<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
OR
[_] TRANSITION REPORT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File Number 0-6879
CORESTATES FINANCIAL CORP
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1899716
- -------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Philadelphia National Bank Building
Broad & Chestnut Streets
P.O. Box 7618
Philadelphia, Pennsylvania 19101-7618 19101
- ------------------------------------------- -------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 215-973-3827
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Class Upon Which Registered
-------------- ---------------------
Common Stock, $1.00 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of voting stock held by non-affiliates of registrant
based on the closing sale price on March 4, 1994 was approximately
$2,862,484,000. For this purpose only, all directors and officers of the
registrant were assumed to be affiliates.
The number of shares of Common Stock outstanding at March 4, 1994 was
116,686,245.
DOCUMENTS INCORPORATED BY REFERENCE
1. Annual Report to Shareholders for the fiscal year ended December 31, 1993,
portions of which are incorporated by reference in Parts I, II and IV of this
Report.
2. Definitive Proxy Statement dated March 17, 1994 for the Annual Shareholders'
Meeting to be held on April 19, 1994, portions of which are incorporated by
reference in Part III of this Report.
<PAGE>
PART I
Item 1 - Business
CoreStates Financial Corp ("CoreStates") is a bank holding company
registered under the Federal Bank Holding Company Act of 1956, as amended (the
"Act") and incorporated under the laws of Pennsylvania with executive offices at
Philadelphia National Bank Building, Broad & Chestnut Streets, Philadelphia,
Pennsylvania 19107 (telephone number 215-973-3827). At December 31, 1993,
CoreStates had total consolidated assets of approximately $23.7 billion and
shareholders' equity of approximately $1.96 billion and, based on December 31,
1993 rankings of bank holding companies, was believed to be the 32nd largest
bank holding company in the United States at such date.
Banking Subsidiaries
The lead banking subsidiary of CoreStates is CoreStates Bank, N.A.
("CoreStates Bank"), a national banking association with executive offices
located in Philadelphia, Pennsylvania. Divisions of CoreStates Bank are
marketed as Philadelphia National Bank Division, the wholesale banking unit,
CoreStates First Pennsylvania Bank Division, the retail banking unit, and since
its merger into CoreStates Bank in August 1993, CoreStates Hamilton Bank, the
unit serving central Pennsylvania. Other principal banking subsidiaries of
CoreStates are New Jersey National Bank ("NJNB"), a national banking association
with its executive offices located in Pennington, New Jersey and CoreStates Bank
of Delaware N.A. ("CBD"), a national banking association with its sole office
located in New Castle County, Delaware. CoreStates Bank, NJNB and CBD are
sometimes referred to herein as the "Banking Subsidiaries". Through CoreStates
Bank, NJNB and CBD, CoreStates has been engaging in the business of providing
wholesale banking services, consumer financial services which includes retail
banking, trust & investment management services and electronic payment services
which are provided through CoreStates' Electronic Payment Services, Inc.
affiliate.
Other Direct and Indirect Subsidiaries and Affiliates
Congress Financial Corporation, ("Congress") a majority-owned subsidiary of
------------------------------
CoreStates, and its subsidiaries are engaged in commercial financing and
factoring with headquarters in New York City and offices in Atlanta, Boston,
Chicago, Columbia, Dallas, Los Angeles, Miami, Milwaukee, Portland and San Juan.
As of December 31, 1993, factored receivables of Congress and its subsidiaries
totalled $555.2 million while outstanding commercial finance obligations and
other receivables totalled $1,426.4 million.
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CoreStates Capital Corp ("Capital") is CoreStates' designated financing
-----------------------
entity to obtain both short-term and long-term financing for CoreStates and its
other subsidiaries. At December 31, 1993, Capital had outstanding commercial
paper in the aggregate principal amount of $468.8 million and debt securities in
the aggregate outstanding principal amount of $1,433 million, with maturities
ranging from 1 month to 11 years.
Electronic Payment Services, Inc. ("EPS") is a joint venture formed in late
---------------------------------
1992 that combined the separate consumer electronic transaction processing
business of CoreStates, Banc One Corporation, PNC Financial Corp. and Society
Corporation into the nation's leading provider of automated teller machine and
point of sale processing services to individuals, financial institutions and
retail stores. CoreStates former electronic payment services business is now
conducted by EPS. EPS has announced the signing of a definitive agreement
providing for two additional banking companies to enter the joint venture. The
transactions are expected to be completed in 1994.
CoreStates also has several other direct and indirect subsidiaries
including companies engaged in discount brokerage services, investment advisory
services, lease financing activities, holding real property facilities used by
CoreStates' Banking Subsidiaries and companies created solely to facilitate the
business of other subsidiaries.
For analytical purposes, management has focused CoreStates into four core
businesses: Wholesale Banking, Consumer Financial Services, Trust & Investment
Management and Electronic Payment Services conducted by EPS. Further
information regarding CoreStates' four core businesses is presented in
Management's Discussion and Analysis of Financial Condition and Results of
Operations at pages 21 through 23 of the CoreStates Annual Report to
Shareholders for the fiscal year ended December 31, 1993 (Exhibit 13 pages 7
through 10) which pages of the Annual Report are incorporated herein by
reference. A brief discussion of the four core businesses is presented below.
There is considerable inter-relationship among these businesses.
Wholesale Banking Wholesale banking services are provided through the
-----------------
Banking Subsidiaries and Congress by the following groups: corporate and
institutional banking; investment banking; cash management; international
banking; corporate middle market; and specialized finance. Domestic financing
services include commercial, industrial and real estate loans, the financing of
receivables, inventory, equipment and other requirements of business customers
and the provision of financial services for correspondent banks. Foreign and
international finance services include the making of loans and acceptances, the
issuance and confirmation of letters of credit and related financial services.
Also provided are transaction processing services, including cash
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management, lock box, funds transfer and collection and disbursement management
on both a domestic and international basis.
International activities are conducted directly by CoreStates Bank through
its head office in Philadelphia and 23 foreign offices. In addition, banking
and financing activities are conducted through two wholly-owned Edge Act
subsidiaries.
Advisory services are also provided which relate to loan syndications,
private placements, mergers and acquisitions, company valuations and other
similar matters. This business also deals in and underwrites obligations of the
United States Government, federal agencies and general obligations of States and
municipal sub-divisions and assists individual corporate customers as well as
other institutions with the purchase and sale of all types of marketable
securities.
Consumer Financial Services This core business is provided by the Banking
---------------------------
Subsidiaries and includes community banking and specialty products. Specialty
products includes credit card, student lending and residential mortgage.
Community banking services are offered through the branch network of the Banking
Subsidiaries in Pennsylvania and New Jersey. This branch banking network
provides a full range of products including deposit, loan and related financial
products, primarily on a full relationship basis. The specialty products and
consumer finance line of business is provided primarily by CBD which is the
issuer of credit cards and also engages in a direct consumer loan business.
Trust & Investment Management This core business provides products through
-----------------------------
four business lines: institutional trust, personal trust, private banking and
investment management. These products are offered through the Banking
Subsidiaries and include fiduciary administration and transaction processing
services, corporate trust services and through CoreStates Investment Advisors,
Inc., investment management services.
Electronic Payment Services This core business includes the MAC automated
---------------------------
teller machine network ("MAC") and point of sale processing ("POS"). Customers
for these businesses include individuals, financial institutions and retail
stores. The MAC and POS business lines were contributed to EPS on December 4,
1992.
Strategic Actions
A discussion of strategic actions taken by CoreStates in 1993 is presented
in Management's Discussion and Analysis of Financial Condition and Results of
Operations at pages 19 through 21 of the CoreStates Annual Report to
Shareholders for the fiscal year ended December 31, 1993 (Exhibit 13 pages 4
through 7) which pages of the Annual Report are incorporated herein by
reference.
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Government Supervision and Regulation
CoreStates is a registered bank holding company subject to the supervision
of, and to regular inspection by, the Board of Governors of the Federal Reserve
System ("Federal Reserve"). All three Banking Subsidiaries are organized as
national banking associations, which are subject to regulation by the
Comptroller of the Currency ("OCC"). The Banking Subsidiaries are also subject
to regulation by other federal bank regulatory bodies. In addition to banking
laws, regulations and regulatory agencies, CoreStates and its subsidiaries and
affiliates are subject to various other laws, regulations and regulatory
agencies, all of which directly or indirectly affect CoreStates' operations,
management and ability to make distributions. The following discussion
summarizes certain aspects of those laws and regulations that affect CoreStates.
Proposals to change the laws and regulations governing the banking industry are
frequently raised in Congress, in the state legislatures and before the various
bank regulatory agencies. The likelihood and timing of any changes and the
impact such changes might have on CoreStates and its Banking Subsidiaries are
difficult to determine.
An important function of the Federal Reserve System is to regulate the
national supply of bank credit. Among the instruments of monetary policy used
by the Federal Reserve System to implement its objectives are: open market
operations in U.S. Government securities; changes in the discount rate on bank
borrowings; and changes in reserve requirements on bank deposits.
Under the Act, CoreStates' activities, and those of companies which it
controls or in which it holds more than 5% of the voting stock, are limited to
banking or managing or controlling banks or furnishing services to or performing
services for its subsidiaries, or any other activity which the Federal Reserve
determines to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. In making such determinations, the Federal
Reserve is required to consider whether the performance of such activities by a
bank holding company or its subsidiaries can reasonably be expected to produce
benefits to the public such as greater convenience, increased competition or
gains in efficiency that outweigh possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices.
Bank holding companies, such as CoreStates, are required to obtain prior
approval of the Federal Reserve to engage in any new activity or to acquire more
than 5% of any class of voting stock of any company. The Act also requires bank
holding companies to obtain the prior approval of the Federal Reserve before
acquiring more than 5% of any class of voting shares of any bank which is not
already majority-owned.
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Provisions of federal banking laws restrict the amount of distributions
that can be paid to CoreStates by the Banking Subsidiaries. Under applicable
federal laws, no dividends may be paid in an amount greater than net profits
then on hand, reduced by certain loan losses (as defined in the applicable
statutes). In addition, for each of CoreStates' Banking Subsidiaries, prior
approval of federal banking authorities is required if dividends declared by a
Banking Subsidiary in any calendar year will exceed its net profits (as defined)
for that year, combined with its retained net profits for the preceding two
calendar years. Based on these regulations, CoreStates' Banking Subsidiaries,
without regulatory approval, could declare dividends at December 31, 1993 of
$171 million.
The OCC, in the cases of the Banking Subsidiaries, also has authority to
prohibit payment of a dividend if such payment constitutes what, in the OCC's
opinion, is an unsafe or unsound practice. In addition, the ability of
CoreStates and its national Banking Subsidiaries to pay dividends may be
affected by the various minimum capital requirements and the capital and non-
capital standards to be established under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), as described below. The rights
of CoreStates, its shareholders and its creditors to participate in any
distribution of the assets or earnings of its Banking Subsidiaries is further
subject to the prior claims of creditors of the respective Banking Subsidiaries.
According to Federal Reserve policy, CoreStates is expected to act as a
source of financial strength to each Banking Subsidiary and to commit resources
to support each Banking Subsidiary in circumstances in which it might not do so
absent such policy. In addition, any capital loans by Corestates to any Banking
Subsidiary would be subordinated in right of payment to deposits and certain
other indebtedness of each Banking Subsidiary.
In addition, CoreStates' Banking Subsidiaries are subject to certain
restrictions imposed by Federal law on any extension of credit to, and certain
other transactions with CoreStates, Capital and certain other non-bank
subsidiaries, on investments in stock or other securities thereof and on the
taking of such securities as collateral for loans. Among other things, the
aggregate of such loans made by each Banking Subsidiary to CoreStates or to any
single non-bank subsidiary generally may not exceed 10% of the sum of such
Banking Subsidiaries' capital and surplus, as defined, and all loans by each
Banking Subsidiary to CoreStates and its non-bank subsidiaries are limited to
20% of such Banking Subsidiaries' capital and surplus. Such loans must be
secured by collateral with a value between 100% and 130% of the loan amount,
depending on the type of collateral. The Banking Subsidiaries may extend credit
to CoreStates and its non-bank subsidiaries without regard to these restrictions
to the extent such extensions of credit are secured by specific kinds of
collateral such as obligations of or guaranteed
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by the U.S. Government or its agencies and certain bank deposits.
FDICIA modifies certain provisions of the Federal Deposit Insurance Act and
makes revisions to several other banking statutes. In general, FDICIA subjects
banks to significantly increased regulation and supervision, and requires the
federal banking agencies to take "prompt corrective action" with respect to
banks which do not meet minimum capital requirements. Among other things,
FDICIA requires a bank which does not meet any one of its capital requirements
set by its regulators to submit a capital restoration plan for improving its
capital. A holding company of a bank must guarantee that the bank will meet its
capital plan, subject to certain limitations. If such a guarantee were deemed
to be a commitment to maintain capital under the U.S. federal Bankruptcy Code, a
claim under such guarantee in a bankruptcy proceeding involving the holding
company would be entitled to a priority over third party creditors of the
holding company. In addition, FDICIA prohibits a bank from making a capital
distribution to its holding company or otherwise if it fails to meet any capital
requirements. Furthermore, under certain circumstances, a holding company of a
bank which fails to meet certain of its capital requirements may be prohibited
from making any capital distributions to its shareholders or otherwise.
Critically undercapitalized banks (which are defined to include banks which
still have a positive net worth) are generally subject to the mandatory
appointment of a receiver. All of CoreStates' Banking Subsidiaries meet
current regulatory capital requirements and are "well capitalized" as defined
by regulatory authorities. Pursuant to FDICIA, in 1993 the FDIC issued a
regulation entitled "Annual Independent Audits and Reporting Requirements" for
banks which requires, among other things, a management assessment on the
effectiveness of the internal controls over financial reporting as of the end
of fiscal year 1993. CoreStates and the Banking Subsidiaries have complied
with this regulation for 1993.
The Financial Institution Reform, Recovery, and Enforcement Act ("FIRREA")
enacted in August 1989 provides among other things for cross-guarantees of the
liabilities of insured depository institutions pursuant to which any bank or
savings association subsidiary of a holding company may be required to reimburse
the FDIC for any loss or anticipated loss to the FDIC that arises from a default
of any of such holding company's other subsidiary banks or savings associations
or assistance provided to such an institution in danger of default. The Banking
Subsidiaries of CoreStates are subject to such cross-guarantee.
The deposits of each of the Banking Subsidiaries are insured up to
applicable limits by the FDIC. Accordingly, the Banking Subsidiaries are
subject to deposit insurance assessments to maintain the Bank Insurance Fund
(the "BIF") of the FDIC. Pursuant to FDICIA, the FDIC has established a risk-
based insurance assessment system. This approach is designed to ensure that a
banking institution's insurance assessment is based on three factors: the
probability that the applicable insurance fund will incur a loss from the
institution; the likely amount of the loss; and the revenue needs of the
insurance fund. Effective January 1, 1993, the FDIC established a risk related
premium assessment system, with assessment rates ranging from .23% of domestic
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deposits (the same rate as under the previous flat-rate assessment system) for
those banks deemed to pose the least risk to the insurance fund, to .31% for
those banks deemed to pose the greatest risk (with intermediate rates of .26%,
.29% and .30%). All Corestates' Banking Subsidiaries have been notified by the
FDIC that, for the semiannual assessment period beginning January 1, 1993, each
will be subject to an assessment rate of .23%.
CAPITAL GUIDELINES
A discussion of capital guidelines and capital strengths is included in
Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 23 and 24 of the CoreStates Annual Report to Shareholders
for the fiscal year ended December 31, 1993 (Exhibit 13 pages 11 and 12) which
pages of the Annual Report are incorporated herein by reference.
COMPETITION
The activities in which CoreStates and the Banking Subsidiaries engage are
highly competitive. Generally, the lines of activity and markets served involve
competition with other banks and non-bank financial institutions, as well as
other entities which offer financial services, located both within and without
the United States. The methods of competition center around various factors,
such as customer services, interest rates on loans and deposits, lending limits
and location of offices.
The four core business segments in the markets served by the Banking
Subsidiaries and EPS are highly competitive and the Banking Subsidiaries and EPS
compete with other commercial banks, savings and loan associations and other
businesses which provide services similar to those offered by the Banking
Subsidiaries and EPS. The Banking Subsidiaries actively compete in wholesale
banking with local, regional and international banks and non-bank financial
organizations, some of which are significantly larger than certain of the
Banking Subsidiaries. In providing consumer financial services, the Banking
Subsidiaries' competitors include other banks, savings and loan associations,
credit unions, regulated small loan companies and other non-bank organizations
offering financial services. In providing trust and investment management
services, the Banking Subsidiaries compete with other banks, investment
counselors and insurance companies in national markets for institutional funds
and corporate pension and profit sharing accounts. The Banking Subsidiaries
also compete with other banks, insurance agents, financial counselors and other
fiduciaries for personal trust business.
The Banking Subsidiaries also actively compete for funding. A primary
source of funds is deposits, and competition for deposits includes other deposit
taking organizations, such as commercial banks, savings and loan associations
and credit unions, and so-
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called "money market" mutual funds. The Banking Subsidiaries also actively
compete for funds with U.S. Government securities and in the open money market.
Employees
As of February 28, 1994, CoreStates and its subsidiaries employed 11,180
persons on a full time basis and 2,855 persons on a part-time basis. CoreStates
provides a variety of employment benefits and considers its relations with its
employees to be satisfactory.
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Selected Statistical Information
Tables and selected statistical information concerning CoreStates and its
subsidiaries as described below and set forth on pages of the CoreStates 1993
Annual Report to Shareholders (and Exhibit 13 page numbers) set forth below are
incorporated herein by reference:
<TABLE>
<CAPTION>
Annual Report to Exhibit 13
Shareholders Page
Page Reference Reference
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<S> <C> <C>
Distribution of Assets, Liabilities
and Stockholders' Equity;
Interest Rates and Interest
Differential ............................64-65, 69 71-74, 78
Investment Portfolio .......................75 86
Loan Portfolio .............................25-32, 70-73 14-24, 79-83
Summary of Loan Loss Experience ............29, 72-73 19-20, 82-83
Deposits ...................................64-65, 73 71-74, 83
Return on Average Equity and Average
Assets ..................................68 77
Short-Term Borrowings ......................53 55-56
</TABLE>
Information illustrating the interest sensitivity of CoreStates interest
earning assets and interest bearing liabilities is contained on page 74 of the
Annual Report to Shareholders (Exhibit 13 page 84) and on page 11 of this Form
10-K.
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Corestates Financial Corp And Subsidiaries
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............. $ 9 $ 9
Time deposits.......................... 578 $ 533 $ 162 1,273
Investment securities.................. 779 280 347 $ 527 $ 434 $ 365 2,732
Interest rate swaps.................... 637 145 345 691 1,787 695 4,300
Asset financial futures................ 296 79 195 20 15 605
------- ------- ------- -------- ------ ------- -------
Total discretionary assets......... 2,299 1,037 1,049 1,238 2,236 1,060 8,919
Total loans(a)......................... 11,837 703 826 1,150 1,617 230 16,363
------- ------- ------- -------- ------ ------- -------
Total earning assets............... 14,136 1,740 1,875 2,388 3,853 1,290 25,282
------- ------- ------- -------- ------ ------- -------
FUNDING SOURCES
Federal funds purchased, repurchase
agreements and other short-term
funds borrowed........................ 1,825 11 1,836
Domestic and foreign time deposits(b)... 869 21 5 5 4 70 974
Long-term debt............. ............ 616 19 30 122 29 639 1,455
Interest rate swaps..................... 3,761 25 33 149 332 4,300
Liability financial futures............. 530 55 20 605
------- ------- ------- -------- ------ ------- -------
Total discretionary liabilities..... 7,601 131 88 276 365 709 9,170
------- ------- ------- -------- ------ ------- -------
Savings certificates.................... 874 610 478 364 370 301 2,997
Money market, savings and NOW accounts.. 3,578 3,396 6,974
------- ------- ------- -------- ------ ------- -------
Total savings certificates and
indefinite maturity liabilities..... 4,452 610 478 364 370 3,697 9,971
------- ------- ------- -------- ------ ------- -------
Total net funding sources............ 12,053 741 566 640 735 4,406 19,141
------- ------- ------- -------- ------ ------- -------
Adjusted period gap................. $ 2,083 $ 999 $ 1,309 $ 1,748 $3,118 $(3,116) $ 6,141(c)
======= ======= ======= ======== ====== ======= =======
Cumulative gap....................... $ 2,083 $ 3,082 $ 4,391 $ 6,139 $9,257 $ 6,141
======= ======= ======= ======== ====== =======
</TABLE>
Notes to interest sensitivity analysis:
(a) Non-performing loans are included in 1-90 days.
(b) Deposit volume exclude time deposits not at interest.
(c) Represents the portion of total interest earning assets which are funded
by non-interest bearing funding sources including demand deposits and
shareholders' equity.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following table shows the name and age of the current executive
officers of CoreStates Financial Corp ("Corporation") and their present and
previous positions held by them for at least the past five years.
<TABLE>
<CAPTION>
NAME AGE PRESENT & PREVIOUS POSITIONS
- ---- --- ----------------------------
<S> <C> <C>
Terrence A. Larsen 47 Chairman, Chief Executive Officer, (1988 to
present) and Director (1986 to present),
President (January 1, 1992 to present, 1986
to March 1990), Chief Operating Officer
(1986 to 1988) of the Corporation; Chairman
and Director (October 1990 to present) and
President (January 1, 1992 to present) of
CoreStates Bank; Chairman (1989 to October
1990), Director (1986 to October 1990), and
Executive Vice President, 1983 to 1986) of
The Philadelphia National Bank ("PNB").
Thomas A. Bracken 47 Chief Executive Officer and President of New
Jersey National Bank ("NJNB") (January 1993
to present), Executive Vice President of
NJNB (1986 to January 1993).
Leslie R. Butler 53 Chief Human Resources Officer (December 1990
to present) of the Corporation; Vice
Chairman (1988 to December 1990) and
Director (1988 to March 1990) and prior
thereto Senior Executive Vice President and
Chief Administration Officer of First
Pennsylvania Bank.
</TABLE>
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<TABLE>
<S> <C> <C>
David C. Carney 56 Chief Financial Officer (April 1991 to
present) of the Corporation; Philadelphia
Area Managing Partner (1989 to March 1991)
of Ernst & Young; Prior thereto, Office
Managing Partner, Arthur Young & Company.
Charles L.
Coltman, III 50 Assistant to the Chairman, Corporate Quality
(February 1993 to present), Chief Credit
Policy Officer (September 1990 to February
1993), Executive Vice President and Credit
Policy Officer (1989 to September 1990) of
the Corporation; Vice Chairman (March 1990
to September 1990) and Executive Vice
President and Credit Policy Officer (1986 to
1989) of PNB.
Charles P. Connolly 45 Chief Credit Policy Officer (February 1993
to present) of the Corporation; Executive
Vice President (1987 to February 1993) of
CoreStates Bank.
Donald M. Cooper 55 Chairman, President and Chief Executive
Officer (August 1993 to present) of
CoreStates Hamilton Bank Division of
CoreStates Bank; Chairman, President and
Chief Executive Officer (January 1991 to
August 1993), Vice Chairman and Chief
Operating Officer (1988 to January 1991) of
Hamilton Bank; Executive Vice President
(1983 to 1988) of the Corporation.
</TABLE>
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<TABLE>
<S> <C> <C>
Robert N. Gilmore 45 Chief Technology and Processing Services
Officer (August 1991 to present), Executive
Vice President (September 1986 to August
1991) of the Corporation; Executive Vice
President (September 1986 to present) of
CoreStates Bank.
Rosemarie B. Greco 47 Chief Retail Services Officer (October 1993
to present) of the Corporation; President
and Chief Executive Officer of CoreStates
First Pennsylvania Bank Division of
CoreStates Bank (March 1991 to Present) and
Director (April 1992 to present); President
and Director (1987 to March 1991), Chief
Executive Officer (September 1990 to March
1991), Executive Vice President (1986 to
1987) of Fidelity Bank; Senior Executive
Vice President and Director (1987 to March
1991) of First Fidelity Bancorporation.
Albert W. Mandia 46 Executive Vice President (1989 to present)
of the Corporation; Executive Vice President
(April 1992 to present) of CoreStates Bank;
Executive Vice President (1986 to 1989) of
PNB.
Blair E. McNeill 49 Executive Vice President (March 1987 to
present) of the Corporation; Chairman and
Chief Executive Officer (July 1991 to
present) of CBD.
</TABLE>
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<TABLE>
<S> <C> <C>
Robert B. Palmer 53 Chairman (February 1991 to present) and
President (October 1990 to February 1991) of
CoreStates First Pennsylvania Division of
CoreStates Bank; Chief Retail Services
Officer (February 1991 to October 1993) of
the Corporation; Director (April 1992 to
present) of CoreStates Bank; President and
Chief Executive Officer (March 1990 to
October 1990) of First Pennsylvania Bank,
N.A.; Chief Executive Officer (1989 to March
1990), President and Chief Operating Officer
(1987 to March 1990) and Executive Vice
President (1976 to 1987) of PNB; Executive
Vice President (1983 to 1987) of the
Corporation.
Frank E. Reed 58 Chief Wholesale Services Officer (May 1992
to present) of the Corporation; President
and Chief Executive Officer (October 1990 to
present) of Philadelphia National Bank
Division of CoreStates Bank; Director (April
1992 to present) of CoreStates Bank;
President and Chief Executive Officer (March
1990 to October 1990) of PNB; President and
Chief Operating Officer (1984 to March 1990)
of First Pennsylvania Corporation and First
Pennsylvania Bank.
</TABLE>
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<TABLE>
<S> <C> <C>
Mark E. Stalnecker 42 Chief Trust & Investment Services Officer
(May 1992 to present) of the Corporation;
Executive Vice President CoreStates Trust
and Investment Group (March 1990 to present)
of CoreStates Bank; Director (April 1992 to
present) of CoreStates Bank; Chief Executive
Officer of Philadelphia National Limited and
Executive Vice President (1988 to March
1990) of the Corporation and PNB; Associate
Director, Treasury - J. P. Morgan
Securities, Ltd.-London (February 1987 to
1988); Executive Vice President of the
Corporation (1986 to 1987).
</TABLE>
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Item 2 - Properties
The principal offices of CoreStates and CoreStates Bank are located in a
25-story building known as the Philadelphia National Bank Building ("PNB
Building"), located at Broad and Chestnut Streets, Philadelphia, Pennsylvania,
owned by Clymer Realty Corporation, a real estate subsidiary of CoreStates Bank,
and in leased space located at Centre Square West, 16th and Market Streets,
Philadelphia, Pennsylvania. CoreStates and its subsidiaries and affiliates
occupy approximately 260,000 square feet of the PNB Building's approximately
400,000 square feet of office space and 547,600 square feet of the office space
in the Centre Square complex. Approximately 194,100 square feet of office space
in the Widener Building adjacent to the PNB Building is leased for use by
CoreStates Bank. In addition, office space is leased for use by CoreStates and
CoreStates Bank in the following Philadelphia locations: approximately 393,000
square feet in the Penn Mutual Buildings, 510, 520 and 530 Walnut Street,
approximately 111,600 square feet in the Curtis Center, 6th and Walnut Streets,
and approximately 62,100 square feet in the Graham Building, One Penn Square
West.
Fifth and Market Corporation, a real estate subsidiary of CoreStates Bank,
owns the 11 story building located at Fifth and Market Streets, Philadelphia,
Pennsylvania. The building, containing approximately 587,000 square feet, is
comprised of almost 493,000 square feet of office space, a branch banking office
and an underground garage, in addition to the public access and service areas.
CoreStates Bank's operations center and its loss prevention and security, human
resources and loan accounting units presently occupy all of the office space in
this building.
CoreStates Bank also owns a service and warehouse building at 1306 Spring
Garden Street in Philadelphia and a six story building at 3020 Market Street in
Philadelphia which is used for storage. An administrative center at 1097
Commercial Avenue, Lancaster, Pennsylvania and the executive offices of its
CoreStates Hamilton Bank division at 100 North Queen Street, Lancaster,
Pennsylvania are also owned by CoreStates Bank. Of 183 CoreStates Bank domestic
banking offices at December 31, 1993, 70 were in CoreStates Bank owned premises
and 113 were in leased premises. The lease provisions for rented properties
generally provide for initial terms of at least 10 to 15 years with varying
options for renewal.
On May 13, 1977, CoreStates (then National Central Financial Corporation)
borrowed $25 million from two institutional lenders at an interest rate of 8
5/8% per annum. The loan is payable over 25 years, with level monthly
installments which are set to fully amortize the loan by maturity. The loan is
secured by a first lien mortgage on 30 CoreStates Bank owned properties
previously owned by Hamilton Bank and occupied by the CoreStates Hamilton Bank
division of CoreStates Bank.
17
<PAGE>
As of December 31, 1993, NJNB maintained 103 bank and bank-related
properties. Of the total, 55 were owned in fee and 48 were leased, of which 13
were owned partially in fee and partially under lease. Of the leased properties
most of the leases range from five to 27 years. All real estate and buildings
owned by NJNB are free from mortgages. Of the buildings owned by NJNB, four
include space leased to others, and of the buildings leased by NJNB, one
includes space leased to others.
CBD leases space in three office buildings located at 1523 Concord Pike,
New Castle County, Delaware. The buildings contain 131,593 square feet of
rental space, all of which is occupied by CBD. The leases expire in 1995 and
contain three five-year renewal options in favor of CBD.
The offices of CoreStates' other direct and indirect subsidiaries and the
foreign branch and representative offices of CoreStates Bank are in leased
premises. Rental expense, reduced by sublease income, for CoreStates and its
subsidiaries in 1993 was $56.6 million.
Item 3 - Legal Proceedings
In the normal course of business, CoreStates and its subsidiaries are
subject to numerous pending and threatened legal actions and proceedings, some
for which the relief or damages sought are substantial. Management does not
believe the outcome of these actions and proceedings will have a materially
adverse effect on the consolidated financial position of CoreStates.
Item 4 - Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5 - Market for the Registrant's Common Stock and Related
Stockholder Matters
CoreStates Common Shares are traded on the New York Stock Exchange under
the symbol "CFL". Until December 29, 1993, CoreStates Common Shares were traded
in the over-the-counter market and the price quotations were reported on the
NASDAQ National Market System. The table below sets forth, for the periods
indicated, the high and low prices for CoreStates Common shares as reported on
the New York Stock Exchange or as quoted on the NASDAQ National Market System,
as applicable, and cash dividends declared per share. Over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions. The
information set forth in the table has been adjusted retroactively for a stock
dividend in the form of a two-for-one stock split declared on
18
<PAGE>
August 17, 1993 and distributed on October 15, 1993 to shareholders of record on
September 15, 1993. On March 4, 1994, there were approximately 32,848
registered holders of Common Stock of CoreStates.
<TABLE>
<CAPTION>
CORESTATES
--------------------------
DIVIDEND
HIGH LOW DECLARED
------- ------- --------
<S> <C> <C> <C>
Year ended December 31, 1992:
First Quarter............... $25 1/8 $21 7/8 $0.25
Second Quarter.............. 27 21 0.25
Third Quarter............... 26 1/4 23 5/8 0.25
Fourth Quarter.............. 28 7/8 24 1/8 0.27
Year ended December 31, 1993:
First Quarter............... 29 3/4 26 3/8 $0.27
Second Quarter.............. 30 1/8 25 1/8 0.27
Third Quarter............... 29 3/4 26 3/4 0.30
Fourth Quarter.............. 29 3/4 25 1/8 0.30
</TABLE>
CoreStates currently expects to continue its policy of paying regular cash
dividends, although there can be no assurance as to further dividends because
they are dependent upon further operating results, capital requirements and
financial condition.
The approval of the Comptroller of the Currency is required for national
banks to pay dividends if the total of all dividends declared in any calendar
year exceeds the bank's net profits for that year combined with its retained net
profits for the preceding two calendar years. Under this formula CoreStates
Bank, NJNB and CBD can declare dividends to CoreStates of approximately $151
million, $19 million and $1 million, respectively, plus an additional amount
equal to CoreStates Bank's, NJNB's and CBD's retained net profits for 1994 up to
the date of dividend declaration.
Item 6 - Selected Financial Data
Pursuant to General Instructions G(2), information required by this Item is
incorporated by reference from pages 66, 67 and 68 of the CoreStates Annual
Report to Shareholders for the fiscal year ended December 31, 1993 (Exhibit 13
pages 75 through 77).
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Pursuant to General Instructions G(2), information required by this Item is
incorporated by reference from pages 18 through 40 of the CoreStates Annual
Report to Shareholders for the fiscal year ended December 31, 1993 (Exhibit 13
pages 1 through 37).
Item 8 - Financial Statements and Supplementary Data
19
<PAGE>
Pursuant to General Instructions G(2), information required by this Item is
incorporated by reference from pages 40 through 77 of the CoreStates Annual
Report to Shareholders for the fiscal year ended December 31, 1993 (Exhibit 13
pages 38 through 90).
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10 - Directors and Executive Officers of the Registrant
Pursuant to General Instruction G(3), information required by this Item is
incorporated by reference from pages 1 through 7 of the CoreStates Proxy
Statement dated March 17, 1994 and from Part I of this report on Form 10-K.
Item 11 - Executive Compensation
Pursuant to General Instruction G(3), information required by this Item is
incorporated by reference from pages 10 through 18 of the CoreStates Proxy
Statement dated March 17, 1994. Such incorporation by reference shall not be
deemed to specifically incorporate by reference the information referred to in
Item 402(a)(8) of Regulation S-K.
Item 12 - Security Ownership of Certain Beneficial Owners and
Management
Pursuant to General Instruction G(3), information required by this Item is
incorporated by reference from pages 2-7, 15-16, and 18 of the CoreStates Proxy
Statement dated March 17, 1994.
On March 25, 1994 CoreStates received a corrected Schedule 13G from
Mellon Bank Corporation which indicates that Mellon Bank Corporation and its
subsidiaries and affiliates own 3.06% of the outstanding Shares of Common
Stock of CoreStates rather than the 5.34% as reported on the original Schedule
13G dated February 9, 1994 and reflected on page 7 of the CoreStates Proxy
Statement dated March 17, 1994.
Item 13 - Certain Relationships and Related Transactions
Pursuant to General Instruction G(3), information required by this Item is
incorporated by reference from page 10 of the CoreStates Proxy Statement dated
March 17, 1994.
20
<PAGE>
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements:
The following consolidated statements of CoreStates Financial Corp
included in the Annual Report of the Registrant to its Shareholders for the
year ended December 31, 1993, are incorporated by reference in Item 8:
<TABLE>
<CAPTION>
Annual Report Exhibit 13
to Shareholders Page
Page Reference Reference
--------------- -------------
<S> <C> <C>
Consolidated Statement of, Income for
each of the years ended December 31,
1993, 1992 and 1991............................ 42 41
Consolidated Balance Sheet at December
31, 1993 and 1992.............................. 43 42
Consolidated Statement of Changes
in Shareholders' Equity for each of
the years ended December 31, 1993, 1992
and 1991....................................... 44 43
Consolidated Statement of Cash Flows
for each of the years ended December
31, 1993, 1992 and 1991........................ 45 44
Notes to the Financial Statements.............. 46-63 45-70
</TABLE>
(a) 2. Financial Statement Schedules
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
(a) 3. Exhibits
--------
<TABLE>
<CAPTION>
Exhibit No. Page No.
- ----------- --------
<C> <S> <C>
2.1 Agreement and Plan of Merger dated as of August
2, 1993 by and between CoreStates Financial Corp
and Constellation Bancorp and filed as Exhibit 2
to Registrants Quarterly Report on Form 10-Q for
the quarter ended June 30, 1993 and incorporated
herein by reference.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Page No.
- ----------- --------
<C> <S> <C>
2.2 Agreement and Plan of Merger dated as of
November 19, 1993 by and between CoreStates
Financial Corp and Independence Bancorp, Inc.
3.1 Articles of Incorporation of Registrant as
amended through May 3, 1993. Filed as Exhibit
3(a) to the Registrant's Current Report on
Form 8-K dated October 21, 1993 and
incorporated herein by reference.
3.2 By-laws of Registrant as amended through April
20, 1993. Filed as Exhibit 3(b) to the
Registrant's Current Report on Form 8-K dated
October 21, 1993 and incorporated herein by
reference.
4.1 The Registrant will furnish to the Securities
and Exchange Commission, upon request, copies
of instruments defining the rights of holders
of long-term debt of CoreStates Financial Corp
and its subsidiaries.
4.2 Distribution Agreement dated January 29, 1991
among CoreStates Financial Corp, CoreStates
Capital Corp and Merrill Lynch & Co., Goldman,
Sachs & Co., Shearson Lehman Brothers Inc. and
J.P. Morgan Securities Inc. Filed as Exhibit
4.5 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31,
1991 and incorporated herein by reference.
4.3 Underwriting Agreement dated February 12, 1991
among CoreStates Financial Corp, CoreStates
Capital Corp and Shearson Lehman Brothers
Inc., Goldman, Sachs & Co., Merrill Lynch &
Co. and J.P. Morgan Securities Inc. Filed as
Exhibit 4.6 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended
December 31, 1991 and incorporated herein by
reference.
4.4 Indenture dated as of December 1, 1990 between
CoreStates Financial Corp, CoreStates Capital
Corp and The First National Bank of Atlanta.
Filed as Exhibit 4.1 to the Registrant's
Current Report on Form 8-K dated January 29,
1991 and incorporated herein by reference.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Page No.
- ----------- --------
<C> <S> <C>
4.5 Indenture dated as of December 1, 1990 between
CoreStates Financial Corp, CoreStates Capital
Corp and Bank One, Columbus, N.A. Filed as
Exhibit 4.2 to the Registrant's Current Report
on Form 8-K dated January 29, 1991 and
incorporated herein by reference.
4.6 First Supplemental Indenture dated as of March
1, 1993 to the Indenture dated as of December
1, 1990 by and between CoreStates Capital
Corporation, CoreStates Financial Corp and
Bank One, Columbus, N.A. filed as Exhibit 4 to
Registrant's Current Report on Form 8-K dated
April 20, 1993 and incorporated herein by
reference.
4.7 Specimen of Medium-Term Note (Senior Fixed
Rate). Filed as Exhibit 4.3 to the
Registrant's Current Report on Form 8-K dated
January 29, 1991 and incorporated herein by
reference.
4.8 Specimen of Medium-Term Note (Senior Floating
Rate). Filed as Exhibit 4.4 to the
Registrant's Current Report on Form 8-K dated
January 29, 1991 and incorporated herein by
reference.
4.9 Specimen of Medium-Term Note (Subordinated
Fixed Rate). Filed as Exhibit 4.5 to the
Registrant's Current Report on Form 8-K dated
January 29, 1991 and incorporated herein by
reference.
4.10 Specimen of Medium-Term Note (Subordinated
Floating Rate). Filed as Exhibit 4.6 to the
Registrant's Current Report on Form 8-K dated
January 29, 1991 and incorporated herein by
reference.
4.11 Specimen of 9 5/8% Subordinated Note due
February 15, 2001. Filed as Exhibit 4.7 to the
Registrant's Current Report on Form 8-K dated
January 29, 1991 and incorporated herein by
reference.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Page No.
- ----------- --------
<C> <S> <C>
4.12 Specimen of CoreStates Capital Corp 9 3/8%
Subordinated Note due April 15, 2003. Filed as
Exhibit (4) to the Registrant's Current Report
on Form 8-K dated April 21, 1991 and
incorporated herein by reference.
4.13 Specimen of 6 5/8% Subordinated Note due March
15, 2005 issued by CoreStates Capital
Corp filed as Exhibit 4 to Registrant's
Current Report on Form 8-K dated March 18,
1993 and incorporated herein by reference.
4.14 Specimen of 5 7/8% Subordinated Note due
October 15, 2003 issued by CoreStates Capital
Corp and unconditionally guaranteed as
to payment of principal and interest on a
subordinated basis by CoreStates Financial
Corp. Filed as Exhibit 4 of Registrant's
Current Report on Form 8-K dated October 21,
1993 and incorporated herein by reference.
10.1 * Incentive Compensation Plan for CoreStates
Financial Corp and Participating Subsidiaries
effective January 1, 1983. Filed as Exhibit
10.5 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31,
1983 and incorporated herein by reference.
10.2 * Long-Term Incentive Compensation Plan of
CoreStates Financial Corp as amended through
April 18, 1989. Filed as Exhibit 10.4 to the
Registrant's Report on Form 10-K for the
fiscal year ended December 31, 1989 and
incorporated herein by reference.
10.3 * Hamilton Bank Directors Deferred Compensation
Plan. Filed as Exhibit 1b, File No. 0-6879 to
National Central Financial Corporation's Form
10-K for the year ended December 31, 1980 and
incorporated herein by reference.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Page No.
- ----------- --------
<C> <S> <C>
10.4 * Deferred Compensation Plan for Directors of
Hamilton Bank as amended and restated
effective July 1, 1988. Filed as Exhibit 10.6
to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1987
and incorporated herein by reference.
10.5 * Deferred Compensation Plan for Directors of
CoreStates Financial Corp and The Philadelphia
National Bank as amended and restated
effective April 1, 1988. Filed as Exhibit 10.7
to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1987
and incorporated herein by reference.
10.6 * Deferred Compensation Plan for Officers of
CoreStates Financial Corp and Participating
Subsidiaries as amended and restated effective
January 1, 1988. Filed as Exhibit 10.8 to the
Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1987 and
incorporated herein by reference.
10.7 * The CoreStates Financial Corp Supplemental
Retirement Plan. Filed as Exhibit 10.9 to the
Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1987 and
incorporated herein by reference.
10.8 * Profit Sharing Deferral Plan for Officers of
CoreStates Financial Corp and Participating
Subsidiaries effective November 1, 1987. Filed
as Exhibit 10.10 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1987 and incorporated herein by
reference.
10.9 Agreement between New Jersey National Bank and
Textron Financial - New Jersey, Inc. for the
sale and leaseback of the Corporate and
operations centers and four branches. Filed as
Exhibit 10(i), File No. 0-6002 to the New
Jersey National Corporation Annual Report on
Form 10-K for the fiscal year ended December
31, 1985 and incorporated herein by reference.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Page No.
- ----------- --------
<C> <S> <C>
10.10 Agreement and Plan of Reorganization, dated as
of September 18, 1989, between First
Pennsylvania Corporation and CoreStates
Financial Corp. Filed as Appendix I to the
Joint Proxy Statement of CoreStates Financial
Corp and First Pennsylvania Corporation
included in the Registrant's Registration
Statement on Form S-4 (File No. 33-31896) and
incorporated herein by reference.
10.11 Lease between Centre Square, Inc. and Tishman
Construction Company of Pennsylvania, Inc. and
The First Pennsylvania Banking and Trust
Company, dated as of December 13, 1968 as
amended through January 31, 1974, for the
property known as Centre Square West. Filed as
Exhibit 10.15 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1989 and incorporated herein by
reference.
10.12* First Pennsylvania Corporation Amended and
Restated Retirement Benefit Supplement Plan
filed as Exhibit 10.16 to the Registrant's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1992 and incorporated
herein by reference.
10.13 Agreement and Plan of Reorganization dated as of
February 13, 1992 between First Peoples
Financial Corporation and CoreStates Financial
Corp filed as Appendix I to the Proxy
Statement of First Peoples Financial
Corporation included in the Registrant's
Registration Statement on Form S-4 (file No.
33-48422) and incorporated herein by
reference.
10.14* CoreStates Financial Corp 1992 Long Term
Incentive Plan filed as Exhibit 10.18 to
Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992 and
incorporated herein by reference.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Page No.
- ----------- --------
<C> <S> <C>
10.15* CoreStates Financial Corp Stock Compensation
Plan For Non-Employee Directors filed as
Exhibit 10.19 to Registrant's Annual Report on
Form 10-K for the fiscal year ended December
31, 1992 and incorporated herein by reference.
10.16* CoreStates Financial Corp 401 Excess Plan For
Senior Management filed as Exhibit 10.20 to
Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992 and
incorporated herein by reference.
10.17 Agreement to Form a Joint Venture By and Among
Banc One Corporation, CoreStates Financial
Corp, PNC Financial Corp and Society
Corporation dated as of July 21, 1992 filed as
Exhibit 10.21 to Registrant's Annual Report on
Form 10-K for the fiscal year ended December
31, 1992 and incorporated herein by reference.
11 CoreStates Financial Corp Statement re
Computation of Per Share Earnings.
12.1 CoreStates Financial Corp and Subsidiaries
Computation of Ratio of Earnings From
Continuing Operations to Fixed Charges of
Continuing Operations.
12.2 CoreStates Financial Corp Computation of Ratio
of Earnings to Fixed Charges Combined
CoreStates (Parent Company) and CoreStates
Capital
13 Pages 18 through 77 of the Registrant's Annual
Report to Shareholders for the fiscal year
ended December 31, 1993.
22 List of Subsidiaries.
23 Consent of Ernst & Young.
99.1 Stock Option Agreement dated August 2, 1993
between CoreStates Financial Corp and
Constellation Bancorp filed as Exhibit 99 to
Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1993 and
incorporated herein by reference.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Page No.
----------- --------
<C> <S> <C>
99.2 Stock Option Agreement dated November 19, 1993
between CoreStates Financial Corp and
Independence Bancorp, Inc.
99.3 Undertaking - Form S-8 Registration Statements.
</TABLE>
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
(b) Reports on Form 8-K for the quarter ended December 31, 1993:
A report on Form 8-K was filed on October 12, 1993 reporting that
CoreStates Financial Corp and Constellation Bancorp had entered into a
definitive agreement providing for CoreStates to acquire Constellation pursuant
to an exchange of stock. In addition, the following financial statements were
filed:
(1) Interim condensed consolidated statements of Constellation Bancorp as
of June 30, 1993 and for the six months ended June 30, 1993 and 1992.
(2) Year-End consolidated financial statements of Constellation Bancorp as
of and for the year ended December 31, 1992.
(3) Pro Forma Financial Information for CoreStates Financial Corp and
Constellation Bancorp as follows:
(i) Pro Forma Condensed Combined Balance Sheet as of June 30, 1993
(ii) Pro Forma Condensed Combined Statements of Income for:
Six months ended June 30, 1993 and 1992
Year ended December 31, 1992, 1991 and 1990
A Report on Form 8-K was filed on October 21, 1993 reporting earnings
information contained in the news release of CoreStates Financial Corp dated
October 20, 1993.
A Report on Form 8-K was filed on November 19, 1993 reporting that
CoreStates Financial Corp and Independence Bancorp had entered into a definitive
agreement for CoreStates to acquire Independence in an exchange of stock.
A Report on Form 8-K was filed on December 13, 1993 reporting that
CoreStates Financial Corp and Independence Bancorp had entered into a definitive
agreement for CoreStates to acquire Independence in an exchange of stock. In
addition, the following financial statements of Independence Bancorp were filed:
(1) Interim condensed consolidated statements of Independence Bancorp,
Inc. as of September 30, 1993 and for the Nine months ended September
30, 1993 and 1992.
28
<PAGE>
(2) Year-end consolidated financial statements of Independence Bancorp,
Inc. as of and for the year ended December 31, 1992.
NOTE: CoreStates Financial Corp will furnish, at cost, any exhibit not
accompanying this document upon request. Cost for each document is determined by
the number of pages in the document.
29
<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 shareholder' 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 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
its operations and its cash flows for each of the three years in the period
ended December 31, 1993, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, in 1993 the Company changed
its methods of accounting for certain investments in debt and equity securities
and for postemployment benefits, and in 1992 the Company changed its method of
accounting for income taxes and for postretirement benefits other than pensions.
/s/Ernst & Young
Philadelphia, Pennsylvania
February 1, 1994
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
(Registrant) CORESTATES FINANCIAL CORP
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Terrence A. Larsen Director, Chairman March 28, 1994
- -------------------------- of the Board,
Terrence A. Larsen President and
Chief Executive
Officer
(principal
executive
officer)
/s/ David C. Carney Principal financial March 28, 1994
- -------------------------- officer
David C. Carney
/s/ Albert W. Mandia Principal March 28, 1994
- -------------------------- accounting officer
Albert W. Mandia
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ George A. Butler Director March 28, 1994
- --------------------------
George A. Butler
/s/ Robert H. Campbell Director March 28, 1994
- --------------------------
Robert H. Campbell
/s/ Nelson G. Harris Director March 28, 1994
- --------------------------
Nelson G. Harris
/s/ Vincent E. Hoyer Director March 28, 1994
- --------------------------
Vincent E. Hoyer
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Carlton E. Hughes Director March 28, 1994
- ---------------------------
Carlton E. Hughes
Director March ___, 1994
- ---------------------------
Shirley A. Jackson
/s/ Ernest E. Jones Director March 28, 1994
- ---------------------------
Ernest E. Jones
/s/ Joseph C. Ladd Director March 28, 1994
- ---------------------------
Joseph C. Ladd
/s/ Herbert Lotman Director March 28, 1994
- ---------------------------
Herbert Lotman
/s/ Patricia A. McFate Director March 28, 1994
- ---------------------------
Patricia A. McFate
/s/ John A. Miller Director March 28, 1994
- ---------------------------
John A. Miller
/s/ Marlin Miller, Jr. Director March 28, 1994
- ---------------------------
Marlin Miller, Jr.
/s/ Seymour S. Preston, III Director March 28, 1994
- ---------------------------
Seymour S. Preston, III
/s/ J. Lawrence Shane Director March 28, 1994
- ---------------------------
J. Lawrence Shane
/s/ Raymond W. Smith Director March 28, 1994
- ---------------------------
Raymond W. Smith
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Harold A. Sorgenti Director March 28, 1994
- ---------------------------
Harold A. Sorgenti
/s/ Peter S. Strawbridge Director March 28, 1994
- ---------------------------
Peter S. Strawbridge
</TABLE>
33
<PAGE>
Exhibit 2.2
===============================================================================
AGREEMENT AND PLAN OF MERGER
DATED AS OF THE 19TH DAY OF NOVEMBER, 1993
BY AND BETWEEN
CORESTATES FINANCIAL CORP
AND
INDEPENDENCE BANCORP, INC.
===============================================================================
<PAGE>
Table of Contents
-----------------
Page
----
Recitals ............................................................... 1
ARTICLE I. The Merger
<TABLE>
<CAPTION>
<S> <C> <C>
Section 1.1. Structure of the Merger ...................... 2
Section 1.2. Effect on Outstanding Shares ................. 2
Section 1.3. Exchange Procedures .......................... 4
Section 1.4. Options ...................................... 6
Section 1.5. Stock Option Agreement ....................... 7
Section 1.6. Convertible Debentures ....................... 7
ARTICLE II. Conduct Pending the Merger
Section 2.1. Conduct of the Company's Business Prior
to the Effective Time ...................... 8
Section 2.2. Forbearance by the Company ................... 8
Section 2.3. Forbearance by Acquiror ...................... 10
ARTICLE III. Representations and Warranties
Section 3.1. Representations and Warranties ............... 10
ARTICLE IV. Covenants
Section 4.1. Acquisition Proposals ........................ 21
Section 4.2. Employee Benefits ............................ 22
Section 4.3. Access and Information ....................... 23
Section 4.4. Certain Filings, Consents and
Arrangements ............................... 24
Section 4.5. Indemnification; Directors' and
Officers' Insurance ........................ 24
Section 4.6. Additional Agreements ........................ 26
Section 4.7. Publicity .................................... 26
Section 4.8. Proxy; Registration Statement ................ 27
Section 4.9. Shareholders' Meetings ....................... 27
Section 4.10. Securities Act; Pooling-of-Interests ......... 27
Section 4.11. Pooling-of-Interests and Tax-Free
Reorganization Treatment ................... 28
Section 4.12. Executive Advisory Committee;
Directorships; Name; Management ............ 28
Section 4.13. Antitakeover Statutes ........................ 29
Section 4.14. Severance Benefits ........................... 29
Section 4.15. Listing ...................................... 29
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Section 4.16 Allowance for Credit Losses .................. 29
Section 4.17 Bank Merger .................................. 30
Section 4.18 Rights Agreement ............................. 32
ARTICLE V. Conditions to Consummation
Section 5.1. Conditions to All Parties' Obligations ....... 32
Section 5.2. Conditions to Obligations of Acquiror ........ 34
Section 5.3. Conditions to the Obligation of
the Company ................................ 35
ARTICLE VI. Termination
Section 6.1. Termination .................................. 36
Section 6.2. Effect of Termination ........................ 40
ARTICLE VII. Effective Date and Effective Time
Section 7.1. Effective Date and Effective Time ............ 40
ARTICLE VIII. Other Matters
Section 8.1. Certain Definitions; Interpretation .......... 40
Section 8.2. Survival ..................................... 41
Section 8.3. Waiver ....................................... 41
Section 8.4. Counterparts ................................. 41
Section 8.5. Governing Law ................................ 42
Section 8.6. Expenses ..................................... 42
Section 8.7. Notices ...................................... 42
Section 8.8. Entire Agreement; Etc......................... 43
Section 8.9. Assignment.................................... 43
</TABLE>
-ii-
<PAGE>
List of Annexes
---------------
<TABLE>
<CAPTION>
<S> <C> <C>
Annex 1 -- Acquiror Rights (Recital C)
Annex 2 -- The Company Rights (Recital C)
Annex 3 -- Significant Subsidiaries of Acquiror (Section
3.1(d))
Annex 4 -- Significant Subsidiaries of the Company
(Section 3.1(d))
Annex 5 -- The Company Employee Benefit Plans
(Section 3.1(m))
Annex 6 -- Form of Amendment to Rights Agreement
(Section 3.1(u))
Annex 7 -- Severance Policies (Section 4.14)
</TABLE>
-iii-
<PAGE>
Index to Definitions
--------------------
<TABLE>
<CAPTION>
Term Location of Definition
- ---- ----------------------
<S> <C>
Acquiror ............................................ Preamble
Acquiror Common Stock ............................... Recital A
Acquiror Preferred Stock ............................ Recital A
Acquisition Proposal ................................ 4.1
Acquiror Ratio ...................................... 6.1(e)
Acquiror Retirement Plan ............................ 4.2(c)
Affiliates .......................................... 4.10(a)
Average Closing Price ............................... 1.2(b)
Bank Regulators ..................................... 3.1(k)
Benefit Plans ....................................... 3.1(m)
Certificate ......................................... 1.3(a)
Code ................................................ Recital D
Company ............................................. Preamble
Company Common Stock ................................ Recital B
Company Meeting ..................................... 4.9
Company Retirement Plan ............................. 4.2(c)
Company Preferred Stock ............................. Recital B
Control ............................................. 8.1
Conversion Number ................................... 1.2(a)
Costs ............................................... 4.5(a)
Determination Date .................................. 6.1(e)
Effective Date ...................................... 7.1
Effective Time ...................................... 7.1
Environmental Law ................................... 3.1(w)
ERISA ............................................... 3.1(m)
Exchange Agent ...................................... 1.3(b)
Exchange Fund ....................................... 1.3(b)
Executive Agreements ................................ 4.2(d)
Federal Reserve Board ............................... 5.1(b)
Final Index Price ................................... 6.1(e)
Final Price ......................................... 6.1(e)
Hazardous Substance ................................. 3.1(w)
Indemnified Parties ................................. 4.5(a)
Index Group ......................................... 6.1(e)
Index Ratio ......................................... 6.1(e)
Initial Index Price ................................. 6.1(e)
IRS ................................................. 3.1(m)
material ............................................ 8.1
Material Adverse Effect ............................. 8.1
Maximum Amount ...................................... 4.5(c)
Merger .............................................. 1.1
NMS ................................................. 1.2(b)
NYSE ................................................ 1.2(b)
Pension Plan ........................................ 3.1(m)
person .............................................. 8.1
Plan ................................................ Preamble
Properties .......................................... 3.1(w)
</TABLE>
-iv-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Proxy Statement ..................................... 3.1(s)
Proxy Statement/Prospectus .......................... 3.1(s)
Registration Statement .............................. 3.1(s)
Reports ............................................. 3.1(g)
Rights .............................................. Recital C
Rights Agreement .................................... Recital C
SEC ................................................. 3.1(g)
Securities Act ...................................... 3.1(s)
Securities Exchange Act ............................. 3.1(g)
Significant Subsidiary .............................. 3.1(b)
Starting Date ....................................... 6.1(e)
Starting Price ...................................... 6.1(e)
Subsidiary .......................................... 8.1
Surviving Corporation ............................... 1.1
</TABLE>
-v-
<PAGE>
AGREEMENT AND PLAN OF MERGER, dated as of the 19th day of November,
1993 (this "Plan"), by and between CoreStates Financial Corp ("Acquiror") and
Independence Bancorp, Inc. (the "Company").
RECITALS:
A. Acquiror. Acquiror has been duly incorpo-rated and is an existing
--------
corporation in good standing under the laws of the Commonwealth of Pennsylvania,
with its prin-cipal executive offices located in Philadelphia, Pennsylvania. As
of November 12, 1993, Acquiror had 200,000,000 authorized shares of common
stock, par value $1.00 per share ("Acquiror Common Stock"), of which 117,196,856
shares were outstanding, and 10,000,000 authorized shares of series preferred
stock, no par value (the "Acquiror Preferred Stock"), none of which is outstand-
ing (no other class of capital stock being authorized).
B. The Company. The Company has been duly incorporated and is an
-----------
existing corporation in good standing under the laws of the Commonwealth of
Pennsylvania, with its principal executive offices located in Perkasie,
Pennsylvania. As of the date hereof, the Company has 50,000,000 authorized
shares of common stock, par value $2.50 per share (the "Company Common Stock"),
of which 11,499,291 shares are outstanding, and 2,500,000 authorized shares of
preferred stock, par value $100 per share (the "Company Preferred Stock"), none
of which is outstanding (no other class of capital stock being authorized).
C. Rights, Etc. None of Acquiror or the Company has any shares of
------------
its capital stock reserved for issuance, any outstanding option, call or
commitment relating to shares of its capital stock or any outstanding
securities, obligations or agreements convertible into or exchangeable for, or
giving any person any right (including, without limitation, pre-emptive rights)
to subscribe for or acquire from it, any shares of its capital stock
(collectively, "Rights"), except (i) in the case of the Company pursuant to the
Rights Agreement, dated as of February 21, 1989, between the Company and The
Bank of New York, as Rights Agent (the "Rights Agreement"), and (ii) as set
forth on Annex 1 (as to Acquiror) and Annex 2 (as to the Company).
D. Intention of the Parties. It is the intention of the parties to
------------------------
this Plan that the Merger (as defined below) (i) for federal income tax purposes
shall qualify as a "reorganization" within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code") and (ii) for accounting
purposes shall qualify for treatment as a "pooling of interests."
<PAGE>
E. Board Approvals. The respective Boards of Directors of Acquiror
---------------
and the Company have duly approved the Plan and have duly authorized its
execution and delivery.
F. Stock Option. The Acquiror and the Company will enter into a
------------
Stock Option Agreement.
NOW, THEREFORE, in consideration of their mutual promises and
obligations hereunder, the parties hereto adopt and make this Plan and prescribe
the terms and conditions hereof and the manner and basis of carrying it into
effect, which shall be as follows:
ARTICLE I. THE MERGER
SECTION 1.1. Structure of the Merger. On the Effective Date (as
-----------------------
defined in Section 7.1), the Company will merge (the "Merger") with and into
Acquiror, with Acquiror being the surviving corporation (the "Surviving Corpora-
tion"), pursuant to the provisions of, and with the effect provided in, the
Pennsylvania Business Corporation Law (the "PBCL"). At the Effective Time (as
defined in Section 7.1), the articles of incorporation and by-laws of the
Surviving Corporation shall be the articles of incorporation and by-laws of
Acquiror in effect immediately prior to the Effective Time. At the Effective
Time, the directors and officers of the Surviving Corporation shall be the
directors and officers of Acquiror.
SECTION 1.2. Effect on Outstanding Shares. (a) By virtue of the
----------------------------
Merger, automatically and without any action on the part of the holder thereof,
each share of the Company Common Stock issued and outstanding at the Effective
Time (other than (i) shares which have not been voted in favor of the approval
of this Plan and with respect to which appraisal rights, if any, shall have been
perfected in accordance with the PBCL (the "Dissenters' Shares"), and (ii)
shares held directly or indirectly by Acquiror, excluding shares held in a
fiduciary capacity or in satisfaction of a debt previously contracted) shall
become and be converted into the number of shares of Acquiror Common Stock (the
"Conversion Number") determined as follows:
(i) if the Average Closing Price on the Determination Date (as
defined in Section 6.1(e)) is less than or equal to $27.00 per share, the
Conversion Number will be 1.50;
-2-
<PAGE>
(ii) if the Average Closing Price on the Determination Date is greater
than or equal to $28.00 per share, the Conversion Number will be 1.45; or
(iii) if the Average Closing Price on the Determination Date is
greater than $27.00 but less than $28.00 per share, the Conversion Number
will be determined by dividing $40.50 by the Average Closing Price;
provided that if Acquiror effects a stock dividend, reclassification,
- --------
recapitalization, split-up, combination, exchange of shares or similar
transaction, after the date hereof and before the Effective Time, the Conversion
Number shall be appropriately adjusted. As of the Effective Time, each share of
the Company Common Stock held directly or indirectly by Acquiror, excluding
shares held in a fiduciary capacity or in satisfaction of a debt previously
contracted and shares held as treasury stock of the Company, shall be cancelled,
retired and cease to exist, and no exchange or payment shall be made with
respect thereof.
(b) No fractional shares of Acquiror Common Stock shall be issued
pursuant hereto. In lieu of the issuance of any fractional share of Acquiror
Common Stock pursuant to Section 1.2(a), cash adjustments will be paid to
holders in respect of any fractional share of Acquiror Common Stock that would
otherwise be issuable; the amount of such cash adjustment shall be equal to such
fractional proportion of the Average Closing Price of a share of Acquiror Common
Stock with respect to the Effective Date. "Average Closing Price" with respect
to a day means the average of the closing price per share of Acquiror Common
Stock, as reported on the National Association of Securities Dealers Automated
Quotation National Market System ("NMS") or the New York Stock Exchange ("NYSE")
Composite Transactions reporting system, as the case may be (as reported by The
---
Wall Street Journal or, if not reported thereby, another authoritative source),
- -------------------
for the 20 NMS or NYSE, as the case may be, trading days ending on the trading
day prior to such day.
(c) The shares of the Acquiror Common Stock issued and outstanding
immediately prior to the Effective Time shall remain outstanding and unchanged
after the Merger.
(d) Dissenters' Shares, if any, shall be pur-chased and paid for in
accordance with the PBCL.
SECTION 1.3. Exchange Procedures. (a) At and after the Effective
-------------------
Time, each certificate previously representing shares of the Company Common
Stock (each a "Certifi-cate") shall represent (i) the number of whole shares of
-3-
<PAGE>
Acquiror Common Stock and (ii) the right to receive cash in lieu of fractional
shares into which the Company Common Stock has been converted pursuant to
Sections 1.2(a) and (b). Certificates previously representing shares of the
Company Common Stock shall be exchanged for certificates representing whole
shares of Acquiror Common Stock and cash in lieu of fractional shares issued in
consideration therefor upon the surrender of such Certificates in accordance
with this Section 1.3, without any interest thereon.
(b) As of the Effective Time, Acquiror shall deposit, or shall cause
to be deposited, with First Chicago Trust Company of New York (or a bank
selected by the Acquiror and reasonably acceptable to the Company) (the
"Exchange Agent"), for the benefit of the holders of shares of the Company
Common Stock, for exchange in accordance with this Section 1.3, certificates
representing the shares of Acquiror Common Stock and the cash in lieu of
fractional shares (such cash and certificates for shares of Acquiror Common
Stock, together with any dividends or distributions with respect thereto, being
hereinafter referred to as the "Exchange Fund") to be issued pursuant to Section
1.2 and paid pursuant to this Section 1.3 in exchange for outstanding shares of
the Company Common Stock.
(c) Promptly after the Effective Time, Acquiror shall cause the
Exchange Agent to mail to each holder of record of a Certificate or Certificates
the following: (i) a letter of transmittal specifying that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
delivery of the Certificates to the Exchange Agent, which shall be in a form and
contain any other provisions as are mutually agreeable to Acquiror and the
Company; and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for certificates representing shares of Acquiror Common
Stock and cash in lieu of fractional shares. Upon the proper surrender of a
Certificate to the Exchange Agent, together with a properly completed and duly
executed letter of transmittal, the holder of such Certificate shall be entitled
to receive in exchange therefor (x) a certificate representing that number of
whole shares of Acquiror Common Stock and (y) a check representing the amount of
cash in lieu of any fractional shares and unpaid dividends and distributions, if
any, which such holder has the right to receive in respect of the Certificate
surrendered pursuant to the provisions of Section 1.2(a), and the Certificate so
surrendered shall forthwith be cancelled. No interest will be paid or accrued
on the cash in lieu of fractional shares and unpaid dividends and distributions,
if any, payable to holders of Certificates. In the event of a transfer of
ownership of any shares of the Company Common Stock not registered in the
transfer records
-4-
<PAGE>
of the Company, a certificate representing the proper number of shares of
Acquiror Common Stock, together with a check for the cash to be paid in lieu of
fractional shares, may be issued to the transferee if the Certificate
representing such Company Common Stock is presented to the Exchange Agent,
accompanied by documents sufficient (1) to evidence and effect such transfer and
(2) to evidence that all applicable stock transfer taxes have been paid.
(d) Whenever a dividend or other distribution is declared by Acquiror
on the Acquiror Common Stock, the record date for which is at or after the
Effective Time, the declaration shall include dividends or other distributions
on all shares issuable pursuant to this Plan; provided that after the 90th day
--------
following the Effective Date no dividend or other distribution declared or made
on the Acquiror Common Stock shall be paid to the holder of any unsurrendered
Certificate with respect to the shares of Acquiror Common Stock represented
thereby until the holder of such Certificate shall duly surrender such
Certificate in accordance with this Section 1.3. Following such surrender of
any such Certificate, there shall be paid to the holder of the certificates
representing whole shares of Acquiror Common Stock issued in exchange therefor,
without interest, (i) at the time of such surrender, the amount of dividends or
other distributions having a record date after the Effective Time theretofore
payable with respect to such whole shares of Acquiror Common Stock and not yet
paid and (ii) at the appropriate payment date, the amount of dividends or other
distributions having (x) a record date after the Effective Time but prior to
surrender and (y) a payment date subsequent to surrender payable with respect to
such whole shares of Acquiror Common Stock.
(e) From and after the Effective Time, there shall be no transfers on
the stock transfer records of the Company of any shares of the Company Common
Stock that were outstanding immediately prior to the Effective Time. If after
the Effective Time Certificates are presented to Acquiror, they shall be
cancelled and exchanged for the shares of Acquiror Common Stock and cash in lieu
of fractional shares, if any, deliverable in respect thereof pursuant to this
Plan in accordance with the procedures set forth in this Section 1.3.
(f) Any portion of the Exchange Fund (including the proceeds of any
investments thereof and any Acquiror Common Stock) that remains unclaimed by the
shareholders of the Company for six months after the Effective Time shall be
repaid to Acquiror. Any shareholders of the Company who have not theretofore
complied with this Section 1.3 shall thereafter look only to Acquiror for
payment of their shares
-5-
<PAGE>
of Acquiror Common Stock, cash in lieu of fractional shares and any unpaid
dividends and distributions on the Acquiror Common Stock deliverable in respect
of each share of the Company Common Stock such stockholder holds as determined
pursuant to this Plan, in each case, without any interest thereon. If
outstanding certificates for shares of the Company Common Stock are not
surrendered or the payment for them not claimed prior to the date on which such
payments would otherwise escheat to or become the property of any governmental
unit or agency, the unclaimed items shall, to the extent permitted by abandoned
property and any other applicable law, become the property of Acquiror (and to
the extent not in its possession shall be paid over to it), free and clear of
all claims or interest of any person previously entitled to such claims.
Notwithstanding the foregoing, none of Acquiror, the Exchange Agent or any other
person shall be liable to any former holder of the Company Common Stock for any
amount delivered to a public body or official pursuant to applicable abandoned
property, escheat or similar laws.
(g) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by Acquiror,
the posting by such person of a bond in such amount as Acquiror may direct as
indemnity against any claim that may be made against it with respect to such
Certificate, the Exchange Agent will issue in exchange for such lost, stolen or
destroyed Certificate the shares of Acquiror Common Stock and cash in lieu of
fractional shares deliverable (and unpaid dividends and distributions) in
respect thereof pursuant to this Plan.
(h) Notwithstanding anything in this Plan to the contrary, for a
period of 90 days after the Effective Date holders of Certificates shall be
entitled to vote as holders of shares of Acquiror Common Stock notwithstanding
that such Certificates shall not have been exchanged.
SECTION 1.4. Options. At the Effective Time, each option granted by
-------
the Company to purchase shares of the Company Common Stock, which is outstanding
and unexercised immediately prior thereto, shall be converted into an option to
purchase shares of Acquiror Common Stock on the same terms and conditions as are
in effect immediately prior to the Merger as adjusted as set forth below. Each
such option that is converted shall be converted into an option to purchase such
number of shares of Acquiror Common Stock at such exercise price as is
determined as provided below (and otherwise having the same duration and other
terms as the original option):
-6-
<PAGE>
(a) the number of shares of Acquiror Common Stock to be subject to
the new option shall be equal to the product of (i) the number of shares
of the Company Common Stock subject to the original option and (ii) the
Conversion Number, the product being rounded, if necessary, up or down,
to the nearest whole share; and
(b) the exercise price per share of Acquiror Com-mon Stock under the
new option shall be equal to (i) the exercise price per share of the
Company Common Stock under the original option divided by (ii) the
Conversion Number, rounded, if necessary, up or down, to the nearest cent.
The adjustment provided herein with respect to any options which are "incentive
stock options" (as defined in Section 422 of the Code) shall be effected in a
manner consis-tent with Section 424(a) of the Code.
SECTION 1.5. Stock Option Agreement. Immediately after the execution
----------------------
and delivery of this Plan, the Acquiror and the Company will execute a Stock
Option Agreement in the form attached hereto as Exhibit A.
SECTION 1.6. Convertible Debentures. The Company's 7% Convertible
----------------------
Subordinated Debentures Due 2011 (the "Debentures") outstanding at the Effective
Time shall be assumed by Acquiror and thereafter be an obligation of the
Acquiror and, from and after the Effective Time, the holders of the Debentures
shall have the right to convert such Debentures into such number of shares of
Acquiror Common Stock receivable by a holder of the number of shares of Company
Common Stock into which such Debentures might have been converted immediately
prior to the Merger. Acquiror shall enter into a supplemental indenture with
respect to such obligations pursuant to the terms of the indenture pursuant to
which the Debentures were issued.
ARTICLE II. CONDUCT PENDING THE MERGER
SECTION 2.1. Conduct of the Company's Business Prior to the Effective
--------------------------------------------------------
Time. Except as expressly provided in this Plan, during the period from the
- ----
date of this Plan to the Effective Time, the Company shall, and shall cause each
of its subsidiaries to, (i) conduct its business in the usual, regular and
ordinary course consistent with past practice, (ii) use its best efforts to
maintain and preserve intact its business organization, employees and
advantageous business relationships and retain the services of its officers and
key employees and (iii) take no action which
-7-
<PAGE>
would adversely affect or delay the ability of the Company or the Acquiror to
obtain any necessary approvals, consents or waivers of any governmental
authority required for the transactions contemplated hereby or to perform its
covenants and agreements on a timely basis under this Plan.
SECTION 2.2. Forbearance by the Company. During the period from the
--------------------------
date of this Plan to the Effective Time, except as noted in the letter delivered
by the Company to Acquiror pursuant to Section 3.1, the Company shall not, and
shall not permit any of its subsidiaries, without the prior written consent of
Acquiror, to:
(a) other than in the ordinary course of business consistent with
past practice, incur any indebtedness for borrowed money, assume,
guarantee, endorse or otherwise as an accommodation become responsible for
the obligations of any other individual, corporation or other entity, or
make any loan or advance;
(b) adjust, split, combine or reclassify any capital stock; make,
declare or pay any dividend other than regular quarterly cash dividends not
exceeding $0.29 per share on the Company Common Stock or make any other
distribution on, or directly or indirectly redeem, purchase or otherwise
acquire, any shares of its capital stock or any securities or obligations
convertible into or exchangeable for any shares of its capital stock, or
grant any stock appreciation rights or grant any individual, corporation or
other entity any right to acquire any shares of its capital stock, except
pursuant to the Rights Agreement and except for dividends paid by any of
the wholly owned subsidiaries of the Company to the Company or any of its
wholly owned subsidiaries; or issue any additional shares of capital stock
except pursuant to (i) the exercise of stock options outstanding as of the
date hereof or (ii) the Rights Agreement;
(c) other than in the ordinary course of business consistent with
past practice, sell, transfer, mortgage, encumber or otherwise dispose of
any of its material properties or assets to any individual, corporation or
other entity other than a direct or indirect wholly owned subsidiary of the
Company, or cancel, release or assign any indebtedness of any such person
or any claims held by any such person, except in the ordinary course of
business consistent with past practice or pursuant to contracts or
agreements in force at the date of this Plan;
-8-
<PAGE>
(d) other than in the ordinary course of business consistent with past
practice, make any material investment either by purchase of stock or
securities, contributions to capital, property transfers, or purchase of
any property or assets of any other individual, corporation or other
entity other than a wholly owned subsidiary of the Company;
(e) other than in the ordinary course of business consistent with
past practice, enter into or terminate any material contract or agreement,
or make any change in any of its material leases or contracts, other than
renewals of contracts and leases without material adverse changes of terms;
(f) except as may be required by law, increase in any manner the
compensation or fringe benefits of its employees (other than increases not
greater than 4.5% in the aggregate over the current level of compensation
and in accordance with past practice) or pay any pension or retirement
allowance not required by any existing plan or agreement to any such
employees, or become a party to, amend or commit itself to any pension,
retirement, profit-sharing or welfare benefit plan or agreement or
employment agreement with or for the benefit of any employee (other than
with respect to new employees in the ordinary course of business), or
adopt, amend, modify or terminate any bonus, profit sharing, compensation,
severance, termination, stock option, pension, retirement, deferred
compensation, employment or other employee benefit agreements, trusts,
plans, funds, employee stock ownership, consulting, severance or fringe
benefit plan, formal or informal, written or oral, or other arrangements
for the benefit or welfare of any director, officer or employee;
(g) other than in the ordinary course of business consistent with
past practice, settle any claim, action or proceeding involving any
liability of the Company or any of its subsidiaries for material money
damages or restrictions upon the operations of the Company or any of its
subsidiaries;
(h) modify in any material respect the manner in which it and its
subsidiaries have heretofore conducted or accounted for their business;
(i) except as contemplated by this Plan, amend its articles of
incorporation, its by-laws or the Rights Agreement;
-9-
<PAGE>
(j) elect or appoint any new director or officer of the Company or any
of its subsidiaries, provided that the appointment of an officer to another
--------
office of the Company or any of its subsidiaries shall not be deemed to be
the appointment of a new officer; or
(k) agree to, or make any commitment to, take any of the actions
prohibited by this Section 2.2.
SECTION 2.3. Forbearance by Acquiror. During the period from the
-----------------------
date of this Plan to the Effective Time, without the prior written consent of
the Company, Acquiror will not declare or pay any extraordinary or special divi-
dend on the Acquiror Common Stock or take any action that would (a) delay or
adversely affect in any material respect the ability of the Company or Acquiror
to obtain any necessary approvals, consents or waivers of any governmental
authority required for the transactions contemplated hereby or (b) adversely
affect its ability to perform its covenants and agreements on a timely basis
under this Plan.
ARTICLE III. REPRESENTATIONS AND WARRANTIES
SECTION 3.1. Representations and Warranties. Acquiror represents and
------------------------------
warrants to the Company, and the Company represents and warrants to Acquiror
that, except as previously disclosed in a letter of the Acquiror or the Company,
respectively, of even date herewith delivered to the other party:
(a) Recitals True. The facts set forth in the Recitals of this Plan
-------------
with respect to it are true and correct.
(b) Capital Stock. All outstanding shares of capital stock of it and
-------------
its Significant Subsidiaries (as defined in Rule 1-02 of Regulation S-X,
provided that, for purposes of this Plan, any subsidiary that is a bank,
--------
savings bank or trust company shall be deemed a Significant Subsidiary) are
duly authorized, validly issued and outstanding, fully paid and (subject to
12 U.S.C. (S) 55 in the case of a national bank subsidi-ary and any similar
state statute in the case of a subsidiary that is a state-chartered bank,
savings bank or trust company) non-assessable, and subject to no preemptive
rights.
(c) Authority. Each of it and its Significant Subsidiaries has the
---------
power and authority, and is duly licensed or qualified in all jurisdictions
(except for
-10-
<PAGE>
such qualifications the absence of which, individually or in the aggregate,
would not have a Material Adverse Effect (as defined in Section 8.1)) where
such license or qualification is required, to carry on its business as it
is now being conducted and to own all its material properties and assets,
and it has all federal, state, local, and foreign governmental
authorizations necessary for it to own or lease its properties and assets
and to carry on its business as it is now being conducted, except for such
powers and authorizations the absence of which, either individually or in
the aggregate, would not have a Material Adverse Effect.
(d) Subsidiaries. In the case of Acquiror, a list of its Significant
------------
Subsidiaries is contained in Annex 3; and in the case of the Company, a
list of its Significant Subsidiaries is contained in Annex 4. The shares
of capital stock of each of its Significant Subsidiaries are owned by it
(except for director's qualifying shares and, in the case of Acquiror, a
minority interest in Congress Financial Corp) free and clear of all liens,
claims, encumbrances and restrictions on transfer and there are no Rights
with respect to such capital stock.
(e) Approvals. In the case of Acquiror, and subject, in the case of
---------
the Company, to the receipt of the required shareholder approval for this
Plan, this Plan has been authorized by all necessary corporate action of
it. In the case of the Company, the affirmative vote of the holders of a
majority of all outstanding shares of the Company Common Stock is the
shareholder vote required for approval of this Plan and consummation of
the Merger and the other transactions contemplated hereby. Subject to
receipt of (A) such shareholder approval and (B) the required approvals,
consents or waivers of governmental authorities referred to in Section
5.1(b), this Plan is a valid and binding agreement of it enforceable
against it in accordance with its terms, subject as to enforcement to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium
and similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles.
(f) No Violations. The execution, delivery and performance of this
-------------
Plan by it does not, and the consummation of the transactions contemplated
hereby by it will not, constitute (i) a breach or violation of, or a
default under, any law, rule or regulation or any judgment, decree, order,
governmental permit or license, or agreement, indenture or instrument of it
or its subsid-
-11-
<PAGE>
iaries or to which it or its subsidiaries (or any of their respective
properties) is subject, which breach, violation or default would have a
Material Adverse Effect on it, or enable any person to enjoin the Merger or
(ii) a breach or violation of, or a default under, the articles of
incorporation or by-laws of it or any of its Significant Subsidiaries; and
the consummation of the transactions contemplated hereby will not require
any approval, consent or waiver under any such law, rule, regulation,
judgment, decree, order, governmental permit or license or the approval,
consent or waiver of any other party to any such agreement, indenture or
instrument, other than (i) the required approval, consents and waivers of
governmental authorities referred to in Section 5.1(b), (ii) the approval
of the shareholders of the Company referred to in Section 3.1(e), (iii)
such approvals, consents or waivers as are required under the federal and
state securities or "Blue Sky" laws in connection with the transactions
contemplated by this Plan and (iv) any other approvals, consents or waivers
the absence of which, individually or in the aggregate, would not result in
a Material Adverse Effect or enable any person to enjoin the Merger.
(g) SEC Reports. As of their respective dates, neither its Annual
-----------
Report on Form 10-K for the fiscal year ended December 31, 1992, nor any
other document filed subsequent to December 31, 1992 under Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act"), each in the form (including exhibits) filed
with the Securities and Exchange Commission (the "SEC") (collectively, its
"Reports"), contained or will contain any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading. Each of the
balance sheets or statements of condition contained or incorporated by
reference in its Reports (including any related notes and schedules)
fairly presented or will fairly present the financial position of the
entity or entities to which it relates as of its date and each of the
statements of operations and retained earnings and of cash flows and
changes in financial position or equivalent statements contained or
incorporated by reference in its Reports (including any related notes and
schedules) fairly presented or will fairly present the results of opera-
tions, retained earnings and cash flows of the entity or entities to which
it relates for the periods set forth therein (subject, in the case of
unaudited
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<PAGE>
interim statements, to normal year-end audit adjustments that are not
material in amount or effect), in each case in accordance with generally
accepted accounting principles applicable to bank holding companies
consistently applied during the periods involved, except as may be noted in
the Reports. There exist no material liabilities of it and its consoli-
dated subsidiaries, contingent or otherwise, that are required to be
disclosed under generally accepted accounting principles, or would be
required to be dis-closed in the financial statements contained in its
Annual Report on Form 10-K for the year ended December 31, 1992 or its
report on Form 10-Q for the quarter ended September 30, 1993, but are not
so disclosed in such Reports.
(h) Absence of Certain Changes or Events. Except as disclosed in its
------------------------------------
Reports filed prior to the date of this Plan, since September 30, 1993,
there has not been any change in the financial condition or results of
operations of it or any of its subsidiaries which, individually or in the
aggregate, has had a Material Adverse Effect on it (other than as a result
of changes in banking laws or regulations of general applicability or
interpretations thereof).
(i) Taxes. In the case of the Company, except as otherwise would not
-----
have a Material Adverse Effect, all federal, state, local, and foreign tax
returns required to be filed by or on behalf of it or any of its subsid-
iaries have been timely filed or requests for extensions have been timely
filed and any such extension shall have been granted and not have expired.
In the case of the Company, all taxes shown on returns filed by or on
behalf of it or any of its subsidiaries have been paid in full or adequate
provision has been made for any such taxes on its balance sheet (in
accordance with generally accepted accounting principles). In the case of
the Company, as of the date of this Plan, there are no assessments or
notices of deficiency or proposed assessments with respect to any taxes of
it or any of its subsidiaries that, if resolved in a manner adverse to it,
would result in a determination that would have a Material Adverse Effect
on it. In the case of the Company, except as otherwise would not have a
Material Adverse Effect, it has not executed an extension or waiver of any
statute of limitations on the assessment or collection of any tax due that
is currently in effect.
(j) Absence of Claims. Except in the case of the Company as
-----------------
disclosed in the Reports, no material liti-
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<PAGE>
gation, proceeding or controversy before any court or governmental agency
is pending, and there is no pending claim, action or proceeding against it
or any of its subsidiaries, which is reasonably likely, individually or in
the aggregate, to have a Material Adverse Effect or to materially hinder or
delay consummation of the transactions contemplated hereby.
(k) Absence of Regulatory Actions. Neither it nor any of its
-----------------------------
subsidiaries is a party to any cease and desist order, written agreement or
memorandum of understanding with, or a party to any commitment letter or
similar undertaking to, or is subject to any order or directive by, or is a
recipient of any extraordinary supervisory letter from, or has adopted any
board resolutions at the request of, federal or state governmental
authorities charged with the supervision or regulation of banks or bank
holding companies or engaged in the insurance of bank deposits ("Bank
Regulators"), nor has it been advised by any Bank Regulator that it is
contemplating issuing or requesting (or is considering the appropriateness
of issuing or requesting) any such order, directive, written agreement,
memorandum of understanding, extraordinary supervisory letter, commitment
letter, board resolutions or similar undertaking.
(l) Labor Matters. In the case of the Company, neither it nor any of
-------------
its subsidiaries is a party to, or is bound by, any collective bargaining
agreement, contract, or other agreement or understanding with a labor union
or labor organization, nor is it or any of its subsidiaries the subject of
any proceeding asserting that it or any such subsidiary has committed an
unfair labor practice or seeking to compel it or such subsidiary to bargain
with any labor organization as to wages and conditions of employment, nor
is there any strike or other labor dispute involving it or any of its
subsidiaries pending or threatened.
(m) Employee Benefit Plans. In the case of the Company, all
----------------------
"employee benefit plans", as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), that cover
any of its or its subsidiaries' employees, comply in all material respects
with all applicable requirements of ERISA, the Code and other applicable
laws; neither it nor any of its subsidiaries has engaged in a "prohibited
transaction" (as defined in Section 406 of ERISA or Section 4975 of the
Code) with respect to any such plan which is likely to result in any
material penalties or taxes under Section 502(i) of ERISA or
-14-
<PAGE>
Section 4975 of the Code; no material liability to the Pension Benefit
Guaranty Corporation has been or is expected by it or them to be incurred
with respect to any such plan which is subject to Title IV of ERISA
("Pension Plan"), or with respect to any "single-employer plan" (as defined
in Section 4001(a)(15) of ERISA) currently or formerly maintained by it,
them or any entity which is considered one employer with it under Section
4001 of ERISA or Section 414 of the Code; no Pension Plan had an
"accumulated funding deficiency" (as defined in Section 302 of ERISA
(whether or not waived)) as of the last day of the end of the most recent
plan year ending prior to the date hereof; the fair market value of the
assets of each Pension Plan exceeds the present value of the "benefit
liabilities" (as defined in Section 4001(a)(16) of ERISA) under such
Pension Plan as of the end of the most recent plan year with respect to the
respective Pension Plan ending prior to the date hereof, calculated on the
basis of the actuarial assumptions used in the most recent actuarial
valuation for such Pension Plan as of the date hereof; no notice of a
"reportable event" (as defined in Section 4043 of ERISA) for which the 30-
day reporting requirement has not been waived has been required to be filed
for any Pension Plan within the 12-month period ending on the date hereof;
neither it nor any of its subsidiaries has provided, or is required to
provide, security to any Pension Plan pursuant to Section 401(a)(29) of the
Code; it and its subsidiaries have not contributed to any "multiemployer
plan", as defined in Section 3(37) of ERISA, on or after September 26,
1980; and it and its subsidiaries do not have any obligations for retiree
health and life benefits under any benefit plan, contract or arrangement
that cannot be amended or terminated without incurring any liability
thereunder. In the case of the Company, with respect to each benefit plan
for employees that is maintained or contributed to by the Company or any of
its subsidiaries, including, but not limited to, "employee benefit plans"
within the meaning of Section 3(3) of ERISA (the "Benefit Plans"), it has
made available to Acquiror a true and correct copy of (i) the most recent
annual report on Form 5500 filed with the Internal Revenue Service (the
"IRS"), (ii) such Benefit Plan, (iii) each trust agreement and insurance
contract relating to such Benefit Plan, (iv) the most recent summary plan
description for such Benefit Plan, (v) the most recent actuarial report or
valuation if such Benefit Plan is subject to Title IV of ERISA and (vi) the
most recent determination letter issued by the IRS if such Benefit Plan is
intended to be qualified under Section 401(a) of the Code and (vii)
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<PAGE>
all outstanding employment contracts or agreements. Annex 5 contains a
complete list of the Benefit Plans (other than medical and other similar
welfare plans made generally available to employees) as well as all
outstanding employment contracts or agreements.
(n) Title to Assets. Each of it and its subsidiaries has good and
---------------
marketable title to its properties and assets (other than (i) property as
to which it is lessee and (ii) real estate owned as a result of fore-
closure, transfer in lieu of foreclosure or other transfer in satisfaction
of a debtor's obligation previously contracted), except for such defects in
title which would not, individually or in the aggregate, have a Material
Adverse Effect.
(o) Knowledge as to Conditions. It knows of no reason why the
--------------------------
approvals, consents and waivers of governmental authorities referred to in
Section 5.1(b) should not be obtained without the imposition of any
condition of the type referred to in the provisos thereto or why the
accountants' letter referred to in Section 5.1(h) cannot be obtained.
(p) Compliance with Laws. It and each of its subsidiaries has all
--------------------
permits, licenses, certificates of authority, orders, and approvals of, and
has made all filings, applications, and registrations with, federal, state,
local, and foreign governmental or regulatory bodies that are required in
order to permit it to carry on its business as it is presently conducted
and the absence of which could, individually or in the aggregate, have a
Material Adverse Effect.
(q) Acquiror Common Stock. In the case of Acquiror, the shares of
---------------------
Acquiror Common Stock to be issued pursuant to this Plan, when issued in
accordance with the terms of this Plan, will be duly authorized, validly
issued, fully paid and non-assessable and subject to no preemptive rights.
(r) Fees. Other than financial advisory services performed for the
----
Company by Alex. Brown & Sons Incorporated (on terms disclosed to
Acquiror), neither it nor any of its subsidiaries, nor any of their respec-
tive officers, directors, employees or agents has employed any broker or
finder or incurred any liability for any financial advisory fees, brokerage
fees, commissions, or finder's fees, and no broker or finder has acted
directly or indirectly for it or any of its subsidiaries, in connection
with the Plan or the transactions contemplated hereby.
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<PAGE>
(s) Registration Statement. The information to be supplied by it for
----------------------
inclusion in (i) the Registration Statement on Form S-4 and/or such other
form(s) as may be appropriate to be filed under the Securities Act of 1933,
as amended (the "Securities Act"), with the SEC by Acquiror for the purpose
of, among other things, registering the Acquiror Common Stock to be issued
to the shareholders of the Company in the Merger (the "Registration
Statement"), or (ii) the proxy statement to be filed with the SEC by the
Company under the Securities Exchange Act and distributed in connection
with the Company's meeting of its shareholders to vote upon this Plan (as
amended or supplemented from time to time, the "Proxy Statement", and
together with the prospectus included in the Registration Statement, as
amended or supplemented from time to time, the "Proxy Statement/
Prospectus") will not, at the time such Registration Statement
becomes effective, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading, and, in the case of
the Proxy Statement/Prospectus, at the time it is mailed and at the time of
the Company Meeting (as defined below), contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading.
(t) Antitakeover Provisions Inapplicable. In the case of the
------------------------------------
Company, the provisions of 15 Pa.C.S.A (S)(S) 2561-2568 and 15 Pa.C.S.A.
(S)(S) 2571-2576 of the PBCL do not and will not apply to this Plan or the
Merger or the transactions contemplated hereby.
(u) Environmental Matters.
---------------------
i) For purposes of this Section 3.1(u), the following terms
shall have the indicated meaning:
"Branch Property" means all real property presently or
formerly owned or operated by the Company and each of its subsidiaries
on which branches or facilities are or were located.
"Environmental Law" means any applicable federal, state or
local statute, law, ordinance, rule, regulation, code, license,
permit, authorization, approval, consent, order, judgment, decree,
injunction, directive, requirement or agreement with any court,
governmental authority
-17-
<PAGE>
or other regulatory or administrative agency or commission, domestic
or foreign ("Governmental Entity") now existing, relating to: (a) the
protection, preservation or restoration of the environment (including,
without limitation, air, water vapor, surface water, groundwater,
drinking water supply, surface land, subsurface land, plant and animal
life or any other natural resource), or to human health or safety, or
(b) the exposure to, or the use, storage, recycling, treatment,
generation, transportation, processing, handling, labeling,
production, release or disposal of Hazardous Substances, in each case
as amended and (c) any common law or equitable doctrine (including,
without limitation, injunctive relief and tort doctrines such as
negligence, nuisance, trespass and strict liability) that may impose
liability or obligations for injuries or damages due to, or threatened
as a result of, the presence of or exposure to any Hazardous
Substance.
"Hazardous Substance" means any substance, whether liquid,
solid or gas, listed, defined, designated or classified as hazardous,
toxic, radioactive or dangerous, under any applicable Environmental
Law, whether by type or by quantity. Hazardous Substance includes,
without limitation, (i) any "hazardous substance" as defined in the
Comprehensive Environmental Response, Compensation and Liability Act,
as amended, (ii) any "hazardous waste" as defined in the Resource
Conservation and Recovery Act, as amended, and (iii) any toxic waste,
pollutant, contaminant, hazardous substance, toxic substance,
hazardous waste, special waste or petroleum or any derivative or by-
product thereof, radon, radioactive material, asbestos, asbestos
containing material, urea formaldehyde foam insulation, lead and
polychlorinated biphenyls.
"Real Property" means the Branch Property, all real property
classified by the Company and each of its subsidiaries as other real
estate owned ("OREO"), all real property on which the Company holds a
lien or security interest and all real property (including property
held as trustee or in any other fiduciary capacity) over which the
Company and each of its subsidiaries currently or formerly has
exercised dominion, management or control.
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<PAGE>
ii) Except as disclosed to Acquiror in writing or as would not
individually or in the aggregate have a Material Adverse Effect on the
Company,
a) each of the Company and its subsidiaries is and has
been in substantial compliance with all applicable Environmental Laws,
b) the Real Property does not contain any Hazardous
Substance in violation of any applicable Environmental Law,
c) neither the Company nor any of its subsidiaries has
received any written notices, demand letters or written requests for
information from any Governmental Entity or any third party indicating
that the Company or any subsidiary may be in violation of, or liable
under, any Environmental Law,
d) there are no civil, criminal or administrative actions,
suits, demands, claims, hearings, investigations or proceedings
pending or threatened against the Company or any subsidiary alleging
that they may be in violation of, or liable under, any Environmental
Law,
e) no reports have been filed, or are required to be filed,
by the Company or any of its subsidiaries concerning the release of
any Hazardous Substance or the threatened or actual violation of any
Environmental Law on or at the Real Property,
f) there are no underground storage tanks on, in or under
any of the branch Property and no underground storage tanks have been
closed or removed from any Branch Property while such Branch Property
was owned or operated by the Company or any of its subsidiaries, and
g) to the knowledge of the Company, neither the Company nor
any of its subsidiaries has incurred, and none of the Real Property is
presently subject to, any liabilities (fixed or, to the knowledge of
the Company, contingent) relating to any suit, settlement, court
order, administrative order, judgment or claim asserted or arising
under any Environmental law.
iii) For the purposes of this Section 3.1(u), "to the knowledge
of the Company" shall mean to the
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<PAGE>
knowledge of each person with the title of Senior Vice President of the
Company or higher.
iv) There are no permits or licenses required under any
Environmental Law in respect of the Branch Property presently operated by
the Company or any of its subsidiaries or in respect of OREO presently held
by the Company or in respect of any real property held as trustee or in any
other fiduciary capacity that are not held and that the absence of which
could, individually or in the aggregate, have a Material Adverse Effect.
v) The Company has delivered to Acquiror copies of all
documentation representing the Company's environmental policies and
procedures and has operated and conducted the Company's business and
operations in compliance with all such policies and procedures except where
the failure to so operate or conduct would not, individually or in the
aggregate, have a Material Adverse Effect.
(v) Material Contracts. Neither it nor any of its subsidiaries is in
------------------
default under any material contract, which default is reasonably likely to
have, either individually or in the aggregate, a Material Adverse Effect on
it, and there has not occurred any event that with the lapse of time or the
giving of notice or both would constitute such a default. In the case of
the Company, neither it nor any of its subsidiaries is a party to or is
bound by any agreement or subject to or bound by any judgment, decree,
order, writ or injunction that places any material restriction on the
ability of the Company or any of its subsidiaries to engage in their
respective businesses in accordance with present practices.
(w) Insurance. The assets, properties and operations of the Company
---------
and its subsidiaries are insured under various policies of general
liability and other forms of insurance, including surety and bonding
arrangements. Such policies are in amounts and types of coverage which are
adequate in relation to the business and assets of each of them and all
premiums due have been paid in full. All such forms of insurance are in
full force and effect in accordance with their terms, no notice of
cancellation has been received, and there is no existing default or event
which, with the giving of notice or lapse of time or both, would constitute
a default thereunder, in each such case, except which would not have a
Material Adverse Effect on the Company. To the best of the
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<PAGE>
knowledge of the Company, there has been no failure to give any notice or
to present any material claim under any insurance arrangement in due and
timely fashion.
ARTICLE IV. COVENANTS
SECTION 4.1. Acquisition Proposals. The Company agrees that neither
---------------------
it nor any of its subsidiaries nor any of the respective officers, directors and
employees of the Company or its subsidiaries, acting within the scope of their
authority shall, and the Company shall direct and use its best efforts to cause
its agents and representatives (including, without limitation, any investment
banker, attorney or accountant retained by it or any of its subsidiaries) not
to, initiate, solicit or encourage, directly or indirectly, any inquiries or the
making of any proposal or offer (including, without limitation, any proposal or
offer to stockholders of the Company) with respect to a merger, consolidation or
similar transaction involving, or any purchase of all or any significant portion
of the assets or any equity securities of, the Company or any of its subsidi-
aries (any such proposal or offer being hereinafter referred to as an
"Acquisition Proposal") or, except as may be legally required for the discharge
by the board of directors of its fiduciary duties, engage in any negotiations
concern-ing, or provide any confidential information or data to, or have any
discussions with, any person relating to an Acquisition Proposal, or otherwise
facilitate any effort or attempt to make or implement an Acquisition Proposal.
The Company will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted heretofore
with respect to any of the foregoing. To the extent not prohibited by a
confidentiality agreement executed prior to the date hereof, the Company will
provide to Acquiror a copy of any written information provided to any person
relating to or in connection with a proposed or potential Acquisition Proposal.
As of the time hereof, the Company is not engaged in any negotiations or
discussions relating to an Acquisition Proposal. To the extent not prohibited
by a confidentiality agreement executed prior to the date hereof, the Company
shall promptly notify Acquiror orally and in writing of any proposal or offer
regarding an Acquisition Proposal or any inquiries with respect thereto. To the
extent not prohibited by a confidentiality agreement executed prior to the date
hereof, such written notification shall include the identity of the Person
making such inquiry or Acquisition Proposal or offer and such other information
with respect thereto as is reasonably necessary to apprise Acquiror of the
material terms of such Acquisition Proposal or offer and all other material
information relating thereto. To the
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<PAGE>
extent not prohibited by a confidentiality agreement executed prior to the date
hereof, the Company shall give Acquiror contemporaneous written notice upon
engaging in discussions or negotiations with, or providing any information
regarding the Company to, any such person regarding an Acquisition Proposal.
SECTION 4.2. Employee Benefits. (a) Acquiror hereby unconditionally
-----------------
agrees to, and agrees to cause its subsidiaries to honor, without modification,
offset or counterclaim, all contracts, agreements and commitments of the Company
or any of its subsidiaries authorized by the Company or any of its subsidiaries
prior to the date of this Plan which apply to any current or former employee or
current or former director of the Company or any of its subsidiaries including,
without limitation, eight employment agreements with certain senior executives
of the Company and its subsidiaries. In accordance with the terms of such
employment agreements, Acquiror hereby assumes, subject to the consummation of
the Merger, all of the Company's and its subsidiaries' obligations under such
employment agreements.
(b) Acquiror hereby unconditionally agrees to, and to cause its
subsidiaries to, provide to officers and employees of the Company and its
subsidiaries who become or remain regular (full time) employees of the Acquiror
or any of its subsidiaries employee benefits which are no less favorable in the
aggregate to those provided from time to time to their respective similarly
situated officers and employees. For purposes of this Section 4.2(b), employee
benefits shall include, without limitation, pension benefits, health and
welfare benefits, life insurance and vacation; but for purposes of determining
employee benefits which are no less favorable in the aggregate, Acquiror shall
not be obligated to maintain or cause its subsidiaries to maintain any single
type of employee benefit of any particular amount. Any employee of the Company
or any of its subsidiaries who becomes a participant in any employee benefit
plan, program, policy, or arrangement of the Acquiror or any of its subsidiaries
shall be given credit under such plan, program, policy, or arrangement for all
service prior to becoming such a participant with the Company or any of its
subsidiaries for purposes of eligibility and vesting.
SECTION 4.3. Access and Information. Upon reasonable notice, each of
----------------------
the parties shall (and shall cause each of the parties' subsidiaries to) afford
to the other parties and their representatives (including, without limitation,
directors, officers and employees of the parties and their affiliates, and
counsel, accountants and other professionals retained) such access during normal
business
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<PAGE>
hours throughout the period prior to the Effective Time to the books, records
(including, without limitation, tax returns and work papers of independent
auditors), properties, personnel and to such other information as any party may
reasonably request; provided, however, that no investigation pursuant to this
-------- -------
Section 4.3 shall affect or be deemed to modify any representation or warranty
made herein. Each party will not, and will cause its representatives not to,
use any information obtained pursuant to this Section 4.3 for any purpose
unrelated to the consummation of the transactions contemplated by this Plan.
Subject to the requirements of law, each party will keep confidential, and will
cause its representatives to keep confidential, all information and documents
obtained pursuant to this Section 4.3 unless such information (i) was already
known to such party, (ii) becomes available to such party from other sources not
known by such party to be bound by a confidentiality obligation, (iii) is
disclosed with the prior written approval of the party to which such information
pertains or (iv) is or becomes readily ascertainable from published information
or trade sources. In the event that this Plan is terminated or the transactions
contemplated by this Plan shall otherwise fail to be consummated, each party
shall promptly cause all copies of documents or extracts thereof containing
information and data as to another party hereto to be returned to the party
which furnished the same.
SECTION 4.4. Certain Filings, Consents and Arrangements. (a)
------------------------------------------
Acquiror and the Company shall (i) as soon as practicable make any filings and
applications required to be filed in order to obtain all approvals, consents
and waivers of governmental authorities necessary or appropriate for the
consummation of the transactions con-templated hereby, (ii) cooperate with one
another (1) in promptly determining what filings are required to be made or
approvals, consents or waivers are required to be obtained under any relevant
federal, state or foreign law or regulation and (2) in promptly making any such
filings, furnishing information required in connection therewith and seeking
timely to obtain any such approvals, consents or waivers and (iii) deliver to
the other copies of the publicly available portions of all such filings and
applications promptly after they are filed.
(b) To the extent required by applicable law, promptly after the
execution of this Plan, the Company shall notify the New Jersey Department of
Environmental Protection and Energy ("NJDEPE") of the transactions contemplated
by this Plan and shall use its best efforts (including taking any actions
required in connection therewith) to obtain a remediation agreement or
administrative consent order from the NJDEPE permitting completion of the Merger
prior to
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<PAGE>
obtaining a no further action letter under the New Jersey Industrial Site
Remediation Act ("ISRA"), and Acquiror will fully cooperate with and assist the
Company in connection therewith.
SECTION 4.5. Indemnification; Directors' and Officers' Insurance.
---------------------------------------------------
(a) From and after the Effective Time, Acquiror agrees to indemnify and hold
harmless each present and former director and officer of the Company or its
subsidiaries and each officer or employee of the Company or its subsidiaries
that is serving or has served as a director or trustee of another entity
expressly at the Company's request or direction, determined as of the Effective
Time (the "Indemnified Parties"), against any and all costs or expenses
(including reasonable attorneys' fees), judgments, fines, losses, claims,
damages or liabilities (collectively, "Costs") incurred in connection with any
and all claim, action, suit, proceeding or investigation, whether civil,
criminal, administrative or investigative, arising out of or pertaining to
matters existing or occurring at or prior to the Effective Time, whether
asserted or claimed prior to, at or after the Effective Time, to the fullest
extent permitted by applicable law (and also advance expenses incurred to the
fullest extent permitted by applicable law).
(b) Any Indemnified Party wishing to claim indemnification under
Section 4.5(a), upon learning of any such claim, action, suit, proceeding or
investigation, shall within forty-five (45) days upon learning of such claim,
action, suit, proceeding or investigation, notify Acquiror thereof, but the
failure to so notify shall not relieve Acquiror of any liability it may have to
such Indemnified Party if such failure does not materially prejudice the
indemnifying party. In the event of any such claim, action, suit, proceeding or
investigation (whether arising before or after the Effective Time), (i) Acquiror
shall have the right to assume the defense thereof and Acquiror shall not be
liable to such Indemnified Parties for any legal expenses of other counsel or
any other expenses subsequently incurred by such Indemnified Parties in
connection with the defense thereof, except that if Acquiror elects not to
assume such defense, or counsel for the Indemnified Parties advises that there
are issues which raise conflicts of interest between Acquiror and the
Indemnified Parties, the Indemnified Parties may retain counsel satisfactory to
them, and Acquiror shall pay the reasonable fees and expenses of such counsel
for the Indemnified Parties promptly as statements therefor are received;
provided, however, that Acquiror shall be obligated pursuant to this paragraph
- -------- -------
(b) to pay for only one firm of counsel for all Indemnified Parties in any
juris-diction unless the use of one counsel for such Indemnified
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<PAGE>
Parties would present such counsel with a conflict of interest, (ii) the
Indemnified Parties will cooperate in the defense of any such matter and (iii)
Acquiror shall not be liable for any settlement effected without its prior
written consent which shall not be unreasonably withheld; and provided further
-------- -------
that Acquiror shall not have any obligation hereunder to any Indemnified Party
when and if a court of competent jurisdiction shall ultimately determine, and
such determination shall have become final and nonappealable, that the
indemnification of such Indemnified Party in the manner contemplated hereby is
prohibited by applicable law. If such indemnity is not available with respect
to any Indemnified Party, then the Indemnified Party shall contribute to the
amount payable in such proportion as is appropriate to reflect the relative
benefit received by such Indemnified Party in any transaction which was the
subject of, and the relative fault of such Indemnified Party with respect to,
such claim, action, suit, proceeding or investigation by the Indemnified Party.
(c) For a period of three years after the Effective Time, Acquiror
shall use all reasonable efforts to cause to be maintained in effect the current
policies of directors' and officers' liability insurance maintained by the
Company (provided that Acquiror may substitute therefor policies of at least the
same coverage and amounts containing terms and conditions which are
substantially no less advantageous to such directors and officers) with respect
to claims arising from facts or events which occurred before the Effective Time;
provided, however, that in no event shall Acquiror be obligated to expend, in
- -------- -------
order to maintain or provide insurance coverage pursuant to this Subsection
4.5(c), any amount per annum in excess of 200% of the amount of the annual
premiums paid as of the date hereof by the Company for such insurance (the
"Maximum Amount"). If the amount of the annual premiums necessary to maintain
or procure such insurance coverage exceeds the Maximum Amount, Acquiror shall
use all reasonable efforts to maintain the most advantageous policies of
directors' and officers' insurance obtainable for an annual premium equal to the
Maximum Amount. In the event that the Acquiror acts as its own insurer for all
of its directors and officers with respect to matters typically covered by a
directors' and officers' liability insurance policy, the Acquiror's obligations
under this subsection (c) of Section 4.5 may be satisfied by such self
insurance.
SECTION 4.6. Additional Agreements. Subject to the terms and
---------------------
conditions herein provided, each of the parties hereto agrees to use all
reasonable efforts to take promptly, or cause to be taken promptly, all actions
and to do promptly, or cause to be done promptly, all things neces-
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<PAGE>
sary, proper or advisable under applicable laws and regulations to consummate
and make effective the transactions contemplated by this Plan as promptly as
practicable, including using efforts to obtain all necessary actions or non-
actions, extensions, waivers, consents and approvals from all applicable
governmental entities, effecting all necessary registrations, applications and
filings (including, without limitation, filings under any applicable state
securities laws) and obtaining any required contractual consents and regulatory
approvals.
SECTION 4.7. Publicity. The initial press release announcing this
---------
Plan shall be a joint press release and thereafter the Company and Acquiror
shall consult with each other in issuing any press releases or otherwise making
public statements with respect to the transactions contemplated hereby and in
making any filings with any governmental entity or with any national securities
exchange with respect thereto.
SECTION 4.8. Proxy; Registration Statement. As soon as practicable
-----------------------------
after the date hereof, Acquiror and the Company shall prepare the Proxy
Statement, file it with the SEC, respond to comments of the Staff of the SEC,
clear the Proxy Statement with the Staff of the SEC and promptly thereafter mail
the Proxy Statement to all holders of record (as of the applicable record date)
of shares of the Company Common Stock. Acquiror and the Company shall cooperate
with each other in the preparation of the Proxy Statement. Acquiror shall
promptly prepare the Registration Statement and file it with the SEC as soon as
is reasonably practicable following receipt of final comments from the Staff of
the SEC on the Proxy Statement (or advice that such Staff will not review such
filing) and shall use all reasonable efforts to have the Registration Statement
declared effective by the SEC as promptly as practicable and to maintain the
effectiveness of such Registration Statement. Acquiror shall also take any
action required to be taken under state "Blue Sky" or securities laws in
connection with the issu-ance of the Acquiror Common Stock pursuant to the
Merger, and the Company shall furnish Acquiror all information concerning the
Company and the holders of its capital stock and shall take any action as
Acquiror may reasonably request in connection with any such action.
SECTION 4.9. Shareholders' Meeting. The Company shall take all
---------------------
action necessary, in accordance with applicable law and its articles of
incorporation and by-laws, to convene a meeting of the holders of the Company
Common Stock (the "Company Meeting") as promptly as practicable for the purpose
of considering and taking action required by this Plan. Except to the extent
legally required for the dis-
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<PAGE>
charge by the board of directors of its fiduciary duties, the board of directors
of the Company shall recommend that the holders of the Company Common Stock vote
in favor of and approve the Merger and adopt this Plan at the Company Meeting.
SECTION 4.10. Securities Act; Pooling-of-Interests. (a) As soon as
------------------------------------
practicable after the date of the Company Meeting, the Company shall identify to
Acquiror all persons who were, at the time of the Company Meeting, possible
"affiliates" of the Company as that term is used in paragraphs (c) and (d) of
Rule 145 under the Securities Act and for purposes of qualifying for "pooling-
of-interests" accounting treatment (the "Affiliates").
(b) The Company shall use its best efforts to obtain a written
"affiliate" letter agreement in form and substance satisfactory to each of the
Company and Acquiror from each person who is identified as a possible Affiliate
pursuant to clause (a) above. The Company shall deliver such written
"affiliates" letter agreements to Acquiror as soon as practicable after the
Company Meeting.
SECTION 4.11. Pooling-of-Interests and Tax-Free Reorganization
------------------------------------------------
Treatment. Neither Acquiror nor the Company shall take or cause to be taken any
- ---------
action, whether before or after the Effective Time, which would disqualify the
Merger as a "pooling-of-interests" for accounting purposes or as a
"reorganization" within the meaning of Section 368 of the Code.
SECTION 4.12. Executive Advisory Committee; Directorships; Name;
--------------------------------------------------
Management. (a) The Acquiror agrees, promptly following the Effective Time, to
- ----------
cause all the members of the Company's board of directors, the board of
directors of each banking subsidiary of the Company immediately prior to the
Effective Time who are nominated by the Company and are willing so to serve if
so nominated and willing to serve to be elected or appointed as members of newly
formed executive advisory boards of each banking subsidiary of the Company, or
if any such banking subsidiary ceases to exist, of CoreStates Bank, N.A., with
Mr. Monroe W. Long serving as Chairman of the advisory board with respect to
Cheltenham Bank.
(b) Acquiror agrees, following the Effective Time, to cause one
member of the Company's board of directors immediately prior to the Effective
Time, who is nominated by the Company and approved by Acquiror, to be elected or
appointed as a director of Acquiror.
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<PAGE>
(c) Acquiror agrees, following the Effective Time, to cause three
members of the Company's board of directors immediately prior to the Effective
Time, who are nominated by the Company and approved by Acquiror, one of whom
shall be Mr. John D. Harding, to be elected or appointed as directors of
CoreStates Bank, N.A.
(d) Acquiror intends under current competitive, marketing and
operating conditions to continue to use the trade names of each banking
subsidiary of the Company, in the market served by such banking subsidiary,
including use of such trade names at each former branch of such banking
subsidiary as the same are used on the date of this Plan.
(e) Acquiror intends that the bank market managers of each banking
subsidiary of the Company will continue their employment duties similar to those
existing on the date of this Plan, including operating responsibilities for the
banking franchises in the marketplaces of the branches of such branch market
managers, consistent with the terms and conditions of their existing employment
contracts.
SECTION 4.13. Antitakeover Statutes. The Company shall take all
---------------------
reasonable steps (i) to exempt the Company and the Merger from the requirements
of any state antitake-over law by action of its board of directors or otherwise
and (ii), upon the request of Acquiror, to assist in any challenge by Acquiror
to the applicability to the Merger of any state antitakeover law.
SECTION 4.14. Severance Benefits. The Acquiror shall provide
------------------
severance benefits to the employees of the Company and its subsidiaries in
accordance with the terms and conditions set forth in Annex 7 hereof.
SECTION 4.15. Listing. Acquiror shall use its best efforts to list
-------
on the NMS or, in the event Acquiror Common Stock is then listed on the NYSE,
the NYSE, in each case upon official notice of issuance, the Acquiror Common
Stock to be issued in the Merger.
SECTION 4.16. Allowance for Credit Losses. (i) The allowance for
---------------------------
credit losses included in the consolidated financial statements of the Company
included in the Com-pany's September 30, 1993 Form 10-Q was determined in
accordance with generally accepted accounting principles to be adequate to
provide for losses relating to or inherent in the loan and lease portfolios of,
and other extensions of credit (including letters of credit and commitments to
make loans or extend credit) by, the Company and its subsidiaries. The Company
has disclosed to Acquiror in writing prior to the date hereof the aggregate
amounts as of a
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<PAGE>
recent date of all loans, losses, advances, credit enhancements, other
extensions of credit, commitments and interest-bearing assets of Company and its
subsidiaries that have been classified by any bank examiner (whether regulatory
or internal) as "Other Loans Specially Mentioned", "Special Mention",
"Substandard", "Doubtful", "Loss", "Classified", "Criticized", "Credit Risk
Assets", "Concerned Loans" or words of similar import, and the Company shall
promptly on a periodic basis inform Acquiror of any such classification arrived
at any time after the date hereof. The OREO included in non-performing assets
is carried net of reserves at the lower of cost or market value based on
independent appraisals.
(ii) The allowance for credit losses included in the consolidated
financial statements of Acquiror included in Acquiror's September 30, 1993 Form
10-Q was determined in accordance with generally accepted accounting principles
to be adequate to provide for losses relating to or inherent in the loan and
lease portfolios of, and other extensions of credit (including letters of credit
and commitments to make loans or extend credit) by, Acquiror and its
subsidiaries. Acquiror has disclosed to the Company in writing prior to the
date hereof the aggregate amounts as of a recent date of all loans, losses,
advances, credit enhancements, other extensions of credit, commitments and
interest-bearing assets of Acquiror and its subsidiaries that have been
classified by any bank examiner (whether regulatory or internal) as "Other Loans
Specially Mentioned", "Special Mention", "Substandard", "Doubtful", "Loss",
"Classified", "Criticized", "Credit Risk Assets", "Concerned Loans" or words of
similar import, and Acquiror shall promptly on a periodic basis inform the
Company of any such classification arrived at any time after the date hereof.
The OREO included in non-performing assets is carried net of reserves at the
lower of cost or market value based on independent appraisals.
SECTION 4.17. Bank Merger. During the period from the date of this
-----------
Plan to the Effective Time, the Company shall, and shall cause its officers,
directors and employees to cooperate with and assist Acquiror in the formulation
of a plan or plans of integration for the merger of each of its bank
subsidiaries with and into CoreStates Bank, N.A. ("Bank Mergers") as soon after
the Effective Time as is practicable.
Notwithstanding that the Company believes that it has established all
reserves and taken all provisions for possible loan losses required by generally
accepted account-ing principles and applicable laws, rules and regulations, the
Company recognizes that Acquiror has adopted different
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<PAGE>
loan, accrual and reserve policies (including loan classifications and levels
of reserves for possible loan losses). From and after the date of this Plan to
the Effective Time and in order to formulate the plan or plans of integration
for the Bank Mergers, the Company and Acquiror shall consult and cooperate with
each other with respect to (i) conforming, as specified in a written notice
from Acquiror to the Company, based upon such consultation, the Company's loan,
accrual and reserve policies to those policies of Acquiror to the extent
appropriate recognizing that differing policies and regulations may apply to
state chartered banks of the Company, (ii) new extensions of credit or material
revisions to existing terms of credits by each bank subsidiary in each case
where the aggregate exposure exceeds $1,500,000 and (iii) conforming, as
specified in a written notice from Acquiror to the Company, based upon such
consultation, the composition of the investment portfolio and overall
asset/liability management position of the Company and each bank subsidiary to
the extent appropriate.
In addition, from and after the date of this Plan to the Effective
Time and in order to formulate the plan or plans of integration for the Bank
Mergers, the Company and Acquiror shall consult and cooperate with each other
with respect to determining, as specified in a written notice from Acquiror to
the Company, based upon such consultation, appropriate accruals, reserves and
charges to establish and take in respect of excess facilities and equipment
capacity, severance costs, litigation matters, write-off or write-down of
various assets and other appropriate accounting adjustments taking into account
the Acquiror's plan or plans of integration and the Bank Mergers.
The Company and Acquiror shall consult and cooperate with each other
with respect to determining, as specified in a written notice from Acquiror to
the Company, based upon such consultation, the amount and the timing for recog-
nizing for financial accounting purposes the expense of the Merger and the
restructuring charges related to or to be incurred in connection with the
Merger.
At the request of Acquiror, the Company shall, prior to the Effective
Time, use its best efforts to establish and take such reserves and accruals as
Acquiror shall request to conform, on a mutually satisfactory basis, the
Company's loan, accrual and reserve policies to Acquiror's policies, shall
establish and take such accruals, reserves and charges in order to implement
such policies in respect of excess facilities and equipment capacity, severance
costs, litigation matters, write-off or write-down of various assets and other
appropriate accounting adjustments, and to recognize for financial accounting
purposes such
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<PAGE>
expenses of the Merger and restructuring charges related to or to be incurred in
connection with the Merger; provided, however, that (i) the Company shall not be
-------- -------
obligated to take any such action pursuant to this paragraph of Section 4.17
unless and until Acquiror specifies its request in a writing delivered by
Acquiror to the Company, and acknowledges and all conditions to its obligations
to consummate the Merger set forth in Section 5.1 and 5.2 have been waived (if
waivable) or satisfied, (ii) the Company acknowledges that the conditions to its
obligation to consummate the Merger set forth in Sections 5.1 and 5.3 have been
satisfied or waived by the Company, (iii) the Company shall not be required to
take any such action that impairs its regulatory capital, that is inconsistent
with any formal or informal undertaking by the Company to any bank regulatory
agency that has been disclosed in writing to Acquiror prior to the date hereof
or is inconsistent with any bank regulatory requirement applicable to the
Company or any of its banking subsidiaries and (iv) the Company shall not be
required to take any such action that is not consistent with generally accepted
accounting principles. The Company's representations, warranties and covenants
contained in this Plan shall not be deemed to be untrue or breached in any
respect for any purpose as a consequence of any action undertaken on account of
this Section 4.17.
SECTION 4.18. Rights Agreement. Promptly following the date hereof,
----------------
the Company will amend its Rights Agreement in substantially the form of Annex
6.
ARTICLE V. CONDITIONS TO CONSUMMATION
SECTION 5.1. Conditions to All Parties' Obligations. The respective
--------------------------------------
obligations of Acquiror and the Company to effect the Merger shall be subject to
the satisfaction or waiver prior to the Effective Time of the following
conditions:
(a) The Plan and the transactions contemplated hereby shall have been
approved by the requisite vote of the shareholders of the Company in
accordance with applicable law.
(b) Acquiror shall have procured the required approval, consent,
waiver or other administrative action with respect to the Plan and the
transactions contemplated hereby (i) by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") under the Bank Holding
Company Act of 1956, (ii) by the Pennsylvania Department of Banking
pursuant to Pennsylvania law, (iii) by the Arizona Director of
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<PAGE>
Insurance pursuant to Arizona law and (iv) by the NJDEPE pursuant to ISRA,
to the extent required by applicable law, and all applicable statutory
waiting periods shall have expired; and the parties shall have procured all
other regulatory approvals, consents, waivers or administrative actions of
governmental authorities or other persons that are necessary or appropriate
to the consummation of the transactions contemplated by the Plan; provided,
--------
however, that no approval, consent, waiver or administrative action
-------
referred to in this Section 5.1(b) shall be deemed to have been received if
it shall include any condition or requirement (other than any condition or
requirement imposed on the basis or as a result of the Acquiror's or any of
its subsidiaries' compliance with the Community Reinvestment Act of 1977)
that would (i) result in a Material Adverse Effect on Acquiror (on a
combined basis giving effect to the Merger and the other transactions
contemplated by this Plan) or (ii) so materially and adversely affect the
economic or business benefits of the Merger that the Acquiror would not
have entered into this Plan had such conditions or requirements been known
at the date hereof;
(c) All other requirements prescribed by law which are necessary to
the consummation of the transactions contemplated by this Plan shall have
been satisfied.
(d) No party hereto shall be subject to any order, decree or
injunction of a court or agency of competent jurisdiction which enjoins or
prohibits the consummation of the Merger or any other transaction
contemplated by this Plan. No litigation or proceeding shall be pending
against Acquiror or the Company or any of their subsidiaries brought by any
governmental agency seeking to prevent consummation of the transactions
contemplated hereby.
(e) No statute, rule, regulation, order, injunction or decree shall
have been enacted, entered, promulgated or enforced by any governmental
authority which prohibits, restricts or makes illegal consummation of the
Merger or any other transaction contemplated by this Plan.
(f) The Registration Statement shall have become effective and no
stop order suspending the effectiveness of the Registration Statement
shall have been issued and no proceedings for that purpose shall have been
initiated or threatened by the SEC.
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<PAGE>
(g) Acquiror and the Company each shall have received the opinion of
Sullivan & Cromwell, dated as of the Effective Date, substantially to the
effect that, on the basis of facts, representations and assumptions set
forth in such opinion which are consistent with the state of facts
existing at the Effective Time, the Merger will be treated for federal
income tax purposes as a reorganization within the meaning of Section
368(a) of the Code and that, accordingly: (i) no gain or loss will be
recognized by Acquiror or the Company as a result of the Merger; (ii) no
gain or loss will be recognized by the shareholders of the Company who
exchange their shares of the Company Common Stock solely for shares of
Acquiror Common Stock pursuant to the Merger (except with respect to cash
received in lieu of a fractional share interest in Acquiror Common Stock);
(iii) the tax basis of the shares of Acquiror Common Stock received by
shareholders who exchange all of their shares of the Company Common Stock
solely for shares of Acquiror Common Stock in the Merger will be the same
as the tax basis of the shares of the Company Common Stock surrendered in
exchange therefor (reduced by any amount allocable to a fractional share
interest for which cash is received); and (iv) the holding period of the
shares of Acquiror Common Stock received in the Merger will include the
period during which the shares of the Company Common Stock surrendered in
exchange therefor were held, provided such shares of the Company Common
Stock were held as capital assets at the Effective Time. In rendering
their opinion, Sullivan & Cromwell may require and rely upon
representations contained in certificates of officers of Acquiror, the
Company and others.
(h) Acquiror and the Company each shall have received a letter, dated
as of the Effective Date, from Acquiror's independent certified public
accountants to the effect that the Merger will qualify for pooling-of-
interests accounting treatment if closed and consummated in accordance
with this Plan.
(i) The Board of Directors of the Company shall have received a
letter, in form and substance satisfactory to the Company, dated the date
of the Proxy Statement/Prospectus, pursuant to which Alex. Brown & Sons
Incorporated shall express its opinion that the consideration to be
received by the Company's shareholders pursuant to Section 1.2 hereof is
fair from a financial point of view.
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<PAGE>
SECTION 5.2. Conditions to Obligations of Acquiror. The obligations
-------------------------------------
of Acquiror to effect the Merger shall be subject to the satisfaction or waiver
prior to the Effective Time of the following additional conditions:
(a) Each of the representations and warranties of the Company
contained in this Plan shall, in all material respects, be true on the
Effective Date as if made on such date (or on the date when made in the
case of any representation or warranty which specifically relates to an
earlier date); the Company shall have performed, in all material respects,
each of its cove-nants and agreements contained in this Plan; and Acquiror
shall have received a certificate signed by the Chief Executive Officer and
the Chief Financial Officer of the Company, dated the Effective Date, to
the foregoing effect.
(b) Acquiror shall have received all state securities laws and "Blue
Sky" permits and other authorizations necessary to consummate the
transactions contemplated hereby.
(c) Acquiror and its directors shall have received from the Company's
independent certified public accountants "agreed upon procedures" letters,
dated (i) the date of the mailing of the Proxy Statement/Prospectus to the
Company's shareholders and (ii) shortly prior to the Effective Date, with
respect to certain financial information regarding the Company in the form
customarily issued by such accountants at such time in transactions of this
type.
SECTION 5.3. Conditions to the Obligation of the Company. The
-------------------------------------------
obligation of the Company to effect the Merger shall be subject to the
satisfaction or waiver prior to the Effective Time of the following additional
conditions:
(a) Each of the representations, warranties and covenants of Acquiror
contained in this Plan shall, in all material respects, be true on the
Effective Date as if made on such date (or on the date when made in the
case of any representation or warranty which specifically relates to an
earlier date); Acquiror shall have performed, in all material respects,
each of its cove-nants and agreements contained in this Plan; and the
Company shall have received certificates signed by the Chief Executive
Officer and the Chief Financial Officer of the Acquiror, dated the
Effective Date, to the foregoing effect.
(b) The Acquiror Common Stock to be issued in the
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<PAGE>
Merger has been approved for listing on the NMS or the NYSE, as the case
may be, subject to official notice of issuance.
(c) The Company and its directors shall have received from Acquiror's
independent certified public accountants "agreed upon procedures" letters,
dated (i) the date of the mailing of the Proxy Statement/ Prospectus to the
Company's shareholders and (ii) shortly prior to the Effective Date, with
respect to certain financial information regarding Acquiror in the form
customarily issued by such accountants at such time in transactions of this
type.
ARTICLE VI. TERMINATION
SECTION 6.1. Termination. This Plan may be terminated, and the
-----------
Merger abandoned, prior to the Effective Date, either before or after its
approval by the shareholders of the Company:
(a) by the mutual consent of Acquiror and the Company, if the board
of directors of each so determines by vote of a majority of the members of
its entire board;
(b) by Acquiror or the Company, if its board of directors so
determines by vote of a majority of the members of its entire board, in the
event of the failure of the shareholders of the Company to approve the
Plan at its meeting called to consider such approval or a material breach
by the other party hereto of any representation, warranty, covenant or
agreement contained herein which is not cured or not curable within 60
days after written notice of such breach is given to the party committing
such breach by the other party;
(c) by Acquiror or the Company by written notice to the other party
if either (i) any approval, consent or waiver of a governmental authority
required to permit consummation of the transactions contemplated hereby
shall have been denied or (ii) any governmental authority of competent
jurisdiction shall have issued a final, unappealable order enjoining or
otherwise prohibiting consummation of the transactions contemplated by
this Plan;
(d) by Acquiror or the Company, if its board of directors so
determines by vote of a majority of the members of its entire board, in the
event that the Merger is not consummated by October 31, 1994, unless
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<PAGE>
the failure to so consummate by such time is due to the breach of any
representation, warranty or covenant contained in this Plan by the party
seeking to terminate; or
(e) by the Company, if its board of directors so determines by a
majority vote of the members of its entire board, at any time during the
ten-day period commencing with the Determination Date if either of the
following conditions are satisfied:
(X)(i) the Average Closing Price on the Determination Date of
shares of Acquiror Common Stock shall be less than an amount equal to
the Starting Price multiplied by 0.90 (adjusted as indicated below in
this Section 6.1(e)); and
(ii) (A) the number obtained by dividing the Average Closing
Price on the Determination Date by the Starting Price (the "Acquiror
Ratio") shall be less than (B) the number obtained by dividing the
Final Index Price on the Determination Date by the Initial Index Price
on the Starting Date and subtracting 0.10 from the quotient in this
clause (ii)(B) (the "Index Ratio"); or
(Y) the Average Closing Price on the Determination Date of
shares of Acquiror Common Stock shall be less than an amount equal to
the Starting Price multiplied by 0.85.
subject, however, to the following three sentences. If the Company elects
------- -------
to exercise its termination right pursuant to this Section 6.1(e), it shall
give written notice to Acquiror (provided that such notice of election to
--------
terminate may be withdrawn at any time within the aforementioned ten-day
period). During the five-day period commencing with its receipt of such
notice, Acquiror shall have the option to increase the consideration to be
received by the holders of the Company Common Stock hereunder, by adjusting
the Conversion Number to equal (calculated to the nearest one one-
thousandth), in the case of this Section 6.1(e)(X) the lesser of (x) a
number obtained by dividing (A) the product of the Starting Price, 0.90 and
the Conversion Number by (B) the Average Closing Price on the Determi-
nation Date, and (y) a number equal to a fraction, the numerator of which
is the Index Ratio multiplied by the Conversion Number and the denominator
of which is the
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<PAGE>
Acquiror Ratio and in the case of this Section 6.1(e)(Y), a number
obtained by dividing (A) the product of the Starting Price, 0.85 and the
Conversion Number by (B) the Average Closing Price on the Determination
Date. If Acquiror so elects within such five-day period, it shall give
prompt written notice to the Company of such election and the revised
Conversion Number, whereupon no termination shall have occurred pursuant to
this Section 6.1(e) and this Plan shall remain in effect in accordance with
its terms (except as the Conversion Number shall have been so modified).
For purposes of this Section 6.1(e), the following terms shall have
the meanings indicated:
"Average Closing Price" shall have the meaning specified in
Section 1.2(b).
"Determination Date" means the fifteenth day after the required
approval of the Federal Reserve Board for the Merger.
"Final Index Price" means the sum of the Final Price for each
company comprising the Index Group multiplied by the appropriate
weighting.
"Final Price", with respect to any company belonging to the Index
Group, means the average of the daily closing sales prices of a share
of common stock of such company, as reported on the consolidated
transaction reporting system for the market or exchange on which such
common stock is principally traded, during the period of 20 trading
days ending on the Determination Date.
"Index Group" means the fifteen bank holding companies listed
below, the common stock of which shall be publicly traded and as to
which there shall not have been a publicly announced proposal since
the Starting Date and before the Determination Date for any such
company to be acquired. In the event that the common stock of any
such com-pany ceases to be publicly traded or a proposal to acquire
any such company is announced after the Starting Date and before the
Determination Date, such company will be removed from the Index Group,
and the weights (which have been determined based on the number of
outstanding shares of common stock and the market prices of such stock
attributed) to the remaining companies will be adjusted
proportionately for purposes of determining the Final Index Price.
The fifteen bank holding
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<PAGE>
companies and the weights attributed to them are as follows:
<TABLE>
<CAPTION>
Bank Holding Company Weighting
-------------------- ---------
<S> <C>
The Bank of New York
Company, Inc. (BK) 7.51%
Norwest Corporation (NOB) 9.72%
Sun Trust Banks, Inc. (STI) 8.06%
First Union Corporation (FTU) 10.06%
Fleet Financial Group, Inc. (FLT) 6.22%
NBD Bancorp, Inc. (NBD) 6.94%
PNC Bank Corp. (PNC) 9.82%
U.S. Bancorp (USBC) 3.60%
Wachovia Corporation (WB) 8.29%
First Bank System, Inc. (FBS) 4.90%
First Fidelity Bancorporation (FFB) 4.76%
Barnett Banks, Inc. (BBI) 5.42%
National City Corporation (NCC) 5.50%
Mellon Bank Corporation (MEL) 5.10%
Boatmen's Bancshares, Inc. (BOAT) 4.11%
_______
100.00%
</TABLE>
"Index Price" on a given date, means the weighted average
(weighted in accordance with the factors listed above) of the closing
prices on such date of the common stocks of the companies comprising
the Index Group.
"Initial Index Price" means the sum of each per share closing
price of the common stock of each company comprising the Index Group
multiplied by the applicable weighting, as such prices are reported on
the consolidated transactions reporting system for the market or
exchange on which such common stock is principally traded on the
Starting Date.
"Starting Date" means the last trading day immediately preceding
the date of the first public announcement of entry into this Plan.
"Starting Price" means the closing price per share of Acquiror
Common Stock, as reported on the NMS or the NYSE, as the case may be
(as reported by The Wall Street Journal or, if not reported thereby,
-----------------------
another authoritative source), for the Starting Date.
-38-
<PAGE>
If Acquiror or any company belonging to the Index Group declares or effects a
stock dividend, reclassification, recapitalization, split-up, combination,
exchange of shares or similar transaction between the Starting Date and the
Determination Date, the prices for the common stock of such company shall be
appropriately adjusted for the purposes of applying this Section 6.1(e).
SECTION 6.2. Effect of Termination. In the event of the termination
---------------------
of this Plan by either Acquiror or the Company, as provided above, this Plan
shall thereafter become void and there shall be no liability on the part of any
party hereto or their respective officers or directors, except that any such
termination shall be without prejudice to the rights of any party hereto arising
out of the willful breach by any other party of any covenant or willful
misrepresentation contained in this Plan.
ARTICLE VII. EFFECTIVE DATE AND EFFECTIVE TIME
SECTION 7.1. Effective Date and Effective Time. On the third
---------------------------------
business day after the expiration of all applicable waiting periods in
connection with approvals of governmental authorities occurs and all conditions
to the consummation of this Plan are satisfied or waived, or on such earlier or
later date as may be agreed by the parties, articles of merger shall be executed
in accordance with all appropriate legal requirements and shall be filed as
required by law, and the Merger provided for herein shall become effective upon
such filing or on such date (which may not be later than such third business
day) as may be specified in such articles of merger. The date of such filing
or such later effective date is herein called the "Effective Date". The
"Effective Time" of the Merger shall be such time on the Effective Date as may
be agreed by the parties.
ARTICLE VIII. OTHER MATTERS
SECTION 8.1. Certain Definitions; Interpretation. As used in this
-----------------------------------
Plan, the following terms shall have the meanings indicated:
"Control" shall have the meaning ascribed thereto in the Bank Holding
Company Act of 1956, as amended.
"material" means material to Acquiror or the Company (as the case may
be) and its respective subsidiaries, taken as a whole.
-39-
<PAGE>
"Material Adverse Effect," with respect to a person, means any
condition, event, change or occurrence that is reasonably likely to have a
material adverse effect upon (A) the financial condition, business or
results of operations of such person and its subsidiaries, taken as a
whole, or (B) the ability of such person to perform its obligations under,
and to consummate the transactions contemplated by, this Plan.
"person" includes an individual, corporation, partnership,
association, trust or unincorporated organization.
"subsidiary," with respect to a person, means any other person
controlled by such person.
When a reference is made in this Plan to Sections, Annexes or Schedules, such
reference shall be to a Section of, or Annex or Schedule to, this Plan unless
otherwise indicated. The table of contents, tie sheet and headings contained in
this Plan are for ease of reference only and shall not affect the meaning or
interpretation of this Plan. Whenever the words "include", "includes", or
"including" are used in this Plan, they shall be deemed followed by the words
"without limitation". Any singular term in this Plan shall be deemed to
include the plural, and any plural term the singular.
SECTION 8.2. Survival. Only those agreements and covenants of the
--------
parties that are applicable in whole or in part after the Effective Time shall
survive the Effective Time. All other representations, warranties, agreements
and covenants shall be deemed to be conditions of the Plan and shall not survive
the Effective Time. If the Plan shall be terminated, the agreements of the
parties in Sections 4.3 and 8.6 shall survive such termination.
SECTION 8.3. Waiver. Prior to the Effective Time, any provision of
------
this Plan may be (i) waived by the party benefitted by the provision or by both
parties by a writing executed by an executive officer, or (ii) amended or
modified at any time (including the structure of the transaction) by an
agreement in writing between the parties hereto approved by their respective
boards of directors, except that, after the vote by the shareholders of the
Company, no such amendment or modification may be made which reduces or changes
the form and amount of consideration payable pursuant to this Plan without
further shareholder approval.
SECTION 8.4. Counterparts. This Plan may be executed in counterparts
------------
each of which shall be deemed to
-40-
<PAGE>
constitute an original, but all of which together shall constitute one and the
same instrument.
SECTION 8.5. Governing Law. This Plan shall be governed by, and
-------------
interpreted in accordance with, the laws of the Commonwealth of Pennsylvania.
SECTION 8.6. Expenses. Each party hereto will bear all expenses
--------
incurred by it in connection with this Plan and the transactions contemplated
hereby, except printing expenses which shall be shared equally.
SECTION 8.7. Notices. All notices, requests, acknowledgements and
-------
other communications hereunder to a party shall be in writing and shall be
deemed to have been duly given when delivered by hand, telecopy, telegram or
telex (confirmed in writing) to such party at its address set forth below or
such other address as such party may specify by notice to the other party
hereto.
If to the Company, to:
Independence Bancorp, Inc.
One Hillendale Road
Perkasie, Pennsylvania 18944
Attention: Philip H. Rinnander
With copies to:
David M. Huggin, Esq.
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
Telecopy: (212) 558-3588
If to Acquiror, to:
CoreStates Financial Corp
Broad & Chestnut Street
Philadelphia, Pennsylvania 19105
Attention: Terrence A. Larsen, Chairman
-41-
<PAGE>
With copies to:
David T. Walker
Deputy Chief Counsel
CoreStates Financial Corp
PNB Building, F.C. 1-1-17-1
Broad & Chestnut Street
Philadelphia, Pennsylvania 19107
SECTION 8.8. Entire Agreement; Etc. This Plan, together with the
----------------------
Option Agreement, represents the entire understanding of the parties hereto with
reference to the transactions contemplated hereby and supersedes any and all
other oral or written agreements heretofore made. All terms and provisions of
the Plan shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Except as to the last
sentence of Section 4.2 and Sections 4.5 and 4.12, nothing in this Plan is
intended to confer upon any other person any rights or remedies of any nature
whatsoever under or by reason of this Plan.
SECTION 8.9. Assignment. This Plan may not be assigned by any party
----------
hereto without the written consent of the other parties.
-42-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Plan to be
executed by their duly authorized officers as of the day and year first above
written.
CORESTATES FINANCIAL CORP
By:s/David C. Carney
------------------------
Chief Financial Officer
INDEPENDENCE BANCORP, INC.
By:s/John D. Harding
-------------------------------
President and Chief Executive
Officer
-43-
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
December 31, December 31
-------------------- -------------------
1993 1992 1993 1992
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(A) Income before cumulative
effect of a change in
accounting principle $ 85,312 $ 69,107 $327,927 $262,404
Cumulative effect of a
change in accounting
principle (13,010) (80,986)
-------- -------- -------- --------
(B) Net income $ 85,312 $ 69,107 $314,917 $181,418
======== ======== ======== ========
EARNINGS PER SHARE
Based on average common shares
- ------------------------------
outstanding
- -----------
(C) Average shares outstanding 117,269 116,422 117,319 115,600
======== ======== ======== ========
(A/C) Income before cumulative
effect of a Change in
accounting principle $ .73 $ .59 $2.80 $2.27
===== ===== ===== =====
(B/C) Net income $ .73 $ .59 $2.69 $1.57
===== ===== ===== =====
Based on average common and common
- ----------------------------------
equivalent shares outstanding
- -----------------------------
Primary:
(D) Average common equivalent shares 1,023 1,290 1,176 1,300
===== ===== ===== =====
(E) Average common and common
equivalent shares (C + D) 118,292 117,712 118,495 116,900
======= ======= ======= =======
(A/E) Income before cumulative
effect of a change in
accounting principle (1) $ .72 $ .59 $2.77 $2.24
===== ===== ===== =====
(B/E) Net income (1) $ .72 $ .59 $2.66 $1.55
===== ===== ===== =====
Fully diluted:
(F) Average common equivalent
shares 912 1,584 979 1,874
=== ===== === =====
(G) Average common and common
equivalent shares (C + F) 118,181 118,006 118,298 117,474
======= ======= ======= =======
(A/G) Income before cumulative
effect of a change in
accounting principle (1) $ .72 $ .59 $2.77 $2.23
===== ===== ===== =====
(B/G) Net income (1) $ .72 $ .59 $2.66 $1.54
===== ===== ===== =====
</TABLE>
- -----------------------------------
(1) Dilution is less than 3%.
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
<PAGE>
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS FROM CONTINUING OPERATIONS
TO FIXED CHARGES OF CONTINUING OPERATIONS
CONSOLIDATED
Twelve Months Ended December 31, 1993
- -------------------------------------
<TABLE>
<CAPTION>
<S> <C>
1. Income from continuing operations before cumulative effect of
change in accounting principle and income taxes.................... $487,581
========
2. Fixed charges of continuing operations:
A. Interest expense (excluding interest on deposits),
amortization of debt issuance costs and one-third of rental
expenses, net of income from subleases.......................... $144,999
B. Interest on deposits............................................ 266,597
--------
C. Total fixed charges (line 2A + line 2B)......................... $411,596
========
3. Income from continuing operations before cumulative effect of
change in accounting principle and income taxes, plus total fixed
charges of continuing operations:
A. Excluding interest on deposits (line 1 + line 2A)............... $632,580
========
B. Including interest on deposits (line 1 + line 2C)............... $899,177
========
4. Ratio of earnings (as defined) to fixed charges:
A. Excluding interest on deposits (line 3A/line 2A).................. 4.36x
====
B. Including interest on deposits (line 3B/line 2C).................. 2.18x
====
</TABLE>
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
EXHIBIT 12.2
COMPUTATION OF RATIO OF EARNINGS FROM CONTINUING OPERATIONS
TO FIXED CHARGES OF CONTINUING OPERATIONS
COMBINED CORESTATES (PARENT ONLY) AND CORESTATES CAPITAL CORPORATION
Twelve Months Ended December 31, 1993
- -------------------------------------
<TABLE>
<CAPTION>
<S> <C>
1. Income before income taxes, equity in undistributed income of
subsidiaries and cumulative effect of change in accounting
principle...................................................... $190,655
2. Fixed charges - interest expense, amortization of
debt issuance costs and one-third of rental expenses, net of
income from subleases.......................................... 89,078
--------
3. Income before taxes, equity in undistributed income of
subsidiaries and cumulative effect of change in accounting
principle, plus fixed charges.................................. $279,733
========
4. Ratio of earnings (as defined) to fixed charges (line 3/
line 2)(a)..................................................... 3.14x
====
</TABLE>
(a) Ratio includes the impact of an $80 million special dividend payment from a
subsidiary bank. The ratio would be 2.24x if the special dividend were
excluded.
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
EXHIBIT 13 - PORTIONS OF THE REGISTRANT'S ANNUAL REPORT
Management's Discussion and Analysis of
Financial Condition and Results of Operations
OVERVIEW
In 1993, CoreStates Financial Corp ("CoreStates") achieved strong growth in
operating income for the third consecutive year, significantly reduced the level
of non-performing assets, and established a historical record for net income.
Income for 1993, before the cumulative effect of a change in accounting
principle, was $327.9 million, or $2.80 per share, reflecting growth of 23.3% on
a per share basis when compared to $262.4 million, or $2.27 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 18.27% and
1.44%, respectively, in 1993, compared to 16.26% and 1.17%, respectively, in
1992. The 1993 Montgomery Securities Regional Bank Composites for returns on
average equity and assets were 15.49% and 1.21%, respectively.
The growth in income for 1993 reflected continued broad strength in
CoreStates' basic banking businesses. Operating results for 1993 were
positively influenced by solid growth in the net interest margin and loan
demand, significant reductions in non-performing assets and the related improved
income statement impact, and increases in non-interest revenues from fee-based
services.
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, 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 7.
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 $.11 per share, as the cumulative effect of a change
in accounting principle in 1993.
1
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
OVERVIEW - continued
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 $122.7 million, $81.0 million after-tax or $.70 per
share, as the cumulative effect of a change in accounting principle in 1992.
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 $1,141.4 $1,084.7 $1,122.0 5.2 % (3.3)%
Provision for losses on loans 100.0 119.3 190.6 (16.2) (37.4)
Non-interest income 503.1 546.5 541.6 (7.9) .9
Non-financial expenses 1,033.4 1,094.6 1,096.1 (5.6) (.1)
-------- -------- --------
Income before income taxes 511.1 417.3 376.9 22.5 10.7
Provision for income taxes 183.2 154.9 149.2 18.3 3.8
-------- -------- --------
Income before the cumula-
tive effect of a change
in accounting principle 327.9 262.4 227.7 25.0 15.2
Cumulative effect of a change
in accounting principle (13.0) (81.0)
-------- -------- --------
Net income $ 314.9 $ 181.4 $ 227.7 73.6 (20.3)
======== ======== ========
Operating Ratios
Return on average equity (1) 18.27% 16.26% 14.96%
Return on average assets (1) 1.44 1.17 .99
Net interest margin 5.82 5.61 5.53
Per Common Share (2)
Income before the cumulative
effect of a change in
accounting principle $ 2.80 $ 2.27 $ 2.00
Net income 2.69 1.57 2.00
Average common shares
outstanding 117.319 115.600 113.624
</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 11).
2
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
OVERVIEW - continued
Comparison of 1993 to 1992
CoreStates' earnings growth in 1993 primarily resulted from a $56.7
million, or 5.2%, increase in tax equivalent net interest income due to an
improved net interest margin, 5.82% in 1993 compared to 5.61% in 1992, and
higher average loan outstandings, $15.6 billion in 1993 compared to $15.3
billion in 1992. Also making a substantial contribution to 1993 earnings growth
was the significant improvement in asset quality, as non-performing assets
declined $134.7 million, or 34.8%, and net loan charge-offs declined $52.9
million, resulting in a $19.3 million, or 16.2%, reduction in the provision for
losses on loans.
Year-to-year comparisons of non-interest income and non-financial expenses
are impacted by the December 1992 restructuring of CoreStates' consumer
electronic payment business into Electronic Payment Services, Inc. ("EPS"), a
joint venture formed with three other banking companies (see the Business Line
Results section beginning on page 7 for further details regarding EPS). As a
result of this transaction, CoreStates' income statement for 1993 reflects
declines in debit and credit card fee income and in total non-financial
expenses.
Total non-interest income for 1993 declined $43.4 million, or 7.9%, from
1992. Growth in revenues from CoreStates' fee-based businesses and from a
business acquired at the end of 1992 was offset by a decline of $91.3 million,
or 61.2%, in debit and credit card fees resulting from the EPS transaction, and
the recognition in 1992 of a $41.1 million pre-tax gain on the EPS transaction.
Aggregate revenues for CoreStates' three largest fee-based categories, service
charges on deposits, trust services and international services, increased $30.6
million, or 10.4% over 1992. Revenues earned in 1993 by Financial Telesis, a
third-party provides of lockbox processing and data management services acquired
by CoreStates on December 31, 1992, were $17.5 million. Refer to the Review and
Analysis of Earnings section beginning on page 32 for a more detailed discussion
of revenues and expenses.
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 3.3% year-to-year
decline in net interest income in 1992 and approximately $60 million of the
$71.3 million, or 37.4%, 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. 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 $9.1 million, or $.10 per
share.
3
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
OVERVIEW - continued
Although total 1992 and 1991 year-to-year non-interest income and non-
financial expenses were essentially level, there was significant growth in
Wholesale Banking non-interest income which was obscured by large gains: in 1991
from the sale of credit card receivables and in 1992 from the EPS transaction.
Non-financial expenses in both years also included significant and unusual
expenses that substantially offset those gains.
Non-performing Assets
Non-performing assets at December 31, 1993 totalled $252.1 million, a
decline of $134.7 million, or 34.8% 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 $78.1 million,
or 32.1% from year-end 1992. Non-performing assets in the commercial portfolio
also declined $50.2 million, or 36.9% from year-end 1992. At December 31, 1993
the allowance for loan losses at $347.5 million was 173.0% of non-performing
loans. This compares to $322.5 million and 105.2% 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.
In August 1993, CoreStates announced a definitive agreement to acquire
Constellation Bancorp ("Constellation"), a New Jersey bank holding company with
$2.3 billion in assets and $2.1 billion in deposits. Assuming approval by
Constellation's shareholders, the transaction is expected to close late in the
first quarter of 1994. As a result of this transaction, approximately 11.3
million new shares of CoreStates' common stock will be issued. The transaction
has a total value of approximately $300 million and will be 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 will be merged into NJNB.
4
<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 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.
At December 31, 1993, Constellation had non-performing assets of $139.2
million. While Constellation has utilized a long-term workout strategy to deal
with its non-performing assets, CoreStates' strategy is to dispose of problem
assets in a more accelerated manner. CoreStates anticipates that Constellation
will conform to this strategic direction and to CoreStates' consumer lending
loan charge-off policies in Constellation's 1993 income statement. CoreStates
estimates that conforming to this strategic direction and to the charge-off
policies will require Constellation to record an addition to its allowance for
possible loan losses of approximately $107 million and an addition to its OREO
reserves of approximately $38 million. CoreStates also anticipates that
Constellation will record pre-tax charges in excess of $42 million in 1993,
which include expenses directly attributable to the acquisition, and certain
other costs and expenses. No charges have been recorded on Constellation's
books pending receipt of approval of the acquisition by Constellation's
shareholders. The aggregate $122 million after-tax impact on shareholders'
equity will be partially offset by approximately $40 million of tax benefits
that will be recorded as the cumulative effect of applying FAS 109 income tax
accounting on a combined basis.
In November 1993, CoreStates announced a definitive agreement to acquire
Independence Bancorp, Inc. ("Independence"), a $2.6 billion Pennsylvania bank
holding company, in a transaction expected to be accounted for as a pooling of
interests. Assuming approval by regulators and by Independence's shareholders,
the transaction is expected to close in the second quarter of 1994. As a result
of this transaction, approximately 16.6 million new shares of CoreStates' common
stock will be issued with a total value of approximately $430 million based on
the year-end stock price.
The 54 branches of Independence's four Pennsylvania bank subsidiaries will
be legally merged into CoreStates' lead banking subsidiary, CoreStates Bank,
N.A. This in-market acquisition is expected to result in significant operating
efficiencies, and after first year charges of approximately $30 million for
CoreStates' planned strategic initiatives regarding Independence's problem
assets and approximately $24 million for closing and consolidation costs, is
expected to add to earnings per share in the second year.
5
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
STRATEGIC ACTIONS IN 1993 - continued
A summary of 1993 financial information for Constellation and Independence
follows:
<TABLE>
<CAPTION>
Operating Results for the Year Ended
December 31, 1993 (in thousands,
except per share) Constellation(1) Independence
------------- ------------
<S> <C> <C>
Net income............................ $16,504 $22,879
Per common share...................... 0.61 1.98
Average common shares
outstanding.......................... 27,197 11,530
<CAPTION>
Balance Sheet
At December 31, 1993
(in millions) Constellation(1) Independence
------------- ------------
<S> <C> <C>
Assets................................ $ 2,281 $ 2,603
Loans................................. 1,663 1,745
Deposits.............................. 2,092 2,153
Shareholders' equity.................. 166 222
- --------------------------------------
</TABLE>
(1) Does not reflect charges in connection with the change in non-
performing asset strategic direction and consumer lending charge-off
policies, or charges for expenses attributable to the merger. The
recording of these charges is pending Constellation's shareholders
approval of the acquisition.
In December 1993, CoreStates announced a definitive agreement to purchase
Rittenhouse Financial Services, Inc. and Rittenhouse Trust Company
("Rittenhouse") in a transaction involving the issuance of $55 million in
equivalent CoreStates' common shares at closing. CoreStates plans to purchase
these shares in the open market. The agreement also anticipates the issuance of
up to $55 million in additional equivalent common shares based on Rittenhouse
earnings growth over a five year period. Assuming approval by regulators, the
transaction is expected to close in the second quarter of 1994.
Rittenhouse is a leading privately held investment advisory firm and
manager of institutional and personal investments including broker sponsored
asset management accounts, a growing national product. This transaction will
increase CoreStates' assets under discretionary management to $26 billion, from
$21 billion, and trust income by more than 25%. This acquisition is consistent
with CoreStates' strategic objective of increasing earnings derived from fee-
based businesses and is expected to add to earnings per share in 1994.
Major Initiatives
In September 1993, CoreStates formed a new transaction services business
named "Transys". Transys is a stand-alone business and includes 1,100 of staff
previously employed in CoreStates' check processing operations. Transys
provides banks and other financial institutions with a full range of check
processing, electronic check presentment and related payment services. This
initiative was undertaken to build on CoreStates' position as a leading provider
of third-party payment processing services and as a response to the emerging
trend among banking institutions to outsource services that are undifferentiated
by customers, but which will require significant investments in technology.
Transys is expected to have the technological and operational base to lead its
customers in the transition from paper to electronic processing.
6
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
STRATEGIC ACTIONS IN 1993 - continued
A related initiative was the November 1993 formation of Synapsys, Inc.
("Synapsys"), a new subsidiary offering credit card and merchant processing
services, another area where the industry trend has been to outsource. Synapsys
will also serve as one of three development sites for VISA U.S.A. for next-
generation, third-party card processing services for commercial card issuers.
Both Transys and Synapsys are part of CoreStates' ongoing strategy to
provide sophisticated processing to other banks and financial institutions.
In August 1993, CoreStates' formerly Pennsylvania state-chartered Hamilton
Bank subsidiary was merged into CoreStates Bank, N.A. This action has improved
operating efficiencies and customer convenience in the Pennsylvania branch
banking business. The Hamilton unit is managed as a division of the lead bank
and will continue to be marketed as CoreStates Hamilton Bank in central
Pennsylvania.
Divestitures
On September 30, 1993, CoreStates concluded its sale of five branches from
its Virgin Islands operations to Banco Popular de Puerto Rico. The five
branches had loans of $131.2 million and deposits of $228.8 million on September
30, 1993. CoreStates recorded a pre-tax gain of $11.0 million on the sale.
CoreStates is currently in negotiations concerning the sale of its remaining two
branches 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.
Corporate overhead, processing and support costs are fully allocated along
with the impact of balance sheet management and hedging activities of
CoreStates. A matched maturity transfer pricing system is used to allocate
interest income and interest expense. The loan loss provision and allowance for
loan losses are allocated based on an expected normalized credit environment.
All business lines in the four core businesses are allocated equity utilizing
regulatory risk-based capital guidelines as well as each business line's fixed
assets and other capital investment requirements. Intangible assets and
associated costs are also allocated to relevant business units. The development
of these allocation methodologies is a continuous process at CoreStates.
The Corporate category includes the income and expense impact of residual
equity; residual loan loss reserves and provision; unusual or non-recurring
items not attributable to the operating activities of the four major business
areas; emerging business activities not directly related to the four major
business areas; and miscellaneous items.
7
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
BUSINESS LINE RESULTS - continued
The earnings contribution of these Core businesses is reflected in the
table below (in millions):
<TABLE>
<CAPTION>
Consumer Trust and
Wholesale Financial Investment
(taxable equivalent Banking Services Management
basis) ------------------- --------------- -------------
1993 1992 1993 1992 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 546.5 $487.9 $527.0 $534.4 $ 29.9 $ 29.9
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
Non-financial expenses 441.2 431.4 441.6 437.5 107.4 103.0
------- ------ ------ ------ ------ ------
Income before income
taxes 283.6 207.1 151.8 142.8 17.1 17.3
Income tax expense 110.5 79.3 57.6 53.6 6.2 6.2
------- ------ ------ ------ ------ ------
Net income $ 173.1 $127.8 $ 94.2 $ 89.2 $ 10.9 $ 11.1
======= ====== ====== ====== ====== ======
Percentage contribution 52.8% 48.7% 28.7% 34.0% 3.3% 4.2%
Return on assets 1.32 1.00 1.71 1.55 1.65 1.62
Return on equity (2) 24.52 18.28 36.09 31.41 40.37 41.11
Average assets $13,139 $12,737 $5,501 $5,772 $ 661 $ 684
$ 5,501
Average equity (2) 706 699 261 284 27 27
<CAPTION>
Electronic
Payment
Services Corporate Total
-------------- --------------- --------------------
1993 1992 1993 1992 1993 1992
-------- ----- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ (5.7) $ 1.8 $ 43.7 $ 30.7 $1,141.4 $1,084.7
Provision for loan
losses (8.9) 8.2 100.0 119.3
Non-interest income 13.2 109.3 41.7 39.2 503.1 546.5
Non-financial expenses 104.2 43.2 18.5 1,033.4 1,094.6
------- ------ ------ -------- -------- --------
Income before income
taxes 7.5 6.9 51.1 43.2 511.1 417.3
Income tax expense (0.7) 4.9 9.6 10.9 183.2 154.9
------- ------ ------ -------- -------- --------
Net income $ 8.2 $ 2.0 $ 41.5 $ 32.3 $ 327.9(1) $ 262.4(1)
======= ====== ====== ======== ======== ========
Percentage contribution 2.5% 0.8% 12.7% 12.3% 100.0% 100.0%
Return on assets 11.88 1.80 1.20 1.06 1.44(1) 1.17(1)
Return on equity (2) 205.00 2.50 5.21 6.16 18.27(1) 16.26(1)
Average assets $ 69 $ 111 $3,455 $ 3,045 $ 22,825 $ 22,349
Average equity (2) 4 80 796 524 1,794 1,614
</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.
8
<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.
9
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
BUSINESS LINE RESULTS - continued
Trust and Investment Management is organized into four business
lines: Institutional Trust; Personal Trust; Private Banking; and Investment
Management. Net income of $10.9 million was down $.2 million from 1992. The
slight decline in net income was due to 4.3% growth in non-financial expenses,
which was partially offset by 4.5% growth in non-interest income. Net interest
income was flat year-to-year. Lower earnings on demand balances due to the low
interest rate environment was the primary factor for net interest income of
$29.9 million being level with 1992. Non-interest income growth was due
principally to growth in Personal Trust, Investment Services and Employee
Benefit fees. Asset growth in the CoreFund family of Mutual funds was 10.6%
over 1992 contributing most of the fee growth in Investment Services. Growth
in trust fees, the largest component of non-interest income, was hampered by
lower than anticipated new business, the continued low interest rate
environment, and the loss of several large Institutional Custody/Securities
Lending relationships in 1992.
Electronic Payment Services includes the MAC automated teller machine
("ATM") network and POS processing business lines. On December 4, 1992, the
MAC and POS business lines were contributed to Electronic Payment Services,
Inc. ("EPS"), a joint venture that combines the separate consumer electronic
transaction processing businesses of CoreStates, Banc One Corporation, PNC
Financial Corp and Society Corporation into the nation's leading provider of
ATM and POS processing services.
EPS has announced the signing of definitive agreements providing for
two additional banking companies to enter the joint venture. The transactions
will significantly expand the MAC network and POS business volume and are
expected to be completed in 1994. As a result of the addition of new partners,
CoreStates' share in earnings of EPS will decline from the current 31% to an
estimated 23%.
Full year 1993 net income totaled $8.2 million versus $2.0 million
for 1992. The 1992 results include MAC and POS as a CoreStates business group
through December 4, 1992 and earnings from EPS for the remainder of the year.
The results for 1993 include income from CoreStates' 31% equity interest in the
earnings of the EPS joint venture and dividends on EPS preferred stock, 80% of
which is tax free, partially offset by an interest carrying charge on the net
investment in EPS.
In December 1993, CoreStates and EPS mutually agreed to enter into a
recapitalization of EPS involving the EPS preferred stock held by CoreStates.
In exchange for substantially all of the preferred stock, CoreStates received
from EPS a ten-year 6.45% note providing for equal principal payments over the
life of the note. The recapitalization does not affect the amount of deferred
gain, but changes the timing of deferred gain income recognition from a five-
year period beginning in 1996 to a ten- year period beginning in 1994.
The Corporate Category's net income increased $9.2 million in 1993.
This category included unusual gains for both 1993 and 1992. In 1992 a $41.1
million pre-tax gain was recorded for the EPS transaction and 1993 includes
pre-tax gains of $11.0 million on the sale of five branches in the Virgin
Islands and $9.1 million on prepayments of long-term debt, and securities
gains of $8.6 million. Additionally, there were significant expenses recorded
in each year that substantially offset those gains. The loan loss provision
in the corporate category was $17.1 million lower than 1992 due to the
reduction in the overall corporate provision levels. The provision reduction
was not allocated to the core businesses where the loan loss provision is
based on a normalized credit environment. The increase in net interest income
in the corporate category was largely due to the impact of an increase in
unallocated average equity, which has grown year-to-year by $272 million.
10
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
CAPITAL STRENGTH
Capital strength must be evaluated in the context of business risk
exposures, including asset quality, interest sensitivity, liquidity and
earnings diversification. CoreStates places a significant emphasis on the
maintenance of strong capital which promotes investor confidence, helps
provide access to the credit markets under favorable terms and enhances the
flexibility to capitalize on business growth and acquisition opportunities.
Capital is managed for each of the CoreStates' subsidiaries based on their
respective risks and growth opportunities, as well as regulatory requirements.
CoreStates is positioned to take advantage of market opportunities to
strengthen capital. A shelf registration is in place for fine tuning the debt
structure and adding debt, preferred or convertible preferred equity, if and
when appropriate. The relative strength of CoreStates' capital is reflected
in the chart "Average Common Equity/Assets".
<TABLE>
<CAPTION>
Average Common Equity/Assets
- -----------------------------
Plotting Points for Graph
- ----------------------------- Average Common
(In percent) Equity/Assets
---------------------------
Montgomery
CoreStates Securities
---------- ----------
<S> <C> <C>
1993 7.86% 7.11%
1992 7.22 6.74
1991 6.60 6.03
1990 6.46 5.74
1989 6.60 5.65
</TABLE>
At December 31, 1993, common shareholders' equity totaled $1,959 million or
8.3% of total assets, compared with $1,703 million or 7.2% at year-end 1992.
The year-end 1993 equity to assets ratio for the Montgomery Securities
Regional Bank Composite was 7.2%. CoreStates has achieved steady internal
capital generation throughout the past five years. Common shareholders'
equity increased over the five years ended December 31, 1993 at a compound
annual growth rate of 6.2%, 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 $1.02 per share in 1992. The common dividend payout
ratio was 40.7% for 1993, compared to 44.9% for 1992.
On August 17, 1993 the Board of Directors approved a two-for-one common
stock split effected in the form of a 100% stock dividend ("the Stock
Dividend"). The additional shares resulting from the Stock Dividend were
distributed on October 15, 1993 to holders of record on September 15, 1993.
All common shares and per common share data have been restated for the impact
of the Stock Dividend.
CoreStates and its bank subsidiaries are subject to minimum risk-based and
leverage capital guidelines issued by the Federal Reserve Board and
Comptroller of the Currency. The measurement of risk-based capital takes into
account the credit risk of both balance sheet assets and off-balance sheet
exposures. These guidelines require minimum risk-based capital ratios of 4%
for Tier 1 capital and 8% for total capital. In addition, a minimum leverage
ratio of Tier 1 capital to quarterly average total assets of 3% is required
for banking organizations that are rated as strong. The following table
illustrates CoreStates' risk-based and leverage capital ratios at December 31,
1993 and 1992:
11
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
CAPITAL STRENGTH - continued
<TABLE>
<CAPTION>
Risk-based and Leverage Capital Ratios at
-----------------------------------------
At December 31,
---------------
($ in millions) 1993 1992
---- ----
<S> <C> <C>
Capital
Tier 1 capital $ 1,873 $ 1,708
Tier 2 capital 888 719
Total qualifying capital 2,761 2,427
Assets
Risk-adjusted assets 20,173 19,087
Average assets-
leverage capital basis 22,868 22,825
Ratios
Tier 1 capital ratio 9.3% 9.0%
Total capital ratio 13.7 12.7
Tier 1 leverage ratio 8.2 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
CoreStates Bank of Delaware, N.A. 10.9 12.1 13.4 .6
</TABLE>
12
<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.
13
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET QUALITY - continued
In addition to the management of credit risk, CoreStates manages and
controls operating and fraud risks in all of its substantive transactional
products through its Transactional Products Exposure Committee ("TPEC"). It
is the role of this committee to review and assign risk levels to all
significant new products prior to their implementation. In addition, reviews
of substantial changes to existing products and regular reviews of the product
array offered to customers are part of TPEC's responsibilities. The products
reviewed by TPEC include products from CoreStates' normal operating services
as well as those arising from Cash Management, Trust and Community Banking
services. Through a predetermined risk matrix approach, all products are
rated and assigned risk levels. Each product manager is responsible for
acting on risk reduction recommendations issued by TPEC. By focusing on the
transactional risk in all of its products, TPEC serves as one element in the
overall risk management process at CoreStates.
Credit quality and the effectiveness of portfolio management are
independently and systematically assessed by Credit Review, which reports to
the Audit Committee of the Board of Directors. Both its credit rating and
process evaluation techniques are consistent with regulatory standards.
Because CoreStates considers risk oversight to be an essential element for
long-term financial stability, in 1994 CoreStates will more cohesively define
its overall risk profile by applying its various well-developed risk analysis
approaches to all risk areas within the corporation.
Loan Portfolio
Wholesale Loans - CoreStates has traditionally maintained limits on
industry, market and borrower concentrations as a way to diversify and manage
credit risk. Management's current policy is to limit industry concentrations
to 50% of total equity and to limit market segment concentrations to 10% of
total assets. CoreStates conservatively manages industry concentrations by
applying these dollar limits to a family of industries that have common risk
characteristics. This management process is reflected in the following chart,
which illustrates each industry that exceeds 10% of total shareholders'
equity. CoreStates' largest concentration is in the non-bank finance industry
at 41.8% of total equity.
Wholesale Loans by Industry
- ---------------------------
(in multi color bar graph, overlay np1 $ per industry)
- ------------------------------------------------------
Plotting Points for Graph
- -------------------------
<TABLE>
<CAPTION>
Outstandings % of
as of % Outstandings
of equity non-performing
------------ --------------
<S> <C> <C>
Non-bank finance 41.8%
Communications 32.8 0.4%
Retail trade 31.2 0.6
Healthcare 21.1 0.2
Depository institutions 19.3
Apparel 18.2 10.6
Trucking and auto leasing 15.5 1.9
Real estate construction 12.9 6.3
Chemical 11.9
</TABLE>
14
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET QUALITY - continued
The following discussion highlights specific portfolios that are of interest in
the current environment. The discussion focuses on three wholesale portfolios:
communications because of its size; healthcare because of the high profile of
this industry; and the commercial finance portfolio at a CoreStates non-bank
subsidiary, Congress Financial Corp ("Congress"), because of the recent growth
in this portfolio.
Communications - The communications/media lending activities are in
industries which are either regulated by the Federal Communications Commission
and/or derive some or all of their revenues from advertising. These industries,
which include Cable Television, Telephone, Newspapers, Broadcasting and
Cellular, are typically financed based on the cash flows available to repay
debt, with less focus on tangible balance sheets. The underlying basis for this
focus is the intangible franchise value of the business which generally exceeds
the cost of establishing the business. Significant and rapid technological,
regulatory and competitive changes are occurring in the communications segments
of these businesses which our specialized lenders are closely monitoring. Risks
are further mitigated through exposures to generally large, often diversified
and highly experienced operators, and conservative debt structures. Three of the
specialized portfolios in this industry, Cable Television, Broadcasting and
Cellular, are highlighted below. Exposures in these industries are managed
within clearly defined parameters regarding total exposure and acceptable tenors
/maturities.
<TABLE>
<CAPTION>
Communications Portfolio
- ------------------------
At December 31, Cable(1) Broadcasting(1) Cellular
- --------------- ----- ------------ --------
(in millions)
1993
- ----
<S> <C> <C> <C>
Outstandings.............. $413.2 $62.4 $55.0
Non-performing............ - 2.7 -
% of loans.............. - 4.3% -
1992
- ----
Outstandings.............. $482.8 $58.0 $17.9
Non-performing............ - 11.4 -
% of loans.............. 19.7% -
</TABLE>
- -----------------------------
(1) Does not include $68 million at December 31, 1993 and $56 million
at December 31, 1992 outstanding to diversified companies that have
cable and broadcasting in their mix of businesses.
Healthcare - The specialized healthcare lending activities are to
healthcare providers which are heavily dependent upon third-party reimbursement
for their revenue base. Two of the subsegments of the industry are the acute
care (hospital) sector and the alternate site care sector (rehabilitation,
subacute, psychiatric, oncology, etc.). Financing typically supports working
capital requirements caused by delays in third-party payments, medium-term
financing for the acquisition of equipment and/or merger activity. The industry
operates in a highly regulated environment and is currently undergoing
significant reform. Our analysis focuses on several key indicators as predictors
for success in this evolving industry: management's ability to identify and
operate profitably within particular market niches, stable and growing market
share, diversified and strong payor mix. The financial analysis emphasizes
strong and steady cash flow and conservative leverage. The changing nature of
this industry requires close monitoring which includes ongoing analysis of
reimbursement by subsegment and geography, assessment of management and their
respective strategies and collateral valuations.
15
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: (continued)
ASSET QUALITY - continued
The following table summarizes CoreStates' exposure in the two Healthcare
industry segments discussed above at December 31, 1993 and 1992. There were no
non-performing loans in these segments for the periods presented.
<TABLE>
<CAPTION>
Healthcare Outstandings
- ----------------------- Alternate
At December 31, Acute care site care
- --------------- ---------- ---------
(in millions)
<S> <C> <C>
1993.................... $127.5 $112.2
1992.................... 127.8 101.4
</TABLE>
Commercial Finance - The loan portfolio at Congress grew approximately 25%
on a year-to-year basis through December 31, 1993. The credit quality of loans
generated during this period is consistent with past performance and reflects
what would be expected from a high quality commercial finance company. During
this period there were unusual market opportunities arising from the constraints
and restrictive lending policies in the commercial banking system and the ever
increasing nationwide reputation of Congress as a highly expert asset based
lender able to structure and syndicate both large and complex transactions. The
new business origination was geographically diverse, represented no particular
industry concentrations and continued the historical collateral characteristics
of the portfolio with its heavy emphasis on working assets such as accounts
receivable and inventory.
<TABLE>
<CAPTION>
Commercial Finance Portfolio
- ----------------------------
At December 31,
- ---------------
(in millions) 1993 1992
---- ----
<S> <C> <C>
Outstandings.................. $1,426.5 $1,136.8
Non-performing................ 15.9 4.6
% of loans.................. 1.1% .4%
</TABLE>
Real Estate Loans - Although improving over the prior three years, the
CoreStates regional real estate market continues to present a mixed picture as
it emerges from a severe recession. The residential market has achieved
supply/demand balance; marginal developers have been removed and low interest
rates have created sales activity. However, the commercial and industrial
market remains fundamentally weak, although there has been some increased
interest from the investor market.
Total real estate related loans outstanding were $4,342 million at December
31, 1993, compared to $4,645 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 $253 million or 1.5% of total
loans at December 31, 1993. Currently, 6.3% of CoreStates' construction and
development loan portfolio is non-performing, compared to 2.4% for the remaining
real estate loan portfolio. The table below summarizes CoreStates' real estate
loans outstanding and other real estate owned at December 31, 1993 and 1992 by
type.
16
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET QUALITY - continued
<TABLE>
<CAPTION>
Real Estate Loans
- -----------------
At December 31, Completed
- --------------- projects/ Total
(in millions) Construction/ Investment real
development properties(1) Residential Other(2) estate
------------- ------------- ----------- -------- ------
<S> <C> <C> <C> <C> <C>
1993
- ----
Year-end outstandings $ 253 $874 $1,709 $1,506 $4,342
Average loans outstanding 283 882 1,798 1,463 4,426
Non-performing loans 16 42 20 36 114
% of year-end loans 6.3% 4.8% 1.2% 2.4% 2.6%
Net charge-offs $ 5 $ 11 $ 5 $ 11 $ 32
% of average loans 1.6% 1.2% .3% .8% .7%
Other real estate owned $ 22 $ 17 $ 2 $ 10 $ 51
1992
- ----
Year-end outstandings $ 328 $877 $1,908 $1,532 $4,645
Average loans outstanding 427 788 1,832 1,483 4,530
Non-performing loans 33 51 24 55 163
% of year-end loans 10.2% 5.8% 1.3% 3.6% 3.5%
Net charge-offs $ 12 $ 21 $ 6 $ 6 $ 45
% of average loans 2.7% 2.7% .3% .4% 1.0%
Other real estate owned $ 38 $ 28 $ 2 $ 12 $ 80
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Completed projects/investment properties included $305 million at
December 31, 1993 and $390 million at December 31, 1992 related to loans
on completed projects for which net rental receipts are not sufficient to
cover 115% of debt service.
(2) 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 $1,709 million or
10.4% 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 34.7% of total real estate loans and 9.2% of total loans.
The remaining category of real estate loans, totaling $874 million at
December 31, 1993, is comprised of completed projects and investment properties.
Included in this category are $569 million of loans, or 65.1%, on properties
which have a positive cash flow exceeding 115% of debt service, a measure which
generally is indicative of an adequately leased-up building. Also in this
category are $305 million of loans, or 34.9%, on properties whose cash flow does
not meet the 115% test.
Net charge-offs of construction and development loans in 1993 were $4.6
million or 1.6% of related average loans outstanding, compared to net charge-
offs of $11.5 million or 2.7% of the average construction and development loans
in 1992.
Another key to risk management in this portfolio is diversification by
project type. The following table illustrates CoreStates' construction and
development portfolio and completed projects/investment properties portfolio by
project type:
17
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET QUALITY - continued
<TABLE>
<CAPTION>
Construction and Development and Completed Projects/Investment Properties
- -------------------------------------------------------------------------
Loans Outstanding by Project Type
- ---------------------------------
At December 31,
- ---------------
(in millions)
Construction Completed projects/
and development Investment properties Total
------------------------- ------------------------ -----------------------
Loans % Non- Loans % Non- Loans % Non-
outstanding performing outstanding performing outstanding performing
----------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
1993
- ----
Residential development........................... $156.3 8.0% $ 156.3 8.0%
Commercial:
Land and site development......................... 62.9 5.2 62.9 5.2
Apartments........................................ $112.0 1.6% 112.0 1.6
Light industrial.................................. 8.9 122.7 2.9 131.6 2.7
Hotels............................................ 7.3 26.0 7.3 26.0
Office............................................ 5.0 8.0 353.7 7.3 358.7 7.3
Shopping centers.................................. 7.8 202.6 1.7 210.4 1.7
Miscellaneous..................................... 11.7 76.2 6.7 87.9 5.8
------ ------ -----
Total commercial.............................. 96.3 3.8 874.5 4.8 970.8 4.7
------ ------ --------
Total......................................... $252.6 6.3% $874.5 4.8% $1,127.1 5.1%
====== ====== ====== ===== ======== ====
1992
- ----
Residential development........................... $182.0 8.2% $ 182.0 8.2%
Commercial:
Land and site development......................... 76.1 15.0 76.1 15.0
Apartments........................................ .9 $117.4 .7% 118.3 7.0
Light industrial.................................. 25.4 113.4 6.3 138.8 5.1
Hotels............................................ 10.3 17.5 10.3 17.5
Office............................................ 25.3 27.7 358.7 9.6 384.0 10.8
Shopping centers.................................. 13.5 197.7 2.0 211.2 1.8
Miscellaneous..................................... 4.4 79.9 3.5 84.3 3.3
------ ------ --------
Total commercial............................... 145.6 12.6 877.4 5.8 1,023.0 6.8
------ ------ --------
Total.......................................... $327.6 10.2% $877.4 5.8% $1,205.0 7.0%
====== ====== ====== ===== ======== ====
</TABLE>
18
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET QUALITY - continued
Geographically, $1,052.2 million or 93.4% of CoreStates' construction and
development loans, completed projects and investment properties are financing
real estate in CoreStates' market area of Pennsylvania, New Jersey and
Maryland/Delaware. Of the $74.9 million of these loans outstanding for
projects outside of CoreStates' local market, $9.6 million is in the greater
Washington D.C. area, with virtually no outstandings in California, New York
City and New England.
Allowance for Loan Losses
In 1993, CoreStates refined its methodology for determining appropriate
levels of allowance for loan losses ("ALLL"). Each subsidiary of CoreStates
which extends credit maintains an allowance sufficient to absorb the
anticipated loss inherent in its credit portfolio for a minimal one-year
horizon. Factors included in management's determination of an adequate level
of ALLL are a statistical analysis of historical loss levels throughout an
economic cycle and one year of projected charge-offs, creating a band, below
which a bank's ALLL is considered inadequate and above which is considered
inappropriate. A quarterly evaluation of loss potential on specific credits,
products, industries, portfolios and markets as well as indicators for loan
growth, the economic environment and concentrations assist in validating the
position of the ALLL within the band. Management's evaluation of the adequacy
of the ALLL is independently tested by Credit Review. CoreStates believes
that the ALLL is an important source of protection against problems in the
portfolio. Equally important is the prompt recognition of problem situations
and prompt write-downs of these assets to net realizable value. Accordingly,
over an economic cycle, CoreStates has experienced relatively high levels of
recoveries against these write-downs compared to other banking companies.
19
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET QUALITY - continued
The year-end 1993 allowance for loan losses totaled $347.5 million and
represented 2.1% of loans. This compares with a loan loss allowance at year-
end 1992 of $322.5 million, also 2.1% of loans. The allowance for loan losses
at year-end 1993 was 173.0% of non-performing loans, an increase over the
year-end 1992 coverage ratio of 105.2% 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 $100.0 million,
down $19.3 million from the $119.3 million provided in 1992. The decrease in
the 1993 loan loss provision resulted primarily from the overall improvement
in asset quality during 1993 as non-performing assets declined 34.8% and net
loan charge-offs declined 40.6%. Net charge-offs in 1993, excluding net LDC
recoveries of $12.6 million, were $89.9 million or .58% of related average
loans. This represents a decrease of $53.4 million when compared to the
$143.3 million of net charge-offs excluding $13.1 million LDC recoveries in
1992.
The following table reflects the distribution of 1993 and 1992 net charge-
offs by loan type:
<TABLE>
<CAPTION>
Distribution of Net Charge-Offs
- -------------------------------
For the Year Ended December 31,
- -------------------------------
(in millions) 1993 1992
----------------------------- ---------------------------
% of % of
Total Total
Net % of net Net % of net
charge- Average charge- charge- Average charge-
Loan type offs loan type offs offs loan type offs
- --------- ------- --------- ------- ------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Domestic:
Commercial
and industrial $ 30.1 .4% 38.9% $ 51.4 .7 % 39.5%
Real estate:
Construction 4.6 1.6 6.0 11.5 2.7 8.8
Other 27.2 .7 35.2 33.0 .8 25.4
Consumer:
Credit card 23.3 2.4 30.1 31.1 3.5 23.9
Installment 4.8 .4 6.2 13.9 1.1 10.7
Other (1) (.1) (.1) 2.4 .2 1.8
------ ----- ------ -----
Total domestic 89.9 .6 116.3 143.3 1.0 110.1
------ ----- ------ -----
Foreign (2) (12.6) (2.3) (16.3) (13.1) (3.1) (10.1)
------ ----- ------ -----
Total net charge-offs $ 77.3 .5% 100.0% $130.2 .8% 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.
20
<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 $252.1 million, or 1.5% of
total loans plus other real estate owned ("OREO") and 1.1% of total assets.
These levels compared to total non-performing assets at year-end 1992 of
$386.8 million, 2.5% of total loans plus OREO and 1.6% of total assets.
Management expects a continuing decline in non-performing asset levels during
1994 for current CoreStates' banks. However, with planned acquisitions,
CoreStates anticipates increases in both non-performing assets and charge-offs
(refer to the Strategic Actions section beginning on page 4).
At year-end 1993, total non-performing assets were comprised of $164.4
million of non-accrual loans, $36.5 million of renegotiated loans and $51.2
million of OREO. The $134.7 million, or 34.8%, 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
$50.2 million, or 36.9%, and the real estate portfolio which declined $78.1
million, or 32.1%. During 1993, loans aggregating $165 million were added to
non-performing status, payments of $149 million against non-performing assets
were received, loans totaling $46 million were returned to full accrual status
and $105 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 $387 $340 $305 $295 $387
Additions 47 29 35 54 165
Return to accrual (23) (14) (1) (8) (46)
Payments (42) (31) (23) (53) (149)
Charge-offs (29) (19) (21) (36) (105)
---- ---- ---- ---- -----
Net change (47) (35) (10) (43) (135)
---- ---- ---- ---- -----
Ending balance $340 $305 $295 $252 $ 252
==== ==== ==== ==== =====
1992
- ----
Beginning balance $487 $474 $485 $442 $ 487
Additions 63 109 63 38 273
Return to accrual (6) (1) (25) (16) (48)
Payments (42) (73) (42) (40) (197)
Charge-offs (28) (24) (39) (37) (128)
---- ---- ---- ---- -----
Net change (13) 11 (43) (55) (100)
---- ---- ---- ---- -----
Ending balance $474 $485 $442 $387 $ 387
==== ==== ==== ==== =====
</TABLE>
Non-performing assets at year-end 1992 decreased $100.3 million, or 20.6%,
as compared to the 1991 year-end level. The 1992 decline in non-performing
assets was principally in the commercial loan portfolio, particularly HLT non-
accrual and renegotiated loans, which decreased $54.6 million from year-end
1991. Non-performing assets attributable to the real estate portfolio
declined $35.4 million, or 12.7%, from the year-end 1991 level.
The chart below illustrates CoreStates' ratio of total non-performing
assets to loans plus OREO as compared to the Montgomery Securities Regional
Bank Composite Index.
21
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET QUALITY - continued
<TABLE>
<CAPTION>
Non-performing Assets to Loans Plus OREO
- ----------------------------------------
Plotting Points for Graph
- -------------------------
(In percent) NPA/Loans Plus OREO
------------------------------
Montgomery
CoreStates Securities
---------- ----------
<S> <C> <C>
1993 1.54% 1.86%
1992 2.49 3.23
1991 3.07 3.93
1990 2.55 3.50
1989 2.02 2.72
</TABLE>
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") $ 5.2 1.1% 2.1% $ 8.5 1.7% 2.2%
Other 80.5 1.2 31.9 127.4 1.9 32.9
Real estate:
Construction 16.0 6.3 6.3 33.3 10.2 8.6
Other loans 98.0 2.4 38.9 129.9 3.0 33.6
OREO 51.2 20.3 80.1 20.7
Other domestic loans(1) 1.0 .1 .4 4.5 .4 1.2
------ ----- ------ -----
Total domestic 251.9 1.6 99.9 383.7 2.5 99.2
------ ----- ------ -----
Foreign loans .2 .1 3.1 .8 .8
------ ----- ------ -----
Total non-performing
assets(2)(3) $252.1 1.5% 100.0% $386.8 2.5% 100.0%
====== === ===== ====== ==== =====
% Total assets 1.1% 1.6%
=== ===
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes loans to financial institutions and lease financing.
(2) The table does not include loans of $34 million and $73 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.
(3) There were no non-performing consumer loans at December 31, 1993 or 1992.
22
<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-accrual loans by their
respective levels of performance as defined below:
Substantial performance - No loss is anticipated on the present book
balance and the borrower has paid at least 85% of contractual obligations
over the prior six months.
Limited performance - Borrower has paid between 25% and 85% of contractual
obligations over the prior six months.
No performance - Borrower has paid less than 25% of contractual obligations
over the prior six months.
Full payment is doubtful - Loan is contractually current, however, there is
some doubt as to full collectability.
Other - Loan is contractually current, however, borrower is in a specified
period of demonstrating performance or loan has a prior charge-off.
<TABLE>
<CAPTION>
Performance Levels of Non-Accrual Loans
- ---------------------------------------
At December 31, 1993
- --------------------
(in millions)
Accumulated
net charge-
offs as % of
Book Contractual contractual
balance(1) balance balance(1)
------- ----------- -----------
<S> <C> <C> <C>
Contractually past due with:
Substantial performance $ 4.3 $ 6.9 37.6%
Limited performance 18.1 30.5 40.8
No performance 62.3 95.8 34.9
------ ------
84.7 133.2 36.4
------ ------
Contractually current, however:
Full payment is doubtful 70.2 97.3 27.8
Other 9.5 12.5 23.4
------ ------
79.7 109.8 27.3
------ ------
Total non-accrual loans $164.4 $243.0 32.3%
====== ====== ====
- -------------------------
</TABLE>
(1) Book balance reflects application of $4.0 million of cash basis interest
received which was applied to principal. The accumulated net charge-off
percentage also includes the impact of interest applied to principal.
23
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET QUALITY - continued
The following OREO portfolio table illustrates the relationship of original
contractual balances to accumulated net charge-offs. Accumulated net charge-
offs include charge-offs taken against the allowance for loan losses while the
asset was classified as a loan and write-downs charged directly to the income
statement subsequent to a loan's transfer to OREO. During 1993 and 1992, $12.1
million and $21.3 million, respectively, were charged to the income statement
for OREO write-downs.
<TABLE>
<CAPTION>
Other Real Estate Owned
- -----------------------
At December 31, 1993
- --------------------
(in millions) Accumulated
net charge-
offs as % of
Book Contractual contractual
balance balance balance
------- ----------- -----------
<S> <C> <C> <C>
Construction and development $22.0 $ 91.9 76.1%
Completed projects 17.0 53.0 67.9
----- ------
Total(1) $39.0 $144.9 73.1%
===== ====== ====
- ------------------------------------------------------------------
</TABLE>
(1) Does not include $2.5 million of OREO from the residential mortgage
portfolio or $9.7 million in OREO from other commercial real estate loans,
primarily the owner occupied portfolio.
The two preceding charts reflect the results of CoreStates' charge-off
practices. At year-end 1993, 32.3% of non-accrual loans has been charged off,
while 73.1% of the OREO asset original contractual balance has been charged off.
These levels of markdowns on OREO reflect CoreStates' approach in handling
problem assets.
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.
24
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT
CoreStates manages its balance sheet to achieve maximum shareholder value
within the constraints of a conservative interest rate risk discipline, the
maintenance of high credit quality, and sound leverage and liquidity positions.
CoreStates' asset and liability management is centralized and individual
subsidiaries are managed within the context of overall corporate policies.
Interest Rate Risk Management - Interest rate risk refers to potential
changes in current and future net interest income resulting from changes in
interest rates, product spreads and mismatches in the repricing between interest
rate sensitive assets and liabilities. CoreStates' management emphasizes stable
net interest income throughout rate cycles, with the result that intermediate
and longer term considerations take precedence over short-term profitability.
This commitment is evidenced by the stability and strength of CoreStates' net
interest margin over time, despite significant changes in economic conditions,
competition and interest rates. CoreStates' net interest margin has remained
consistently above industry averages over the last five years as illustrated in
the chart "Net Interest Margin".
<TABLE>
<CAPTION>
Net Interest Margin
- -------------------
Plotting Points for Graph
- -------------------------
(In percent) Net interest margin
-------------------------
Montgomery
CoreStates Securities
---------- ----------
<S> <C> <C>
1993 5.82% 4.81%
1992 5.61 4.78
1991 5.53 4.40
1990 5.31 4.21
1989 5.09 4.27
</TABLE>
25
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT - continued
At CoreStates, measurement of interest rate risk focuses on potential
changes in net interest income identified through computer simulations against
both rising and falling interest rates. Longer term repricing risks are measured
and controlled through gap analysis. All measurements of interest rate risk
include the impact of off-balance sheet activities. Under CoreStates' policy,
rate changes of at least 200 basis points over a six-month period are simulated
with rate related negative net interest income volatility over a twelve-month
horizon limited to 4% of shareholders' equity. Included in these simulations are
all contractual repricing risks, the impact of prepayments in the loan and
securities portfolios, potential spread and volume changes on consumer deposits
and fluctuations in the value of non-interest bearing funding sources.
CoreStates believes that the spread between the prime rate and financial market
rates is a function of both interest rates and credit conditions. While changes
in the prime spread are included in simulations, only that portion believed to
be interest rate related is subject to the policy guidelines.
As a matter of practice, positions are generally managed to produce
significantly lower volatility than policy guidelines would permit. Current
simulations show that CoreStates' net interest income volatility over one year
due to a 200 basis point change in short-term interest rates is relatively
neutral. Reflecting its interest rate risk management philosophy, CoreStates'
net interest margin results from strong relationship business profitability
rather than a temporarily favorable interest rate environment.
There are two key elements to CoreStates' interest rate risk. First, is
the broad mismatch between the rate sensitivity of the assets and liabilities in
its core businesses. Second, is the spread risk between the rates on those
products and financial market rates.
CoreStates carries a large portfolio of prime and other short-term rate
related assets generated through its core wholesale and retail businesses. As a
regional banking company, CoreStates has a significant funding base of consumer
deposits with indefinite maturities and non-contractual rates such as savings,
NOW and money market accounts. Traditionally, consumer deposits have had a
longer term rate sensitivity; pricing has been relatively stable for long
periods and pricing changes lag changes in financial market rates. While this
mix of relationship assets and liabilities provides excellent liquidity, it
results in considerable interest rate risk. This inherent mismatch (the
"relationship gap") of longer term fixed-rate liabilities funding short-term
rate sensitive assets would generate significant exposure to declining interest
rates if not hedged.
CoreStates hedges this relationship gap through the use of both on and off-
balance sheet discretionary assets and liabilities. The typical offsetting
position is created by purchasing fixed-rate investment securities funded by
short-term liabilities, and entering into interest rate swaps in which
CoreStates receives a fixed rate and pays a variable rate. The following
excerpts from the Interest Sensitivity Analysis shown on page 84 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.
26
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT - continued
<TABLE>
<CAPTION>
Selected Interest Sensitivity Balances
- ----------------------------------------
At December 31, 1993
- ----------------------------------------
(in millions)
Months Years
------------------------ ------------------------
0-3 4-6 7-12 1-2 3-5 >5 Total
------- ------ ------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Relationship Portfolios:
Total loans............................. $11,587 $ 893 $ 846 $ 1,190 $ 1,617 $ 230 $16,363
Total consumer
deposits, net non-
interest funding....................... 6,707 1,270 1,344 1,893 2,219 2,679 16,112
Adjustments............................. 395 (619) (318) (397) (1,248) 2,187 -0-
------- ------ ------ ------- ------- ------ -------
Relationship gap...................... 5,275 ( 996) (816) (1,100) (1,850) (262) 251
------- ------ ------ ------- ------- ------ -------
Discretionary Portfolios:
Assets.................................. 2,299 1,037 1,049 1,238 2,236 1,060 8,919
Liabilities............................. 7,601 131 88 276 365 709 9,170
------- ------ ------ ------- ------- ------ -------
Discretionary gap..................... (5,302) 906 961 962 1,871 351 (251)
------- ------ ------ ------- ------- ------ -------
Combined gap.......................... $ (27) $ (90) $ 145 $ (138) $ 21 $ 89 $ -0-
======= ====== ====== ======= ======= ====== =======
</TABLE>
The second major element of CoreStates' interest rate risk is the spread
risk between product rates and financial market rates. CoreStates simulates the
behavior of individual products under various rate scenarios to determine an
appropriate investment or funding strategy to provide a stable spread.
Declining interest rates in 1993 provided the opportunity to reprice
consumer savings, NOW and money market accounts. This contributed to a wider net
interest margin in 1993 to the extent that these deposit balances funded fixed-
rate assets. Assuming a stable rate environment, spreads are expected to narrow
as the fixed-rate assets mature and are replaced at market rates. There was also
growth in those deposit balances in 1993, increasing the significance of the
repricing of those products to net interest income. CoreStates has simulated
potential changes in pricing and the resultant impact on deposit volumes under a
multitude of rate environments. The key simulation assumptions revolve around
the ability to reprice those products if rates fall, and the extent to which
balances will be maintained and repricing will lag market rates if rates rise.
Recognizing that much of the growth in these products represents a temporary
liquidity preference, CoreStates has invested additional balances for a shorter
term than for those considered to be more permanent.
The spread between the prime rate and short-term market rates is also an
important component of net interest income. In 1993, that spread averaged well
above prior years' experience and, while management does not expect a return to
historic levels, some compression of the prime spread is anticipated.
CoreStates has approximately $6 billion in loans subject to changes in prime,
excluding the credit card portfolio which floats with prime only at higher rate
levels.
27
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations:continued
ASSET AND LIABILITY MANAGEMENT - continued
The low rate environment of 1993 provided refinancing opportunities for
many consumers and raised questions concerning the level of prepayment risk in
many financial institutions. CoreStates' interest rate risk discipline has been
to minimize prepayment risk by selling fixed-rate mortgages as created, and
restricting purchases of mortgage related securities to short-term
collateralized mortgage obligations, with limited cash flow variability. In
1993, CoreStates completed two transactions in which $207 million in longer term
fixed-rate home equity loans were sold and securitized. These securitizations
served both CoreStates' customers and shareholders by providing long-term fixed-
rate financing to consumers, while reducing both credit and interest rate risk
on the balance sheet.
Off-Balance Sheet Instruments - CoreStates uses off-balance sheet
instruments to hedge interest rate risk. Most activities are designed to be a
substitute for the fixed rate assets which are necessary to balance the
sensitivity of relationship business portfolios.
CoreStates believes the management of interest rate risk must be balanced
with the management of liquidity and capital and, therefore, off-balance sheet
instruments are used to hedge interest rate risk and avoid unnecessary leverage
and liquidity impairment. The required level of fixed-rate asset sensitivity
could be achieved principally with on-balance sheet investment securities. The
amount recorded in net interest income related to interest rate swaps was income
of $114.7 million in 1993, $122.9 million in 1992 and $68.5 million in 1991. If
the alternative approach of on-balance sheet assets were used, it would not
materially affect net interest income.
CoreStates' use of financial futures is concentrated in short-term LIBOR
and Eurodollar contracts although longer term contracts are occasionally used to
hedge anticipatory transactions. CoreStates uses interest rate swaps in both
short and longer term maturities to offset on-balance sheet interest rate risk
and, as of December 31, 1993, does not use index amortizing swaps. In addition
to its hedging portfolio; CoreStates also offers interest rate swaps as a risk
management tool to commercial customers; however, customer transactions
represent only 10% of the portfolio and are generally offset with swaps of
similar terms. The following table reflects the future repricing schedule of
CoreStates' interest rate swap portfolio at December 31, 1993:
<TABLE>
<CAPTION>
Repricing Schedule of Interest Rate Swaps
- -----------------------------------------
At December 31, 1993
- --------------------
(in millions)
CoreStates receives CoreStates pays
--------------- -------------
Notional Notional
amount Rate amount Rate
-------- ---- -------- ----
<S> <C> <C> <C> <C>
0-1 year $1,126 5.69% $3,818 3.52%
1-2 years 691 6.65 149 6.46
2-3 years 890 7.31 230 6.30
3-4 years 496 6.01 90 4.59
4-5 years 401 5.76 13 6.61
over 5 years 696 6.23
------ ------
Total $4,300 6.31% $4,300 3.80%
====== ==== ====== ====
</TABLE>
28
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT - continued
In addition to using interest rate swaps to hedge the relationship gap,
interest rate swaps have also been used to convert long-term fixed rate debt to
a floating rate sensitivity, accounting for most of the swaps maturing beyond
five years in the preceding table.
CoreStates evaluates the credit worthiness of all off-balance sheet
counterparties using the same standards applied in any other loan or credit
transaction, and credit risk in these positions is centrally managed and
controlled by the Credit Policy Group. The current credit exposure in a
derivative transaction is the cost to replace the transaction at current market
rates, while potential exposure is the estimated cost to replace the transaction
at future rates. CoreStates continually monitors both current and potential
risk. As of December 31, 1993, the current cost to replace CoreStates' interest
rate swap portfolio was $154 million.
Liquidity - Liquidity management allows a financial institution to meet
potential cash needs at a reasonable price under various operating conditions.
Liquidity comes from a variety of sources: the maturing of short-term assets,
readily marketable unpledged securities, and the ability to attract new funds.
The ability to securitize or sell other assets, such as loans, also enhances
liquidity, as does the structure and stability of existing funding sources.
CoreStates maintains sufficient liquidity to meet its obligations in a
timely and cost-effective manner. Management monitors current and projected cash
flows, and adjusts positions as necessary to maintain adequate levels of
liquidity. CoreStates emphasizes diversification of funding sources. By using a
variety of markets, limiting funds borrowed from a single investor, and
staggering maturities, the risk of potential funding pressure is significantly
reduced. Management also maintains a detailed liquidity contingency plan
designed to adequately respond to situations such as a decline in asset quality
or credit ratings, which could lead to liquidity concerns. Management analyzes
potential changes in major funding sources during difficult times, the amount of
runoff that may be expected, as well as available options to replace those
funds. The plan includes specific action steps to be taken in the event of
funding disturbances.
The cornerstone of CoreStates' liquidity position is a sizable and stable
base of core deposits acquired through customer relationships. Core deposits are
comprised of interest bearing consumer savings products as well as non-interest
bearing consumer and commercial deposits. Core deposits averaged 67.4% of assets
in 1993 compared to 68.4% in 1992. This decline is a result of increased loan
volumes and relatively no growth in core deposits.
29
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT - continued
Core deposits are supplemented by discretionary funding sources from direct
customer contacts in both the domestic and international markets. These sources
include large denomination certificates of deposit, deposits in foreign branches
as well as federal funds, repurchase agreements, commercial paper and long-term
debt. Commercial paper is used primarily to fund Congress, the non-bank
commercial finance subsidiary. In addition to commercial paper, Congress is
funded through the issuance of medium-term notes and long-term debt. Growth in
loans at Congress during 1993 resulted in increases in these funding sources
while loan growth in the banking subsidiaries accounted for the growth in other
discretionary sources. CoreStates' liquidity is further enhanced by its ability
to raise funds in a variety of domestic and international money and capital
markets. During 1993, CoreStates issued $375 million in new subordinated long-
term debt with maturities of 10 to 12 years.
Under existing shelf registration statements filed with the Securities and
Exchange Commission ("SEC"), CoreStates had debt and capital securities that
were registered but unissued of approximately $177 million at December 31, 1993.
In February 1994, CoreStates' Board of Directors approved the filing of a shelf
registration with the SEC that will, when effective, cover the issuance of a
broad range of debt and equity securities that will increase available
registered but unissued securities to $1 billion.
The tables on pages 83 and 85-86 illustrate the maturity characteristics of
CoreStates' domestic certificates of deposit over $100 thousand, loan portfolio
and investment portfolio, respectively. For information regarding the maturity
characteristics of CoreStates' short-term funds borrowed and long-term debt, see
notes 10 and 11 to the financial statements.
Investment Portfolio - Within the context of the policies and practices
previously outlined, CoreStates maintains a portfolio of marketable debt
securities to contribute to a balanced interest rate risk position and to
provide liquidity reserves. Interest rate risk management disciplines require
strict matching of interest rate sensitivities and, therefore, CoreStates
generally does not consider changes in the market value of individual portfolios
as significant to the management of its interest sensitivity. CoreStates
generally has both the ability and the intent to hold these securities until
maturity.
In 1993, the Financial Accounting Standards Board issued statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities" ("FAS 115"). As a result of adopting FAS 115 on
December 31, 1993, CoreStates has reclassified $545 million of investment
securities as "Available-for-Sale". These investment securities were marked to
fair value, adding $64.8 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.
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.
30
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
SOURCES AND USES OF FUNDS
Total assets were $23.7 billion at year-end 1993, substantially unchanged
from year-end 1992. However, comparing specific asset categories to year-end
1992 balances reflects recovering loan demand, as loans increased $893 million
or 5.8%, and a $122 million, or 4.7%, increase in investment securities, mostly
due to the FAS 115 recognition of unrealized net appreciation in Available-for-
Sale securities. Time deposits declined $493 million or 27.9%. The increase in
loans was primarily due to improved demand across CoreStates' lending products.
A $528 million, or 4.9%, decline in interest bearing deposits, principally the
result of the September 30, 1993 sale of the five Virgin Islands branches, was
offset by growth of $188 million, or 3.2% in demand deposits, an increase of
$202 million, or 16.1% in long-term debt, and retained earnings.
Total assets averaged $22.8 billion in 1993, an increase of $476 million or
2.1% from 1992. Average loans increased $262 million, or 1.7% and average
investment securities increased $327 million or 13.9%. As reflected in the
chart on Earning Asset Mix, loans comprised 79.5% of CoreStates' average earning
assets in 1993, compared to 79.3% 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
-----------------
Plotting Points for Graph
-------------------------
(Percentage of average earning assets)
<TABLE>
<CAPTION>
Earning Asset Mix
---------------------------------
Money Investment
Market Securities Loans
------- ----------- -----------
<S> <C> <C> <C>
1993 6.9% 13.6% 79.5%
1992 8.6 12.1 79.3
1991 6.7 10.5 82.8
1990 3.9 10.0 86.1
1989 6.1 12.7 81.2
</TABLE>
The accompanying chart on Funding Mix illustrates that 54.3% of CoreStates'
funds were derived from consumer deposits in 1993, compared with 57.8% 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
-----------
Plotting Points for Graph
-------------------------
(Percentage of average earnings assets*)
<TABLE>
<CAPTION>
Funding Mix
-------------------------------
Other Non-
Retail Interest Interest
Deposits Bearing Bearing
--------- --------- ---------
<S> <C> <C> <C>
1993 54.3% 15.6% 30.1%
1992 57.8 13.7 28.5
1991 52.8 24.4 22.8
1990 47.3 31.2 21.5
1989 45.5 31.4 23.1
</TABLE>
* excluding short-term money market investments
31
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
REVIEW AND ANALYSIS OF EARNINGS
Operating Revenue
Although operating revenue for 1993 was significantly impacted by the
December 1992 EPS transaction and other significant items, CoreStates' operating
revenue reflected strong growth in revenues in Wholesale Banking and in fee-
based businesses. Excluding EPS related revenues in 1993 and 1992, net gains on
investment securities transactions, pre-tax gains of $11.0 million from the
Virgin Islands branch sale and $9.1 million on prepayments of long-term debt in
1993, and the $41.1 million pre-tax gain recorded on the December 1992 EPS
transaction, operating revenue increased 7.5% for 1993.
Operating revenue has three major components and, as illustrated on the
accompanying chart ("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
-----------------
Plotting Points for Graph
-------------------------
(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 $1,031.3 $ 110.1 $ 503.1 $1,644.5
1992 963.1 121.6 546.5 1,631.2
1991 988.0 134.0 541.6 1,663.6
1990 978.7 122.7 412.8 1,514.2
1989 943.5 116.6 379.3 1,439.4
</TABLE>
Net Interest Income
<TABLE>
<CAPTION>
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 $1,510.5 $1,587.4 $2,021.9 (4.8)% (21.5)%
Tax equivalent adjustment 23.5 27.6 35.6 (14.9) (22.5)
-------- -------- --------
Tax equivalent interest income 1,534.0 1,615.0 2,057.5 (5.0) (21.5)
Total interest expense 392.6 530.3 935.5 (26.0) (43.3)
-------- -------- --------
Tax equivalent net interest income $1,141.4 $1,084.7 $1,122.0 5.2 (3.3)
======== ======== ========
Interest rate spread 5.04% 4.65% 4.28%
======== ======== ========
Net interest margin 5.82% 5.61% 5.53%
======== ======== ======
</TABLE>
32
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
Net Interest Income - continued
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 $56.7 million, or 5.2% in 1993, following a decrease of $37.3 million,
or 3.3% in 1992.
The increase in net interest income in 1993 principally reflects the impact
of a $288 million increase in average interest earning assets. Also contributing
to the increase in net interest income were wider interest rate spreads, a $.5
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 105 basis points, while the
rates earned on domestic loans decreased 39 basis points.
The decrease in net interest income for 1992 was the result of reduced
domestic loan volume. On average, domestic loans decreased $1.5 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 21 basis points in 1993 to 5.82%. 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 71-74, and the
rate/volume analysis on page 78.
33
<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) $ 381.2 $349.4 $323.0 9.1% 8.2%
EPS related revenues (2) 13.2 92.5 101.6 (85.7) (9.0)
Securities gains (losses) 15.7 13.4 (17.5)
Other non-interest income 93.0(3) 91.2(4) 134.5(5) 2.0 (32.2)
------- ------ ------
Total non-interest income $ 503.1 $546.5 $541.6 (7.9) .9
======= ====== ======
- -------------------------------------------------------------------------------------------
</TABLE>
(1) Comprised of debit and credit card fees, service charges on deposit
accounts, trust income, and fees for international services.
(2) Includes EPS joint venture preferred dividends and CoreStates' share in the
net income of the EPS joint venture in 1993, and for 1992 and 1991, MAC and
POS revenues, the businesses contributed to the joint venture in December
1992.
(3) Includes pre-tax gains of $11.0 million recorded on the sale of five
Virgin Islands branches and $9.1 million on prepayments of long-term debt.
(4) Includes a $41.1 million pre-tax gain recorded on the EPS transaction.
(5) Includes an $86.6 million pre-tax gain recorded on the sale of
approximately $1 billion of credit card receivables.
While reported total non-interest income decreased $43.4 million or 7.9% in
1993, following an increase of $4.9 million, or .9% in 1992, total non-interest
income in 1993 excluding unusual and significant items increased more than 13%
over 1992. Comparability between 1993 and 1992 was affected by the following
items: the $11.0 million gain on the sale of five Virgin Islands branches in
1993; gains of $9.1 million on prepayments of long-term debt in 1993; securities
gains; and the December 1992 restructuring of CoreStates' MAC and POS consumer
electronic payment business into EPS. As a result of the EPS restructuring,
CoreStates' Statement of Income in 1993 reflects a significant decline in debit
and credit card fees and includes $13.2 million, reflecting EPS' preferred stock
dividends and CoreStates' 31% equity share in the net income of the EPS joint
venture. For analytical purposes, fees generated by the MAC and POS businesses
have been reclassified from the debit and credit card fee category in the
preceding table in 1992 and 1991. POS and MAC revenues in 1993 were recorded by
EPS. Included in other non-interest income in 1993 was $17.5 million of fees
earned by Financial Telesis, a third-party provider of lockbox processing and
data management services, which was acquired by CoreStates on December 31, 1992.
Other non-interest income in 1992 included the $41.1 million pre-tax gain
recorded on the EPS transaction. Excluding the impact of securities gains and
losses, EPS related revenues and the $86.6 million pre-tax gain recorded on the
October 1991 credit card sale, total non-interest income in 1992 increased more
than 7% over 1991.
CoreStates recorded net securities gains of $15.7 million in 1993 and $13.4
million in 1992, compared with net securities losses of $17.5 million in 1991.
Investment securities gains for 1993 included $12.8 million on sales of domestic
equity securities and $8.6 million on sales of foreign equity securities,
partially offset by $6.1 million for partial writedowns of foreign equity
securities. Investment securities gains for 1992 included $3.6 million of gains
recorded on sales of certain investments acquired with First Peoples Corporation
in September 1992, $5.3 million of gains recorded on the partial sale of a
foreign equity investment, and $1.7 million of gains recorded on sales of
certain investments in a portfolio of bank stocks. Included in 1991 securities
losses were $22.8 million of pre-tax write-downs taken against the portfolio of
bank stocks.
34
<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 9.1% in 1993,
following growth of 8.2% in 1992. Service charges on deposits continued to be
the most significant contributor to the growth, increasing $17.9 million, or
12.6%, in 1993 and $22.1 million, or 18.3% in 1992. The components of basic
banking transactional services are discussed in detail below.
. Service charges on deposit accounts, paid in fees, increased $17.9
million, or 12.6%, in 1993 and $22.1 million, or 18.3%, 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 $270.7 million, up $6.4 million, or 2.4%, from
1992. The benefit derived from deposit balances maintained by commercial
and correspondent customers decreased $12.5 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 $264.3 million, an increase of $9.7 million or 3.8% over 1991.
. Fees for international services increased $8.2 million, or 13.6%, in
1993, as compared with an increase of $13.0 million, or 27.4%, in 1992.
The high growth in revenues for 1993 was principally due to increased
volume from new branch offices opened over the past year. The prior
period increase was primarily related to product volume growth for
traditional cash management products including: funds transfer; trade
payment services; and reimbursement collection services. International
non-credit product volume growth, particularly foreign exchange fees,
continued to be responsible for high gross revenue increases in 1993 and
1992.
. Trust income increased $4.5 million, or 5.0%, in 1993 following a slight
decline of $.6 million, or .7%, 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 $1.2 million, or 2.0% in 1993,
following a decrease of $8.0 million, or 12.4%, 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 34 in 1992 and 1991. Credit card fees were up $.9 million, or 3.4%,
for 1993 following a decline of $14.1 million, or 36.2%, for 1992. The
1992 decline was mostly due to the sale of approximately 560,000 accounts
in the fourth quarter of 1991. At year-end 1993, CoreStates' credit card
portfolio included approximately 575,000 active accounts, compared to
546,000 active accounts at year-end 1992. Merchant processing services
fees in 1993 were level with 1992, following growth of $3.1 million or
21.2% in 1992.
35
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
Non-Interest Income - continued
Other operating income, including gains on trading account securities and
other gains, increased $1.8 million in 1993, following a decrease of $43.3
million in 1992. Other operating income in 1993 included pre-tax gains of $11.0
million on the Virgin Islands branch sale and $9.1 million on prepayments of
long-term debt, and $17.5 million of fees earned by Financial Telesis. Other
operating income in 1992 included the $41.1 million pre-tax gain recorded on the
EPS transaction, while 1991 included the $86.6 million pre-tax gain recorded on
the sale of credit cards. 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.
<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 $ 535.9 $ 537.8 $ 522.8 (.4)% 2.9%
Net occupancy expense 99.5 96.8 104.7 2.8 (7.5)
Equipment expense 63.5 72.0 72.9 (11.8) (1.2)
Other operating expenses 334.5 388.0 395.7 (13.8) (1.9)
-------- -------- --------
Total non-financial
expenses $1,033.4 $1,094.6 $1,096.1 (5.6) (.1)
======== ======== ========
</TABLE>
While reported total non-financial expenses in 1993 of $1,033.4 million
reflected a decrease of 5.6% from 1992, excluding significant and unusual items
as noted below for both years, non-financial expenses for 1993 increased less
than 6% over 1992. Expenses incurred by Financial Telesis in 1993 accounted for
one-third, or 2%, of the increase over 1992. Comparability of 1993 and 1992
total non-financial expenses is affected by certain significant expenses
recorded in each year. In 1993, total non-financial expenses included: a $10.0
million restructuring charge related to the formation of Transys; and $12.1
million for write-downs against other real estate owned. In 1992, total non-
financial expenses included: $16.2 million for systems enhancements and
operations consolidations; $21.3 million for write-downs against other real
estate owned $7.4 million of expenses associated with personnel related
initiatives; and $4.5 million for streamlining business operations.
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: $29.3
million of write-offs against other real estate owned; and $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. Excluding these items for both years, non-financial
expenses for 1992 were approximately level with 1991.
36
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
Non-Financial Expenses: continued
Salaries, wages and benefits decreased .4% in 1993, compared to an increase
of 2.9% in 1992. The decrease in 1993 salary expense was principally
attributable to the transfer of employees in the MAC and POS businesses to EPS,
partially offset by an increase in employee related expenses of $11.7 million
due to the acquisition of Financial Telesis. The increase in 1992 was
attributable to the $9.1 million impact of adopting FAS 106 in that year, and
recording $7.4 million of expenses associated with personnel related
initiatives, including a fourth quarter stock distribution making all employees
with service of one year or longer shareholders. The number of full-time
equivalent employees at December 31, 1993, 1992 and 1991 was: 13,715; 13,782;
and 13,997, respectively.
Net occupancy expense increased 2.8% in 1993, compared to a decline of 7.5%
in 1992. Equipment expenses declined 11.8% in 1993, compared to a decline of
1.2% in 1992. The decline in combined 1993 net occupancy and equipment expense
was primarily due to the formation of the EPS joint venture. The 1992 declines
were mostly due to the costs recorded in 1991 associated with streamlining
business operations and the May 1992 sale of Signal assets.
Other operating expenses declined 13.8% in 1993. Comparability of 1993 and
1992 other operating expenses is affected by the formation of EPS and certain
significant expenses recorded in each year. The decline in 1993 is principally
attributable to $45.4 million of MAC and POS expenses recorded in 1992,
partially offset by: a $10.0 million restructuring charge for Transys; $4.2
million of expenses recorded by Financial Telesis; and $12.1 million in write-
downs against other real estate owned. Other operating expenses in 1992
included: $16.2 million for systems enhancements and operations consolidations;
$21.3 million for write-downs against other real estate owned; and $4.5 million
for streamlining business operations. Excluding the impact of these items for
both years, other operating expenses increased less than 3% in 1993.
Other operating expenses in 1992 declined 1.9%. Much of the decline was
due to significant expenses recorded in 1991, including the following items:
$34.3 million in acquisition-related operating costs; $29.3 million of write-
offs against other real estate owned; and $18.5 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. Excluding the impact of these items for both years, other operating
expenses increased less than 1% over 1991.
Provision for Income Taxes
The provision for income taxes was $159.7 million in 1993 compared to
$127.3 million in 1992 and $113.6 million in 1991. The $32.4 million increase in
total tax expense for 1993 was primarily the result of a $97.9 million increase
in pre-tax income and higher income at subsidiaries subject to state income tax.
The provision for income taxes for 1993, 1992 and 1991 were at effective rates
of 32.7%, 32.7% and 33.3%, respectively. The impacts of 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 CoreStates'
net deferred tax asset, reflecting the increased Federal tax rate and a higher
dividends received deduction.
37
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S REPORT ON INTERNAL CONTROLS OVER
FINANCIAL REPORTING
Financial Statements
CoreStates Financial Corp is responsible for the preparation, integrity,
and fair presentation of its published financial statements as of December 31,
1993, and the year then ended. The consolidated financial statements of
CoreStates Financial Corp have been prepared in accordance with generally
accepted accounting principles and, as such, include some amounts that are based
on judgements and estimates of management.
Internal Controls over Financial Reporting
Management is responsible for establishing and maintaining an effective
internal control structure over financial reporting. The system contains
monitoring mechanisms, and actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any system of
internal control, including the possibility of human error and the circumvention
or overriding of controls. Accordingly, even an effective internal control
system can provide only reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions, the effectiveness of an
internal control system may vary over time.
Management assessed CoreStates Financial Corp's internal control structure
over financial reporting as of December 31, 1993. This assessment was based on
criteria for effective internal control over financial reporting described in
"Internal Control-Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes that CoreStates Financial Corp maintained an effective internal control
structure over financial reporting as of December 31, 1993.
/s/ David C. Carney
Chief Financial Officer
/s/ Terrence A. Larsen
Chairman and Chief Executive Officer
38
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
INDEPENDENT ACCOUNTANT'S REPORT
The Board of Directors and Shareholders
CoreStates Financial Corp
We have examined management's assertion that CoreStates Financial Corp
maintained an effective internal control structure over financial reporting as
of December 31, 1993 included in the accompanying Management's Report on
Internal Controls over Financial Reporting, insofar as management's assertion
relates to the internal control structure over the annual financial reporting in
the 1993 consolidated financial statements of CoreStates Financial Corp.
Over examination was made in accordance with standards established by the
American Institute of Certified Public Accountants and, accordingly, included
obtaining an understanding of the internal control structure over financial
reporting, testing, and evaluating the design and operating effectiveness of the
internal control structure, and such other procedures as we considered necessary
in the circumstances. We believe that our examination provides a reasonable
basis for our opinion.
Because of inherent limitations in any internal control structure, errors
or irregularities may occur and not be detected. Also, projections of any
evaluation of the internal control structure over financial reporting to future
periods are subject to the risk that the internal control structure may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assertion that CoreStates Financial Corp
maintained an effective internal control structure over financial reporting as
of December 31, 1993, insofar as management's assertion relates to the internal
control structure over the annual financial reporting in the 1993 consolidated
financial statements of CoreStates Financial Corp, is fairly stated, in all
material respects, based upon the criteria established in "Internal Control -
Integrated Framework" issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
/s/Ernst & Young
Philadelphia, Pennsylvania
March 15, 1994
39
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
CoreStates Financial Corp
We have audited the accompanying consolidated balance sheets of CoreStates
Financial Corp as of December 31, 1993 and 1992, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1993. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We 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 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
its operations and its cash flows for each of the three years in the period
ended December 31, 1993, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, in 1993 the Company
changed its methods of accounting for certain investments in debt and equity
securities and for postemployment benefits, and in 1992 the Company changed its
method of accounting for income taxes and for postretirement benefits other than
pensions.
/s/Ernst & Young
Philadelphia, Pennsylvania
February 1, 1994
40
<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........... $1,283,310 $1,320,409 $1,718,041
Tax exempt income........ 25,431 31,755 41,198
Interest on investment
securities:
Taxable income........... 138,033 146,731 148,166
Tax exempt income........ 18,208 21,982 27,983
Interest on time deposits
in banks.................. 43,049 55,635 73,132
Interest on Federal funds
sold, securities purchased
under agreements to
resell and other........ 2,480 10,848 13,337
---------- ---------- ----------
Total interest
income.......... 1,510,511 1,587,360 2,021,857
---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits:
Domestic savings......... 95,048 158,571 244,373
Domestic time (Note 9)... 153,301 215,956 368,095
Overseas branches and
subsidiaries............ 18,248 28,319 76,929
---------- ---------- ----------
Total interest
on deposits..... 266,597 402,846 689,397
Interest on short-term
funds borrowed (Note 10).. 64,441 56,709 164,009
Interest on long-term debt
(Note 11)................. 61,572 70,759 82,058
---------- ---------- ----------
Total interest
expense......... 392,610 530,314 935,464
---------- ---------- ----------
Net interest
income.......... 1,117,901 1,057,046 1,086,393
Provision for losses on
loans (Note 7)............ 100,000 119,300 190,601
---------- ---------- ----------
Net interest
income after
provision for
losses on
loans........ 1,017,901 937,746 895,792
---------- ---------- ----------
NON-INTEREST INCOME
Service charges on deposit
accounts.................. 160,578 142,672 120,602
Trust income............... 94,294 89,833 90,482
Fees for international
services.................. 68,447 60,247 47,275
Debit and credit card fees. 57,835 149,154 166,231
Income from investment in
EPS, Inc. (Note 20)....... 13,159
Gains on trading account
securities................ 2,254 1,836 2,613
Securities gains (losses)
(Note 5).................. 15,699 13,407 (17,546)
Other gains (Notes 6 and
20)....................... 11,000 41,072 86,609
Other operating income..... 79,789 48,288 45,380
---------- ---------- ----------
Total
non-interest
income.......... 503,055 546,509 541,646
---------- ---------- ----------
NON-FINANCIAL EXPENSES
Salaries, wages and
benefits (Notes 12 and 13) 535,939 537,755 522,828
Net occupancy (Notes 8 and
14)....................... 99,511 96,751 104,667
Equipment expenses (Note 8) 63,491 72,042 72,915
Other operating expenses
(Note 16)................. 334,434 388,043 395,709
---------- ---------- ----------
Total
non-financial
expenses........ 1,033,375 1,094,591 1,096,119
---------- ---------- ----------
INCOME BEFORE INCOME TAXES. 487,581 389,664 341,319
Provision for income taxes
(Note 16)................. 159,654 127,260 113,573
---------- ---------- ----------
INCOME BEFORE CUMULATIVE
EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE.... 327,927 262,404 227,746
Cumulative effect of a
change in accounting
principle, net of
income tax benefits of
$7,005 in
1993 and $41,720 in
1992 (Note 12)......... (13,010) (80,986)
---------- ---------- ----------
NET INCOME................. $ 314,917 $ 181,418 $ 227,746
========== ========== ==========
PER COMMON SHARE DATA
(Based on weighted average
shares outstanding of
117.319 million in 1993,
115.600 million in 1992
and 113.624 million in
1991)
Income before cumulative
effect of a change in
accounting principle.... $2.80 $2.27 $2.00
========== ========== ==========
Net Income................. $2.69 $1.57 $2.00
========== ========== ==========
Cash dividends declared.... $1.14 $1.02 $0.97
========== ========== ==========
</TABLE>
See accompanying notes to the financial statements.
41
<PAGE>
CoreStates Financial Corp and Subsidiaries
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
(in thousands)
December 31,
-------------------------
1993 1992
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks (Note 4)........................ $ 2,362,630 $ 2,302,137
Time deposits, principally Eurodollars.................. 1,273,373 1,766,727
Investment securities (market value:
1993-$2,760,608;
1992-$2,700,897) (Note 5)............................. 2,731,771 2,610,191
Total loans, net of unearned discounts of
$117,293 in 1993 and $161,070 in 1992 (Note 6)........ 16,362,785 15,469,571
Less: Allowance for loan losses (Note 7).............. (347,547) (322,483)
----------- -----------
Net loans..................................... 16,015,238 15,147,088
Federal funds sold and securities purchased under
agreements to resell.................................. 3,027 105,490
Trading account securities.............................. 6,393 2,796
Due from customers on acceptances....................... 331,411 632,564
Premises and equipment (Note 8)......................... 353,584 343,140
Other assets (Note 20).................................. 588,134 788,965
----------- -----------
Total assets.................................. $23,665,561 $23,699,098
=========== ===========
LIABILITIES
Deposits:
Domestic:
Non-interest bearing................................ $ 6,008,016 $ 5,820,098
Interest bearing (Note 9)........................... 10,148,185 10,675,906
Overseas branches and subsidiaries (Note 9)........... 796,902 766,119
----------- -----------
Total deposits................................ 16,953,103 17,262,123
Short-term funds borrowed (Note 10)..................... 1,836,409 1,778,042
Bank acceptances outstanding............................ 336,357 635,132
Other liabilities (Note 12)............................. 1,125,175 1,066,956
Long-term debt (Note 11)................................ 1,455,036 1,253,359
----------- -----------
Total liabilities............................. 21,706,080 21,995,612
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 15)
SHAREHOLDERS' EQUITY (Notes 11, 13 and 19)
Common stock: $1 par value; authorized 200.0 million
shares; issued 117.9 million shares in 1993 and
117.0 million shares in 1992 (including treasury
shares of .4 million in 1993 and .2 million in 1992).. 1,959,481 1,703,486
----------- -----------
Total shareholders' equity.................... 1,959,481 1,703,486
----------- -----------
Total liabilities and shareholders'
equity....................................... $23,665,561 $23,699,098
=========== ===========
</TABLE>
See accompanying notes to the financial statements.
42
<PAGE>
CoreStates Financial Corp and Subsidiaries
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF
CHANGES IN SHAREHOLDERS'
EQUITY
(in thousands) Common Capital Retained Treasury
stock surplus earnings stock Total
------------ ------------ ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
Balances at December 31,
1990...................... $ 57,322 $510,161 $ 899,973 $(23,815) $1,443,641
Net income................. 227,746 227,746
Net change in unrealized
loss on marketable equity
securities, net of tax
(Note 5)................ 21,390 21,390
Treasury shares acquired
(73 shares)............... (3,051) (3,051)
Common stock issued under
employee benefit
plans (397 shares)....... 4 881 (3,038) 14,670 12,517
Common stock issued under
dividend reinvestment
plan (120 shares)........ 549 4,485 5,034
Foreign currency
translation adjustments... 674 674
Common dividends declared.. (109,479) (109,479)
--------- -------- ---------- --------- ----------
Balances at December 31,
1991...................... 57,326 511,591 1,037,266 (7,711) 1,598,472
Net income................. 181,418 181,418
Net change in unrealized
gain in marketable
equity securities, net
of tax (Note 5)......... 236 236
Treasury shares acquired
(30 shares)............... (1,480) (1,480)
Common stock issued under
employee benefit
plans (944 shares)....... 918 27,262 (79) 777 28,878
Common stock issued under
dividend reinvestment
plan (390 shares)........ 279 13,030 4,288 17,597
Conversion of subordinated
debt...................... (45) 245 200
Foreign currency
translation adjustments... (4,384) (4,384)
Common dividends declared.. (117,451) (117,451)
--------- -------- ---------- --------- ----------
Balances at December 31,
1992...................... 58,523 551,883 1,096,961 (3,881) 1,703,486
Net income................. 314,917 314,917
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)...... 64,845 64,845
Acquisition of Inter
Community Bancorp (Note 2) (213) 17,459 17,246
Treasury shares acquired
(1,060 shares)............ (28,734) (28,734)
Common stock issued under
employee benefit
plans (536 shares)....... 268 9,604 (1,421) 4,156 12,607
Common stock issued under
dividend reinvestment
plan (276 shares)........ 138 7,433 (101) 3,181 10,651
Foreign currency
translation adjustments... (1,758) ( 1,758)
Common dividends declared.. (133,779 (133,779)
--------- -------- ---------- --------- ----------
Balances at December 31,
1993...................... $ 117,858 $509,991 $1,339,451 $ (7,819) $1,959,481
========= ======== ========== ========= ==========
</TABLE>
See accompanying notes to the financial statements.
43
<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.................................. $ 314,917 $ 181,418 $ 227,746
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of a change in
accounting principle (Note 12)........ 13,010 80,986
Provision for losses on loans........... 100,000 119,300 190,601
Depreciation and amortization........... 60,368 80,440 99,331
Deferred income tax expense (benefit)... (17,861) 29,545 43,695
Securities (gains) losses (Note 5) (15,699) (13,407) 17,546
Other gains (Notes 6 and 20)............ (11,000) (41,072) (86,609)
Increase in due to factored clients..... 147,072 1,923 12,976
Proceeds from contribution of assets
to EPS joint venture (Note 20)........ 79,350
Decrease in interest receivable......... 862 34,907 50,373
Decrease in interest payable............ (3,282) (54,243) (50,909)
Other................................... 60,720 90,373 46,901
------------ ----------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES... 649,107 589,520 551,651
------------ ----------- ----------
INVESTING ACTIVITIES
Net (increase) decrease in loans (Note 6)... (1,207,432) 4,674 495,900
Proceeds from sales of loans (Note 6)....... 518,103 316,876 1,290,264
Loans originated or acquired-non-bank
subsidiaries.............................. (24,712,336) (16,561,468) $(11,675,599)
Principal collected on loans-non-bank
subsidiaries.............................. 24,411,312 16,364,389 11,563,639
Net (increase) decrease in time deposits,
principally Eurodollars................... 493,354 (175,463) (445,574)
Purchases of investment securities.......... (1,677,635) (1,496,900) (1,018,184)
Proceeds from sales of investment
securities (Note 5)....................... 368,259 192,911 236,018
Proceeds from maturities of investment
securities................................ 1,360,810 972,624 597,521
Net (increase) decrease in Federal funds
sold and securities purchased under
agreements to resell..................... 102,463 58,010 (9,426)
Purchases of premises and equipment......... (102,540) (41,832) (72,064)
Proceeds from sales and paydowns on other
real estate owned......................... 36,256 41,152 13,614
Other....................................... 3,878 14,445 (86,416)
------------ ----------- ------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES.............................. (405,508) (310,582) 889,693
------------ ----------- ------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits......... (309,020) 274,133 (542,513)
Long-term debt issued (Note 11)............. 886,371 297,550 626,145
Retirement of long-term debt................ (683,266) (198,130) (258,500)
Net increase (decrease) in short-term
funds borrowed............................ 58,367 (165,733) (1,571,466)
Cash dividends paid......................... (130,082) (113,335) (108,188)
Other....................................... (5,476) 44,995 14,500
------------ ----------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES.............................. (183,106) 139,480 (1,840,022)
------------ ----------- ------------
INCREASE (DECREASE) IN CASH AND DUE FROM
BANKS................................... 60,493 418,418 (398,678)
Cash and due from banks at January 1,..... 2,302,137 1,883,719 2,282,397
------------ ----------- ------------
CASH AND DUE FROM BANKS AT DECEMBER 31,..... $ 2,362,630 $ 2,302,137 $ 1,883,719
============ =========== ============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during the year for:
Interest................................... $ 395,892 $ 584,557 $ 986,408
============ =========== ============
Income taxes............................... $ 160,116 $ 117,452 $ 41,343
============ =========== ============
</TABLE>
See accompanying notes to the financial statements.
44
<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"); and
CoreStates Bank of Delaware, N.A. ("CBD"). All material intercompany
transactions have been eliminated. 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 $.11 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 $544,507 were
classified as available-for-sale at December 31, 1993 and were written up to
their aggregate fair value of $644,269. After the related tax effects,
shareholders' equity at December 31, 1993 was increased by $64,845 to reflect
the write-up of these securities to fair value.
Effective January 1, 1992, the Corporation adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions" ("FAS 106"). FAS 106 requires that employers accrue the
costs associated with providing postretirement benefits during the active
service periods of employees. As permitted under FAS 106, the Corporation
elected to immediately recognize the January 1, 1992 transitional liability of
$122,706, $80,986 after-tax or $.70 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.
45
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Continued
Investment securities
Held-to-maturity securities are carried at cost adjusted for amortization of
premiums and accretion of discounts, both computed on the interest method.
Held-to-maturity securities primarily consist of debt securities. The
Corporation has both the ability and positive intent to hold these securities
until maturity. Trading account securities are carried at market values. Gains
on trading account securities include both realized and unrealized gains and
losses on the portfolio.
Debt securities not classified as held-to-maturity or trading and marketable
equity securities are classified as available-for-sale. Available-for-sale
securities are carried at fair value, with unrealized gains and losses, net of
tax, reported as a component of shareholders' equity. The accumulated net
unrealized gain on available-for-sale securities included in retained earnings
was $64,845 at December 31, 1993.
The adjusted cost of a specific certificate sold is the basis for determining
realized securities gains and losses as included in the consolidated statement
of income in "non-interest income".
Interest and dividends on investment securities are recognized as income when
earned.
Loans
Interest on commercial loans is recognized on the daily principal amounts
outstanding. Loan fees are generally considered as adjustments of interest rate
yields and are amortized into interest income on loans over the terms of the
related loans. Interest on installment loans is principally recognized on the
interest method.
Commercial loans are placed on a non-accrual status, generally recognizing
interest as income when received, when, in the opinion of management, the
collectibility of principal or interest becomes doubtful. The deferral or non-
recognition of interest does not constitute forgiveness of the borrower's
obligation. In those cases where collection of principal is in doubt, additions
are made to the allowance for loan losses.
Allowance for loan losses
The allowance for loan losses is based on management's evaluation of the effects
on the loan portfolio of current economic and political conditions and other
pertinent indicators. Activities in foreign countries may involve special risks
not normally a part of domestic operations. Credit review personnel and senior
officers evaluate the loan portfolio by determining the net realizable value of
collateral and the financial strength of borrowers. Installment and credit card
loans are evaluated largely on the basis of delinquency data because of the
number of such loans and the relatively small size of each individual loan.
Additions to the allowance arise from the provision for loan losses charged to
operations or from the recovery of amounts previously charged off. Loan charge-
offs reduce the allowance. Loans are charged off when there has been permanent
impairment of the related carrying values.
Premises and equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. The provision for depreciation and amortization is computed,
generally, on the straight-line method at rates based on the following range of
lives: buildings - 10 to 45 years; equipment - 3 to 12 years; and leasehold
improvements - 3 to 15 years.
Retirement plans
The Corporation maintains a non-contributory defined benefit pension plan for
substantially all employees. Benefits are primarily based on the employee's
years of credited service, average annual salary and primary social security
benefit, as defined in the plan. It is the Corporation's policy to fund the
plan on a current basis to the extent deductible under existing tax regulations.
The Corporation provides certain postretirement health care and life insurance
benefits for retired employees. In order to participate in the health care
plan, an employee must retire with at least 10 years of service. The
postretirement health care plan is contributory, with retiree contributions
based on years of service. It is the Corporation's policy to fund the health
care plan on a current basis to the extent deductible under existing tax
regulations.
46
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Continued
International operations
Forward exchange contracts are valued at current rates of exchange. Gains or
losses on forward exchange contracts intended to hedge an identifiable foreign
currency commitment are deferred and included in the measurement of the related
foreign currency transaction. All other gains or losses on forward exchange
contracts are included in the consolidated statement of income.
Currency gains and losses in connection with foreign loans and deposit contract
transactions, which are included in interest income and expenses, are recognized
pro rata over the contract terms. Foreign currency translation adjustments are
recorded directly to retained earnings. The cumulative foreign currency
translation gain (loss) was $(1,623), $135 and $4,519 at December 31, 1993, 1992
and 1991, respectively.
Interest rate contracts
The Corporation uses various interest rate contracts such as, interest rate
swaps, futures, forward rate agreements, caps and floors, primarily as hedges
against specific assets, liabilities or anticipated transactions and to provide
for the needs of its customers. For contracts designated as hedges, gains or
losses are deferred and recognized as adjustments to interest income or expense
of the underlying assets or liabilities. Gains or losses resulting from early
terminations of contracts are deferred and amortized over the remaining term of
the underlying assets or liabilities. Any fees received or disbursed which
represent adjustments to the yield on interest rate contracts are capitalized
and amortized over the term of the interest rate contracts. Other contracts are
valued at market with gains or losses included in the consolidated income
statement.
Cash dividends declared per share
Cash dividends declared per share for the periods prior to the acquisition of
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.
47
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
2. ACQUISITIONS AND PROPOSED ACQUISITIONS
On December 17, 1993, the Corporation purchased Inter Community Bancorp ("Inter
Community"), a New Jersey bank holding company with $133 million in assets and
$110 million in deposits at the time of the acquisition. As a result of this
acquisition, 640 thousand shares of the Corporation's common stock was issued.
The transaction had a total value of approximately $17 million and was accounted
for under the purchase accounting method. Accordingly, the results of
operations of Inter Community have been included with the Corporation since the
date of acquisition.
In December 1993, the Corporation announced a definitive agreement to purchase
privately held Rittenhouse Financial Services, Inc. and the $35 million asset
Rittenhouse Trust Company ("Rittenhouse") in a transaction involving the
issuance of $55 million in equivalent Corporation common shares at closing. The
Corporation plans to purchase these shares in the open market.
The agreement also anticipates the issuance of up to $55 million in additional
equivalent common shares based on Rittenhouse earnings growth over a five year
period. Assuming approval by regulators, the transaction is expected to close
in the second quarter of 1994.
These acquisitions are not material to the financial position or results of
operations and accordingly, pro forma information is deemed not necessary.
In August 1993, the Corporation announced a definitive agreement to acquire
Constellation Bancorp ("Constellation"), a New Jersey bank holding company with
$2.3 billion in assets and $2.1 billion in deposits. Assuming approval by
Constellation's shareholders, the transaction is expected to close late in the
first quarter of 1994. Each of Constellation's $27.2 million shares of common
stock will be exchanged for .4137 of a share of the Corporation's common stock
resulting in the issuance of approximately 11.3 million new shares. The
transaction will be accounted for as a pooling of interests.
A summary of unaudited historical financial information for Constellation
follows:
<TABLE>
<CAPTION>
1993(a) 1992 1991
---------- -------- ---------
<S> <C> <C> <C>
Operating results (in thousands,
except per share):
Net income (loss)............................. $16,504 $(1,691) $(88,722)
Per common share.............................. .61 (.19) (10.82)
Average common shares
outstanding................................. 27,197 9,065 8,200
<CAPTION>
1993(a) 1992
------- -------
<S> <C> <C>
Balance sheet at year-end (in
millions, except per share):
Assets........................................ $ 2,281 $ 2,415
Loans......................................... 1,663 1,760
Deposits...................................... 2,092 2,251
Shareholders' equity.......................... 166 146
Book value per common share................... 6.11 5.39
- -------------------
</TABLE>
(a) See note (c) to the unaudited pro forma financial information table.
In November 1993, the Corporation announced a definitive agreement to acquire
the $2.6 billion asset Independence Bancorp, Inc. ("Independence"), a
Pennsylvania bank holding company, in a transaction expected to be accounted for
as a pooling of interests. Assuming approval by regulators and by
Independence's shareholders, the transaction is expected to close in the second
quarter of 1994. For each Independence common share outstanding, a maximum of
1.5 shares of the Corporation's common stock will be issued assuming that the
average price per Corporation share over a pre-closing pricing period is less
than $27 per share, or a minimum of 1.45 shares of the Corporation's common
stock will be issued assuming that the average price per Corporation share is
greater than $28 per share. As a result of this transaction up to approximately
16.6 million new shares will be issued.
48
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
2. ACQUISITIONS - (continued)
A summary of unaudited historical financial information for Independence
follows:
<TABLE>
<CAPTION>
1993 1992 1991
------- --------- -------
<S> <C> <C> <C>
Operating results (in thousands,
except per share):
Net income........................ $22,879 $7,112(b) $18,956
Per common share.................. 1.98 .63 1.72
Average common shares
outstanding..................... 11,530 11,237 11,047
<CAPTION>
1993 1992
------- -------
<S> <C> <C>
Balance sheet at year-end (in
millions, except per share):
Assets............................ $ 2,603 $ 2,727
Loans............................. 1,745 1,707
Deposits.......................... 2,153 2,249
Shareholders' equity.............. 222 208
Book value per common share....... 19.26 18.43
</TABLE>
(b) Before cumulative effect of a change in accounting principle.
A summary of unaudited pro forma financial information for the Corporation,
Constellation and Independence combined follows:
<TABLE>
<CAPTION>
1993(c) 1992 1991
------------- ---------- ----------
<S> <C> <C> <C>
Operating results (in thousands,
except per share):
Net interest income............... $1,325,271 $1,252,478 $1,272,910
Non-interest income............... 574,030 610,664 615,565
Income before cumulative effect
of a change in accounting
principle....................... 240,554 268,134 180,317
Per common share.................. 1.66 1.98 1.36
Average common shares
outstanding..................... 144,925 135,628 133,021
<CAPTION>
1993(c) 1992
---------- ----------
<S> <C> <C>
Balance sheet at year-end (in
millions, except per share):
Assets............................ $ 28,380 $ 28,786
Loans............................. 19,771 18,936
Deposits.......................... 21,132 21,673
Shareholders' equity.............. 2,210 2,095
Book value per common share....... 15.26 14.58
</TABLE>
(c) At December 31, 1993, Constellation had non-performing assets, loans plus
other real estate owned ("OREO"), of $139.2 million. While Constellation has
utilized a long-term workout strategy to deal with its non-performing assets,
the Corporation's strategy is to dispose of problem assets in a more accelerated
manner. The Corporation anticipates that Constellation will conform to this
strategic direction and to the Corporation's consumer lending loan charge-off
policies in Constellation's 1993 income statement. The Corporation estimates
that conforming to this strategic direction and to the charge-off policies will
require Constellation to record an addition to its allowance for possible loan
losses of approximately $107 million and an addition to its OREO reserves of
approximately $38 million. The Corporation also anticipates that Constellation
will record pre-tax charges of at least $42 million in 1993, which include
expenses directly attributable to the acquisition, and certain other costs and
expenses. No charges have been recorded by Constellation pending receipt of
approval of the acquisition by Constellation's shareholders. Unaudited pro
forma financial information for 1993 reflect the aggregate $121.9 million after-
tax impact of these charges. The impact of these charges on shareholders'
equity is partially offset by approximately $40 million of tax benefits that
will be recorded as the cumulative effect of applying FAS 109 income tax
accounting on a combined basis. The impact of FAS 109 on 1993 pro forma net
income is a reduction of $5.1 million. Pro forma shareholders' equity at
49
<PAGE>
Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
2. ACQUISITIONS - (continued)
December 31, 1993 has also been reduced by $35.2 million, the combined after-tax
effect of 1994 additions to Independence's allowance for possible loan losses
and OREO reserves of $25.0 million and $5.0 million, respectively, for the
Corporation's planned strategic initiatives regarding Independence's problem
assets, and charges of approximately $24 million, which include expenses
directly related to the Independence acquisition.
3. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" ("FAS 107"), requires disclosure of fair value
information about financial instruments, whether or not required to be
recognized in the balance sheet, for which it is practicable to estimate that
value. FAS 107 defines a financial instrument as cash, evidence of ownership
interest in an entity, or a contractual obligation or right that will be settled
with another financial instrument.
In cases where quoted market prices are not available, fair values are based on
estimates using discounted cash flow or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Fair value estimates derived
through those techniques cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. FAS 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the
Corporation.
Fair value estimates, methods, and assumptions are set forth below for the
Corporation's financial instruments.
Cash and due from banks and short-term instruments The carrying amounts reported
- --------------------------------------------------
in the balance sheet for cash and due from banks and short-term instruments
approximate their fair values. Short-term instruments include: time deposits;
Federal funds sold; and securities purchased under agreements to resell, all of
which generally have original maturities of less than 90 days.
Investment securities Fair values for investment securities are based on quoted
- ---------------------
market prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments. See Note 5
for the carrying value and estimated fair value of investment securities.
Trading account securities Fair values for the Corporation's trading account
- --------------------------
securities, which also are the amounts recognized in the balance sheet, are
based on quoted market prices where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans Fair values are estimated for loans in groups with similar financial and
- -----
risk characteristics. Loans are segregated by type including: commercial and
industrial, commercial real estate; residential real estate; credit card and
other consumer; financial institutions; factoring receivables; and foreign.
Each loan type is further segmented into fixed and variable rate interest terms
and by performing and non-performing categories in order to estimate fair
values.
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.
50
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
3. FAIR VALUES OF FINANCIAL INSTRUMENTS: continued
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 $554,851 and $436,809 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................ $ 7,317,352 $ 7,362,715 $ 6,745,113 $ 6,784,298
Real estate loans......... 4,342,086 4,464,168 4,645,006 4,740,270
Consumer:
Installment............. 1,032,320 1,060,620 1,072,804 1,096,575
Credit card............. 1,161,046 1,261,466 939,493 1,024,502
Financial institutions.... 856,837 858,780 775,947 781,648
Factoring receivables..... 555,211 555,211 454,244 454,244
Foreign..................... 543,082 543,127 400,155 401,067
----------- ----------- ----------- -----------
Total loans, excluding
lease financing.......... 15,807,934 16,106,087 15,032,762 15,282,604
Allowance for loan losses... 347,547 322,483
----------- ----------- ----------- ----------
Net loans, excluding lease
financing............... $15,460,387 $16,106,087 $14,710,279 $15,282,604
=========== =========== =========== ===========
</TABLE>
The fair value estimate for credit card loans is based on the value of existing
loans at December 31, 1993 and 1992. This estimate does not include the benefit
that relates to estimated cash flows from new loans expected to be generated
from existing cardholders over the remaining life of the portfolio. That
benefit is estimated to be approximately $64 million at December 31, 1993 and
$62 million at December 31, 1992 and is neither included in the fair value
estimate for credit card loans, nor recorded as an intangible asset in the
consolidated balance sheet.
Deposit liabilities The fair values disclosed for demand deposits (non-interest
bearing checking accounts, NOW accounts, savings accounts, and money market
accounts) are, by FAS 107 definition, equal to the amount payable on demand at
the reporting date (i.e. their carrying amounts). The carrying amounts for
variable-rate, fixed-term certificates of deposit approximate their fair values.
Fair values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates offered on
certificates at December 31, 1993 and 1992, respectively, to an estimate of
aggregate expected maturities for those certificates of deposit.
51
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
3. FAIR VALUES OF FINANCIAL INSTRUMENTS: continued
The following table presents carrying amounts and estimated fair values of
deposits at December 31, 1993 and 1992:
<TABLE>
<CAPTION>
1993 1992
------------------------ ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Domestic:
Non-interest bearing
checking................. $ 6,008,016 $ 6,008,016 $ 5,820,098 $ 5,820,098
NOW accounts.............. 1,283,054 1,283,054 1,315,022 1,315,022
Savings accounts.......... 3,463,808 3,463,808 3,657,259 3,657,259
Money market accounts..... 2,126,736 2,126,736 1,868,359 1,868,359
Time deposits............. 3,274,587 3,425,465 3,835,266 3,990,458
----------- ----------- ----------- -----------
Total domestic
deposits........... 16,156,201 16,307,079 16,496,004 16,651,196
Overseas branches and
subsidiaries............. 796,902 796,902 766,119 766,119
----------- ----------- ----------- -----------
Total deposits...... $16,953,103 $17,103,981 $17,262,123 $17,417,315
=========== =========== =========== ===========
</TABLE>
The estimated fair values above do not include the benefit that results from the
low-cost funding provided by core deposit liabilities as compared to the cost of
borrowing funds in the financial markets. That benefit, commonly referred to as
a deposit base intangible, is estimated to be approximately $450,000 at December
31, 1993 and $400,000 at December 31, 1992 and is neither considered in the
above estimated fair value amounts nor recorded as an intangible asset in the
consolidated balance sheet. The core deposit base intangible was determined by
using a discounted cash flow approach to value the spread between the cost of
core deposit liabilities and the cost of alternative borrowing sources over the
estimated lives of the core deposit liabilities.
Short-term funds borrowed The carrying amounts of Federal funds purchased,
securities sold under agreements to repurchase, commercial paper and other
short-term borrowings approximate their fair values.
Long-term debt The fair values for long-term debt are based on quoted market
prices where available. If quoted market prices are not available, fair values
are estimated using discounted cash flow analyses based on the Corporation's
borrowing rates at December 31, 1993 and 1992 for comparable types of borrowing
arrangements. See Note 11 for additional information regarding the carrying
value and estimated fair value of long-term debt.
Off-balance sheet instruments Fair values for the Corporation's futures,
forwards, interest rate swaps, options, interest rate caps and floors, and
foreign exchange contracts are based on quoted market prices (futures); current
settlement values (forwards); quoted market prices of comparable instruments
(foreign currency exchange contracts); or, if there are no relevant comparable
instruments, on pricing models or formulas using current assumptions (interest
rate swaps, interest rate caps and floors, and options). The fair value of
commitments to extend credit other than credit card is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present credit worthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates.
The value of commitments to extend credit under credit card lines is embodied in
the benefit that relates to estimated cash flows from new loans expected to be
generated from existing cardholders over the remaining life of the portfolio.
The fair value of standby and commercial letters of credit is based on fees
currently charged for similar agreements or on the estimated cost to terminate
the agreements or otherwise settle the obligations with the counterparties. See
Note 15 for the notional value and estimated fair value of the Corporation's
off-balance sheet financial instruments.
4. CASH AND DUE FROM BANKS
The Corporation's banking subsidiaries are required to maintain reserve balances
with the Federal Reserve Bank. The average amount of those reserve balances for
the years ended December 31, 1993 and 1992 were approximately $393,000, and
$267,000, respectively.
52
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
5. INVESTMENT SECURITIES
The carrying and fair values of investment securities at December 31, 1993 and
1992 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1993
- ----
Held-to-Maturity
- ----------------
U.S. Treasury................... $ 386,675 $ 6,086 $ 168 $ 392,593
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....................... 83,277 1,193 154 84,316
Foreign........................ 21,651 2,655 4 24,302
---------- -------- ------ ----------
Total held-to-maturity........ $2,087,502 $ 32,168 $3,331 $2,116,339
========== ======== ====== ==========
Available-for-Sale
- ------------------
U.S. Treasury................... $ 433,718 $ 14,317 $ 502 $ 447,533
U.S. Government agencies........ 45,657 1,523 58 47,122
State and municipal............. 12,842 1,406 7 14,241
Other:
Domestic....................... 41,157 30,777 70 71,864
Foreign........................ 11,133 52,376 63,509
---------- -------- ------ ----------
Total available-for-sale..... $ 544,507 $100,399 $ 637 $ 644,269
========== ======== ====== ==========
1992
- ----
U.S. Treasury................... $ 750,556 $ 16,113 $2,584 $ 764,085
U.S. Government agencies........ 1,331,243 14,250 5,337 1,340,156
State and municipal............. 372,943 17,704 361 390,286
Other:
Domestic....................... 121,084 27,085 545 147,624
Foreign........................ 34,365 24,381 58,746
---------- -------- ------ ----------
Total investment securities... $2,610,191 $ 99,533 $8,827 $2,700,897
========== ======== ====== ==========
</TABLE>
At December 31, 1992, the other domestic investment securities category included
marketable equity securities of $29,708, which were carried at the aggregate of
their lower of cost or market in 1992. During 1991, the Corporation recorded
$22,783 of pre-tax losses for write-downs taken against these securities. These
write-downs reflected the amount of market value impairment in the portfolio
which management viewed to be due to other than temporary conditions. During
1992, the Corporation recorded pre-tax gains of $1,759 on sales of certain
domestic equity securities. At December 31, 1992, the market value of the
marketable equity securities portfolio exceeded its carrying value by $22,522.
As a result of the December 31, 1993 adoption of FAS 115, these marketable
equity securities are carried in the available-for-sale portfolio and have been
written up by $30,707, the aggregate of their December 31, 1993 fair values,
through an after-tax credit to retained earnings. The Corporation recorded pre-
tax gains of $12,840 on sales of certain domestic equity securities in 1993.
During 1993 and 1992, the Corporation recorded pre-tax gains of $8,617 and
$5,325 on sales of foreign equity securities.
At December 31, 1993 and 1992, there were no investments in securities of any
single, non-Federal issuer in excess of 10% of shareholders' equity.
Securities with a carrying value of $1,458,470 were pledged at December 31, 1993
to secure public deposits, trust deposits, and for certain other purposes as
required by law.
53
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
5. INVESTMENT SECURITIES - (continued)
The amortized cost and estimated fair value of debt securities at December 31,
1993, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
prepay obligations without prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---------- ----------
<S> <C> <C>
Held-to-Maturity
- ----------------
Due in one year or less................................. $ 283,881 $ 286,340
Due after one year through five years................... 413,160 426,950
Due after five year through ten years................... 95,941 97,760
Due after ten years..................................... 69,659 75,246
---------- ----------
862,641 886,296
Mortgage-backed securities.............................. 1,187,628 1,189,159
---------- ----------
$2,050,269 $2,075,455
========== ==========
Available-for-Sale
- ------------------
Due in one year or less................................. $ 54,128 $ 54,130
Due after one year through five years................... 126,232 128,063
Due after five year through ten years................... 259,293 271,809
Due after ten years..................................... 11,648 12,733
---------- ----------
451,301 466,735
Mortgage-backed securities.............................. 44,393 45,778
---------- ----------
$ 495,694 $ 512,513
========== ==========
</TABLE>
Proceeds from sales of investments in debt securities during 1993, 1992 and 1991
were $329,848, $172,959 and $231,996, respectively. Gross gains of $2,324 in
1993, $5,828 in 1992 and $5,260 in 1991, and gross losses of $65 in 1993, $89 in
1992 and $23 in 1991 were realized on those sales.
6. LOAN PORTFOLIO
For a breakdown of the loan portfolio by type of loan and for information on
non-performing loans, refer to Supplemental Financial Data under the captions
Loan Portfolio and Non-Performing Assets (pages 79 and 81).
The book value of real estate loans transferred to other real estate owned
during 1993, 1992 and 1991 was $20,011, $57,090 and $89,133 respectively. Other
real estate owned includes properties that the Corporation has acquired in
foreclosure or that has been determined to be "in substance" foreclosed.
At December 31, 1993 and 1992, the Corporation had loans totalling $126,558 and
$151,290, 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 $2,377,538 and $2,402,270, respectively.
In October 1991, the Corporation sold $1,017,989 of credit card receivables,
representing most of its out-of-region credit card portfolio. The sale resulted
in a net gain of $53,524 after $33,085 of income tax expense. The loans were
sold net of $27,486 of the allowance for loan losses and the gain also reflects
the write-off of $74,748 of intangible assets associated with the loans sold.
In May 1992, the Corporation sold the assets of Signal Financial Corp, a
consumer finance subsidiary, including approximately $300,000 of consumer
installment loans. The loans were sold net of $14,700 of the allowance for loan
losses. This transaction had an immaterial impact on the earnings of the
Corporation.
In September 1993, the Corporation sold five of its seven branches from the
Virgin Islands operations. The five branches had loans of $131,200 and deposits
of $228,800 at the time of sale. The Corporation recorded a pre-tax gain of
$11,000 on the sale. Also in 1993, the Corporation sold $207,000 of fixed-rate
home equity loans in two securitization transactions.
54
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
7. ALLOWANCE FOR LOAN LOSSES
The following represents an analysis of changes in the allowance for loan losses
for the years ended December 31, 1993, 1992 and 1991:
<TABLE>
<CAPTION>
1993 1992 1991
---------- ---------- ---------
<S> <C> <C> <C>
Balance at beginning of period............... $ 322,483 $ 348,081 $ 407,400
Allowance for loans sold at date of sale..... (353) (14,700) (27,486)
Allowance for loans of acquired bank......... 2,703
Provision charged to operating expense....... 100,000 119,300 190,601
Recoveries of loans previously charged off... 77,797 64,142 76,272
Loan charge-offs............................. (155,083) (194,340) (298,706)
--------- --------- ---------
Balance at end of period..................... $ 347,547 $ 322,483 $ 348,081
========= ========= =========
</TABLE>
8. PREMISES AND EQUIPMENT
The consolidated balance sheet includes premises and equipment, net of
accumulated depreciation and amortization of $410,629 and $429,442 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 $50,059,
$55,738 and $59,703, respectively.
9. TIME DEPOSITS
Domestic time deposits in denominations of $100 or more at December 31, 1993,
1992, and 1991 were:
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Commercial certificates of deposit............. $221,922 $504,709 $728,343
Other domestic time deposits,
principally savings certificates........... 109,515 158,887 254,112
-------- -------- --------
Total........................... $331,437 $663,596 $982,455
======== ======== ========
</TABLE>
Interest expense on domestic time deposits in denominations of $100 or more for
the years ended December 31, 1993, 1992 and 1991 was:
<TABLE>
<CAPTION>
1993 1992 1991
------ ------- -------
<S> <C> <C> <C>
Interest expense:
Commercial certificates of deposit......... $ 9,350 $21,190 $59,319
Other domestic time deposits, principally
savings certificates.................. 6,521 13,755 18,196
------ ------- -------
Total........................... $15,871 $34,945 $77,515
======= ======= =======
</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)......................... $ 624,307 $ 854,488
Securities sold under agreements to repurchase (b).. 194,781 307,712
Commercial paper (c)................................ 501,838 566,990
Other short-term funds borrowed (d)................. 515,483 48,852
---------- ----------
Total short-term funds borrowed (e)....... $1,836,409 $1,778,042
========== ==========
</TABLE>
(a) Federal funds purchased generally represent the overnight Federal funds
transactions of banking subsidiaries with correspondent banks. The weighted
average interest rate was 3.15% in 1993, 3.38% in 1992 and 5.83% in 1991. The
maximum amount outstanding at any month-end was $1,159,306 in 1993, $854,488 in
1992 and $1,385,585 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 2.75%
in 1993, 3.68% in 1992 and 5.15% in 1991. The maximum amount outstanding at any
month-end was $253,155 during 1993, $307,712 during 1992 and $568,374 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.
55
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
10. SHORT-TERM FUNDS BORROWED
At December 31, 1993, the Corporation had fee-based lines of credit facilities
from unaffiliated banks totalling $645,000. The lines of credit were
established in support of commercial paper borrowings and general corporate
purposes. Unless extended by the Corporation in accordance with the terms of the
credit agreement, all of the lines expire July 30, 1994. There were no
borrowings under these lines at December 31, 1993. The interest rate charged for
usage of these lines varies with money market conditions.
(d) Other short-term funds borrowed include term Federal funds purchased and
demand notes payable to the U.S. Treasury.
(e) The aggregate average funds borrowed were $1,865,000 in 1993, $1,544,000 in
1992 and $2,677,000 in 1991. The weighted average interest rate was 3.46% in
1993, 3.67% in 1992 and 6.13% in 1991. The average interest rate is calculated
primarily on a daily average of funds borrowed.
11. LONG-TERM DEBT
Long-term debt at December 31, 1993 and 1992 includes the following:
<TABLE>
<CAPTION>
1993 1992
------------------------ -------------------------
Carrying Fair Carrying Fair
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
---------- ---------- ---------- -----------
10,803 12,505 31,542 32,626
---------- ---------- ---------- -----------
CoreStates Capital Corp
("CSCC"):
5 7/8% Guaranteed
Subordinated
Notes due 2003 (b)....... 200,000 192,480
6 5/8% Guaranteed
Subordinated
Notes due 2005 (c)....... 175,000 172,358
9 5/8% Guaranteed
Subordinated
Notes due 2001 (d)....... 150,000 178,395 150,000 167,250
9 3/8% Guaranteed
Subordinated
Notes due 2003 (e)....... 100,000 118,830 100,000 110,820
Medium Term Notes (f)...... 808,085 812,299 531,070 538,426
8 3/8% Guaranteed Notes
due 1996 (g).............. 200,000 205,780
8 1/2% Guaranteed Notes
due 1996 (h).............. 125,000 126,138
---------- ---------- ---------- -----------
1,433,085 1,474,362 1,106,070 1,148,414
---------- ---------- ---------- -----------
Other subsidiaries:
9.35% Subordinated
Note due July 2003 (i)... 10,000 10,250 10,000 10,300
Senior debt, due September
1993 (j)................. 60,000 60,000
8 1/4% Subordinated
Capital Notes
due January 1999 (k)..... 25,086 25,274
9 7/8% Mortgages due 2003.. 16,983 19,656
Various other.............. 1,148 1,148 3,678 3,678
---------- ---------- ---------- -----------
11,148 11,398 115,747 118,908
---------- ---------- ---------- -----------
Total long-term debt (l)... $1,455,036 $1,498,265 $1,253,359 $1,299,948
========== ========== ========== ===========
</TABLE>
(a) The Debentures were retired at par plus accrued interest on the June 1,
1993 maturity date.
(b) The Notes are not subject to redemption prior to maturity and are
unconditionally guaranteed, on a subordinated basis, as to payment of
principal and interest by the Corporation. The Notes are subordinated to all
existing and future senior CSCC indebtedness and the guarantee is subordinated
to all outstanding senior Corporation indebtedness.
(c) The Notes are not subject to redemption prior to maturity and are
unconditionally guraranteed, on a subordinated basis, as to payment of principal
and interest by the Corporation. The Notes are subordinated to all existing and
future senior CSCC indebtedness and the guarantee is subordinated to all
outstanding Senior Corporation indebtedness.
56
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
11. LONG-TERM DEBT (continued)
(d) The Notes are unconditionally guaranteed, on a subordinated basis, as to
payment of principal and interest by the Corporation. The Notes are
subordinated to all existing and future senior CSCC indebtedness and the
guarantee is subordinated to all existing and future senior indebtedness of the
Corporation.
(e) The Notes are not subject to redemption prior to maturity and are
unconditionally guaranteed, on a subordinated basis, as to payment of principal
and interest by the Corporation. The Notes are subordinated to all existing and
future senior CSCC indebtedness and the guarantee is subordinated to all
existing and future senior Corporation indebtedness.
(f) CSCC can issue up to $825,000 in Medium Term Notes (Senior and
Subordinated) ranging in maturity from nine months to thirty years from date of
issue. The interest rate or interest rate formula on each Note is established
by CSCC at the time of issuance. The Senior Notes are unconditionally
guaranteed as to payment of principal and interest by the Corporation. The
Subordinated Notes are unconditionally guaranteed, on a subordinated basis, as
to payment of principal and interest by the Corporation. The Subordinated Notes
are subordinated to all existing and future senior CSCC indebtedness and the
guarantee is subordinated to all existing and future senior Corporation
indebtedness. At December 31, 1993, $808,085 of debt was outstanding at
interest rates ranging from 4.88% to 8.63% with terms up to three years.
Under existing shelf registration statements filed with the Securities and
Exchange Commission (SEC), the Corporation had debt and capital securities that
were registered but unissued of approximately $177,000 at December 31, 1993. In
February 1994, the Board of Directors approved the filing of a shelf
registration with the SEC that will (when effective) cover the issuance of a
broad range of debt and equity securities that will increase available
registered but unissued securities to $1 billion.
(g) On November 1, 1993, the Notes were redeemed at the option of CSCC at par
plus interest to the date of redemption.
(h) On April 1, 1993, the Notes were redeemed at the option of CSCC at par plus
interest to the date of redemption.
(i) The Note is redeemable at CBNA's option. During 1994, the redemption price
is 103.0% through June 30, and 102.5% from July 1 to December 31.
(j) In November 1990, CBD entered into an agreement with the Student Loan
Marketing Association (Sallie Mae) to borrow $102,000 at a sub-LIBOR rate of
interest. This borrowing matured September 15, 1993.
(k) The Subordinated Capital Notes were redeemed at par plus interest in
January 1994. Accordingly, the Notes were classified as short-term borrowings
at December 31, 1993.
(l) The consolidated aggregate maturities and sinking fund requirements for
long-term debt for the years ended December 31, 1994 through 1998 are:
$186,003; $444,412; $170,851; $11,396; and $2,042, respectively.
57
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
12. RETIREMENT AND BENEFIT PLANS
Pension expense under the Corporation's pension plans was $11,519 in 1993,
$10,091 in 1992 and $9,243 in 1991. The projected benefit obligation exceeded
plan assets at fair value by $45,552 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)............................... $447,549 $420,460
-------- --------
Present value of benefit obligation:
Accumulated benefits based on salaries to date,
including vested benefits of $350,351 in 1993
and $290,419 in 1992.................................... 384,620 318,199
Additional benefits based on estimated future salary
levels.................................................. 108,481 82,081
-------- --------
Projected benefit obligation............................... 493,101 400,280
-------- --------
Amount projected benefit obligation is (over)/under plan
assets at fair value at December 31,...................... (45,552) 20,180
Reconciliation:
Unrecognized prior service cost.......................... 6,664 7,736
Unrecognized net asset from date of initial application.. (32,739) (37,941)
Net deferred actuarial (loss)/gain....................... 40,974 (9,549)
-------- --------
Accrued pension expense included in other liabilities...... $(30,653) $(19,574)
======== ========
</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.. $ 15,316 $ 14,564 $ 12,617
Interest cost on projected benefit obligation... 32,512 30,280 27,623
Actual return on plan assets.................... (45,119) (14,445) (95,769)
Net amortization and deferral................... 8,810 (20,308) 64,772
-------- -------- --------
Net pension cost.............................. $ 11,519 $ 10,091 $ 9,243
======== ======== ========
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.0% and 8.0%, respectively, at
December 31, 1993 and 1992. The rate of increase on future compensation levels
used was 5.0% to 6.0%. The expected long-term rate of return on plan assets was
8.5% to 9.5%.
The Corporation sponsors a savings plan for its employees. Contributions to the
savings plan for the employers' match were $12,576 in 1993, $12,036 in 1992, and
$11,647 in 1991.
The Corporation and its subsidiaries provide certain postretirement health care
and life insurance benefits for retired employees. The liability for these
postretirement benefits is unfunded. Postretirement benefits are provided
through an insurance company whose premiums are based on the benefits paid
during the year. The postretirement health care plan is contributory, with
retiree contributions based on years of service.
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" ("FAS 106") was issued in December
1990 to establish the accounting for postretirement benefits. FAS 106 requires
that employers accrue the costs associated with providing postretirement
benefits during the active service periods of employees, rather than the
previously accepted accounting practice of recognizing these costs on a pay-as-
you-go basis.
Effective January 1, 1992, the Corporation adopted FAS 106. As permitted under
FAS 106, the Corporation elected to recognize immediately the transitional
postretirement benefit liability of $122,706, $80,986 after-tax or $0.70 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 $9,132.
58
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
12. RETIREMENT AND BENEFIT PLANS (continued)
The liability for postretirement benefits included in other liabilities at
December 31, 1993 and 1992 was a follows:
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees..................................... $ (96,735) $ (79,199)
Fully eligible active plan participants...... (3,278) (3,255)
Other active plan participants............... (39,312) (48,284)
--------- ---------
Accumulated postretirement benefit obligation... (139,325) (130,738)
Plan assets at fair value (a)................... 20,006
--------- ---------
Unfunded obligation at December 31,............. (119,319) (130,738)
Unrecognized net loss........................... 2,829
--------- ---------
Accrued postretirement benefit obligation....... $(116,490) $(130,738)
========= =========
</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.. $ 2,073 $ 3,061
Interest cost on accumulated postretirement
benefit obligation........................... 9,559 9,914
Actual return on plan assets.................... (6)
Net amortization and deferral................... 6
------- -------
Net periodic postretirement benefit cost........ $11,632 $12,975
======= =======
</TABLE>
The cost of providing postretirement benefits in 1991 was recognized by
expensing the annual insurance premiums, which were $3,699.
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 $10,247 and the aggregate of the service
and interest cost components of net periodic postretirement benefit cost for the
year then ended by $781.
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.
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 $0.11
per share, as the cumulative effect of a change in accounting principle. The
impact of FAS 112 on salaries, wages and benefits expense for the year ended
December 31, 1993 was not material.
13. LONG-TERM INCENTIVE PLAN
The Corporation has outstanding options granted under the Corporation's long-
term incentive plan (Plan). As provided in the Plan, a variety of incentives
can be issued to eligible participants including restricted stock awards,
incentive stock options, non-qualified stock options, stock appreciation rights,
performance units and cash awards. Information on options for 1993 follows:
59
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS: Continued
(dollar amounts in thousands)
13. LONG-TERM INCENTIVE PLAN (continued)
<TABLE>
<CAPTION>
Number of shares
----------------------------------------
Under Option price
Available option per share
----------- ---------- ---------------
<S> <C> <C> <C>
Balance at January 1, 1993.... 4,081,650 4,329,738 $6.51 - $23.19
Options granted............... (1,719,102) 1,719,102 27.50 - 28.50
Options exercised............. (686,098) 7.16 - 23.19
Options cancelled............. 68,736 (68,736) 7.16 - 27.50
---------- ---------
Balance at December 31, 1993.. 2,431,284 5,294,006 6.51 - 28.50
========== =========
</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
$56,577, $55,782 and $56,641 for 1993, 1992 and 1991, respectively.
15. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, there are outstanding commitments and
contingent liabilities which are not reflected in the financial statements.
These include various financial instruments with off-balance sheet risk used in
connection with the Corporation's asset and liability management and to provide
for the needs of customers. These involve varying degrees of credit, interest
rate and liquidity risk, but do not represent unusual risks for the Corporation
and management does not anticipate any significant losses as a result of these
transactions.
The following is a summary of significant commitments and contingent liabilities
as of December 31, 1993 and 1992, including fair values:
<TABLE>
<CAPTION>
1993 1992
--------------------------- ---------------------------
Notional Fair Notional Fair
or Value or Value
Contractual of Asset Contractual of Asset
Amount (Liability)(1) Amount (Liability)(1)
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Standby letters of credit, net of participations (a) $1,081,690 $ (2,704) $ 886,734 $ (2,217)
Commercial letters of credit.......................... 883,304 (2,208) 741,192 (1,853)
Commitments to extend credit (b)...................... 6,262,363 (10,775) 4,763,701 (7,933)
Unused commitments under credit card lines............ 2,993,233 1,976,773
Futures and forward contracts (c):
Commitments to purchase............................ 925,500 365 1,462,000 175
Commitments to purchase foreign and
U.S. currencies (d)................................ 1,336,605 1,148 1,422,640 2,538
Interest rate swaps, notional principal
amounts (e)........................................ 4,299,619 140,137 4,613,645 153,482
Interest rate caps and floors (f):
Written............................................ 622,920 (4,196) 231,577 (558)
Purchased.......................................... 571,398 4,759 204,242 386
(1) See Note 3 for discussion of fair value.
</TABLE>
60
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS: Continued
(dollar amounts in thousands)
15. COMMITMENTS AND CONTINGENT LIABILITIES - (continued)
(a) Standby letters of credit (SBLC) are used in various transactions to enhance
the credit standing of the Corporation's customers and are subjected to the same
risk, credit review and approval process as loans. SBLC's are irrevocable
assurances that the Corporation will make payment in the event that a customer
cannot perform its contractual obligations to third parties.
(b) Commitments to extend credit represent the Corporation's obligation to fund
commercial and real estate loans, including home equity lines, lines of credit,
revolving lines of credit and other types of commitments.
(c) Exchange traded futures contracts and forward rate agreements represent
agreements to exchange dollar amounts at a specified future date for interest
rate differentials between an agreed interest rate and a reference rate,
computed on a notional amount. Credit and market risk exist with respect to
these instruments. Exchange traded futures contracts entail daily cash
settlement; therefore, the credit risk amount represents a one-day receivable.
Gains and losses on these contracts are deferred and amortized over the life of
the specific asset, liability or transaction hedged.
(d) Commitments to purchase foreign and U.S. currencies are primarily executed
for the needs of customers. These foreign exchange contracts are structured
similar to interest rate futures and forward contracts. The risk associated
with a foreign exchange contract arises from the counterparty's ability to make
payment at settlement and that the value of a foreign currency might change in
relation to the U.S. dollar. The Corporation's exposure, if any, to
counterparty failure equals the current market value of the contract. At
December 31, 1993 and 1992, the market value of the Corporation's foreign
exchange contracts which has been included in income was $1,160 and $2,543,
respectively.
(e) Interest rate swaps generally represent the contractual exchange of fixed
and variable rate interest payments based on a notional principal amount and an
interest reference rate. The differential between the fixed and variable rate
is included as interest income or expense of the asset or liability transaction
hedged. Credit and market rate risk exist with respect to these instruments.
The risk associated with interest rate swaps arises from the possible failure of
the counterparty to make required payments on those contracts which are
favorable to the Corporation. The Corporation's exposure to counterparty failure
equals the current replacement cost of the contract. At December 31, 1993 and
1992, the replacement cost of the Corporation's interest rate swap contracts was
$153,624 and $163,482, respectively. The risk of counterparty failure is
controlled by limiting transactions to an approved list of counterparties.
(f) Interest rate caps and floors are written by the Corporation to enable
customers to transfer, modify or reduce their interest rate risk. Interest rate
caps and floors are similar to interest rate swaps except that payments are made
only if current interest rates move above or below a predetermined rate. The
risk associated with interest rate caps and floors is an unfavorable change in
interest rates. As a writer of interest rate caps and floors, the Corporation
receives a premium in exchange for bearing the risk of an unfavorable change in
interest rates. The Corporation generally minimizes this risk by entering into
offsetting cap and floor positions that essentially counterbalance each other.
In the normal course of business, the Corporation and its subsidiaries are
subject to numerous pending and threatened legal actions and proceedings, some
for which the relief or damages sought are substantial. Management and the
Corporation's legal counsel do not believe the outcome of these actions and
proceedings will have a materially adverse effect on the consolidated financial
position of the Corporation.
61
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
16. PROVISION FOR INCOME TAXES
The provision for income taxes in the consolidated statement of income consists
of the following:
<TABLE>
<CAPTION>
1993 1992 1991
--------- -------- --------
<S> <C> <C> <C>
Current:
Federal..................................... $149,684 $ 82,305 $ 47,445
State....................................... 17,547 11,042 17,097
-------- -------- --------
Total domestic........................ 167,231 93,347 64,542
Foreign..................................... 10,284 4,368 5,336
-------- -------- --------
Total current......................... 177,515 97,715 69,878
Deferred Federal and state expense (benefit).. (17,861) 29,545 43,695
-------- -------- --------
Total provision for income taxes...... $159,654 $127,260 $113,573
======== ======== ========
</TABLE>
The significant components of the Corporation's deferred tax assets and
liabilities at December 31, 1993 and 1992 are as follows:
<TABLE>
<CAPTION>
1993 1992
-------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses.................... $113,516 $102,534
Postretirement and postemployment benefits. 48,210 44,825
Reserves..................................... 25,757 23,215
Employee compensation........................ 11,610 11,534
Other........................................ 42,744 30,142
-------- --------
Total deferred tax assets............. 241,837 212,250
-------- --------
Deferred tax liabilities:
Auto leasing portfolio....................... 63,366 54,058
FAS 115 fair value accounting................ 34,917
Partnership investments...................... 19,660 18,299
Tax over book depreciation................... 15,184 13,476
Affiliate income............................. 14,924 21,090
Other........................................ 10,556 6,987
-------- --------
Total deferred tax liabilities......... 158,607 113,910
-------- --------
Net deferred tax assets........................ $ 83,230 $ 98,340
======== ========
</TABLE>
At December 31, 1993 cumulative deductible temporary differences are
approximately $691 million and the related deferred asset is $242 million. The
major components include $138 million related to FAS 106 and FAS 112 and $324
million related to the allowance for loan losses. Cumulative taxable temporary
differences related to deferred tax credits at December 31, 1993 are estimated
at $453 million and are primarily related to leasing, FAS 115 fair value
accounting, partnership investments and depreciation. The related deferred tax
liability is $159 million.
As required by FAS 109, the Corporation has determined that it is not required
to establish a valuation reserve for the deferred tax asset since it is more
likely than not that the deferred tax asset of $242 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 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.................... (3.0) (4.5) (7.2)
State, local and foreign income tax.. 2.5 2.2 4.2
Other, net........................... (1.8) 1.0 2.3
---- ---- ----
Effective tax rate..................... 32.7% 32.7% 33.3%
==== ==== ====
</TABLE>
62
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS: Continued
(dollar amounts in thousands)
16. PROVISION FOR INCOME TAXES: Continued
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 previously untaxed insurance subsidiary 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 $65,642, $64,421 and $58,389,
respectively.
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents summarized quarterly financial data of the Corporation,
which, in the opinion of management, reflects all adjustments (comprising only
normal recurring accruals) necessary for a fair presentation:
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------
Dec. 31 Sept. 30 June 30 March 31
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
1993
- ----
Interest income...................... $376,940 $381,628 $378,321 $373,622
======== ======== ======== ========
Interest expense..................... $ 95,602 $ 95,895 $ 98,202 $102,911
======== ======== ======== ========
Net interest income.................. $281,338 $285,733 $280,119 $270,711
======== ======== ======== ========
Provision for losses on loans........ $ 25,000 $ 25,000 $ 25,000 $ 25,000
======== ======== ======== ========
Securities gains (losses)............ $ 10,169 $ 3,318 $ (779) $ 2,991
======== ======== ======== ========
Income before cumulative effect of
a change in accounting principle.. $ 85,312 $ 86,010 $ 83,289 $ 73,316
======== ======== ======== ========
Cumulative effect of a change
in accounting principle........... $(13,010)
========
Net income........................... $ 85,312 $ 86,010 $ 83,289 $ 60,306
======== ======== ======== ========
Net income per common share.......... $.73 $.73 $.71(b) $.63(a)(b)
==== ==== ==== ====
Average common shares outstanding.... 117,269 117,530 117,403(b) 117,068(b)
======= ======= ======= =======
1992
- ----
Interest income...................... $384,585 $382,283 $402,602 $417,890
======== ======== ======== ========
Interest expense..................... $110,668 $122,273 $140,353 $157,020
======== ======== ======== ========
Net interest income.................. $273,917 $260,010 $262,249 $260,870
======== ======== ======== ========
Provision for losses on loans........ $ 27,000 $ 27,000 $ 32,150 $ 33,150
======== ======== ======== ========
Securities gains (losses)............ $ 2 $ 3,731 $ 3,241 $ 6,433
======== ======== ======== ========
Income before cumulative effect of
a change in accounting principle. $ 69,107 $ 67,895 $ 66,396 $ 59,006
======== ======== ======== ========
Cumulative effect of a change
in accounting principle............ $(80,986)
========
Net income (loss).................... $ 69,107 $ 67,895 $ 66,396 $(21,980)
======== ======== ======== ========
Net income per common share.......... $.59(b) $.59(b) $.58(b) $.51(a)(b)
==== ==== ==== ====
Average common shares outstanding.... 116,422(b) 115,884(b) 115,368(b) 114,702(b)
======= ======= ======= =======
- -------------------------------------
</TABLE>
(a) Based on an income before cumulative effect of a change in accounting
principle.
(b) Adjusted to reflect the impact of the Stock Dividend.
63
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS: Continued
(dollar amounts in thousands)
18. International Operations
International operations include the international activities of CBNA and its
six overseas branches and two Edge Act subsidiaries. The International Banking
group engages in foreign banking and international financing activities
including loans, acceptances, time deposits, letter of credit financing and
related financial services. Total assets and liabilities of the international
operations at December 31, 1993 and 1992 are as follows:
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
Assets............... $1,650,159 $1,945,992
========== ==========
Liabilities.......... $1,366,038 $1,704,665
========== ==========
</TABLE>
The following distribution between domestic and international segments involves
many judgments because of the integrated operation of the business of the
Corporation. Charges for funds used by one segment provided by another segment
are based on a pooled cost of purchased funds. Geographic distributions of
earnings are based upon average interest earning assets. Expenses are charged to
international operations as directly incurred by such activities plus allocated
charges consistent with internal allocation policies.
64
<PAGE>
CoreStates Financial Corp and Subsidiaries
Notes To The Financial Statements:
(dollar amounts in thousands)
18. International Operations: Continued
<TABLE>
<CAPTION>
International Operations
-----------------------------------------------
Domestic Europe and Latin Asia and Middle East
Operations Canada America Australia and Africa Total
----------- ---------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1993
Assets..................................... $22,015,402 $ 939,631 $173,740(a) $524,375 $12,413 $23,665,561
=========== ========== ======== ======== ======= ===========
Total operating
income (b)............................... $ 1,865,722 $ 83,226 $ 10,771 $ 53,243 $ 604 $ 2,013,566
=========== ========== ======== ======== ======= ===========
Income before
income taxes............................. $ 421,742 $ 25,530 $ 16,209 $ 23,889 $ 211 $ 487,581
=========== ========== ======== ======== ======= ===========
Income before cumulative effect of a
change in accounting principle........... $ 285,131 $ 18,938 $ 7,021 $ 16,684 $ 153 $ 327,927
=========== ========== ======== ======== ======= ===========
DECEMBER 31, 1992
Assets..................................... $21,753,106 $1,255,214 $ 86,224 $602,113 $ 2,441 $23,699,098
=========== ========== ======== ======== ======= ===========
Total operating
income (b)............................... $ 1,991,635 $ 89,038 $ 6,088 $ 46,777 $ 331 $ 2,133,869
=========== ========== ======== ======== ======= ===========
Income before
income taxes............................. $ 315,745 $ 35,725 $ 15,069 $ 22,982 $ 143 $ 389,664
=========== ========== ======== ======== ======= ===========
Income before
cumulative effect of
a change in
accounting principle..................... $ 217,839 $ 20,820 $ 9,750 $ 13,911 $ 84 $ 262,404
=========== ========== ======== ======== ======= ===========
DECEMBER 31, 1991
Assets..................................... $21,235,997 $ 970,903 $ 49,772 $437,215 $ 5,967 $22,699,854
=========== ========== ======== ======== ======= ===========
Total operating
income(b)................................ $ 2,395,820 $ 107,575 $ 10,783 $ 48,487 $ 838 $ 2,563,503
=========== ========== ======== ======== ======= ===========
Income before
income taxes............................. $ 270,330 $ 29,587 $ 27,383 $ 13,733 $ 286 $ 341,319
=========== ========== ======== ======== ======= ===========
Net income................................. $ 181,963 $ 19,101 $ 17,659 $ 8,839 $ 184 $ 227,746
=========== ========== ======== ======== ======= ===========
</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.
65
<PAGE>
CoreStates Financial Corp and Subsidiaries
Notes To The Financial Statements: Continued
(dollar amounts in thousands)
18. International Operations: Continued
<TABLE>
<CAPTION>
A maturity schedule of selected international assets and liabilities at
December 31, 1993 follows:
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.
66
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS: Continued
(dollar amounts in thousands)
19. Financial Statements of the Parent Company
<TABLE>
<CAPTION>
Statement of Income
Year Ended December 31,
------------------------------
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
REVENUES
- --------
Dividends from subsidiaries:
Banks....................................... $179,027 $135,660 $244,243
Other subsidiaries.......................... 14,476 10,527 10,653
-------- -------- --------
Total dividends from subsidiaries..... 193,503 146,187 254,896
Interest income from subsidiaries............. 1,580 672 775
Processing and management fees from
subsidiaries 123,121 119,965 276,961
Rental income from subsidiaries............... 2,059 2,059 2,409
Securities gains (losses)..................... (1,135) 219 (22,783)
Other income.................................. 25 138 364
-------- -------- --------
Total revenues........................... 319,153 269,240 512,622
-------- -------- --------
EXPENSES
- --------
Interest on:
Funds borrowed.............................. 2,747 2,311 4,376
Long-term debt..............................
1,527 4,731 17,752
Total interest expense...................... -------- -------- --------
4,274 7,042 22,128
Salaries, wages and benefits.................. 67,394 64,372 174,174
Net occupancy................................. 29,321 25,995 16,147
Equipment expenses............................ 5,982 3,697 28,214
Other operating expenses...................... 21,527 24,487 76,983
-------- -------- --------
Total expenses........................... 128,498 125,593 317,646
-------- -------- --------
Income before income tax benefit and equity in
undistributed income of subsidiaries........ 190,655 143,647 194,976
Income tax benefit............................ (1,369) (754) (20,084)
-------- -------- --------
Income before equity in undistributed income
of subsidiaries............................. 192,024 144,401 215,060
Equity in undistributed income of
subsidiaries:
Banks....................................... 74,851 16,770 (4,131)
Other subsidiaries.......................... 48,042 21,716 16,817
-------- -------- --------
122,893 38,486 12,686
-------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE........................ 314,917 182,887 227,746
Cumulative effect of a change in accounting
principle (Note 12)......................... (1,469)
-------- -------- --------
NET INCOME.................................... $314,917 $181,418 $227,746
======== ======== ========
</TABLE>
67
<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
---------- ----------
ASSETS
- ------
<S> <C> <C>
Cash.............................................. $ 8,704 $ 53,252
Investments and receivables-subsidiaries:
Investments in subsidiaries at equity
in underlying net assets:
Banks......................................... 1,701,303 1,565,753
Other subsidiaries............................ 229,003 186,865
---------- ----------
Total investments in subsidiaries........... 1,930,306 1,752,618
Other........................................... 14,271 7,209
---------- ----------
Total investments and receivables-
subsidiaries.............................. 1,944,577 1,759,827
Other investments................................. 54,070 17,572
Premises, net of accumulated depreciation......... 6,416 11,008
Other assets...................................... 2,781 2,800
---------- ----------
Total assets................................ $2,016,548 $1,844,459
========== ==========
LIABILITIES
- -----------
Funds borrowed.................................... $ 69,003
Dividends payable................................. $ 35,171 31,474
Other liabilities................................. 8,905 8,997
Long-term debt.................................... 12,991 31,499
---------- ----------
Total liabilities............................ 57,067 140,973
---------- ----------
SHAREHOLDERS' EQUITY
- --------------------
Total shareholders' equity................... 1,959,481 1,703,486
---------- ----------
Total liabilities and shareholders' equity... $2,016,548 $1,844,459
========== ==========
</TABLE>
The approval of the Comptroller of the Currency is required for a nationally
chartered bank to pay dividends if the total of all dividends declared in any
calendar year exceeds the bank's net profits (as defined) for that year combined
with its retained net profits for the preceding two calendar years. Under this
formula, CBNA , NJNB and CBD can declare dividends without approval of the
Comptroller of the Currency of approximately $151 million, $19 million and $1
million, respectively, plus an additional amount equal to CBNA's, NJNB's and
CBD's retained net profits for 1994 up to the date of any such dividend
declaration. CBD paid special dividends of $10 million in January 1992 and $25
million in September 1992. In addition, CBD paid $30 million as a return of
capital in January 1992. These payments had the prior approval of the
Comptroller of the Currency and resulted from CBD's lower capital requirements
after the October 1991 sale of credit card receivables (Note 6).
68
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS: Continued
(dollar amounts in thousands)
19. Financial Statements of the Parent Company: Continued
The Federal Reserve Act requires that extensions of credit by CBNA and NJNB to
certain affiliates, including the Corporation, be secured by readily marketable
securities, that extensions of credit to any such affiliate be limited to 10% of
capital and surplus (as defined) and that extensions of credit to all such
affiliates be limited to 20% of capital and surplus.
The Corporation has guaranteed certain borrowings of its subsidiaries in the
amount of $1,934,923, which includes $501,838 for commercial paper.
The maturities for parent company long-term debt for the years ending December
31, 1994 through 1998 are: $956; $1,041; $1,136; $1,237; and $1,349,
respectively.
<TABLE>
<CAPTION>
Statement of Cash Flows
Year Ended December 31,
---------------------------------
1993 1992 1991
--------- --------- ---------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income.............................. $ 314,927 $ 181,418 $ 227,746
Adjustments to reconcile net income to
net cash provided by operating
activities:
Undistributed income of subsidiaries.. (122,893) (38,486) (12,686)
Cumulative effect of a change in
accounting principle.................. 1,469
Securities (gains) losses.............. 1,135 (219) 22,783
Depreciation and amortization.......... 644 1,043 1,246
Deferred income tax expense (benefit).. 1,705 (1,398) (9,481)
Decrease in interest receivable........ 384
Increase (decrease) in interest payable 1,006 (101) (329)
Increase (decrease) in due to
subsidiaries.......................... (6,875) (47,695) 9,751
Other.................................. 1,194 12,575 5,796
--------- --------- ---------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 190,833 108,606 245,210
--------- --------- ---------
INVESTING ACTIVITIES
Investment in subsidiaries.............. (1,000) (9,240) (20,000)
Increase (decrease) in receivables from
subsidiaries........................... (7,060) 16,752 28,954
Purchases of investment securities...... (311,940) (113,449) (72,265)
Proceeds from sales of investment
securities............................. 275,817 168,159 31,670
Return of capital from subsidiaries..... 34,303 30,000
--------- --------- ---------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (9,880) 92,222 (31,641)
--------- --------- ---------
FINANCING ACTIVITIES
Retirement of long-term debt............ (20,940) (907) (152,651)
Net increase (decrease) in financing
from subsidiaries (69,003) (80,849) 34,843
Cash dividends paid..................... (130,082) (113,335) (108,188)
Other................................... (5,476) 44,995 14,465
--------- --------- ---------
NET CASH USED IN FINANCING
ACTIVITIES............................. (225,501) (150,096) (211,531)
INCREASE (DECREASE) IN CASH AND DUE
FROM BANKS............................. (44,548) 50,732 2,038
Cash and due from banks at January 1,... 53,252 2,520 482
--------- --------- ---------
CASH AND DUE FROM BANKS AT DECEMBER 31.. $ 8,704 $ 53,252 $ 2,520
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest............................... $ 4,632 $ 8,620 $ 22,457
========= ========= =========
Income taxes........................... - - -
========= ========= =========
</TABLE>
69
<PAGE>
CoreStates Financial Corp and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share amounts)
20. Joint Venture
On December 4, 1992, the Corporation entered into a joint venture with three
other banking companies creating Electronic Payment Services, Inc. ("EPS"). The
joint venture combines the partners' separate consumer electronic transaction
processing businesses and provides automated teller machine ("ATM") and
electronic point-of-sale ("POS") processing services.
The Corporation contributed to EPS its wholly-owned subsidiaries Money Access
Service Inc. ("MAC"), a regional ATM network, and BUYPASS Corporation, a third-
party processor of electronic POS transactions.
The Corporation has equal ownership with two partners in the joint venture, each
with 31%. The fourth partner owns 7%. As part of the transaction, the
Corporation received a cash payment of $79,350 and $245,400 of EPS 5% cumulative
redeemable preferred stock (additional dividends are tied to EPS performance).
The exchange of assets involved in the transaction resulted in a pre-tax gain to
the Corporation of $41,072, $25,670 after-tax, which was recorded in other
operating income for the year ended December 31, 1992. The exchange also
generated a deferred gain of approximately $136,000.
In December 1993, the Corporation and EPS mutually agreed to enter into a
recapitalization of EPS involving the EPS preferred stock held by the
Corporation. In exchange for substantially all of the preferred stock, the
Corporation received from EPS a ten-year 6.45% note providing for equal
principal payments over the life of the note. The recapitalization does not
affect the amount of deferred gain, but changes the timing of deferred gain
income recognition from a five-year period beginning in 1996 to a ten-year
period beginning in 1994.
EPS has announced the signing of definitive agreements providing for two
additional banking companies to enter the joint venture. The transactions are
expected to be completed in 1994. As a result of the addition of new partners,
the Corporation's share in earnings of EPS will decline from the current 31% to
an estimated 23%.
The Corporation's net investment in EPS, $69,436 at December 31, 1993, is
included in other assets.
70
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL DATA
CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND
RATES
<TABLE>
<CAPTION>
1993 1992 1991
------------------------------- ------------------------------ ------------------------------
Average Income/ Average Income/ Average Income/
balance Rate expense balance Rate expense balance Rate expense
--------- ------ ----------- --------- ------ ----------- --------- ------ -----------
(000,000) (000) (000,000) (000) (000,000) (000)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
Time deposits, principally
Eurodollars (a)................... $ 1,275 3.38% $ 43,049 $ 1,367 4.07% $ 55,635 $ 1,127 6.49% $ 73,132
Investment securities (b):
U.S. Government.................. 2,160 5.83 125,936 1,688 7.32 123,514 1,293 8.60 111,247
State and municipal.............. 363 8.62 31,305 397 9.55 37,897 430 10.38 44,633
Other............................ 149 5.90 8,796 260 7.16 18,608 401 8.65 34,680
--------- ---------- --------- ---------- --------- ----------
Total investment
securities............... 2,672 6.21 166,037 2,345 7.68 180,019 2,124 8.97 190,560
Federal funds sold................. 75 3.23 2,421 285 3.79 10,791 225 5.90 13,286
Trading account securities......... 2 4.15 83 1 7.20 72 1 5.10 51
Loans (b)(c)(d):
Domestic:
Commercial, industrial and
other......................... 6,807 8.06 548,786 6,501 8.19 532,619 7,003 9.55 668,605
Real estate.................... 4,426 7.93 350,786 4,530 8.72 394,791 4,338 9.81 425,547
Consumer....................... 2,059 12.44 256,049 2,137 12.81 273,856 3,262 14.65 478,032
Financial institutions......... 704 6.15 43,325 826 6.26 51,710 882 8.75 77,213
Factoring receivables.......... 554 9.62 53.312 486 9.70 47,154 480 10.69 51,327
Lease financing................ 498 8.62 42,907 421 9.59 40,370 416 10.17 42,303
Foreign.......................... 544 5.01 27,258 429 6.53 28,018 431 8.68 37,429
--------- ---------- --------- ---------- --------- ----------
Total loans, net of
discounts............... 15,592 8.48 1,322,423 15,330 8.93 1,368,518 16,812 10.59 1,780,456
--------- ---------- --------- ---------- --------- ----------
Total interest earning
assets (d)(e)........... $ 19,616 7.82 1,534,013 $ 19,328 8.36 1,615,035 $ 20,289 10.14 2,057,485
========= ----- ---------- ========= ----- ---------- ========= ----- ----------
FUNDING SOURCES
Interest bearing liabilities (b):
Deposits in domestic offices (f):
Commercial..................... $ 303 3.14 9,522 $ 568 3.97 22,555 $ 1,002 6.23 62,375
NOW accounts................... 1,197 .45 4,871 1,122 1.98 20,137 972 4.24 36,887
Money Market Accounts.......... 3,199 1.93 61,450 3,236 2.70 87,206 2,923 4.76 139,064
Consumer savings............... 2,279 1.26 28,727 2,001 2.56 51,228 1,514 4.52 68,422
Consumer certificates.......... 3,222 4.46 143,779 3,854 5.02 193,401 4,579 6.68 305,720
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................ 10,911 2.47 266,597 11,537 3.52 402,846 12,217 5.69 689,397
Short-term funds borrowed:
Federal funds purchased........ 1,040 3.08 32,078 889 3.41 30,336 1,200 5.57 66,841
Commercial paper............... 604 3.14 18,982 539 3.72 20,030 791 6.28 49,657
Other.......................... 221 6.05 13,381 116 5.47 6,343 686 6.93 47,511
--------- ---------- --------- ---------- --------- ----------
Total short-term funds
borrowed................ 1,865 3.46 64,441 1,544 3.67 56,709 2,677 6.13 164,009
Long-term debt (g)............... 1,333 4.62 61,572 1,211 5.93 70,759 1,075 7.76 82,058
--------- ---------- --------- ---------- --------- ----------
Total interest bearing
liabilities............. 14,109 2.78 392,610 14,292 3.71 530,314 15,969 5.86 935,464
Portion of non-interest bearing
funding sources................... 5,507 5,036 4,320
--------- ----- ---------- --------- ----- ---------- --------- ----------
Total funding sources
(e) .................... $ 19,616 2.00 392,610 $ 19,328 2.75 530,314 $ 20,289 4.61 935,464
========= ----- ---------- ========= ----- ---------- ========= ----- ----------
Net interest income and net
interest margin................... 5.82% $1,141,403 5.61% $1,084,721 5.53% $1,122,021
===== ========== ===== ========== ===== ==========
</TABLE>
71
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-Interest Earning Assets
Cash....................... $ 2,088 $ 1,854 $ 1,706
Allowance for loan losses.. (343) (340) (382)
Other assets............... 1,464 1,507 1,436
------- ------- -------
Total non-interest
earning assets....... $ 3,209 $ 3,021 $ 2,760
======= ======= =======
Non-Interest Bearing
Funding Sources
Demand deposits:
Domestic................. $ 5,096 $ 4,751 $ 4,094
Foreign.................. 369 324 308
Other liabilities.......... 1,457 1,368 1,156
Shareholders' equity....... 1,794 1,614 1,522
Non-interest bearing
funding sources used to
fund earning assets...... (5,507) (5,036) (4,320)
------- ------- -------
Total net
non-interest bearing
funding
sources........... $ 3,209 $ 3,021 $ 2,760
======= ======= =======
Supplementary Averages
Net demand deposits........ $ 4,138 $ 3,571 $ 2,914
Net Federal funds purchased $ 965 3.07% $29,657 604 3.24% $19,545 975 5.56% $54,184
Certificates of deposit in
domestic offices
over $100,000............ 286 3.27 9,350 509 4.16 21,190 915 6.48 59,319
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.
72
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL DATA
CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND
RATES
<TABLE>
<CAPTION>
1990 1989 1988
------------------------------ ----------------------------- -----------------------------
Average Income/ Average Income/ Average Income/
balance Rate expense balance Rate expense balance Rate expense
-------- ----- ---------- -------- ----- ---------- -------- ----- ----------
(000,000) (000) (000,000) (000) (000,000) (000)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
Time deposits, principally
Eurodollars (a)................... $ 659 8.41% $ 55,412 $ 999 9.17% $ 91,629 $ 1,204 7.96% $ 95,889
Investment securities (b):
U.S. Government.................. 1,145 9.05 103,673 1,522 8.80 133,861 1,342 8.09 108,513
State and municipal.............. 420 10.51 44,158 415 10.38 43,093 455 10.18 46,316
Other............................ 515 9.01 46,383 706 9.89 69,833 747 8.61 64,300
--------- ---------- --------- ---------- --------- ----------
Total investment
securities.............. 2,080 9.34 194,214 2,643 9.34 246,787 2,544 8.61 219,129
Federal funds sold................. 135 8.45 11,412 232 9.35 21,687 298 7.61 22,673
Trading account securities......... 7 8.66 606 38 8.26 3,138 58 7.04 4,083
Loans (b)(c)(d):
Domestic:
Commercial, industrial and
other......................... 7,365 10.76 792,225 7,033 11.51 809,775 6,350 10.31 654,527
Real estate.................... 4,415 10.84 478,653 4,148 11.39 472,443 3,678 10.79 396,941
Consumer....................... 3,587 14.76 529,592 3,086 14.37 443,410 2,715 13.91 377,558
Financial institutions......... 996 10.13 100,869 946 10.41 98,438 919 9.18 84,333
Factoring receivable........... 478 10.42 49,829 458 11.79 53,983 415 13.20 54,790
Lease financing................ 440 10.44 45,921 386 11.15 43,031 322 11.08 35,666
Foreign.......................... 582 9.77 56,876 874 9.23 80,670 977 9.90 96,733
--------- ---------- --------- ---------- --------- ----------
Total loans, net of
discounts............... 17,863 11.50 2,053,965 16,931 11.82 2,001,750 15,376 11.06 1,700,548
--------- ---------- --------- ---------- --------- ----------
Total interest earning
assets (d)(e)........... $ 20,744 11.16 2,315,609 $ 20,843 11.35 2,364,991 $ 19,480 10.48 2,042,322
========= ----- ---------- ========= ----- ---------- ========= ----- ----------
FUNDING SOURCES
Interest bearing liabilities (b):
Deposits in domestic offices (f):
Commercial..................... $ 1,370 8.07 109,238 $ 1,555 8.74 134,536 $ 1,364 7.24 97,207
NOW accounts................... 892 5.13 40,976 871 5.08 40,822 881 5.15 41,797
Money Market Accounts.......... 2,621 6.04 156,752 2,433 6.18 149,506 2,622 5.46 142,335
Consumer savings............... 1,366 4.99 68,052 1,339 5.02 67,002 1,431 5.01 71,424
Consumer certificates.......... 4,562 8.27 377,033 4,260 8.61 366,657 3,353 7.91 264,989
Time deposits of overseas branches
and subsidiaries............... 943 8.59 81,039 1,439 9.57 137,653 1,567 7.88 123,549
--------- ---------- --------- ---------- --------- ----------
Total interest bearing
deposits................ 11,754 7.17 833,090 11,897 7.60 896,176 11,218 6.67 741,301
Short-term funds borrowed:
Federal funds purchased........ 1,814 8.11 147,135 2,223 9.25 205,738 1,800 7.66 137,888
Commercial paper............... 1,160 8.17 94,767 880 9.21 81,069 747 7.67 57,267
Other.......................... 1,004 7.36 73,915 601 9.52 57,231 552 8.36 46,174
--------- ---------- --------- ---------- --------- ----------
Total short-term funds
borrowed................ 3,978 7.94 315,817 3,704 9.29 344,038 3,099 7.79 241,329
Long-term debt (g)................ 734 9.13 65,293 722 9.22 64,713 773 8.48 63,763
--------- ---------- --------- ---------- --------- ----------
Total interest bearing
liabilities............. 16,466 7.37 1,214,200 16,323 7.99 1,304,927 15,090 6.93 1,046,393
Portion of non-interest bearing
funding sources................... 4,278 4,520 4,390
--------- --------- ---------
Total funding
sources (e)............ $ 20,744 5.85 1,214,200 $ 20,843 6.26 1,304,927 $ 19,480 5.37 1,046,393
========= ----- ---------- ========= ----- ---------- ========= ----- ----------
Net interest income and net
interest margin................... 5.31% $1,101,409 5.09% $1,060,064 5.11% $ 995,929
===== ========== ===== ========== ===== ==========
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-Interest Earnings Assets
Cash........................................... $ 1,852 $ 1,808 $ 1,751
Allowance for loan losses...................... (299) (362) (326)
Other assets................................... 1,328 1,370 1,315
------- ------- -------
Total non-interest earning assets.... $ 2,881 $ 2,816 $ 2,740
======= ======= =======
Non-Interest Bearing Funding Sources
Demand deposits:
Domestic..................................... $ 4,172 $ 4,088 $ 4,148
Foreign...................................... 273 275 271
Other liabilities.............................. 1,171 1,312 1,244
Shareholders' equity........................... 1,543 1,661 1,467
Non-interest bearing funding sources used to
fund earning assets.......................... (4,278) (4,520) (4,390)
------- ------- -------
Total net non-interest bearing
funding sources.................... $ 2,881 $ 2,816 $ 2,740
======= ======= =======
Supplementary Averages
Net demand deposits............................ $ 2,821 $ 2,747 $ 2,839
Net Federal funds purchased.................... 1,679 8.08% $135,723 1,991 9.24% $184,051 1,502 7.67% $115,215
Certificates of deposit in domestic offices
over $100,000................................ 1,159 8.25 95,599 1,482 8.86 131,327 1,266 7.59 96,128
Average prime rate............................. 10.01 10.87 9.32
</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.
74
<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.................. $1,510,511 $1,587,360 $2,021,857 $2,272,587 $2,316,416 $1,995,247
Interest expense.......................... 392,610 530,314 935,464 1,214,200 1,304,927 1,046,479
---------- ---------- ---------- ---------- ---------- ----------
Net interest income...................... 1,117,901 1,057,046 1,086,393 1,058,387 1,011,489 948,768
Provision for losses on loans............. 100,000 119,300 190,601 327,300 306,600 122,800
---------- ---------- ---------- ---------- ---------- ----------
Net interest income after
provision for losses on loans... 1,017,901 937,746 895,792 731,087 704,889 825,968
Non-interest income....................... 503,055 546,509 541,646 412,758 379,295 344,608
Non-financial expenses.................... 1,033,375 1,094,591 1,096,119 977,061 962,581 850,822
---------- ---------- ---------- ---------- ---------- ----------
Income from continuing operations before
income taxes............................ 487,581 389,664 341,319 166,784 121,603 319,754
Provision for income taxes................ 159,654 127,260 113,573 38,128 5,653 39,677
---------- ---------- ---------- ---------- ---------- ----------
Income before cumulative effect of a
change in accounting principle.......... 327,927 262,404 227,746 128,656 115,950 280,077
Cumulative effect of a change in
accounting principle, net of tax........ (13,010) (80,986)
---------- ---------- ---------- ---------- ---------- ----------
Net income................................ 314,917 181,418 227,746 128,656 115,950 280,077
Dividends on preferred stock.............. 1,662 20,973 9,350
---------- ---------- ---------- ---------- ---------- ----------
Net income applicable to common stock..... $ 314,917 $ 181,418 $ 227,746 $ 126,994 $ 94,977 $ 270,727
========== ========== ========== ========== ========== ==========
Per common share data:
Income before cumulative effect of a
change in accounting principle....... $2.80 $2.27 $2.00 $1.11 $.83 $2.35
========== ========== ========== ========== ========== ==========
Net income............................. $2.69 $1.57 $2.00 $1.11 $.83 $2.35
========== ========== ========== ========== ========== ==========
Average common shares outstanding......... 117,319 115,600 113,624 113,956 114,850 115,034
========== ========== ========== ========== ========== ==========
</TABLE>
75
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: Continued
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks..................... $ 2,362,630 $ 2,302,137 $ 1,883,719 $ 2,282,397 $ 2,401,051 $ 2,022,745
Time deposits, principally Eurodollars...... 1,273,373 1,766,727 1,591,264 1,145,690 733,762 1,577,899
Investment securities....................... 2,731,771 2,610,191 2,264,769 2,060,390 2,422,708 2,676,378
Loans....................................... 16,362,785 15,469,571 15,781,330 17,628,657 17,573,397 15,914,011
Allowance for loan losses................... (347,547) (322,483) (348,081) (407,400) (506,545) (345,499)
Funds sold.................................. 3,027 105,490 163,500 117,823 226,076 416,891
Trading account securities.................. 6,393 2,796 1,255 3,883 18,691 3,245
Due from customers on acceptances........... 331,411 632,564 212,024 499,690 371,883 551,516
Premises, equipment and other assets........ 941,718 1,132,105 1,150,074 1,228,400 1,261,470 966,812
----------- ----------- ----------- ----------- ----------- -----------
Total assets........................ $23,665,561 $23,699,098 $22,699,854 $24,559,530 $24,502,493 $23,783,998
=========== =========== =========== =========== =========== ===========
LIABILITIES
Deposits:
Domestic:
Non-interest bearing.................... $ 6,008,016 $ 5,820,098 $ 5,235,907 $ 5,085,421 $ 5,034,754 $ 4,965,017
Interest bearing........................ 10,148,185 10,675,906 10,912,756 11,263,742 10,978,555 10,012,158
Overseas branches and subsidiaries........ 796,902 766,119 839,327 1,181,341 1,296,926 1,709,970
----------- ----------- ----------- ----------- ----------- -----------
Total deposits...................... 16,953,103 17,262,123 16,987,990 17,530,504 17,310,235 16,687,145
Short-term funds borrowed................... 1,836,409 1,778,042 1,943,775 3,478,989 3,589,608 3,374,964
Bank acceptances outstanding................ 336,357 635,132 213,613 503,049 376,213 567,097
Other liabilities........................... 1,125,175 1,066,956 801,674 816,117 955,999 868,779
Long-term debt.............................. 1,455,036 1,253,359 1,154,330 787,230 710,062 737,505
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities................... 21,706,080 21,995,612 21,101,382 23,115,889 22,942,117 22,235,490
----------- ----------- ----------- ----------- ----------- -----------
SHAREHOLDERS' EQUITY
Preferred................................... 100,000 100,000
Common...................................... 1,959,481 1,703,486 1,598,472 1,443,641 1,460,376 1,448,508
----------- ----------- ----------- ----------- ----------- -----------
Total shareholders' equity.......... 1,959,481 1,703,486 1,598,472 1,443,641 1,560,376 1,548,508
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and
shareholders' equity.............. $23,665,561 $23,699,098 $22,699,854 $24,559,530 $24,502,493 $23,783,998
=========== =========== =========== =========== =========== ===========
</TABLE>
76
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: Continued
SHAREHOLDERS' DATA
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Earnings and Dividends Per Share Applicable
to Common Shares
Income before cumulative effect of a
change in accounting principle............. $ 2.80 $ 2.27 $ 2.00 $ 1.11 $ .83 $ 2.35
Dividends paid............................... 1.11 1.00 .96 .96 .84 .75
Dividends declared........................... 1.14 1.02 .97 .96 .87 .77 1/4
Common Stock Market Bid Information
First quarter:
High....................................... $29 3/4 $25 1/8 $18 3/8 $21 5/8 $21 3/4 $20 1/8
Low........................................ 26 3/8 21 7/8 12 18 5/8 20 16 3/4
Second quarter:
High....................................... 30 1/8 27 20 3/4 22 24 1/8 20 7/8
Low........................................ 25 1/8 21 17 3/4 18 3/8 21 1/2 19
Third quarter:
High....................................... 29 3/4 26 1/4 23 1/2 20 3/4 25 20 5/8
Low........................................ 26 3/4 23 5/8 19 1/4 13 23 1/8 19 3/8
Fourth quarter:
High....................................... 29 3/4 28 7/8 24 3/8 15 7/8 23 1/2 20 1/2
Low........................................ 25 1/8 24 1/8 20 7/8 11 3/4 19 1/4 20
Year-end..................................... 26 1/8 28 1/2 24 15 5/8 21 3/8 20 1/4
Year-end bid/net income...................... 9.3x 12.6x 12.0x 14.1x 25.8x 8.6x
Book value per share at year-end............. $ 16.68 $ 14.58 $ 14.00 $ 12.74 $ 12.75 $ 12.60
<CAPTION>
OTHER SELECTED DATA
Operating Ratios:
Income from continuing operations
applicable to common stock 1993 1992 1991 1990 1989 1988
as a percent of: ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Operating income......................... 16.29% 12.30% 8.88% 4.73% 3.52% 11.58%
Average common shareholders' equity...... 18.27 16.26 14.96 8.32 6.08 20.14
Average total assets..................... 1.44 1.17 .99 .54 .40 1.22
Average total shareholders' equity as a
percent of average total assets............ 7.86 7.22 6.60 6.53 7.02 6.60
Dividends declared as a percent of
income from continuing operations.......... 40.80 44.76 48.07 78.18 72.41 22.42
Full Time Equivalent Staff at Year-End....... 13,715 13,782 13,997 14,024 14,371 14,034
Number of Locations.......................... 365 360 408 387 428 427
Number of Registered Common Shareholders..... 32,825 33,570 35,972 37,706 41,249 44,032
</TABLE>
77
<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
---------------------------------- ------------------------------------
Change attributable to Change attributable to
Income / ---------------------- Income/ ------------------------
expense Volume Rate expense Volume Rate
----------- ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets
- -----------------------
Time deposits, principally
Eurodollars.......................................... $ (12,586) $ (3,744) $ (8,842) $ (17,497) $ 15,576 $ (33,073)
Investment securities.................................. (13,982) 25,114 (39,096) (10,541) 19,824 (30,365)
Federal funds sold..................................... (8,370) (7,959) (411) (2,495) 3,540 (6,035)
Trading account securities............................. 11 72 (61) 21 21
Loans:
Domestic............................................ (45,335) 18,705 (64,040) (402,527) (207,567) (194,960)
Foreign............................................. (760) 7,510 (8,270) (9,411) (174) (9,237)
--------- -------- --------- --------- --------- ---------
Total interest income............................ (81,022) 39,698 (120,720) (442,450) (168,801) (273,649)
--------- -------- --------- --------- --------- ---------
Interest bearing funds
- ----------------------
Deposits:
Domestic............................................. (126,178) (20,709) (105,469) (237,941) (11,919) (226,022)
Overseas............................................. (10,071) (1,688) (8,383) (48,610) (29,532) (19,078)
Short-term funds borrowed:
Federal funds purchased.............................. 1,742 5,149 (3,407) (36,505) (17,323) (19,182)
Other................................................ 5,990 6,851 (861) (70,795) (54,088) (16,707)
Long-term debt......................................... (9,187) 7,235 (16,422) (11,299) 10,554 (21,853)
--------- -------- --------- --------- --------- ---------
Total interest expense........................... (137,704) (3,162) (134,542) (405,150) (102,308) (302,842)
--------- -------- --------- --------- --------- ---------
Net interest income.................................... $ 56,682 $ 42,860 $ 13,822 $ (37,300) $ (66,493) $ 29,193
- ------------------- ========= ======== ========= ========= ========= =========
</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 $60.2 million, $54.5 million and $55.7 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.
78
<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......... $ 7,317,352 $ 6,745,113 $ 6,685,263 $ 7,148,520 $ 7,228,726
----------- ----------- ----------- ----------- -----------
Real estate loans:
Construction and development........... 252,629 327,673 507,427 659,916 812,479
Residential............................ 1,709,343 1,908,355 1,743,415 1,718,820 1,501,400
Other, primarily commercial mortgages
and commercial loans secured by
owner-occupied real estate........... 2,380,114 2,408,978 2,259,973 2,158,276 1,932,591
----------- ----------- ----------- ----------- -----------
Total real estate loans............ 4,342,086 4,645,006 4,510,815 4,537,012 4,246,470
----------- ----------- ----------- ----------- -----------
Consumer loans:
Installment............................ 1,032,320 1,072,804 1,460,038 1,627,944 1,717,681
Credit card............................ 1,161,046 939,493 955,850 1,995,441 1,719,360
----------- ----------- ----------- ----------- -----------
Total consumer loans............... 2,193,366 2,012,297 2,415,888 3,623,385 3,437,041
----------- ----------- ----------- ----------- -----------
Financial institutions................... 856,837 775,947 973,138 1,017,741 1,049,422
Factoring receivables.................... 555,211 454,244 402,752 418,129 420,565
Lease financing.......................... 554,851 436,809 402,109 421,823 402,193
----------- ----------- ----------- ----------- -----------
Total domestic loans.............. 15,819,703 15,069,416 15,389,965 17,166,610 16,784,417
----------- ----------- ----------- ----------- -----------
Foreign loans:
Loans to or guaranteed by foreign
banks:
Government owned and central
banks.............................. 257 1,506 7,725 6,778
Other foreign banks.................. 332,149 203,103 130,308 154,158 184,622
----------- ----------- ----------- ----------- -----------
332,149 203,360 131,814 161,883 191,400
Commercial and industrial................ 210,573 196,795 242,098 300,164 234,171
Loans to other financial institutions.... 360 17,453 3,950
Loans to or guaranteed by foreign
governments/agencies excluding
banks.................................. 359,459
----------- ----------- ----------- ----------- -----------
Total foreign loans................ 543,082 400,155 391,365 462,047 788,980
----------- ----------- ----------- ----------- -----------
Total loans........................ $16,362,785 $15,469,571 $15,781,330 $17,628,657 $17,573,397
=========== =========== =========== =========== ===========
</TABLE>
79
<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 $185,162 in the
United Kingdom at December 31, 1993; $191,724 in France, $197,974 in Germany
and $191,368 in Korea at December 31, 1992; and $183,829 in France at December
31, 1991.
80
<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.......................... $164,266 $278,592 $365,641 $375,702 $116,728
Foreign........................... 171 3,047 8,797 29,139 217,465
-------- -------- -------- -------- --------
Total non-accrual loans...... 164,437 281,639 374,438 404,841 334,193
-------- -------- -------- -------- --------
Renegotiated loans
Domestic.......................... 36,440 25,030 27,108 6,547 8,246
-------- -------- -------- -------- --------
Total renegotiated loans..... 36,440 25,030 27,108 6,547 8,246
-------- -------- -------- -------- --------
Total non-performing loans... 200,877 306,669 401,546 411,388 342,439
-------- -------- -------- -------- --------
Other real estate owned (OREO)
Acquired through foreclosure
or exchange..................... 29,976 28,612 35,020 31,217 12,731
In-substance foreclosure.......... 15,017 47,570 48,531 8,294
Property formerly used in
banking operations.............. 6,202 3,908 2,022
-------- -------- -------- -------- --------
Total OREO................... 51,195 80,090 85,573 39,511 12,731
-------- -------- -------- -------- --------
Total non-performing assets.. $252,072 $386,759 $487,119 $450,899 $355,170
======== ======== ======== ======== ========
Non-performing assets as a
percentage of loans plus OREO... 1.54% 2.49% 3.07% 2.55% 2.02%
======== ======== ======== ======== ========
Non-performing assets as a
percentage of total assets...... 1.07% 1.63% 2.15% 1.84% 1.45%
======== ======== ======== ======== ========
</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.............................. $20,840 $26,141 $42,482
Foreign............................... 38 324 1,462
------- ------- -------
Total............................ 20,878 26,465 43,944
------- ------- -------
Interest income reflected in total
operating income:
Domestic.............................. 15,628 17,853 11,371
Foreign...............................
------- ------- -------
Total............................ 15,628 17,853 11,371
------- ------- -------
Net reduction in interest income and net
interest income.......................... $ 5,250 $ 8,612 $32,573
======= ======= =======
</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.......................... $33,510 $72,569 $72,173 $79,423 $61,131
------- ------- ------- ------- -------
Total........................... $33,510 $72,569 $72,173 $79,423 $61,131
======= ======= ======= ======= =======
</TABLE>
81
<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....................................................... $312,483 $338,081 $390,887 $219,778 $187,806
Foreign........................................................ 10,000 10,000 16,513 286,767 157,693
-------- -------- -------- -------- --------
322,483 348,081 407,400 506,545 345,499
-------- -------- -------- -------- --------
Allowance for loans purchased
at date of purchase
Domestic.................................................... 2,703 6,146 6,415
-------- -------- --------
Allowance for loans sold
at date of sale:
Domestic.................................................... (14,700) (27,486)
Foreign..................................................... (353)
-------- -------- --------
(353) (14,700) (27,486)
-------- -------- --------
Recoveries, by type of loan:
Domestic:
Commercial, industrial
and other................................................. 38,579 22,648 22,892 29,415 14,171
Real estate.................................................. 7,194 4,986 5,645 8,582 1,882
Consumer..................................................... 17,133 20,594 19,183 10,004 11,204
Financial institutions....................................... 2,246 2,776 1,966 1,607 12
Foreign........................................................ 12,645 13,138 26,586 17,110 1,618
-------- -------- -------- -------- --------
Total recoveries............................................ 77,797 64,142 76,272 66,718 28,887
-------- -------- -------- -------- --------
Charge-offs, by type of loan:
Domestic:
Commercial, industrial
and other............................................... 68,700 74,013 96,099 65,944 39,699
Real estate.................................................. 38,986 49,528 63,213 76,275 9,893
Consumer..................................................... 46,581 67,599 121,835 86,309 59,829
Financial institutions....................................... 816 3,195 14,669 5,993 3,891
Foreign........................................................ 5 2,890 264,788 67,544
-------- -------- -------- -------- --------
Total loans charged off..................................... 155,083 194,340 298,706 499,309 180,856
-------- -------- -------- -------- --------
Total net charge-offs........................................... 77,286 130,198 222,434 432,591 151,969
-------- -------- -------- -------- --------
Provision charged to operating
expense:
Domestic....................................................... 112,645 132,433 220,810 349,876 111,600
Foreign........................................................ (12,645)(a) (13,133)(a) (30,209)(a) (22,576)(a) 195,000
-------- -------- -------- -------- --------
100,000 119,300 190,601 327,300 306,600
-------- -------- -------- -------- --------
Balance at end of year:
Domestic....................................................... 337,547 312,483 338,081 390,887 219,778
Foreign........................................................ 10,000 10,000 10,000 16,513 286,767
-------- -------- -------- -------- --------
$347,547 $322,483 $348,081 $407,400 $506,545
======== ======== ======== ======== ========
Ratios:
Net charge-offs as a percentage
of average loans outstanding................................... .50% .85% 1.32% 2.42% .90%
===== ===== ===== ===== =====
Allowance for loan losses as a
percentage of year-end loans................................... 2.12% 2.08% 2.21% 2.31% 2.88%
===== ===== ===== ===== =====
</TABLE>
(a) Reflects reallocation of the foreign allowance for loan losses to the
domestic allowance for loan losses.
82
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: Continued
DISTRIBUTION OF ALLOWANCE FOR LOAN LOSSES (a)
The distribution of the allowance for loan losses and the percentage of such
distributions to each loan type at December 31, 1993, 1992, 1991 and 1990 is
illustrated in the table below (in millions):
<TABLE>
<CAPTION>
1993 1992 1991 1990
------------------- ------------------- ------------------- -------------------
% % % %
of Loan of Loan of Loan of Loan
Allowance type Allowance type Allowance type Allowance type
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loan type
- ---------
Domestic:
Commercial and industrial.. $157.0 2.0% $145.0 2.0% $180.7 2.5% $127.6 1.7%
Real estate:
Construction............. 53.0 21.0 70.7 21.6 60.2 11.9 108.2 16.4
Other.................... 34.0 .8 10.0 .2 15.0 .4 40.0 1.0
Consumer................... 78.5 3.6 68.8 3.4 72.2 3.0 105.1 2.9
Other domestic loans....... 15.0 1.1 18.0 1.5 10.0 .7 10.0 .7
Foreign...................... 10.0 1.8 10.0 2.5 10.0 2.6 16.5 3.6
------ ------ ------ ------
Total................... $347.5 2.1% $322.5 2.1% $348.1 2.2% $407.4 2.3%
====== ==== ====== ==== ====== ==== ====== ====
</TABLE>
- ------------------------------------------
(a) This distribution is made for analytical purposes. It does not represent
specific allocations of the allowance. The total allowance is available to
absorb losses from any segment of the portfolio.
CERTIFICATES OF DEPOSIT OVER $100,000 ISSUED BY DOMESTIC OFFICES
(in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1993 1992
-------------------- ------------------
Amount Percent Amount Percent
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Maturity Distribution
3 months or less.................................................. $154,129 69.5% $272,587 54.0%
3 through 6 months................................................ 30,491 13.7 92,741 18.4
6 through 12 months............................................... 13,769 6.2 66,129 13.1
Over 12 months.................................................... 23,533 10.6 73,252 14.5
-------- ----- -------- -----
$221,922 100.0% $504,709 100.0%
======== ===== ======== =====
</TABLE>
83
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: Continued
<TABLE>
<CAPTION>
INTEREST SENSITIVITY ANALYSIS AT DECEMBER 31, 1993
(in millions)
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............................... $ 9 $ 9
Time deposits....................................... 578 $ 533 $ 162 1,273
Investment securities............................... 779 280 347 $ 527 $ 434 $ 365 2,732
Interest rate swaps................................. 637 145 345 691 1,787 695 4,300
Asset financial futures............................. 296 79 195 20 15 605
------- ------- -------- ------ ------- ------- -------
Total discretionary assets..................... 2,299 1,037 1,049 1,238 2,236 1,060 8,919
Total loans(a)...................................... 11,587 893 846 1,190 1,617 230 16,363
------- ------- -------- ------ ------- ------- -------
Total earning assets........................... 13,886 1,930 1,895 2,428 3,853 1,290 25,282
------- ------- -------- ------ ------- ------- -------
FUNDING SOURCES
Federal funds purchased, repurchase
agreements and other short-term funds
borrowed......................................... 1,825 11 1,836
Domestic and foreign time deposits(b)............... 869 21 5 5 4 70 974
Long-term debt...................................... 616 19 30 122 29 639 1,455
Interest rate swaps................................. 3,761 25 33 149 332 4,300
Liability financial futures......................... 530 55 20 605
------- ------- -------- ------ ------- ------- -------
Total discretionary liabilities................ 7,601 131 88 276 365 709 9,170
------- ------- -------- ------ ------- ------- -------
Savings certificates................................ 874 610 478 364 370 301 2,997
Money market, savings and NOW accounts.............. 2,070 660 866 1,529 1,849 6,974
Net non-interest bearing funds(c)(d)................ 3,763 2,378 6,141
------- ------- -------- ------ ------- ------- -------
Total savings certificates and indefinite
maturity liabilities........................ 6,707 1,270 1,344 1,893 2,219 2,679 16,112
------- ------- -------- ------ ------- ------- -------
Total net funding sources...................... 14,308 1,401 1,432 2,169 2,584 3,388 25,282
------- ------- -------- ------ ------- ------- -------
Period gap..................................... (422) 529 463 259 1,269 (2,098) -0-
Cumulative gap................................. (422) 107 570 829 2,098 -0-
Adjustments(e)................................. 395 (619) (318) (397) (1,248) 2,187 -0-
------- ------- -------- ------ ------- ------- -------
Adjusted period gap............................ $ (27) $ (90) $ 145 $ (138) $ 21 $ 89 $ -0-
======= ======= ======== ====== ======= ======= =======
Cumulative gap................................. $ (27) $ (117) $ 28 $ (110) $ (89) $ -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.
84
<PAGE>
CoreStates Financial Corp and Subsidiaries
SUPPLEMENTAL FINANCIAL DATA: Continued
LOAN MATURITY AND INTEREST SENSITIVITY, NET OF UNEARNED DISCOUNTS
The contractual loan maturity of loans outstanding at December 31, 1993 was as
follows (in thousands):
<TABLE>
<CAPTION>
Due after one
Due in one year through Due after
year or less five years five years Total
------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
Commercial, industrial and other loans............... $5,785,160 $1,262,430 $269,762 $ 7,317,352
---------- ---------- -------- -----------
Real estate loans:
Construction and development....................... 132,193 109,422 11,014 252,629
Other, primarily permanent commercial mortgages.... 794,295 1,320,214 383,866 2,498,375
---------- ---------- -------- -----------
Total real estate loans.................... 926,488 1,429,636 394,880 2,751,004
---------- ---------- -------- -----------
Loans to financial institutions:
Domestic commercial banks and
bank holding companies........................... 20,653 2,000 22,653
Other.............................................. 754,167 76,111 3,906 834,184
---------- ---------- -------- -----------
Total loans to financial institutions...... 754,167 96,764 5,906 856,837
---------- ---------- -------- -----------
Factoring receivables................................ 555,211 555,211
---------- -----------
Lease financing...................................... 5,069 44,819 49,888
---------- ---------- -----------
Foreign loans........................................ 510,490 26,936 5,656 543,082
---------- ---------- -------- -----------
Total loans (excluding loans to
individuals)(a)......................... $8,536,585 $2,860,585 $676,204 $12,073,374
========== ========== ======== ===========
</TABLE>
(a) Loans due after one year totalling $2,546,516 have fixed interest rates.
The remaining 28% of such loans or $990,273 have floating or adjustable
rates.
85
<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........................................ $ 834,208 $ 750,556 $ 600,627
U.S. Government agencies and
corporations.................................... 1,365,644 1,331,243 979,478
State and municipal.................................. 291,618 372,943 367,475
Other................................................ 240,301 155,449 317,189
---------- ---------- ----------
$2,731,771 $2,610,191 $2,264,769
========== ========== ==========
</TABLE>
(a) Held-to-maturity and available-for-sale portfolios.
<TABLE>
<CAPTION>
Maturity Distribution and Weighted Average Yield at
December 31, 1993(a)
U.S. Government Total
Agencies and State and ---------------------
U.S. Treasury Corporations Municipal Other Amount Yield(b)
------------- --------------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
1 year or less.................................. $ 206,876 $ 186,290 $ 81,164 $ 49,812 $ 524,142 5.64%
1 year through 5 years.......................... 356,384 1,018,884 143,265 15,248 1,533,781 5.52
5 years through 10 years........................ 270,901 72,795 32,733 2,917 379,346 6.50
After 10 years.................................. 47 87,675 34,456 172,324 294,502 7.21
---------- ---------- ---------- ---------- ----------
$ 834,208 $1,365,644 $ 291,618 $ 240,301 $2,731,771 5.86
========== ========== ========== ========== ==========
</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.
86
<PAGE>
CoreStates Financial Corp and Subsidiaries
SUPPLEMENTAL FINANCIAL DATA: Continued
FOURTH QUARTER RESULTS
CoreStates recorded net income of $85.3 million or $.73 per share in the fourth
quarter of 1993, compared to $69.1 million or $.59 per share for the same period
in 1992.
The 23.7% increase in fourth quarter net income per share was principally
attributable to: a $7.4 million improvement in net interest income reflecting
strengthened loan demand and an increase in the net financial margin; a $2.0
million reduction in the provision for losses on loans, mostly due to an
improving outlook for credit quality including a 14.7% reduction in non-
performing assets during the fourth quarter; and increases in income from fee-
based services. The net financial margin for the fourth quarter of 1993 was
5.75%, compared to 5.72% for the prior year fourth quarter. Average loans
outstanding for the fourth quarter of 1993 were $15.9 billion, up 5.4% from the
prior year.
Total non-interest income for the fourth quarter of 1993 decreased $27.0 million
from the prior year fourth quarter mostly due to the late 1992 restructuring of
CoreStates' consumer electronic payment services business into Electronic
Payment Services, Inc. (EPS), a joint venture formed with three other banking
companies. Included in non-interest income for the fourth quarter of 1993 was
$2.5 million for dividends on EPS preferred stock and CoreStates' 31% equity
share in fourth quarter net income of EPS. The prior year fourth quarter
included fee income from the electronic payment services business and a pre-tax
gain of $41.1 million, $25.7 million after tax, resulting from the formation of
EPS.
Excluding the impact of securities gains and the formation of EPS, non-interest
income for the fourth quarter of 1993 grew 26% over the fourth quarter of 1992.
The improvement in income from fee-based services was mostly due to: an increase
in service charges on deposits of $4.1 million or 11.0% reflecting volume
increases and commercial and correspondent customers' decisions to pay fees for
banking services in place of maintaining deposit balances; an increase in trust
income of $5.4 million or 31.2% due to growth in assets and related fees in the
Personal Trust, Investment Services and Employee Benefit areas; and an increase
in fees for international services of $1.3 million or 8.1% principally due to
increased volume from new foreign branches opened over the past year. Also
contributing to the growth in non-interest income was the inclusion of $4.6
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-financial expenses for the fourth quarter of 1993 totaled $266.4 million, a
decrease of $37.1 million from the fourth quarter of 1992. Comparability of
fourth quarter 1993 and 1992 expenses was impacted by: the formation of the EPS
joint venture; the acquisition of Financial Telesis; and by certain significant
expenses recorded in the fourth quarter of 1992 including $16.2 million for
systems enhancements and operations consolidations, $7.4 million of expenses
associated with personnel related initiatives; and $4.5 million for streamlining
business operations. Excluding the impact of EPS, Financial Telesis and the
significant expenses in the fourth quarter of 1992, total non-financial expenses
increased less than 3% for the fourth quarter of 1993.
87
<PAGE>
CoreStates Financial Corp and Subsidiaries
SUPPLEMENTAL FINANCIAL DATA: Continued
FOURTH QUARTER RESULTS: Continued
<TABLE>
<CAPTION>
Condensed Consolidated Statement of Income
(in thousands, except per share amounts)
Three Months Ended
December 31,
------------------
1993 1992
-------- --------
<S> <C> <C>
Interest income and fees.............................. $376,940 $384,585
Interest expense...................................... 95,602 110,668
-------- --------
Net interest income............................... 281,338 273,917
Provision for losses on loans......................... 25,000 27,000
-------- --------
Net interest income after provision for losses on
loans............................................ 256,338 246,917
Non-interest income................................... 132,537 159,586(a)
Non-financial expenses................................ 266,373 303,475
-------- --------
Income before income taxes............................ 122,502 103,028
Provision for income taxes............................ 37,190 33,921
-------- --------
Net income............................................ $ 85,312 $ 69,107
======== ========
PER COMMON SHARE DATA
(Based on weighted average shares of 117.269 million
in 1993 and 116.422 million in 1992):
Net income............................................ $.73 $.59
==== ====
Cash dividends declared............................... $.30 $.27
==== ====
</TABLE>
- --------------------------------------
(a) Includes a $41.1 million pre-tax gain recorded on the formation of a joint
venture.
88
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: Continued
CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND
RATES
<TABLE>
<CAPTION>
Three Months Ended December 31, 1993 September 30, 1993
---------------------------- ----------------------------
Average Income/ Average Income/
balance Rate expense balance Rate expense
--------- ------ --------- --------- ------ ---------
(000,000) (000) (000,000) (000)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
Time deposits, principally Eurodollars (a)........ $ 1,145 3.46% $ 9,983 $ 1,158 3.22% $ 9,386
Investment securities(b):
U.S. Government................................. 2,200 5.23 29,007 2,163 5.70 31,087
State and municipal............................. 322 8.88 7,150 337 8.72 7,347
Other........................................... 143 2.99 1,078 136 5.10 1,748
------- -------- ------- --------
Total investment securities........... 2,665 5.54 37,235 2,636 6.05 40,182
Federal funds sold................................ 90 2.84 644 62 3.51 548
Trading account securities........................ 2 5.60 28 2 4.80 24
Loans (b)(c)(d):
Domestic:
Commercial, industrial and other.............. 7,049 8.05 142,967 7,005 8.12 143,408
Real estate................................... 4,213 7.51 79,726 4,482 7.87 88,878
Consumer...................................... 2,203 12.65 70,256 2,061 11.89 61,785
Financial institutions........................ 756 6.05 11,520 724 5.78 10,547
Factoring receivables......................... 614 8.55 13,233 579 10.26 14,969
Lease financing............................... 541 8.14 11,011 514 8.36 10,738
Foreign......................................... 572 4.69 6,766 505 5.03 6,400
------- -------- ------- --------
Total loans, net of discounts......... 15,948 8.35 335,479 15,870 8.42 336,725
------- -------- ------- --------
Total interest earning assets (d)..... $19,850 7.66 383,369 $19,728 7.78 386,865
======= ----- -------- ======= ----- --------
FUNDING SOURCES
Interest bearing liabilities(b):
Deposits in domestic offices (e):
Commercial.................................... $ 290 3.34 2,443 $ 268 3.14 2,121
NOW accounts.................................. 1,208 .38 1,049 1,180 .30 813
Money Market Accounts......................... 3,216 1.97 15,912 3,181 1.94 15,496
Consumer savings.............................. 2,262 1.07 6,104 2,322 1.22 7,156
Consumer certificates......................... 3,059 4.48 34,577 3,127 4.36 34,383
Time deposits of overseas branches
and subsidiaries............................... 707 2.28 4,059 672 2.62 4,442
------- -------- ------- --------
Total interest bearing deposits......... 10,742 2.39 64,144 10,750 2.40 64,411
Short-term funds borrowed:
Federal funds purchased....................... 967 3.27 7,960 983 2.89 7,156
Commercial paper.............................. 554 3.14 4,387 627 3.13 4,943
Other......................................... 310 7.70 6,016 367 3.56 3,289
------- -------- ------- --------
Total short-term funds borrowed....... 1,831 3.98 18,363 1,977 3.09 15,388
Long-term debt (f).............................. 1,400 3.71 13,095 1,386 4.61 16,096
------- -------- ------- --------
Total interest bearing liabilities.... 13,973 2.71 95,602 14,113 2.70 95,895
Portion of non-interest bearing funding
sources......................................... 5,877 5,615
------- -------- ------- --------
Total funding sources................. $19,850 1.91 95,602 $19,728 1.93 95,895
======= ----- -------- ======= ----- --------
Net interest income and net interest margin....... 5.75% $287,767 5.85% $290,970
===== ======== ===== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1992
----------------------------
Average Income/
balance Rate expense
--------- ------ ---------
(000,000) (000)
<S> <C> <C> <C>
INTEREST EARNING ASSETS
Time deposits, principally Eurodollars (a)........ $ 1,551 3.52% $ 13,713
Investment securities(b):
U.S. Government................................. 1,987 6.62 33,060
State and municipal............................. 412 9.49 9,773
Other........................................... 194 5.78 2,871
------- --------
Total investment securities........... 2,593 7.00 45,650
Federal funds sold................................ 258 3.11 2,016
Trading account securities........................ 1 6.37 26
Loans (b)(c)(d):
Domestic:
Commercial, industrial and other.............. 6,420 7.95 128,319
Real estate................................... 4,561 8.69 99,657
Consumer...................................... 1,989 12.35 61,737
Financial institutions........................ 749 6.13 11,548
Factoring receivables......................... 520 9.19 12,013
Lease financing............................... 434 9.23 10,014
Foreign......................................... 463 5.96 6,933
------- --------
Total loans, net of discounts......... 15,136 8.68 330,221
------- --------
Total interest earning assets (d)..... $19,539 7.97 391,626
======= ----- --------
FUNDING SOURCES
Interest bearing liabilities(b):
Deposits in domestic offices (e):
Commercial.................................... $ 391 3.21 3,152
NOW accounts.................................. 1,187 1.31 3,550
Money Market Accounts......................... 3,227 2.06 16,628
Consumer savings.............................. 2,196 2.11 11,621
Consumer certificates......................... 3,601 4.69 42,411
Time deposits of overseas branches
and subsidiaries............................... 731 2.71 4,986
------- --------
Total interest bearing deposits......... 11,333 2.92 82,348
Short-term funds borrowed:
Federal funds purchased....................... 816 2.95 6,050
Commercial paper.............................. 543 3.21 4,383
Other......................................... 40 11.80 1,186
------- --------
Total short-term funds borrowed....... 1,399 3.30 11,619
Long-term debt (f).............................. 1,250 5.39 16,701
------- --------
Total interest bearing liabilities.... 13,982 3.15 110,668
Portion of non-interest bearing funding
sources......................................... 5,557
------- --------
Total funding sources................. $19,539 2.25 110,668
======= ----- --------
Net interest income and net interest margin....... 5.72% $280,958
===== ========
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
NON-INTEREST EARNING ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash.............................................. $ 2,110 $ 2,054 $ 2,014
Allowance for loan losses......................... (353) (344) (330)
Other assets...................................... 1,319 1,393 1,627
------- ------- -------
Total non-interest earning assets..... $ 3,076 $ 3,103 $ 3,311
======= ======= =======
NON-INTEREST BEARING FUNDING SOURCES
Demand deposits:
Domestic........................................ $ 5,287 $ 5,066 $ 5,216
Foreign......................................... 377 385 368
Other liabilities................................. 1,423 1,429 1,602
Shareholders' equity.............................. 1,866 1,838 1,682
Non-interest bearing funding sources used to fund
earning assets.................................. (5,877) (5,615) (5,557)
------- ------- -------
Total net non-interest bearing funding
sources............................. $ 3,076 $ 3,103 $ 3,311
======= ======= =======
SUPPLEMENTARY AVERAGES
Net demand deposits............................... $ 4,198 $ 4,249 $ 4,374
Net Federal funds purchased....................... 878 3.31% $ 7,316 921 2.85% $ 6,608 558 2.88% $ 4,034
Certificates of deposit in domestic offices over
$100,000........................................ 273 3.42 2,350 245 3.41 2,107 322 3.98 3,222
Average prime rate................................ 6.00 6.00 6.00
</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) Average balances on time deposits in domestic offices are reduced by
specified reserve amounts for purposes of rate calculations.
(f) Rates on long-term debt are based on average balances excluding average
capital lease obligations.
90
<PAGE>
CoreStates Financial Corp and Subsidiaries
GRAPHICS APPENDIX LIST
<TABLE>
<CAPTION>
EDGAR Version Typeset Version
- ------------- ---------------
Narrative description of graphs from the Management's Discussion and Analysis of
Financial Condition and Results of Operations:
<S> <C>
Page 11 contains the plotting points for the The Average Common Equity to Assets graph is a 1990, 1991, 1992, and 1993
Average Common Equity to Assets Graph five year, vertical bar graph with the years 1989, listed along the x axis.
Lines numbering 0 to 8 are drawn along the y axis and represent, in percent,
the average common equity to assets ratio. There are 2 bars for each year: the
first representing the CoreStates ratio and the second representing the
Montgomery Securities Regional Bank index ratio.
Page 14 contains the plotting points for the The Wholesale Loans by Industry graph is a horizontal bar graph with 9
Wholesale Loans by Industry Graph wholesale loan industries listed down the y axis. One bar extends out from
each industry, parallel to the x axis and represents the industry's
December 31, 1993 loan outstandings as a percentage of December
31, 1993 equity. A second bar is overlayed on top of the first bar and
represents the percentage of the industry's loan outstandings that are non-
performing.
Page 22 contains the plotting points for the The Non-performing Assets to Loans Plus OREO graph is a five year, vertical
Non-performing Assets to Loans Plus OREO Graph vertical bar graph with the years 1989, 1990, 1991, 1992, and 1993 listed along
the x axis. Lines numbering 0 to 5 are drawn along the y axis and represent, in
percent, the non-performing assets to loans plus OREO ratio. There are 2 bars
for each year: the first representing the CoreStates ratio and the second
representing the Montgomery Securities Regional Bank Index ratio.
Page 25 contains the plotting points for the The Net Interest Margin graph is a five year,vertical bar gralph with the
Net Interest Margin Graph years 1989, 1990, 1991, 1992, and 1993 listed along the x axis. Lines numbering
0 to 6 are drawn along the y axis and represent, in percent, the net interest
margin ratio. There are 2 bars for each year: the first representing the
CoreStates ratio and the second representing the Montgomery Securities Regional
Bank Index ratio.
</TABLE>
<PAGE>
CoreStates Financial Corp and Subsidiaries
GRAPHICS APPENDIX LIST - (continued)
<TABLE>
<S> <C>
Page 31 contains the plotting points for the The Earning Asset Mix graph is a five year, vertical bar graph with the
Earning Asset Mix Graph years 1989, 1990, 1991, 1992, and 1993 listed along the x axis. One bar is
drawn in each year to represent 100% of average earning assets. Each bar is
divided into three sections along the y axis, representing the percentage of
average earning assets comprised of: 1) loans, 2) investment securities, and 3)
short-term money market investments.
Page 31 contains the plotting points for the The Funding Mix graph is a five year, vertical bar graph with the years 1989,
Funding Mix Graph 1990, 1991, 1992, and 1993 listed along the x axis. One bar is drawn in each
year to represent 100% of average earning assets, excluding short-term money
market investments. Each bar is divided into three sections along the y axis,
representing the percentage of: 1) equity and other non-interest bearing
sources, 2) long-term debt and other borrowed funds, and 3) Money Market,
NOW, consumer savings and certificate accounts to average earning assets.
Page 32 contains the plotting points for the The Operating Revenue graph is a five year, vertical bar graph with the years
Operating Revenue Graph 1989, 1990, 1991, 1992, and 1993 listed along the x axis. One bar is drawn in
each year to represent the total dollar amount of operating revenue (tax
equivalent net interest income plus non-interest income) recorded, in
millions. Each bar is divided into three sections along the y axis,
representing the dollar amount of operating revenue derived from: 1) loan and
investment related net interest income, 2) net interest income derived from
non-credit balances, and 3) non-interest income.
</TABLE>
<PAGE>
EXHIBIT 22
----------
List of Subsidiaries of CoreStates Financial Corp
-------------------------------------------------
as of December 31, 1993
-----------------------
<TABLE>
<S> <C> <C>
Congress Financial Corporation California 96%
Congress Credit Corporation New York 100%
Congress Financial Corporation Illinois 100%
(Central)
Congress Financial Corporation Florida 100%
(Florida)
Congress Financial Corporation Wisconsin 100%
(Midwest)
Congress Financial Corporation Massachusetts 100%
(New England)
Congress Financial Corporation Oregon 100%
(Northwest)
Congress Financial Corporation Georgia 100%
(Southern)
Congress Financial Corporation Texas 100%
(Southwest)
Congress Financial Corporation California 100%
(Western)
Congress Talcott Corporation New York 100%
Congress Talcott Corporation California 100%
(Western)
CoreStates Bank of Delaware, N.A. U.S.A. 100%
CoreStates Consumer Finance Delaware 100%
Company
Synapsys Inc. Delaware 100%
CoreStates Bank, N.A. U.S.A. 100%
Bala Development, Inc. Pennsylvania 100%
Centre Properties, Inc. Pennsylvania 100%
Clymer Realty Corporation Pennsylvania 100%
CoreStates Dealer Services Corp Pennsylvania 100%
CoreStates Investment Advisers, Pennsylvania 100%
Inc.
Fifth and Market Corporation Pennsylvania 100%
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Financial Telesis, Inc. Delaware 100%
First Penco Realty Inc. Pennsylvania 100%
First Pennsylvania Financial Delaware 100%
Services, Inc.
Philadelphia International Bank U.S.A. 100%
Philadelphia International Hong Kong 100%
Finance Co. - Hong Kong
Limited
Philadelphia National LTDA Brazil 100%/1/
Philadelphia International U.S.A. 100%
Investment Corporation
Established Holdings Limited England 100%
New World Development Bahamas 100%
Corporation Limited
Philadelphia National England 48%
Limited
Philadelphia International Delaware 100%
Equities, Inc.
Heritable Group PLC England 50.01%
Philadelphia National England 52%/2/
Limited
TI Remnaco, Inc. Canada 37.5%
Two APM Plaza, Inc. Delaware 89%
CoreStates Capital Corp Pennsylvania 100%
CoreStates Community Development Pennsylvania Board
Corporation, Inc. majority
Partnership Homes Pennsylvania 1/2 Board
membership
CoreStates Export Trading Company Pennsylvania 100%
CoreStates Holdings, Inc. Delaware 100%
</TABLE>
--------------------
/1/Except for Brazilian resident quote shares
/2/The remaining 48% is owned by New World Development
Corporation, Ltd.
<PAGE>
<TABLE>
<S> <C> <C>
Electronic Payment Services, Inc. Delaware 30.99 2/3%/3/
BUYPASS Corporation Georgia 54%
Data NOW National Delaware 100%
Services, Inc.
MONEY ACCESS SERVICE CORP Ohio 100%
Metroteller Security New York 100%
Corporation
Money Access Service Inc. Delaware 100%
NetOps Corp. Pennsylvania 100%
CoreStates Securities Corp Pennsylvania 100%
First Bank of Philadelphia Pennsylvania 24.81%
First Pennsylvania Insurance Virginia 100%
Services, Inc.
New Jersey National Corporation New Jersey 100%
New Jersey National Bank U.S.A. 100%
Badeal, Inc. New Jersey 100%
ABD Properties, Inc. Pennsylvania 100%
North Towne Village, Inc. Pennsylvania 100%
Citizens Investments Delaware 100%
of Delaware
First Peoples Investment Co. Delaware 100%
Mercer Development, Co., Inc. New Jersey 100%
Yerac Liquors New Jersey 100%
Pennamco, Inc., Delaware 100%
Pennco Life Insurance Company Arizona 100%
Princeton Life Insurance Company Pennsylvania 100%/4/
</TABLE>
----------------------
/3/The remaining interests are owned by Banc One Corporation,
PNC Financial Corp and Society Corporation.
/4/Except for directors' qualifying shares
<PAGE>
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in (a) the Registration Statement
(Form S-8, No. 33-5874), in 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 prospectus and prospectus supplement
pertaining to $1,000,000,000 in aggregate amount of Debt Securities issuable
by CoreStates Capital Corp and the related guarantees of the Corporation, and
Preferred Stock, Depository Shares, Common Stock, and Capital Securities,
issuable by the Corporation, (e) the Registration Statement (Form S-4,
No. 33-7286) and prospectus relating to shares of the Corporation Common Stock
issuable upon the exercise of stock 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, (f) the Registration Statement (Form S-4, No. 33-31896) and
prospectus relating to shares of the Corporation Common Stock issuable upon
the exercise of stock options and stock appreciation rights and outstanding
5-1/2% Convertible Subordinated Debentures, the obligations in respect to which
were assumed by the Corporation in connection with the acquisition of First
Pennsylvania Corporation, (g) the Registration Statement (Form S-4,
No. 33-48422) and prospectus relating to shares of the Corporation Common Stock
issuable upon the exercise of stock options, the obligations in respect to
which were assumed by the Corporation in connection with the acquisition of
First Peoples Corporation, (h) the Registration Statement (Form S-3,
No. 33-40717) and prospectus relating to shares of the Corporation Common Stock
issuable pursuant to the CoreStates Dividend Reinvestment and Share Purchase
Plan, and (i) the Registration Statement (Form S-4, No. 33-51429) and prospectus
relating to shares of the Corporation Common Stock issuable upon the exercise of
stock options, the obligation in respect to which were assumed by the
Corporation in connection with the acquisition of Constellation Bancorp, of our
report dated February 1, 1994, with respect to the consolidated financial
statements of CoreStates Financial Corp incorporated by reference in this Annual
Report (Form 10-K) for the year ended December 31, 1993.
/s/Ernst & Young
Philadelphia, Pennsylvania
March 28, 1994
<PAGE>
Exhibit 99.2
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT, dated November 19, 1993, between CoreStates
Financial Corp, a Pennsylvania corporation ("Grantee"), and Independence
Bancorp, Inc., a Pennsylvania corporation ("Issuer").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Grantee and Issuer have entered into an Agreement and Plan of
Merger of even date herewith (the "Merger Agreement"), which agreement has been
executed by the parties hereto prior to this Agreement; and
WHEREAS, as a condition to Grantee's entering into the Merger
Agreement and in consideration therefor, Issuer has agreed to grant Grantee the
Option (as hereinafter defined):
NOW, THEREFORE, in consideration of the foregoing and the covenants
and agreements set forth herein and in the Merger Agreement, the parties hereto
agree as follows:
1. Issuer hereby grants to Grantee an unconditional, irrevocable
option (the "Option") to purchase, subject to the terms hereof, up to 1,130,000
nonassessable shares of common stock, par value $2.50 per share ("Common
Stock"), of Issuer at a price per share equal to $33.50. Such price as adjusted
pursuant to Section 5 hereof is hereinafter referred to as the "Option Price."
The number of shares of Common Stock that may be received upon the exercise of
the Option and the Option Price are subject to adjustment as herein set forth.
2. (a) The Holder (as hereinafter defined) may exercise the Option,
in whole or part, if, but only if, both an Initial Triggering Event (as
hereinafter defined) and a Subsequent Triggering Event (as hereinafter defined)
shall have occurred prior to the occurrence of an Exercise Termination Event (as
hereinafter defined), provided that the Holder shall have sent the written
--------
notice of such exercise (as provided in subsection (e) of this Section 2) within
30 days following such Subsequent Triggering Event. Each of the following shall
be an Exercise Termination Event: (i) the Effective Time of the Merger; (ii)
termination of the Merger Agreement in accordance with the provisions thereof
if such termination occurs prior to the occurrence of an Initial Triggering
Event; or (iii) the passage of nine months after termination of the Merger
Agreement if such termination follows the occurrence of an Initial Triggering
Event (provided that if an Initial Triggering Event continues or occurs beyond
--------
such termination, the Exercise Termination Event shall be nine months from the
<PAGE>
expiration of the Last Triggering Event but in no event more than twelve months
after such termination). The "Last Triggering Event" shall mean the last
Initial Triggering Event to occur. The term "Holder" shall mean the holder or
holders of the Option. Notwithstanding the foregoing, the Option may not be
exercised if, at the time of exercise or repurchase, Grantee is in breach of any
covenant or obligation contained in the Merger Agreement.
(b) The term "Initial Triggering Event" shall mean any of the
following events or transactions occurring after the date hereof:
(i) Issuer or any bank or trust company subsidiary of Issuer
(an "Issuer Subsidiary"), without having received Grantee's prior
written consent, shall have entered into an agreement to engage in an
Acquisition Transaction (as hereinafter defined) with any person (the
term "person" for purposes of this Agreement having the meaning assigned
thereto in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act,
and the rules and regulations thereunder) other than Grantee or any of
its Subsidiaries (each a "Grantee Subsidiary") or the Board of Directors
of Issuer shall have recommended that the shareholders of Issuer approve
or accept any Acquisition Transaction other than as contemplated by the
Merger Agreement. For purposes of this Agreement, "Acquisition
Transaction" shall mean (x) a merger or consolidation, or any similar
transaction, involving Issuer or an Issuer Subsidiary, (y) a purchase,
lease or other acquisition of all or substantially all of the assets of
Issuer or an Issuer Subsidiary, or (z) a purchase or other acquisition
(including by way of merger, consolidation, share exchange or otherwise)
of securities representing 20% or more of the voting power of Issuer or
an Issuer Subsidiary;
(ii) Any person other than Grantee, any Grantee Subsidiary
or any Subsidiary of Issuer acting in a fiduciary capacity shall have
acquired beneficial ownership or the right to acquire beneficial ownership
of 20% or more of the outstanding shares of Common Stock (the term
"beneficial ownership" for purposes of this Option Agreement having the
meaning assigned thereto in Section 13(d) of the Securities Exchange Act
and the rules and regulations thereunder);
(iii) Any person other than Grantee or any Grantee Subsidiary
shall have made a bona fide proposal to Issuer or its shareholders by
public announcement or
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<PAGE>
written communication that is or becomes the subject of public disclosure
to engage in an Acquisition Transaction;
(iv) After a proposal is made by a third party to Issuer or
its shareholders to engage in an Acquisition Transaction, Issuer shall
have breached any covenant or obligation contained in the Merger Agreement
and such breach (x) would entitle Grantee to terminate the Merger Agreement
and (y) shall not have been cured prior to the Notice Date (as defined
below); or
(v) Any person other than Grantee or any Grantee Subsidiary,
other than in connection with a transaction to which Grantee has given its
prior written consent, shall have filed an application or notice with the
Federal Reserve Board, or other federal or state bank regulatory authority,
which application or notice has been accepted for processing, for approval
to engage in an Acquisition Transaction.
(c) The term "Subsequent Triggering Event" shall mean either of the
following events or transactions occurring after the date hereof:
(i) The acquisition by any person of beneficial ownership of
25% or more of the then outstanding Common Stock; or
(ii) The occurrence of the Initial Triggering Event
described in clause (i) of subsection (b) of this Section 2, except that
the percentage referred to in clause (z) shall be 25%.
(d) Issuer shall notify Grantee promptly in writing of the
occurrence of any Initial Triggering Event or Subsequent Triggering Event
(together, a "Triggering Event") after it becomes aware that such an event has
occurred, it being understood that the giving of such notice by Issuer shall not
be a condition to the right of the Holder to exercise the Option.
(e) In the event the Holder is entitled to and wishes to exercise the
Option, it shall send to Issuer a written notice (the date of which being herein
referred to as the "Notice Date") specifying (i) the total number of shares it
will purchase pursuant to such exercise and (ii) a place and date not earlier
than three business days nor later than 30 business days from the Notice Date
for the closing of such purchase (the "Closing Date"); provided that if prior
--------
notification to or approval of the Federal Reserve
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<PAGE>
Board or any other regulatory agency is required in connection with such
purchase, the Holder shall promptly file the required notice or application for
approval and shall expeditiously process the same and the period of time that
otherwise would run pursuant to this sentence shall run instead from the date on
which any required notification periods have expired or been terminated or such
approvals have been obtained and any requisite waiting period or periods shall
have passed. Any exercise of the Option shall be deemed to occur on the Notice
Date relating thereto.
(f) At the closing referred to in subsection (e) of this Section 2,
the Holder shall pay to Issuer the aggregate purchase price for the shares of
Common Stock purchased pursuant to the exercise of the Option in immediately
available funds by wire transfer to a bank account designated by Issuer,
provided that failure or refusal of Issuer to designate such a bank account
- --------
shall not preclude the Holder from exercising the Option.
(g) At such closing, simultaneously with the delivery of immediately
available funds as provided in subsection (f) of this Section 2, Issuer shall
deliver to the Holder a certificate or certificates representing the number of
shares of Common Stock purchased by the Holder and, if the Option should be
exercised in part only, a new Option evidencing the rights of the Holder thereof
to purchase the balance of the shares purchasable hereunder, and the Holder
shall deliver to Issuer a copy of this Agreement and a letter agreeing that the
Holder will not offer to sell or otherwise dispose of such shares in violation
of applicable law or the provisions of this Agreement.
(h) Certificates for Common Stock delivered at a closing hereunder
may be endorsed with a restrictive legend that shall read substantially as
follows:
"The transfer of the shares represented by this certificate is subject
to certain provisions of an agreement between the registered holder
hereof and Issuer and to resale restrictions arising under the
Securities Act of 1933, as amended. A copy of such agreement is on
file at the principal office of Issuer and will be provided to the
holder hereof without charge upon receipt by Issuer of a written
request therefor."
It is understood and agreed that: (i) the reference to the resale restrictions
of the Securities Act in the above legend shall be removed by delivery of
substitute certificate(s) without such reference if the Holder shall have
-4-
<PAGE>
delivered to Issuer a copy of a letter from the staff of the SEC, or an opinion
of counsel, in form and substance satisfactory to Issuer, to the effect that
such legend is not required for purposes of the Securities Act; (ii) the
reference to the provisions to this Agreement in the above legend shall be
removed by delivery of substitute certificate(s) without such reference if the
shares have been sold or transferred in compliance with the provisions of this
Agreement and under circumstances that do not require the retention of such
reference; and (iii) the legend shall be removed in its entirety if the
conditions in the preceding clauses (i) and (ii) are both satisfied. In
addition, such certificates shall bear any other legend as may be required by
law.
(i) Upon the giving by the Holder to Issuer of the written notice of
exercise of the Option provided for under subsection (e) of this Section 2 and
the tender of the applicable purchase price in immediately available funds, the
Holder shall be deemed to be the holder of record of the shares of Common Stock
issuable upon such exercise, notwithstanding that the stock transfer books of
Issuer shall then be closed or that certificates representing such shares of
Common Stock shall not then be actually delivered to the Holder. Issuer shall
pay all expenses, and any and all United States federal, state and local taxes
and other charges that may be payable in connection with the preparation, issue
and delivery of stock certificates under this Section 2 in the name of the
Holder or its assignee, transferee or designee.
3. Issuer agrees: (i) that it shall at all times maintain, free from
preemptive rights, sufficient authorized but unissued or treasury shares of
Common Stock so that the Option may be exercised without additional
authorization of Common Stock after giving effect to all other options,
warrants, convertible securities and other rights to purchase Common Stock; (ii)
that it will not, by charter amendment or through reorganization, consolidation,
merger, dissolution or sale of assets, or by any other voluntary act, avoid or
seek to avoid the observance or performance of any of the covenants,
stipulations or conditions to be observed or performed hereunder by Issuer;
(iii) promptly to take all action as may from time to time be required
(including (x) complying with all premerger notification, reporting and waiting
period requirements specified in 15 U.S.C. (S) 18a and regulations promulgated
thereunder and (y) in the event, under the Bank Holding Company Act of 1956, as
amended, or the Change in Bank Control Act of 1978, as amended, or any state
banking law, prior approval of or notice to the Federal Reserve Board or to any
state regulatory authority
-5-
<PAGE>
is necessary before the Option may be exercised, cooperating fully with the
Holder in preparing such applications or notices and providing such information
to the Federal Reserve Board or such state regulatory authority as they may
require) in order to permit the Holder to exercise the Option and Issuer duly
and effectively to issue shares of Common Stock pursuant hereto; and (iv)
promptly to take all action provided herein to protect the rights of the Holder
against dilution.
4. This Agreement (and the Option granted hereby) is exchangeable,
without expense, at the option of the Holder, upon presentation and surrender of
this Agreement at the principal office of Issuer, for other Agreements
providing for Options of different denominations entitling the holder thereof to
purchase, on the same terms and subject to the same conditions as are set forth
herein, in the aggregate the same number of shares of Common Stock purchasable
hereunder. The terms "Agreement" and "Option" as used herein include any Stock
Option Agreements and related Options for which this Agreement (and the Option
granted hereby) may be exchanged. Upon receipt by Issuer of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this
Agreement, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Agreement, if mutilated, Issuer will execute and deliver a new Agreement of like
tenor and date.
5. The number of shares of Common Stock purchasable upon the exercise
of the Option shall be subject to adjustment from time to time as provided in
this Section 5.
(a) In the event of any change in Common Stock by reason of
stock dividends, split-ups, mergers, recapitalizations, combinations,
subdivisions, conversions, exchanges of shares or the like, the type and
number of shares of Common Stock purchasable upon exercise hereof shall be
appropriately adjusted.
(b) Whenever the number of shares of Common Stock purchasable
upon exercise hereof is adjusted as provided in this Section 5, the Option
Price shall be adjusted by multiplying the Option Price by a fraction, the
numerator of which shall be equal to the number of shares of Common Stock
purchasable prior to the adjustment and the denominator of which shall be
equal to the number of shares of Common Stock purchasable after the
adjustment.
-6-
<PAGE>
6. Upon the occurrence of a Subsequent Triggering Event that occurs
prior to an Exercise Termination Event, Issuer shall, at the request of Grantee
delivered within 30 days of such Subsequent Triggering Event (or such later
period as provided in Section 8) (whether on its own behalf or on behalf of any
subsequent holder of this Option (or part thereof) or any of the shares of
Common Stock issued pursuant hereto), promptly prepare, file and keep current a
shelf registration statement under the Securities Act covering any shares issued
and issuable pursuant to this Option and shall use its reasonable efforts to
cause such registration statement to become effective and remain current in
order to permit the sale or other disposition of any shares of Common Stock
issued upon total or partial exercise of this Option ("Option Shares") in
accordance with any plan of disposition requested by Grantee; provided, however,
-------- -------
that Issuer may postpone filing a registration statement relating to a
registration request by Grantee under this Section 6 for a period of time (not
in excess of 90 days) if in its judgment such filing would require the
disclosure of material information that Issuer has a bona fide business purpose
---- ----
for preserving as confidential. Issuer will use its best efforts to cause such
registration statement first to become effective and then to remain effective
for such period not in excess of 180 days from the day such registration
statement first becomes effective or such shorter time as may be reasonably
necessary to effect such sales or other dispositions. Grantee shall have the
right to demand two such registrations. The foregoing notwithstanding, if, at
the time of any request by Grantee for registration of Option Shares as provided
above, Issuer is in registration with respect to an underwritten public offering
of shares of Common Stock, and if in the good faith judgment of the managing
underwriter or managing underwriters, or, if none, the sole underwriter or
underwriters, of such offering the inclusion of the Holder's Option or Option
Shares would interfere with the successful marketing of the shares of Common
Stock offered by Issuer, the number of Option Shares otherwise to be covered in
the registration statement contemplated hereby may be reduced; and provided,
--------
however, that after any such required reduction the number of Option Shares to
- -------
be included in such offering for the account of the Holder shall constitute at
least 25% of the total number of shares to be issued by the Holder and Issuer in
the aggregate; and provided further, however, that if such reduction occurs,
-------- -------
then the Issuer shall file a registration statement for the balance as promptly
as practicable and no reduction shall thereafter occur. Each such Holder shall
provide all information reasonably requested by Issuer for inclusion in any
registration statement to be filed hereunder. If requested by any such Holder
in connection
-7-
<PAGE>
with such registration, Issuer shall become a party to any underwriting
agreement relating to the sale of such shares, but only to the extent of
obligating itself in respect of representations, warranties, indemnities and
other agreements customarily included in such underwriting agreements for the
Issuer.
7. (a) In the event that prior to an Exercise Termination Event,
Issuer shall enter into an agreement (i) to consolidate with or merge into any
person, other than Grantee or a Grantee Subsidiary, and shall not be the
continuing or surviving corporation of such consolidation or merger, (ii) to
permit any person, other than Grantee or a Grantee Subsidiary, to merge into
Issuer and Issuer shall be the continuing or surviving corporation, but, in
connection with such merger, the then outstanding shares of Common Stock shall
be changed into or exchanged for stock or other securities of any other person
or cash or any other property or the then outstanding shares of Common Stock
shall after such merger represent less than 50% of the outstanding shares and
share equivalents of the merged company, or (iii) to sell or otherwise
transfer all or substantially all of its assets to any person, other than
Grantee or a Grantee Subsidiary, then, and in each such case, the agreement
governing such transaction shall make proper provision so that the Option
shall, upon the consummation of any such transaction and upon the terms and
conditions set forth herein, be converted into, or exchanged for, an option
(the "Substitute Option"), at the election of the Holder, of either (x) the
Acquiring Corporation (as hereinafter defined) or (y) any person that controls
the Acquiring Corporation.
(b) The following terms have the meanings indicated:
(1) "Acquiring Corporation" shall mean (i) the continuing or
surviving corporation of a consolidation or merger with Issuer (if other
than Issuer), (ii) Issuer in a merger in which Issuer is the continuing or
surviving person, and (iii) the trans-feree of all or substantially all of
Issuer's assets.
(2) "Substitute Common Stock" shall mean the common stock issued
by the issuer of the Substitute Option upon exercise of the Substitute
Option.
(3) "Assigned Value" shall mean the highest of (i) the price per
share of Common Stock at which a tender offer or exchange offer therefor
has been made, (ii) the price per share of Common Stock to be paid by
-8-
<PAGE>
any third party pursuant to an agreement with Issuer, (iii) the highest
closing price for shares of Common Stock within the 30 day period prior to
the event resulting in the issuance of the Substitute Option, or (iv) in
the event of a sale of all or substantially all of Issuer's assets, the sum
of the price paid in such sale for such assets and the current market value
of the remaining net assets of Issuer as determined by a nationally
recognized investment banking firm selected by the Holder or the owner of
Option Shares (the "Owner"), as the case may be, divided by the number of
shares of Common Stock of Issuer outstanding at the time of such sale. In
determining the Assigned Value, the value of consideration other than cash
shall be determined by a nationally recognized investment banking firm
selected by the Holder or Owner, as the case may be.
(4) "Average Price" shall mean the average closing price of a
share of the Substitute Common Stock for the one year immediately preceding
the consolidation, merger or sale in question, but in no event higher than
the closing price of the shares of Substitute Common Stock on the day
preceding such consolidation, merger or sale; provided that if Issuer is
--------
the issuer of the Substitute Option, the Average Price shall be computed
with respect to a share of common stock issued by the person merging into
Issuer or by any company which controls or is controlled by such person, as
the Holder may elect.
(c) The Substitute Option shall have the same terms as the Option,
provided, that if the terms of the Substitute Option cannot, for legal reasons,
- --------
be the same as the Option, such terms shall be as similar as possible and in no
event less advantageous to the Holder. The issuer of the Substitute Option
shall also enter into an agreement with the then Holder or Holders of the
Substitute Option in substantially the same form as this Agreement, which shall
be applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such number of
shares of Substitute Common Stock as is equal to the Assigned Value multiplied
by the number of shares of Common Stock for which the Option is then
exercisable, divided by the Average Price. The exercise price of the Substitute
Option per share of Substitute Common Stock shall then be equal to the Option
Price multiplied by a fraction, the numerator of which shall be the number of
shares of Common Stock for which the Option is then exercisable and the
denominator of which shall be the
-9-
<PAGE>
number of shares of Substitute Common Stock for which the Substitute Option is
exercisable.
(e) In no event, pursuant to any of the foregoing paragraphs, shall
the Substitute Option be exercisable for more than 9.9% of the shares of
Substitute Common Stock outstanding prior to exercise of the Substitute Option.
In the event that the Substitute Option would be exercisable for more than 9.9%
of the shares of Substitute Common Stock outstanding prior to exercise but for
this clause (e), the issuer of the Substitute Option (the "Substitute Option
Issuer") shall make a cash payment to Holder equal to the excess of (i) the
value of the Substitute Option without giving effect to the limitation in this
clause (e) over (ii) the value of the Substitute Option after giving effect to
the limitation in this clause (e). This difference in value shall be
determined by a nationally recognized investment banking firm selected by the
Holder or the Owner, as the case may be.
8. The 30-day period for exercise of certain rights under Sections 2,
6 and 10 shall be extended: (i) to the extent necessary to obtain all regulatory
approvals for the exercise of such rights and for the expiration of all
statutory waiting periods; and (ii) to the extent necessary to avoid liability
under Section 16(b) of the Securities Exchange Act by reason of such exercise.
Nothing contained in this Agreement shall restrict Grantee from specifying
alternative exercising of rights pursuant to Sections 2 or 6 hereof in the event
that the exercising of any such rights shall not have occurred due to the
failure to obtain any required approval referred to in this Section 8.
9. Issuer hereby represents and warrants to Grantee as follows:
(a) Issuer has the corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly approved by the Board of
Directors of Issuer and no other corporate proceedings on the part of Issuer
are necessary to authorize this Agreement or to consummate the transactions so
contemplated. This Agreement has been duly executed and delivered by Issuer.
This Agreement is the valid and legally binding obligation of Issuer.
(b) Issuer has taken all necessary corporate action to authorize and
reserve and to permit it to issue, and at all times from the date hereof through
the termination of
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<PAGE>
this Agreement in accordance with its terms will have reserved for issuance
upon the exercise of the Option, that number of shares of Common Stock equal to
the maximum number of shares of Common Stock at any time and from time to time
issuable hereunder, and all such shares, upon issuance pursuant hereto, will be
duly authorized, validly issued, fully paid, nonassessable, and will be
delivered free and clear of all claims, liens, encumbrance and security
interests and not subject to any preemptive rights.
10. Neither of the parties hereto may assign any of its rights or
obligations under this Option Agreement or the Option created hereunder to any
other person, without the express written consent of the other party, except
that in the event a Subsequent Triggering Event shall have occurred prior to an
Exercise Termination Event, Grantee, subject to the express provisions hereof,
may assign in whole or in part its rights and obligations hereunder within 30
days following such Subsequent Triggering Event (or such later period as
provided in Section 8); provided, however, that until the date 30 days following
-------- -------
the date on which the Federal Reserve Board approves an application by Grantee
under the Bank Holding Company Act to acquire the shares of Common Stock subject
to the Option, Grantee may not assign its rights under the Option except in (i)
a widely dispersed public distribution, (ii) a private placement in which no one
party acquires the right to purchase in excess of 2% of the voting shares of
Issuer, (iii) an assignment to a single party (e.g., a broker or investment
- -
banker) for the purpose of conducting a widely dispersed public distribution on
Grantee's behalf, or (iv) any other manner approved by the Federal Reserve
Board.
11. Each of Grantee and Issuer will use its best efforts to make all
filings with, and to obtain consents of, all third parties and governmental
authorities necessary to the consummation of the transactions contemplated by
this Agreement, including without limitation applying to the Federal Reserve
Board under the Bank Holding Company Act for approval to acquire the shares
issuable hereunder.
12. The parties hereto acknowledge that damages would be an
inadequate remedy for a breach of this Agreement by either party hereto and that
the obligations of the parties hereto shall be enforceable by either party
hereto through injunctive or other equitable relief.
13. If any term, provision, covenant or restriction contained in
this Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the
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<PAGE>
terms, provisions and covenants and restrictions contained in this Agreement
shall remain in full force and effect, and shall in no way be affected, impaired
or invalidated. If for any reason such court or regulatory agency determines
that the Holder is not permitted to acquire the full number of shares of Common
Stock provided in Section l(a) hereof (as adjusted pursuant to Section 1(b) or 5
hereof), it is the express intention of Issuer to allow the Holder to acquire or
to require Issuer to repurchase such lesser number of shares as may be
permissible, without any amendment or modification hereof.
14. All notices, requests, claims, demands and other communications
hereunder shall be deemed to have been duly given when delivered in person, by
cable, telegram, telecopy or telex, or by registered or certified mail (postage
prepaid, return receipt requested) at the respective addresses of the parties
set forth in the Merger Agreement.
15. This Agreement shall be governed by and construed in accordance
with the laws of the Commonwealth of Pennsylvania regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
16. This Agreement may be executed in two or more counterparts, each
of which shall be deemed to be an original, but all of which shall constitute
one and the same agreement.
17. Except as otherwise expressly provided herein, each of the
parties hereto shall bear and pay all costs and expenses incurred by it or on
its behalf in connection with the transactions contemplated hereunder, including
fees and expenses of its own financial consultants, investment bankers,
accountants and counsel.
18. Except as otherwise expressly provided herein or in or pursuant
to the Merger Agreement, this Agreement contains the entire agreement between
the parties with respect to the transactions contemplated hereunder and
supersedes all prior arrangements or understandings with respect thereof,
written or oral. The terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
successors and permitted assigns. Nothing in this Agreement, expressed or
implied, is intended to confer upon any party, other than the parties hereto,
and their respective successors except as assigns, any rights, remedies,
obligations or liabilities under or by reason of this Agreement, except as
expressly provided herein.
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<PAGE>
19. Capitalized terms used in this Agreement and not defined herein
shall have the meanings assigned thereto in the Merger Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to
be executed on its behalf by its officers thereunto duly authorized, all as of
the date first above written.
INDEPENDENCE BANCORP, INC.
By:s/John D. Harding
---------------------------
President and Chief
Executive Officer
CORESTATES FINANCIAL CORP
By:s/David C. Carney
---------------------------
Chief Financial Officer
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<PAGE>
EXHIBIT 99.3
------------
The undertaking set forth below is filed for purposes of incorporation by
reference into Part II of the registration statements on Form S-8, File Nos.
33-28808, 33-5874, 33-32934 and 33-50324.
Item 9. Undertakings.
- ------- ------------
(a) The undersigned registrant hereby undertakes:
Insofar as indemnification for liabilities rising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors,
officers or persons controlling the registrant pursuant to the
provisions described in this registration statement, or otherwise,
CoreStates Financial Corp (the "Company") has been advised that in the
opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
