<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 8-K
----------------
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JUNE 8, 1994
CORESTATES FINANCIAL CORP
(EXACT NAME OF REGISTRANT SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 0-6879 23-1899716
(STATE OR OTHER (COMMISSION (IRS EMPLOYEE
JURISDICTION OF FILE NUMBER) IDENTIFICATION NO.)
INCORPORATION)
CENTRE SQUARE WEST,
1500 MARKET STREET
PHILADELPHIA, PENNSYLVANIA 19101
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE, INCLUDING AREA CODE: (215) 973-3806
(FORMER NAME AND FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
================================================================================
<PAGE>
ITEM 5. OTHER EVENTS.
As previously announced, CoreStates Financial Corp ("CoreStates") and
Independence Bancorp, Inc. ("Independence") have entered into a definitive
agreement, dated November 19, 1993, providing for CoreStates to acquire
Independence pursuant to an exchange of stock ("the Merger"). Under the terms of
the agreement, each of Independence's 11.7 million shares of common stock will
be exchanged for 1.5 shares of CoreStates' common stock, assuming that the
average price of CoreStates' common stock over a pricing period prior to
closing is $27 per share or less. If the average price of CoreStates' common
stock is $28 or more, the exchange ratio will be 1.45 shares of CoreStates'
common stock for each Independence share. If the average price of CoreStates'
common stock falls between $27 and $28, the exchange ratio will be determined
by dividing $40.50 by the average price of CoreStates' common stock. CoreStates
also has received an option to purchase up to 9.9% of Independence's common
stock if certain contingencies occur.
The transaction, which will be accounted for as a pooling of interests, is
subject to certain conditions, including the receipt of regulatory and
shareholder approval. The special meeting of shareholders of Independence will
be held on June 27, 1994.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
(1.) Interim condensed consolidated financial statements of Independence
Bancorp, Inc.: Page
(i) Consolidated Balance Sheet as of March 31, 1994 (Unaudited) 3
(ii) Consolidated Statements of Income For the Three Months
Ended March 31, 1994 and 1993 (Unaudited) 4
(iii) Consolidated Statements of Changes in Shareholders' Equity
For the Three Months Ended March 31, 1994 and 1993 (Unaudited) 5
(iv) Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1994 and 1993 (Unaudited) 6
(v) Notes to Interim Consolidated Financial Statements
(Unaudited) 7-10
(2.) Year-end consolidated financial statements of Independence
Bancorp, Inc.: Page
(i) Consolidated Balance Sheet as of December 31, 1993 11
(ii) Consolidated Statement of Income for the Year Ended
December 31, 1993 12
(iii) Consolidated Statement of Changes in Shareholders' Equity
for the Year Ended December 31, 1993 13
(iv) Consolidated Statement of Cash Flows for the Year Ended
December 31, 1993 14
(v) Notes to the December 31, 1993 Consolidated Financial
Statements 15-30
(vi) Report of Coopers & Lybrand 31
Corestates Financial Corp
(Registrant)
By: /s/ David T. Walker
---------------------------------
David T. Walker
Deputy Chief Counsel
Dated: June 8, 1994
2
<PAGE>
Independence Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheet (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, 1994
- -----------------------------------------------------------------------
<S> <C>
Assets
Cash and due from banks $114,600
Interest-bearing deposits with banks 42,395
Federal funds sold (including term federal funds sold
of $16,000) 88,500
Other short-term investments 7,469
Mortgages held for sale 22,448
Investments available-for-sale 559,160
Loans (net of unearned income of $31,620) 1,652,945
Less: Allowance for possible loan losses 33,016
- -----------------------------------------------------------------------
Net loans 1,619,929
Premises and equipment, net 33,051
Accrued income and other assets 67,925
- -----------------------------------------------------------------------
Total Assets $2,555,477
==============
Liabilities
Deposits
Demand - non-interest-bearing $374,626
Demand - interest-bearing 249,246
Savings 913,759
Time 538,629
Time over $100,000 52,409
- -----------------------------------------------------------------------
Total deposits 2,128,669
Short-term borrowings
Securities sold under agreements to repurchase 41,246
Other short-term borrowings 10,160
- -----------------------------------------------------------------------
Total short-term borrowings 51,406
Long-term borrowings 132,880
Accrued expenses and other liabilities 28,870
- -----------------------------------------------------------------------
Total Liabilities 2,341,825
--------------
Commitment and Contingent Liabilities
Shareholders' Equity
Preferred stock, par value $100 per share;
authorized 2,500,000 shares, none issued ---
Common stock, par value $2.50 per share;
authorized 50,000,000; issued 11,718,502 29,296
Surplus 92,606
Retained earnings 94,140
Treasury stock, 152,742 shares at cost (2,390)
- -----------------------------------------------------------------------
Total Shareholders' Equity 213,652
--------------
Total Liabilities and Shareholders' Equity $2,555,477
==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
Independence Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1994 1993
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest Income
Interest and fees on loans $33,179 $34,709
Interest on investment securities
Taxable 7,314 9,153
Exempt from federal income tax 337 244
Dividends 132 163
Interest on mortgages held for sale 658 697
Interest on other investments 777 753
- ---------------------------------------------------------------------------------------------------
Total Interest Income 42,397 45,719
------------------------
Interest Expense
Demand - interest-bearing 962 1,218
Savings 5,913 6,485
Time 5,390 7,323
Time over $100,000 833 1,160
Short-term borrowings 317 865
Long-term borrowings 2,168 1,889
- ---------------------------------------------------------------------------------------------------
Total Interest Expense 15,583 18,940
------------------------
Net Interest Income 26,814 26,779
Provision for possible loan losses 1,905 3,225
- ---------------------------------------------------------------------------------------------------
Net Interest Income after Provision for Possible Loan Losses 24,909 23,554
------------------------
Non-Interest Income
Trust income 1,227 1,163
Service charges on deposit accounts 2,423 2,249
Other service charges and fees 1,891 1,791
Securities gains (losses) (13) (173)
Gains on sales of mortgages held for sale 586 891
Other income 449 667
- ---------------------------------------------------------------------------------------------------
Total Non-Interest Income 6,563 6,588
------------------------
Non-Interest Expense
Salaries 8,828 9,265
Employee benefits 2,702 2,448
Net occupancy expense 1,741 1,663
Furniture and equipment expense 1,415 1,545
Data processing expense 1,329 1,325
Insurance expense 1,541 1,565
Other real estate expense 1,257 322
Other expense 4,119 4,620
- ---------------------------------------------------------------------------------------------------
Total Non-Interest Expense 22,932 22,753
------------------------
Income Before Taxes and Effect of Cumulative Change in Accounting
Method 8,540 7,389
Income taxes 2,647 2,158
------------------------
Income Before Effect of Cumulative Change in Accounting Method 5,893 5,231
Cumulative change in accounting method for recognition of impairment
losses, net of tax (3,430) ---
------------------------
Net Income $2,463 $5,231
========================
Per Share Data
Primary
Income before effect of cumulative change in accounting method $0.50 $0.46
Cumulative change in accounting method for recognition of impairment
losses (0.29) ---
Net Income 0.21 0.46
Cash dividends paid 0.29 0.29
Average Primary Common Shares Outstanding 11,683,928 11,493,009
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
Independence Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Common Retained Treasury
Three Months Ended March 31, 1993 and 1994 Stock Surplus Earnings Stock Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 $28,611 $86,828 $95,009 ($2,393) $208,055
Net income 5,231 5,231
Cash dividends paid ($1.16 per share) (3,289) (3,289)
Change in unrealized loss on
marketable equity securities 250 250
Exercise of stock options (91,838 shares) 229 1,525 1,754
Dividend reinvestment plan and employee
stock purchase plan (21,133 shares) 53 437 490
- ------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1993 $28,893 $88,790 $97,201 ($2,393) $212,491
====================================================================
Balance at December 31, 1993 $29,188 $91,659 $103,521 ($2,390) $221,978
Net income 2,463 2,463
Cash dividends paid ($1.16 per share) (3,343) (3,343)
Cash dividends declared, unpaid ($1.16 per share) (3,351) (3,351)
Unrealized holding loss of investments available-for-sale,
net of tax of $2,773 (5,150) (5,150)
Conversion of subordinated debentures (827 shares) 2 28 30
Exercise of stock options (42,575 shares) 106 919 1,025
- ------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1994 $29,296 $92,606 $94,140 ($2,390) $213,652
====================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
Independence Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1994 1993
- -------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $2,463 $5,231
Adjustments to reconcile net income to net
cash provided by operating activities:
Net amortization of premiums and discounts 808 1,281
Amortization of deferred fees and costs (180) (236)
Provision for possible loan losses 1,905 3,225
Securities losses 13 173
Impairment losses on residuals 5,276 ---
Provision for depreciation and amortization 1,197 1,249
Provision net of (gains) losses on sales of other
real estate owned 934 287
Proceeds from sales of mortgages held for sale 63,553 54,610
Gains on sales of mortgages (581) (891)
Originations of mortgages held for sale (30,863) (34,413)
Gains on sales of portfolio loans (114) (112)
Net increase in taxes receiveable 2,647 2,118
Net decrease in deferred tax debits (1,846) ---
Net (increase) decrease in accrued income and other
assets (5,087) 654
Net decrease in accrued expense and other liabilities (6,379) (7,445)
- -------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 33,746 25,731
- -------------------------------------------------------------------------------------
Investing Activities
Net (increase) decrease in term federal funds sold (11,000) 4,000
Net decrease in interest-bearing deposits with banks 3,636 2,520
Net decrease in other short-term investments 7,239 5,199
Proceeds from sales of investments held for sale --- 519
Purchases of investment securities (57,961) (103,616)
Proceeds from sales of securities available-for-sale 6,378 ---
Proceeds from maturities and calls of investment
securities 66,609 79,193
Proceeds from sale of other real estate owned 1,299 2,486
Proceeds from sales of portfolio loans 10,401 3,542
Net decrease in loans 23,995 3,804
Premises and equipment expenditures (341) (729)
- -------------------------------------------------------------------------------------
Net Cash Provided (Used) by Investing Activities 50,255 (3,082)
- -------------------------------------------------------------------------------------
Financing Activities
Net increase (decrease) in demand and savings deposits 7,949 (34,720)
Net decrease in time deposits (32,426) (68,654)
Net increase (decrease) in short-term borrowings (10,824) 11,166
Proceeds from issuance of long-term debt --- 10,000
Repayment of long-term borrowings (1,344) (28)
Proceeds from dividend reinvestment and
employee stock purchase and option plans 1,025 2,244
Cash dividends paid (3,343) (3,289)
- -------------------------------------------------------------------------------------
Net Cash Used by Financing Activities (38,963) (83,281)
- -------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 45,038 (60,632)
Cash and Cash Equivalents at Beginning of Year 142,062 212,932
- -------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $187,100 $152,300
===========================
Supplemental disclosures
Interest paid $16,187 $19,191
Net income taxes paid --- ---
Noncash transactions:
Transfer of loans to other real estate owned 1,300 2,015
Transfer of mortgages held for sale to
residential mortgages 2,562 1,547
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
INDEPENDENCE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1
ACCOUNTING AND REPORTING POLICIES
The accounting and financial reporting policies of Independence Bancorp, Inc.
(Independence) and its subsidiaries conform to generally accepted accounting
principles and to general practice within the banking industry. The
consolidated financial statements include the accounts of Independence and its
subsidiaries, all of which are wholly owned. All significant intercompany
accounts and transactions have been eliminated in the consolidated financial
statements. Additional significant accounting policies are presented in the
notes to the financial statements included in the Independence 1993 Annual
Report to Shareholders.
During the first quarter of 1994, Independence recognized a $3.4 million after-
tax impairment loss on certain mortgage securities. The loss was the result of
a write-down to fair value of these securities, which were deemed to be
impaired. This resulted from a recent Financial Accounting Standards Board
(FASB) interpretation of a 1993 accounting change, Statement of Financial
Accounting Standards No. 115 (SFAS No. 115). The interpretation, reached by a
consensus of the FASB Emerging Issues Task Force in March 1994, requires more
definitive criteria for recognition of impairment losses on these types of
securities.
Certain data for prior years has been reclassified to conform to the current
year's presentation. These reclassifications had no effect on net income.
Tabular information below is presented in thousands of dollars.
NOTE 2
PROPOSED TRANSACTION
In the fourth quarter of 1993, Independence and CoreStates Financial Corp
("CoreStates") entered into an agreement and plan of merger (the "Merger
Agreement") and a stock option agreement (the "Stock Option Agreement"). This
transaction is subject to approval by various regulatory agencies and
Independence's shareholders and the satisfaction of all closing conditions. The
following information is qualified in its entirety by reference to the Merger
Agreement and Stock Option Agreement which were filed in the Independence Form
8-K of November 19, 1993. Under the terms of the Merger Agreement, each
shareholder of Independence will receive for each Independence Common Share a
number of CoreStates Common Shares determined as follows: (i) if the Average
Closing Price (as defined in the Merger Agreement) of CoreStates Common Shares
on the Determination Date (as defined in the Merger Agreement) is less than or
equal to $27.00 per share, the exchange ratio will be 1.50; (ii) if the Average
Closing Price of CoreStates Common Shares on the Determination Date is greater
than or equal to $28.00 per share, the exchange ratio will be 1.45; or, (iii) if
the Average Closing Price of CoreStates Common Shares on the Determination Date
is greater than $27.00 but less than $28.00 per share, the exchange ratio will
be determined by dividing $40.50 by the Average Closing Price. As a condition
to CoreStates entering into the Merger Agreement, and in consideration thereof,
Independence and CoreStates entered into the Stock Option Agreement, entitling
CoreStates, under certain circumstances to purchase up to 1,130,000 authorized
but unissued shares of Independence Common Stock at an exercise price of $33.50,
subject to termination within certain periods, in cash.
While Independence has utilized a long-term work out strategy for all of its
assets in the belief that value could be maximized over time, CoreStates'
strategy is to seek to dispose of certain assets via bulk sale, individual
credit direct negotiation or foreclosure, in an accelerated manner. It is
CoreStates' philosophy that this change maximizes the total value of the
proposed transaction and allows the ongoing institution to concentrate upon new
franchise initiatives and revenue generation. In CoreStates' experience, a
strategy that involves the accelerated resolution of problem assets has been
more economical than a long-term work out approach. It has been CoreStates'
experience that the costs of working out assets as well as other carrying costs
typically outweigh any improvement in an asset's realized value. Furthermore,
resources and management time and attention are diverted away from building the
business and creating long-term franchise value. CoreStates currently
estimates that in connection with the change
7
<PAGE>
in strategic direction and to conform Independence's loan, accrual and reserve
policies to those of CoreStates, it will take an addition to the allowance for
possible loan losses of approximately $25.0 million and an addition to the
reserve against other real estate owned of approximately $5.0 million.
Accordingly, pro forma shareholders' equity will be reduced by $19.5 million,
the after-tax effect of the estimated provisions. CoreStates currently
estimates that the assets related to the $30.0 million in estimated aggregate
provisions will be disposed of within eighteen months of the effective date of
the proposed transaction. The carrying value of these assets is approximately
$120.0 million and the estimated provisions represent 25% of this amount.
NOTE 3
CASH AND DUE FROM BANKS
The Federal Reserve requires maintenance of certain average reserve balances for
all financial institutions. In addition, commercial banks maintain compensating
balances, most of which are not required, but are used to offset specific
charges for check clearing and other services. At March 31, 1994, required
compensating and reserve balances were $41.5 million.
NOTE 4
INVESTMENT SECURITIES
The carrying values and fair values of investments available-for-sale as of
March 31, 1994, were as follows:
<TABLE>
<CAPTION>
Unrealized Unrealized
Carrying Holding Holding Fair
Value Gains Losses Value
--------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 3,159 $ --- $ (28) $ 3,131
U.S. Government agencies and
corporations 13,144 87 (73) 13,158
State and municipal 74,561 140 (1,112) 73,589
Foreign Government securities 250 --- --- 250
Corporate securities 69,774 --- (1,066) 68,708
Mortgage-backed securities 306,875 916 (7,793) 299,998
Other securities 90,657 139 (1,223) 89,573
Equity securities 10,763 46 (56) 10,753
--------------------------------------------
Subtotal 569,183 $1,328 $(11,351) $559,160
===============================
Less: Net unrealized holding
losses (10,023)
--------
Total $559,160
========
</TABLE>
Proceeds from sales of investments held for sale were $519,000 for the first
quarter of 1993. Gains of $6,000 and losses of $7,000 were realized on these
sales in the first quarter of 1993.
Proceeds from sales of debt securities for the first quarter of 1994 were $6.4
million. Gains of $25,000 and losses of $38,000 were realized on these sales.
There were no sales of debt securities in the first quarter of 1993. There were
no sales of marketable equity securities during the first quarters of 1994 and
1993.
At March 31, 1994, the amortized cost and fair value of mortgage residual
securities were $7.3 million and $7.7 million, respectively. An impairment loss
of $5.3 million was recognized against these securities during the first quarter
of 1994. As discussed in Note 1, this resulted from a recent FASB
interpretation of SFAS No. 115. At March 31, 1993, write-downs of $172,000
were recognized on these investments and were included in securities gains and
losses.
At March 31, 1994, assets having a book value of $162.0 million were pledged to
collateralize deposits of public funds and for other purposes.
8
<PAGE>
NOTE 5
LOANS AND LEASE FINANCING
Loans and lease financing at March 31, 1994 were classified as follows:
<TABLE>
<CAPTION>
March 31, 1994
---------------
<S> <C>
Commercial $ 569,744
Real estate--construction 36,308
Mortgage--commercial 247,603
Mortgage--residential 92,432
Installment loans 649,150
Lease financing 89,328
----------
Total 1,684,565
Unearned income (31,620)
----------
Total net loans $1,652,945
==========
</TABLE>
NOTE 6
ALLOWANCE FOR POSSIBLE LOAN LOSSES
Independence reviews the adequacy of its allowance for possible loan losses each
quarter through a detailed analysis of various factors. Consideration is given
to changes in the nature and volume of the portfolio, overall portfolio quality,
specific problem loans and current and anticipated economic conditions that may
affect borrowers' ability to pay.
Transactions in the allowance for possible loan losses are summarized below:
<TABLE>
<CAPTION>
Three months ended March 31, 1994
- ---------------------------------------------
<S> <C>
Balance at beginning of period $33,056
Charge-offs:
Commercial 1,840
Real estate--construction ---
Mortgage--commercial 94
Mortgage--residential 11
Installment loans 346
Lease financing 96
- ---------------------------------------------
Total charge-offs 2,387
- ---------------------------------------------
Recoveries:
Commercial 231
Real estate--construction 9
Mortgage--commercial 10
Installment loans 153
Lease financing 39
- ---------------------------------------------
Total recoveries 442
- ---------------------------------------------
Net charge-offs 1,945
Provision for possible loan losses 1,905
- ---------------------------------------------
Balance at end of period $33,016
=======
</TABLE>
9
<PAGE>
NOTE 7
NONPERFORMING ASSETS
The following table presents risk elements in the loan portfolio by type.
Nonperforming assets consist of nonaccrual loans, restructured loans and
holdings of other real estate. Loans are placed in nonaccrual status when
management determines that uncertainty of interest collection exists, but
payment of principal is not impaired. When uncertainty of collection of
principal exists, the asset is written down to its net realizable value.
Restructured loans are those that have been formally renegotiated due to the
financial weakness of the borrower.
<TABLE>
<CAPTION>
March 31, 1994
--------------
<S> <C>
Accruing loans 90 days past due $ 4,732
Nonaccrual loans 19,894
Restructured debt 1,586
Other real estate owned 15,170
</TABLE>
NOTE 8
INCOME TAXES
The provision for federal income taxes is less than the amount determined using
the statutory rate of 35% due primarily to tax-exempt interest on certain loans
and investment securities.
NOTE 9
COMMITMENTS AND CONTINGENCIES
Various legal proceedings are pending against Independence and its subsidiaries.
Management does not anticipate any material financial impact as a result of
these actions.
In the normal course of business, Independence uses off-balance-sheet
instruments to meet the financing needs of its customers and to reduce its own
exposure to fluctuations in interest rates. These financial instruments include
commitments to extend credit, standby letters of credit, recourse arrangements,
commitments to sell and purchase mortgage loans and mortgage-backed securities,
interest rate swaps, caps and forward rate agreements. The instruments involve,
to varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the financial statements.
<TABLE>
<CAPTION>
Contract or Notional Amount
March 31, 1994
--------------
<S> <C>
Financial instruments whose contract amounts represent potential risk:
Commitments to extend credit $459,519
Standby letters of credit 33,315
Loans sold with recourse 9,143
Financial instruments whose contractual or notional amounts exceed
the amount of potential credit risk:
Interest rate swaps maturing within one year 80,000
Interest rate swaps maturing beyond one year 312,500
Purchased option contacts 80,000
Commitments to sell mortgage loans and mortgage-backed securities 17,430
</TABLE>
10
<PAGE>
Independence Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheet
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31, 1993
- ------------------------------------------------------------------------------------------
<S> <C>
Assets
Cash and due from banks $120,462
Interest-bearing deposits with banks 46,084
Federal funds sold (including term federal funds sold of $5,000) 26,600
Other short-term investments 14,430
Mortgages held for sale 57,119
Investments available-for-sale 588,004
Loans (net of unearned income of $31,750) 1,687,997
Less: Allowance for possible loan losses 33,056
- ------------------------------------------------------------------------------------------
Net loans 1,654,941
Premises and equipment, net 33,907
Accrued income and other assets 61,878
- ------------------------------------------------------------------------------------------
Total Assets $2,603,425
============
Liabilities
Deposits
Demand - non-interest-bearing $383,890
Demand - interest-bearing 248,195
Savings 897,597
Time 554,493
Time over $100,000 68,890
- ------------------------------------------------------------------------------------------
Total deposits 2,153,065
Short-term borrowings
Securities sold under agreements to repurchase 51,774
Other short-term borrowings 10,456
- ------------------------------------------------------------------------------------------
Total short-term borrowings 62,230
Long-term borrowings 134,254
Accrued expenses and other liabilities 31,898
- ------------------------------------------------------------------------------------------
Total Liabilities 2,381,447
------------
Commitments and Contingent Liabilities
Shareholders' Equity
Preferred stock, par value $100 per share;
authorized 2,500,000 shares, none issued ---
Common stock, par value $2.50 per share;
authorized 50,000,000; issued 11,675,100 29,188
Surplus 91,659
Retained earnings 103,521
Treasury stock, 152,742 shares at cost (2,390)
- ------------------------------------------------------------------------------------------
Total Shareholders' Equity 221,978
------------
Total Liabilities and Shareholders' Equity $2,603,425
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
Independence Bancorp, Inc. and Subsidiaries
Consolidated Statement of Income
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1993
- -----------------------------------------------------------------------------------------
<S> <C>
Interest Income
Interest and fees on loans $138,935
Interest on investment securities
Taxable 30,242
Exempt from federal income tax 1,094
Dividends 724
Interest on mortgages held for sale 3,234
Interest on other investments 3,056
- -----------------------------------------------------------------------------------------
Total Interest Income 177,285
--------
Interest Expense
Demand - interest-bearing 4,543
Savings 24,908
Time 26,018
Time over $100,000 4,258
Short-term borrowings 2,652
Long-term borrowings 8,289
- -----------------------------------------------------------------------------------------
Total Interest Expense 70,668
--------
Net Interest Income 106,617
Provision for possible loan losses 11,201
- -----------------------------------------------------------------------------------------
Net Interest Income after Provision for Possible Loan Losses 95,416
--------
Non-Interest Income
Trust income 4,487
Service charges on deposit accounts 9,510
Other service charges and fees 6,824
Securities gains 362
Recoveries on certain bonds 155
Gains on sales of mortgages 3,958
Other income 4,080
- -----------------------------------------------------------------------------------------
Total Non-Interest Income 29,376
--------
Non-Interest Expense
Salaries 37,444
Employee benefits 9,054
Net occupancy expense 6,656
Furniture and equipment expense 5,772
Data processing expense 5,363
Insurance expense 6,113
State taxes 2,669
Other real estate expense 2,425
Other expense 18,105
- -----------------------------------------------------------------------------------------
Total Non-Interest Expense 93,601
--------
Income Before Taxes 31,191
Income taxes 8,312
--------
Net Income $22,879
========
Per Share Data
Net income $1.98
Cash dividends paid 1.16
Average Common Shares Outstanding 11,529,824
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
Independence Bancorp, Inc. and Subsidiaries
Consolidated Statement
of Changes in Shareholders' Equity
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Common Retained Treasury
Year Ended December 31, 1993 Stock Surplus Earnings Stock Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993 $28,611 $86,828 $95,009 ($2,393) $208,055
Net income 22,879 22,879
Cash dividends paid ($1.16 per share) (13,252) (13,252)
Change in unrealized loss on
marketable equity securities 250 250
Adjustment to unrealized holding loss of investments
available-for-sale, net of tax of $735 (1,365) (1,365)
Treasury stock issued (217 shares) 3 3
Corporate tax benefit related to exercise stock options 445 445
Exercise of stock options (160,678 shares) 402 2,823 3,225
Dividend reinvestment plan and employee
stock purchase plan (70,119 shares) 175 1,563 1,738
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 $29,188 $91,659 $103,521 ($2,390) $221,978
==================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
Independence Bancorp, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31, 1993
- ------------------------------------------------------------------------------------------
<S> <C>
Operating Activities
Net income $22,879
Adjustments to reconcile net income to net
cash provided by operating activities:
Net amortization of premiums and discounts 6,204
Amortization of deferred fees and costs (363)
Provision for possible loan losses 11,201
Securities (gains) losses (362)
Recoveries on certain bonds (155)
Gains on sales of loans (542)
Provision for depreciation and amortization 4,890
Provision net of (gains) losses on sales of other real estate owned 2,425
Proceeds from sales of mortgages held for sale 262,223
Gains on sales of mortgages (3,958)
Originations of mortgages held for sale (278,894)
Net increase (decrease) in taxes receiveable 1,672
Net increase in deferred tax debits (717)
Net (increase) decrease in accrued income and other assets 10,304
Net decrease in accrued expense and other liabilities (4,217)
- ------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 32,590
- ------------------------------------------------------------------------------------------
Investing Activities
Net (increase) decrease in term federal funds sold (1,000)
Net decrease in interest-bearing deposits with banks 2,261
Net decrease in other short-term investments 2,935
Proceeds from sales of investments held for sale 2,832
Purchases of investment securities (457,972)
Proceeds from sales of investment securities 206,263
Proceeds from maturities and calls of investment securities 317,444
Proceeds from sale of other real estate owned 8,300
Net (increase) decrease in loans (39,776)
Premises and equipment expenditures (2,947)
- ------------------------------------------------------------------------------------------
Net Cash Provided by Investing Activities 38,340
- ------------------------------------------------------------------------------------------
Financing Activities
Net increase in demand and savings deposits 56,829
Net decrease in time deposits (153,215)
Net increase (decrease) in short-term borrowings (67,143)
Proceeds from issuance of long-term debt 30,148
Repayment of long-term borrowings (133)
Proceeds from dividend reinvestment and
employee stock purchase and option plans 4,966
Cash dividends paid (13,252)
- ------------------------------------------------------------------------------------------
Net Cash Used by Financing Activities (141,800)
- ------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents (70,870)
Cash and Cash Equivalents at Beginning of Year 212,932
- ------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $142,062
============
Supplemental disclosures
Interest paid $74,249
Net income taxes paid 7,100
Noncash transactions:
Transfer of loans to other real estate owned 9,452
Transfer of mortgages held for sale to residential mortgages 10,249
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
INDEPENDENCE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and financial reporting policies of Independence Bancorp, Inc.
("Independence") and its subsidiaries conform to generally accepted accounting
principles and to general practice within the banking industry. The following
is a description of the more significant of these policies. Tabular information
is presented in thousands of dollars.
Basis of Presentation
The consolidated financial statements include the accounts of Independence and
its subsidiaries, all of which are wholly-owned. All significant intercompany
accounts and transactions have been eliminated in the consolidated financial
statements.
Mortgages Held for Sale
Mortgages held for sale are carried at the lower of aggregate cost or market
value, net of the effect of hedging transactions. Gains and losses on mortgages
held for sale are included in non-interest income.
Investments
In the fourth quarter of 1993, Independence adopted Statement of Financial
Accounting Standards ("SFAS") No. 115. Prior year's investment securities and
investments held for sale were not changed. The effect of adopting SFAS No. 115
resulted in an unrealized holding loss of $2.1 million against the investment
portfolio. Retained earnings was affected by the unrealized holding loss, net
of tax, of $1.4 million. Adoption of SFAS No. 115 had no effect on net income.
The decision to purchase or sell investments is based on management's assessment
of various factors such as foreseeable economic conditions, including interest
rates, and the interest rate risk, liquidity and capital position of
Independence. Independence has classified all investments as available-for-sale
since it anticipates that these securities would be available to be sold in
response to the above foreseeable economic conditions. Investments available-
for-sale are held at fair value; unrealized holding gains and losses are
recognized in non-interest income when these securities are sold.
Investments consist of debt and equity securities. Debt securities are adjusted
for amortization of premiums and accretion of discounts to maturity date.
Income is recognized on stated rates or rates computed by estimating future cash
flows of the instrument. Gains and losses on sales of investment securities,
including write-downs on mortgage residual securities, are included in
securities gains and losses and are calculated on a specific identification
basis.
Financial Futures, Swaps and Options
Financial futures contracts, interest rate swaps, caps, forward rate agreements
and option contracts are principally used to hedge assets and liabilities from
changes in interest rates. Gains and losses on financial futures contracts, and
the results of interest rate swaps, caps, forward rate agreements and options
contracts designated as hedges, are deferred, recorded on the balance sheet
and recognized over the life of the hedged asset or liability as an adjustment
to the related interest income or expense. If the asset or liability being
hedged is disposed of, any unamortized gain or loss on the hedging instrument
is included in the determination of the gain or loss from the disposition.
15
<PAGE>
Loans and Lease Financing
Loans are stated at the principal amount outstanding, net of unearned income and
net deferred loan fees and costs. Income is accrued on the principal amount
outstanding. Accrual of interest is discontinued when, in management's
judgement, collection of interest or principal is questionable.
Loan origination fees and direct loan origination costs are deferred and
amortized by the interest method over the life of each loan. The unamortized
balance of these fees and costs are included as part of the loan balance to
which it relates. The amortized amounts recognized as an adjustment of yield
are reported in interest income. Certain other loan fees are amortized on a
straight-line basis and are reported in non-interest income.
Allowance for Possible Loan Losses
The allowance for loan losses is established through a provision for loan losses
charged to operations. Loan losses are charged against the allowance when
management believes that the collectibility of the loan principal is unlikely.
Recoveries on loans previously charged-off are credited to the allowance.
The allowance is an amount that management believes will be adequate to absorb
possible loan losses based on evaluations of loan collectibility and prior loss
experience. The evaluations take into consideration such factors as changes in
the nature and volume of the portfolio, overall portfolio quality, specific
problem loans and current and anticipated economic conditions that may affect
borrowers' ability to pay.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are calculated over the estimated
useful life of the asset, limited in the case of leasehold improvements to the
lease term, using the straight-line method.
Other Real Estate Owned
Other real estate owned represents properties acquired through customers' loan
defaults. The real estate is stated at an amount equal to the loan balance
prior to foreclosure, plus costs incurred for improvements to the property, but
no more than the fair market value of the property, less estimated costs to
sell.
Income Taxes
Independence accounts for income taxes under the asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in
Independence's financial statements or tax returns. In estimating future tax
consequences, Independence generally considers all expected future events
other than enactments of changes in the tax law or rates. A valuation
allowance may be provided for the deferred tax assets to the extent that it is
more likely than not that they will not be realized.
Earnings Per Share
Earnings per share are computed by dividing net income by the weighted average
number of shares outstanding and the assumed exercise of stock options using
the treasury stock method to the extent that the effect is dilutive.
Fully diluted earnings per share are based on net income increased by interest
expense (net of tax) on outstanding convertible subordinated debentures, unless
the effect on fully diluted earnings per share is antidilutive. The weighted
average number of shares outstanding is increased by the assumed conversion of
outstanding convertible subordinated debentures and the assumed exercise of
stock
16
<PAGE>
options using the treasury stock method to the extent that the effect is
dilutive. Fully-diluted earnings are not presented on the income statement if
the reduction is less than three percent.
Cash Flow Statement
For purposes of the statement of cash flows, Independence considers cash and due
from banks and federal funds sold, excluding term federal funds sold, as cash
and cash equivalents.
NOTE 2
PROPOSED TRANSACTION
In the fourth quarter of 1993, Independence and CoreStates Financial Corp
("CoreStates") entered into an agreement and plan of merger (the "Merger
Agreement") and a stock option agreement (the "Stock Option Agreement"). This
transaction is subject to approval by various regulatory agencies and
Independence's shareholders and the satisfaction of all closing conditions. The
following information is qualified in its entirety by reference to the Merger
Agreement and Stock Option Agreement which were filed in the Independence Form
8-K of November 19, 1993. Under the terms of the Merger Agreement, each
shareholder of Independence will receive for each Independence Common Share a
number of CoreStates Common Shares determined as follows: (i) if the Average
Closing Price (as defined in the Merger Agreement) of CoreStates Common Shares
on the Determination Date (as defined in the Merger Agreement) is less than or
equal to $27.00 per share, the exchange ratio will be 1.50; (ii) if the Average
Closing Price of CoreStates Common Share on the Determination Date is greater
than or equal to $28.00 per share, the exchange ratio will be 1.45; or, (iii) if
the Average Closing Price of CoreStates Common Shares on the Determination Date
is greater than $27.00 but less than $28.00 per share, the exchange ratio will
be determined by dividing $40.50 by the Average Closing Price. As a condition
to CoreStates entering into the Merger Agreement, and in consideration thereof,
Independence and CoreStates entered into the Stock Option Agreement, entitling
CoreStates, under certain circumstances to purchase up to 1,130,000 authorized
but unissued shares of Independence Common Stock at an exercise price of $33.50,
subject to termination within certain periods, in cash.
While Independence has utilized a long-term workout strategy for all of its
assets in the belief that value could be maximized over time, CoreStates'
strategy is to seek to dispose of certain assets via bulk sale, individual
credit direct negotiation or foreclosure, in an accelerated manner. It is
CoreStates' philosophy that this change maximizes the total value of the
proposed transaction and allows the ongoing institution to concentrate upon
new franchise initiatives and revenue generation. In CoreStates' experience, a
strategy that involves the accelerated resolution of problem assets has been
more economical than a long-term workout approach. It has been CoreStates'
experience that the costs of working out assets as well as other carrying
costs typically outweigh any improvement in an asset's realized value.
Furthermore, resources and management time and attention are diverted away
from building the business and creating long-term franchise value.
Independence currently estimates that in connection with the change in
strategic direction and to conform its loan, accrual and reserve policies to
those of CoreStates, Independence will make an addition to the allowance for
possible loan losses of $25.0 million and an addition to the reserve against
other real estate owned of approximately $5.0 million. Independence currently
estimates that the assets related to the $30.0 million in estimated aggregate
provisions will be disposed of within eighteen months of the effective date of
the merger. The carrying value of these assets is approximately $120.0 million
and the estimated provisions represent 25% of this amount. In addition, $24.2
million of closing and consolidation costs are
17
<PAGE>
expected due to the merger. Accordingly, pro forma shareholders' equity will be
reduced by $35.2 million, the after-tax effect of the estimated provisions and
costs.
NOTE 3
CASH AND DUE FROM BANKS
The Federal Reserve Bank requires maintenance of certain average reserve
balances for all financial institutions. In addition, commercial banks maintain
compensating balances, most of which are not required, but are used to offset
specific charges for check clearing and other services. At December 31, 1993,
required compensating and reserve balances were $41.5 million.
NOTE 4
INVESTMENT SECURITIES
The carrying values and fair values of investments available-for-sale as of
December 31, 1993 were as follows:
<TABLE>
<CAPTION>
Unrealized Unrealized
Carrying Holding Holding Fair
Value Gains Losses Value
--------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 2,003 $ 3 $ --- $ 2,006
U.S. Government agencies
and corporations 13,651 250 (9) 13,892
State and municipal 64,194 779 (167) 64,806
Foreign Government securities 250 --- --- 250
Corporate securities 80,327 8 (279) 80,056
Mortgage-backed securities 311,828 2,863 (5,711) 308,980
Other securities 107,559 477 (344) 107,692
Equity securities 10,292 63 (33) 10,322
--------------------------------------------
Subtotal 590,104 $ 4,443 $ (6,543) $588,004
=============================
Less: Net unrealized
holding losses (2,100)
--------
Total $588,004
========
</TABLE>
The amortized cost and fair value of debt securities by contractual maturity at
December 31, 1993 are shown in the following table. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties. Mortgage-
backed securities are shown separately due to the amortization and prepayment of
principal occurring throughout the life of these instruments.
<TABLE>
<CAPTION>
DECEMBER 31, 1993
-------------------
Amortized Fair
Cost Value
-------------------
<S> <C> <C>
Due in one year or less $ 72,630 $ 72,635
Due after one year through five years 112,261 112,246
Due after five years through ten years 22,281 22,432
Due after ten years 60,812 61,389
Mortgage-backed securities 311,828 308,980
------------------
Total debt securities $579,812 $577,682
==================
</TABLE>
The amortized cost and fair value of mortgage residual securities were $13.3
million and $8.3 million at December 31, 1993. Write-downs of $4.0 million were
recognized in 1993 on these investments and are included in securities gains
and losses.
18
<PAGE>
Proceeds from sales and calls of debt securities and investments held for sale
were $201.9 million during 1993. Gains of $3.7 million and losses of $132,000
were realized on these sales in 1993. Net realized gains of $746,000 on the
sales of marketable equity securities were recognized in 1993.
In 1993, Independence received additional payments due to previous settlements
on certain bonds of $155,000, which were recorded in non-interest income.
At December 31, 1993, assets having a book value of $187.2 million were pledged
to collateralize deposits of public funds and for other purposes.
In 1993, Independence held no securities that, in the aggregate from any issuer
(excluding the U.S. Government and its agencies), were in excess of 10.0% of
shareholders' equity. Independence held $18.1 million, or 3.1% of total
investment securities at December 31, 1993, of bank or bank holding company
securities which could be affected by the condition of the general economy and
the banking industry. Independence's investment policy requires that all new
purchases have at least a long-term rating of A. In addition, Independence held
interest-bearing deposits with banks, federal funds sold, bank notes, banker's
acceptances and commercial paper totaling $87.1 million at December 31, 1993
which would be similarly affected by the status of the banking industry. These
investments are principally short-term in nature and require a minimum A2/P2
rating at the time of purchase.
NOTE 5
LOANS AND LEASE FINANCING
Loans were classified as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1993
------------------
<S> <C>
Commercial $ 577,516
Real estate - construction 40,706
Mortgages - commercial 257,710
Mortgages - residential 103,946
Installment loans to individuals 655,538
Lease financing 84,331
----------
Total 1,719,747
Unearned income (31,750)
----------
Total net loans $1,687,997
==========
</TABLE>
It is the practice of Independence to lend primarily in its trade area which
consists principally of eastern Pennsylvania. Independence, to a large extent,
extends credit collateralized by real estate. This includes residential and
commercial mortgages, residential and commercial construction loans, home equity
loans and commercial loans collateralized by real estate. These lending
activities could be similarly affected changes in the general economy, the
regional economy or real estate values.
At December 31, 1993 nonaccrual loans were $20.3 million. The gross amount of
interest that would have been earned at original rates on nonaccrual loans was
$2.3 million in 1993, of which $464,000 was received in 1993 and recorded in
interest income.
At December 31, 1993, restructured commercial mortgages were $1.6 million. The
gross amount of interest that would have been earned in 1993 if there had been
no restructuring was $95,000 of which $83,000 was received and recorded in
interest income. There are no commitments to lend additional funds to any
debtor who is a party to a restructured loan.
19
<PAGE>
The following table presents the amounts due from directors, principal officers,
and their related interests. All of these transactions were made in the
ordinary course of business on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other persons, and they did not involve a more than normal
risk of collectibility or present any other unfavorable features.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
-----------------------------
<S> <C>
Balance at beginning of year $ 37,321
Additions 11,289
Repayments and other changes (23,816)
--------
Balance at end of year $ 24,794
========
</TABLE>
NOTE 6
ALLOWANCE FOR POSSIBLE LOAN LOSSES
Transactions in the allowance for possible loan losses are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
----------------------------
<S> <C>
Balance at beginning of year $ 34,634
Charge-offs (17,352)
Recoveries 4,573
--------
Net charge-offs (12,779)
Provision for possible loan losses 11,201
--------
Balance at end of year $ 33,056
========
</TABLE>
NOTE 7
PREMISES AND EQUIPMENT
Premises and equipment, stated at cost less accumulated depreciation and
amortization, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1993
-----------------
<S> <C>
Land and buildings $ 36,214
Furniture and equipment 32,113
Leasehold improvements 7,153
Assets held under capital leases 372
--------
Gross book value 75,852
Accumulated depreciation and amortization (41,945)
--------
Net book value $ 33,907
========
</TABLE>
Depreciation and amortization expense on premises and equipment amounted to $4.9
million in 1993.
Certain facilities and equipment are leased under short- and long-term lease
agreements expiring at various dates to the year 2003. Substantially all such
leases are accounted for as operating leases. In certain cases, these leases
contain renewal options and generally provide that Independence pays for
insurance, taxes and maintenance. Rental expense on operating leases amounted
to $1.7 million in 1993. Required minimum annual rentals due on noncancelable
leases expiring after one year approximate $8.9 million in the aggregate at
December 31, 1993. Minimum annual rentals for each of the years 1994 through
1998 are approximately $1.6 million, $1.4 million, $1.2 million, $1.1 million
and $752,000, respectively.
20
<PAGE>
NOTE 8
OTHER ASSETS
At December 31, 1993, Independence had $16.1 million of other real estate owned.
Other real estate expense was $2.4 million in 1993.
NOTE 9
SHORT-TERM BORROWINGS
Federal funds purchased represent overnight borrowings. Securities sold under
agreements to repurchase represent borrowings which may range from one day to
three months in maturity. Other short-term borrowings consist of demand notes,
and Treasury, tax and loan note options payable upon demand.
The following table presents certain information for federal funds purchased,
securities sold under agreements to repurchase and other short-term borrowings:
<TABLE>
<CAPTION>
DECEMBER 31, 1993
----------------------
Average
Amount Rate
----------------------
<S> <C> <C>
Federal funds purchased:
At December 31 $ --- ---%
Average amount outstanding 221 3.62
Maximum month-end balance ---
Securities sold under
agreements to repurchase:
At December 31 $ 51,774 2.29%
Average amount outstanding 89,718 2.73
Maximum month-end balance 130,278
Other short-term borrowings:
At December 31 $ 10,456 2.85%
Average amount outstanding 7,705 2.63
Maximum month-end balance 13,898
</TABLE>
NOTE 10
LONG-TERM BORROWINGS
Long-term borrowings represent obligations with original maturities exceeding
one year. A summary of these borrowings is presented below:
<TABLE>
<CAPTION>
DECEMBER 31, 1993
-----------------
<S> <C>
Mortgage loans, secured by bank premises $ 1,821
Subordinated convertible debentures 42,147
Subordinated debentures 25,000
Obligations under capital leases 286
Federal Home Loan Bank borrowings 65,000
--------
Total $134,254
========
</TABLE>
Mortgage loans range in maturity from 1994 to 1999 at fixed rates of 7.50% and
floating interest rates up to 70% of prime. The aggregate amount of maturities
for all long-term borrowings due in each of the five years 1994 through 1998
are $1.4 million, $25.1 million, $30.1 million, $10.0 million and $10,000,
respectively.
21
<PAGE>
Independence has $42.1 million outstanding in 7.0% convertible subordinated
debentures due in 2011. Interest is paid semi-annually. The debentures are
convertible at any time prior to maturity, unless previously redeemed, into
shares of common stock at a conversion price of $36.25 per share. The
debentures are redeemable at Independence's option at a price of 102.1% of par
on or after June 15, 1993, declining annually thereafter to par on and after
June 15, 1996, together in each case with accrued interest. Independence must
comply with covenants under this agreement. These covenants include
restrictions upon the issuance of capital stock of significant subsidiaries (as
defined), and limitations on liens, as security for indebtedness for money
borrowed, upon any shares of stock of any significant subsidiary.
In 1990, Independence issued for general purposes $25.0 million in subordinated
debentures due in 2000 with a floating interest rate of prime plus 0.25%.
Optional repayments may begin after the third year. This agreement contains
certain covenants which include limitations on the issuance of funded and senior
indebtedness (as defined), the creation of encumbrances, sale and leaseback
transactions, investments in subsidiaries, long-term lease rentals, the issuance
of certificates of deposit greater than $100,000 and deposit notes, transactions
with affiliates, the issuance of preferred stock by certain subsidiaries,
acquisition and disposition of assets including consolidations and mergers, the
purchase of treasury stock, the payment of cash dividends and the maintenance of
specified ratios. At December 31, 1993, under the most restrictive limitations,
consolidated retained earnings of $14.8 million were unrestricted and available
for dividends, the amount of additional funded indebtedness, as defined, that
could be issued was $41.7 million, and the minimum net worth requirement was
$165.0 million.
Federal Home Loan Bank ("FHLB") borrowings of $65.0 million were borrowed at
rates ranging from one-month LIBOR less 0.10% to 5.89% and are used for
general corporate purposes. At a subsidiary bank, these borrowings are
collateralized by a pledge of the bank's portfolio of the unencumbered
investment securities, mortgaged-backed securities, certain mortgage loans and
a lien on the bank's FHLB stock.
NOTE 11
FEDERAL INCOME TAXES
Applicable income taxed consisted of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
----------------------------
<S> <C>
Current income taxes $6,288
Deferred income taxes 2,024
------
Total $8,312
======
</TABLE>
22
<PAGE>
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities that represent the significant portions of the
deferred tax asset or liability at December 31, 1993 were as follows:
<TABLE>
<CAPTION>
December 31, 1993
------------------
<S> <C>
Provision for possible loan losses ($11,365)
Lease financing deduction 6,355
Investment income (1,763)
Other, net 886
---------
Net deferred tax asset ($ 5,887)
=========
</TABLE>
The reconciliation between the statutory and effective tax rate for net income
was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
----------------------------
<S> <C>
Statutory tax rate 35%
Tax exempt interest (4)
Other (4)
-----
Effective tax rate 27%
=====
</TABLE>
NOTE 12
SHAREHOLDERS' EQUITY
Independence had a dividend reinvestment and stock purchase plan for
shareholders in which 3,000,000 shares of common stock were authorized for
issuance. This plan was terminated on December 31, 1993, as required under the
agreement and plan of merger with CoreStates. Additional shares of common
stock were able to be purchased with reinvested dividends at a 5% discount
from the market price. Common stock was also able to be purchased with
voluntary cash payments at the market price. The number of shares purchased
pursuant to this plan were 53,997 shares in 1993.
During 1993, Independence had an employee stock purchase plan in which 600,000
shares of common stock were authorized for issuance to persons who have been
continuously employed by Independence for one year and who participated through
payroll deductions; this plan was also terminated on December 31, 1993, as
required under the agreement and plan of merger with CoreStates. Option
periods under the employee stock purchase plan covered a six-month period from
January 1 to June 30, and July 1 to December 31. Common stock was purchased
under the plan at the lesser of 85% of the fair market value of the common
stock on the first or last day of the offering period. During 1993, 16,122
shares were issued to participants at $19.98 and $21.89 per share.
Independence has a 1992 employee long-term incentive plan under which 600,000
shares were registered on May 21, 1992 for issuance as stock options, stock
appreciation rights, share awards or stock grants. Independence also has a 1992
non-employee director stock option plan under which 150,000 shares were
registered on May 21, 1992. In 1993, 21,000 options were granted under the non-
employee director stock option plan; no options were granted under the 1992
employee long-term incentive plan. These options have been granted for a term
up to five years at a minimum fair market value of the shares at the date of
23
<PAGE>
grant. Under the Merger Agreement, future stock option grants are not
authorized. Changes in total options outstanding during 1993 were as follows:
<TABLE>
<CAPTION>
Shares Options Option Price
Available Outstanding Per Share
------------------------------------------
<S> <C> <C> <C>
January 1, 1993 844,102 690,928 $13.50 to $31.00
Granted during year ( 21,000) 21,000 25.75
Exercised during year --- (163,763) 13.50 to 31.00
Forfeited during year 25,100 (25,100) 13.50 to 31.00
-----------------------------------------
December 31, 1993 848,202 523,065 $13.50 to $31.00
=========================================
Options exercisable at end of year 470,915 $13.50 to $31.00
===========================
</TABLE>
Independence has a shareholders rights plan under which each share of common
stock has a right to purchase 1/100th of a share of Series A preferred stock.
The exercise price is $80.00 after any person or group acquires 20.0% or more of
Independence's common stock or in certain other circumstances. The rights are
redeemable by Independence for $0.01 per right until the earlier of the
expiration date of February 21, 1999 or their exercise. Under the Merger
Agreement, several amendments were made to this rights plan exempting
CoreStates from the applications of the plan. The rights do not have voting or
dividend rights and, until they become exercisable, have no dilutive effect on
the earnings of Independence.
As discussed in Note 2, as a condition to CoreStates entering into the Merger
Agreement, and in consideration thereof, Independence and CoreStates entered
into the Stock Option Agreement, entitling CoreStates, under certain
circumstances to purchase up to 1,130,000 authorized but unissued shares of
Independence Common Stock at an exercise price of $33.50, subject to termination
within certain periods, in cash.
NOTE 13
RETIREMENT PLANS
Independence has a defined contribution plan which covers all employees who meet
the age and service requirements. Independence made contributions of 9.0% of
covered compensation in 1993 according to the plan's vesting schedule.
Independence also has a savings plan pursuant to the provisions of 401(k) of
the Internal Revenue Code. The savings plan covers substantially all employees
who meet the age and service requirements. The plan provides for elective
employee contributions up to 8.0% of compensation and a full matching company
contribution limited to 3.0%. The total expense relating to current retirement
plans was $3.4 million in 1993.
NOTE 14
DIVIDEND AND LOAN RESTRICTIONS
The dividends that may be paid to the parent company by its banking subsidiaries
are subject to certain legal limitations. Based on these limitations, the
amount available for payment of dividends by all subsidiary banks was $83.7
million at December 31, 1993. Under current Federal Reserve regulations, the
banking subsidiaries are limited in the amount they may loan to their
affiliates, including the parent company. Such loans must be secured by
specified obligations. In addition, any such loans to a single affiliate may
not exceed 10.0%, and the aggregate of all loans to all affiliates may not
exceed 20.0% of each banking subsidiary's regulatory capital. At December 31,
1993, the maximum amount available for transfer from the banking subsidiaries to
the parent company in the form of loans and dividends approximated 49.3% of
consolidated shareholders' equity.
24
<PAGE>
Independence has certain restrictive covenants in its loan agreements which
include limitations on the payment of cash dividends. At December 31, 1993,
$14.8 million of consolidated retained earnings were unrestricted and available
for dividend payments.
NOTE 15
COMMITMENTS AND CONTINGENCIES
Various legal proceedings are pending against Independence and its subsidiaries.
Management does not anticipate any material losses as a result of these actions.
Independence is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, standby letters of credit,
recourse arrangements, commitments to sell and purchase mortgage loans and
mortgage-backed securities, and interest rate swaps, caps and forward rate
agreements. These instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the financial
statements.
Credit risk is defined as the possibility of sustaining a loss due to the
failure of the other parties to a financial instrument to perform in accordance
with the terms of the contract. The maximum exposure to credit loss under
commitments to extend credit, standby letters of credit, and loans sold with
recourse is represented by the contractual amount of these instruments.
Independence uses the same underwriting standards and policies in making credit
commitments as it does for on-balance-sheet instruments. For interest rate
swaps, caps, forward rate agreements and purchased option contracts, the
notional amounts do not reflect exposure to credit loss. The credit risk of
these instruments is controlled through credit approvals, risk control limits
and monitoring procedures.
<TABLE>
<CAPTION>
CONTRACT OR NOTIONAL AMOUNT
DECEMBER 31, 1993
-----------------
<S> <C>
Financial instruments whose contract amounts represent potential risk:
Commitments to extend credit $498,630
Standby letters of credit 33,607
Loans sold with recourse 9,834
Financial instruments whose notional or contractual amounts exceed the amount of
potential credit risk:
Floating rate basis swaps 15,000
Interest rate swaps maturing within one year 75,000
Interest rate swaps maturing beyond one year 302,500
Purchased Option Contracts 89,000
Commitments to sell mortgage loans
and mortgage-backed securities 37,580
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and many
require the payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Independence evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained
upon extension of credit is based on management's credit evaluation of the
customer. Collateral held varies but may include real estate, accounts
receivable, marketable securities, pledged deposits, inventory, and equipment.
25
<PAGE>
Standby letters of credit are conditional commitments issued that guarantee the
performance of a customer to a third party. The credit risk and collateral
policy involved in issuing letters of credit is essentially the same as that
involved in extending loan commitments. The amount of collateral obtained is
based on management's credit evaluation of the customer. Collateral held varies
but may include real estate, accounts receivable, marketable securities, pledged
deposits, inventory, and equipment.
Independence has retained credit risk on certain residential mortgage loans
sold. The investor may require that Independence repurchase the individual
loans if they become 90 days past due. The loans sold with recourse totaled
$9.8 million December 31, 1993.
Independence enters into interest rate swaps, forward rate agreements and
purchased option contracts to manage the interest rate exposure of its balance
sheet. These transactions generally involve the exchange of fixed and floating
rate interest payment obligations without the exchange of the underlying
principal amounts. Entering into interest rate swaps, forward rate agreements
and purchased option contracts involves not only the risk of default by the
other party, but also the interest rate risk associated with unmatched
positions. Independence enters into only matched or hedged positions. The
amounts potentially subject to credit risk are the streams of payments under the
agreements and not the notional amounts used to express the volume of these
transactions. The exposure to credit loss from interest rate swaps, forward
rate agreements and purchased option contracts can be estimated by calculating
the cost, on a present value basis, to replace at current market rates all
profitable contracts outstanding at year-end. On that basis, the estimate of
exposure on outstanding interest rate swaps, forward rate agreements and
purchased option contracts was $4.8 million at December 31, 1993.
In conjunction with its mortgage banking activities, Independence commits to
sell mortgage loans and mortgage-backed securities. These forward contracts are
entered into for the purposes of reducing the market risk associated with
originating residential mortgage loans for sale. Additional risks may arise if
Independence is unable to originate loans to fulfill the contracts, in which
case Independence would repurchase mortgage-backed securities to deliver against
the contracts. In addition, options and futures contracts may be used to offset
the interest rate risk. Unrealized gains or losses on these purchased option
contracts are included in the lower of cost or market valuation of the mortgages
held for sale at year-end.
NOTE 16
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards #107, "Disclosures about Fair Value
of Financial Instruments", requires all entities to disclose the estimated fair
value of its financial instrument assets and liabilities. For Independence, as
for most financial institutions, approximately 98.0% of its assets and
liabilities are considered financial instruments; however, many of these
instruments lack an available trading market as characterized by a willing buyer
and willing seller engaging in an exchange transaction. It is also
Independence's general practice and intent to hold its financial instruments to
maturity and not to engage in trading or sales activities. Therefore,
significant estimations and present value calculations were used by the company
for the purpose of this disclosure.
Estimated fair values have been determined by Independence using the best
available data, and an estimated methodology suitable for each category of
financial instruments. For those loans and deposits with floating interest
rates, it is presumed that estimated fair values generally approximate the
recorded book balances. The estimated methodologies used, the estimated fair
values and recorded book balances at December 31, 1993, were as follows:
26
<PAGE>
The carrying amounts of cash and due from banks and short-term investments
approximate fair value because of the short maturity of these instruments.
<TABLE>
<CAPTION>
Estimated Recorded
Fair Value Book Balance
------------------------
<S> <C> <C>
Cash and due from banks $ 120,462 $ 120,462
Short-term investments 87,114 87,144
</TABLE>
Financial instruments actively traded in a secondary market have been valued
using quoted available market prices. Investments available-for-sale are
carried at fair value.
<TABLE>
<CAPTION>
Estimated Recorded
Fair Value Book Balance
------------------------
<S> <C> <C>
Mortgages held for sale $ 57,572 $ 57,119
Investments available-for-sale 588,004 588,004
</TABLE>
Financial instruments with stated maturities have been valued using present
value discounted cash flow with a discount rate approximating the current market
for similar assets and liabilities.
<TABLE>
<CAPTION>
Estimated Recorded
Fair Value Book Balance
------------------------
<S> <C> <C>
Deposits with stated maturities $629,718 $623,383
Short-term borrowings 62,217 62,230
Long-term debt 138,833 134,254
</TABLE>
Financial instrument liabilities with no stated maturities have an estimated
fair value equal to the amount payable on demand which is the recorded book
balance.
<TABLE>
<CAPTION>
Estimated Recorded
Fair Value Book Balance
-------------------------
<S> <C> <C>
Deposits with no stated maturities $1,529,682 $1,529,682
</TABLE>
The net loan portfolio has been valued using a present value discounted cash
flow. The discount rate used in these calculations is the Treasury yield curve
adjusted for non-interest operating costs, credit loss and assumed prepayment
risk.
<TABLE>
<CAPTION>
Estimated Recorded
Fair Value Book Balance
------------------------
<S> <C> <C>
Loans, net of unearned income $1,713,555 $1,687,997
</TABLE>
27
<PAGE>
Changes in assumptions or estimated methodologies may have a material effect on
these estimated fair values.
Independence's remaining assets and liabilities which are not considered
financial instruments have not been valued differently than has been customary
with historical cost accounting.
The fair values of off-balance-sheet instruments have been determined based on
fees, net of costs, currently charged for similar agreements or on the estimated
cost to terminate them or otherwise settle the obligations with the
counterparties.
<TABLE>
<CAPTION>
Fair Value of Asset (Liability)
DECEMBER 31, 1993
-------------------------------
<S> <C>
Commitments to extend credit $(1,868)
Standby letters of credit 840
Interest rate swap agreements (6,974)
Purchased option contracts 470
</TABLE>
Management is concerned that reasonable comparability between financial
institutions may not be likely due to the wide range of permitted valuation
techniques and numerous estimates which must be made given the absence of active
secondary markets for many of the financial instruments. This lack of uniform
valuation methodologies also introduces a greater degree of subjectivity to
these estimated fair values. Therefore, these values may not be realizable.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of Independence.
28
<PAGE>
NOTE 17
FINANCIAL STATEMENTS OF
INDEPENDENCE BANCORP, INC. (PARENT ONLY)
<TABLE>
<CAPTION>
BALANCE SHEET
- -------------------------------------------------------------------------------------
December 31, 1993
- -------------------------------------------------------------------------------------
<S> <C>
Assets
Cash and due from banks $ ---
Investments in subsidiary banks 219,964
Investments in nonbank subsidiaries 13,884
Advances to and notes receivable from subsidiary banks 37,755
Advances to and notes receivable from nonbank subsidiaries 11,141
Other investments 1,247
Other assets 7,095
- -------------------------------------------------------------------------------------
Total Assets $291,086
=========
Liabilities
Long-term borrowings $67,147
Other liabilities 1,961
Total Liabilities 69,108
Shareholders' Equity
Preferred stock ---
Common stock 29,188
Surplus 91,659
Retained earnings 103,521
Treasury stock (2,390)
- -------------------------------------------------------------------------------------
Total Shareholders' Equity 221,978
- -------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $291,086
=========
<CAPTION>
STATEMENT OF INCOME
- -----------------------------------------------------------------------
Year Ended December 31, 1993
- -----------------------------------------------------------------------
<S> <C>
Dividends from subsidiary banks $25,366
Dividends from nonbank subsidiaries 172
Interest income from subsidiary banks 1,352
Interest income from nonbank subsidiaries 3,160
Other income and dividends 696
Management fees charged to subsidiary banks 9,759
Management fees charged to nonbank subsidiaries 234
Gains (losses) on sales of investment securities 748
- -----------------------------------------------------------------------
Total income 41,487
- -----------------------------------------------------------------------
Salaries and employee benefits 7,530
Interest expense 7,300
Other expenses 5,139
- -----------------------------------------------------------------------
Total expense 19,969
- -----------------------------------------------------------------------
Income before applicable income tax benefit and
equity in undistributed earnings of subsidiaries 21,518
Income taxes (benefit) (1,511)
- -----------------------------------------------------------------------
Income before equity in undistributed earnings of
subsidiary banks 23,029
Equity in undistributed earnings (losses) of subsidiary banks 3,092
Equity in undistributed earnings (losses) of nonbank
subsidiaries (3,242)
- -----------------------------------------------------------------------
Net Income $22,879
========
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOW
- ---------------------------------------------------------------------------
Year Ended December 31, 1993
- ---------------------------------------------------------------------------
<S> <C>
Operating Activities
Net income $22,879
Adjustments to reconcile net income to net cash
provided by operating activities:
Securities (gains) losses (748)
Recoveries on certain bonds (4)
Provision for depreciation 260
Equity in undistributed earnings of subsidiaries (8,466)
Net (increase) decrease in accrued income and other assets (2,107)
Net decrease in accrued expense and other liabilities (829)
- ---------------------------------------------------------------------------
Net cash provided by operating activities 10,985
- ---------------------------------------------------------------------------
Investing Activities
Net (increase) decrease in advances and notes
receivable with subidiaries (9,902)
Purchases of investment securities (2,151)
Proceeds from sales of investment securities 5,665
Return of capital from subsidiaries 8,276
Additional capitalization of subsidiaries (4,460)
Premises and equipment expenditures (188)
- ---------------------------------------------------------------------------
Net cash provided (used) by investing activities (2,760)
- ---------------------------------------------------------------------------
Financing Activities
Proceeds from dividend reinvestment
and employee stock purchase plans 4,966
Cash dividends paid (13,252)
- ---------------------------------------------------------------------------
Net cash used by financing activities (8,286)
- ---------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (61)
Cash and cash equivalents at beginning of year 61
- ---------------------------------------------------------------------------
Cash and cash equivalents at end of year $0
========
Supplemental disclosures:
Interest paid $6,080
Income taxes paid ---
Noncash transactions:
Conversion of note receivable to investment in subsidiary 15,400
Securities transferred from bank subsidiaries as dividend
payment 340
</TABLE>
NOTES TO PARENT COMPANY ONLY FINANCIAL STATEMENTS
1. The financial statements of Independence Bancorp, Inc. (Parent Only) shown
above should be read in conjunction with the consolidated financial
statements and the footnotes to the consolidated financial statements.
2. There is no federal income tax applicable to the dividends and other income
received from the subsidiaries since the parent company and its subsidiaries
file a consolidated federal income tax return.
3. Interest expense includes $2.7 million of interest rate swap expense in
1993.
30
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Independence Bancorp, Inc.:
We have audited the accompanying consolidated balance sheet of Independence
Bancorp, Inc. and Subsidiaries as of December 31, 1993 and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Independence Bancorp, Inc. and Subsidiaries at December 31, 1993 and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 4 to the Consolidated Financial Statements, the
Company changed its method of accounting for investments in 1993.
COOPERS & LYBRAND
January 19, 1994
2400 Eleven Penn Center
Philadelphia, Pennsylvania
31
