<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): May 5, 1994
CORESTATES FINANCIAL CORP
- - --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 0-6879 23-1899716
- - --------------------------------------------------------------------------------
(STATE OR OTHER (COMMISSION (IRS EMPLOYEE
JURISDICTION OF FILE NUMBER) IDENTIFICATION NO.)
INCORPORATION)
CENTRE SQUARE WEST, 1500 MARKET STREET
PHILADELPHIA, PENNSYLVANIA 19101
- - --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE, INCLUDING AREA CODE: (215) 973-3806
--------------
- - --------------------------------------------------------------------------------
(FORMER NAME AND FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
PAGE 1 OF 92
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
---------------------------------
(A) Consolidated Financial Statements of CoreStates PAGE
----
Financial Corporation and Subsidiaries
(1) Consolidated Statements of Income for the years
ended December 31, 1993, 1992, and 1991............. 5
(2) Consolidated Balance Sheets as of December 31,
1993 and 1992....................................... 6
(3) Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1993, 1992,
and 1991............................................ 7
(4) Consolidated Statements of Cash Flows for the years
ended December 31, 1993, 1992, and 1991............. 8
(5) Notes to the Consolidated Financial Statements...... 9 to 35
(6) Reports of Independent Auditors..................... 36 and 37
(7) Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 38 to 75
(8) Supplemental Financial Data
(a) Five Year Average Balance Sheet, Statement
of Income and Balance Sheet 76 to 81
(b) Shareholders' and Other Selected Data 82
(c) Rate/Volume Analysis 83
(d) Loan Portfolio, Risk Elements and Allowance 84 to 88
for Loan Losses Data
(e) Selected Maturity and Interest Sensitivity Data 88 to 90
(B) Exhibits
23.1 Consent of Ernst & Young
23.2 Consent of KPMG Peat Marwick
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No.
-----------
<S> <C> <C>
23.1 Consent of Ernst & Young............................ 91
23.2 Consent of KPMG Peat Marwick........................ 92
</TABLE>
PAGE 2 OF 92
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CORESTATES FINANCIAL CORP
(Registrant)
By /s/David T. Walker
------------------------
David T. Walker
Deputy Chief Counsel
Dated: May 5, 1994
PAGE 3 OF 92
<PAGE>
CoreStates Financial Corp and Subsidiaries
FINANCIAL STATEMENTS (a)
PAGE
----
Consolidated Statements of Income for the
years ended December 31, 1993, 1992, and 1991........... 5
Consolidated Balance Sheets as of December 31, 1993
and 1992................................................ 6
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1993,
1992 and 1991........................................... 7
Consolidated Statements of Cash Flows for the years ended
December 31, 1993, 1992, and 1991....................... 8
Notes to the Consolidated Financial Statements............. 9 to 35
Reports of Independent Auditors............................ 36 and 37
Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 38 to 75
Supplemental Financial Data 76 to 90
- - ------------------------------------
(a) The accompanying Financial Statements have been restated to include the
consolidated accounts of Constellation Bancorp, which was acquired on
March 16, 1994 and accounted for on a pooling of interest basis.
PAGE 4 OF 92
<PAGE>
CoreStates Financial Corp and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
INTEREST INCOME 1993 1992 1991
---------- ----------- -----------
<S> <C> <C> <C>
Interest and fees on loans:
Taxable income......................................... $1,414,135 $ 1,461,958 $ 1,900,037
Tax exempt income...................................... 28,659 35,450 46,043
Interest on investment securities:
Taxable income......................................... 154,540 171,933 178,703
Tax exempt income...................................... 18,208 22,096 30,306
Interest on time deposits in banks....................... 43,049 55,635 73,775
Interest on Federal funds sold, securities purchased
under agreements to resell and other................... 6,178 15,679 25,609
---------- ----------- -----------
Total interest income.......................... 1,664,769 1,762,751 2,254,473
---------- ----------- -----------
INTEREST EXPENSE
Interest on deposits:
Domestic savings....................................... 119,643 194,587 300,608
Domestic time (Note 9)................................. 182,195 266,597 458,163
Overseas branches and subsidiaries..................... 18,248 28,319 76,929
---------- ----------- -----------
Total interest on deposits..................... 320,086 489,503 835,700
Interest on short-term funds borrowed (Note 10).......... 64,457 57,070 166,487
Interest on long-term debt (Note 11)..................... 61,572 72,828 84,418
---------- ----------- -----------
Total interest expense......................... 446,115 619,401 1,086,605
---------- ----------- -----------
NET INTEREST INCOME............................ 1,218,654 1,143,350 1,167,868
Provision for losses on loans (Note 7)................... 230,000 129,300 272,596
---------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOSSES ON LOANS............................. 988,654 1,014,050 895,272
---------- ----------- -----------
NON-INTEREST INCOME
Service charges on deposit accounts...................... 170,786 154,667 135,148
Trust income............................................. 97,306 92,654 93,386
Fees for international services.......................... 69,432 60,247 47,275
Debit and credit card fees............................... 59,500 149,892 166,167
Income from investment in EPS, Inc. (Note 20)............ 13,159
Gains on trading account securities...................... 2,254 1,836 2,613
Securities gains (losses) (Note 5)....................... 15,748 15,085 (14,175)
Other gains (Notes 6 and 20)............................. 11,000 41,072 86,609
Other operating income................................... 105,469 71,270 70,090
---------- ----------- -----------
Total non-interest income...................... 544,654 586,723 587,113
---------- ----------- -----------
NON-FINANCIAL EXPENSES
Salaries, wages and benefits (Notes 12 and 13)........... 576,470 582,067 575,438
Net occupancy (Notes 8 and 14)........................... 108,295 106,203 115,462
Equipment expenses (Note 8).............................. 69,072 79,350 83,091
Other operating expenses (Note 16)....................... 469,424 445,723 455,265
---------- ----------- -----------
Total non-financial expenses................... 1,223,261 1,213,343 1,229,256
---------- ----------- -----------
INCOME BEFORE INCOME TAXES............................... 310,047 387,430 253,129
Provision for income taxes (Note 16)..................... 98,297 126,408 90,503
---------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE.................................. 211,750 261,022 162,626
Cumulative effect of a change in accounting
principle, net of income tax benefits of $7,005 in
1993 and $43,760 in 1992 (Note 12).................... (13,010) (84,946) -
---------- ----------- -----------
NET INCOME............................................... $ 198,740 $ 176,076 $ 162,626
========== =========== ===========
PER COMMON SHARE DATA (Based on weighted average
shares outstanding of 128.570 million in 1993,
119.350 million in 1992 and 117.016 million in 1991)
Income before cumulative effect of a change in
accounting principle.................................. $1.65 $2.19 $1.39
========== =========== ===========
Net Income............................................... $1.55 $1.48 $1.39
========== =========== ===========
Cash dividends declared.................................. $1.14 $1.02 $.97
========== =========== ===========
</TABLE>
See accompanying notes to the financial statements.
5
<PAGE>
CoreStates Financial Corp and Subsidiaries
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
December 31,
-------------------------
1993 1992
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks (Note 4)......................... $ 2,466,867 $ 2,445,283
Time deposits, principally Eurodollars................... 1,273,373 1,766,727
Investment securities (market value: 1993-$3,042,559;
1992-$3,008,165) (Note 5).............................. 3,013,606 2,913,686
Total loans, net of unearned discounts of
$120,244 in 1993 and $167,920 in 1992 (Note 6)......... 18,026,142 17,229,407
Less: Allowance for loan losses (Note 7)............... (537,767) (407,633)
----------- -----------
Net loans...................................... 17,488,375 16,821,774
Federal funds sold and securities purchased under
agreements to resell................................... 148,527 215,490
Trading account securities............................... 6,393 2,796
Due from customers on acceptances........................ 332,234 632,976
Premises and equipment (Note 8).......................... 376,115 369,577
Other assets (Note 20)................................... 665,588 946,173
----------- -----------
Total assets................................... $25,771,078 $26,114,482
=========== ===========
LIABILITIES
Deposits:
Domestic:
Non-interest bearing................................. $ 6,331,130 $ 6,184,010
Interest bearing (Note 9)............................ 11,916,852 12,562,535
Overseas branches and subsidiaries (Note 9)............ 796,902 766,119
----------- -----------
Total deposits................................. 19,044,884 19,512,664
Short-term funds borrowed (Note 10)...................... 1,830,495 1,782,271
Bank acceptances outstanding............................. 337,180 635,544
Other liabilities (Note 12).............................. 1,069,570 1,040,191
Long-term debt (Note 11)................................. 1,455,036 1,253,359
----------- -----------
Total liabilities.............................. 23,737,165 24,224,029
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 15)
SHAREHOLDERS' EQUITY (NOTES 11, 13 AND 19)
Common stock: $1 par value; authorized 200.0 million
shares; issued 129.2 million shares in 1993 and 128.2
million shares in 1992 (including treasury shares of
.4 million in 1993 and .2 million in 1992)............. 2,033,913 1,890,453
----------- -----------
Total shareholders' equity..................... 2,033,913 1,890,453
----------- -----------
Total liabilities and shareholders' equity..... $25,771,078 $26,114,482
=========== ===========
</TABLE>
See accompanying notes to the financial statements.
6
<PAGE>
CoreStates Financial Corp and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Capital Retained Treasury
stock surplus earnings stock Total
-------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1991................................ $ 57,322 $510,161 $ 899,973 $(23,815) $1,443,641
Acquisition of Constellation Bancorp (Note 2).............. 3,381 109,841 75,192 188,414
-------- -------- ---------- -------- ----------
Balances at January 1, 1991, restated...................... 60,703 620,002 975,165 (23,815) 1,632,055
Net income................................................. 162,626 162,626
Net change in unrealized loss on marketable equity
securities, net of tax (Note 5).......................... 22,028 22,028
Treasury shares acquired (73 shares)....................... (3,051) (3,051)
Common stock issued under employee benefit
plans (397 shares)....................................... 2 1,325 (3,038) 14,670 12,959
Common stock issued under dividend reinvestment and
stock purchase plans (136 shares)........................ 16 778 4,485 5,279
Foreign currency translation adjustments................... 674 674
Common dividends declared.................................. (109,479) (109,479)
-------- -------- ---------- -------- ----------
Balances at December 31, 1991.............................. 60,721 622,105 1,047,976 (7,711) 1,723,091
Net income................................................. 176,076 176,076
Net change in unrealized gain in marketable
equity securities, net of tax (Note 5)................... 236 236
Treasury shares acquired (30 shares)....................... (1,480) (1,480)
Stock issued in public offering (7,842).................... 7,842 59,739 67,581
Common stock issued under employee benefit
plans (944 shares)....................................... 906 27,383 (79) 777 28,987
Common stock issued under dividend reinvestment
plan (390 shares)........................................ 279 13,030 4,288 17,597
Conversion of subordinated debt............................ (45) 245 200
Foreign currency translation adjustments................... (4,384) (4,384)
Common dividends declared.................................. (117,451) (117,451)
-------- -------- ---------- -------- ----------
Balances at December 31, 1992.............................. 69,748 722,257 1,102,329 (3,881) 1,890,453
Net income................................................. 198,740 198,740
Issuance of shares in connection with a 100% common
stock dividend........................................... 58,929 (58,929)
Net unrealized gain on investments available-for-sale,
net of tax (Note 5)...................................... 68,331 68,331
Acquisition of Inter Community Bancorp (Note 2)............ (213) 17,459 17,246
Treasury shares acquired (1,060 shares).................... (28,734) (28,734)
Common stock issued under employee benefit
plans (518 shares)....................................... 250 9,386 (1,509) 4,156 12,283
Common stock issued under dividend reinvestment
plan (347 shares)........................................ 209 7,842 (101) 3,181 11,131
Foreign currency translation adjustments................... (1,758) (1,758)
Common dividends declared.................................. (133,779) (133,779)
-------- -------- ---------- -------- ----------
Balances at December 31, 1993.............................. $129,136 $680,556 $1,232,040 $ (7,819) $2,033,913
======== ======== ========== ======== ==========
</TABLE>
See accompanying notes to the financial statements.
7
<PAGE>
CoreStates Financial Corp and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1993 1992 1991
------------ ------------ -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.......................................... $ 198,740 $ 176,076 $ 162,626
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of a change in
accounting principle (Note 12)................ 13,010 84,946
Provision for losses on loans..................... 230,000 129,300 272,596
Provision for losses and writedowns
on other real estates owned...................... 52,189 31,386 35,999
Depreciation and amortization..................... 84,267 98,956 115,451
Deferred income tax expense (benefit) (17,756) 29,342 43,695
Securities (gains) losses (Note 5)................ (15,748) (15,085) 14,175
Other gains (Notes 6 and 20)...................... (11,000) (41,072) (86,609)
Increase in due to factored clients............... 147,072 1,923 12,976
Proceeds from contribution of assets
to EPS joint venture (Note 20)................... 79,350
Decrease in interest receivable................... 2,952 41,405 57,292
Decrease in interest payable...................... (4,022) (56,670) (52,205)
Other, net........................................ 16,267 89,931 2,589
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 695,971 649,788 578,585
------------ ------------ ------------
INVESTING ACTIVITIES
Net (increase) decrease in loans (Note 6)........... (1,154,544) 92,062 651,207
Proceeds from sales of loans (Note 6)............... 518,103 316,876 1,290,264
Loans originated or acquired-non-bank
subsidiaries...................................... (24,712,336) (16,561,468) (11,675,599)
Principal collected on loans-non-bank
subsidiaries...................................... 24,411,312 16,364,389 11,563,639
Net (increase) decrease in time deposits,
principally Eurodollars........................... 493,354 (175,463) (400,571)
Purchases of investment securities.................. (1,795,635) (1,693,138) (1,339,035)
Proceeds from sales of investment securities
(Note 5).......................................... 372,006 274,146 329,429
Proceeds from maturities of investment
securities........................................ 1,502,056 1,230,052 784,965
Net (increase) decrease in Federal funds sold
and securities purchased under agreements
to resell......................................... 66,963 158,010 (109,951)
Purchases of premises and equipment................. (104,328) (42,878) (74,661)
Proceeds from sales and paydowns on other real
estate owned...................................... 76,089 67,142 23,627
Other, net.......................................... 4,428 16,671 (89,284)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES...................................... (322,532) 46,401 954,030
------------ ------------ ------------
FINANCING ACTIVITIES
Net decrease in deposits............................ (467,780) (220,619) (644,566)
Long-term debt issued (Note 11)..................... 886,371 297,550 626,145
Retirement of long-term debt........................ (683,266) (215,630) (261,000)
Net proceeds from issuance of common
stock in public offering.......................... 67,581
Net increase (decrease) in short-term funds
borrowed.......................................... 48,224 (182,347) (1,603,041)
Cash dividends paid................................. (130,082) (113,335) (108,188)
Other, net.......................................... (5,322) 44,995 14,745
------------ ------------ ------------
NET CASH USED IN FINANCING ACTIVITIES............. (351,855) (321,805) (1,975,905)
------------ ------------ ------------
INCREASE DECREASE IN CASH AND DUE FROM BANKS 21,584 374,384 (443,290)
Cash and due from banks at January 1,............. 2,445,283 2,070,899 2,514,189
------------ ------------ ------------
CASH AND DUE FROM BANKS AT DECEMBER 31,............. $ 2,466,867 $ 2,445,283 $ 2,070,899
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest.......................................... $ 450,316 $ 676,071 $ 1,138,845
============ ============ ============
Income taxes...................................... $ 160,116 $ 117,452 $ 41,458
============ ============ ============
</TABLE>
See accompanying notes to the financial statements.
8
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of CoreStates
Financial Corp ("the Corporation") and all of its subsidiaries, including:
CoreStates Bank, N.A. ("CBNA"); New Jersey National Bank ("NJNB"); Constellation
Bank, N.A. ("Constellation Bank"); and CoreStates Bank of Delaware, N.A.
("CBD"). All material intercompany transactions have been eliminated. The
financial statements have been restated to include Constellation Bancorp
("Constellation"), which was acquired on March 16, 1994 in a transaction
accounted for as a pooling of interests. Certain amounts in prior years have
been reclassified for comparative purposes.
All common shares outstanding and per common share data have been restated to
reflect the impact of the Corporation's 100% stock dividend declared on August
17, 1993, and paid on October 15, 1993 to shareholders of record on September
15, 1993 ("the Stock Dividend"). An amount equal to the par value of the shares
issued in connection with the Stock Dividend was transferred from capital
surplus to common stock.
At the annual shareholders' meeting on April 20, 1993, an increase in the number
of authorized shares of common stock from 80,000,000 to 200,000,000 was
approved.
CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1993, the Corporation adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits" ("FAS 112"). FAS 112 established the accounting requirements for
benefits provided to former or inactive employees after employment but before
retirement. FAS 112 requires that employers accrue the costs associated with
providing benefits, such as salary and benefit continuation under disability
plans, when payment of the benefits is probable and the amount of the obligation
can be reasonably estimated. The Corporation recognized the January 1, 1993 FAS
112 transitional liability of $20,015, $13,010 after-tax or $.10 per share, as
the cumulative effect of a change in accounting principle.
Effective December 31, 1993, the Corporation adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("FAS 115"). FAS 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 115, securities with an original carrying value of $680,000 were
classified as available-for-sale at December 31, 1993 and were written up to
their aggregate fair value of $785,046. After the related tax effects,
shareholders' equity at December 31, 1993 was increased by $68,331 to reflect
the write-up of these securities to fair value.
Effective January 1, 1992, the Corporation adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions" ("FAS 106"). FAS 106 requires that employers accrue the
costs associated with providing postretirement benefits during the active
service periods of employees. As permitted under FAS 106, the Corporation
elected to immediately recognize the January 1, 1992 transitional liability of
$128,706, $84,946 after-tax or $.71 per share, as the cumulative effect of a
change in accounting principle.
INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"). In the first quarter of 1992 the Corporation retroactively adopted FAS
109 as of January 1, 1987. Under the asset and liability method provided for by
FAS 109, deferred tax assets and liabilities are recognized for the tax
consequences of temporary differences by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
The Corporation and its subsidiaries file a consolidated Federal income tax
return.
9
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: continued
INVESTMENT SECURITIES
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
Corporation 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. 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 accumulated net
unrealized gain on available-for-sale securities included in retained earnings
was $68,331 at December 31, 1993.
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.
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.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is based on management's evaluation of the effects
on the loan portfolio of current economic and political conditions and other
pertinent indicators. Activities in foreign countries may involve special risks
not normally a part of domestic operations. Credit review personnel and senior
officers evaluate the loan portfolio by determining the net realizable value of
collateral and the financial strength of borrowers. Installment and credit card
loans are evaluated largely on the basis of delinquency data because of the
number of such loans and the relatively small size of each individual loan.
Additions to the allowance arise from the provision for loan losses charged to
operations or from the recovery of amounts previously charged off. Loan charge-
offs reduce the allowance. Loans are charged off when there has been permanent
impairment of the related carrying values.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. The provision for depreciation and amortization is computed,
generally, on the straight-line method at rates based on the following range of
lives: buildings - 10 to 45 years; equipment - 3 to 12 years; and leasehold
improvements - 3 to 15 years.
RETIREMENT PLANS
The Corporation maintains a non-contributory defined benefit pension plan for
substantially all employees. Benefits are primarily based on the employee's
years of credited service, average annual salary and primary social security
benefit, as defined in the plan. It is the Corporation's policy to fund the
plan on a current basis to the extent deductible under existing tax regulations.
The Corporation provides certain postretirement health care and life insurance
benefits for retired employees. In order to participate in the health care
plan, an employee must retire with at least 10 years of service. The
postretirement health care plan is contributory, with retiree contributions
based on years of service. It is the Corporation's policy to fund the health
care plan on a current basis to the extent deductible under existing tax
regulations.
10
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: CONTINUED
INTERNATIONAL OPERATIONS
Forward exchange contracts are valued at current rates of exchange. Gains or
losses on forward exchange contracts intended to hedge an identifiable foreign
currency commitment are deferred and included in the measurement of the related
foreign currency transaction. All other gains or losses on forward exchange
contracts are included in the consolidated statement of income.
Currency gains and losses in connection with foreign loans and deposit contract
transactions, which are included in interest income and expenses, are recognized
pro rata over the contract terms. Foreign currency translation adjustments are
recorded directly to retained earnings. The cumulative foreign currency
translation gain (loss) was $(1,623), $135 and $4,519 at December 31, 1993, 1992
and 1991, respectively.
INTEREST RATE CONTRACTS
The Corporation uses various interest rate contracts such as, interest rate
swaps, futures, forward rate agreements, caps and floors, primarily as hedges
against specific assets, liabilities or anticipated transactions and to provide
for the needs of its customers. For contracts designated as hedges, gains or
losses are deferred and recognized as adjustments to interest income or expense
of the underlying assets or liabilities. Gains or losses resulting from early
terminations of contracts are deferred and amortized over the remaining term of
the underlying assets or liabilities. Any fees received or disbursed which
represent adjustments to the yield on interest rate contracts are capitalized
and amortized over the term of the interest rate contracts. Other contracts are
valued at market with gains or losses included in the consolidated income
statement.
CASH DIVIDENDS DECLARED PER SHARE
Cash dividends declared per share for the periods prior to the acquisitions of
Constellation Bancorp on March 16, 1994 and First Peoples Financial Corporation
on September 3, 1992 assume that the Corporation would have declared cash
dividends equal to the cash dividends per share actually declared by the
Corporation.
11
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
2. ACQUISITIONS AND PROPOSED ACQUISITIONS
On December 17, 1993, the Corporation purchased Inter Community Bancorp ("Inter
Community"), a New Jersey bank holding company with $133 million in assets and
$110 million in deposits at the time of the acquisition. As a result of this
acquisition, 640 thousand shares of the Corporation's common stock was issued.
The transaction had a total value of approximately $17 million and was accounted
for under the purchase accounting method. Accordingly, the results of
operations of Inter Community have been included with the Corporation since the
date of acquisition.
In December 1993, the Corporation announced a definitive agreement to purchase
privately held Rittenhouse Financial Services, Inc. and the $35 million asset
Rittenhouse Trust Company ("Rittenhouse") in a transaction involving the
issuance of $55 million in equivalent Corporation common shares at closing. The
Corporation plans to purchase these shares in the open market.
The agreement also anticipates the issuance of up to $55 million in additional
equivalent common shares based on Rittenhouse earnings growth over a five year
period. Assuming approval by regulators, the transaction is expected to close
in the second quarter of 1994.
These acquisitions are not material to the financial position or results of
operations and accordingly, pro forma information is deemed not necessary.
On March 16, 1994, the Corporation acquired Constellation Bancorp
("Constellation"), a New Jersey bank holding company with $2.1 billion in assets
and $2.1 billion in deposits. The Corporation issued approximately 11.3 million
shares of common stock to shareholders of Constellation based on an exchange
ratio of .4137 of a share of the Corporation's common stock for each share of
Constellation common stock.
The merger was accounted for as a pooling of interests, accordingly, the
consolidated financial statements have been restated to include the consolidated
accounts of Constellation for all periods presented. Previously reported
information is as follows:
<TABLE>
<CAPTION>
1993 CORPORATION CONSTELLATION
- - ---- ----------- -------------
<S> <C> <C>
Net interest income................................... $1,117,901 $100,753
Provision for losses on loans......................... 100,000 130,000 (a)
Non-interest income................................... 503,055 41,599
Non-financial expenses................................ 1,033,375 190,186 (a)
Provision for income taxes ........................... 159,654 662 (b)
Income (loss) before cumulative effect of a
change in accounting principle...................... 327,927 (178,496)(a)
Cumulative effect of a change in accounting
principle........................................... (13,010)
Net income (loss)..................................... 314,917 (178,496)(a)
Income (loss) per share before cumulative
effect of a change in accounting principle.......... 2.80 (6.56)
Net income (loss) per share........................... 2.69 (6.56)
Cash dividends declared............................... 1.14
1992
- - ----
Net interest income................................... $1,057,046 $ 86,304
Provision for losses on loans......................... 119,300 10,000
Non-interest income................................... 546,509 40,585
Non-financial expenses................................ 1,094,591 118,527
Provision for income taxes............................ 127,260 53 (b)
Income (loss) before cumulative effect of a
change in accounting principle...................... 262,404 (1,691)
Cumulative effect of a change in accounting
principle........................................... (80,986)
Net income (loss)..................................... 181,418 (1,691)
Income (loss) per share before cumulative
effect of a change in accounting principle.......... 2.27 (.19)
Net income (loss) per share........................... 1.57 (.19)
Cash dividends declared............................... 1.02
</TABLE>
12
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
2. ACQUISITIONS AND PROPOSED ACQUISITIONS: continued
<TABLE>
<CAPTION>
1991
- - ----
<S> <C> <C>
Net interest income................................... $1,086,393 $ 81,475
Provision for losses on loans......................... 190,601 81,995
Non-interest income................................... 541,646 46,285
Non-financial expenses................................ 1,096,119 133,955
Provision for income taxes............................ 113,573 532 (b)
Net income (loss)..................................... 227,746 (88,722)
Net income (loss) per share........................... 2.00 (10.82)
Cash dividends declared............................... 0.97
- - ------------------------------------------------------
</TABLE>
(a) 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, the Corporation's 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 the Corporation's
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 include expenses directly attributable to the acquisition, and
certain other costs and expenses.
(b) 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 Cumulative
in net income increase
-------------------- 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>
In November 1993, the Corporation announced a definitive agreement to acquire
the $2.6 billion asset Independence Bancorp, Inc. ("Independence"), a
Pennsylvania bank holding company, in a transaction expected to be accounted for
as a pooling of interests. Assuming approval by regulators and by
Independence's shareholders, the transaction is expected to close in the second
quarter of 1994. For each Independence common share outstanding, a maximum of
1.5 shares of the Corporation's common stock will be issued assuming that the
average price per Corporation share over a pre-closing pricing period is less
than $27 per share, or a minimum of 1.45 shares of the Corporation's common
stock will be issued assuming that the average price per Corporation share is
greater than $28 per share. As a result of this transaction up to approximately
16.6 million new shares will be issued.
13
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
2. ACQUISITIONS: continued
A summary of unaudited historical financial information for Independence
follows:
<TABLE>
<CAPTION>
1993 1992 1991
------- --------- -------
<S> <C> <C> <C>
Operating results (in thousands,
except per share):
Net income........................ $22,879 $7,112(c) $18,956
Per common share.................. 1.98 .63 1.72
Average common shares
outstanding..................... 11,530 11,237 11,047
<CAPTION>
1993 1992
------- -------
<S> <C> <C>
Balance sheet at year-end (in
millions, except per share):
Assets............................ $ 2,603 $ 2,727
Loans............................. 1,745 1,707
Deposits.......................... 2,153 2,249
Shareholders' equity.............. 222 208
Book value per common share....... 19.26 18.43
</TABLE>
(c) Before cumulative effect of a change in accounting principle.
In March 1994, the Corporation announced a definitive agreement to acquire
Germantown Savings Bank ("GSB"), a $1.6 billion Pennsylvania chartered stock
savings bank. The total purchase price of approximately $260 million will be
paid, 55% in the Corporation's common stock and 45% in cash, and the
acquisition will be accounted for as a purchase creating an intangible of
approximately $141 million. The Corporation plans to purchase in the market
100% of the shares to be issued. The transaction is expected to close late in
the third quarter of 1994, assuming approval by regulators and GSB
shareholders.
A summary of unaudited historical financial information for GSB follows:
<TABLE>
<CAPTION>
1993 1992(d) 1991(d)
------- --------- ---------
<S> <C> <C> <C>
Operating results (in thousands,
except per share):
Net income........................ $20,498 $15,183 $8,345
Per common share.................. 4.68 3.54 2.06
Average common shares outstanding. 4,377 4,287 4,061
Balance sheet at year-end (in
millions, except per share):
Assets............................ $ 1,637 $ 1,555
Loans............................. 1,039 1,017
Deposits.......................... 1,476 1,419
Shareholders' equity.............. 142 120
Book value per common share....... 33.89 29.26
</TABLE>
(d) Before extraordinary item and cumulative effect of a change in accounting
principle.
A summary of unaudited pro forma financial information for the Corporation,
Independence and GSB combined follows. Independence has been combined for
all periods presented and GSB has been combined for 1993.
<TABLE>
<CAPTION>
1993(e) 1992 1991
------------- ---------- ----------
<S> <C> <C> <C>
Operating results (in thousands,
except per share):
Net interest income.......................... $1,382,777 $1,252,478 $1,272,910
Non-interest income.......................... 580,445 610,664 615,565
Income before cumulative effect of a change
in accounting principle................... 242,955 268,134 180,317
Per common share............................. 1.61 1.97 1.35
Average common shares outstanding............ 151,032 135,813 133,534
</TABLE>
14
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
2. ACQUISITIONS: continued
<TABLE>
<CAPTION>
1993(e) 1992
---------- ----------
<S> <C> <C>
Balance sheet at year-end (in
millions, except per share):
Assets....................................... $ 30,077 $ 28,841
Loans........................................ 20,823 18,890
Deposits..................................... 22,617 21,762
Shareholders' equity......................... 2,347 2,095
Book value per common share.................. 15.56 14.48
</TABLE>
(e) Pro forma shareholders' equity at December 31, 1993 has been reduced by
$35.2 million, the combined after-tax effect of anticipated 1994 additions to
Independence's allowance for possible loan losses and OREO reserves of
approximately $25.0 million and $5.0 million, respectively, for the
Corporation's planned strategic initiatives regarding Independence's problem
assets, and charges of approximately $24.2 million, which include expenses
directly related to the Independence acquisition.
3. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" ("FAS 107"), requires disclosure of fair value
information about financial instruments, whether or not required to be
recognized in the balance sheet, for which it is practicable to estimate that
value. FAS 107 defines a financial instrument as cash, evidence of ownership
interest in an entity, or a contractual obligation or right that will be settled
with another financial instrument.
In cases where quoted market prices are not available, fair values are based on
estimates using discounted cash flow or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Fair value estimates derived
through those techniques cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. FAS 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the
Corporation.
Fair value estimates, methods, and assumptions are set forth below for the
Corporation's financial instruments.
CASH AND DUE FROM BANKS AND SHORT-TERM INSTRUMENTS The carrying amounts reported
in the balance sheet for cash and due from banks and short-term instruments
approximate their fair values. Short-term instruments include: time deposits;
Federal funds sold; and securities purchased under agreements to resell, all of
which generally have original maturities of less than 90 days.
INVESTMENT SECURITIES Fair values for investment securities are based on quoted
market prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments. See Note 5
for the carrying value and estimated fair value of investment securities.
TRADING ACCOUNT SECURITIES Fair values for the Corporation's trading account
securities, which also are the amounts recognized in the balance sheet, are
based on quoted market prices where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
LOANS Fair values are estimated for loans in groups with similar financial and
risk characteristics. Loans are segregated by type including: commercial and
industrial, commercial real estate; residential real estate; credit card and
other consumer; financial institutions; factoring receivables; and foreign.
Each loan type is further segmented into fixed and variable rate interest terms
and by performing and non-performing categories in order to estimate fair
values.
15
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
3. FAIR VALUES OF FINANCIAL INSTRUMENTS: continued
The fair value of fixed-rate performing loans is calculated by discounting
scheduled principal and interest cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and interest rate risk
inherent in the loan type at December 31, 1993 and 1992. The estimate of
maturity is based on the Corporation's historical experience with repayments for
each loan type, modified by an estimate of the effect of current economic and
lending conditions. For performing residential mortgage loans, fair value is
estimated by discounting contractual cash flows adjusted for prepayment
estimates using discount rates based on secondary market sources.
For credit card loans, cash flows and maturities are estimated based on
contractual interest rates and historical experience and are discounted using
secondary market rates adjusted for differences in servicing and credit costs.
For variable rate loans that reprice frequently and which have experienced no
significant change in credit risk, fair values are based on carrying amounts.
Fair value for non-performing loans is based on discounting estimated cash flows
using a rate commensurate with the risk associated with the estimated cash
flows. Assumptions regarding cash flows, and discount rates are determined
using available market information and specific borrower information.
The following table presents carrying amounts and estimated fair values for
loans at December 31, 1993 and 1992. Disclosures about fair value of lease
financing receivables, which totaled $656,620 and $527,925 at December 31, 1993
and 1992, respectively, are not required by FAS 107, accordingly, the following
table excludes lease financing receivables.
<TABLE>
<CAPTION>
1993 1992
------------------------ ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Domestic loans:
Commercial, industrial and other.. $ 7,538,474 $ 7,524,489 $ 6,969,279 $ 6,971,678
Real estate loans................. 5,647,856 5,664,174 6,050,434 6,110,015
Consumer:
Installment..................... 1,058,359 1,072,743 1,103,911 1,115,332
Credit card..................... 1,161,046 1,261,466 944,789 1,029,796
Financial institutions............ 865,494 867,401 778,670 784,312
Factoring receivables............. 555,211 555,211 454,244 454,244
Foreign............................. 543,082 543,127 400,155 401,067
----------- ----------- ----------- -----------
Total loans, excluding lease
financing......................... 17,369,522 17,488,611 16,701,482 16,866,444
Allowance for loan losses........... 537,767 407,633
----------- -----------
Net loans, excluding lease
financing....................... $16,831,755 $17,488,611 $16,293,849 $16,866,444
=========== =========== =========== ===========
</TABLE>
The fair value estimate for credit card loans is based on the value of existing
loans at December 31, 1993 and 1992. This estimate does not include the benefit
that relates to estimated cash flows from new loans expected to be generated
from existing cardholders over the remaining life of the portfolio. That
benefit is estimated to be approximately $64 million at December 31, 1993 and
$62 million at December 31, 1992 and is neither included in the fair value
estimate for credit card loans, nor recorded as an intangible asset in the
consolidated balance sheet.
DEPOSIT LIABILITIES The fair values disclosed for demand deposits (non-interest
bearing checking accounts, NOW accounts, savings accounts, and money market
accounts) are, by FAS 107 definition, equal to the amount payable on demand at
the reporting date (i.e. their carrying amounts). The carrying amounts for
variable-rate, fixed-term certificates of deposit approximate their fair values.
Fair values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates offered on
certificates at December 31, 1993 and 1992, respectively, to an estimate of
aggregate expected maturities for those certificates of deposit.
16
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
3. FAIR VALUES OF FINANCIAL INSTRUMENTS: continued
The following table presents carrying amounts and estimated fair values of
deposits at December 31, 1993 and 1992:
<TABLE>
<CAPTION>
1993 1992
------------------------ ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Domestic:
Non-interest bearing checking.. $ 6,331,130 $ 6,331,130 $ 6,184,010 $ 6,184,010
NOW accounts................... 1,659,342 1,659,342 1,672,760 1,672,760
Savings accounts............... 3,842,567 3,842,567 4,023,741 4,023,741
Money market accounts.......... 2,491,718 2,491,718 2,229,648 2,229,648
Time deposits.................. 3,923,225 4,078,742 4,636,386 4,798,766
----------- ----------- ----------- -----------
Total domestic deposits.. 18,247,982 18,403,499 18,746,545 18,908,925
Overseas branches and
subsidiaries.................. 796,902 796,902 766,119 766,119
----------- ----------- ----------- -----------
Total deposits........... $19,044,884 $19,200,401 $19,512,664 $19,675,044
=========== =========== =========== ===========
</TABLE>
The estimated fair values above do not include the benefit that results from the
low-cost funding provided by core deposit liabilities as compared to the cost of
borrowing funds in the financial markets. That benefit, commonly referred to as
a deposit base intangible, is estimated to be approximately $510,000 at December
31, 1993 and $460,000 at December 31, 1992 and is neither considered in the
above estimated fair value amounts nor recorded as an intangible asset in the
consolidated balance sheet. The core deposit base intangible was determined by
using a discounted cash flow approach to value the spread between the cost of
core deposit liabilities and the cost of alternative borrowing sources over the
estimated lives of the core deposit liabilities.
SHORT-TERM FUNDS BORROWED The carrying amounts of Federal funds purchased,
securities sold under agreements to repurchase, commercial paper and other
short-term borrowings approximate their fair values.
LONG-TERM DEBT The fair values for long-term debt are based on quoted market
prices where available. If quoted market prices are not available, fair values
are estimated using discounted cash flow analyses based on the Corporation's
borrowing rates at December 31, 1993 and 1992 for comparable types of borrowing
arrangements. See Note 11 for additional information regarding the carrying
value and estimated fair value of long-term debt.
OFF-BALANCE SHEET INSTRUMENTS Fair values for the Corporation's futures,
forwards, interest rate swaps, options, interest rate caps and floors, and
foreign exchange contracts are based on quoted market prices (futures); current
settlement values (forwards); quoted market prices of comparable instruments
(foreign currency exchange contracts); or, if there are no relevant comparable
instruments, on pricing models or formulas using current assumptions (interest
rate swaps, interest rate caps and floors, and options). The fair value of
commitments to extend credit other than credit card is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present credit worthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates.
The value of commitments to extend credit under credit card lines is embodied in
the benefit that relates to estimated cash flows from new loans expected to be
generated from existing cardholders over the remaining life of the portfolio.
The fair value of standby and commercial letters of credit is based on fees
currently charged for similar agreements or on the estimated cost to terminate
the agreements or otherwise settle the obligations with the counterparties. See
Note 15 for the notional value and estimated fair value of the Corporation's
off-balance sheet financial instruments.
4. CASH AND DUE FROM BANKS
The Corporation's banking subsidiaries are required to maintain reserve balances
with the Federal Reserve Bank. The average amount of those reserve balances for
the years ended December 31, 1993 and 1992 were approximately $421,000, and
$290,000, respectively.
17
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
5. INVESTMENT SECURITIES
The carrying and fair values of investment securities at December 31, 1993 and
1992 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1993
- - ----
Held-to-Maturity
- - ----------------
U.S. Treasury................... $ 522,537 $ 6,203 $ 169 $ 528,571
U.S. Government agencies........ 1,318,522 5,481 2,758 1,321,245
State and municipal............. 277,377 16,753 247 293,883
Other:
Domestic....................... 88,423 1,193 154 89,462
Foreign........................ 21,701 2,655 4 24,352
---------- -------- ------ ----------
Total held-to-maturity........ $2,228,560 $ 32,285 $3,332 $2,257,513
========== ======== ====== ==========
Available-for-Sale
- - ------------------
U.S. Treasury................... $ 433,718 $ 14,317 $ 502 $ 447,533
U.S. Government agencies........ 178,575 6,823 58 185,340
State and municipal............. 12,856 1,406 7 14,255
Other:
Domestic....................... 43,718 30,797 106 74,409
Foreign........................ 11,133 52,376 63,509
---------- -------- ------ ----------
Total available-for-sale..... $ 680,000 $105,719 $ 673 $ 785,046
========== ======== ====== ==========
1992
- - ----
U.S. Treasury................... $ 885,998 $ 16,548 $2,754 $ 899,792
U.S. Government agencies........ 1,490,414 18,175 5,714 1,502,875
State and municipal............. 372,966 17,705 361 390,310
Other:
Domestic....................... 129,793 27,154 656 156,291
Foreign........................ 34 515 24,382 58,897
---------- -------- ------ ----------
Total investment securities. $2,913,686 $103,964 $9,485 $3,008,165
========== ======== ====== ==========
</TABLE>
At December 31, 1992, the other domestic investment securities category included
marketable equity securities of $33,344, which were carried at the aggregate of
their lower of cost or market in 1992. During 1991, the Corporation recorded
$24,589 of pre-tax losses for write-downs taken against these securities. These
write-downs reflected the amount of market value impairment in the portfolio
which management viewed to be due to other than temporary conditions. During
1992, the Corporation recorded pre-tax gains of $2,822 on sales of certain
domestic equity securities. At December 31, 1992, the market value of the
marketable equity securities portfolio exceeded its carrying value by $22,536.
As a result of the December 31, 1993 adoption of FAS 115, these marketable
equity securities are carried in the available-for-sale portfolio and have been
written up by $30,705, the aggregate of their December 31, 1993 fair values,
through an after-tax credit to retained earnings. The Corporation recorded pre-
tax gains of $12,848 on sales of certain domestic equity securities in 1993.
During 1993 and 1992, the Corporation recorded pre-tax gains of $8,617 and
$5,325 on sales of foreign equity securities.
At December 31, 1993 and 1992, there were no investments in securities of any
single, non-Federal issuer in excess of 10% of shareholders' equity.
Securities with a carrying value of $1,647,767 were pledged at December 31, 1993
to secure public deposits, trust deposits, and for certain other purposes as
required by law.
18
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
5. INVESTMENT SECURITIES - (continued)
The amortized cost and estimated fair value of debt securities at December 31,
1993, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to prepay
obligations without prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---------- ----------
<S> <C> <C>
Held-to-Maturity
- - ----------------
Due in one year or less.................................. $ 374,557 $ 377,083
Due after one year through five years.................... 458,311 472,150
Due after five year through ten years.................... 95,941 97,760
Due after ten years...................................... 69,659 75,246
---------- ----------
998,468 1,022,239
Mortgage-backed securities............................... 1,187,628 1,189,159
---------- ----------
$2,186,096 $2,211,398
========== ==========
Available-for-Sale
- - ------------------
Due in one year or less.................................. $ 54,237 $ 54,239
Due after one year through five years.................... 127,631 129,457
Due after five year through ten years.................... 260,224 272,738
Due after ten years...................................... 11,784 12,860
---------- ----------
453,876 469,294
Mortgage-backed securities............................... 177,311 183,996
---------- ----------
$ 631,187 $ 653,290
========== ==========
</TABLE>
Proceeds from sales of investments in debt securities during 1993, 1992 and 1991
were $333,336, $247,077 and $324,238, respectively. Gross gains of $2,369 in
1993, $6,675 in 1992 and $10,504 in 1991, and gross losses of $68 in 1993, $297
in 1992 and $56 in 1991 were realized on those sales.
6. LOAN PORTFOLIO
For a breakdown of the loan portfolio by type of loan and for information on
non-performing loans, refer to Supplemental Financial Data under the captions
Loan Portfolio and Non-Performing Assets (pages 84 and 86).
The book value of real estate loans transferred to other real estate owned
during 1993, 1992 and 1991 was $38,672, $109,993 and $142,824 respectively.
Other real estate owned includes properties that the Corporation has acquired in
foreclosure or that has been determined to be "in substance" foreclosed.
At December 31, 1993 and 1992, the Corporation had loans totalling $147,381 and
$200,145, respectively, to its directors, officers and companies in which the
directors had a 10% or more voting interest. These loans were made on
substantially the same terms, including interest rates and collateral as those
prevailing at the time for comparable transactions with unrelated persons and do
not involve more than normal risk of collectibility. The 1993 additions and
reductions were $2,463,230 and $2,515,994, respectively.
In October 1991, the Corporation sold $1,017,989 of credit card receivables,
representing most of its out-of-region credit card portfolio. The sale resulted
in a net gain of $53,524 after $33,085 of income tax expense. The loans were
sold net of $27,486 of the allowance for loan losses and the gain also reflects
the write-off of $74,748 of intangible assets associated with the loans sold.
In May 1992, the Corporation sold the assets of Signal Financial Corp, a
consumer finance subsidiary, including approximately $300,000 of consumer
installment loans. The loans were sold net of $14,700 of the allowance for loan
losses. This transaction had an immaterial impact on the earnings of the
Corporation.
In September 1993, the Corporation sold five of its seven branches from the
Virgin Islands operations. The five branches had loans of $131,200 and deposits
of $228,800 at the time of sale. The Corporation recorded a pre-tax gain of
$11,000 on the sale. Also in 1993, the Corporation sold $207,000 of fixed-rate
home equity loans in two securitization transactions.
19
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands)
7. ALLOWANCE FOR LOAN LOSSES
The following represents an analysis of changes in the allowance for loan losses
for the years ended December 31, 1993, 1992 and 1991:
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of period............... $407,633 $446,332 $488,718
Allowance for loans sold at date of sale..... (353) (14,700) (27,486)
Allowance for loans of bank acquired under
purchase method of accounting............. 2,703
Provision charged to operating expense....... 230,000 129,300 272,596
Recoveries of loans previously charged off. 82,165 67,870 80,105
Loan charge-offs............................. 184,381 221,169 367,601
-------- -------- --------
Balance at end of period..................... $537,767 $407,633 $446,332
======== ======== ========
</TABLE>
8. PREMISES AND EQUIPMENT
The consolidated balance sheet includes premises and equipment, net of
accumulated depreciation and amortization of $491,982 and $509,128 at December
31, 1993 and 1992, respectively. Depreciation and amortization of premises and
equipment for the years ended December 31, 1993, 1992, and 1991 was $54,902,
$62,365 and $68,258, respectively.
9. TIME DEPOSITS
Domestic time deposits in denominations of $100 or more at December 31, 1993,
1992, and 1991 were:
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- ----------
<S> <C> <C> <C>
Commercial certificates of deposit............ $227,545 $520,850 $ 930,759
Other domestic time deposits,
principally savings certificates.......... 109,515 158,887 254,112
-------- -------- ----------
Total.......................... $337,060 $679,737 $1,184,871
======== ======== ==========
</TABLE>
Interest expense on domestic time deposits in denominations of $100 or more for
the years ended December 31, 1993, 1992 and 1991 was:
<TABLE>
<CAPTION>
1993 1992 1991
------ ------- -------
<S> <C> <C> <C>
Interest expense:
Commercial certificates of deposit........ $ 8,799 $25,360 $75,798
Other domestic time deposits, principally
savings certificates............... 7,401 13,755 18,196
----- ------- -------
Total.......................... $16,200 $39,115 $93,994
======= ======= =======
</TABLE>
Substantially all of the deposits of overseas branches and subsidiaries were
time deposits in denominations of $100 or more for each of the three years.
10. SHORT-TERM FUNDS BORROWED
Short-term funds borrowed at December 31, 1993 and 1992 include the following:
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
Federal funds purchased (a)......................... $ 615,217 $ 856,553
Securities sold under agreements to repurchase (b).. 197,957 309,876
Commercial paper (c)................................ 501,838 566,990
Other short-term funds borrowed (d).................
515,483 48,852
Total short-term funds borrowed (e)....... ---------- ----------
$1,830,495 $1,782,271
========== ==========
</TABLE>
(a) Federal funds purchased generally represent the overnight Federal funds
transactions of banking subsidiaries with correspondent banks. The weighted
average interest rate was 3.15% in 1993, 3.38% in 1992 and 5.83% in 1991. The
maximum amount outstanding at any month-end was $1,160,951 in 1993, $856,553 in
1992 and $1,393,750 in 1991.
(b) Securities sold under agreements to repurchase usually mature within one to
thirty days or are due on demand. The weighted average interest rate was 2.74%
in 1993, 3.67% in 1992 and 5.14% in 1991. The maximum amount outstanding at any
month-end was $256,367 during 1993, $309,876 during 1992 and $564,223 during
1991.
(c) Commercial paper issued by CoreStates Capital Corp is used to finance the
short-term borrowing requirements of certain banking-related activities.
Commercial paper is issued with maturities of not more than nine months and
there are no provisions for extension, renewal or automatic rollover. The
weighted average interest rate on commercial paper borrowings was 3.14% in 1993,
3.72% in 1992 and 6.28% in 1991. The maximum amount outstanding at any month-end
was $714,439 in 1993, $578,364 in 1992 and $1,074,105 in 1991.
20
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
10. SHORT-TERM FUNDS BORROWED
At December 31, 1993, the Corporation had fee-based lines of credit facilities
from unaffiliated banks totalling $645,000. The lines of credit were
established in support of commercial paper borrowings and general corporate
purposes. Unless extended by the Corporation in accordance with the terms of the
credit agreement, all of the lines expire July 30, 1994. There were no
borrowings under these lines at December 31, 1993. The interest rate charged for
usage of these lines varies with money market conditions.
(d) Other short-term funds borrowed include term Federal funds purchased and
demand notes payable to the U.S. Treasury.
(e) The aggregate average funds borrowed were $1,867,000 in 1993, $1,553,000 in
1992 and $2,720,000 in 1991. The weighted average interest rate was 3.45% in
1993, 3.67% in 1992 and 6.12% in 1991. The average interest rate is calculated
primarily on a daily average of funds borrowed.
11. LONG-TERM DEBT
Long-term debt at December 31, 1993 and 1992 includes the following:
<TABLE>
<CAPTION>
1993 1992
-------------------------------------------- ---------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------- --------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
CoreStates Financial Corp:
8 5/8% Mortgages due 2001............. $ 10,803 $ 12,505 $ 11,555 $ 12,481
5 1/2% Convertible Subordinated
Debentures due 1993 (a)............. 19,987 20,145
---------- ---------- ---------- ---------------
10,803 12,505 31,542 32,626
---------- ---------- ---------- ---------------
CoreStates Capital Corp ("CSCC"):
5 7/8% Guaranteed Subordinated
Notes due 2003 (b).................. 200,000 192,480
6 5/8% Guaranteed Subordinated
Notes due 2005 (c).................. 175,000 172,358
9 5/8% Guaranteed Subordinated
Notes due 2001 (d).................. 150,000 178,395 150,000 167,250
9 3/8% Guaranteed Subordinated
Notes due 2003 (e).................. 100,000 118,830 100,000 110,820
Medium Term Notes (f)................. 808,085 812,299 531,070 538,426
8 3/8% Guaranteed Notes due
1996 (g)............................ 200,000 205,780
8 1/2% Guaranteed Notes due
1996 (h)............................ 125,000 126,138
---------- ---------- ---------- ---------------
1,433,085 1,474,362 1,106,070 1,148,414
---------- ---------- ---------- ---------------
Other subsidiaries:
9.35% Subordinated
Note due July 2003 (i).............. 10,000 10,250 10,000 10,300
Senior debt, due September
1993 (j)............................ 60,000 60,000
8 1/4% Subordinated Capital
Notes due January 1999 (k).......... 25,086 25,274
9 7/8% Mortgages due 2003............. 16,983 19,656
Various other......................... 1,148 1,148 3,678 3,678
---------- ---------- ---------- ---------------
11,148 11,398 115,747 118,908
---------- ---------- ---------- ---------------
Total long-term debt (l).............. $1,455,036 $1,498,265 $1,253,359 $1,299,948
========== ========== ========== ===============
</TABLE>
(a) The Debentures were retired at par plus accrued interest on the June 1, 1993
maturity date.
(b) The Notes are not subject to redemption prior to maturity and are
unconditionally guaranteed, on a subordinated basis, as to payment of principal
and interest by the Corporation. The Notes are subordinated to all existing and
future senior CSCC indebtedness and the guarantee is subordinated to all
outstanding senior Corporation indebtedness.
(c) The Notes are not subject to redemption prior to maturity and are
unconditionally guraranteed, on a subordinated basis, as to payment of principal
and interest by the Corporation. The Notes are subordinated to all existing and
future senior CSCC indebtedness and the guarantee is subordinated to all
outstanding Senior Corporation indebtedness.
21
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
11. LONG-TERM DEBT (continued)
(d) The Notes are unconditionally guaranteed, on a subordinated basis, as to
payment of principal and interest by the Corporation. The Notes are
subordinated to all existing and future senior CSCC indebtedness and the
guarantee is subordinated to all existing and future senior indebtedness of the
Corporation.
(e) The Notes are not subject to redemption prior to maturity and are
unconditionally guaranteed, on a subordinated basis, as to payment of principal
and interest by the Corporation. The Notes are subordinated to all existing and
future senior CSCC indebtedness and the guarantee is subordinated to all
existing and future senior Corporation indebtedness.
(f) CSCC can issue up to $825,000 in Medium Term Notes (Senior and
Subordinated) ranging in maturity from nine months to thirty years from date of
issue. The interest rate or interest rate formula on each Note is established
by CSCC at the time of issuance. The Senior Notes are unconditionally
guaranteed as to payment of principal and interest by the Corporation. The
Subordinated Notes are unconditionally guaranteed, on a subordinated basis, as
to payment of principal and interest by the Corporation. The Subordinated Notes
are subordinated to all existing and future senior CSCC indebtedness and the
guarantee is subordinated to all existing and future senior Corporation
indebtedness. At December 31, 1993, $808,085 of debt was outstanding at
interest rates ranging from 4.88% to 8.63% with terms up to three years.
Under existing shelf registration statements filed with the Securities and
Exchange Commission (SEC), the Corporation had debt and capital securities that
were registered but unissued of approximately $177,000 at December 31, 1993. In
February 1994, the Board of Directors approved the filing of a shelf
registration with the SEC that will (when effective) cover the issuance of a
broad range of debt and equity securities that will increase available
registered but unissued securities to $1 billion.
(g) On November 1, 1993, the Notes were redeemed at the option of CSCC at par
plus interest to the date of redemption.
(h) On April 1, 1993, the Notes were redeemed at the option of CSCC at par plus
interest to the date of redemption.
(i) The Note is redeemable at CBNA's option. During 1994, the redemption price
is 103.0% through June 30, and 102.5% from July 1 to December 31.
(j) In November 1990, CBD entered into an agreement with the Student Loan
Marketing Association (Sallie Mae) to borrow $102,000 at a sub-LIBOR rate of
interest. This borrowing matured September 15, 1993.
(k) The Subordinated Capital Notes were redeemed at par plus interest in
January 1994. Accordingly, the Notes were classified as short-term borrowings
at December 31, 1993.
(l) The consolidated aggregate maturities and sinking fund requirements for
long-term debt for the years ended December 31, 1994 through 1998 are:
$186,003; $444,412; $170,851; $11,396; and $2,042, respectively.
22
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
12. RETIREMENT AND BENEFIT PLANS
Pension expense under the Corporation's pension plans was $11,945 in 1993,
$10,910 in 1992 and $10,578 in 1991. The projected benefit obligation exceeded
plan assets at fair value by $46,345 at December 31, 1993, based on current and
estimated future salary levels. The excess of the projected benefit obligation
is reconciled to the accrued pension cost included in other liabilities as
follows:
<TABLE>
<CAPTION>
December 31,
--------------------
1993 1992
--------- ---------
<S> <C> <C>
Plan assets at fair value(a)..................................... $484,273 $454,039
Present value of benefit obligation: -------- --------
Accumulated benefits based on salaries to date, including
vested benefits of $384,469 in 1993 and $317,243 in 1992....... 419,943 345,907
Additional benefits based on estimated future salary levels.... 110,675 84,359
-------- --------
Projected benefit obligation..................................... 530,618 430,266
Amount projected benefit obligation is (over)/under plan assets -------- --------
at fair value at December 31,................................. (46,345) 23,773
Reconciliation:
Unrecognized prior service cost................................ 5,736 6,712
Unrecognized net asset from date of initial application........ (31,551) (36,679)
Net deferred actuarial (loss)/gain............................. 44,172 (10,598)
-------- --------
Accrued pension expense included in other liabilities............ $(27,988) $(16,792)
======== ========
</TABLE>
(a) Primarily U.S. Government securities, U.S. agency securities, fixed income
securities and commingled funds managed by subsidiary banks.
Net pension cost for the years ended December 31, 1993, 1992 and 1991 included
the following expense (income) components:
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Service cost benefits earned during the period.. $ 16,117 $ 15,384 $ 13,819
Interest cost on projected benefit obligation... 35,124 32,917 30,406
Actual return on plan assets.................... (49,401) (16,426) (99,173)
Net amortization and deferral................... 10,105 (20,965) 65,526
-------- -------- --------
Net pension cost.............................. $ 11,945 $ 10,910 $ 10,578
======== ======== ========
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation for the Corporation was 7.0% and
8.0%, respectively, at December 31, 1993 and 1992. The discount rate used in
the Constellation plan was 7.0% and 9.0%, respectively, at December 31, 1993
and 1992. The rate of increase on future compensation levels used for both
plans was 5.0% to 6.0%. The expected long-term rate of return on plan assets
for both plans was 8.5% to 9.5%.
The Corporation sponsors a savings plan for its employees. Contributions to the
savings plan for the employers' match were $12,763 in 1993, $12,303 in 1992, and
$12,326 in 1991.
The Corporation and its subsidiaries provide certain postretirement health care
and life insurance benefits for retired employees. The liability for these
postretirement benefits is unfunded. Postretirement benefits are provided
through an insurance company whose premiums are based on the benefits paid
during the year. The postretirement health care plan is contributory, with
retiree contributions based on years of service.
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" ("FAS 106") was issued in December
1990 to establish the accounting for postretirement benefits. FAS 106 requires
that employers accrue the costs associated with providing postretirement
benefits during the active service periods of employees, rather than the
previously accepted accounting practice of recognizing these costs on a pay-as-
you-go basis.
Effective January 1, 1992, the Corporation adopted FAS 106. As permitted under
FAS 106, the Corporation elected to recognize immediately the transitional
postretirement benefit liability of $128,706, $84,946 after-tax or $.71 per
share, as the cumulative effect of a change in accounting principle. The impact
of FAS 106 on salaries, wages and benefits expense on the Consolidated Statement
of Income for the year ended December 31, 1992 versus the pay-as-you-go basis
was an increase of $9,288.
23
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
12. RETIREMENT AND BENEFIT PLANS (continued)
The liability for postretirement benefits included in other liabilities at
December 31, 1993 and 1992 was a follows:
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees..................................... $(102,143) $ (83,511)
Fully eligible active plan participants...... (3,662) (3,548)
Other active plan participants............... (41,056) (49,613)
--------- ---------
Accumulated postretirement benefit obligation (146,861) (136,672)
Plan assets at fair value (a)................... 20,006
--------- ---------
Unfunded obligation at December 31,............. (126,855) (136,672)
Unrecognized net loss........................... 3,795
--------- ---------
Accrued postretirement benefit obligation....... $ 123,060 $(136,672)
========= =========
</TABLE>
(a) Primarily commingled funds managed by subsidiary banks.
Net periodic postretirement benefit cost for the year ended December 31, 1993
and 1992 included the following expense (income) components:
<TABLE>
<CAPTION>
1993 1992
-------- -------
<S> <C> <C>
Service cost-benefits earned during the period.. $ 2,160 $ 3,145
Interest cost on accumulated postretirement
benefit obligation........................... 10,108 10,426
Actual return on plan assets.................... (6)
Net amortization and deferral................... 6
------- -------
Net periodic postretirement benefit cost........ $12,268 $13,571
======= =======
</TABLE>
The cost of providing postretirement benefits in 1991 was recognized by
expensing the annual insurance premiums, which were $4,179.
For measurement purposes, a 13% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 1994; the rate was assumed to
decrease gradually to 10.5% for 1997 and remains at that level thereafter. For
measurement purposes, a fixed dollar amount was determined as the Corporation's
maximum contribution per employee. This fixed dollar amount was established at
the projected cost level for medical expenses in 1997. 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 percentage
point in each year would increase the accumulated postretirement benefit
obligation as of December 31, 1993 by $10,584 and the aggregate of the service
and interest cost components of net periodic postretirement benefit cost for the
year then ended by $805.
The expected long-term rate of return on plan assets was 8.5%. The weighted-
average discount rate used in determining the accumulated postretirement benefit
obligation was 7.0% and 8.0%, respectively, at December 31, 1993 and 1992. The
discount rate used in the Constellation plan was 7.0% and 9.0%, respectively, at
December 31, 1993 and 1992.
Statement of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" ("FAS 112") was issued in November 1992 to establish
accounting for benefits provided to former or inactive employees after
employment but before retirement. FAS 112 requires that employers accrue the
costs associated with providing benefits, such as salary and benefit
continuation under disability plans, when payment of the benefits is probable
and the amount of the obligation can be reasonably estimated. Effective January
1, 1993, the Corporation adopted FAS 112. The Corporation recognized the January
1, 1993 FAS 112 transitional liability of $20,015, $13,010 after-tax or $0.10
per share, as the cumulative effect of a change in accounting principle. The
impact of FAS 112 on salaries, wages and benefits expense for the year ended
December 31, 1993 was not material.
13. LONG-TERM INCENTIVE PLAN
The Corporation has outstanding options granted under the Corporation's long-
term incentive plan (Plan). As provided in the Plan, a variety of incentives
can be issued to eligible participants including restricted stock awards,
incentive stock options, non-qualified stock options, stock appreciation rights,
performance units and cash awards. Information on options for 1993 follows:
24
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS: CONTINUED
(DOLLAR AMOUNTS IN THOUSANDS)
13. LONG-TERM INCENTIVE PLAN (continued)
<TABLE>
<CAPTION>
Number of shares
-----------------------
Under Option price
Available option per share
----------- ---------- --------------
<S> <C> <C> <C>
Balance at January 1, 1993.... 4,294,706 4,467,210 $3.21 - $54.70
Options granted............... (1,932,158) 1,932,158 9.06 - 28.50
Options exercised............. (740,072) 3.21 - 23.19
Options cancelled............. 68,736 (72,790) 7.16 - 46.41
---------- ---------
Balance at December 31, 1993.. 2,431,284 5,586,506 3.21 - 54.70
========== =========
</TABLE>
Options under the Plan are granted to purchase the Corporation's common shares
at market value on the date of grant and are exercisable one year from the date
of grant for a period not exceeding ten years. Stock appreciation rights may be
granted in conjunction with the granting of an option. Upon the exercise of
stock appreciation rights and the surrender of the related option, an employee
may receive in cash or common stock of the Corporation a value equal to the
difference between the market price at the date of exercise and the option price
of shares.
The assumed exercise of the options and other awards under the Plan did not have
a materially dilutive effect on the earnings per share in years 1991 through
1993.
The preceding option table does not reflect 280,190 performance unit awards
outstanding at December 31, 1993, 371,514 at December 31, 1992 and 481,836 at
December 31, 1991. Performance unit awards are earned subject to specific
performance of the Corporation over specified performance periods as defined in
the Plan. The payment value of each performance unit earned for the applicable
performance period is the fair market value of one share of common stock of the
Corporation based on the formula contained in the Plan. During 1993, 1992 and
1991, respectively, $1,051, $1,557 and $2,265 was expensed in connection with
performance unit awards.
14. OPERATING LEASES
Rental expense, reduced by sublease rental income, charged to operations was
$61,338, $60,163 and $61,874 for 1993, 1992 and 1991, respectively.
15. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, there are outstanding commitments and
contingent liabilities which are not reflected in the financial statements.
These include various financial instruments with off-balance sheet risk used in
connection with the Corporation's asset and liability management and to provide
for the needs of customers. These involve varying degrees of credit, interest
rate and liquidity risk, but do not represent unusual risks for the Corporation
and management does not anticipate any significant losses as a result of these
transactions.
The following is a summary of significant commitments and contingent liabilities
as of December 31, 1993 and 1992, including fair values:
<TABLE>
<CAPTION> 1993 1992
------------------------- --------------------------
Notional Fair Notional Fair
or Value or Value
Contractual of Asset Contractual of Asset
Amount (Liability)(1) Amount (Liability)(1)
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Standby letters of credit, net of participations (a) $1,089,696 $ (2,724) $ 895,703 $ (2,239)
Commercial letters of credit.......................... 890,917 (2,227) 747,279 (1,868)
Commitments to extend credit (b)...................... 6,502,059 (11,132) 4,994,491 (8,398)
Unused commitments under credit card lines............ 2,993,233 1,976,773
Futures and forward contracts (c):
Commitments to purchase............................ 925,500 365 1,462,000 175
Commitments to purchase foreign and
U.S. currencies (d)................................ 1,336,646 1,148 1,422,806 2,555
Interest rate swaps, notional principal
amounts (e)........................................ 4,299,619 140,137 4,613,645 153,482
Interest rate caps and floors (f):
Written............................................ 622,920 (4,196) 231,577 (558)
Purchased.......................................... 571,398 4,759 204,242 386
</TABLE>
(1) See Note 3 for discussion of fair value.
25
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS: CONTINUED
(DOLLAR AMOUNTS IN THOUSANDS)
15. COMMITMENTS AND CONTINGENT LIABILITIES - (continued)
(a) Standby letters of credit (SBLC) are used in various transactions to enhance
the credit standing of the Corporation's customers and are subjected to the same
risk, credit review and approval process as loans. SBLC's are irrevocable
assurances that the Corporation will make payment in the event that a customer
cannot perform its contractual obligations to third parties.
(b) Commitments to extend credit represent the Corporation's obligation to fund
commercial and real estate loans, including home equity lines, lines of credit,
revolving lines of credit and other types of commitments.
(c) Exchange traded futures contracts and forward rate agreements represent
agreements to exchange dollar amounts at a specified future date for interest
rate differentials between an agreed interest rate and a reference rate,
computed on a notional amount. Credit and market risk exist with respect to
these instruments. Exchange traded futures contracts entail daily cash
settlement; therefore, the credit risk amount represents a one-day receivable.
Gains and losses on these contracts are deferred and amortized over the life of
the specific asset, liability or transaction hedged.
(d) Commitments to purchase foreign and U.S. currencies are primarily executed
for the needs of customers. These foreign exchange contracts are structured
similar to interest rate futures and forward contracts. The risk associated
with a foreign exchange contract arises from the counterparty's ability to make
payment at settlement and that the value of a foreign currency might change in
relation to the U.S. dollar. The Corporation's exposure, if any, to
counterparty failure equals the current market value of the contract. At
December 31, 1993 and 1992, the market value of the Corporation's foreign
exchange contracts which has been included in income was $1,160 and $2,543,
respectively.
(e) Interest rate swaps generally represent the contractual exchange of fixed
and variable rate interest payments based on a notional principal amount and an
interest reference rate. The differential between the fixed and variable rate
is included as interest income or expense of the asset or liability transaction
hedged. Credit and market rate risk exist with respect to these instruments.
The risk associated with interest rate swaps arises from the possible failure of
the counterparty to make required payments on those contracts which are
favorable to the Corporation. The Corporation's exposure to counterparty failure
equals the current replacement cost of the contract. At December 31, 1993 and
1992, the replacement cost of the Corporation's interest rate swap contracts was
$153,624 and $163,482, respectively. The risk of counterparty failure is
controlled by limiting transactions to an approved list of counterparties.
(f) Interest rate caps and floors are written by the Corporation to enable
customers to transfer, modify or reduce their interest rate risk. Interest rate
caps and floors are similar to interest rate swaps except that payments are made
only if current interest rates move above or below a predetermined rate. The
risk associated with interest rate caps and floors is an unfavorable change in
interest rates. As a writer of interest rate caps and floors, the Corporation
receives a premium in exchange for bearing the risk of an unfavorable change in
interest rates. The Corporation generally minimizes this risk by entering into
offsetting cap and floor positions that essentially counterbalance each other.
In the normal course of business, the Corporation and its subsidiaries are
subject to numerous pending and threatened legal actions and proceedings, some
for which the relief or damages sought are substantial. Management and the
Corporation's legal counsel do not believe the outcome of these actions and
proceedings will have a materially adverse effect on the consolidated financial
position of the Corporation.
26
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
16. PROVISION FOR INCOME TAXES
The provision for income taxes in the consolidated statement of income consists
of the following:
<TABLE>
<CAPTION>
Current: 1993 1992 1991
--------- -------- --------
<S> <C> <C> <C>
Federal..................................... $149,684 $ 82,305 $33,274
State....................................... 18,209 11,095 17,629
-------- -------- -------
Total domestic........................ 167,893 93,400 50,903
Foreign..................................... 10,284 4,368 5,336
-------- -------- -------
Total current......................... 178,177 97,768 56,239
Deferred Federal and state expense (benefit) (79,880) 28,640 34,264
-------- -------- -------
Total provision for income taxes...... $ 98,297 $126,408 $90,503
======== ======== =======
</TABLE>
The significant components of the Corporation's deferred tax assets and
liabilities at December 31, 1993 and 1992 are as follows:
<TABLE>
<CAPTION>
1993 1992
--------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses.................... $201,049 $134,999
Postretirement and postemployment benefits. 48,210 44,825
Reserves..................................... 40,917 23,456
Employee compensation........................ 11,610 11,534
Other........................................ 54,887 39,090
Net Operating loss carry forward............. 16,393 15,396
-------- --------
Gross deferred tax asset..................... 373,066 269,300
Valuation allowance.......................... (20,334) (8,317)
-------- --------
Total deferred tax assets............. 352,732 260,983
-------- --------
Deferred tax liabilities:
Auto leasing portfolio....................... 63,366 54,058
FAS 115 fair value accounting................ 34,916
Partnership investments...................... 19,660 18,229
Tax over book depreciation................... 16,689 15,291
Affiliate income............................. 14,924 21,090
Other........................................ 14,806 8,905
-------- --------
Total deferred tax liabilities......... 164,361 117,643
-------- --------
Net deferred tax assets $188,371 $143,340
======== ========
</TABLE>
At December 31, 1993 cumulative deductible temporary differences are
approximately $1,065 million and the related deferred asset is $373 million.
The major components of the temporary differences include $138 million related
to FAS 106 and FAS 112 and $374 million related to the allowance for loan
losses. Cumulative taxable temporary differences related to deferred tax
credits at December 31, 1993 are estimated at $469 million and are primarily
related to leasing, FAS 115 fair value accounting, partnership investments and
depreciation. The related deferred tax liability is $164 million.
As required by FAS 109, the Corporation has determined that it is required to
establish a valuation reserve of $20 million for the deferred tax asset
related to Constellation's New Jersey income taxes. The net change in the
valuation allowance of $12 million is all related to losses which will not
produce New Jersey tax benefits. It is more likely than not that the deferred
tax asset of $353 million will be principally realized through carryback to
taxable income in prior years, and future reversals of existing taxable
temporary differences, and to a lesser extent, future taxable income and tax
planning strategies. Management believes that future taxable income other than
in New Jersey will be sufficient to realize the benefits of temporary
deductible differences that cannot be realized through carryback to prior
years or through the reversal of future temporary taxable differences. The
Corporation's conclusion that it is "more likely than not" that the unreserved
deferred tax asset will be realized is based on a history of growth in
earnings and the prospects for continued growth including an analysis of
potential uncertainties that may affect future operating results. The
Corporation will continue to review the tax criteria of "more likely than
not", for the recognition of deferred tax assets on a quarterly basis.
27
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS: Continued
(dollar amounts in thousands)
16. PROVISION FOR INCOME TAXES: Continued
The consolidated effective tax rates are reconciled to the statutory rate as
follows:
<TABLE>
<CAPTION>
1993 1992 1991
----- ----- ------
<S> <C> <C> <C>
Statutory rate......................... 35.0% 34.0% 34.0%
Difference resulting from:
Tax-exempt income.................... (4.9) (4.9) (10.4)
State, local and foreign income tax.. 4.1 2.2 5.9
Other, net........................... (2.5) 1.3 6.4
---- ---- -----
Effective tax rate..................... 31.7% 32.6% 35.9%
==== ==== =====
</TABLE>
Foreign earnings of certain subsidiaries would be taxed only upon their transfer
to the United States. Accumulated earnings of insurance subsidiaries would be
taxed only to the extent they are distributed as dividends, or exceed limits
prescribed by tax laws. During 1993, earnings of a foreign subsidiary were
repatriated and a portion of insurance subsidiary previously untaxed earnings
became subject to tax. No further transfers or dividends are contemplated.
Taxes payable upon remittance of such accumulated earnings of $22,014 at
December 31, 1993 would approximate $7,306.
Taxes, other than income taxes, included in other operating expenses for the
years ended December 31, 1993, 1992 and 1991 are $70,374, $69,655 and $62,876,
respectively.
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents summarized quarterly financial data of the Corporation,
which, in the opinion of management, reflects all adjustments (comprising only
normal recurring accruals) necessary for a fair presentation:
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------
Dec. 31 Sept. 30 June 30 March 31
------- -------- ------- --------
<S> <C> <C> <C> <C>
1993
- - ----
Interest income...................... $414,290 $420,355 $416,646 $413,478
======== ======== ======== ========
Interest expense..................... $107,167 $108,610 $112,021 $118,317
======== ======== ======== ========
Net interest income.................. $307,123 $311,745 $304,625 $295,161
======== ======== ======== ========
Provision for losses on loans........ $147,500 $ 27,500 $ 27,500 $ 27,500
======== ======== ======== ========
Securities gains (losses)............ $ 10,182 $ 3,332 $ (788) $ 3,022
======== ======== ======== ========
Income (loss) before cumulative effect
of a change in accounting principle $(38,947) $ 90,053 $ 85,594 $ 75,050
======== ======== ======== ========
Cumulative effect of a change
in accounting principle........... $(13,010)
========
Net income (loss).................... $(38,947) $ 90,053 $ 85,594 $ 62,040
======== ======== ======== ========
Net income (loss) per common share. $(.30) $.70 $.67(b) $.58(a)(b)
======== ======== ========= =========
Average common shares outstanding.... 128,539 128,791 128,644(b) 128,300(b)
======== ======== ========= =========
1992
- - ----
Interest income...................... $425,108 $425,050 $447,482 $465,111
======== ======== ======== ========
Interest expense..................... $128,883 $142,495 $163,847 $184,176
======== ======== ======== ========
Net interest income.................. $296,225 $282,555 $283,635 $280,935
======== ======== ======== ========
Provision for losses on loans........ $ 28,500 $ 30,500 $ 36,150 $ 34,150
======== ======== ======== ========
Securities gains..................... $ 47 $ 4,860 $ 3,617 $ 6,561
======== ======== ======== ========
Income before cumulative effect of
a change in accounting principle. $ 70,340 $ 62,562 $ 67,963 $ 60,157
======== ======== ======== ========
Cumulative effect of a change
in accounting principle............ $(84,946)
========
Net income (loss).................... $ 70,340 $ 62,562 $ 67,963 $(24,789)
======== ======== ======== ========
Net income per common share.......... $.58(b) $.52(b) $.57(b) $.51(a)(b)
========= ========= ========= =========
Average common shares outstanding.... 121,255(b) 119,270(b) 118,754(b) 118,091(b)
========= ========= ========= =========
- - -------------------------------------
</TABLE>
(a) Based on an income before cumulative effect of a change in accounting
principle.
(b) Adjusted to reflect the impact of the Stock Dividend.
28
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS: CONTINUED
(dollar amounts in thousands)
18. International Operations
International operations include the international activities of CBNA and its
six overseas branches and two Edge Act subsidiaries. The International Banking
group engages in foreign banking and international financing activities
including loans, acceptances, time deposits, letter of credit financing and
related financial services. Total assets and liabilities of the international
operations at December 31, 1993 and 1992 are as follows:
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
Assets....... $1,650,159 $1,945,992
========== ==========
Liabilities.. $1,366,038 $1,704,665
========== ==========
</TABLE>
The following distribution between domestic and international segments involves
many judgments because of the integrated operation of the business of the
Corporation. Charges for funds used by one segment provided by another segment
are based on a pooled cost of purchased funds. Geographic distributions of
earnings are based upon average interest earning assets. Expenses are charged to
international operations as directly incurred by such activities plus allocated
charges consistent with internal allocation policies.
29
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS:
(dollar amounts in thousands)
18. INTERNATIONAL OPERATIONS: Continued
<TABLE>
<CAPTION>
International Operations
-----------------------------------------------
Domestic Europe and Latin Asia and Middle East
Operations Canada America Australia and Africa Total
----------- ---------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1993
Assets..................................... $24,120,919 $ 939,631 $173,740(a) $524,375 $12,413 $25,771,078
=========== ========== ========== ======== ======= ===========
Total operating
income (b)............................... $ 2,061,579 $ 83,226 $10,771 $ 53,243 $ 604 $ 2,209,423
=========== ========== ======= ======== ======= ===========
Income before
income taxes............................. $ 244,208 $ 25,530 $16,209 $ 23,889 $ 211 $ 310,047
=========== ========== ======= ======== ======= ===========
Income before cumulative
effect of a change in
accounting principle..................... $ 168,954 $ 18,938 $ 7,021 $ 16,684 $ 153 $ 211,750
=========== ========== ======= ======== ======= ===========
DECEMBER 31, 1992
Assets..................................... $24,168,490 $1,255,214 $86,224 $602,113 $ 2,441 $26,114,482
=========== ========== ======= ======== ======= ===========
Total operating
income (b)............................... $ 2,207,240 $ 89,038 $ 6,088 $ 46,777 $ 331 $ 2,349,474
=========== ========== ======= ======== ======= ===========
Income before
income taxes............................. $ 313,511 $ 35,725 $15,069 $ 22,982 $ 143 $ 387,430
=========== ========== ======= ======== ======= ===========
Income before
cumulative effect of
a change in
accounting principle..................... $ 216,457 $ 20,820 $ 9,750 $ 13,911 $ 84 $ 261,022
=========== ========== ======= ======== ======= ===========
DECEMBER 31, 1991
Assets..................................... $24,121,114 $ 970,903 $49,772 $437,215 $ 5,967 $25,584,971
=========== ========== ======= ======== ======= ===========
Total operating
income(b)................................ $ 2,673,903 $ 107,575 $10,783 $ 48,487 $ 838 $ 2,841,586
=========== ========== ======= ======== ======= ===========
Income before
income taxes............................. $ 182,140 $ 29,587 $27,383 $ 13,733 $ 286 $ 253,129
=========== ========== ======= ======== ======= ===========
Net income................................. $ 116,843 $ 19,101 $17,659 $ 8,839 $ 184 $ 162,626
=========== ========== ======= ======== ======= ===========
</TABLE>
(a) At December 31, 1993, $130,869 of these assets represent LDC risk related to
short-term trade finance.
(b) Amounts for operating income include foreign exchange gains of $15,979,
$16,887 and $14,283 at December 31, 1993, 1992 and 1991, respectively.
30
<PAGE>
CoreStates Financial Corp and Subsidiaries
Notes To The Financial Statements: Continued
(dollar amounts in thousands)
18. International Operations: Continued
A maturity schedule of selected international assets and liabilities at
December 31, 1993 follows:
<TABLE>
<CAPTION>
Europe and Latin Asia and Middle East
Canada America(a) Australia and Africa Total
---------- ---------- --------- ----------- -----
<S> <C> <C> <C> <C> <C>
Eurodollar Time Deposits
Placed
1 year or less............. $540,134 $ 5,000 $ 79,868 $625,002
Over 1 year................
-------- -------- -------- --------
$540,134 $ 5,000 $ 79,868 $625,002
======== ======== ======== ========
Loans and Acceptances
1 year or less............. $304,859 $146,866 $362,374 $11,875 $825,974
Over 1 year................ 28,818 2,182 31,000
-------- -------- -------- ------- --------
$333,677 $149,048 $362,374 $11,875 $856,974
======== ======== ======== ======= ========
Deposit Liabilities
1 year or less............. $263,739 $125,010 $503,749 $26,014 $918,512
Over 1 year................
-------- -------- -------- ------- --------
$263,739 $125,010 $503,749 $26,014 $918,512
======== ======== ======== ======= ========
</TABLE>
(a) Amounts for Latin America include time deposit placements of $5,000 and
deposit liabilities of $5,845 with bank branches in Nassau and the Cayman
Islands at December 31, 1993.
31
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS: Continued
(dollar amounts in thousands)
19. Financial Statements of the Parent Company
<TABLE>
<CAPTION>
Statement of Income
Year Ended December 31,
------------------------------
1993 1992 1991
-------- -------- --------
REVENUES
- - --------
<S> <C> <C> <C>
Dividends from subsidiaries:
Banks....................................... $179,027 $135,660 $244,243
Other subsidiaries.......................... 14,476 10,527 10,653
-------- -------- --------
Total dividends from subsidiaries..... 193,503 146,187 254,896
Interest income from subsidiaries............. 1,726 1,972 2,303
Processing and management fees from
subsidiaries 123,121 119,965 276,961
Rental income from subsidiaries............... 2,059 2,059 2,409
Securities gains (losses)..................... (1,128) 946 (24,319)
Other income.................................. 25 331 609
-------- -------- --------
Total revenues........................... 319,306 271,460 512,859
-------- -------- --------
EXPENSES
- - --------
Interest on:
Funds borrowed.............................. 2,738 2,311 4,376
Long-term debt..............................
1,527 6,802 20,112
Total interest expense...................... -------- -------- --------
4,265 9,113 24,488
Salaries, wages and benefits.................. 67,501 64,663 174,756
Net occupancy................................. 29,321 25,995 16,147
Equipment expenses............................ 5,982 3,697 28,214
Other operating expenses...................... 21,995 24,538 77,313
-------- -------- --------
Total expenses........................... 129,064 128,006 320,918
-------- -------- --------
Income before income tax benefit and equity in
undistributed income of subsidiaries........ 190,242 143,454 191,941
Income tax benefit............................ (1,371) (783) (20,048)
-------- -------- --------
Income before equity in undistributed income
of subsidiaries............................. 191,613 144,237 211,989
Equity in undistributed income of
subsidiaries:
Banks....................................... (41,149) 11,608 (66,155)
Other subsidiaries.......................... 48,276 21,700 16,792
-------- -------- --------
7,127 33,308 (49,363)
-------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE........................ 198,740 177,545 162,626
Cumulative effect of a change in accounting
principle (Note 12)......................... (1,469)
--------
NET INCOME.................................... $198,740 $176,076 $162,626
======== ======== ========
</TABLE>
32
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS: Continued
(dollar amounts in thousands)
19. Financial Statements of the Parent Company: Continued
<TABLE>
<CAPTION>
Balance Sheet December 31,
----------------------
1993 1992
---------- ----------
<S> <C> <C>
ASSETS
- - ------
Cash.............................................. $ 8,754 $ 53,296
Investments and receivables-subsidiaries:
Investments in subsidiaries at equity
in underlying net assets:
Banks......................................... 1,768,612 1,745,575
Other subsidiaries............................ 230,053 187,681
---------- ----------
Total investments in subsidiaries........... 1,998,665 1,933,256
Other........................................... 20,407 15,291
---------- ----------
Total investments and receivables-
subsidiaries.............................. 2,019,072 1,948,547
Other investments................................. 54,070 17,681
Premises, net of accumulated depreciation......... 6,416 11,008
Other assets...................................... 3,428 3,201
---------- ----------
Total assets................................ $2,091,740 $2,033,733
========== ==========
LIABILITIES
- - -----------
Funds borrowed.................................... $ 69,003
Dividends payable................................. $ 35,171 31,474
Other liabilities................................. 9,665 11,304
Long-term debt.................................... 12,991 31,499
---------- ----------
Total liabilities............................ 57,827 143,280
---------- ----------
SHAREHOLDERS' EQUITY
- - --------------------
Total shareholders' equity................... 2,033,913 1,890,453
---------- ----------
Total liabilities and shareholders' equity. $2,091,740 $2,033,733
========== ==========
</TABLE>
The approval of the Comptroller of the Currency is required for a nationally
chartered bank to pay dividends if the total of all dividends declared in any
calendar year exceeds the bank's net profits (as defined) for that year combined
with its retained net profits for the preceding two calendar years. Under this
formula, CBNA, NJNB and CBD can declare dividends without approval of the
Comptroller of the Currency of approximately $151 million, $19 million and $1
million, respectively, plus an additional amount equal to CBNA's, NJNB's and
CBD's retained net profits for 1994 up to the date of any such dividend
declaration. CBD paid special dividends of $10 million in January 1992 and $25
million in September 1992. In addition, CBD paid $30 million as a return of
capital in January 1992. These payments had the prior approval of the
Comptroller of the Currency and resulted from CBD's lower capital requirements
after the October 1991 sale of credit card receivables (Note 6). Constellation
Bank has been prohibited from paying dividends since 1991 without the approval
of the Comptroller of the Currency and other regulatory agencies.
33
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS: Continued
(dollar amounts in thousands)
19. Financial Statements of the Parent Company: Continued
The Federal Reserve Act requires that extensions of credit by CBNA and NJNB to
certain affiliates, including the Corporation, be secured by readily marketable
securities, that extensions of credit to any such affiliate be limited to 10% of
capital and surplus (as defined) and that extensions of credit to all such
affiliates be limited to 20% of capital and surplus.
The Corporation has guaranteed certain borrowings of its subsidiaries in the
amount of $1,934,923, which includes $501,838 for commercial paper.
The maturities for parent company long-term debt for the years ending December
31, 1994 through 1998 are: $956; $1,041; $1,136; $1,237; and $1,349,
respectively.
<TABLE>
<CAPTION>
Statement of Cash Flows
Year Ended December 31,
------------------------------
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................. $198,740 $176,076 $162,626
Adjustments to reconcile net income to
net cash provided by operating
activities:
Undistributed (income) losses of
subsidiaries.............................. (7,127) (33,308) 49,363
Cumulative effect of a change in
accounting principle..................... 1,469
Securities (gains) losses................. 1,128 (946) 24,319
Depreciation and amortization............. 678 1,099 1,286
Deferred income tax expense (benefit)..... 1,707 (1,369) (9,517)
Decrease in interest receivable........... 4 335 506
Increase (decrease) in interest payable... 1,006 (101) (329)
Increase (decrease) in due to
subsidiaries............................. (6,875) (47,695) 9,751
Other..................................... (547) 14,755 (972)
-------- -------- --------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 188,714 110,315 237,033
-------- -------- --------
INVESTING ACTIVITIES
Investment in subsidiaries.................. (1,000) (67,240) (20,000)
Increase (decrease) in receivables from
subsidiaries............................... (7,060) 16,752 28,954
Purchases of investment
securities................................. (481,400) (225,624) (238,259)
Proceeds from maturities and sales of
investment securities...................... 447,337 286,535 208,114
Return of capital from subsidiaries......... 34,303 30,000
-------- -------- --------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (7,820) 40,423 (21,191)
-------- -------- --------
FINANCING ACTIVITIES
Retirement of long-term debt................ (20,940) (18,407) (155,151)
Net increase (decrease) in financing
from subsidiaries.......................... (69,003) (80,849) 34,843
Proceeds from public issuance of common
stock...................................... 67,581
Cash dividends paid......................... (130,082) (113,335) (108,188)
Other....................................... (5,411) 44,995 14,710
-------- -------- --------
NET CASH USED IN FINANCING ACTIVITIES...... (225,436) (100,015) (213,786)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND DUE
FROM BANKS................................ (44,542) 50,723 2,056
Cash and due from banks at January 1,...... 53,296 2,573 517
-------- -------- --------
CASH AND DUE FROM BANKS AT DECEMBER 31..... $ 8,754 $ 53,296 $ 2,573
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest................................... $ 4,632 $ 11,029 $ 24,911
======== ======== ========
Income taxes............................... - - -
======== ======== ========
</TABLE>
34
<PAGE>
CoreStates Financial Corp and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share amounts)
20. Joint Venture
On December 4, 1992, the Corporation entered into a joint venture with three
other banking companies creating Electronic Payment Services, Inc. ("EPS"). The
joint venture combines the partners' separate consumer electronic transaction
processing businesses and provides automated teller machine ("ATM") and
electronic point-of-sale ("POS") processing services.
The Corporation contributed to EPS its wholly-owned subsidiaries Money Access
Service Inc. ("MAC"), a regional ATM network, and BUYPASS Corporation, a third-
party processor of electronic POS transactions.
The Corporation has equal ownership with two partners in the joint venture, each
with 31%. The fourth partner owns 7%. As part of the transaction, the
Corporation received a cash payment of $79,350 and $245,400 of EPS 5% cumulative
redeemable preferred stock (additional dividends are tied to EPS performance).
The exchange of assets involved in the transaction resulted in a pre-tax gain to
the Corporation of $41,072, $25,670 after-tax, which was recorded in other
operating income for the year ended December 31, 1992. The exchange also
generated a deferred gain of approximately $136,000.
In December 1993, the Corporation and EPS mutually agreed to enter into a
recapitalization of EPS involving the EPS preferred stock held by the
Corporation. In exchange for substantially all of the preferred stock, the
Corporation received from EPS a ten-year 6.45% note providing for equal
principal payments over the life of the note. The recapitalization does not
affect the amount of deferred gain, but changes the timing of deferred gain
income recognition from a five-year period beginning in 1996 to a ten-year
period beginning in 1994.
EPS has announced the signing of definitive agreements providing for two
additional banking companies to enter the joint venture. The transactions are
expected to be completed in 1994. As a result of the addition of new partners,
the Corporation's share in earnings of EPS will decline from the current 31% to
an estimated 23%.
The Corporation's net investment in EPS, $69,436 at December 31, 1993, is
included in other assets.
35
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
CoreStates Financial Corp
We have audited the accompanying consolidated balance sheets of CoreStates
Financial Corp as of December 31, 1993 and 1992, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1993. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Constellation
Bancorp, which statements reflect total assets of 8.2% and 9.3% as of December
31, 1993 and 1992, respectively, and net interest income of 8.3%, 7.6% and
7.0% for the years ended December 31, 1993, 1992 and 1991, respectively. Those
statements were audited by other auditors whose report thereon has been
furnished to us, and our opinion, insofar as it relates to data included for
Constellation Bancorp, is based solely on the report of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of CoreStates Financial Corp at December 31,
1993 and 1992, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1993, in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1993 the Company
changed its methods of accounting for certain investments in debt and equity
securities and for postemployment benefits, and in 1992 the Company changed
its methods of accounting for income taxes and for postretirement benefits
other than pensions.
/s/Ernst & Young
Philadelphia, Pennsylvania
February 1, 1994,
except for Note 2, as to which the date is March 16, 1994
36
<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 consolidated statements of condition of Constellation
Bancorp and subsidiaries as of December 31, 1993 and 1992, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1993
(not presented separately herein). 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 at 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
37
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
OVERVIEW
In August 1993, CoreStates Financial Corp ("CoreStates") entered into an
agreement to acquire Constellation Bancorp ("Constellation"), a bank holding
company with $2.3 billion in assets. On March 16, 1994, CoreStates consummated
its acquisition of Constellation and has accounted for this transaction as a
pooling of interests. CoreStates' originally reported results have been restated
herein to include Constellation's results for 1993 and all other periods
presented.
Constellation had utilized a long-term workout strategy to deal with its non-
performing assets. In connection with the merger with CoreStates, Constellation
changed its workout strategy to conform to CoreStates strategy which is to
dispose of problems assets in a more accelerated manner. As a result of this
change in strategy, Constellation recorded in 1993 an additional loan loss
provision of $120 million and OREO provision of $28 million. Constellation also
recorded in 1993 expenses of $47 million in connection with the merger with
CoreStates.
Since the impact of the acquisition of Constellation and the $195 million of
special charges recorded in 1993 was significant to CoreStates, listed below are
key financial data for CoreStates before and after the acquisition of
Constellation, and including Constellation but without the $195 million of
special charges:
<TABLE>
<CAPTION>
Selected CoreStates Financial Information
--------------------------------------------------------------------------------
Including
Restated to Constellation
Originally include but without
reported Constellation special charges
----------------- -------------------- --------------------
1993 1992 1993 1992 1993 1992
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Income before change in accounting
principle (in millions)........... $327.9 $262.4 $211.7 $261.0 $339.7 $261.0
Earnings per share before
change in accounting principle.... 2.80 2.27 1.65 2.19 2.65 2.19
Return on average equity............ 18.27% 16.26% 10.66% 14.98% 17.10% 14.98%
Return on average assets............ 1.44 1.17 .84 1.05 1.35 1.05
</TABLE>
As the financial information in the above table illustrates, CoreStates'
operating results were significantly affected in 1993 by the impact of the
Constellation acquisition. In order to properly understand and review
CoreStates' operating results, the following two paragraphs discuss CoreStates
results combined with Constellation, but excluding the special charges recorded
in 1993.
Income for 1993, before the cumulative affect of a change in accounting
principle, was $339.7 million, or $2.65 per share, reflecting growth of 21% on a
per share basis when compared to $261.0 million, or $2.19 per share for 1992.
Key performance measures improved during 1993 and are among the highest in the
banking industry. Returns on average equity and assets were 17.10% and 1.35%
respectively, in 1993, compared to 14.98% and 1.05%, respectively in 1992. The
1993 Montgomery Securities Regional Bank Composites for returns on average
equity and assets were 15.49% and 1.21%, respectively.
38
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
OVERVIEW - continued
On a business line basis, CoreStates' 1993 earnings improvement reflects
the strong growth achieved by the Wholesale Banking business, as net income
increased $45.3 million, or 35.4% for that business. Wholesale Banking
experienced a 12.0% increase in net interest income due primarily to substantial
reductions in non-performing assets (this excludes Constellation which is
treated as a separate line of business), higher average loan balances and wider
interest spreads on prime based loans. Wholesale Banking's non-interest income
increased by 14.3%, mostly due to growth in service charges on deposits and fees
for international services. For a more detailed analysis of the performance of
Wholesale Banking and CoreStates' other business lines, refer to the Business
Line Results section beginning on page 46.
CoreStates' income statements in 1993 and 1992 reflect the adoption of two
new accounting standards. Effective January 1, 1993, CoreStates adopted
Statement of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" ("FAS 112"). FAS 112 requires that employers accrue
the costs associated with providing benefits, such as salary and benefit
continuation under disability plans, when payment of the benefits is probable
and the amount of the obligation can be reasonably estimated. CoreStates
recognized the January 1, 1993 FAS 112 transitional liability of $20.0 million,
$13.0 million after-tax or $.10 per share, as the cumulative effect of a change
in accounting principle in 1993.
In the prior year, CoreStates adopted Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" ("FAS 106") effective January 1, 1992. FAS 106 requires that
employers accrue the costs associated with providing postretirement benefits
during the active service periods of employees. CoreStates recognized the
January 1, 1992 transitional liability of $128.7 million, $84.9 million after-
tax or $.71 per share, as the cumulative effect of a change in accounting
principle in 1992.
39
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
OVERVIEW - continued
Fully combined operating results on a taxable equivalent basis and per
share information are summarized in the following table. Results for 1993
include the special charges related to Constellation which totaled $195 million,
($128 million after taxes) or $1.00 per share (in millions, except per share):
<TABLE>
<CAPTION>
Percentage
increase(decrease)
------------------
<S> <C> <C> <C> <C> <C>
1993 1992 1991 '93/'92 '92/'91
-------- -------- -------- ------ ------
Operating Results
Net interest income............ $1,243.3 $1,172.4 $1,206.3 6.0 % (2.8)%
Provision for losses on loans.. 230.0 129.3 272.6 77.9 (52.6)
Non-interest income............ 544.6 586.7 587.1 (7.2) (.1)
Non-financial expenses......... 1,223.3 1,213.3 1,229.3 .8 (1.3)
-------- -------- --------
Income before income taxes... 334.6 416.5 291.5 (19.7) 42.9
Provision for income taxes..... 122.9 155.5 128.9 (21.0) 20.6
-------- -------- --------
Income before the cumula-
tive effect of a change
in accounting principle...... 211.7 261.0 162.6 (18.9) 60.5
Cumulative effect of a change
in accounting principle...... (13.0) (84.9)
-------- -------- --------
Net income........... $ 198.7 $ 176.1 $ 162.6 12.8 8.3
======== ======== ========
Operating Ratios
Return on average equity (1)... 10.66% 14.98% 9.75%
Return on average assets (1)... .84 1.05 .62
Net interest margin............ 5.72 5.41 5.24
Per Common Share (2)
Income before the cumulative
effect of a change in
accounting principle......... $ 1.65 $ 2.19 $ 1.39
Net income..................... 1.55 1.48 1.39
Average common shares
outstanding................. 128.570 119.350 117.016
- - -----------------------------
</TABLE>
(1) Calculated based on income before cumulative effect of a change in
accounting principle.
(2) Common shares outstanding and per common share data for 1992 and 1991
have been restated to reflect the impact of the Stock Dividend (see
Capital Strength section beginning on page 51).
40
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
OVERVIEW - continued
Comparison of 1992 to 1991
The comparability of CoreStates' 1992 reported revenues and expenses to 1991
was impacted by strategic actions occurring in those years. These actions
included the October 1991 sale of approximately $1 billion of credit card
receivables and the May 1992 sale of approximately $300 million of consumer
installment loans. These two actions were responsible for the 2.8% year-to-year
decline in net interest income in 1992 and approximately $60 million of the
$143.3 million, or 52.6%, decline in the loan loss provision in 1992. From an
operating earnings standpoint, the related business lines (Credit Card and
Consumer Finance) experienced a $14.0 million after-tax earnings decline in 1992
that was principally attributable to these asset sales. Most of the remaining
decline in the 1992 loan loss provision was due to the $72.0 million reduction
at Constellation. Strong performances in the Wholesale and Community Banking
businesses in 1992 more than offset this unfavorable impact. Also impacting
1992 to 1991 comparability was the adoption of FAS 106 which reduced 1992
operating earnings by $9.3 million, or $.08 per share.
Although total 1992 and 1991 year-to-year non-interest income and non-
financial expenses were essentially level, there was significant growth in
Wholesale Banking non-interest income which was obscured by large gains: in 1991
from the sale of credit card receivables and in 1992 from the EPS transaction.
Non-financial expenses in both years also included significant and unusual
expenses that substantially offset those gains.
Non-performing Assets
Non-performing assets at December 31, 1993 totalled $372.6 million, a decline
of $245.1 million, or 39.7% from December 31, 1992. The decrease in non-
performing assets as compared to the level at December 31, 1992 was principally
in non-performing real estate assets which were down $196.0 million, or 43.0%
from year-end 1992. Non-performing assets in the commercial portfolio also
declined $43.2 million, or 28.2% from year-end 1992. At December 31, 1993 the
allowance for loan losses at $537.8 million was 191.2% of non-performing loans.
This compares to $407.6 million and 92.4% at December 31, 1992.
41
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
STRATEGIC ACTIONS IN 1993
Acquisitions
On December 17, 1993, CoreStates purchased Inter Community Bancorp ("Inter
Community"), a New Jersey bank holding company with $133 million in assets and
$110 million in deposits. The four Inter Community branches acquired were merged
into CoreStates' New Jersey National Bank ("NJNB") subsidiary providing added
presence in an important marketplace and a strategic complement to NJNB's
growing middle market business. As a result of this acquisition, 640 thousand
CoreStates' common shares were issued out of treasury. The transaction has a
total value of approximately $17 million.
On March 16, 1994, CoreStates acquired Constellation Bancorp
("Constellation"), a New Jersey bank holding company with $2.3 billion in assets
and $2.1 billion in deposits. As a result of this transaction, approximately
11.3 million new shares of CoreStates' common stock were issued. The transaction
has a total value of approximately $300 million and accounted for as a pooling
of interests.
The Constellation acquisition is expected to add to CoreStates' earnings per
share in the second year following closing. CoreStates expects to reduce
operating costs by approximately one-third of Constellation's non-financial
expenses through operations and branch consolidations and support staff
efficiencies. Constellation's bank subsidiary is being merged into NJNB on
April 30, 1994.
The acquisition of Constellation with its 49 branches in northern and central
New Jersey is highly complementary to the branch network and businesses of NJNB,
and the combined bank will be the fourth largest in New Jersey with more than $6
billion in assets. The acquisition creates the strength of presence CoreStates
considers necessary in the strategically important commercial and industrial
middle region of New Jersey.
42
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
STRATEGIC ACTIONS IN 1993 - continued
In November 1993, CoreStates announced a definitive agreement to acquire
Independence Bancorp, Inc. ("Independence"), a $2.6 billion Pennsylvania bank
holding company, in a transaction expected to be accounted for as a pooling of
interests. Assuming approval by regulators and by Independence's shareholders,
the transaction is expected to close in the second quarter of 1994. As a result
of this transaction, approximately 16.6 million new shares of CoreStates' common
stock will be issued with a total value of approximately $430 million based on
the year-end stock price.
The 54 branches of Independence's four Pennsylvania bank subsidiaries will be
legally merged into CoreStates' lead banking subsidiary, CoreStates Bank, N.A.
This in-market acquisition is expected to result in significant operating
efficiencies, and after first year charges of approximately $30 million for
CoreStates' planned strategic initiatives regarding Independence's problem
assets and approximately $24 million for closing and consolidation costs, is
expected to add to earnings per share in the second year following the
acquisition.
In March 1994, CoreStates announced a definitive agreement to acquire
Germantown Savings Bank ("GSB"), a $1.6 billion Pennsylvania chartered stock
savings bank. The transaction has a total value of approximately $260 million,
of which 55% will be paid in CoreStates common stock and 45% will be paid in
cash, and will be accounted for as a purchase creating an intangible of
approximately $141 million. CoreStates plans to purchase in the market 100% of
the shares to be issued. The transaction is expected to close late in the
third quarter of 1994, assuming approval by regulators and GSB shareholders.
The 32 branches of GSB will be legally merged into CoreStates' lead banking
subsidiary, CoreStates Bank, N.A. This in-market acquisition is expected to
result in signficant operating efficiencies, and is expected to add to
earnings per share in the second year following the acquisition.
43
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
STRATEGIC ACTIONS IN 1993 - continued
A summary of 1993 financial information for Independence and GSB follows:
<TABLE>
<CAPTION>
Operating Results for the Year Ended
December 31, 1993 (in thousands,
except per share) Independence GSB
------------ -------
<S> <C> <C>
Net income............................ $22,879 $20,498
Per common share...................... 1.98 4.68
Average common shares
outstanding.......................... 11,530 4,377
Balance Sheet
At December 31, 1993
(in millions) Independence GSB
------------ -------
Assets................................ $ 2,603 $ 1,637
Loans................................. 1,745 1,039
Deposits.............................. 2,153 1,476
Shareholders' equity.................. 222 142
</TABLE>
In December 1993, CoreStates announced a definitive agreement to purchase
Rittenhouse Financial Services, Inc. and Rittenhouse Trust Company
("Rittenhouse") in a transaction involving the issuance of $55 million in
equivalent CoreStates' common shares at closing. CoreStates plans to purchase
these shares in the open market. The agreement also anticipates the issuance of
up to $55 million in additional equivalent common shares based on Rittenhouse
earnings growth over a five year period. Assuming approval by regulators, the
transaction is expected to close in the second quarter of 1994.
Rittenhouse is a leading privately held investment advisory firm and manager
of institutional and personal investments including broker sponsored asset
management accounts, a growing national product. This transaction will increase
CoreStates' assets under discretionary management to $26 billion, from $21
billion, and trust income by more than 25%. This acquisition is consistent with
CoreStates' strategic objective of increasing earnings derived from fee-based
businesses and is expected to add to earnings per share in 1994.
Major Initiatives
In September 1993, CoreStates formed a new transaction services business named
"Transys". Transys is a stand-alone business and includes 1,100 of staff
previously employed in CoreStates' check processing operations. Transys
provides banks and other financial institutions with a full range of check
processing, electronic check presentment and related payment services. This
initiative was undertaken to build on CoreStates' position as a leading provider
of third-party payment processing services and as a response to the emerging
trend among banking institutions to outsource services that are undifferentiated
by customers, but which will require significant investments in technology.
Transys is expected to have the technological and operational base to lead its
customers in the transition from paper to electronic processing.
44
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
STRATEGIC ACTIONS IN 1993 - continued
A related initiative was the November 1993 formation of Synapsys, Inc.
("Synapsys"), a new subsidiary offering credit card and merchant processing
services, another area where the industry trend has been to outsource. Synapsys
will also serve as one of three development sites for VISA U.S.A. for next-
generation, third-party card processing services for commercial card issuers.
Both Transys and Synapsys are part of CoreStates' ongoing strategy to provide
sophisticated processing to other banks and financial institutions.
In August 1993, CoreStates' formerly Pennsylvania state-chartered Hamilton
Bank subsidiary was merged into CoreStates Bank, N.A. This action has improved
operating efficiencies and customer convenience in the Pennsylvania branch
banking business. The Hamilton unit is managed as a division of the lead bank
and will continue to be marketed as CoreStates Hamilton Bank in central
Pennsylvania.
Divestitures
On September 30, 1993, CoreStates concluded its sale of five branches from
its Virgin Islands operations to Banco Popular de Puerto Rico. The five
branches had loans of $131.2 million and deposits of $228.8 million on
September 30, 1993. CoreStates recorded a pre-tax gain of $11.0 million on the
sale. On April 22, 1994, CoreStates executed a purchase and assumption
agreement for the sale of its remaining banking operations in the Virgin
Islands. The Virgin Island branches are in markets well beyond CoreStates'
core consumer strategy.
In May 1993, CoreStates completed the sale of its Australian merchant banking
unit, PNB Australia Limited. Based in Sydney, PNB Australia Limited had $70
million in assets. The merchant bank was not of a strategic size and its
business mix was not consistent with CoreStates' international strategy.
45
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
BUSINESS LINE RESULTS
CoreStates utilizes a value-based reporting methodology to facilitate
management's analysis of performance by defined business lines. This process
supports CoreStates' strategic objective of creating superior growth in
shareholder value by focusing on the performance and value creation potential of
CoreStates' component businesses.
This section of management's discussion and analysis presents the performance
results of CoreStates' four core businesses: Wholesale Banking; Consumer
Financial Services; Trust and Investment Management; and Electronic Payment
Services. Each core business is comprised of well-defined business lines with
market or product specific missions. For the current reporting period,
Constellation is shown as a separate entity. During 1994, as the new company is
fully integrated into CoreStates, the respective business components of
Constellation will be blended into the existing business lines. It is expected
that there will be a one to two quarter transition period following each
acquisition prior to when complete business line reporting can be established.
During the transition period, a new acquisition will be reported separately from
the existing lines of business.
Corporate overhead, processing and support costs are fully allocated along
with the impact of balance sheet management and hedging activities of
CoreStates. A matched maturity transfer pricing system is used to allocate
interest income and interest expense. The loan loss provision and allowance for
loan losses are allocated based on an expected normalized credit environment.
All business lines in the four core businesses are allocated equity utilizing
regulatory risk-based capital guidelines as well as each business line's fixed
assets and other capital investment requirements. Intangible assets and
associated costs are also allocated to relevant business units. The development
of these allocation methodologies is a continuous process at CoreStates.
The Corporate category includes the income and expense impact of residual
equity; residual loan loss reserves and provision; unusual or non-recurring
items not attributable to the operating activities of the four major business
areas; emerging business activities not directly related to the four major
business areas; and miscellaneous items.
46
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
BUSINESS LINE RESULTS - continued
The earnings contribution of these Core businesses and Constellation is
reflected in the table below (in millions):
<TABLE>
<CAPTION>
Consumer Trust and Electronic
Wholesale Financial Investment Payment
(taxable equivalent Banking Services Management Services
-------------------- ------------------ ------------------------ -------------------
basis) 1993 1992 1993 1992 1993 1992 1993 1992
---------- -------- ---------- ------- ----------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income........ $ 546.5 $ 487.9 $527.0 $534.4 $ 29.9 $ 29.9 $ (5.7) $ 1.8
Provision for loan
losses................... 59.8 57.8 48.1 52.2 1.0 1.1
Non-interest income........ 238.1 208.4 114.5 98.1 95.6 91.5 13.2 109.3
Non-financial expenses..... 441.2 431.4 441.6 437.5 107.4 103.0 104.2
------- ------- ------ ------ ------ ------ ------
Income (loss) before
income taxes............. 283.6 207.1 151.8 142.8 17.1 17.3 7.5 6.9
Income tax expense......... 110.5 79.3 57.6 53.6 6.2 6.2 (0.7) 4.9
------- ------- ------ ------ ------ ------ ------- ------
Net income (loss).......... $ 173.1 $ 127.8 $ 94.2 $ 89.2 $ 10.9 $ 11.1 $ 8.2 $ 2.0
======= ======= ====== ====== ====== ====== ======= ======
Percentage contribution.... 81.8% 49.0% 44.5% 34.2% 5.1% 4.3% 3.9% 0.8%
Return on assets........... 1.32 1.00 1.71 1.55 1.65 1.62 11.88 1.80
Return on equity (2)....... 24.52 18.28 36.09 31.41 40.37 41.11 205.00 2.50
Average assets............. $13,139 $12,737 $5,501 $5,772 $ 661 $ 684 $ 69 $ 111
Average equity (2)......... 706 699 261 284 27 27 4 80
</TABLE>
<TABLE>
<CAPTION>
Constellation
(taxable equivalent Bancorp Corporate Total
----------------- ---------------- -----------------------------
basis) 1993 1992 1993 1992 1993 1992
-------- ------- ------- ------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income........ $ 101.9 $ 87.7 $ 43.7 $ 30.7 $1,243.3 $1,172.4
Provision for loan
losses................... 130.0 10.0 (8.9) 8.2 230.0 129.3
Non-interest income........ 41.5 40.2 41.7 39.2 544.6 586.7
Non-financial expenses..... 189.9 118.7 43.2 18.5 1,223.3 1,213.3
------- ------ ------ ------ -------- --------
Income (loss) before
income taxes............. (176.5) (.8) 51.1 43.2 334.6 416.5
Income tax expense......... (60.3) .6 9.6 10.9 122.9 155.5
------- ------ ------ ------ -------- --------
Net income (loss).......... $(116.2) $ (1.4) $ 41.5 $ 32.3 $211.7(1) $261.0(1)
======= ====== ====== ====== ======== ========
Percentage contribution.... (54.9)% (0.4)% 19.6% 12.4% 100.0% 100.0%
Return on assets........... (4.95) (.05) 1.20 1.06 .84(1) 1.05(1)
Return on equity (2)....... (60.21) (1.09) 5.21 6.16 10.66(1) 14.98(1)
Average assets............. $2,346 $2,583 $3,455 $3,045 $ 25,171 $ 24,931
Average equity (2)......... 193 128 796 524 1,987 1,742
</TABLE>
- - ---------------------------------------------
(1) Based on income before the cumulative effect of a change in accounting
principle.
(2) Equity is allocated to business lines in the four core businesses by
applying a factor of 5.0% against average risk-weighted assets and adding
intangible assets. Equity for Constellation Bancorp reflects that
entity's legal equity.
47
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
BUSINESS LINE RESULTS - continued
Wholesale Banking is organized into six business lines: Corporate and
Institutional Banking; Investment Banking; Cash Management; International
Banking; Corporate Middle Market; and Specialized Finance. Wholesale Banking
continued its strong performance in 1993 as net income increased $45.3 million,
or 35.4% above 1992. This increase was due primarily to growth in net interest
income and non-interest income. Net-interest income was $58.6 million, or 12.0%
above 1992 due to lower levels of non-performing loans, cash basis interest
received on non-performing loans, higher loan and factoring volume and wider
spreads on prime based loans. Average non-performing loans declined 27.7% from
prior year. Average loan outstandings increased 4.9% from 1992. Fees
recognized on loans were also well above 1992 principally resulting from loan
prepayments due to the low interest rate environment. Non-interest income was
14.3% above 1992 as continued emphasis on Cash Management products resulted in
substantial year-to-year growth in both service charges on deposits and fees for
international services. An increase in securities gains also contributed to the
year-to-year growth.
Consumer Financial Services includes the Community Banking and Specialty
Products business lines. Specialty Products includes Credit Card, Student
Lending and Residential Mortgage. Community Banking's 1993 results include the
Virgin Islands operations center and five branches until their sale on September
30, 1993.
Total net income for Consumer Financial Services of $94.2 million in 1993
was $5.0 million or 5.6% above 1992. This increase was primarily the result of
significant net interest income growth in the credit card portfolio, strong non-
interest income performance in Community Banking, and management's continued
emphasis on cost control throughout the Group. Net interest income declined
$7.4 million or 1.4% in 1993, reflecting the May 1992 sale of Signal Financial,
a $300 million consumer finance subsidiary, and the sale of the Virgin Islands
branches in September 1993. Excluding these transactions, net interest income
increased by $6.5 million, including growth of 14.0% in credit card interest,
partially offset by a declining net interest margin in Community Banking. The
Community Banking margin continued to reflect the impact of deposit spread
compression in a sustained low interest rate environment in 1993. Average loan
volumes decreased 3.6% from 1992, primarily as a result of the two sale
transactions and the securitization of $207 million in home equity loans during
1993. Average deposit volumes declined 2.1% compared to 1992, as consumers
continue to shift out of certificates of deposits and into more liquid bank
deposit products, as well as into higher yielding non-bank investment products.
The loan loss provision for 1993 decreased $4.1 million or 7.9%, a direct impact
of the decline in loan volumes. Non-interest income reflected strong growth of
$16.4 million, or 16.7%, above 1992. Service charges on deposits in Community
Banking increased 14.2% compared to 1992, as ongoing emphasis is placed on fee
income generation. Additionally, loan securitizations also produced significant
fee income for Community Banking in 1993. The 1993 results also reflect
revenues from introducing sales of annuities and mutual funds by a third party
through the CoreStates branch network. Non-financial expenses of the Group grew
by $4.1 million or .9% in 1993. On a normalized basis, excluding the impact of
the Signal and Virgin Island sales, non-financial expenses increased 3.3% as
management's cost control efforts continued.
48
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
BUSINESS LINE RESULTS - continued
Trust and Investment Management is organized into four business lines:
Institutional Trust; Personal Trust; Private Banking; and Investment Management.
Net income of $10.9 million was down $.2 million from 1992. The slight decline
in net income was due to 4.3% growth in non-financial expenses, which was
partially offset by 4.5% growth in non-interest income. Net interest income was
flat year-to-year. Lower earnings on demand balances due to the low interest
rate environment was the primary factor for net interest income of $29.9 million
being level with 1992. Non-interest income growth was due principally to growth
in Personal Trust, Investment Services and Employee Benefit fees. Asset growth
in the CoreFund family of Mutual funds was 10.6% over 1992 contributing most of
the fee growth in Investment Services. Growth in trust fees, the largest
component of non-interest income, was hampered by lower than anticipated new
business, the continued low interest rate environment, and the loss of several
large Institutional Custody/Securities Lending relationships in 1992.
Electronic Payment Services includes the MAC automated teller machine
("ATM") network and POS processing business lines. On December 4, 1992, the MAC
and POS business lines were contributed to Electronic Payment Services, Inc.
("EPS"), a joint venture that combines the separate consumer electronic
transaction processing businesses of CoreStates, Banc One Corporation, PNC
Financial Corp and Society Corporation into the nation's leading provider of ATM
and POS processing services.
EPS has announced the signing of definitive agreements providing for two
additional banking companies to enter the joint venture. The transactions will
significantly expand the MAC network and POS business volume and are expected to
be completed in 1994. As a result of the addition of new partners, CoreStates'
share in earnings of EPS will decline from the current 31% to an estimated 23%.
Full year 1993 net income totaled $8.2 million versus $2.0 million for 1992.
The 1992 results include MAC and POS as a CoreStates business group through
December 4, 1992 and earnings from EPS for the remainder of the year. The
results for 1993 include income from CoreStates' 31% equity interest in the
earnings of the EPS joint venture and dividends on EPS preferred stock, 80% of
which is tax free, partially offset by an interest carrying charge on the net
investment in EPS.
In December 1993, CoreStates and EPS mutually agreed to enter into a
recapitalization of EPS involving the EPS preferred stock held by CoreStates.
In exchange for substantially all of the preferred stock, CoreStates received
from EPS a ten-year 6.45% note providing for equal principal payments over the
life of the note. The recapitalization does not affect the amount of deferred
gain, but changes the timing of deferred gain income recognition from a five-
year period beginning in 1996 to a ten-year period beginning in 1994.
Constellation Bancorp at December 31, 1993 had non-performing assets 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. Constellation conformed to this
strategic direction and to CoreStates' consumer lending loan charge-off policies
at December 31, 1993. In conforming to this strategic direction and to the
charge-off policies, Constellation 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 in 1993,
which include expenses directly attributable to the acquisition, and certain
other costs and expenses.
49
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
BUSINESS LINE RESULTS - continued
The net loss for Constellation in 1993 was $116.2 million as compared to a
loss of $1.4 million in 1992. The loss before taxes for Constellation of $176.5
million was $175.7 million worse than 1992. Before the one-time charges
mentioned above, Constellation's 1993 pre-tax income was $18.5 million or $19.3
million above 1992. The increase on this basis was primarily due to a $14.2
million increase in net interest income and a $3.8 million decline in non-
financial expenses.
The primary reason for the improvement in net interest income was due to the
earnings on new capital, a more rapid decline in average rates on interest
bearing liabilities than on interest earning assets, a lower level of non-
performing assets and the extinguishment of Constellation's high cost debt.
The decrease in non-financial expenses was primarily the result of lower
salaries and employee benefits, net occupancy expense, furniture and equipment
expense, and amortization of purchased assets partially offset by higher legal
and non-performing asset related expenses.
The Corporate Category's net income increased $9.2 million in 1993. This
category included unusual gains for both 1993 and 1992. In 1992 a $41.1 million
pre-tax gain was recorded for the EPS transaction and 1993 includes pre-tax
gains of $11.0 million on the sale of five branches in the Virgin Islands and
$9.1 million on prepayments of long-term debt, and securities gains of $8.6
million. Additionally, there were significant expenses recorded in each year
that substantially offset those gains. The loan loss provision in the corporate
category was $17.1 million lower than 1992 due to the reduction in the overall
corporate provision levels. The provision reduction was not allocated to the
core businesses where the loan loss provision is based on a normalized credit
environment. The increase in net interest income in the corporate category was
largely due to the impact of an increase in unallocated average equity, which
has grown year-to-year by $272 million.
50
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
CAPITAL STRENGTH
Capital strength must be evaluated in the context of business risk
exposures, including asset quality, interest sensitivity, liquidity and earnings
diversification. CoreStates places a significant emphasis on the maintenance of
strong capital which promotes investor confidence, helps provide access to the
credit markets under favorable terms and enhances the flexibility to capitalize
on business growth and acquisition opportunities. Capital is managed for each of
the CoreStates' subsidiaries based on their respective risks and growth
opportunities, as well as regulatory requirements. CoreStates is positioned to
take advantage of market opportunities to strengthen capital. A shelf
registration is in place for fine tuning the debt structure and adding debt,
preferred or convertible preferred equity, if and when appropriate. The relative
strength of CoreStates' capital is reflected in the table "Average Common
Equity/Assets".
<TABLE>
<CAPTION>
Average Common Equity/Assets
- - ------------------------------
Average Common
(In percent) Equity/Assets
- - ------------------------------ -------------
Montgomery
CoreStates Securities*
------------- ----------
<S> <C> <C>
1993 7.89% 7.11%
1992 6.99 6.74
1991 6.41 6.03
1990 6.70 5.74
1989 6.99 5.65
</TABLE>
* The Montgomery Securities Regional Bank Composite
At December 31, 1993, common shareholders' equity totaled $2,034 million or
7.9% of total assets, compared with $1,890 million or 7.2% at year-end 1992.
The year-end 1993 equity to assets ratio for the Montgomery Securities Regional
Bank Composite was 7.2%. CoreStates has achieved steady internal capital
generation throughout the past five years. Common shareholders' equity
increased over the five years ended December 31, 1993 at a compound annual
growth rate of 3.4%, while dividends paid increased at a compound annual growth
rate of 8.2%.
During 1993, CoreStates increased its quarterly dividend by 8.0% to $.27 per
share beginning January 1993, and again by 11.1% to $.30 per share beginning in
October 1993. CoreStates' dividend on its common stock was $1.14 per share in
1993 and $1.02 per share in 1992. The common dividend payout ratio was 69.1%
for 1993, compared to 46.6% for 1992.
On August 17, 1993 the Board of Directors approved a two-for-one common
stock split effected in the form of a 100% stock dividend ("the Stock
Dividend"). The additional shares resulting from the Stock Dividend were
distributed on October 15, 1993 to holders of record on September 15, 1993. All
common shares and per common share data have been restated for the impact of the
Stock Dividend.
CoreStates and its bank subsidiaries are subject to minimum risk-based and
leverage capital guidelines issued by the Federal Reserve Board and Comptroller
of the Currency. The measurement of risk-based capital takes into account the
credit risk of both balance sheet assets and off-balance sheet exposures. These
guidelines require minimum risk-based capital ratios of 4% for Tier 1 capital
and 8% for total capital. In addition, a minimum leverage ratio of Tier 1
capital to quarterly average total assets of 3% is required for banking
organizations that are rated as strong. The following table illustrates
CoreStates' risk-based and leverage capital ratios at December 31, 1993 and
1992:
51
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
CAPITAL STRENGTH - continued
<TABLE>
<CAPTION>
Risk-based and Leverage Capital Ratios at
- - -------------------------------------------
At December 31,
- - --------------
($ in millions) 1993 1992
------ ------
Capital
<S> <C> <C>
Tier 1 capital $ 1,940 $ 1,892
Tier 2 capital 909 739
Total qualifying capital 2,849 2,631
<CAPTION>
Assets
<S> <C> <C>
Risk-adjusted assets 21,606 20,717
Average assets-
leverage capital basis 25,165 25,285
<CAPTION>
Ratios
<S> <C> <C>
Tier 1 capital ratio 9.0% 9.1%
Total capital ratio 13.2 12.7
Tier 1 leverage ratio 7.7 7.5
</TABLE>
Bank regulators have also adopted five capital category definitions which
are applicable to the supervision of all insured financial institutions. A bank
is considered "well capitalized" if it has minimum Tier 1 and Total risk-based
capital ratios of 6% and 10%, respectively, and a minimum Tier 1 leverage ratio
of 5%. As illustrated in the following table, all of CoreStates' banking
subsidiaries qualified as "well capitalized" at December 31, 1993.
Constellation Bank was undercapitalized on December 31, 1993; however, on
March 29, 1994, CoreStates made an $80 million capital contribution to
Constellation Bank. As previously discussed in the section "Strategic Actions
in 1993", Constellation Bank is being merged into NJNB on April 30, 1994.
<TABLE>
<CAPTION>
Bank Regulatory Capital Ratios
- - ------------------------------
At December 31, 1993 Capital Ratios
- - -------------------- --------------------------- Total
($ in billions) Tier 1 Total Leverage assets
------ ----- -------- ------
<S> <C> <C> <C> <C>
CoreStates Bank, N.A. 8.5% 10.9% 7.3% $17.8
New Jersey National Bank 9.3 11.4 6.5 4.5
CoreStates Bank of Delaware, N.A. 10.9 12.1 13.4 .6
</TABLE>
52
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET QUALITY
Risk Management
CoreStates manages asset quality and credit risk by maintaining
diversification in its loan portfolio and through intensive review processes
that include careful analysis of credit requests and ongoing examination of
outstandings and delinquencies, with particular attention to portfolio dynamics.
CoreStates strives to identify loans experiencing difficulty early enough to
correct the problems, to recognize non-performing loans early, to record charge-
offs promptly based on realistic assessments of current collateral values, and
to maintain reserves that are strong.
CoreStates' credit culture has served it well during economic downturns and,
while asset quality was impacted by the recent extended recession, it has
steadily improved over the past six quarters and remains strong relative to its
peers. This same well- developed and ingrained credit culture that has evolved
over the past decade will serve CoreStates well in the emerging economic growth
environment and for the next inevitable recession. This credit culture has as a
cornerstone a team approach that includes well- trained relationship managers
supported by: 1) a group of Credit Officers with significant lending experience
who have demonstrated the highest level of credit judgment and who have no
direct business development or profit responsibility; 2) a credit management
process that requires early and broad communication of and action on
deteriorating credits, as well as regular, formal, detailed evaluations and
projections of non-performing assets and potential losses; and 3) formal
guidance through the loan quality committee process in which all criticized
credits, all deteriorating credits and other credits with specified risk
characteristics are reviewed and addressed by all levels involved in the credit
process up through senior management on a regular basis. The team approach and
successful use of Credit Officers in CoreStates' Wholesale Banking line of
business have been extended into other areas including Trust, Community Banking
and Asset and Liability Management.
The above process allows CoreStates to make timely credit decisions, to know
the customers' needs and evaluate closely all aspects of their businesses,
keeping negotiating and structuring close to the customer. It allows for the
early detection and reporting of credit problems, which is key to CoreStates'
historically high levels of asset quality. Also, the mixing of experienced and
less experienced bankers provides excellent training and mentoring, important
components of our overall management approach.
Underlying CoreStates' credit culture are well tested and defined credit
policies and procedures. Approved at the holding company level by the
CoreStates Credit Policy Office in concert with each bank's Chief Lending
Office, these policies set underwriting standards, approval procedures, limits
on exposure by borrower and by industry and such other limits as currently
deemed prudent. The credit process is designed to make approval of
straightforward credits relatively simple through a dual approval matrix system,
but to increase the degree of involvement by experienced approvers as the credit
becomes more complex. Some examples of complexities that require sign-offs
beyond the dual approval matrix system include: large dollar concentrations,
highly leveraged transactions, tenors beyond policy, lower rated credits and
loans to customers with specialty characteristics.
53
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET QUALITY - continued
In addition to the management of credit risk, CoreStates manages and
controls operating and fraud risks in all of its substantive transactional
products through its Transactional Products Exposure Committee ("TPEC"). It is
the role of this committee to review and assign risk levels to all significant
new products prior to their implementation. In addition, reviews of substantial
changes to existing products and regular reviews of the product array offered to
customers are part of TPEC's responsibilities. The products reviewed by TPEC
include products from CoreStates' normal operating services as well as those
arising from Cash Management, Trust and Community Banking services. Through a
predetermined risk matrix approach, all products are rated and assigned risk
levels. Each product manager is responsible for acting on risk reduction
recommendations issued by TPEC. By focusing on the transactional risk in all of
its products, TPEC serves as one element in the overall risk management process
at CoreStates.
Credit quality and the effectiveness of portfolio management are
independently and systematically assessed by Credit Review, which reports to the
Audit Committee of the Board of Directors. Both its credit rating and process
evaluation techniques are consistent with regulatory standards. Because
CoreStates considers risk oversight to be an essential element for long-term
financial stability, in 1994 CoreStates will more cohesively define its overall
risk profile by applying its various well-developed risk analysis approaches to
all risk areas within the corporation.
Loan Portfolio
Wholesale Loans - CoreStates has traditionally maintained limits on
industry, market and borrower concentrations as a way to diversify and manage
credit risk. Management's current policy is to limit industry concentrations to
50% of total equity and to limit market segment concentrations to 10% of total
assets. CoreStates conservatively manages industry concentrations by applying
these dollar limits to a family of industries that have common risk
characteristics. This management process is reflected in the following table,
which illustrates each industry that exceeds 10% of total shareholders' equity.
CoreStates' largest concentration is in the non-bank finance industry at 41.0%
of total equity.
<TABLE>
<CAPTION>
Wholesale Loans by Industry
- - ---------------------------
Outstandings % of
as of % Outstandings
of equity non-performing
------------ --------------
<S> <C> <C>
Non-bank finance 41.0% 0.2%
Communications 31.6 0.4
Retail trade 30.7 0.8
Healthcare 21.1 0.2
Depository institutions 18.7
Apparel 17.5 10.6
Trucking and auto leasing 15.1 1.9
Real estate construction 16.1 5.8
Chemical 11.5
</TABLE>
54
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
- - ------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET QUALITY - continued
The following discussion highlights specific portfolios that are of interest
in the current environment. The discussion focuses on three wholesale
portfolios: communications because of its size; healthcare because of the high
profile of this industry; and the commercial finance portfolio at a CoreStates
non-bank subsidiary, Congress Financial Corp ("Congress"), because of the recent
growth in this portfolio.
Communications - The communications/media lending activities are in
industries which are either regulated by the Federal Communications Commission
and/or derive some or all of their revenues from advertising. These industries,
which include Cable Television, Telephone, Newspapers, Broadcasting and
Cellular, are typically financed based on the cash flows available to repay
debt, with less focus on tangible balance sheets. The underlying basis for this
focus is the intangible franchise value of the business which generally exceeds
the cost of establishing the business. Significant and rapid technological,
regulatory and competitive changes are occurring in the communications segments
of these businesses which our specialized lenders are closely monitoring. Risks
are further mitigated through exposures to generally large, often diversified
and highly experienced operators, and conservative debt structures. Three of the
specialized portfolios in this industry, Cable Television, Broadcasting and
Cellular, are highlighted below. Exposures in these industries are managed
within clearly defined parameters regarding total exposure and acceptable tenors
/maturities.
<TABLE>
<CAPTION>
Communications Portfolio
- - ------------------------
At December 31, Cable(1) Broadcasting(1) Cellular
- - -------------- ------- -------------- --------
(in millions)
<S> <C> <C> <C>
1993
- - ----
Outstandings.............. $413.2 $62.4 $55.0
Non-performing............ - 2.7 -
% of loans.............. - 4.3% -
1992
- - ----
Outstandings.............. $482.8 $58.0 $17.9
Non-performing............ - 11.4 -
% of loans.............. - 19.7% -
- - ---------------------------
</TABLE>
(1) Does not include $68 million at December 31, 1993 and $56 million at
December 31, 1992 outstanding to diversified companies that have cable
and broadcasting in their mix of businesses.
Healthcare - The specialized healthcare lending activities are to healthcare
providers which are heavily dependent upon third-party reimbursement for their
revenue base. Two of the subsegments of the industry are the acute care
(hospital) sector and the alternate site care sector (rehabilitation, subacute,
psychiatric, oncology, etc.). Financing typically supports working capital
requirements caused by delays in third-party payments, medium-term financing for
the acquisition of equipment and/or merger activity. The industry operates in a
highly regulated environment and is currently undergoing significant reform.
Our analysis focuses on several key indicators as predictors for success in this
evolving industry: management's ability to identify and operate profitably
within particular market niches, stable and growing market share, diversified
and strong payor mix. The financial analysis emphasizes strong and steady cash
flow and conservative leverage. The changing nature of this industry requires
close monitoring which includes ongoing analysis of reimbursement by subsegment
and geography, assessment of management and their respective strategies and
collateral valuations.
55
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: (continued)
ASSET QUALITY - continued
The following table summarizes CoreStates' exposure in the two Healthcare
industry segments discussed above at December 31, 1993 and 1992. There were no
non-performing loans in these segments for the periods presented.
<TABLE>
<CAPTION>
Healthcare Outstandings
- - ----------------------- Alternate
At December 31, Acute care site care
- - -------------- ---------- ---------
(in millions)
<S> <C> <C>
1993.................... $127.6 $117.1
1992.................... 127.8 101.4
</TABLE>
Commercial Finance - The loan portfolio at Congress grew approximately 25%
on a year-to- year basis through December 31, 1993. The credit quality of loans
generated during this period is consistent with past performance and reflects
what would be expected from a high quality commercial finance company. During
this period there were unusual market opportunities arising from the constraints
and restrictive lending policies in the commercial banking system and the ever
increasing nationwide reputation of Congress as a highly expert asset based
lender able to structure and syndicate both large and complex transactions. The
new business origination was geographically diverse, represented no particular
industry concentrations and continued the historical collateral characteristics
of the portfolio with its heavy emphasis on working assets such as accounts
receivable and inventory.
<TABLE>
<CAPTION>
Commercial Finance Portfolio
- - ----------------------------
At December 31,
- - --------------
(in millions) 1993 1992
---- ----
<S> <C> <C>
Outstandings.................. $1,426.5 $1,136.8
Non-performing................ 15.9 4.6
% of loans.................. 1.1% .4%
</TABLE>
Real Estate Loans - Although improving over the prior three years, the
CoreStates regional real estate market continues to present a mixed picture as
it emerges from a severe recession. The residential market has achieved
supply/demand balance; marginal developers have been removed and low interest
rates have created sales activity. However, the commercial and industrial
market remains fundamentally weak, although there has been some increased
interest from the investor market.
Total real estate related loans outstanding were $5,648 million at December
31, 1993, compared to $6,050 million at December 31, 1992. Included within the
broad classification of real estate loans are a number of different lending
categories with distinctly different risk factors and performance. The
construction and development loan portfolio was $327 million or 1.8% of total
loans at December 31, 1993. Currently, 5.8% of CoreStates' construction and
development loan portfolio is non-performing, compared to 2.8% for the remaining
real estate loan portfolio. The table below summarizes CoreStates' real estate
loans outstanding.
56
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET QUALITY - continued
<TABLE>
<CAPTION>
Real Estate Loans
- - -----------------
At December 31,
- - --------------
(in millions) Completed
projects/ Total
Construction/ Investment real
1993 development properties Residential Other(1) estate
- - ---- -------------- ----------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Year-end outstandings..... $ 327 $1,063 $2,524 $1,734 $5,648
Average loans outstanding 373 1,084 2,300 2,020 5,777
Non-performing loans..... 19 46 41 63 169
% of year-end loans.... 5.8% 4.3% 1.6% 3.6% 3.0%
Net charge-offs........ $ 7 $ 11 $ 5 $ 24 $ 47
% of average loans..... 2.0% 1.0% .2% 1.2% .8%
1992
- - ----
Year-end outstandings.... $ 450 $1,058 $2,782 $1,760 $6,050
Average loans outstanding 570 987 2,699 1,712 5,968
Non-performing loans..... 54 59 53 114 280
% of year-end loans.... 11.9% 5.6% 1.9% 6.5% 4.6%
Net charge-offs.......... $ 13 $ 21 $ 7 $ 18 $ 59
% of average loans..... 2.3% 2.1% .3% 1.1% 1.0%
- - --------------------------------------------------------------------------------------
</TABLE>
(1) Principally commercial loans secured by owner-occupied real estate.
The largest category within real estate loans is residential mortgages which
include home equity loans. Residential mortgages were $2,524 million or 14.0%
of total loans at December 31, 1993. Loans in the Other Real Estate Loans
category, primarily commercial loans collateralized by owner-occupied real
estate, accounted for 30.7% of total real estate loans and 9.6% of total loans.
The remaining category of real estate loans, totaling $1,063 million at
December 31, 1993, is comprised of completed projects and investment properties.
Net charge-offs of construction and development loans in 1993 were $7 million
compared to net charge-offs of $13 million in 1992.
57
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET QUALITY - continued
Allowance for Loan Losses
In 1993, CoreStates refined its methodology for determining appropriate
levels of allowance for loan losses ("ALLL"). Each subsidiary of CoreStates
which extends credit maintains an allowance sufficient to absorb the anticipated
loss inherent in its credit portfolio for a minimal one-year horizon. Factors
included in management's determination of an adequate level of ALLL are a
statistical analysis of historical loss levels throughout an economic cycle and
one year of projected charge-offs, creating a band, below which a bank's ALLL is
considered inadequate and above which is considered inappropriate. A quarterly
evaluation of loss potential on specific credits, products, industries,
portfolios and markets as well as indicators for loan growth, the economic
environment and concentrations assist in validating the position of the ALLL
within the band. Management's evaluation of the adequacy of the ALLL is
independently tested by Credit Review. CoreStates believes that the ALLL is an
important source of protection against problems in the portfolio. Equally
important is the prompt recognition of problem situations and prompt write-downs
of these assets to net realizable value. Accordingly, over an economic cycle,
CoreStates has experienced relatively high levels of recoveries against these
write-downs compared to other banking companies.
58
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET QUALITY - continued
The year-end 1993 allowance for loan losses totaled $537.8 million and
represented 3.0% of loans. This compares with a loan loss allowance at year-end
1992 of $407.6 million, or 2.4% of loans. The allowance for loan losses at
year-end 1993 was 191.2% of non-performing loans, an increase over the year-end
1992 coverage ratio of 92.4% and a reflection of the lower level of non-
performing loans at year-end 1993 and reduced net loan charge-offs during 1993.
CoreStates' total provision for loan losses in 1993 was $230.0 million, an
increase of $100.7 million from the $129.3 million provided in 1992. The
increase in the 1993 loan loss provision resulted primarily from identified
weakness in the real estate portfolio and an addition to Constellation's
allowance of approximately $120 million in order to more closely conform to
CoreStates' strategy to dispose of problem assets in a more accelerated manner.
Net charge-offs in 1993, excluding net LDC recoveries of $12.6 million, were
$114.9 million or .7% of related average loans. This represents a decrease of
$51.5 million when compared to the $166.4 million of net charge-offs excluding
$13.1 million LDC recoveries in 1992.
The following table reflects the distribution of 1993 and 1992 net charge-
offs by loan type:
<TABLE>
<CAPTION>
Distribution of Net Charge-Offs
- - -------------------------------
For the Year Ended December 31,
- - ------------------------------
(in millions) 1993 1992
----------------------------- -----------------------------
% of % of
Total Total
Net % of net Net % of net
charge- Average charge- charge- Average charge-
Loan type offs loan type offs offs loan type offs
- - --------- ------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Domestic:
Commercial
and industrial $ 38.4 0.5% 37.5% $ 58.2 0.8% 38.0%
Real estate:
Construction 7.4 2.0 7.3 13.3 2.3 8.6
Other 39.8 0.7 38.9 45.9 0.9 29.9
Consumer:
Credit card 23.3 2.3 25.1 34.6 3.8 22.6
Installment 5.1 0.5 5.0 14.0 1.1 9.1
Other (1) .8 (0.1) (1.4) .4 0.3
------ ----- ------ -----
Total domestic 114.8 0.7 112.4 166.4 108.5
------ ----- ------ -----
Foreign (2) (12.6) (2.3) (12.4) (13.1) (3.1) (8.5)
------ ----- ------ -----
Total net charge-offs $102.2 0.6% 100.0% $153.3 0.9% 100.0%
====== ==== ===== ====== ==== =====
</TABLE>
- - ----------------------------------------------------------------
(1) Includes loans to financial institutions and lease financing.
(2) Reflects net recoveries on Less Developed Countries (LDC) assets of $12.6
million in 1993 and $13.1 million in 1992.
59
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
Asset Quality - continued
Non-Performing Assets
Non-performing assets at year-end 1993 were $372.6 million, or 2.1% of total
loans plus other real estate owned ("OREO") and 1.4% of total assets. These
levels compared to total non-performing assets at year-end 1992 of $617.7
million, 3.5% of total loans plus OREO and 2.4% of total assets. Management
expects a continuing decline in non-performing asset levels during 1994 for
current CoreStates' banks. However, with planned acquisitions, CoreStates
anticipates increases in both non-performing assets and charge-offs (refer to
the Strategic Actions section beginning on page 42).
At year-end 1993, total non-performing assets were comprised of $226.3
million of non-accrual loans, $54.9 million of renegotiated loans and $91.4
million of OREO. The $245.1 million, or 39.7%, decline in total non-performing
assets as compared to year-end 1992 was principally experienced in CoreStates'
two largest portfolios, the commercial loan portfolio, declining $43.2 million,
or 28.2%, and the real estate portfolio which declined $196.0 million, or 43.0%.
During 1993, loans aggregating $227 million were added to non-performing status,
payments of $218 million against non-performing assets were received, loans
totaling $81 million were returned to full accrual status and $173 million of
non-performing assets were charged off.
CoreStates monitors the movements within the non-performing portfolio
closely. The following table illustrates the components of the quarterly changes
for 1993 and 1992:
<TABLE>
<CAPTION>
Quarterly Changes in Non-performing Assets
- - ------------------------------------------
(in millions)
Quarter Ended
--------------------------------------------------- Full
March 31 June 30 September 30 December 31 Year
--------- ------- ------------ ----------- ----
1993
- - ----
<S> <C> <C> <C> <C> <C>
Beginning balance.......... $618 $538 $483 $451 $ 618
Additions.................. 64 43 48 72 227
Return to accrual.......... (46) (14) (8) (13) (81)
Payments................... (61) (55) (35) (67) (218)
Charge-offs................ (37) (29) (37) (70) (173)
---- ---- ---- ---- -----
Net change................. (80) (55) (32) (78) (245)
---- ---- ---- ---- -----
Ending balance............. $538 $483 $451 $373 $ 373
==== ==== ==== ==== =====
<CAPTION>
1992
- - ----
<S> <C> <C> <C> <C> <C>
Beginning balance.......... $758 $745 $737 $684 $ 758
Additions.................. 87 126 87 64 364
Return to accrual.......... (14) (12) (40) (16) (82)
Payments................... (49) (89) (50) (68) (256)
Charge-offs................ (37) (33) (50) (46) (166)
---- ---- ---- ---- -----
Net change................. (13) (8) (53) (66) (140)
---- ---- ---- ---- -----
Ending balance............. $745 $737 $684 $618 $ 618
==== ==== ==== ==== =====
</TABLE>
60
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET QUALITY - continued
The following table reflects the distribution of non-performing assets by
loan type at December 31, 1993 and 1992:
<TABLE>
<CAPTION>
Distribution of Non-performing Assets
- - -------------------------------------
At December 31,
- - --------------
(in millions)
1993 1992
--------------------------------- -------------------------------
% Total % Total
Non- % of non- Non- % of non-
Loan type performing Loan type performing performing Loan type performing
- - --------- ---------- ----------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Domestic:
Commercial and
industrial:
Highly leveraged
transactions ("HLTs").. $ 5.1 1.1% 1.4% $ 8.5 1.7% 1.4%
Other................... 104.8 1.4 28.1 144.6 2.1 23.4
Real estate:
Construction............ 19.4 5.8 5.2 53.7 11.9 8.7
Other loans............. 149.4 2.8 40.1 226.2 4.0 36.6
OREO.................... 91.4 24.5 176.4 28.6
Consumer.................. .7 .2 .1
Other domestic loans(1). 1.6 .1 .4 5.2 .4 .8
------ ----- ------ -----
Total domestic.......... 372.4 2.1 99.9 614.7 3.6 99.5
------ ----- ------ -----
Foreign loans.............. .2 .1 3.0 .8 .5
------ ----- ------ -----
Total non-performing
assets(2).............. $372.6 2.1% 100.0% $617.7 3.5% 100.0%
====== ==== ===== ====== ==== =====
% Total assets.......... 1.4% 2.4%
=== ===
</TABLE>
- - --------------------------------------------------------------------------------
(1) Includes loans to financial institutions and lease financing.
(2) The table does not include loans of $47 million and $89 million at December
31, 1993 and 1992, respectively, that are past due 90 days or more as to
principal or interest, but which remain on full accrual since such loans are
well secured and in the process of collection.
In May 1993, the Financial Accounting Standards Board issued statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan" ("FAS 114"). FAS 114 addresses accounting for impairment of certain
loans and requires that impaired loans within the scope of FAS 114 be measured
based on the present value of expected cash flows discounted at the loan's
effective interest rate, or be measured at the loan's observable market price or
the fair value of its collateral. FAS 114 is effective beginning in 1995. The
impact that FAS 114 will have on CoreStates' future results of operations cannot
be estimated with certainty at the current time. However, the adoption of FAS
114 is not expected to have a material impact on CoreStates' level of allowance
for loan losses.
61
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT
CoreStates manages its balance sheet to achieve maximum shareholder value
within the constraints of a conservative interest rate risk discipline, the
maintenance of high credit quality, and sound leverage and liquidity positions.
CoreStates' asset and liability management is centralized and individual
subsidiaries are managed within the context of overall corporate policies.
Interest Rate Risk Management - Interest rate risk refers to potential
changes in current and future net interest income resulting from changes in
interest rates, product spreads and mismatches in the repricing between interest
rate sensitive assets and liabilities. CoreStates' management emphasizes stable
net interest income throughout rate cycles, with the result that intermediate
and longer term considerations take precedence over short-term profitability.
This commitment is evidenced by the stability and strength of CoreStates' net
interest margin over time, despite significant changes in economic conditions,
competition and interest rates. CoreStates' net interest margin has remained
consistently above industry averages over the last five years as illustrated in
the table "Net Interest Margin".
<TABLE>
<CAPTION>
Net Interest Margin
- - ---------------------
(In percent) Net interest margin
---------------------------
Montgomery
CoreStates Securities*
---------- ----------
<S> <C> <C>
1993 5.72% 4.81%
1992 5.41 4.78
1991 5.24 4.40
1990 5.18 4.21
1989 5.04 4.27
</TABLE>
* The Montgomery Securities Regional Bank Composite
62
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT - continued
At CoreStates, measurement of interest rate risk focuses on potential
changes in net interest income identified through computer simulations against
both rising and falling interest rates. Longer term repricing risks are measured
and controlled through gap analysis. All measurements of interest rate risk
include the impact of off-balance sheet activities. Under CoreStates' policy,
rate changes of at least 200 basis points over a six-month period are simulated
with rate related negative net interest income volatility over a twelve-month
horizon limited to 4% of shareholders' equity. Included in these simulations are
all contractual repricing risks, the impact of prepayments in the loan and
securities portfolios, potential spread and volume changes on consumer deposits
and fluctuations in the value of non-interest bearing funding sources.
CoreStates believes that the spread between the prime rate and financial market
rates is a function of both interest rates and credit conditions. While changes
in the prime spread are included in simulations, only that portion believed to
be interest rate related is subject to the policy guidelines.
As a matter of practice, positions are generally managed to produce
significantly lower volatility than policy guidelines would permit. Current
simulations show that CoreStates' net interest income volatility over one year
due to a 200 basis point change in short-term interest rates is relatively
neutral. Reflecting its interest rate risk management philosophy, CoreStates'
net interest margin results from strong relationship business profitability
rather than a temporarily favorable interest rate environment.
There are two key elements to CoreStates' interest rate risk. First, is the
broad mismatch between the rate sensitivity of the assets and liabilities in its
core businesses. Second, is the spread risk between the rates on those products
and financial market rates.
CoreStates carries a large portfolio of prime and other short-term rate
related assets generated through its core wholesale and retail businesses. As a
regional banking company, CoreStates has a significant funding base of consumer
deposits with indefinite maturities and non-contractual rates such as savings,
NOW and money market accounts. Traditionally, consumer deposits have had a
longer term rate sensitivity; pricing has been relatively stable for long
periods and pricing changes lag changes in financial market rates. While this
mix of relationship assets and liabilities provides excellent liquidity, it
results in considerable interest rate risk. This inherent mismatch (the
"relationship gap") of longer term fixed-rate liabilities funding short-term
rate sensitive assets would generate significant exposure to declining interest
rates if not hedged.
CoreStates hedges this relationship gap through the use of both on and off-
balance sheet discretionary assets and liabilities. The typical offsetting
position is created by purchasing fixed-rate investment securities funded by
short-term liabilities, and entering into interest rate swaps in which
CoreStates receives a fixed rate and pays a variable rate. The following
excerpts from the Interest Sensitivity Analysis shown on page 89 demonstrates
the basic mismatch of the relationship portfolios and the offsetting
discretionary position. The adjustments and the placement of indefinite
maturity products within the table reflect the lagged pricing effects of those
products, as identified through simulations.
63
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT - continued
<TABLE>
<CAPTION>
Selected Interest Sensitivity Balances
- - --------------------------------------
At December 31, 1993
- - --------------------
(in millions)
Months Years
--------------------------- --------------------------
0-3 4-6 7-12 1-2 3-5 >5 Total
------- ------ ------ ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Total loans............................. $12,047 $1,347 $1,109 $ 1,334 $ 1,893 $ 296 $18,026
Total consumer
deposits, net non-
interest funding....................... 7,636 1,536 1,635 2,146 2,571 2,679 18,203
Adjustments............................. 401 (630) (289) (390) (1,267) 2,175 0
------- ------ ------ ------- ------- ------ -------
Relationship gap...................... 4,812 (819) (815) (1,202) (1,945) (208) (177)
------- ------ ------ ------- ------- ------ -------
Discretionary Portfolios
Assets.................................. 2,511 1,090 1,096 1,301 2,270 1,094 9,362
Liabilities............................. 7,616 131 88 276 365 709 9,185
------- ------ ------ ------- ------- ------ -------
Discretionary gap..................... (5,105) 959 1,008 1,025 1,905 385 177
------- ------ ------ ------- ------- ------ -------
Combined gap.......................... $ (293) $ 140 $ 193 $ (177) $ (40) $ 177 $ -0-
======= ====== ====== ======= ======= ====== =======
</TABLE>
The second major element of CoreStates' interest rate risk is the spread
risk between product rates and financial market rates. CoreStates simulates the
behavior of individual products under various rate scenarios to determine an
appropriate investment or funding strategy to provide a stable spread.
Declining interest rates in 1993 provided the opportunity to reprice
consumer savings, NOW and money market accounts. This contributed to a wider net
interest margin in 1993 to the extent that these deposit balances funded fixed-
rate assets. Assuming a stable rate environment, spreads are expected to narrow
as the fixed-rate assets mature and are replaced at market rates. There was also
growth in those deposit balances in 1993, increasing the significance of the
repricing of those products to net interest income. CoreStates has simulated
potential changes in pricing and the resultant impact on deposit volumes under a
multitude of rate environments. The key simulation assumptions revolve around
the ability to reprice those products if rates fall, and the extent to which
balances will be maintained and repricing will lag market rates if rates rise.
Recognizing that much of the growth in these products represents a temporary
liquidity preference, CoreStates has invested additional balances for a shorter
term than for those considered to be more permanent.
The spread between the prime rate and short-term market rates is also an
important component of net interest income. In 1993, that spread averaged well
above prior years' experience and, while management does not expect a return to
historic levels, some compression of the prime spread is anticipated.
CoreStates has approximately $6.5 billion in loans subject to changes in prime,
excluding the credit card portfolio which floats with prime only at higher rate
levels.
64
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations:continued
ASSET AND LIABILITY MANAGEMENT - continued
The low rate environment of 1993 provided refinancing opportunities for many
consumers and raised questions concerning the level of prepayment risk in many
financial institutions. CoreStates' interest rate risk discipline has been to
minimize prepayment risk by selling fixed-rate mortgages as created, and
restricting purchases of mortgage related securities to short-term
collateralized mortgage obligations, with limited cash flow variability. In
1993, CoreStates completed two transactions in which $207 million in longer term
fixed-rate home equity loans were sold and securitized. These securitizations
served both CoreStates' customers and shareholders by providing long-term fixed-
rate financing to consumers, while reducing both credit and interest rate risk
on the balance sheet.
Off-Balance Sheet Instruments - CoreStates uses off-balance sheet
instruments to hedge interest rate risk. Most activities are designed to be a
substitute for the fixed rate assets which are necessary to balance the
sensitivity of relationship business portfolios.
CoreStates believes the management of interest rate risk must be balanced
with the management of liquidity and capital and, therefore, off-balance sheet
instruments are used to hedge interest rate risk and avoid unnecessary leverage
and liquidity impairment. The required level of fixed-rate asset sensitivity
could be achieved principally with on-balance sheet investment securities. The
amount recorded in net interest income related to interest rate swaps was income
of $114.7 million in 1993, $122.9 million in 1992 and $68.5 million in 1991. If
the alternative approach of on-balance sheet assets were used, it would not
materially affect net interest income.
CoreStates' use of financial futures is concentrated in short-term LIBOR and
Eurodollar contracts although longer term contracts are occasionally used to
hedge anticipatory transactions. CoreStates uses interest rate swaps in both
short and longer term maturities to offset on-balance sheet interest rate risk
and, as of December 31, 1993, does not use index amortizing swaps. In addition
to its hedging portfolio; CoreStates also offers interest rate swaps as a risk
management tool to commercial customers; however, customer transactions
represent only 10% of the portfolio and are generally offset with swaps of
similar terms. The following table reflects the future repricing schedule of
CoreStates' interest rate swap portfolio at December 31, 1993:
<TABLE>
<CAPTION>
Repricing Schedule of Interest Rate Swaps
- - -----------------------------------------
At December 31, 1993
- - --------------------
(in millions)
CoreStates receives CoreStates pays
------------------- ---------------
Notional Notional
amount Rate amount Rate
-------- ---- -------- ----
<S> <C> <C> <C> <C>
0-1 year $1,126 5.69% $3,818 3.52%
1-2 years 691 6.65 149 6.46
2-3 years 890 7.31 230 6.30
3-4 years 496 6.01 90 4.59
4-5 years 401 5.76 13 6.61
over 5 years 696 6.23
------ ------
Total $4,300 6.31% $4,300 3.80%
====== ==== ====== ====
</TABLE>
65
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations:continued
ASSET AND LIABILITY MANAGEMENT - continued
In addition to using interest rate swaps to hedge the relationship gap,
interest rate swaps have also been used to convert long-term fixed rate debt to
a floating rate sensitivity, accounting for most of the swaps maturing beyond
five years in the preceding table.
CoreStates evaluates the credit worthiness of all off-balance sheet
counterparties using the same standards applied in any other loan or credit
transaction, and credit risk in these positions is centrally managed and
controlled by the Credit Policy Group. The current credit exposure in a
derivative transaction is the cost to replace the transaction at current market
rates, while potential exposure is the estimated cost to replace the transaction
at future rates. CoreStates continually monitors both current and potential
risk. As of December 31, 1993, the current cost to replace CoreStates' interest
rate swap portfolio was $154 million.
Liquidity - Liquidity management allows a financial institution to meet
potential cash needs at a reasonable price under various operating conditions.
Liquidity comes from a variety of sources: the maturing of short-term assets,
readily marketable unpledged securities, and the ability to attract new funds.
The ability to securitize or sell other assets, such as loans, also enhances
liquidity, as does the structure and stability of existing funding sources.
CoreStates maintains sufficient liquidity to meet its obligations in a timely
and cost-effective manner. Management monitors current and projected cash
flows, and adjusts positions as necessary to maintain adequate levels of
liquidity. CoreStates emphasizes diversification of funding sources. By using
a variety of markets, limiting funds borrowed from a single investor, and
staggering maturities, the risk of potential funding pressure is significantly
reduced. Management also maintains a detailed liquidity contingency plan
designed to adequately respond to situations such as a decline in asset quality
or credit ratings, which could lead to liquidity concerns. Management analyzes
potential changes in major funding sources during difficult times, the amount of
runoff that may be expected, as well as available options to replace those
funds. The plan includes specific action steps to be taken in the event of
funding disturbances.
The cornerstone of CoreStates' liquidity position is a sizable and stable base
of core deposits acquired through customer relationships. Core deposits are
comprised of interest bearing consumer savings products as well as non-interest
bearing consumer and commercial deposits. Core deposits averaged 69.0% of
assets in 1993 compared to 70.2% in 1992. This decline is a result of increased
loan volumes and relatively no growth in core deposits.
66
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT - continued
Core deposits are supplemented by discretionary funding sources from direct
customer contacts in both the domestic and international markets. These sources
include large denomination certificates of deposit, deposits in foreign branches
as well as federal funds, repurchase agreements, commercial paper and long-term
debt. Commercial paper is used primarily to fund Congress, the non-bank
commercial finance subsidiary. In addition to commercial paper, Congress is
funded through the issuance of medium-term notes and long-term debt. Growth in
loans at Congress during 1993 resulted in increases in these funding sources
while loan growth in the banking subsidiaries accounted for the growth in other
discretionary sources. CoreStates' liquidity is further enhanced by its ability
to raise funds in a variety of domestic and international money and capital
markets. During 1993, CoreStates issued $375 million in new subordinated long-
term debt with maturities of 10 to 12 years.
Under existing shelf registration statements filed with the Securities and
Exchange Commission ("SEC"), CoreStates had debt and capital securities that
were registered but unissued of approximately $177 million at December 31, 1993.
In February 1994, CoreStates' Board of Directors approved the filing of a shelf
registration with the SEC that will, when effective, cover the issuance of a
broad range of debt and equity securities that will increase available
registered but unissued securities to $1 billion.
The tables on pages 88 and 90 illustrate the maturity characteristics of
CoreStates' domestic certificates of deposit over $100 thousand and investment
portfolio, respectively. For information regarding the maturity characteristics
of CoreStates' short-term funds borrowed and long-term debt, see notes 10 and 11
to the financial statements.
Investment Portfolio - Within the context of the policies and practices
previously outlined, CoreStates maintains a portfolio of marketable debt
securities to contribute to a balanced interest rate risk position and to
provide liquidity reserves. Interest rate risk management disciplines require
strict matching of interest rate sensitivities and, therefore, CoreStates
generally does not consider changes in the market value of individual portfolios
as significant to the management of its interest sensitivity. CoreStates
generally has both the ability and the intent to hold these securities until
maturity.
In 1993, the Financial Accounting Standards Board issued statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" ("FAS 115"). As a result of adopting FAS 115 on December 31,
1993, CoreStates has reclassified $680 million of investment securities as
"Available-for-Sale". These investment securities were marked to fair value,
adding $68.3 million after-tax to shareholders' equity as of December 31, 1993.
These securities include a bank stock portfolio and other marketable equity
securities, as well as certain debt securities which CoreStates foresees as
potential candidates for sale prior to maturity. Constellation's
classifications will be reviewed in the second quarter and reclassifications
will be made as appropriate.
CoreStates' Available-for-Sale account guidelines establish a minimum and
maximum amount of debt and equity securities which can be carried as Available-
for-Sale. The intent of the minimum guideline is to establish an amount of debt
securities as Available-for-Sale to meet liquidity and balance sheet management
concerns. The maximum is established to protect against capital ratio
deterioration, while providing portfolio management flexibility.
67
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
SOURCES AND USES OF FUNDS
Total assets were $25.8 billion at year-end 1993, down $343 million or 1.3%
from year-end 1992. However, comparing specific asset categories to year-end
1992 balances reflects recovering loan demand, as loans increased $797 million
or 4.6%, and a $100 million, or 3.4%, increase in investment securities, mostly
due to the FAS 115 recognition of unrealized net appreciation in Available-for-
Sale securities. Time deposits declined $493 million or 27.9%. The increase in
loans was primarily due to improved demand across CoreStates' lending products.
A $646 million, or 5.1%, decline in interest bearing deposits, principally the
result of the September 30, 1993 sale of the five Virgin Islands branches, was
partially offset by growth of $147 million, or 2.4% in demand deposits, and an
increase of $202 million, or 16.1% in long-term debt.
Total assets averaged $25.2 billion in 1993, an increase of $239 million or
1.0% from 1992. Average loans increased $163 million, or 1.0% and average
investment securities increased $288 million or 10.8%. As reflected in the
table on Earning Asset Mix, loans comprised 79.6% of CoreStates' average earning
assets in 1993, compared to 79.2% in 1992, ending two consecutive years of
declining average loan outstandings. Funding for the increase in average assets
was provided by non-interest bearing funding sources.
Earning Asset Mix
-----------------
(Percentage of average earning assets)
<TABLE>
<CAPTION>
Earning Asset Mix
---------------------------------
Money Investment
Market Securities Loans
------- ----------- -----------
<S> <C> <C> <C>
1993 6.8% 13.6% 79.6%
1992 8.5 12.3 79.2
1991 6.8 11.2 82.0
1990 4.1 10.5 85.4
1989 6.4 12.6 81.0
</TABLE>
The accompanying table on Funding Mix illustrates that 57.4% of CoreStates'
funds were derived from consumer deposits in 1993, compared with 61.4% in 1992.
Funding to accommodate current business needs and future growth at non-bank
subsidiaries will continue to be supported by the previously discussed SEC shelf
registration.
Funding Mix
-----------
(Percentage of average earnings assets*)
<TABLE>
<CAPTION>
Funding Mix
-------------------------------
Other Non-
Retail Interest Interest
Deposits Bearing Bearing
--------- --------- ---------
<S> <C> <C> <C>
1993 57.4% 13.7% 28.9%
1992 61.4 11.9 26.7
1991 56.5 22.2 21.3
1990 50.4 28.9 20.7
1989 48.4 29.3 22.3
</TABLE>
* excluding short-term money market
investments
68
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
REVIEW AND ANALYSIS OF EARNINGS
Operating Revenue
Although operating revenue for 1993 was significantly impacted by the December
1992 EPS transaction and other significant items, CoreStates' operating revenue
reflected strong growth in revenues in Wholesale Banking and in fee-based
businesses. Excluding EPS related revenues in 1993 and 1992, net gains on
investment securities transactions, pre-tax gains of $11.0 million from the
Virgin Islands branch sale and $9.1 million on prepayments of long-term debt in
1993, and the $41.1 million pre-tax gain recorded on the December 1992 EPS
transaction, operating revenue increased 8.0% for 1993.
Operating revenue has three major components and, as illustrated on the
accompanying table ("Operating Revenue"), net interest income from loans and
investments is the largest component. Net interest income is presented
excluding the earnings benefit of balances maintained by commercial customers as
compensation for transaction oriented non-credit products.
The two other components of operating revenue are non-interest income and the
previously mentioned earnings benefit of balances maintained as compensation for
non-credit products. Net interest income and non-interest income are discussed
in further detail on the following pages.
<TABLE>
<CAPTION>
Operating Revenue
- - -----------------------------------
(tax equivalent net interest income plus non-interest income-in millions)
Operating Revenue
------------------------------------------
Derived
Loan & from Non-
Investment Non-credit Interest
Interest Balances Income Total
---------- ---------- -------- ---------
<S> <C> <C> <C> <C>
1993 $1,243.3 $115.9 $544.7 $1,903.9
1992 1,172.4 128.2 586.7 1,887.3
1991 1,206.3 141.6 587.1 1,935.0
1990 1,216.9 130.3 454.3 1,801.5
1989 1,187.2 121.7 419.7 1,728.6
</TABLE>
69
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
<TABLE>
<CAPTION>
Net Interest Income
Taxable Equivalent Net Interest Income Percentage
(in millions) increase(decrease)
------------------
1993 1992 1991 '93/'92 '92/'91
-------- -------- -------- ------ ------
<S> <C> <C> <C> <C> <C>
Total interest income $1,664.8 $1,762.8 $2,254.5 (5.6)% (21.8)%
Tax equivalent adjustment 24.6 29.0 38.4 (15.2) (24.5)
-------- -------- --------
Tax equivalent interest
income 1,689.4 1,791.8 2,292.9 (5.7) (21.9)
Total interest expense 446.1 619.4 1,086.6 (28.0) (43.0)
-------- -------- --------
Tax equivalent net
interest income $1,243.3 $1,172.4 $1,206.3 6.0 (2.8)
======== ======== ========
Interest rate spread 4.97% 4.50% 4.08%
======== ======== ========
Net interest margin 5.72% 5.41% 5.24%
======== ======== ========
</TABLE>
For analytical purposes, net interest income is adjusted to a taxable
equivalent basis to recognize the income from tax exempt assets as if the
interest were taxable. Net interest income on a taxable equivalent basis
increased $70.9 million, or 6.0% in 1993, following a decrease of $33.9 million,
or 2.8% in 1992.
The increase in net interest income in 1993 principally reflects the impact
of a $77 million increase in average interest earning assets. Also contributing
to the increase in net interest income were wider interest rate spreads, a $.2
billion increase in non-interest bearing funding sources, the earnings impact of
lower levels of non-performing loans and cash basis interest received on non-
performing loans. The interest rate spread increased in 1993 mostly due to a
decline in the rates paid on domestic deposits of 109 basis points, while the
rates earned on domestic loans decreased 36 basis points.
The decrease in net interest income for 1992 was the result of reduced
domestic loan volume. On average, domestic loans decreased $1.7 billion from
1991, mostly due to the $1 billion October 1991 credit card sale and the $300
million May 1992 consumer installment loan sale. Partially offsetting the
decline in interest income attributable to lower domestic loan volume was the
impact of a $.7 billion increase in non-interest bearing funding sources.
The net interest margin is a key measure of net interest income
performance. It represents the difference between tax equivalent interest
income, including net loan fees earned, and interest expense, reflected as a
percentage of average earning assets.
The net interest margin increased 31 basis points in 1993 to 5.72%. This
increase was principally related to improved interest rate spreads which
resulted from the continued decline of interest rates in 1993 and from the shift
in funding mix to lower cost funding. The migration of consumer deposits from
certificates of deposit to more liquid and less costly deposit products
contributed to the reduction in 1993 funding costs. The low rate environment in
1993 also provided CoreStates with the opportunity to reprice these deposit
products at lower rates and to refinance $325 million in long-term debt.
For further detailed information regarding average balances, yields and
costs, see the consolidated average balance sheet on pages 76-79, and the
rate/volume analysis on page 83.
70
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
<TABLE>
<CAPTION>
Non-Interest Income
Percentage
(in millions) increase(decrease)
------------------
1993 1992 1991 '93/'92 '92/'91
------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
Basic banking transactional
services(1) $397.0 $365.0 $340.4 8.8 % 7.2 %
EPS related revenues (2) 13.2 92.5 101.6 (85.7) (9.0)
Securities gains (losses) 15.7 15.1 (14.2)
Other non-interest income 98.7 71.2 72.7 38.6 (2.1)
------ ------ ------
Non-interest income before
non-recurring items 524.6 543.8 500.5 (3.5) 8.6
Non-recurring items 20.1(3) 42.9(4) 86.6(5)
------ ------ ------
Total non-interest income $544.7 $586.7 $587.1 (7.2) (.1)
====== ====== ======
</TABLE>
- - -------------------------------
(1) Comprised of debit and credit card fees, service charges on deposit
accounts, trust income, and fees for international services.
(2) Includes EPS joint venture preferred dividends and CoreStates' share in the
net income of the EPS joint venture in 1993, and for 1992 and 1991, MAC and
POS revenues, the businesses contributed to the joint venture in December
1992.
(3) Includes pre-tax gains of $11.0 million recorded on the sale of five
Virgin Islands branches and $9.1 million on prepayments of long-term debt.
(4) Includes a $41.1 million pre-tax gain recorded on the EPS transaction, and
a $1.8 million gain on the sale of a Constellation branch.
(5) Includes an $86.6 million pre-tax gain recorded on the sale of
approximately $1 billion of credit card receivables.
While reported total non-interest income decreased $42.0 million or 7.2% in
1993, following a slight decline of $.4 million, or .1% in 1992, total non-
interest income in 1993 before non-recurring items and EPS related revenues
increased more than $60 million or 13.3% over 1992. Comparability between 1993
and 1992 was affected by the following items: the $11.0 million gain on the sale
of five Virgin Islands branches in 1993; gains of $9.1 million on prepayments of
long-term debt in 1993; securities gains; the $1.8 million gain on the sale of a
Constellation branch in 1992; and the December 1992 restructuring of CoreStates'
MAC and POS consumer electronic payment business into EPS. As a result of the
EPS restructuring, CoreStates' Statement of Income in 1993 reflects a
significant decline in debit and credit card fees and includes $13.2 million,
reflecting EPS' preferred stock dividends and CoreStates' 31% equity share in
the net income of the EPS joint venture. For analytical purposes, fees
generated by the MAC and POS businesses have been reclassified from the debit
and credit card fee category in the preceding table in 1992 and 1991. POS and
MAC revenues in 1993 were recorded by EPS. Included in other non-interest
income in 1993 was $17.5 million of fees earned by Financial Telesis, a third-
party provider of lockbox processing and data management services, which was
acquired by CoreStates on December 31, 1992. Other non-interest income in 1992
included the $41.1 million pre-tax gain recorded on the EPS transaction.
Excluding the impact of securities gains and losses, EPS related revenues and
the $86.6 million pre-tax gain recorded on the October 1991 credit card sale,
total non-interest income in 1992 increased more than 5% over 1991.
71
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
Non-Interest Income - continued
CoreStates recorded net securities gains of $15.7 million in 1993 and $15.1
million in 1992, compared with net securities losses of $14.2 million in 1991.
Investment securities gains for 1993 included $12.8 million on sales of domestic
equity securities and $8.6 million on sales of foreign equity securities,
partially offset by $6.1 million for partial writedowns of foreign equity
securities. Investment securities gains for 1992 included $3.6 million of gains
recorded on sales of certain investments acquired with First Peoples Corporation
in September 1992, $5.3 million of gains recorded on the partial sale of a
foreign equity investment, and $1.7 million of gains recorded on sales of
certain investments in a portfolio of bank stocks. Included in 1991 securities
losses were $22.8 million of pre-tax write-downs taken against the portfolio of
bank stocks.
Income from basic banking transactional services increased 8.8% in 1993,
following growth of 7.2% in 1992. The components of basic banking
transactional services are discussed in detail below.
. Service charges on deposit accounts, paid in fees, increased $16.1 million, or
10.4%, in 1993 and $19.5 million, or 14.4%, in 1992 reflecting added volume
and many commercial and correspondent customers' decisions to pay fees for
banking services in place of maintaining deposit balances. After adding the
value of service charges paid through the maintenance of deposit balances by
commercial and correspondent customers, which is included in net interest
income, total service charge compensation for 1993 was $286.7 million, up $3.8
million, or 1.3%, from 1992. The benefit derived from deposit balances
maintained by commercial and correspondent customers decreased $12.3 million
from 1992 due to the decline in the value of maintaining balances in the lower
1993 interest rate environment. Total service charge compensation on this
basis for 1992 was $282.9 million, an increase of $6.2 million or 2.2% over
1991.
. Fees for international services increased $9.2 million, or 15.2%, in 1993, as
compared with an increase of $13.0 million, or 27.4%, in 1992. The high growth
in revenues for 1993 was principally due to increased volume from new branch
offices opened over the past year. The prior period increase was primarily
related to product volume growth for traditional cash management products
including: funds transfer; trade payment services; and reimbursement
collection services. International non-credit product volume growth,
particularly foreign exchange fees, continued to be responsible for high gross
revenue increases in 1993 and 1992.
. Trust income increased $4.6 million, or 5.0%, in 1993 following a slight
decline of $.7 million, or .8%, in 1992. Growth in assets and related fees in
the Personal Trust, Investment Services, and Employee Benefit areas
contributed to 1993 fee growth. The decline in 1992 trust income was
principally attributable to the loss of several large customers and the impact
of lower interest rates.
72
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
Non-Interest Income - continued
. Debit and credit card fees increased $2.1 million, or 3.6% in 1993, following
a decrease of $7.2 million, or 11.1%, in 1992. For analytical purposes, fees
generated by the MAC and POS businesses, which were contributed to the EPS
joint venture in December 1992, have been reclassfied from the debit and
credit card fee category in the table on page 71 in 1992 and 1991. Credit card
fees were up $.9 million, or 3.4%, for 1993 following a decline of $14.1
million, or 36.2%, for 1992. The 1992 decline was mostly due to the sale of
approximately 560,000 accounts in the fourth quarter of 1991. At year-end
1993, CoreStates' credit card portfolio included approximately 575,000 active
accounts, compared to 546,000 active accounts at year-end 1992. Merchant
processing services fees in 1993 were level with 1992, following growth of
$3.1 million or 21.2% in 1992.
Other operating income, including gains on trading account securities and
other gains but excluding pre-tax gains of $11.0 million on the Virgin Islands
branch sale and $9.1 million on prepayments of long-term debt, increased $27.5
million in 1993, following a decrease of $1.5 million in 1992. Other operating
income in 1993 included $17.5 million of fees earned by Financial Telesis.
Gains on trading account securities were $2.3 million in 1993, as compared with
$1.8 million in 1992 and $2.6 million in 1991.
73
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
<TABLE>
<CAPTION>
Non-Financial Expenses Percentage
(in millions) increase(decrease)
------------------
1993 1992 1991 '93/'92 '92/'91
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Salaries, wages and benefits $ 567.5 $ 565.6 $ 561.6 .3 % .7 %
Net occupancy expense 104.9 106.2 112.0 (1.2) (5.2)
Equipment expense 68.2 79.4 78.4 (14.1) 1.3
Other operating expenses 385.6 382.5 356.2 .8 7.4
-------- -------- --------
Non-financial expenses before
significant and unusual
items 1,126.2 1,133.7 1,108.2 (.7) 2.3
Significant and unusual items 97.1 79.7 121.1 21.8 (34.2)
-------- -------- --------
Total non-financial expenses $1,223.3 $1,213.3 $1,229.3 .8 (1.3)
======== ======== ========
</TABLE>
While reported total non-financial expenses in 1993 of $1,223.3 million
reflected a slight increase of .8% from 1992; excluding significant and unusual
items as noted below for both years, non-financial expenses for 1993 decreased
less than 1% over 1992. Comparability of 1993 and 1992 total non-financial
expenses is affected by certain significant expenses recorded in each year. In
1993, total non-financial expenses included: a $10.0 million restructuring
charge related to the formation of Transys; $37 million restructuring and
closing costs related to the Constellation acquisition; $40.1 million for
reserves and write-downs against other real estate owned; and a $10 million
write-down in PMSRs. In 1992, total non-financial expenses included: $16.2
million for systems enhancements and operations consolidations; $40.0 million
for reserves and write-downs against other real estate owned; $7.4 million of
expenses associated with personnel related initiatives; $9.1 million impact of
adopting FAS 106; $4.5 million for streamlining business operations; and a $2.5
million reserve for PMSR write-downs. Comparability of 1993 and 1992 is also
impacted by the formation of EPS, as total non-financial expenses for 1992
included eleven months of expenses related to the MAC and POS businesses which
were contributed to EPS in December 1992.
Comparability for 1992 and 1991 is also affected by the significant 1992
operating costs, as described above, by the EPS transaction, as an additional
month's expenses for MAC and POS would have added approximately $8.6 million to
1992 non-financial expenses, and by several significant expenses recorded in
1991. In 1991, non-financial expenses included the following items: $44.3
million of write-offs against other real estate owned; $27.1 million associated
with the costs of systems enhancements and conversions, streamlining business
operations, and write-downs of certain assets no longer required in the
streamlined operations; and $6.6 million in charges related to branch
consolidations. Excluding these items for both years, non-financial expenses for
1992 were somewhat lower than 1991.
74
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
Non-Financial Expenses: continued
Salaries, wages and benefits increased .3% in 1993, compared to an increase of
.7% in 1992. A decrease in 1993 salary expense was attributable to the transfer
of employees in the MAC and POS businesses to EPS, was partially offset by an
increase in employee related expenses of $11.7 million due to the acquisition of
Financial Telesis. The number of full-time equivalent employees at December 31,
1993, 1992 and 1991 was: 14,728; 14,887; and 15,176, respectively.
Net occupancy expense decreased 1.2% in 1993, compared to a decline of 5.2% in
1992. Equipment expenses declined 14.1% in 1993, compared to a modest increase
of 1.2% in 1992. The decline in combined 1993 net occupancy and equipment
expense was primarily due to the formation of the EPS joint venture. Other
operating expenses increased slightly .8% in 1993, following an increase of 7.4%
in 1992 compared to 1991.
Provision for Income Taxes
The provision for income taxes was $98.3 million in 1993 compared to $126.4
million in 1992 and $90.5 million in 1991. The $28.1 million decrease in 1993
total tax expense was primarily the result of Constellation's pre-tax book loss
of $178 million. This loss was largely due to provision for loan losses and ORE
write offs. The provision for income taxes for 1993, 1992 and 1991 were at
effective rates of 31.7%, 32.6% and 35.8%, respectively. The 1% retroactive
increase in the 1993 Federal corporate tax rate, higher state tax expense and
lower tax exempt income were offset by the FAS 109 revaluation of the net
deferred tax asset, reflecting the increased Federal tax rate and a higher
dividends received deduction.
75
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL DATA
CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND
RATES
<TABLE>
<CAPTION>
1993 1992 1991
------------------------------ ------------------------------ ------------------------------
Average Income/ Average Income/ Average Income/
balance Rate expense balance Rate expense balance Rate expense
--------- ------ ----------- --------- ------ ----------- --------- ------ -----------
(000,000) (000) (000,000) (000) (000,000) (000)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
Time deposits, principally
Eurodollars (a)................... $ 1,275 3.38% $ 43,049 $ 1,367 4.07% $ 55,635 $ 1,127 6.49% $ 73,132
Investment securities (b):
U.S. Government.................. 2,440 5.82 141,913 1,992 7.08 141,093 1,720 8.16 140,385
State and municipal.............. 363 8.62 31,305 399 9.54 38,070 461 10.44 48,150
Other............................ 157 5.94 9,327 281 7.19 20,214 401 8.65 34,680
--------- ---------- --------- ---------- --------- ----------
Total investment
securities............... 2,960 6.17 182,545 2,672 7.46 199,377 2,582 8.65 223,215
Federal funds sold................. 197 3.11 6,119 480 4.52 21,679 427 6.46 27,597
Trading account securities......... 2 4.15 83 1 7.20 72 1 5.10 51
Loans (b)(c)(d):
Domestic:
Commercial, industrial and
other......................... 7,048 8.02 565,362 6,747 8.23 555,541 7,347 9.58 704,158
Real estate.................... 5,777 7.88 455,124 5,968 8.55 509,973 5,902 9.60 566,856
Consumer....................... 2,091 12.40 259,264 2,187 12.73 278,337 3,340 14.57 486,479
Financial institutions......... 706 6.15 43,427 826 6.26 51,710 882 8.75 77,213
Factoring receivables.......... 554 9.62 53,312 486 9.70 47,154 480 10.69 51,327
Lease financing................ 595 9.05 53,826 509 8.70 44,285 487 9.34 45,488
Foreign.......................... 544 5.01 27,258 429 6.53 28,018 431 8.68 37,429
--------- ---------- --------- ---------- --------- ----------
Total loans, net of
discounts............... 17,315 8.42 1,457,573 17,152 8.83 1,515,018 18,869 10.43 1,968,950
--------- ---------- --------- ---------- --------- ----------
Total interest earning
assets (d)(e)........... $ 21,749 7.77 1,689,369 $ 21,672 8.27 1,791,781 $ 23,006 9.96 2,292,945
========= ----- ---------- ========= ----- ---------- ========= ----- ----------
FUNDING SOURCES
Interest bearing liabilities (b):
Deposits in domestic offices (f):
Commercial..................... $ 312 3.16 9,851 $ 663 4.03 26,725 $ 1,258 6.27 78,854
NOW accounts................... 1,558 0.77 10,900 1,459 2.25 29,778 1,269 4.46 50,615
Money Market Accounts.......... 3,573 1.99 71,112 3,645 2.78 101,393 3,436 4.87 167,228
Consumer savings............... 2,655 1.42 37,631 2,361 2.69 63,408 1,797 4.61 82,772
Consumer certificates.......... 3,931 4.38 172,344 4,752 5.05 239,880 5,658 6.70 379,302
Time deposits of overseas
branches and subsidiaries....... 711 2.57 18,248 756 3.75 28,319 1,227 6.27 76,929
--------- ---------- --------- ---------- --------- ----------
Total interest bearing
deposits................ 12,740 2.54 320,086 13,636 3.63 489,503 14,645 5.76 835,700
Short-term funds borrowed:
Federal funds purchased........ 1,042 3.08 32,094 897 3.41 30,605 1,240 5.58 69,144
Commercial paper............... 604 3.14 18,982 539 3.72 20,030 791 6.28 49,657
Other.......................... 221 6.05 13,381 117 5.50 6,435 689 6.92 47,686
--------- ---------- --------- ---------- --------- ----------
Total short-term funds
borrowed................ 1,867 3.45 64,457 1,553 3.67 57,070 2,720 6.12 166,487
Long-term debt (g)............... 1,333 4.62 61,572 1,227 6.01 72,828 1,094 7.84 84,418
--------- ---------- --------- ---------- --------- ----------
Total interest bearing
liabilities............. 15,940 2.80 446,115 16,416 3.77 619,401 18,459 5.89 1,086,605
Portion of non-interest bearing funding
sources........................... 5,809 5,256 4,547
--------- ---------- --------- ---------- --------- ----------
Total funding
sources (e) ............ $ 21,749 2.05 446,115 $ 21,672 2.86 619,401 $ 23,006 4.72 1,086,605
========= ----- ---------- ========= ----- ---------- ========= ----- ----------
Net interest income and net
interest margin................... 5.72% $1,243,254 5.41% $1,172,380 5.24% $1,206,340
===== ========== ===== ========== ===== ==========
</TABLE>
76
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL DATA
CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND
RATES
<TABLE>
<CAPTION>
1993 1992 1991
------------------------- ------------------------- -------------------------
Average Income/ Average Income/ Average Income/
balance Rate expense balance Rate expense balance Rate expense
--------- ----- ------- --------- ----- ------- --------- ----- -------
(000,000) (000) (000,000) (000) (000,000) (000)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-Interest Earning Assets
Cash............................................. $ 2,213 $ 1,987 $ 1,857
Allowance for loan losses........................ (422) (433) (486)
Other assets..................................... 1,631 1,705 1,659
--------- ------- --------
Total non-interest earning assets........... $ 3,422 $ 3,259 $ 3,030
========= ======== ========
Non-Interest Bearing Funding Sources
Demand deposits:
Domestic....................................... $ 5,441 $ 5,113 $ 4,461
Foreign........................................ 369 324 308
Other liabilities................................ 1,434 1,336 1,140
Shareholders' equity............................. 1,987 1,742 1,668
Non-interest bearing funding sources used to
fund earning assets............................ (5,809) (5,256) (4,547)
--------- --------- ---------
Total net non-interest bearing funding
sources................................. $ 3,422 $ 3,259 $ 3,030
========= ======== ========
Supplementary Averages
Net demand deposits.............................. $ 4,358 $ 3,801 $ 3,131
Net Federal funds purchased...................... 846 3.07% $25,975 416 2.15% $ 8,926 812 5.19% $42,176
Certificates of deposit in domestic offices
over $100,000.................................. 295 3.28 9,678 603 4.21 25,360 1,170 6.48 75,798
Average prime rate............................... 6.00 6.25 8.46
(a) Yields and income on time deposits include net Eurodollar trading (e) For the years 1993-1988, 8%, 10%, 9%, 8%, 7% and
profits. 12%, respectively, of total average assets and
(b) The net impact of interest rate swaps is recognized as an adjustment liabilities are attributed to foreign operations.
to interest income or expense of the related hedged asset or liability. (f) Average balances on time deposits in domestic
(c) Yields and income on loans include fees on loans. offices are reduced by specified reserve amounts
(d) Non-performing loans are included in interest earning assets. for purposes of rate calculations.
(g) Rates on long-term debt are based on average
balances excluding capital lease obligations.
</TABLE>
77
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL DATA
CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND
RATES: continued
<TABLE>
<CAPTION>
1990 1989
------------------------------ ------------------------------
Average Income/ Average Income/
balance Rate expense balance Rate expense
--------- ------ ----------- --------- ------ -----------
(000,000) (000) (000,000) (000)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
Time deposits, principally Eurodollars (a)....... $ 659 8.41% $ 55,412 $ 999 9.17% $ 91,629
Investment securities (b):
U.S. Government................................ 1,400 8.87 124,139 1,728 8.74 150,953
State and municipal............................ 544 10.77 58,565 540 10.63 57,377
Other.......................................... 515 9.01 46,383 706 9.89 69,833
--------- ---------- --------- ----------
Total investment securities............ 2,459 9.32 229,087 2,974 9.35 278,163
Federal funds sold............................... 300 8.51 25,528 472 8.73 41,199
Trading account securities....................... 7 8.66 606 038 8.26 3,138
Loans (b)(c)(d):
Domestic:
Commercial, industrial and other............. 7,748 10.89 843,728 7,410 11.66 863,815
Real estate.................................. 6,076 10.64 646,200 5,698 11.33 645,662
Consumer..................................... 3,711 14.62 542,366 3,263 14.17 462,338
Financial institutions....................... 996 10.13 100,869 946 10.41 98,438
Factoring receivable......................... 478 10.42 49,829 458 11.79 53,983
Lease financing.............................. 497 9.81 48,779 414 10.99 45,505
Foreign.......................................... 582 9.77 56,876 874 9.23 80,670
--------- ---------- --------- ----------
Total loans, net of discounts.......... 20,088 11.39 2,288,647 19,063 11.81 2,250,411
--------- ---------- --------- ----------
Total interest earning assets (d)(e)... $ 23,513 11.06 2,599,280 $ 23,546 11.31 2,664,540
========= ----- ---------- ========= ----- ----------
FUNDING SOURCES
Interest bearing liabilities (b):
Deposits in domestic offices (f):
Commercial................................... $ 1,722 8.15 138,037 $ 1,924 8.87 168,276
NOW accounts................................. 1,170 5.23 54,709 1,128 5.22 53,883
Money Market Accounts........................ 3,039 6.08 183,511 2,958 6.12 180,548
Consumer savings............................. 1,632 5.03 81,899 1,620 5.06 81,755
Consumer certificates........................ 5,568 8.14 453,435 4,983 8.61 429,143
Time deposits of overseas branches
and subsidiaries............................. 943 8.59 81,039 1,439 9.57 137,653
--------- ---------- --------- ----------
Total interest bearing deposits........ 14,074 7.14 992,630 14,052 7.55 1,051,258
Short-term funds borrowed:
Federal funds purchased...................... 1,889 8.11 153,144 2,382 9.25 220,350
Commercial paper............................. 1,160 8.17 94,767 880 9.21 81,069
Other........................................ 1,006 7.36 74,122 605 9.52 57,571
--------- ---------- --------- ----------
Total short-term funds borrowed........ 4,055 7.94 322,033 3,867 9.28 358,990
Long-term debt (g).............................. 754 9.21 67,700 741 9.30 67,120
--------- ---------- --------- ----------
Total interest bearing liabilities..... 18,883 7.32 1,382,363 18,660 7.92 1,477,368
Portion of non-interest bearing funding sources.. 4,630 4,886
--------- ---------
Total funding sources (e).............. $ 23,513 5.88 1,382,363 $ 23,546 6.27 1,477,368
========= ----- ---------- ========= ----- ----------
Net interest income and net interest margin...... 5.18% $1,216,917 5.04% $1,187,172
===== ========== ===== ==========
</TABLE>
78
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL DATA
CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND
RATES: continued
<TABLE>
<CAPTION>
1990 1989
------------------------------ -----------------------------
Average Income/ Average Income/
balance Rate expense balance Rate expense
--------- ------ ---------- --------- ------ ----------
(000,000) (000) (000,000) (000)
<S> <C> <C> <C> <C> <C> <C>
Non-Interest Earnings Assets
Cash.............................................. $ 2,021 $ 1,990
Allowance for loan losses......................... (335) (382)
Other assets...................................... 1,487 1,506
--------- --------
Total non-interest earning assets....... $ 3,173 $ 3,114
========= ========
Non-Interest Bearing Funding Sources
Demand deposits:
Domestic........................................ $ 4,561 $ 4,530
Foreign......................................... 273 275
Other liabilities................................. 1,182 1,331
Shareholders' equity.............................. 1,787 1,864
Non-interest bearing funding sources used to
fund earning assets............................. (4,630) (4,886)
--------- --------
Total net non-interest bearing funding
sources............................... $ 3,173 $ 3,114
========= ========
Supplementary Averages
Net demand deposits............................... $ 3,044 $ 3,007
Net Federal funds purchased....................... 1,588 8.04% $127,616 1,909 9.38% $179,151
Certificates of deposit in domestic offices
over $100,000................................... 1,510 8.24 124,398 1,850 8.90 164,697
Average prime rate................................ 10.01 10.87
</TABLE>
(a) Yields and income on time deposits include net Eurodollar trading profits.
(b) The net impact of interest rate swaps is recognized as an adjustment to
interest income or expense of the related hedged asset or liability.
(c) Yields and income on loans include fees on loans.
(d) Non-performing loans are included in interest earning assets.
(e) For the years 1993-1988, 8%, 10%, 9%, 8%, 7% and 12%,
respectively, of total average assets and liabilities are
attributed to foreign operations.
(f) Average balances on time deposits in domestic offices are reduced
by specified reserve amounts for purposes of rate calculations.
(g) Rates on long-term debt are based on average balances excluding
capital lease obligations.
79
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: Continued
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988
----------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest income and fees.................. $1,664,769 $1,762,751 $2,254,473 $2,549,267 $2,608,651 $2,236,092
Interest expense.......................... 446,115 619,401 1,086,605 1,382,363 1,477,368 1,182,178
---------- ---------- ---------- ---------- ---------- ----------
Net interest income...................... 1,218,654 1,143,350 1,167,868 1,166,904 1,131,283 1,053,914
Provision for losses on loans............. 230,000 129,300 272,596 424,644 322,166 131,085
---------- ---------- ---------- ---------- ---------- ----------
Net interest income after
provision for losses on loans... 988,654 1,014,050 895,272 742,260 809,117 922,829
Non-interest income....................... 544,654 586,723 587,113 454,349 419,695 379,495
Non-financial expenses.................... 1,223,261 1,213,343 1,229,256 1,101,613 1,071,026 947,623
---------- ---------- ---------- ---------- ---------- ----------
Income from continuing operations before
income taxes............................ 310,047 387,430 253,129 94,996 157,786 354,701
Provision for income taxes................ 98,297 126,408 90,503 6,365 14,894 49,363
---------- ---------- ---------- ---------- ---------- ----------
Income before cumulative effect of a
change in accounting principle.......... 211,750 261,022 162,626 88,631 142,892 305,338
Cumulative effect of a change in
accounting principle, net of tax........ (13,010) (84,946)
---------- ---------- ---------- ---------- ---------- ----------
Net income................................ 198,740 176,076 162,626 88,631 142,892 305,338
Dividends on preferred stock.............. 0 0 0 1,662 20,973 9,350
---------- ---------- ---------- ---------- ---------- ----------
Net income applicable to common stock..... $ 198,740 $ 176,076 $ 162,626 $ 86,969 $ 121,919 $ 295,988
========== ========== ========== ========== ========== ==========
Per common share data:
Income before cumulative effect of a
change in accounting principle....... $1.65 $2.19 $1.39 $.74 $1.03 $2.50
===== ===== ===== ==== ===== =====
Net income............................. $1.55 $1.48 $1.39 $.74 $1.03 $2.50
===== ===== ===== ==== ===== =====
Average common shares outstanding......... 128,570 119,350 117,016 117,293 118,128 118,215
======= ======= ======= ======= ======= =======
</TABLE>
80
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: Continued
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks................. $2,466,867 $ 2,445,283 $ 2,070,899 $ 2,514,189 $ 2,600,903 $ 2,283,598
Time deposits, principally Eurodollars.. 1,273,373 1,766,727 1,591,264 1,190,693 733,762 1,577,899
Investment securities................... 3,013,606 2,913,686 2,709,011 2,461,265 2,947,901 3,221,107
Loans................................... 18,026,142 17,229,407 17,704,559 19,831,352 19,791,422 17,970,693
Allowance for loan losses............... (537,767) (407,633) (446,332) (488,718) (532,514) (364,421)
Funds sold.............................. 148,527 215,490 373,500 227,298 240,426 426,966
Trading account securities.............. 6,393 2,796 1,255 3,883 18,691 3,245
Due from customers on acceptances....... 332,234 632,976 212,024 499,690 371,883 551,516
Premises, equipment and other assets.... 1,041,703 1,315,750 1,368,791 1,423,917 1,410,403 1,094,551
----------- ----------- ----------- ----------- ----------- -----------
Total assets........................ $25,771,078 $26,114,482 $25,584,971 $27,663,569 $27,582,877 $26,765,154
=========== =========== =========== =========== =========== ===========
LIABILITIES
Deposits:
Domestic:
Non-interest bearing.............. $6,331,130 $ 6,184,010 $ 5,610,780 $ 5,494,828 $ 5,502,524 $ 5,491,019
Interest bearing.................. 11,916,852 12,562,535 13,283,176 13,701,681 13,210,639 12,094,395
Overseas branches and subsidiaries.. 796,902 766,119 839,327 1,181,341 1,296,926 1,709,970
----------- ----------- ----------- ----------- ----------- -----------
Total deposits................ 19,044,884 19,512,664 19,733,283 20,377,850 20,010,089 19,295,384
Short-term funds borrowed............. 1,830,495 1,782,271 1,964,618 3,531,407 3,697,524 3,534,352
Bank acceptances outstanding.......... 337,180 635,544 213,613 503,049 376,213 567,097
Other liabilities..................... 1,069,570 1,040,191 778,536 811,978 970,905 886,931
Long-term debt........................ 1,455,036 1,253,359 1,171,830 807,230 730,062 757,505
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities............. 23,737,165 24,224,029 23,861,880 26,031,514 25,784,793 25,041,269
----------- ----------- ----------- ----------- ----------- -----------
SHAREHOLDERS' EQUITY
Preferred............................. 100,000 100,000
Common................................ 2,033,913 1,890,453 1,723,091 1,632,055 1,698,084 1,623,885
----------- ----------- ----------- ----------- ----------- -----------
Total shareholders' equity.... 2,033,913 1,890,453 1,723,091 1,632,055 1,798,084 1,723,885
----------- --------- --------- --------- --------- ---------
Total liabilities and
shareholders' equity........ $25,771,078 $26,114,482 $25,584,971 $27,663,569 $27,582,877 $26,765,154
=========== =========== =========== =========== =========== ===========
</TABLE>
81
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data:
Continued
SHAREHOLDERS' DATA
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Earnings and Dividends Per
Share Applicable
to Common Shares
Income before cumulative
effect of a change in
accounting principle...... $ 1.65 $ 2.19 $ 1.39 $ .74 $ 1.03
Dividends paid............... 1.11 1.00 .96 .96 .84
Dividends declared........... 1.14 1.02 .97 .96 .87
Common Stock Market Bid
Information
First quarter:
High....................... $29 3/4 $25 1/8 $18 3/8 $21 5/8 $21 3/4
Low........................ 26 3/8 21 7/8 12 18 5/8 20
Second quarter:
High....................... 30 1/8 27 20 3/4 22 24 1/8
Low........................ 25 1/8 21 17 3/4 18 3/8 21 1/2
Third quarter:
High....................... 29 3/4 26 1/4 23 1/2 20 3/4 25
Low........................ 26 3/4 23 5/8 19 1/4 13 23 1/8
Fourth quarter:
High....................... 29 3/4 28 7/8 24 3/8 15 7/8 23 1/2
Low........................ 25 1/8 24 1/8 20 7/8 11 3/4 19 1/4
Year-end..................... 26 1/8 28 1/2 24 15 5/8 21 3/8
Year-end bid/net income...... 15.8x 13.0x 17.3x 21.1x 16.7x
Book value per share at
year-end.................... $ 15.79 $ 14.76 $ 14.65 $ 13.99 $ 14.41
<CAPTION>
OTHER SELECTED DATA
Operating Ratios:
Income from continuing
operations
applicable to common stock 1993 1992 1991 1990 1989
------- ------- ------- ------- -------
as a percent of:
<S> <C> <C> <C> <C> <C>
Operating income......... 9.58% 11.11% 5.72% 2.95% 4.72%
Average common
shareholders' equity.... 10.66 14.98 9.75 4.91 6.91
Average total assets..... .84 1.05 .62 .33 .54
Average total shareholders'
equity as a percent of
average total assets....... 7.89 6.81 6.28 6.66 6.99
Dividends declared as a
percent of income from
continuing operations...... 63.18 45.00 67.32 125.12 54.55
Full Time Equivalent Staff
at Year-End................. 14,728 14,887 15,176 15,723 16,129
Number of Locations.......... 424 422 479 494 511
Number of Registered Common
Shareholders................ 36,769 37,921 40,303 42,218 45,676
</TABLE>
82
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: continued
<TABLE>
<CAPTION>
Rate/Volume Analysis Taxable Equivalent Basis - (in thousands)
1993 vs. 1992 1992 vs. 1991
----------------------------------- -----------------------------------
Increase (decrease) in interest Increase (decrease) in interest
----------------------------------- -----------------------------------
Income / Change attributable to Income/ Change attributable to
------------------------- -----------------------
expense Volume Rate expense Volume Rate
----------- --------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets
- - -----------------------
Time deposits, principally
Eurodollars.......................................... $ (12,586) $ (3,744) $ (8,842) $ (17,497) $ 15,576 $ (33,073)
Investment securities.................................. (16,832) 21,485 (38,317) (23,838) 7,785 (31,623)
Federal funds sold..................................... (15,560) (12,792) (2,768) (5,918) 3,424 (9,342)
Trading account securities............................. 11 72 (61) 21 21
Loans:
Domestic............................................ (56,685) 4,267 (60,952) (444,521) (179,732) (264,789)
Foreign............................................. (760) 7,510 (8,270) (9,411) (174) (9,237)
--------- -------- --------- --------- --------- ---------
Total interest income............................ $(102,412) $ 16,798 $(119,210) $(501,164) $(153,121) $(348,043)
--------- -------- --------- --------- --------- ---------
Interest bearing funds
- - ----------------------
Deposits:
Domestic............................................. $(159,346) $(31,132) $(128,214) $(297,587) $ (31,062) $(266,525)
Overseas............................................. (10,071) (1,688) (8,383) (48,610) (29,532) (19,078)
Short-term funds borrowed:
Federal funds purchased.............................. 1,489 4,945 (3,456) (38,539) (19,139) (19,400)
Other................................................ 5,898 6,811 (913) (70,878) (54,219) (16,659)
Long-term debt......................................... (11,256) 7,332 (18,588) (11,590) 10,506 (22,096)
--------- -------- --------- --------- --------- ---------
Total interest expense........................... (173,286) (13,732) (159,554) (467,204) (123,446) (343,758)
--------- -------- --------- --------- --------- ---------
Net interest income.................................... $ 70,874 $ 30,530 $ 40,344 $ (33,960) $ (29,675) $ (4,285)
- - ------------------- ========= ======== ========= ========= ========= =========
</TABLE>
Changes in interest income or expense not arising solely as a result of volume
or rate variances are allocated to rate variances due to the interest
sensitivity of consolidated assets and liabilities.
Included in interest income is $61.7 million, $56.2 million and $56.4 million
of loan fees for the years ended 1993, 1992 and 1991, respectively.
Non-performing loans are included in interest earning assets.
The changes in interest expense on domestic time deposits attributable to
volume and rate are adjusted by specific reserves as average balances are
reduced by such reserve amounts for purposes of rate calculations.
83
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: Continued
LOAN PORTFOLIO
The following are summaries of certain loan categories, net of unearned
discounts, for the five years ended December 31, 1993 (in thousands):
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Domestic loans:
Commercial, industrial and other......... $ 7,538,474 $ 6,969,279 $ 6,970,081 $ 7,498,512 $ 7,608,801
----------- ----------- ----------- ----------- -----------
Real estate loans:
Construction and development........... 326,658 450,186 689,634 919,137 1,085,121
Residential............................ 2,524,471 2,782,165 2,615,997 2,629,611 2,346,801
Other, primarily commercial mortgages
and commercial loans secured by
owner-occupied real estate........... 2,796,727 2,818,083 2,701,519 2,682,459 2,444,923
----------- ----------- ----------- ----------- -----------
Total real estate loans............ 5,647,856 6,050,434 6,007,150 6,231,207 5,876,845
----------- ----------- ----------- ----------- -----------
Consumer loans:
Installment............................ 1,053,411 1,103,911 1,512,784 1,712,532 1,869,516
Credit card............................ 1,165,994 944,789 961,683 2,000,941 1,724,982
----------- ----------- ----------- ----------- -----------
Total consumer loans............... 2,219,405 2,048,700 2,474,467 3,713,473 3,594,498
----------- ----------- ----------- ----------- -----------
Financial institutions................... 865,494 778,670 975,447 1,020,859 1,052,604
Factoring receivables.................... 555,211 454,244 402,752 418,129 420,565
Lease financing.......................... 656,620 527,925 483,297 487,125 449,129
----------- ----------- ----------- ----------- -----------
Total domestic loans.............. 17,483,060 16,829,252 17,313,194 19,369,305 19,002,442
----------- ----------- ----------- ----------- -----------
Foreign loans:
Loans to or guaranteed by foreign
banks:
Government owned and central
banks.............................. 257 1,506 7,725 6,778
Other foreign banks.................. 332,149 203,103 130,308 154,158 184,622
----------- ----------- ----------- ----------- -----------
332,149 203,360 131,814 161,883 191,400
Commercial and industrial................ 210,573 196,795 242,098 300,164 234,171
Loans to other financial institutions.... 360 17,453 3,950
Loans to or guaranteed by foreign
governments/agencies excluding
banks.................................. 359,459
----------- ----------- ----------- ----------- -----------
Total foreign loans................ 543,082 400,155 391,365 462,047 788,980
----------- ----------- ----------- ----------- -----------
Total loans........................ $18,026,142 $17,229,407 $17,704,559 $19,831,352 $19,791,422
=========== =========== =========== =========== ===========
</TABLE>
84
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: Continued
RISK ELEMENT DATA:
FOREIGN OUTSTANDINGS
At December 31, 1993 there were no aggregate foreign outstandings (defined as
loans, investments, acceptances and time deposits) to borrowers in a foreign
country that exceeded 1% of total assets. At December 31, 1992 and 1991,
countries where such outstandings exceeded 1% of total assets were as follows
(in thousands):
<TABLE>
<CAPTION>
Banks
and other Governments Commercial
financial and and
institutions agencies industrial Total
------------ --------- ----------- ----------
<S> <C> <C> <C> <C>
December 31, 1992
United Kingdom......... $180,114 $106,303 $286,417
December 31, 1991
United Kingdom......... 204,300 123,707 328,007
</TABLE>
While the associated risks are clearly recognized, international lending is a
part of the Corporation's wide range of international services. It is the
Corporation's intent to remain involved in providing the international financial
services needed for the increasingly global competition faced by customers.
Outstandings below 1%, but over .75% of total assets were $197,974 in Germany at
December 31, 1992.
85
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: Continued
NON-PERFORMING ASSETS
The following represents the Corporation's non-accrual loans, renegotiated loans
and other real estate owned for the five years ended December 31, 1993 (in
thousands):
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Non-accrual loans
Domestic.......................... $226,166 $380,817 $537,927 $521,992 $158,486
Foreign........................... 171 3,047 8,797 29,139 217,465
-------- -------- -------- -------- --------
Total non-accrual loans...... 226,337 383,864 546,724 551,131 375,951
-------- -------- -------- -------- --------
Renegotiated loans
Domestic.......................... 54,871 57,494 46,611 6,547 8,358
-------- -------- -------- -------- --------
Total renegotiated loans..... 54,871 57,494 46,611 6,547 8,358
-------- -------- -------- -------- --------
Total non-performing loans... 281,208 441,358 593,335 557,678 384,309
-------- -------- -------- -------- --------
Other real estate owned (OREO)
Acquired through foreclosure
or exchange..................... 46,869 63,427 63,002 50,107 19,294
In-substance foreclosure.......... 38,343 109,045 99,983 31,853
Property formerly used in
banking operations.............. 6,202 3,908 2,022
-------- -------- -------- -------- --------
Total OREO................... 91,414 176,380 165,007 81,960 19,294
-------- -------- -------- -------- --------
Total non-performing assets.. $372,622 $617,738 $758,342 $639,638 $403,603
======== ======== ======== ======== ========
Non-performing assets as a
percentage of loans plus OREO... 2.06% 3.55% 4.24% 3.21% 2.04%
==== ==== ==== ==== ====
Non-performing assets as a
percentage of total assets...... 1.45% 2.37% 2.96% 2.31% 1.46%
==== ==== ==== ==== ====
</TABLE>
The following reflects the effect of non-accrual and renegotiated loans on both
interest income and net interest income for the three years ended December 31,
1993 (in thousands):
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- -------
<S> <C> <C> <C>
Interest income which would have
been recorded in accordance with original
terms:
Domestic................................... $ 28,567 $ 35,830 $59,202
Foreign.................................... 38 324 1,462
-------- -------- -------
Total................................. 28,605 36,154 60,664
-------- -------- -------
Interest income reflected in
total operating income:
Domestic................................... 16,836 19,804 15,180
Foreign....................................
-------- -------- -------
Total................................. 16,836 19,804 15,180
-------- -------- -------
Net reduction in interest income and net
interest income. $ 11,769 $ 16,350 $45,484
======== ======== =======
</TABLE>
ACCRUING LOANS PAST DUE 90 DAYS OR MORE
Accruing loans 90 days or more past due as to payment of interest or principal
for the five years ended December 31, 1993 were as follows (in thousands):
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Domestic......................... $46,645 $89,353 $100,223 $139,111 $80,567
------- ------- -------- -------- -------
Total.......................... $46,645 $89,353 $100,223 $139,111 $80,567
======= ======= ======== ======== =======
</TABLE>
86
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Fianncial Data: Continued
CONSOLIDATED ALLOWANCE FOR LOAN LOSSES
The following table summarizes the distribution of loan charge-offs and
recoveries by type of loan for the five years ended December 31, 1993 (in
thousands):
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
------------ ------------ ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year:
Domestic....................................................... $397,633 $436,332 $472,205 $245,747 $206,728
Foreign........................................................ 10,000 10,000 16,513 286,767 157,693
-------- -------- -------- -------- --------
407,633 446,332 488,718 532,514 364,421
-------- -------- -------- -------- --------
Allowance for loans purchased
at date of purchase
Domestic.................................................... 2,703 6,146 6,415
-------- -------- --------
Allowance for loans sold
at date of sale:
Domestic.................................................... (14,700) (27,486)
Foreign..................................................... (353)
-------- -------- --------
(353) (14,700) (27,486)
-------- -------- --------
Recoveries, by type of loan:
Domestic:
Commercial, industrial
and other................................................. 41,463 24,814 25,669 30,078 15,204
Real estate.................................................. 8,281 6,241 5,798 8,688 1,882
Consumer..................................................... 17,530 20,901 20,086 10,716 12,122
Financial institutions....................................... 2,246 2,776 1,966 1,607 12
Foreign........................................................ 12,645 13,138 26,586 17,110 1,618
-------- -------- -------- -------- --------
Total recoveries............................................ 82,165 67,870 80,105 68,199 30,838
-------- -------- -------- -------- --------
Charge-offs, by type of loan:
Domestic:
Commercial, industrial
and other............................................... 79,842 83,014 125,613 98,208 46,939
Real estate.................................................. 55,515 65,396 97,568 84,495 11,238
Consumer..................................................... 48,208 69,559 126,861 89,301 61,714
Financial institutions....................................... 816 3,195 14,669 5,993 3,891
Foreign........................................................ 5 2,890 264,788 67,544
-------- -------- -------- -------- --------
Total loans charged off..................................... 184,381 221,169 367,601 542,785 191,326
-------- -------- -------- -------- --------
Total net charge-offs........................................... 102,216 153,299 287,496 474,586 160,488
-------- -------- -------- -------- --------
Provision charged to operating
expense:
Domestic....................................................... 242,645 142,433 302,805 447,220 127,166
Foreign........................................................ (12,645)(a) (13,133)(a) (30,209)(a) (22,576)(a) 195,000
-------- -------- -------- -------- --------
230,000 129,300 272,596 424,644 322,166
-------- -------- -------- -------- --------
Balance at end of year:
Domestic....................................................... 527,767 397,633 436,332 472,205 245,747
Foreign........................................................ 10,000 10,000 10,000 16,513 286,767
-------- -------- -------- -------- --------
$537,767 $407,633 $446,332 $488,718 $532,514
======== ======== ======== ======== ========
Ratios
Net charge-offs as a percentage
of average loans outstanding................................... .59% .89% 1.52% 2.36% .84%
==== ==== ==== ==== ===
Allowance for loan losses as a
percentage of year-end loans................................... 2.98% 2.37% 2.52% 2.46% 2.69%
==== ==== ==== ==== ====
</TABLE>
(a) Reflects reallocation of the foreign allowance for loan losses to the
domestic allowance for loan losses.
87
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: Continued
DISTRIBUTION OF ALLOWANCE FOR LOAN LOSSES (a)
The distribution of the allowance for loan losses and the percentage of such
distributions to each loan type at December 31, 1993, 1992, 1991 and 1990 is
illustrated in the table below (in millions):
<TABLE>
<CAPTION>
1993 1992 1991 1990
------------------- ------------------- ------------------- -------------------
% % % %
of Loan of Loan of Loan of Loan
Allowance type Allowance type Allowance type Allowance type
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loan type
- - ---------
Domestic:
Commercial and industrial.. $214.2 2.6% $179.3 2.4% $217.8 3.0% $156.7 2.0%
Real estate:
Construction............. 67.0 20.5 92.6 20.6 86.1 12.5 132.7 14.4
Other.................... 142.6 2.7 33.2 .6 43.9 .8 62.6 1.2
Consumer................... 87.5 3.9 72.7 3.5 77.3 3.1 109.2 2.9
Other domestic loans....... 16.5 1.1 19.8 1.5 11.2 .8 11.0 .7
Foreign...................... 10.0 1.8 10.0 2.5 10.0 2.6 16.5 3.6
------ ------ ------ ------
Total................... $537.8 3.0% $407.6 2.4% $446.3 2.5% $488.7 2.5%
====== ==== ====== ==== ====== ==== ====== ====
</TABLE>
- - ------------------------------------
(a) This distribution is made for analytical purposes. It does not represent
specific allocations of the allowance. The total allowance is available to
absorb losses from any segment of the portfolio.
CERTIFICATES OF DEPOSIT OVER $100,000 ISSUED BY DOMESTIC OFFICES
(in thousands)
<TABLE>
<CAPTION>
December 31,
------------------------------------
1993 1992
----------------- -----------------
Amount Percent Amount Percent
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Maturity Distribution
3 months or less......................... $159,752 70.2% $282,807 54.3%
3 through 6 months....................... 30,491 13.4 96,562 18.5
6 through 12 months...................... 13,769 6.1 68,229 13.1
Over 12 months........................... 23,533 10.3 73,252 14.1
-------- ----- -------- -----
$227,545 100.0% $520,850 100.0%
======== ===== ======== =====
</TABLE>
88
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: Continued
INTEREST SENSITIVITY ANALYSIS AT DECEMBER 31, 1993
(in millions)
<TABLE>
<CAPTION>
Rate Maturity Period
-------------------------------------------------------------
1-90 91-181 182-365 1-2 3-5 > 5
Days Days Days Years Years Years Total
------ ------ ------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Federal funds sold, resale agreements and trading
account securities.............................. $ 170 $ 170
Time deposits...................................... 578 $ 533 $ 162 1,273
Investment securities.............................. 830 333 394 $ 590 $ 468 $ 399 3,014
Interest rate swaps................................ 637 145 345 691 1,787 695 4,300
Asset financial futures........................... 296 79 195 20 15 605
------- ------- -------- ------ ------- ------- -------
Total discretionary assets.................... 2,511 1,090 1,096 1,301 2,270 1,094 9,362
Total loans(a)..................................... 12,047 1,347 1,109 1,334 1,893 296 18,026
------- ------- -------- ------ ------- ------- -------
Total earning assets.......................... 14,558 2,437 2,205 2,635 4,163 1,390 27,388
------- ------- -------- ------ ------- ------- -------
FUNDING SOURCES
Federal funds purchased, repurchase
agreements and other short-term funds
borrowed........................................ 1,834 11 1,845
Domestic and foreign time deposits(b).............. 875 21 5 5 4 70 980
Long-term debt..................................... 616 19 30 122 29 639 1,455
Interest rate swaps................................ 3,761 25 33 149 332 4,300
Liability financial futures........................ 530 55 20 605
------- ------- -------- ------ ------- ------- -------
Total discretionary liabilities............... 7,616 131 88 276 365 709 9,185
------- ------- -------- ------ ------- ------- -------
Savings certificates............................... 1,098 786 617 424 414 301 3,640
Money market, savings and NOW accounts............. 2,447 750 1,018 1,722 2,157 8,094
Net non-interest bearing funds(c)(d)............... 4,091 2,378 6,469
------- ------- -------- ------ ------- ------- -------
Total savings certificates and indefinite
maturity liabilities....................... 7,636 1,536 1,635 2,146 2,571 2,679 18,203
------- ------- -------- ------ ------- ------- -------
Total net funding sources..................... 15,252 1,667 1,723 2,422 2,936 3,388 27,388
------- ------- -------- ------ ------- ------- -------
Period gap.................................... (694) 770 482 213 1,227 (1,998) -0-
Cumulative gap................................ (694) 76 558 771 1,998 -0-
Adjustments(e)................................ 401 (630) (289) (390) (1,267) 2,175 -0-
------- ------- -------- ------ ------- ------- -------
Adjusted period gap........................... $ (293) $ 140 $ 193 $ (177) $ (40) $ 177 $ -0-
======= ======= ======== ====== ======= ======= =======
Cumulative gap................................ $ (293) $ (153) $ 40 $ (137) $ (177) $ -0- $ -0-
======= ======= ======== ====== ======= ======= =======
</TABLE>
Notes to interest sensitivity analysis:
(a) Non-performing loans are included in 1-90 days.
(b) Deposit volumes exclude time deposits not at interest.
(c) Net non-interest bearing funds is the sum of non-interest bearing
liabilities and shareholders' equity minus non-interest earning assets.
(d) The estimated volume of stable net non-interest bearing funds is allocated
to the over 1 year interest sensitivity period. Allocations to the under 1
year periods include: estimated volumes that are expected to vary inversely
with interest rates; and the temporary difference between the actual volume
of total net non-interest bearing funds on December 31, 1993 and the trend
volume at the current level of interest rates.
(e) Adjustments reflect managerial assumptions as to the appropriate investment
maturities for non-interest bearing funding sources, along with the funding
of current investment and loan commitments.
89
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: Continued
<TABLE>
<CAPTION>
INVESTMENT SECURITIES
(in thousands)
Carrying Value at December 31,
1993(a) 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
U.S. Treasury........................................ $ 970,070 $ 885,998 $ 853,485
U.S. Government agencies and
corporations.................................... 1,503,862 1,490,414 1,122,660
State and municipal.................................. 291,632 372,966 371,190
Other................................................ 248,042 164,308 361,676
---------- ---------- ----------
$3,013,606 $2,913,686 $2,709,011
========== ========== ==========
</TABLE>
(a) Held-to-maturity and available-for-sale portfolios.
Maturity Distribution and Weighted Average Yield at December 31, 1993(a)
<TABLE>
<CAPTION>
U.S.
Government Total
U.S. Agencies and State and -------------------
Treasury Corporations Municipal Other Amount Yield(b)
-------- ------------ ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
1 year or less....................................... $ 297,587 $ 186,290 $ 81,173 $ 49,912 $ 614,962 5.34%
1 year through 5 years............................... 401,535 1,018,942 143,269 16,638 1,580,384 5.48
5 years through 10 years............................. 270,901 79,627 32,734 3,845 387,107 6.48
After 10 years....................................... 47 219,003 34,456 177,647 431,153 7.17
---------- ---------- ---------- ---------- ----------
$970,070 $1,503,862 $ 291,632 $ 248,042 $3,013,606 5.82%
========== ========== ========== ========== ==========
</TABLE>
(a) Held-to-maturity and available-for-sale portfolios.
(b) The weighted average yield has been computed on a tax equivalent basis using
an effective tax rate of 35%. The amount of the tax equivalent adjustment by
range of maturity is as follows: 1 year or less - $2,196; 1 year to 5 years -
$5,009; 5 years to 10 years - $1,050 and after 10 years - $2,240.
90
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in (a) the Registration Statement
(Form S-8, No. 33-5874), the Post-Effective Amendment No. 1 to the Registration
Statement (Form S-8, No. 2-91176), the Registration Statement (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 (Form
S-8, No. 33-32934) and prospectus relating to the CoreStates Savings Plan, (c)
the Registration Statement (Form S-8, No. 33-50324) pertaining to the CoreStates
Financial Corp 1992 Long-Term Incentive Plan, (d) the Registration Statement
(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 Capital Corp and the related guarantees of the Corporation, and
Preferred Stock, Depository Shares, Common Stock, and Capital Securities,
issuable by the Corporation, (e) the Registration Statement (Form S-4, No. 33-
7286) and prospectus relating to shares of the Corporation Common Stock
issuable upon the exercise of stock option and Convertible Subordinated
Debentures, the obligations in respect to which were assumed by the
Corporation in connection with the acquisition of New Jersey National
Corporation, (f) the Registration Statement (Form S-4, No. 33-31896) and
prospectus relating to shares of the Corporation Common Stock issuable upon
the exercise of stock options and stock appreciation rights and outstanding 5-
1/2% Convertible Subordinated Debentures, the obligations in respect to which
were assumed by the Corporation in connection with the acquisition of First
Pennsylvania Corporation, (g) the Registration Statement (Form S-4, No. 33-
48422) and prospectus relating to shares of the Corporation Common Stock
issuable upon the exercise of stock options, the obligations in respect to
which were assumed by the Corporation in connection with the acquisition of
First Peoples Corporation, (h) the Post-effective Amendment No. 1 to the
Registration Statement (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, and (i) the Registration
Statement (Form S-4, No. 33-51429) and prospectus relating to shares of the
Corporation Common Stock issuable upon the exercise of stock options, the
obligation in respect to which were assumed by the Corporation in connection
with the acquisition of Constellation Bancorp, of our report dated February 1,
1994, except for Note 2, as to which the date is March 16, 1994, with respect
to the consolidated financial statements of CoreStates Financial Corp included
in the current report on Form 8-K dated May 5, 1994.
/s/ Ernst & Young
Philadelphia, Pennsylvania
May 5, 1994
91
<PAGE>
Exhibit 23.2
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
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. The financial statements
referred to above are not separately presented in such report on Form 8-K.
/s/ KPMG Peat Marwick
Short Hills, New Jersey
May 5, 1994
92
