<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): September 13, 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)
1
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
---------------------------------
(A) Consolidated Financial Statements of CoreStates PAGE
Financial Corp 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 34
(6) Reports of Independent Auditors...................... 35 to 37
(7) Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 38 to 64
(8) Supplemental Financial Data
(a) Five Year Average Balance Sheet, Statement
of Income and Balance Sheet 65 to 70
(b) Shareholders' and Other Selected Data 71
(c) Rate/Volume Analysis 72
(d) Loan Portfolio, Risk Elements and Allowance 73 to 77
for Loan Losses Data
(e) Selected Maturity and Interest Sensitivity Data 77 to 79
(B) Exhibits
23.1 Consent of Ernst & Young LLP
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Coopers & Lybrand LLP
EXHIBIT INDEX
-------------
Exhibit No.
-----------
23.1 Consent of Ernst & Young LLP.......................... 80
23.2 Consent of KPMG Peat Marwick LLP...................... 81
23.3 Consent of Coopers & Lybrand LLP...................... 82
2
<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/ Albert W. Mandia
------------------------
Albert W. Mandia
Executive Vice President, Finance
(Principal Accounting Officer)
Dated: September 13, 1994
3
<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 34
Reports of Independent Auditors............................... 35 to 37
Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 38 to 64
Supplemental Financial Data................................... 65 to 79
- ------------------------------------
(a) The accompanying Financial Statements have been restated to include the
consolidated accounts of Independence Bancorp, Inc., which was acquired on
June 27, 1994 and accounted for as a pooling of interests.
4
<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......................................... $1,553,865 $1,609,209 $2,066,918
Tax exempt income...................................... 31,150 38,554 49,923
Interest on investment securities:
Taxable income......................................... 185,866 216,074 230,930
Tax exempt income...................................... 19,304 22,777 30,813
Interest on time deposits in banks....................... 44,340 58,613 79,768
Interest on Federal funds sold, securities purchased
under agreements to resell and other................... 7,339 16,611 26,925
---------- ---------- ----------
Total interest income............................... 1,841,864 1,961,838 2,485,277
---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits:
Domestic savings....................................... 149,094 230,166 345,031
Domestic time (Note 9)................................. 212,471 311,970 528,439
Overseas branches and subsidiaries..................... 18,248 28,319 76,929
---------- ---------- ----------
Total interest on deposits.......................... 379,813 570,455 950,399
Interest on short-term funds borrowed (Note 10).......... 67,001 60,480 171,605
Interest on long-term debt (Note 11)..................... 69,779 78,425 90,363
---------- ---------- ----------
Total interest expense.............................. 516,593 709,360 1,212,367
---------- ---------- ----------
Net interest income................................. 1,325,271 1,252,478 1,272,910
Provision for losses on loans (Note 7)................... 121,201 160,250 291,261
---------- ---------- ----------
Net interest income after provision for
losses on loans.................................... 1,204,070 1,092,228 981,649
NON-INTEREST INCOME
Service charges on deposit accounts...................... 179,428 163,132 142,989
Trust income............................................. 101,793 96,731 97,362
Fees for international services.......................... 69,432 60,247 47,275
Debit and credit card fees............................... 61,717 152,078 168,056
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)....................... 16,110 13,805 (13,868)
Other gains (Notes 6 and 20)............................. 11,000 41,072 89,062
Other operating income................................... 119,137 81,763 82,076
---------- ---------- ----------
Total non-interest income........................... 574,030 610,664 615,565
---------- ---------- ----------
NON-FINANCIAL EXPENSES
Salaries, wages and benefits (Notes 12 and 13)........... 622,968 627,904 620,359
Net occupancy (Notes 8 and 14)........................... 114,951 112,765 121,848
Equipment expenses (Note 8).............................. 74,844 85,589 89,066
Other operating expenses (Note 16)....................... 429,099 480,335 488,192
---------- ---------- ----------
Total non-financial expenses...................... 1,241,862 1,306,593 1,319,465
---------- ---------- ----------
INCOME BEFORE INCOME TAXES............................... 536,238 396,299 277,749
Provision for income taxes (Note 16)..................... 173,809 128,165 97,432
---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE................................. 362,429 268,134 180,317
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............................................... $ 349,419 $ 183,188 $ 180,317
========== ========== ==========
PER COMMON SHARE DATA (Based on weighted average
shares outstanding of 145.398 million in 1993,
135.813 million in 1992 and 133.237 million in 1991)
Income before cumulative effect of a change in
accounting principle................................... $2.49 $1.97 $1.35
===== ===== =====
Net Income............................................... $2.40 $1.35 $1.35
===== ===== =====
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)......................... $ 2,521,676 $ 2,510,001
Time deposits, principally Eurodollars................... 1,319,457 1,815,394
Investment securities (market value: 1993-$3,628,119
1992-$3,671,842) (Note 5).............................. 3,599,166 3,588,348
Total loans, net of unearned discounts of
$151,994 in 1993 and $194,619 in 1992 (Note 6)......... 19,776,258 18,940,402
Less: Allowance for loan losses (Note 7)............... (450,823) (442,267)
----------- -----------
Net loans...................................... 19,325,435 18,498,135
Federal funds sold and securities purchased under
agreements to resell................................... 161,527 266,890
Trading account securities............................... 6,393 2,796
Due from customers on acceptances........................ 332,234 632,976
Premises and equipment (Note 8).......................... 410,022 405,427
Other assets (Note 20)................................... 758,707 1,012,750
----------- -----------
Total assets................................... $28,434,617 $28,732,717
=========== ===========
LIABILITIES
Deposits:
Domestic:
Non-interest bearing................................. $ 6,649,367 $ 6,460,415
Interest bearing (Note 9)............................ 13,686,027 14,446,043
Overseas branches and subsidiaries (Note 9)............ 796,902 766,119
----------- -----------
Total deposits................................. 21,132,296 21,672,577
Short-term funds borrowed (Note 10)...................... 1,884,125 1,904,044
Bank acceptances outstanding............................. 337,180 635,544
Other liabilities (Note 12).............................. 1,123,342 1,068,395
Long-term debt (Note 11)................................. 1,589,290 1,357,598
----------- -----------
Total liabilities.............................. 26,066,233 26,638,158
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 15)
SHAREHOLDERS' EQUITY (NOTES 11, 13 AND 19)
Common stock: $1 par value; authorized 200.0 million
shares; issued 145.8 million shares in 1993 and 144.7
million shares in 1992 (including treasury shares of
.4 million in 1993 and .2 million in 1992)............. 2,368,384 2,094,559
----------- -----------
Total shareholders' equity..................... 2,368,384 2,094,559
----------- -----------
Total liabilities and shareholders' equity..... $28,434,617 $28,732,717
=========== ===========
</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............................. $ 60,703 $620,002 $ 975,165 $(23,815) $1,632,055
Acquisition of Independence Bancorp, Inc. (Note 2)...... 16,128 89,681 91,702 197,511
-------- -------- ---------- -------- ----------
Balances at January 1, 1991, restated................... 76,831 709,683 1,066,867 (23,815) 1,829,566
Net income.............................................. 180,317 180,317
Net change in unrealized loss on marketable equity
securities, net of tax (Note 5)........................ 22,257 22,257
Treasury shares acquired (73 shares).................... (3,051) (3,051)
Repurchase and retirement of common stock............... (12) (66) (21) (99)
Common stock issued under employee benefit
plans (451 shares)..................................... 56 1,650 (3,038) 14,670 13,338
Common stock issued under dividend reinvestment and
stock purchase plans (262 shares)...................... 142 2,016 4,485 6,643
Foreign currency translation adjustments................ 674 674
Common dividends declared............................... (122,234) (122,234)
-------- -------- ---------- -------- ----------
Balances at December 31, 1991........................... 77,017 713,283 1,144,822 (7,711) 1,927,411
Net income.............................................. 183,188 183,188
Net change in unrealized gain in marketable
equity securities, net of tax (Note 5)................. 1,331 1,331
Treasury shares acquired (30 shares).................... (1,480) (1,480)
Stock issued in public offering (7,842 shares).......... 7,842 59,739 67,581
Common stock issued under employee benefit
plans (1,230 shares)................................... 1,190 30,286 131 777 32,384
Common stock issued under dividend reinvestment
plan (449 shares)...................................... 338 14,083 4,288 18,709
Conversion of subordinated debt......................... (45) 245 200
Foreign currency translation adjustments................ (4,384) (4,384)
Common dividends declared............................... (130,381) (130,381)
-------- -------- ---------- -------- ----------
Balances at December 31, 1992........................... 86,387 817,391 1,194,662 (3,881) 2,094,559
Net income.............................................. 349,419 349,419
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).................................... 64,305 64,305
Acquisition of Inter Community Bancorp (Note 2)......... (213) 17,459 17,246
Treasury shares acquired (1,060 shares)................. (28,734) (28,734)
Repurchase and retirement of common stock............... (382) (2,255) (5,808) (8,445)
Common stock issued under employee benefit
plans (857 shares)..................................... 586 13,701 (1,510) 4,156 16,289
Common stock issued under dividend reinvestment
plan (358 shares)...................................... 220 8,590 (101) 3,181 12,534
Foreign currency translation adjustments................ (1,758) (1,758)
Common dividends declared............................... (147,031) (147,031)
-------- -------- ---------- -------- ----------
Balances at December 31, 1993........................... $145,740 $778,498 $1,451,965 $ (7,819) $2,368,384
======== ======== ========== ======== ==========
</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....................................... $ 349,419 $ 183,188 $ 180,317
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.................. 121,201 160,250 291,261
Provision for losses and writedowns
on other real estates owned................... 26,614 34,253 38,031
Depreciation and amortization.................. 84,998 106,111 119,186
Deferred income tax expense (benefit).......... (10,656) 26,864 32,238
Securities (gains) losses (Note 5)............. (16,110) (13,805) 13,868
Other gains (Notes 6 and 20)................... (11,000) (41,072) (89,062)
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............... 3,646 44,398 59,495
Decrease in interest payable.................. (7,738) (62,667) (58,526)
Other, net..................................... 44,234 80,421 (7,277)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES........ 744,690 684,160 592,507
------------ ------------ ------------
INVESTING ACTIVITIES
Net (increase) decrease in loans (Note 6)........ (1,483,539) (191,780) 499,710
Proceeds from sales of loans (Note 6)............ 790,193 568,698 1,414,444
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........................ 495,615 (131,596) (383,932)
Purchases of investment securities............... (2,252,933) (2,169,341) (1,600,443)
Proceeds from sales of investment
securities (Note 5)............................ 581,101 408,341 498,878
Proceeds from maturities of investment
securities..................................... 1,819,500 1,440,311 898,300
Net (increase) decrease in Federal funds
sold and securities purchased under
agreements to resell........................... 105,363 109,410 (94,351)
Purchases of premises and equipment.............. (107,275) (47,221) (77,635)
Proceeds from sales and paydowns on other
real estate owned.............................. 84,389 79,073 34,146
Other, net....................................... 6,689 49,505 (72,653)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES................................... (261,921) (81,679) 1,004,504
------------ ------------ ------------
FINANCING ACTIVITIES
Net decrease in deposits......................... (540,605) (244,987) (692,831)
Long-term debt issued (Note 11).................. 916,519 332,775 626,145
Retirement of long-term debt..................... (683,399) (215,756) (266,901)
Net proceeds from issuance of common
stock in public offering....................... 4,966 71,782 1,746
Net decrease in short-term funds
borrowed....................................... (19,919) (165,407) (1,595,598)
Cash dividends paid.............................. (143,334) (126,265) (120,943)
Other, net....................................... (5,322) 44,995 14,643
------------ ------------ ------------
NET CASH USED IN FINANCING ACTIVITIES.......... (471,094) (302,863) (2,033,739)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND DUE
FROM BANKS.................................... 11,675 299,618 (436,728)
Cash and due from banks at January 1,.......... 2,510,001 2,210,383 2,647,111
------------ ------------ ------------
CASH AND DUE FROM BANKS AT DECEMBER 31,.......... $ 2,521,676 $ 2,510,001 $ 2,210,383
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest....................................... $ 524,565 $ 771,780 $ 1,271,606
============ ============ ============
Income taxes................................... $ 167,216 $ 124,952 $ 49,458
============ ============ ============
</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"); CoreStates
Bank of Delaware, N.A. ("CBD"); Constellation Bank, N.A. ("Constellation Bank");
Bucks County Bank and Trust Company; Cheltenham Bank; Lehigh Valley Bank; and
Third National Bank and Trust Company of Scranton. All material intercompany
transactions have been eliminated. The financial statements include the
consolidated accounts of Independence Bancorp, Inc. ("Independence"), which was
acquired on June 27, 1994, and Constellation Bancorp ("Constellation"), which
was acquired on March 16, 1994 for all periods presented. Both transactions were
accounted for as poolings 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 $.09 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 $1,272,138
were classified as available-for-sale at December 31, 1993 and were written up
to their aggregate fair value of $1,370,606. After the related tax effects,
shareholders' equity at December 31, 1993 was increased by $64,305 to reflect
the write-up of these securities to fair value.
9
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 $.62 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.
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 $64,305 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.
10
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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
Independence Bancorp, Inc. on June 27, 1994, 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.
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. This acquisition is not material to the financial position
or results of operations and accordingly, pro forma information is deemed not
necessary.
11
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
2. ACQUISITIONS AND PROPOSED ACQUISITIONS (continued)
On March 16, 1994, the Corporation acquired Constellation Bancorp
("Constellation"), a New Jersey bank holding company with $2.3 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.
On June 27, 1994, the Corporation acquired Independence Bancorp, Inc.
("Independence"), a Pennsylvania bank holding company with $2.6 billion in
assets and $2.1 billion in deposits. The Corporation issued approximately 16.6
million shares of common stock to shareholders of Independence based on an
exchange ratio of 1.5 shares of the Corporation's common stock for each share of
Independence common stock.
The Constellation and Independence acquisitions were both accounted for as a
pooling of interests; accordingly, the consolidated financial statements have
been restated to include the consolidated accounts of Constellation and
Independence for all periods presented. Previously reported information was as
follows:
<TABLE>
<CAPTION>
1993 CORPORATION CONSTELLATION INDEPENDENCE
- ---- ----------- ------------- ------------
<S> <C> <C> <C>
Net interest income.......................... $1,117,901 $100,753 $106,617
Provision for losses on loans................ 100,000 10,000 11,201
Non-interest income.......................... 503,055 41,599 29,376
Non-financial expenses....................... 1,033,375 115,186 93,601
Provision for income taxes................... 159,654 662 (a) 8,312
Income before cumulative effect of a change
in accounting principle..................... 327,927 16,504 22,879
Cumulative effect of a change in accounting
principle, net of tax....................... (13,010) -
Net income................................... 314,917 16,504 22,879
Income per share before cumulative effect
of a change in accounting principle......... 2.80 .61 1.98
Net income per share......................... 2.69 .61 1.98
Cash dividends declared...................... 1.14 - 1.16
1992
- ----
Net interest income.......................... $1,057,046 $ 86,304 $109,128
Provision for losses on loans................ 119,300 10,000 30,950
Non-interest income.......................... 546,509 40,585 23,941
Non-financial expenses....................... 1,094,591 118,527 93,250
Provision for income taxes................... 127,260 53 (a) 1,757
Income (loss) before cumulative effect of a
change in accounting principle.............. 262,404 (1,691) 7,112
Cumulative effect of a change in accounting
principle, net of tax....................... (80,986) - (c) 4,378 (b)
Net income, (loss)........................... 181,418 (1,691) 11,490
Income (loss) per share before cumulative
effect of a change in accounting principle.. 2.27 (.19) .63
Net income (loss) per share.................. 1.57 (.19) 1.02
Cash dividends declared...................... 1.02 - 1.16
</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> <C>
Net interest income........................ $1,086,393 $ 81,475 $105,042
Provision for losses on loans.............. 190,601 81,995 18,665
Non-interest income........................ 541,646 46,285 28,452
Non-financial expenses..................... 1,096,119 133,955 90,209
Provision for income taxes................. 113,573 532 (a) 5,664 (b)
Net income (loss).......................... 227,746 (88,722) 18,956
Net income (loss) per share................ 2.00 (10.82) 1.72
Cash dividends declared.................... .97 - 1.16
- -------------------------------------------------------------------
</TABLE>
(a) In 1993, Constellation prospectively adopted FAS 109. However, restated
financial information is prepared as if Constellation retroactively adopted
FAS 109 as of January 1, 1987. The impact of applying pooling of interests
accounting rules and retroactively applying FAS 109 to Constellation had
the following effects on restated net income and period-end common
shareholders' equity:
<TABLE>
<CAPTION>
Increase (decrease)
in net income Cumulative increase
-------------------------- in common
Amount Per Share shareholders' equity
------ --------- --------------------
<S> <C> <C> <C>
Year ended:
December 31, 1993............ $(5,076) $(0.03) $39,924
December 31, 1992............ 702 0.01 45,000
December 31, 1991............ 23,602 0.02 44,298
</TABLE>
(b) Independence prospectively adopted FAS 109 on January 1, 1992, recognizing
a cumulative benefit of $4.4 million as the cumulative effect of a change in
accounting principle. However, restated financial information is prepared as if
Independence retroactively adopted FAS 109 as of January 1, 1987. The impact of
applying pooling of interests accounting rules and retroactively applying FAS
109 to Independence has the following effects on restated net income and period-
end common shareholders' equity:
<TABLE>
<CAPTION>
Increase (decrease)
in net income Cumulative increase
-------------------------- in common
Amount Per Share shareholders' equity
------ --------- --------------------
<S> <C> <C> <C>
Year ended:
December 31, 1993............ - - -
December 31, 1992............ $(4,378) $(0.03) -
December 31, 1991............ (1,265) (0.01) $4,378
</TABLE>
(c) Constellation adopted FAS 106 on January 1, 1993, the date required under
that statement. Constellation elected not to recognize immediately its $6.0
million transitional liability, but to amortize that liability over 20 years. As
permitted under FAS 106 and pooling accounting, the restated financial
information is prepared as if Constellation adopted FAS 106 effective January 1,
1992 and immediately recognized the $6.0 million, $4.0 million after-tax,
transitional liability. Restated salaries, wages and benefits have been adjusted
accordingly.
Subsequent to the March 16, 1994 consummation of the Constellation acquisition,
Constellation recorded merger-related charges in the first quarter of 1994 in
connection with a change in strategic direction related to problem assets and to
conform its consumer lending charge-off policies to those of the Corporation,
and charges for expenses attributable to the acquisition. These merger related
charges totalled $127.8 million after-tax, or $0.89 per share. On a pre-tax
basis, the merger-related charges consisted of a $120.0 million provision for
loan losses, a $28.0 million addition to the OREO reserve, $13.0 million for the
writedown of purchased mortgage servicing rights and related assets, and $34.0
million for expenses directly attributable to the acquisition.
Subsequent to the June 27, 1994 consummation of the Independence acquisition,
Independence recorded merger-related charges in the second quarter of 1994 in
connection with a change in strategic direction related to problem assets and to
conform its consumer lending charge-off policies to those of the Corporation,
and charges for expenses attributable to the acquisition. These merger-related
charges totalled $39.9 million after-tax, or $0.28 per share. On a pre-tax
basis, the merger-related charges consisted of a $25.0 million provision for
loan losses, a $4.0 million addition to the OREO reserve, and $29.7 million for
expenses directly attributable to the acquisition.
In March 1994, the Corporation announced a definitive agreement to acquire
Germantown Savings Bank ("GSB"), a $1.6 billion Pennsylvania chartered stock
savings bank. Under the terms of the agreement each of GSB's 4.19 million
shares of common stock will be exchanged for a combination of the Corporation's
common stock, equal to 55% of the $62 per GSB share purchase price, and cash,
equal to 45% of the purchase price. The total purchase price is approximately
$260 million. The acquisition will be accounted for as a purchase creating
intangible assets 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 in the fourth quarter of 1994, assuming approval by regulators
and GSB shareholders. A summary of unaudited historical financial information
for GSB follows:
13
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
2. ACQUISITIONS AND PROPOSED ACQUISITIONS - (continued)
<TABLE>
<CAPTION>
1993 1992(d) 1991(c)
------- ------- -------
<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 and common
equivalent 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 and
GSB combined follows:
<TABLE>
<CAPTION>
1993
----------
<S> <C>
Operating results (in thousands,
except per share):
Net interest income................ $1,382,777
Non-interest income................ 580,445
Income before cumulative effect
of a change in accounting
principle........................ 370,755
Per common share................... 2.45
Average common shares
outstanding...................... 151,032
<CAPTION>
1993
----------
<S> <C>
Balance sheet at year-end (in
millions, except per share):
Assets............................. $30,238
Loans.............................. 20,823
Deposits........................... 22,617
Shareholders' equity............... 2,474
Book value per common share........ 16.41
</TABLE>
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.
14
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
3. FAIR VALUES OF FINANCIAL INSTRUMENTS: continued
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.
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 $728,764 and $583,187 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........... $ 7,879,451 $ 7,869,217 $ 7,354,666 $ 7,357,065
Real estate loans.......................... 6,663,656 6,695,595 7,028,097 7,100,150
Consumer:
Installment.............................. 1,361,581 1,380,210 1,379,760 1,395,043
Credit card.............................. 1,174,024 1,274,288 957,168 1,042,348
Financial institutions..................... 870,489 872,396 783,125 788,767
Factoring receivables...................... 555,211 555,211 454,244 454,244
Foreign...................................... 543,082 543,127 400,155 401,067
----------- ----------- ----------- -----------
Total loans, excluding lease
financing.................................. 19,047,494 19,190,044 18,357,215 18,538,684
Allowance for loan losses.................... (450,823) - (442,267) -
----------- ----------- ----------- -----------
Net loans, excluding lease
financing................................ $18,596,671 $19,190,044 $17,914,948 $18,538,684
=========== =========== =========== ===========
</TABLE>
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 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.
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.. $ 6,649,367 $ 6,649,367 $ 6,460,415 $ 6,460,415
NOW accounts................... 1,907,537 1,907,537 1,913,539 1,913,539
Savings accounts............... 4,188,103 4,188,103 4,285,076 4,285,076
Money market accounts.......... 3,043,779 3,043,779 2,834,768 2,834,768
Time deposits.................. 4,546,608 4,708,460 5,412,660 5,577,814
----------- ----------- ----------- -----------
Total domestic deposits.. 20,335,394 20,497,246 20,906,458 21,071,612
Overseas branches and
subsidiaries.................. 796,902 796,902 766,119 766,119
----------- ----------- ----------- -----------
Total deposits........... $21,132,296 $21,294,148 $21,672,577 $21,837,731
=========== =========== =========== ===========
</TABLE>
The estimated fair values above do not include the benefit that results from
funding provided by core deposit liabilities as compared to the cost of
borrowing funds in the financial markets. That benefit, commonly referred to as
a deposit base intangible, is estimated to be approximately $570,000 at December
31, 1993 and $515,000 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.
16
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
3. FAIR VALUES OF FINANCIAL INSTRUMENTS-continued
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 $462,000, and
$326,000, respectively.
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................... $ 435,721 $ 14,320 $ 502 $ 449,539
U.S. Government agencies........ 439,496 9,815 621 448,690
State and municipal............. 77,050 2,185 174 79,061
Other:
Domestic....................... 308,488 26,988 5,919 329,557
Foreign........................ 11,383 52,376 - 63,759
---------- -------- ------- ----------
Total available-for-sale..... $1,272,138 $105,684 $ 7,216 $1,370,606
========== ======== ======= ==========
1992
- ----
U.S. Treasury................... $ 887,055 $ 16,548 $ 2,754 $ 900,849
U.S. Government agencies........ 1,848,837 21,207 8,225 1,861,819
State and municipal............. 419,303 18,026 578 436,751
Other:
Domestic....................... 398,388 27,936 13,048 413,276
Foreign........................ 34,765 24,382 - 59,147
---------- -------- ------- ----------
Total investment securities. $3,588,348 $108,099 $24,605 $3,671,842
========== ======== ======= ==========
</TABLE>
17
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
5. INVESTMENT SECURITIES - (continued)
At December 31, 1992, the other domestic investment securities category included
marketable equity securities of $37,204, 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 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 $2,636 on sales of certain domestic
marketable equity securities. At December 31, 1992, the market value of the
marketable equity securities portfolio exceeded its carrying value by $20,592.
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 $26,257, the aggregate of their excess December 31, 1993 fair
values over cost, through an after-tax credit to retained earnings. The
Corporation recorded pre-tax gains of $13,594 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.
Included in other domestic securities available-for-sale at December 31, 1993
were mortgage residual securities with an amortized cost and fair value of
$13,251 and $8,339, respectively. At December 31, 1992, the carrying value and
market value were $26,401 and $16,144, respectively. Write-downs of $3,961 and
$2,376 were recognized in 1993 and 1992, respectively, on these investments and
were included in securities gains and losses. During the first quarter of 1994,
a $3.4 million after-tax impairment loss was recognized on these mortgage
residual securities as the cumulative effect of a change in accounting
principle. The loss was the result of a write-down to fair value of
these securities which were deemed to be impaired. This write-down resulted
from a FASB interpretation of FAS 115 reached by a consensus of the FASB
Emerging Issues Task Force in March 1994, providing more definitive criteria for
recognition of impairment losses on these types of 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 $3,519,767 were pledged at December 31, 1993
to secure public deposits, trust deposits, and for certain other purposes as
required by law.
The amortized cost and estimated fair value of debt securities at December 31,
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................ $ 141,297 $ 141,304
Due after one year through five years.. 239,892 241,703
Due after five year through ten years.. 282,505 295,170
Due after ten years.................... 72,596 74,249
---------- ----------
736,290 752,426
Mortgage-backed securities............. 489,139 492,976
---------- ----------
$1,225,429 $1,245,402
========== ==========
</TABLE>
Proceeds from sales of investments in debt securities during 1993, 1992 and 1991
were $535,267, $344,605 and $490,313, respectively. Gross gains of $6,069 in
1993, $8,475 in 1992 and $13,704 in 1991, and gross losses of $200 in 1993, $808
in 1992 and $3,056 in 1991 were realized on those sales.
18
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
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 73 and 75).
The book value of real estate loans transferred to other real estate owned
during 1993, 1992 and 1991 was $48,124, $126,184 and $163,808 respectively.
Other real estate owned includes properties that the Corporation has acquired in
foreclosure or that have been determined to be "in substance" foreclosed.
At December 31, 1993 and 1992, the Corporation had loans totalling $172,175 and
$237,466, 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 $2,474,519 and $2,539,810, respectively.
In October 1991, the Corporation sold $1,036,514 of credit card receivables,
representing most of its out-of-region credit card portfolio. The sale resulted
in a net gain of $55,143 after $33,919 of income tax expense. The majority of
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.
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............... $ 442,267 $ 473,301 $ 512,288
Allowance for loans sold at date of sale..... (353) (14,700) (27,486)
Allowance for loans purchased at date
of purchase............................... - 1,028 -
Allowance for loans of bank acquired under
purchase method of accounting............. 2,703 - -
Provision charged to operating expense....... 121,201 160,250 291,261
Recoveries of loans previously charged off. 86,738 70,069 81,791
Loan charge-offs............................. (201,733) (247,681) (384,553)
--------- --------- ---------
Balance at end of period..................... $ 450,823 $ 442,267 $ 473,301
========= ========= =========
</TABLE>
8. PREMISES AND EQUIPMENT
The consolidated balance sheet includes premises and equipment, net of
accumulated depreciation and amortization of $525,889 and $544,978 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 $59,792,
$67,384 and $73,142, respectively.
19
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
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.... $330,915 $687,408 $1,104,977
Other domestic time deposits,
principally savings certificates.. 110,115 160,487 255,712
-------- -------- ----------
Total.................. $441,030 $847,895 $1,360,689
======== ======== ==========
</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
------- ------- --------
Interest expense:
<S> <C> <C> <C>
Commercial certificates of deposit......... $15,912 $34,877 $ 93,161
Other domestic time deposits, principally
savings certificates................ 7,430 13,818 18,298
------- ------- --------
Total........................... $23,342 $48,695 $111,459
======= ======= ========
</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)......................... $ 606,617 $ 848,953
Securities sold under agreements to repurchase (b).. 249,731 427,349
Commercial paper (c)................................ 501,838 566,990
Other short-term funds borrowed (d)................. 525,939 60,752
---------- ----------
Total short-term funds borrowed (e)....... $1,884,125 $1,904,044
========== ==========
</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, 3.39% in 1992 and 5.82% in 1991. The
maximum amount outstanding at any month-end was $1,160,951 in 1993, $848,953 in
1992 and $1,403,150 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 2.73%
in 1993, 3.57% in 1992 and 5.24% in 1991. The maximum amount outstanding at any
month-end was $386,368 during 1993, $427,349 during 1992 and $653,079 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.
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. In accordance with the terms of the credit agreement, all of the
lines expire July 30, 1994. Subsequently, these lines were extended to July 25,
1995. 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 $1,962,000 in 1993, $1,657,000 in
1992 and $2,813,000 in 1991. The weighted average interest rate was 3.42% in
1993, 3.65% in 1992 and 6.10% in 1991. The average interest rate is calculated
primarily on a daily average of funds borrowed.
20
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
11. LONG-TERM DEBT
Long-term debt at December 31, 1993 and 1992 includes the following:
<TABLE>
<CAPTION>
1993 1992
---------------------- ----------------------
Carrying Fair Carrying Fair
CoreStates Financial Corp: Amount Value Amount Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
7% Convertible Subordinated
Debentures due 2011 (b)......... 42,147 44,813 42,147 39,407
Subordinated Debentures due
2000 (c)........................ 25,000 25,000 25,000 25,000
---------- ---------- ---------- ----------
77,950 82,318 98,689 97,033
---------- ---------- ---------- ----------
CoreStates Capital Corp ("CSCC"):
5 7/8% Guaranteed Subordinated
Notes due 2003 (d).............. 200,000 192,480
6 5/8% Guaranteed Subordinated
Notes due 2005 (e).............. 175,000 172,358
9 5/8% Guaranteed Subordinated
Notes due 2001 (f).............. 150,000 178,395 150,000 167,250
9 3/8% Guaranteed Subordinated
Notes due 2003 (g).............. 100,000 118,830 100,000 110,820
Medium Term Notes (h)............. 808,085 812,299 531,070 538,426
8 3/8% Guaranteed Notes due
1996 (i)........................ 200,000 205,780
8 1/2% Guaranteed Notes due
1996 (j)........................ 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 (k).......... 10,000 10,250 10,000 10,300
Senior debt, due September
1993 (l)........................ 60,000 60,000
8 1/4% Subordinated Capital
Notes due January 1999 (m)...... 25,086 25,274
9 7/8% Mortgages due 2003......... 16,983 19,656
Federal Home Loan Bank
Borrowings (n).................. 65,000 66,801 35,000 35,069
Various other..................... 3,255 3,367 5,770 5,801
---------- ---------- ---------- ----------
78,255 80,418 152,839 156,100
---------- ---------- ---------- ----------
Total long-term debt (o).......... $1,589,290 $1,637,098 $1,357,598 $1,401,547
========== ========== ========== ==========
</TABLE>
(a) The Debentures were retired at par plus accrued interest on the June 1, 1993
maturity date.
(b) The Debentures are convertible at any time prior to maturity, unless
previously redeemed, into shares of common stock at a conversion price of
$24.1667 per share. The debentures are redeemable at the Corporation's option
at a price of 102.1% of par on or after June 15, 1993, declining annually
thereafter to par on and after June 15, 1996, together in each case with accrued
interest.
(c) The Debentures were issued for general purposes at a floating rate of prime
plus .25%. These debentures were originally issued by Independence in
1990. The debentures were retired at par plus accrued interest in January
1994.
(d) 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.
(e) 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)
(f) 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.
(g) 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.
(h) 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.
(i) On November 1, 1993, the Notes were redeemed at the option of CSCC at par
plus interest to the date of redemption.
(j) On April 1, 1993, the Notes were redeemed at the option of CSCC at par plus
interest to the date of redemption.
(k) 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.
(l) 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.
(m) 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.
(n) The borrowings range in maturity from May 1995 to June 1997 at floating
interest rates from one month LIBOR less .10% to three month LIBOR less .10% and
fixed interest rates from 4.58% to 5.89%.
(o) The consolidated aggregate maturities and sinking fund requirements for
long-term debt for the years ended December 31, 1994 through 1998 are:
$187,394; $469,489; $200,938; $21,438; and $2,051, 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 defined benefit pension plans was
$12,007 in 1993, $10,926 in 1992 and $10,633 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... 35,186 32,933 30,461
Actual return on plan assets.................... (49,401) (16,426) (99,173)
Net amortization and deferral................... 10,105 (20,965) 65,526
-------- -------- --------
Net pension cost.............................. $ 12,007 $ 10,926 $ 10,633
======== ======== ========
</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 $13,576 in 1993, $13,117 in 1992, and
$12,366 in 1991.
Prior to its acquisition by the Corporation, Independence maintained a defined
contribution plan which covered all employees who meet age and service
requirements. Expense related to this plan was $2,636 in 1993, $2,861 in 1992,
and $2,418 in 1991. Vested contributions will be rolled into the Corporation's
savings plan.
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.
23
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
12. RETIREMENT AND BENEFIT PLANS (continued)
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 $.62 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.
The liability for postretirement benefits included in other liabilities at
December 31, 1993 and 1992 was as 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 $0.09
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.
24
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS: CONTINUED
(DOLLAR AMOUNTS IN THOUSANDS)
13. LONG-TERM INCENTIVE PLAN
The Corporation has outstanding options granted under the Corporation's long-
term incentive plan (the "Plan"). As provided in the Plan, a variety of
incentives can be issued to eligible participants including restricted stock
awards, incentive stock options, non-qualified stock options, stock appreciation
rights, performance units and cash awards. Constellation and Independence had
maintained similar plans. Options granted under those plans were carried over
into the Corporation's Plan upon consummation of their respective acquisitions.
Information on options for 1993 follows:
<TABLE>
<CAPTION>
Number of shares
-----------------------
Under Option price
Available option per share
----------- ---------- --------------
<S> <C> <C> <C>
Balance at January 1, 1993.... 4,284,502 5,503,602 $3.21 - $54.70
Options granted............... (1,963,658) 1,963,658 9.06 - 28.50
Options exercised............. (985,717) 3.21 - 23.19
Options cancelled............. 110,440 (110,440) 7.16 - 46.41
---------- ---------
Balance at December 31, 1993.. 2,431,284 6,371,103 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
$63,055, $62,042 and $63,729 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.
25
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS: CONTINUED
(DOLLAR AMOUNTS IN THOUSANDS)
15. COMMITMENTS AND CONTINGENT LIABILITIES - (continued)
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) $1,123,303 $ (1,884) $ 932,317 $ (1,530)
Commercial letters of credit.......................... 892,450 (2,227) 749,394 (1,868)
Commitments to extend credit (b)...................... 7,000,689 (13,000) 5,522,823 (10,120)
Unused commitments under credit card lines............ 2,993,233 1,976,773
Futures and forward contracts (c):
Commitments to purchase............................ 925,500 365 1,477,000 178
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)........................................ 4,597,119 133,163 5,071,645 145,993
Interest rate caps and floors (f):
Written............................................ 622,920 (4,196) 231,577 (558)
Purchased.......................................... 660,398 5,229 261,042 386
</TABLE>
(1) See Note 3 for discussion of fair value.
(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
$160,598 and $170,971, respectively. The risk of counterparty failure is
controlled by limiting transactions to an approved list of counterparties.
26
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS: CONTINUED
(DOLLAR AMOUNTS IN THOUSANDS)
15. COMMITMENTS AND CONTINGENT LIABILITIES - (continued)
(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.
16. PROVISION FOR INCOME TAXES
The provision for income taxes in the consolidated statement of income consists
of the following:
<TABLE>
<CAPTION>
1993 1992 1991
--------- -------- -------
<S> <C> <C> <C>
Current:
Federal..................................... $155,972 $ 85,838 $42,229
State....................................... 18,209 11,095 17,629
-------- -------- -------
Total domestic........................ 174,181 96,933 59,858
Foreign..................................... 10,284 4,368 5,336
-------- -------- -------
Total current......................... 184,465 101,301 65,194
Deferred Federal and state expense (benefit).. (10,656) 26,864 32,238
-------- -------- -------
Total provision for income taxes...... $173,809 $128,165 $97,432
======== ======== =======
</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
--------- ---------
Deferred tax assets:
<S> <C> <C>
Allowance for loan losses.................... $149,097 $146,852
Postretirement and postemployment benefits... 48,210 44,825
Reserves..................................... 25,802 23,456
Employee compensation........................ 11,610 11,534
Other........................................ 56,650 42,595
Net Operating loss carry forward............. 16,393 15,396
-------- --------
Gross deferred tax asset..................... 307,762 284,658
Valuation allowance.......................... ( 9,102) (8,817)
-------- --------
Total deferred tax assets............. 298,660 275,841
-------- --------
Deferred tax liabilities:
Auto leasing portfolio....................... 69,721 58,609
FAS 115 fair value accounting................ 34,916 -
Partnership investments...................... 19,660 18,299
Tax over book depreciation................... 16,689 15,291
Affiliate income............................. 14,924 21,090
Other........................................ 15,692 11,301
-------- --------
Total deferred tax liabilities......... 171,602 124,590
-------- --------
Net deferred tax assets $127,058 $151,251
======== ========
</TABLE>
At December 31, 1993 cumulative deductible temporary differences are
approximately $880 million and the related deferred tax asset is $308 million.
The major components of the temporary differences include $426 million related
to the allowance for loan losses and $138 million related to FAS 106 and FAS
112. Cumulative taxable temporary differences related to deferred tax credits
at December 31, 1993 are estimated at $490 million and are primarily related to
leasing, FAS 115 fair value accounting, partnership investments and
depreciation. The related deferred tax liability is $172 million.
27
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
16. PROVISION FOR INCOME TAXES - continued
As required by FAS 109, the Corporation has determined that it is required to
establish a valuation reserve of $9 million for the deferred tax asset related
to Constellation's New Jersey income taxes. It is more likely than not that the
deferred tax asset of $299 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 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.
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.................... (3.1) (5.0) (10.4)
State, local and foreign income tax.. 2.4 2.2 5.4
Other, net........................... (1.9) 1.1 5.6
---- ---- -----
Effective tax rate..................... 32.4% 32.3% 35.1%
==== ==== =====
</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 $76,608, $75,382 and $66,382,
respectively.
28
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS: Continued
(DOLLAR AMOUNTS IN THOUSANDS)
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...................... $457,021 $464,164 $461,521 $459,158
======== ======== ======== ========
Interest expense..................... $123,601 $125,930 $129,844 $137,218
======== ======== ======== ========
Net interest income.................. $333,420 $338,234 $331,677 $321,940
======== ======== ======== ========
Provision for losses on loans........ $ 29,646 $ 30,005 $ 30,825 $ 30,725
======== ======== ======== ========
Securities gains (losses)............ $ 10,649 $ 3,306 $ (694) $ 2,849
======== ======== ======== ========
Income before cumulative
effect of a change in accounting
principle......................... $ 94,676 $ 96,081 $ 91,391 $ 80,281
======== ======== ======== ========
Cumulative effect of a change
in accounting principle........... $(13,010)
========
Net income........................... $ 94,676 $ 96,081 $ 91,391 $ 67,271
======== ======== ======== ========
Net income per common share.......... $ 0.65 $ 0.66 $ 0.63(b) $ 0.55(a)(b)
======== ======== ========= ========
Average common shares outstanding.... 145,372 145,702 145,476(b) 145,109(b)
======== ======== ========= =========
1992
- ----
Interest income...................... $473,288 $474,047 $497,977 $516,526
======== ======== ======== ========
Interest expense..................... $149,117 $163,800 $187,448 $208,995
======== ======== ======== ========
Net interest income.................. $324,171 $310,247 $310,529 $307,531
======== ======== ======== ========
Provision for losses on loans........ $ 47,766 $ 34,675 $ 39,842 $ 37,967
======== ======== ======== ========
Securities gains (losses)............ $ (962) $ 4,585 $ 3,621 $ 6,561
======== ======== ======== ========
Income before cumulative effect of
a change in accounting principle. $ 63,607 $ 67,084 $ 72,919 $ 64,524
======== ======== ======== ========
Cumulative effect of a change
in accounting principle............ $(84,946)
========
Net income (loss).................... $ 63,607 $ 67,084 $ 72,919 $(20,422)
======== ======== ======== ========
Net income per common share.......... $ 0.46(b) $ 0.49(b) $ 0.54(b) $ 0.48(a)(b)
========= ======== ======== ========
Average common shares outstanding.... 137,819(b) 135,769(b) 135,183(b) 134,447(b)
========= ======== ======== ========
- -------------------------------------
</TABLE>
(a) Based on income before cumulative effect of a change in accounting
principle.
(b) Adjusted to reflect the impact of the Stock Dividend.
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: CONTINUED
(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...................... $26,784,458 $ 939,631 $173,740(a) $524,375 $12,413 $28,434,617
=========== ========== ======== ======== ======= ===========
Total operating
income (b)................ $ 2,268,050 $ 83,226 $ 10,771 $ 53,243 $ 604 $ 2,415,894
=========== ========== ======== ======== ======= ===========
Income before
income taxes.............. $ 470,399 $ 25,530 $ 16,209 $ 23,889 $ 211 $ 536,238
=========== ========== ======== ======== ======= ===========
Income before cumulative
effect of a change in
accounting principle...... $ 319,633 $ 18,938 $ 7,021 $ 16,684 $ 153 $ 362,429
=========== ========== ======== ======== ======= ===========
DECEMBER 31, 1992
Assets...................... $26,786,725 $1,255,214 $ 86,224 $602,113 $ 2,441 $28,732,717
=========== ========== ======== ======== ======= ===========
Total operating
income (b)................ $ 2,430,268 $ 89,038 $ 6,088 $ 46,777 $ 331 $ 2,572,502
=========== ========== ======== ======== ======= ===========
Income before
income taxes.............. $ 322,380 $ 35,725 $ 15,069 $ 22,982 $ 143 $ 396,299
=========== ========== ======== ======== ======= ===========
Income before cumulative
effect of a change in
accounting principle...... $ 223,569 $ 20,820 $ 9,750 $ 13,911 $ 84 $ 268,134
=========== ========== ======== ======== ======= ===========
DECEMBER 31, 1991
Assets...................... $26,720,040 $ 970,903 $ 49,772 $437,215 $ 5,967 $28,183,897
=========== ========== ======== ======== ======= ===========
Total operating
income(b)................. $ 2,936,159 $ 107,575 $ 10,783 $ 48,487 $ 838 $ 3,100,842
=========== ========== ======== ======== ======= ===========
Income before
income taxes.............. $ 206,760 $ 29,587 $ 27,383 $ 13,733 $ 286 $ 277,749
=========== ========== ======== ======== ======= ===========
Net income.................. $ 134,534 $ 19,101 $ 17,659 $ 8,839 $ 184 $ 180,317
=========== ========== ======== ======== ======= ===========
</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.
19. FINANCIAL STATEMENTS OF THE PARENT COMPANY
<TABLE>
<CAPTION>
Statement of Income
Year Ended December 31,
--------------------------------
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
REVENUES
- --------
Dividends from subsidiaries:
Banks......................................... $204,393 $151,016 $257,333
Other subsidiaries............................ 14,648 20,527 10,653
-------- -------- --------
Total dividends from subsidiaries......... 219,041 171,543 267,986
Interest income from subsidiaries............... 6,238 6,724 6,784
Processing and management fees from subsidiaries 133,114 128,917 283,738
Rental income from subsidiaries................. 2,059 2,059 2,409
Securities gains (losses)....................... (380) 806 (24,207)
Other income.................................... 721 828 1,408
-------- -------- --------
Total revenues.............................. 360,793 310,877 538,118
-------- -------- --------
EXPENSES
- --------
Interest on:
Funds borrowed................................ 2,738 2,311 4,376
Long-term debt................................ 8,827 18,348 27,123
-------- -------- --------
Total interest expense........................ 11,565 20,659 31,499
Salaries, wages and benefits.................... 75,031 71,327 180,510
Net occupancy................................... 29,321 25,995 16,147
Equipment expenses.............................. 5,982 3,697 28,214
Other operating expenses........................ 27,134 29,210 80,927
-------- -------- --------
Total expenses.............................. 149,033 150,888 337,297
-------- -------- --------
Income before income tax benefit and equity in
undistributed income of subsidiaries.......... 211,760 159,989 200,821
Income tax (benefit)............................ (2,882) (3,840) (19,962)
-------- -------- --------
Income before equity in undistributed income
of subsidiaries............................... 214,642 163,829 220,783
Equity in undistributed income (loss) of
subsidiaries:
Banks......................................... 89,743 3,767 (61,361)
Other subsidiaries............................ 45,034 17,061 20,895
-------- -------- --------
134,777 20,828 (40,466)
-------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE.......................... 349,419 184,657 180,317
Cumulative effect of a change in accounting
principle (Note 12)........................... (1,469)
-------- -------- --------
NET INCOME...................................... $349,419 $183,188 $180,317
======== ======== ========
</TABLE>
31
<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 $ 53,357
Investments and receivables-subsidiaries:
Investments in subsidiaries at equity
in underlying net assets:
Banks........................................ 2,101,069 1,936,766
Other subsidiaries........................... 243,937 207,866
---------- ----------
Total investments in subsidiaries.......... 2,345,006 2,144,632
Other......................................... 69,303 69,685
---------- ----------
Total investments and receivables-
subsidiaries.............................. 2,414,309 2,214,317
Other investments............................... 55,317 21,183
Premises, net of accumulated depreciation....... 6,416 11,008
Other assets.................................... 6,718 7,911
---------- ----------
Total assets............................... $2,491,514 $2,307,776
========== ==========
LIABILITIES
- -----------
Funds borrowed.................................. $ 69,003
Dividends payable............................... $ 35,171 31,474
Other liabilities............................... 7,821 14,094
Long-term debt.................................. 80,138 98,646
---------- ----------
Total liabilities........................... 123,130 213,217
SHAREHOLDERS' EQUITY
- --------------------
Total shareholders' equity.................. $2,368,384 $2,094,559
---------- ----------
Total liabilities and shareholders' equity.. $2,491,514 $2,307,776
========== ==========
</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 (See 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.
Constellation Bank was merged into NJNB on April 29, 1994. Upon consummation of
that intra-corporate merger, and after taking into account the merger-related
charges (see Note 2), NJNB could not declare dividends without approval of the
Comptroller of the Currency.
The four banking subsidiaries acquired with Independence (Bucks County Bank and
Trust Company, Cheltenham Bank, Lehigh Valley Bank, and Third National Bank and
Trust Company of Scranton), under various regulatory limitations, can declare
dividends of approximately $84 million in total.
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.
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>
Statement of Cash Flows
Year Ended December 31,
-----------------------------------
1993 1992 1991
----------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................ $349,419 $ 183,188 $ 180,317
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed (income) losses of subsidiaries....... (143,393) (32,823) 41,731
Cumulative effect of a change in
accounting principle.............................. 1,469
Securities (gains) losses........................... 380 (806) 24,207
Depreciation and amortization....................... 938 1,328 1,463
Deferred income tax expense (benefit)............... 1,692 (1,563) (9,464)
Decrease in interest receivable..................... 96 291 723
Increase (decrease) in interest payable............. 1,082 60 (329)
Increase (decrease) in due to subsidiaries.......... (6,875) (47,695) 9,751
Other............................................... (3,640) 14,640 (970)
-------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 199,699 118,089 247,429
INVESTING ACTIVITIES
Investment in subsidiaries............................ (5,460) (72,240) (20,000)
Increase (decrease) in receivables from subsidiaries.. (16,962) 11,142 29,338
Purchases of investment securities.................... (483,551) (232,313) (238,636)
Proceeds from maturities and sales of investment
securities.......................................... 453,002 292,956 209,048
Premises and equipment expenditures................... (188) (271) (392)
Return of capital from subsidiaries................... 42,579 42,165
-------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (10,580) 41,439 (20,642)
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......... 4,966 71,782 1,746
Cash dividends paid................................... (143,334) (126,265) (120,943)
Other................................................. (5,411) 44,995 14,608
-------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES............ (233,722) (108,744) (224,897)
-------- --------- ---------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS... (44,603) 50,784 1,890
Cash and due from banks at January 1,............ 53,357 2,573 683
-------- --------- ---------
CASH AND DUE FROM BANKS AT DECEMBER 31........... $ 8,754 $ 53,357 $ 2,573
======== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest............................................ $ 10,712 $ 15,965 $ 30,382
======== ========= =========
Income taxes........................................ - - -
======== ========= =========
</TABLE>
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.
33
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
20. JOINT VENTURE - continued
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.
34
<PAGE>
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
CORESTATES FINANCIAL CORP
We have audited the accompanying consolidated balance sheets of CoreStates
Financial Corp as of December 31, 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
and Independence Bancorp, Inc., which statements reflect total assets
constituting of 17.2% and 17.9% of the related consolidated totals as of
December 31, 1993 and 1992, respectively, and net interest income constituting
of 15.6%, 15.6% and 14.7% of the related consolidated totals for the years ended
December 31, 1993, 1992 and 1991, respectively. Those statements were audited by
other auditors whose reports thereon have been furnished to us, and our opinion,
insofar as it relates to data included for Constellation Bancorp and
Independence Bancorp, Inc., is based solely on the reports of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of CoreStates Financial Corp at December 31,
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 post-employment benefits, and in 1992 the Company changed its method of
accounting for income taxes and for post-retirement benefits other than
pensions.
/s/Ernst & Young LLP
Philadelphia, Pennsylvania
February 1, 1994,
except for the second paragraph of Note 2, as to which the date is March 16,
1994, and the third paragraph of Note 2, as to which the date is June 27, 1994
35
<PAGE>
INDEPENDENT AUDITOR'S REPORT
KPMG PEAT MARWICK LLP
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 Note 1 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.
As discussed in note 1, the accompanying 1993 Consolidated Financial Statements
have been restated to remove certain merger-related charges.
/s/ KPMG Peat Marwick LLP
March 16, 1994 except as to the third
paragraph of Note 1 and the last
paragraph of Note 16, which are as
of July 19, 1994
36
<PAGE>
INDEPENDENT AUDITOR'S REPORT
COOPERS & LYBRAND LLP
Certified Public Accountants
2400 Eleven Penn Center
Philadelphia, Pennsylvania 19103
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
INDEPENDENCE BANCORP, INC.:
We have audited the accompanying consolidated balance sheets of Independence
Bancorp, Inc. 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 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 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 consolidated financial position of
Independence Bancorp, Inc. and Subsidiaries 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 Notes 1, 4 and 11 to the Consolidated Financial Statements, the
Company changed its method of accounting for investments in 1993 and method of
accounting for income taxes in 1992.
/s/ Coopers & Lybrand LLP
January 19, 1994
37
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
CoreStates Financial Corp ("CoreStates") consummated its acquisition of
Independence Bancorp, Inc. ("Independence") on June 27, 1994 and its acquisition
of Constellation Bancorp ("Constellation") on March 16, 1994. The Independence
and Constellation acquisitions were both accounted for as a pooling of
interests. Corestates' originally reported results have been restated herein to
include Independence and Constellation's results for 1993 and all other periods
presented.
Subsequent to the March 16, 1994 consummation of the Constellation acquisition,
Constellation recorded merger-related charges in the first quarter of 1994 in
connection with a change in strategic direction related to problem assets and to
conform its consumer lending charge-off policies to those of CoreStates, and for
expenses directly attributable to the acquisition. These merger-related charges
totalled $127.8 million after-tax, or $.89 per share. On a pre-tax basis, the
merger-related charges consisted of a $120.0 million provision for loan losses,
a $28.0 million addition to the OREO reserve, $13.0 million for the writedown of
purchased mortgage servicing rights and related assets, and $34.0 million for
expenses directly attributable to the acquisition.
Subsequent to the June 27, 1994 consummation of the Independence acquisition,
Independence recorded merger-related charges in the second quarter of 1994 in
connection with a change in strategic direction related to problem assets and to
conform its consumer lending charge-off policies to those of CoreStates, and for
expenses directly attributable to the acquisition. These merger-related charges
totalled $39.9 million after-tax, or $.28 per share. On a pre-tax basis, the
merger-related charges consisted of a $25.0 million provision for loan losses, a
$4.0 million addition to the OREO reserve, and $29.7 million for expenses
directly attributable to the acquisition.
Income for 1993, before the cumulative affect of a change in accounting
principle, was $362.4 million, or $2.49 per share, reflecting growth of 26.4% on
a per share basis when compared to $268.1 million, or $1.97 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 16.49% and 1.31%
respectively, in 1993, compared to 13.75% and .97%, respectively in 1992. The
1993 Montgomery Securities Regional Bank Composites for returns on average
equity and assets were 15.49% and 1.21%, respectively.
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 and
Independence which are 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 42.
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 $.09 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 $.62 per share, as the cumulative effect of a change in accounting
principle in 1992.
38
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW - continued
Fully combined operating results on a taxable equivalent basis and per
share information are summarized in the following table (in millions, except per
share):
<TABLE>
<CAPTION>
Percentage
increase (decrease)
------------------
1993 1992 1991 '93/'92 '92/'91
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Net interest income............ $1,351.8 $1,283.5 $1,313.7 5.3% (2.3)%
Provision for losses on loans.. 121.2 160.3 291.3 (24.4) (45.0)
Non-interest income............ 574.0 610.7 615.6 (6.0) (.8)
Non-financial expenses......... 1,241.9 1,306.6 1,319.5 (5.0) (1.0)
-------- -------- --------
Income before income taxes... 562.7 427.3 318.5 31.7 34.2
Provision for income taxes..... 200.3 159.2 138.2 25.8 15.2
-------- -------- --------
Income before the cumula-
tive effect of a change
in accounting principle...... 362.4 268.1 180.3 35.2 48.7
Cumulative effect of a change
in accounting principle...... (13.0) (84.9)
-------- -------- --------
Net income............... $ 349.4 $ 183.2 $ 180.3 90.7 1.6
======== ======== ========
OPERATING RATIOS
Return on average equity (1)... 16.49% 13.75% 9.68%
Return on average assets (1)... 1.31 .97 .63
Net interest margin............ 5.59 5.32 5.16
PER COMMON SHARE (2)
Income before the cumulative
effect of a change in
accounting principle......... $ 2.49 $ 1.97 $ 1.35
Net income..................... 2.40 1.35 1.35
Average common shares
outstanding................. 145.398 135.813 133.237
- -----------------------------
</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 46).
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 2.3% year-to-year
decline in net interest income in 1992 and approximately $60 million of the
$131.0 million, or 45.8%, 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 $.07 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.
39
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED
OVERVIEW - CONTINUED
NON-PERFORMING ASSETS
Non-performing assets at December 31, 1993 totalled $438.7 million, a decline
of $232.9 million, or 34.7% 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 $170.8 million, or 35.3%
from year-end 1992. Non-performing assets in the commercial portfolio also
declined $56.2 million, or 31.4% from year-end 1992. At December 31, 1993 the
allowance for loan losses at $450.8 million was 148.7% of non-performing loans.
This compares to $442.3 million and 92.7% at December 31, 1992.
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 was merged into NJNB on April 29,
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.
On June 27, 1994, CoreStates acquired Independence Bancorp, Inc.
("Independence"), a $2.6 billion asset Pennsylvania bank holding company with
$2.1 billion in deposits. As a result of this transaction, approximately 16.6
million new shares of CoreStates' common stock were issued with a total value of
approximately $430 million based on the year-end stock price. The transaction
is being accounted for as a pooling of interests.
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 $29 million for
CoreStates' planned strategic initiatives regarding Independence's problem
assets and approximately $30 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 asset 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
fourth quarter of 1994, assuming approval by regulators and GSB shareholders.
40
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED
STRATEGIC ACTIONS IN 1993 - CONTINUED
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.
A summary of 1993 financial information for GSB follows:
<TABLE>
<CAPTION>
Operating Results for the Year Ended
December 31, 1993 (in thousands,
except per share) GSB
-------
<S> <C>
Net income............................ $20,498
Per common share...................... 4.68
Average common shares
outstanding.......................... 4,377
Balance Sheet
At December 31, 1993
(in millions) GSB
-------
Assets................................ $ 1,637
Loans................................. 1,039
Deposits.............................. 1,476
Shareholders' equity.................. 142
</TABLE>
In December 1993, CoreStates had announced a definitive agreement to purchase
privately held Rittenhouse Financial Services, Inc. and the $35 million asset
Rittenhouse Trust Company. That agreement was terminated on June 8, 1994, by
mutual consent.
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.
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.
41
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED
STRATEGIC ACTIONS IN 1993 - CONTINUED
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.
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.
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 1993 and 1992 reporting periods,
Constellation and Independence are shown as separate entities. During 1994, as
the new companies are fully integrated into CoreStates, the respective business
components of Constellation and Independence 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.
42
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED
BUSINESS LINE RESULTS - continued
Corporate overhead, processing and support costs are 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 unallocated
equity; unallocated 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.
The earnings contribution of these Core businesses, Constellation and
Independence is reflected in the table below (in millions):
<TABLE>
<CAPTION>
Consumer Trust and Electronic
Wholesale Financial Investment Payment
Banking Services Management Services
(taxable equivalent ------------------- ------------------- ------------------- -------------------
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.. 47.8% 47.7% 26.0% 33.3% 3.0% 4.1% 2.3% 0.7%
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 Independence Corporate Total
------------------- ------------------- ------------------- ---------------------
1993 1992 1993 1992 1993 1992 1993 1992
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income...... $101.9 $ 87.7 $108.6 $111.1 $ 43.6 $ 30.7 $1,351.8 $1,283.5
Provision for loan
losses................. 10.0 10.0 11.1 31.0 (8.8) 8.2 121.2 160.3
Non-interest income...... 41.5 40.2 29.4 23.9 41.7 39.3 574.0 610.7
Non-financial expenses... 114.9 118.7 93.6 93.3 43.2 18.5 1,241.9 1,306.6
------ ------- ------ ------ ------ ------ -------- --------
Income (loss) before
income taxes........... 18.5 (.8) 33.3 10.7 50.9 43.3 562.7 427.3
Income tax expense....... 6.9 .6 10.3 3.6 9.5 11.0 200.3 159.2
------ ------- ------ ------ ------ ------ -------- --------
Net income (loss)........ $ 11.6 $ (1.4) $ 23.0 $ 7.1 $ 41.4 $ 32.3 $ 362.4(1) $ 268.1(1)
====== ======= ====== ====== ====== ====== ======== ========
Percentage contribution.. 3.2% (0.5)% 6.3% 2.6% 11.4% 12.1% 100.0% 100.0%
Return on assets......... .49 (.05) .88 .27 1.23 1.06 1.31(1) .97(1)
Return on equity (2)..... 6.01 (1.09) 10.70 3.33 5.23 6.22 16.49(1) 13.75(1)
Average assets........... $2,346 2,583 $2,617 $2,627 $3,367 $3,040 $ 27,700 $ 27,554
Average equity (2)....... 193 128 215 213 792 519 2,198 1,950
</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 reported for Constellation and Independence
reflects those entities legal equity.
43
<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.
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.
44
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED
BUSINESS LINE RESULTS - continued
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'S net income in 1993 was $11.6 million as compared to a loss of
$1.4 million in 1992. The increase 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 occupany expense, furniture and equipment
expense, and amortization of purchased assets partially offset by higher legal
and non-performing asset related expenses.
INDEPENDENCE had net income of $23.0 million in 1993 compared with $7.1
million in 1992. The improvement in 1993 was primarily due to a decrease in
the provision for loan losses, $11.1 million in 1993 compared with $31.0 million
in 1992, resulting from a lower level of non-performing assets. Net interest
income was $108.6 million compared with $111.1 million in 1992. This decrease
was due to the lower interest rate environment and the lower level of earning
assets. Non-interest income was $29.4 million in 1993, a $5.5 million increase
from 1992. This increase was due to a $1.4 million excess recovery from the
settlement on a charged-off loan, securities gains in 1993 compared with losses
in 1992, and higher gains on the sale of mortgages. Non-financial expense was
$93.6 million in 1993, a $0.3 million increase from 1992.
45
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED
BUSINESS LINE RESULTS - continued
THE CORPORATE CATEGORY'S net income increased $9.1 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 $17.0 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 $273 million.
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 7.94% 7.11%
1992 7.08 6.74
1991 6.50 6.03
1990 6.69 5.74
1989 6.62 5.65
</TABLE>
* The Montgomery Securities Regional Bank Composite
At December 31, 1993, common shareholders' equity totaled $2,368 million or
8.3% of total assets, compared with $2,095 million or 7.3% 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 5.6%, 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 $1.02 per share in 1992. The common dividend payout ratio was 45.8%
for 1993, compared to 51.8% for 1992.
On August 17, 1993 the Board of Directors approved a two-for-one common stock
split effected in the form of a 100% stock dividend ("the Stock Dividend"). The
additional shares resulting from the Stock Dividend were distributed on October
15, 1993 to holders of record on September 15, 1993. All common shares and per
common share data have been restated for the impact of the Stock Dividend.
46
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED
CAPITAL STRENGTH - CONTINUED
CoreStates and its bank subsidiaries are subject to minimum risk-based and
leverage capital guidelines issued by the Federal Reserve Board and Comptroller
of the Currency. The measurement of risk-based capital takes into account the
credit risk of both balance sheet assets and off-balance sheet exposures. These
guidelines require minimum risk-based capital ratios of 4% for Tier 1 capital
and 8% for total capital. In addition, a minimum leverage ratio of Tier 1
capital to quarterly average total assets of 3% is required for banking
organizations that are rated as strong. The following table illustrates
CoreStates' risk-based and leverage capital ratios at December 31, 1993 and
1992:
<TABLE>
<CAPTION>
RISK-BASED AND LEVERAGE CAPITAL RATIOS
- --------------------------------------
AT DECEMBER 31,
- ---------------
($ in millions) 1993 1992
------- -------
<S> <C> <C>
CAPITAL
Tier 1 capital $ 2,279 $ 2,096
Tier 2 capital 1,002 833
Total qualifying capital 3,281 2,929
ASSETS
Risk-adjusted assets 23,863 22,723
Average assets-
leverage capital basis 27,603 27,921
RATIOS
Tier 1 capital ratio 9.5% 9.2%
Total capital ratio 13.7 12.9
Tier 1 leverage ratio 8.3 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.
<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
Constellation Bank, N.A. 9.9 11.2 6.7 2.3
CoreStates Bank of Delaware, N.A. 10.9 12.1 13.4 .6
Bucks County Bank 9.7 11.0 8.0 1.2
Cheltenham Bank 10.9 13.9 7.8 .5
Lehigh Valley Bank 11.4 12.6 9.6 .5
Third National Bank 9.9 11.0 8.5 .5
</TABLE>
47
<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.
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.
48
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED
ASSET QUALITY - CONTINUED
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 35.4% of total
equity.
<TABLE>
<CAPTION>
Wholesale Loans by Industry
- ---------------------------
Outstandings % of
as of % Outstandings
of equity non-performing
------------ --------------
<S> <C> <C>
Non-bank finance 35.4% 0.2%
Retail trade 27.9 0.9
Communications 27.2 0.4
Healthcare 20.6 0.2
Depository institutions 16.2
Real estate construction 15.5 5.4
Apparel 15.2 10.5
Trucking and auto leasing 13.5 1.9
Chemical 10.6
</TABLE>
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.
49
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS: (CONTINUED)
ASSET QUALITY - CONTINUED
<TABLE>
<CAPTION>
Communications Portfolio
- ------------------------
At December 31, 1993 Cable(1) Broadcasting(1) Cellular
- -------------------- ----- ------------ --------
(in millions)
<S> <C> <C> <C>
Outstandings............... $413.2 $62.9 $55.1
Non-performing............. -- 2.7 --
% of loans............... N/A 4.3% N/A
- ----------------------------------------------------------------
</TABLE>
(1) Does not include $68 million at December 31, 1993 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.
The following table summarizes CoreStates' exposure in the two Healthcare
industry segments discussed above at December 31, 1993. There were no non-
performing loans in these segments for the period presented.
<TABLE>
<CAPTION>
Alternate
Healthcare Outstandings Acute care site care
- ----------------------- ---------- ---------
(in millions)
<S> <C> <C>
December 31, 1993...... $ 130.2 $ 138.2
</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>
50
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED
ASSET QUALITY - CONTINUED
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 $6,664 million at December
31, 1993, compared to $7,028 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 $367 million or 1.9 % of total
loans at December 31, 1993. At December 31, 1993, 5.4% of CoreStates'
construction and development loan portfolio was non-performing, compared to 2.5%
for the remaining real estate loan portfolio. The table below summarizes
CoreStates' real estate loans outstanding.
<TABLE>
<CAPTION>
Real Estate Loans
- -----------------
At December 31, Completed
- ----------------- projects/ Total
(in millions) Construction/ Investment real
development properties Residential Other(1) estate
-------------- ----------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
1993
- ----
Year-end outstandings...... $ 367 $1,321 $3,121 $1,855 $6,664
Average loans outstanding 421 1,351 2,867 2,156 6,795
Non-performing loans....... 20 47 43 68 178
% of year-end loans...... 5.4% 3.6% 1.4% 3.7% 2.7%
Net charge-offs.......... 8 13 6 24 51
% of average loans....... 1.9% 1.0% 0.2% 1.1% 0.8%
1992
- ----
Year-end outstandings...... $ 501 $1,333 $3,314 $1,880 $7,028
Average loans outstanding 631 1,231 3,195 1,797 6,854
Non-performing loans....... 55 62 55 118 290
% of year-end loans...... 10.9% 4.7% 1.7% 6.3% 4.1%
Net charge-offs............ 14 22 7 20 63
% of average loans....... 2.2% 1.8% 0.2% 1.1% 0.9%
</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 $3,121 million or 15.8%
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 27.8% of total real estate loans and 9.4% of total loans.
The remaining category of real estate loans, totaling $1,321 million at
December 31, 1993, is comprised of completed projects and investment properties.
Net charge-offs of construction and development loans in 1993 were $8 million
compared to net charge-offs of $14 million in 1992.
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
51
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED
ASSET QUALITY - CONTINUED
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.
The year-end 1993 allowance for loan losses totaled $450.8 million and
represented 2.3% of loans. This compares with a loan loss allowance at year-end
1992 of $442.2 million, or 2.3% of loans. The allowance for loan losses at
year-end 1993 was 148.7% of non-performing loans, an increase over the year-end
1992 coverage ratio of 92.7% 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 $121.2 million, a
decrease of $39.1 million from the $160.3 million provided in 1992. Net
charge-offs in 1993, excluding net LDC recoveries of $12.6 million, were $127.6
million or 0.7% of related average loans. This represents a decrease of $63.1
million when compared to the $190.7 million of net charge-offs excluding $13.1
million LDC recoveries in 1992.
Subsequent to the March 16, 1994 consummation of the Constellation acquisition,
Constellation recorded a $120.0 million provision for loan losses in the first
quarter of 1994 in connection with a change in strategy related to problem
assets and to conform its consumer lending charge-off policies to those of
CoreStates.
Subsequent to the June 27, 1994 consummation of the Independence acquisition,
Independence recorded a $25.0 million provision for loan losses in the second
quarter of 1994 in connection with a change in strategy related to problem
assets, and to conform its consumer lending charge-off policies to those of
CoreStates.
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 $ 46.6 .6% 40.5% $ 77.1 1.0% 43.4%
Real estate:
Construction 8.1 1.9 7.0 14.1 2.2 8.0
Other 42.6 .7 37.0 49.4 .8 27.8
Consumer:
Credit card 23.6 2.2 20.5 31.4 3.2 17.7
Installment 5.7 .4 5.0 14.4 1.0 8.1
Other (1) 1.0 .1 .9 4.3 .3 2.4
------ ----- ------ -----
Total domestic 127.6 .7 110.9 190.7 1.0 107.4
Foreign (2) (12.6) (2.3) (10.9) (13.1) (3.1) (7.4)
------ ----- ------ -----
Total net charge-offs $115.0 .6 100.0% $177.6 .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.
52
<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 $438.7 million, or 2.2% of total
loans plus other real estate owned ("OREO") and 1.5% of total assets. These
levels compared to total non-performing assets at year-end 1992 of $671.6
million, 3.5% of total loans plus OREO and 2.3% of total assets. Except for
the impact that the acquisition of Constellation will have on non-performing
assets at March 31, 1994, management expects a continuing decline in non-
performing asset levels during 1994.
At year-end 1993, total non-performing assets were comprised of $246.7 million
of non-accrual loans, $56.5 million of renegotiated loans and $135.5 million of
OREO. The $232.9 million, or 34.7%, 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 $56.2 million, or 31.4%,
and the real estate portfolio which declined $170.8 million, or 35.3%. During
1993, loans aggregating $247 million were added to non-performing status,
payments of $236 million against non-performing assets were received, loans
totaling $83 million were returned to full accrual status and $161 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
---------- --------- ------------ ----------- -----
<S> <C> <C> <C> <C> <C>
1993
- ----
Beginning balance.... $672 $590 $529 $494 $ 672
Additions............ 70 47 54 76 247
Return to accrual.... (46) (15) (8) (14) (83)
Payments............. (65) (60) (39) (72) (236)
Charge-offs.......... (41) (33) (42) (45) (161)
---- ---- ---- ---- -----
Net change........... (82) (61) (35) (55) (233)
---- ---- ---- ---- -----
Ending balance....... $590 $529 $494 $439 $ 439
==== ==== ==== ==== =====
1992
- ----
Beginning balance.... $802 $788 $777 $728 $ 802
Additions............ 93 129 98 85 405
Return to accrual.... (14) (12) (40) (17) (83)
Payments............. (54) (93) (55) (75) (277)
Charge-offs.......... (39) (35) (52) (49) (175)
---- ---- ---- ---- -----
Net change........... (14) (11) (49) (56) (130)
---- ---- ---- ---- -----
Ending balance....... $788 $777 $728 $672 $ 672
==== ==== ==== ==== =====
</TABLE>
53
<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% 1.2% $ 8.5 $ 1.7% 1.3%
Other................. 117.6 1.5 26.8 170.4 2.3 25.4
Real estate:
Construction.......... 19.7 5.4 4.5 54.5 10.9 8.1
Other loans........... 157.8 2.5 36.0 235.0 3.6 35.0
OREO.................. 135.5 30.9 194.3 28.9
Consumer................ 1.0 .2 .5 .1
Other domestic loans(1). 1.8 .1 .4 5.3 .4 .7
------ ----- ------ -----
Total domestic........ 438.5 2.3 100.0 668.5 3.6 99.5
Foreign loans............ .2 3.1 .8 .5
------ ----- ------ -----
Total non-performing
assets(2)............ $438.7 2.2% 100.0% $671.6 3.5% 100.0%
====== === ===== ====== === =====
% Total assets........ 1.5% 2.3%
=== ===
</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.
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.
54
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED
ASSET AND LIABILITY MANAGEMENT - CONTINUED
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 5.59% 4.81%
1992 5.32 4.78
1991 5.16 4.40
1990 5.08 4.21
1989 4.95 4.27
</TABLE>
* The Montgomery Securities Regional Bank Composite
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.
55
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED
ASSET AND LIABILITY MANAGEMENT - CONTINUED
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 78 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.
<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>
Relationship Portfolios:
Total loans................ $13,026 $ 1,450 $ 1,232 $ 1,510 $ 2,175 $ 383 $19,776
Total consumer
deposits, net non-
interest funding.......... 8,631 1,784 1,916 2,366 2,974 2,681 20,352
Adjustments................ 767 (671) (347) (447) (1,437) 2,134 -0-
------- ------- ------- ------- ------- ------ -------
Relationship gap......... 5,162 (1,005) (1,031) (1,303) (2,236) (164) (576)
------- ------- ------- ------- ------- ------ -------
Discretionary Portfolios:
Assets..................... 2,711 1,168 1,200 1,427 2,630 1,152 10,288
Liabilities................ 7,983 145 91 322 437 734 9,712
------- ------- ------- ------- ------- ------ -------
Discretionary gap........ (5,272) 1,023 1,109 1,105 2,193 418 576
------- ------- ------- ------- ------- ------ -------
Combined gap............. $ (110) $ 18 $ 78 $ (198) $ (43) $ 254 $ -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.
56
<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 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 $7.4 billion in loans subject to changes in prime,
excluding the credit card portfolio which floats with prime only at higher rate
levels.
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 $116.2 million in 1993, $127.1 million in 1992 and $72.1 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 $1,264 5.63% $4,069 3.50%
1-2 years 736 6.54 164 6.37
2-3 years 930 7.21 250 6.20
3-4 years 531 5.98 65 4.59
4-5 years 441 5.87 24 4.54
over 5 years 695 6.23 25 9.11
------ ------
Total $4,597 6.25% $4,597 3.80%
====== ==== ====== ====
</TABLE>
57
<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 $161 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 70.4% of
assets in 1993 compared to 71.6% in 1992. This decline is a result of increased
loan volumes and relatively no growth in core deposits.
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 77 and 79 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.
58
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED
ASSET AND LIABILITY MANAGEMENT - CONTINUED
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 $1,272 million of investment
securities as "Available-for-Sale". These investment securities were marked to
fair value, adding $64.3 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 and Independence's classifications will be reviewed in the
quarter following the consummations of their respective acquisitions 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.
SOURCES AND USES OF FUNDS
Total assets were $28.4 billion at year-end 1993, down $298 million or 1.0%
from year-end 1992. However, comparing specific asset categories to year-end
1992 balances reflects recovering loan demand, as loans increased $836 million
or 4.4%. The increase in loans was primarily due to improved demand across
CoreStates' lending products. Time deposits declined $496 million or 27.3%. A
$729 million, or 4.8%, 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 $189 million, or 2.9% in demand deposits, and an
increase of $232 million, or 17.1% in long-term debt.
Total assets averaged $27.7 billion in 1993, an increase of $146 million or
0.5% from 1992. Average loans increased $167 million, or 0.9% and average
investment securities increased $289 million or 8.8%. As reflected in the table
on Earning Asset Mix, loans comprised 78.8% of CoreStates' average earning
assets in 1993, compared to 78.3% 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 6.4% 14.8% 78.8%
1992 8.1 13.6 78.3
1991 6.5 12.6 80.9
1990 4.2 11.8 84.0
1989 6.0 14.2 79.8
</TABLE>
59
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED
ASSET AND LIABILITY MANAGEMENT - CONTINUED
SOURCES AND USES OF FUNDS - continued
The accompanying table on Funding Mix illustrates that 59.3% of CoreStates'
funds were derived from consumer deposits in 1993, compared with 63.0% 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 59.3% 13.3% 27.4%
1992 63.0 11.6 25.4
1991 58.3 21.1 20.6
1990 52.4 27.5 20.1
1989 49.6 29.0 21.4
</TABLE>
* excluding short-term money market investments
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 7.4% 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 $1,230.4 $121.4 $574.0 $1,925.8
1992 1,150.1 133.4 610.7 1,894.2
1991 1,167.3 146.4 615.6 1,929.3
1990 1,187.0 132.4 475.0 1,794.4
1989 1,163.4 126.1 430.9 1,720.4
</TABLE>
60
<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 $1,841.9 $1,961.8 $2,485.3 (6.1)% (21.1)%
Tax equivalent adjustment 26.5 31.0 40.7 (14.5) (23.8)
-------- -------- --------
Tax equivalent interest
income 1,868.4 1,992.8 2,526.0 (6.2) (21.1)
Total interest expense 516.6 709.3 1,212.3 (27.2) (41.5)
-------- -------- --------
Tax equivalent net
interest income $1,351.8 $1,283.5 $1,313.7 5.3 (2.3)
======== ======== ========
Interest rate spread 4.83% 4.43% 4.03%
==== ==== ====
Net interest margin 5.59% 5.32% 5.16%
==== ==== ====
</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 $68.3 million, or 5.3% in 1993, following a decrease of $30.2 million,
or 2.3% in 1992.
The increase in net interest income in 1993 principally reflects the impact
of wider interest rate spreads. Also contributing to the increase in net
interest income were a $59 million increase in average interest earning assets,
a $.6 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 131 basis points, while
the rates earned on domestic loans decreased 38 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 27
basis points in 1993 to 5.59%. 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 65-68, and the
rate/volume analysis on page 72.
61
<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) $412.4 $379.7 $354.1 8.6% 7.2%
EPS related revenues (2) 13.2 92.5 101.6 (85.7) (9.0)
Securities gains (losses) 16.1 13.8 (13.9)
Other non-interest income 110.8 81.8 80.6 35.5 1.5
------ ------ ------
Non-interest income before
non-recurring items 552.5 567.8 522.4 (2.7) 8.7
Non-recurring items 21.5(3) 42.9(4) 93.2(5) (49.9) (54.0)
------ ----- ----
Total non-interest income $574.0 $610.7 $615.6 (6.0) (.8)
====== ====== ======
</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, $9.1 million on prepayments of long-term debt and
$1.4 million in excess recoveries from the settlement of a previously
charged off loan at Independence.
(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 $89.1 million pre-tax gain recorded on the sale of
approximately $1 billion of credit card receivables, and a recovery of
$4.1 million on the settlement of litigation concerning certain
asset-backed bonds at Independence.
While reported total non-interest income decreased $36.7 million or 6.0% in
1993, following a slight decline of $4.9 million, or .8% in 1992, total non-
interest income in 1993 before non-recurring items and EPS related revenues
increased more than $64.0 million or 13.5% 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; $1.4 million in excess recoveries from
the settlement of a previously charged off loan at Independence; 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.
Non-recurring non-interest income in 1992 included the $41.1 million pre-tax
gain recorded on the EPS transaction and a $1.8 million gain on the sale of a
Constellation branch. Excluding the impact of securities gains and losses, EPS
related revenues and the $89.1 million pre-tax gain recorded on the October 1991
credit card sale and Independence credit card sale; and the $4.1 recovery on the
asset-backed bonds at Independence, total non-interest income in 1992 increased
more than 5% over 1991.
CoreStates recorded net securities gains of $16.1 million in 1993 and $13.8
million in 1992, compared with net securities losses of $13.9 million in 1991.
Investment securities gains for 1993 included $13.6 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 were $2.6 million, including
$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.
62
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED
NON-INTEREST INCOME - CONTINUED
Income from basic banking transactional services increased 8.6% 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 $16.3 million,
or 10.0%, in 1993 and $20.1 million, or 14.1%, 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 $292.2 million, up $4.1
million, or 1.4%, from 1992. The benefit derived from deposit balances
maintained by commercial and correspondent customers decreased $12.0 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 $288.1 million, an increase of $6.6 million or 2.3% 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 $5.1 million, or 5.2%, in 1993 following a slight
decline of $.6 million, or .6%, 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.
. Debit and credit card fees increased $2.1 million, or 3.6% in 1993,
following a decrease of $6.9 million, or 10.4%, 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 62 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 $3.6 million or 25.5% in 1992.
Other operating income, excluding the non-recurring pre-tax gains of $11.0
million on the Virgin Islands branch sale, $9.1 million on prepayments of long-
term debt and $1.4 million recovery on Independence loan previously charged off,
increased $29.0 million in 1993, following an increase of $1.2 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.
63
<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 $ 614.0 $ 611.4 $ 606.6 0.4% 0.8%
Net occupancy expense 111.6 112.8 118.3 (1.1) (4.7)
Equipment expense 73.9 85.6 84.3 (13.7) (1.5)
Other operating expenses 420.3 417.1 389.1 0.8 7.2
-------- -------- --------
Non-financial expenses before 1,219.8 1,226.9 1,198.3 (0.6) 2.4
significant and unusual
items
Significant and unusual items 22.1 79.7 121.2
-------- -------- --------
Total non-financial expenses $1,241.9 $1,306.6 $1,319.5 (5.0) (1.0)
======== ======== ========
</TABLE>
While reported total non-financial expenses in 1993 of $1,241.9 million
reflected a decrease of 5.0% from 1992, excluding significant and unusual items
as noted below for both years, non-financial expenses for 1993 decreased 0.6%
from 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 and $12.1 million for reserves and write-downs against
other real estate owned. 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; $9.3 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 2.4% above 1991.
Salaries, wages and benefits increased 0.4% in 1993, compared to an increase
of 0.8% in 1992. A decrease in 1993 salary expense 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: 16,017; 16,271; and 16,571, respectively.
Net occupancy expense decreased 1.1% in 1993, compared to a decline of 4.7%
in 1992. Equipment expenses declined 13.7% in 1993, compared to a slight
decrease of 1.5% 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 0.7% in 1993, following an increase
of 7.2% in 1992 compared to 1991.
PROVISION FOR INCOME TAXES
The provision for income taxes was $173.8 million in 1993 compared to $128.2
million in 1992 and $97.4 million in 1991. The $45.6 million increase in 1993
total tax expense was primarily the result of higher pre-tax book income of
$139.9 million. The provision for income taxes for 1993, 1992 and 1991 were at
effective rates of 32.4%, 32.3% and 35.1%, 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.
64
<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
---------- ------ ---------- ---------- ------ ----------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(000,000) (000) (000,000) (000) (000,000) (000)
INTEREST EARNING ASSETS
Time deposits, principally
Eurodollars (a)................... $ 1,312 3.38% $ 44,336 $ 1,435 4.08% $ 58,612 $ 1,213 6.52% $ 79,125
Investment securities (b):
U.S. Government.................. 2,759 5.80 159,950 2,321 6.97 161,760 2,061 8.04 165,700
State and municipal.............. 414 8.28 34,261 423 9.40 39,766 466 10.44 48,664
Other............................ 410 5.21 21,348 550 7.82 43,025 671 9.23 61,945
--------- ---------- --------- ---------- --------- ----------
Total investment
securities............... 3,583 6.02 215,559 3,294 7.42 244,551 3,198 8.64 276,309
Federal funds sold................. 235 3.10 7,284 510 4.43 22,611 450 6.40 28,813
Trading account securities......... 2 4.15 83 1 7.20 72 1 5.10 51
Loans (b)(c)(d):
Domestic:
Commercial, industrial and
other......................... 7,378 8.07 595,115 7,234 8.31 601,294 7,993 9.71 776,261
Real estate.................... 6,795 7.89 536,234 6,854 8.51 583,562 6,571 9.47 622,340
Consumer....................... 2,399 11.93 286,134 2,471 12.35 305,193 3,653 14.35 524,058
Financial institutions......... 707 6.15 43,475 832 6.24 51,903 900 8.71 78,420
Factoring receivables.......... 554 9.62 53,312 486 9.70 47,154 480 10.69 51,327
Lease financing................ 658 9.06 59,609 562 8.87 49,848 546 9.50 51,876
Foreign.......................... 544 5.01 27,258 429 6.53 28,018 431 8.68 37,429
--------- ---------- --------- ---------- --------- ----------
Total loans, net of
discounts............... 19,035 8.41 1,601,137 18,868 8.83 1,666,972 20,574 10.41 2,141,711
--------- ---------- --------- ---------- --------- ----------
Total interest earning
assets (d)(e) $ 24,167 7.73 1,868,399 $ 24,108 8.27 1,992,818 $ 25,436 9.93 2,526,009
========= ----- ---------- ========= ----- ---------- ========= ----- ----------
FUNDING SOURCES
Interest bearing liabilities (b):
Deposits in domestic offices (f):
Commercial..................... $ 419 3.74 15,656 $ 796 4.40 34,996 $ 1,466 6.42 94,181
NOW accounts................... 1,793 .95 15,442 1,671 2.44 36,858 1,444 4.54 58,450
Money Market Accounts.......... 4,142 2.13 88,061 4,225 2.89 122,085 3,947 4.91 193,621
Consumer savings............... 2,982 1.54 45,792 2,612 2.74 71,495 2,024 4.62 93,408
Consumer certificates.......... 4,499 4.37 196,614 5,446 5.08 276,701 6,449 6.73 433,790
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................ 14,545 2.64 379,813 15,506 3.72 570,454 16,557 5.79 950,379
Short-term funds borrowed:
Federal funds purchased........ 1,129 3.05 34,444 990 3.41 33,735 1,321 5.58 73,742
Commercial paper............... 604 3.14 18,982 539 3.72 20,030 791 6.28 49,657
Other.......................... 229 5.93 13,579 128 5.25 6,715 700 6.89 48,206
--------- ---------- --------- ---------- --------- ----------
Total short-term funds
borrowed................ 1,962 3.42 67,005 1,657 3.65 60,480 2,812 6.10 171,605
Long-term debt (g)............... 1,455 4.80 69,776 1,312 6.06 78,426 1,168 7.86 90,363
--------- ---------- --------- ---------- --------- ----------
Total interest bearing
liabilities............. 17,962 2.90 516,594 18,475 3.84 709,360 20,537 5.90 1,212,347
Portion of non-interest bearing
funding sources................... 6,205 5,633 4,899
--------- ---------- --------- ---------- ---------
Total funding sources (e) $ 24,167 2.14 516,594 $ 24,108 2.94 709,360 $ 25,436 4.77 1,212,347
========= ----- ---------- ========= ----- ---------- ========= ----- ----------
Net interest income and net
interest margin................... 5.59% $1,351,805 5.32% $1,283,458 5.16% $1,313,662
===== ========== ===== ========== ===== ==========
65
</TABLE>
<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
---------- ----- -------- ---------- ----- -------- ---------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(000,000) (000) (000,000) (000) (000,000) (000)
NON-INTEREST EARNING ASSETS
Cash......................................... $ 2,263 $ 2,114 $ 1,973
Allowance for loan losses.................... (457) (463) (512)
Other assets................................. 1,727 1,795 1,746
--------- --------- ---------
Total non-interest earning assets....... $ 3,533 $ 3,446 $ 3,207
========= ========= =========
NON-INTEREST BEARING FUNDING SOURCES
Demand deposits:
Domestic................................... $ 5,714 $ 5,437 $ 4,752
Foreign.................................... 369 324 308
Other liabilities............................ 1,457 1,368 1,184
Shareholders' equity......................... 2,198 1,950 1,862
Non-interest bearing funding sources used
to fund earning assets..................... (6,205) (5,633) (4,899)
--------- --------- ---------
Total net non-interest bearing
funding sources..................... $ 3,533 $ 3,446 $ 3,207
========= ========= =========
SUPPLEMENTARY AVERAGES
Net demand deposits.......................... $ 4,579 $ 3,998 $ 3,306
Net Federal funds purchased.................. 894 3.04% $27,160 479 2.32% $11,124 807 5.24% $45,558
Certificates of deposit in domestic offices
over $100,000.............................. 360 3.61 13,008 681 4.33 29,492 1,310 6.47 84,812
Average prime rate........................... 6.00 6.25 8.46
</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.
66
<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
---------- ------ ----------- ---------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
(000,000) (000) (000,000) (000)
INTEREST EARNING ASSETS
Time deposits, principally Eurodollars (a)....... $ 744 8.43% $ 62,706 $ 1,043 9.17% $ 95,592
Investment securities (b):
U.S. Government................................ 1,761 8.73 153,707 2,144 8.71 186,756
State and municipal............................ 560 10.74 60,151 576 10.64 61,279
Other.......................................... 752 9.17 68,931 974 9.33 90,827
--------- ---------- --------- ----------
Total investment securities............ 3,073 9.20 282,789 3,694 9.17 338,862
Federal funds sold............................... 328 8.47 27,787 499 8.77 43,766
Trading account securities....................... 7 8.66 606 38 8.26 3,138
Loans (b)(c)(d):
Domestic:
Commercial, industrial and other............. 8,436 10.91 920,406 8,061 11.69 942,247
Real estate.................................. 6,563 10.77 707,084 6,165 11.43 704,631
Consumer..................................... 4,159 14.06 584,594 3,773 13.60 513,167
Financial institutions....................... 1,025 10.08 103,306 966 10.38 100,285
Factoring receivable......................... 478 10.42 49,829 458 11.79 53,983
Lease financing.............................. 566 9.92 56,175 496 10.97 54,392
Foreign.......................................... 582 9.77 56,876 874 9.23 80,670
--------- ---------- --------- ----------
Total loans, net of discounts.......... 21,809 11.36 2,478,270 20,793 11.78 2,449,375
--------- ---------- --------- ----------
Total interest earning assets (d)(e) $ 25,961 10.99 2,852,158 $ 26,067 11.24 2,930,733
========= ----- ---------- ========= ----- ----------
FUNDING SOURCES
Interest bearing liabilities (b):
Deposits in domestic offices (f):
Commercial................................... $ 1,976 8.23 159,832 $ 2,387 8.96 210,408
NOW accounts................................. 1,327 5.25 62,115 1,272 5.27 61,062
Money Market Accounts........................ 3,520 6.09 213,098 3,387 6.11 206,564
Consumer savings............................. 1,854 5.03 93,049 1,854 5.07 93,769
Consumer certificates........................ 6,337 8.15 516,574 5,628 8.59 483,381
Time deposits of overseas branches
and subsidiaries............................. 943 8.59 81,039 1,439 9.57 137,653
--------- ---------- --------- ----------
Total interest bearing deposits........ 15,957 7.14 1,125,707 15,967 7.55 1,192,837
Short-term funds borrowed:
Federal funds purchased...................... 1,993 8.11 161,588 2,500 9.24 230,991
Commercial paper............................. 1,179 8.18 96,435 947 9.24 87,529
Other........................................ 1,016 7.37 74,843 617 9.48 58,502
--------- ---------- --------- ----------
Total short-term funds borrowed........ 4,188 7.95 332,866 4,064 9.28 377,022
Long-term debt (g).............................. 825 9.20 74,162 798 9.17 71,380
--------- ---------- --------- ----------
Total interest bearing liabilities..... 20,970 7.31 1,532,735 20,829 7.88 1,641,239
Portion of non-interest bearing funding sources 4,991 5,239
--------- ---------
Total funding sources (e).............. $ 25,961 5.90 1,532,735 $ 26,068 6.30 1,641,239
========= ----- ---------- ========= ----- ----------
Net interest income and net interest margin...... 5.08% $1,319,423 4.95% $1,289,494
===== ========== ===== ==========
</TABLE>
67
<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
---------- ------ --------- ---------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
(000,000) (000) (000,000) (000)
NON-INTEREST EARNINGS ASSETS
Cash.......................................... $ 2,136 $ 2,113
Allowance for loan losses..................... (358) (405)
Other assets.................................. 1,573 1,600
--------- ---------
Total non-interest earning assets... $ 3,351 $ 3,308
========= =========
NON-INTEREST BEARING FUNDING SOURCES
Demand deposits:
Domestic.................................... $ 4,860 $ 4,839
Foreign..................................... 273 275
Other liabilities............................. 1,231 1,387
Shareholders' equity.......................... 1,978 2,046
Non-interest bearing funding sources used to
fund earning assets......................... (4,991) (5,239)
--------- ---------
Total net non-interest bearing
funding sources................... $ 3,351 $ 3,308
========= =========
SUPPLEMENTARY AVERAGES
Net demand deposits........................... $ 3,228 $ 3,193
Net Federal funds purchased................... 1,664 8.04% $133,801 1,999 9.37% $187,225
Certificates of deposit in domestic offices
over $100,000............................... 1,700 8.24 140,084 2,253 8.93 201,124
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.
68
<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.................. $1,841,864 $1,961,838 $2,485,277 $2,799,141 $2,870,616 $2,482,410
Interest expense.......................... 516,593 709,360 1,212,367 1,532,735 1,641,239 1,343,516
---------- ---------- ---------- ---------- ---------- ----------
Net interest income...................... 1,325,271 1,252,478 1,272,910 1,266,406 1,229,377 1,138,894
Provision for losses on loans............. 121,201 160,250 291,261 437,860 327,181 137,619
---------- ---------- ---------- ---------- ---------- ----------
Net interest income after
provision for losses on loans... 1,204,070 1,092,228 981,649 828,546 902,196 1,001,275
Non-interest income....................... 574,030 610,664 615,565 474,971 430,915 359,264
Non-financial expenses.................... 1,241,862 1,306,593 1,319,465 1,186,319 1,156,107 1,024,045
---------- ---------- ---------- ---------- ---------- ----------
Income from continuing operations before
income taxes............................ 536,238 396,299 277,749 117,198 177,004 336,494
Provision for income taxes................ 173,809 128,165 97,432 11,998 18,708 34,800
---------- ---------- ---------- ---------- ---------- ----------
Income before cumulative effect of a
change in accounting principle.......... 362,429 268,134 180,317 105,200 158,296 301,694
Cumulative effect of a change in
accounting principle, net of tax........ (13,010) (84,946) - - - -
---------- ---------- ---------- ---------- ---------- ----------
Net income................................ 349,419 183,188 180,317 105,200 158,296 301,694
Dividends on preferred stock.............. - - - 1,662 20,973 9,350
---------- ---------- ---------- ---------- ---------- ----------
Net income applicable to common stock..... $ 349,419 $ 183,188 $ 180,317 $ 103,538 $ 137,323 $ 292,344
========== ========== ========== ========== ========== ==========
Per common share data:
Income before cumulative effect of a
change in accounting principle....... $2.49 $1.97 $1.35 $0.78 $1.02 $2.19
Net income............................. $2.40 $1.35 $1.35 $0.78 $1.02 $2.19
Average common shares outstanding......... 145,398 135,813 133,237 133,525 134,066 133,249
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL DATA: CONTINUED
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
December 31,
---------------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks..................... $ 2,521,676 $ 2,510,001 $ 2,210,383 $ 2,642,911 $ 2,743,216 $ 2,422,615
Time deposits, principally Eurodollars...... 1,319,457 1,815,394 1,673,553 1,289,925 815,125 1,578,189
Investment securities....................... 3,599,166 3,588,348 3,298,107 3,086,687 3,579,390 4,037,091
Loans....................................... 19,776,258 18,940,402 19,418,084 21,543,536 21,548,468 19,681,419
Allowance for loan losses................... (450,823) (442,267) (473,301) (512,288) (555,427) (386,454)
Funds sold.................................. 161,527 266,890 376,300 234,298 260,226 497,766
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........ 1,168,729 1,418,177 1,467,492 1,514,522 1,502,717 1,203,137
----------- ----------- ----------- ----------- ----------- -----------
Total assets........................ $28,434,617 $28,732,717 $28,183,897 $30,303,164 $30,284,289 $29,588,524
=========== =========== =========== =========== =========== ===========
LIABILITIES
Deposits:
Domestic:
Non-interest bearing.................... $ 6,649,367 $ 6,460,415 $ 5,930,296 $ 5,813,027 $ 5,857,767 $ 5,821,404
Interest bearing........................ 13,686,027 14,446,043 15,147,941 15,616,028 15,100,264 14,096,472
Overseas branches and subsidiaries........ 796,902 766,119 839,327 1,181,341 1,296,926 1,709,970
----------- ----------- ----------- ----------- ----------- -----------
Total deposits...................... 21,132,296 21,672,577 21,917,564 22,610,396 22,254,957 21,627,846
Short-term funds borrowed................... 1,884,125 1,904,044 2,069,451 3,628,797 3,860,900 3,743,172
Bank acceptances outstanding................ 337,180 635,544 213,613 503,049 376,213 567,097
Other liabilities........................... 1,123,342 1,068,395 814,888 849,085 1,017,493 928,687
Long-term debt.............................. 1,589,290 1,357,598 1,240,970 882,271 781,187 817,279
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities................... 26,066,233 26,638,158 26,256,486 28,473,598 28,290,750 27,684,081
----------- ----------- ----------- ----------- ----------- -----------
SHAREHOLDERS' EQUITY
Preferred................................... - - - - 100,000 100,000
Common...................................... 2,368,384 2,094,559 1,927,411 1,829,566 1,893,539 1,804,443
----------- ----------- ----------- ----------- ----------- -----------
Total shareholders' equity.......... 2,368,384 2,094,559 1,927,411 1,829,566 1,993,539 1,904,443
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and
shareholders' equity.............. $28,434,617 $28,732,717 $28,183,897 $30,303,164 $30,284,289 $29,588,524
=========== =========== =========== =========== =========== ===========
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL DATA: CONTINUED
SHAREHOLDERS' DATA
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............. $ 2.49 $ 1.97 $ 1.35 $ .78 $ 1.02
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...................... 10.5x 14.5x 17.8x 20.0x 21.0x
Book value per share at year-end............. $16.29 $14.48 $14.40 $13.77 $14.13
</TABLE>
OTHER SELECTED DATA
<TABLE>
<CAPTION>
OPERATING RATIOS:
Income from continuing operations
applicable to common stock
as a percent of:
<S> <C> <C> <C> <C> <C>
Operating income......................... 15.00% 10.42% 5.82% 3.16% 4.16%
Average common shareholders' equity...... 16.49 13.75 9.68 5.28 7.06
Average total assets..................... 1.31 .97 .63 .35 .47
Average total shareholders' equity as a
percent of average total assets............ 7.94 7.08 6.50 6.75 6.96
Dividends declared as a percent of
income from continuing operations.......... 45.78 51.78 71.85 123.08 85.29
FULL TIME EQUIVALENT STAFF AT YEAR-END....... 16,017 16,271 16,571 17,144 17,572
NUMBER OF LOCATIONS.......................... 483 482 540 554 573
NUMBER OF REGISTERED COMMON SHAREHOLDERS..... 44,128 45,209 48,701 51,076 55,512
</TABLE>
71
<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.............. $ (14,276) $ (5,018) (9,258) $ (20,513) $ 14,474 $ (34,987)
Investment securities...... (28,992) 21,444 (50,436) (31,758) 8,294 (40,052)
Federal funds sold......... (15,327) (12,183) (3,144) (6,202) 3,840 (10,042)
Trading account securities. 11 72 (61) 21 - 21
Loans:
Domestic................ (65,076) 4,623 (69,699) (465,328) (178,068) (287,260)
Foreign................. (760) 7,510 (8,270) (9,411) (174) (9,237)
--------- -------- --------- --------- --------- ---------
Total interest income (124,420) 16,448 (140,868) (533,191) (151,634) (381,557)
--------- -------- --------- --------- --------- ---------
Interest bearing funds
- ---------------------------
Deposits:
Domestic................. (180,570) (34,484) (146,086) (331,315) (33,754) (297,561)
Overseas................. (10,071) (1,688) (8,383) (48,610) (29,532) (19,078)
Short-term funds borrowed:
Federal funds purchased.. 709 4,740 (4,031) (40,007) (18,470) (21,537)
Other.................... 5,816 6,657 (841) (71,118) (54,054) (17,064)
Long-term debt............. (8,650) 9,696 (18,346) (11,937) 11,397 (23,334)
--------- -------- --------- --------- --------- ---------
Total interest
expense............. (192,766) (15,079) (177,687) (502,987) (124,413) (378,574)
--------- -------- --------- --------- --------- ---------
Net interest income........ $ 68,346 $ 31,527 $ 36,819 $ (30,204) $ (27,221) $ (2,983)
- --------------------------- ========= ======== ========= ========= ========= =========
</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 $62.1 million, $57.2 million and $57.3 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.
72
<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......... $ 7,879,451 $ 7,354,666 $ 7,503,223 $ 8,002,759 $ 8,140,936
----------- ----------- ----------- ----------- -----------
Real estate loans:
Construction and development........... 367,364 501,404 754,089 1,016,830 1,196,497
Residential............................ 3,121,008 3,314,111 3,106,984 3,065,826 2,738,090
Other, primarily commercial mortgages
and commercial loans secured by
owner-occupied real estate........... 3,175,284 3,212,582 2,984,798 2,954,493 2,759,689
----------- ----------- ----------- ----------- -----------
Total real estate loans............ 6,663,656 7,028,097 6,845,871 7,037,149 6,694,276
----------- ----------- ----------- ----------- -----------
Consumer loans:
Installment............................ 1,356,633 1,379,760 1,762,210 1,998,889 2,194,159
Credit card............................ 1,178,972 957,168 979,327 2,000,941 1,724,982
----------- ----------- ----------- ----------- -----------
Total consumer loans....................... 2,535,605 2,336,928 2,741,537 3,999,830 3,919,141
----------- ----------- ----------- ----------- -----------
Financial institutions................... 870,489 783,125 996,500 1,077,419 1,062,095
Factoring receivables.................... 555,211 454,244 402,752 418,129 420,565
Lease financing.......................... 728,764 583,187 536,836 546,203 522,475
----------- ----------- ----------- ----------- -----------
Total domestic loans.............. 19,233,176 18,540,247 19,026,719 21,081,489 20,759,488
----------- ----------- ----------- ----------- -----------
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
----------- ----------- ----------- ----------- -----------
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................ 543,082 400,155 391,365 462,067 788,980
----------- ----------- ----------- ----------- -----------
Total loans........................ $19,776,258 $18,940,402 $19,418,084 $21,543,536 $21,548,468
=========== =========== =========== =========== ===========
</TABLE>
73
<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.
74
<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.......................... $246,512 $411,120 $565,644 $539,766 $170,053
Foreign........................... 171 3,047 8,797 29,139 217,465
-------- -------- -------- -------- --------
Total non-accrual loans...... 246,683 414,167 574,441 568,905 387,518
-------- -------- -------- -------- --------
RENEGOTIATED LOANS
Domestic.......................... 56,457 63,074 46,611 6,547 8,358
-------- -------- -------- -------- --------
Total renegotiated loans..... 56,457 63,074 46,611 6,547 8,358
-------- -------- -------- -------- --------
Total non-performing loans... 303,140 477,241 621,052 575,452 395,876
-------- -------- -------- -------- --------
Other real estate owned (OREO)
Acquired through foreclosure
or exchange..................... 72,907 72,140 76,138 58,213 19,993
In-substance foreclosure.......... 56,419 118,264 103,386 31,853
Property formerly used in
banking operations.............. 6,202 3,908 2,022
-------- -------- -------- -------- --------
Total OREO................... 135,528 194,312 181,546 90,066 19,993
-------- -------- -------- -------- --------
Total non-performing assets.. $438,668 $671,553 $802,598 $665,518 $415,869
======== ======== ======== ======== ========
Non-performing assets as a
percentage of loans plus OREO... 2.20% 3.51% 4.09% 3.08% 1.93%
======== ======== ======== ======== ========
Non-performing assets as a
percentage of total assets...... 1.54% 2.34% 2.85% 2.20% 1.37%
======== ======== ======== ======== ========
</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.............................. $30,838 $38,375 $ 62,151
Foreign............................... 38 324 1,462
------- ------- --------
Total............................ 30,876 38,699 63,613
------- ------- --------
Interest income reflected in
total operating income:
Domestic.............................. 17,300 20,479 16,216
Foreign...............................
------- ------- --------
Total............................ 17,300 20,479 16,216
------- ------- --------
Net reduction in interest income
and net interest income................... $13,576 $18,220 $ 47,397
======= ======= ========
</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.................................. $52,665 $95,866 $110,143 $147,218 $88,916
------- ------- -------- -------- -------
Total................................... $52,665 $95,866 $110,143 $147,218 $88,916
======= ======= ======== ======== =======
</TABLE>
75
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL 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........................ $432,267 $463,301 $495,775 $268,660 $228,761
Foreign......................... 10,000 10,000 16,513 286,767 157,693
-------- -------- -------- -------- --------
442,267 473,301 512,288 555,427 386,454
Allowance for loans purchased
at date of purchase
Domestic..................... 2,703 1,028 6,146 6,415
Allowance for loans sold
at date of sale:
Domestic..................... (353) (14,700) (27,486) (657)
Foreign...................... -------- -------- -------- -------- --------
(353) (14,700) (27,486) (657)
Recoveries, by type of loan:
Domestic:
Commercial, industrial
and other.................. 45,207 25,865 26,636 30,853 15,973
Real estate................... 8,470 6,438 5,874 8,690 1,882
Consumer...................... 18,170 21,852 20,729 11,343 12,543
Financial institutions........ 2,246 2,776 1,966 1,607 12
Foreign......................... 12,645 13,138 26,586 17,110 1,618
-------- -------- -------- -------- --------
Total recoveries............. 86,738 70,069 81,791 69,603 32,028
Charge-offs, by type of loan:
Domestic:
Commercial, industrial
and other................ 91,785 103,000 136,363 105,240 49,598
Real estate................... 59,191 69,896 99,650 87,074 11,238
Consumer...................... 49,941 71,585 130,981 92,996 64,380
Financial institutions........ 816 3,195 14,669 5,993 3,891
Foreign......................... 5 2,890 264,788 67,544
--------- -------- -------- -------- --------
Total loans charged off...... 201,733 247,681 384,553 556,091 196,651
Total net charge-offs............ 114,995 177,612 302,762 486,488 164,623
Provision charged to operating
expense:
Domestic........................ 133,846 173,383 321,470 460,436 132,181
Foreign......................... (12,645)(a) (13,133)(a) (30,209)(a) (22,576)(a) 195,000
-------- -------- -------- -------- --------
121,201 160,250 291,261 437,860 327,181
Balance at end of year:
Domestic........................ 440,823 432,267 463,301 495,775 268,660
Foreign......................... 10,000 10,000 10,000 16,513 286,767
-------- -------- -------- -------- --------
$450,823 $442,267 $473,301 $512,288 $555,427
======== ======== ======== ======== ========
RATIOS
Net charge-offs as a percentage
of average loans outstanding.... 0.60% 0.94% 1.47% 2.23% 0.79%
======== ======== ======== ======== ========
Allowance for loan losses as a
percentage of year-end loans.... 2.28% 2.34% 2.44% 2.38% 2.58%
======== ======== ======= ======== ========
</TABLE>
(a) Reflects reallocation of the foreign allowance for loan losses to the
domestic allowance for loan losses.
76
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
SUPPLEMENTAL FIANNCIAL 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.. $208.3 2.5% $206.6 2.6% $238.1 3.0% $173.2 2.1%
Real estate:
Construction............. 69.0 18.8 94.7 18.9 88.0 11.7 134.3 13.2
Other.................... 63.4 1.0 36.9 .6 45.5 .7 65.3 1.1
Consumer................... 83.1 3.3 73.8 3.2 79.6 2.9 111.0 2.8
Other domestic loans....... 17.0 1.1 20.2 1.5 12.1 .8 12.0 .7
Foreign...................... 10.0 1.8 10.0 2.5 10.0 2.6 16.5 3.6
--------- --------- --------- ---------
Total................... $450.8 2.3% $442.2 2.3% $473.3 2.4% $512.3 2.4%
========= ======= ========= ======= ========= ======= ========= =======
</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.
<TABLE>
<CAPTION>
CERTIFICATES OF DEPOSIT OVER $100,000 ISSUED BY DOMESTIC OFFICES
(in thousands)
December 31,
---------------------------------
1993 1992
--------------- ---------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
MATURITY DISTRIBUTION
3 months or less....................................... $210,558 63.6% $355,868 51.8%
3 through 6 months..................................... 51,783 15.6 136,363 19.8
6 through 12 months.................................... 29,022 8.8 78,688 11.5
Over 12 months......................................... 39,552 12.0 116,489 16.9
-------- ----- -------- -----
$330,915 100.0% $687,408 100.0%
======== ===== ======== =====
77
</TABLE>
<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.............................. $ 168 $ 168
Time deposits...................................... 624 $ 533 $ 162 1,319
Investment securities.............................. 861 396 453 $ 686 $ 746 $ 457 3,599
Interest rate swaps................................ 762 160 390 721 1,869 695 4,597
Asset financial futures........................... 296 79 195 20 15 605
------- ------- -------- ------ ------- ------- -------
Total discretionary assets.................... 2,711 1,168 1,200 1,427 2,630 1,152 10,288
Total loans(a)..................................... 13,026 1,450 1,232 1,510 2,175 383 19,776
------- ------- -------- ------ ------- ------- -------
Total earning assets.......................... 15,737 2,618 2,432 2,937 4,805 1,535 30,064
------- ------- -------- ------ ------- ------- -------
FUNDING SOURCES
Federal funds purchased, repurchase
agreements and other short-term funds
borrowed........................................ 1,873 11 1,884
Domestic and foreign time deposits(b).............. 913 35 8 6 5 70 1,037
Long-term debt..................................... 704 19 30 137 60 639 1,589
Interest rate swaps................................ 3,963 25 33 179 372 25 4,597
Liability financial futures........................ 530 55 20 605
------- ------- -------- ------ ------- ------- -------
Total discretionary liabilities............... 7,983 145 91 322 437 734 9,712
------- ------- -------- ------ ------- ------- -------
Savings certificates............................... 1,274 915 722 498 489 303 4,201
Money market, savings and NOW accounts............. 2,830 869 1,194 1,868 2,485 9,246
Net non-interest bearing funds(c)(d)............... 4,527 2,378 6,905
------- ------- -------- ------ ------- ------- -------
Total savings certificates and indefinite
maturity liabilities....................... 8,631 1,784 1,916 2,366 2,974 2,681 20,352
------- ------- -------- ------ ------- ------- -------
Total net funding sources..................... 16,614 1,929 2,007 2,688 3,411 3,415 30,064
------- ------- -------- ------ ------- ------- -------
Period gap.................................... (877) 689 425 249 1,394 (1,880) -0-
Cumulative gap................................ (877) (188) 237 486 1,880 -0-
Adjustments(e)................................ 767 (671) (347) (447) (1,437) 2,134 -0-
------- ------- -------- ------ ------- ------- -------
Adjusted period gap........................... $ (110) $ 18 $ 78 $ (198) $ (43) $ 254 $ -0-
======= ======= ======== ====== ======= ======= =======
Cumulative gap................................ $ (110) $ (92) $ (14) $ (211) $ (254) $ -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.
78
<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................................... $ 972,076 $ 887,055 $ 880,154
U.S. Government agencies and
corporations............................... 1,767,212 1,848,837 1,391,353
State and municipal............................. 356,438 419,303 380,944
Other........................................... 503,440 433,153 645,656
---------- ---------- ----------
$3,599,166 $3,588,348 $3,298,107
========== ========== ==========
</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
Agencies and State and Total
-------------------
U.S. Treasury Corporations Municipal Other Amount Yield(b)
------------- --------------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
1 year or less.................................. $298,233 $ 235,053 $ 88,837 $ 158,552 $ 780,675 4.98%
1 year through 5 years.......................... 402,895 1,200,184 194,975 155,865 1,953,919 5.45
5 years through 10 years........................ 270,901 109,321 38,133 17,689 436,044 6.44
After 10 years.................................. 47 222,654 34,493 171,334 428,528 7.45
-------- ---------- ---------- ---------- ---------- -----
$972,076 $1,767,212 $ 356,438 $ 503,440 $3,599,166 5.71%
======== ========== ========== ========== ========== =====
</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.
79
<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, and Capital Securities, issuable by
the Corporation, (e) the Registration Statement (Form S-3, No. 33-54049)
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 (f) 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, (g)
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, (h) 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, (i) 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,
(j) 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, and (k) the Registration Statement (Form S-4, No. 33-53539) 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
Independence Bancorp, Inc., of our report dated February 1, 1994, except
for the second paragraph of Note 2, as to which the date is March 16,
1994, and the third paragraph of Note 2, as to which the date is June 27,
1994, with respect to the consolidated financial statements of CoreStates
Financial Corp included in the current report on Form 8-K dated September
13, 1994.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
September 12, 1994
80
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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 Capital Corp and the related guarantees of the
Corporation, and Preferred Stock, Depository Shares, and Capital
Securities, issuable by the Corporation, (e) the Registration Statement
(Form S-3, No. 33-54049) and the 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, (f) 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 (g) the Registration Statement (Form S-4, No.
33-31896) and 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, (h) 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, (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,
(j) the Registration Statement (Form S-4, No. 33-53539) 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 Independence
Bancorp, Inc., and (k) 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 Note 2 which is as of March 29, 1994, and the third paragraph
of note 1 which is as of July 20, 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 September 13, 1994 report on Form 8-K of CoreStates
Financial Corp. Our report refers to a restatement of the 1993 financial
statements to remove certain merger-related charges, and 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 LLP
Short Hills, New Jersey
September 12, 1994
81
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EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in (a) the Registration Statement
on Form S-8 (No. 33-5874), the Post-Effective Amendment No.1 to the Registration
Statement on Form S-8 (No. 2-91176), the Registration Statement in 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 Capital Corp and the related guarantees of the
Corporation, Preferred Stock, Depository Shares, and Capital Securities issuable
by the Corporation, (e) the Registration Statement on Form S-3 (No. 33-54049)
and the 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, (f) the Registration Statement on Form S-4 (No. 33-7286) and
prospectus relating to shares of the Corporation Common Stock issuable upon the
exercise of stock options 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 (g) The Registration
Statement on Form S-4 (No. 33-31896) and relating to shares of the Corporation
Common Stock issuable upon the exercise of common 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, (h) the Registration Statement on
Form S-4 (No. 33-48422) 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 First Peoples Corporation, (i) the Registration Statement on 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, (j) the Registration Statement on Form S-4 (No. 33-53539)
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 on Independence Bancorp,
Inc. and (k) 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,
which includes an explanatory paragraph related to changes in the method of
accounting for investments in 1993 and method of accounting for income taxes in
1992, dated January 19, 1994, on our audits of the consolidated financial
statements of Independence Bancorp, Inc. as of December 31, 1993 and 1992, and
for the years ended December 31, 1993, 1992, and 1991.
/s/ Coopers & Lybrand L.L.P.
Philadelphia, Pennsylvania
September 12, 1994
82
