<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 March 31, 1995 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 May 1, 1995: 141,613,478
<PAGE>
Page 2
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
INDEX Page
----
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets as of March 31, 1995 and
December 31, 1994 3
Consolidated Statements of Income for the Three
Months Ended March 31, 1995 and 1994 4
Consolidated Statements of Changes in
Shareholders' Equity for the Three Months Ended
March 31, 1995 and 1994 5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1995 and 1994 6
Notes to the Consolidated Financial
Statements 7-8
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations 9-29
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 30
SIGNATURE 31
EXHIBITS 11, 12.1, 12.2, 27 32-36
<PAGE>
Page 3
PART I. FINANCIAL INFORMATION
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
(in thousands) March 31, December 31,
1995 1994
----------- ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
- ------
Cash and due from banks........................... $ 1,933,867 $ 2,262,512
Time deposits, principally Eurodollars............ 1,868,706 1,750,458
Investments held-to-maturity (fair value:
1995 - $2,212,815; 1994 - $2,463,488)........... 2,219,869 2,454,584
Investments available-for-sale, at fair value..... 410,600 426,047
Loans, net of unearned discounts of $142,604 in
1995 and $141,109 in 1994 (Note B).............. 20,912,191 20,526,216
Less: Allowance for loan losses................. (498,696) (500,631)
----------- -----------
Net loans............................... 20,413,495 20,025,585
Federal funds sold and securities purchased under
agreements to resell............................ 43,960 731,820
Trading account securities, at fair value......... 78 1,206
Due from customers on acceptances................. 369,690 342,211
Premises and equipment............................ 419,510 423,832
Other assets...................................... 815,661 906,881
----------- -----------
Total assets............................ $28,495,436 $29,325,136
=========== ===========
LIABILITIES
- -----------
Deposits:
Domestic:
Non-interest bearing.......................... $ 5,652,960 $ 6,362,470
Interest bearing.............................. 14,074,848 14,565,051
Overseas branches and subsidiaries.............. 1,182,966 1,113,365
----------- -----------
Total deposits.......................... 20,910,774 22,040,886
Funds borrowed.................................... 1,935,663 1,546,201
Bank acceptances outstanding...................... 370,635 336,103
Other liabilities................................. 1,182,470 1,260,722
Long-term debt.................................... 1,803,553 1,791,110
----------- -----------
Total liabilities....................... 26,203,095 26,975,022
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES (Note C)
- -----------------------------------------------
SHAREHOLDERS' EQUITY
- --------------------
Preferred stock: authorized 10.0 million shares; no
shares issued................................... -- --
Common stock: $1 par value; authorized 200.0
million shares; issued 145.9 million shares in
1995 and 1994 (including treasury shares of
2.8 million in 1995 and 1.0 million in 1994)..... 2,292,341 2,350,114
----------- -----------
Total shareholders' equity.............. 2,292,341 2,350,114
----------- -----------
Total liabilities and shareholders'
equity................................. $28,495,436 $29,325,136
=========== ===========
</TABLE>
Note: The balance sheet at December 31, 1994 has been derived from the
audited financial statements at that date.
See accompanying notes to the consolidated financial statements.
<PAGE>
Page 4
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1995 1994
------ ------
<S> <C> <C>
INTEREST INCOME
- ---------------
Interest and fees on loans:
Taxable income................................. $476,900 $385,807
Tax exempt income.............................. 4,917 6,101
Interest on investment securities:
Taxable income................................. 34,636 35,689
Tax exempt income.............................. 3,313 4,337
Interest on time deposits in banks............... 29,130 14,796
Other interest income............................ 2,091 2,479
-------- --------
Total interest income......................... 550,987 449,209
-------- --------
INTEREST EXPENSE
- ----------------
Interest on deposits............................. 128,390 86,741
Interest on funds borrowed....................... 27,298 16,959
Interest on long-term debt....................... 30,431 17,171
------- --------
Total interest expense........................ 186,119 120,871
-------- --------
NET INTEREST INCOME........................... 364,868 328,338
Provision for losses on loans.................... 25,000 146,905
------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOSSES ON LOANS................ 339,868 181,433
-------- --------
NON-INTEREST INCOME
- -------------------
Service charges on deposit accounts.............. 43,930 46,022
Trust income..................................... 24,330 24,593
Fees for international services.................. 21,972 18,139
Debit and credit card fees....................... 14,344 14,398
Income from investment in EPS, Inc............... 26,493 7,912
Gains on trading account securities.............. 668 310
Securities gains................................. 6,395 6,897
Other operating income........................... 24,169 27,676
-------- --------
Total non-interest income..................... 162,301 145,947
-------- --------
NON-FINANCIAL EXPENSES
- ----------------------
Salaries, wages and benefits..................... 158,059 158,928
Net occupancy.................................... 29,407 30,192
Equipment expenses............................... 19,488 19,204
Restructuring and merger-related charges......... 110,000 75,000
Other operating expenses......................... 97,116 88,010
-------- --------
Total non-financial expenses.................. 414,070 371,334
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES................ 88,099 (43,954)
- ---------------------------------
Provision (benefit) for income taxes............. 32,732 (13,959)
-------- --------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A
- -------------------------------------------
CHANGE IN ACCOUNTING PRINCIPLE.................. 55,367 (29,995)
------------------------------
Cumulative effect of a change in accounting
principle, net of income tax benefits of
$1,846.......................................... - (3,430)
-------- --------
NET INCOME (LOSS)................................ $ 55,367 $(33,425)
- ----------------- ======== ========
Average common shares outstanding................ 144,246 144,612
======== ========
PER COMMON SHARE DATA
- ---------------------
Income (loss) before cumulative effect of a
change in accounting principle.................. $0.38 $(0.21)
======= ========
Net income (loss)................................ $0.38 $(0.23)
======= ========
Cash dividends declared.......................... $0.34 $0.30
======= ========
</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>
Three Months Ended March 31, 1994
- ---------------------------------
Balances at beginning of year........................... $145,740 $778,498 $1,451,965 $ (7,819) $2,368,384
Net income (loss)....................................... (33,425) (33,425)
Net change in unrealized gain on investments
available-for-sale, net of tax......................... (30,361) (30,361)
Treasury shares acquired (2,004 shares)................. (53,879) (53,879)
Purchase and retirement of common stock................. (165) (979) (3,027) (4,171)
Common stock issued under employee benefit
plans (74 new shares; 126 treasury shares)............ 74 936 (660) 3,403 3,753
Common stock issued under dividend reinvestment
plan (122 treasury shares)............................ 1 (364) 3,522 3,159
Conversion of subordinated debentures (1 share)......... 1 29 30
Foreign currency translation adjustments................ (14) (14)
Common dividends declared............................... (41,927) (41,927)
-------- -------- ---------- -------- ----------
Balances at end of period............................... $145,650 $778,485 $1,342,187 $(54,773) $2,211,549
======== ======== ========== ======== ==========
Three Months Ended March 31, 1995
- ---------------------------------
Balances at beginning of year........................... $145,878 $781,766 $1,446,767 $(24,297) $2,350,114
Net income.............................................. 55,367 55,367
Net change in unrealized gain on investments
available-for-sale, net of tax........................ 724 724
Treasury shares acquired (3,038 shares)................. (88,696) (88,696)
Common stock issued under employee benefit
plans (1,137 treasury shares)......................... (12,065) 32,526 20,461
Common stock issued under dividend reinvestment
plan (127 treasury shares)............................ 19 (2) 3,353 3,370
Cash paid for fractional shares......................... (24) (24)
Foreign currency translation adjustments................ 108 108
Common dividends declared............................... (49,083) (49,083)
-------- -------- ---------- -------- ----------
Balances at end of period............................... $145,878 $781,785 $1,441,792 $(77,114) $2,292,341
======== ======== ========== ======== ==========
</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>
Three Months Ended
March 31,
-------------------------
1995 1994
-------- --------
<S> <C> <C>
Operating Activities
- --------------------
Net income (loss)............................. $ 55,367 $ (33,425)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Restructuring and merger-related charges.... 110,000 37,000
Cumulative effect of a change in
accounting principle....................... - 3,430
Provision for losses on loans............... 25,000 146,905
Provision for losses and writedowns on
OREO....................................... 2,973 28,934
Depreciation and amortization............... 17,822 31,261
Securities gains, net....................... (6,395) (6,897)
Other gains................................. (19,000) -
Deferred income tax expense (benefit)....... (27,840) (73,943)
Increase (decrease) in due to factored
clients.................................... (76,190) 56,807
Decrease in interest receivable............. 5,119 6,579
Increase (decrease) in interest payable..... 10,175 (14,606)
Other assets and liabilities, net........... 17,147 8,539
----------- -----------
Net Cash Provided By Operating
Activities.............................. 114,178 190,584
----------- -----------
Investing Activities
- --------------------
Net increase in loans......................... (280,736) (503,756)
Proceeds from sales of loans.................. 132,003 160,890
Loans originated or acquired - non-bank
subsidiary................................... (8,360,549) (7,673,456)
Principal collected on loans - non-bank
subsidiary................................... 8,103,859 7,551,980
Net increase in time deposits, principally
Eurodollars................................. (116,229) (12,795)
Purchases of investments held-to-maturity..... (138,504) (343,604)
Purchases of investments available-for-sale... (73,818) (132,499)
Proceeds from maturities of investments
available-for-sale........................... 13,920 69,836
Proceeds from maturities of investments
held-to-maturity............................. 365,593 501,529
Proceeds from sales of investments
available-for-sale........................... 91,028 469,144
Net decrease in Federal funds sold and
securities purchased under agreements to
resell..................................... 687,860 (280,935)
Purchases of premises and equipment........... (41,735) (21,536)
Proceeds from sales and paydowns on OREO...... 7,214 8,795
Other......................................... 11,578 1,317
----------- -----------
Net Cash Provided By (Used In)
Investing Activities.................... 401,484 (205,090)
----------- -----------
Financing Activities
- --------------------
Net decrease in deposits...................... (1,131,116) (414,531)
Proceeds from issuance of long-term debt...... 105,000 26,701
Retirement of long-term debt.................. (92,612) (29,604)
Net increase in short-term funds borrowed..... 389,462 325,224
Cash dividends paid........................... (50,152) (38,514)
Purchases of treasury stock................... (88,696) (53,879)
Other......................................... 23,807 6,912
----------- -----------
Net Cash Used In Financing Activities.... (844,307) (177,691)
----------- -----------
Decrease In Cash And Due From Banks...... (328,645) (192,197)
-----------------------------------
Cash And Due From Banks at January 1,.... 2,262,512 2,521,676
----------- -----------
Cash and due from banks at March 31,..... $ 1,933,867 $ 2,329,479
=========== ===========
Supplemental Disclosure of Cash Flow
Information
- ------------------------------------
Cash paid during the period for:
Interest................................. $ 175,944 $ 135,862
=========== ===========
Income taxes............................. $ 2,914 $ 621
=========== ===========
Net cash received on interest rate swaps...... $ 9,727 $ 30,106
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
Page 7
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31, 1995
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. Certain amounts in prior
periods have been reclassified for comparative purposes. Operating results for
the three-month period ended March 31, 1995 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1995.
In March 1995, CoreStates completed an intensive review of its operations and
businesses and announced a corporate-wide process redesign plan, which
restructures its banking services around customers and enhances employees'
authority to make decisions to benefit customers. As a result of this process
redesign, CoreStates recorded a $110 million pre-tax restructuring charge, $70.0
million after-tax or $0.49 per share, in March 1995. The process redesign is
expected to generate by late 1996, efficiencies which will reduce expenses by
approximately $180 million and revenue enhancements which will net an addition
of approximately $30 million to revenues, combining to improve net income at an
annual rate of $0.90 per share.
During the first quarter of 1994, CoreStates 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 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.
NOTE B -- LOAN PORTFOLIO
Loans, net of unearned discounts, at March 31, 1995 and December 31, 1994
consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
----------- ------------
<S> <C> <C>
Domestic:
Commercial, industrial and other:
Highly leveraged transactions ("HLTs").... $ 491,534 $ 497,972
Other..................................... 8,779,575 8,190,761
----------- -----------
Total commercial, industrial and other.. 9,271,109 8,688,733
----------- -----------
Real estate:
Construction and development.............. 324,471 331,369
Residential............................... 2,983,340 3,180,227
Other..................................... 2,882,772 2,979,053
----------- -----------
Total real estate....................... 6,190,583 6,490,649
----------- -----------
Consumer:
Installment............................... 1,381,436 1,386,776
Credit card............................... 1,370,305 1,374,598
----------- -----------
Total consumer.......................... 2,751,741 2,761,374
----------- -----------
Financial institutions...................... 707,065 668,119
Factoring receivables....................... 608,701 622,380
Lease financing............................. 732,028 710,338
----------- -----------
Total domestic.......................... 20,261,227 19,941,593
----------- -----------
Foreign....................................... 650,964 584,623
----------- -----------
Total loans............................. $20,912,191 $20,526,216
=========== ===========
</TABLE>
<PAGE>
Page 8
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)--continued
March 31, 1995
NOTE B -- LOAN PORTFOLIO - continued
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan" ("FAS 114") and in October 1994, the FASB issued
Statement No. 118, "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures" ("FAS 118"). FAS 114 addresses accounting for
impairment of certain loans and requires that impaired loans within the scope of
FAS 114 be measured based on the present value of expected cash flows discounted
at the loan's effective interest rate, or be measured at the loan's observable
market price or the fair value of its collateral. FAS 118 amended FAS 114's
income recognition policies and clarifies FAS 114's disclosure requirements.
Both FAS 114 and 118 are effective beginning in 1995. As required, CoreStates
adopted both statements in the first quarter of 1995. The adoption of these
standards did not have an impact on CoreStates' provision for loan losses or
allowance for loan losses, nor change CoreStates' methodology for recognizing
income on impaired loans.
NOTE C -- OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS AND COMMITMENTS
In the normal course of business, there are outstanding commitments and
contingent liabilities which are not reflected in the financial statements.
These include various financial instruments with off-balance sheet risk used in
connection with CoreStates' asset and liability management and to provide for
the needs of customers. These involve varying degrees of credit, interest rate
and liquidity risk, but do not represent unusual risks for the Corporation.
Management does not anticipate any significant losses as a result of these
transactions.
The following is a summary of contractual or notional amounts of off-balance
sheet commitments and derivative financial instruments as of March 31, 1995 and
December 31, 1994 (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
---------- ------------
<S> <C> <C>
Standby letters of credit, net of participations.. $1,106,008 $1,125,262
Commercial letters of credit...................... 1,241,806 1,244,164
Commitments to extend credit...................... 8,459,300 8,223,261
Unused commitments under credit card lines........ 3,833,442 3,579,453
Interest rate futures contracts:
Commitments to purchase......................... 1,068,000 1,043,000
Commitments to purchase foreign and
U.S. currencies................................. 1,644,731 1,816,549
Interest rate swaps, notional principal
amounts......................................... 8,481,439 8,234,400
Interest rate caps and floors:
Written......................................... 763,219 749,857
Purchased....................................... 1,188,019 1,150,657
Other derivatives................................. 205,000 295,000
</TABLE>
<PAGE>
Page 9
PART I. FINANCIAL INFORMATION -- continued
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY
- -------
Earnings Review - In the first quarter of 1995, CoreStates Financial Corp
- ---------------
("CoreStates") recorded net income of $55.4 million or $0.38 per share.
"Operating earnings" for the first quarter of 1995, which has been defined for
purposes of this discussion as net income excluding a restructuring charge and a
gain related to changes in an investment in an affiliate joint venture, was
$113.6 million, or $0.79 per share. This represents a 16.2% increase when
compared to first quarter of 1994 operating earnings of $97.8 million, or $0.68
per share. Operating earnings for the first quarter of 1994 excludes merger-
related charges of $127.8 million after-tax, or $0.89 per share, and the
cumulative effect of a change in accounting principle.
The $15.8 million improvement in operating earnings for the first quarter of
1995, as compared to the first quarter of 1994, was primarily due to an increase
in taxable equivalent net interest income of $35.3 million, or 10.6%. The net
interest margin for the first quarter of 1995 was 5.93%, an increase of 37 basis
points when compared to 5.56% for the first quarter of 1994. Partially
offsetting the increase in net interest income was a $2.6 million, or 1.8%
decline in non-interest income excluding the gain on the affiliate joint venture
and a $7.8 million, or 2.6% increase in non-financial expenses excluding the
restructuring and merger-related charges.
Key performance measures, based on operating earnings, continued to be strong.
Returns on average equity and assets were 19.63% and 1.63%, respectively, in the
first quarter of 1995, compared to 16.45% and 1.43%, respectively, in the first
quarter of 1994.
In March 1995, CoreStates completed an intensive review of its operations and
businesses and announced a corporate-wide process redesign plan, which
restructures its banking services around customers and enhances employees'
authority to make decisions to benefit customers. As a result of this process
redesign, CoreStates recorded a $110.0 million pre-tax restructuring charge,
$70.0 million after-tax or $0.49 per share in March 1995. For a more detailed
discussion of the process redesign and related restructuring charge see "Process
Redesign" beginning on page 10.
Also in March 1995, Electronic Payment Services, Inc. ("EPS") an affiliate
joint venture formed in 1992 to combine the consumer electronic transaction
processing businesses of CoreStates and three partners, admitted a fifth partner
and increased the ownership interest of an existing partner. As a direct result
of this change in its ownership interest, CoreStates recognized a pre-tax gain
of $19.0 million, $11.8 million after-tax or $0.08 per share.
Upon consummation of its acquisition by CoreStates on March 16, 1994,
Constellation Bancorp ("Constellation") recorded merger-related charges in the
first quarter of 1994 in connection with a change in strategic direction related
to problem assets and to conform consumer lending charge-off policies to those
of CoreStates, and for expenses directly attributable to the acquisition. 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 including $8.0 million of
severance costs related to approximately 370 employees.
During the first quarter of 1994, CoreStates 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.
<PAGE>
Page 10
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
SUMMARY - continued
- -------
Operating results, key financial ratios and per share information are summarized
in the following table (in millions, except per share):
<TABLE>
<CAPTION>
Three Months Ended Percentage
March 31, Increase
------------------
1995 1994 (Decrease)
---------- --------- ----------
<S> <C> <C> <C>
Net interest income (taxable
equivalent basis)................... $ 369.3 $ 334.0 10.6%
======== ========
Income (loss) before the cumulative
effect of a change in accounting
principle........................... $ 55.4 $ (30.0)
Add back after-tax restructuring
charge.............................. 70.0 -
Less after-tax EPS gain.............. (11.8) -
Add back after-tax merger-related
charges............................. - 127.8
-------- --------
Operating earnings................... $ 113.6 $ 97.8 16.2
======== ========
Operating earnings per share......... $ 0.79 $ 0.68 16.2
======== ========
Return on average equity (a)......... 19.63% 16.45%
Return on average assets (a)......... 1.63 1.43
Net interest margin.................. 5.93 5.56
Average common shares outstanding.... 144.246 144.612
- ------------------
</TABLE>
(a) Calculated based on "Operating earnings."
Process Redesign - In order to build upon CoreStates' strong financial condition
- ----------------
and sustain previous financial successes, and to accomplish this goal in the
competitive financial services environment in which CoreStates operates,
management had commenced an intensive review of all aspects of CoreStates'
operations and businesses in September 1994. In March 1995, CoreStates
completed its review and approved and announced a corporate-wide process
redesign plan, which restructures its banking services around customers and
enhances employees' authority to make decisions to benefit customers. The
objectives of the process redesign are: (i) to enhance CoreStates' customer
focus; (ii) to accelerate the culture change already in progress at CoreStates;
and (iii) to improve productivity.
As a result of the process redesign, CoreStates recorded a $110 million
restructuring charge, $70 million after-tax or $0.49 per share, in March 1995.
The process redesign will result in the elimination of 2,800 positions, or 2,600
full-time equivalent employees. The breakdown of the eliminated positions is as
follows: (i) 450 positions resulting from a hiring freeze in place since
September 1994; (ii) 530 positions resulting from expected attrition during
implementation of the process redesign; (iii) 930 employees who have elected to
accept an enhanced severance package; and (iv) 890 layoffs. At March 31, 1995,
CoreStates had 14,497 full-time equivalent employees which include reductions
only for the impact of the hiring freeze. The components of the restructuring
charge were as follows (in millions):
<TABLE>
<CAPTION>
Requiring
Cash
Total Outflow
----- ---------
<S> <C> <C>
Severance costs............... $ 72 $72
Office reconfiguration costs.. 16 7
Branch closing costs.......... 15 7
Outplacement costs............ 3 3
Miscellaneous................. 4 2
---- ---
Total....................... $110 $91
==== ===
</TABLE>
<PAGE>
Page 11
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
SUMMARY - continued
- -------
The severance charge relates to the separation package which will be paid to
those employees who have elected to accept that package and to those employees
laid off. Cash payments under separation packages will commence in April 1995
and continue for varying terms. No lump sum severance payments will be made.
The office reconfiguration charge relates to the costs of asset writeoffs and
lease buyouts that will be incurred principally in the process of streamlining
and consolidating center city Philadelphia operations. This streamlining and
consolidating process will occur over the next 18 months. The branch closing
charge relates to the costs of asset writeoffs and lease buyouts that will be
incurred in the process of consolidating and closing 37 branch offices, most by
the third quarter of 1995. At March 31, 1995, no payments have been charged
against the accruals. Future cash outflows to be incurred in implementing the
process redesign plan, which were not included in the restructuring charge, will
include approximately $20 million for capital expenditures and approximately $25
million in operating expenses.
The principal themes of the process redesign plan are as follows:
. Redefine the organizational structure around customers, customer segments and
markets, not products;
. Streamline and consolidate functions and processes;
. Vacate 1.2 million square feet of currently occupied space in 45 buildings,
including the 37 branches to be closed;
. Use technology to automate services and processes; and
. Employ tiered pricing strategies and streamline product pricing.
Implementation of the process redesign plan will occur over the next 18 months.
The process redesign is expected to generate by late 1996, cost efficiencies
which will reduce expenses by $180 million and revenue enhancements which will
net an addition of $30 million to recurring fee income, combining to improve
CoreStates' net income at an annual rate of $0.90 per share. The process
redesign is expected to have a positive impact on net income of approximately
$0.16 per share in 1995 (excluding the restructuring charge) and $0.72 per share
in 1996. A breakdown of expected expense reductions is as follows: personnel
related - $98 million; professional and outside services - $20 million;
occupancy - $18 million; office supplies - $9 million; telecommunications - $5
million; travel and entertainment - $5 million; furnishings - $4 million; and
all other - $21 million.
<PAGE>
Page 12
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
BUSINESS LINE RESULTS
- ---------------------
The following tables present the performance results of CoreStates' four core
business segments; Wholesale Banking; Consumer Financial Services; Trust and
Investment Management; and Electronic Payment Services, Inc. ("EPS"), an
affiliate, for the three month period ended March 31, 1995 and 1994. Each
segment is comprised of well defined business lines with market or product-
specific missions.
Three Months Ended March 31,
($ in millions, taxable equivalent basis)
<TABLE>
<CAPTION>
Consumer Trust and
Wholesale Financial Investment
Banking Services Management
---------------- ---------------- --------------
1995 1994 1995 1994 1995 1994
------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net interest income......... $ 156.8 $ 147.9 $174.7 $161.3 $ 7.0 $ 7.5
Provision for loan losses... 10.4 12.6 14.3 14.1 0.3 0.2
Non-interest income......... 59.4 56.4 39.4 46.2 24.5 24.8
Non-financial expenses...... 110.4 116.4 139.1 149.2 26.9 27.4
------- ------- ------ ------ ------ ------
Income before income
taxes...................... 95.4 75.3 60.7 44.2 4.3 4.7
Income tax expense.......... 37.4 29.6 23.6 17.1 1.6 1.7
------- ------- ------ ------ ------ ------
Net income.................. $ 58.0 $ 45.7 $ 37.1 $ 27.1 $ 2.7 $ 3.0
======= ======= ====== ====== ====== ======
Return on assets............ 1.50% 1.23% 2.07% 1.43% 1.54% 1.78%
Return on equity (a)........ 26.14 23.14 45.73 29.62 42.12 41.95
Average assets.............. $15,634 $15,072 $7,268 $7,676 $ 710 $ 685
Average equity (a).......... $ 900 $ 801 $ 329 $ 371 $ 26 $ 29
</TABLE>
<TABLE>
<CAPTION>
EPS, Inc.
Affiliate Corporate Total
---------------- ---------------- --------------
1995 1994 1995 1994(d) 1995 1994
------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net interest income......... $ (1.2) $ (1.4) $ 32.0 $ 18.7 $ 369.3 $ 334.0
Provision for loan losses... 120.0 25.0 146.9
Non-interest income......... 26.5(b) 7.9 12.5 10.6 162.3 145.9
Non-financial expenses...... 137.7(c) 78.3 414.1 371.3
------- ------- ------- -------- ------- -------
Income (loss) before
income taxes............... 25.3 6.5 (93.2) (169.0) 92.5 (38.3)
Income tax expense
(benefit).................. 9.4 2.3 (34.9) (59.0) 37.1 (8.3)
------- ------- ------- -------- ------- -------
Net income (loss)........... $ 15.9 $ 4.2 $ (58.3) $ (110.0) $ 55.4 $ (30.0)(e)
======= ======= ======= ======== ======= =======
Return on assets............ 96.24% 22.71% (5.15)% (10.56)% 0.79% (0.44)%
Return on equity (a)........ 2149.4 425.83 (21.70) (39.96) 9.57 (5.04)
Average assets.............. $ 67 $ 75 $ 4,589 $ 4,224 $28,268 $27,732
Average equity (a).......... $ 3 $ 4 $ 1,089 $ 1,207 $ 2,347 $ 2,412
- -------------------------
</TABLE>
(a) 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.
(b) Includes a gain of $19.0 million pre-tax, $11.8 million after-tax or $0.08
per share, related to changes in the investment in the EPS affiliate joint
venture.
(c) Includes a restructuring charge of $110.0 million pre-tax, $70.0 million
after-tax or $0.49 per share, related to a corporate-wide process redesign.
(d) Includes after-tax merger-related charges of $127.8 million or $0.89 per
share recorded in the first quarter of 1994 for the Constellation Bancorp
acquisition.
(e) Based on income before cumulative effect of change in accounting principle.
<PAGE>
Page 13
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, and the loan loss
provision 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. All business lines in
the four core businesses are allocated equity utilizing regulatory risk-based
capital guidelines as well as each business line's fixed assets and other
capital investment requirements. Intangible assets and associated costs are
also allocated to relevant business units. The development of these allocation
methodologies is a continuous process at CoreStates.
The Corporate category includes the income and expense impact of unallocated
equity; 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 Middle
Market; Corporate and Institutional Banking; Investment Banking; Cash
Management; International Banking; and Specialized Finance (including Congress
Financial Corporation, CoreStates' commercial finance subsidiary). Wholesale
Banking continued its strong performance in 1995 as net income increased $12.3
million, or 26.9% above first quarter 1994. This increase was due primarily to
growth in net interest income, non-interest income and a decline in non-
financial expenses. Net interest income was $8.9 million, or 6.0% above 1994
due to higher loan and factoring volumes (primarily at Congress), higher loan
spreads, lower levels of non-performing loans, and higher loan fees. Average
loan outstandings increased 5.5% from prior year. Average non-performing loans
declined 33.7% from prior year. Non-interest income increased $3.0 million, or
5.3% above prior year largely due to growth in international service fees and
securities gains. Non-financial expenses declined 5.2%, or $6.0 million largely
due to declines in overhead and processing expenses. The provision for loan
losses declined 17.5% as the overall quality of the loan portfolio improved.
Consumer Financial Services includes the Community Banking, Mortgage
Services and Specialty Products business lines. Specialty Products includes
Credit Card, Student Lending, Card Linx and Synapsys.
Net income for the first quarter of 1995 was $37.1 million, an increase of
$10.0 million, or 36.9% over the first quarter of 1994. Net interest income
grew by $13.4 million, or 8.3% for the quarter when compared to prior year.
Community Banking net interest income increased by $10.4 million, as favorable
deposit spreads, up 59 basis points, generated a $19.5 million increase. This
increase was partially offset by the impacts of narrowing loan spreads, down 35
basis points, resulting in a $4.1 million decline in net interest income, and a
$450 million decrease in loan outstandings, resulting in a $3.3 million decline
in net interest income. The decrease in loan outstandings was driven by
portfolio sales and weak consumer loan demand. The Specialty Products Group net
interest income grew by $4.1 million driven by a 19.8% increase in credit card
outstandings which equated to a $5.5 million favorable impact. This growth was
slightly offset by a narrowing credit card spread, down 54 basis points for a
$1.5 million impact.
Non-interest income for the quarter declined $6.8 million, or 14.7% in
comparison to 1994. Mortgage income declined by $4.0 million primarily
resulting from the Constellation portfolio which was sold in 1994 as well as a
decline in the ongoing mortgage business. In addition, in March 1994, Community
Banking sold its marine portfolio for a one-time gain of $1.5 million. Revenue
from third party sales of annuities and mutual funds declined quarter-to-quarter
due, in part, to customers' shifting from these products to certificates of
deposits as rates became more attractive in the latter half of 1994. Non-
financial expenses declined by $10.1 million, or 6.8%. In Community Banking,
savings gained from a hiring freeze and heightened expense management exercised
during the company-wide redesign program, as well as merger-related synergies,
were the major reasons for the expense decline. Specialty Products Group
expenses increased by $1.7 million quarter-to-quarter mainly due to a $0.6
million increase in credit card advertising expense and additional expenses
incurred resulting from the increase in credit card volume.
<PAGE>
Page 14
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
BUSINESS LINE RESULTS - continued
- ---------------------------------
Trust and Investment Management is organized into four business lines:
Institutional Trust; Personal Trust; Private Banking; and Investment Management.
Net income of $2.7 million was down $0.3 million, or 10.0% from 1994. A $0.5
million or 6.7% decline in net interest income was caused by continued soft loan
demand and narrower loan spreads in Private Banking, as well as lower balance
credits in most business lines, particularly in Corporate Trust, due to lower
bond refundings. Non-interest income declined $0.3 million, or 1.2% from 1994,
principally due to lower fees in Personal Trust. Expenses were $0.5 million
below 1994, partially offsetting the shortfall in revenues.
Electronic Payment Services, Inc. ("EPS") was formed on December 4, 1992
through a separate contribution of the consumer electronic transaction
processing businesses of CoreStates, Banc One Corporation, PNC Bank Corp and Key
Corp. EPS is the nation's leading provider of ATM and POS processing services.
CoreStates' received cash, preferred stock and common stock for the contribution
of its MAC ATM network and BUYPASS POS businesses. CoreStates' ownership at
formation was 31%.
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 quarterly 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 recognition of the $138 million deferred
gain from a five-year period beginning in 1996 to a ten-year period which began
in 1994.
Net income of $15.9 million for the first quarter of 1995 includes a $19.0
million gain, $11.8 million after-tax, associated with the addition of National
City Corp as a partner in EPS and the buy-up by KeyCorp to a full partner in
EPS. Both transactions closed on March 2, 1995. These transactions decreased
CoreStates' share of ownership from 31% to 20%. The 1995 results also include
$7.5 million in non-interest income from CoreStates' equity interest in EPS net
income, recognition of the deferred gain, and interest income on the promissory
note, partly offset by interest carrying charges on the net investment in EPS.
Net income for the first quarter 1994 totalled $4.2 million.
<PAGE>
Page 15
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 first quarter of 1995 was
$369.3 million, an increase of $35.3 million, or 10.6%, from the first quarter
of 1994. The net interest margin at 5.93% improved 37 basis points from the
first quarter of 1994. 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 loans increased 133 basis points
from the first quarter of 1994 while the rate paid on deposits increased only 98
basis points, and a lower level of non-performing assets. The strength of
CoreStates' net interest income and net interest margin stems from the
combination of wide spreads on both loans and deposits and a balance sheet which
has a relatively high portion of loans and a large base of non-interest bearing
funding principally generated by our processing and cash management businesses.
Taxable equivalent net interest income for the first quarter of 1995
increased $4.9 million, or 1.3%, compared to the fourth quarter of 1994. The
modest growth in first quarter interest income as compared to the fourth quarter
of 1994 principally reflected a $753 million increase in average loan
outstandings mostly due to the December 2, 1994 purchase of Germantown Savings
Bank, partially offset by the impact of two fewer days in the first quarter.
The following table compares taxable equivalent net interest income for the
three months ended March 31, 1995 versus the first quarter of 1994 and the
fourth quarter of 1994, respectively (in millions):
Taxable Equivalent Net Interest Income
- --------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Increase (decrease)
---------------------------------- --------------------------
March 31, March 31, Dec. 31, March 1995/ March 1995/
1995 1994 1994 March 1994 Dec.1994
--------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Total interest income...... $551.0 $449.2 $517.9 $101.8 $33.1
Tax equivalent adjustment.. 4.4 5.6 5.2 (1.2) (.8)
------ ------ ------ ------ -----
Tax equivalent interest
income................... 555.4 454.8 523.1 100.6 32.3
Total interest expense..... 186.1 120.8 158.7 65.3 27.4
------ ------ ------ ------ -----
Taxable equivalent net
interest income......... $369.3 $334.0 $364.4 $ 35.3 $ 4.9
====== ====== ====== ====== =====
Interest rate spread....... 4.91% 4.82% 4.94%
====== ====== ======
Net interest margin........ 5.93% 5.56% 5.89%
====== ====== ======
</TABLE>
<PAGE>
Page 16
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 (decrease) in interest Increase (decrease) in interest
-------------------------------- --------------------------------
Three Months Ended Three Months Ended
March 31, 1995/1994 March 31, 1995/Dec. 31, 1994
-------------------------------- --------------------------------
Change attributable to Change attributable to
Income/ ---------------------- Income/ ----------------------
expense Volume Rate expense Volume Rate
------- ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets
- -----------------------
Time deposits-Eurodollars... $ 14.3 $ 6.0 $ 8.3 $ 7.7 $ 2.2 $ 5.5
Investment securities....... (2.6) (8.1) 5.5 (2.3) (2.0) (0.3)
Federal funds sold.......... (0.4) (1.1) 0.7 (0.9) (1.1) 0.2
Trading account securities.. - - - - - -
Loans:
Domestic................... 84.2 19.8 64.4 26.1 16.0 10.1
Foreign.................... 5.1 1.6 3.5 1.7 0.5 1.2
------ ----- ----- ----- ----- -----
Total interest income.... 100.6 18.2 82.4 32.3 15.6 16.7
------ ----- ----- ----- ----- -----
Interest bearing funds
- ----------------------
Deposits:
Domestic................... 40.4 11.1 29.3 19.9 8.1 11.8
Overseas................... 1.3 2.2 (0.9) 2.2 0.2 2.0
Funds borrowed:
Federal funds purchased.... 3.6 (2.1) 5.7 4.1 1.4 2.7
Other...................... 6.7 1.2 5.5 0.8 1.0 (0.2)
Long-term debt.............. 13.3 2.2 11.1 0.4 0.3 0.1
------ ----- ----- ----- ----- -----
Total interest expense..... 65.3 14.6 50.7 27.4 11.0 16.4
------ ----- ----- ----- ----- -----
Net interest income......... $ 35.3 $ 3.6 $31.7 $ 4.9 $ 4.6 $ 0.3
- ------------------- ====== ===== ===== ===== ===== =====
</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.
The effect of cash basis and other non-performing loans on interest income
and net interest income for the three month period ended March 31, 1995 and 1994
was as follows (in millions):
<TABLE>
<CAPTION>
Three
Months Ended
March 31,
---------------
1995 1994
---- ----
<S> <C> <C>
Interest income due on non-performing loans
in accordance with their original terms.... $5.9 $8.5
Interest income on non-performing loans
reflected in total interest income......... 3.1 4.1
---- ----
Net reduction in interest income............. $2.8 $4.4
==== ====
</TABLE>
<PAGE>
Page 17
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 first quarter of 1995 was $25.0
million, a $1.9 million decline from the $26.9 million provision (excluding the
$120.0 million Constellation merger-related provision) recorded in the prior
year first quarter and unchanged from the 1994 fourth quarter provision. In the
first quarter of 1994, Constellation recorded a $120.0 million provision for
loan losses in connection with a change in strategy related to problem assets,
and to conform its consumer lending charge-off policies to those of CoreStates.
The following table presents an analysis of changes in the allowance for
loan losses for the three month period ended March 31, 1995 and 1994 (in
millions):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1995 1994
-------- --------
<S> <C> <C>
Balance at beginning of period.............. $500.6 $450.8
Provision charged to operating expense...... 25.0 146.9(a)
Loan charge-offs............................ (43.3) (45.5)
Recoveries of loans previously charged off.. 16.4 13.4
------ ------
Net loan charge-offs...................... (26.9) (32.1)
------ ------
Balance at end of period.................... $498.7 $565.6
====== ======
Ratios:
Net charge-offs (annualized) as a
percentage of average total loans......... 0.52% 0.66%
====== ======
Allowance for loan losses as a
percentage of loans at end of period...... 2.38% 2.80%
====== ======
Allowance for loan losses as a percentage
of non-performing loans................... 206.23% 142.42%
====== ======
- --------------------------------------------
</TABLE>
(a) Includes a merger-related provision of $120.0 million related to the first
quarter of 1994 Constellation acquisition.
<PAGE>
Page 18
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 table reflects the distribution of net loan charge-offs by
loan type for the three month period ended March 31, 1995 and 1994 (in
millions):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1995 March 31, 1994
---------------------------- ------------------------------
% 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....... $ 5.9 0.3% 21.9% $17.4 0.8% 54.2%
Real estate:
Construction and development loans... 1.1 1.3 4.1 1.3 1.4 4.0
Other................................ 9.5 0.5 35.3 5.8 0.4 18.1
Consumer:
Credit card.......................... 10.4 3.1 38.7 6.1 2.1 19.1
Installment.......................... .2 0.1 0.7 1.3 0.4 4.0
Other (b).............................. (.2) (0.7) 0.2 0.1 0.6
----- ----- ----- -----
Total domestic....................... 26.9 0.5 100.0 32.1 0.7 100.0
----- ----- ----- -----
Foreign.................................. - - - -
----- ----- ----- -----
Total net charge-offs................ $26.9 0.5% 100.0% $32.1 0.7% 100.0%
===== === ===== ===== === =====
</TABLE>
- ---------------------------------------
(a) Annualized
(b) Includes loans to financial institutions and lease financing.
<PAGE>
Page 19
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 March 31, 1995 decreased $12.2 million, or
3.9%, from December 31, 1994. Most of the decrease from December 31, 1994 was
in the non-performing real estate portfolio which declined by $9.8 million.
The following table summarizes non-performing assets at March 31, 1995 and
December 31, 1994 (in millions):
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
------ ------
<S> <C> <C>
Non-accrual loans........................ $240.2 $244.6
Renegotiated loans....................... 1.6 1.6
------ ------
Total non-performing loans........... 241.8 246.2
------ ------
Other real estate owned (OREO):
Acquired through foreclosure........... 49.8 53.9
In-substance foreclosure............... 4.5 6.7
Property formerly used in
banking operations................... 2.6 4.1
------ ------
Total other real estate owned........ 56.9 64.7
------ ------
Total non-performing assets.......... $298.7 $310.9
====== ======
</TABLE>
The following table reflects the distribution of non-performing assets by
loan type at March 31, 1995 and December 31, 1994 (in millions):
<TABLE>
<CAPTION>
March 31, 1995 December 31,1994
------------------ ------------------
% of % of
Non- Loan Non- Loan
Domestic: performing Type performing Type
----------- ----- ----------- -----
<S> <C> <C> <C> <C>
Commercial, industrial and other:
HLTs................................ $ 1.5 0.3% $ 3.0 0.6%
Other............................... 85.2 0.9 84.2 1.0
------ ------
Total commercial, industrial and
other........................... 86.7 0.9 87.2 1.0
------ ------
Real estate:
Construction and development loans.. 11.7 3.6 10.7 3.2
Other loans......................... 115.2 2.0 118.2 1.9
Other real estate owned............. 56.9 64.7
------ ------
Total real estate................. 183.8 2.1 193.6 2.0
------ ------
Consumer.............................. 0.7 0.7
------ ------
Other domestic loans(a)............... 27.3 1.9 29.2 2.1
------ ------
Total domestic non-performing
assets.......................... 298.5 1.5 310.7 1.6
------ ------
Foreign loans........................... 0.2 0.2
------ ------
Total non-performing assets(b).... $298.7 1.4% $310.9 1.5%
====== === ====== ===
% Total assets.................... 1.1% 1.1%
=== ===
- -----------------------------------------------------
</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 $49 million and $53 million at March
31, 1995 and December 31, 1994, 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 20
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 change in non-
performing assets for the first quarter of 1995 (in millions):
<TABLE>
<CAPTION>
<S> <C>
Beginning balance............ $311
Additions.................... 54
Return to accrual............ (3)
Payments..................... (38)
Charge-offs.................. (25)
----
Net change................ (12)
----
Ending balance............... $299
====
</TABLE>
NON-INTEREST INCOME
- -------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31, Percentage
------------------ Increase/
(in millions) 1995 1994 (decrease)
-------- -------- ----------
<S> <C> <C> <C>
Basic banking transactional
services (a).................. $104.6 $103.2 1.4%
Income from investment in
EPS, Inc...................... 7.5 7.9 (5.1)
Securities gains............... 6.4 6.9
Other non-interest income...... 24.8 27.9 (11.1)
------ ------
Non-interest income before
significant and unusual
items......................... 143.3 145.9 (1.8)
Significant and unusual items.. 19.0(b) -
------ ------
Total non-interest income...... $162.3 $145.9 11.2%
====== ====== =====
</TABLE>
- -----------------------------
(a) Comprised of debit and credit card fees, service charges on deposit
accounts, trust income, and fees for international services.
(b) Reflects the $19.0 million pre-tax gain related to the changes in the
investment in the EPS, Inc. affiliate joint venture.
While total non-interest income for the first quarter of 1995 increased
11.2% from the first quarter of 1994, non-interest income before significant and
unusual items declined $2.6 million, or 1.8%, from the prior year first quarter.
That decline reflects the relatively flat revenues in CoreStates' fee-based
businesses, as a $3.8 million, or 21.1%, increase in fees for international
services was partially offset by a $2.1 million, or 4.5%, decrease in service
charges on deposits. The decline in service charges on deposits reflects the
election by commercial customers to pay for deposit services by maintaining
deposit balances in a comparatively higher interest rate environment (the value
of which is included in net interest income), in lieu of cash fees.
Other non-interest income declined $3.1 million, or 11.1%, principally as a
result of a $0.7 million decline in mortgage servicing fees and $2.8 million of
gains recognized on the sale of loans in the first quarter of 1994.
Investment securities gains in the first quarter of 1995 were $6.4 million
compared to $6.9 million in the prior year first quarter. Investment securities
gains in the first quarter of 1995 included a $6.2 million gain recorded on the
sale of equity securities acquired in connection with a prior loan arrangement.
The first quarter of 1994 includes gains of $5.0 million recorded on sales of
certain investments acquired with Constellation.
<PAGE>
Page 21
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
NON-FINANCIAL EXPENSES
- ----------------------
<TABLE>
<CAPTION>
(in millions) Three Months Ended
March 31, Percentage
------------------ Increase/
1995 1994 (decrease)
------ ------ ----------
<S> <C> <C> <C>
Salaries, wages and benefits.... $158.1 $158.9 (0.5)%
Net occupancy expense........... 29.4 30.2 (2.6)
Equipment expense............... 19.5 19.2 1.6
Other operating expenses........ 97.1 88.0 10.3
------ ------
Non-financial expenses before
significant and unusual items.. 304.1 296.3 2.6
Significant and unusual items... 110.0(a) 75.0(b)
------ ------
Total non-financial expenses.... $414.1 $371.3 11.5%
====== ====== ====
- -------------------------------
</TABLE>
(a) Includes a $110.0 million restructuring charge related to a corporate-wide
process redesign. See "Process Redesign" on page 10 for more detail.
(b) Includes merger-related costs of $75.0 million for the Constellation
acquisition.
Total non-financial expenses for the first quarter of 1995, excluding the
$110.0 million restructuring charge, were $304.1 million, an increase of $7.8
million, or 2.6% from the first quarter of 1994. The increase is attributable
to the acquisitions of Germantown Savings Bank ("Germantown") on December 2,
1994 and National Remittance Centers, Inc. ("NRC") on January 27, 1995.
Excluding the amortization of intangible assets created in the acquisitions,
Germantown added approximately $7.0 million to non-financial expenses and NRC
added approximately $3.6 million. Expense for amortization of intangible assets
created in the two acquisitions added $3.6 million to first quarter of 1995
expenses. Excluding the significant and unusual items as noted in the above
table and the impact of Germantown and NRC related expenses, non-financial
expenses for the first quarter of 1995 declined 2.2% from the prior year first
quarter. This decline reflects the impacts of the hiring freeze and expense
management during the process redesign, as well as merger-related synergies.
CAPITAL MANAGEMENT
- ------------------
CoreStates' capital provides the resources and flexibility for anticipated
growth. CoreStates' capital position at March 31, 1995 under risk-based capital
guidelines was $2.1 billion, or 8.3% of risk-weighted assets, for Tier 1 capital
and $3.0 billion, or 12.1%, for total risk-based capital. Tier 1 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 1
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 March 31, 1995 are above the risk-based capital standards
that require all banks to have Tier 1 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 1 capital to quarterly average total
assets), CoreStates had a leverage ratio of 7.4% at March 31, 1995. 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 22
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 March 31, 1995 the banking subsidiaries of CoreStates
were "well capitalized" as defined by regulatory authorities.
<TABLE>
<CAPTION>
Regulatory Capital Ratios
----------------------------
Tier 1 Total Leverage
-------- ------- ---------
<S> <C> <C> <C>
CoreStates Bank, N.A. .............. 8.1% 10.3% 7.2%
New Jersey National Bank............ 10.5 13.8 6.4
CoreStates Bank of Delaware, N.A. .. 11.1 13.6 11.6
</TABLE>
CoreStates' dividend on its common stock was $0.34 per share in the first
quarter of 1995 and $0.30 per share in the first quarter of 1994. Excluding the
restructuring charge, the EPS gain and merger-related charges, the common
dividend payout ratio was 43.0% for the first quarter of 1995, compared to 44.1%
for the first quarter of 1994.
In March 1995, the Board of Directors approved an expansion of CoreStates'
common stock repurchase program from an annual maximum of 2% of outstanding
shares to a maximum of 5%, excluding purchases for benefit plans and the
dividend reinvestment plan. During the three months ended March 31, 1995,
CoreStates repurchased approximately 3.0 million shares of its common stock.
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. At CoreStates, measurement of interest rate risk focuses on
potential changes in net interest income identified through monthly computer
simulations against both rising and falling interest rates. Longer term
repricing risks are measured through gap analysis. All measurements of
interest rate risk include the impact of off-balance sheet activities. Under
CoreStates' policy, rate changes of at least 200 basis points over a six-month
period are simulated with rate related negative net interest income volatility
over a twelve-month horizon limited to 4% of shareholders' equity. Changes are
measured relative to a base forecast in which rates remain constant at current
levels. Based on historical data, 95% of the time, rates have moved 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. It
should be noted that CoreStates believes the spread between the prime rate and
financial market rates is a function of both interest rates and credit
conditions. While changes in the prime spread are included in simulations, only
that portion believed to be interest rate related is subject to the policy
guidelines.
As a matter of practice, positions are generally managed to produce
significantly lower volatility than policy guidelines would permit. Current
simulations using a 200 basis point change in short term interest rates show
that CoreStates' net interest income volatility over the next twelve months
would be relatively neutral or less than 1% of shareholders' equity. That level
is representative of simulations performed throughout the year. Recognizing
that simulation is a very assumption driven process, management reviews results
by category of risk as well as by product and tests the sensitivity of the
results to key assumptions.
There are two main elements to CoreStates' interest rate risk. The first is
the broad mismatch between the rate sensitivity of the assets and liabilities in
its core businesses, and the second is the spread risk between the rates on
those products and financial market rates.
<PAGE>
Page 23
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
INTEREST RATE RISK MANAGEMENT - continued
- -----------------------------
CoreStates' core wholesale and retail businesses generate a large portfolio
of prime and other short-term rate related assets. Characteristic of a regional
banking company, CoreStates also has a significant funding base of consumer
deposits on which pricing changes have traditionally lagged changes in financial
market rates. This inherent mismatch of longer term fixed-rate liabilities
funding short-term rate sensitive assets generates significant exposure to
declining interest rates if not managed. CoreStates manages this position
through the use of both on and off-balance sheet discretionary assets and
liabilities. In keeping with CoreStates' interest rate risk discipline, the
combined position is relatively balanced so that there is minimal impact on
earnings from an interest rate move in either direction.
The second major element of CoreStates' interest rate risk is the spread
risk between product rates and financial market rates. These spreads are a
function of competitive and other factors as well as interest rate levels.
CoreStates simulates the behavior of individual products under various rate
scenarios to determine an appropriate investment or funding strategy to provide
a stable spread.
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 the management of liquidity and capital.
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 off-balance sheet derivative instruments for
speculative investment.
Interest Rate Risk Related Derivative Activities - CoreStates' use of
derivatives for interest rate risk management falls into three categories:
interest sensitivity adjustments, spread protection, and the hedging of
anticipated asset sales. The following schedule reflects by interest rate risk
management category, the outstanding derivative positions as of March 31, 1995,
the major balance sheet category to which they relate, and the associated
unrealized gains/losses:
<PAGE>
Page 24
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
INTEREST RATE RISK MANAGEMENT - continued
- -----------------------------
<TABLE>
<CAPTION>
Outstanding Interest Rate Risk Related Derivatives
- --------------------------------------------------------
At March 31, 1995
- -----------------
(in millions) Interest Interest Interest
rate rate rate Other
swaps futures caps Derivatives Total
-------- -------- -------- ----------- -------
<S> <C> <C> <C> <C> <C>
Interest Sensitivity Adjustment:
Assets:
Notional amount................ $2,992 $1,068 $ 51 $ 4,111
Unrealized gains............... 33 1 1 35
Unrealized losses.............. (33) (33)
Deposits and other borrowings:
Notional amount................ 4,035 4,035
Unrealized gains............... 15 15
Unrealized losses.............. (49) (49)
Long-term debt:
Notional amount................ 720 25 745
Unrealized gains............... 7 7
Unrealized losses.............. (43) (1) (44)
Spread Protection:
Assets:
Notional amount................ 671 671
Unrealized gains............... 3 3
Unrealized losses.............. (6) (6)
Deposits and other borrowings:
Notional amount................ 300 300
Unrealized gains............... 7 7
Unrealized losses..............
Anticipated Asset Sales:
Notional amount................ 320 $205 525
Unrealized gains...............
Unrealized losses.............. (10) (6) (16)
Total:
Notional amount................ $8,067 $1,068 $1,047 $205 $10,387
====== ====== ====== ==== =======
Unrealized gains............... $ 55 $ 1 $ 11 - $ 67
====== ====== ====== ==== =======
Unrealized losses.............. $ (135) - $ (7) $ (6) $ (148)
====== ====== ====== ==== =======
Net unrealized gains
(losses)...................... $ (80) $ 1 $ 4 $ (6) $ (81)
====== ====== ====== ==== =======
</TABLE>
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 given that the portfolios are used to offset specific
risks. As of March 31, 1995, CoreStates off-balance sheet portfolios do not
include any instruments which carry a leveraged exposure to either rising or
falling rates.
Interest sensitivity adjustments account for the majority of CoreStates'
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. Therefore, CoreStates uses fixed
rate assets or off-balance sheet instruments with characteristics similar to
fixed-rate assets to offset this risk. When off-balance sheet instruments are
used, cash balances are invested in shorter time periods and interest rate swaps
or other derivatives are used to "fix" the rate for longer terms similar to
those of CoreStates' liabilities. By using swaps and futures in this manner,
leverage is reduced and liquidity is enhanced. If derivative instruments were
not used, CoreStates would invest in longer term assets based on its disciplined
interest rate risk management practice of strict matching of asset and liability
terms. 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 spread is not material relative to pre-
tax income.
<PAGE>
Page 25
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
INTEREST RATE RISK MANAGEMENT - continued
- -----------------------------
For accounting purposes, the income effects of futures or swaps is associated
with either the asset or the liability contributing to the mismatch. When
CoreStates is adjusting the interest sensitivity of an asset with interest rate
swaps or futures contracts, it is generally to lengthen the interest rate
sensitivity of short-term assets. Conversely, when they are associated with
deposits and other borrowings or long-term debt, it is generally to shorten the
repricing characteristics of longer term liabilities.
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. As
of March 31, 1995, 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.
CoreStates also uses interest rate futures in a similar manner. While swaps are
used in both short and long term maturities, futures are used primarily to
extend the rate sensitivity of short-term assets to periods less than one year.
CoreStates' use of financial futures is largely concentrated in Eurodollar and
LIBOR contracts.
Given the direction of its natural interest sensitivity, CoreStates has not
historically paid fixed rates on interest rate swaps or used off-balance sheet
instruments to extend its liabilities. However, its current position includes
fixed rate pay positions acquired through mergers which relate to specific
assets and liabilities also acquired.
CoreStates also uses derivative instruments to protect spreads on certain
balance sheet products. CoreStates' loan portfolio includes adjustable rate
mortgages which carry interest rate caps limiting the amount of rate increase
per year as well as over the life of the mortgage. As interest rates rise and
funding costs increase, the spread on that portfolio will compress. CoreStates
holds $371 million of interest rate caps which offset that risk by limiting the
potential increase in funding costs. CoreStates also owns a combination of caps
which were designed to reduce the risk of a narrowing spread on prime rate
indexed assets in a rising rate environment; CoreStates sold $300 million of
interest rate caps indexed to prime rate and purchased an identical amount of
caps indexed to LIBOR.
The third category of derivative activity is the hedging of anticipated asset
sales. As fixed rate assets are accumulated for future sale, CoreStates is
exposed to a decline in sale price due to rising interest rates. At March 31,
1995, CoreStates held $385 million in fixed-rate pay swaps and forward rate
locks to hedge a portion of the residential mortgage portfolio. This included
$198 million of swaps which will amortize with a reference portfolio of
mortgage-backed securities. CoreStates entered into these transactions in 1994
in anticipation of the sale of a portion of the mortgage portfolio.
Approximately $100 million in mortgages were sold in the first quarter and
CoreStates anticipates selling the remainder in the second quarter. The
interest rate swaps are intended to be terminated as the mortgage sales are
completed. If rates rise, the swaps will increase in value and offset any loss
in value on the mortgage portfolio. CoreStates securitizes and sells its longer
term fixed-rate home equity loans and fixed-rate mortgages on an ongoing basis.
Home equity loans are held for several months prior to sale while sufficient
volume for securitization is accumulated. Forward rate locks are used to hedge
rate changes during that warehouse period. At March 31, 1995, CoreStates held
$140 million in rate locks to hedge sales of home equity loans. Options on
mortgage-backed securities as well as both mandatory and optional forward sale
commitments are used to hedge the mortgage pipeline.
The following repricing schedule 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. Floating rates included in the repricing schedule are
based on the rates in effect on March 31, 1995. The amount recorded in net
interest income related to interest rate swaps was $4.9 million in the first
quarter of 1995, compared to $26.6 million in 1994.
<PAGE>
Page 26
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
INTEREST RATE RISK MANAGEMENT - continued
- -----------------------------
<TABLE>
<CAPTION>
Repricing Schedule of Interest Rate Swaps
- -----------------------------------------
At March 31, 1995
- -------------------------------
(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........... $1,505 $2,230 $ 822 $ 707 $1,018 $1,000 $7,282
Rate............... 6.54% 7.00% 6.52% 6.74% 7.31% 6.95% 6.87%
Pay Notional........... $7,282 $7,282
Rate............... 6.24% 6.24%
Pay Fixed/Receive Floating(a)
Pay Notional........... $ 248 $ 20 $ 20 $ 20 $ 62 $ 65 $ 435
Rate............... 7.96% 9.02% 8.60% 8.07% 8.56% 8.09% 8.15%
Receive Notional........... $ 435 $ 435
Rate............... 5.65% 5.65%
Receive Floating/Pay Floating
(Basis Swaps)
Notional........... $ 90 $ 90
Receive Rate............... 5.19% 5.19%
Pay Rate............... 6.26% 6.26%
Receive Fixed/Pay Floating(b)
(Forward Start)
Receive Notional......... $ 50 $ 185 $ 25 $ 260
Rate............. 6.82% 6.19 6.37% 6.33%
Start Date Notional......... $ 80 $ 180 $ 260
</TABLE>
________________________________________
(a) Includes $198 million of swaps which CoreStates has agreed with counterparty
to terminate May, 1995.
(b) Pay rate will be determined on forward start date.
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 from counterparties when the risk exceeds an acceptable
threshold. Collateral agreements are determined based on the quality of
individual counterparties. As of March 31, 1995, the current cost to replace
CoreStates' derivatives portfolio was $66.8 million. This assumes that only
counterparties for whom it would be favorable to default would do so.
<PAGE>
Page 27
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
INTEREST RATE RISK MANAGEMENT - continued
- -----------------------------
The following schedule illustrates CoreStates' interest rate risk related
derivative activity during the quarter ended March 31, 1995:
Activity in Derivatives Products
- --------------------------------
Quarter ended March 31, 1995
- ----------------------------
(in millions)
<TABLE>
<CAPTION>
Interest Interest Interest
rate rate rate Other
Notional Amounts swaps futures caps derivatives Total
- ---------------- -------- -------- -------- ----------- -------
<S> <C> <C> <C> <C> <C>
As of December 31, 1994........... $7,850 $1,043 $1,053 $ 295 $10,241
Additions......................... 727 1,044 48 35 1,854
Terminated contracts(a)........... (109) - - (125) (234)
Maturities/amortization........... (401) (1,019) (54) - (1,474)
------ ------ ------ ------ -------
As of March 31, 1995.............. $8,067 $1,068 $1,047 $ 205 $10,387
====== ====== ====== ====== =======
</TABLE>
- -------------------------
(a) As of March 31, 1995, CoreStates had no material deferred gains or losses
related to terminated derivative contracts.
Changes in the notional amount of CoreStates' interest rate swaps during the
quarter include the termination of $109 million in swaps related to the sale of
mortgages which were hedged with those swaps as well as a net increase of
approximately $300 million in swaps to replace the fixed-rate sensitivity lost
through maturity of 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 March 31, 1995.
<TABLE>
<CAPTION>
Customer Related Derivatives
- ----------------------------
At March 31, 1995
- -----------------
(in millions)
Notional Net gain
Interest Rate Swaps: amount (loss)(a)
---------- ----------
<S> <C> <C>
CoreStates receives fixed.......... $ 207 $(2)
CoreStates pays fixed.............. 207 2
Interest Rate Caps/Floors:
Sold............................... 437 (3)
Purchased.......................... 437 3
Options Purchased................... 30 -
Foreign Exchange Contracts.......... 1,645 2
------ ---
Total Customer Related Derivatives.. $2,963 $ 2
====== ===
- -----------------
</TABLE>
(a) Average net gain (loss) during 1995 was substantially the same as the net
gain (loss) at March 31, 1995.
The current replacement cost for the customer related derivatives portfolio was
$40.6 million at March 31, 1995. This assumes that only counterparties for whom
it would be favorable to default would do so.
<PAGE>
Page 28
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND
RATES
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------
March 31, 1995 December 31, 1994
----------------------------- ---------------------------------
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)................. $ 1,894 6.24% $ 29,130 $ 1,722 4.95% $ 21,478
Investment securities (b):
U.S. Government................. 1,986 5.62 27,510 2,147 5.49 29,706
State and municipal............. 297 8.60 6,388 330 8.60 7,091
Other........................... 405 5.83 5,827 363 5.72 5,229
------- -------- ------- --------
Total investment securities... 2,688 5.99 39,725 2,840 5.87 42,026
Federal funds sold............... 143 5.85 2,063 224 5.26 2,972
Trading account securities....... 2 7.20 36 3 5.20 39
Loans (b) (c) (d):
Domestic:
Commercial, industrial and
other......................... 8,847 9.66 210,668 8,490 9.34 199,854
Real estate.................... 6,343 8.83 138,098 5,977 8.20 123,590
Consumer....................... 2,766 12.31 83,944 2,701 11.96 81,419
Financial institutions......... 658 7.13 11,561 637 7.76 12,455
Factoring receivables.......... 521 11.21 14,398 631 9.67 15,376
Lease financing................ 721 7.88 14,209 703 8.01 14,085
Foreign......................... 676 6.95 11,587 640 6.10 9,845
------- -------- ------- --------
Total loans, net of
discounts.................... 20,532 9.57 484,465 19,779 9.16 456,624
------- -------- ------- --------
Total interest earning
assets (d)................... $25,259 8.92 555,419 $24,568 8.45 523,139
======= ----- -------- ======= ------ --------
FUNDING SOURCES
- ---------------
Interest bearing liabilities (b):
Deposits in domestic offices:
Commercial..................... $ 270 5.48 3,651 $ 265 4.22 2,819
NOW accounts (e)............... 1,782 1.13 4,587 1,786 0.94 3,876
Money Market Accounts (e)...... 3,720 3.19 29,157 3,749 2.19 20,686
Consumer savings............... 2,967 1.95 14,292 2,957 2.21 16,472
Consumer certificates.......... 5,513 4.92 66,865 4,798 4.53 54,815
Time deposits of overseas
branches and
subsidiaries................... 923 4.32 9,838 901 3.37 7,650
------- -------- ------- --------
Total interest bearing
deposits (e)................. 15,175 3.47 128,390 14,456 2.95 106,318
Short-term funds borrowed:
Federal funds purchased........ 708 6.44 11,235 591 4.75 7,076
Commercial paper............... 863 5.96 12,687 878 4.82 10,675
Other.......................... 295 4.64 3,376 234 7.81 4,604
------- -------- ------- --------
Total short-term funds
borrowed..................... 1,866 5.93 27,298 1,703 5.21 22,355
Long-term debt.................. 1,789 6.90 30,431 1,769 6.74 30,036
------- -------- ------- --------
Total interest bearing
liabilities.................. 18,830 4.01 186,119 17,928 3.51 158,709
Portion of non-interest
bearing funding sources......... 6,429 6,640
------- -------- ------- --------
Total funding sources......... $25,259 2.99 186,119 $24,568 2.56 158,709
======= ----- -------- ======= ------ --------
Net interest income and net
interest margin................. 5.93% $369,300 5.89% $364,430
===== ======== ===== ========
</TABLE>
<TABLE>
<CAPTION>
---------------------------
March 31, 1994
---------------------------
Average Income/
balance Rate expense
-------- ------ --------
(000,000) (000)
<S> <C> <C> <C>
INTEREST EARNING ASSETS
- -----------------------
Time deposits, principally
Eurodollars (a)................. $ 1,348 4.45% $ 14,796
Investment securities (b):
U.S. Government................. 2,421 4.97 29,693
State and municipal............. 398 7.75 7,712
Other........................... 489 4.11 4,954
-------- --------
Total investment securities... 3,308 5.19 42,359
Federal funds sold............... 257 3.88 2,457
Trading account securities....... 2 7.80 39
Loans (b) (c) (d):
Domestic:
Commercial, industrial and
other......................... 7,905 7.70 150,088
Real estate.................... 6,584 7.88 127,983
Consumer....................... 2,530 11.52 71,892
Financial institutions......... 619 6.92 10,564
Factoring receivables.......... 536 9.70 12,825
Lease financing................ 739 8.29 15,312
Foreign......................... 541 4.89 6,528
-------- --------
Total loans, net of
discounts.................... 19,454 8.24 395,192
-------- --------
Total interest earning
assets (d)................... $ 24,369 7.57 454,843
======== ----- --------
FUNDING SOURCES
- ---------------
Interest bearing liabilities (b):
Deposits in domestic offices:
Commercial..................... $ 280 3.38 2,332
NOW accounts (e)............... 1,896 0.53 2,313
Money Market Accounts (e)...... 4,135 2.11 21,365
Consumer savings............... 3,065 1.18 8,890
Consumer certificates.......... 4,193 4.19 43,274
Time deposits of overseas
branches and
subsidiaries................... 735 4.73 8,567
-------- --------
Total interest bearing
deposits (e)................. 14,304 2.49 86,741
Short-term funds borrowed:
Federal funds purchased........ 973 3.18 7,629
Commercial paper............... 549 3.26 4,415
Other.......................... 399 5.00 4,915
-------- --------
Total short-term funds
borrowed..................... 1,921 3.58 16,959
Long-term debt.................. 1,591 4.38 17,171
-------- --------
Total interest bearing
liabilities.................. 17,816 2.75 120,871
Portion of non-interest
bearing funding sources......... 6,553
-------- --------
Total funding sources......... $ 24,369 2.01 120,871
======== ----- --------
Net interest income and net 5.56% $333,972
interest margin................. ===== ========
</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.
<PAGE>
Page 29
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND
RATES -- continued
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------
March 31, 1995 December 31, 1994
---------------------------- ---------------------------------
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............................................... $ 1,975 $ 2,061
Allowance for loan losses.......................... (505) (489)
Other assets....................................... 1,539 1,435
------- -------
Total non-interest earning assets................ $ 3,009 $ 3,007
======= =======
NON-INTEREST BEARING FUNDING SOURCES
- ------------------------------------
Demand deposits:
Domestic......................................... $ 5,268 $ 5,577
Foreign.......................................... 497 452
Other liabilities.................................. 1,326 1,350
Shareholders' equity............................... 2,347 2,268
Non-interest bearing funding sources used to fund
earning assets................................... (6,429) (6,640)
------- -------
Total net non-interest bearing funding
sources.................................... $ 3,009 $ 3,007
======= =======
SUPPLEMENTARY AVERAGES
- ----------------------
Net demand deposits................................ $ 4,735 $ 4,679
Net Federal funds purchased........................ 565 6.58% $9,172 367 4.44% $4,104
Commercial certificates of deposit in domestic
offices over $100,000............................ 270 5.15 3,430 261 4.15 2,729
Average prime rate................................. 8.83 8.13
</TABLE>
<TABLE>
<CAPTION>
-------------------------
March 31, 1994
-------------------------
Average Income/
balance Rate expense
-------- ----- -------
(000,000) (000)
<S> <C> <C> <C>
NON-INTEREST EARNING ASSETS
- ---------------------------
Cash............................................... $ 2,323
Allowance for loan losses.......................... (512)
Other assets....................................... 1,552
-------
Total non-interest earning assets................ $ 3,363
=======
NON-INTEREST BEARING FUNDING SOURCES
- ------------------------------------
Demand deposits:
Domestic......................................... $ 5,805
Foreign.......................................... 372
Other liabilities.................................. 1,327
Shareholders' equity............................... 2,412
Non-interest bearing funding sources used to fund
earning assets................................... (6,553)
-------
Total net non-interest bearing funding
sources.................................... $ 3,363
=======
SUPPLEMENTARY AVERAGES
- ----------------------
Net demand deposits................................ $ 4,594
Net Federal funds purchased........................ 716 2.93% $5,172
Commercial certificates of deposit in domestic
offices over $100,000............................ 234 4.90 2,829
Average prime rate................................. 6.02
</TABLE>
<PAGE>
Page 30
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: January 19, 1995
--------------
Item(s) Reported: Reporting under Item 5 the information set
----------------
forth in the earnings news release of CoreStates Financial Corp
2. Date of Report: March 29, 1995
--------------
Item(s) Reported: Reporting under Item 5 the announcement of
----------------
customer-oriented redesign, anticipated financial and staffing
impacts, earnings estimate and expanded stock repurchase
program as set forth in the news release of CoreStates
Financial Corp
<PAGE>
Page 31
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: May 12, 1995 By:/s/ Christopher J. Carey
--------------------------------
Christopher J. Carey
Senior Vice President and Controller
(Principal Accounting Officer)
<PAGE>
Page 32
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
March 31,
--------------------
1995 1994
-------- --------
<S> <C> <C>
(A) Income (loss) before cumulative effect
of a change in accounting principle..... $ 55,367 $(29,995)
Cumulative effect of a change in
accounting principle.................... - (3,430)
-------- --------
(B) Net income (loss)......................... $ 55,367 $(33,425)
======== ========
EARNINGS PER SHARE
Based on average common shares outstanding
- ------------------------------------------
(C) Average shares outstanding................ 144,246 144,612
======== ========
(A/C) Income (loss) before cumulative effect
of a change in accounting principle.... $ 0.38 $ (0.21)
======== ========
(B/C) Net income (loss)....................... $ 0.38 $ (0.23)
======== ========
Based on average common and common
- ----------------------------------
equivalent shares outstanding
- -----------------------------
Primary:
(D) Average common equivalent shares......... 968 1,295
======== ========
(E) Average common and common
equivalent shares (C + D).............. 145,214 145,907
======== ========
(A/E) Income (loss) before cumulative
effect of a change in accounting
principle............................. $ 0.38(1) $ (0.21)(2)
======== ========
(B/E) Net income (loss)...................... $ 0.38(1) $ (0.23)(2)
======== ========
Fully diluted:
(F) Average common equivalent shares......... 1,379 1,315
======== ========
(G) Average common and common
equivalent shares (C + F).............. 145,625 145,927
======== ========
(I) Interest expense on Subordinated
Convertible Debentures, net of tax........ - $ 479
======== ========
((A+I)/G) Income (loss) before cumulative
effect of a change in accounting
principle......................... $ 0.38(1) $ (0.21)(2)
======== ========
((B+I)/G) Net income (loss)................... $ 0.38(1) $ (0.23)(2)
======== ========
</TABLE>
- -------------------------------
(1) Dilution is less than 3%.
(2) Antidilutive
<PAGE>
Page 33
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS FROM CONTINUING OPERATIONS
TO FIXED CHARGES OF CONTINUING OPERATIONS
CONSOLIDATED
<TABLE>
<CAPTION>
Three Months Ended March 31, 1995
- ---------------------------------
<S> <C>
1. Income from continuing operations before extraordinary items and
income taxes...................................................... $ 88,099
========
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......................... $ 63,021
B. Interest on deposits........................................... 128,390
--------
C. Total fixed charges (line 2A + line 2B)........................ $191,411
========
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).............. $151,120
========
B. Including interest on deposits (line 1 + line 2C).............. $279,510
========
4. Ratio of earnings (as defined) to fixed charges:
A. Excluding interest on deposits (line 3A/line 2A)............... 2.40x
====
B. Including interest on deposits (line 3B/line 2C)............... 1.46x
====
</TABLE>
<PAGE>
Page 34
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
<TABLE>
<CAPTION>
Three Months Ended March 31, 1995
- ---------------------------------
<S> <C>
1. Income before income taxes and equity in undistributed income
of subsidiaries................................................ $25,940
2. Fixed charges - interest expense, amortization of
debt issuance costs and one-third of rental expenses, net of
income from subleases.......................................... 39,716
-------
3. Income before taxes and equity in undistributed income of
subsidiaries, plus fixed charges............................... $65,656
=======
4. Ratio of earnings (as defined) to fixed charges (line 3/
line 2)........................................................ 1.65x
====
</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 March 31, 1995, 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 three months ended March
31, 1995 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 1,933,867
<INT-BEARING-DEPOSITS> 1,868,706
<FED-FUNDS-SOLD> 43,960
<TRADING-ASSETS> 78
<INVESTMENTS-HELD-FOR-SALE> 410,600
<INVESTMENTS-CARRYING> 2,219,869
<INVESTMENTS-MARKET> 2,212,815
<LOANS> 20,912,191
<ALLOWANCE> 498,696
<TOTAL-ASSETS> 28,495,436
<DEPOSITS> 20,910,774
<SHORT-TERM> 1,935,663
<LIABILITIES-OTHER> 1,182,470
<LONG-TERM> 1,803,553
<COMMON> 145,878
0
0
<OTHER-SE> 2,146,463
<TOTAL-LIABILITIES-AND-EQUITY> 28,495,436
<INTEREST-LOAN> 481,817
<INTEREST-INVEST> 37,949
<INTEREST-OTHER> 31,221
<INTEREST-TOTAL> 550,987
<INTEREST-DEPOSIT> 128,390
<INTEREST-EXPENSE> 186,119
<INTEREST-INCOME-NET> 364,868
<LOAN-LOSSES> 25,000
<SECURITIES-GAINS> 6,395
<EXPENSE-OTHER> 414,070
<INCOME-PRETAX> 88,099
<INCOME-PRE-EXTRAORDINARY> 55,367
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,367
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.38
<YIELD-ACTUAL> 5.93
<LOANS-NON> 240,200
<LOANS-PAST> 49,000
<LOANS-TROUBLED> 1,600
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 500,600
<CHARGE-OFFS> 43,300
<RECOVERIES> 16,400
<ALLOWANCE-CLOSE> 498,700
<ALLOWANCE-DOMESTIC> 478,700
<ALLOWANCE-FOREIGN> 20,000
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
