %
Income before income taxes $475,383 $323,259 $350,459
- ----------------------------------------------------------------------------------------------------------
Tax expense at statutory rate 166,384 35.0 113,141 35.0 122,661 35.0
- ----------------------------------------------------------------------------------------------------------
Increase (decrease) in taxes resulting from:
Allowance for loan loss recapture - .- (8,694) (2.6) 8,694 2.6
Tax-exempt interest and dividends (8,016) (1.7) (7,314) (2.3) (8,047) (2.3)
Nondeductible interest expense 1,841 .4 1,079 .3 807 .2
Amortization of goodwill 4,214 .9 4,146 1.3 3,928 1.1
State income taxes 5,820 1.2 1,866 .6 7,138 2.0
Other - net (4,668) (1.0) 764 .2 (609) (.2)
- ----------------------------------------------------------------------------------------------------------
Total increase (decrease) in taxes (809) (.2) (8,153) (2.5) 11,911 3.4
- ----------------------------------------------------------------------------------------------------------
Total income tax expense $165,575 34.8 $104,988 32.5 $134,572 38.4
==========================================================================================================
The Corporation made income tax payments of $151.5, $114.1 million and $105.3
million during 1997, 1996 and 1995, respectively.
The sources and tax effects of temporary differences that gave rise to
significant portions of deferred income tax assets (liabilities) at December 31
were:
==========================================================================================================
In thousands 1997 1996
Deferred income tax assets:
Allowance for loan losses $ 95,979 $ 85,797
Intangible assets 19,670 16,211
Compensation and employee benefits 33,492 28,568
Unrealized loss on securities available for sale 236 11,484
Other 12,304 9,692
- --------------------------------------------------------------------------------------------------------------
Total deferred income tax assets 161,681 151,752
- --------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Premises and equipment (13,856) (15,543)
Loans (12,324) (5,091)
Mortgage servicing (11,953) (9,462)
Other (4,142) (4,697)
- --------------------------------------------------------------------------------------------------------------
Total deferred income tax liabilities (42,275) (34,793)
- --------------------------------------------------------------------------------------------------------------
Net deferred income tax asset $119,406 $116,959
==============================================================================================================
The net deferred income tax asset is included in other assets in the
accompanying consolidated balance sheets. There was no valuation allowance
relating to the net deferred tax asset at December 31, 1997 and 1996. Crestar
has sufficient taxable income in the available carryback periods to realize all
of its deferred income tax assets.
(11) Short-Term Borrowings
Short-term borrowings outstanding as of December 31 and their weighted average
interest rates were:
===============================================================================================================
In thousands 1997 1996 1995
-------------------- ------------------- ------------------------
Amount Rate Amount Rate Amount Rate
Federal funds purchased $1,709,698 6.12% $2,277,338 6.29% $1,486,553 5.46%
Securities sold under repurchase
agreements 868,233 5.59 888,281 5.58 725,104 5.19
Federal Home Loan Bank borrowings 938,500 5.88 525,000 5.50 427,200 5.83
Term Federal funds purchased 675,000 5.75 175,000 5.41 50,000 5.41
U.S. Treasury demand notes 335,164 5.59 - - - -
Notes payable 260,225 5.30 248,194 5.26 181,125 4.92
Other 2,225 5.14 2,238 6.23 1,539 2.91
- ---------------------------------------------------------------------------------------------------------------
Total short-term borrowings $4,789,045 $4,116,051 $2,871,521
===============================================================================================================
Federal funds purchased mature daily. Securities sold under repurchase
agreements are due upon demand. Short-term Federal Home Loan Bank borrowings all
mature within 365 days, with the majority maturing within one month. Term
Federal funds purchased mature within 180 days. U.S. Treasury demand notes
mature daily. Notes payable are due upon demand.
The Corporation is required to maintain as collateral for its Federal Home Loan
Bank borrowings, including those classified as long-term obligations in note 12,
real estate mortgage loans in an amount approximating 133% of the outstanding
principal balance of the borrowings.
Crestar Bank, a wholly owned subsidiary of Crestar, had a $6.5 million unused
committed Federal Home Loan Bank letter of credit outstanding at December 31,
1997. The Parent's unused committed lines of credit totaled $30 million at
December 31, 1997.
Crestar paid $604.9 million, $647.8 million and $621.7 million in interest on
deposits and short-term borrowings in 1997, 1996 and 1995, respectively.
Notes to Consolidated Financial Statements
Crestar Financial Corporation And Subsidiaries
(12) Long-Term Debt Long-term debt at December 31 included:
============================================================================================================
In thousands 1997 1996
Parent:
8 3/4% Subordinated notes due 2004 $149,732 $149,693
8 1/4% Subordinated notes due 2002 125,000 125,000
8 5/8% Subordinated notes due 1998 49,997 49,987
- ------------------------------------------------------------------------------------------------------------
Total Parent 324,729 324,680
4 - 8% Federal Home Loan Bank obligations payable through 2017 284,270 310,225
7 7/8 - 111/4% Collateralized mortgage obligation bonds maturing through 2019 12,761 14,864
8 1/4% Mortgage indebtedness maturing through 2009 7,875 8,579
8 1/8 - 143/8% Capital lease obligations maturing through 2006 1,748 988
Crestar Capital Trust I preferred stock 200,000 200,000
- ------------------------------------------------------------------------------------------------------------
Total consolidated long-term debt $831,383 $859,336
============================================================================================================
Crestar Capital Trust I (the Trust) is a wholly-owned special purpose finance
subsidiary of the Parent, operating in the form of a grantor trust. The Trust
was created in 1996 solely to issue capital securities and remit the proceeds to
Crestar. Crestar is the sole owner of the common stock securities of the Trust.
On December 31, 1996, the Trust issued 200,000 shares of Preferred Stock capital
securities (Trust Preferred Stock) with a stated value of $1,000 per share, and
a fixed dividend yield of 8.16% of the stated value. The stated value of the
Trust Preferred Stock is unconditionally guaranteed on a subordinated basis by
the Parent. The securities have a mandatory redemption date of December 15,
2026, and are subject to varying call provisions at the option of Crestar
beginning December 15, 2006. Through an inter-company lending transaction,
proceeds received by the Trust from the sale of the securities were lent to the
Parent for general corporate purposes.
The Trust Preferred Stock is senior to Crestar's common stock in event of
claims against Crestar, but is subordinate to all senior and subordinated debt
securities. Crestar has the right to terminate the Trust upon the occurrence of
certain events, including (a) dividend payments on the preferred stock
securities are no longer deemed tax-deductible, or the Trust is taxed on the
income received from the underlying inter-company debt agreement with the
Parent, (b) the capital securities are no longer considered Tier 1 capital under
Federal Reserve Bank guidelines, or (c) the Trust, through a change of law, is
deemed to be an investment company under the Investment Company Act of 1940 and
subject to that act's reporting requirements.
Shares of the Trust Preferred Stock are capital securities which are distinct
from the common stock or preferred stock of Crestar, and the dividends thereon
are tax-deductible. Dividends accrued for payment by the Trust are classified as
interest expense on long-term debt in the consolidated income statement of
Crestar.
Neither the 8 3/4% nor the 8 1/4% subordinated notes are redeemable prior to
maturity. The 8 5/8% subordinated notes may not be exchanged or redeemed prior
to maturity, except upon the occurrence of certain events relating to the
federal income tax treatment of the notes to the Corporation. The 8 3/4%, 8 1/4%
and 8 5/8% subordinated notes all qualify as Tier 2 capital for Federal bank
regulatory purposes subject to applicable discounts for remaining time to
maturity. Expenses relating to the issuance of the 8 3/4%, 8 1/4% and 8 5/8%
notes are being amortized to maturity on a straight-line basis. Outstanding debt
agreements at December 31, 1997 place restrictions upon the disposal of
subsidiary common stock.
Mortgage indebtedness consists of the debt relating to one pledged facility
owned by Crestar Bank which had an aggregate carrying value of $9.7 million at
December 31, 1997. Mortgage payments in 1997, including interest, were $1.4
million; payments in 1998 are expected to approximate the 1997 amount.
The Corporation made payments of $62.1 million, $49.8 million and $48.2
million in interest on long-term debt in 1997, 1996 and 1995, respectively.
The combined maturities of all long-term debt for the years 1998 through 2002
follow:
===========================================================================
In thousands 1998 1999 2000 2001 2002
Parent $ 49,997 $ - $ - $ - $125,000
Consolidated 137,935 67,196 62,422 19,019 153,314
===========================================================================
(13) Regulatory Requirements And Restrictions
The Corporation's bank affiliate 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 Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the bank affiliate must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The bank affiliate'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 affiliate to maintain minimum amounts and ratios of total and
Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets.
Management believes, as of December 31, 1997, that the bank affiliate meets all
capital adequacy requirements to which it is subject. As of December 31, 1997,
the most recent notification from the Federal Reserve Bank categorized the bank
affiliate as "well capitalized". There are no conditions or events since that
notification that management believes have changed the institution's category.
The bank affiliate's actual regulatory capital amounts and ratios are set
forth below:
============================================================================================================
In millions Minimum To Be Well
Requirements Capitalized Under
For Capital Regulatory
Actual Adequacy Purposes Provisions
----------------- ------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1997: $ % $ % $ %
Total Capital (to Risk Weighted Assets):
Consolidated 2,574 12.5 1,646 8.0 2,058 10.0
Crestar Bank 2,028 10.0 1,615 8.0 2,019 10.0
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 2,068 10.1 823 4.0 1,235 6.0
Crestar Bank 1,523 7.5 808 4.0 1,211 6.0
Tier 1 Capital (to Average Assets):
Consolidated 2,068 9.2 899 4.0 1,124 5.0
Crestar Bank 1,523 7.0 873 4.0 1,092 5.0
As of December 31, 1996:
Total Capital (to Risk Weighted Assets):
Consolidated 2,326 13.4 1,389 8.0 1,736 10.0
Crestar Bank(1) 1,965 11.3 1,391 8.0 1,739 10.0
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 1,827 10.5 694 4.0 1,042 6.0
Crestar Bank(1) 1,464 8.4 696 4.0 1,043 6.0
Tier 1 Capital (to Average Assets):
Consolidated 1,827 8.4 868 4.0 1,085 5.0
Crestar Bank(1) 1,464 6.8 855 4.0 1,069 5.0
============================================================================================================
(1) During 1997, two bank affiliates of Crestar, Citizens Bank of Maryland and
Citizens Bank of Washington, N.A., which were acquired by Crestar in its
December 31, 1996 merger with Citizens Bancorp, were merged into Crestar
Bank. All data as of December 31, 1996 for Crestar Bank reflects the pro
forma balances of the two banking affiliates (Citizens Bank of Maryland and
Citizens Bank of Washington, N.A.) as if the mergers into Crestar Bank had
taken place on December 31, 1996. Each individual affiliate was "well
capitalized" as of year-end 1996 under the applicable regulatory guidelines.
Notes To Consolidated Financial Statements
Crestar Financial Corporation And Subsidiaries
Under the current supervisory practices of the Bank subsidiary's regulatory
agencies, prior approval from those agencies is required if cash dividends
declared in any given year exceed net income for that year plus retained
earnings of the two preceding years. The amount of dividends available to the
Parent from the Bank subsidiary at January 1, 1998, without prior approval, was
approximately $279.1 million. Cash dividends paid by the Bank subsidiary to the
Parent in 1997, 1996 and 1995 were $105.6 million, $144.7 million and $89.1
million, respectively.
Section 23A of the Federal Reserve Act imposes limitations on the amount of
credit that may be extended to the Parent by the Bank subsidiary. Generally, up
to 10% of the Bank subsidiary's total risk-based capital and excess allowance
for loan losses may be loaned by the bank subsidiary to the Parent. As of
December 31, 1997, $206 million of credit was available to the Parent under this
limitation, although no Section 23A extensions of credit were outstanding.
For the reserve maintenance period in effect at December 31, 1997 and 1996,
the Bank subsidiary was required to maintain an average daily balance totaling
approximately $219.7 million and $289.5 million, respectively, with the Federal
Reserve Bank. The average amount of reserve balances for the year ended December
31, 1997 totaled approximately $335.4 million.
As of January 1, 1997, aggregate loans to directors and executive officers
and their associates were $37.3 million. Additions and repayments totaled $16.7
million and $519,000, respectively, during 1997 and the balance was $20.7
million at year end. A net reduction of $32.8 million in 1997 resulted from
changes in executive officer and director status. These loans were made in the
ordinary course of business and were arms-length in terms of credit risk,
interest rates and collateral requirements prevailing at the time for comparable
transactions. These loans do not represent more than a normal credit risk. None
of these loans were nonaccrual, past due or restructured at December 31, 1997.
(14) Pension Plans
Substantially all employees are participants in the Corporation's
noncontributory defined benefit pension plans. Benefits under the plans are
based on length of service and a percentage of qualifying compensation during
the final years of employment. The Corporation's funding policy is to contribute
annually the maximum amount that can be contributed for federal income tax
purposes. Contributions are intended to provide not only for benefits attributed
to service to date but also for those expected to be earned in the future.
A summary of the plans' funded status and amounts recognized in the
Corporation's consolidated balance sheets at December 31, 1997 and 1996 based on
a measurement date of September 30 for each year, follows.
============================================================================================================
In thousands 1997 1996
Accumulated benefit obligations:
Vested $171,870 $125,637
Nonvested 7,904 3,330
- ------------------------------------------------------------------------------------------------------------
Total accumulated benefit obligations 179,774 128,967
============================================================================================================
Projected benefit obligations for service rendered to date (237,957) (177,634)
Plan assets at fair value, primarily listed stocks and
U.S. Treasury and agency obligations 207,012 169,862
- ------------------------------------------------------------------------------------------------------------
Plan assets less than projected benefit
obligations (30,945) (7,772)
Unrecognized net gain from past experience different
from that assumed and effects of changes in assumptions (3,548) (4,407)
Unrecognized prior service costs 24,570 9,734
Unrecognized net obligations being amortized
over approximately 15 years (1,872) (1,965)
- ------------------------------------------------------------------------------------------------------------
Accrued pension expense $ (11,795) $ (4,410)
============================================================================================================
Net periodic pension expense included the following components in 1997, 1996 and
1995:
============================================================================================================
In thousands 1997 1996 1995
Service cost - benefits earned during the year $ 9,609 $ 8,601 $ 7,258
Interest expense on projected benefit obligations 14,094 11,507 11,727
Effect of actual return on plan assets (40,982) (24,289) (3,137)
Net amortization and deferral 27,155 12,985 (10,508)
- ------------------------------------------------------------------------------------------------------------
Net periodic pension expense $ 9,876 $ 8,804 $ 5,340
============================================================================================================
During 1995, Crestar purchased annuities to settle pension obligations for
selected retirees of the Corporation. As a result, the projected benefit
obligation was reduced by $18.9 million in 1995, and a pre-tax gain of $4.3
million was recognized as noninterest income.
Assumptions used in the valuation of the defined benefit pension plans and
the determination of the actuarial present value of the project benefit
obligation for 1997 were a weighted average discount rate of 7.5%, an expected
long-term rate of return of 9.25%, and an assumed 4.75% rate of increase in
future compensation.
The Citizens and Loyola plans were each valued separately for periods prior
to their merger with Crestar, and each plan independently determined its
assumptions. The aggregate disclosures for 1996 and 1995, therefore, reflect the
following weighted average assumptions used in determining the actuarial present
value of the projected benefit obligations:
============================================================================================================
Crestar Citizens Loyola
------------- ------------- -------
1996 1995 1996 1995 1995
Weighted average discount rate 7.75% 7.75% 7.75% 7.00% 7.75%
Expected long-term rate of return 9.25 9.25 8.00 8.00 9.25
Rate of increase in future compensation 4.75 4.75 4.75 5.00 4.75
============================================================================================================
Notes To Consolidated Financial Statements
Crestar Financial Corporation And Subsidiaries
(15) Stock Compensation Plans
The Corporation applies Accounting Principles Board (APB) Opinion 25 and related
interpretations in accounting for stock-based compensation plans. Accordingly,
no compensation cost has been recognized for its fixed stock options. Had
compensation cost for the Corporation's fixed stock options been determined
based on the fair value at the grant dates, consistent with the alternative
method of Financial Accounting Standards No. 123 (SFAS 123), the Corporation's
net income and diluted earnings per common 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 fixed stock options with grant dates
subsequent to January 1, 1995.
============================================================================================================
In thousands except per share data 1997 1996 1995
Net income As reported $309,808 $218,271 $215,887
Pro forma 305,767 215,219 213,601
Earnings per common share-diluted As reported 2.77 1.95 1.92
Pro forma 2.73 1.92 1.90
============================================================================================================
Under the 1993 Stock Incentive Plan, the Corporation may grant incentive and
non-qualified stock options, stock appreciation rights (SARs), financial
performance-related stock awards and outright awards of stock to any employee.
The Corporation may grant a maximum of 4.0 million shares under the 1993 Stock
Incentive Plan; stock awards, including the settlement of performance awards,
are limited to a maximum of 1.4 million shares. Under the 1981 Stock Option
Plan, 727,259 previously granted incentive and non-qualified stock options were
outstanding at December 31, 1997. No future options are available for grant
under this plan. Under both plans, the exercise price of each fixed stock option
equals the market price of the Corporation's stock on the date of grant. An
option's maximum term is 10 years. Options vest one year from date of grant.
For the purpose 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 assumptions used for Crestar's grants in
1997, 1996 and 1995: dividend yields of 2.9% to 4.2%; expected volatility of
29%, 30% and 27%, respectively; risk-free interest rates of 5.3% to 7.7%; and an
expected option life of 3.8 years. Citizens used the following assumptions for
grants in 1996 and 1995: dividend yields of 3.8% to 4.2%; expected volatility of
25% and 26%, respectively; a risk-free interest rate of 6.6%; and an expected
option life of 4.8 years.
The weighted-average fair value of each option granted by Crestar during
1997, 1996 and 1995 was $9.00, $5.95 and $4.18, respectively. The
weighted-average fair value of each option granted by Citizens during 1996 and
1995 was $4.54 and $4.09, respectively. A summary of the status of the
Corporation's fixed stock option plans as of December 31 and changes during the
years ending on those dates is presented below:
=============================================================================================================
1997 1996 1995
-------------------- ---------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
Outstanding, Jan. 1 3,594,558 $17 4,672,427 $12 4,365,879 $11
Granted 752,956 34 706,630 26 811,014 18
Exercised (1,210,580) 15 (1,779,490) 9 (495,222) 10
Forfeited (16,460) 25 (5,009) 18 (9,244) 13
----------- ----------- ---------
Outstanding, Dec. 31 3,120,474 22 3,594,558 17 4,672,427 12
=========== =========== =========
Options exercisable at year-end 2,519,198 2,814,769 3,805,648
===============================================================================================================
The following table summarizes information about fixed stock options
outstanding:
================================================================================================================
As of December 31, 1997 Options Outstanding
----------------------------------------
Options Exercisable
Weighted- -------------------------------
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
$3.33 to 14.60 712,609 3.5 years $11 712,609 $11
15.87 to 19.78 715,504 7.1 18 715,504 18
20.19 to 27.00 587,491 6.1 22 587,491 22
27.06 to 35.78 504,294 8.1 27 503,594 27
35.78 to 52.91 600,576 9.1 37 - -
----------- ---------
$3.33 to 52.91 3,120,474 6.6 22 2,519,198 19
================================================================================================================
The Value Share Program was established under the 1993 Stock Incentive Plan to
provide senior managers with an opportunity for reward based on the
Corporation's long-term performance. During 1997, the Corporation granted
214,300 value shares when Crestar's stock price was $37 per share, and 121,650
value shares when Crestar's stock price was $56 per share. The grant of 214,300
value shares is payable in fifty percent stock and fifty percent cash; the grant
of 121,650 value shares is payable entirely in stock. The percentage of value
share awards earned is based on Crestar's attainment of certain strategic goals
over a performance cycle. The performance cycle is two to three years; value
shares may be earned earlier if certain strategic goals are met. There were no
new value share awards granted in 1996 and 1995. During 1997, 96,450 value
shares granted prior to 1995 were paid in an award of $1.7 million cash and
48,154 common shares when Crestar's stock price was $35 per share. In
conjunction with this award, 75,476 non-qualified stock options were granted.
During 1997, 1996 and1995, common shares of 25,748, 51,602 and 20,852,
respectively, related to performance awards granted prior to 1995 were issued
when Crestar's stock price was $37, $29 and $22 per share, respectively. Other
outright awards of stock were not material in the years presented.
During 1995, the Corporation granted 30,000 performance shares, subject only
to a three year vesting requirement, to the Chairman and Chief Executive Officer
when the stock price was $28 per share. These performance shares are not issued
and have no voting rights, but do receive dividend equivalents which are
converted to additional shares.
The Corporation recognized compensation expense for performance and value
shares, including awards granted in years prior to 1995, of $1.4, $3.3 and $1.3
million in 1997, 1996 and 1995, respectively.
Under the Directors' Equity Program, each non-employee director is eligible
to receive equity awards covering a five-year cycle. Equity awards are not
issued and have no voting rights; equity awards do receive dividend equivalents
which are converted to additional shares. Equity awards vest over the five-year
cycle in 20 percent increments based on the participant's total years of board
service, including years prior to 1996. Equity awards granted in 1996 totaled
20,400 shares, each granted when the stock price was $30 per share. There were
no material directors' equity awards or distributions in 1997. Compensation
expense recognized in 1996 related to directors' equity awards totaled $600,000.
Directors' may also defer annual retainers which may be payable in stock at the
election of the director; such amounts were not material in the years presented.
Notes To Consolidated Financial Statements
Crestar Financial Corporation And Subsidiaries
(16) Other Employee Benefit Plans
The Corporation provides postretirement life and contributory health insurance
benefit plans for eligible retirees. The cost of such benefits are accrued in a
manner similar to pension costs. The projected status of Crestar's
postretirement life and contributory health insurance benefit plans for eligible
retirees as of December 31 follow:
===========================================================================================================
In thousands 1997 1996
Accumulated postretirement benefit obligations (other than pensions):
Retirees $48,236 $47,104
Eligible active plan participants 7,094 6,320
Ineligible active participants 10,820 11,613
- -----------------------------------------------------------------------------------------------------------
Total 66,150 65,037
Unrecognized net loss from past experience different from that assumed
and effects of changes in assumptions (26,417) (19,333)
Unrecognized transition obligation to be recognized over 20 years (22,099) (29,773)
- -----------------------------------------------------------------------------------------------------------
Accrued postretirement benefit expense $17,634 $15,931
===========================================================================================================
Postretirement benefit expense for the years ended December 31 included:
===========================================================================================================
In thousands 1997 1996 1995
Service cost $1,057 $1,039 $ 870
Interest cost 4,538 3,847 4,026
Net amortization and deferral 2,668 2,343 2,132
- -----------------------------------------------------------------------------------------------------------
Net postretirement benefit expense $8,263 $7,229 $7,028
===========================================================================================================
The weighted average annual assumed rate of increase in the per capita cost of
covered benefits for health insurance is 7% for 1998 and is assumed to decrease
to 6% in 1999 and remain at that level thereafter. Increasing the assumed health
care trend rates by one percentage point in each year would increase the
accumulated postretirement benefit obligation for the medical plan by
approximately $5.3 million, and would increase the aggregate of the service and
interest components of net postretirement benefit expense by approximately $403
thousand for 1997. The weighted average discount rate used in projecting the
accumulated plan benefit obligation was 7.50% for 1997 and 7.75% for 1996; the
average rate of annual compensation increase was 4.75% for both years.
The Corporation maintains a grantor trust to pay certain employee benefits as
they become due. Assets of the trust are restricted to use for applicable
employee benefit plans, including deferred compensation and medical benefit
plans. Such trust assets of $100 million and $91 million at December 31, 1997
and 1996, respectively, are included in the Corporation's total assets.
The Corporation has thrift and profit-sharing plans covering substantially
all full-time employees beginning January 1 after date of hire. During 1997,
1996 and 1995 the Corporation made matching contributions of 50 cents for every
$1 of employee contributions to the thrift plan, up to 6 percent of base pay.
Employer profit-sharing contributions are determined by applying a formula based
on return on equity to covered compensation. Thrift and profit-sharing plan
expenses totaled $17.6 million, $16.8 million and $16.0 million in 1997, 1996
and 1995, respectively.
(17) Other Income
Other income in the consolidated statements of income includes:
=============================================================================================================
In thousands 1997 1996 1995
Automated teller machine fees $ 25,945 $18,684 $17,856
Mortgage origination - net 19,632 12,212 2,753
Mortgage servicing - net 15,404 17,085 16,087
Trading account activities 5,058 3,833 3,515
Commissions on letters of credit 4,954 4,980 4,805
Gain on sale of mortgage servicing rights 10,450 8,268 11,000
Gain (loss) on sale and disposal of branches
and other properties - net 6,884 (22,380) (2,317)
Gain on securitization of student loans 9,305 - -
Gain on sale of merchant card processing 17,325 - -
Miscellaneous 58,656 54,834- 49,396
- -------------------------------------------------------------------------------------------------------------
Total other income $173,613 $97,516 $103,095
=============================================================================================================
(18) Other Expense
Other expense in the consolidated statements of income includes:
============================================================================================================
In thousands 1997 1996 1995
Communications $ 37,182 $ 38,572 $ 34,446
Outside data services 26,717 28,883 26,112
Professional fees and services 26,061 30,692 22,620
Advertising and marketing 21,732 26,165 20,400
Amortization of purchased intangibles 17,147 16,673 15,416
Loan expense 12,217 12,731 9,407
Stationery, printing and supplies 10,436 12,669 12,709
Transportation 7,101 7,056 7,281
FDIC premiums - net 2,684 41,174 24,812
Foreclosed properties (net recoveries) 3,097 6,872 (3,616)
Miscellaneous 57,821 58,482 59,303
- ------------------------------------------------------------------------------------------------------------
Total other expense $222,195 $279,969 $228,890
============================================================================================================
Notes To Consolidated Financial Statements
Crestar Financial Corporation And Subsidiaries
(19) Condensed Parent Information
The Parent's Condensed Balance Sheets at
December 31 were:
============================================================================================================
In thousands 1997 1996
Cash in banks $ 48,831 $ 76,611
Securities available for sale 125,505 123,747
Money market investments 601,553 380,499
Notes receivable from subsidiaries 185,000 336,369
Investments in wholly-owned subsidiaries:
Bank subsidiaries 1,761,401 1,662,418
Non-bank subsidiaries 173,609 15,974
Investment in Crestar Capital Trust I 6,003 6,200
Other assets 33,309 61,380
- ------------------------------------------------------------------------------------------------------------
Total Assets $2,935,211 $2,663,198
============================================================================================================
Short-term borrowings from subsidiaries $ 8,657 $ 50,051
Other short-term borrowings 260,225 202,962
Other liabilities 75,637 99,795
Long-term note payable to subsidiary 206,200 206,200
Other long-term debt 324,729 324,680
Total shareholders' equity 2,059,763 1,779,510
- ------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $2,935,211 $2,663,198
============================================================================================================
The Parent's retained earnings were $1.2 billion and $1.0 billion at December
31, 1997 and 1996, respectively, and were primarily comprised of the
undistributed earnings of its subsidiaries. The Parent's Condensed Statements of
Income for each of the last three years ended December 31 were:
============================================================================================================
In thousands 1997 1996 1995
Cash dividends from bank subsidiaries $110,635 $144,721 $ 89,072
Interest from subsidiaries 28,094 21,261 21,011
Interest on securities available for sale 5,051 4,346 2,896
Income on money market investments 15,553 6,472 8,631
Other income 760 1,347 1,437
- ----------------------------------------------------------------------------------------------------------
Total income 160,093 178,147 123,047
- ----------------------------------------------------------------------------------------------------------
Interest on short-term borrowings 12,282 9,654 8,820
Interest on long-term note payable to subsidiary 16,826 - -
Interest on other long-term debt 27,800 27,800 27,800
Other expense 1,487 2,341 6,521
- ----------------------------------------------------------------------------------------------------------
Total expense 58,395 39,795 43,141
- ----------------------------------------------------------------------------------------------------------
Income before income taxes and equity in undistributed
net income of subsidiaries 101,698 138,352 79,906
Income tax benefit (4,961) (3,697) (4,068)
- -----------------------------------------------------------------------------------------------------------
Income before equity in undistributed net income of subsidiaries 106,659 142,049 83,974
Equity in undistributed net income of subsidiaries 203,149 76,222 131,913
- -----------------------------------------------------------------------------------------------------------
Net Income $309,808 $218,271 $215,887
============================================================================================================
The Parent's Condensed Statements of Cash Flows for each of the last three
years ended December 31 were:
============================================================================================================
In thousands 1997 1996 1995
Operating Activities
Net income $309,808 $218,271 $215,887
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed net income of subsidiaries (203,149) (76,222) (131,913)
Amortization and accretion, net 480 430 407
Net decrease (increase) in accrued interest receivable, prepaid
expenses and other assets 24,590 (38,154) (1,010)
Net increase in accrued interest payable,
accrued expenses and other liabilities 9,982 5,306 2,334
Other, net 2,255 918 531
- ------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 143,966 110,549 86,236
- ------------------------------------------------------------------------------------------------------------
Investing Activities
Proceeds from maturities of securities held to maturity 3,367 6,402 1,347
Proceeds from maturities of securities available for sale 758,088 724,989 487,734
Purchases of securities available for sale (759,800) (733,381) (518,995)
Net decrease (increase) money market investments (221,054) (307,097) 105,126
Net decrease (increase) in notes receivable from subsidiaries 342 (63,163) (37,999)
Net decrease in investment in subsidiaries 199,999 172,800 27,537
Net cash paid for acquisitions (11,598) - (22,643)
Other, net 1,028 363 988
- ------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (29,628) (199,087) 43,095
- ------------------------------------------------------------------------------------------------------------
Financing Activities
Net increase in short-term borrowings 15,869 63,912 20,864
Proceeds from advance from subsidiary - 206,200 -
Cash dividends paid (130,671) (98,660) (87,031)
Common stock purchased and retired (84,845) (98,823) (82,144)
Proceeds from the issuance of common stock 57,693 34,537 30,428
Other, net (164) (2,086) -
- ------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (142,118) 105,080 (117,883)
- ------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (27,780) 16,542 11,448
Cash and cash equivalents at beginning of year 76,611 60,069 48,621
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 48,831 $ 76,611 $ 60,069
============================================================================================================
Cash and cash equivalents consists of cash in banks.
(20) Commitments, Contingencies
And Other Financial Instruments
In the normal course of business, there are outstanding commitments,
contingent liabilities and other financial instruments that are not reflected in
the accompanying consolidated financial statements. These include commitments to
extend credit, standby letters of credit, interest rate caps, floors and
collars, swaps and forward contracts, which are some of the instruments used by
Crestar to meet the financing needs of its customers and to manage its own
interest rate risk. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amounts recognized in the
consolidated balance sheets. Any losses which may result from these transactions
are not expected to have a material effect on the accompanying consolidated
financial statements. Notional principal amounts often are used to express the
volume of the transaction, but the amounts potentially subject to credit risk
are much smaller. The contract or notional amount, the estimated fair value and
the credit risk amount of each class of such instruments at December 31 was:
============================================================================================================
In thousands 1997 1996
------------------------------------ -------------------------------------
Estimated Estimated
Fair Value Contract/ Fair Value Contract/
Asset Notional Credit risk Asset Notional Credit risk
(Liability) Amount Amount (Liability) Amount Amount
Financial instruments whose notional or contract amounts equaled maximum credit
risk:
Legally binding unfunded com-
mitments to extend credit $(2,817) $10,071,337 $10,071,337 $(9,396) $ 8,148,955 $ 8,148,955
Standby letters of credit - 472,959 472,959 - 387,672 387,672
Commercial and similar letters
of credit - 54,559 54,559 - 97,510 97,510
Recourse obligations - 1,677,298 1,677,298 - 1,633,445 1,633,445
- ------------------------------------------------------------------------------------------------------------
Total $(2,817) $12,276,153 $12,276,153 $(9,396) $10,267,582 $10,267,582
============================================================================================================
Financial instruments whose notional or contract amounts exceeded maximum credit
risk:
For interest rate risk management
Interest rate swaps $11,893 $1,675,000 $ 32,260 $(6,434) $ 900,000 $ 20,597
Interest rate caps 4,591 2,410,000 20,634 12,198 1,785,000 26,637
Interest rate floors - - - 6,133 1,000,000 16,605
Forward contracts (4,684) 1,459,888 - 733 706,731 -
As a financial intermediary
Interest rate swaps 251 79,722 4,865 312 98,372 5,813
Interest rate caps - 23,920 3 - 33,920 15
Interest rate collars - 10,000 9 - 26,000 395
- ------------------------------------------------------------------------------------------------------------
Total $12,051 $5,658,530 $ 57,771 $12,942 $4,550,023 $ 70,062
============================================================================================================
Commitments to extend credit are legally binding agreements to lend to a
customer which typically contain clauses that permit cancellation of the
commitment in the event of credit deterioration of the borrower. Standby letters
of credit are conditional commitments issued by Crestar to guarantee the
performance of customers to a third party. Crestar receives a commitment fee for
entering into such agreements.
The credit risk associated with commitments to extend credit and standby letters
of credit is similar to direct lending; therefore, all of these items are
subject to the Corporation's loan approval and review procedures and policies.
Based upon management's credit evaluation of the customer, Crestar may require
the customer to provide various types of collateral as security for the
agreement, including balances on deposit, investment securities, real estate and
inventory. The maximum credit risk associated with commitments to extend credit
and standby letters of credit assumes that the counterparty defaults and the
collateral proves to be worthless. The total contract amounts do not necessarily
represent future cash requirements, since many of these items are expected to
expire without being drawn upon.
A geographic concentration exists within Crestar's loan portfolio since most of
Crestar's business activity is with customers located in Virginia, Maryland or
Washington, DC. Based upon Standard Industrial Classification codes used for
regulatory purposes, the Corporation had no aggregate loan concentration of 10%
or more of total loans in any particular industry at December 31, 1997. However,
under a broader view of the portfolio, Crestar had $1.8 billion in loans
outstanding to real estate developers and investors at year-end 1997. These
loans are diversified by geographic region within Crestar's market and by
project type and are made in accordance with the Corporation's normal credit and
underwriting guidelines and risk management policies.
The Corporation services mortgage loans other than those included in the
accompanying consolidated financial statements and, in some cases, accepts a
recourse liability on the serviced loans. Recourse obligations at December 31,
1997 included $112 million of contractual recourse liability accepted by
Crestar on mortgage loan sales to the Federal National Mortgage Association
(FNMA) and Federal Home Loan Mortgage Corporation (FHLMC). For the period
extending over the life of the loans, FNMA and FHLMC have the right to sell any
loans which become delinquent back to Crestar. Crestar maintains an allowance
(included in other liabilities in the consolidated balance sheet), which had a
balance of $309,000 at December 31, 1997, based on estimates of future losses on
this contractual recourse liability. Recourse obligations also included $119
million of contractual recourse liability accepted by Crestar on certain
mortgage loan sales to private investors. For the period extending up to one
year from origination, investors have the right to sell loans that meet certain
delinquency criteria back to Crestar. The remaining notional balance of recourse
obligations of $1.5 billion at December 31, 1997 results from the origination
and acquisition by Crestar of mortgage servicing rights on Federal Housing
Association and Veterans' Association loans, which are serviced under programs
of the Government National Mortgage Association (GNMA). Approximately $1.0
billion of this notional balance was insured by agencies of the Federal
government or private insurance companies at December 31, 1997.
As a financial institution, Crestar entails interest rate risk as a provider
of banking services to its customers. This risk can be managed through
derivative interest rate contracts, such as interest rate swaps, caps and
floors. Changes in the fair value of such derivatives are generally offset by
changes in the fair value of the underlying hedged asset or liability. For
interest rate risk management purposes, Crestar was using interest rate (fixed
receive) swaps with notional balances of $1.4 billion and $250 million at
December 31, 1997 to convert floating rate commercial and instalment loans,
respectively, to fixed rates. Crestar was using purchased interest rate caps
with notional balances of $1.75 billion and $200 million to hedge the market
value of fixed rate securities available for sale and real estate income
property loans, respectively, and $460 million to minimize interest rate risk
associated with rising rates on floating rate money market deposits. Crestar
also serves as a financial intermediary in interest rate swap, cap and collar
agreements, providing interest rate risk management services to customers. As an
intermediary, Crestar becomes a principal in the exchange of interest payments
between parties and is exposed to loss should one party default. The Corporation
performs normal credit review on each counterparty and minimizes its exposure by
entering into offsetting positions or by using hedging techniques.
The notional amount of these over-the-counter traded interest rate swaps,
caps, floors and collars does not fully represent Crestar's credit and market
exposure, which the Corporation believes is a combination of current replacement
cost (any unrealized gain plus accrued receivable) of approximately $19.6
million, less collateral held of approximately $11.1 million, plus an amount for
prospective market movement. Four counterparties constituted 17%, 16%, 11% and
10% of the estimated credit and market exposure of $57.8 million at December 31,
1997.
Crestar also had forward agreements outstanding at December 31, 1997, which
are primarily used to reduce the interest rate risk arising from changes in
market rates from the time residential mortgage lending commitments are made
until those commitments are funded.
Crestar may, from time to time, enter into certain derivative contracts, such
as purchased futures or options contracts, for trading purposes. Such contract
amounts were not material in 1997 and 1996.
The fair values of commitments to extend credit, standby letters of credit
and commercial and similar letters of credit were estimated based on the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and creditworthiness of counterparties.
Unfunded loan commitments are generally priced at market at the time of funding
and are subject to certain credit standards. The fair values of forward
agreements are estimated based on current settlement values. The fair values of
interest rate swaps, caps and floors are estimated based on the amount the
Corporation would receive or pay to terminate the contracts or agreements. Such
amounts are determined using a valuation model which considers current market
yields, counterparty credit risk and other relevant variables. The carrying
value of interest rate swaps, caps, floors and forward contracts related to
interest rate risk management activities was $20.3 million and $24.0 million at
December 31, 1997 and 1996, respectively. The carrying value of such instruments
includes any accrued interest receivable and/or payable balances, and
unamortized premiums paid for interest rate caps and floors. The carrying value
of other off-balance sheet financial instruments was not material at December
31, 1997 and 1996.
Certain litigation is pending or threatened against Crestar. Management, in
consultation with legal counsel, is of the opinion that there is no pending or
threatened litigation that could, individually or in the aggregate, have a
material impact on the Corporation's financial condition or financial statements
beyond liabilities established for this purpose.
Notes To Consolidated Financial Statements
Crestar Financial Corporation And Subsidiaries
(21) Fair Value Of Financial Instruments
Statement of Financial Accounting Standards No. 107 (SFAS 107), "Disclosures
about Fair Value of Financial Instruments," defines the fair value of a
financial instrument as the amount at which the instrument could be exchanged in
a current transaction between willing parties, other than in a forced or
liquidation sale. As the majority of Crestar's financial instruments lack an
available trading market, significant estimates, assumptions and present value
calculations are required to determine estimated fair value.
Comparability among financial institutions is difficult due to the wide range of
acceptable valuation techniques and the subjectivity of required assumptions.
Crestar's remaining assets and liabilities, not considered financial
instruments, have not been valued differently than customary, historical cost
accounting, nor have lines of business been separately valued. Information
regarding the estimated fair values of Crestar's financial instruments at
December 31 follows:
===============================================================================================================
In thousands Estimated Fair Value Carrying Value
Assets (Liabilities) Assets (Liabilities)
-------------------- ----------------------
1997 1996 1997 1996
Cash and due from banks $ 1,175,314 $ 1,105,036 $ 1,175,314 $ 1,105,036
Securities held to maturity 631,491 966,750 626,716 967,510
Securities available for sale 3,839,006 4,318,349 3,839,006 4,318,349
Money market investments 1,431,790 745,672 1,431,790 745,672
Net loans, including loans held for sale 16,655,000 14,628,000 16,360,293 14,439,675
Other financial instrument assets 404,756 321,744 404,756 321,744
Deposits with no stated maturities (11,246,043) (10,887,219) (11,246,043) (10,887,219)
Deposits with stated maturities (5,121,000) (4,765,000) (5,123,209) (4,783,991)
Short-term borrowings (4,789,045) (4,116,051) (4,789,045) (4,116,051)
Long-term debt (877,078) (880,067) (831,383) (859,336)
Other financial instrument liabilities (783,480) (425,188) (783,480) (425,188)
Off-balance sheet financial instruments - net 9,234 3,546 - -
===============================================================================================================
The carrying amounts in the table are included in the consolidated balance
sheets under the indicated captions, except for off-balance sheet financial
instruments which are discussed in note 20. The carrying value of cash and due
from bank balances and money market investments approximates fair value.
Financial instruments actively traded in a secondary market, such as securities,
were valued using available quoted market prices.
The Corporation's loan portfolio was valued based on estimated future cash
flows, discounted at various rates. The discount rates used were commensurate
with rates paid on U.S. Treasury securities with various maturity dates,
adjusted for noninterest operating costs, anticipated credit losses and
prepayment risk. The estimated fair value of the loan portfolio excludes the
intangible value attributable to account relationships, including bank card,
home equity line or similar revolving line of credit arrangements.
Other financial instrument assets consist primarily of customers' liability
on acceptances and accrued interest receivable, for which carrying amount
approximates fair value.
The carrying value of demand deposits, interest checking deposits, money
market deposit accounts and regular savings deposits is defined by SFAS 107 to
approximate fair value. Deposits with stated maturities were valued based on
estimated future cash flows, discounted at various rates. The discount rates
used were commensurate with rates paid on U.S. Treasury securities, adjusted for
factors such as operating expenses and prepayment risk. The estimated fair value
of deposits excludes the intangible value attributable to long-term
relationships with depositors.
The carrying value of short-term borrowings approximates fair value.
Long-term debt was valued based on interest rates currently available to Crestar
for debt with similar terms and remaining maturities. Other financial instrument
liabilities consist primarily of liability on acceptances, interest payable on
deposits and balances due upon settlement of securities purchases, for which
carrying value approximates fair value.
(22) Quarterly Financial Results (Unaudited) Consolidated quarterly results of
operations for the years ended December 31 were:
=============================================================================================================
Dollars in thousands, except per share data First Second Third Fourth
1997 Quarter Quarter Quarter(1) Quarter(2)
Income from earning assets $388,791 $385,614 $391,737 $409,442
Net interest income 219,660 218,309 217,138 221,191
Provision for loan losses 29,698 36,000 19,099 23,300
Securities gains (losses) 4,064 (91) 124 1,231
Other noninterest income 99,403 111,107 95,985 109,616
Net credit and noninterest income 293,429 293,325 294,148 308,738
Noninterest expense 180,005 179,010 173,231 182,011
Income before income taxes 113,424 114,315 120,917 126,727
Net Income 71,780 75,790 79,543 82,695
- -------------------------------------------------------------------------------------------------------------
Basic:
Earnings per share $ .65 $ .69 $ .71 $ .75
Average shares outstanding (000s) 110,290 110,496 110,760 110,916
Diluted:
Earnings per share $ .64 $ .68 $ .71 $ .74
Average shares outstanding (000s) 111,579 111,602 112,069 112,423
Dividends paid per common share $ .27 $ .29 $ .29 $ .29
- -------------------------------------------------------------------------------------------------------------
1996
Income from earning assets $385,826 $392,900 $388,868 $395,785
Net interest income 211,653 218,623 215,566 220,468
Provision for loan losses 22,230 24,430 25,100 24,130
Securities gains 2,373 270 96 654
Other noninterest income 85,178 91,320 80,221 73,073
Net credit and noninterest income 276,974 285,783 270,783 270,065
Noninterest expense 175,118 180,729 212,039 212,460
Income before income taxes 101,856 105,054 58,744 57,605
Net Income 65,111 66,876 48,118 38,166
- -------------------------------------------------------------------------------------------------------------
Basic:
Earnings per share $ .59 $ .60 $ .44 $ .34
Average shares outstanding (000s) 111,116 111,002 110,150 109,981
Diluted:
Earnings per share $ .58 $ .60 $ .43 $ .34
Average shares outstanding (000s) 112,405 111,923 111,101 111,447
Dividends paid per common share $ .225 $ .26 $ .26 $ .26
==============================================================================================================
(1) During the third quarter of 1996 Crestar recorded a one-time after-tax
charge of $21.5 million, or $.19 per share, associated with congressional
legislation regarding the recapitalization of the Savings Association
Insurance Fund. Also in the third quarter of 1996, a nonrecurring tax
benefit of $10.6 million, or $.09 per share, was recorded in connection with
the repeal of thrift bad debt tax legislation.
(2) During the fourth quarter of 1996, nonrecurring after-tax merger costs
totaling $32.5 million, or $.29 per share, were recorded as part of the
pooling-of-interests merger with Citizens Bancorp.
Crestar Financial Corporation
The Board Of Directors And Shareholders
We have audited the accompanying consolidated balance sheets of Crestar
Financial Corporation and subsidiaries (the Corporation) as of December 31, 1997
and 1996 and the related consolidated statements of income, cash flows and
changes in shareholders' equity for each of the years in the three-year period
ended December 31, 1997. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. We
did not audit the consolidated financial statements of Citizens Bancorp
(Citizens), which was acquired during 1996 in a transaction accounted for as a
pooling of interests, as discussed in note 2. Such statements are included in
the consolidated financial statements of the Corporation and reflect total
assets constituting 18% at December 31, 1996, and total income from earning
assets constituting 18% in 1996 and 1995 of the related consolidated totals.
Those statements were audited by other auditors whose report, dated January 16,
1997 expressed an unqualified opinion thereon. The other auditors' report has
been furnished to us, and our opinion, insofar as it relates to the amounts
included for Citizens, is based solely on the report of the other auditors.
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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Crestar Financial Corporation and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
Richmond, Virginia
January 14, 1998