<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the quarter ended September 30, 1994 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.)
N.E. Corner Broad and Chestnut Streets
Philadelphia, Pennsylvania 19101
- ---------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code 215-973-3827
------------
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 .
------- -----
Number of Shares of Common Stock Outstanding
at November 1, 1994: 140,705,063
<PAGE>
Page 2
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet September 30, 1994 and
December 31, 1993 3
Consolidated Statement of Income for the Three and
Nine Months Ended September 30, 1994 and 1993 4
Consolidated Statement of Changes in Shareholders'
Equity for the Nine Months Ended September 30, 1994
and 1993 5
Consolidated Statement of Cash Flows for the
Nine Months Ended September 30, 1994 and 1993 6
Notes to the Consolidated Financial Statements 7-13
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-40
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 41
SIGNATURE 42
EXHIBITS 11, 12.1, 12.2, 27 43-47
</TABLE>
<PAGE>
Page 3
PART I. FINANCIAL INFORMATION
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET (unaudited)
(in thousands) September 30, December 31,
1994 1993
-------------- -------------
Restated
(See Note A)
<S> <C> <C>
ASSETS
- ------
Cash and due from banks................................. $ 1,846,019 $ 2,521,676
Time deposits, principally Eurodollars.................. 1,601,494 1,319,457
Investments held-to-maturity (fair value:
1994 - $2,463,488; 1993 - $2,257,813).................. 2,481,080 2,228,560
Investments available-for-sale, at fair value........... 374,912 1,370,606
Loans, net of unearned discounts of $141,109 in 1994
and $151,994 in 1993 (Note C).......................... 19,723,793 19,776,258
Less:Allowance for loan losses......................... (477,878) (450,823)
----------- -----------
Net loans............................................ 19,245,915 19,325,435
Federal funds sold and securities purchased under
agreements to resell................................... 126,706 161,527
Trading account securities, at fair value............... 5,200 6,393
Due from customers on acceptances....................... 300,783 332,234
Premises and equipment.................................. 419,012 410,022
Other assets............................................ 641,227 758,707
----------- -----------
Total assets......................................... $27,042,348 $28,434,617
=========== ===========
LIABILITIES
- -----------
Deposits:
Domestic:
Non-interest bearing.................................. $ 5,682,136 $ 6,649,367
Interest bearing...................................... 12,928,741 13,686,027
Overseas branches and subsidiaries..................... 900,510 796,902
----------- -----------
Total deposits....................................... 19,511,387 21,132,296
Funds borrowed.......................................... 2,198,881 1,884,125
Bank acceptances outstanding............................ 301,380 337,180
Other liabilities....................................... 1,105,331 1,123,342
Long-term debt.......................................... 1,725,184 1,589,290
----------- -----------
Total liabilities.................................... 24,842,163 26,066,233
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES (Note D)
- --------------------------------------
SHAREHOLDERS' EQUITY
- --------------------
Common stock: $1 par value; authorized 200.0 million
shares; issued 145.9 million shares in 1994 and 145.8
million shares in 1993 (including treasury shares of
5.3 million in 1994 and .4 million in 1993)............ 2,200,185 2,368,384
----------- -----------
Total shareholders' equity........................... 2,200,185 2,368,384
----------- -----------
Total liabilities and shareholders' equity........... $27,042,348 $28,434,617
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
Page 4
<TABLE>
<CAPTION>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (unaudited)
(in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -----------------------
1994 1993 1994 1993
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
- ---------------
Interest and fees on loans:
Taxable income............................................ $426,337 $ 396,057 $1,227,510 $1,162,990
Tax exempt income......................................... 5,344 7,157 17,225 22,968
Interest on investment securities:
Taxable income............................................ 33,161 44,717 104,539 144,445
Tax exempt income......................................... 3,827 4,732 12,530 15,394
Interest on time deposits in banks......................... 18,566 9,663 44,911 34,017
Other interest income...................................... 1,171 1,838 4,856 5,029
-------- ---------- ---------- ----------
Total interest income................................... 488,406 464,164 1,411,571 1,384,843
-------- ---------- ---------- ----------
INTEREST EXPENSE
- ----------------
Interest on deposits....................................... 89,702 91,701 258,540 290,124
Interest on funds borrowed................................. 23,169 15,939 62,768 48,396
Interest on long-term debt................................. 23,416 18,290 60,141 54,472
-------- ---------- ---------- ----------
Total interest expense.................................. 136,287 125,930 381,449 392,992
-------- ---------- ---------- ----------
NET INTEREST INCOME..................................... 352,119 338,234 1,030,122 991,851
Provision for losses on loans.............................. 25,000 30,005 221,900 91,555
-------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOSSES ON LOANS.......................... 327,119 308,229 808,222 900,296
-------- ---------- ---------- ----------
NON-INTEREST INCOME
- -------------------
Service charges on deposit accounts........................ 44,448 45,639 137,454 133,720
Trust income............................................... 23,166 25,387 72,379 76,994
Fees for international services............................ 21,881 18,999 59,321 51,569
Debit and credit card fees................................. 16,565 16,289 47,068 45,504
Income from investment in EPS, Inc......................... 8,125 3,267 23,802 10,699
Gains (losses) on trading account securities............... 714 508 1,887 1,898
Securities gains (losses).................................. 4,223 3,306 14,143 5,461
Other operating income..................................... 14,173 42,017 65,225 99,757
-------- ---------- ---------- ----------
Total non-interest income............................... 133,295 155,412 421,279 425,602
-------- ---------- ---------- ----------
NON-FINANCIAL EXPENSES
- ----------------------
Salaries, wages and benefits............................... 157,935 157,445 477,883 468,479
Net occupancy.............................................. 28,863 28,944 87,484 86,597
Equipment expenses......................................... 18,615 17,944 57,081 55,841
Other operating expenses................................... 92,993 114,499 388,410 314,289
-------- ---------- ---------- ----------
Total non-financial expenses............................ 298,406 318,832 1,010,858 925,206
-------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES................................. 162,008 144,809 218,643 400,692
- --------------------------
Provision for income taxes................................. 57,787 48,728 81,326 132,939
-------- ---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN
- ----------------------------------------------
ACCOUNTING PRINCIPLE...................................... 104,221 96,081 137,317 267,753
--------------------
Cumulative effect of a change in accounting prin-
ciple, net of income tax benefits of $1,846
in 1994 and $7,005 in 1993............................... (3,430) (13,010)
-------- ---------- ---------- ----------
NET INCOME ................................................ $104,221 $ 96,081 $ 133,887 $ 254,743
- ---------- ======== ========== ========== ==========
Average common shares outstanding.......................... 141,033 145,702 142,581 145,431
======= ======= ======= =======
PER COMMON SHARE DATA
- ---------------------
Income before cumulative effect of a change in
accounting principle...................................... $0.74 $0.66 $0.97 $1.84
===== ===== ===== =====
Net income................................................. $0.74 $0.66 $0.95 $1.75
===== ===== ===== =====
Cash dividends declared.................................... $0.30 $0.30 $0.90 $0.84
===== ===== ===== =====
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
Page 5
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)
(in thousands)
<TABLE>
<CAPTION>
Common Capital Retained Treasury
stock surplus earnings stock Total
-------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Nine Months Ended September 30, 1993
- ------------------------------------
Balances at beginning of year.............................. $ 86,387 $ 817,391 $1,194,662 $ (3,881) $2,094,559
Net income................................................. 254,743 254,743
Issuance of shares in connection with a 100%
common stock dividend.................................... 58,929 (58,929)
Change in unrealized loss on marketable equity
securities................................................ 250 250
Treasury shares acquired (225 shares)...................... (5,799) (5,799)
Common stock issued under employee
benefit plans (801 new shares; 105 treasury
shares................................................... 531 12,815 (839) 2,342 14,849
Common stock issued under dividend
reinvestment plan (352 new shares)....................... 214 8,522 8,736
Foreign currency translation adjustments................... (1,896) (1,896)
Common dividends declared.................................. (108,525) (108,525)
--------- --------- ---------- --------- ----------
Balances at end of period.................................. $ 146,061 $ 779,799 $1,338,395 $ (7,338) $2,256,917
========= ========= ========== ========= ==========
Nine Months Ended September 30, 1994
- ------------------------------------
Balances at beginning of year, restated (See Note A) $ 145,740 $ 778,498 $1,451,965 $ (7,819) $2,368,384
Net income................................................. 133,887 133,887
Net change in unrealized gain on invest-
ments available-for-sale, net of tax..................... (37,394) (37,394)
Treasury shares acquired (5,849 shares).................... (157,543) (157,543)
Common stock issued under employee benefit
plans (279 new shares; 559 treasury shares).............. 279 4,159 (6,313) 15,069 13,194
Common stock issued under dividend reinvest-
ment plan (338 treasury shares).......................... 8 (474) 9,315 8,849
Purchase and retirement of common stock.................... (166) (994) (3,583) (4,743)
Conversion of subordinated debt (30 new shares)............ 30 684 714
Cash paid for fractional shares............................ (83) (83)
Foreign currency translation adjustments................... 90 90
Common dividends declared.................................. (125,170) (125,170)
--------- --------- ---------- --------- ----------
Balances at end of period.................................. $ 145,883 $ 782,355 $1,412,925 $(140,978) $2,200,185
========= ========= ========== ========= ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
Page 6
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1994 1993
------------- -------------
<S> <C> <C>
Operating Activities
- --------------------
Net income........................................................ $ 133,887 $ 254,743
Adjustments to reconcile net income to net cash provided
by operating activities:
Cumulative effect of a change in accounting principle........... 3,430 13,010
Provision for losses on loans................................... 221,900 91,555
Provision for losses on OREO and writedowns..................... 33,181 11,916
Depreciation and amortization................................... 53,008 68,209
Securities gains, net........................................... (14,143) (5,461)
Other gains..................................................... (11,000)
Deferred income tax expense (benefit)........................... (24,310) 23,216
Increase in due to factored clients............................. 146,480 121,249
(Increase) decrease in interest receivable...................... 18,357 (1,768)
Increase (decrease) in interest payable......................... 7,011 (46,037)
Other assets and liabilities, net............................... (61,163) 155,335
------------ ------------
Net Cash Provided By Operating Activities.................... 517,638 674,967
------------ ------------
Investing Activities
- --------------------
Net increase in loans............................................. (250,613) (860,400)
Proceeds from sales of loans...................................... 664,362 509,186
Loans originated or acquired - non-bank subsidiary................ (25,895,781) (19,741,692)
Principal collected on loans - non-bank subsidiary................ 25,309,901 19,609,711
Net (increase) decrease in time deposits, principally
eurodollars..................................................... (282,037) 689,832
Purchases of investments held-to-maturity......................... (798,748)
Purchases of investments available-for-sale....................... (350,166)
Purchases of investment securities................................ (1,674,767)
Proceeds from maturities of investments available-for-sale 306,083
Proceeds from maturities of investments held-to-maturity.......... 1,054,808
Proceeds from sales of investments available-for-sale............. 465,641 4,710
Proceeds from sales of investment securities...................... 371,477
Proceeds from maturities of investment securities................. 1,239,704
Net decrease in Federal funds sold and
securities purchased under agreements to resell............... 34,821 68,396
Purchases of premises and equipment............................... (72,239) (80,238)
Proceeds from sales and paydowns on other real estate
owned......................................................... 26,664 71,683
Other............................................................. 17,096 16,524
------------ ------------
Net Cash Provided By Investing Activities.................... 229,792 224,126
------------ ------------
Financing Activities
- --------------------
Net decrease in deposits.......................................... (1,620,909) (1,251,162)
Proceeds from issuance of long-term debt.......................... 267,115 616,519
Retirement of long-term debt...................................... (130,634) (657,155)
Net increase in funds borrowed.................................... 314,756 223,632
Cash dividends paid............................................... (113,089) (104,721)
Purchases of treasury stock....................................... (157,543) (5,799)
Other............................................................. 17,217 20,954
------------ ------------
Net Cash Used In Financing Activities........................ (1,423,087) (1,157,732)
------------ ------------
Decrease In Cash And Due From Banks.......................... (675,657) (258,639)
Cash And Due From Banks at January 1,........................ 2,521,676 2,510,001
------------ ------------
Cash and due from banks at September 30,..................... $ 1,846,019 $ 2,251,362
============ ============
Supplemental Disclosure of Cash Flow Information
- ------------------------------------------------
Cash paid during the period for:
Interest..................................................... $ 374,438 $ 439,078
============ ============
Income taxes................................................. $ 104,776 $ 116,863
============ ============
Net cash received on interest rate swaps.......................... $ 81,020
============
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
Page 7
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 1994
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of CoreStates
Financial Corp ("CoreStates") have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (comprising only normal recurring accruals)
necessary for a fair presentation have been included. The accompanying financial
statements include the consolidated accounts of Constellation Bancorp
("Constellation"), which was acquired on March 16, 1994, and Independence
Bancorp, Inc. ("Independence"), which was acquired on June 27, 1994, for all
periods presented. Both transactions were accounted for under the pooling of
interests method of accounting. Certain amounts in prior periods have been
reclassified for comparative purposes. Operating results for the nine-month
period ended September 30, 1994 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1994.
As previously reported in the second quarter, the accompanying financial
information for December 31, 1993 and the results of operations for the three
months ended March 31, 1994, which are included in the consolidated statement of
income for the nine months ended September 30, 1994, have been restated to
reflect merger-related charges of $127.8 million after-tax, or $0.89 per share,
related to the Constellation acquisition in the first quarter of 1994, rather
than in the fourth quarter of 1993. This restatement was made after discussions
with the Securities and Exchange Commission staff which resulted in these
charges being reflected in the quarter that the acquisition was consummated.
This restatement has no effect on CoreStates' financial position as reported for
March 31, 1994. The restatement also has no effect on CoreStates' basic
operating results, excluding the one-time merger-related charges.
During the first quarter of 1994, Independence recognized a $3,430,000
after-tax, or $0.02 per share, impairment loss on certain mortgage securities as
a cumulative effect of a change in accounting principle. The loss was the result
of a write-down to fair value of these securities, which were deemed to be
impaired. This resulted from a Financial Accounting Standards Board ("FASB")
1994 interpretation of Statement of Financial Accounting Standards No. 115 ("FAS
115"). The interpretation, reached by a consensus of the FASB Emerging Issues
Task Force in March 1994, provides more definitive criteria for recognition of
impairment losses on these types of securities.
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 postemployment benefits during the active service periods of
employees. CoreStates recognized the January 1, 1993 transitional liability of
$20,015,000, $13,010,000 after-tax or $0.09 per share, as the cumulative effect
of a change in accounting principle.
<PAGE>
Page 8
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE B -- PROPOSED ACQUISITION
In March 1994, CoreStates announced a definitive agreement to acquire
Germantown Savings Bank ("GSB") in a transaction to be accounted for as a
purchase. Under the terms of the agreement, 55% of GSB's 4.2 million shares of
common stock will be exchanged for CoreStates' common stock at a price of $62
per share, and 45% will receive cash of $62 for each share of GSB common stock.
Most of the 5.4 million shares of CoreStates common stock to be issued in this
transaction will be issued out of treasury stock. This agreement is subject to,
among other conditions, approval by GSB's shareholders and certain regulatory
authorities.
The following unaudited pro forma information reflects the proposed
acquisition of GSB. This pro forma information has been prepared using
historical consolidated financial statements, as modified for intercompany
balances, assuming that the operations of GSB had been consolidated with
CoreStates since January 1, 1994.
The pro forma information does not purport to be indicative of the combined
financial position as it may be in the future or indicative of the results that
actually would have been realized had the entities been a single entity during
these periods or indicative of the actual results the combined company will
report in the future.
Pro forma cash dividends declared per share assume that CoreStates would
have declared cash dividends per share equal to the cash dividends per share
actually declared by CoreStates prior to September 30, 1994.
Unaudited pro forma financial information for CoreStates and GSB combined
follows:
<PAGE>
Page 9
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - Continued
NOTE B -- PROPOSED MERGER - CONTINUED
PRO FORMA CONDENSED COMBINED BALANCE SHEET - September 30, 1994
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
CoreStates Germantown
and Savings
Subsidiaries Bank Pro Forma
------------ ---------- --------------
<S> <C> <C> <C>
ASSETS
- ------
Cash and due from banks $ 1,846,019 $ 21,682 $ 1,863,043 (a)
Time deposits, principally Eurodollars 1,601,494 140 1,601,634
Investment securities 2,855,992 523,788 3,373,821 (d)
Loans, net of unearned discounts 19,723,793 990,446 20,695,470 (d)
Allowance for loan losses (477,878) (23,646) (501,524)
Federal funds sold and securities
purchased under agreements to resell 126,706 21,000 140,706 (a)
Trading account securities 5,200 5,200
Due from customers on acceptances 300,783 300,783
Premises, equipment and other assets 1,060,239 31,496 1,253,279 (b)(d)
----------- ---------- -----------
Total assets $27,042,348 $1,564,906 $28,732,412
=========== ========== ===========
LIABILITIES
- -----------
Deposits:
Domestic:
Non-interest bearing $ 5,682,136 $ 47,559 $ 5,725,037 (a)
Interest bearing 12,928,741 1,350,421 14,275,904 (d)
Overseas branches and subsidiaries 900,510 900,510
----------- ---------- -----------
Total deposits 19,511,387 1,397,980 20,901,451
Funds borrowed 2,198,881 2,191,881
Bank acceptances outstanding 301,380 301,380
Other liabilities 1,105,331 10,830 1,152,201 (b)(d)
Long-term debt 1,725,184 1,842,242 (c)
----------- ---------- -----------
Total liabilities 24,842,163 1,408,810 26,389,155
----------- ---------- -----------
SHAREHOLDERS' EQUITY
- --------------------
Common shareholder equity 2,200,185 156,096 2,343,257 (c)
----------- ---------- -----------
Total shareholders' equity 2,200,185 156,096 2,343,257
----------- ---------- -----------
Total liabilities and
shareholders' equity $27,042,348 $1,564,906 $28,732,412
=========== ========== ===========
Book value per share $15.65 $37.20 $16.05
====== ====== ======
</TABLE>
See FOOTNOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET on page 10.
<PAGE>
Page 10
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - Continued
NOTE B -- PROPOSED MERGER - CONTINUED
FOOTNOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET - September 30, 1994
(a) Reflects elimination of intercompany deposits and Federal funds
transactions.
(b) Reflects charges of approximately $41.9 million, $27.3 million after
related tax effects, for expenses directly attributable to the acquisition
of GSB including $16.1 million to redeem GSB stock options, $10.0 million
to writedown duplicate GSB facilities and systems, and $9.0 million for
employee severance.
(c) Represents the purchase price in the GSB acquisition using the following
assumptions:
(1) Shareholders of GSB will receive $62 in equivalent value CoreStates
Common Shares for 55% of the 4,194,647 GSB Common Shares and 45% will
receive $62 in cash for each GSB Common Share,for a total purchase
price of $260.1 million.
(2) The market value for CoreStates Common Shares, for purposes of GSB pro
forma calculations, was assumed to be $26.50 per share.
(3) CoreStates Common Shares issued in the GSB acquisition will equal 5.399
million shares.
(4) The cash portion of the purchase price ($117.1 million) was assumed to
be raised through the issuance of seven year notes at a fixed-rate of
8.0%.
(5) The elimination of GSB's total shareholders' equity at September 30,
1994 after reduction for the $41.9 million, $27.3 million after-tax, of
expenses directly attributable to the GSB acquisition.
(d) Represents the estimated adjustments of GSB's assets and liabilities to
their fair values (which were determined using information available at the
most recent practicable date), the intangible asset related to the value of
the deposit base acquired, which is estimated to be approximately $30
million ($47 million including the deferred income tax effect), and the
adjustment of approximately $115 million arising from the excess of the
total purchase price over net assets acquired (i.e. goodwill).
<PAGE>
Page 11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - Continued
NOTE B -- PROPOSED MERGER - CONTINUED
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended September 30, 1994 Nine Months Ended September 30,1994
----------------------------------------------------- --------------------------------------------
CoreStates Germantown CoreStates Germantown
and Savings and Savings
Subsidiaries Bank Pro Forma Subsidiaries Bank Pro Forma
----------------- --------------- ----------------- ---------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
- ---------------
Interest and fees on loans $431,681 $19,417 $452,036(b) $1,244,735 $58,154 $1,305,704(b)
Interest on investment
securities 36,988 7,317 44,743(b) 117,069 21,329 139,712(b)
Interest on time deposits
in banks 18,566 2 18,568 44,911 4 44,915
Interest on federal funds
sold and securities purchased
under agreement to resell 1,130 203 1,264(a) 4,782 578 5,190(a)
Other interest income 41 41 74 74
-------- ------- -------- ---------- ------- ----------
Total interest income 488,406 26,939 516,652 1,411,571 80,065 1,495,595
-------- ------- -------- ---------- ------- ----------
INTEREST EXPENSE
- ----------------
Interest on deposits 89,702 10,020 100,265(b) 258,540 30,288 290,457(b)
Interest on funds borrowed 23,169 23,100(a) 62,768 62,598(a)
Interest on long-term debt 23,416 25,776(b) 60,141 67,145(b)
-------- ------- -------- ---------- ------- ----------
Total interest expense 136,287 10,020 149,141 381,449 30,288 420,200
-------- ------- -------- ---------- ------- ----------
Net interest income 352,119 16,919 367,511 1,030,122 49,777 1,075,395
Provision for losses on
loans 25,000 25,000 221,900 200 222,100
-------- ------- -------- ---------- ------- ----------
Net interest income after
provision for losses on loans 327,119 16,919 342,511 808,222 49,577 853,295
-------- ------- -------- ---------- ------- ----------
NON-INTEREST INCOME
- -------------------
Service charges on deposit
accounts 44,448 700 45,145(a) 137,454 2,056 139,505(a)
Trust income 23,166 23,166 72,379 72,379
Fees for international
services 21,881 21,881 59,321 59,321
Debit and credit card fees 16,565 38 16,603 47,068 118 47,186
Securities gains (losses) 4,223 351 4,574 14,143 496 14,639
Other operating income 23,012 199 23,211 90,914 881 91,795
-------- ------- -------- ---------- ------- ----------
Total non-interest
income 133,295 1,288 134,580 421,279 3,551 424,825
-------- ------- -------- ---------- ------- ----------
NON-FINANCIAL EXPENSES
- ----------------------
Salaries, wages and
benefits 157,935 5,406 163,341 477,883 15,620 493,503
Net occupancy 28,863 1,222 30,085 87,484 3,568 91,052
Equipment expenses 18,615 386 19,001 57,081 1,215 58,296
Other operating expenses 92,993 2,036 98,107(a)(b) 388,410 7,268 404,915(a)(b)
-------- ------- -------- ---------- ------- ----------
Total non-financial
expenses 298,406 9,050 310,534 1,010,858 27,671 1,047,766
-------- ------- -------- ---------- ------- ----------
Income before income taxes 162,008 9,157 166,557 218,643 25,457 230,354
Provision for income taxes 57,787 3,135 59,980(b) 81,326 8,679 87,206(b)
-------- ------- -------- ---------- ------- ----------
Income before cumulative
effect of a change in
accounting principle(c) $104,221 $ 6,022 $106,577 $ 137,317 $16,778 $ 143,148(d)
======== ======= ======== ========== ======= ==========
Average common shares
outstanding 141,033 4,196 146,432 142,581 4,195 147,979
======== ======= ======== ========== ======= ==========
PER COMMON SHARE DATA
- ---------------------
Income before the
cumulative effect
of change in accounting
principle $0.74 $1.36 $0.73 $0.97 $3.78 $0.97(d)
===== ===== ===== ===== ===== =====
Cash dividends declared $0.30 $0.30 $0.30 $0.90 $0.55 $0.90
===== ===== ===== ===== ===== =====
</TABLE>
See FOOTNOTES TO PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME on page 12.
<PAGE>
Page 12
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - continued
NOTE B -- PROPOSED MERGER - CONTINUED
FOOTNOTES TO PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
(a) Reflects the elimination of intercompany interest on Federal funds
transactions and intercompany servicing fees.
(b) Reflects the anticipated impact of the purchase accounting adjustments
(which were determined using information available at the most recent
practicable date) assuming the GSB acquisition was effective on January 1,
1994. For the purposes of determining the effects on the pro forma combined
condensed statement of income, the following pro forma adjustments have been
made:
1) Amortization of the discount on the loan and investment securities
portfolios and certificates of deposit and the related income tax
effects.
2) Amortization of intangibles including goodwill and deposit base
intangible which was calculated using lives of 15 years and 10 years,
respectively. As required by FAS 109 "Accounting for Income Taxes", the
provision for income taxes assumes that the amortization of the deposit
base intangible is deductible for Federal income tax purposes.
3) Interest expense on the seven year 8.0% fixed-rate notes which were
assumed to have been issued to fund the cash portion of the purchase
price.
(c) During the first quarter of 1994, Independence recognized a $3.4 million
after-tax, or $0.02 per share, impairment loss on certain mortgage
securities as a cumulative effect of a change in accounting principle. The
loss was the result of a write down to fair value of these securities,
which were deemed to be impaired. This resulted from the Financial
Accounting Standards Board's ("FASB") 1994 interpretation of Statement of
Financial Accounting Standards No. 115. The interpretation reached by a
consensus of the FASB Emerging Issues Task Force in March 1994 provides
more definitive criteria for recognition of impairment losses on these
types of securities.
(d) Excluding after-tax merger-related charges of $127.8 million or $0.89 per
share recorded in the first quarter of 1994 for the Constellation
acquisition and $39.6 million or $0.28 per share recorded in the second
quarter of 1994 for the Independence acquisition, selected pro forma
operating results for the nine months ended September 30, 1994 were as
follows:
Income before cumulative effect of
a change in accounting principle........... $310,595
Per share.................................... $2.10
<PAGE>
Page 13
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - Continued
NOTE C -- LOAN PORTFOLIO
Loans, net of unearned discounts, at September 30, 1994 and December 31, 1993
consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
------------- ------------
Domestic:
<S> <C> <C>
Commercial, industrial and other:
Highly leveraged transactions ("HLTs").... $ 477,490 $ 452,137
Other..................................... 8,060,513 7,427,314
----------- -----------
Total commercial, industrial and other.. 8,538,003 7,879,451
----------- -----------
Real estate:
Construction and development.............. 329,583 367,364
Residential............................... 2,572,599 3,121,008
Other..................................... 3,081,758 3,175,284
----------- -----------
Total real estate....................... 5,983,940 6,663,656
----------- -----------
Consumer:
Installment............................... 1,294,347 1,356,633
Credit card............................... 1,293,356 1,178,972
----------- -----------
Total consumer.......................... 2,587,703 2,535,605
----------- -----------
Financial institutions...................... 602,566 870,489
Factoring receivables....................... 617,348 555,211
Lease financing............................. 793,088 728,764
----------- -----------
Total domestic.......................... 19,122,648 19,233,176
----------- -----------
Foreign....................................... 601,145 543,082
----------- -----------
Total loans............................. $19,723,793 $19,776,258
=========== ===========
</TABLE>
NOTE D -- COMMITMENTS AND CONTINGENT LIABILITIES
There are outstanding commitments or contingent liabilities which include,
among other things, commitments to extend credit, interest rate contracts,
letters of credit and loan guarantees undertaken in the normal course of
business. Outstanding standby letters of credit at September 30, 1994 amount to
$1,140 million. Management does not anticipate any significant losses as a
result of these transactions.
<PAGE>
Page 14
PART I. FINANCIAL INFORMATION
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY
- -------
CoreStates Financial Corp ("CoreStates") consummated its acquisition of
Independence Bancorp, Inc. ("Independence") on June 27, 1994 and its acquisition
of Constellation Bancorp ("Constellation") on March 16, 1994. The Independence
and Constellation acquisitions were both accounted for as pooling of interests.
All prior period data has been restated to include Independence and
Constellation.
Upon consummation of the acquisitions, Constellation and Independence
recorded merger-related charges in the first and second quarter of 1994,
respectively, in connection with a change in strategic direction related to
problem assets and to conform their consumer lending charge-off policies to
those of CoreStates, and for expenses directly attributable to the acquisitions.
In the first quarter of 1994, Constellation recorded merger-related charges
totalling $127.8 million after-tax, or $0.89 per share. On a pre-tax basis,
these merger-related charges consisted of a $120.0 million provision for loan
losses, a $28.0 million addition to the OREO reserve, $13.0 million for the
writedown of purchased mortgage servicing rights and related assets, and $34.0
million for expenses directly attributable to the acquisition. In the second
quarter of 1994, Independence recorded merger-related charges totalling $39.6
million after-tax, or $0.28 per share. On a pre-tax basis, these merger-related
charges consisted of a $25.0 million provision for loan losses, a $4.0 million
addition to the OREO reserve, and $29.7 million for expenses directly
attributable to the acquisition.
Net income for the third quarter of 1994 was $104.2 million, or $0.74 per
share, compared to $96.1 million, or $0.66 per share for the third quarter of
1993. Income before the cumulative effect of a change in accounting principle
for the first nine months of 1994 was $137.3 million, or $0.97 per share,
compared to $267.8 million, or $1.84 per share in 1993. Excluding the
Independence merger-related charges recorded in the second quarter of 1994,
which totalled $39.6 million after-tax, or $0.28 per share, and the
Constellation merger-related charges recorded in the first quarter of 1994 of
$127.8 million after-tax, or $0.89 per share, income for the nine months ended
September 30, 1994 was $304.8 million, or $2.14 per share.
During the first quarter of 1994, Independence recognized a $3.4 million
after-tax, or $0.02 per share, impairment loss on certain mortgage securities as
a cumulative effect of a change in accounting principle. The loss was the result
of a writedown to fair value of these securities, which were deemed to be
impaired. This resulted from the Financial Accounting Standards Board's ("FASB")
1994 interpretation of Statement of Financial Accounting Standards No. 115 ("FAS
115"). The interpretation, reached by a consensus of the FASB Emerging Issues
Task Force in March 1994, provides more definitive criteria for recognition of
impairment losses on these types of securities.
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 postemployment benefits during the active service
periods of employees. CoreStates recognized the January 1, 1993 transitional
liability of $20.0 million, $13.0 million after-tax, or $0.09 per share, as the
cumulative effect of a change in accounting principle.
<PAGE>
Page 15
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
SUMMARY - continued
- -------
Third quarter of 1994 highlights included:
. An 18.91% return on average common shareholders' equity and 1.50% return on
average total assets. Net income per share for the third quarter of 1994 was
12.1% above the third quarter of 1993.
. Net interest income on a taxable equivalent basis increased $12.8 million, or
3.7%, over the third quarter of 1993 primarily due to wider interest rate
spreads and a lower level of non-performing assets. The net interest margin
for the third quarter was 5.91%, an increase of 28 basis points from 5.63% in
the prior year third quarter and an increase of 5 basis points compared to
5.86% in the second quarter of 1994.
. The provision for losses on loans for the third quarter of 1994 was $5.0
million lower than the provision recorded for the third quarter of 1993 and
unchanged from the second quarter of 1994 normal provision. Non-performing
assets at September 30, 1994 were $356.6 million, compared to $438.7 million
at December 31, 1993 and $352.1 million at June 30, 1994. The decline in non-
performing loans from December 31, 1993 resulted primarily from the second
quarter charge-off and bulk sale of Constellation problem assets. The slight
increase in non-performing assets from June 30, 1994 reflected the continuing
decline in non-performing assets offset by the addition of a single $25
million credit to non-accrual status.
PENDING ACQUISITION - On March 7, 1994, CoreStates announced a definitive
- -------------------
agreement to acquire Germantown Savings Bank ("GSB"), which has $1.6 billion in
assets. Assuming approval by GSB's shareholders and certain regulatory
authorities, the transaction is expected to close in the fourth quarter of 1994.
This transaction will be accounted for as a purchase, and under the terms of the
agreement, 55% of GSB's 4.2 million shares of common stock will be exchanged for
CoreStates' common stock at a price of $62 per share and 45% will receive cash
of $62 for each share of GSB common stock. This in-market acquisition is
expected to result in annual expense savings of approximately $23 million,
partially offset by $11 million of amortization expense that will be recorded
each year related to the intangible assets created as a result of purchase
accounting. As a result of this acquisition it is expected that approximately
175 employees will be terminated.
PROCESS REDESIGN - In order to build upon CoreStates' strong financial condition
- ----------------
and sustain previous financial successes, and accomplish this goal in the
competitive financial services environment in which CoreStates operates,
management has authorized an intensive review of all aspects of CoreStates'
operations and businesses. Based upon this review, which is scheduled to
conclude in the first quarter of 1995, CoreStates will redesign its processes,
as appropriate, to achieve the following objectives: (i) to enhance CoreStates'
customer focus; (ii) to accelerate the development of an inclusive culture; and
(iii) to create the greatest value for customers with the most efficient use of
resources.
<PAGE>
Page 16
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
SUMMARY - continued
- -------
CoreStates expects that this review will identify many current processes which
do not contribute value for customers and that the resulting process redesign
will lead to reductions in the number of jobs and future expense levels, and
increases in future revenues. CoreStates further expects to record a charge
against earnings in the first quarter of 1995 for the costs associated with the
process redesign.
The amount of the restructuring charge and the impact of the process redesigns
on future results cannot be determined at this time.
INTRABANK MERGER - In August, CoreStates filed regulatory applications for the
- ----------------
merger of its New Jersey National Bank subsidiary into its Pennsylvania banking
subsidiary, CoreStates Bank, N.A. The creation of a single legal bank will give
customers universal access to all banking services and products at any
CoreStates branch office in either state. Due to New Jersey banking laws, the
legal headquarters of CoreStates Bank, N.A. will be moved from Philadelphia to
Pennington, NJ.
<PAGE>
Page 17
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
BUSINESS LINE RESULTS
- ---------------------
The following tables present the performance results of CoreStates' four
core business segments; Wholesale Banking; Consumer Financial Services; Trust
and Investment Management; and Electronic Payment Services ("EPS"), Inc.
Affiliate for the three and nine-month periods ended September 30, 1994 and
1993. Each segment is comprised of well defined business lines with market or
product-specific missions.
Independence is shown as a separate entity. During 1994, as the new company
is fully integrated into CoreStates, the respective business components of
Independence will be blended into the existing business lines. It is expected
that there will be a one to two quarter transition period following each
acquisition before complete business line reporting can be established. During
the transition period, a new acquisition may be reported separately from the
existing lines of business.
Three Months Ended September 30,
($ in millions, taxable equivalent basis)
<TABLE>
<CAPTION>
Consumer Trust and
Wholesale Financial Investment
Banking Services Management
-------------------- ------------------ ------------------
1994 1993(a) 1994 1993(a) 1994 1993(a)
------ ------- ---- ------- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Net interest income....... $ 158.2 $ 148.9 $151.0 $145.2 $ 7.5 $ 7.6
Provision for loan losses. 15.8 15.1 14.6 12.9 0.3 0.2
Non-interest income....... 54.5 54.1 38.4 45.3 22.3 24.5
Non-financial expenses.... 111.3 109.9 129.4 129.8 27.3 26.6
------- ------- ------ ------ ------ ------
Income before income taxes 85.6 78.0 45.4 47.8 2.2 5.3
Income tax expense........ 33.9 30.2 18.0 18.4 0.9 2.0
------- ------- ------ ------ ------ ------
Net income................ $ 51.7 $ 47.8 $ 27.4 $ 29.4 $ 1.3 $ 3.3
======= ======= ====== ====== ====== ======
Percentage contribution... 49.6% 49.7% 26.3% 30.6% 1.3% 3.4%
Return on assets.......... 1.38 1.31 1.82 1.79 0.73 1.93
Return on equity (b)...... 24.86 24.89 37.75 38.12 18.42 46.76
Average assets............ $14,910 $14,488 $5,977 $6,517 $ 705 $ 680
Average equity (b)........ $ 825 $ 762 $ 288 $ 306 $ 28 $ 28
</TABLE>
<TABLE>
<CAPTION>
EPS, Inc.
Affiliate Independence Corporate Total
----------------------- -------------------- --------------------- ------------------
1994 1993(a) 1994 1993 1994 1993(a) 1994 1993(a)
------ ------ ------ ------ ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income....... $ (1.5) $ (1.4) $ 31.0 $ 27.1 $ 10.9 $ 16.9 $ 357.1 $ 344.3
Provision for loan losses. 1.5 2.6 (7.2) (0.8) 25.0 30.0
Non-interest income....... 8.0 3.2 2.4 8.5 7.7 19.8 133.3 155.4
Non-financial expenses.... 20.3 24.2 10.1 28.3 298.4 318.8
------- ------- ------- ------- ------ ------ ------- -------
Income before income taxes 6.5 1.8 11.6 8.8 15.7 9.2 167.0 150.9
Income tax expense........ 2.3 (0.2) 4.0 2.8 3.7 1.6 62.8 54.8
------- ------- ------- ------- ------ ------ ------- -------
Net income................ $ 4.2 $ 2.0 $ 7.6 $ 6.0 $ 12.0 $ 7.6 $ 104.2 $96.1
======= ======= ======= ======= ====== ====== ======= =======
Percentage contribution... 4.0% 2.1% 7.3% 6.2% 11.5% 8.0% 100.0% 100.0%
Return on assets.......... 20.83 11.50 1.24 0.91 1.41 0.91 1.50 1.38
Return on equity (b)...... 416.58 198.37 15.15 10.97 5.65 3.30 18.91 17.09
Average assets............ $ 80 $ 69 $ 2,427 $ 2,621 $3,383 $3,316 $27,482 $27,691
Average equity (b)........ $ 4 $ 4 $ 199 $ 217 $ 842 $ 914 $ 2,186 $ 2,231
</TABLE>
(a) Restated to include Constellation.
(b) Equity is allocated to business lines in the four core business segments by
applying a factor of 5.0% against average risk-weighted assets and adding
intangible assets. Equity for Independence reflects that entity's legal
equity.
<PAGE>
Page 18
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
BUSINESS LINE RESULTS - continued
- ---------------------
Nine Months Ended September 30,
($ in millions, taxable
equivalent basis)
<TABLE>
<CAPTION>
Consumer Trust and
Wholesale Financial Investment
Banking Services Management
-------------------- ------------------- -------------------
1994 1993(a) 1994 1993(a) 1994 1993(a)
------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net interest income.................... $ 455.8 $ 427.2 $ 442.8 $ 436.6 $ 22.5 $ 23.1
Provision for loan losses.............. 46.6 43.2 42.4 37.4 0.8 0.8
Non-interest income.................... 167.1 156.0 118.5 125.5 69.6 74.4
Non-financial expenses................. 337.9 338.6 390.7 380.3 81.3 81.1
------- ------- ------- ------- ------- -------
Income (loss) before income taxes...... 238.4 201.4 128.2 144.4 10.0 15.6
Income tax expense..................... 93.7 77.1 50.1 54.8 3.8 5.6
------- ------- ------- ------- ------- -------
Net income (loss)...................... $ 144.7 $ 124.3 $ 78.1 $ 89.6 $ 6.2 $ 10.0
======= ======= ======= ======= ======= =======
Percentage contribution................ 105.4% 46.4% 56.9% 33.5% 4.5% 3.7%
Return on assets....................... 1.31 1.17 1.68 1.85 1.19 1.94
Return on equity (b)................... 24.00 22.13 35.40 39.41 29.60 47.75
Average assets......................... $14,817 $14,172 $ 6,200 $ 6,468 $ 698 $ 688
Average equity (b)..................... $ 806 $ 751 $ 295 $ 304 $ 28 $ 28
</TABLE>
<TABLE>
<CAPTION>
EPS, Inc.
Affiliate Independence Corporate Total
--------------------- ------------------ ------------------ ----------------------
1994 1993(a) 1994 1993 1994(c) 1993(a) 1994 1993(a)
-------- ---------- ------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income......... $ (4.4) $ (4.3) $ 86.3 $ 81.9 $ 43.2 $ 46.8 $1,046.2 $1,011.3
Provision for loan losses... 6.4 9.1 125.7 1.1 221.9 91.6
Non-interest income......... 23.7 10.7 14.9 22.0 27.5 37.0 421.3 425.6
Non-financial expenses...... 64.8 70.1 136.2 55.1 1,010.9 925.2
------- ------- ------- ------- -------- ------- -------- --------
Income (loss) before income taxes 19.3 6.4 30.0 24.7 (191.2) 27.6 234.7 420.1
Income tax expense.......... 6.8 (0.3) 10.4 7.6 (67.4) 7.5 97.4 152.3
------- ------- ------- ------- -------- ------- -------- --------
Net income (loss)........... $ 12.5 $ 6.7 $ 19.6 $ 17.1 $ (123.8) $ 20.1 $137.3(d) $ 267.8(d)
======= ======= ======= ======= ======== ======== ======== ========
Percentage contribution..... 9.1% 2.5% 14.3% 6.4% (90.2)% 7.5% 100.0% 100.0%
Return on assets............ 21.99 12.98 1.05 0.87 (4.86) 0.73 0.66(d) 1.29(d)
Return on equity (b)........ 417.81 223.95 12.36 10.73 (17.89) 3.09 8.09(d) 16.50(d)
Average assets.............. $ 76 $ 69 $ 2,503 $ 2,624 $ 3,404 $ 3,673 $27,698 $ 27,694
Average equity (b).......... $ 4 $ 4 $ 212 $ 213 $ 925 $ 870 $ 2,270 $ 2,170
</TABLE>
(a) Restated to include Constellation.
(b) Equity is allocated to business lines in the four core business segments by
applying a factor of 5.0% against average risk-weighted assets and adding
intangible assets. Equity for Independence reflects that entity's legal
equity.
(c) Includes $120.0 million in the provision and $75.0 million in other
operating expenses related to the Constellation acquisition and $25.0
million in the provision and $33.7 million in other operating expenses
related to the Independence acquisition.
(d) Based on income before cumulative effect of a change in accounting
principle.
<PAGE>
Page 19
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
BUSINESS LINE RESULTS - continued
- ---------------------
Corporate overhead, processing and support costs are allocated along with
the impact of balance sheet management and hedging activities of CoreStates. A
matched maturity transfer pricing system is used to allocate interest income and
interest expense. The loan loss provision and allowance for loan losses are
allocated based on an expected normalized credit environment. All business lines
are allocated equity based on 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. Business line results can change as a result of improvements to
the underlying allocation methodologies.
The Corporate category includes the income and expense impact of:
unallocated equity; unallocated loan loss reserves and provision; unusual or
non-recurring items not attributable to the operating activities of the major
business areas; emerging business activities not directly related to the four
major business areas; and miscellaneous items.
WHOLESALE BANKING is organized into six business lines: Corporate and
Institutional Banking; Investment Banking; Cash Management; International
Banking; Corporate Middle Market; and Specialized Finance. Net income for the
third quarter was $51.7 million, or 8.2% above the third quarter of 1993, while
September year-to-date net income was $144.7 million, or 16.4% above last year.
These increases were due primarily to increases in net interest income and non-
interest income. Net interest income was 6.2% above third quarter of 1993 and
6.7% above 1993 year-to-date. This improvement was due to lower non-performing
loans, higher loan and deposit volumes, wider spreads on prime-based loans and
interest and fees received on factoring volumes. Average loan outstandings were
above 1993 by 5.7% for the quarter and 7.7% year-to-date. Non-interest income
was above 1993 levels by .7% and 7.1% for the third quarter and year-to-date,
respectively. This improvement was primarily due to increases in fees for
international services and other operating income. Non-financial expenses were
1.3% above the third quarter of 1993 and .2% below 1993 on a year-to-date basis.
CONSUMER FINANCIAL SERVICES includes the following business lines:
Community Banking; Specialty Products; and Mortgage Banking. Specialty Products
("SPG") includes Credit Card, Student Lending, Synapsys and CardLinx. Community
Banking's 1993 results include five Virgin Islands branches and related
operations areas, all of which were sold on September 30, 1993. From a net
operating earnings standpoint, the impact of the Virgin Islands was
insignificant and the following discussion excludes the Virgin Islands to
facilitate a meaningful review of the operating trends of the remaining
businesses.
Net income for the third quarter was $27.3 million, or $2.0 million below the
third quarter of 1993, excluding the Virgin Islands, while September year-to-
date net income was $77.9 million, or $11.9 million below 1993. These declines
were primarily attributable to decreases in non-interest income for both the
third quarter and year-to-date and an increase in non-financial expenses for the
year-to-date period.
<PAGE>
Page 20
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
BUSINESS LINE RESULTS - CONTINUED
- ---------------------
Net interest income increased $7.9 million and $12.7 million for the quarter and
year-to-date, respectively, when compared to the prior year. For the quarter,
growth of $6.0 million in SPG net interest income primarily resulted from an
increase in credit card outstandings. In Community Banking, net interest income
growth of $1.9 million was due to improved deposit spreads, partially offset by
declines in loan outstandings resulting from portfolio sales. On a year-to-date
basis, the $12.7 million net interest income improvement reflects an increase of
$18.7 million, or 21.9% at SPG. This was partially offset by a $6.0 million
decrease in Community Banking's net interest income, reflecting the impact of
lower loan outstandings due to portfolio sales and lower deposit spreads in the
first quarter of 1994.
The loan loss provision increased by $1.8 million and $5.4 million for the
quarter and year-to-date, respectively, in conjunction with the growth in credit
card outstandings.
Non-interest income of $38.3 million for the third quarter reflects a decline of
$6.7 million from 1993. In Community Banking, the majority of this decline was
the result of lower mortgage income primarily at Constellation, with a smaller
decline in securitization income. For the year-to-date, total non-interest
income was $6.4 million lower than 1993 also due primarily to lower mortgage
revenues and securitization income, partially offset by higher service charges
on deposits.
Non-financial expenses for the group grew by $1.7 million, or 1.3% for the
quarter and $17.7 million, or 4.8% for the year-to-date in comparison to 1993.
SPG expenses grew by 7.2% for the quarter and 17.5% over the first nine months,
primarily as the result of aggressive marketing efforts to increase the credit
card portfolio in 1994, as well as an incremental increase in expenses due to
greater credit card outstandings year to year. Excluding SPG, total expenses for
the group were level with 1993 for the quarter and grew by only 2.2% year-to-
date. This reflects management's ongoing efforts to control costs as well as
efficiencies realized from the Constellation acquisition.
TRUST AND INVESTMENT MANAGEMENT is organized into four business lines:
Institutional Trust; Personal Trust; Private Banking; and Investment Management.
Net income of $1.3 million for the third quarter was down $2.0 million from the
third quarter of 1993, and net income of $6.2 million year-to-date was down $3.8
million from 1993. The decline in net income for the quarter is due primarily
to a 9.0% decline in non-interest income. The decline in net income year-to-date
is due to a 2.6% decline in net interest income and a 6.5% decline in non-
interest income. The decline in net interest income was due to soft loan demand
and narrower spreads in Private Banking, and lower balance credits in
Institutional Trust. Bond refunding levels in early 1993 have not been repeated
in 1994 thus reducing the level of balances that generate revenue in
Institutional Trust. The decline in non-interest income for the third quarter
and year-to-date versus 1993 was caused by declines in the financial markets
which generated lower asset values, as well as the loss of several Institutional
accounts. Fee growth for the quarter and year-to-date continues to be hampered
by lower than anticipated new business and declines in the financial markets.
Fee growth in Investment Services partially offset the declines in the Personal
Financial Services and Institutional businesses, due in part to asset growth in
the CoreFund family of Mutual Funds. Asset growth in the CoreFund family of
Mutual Funds for the quarter and year-to-date was 2.6% and 2.4%, respectively,
above 1993.
<PAGE>
Page 21
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
BUSINESS LINE RESULTS - continued
- ---------------------
ELECTRONIC PAYMENT SERVICES, INC. includes the following business lines:
the MAC automated teller machine ("ATM") network and POS processing. The MAC and
POS business lines were contributed to Electronic Payment Services, Inc. ("EPS")
on December 4, 1992, a joint venture that combines the separate consumer
electronic transaction processing businesses of CoreStates, Banc One
Corporation, PNC Bank Corp and Society Corporation into the nation's leading
provider of ATM and POS processing services. The exchange generated a deferred
gain of approximately $136 million.
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 the
deferred gain generated in the 1992 contribution of the business lines to EPS,
but does change the timing of the deferred gain recognition from a five-year
period beginning in 1996 to a ten-year period beginning in 1994.
Net income totalled $4.2 million for the quarter and $12.5 million year-to-
date. This represents increases of $2.2 million and $5.8 million for the quarter
and year-to-date, respectively, versus 1993. Most of the current quarter and
year-to-date increase from the prior year is due to recognition of the EPS
deferred gain. The 1994 results include non-interest income from recording
CoreStates' 31% share of EPS earnings, partial recognition of the EPS deferred
gain, and interest income on the $250 million promissory note, partly offset by
an interest carrying charge of $1.5 million for the quarter and $4.4 million
year-to-date on the net investment in EPS. Loss of prior year's favorable tax
treatment on the preferred dividends is offset by higher income recognition on
the $250 million promissory note.
INDEPENDENCE net income for the third quarter of 1994 was $7.6 million, or
26.7% above 1993, while year-to-date net income was $19.6 million, or 14.6%
above 1993. Net interest income increased $3.9 million, or 14.4% over the third
quarter of 1993 and $4.4 million, or 5.4% year-to-date versus 1993. Non-interest
income decreased $6.1 million for the quarter and $7.1 million year-to-date due
to the reduction in gains on sales of mortgages resulting from lower refinance
activity in 1994. Non-financial expenses were below 1993 levels by $3.9
million, or 16.1% for the third quarter, and by $5.3 million, or 7.6% for the
year-to-date due to the curtailment of new expenditures in anticipation of the
merger, and merger-related cost efficiencies.
<PAGE>
Page 22
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
NET INTEREST INCOME
- -------------------
The largest source of CoreStates' operating revenue is net interest income.
For analytical purposes, net interest income is adjusted to a "taxable
equivalent" basis to recognize the income tax savings on tax exempt assets. Net
interest income on a taxable equivalent basis for the third quarter of 1994 was
$357.1 million, an increase of $12.8 million, or 3.7%, from the third quarter of
1993. The net interest margin at 5.91% improved 28 basis points from the third
quarter of 1993. The increase in the level of taxable equivalent net interest
income and the net interest margin were primarily a result of: wider interest
rate spreads as the rates earned on domestic loans increased 55 basis points
from the third quarter of 1993 while the rate paid on domestic deposits
decreased 7 basis points, and a lower level of non-performing assets.
Taxable equivalent net interest income for the third quarter of 1994
increased $2.0 million, or 0.6%, compared to the second quarter of 1994. The
modest growth in third quarter interest income as compared to the second quarter
of 1994 principally reflected stable interest rates spreads, as the rates earned
on domestic loans increased 27 basis points, while the rates paid on domestic
deposits also increased 14 basis points, and a $294 million decrease in average
loan volume due to bulk sales of certain loans acquired with Constellation.
For the nine-month period ended September 30, 1994, taxable equivalent net
interest income increased $34.9 million, or 3.5%, from the comparable period in
1993. This increase principally reflects: wider interest rate spreads as the
rates paid on domestic deposits decreased 28 basis points, while the rates
earned on domestic loans increased 13 basis points, a $371 million increase in
non-interest bearing funding, and a $577 million increase in average domestic
loan volume.
<PAGE>
Page 23
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
NET INTEREST INCOME - continued
- -------------------
The following tables compare taxable equivalent net interest income for the
three months ended September 30, 1994 versus the third quarter of 1993 and the
second quarter of 1994, respectively and the nine months ended September 30,
1994 versus the nine months ended September 30, 1993 (in millions):
Taxable Equivalent
Net Interest Income
- -------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED INCREASE (DECREASE)
------------------------------- ------------------------------
Sept. 30, Sept. 30, June 30, Sept. 1994/ Sept. 1994/
1994 1993 1994 Sept. 1993 June 1994
---------- ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Total interest income........... $488.4 $464.2 $474.0 $24.2 $14.4
Tax equivalent adjustment....... 5.0 6.0 5.4 (1.0) (0.4)
-------- -------- ------ ----- -----
Tax equivalent interest income 493.4 470.2 479.4 23.2 14.0
Total interest expense.......... 136.3 125.9 124.3 10.4 12.0
-------- -------- ------ ----- -----
Taxable equivalent net
interest income................ $357.1 $344.3 $355.1 $12.8 $ 2.0
======== ======== ====== ===== =====
Interest rate spread............ 5.12% 4.91% 5.11%
==== ==== ====
Net interest margin............. 5.91% 5.63% 5.86%
==== ==== ====
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
Increase
1994 1993 (decrease)
---------- -------- ---------
<S> <C> <C> <C>
Total interest income........... $1,411.6 $1,384.8 $ 26.8
Tax equivalent adjustment....... 16.0 19.5 (3.5)
-------- -------- ------
Tax equivalent interest income.. 1,427.6 1,404.3 23.3
Total interest expense.......... 381.4 393.0 (11.6)
-------- -------- ------
Tax equivalent net
interest income................ $1,046.2 $1,011.3 $34.9
======== ======== ======
Interest rate spread............ 5.01% 4.88%
==== ====
Net interest margin............. 5.78% 5.61%
==== ====
</TABLE>
<PAGE>
Page 24
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Continued
NET INTEREST INCOME - CONTINUED
- -------------------------------
The following rate/volume analysis on a taxable equivalent basis illustrates the
underlying factors producing these increases (decreases) in tax equivalent net
interest income (in millions):
<TABLE>
<CAPTION>
Increase Increase Increase
(decrease) in interest (decrease) in interest (decrease) in interest
------------------------------ ----------------------------- --------------------------
Three Months Ended Three Months Ended Nine Months Ended
September 30, 1994/1993 September 30, 1994/June 30, 1994 September 30, 1994/1993
------------------------------ -------------------------------- --------------------------
Change Change Change
attributable to attributable to attributable to
Income/ -------------------- Income/ ------------------- Income/ -----------------
expense Volume Rate expense Volume Rate expense Volume Rate
------- ------ ---- ------- ------ ---- ------- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
- ---------------------------
Time deposits-Eurodollars $ 8.9 $ 3.0 $ 5.9 $ 7.0 $ 1.0 $ 6.0 $ 10.9 $ 2.4 $ 8.5
Investment securities (12.8) (9.3) (3.5) (3.3) (2.2) (1.1) (43.9) (24.9) (19.0)
Federal funds sold (0.7) (1.2) 0.5 (0.1) (0.4) 0.3 (0.2) (1.6) 1.4
Trading account securities 0.0 0.0 0.0 0.1 0.0 0.1 0.1 0.1 0.0
Loans:
- - Domestic 26.4 3.2 23.2 10.1 (5.9) 16.0 55.1 43.0 12.1
- - Foreign 1.4 1.2 0.2 0.2 0.4 (0.2) 1.3 1.3 0.0
------ ----- ----- ----- ----- ----- ------ ------ ------
Total interest income 23.2 (3.1) 26.3 14.0 (7.1) 21.1 23.3 20.3 3.0
------ ----- ----- ----- ----- ----- ------ ------ ------
INTEREST BEARING FUNDS
- ---------------------------
Deposits:
Domestic (5.6) (3.7) (1.9) 3.5 (0.3) 3.8 (38.0) (17.2) (20.8)
Overseas 3.6 1.0 2.6 4.1 0.3 3.8 6.5 1.2 5.3
Funds borrowed:
Federal funds purchased 3.8 (0.5) 4.3 2.4 0.9 1.5 1.8 (4.9) 6.7
Other 3.5 0.7 2.8 (1.9) (0.5) (1.4) 12.6 7.4 5.2
Long-term debt 5.1 1.5 3.6 3.9 0.2 3.7 5.5 7.2 (1.7)
------ ----- ----- ----- ----- ----- ------ ------ ------
Total interest expense 10.4 (1.0) 11.4 12.0 0.6 11.4 (11.6) (6.3) (5.3)
------ ----- ----- ----- ----- ----- ------ ------ ------
NET INTEREST INCOME $ 12.8 $(2.1) $14.9 $ 2.0 $(7.7) $ 9.7 $ 34.9 $ 26.6 $ 8.3
- --------------------------- ====== ===== ===== ===== ===== ===== ====== ====== ======
</TABLE>
- - Changes in interest income or expenses 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.
- - 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 reserves for purposes of rate calculations.
<PAGE>
Page 25
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Continued
NET INTEREST INCOME - CONTINUED
- -------------------------------
The effect of cash basis and other non-performing loans on interest income and
net interest income for the three and nine-month periods ended September 30,
1994 and 1993 was as follows (in millions):
<TABLE>
<CAPTION>
Three Nine
Months Ended Months Ended
September 30, September 30,
--------------- -------------
1994 1993 1994 1993
-------- ----- ------ -----
<S> <C> <C> <C> <C>
Interest income due on non-performing loans
in accordance with their original terms.... $ 6.4 $ 7.2 $20.3 $22.2
Interest income on non-performing loans
reflected in total interest income......... 7.4 4.3 17.5 13.5
----- ----- ----- -----
Net reduction in interest income............. $(1.0) $ 2.9 $ 2.8 $ 8.7
===== ===== ===== =====
</TABLE>
<PAGE>
Page 26
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Continued
PROVISION AND ALLOWANCE FOR LOAN LOSSES
- ---------------------------------------
The provision for loan losses for the third quarter of 1994 was $5.0 million
lower than the provision for the prior year third quarter. The decrease in the
loan loss provision resulted primarily from continued improvement in the outlook
for credit quality and in credit quality indicators, including a 18.7% decline
in non-performing assets from December 31, 1993.
The following table presents an analysis of changes in the allowance for loan
losses for the three and nine-month periods ended September 30, 1994 and 1993
(in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at beginning of period.............. $475.3 $452.6 $ 450.8 $442.3
Allowance for loans sold at date of sale.... (0.4)
Provision charged to operating expense...... 25.0 30.0 221.9 (a) 91.6
Loan charge-offs............................ (39.4) (49.4) (241.5)(b) (145.9)
Recoveries of loans previously charged off.. 17.0 14.1 46.7 59.7
------ ------- ------- ------
Net loan charge-offs...................... (22.4) (35.3) (194.8) (86.2)
------ ------- ------- ------
Balance at end of period.................... $477.9 $447.3 $ 477.9 $447.3
====== ======= ======= ======
Ratios:
Net charge-offs (annualized) as a
percentage of average total loans......... 0.46% 0.73% 1.33% 0.61%
====== ======== ======= ======
Allowance for loan losses as a
percentage of loans at end of period...... 2.42% 2.32%
====== ========
Allowance for loan losses as a percentage
of non-performing loans................... 171.6% 126.83%
====== ========
</TABLE>
- -----------------------------------------------
(a) Includes merger-related provisions of $120.0 million in the first quarter
of 1994 related to the Constellation acquisition and $25.0 million in the
second quarter of 1994 related to the Independence acquisition.
(b) Reflects net loan charge-offs of $103.1 million recorded in the second
quarter of 1994 related to problem assets acquired with Constellation.
<PAGE>
Page 27
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Continued
PROVISION AND ALLOWANCE FOR LOAN LOSSES -- CONTINUED
- ---------------------------------------
The following tables reflect the distribution of net loan charge-offs by loan
type for the three and nine-month periods ended September 30, 1994 and 1993 (in
millions):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1994 September 30, 1993
--------------------------------- ---------------------------------
% of % of
% of Total % of Total
Net Average Net Net Average Net
Charge- Loan Charge- Charge Loan Charge-
offs Type(a) offs offs Type(a) offs
------------ --------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Domestic:
Commercial, industrial and other............. $ 5.2 0.2% 23.2% $ 22.6 1.2% 64.0%
Real estate:
Construction and development loans.......... 2.2 2.7 9.8 1.2 1.2 3.4
Other....................................... 6.8 0.5 30.4 5.5 0.3 15.6
Consumer:
Credit Card................................. 7.7 2.4 34.4 5.5 2.2 15.6
Installment................................. 0.5 0.2 2.2 1.0 0.3 2.8
Other (b).................................... 0.2 0.6
----- ------ ------ ------
Total domestic.............................. 22.4 0.5 100.0 36.0 0.8 102.0
----- ------ ------ ------
Foreign (c).................................. (0.7) (0.6) (2.0)
----- ------ ------ ------
Total net charge-offs........................ $22.4 0.5% 100.0% $ 35.3 0.7% 100.0%
===== ====== ====== ====== ==== ======
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1994 September 30, 1993
--------------------------------- ---------------------------------
% of % of
% of Total % of Total
Net Average Net Net Average Net
Charge- Loan Charge- Charge- Loan Charge-
offs Type(a) offs offs Type(a) offs
----------- --------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Domestic:
Commercial, industrial and other............. $ 71.9 1.1% 36.9% $ 38.7 0.7% 44.9%
Real estate:
Construction and development loans.......... 6.1 2.4 3.1 5.0 1.5 5.8
Other....................................... 90.2 2.0 46.3 28.6 0.6 33.2
Consumer:
Credit card................................. 20.9 2.3 10.7 17.6 2.3 20.4
Installment................................. 5.5 0.6 2.9 4.3 0.4 5.0
Other (b).................................... 0.2 0.1 0.2 0.2
------ ------ ------ --------
Total domestic.............................. 194.8 1.4 100.0 94.4 0.7 109.5
------ ------ ------ --------
Foreign (c)................................... (8.2) (2.0) (9.5)
------ ------ ------ --------
Total net charge-offs....................... $194.8(d) 1.3% 100.0% $ 86.2 0.6% 100.0%
========= ===== ====== ====== ====== ========
</TABLE>
- -------------------------------------------
(a) Annualized.
(b) Includes loans to financial institutions and lease financing.
(c) Reflects net recoveries on LDC assets of $0.7 million for the three months
ended September 30, 1993 and $8.2 million for the nine months ended
September 30, 1993.
(d) Reflects net loan charge-offs of $103.1 million recorded in the second
quarter of 1994 related to problem assets acquired with Constellation.
<PAGE>
Page 28
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Continued
NON-PERFORMING LOANS AND OTHER REAL ESTATE OWNED
- ------------------------------------------------
Total non-performing assets at September 30, 1994 decreased $82.1 million, or
18.7%, from December 31, 1993. Most of the decrease from December 31, 1993 was
in the real estate category, which decreased $79.9 million primarily due to the
bulk sale of Constellation loans and OREO, and the $28 million addition to the
Constellation OREO reserve during the first quarter of 1994. The commercial and
industrial loan portfolio declined by $30.6 million mostly due to loan charge-
offs against the Constellation portfolio.
<TABLE>
<CAPTION>
The following table summarizes non-performing assets at September 30, 1994 and
December 31, 1993 (in millions):
September 30, December 31,
1994 1993
------------ -----------
<S> <C> <C>
Non-accrual loans.......................... $276.2 $246.7
Renegotiated loans......................... 2.3 56.5
------ ------
Total non-performing loans............... 278.5 303.2
Other real estate owned (OREO):
Acquired through foreclosure.............. 57.6 90.9
In-substance foreclosure.................. 15.8 38.4
Property formerly used in
banking operations....................... 4.7 6.2
------ ------
Total other real estate owned............ 78.1 135.5
------ ------
Total non-performing assets................ $356.6 $438.7
====== ======
</TABLE>
The following table reflects the distribution of non-performing assets by loan
type at September 30, 1994 and December 31, 1993 (in millions):
<TABLE>
<CAPTION>
September 30, 1994 December 31,1993
------------------ ----------------
% of % of
Non- Loan Non- Loan
Domestic: performing Type performing Type
---------- ----- ---------- ----
<S> <C> <C> <C> <C>
Commercial, industrial and other:
HLTs.................................. $ 3.0 0.6% $ 5.1 1.1%
Other................................. 89.0 1.0 117.6 1.5
------ ------
Total commercial, industrial and 92.0 1.0 122.7 1.5
------ ------
other.............................
Real estate:
Construction and development loans.... 13.4 4.1 19.7 5.4
Other loans........................... 141.6 2.5 157.8 2.5
Other real estate owned............... 78.1 135.5
------ ------
Total real estate................... 233.1 2.6 313.0 2.7
------ ------
Consumer................................ 1.2 1.0
------ ------
Other domestic loans(a)................. 30.1 2.2 1.8 0.1
------ ------
Total domestic non-performing assets 356.4 1.9 438.5 2.3
------ ------
Foreign loans............................. .2 .2
------ ------
Total non-performing assets(b)........ $356.6 1.8% $438.7 2.2%
====== === ====== ===
% Total assets........................ 1.3% 1.5%
====== ===
</TABLE>
- ------------------------------------------------------------------
(a) Includes loans to financial institutions and lease financing.
(b) Includes non-accrual loans, renegotiated loans and other real estate owned.
The table does not include loans of $51 million and $53 million at
September 30, 1994 and December 31, 1993, 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.
<PAGE>
Page 29
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Continued
NON-PERFORMING LOANS AND OTHER REAL ESTATE OWNED - CONTINUED
- ------------------------------------------------
The following table summarizes the components of the quarterly change in
non-performing assets for 1994 (in millions):
<TABLE>
<CAPTION>
Quarter Nine
---------------------------
First Second Third Months
------- -------- ------- ------
<S> <C> <C> <C> <C>
Beginning balance............................ $439 $ 501 $353 $ 439
Additions.................................... 132 125 74 331
Return to accrual............................ (15) (37) (1) (53)
Payments..................................... (26) (102) (46) (174)
Charge-offs.................................. (29) (134) (23) (186)
---- ----- ---- -----
Net change.................................. 62 (148) 4 (82)
---- ----- ---- -----
Ending balance............................... $501 $ 353 $357 $ 357
==== ===== ==== =====
</TABLE>
NON-INTEREST INCOME
- -------------------
Total non-interest income for the third quarter of 1994 decreased $22.1
million, or 14.2%, from the third quarter of 1993. This 14.2% decrease results
principally from a $27.8 million, or 66.3% decrease in other operating income,
principally reflecting a one-time $11.0 millon gain recorded on the sale of five
branches in the Virgin Islands in the third quarter of 1993 and the impacts of
businesses experiencing acquisition-related changes including a $4.5 million
decrease in related ongoing revenues, losses of $2.5 million on sales of assets
in the third quarter of 1994 and gains of $3.9 million on sales of assets in the
third quarter of 1993. Non-interest income for the third quarter of 1994
reflects flat revenues from CoreStates' fee-based businesses as a $2.9 million,
or 15.2%, increase in fees for international services was offset by a $2.2
million, or 8.7%, decrease in trust income and a $1.2 million, or 2.6%, decrease
in service charges on deposit accounts. Income related to CoreStates' investment
in Electronic Payment Services, Inc. ("EPS") was up $4.9 million for the third
quarter as a result of the late 1993 restructuring of that investment.
Investment securities gains in the third quarter of 1994 were $4.2 million
compared to $3.3 million in the prior year third quarter. The third quarters of
1994 and 1993 include gains of $2.8 million and $2.9 million, respectively,
recorded on sales of certain bank stock investments.
For the nine-month period ended September 30, 1994, non-interest income
decreased $4.3 million, or 1.0% from the comparable prior year period.
Excluding the impact of gains on investment securities, year-to-date non-
interest income decreased $13.0 million, or 3.1%. For the 1994 nine-month
period, service charges on deposit accounts increased $3.7 million, or 2.8%,
fees for international services increased $7.8 million, or 15.0%, and income
from the EPS joint venture increased $13.1 million. Other operating income
decreased $34.5 million, or 34.6% from the same period last year. This decrease
principally reflects one-time gains recorded in 1993, including the $11.0
million branch sale gain and a $5.0 million gain on prepayment of long-term
debt, and the impacts of businesses experiencing acquisition-related changes.
Investment securities gains for the nine-month period ended September 30, 1994
were $14.1 million compared to $5.5 million in the same period last year. Year-
to-date 1994 investment securities gains include $5.0 million recorded on sales
of certain investments acquired with Constellation and $7.1 million of gains on
sales of certain bank stock investments. Prior year investment securities gains
reflect a $2.2 million net gain recorded on foreign equity securities and a $2.9
gain recorded on sales of bank stocks.
<PAGE>
Page 30
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
- ------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED
- ----------------------------------------------------------
NON-FINANCIAL EXPENSES
- ----------------------
Total non-financial expenses were $298.4 million in the third quarter of 1994,
a decrease of $20.4 million, or 6.4% from the third quarter of 1993. Total non-
financial expenses in the third quarter of 1993 included a $10.0 million one-
time restructuring charge for the formation of the new Transys business unit.
Excluding the one-time charge, non-financial expenses decreased 3.4% reflecting
some progress toward achieving efficiencies from recent acquisitions.
For the nine-month period ended September 30, 1994, non-financial expenses
increased $85.7 million or 9.3%. Excluding the impacts of merger-related costs
of $75.0 million for the Constellation acquisition recorded in the first quarter
of 1994, $33.7 million for the Independence acquisition recorded in the second
quarter of 1994 and the $10.0 million restructuring charge in the third quarter
of 1993, non-financial expenses decreased $13.0 million, or 1.4%, reflecting
CoreStates' continuing emphasis on expense management and some progress toward
achieving efficiencies from recent acquisitions.
CAPITAL MANAGEMENT
- ------------------
CoreStates' capital provides the resources and flexibility for anticipated
growth. CoreStates' capital position at September 30, 1994 under risk-based
capital guidelines was $2.2 billion, or 9.1% of risk-weighted assets, for Tier I
capital and $3.1 billion, or 13.2%, for total risk-based capital. Tier I
capital consists primarily of common shareholders' equity less goodwill and
certain intangible assets, while total risk-based capital adds qualifying
subordinated debt and the allowance for loan losses, within permitted limits, to
Tier I capital. Risk-weighted assets are determined by assigning various levels
of risk to different categories of assets and off-balance sheet activities.
CoreStates' ratios at September 30, 1994 are above the risk-based capital
standards that require all banks to have Tier I capital of at least 4% and total
capital of 8%.
Under the Federal Reserve Board's capital leverage guidelines, which require a
minimum leverage ratio of 3.0% (Tier I capital to quarterly average total
assets), CoreStates had a leverage ratio of 7.9% at September 30, 1994. The
minimum 3.0% leverage requirement applies only to top rated banking
organizations without any operating, financial, or supervisory deficiencies.
Other organizations (including those experiencing or anticipating significant
growth) are expected to hold an additional capital cushion of at least 100 to
200 basis points of Tier 1 capital, and in all cases, banking organizations
should hold capital commensurate with the level and nature of all the risks,
including the volume and severity of problem loans, to which they are exposed.
<PAGE>
Page 31
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Continued
CAPITAL MANAGEMENT - CONTINUED
- ------------------
Substantially the same capital requirements are applied to CoreStates' banking
subsidiaries under guidelines issued by the Office of the Comptroller of the
Currency and the Federal Deposit Insurance Corporation. As illustrated in the
following table, at September 30, 1994 the banking subsidiaries of CoreStates
were "well capitalized" as defined by regulatory authorities.
<TABLE>
<CAPTION>
Regulatory Capital Ratios Total
----------------------------
Tier I Total Leverage Assets
-------- ------- --------- ------
($ in billions)
<S> <C> <C> <C> <C>
CoreStates Bank, N.A.............. 8.4% 10.8% 7.5% $17.3
New Jersey National Bank.......... 8.6 11.9 5.4 6.2
CoreStates Bank of Delaware, N.A.. 11.4 14.1 12.2 0.7
Bucks County Bank................. 11.4 12.6 8.6 1.1
Cheltenham Bank................... 14.4 15.7 10.0 0.4
Lehigh Valley Bank................ 14.1 15.4 10.2 0.4
Third National Bank and
Trust Company of Scranton........ 11.7 12.7 9.5 0.4
</TABLE>
CoreStates' dividend on its common stock was $0.30 per share in the third
quarter of 1994 and the third quarter of 1993, both reflecting the Stock
Dividend. The common dividend payout ratio was 40.5% for the third quarter of
1994, compared to 45.5% for the third quarter of 1993.
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.
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
monthly with rate related negative net interest income volatility over a twelve-
month horizon limited to 4% of shareholders' equity. Based on historical data,
95% of the time rates have changed by less than 200 basis points over a six-
month period. 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 simulation, 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.
<PAGE>
Page 32
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Continued
OFF-BALANCE SHEET INSTRUMENTS AND DERIVATIVE ACTIVITIES
- -------------------------------------------------------
CoreStates uses off-balance sheet derivative instruments primarily to manage
CoreStates' interest rate risk. CoreStates believes that interest rate risk
management must be balanced with liquidity and capital management. Therefore,
CoreStates uses off-balance sheet instruments to modify its rate sensitivity and
consequently, avoids the unnecessary leverage and liquidity impairment which
would result from on-balance sheet alternatives. CoreStates also uses interest
rate contracts to provide risk management services for its customers.
CoreStates does not use derivative instruments for speculative investment.
Interest Rate Risk Related Derivative Activities
- ------------------------------------------------
CoreStates has a naturally asset sensitive balance sheet as a result of its
basic loan and deposit businesses. Commercial and consumer loan activities
tend to have short-term repricing characteristics versus the longer term
repricing nature of CoreStates' funding sources. These relationship portfolios
have a positive effect on earnings in a rising rate environment and a negative
effect in a falling rate environment. Off-balance sheet and derivative market
instruments are primarily used to balance CoreStates' natural repricing
mismatch. Given this balance, the effect on CoreStates' earnings for interest
rate movement is modest regardless of direction.
<PAGE>
Page 33
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Continued
OFF-BALANCE SHEET INSTRUMENTS AND DERIVATIVE ACTIVITIES - continued
- -------------------------------------------------------
Interest Rate Risk Related Derivative Activities - continued
- ------------------------------------------------
The following schedule reflects outstanding derivative positions as of September
30, 1994 and the major balance sheet category to which they relate. Although
the value of the various derivative instruments will change with interest rates,
CoreStates does not consider changes in individual portfolio values to be
significant due to its practice of maintaining a relatively balanced interest
sensitivity position. At September 30, 1994, the notional amounts and the
unrealized gains/losses on CoreStates derivative portfolios were as follows:
<TABLE>
<CAPTION>
Outstanding Derivatives by Balance Sheet Category
As of September 30, 1994
(in millions)
Interest Interest Interest
Rate Rate Rate Other
Swaps Futures Caps Derivatives Total
-------- -------- -------- ----------- -----
<S> <C> <C> <C> <C> <C>
Assets:
Notional amount............ $2,026 $1,877 $ 802 $165 $4,870
Unrealized gains........... 13 5 1 19
Unrealized losses.......... 43 1 8 52
Core Deposits:
Notional amount............ 3,295 300 3,595
Unrealized gains........... 14 9 23
Unrealized losses.......... 49 49
Long-term Debt:
Notional amount............ 781 25 806
Unrealized gains........... 6 6
Unrealized losses.......... 51 1 52
Total:
Notional amount............ $6,102 $1,877 $1,127 $165 $9,271
====== ====== ====== ==== ======
Unrealized gains........... $ 33 $ - $ 14 $ 1 $ 48
====== ====== ====== ==== ======
Unrealized losses.......... $ 143 $ 1 $ 9 $ - $ 153
====== ====== ====== ==== ======
</TABLE>
Interest rate swaps are agreements between two parties to exchange interest cash
flows. Generally, one party receives a fixed rate and pays a variable rate,
while the counterparty pays the fixed rate and receives the variable rate. When
CoreStates allocates interest rate swaps to assets, the swaps are generally used
to make the interest rate sensitivity of short-term assets longer. When
associated with core deposits and long-term debt, interest rate swaps are most
often used to shorten the repricing characteristics of longer term liabilities.
<PAGE>
Page 34
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Continued
OFF-BALANCE SHEET INSTRUMENTS AND DERIVATIVE ACTIVITIES - continued
- -------------------------------------------------------
Interest Rate Risk Related Derivative Activities - continued
- ------------------------------------------------
The repricing schedule below summarizes the notional amount and associated
interest rate of CoreStates' interest rate swaps categorized by whether
CoreStates receives or pays the rate shown. The swaps are stratified by
repricing date or maturity depending on whether the payments are floating or
fixed, respectively. As of September 30, 1994, the rates CoreStates has
contracted to receive are fixed for longer time periods than the rates
CoreStates has contracted to pay. Therefore, if interest rates fall, this
portfolio will provide higher interest income, offsetting a decline in interest
income in relationship portfolios; conversely if rates rise, the swap portfolio
will produce less interest income which will be offset by increased interest
income in the relationship portfolios.
<TABLE>
<CAPTION>
Repricing Schedule of Interest Rate Swaps
As of September 30, 1994
(in millions)
Years
------------------------------------------------
0-1 1-2 2-3 3-4 4-5 over 5 Total
----- --- ------ ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Receive Fixed/Pay Floating
Receive Notional............... $1,286 $1,519 $727 $469 $ 863 $ 720 $5,584
Rate................... 6.00% 6.68% 6.60% 6.12% 6.50% 6.50% 6.41%
Pay Notional............... $5,584 $5,584
Rate................... 4.96% 4.96%
Pay Fixed/Receive Floating
Pay Notional............... $ 13 $ 55 $ 20 $ 5 $ 25 $ 118
Rate................... 9.68% 8.98% 8.69% 8.48% 9.11% 9.01%
Receive Notional............... $ 118 $ 118
Rate................... 5.43% 5.43%
Receive Floating/Pay Floating
(Basis Swaps)
Notional............... $ 90 $ 90
Receive Rate................... 4.25% 4.25%
Pay Rate................... 5.00% 5.00%
Receive Fixed/Pay Floating*
(Forward Start)
Receive Notional............... $ 40 $ 205 $ 40 $ 25 $ 310
Rate................... 7.39% 6.37% 6.56% 6.37% 6.53%
Start Date Notional............... $ 50 $ 225 $ 35 $ 310
</TABLE>
________________________________________
* Pay rate will be determined on forward start date
<PAGE>
Page 35
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Continued
OFF-BALANCE SHEET INSTRUMENTS AND DERIVATIVE ACTIVITIES - continued
- -------------------------------------------------------
Interest Rate Risk Related Derivative Activities - continued
- ------------------------------------------------
When interest rate swaps are used instead of on-balance sheet alternatives to
lengthen the repricing terms of assets or to shorten the repricing
characteristics of liabilities, leverage is reduced and liquidity is enhanced.
If derivative instruments were not used, in order to maintain identical matching
of asset and liability terms, CoreStates would invest in longer term investment
assets replacing short term investments and adding leverage to the balance
sheet. Therefore, the impact of derivatives on pre-tax income is confined to
the spread between the derivative instrument and other instruments of similar
terms. Management estimates that this amount would not have a material impact
on pre-tax income.
CoreStates has not historically paid fixed rates on interest rate swaps. Its
existing position of $118 million was acquired through mergers and acquisitions.
These acquired fixed-rate pay positions relate to specific assets and
liabilities also acquired. Consequently, these positions are not expected to
have a material impact on future earnings. As of September 30, 1994, CoreStates
does not use index amortizing swaps.
CoreStates uses financial futures in a manner similar to its interest rate swap
portfolio. Therefore, the performance of financial futures will parallel the
performance of the swap portfolio. Activity is largely concentrated in
Eurodollar and LIBOR contracts and is primarily designed to extend the rate
sensitivity of short-term assets to periods generally less than one year.
Occasionally, Treasury Note contracts are purchased in anticipation of fixed-
rate asset activity.
CoreStates purchased $406 million of interest rate caps to offset cap risk
imbedded in adjustable rate mortgages. CoreStates has also sold $300 million of
interest rate caps indexed to Prime rate in combination with the purchase of an
identical amount of caps indexed to LIBOR; this combination reduces the risk of
a narrowing spread on Prime rate indexed assets in rising rate environments.
Interest rate caps have also been sold to hedge liabilities which carry
identical imbedded cap protection.
CoreStates also purchases options and uses forward rate locks to manage the
sensitivity of assets intended for sale.
Credit risk exists in a derivative transaction to the extent that there is a
favorable move in interest rates and the counterparty fails to perform. The
current credit exposure in a derivative transaction is the estimated cost to
replace the transaction at current market rates, while potential exposure is the
estimated cost to replace the transaction at future interest rates. CoreStates
monitors both the current and potential risk. CoreStates evaluates the credit
worthiness of all off-balance sheet counterparties using the same standards
applied in any other loan or credit transaction. In addition, CoreStates
requires collateral for certain counterparties in which the risk exceeds an
acceptable threshold. Collateral agreements are determined based on the
quality of individual counterparties.
<PAGE>
Page 36
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Continued
OFF-BALANCE SHEET INSTRUMENTS AND DERIVATIVE ACTIVITIES - continued
- -------------------------------------------------------
Interest Rate Risk Related Derivative Activities- continued
- -------------------------------------------------
The following schedule outlines derivative activity in the third quarter:
<TABLE>
<CAPTION>
Activity in Derivatives Products
Three Months Ended September 30, 1994
(in millions) Interest Interest Interest
Rate Rate Rate Other
Notional Amounts Swaps Futures Caps Derivatives Total
- ----------------- -------- -------- -------- ----------- -----
<S> <C> <C> <C> <C> <C>
As of June 30, 1994.................... $5,435 $ 2,582 $1,127 $ 345 $ 9,489
Additions.............................. 876 1,731 48 276 2,931
Terminated Contracts(a)................ (2,436) (186) (2,622)
Maturities/
Amortization.......................... (209) (48) (270) (527)
------ ------ ------ ------ ------
As of September 30, 1994............... $6,102 $1,877 $1,127 $ 165 $9,271
====== ====== ====== ====== ======
</TABLE>
- --------------------------------------
(a) As of September 30, 1994, CoreStates had no material deferred gains or
losses related to terminated derivative contracts.
The notional amount of CoreStates' interest rate swaps increased $0.7 billion
versus June 30, 1994. This increase provided protection related to an increase
in fixed-rate deposits and also, offset declines in futures contracts and
investment securities.
Customer Related Derivative Activities
- --------------------------------------
CoreStates also engages in derivative market activities to provide risk
management services for its customers. These services include interest rate
swaps, caps and floors. CoreStates offsets protection sold to customers through
purchases of similar protection. Customer related derivative activity is marked
to market. The following schedule details the outstanding notional amounts of
customer related derivative transactions as of September 30, 1994.
<TABLE>
<CAPTION>
Customer Related Derivatives
As of September 30, 1994
(in millions)
<S> <C>
Interest Rate Swaps:
CoreStates receives fixed.......... $ 188
CoreStates pays fixed.............. 188
Interest Rate Caps/Floors:
Sold............................... 438
Purchased.......................... 437
------
Total Customer Related Derivatives.. $1,251
======
</TABLE>
<PAGE>
Page 37
PART I FINANCIAL INFORMATION
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND
RATES
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------------------------------------------
September 30, 1994 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)....... $ 1,452 4.14% $ 44,911 $ 1,356 3.35% $ 34,017
Investment securities (b):
U.S. Government................................ 2,265 4.92 83,284 2,774 5.97 123,954
State and municipal............................ 377 7.84 22,172 425 8.26 26,317
Other.......................................... 431 5.69 18,354 413 5.67 17,516
--------- ---------- ------- ----------
Total investment securities................ 3,073 5.39 123,810 3,612 6.21 167,787
Federal funds sold............................... 145 4.41 4,782 213 3.13 4,989
Trading account securities....................... 3 5.78 130 1 7.33 55
Loans (b) (c) (d):
Domestic:
Commercial, industrial and other............. 8,132 8.29 504,131 7,301 8.07 440,719
Real estate.................................. 6,362 7.95 378,458 6,880 7.99 411,335
Consumer..................................... 2,528 11.72 221,532 2,349 11.87 208,566
Financial institutions....................... 611 8.12 37,116 690 6.18 31,901
Factoring receivables........................ 573 10.04 43,013 533 10.05 40,079
Lease financing.............................. 765 8.35 47,914 641 9.22 44,312
Foreign........................................ 570 5.12 21,838 535 5.12 20,492
--------- ---------- ------- ----------
Total loans, net of discounts.............. 19,541 8.58 1,254,002 18,929 8.46 1,197,404
--------- ---------- ------- ----------
Total interest earning assets (d).......... $ 24,214 7.88 1,427,635 $24,111 7.79 1,404,252
========= ----- ---------- ======= ----- ----------
FUNDING SOURCES
- ---------------
Interest bearing liabilities (b):
Deposits in domestic offices:
Commercial................................... $ 271 3.60 7,306 $ 425 3.73 11,841
NOW accounts (e)............................. 1,844 0.60 7,594 1,783 1.01 12,142
Money Market Accounts (e).................... 3,997 2.09 62,481 4,141 2.13 65,900
Consumer savings............................. 3,053 1.25 28,594 2,981 1.60 35,652
Consumer certificates........................ 4,214 4.19 131,929 4,582 4.39 150,400
Time deposits of overseas branches and
subsidiaries................................. 772 3.57 20,636 712 2.66 14,189
--------- ---------- ------- ----------
Total interest bearing deposits (e)........ 14,151 2.47 258,540 14,624 2.68 290,124
Short-term funds borrowed:
Federal funds purchased...................... 952 3.94 28,086 1,168 3.01 26,278
Commercial paper............................. 711 4.00 21,273 621 3.14 14,595
Other........................................ 341 5.26 13,409 200 5.03 7,523
--------- ---------- ------- ----------
Total short-term funds borrowed............ 2,004 4.19 62,768 1,989 3.25 48,396
Long-term debt (f)............................. 1,619 4.97 60,141 1,429 5.10 54,472
--------- ---------- ------- ----------
Total interest bearing liabilities......... 17,774 2.87 381,449 18,042 2.91 392,992
Portion of non-interest bearing funding sources.. 6,440 6,069
--------- ---------- ------- ----------
Total funding sources...................... $ 24,214 2.10 381,449 $24,111 2.18 392,992
========= ----- ---------- ======= ----- ----------
Net interest income and net interest margin...... 5.78% $1,046,186 5.61% $1,011,260
===== ========== ===== ==========
</TABLE>
<PAGE>
Page 38
PART I FINANCIAL INFORMATION
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND
RATES -- CONTINUED
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------------------------------------
September 30, 1994 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>
NON-INTEREST EARNING ASSETS
- ---------------------------
Cash............................................... $ 2,322 $ 2,259
Allowance for loan losses.......................... (512) (457)
Other assets....................................... 1,674 1,781
--------- -------
Total non-interest earning assets................ $ 3,484 $ 3,583
========= =======
NON-INTEREST BEARING FUNDING SOURCES
- ------------------------------------
Demand deposits:
Domestic......................................... $ 5,752 $ 5,645
Foreign.......................................... 405 367
Other liabilities.................................. 1,497 1,470
Shareholders' equity............................... 2,270 2,170
Non-interest bearing funding sources used to fund
earning assets................................... (6,440) (6,069)
--------- -------
Total net non-interest bearing funding
sources.................................... $ 3,484 $ 3,583
========= =======
SUPPLEMENTARY AVERAGES
- ----------------------
Net demand deposits................................ $ 4,474 $ 4,555
Net Federal funds purchased........................ 807 3.86% $ 23,304 955 2.98% $21,289
Commercial certificates of deposit in domestic
offices over $100,000............................ 255 3.57 6,810 364 3.58 9,734
Average prime rate................................. 6.81 6.00
</TABLE>
(a) Yields and income on 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 NOW and Money Market Accounts 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.
<PAGE>
Page 39
PART I FINANCIAL INFORMATION
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND
RATES
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------------------------------
September 30, 1994 June 30, 1994 September 30, 1993
------------------------------ ---------------------------- -------------------------
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) $ 1,562 4.72% $ 18,566 $ 1,445 3.21% $ 11,549 $ 1,190 3.22% $ 9,663
Investment securities (b):
U.S. Government.......................... 2,166 4.85 26,489 2,212 4.91 27,102 2,752 5.67 39,323
State and municipal...................... 344 8.15 7,012 388 7.68 7,448 387 8.32 8,047
Other.................................... 381 5.78 5,546 424 7.43 7,854 386 4.66 4,535
------- -------- --------- -------- ------- -------
Total investment securities............ 2,891 5.36 39,047 3,024 5.62 42,404 3,525 5.84 51,905
Federal funds sold........................ 76 5.90 1,130 105 4.56 1,195 227 3.18 1,821
Trading account securities................ 3 8.13 61 3 4.00 30 2 4.80 24
Loans (b) (c) (d):
Domestic:
Commercial, industrial and other........ 8,274 8.83 184,141 8,189 8.32 169,902 7,572 8.13 155,137
Real estate............................. 6,037 7.98 121,447 6,472 8.00 129,028 6,871 7.81 135,298
Consumer................................ 2,556 11.99 77,235 2,497 11.63 72,405 2,399 11.47 69,347
Financial institutions.................. 612 8.12 12,524 628 8.96 14,028 726 5.78 10,571
Factoring receivables................... 577 10.30 14,986 605 10.08 15,202 579 10.26 14,969
Lease financing......................... 786 8.38 16,458 770 8.39 16,144 677 8.91 15,083
Foreign.................................. 596 5.17 7,765 571 5.30 7,545 505 5.03 6,400
------- -------- --------- -------- ------- -------
Total loans, net of discounts.......... 19,438 8.87 434,556 19,732 8.62 424,254 19,329 8.35 406,805
------- -------- --------- -------- ------- -------
Total interest earning assets (d)...... $23,970 8.17 493,360 $ 24,309 7.91 479,432 $24,273 7.69 470,218
======= -------- -------- ========= ----- -------- ======= ----- -------
FUNDING SOURCES
- ---------------
Interest bearing liabilities (b):
Deposits in domestic offices:
Commercial.............................. $ 260 3.56 2,330 $ 272 3.90 2,644 $ 380 3.70 3,547
NOW accounts (e)........................ 1,771 0.72 2,917 1,866 0.53 2,364 1,780 0.81 3,279
Money Market Accounts (e)............... 3,848 2.10 20,305 4,012 2.08 20,811 4,115 2.12 21,986
Consumer savings........................ 3,014 1.37 10,437 3,080 1.21 9,267 3,053 1.49 11,485
Consumer certificates................... 4,278 4.23 45,639 4,170 4.14 43,016 4,369 4.26 46,962
Time deposits of overseas branches and
subsidiaries............................ 820 3.91 8,074 759 2.11 3,995 672 2.62 4,442
------- -------- --------- -------- ------- -------
Total interest bearing deposits (e).... 13,991 2.57 89,702 14,159 2.34 82,097 14,369 2.56 91,701
Short-term funds borrowed:
Federal funds purchased................. 984 4.61 11,424 902 4.02 9,033 1,060 2.86 7,648
Commercial paper........................ 825 4.54 9,442 756 3.93 7,416 627 3.13 4,943
Other................................... 280 3.26 2,303 343 7.24 6,191 375 3.54 3,348
------- -------- --------- -------- ------- -------
Total short-term funds borrowed........ 2,089 4.40 23,169 2,001 4.54 22,640 2,062 3.07 15,939
Long-term debt (f)....................... 1,640 5.66 23,416 1,626 4.82 19,554 1,519 4.78 18,290
------- -------- --------- -------- ------- -------
Total interest bearing liabilities..... 17,720 3.05 136,287 17,786 2.80 124,291 17,950 2.78 125,930
Portion of non-interest bearing funding
sources.................................. 6,250 6,523 6,323
------- -------- --------- -------- ------- --------
Total funding sources.................. $23,970 2.26 136,287 $ 24,309 2.05 124,291 $24,273 2.06 125,930
======= -------- -------- ========= ----- -------- ======= ----- --------
Net interest income and net interest
margin................................... 5.91% $357,073 5.86% $355,141 5.63% $344,288
======== ======== ===== ======== ===== ========
</TABLE>
<PAGE>
Page 40
PART I FINANCIAL INFORMATION
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND
RATES -- continued
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------------------------------
September 30, 1994 June 30, 1994 September 30, 1993
------------------------------ ----------------------------- -----------------------
Average Income/ Average Income/ Average Income/
balance Rate expense balance Rate expense balance Rate expense
------- ---- ------- ------- ---- ------- ------- ---- -------
(000,000) (000) (000,000) (000) (000,000) (000)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NON-INTEREST EARNING ASSETS
- ---------------------------
Cash...................................... $ 2,286 $ 2,353 $ 2,227
Allowance for loan losses................. (482) (541) (458)
Other assets.............................. 1,708 1,768 1,649
--------- ------- -------
Total non-interest earning assets....... $ 3,512 $ 3,580 $ 3,418
========= ======= =======
NON-INTEREST BEARING FUNDING SOURCES
- ------------------------------------
Demand deposits:
Domestic................................ $ 5,711 $ 5,745 $ 5,685
Foreign................................. 431 412 385
Other liabilities......................... 1,434 1,725 1,440
Shareholders' equity...................... 2,186 2,221 2,231
Non-interest bearing funding sources used
to fund earning assets................... (6,250) (6,523) (6,323)
--------- ------- -------
Total net non-interest bearing
funding sources.................... $ 3,512 $ 3,580 $ 3,418
========= ======= =======
SUPPLEMENTARY AVERAGES
- ----------------------
Net demand deposits....................... $ 4,357 $ 4,472 $ 4,696
Net Federal funds purchased............... 908 4.50% $ 10,294 797 3.94% $7,838 833 2.78% $5,827
Commercial certificates of deposit in
domestic offices over $100,000........... 260 3.55 2,325 272 3.90 2,642 320 3.60 2,908
Average prime rate........................ 7.50 6.90 6.00
</TABLE>
(a) Yields and income on 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 NOW and Money Market Accounts 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.
<PAGE>
Page 41
PART II. OTHER INFORMATION
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Item 6: EXHIBITS AND REPORTS ON FORM 8-K
- ------
(a) Exhibits - The following exhibits are filed herewith in connection with
registration statements filed from time to time by the Corporation:
11 Computation of Per Share Earnings
12.1 Computation of Ratio of Earnings to Fixed Charges (Consolidated)
12.2 Computation of Ratio of Earnings to Fixed Charges (Combined
CoreStates Parent Company and CoreStates Capital Corporation)
27 Financial Data Schedule
(b) The following Reports on Form 8-K were filed by CoreStates Financial Corp
during the quarter:
1. Date of Report: July 14, 1994
--------------
Item(s) Reported: Reporting under Item 7 Amendment No. 1 dated July
----------------
14, 1994 to the Agreement and Plan of Merger between CoreStates
Financial Corp and Germantown Savings Bank Dated May 7,1994.
2. Date of Report: July 20, 1994
--------------
Item(s) Reported: Reporting under Item 5 the information set forth in
----------------
the earnings news release of CoreStates Financial Corp.
3. Date of Report: September 13, 1994
--------------
Item(s) Reported: Form 8-K/A, Amendment No. 2 to Form 8-K dated March
----------------
16, 1994. Reporting under Item 7 Restated Financial Statements of
Constellation Bancorp and Subsidiaries and Restated Financial
Information of CoreStates Financial Corp and Subsidiaries.
4. Date of Report: September 13, 1994
--------------
Item(s) Reported: Form 8-K/A, Amendment No. 1 to Form 8-K dated May
----------------
5, 1994. Reporting under Item 7 Restated Financial Statements of
CoreStates Financial Corp reflecting the acquisition of Constellation
Bancorp on March 16, 1994 under the pooling of interests method of
accounting.
5. Date of Report: September 13, 1994
--------------
Item(s) Reported: Form 8-K/A, Amendment No. 1 to Form 8-K dated June
----------------
27, 1994. Reporting under Item 7 restated financial statements of
CoreStates Financial Corp reflecting the acquisition of Independence
Bancorp, Inc. on June 27, 1994 under the pooling of interests method
of accounting.
6. Date of Report: September 13, 1994
--------------
Item(s) Reported: Reporting under Item 7 financial statements of
----------------
CoreStates Financial Corp restated to include the consolidated
accounts of Independence Bancorp, Inc., which was acquired on June 27,
1994 and accounted for as a pooling of interests.
7. Date of Report: September 14, 1994
--------------
Item(s) Reported: Reporting under Item 5 information regarding Off-
----------------
Balance Sheet Instruments and Derivative Activities of CoreStates
Financial Corp.
<PAGE>
Page 42
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
SIGNATURE
- ---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CORESTATES FINANCIAL CORP
Date: November 10, 1994 By:/s/ Albert W. Mandia
--------------------------------
Albert W. Mandia
Executive Vice President, Finance
(Principal Accounting Officer)
<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 Nine Months Ended
September 30, September 30,
------------------ --------------------
1994 1993 1994 1993
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
(A) Income before cumulative effect of a
change in accounting principle.......... $104,221 $ 96,081 $137,317 $267,753
Cumulative effect of a change in
accounting principle.................... (3,430) (13,010)
-------- -------- -------- --------
(B) Net Income.............................. $104,221 $ 96,081 $133,887 $254,743
======== ======== ======== ========
EARNINGS PER SHARE
Based on average common shares outstanding
- ---------------------------------------------
(C) Average shares outstanding.............. 141,033 145,702 142,581 145,431
======== ======== ======== ========
(A/C) Income before cumulative effect of a
change in accounting principle...... $ 0.74 $ 0.66 $ 0.97 $ 1.84
======== ======== ======== ========
(B/C) Net Income............................ $ 0.74 $ 0.66 $ 0.95 $ 1.75
======== ======== ======== ========
Based on average common and common
- ----------------------------------
equivalent shares outstanding
- -----------------------------
Primary:
(D) Average common equivalent shares......... 1,648 2,254 1,318 3,374
======== ======== ======== ========
(E) Average common and common
equivalent shares (C + D).............. 142,681 147,956 143,899 148,805
======== ======== ======== ========
(A/E) Income before cumulative effect of a
change in accounting principle (1). $ 0.73 $ 0.65 $ 0.95 $ 1.80
======== ======== ======== ========
(B/E) Net Income (1)......................... $ 0.73 $ 0.65 $ 0.93 $ 1.71
======== ======== ======== ========
Fully diluted:
(F) Average common equivalent shares......... 1,650 2,363 1,319 3,676
======== ======== ======== ========
(G) Average common and common
equivalent shares (C + F).............. 142,683 148,065 143,900 149,107
======== ======== ======== ========
(I) Interest expense on Subordinated
convertible debentures, net of tax........ $ 479 $ 479 $ 1,437 $ 1,438
======== ======== ======== ========
((A+I)/G) Income before cumulative effect
of a change in accounting
principle (1)..................... $ 0.73 $ 0.65 $ 0.96 $ 1.81
======== ======== ======== ========
((B+I)/G) Net Income (1)...................... $ 0.73 $ 0.65 $ 0.94 $ 1.72
======== ======== ======== ========
</TABLE>
- -------------------------------
(1) Dilution is less than 3%.
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS FROM CONTINUING OPERATIONS
TO FIXED CHARGES OF CONTINUING OPERATIONS
CONSOLIDATED
Nine Months Ended September 30, 1994
- ------------------------------------
<TABLE>
<S> <C>
1. Income from continuing operations before extraordinary items and
income taxes...................................................... $218,643
========
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......................... $139,452
B. Interest on deposits........................................... 258,540
--------
C. Total fixed charges (line 2A + line 2B)........................ $397,992
========
3. Income from continuing operations before extraordinary items and
income taxes, plus total fixed charges of continuing operations:
A. Excluding interest on deposits (line 1 + line 2A).............. $358,095
========
B. Including interest on deposits (line 1 + line 2C).............. $616,635
========
4. Ratio of earnings (as defined) to fixed charges:
A. Excluding interest on deposits (line 3A/line 2A)............... 2.57x
====
B. Including interest on deposits (line 3B/line 2C)............... 1.55x
====
</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
Nine Months Ended September 30, 1994
- ------------------------------------
<TABLE>
<S> <C>
1. Income before income taxes and equity in undistributed income
of subsidiaries............................................... $ 82,912
2. Fixed charges - interest expense, amortization of
debt issuance costs and one-third of rental expenses, net of
income from subleases......................................... 84,598
--------
3. Income before taxes and equity in undistributed income of
subsidiaries, plus fixed charges.............................. $167,510
========
4. Ratio of earnings (as defined) to fixed charges (line 3/
line 2)...................................................... 1.98x
====
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
CoreStates Financial Corp consolidated balance sheet as of September 30, 1994,
and the related consolidated statement of income, changes in shareholders'
equity, and other financial data included within management's discussion and
analysis of financial condition and results of operations for the nine months
ended September 30, 1994 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<CASH> $ 1,846,019
<INT-BEARING-DEPOSITS> 1,601,494
<FED-FUNDS-SOLD> 126,706
<TRADING-ASSETS> 5,200
<INVESTMENTS-HELD-FOR-SALE> 374,912
<INVESTMENTS-CARRYING> 2,481,080
<INVESTMENTS-MARKET> 2,463,488
<LOANS> 19,723,793
<ALLOWANCE> 477,878
<TOTAL-ASSETS> 27,042,348
<DEPOSITS> 19,511,387
<SHORT-TERM> 2,198,881
<LIABILITIES-OTHER> 1,105,331
<LONG-TERM> 1,725,184
<COMMON> 145,883
0
0
<OTHER-SE> 2,054,302
<TOTAL-LIABILITIES-AND-EQUITY> 27,042,348
<INTEREST-LOAN> 1,244,735
<INTEREST-INVEST> 117,069
<INTEREST-OTHER> 49,767
<INTEREST-TOTAL> 1,411,571
<INTEREST-DEPOSIT> 258,540
<INTEREST-EXPENSE> 381,449
<INTEREST-INCOME-NET> 1,030,122
<LOAN-LOSSES> 221,900
<SECURITIES-GAINS> 14,143
<EXPENSE-OTHER> 1,010,858
<INCOME-PRETAX> 218,643
<INCOME-PRE-EXTRAORDINARY> 137,317
<EXTRAORDINARY> 0
<CHANGES> (3,430)
<NET-INCOME> 133,887
<EPS-PRIMARY> 0.95
<EPS-DILUTED> 0.95
<YIELD-ACTUAL> 5.78
<LOANS-NON> 276,200
<LOANS-PAST> 51,000
<LOANS-TROUBLED> 2,300
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 450,800
<CHARGE-OFFS> 241,500
<RECOVERIES> 46,700
<ALLOWANCE-CLOSE> 477,900
<ALLOWANCE-DOMESTIC> 467,900
<ALLOWANCE-FOREIGN> 10,000
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
