<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 8-K
------------------
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) : November 14, 1995
CORESTATES FINANCIAL CORP
(EXACT NAME OF REGISTRANT SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 0-6879 23-1899716
(STATE OR OTHER (COMMISSION (IRS EMPLOYEE
JURISDICTION OF FILE NUMBER) IDENTIFICATION NO.)
INCORPORATION)
CENTRE SQUARE WEST,
1500 MARKET STREET
PHILADELPHIA, PENNSYLVANIA 19101
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICERS) (ZIP CODE)
REGISTRANT'S TELEPHONE, INCLUDING AREA CODE: (215) 973-3806
(FORMER NAME AND FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
<PAGE>
ITEM 5. OTHER EVENTS.
As previously announced, CoreStates Financial Corp ("CoreStates") and
Meridian Bancorp, Inc. ("Meridian") have entered into a definitive agreement,
dated October 10, 1995, providing for CoreStates to acquire Meridian pursuant to
an exchange of stock ("the Merger"). Under the terms of the agreement, each of
Meridian's 55.9 million shares of common stock will be exchanged for 1.225
shares of CoreStates' common stock. CoreStates also has received an option to
purchase up to 19.9% of Meridian's common stock if certain contingencies occur.
In May 1995, Meridian announced a definitive agreement to acquire United
Counties Bancorporation ("United Counties") pursuant to an exchange of stock
("the United Counties Proposed Combination"). Under the terms of the agreement,
each of United Counties 2.1 million shares of common stock will be exchanged for
5.0 shares of Meridian's common stock. United Counties has granted Meridian an
option to acquire 375,000 shares of United Counties' common stock at $125 per
share under certain circumstances.
The Merger and United Counties Proposed Combination, which are both expected
to be accounted for as a pooling of interests, are subject to certain
conditions, including the receipt of regulatory and shareholder approval.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
(1.) Interim condensed consolidated financial statements of
United Counties Bancorporation and Subsidiaries: Page
(i) Consolidated Balance Sheet as of September 30, 1995 3
(Unaudited)
(ii) Consolidated Statements of Income For the Nine Months
Ended September 30, 1995 and 1994 (Unaudited) 4
(iii) Consolidated Statements of Changes in Shareholders'
Equity For the Nine Months Ended September 30, 1995
and 1994 (Unaudited) 5
(iv) Consolidated Statements of Cash Flow for the Nine
Months Ended September 30, 1995 and 1994 (Unaudited) 6
(v) Notes to Interim Consolidated Financial Statements
(Unaudited) 7-11
(2) Year-end consolidated financial statements of United
Counties Bancorporation and Subsidiaries: Page
(i) Consolidated Balance Sheet as of December 31, 1994 12
(ii) Consolidated Statement of Income for the Year Ended
December 31, 1994 13
(iii) Consolidated Statement of Changes in Shareholders'
Equity for the Year Ended December 31, 1994 14
(iv) Consolidated Statement of Cash Flow for the Year
Ended December 31, 1994 15
(v) Notes to the December 31, 1994 Consolidated Financial
Statements 16-25
(vi) Report of KPMG Peat Marwick LLP 26
CoreStates Financial Corp
(Registrant)
By: /s/ David T. Walker
-------------------------
David T. Walker
Senior Vice President
Date: November 14, 1995
<PAGE>
UNITED COUNTIES BANCORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30,
1995
----
<S> <C>
Assets
- ------
Cash and due from banks $ 75,663
Money market investments 7,460
Securities available-for-sale 104,228
Investment securities (market value:
$939,550) 935,114
Federal funds sold 90,000
Loans, net of unearned discounts of $366 388,600
Less: Allowance for loan losses 11,042
----------
Net loans 377,558
Premises and equipment, net 11,303
Accrued interest receivable 19,543
Other assets 9,593
----------
Total assets $1,630,462
==========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Deposits
Demand $ 249,211
Savings 712,011
Time 342,003
----------
Total deposits 1,303,225
Securities sold under repurchase agreements 91,536
Other borrowed funds 8,354
Other liabilities 28,256
----------
Total liabilities 1,431,371
Commitments and Contingent Liabilities
Stockholders' equity:
Preferred stock: no par value, no stated
value; authorized 3,000,000 shares; zero
shares issued and outstanding -
Common stock: no par value, $1 stated value;
authorized 6,000,000 shares; issued 2,529,588
shares 2,530
Additional paid-in capital 24,244
Retained earnings 188,071
Net unrealized gain on securities
available-for-sale, net of income taxes 6,479
----------
221,324
Less: treasury stock, at cost, 381,438 shares 22,233
----------
Total stockholders' equity 199,091
----------
Total liabilities and stockholders' equity $1,630,462
==========
</TABLE>
-3-
<PAGE>
UNITED COUNTIES BANCORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1995 1994
---- ----
<S> <C> <C>
Interest income
Interest and fees on loans
Taxable income $24,467 $22,710
Tax-exempt income 387 460
Interest and dividends on securities available-for-sale 4,976 4,625
Interest on investment securities
Taxable income 44,852 44,721
Tax-exempt income 387 354
Interest on money market investments 165 127
Interest on federal funds sold 2,552 2,169
------- -------
Total interest income 77,786 75,166
------- -------
Interest expense
Savings and time deposits 27,888 23,818
Securities sold under repurchase agreements 2,262 1,334
Other borrowed funds 348 249
------- -------
Total interest expense 30,498 25,401
------- -------
Net interest income 47,288 49,765
Provision for loan losses (500) (825)
------- -------
Net interest income after provision for loan losses 47,788 50,590
------- -------
Other operating income
Gains on securities available-for-sale 12,263 -
Service charges on deposit accounts 2,246 2,295
Trust fees 751 806
Other income 1,086 2,403
------- -------
Total other operating income 16,346 5,504
------- -------
Net interest and other operating income 64,134 56,094
------- -------
Other operating expenses
Salaries and employee benefits 15,030 15,524
Net occupancy expense 2,567 2,722
Equipment expense 1,246 1,325
FDIC insurance premium 1,528 2,286
Other expense 5,754 7,923
------- -------
Total other operating expenses 26,125 29,780
------- -------
Income before income taxes 38,009 26,314
Income taxes 12,500 8,595
------- -------
Net income $25,509 $17,719
======= =======
Income per share of common stock:
Average outstanding shares 2,145 2,136
===== =====
Net income $11.89 $8.30
====== =====
Dividends paid per share of common stock $3.45 $2.20
===== =====
Cash dividend payable - November 1 - $ .80
=== =====
</TABLE>
-4-
<PAGE>
UNITED COUNTIES BANCORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholder's Equity
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Net
Unrealized Gain
on Securities
Additional Available-for-
Nine Months Ended Preferred Common Paid-in Retained Sale, Net of Treasury
September 30, 1995 Stock Stock Capital Earnings Income Taxes Stock Total
- ------------------ ----- ----- ------- -------- ------------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at
January 1, 1995 - $2,524 $23,947 $169,967 $6,747 $(21,602) $181,583
Shares issued under
Incentive Stock
Option Plans 6 297 303
Net income 25,509 25,509
Dividends paid (7,405) (7,405)
Treasury stock acquired -
5,168 shares (631) (631)
Net change in net
unrealized gain on
securities available-
for-sale, net of income
taxes (268) (268)
-------- -------- -------- -------- -------- -------- --------
Balances at
September 30, 1995 - $2,530 $24,244 $188,071 $6,479 $(22,233) $199,091
======== ======== ======== ======== ======== ======== ========
<CAPTION>
Net
Unrealized Gain
on Securities
Additional Available-for-
Nine Months Ended Preferred Common Paid-in Retained Sale, Net of Treasury
September 30, 1994 Stock Stock Capital Earnings Income Taxes Stock Total
- ------------------ ----- ----- ------- -------- ------------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at
January 1, 1994 - $2,501 $22,970 $153,218 - $(20,721) $157,968
Shares issued under
Incentive Stock
Option Plans 15 586 601
Net income 17,719 17,719
Dividends paid (3,207) (3,207)
Dividend payable 11/1/94 (1,710) (1,710)
Treasury stock acquired -
6,204 shares (598) (598)
Net unrealized gain
on securities
available-for-sale,
net of income taxes $7,293 7,293
-------- -------- -------- -------- -------- -------- --------
Balances at
September 30, 1994 - $2,516 $23,556 $166,020 $7,293 $(21,319) $178,066
======== ======== ======== ======== ======== ======== ========
</TABLE>
-5-
<PAGE>
UNITED COUNTIES BANCORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flow
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1995 1994
---- ----
<S> <C> <C>
Operating Activities:
Net income $ 25,509 $ 17,719
Adjustments to reconcile net income to net cash from
operating activities:
Gains on sales of securities available-for-sale (173) 0
Gains on exchanges of securities available-for-sale (12,090) -
Amortization of premiums and discounts, net 3,532 6,328
Depreciation 932 1,077
Provision for loan losses (500) (825)
Deferred income tax expense (benefit) 4,599 (52)
Amortization of deferred loan fees (165) 29
Decrease in interest receivable 1,746 829
Increase (decrease) in interest payable 1,817 (40)
Increase in other assets (6,083) (2,963)
Increase in other liabilities 4,387 1,243
Increase in current income tax payable 80 81
---------- ----------
Total adjustments (1,918) 5,707
---------- ----------
Net cash from operating activities 23,591 23,426
---------- ----------
Investing Activities:
Proceeds from sale of securities available-for-sale 898 0
Proceeds from maturities of securities available-for-sale 10,308 5,000
Purchases of securities available-for-sale (3,866) 0
Proceeds from maturities/calls of investment securities 118,543 218,646
Purchases of investment securities (91,050) (236,472)
Net (increase) decrease in short-term investments (4,905) 31
Net decrease in federal funds sold 25,000 57,000
Net decrease in credit card receivables
and other short-term loans 2,104 10,006
Principal collected on longer term loans 71,383 92,844
Longer term loans originated or acquired (87,245) (95,192)
Purchases of premises and equipment, net (481) (424)
---------- ----------
Net cash from investing activities 40,689 51,439
---------- ----------
Financing Activities:
Net decrease in demand deposits, NOW
accounts, and savings accounts (74,536) (30,650)
Net increase in open time accounts 4,304 3,367
Proceeds from sales of certificates of deposit 103,933 75,019
Payments for maturing certificates of deposit (85,214) (69,339)
Net decrease in short-term borrowings (22,592) (47,563)
Payments to acquire treasury stock (631) (598)
Dividends paid (7,405) (4,700)
Proceeds from exercise of stock options 303 601
---------- ----------
Net cash applied to financing activities (81,838) (73,863)
---------- ----------
Net increase (decrease) in cash and cash equivalents (17,558) 1,002
---------- ----------
Cash and cash equivalents at beginning of period 93,221 85,388
---------- ----------
Cash and cash equivalents at end of period $ 75,663 $ 86,390
========== ==========
Cash paid during the period for:
Interest $ 28,681 $ 25,441
========== ==========
Income taxes $ 8,666 $ 10,790
========== ==========
Transfer from investment securities to
securities available-for-sale - $ 100,054
========== ==========
</TABLE>
-6-
<PAGE>
UNITED COUNTIES BANCORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Principles of Consolidation
---------------------------
The consolidated financial statements of United Counties Bancorporation
include the accounts of the parent company and subsidiaries, United Capital
Corporation and United Counties Trust Company (Bank), and its subsidiaries. All
material intercompany transactions have been eliminated. In the opinion of
management, all adjustments made to the unaudited interim financial statements
necessary for a fair statement of the results for the period have been included
and were of a normal recurring nature.
2. Adoption of Recent Accounting Pronouncements
--------------------------------------------
Effective January 1, 1995, the Bancorporation adopted FASB Statement No.
114, "Accounting by Creditors for Impairment of a Loan." This Standard applies
to contractual rights to receive money on demand or on fixed or determinable
dates that are recognized as assets on creditors' balance sheets, including
accounts receivable due in more than one year. A loan is considered impaired if,
based upon current information and events, it is probable that the creditor will
not be able to collect all principal and interest due in accordance with the
terms of the agreement. Once a loan is considered impaired, the Standard
requires calculation of the present value of expected future cash flows using
the effective rate of the loan. If the calculated present value is less than the
recorded investment in the loan, the difference is to be charged to bad debt
expense with a corresponding credit to a valuation allowance account. Loans for
which repayment is expected to be provided by the underlying collateral, the
fair value of the collateral of the loan may be used.
Also effective January 1, 1995, the Bancorporation adopted FASB Statement
No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition
and Disclosures." This Standard amends the income recognition and disclosure
requirements of FASB No. 114.
The adoption of these Standards did not have a material effect on the
financial position of the Bancorporation.
FASB No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," was adopted on January 1, 1994. This Standard applies to equity
securities having readily determinable fair values and to all debt securities.
For accounting and financial reporting purposes, securities are to be
classified into one of the following three categories: 1) held-to maturity; 2)
trading securities; or 3) available-for-sale. Only debt securities may be
classified as held-to-maturity. Those securities that are classified as
held-to-maturity are to be carried at amortized cost while unrealized
gains/losses from the changes in market value for investments categorized as
available-for-sale are to be reported as a separate component of stockholders'
equity net of related tax effects. See Note 4.
3. Pending Acquisition
-------------------
On May 24, 1995 United Counties Bancorporation ("UCB") announced that it
signed a definitive merger agreement with Meridian Bancorp, Inc., Reading,
Pennsylvania ("Meridian"), pursuant to which UCB will be acquired in a tax-free,
stock-for-stock merger. Pursuant to the merger, each of the outstanding shares
of UCB common stock will be exchanged for five (5) shares of Meridian common
stock. UCB will be merged into Meridian and UCB's wholly-owned subsidiary,
United Counties Trust Company ("UCTC"), will be merged into Meridian's
wholly-owned subsidiary, Meridian Bank, New Jersey ("MBNJ"). The acquisition is
conditioned upon necessary bank regulatory approvals, shareholder approval and
other customary terms and conditions. In connection with the merger agreement
UCB also granted Meridian an option to acquire 375,000 shares of UCB stock at
$125 per share under certain circumstances.
On October 10, 1995, Meridian Bancorp, Inc. announced the signing of a
definitive merger agreement with CoreStates Financial Corp (CoreStates) of
Philadelphia, Pennsylvania. Under the terms of this agreement, each share of
Meridian common stock will be exchanged for 1.225 shares of CoreStates common
stock and is dependent upon a similar approval process.
-7-
<PAGE>
4. Investment Securities and Securities Available-for-Sale
-------------------------------------------------------
On January 1, 1994, FASB No. 115 was adopted. The following tables present
information related to the portfolio of investment securities held-to-maturity
and available-for-sale of the Bancorporation as of September 30, 1995 (in
thousands):
<TABLE>
<CAPTION>
September 30, 1995
------------------
Amortized Gross Unrealized Estimated
Cost Gains Losses Market Value
---- ----- ------ ------------
<S> <C> <C> <C> <C>
Investment Securities Held-to-Maturity:
- --------------------------------------
United States Treasury securities
and obligations of United States
government corporations and
agencies $785,747 $ 8,254 $3,606 $790,395
Obligations of states and
political subdivisions 13,618 0 2 13,616
Corporate obligations 135,749 1,245 1,455 135,539
-------- ------- ------ --------
Total $935,114 $ 9,499 $5,063 $939,550
======== ======= ====== ========
<CAPTION>
September 30, 1995
------------------
Amortized Gross Unrealized Book/Market
Cost Gains Losses Value
---- ----- ------ -----------
<S> <C> <C> <C> <C>
Securities Available-for-Sale:
- -----------------------------
United States Treasury securities
and obligations of United States
government corporations and
agencies $ 66,067 $ 280 $ 330 $ 66,017
Marketable equity securities 27,968 10,243 0 38,211
-------- ------- ------ --------
Total $ 94,035 $10,523 $ 330 $104,228
======== ======= ====== ========
</TABLE>
The carrying value of securities pledged to secure public funds and for
other purposes as required by law was $176,961,000 at September 30, 1995.
The amortized cost and estimated market value of investment securities
held-to-maturity and available-for-sale at September 30, 1995, by contractual
maturity, are shown in the table on the next page. Expected maturities may
differ from contractual maturities since certain borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties (in
thousands):
-8-
<PAGE>
<TABLE>
<CAPTION>
September 30, 1995
------------------
Amortized Estimated
Cost Market Value
---- ------------
Investment Securities Held-to-Maturity:
- ---------------------------------------
<S> <C> <C>
Due in one year or less $220,755 $221,718
Due after one year through
five years 703,850 706,910
Due after five years through
ten years 10,113 10,528
Due after ten years 396 394
-------- --------
Total $935,114 $939,550
======== ========
<CAPTION>
September 30, 1995
------------------
Amortized Book/Market
Cost Value
---- -----
Securities Available-for-Sale:
- ------------------------------
<S> <C> <C>
Due in one year or less $ 20,126 $ 20,192
Due after one year through
five years 45,941 45,825
-------- --------
Total $ 66,067 $ 66,017
======== ========
</TABLE>
Proceeds from sales of securities available-for-sale for the nine months
ended September 30, 1995, were $898,000. Gross gains of $173,000 were recorded
in 1995.
Fixed income investment securities are traded in liquid markets and are of
investment quality as rated by nationally recognized rating services.
5. Loans
-----
The following summarizes the loan categories, net of unearned discounts, at
September 30, 1995 (in thousands):
<TABLE>
<CAPTION>
September 30,
1995
----
<S> <C>
Real estate loans:
Construction $ 15,262
Commercial 123,990
Residential:
Conventional 99,678
Insured or guaranteed 923
Home equity & secondary mortgage 90,205
Economic Development Authority 6,528
Term 4,371
--------
Total real estate loans 340,957
Consumer loans 17,481
Credit card 1,450
Commercial and industrial 28,472
Lease financing receivables 240
--------
Total loans, net of unearned discounts $388,600
========
</TABLE>
The primary lending marketplace of the Bancorporation includes the New
Jersey Counties of Middlesex, Monmouth, Morris, Somerset and Union.
A significant portion of the loan portfolio of the Bank is secured by real
estate. At September 30, 1995, real estate loans amounted to 87.7% of the total
loan portfolio.
-9-
<PAGE>
6. Allowance for Loan Losses
-------------------------
The following is an analysis of changes in the Allowance for Loan Losses
Account (in thousands):
<TABLE>
<CAPTION>
Nine months Nine months
ended ended
Sept. 30, 1995 Sept. 30, 1994
-------------- --------------
<S> <C> <C>
Balance at beginning of year $11,091 $11,014
Provision for loan losses (500) (825)
Recoveries of loans previously
charged-off 917 822
Loans charged-off (466) (180)
------- -------
Balance at period end $11,042 $10,831
======= =======
</TABLE>
7. Risk Elements
-------------
Risk elements, which include nonaccrual loans, restructured loans, loans
past due 90 days or more and other real estate owned at September 30, 1995 and
September 30, 1994, were as follows (in thousands):
<TABLE>
<CAPTION>
Sept. 30, 1995 Sept. 30, 1994
-------------- --------------
<S> <C> <C>
Nonaccrual loans $ 2,791 $ 284
Restructured loans 4,809 5,436
Loans past due 90 days or more 2,362 5,132
Other real estate owned 125 -
------- -------
Total $10,087 $10,852
======= =======
</TABLE>
The impact of risk elements on interest income is not material.
8. Dividend Restrictions
---------------------
Certain limitations are imposed by New Jersey statutes on the availability
of a subsidiary bank's undistributed net assets for the payment of dividends to
the parent company without prior approval of the regulatory authorities. The
Bank may pay dividends only if, following the payment of each such dividend, the
capital stock of the subsidiary bank will not be impaired and (1) the Bank will
have additional paid-in capital of not less than 50% of its capital stock, or,
if not, (2) the payment of such dividends will not reduce the additional paid-in
capital of the Bank. The Bank is also subject to the Federal Deposit Insurance
Corporation regulations that require the Bank to maintain minimum capital
ratios. Under current law, a minimum leverage ratio (Tier 1 capital to quarterly
average assets, less intangibles) of 4%, Tier 1 risk-based capital ratio of 4%
and total risk-based capital ratio, Tier 2, of 8% must be maintained.
At September 30, 1995, the capital accounts of the Bank totalled
$150,388,000 of which $87,713,000 was available for the payment of dividends to
the parent company.
9. Commitments and Contingent Liabilities
--------------------------------------
The Bancorporation may, from time to time, be a defendant in legal
proceedings relating to the conduct of its business. In the normal course of
business there also are outstanding various contingent liabilities, such as
commitments to extend credit (including standby letters of credit in the amount
of $7,364,000 at September 30, 1995) which are not reflected in the accompanying
consolidated financial statements. In the judgement of management, the
consolidated financial position of the Bancorporation and its subsidiaries will
not be affected materially by the final outcome of any present legal proceeding
or other contingent liability.
The Bancorporation is party to financial obligations with off-balance sheet
risk incurred in the normal course of business. These instruments include
commitments to extend credit in the form of loans totalling $163,848,000 at
September 30, 1995. The exposure of the Bancorporation to credit loss in the
event of non-performance by the other party to these financial instruments is
equal to the contractual amount. The Bancorporation uses the same credit
policies in granting these commitments as it does for loans presently
outstanding. Collateral is obtained when deemed appropriate. These commitments
do not necessarily represent future obligations. A substantial portion of these
commitments historically have remained unused, or if used, would be secured by
mortgages on real estate.
-10-
<PAGE>
10. Income Taxes
------------
The current and deferred amounts of federal income tax expense (benefit) as
of September 30, 1995 and 1994 were as follows (in thousands):
<TABLE>
<CAPTION>
September 30,
-------------------
1995 1994
---- ----
<S> <C> <C>
Current expense $ 7,901 $8,647
Deferred expense (benefit) 4,599 (52)
------- ------
Total income tax expense $12,500 $8,595
======= ======
</TABLE>
The Bancorporation has established a deferred tax liability of $3,714,000
as a result of the net unrealized gains on securities designated as
available-for-sale under the provisions of FASB No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
Certain deferred tax information for 1994 has been adjusted from amounts
previously presented to conform with tax returns filed for this period.
The significant components of the Corporation's deferred tax liabilities
and assets are as follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1995 1994 1994
---- ---- ----
<S> <C> <C> <C>
Deferred tax liabilities:
Accretion on bond discounts, net $ 860 $ 401 $ 279
Unrealized gain on securities available-for-sale 3,714 3,703 4,102
Gain on exchange of securities available-for-sale 4,408 - -
------- ------ ------
Total deferred tax liabilities 8,982 4,104 4,381
------- ------ ------
Deferred tax assets:
New Jersey Corporation business tax 1,039 1,281 1,419
Book over tax depreciation 564 496 350
Excess book bad debt 3,361 3,382 3,378
Postretirement benefits 3,348 3,108 3,041
Book over tax core deposit premium amortization 708 696 510
Other, net 142 207 303
------- ------ ------
Total deferred tax assets 9,162 9,170 9,001
------- ------ ------
Net deferred tax asset $ 180 $5,066 $4,620
======= ====== ======
The significant components of the 1995 and 1994 deferred expense (benefit) were:
Deferred income tax expense (benefit) $ 4,599 $ (52)
======= ======
</TABLE>
As required by FASB 109, United Counties Bancorporation has determined that
it is not required to establish a valuation reserve for the deferred tax asset
account since it is "more likely than not" that the deferred tax asset will be
realized through carryback to taxable income in prior years, future reversals of
existing taxable temporary differences, future taxable income and tax planning
strategies. The conclusion that it is "more likely than not" that the deferred
tax asset will be realized is based on the history of earnings and the prospects
for continued growth including an analysis of potential uncertainties that may
affect future operating results. Management believes that future taxable income
will be sufficient to realize the benefits of temporary deductible differences
that cannot be realized through carryback to prior years or through the reversal
of future temporary taxable differences. Management will continue to review the
tax criteria related to the recognition of deferred tax assets.
The consolidated effective tax rate is reconciled to the statutory rate for
September 30, 1995 and 1994 as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Statutory rate 35.0% 35.0%
Difference resulting from:
Tax-exempt income (0.7) (1.0)
Other, net (1.4) (1.3)
---- ----
Effective tax rate 32.9% 32.7%
==== ====
</TABLE>
-11-
<PAGE>
United Counties Bancorporation and Subsidiaries
Consolidated Balance Sheet
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1994
-----------------
<S> <C>
Assets
Cash and due from banks (Note 2) $ 93,221
Money market investments 2,555
Securities available-for-sale (Note 3) 100,070
Investment securities (market value: $931,639) (Note 3) 965,239
Federal funds sold 115,000
Loans, net of unearned discounts of $255 (Note 4) 374,375
Less: Allowance for loan losses (Note 5) 11,091
----------
Net loans 363,284
Premises and equipment, net (Note 6) 11,754
Accrued interest receivable 21,289
Other assets (Note 15) 8,528
----------
Total assets $1,680,940
==========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Demand $ 264,781
Savings 770,977
Time 318,980
----------
Total deposits (Note 7) 1,354,738
Securities sold under repurchase agreements (Note 8) 110,141
Other borrowed funds (Note 9) 12,341
Other liabilities (Note 13) 22,137
----------
Total liabilities 1,499,357
Commitments and contingent liabilities (Notes 14 and 16)
Stockholders' equity (Notes 10 and 11):
Preferred stock: no par value, no stated value;
authorized 3,000,000 shares; zero shares issued and
outstanding -
Common stock: no par value, $1 stated value;
authorized 6,000,000 shares; issued 2,523,976 shares 2,524
Additional paid-in capital 23,947
Retained earnings 169,967
Net unrealized gain on securities available-for-sale,
net of income taxes 6,747
----------
203,185
Less: treasury stock, at cost - 376,270 shares 21,602
----------
Total stockholders' equity 181,583
----------
Total liabilities and stockholders' equity $1,680,940
==========
</TABLE>
See accompanying notes to consolidated financial statements.
-12-
<PAGE>
United Counties Bancorporation and Subsidiaries
Consolidated Statement of Income
(in thousands, except per share amounts)
Year Ended December 31, 1994
<TABLE>
<S> <C>
Interest income
Interest and fees on loans:
Taxable income $ 30,612
Tax-exempt income 584
Interest and dividends on securities available-for-sale 6,075
Interest on investment securities:
Taxable income 60,080
Tax-exempt income 482
Interest on money market investments 189
Interest on federal funds sold 2,788
--------
Total interest income 100,810
--------
Interest expense
Savings and time deposits (Note 7) 32,393
Securities sold under repurchase agreements (Note 8) 1,841
Other borrowed funds (Note 9) 346
--------
Total interest expense 34,580
--------
Net interest income 66,230
Provision for loan losses (Note 5) (825)
--------
Net interest income after provision for loan losses 67,055
--------
Other operating income
Service charges on deposit accounts 3,060
Trust fees 1,128
Other income (Note 12) 2,920
--------
Total other operating income 7,108
--------
Net interest and other operating income 74,163
--------
Other operating expenses
Salaries and employee benefits (Note 13) 20,737
Net occupancy expense (Notes 6 and 14) 3,601
Equipment expense (Notes 6 and 14) 1,816
FDIC insurance premium 3,054
Other expense (Note 12) 10,125
--------
Total other operating expenses 39,333
--------
Income before income taxes 34,830
Income taxes (Note 15) 11,038
--------
Net income $ 23,792
========
Net income per share of common stock $11.12
======
Average number of outstanding shares 2,139
=====
</TABLE>
See accompanying notes to consolidated financial statements.
-13-
<PAGE>
United Counties Bancorporation and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
(Dollars in thousands)
Year Ended December 31, 1994
<TABLE>
<CAPTION>
Net Unrealized
Gain on Securities
Available-for-Sale,
Additional Net of
Preferred Common Paid-in Retained Income Treasury
Stock Stock Capital Earnings Taxes Stock Total
--------- ----- ---------- -------- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1993 -- $2,501 $22,970 $153,218 -- $(20,721) $157,968
Shares issued under the
Incentive Stock Option
Plans (Note 10) 23 977 1,000
Net income 23,792 23,792
Dividends declared (7,043) (7,043)
Net unrealized
gain on securities
available-for-sale,
net of income taxes $6,747 6,747
Treasury stock acquired -
8,929 shares (881) (881)
------- ------ ------- -------- ------ -------- --------
Balances at
December 31, 1994 -- $2,524 $23,947 $169,967 $6,747 $(21,602) $181,583
======= ====== ======= ======== ====== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
-14-
<PAGE>
United Counties Bancorporation and Subsidiaries
Consolidated Statement of Cash Flow
(in thousands)
Year Ended December 31, 1994
<TABLE>
<S> <C>
Operating Activities:
Net income $ 23,792
Adjustments to reconcile net income to net cash
from operating activities:
Amortization of premiums and discounts, net 7,793
Depreciation 1,462
Provision for loan losses (825)
Deferred income tax expense 77
Amortization of deferred loan fees 5
Decrease in interest receivable 765
Decrease in interest payable (288)
Increase in other assets (505)
Decrease in other liabilities (1,255)
Increase in current income tax payable 363
--------
Total adjustments 7,592
--------
Net cash from operating activities 31,384
--------
Investing Activities:
Proceeds from maturities of securities available-for-sale 10,000
Purchases of securities available-for-sale (115)
Proceeds from maturities/calls of investment securities 261,138
Purchases of investment securities (250,007)
Net decrease in short-term investments 3,765
Net increase in federal funds sold (15,000)
Net decrease in credit card receivables and other short-term
loans 8,249
Principal collected on longer term loans 121,168
Longer term loans originated or acquired (127,223)
Purchases of premises and equipment, net (589)
--------
Net cash from investing activities 11,386
--------
Financing Activities:
Net decrease in demand deposits, NOW accounts, and savings
accounts (51,920)
Net increase in open time accounts 4,723
Proceeds from sales of certificates of deposit 107,252
Payments for maturing certificates of deposit (98,154)
Net increase in short-term borrowings 11,580
Payments to acquire treasury stock (881)
Dividends paid (8,537)
Proceeds from exercise of stock options 1,000
--------
Net cash applied to financing activities (34,937)
--------
Net increase in cash and cash equivalents 7,833
--------
Cash and cash equivalents at beginning of year 85,388
--------
Cash and cash equivalents at end of year $ 93,221
========
Cash paid during the year for:
Interest $ 34,869
========
Income taxes $ 14,040
========
Transfer from investment securities
to securities available-for-sale $100,054
========
</TABLE>
See accompanying notes to consolidated financial statements.
-15-
<PAGE>
United Counties Bancorporation and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements of United Counties Bancorporation ("the
Bancorporation") include the accounts of the parent company and subsidiaries,
United Capital Corporation and United Counties Trust Company (Bank) and its
subsidiaries. All material intercompany transactions have been eliminated.
Investment Securities
Investments classified as held-to-maturity consist of debt securities, and are
carried at cost, adjusted for accretion of discounts and amortization of
premiums, both computed on the level yield method. The Bancorporation has both
the ability and positive intent to hold these securities to maturity.
Debt securities not classified as held-to-maturity and marketable equity
securities are categorized as available-for-sale and carried at fair value.
Unrealized gains and losses, net of related tax effects, are reported as a
separate component of stockholders' equity.
The adjusted cost of a specific security is the basis for calculating the gain
or loss on the sale of a security as reported in the consolidated statements of
income.
Interest and dividends on investment securities are recognized as income when
earned.
Loans
Loans are stated at the principal amount outstanding, net of unearned discounts.
Unearned discount, where appropriate, is recognized on a monthly basis using the
actuarial method, which approximates the level yield method. Interest is accrued
monthly on other non-discounted loans based upon the principal amount
outstanding. Loan origination fees are recognized over the estimated life of the
loan and as an adjustment to yield.
When a loan is past due in excess of 90 days or doubt exists in the opinion of
management as to the collectibility of principal or interest, it is placed on a
nonaccrual basis, recognizing interest income as received. At the same time,
previously accrued but unpaid interest is reversed and charged against current
earnings.
Allowance for Loan Losses
The Allowance for Loan Losses account is an estimate and may be subject to
variance based upon economic conditions throughout our trade area as well as
periodic fluctuations in the financial condition of individual loans.
Additions to the Allowance arise from charges to operations through the
Provision for Loan Losses or from the recovery of amounts previously charged
off. The Allowance is reduced by loan charge-offs. Loans are charged off when
management believes there has been permanent impairment to the values at which
loans are carried.
Premises and Equipment
Land is carried at cost. Premises, furniture, equipment, and leasehold
improvements are stated at cost less accumulated depreciation. Depreciation is
computed on the straight-line and declining balance methods over the estimated
useful lives, which generally range from three to forty years. Leasehold
improvements are carried at cost less accumulated amortization computed on a
straight-line basis over the terms of the leases or the estimated useful lives
of the assets, if shorter. Maintenance and repairs are expensed as incurred.
Other Real Estate Owned
Other real estate owned includes both formally foreclosed and in-substance
foreclosed property. When a property is acquired through foreclosure or
in-substance foreclosure, it is reported at its estimated fair market value and
subsequently reported at the lower of its new cost basis or estimated fair
market value less estimated liquidation costs.
Income Taxes
Certain items of income and expense are recognized over different periods for
financial reporting purposes than for income tax purposes. Deferred taxes are
provided in recognition of these temporary differences. The Bancorporation files
a consolidated federal income tax return. The applicable income taxes of the
parent and subsidiaries generally are computed individually and reflected as
such for financial statement purposes.
Retirement Benefit Plans
Retirement benefit plan costs, based on actuarial computations of current and
future benefits for employees, are charged to expense and generally funded based
on the maximum amount that can be deducted for federal income tax purposes.
Income Per Share
Income per share of common stock is calculated based on the average daily
number of common shares outstanding. Shares issuable under the 1984
Incentive Stock Option Plan and the 1989 Incen-
-16-
<PAGE>
tive Stock Option Plan have no materially dilutive effect and are not included
in the average number of shares outstanding.
Reclassifications
Certain amounts in previous periods have been reclassified to conform to the
current period's presentation. These reclassifications have no material effect
on net income or total assets.
Adoption of Recent Accounting Pronouncements
FASB No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," was adopted on January 1, 1994. This Standard applies to equity
securities having readily determinable fair values and to all debt securities.
For accounting and financial reporting purposes, securities are to be
classified into one of the following three categories: 1) held-to-maturity;
2) trading securities; or 3) available-for-sale. Only debt securities may be
classified as held-to-maturity. Those securities that are classified as
held-to-maturity are to be carried at amortized cost while unrealized
gains/losses from the changes in market value for investments categorized as
available-for-sale are to be reported as a separate component of stockholders'
equity net of related tax effects. See Note 3.
2. Cash and Due from Banks
The average reserve requirement of the Bank amounted to $26,569,000 at December
31, 1994.
3. Investment Securities and Securities Available-for-Sale
On January 1, 1994, FASB No. 115 was adopted. The following tables present
information related to the portfolio of investment securities held-to-maturity
and available-for-sale of the Bancorporation at December 31, 1994 (in
thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ----------
1994
- ----
<S> <C> <C> <C> <C>
Investment Securities
Held-to-Maturity
- ----------------
United States Treasury
securities and obliga-
tions of United States
government corpora-
tions and agencies $ 810,182 $ 525 $ 27,433 $ 783,274
Obligations of states and
political subdivisions 14,778 4 4 14,778
Corporate obligations 140,279 162 6,854 133,587
---------- -------- -------- ----------
Total $ 965,239 $ 691 $ 34,291 $ 931,639
========== ======== ======== ==========
<CAPTION>
Gross Gross Book/
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Securities Available-for-Sale
- -----------------------------
United States Treasury
securities and obliga-
tions of United States
government corpora-
tions and agencies $ 76,574 $ 77 $ 2,518 $ 74,133
Marketable equity
securities 13,046 12,891 -0- 25,937
--------- -------- -------- ---------
Total $ 89,620 $ 12,968 $ 2,518 $ 100,070
========= ======== ======== =========
</TABLE>
The carrying value of securities pledged to secure public funds and for other
purposes as required by law was $209,635,000 at December 31, 1994.
-17-
<PAGE>
The amortized cost and estimated market value of investment securities
held-to-maturity and available-for-sale at December 31, 1994 by contractual
maturity, are shown in the table below. Expected maturities may differ from
contractual maturities since certain borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties (in thousands):
<TABLE>
<CAPTION>
December 31, 1994
---------------------
Estimated
Amortized Market
Cost Value
---------- ---------
Investment Securities
Held-to-Maturity
----------------
<S> <C> <C>
Due in one year or less $144,914 $144,896
Due after one year through five years 757,617 728,328
Due after five years through ten years 62,193 57,904
Due after ten years 515 511
-------- --------
Total $965,239 $931,639
======== ========
</TABLE>
<TABLE>
<CAPTION>
Book/
Amortized Market
Cost Value
--------- --------
Securities
Available-for-Sale
------------------
<S> <C> <C>
Due in one year or less $ 15,062 $ 15,117
Due after one year through five years 61,512 59,016
-------- --------
Total $ 76,574 $ 74,133
======== ========
</TABLE>
Proceeds from sales of securities during 1994 were zero.
Fixed income investment securities are traded in liquid markets and are of
investment quality as rated by nationally recognized rating services.
4. Loans
The following summarizes the loan categories, net of unearned discounts, at
December 31, 1994 (in thousands):
<TABLE>
<CAPTION>
1994
--------
<S> <C>
Real estate loans:
Construction $ 15,214
Commercial 115,829
Residential:
Conventional 99,028
Insured or guaranteed 1,067
Home equity & secondary mortgage 87,568
Economic Development Authority 7,013
Term 2,555
--------
Total real estate loans 328,274
Consumer loans 16,905
Credit card 3,075
Commercial and industrial 26,005
Lease financing receivables 116
--------
Total loans, net of unearned discounts $374,375
========
</TABLE>
The primary lending marketplace of the Bancorporation includes the New Jersey
counties of Middlesex, Monmouth, Morris, Somerset, and Union.
Loans to principal officers, directors, and their affiliates are made in the
ordinary course of business and are on substantially the same terms, including
interest rates and collateral, as loans to other customers of the Bank. These
loans aggregated $17,472,000 at December 31, 1994. During 1994, loan activity to
principal officers, directors, and their affiliates consisted of new loans
amounting to $13,098,000 and principal payments on outstanding loans of
$6,668,000.
A significant portion of the loan portfolio of the Bank is secured by real
estate. At December 31, 1994, real estate loans amounted to 87.7% of the total
loan portfolio.
Risk elements, which include nonaccrual loans, restructured loans, and loans
past due 90 days or more at December 31, 1994 were as follows (in thousands):
<TABLE>
<CAPTION>
1994
-------
<S> <C>
Nonaccrual loans $ 2,769
Restructured loans 5,265
Loans past due 90 days or more 2,401
-------
Total $10,435
=======
</TABLE>
-18-
<PAGE>
5. Allowance for Loan Losses
The following is an analysis of changes in the Allowance for Loan Losses for the
year ended December 31, 1994 (in thousands):
<TABLE>
<CAPTION>
1994
--------
<S> <C>
Balance at beginning of year $11,014
Provision credited to operating
expenses (825)
Recoveries of loans previously
charged off 1,175
Loans charged off (273)
-------
Balance at end of year $11,091
=======
</TABLE>
The Allowance for Loan Losses account for federal income tax purposes amounted
to $2,323,000 at December 31, 1994.
6. Premises and Equipment
Premises and equipment at December 31, 1994 is detailed below (in thousands):
<TABLE>
<CAPTION>
1994
--------
<S> <C>
Land $ 4,293
Premises 18,258
Furniture and equipment 11,534
Leasehold improvements 744
-------
34,829
Less: Accumulated depreciation
and amortization 23,075
-------
Premises and equipment, net $11,754
=======
</TABLE>
Depreciation and amortization charged to operating expense for the year ended
December 31, 1994 amounted to $1,462,000.
7. Deposits
Time deposits in denominations of $100,000 and over at December 31, 1994
consisted of the following (in thousands):
<TABLE>
<CAPTION>
1994
--------
<S> <C>
Certificates of deposit $12,095
Other time deposits 6,896
-------
Total $18,991
=======
</TABLE>
Interest expense relating to time deposits in denominations of $100,000 and
over, totalled $682,000 in 1994.
8. Securities Sold Under Repurchase Agreements
Balances and rates of securities sold under repurchase agreements for the year
ended December 31, 1994 were as follows (in thousands):
<TABLE>
<CAPTION>
1994
--------
<S> <C>
Balance at end of year $110,141
Average during year 55,228
Maximum month-end balance during year 110,141
Average rate during year 3.34%
Rate at end of year 4.98
</TABLE>
9. Other Borrowed Funds
Other borrowed funds consist of Treasury tax and loan obligations due on demand.
Interest on the Treasury tax and loan notes is computed at a rate equal to 25
basis points below the weekly average federal funds rate. Balances and rates for
the year ended December 31, 1994 were as follows (in thousands):
<TABLE>
<CAPTION>
1994
--------
<S> <C>
Balance at end of year $12,341
Average during year 8,669
Maximum month-end balance during year 14,153
Average rate during year 3.98%
Rate at end of year 5.11
</TABLE>
10. Incentive Stock Option Plans
The United Counties Bancorporation 1984 and 1989 Incentive Stock Option Plans
became effective after approval by stockholders on December 13, 1984, and
January 12, 1989, respectively. The Plans are designed to provide long-term
equity incentives to key officers and executives to foster the growth and
profitability of the Bancorporation and its subsidiaries. The Plans are
administered by a Committee of the Board of Directors. The 1989 Plan provides
that a maximum of 100,000 shares of common stock may be granted in the form of
Incentive Stock Options, whereas the 1984 Plan provides that a maximum of
125,000 shares of common stock may be granted. Options are granted at the fair
market value of the stock on the date of the grant. Options are exercisable
-19-
<PAGE>
in full or in installments as specified by the Committee, provided a minimum of
10% of the eligible shares are exercised. The 1984 Plan terminated during
December 1994. The 1989 Plan terminates on December 31, 1999.
Transactions in the Plans were as follows:
<TABLE>
<CAPTION>
Number of Shares
----------------
Available Under Option price
for Option Option per share
---------- ------ ---------------
<S> <C> <C> <C>
1989 Plan
Balance at December 31, 1993 65,195 37,480 $ 50.25-$ 86.50
Options granted (1,900) 1,900 $104.25-$134.75
Options cancelled 1,475 (1,475) $ 54.00-$ 73.00
Options exercised (4,883) $ 54.00
------ ------
Balance at December 31, 1994 64,770 33,022 $ 50.25-$134.75
====== ======
1984 Plan
Balance at December 31, 1993 2,010 33,391 $ 28.75-$ 86.50
Options granted (1,600) 1,600 $134.75
Options cancelled 542 (542) $ 54.00
Options terminated (952) --
Options exercised (17,752) $ 28.75-$ 54.00
------ ------
Balance at December 31, 1994 0 16,697 $ 28.75-$134.75
====== ======
</TABLE>
The number of shares that were exercisable at December 31, 1994, were 4,874.
11. Dividend Restrictions
Certain limitations are imposed by New Jersey statutes on the availability of a
subsidiary bank's undistributed net assets for the payment of dividends to the
parent company without prior approval of the regulatory authorities. The Bank
may pay dividends only if, following the payment of each such dividend, the
capital stock of the subsidiary bank will not be impaired and (1) the Bank will
have additional paid-in capital of not less than 50% of its capital stock, or,
if not, (2) the payment of such dividends will not reduce the additional paid-in
capital of the Bank. The Bank is also subject to the Federal Deposit Insurance
Corporation regulations that require the Bank to maintain minimum capital
ratios. Under current law, a minimum leverage ratio of 4%, Tier 1 risk-based
capital ratio of 4% and total risk-based capital ratio, Tier 2, of 8% must be
maintained. At December 31, 1994, the capital accounts of the Bank totalled
$155,841,000 of which $93,041,000 was available for the payment of dividends to
the parent company.
12. Other Income and Expense
Included in other income and expense for the year ended December 31, 1994 are
the following major components, which represent more than one percent of total
interest income and other operating income (in thousands):
<TABLE>
<CAPTION>
1994
--------
<S> <C>
Other income:
Credit card merchant fees $1,465
======
Other expense:
Credit card merchant expenses $1,007
======
Telephone, postage, and
communication expenses $2,210
======
N.J. Corporate Business Tax
expense $1,354
======
</TABLE>
13. Retirement and Profit Sharing Plans
The Bank has a trusteed noncontributory retirement plan for its eligible
employees. Plan assets consist primarily of common stock, United States
government and corporate obligations.
Pension costs for 1994 are based on data from the September 30, 1994 evaluation
data. They include the following components (in thousands):
<TABLE>
<CAPTION>
September 30,
1994
------
<S> <C>
Service cost - benefits earned during
the period $ 408
Interest cost on projected benefit obligation 820
Return on assets (133)
Amortization of net loss (1,146)
-------
Pension credit $ (51)
=======
</TABLE>
-20-
<PAGE>
The funded status of the pension plan is as follows:
<TABLE>
<CAPTION>
September 30,
1994
------
<S> <C>
Actuarial present value of:
Vested benefit obligation $ 9,800
========
Accumulated benefit obligation $ 10,000
========
Projected benefit obligation $(11,867)
Plan assets at fair value 14,024
--------
Excess of plan assets over projected
benefit obligation 2,157
Unrecognized prior services credit (149)
Unrecognized market value over book
value of assets (582)
Unrecognized gain (1,376)
--------
Accrued pension credit $ 50
========
</TABLE>
The projected benefit obligation was determined using an assumed discount rate
of 7.50%, an assumed long-term rate of compensation increase of 6.00% and an
expected long-term rate of return on plan assets of 7.50% for 1994.
In addition to the pension plan, the Bank has a defined profit sharing plan
which provides for annual contributions based on net operating income.
Substantially all employees of the Bank are eligible. Profit sharing expense was
$1,996,000 for 1994.
The Bank also provides certain health care and life insurance benefits for
retired employees. Current eligible employees must satisfy certain service and
age requirements in order to be covered for postretirement benefits other than
pensions. Currently, the Plan is not required to fund a separate trusteed
account. The assumed health care cost trend is 12% per annum.
Postretirement costs for 1994 are based on data from the January 1, 1994
evaluation data. They include the following components (in thousands):
<TABLE>
<CAPTION>
December 31,
1994
------
<S> <C>
Service cost $ 219
Interest cost 570
Return on assets -0-
Amortization of net loss 6
Amortization of unrecognized transition
obligation -0-
------
Net periodic postretirement benefit cost $ 795
======
</TABLE>
The unfunded status of the postretirement plan is as follows:
<TABLE>
<CAPTION>
December 31,
1994
------
<S> <C>
Fair value of assets -0-
Accumulated Postretirement Benefit Obligation:
A) Retirees $(3,405)
B) Other fully eligible plan participants (431)
C) Other active plan participants (3,421)
-------
Unfunded status (7,257)
-------
Unrecognized loss 120
Unrecognized transition obligation -0-
-------
Accrued postretirement benefit cost $(7,137)
=======
</TABLE>
Effect of a 1% increase in the medical inflation rate:
<TABLE>
<S> <C>
Increase in the aggregate of the service and
interest cost components of net periodic
postretirement benefit cost $ 61
Increase in the accumulated postretirement
benefit obligation 490
-----
Total $ 551
=====
</TABLE>
The present value of the accumulated benefit obligation assumed a discount rate
of 8.50% in 1994. The rate of increase used in future compensation levels was
6.00% for 1994.
14. Leases
Future minimum rental payments under noncancellable leasehold commitments as of
December 31, 1994, are not material in relation to the consolidated financial
statements.
15. Income Taxes
-21-
<PAGE>
The current and deferred amounts of federal income tax expense at December 31,
1994 were as follows (in thousands):
<TABLE>
<CAPTION>
1994
------
<S> <C>
Current expense $10,961
Deferred expense 77
-------
Total income tax expense $11,038
=======
</TABLE>
The Bancorporation has established a deferred tax liability of $3,703,000 as a
result of the net unrealized gains on securities designated as
available-for-sale under the provisions of FASB No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." See Notes 1 and 3.
The significant components of the Corporation's deferred tax assets and
liabilities at December 31, 1994 were as follows (in thousands):
<TABLE>
<CAPTION>
1994
------
<S> <C>
Deferred tax liabilities:
Accretion on bond discounts, net $ 401
Net unrealized gain on securities
available-for-sale 3,703
-------
Total deferred tax liabilities 4,104
-------
Deferred tax assets:
Excess book bad debt 3,382
Postretirement benefits 3,108
New Jersey Corporate business tax 1,281
Book over tax depreciation 496
Book over tax core deposit premium
amortization 525
Other 207
-------
Total deferred tax assets 8,999
-------
Net deferred tax asset $ 4,895
=======
</TABLE>
As required by FASB No. 109, the Bancorporation has determined that it is not
required to establish a valuation reserve for the deferred tax asset account
since it is "more likely than not" that the deferred tax asset will be realized
through a carryback to taxable income in prior years, future reversals of
existing taxable temporary differences, future taxable income and tax planning
strategies. The conclusion that it is "more likely than not" that the deferred
tax asset will be realized is based on the history of earnings and the prospects
for continued growth including an analysis of potential uncertainties that may
affect future operating results. Management believes that future taxable income
will be sufficient to realize the benefits of temporary deductible differences
that cannot be realized through carryback to prior years or through the reversal
of future temporary taxable differences. Management will continue to review the
tax criteria related to the recognition of deferred tax assets.
The significant components of the 1994 deferred expense were as follows (in
thousands):
<TABLE>
<CAPTION>
1994
------
<S> <C>
Deferred income tax expense $ 77
=====
</TABLE>
A reconciliation between the amount of reported total federal income tax expense
and the amount computed by multiplying the applicable statutory federal income
tax rate to income before taxes is as follows (in thousands):
<TABLE>
<CAPTION>
1994 %
------ -----
<S> <C> <C>
Tax expense at statutory rate $12,191 35.0%
Tax-exempt interest (358) (1.0)
Other - net (795) (2.3)
-------- -----
Total federal tax expense $11,038 31.7%
======= =====
</TABLE>
Income tax expense applicable to security gains for the year ended December 31,
1994 was zero.
-22-
<PAGE>
16. Commitments and Contingent Liabilities
The Bancorporation may, from time to time, be a defendant in legal proceedings
relating to the conduct of its business. In the normal course of business there
also are outstanding various contingent liabilities, such as commitments to
extend credit (including standby letters of credit in the amount of $7,327,000
at December 31, 1994) which are not reflected in the accompanying consolidated
financial statements. In the judgement of management, the consolidated financial
position of the Bancorporation and its subsidiaries will not be affected
materially by the final outcome of any present legal proceedings or other
contingent liability.
The Bancorporation is party to financial obligations with off-balance sheet risk
incurred in the normal course of business. These instruments are commitments to
extend credit in the form of loans totalling $185,847,000 at December 31, 1994.
The exposure of the Bancorporation to credit loss in the event of
non-performance by the other party to these financial instruments is equal to
the contractual amount. The Bancorporation uses the same credit policies in
granting these commitments as it does for loans presently outstanding.
Collateral is obtained when deemed appropriate. These commitments do not
necessarily represent future obligations. A substantial portion of the
commitments historically have remained unused, or if used, would be secured by
mortgages on real estate.
17. Parent Company Only Financial Statements
The condensed financial statements of the parent company only are presented
below (in thousands):
<TABLE>
<CAPTION>
December 31,
1994
--------
<S> <C>
Balance Sheet
Assets:
Cash $ 91
Securities available-for-sale 25,938
Investment in subsidiaries 156,184
Repurchase agreement 4,075
Other assets 19
--------
Total assets $186,307
========
Liabilities and Stockholders' Equity:
Liabilities $ 4,724
Stockholders' Equity 203,185
Less: treasury stock, at cost-
376,270 shares 21,602
--------
Total stockholders' equity 181,583
--------
Total liabilities and
stockholders' equity $186,307
========
<CAPTION>
Year Ended December 31, 1994
--------
<S> <C>
Statement of Income
Income:
Dividends from bank subsidiary $ 8,212
Other dividend income 589
Interest income 105
--------
Total income 8,906
--------
Other expenses 395
--------
Income before income tax benefit and equity
in undistributed income of subsidiaries 8,511
Income tax benefit (40)
--------
Income before equity in undistributed
income of subsidiaries 8,551
Equity in undistributed income of
subsidiaries 15,241
--------
Net income $ 23,792
========
</TABLE>
-23-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1994
------
<S> <C>
Statement of Cash Flow
Operating Activities:
Net income $23,792
Adjustments to reconcile net income
to net cash from operating activities:
Equity in undistributed income
of subsidiaries (15,241)
Decrease in other assets 1,934
Decrease in other liabilities (14)
-------
Total adjustments (13,321)
-------
Net cash from operating activities 10,471
-------
Investing Activities:
Purchases of securities
available-for-sale (115)
Net increase in short-term
investments (1,945)
-------
Net cash applied to investing activities (2,060)
-------
Financing Activities:
Payments to acquire treasury stock (881)
Dividends paid (8,537)
Proceeds from exercise of
stock options 1,000
-------
Net cash applied to financing activities (8,418)
-------
Net decrease in cash and cash
equivalents (7)
-------
Cash and cash equivalents at beginning
of year 98
-------
Cash and cash equivalents at end
of year $ 91
=======
</TABLE>
18. Quarterly Financial Data (unaudited)
The following is a summary of quarterly financial data of the Bancorporation
and, in the opinion of management, reflects necessary adjustments for a fair
presentation of such data (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------
December 31 September 30 June 30 March 31
------------- ------------ ------- ----------
1994
- ----
<S> <C> <C> <C> <C>
Total interest income $25,644 $25,590 $25,058 $24,518
Total interest expense 9,179 9,074 8,434 7,893
------- ------- ------- -------
Net interest income $16,465 $16,516 $16,624 $16,625
======= ======= ======= =======
Provision for loan losses $ -0- $ (200) $ (325) $ (300)
======= ======= ======= =======
Income before income
taxes $ 8,516 $ 8,628 $ 9,029 $ 8,657
Income taxes 2,443 2,647 3,029 2,919
------- ------- ------- -------
Net income $ 6,073 $ 5,981 $ 6,000 $ 5,738
======= ======= ======= =======
Net income per share $2.82 $2.80 $2.81 $2.69
===== ===== ===== =====
Average number of
shares outstanding 2,148 2,138 2,136 2,134
===== ===== ===== =====
</TABLE>
-24-
<PAGE>
19. Fair Value of Financial Instruments
A financial instrument is defined as cash, evidence of an ownership interest, or
participation in certain contracts. This definition would include virtually all
assets, liabilities, and off-balance sheet instruments. Fair value is defined as
the amount at which an instrument could be exchanged in a current arms length
transaction between willing parties other than in a forced or liquidation sale
and given sufficient exposure to the marketplace.
The fair value estimates presented are determined based upon relevant
information as well as knowledge about the financial instrument at a particular
time. The Bancorporation utilizes quoted market prices when available. Since
only a limited market exists for a portion of the Bancorporation's financial
instruments, fair value estimates are based on the discounted cash flow method.
This technique takes into account current economic conditions, risk
characteristics, and other factors which warrant consideration. These estimates
are subjective in nature, involve uncertainties, and matters of significant
judgement; and therefore, cannot be determined with exact accuracy. Changes in
assumptions could significantly affect the estimates presented. Additionally,
the fair value estimates disclosed are based upon existing on and off-balance
sheet financial instruments without attempting to estimate the value of any
anticipated future business and only consider assets and liabilities that are
financial instruments.
The methods and assumptions used to estimate the fair value of significant
financial instruments were as follows. Book value is considered to approximate
fair value for cash and due from banks, money market investments, federal funds
sold, and deposit liabilities with no defined maturity. Quoted market prices are
generally used to ascertain fair values of investment securities and securities
available-for-sale.
The fair value of loans is calculated by discounting estimated future cash flows
at applicable rates. For time deposit liabilities and securities sold under
repurchase agreements, fair value was estimated by discounting future cash flows
using currently offered market rates for obligations of similar remaining
maturities.
The fair value of both commitments to extend credit and standby letters of
credit are estimated using fees currently charged to enter into similar
agreements. The value of these amounts, which are considered immaterial, are
deemed to approximate fair value and are included in the value of the related
financial instrument. If funded, the fair value of these commitments is equal to
the commitment amount. The estimated fair value of financial instruments and
their related carrying values at December 31, 1994 were as follows (in
thousands):
<TABLE>
<CAPTION>
Estimated Carrying
Fair Value Value
---------- ----------
<S> <C> <C>
1994
- ----
Financial assets:
Cash and due from banks $ 93,221 $ 93,221
Money market investments 2,555 2,555
Securities available-for-sale 100,070 100,070
Investment securities 931,639 965,239
Federal funds sold 115,000 115,000
Net loans 359,761 363,284
Financial liabilities:
Deposits $1,353,491 $1,354,738
Securities sold under
repurchase agreements 110,457 110,141
Other borrowed funds 12,341 12,341
</TABLE>
20. Events (Unaudited) Subsequent to the Date of the Independent Auditors'
Report
On May 24, 1995 the Bancorporation announced that it signed a definitive merger
agreement with Meridian Bancorp, Inc., Reading, Pennsylvania ("Meridian"),
pursuant to which the Bancorporation will be acquired in a tax-free, stock-for-
stock merger. Pursuant to the merger, each of the outstanding shares of the
Bancorporation common stock will be exchanged for five (5) shares of Meridian
common stock. The Bancorporation will be merged into Meridian and the
Bancorporation's wholly-owned subsidiary, the Bank, will be merged into
Meridian's wholly-owned subsidiary, Meridian Bank, New Jersey. The acquisition
is conditioned upon necessary bank regulatory approvals, shareholder approval
and other customary terms and conditions. In connection with the merger
agreement the Bancorporation also granted Meridian an option to acquire 375,000
shares of the Bancorporation stock at $125 per share under certain
circumstances.
On October 10, 1995, Meridian announced the signing of a definitive merger
agreement with CoreStates Financial Corp (CoreStates) of Philadelphia,
Pennsylvania. Under the terms of this agreement, each share of Meridian common
stock will be exchanged for 1.225 shares of CoreStates common stock and is
dependent upon a similar approval process.
-25-
<PAGE>
[LETTERHEAD FOR KPMG Peat Marwick LLP]
Independent Auditors' Report
The Board of Directors and Stockholders
United Counties Bancorporation:
We have audited the accompanying consolidated balance sheet of United Counties
Bancorporation and subsidiaries as of December 31, 1994, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flow for the year then ended. These consolidated financial statements are the
responsibility of the Bancorporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of United Counties
Bancorporation and subsidiaries at December 31, 1994, and the results of their
operations and their cash flow for the year then ended in conformity with
generally accepted accounting principles.
As discussed in notes 1 and 3 to the consolidated financial statements, the
Bancorporation adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," in 1994.
KPMG Peat Marwick LLP
January 13, 1995
-26-
