<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Amendment No. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Act of 1934
Date of Report (Date of earliest event reported): March 16, 1994
CoreStates Financial Corp
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(Exact name of registrant as specified in Charter)
Pennsylvania 0-6879 23-1899716
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(State or other (Commission (IRS Employee
jurisdiction of File Number) identification No.)
incorporation)
Centre Square West, 1500 Market Street
Philadelphia, Pennsylvania 19101
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(Address of principal executive offices) (Zip Code)
Registrant's telephone, including area code: (215) 973-3806
--------------
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(Former name and former address, if changed since last report)
Page 1 of 50
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<TABLE>
<CAPTION>
Item 7. Financial Statements and Exhibits.
PAGE
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<C> <S> <C>
(a) Consolidated Financial Statements of
Constellation Bancorp and Subsidiaries
(1) Consolidated Statements of Condition as of 4
December 31, 1993 and 1992
(2) Consolidated Statements of Operations for the years 5
ended December 31, 1993, 1992, and 1991
(3) Consolidated Statements of Changes in 6
Shareholders' Equity for the years ended
December 31, 1993, 1992, and 1991
(4) Consolidated Statements of Cash Flows for the 7
years ended December 31, 1993, 1992, and 1991
(5) Notes to Consolidated Financial Statements 9 to 42
(6) Report of Independent Auditors 43
(b) Restated Financial Information of
CoreStates Financial Corp and Subsidiaries
(Unaudited)
(1) Introductory Note to Restated Financial 44
Information (Unaudited)
(2) Restated Condensed Combined Balance Sheet 45
(Unaudited) as of December 31, 1993
(3) Footnotes to Restated Condensed 46
Combined Balance Sheet
(4) Restated Condensed Combined Statement of 47
Income (Unaudited) for the year ended
December 31, 1993
(5) Restated Condensed Combined Statement of 48
Income (Unaudited) for the year ended
December 31, 1992
(6) Restated Condensed Combined Statement of 49
Income (Unaudited) for the year ended
December 31, 1991
(7) Footnotes to Restated Condensed Combined 50
Statements of Income
</TABLE>
Page 2
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<TABLE>
<CAPTION>
PAGE
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<C> <S> <C>
Proforma Financial Information of
CoreStates Financial Corp and Subsidiaries
(Unaudited)
(8) Introductory Note to Proforma Financial 51
Information (Unaudited)
(9) Proforma Condensed Combined Balance Sheet 52
(Unaudited) as of December 31, 1993
(10) Footnotes to Proforma Condensed 53
Combined Balance Sheet
(11) Proforma Condensed Combined Statement of 54
Income (Unaudited) for the year ended
December 31, 1993
(12) Proforma Condensed Combined Statement of 55
Income (Unaudited) for the year ended
December 31, 1992
(13) Proforma Condensed Combined Statement of 56
Income (Unaudited) for the year ended
December 31, 1991
(14) Footnotes to Proforma Condensed Combined 57-58
Statements of Income
</TABLE>
(c) Exhibits.
(2.1) Amended and Restated Agreement and Plan of Merger, dated as of
August 2, 1993 between Constellation Bancorp and CoreStates Financial Corp,
incorporated herein by reference to Appendix I to the Proxy Statement -
Prospectus in CoreStates Financial Corp's Registration Statement on Form S-4,
Registration No. 33-51429.
(2.2) Articles of Merger, dated March 16, 1994, incorporated herein by
reference to Exhibit (2.2) of CoreStates Financial Corp's Current Report on
Form 8-K dated March 16, 1994.
(23) Consent of KPMG Peat Marwick.
Exhibit Index
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<TABLE>
<CAPTION>
Exhibit No. Page
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<S> <C> <C>
2.1 Amended and Restated Agreement Incorporated herein
and Plan of Merger between by reference to
Constellation Bancorp and Appendix I to the
CoreStates Financial Corp Proxy Statement-
Prospectus in
CoreStates Financial
Corp's Registration
Statement on Form
S-4, Registration
No. 33-51429
2.2 Articles of Merger dated Incorporated herein
March 16, 1994 by reference to
Exhibit (2.2) of
CoreStates Financial
Corp's Current
Report on Form 8-K
dated March 16, 1994
23 Consent of KPMG Peat Marwick 59
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this amendment No. 1 to its current report on Form
8-K dated March 16, 1994 to be signed on its behalf by the undersigned
thereunto duly authorized.
CORESTATES FINANCIAL CORP
By: /s/ David T. Walker
----------------------------
David T. Walker
Deputy Chief Counsel
Dated: May 5, 1994
Page 3
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS OF
CONSTELLATION BANCORP AND SUBSIDIARIES
Consolidated Statements of Condition
<TABLE>
<CAPTION>
December 31,
1993 1992
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(In thousands)
Assets
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<S> <C> <C>
Cash and due from banks $ 104,237 $ 143,146
Federal funds sold 160,500 110,000
Securities held to maturity (market value of
$141,474 in 1993 and $292,019 in 1992) 141,358 288,261
Securities available for sale (market value
of $140,777 in 1993 and $15,549 in 1992) 140,777 15,534
Loans-net 1,663,357 1,759,836
Less: Allowance for loan losses 190,220 85,150
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Net Loans 1,473,137 1,674,686
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Premises and equipment-net 22,531 26,437
Accrued interest receivable 12,476 14,566
Other real estate owned-net 40,219 96,290
Purchased mortgage servicing rights 2,951 21,178
Other assets 22,631 25,174
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Total Assets $2,120,817 $2,415,272
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Liabilities and Shareholders' Equity
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Deposits
Demand-non-interest bearing $ 323,114 $ 363,912
Demand-interest bearing 376,288 357,738
Money market 364,982 361,289
Savings and clubs 378,759 366,482
Time deposits 643,015 784,979
CDs of $100,000 or more 5,923 16,441
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Total Deposits 2,092,081 2,250,841
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Other borrowed funds 9,086 4,229
Accrued expenses and other liabilities 48,184 13,882
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Total Liabilities 2,149,351 2,268,952
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Commitments and contingencies
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Shareholders' Equity
Preferred stock, authorized 5,000,000 shares
None issued and outstanding
Common stock, no par value
Authorized 75,000,000 shares
Issued 27,269,830 and outstanding 27,261,769
shares in l993 and issued and outstanding
27,131,527 shares in l992 136,349 135,658
Surplus 45,494 45,941
Accumulated deficit ( 210,288) ( 35,279)
Treasury Stock at cost (8,061 shares) ( 89)
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Total Shareholders' Equity ( 28,534) 146,320
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Total Liabilities and Shareholders' Equity $2,120,817 $2,415,272
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See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
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<PAGE>
CONSTELLATION BANCORP AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
1993 1992 1991
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(In Thousand Except Per Share Data)
<S> <C> <C> <C>
Interest Income
- - ---------------
Interest and fees on loans $ 134,053 $ 145,244 $ 186,841
Interest and dividends on investments:
Taxable interest and dividend income 15,966 23,636 30,537
Tax-exempt interest income - 114 2,323
Interest on securities available for sale 550 1,566 -
Interest on deposits with banks - - 643
Interest on Federal funds sold 3,868 4,831 12,272
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Total Interest Income 154,437 175,391 232,616
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Interest Expense
- - ----------------
Interest on:
Interest bearing demand deposits 6,029 9,644 13,728
Money market accounts 9,662 14,187 28,164
Savings and clubs 8,904 12,185 14,343
Time deposits 28,565 46,471 73,589
CD's of $100,000 or more 338 4,170 16,479
Borrowed funds 186 2,430 4,838
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Total Interest Expense 53,684 89,087 151,141
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Net Interest income 100,753 86,304 81,475
Provision for loan losses 130,000 10,000 81,995
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Net Interest (Loss) income after
Provision For Loan Losses ( 29,247) 76,304 ( 520)
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Non-Interest Income
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Service fees on deposit accounts 10,208 11,995 14,546
Mortgage origination and servicing 9,022 12,284 15,545
Other service fees 2,721 2,719 5,558
Trust income 3,012 2,821 2,904
Net securities transaction 49 1,678 3,371
Other income 16,587 9,088 4,361
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Total Non-Interest Income 41,599 40,585 46,285
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Non-Interest Expense
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Salaries and employee benefits 40,831 43,716 52,610
Net occupancy expense 8,784 9,452 10,795
Furniture and equipment expense 5,581 7,308 10,176
Other expenses 134,990 58,051 60,374
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Total Non-Interest Expense 190,186 118,527 133,955
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Loss before income tax expense ( 177,834) ( 1,638) ( 88,190)
Income tax expense 662 53 532
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Net Loss ($178,496) ($ 1,691) ($ 88,722)
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Net Loss Per Share of Common Stock ($ 6.56) ($ .19) ( $10.82)
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</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
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<PAGE>
CONSTELLATION BANCORP AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
Retained
(In Thousands Except Share Common Earnings Treasury
and Per Share Data) Stock Surplus (Deficit) Stock Total
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<S> <C> <C> <C> <C> <C>
Balance - December 31, 1990 $ 40,866 $72,356 $54,496 $ - $167,718
Net loss - - ( 88,722) - ( 88,722)
Stock issued under stock purchase
plan (39,251 shares) 196 49 - - 245
Change in unrealized loss on equity
securities - - 638 - 638
Forfeiture of restricted stock awards ( 28) 28 - - -
Unearned compensation-restricted
stock awards amortization - 442 - - 442
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Balance - December 31, 1991 41,034 72,875 ( 33,588) - 80,321
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Net loss - - ( 1,691) - ( 1,691)
Stock issued in public offering
(18,955,059 shares) 94,775 ( 27,194) - - 67,581
Forfeiture of restricted stock awards ( 151) 151 - - -
Unearned compensation-restricted
stock awards amortization - 109 - - 109
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Balance - December 31, 1992 135,658 45,941 ( 35,279) - 146,320
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Loss - - ( 178,496) - (178,496)
Stock issued under public offering
and stock purchase plans
(171,014 shares) 855 ( 375) - - 480
Unrealized holding gains on
securities available for sale - - 3,487 - 3,487
Forfeiture of restricted stock awards ( 5) 5 - - -
Retirement of common stock
(31,831 shares) ( 159) ( 167) - - ( 326)
Unearned compensation-restricted
stock awards amortization - 90 - - 90
Treasury stock acquired (8,061 shares) - - - ( 89) ( 89)
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Balance - December 31, 1993 $136,349 $45,494 ($210,288) ($ 89) ($ 28,534)
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</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
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<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
(In thousands) 1993 1992 1991
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Cash Flows From Operating Activities
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<S> <C> <C> <C>
Net Loss ($178,496) ($ 1,691) ($ 88,722)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation of premises and equipment 4,843 6,627 8,555
Amortization of mortgage servicing
rights and other intangibles 19,056 11,889 7,565
Provision for loan losses 130,000 10,000 81,995
Provision for losses on other real estate owned
and writedowns 40,050 10,100 6,679
Gain on sale of investment securities ( 3) ( 1,691) ( 5,353)
Gain on sale of securities available
for sale ( 70) ( 229) -
Loss on sale of investment securities - 36 242
Loss on sale/unrealized loss of securities
available for sale 24 206 -
Gain on sale of other real estate owned ( 3,967) ( 838) -
Gain on sale of purchased mortgage
servicing rights - ( 305) -
Loss on writedown of investment securities - - 1,740
Loss (gain) on disposal of premises and
equipment 301 ( 21) ( 9)
Loss on restructuring disposition of premises
and equipment - 1,025 -
(Increase) decrease in taxes receivable ( 998) 21,117 ( 472)
Decrease in interest receivable 2,090 6,498 6,919
Decrease in interest payable ( 740) ( 2,427) ( 1,296)
(Decrease) increase in deferred loan fees ( 125) 482 ( 1,096)
(Decrease) increase in unearned income ( 3,774) ( 1,499) 6,502
Increase (decrease) in accrued expenses
and other liabilities 32,038 ( 4,851) 6,371
Other-net 6,635 5,840 ( 2,686)
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Net Cash Provided by Operating Activities 46,864 60,268 26,934
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Cash Flows From Investing Activities
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Proceeds from sales of investment securities 752 14,950 93,411
Proceeds from maturities of investment securities 131,237 253,304 187,444
Purchase of investment securities ( 118,000) ( 190,442) ( 320,851)
Proceeds from sale of securities available for sale 2,995 66,285 -
Proceeds from maturities of securities
available for sale 10,009 4,124 -
Purchase of securities available for sale - ( 6,096) -
Net decrease in loans 52,888 87,388 155,307
Proceeds from the sale of purchased mortgage
servicing rights - 524 -
Purchase of mortgage servicing rights - - ( 3,522)
Proceeds from the operations/sale of
other real estate owned 39,833 25,990 10,013
Capital expenditures ( 1,788) ( 1,046) ( 2,597)
Proceeds from sale of premises and equipment 550 1,702 654
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Net Cash Provided by Investing Activities 118,476 256,683 119,859
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</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Cash Flows From Financing Activities
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<S> <C> <C> <C>
Net (decrease) increase in demand deposits,
NOW accounts and savings accounts ( 6,278) ( 80,014) 67,707
Net decrease in certificates of deposit (152,482) (414,438) (169,760)
Net increase (decrease) in short-term borrowings 4,857 ( 16,614) ( 31,575)
Repayment of long-term debt - ( 17,500) ( 2,500)
Net proceeds from issuance/retirement of common stock 154 67,581 245
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Net Cash Used by Financing Activities (153,749) (460,985) (135,883)
- - --------------------------------------------------------------------------------------------
Net Increase/(Decrease) in Cash and Cash Equivalents 11,591 (144,034) 10,910
Cash and Cash Equivalents at beginning of Period 253,146 397,180 386,270
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Cash and Cash Equivalents at End of Period $264,737 $253,146 $397,180
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Non-cash investing and financing activities:
Transfer of loans to other real estate owned 18,661 52,903 53,691
Loans originated to facilitate the sale of other real
estate owned 80 1,316 540
Investments transferred to Securities Available
for sale 132,917 79,824 -
Gross unrealized holding gains on securities available
for sale 5,284 - -
Cash paid during the year for:
Interest $ 54,424 $ 91,514 $152,437
Income taxes $ - $ - $ 115
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</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
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<PAGE>
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and practices within the banking
industry. The significant accounting policies are summarized below.
Basis of Presentation and Consolidation
The accompanying consolidated financial statements include the accounts of
Constellation Bancorp (the "holding company") and it's two wholly-owned
subsidiaries (the "Company"), Constellation Bank, N.A. ("Constellation") and
Home Investors Mortgage Corporation ("Home Investors"), and the Constellation
affiliate, WASCO Funding Corp. ("WASCO"). All material intercompany balances
and transactions have been eliminated in consolidation. On March 16, 1994, the
Company was acquired by CoreStates Financial Corp ("CoreStates"). See Note 2.
In preparing the financial statements, management is required to make
estimates that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period. In making
such estimates, management must make certain assumptions based on available
information and existing conditions. It is management's responsibility to make
reasonable assumptions when preparing such estimates.
Because events may occur or conditions result that are different from those
assumed to occur or result, actual results could differ significantly from the
results based on such estimates. Events and conditions that could occur or
change and result in changes different than those based on such estimates
include dramatic and unforeseen changes in economic conditions over a short
period of time, conditions in the real estate markets and specific events
affecting specific borrowers or groups of borrowers. These assumptions are
particularly important with respect to the determination of the allowance for
loan losses and the valuation of real estate owned in connection with
foreclosures and in-substance foreclosures. In connection with the
determination of the allowances for loan losses, management generally obtains
independent appraisals for properties.
While management uses available information to recognize losses on loans
and real estate, future additions to the allowance for loan losses or further
writedowns of other real estate owned and loans foreclosed in-substance may be
necessary based on changes in economic conditions in our market area.
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<PAGE>
Investments
Effective December 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("FAS No. 115"). FAS No. 115 established the accounting and
reporting requirements for investments in equity securities that have readily
determinable fair values and for all investments in debt securities. All
affected investment securities must be classified as either held-to-maturity,
trading, or available-for-sale. Held-to-maturity securities are carried at
amortized cost basis. Trading securities are carried at fair value with
unrealized holding gains and losses reported in the income statement.
Available-for-sale securities are carried at fair value with unrealized holding
gains and losses reported as a component of shareholders' equity. As a result
of adopting FAS No. 115, securities with an original carrying value of
$132,900,000 were classified as available-for-sale at December 31, 1993 and were
adjusted to their aggregate fair value of $138,200,000. After the related tax
effects, shareholders' equity at December 31, 1993 was increased by $3,487,000
to reflect the adjustment of these securities to fair value.
Held-to-maturity securities are carried at cost adjusted for amortization of
premiums and accretion of discounts, both computed on the interest method.
Held-to-maturity securities primarily consist of debt securities. The Company
has both the ability and positive intent to hold these securities until
maturity. Trading account securities are carried at market values. Gains on
trading account securities include both realized and unrealized gains and losses
on the portfolio.
Debt securities not classified as held-to-maturity or trading and marketable
equity securities are classified as available-for-sale because they are held for
an indefinite period of time and are not intended to be held to maturity.
Available for sale securities include securities that management intends to use
as part of its overall asset/liability strategy and that may be sold in response
to changes in interest rates and resultant prepayment risk. Available-for-sale
securities are carried at fair value, with unrealized gains and losses, net of
tax, reported as a component of shareholders' equity.
The adjusted cost of a specific certificate sold is the basis for determining
realized securities gains and losses as included in the consolidated statement
of income in "non-interest income".
Interest and dividends on investment securities are recognized as income when
earned.
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<PAGE>
Loans
Interest on commercial loans is recognized on the daily principal amounts
outstanding. Loan fees are generally considered as 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
collectibility of principal or interest becomes doubtful. The deferral or non-
recognition of interest does not constitute forgiveness of the borrower's
obligation. In those cases where collection of principal is in doubt, additions
are made to the allowance for loan losses. When loans are placed on
non-accrual status, interest receivable thereon which had been previously
credited to income is reversed. Interest income on these loans is recognized
only to the extent payments are received. Loans are returned to an accrual
status when factors indicating doubtful collectibility on a timely basis no
longer exist and all past due payments are brought current.
Allowance for Loan Losses
The allowance for loan losses is increased by provisions charged to expense and
reduced by charge-offs, net of recoveries. While management uses available
information to recognize losses on loans and real estate, future additions to
the allowance for loan losses or further writedowns of other real estate owned
and loans foreclosed in-substance may be necessary based on changes in economic
conditions in the company's market area.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the company's allowances for loan
losses on loans and other real estate valuations. Such agencies may require the
company to recognize additions to the allowance or additional writedowns based
on their judgment about information available to them at the time of their
examination.
Trust Income
Trust income is recognized generally on a cash basis in accordance with
customary banking practice. The results of trust operations would not be
materially different if reported on an accrual method. Trust assets held in
fiduciary or agency capacities for customers of the trust division are not
assets of the company and, accordingly, are not included in the accompanying
consolidated financial statements.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are computed on the straight-line
method over the estimated useful lives of the related assets. Leasehold
improvements are amortized over the lives of the respective leases or the
estimated useful lives of the improvements, whichever is shorter. Expenditures
for major improvements are capitalized, while repairs and maintenance costs are
expensed as incurred. Gains and losses on dispositions are reflected in current
operations.
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<PAGE>
Other Real Estate Owned and Loans Foreclosed In-Substance
Other real estate owned ("OREO") is comprised of foreclosed properties where the
Company has actually received title. When a borrower has little or no equity in
a property which is the primary source of repayment of a loan and it is doubtful
that equity will be rebuilt in the foreseeable future, the property is
considered foreclosed in-substance. Both other real estate owned and in-
substance foreclosures are carried at the lower of fair value less estimated
costs to sell as determined by current appraisals or the recorded investment in
the loan on the property. Costs of holding such property are charged to expense
in the current period, except for certain expenses, such as significant property
improvements, which are capitalized to the extent that the carrying value of the
property does not exceed net realizable value. Prior to January 1992, write-
downs on such properties occurring after the initial transfer from the loan
portfolio were recorded as operating expenses. Gains, to the extent allowable,
and losses on the disposition of property were reflected in current operations.
Subsequent to initial establishment of an 0RE0 reserve on December 31, 1991,
write-downs and losses on the disposition of property are charged to the OREO
reserve. The reserve is replenished through an OREO provision reflected in
current operations.
Excess of Cost Over Fair Value of Net Assets Acquired
The excess of cost over fair value of net assets acquired in business
combinations is included in other assets and is amortized on a straight-line
basis over periods ranging from 10 to 15 years.
Income Taxes
The Company files a consolidated Federal income tax return. State income tax
returns are filed on a separate basis.
In February 1992, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 109, "Accounting for
Income Taxes." FAS No. 109 requires a change to the asset and liability method
of income tax accounting from the deferred method of accounting for income taxes
required by Accounting Principles Board ("APB") Opinion No. 11. FAS No. 109
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the Company's
financial statements or tax returns. The measurement of deferred tax assets and
liabilities is based on the enacted tax rates applicable to taxable income for
the years in which those temporary differences are expected to be recovered or
settled. FAS No. 109 requires that deferred tax assets and liabilities be
adjusted for the effect of a change in tax rates in the period of enactment.
The Company adopted FAS No. 109 in 1993 without restating prior periods
financial statements. However, to conform with CoreStates presentation, the
consolidated financial statements have been prepared as if the Company
retroactively adopted FAS No. 109 as of January 1, 1987. See Note 13.
- 12 -
<PAGE>
Loss Per Common Share
Loss per common share was computed by dividing net loss by the weighted average
number of shares outstanding. The average shares outstanding were 27.197
million, 9.065 million and 8.200 million for the years ended December 31, 1993,
1992 and 1991, respectively.
Shares issuable under stock option plans have not been included in the
calculation of net loss per common share since their effect is either immaterial
or anti-dilutive.
Pension Plans
Pension plan costs based on actuarial computation of current and future benefits
for employees are charged to expense and are funded based on the maximum amount
that can be deducted for Federal income tax purposes.
Other Postretirement Benefits
The Company adopted FAS No. 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions," as of January 1, 1993. FAS No. 106 requires the
accrual, during the service periods of the employees, of the expected cost of
providing health care and other benefits to employees subsequent to their
retirement. Prior to the adoption of FAS No. 106, such costs were recorded on a
cash basis.
Statements of Cash Flows
For purposes of the statements of cash flows, cash and cash equivalents include
cash and due from banks, federal funds sold and interest bearing deposits with
banks. Generally, federal funds are purchased/sold for one-day periods. All
short-term investments with a maturity of three months or less at date of
purchase are considered to be cash equivalents.
Fair Value of Financial Instruments
FAS No. 107, "Disclosures About Fair Value of Financial Instruments", requires
entities to disclose the fair value information on financial instruments. The
disclosure includes both on and off balance sheet financial instruments. Fair
value estimates are based on quoted market prices, discounting scheduled cash
flows through the estimated maturity using estimated market discount rates, or
other methods as appropriate. These estimates are subjective in nature and
involve uncertainties and matters of judgement and as a result cannot be
considered as the actual value of the bank. Changes in assumptions used in
determining fair value of the financial instruments could significantly alter
the estimates.
The following assumptions were used by the Company in estimating the fair
value of financial instruments;
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<PAGE>
Cash and due from banks, and federal funds sold: the carrying amount
approximates fair value.
Securities: For investment securities and investment securities available
for sale, fair values are based on quoted market prices or dealer quotes. If a
quoted market price is not available, fair value is estimated using quoted
market prices for similar securities.
Loans: Fair value is estimated for portfolios of loans with similar loan
characteristics. The fair value for certain residential mortgage loans and
consumer loans are based on quoted market prices for securities backed by
similar loans adjusted for difference in loan characteristics. The fair value
for commercial, commercial mortgage and construction type loans is estimated by
discounting cash flows using current interest rates for loans with similar
characteristics. Certain loans have been identified for accelerated resolution
and were valued utilizing estimated liquidation market values of loans with
similar characteristics.
Deposit Liabilities: The fair value of non-interest bearing demand
deposits, savings accounts, NOW accounts, and money market accounts is the same
as the carrying amount reported. The fair value of certificates of deposit is
calculated using the discounted cash flows method. The discount rate used was
the current rate offered by the bank for deposits with similar remaining
maturities.
Commitments to Extend Credit, Standby Letters of Credit and Financial
Guarantees Written: The fair value of commitments is estimated using fees
currently charged for similar agreements, based on the remaining term of the
commitment and the present credit quality rating of the counterparty. The fair
value on the standby letters of credit and financial guarantees written is based
on fees currently charged for similar agreements or on estimated cost to
terminate them or to settle the obligations with the counterparties at the
reporting date.
Other Borrowed Funds: Other borrowed funds which primarily consist of
federal funds purchased and securities sold under agreement to repurchase are
short term in nature and their carrying amount approximates fair value.
Reclassification
Reclassifications of prior period amounts are made when necessary to conform to
current year's presentation.
- 14 -
<PAGE>
Note 2 Acquisition of the Company
On March 16, 1994, the Company was acquired by CoreStates Financial Corp
("CoreStates") in a transaction accounted for as a pooling of interests ("the
Acquisition"). For each Company share of common stock outstanding, .4137 of a
share of CoreStates common stock was issued (Exchange Ratio). Constellation
will be merged into CoreStates' New Jersey National Subsidiary. The Company's
1993 consolidated statement of operations includes Acquisition related charges
in connection with a change in non-performing asset strategic direction and to
conform consumer lending charge-off policies, and charges for expenses
attributable to the Acquisition. The following summarizes the impact of the
Acquisition on the 1993 consolidated financial statements of the Company.
Allowance for Loan and Other Real Estate Owned Losses
In connection with a change in strategic direction by CoreStates after the
Acquisition and to conform the Company's loan, accrual and reserve policies to
those of CoreStates', the Company recorded an addition to the allowance for
possible loan losses of approximately $120,000,000 and an addition to the
reserve against other real estate owned ("OREO") of approximately $28,000,000
in 1993. The Company currently estimates that assets with a carrying value of
approximately $340,000,000 will be disposed of within eighteen months from the
date of Acquisition. The estimated reserves against these assets represent
approximately 40% of this amount. It is also estimated that the conforming
adjustments, mostly related to consumer lending charge-off policies, will
comprise approximately $10,500,000 of the aggregate $148,000,000 in estimated
provisions.
- 15 -
<PAGE>
Special Charges
In connection with the Acquisition, the Company recorded a charge in 1993 of
$37,000,000 for expenses directly attributable to the Acquisition, including
severance benefits, employment contracts, leasehold terminations and
professional fees and certain other costs and expenses. In addition, a
$10,000,000 writedown of the Company's purchased mortgage servicing rights was
recorded. The write-down was taken primarily due to accelerated prepayment
assumptions to conform to CoreStates' methodology.
Restatement of Prior Periods for Statement of Financial Accounting Standards No.
109 "Accounting for Income Taxes" (FAS No. 109)
The Company previously adopted FAS No. 109 on January 1, 1993 without
restating prior periods financial statements. However, to conform with
CoreStates presentation the consolidated financial statements have been
prepared as if the Company retroactively adopted FAS No. 109 as of January 1,
1987.
A valuation allowance equal to the tax benefits resulting from the adoption of
FAS No. 109 was established. There is no effect of conforming the Company's
method of adoption to CoreStates because tax benefits have not been recognized
in the Company's consolidated financial statements as it is more likely than
not that the Company will not be able to currently recognize such benefits
based upon the Company's lack of recoverable taxes and the uncertainty
regarding the generation of future taxable income.
Stock Option Plans
The Company maintains a 1987 Stock Incentive Compensation Plan (the "1987
Plan"), 1989 Stock Incentive Compensation Plan (the "1989 Plan"), the Stock
Option Plan for Outside Directors of New Brunswick Savings Bank and the 1992
Stock Option and Stock Appreciation Right Plan (the "1992 Plan").
In connection with the Acquisition, Company stock options will be converted into
options to purchase CoreStates Common Shares on the same terms and conditions as
are in effect immediately prior to the Acquisition, based upon the Exchange
Ratio. Certain Company stock options issued under the 1987 Plan and the stock
options issued under the 1992 Plan that are not otherwise exercisable will
become exercisable at the time of the Acquisition pursuant to provisions
providing for immediate exercise upon the occurrence of a change of control,
such as the Acquisition.
- 16 -
<PAGE>
Capital Infusion
On March 29, 1994, CoreStates contributed $80,000,000 to the capital of
Constellation.
Note 3 Restricted Cash Balances
Cash balances reserved to meet regulatory requirements of the Federal Reserve
Bank and balances maintained at other banks for compensating balance
requirements amounted to $32,778,000 and $9,321,000 respectively, at December
31, 1993.
Note 4 Securities
A comparison of the carrying value, gross unrealized gains and losses and
approximate market value of securities held to maturity and carrying value,
gross unrealized gains and losses and amortized value of securities available
for sale by maturity composition follows:
- 17 -
<PAGE>
Securities Held to Maturity
<TABLE>
<CAPTION>
Gross Gross
Carrying Unrealized Unrealized Market
December 31, 1993 (In Thousands) Value Gains Losses Value
- - -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities
Within one year $ 90,711 $ 67 $ - $ 90,778
After one year but within five years 45,151 50 ( 1) 45,200
After five years but within ten years - - - -
After ten years - - - -
- - -----------------------------------------------------------------------------------------
Total U.S. Treasury Securities 135,862 117 ( 1) 135,978
- - -----------------------------------------------------------------------------------------
Other securities
Within one year 300 - - 300
After one year but within five years - - - -
After five years but within ten years - - - -
After ten years 5,196 - - 5,196
- - -----------------------------------------------------------------------------------------
Total Other Securities 5,496 - - 5,496
- - -----------------------------------------------------------------------------------------
Total $141,358 $ 117 ($ 1) $141,474
- - -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Carrying Unrealized Unrealized Market
December 31, 1992 (In Thousands) Value Gains Losses Value
- - -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities
Within one year $ 99,288 $ 377 $ - $ 99,665
After one year but within five years 25,747 3 ( 154) 25,596
After five years but within ten years - - - -
After ten years 299 - ( 16) 283
- - -----------------------------------------------------------------------------------------
Total U.S. Treasury Securities 125,334 380 ( 170) 125,544
- - -----------------------------------------------------------------------------------------
Mortgage-backed securities
After one year but within five years 447 6 - 453
After five years but within ten years 7,383 82 ( 205) 7,260
After ten years 151,341 3,837 ( 172) 155,006
- - ------------------------------------------------------------------------------------------
Total Mortgage-Backed Securities 159,171 3,925 ( 377) 162,719
- - ------------------------------------------------------------------------------------------
Other securities
Within one year 300 - - 300
After one year but within five years - - - -
After five years but within ten years - - - -
After ten years 3,456 - - 3,456
- - ------------------------------------------------------------------------------------------
Total Other Securities 3,756 - - 3,756
- - ------------------------------------------------------------------------------------------
Total $288,261 $4,305 ($ 547) $292,019
- - -------------------------------------------------------------------------------------------
</TABLE>
- 18 -
<PAGE>
Securities Available for Sale
<TABLE>
<CAPTION>
Market
and Gross Gross
Carrying Unrealized Unrealized Amortized
December 31, 1993 (In Thousands) Value Gains Losses Cost
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Obligations of States and
Political Subdivisions
Within one year $ 9 $ - $ - $ 9
After one year but within five years 4 - - 4
After five years but within ten years 1 - - 1
- - -----------------------------------------------------------------------------------------------
Total Obligations of States and
Political Subdivisions 14 - - 14
- - -----------------------------------------------------------------------------------------------
Mortgage-backed securities
After one year but within five years 58 1 - 57
After five years but within ten years 6,832 138 - 6,694
After ten years 131,328 5,161 - 126,167
- - -----------------------------------------------------------------------------------------------
Total Mortgage-Backed Securities 138,218 5,300 - 132,918
- - -----------------------------------------------------------------------------------------------
Other securities
Within one year 100 - - 100
After one year but within five years 1,390 9 ( 14) 1,395
After five years but within ten years 928 11 ( 13) 930
After ten years 127 - ( 9) 136
- - -----------------------------------------------------------------------------------------------
Total Other Securities 2,545 20 ( 36) 2,561
- - -----------------------------------------------------------------------------------------------
Total $140,777 $5,320 ($ 36) $135,493
- - -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Carrying Unrealized Unrealized Market
December 31, 1992 (In Thousands) Value Gains Losses Value
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities
Within one year $ 10,108 $ 55 $ - $ 10,163
- - -----------------------------------------------------------------------------------------------
Total U.S. Treasury Securities $ 10,108 $ 55 $ - $ 10,163
- - -----------------------------------------------------------------------------------------------
Obligations of States and
Political Subdivisions
Within one year 9 - - 9
After one year but within five years 12 1 - 13
After five years but within ten years 2 - - 2
- - -----------------------------------------------------------------------------------------------
Total Obligations of States and
Political Subdivisions 23 1 - 24
- - -----------------------------------------------------------------------------------------------
Other securities
Within one year 100 1 - 101
After one year but within five years 1,475 2 ( 39) 1,438
After five years but within ten years 3,248 31 ( 33) 3,246
After ten years 580 36 ( 39) 577
- - -----------------------------------------------------------------------------------------------
Total Other Securities 5,403 70 ( 111) 5,362
- - -----------------------------------------------------------------------------------------------
Total $ 15,534 $ 126 ($ 111) $ 15,549
- - -----------------------------------------------------------------------------------------------
</TABLE>
- 19 -
<PAGE>
The carrying value, market value and amortized cost of securities held to
maturity and securities available for sale are distributed by contractual
maturity.
The estimated market value disclosed in the above schedules currently satisfy
the fair value disclosure requirements of FAS No. 107.
Securities with a carrying value of approximately $189,297,000 and
$286,350,000 at December 31, 1993 and 1992, respectively, were pledged to secure
public funds and trust deposits, repurchase agreements and other purposes
required by law.
Note 5 Loans
Loans are summarized as follows:
<TABLE>
<CAPTION>
December 31, (In Thousands) 1993 1992
- - ----------------------------------------------------------------------
<S> <C> <C>
Commercial $ 526,687 $ 555,203
Real Estate-Construction 50,029 96,513
Real Estate-Residential 470,265 531,624
Real Estate-Commercial 188,481 181,410
Consumer 329,077 310,820
Leasing Finance Receivable 101,769 91,116
- - ----------------------------------------------------------------------
Total Loans $1,666,308 $1,766,686
- - ----------------------------------------------------------------------
</TABLE>
The following table presents the carrying amounts and the estimated fair value
of loans net of unearned income and deferred loan fees of $2,951,000 and
$6,850,000 at December 31, 1993 and 1992 respectively.
<TABLE>
<CAPTION>
Carrying Fair
December 31, 1993 (In Thousands) Amount Value
- - ----------------------------------------------------------------------
<S> <C> <C>
Commercial $ 526,311 $ 524,281
Real Estate-Construction 49,925 47,764
Real Estate-Residential 467,951 469,641
Real Estate-Commercial 188,108 194,063
Consumer 329,293 336,975
Lease Financing Receivable 101,769 108,095
- - ----------------------------------------------------------------------
Loans-net 1,663,357 1,680,819
Allowance for loan losses 190,220 190,220
- - ----------------------------------------------------------------------
Net Loans Receivable $1,473,137 $1,490,599
- - ----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Carrying Fair
December 31, 1992 (In Thousands) Amount Value
- - ---------------------------------------------------------------------
<S> <C> <C>
Commercial $ 555,632 $ 543,041
Real Estate-Construction 96,348 92,918
Mortgage-Residential 525,414 536,185
Mortgage-Commercial 180,958 180,750
Consumer 311,317 316,096
Lease Financing Receivable 90,167 96,187
- - ---------------------------------------------------------------------
Loans-net 1,759,836 1,765,177
Allowance for loan losses 85,150 85,150
- - ---------------------------------------------------------------------
Net Loans Receivable $1,674,686 $1,680,027
- - ---------------------------------------------------------------------
</TABLE>
- 20 -
<PAGE>
The following table summarizes information pertaining to non-accrual loans,
loans on which the original terms have been modified to grant concessions in
light of the borrower's financial difficulty, real estate acquired through
foreclosures, in-substance foreclosures, and loans which are contractually past
due 90 days or more as to interest or principal payments but have not been
classified as non-accrual because they are well secured and in the process of
collection:
<TABLE>
<CAPTION>
December 31, (In Thousands) 1993 1992
- - --------------------------------------------------------------------------
<S> <C> <C>
Non-accrual loans $ 69,592 $115,778
Restructured loans 10,739 18,911
Other real estate owned
(net of reserve) 6,437 34,815
In-substance foreclosures 33,782 61,475
- - --------------------------------------------------------------------------
Total $120,550 $230,979
- - --------------------------------------------------------------------------
Loans past due 90 days or more
and still accruing $ 13,135 $ 16,784
- - --------------------------------------------------------------------------
</TABLE>
Analysis of the activity in the Other Real Estate Owned (OREO) reserve is as
follows:
<TABLE>
<CAPTION>
December 31, (In Thousands) 1993 1992 1991
- - -----------------------------------------------------------------------------
<S> <C> <C> <C>
Balance $ 4,483 $ 2,500 $ 0
Provision 40,050 (a) 10,100 2,500
Less: write-downs/losses on
dispositions 15,146 8,117 0
- - -----------------------------------------------------------------------------
Ending balance $29,387 $ 4,483 $2,500
- - -----------------------------------------------------------------------------
</TABLE>
(a) Includes a provision of $28,000,000 in connection which a change in
strategic direction related to the Company being acquired by CoreStates.
If the non-accrual and restructured loans had continued to accrue interest in
accordance with their original contract terms, net income, after assuming a 34%
tax rate, would have increased approximately $5,100,000 ($.19 per share),
$6,395,000 ($.71 per share) and $11,035,000 ($1.35 per share) in 1993, 1992 and
1991, respectively. The total amount of interest income received on these loans
in 1993, 1992 and 1991 amounted to $1,208,000, $1,951,000 and $3,809,000,
respectively. At December 31, 1993, there were no material commitments to lend
additional funds to borrowers whose loans were classified as non-accrual or
restructured. Non-performing asset related expense which amounted to $24.545
million, $18.703 million and $14.979 million for 1993, 1992 and 1991,
respectively, are included within other expenses in the consolidated statements
of income.
Most of the Company's business is with customers located within New Jersey.
A portion of the total loan portfolio is secured by real estate located in a
current weak real estate environment. Commercial real estate loans of $273
million represented 16.4% of the total loan portfolio at December 31, 1993,
which includes construction loans of $50 million, or 3.1% of the total loan
portfolio at year-end. The
- 21 -
<PAGE>
principal area of exposure within total commercial real estate loans was in
residential and commercial construction projects. In addition, substantially
all of the other real estate owned and loans foreclosed in-substance are located
in the same region. Accordingly, the ultimate collectibility of the loan
portfolio is susceptible to changes in market conditions in the New Jersey real
estate market.
The Company has had, and expects to have in the future, banking
transactions in the ordinary course of business with directors, officers and
associates on the same terms as those prevailing for comparable transactions
with other borrowers. The aggregate of these loans was $20,823,000 and
$48,855,000 at December 31, 1993 and 1992, respectively. During 1993, new loans
in the amount of $85,692,000 were made to such persons and repayments by such
persons were $113,724,000.
Note 6 Allowance for Loan Losses
Analysis of the reserve for possible loan losses is as follows:
<TABLE>
<CAPTION>
(In Thousands) 1993 1992 1991
- - ---------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1 $ 85,150 $ 98,251 $ 81,318
Charge-offs 29,298 ( 26,829) ( 68,895)
Recoveries 4,368 3,728 3,833
- - ---------------------------------------------------------------------------
Net Charge-offs 24,930 ( 23,101) ( 65,062)
- - ---------------------------------------------------------------------------
Provision for loan losses 130,000(a) 10,000 81,995
- - ---------------------------------------------------------------------------
Balance at December 31 $190,220 $ 85,150 $ 98,251
- - ---------------------------------------------------------------------------
</TABLE>
(a) The provision for loan losses for 1993 includes $120,000,000 recorded in
connection with a change in strategic direction related to the
Acquisition and to conform consumer lending charge-off policies to those
of CoreStates.
The Company's allowance for loan losses for Federal income tax purposes was
approximately $15,024,000, $18,043,000 and $21,062,000 at December 31, 1993,
1992 and 1991, respectively.
Note 7 Premises and Equipment
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31, (In Thousands) 1993 1992
- - ------------------------------------------------------------------------
<S> <C> <C>
Land $ 4,412 $ 4,636
Buildings 24,797 26,217
Equipment 65,034 65,207
Leasehold improvements 9,641 10,063
- - ------------------------------------------------------------------------
103,884 106,123
Less: Accumulated depreciation and
amortization 81,353 79,686
- - ------------------------------------------------------------------------
Total $ 22,531 $ 26,437
- - ------------------------------------------------------------------------
</TABLE>
Depreciation and amortization of premises and equipment charged to non-interest
expense amounted to $4,843,000, $6,627,000 and $8,555,000 for the years ended
December 31, 1993, 1992 and 1991, respectively.
- 22 -
<PAGE>
Note 8 Mortgage Servicing
The Company services real estate loans for investors which are not included in
the accompanying consolidated statements of condition. The total of such loans
serviced, but wholly-owned by investors, amounted to approximately $1.392
billion, $2.109 billion and $2.754 billion at December 31, 1993, 1992 and 1991,
respectively. The carrying value of purchased mortgage servicing rights
("PMSR") was $3.0 million at December 31, 1993 compared to $21.2 million and
$32.2 million at December 31, 1992 and 1991, respectively, and is being
amortized over the estimated periods which the related loans are expected to
generate income. Amortization, which amounted to $18.218 million, $10.699
million and $6.778 million for 1993, 1992 and 1991, respectively, is included
within other expenses on the consolidated statements of operations. Included in
the 1993 amortization is an additional $10.0 million PMSR writedown recorded
to reflect accelerated prepayment assumptions in conforming to CoreStates'
methodology.
Note 9 Other Expenses
Other expenses consists of the following:
<TABLE>
<CAPTION>
December 31, (In Thousands) 1993 1992 1991
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Advertising and marketing $ 804 $ 921 $ 946
FDIC insurance 6,553 5,878 5,280
Legal fees (a) 5,982 5,790 5,176
Consultant 394 320 1,740
Non-performing asset
related expenses 8,296 4,917 5,115
Provision for OREO and
write-downs 40,050 10,100 6,679
Postage 1,273 1,298 1,409
Stationery and supplies 1,193 1,478 2,182
Telecommunications 1,677 1,811 1,825
Amortization - purchased assets 19,056 11,889 7,565
Special charges (b) 37,000 - 6,574
Other 12,712 13,649 15,883
- - --------------------------------------------------------------------------------
Total $134,990 $58,051 $60,374
- - --------------------------------------------------------------------------------
</TABLE>
(a) Certain legal fees associated with OREO are included in legal fees.
(b) In connection with the Acquisition, the Company recorded charges in 1993 for
expenses directly attributable to the Acquisition and certain other costs
and expenses. The Company also provided additional reserves of $28,000,000
to the OREO provision in connection with a change in strategic direction
resulting from the Acquisition.
- - --------------------------------------------------------------------------------
- 23 -
<PAGE>
Note 10 Deposits
The following table shows the time remaining to maturity of certificates of
deposit of $100,000 or more at December 31, 1993 and 1992.
<TABLE>
<CAPTION>
(In Thousands) 1993 1992
- - -----------------------------------------------------------------------
<S> <C> <C>
Three months or less $5,923 $ 10,520
Over three months but within six months - 3,821
Over six months but within twelve months - 2,100
Over twelve months - -
- - -----------------------------------------------------------------------
Total $5,923 $ 16,441
- - -----------------------------------------------------------------------
</TABLE>
The following table presents the carrying amounts and the fair value of deposits
at December 31, 1993 and 1992.
<TABLE>
<CAPTION>
Carrying Fair
December 31, 1993 (In Thousands) Amount Value
- - -----------------------------------------------------------------------
<S> <C> <C>
Demand $ 323,114 $ 323,114
Money market 364,982 364,982
Savings accounts 378,759 378,759
Interest bearing demand deposits 376,288 376,288
Certificate of deposits of
$100,000 or more 5,923 5,928
Other time deposits 643,015 647,649
- - -----------------------------------------------------------------------
Total Deposits $2,092,081 $2,096,720
- - -----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Carrying Fair
December 31, 1992 (In Thousands) Amount Value
- - -----------------------------------------------------------------------
<S> <C> <C>
Demand $ 363,912 $ 363,912
Money market 361,289 361,289
Savings accounts 366,482 366,482
Interest bearing demand deposits 357,738 357,738
Certificate of deposits of
$100,000 or more 16,441 16,528
Other time deposits 784,979 792,080
- - -----------------------------------------------------------------------
Total Deposits $2,250,841 $2,258,029
- - -----------------------------------------------------------------------
</TABLE>
- 24 -
<PAGE>
Note 11 Other Borrowed Funds
Other borrowed funds consist primarily of Federal funds purchased and securities
sold under agreements to repurchase. Data regarding other borrowed funds is as
follows:
<TABLE>
<CAPTION>
(In Thousands) 1993 1992 1991
- - -----------------------------------------------------------------------
<S> <C> <C> <C>
Average for the year:
Amount outstanding $ 7,958 $ 8,797 $43,378
Weighted average interest
rate 2.34% 4.10% 5.71%
At year-end:
Amount outstanding $ 9,086 $ 4,229 $20,843
Weighted average interest
rate 2.33% 2.24% 3.18%
Maximum amount outstanding
at any month-end $10,646 $17,270 $67,825
- - ----------------------------------------------------------------------
</TABLE>
Other borrowed funds are primarily short term in nature and the carrying amount
outstanding approximate fair value.
Note 12 Rights Offering - Recapitalization
On December 18, 1992 the company successfully completed a Recapitalization Plan.
The Recapitalization consisted of the sale of 13.3 million shares of common
stock in a Rights Offering to existing shareholders, the sale of 5.5 million
additional shares of common stock to various standby purchasers and the
repayment of $17.5 million in indebtedness for cash. Also, as part of the
Recapitalization, the Company contributed to its wholly-owned subsidiary,
Constellation, as a capital contribution, approximately $47.4 million of the net
proceeds from the sale of such stock and a $10 million subordinated note.
As a result, the company's shareholders' equity increased by approximately
$67.5 million and Constellation's shareholders' equity increased by
approximately $58 million.
Note 13 Income Taxes
In February 1992, the FASB issued FAS No. 109, "Accounting for Income
Taxes." FAS No. 109 calls for a change to the asset and liability method of
income tax accounting from the deferred method of accounting for income taxes
required by Accounting Principles Board ("APB") Opinion No. 11. FAS No. 109
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the company's
financial statements or tax returns. The measurement of deferred tax assets and
liabilities is based on the enacted tax rates applicable to taxable income for
the years in which those temporary differences are expected to be recovered or
settled. FAS No. 109 requires that deferred tax assets and liabilities be
adjusted for the effect of a change in tax rates in the period of enactment.
- 25 -
<PAGE>
As required by FAS No. 109, the Company adopted the pronouncement on January 1,
1993. However, the consolidated financial statements have been prepared as if
the Company retroactively adopted FAS No. 109 as of January 1, 1987.
For 1993, 1992 and 1991, the income tax expense (benefit) includes the
following components:
<TABLE>
<CAPTION>
Federal (In Thousands) 1993 1992 1991
- - -------------------------------------------------------------------------
<S> <C> <C> <C>
Currently receivable $ - $ - ($14,171)
Deferred benefit - - 14,171
- - -------------------------------------------------------------------------
Total Federal Income Tax
Expense (Benefit) - - -
- - -------------------------------------------------------------------------
State income taxes 662 $ 53 $ 532
- - -------------------------------------------------------------------------
Total Federal & State Income
Tax Expense $ 662 $ 53 $ 532
- - -------------------------------------------------------------------------
</TABLE>
The reasons for the differences between the amount computed by applying the
statutory Federal income tax rate of 35% in 1993, 34% in 1992 and 1991 to loss
before Federal income taxes are shown in the following table:
<TABLE>
<CAPTION>
(In Thousands) 1993 1992 1991
- - ------------------------------------------------------------------------
<S> <C> <C> <C>
Tax benefit at statutory rate ($62,242) ($ 557) ($29,985)
- - ------------------------------------------------------------------------
Increase (Reduction) Resulting From:
- - ------------------------------------------------------------------------
Tax benefit of net operating
loss not recognized 62,797 1,707 30,284
Tax-exempt interest ( 700) ( 1,383) ( 1,873)
Non-deductible interest expense 44 82 135
Low income housing credits and
jobs tax credits ( 58) - ( 16)
State income tax 662 53 532
Excess tax provision for loan
losses - - 1,418
Other-net 159 151 37
- - ------------------------------------------------------------------------
Total $ 662 $ 53 $ 532
- - ------------------------------------------------------------------------
</TABLE>
After the IRS examination of the 1991 net operating loss carryback claim,
Constellation's December 31, 1993 consolidated net operating loss carryforward
for tax return purposes is expected to approximate $33 million. In addition,
Constellation also has general business credit carryforwards of approximately
$1.3 million expiring from 1994 through 2008 and alternative minimum tax
credit carryforwards of approximately $1.2 million having indefinite lives.
- 26 -
<PAGE>
The tax effect of temporary differences that give rise to significant portions
of the deferred tax asset at December 31, 1993 are presented below (in
thousands):
<TABLE>
<CAPTION>
Deferred Tax Assets 1993 1992 1991
- - ------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Bad debt and OREO reserve $ 87,533 $ 32,465 $ 36,824
Non-accrual interest 1,635 2,903 2,462
Deferred loan fees 1,831 1,391 839
Securities writedowns 45 61 721
Net operating loss carryforward 16,393 15,376 9,196
Core deposit premiums 723 653 446
Mortgage servicing rights 4,085 - -
Restructuring charges 15,115 186 1,739
Tax credits 2,666 2,601 2,601
Other 1,308 1,414 1,357
- - ---------------------------------------------------------------------
Gross deferred tax asset 131,334 57,050 56,185
- - ---------------------------------------------------------------------
Valuation allowance (125,580) ( 53,317) ( 52,182)
- - ---------------------------------------------------------------------
5,754 3,733 4,003
- - ---------------------------------------------------------------------
Deferred Tax Liabilities
- - ------------------------
Fixed asset depreciation 1,505 1,815 2,596
Carrying value of securities 1,878 - -
Other 2,371 1,918 1,407
- - ---------------------------------------------------------------------
5,754 3,733 4,003
- - ---------------------------------------------------------------------
Net deferred tax asset $ - $ - $ -
- - ---------------------------------------------------------------------
</TABLE>
Except for the effects of the reversal of net deductible temporary differences,
the Company is not currently aware of any factors which would cause any
significant differences between taxable income and pretax book income in future
years. However, there can be no assurances that there will be no significant
differences in the future between taxable income and pretax book income if
circumstances change (such as, for example, changes in tax laws or the Company's
financial condition or performance). In order to fully realize the deferred tax
asset, the Company will need to generate future taxable income. Management
believes it is more likely than not that the Company will not realize the
benefit of net deductible temporary differences. Management has projected that
the Company will not generate sufficient taxable income to currently utilize the
deferred tax asset. There can be no assurance that the Company will generate
any earnings or any specific level of continuing earnings. A valuation
allowance equal to the deferred tax asset has been established as a result of
the above. Beginning in 1994, the Company will file a consolidated tax return
with its parent CoreStates. Future realizability of the deferred tax asset
will be based on the consolidated position of CoreStates.
- 27 -
<PAGE>
Note 14 Benefit Plans
Pension Plans
Constellation provides a non-contributory defined benefit plan covering
substantially all employees. Benefits under the plan are based on years of
credited service, employees estimated compensation at retirement and primary
social security benefits. For the years ended December 31, 1993, 1992 and 1991,
the pension expense aggregated $232,000, $317,000 and $1,125,000 respectively.
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated financial statements.
<TABLE>
<CAPTION>
December 31 (In Thousands) 1993 1992
- - -----------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits ($32,876) ($26,824)
Nonvested benefits ( 1,176) ( 885)
- - ----------------------------------------------------------------------
Projected benefit obligation for service
rendered to date ($36,215) ($29,986)
Plan assets at fair value, primarily listed
stocks and bonds 36,724 33,579
- - ----------------------------------------------------------------------
Projected benefit obligation in (excess of)
less than plan assets 509 3,593
Unrecognized net loss (gain) 3,096 ( 1,049)
Prior service cost not yet recognized in net
periodic pension cost ( 928) ( 1,024)
Unrecognized net obligation at January 1, 1987
being amortized over 15 years 1,122 1,262
- - ----------------------------------------------------------------------
Prepaid pension cost included in other assets $ 3,799 $ 2,782
- - ----------------------------------------------------------------------
Assumptions used for disclosure of
funded status:
Discount rate 7.0% 9.0%
Rate of increase in compensation levels 5.0% 5.0%
- - ----------------------------------------------------------------------
</TABLE>
- 28 -
<PAGE>
The net pension cost for 1993 and 1992 included the following components:
<TABLE>
<CAPTION>
(In Thousands) 1993 1992
- - ---------------------------------------------------------------------
<S> <C> <C>
Service cost-benefit earned during the period $ 797 $ 820
Interest cost on projected benefit obligation 2,517 2,502
Actual return on plan assets ( 4,282) ( 1,981)
Net amortization and deferral 1,200 ( 1,024)
FASB 88 curtailment costs - -
- - ---------------------------------------------------------------------
Net pension cost included in salaries $ 232 $ 317
- - ---------------------------------------------------------------------
Assumptions used for determination of
net pension cost:
Discount rate 9.0% 9.0%
Rate of increase in compensation levels 5.0% 5.0%
Expected long-term rate of return on
assets 9.5% 9.5%
- - ---------------------------------------------------------------------
</TABLE>
In addition, Constellation has a Supplemental Executive Retirement Plan. This
plan, which is not funded, is designed to supplement the pension plan for key
employees designated by the Board of Directors. The cost of this plan is being
accrued annually and amounted to $194,000, $502,000 and $210,000 in 1993, 1992
and 1991 respectively.
Other Postretirement Benefits
The Company provides certain health care and life insurance benefits to active
and retired employees. Substantially all of the company's employees may become
eligible for retired employees' health and life insurance if they reach
retirement age and satisfy certain service requirements. The company adopted,
on a prospective basis, Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" (FAS No.
106). Under FAS No. 106 the costs of such benefits are accrued based on
actuarial assumptions from the date of hire to the date the employee is fully
eligible to receive the benefits. Prior to the adoption of FAS No. 106, the
costs of these benefits were expensed as paid.
For measurement purposes, the 1993 health care cost trend rate is projected
to be 15% through 1995, 10% for the next 10 years, and 6% thereafter. The
health care cost trend rate assumption has a significant effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend rates by
1% in each year would increase the accumulated postretirement benefit obligation
as of January 1, 1993 by $337,000 (3%) and the aggregate of the service and
interest cost components of net periodic retirement benefit cost for the year
1993 by $24,000 (3%). The weighted average discount rate used in determining
the accumulated postretirement benefit obligation was 7%. The change in the
weighted average discount rate from 9% resulted in an increase in the actuarial
present value of the postretirement benefit obligation of approximately $1.1
million.
- 29 -
<PAGE>
The following table sets forth the funding status and amounts recognized in
the consolidated financial statements at December 31, 1993:
<TABLE>
<CAPTION>
(In Thousands) 1993
- - ----------------------------------------------------------------
<S> <C>
Accumulated Postretirement Benefit Obligation:
Retirees ($ 5,408)
Actives Fully Eligible ( 384)
Actives Not Fully Eligible ( 1,744)
- - ----------------------------------------------------------------
Accumulated Postretirement Benefit Obligation ( 7,536)
Plan Assets at Fair Value --
- - ----------------------------------------------------------------
Accumulated Postretirement Benefit Obligation
(in excess of) or less than Plan Assets ( 7,536)
Unrecognized Net (Gain) or Loss from Past
Experience different from that assumed and
effects of changes in assumptions 966
Prior Service Cost not yet recognized in
net periodic postretirement benefit cost --
Unrecognized net obligation or (Net Asset)
at January 1, 1993 being recognized over
20 years 6,093
- - ----------------------------------------------------------------
(Accrued)/Prepaid Postretirement Benefit
Cost recognized in the statement of
financial position ($ 477)
- - ----------------------------------------------------------------
The net postretirement benefit cost for 1993
included the following components:
(In Thousands)
- - ----------------------------------------------------------------
Service cost $ 87
Interest cost 549
Actual return on plan assets --
Net amortization and deferral 320
- - ----------------------------------------------------------------
Net postretirement benefit cost $ 956
- - ----------------------------------------------------------------
</TABLE>
Incentive Bonus Plans
Management incentive plans have been established with the intention of providing
added incentive to key executives to increase the profits of the company. The
executives and the amount of the awards are subject to limits as set forth in
the plans. Payments to the plans amounted to $787,000, $0 and $28,000 in 1993,
1992 and 1991, respectively. In addition to the foregoing, Constellation Bank
awarded discretionary cash bonuses for 1993 performance under the 1993 Incentive
Plan in an additional amount of $250,000.
Certain subsidiaries maintain other incentive plans for certain officers
and employees. There were no payments under these plans for 1993, 1992 and
1991.
- 30 -
<PAGE>
Savings and Investment Plan
A savings and investment plan is available to employees of Constellation
Bancorp. Employees can make contributions to the plan by means of payroll
deduction of up to 15% of their compensation. The company provides a matching
contribution of at least 25% of the first 6% of the employees' contributions.
Payments to the plan by the company in 1993, 1992 and 1991 amounted to $187,000,
$267,000 and $679,000, respectively.
Stock Option Plan
The Stock Incentive Compensation Plan (the "Plan") specifies that a maximum of
400,000 shares of Constellation Bancorp's common stock may be issued to key
employees of the company. The exercise price of all stock options granted under
the Plan must be at least equal to the fair market value of such shares on the
date of grant. Options expire ten years from the date of the grant. Stock
appreciation rights maybe added to all or part of any option granted under the
Plan. Any such Right shall permit the participant to receive, upon exercise of
the Right and surrender of the option, an amount, to be paid in cash, shares, or
both, equal in value to the difference between the fair market value of the
shares with respect to which the Right is exercised and the option price of the
shares.
Information with respect to options under the Plan is as follows:
<TABLE>
<CAPTION>
Number of Option Price
Shares Per Share
- - ------------------------------------------------------------------------
<S> <C> <C>
Outstanding, December 31, 1990 (152,100
shares exercisable) 255,200 $8.74-22.80
Granted 106,000 1.33- 4.49
Expired or cancelled 126,900 8.74-22.63
- - ------------------------------------------------------------------------
Outstanding, December 31, 1991 (101,734
shares exercisable) 234,300 1.33-22.80
Granted 88,200 3.16- 4.49
Expired or cancelled 65,700 2.16-22.80
- - ------------------------------------------------------------------------
Outstanding, December 31, 1992 (107,433
shares exercisable) 256,800 1.33-22.63
Granted - -
Exercised 68,066 1.33- 3.53
Expired or cancelled 2,800 11.65
- - ------------------------------------------------------------------------
Outstanding, December 31, 1993 (106,296
shares exercisable) 185,934 $1.33-22.63
- - ------------------------------------------------------------------------
</TABLE>
In addition to the above plans, in 1989 the Board of Directors of the company
adopted the 1989 Stock Incentive Compensation Plan (the "1989 Plan"). The 1989
Plan authorizes the grant of non-qualified and incentive stock options and
restricted share awards for up to 185,000 shares of common stock, subject to
adjustment in certain events, to such officers and other key employees of the
corporation and its subsidiaries as the Compensation Committee of the Board of
Directors
- 31 -
<PAGE>
of the company may determine. The company has approved the grant of options to
purchase an aggregate of 75,100 shares of common stock to certain officers and
key employees of Constellation, at an exercise price per share equal to $19.20
(after applying the January 19, 1993 conversion factor). The options will be
exercisable on a cumulative basis in equal installments over a five-year period.
Each such option will have a maximum term of ten years.
The 1989 Plan also provides for the grant of restricted stock awards. Each
such award entitles the recipient to receive a specified number of shares of
common stock, unrestricted title to which is contingent upon the recipient's
continuation of employment with the company or its subsidiaries for a period
specified in the award, which period may not be less than one year nor more than
ten years. In 1989 the company approved the grant of restricted stock awards
for an aggregate of 76,590 shares of common stock at a price per share of $28.85
or $2.210 million to officers and key employees of Constellation. Each such
award will be 20% vested on the first anniversary of the date of grant, will
vest at a rate of 20% on each anniversary thereafter and will become 100% vested
on the fifth anniversary of the date of grant.
In 1989, the Board of Directors of the company adopted the Stock Option
Plan for Outside Directors of New Brunswick Savings Bank (the "Directors'
Plan"). The Directors' Plan authorizes the grant of non-qualified stock options
for up to 79,200 shares of common stock, subject to adjustment in certain
events, to members of the Board of Directors of New Brunswick Savings Bank other
than directors who also serve as employees of New Brunswick Savings Bank, the
company or any subsidiaries of the company. In 1989 the company approved the
grant of an option to purchase 8,800 shares of common stock to certain non-
employee members of the Board of Directors of New Brunswick Savings Bank. In
1991, New Brunswick Savings Bank was merged with and into Constellation. Four
members of the Board of Directors of New Brunswick Savings Bank continue to
serve as members of the Board of Directors of Constellation and hold options.
The options are exercisable at a price per share of $19.20 (after applying the
January 19, 1993 conversion factor). Each option is exercisable on a cumulative
basis in equal installments over a five-year period. Options will terminate
upon the earlier of five years following the date of grant or ninety (90) days
following the date on which the director ceases to serve in such capacity for
any reason other than death.
- 32 -
<PAGE>
1989 Stock Incentive Compensation Plan
<TABLE>
<CAPTION>
Number of Option Price
Shares Per Share
- - ----------------------------------------------------------------------
<S> <C> <C>
Stock Options
Outstanding, December 31, 1990 (14,508
shares exercisable) 70,540 $28.85
Granted - -
Exercised - -
Expired or cancelled 12,629 28.85
- - -----------------------------------------------------------------------
Outstanding, December 31, 1991 (24,968
shares exercisable) 57,911 19.20
Granted 53,300 3.91
Exercised - -
Expired or cancelled 35,711 3.91- 19.20
- - -----------------------------------------------------------------------
Outstanding, December 31, 1992 (11,760
shares exercisable) 75,500 3.91- 19.20
Granted - -
Exercised 2,400 3.91
Expired or cancelled 7,000 3.91- 19.20
- - -----------------------------------------------------------------------
Outstanding, December 31, 1993 (34,545
shares exercisable) 66,100 $3.91-$19.20
- - -----------------------------------------------------------------------
Restricted Stock Awards
Outstanding, December 31, 1990 59,459 $28.85
Granted - -
Vested 14,178 28.85
Forfeited 4,802 28.85
- - -----------------------------------------------------------------------
Outstanding, December 31, 1991 40,479 28.85
Granted - -
Vested 3,400 28.85
Forfeited 30,279 28.85
- - -----------------------------------------------------------------------
Outstanding, December 31, 1992 6,800 28.85
Granted - -
Vested 2,960 28.85
Forfeited 880 28.85
- - -----------------------------------------------------------------------
Outstanding, December 31, 1993 2,960 $28.85
- - -----------------------------------------------------------------------
</TABLE>
In 1992 the Board of Directors of the Company adopted the Constellation
Bancorp 1992 Stock Option and Stock Appreciation Right Plan (the "Plan). The
purposes of the Plan are to provide special earnings opportunities to key
executives of the Company and its subsidiaries by enabling them to share in
positive changes in the value of the Common Stock of the Company and to enable
the Company to attract and to keep in its employment executives who can
contribute significantly to its long term business interests. Under the Plan,
options covering a maximum of 1,000,000 shares of Common Stock may be granted to
key employees of the Company. Options granted under the Plan may be either
incentive stock options or non-qualified stock options, as the Committee
determines to be in the best interests of the Company at the time of the grant
of options. The Compensation Committee will have authority, in its sole
discretion, to provide that a stock appreciation right shall be added to all or
part of any option granted under the Plan. Any such stock appreciation right
will permit the participant to receive, upon exercise of the stock appreciation
right and surrender of the option, an amount, to be paid in cash, in shares, or
in both cash and shares, as determined by the Compensation Committee in its
discretion, equal in value to the difference between the fair market value of
the shares with respect to which the stock appreciation right is exercised and
the option price of the shares. The option price per share of Common Stock
- 33 -
<PAGE>
under each incentive stock option shall be determined by the Compensation
Committee and shall not be less than the fair market value at the time the
option is granted. The option price per share of Common Stock under each non-
qualified stock option shall be determined by the Compensation Committee. Each
option shall be exercisable in whole or in part at such times as the Committee
may determine, but not later than ten years from the date the option is granted.
In the event of a Change in Control, as defined in the Plan, all options shall
become exercisable in full.
<TABLE>
<CAPTION>
Number of Option Price
Shares Per Share
- - ---------------------------------------------------------------------------
<S> <C> <C>
1992 Stock Option Plan
Outstanding, December 31, 1992 -
Granted 515,000 3.75
Exercised 60,000 3.75
Outstanding, December 31, 1993
(No shares exercisable) 455,000 3.75
- - ---------------------------------------------------------------------------
</TABLE>
On January 19, 1993, the Compensation Committee acted to adjust the option
price of the stock options outstanding prior to November 18, 1992, the record
date for the company's Recapitalization. The Compensation Committee adjusted
the option price of all stock options outstanding prior to November 18, 1992 by
a factor of .6656 to preserve the relative option value of options outstanding
prior to the Recapitalization. The data herein reflects such adjustments.
Impact on Benefit Plans of Acquisition
It is anticipated that the Company's pension and savings and investment
plans will be merged into those of CoreStates subsequent to the Acquisition.
Officers and employees of the Company who become or remain regular (full-time)
employees of CoreStates or any of its subsidiaries will be provided employee
benefits no less favorable than those provided by CoreStates and its
subsidiaries to their similarly situated officers or employees. In addition,
any officer or employee of the Company who becomes a participant in any
employee benefit plan of CoreStates shall be given credit under such plan for
all prior service with the Company for purposes of eligibility and vesting.
Upon consummation of the Acquisition, each outstanding and unexercised
option to purchase shares of the Company issued under the Company's stock
option plans was converted into an option to purchase CoreStates Common Shares
as adjusted based upon the Exchange Ratio.
Note 15 Shareholder Rights Plan
Constellation Bancorp had a Shareholder Rights Plan designed to protect the
shareholders of the company in the event of takeover action that the Board of
Directors believed would deny shareholders the full value of their investment.
The Shareholder Rights Plan did not intend to prevent a takeover of the company
that the Board believed beneficial to the company's shareholders.
Note 16 Regulatory Matters
The Federal Reserve Board in the case of bank holding companies such as the
company, and the Comptroller of the Currency (the "OCC") in the case of national
banks such as Constellation each in general measure capital adequacy by using a
risk-based capital framework and by monitoring compliance with minimum leverage
ratio guidelines. The minimum ratio of total risk-based capital to risk-
weighted assets (including certain off-balance sheet items, such as standby
letters of credit) is 8%. At least half of the total capital, or 4%, is to be
comprised of common equity and qualifying perpetual preferred
- 34 -
<PAGE>
stock, less deductible intangibles ("Tier I capital"). The remainder ("Tier II
capital") may consist of mandatory convertible debt securities, qualifying
subordinated debt, other preferred stock and a portion of the reserve for
possible credit losses up to 1.25% of total calculated assets.
In addition, the Federal Reserve Board has established minimum leverage
ratio guidelines for bank holding companies and the OCC has established minimum
leverage ratio guidelines for national banks. These guidelines provide for a
minimum Tier I leverage ratio (Tier I capital to quarterly average total assets
for bank holding companies and period-end assets for national banks less
deductible intangibles) of 3% for bank holding companies and banks that meet
certain criteria, including that they maintain the highest regulatory rating.
All other bank holding companies and banks are required to maintain a leverage
ratio of 3% plus an additional cushion of at least 100 to 200 basis points.
The Federal Reserve Board and OCC have adopted changes to its risk-based
and leverage ratio requirements applicable to bank holding companies and state
chartered member banks that require that all intangibles, including core deposit
intangibles, PMSRs and purchased credit card relationships ("PCCRs"), be
deducted from Tier I capital. The changes, however, grandfather identifiable
assets (other than PMSRs and PCCRs) acquired on or before February 19, 1992 and
permit the inclusion of readily marketable PMSRs and PCCRs in Tier I capital to
the extent that (i) PMSRs and PCCRs do not exceed 50% of Tier I capital and (ii)
PCCRs do not exceed 25% of Tier I capital. For such purposes, PMSRs and PCCRs
each would be included in Tier I capital only up to the lessor of (i) 90% of
their fair market value (which must be determined quarterly) and (ii) 100% of
the remaining unamortized book value of such assets.
On August 22, 1991, Constellation entered into the Consent Order with the
OCC and on July 20, 1992, the Company entered into a written Agreement with the
FRBNY. Such consent orders generally indicate a high level of regulatory
concern as to the viability of the institution. The Consent Order and the
Written Agreement had imposed significant and material operating restrictions on
the Company and Constellation and required the Company and Constellation to take
a variety of material remedial steps to restore their financial condition and
results of operations.
The Consent Order resulted from, among other things, the OCCs determination
as indicated in the Consent Order, that certain practices of Constellation were
deemed to be unsafe and unsound.
Constellation submitted a capital plan to the OCC in December 1991. The
plan called for a recapitalization of Constellation via a restructuring of the
outstanding Company debt and the raising of new equity in 1992, which was
successfully completed via a rights offering in December 1992.
- 35 -
<PAGE>
The Federal Deposit and Insurance Corporation Improvement Act of 1991
(FDICIA) required the Federal bank regulatory authorities to take prompt
corrective action with respect to depository institutions which do not meet
minimum capital standards and other safety and soundness regulations which have
not been finalized. In response to FDICIA, the FDIC and the OCC have adopted
regulations which establish a scheme for prompt regulatory corrective action
with respect to depository institutions which do not meet minimum capital
requirements. The "prompt corrective action" regulations established five
categories of depository institutions: (1) well-capitalized, (2) adequately
capitalized, (3) undercapitalized, (4) significantly undercapitalized and (5)
critically undercapitalized. Each category relates to the level of capital for
the depository institution. To be considered "adequately capitalized", an
institution must generally have a leverage ratio of at least 4%, a Tier I risk-
based capital ratio of at least 4% and a total risk-based capital ratio of at
least 8%. An institution is deemed to be "critically undercapitalized" if it
has a tangible equity ratio of 2% or less.
Under FDICIA, depository institutions that are "undercapitalized" under
proposed regulations become subject to significant restrictions and are required
to take certain actions to restore their capital levels. An undercapitalized
institution must submit an acceptable capital restoration plan to the
appropriate federal banking agency, which plan must be, in the opinion of such
agency, "likely to succeed" in restoring the institution's capital and be
accompanied by a guarantee, subject to certain limitations, of such plan and its
performance by the holding company for such institution. This guarantee would
rank senior to most of the holding company's other obligations in the event of
the holding company's insolvency. A receiver or conservator may be appointed
for an undercapitalized institution if it fails to submit or comply with an
acceptable capital plan, has no reasonable prospect of being adequately
capitalized or otherwise fails to raise sufficient capital.
At December 31, 1993, for regulatory capital purposes both the Company and
Constellation were classified as critically undercapitalized.
On March 16, 1994, the holding company was merged into CoreStates Financial
Corp. On March 29, 1994, CoreStates contributed $80,000,000 to the capital of
Constellation. It is anticipated that Constellation will be merged into
CoreStates New Jersey National on April 30, 1994.
- 36 -
<PAGE>
Note 17 Dividend Restrictions and Liquidation Rights
The Company is a legal entity separate and distinct from Constellation and the
company's other subsidiaries. Other than its equity interest in Constellation,
the company does not have any significant sources of revenue other than
dividends from Constellation. Federal law imposes limitation on the payment of
dividends by national banks such as Constellation. Two different calculations
are performed to measure the amount of dividends that may be paid: a "recent
earnings" test and a "undivided profits" test.
Under the recent earnings test, a dividend may not be paid in any calendar
year if the total of all dividends declared by a national bank in any calendar
year is in excess of the current year's net profits combined of the two
preceding years unless the bank obtains the prior approval of the OCC. Pursuant
to regulations (the "Regulations") adopted in December 1990 by the OCC, "net
profits" is defined as the net income figure reported by a bank in its Reports
of Condition and Income and "retained net profits" is "net profits" less any
common or preferred dividends declared for that reporting period. Under the
recent earnings test, to the extent that a national bank has a loss in any year
the national bank must subtract that loss (as well as any dividend paid) from
earnings during the next two years in determining its capacity to pay dividends.
Under the undivided profits test, a dividend may not be paid in excess of a
bank's undivided profits then on hand, after deducting (i) losses and (ii) bad
debts in excess of the allowance for loan losses. Under the Regulations,
"allowance for loan losses" and "undivided profits" are defined as the amounts
reported as such by a bank in its Reports of Condition and Income; and "bad
debts" is defined to include matured obligations due a bank on which the
interest is past due and unpaid for six months, unless the debts are well-
secured and in the process of collection. Generally, a debt is considered
"matured" when all or part of the principal is due and payable as a result of
demand, arrival of the stated maturity date, or acceleration by contract or by
operation of law. In addition, the Regulations specify that only that portion
of a bank's surplus account that is "earned surplus" (that is, surplus derived
from earnings of prior periods that is in excess of the minimum amount of
surplus required under federal law to be maintained by the bank) may be
transferred to undivided profits for the purpose of paying dividends, provided
that the transfer is approved by the OCC. Under the recent earnings test, as of
December 31, 1993, Constellation could not pay any dividends to the company
without the prior approval of the OCC. Under the "undivided profits test," as
of December 31, 1993, Constellation could not pay any dividends to the company.
Constellation had a deficit with respect to its retained net profits of $265.4
million at December 31, 1993. Constellation had a deficit with respect to its
undivided profits of $209.2 million at December 31, 1993.
- 37 -
<PAGE>
The payment of dividends by the Company and Constellation may also be
affected by other factors, such as the maintenance of adequate capital. For
example, FDIClA generally prohibits an undercapitalized institution from paying
dividends. In addition, if, in the opinion of the applicable regulatory
authority, a bank holding company or a bank under its jurisdiction is engaged in
or is about to engage in an unsafe or unsound practice (which, depending on the
financial condition of the bank, could include the payment of dividends), such
authority may require, after notice and hearing, that such bank cease and desist
from such practice. The FRBNY, the OCC and the FDIC have issued policy
statements which provide that insured banks and bank holding companies should
generally only pay dividends out of the current operating earnings.
A liquidation account was established for the benefit of all eligible
account holders of New Brunswick who continue to maintain their deposits in New
Brunswick. The initial liquidation account balance of $58.6 million equaled the
shareholders' equity of New Brunswick as of June 30, 1989. The initial interest
of each account holder was in the same proportion that the balance in his or her
deposit account was to the aggregate balance in the deposit accounts as of the
eligibility record date. New Brunswick may not declare or pay a cash dividend
if the effect thereof will cause its shareholders' equity to be reduced below
the amount required for the liquidation account. The liquidation account is
reduced annually in proportion to the reduction of eligible deposit account
balances. The amount of the liquidation account at December 31, 1993 was $3.0
million.
Note 18 Commitments and Contingencies
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financial needs of its customers.
These financial instruments consist of commitments to extend credit, standby
letters of credit and future contracts. These financial instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the accompanying consolidated statements of condition. The
contract or notional amounts of these instruments express the extent of
involvement the company has in each class of financial instruments.
The Company uses the same credit policies and collateral requirements in
making commitments and conditional obligations as it does for on-balance
instruments. Commitments to extend credit are agreements to lend to customers
as long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since the commitments may expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon
- 38 -
<PAGE>
extension of credit, is based upon management's credit evaluation of the
borrower. Collateral held on these commitments varies. Standby letters of
credit are conditional commitments issued by the company insuring performance or
commercial obligations of a customer to a third party. These commitments
commonly involve real estate transactions. Commercial letters of credit are
irrevocable instruments issued by the company for the benefit of a customer's
supplier to insure payment when the terms and conditions of the letters of
credit are met. Most of the company's lending activity is with customers
located within the State of New Jersey.
Annual rental expense charged to non-interest expense was approximately
$4,761,000, $4,381,000 and $5,233,000 in the years 1993, 1992 and 1991,
respectively.
<TABLE>
<CAPTION>
Financial Instruments Whose Contract or Notional
Contract Amounts Represent Credit Amount at
Risk December 31, 1993
- - ---------------------------------------------------------------------
<S> <C>
Outstanding loan commitments $239,696,000
Standby letters of credit 8,006,000
Commercial letters of credit 7,613,000
Foreign exchange contracts 41,000
- - ---------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Financial Instruments Whose Contract or Notional
Contract Amounts Represent Credit Amount at
Risk December 31, 1992
- - ---------------------------------------------------------------------
<S> <C>
Outstanding loan commitments $230,790,000
Standby letters of credit 8,969,000
Commercial letters of credit 6,087,000
Foreign exchange contracts 166,000
- - ---------------------------------------------------------------------
</TABLE>
Commitment fees amounted to $356,615 and $465,003 at December 31, 1993 and
December 31, 1992 respectively, and are generally related to adjustable rate
instruments. Such fees are at a market rate and approximate fair value.
The minimum annual rental under non-cancellable operating leases for premises
and equipment, exclusive of payments for maintenance, insurance and taxes, is
summarized as follows:
<TABLE>
<CAPTION>
Operating Losses
(In Thousands) Building Equipment
- - --------------------------------------------------------------------
<S> <C> <C>
1994 $ 2,971 $277
1995 2,757 187
1996 2,267 32
1997 2,183 -
1998 1,995 -
Thereafter 9,325 -
- - --------------------------------------------------------------------
Total $21,498 $496
- - --------------------------------------------------------------------
</TABLE>
- 39 -
<PAGE>
A class action complaint was filed in the United States District Court for
the Southern District of New York on June 8, 1990. A first amended and second
amended complaint were filed on August 23, 1990 and April 1, 1992, respectively.
The second amended complaint names as defendants the company, its then banking
subsidiaries, the bank and New Brunswick Savings Bank, and the following present
and former directors and officers: John J. Connolly, C. William Kuhlthau, III,
Frederic K. Becker, Francis V. Bonello, Anne Evans Gibbons, W. Emlen Roosevelt,
Joel D. Siegel, Martin L. Ritter, John A. Brockriede and Robert M. Jackson. The
second amended complaint alleges that the company's reserves for loan losses
were inadequate, and that defendants made misleading positive statements about
the company's financial condition, thus artificially inflating the company's
assets and earnings and the prices of the company's securities during a
purported class period of February 6, 1989 through January 24, 1990. The suit
further alleges that the company's internal credit review and controls were
inadequate. In addition, plaintiffs assert that the Registration Statement,
dated August 11, 1989, issued by the company in connection with its acquisition
of New Brunswick Savings Bank, was false and misleading because it did not
disclose the foregoing conduct. The plaintiffs demand judgment including
unspecified monetary damages and attorneys' fees. On March 3, 1992, the Court
denied defendants' motion to dismiss the first amended complaint. On May 20,
1993, the Court ordered pursuant to stipulation of the parties, the
certification of a class of individuals who purchased company securities between
February 6, 1989 and January 24, 1990. The Board of Directors and management of
the company believe the allegations contained in the second amended complaint to
be lacking in merit and intend to defend this action vigorously. Management
believes that the consolidated financial condition of the company will not be
affected materially by the outcome of this action. However, any adverse outcome
in this action could have a material impact on the results of operations of the
company in any interim or annual period. As permitted by New Jersey law and the
company's Certificate of Incorporation and By-laws, the expenses of the
individual defendants are being advanced by the company.
Certain other claims, suits and complaints involving the company and its
subsidiaries arising in the normal course of business have been filed or are
pending. Management is of the opinion that all such matters are either
adequately covered by insurance, are without merit or are of such kind, or
involve such amounts that a liability, if any, from an unfavorable disposition
would not have a significant effect on the consolidated financial position of
the Company.
- 40 -
<PAGE>
Note 19 Parent Company Only
The condensed financial statements for Constellation Bancorp are presented below
(in thousands):
Condensed Statements of Condition
<TABLE>
<CAPTION>
December 31, 1993 1992
- - ----------------------------------------------------------------------
<S> <C> <C>
Assets
- - ----------------------------------------------------------------------
Cash $ 50 $ 44
Short-term investments with subsidiaries 6,136 8,082
Investment securities:
Securities available for sale - 109
Other 300 300
Investment in subsidiaries:
Constellation (35,957) 138,875
Home Investors 1,050 816
Excess of cost over fair value of net
assets acquired 343 378
Other assets 305 23
- - ----------------------------------------------------------------------
Total Assets ($27,773) $148,627
- - ----------------------------------------------------------------------
Liabilities
- - ----------------------------------------------------------------------
Accrued expenses and other liabilities 761 2,307
- - ----------------------------------------------------------------------
Total Liabilities 761 2,307
- - ----------------------------------------------------------------------
Shareholders' Equity (28,534) 146,320
- - ----------------------------------------------------------------------
Total Liabilities and Shareholders' Equity ($27,773) $148,627
- - ----------------------------------------------------------------------
</TABLE>
Condensed Statements of Operations
<TABLE>
<CAPTION>
Year-Ended December 31 1993 1992 1991
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
- - -------------------------------------------------------------------------------
Interest an dividends on investments $ 155 $ 1,416 $ 1,773
Interest on securities available for
sale - 58 -
Net gain (loss) on securities
transactions 7 727 ( 1,536)
Other income - 19 -
- - -------------------------------------------------------------------------------
Total Income 162 2,220 237
- - -------------------------------------------------------------------------------
Expenses
- - -------------------------------------------------------------------------------
Interest expense - 2,071 2,360
Other operating expenses 575 342 912
- - -------------------------------------------------------------------------------
Total Expenses 575 2,413 3,272
- - -------------------------------------------------------------------------------
Income (loss) before taxes ( 413) ( 193) ( 3,035)
Federal tax expense (benefit) ( 2) ( 29) 36
- - -------------------------------------------------------------------------------
Income (loss) before equity in
undistributed income of subsidiaries ( 411) ( 164) ( 3,071)
Equity in undistributed loss of
subsidiaries ( 178,085) ( 1,527) ( 85,651)
- - -------------------------------------------------------------------------------
Net Loss ($178,496) ($ 1,691) ($ 88,722)
- - -------------------------------------------------------------------------------
</TABLE>
- 41 -
<PAGE>
Condensed Statements of Cash Flow
<TABLE>
<CAPTION>
Year-Ended December 31 1993 1992 1991
- - -----------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
- - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss ($178,496) ($ 1,691) ($ 88,722)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation of equipment - - 5
Amortization of intangibles 34 56 35
(Gain) loss on sale of securities - ( 367) 73
Gain on sale of securities
available for sale ( 7) ( 360) -
Loss on write-down of securities - - 1,463
Provision for deferred taxes 2 29 ( 36)
Decrease in interest receivable 4 335 122
(Increase) decrease in other assets ( 195) 69 446
(Decrease) increase in other
liabilities ( 1,546) 2,057 ( 7,214)
Other-net - 54 -
Equity in undistributed loss of
subsidiaries 178,085 1,527 85,651
- - -------------------------------------------------------------------------------------------------------------------
Net Cash (Used by) Provided by
Operating Activities ( 2,119) 1,709 ( 8,177)
- - -------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
- - -------------------------------------------------------------------------------------------------------------------
Proceeds from sales of investment
securities 116 3,319 2,109
Proceeds from maturities of investment
securities 171,404 115,052 174,335
Purchase of investment securities ( 169,460) ( 112,175) ( 165,994)
Investments in subsidiaries - ( 58,000) -
Sale of premises and equipment - 5 -
- - -------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used by)
Investing Activities 2,060 ( 51,799) 10,450
- - -------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
- - -------------------------------------------------------------------------------------------------------------------
Proceeds from issuance/retirement
of stock 154 67,581 245
Repayment of long-term debt - ( 17,500) ( 2,500)
Purchase of treasury stock ( 89) - -
- - -------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used by)
Financing Activities 65 50,081 ( 2,255)
- - -------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and
Cash Equivalents 6 ( 9) 18
Cash and cash equivalents at
beginning of year 44 53 35
- - -------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at
End of Year $ 50 $ 44 $ 53
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
- 42 -
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
INDEPENDENT AUDITOR'S REPORT
KPMG Peat Marwick
Certified Public Accountants
150 John F. Kennedy Parkway
Short Hills, New Jersey 07078
The Board of Directors and Shareholders of
Constellation Bancorp:
We have audited the accompanying consolidated statements of condition of
Constellation Bancorp and subsidiaries as of December 31, 1993 and 1992, and the
related consolidated statements of operations, changes in shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1993. 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 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 Constellation
Bancorp and subsidiaries as of December 31, 1993 and 1992 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1993, in conformity with generally accepted
accounting principles.
As explained in notes 1 and 2 to the consolidated financial statements,
Constellation Bancorp adopted the provisions of the Financial Accounting
Standards Board's Statements of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other than Pensions," No.
109, "Accounting for Income Taxes," and No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," in 1993.
/s/ KPMG Peat Marwick
March 16, 1994, except as to the last
paragraph of note 2 and note 16,
which are as of March 29, 1994
43
<PAGE>
RESTATED FINANCIAL INFORMATION OF
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
(UNAUDITED)
The following unaudited condensed combined financial statements reflect the
restatement for the acquisition of Constellation Bancorp ("Constellation") under
the pooling of interests method of accounting. Under such method of accounting,
the historical book values of the assets, liabilities and shareholders' equity
of Constellation, as reported on its consolidated balance sheet, and modified
for intercompany balances, are carried over onto the consolidated balance sheet
of CoreStates and no goodwill or other intangible assets are created.
CoreStates will include in its Consolidated Statement of Income for the year
ending December 31, 1994 the results of operations of Constellation beginning
January 1, 1994, as modified for intercompany transactions and has combined and
restated as its income for prior periods the reported results of operations of
Constellation for such prior periods, as modified for intercompany transactions.
This restated financial information is based on the adjustments set forth
herein and in the notes to such statements. The restated information has been
prepared using the historical consolidated financial statements of both
CoreStates and Constellation and should be read in conjunction with such
historical financial statements and notes thereto. Certain amounts have been
reclassified for comparative purposes. The restated condensed combined
financial statements do not purport to be indicative of the combined financial
position or results of operations for future periods or indicative of the
results that actually would have been realized had the entitles been combined
during these periods.
The accompanying unaudited restated financial statements reflect an
equivalent per Constellation Common Share value of .4137 CoreStates Common Share
which represents the number of CoreStates Common Shares issued upon consummation
of the Merger on March 16, 1994 in exchange for each Constellation Common Share
outstanding.
Cash dividends per share declared for the periods presented assume that
CoreStates would have declared cash dividends per share equal to the cash
dividends per share declared by CoreStates prior to December 31, 1993.
Unaudited proforma financial information reflecting CoreStates proposed
business combinations with Independence Bancorp, Inc. and Germantown Savings
Bank is presented on pages 52-58. See "Pro Forma Financial Information" on
page 51.
44
<PAGE>
CORESTATES FINANCIAL CORP
RESTATED CONDENSED COMBINED BALANCE SHEET
(UNAUDITED)
December 31, 1993
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
CoreStates Constellation
and Bancorp and
Subsidiaries Subsidiaries Combined
------------ ------------- --------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $2,362,630 $104,237 $2,466,867
Time deposits 1,273,373 300 1,273,373 (A)
Investment securities 2,731,771 281,835 3,013,606
Loans 16,362,785 1,663,357 18,026,142
Allowance for loan losses (347,547) (190,220) (537,767)(B)
Federal funds sold and securities purchased
under agreements to resell 3,027 160,500 148,527 (A)
Trading account securities 6,393 6,393
Due from customers on acceptances 331,411 823 332,234
Premises and equipment 353,584 22,531 376,115
Other assets 588,134 77,454 665,588 (B)
---------- --------- ----------
Total assets $23,665,561 $2,120,817 $25,771,078
========== ========= ==========
LIABILITIES
Deposits:
Domestic:
Non-interest bearing $6,008,016 $323,114 $6,331,130
Interest bearing 10,148,185 1,768,967 11,916,852 (A)
Overseas branches and subsidiaries 796,902 796,902
---------- --------- ----------
Total deposits 16,953,103 2,092,081 19,044,884
Funds borrowed 1,836,409 9,086 1,830,495 (A)
Bank acceptances outstanding 336,357 823 337,180
Other liabilities 1,125,175 47,361 1,069,570 (B)
Long-term debt 1,455,036 1,455,036
---------- --------- ----------
Total liabilities 21,706,080 2,149,351 23,737,165
---------- --------- ----------
SHAREHOLDERS' EQUITY
Common stock 117,858 136,349 129,136 (E)
Capital surplus 509,991 45,494 680,556 (E)
Retained earnings 1,339,451 (210,377) 1,232,040 (B)(C)(D)
Treasury stock (7,819) (7,819)
---------- --------- ----------
Total shareholders' equity 1,959,481 (28,534) 2,033,913
---------- --------- ----------
Total liabilities and shareholders' equity $23,665,561 $2,120,817 $25,771,078
========== ========= ==========
Book value per share $16.68 ($1.05) $15.79
========== ========= ==========
</TABLE>
See Footnotes to Restated Condensed Combined Balance Sheet.
45
<PAGE>
FOOTNOTES TO RESTATED CONDENSED
COMBINED BALANCE SHEET
(A) Reflects the elimination of intercompany deposits and Federal funds
transactions.
(B) At December 31, 1993, Constellation had non-performing assets, non-
performing loans plus other real estate owned ("OREO"), of $120.6 million.
While Constellation had utilized a long-term workout strategy to deal with
its non-performing assets, CoreStates' strategy is to dispose of problem
assets in a more accelerated manner. In the fourth quarter of 1993
Constellation conformed to this strategic direction and to CoreStates'
consumer lending loan charge-off policies and recorded an addition to its
allowance for possible loan losses of $120 million and an addition to its
OREO reserves of $28 million. Constellation also recorded pre-tax charges
of $47 million, which included expenses directly attributable to the
acquisition, and certain other costs and expenses. Deferred tax benefits
related to the $120 million addition to Constellation's allowance for
possible loan losses, the $28 million addition to Constellation's OREO
reserves, and the $47 million of acquisition-related costs and expenses
were not recorded separately by Constellation, due to Constellation's
inability to generate sufficient future income, but these deferred tax
benefits were recognized in restated net income and shareholders' equity.
(C) In 1993, Constellation retroactively adopted FAS 109 as of January 1,
1987. Constellation's adoption of FAS 109 and the impact of applying
pooling of interests accounting rules had the following effects on
restated net income and period-end common shareholders' equity:
<TABLE>
<CAPTION>
Increase (decrease) Cumulative
in net income increase (decrease)
--------------------- in common
Amount Per Share shareholders' equity
------ --------- --------------------
<S> <C> <C> <C>
Year ended:
December 31, 1993......... $60,248 $0.47 $105,248
December 31, 1992......... 702 0.01 45,000
December 31, 1991......... 23,602 0.02 44,298
</TABLE>
(D) On January 1, 1993, Constellation adopted FAS 106, the date required under
that statement. Constellation elected not to recognize immediately its $6.0
million transitional liability, but to amortize that liability over 20
years. As permitted under FAS 106 and pooling accounting, the restated
financial information is prepared as if Constellation adopted FAS 106
effective January 1, 1992 and immediately recognized the $6.0 million, $4.0
million after-tax, transitional liability.
(E) Reflects the conversion of 27.262 million outstanding Constellation Common
Shares on December 31, 1993 into 11.278 million CoreStates Common Shares.
46
<PAGE>
CORESTATES FINANCIAL CORP
RESTATED CONDENSED COMBINED STATEMENT OF INCOME
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1993
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
CoreStates Constellation
and Bancorp and
Subsidiaries Subsidiarie (A) Combined
------------ ------------- ----------
<S> <C> <C> <C>
Interest Income:
Interest and fees on loans $1,308,741 $134,053 $1,442,794
Interest on investment securities 156,241 16,516 172,748 (B)
Interest on time deposits in banks 43,049 43,049
Interest on federal funds sold and securities
purchased under agreements to resell 2,421 3,868 6,119 (B)
Other interest income 59 59
---------- ---------- ----------
Total Interest Income 1,510,511 154,437 1,664,769
---------- ---------- ----------
Interest Expense:
Interest on deposits 266,597 53,498 320,086 (B)
Interest on funds borrowed 64,441 186 64,457 (B)
Interest on long-term debt 61,572 61,572
---------- ---------- ----------
Total interest expense 392,610 53,684 446,115
---------- ---------- ----------
Net Interest Income 1,117,901 100,753 1,218,654
Provision for losses on loans 100,000 130,000 230,000 (C)
---------- ---------- ----------
Net Interest Income after provision
for losses on loans 1,017,901 (29,247) 988,654
---------- ---------- ----------
Non-Interest Income:
Service charges on deposit accounts 160,578 10,208 170,786
Trust income 94,294 3,012 97,306
Fees for international services 68,447 985 69,432
Debit and credit card fees 57,835 1,665 59,500
Securities gains (losses) 15,699 49 15,748
Other operating income 106,202 25,680 131,882 (C)
---------- ---------- ----------
Total non-interest income 503,055 41,599 544,654
---------- ---------- ----------
Net interest and other income 1,520,956 12,352 1,533,308
---------- ---------- ----------
Non-Financial Expenses:
Salaries, wages and benefits 535,939 40,831 576,470 (E)
Net occupancy 99,511 8,784 108,295
Equipment expenses 63,491 5,581 69,072
Other operating expenses 334,434 134,990 469,424
---------- ---------- ----------
Total non-financial expenses 1,033,375 190,186 1,223,261
---------- ---------- ----------
Income (loss) before income taxes 487,581 (177,834) 310,047
Provision for income taxes 159,654 662 98,297 (C)(D)(E)
---------- ---------- ----------
Income (loss) before cumulative effect
of a change in accounting principle 327,927 (178,496) 211,750
Cumulative effect of a change in
accounting principle, net of tax (13,010) (13,010)
---------- ---------- ----------
Net Income (Loss) $314,917 ($178,496) $198,740
========== ========== ==========
Average comon shares outstanding 117,319 27,197 128,570
========== ========== ==========
Per Common Share Data:
Income (loss) before cumulative effect
of a change in accounting principle $2.80 ($6.56) $1.65
========== ========== ==========
Net income (loss) $2.69 ($6.56) $1.55
========== ========== ==========
Cash dividends declared $1.14 --- $1.14
========== ========== ==========
</TABLE>
See Footnotes to Restated Condensed Combined Income Statements.
47
<PAGE>
CORESTATES FINANCIAL CORP
RESTATED CONDENSED COMBINED STATEMENT OF INCOME
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1992
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
CoreStates Constellation
and Bancorp and
Subsidiaries Subsidiaries(A) Combined
------------ ------------ --------
<S> <C> <C> <C>
Interest Income:
Interest and fees on loans $1,352,164 $145,244 $1,497,408
Interest on investment securities 168,713 25,316 194,029
Interest on time deposits in banks 55,635 55,635
Interest on federal funds sold and securities
purchased under agreements to resell 10,791 4,831 15,622
Other interest income 57 57
---------- -------- ----------
Total Interest Income 1,587,360 175,391 1,762,751
---------- -------- ----------
Interest Expense:
Interest on deposits 402,846 86,657 489,503
Interest on funds borrowed 56,709 361 57,070
Interest on long-term debt 70,759 2,069 72,828
---------- -------- ----------
Total interest expense 530,314 89,087 619,401
---------- -------- ----------
Net Interest Income 1,057,046 86,304 1,143,350
Provision for losses on loans 119,300 10,000 129,300
---------- -------- ----------
Net Interest Income after provision
for losses on loans 937,746 76,304 1,014,050
---------- -------- ----------
Non-Interest Income:
Service charges on deposit accounts 142,672 11,995 154,667
Trust income 89,833 2,821 92,654
Fees for international services 60,247 60,247
Debit and credit card fees 149,154 738 149,892
Securities gains (losses) 13,407 1,678 15,085
Other operating income 91,196 22,982 114,178
---------- -------- ----------
Total non-interest income 546,509 40,214 586,723
---------- -------- ----------
Net interest and other income 1,484,255 116,518 1,600,773
---------- -------- ----------
Non-Financial Expenses:
Salaries, wages and benefits 537,755 43,716 582,067 (E)
Net occupancy 96,751 9,452 106,203
Equipment expenses 72,042 7,308 79,350
Other operating expenses 388,043 57,680 445,723
---------- -------- ----------
Total non-financial expenses 1,094,591 118,156 1,213,343
---------- -------- ----------
Income (loss) before income taxes 389,664 (1,638) 387,430
Provision for income taxes 127,260 53 126,408 (D)(E)
---------- -------- ----------
Income (loss) before cumulative effect
of a change in accounting principle 262,404 (1,691) 261,022
Cumulative effect of a change in
accounting principle, net of tax (80,986) (84,946)
---------- -------- ----------
Net Income (Loss) $181,418 ($1,691) $176,076
========== ======== ==========
Average comon shares outstanding 115,600 9,065 119,350
========== ======== ==========
Per Common Share Data:
Income (loss) before cumulative effect
of a change in accounting principle $2.27 ($0.19) $2.19
========== ======== ==========
Net income (loss) $1.57 ($0.19) $1.48
========== ======== ==========
Cash dividends declared $1.02 --- $1.02
========== ======== ==========
</TABLE>
See Footnotes to Restated Condensed Combined Income Statements.
48
<PAGE>
CORESTATES FINANCIAL CORP
RESTATED CONDENSED COMBINED STATEMENT OF INCOME
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1991
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
CoreStates Constellation
and Bancorp and
Subsidiaries Subsidiaries (A) Combined
------------ ------------ ----------
<S> <C> <C> <C>
Interest Income:
Interest and fees on loans $1,759,239 $186,841 $1,946,080
Interest on investment securities 176,149 32,860 209,009
Interest on time deposits in banks 73,132 643 73,775
Interest on federal funds sold and securities
purchased under agreements to resell 13,286 12,272 25,558
Other interest income 51 51
---------- ------------ ----------
Total Interest Income 2,021,857 232,616 2,254,473
---------- ------------ ----------
Interest Expense:
Interest on deposits 689,397 146,303 835,700
Interest on funds borrowed 164,009 2,478 166,487
Interest on long-term debt 82,058 2,360 84,418
---------- ------------ ----------
Total interest expense 935,464 151,141 1,086,605
---------- ------------ ----------
Net Interest Income 1,086,393 81,475 1,167,868
Provision for losses on loans 190,601 81,995 272,596
---------- ------------ ----------
Net Interest Income after provision
for losses on loans 895,792 (520) 895,272
---------- ------------ ----------
Non-Interest Income:
Service charges on deposit accounts 120,602 14,546 135,148
Trust income 90,482 2,904 93,386
Fees for international services 47,275 47,275
Debit and credit card fees 166,231 (64) 166,167
Securities gains (losses) (17,546) 3,371 (14,175)
Other operating income 134,602 24,710 159,312
---------- ------------ ----------
Total non-interest income 541,646 45,467 587,113
---------- ------------ ----------
Net interest and other income 1,437,438 44,947 1,482,385
---------- ------------ ----------
Non-Financial Expenses:
Salaries, wages and benefits 522,828 52,610 575,438
Net occupancy 104,667 10,795 115,462
Equipment expenses 72,915 10,176 83,091
Other operating expenses 395,709 59,556 455,265
---------- ------------ ----------
Total non-financial expenses 1,096,119 133,137 1,229,256
---------- ------------ ----------
Income (loss) before income taxes 341,319 (88,190) 253,129
Provision for income taxes 113,573 532 90,503 (D)
---------- ------------ ----------
Net Income (Loss) $227,746 ($88,722) $162,626
========== ============ ==========
Average comon shares outstanding 113,624 8,200 117,016
========== ============ ==========
Per Common Share Data:
Net income (loss) $2.00 ($10.82) $1.39
========== ============ ==========
Cash dividends declared $0.97 --- $0.97
========== ============ ==========
</TABLE>
See Footnotes to Restated Condensed Combined Income Statements.
49
<PAGE>
FOOTNOTES TO RESTATED CONDENSED
COMBINED STATEMENTS OF INCOME
(A) Certain amounts have been reclassified for comparative purposes.
(B) Reflects the elimination of intercompany interest on deposits and federal
funds transactions.
(C) At December 31, 1993, Constellation had non-performing assets, non-
performing loans plus other real estate owned ("OREO"), of $120.6 million.
While Constellation had utilized a long-term workout strategy to deal with
its non-performing assets, CoreStates' strategy is to dispose of
problem assets in a more accelerated manner. In the fourth quarter of 1993
Constellation conformed to this strategic direction and to CoreStates'
consumer lending loan charge-off policies and recorded an addition to its
allowance for possible loan losses of $120 million and an addition to its
OREO reserves of $28 million. Constellation also recorded pre-tax charges of
$47 million, which included expenses directly attributable to the
acquisition, and certain other costs and expenses .
(D) In 1993, Constellation retroactively adopted FAS 109 as of January 1, 1987.
Constellation's adoption of FAS 109 and the impact of applying pooling of
interests accounting rules had the following effects on Constellation's net
income and period-end common shareholders' equity:
<TABLE>
<CAPTION>
Increase (decrease) Cumulative
in net income increase (decrease)
------------------- in common
Amount Per Share shareholders' equity
------ --------- --------------------
<S> <C> <C> <C>
Year ended:
December 31, 1993.. $60,248 $0.47 $105,248
December 31, 1992.. 702 0.01 45,000
December 31, 1991.. 23,602 0.02 44,298
</TABLE>
(E) On January 1, 1993, Constellation adopted FAS 106, the date required under
that statement. Constellation elected not to recognize immediately its $6.0
million transitional liability, but to amortize that liability over 20
years. As permitted under FAS 106 and pooling accounting, the restated
financial information is prepared as if Constellation adopted FAS 106
effective January 1, 1992 and immediately recognized the $6.0 million, $4.0
million after-tax, transitional liability. Restated salaries, wages and
benefits have been adjusted accordingly.
50
<PAGE>
PRO FORMA FINANCIAL INFORMATION
OF CORESTATES FINANCIAL CORP AND SUBSIDIARIES
(UNAUDITED)
The following unaudited pro forma condensed combined financial statements
reflect the proposed merger of CoreStates and Independence Bancorp ("Proposed
Merger")under the application of the pooling of interests method of
accounting. Under this method of accounting, the historical book values of the
assets, liabilities and shareholders' equity of Independence, as reported on
its Consolidated Balance Sheet, will be carried over onto the Consolidated
Balance Sheet of CoreStates and no goodwill or other intangible assets will be
created. CoreStates will include in its Consolidated Statement of Income the
consolidated results of operations of Independence for the entire fiscal year
in which the Proposed Merger is consummated and will combine and restate its
results of operations for prior periods to include the reported consolidated
results of operations of Independence for prior periods. The Pro Forma
Statements of Income for the years ended December 31, 1993, 1992 and 1991
include adjustments which reflect retroactive adoption of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (FAS 109)
on a combined basis, as of January 1, 1987. See footnote (4) to the Pro Forma
Condensed Combined Statements of Income. The Consolidated Balance Sheet and
Statements of Income of CoreStates reflect the restatement for the March 16,
1994 acquisition of Constellation under the pooling of interests method of
accounting as presented on pages 45-50.
The unaudited pro forma condensed combined financial statements also reflect
the proposed combination of CoreStates and Germantown Savings Bank ("Proposed
Combination") as if it had become effective on January 1, 1993 for pro forma
statement of income presentation and on December 31, 1993 for pro forma
balance sheet presentation. The Proposed Combination will be accounted for, in
accordance with generally accepted accounting principles, as a purchase of
Germantown by CoreStates. Under the purchase method of accounting, all assets
and liabilities of Germantown at December 31, 1993 have been adjusted, net of
income tax effects, to their current fair values and combined with the asset
and liability book values of CoreStates.
This pro forma financial information is based on the estimates and
assumptions set forth in the notes to such statements. The pro forma
adjustments made in connection with the development of the pro forma
information are preliminary and have been made solely for purposes of
developing such pro forma information as necessary to comply with the
disclosure requirements of the Commission. Where applicable, the pro forma
adjustments have been separately tax effected at the following statutory
rates: 1993--35%; and 1992--34%. The pro forma information has been prepared
using the historical consolidated financial statements and notes thereto. The
unaudited pro forma condensed combined financial statements do not purport to
be indicative of the combined financial position or results of operations of
future periods or indicative of the results that actually would have been
realized had the entities been a single entity during these periods.
The Proposed Merger provides for an Exchange Ratio of 1.50 CoreStates Common
Shares for each Independence Common Share. The accompanying unaudited pro
forma financial information reflects an equivalent per Independence Common
Share value at that exchange ratio. The accompanying unaudited pro forma
financial information for 1993 also assumes that 5.391 million CoreStates
Common Shares will be issued in the Proposed Combination.
Pro forma cash dividends declared for the periods presented assume that
CoreStates would have declared cash dividends per share equal to the cash
dividends per share declared by CoreStates prior to December 31, 1993.
51
<PAGE>
PRO FORMA CONDENSED COMBINED BALANCE SHEET
(UNAUDITED)
DECEMBER 31, 1993
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CORESTATES
CORESTATES GERMANTOWN AND CORESTATES INDEPENDENCE INDEPENDENCE
AND GERMANTOWN PRO FORMA GERMANTOWN AND BANCORP AND PRO FORMA
SUBSIDIARIES SAVINGS BANK ADJUSTMENTS PRO FORMA SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS
------------ ------------ ----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from
banks............. $ 2,466,867 $ 27,849 $ (222)(1) $ 2,494,494 $ 2,466,867 $ 120,462 $ (65,653)(1)
Time deposits..... 1,273,373 138 1,273,511 1,273,373 46,084
Investment
securities........ 3,013,606 547,514 6,818 (1)(9) 3,567,938 3,013,606 602,434 (16,874)(6)
Loans............. 18,026,142 1,039,381 12,522 (9) 19,078,045 18,026,142 1,745,116
Allowance for loan
losses............ (537,767) (23,043) (560,810) (537,767) (33,056) (25,000)(2)
Federal funds sold
and securities
purchased under
agreements to
resell............ 148,527 13,000 161,527 148,527 26,600 (8,600)(1)
Trading account
securities........ 6,393 6,393 6,393
Due from customers
on acceptances.... 332,234 332,234 332,234
Premises and
equipment and
other assets...... 1,041,703 32,351 148,657 (4)(9) 1,222,711 1,041,703 95,785 13,970 (2)(3)
----------- ---------- -------- ----------- ----------- ---------- ----------
Total assets.... $25,771,078 $1,637,190 $167,775 $27,576,043 $25,771,078 $2,603,425 $ (102,157)
=========== ========== ======== =========== =========== ========== ==========
LIABILITIES
Deposits:
Domestic:
Non-interest
bearing......... $ 6,331,130 $ 48,977 $ (222)(1) $ 6,379,885 $ 6,331,130 $ 383,890 $ (65,653)(1)
Interest
bearing......... 11,916,852 1,426,662 9,363 (9) 13,352,877 11,916,852 1,769,175
Overseas branches
and subsidiaries. 796,902 796,902 796,902
----------- ---------- -------- ----------- ----------- ---------- ----------
Total deposits.. 19,044,884 1,475,639 9,141 20,529,664 19,044,884 2,153,065 (65,653)
Funds borrowed.... 1,830,495 (1,001)(1) 1,829,494 1,830,495 62,230 (8,600)(1)
Bank acceptances
outstanding....... 337,180 337,180 337,180
Other liabilities. 1,069,570 19,560 41,887 (4) 1,131,017 1,069,570 31,898 24,200 (3)
Long-term debt.... 1,455,036 116,883 (7) 1,571,919 1,455,036 134,254
----------- ---------- -------- ----------- ----------- ---------- ----------
Total
liabilities..... 23,737,165 1,495,199 166,910 25,399,274 23,737,165 2,381,447 (50,053)
----------- ---------- -------- ----------- ----------- ---------- ----------
SHAREHOLDERS'
EQUITY
Common stock...... 129,136 419 5,391 (7) 134,527 129,136 29,188 (11,623)(5)
(419)(8) (1,514)(6)
Capital surplus... 680,556 38,480 137,465 (7) 818,021 680,556 91,659 11,623 (5)
(38,480)(8) (4,731)(6)
Retained earnings. 1,232,040 103,092 (103,092)(8) 1,232,040 1,232,040 103,521 (48,249)(2)(3)(6)
Treasury stock.... (7,819) (7,819) (7,819) (2,390) 2,390 (6)
----------- ---------- -------- ----------- ----------- ---------- ----------
Total
shareholders'
equity.......... 2,033,913 141,991 865 2,176,769 2,033,913 221,978 (52,104)
----------- ---------- -------- ----------- ----------- ---------- ----------
Total
liabilities and
shareholders'
equity.......... $25,771,078 $1,637,190 $167,775 $27,576,043 $25,771,078 $2,603,425 $ (102,157)
=========== ========== ======== =========== =========== ========== ==========
Book value per
share(5)(7)....... $15.79 $33.90 $16.22 $15.79 $19.26
====== ====== ====== ====== ======
<CAPTION>
CORESTATES PRO FORMA
AND COMBINED
INDEPENDENCE ALL
PRO FORMA TRANSACTIONS
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from
banks............. $ 2,521,676 $ 2,549,303
Time deposits..... 1,319,457 1,319,595
Investment
securities........ 3,599,166 4,153,498
Loans............. 19,771,258 20,823,161
Allowance for loan
losses............ (595,823) (618,866)
Federal funds sold
and securities
purchased under
agreements to
resell............ 166,527 179,527
Trading account
securities........ 6,393 6,393
Due from customers
on acceptances.... 332,234 332,234
Premises and
equipment and
other assets...... 1,151,458 1,332,466
------------- -------------
Total assets.... $28,272,346 $30,077,311
============= =============
LIABILITIES
Deposits:
Domestic:
Non-interest
bearing......... $ 6,649,367 $ 6,698,122
Interest
bearing......... 13,686,027 15,122,052
Overseas branches
and subsidiaries. 796,902 796,902
------------- -------------
Total deposits.. 21,132,296 22,617,076
Funds borrowed.... 1,884,125 1,883,124
Bank acceptances
outstanding....... 337,180 337,180
Other liabilities. 1,125,668 1,187,115
Long-term debt.... 1,589,290 1,706,173
------------- -------------
Total
liabilities..... 26,068,559 27,730,668
------------- -------------
SHAREHOLDERS'
EQUITY
Common stock...... 145,187 150,578
Capital surplus... 779,107 916,572
Retained earnings. 1,287,312 1,287,312
Treasury stock.... (7,819) (7,819)
------------- -------------
Total
shareholders'
equity.......... 2,203,787 2,346,643
------------- -------------
Total
liabilities and
shareholders'
equity.......... $28,272,346 $30,077,311
============= =============
Book value per
share(5)(7)....... $15.16 $15.56
====== ======
</TABLE>
See footnotes to the Pro Forma Condensed Combined Balance Sheet on page 53.
52
<PAGE>
FOOTNOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET
(UNAUDITED)
(1) Elimination of intercompany deposits, Federal funds transactions and other
intercompany funding.
(2) It is CoreStates' strategy to seek to dispose of certain assets via bulk
sale, individual credit direct negotiation or foreclosure, in an
accelerated manner. CoreStates currently estimates that to conform
Independence's loan, accrual and reserve policies to those of CoreStates,
it will take a $25.0 million addition to Independence's allowance for
possible loan losses and a $5.0 million addition to Independence's reserve
against OREO. Accordingly, pro forma common shareholders' equity has been
reduced by $19.5 million, the after-tax effect of the estimated
provisions. CoreStates currently estimates that the assets related to the
$30.0 million in estimated aggregated provisions will be disposed of
within eighteen months of the Effective Date. The carrying value of these
assets is approximately $120.0 million and the estimated provisions
represent 25% of this amount.
(3) Reflects charges of approximately $24.2 million, $15.7 million after the
related tax effects, which include expenses directly attributable to the
Merger.
Deferred taxes receivable at statutory rates totalling $18.970 million
related to the charges of approximately $24.2 million of expenses
directly attributable to the Merger, the $25.0 million addition to
Independence's allowance for possible loan losses and the $5.0 million
reserve against OREO are reflected in other assets.
(4) Reflects charges of approximately $41.9 million, $27.3 million after the
related tax effects, which include expenses directly attributable to the
Proposed Combination.
(5) Reflects the conversion of 11.522 million outstanding Independence Common
Shares on December 31, 1993 into 17.283 million CoreStates Common Shares.
(6) Reflects the cancellation of 453 thousand Independence Common Shares owned
by CoreStates and 153 thousand Independence Common Shares held as treasury
stock.
(7) Represents the purchase price in the Proposed Combination using the
following assumptions:
a) Shareholders of Germantown will receive, for each of the 4,189,334
Germantown Common Shares, $62 per share payable 55% in equivalent
value CoreStates Common Shares and 45% in cash, for a total purchase
price of $259.7 million.
b) The market value for CoreStates Common Shares, for purposes of
Germantown pro forma calculations, was assumed to be $26.50 per
share.
c) CoreStates Common Shares issued in the Proposed Combination will
equal 5.391 million shares.
d) The cash portion of the purchase price was assumed to be raised
through the issuance of seven-year notes at 7 1/4%.
(8) The following shareholders' equity accounts of Germantown will be
eliminated (in thousands):
<TABLE>
<S> <C>
Common Stock..................................................... $ 419
Surplus.......................................................... 38,480
Retained Earnings................................................ 103,092
--------
Total Shareholders' Equity....................................... $141,991
========
</TABLE>
(9) Represents the estimated adjustments of Germantown's assets and
liabilities to their fair values (which were determined using information
available at the most recent practicable date), the intangible asset
related to the value of the deposit base acquired, which is estimated to
be approximately $28 million, and the adjustment of approximately $109
million arising from the excess of the total purchase price over net
assets acquired (i.e. goodwill).
53
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CORESTATES CORESTATES
CORESTATES GERMANTOWN AND CORESTATES INDEPENDENCE INDEPENDENCE AND
AND GERMANTOWN PRO FORMA GERMANTOWN AND BANCORP AND PRO FORMA INDEPENDENCE
SUBSIDIARIES SAVINGS BANK ADJUSTMENTS PRO FORMA SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS PRO FORMA(1)
------------ ------------ ----------- ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees
on loans......... $1,442,794 $84,413 $ (2,504)(6) $1,524,703 $1,442,794 $142,169 $1,584,963
Interest on in-
vestment securi-
ties............. 172,757 27,371 (2,383)(2)(6) 197,745 172,757 32,060 $ (82)(2) 204,735
Interest on time
sdeposits in
banks............ 43,040 10 43,050 43,040 43,040
Interest on
federal funds
sold and
securities
purchased under
agreements to
resell........... 6,119 680 6,799 6,119 3,056 (108)(2) 9,067
Other interest
income........... 59 59 59 59
---------- ------- -------- ---------- ---------- -------- ----- ----------
Total interest
income.......... 1,664,769 112,474 (4,887) 1,772,356 1,664,769 177,285 (190) 1,841,864
---------- ------- -------- ---------- ---------- -------- ----- ----------
INTEREST EXPENSE
Interest on de-
posits........... 320,086 47,870 (6,180)(6) 361,776 320,086 59,727 379,813
Interest on funds
borrowed......... 64,457 (83)(2) 64,374 64,457 2,652 (108)(2) 67,001
Interest on long-
term debt........ 61,572 8,474(6) 70,046 61,572 8,289 (82)(2) 69,779
---------- ------- -------- ---------- ---------- -------- ----- ----------
Total interest
expense......... 446,115 47,870 2,211 496,196 446,115 70,668 (190) 516,593
---------- ------- -------- ---------- ---------- -------- ----- ----------
Net interest in-
come............. 1,218,654 64,604 (7,098) 1,276,160 1,218,654 106,617 0 1,325,271
Provision for
losses on loans.. 230,000 1,900 231,900 230,000 11,201 241,201
---------- ------- -------- ---------- ---------- -------- ----- ----------
Net interest in-
come after provi-
sion for losses
on loans......... 988,654 62,704 (7,098) 1,044,260 988,654 95,416 1,084,070
---------- ------- -------- ---------- ---------- -------- ----- ----------
NON-INTEREST IN-
COME
Debit and credit
card fees........ 59,500 163 59,663 59,500 2,217 61,717
Service charges
on deposit ac-
counts........... 170,786 3,268 (19)(2) 174,035 170,786 8,642 179,428
Trust income..... 97,306 97,306 97,306 4,487 101,793
Fees for interna-
tional services.. 69,432 69,432 69,432 69,432
Securities gains
(losses)......... 15,748 1,179 16,927 15,748 362 16,110
Other operating
income........... 131,882 1,824 133,706 131,882 13,668 145,550
---------- ------- -------- ---------- ---------- -------- ----- ----------
Total non-inter-
est income...... 544,654 6,434 (19) 551,069 544,654 29,376 574,030
---------- ------- -------- ---------- ---------- -------- ----- ----------
NON-FINANCIAL EX-
PENSES
Salaries, wages
and benefits..... 576,470 19,992 596,462 576,470 46,498 622,968
Net occupancy.... 108,295 4,618 112,913 108,295 6,656 114,951
Equipment ex-
penses........... 69,072 1,728 70,800 69,072 5,772 74,844
Other operating
expenses......... 469,424 11,840 11,609(2)(6) 492,873 469,424 34,675 504,099
---------- ------- -------- ---------- ---------- -------- ----- ----------
Total non-finan-
cial expenses... 1,223,261 38,178 11,609 1,273,048 1,223,261 93,601 1,316,862
---------- ------- -------- ---------- ---------- -------- ----- ----------
Income before in-
come taxes....... 310,047 30,960 (18,726) 322,281 310,047 31,191 341,238
Provision for in-
come taxes(4).... 98,297 10,462 (6,554)(6)(7) 102,205 98,297 8,312 106,609
---------- ------- -------- ---------- ---------- -------- ----- ----------
Income before
cumulative effect
of a change in
accounting
principle(7)..... $ 211,750 $20,498 $(12,172) $ 220,076 $ 211,750 $ 22,879 $ 234,629
========== ======= ======== ========== ========== ======== ===== ==========
Average common
shares outstand-
ing.............. 128,570 4,377 134,204 128,570 11,438 145,399
PER COMMON SHARE
DATA(5)
Income before
cumulative effect
of a change in
accounting
principle........ $1.65 $4.68 $1.64 $1.65 $1.98 $1.61
Cash dividends
declared......... $1.14 $1.14 $1.14 $1.16 $1.14
<CAPTION>
PRO FORMA
COMBINED
ALL
TRANSACTIONS
------------
<S> <C>
INTEREST INCOME
Interest and fees
on loans......... $1,666,872
Interest on in-
vestment securi-
ties............. 229,723
Interest on time
deposits in
banks............ 43,050
Interest on
federal funds
sold and
securities
purchased under
agreements to
resell........... 9,747
Other interest
income........... 59
------------
Total interest
income.......... 1,949,451
------------
INTEREST EXPENSE
Interest on de-
posits........... 421,503
Interest on funds
borrowed......... 66,918
Interest on long-
term debt........ 78,253
------------
Total interest
expense......... 566,674
------------
Net interest in-
come............. 1,382,777
Provision for
losses on loans.. 243,101
------------
Net interest in-
come after provi-
sion for losses
on loans......... 1,139,676
------------
NON-INTEREST IN-
COME
Debit and credit
card fees........ 61,880
Service charges
on deposit ac-
counts........... 182,677
Trust income..... 101,793
Fees for interna-
tional services.. 69,432
Securities gains
(losses)......... 17,289
Other operating
income........... 147,374
------------
Total non-inter-
est income...... 580,445
------------
NON-FINANCIAL EX-
PENSES
Salaries, wages
and benefits..... 642,960
Net occupancy.... 119,569
Equipment ex-
penses........... 76,572
Other operating
expenses......... 527,548
------------
Total non-finan-
cial expenses... 1,366,649
------------
Income before in-
come taxes....... 353,472
Provision for in-
come taxes(4).... 110,517
------------
Income before
cumulative effect
of a change in
accounting
principle(7)..... $ 242,955
============
Average common
shares outstand-
ing.............. 151,032
PER COMMON SHARE
DATA(5)
Income before
cumulative effect
of a change in
accounting
principle........ $1.61
Cash dividends
declared......... $1.14
</TABLE>
See Footnotes to Pro Forma Condensed Combined Statements of Income on pages 57-
58.
54
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1992
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CORESTATES
CORESTATES INDEPENDENCE AND
AND BANCORP AND PRO FORMA INDEPENDENCE
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS PRO FORMA
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on
loans.................... $1,497,408 $150,174 $1,647,582
Interest on investment se-
curities................. 194,029 44,986 $(41)(2) 238,974
Interest on time deposits
in banks................. 55,635 2,855 58,490
Interest on federal funds
sold and securities pur-
chased under agreements
to resell................ 15,622 1,113 16,735
Other interest income..... 57 57
---------- -------- ---- ----------
Total interest income.... 1,762,751 199,128 (41) 1,961,838
---------- -------- ---- ----------
INTEREST EXPENSE
Interest on deposits...... 489,503 80,952 570,455
Interest on funds borrow-
ed....................... 57,070 3,410 60,480
Interest on long-term
debt..................... 72,828 5,638 (41)(2) 78,425
---------- -------- ---- ----------
Total interest expense... 619,401 90,000 (41) 709,360
---------- -------- ---- ----------
Net interest income....... 1,143,350 109,128 0 1,252,478
Provision for losses on
loans.................... 129,300 30,950 160,250
---------- -------- ---- ----------
Net interest income after
provision for losses on
loans.................... 1,014,050 78,178 1,092,228
---------- -------- ---- ----------
NON-INTEREST INCOME
Debit and credit card
fees..................... 149,892 2,186 152,078
Service charges on deposit
accounts................. 154,667 8,465 163,132
Trust income.............. 92,654 4,077 96,731
Fees for international
services................. 60,247 60,247
Securities gains (losses). 15,085 (1,280) 13,805
Other operating income.... 114,178 10,493 124,671
---------- -------- ---- ----------
Total non-interest in-
come.................... 586,723 23,941 610,664
---------- -------- ---- ----------
NON-FINANCIAL EXPENSES
Salaries, wages and bene-
fits..................... 582,067 45,837 627,904
Net occupancy............. 106,203 6,562 112,765
Equipment expenses........ 79,350 6,239 85,589
Other operating expenses.. 445,723 34,612 480,335
---------- -------- ---- ----------
Total non-financial ex-
penses.................. 1,213,343 93,250 1,306,593
---------- -------- ---- ----------
Income before income tax-
es....................... 387,430 8,869 396,299
Provision for income tax-
es(4) ................... 126,408 1,757 128,165
---------- -------- ---- ----------
Income before cumulative
effect of a change in
accounting principle(3).. $ 261,022 $ 7,112 $ 268,134
========== ======== ==== ==========
Average common shares out-
standing................. 119,350 11,173 135,813
PER COMMON SHARE DATA(5)
Income before cumulative
effect of a change in
accounting principle..... $2.19 $0.63 $1.97
Cash dividends declared... $1.02 $1.16 $1.02
</TABLE>
See Footnotes to Pro Forma Condensed Combined Statements of Income on pages 57-
58.
55
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
(UNAUDITED)
YEAR ENDED DECEMBER 31, 1991
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CORESTATES
CORESTATES INDEPENDENCE AND
AND BANCORP AND PRO FORMA INDEPENDENCE
SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS PRO FORMA
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on
loans................... $1,946,080 $169,555 $2,115,635
Interest on investment
securities.............. 209,009 53,104 262,113
Interest on time deposits
in banks................ 73,775 5,734 $ (13)(2) 79,496
Interest on federal funds
sold and securities
purchased under
agreements to resell.... 25,558 2,424 27,982
Other interest income.... 51 51
---------- -------- ------- ----------
Total interest income... 2,254,473 230,817 (13) 2,485,277
---------- -------- ------- ----------
INTEREST EXPENSE
Interest on deposits..... 835,700 114,712 (13)(2) 950,399
Interest on funds
borrowed................ 166,487 5,118 171,605
Interest on long-term
debt.................... 84,418 5,945 90,363
---------- -------- ------- ----------
Total interest expense.. 1,086,605 125,775 (13) 1,212,367
---------- -------- ------- ----------
Net interest income...... 1,167,868 105,042 0 1,272,910
Provision for losses on
loans................... 272,596 18,665 291,261
---------- -------- ------- ----------
Net interest income after
provision for losses on
loans................... 895,272 86,377 981,649
---------- -------- ------- ----------
NON-INTEREST INCOME
Debit and credit card
fees.................... 166,167 1,753 167,920
Service charges on
deposit accounts........ 135,148 7,841 142,989
Trust income............. 93,386 3,976 97,362
Fees for international
services................ 47,275 47,275
Securities gains
(losses)................ (14,175) 307 (13,868)
Other operating income... 159,312 14,575 173,887
---------- -------- ------- ----------
Total non-interest
income................. 587,113 28,452 615,565
---------- -------- ------- ----------
NON-FINANCIAL EXPENSES
Salaries, wages and
benefits................ 575,438 44,921 620,359
Net occupancy............ 115,462 6,386 121,848
Equipment expenses....... 83,091 5,975 89,066
Other operating expenses. 455,265 32,927 488,192
---------- -------- ------- ----------
Total non-financial
expenses............... 1,229,256 90,209 1,319,465
---------- -------- ------- ----------
Income before income
taxes................... 253,129 24,620 277,749
Provision for income
taxes(4) ............... 90,503 5,664 1,265(4) 97,432
---------- -------- ------- ----------
Net income............... $ 162,626 $ 18,956 $(1,265) $ 180,317
========== ======== ======= ==========
Average common shares
outstanding............. 117,016 11,012 133,534
PER COMMON SHARE DATA(5)
Net income............... $1.39 $1.72 $1.35
Cash dividends declared.. $0.97 $1.16 $0.97
</TABLE>
See Footnotes to Pro Forma Condensed Combined Statements of Income on pages 57-
58.
56
<PAGE>
FOOTNOTES TO PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
(UNAUDITED)
(1) The Pro Forma Condensed Combined Statements of Income do not reflect the
estimated $25.0 million provision for losses on loans related to
Independence's loan portfolio, the $5.0 million addition to Independence's
reserve against OREO, or charges of approximately $24.2 million directly
attributable to the Merger. Were these expenses reflected in the Pro Forma
Condensed Combined Statement of Income for the year ended December 31,
1993, net income would decrease by $35.2 million, or $0.24 per share.
(2) Reflects the elimination of intercompany interest on deposits, long-term
debt, Federal funds transactions and other intercompany funding.
(3) Reflects the adoption of FAS 106, "Employers Accounting for Postretirement
Benefits Other Than Pensions." As permitted under FAS 106, CoreStates
elected to recognize immediately the January 1, 1992 transitional liability
of $128.7 million pre-tax, $84.9 million or $0.71 per share after-tax, as
the cumulative effect of a change in accounting principle in the first
quarter of 1992.
The impact of FAS 106 on Independence is immaterial.
Germantown adopted FAS 106 effective January 1, 1992 and elected to
recognize immediately a one-time, non-cash charge equal to its January 1,
1992 transitional liability of $3.7 million, $2.4 million after-tax, as the
cumulative effect of a change in accounting principle.
(4) In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes
("FAS 109"), which superseded FAS 96. Although FAS 109 was not required to
be adopted until the first quarter of 1993, in the first quarter of 1992
CoreStates retroactively adopted FAS 109 as of January 1, 1987.
Independence prospectively adopted FAS 109 on January 1, 1992, recognizing a
cumulative benefit of $4.4 million as the cumulative effect of a change in
accounting principle. However, the pro forma financial information is
prepared as if Independence retroactively adopted FAS 109 as of January 1,
1987. The impact of retroactively applying FAS 109 to Independence has the
following effects on pro forma net income and period-end common
shareholders' equity (in thousands, except per share):
57
<PAGE>
<TABLE>
<CAPTION>
INCREASE
(DECREASE) CUMULATIVE
IN NET INCOME INCREASE (DECREASE)
--------------- IN COMMON
PER SHAREHOLDERS'
AMOUNT SHARE EQUITY
------- ------ -------------------
<S> <C> <C> <C>
Year ended:
December 31, 1993...................... -- -- --
December 31, 1992...................... $(4,378) $(0.03) --
December 31, 1991...................... (1,265) (0.01) $4,378
December 31, 1990...................... (533) * 5,643
December 31, 1989...................... (613) * 6,176
</TABLE>
--------
* Decrease less than $.01 per share.
(5) Reflects the impact of the Stock Dividend. CoreStates, Independence and pro
forma earnings per common share for the years ended December 31, 1993, 1992
and 1991 were based on weighted average common shares outstanding as
dilution from potentially dilutive common stock equivalents was less than
3% for each period.
(6) Reflects the anticipated impact of the purchase accounting adjustments
(which were determined using information available at the most recent
practicable date) assuming the Proposed Combination was effective on
January 1, 1993. For the purposes of determining the effects on the pro
forma combined condensed statement of income, the following pro forma
adjustments have been made (in thousands):
a) Amortization of the premium on the loan and investment securities
portfolios and certificates of deposit and the related income tax
effects.
b) Amortization of intangibles including goodwill and deposit base
intangible which was calculated using lives of 15 years and 10 years,
respectively. As required by FAS 109, the provision for income taxes
assumes that the amortization of the deposit base intangible is
deductible for Federal income tax purposes.
c) Interest expense on the seven-year 7 1/4% notes which were assumed
issued to fund the cash portion of the purchase price.
(7) Effective January 1, 1993, CoreStates adopted FAS 112, "Employers'
Accounting for Postemployment Benefits." CoreStates recognized the January
1, 1993 FAS 112 transitional liability of $20.0 million, $13.0 million
after-tax or $0.10 per share, as the cumulative effect of a change in
accounting principle. The impact of FAS 112 on Independence and Germantown
is immaterial.
58
<PAGE>
Exhibit 23
Independent Auditors' Consent
-----------------------------
We consent to the incorporation by reference in (a) the Registration Statement
on Form S-8 (No. 33-5874), in Post-Effective Amendment No. 1 to the
Registration Statement on Form S-8 (No. 2-91176), the Registration Statement
on Form S-8 (No. 33-28808) and in the related prospectuses, each pertaining to
the CoreStates Financial Corp Long-Term Incentive Plan, (b) the Registration
Statement on Form S-8 (No. 33-32934) and prospectus relating to the CoreStates
Savings Plan, (c) the Registration Statement on Form S-8 (No. 33-50324)
pertaining to the CoreStates Financial Corp 1992 Long-Term Incentive Plan, (d)
the Registration Statement on Form S-3 (No. 33-57034) and related prospectus
and prospectus supplements pertaining to $1,000,000,000 in aggregate amount of
Debt Securities issuable by CoreStates Corp and the related guarantees of the
Corporation, and Preferred Stock, Depository Shares, Common Stock, and Capital
Securities, issuable by the Corporation, and (e) the Registration Statement on
Form S-3 (No. 33-40717) and prospectus relating to shares of the Corporation
Common Stock issuable pursuant to the CoreStates Dividend Reinvestment and
Share Purchase Plan of our report dated March 16, 1994, except as to the last
paragraph of Notes 2 and 16 which are as of March 29, 1994, relating to the
consolidated statements of condition of Constellation Bancorp and subsidiaries
as of December 31, 1993 and 1992, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1993, which report appears
in the May 5, 1994 report on Form 8-K/A of CoreStates Financial Corp. Our
report refers to a change in accounting for postretirement benefits, other
than pensions, income taxes and certain investments in debt and equity
securities in 1993.
/s/ KPMG Peat Marwick
Short Hills, New Jersey
May 5, 1994
59
