SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) November 18, 1997
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FIRST UNION CORPORATION
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(Exact name of registrant as specified in its charter)
North Carolina 1-10000 56-0898180
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(State of other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
One First Union Center
Charlotte, North Carolina 28288-0013
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (704)374-6565
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(Former name or former address, if changed since last report.)
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Item 5. Other Events.
As previously reported by First Union Corporation ("FUNC") in its
Current Report on Form 8-K, dated November 18, 1997, FUNC entered into an
Agreement and Plan of Mergers (the "Acquisition Agreement") on November 18,
1997, which provides, among other things, for the acquisition of CoreStates
Financial Corp ("CoreStates") by FUNC (the "CoreStates Acquisition").
Attached hereto as exhibits and incorporated herein by reference are
(i) the Acquisition Agreement (without exhibits), (ii) certain pro forma
financial information (the "Pro Forma Financial Information") with respect to
the CoreStates Acquisition (which is to be accounted for as a pooling of
interests), FUNC's pending pooling of interests acquisition of Signet Banking
Corporation ("Signet") (the "Signet Acquisition"), FUNC's pending pooling of
interests acquisition of Wheat First Butcher Singer, Inc. ("Wheat") (the "Wheat
Acquisition"), and FUNC's pending purchase acquisition of Covenant Bancorp, Inc.
("Covenant") (the "Covenant Acquisition" and, together with the CoreStates
Acquisition, the Signet Acquisition and the Wheat Acquisition, the
"Acquisitions"), (iii) certain unaudited consolidated financial information of
CoreStates, including the consolidated balance sheet of CoreStates as of
September 30, 1997, and the related consolidated statements of income, changes
in shareholders' equity and cash flows for the three months and the nine months
ended September 30, 1997 and September 30, 1996, as applicable, and the related
unaudited notes thereto (collectively, the "Unaudited Financial Information"),
(iv) certain audited consolidated financial information of CoreStates, including
the consolidated balance sheets of CoreStates as of December 31, 1996 and 1995,
the related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1996, and the related notes and report of independent auditors thereto
(collectively, the "Audited Financial Information" and, together with the
Unaudited Financial Information, the "CoreStates Historical Financial
Information"), and (v) the consents and certain other reports of independent
auditors relating to the Audited Financial Information. The Signet Acquisition
is expected to be consummated on the date hereof. The CoreStates Acquisition,
Wheat Acquisition and Covenant Acquisition each remains subject to various
conditions to consummation, including stockholder and regulatory approvals.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This Current Report on Form 8-K (including information included or
incorporated by reference herein) contains certain forward-looking statements
with respect to the financial condition, results of operations, plans,
objectives, future performance and business of each of FUNC, CoreStates, Signet,
Wheat and Covenant on a stand-alone basis and of FUNC on a pro forma combined
basis, as well as certain additional information relating to the Acquisitions,
including (i) statements relating to the cost savings estimated to result from
the CoreStates and Signet acquisitions, (ii) statements relating to revenues
estimated to result from the CoreStates and Signet acquisitions, (iii)
statements relating to the restructuring charges estimated to be incurred in
connection with the CoreStates and Signet acquisitions, and (iv) statements
preceded by, followed by or that include the words "believes", "expects",
"anticipates", "estimates" or similar expressions. These forward-looking
statements involve certain risks and uncertainties. Factors that may cause
actual results to differ materially from those contemplated by such
forward-looking statements include, among others, the following possibilities:
(a) expected cost savings from the Acquisitions may not be fully realized or
realized within the expected time frame; (b) revenues following the Acquisitions
may be lower than expected, or deposit attrition, operating costs or customer
loss and business disruption following the Acquisitions may be greater than
expected; (c) competitive pressures among depository and other financial
institutions may increase significantly; (d) costs or difficulties related to
the integration of the business of FUNC, CoreStates, Signet, Wheat and/or
Covenant may be greater than expected; (e) changes in the interest rate
environment may reduce margins; (f) general economic or business conditions,
either nationally or in the states in which FUNC is doing business, may be less
favorable than expected resulting in, among other things, a deterioration in
credit quality or a reduced demand for credit; (g) legislative or regulatory
changes may adversely affect the business in which FUNC is engaged; and (h)
changes may occur in the securities markets.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(c) Exhibits.
(2) The Acquisition Agreement (without exhibits).
(23)(a) Consent of Ernst & Young LLP.
(23)(b) Consent of KPMG Peat Marwick LLP.
(23)(c) Consent of KPMG Peat Marwick LLP.
(99)(a) Pro Forma Financial Information.
(99)(b) CoreStates Historical Financial Information.
(99)(c) Independent Auditors' Report of KPMG Peat Marwick LLP.
(99)(d) Independent Auditors' Report of KPMG Peat Marwick LLP.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FIRST UNION CORPORATION
Date: November 28, 1997 By: /s/ Kent S. Hathaway
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Name: Kent S. Hathaway
Title: Senior Vice President
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EXHIBIT INDEX
Exhibit No. Description
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(2) The Acquisition Agreement (without exhibits).
(23)(a) Consent of Ernst & Young LLP.
(23)(b) Consent of KPMG Peat Marwick LLP.
(23)(c) Consent of KPMG Peat Marwick LLP.
(99)(a) Pro Forma Financial Information.
(99)(b) CoreStates Historical Financial Information.
(99)(c) Independent Auditors' Report of KPMG Peat Marwick LLP.
(99)(d) Independent Auditors' Report of KPMG Peat Marwick LLP.
Exhibit 2
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AGREEMENT AND PLAN OF MERGERS, dated as of the 18th day of November, 1997
(this "Plan"), by and between CoreStates Financial Corp ("CoreStates") and First
Union Corporation ("First Union").
RECITALS:
(A) CORESTATES. CoreStates is a corporation duly organized and existing in
good standing under the laws of the Commonwealth of Pennsylvania, with its
principal executive offices located in Philadelphia, Pennsylvania. As of the
date hereof, CoreStates has 350,000,000 authorized shares of common stock, each
of $1.00 par value ("CoreStates Common Stock"), and 10,000,000 authorized shares
of preferred stock, no par value ("CoreStates Preferred Stock") (no other class
or series of capital stock being authorized), of which 197,813,302 shares of
CoreStates Common Stock and no shares of CoreStates Preferred Stock were issued
and outstanding as of November 3, 1997.
(B) FIRST UNION. First Union is a corporation duly organized and existing
in good standing under the laws of the State of North Carolina, with its
principal executive offices located in Charlotte, North Carolina. As of the date
hereof, First Union has 750,000,000 authorized shares of common stock, each of
$3.33 1/3 par value ("First Union Common Stock"), 40,000,000 authorized shares
of Class A Preferred Stock, no-par value ("First Union Class A Preferred
Stock"), and 10,000,000 authorized shares of Preferred Stock, no-par value
("First Union No-Par Preferred Stock"; and, together with the First Union Class
A Preferred Stock, "First Union Preferred Stock") (no other class or series of
capital stock being authorized), of which 568,541,346 shares of First Union
Common Stock and no shares of First Union Preferred Stock were issued and
outstanding as of October 31, 1997.
(C) CORESTATES BANK. CoreStates Bank, N.A. ("CoreStates Bank") is a
national banking association, having its principal place of business in
Philadelphia, Pennsylvania. As of September 30, 1997 (rounded to the nearest
thousand dollars), CoreStates Bank had capital of $3,060,419,000 divided into
common stock of $37,308,000, surplus of $2,393,290,000, and undivided profits,
including capital reserves, of $621,992,000, and net unrealized holding gains
(losses) on available for sale securities of $7,829,000. All of the issued and
outstanding shares of capital stock of CoreStates Bank ("CoreStates Bank Capital
Stock") are owned by CoreStates.
(D) FUNB. First Union National Bank ("FUNB") is a national banking
association having its principal place of business in Avondale, Pennsylvania. As
of September 30, 1997, FUNB had capital of $2,291,534,000, divided into common
stock of $452,155,620, preferred stock of $160,540,000, surplus of
$1,300,079,773, undivided profits, including capital reserves, of $356,154,000,
and net unrealized holding gains (losses) on available for sale securities of
$22,604,000. All of FUNB's issued and outstanding shares of capital stock are
owned by First Fidelity Incorporated ("FFI"), a wholly-owned subsidiary of First
Union Corporation of New Jersey ("FUNC-NJ"), a wholly-owned subsidiary of First
Union.
(E) STOCK OPTION AGREEMENTS. As a condition and inducement to First Union's
willingness to enter into this Plan, concurrently with the execution and
delivery of this Plan, CoreStates has executed and delivered a Stock Option
Agreement with First Union (the "CoreStates Stock Option Agreement") in
substantially the form attached hereto as EXHIBIT A, pursuant to which
CoreStates is granting to First Union an option to purchase, under certain
circumstances, shares of CoreStates Common Stock. As a condition and inducement
to CoreStates's willingness to enter into this Plan, concurrently with the
execution and delivery of this Plan, First Union has executed and delivered a
Stock Option Agreement with CoreStates (the "First Union Stock Option
Agreement"; and, together with the CoreStates Stock Option Agreement, the "Stock
Option Agreements") in substantially the form attached hereto as EXHIBIT B,
pursuant to which First Union is granting to CoreStates an option to purchase,
under certain circumstances, shares of First Union Common Stock.
(F) INTENTION OF THE PARTIES. It is the intention of the parties to this
Plan that (i) the Corporate Merger (as defined in SECTION 1.01) shall be
accounted for as a pooling of interests under generally accepted accounting
principles and (ii) the Mergers (as defined in SECTION 1.02) shall qualify as
reorganizations under Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code").
(G) APPROVALS. The Board of Directors of each of the parties hereto (i) has
determined that this Plan and the transactions contemplated hereby are in their
respective best interests and in the best interests of, in the case of First
Union, its stockholders, and in the case of CoreStates, its stakeholders, (ii)
has determined that this Plan and the transactions contemplated hereby are
consistent with, and in furtherance of, its respective business strategies and
(iii) has approved, at meetings of each of such Boards of Directors, this Plan.
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NOW, THEREFORE, in consideration of their mutual promises and obligations,
the parties hereto approve, adopt and make this Plan and prescribe the terms and
conditions hereof and the manner and basis of carrying it into effect, which
shall be as follows:
I. THE MERGERS; EFFECTS OF THE MERGERS
1.01. THE CORPORATE MERGER.
(A) THE CONTINUING CORPORATION. At the Effective Time (as defined in
SECTION 1.03), CoreStates shall merge with and into First Union (the
"Corporate Merger"), the separate corporate existence of CoreStates shall
cease and First Union shall survive and continue to exist as a North
Carolina corporation (First Union, as the surviving corporation in the
Corporate Merger, sometimes being referred to herein as the "Continuing
Corporation"). First Union may at any time prior to the Effective Time
change the method of effecting the Mergers (including, without limitation,
the provisions of this ARTICLE I) if and to the extent it deems such change
to be necessary, appropriate or desirable; provided, however, that no such
change shall (i) alter or change the amount or kind of consideration to be
issued to holders of CoreStates Common Stock as provided for in this Plan,
(ii) adversely affect the tax treatment of CoreStates's stockholders or
(iii) materially impede or delay consummation of the transactions
contemplated by this Plan.
(B) EFFECT OF THE CORPORATE MERGER. Subject to the satisfaction or
waiver of the conditions set forth in ARTICLE VI, the Corporate Merger
shall become effective upon the occurrence of the filing in the office of
the Secretary of the Commonwealth of Pennsylvania (the "Department of
State") of articles of merger in accordance with Section 1928 of the
Pennsylvania Business Corporation Law of 1988, as amended (the "PBCL") and
the filing in the Office of the Secretary of State of the State of North
Carolina (the "North Carolina Secretary") of articles of merger in
accordance with Section 55-11-05 of the North Carolina Business Corporation
Act (the "NCBCA") or such later date and time as may be set forth in such
articles. The Corporate Merger shall have the effects prescribed in the
NCBCA and the PBCL.
(C) ARTICLES OF INCORPORATION AND BY-LAWS. The articles of
incorporation and by-laws of First Union immediately after the Corporate
Merger shall be those of First Union as in effect immediately prior to the
Effective Time.
(D) DIRECTORS AND OFFICERS OF THE CONTINUING CORPORATION. The
directors and officers of First Union immediately after the Corporate
Merger shall be the directors and officers of First Union immediately prior
to the Effective Time, together with such additional directors and officers
as Previously Disclosed and as may thereafter be elected, who shall hold
office until such time as their successors shall be duly elected and
qualified.
(E) RIGHTS, ETC. The Continuing Corporation shall thereupon and
thereafter possess all the rights, privileges, immunities and franchises,
of a public as well as of a private nature, of each of the corporations so
merged as provided in Chapter 55 of the NCBCA and Subchapter C of Chapter
19 of the PBCL.
(F) LIABILITIES, ETC. The Continuing Corporation shall thenceforth be
responsible and liable for all the liabilities, obligations and penalties
of the corporations so merged. All rights of creditors and obligors and all
liens on the property of each of CoreStates and First Union shall be
preserved unimpaired.
1.02. THE BANK MERGER. Following the Corporate Merger on the Effective Date
or as soon thereafter as First Union may deem appropriate:
(A) CONTRIBUTION OF CORESTATES BANK CAPITAL STOCK. First Union shall
contribute the CoreStates Bank Capital Stock to FUNC-NJ and shall cause
FUNC-NJ to contribute the CoreStates Bank Capital Stock to FFI.
(B) THE CONTINUING BANK. CoreStates Bank shall be merged with and into
FUNB or, at First Union's option, FUNB shall be merged with and into
CoreStates Bank (the "Bank Merger" and together with the Corporate Merger,
the "Mergers"), the separate existence of the merging bank shall cease and
the surviving bank (the "Continuing Bank") shall survive; the name of the
Continuing Bank shall be "First Union National Bank"; and the Continuing
Bank shall continue to conduct the business of a national banking
association at FUNB's main office in Avondale, Pennsylvania and at the
legally established branches of CoreStates Bank and FUNB. Certain
additional matters relating to the Continuing Bank have been Previously
Disclosed.
(C) RIGHTS, ETC. The Continuing Bank shall thereupon and thereafter
possess all the rights, privileges, immunities and franchises, of a public
as well as of a private nature, of each of the banks so merged; and all
property, real, personal and mixed, and all debts due on whatever account,
and all other choices in action, and all and every other interest, of or
belonging to or due to each of the banks so merged, shall be taken and
deemed to be transferred to and vested in the
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Continuing Bank without further act or deed, including appointments,
designations and nominations and all other rights and interests in any
fiduciary capacity; and the title to any real estate or any interest
therein, vested in each of such banks, shall not revert or be in any way
impaired by reason of the Bank Merger.
(D) LIABILITIES, ETC. The Continuing Bank shall thenceforth be
responsible and liable for all the liabilities, obligations and penalties
of the banks so merged (including liabilities arising out of the operation
of any trust departments). All rights of creditors and obligors and all
liens on the property of each of CoreStates Bank and FUNB shall be
preserved unimpaired.
(E) CHARTER; BYLAWS; DIRECTORS; OFFICERS. The charter and bylaws of
the Continuing Bank shall be those of CoreStates Bank, as in effect
immediately prior to the Bank Merger becoming effective. The directors and
officers of FUNB in office immediately prior to the Bank Merger becoming
effective shall be the directors and officers of the Continuing Bank,
together with such additional directors and officers as may thereafter be
elected, who shall hold office until such time as their successors are
elected and qualified.
(F) OUTSTANDING STOCK OF THE CONTINUING BANK. First Union shall cause
the amount of the capital stock of the Continuing Bank to be not less than
$37,308,000 which shall consist of not less than 1,865,400 issued and
outstanding shares of common stock, each of $20.00 par value, and 160,540
issued and outstanding shares of preferred stock, each of $1.00 par value,
and such issued and outstanding shares shall remain issued and outstanding
as shares of the Continuing Bank, each of $20.00 par value and $1.00 par
value, as applicable, and the holders thereof shall retain their rights
therein.
(G) OUTSTANDING STOCK OF CORESTATES BANK. Promptly after the Bank
Merger becomes effective, FFI shall deliver all of the issued and
outstanding shares of the capital stock of the merging bank to the
Continuing Bank for cancellation.
1.03. EFFECTIVE DATE AND EFFECTIVE TIME. Subject to the conditions to the
obligations of the parties to effect the Mergers as set forth in ARTICLE VI, the
effective date (the "Effective Date") of the Corporate Merger shall be such date
as the parties hereto mutually agree upon; provided, however, that if the
parties are not able to agree upon such date, such date shall be the date as
First Union shall notify CoreStates in writing not less than five days prior
thereto, which date shall not be more than 15 days after such conditions have
been satisfied or waived in writing (other than such conditions as by their
terms are to be satisfied at the Effective Time). The time on the Effective Date
at which the Corporate Merger becomes effective is referred to as the "Effective
Time".
II. CONSIDERATION
2.01. MERGER CONSIDERATION. Subject to the provisions of this Plan, at the
Effective Time, automatically by virtue of the Corporate Merger and without any
action on the part of any party or stockholder:
(A) OUTSTANDING FIRST UNION COMMON STOCK. Each share of First Union
Common Stock (and each attached right (a "First Union Right") issued
pursuant to the Amended and Restated Shareholder Protection Rights
Agreement, dated as of October 15, 1996 (as amended, the "First Union
Rights Agreement"), between First Union and First Union National Bank, as
Rights Agent) issued and outstanding immediately prior to the Effective
Time shall be unchanged and shall remain issued and outstanding.
(B) OUTSTANDING CORESTATES COMMON STOCK. Each share (excluding shares
held by CoreStates or any of its subsidiaries (as defined in SECTION 8.08)
or by First Union or any of its subsidiaries, in each case other than in a
trust, fiduciary or nominee capacity or as a result of debts previously
contracted ("Treasury Shares")) of CoreStates Common Stock issued and
outstanding immediately prior to the Effective Time shall become and be
converted into 1.62 shares (subject to possible adjustment as set forth in
SECTIONS 2.05 AND 7.01(F), the "Exchange Ratio") of First Union Common
Stock (with the appropriate number of First Union Rights, which shall be
attached thereto or represented by Rights Certificates in accordance with
the First Union Rights Agreement).
(C) TREASURY SHARES. Each Treasury Share immediately prior to the
Effective Time shall be canceled and retired at the Effective Time and no
consideration shall be issued in exchange therefor.
2.02. STOCKHOLDER RIGHTS; STOCK TRANSFERS. At the Effective Time, holders
of CoreStates Common Stock shall cease to be, and shall have no rights as,
stockholders of CoreStates, other than to receive any dividend or other
distribution with respect to the CoreStates Common Stock with a record date
occurring prior to the Effective Time and the consideration provided under this
ARTICLE II. After the Effective Time, there shall be no transfers on the stock
transfer books of CoreStates or the Continuing Corporation of shares of
CoreStates Common Stock.
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2.03. FRACTIONAL SHARES. Notwithstanding any other provision hereof, no
fractional shares of First Union Common Stock and no certificates or scrip
therefor, or other evidence of ownership thereof, will be issued in the
Corporate Merger; instead, First Union shall pay to each holder of CoreStates
Common Stock who would otherwise be entitled to a fractional share an amount in
cash determined by multiplying such fraction by the average of the last sale
prices of First Union Common Stock, as reported by the New York Stock Exchange
(the "NYSE") Composite Transactions tape (as reported in THE WALL STREET JOURNAL
or, if not reported therein, in another authoritative source), for the five NYSE
trading days immediately preceding the Effective Date.
2.04. EXCHANGE PROCEDURES.
(A) As promptly as practicable after the Effective Date, First Union
shall send or cause to be sent to each former holder of shares (other than
Treasury Shares) of CoreStates Common Stock of record immediately prior to
the Effective Time transmittal materials for use in exchanging such
stockholder's certificates formerly representing CoreStates Common Stock
("Old Certificates") for the consideration set forth in this ARTICLE II.
The certificates representing the shares of First Union Common Stock ("New
Certificates") into which shares of such stockholder's CoreStates Common
Stock are converted at the Effective Time and any checks in respect of a
fractional share interest or dividends or distributions which such person
shall be entitled to receive will be delivered to such stockholder only
upon delivery to First Union National Bank, as Exchange Agent (the
"Exchange Agent") of Old Certificates representing all of such shares of
CoreStates Common Stock (or indemnity reasonably satisfactory to First
Union and the Exchange Agent, if any of such certificates are lost, stolen
or destroyed) owned by such stockholder. No interest will be paid on any
such cash to be paid in lieu of fractional share interests or dividends or
distributions which any such person shall be entitled to receive pursuant
to this ARTICLE II upon such delivery. Old Certificates surrendered for
exchange by any CoreStates Affiliate (as defined in SECTION 5.07) shall not
be exchanged for New Certificates until First Union has received a written
agreement from such person as specified in SECTION 5.07.
(B) Notwithstanding the foregoing, neither the Exchange Agent nor any
party hereto shall be liable to any former holder of CoreStates Common
Stock for any amount properly delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
(C) At the election of First Union, no dividends or other
distributions with a record date occurring after the Effective Time shall
be paid to the holder of any unsurrendered Old Certificates representing
CoreStates Common Stock until such Old Certificates have been surrendered
for exchange for New Certificates. After becoming so entitled in accordance
with this SECTION 2.04, the record holder thereof also shall be entitled to
receive any such dividends or other distributions, without any interest
thereon, which theretofore had become payable with respect to shares of
First Union Common Stock such holder had the right to receive upon
surrender of the Old Certificate.
2.05. ANTI-DILUTION PROVISIONS. In the event First Union changes (or
establishes a record date for changing) the number of shares of First Union
Common Stock issued and outstanding prior to the Effective Date as a result of a
stock split, stock dividend, recapitalization or similar transaction with
respect to the outstanding First Union Common Stock and the record date therefor
shall be prior to the Effective Date, the Exchange Ratio shall be
proportionately adjusted.
2.06. OPTIONS.
(A) From and after the Effective Time, all employee and director stock
options to purchase shares of CoreStates Common Stock (each, a "CoreStates
Option"), which are then outstanding and unexercised, shall be converted
into and become options to purchase shares of First Union Common Stock, and
First Union shall assume each such CoreStates Option in accordance with the
terms of the plan and agreement by which it is evidenced, including but not
limited to the accelerated vesting of such CoreStates Options which shall
occur in connection with and by virtue of the Corporate Merger as and to
the extent required by such plans and agreements; PROVIDED, HOWEVER, that
from and after the Effective Time (i) each such CoreStates Option assumed
by First Union may be exercised solely to purchase shares of First Union
Common Stock, (ii) the number of shares of First Union Common Stock
purchasable upon exercise of such CoreStates Option shall be equal to the
number of shares of CoreStates Common Stock that were purchasable under
such CoreStates Option immediately prior to the Effective Time multiplied
by the Exchange Ratio and rounding to the nearest whole share, and (iii)
the per share exercise price under each such CoreStates Option shall be
adjusted by dividing the per share exercise price of each such CoreStates
Option by the Exchange Ratio, and rounding up to the nearest cent. The
terms of each CoreStates Option shall, in accordance with its terms, be
subject to further adjustment as appropriate to reflect any stock split,
stock dividend, recapitalization or other similar transaction with respect
to First Union Common Stock on or subsequent to the Effective Date.
Notwithstanding the foregoing, the number of shares and the per share
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exercise price of each CoreStates Option which is intended to be an
"incentive stock option" (as defined in SECTION 422 of the Code) shall be
adjusted in accordance with the requirements of SECTION 424 of the Code.
Accordingly, with respect to any incentive stock options, fractional shares
shall be rounded down to the nearest whole number of shares and where
necessary the per share exercise price shall be rounded up to the nearest
cent.
(B) Prior to the Effective Time, First Union shall reserve for
issuance the number of shares of First Union Common Stock necessary to
satisfy First Union's obligations under SECTION 2.06(A). Promptly after the
Effective Time, First Union shall file with the SEC a registration
statement on an appropriate form under the Securities Act with respect to
the shares of First Union Common Stock subject to options to acquire First
Union Common Stock issued pursuant to SECTION 2.06(A) hereof, and shall use
its reasonable best efforts to maintain the current status of the
prospectus contained therein, as well as comply with any applicable state
securities or "blue sky" laws, for so long as such options remain
outstanding.
III. ACTIONS PENDING MERGERS
From the date hereof until the Effective Time, except as expressly
contemplated in this Plan, (i) without the prior written consent of First Union
(which consent shall not be unreasonably withheld or delayed) CoreStates will
not, and will cause each of its subsidiaries not to, and (ii) without the prior
written consent of CoreStates (which consent shall not be unreasonably withheld
or delayed) First Union will not, and will cause each of its subsidiaries not
to:
3.01. ORDINARY COURSE. Conduct the business of it and its subsidiaries
other than in the ordinary and usual course or, to the extent consistent
therewith, fail to use reasonable efforts to preserve intact their business
organizations and assets and maintain their rights, franchises and existing
relations with customers, suppliers, employees and business associates, or take
any action that would (i) adversely affect the ability of any party to obtain
any necessary approvals of any Regulatory Authorities (as defined in SECTION
4.03(I)) required for the transactions contemplated hereby without the
imposition of a condition or restriction of the type referred to in the proviso
to SECTION 6.02 or (ii) adversely affect its ability to perform any of its
material obligations under this Plan, provided that nothing in this Plan shall
be deemed to restrict the ability of a party to exercise its rights under the
applicable Stock Option Agreement.
3.02. CAPITAL STOCK. In the case of CoreStates, other than (i) as
Previously Disclosed (as defined in SECTION 8.08), (ii) in connection with
acquisitions of businesses permitted in SECTION 3.06 or as permitted pursuant to
SECTION 3.04, (iii) under the CoreStates Stock Option Agreement or (iv) upon the
exercise of CoreStates Options and stock appreciation rights that were
outstanding on the date hereof, (A) issue, sell or otherwise permit to become
outstanding any additional shares of capital stock, any stock appreciation
rights, or any Rights (as defined in SECTION 8.08), (B) enter into any agreement
with respect to the foregoing, or (C) permit any additional shares of capital
stock to become subject to new grants of employee stock options, stock
appreciation rights, or similar stock-based employee rights.
3.03. DIVIDENDS, ETC. (A) Make, declare or pay any dividend (other than (i)
in the case of CoreStates, subject to SECTION 5.16, quarterly cash dividends on
CoreStates Common Stock payable at a rate not to exceed $0.50 per share and
dividends from subsidiaries to CoreStates or another subsidiary of CoreStates,
as applicable, and (ii) in the case of First Union, quarterly cash dividends on
First Union Common Stock, dividends payable in First Union Common Stock and
dividends from subsidiaries to First Union or another subsidiary of First Union,
as applicable) on or in respect of, or declare or make any distribution on, any
shares of its capital stock, or (B) in the case of CoreStates, except as
Previously Disclosed or as contemplated by SECTION 5.08(B), directly or
indirectly combine, redeem, reclassify, purchase or otherwise acquire, any
shares of its capital stock.
3.04. COMPENSATION; EMPLOYMENT AGREEMENTS; ETC. In the case of CoreStates
and its subsidiaries, enter into or amend any written employment, severance or
similar agreements or arrangements with any of its directors, officers or
employees, or grant any salary or wage increase or increase any employee benefit
(including incentive or bonus payments), except for (i) normal individual
increases in compensation to employees in the ordinary course of business
consistent with past practice or consistent with individual increases by First
Union for similarly situated employees of First Union, (ii) other changes as may
be required by law or to satisfy contractual obligations existing as of the date
hereof or additional grants of awards (including CoreStates Options and other
equity-based awards, not to exceed 3,300,000 shares of CoreStates Common Stock
in the aggregate) to employees consistent with past practice, which to the
extent practicable have been Previously Disclosed, (iii) any changes proposed in
the CoreStates Pay Practices Study prepared by Hewitt Associates previously
communicated to the employees of CoreStates or its subsidiaries, or (iv) as
otherwise contemplated by this Plan.
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3.05. BENEFIT PLANS. In the case of CoreStates and its subsidiaries, enter
into or modify (except as may be required by applicable law or to satisfy
contractual obligations existing as of the date hereof, which to the extent
practicable have been Previously Disclosed, and except as otherwise contemplated
by this Plan) any pension, retirement, stock option, stock purchase, savings,
profit sharing, deferred compensation, consulting, bonus, group insurance or
other employee benefit, incentive or welfare contract, plan or arrangement, or
any trust agreement related thereto, in respect of any of its directors,
officers or other employees, including without limitation taking any action
(including discretionary action pursuant to the terms of such contract, plan or
arrangement) that accelerates the vesting or exercise of any benefits payable
thereunder.
3.06. ACQUISITIONS AND DISPOSITIONS. In the case of CoreStates, except as
Previously Disclosed and except for dispositions and acquisitions of assets in
the ordinary and usual course of business consistent with past practice, dispose
of or discontinue any portion of its assets, deposits, business or properties,
in excess of $20 million in the aggregate, or merge or consolidate with, or
acquire (other than by way of foreclosures or acquisitions of control in a BONA
FIDE trust or fiduciary capacity or in satisfaction of debts previously
contracted in good faith, in each case in the ordinary and usual course of
business consistent with past practice) all or any portion of, the business or
property of any other entity which is material to it and its subsidiaries taken
as a whole (any of the foregoing, a "Business Combination Transaction"); it
being understood, for purposes of this SECTION 3.06, that (i) Business
Combination Transactions in which the purchase price to be paid or received by
CoreStates and/or its subsidiaries consists solely of cash in an amount not
exceeding $500 million in any one case shall be considered not to be material to
CoreStates and its subsidiaries taken as a whole and (ii) no Business
Combination Transaction involving the issuance by CoreStates and/or its
subsidiaries of shares of capital stock or other securities would be permissible
without First Union's prior consent.
3.07. AMENDMENTS. Amend its articles of incorporation or by-laws (or
similar constitutive documents) (except that First Union may amend its articles
of incorporation to increase the number of authorized shares of First Union
Common Stock from 750,000,000 shares to 2,000,000,000).
3.08. ACCOUNTING METHODS. Implement or adopt any material change in its
accounting principles, practices or methods, other than as may be required by
generally accepted accounting principles.
3.09. ADVERSE ACTIONS. (A) Take any action that would, or is reasonably
likely to, prevent or impede the Mergers from qualifying (1) for
pooling-of-interests accounting treatment or (2) as a reorganization within the
meaning of SECTION 368(A) of the Code; or (B) knowingly take any action that is
intended or is reasonably likely to result in (i) any of its representations or
warranties set forth in this Plan being or becoming untrue in any material
respect at any time prior to the Effective Time, (ii) any of the conditions to
the Mergers set forth in ARTICLE VI not being satisfied or (iii) a material
violation of any provision of this Plan or the Stock Option Agreements except,
in every case, as may be required by applicable law; PROVIDED, HOWEVER, that
nothing contained herein shall limit the ability of CoreStates or First Union to
exercise its rights under either Stock Option Agreement.
3.10. RISK MANAGEMENT. Except as required by applicable law or regulation,
(A) implement or adopt any material change in its interest rate and other risk
management policies, procedures or practices; (B) fail to follow in any material
respect its existing policies or practices with respect to managing its exposure
to interest rate and other risk; or (C) fail to use commercially reasonable
means to avoid any material increase in its aggregate exposure to interest rate
risk.
3.11. INDEBTEDNESS. In the case of CoreStates, incur any indebtedness for
borrowed money other than in the ordinary course of business.
3.12. AGREEMENTS. Agree or commit to do anything prohibited by SECTIONS
3.01 through 3.11.
IV. REPRESENTATIONS AND WARRANTIES
4.01. DISCLOSURE SCHEDULE. On or prior to the date hereof, First Union has
delivered to CoreStates and CoreStates has delivered to First Union a schedule
(as the case may be, its "Disclosure Schedule") setting forth, among other
things, items the disclosure of which is necessary or appropriate either (i) in
response to an express disclosure requirement contained in a provision hereof or
(ii) as an exception to one or more representations or warranties in SECTION
4.03 or to one or more of its covenants contained in ARTICLE III; PROVIDED, that
(a) no such item is required to be set forth in a Disclosure Schedule as an
exception to a representation or warranty if its absence would not be reasonably
likely to result in the related representation or warranty being deemed untrue
or incorrect under the standards established by Section 4.02, and (b) the mere
inclusion of an item in a Disclosure Schedule as an exception to a
representation or warranty shall not be deemed an admission by a party that such
item represents a material exception or fact, event or circumstance or that such
item is reasonably likely to result in a Material Adverse Effect (as defined in
SECTION 8.08).
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4.02. STANDARD. No representation or warranty of First Union or CoreStates
contained in SECTION 4.03 shall be deemed untrue or incorrect, and no party
hereto shall be deemed to have breached a representation or warranty, as a
consequence of the existence of any fact, circumstance or event if such fact,
circumstance or event, individually or taken together with all other facts,
circumstances or events inconsistent with any paragraph of SECTION 4.03, is not
reasonably likely to have a Material Adverse Effect on the party making such
representation or warranty.
4.03. REPRESENTATIONS AND WARRANTIES. Subject to SECTIONS 4.01 and 4.02,
CoreStates hereby represents and warrants to First Union, and First Union hereby
represents and warrants to CoreStates, as follows:
(A) RECITALS. In the case of the representations and warranties of
CoreStates, the facts set forth in Recitals A, C, E, F and G of this Plan
with respect to it and CoreStates Bank are true and correct. In the case of
the representations and warranties of First Union, the facts set forth in
Recitals B, D, E, F and G of this Plan with respect to it and FUNB are true
and correct.
(B) ORGANIZATION, STANDING, AND AUTHORITY. It is duly qualified to do
business and is in good standing in the states of the United States and
foreign jurisdictions where its ownership or leasing of property or the
conduct of its business requires it to be so qualified. It has in effect
all federal, state, local, and foreign governmental authorizations
necessary for it to own or lease its properties and assets and to carry on
its business as it is now conducted.
(C) SHARES.
(1) The outstanding shares of its capital stock have been duly
authorized and are validly issued and outstanding, fully paid and
nonassessable, and subject to no preemptive rights (and were not issued
in violation of any preemptive rights). In the case of CoreStates,
except as Previously Disclosed, there are no shares of its capital stock
authorized and reserved for issuance, it does not have any Rights issued
or outstanding with respect to its capital stock, and it does not have
any commitment to authorize, issue, sell, repurchase or redeem any such
shares or Rights, except pursuant to this Plan or the relevant Stock
Option Agreement or pursuant to outstanding CoreStates Options. Since
October 31, 1997, it has issued no shares of its capital stock except
pursuant to plans or commitments Previously Disclosed.
(2) (i) The number of shares of CoreStates Common Stock which are
issuable upon exercise of CoreStates Options as of the date of this Plan
has been Previously Disclosed by CoreStates and (ii) the number of
shares of First Union Common Stock which are issuable upon exercise of
options to purchase shares of First Union Common Stock as of the date of
this Plan has been Previously Disclosed by First Union.
(3) In the case of the representations and warranties of First
Union, the shares of First Union Common Stock to be issued in exchange
for shares of CoreStates Common Stock in the Corporate Merger, when
issued in accordance with the terms of this Plan, will be duly
authorized, validly issued, fully paid and nonassessable, and subject to
no preemptive rights.
(D) SUBSIDIARIES.
(1) In the case of the representations and warranties of
CoreStates, (a) it has Previously Disclosed a list of all its
significant subsidiaries together with state of incorporation for each
such significant subsidiary, (b) no equity securities of any of its
significant subsidiaries (as defined in SECTION 8.08) are or may become
required to be issued (other than to it or a subsidiary of it) by reason
of any Rights, (c) there are no contracts, commitments, understandings,
or arrangements by which any of such significant subsidiaries is or may
be bound to sell or otherwise transfer any shares of the capital stock
of any such significant subsidiary (other than to it or a subsidiary of
it), (d) there are no contracts, commitments, understandings, or
arrangements relating to its rights to vote or to dispose of such shares
(other than to it or a subsidiary of it), and (e) all of the shares of
capital stock of each such significant subsidiary held by it or its
subsidiaries are fully paid and (except pursuant to 12 U.S.C.
(section mark) 55 or equivalent state statutes in the case of banking
subsidiaries) nonassessable and are owned by it or its subsidiaries free
and clear of any charge, mortgage, pledge, security interest,
restriction, claim, lien, or encumbrance ("Liens").
(2) Each of its significant subsidiaries has been duly organized
and is validly existing in good standing under the laws of the
jurisdiction in which it is incorporated or organized, and is duly
qualified to do business and in good standing in the jurisdictions where
its ownership or leasing of property or the conduct of its business
requires it to be so qualified.
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(E) CORPORATE POWER. It and each of its significant subsidiaries has
the corporate power and authority to carry on its business as it is now
being conducted and to own all its material properties and assets; and it
has the corporate power and authority to execute, deliver and perform its
obligations under this Plan and the Stock Option Agreements.
(F) Corporate Authority. Subject, in the case of this Plan, to receipt
of the requisite approval of its stockholders referred to in SECTION 6.01,
this Plan and the Stock Option Agreements, and the transactions
contemplated hereby and thereby, have been authorized by all necessary
corporate action of it and this Plan and the Stock Option Agreements have
been duly executed and delivered by it, each is a valid and binding
agreement of it, and is enforceable in accordance with its terms (except as
may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium, fraudulent transfer and similar laws of general applicability
relating to or affecting creditors' rights or by general equity
principles).
(G) REGULATORY APPROVALS; NO DEFAULTS.
(1) No consents or approvals of, or filings or registrations with,
any Regulatory Authority (as defined in SECTION 4.03(I)) or with any
third party are required to be made or obtained by it or any of its
subsidiaries in connection with the execution, delivery or performance
by it of this Plan or the respective Stock Option Agreement or to
consummate the Mergers except for (a) filings of applications or notices
with federal banking authorities, (B) filings with the Securities and
Exchange Commission (the "SEC") and state securities authorities and the
approval of this Plan by the stockholders of it, and (C) the filing of
articles of merger with the Department of State pursuant to the PBCL and
the North Carolina Secretary pursuant to the NCBA and the issuance of
related certificates of merger. As of the date hereof, it is not aware
of any reason why the approvals set forth in SECTION 6.02 will not be
received without the imposition of a condition, restriction or
requirement of the type described in SECTION 6.02.
(2) Subject to receipt of the regulatory approvals referred to in
the preceding paragraph, and expiration of related waiting periods, and
required filings under federal and state securities laws, the execution,
delivery and performance of this Plan and the respective Stock Option
Agreement and the consummation of the transactions contemplated hereby
and thereby do not and will not (A) constitute a breach or violation of,
or a default under, or give rise to any Lien, any acceleration of
remedies or any right of termination under, any law, rule or regulation
or any judgment, decree, order, governmental permit or license, or
agreement, indenture or instrument of it or of any of its subsidiaries
or to which it or any of its subsidiaries or properties is subject or
bound, (B) constitute a breach or violation of, or a default under, its
articles of incorporation or by-laws, or (C) require any consent or
approval under any such law, rule, regulation, judgment, decree, order,
governmental permit or license, agreement, indenture or instrument.
(H) FINANCIAL REPORTS AND SEC DOCUMENTS. Its Annual Reports on Form
10-K for the fiscal years ended December 31, 1994, 1995 and 1996, and all
other reports, registration statements, definitive proxy statements or
information statements filed or to be filed by it or any of its
subsidiaries subsequent to December 31, 1994 under the Securities Act of
1933, as amended (together with the rules and regulations thereunder, the
"Securities Act") or under SECTIONS 13(A), 13(C), 14 AND 15(D) of the
Securities Exchange Act of 1934, as amended (together with the rules and
regulations thereunder, the "Exchange Act"), in the form filed, or to be
filed, with the SEC (collectively, its "SEC Documents") (i) complied or
will comply in all material respects as to form with the applicable
requirements under the Securities Act or the Exchange Act, as the case may
be, and (ii) did not and will not, at the time of such filing, contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made
therein, in light of the circumstances under which they were made, not
misleading; and each of the balance sheets in or incorporated by reference
into any such SEC Document (including the related notes and schedules
thereto) fairly presents and will fairly present the financial position of
the entity or entities to which it relates as of its date and each of the
statements of income and changes in stockholders' equity and cash flows or
equivalent statements in such report and documents (including any related
notes and schedules thereto) fairly presents and will fairly present the
results of operations, changes in stockholders' equity and changes in cash
flows, as the case may be, of the entity or entities to which it relates
for the periods set forth therein, in each case in accordance with
generally accepted accounting principles consistently applied during the
periods involved, except in each case as may be noted therein, subject to
normal year-end audit adjustments in the case of unaudited statements.
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(I) LITIGATION; REGULATORY ACTION.
(1) Except as Previously Disclosed, no litigation, proceeding or
claim before any court or governmental agency is pending against it or
any of its subsidiaries and, to the best of its knowledge, no such
litigation, proceeding or claim has been threatened.
(2) Except as Previously Disclosed, neither it nor any of its
subsidiaries or properties is a party to or is subject to any order,
decree, agreement, memorandum of understanding or similar arrangement
with, or a commitment letter or similar submission to, any federal or
state governmental agency or authority charged with the supervision or
regulation of financial institutions or engaged in the insurance of
deposits (including, without limitation, the Office of the Comptroller
of the Currency, the Board of Governors of the Federal Reserve System
and the Federal Deposit Insurance Corporation), or issuers of securities
(including, without limitation, the SEC and non-governmental
self-regulatory bodies), or the supervision or regulation of it or any
of its subsidiaries (collectively, the "Regulatory Authorities").
(3) Neither it nor any of its subsidiaries has been advised by any
Regulatory Authority that such Regulatory Authority is contemplating
issuing or requesting (or is considering the appropriateness of issuing
or requesting) any such order, decree, agreement, memorandum or
understanding, commitment letter or similar submission.
(J) COMPLIANCE WITH LAWS. Except as Previously Disclosed, it and each
of subsidiaries:
(1) is in compliance, in the conduct of its business, with all
applicable federal, state, local and foreign statutes, laws,
regulations, ordinances, rules, judgments, orders or decrees applicable
thereto or to the employees conducting such businesses, including,
without limitation, the Equal Credit Opportunity Act, the Fair Housing
Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act
and all other applicable fair lending laws and other laws relating to
discriminatory business practices;
(2) has all permits, licenses, authorizations, orders and approvals
of, and has made all filings, applications and registrations with, all
Regulatory Authorities that are required in order to permit it to
conduct its businesses substantially as presently conducted; all such
permits, licenses, certificates of authority, orders and approvals are
in full force and effect and, to the best of its knowledge, no
suspension or cancellation of any of them is threatened; and
(3) has received, since December 31, 1995, no notification or
communication from any Regulatory Authority (i) asserting that it or any
of its subsidiaries is not in compliance with any of the statutes,
regulations, or ordinances which such Regulatory Authority enforces or
(ii) threatening to revoke any license, franchise, permit, or
governmental authorization, (iii) threatening or contemplating
revocation or limitation of, or which would have the effect of revoking
or limiting, federal deposit insurance (nor, to its knowledge, do any
grounds for any of the foregoing exist) or (iv) failing to approve any
proposed acquisition, or stating its intention not to approve any
acquisition pending or proposed to be effected by it prior to the date
hereof.
(K) MATERIAL CONTRACTS; DEFAULTS. Except for those agreements and
other documents filed as exhibits to its SEC Documents or Previously
Disclosed, neither it nor any of its subsidiaries is a party to, bound by
or subject to any agreement, contract, arrangement, commitment or
understanding (whether written or oral) that is a "material contract"
within the meaning of Item 601(b)(10) of the SEC's Regulation S-K (without
giving effect to the "ordinary course" exception set forth therein).
Neither it nor any of its subsidiaries is in default under any contract,
agreement, commitment, arrangement, lease, insurance policy or other
instrument to which it is a party, by which its respective assets,
business, or operations may be bound or affected, or under which it or its
respective assets, business, or operations receives benefits, and there has
not occurred any event that, with the lapse of time or the giving of notice
or both, would constitute such a default. Neither it nor any of its
subsidiaries is subject to, or bound by, any contract containing covenants
which (i) limit the ability of it or any subsidiary to compete in any
material line of business or with any person, or (ii) involve any material
restriction of geographical area in which, or method by which, it or any
subsidiary may carry on its business (other than as may be required by law
or any applicable Regulatory Authority).
(L) NO BROKERS. All negotiations relative to this Plan and the
transactions contemplated hereby have been carried on by it directly with
the other party hereto and no action has been taken by it that would give
rise to any valid claim against any party hereto for a brokerage
commission, finder's fee or other like payment, excluding, in the case of
CoreStates, fees to be paid to J.P. Morgan Securities Inc. and Credit
Suisse First Boston Corporation, and, in the case of First Union, a fee to
be paid to Morgan, Stanley Dean Witter Discover Incorporated, which, in
each case, has been heretofore disclosed to the other party.
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(M) EMPLOYEE BENEFIT PLANS
(1) CoreStates has delivered or will deliver to First Union copies
of all of CoreStates' Compensation and Benefit Plans (as defined below).
Compensation and Benefit Plans means all existing bonus, incentive,
paid-time-off, deferred compensation, pension, retirement,
profit-sharing, thrift, savings, employee stock ownership, stock bonus,
stock purchase, restricted stock and stock option plans, all employment
or severance contracts, all medical, dental, disability, health and life
insurance plans, all other employee benefit and fringe benefit plans,
contracts or arrangements and any applicable "change of control" or
similar provisions in any plan, contract or arrangement maintained or
contributed to by it or any of its subsidiaries for the benefit of
officers, former officers, employees, former employees, directors,
former directors, or the beneficiaries of any of the foregoing. First
Union will deliver to CoreStates copies of all qualified retirement
plans and welfare benefit plans.
(2) Except as Previously Disclosed, to its knowledge, each of its
Compensation and Benefit Plans has been operated and administered by it
in all material respects in accordance with its terms and with
applicable law, including, but not limited to, ERISA, the Code, the
Securities Act, the Exchange Act, the Age Discrimination in Employment
Act, or any regulations or rules promulgated thereunder, and all
filings, disclosures and notices required by ERISA, the Code, the
Securities Act, the Exchange Act, the Age Discrimination in Employment
Act and any other applicable law have been timely made. Except as
Previously Disclosed, to its knowledge, each of its Compensation and
Benefit Plans which is an "employee pension benefit plan" within the
meaning of SECTION 3(2) of ERISA (a "Pension Plan") and which is
intended to be qualified under SECTION 401(A) of the Code has received a
favorable determination letter (including a determination that the
related trust under such Compensation and Benefit Plan is exempt from
tax under SECTION 501(A) of the Code) from the IRS for "TRA" (as defined
in Rev. Proc. 93-39), or will file for such determination letter prior
to the expiration of the remedial amendment period for such Compensation
and Benefit Plan, and it is not aware of any circumstances likely to
result in revocation of any such favorable determination letter. There
is no pending or, to its knowledge, threatened legal action, suit or
claim relating to the Compensation and Benefit Plans. Except as
Previously Disclosed, to its knowledge, neither it nor any of its
subsidiaries has engaged in a transaction, or omitted to take any
action, with respect to any Compensation and Benefit Plan that would
reasonably be expected to subject it or any of its subsidiaries to a tax
or penalty imposed by either SECTION 4975 of the Code or SECTION 502 of
ERISA, assuming for purposes of SECTION 4975 of the Code that the
taxable period of any such transaction expired as of the date hereof.
(3) No liability (other than for payment of premiums to the PBGC
which have been made or will be made on a timely basis) under Title IV
of ERISA has been or is reasonably expected to be incurred by it or any
of its subsidiaries with respect to any ongoing, frozen or terminated
"single-employer plan", within the meaning of SECTION 4001(A)(15) of
ERISA, currently or formerly maintained by any of them, or any
single-employer plan of any entity (an "ERISA Affiliate") which is
considered one employer with it under SECTION 4001(A)(14) of ERISA or
SECTION 414(B) OR (C) of the Code (an "ERISA Affiliate Plan"). None of
it, any of its subsidiaries or any ERISA Affiliate has contributed, or
has been obligated to contribute, to a multiemployer plan under Subtitle
E of Title IV of ERISA at any time since September 26, 1980. No notice
of a "reportable event", within the meaning of SECTION 4043 of ERISA,
for which the 30-day reporting requirement has not been waived, has been
required to be filed for any Compensation and Benefit Plan or by any
ERISA Affiliate Plan within the 12-month period ending on the date
hereof. The PBGC has not instituted proceedings to terminate any Pension
Plan or ERISA Affiliate Plan and, to it's knowledge, no condition exists
that presents a risk that such proceedings will be instituted. To its
knowledge, there is no pending investigation or enforcement action by
the PBGC, the Department of Labor (the "DOL") or IRS or any other
governmental agency with respect to any Compensation and Benefit Plan.
Under each Pension Plan and ERISA Affiliate Plan, as of the date of the
most recent actuarial valuation performed prior to the date of this
Plan, the actuarially determined present value of all "benefit
liabilities", within the meaning of SECTION 4001(A)(16) of ERISA (as
determined on the basis of the actuarial assumptions contained in such
actuarial valuation of such Pension Plan or ERISA Affiliate Plan), did
not exceed the then current value of the assets of such Pension Plan or
ERISA Affiliate Plan and since such date there has been neither an
adverse change in the financial condition of such Pension Plan or ERISA
Affiliate Plan nor any amendment or other change to such Pension Plan or
ERISA Affiliate Plan that would increase the amount of benefits
thereunder which in either case reasonably could be expected to change
such result.
(4) All contributions required to be made under the terms of any
Compensation and Benefit Plan or ERISA Affiliate Plan or any employee
benefit arrangements under any collective bargaining agreement to which
it or any of its subsidiaries is a party have been timely made or have
been reflected on its financial statements to the extent
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required by generally accepted accounting principles. Neither any
Pension Plan nor any ERISA Affiliate Plan has an "accumulated funding
deficiency" (whether or not waived) within the meaning of SECTION 412 of
the Code or SECTION 302 of ERISA and all required payments to the PBGC
with respect to each Pension Plan or ERISA Affiliate Plan have been made
on or before their due dates. None of it, any of its subsidiaries or any
ERISA Affiliate (x) has PROVIDED, or would reasonably be expected to be
required to provide, security to any Pension Plan or to any ERISA
Affiliate Plan pursuant to SECTION 401(A)(29) of the Code, or (y) has
taken any action, or omitted to take any action, that has resulted, or
would reasonably be expected to result, in the imposition of a lien
under SECTION 412(N) of the Code or pursuant to ERISA.
(N) LABOR MATTERS. Neither it nor any of its subsidiaries is a party
to, or is bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization, nor is
it or any of its subsidiaries the subject of a proceeding asserting that it
or any such subsidiary has committed an unfair labor practice (within the
meaning of the National Labor Relations Act) or seeking to compel it or
such subsidiary to bargain with any labor organization as to wages and
conditions of employment, nor is there any strike or other labor dispute
involving it or any of its subsidiaries, pending or, to the best of its
knowledge, threatened, nor is it aware, as of the date of this Plan, of any
activity involving it or any of its subsidiaries' employees seeking to
certify a collective bargaining unit or engaging in any other organization
activity.
(O) INSURANCE. It and its subsidiaries have taken all requisite action
(including without limitation the making of claims and the giving of
notices) pursuant to its directors' and officers' liability insurance
policy or policies in order to preserve all rights thereunder with respect
to all matters (other than matters arising in connection with this Plan and
the transactions contemplated hereby) that are known to it.
(P) TAKEOVER LAWS; DISSENTERS RIGHTS. It has taken all action required
to be taken by it in order to exempt this Plan and the relevant Stock
Option Agreement, and the transactions contemplated hereby and thereby,
from, and this Plan and the relevant Stock Option Agreement and the
transactions contemplated hereby and thereby are exempt from, the
requirements of any "moratorium", "control share", "fair price", "affiliate
transaction", "control transaction", "business combination" or other
antitakeover laws and regulations (collectively, the "Takeover Laws") of
(i) the State of North Carolina in the case of the representations and
warranties of First Union, including ARTICLES 9 AND 9A of the NCBCA, and
(ii) the Commonwealth of Pennsylvania in the case of the representations
and warranties of CoreStates, including, without limitation, Chapter 25 of
the PBCL. Holders of CoreStates Common Stock and First Union Common Stock
do not have dissenters' or appraisal rights in connection with the
execution of this Plan or the consummation of any of the transactions
contemplated hereby.
(Q) ENVIRONMENTAL MATTERS. Except as Previously Disclosed, there are
no proceedings, claims, actions, or investigations of any kind, pending or
threatened, in any court, agency, or other government authority or in any
arbitral body, arising under any Environmental Law (as defined below);
there is no reasonable basis for any such proceeding, claim, action or
investigation; there are no agreements, orders, judgments or decrees by or
with any court, regulatory agency or other governmental authority, imposing
liability or obligation under or in respect of any Environmental Law; there
are and have been no Materials of Environmental Concern (as defined below)
or other conditions at any property (owned, operated, or otherwise used by,
or the subject of a security interest on behalf of, it or any of its
subsidiaries); and there are no reasonably anticipated future events,
conditions, circumstances, practices, plans, or legal requirements that
could give rise to obligations under any Environmental Law. "Environmental
Laws" means the statutes, rules, regulations, ordinances, codes, orders,
decrees, and any other laws (including common law) of any foreign, federal,
state, local, and any other governmental authority, regulating, relating to
or imposing liability or standards of conduct concerning pollution, or
protection of human health and safety or of the environment, as in effect
on or prior to the date of this Plan. "Materials of Environmental Concern"
means any hazardous or toxic substances, materials, wastes, pollutants, or
contaminants, including without limitation those defined or regulated as
such under any Environmental Law, and any other substance the presence of
which may give rise to liability under any Environmental Law.
(R) TAX REPORTS. (1) All material reports, declarations, estimates,
statements and returns (including without limitation information returns)
with respect to Taxes (as defined below) that are required to be filed by
or with respect to it or its subsidiaries, including without limitation
consolidated United States federal income tax returns of it and its
subsidiaries (collectively, the "Tax Returns"), have been timely filed, or
requests for extensions have been timely filed and have not expired, and
such Tax Returns were true, complete and accurate in all material respects;
(2) all taxes (which shall include without limitation, all United States
federal, state, local or foreign income, gross receipts, windfall profits,
severance, property, production, sales, use, license, excise, franchise,
employment, withholding or similar taxes imposed on
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the income, properties or operations of it or its subsidiaries, together
with any interest, additions, or penalties with respect thereto and any
interest in respect of such additions or penalties, collectively "Taxes")
shown to be due on such Tax Returns have been paid in full or adequate
reserves have been established for the payment of such Taxes; (3) all Taxes
due with respect to completed and settled examinations have been paid in
full or adequate reserves have been established for the payment of such
Taxes; (4) no issues have been raised by the relevant taxing authority in
connection with the examination of any of such Tax Returns; and (5) no
waivers of statutes of limitations (excluding such statutes that relate to
years currently under examination by the Internal Revenue Service) have
been given by or requested with respect to any Taxes of it or any of its
subsidiaries.
(S) POOLING; REORGANIZATION. As of the date hereof, it is aware of no
reason why (i) the Corporate Merger will fail to qualify for
pooling-of-interests accounting treatment or (ii) the Mergers will fail to
qualify as reorganizations under SECTION 368(A) of the Code.
(T) REGULATORY APPROVALS. As of the date hereof, it is aware of no
reason why the regulatory approvals and consents referred to in SECTION
6.02 will not be received without the imposition of a condition or
requirement described in the proviso thereto.
(U) NO MATERIAL ADVERSE EFFECT. Since December 31, 1996, except as
Previously Disclosed in its SEC Documents filed with the SEC on or before
the date hereof or in any Section of its Disclosure Schedule, (i) it and
its subsidiaries have conducted their respective businesses in the ordinary
and usual course (excluding the incurrence of expenses related to this Plan
and the transactions contemplated hereby) and (ii) no event has occurred or
circumstance arisen that, individually or taken together with all other
facts, circumstances and events (described in any paragraph of SECTION 4.03
or otherwise), is reasonably likely to have a Material Adverse Effect with
respect to it.
(V) REQUIRED VOTE; RIGHTS PLAN.
(1) In the case of the representations and warranties of
CoreStates, the affirmative vote of the holders of a majority of the
shares of CoreStates Common Stock voting at the CoreStates Meeting (as
defined in SECTION 5.02) is the only vote of the holders of any class or
series of capital stock of CoreStates necessary to approve this Plan or
the Corporate Merger.
(2) In the case of the representations and warranties of First
Union, the affirmative vote of the holders of a majority of (a) the
outstanding shares of First Union Common Stock is the only vote of the
holders of any class or series of capital stock of First Union necessary
to approve this Plan, and (b) the total votes cast (provided that the
total votes cast represent over 50% of all securities entitled to vote)
by the holders of First Union Common Stock is the only vote of the
holders of any class or series of capital stock of First Union necessary
to approve the amendment to its articles or incorporation to increase
the number of authorized shares of First Union Common Stock from
750,000,000 to 2,000,000,000.
(3) In the case of the representations and warranties of First
Union, First Union has heretofore provided CoreStates with a complete
and correct copy of the First Union Rights Agreement, including all
amendments and exhibits thereto. First Union has taken all necessary
action so that none of the execution of this Agreement or the First
Union Stock Option Agreement, the acquisition of shares of First Union
Common Stock upon exercise of the option contained in the First Union
Stock Option Agreement or the consummation of the Mergers will (i) cause
the Rights issued pursuant to the First Union Rights Agreement to become
exercisable, (ii) cause any person to become an Acquiring Person (as
such term is defined in the First Union Rights Agreement) or (iii) give
rise to a Separation Time (as such term is defined in the First Union
Rights Agreement).
V. COVENANTS
CoreStates hereby covenants to and agrees with First Union, and First Union
hereby covenants to and agrees with CoreStates, that:
5.01. REASONABLE BEST EFFORTS. Subject to the terms and conditions of this
Plan, it shall use its reasonable best efforts in good faith to take, or cause
to be taken, all actions, and to do, or cause to be done, all things necessary,
proper or desirable, or advisable under applicable laws, so as to permit
consummation of the Mergers as promptly as reasonably practicable and to
otherwise enable consummation of the transactions contemplated hereby,
including, without limitation, obtaining (and cooperating with the other party
hereto in obtaining) any consent, authorization, order or approval of, or any
exemption by, any Regulatory Authority and any other third party that is
required to be obtained by First Union or CoreStates or any of their
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respective subsidiaries in connection with the Mergers and the other
transactions contemplated by this Plan, and using reasonable efforts to lift or
rescind any injunction or restraining order or other order adversely affecting
the ability of the parties to consummate the transactions contemplated hereby,
and using reasonable efforts to defend any litigation seeking to enjoin, prevent
or delay the consummation of the transactions contemplated hereby or seeking
material damages, and each shall cooperate fully with the other parties hereto
to that end.
5.02. STOCKHOLDER APPROVALS. Each of them shall take, in accordance with
applicable law, NYSE rules and its respective articles of incorporation and
by-laws, all action necessary to convene, respectively, (A) an appropriate
meeting of stockholders of First Union to consider and vote upon (i) the
approval of an amendment to the articles of incorporation of First Union to
increase the number of authorized shares of First Union Common Stock from
750,000,000 to 2,000,000,000 and (ii) the approval of this Plan, and (iii) any
other stockholder approval matters required for consummation of the Corporate
Merger and the transactions contemplated hereby (the "First Union Meeting"), and
(B) an appropriate meeting of stockholders of CoreStates to consider and vote
upon the approval of this Plan and any other stockholder approval matters
required for consummation of the Corporate Merger and the transactions
contemplated hereby (the "CoreStates Meeting"; each of the First Union Meeting
and the CoreStates Meeting, a "Meeting"), respectively, as promptly as
practicable after the Registration Statement (as defined in SECTION 5.03) is
declared effective. The Board of Directors of each of First Union and CoreStates
will recommend approval of such matters, and each of First Union and CoreStates
will take all reasonable lawful action to solicit such approval by its
respective stockholders, provided that each of First Union and CoreStates may
withdraw, modify or change in an adverse manner to the other party its
recommendations if the Board of Directors of such party, after having consulted
with and based upon the advice of outside counsel, determines in good faith that
the failure to so withdraw, modify or change its recommendation could constitute
a breach of the fiduciary duties of such party's Board of Directors under
applicable law. In addition, nothing in this SECTION 5.02 or elsewhere in this
Plan shall prohibit accurate disclosure by either party of information that is
required to be disclosed in the Registration Statement or the Joint Proxy
Statement or any other document required to be filed with the SEC (including
without limitation a Solicitation/Recommendation Statement on Schedule 14D-9) or
otherwise required to be publicly disclosed by applicable law or regulation or
the rules of the NYSE.
5.03. REGISTRATION STATEMENT.
(A) Each of First Union and CoreStates agrees to cooperate in the
preparation of a registration statement on Form S-4 (the "Registration
Statement") to be filed by First Union with the SEC in connection with the
issuance of First Union Common Stock in the Corporate Merger (including the
joint proxy statement and prospectus and other proxy solicitation materials
of First Union and CoreStates constituting a part thereof, the "Joint Proxy
Statement"). Each of CoreStates and First Union agrees to use all
reasonable efforts to cause the Registration Statement to be declared
effective under the Securities Act as promptly as reasonably practicable
after filing thereof. First Union also agrees to use all reasonable efforts
to obtain all necessary state securities law or "Blue Sky" permits and
approvals required to carry out the transactions contemplated by this Plan.
CoreStates agrees to furnish to First Union all information concerning
CoreStates, its subsidiaries, officers, directors and stockholders as may
be reasonably requested in connection with the foregoing.
(B) Each of CoreStates and First Union agrees, as to itself and its
subsidiaries, that none of the information supplied or to be supplied by it
for inclusion or incorporation by reference in (i) the Registration
Statement will, at the time the Registration Statement and each amendment
or supplement thereto, if any, becomes effective under the Securities Act,
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading, and (ii) the Joint Proxy Statement and
any amendment or supplement thereto will, at the date of mailing to
stockholders and at the times of the First Union Meeting and the CoreStates
Meeting, contain any statement which, in the light of the circumstances
under which such statement is made, will be false or misleading with
respect to any material fact, or which will omit to state any material fact
necessary in order to make the statements therein not false or misleading
or necessary to correct any statement in any earlier statement in the Joint
Proxy Statement or any amendment or supplement thereto. Each of First Union
and CoreStates agrees that the Joint Proxy Statement (except, in the case
of First Union, with respect to portions thereof prepared by CoreStates,
and except, in the case of CoreStates, with respect to portions thereof
prepared by First Union) will comply as to form in all material respects
with the requirements of the Exchange Act and the rules and regulations of
the SEC thereunder, and the Registration Statement (except, in the case of
First Union, with respect to portions thereof prepared by CoreStates, and
except, in the case of CoreStates, with respect to portions thereof
prepared by First Union) will comply as to form in all material respects
with the requirements of the Securities Act and the rules and regulations
of the SEC thereunder.
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(C) In the case of First Union, First Union will advise CoreStates,
promptly after First Union receives notice thereof, of the time when the
Registration Statement has become effective or any supplement or amendment
has been filed, of the issuance of any stop order or the suspension of the
qualification of the First Union Common Stock for offering or sale in any
jurisdiction, of the initiation or threat of any proceeding for any such
purpose, or of any request by the SEC for the amendment or supplement of
the Registration Statement or for additional information.
5.04. PRESS RELEASES. It will not, without the prior approval of the other,
issue any press release or written statement for general circulation relating to
the transactions contemplated hereby or the Stock Option Agreements, except as
otherwise required by applicable law or the rules of the NYSE.
5.05. ACCESS; INFORMATION.
(A) Upon reasonable notice, it shall afford the other party and its
officers, employees, counsel, accountants and other authorized
representatives, access, during normal business hours throughout the period
prior to the Effective Date, to all of its properties, books, contracts,
commitments and records and, during such period, it shall furnish promptly
to the other (i) a copy of each material report, schedule and other
document filed by it pursuant to the requirements of federal or state
securities or banking laws, and (ii) all other information concerning the
business, properties and personnel of it as the other may reasonably
request. Neither First Union nor CoreStates, nor any of their respective
subsidiaries, shall be required to provide access to or to disclose
information where such access or disclosure would violate or prejudice the
rights of its customers, jeopardize the attorney-client or similar
privilege with respect to such information or contravene any law, rule,
regulation, order, judgment, decree, fiduciary duty or agreement entered
into prior to the date hereof. The parties will use their reasonable best
efforts to make appropriate substitute disclosure arrangements, to the
extent practicable, in circumstances in which the restrictions of the
preceding sentence apply.
(B) It will not use any information obtained pursuant to this SECTION
5.05 for any purpose unrelated to the consummation of the transactions
contemplated by this Plan and, if this Plan is terminated, will hold all
information and documents obtained pursuant to this paragraph in confidence
(as provided in SECTION 8.06) unless and until such time as such
information or documents become publicly available other than by reason of
any action or failure to act by it or as it is advised by counsel that any
such information or document is required by applicable law to be disclosed.
(C) No investigation by either party of the business and affairs of
the other shall affect or be deemed to modify or waive any representation,
warranty, covenant or agreement in this Plan, or the conditions to either
party's obligation to consummate the transactions contemplated by this
Plan.
5.06. ACQUISITION PROPOSALS. Without the prior written consent of the
other, neither CoreStates nor First Union shall, and each of them shall cause
its respective subsidiaries and its and its subsidiaries' officers and directors
not to, solicit or encourage inquiries with respect to, or engage in
negotiations concerning, or provide any confidential information or assistance
to, or have any discussions with, any person relating to, any tender offer or
exchange offer for, or any proposal for the acquisition of a substantial equity
interest in, or a substantial portion of the assets or deposits of, such party
or any of its significant subsidiaries (each an "Acquisition Proposal").
Notwithstanding the foregoing, each of CoreStates and First Union may, and may
authorize and permit its officers, directors, agents, advisors, attorneys,
accountants and affiliates (collectively, "Representatives") to, provide third
parties with confidential information, have discussions or negotiations with or
otherwise facilitate any effort or attempt by such third party to make or
implement an Acquisition Proposal not solicited in violation of this Agreement
if such party's Board of Directors, after having consulted with and based upon
the advice of outside counsel, determines in good faith that the failure to take
such actions could constitute a breach of the fiduciary duties of such party's
Board of Directors under applicable law; PROVIDED, that such party shall
promptly advise the other party following the receipt of any Acquisition
Proposal and the material details thereof; and PROVIDED, FURTHER, that prior to
delivery of confidential information relating to such party or providing access
to such party's books, records or properties in connection therewith, such party
shall have entered into a confidentiality agreement substantially similar to the
one previously entered into between CoreStates and First Union. Nothing
contained in this SECTION 5.06 shall prohibit the Board of Directors of either
party from complying with Rule 14e-2 promulgated under the Exchange Act with
regard to a tender offer or exchange offer. It shall instruct its and its
subsidiaries' Representatives to refrain from any violation of this SECTION
5.06.
5.07. AFFILIATE AGREEMENTS.
(A) Not later than the 15th day prior to the mailing of the Joint
Proxy Statement, CoreStates shall deliver to First Union a schedule of each
person that, to the best of its knowledge, is or is reasonably likely to
be, as of the date of the CoreStates Meeting, deemed to be an "affiliate"
of CoreStates (each, a "CoreStates Affiliate") as that term is used in Rule
145 under the Securities Act or SEC Accounting Series Releases 130 and 135.
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(B) CoreStates shall use its reasonable best efforts to cause each
person who may be deemed to be a CoreStates Affiliate to execute and
deliver to First Union on or before the date of mailing of the Proxy
Statement an agreement in the form attached hereto as EXHIBIT C. Such
CoreStates Affiliates will not receive New Certificates until such
agreement is delivered to First Union.
5.08. CERTAIN MODIFICATIONS; RESTRUCTURING CHARGES. CoreStates and First
Union shall consult with respect to their loan, litigation and real estate
valuation policies and practices (including loan classifications and levels of
reserves) and CoreStates shall make such modifications or changes to its
policies and practices, if any, and at such date prior to the Effective Time, as
may be mutually agreed upon. CoreStates and First Union shall also consult with
respect to the character, amount and timing of restructuring charges to be taken
by each of them in connection with the transactions contemplated hereby and
shall take such charges in accordance with generally accepted accounting
principles, as may be mutually agreed upon. No party's representations,
warranties and covenants contained in this Plan shall be deemed to be untrue or
breached in any respect for any purpose as a consequence of any modifications or
changes to such policies and practices which may be undertaken on account of
this SECTION 5.08.
5.09. TAKEOVER LAWS. No party hereto shall take any action that would cause
the transactions contemplated by this Plan or the Stock Option Agreements to be
subject to requirements imposed by any Takeover Law and each of them shall take
all necessary steps within its control to exempt (or ensure the continued
exemption of) the transactions contemplated by this Plan from, or if necessary
challenge the validity or applicability of, any applicable Takeover Law, as now
or hereafter in effect.
5.10. NO RIGHTS TRIGGERED. Each of CoreStates and First Union shall take
all necessary steps to ensure that the entering into of this Plan and the Stock
Option Agreements and the consummation of the transactions contemplated hereby
and thereby and any other action or combination of actions, or any other
transactions contemplated hereby or thereby, do not and will not result in the
grant of any rights to any person (A) under its articles of incorporation or
by-laws, or (B) under any material agreement to which it or any of its
subsidiaries is a party.
5.11. SHARES LISTED. In the case of First Union, First Union shall use its
reasonable best efforts to list, prior to the Effective Date, on the NYSE, upon
official notice of issuance, the shares of First Union Common Stock to be issued
to the holders of CoreStates Common Stock in the Corporate Merger.
5.12. REGULATORY APPLICATIONS.
(A) Each party shall promptly (i) cause FUNB, in the case of First
Union, and CoreStates Bank, in the case of CoreStates, to adopt and approve
the transactions contemplated by this Plan, (ii) prepare and submit
applications to the appropriate Regulatory Authorities and (iii) make all
other appropriate filings to secure all other approvals, consents and
rulings, which are necessary for it to consummate the Mergers.
(B) Each of First Union and CoreStates agrees to cooperate with the
other and, subject to the terms and conditions set forth in this Plan, use
its reasonable best efforts to prepare and file all necessary
documentation, to effect all necessary applications, notices, petitions,
filings and other documents, and to obtain all necessary permits, consents,
orders, approvals and authorizations of, or any exemption by, all third
parties and Regulatory Authorities necessary or advisable to consummate the
transactions contemplated by this Plan, including without limitation the
regulatory approvals referred to in SECTION 6.02. Each of First Union and
CoreStates shall have the right to review in advance, and to the extent
practicable each will consult with the other, in each case subject to
applicable laws relating to the exchange of information, with respect to
all material written information submitted to, any third party or any
Regulatory Authorities in connection with the transactions contemplated by
this Plan. In exercising the foregoing right, each of the parties hereto
agrees to act reasonably and as promptly as practicable. Each party hereto
agrees that it will consult with the other party hereto with respect to the
obtaining of all material permits, consents, approvals and authorizations
of all third parties and Regulatory Authorities necessary or advisable to
consummate the transactions contemplated by this Plan and each party will
keep the other party apprised of the status of material matters relating to
completion of the transactions contemplated hereby.
(C) Each party agrees, upon request, to furnish the other parties with
all information concerning itself, its subsidiaries, directors, officers
and stockholders and such other matters as may be reasonably necessary or
advisable in connection with any filing, notice or application made by or
on behalf of such other party or any of its subsidiaries to any Regulatory
Authority.
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5.13. INDEMNIFICATION.
(A) First Union shall indemnify, defend and hold harmless the present
and former directors, officers and employees of CoreStates and its
subsidiaries (each, an "Indemnified Party") against all costs or expenses
(including reasonable attorneys' fees), judgments, fines, losses, claims,
damages or liabilities (collectively, "Costs") incurred in connection with
any claim, action, suit, proceeding or investigation, whether civil,
criminal, administrative or investigative, arising out of actions or
omissions occurring at or prior to the Effective Time (including, without
limitation, the transactions contemplated by this Plan and the CoreStates
Stock Option Agreement) to the fullest extent that such persons are
permitted to be indemnified under the laws of the Commonwealth of
Pennsylvania and CoreStates's articles of incorporation and by-laws as in
effect on the date hereof (and during such period First Union shall also
advance expenses (including expenses constituting Costs described in
SECTION 5.13(E)) as incurred to the fullest extent permitted under
applicable law, provided that the person to whom expenses are advanced
provides an undertaking to repay such advances if it is ultimately
determined that such person is not entitled to indemnification with no bond
or security to be required); provided that any determination required to be
made with respect to whether an officer's, director's or employee's conduct
complies with the standards set forth under Pennsylvania law and such
articles of incorporation and by-laws shall be made by independent counsel
(which shall not be counsel that provides material services to First Union)
selected by First Union and reasonably acceptable to such officer, director
or employee. First Union's obligations under this SECTION 5.13(A) shall
continue in full force and effect for a period of six years after the
Effective Date; provided that all rights to indemnification in respect of
any claim, action, suit, proceeding or investigation made, asserted or
commenced within such six year period shall continue until the final
disposition of such claim, action, suit, proceeding or investigation.
(B) First Union shall maintain CoreStates's existing directors' and
officers' liability insurance policy (or a policy providing comparable
coverage and amounts on terms no less favorable to the persons currently
covered by CoreStates's existing policy, including First Union's existing
policy if it meets the foregoing standard) covering persons who are
currently covered by such insurance for a period of three years after the
Effective Date.
(C) Any Indemnified Party wishing to claim indemnification under
SECTION 5.13(A), upon learning of any claim, action, suit, proceeding or
investigation described above, shall promptly notify First Union thereof;
provided that the failure so to notify shall not affect the obligations of
First Union under SECTION 5.13(A) unless and to the extent such failure
materially increases First Union's liability under such subsection (A).
(D) If First Union or any of its successors or assigns shall
consolidate with or merge into any other entity and shall not be the
continuing or surviving entity of such consolidation or merger or shall
transfer all or substantially all of its assets to any entity, then and in
each case, proper provision shall be made so that the successors and
assigns of First Union shall assume the obligations set forth in this
SECTION 5.13.
(E) First Union shall pay all reasonable Costs, including attorneys'
fees, that may be incurred by any Indemnified Party in enforcing the
indemnity and other obligations provided for in this SECTION 5.13. The
rights of each Indemnified Party hereunder shall be in addition to any
other rights such Indemnified Party may have under applicable law.
5.14. BENEFIT PLANS.
(A) Except as Previously Disclosed, as soon as administratively
practicable after the Effective Time, but not before January 1, 1999,
unless administratively impractical or required by law, employees of
CoreStates and its subsidiaries shall be generally entitled to participate
in the pension, benefit, and similar plans of First Union on substantially
the same terms and conditions as employees of First Union and its
subsidiaries (without duplication with respect to pension, benefit and
similar plans provided by CoreStates that survive the Effective Time) and
until such time as administratively practicable the plans of CoreStates
shall remain in effect without any adverse amendments except as required by
law; PROVIDED, HOWEVER, that the plans currently in effect for Congress
Financial Corporation shall remain in effect until December 31, 1998,
unless payroll conversion requires an earlier conversion. For the purpose
of determining eligibility to participate in such plans and the vesting of
benefits under such plans (but not for the accrual of benefits under such
plans), First Union shall give effect to years of service with CoreStates
or its subsidiaries, as the case may be, as if such service had been with
First Union or its subsidiaries. First Union intends to merge the
CoreStates tax-qualified defined benefit plan (the "CoreStates DB Plan")
into the First Union tax-qualified defined benefit plan ("First Union DB
Plan"). Effective as of the merger of such plans, First Union will cause
the following to occur: (1) the First Union DB Plan will provide that
participants in the CoreStates DB Plan who are employed by First Union as
of the date of such merger (the "CoreStates Merger Participants") will
receive service credit for purposes of benefit accrual under the First
Union DB Plan to the extent the CoreStates Merger Participants have earned
service credit for purposes of benefit accrual under the
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CoreStates DB Plan as of the merger of such plans; and (2) the First Union
DB Plan benefit for CoreStates Merger Participants will be the greater of
(a) the CoreStates DB Plan benefit determined as of the merger of such
plans or (b) the First Union DB Plan benefit (determined by including
benefit accrual service described in the preceding sentence).
(B) SEVERANCE POLICY AND OTHER AGREEMENTS. Any employee of CoreStates
or its subsidiaries at the Effective Time whose employment is terminated by
his or her employer (or who otherwise would be eligible for benefits
pursuant to CoreStates' severance plan and/or CoreStates' outplacement
policy, as amended through and as in effect on the date immediately
preceding the Effective Time (the "Severance Plan")) prior to the first
anniversary of the Effective Time shall receive severance payments and
benefits no less favorable than those provided pursuant to the Severance
Plan. For purposes of calculating the benefits that would be payable
pursuant to the Severance Plan, the employees' period of service shall
include all of their cumulative period of service with First Union,
CoreStates or any of their respective affiliates. First Union shall honor
or cause to be honored all severance agreements and employment agreements
with CoreStates's directors, officers and employees, and shall provide
CoreStates' employees with outplacement services no less favorable than
that in effect for First Union employees.
(C) 1997 AND 1998 BONUS. First Union will maintain, or cause to be
maintained, CoreStates' bonus plans, as in effect on the date hereof,
through the end of the 1998 fiscal year, with bonuses to be paid to the
employees participating thereunder at the greater of (i) the target level,
if applicable, or (ii) such bonus as the employee would have earned if the
transactions contemplated by this Agreement had not occurred, in all events
on a basis consistent with past practices.
(D) CREDIT FOR DEDUCTIBLES. First Union will, or will cause its
affiliates to, (i) waive all limitations as to preexisting conditions,
exclusions and waiting periods with respect to participation and coverage
requirements applicable to the employees of CoreStates under any welfare
plan that such employees may be eligible to participate in after the
Effective Time, and (ii) provide each employee of CoreStates with credit
for any co-payments and deductibles incurred under the CoreStates medical
plans during the calendar year in which CoreStates employees become covered
under similar plans offered by First Union.
5.15. ACCOUNTANTS' LETTERS. Each of CoreStates and First Union shall use
its reasonable best efforts to cause to be delivered to the other party, and to
First Union's directors and officers who sign the Registration Statement, a
letter of KPMG Peat Marwick LLP and Ernst & Young LLP, respectively, independent
auditors, dated (i) the date on which the Registration Statement shall become
effective and (ii) a date shortly prior to the Effective Date, and addressed to
such other party, and such directors and officers, in form and substance
customary for "comfort" letters delivered by independent accountants in
accordance with Statement on Auditing Standards No. 72.
5.16. DIVIDEND COORDINATION. The CoreStates Board shall cause its regular
quarterly dividend record dates and payment dates for CoreStates Common Stock to
be the same as First Union's regular quarterly dividend record dates and payment
dates for First Union Common Stock (beginning in the quarter following the
quarter in which this Plan is executed), and CoreStates shall not thereafter
change its regular dividend payment dates and record dates.
5.17. NOTIFICATION OF CERTAIN MATTERS. Each of CoreStates and First Union
shall give prompt notice to the other of any fact, event or circumstance known
to it that (i) is reasonably likely, individually or taken together with all
other facts, events and circumstances known to it, to result in any Material
Adverse Effect with respect to it or (ii) would cause or constitute a material
breach of any of its representations, warranties, covenants or agreements
contained herein.
VI. CONDITIONS TO CONSUMMATION OF THE CORPORATE MERGER
The obligations of each of the parties to consummate the Corporate Merger
is conditioned upon the satisfaction at or prior to the Effective Time of each
of the following:
6.01. STOCKHOLDER VOTE. Approval of (i) this Plan by the requisite vote of
the stockholders of CoreStates, and (ii) this Plan and the amendment to its
articles of incorporation referred to in SECTION 5.02, by the requisite vote of
the stockholders of First Union;
6.02. REGULATORY APPROVALS. Procurement by First Union and CoreStates of
all requisite approvals and consents of Regulatory Authorities and the
expiration of the statutory waiting period or periods relating thereto for the
Corporate Merger; PROVIDED, HOWEVER, that no such approval or consent shall have
imposed any condition or requirement (other than conditions or requirements
Previously Disclosed) which would so materially and adversely impact the
economic or business benefits to First Union or CoreStates of the transactions
contemplated by this Plan that, had such condition or requirement been known,
such party would not, in its reasonable judgment, have entered into this Plan;
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6.03. THIRD PARTY CONSENTS. All consents or approvals of all persons (other
than Regulatory Authorities) required for the consummation of the Corporate
Merger shall have been obtained and shall be in full force and effect, unless
the failure to obtain any such consent or approval is not reasonably likely to
have, individually or in the aggregate, a Material Adverse Effect on CoreStates
or First Union;
6.04. NO INJUNCTION, ETC. No order, decree or injunction of any court or
agency of competent jurisdiction shall be in effect, and no law, statute or
regulation shall have been enacted or adopted, that enjoins, prohibits or makes
illegal consummation of the Corporate Merger;
6.05. POOLING LETTERS. First Union and CoreStates shall have received from
(i) KPMG Peat Marwick LLP, independent auditors for First Union, and (ii) Ernst
& Young LLP, independent auditors for CoreStates, letters, dated the date of or
shortly prior to each of the mailing date of the Joint Proxy Statement and the
Effective Date, to the effect that such auditors are not aware of any facts or
circumstances which might cause the Corporate Merger not to qualify for pooling
of interests accounting treatment;
6.06. REPRESENTATIONS, WARRANTIES AND COVENANTS OF FIRST UNION. (i) Each of
the representations and warranties contained herein of First Union shall be true
and correct as of the date of this Plan and upon the Effective Date with the
same effect as though all such representations and warranties had been made on
the Effective Date, except for any such representations and warranties made as
of a specified date, which shall be true and correct as of such date, in any
case subject to the standards established by SECTION 4.02, (ii) each and all of
the agreements and covenants of First Union to be performed and complied with
pursuant to this Plan on or prior to the Effective Date shall have been duly
performed and complied with in all material respects, and (iii) CoreStates shall
have received a certificate signed by the Chief Financial Officer of First
Union, dated the Effective Date, to the effect set forth in clauses (i) and
(ii);
6.07. REPRESENTATIONS, WARRANTIES AND COVENANTS OF CORESTATES. (i) Each of
the representations and warranties contained herein of CoreStates shall be true
and correct as of the date of this Plan and upon the Effective Date with the
same effect as though all such representations and warranties had been made on
the Effective Date, except for any such representations and warranties made as
of a specified date, which shall be true and correct as of such date, in any
case subject to the standards established by SECTION 4.02, (ii) each and all of
the agreements and covenants of CoreStates to be performed and complied with
pursuant to this Plan on or prior to the Effective Date shall have been duly
performed and complied with in all material respects, and (iii) First Union
shall have received a certificate signed by the Chief Financial Officer of
CoreStates, dated the Effective Date, to the effect set forth in clauses (i) and
(ii);
6.08. EFFECTIVE REGISTRATION STATEMENT. The Registration Statement shall
have become effective and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been initiated or threatened by the SEC or any other
Regulatory Authority;
6.09. BLUE-SKY PERMITS. First Union shall have received all state
securities laws and "blue sky" permits necessary to consummate the Corporate
Merger;
6.10. TAX OPINIONS. First Union and CoreStates shall have received an
opinion from (i) Alston & Bird LLP, special tax counsel to First Union, in the
case of First Union, and (ii) Simpson Thacher & Bartlett, special tax counsel to
CoreStates, in the case of CoreStates, to the effect that (a) the Corporate
Merger constitutes a reorganization under SECTION 368(A) of the Code, and (b) no
gain or loss will be recognized by stockholders of CoreStates who receive shares
of First Union Common Stock in exchange for their shares of CoreStates Common
Stock, except that gain or loss may be recognized as to cash received in lieu of
fractional share interests; in rendering their opinion, such counsel may require
and rely upon representations and agreements, including those contained in
certificates of officers of First Union, CoreStates, and others; and
6.11. NYSE LISTING. The shares of First Union Common Stock issuable
pursuant to this Plan shall have been approved for listing on the NYSE, subject
to official notice of issuance;
PROVIDED, HOWEVER, that a failure to satisfy any of the conditions set forth in
SECTION 6.07 shall only constitute conditions if asserted by First Union, and a
failure to satisfy any of the conditions set forth in SECTION 6.06 shall only
constitute conditions if asserted by CoreStates.
VII. TERMINATION
7.01. TERMINATION. This Plan may be terminated, and the Mergers may be
abandoned:
18
<PAGE>
(A) MUTUAL CONSENT. At any time prior to the Effective Time, by the
mutual consent of First Union and CoreStates, if the Board of Directors of
each so determines by vote of a majority of the members of its entire
Board.
(B) BREACH. At any time prior to the Effective Time, by First Union or
CoreStates, if its Board of Directors so determines by vote of a majority
of the members of its entire Board, in the event of either: (i) a breach by
the other party of any representation or warranty contained herein (subject
to the standards established by SECTION 4.02), which breach cannot be or
has not been cured within 30 days after the giving of written notice to the
breaching party of such breach; or (ii) a material breach by the other
party of any of the covenants or agreements contained herein, which breach
cannot be or has not been cured within 30 days after the giving of written
notice to the breaching party of such breach; provided that First Union or
CoreStates may not terminate this Plan pursuant to this SECTION 7.01(B) at
any time when such party is in material breach of any representation,
warranty, covenant or other agreement of such party contained herein.
(C) DELAY. At any time prior to the Effective Time, by First Union or
CoreStates, if its Board of Directors so determines by vote of a majority
of the members of its entire Board, in the event that the Corporate Merger
is not consummated by September 30, 1998, except to the extent that the
failure of the Corporate Merger then to be consummated arises out of or
results from the knowing failure of the party seeking to terminate pursuant
to this SECTION 7.01(C) to perform or observe the covenants and agreements
of such party set forth herein.
(D) NO APPROVAL. By CoreStates or First Union, if its Board of
Directors so determines by a vote of a majority of the members of its
entire Board, in the event (i) the consent of the Board of Governors of the
Federal Reserve System for consummation of the Corporate Merger shall have
been denied by final nonappealable action of such Regulatory Authority or
(ii) any stockholder approval required by SECTION 6.01 herein is not
obtained at the CoreStates Meeting or the First Union Meeting.
(E) FAILURE TO RECOMMEND, ETC. At any time prior to the CoreStates
Meeting, by First Union if the Board of Directors of CoreStates shall have
failed to make its recommendation referred to in SECTION 5.02, withdrawn
such recommendation or modified or changed such recommendation in a manner
adverse to the interests of First Union; or at any time prior to the First
Union Meeting, by CoreStates if the Board of Directors of First Union shall
have failed to make its recommendation referred to in SECTION 5.02,
withdrawn such recommendation or modified or changed such recommendation in
a manner adverse to the interests of CoreStates.
(F) POSSIBLE ADJUSTMENT. By CoreStates, if its Board of Directors so
determines by a vote of a majority of the members of its entire Board, at
any time during the ten-day period commencing two days after the
Determination Date, if either (x) both of the following conditions are
satisfied:
(1) the Average Closing Price on the Determination Date of shares
of First Union Common Stock shall be less than the product of 0.85 and
the Starting Price; and
(2) (i) the number obtained by dividing the Average Closing Price
on such Determination Date by the Starting Price (such number being
referred to herein as the "First Union Ratio") shall be less than (ii)
the number obtained by dividing the Index Price on the Determination
Date by the Index Price on the Starting Date and subtracting 0.15 from
the quotient in this clause (x)(2) (ii) (such number being referred to
herein as the "Index Ratio");
or (y) the Average Closing Price on the Determination Date of shares of
First Union Common Stock shall be less than the product of 0.75 and the
Starting Price;
SUBJECT, HOWEVER, to the following four sentences. If CoreStates elects to
exercise its termination right pursuant to the immediately preceding
sentence, it shall give prompt written notice to First Union which notice
shall specify which of clauses (x) or (y) is applicable (or if both would
be applicable, which clause is being invoked); provided that such notice of
election to terminate may be withdrawn at any time within the
aforementioned ten-day period. During the five-day period commencing with
its receipt of such notice, First Union shall have the option in the case
of a failure to satisfy the condition in clause (x), of adjusting the
Exchange Ratio to equal the lesser of (i) a number equal to a quotient
(rounded to the nearest one-ten-thousandth), the numerator of which is the
product of 0.85, the Starting Price and the Exchange Ratio (as then in
effect) and the denominator of which is the Average Closing Price, and (ii)
a number equal to a quotient (rounded to the nearest one-ten-thousandth),
the numerator of which is the Index Ratio multiplied by the Exchange Ratio
(as then in effect) and the denominator of which is the First Union Ratio.
During such five-day period, First Union shall have the option, in the case
of a failure to satisfy the condition in clause (y), to elect to increase
the Exchange Ratio to equal a number equal to a quotient (rounded to the
nearest one-ten-thousandth), the numerator of which is the product of 0.75,
the Starting Price and the Exchange Ratio (as then in effect) and the
denominator of which is the Average Closing
19
<PAGE>
Price. If First Union makes an election contemplated by either of the two
preceding sentences, within such five-day period, it shall give prompt
written notice to CoreStates of such election and the revised Exchange
Ratio, whereupon no termination shall have occurred pursuant to this
SECTION 7.01(F) and this Plan shall remain in effect in accordance with its
terms (except as the Exchange Ratio shall have been so modified), and any
references in this Plan to "Exchange Ratio" shall thereafter be deemed to
refer to the Exchange Ratio as adjusted pursuant to this SECTION 7.01(F).
For purposes of this SECTION 7.01(F), the following terms shall have the
meanings indicated:
"Average Closing Price" means the average of the daily last sale
prices of First Union Common Stock as reported on the NYSE Composite
Transactions tape (as reported in THE WALL STREET JOURNAL or, if not
reported therein, in another mutually agreed upon authoritative source) for
the ten consecutive full trading days in which such shares are traded on
the NYSE ending at the close of trading on the Determination Date.
"Determination Date" means the date on which approval of the Federal
Reserve Board required for consummation of the Corporate Merger shall be
received.
"Index Group" means the group of each of the 14 bank holding companies
listed below, the common stock of all of which shall be publicly traded and
as to which there shall not have been, since the Starting Date and before
the Determination Date, an announcement of a proposal for such company to
be acquired or for such company to acquire another company or companies in
transactions with a value exceeding 25% of the acquiror's market
capitalization as of the Starting Date. In the event that the common stock
of any such company ceases to be publicly traded or any such announcement
is made with respect to any such company, such company will be removed from
the Index Group, and the weights (which have been determined based on the
number of outstanding shares of common stock) redistributed proportionately
for purposes of determining the Index Price. The 14 bank holding companies
and the weights attributed to them are as follows:
<TABLE>
<CAPTION>
BANK HOLDING COMPANY WEIGHTING
<S> <C>
NationsBank Corporation............................................ 18.77%
BankAmerica Corporation............................................ 16.48
Banc One Corp...................................................... 10.66
U.S. Bancorp....................................................... 8.22
First Chicago NBD Corporation...................................... 7.02
Fleet Financial Group, Inc......................................... 5.20
PNC Financial Corp................................................. 4.88
SunTrust Banks, Inc................................................ 4.71
KeyCorp............................................................ 4.50
National City Corporation.......................................... 4.45
Mellon Bank Corporation............................................ 4.33
Norwest Corporation................................................ 4.06
Wachovia Corporation............................................... 3.90
Comerica Incorporated.............................................. 2.82
100.00%
</TABLE>
"Index Price" on a given date means the weighted average (weighted in
accordance with the factors listed above) of the closing prices of the
companies composing the Index Group.
"Starting Date" means the first full trading day following the
issuance of a press release announcing this Plan.
"Starting Price" shall mean the last sale price per share of First
Union Common Stock on the Starting Date, as reported by the NYSE Composite
Transactions tape (as reported in THE WALL STREET JOURNAL or, if not
reported therein, in another mutually agreed upon authoritative source).
If any company belonging to the Index Group or First Union declares or
effects a stock dividend, reclassification, recapitalization, split-up,
combination, exchange of shares or similar transaction between the Starting
Date and the Determination Date, the prices for the common stock of such
company or First Union shall be appropriately adjusted for the purposes of
applying this SECTION 7.01(F).
7.02. EFFECT OF TERMINATION AND ABANDONMENT. In the event of termination of
this Plan and the abandonment of the Mergers pursuant to this ARTICLE VII, no
party to this Plan shall have any liability or further obligation to any other
party
20
<PAGE>
hereunder except (i) as set forth in SECTION 8.01, (ii) that each of the Stock
Option Agreements shall be governed by its own terms as to termination and (iii)
that termination will not relieve a breaching party from liability for any
willful breach of this Plan giving rise to such termination.
VIII. OTHER MATTERS
8.01. SURVIVAL. All representations, warranties, agreements and covenants
contained in this Plan shall not survive the Effective Time or termination of
this Plan if this Plan is terminated prior to the Effective Time; PROVIDED,
HOWEVER, if the Effective Time occurs, the agreements of the parties in SECTIONS
5.13, 5.14, 8.01, 8.04 AND 8.09 shall survive the Effective Time, and if this
Plan is terminated prior to the Effective Time, the agreements of the parties in
SECTIONS 5.05(B), 7.02, 8.01, 8.02, 8.04, 8.05, 8.06, 8.07 AND 8.09, shall
survive such termination.
8.02. WAIVER; AMENDMENT. Prior to the Effective Time, any provision of this
Plan may be (i) waived by the party benefitted by the provision, or (ii) amended
or modified at any time, by an agreement in writing among the parties hereto
approved by their respective Boards of Directors and executed in the same manner
as this Plan, except that, after the CoreStates Meeting the consideration to be
received by the stockholders of CoreStates for each share of CoreStates Common
Stock shall not thereby be decreased.
8.03. COUNTERPARTS. This Plan may be executed in one or more counterparts,
each of which shall be deemed to constitute an original.
8.04. GOVERNING LAW. This Plan shall be governed by, and interpreted in
accordance with, the laws of the State of North Carolina, without regard to the
conflict of law principles thereof (except to the extent that mandatory
provisions of Pennsylvania or federal law govern).
8.05. EXPENSES. Each party hereto will bear all expenses incurred by it in
connection with this Plan and the transactions contemplated hereby, except that
printing expenses and SEC filing fees shall be shared equally between CoreStates
and First Union.
8.06. CONFIDENTIALITY. Except as otherwise provided in SECTION 5.05(B),
each of the parties hereto and their respective agents, attorneys and
accountants will maintain the confidentiality of all information provided in
connection herewith which has not been publicly disclosed (other than by any
party in violation of this Plan) unless and until it is advised by counsel that
any such information or document is required by applicable law to be disclosed.
8.07. NOTICES. All notices, requests and other communications hereunder to
a party shall be in writing and shall be deemed given if personally delivered,
telecopied (with confirmation) or mailed by registered or certified mail (return
receipt requested) to such party at its address set forth below or such other
address as such party may specify by notice to the parties hereto.
If to First Union, to: First Union Corporation
One First Union Center
Charlotte, North Carolina 28288
Attention: Edward E. Crutchfield
Chairman and Chief
Executive Officer
Telecopier: (704)374-3425
With a copy to: Marion A. Cowell, Jr.
General Counsel
First Union Corporation
One First Union Center
Charlotte, North Carolina 28288-0013
Telecopier: (704)374-3425
21
<PAGE>
If to CoreStates, to: CoreStates Financial Corp
Philadelphia National Bank Building
Broad & Chestnut Streets
P.O. Box 7618
Philadelphia, Pennsylvania 19101
Attention: Terrence A. Larsen
Chairman and Chief
Executive Officer
Telecopier: (215) 786-8963
With a copy to: Lee Meyerson, Esq.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Telecopier: (212) 455-2502
8.08. DEFINITIONS. Any term defined anywhere in this Plan shall have the
meaning ascribed to it for all purposes of this Plan (unless expressly noted to
the contrary). In addition:
(A) the term "Material Adverse Effect" shall mean, with respect to
CoreStates or First Union, respectively, any effect that (i) is material
and adverse to the financial position, results of operations or business of
CoreStates and its subsidiaries taken as a whole, or First Union and its
subsidiaries taken as a whole, respectively, or (ii) materially impairs the
ability of CoreStates or First Union, respectively, to perform its
obligations under this Plan or the consummation of the Corporate Merger and
the other transactions contemplated by this Plan; PROVIDED, HOWEVER, that
Material Adverse Effect shall not be deemed to include the impact of (a)
changes in banking and similar laws of general applicability or
interpretations thereof by courts or governmental authorities, (b) changes
in generally accepted accounting principles or regulatory accounting
requirements applicable to banks and bank holding companies generally, (c)
actions or omissions of CoreStates or First Union taken with the prior
consent of CoreStates or First Union, as applicable, in contemplation of
the transactions contemplated hereby, and (d) the effects of the Mergers
and of the actions contemplated by SECTION 5.08 or ARTICLE III;
(B) the term "person" shall mean any individual, bank, savings
association, corporation, partnership, association, joint-stock company,
business trust or unincorporated organization;
(C) the term "Previously Disclosed" by a party shall mean information
set forth in its Disclosure Schedule that is delivered by that party to the
other parties prior to the execution of this Plan and specifically
designated as information "Previously Disclosed" pursuant to this Plan or
set forth in its SEC Documents filed with the SEC prior to the date hereof;
(D) the term "Rights" means, with respect to any person, securities or
obligations convertible into or exchangeable for, or giving any person any
right to subscribe for or acquire, or any options, calls or commitments
relating to, shares of capital stock of such person; and
(E) the terms "subsidiary" and "significant subsidiary" shall have the
meanings set forth in Rule 1-02 of Regulation S-X of the SEC.
8.09. ENTIRE UNDERSTANDING; NO THIRD PARTY BENEFICIARIES. This Plan and the
Stock Option Agreements together represent the entire understanding of the
parties hereto with reference to the transactions contemplated hereby and
thereby and supersede any and all other oral or written agreements heretofore
made. Except for SECTION 5.13, nothing in this Plan, expressed or implied, is
intended to confer upon any person, other than the parties hereto or their
respective successors, any rights, remedies, obligations or liabilities under or
by reason of this Plan. The provisions of SECTION 5.13 are intended to be for
the benefit of and shall be enforceable by each Indemnified Party.
8.10. HEADINGS. The headings contained in this Plan are for reference
purposes only and are not part of this Plan.
22
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed in counterparts by their duly authorized officers, all as of the day
and year first above written.
CORESTATES FINANCIAL CORP
By: /s/ TERRENCE A. LARSEN
Name: Terrence A. Larsen
Title: Chairman and Chief Executive
Officer
FIRST UNION CORPORATION
By: /s/ EDWARD E. CRUTCHFIELD
Name: Edward E. Crutchfield
Title: Chairman and Chief Executive
Officer
23
Exhibit (23)(a)
CONSENT OF INDEPENDENT AUDITORS
- -----------------------------------------------------------------------------
We consent to the inclusion in the Current Report on Form 8-K dated November
28, 1997 of First Union Corporation and to the incorporation by reference in
the Registration Statements of (i) First Union Corporation on:
Registration Registration
Statement Statement
Form Number Form Number
--------- ---------- ---------- -----------
S-3 33-50103 S-4 333-20611
S-3 33-61941 S-3 333-34151
S-3 333-15743 S-3 333-35363
S-3 333-17599 S-3 33-56927
S-4 333-19039-01
(ii) First Union Capital I on Form S-3 (No. 333-15743-01), (iii) First Union
Capital II on Form S-3 (No. 333-15743-02); (iv) First Union Capital III on Form
S-3 (No. 333-15743-03); (v) First Union Institutional Capital I on Form S-4 (No.
333-19039); and (vi) First Union Institutional Capital II on Form S-4 (No.
333-20611-01) of our report dated January 22, 1997, with respect to the
consolidated balance sheets of CoreStates Financial Corp as of December 31, 1996
and 1995, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996, which report is included in the Current Report on Form
8-K dated November 28, 1997 of First Union Corporation.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
November 26 1997
<PAGE>
<TABLE>
<CAPTION>
Exhibit (23)(b)
CONSENT OF KPMG PEAT MARWICK LLP
- -----------------------------------------------------------------------------------------------------------------------
Board of Directors
CoreStates Financial Corp
We consent to the incorporation by reference in
the Registration Statements of (i) First Union Corporation on:
Registration Registration
Statement Statement
Form Number Form Number
--------------- -------------------------- ----------------- -----------------
<S> <C> <C> <C> <C>
S-3 33-50103 S-4 333-20611
S-3 33-61941 S-3 333-34151
S-3 333-15743 S-3 333-35363
S-3 333-17599 S-3 33-56927
S-4 333-19039-01
</TABLE>
(ii) First Capital I on Form S-3 (No. 333-15743-01); (iii) First Union Capital
II on Form S-3 (No. 333-15743-02); (iv) First Capital III on Form S-3 (No.
333-15743-03); (v) First Union Institutional Capital I on Form S-4 (No.
333-19039); and (vi) First Union Institutional Capital II on Form S-4 (No.
333-20611-01) of our report dated January 17,1996, except as to Note 2, which is
as of February 23, 1996, with respect to the consolidated balance sheets of
Meridian Bancorp, Inc. and subsidiaries as of December 31, 1995, and 1994, and
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the years in the two-year period ended December 31, 1995
(which report includes an explanatory paragraph which discusses that Meridian
Bancorp, Inc. adopted the provisions of Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, and No. 112, Employers' Accounting
for Postemployment Benefits, in 1994), which reports appear in CoreStates
Financial Corp's 1996 Form 10-K.
KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
November 26, 1997
Exhibit (23)(c)
CONSENT OF KPMG PEAT MARWICK LLP
- ------------------------------------------------------------------------------
Board of Directors
CoreStates Financial Corp
We consent to the incorporation by reference in the Registration
Statements of (i) First Union Corporation on:
Registration Registration
Statement Statement
Form Number Form Number
------ ---------------- ----------------- -----------------
S-3 33-50103 S-4 333-20611
S-3 33-61941 S-3 333-34151
S-3 333-15743 S-3 333-35363
S-3 333-17599 S-3 33-56927
S-4 333-19039-01
(ii) First Union Capital I on Form S-3 (No. 333-15743-01); (iii) First Union
Capital II on Form S-3 (No. 333-15743-02); (iv) First Union Capital III on Form
S-3 (No. 333-15743-03); (v) First Union Institutional Capital I on Form S-4 (No.
333-19039); and (vi) First Union Institutional Capital II on Form S-4 (No.
333-20611-01) of our report dated January 16, 1996, except as to Note 20, which
is as of February 23, 1996, with respect to the consolidated balance sheets of
United Counties Bancorporation and subsidiaries as of December 31, 1995 and
1994, and the related consolidated statements of income, changes in equity and
cash flows for each of the years in the two-year period ended December 31, 1995
(which report includes an explanatory paragraph which discusses that United
Counties Bancorporation adopted the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, in 1994),
which reports appear in CoreStates Financial Corp's 1996 Form 10-K.
KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
November 26, 1997
<PAGE>
<TABLE>
<CAPTION>
Exhibit (99)(a)
PRO FORMA FINANCIAL INFORMATION
PRO FORMA COMBINED CONDENSED BALANCE SHEET
FUNC, CoreStates, Signet, Wheat and Covenant
September 30, 1997
(Unaudited)
The following unaudited pro forma combined condensed balance sheet combines the
consolidated historical balance sheets of FUNC, CoreStates, Signet, Wheat and
Covenant assuming the companies had been combined as of September 30, 1997, on
a pooling of interests accounting basis with respect to the CoreStates, Signet,
and Wheat Acquisitions, and on a purchase accounting basis with respect to the
Covenant Acquisition.
Pro Forma
(In millions) FUNC CoreStates Signet Wheat Adjustments
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C>
Cash and due from banks $ 6,200 3,166 462 34 -
Interest-bearing bank balances 200 3,044 4 - -
Federal funds sold and securities
purchased under resale agreements 6,011 139 887 77 -
- --------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 12,411 6,349 1,353 111 -
- --------------------------------------------------------------------------------------------------------------------------
Trading account assets 7,548 327 277 180 -
Securities available for sale 16,690 2,211 2,233 6 -
Investment securities 2,268 1,413 - - -
Loans, net of unearned income 94,904 35,085 6,522 - -
Allowance for loan losses (1,370) (679) (126) - -
- --------------------------------------------------------------------------------------------------------------------------
Loans, net 93,534 34,406 6,396 - -
- --------------------------------------------------------------------------------------------------------------------------
Premises and equipment 4,056 627 172 66 -
Due from customers on acceptances 837 791 - - -
Other intangible assets 2,701 287 31 - -
Other assets 3,859 1,180 809 810 -
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Total $ 143,904 47,591 11,271 1,173 -
- --------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits 18,963 8,942 1,771 - -
Interest-bearing deposits 72,727 24,799 5,941 - -
- --------------------------------------------------------------------------------------------------------------------------
Total deposits 91,690 33,741 7,712 - -
Short-term borrowings 27,623 4,239 1,922 271 -
Bank acceptances outstanding 837 789 - - -
Other liabilities 4,225 1,925 297 651 -
Long-term debt 7,819 3,784 350 86 -
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 132,194 44,478 10,281 1,008 -
- --------------------------------------------------------------------------------------------------------------------------
Guaranteed preferred beneficial interests
in Corporation's junior subordinated
deferrable interest debentures 990 - - - -
- --------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock - - - 3 (3)
Common stock 1,894 224 305 17 779
Paid-in capital 999 1,253 216 21 (985)
Retained earnings 7,681 2,955 435 124 (1,145)
Unrealized gain (loss) on debt and
equity securities, net 146 35 34 - -
Treasury stock - (1,302) - - 1,302
Unallocated shares held by ESOP - (52) - - 52
- --------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 10,720 3,113 990 165 -
- --------------------------------------------------------------------------------------------------------------------------
Total $ 143,904 47,591 11,271 1,173 -
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Pro Forma Pro Forma Pro Forma
(In millions) Combined Covenant Adjustments Combined
- ---------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C>
Cash and due from banks 9,862 16 (87) 9,791
Interest-bearing bank balances 3,248 - - 3,248
Federal funds sold and securities
purchased under resale agreements 7,114 - - 7,114
- -----------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 20,224 16 (87) 20,153
- -----------------------------------------------------------------------------------------------------------
Trading account assets 8,332 - 8,332
Securities available for sale 21,140 120 - 21,260
Investment securities 3,681 11 - 3,692
Loans, net of unearned income 136,511 258 - 136,769
Allowance for loan losses (2,175) (3) - (2,178)
- -----------------------------------------------------------------------------------------------------------
Loans, net 134,336 255 - 134,591
- -----------------------------------------------------------------------------------------------------------
Premises and equipment 4,921 9 - 4,930
Due from customers on acceptances 1,628 - - 1,628
Other intangible assets 3,019 - 55 3,074
Other assets 6,658 9 - 6,667
- ------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Total 203,939 420 (32) 204,327
- -----------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits 29,676 48 - 29,724
Interest-bearing deposits 103,467 256 - 103,723
- -----------------------------------------------------------------------------------------------------------
Total deposits 133,143 304 - 133,447
Short-term borrowings 34,055 64 - 34,119
Bank acceptances outstanding 1,626 - - 1,626
Other liabilities 7,098 5 - 7,103
Long-term debt 12,039 15 - 12,054
- -----------------------------------------------------------------------------------------------------------
Total liabilities 187,961 388 - 188,349
- -----------------------------------------------------------------------------------------------------------
Guaranteed preferred beneficial interests
in Corporation's junior subordinated
deferrable interest debentures 990 - - 990
- -----------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock - 8 (8) -
Common stock 3,219 15 (15) 3,219
Paid-in capital 1,504 12 (12) 1,504
Retained earnings 10,050 (3) 3 10,050
Unrealized gain (loss) on debt and
equity securities, net 215 - - 215
Treasury stock - - - -
Unallocated shares held by ESOP - - - -
- -----------------------------------------------------------------------------------------------------------
Total stockholders' equity 14,988 32 (32) 14,988
- -----------------------------------------------------------------------------------------------------------
Total 203,939 420 (32) 204,327
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to pro forma financial information.
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA FINANCIAL INFORMATION
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
FUNC, CoreStates, Signet, Wheat and Covenant
September 30, 1997
(Unaudited)
The following unaudited pro forma combined condensed statements of income
present the combined statements of income of FUNC, CoreStates, Signet, Wheat and
Covenant assuming the companies had been combined for each period presented on a
pooling of interests accounting basis with respect to the CoreStates, Signet,
and Wheat Acquisitions, and on a purchase accounting basis with respect to the
Covenant Acquisition (for the nine months ended September 30, 1997, and the year
ended December 31, 1996, only). Such information for Wheat for the 12-month
periods ended March 31 has been added to comparable information related to FUNC,
CoreStates, Signet and Covenant for the preceding 12-month periods ended
December 31, as appropriate.
Nine Months Ended
September 30,
-----------------------------------------
(In millions, except per share data) 1997 1996
- ------------------------------------------------------------------------------------------------- ------------------
CONSOLIDATED SUMMARIES OF INCOME
<S> <C> <C>
Interest income $ 10,789 10,308
Interest expense 4,839 4,591
------------------ ------------------
Net interest income 5,950 5,717
Provision for loan losses 658 488
Net interest income after provision for
------------------ ------------------
loan losses 5,292 5,229
Securities available for sale transactions 101 142
Investment security transactions 3 3
Noninterest income 3,438 2,715
Merger-related restructuring charges - 130
SAIF special assessment - 147
Noninterest expense 5,497 5,299
------------------ ------------------
Income before income taxes 3,337 2,513
Income taxes 1,173 905
------------------ ------------------
Net income 2,164 1,608
Dividends on preferred stock - 8
------------------ ------------------
Net income applicable to common
stockholders before redemption premium 2,164 1,600
Redemption premium on preferred stock - -
------------------ ------------------
Net income applicable to common
stockholders after redemption premium $ 2,164 1,600
------------------ ------------------
PER COMMON SHARE DATA
Net income before redemption premium $ 2.22 1.61
Net income after redemption premium $ 2.22 1.61
Average common shares outstanding (In thousands) 973,263 990,901
FUNC HISTORICAL PER COMMON SHARE DATA
Net income before redemption premium $ 2.60 1.85
Net income after redemption premium $ 2.60 1.85
Average common shares outstanding (In thousands) 562,534 557,968
<CAPTION>
---------------------------------------------------------
(In millions, except per share data) 1997/1996 1996/1995 1995/1994
- ---------------------------------------------------------- ------------ ------------------ ------------------
CONSOLIDATED SUMMARIES OF INCOME
<S> <C> <C> <C>
Interest income 13,831 13,068 11,086
Interest expense 6,187 5,752 4,052
------------ ------------------ ------------------
Net interest income 7,644 7,316 7,034
Provision for loan losses 679 402 472
Net interest income after provision for
------------ ------------------ ------------------
loan losses 6,965 6,914 6,562
Securities available for sale transactions 184 156 97
Investment security transactions 4 6 4
Noninterest income 3,794 3,269 3,115
Merger-related restructuring charges 422 139 107
SAIF special assessment 148 - -
Noninterest expense 6,802 6,750 6,673
------------ ------------------ ------------------
Income before income taxes 3,575 3,456 2,998
Income taxes 1,278 1,232 1,018
------------ ------------------ ------------------
Net income 2,297 2,224 1,980
Dividends on preferred stock 10 26 46
------------ ------------------ ------------------
Net income applicable to common
stockholders before redemption premium 2,287 2,198 1,934
Redemption premium on preferred stock - - 41
------------ ------------------ ------------------
Net income applicable to common
stockholders after redemption premium 2,287 2,198 1,893
------------ ------------------ ------------------
PER COMMON SHARE DATA
Net income before redemption premium 2.31 2.21 1.93
Net income after redemption premium 2.31 2.21 1.89
Average common shares outstanding (In thousands) 989,106 993,504 1,003,740
FUNC HISTORICAL PER COMMON SHARE DATA
Net income before redemption premium 2.67 2.52 2.36
Net income after redemption premium 2.67 2.52 2.29
Average common shares outstanding (In thousands) 557,624 557,354 563,325
<CAPTION>
Twelve Months Ended
---------------------------------------------
(In millions, except per share data) 1994/1993 1993/1992
- --------------------------------------------------- ------------------ ------------------
CONSOLIDATED SUMMARIES OF INCOME
<S> <C> <C>
Interest income 10,335 10,480
Interest expense 3,660 4,477
------------------ ------------------
Net interest income 6,675 6,003
Provision for loan losses 606 972
Net interest income after provision for
------------------ ------------------
loan losses 6,069 5,031
Securities available for sale transactions 111 129
Investment security transactions 7 (21)
Noninterest income 2,987 2,708
Merger-related restructuring charges - -
SAIF special assessment - -
Noninterest expense 6,324 6,190
------------------ ------------------
Income before income taxes 2,850 1,657
Income taxes 916 511
------------------ ------------------
Net income 1,934 1,146
Dividends on preferred stock 46 53
------------------ ------------------
Net income applicable to common
stockholders before redemption premium 1,888 1,093
Redemption premium on preferred stock - -
------------------ ------------------
Net income applicable to common
stockholders after redemption premium 1,888 1,093
------------------ ------------------
PER COMMON SHARE DATA
Net income before redemption premium 1.91 1.17
Net income after redemption premium 1.91 1.17
Average common shares outstanding (In thousands) 988,055 933,400
FUNC HISTORICAL PER COMMON SHARE DATA
Net income before redemption premium 2.15 1.26
Net income after redemption premium 2.15 1.26
Average common shares outstanding (In thousands) 544,876 510,768
</TABLE>
See accompanying notes to pro forma financial information.
<PAGE>
NOTES TO PRO FORMA FINANCIAL INFORMATION
(1) The unaudited pro forma information presented herein is not necessarily
indicative of the results of operations or the combined financial position that
would have resulted had the Acquisitions been consummated at the beginning of
the applicable periods indicated, nor is it necessarily indicative of the
results of operations in future periods or the future financial position of the
combined entities. Consummation of each Acquisition is not contingent upon
consummation of any other such Acquisitions. Pro forma financial information
with respect to the CoreStates, Signet and Wheat Acquisitions assumes such
Acquisitions were consummated as of the beginning of each period presented. Such
information for Wheat for the 12-month periods ended March 31 has been added to
comparable information related to FUNC, CoreStates and Signet for the preceding
12-month periods ended December 31, as appropriate. Pro forma financial
information for the Covenant Acquisition is included only for the nine months
ended September 30, 1997, and the year ended December 31, 1996.
(2) It is assumed that the CoreStates Acquisition will be accounted for on a
pooling of interests accounting basis, and accordingly, the related pro forma
adjustments herein reflect, where applicable, an exchange ratio of 1.62 shares
of FUNC common stock for each of the 197,597,000 shares of CoreStates common
stock which were outstanding at September 30, 1997. The 1.62 exchange ratio is
subject to possible adjustment under certain circumstances.
As a result, information was adjusted for the CoreStates Acquisition by the (i)
addition of 320,107,000 shares of FUNC common stock amounting to $1.1 billion
(excluding an estimated 4.9 million shares of CoreStates common stock that
CoreStates expects to issue in order to qualify the CoreStates Acquisition as a
pooling of interests); (ii) elimination of 197,597,000 shares of outstanding
CoreStates common stock amounting to $198 million; (iii) elimination of the cost
of CoreStates treasury stock of $1.3 billion; (iv) elimination of the cost of
unallocated shares held by the CoreStates ESOP of $52 million; and (v)
recordation of the remaining amount of $1.1 billion as a reduction of paid-in
capital at September 30, 1997.
As of September 30, 1997, FUNC and CoreStates had 50,530,000 and 16,915,000
shares of common stock reserved for issuance primarily for stock option plans,
respectively, (excluding, as to FUNC, shares reserved for issuance in connection
with the Acquisitions, or upon exercise of the rights attached to FUNC common
stock), which are not included in the unaudited pro forma financial information
presented herein.
For the nine months ended September 30, 1997, CoreStates had net income
applicable to common stockholders of $597 million.
In 1993, CoreStates changed its method of accounting for postemployment
benefits, and in 1992 CoreStates changed its method of accounting for
post-retirement benefits. As a result, CoreStates reported an additional expense
as a cumulative effect of a change in accounting principle, net of tax of
$16 million in 1993 and $108 million in 1992. Such amounts have been included in
noninterest expense in 1993 and 1992, respectively, in the pro forma financial
information presented herein.
(3) The Signet Acquisition will be accounted for on a pooling of interests
accounting basis, and accordingly, the related pro forma adjustments herein
reflect, where applicable, an exchange ratio of 1.10 shares of FUNC common stock
for each of the 60,944,000 shares of Signet common stock which were outstanding
at September 30, 1997.
As a result, information was adjusted for the Signet Acquisition by the (i)
addition of 67,038,000 shares of FUNC common stock amounting to $223 million;
(ii) elimination of 60,944,000 shares of Signet common stock amounting to $305
million; and (iii) recordation of the remaining amount of $82 million as an
increase to paid-in capital at September 30, 1997.
<PAGE>
As of September 30, 1997, FUNC and Signet had 50,530,000 and 3,501,000 shares of
common stock reserved for issuance primarily for stock option plans,
respectively, (excluding, as to FUNC, shares reserved for issuance in connection
with the Acquisitions, or upon exercise of the rights attached to FUNC common
stock and, as to Signet, shares reserved for issuance upon exercise of the
rights attached to shares of Signet common stock), which are not included in the
unaudited pro forma financial information presented herein.
For the nine months ended September 30, 1997, Signet had net income applicable
to common stockholders of $73 million.
(4) It is assumed that the Wheat Acquisition will be accounted for on a pooling
of interests accounting basis, and accordingly, the related pro forma
adjustments herein reflect, where applicable, an exchange ratio of 1.1621
shares of FUNC common stock for each of the 209,000 shares of Wheat preferred
stock and 8,599,000 shares of Wheat common stock which were outstanding at
September 30, 1997. The 1.1621 exchange ratio is subject to possible adjustment
under certain circumstances.
As a result, information was adjusted for the Wheat Acquisition by the (i)
addition of 10,267,000 shares of FUNC common stock amounting to $35 million;
(ii) elimination of 209,000 shares of Wheat preferred stock amounting to $3
million; (iii) elimination of 8,599,000 shares of Wheat common stock amounting
to $17 million; and (iv) recordation of the remaining amount of $15 million as a
reduction of paid-in capital at September 30, 1997.
As of September 30, 1997, FUNC had 50,530,000, and Wheat had no shares of common
stock reserved for issuance primarily for stock option plans (excluding, as to
FUNC, shares reserved for issuance in connection with the Acquisitions, or upon
exercise of the rights attached to FUNC common stock), which are not included in
the unaudited pro forma financial information presented herein.
For the nine months ended September 30, 1997, Wheat had net income applicable to
common stockholders of $33 million, which includes $9 million related to Wheat's
results of operations in the fourth quarter ended March 31, 1997.
(5) The Covenant Acquisition will be accounted for on a purchase accounting
basis, and accordingly, the related pro forma adjustments herein reflect, where
applicable, (i) an exchange ratio of (a) 1.516 shares of FUNC common stock for
each of the 138,000 shares of Covenant series A preferred stock which were
outstanding at September 30, 1997, (b) an exchange ratio of 1.2 shares of FUNC
common stock for each of the 162,000 shares of Covenant series B preferred stock
which were outstanding at September 30, 1997, (c) an exchange ratio of .3813
shares of FUNC common stock for each of the 3,057,000 shares of Covenant common
stock which were outstanding at September 30, 1997, and (d) the resulting
issuance of 1,743,000 shares of FUNC common stock; (ii) the repurchase of such
aggregate shares of FUNC common stock in the open market at a cost of $87
million; and (iii) an increase in goodwill and deposit base premium of $49
million and $6 million, respectively.
Additionally, the pro forma adjustments related to the unaudited pro forma
combined condensed statements of income with respect to the Covenant Acquisition
reflect a (i) 5.51 percent and 5.27 percent cost of funds for the nine months
ended September 30, 1997, and for the year ended December 31, 1996,
respectively; (ii) ten-year sum-of-the-digits years' method related to deposit
base premium; and (iii) 25-year straight- line life related to goodwill.
As a result, for the nine months ended September 30, 1997, and the year ended
December 31, 1996, these adjustments amounted to (i) an increase in
<PAGE>
noninterest expense of $2 million and $10 million, respectively; and (ii)
reductions in (a) interest income of $2 million and $4 million, respectively,
(b) income taxes of $1 million and $5 million, respectively, and (c) net income
applicable to common stockholders of $3 million and $9 million, respectively.
(6) In the second quarter of 1997, FUNC acquired the Bank of Boca Raton with
assets of $29 million, net loans of $15 million and deposits of $27 million for
$2 million in cash. This purchase accounting acquisition has been reflected in
the pro forma financial information only from the date of consummation.
From January 1, 1997, through September 30, 1997, FUNC has purchased 24 million
shares of FUNC common stock in the open market at a cost of $1.0 billion, of
which 1.65 million shares relate to the Covenant Acquisition as noted above.
The historical financial statements of FUNC will be restated for the CoreStates
Acquisition for all periods presented and for the Signet Acquisition only for
periods beginning January 1, 1995, and thereafter. Such statements will not be
restated for the Wheat Acquisition or the Covenant Acquisition.
(7) Income per share data has been computed based on the combined historical net
income applicable to common stockholders of FUNC and the Acquisitions using the
historical weighted average shares outstanding of FUNC common stock and the
weighted average outstanding shares, adjusted to equivalent shares of FUNC
common stock, as of the earliest applicable period presented, as appropriate.
(8) Certain insignificant reclassifications have been included herein to conform
to statement presentations. Transactions conducted in the ordinary course of
business between FUNC, CoreStates, Signet, Wheat and Covenant are immaterial,
and accordingly, have not been eliminated.
(9) The unaudited pro forma financial information does not include any material
merger-related expenses or any material expenses related to the Acquisitions.
FUNC currently estimates after-tax restructuring and merger-related charges of
approximately (i) $135 million related to the Signet Acquisition, or $0.42 per
share of FUNC common stock, expected to be taken in the fourth quarter of 1997;
and (ii) $795 million related to the CoreStates Acquisition, or $0.81 per share
of FUNC common stock, expected to be taken in the second quarter of 1998. In
addition, FUNC expects to incur an estimated $75 million in after-tax
restructuring and merger-related expenses in the 12-month period following the
CoreStates Acquisition.
(10) FUNC expects to realize significant revenue enhancements and cost savings
from the Acquisitions. The pro forma financial information, which does not
reflect any revenue enhancements, direct costs or potential savings from the
consolidation of operations of FUNC and the Acquisitions, is not indicative of
the results of future operations. No assurance can be given with respect to the
ultimate level of such revenue enhancements or cost savings. As indicated by the
foregoing unaudited pro forma financial information and based solely on the
foregoing assumptions, consummation of the Acquisitions would have diluted
FUNC's historical net income per common share for the nine months ended
September 30, 1997, and the year ended December 31, 1996, by 15 percent and 13
percent, respectively.
<PAGE>
Exhibit (99)(b)
<TABLE>
<CAPTION>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
1997 1996
------------- ------------
(Unaudited) (Note)
ASSETS
- ------
<S> <C> <C>
Cash and due from banks.............................................. $ 3,166,454 $ 3,462,287
Time deposits, principally Eurodollars............................... 3,043,723 2,443,154
Federal funds sold and securities purchased under
agreements to resell............................................. 138,699 509,694
Trading account assets............................................... 326,717 122,317
Investments available-for-sale, at fair value........................ 2,211,382 2,394,166
Investments held-to-maturity (fair value:
1997 - $1,417,351; 1996 - $1,692,243)............................ 1,413,351 1,689,058
Loans, net of unearned discounts of $220,485 in 1997
and $234,607 in 1996 ............................................ 35,085,285 32,777,032
Less: Allowance for loan losses................................. (679,415) (710,327)
------------ ------------
Net loans.............................................. 34,405,870 32,066,705
------------ ------------
Due from customers on acceptances.................................... 790,548 738,077
Premises and equipment............................................... 626,760 625,876
Other assets ........................................................ 1,467,105 1,442,860
------------ ------------
Total assets........................................... $47,590,609 $ 45,494,194
============ ============
LIABILITIES
- -----------
Deposits:
Domestic:
Non-interest bearing......................................... $ 8,942,224 $ 9,330,445
Interest bearing............................................. 23,401,727 22,986,955
Overseas branches and subsidiaries............................... 1,396,731 1,409,756
------------ ------------
Total deposits......................................... 33,740,682 33,727,156
------------ ------------
Funds borrowed....................................................... 4,239,227 2,633,157
Bank acceptances outstanding......................................... 789,169 727,728
Other liabilities.................................................... 1,924,257 1,661,162
Long-term debt....................................................... 3,784,179 3,049,297
------------ ------------
Total liabilities...................................... 44,477,514 41,798,500
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES
- --------------------------------------
SHAREHOLDERS' EQUITY
- --------------------
Preferred stock: authorized 10.0 million shares; no
shares issued.................................................... - -
Common stock: $1 par value; authorized 350.0 million
shares; issued 223.599 million shares in 1997 and 1996 (including treasury
shares of 23.820 million in 1997 and 8.900 million in 1996, and unallocated
shares held by the Employee Stock Ownership Plan ("ESOP") of 2.182 million
in 1997 and 2.267 million
in 1996)......................................................... 223,599 223,599
Other common shareholders' equity, net............................... 2,889,496 3,472,095
------------ ------------
Total shareholders' equity............................. 3,113,095 3,695,694
------------ ------------
Total liabilities and shareholders' equity............. $ 47,590,609 $ 45,494,194
============ ============
</TABLE>
Note: The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date.
See accompanying notes to the consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1997 1996 1997 1996
-------- --------- -------- --------
INTEREST INCOME
- ---------------
Interest and fees on loans:
<S> <C> <C> <C> <C>
Taxable income ...................................... $ 760,590 $ 716,075 $2,221,554 $2,118,771
Tax exempt income ................................... 5,201 6,009 15,759 19,409
Interest on investment securities:
Taxable income ...................................... 51,890 58,363 157,064 198,952
Tax exempt income ................................... 3,950 5,855 13,006 17,952
Interest on time deposits in banks ....................... 43,234 33,277 112,619 85,969
Interest on Federal funds sold, securities purchased under
agreements to resell and other ....................... 8,169 3,504 20,719 21,503
---------- ---------- ---------- ----------
Total interest income ...................... 873,034 823,083 2,540,721 2,462,556
---------- ---------- ---------- ----------
INTEREST EXPENSE
- ----------------
Interest on deposits ..................................... 229,291 207,391 646,273 629,811
Interest on short-term funds borrowed .................... 53,586 35,780 132,035 111,379
Interest on long-term debt ............................... 59,663 39,564 171,463 116,969
---------- ---------- ---------- ----------
Total interest expense ..................... 342,540 282,735 949,771 858,159
---------- ---------- ---------- ----------
NET INTEREST INCOME ........................ 530,494 540,348 1,590,950 1,604,397
Provision for losses on loans ............................ 50,000 40,000 143,000 188,767
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOSSES ON LOANS ................ 480,494 500,348 1,447,950 1,415,630
---------- ---------- ---------- ----------
NON-INTEREST INCOME
- -------------------
Service charges on deposit accounts ...................... 63,039 57,863 180,958 172,779
Trust income ............................................. 47,453 42,102 137,620 124,877
Fees for international services .......................... 31,445 27,130 84,194 74,805
Debit and credit card fees ............................... 25,261 22,417 70,729 65,041
Third party processing ................................... 19,389 14,075 58,136 42,543
Income from investment in EPS, Inc. ...................... 7,499 7,469 22,109 22,192
Income from trading activities ........................... 9,591 2,763 25,377 15,880
Securities gains ......................................... 5,023 31,135 14,857 55,476
Other operating income ................................... 26,777 31,677 82,872 101,105
---------- ---------- ---------- ----------
Total non-interest income .................. 235,477 236,631 676,852 674,698
---------- ---------- ---------- ----------
NON-FINANCIAL EXPENSES
- ----------------------
Salaries, wages and benefits ............................. 206,467 204,945 614,201 619,725
Net occupancy ............................................ 36,286 39,856 110,876 120,201
Equipment expenses ....................................... 30,320 29,427 92,717 90,360
Restructuring and merger-related charges ................. - 12,298 - 130,100
Other operating expenses ................................. 136,749 145,327 386,906 399,154
---------- ---------- ---------- ----------
Total non-financial expenses ............... 409,822 431,853 1,204,700 1,359,540
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES ............................... 306,149 305,126 920,102 730,788
- --------------------------
Provision for income taxes ............................... 107,335 108,269 323,449 277,190
---------- ---------- ---------- ----------
NET INCOME ............................................... $ 198,814 $ 196,857 $ 596,653 $ 453,598
- ---------- ========== ========== ========== ==========
Average common shares outstanding ........................ 199,817 220,409 205,316 219,802
========== ========== ========== ==========
PER COMMON SHARE DATA
- ---------------------
Net income ............................................... $ 1.00 $ 0.89 $ 2.91 $ 2.06
========== ========== ========== ==========
Cash dividends declared .................................. $ 0.47 $ 0.42 $ 1.41 $ 1.26
========== ========== ========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)
(in thousands)
Common Capital Retained
stock surplus earnings
--------- ---------- -----------
Nine Months Ended September 30, 1996
- ------------------------------------
<S> <C> <C> <C>
Balances at beginning of year ................................... $230,231 $1,225,167 $2,724,298
Net income ...................................................... 453,598
Net change in unrealized gain on investments
available-for-sale, net of tax................................ (33,264)
Treasury shares acquired (741 shares)............................
Treasury shares issued in merger (7,300 shares).................. (7,300) (33,288) (192,042)
Repurchase and retirement of common stock (1,340 shares)........ (1,340) (43,559) (12,804)
Common stock issued under employee benefit plans
(1,575 new shares; 928 treasury shares)....................... 1,575 55,521 (14,668)
Common stock issued under dividend reinvestment plan
(31 new shares) (347 treasury shares)......................... 31 1,727 (68)
ESOP shares committed for release (92 shares).................... 1,454
Cash paid for fractional shares issued........................... (341)
Foreign currency translation adjustments......................... 1,037
Common dividends declared........................................ (272,658)
-------- ---------- ----------
Balances at end of period........................................ $223,197 $1,207,022 $2,653,088
======== ========== ==========
Nine Months Ended September 30, 1997
- ------------------------------------
Balances at beginning of year.................................... $223,599 $1,234,522 $2,729,310
Net income....................................................... 596,653
Net change in unrealized gain on investments
available-for-sale, net of tax................................ 8,406
Treasury shares acquired (17,098 shares).........................
Common stock issued under employee benefit plans
(1,734 treasury shares)....................................... 15,510 (49,740)
Common stock issued under dividend reinvestment plan
(444 treasury shares)......................................... 330 (1,058)
ESOP shares committed for release (85 shares).................... 2,587
Foreign currency translation adjustments......................... (1,194)
Common dividends declared........................................ (291,802)
-------- ---------- ----------
Balances at end of period........................................ $223,599 $1,252,949 $2,990,575
======== ========== ==========
Unallocated
Treasury ESOP
Nine Months Ended September 30, 1996 stock shares Total
- ------------------------------------ -------- ----------- -----------
Balances at beginning of year ................................... $ (250,465) $(53,666) $3,875,565
Net income ...................................................... 453,598
Net change in unrealized gain on investments
available-for-sale, net of tax................................ (33,264)
Treasury shares acquired (741 shares)............................ (28,294) (28,294)
Treasury shares issued in merger (7,300 shares).................. 232,630 -
Repurchase and retirement of common stock (1,340 shares)........ (57,703)
Common stock issued under employee benefit plans
(1,575 new shares; 928 treasury shares)....................... 33,079 75,507
Common stock issued under dividend reinvestment plan
(31 new shares) (347 treasury shares)......................... 13,050 14,740
ESOP shares committed for release (92 shares).................... 2,250 3,704
Cash paid for fractional shares issued........................... (341)
Foreign currency translation adjustments......................... 1,037
Common dividends declared........................................ (272,658)
----------- -------- -----------
Balances at end of period........................................ $ - $(51,416) $4,031,891
=========== ======== ==========
Nine Months Ended September 30, 1997
- ------------------------------------
Balances at beginning of year.................................... $ (437,580) $(54,157) $3,695,694
Net income....................................................... 596,653
Net change in unrealized gain on investments
available-for-sale, net of tax................................ 8,406
Treasury shares acquired (17,098 shares)......................... (986,575) (986,575)
Common stock issued under employee benefit plans
(1,734 treasury shares)....................................... 98,986 64,756
Common stock issued under dividend reinvestment plan
(444 treasury shares)......................................... 23,277 22,549
ESOP shares committed for release (85 shares).................... 2,021 4,608
Foreign currency translation adjustments......................... (1,194)
Common dividends declared........................................ (291,802)
----------- -------- ----------
Balances at end of period........................................ $(1,301,892) $(52,136) $3,113,095
=========== ======== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands) Nine Months Ended
September 30,
------------------------------
1997 1996
----------- -----------
Operating Activities
- --------------------
<S> <C> <C>
Net income ..................................................................... $ 596,653 $ 453,598
Adjustments to reconcile net income to net cash
provided by operating activities:
Restructuring and merger-related charges.................................... - 130,100
Provision for losses on loans............................................... 143,000 188,767
Provision for losses and writedowns on OREO................................. 2,012 2,753
Depreciation and amortization............................................... 93,459 88,448
Deferred income tax expense (benefit)....................................... 32,250 (10,525)
Securities gains............................................................ (14,857) (55,476)
(Increase) decrease in trading account assets............................... (204,400) 90,418
Increase (decrease) in due to factored clients.............................. 77,028 (16,292)
(Increase) decrease in interest receivable.................................. (13,895) 44,813
Increase (decrease) in interest payable..................................... 8,776 (5,519)
Other, net.................................................................. 80,356 181,460
----------- -----------
Net Cash Provided by Operating Activities................................ 800,382 1,092,545
----------- -----------
Investing Activities
- --------------------
Net increase in loans........................................................... (2,462,447) (1,895,346)
Proceeds from sales of loans.................................................... 491,506 843,260
Loans originated or acquired - non-bank subsidiaries............................ (27,289,355) (28,572,504)
Principal collected on loans - non-bank subsidiaries............................ 26,758,059 28,274,066
Net increase in time deposits, principally Eurodollars.......................... (600,569) (685,213)
Purchases of investments held-to-maturity....................................... (445,244) (372,596)
Purchases of investments available-for-sale..................................... (549,954) (1,430,753)
Proceeds from maturities of investments held-to-maturity........................ 739,006 1,164,746
Proceeds from maturities of investments available-for-sale...................... 678,077 767,581
Proceeds from sales of investments available-for-sale........................... 89,092 856,474
Net decrease in Federal funds sold and securities purchased under
agreements to resell........................................................ 370,995 551,235
Purchases of premises and equipment............................................. (63,050) (77,435)
Proceeds from sales and paydowns on OREO........................................ 12,398 26,536
Other, net...................................................................... 32,187 27,475
----------- -----------
Net Cash Used in Investing Activities.................................... (2,239,299) (522,474)
----------- -----------
Financing Activities
- --------------------
Net increase (decrease) in deposits............................................. 13,312 (1,251,670)
Payment for sale of deposits.................................................... - (368,110)
Proceeds from issuance of long-term debt........................................ 1,138,145 533,070
Retirement of long-term debt.................................................... (402,154) (225,973)
Net increase in short-term funds borrowed....................................... 1,606,070 325,374
Cash dividends paid............................................................. (297,510) (236,987)
Purchases of treasury stock..................................................... (986,575) (28,294)
Repurchase and retirement of common stock....................................... - (57,703)
Common stock issued under employee benefit plans................................ 49,247 48,448
Other, net...................................................................... 22,549 14,399
----------- -----------
Net Cash Provided by (Used in) Financing Activities...................... 1,143,084 (1,247,446)
----------- -----------
Decrease In Cash And Due From Banks...................................... (295,833) (677,375)
------------------------------------
Cash and due from banks at January 1,.................................... 3,462,287 3,662,143
----------- -----------
Cash and due from banks at September 30,................................. $ 3,166,454 $ 2,984,768
=========== ===========
Supplemental Disclosure of Cash Flow Information
- ------------------------------------------------
Cash paid during the period for:
Interest................................................................. $ 940,995 $ 863,678
=========== ===========
Income taxes............................................................. $ 191,007 $ 248,505
=========== ===========
Net cash received on interest rate swaps........................................ $ 44,983 $ 46,253
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 1997
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
CoreStates Financial Corp ("CoreStates") have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (comprising only normal recurring
accruals) necessary for a fair presentation have been included. Certain amounts
in prior periods have been reclassified for comparative purposes. Operating
results for the nine-month period ended September 30, 1997 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1997.
NOTE B -- CHANGE IN ACCOUNTING PRINCIPLES
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("FAS 128") was issued in February 1997. FAS 128, which must be adopted
on December 31, 1997, requires entities to change the method currently used to
compute earnings per share and to restate earnings per share for all prior
periods presented. Under FAS 128, primary earnings per share will exclude the
dilutive effect of stock options and fully diluted earnings per share must
include the dilutive effect of stock options even if the dilutive effect is
immaterial. The impact of FAS 128 on the calculation of primary earnings per
share and fully diluted earnings per share is not expected to be material.
<TABLE>
<CAPTION>
NOTE C -- LOAN PORTFOLIO
Loans, net of unearned discounts, consist of the following (in
thousands):
September 30, December 31,
1997 1996
-------------- ------------
Domestic:
<S> <C> <C>
Commercial, industrial and other................ $ 15,800,229 $ 13,906,646
Real estate:
Construction and development................. 625,910 554,924
Residential.................................. 4,312,171 4,226,980
Other........................................ 4,284,944 4,541,697
------------ ------------
Total real estate....................... 9,223,025 9,323,601
------------ ------------
Consumer:
Installment.................................. 3,260,034 3,319,970
Credit card.................................. 1,686,941 1,674,921
------------ ------------
Total consumer.......................... 4,946,975 4,994,891
------------ ------------
Financial institutions.......................... 1,362,525 1,153,715
Factoring receivables........................... 564,877 411,280
Lease financing................................. 1,217,578 1,232,213
------------ ------------
Total domestic.......................... 33,115,209 31,022,346
------------ ------------
Foreign ............................................. 1,970,076 1,754,686
------------ ------------
Total loans............................. $ 35,085,285 $ 32,777,032
============ ============
</TABLE>
NOTE D -- OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS AND COMMITMENTS
In the normal course of business, there are outstanding commitments and
contingent liabilities which are not reflected in the financial statements.
These include various financial instruments with off-balance sheet risk used in
connection with CoreStates' asset and liability management and to provide for
the needs of customers. These involve varying degrees of credit, interest rate
<PAGE>
and liquidity risk, but do not represent unusual risks for the Corporation and
management does not anticipate any significant losses as a result of these
transactions.
<TABLE>
<CAPTION>
The following is a summary of contractual or notional amounts of
off-balance sheet commitments and derivative financial instruments (in
thousands):
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Standby letters of credit, net of participations.................. $ 1,889,145 $ 1,630,621
Commercial letters of credit...................................... 1,503,337 1,262,593
Commitments to extend credit...................................... 17,250,051 15,396,553
Unused commitments under credit card lines........................ 4,493,830 4,173,013
When-issued securities:
Commitments to purchase...................................... 15,990 1,770
Commitments to sell.......................................... 110,000 75,120
Whole mortgage loans and securities:
Commitments to purchase...................................... 17,048 17,280
Commitments to sell.......................................... 41,195 7,965
Loans sold with recourse and loan servicing
acquired with recourse....................................... 316,038 361,410
Interest rate futures contracts:
Commitments to purchase...................................... 1,825,900 4,489,800
Commitments to purchase foreign and U. S. currencies.............. 2,728,984 1,766,122
Interest rate swaps, notional principal amounts................... 11,068,963 9,850,708
Interest rate caps and floors:
Written...................................................... 1,728,073 908,799
Purchased.................................................... 2,802,353 2,039,331
Tender option bonds............................................... 471,395 148,711
Treasury float contracts.......................................... 256,546 270,358
Other derivative financial instruments............................ 864,199 597,261
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
CoreStates Financial Corp
We have audited the accompanying consolidated balance sheets of CoreStates
Financial Corp as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the 1995 or 1994 financial statements of Meridian
Bancorp, Inc. and United Counties Bancorporation, which statements reflect
combined total assets of 35.6% as of December 31, 1995 and combined net interest
income constituting 31.3% and 32.8% of the related consolidated totals for the
years ended December 31, 1995 and 1994, respectively. Those statements were
audited by other auditors whose reports thereon have been furnished to us, and
our opinion, insofar as it relates to data included for Meridian Bancorp, Inc.
and United Counties Bancorporation, is based solely on the reports of 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 reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of CoreStates Financial Corp at December 31,
1996 and 1995, and the consolidated results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
January 22, 1997
<PAGE>
CoreStates Financial Corp and Subsidiaries CONSOLIDATED STATEMENT OF INCOME (in
thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans:
Taxable income ............................................................. $2,845,898 $2,902,265 $2,484,660
Tax exempt income .......................................................... 25,335 30,390 34,023
Interest on investment securities:
Taxable income ............................................................. 254,576 349,138 365,298
Tax exempt income .......................................................... 23,190 31,018 38,180
Interest on time deposits in banks ........................................... 122,752 121,993 70,996
Interest on Federal funds sold,
securities purchased
under agreements to resell and
other ....................................................................... 26,453 40,276 21,402
---------- ---------- ----------
Total interest income ...................................................... 3,298,204 3,475,080 3,014,559
---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits:
Domestic savings ........................................................... 295,650 396,176 280,532
Domestic time .............................................................. 497,956 492,610 370,373
Overseas branches and subsidiaries ......................................... 48,174 52,261 29,602
---------- ---------- ----------
Total interest on deposits .............................................. 841,780 941,047 680,507
Interest on short-term funds
borrowed .................................................................... 153,129 214,119 149,618
Interest on long-term debt ................................................... 161,811 152,989 116,419
---------- ---------- ----------
Total interest expense .................................................. 1,156,720 1,308,155 946,544
---------- ---------- ----------
Net interest income ........................................................ 2,141,484 2,166,925 2,068,015
Provision for losses on loans ................................................ 228,767 144,002 279,195
---------- ---------- ----------
Net interest income after
provision for losses on loans .............................................. 1,912,717 2,022,923 1,788,820
---------- ---------- ----------
NON-INTEREST INCOME
Service charges on deposit accounts .......................................... 243,696 244,439 239,811
Trust income ................................................................. 167,138 162,776 153,214
Fees for international services .............................................. 101,761 94,396 87,364
Debit and credit card fees ................................................... 74,707 83,812 80,482
Income from investment in EPS, Inc. .......................................... 29,902 30,114 31,800
Income from trading activities ............................................... 25,216 35,403 23,360
Securities gains ............................................................. 59,512 31,475 18,283
Other gains .................................................................. 8,200 26,400 --
Other operating income ....................................................... 188,943 173,407 154,173
---------- ---------- ----------
Total non-interest income .................................................. 899,075 882,222 788,487
---------- ---------- ----------
NON-FINANCIAL EXPENSES
Salaries, wages and benefits ................................................. 826,442 904,377 947,903
Net occupancy ................................................................ 157,358 159,530 162,003
Equipment expenses ........................................................... 120,602 118,532 117,659
Restructuring and merger-related
charges ..................................................................... 139,702 138,600 107,119
Other operating expenses ..................................................... 532,724 564,489 583,558
---------- ---------- ----------
Total non-financial expenses ............................................... 1,776,828 1,885,528 1,918,242
---------- ---------- ----------
INCOME BEFORE INCOME TAXES ................................................... 1,034,964 1,019,617 659,065
Provision for income taxes ................................................... 385,820 364,441 225,859
---------- ---------- ----------
NET INCOME ................................................................... $ 649,144 $ 655,176 $ 433,206
========== ========== ==========
PER COMMON SHARE DATA (Based on weighted average shares outstanding of 218.812
million in 1996, 222.268 million in 1995 and 226.234 million in 1994)
Net income ................................................................... $ 2.97 $ 2.95 $ 1.91
========== ========== ==========
Cash dividends declared ...................................................... $ 1.73 $ 1.44 $ 1.24
========== ========== ==========
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
CoreStates Financial Corp and Subsidiaries
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
----------- ----------
ASSETS
<S> <C> <C>
Cash and due from banks ...................................................... $ 3,462,287 $ 3,662,143
Time deposits, principally Eurodollars ....................................... 2,443,154 1,909,260
Federal funds sold and securities
purchased under agreements to resell ........................................ 509,694 719,937
Trading account assets ....................................................... 122,317 147,218
Investment securities available-for-sale ..................................... 2,394,166 2,572,315
Investment securities held-to-maturity
(market value: 1996-$1,692,243;
1995-$3,075,964) ............................................................ 1,689,058 3,059,917
Total loans, net of unearned discounts
of $204,521 in 1996 and $232,077 in 1995 .................................... 32,777,032 31,714,152
Less: Allowance for loan losses ............................................. (710,327) (670,265)
------------ ------------
Net loans .............................................................. 32,066,705 31,043,887
------------ ------------
Due from customers on acceptances ............................................ 738,077 560,707
Premises and equipment ....................................................... 625,876 664,279
Other assets ................................................................. 1,442,860 1,657,579
------------ ------------
Total assets ........................................................... $ 45,494,194 $ 45,997,242
============ ============
LIABILITIES
Deposits:
Domestic:
Non-interest bearing ................................................... $ 9,330,445 $ 8,937,147
Interest bearing ....................................................... 22,986,955 23,883,726
Overseas branches and subsidiaries .......................................... 1,409,756 1,142,947
------------ ------------
Total deposits ................................................... 33,727,156 33,963,820
------------ ------------
Short-term funds borrowed .................................................... 2,633,157 3,677,013
Bank acceptances outstanding ................................................. 727,728 549,048
Other liabilities ............................................................ 1,661,162 1,719,697
Long-term debt ............................................................... 3,049,297 2,212,099
------------ ------------
Total liabilities ...................................................... 41,798,500 42,121,677
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY
Preferred stock: authorized 10.0 million
shares; no shares issued .................................................... -- --
Common stock: $1 par value; authorized
350.0 million shares; issued 223.6 million shares in 1996 and 230.2 million
shares in 1995 (including treasury shares of 8.9 million in 1996 and 7.8
million in 1995, and unallocated shares held by Employee Stock Ownership Plan
("ESOP") of 2.3 million in 1996 and
2.3 million in 1995) ........................................................ 223,599 230,231
Other common shareholders' equity, net ....................................... 3,472,095 3,645,334
------------ ------------
Total shareholders' equity ............................................. 3,695,694 3,875,565
------------ ------------
Total liabilities and
shareholders' equity .................................................. $ 45,494,194 $ 45,997,242
============ ============
</TABLE>
See accompanying notes to the financial statements
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Capital Retained Treasury Unallocated
stock surplus earnings stock ESOP shares Total
------------ ----------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1993........... $ 230,050 $1,194,872 $ 2,287,406 $ (7,819) $3,704,509
Net income.............................. 433,206 433,206
Net change in unrealized gain on
investments available-for-sale, net of
tax.................................... (66,095) (66,095)
Acquisition of Germantown Savings Bank
(5,880 treasury shares)................ (8,605) 156,361 147,756
Stock issued in other acquisitions (190
new shares)............................ 190 6,782 6,972
Treasury shares acquired (8,598 shares). (228,963) (228,963)
Repurchase and retirement of common
stock (1,016 shares)................... (1,016) (6,646) (17,226) (24,888)
Common stock issued under employee
benefit plans (567 new shares; 688
treasury shares)....................... 567 6,097 (6,410) 18,456 18,710
Common stock issued under dividend
reinvestment plan (450 treasury shares) (447) (483) 12,306 11,376
Purchase of shares for Employee Stock
Ownership Plan (1,574 shares).......... $(35,568) (35,568)
Conversion of subordinated debt (36 new
shares; 909 treasury shares)........... 36 (2,001) 25,362 23,397
Cash paid for fractional shares......... (83) (83)
Foreign currency translation adjustments 52 52
Common dividends declared............... (259,449) (259,449)
---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1994........... 229,827 1,200,658 2,360,312 (24,297) (35,568) 3,730,932
Net income.............................. 655,176 655,176
Net change in unrealized gain on
investments available-for-sale, net of
tax.................................... 41,187 41,187
Treasury shares acquired (10,307 shares) (335,528) (335,528)
Repurchase and retirement of common
stock (595 shares)..................... (595) (4,093) (12,446) (17,134)
Common stock issued under employee
benefit plans (1,002 new shares;
3,089 treasury shares)............ 999 26,825 (25,483) 96,670 99,011
Common stock issued under dividend
reinvestment plan (417 treasury shares) (9) (2) 12,690 12,679
Purchase of shares for Employee Stock
Ownership Plan (876 shares)............ (20,922) (20,922)
Employee Stock Ownership Plan shares
committed for release (123 shares)..... 1,786 2,824 4,610
Cash paid for fractional shares......... (24) (24)
Foreign currency translation adjustments (29) (29)
Common dividends declared............... (294,393) (294,393)
---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1995........... 230,231 1,225,167 2,724,298 (250,465) (53,666) 3,875,565
</TABLE>
(continued)
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Capital Retained Treasury Unallocated
stock surplus earnings stock ESOP shares Total
------------ ----------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net income.............................. 649,144 649,144
Net change in unrealized gain on
investments
available-for-sale, net of tax........ (25,070) (25,070)
Treasury shares acquired (11,055 shares) (533,932) (533,932)
Treasury shares issued in merger (7,300
shares)................................ (7,300) (33,288) (192,042) 232,630 -
Repurchase and retirement of
common stock (1,340 shares)............. (1,340) (43,559) (12,804) (57,703)
Common stock issued under employee
benefit plans (1,824 new shares;
2,330 treasury shares)................. 1,824 75,618 (48,119) 100,826 130,149
Common stock issued under dividend
reinvestment plan (184 new shares;
353 treasury shares)................... 184 8,225 (68) 13,361 21,702
Purchase of shares for Employee
Stock Ownership Plan (65 shares)........ (38) (3,509) (3,547)
Employee stock ownership plan shares
committed for release (126 shares)..... 2,397 3,018 5,415
Cash paid for fractional shares......... (342) (342)
Foreign currency translation adjustments 5,448 5,448
Common dividends declared............... (371,135) (371,135)
------------ ----------- ------------ ---------- ----------- -----------
Balances at December 31, 1996........... $ 223,599 $1,234,522 $2,729,310 $(437,580) $(54,157) $3,695,694
============ =========== ============ ========== =========== ===========
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
OPERATING ACTIVITIES 1996 1995 1994
------------- -------------- ---------------
<S> <C> <C> <C>
Net income............................................ $ 649,144 $ 655,176 $ 433,206
Adjustments to reconcile net income to net
cash provided by operating activities:
Restructuring and merger-related charges........... 139,702 138,600 107,119
Provision for losses on loans...................... 228,767 144,002 279,195
Provision for losses and writedowns
on other real estate owned....................... 3,387 15,971 14,596
Depreciation and amortization...................... 110,512 122,996 139,305
Deferred income tax expense........................ 9,156 28,420 41,847
Securities gains................................... (59,512) (31,475) (18,283)
Gains on sale of mortgage servicing................ - (2,387) (867)
Other gains........................................ (8,200) (26,400) -
(Increase) decrease in trading account assets...... 24,901 200,833 (18,392)
Increase (decrease) in due to factored clients..... 1,805 (86,921) 41,262
(Increase) decrease in interest receivable......... 45,046 2,009 (33,548)
Increase in interest payable....................... 10,163 45,044 26,026
Other, net......................................... 115,877 (117,411) (102,895)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............. 1,270,748 1,088,457 908,571
------------ ------------ ------------
INVESTING ACTIVITIES
Net increase in loans................................. (2,896,402) (1,832,179) (1,310,777)
Proceeds from sales of loans.......................... 1,577,270 1,087,732 1,130,918
Loans originated or acquired--non-bank
subsidiaries......................................... (39,054,032) (35,767,440) (33,760,035)
Principal collected on loans--non-bank
subsidiaries......................................... 39,039,627 35,407,667 33,399,764
Net increase in time deposits, principally
Eurodollars.......................................... (533,894) (33,172) (452,747)
Purchases of investments held-to-maturity............. (490,995) (686,652) (2,386,505)
Purchases of investments available-for-sale........... (2,062,012) (589,327) (711,227)
Proceeds from maturities of investments
held-to-maturity..................................... 1,524,670 2,175,780 2,911,632
Proceeds from maturities of investments
available-for-sale................................... 854,898 161,477 386,142
Proceeds from sales of investments
available-for-sale................................... 1,500,504 546,728 767,453
Net (increase) decrease in Federal funds
sold and securities purchased under
agreements to resell................................. 210,243 203,693 (646,409)
Purchases of premises and equipment................... (101,469) (125,216) (147,308)
Proceeds from sales and paydowns on other
real estate owned.................................... 31,465 66,834 78,057
Purchase of Germantown Savings
Bank, net of cash acquired........................... - - (74,053)
Net cash provided by other acquisitions............... - - 379,318
Other, net............................................ 141,063 11,303 39,357
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES........................................ (259,064) 627,228 (396,420)
------------ ------------ ------------
</TABLE>
(continued)
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS: continued
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1996 1995 1994
------------ ------------ ------------
FINANCING ACTIVITIES
<S> <C> <C> <C>
Net increase (decrease) in deposits................. 172,155 (660,745) (1,013,622)
Payment for sales of deposits....................... (368,110) (154,360) -
Proceeds from issuance of long-term debt............ 1,340,099 582,251 480,433
Retirement of long-term debt........................ (501,165) (533,480) (306,452)
Net increase (decrease) in short-term
funds borrowed..................................... (1,043,856) 215,764 694,499
Cash dividends paid................................. (328,114) (286,565) (245,962)
Purchases of treasury stock......................... (533,932) (335,528) (228,963)
Purchases of ESOP shares............................ - - (35,568)
Funds transferred to Trust for future
ESOP purchases..................................... - - (24,432)
Repurchase and retirement of common stock........... (57,703) (17,134) (24,888)
Common stock issued under employee benefit
plans.............................................. 87,726 99,011 18,710
Other, net.......................................... 21,360 12,655 11,293
----------- ----------- -----------
NET CASH USED IN FINANCING ACTIVITIES............... (1,211,540) (1,078,131) (674,952)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND DUE
FROM BANKS....................................... (199,856) 637,554 (162,801)
Cash and due from banks at January 1,............... 3,662,143 3,024,589 3,187,390
----------- ----------- -----------
CASH AND DUE FROM BANKS AT DECEMBER 31,............. $ 3,462,287 $ 3,662,143 $ 3,024,589
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for:
Interest......................................... $ 1,146,557 $ 1,263,681 $ 918,503
=========== =========== ===========
Income taxes..................................... $ 331,940 $ 284,987 $ 189,918
=========== =========== ===========
</TABLE>
See accompanying notes to the financial statements.
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements include the accounts of CoreStates
Financial Corp ("the Corporation") and all of its subsidiaries, including:
CoreStates Bank, N.A. ("CBNA"); CoreStates Bank of Delaware, N.A. ("CBD");
Congress Financial Corporation; and CoreStates Capital Corp ("CSCC"). All
material intercompany transactions have been eliminated. The financial
statements include the consolidated accounts of Meridian Bancorp, Inc.
("Meridian") which was acquired on April 9, 1996 in a transaction accounted for
under the pooling of interests method of accounting. On February 23, 1996,
Meridian acquired United Counties Bancorporation ("United Counties") in a
transaction accounted for as a pooling of interests. The consolidated accounts
of Meridian include United Counties for all periods presented. Certain amounts
in prior years have been reclassified for comparative purposes.
The Corporation is a bank holding company incorporated under the laws of the
Commonwealth of Pennsylvania, primarily operating in the eastern Pennsylvania,
northern Delaware and the central and southern New Jersey markets. Through its
subsidiaries, the Corporation is engaged in the business of providing global and
specialized banking (including international banking services), regional
banking, retail credit services, trust and asset management and third party
processing services to a diversified customer base.
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 financial statements and accompanying notes.
Actual results could differ from those estimates.
Changes in accounting principles
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123") was issued in October 1995 to establish accounting and
reporting standards for stock-based employee compensation plans such as stock
option and restricted stock plans ("stock-based plans"). FAS 123 defines a fair
value method of accounting for measuring compensation expense for stock-based
plans and encourages all entities to adopt that method of accounting. However,
FAS 123 also permits entities to continue to measure compensation expense for
stock-based plans using the intrinsic value method prescribed by APB Opinion No.
25, "Accounting for Stock Issued to Employees."
Under the fair value method, compensation expense would be measured as the value
of an award under a stock-based plan on the date the award is granted, and would
be recognized over the vesting period of the award. Under the intrinsic value
method, compensation expense is measured as the excess, if any, of the market
price of the stock underlying the award on the date the award is granted, over
the exercise price. Under the Corporation's stock-based long-term incentive
plan, awards have no intrinsic value on the date of grant as the exercise price
equals the market price on that date. The Corporation did not adopt the fair
value method of accounting for stock-based plans, and will continue to use the
intrinsic value method to measure compensation expense.
Effective January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
("FAS 114") and Statement No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures" ("FAS 118"). FAS 114 addresses
accounting for impairment of certain loans and requires that impaired loans
within the scope of FAS 114 be measured based on the present value of expected
cash flows discounted at the loan's effective interest rate, or be measured at
the loan's observable market price or the fair value of its collateral. FAS 118
amended the income recognition policies and clarified disclosure requirements of
FAS 114. The adoption of these standards did not have an impact on CoreStates'
<PAGE>
provision for loan losses or allowance for loan losses, nor change CoreStates'
methodology for recognizing income on impaired loans.
Income taxes
Under the asset and liability method used by the Corporation to provide for
income taxes, deferred tax assets and liabilities are recognized for the tax
consequences of temporary differences by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
The Corporation and its subsidiaries file a consolidated Federal income tax
return.
Investments
Held-to-maturity securities, consisting primarily of debt securities, are
carried at cost adjusted for amortization of premiums and accretion of
discounts, both computed on the interest method. The Corporation has both the
ability and positive intent to hold these securities until maturity. Trading
account assets are carried at market value. Gains on trading account assets
include both realized and unrealized gains and losses on the portfolio. All
other securities are classified as available-for-sale and are carried at fair
value, with unrealized gains and losses, net of tax, reported as a component of
shareholders' equity. The net unrealized gain on available-for-sale securities
included in retained earnings was $26,555 at December 31, 1996 and $51,625 at
December 31, 1995. Realized securities gains and losses are determined using the
adjusted cost of a specific security sold.
Interest and dividends on investment securities are recognized as income when
earned.
Loans
Interest on commercial loans is recognized on the daily principal amounts
outstanding. Loan fees are generally considered adjustments of interest rate
yields and are amortized into interest income on loans over the terms of the
related loans. Interest on installment loans is principally recognized on the
interest method.
Commercial loans are placed on a non-accrual status, generally recognizing
interest as income when received, when, in the opinion of management, the
collectability of principal or interest payments becomes doubtful or when such
payments are 90 days or more past due, unless the loan is well secured and in
the process of collection. The deferral or non-recognition of interest does not
constitute forgiveness of the borrower's obligation.
Consumer loans, excluding residential mortgage loans and credit card loans, are
charged off after reaching 90 days past due. Residential mortgage loans are
placed on non-accrual status after reaching 120 days past due and are written
down to the fair value of underlying collateral at that time. Credit card loans
are charged off after reaching 150 days past due. Prior to the second quarter of
1996, credit card loans were charged off after reaching 180 days past due.
Other real estate owned
When a property is acquired through foreclosure of a loan secured by real
estate, that property is recorded at the lower of the cost basis in the loan or
the estimated fair value of the property less estimated disposal costs.
Writedowns at the time of foreclosure are charged against the allowance for loan
losses. Subsequent writedowns for changes in the fair value of the property are
charged to other non-financial expense.
Allowance for loan losses
<PAGE>
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated probable credit losses. Factors included in
management's determination of an adequate level of allowance for loan losses are
a statistical analysis of historical loss levels throughout an economic cycle
and one year of projected charge-offs, establishing a minimum level below which
the allowance for loan losses is considered inadequate and a maximum level above
which is considered inappropriate. A quarterly evaluation of loss potential on
specific credits, products, industries, portfolios and markets, as well as
indicators for loan growth, the economic environment and concentrations assist
in validating the position of the allowance for loan losses within those
boundaries. This evaluation is inherently subjective as it requires material
estimates that may be susceptible to significant change.
The Corporation adopted FAS 114 effective January 1, 1995. Under FAS 114, the
allowance for loan losses related to "impaired loans" is based on discounted
cash flows using the impaired loan's initial effective interest rate as the
discount rate, or the fair value of the collateral for collateral dependent
loans. A loan is impaired when it meets the criteria to be placed on non-
accrual status or is a renegotiated loan. Loans which are evaluated for
impairment pursuant to FAS 114 are assessed on a loan-by-loan basis, and include
only commercial non-accrual and renegotiated loans. Large groups of smaller
balance homogeneous loans, such as credit cards, lease financing receivables,
loans secured by first and second liens on residential properties, and other
consumer loans are evaluated collectively for impairment.
Additions to the allowance arise from the provision for loan losses charged to
operations or from the recovery of amounts previously charged off. Loan charge-
offs reduce the allowance. Loans are charged off when there has been permanent
impairment of the related carrying values.
Premises and equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. The provision for depreciation and amortization is computed,
generally, on the straight-line method at rates based on the following range of
lives: buildings - 10 to 45 years; equipment - 3 to 12 years; and leasehold
improvements - 3 to 15 years.
Retirement plans
The Corporation maintains non-contributory defined benefit pension plans for
substantially all employees. Benefits are primarily based on the employee's
years of credited service, average annual salary and primary social security
benefit, as defined in the plans. It is the Corporation's policy to fund the
plans on a current basis to the extent deductible under existing tax
regulations.
The Corporation provides postretirement health care and life insurance benefits
for substantially all retired employees. In order to participate in the health
care plan, an employee must retire with at least 10 years of service. The
postretirement health care plan is contributory, with retiree contributions
based on years of service. It is the Corporation's policy to fund these plans on
a current basis to the extent deductible under existing tax regulations.
Employee Stock Ownership Plan ("ESOP")
Compensation expense was recognized based on the average fair value of shares
committed to be released to employees. Effective January 1, 1997, the ESOP was
combined with the Corporation's 401(k) Savings Plan. The remaining shares in the
ESOP will be released to substantially all employees and will be recorded as a
portion of the Corporation's match of employee contributions to the 401(k)
Savings Plan.
Foreign exchange/currency
Forward exchange contracts are valued at current rates of exchange. Gains or
losses on forward exchange contracts intended to hedge an identifiable foreign
<PAGE>
currency commitment, if any, are deferred and included in the measurement of the
related foreign currency transaction. All other gains or losses on forward
exchange contracts are included in fees for international services.
Currency gains and losses in connection with non-dollar denominated loans and
deposits, which are included in interest income and expenses, are recognized pro
rata over the contract terms. Foreign currency translation adjustments are
recorded directly to retained earnings. The cumulative foreign currency
translation gain (loss) was $3,848, $(1,600) and $(1,571) at December 31, 1996,
1995 and 1994, respectively.
Derivative interest rate contracts
The Corporation uses various interest rate contracts such as, interest rate
swaps, futures, forward rate agreements, caps and floors, tender option bonds,
Treasury float agreements, and forward commitments to purchase and sell loans
and securities, primarily to manage the interest rate risk of specific assets,
liabilities or anticipated transactions, to manage interest rate risk in
securities trading positions and to provide for the needs of its customers. For
contracts held for purposes other than trading, gains or losses are deferred and
recognized as adjustments to interest income or expense of the underlying assets
or liabilities and the interest differentials are recognized as adjustments of
the related interest income or expense. Gains or losses resulting from early
terminations of these contracts are deferred and amortized over the remaining
term of the underlying assets or liabilities. Any fees received or disbursed
which represent adjustments to the yield on interest rate contracts are
capitalized and amortized over the term of the interest rate contracts. If the
underlying assets or liabilities related to a derivative matures, is sold,
extinguished, or terminates, the amount of the previously unrecognized gain or
loss is recognized at that time in the consolidated income statement.
The Corporation's trading and customer-related derivative positions mostly
include tender option bonds, Treasury float agreements, and forward commitments
to purchase and sell loans and securities, and interest rate caps, floors, and
swaps. Tender option bonds represent a contingent liability to purchase
securities. Gains and losses and net interest spread earned on these products
are included in non-interest income. Treasury float agreements represent
purchased option contracts. Forward commitments to purchase and sell loans and
securities consist primarily of forward commitments to sell mortgage-backed
securities, which are used to hedge mortgage loans held in the trading account.
These commitments are marked to fair value with unrealized gains and losses
recorded in income from trading activities. Contracts held or issued for
customers are valued at market with gains or losses included in income from
trading activities.
Earnings per common share
Earnings per common share for all periods presented are based on weighted
average common shares outstanding as dilution from potentially dilutive common
stock equivalents (primarily stock options) does not have a materially dilutive
effect on earnings per share. For purposes of computing earnings per share,
shares committed to be released and shares allocated in the ESOP are considered
outstanding.
Treasury stock
The purchase of the Corporation's common stock is recorded at cost. At the date
of subsequent reissuance, the treasury stock account is reduced by the cost of
shares reissued on a last-in-first-out basis.
Cash dividends declared per share
Cash dividends declared per share for the periods prior to the acquisitions of
Meridian on April 9, 1996, Independence Bancorp, Inc. on June 27, 1994 and
Constellation Bancorp on March 16, 1994 assume that the Corporation would have
declared cash dividends equal to the cash dividends per share actually declared
by the Corporation.
<PAGE>
2. ACQUISITIONS
Purchase acquisition
On December 2, 1994, the Corporation purchased Germantown Savings Bank
("Germantown"), a Pennsylvania chartered stock savings bank with $1.6 billion in
assets and $1.4 billion in deposits at the time of the acquisition. Under the
terms of the transaction, each of Germantown's 4.15 million shares of common
stock was exchanged for a combination of the Corporation's common stock, equal
to approximately 55% of the $62 per Germantown share purchase price, and cash,
equal to approximately 45% of the purchase price. As a result of this
acquisition, 5.9 million shares of the Corporation's common stock were issued
out of treasury stock. The transaction had a total value of approximately $260
million and was accounted for under the purchase method of accounting.
Accordingly, the results of operations of Germantown have been included since
the date of acquisition. Under this method of accounting, the purchase price is
allocated to the respective assets acquired and liabilities assumed based on
their estimated fair values, net of applicable income tax effects. Intangible
assets of $183 million, including $140 million of goodwill, were created in this
transaction. Goodwill is being amortized to other operating expense on a
straight-line basis over 15 years.
A summary of unaudited pro forma combined financial information for the year
ended December 31, 1994 for the Corporation and Germantown as if the transaction
had occurred on January 1, 1994 is as follows:
Net interest income..... $2,135,969
Non-interest income..... 797,961
Net income.............. 451,063
Per common share........ $1.94
Average common shares
outstanding........... 232,180
Pooling acquisition
On April 9, 1996, the Corporation acquired Meridian, a Pennsylvania bank holding
company with $15.2 billion in assets and $12.1 billion in deposits. The
Corporation issued approximately 81.1 million shares of common stock to
shareholders of Meridian based on an exchange ratio of 1.225 shares of the
Corporation's common stock for each share of Meridian common stock. At a
February 6, 1996 shareholders' meeting, the Corporation's shareholders approved
an increase in the number of authorized shares from 200 million to 350 million.
On February 23, 1996, Meridian acquired United Counties, a New Jersey bank
holding company with $1.6 billion in assets in a transaction accounted for as a
pooling of interests. Accordingly, the consolidated accounts of Meridian include
United Counties for all periods presented.
The Meridian acquisition was accounted for under the pooling of interests method
of accounting; accordingly, the consolidated financial statements include the
consolidated accounts of Meridian for all periods presented. Financial
information on a separate company basis for the two years ended December 31,
1995 for the Corporation and Meridian (including United Counties) was as
follows:
<TABLE>
<CAPTION>
1995 1994
-------------------------- ----------------------------
The (Unaudited) The (Unaudited)
Corporation Meridian Corporation Meridian
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Net interest income..................... $1,488,534 $678,391 $1,389,369 $678,646
Provision for losses on loans........... 105,000 38,877 246,900 27,261
Non-interest income..................... 605,666 276,556 562,264 226,223
Non-financial expenses.................. 1,274,398 612,695 1,317,561 608,736
Provision for income taxes.............. 262,565 101,372 141,810 82,992
Income before cumulative effect of a
change in accounting principle......... 452,237 202,003 245,362 185,880
Cumulative effect of a change in
accounting principle................... - - (2,730)(a)
Net income.............................. 452,237 202,003 245,362 183,150
<PAGE>
Income per share before cumulative
effect of a change in accounting
principle.............................. $ 3.22 $ 3.03 $ 1.73 $ 2.72
Net income per share.................... 3.22 3.03 1.73 2.68
Cash dividends declared................. 1.44 1.45 1.24 1.34
</TABLE>
- ----------
(a) Meridian adopted FAS 112 on January 1, 1994, the date required under that
statement, and recognized a charge of $4,200, $2,730 after-tax, as the
cumulative effect of a change in accounting principle. CoreStates adopted FAS
112 on January 1, 1993. As permitted under pooling of interests accounting, the
restated consolidated financial statements are prepared as if Meridian also
adopted FAS 112 effective January 1, 1993.
The restated consolidated statements of income for 1995 and 1994 reflect a
conforming accounting adjustment for Statement of Financial Accounting Standards
No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions"
("FAS 106"). The Corporation elected to recognize immediately the January 1,
1992 transitional liability of $128,706 pre-tax, $84,946 after-tax, as the
cumulative effect of a change in accounting principle in the first quarter of
1992. Meridian adopted FAS 106 on January 1, 1993, the date required under that
statement. As permitted by FAS 106, Meridian elected to amortize its liability
over 20 years. As permitted under pooling of interests accounting, the restated
financial information is prepared as if Meridian adopted FAS 106 effective
January 1, 1992 and immediately recognized the $28,827, $18,738 after-tax,
transitional liability. Restated salaries, wages and benefits have been adjusted
accordingly.
3. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" ("FAS 107"), requires disclosure of fair value
information about financial instruments, whether or not required to be
recognized in the balance sheet, for which it is practicable to estimate that
value. FAS 107 defines a financial instrument as cash, evidence of ownership
interest in an entity, or a contractual obligation or right that will be settled
with another financial instrument.
In cases where quoted market prices are not available, fair values are based on
estimates using discounted cash flow or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Fair value estimates derived
through those techniques cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. FAS 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the
Corporation.
The following table summarizes the carrying amount and fair value estimates of
financial instruments at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
--------------------------------- ---------------------------------
Carrying Carrying
or Notional Fair or Notional Fair
Amount Value Amount Value
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Assets:
Cash and short-term assets............... $ 6,415,135 $ 6,415,135 $ 6,291,340 $ 6,291,340
Investment securities.................... 4,083,224 4,086,409 5,632,232 5,648,279
Trading account assets................... 122,317 122,317 147,218 147,218
Net loans, excluding leases.............. 30,834,492 30,837,703 29,876,531 30,293,254
Liabilities:
Demand and savings deposits.............. 22,629,513 22,629,513 23,063,053 23,063,053
Time deposits, including overseas
branches and subsidiaries............... 11,097,643 11,321,471 10,900,767 11,065,260
Short-term borrowings.................... 2,633,157 2,633,157 3,677,013 3,677,013
Long-term debt........................... 3,049,297 3,059,173 2,212,099 2,266,725
Off-balance sheet asset (liability):
Letters of credit........................ 2,893,214 (28,931) 2,873,265 (27,659)
Commitments to extend credit............. 19,569,566 (21,204) 18,438,277 (16,135)
Mortgage loans sold and loan servicing
<PAGE>
acquired with recourse................ 361,410 (9,637) 434,628 (12,260)
Derivative financial instruments......... 20,173,225 96,629 16,091,322 237,649
</TABLE>
Fair value estimates, methods, and assumptions for the Corporation's financial
instruments are set forth below:
Cash and due from banks and short-term instruments - The carrying amounts
reported in the balance sheet for cash and due from banks and short-term
instruments approximate their fair values. Short-term instruments include: time
deposits; Federal funds sold; and securities purchased under agreements to
resell, all of which generally have original maturities of less than 90 days.
Investment securities - Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Trading account assets - Fair values for the Corporation's trading account
assets, which also are the amounts recognized in the balance sheet, are based on
quoted market prices where available. If quoted market prices are not available,
fair values are based on quoted market prices of comparable instruments or are
derived from pricing models or formulas using discounted cash flows.
Loans - Fair values are estimated for loans in groups with similar financial and
risk characteristics. Loans are segregated by type including: commercial and
industrial; commercial real estate; residential real estate; credit card and
other consumer; financial institutions; factoring receivables; and foreign. Each
loan type is further segmented into fixed and variable rate interest terms and
by performing and non-performing categories in order to estimate fair values.
The fair value of fixed-rate performing loans is calculated by discounting
scheduled principal and interest cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and interest rate risk
inherent in the loan type at December 31, 1996 and 1995. The estimate of
maturity is based on the Corporation's historical experience with repayments for
each loan type, modified by an estimate of the effect of current economic and
lending conditions. For performing residential mortgage loans, fair value is
estimated by referring to secondary market source pricing.
For credit card loans, cash flows and maturities are estimated based on
contractual interest rates and historical experience and are discounted using
secondary market rates adjusted for differences in servicing and credit costs.
This estimate does not include the benefit that relates to cash flows which
could generate from new loans to existing cardholders over the remaining life of
the portfolio.
For variable rate loans that reprice frequently and which have experienced no
significant change in credit risk, fair values are based on carrying amounts.
Fair value for non-performing loans is based on discounting estimated cash flows
using a rate commensurate with the risk associated with the estimated cash
flows. Assumptions regarding cash flows and discount rates are determined using
available market information and specific borrower information.
Deposit liabilities - The fair values disclosed for demand deposits (non-
interest bearing checking accounts, NOW accounts, savings accounts, and money
market accounts) are, by FAS 107 definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). The carrying
amounts for variable-rate, fixed-term certificates of deposit approximate their
fair values. Fair values for fixed-rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates offered on
certificates at December 31, 1996 and 1995, respectively, to an estimate of
aggregate expected maturities for those certificates of deposit.
The estimated fair values do not include the benefit that results from funding
provided by core deposit liabilities as compared to the cost of borrowing funds
in the financial markets.
<PAGE>
Short-term funds borrowed - The carrying amounts of Federal funds purchased,
securities sold under agreements to repurchase, commercial paper and other
short-term borrowings approximate their fair values.
Long-term debt - The fair values for long-term debt are based on quoted market
prices where available. If quoted market prices are not available, fair values
are estimated using discounted cash flow analyses based on the Corporation's
borrowing rates at December 31, 1996 and 1995 for comparable types of borrowing
arrangements.
Off-balance sheet derivative financial instruments and commitments - Fair values
for the Corporation's futures, forwards, interest rate swaps, options, interest
rate caps and floors, foreign exchange contracts, tender option bonds and
Treasury float contracts are based on quoted market prices (futures); current
settlement values (forwards); quoted market prices of comparable instruments
(foreign currency exchange contracts); or, if there are no directly comparable
instruments, on pricing models or formulas using current assumptions (interest
rate swaps, interest rate caps and floors, tender option bonds, Treasury float
contracts and options). The fair value of commitments to extend credit, other
than credit card lines, is estimated using the fees currently charged to enter
into similar agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the counterparties. For fixed-
rate loan commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. The value of commitments to
extend credit under credit card lines is embodied in the benefit that relates to
estimated cash flows from new loans expected to be generated from existing
cardholders over the remaining life of the portfolio.
The fair value of standby and commercial letters of credit is based on fees
currently charged for similar agreements or on the estimated cost to terminate
the agreements or otherwise settle the obligations with the counterparties.
4. LOAN PORTFOLIO
The following are summaries of certain loan categories, net of unearned
discounts, for the two years ended December 31, 1996 (in thousands):
<TABLE>
1996 1995
Domestic loans:
<S> <C> <C>
Commercial, industrial and other....... $13,906,646 $12,597,470
Real estate loans:
Construction and development.......... 554,924 607,845
Residential........................... 4,676,016 5,648,661
Other, primarily commercial mortgages
and commercial loans secured by
owner-occupied real estate........... 4,541,697 4,712,473
----------- -----------
Total real estate loans............. 9,772,637 10,968,979
----------- -----------
Consumer loans:
Installment........................... 2,870,934 2,912,670
Credit card........................... 1,674,921 1,527,447
----------- -----------
Total consumer loans................ 4,545,855 4,440,117
----------- -----------
Financial institutions................. 1,153,715 961,289
Factoring receivables.................. 411,280 557,272
Lease financing........................ 1,232,213 1,167,356
<PAGE>
<CAPTION>
----------- -----------
<S> <C> <C>
Total domestic loans............... 31,022,346 30,692,483
=========== ===========
Foreign loans:
Loans to or guaranteed by foreign
banks:
Government owned and central
banks............................... - -
Other foreign banks.................. 1,369,015 615,166
Commercial and industrial.............. 385,426 406,503
Loans to other financial institutions.. 245 -
----------- -----------
Total foreign loans................. 1,754,686 1,021,669
----------- -----------
Total loans....................... $32,777,032 $31,714,152
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
The following represents the Corporation's non-accrual loans, renegotiated loans
and other real estate owned for the years ended December 31, 1996 and 1995:
1996 1995
---------- -----------
Non-accrual loans
<S> <C> <C>
Domestic............................... $220,770 $223,602
Foreign................................ - -
Total non-accrual loans........... 220,770 223,602
Renegotiated loans (a)................. 18 7,202
-------- --------
Total non-performing loans........ 220,788 230,804
-------- --------
Other real estate owned (OREO)......... 24,175 37,502
-------- --------
Total non-performing assets............ $244,963 $268,306
======== ========
- ---------------
(a) There were no foreign renegotiated loans in any periods presented.
</TABLE>
The following reflects the effect of non-accrual and renegotiated loans on both
interest income and net interest income for the three years ended December 31,
1996, 1995 and 1994:
1996 1995 1994
-------- -------- -------
Interest income which would have been recorded in accordance with original
terms:
Domestic.......................... $20,244 $27,452 $35,554
Foreign........................... - 8 9
------- ------- -------
Total......................... 20,244 27,460 35,563
------- ------- -------
Interest income reflected in total
operating income:
Domestic.......................... 8,977 14,354 12,599
------- ------- -------
Total......................... 8,977 14,354 12,599
------- ------- -------
Net reduction in interest income and
net interest income................... $11,267 $13,106 $22,964
======= ======= =======
The Corporation has traditionally maintained limits on industry, market and
borrower concentrations as a way to diversify and manage credit risk. The
Corporation's current policy is to limit industry concentrations to 50% of total
equity and to limit market segment concentrations to 10% of total assets. The
Corporation manages industry concentrations by applying these dollar limits to
industries that have common risk characteristics.
At December 31, 1996 and 1995, the Corporation had loans totaling $110,948 and
$152,436, respectively, to its officers, directors and companies in which the
directors had a 10% or more voting interest. These loans were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unrelated persons and do
not involve more than normal risk of collectibility. The 1996 additions and
reductions were $376,984 and $418,472, respectively.
Included in loans at December 31, 1996 and 1995 were $446,000 and $514,000,
respectively, of loans held for sale and carried at lower of cost or market.
The book value of real estate loans transferred to other real estate owned
during 1996, 1995 and 1994 was $19,536, $29,337 and $79,539, respectively.
The following presents information on derivative financial instruments used to
manage interest rate risk associated with loans:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
At December 31,
<PAGE>
<S> <C> <C>
Notional value................ $9,118,000 $4,251,000
Unrealized gains.............. 64,000 104,000
Unrealized losses............. 19,000 5,000
Effect on loan yield for the
years ended December 31,
From.......................... 8.92% 9.37%
To............................ 9.03% 9.43%
</TABLE>
5. INVESTMENT SECURITIES
The carrying and fair values of investment securities at December 31, 1996 and
1995 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
1996
Held-to-Maturity
U.S. Treasury and
Government agencies.......... $ 362,736 $ 3,501 $ 815 $ 365,422
State and municipal............. 366,012 8,548 95 374,465
Mortgage-backed................. 463,796 52 1,023 462,825
Other:
Domestic..................... 442,082 340 7,529 434,893
Foreign...................... 54,432 224 18 54,638
---------- ------- ------- ----------
Total held-to-maturity..... $1,689,058 $12,665 $ 9,480 $1,692,243
========== ======= ======= ==========
Available-for-Sale
U.S. Treasury and
Government agencies.......... $1,512,966 $ 9,207 $ 1,061 $1,521,112
State and municipal............. 59,864 468 335 59,997
Mortgage-backed................. 505,527 4,494 4,854 505,167
Other:
Domestic..................... 186,029 14,096 939 199,186
Foreign...................... 87,741 20,974 11 108,704
---------- ------- ------- ----------
Total available-for-sale... $2,352,127 $49,239 $ 7,200 $2,394,166
========== ======= ======= ==========
1995
Held-to-Maturity
U.S. Treasury and
Government agencies.......... $ 978,603 $12,198 $ 1,310 $ 989,491
State and municipal............. 469,330 13,276 552 482,054
Mortgage-backed................. 1,136,486 5,587 4,950 1,137,123
Other:
Domestic..................... 444,090 4,107 12,323 435,874
Foreign..................... 31,408 16 2 31,422
---------- ------- ------- ----------
Total held-to-maturity..... $3,059,917 $35,184 $19,137 $3,075,964
========== ======= ======= ==========
Available-for-Sale
U.S. Treasury and
Government agencies.......... $1,570,689 $17,098 $ 1,744 $1,586,043
State and municipal............. 78,625 1,174 94 79,705
Mortgage-backed................. 620,727 6,508 4,838 622,397
Other:
Domestic..................... 186,409 45,555 955 231,009
Foreign...................... 31,844 21,317 - 53,161
---------- ------- ------- ----------
Total available-for-sale... $2,488,294 $91,652 $ 7,631 $2,572,315
========== ======= ======= ==========
On November 15, 1995, the FASB issued a Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities", which permitted an enterprise to reassess the
<PAGE>
appropriateness of the classification of all investment securities held between
November 15, 1995 and December 31, 1995. Based on its reassessment, the
Corporation reclassified $1,726,739 in investment securities previously
classified as held-to-maturity to the available-for-sale category. Unrealized
gains on transferred investments were $12,160, unrealized losses were $8,340,
and the fair value was $1,730,559.
Marketable equity securities are carried in the available-for-sale portfolio and
have been written up by $34,808 at December 31, 1996 and $66,061 at December 31,
1995, the aggregate of their excess fair values over cost, through after-tax
credits to retained earnings. The Corporation recorded pre-tax gains of $13,210
in 1996, $7,654 in 1995 and $14,167 in 1994 on sales of certain domestic equity
securities. During 1996 and 1995, the Corporation recorded pre-tax gains of
$28,656 and $13,596, on the exchange of certain domestic equity securities.
During 1996, 1995 and 1994, the Corporation recorded pre-tax gains of $18,924,
$939 and $2,567 on sales of foreign equity securities.
Included in mortgage-backed securities available-for-sale at December 31, 1996
were mortgage residual securities with an amortized cost and fair value of
$5,989 and $7,569, respectively. Pre-tax write-downs of $5,276 were recognized
in 1994 on these investments and were included in securities gains and losses.
At December 31, 1996 and 1995, there were no investments in securities of any
single, non-Federal issuer in excess of 10% of shareholders' equity.
Securities with a carrying value of $1,734,355 were pledged at December 31, 1996
to secure public deposits, trust deposits, and for certain other purposes as
required by law.
The amortized cost and estimated fair value of debt securities at December 31,
1996, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to prepay
obligations without prepayment penalties.
Amortized Fair
Cost Value
----------- -----------
Held-to-Maturity
Due in one year or less.................. $ 220,553 $ 221,808
Due after one year through five years.... 595,215 599,835
Due after five years through ten years... 94,845 97,802
Due after ten years...................... 46,533 49,385
Mortgage-backed securities............... 463,796 462,825
---------- ----------
$1,420,942 $1,431,655
========== ==========
Available-for-Sale
Due in one year or less.................. $ 562,884 $ 564,608
Due after one year through five years.... 1,100,626 1,106,603
Due after five years through ten years... 11,591 11,627
Due after ten years...................... 26,130 26,161
Mortgage-backed securities............... 505,527 505,167
---------- ----------
$2,206,758 $2,214,166
========== ==========
Proceeds from sales of investments in debt securities during 1996, 1995, and
1994 were $1,411,398, $560,022, and $739,457,respectively. Gross gains of $4,100
in 1996, $11,180 in 1995, and $14,646 in 1994, and gross losses of $5,378 in
1996, $1,894 in 1995, and $5,005 in 1994 were realized on those sales.
6. REGULATORY AND CAPITAL MATTERS
The Corporation and its subsidiaries are subject to the regulations of certain
Federal and state agencies including minimum risk-based and leverage capital
guidelines issued by the Federal Reserve Board and Comptroller of the Currency.
<PAGE>
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 Corporation must meet specific capital guidelines that
involve quantitative measures of the Corporation's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Corporation's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors.
At December 31, 1996, management believes that the Corporation and its principal
bank subsidiary, CBNA, meet all capital adequacy requirements to which they are
subject. The following table illustrates the Corporation's and CBNA's risk-
based and leverage capital ratios at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Per Regulatory Guidelines
---------------------------------------------------------------
Actual Minimum "Well-Capitalized"
------------------------ ----------------------------- --------------------------------
December 31, 1996 Amount Ratio Amount Ratio Amount Ratio
-------------- -------- --------------- ------------ ----------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital (a):
Consolidated .................... $3,725,318 9.45% $1,576,914 4% $2,365,372 6%
CBNA ............................ 3,270,045 8.90 1,471,992 4 2,207,987 6
Total capital (b):
Consolidated .................... 5,215,789 13.23 3,153,829 8 3,942,286 10
CBNA ............................ 4,206,434 11.43 2,943,983 8 3,679,979 10
Tier 1 leverage ratio:
Consolidated .................... 3,725,318 8.46 1,321,090 3 2,201,817 5
CBNA ............................ 3,270,045 7.80 1,257,745 3 2,096,241 5
December 31, 1995 Tier 1 capital (a):
Consolidated .................... 3,534,144 9.20 1,537,225 4 2,305,838 6
CBNA ............................ 1,404,622 7.57 742,217 4 1,113,326 6
Total capital (b):
Consolidated .................... 4,890,929 12.71 3,074,450 8 3,843,063 10
CBNA ............................ 1,966,829 10.60 1,484,434 8 1,855,543 10
Tier 1 leverage ratio:
Consolidated .................... 3,534,144 7.99 1,327,425 3 2,212,374 5
CBNA ............................ 1,404,622 6.83 616,934 3 1,028,223 5
</TABLE>
(a) Consists primarily of common shareholders' equity and Trust Capital
Securities, less goodwill and certain intangible assets.
(b) Consists of Tier 1 capital plus qualifying subordinated debt and the
allowance for loan losses, within permitted limits.
The primary source of funds for cash dividend payments by the Corporation to its
shareholders is dividends received from its banking subsidiaries. The approval
of the Comptroller of the Currency is required for a nationally chartered bank
to pay dividends if the total of all dividends declared in any calendar year
exceeds the bank's net profits (as defined by national banking regulations) for
that year combined with its retained net profits for the preceding two calendar
years. Under this formula, CBNA and CBD can declare dividends without approval
of the Comptroller of the Currency of approximately $112,000 and $18,000,
respectively, plus an additional amount equal to CBNA's and CBD's retained net
profits for 1997 up to the date of any such dividend declaration. The Federal
Reserve Act requires that extensions of credit by CBNA to certain affiliates,
including the Corporation, be secured by specified amounts and types of
collateral, that extensions of credit to any such affiliate generally be limited
to 10% of capital and surplus (as defined in that Act) and that extensions of
credit to all such affiliates be limited to 20% of capital and surplus.
The Corporation's banking subsidiaries are required to maintain reserve balances
with the Federal Reserve Bank. The average amount of those reserve balances for
the years ended December 31, 1996 and 1995 were approximately $257,000 and
$429,000, respectively.
7. ALLOWANCE FOR LOAN LOSSES
The following represents an analysis of changes in the allowance for loan losses
for the years ended December 31, 1996, 1995 and 1994:
<PAGE>
<TABLE>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of period................. $ 670,265 $ 681,124 $ 636,915
Provision charged to operating expense......... 228,767 144,002 279,195
Recoveries of loans previously charged off..... 92,985 85,226 83,914
Loan charge-offs............................... (281,690) (240,087) (341,454)
Allowance for loans sold at date of sale....... - - (2,377)
Allowance for loans purchased at date
of purchase................................. - - 1,192
Allowance for loans of bank acquired
under purchase method of accounting........... - - 23,739
--------- --------- ---------
Balance at end of period....................... $ 710,327 $ 670,265 $ 681,124
========= ========= =========
</TABLE>
The following presents information on loans that are considered impaired under
FAS 114:
At December 31, 1996 1995
--------- ---------
Recorded investment in impaired loans......... $183,330 $203,399
Impaired loans against which a portion
of the allowance for loan losses is
specifically allocated..................... 74,609 88,973
Amount of allowance for loan losses
specifically allocated to impaired loans... 15,105 24,445
For the years ended December 31,
Average recorded investment in impaired
loans...................................... 197,854 257,746
Interest income recognized on impaired
loans...................................... 8,977 14,354
8. PREMISES AND EQUIPMENT
Premises and equipment on the consolidated balance sheet is presented net of
accumulated depreciation and amortization of $667,412 and $711,830 at December
31, 1996 and 1995, respectively. Depreciation and amortization of premises and
equipment for the years ended December 31, 1996, 1995, and 1994, was $95,897,
$98,033 and $95,240, respectively.
9. OPERATING LEASES
Rental expense, reduced by sublease rental income, charged to operations was
$90,982, $85,419 and $85,554 for 1996, 1995 and 1994, respectively.
10. DEPOSITS
The following presents a breakdown of deposits at December 31, 1996 and 1995:
1996 1995
----------- -----------
Domestic:
Non-interest bearing checking.... $ 9,330,445 $ 8,937,147
Savings, NOW and money
market accounts................ 13,299,068 14,125,906
Time deposits.................... 9,687,887 9,757,820
----------- -----------
Total domestic deposits....... 32,317,400 32,820,873
Overseas branches and subsidiaries.. 1,409,756 1,142,947
----------- -----------
Total deposits................ $33,727,156 $33,963,820
=========== ===========
Domestic time deposits in denominations of $100 or more at December 31, 1996,
1995, and 1994 were:
<PAGE>
1996 1995 1994
----------- ---------- ----------
Commercial certificates of deposit.. $ 754,437 $ 695,970 $ 611,206
Other domestic time deposits,
principally savings certificates... 613,126 501,058 533,336
----------- ---------- ----------
Total........................... $ 1,367,563 $1,197,028 $1,144,542
=========== ========== ==========
Interest expense on domestic time deposits in denominations of $100 or more for
the years ended December 31, 1996, 1995, and 1994 was:
1996 1995 1994
----------- ---------- ----------
Interest expense:
Commercial certificates of
deposit........................... $ 30,857 $ 36,520 $ 22,499
Other domestic time deposits,
principally savings certificates.. 25,451 30,057 24,138
----------- ---------- ----------
Total........................... $ 56,308 $ 66,577 $ 46,637
=========== ========== ==========
Substantially all of the deposits of overseas branches and subsidiaries were
time deposits in denominations of $100 or more for each of the three years
presented.
The following presents information on derivative financial instruments used to
manage interest rate risk associated with deposits:
1996 1995
----------- -----------
At December 31,
Notional value................. $5,314,000 $6,962,000
Unrealized gains............... 50,000 106,000
Unrealized losses.............. 16,000 8,000
Effect on deposit cost for the
year ended December 31,
From........................... 3.62% 3.75%
To............................. 3.49% 3.76%
11. SHORT-TERM FUNDS BORROWED
Short-term funds borrowed at December 31, 1996 and 1995 include the following:
1996 1995
------------ -----------
Federal funds purchased (a)................ $ 532,334 $1,129,432
Securities sold under agreements to
repurchase (b)............................ 656,397 812,281
Commercial paper (c)....................... 675,181 1,255,656
Other short-term funds borrowed (d)........ 769,245 479,644
---------- ----------
Total short-term funds borrowed (e)..... $2,633,157 $3,677,013
========== ==========
(a) Federal funds purchased generally represent the overnight Federal funds
transactions of banking subsidiaries with correspondent banks. The weighted
average interest rate paid was 5.54% in 1996, 6.02% in 1995 and 4.58% in 1994.
The maximum amount outstanding at any month-end was $1,977,950 during 1996,
$2,060,375 during 1995, and $1,646,440 during 1994.
(b) Securities sold under agreements to repurchase usually mature within one to
thirty days or are due on demand. The weighted average interest rate paid was
4.52% in 1996, 5.03% in 1995 and 3.44% in 1994. The maximum amount outstanding
at any month-end was $836,722 during 1996, $863,937 during 1995, and $1,025,217
during 1994.
<PAGE>
(c) Commercial paper issued by CSCC is used to finance the short-term borrowing
requirements of certain banking-related activities. Commercial paper is issued
with maturities of not more than nine months and there are no provisions for
extension, renewal or automatic rollover. The weighted average interest rate on
commercial paper borrowings was 5.44% in 1996, 5.94% in 1995, and 4.24% in 1994.
The maximum amount outstanding at any month-end was $1,106,078 during 1996,
$1,388,927 during 1995, and $919,292 during 1994.
At December 31, 1996, the Corporation had a $700,000 revolving credit
facility from unaffiliated banks. The facility was established in support of
commercial paper borrowings, Medium Term Note (see Note 12) issuance and general
corporate purposes. Unless extended by the Corporation in accordance with the
terms of the facility agreement, the facility expires February 2000. There were
no borrowings under this facility at December 31, 1996. The interest rate
charged for usage of these lines varies with money market conditions.
(d) Other short-term funds borrowed include term Federal funds purchased,
short-term Bank Notes and demand notes payable to the U.S. Treasury.
(e) The aggregate average short-term funds borrowed were $2,958,655 in 1996,
$3,751,518 in 1995, and $3,435,972 in 1994. The weighted average interest rate
was 5.18% in 1996, 5.71% in 1995 and 4.35% in 1994. The average interest rate is
calculated primarily on a daily average of short-term funds borrowed.
12. LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1995 includes the following:
CoreStates Financial Corp: 1996 1995
------------ ------------
6 5/8% Notes due 2000 (a)......................... $ 150,000 $ 150,000
7 7/8% Subordinated Notes due 2002 (b)............ 100,000 100,000
7 7/8% Subordinated Notes due 1996................ - 75,000
8 5/8% Mortgages due 2001......................... 6,603 8,823
Unamortized Discounts............................. (271) (325)
---------- ----------
256,332 333,498
---------- ----------
CSCC:
6 3/4% Guaranteed Subordinated
Notes due 2006 (c).............................. 200,000 -
5 7/8% Guaranteed Subordinated
Notes due 2003 (c).............................. 200,000 200,000
6 5/8% Guaranteed Subordinated
Notes due 2005 (c).............................. 175,000 175,000
9 5/8% Guaranteed Subordinated
Notes due 2001 (c).............................. 150,000 150,000
9 3/8% Guaranteed Subordinated
Notes due 2003 (c).............................. 100,000 100,000
Medium Term Notes (d)............................. 1,509,000 1,036,035
Unamortized Discounts............................. (4,990) (3,631)
---------- ----------
2,329,010 1,657,404
---------- ----------
CoreStates Capital I:
8% Trust Capital Securities due 2026(e)........... 300,000
Unamortized Discounts............................. (6,491)
----------
293,509
----------
Other subsidiaries:
6 5/8% Subordinated Notes due 2003 (f)............ 150,000 150,000
Federal Home Loan Bank Borrowings (g)............. 2,888 42,888
Various other..................................... 18,175 29,022
Unamortized Discounts............................. (617) (713)
---------- ----------
170,446 221,197
---------- ----------
<PAGE>
Total long-term debt (h).......................... $3,049,297 $2,212,099
========== ==========
(a) The Notes are unsecured and senior in right of payment to all subordinated
indebtedness of the Corporation. The Notes are not redeemable by the Corporation
or the holders prior to the maturity date and are not entitled to the benefit of
any sinking fund.
(b) The Notes are unsecured and subordinate in right of payment to all present
and future senior indebtedness of the Corporation. The Notes are not redeemable
by the Corporation or the holders prior to the maturity date and are not
entitled to the benefit of any sinking fund.
(c) The Notes are not subject to redemption prior to maturity and are
unconditionally guaranteed, on a subordinated basis, as to payment of principal
and interest by the Corporation. The Notes are subordinated to all existing and
future senior CSCC indebtedness and the guarantee is subordinated to all
outstanding senior Corporation indebtedness.
(d) CSCC can issue Medium Term Notes (Senior and Subordinated) with maturities
of nine months or greater from date of issue. The interest rate or interest rate
formula on each Note is established by CSCC at the time of issuance. The Senior
Notes are unconditionally guaranteed as to payment of principal and interest by
the Corporation. The Subordinated Notes are unconditionally guaranteed, on a
subordinated basis, as to payment of principal and interest by the Corporation.
The Subordinated Notes are subordinated to all existing and future senior CSCC
indebtedness and the guarantee is subordinated to all existing and future senior
Corporation indebtedness. At December 31, 1996, $1,509,000 of debt is
outstanding with maturities up to five years. Interest rates are predominately
variable.
Under an existing shelf registration statement filed with the
Securities and Exchange Commission, the Corporation had debt and capital
securities that were registered but unissued of approximately $1,085,000 at
December 31, 1996.
(e) The Trust Capital Securities evidence a preferred ownership interest in a
trust, of which 100% of the common equity is owned by CBNA. The Trust Capital
Securities are unconditionally guaranteed by CBNA. The proceeds from issuance of
the Trust Capital Securities are invested in 8% Junior Subordinated Deferrable
Interest Debentures of CBNA due 2026. These Subordinated Debt Securities have
provisions enabling certain actions such as redemption or the deferment of the
semiannual payments of interest, which will impact the Trust Capital Securities.
CBNA may redeem the Subordinated Debt Securities in whole or in part, on or
after December 15, 2006. In addition, Subordinated Debt Securities may be
redeemed by CBNA at any time upon the occurrence of certain events. In the event
of such a redemption of the Subordinated Debt Securities, the proceeds of such
payment or repayment shall concurrently be applied to redeem the Trust Capital
Securities.
(f) The Notes were issued by CBNA and are unsecured and subordinate to the
claims of depositors and other creditors. The Notes are not redeemable by CBNA
or the holders prior to the maturity date and are not entitled to the benefit of
any sinking fund.
(g) The borrowing matures in July 2016 and carries a fixed interest rate of
6.66%. These borrowings require membership in the Federal Home Loan Bank of
Pittsburgh and the maintenance of available collateral with a fair value which
approximates the total amount of the outstanding debt.
(h) The consolidated aggregate maturities for long-term debt for the years
ending December 31, 1997 through 2001 are: $376,637; $528,562; $395,740;
$216,672; and $298,203, respectively.
The following presents information on derivative financial instruments used to
manage interest rate risk associated with long-term debt:
<PAGE>
1996 1995
---------- --------
At December 31,
Notional value........................... $1,019,000 $614,000
Unrealized gains......................... 16,000 24,000
Unrealized losses........................ 13,000 8,000
Effect on long-term debt cost for
the years ended December 31,
From..................................... 6.53% 6.78%
To....................................... 6.38% 6.76%
13. RETIREMENT AND BENEFIT PLANS
The fair value of the assets in the Corporation's defined benefit pension plans
exceeded the projected benefit obligation by $57,158 at December 31, 1996, based
on current and estimated future salary levels. The excess of the fair value of
plan assets is reconciled to the accrued pension cost included in other
liabilities as follows:
December 31,
-----------------------
1996 1995
--------- --------
Plan assets at fair value(a)...................... $902,947 $815,621
-------- --------
Present value of benefit obligation:
Accumulated benefits based on salaries to date,
including vested benefits of $667,536 in 1996
and $611,077 in 1995.......................... 688,102 647,743
Additional benefits based on estimated future
salary levels................................. 157,687 175,454
-------- --------
Projected benefit obligation...................... 845,789 823,197
-------- --------
Amount the fair value of plan assets exceeds (is
less than) the projected benefit obligation at
December 31,................................... 57,158 (7,576)
Reconciliation:
Unrecognized prior service cost................ 30,770 11,676
Unrecognized net asset from date of initial
application................................... (20,016) (25,357)
Net deferred actuarial loss (gain)............. (91,835) 22,151
-------- --------
Prepaid (accrued) pension expense included in
other liabilities................................ $(23,923) $ 894
======== ========
- ---------------
(a) Primarily U.S. Government securities, U.S. agency securities, fixed income
securities, common stock, and commingled funds managed by subsidiary banks.
Net pension cost for the years ended December 31, 1996, 1995 and 1994 included
the following expense (income) components:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
Service cost benefits earned during
the period.......................... $ 29,020 $ 24,492 $ 30,411
Interest cost on projected benefit
obligation.......................... 60,793 54,497 51,881
Actual (return) loss on plan assets... (121,868) (162,143) 22,038
Net amortization and deferral......... 53,887 96,484 (80,394)
--------- --------- --------
Net pension cost.................... $ 21,832 $ 13,330 $ 23,936
========= ========= ========
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation for the Corporation was 7.5% and
7.0%-7.5%; respectively, at December 31, 1996 and 1995. The rate of increase on
<PAGE>
future compensation levels was 5.0% to 6.0% in both 1996 and 1995. The expected
long-term rate of return on plan assets was 7.5%-9.5% in both 1996 and 1995.
The Corporation sponsors a 401(k) savings plan for substantially all its
employees. Contributions to the savings plan for the employer's match were
$18,955 in 1996, $18,192 in 1995, and $23,140 in 1994.
The ESOP is a leveraged plan funded through a direct loan from the Corporation.
The ESOP has acquired a total of 2,450,000 shares of common stock for
distribution to eligible employees ratably over a 20 year period. Compensation
cost has been recognized based on the fair market value of the shares committed
to be released to employees. Total compensation cost recognized was $5,378 in
1996 and $3,600 in 1995. Dividends on allocated shares are paid to participants
and are charged to retained earnings. Dividends on unallocated shares are used
by the ESOP to reduce its loan. Effective January 1, 1997 the ESOP was combined
with the Corporation's 401(k) savings plan.
The Corporation and its subsidiaries provide postretirement health care and life
insurance benefits for substantially all retired employees. Postretirement
benefits are provided through an insurance company whose premiums are based on
the benefits paid during the year. The postretirement health care plan is
contributory, with retiree contributions based on years of service.
The liability for postretirement benefits included in other liabilities at
December 31, 1996 and 1995 was as follows:
1996 1995
--------- ---------
Accumulated postretirement benefit obligation:
Retirees...................................... $ (68,702) $(125,502)
Fully eligible active plan participants....... (1,827) (3,864)
Other active plan participants................ (29,748) (39,709)
--------- ---------
Accumulated postretirement benefit obligation.... (100,277) (169,075)
Plan assets at fair value (a).................... 52,591 46,974
--------- ---------
Unfunded obligation at December 31,.............. (47,686) (122,101)
Unrecognized prior service cost.................. (45,239) 115
Unrecognized net gain............................ (51,157) (22,638)
--------- ---------
Accrued postretirement benefit obligation
included in other liabilities................... $(144,082) $(144,624)
========= =========
- ------------------
(a) Primarily municipal bonds and short-term investments.
Net periodic postretirement benefit cost for the years ended December 31, 1996,
1995 and 1994 included the following expense (income) components:
1996 1995 1994
------- ------- -------
Service cost benefits earned during
the period............................. $ 2,769 $ 3,044 $ 3,602
Interest cost on accumulated
postretirement benefit obligation...... 7,947 11,932 11,931
Actual return on plan assets............. (1,527) (1,107) (461)
Net amortization and deferral............ (6,069) (1,436) (730)
------- ------- -------
Net periodic postretirement benefit
cost................................... $ 3,120 $12,433 $14,342
======= ======= =======
For measurement purposes, the rate of increase in the per capita cost of covered
health care benefits was assumed to be 5.5% per year and remains at that level
until a predetermined benefit cap is reached. This fixed dollar cap was
established as the per capita projected cost level in 1997 associated with the
Corporation's indemnity medical plan. The health care cost trend rate assumption
has an effect on the amounts reported. To illustrate, increasing the
<PAGE>
assumed health care cost trend rates by 1 percentage point in each year would
increase the accumulated postretirement benefit obligation as of December 31,
1996 by $4,479 and the aggregate of the service and interest cost components of
net periodic postretirement benefit cost for the year then ended by $745.
The expected long-term rate of return on plan assets was 6.0%. The weighted-
average discount rate used in determining the Corporation's accumulated
postretirement benefit obligation was 7.5% and 7.0%, respectively, at December
31, 1996 and 1995.
14. LONG-TERM INCENTIVE PLAN
The Corporation has outstanding options granted under the Corporation's long-
term incentive plan (the "Plan"). As provided in the Plan, a variety of
incentives can be issued to eligible participants including restricted stock
awards, incentive stock options, non-qualified stock options, stock appreciation
rights, performance units and cash awards. Meridian, Constellation,
Independence, United Counties and Germantown had maintained similar plans.
Options granted under those plans were assumed by the Corporation upon
consummation of their respective acquisitions. The Plan provides for a maximum
number of options available to be granted each year equal to 2% of outstanding
common shares as of January 1 of that year. Options under the Plan are granted
to purchase the Corporation's common shares at market value on the date of grant
and are exercisable one year from the date of grant for a period not exceeding
ten years from the date of grant. Stock appreciation rights may be granted in
conjunction with the granting of an option.
Information on option activity for 1996 follows:
Shares under Weighted-Average
Option Exercise Price
------------ ----------------
Balance at January 1, 1996....... 8,581,554 $23.86
Options granted.................. 1,968,001 (a) 41.49
Options exercised................ (4,519,411) 23.27
Options canceled................. (241,080) 31.84
----------
Balance at December 31, 1996..... 5,789,064 29.98
==========
- -----------------
(a) The fair value of options granted during 1996 was $12.6 million.
The following table summarizes information about options outstanding at December
31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- ------------------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 3.99 to $15.67 293,947 2.69 years $13.34 293,947 $13.34
$16.12 to $23.27 912,288 6.20 21.51 912,288 21.51
$25.41 to $29.95 2,977,462 7.94 27.74 2,977,462 27.74
$37.96 to $42.63 1,605,367 9.13 41.98 221,843 37.96
--------- ---------
$ 3.99 to $42.63 5,789,064 7.73 29.98 4,405,540 25.37
========= =========
</TABLE>
The Corporation uses the intrinsic value method of accounting to measure
compensation expense. If the fair value method had been used to measure
compensation expense, net income would have been reduced by $7.4 million, or
$0.04 per share and $7.2 million, or $0.03 per share, to $641.8 million, or
$2.93 per share, and $647.9 million, or $2.92 per share, for the years ended
December 31, 1996 and 1995, respectively.
The fair value of options granted in 1996 and 1995 was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted-
average assumptions, respectively: risk-free interest rates of 5.49% to 7.80%,
<PAGE>
dividend yield of 4.0%, volatility factors of the expected market price of the
Corporation's common stock of .148 to .223, and a weighted-average expected life
of the options of 6 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Corporation's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS, COMMITMENTS AND
CONTINGENT LIABILITIES
In the normal course of business, there are outstanding commitments and
contingent liabilities which are not reflected in the financial statements.
These include various financial instruments with off-balance sheet risk used in
connection with the Corporation's asset and liability management, the management
of interest rate risk in securities trading positions and to provide for the
needs of customers. These involve varying degrees of credit, interest rate and
liquidity risk, but do not represent unusual risks for the Corporation and
management does not anticipate any significant losses as a result of these
transactions.
Derivative Financial Instruments Held or Issued for Purposes Other Than Trading
The Corporation uses off-balance sheet derivative financial instruments, such as
interest rate swaps, futures and caps, to manage interest rate risk. The
Corporation's exposure to interest rate risk stems from the mismatch between the
sensitivity to movements in interest rates of the Corporation's assets and
liabilities and from the spread risk between the rates on those assets and
liabilities and financial market rates. The use of derivatives to manage
interest rate risk falls into three categories: interest sensitivity
adjustments, interest rate spread protection and hedging anticipated asset
sales.
Interest rate swaps and futures are generally used to lengthen the interest rate
sensitivity of short-term assets and to shorten the repricing characteristics of
longer term liabilities. Interest rate caps are used to manage spread risk.
Interest rate caps are also used to offset the risk of upward interest rate
movement on adjustable rate mortgages and other products with imbedded caps as
well as to reduce the risk that interest rate spreads narrow on prime based
products. Gains or losses are used to adjust the basis of the related asset or
liability and interest differentials are adjustments of the related interest
income or expense.
In connection with anticipated sales of longer term assets acquired through
merger or generated in the loan origination process, the Corporation uses
interest rate swaps, rate locks and option agreements to reduce interest rate
sensitivity as the assets are readied for sale. Hedge gains or losses are used
to adjust the basis of the assets held for sale.
Derivative financial instruments used in the management of interest rate risk at
December 31, 1996 are summarized below (in millions):
<TABLE>
<CAPTION>
Interest Interest Interest
rate rate rate caps Other
swaps futures and floors derivatives Total
<S> <C> <C> <C> <C> <C>
Interest Sensitivity Adjustment:
Assets (primarily loans):
Notional amount $4,092 $4,451 $ 8 $ 80 $ 8,631
Unrealized gains 64 2 - - 66
Unrealized losses (19) - - - (19)
Deposits and other borrowings:
Notional amount 4,132 925 150 5,207
Unrealized gains 35 13 2 50
Unrealized losses (16) - - (16)
Long-term debt:
Notional amount 869 150 1,019
Unrealized gains 13 3 16
Unrealized losses (13) - (13)
Spread Protection:
Assets (primarily loans):
Notional amount 50 500 550
Unrealized gains 3 2 5
Unrealized losses - - -
Deposits and other borrowings:
Notional amount 107 107
Unrealized gains - -
Unrealized losses - -
Anticipated Asset Sales:
Notional amount 37 37
Unrealized gains - -
Unrealized losses - -
Total
Notional amount $9,143 $4,451 $1,540 $ 417 $15,551
------- ------ ------ ------ --------
Unrealized gains $ 115 $ 2 $ 15 $ 5 $ 137
------- ------ ------ ------ --------
Unrealized losses $ (48) $ - $ - $ - $ (48)
------- ------ ------ ------ --------
Net unrealized gains $ 67 $ 2 $ 15 $ 5 $ 89
------- ------ ------ ------ --------
</TABLE>
<PAGE>
A summary of interest rate swap contracts categorized by whether the Corporation
receives or pays fixed rates and stratified by repricing or maturity date is
below (in millions):
<TABLE>
<CAPTION>
Years
0-1 1-2 2-3 3-4 4-5 over 5 Total
<S> <C> <C> <C> <C> <C> <C> <C>
Receive Fixed/Pay Floating:
Receive Notional $1,775 $1,271 $1,346 $1,402 $1,538 $1,050 $8,382
Rate 6.32% 6.30% 6.79% 6.41% 6.50% 6.74% 6.50%
Pay Notional $8,382 $8,382
Rate 5.68% 5.68%
Pay Fixed/Receive Floating:
Pay Notional $ 15 $ 9 $ 25 $ 49
Rate 8.60% 8.09% 9.26% 8.84%
Receive Notional $ 49 $ 49
Rate 5.60% 5.60%
Receive Floating/Pay Floating:
(Basis Swaps)
Notional $ 230 $ 230
Receive Rate 5.54% 5.54%
Pay Rate 5.58% 5.58%
Receive Fixed/Pay Floating(a):
(Forward Start)
Receive Notional $ 160 $ 275 $ 47 $ 482
Rate 7.07% 6.48% 7.05% 6.73%
Start Date Notional $ 115 $ 132 $ 235 $ 482
</TABLE>
(a) Pay rate will be determined on forward start date.
<PAGE>
Foreign currency derivatives used for hedging activities
have not had a material impact on income or liquidity of the Corporation for any
of the years presented.
Derivative Financial Instruments Held or Issued for Trading Purposes
In its business of providing risk management services for its customers, the
Corporation purchases and sells certain derivatives including interest rate
swaps, caps and floors. In addition, as part of its international business, the
<PAGE>
Corporation enters into foreign exchange contracts on behalf of customers. These
contracts are matched against forward sale or purchase contracts. Customer
related derivative financial instrument transactions are generally marked to
market and any gains or losses are recorded in the income statement. The
Corporation also holds derivatives in connection with its securities trading
activities and, at times, as a position taken in the expectation of profiting
from favorable movements in interest rates. These products include tender option
bonds and Treasury float contracts. Included in the income statement are trading
revenues from derivatives of $29,242 of which $22,557 represents net foreign
exchange gains included in fees for international services.
Outstanding notional amounts and related fair values of trading and customer
related derivative financial instruments at December 31, 1996 and 1995 are
summarized by type of instrument below (in millions):
<TABLE>
<CAPTION>
1996 1995
Positive Negative
Notional Net assets Market Market Notional Net assets
amount (liability)(a) Value Value amount (liability)(a)
<S> <C> <C> <C> <C> <C> <C>
Interest Rate Swaps:
CoreStates receives fixed $ 355 $ 1.5 $ 2.7 $ (1.2) $ 115 $ 2
CoreStates pays fixed 353 (1.0) 1.3 (2.3) 115 (2)
Futures 39 0.4 0.4 - 2 -
Rate Locks:
CoreStates receives fixed 30 (0.1) - (0.1) 15 -
CoreStates pays fixed 30 0.1 0.1 - 15 -
Interest Rate Caps/Floors:
Sold 705 (2.7) - (2.7) 517 (1)
Purchased 704 2.7 2.7 - 517 1
Commitments to purchase/ sell whole mortgage
loans and securities (including when-issued
securities):
Sold 83 (0.2) 0.1 (0.3) 117 (2)
Purchased 19 - - - 106 2
Other Options:
Sold 206 6.5 7.1 (0.6) 247 6
Purchased 334 0.8 0.8 624 1
Foreign exchange contracts (b) 1,766 (0.5) 28.0 (28.5) 1,695 2 (c)
--------- --------- ---------- ---------- --------- --------
Total Trading and Customer Related
Derivatives $ 4,624 $ 7.5 $ 43.2 $ (35.7) $ 4,085 $ 9
---------- ----------- ----------- --------- ---------- ---------
_____________________________________
(a) Average net assets (liabilities) during 1996 and 1995 were substantially the same as the net assets (liabilities)
at December 31, 1996 and 1995, respectively.
(b) Foreign exchange contracts purchased and sold at December 31, 1996 were $836 million and $930 million, respectively,
and at December 31, 1995 were $853 million and $842 million, respectively.
(c) Gross assets and (liabilities) on foreign exchange contracts at December 31, 1995 were $16 million and
$14 million, respectively.
</TABLE>
The following is a summary of off-balance sheet commitments and derivative
financial instruments as of December 31, 1996 and 1995, including fair values.
See Note 3 for a discussion of fair value.
<TABLE>
<CAPTION>
1996 1995
------------------------- ----------------------------
Notional Fair Notional Fair
or Value or Value
Contractual of Asset Contractual of Asset
Amount (Liability) Amount (Liability)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Standby letters of credit, net of participations (a) ................ $ 1,630,621 $ (16,306) $ 1,548,551 $ (14,502)
Commercial letters of credit ........................................ 1,262,593 (12,625) 1,324,714 (13,157)
Commitments to extend credit (b) .................................... 15,396,553 (21,204) 14,565,636 (16,135)
Unused commitments under credit card lines .......................... 4,173,013 -- 3,872,641 --
When-issued securities (c):
Commitments to purchase .......................................... 1,770 -- 500 --
Commitments to sell .............................................. 75,120 (140) 145,000 (1,411)
Commitments to purchase/sell whole mortgage loans and securities (c):
Commitments to purchase .......................................... 17,280 30 109,714 2,071
Commitments to sell .............................................. 7,965 (70) 47,259 (1,738)
Mortgage loans sold and loan servicing acquired with
recourse (d) ...................................................... 361,410 (9,637) 434,628 (12,260)
Interest rate futures contracts (e):
Commitments to purchase .......................................... 4,489,800 2,781 621,000 658
Commitments to purchase foreign and U.S. currencies (f) ............ 1,766,122 (488) 1,695,148 1,567
Interest rate swaps, notional principal amounts (g) ................. 9,850,708 67,673 9,945,840 206,186
Interest rate caps and floors (h):
Written .......................................................... 908,799 (2,842) 847,323 (1,229)
Purchased ........................................................ 2,039,331 17,383 1,673,023 25,021
Tender option bonds (i) ............................................. 148,711 5,976 208,103 4,995
Treasury float contracts (j) ........................................ 270,358 682 623,738 884
Other derivatives ................................................... 597,261 5,644 174,674 645
</TABLE>
(a) Standby letters of credit ("SBLC") are used in various transactions to
enhance the credit standing of the Corporation's customers and are subjected to
the same risk, credit review and approval process as loans. SBLC's are
irrevocable assurances that the Corporation will make payment in the event that
a customer cannot perform its contractual obligations to third parties.
(b) Commitments to extend credit represent the Corporation's obligation to fund
various types of loans, including home equity lines, lines of credit, revolving
lines of credit and other types of commitments.
(c) The Corporation has commitments to purchase/sell mortgage-backed securities
or loans with delivery at a future date but typically within 120 days. The fair
value of these instruments is affected by interest rates. In a declining
interest rate environment, commitments to sell mortgage-backed securities or
loans will decline in value. In a rising interest rate environment, commitments
to buy mortgage-backed securities or loans will increase in value.
Forward agreements to sell securities are used in transactions with
municipalities that generally have a debt payment due in the future. Under these
agreements, the Corporation agrees to deliver primarily United States Treasury
securities that will mature on or before the required payment date. The type and
associated interest rate of these securities is established when the agreement
is entered. The primary risk associated with forward agreements is interest rate
risk to the extent the required securities have not been purchased. If interest
rates fall, securities yielding the higher agreed upon fixed rate will be more
expensive for the Corporation to purchase.
<PAGE>
Included in when-issued securities and commitments to purchase/sell whole
mortgage loans and securities are customer and trading-related products with a
notional value of $102,135 and $223,873 at December 31, 1996 and 1995,
respectively.
(d) The Corporation originates and sells residential mortgage loans as part of
various mortgage-backed security programs sponsored by the United States
government agencies or government-sponsored agencies, such as the Government
National Mortgage Association, Federal Home Loan Mortgage Corporation and the
Federal National Mortgage Association. Certain sales and other servicing
acquired are subject to recourse provisions in the event of default by the
borrower. The Corporation provides for potential losses under these recourse
provisions by establishing reserves at the time of sale and evaluates the
adequacy of these reserves on an ongoing basis.
(e) Exchange traded futures contracts represent agreements to exchange dollar
amounts at a specified future date for interest rate differentials between an
agreed interest rate and a reference rate, computed on a notional amount. Credit
and market risk exist with respect to these instruments. Exchange traded futures
contracts entail daily cash settlement; therefore, the credit risk amount
represents a one-day receivable.
(f) Commitments to purchase foreign and U.S. currencies are primarily executed
for the needs of customers. These foreign exchange contracts are structured
similar to interest rate futures and forward contracts. The risk associated with
a foreign exchange contract arises from the counterparty's ability to make
payment at settlement and that the value of a foreign currency might change in
relation to the U.S. dollar. The Corporation's exposure, if any, to counterparty
failure equals the current market value of the contract, which at December 31,
1996 and 1995 was $27,962 and $16,434, respectively. Included in fees for
international services are net foreign exchange gains of $22,557, $22,943, and
$19,783 for the years ended December 31, 1996, 1995 and 1994, respectively.
(g) Interest rate swaps generally represent the contractual exchange of fixed
and variable rate interest payments based on a notional principal amount and an
interest reference rate. Credit risk exists with respect to these instruments
arising from the possible failure of the counterparty to make required payments
on those contracts which are favorable to the Corporation. The Corporation's
exposure to counterparty failure equals the current replacement cost of the
contract. At December 31, 1996 and 1995, the replacement cost of the
Corporation's interest rate swap contracts was $118,929 and $225,140,
respectively. The risk of counterparty failure is controlled by limiting
transactions to an approved list of counterparties and requiring collateral in
certain instances. Net cash received on interest rate swaps during 1996 and 1995
totaled $68,103 and $7,493, respectively.
(h) Interest rate caps and floors are written by the Corporation to enable
customers to transfer, modify or reduce their interest rate risk. Interest rate
caps and floors are similar to interest rate swaps except that payments are made
only if current interest rates move above or below a predetermined rate. The
risk associated with interest rate caps and floors is an unfavorable change in
interest rates. As a writer of interest rate caps and floors, the Corporation
receives a premium in exchange for bearing the risk of an unfavorable change in
interest rates. The Corporation generally reduces risk by entering into
offsetting cap and floor positions that essentially counterbalance each other.
The Corporation also enters interest rate caps to offset the risk of upward
interest rate movement on assets with embedded caps as well as to limit spread
risk. As a purchaser of interest rate caps, the Corporation pays a premium in
exchange for the right to receive payments if interest rates rise above
predetermined levels. The Corporation has also purchased interest rate floors in
which the Corporation has paid a fee for the right to receive payments if rates
fall below a predetermined level. Similar to interest rate swaps, credit risk
exists with respect to the possible failure of the counterparty to make required
payments on those contracts which are favorable to the Corporation. Exposure to
counterparty failure equals the current replacement cost of the
<PAGE>
contract which totaled $17,383 and $26,384, respectively, at December 31, 1996
and 1995.
(i) Tender option bonds are instruments associated with municipalities. A
municipality generally issues a tax-free, fixed rate, long-term security in
order to finance the origination of single family residential mortgages. The
municipality enters into a tender option bond program with the Corporation,
which converts the fixed rate long-term instrument into a variable rate
short-term product.
(j) A Treasury float contract is created because a municipality, which has
defeased a bond issue with government securities, has a mismatch in the timing
of the maturity of the securities and the date the funds are needed to pay the
debt service. The Corporation will pay an up-front fee for the right to sell
government securities to the municipality, generally at par. The Corporation
retains any profit between the sales price and the price at which the
Corporation acquired the securities.
Contingent Liabilities
In the normal course of business, the Corporation and its subsidiaries are
subject to numerous pending and threatened legal actions and proceedings, some
for which the relief or damages sought are substantial. Management does not
believe the outcome of these actions and proceedings will have a materially
adverse effect on the consolidated financial position of the Corporation.
16. PROVISION FOR INCOME TAXES
The provision for income taxes for the years ended December 31, 1996, 1995, and
1994 consists of the following:
1996 1995 1994
--------- --------- ---------
Current:
Federal.............................. $344,142 $303,647 $158,771
State................................ 20,401 24,134 19,683
-------- -------- --------
Total domestic.................. 364,543 327,781 178,454
Foreign.............................. 12,121 8,240 5,558
-------- -------- --------
Total current................... 376,664 336,021 184,012
Deferred Federal and state expense...... 9,156 28,420 41,847
-------- -------- --------
Total provision for income taxes $385,820 $364,441 $225,859
======== ======== ========
The significant components of the Corporation's deferred tax assets and
liabilities at December 31, 1996 and 1995 are as follows:
1996 1995
-------- --------
Deferred tax assets:
Allowance for loan losses............... $261,180 $241,487
Postretirement and postemployment
benefits............................... 57,191 54,127
Reserves................................ 56,489 54,779
Other................................... 77,181 70,928
-------- --------
Total deferred tax assets.............. 452,041 421,321
-------- --------
Deferred tax liabilities:
Auto leasing portfolio.................. 142,196 119,894
FAS 115 fair value accounting........... 14,298 15,596
Partnership investments................. 3,781 3,980
Tax over book depreciation.............. 38,446 30,626
Affiliate income........................ 32,873 30,404
Other................................... 71,802 59,405
<PAGE>
-------- --------
Total deferred tax liabilities......... 303,396 259,905
-------- --------
Net deferred tax assets.................. $148,645 $161,416
======== ========
At December 31, 1996, cumulative deductible temporary differences related to the
deferred tax asset are approximately $1,292,000. Cumulative taxable temporary
differences related to deferred tax liabilities at December 31, 1996 are
estimated at $867,000.
At December 31, 1996, the Corporation has determined that it is not required to
establish a valuation allowance for the deferred tax asset since it is more
likely than not that the deferred tax asset of $452,041 will be realized
principally through carryback to taxable income in prior years, future reversals
of existing taxable temporary differences, future taxable income and to a lesser
extent, tax planning strategies. The Corporation's conclusion that it is "more
likely than not" that the deferred tax asset will be realized is based on a
history of growth in earnings and the prospects for continued growth, including
an analysis of potential uncertainties that may affect future operating results.
The Corporation will continue to review the tax criteria of "more likely than
not" for the recognition of deferred tax assets on a quarterly basis.
The consolidated effective tax rates are reconciled to the statutory rate as
follows:
1996 1995 1994
----- ------ -----
Statutory rate.................................... 35.0% 35.0% 35.0%
Difference resulting from:
Tax-exempt income............................... (1.6) (2.0) (3.6)
State, local and foreign income tax............. 1.6 1.5 1.9
Other, net...................................... 2.3 1.2 1.0
---- ----- ----
Effective tax rate................................ 37.3% 35.7 % 34.3%
==== ===== ====
Foreign earnings of certain subsidiaries would be taxed only upon their transfer
to the United States. No transfers or dividends are contemplated at this time.
Taxes payable upon remittance of such accumulated earnings of $21,323 at
December 31, 1996 would approximate $7,065.
Taxes, other than income taxes, included in other operating expenses for the
years ended December 31, 1996, 1995 and 1994 are $101,109, $105,913 and
$104,805, respectively.
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents summarized quarterly financial data of the Corporation,
which, in the opinion of management, reflects all adjustments (comprising only
normal recurring accruals) necessary for a fair presentation:
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------------------------
Dec. 31 Sept. 30 June 30 March 31
------- -------- ------- --------
1996
- ----
<S> <C> <C> <C> <C>
Interest income....................... $835,649 $823,082 $815,755 $823,718
======== ======== ======== ========
Interest expense...................... $298,561 $282,735 $282,360 $293,064
======== ======== ======== ========
Net interest income................... $537,088 $540,347 $533,395 $530,654
======== ======== ======== ========
Provision for losses on loans......... $ 40,000 $ 40,000 $110,000(a) $ 38,767
======== ======== ======== ========
Securities gains...................... $ 4,036 $ 31,135 $ 17,393 $ 6,948
======== ======== ======== ========
Net income............................ $195,546 $196,857 $ 79,597(a) (b) $177,144
======== ======== ======== ========
Net income per common share........... $0.91 $0.89 $0.36(a) (b) $ 0.81
======== ======== ======== ========
Average common shares
outstanding.......................... 215,866 220,409 219,478 219,512
======== ======== ======== ========
<PAGE>
Common Stock Price Information:
High................................. $ 55 3/8 $ 44 $ 43 1/8 $ 44
Low.................................. 42 3/4 35 1/2 35 3/4 36 1/8
Quarter-end.......................... 51 7/8 43 1/4 38 1/2 42 3/8
1995
- ----
Interest income....................... $868,521 $871,164 $884,807 $850,588
======== ======== ======== ========
Interest expense...................... $322,095 $329,592 $337,203 $319,265
======== ======== ======== ========
Net interest income................... $546,426 $541,572 $547,604 $531,323
======== ======== ======== ========
Provision for losses on loans......... $ 38,225 $ 38,050 $ 34,661 $ 33,066
======== ======== ======== ========
Securities gains...................... $ 5,729 $ 2,230 $ 5,512 $ 18,004
======== ======== ======== ========
Net income............................ $192,145 $194,712 $158,150 (c) $110,169 (c)
======== ======== ======== ========
Net income per common share........... $0.87 $0.88 $0.71 (c) $ 0.49 (c)
======== ======== ======== ========
Average common
shares
outstanding.......................... 219,915 220,718 222,440 226,091
======== ======== ======== ========
Common Stock Price Information:
High................................. $ 40 1/8 $ 38 7/8 $ 36 $ 33
Low.................................. 34 5/8 34 1/4 30 1/2 25 5/8
Quarter-end.......................... 37 7/8 36 5/8 34 5/8 32
</TABLE>
- -------------------------------
(a) Includes a provision for loan losses of $70.0 million, $45.5 million after-
tax or $0.20 per share, related to the Meridian acquisition.
(b) Includes net restructuring and merger-related charges of $139.7 million,
$105.3 million after-tax or $0.48 per share, primarily recorded in the second
quarter and related to costs associated with the Meridian acquisition.
(c) Includes restructuring charges of $110.0 million pre-tax, $70.0 million
after-tax or $0.31 per share, recorded by CoreStates, and $32.0 million pre-tax,
$20.8 million after-tax or $0.09 per share, recorded by Meridian related to
corporate-wide process redesigns in the first and second quarters, respectively.
18. JOINT VENTURE
In December 1992, the Corporation entered into a joint venture with three other
banking companies creating Electronic Payment Services, Inc. ("EPS"). The joint
venture combines the partners' separate consumer electronic transaction
processing businesses and provides automated teller machine ("ATM") and
electronic point-of-sale ("POS") processing services. The Corporation
contributed to EPS its wholly-owned subsidiaries of Money Access Service Inc.
("MAC"), a regional ATM network, and BUYPASS Corporation, a third-party
processor of electronic POS transactions.
At the formation of EPS, the Corporation had equal ownership with two partners
in the joint venture, each with 31%. The fourth partner owned 7%. As part of the
1992 transaction, the Corporation received a cash payment of $79,350 and
$245,400 of EPS 5% cumulative redeemable preferred stock. The exchange of assets
involved in the transaction resulted in a 1992 pre-tax gain to the Corporation
of $41,072, $25,670 after-tax. The exchange also generated a deferred gain of
approximately $138,000.
In December 1993, the Corporation and EPS mutually agreed to enter into a
recapitalization of EPS involving the EPS preferred stock held by the
Corporation. In exchange for substantially all of the preferred stock, the
Corporation received from EPS a ten-year 6.45% note providing for equal
principal payments over the life of the note. The recapitalization did not
affect the amount of deferred gain, but changed the timing of deferred gain
income recognition from a five-year period beginning in 1996 to a ten-year
period which began in 1994.
On March 27, 1995, EPS added a new partner and increased the ownership interests
of an existing partner to that of a full partner, resulting in a decrease in the
Corporation's share of ownership from 31% to 20%. As a direct result of this
change in ownership interests, the Corporation recognized a pre-tax gain of
$19,000, $11,800 after-tax or $0.05 per share, in 1995. Included in the pre-tax
gain amount was $4,000 related to the acceleration of deferred gain recognition.
<PAGE>
The Corporation's investment in EPS at December 31, 1996, net of $104,000
deferred gain, is $65,304 and is included in other assets. "Income from
investment in EPS, Inc.", which is included in non-interest income, reflects the
Corporation's share in EPS net income, interest income on the 6.45% note and
amortization of the deferred gain.
19. RESTRUCTURING AND MERGER-RELATED CHARGES
A summary of restructuring and merger-related charges for the years ended
December 31, 1996 and 1995 were as follows:
1996 1995
---------- ----------
Meridian and United Counties merger-related
restructuring charges.............................. $161,598 $ 10,000
Meridian merger-related implementation costs........ 29,019 -
Process redesign restructuring charges.............. - 142,000
Gains on sales of branches.......................... (43,064) (3,988)
Pension curtailment gains........................... (7,851) (9,412)
-------- --------
Total............................................ $139,702 $138,600
======== ========
In 1996, the Corporation recorded merger-related restructuring charges of
$161,598, $120,150 after-tax or $0.55 per share, in connection with the
acquisitions of Meridian and United Counties. The charges included direct and
incremental costs associated with these acquisitions. The components of the
merger-related restructuring charges were as follows:
Requiring 1996
Cash Cash
Provision Outflow Outflow
--------- --------- ----------
Severance costs........................... $ 70,469 $ 70,469 $33,939
Branch closing costs...................... 33,469 15,102 3,815
Office reconfiguration costs.............. 19,059 2,792 21
Merger transaction costs.................. 14,624 14,624 13,328
System consolidation writedowns........... 6,391 - -
Miscellaneous............................. 17,586 17,593 9,634
-------- -------- -------
Total................................... $161,598 $120,580 $60,737
======== ======== =======
Restructuring and merger-related charges in 1996 also included $29,019, $18,263
after-tax or $0.07 per share, of implementation costs that were incurred in the
process of consolidating Meridian and United Counties businesses and operations.
The Corporation recorded restructuring credits of $50,915, $33,096 after-tax or
$0.14 per share and $13,400, $8,549 after-tax or $0.03 per share in 1996 and
1995, respectively, related to gains on the curtailment of pension benefits
associated with employees displaced during 1996 and 1995 and gains on the sale
of branches which were sold as a result of consolidating the Meridian and United
Counties branches and the process redesigns.
Upon consummation of the merger, the Corporation recorded a $70 million
provision for loan losses in connection with a change in strategic direction
related to Meridian's problem assets and to conform its consumer lending charge-
off policies to those of the Corporation.
In 1995, the Corporation recorded restructuring charges of $142,000, $90,800
after-tax or $0.40 per share, in connection with process redesigns commenced
during that year. The objectives of the process redesigns were: (i) to enhance
customer focus; (ii) to accelerate "cultural changes" which were already in
progress; and (iii) to improve productivity. The charges included direct and
incremental costs associated with the process redesigns. The components of the
process redesign restructuring charges were as follows:
<PAGE>
Requiring Cash
Cash Outflow
Provision Outflow to Date
---------- --------- ---------
Severance costs............................... $ 87,900 $ 87,900 $74,944
Office reconfiguration and branch
closing costs.............................. 44,300 16,600 3,881
Outplacement costs............................ 2,500 2,500 2,002
Miscellaneous................................. 7,300 5,300 4,464
-------- -------- -------
Total...................................... $142,000 $112,300 $85,291
======== ======== =======
The following table summarizes the activity in the restructuring and merger-
related accrual for the year ended December 31, 1996:
1996
----------
Balance at beginning of year..................... $ 82,772
Provision charged against income................. 161,598
Cash outflow..................................... (100,258)
Writedowns of assets............................. (35,907)
---------
Balance at December 31,.......................... $ 108,205
=========
20. FINANCIAL STATEMENTS OF THE PARENT COMPANY
<TABLE>
<CAPTION>
STATEMENT OF INCOME Year Ended December 31,
-------------------------------------------
1996 1995 1994
------------- -------------- ------------
<S> <C> <C> <C>
REVENUES
- --------
Dividends from subsidiaries:
Banks...................................................... $657,744 $373,023 $389,733
Other subsidiaries......................................... 27,217 91,917 27,575
-------- -------- --------
Total dividends from subsidiaries........................ 684,961 464,940 417,308
Management fees and other income from subsidiaries............ 178,179 190,027 186,092
Securities gains (losses)..................................... (22) 16,343 259
Other income.................................................. 3,054 3,241 1,483
-------- -------- --------
Total revenues........................................... 866,172 674,551 605,142
-------- -------- --------
EXPENSES
- --------
Interest on:
Funds borrowed............................................. 5,606 19,685 11,613
Long-term debt............................................. 22,843 21,578 13,137
-------- -------- --------
Total interest expense................................. 28,449 41,263 24,750
Other operating expenses...................................... 245,836 219,463 210,629
-------- -------- --------
Total expenses........................................... 274,285 260,726 235,379
-------- -------- --------
Income before income tax benefit and equity in
undistributed income of subsidiaries....................... 591,887 413,825 369,763
Income tax benefit............................................ (14,911) (11,977) (15,357)
-------- -------- --------
Income before equity in
undistributed income of subsidiaries......................... 606,798 425,802 385,120
Equity in undistributed income (excess dividends) -------- -------- --------
of subsidiaries:
Banks.................................................... (52,497) 203,909 (9,827)
Other subsidiaries....................................... 94,843 25,465 57,913
-------- -------- --------
Total equity in
undistributed income of
subsidiaries........................................ 42,346 229,374 48,086
-------- -------- --------
NET INCOME.................................................... $649,144 $655,176 $433,206
======== ======== ========
</TABLE>
<PAGE>
BALANCE SHEET December 31,
-------------------------
1996 1995
------------ -----------
ASSETS
- ------
Cash........................................... $ 1,374 $ 1,340
Time deposits.................................. 887 -
Investment-securities available-for-sale....... 97,786 148,009
Investments and receivables-subsidiaries:
Investments in subsidiaries at equity
in underlying net assets:
Banks...................................... 3,389,148 3,769,779
Other subsidiaries......................... 558,062 427,451
---------- ----------
Total investments in subsidiaries......... 3,947,210 4,197,230
Receivables - subsidiaries................... 40,814 108,827
---------- ----------
Total investments and
receivables-subsidiaries................. 3,988,024 4,306,057
Other assets................................... 80,039 76,453
---------- ----------
Total assets.............................. $4,168,110 $4,531,859
========== ==========
LIABILITIES
- -----------
Funds borrowed - subsidiaries.................. $ - $ 177,827
Dividends payable and other liabilities........ 214,925 143,575
Long-term debt................................. 257,491 334,892
---------- ----------
Total liabilities......................... 472,416 656,294
---------- ----------
SHAREHOLDERS' EQUITY
- --------------------
Total shareholders' equity................ 3,695,694 3,875,565
---------- ----------
Total liabilities and
shareholders' equity..................... $4,168,110 $4,531,859
========== ==========
The Corporation has guaranteed certain borrowings of its subsidiaries
at December 31, 1996 in the amount of $3,259,181, which includes $675,181 for
commercial paper.
The maturities for parent company long-term debt for the years ending
December 31, 1997 through 2001 are: $1,475; $1,607; $1,751; $1,908; and $697,
respectively.
Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income....................................................... $ 649,144 $ 655,176 $ 433,206
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed income of subsidiaries......................... (42,346) (229,374) (48,086)
Securities (gains) losses.................................... 22 (16,343) (259)
Deferred income tax expense (benefit)........................ 180 (785) (3,895)
Net (increase) decrease in other assets...................... (6,969) 24,265 6,360
Net increase (decrease) in other liabilities................. 8,454 (22,761) 13,921
Other, net................................................... 7,288 7,840 (8,865)
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES..................... 615,773 418,018 392,382
---------- ---------- ----------
INVESTING ACTIVITIES
Net capital returned from (contributed to) subsidiaries.......... 270,226 190,900 (99,903)
(Increase) decrease in receivables from subsidiaries............. 107,069 (3,593) 53,862
Purchases of investment securities............................... (707,008) (170,988) (202,424)
Proceeds from maturities and sales of investment
securities...................................................... 717,536 118,483 188,028
Purchase of Germantown Savings Bank.............................. - - (108,061)
Other, net....................................................... - (1,380) (1,428)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES.................................................... 387,823 133,422 (169,926)
---------- ---------- ----------
FINANCING ACTIVITIES
<PAGE>
Issuance (repayment) of funds borrowed........................... - (75,000) 75,000
Retirement of long-term debt..................................... (77,401) (1,471) (45,568)
Proceeds from issuance of long-term debt......................... - 149,877 -
Net increase (decrease) in financing from and due to
subsidiaries.................................................... (115,498) (94,054) 270,587
Cash dividends paid.............................................. (328,114) (286,565) (245,962)
Purchases of treasury stock...................................... (533,932) (335,528) (228,963)
Purchases of ESOP shares......................................... - - (35,568)
Repurchase and retirement of common stock........................ (57,703) (17,134) (24,888)
Common stock issued under employee benefit plans................. 87,726 99,011 18,710
Funds transferred to Trust for future ESOP purchases............. - - (24,432)
Other, net....................................................... 21,360 6,777 11,294
---------- ---------- ----------
NET CASH USED IN FINANCING ACTIVITIES.............................. (1,003,562) (554,087) (229,790)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS.................... 34 (2,647) (7,334)
Cash and due from banks at January 1,............................. 1,340 3,987 11,321
---------- ---------- ----------
CASH AND DUE FROM BANKS AT DECEMBER 31,........................... $ 1,374 $ 1,340 $ 3,987
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest....................................................... $ 25,267 $ 40,745 $ 24,500
========== ========== ==========
Income taxes................................................... $ - $ 43 $ (626)
========== ========== ==========
</TABLE>
<PAGE>
Independent Auditors' Report
EXHIBIT (99)(c)
The Board of Directors
Meridian Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Meridian
Bancorp, Inc. and subsidiaries as December 31, 1995 and 1994, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the years in the two year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audit 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 accounts and discloures in the financial statements. An audit also includes
asserting the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Meridian Bancorp,
Inc. and subsidiaries as of December 31, 1995 and 1994 and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
As described in Notes 1 and 8, respectively, to the consolidated financial
statements, the Company adopted the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities and Statement
of Financial Accounting Standards No. 112, Employers' Accounting for
Postemployment Benefits, in 1994.
Philadelphia, PA
January 17, 1996,
Except as to note 2, which is as of February 23, 1996
/s/ KPMG Peat Marwick LLP
<PAGE>
Independent Auditors' Report
EXHIBIT (99)(d)
The Board of Directors and Stockholders
United Counties Bancorporation:
We have audited the accompanying consolidated balance sheets of United Counties
Bancorporation and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flow for each of the years in the two-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the
Bancorporation's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of United Counties
Bancorporation and subsidiaries at December 31, 1995 and 1994, and the results
of their operations and their cash flow for each of the years in the two-year
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in notes 1 and 3 to the consolidated financial statements, the
Bancorporation adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," in 1994.
/s/ KPMG Peat Marwick LLP
Short Hills, New Jersey
January 16, 1996, except for note 20,
which is as of February 23, 1996
