<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 June 30, 1996 Commission file number 0-6879
CORESTATES FINANCIAL CORP
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-189716
- ---------------------------------------- ------------------------
(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)
215-973-3827
------------
(Registrants telephone number,
including area code)
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 August 1, 1996: 222,636,131
1
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Item 1 - FINANCIAL INFORMATION
Consolidated Balance Sheets as of June 30, 1996 and
December 31, 1995...................................................... 3
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 1996 and 1995.................................... 4
Consolidated Statements of Changes in Shareholders'
Equity for the Six Months Ended June 30, 1996 and 1995................. 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1996 and 1995................................ 6
Notes to the Consolidated Financial Statements......................... 7-8
Item 2 - Managements Discussion and Analysis of Financial
Condition and Results of Operations.................................... 9-38
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K....................................... 39
SIGNATURE........................................................................ 40
EXHIBITS 10.1, 10.2, 10.3, 10.4(A), 10.4(B), 11, 12.1, 12.2, 27
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
- ------
Cash and due from banks..................................... $ 2,943,791 $ 3,662,143
Time deposits, principally Eurodollars...................... 2,073,097 1,909,260
Federal funds sold and securities purchased under
agreements to resell...................................... 204,775 719,937
Trading account securities, at fair value................... 87,234 147,218
Investments available-for-sale, at fair value............... 2,377,510 2,572,315
Investments held-to-maturity (fair value:
1996 - $2,216,784; 1995 - $3,075,964)..................... 2,218,930 3,059,917
Loans, net of unearned discounts of $213,284 in 1996
and $232,077 in 1995...................................... 31,950,081 31,714,152
Less: Allowance for loan losses.......................... (705,178) (670,265)
------------- -------------
Net loans....................................... 31,244,903 31,043,887
------------- -------------
Due from customers on acceptance............................ 432,547 560,707
Premises and equipment...................................... 642,074 664,279
Other assets................................................ 1,442,876 1,657,579
------------- -------------
Total assets.................................... $ 43,667,737 $ 45,997,242
============= =============
LIABILITIES
- -----------
Deposits:
Domestic:
Non-interest bearing.................................... $ 8,509,501 $ 8,937,147
Interest bearing........................................ 23,078,335 23,883,726
Overseas branches and subsidiaries........................ 933,024 1,142,947
------------- -------------
Total deposits.................................. 32,520,860 33,963,820
Funds borrowed.............................................. 2,642,020 3,677,013
Bank acceptances outstanding................................ 416,843 549,048
Other liabilities........................................... 1,711,208 1,719,697
Long-term debt.............................................. 2,477,773 2,212,099
------------- -------------
Total liabilities............................... 39,768,704 42,121,677
------------- -------------
COMMITMENTS AND CONTINGENT LIABILITIES
- --------------------------------------
SHAREHOLDERS EQUITY
- -------------------
Preferred stock: authorized 10.0 million shares; no
shares issued.............................................
Common stock: $1 par value; authorized 350.0 million
shares; issued 222.029 million shares in 1996 and
230.231 million shares in 1995 (including treasury shares of
0.145 million in 1996 and 7.824 million in 1995 and unallocated
shares held by the Employee Stock Ownership Plan ("ESOP")
of 2.266 million in 1996 and 2.328 million in 1995)....... 222,029 230,231
Other common shareholders' equity, net...................... 3,677,004 3,645,334
------------- -------------
Total shareholders' equity...................... 3,899,033 3,875,565
------------- -------------
Total liabilities and shareholders' equity...... $ 43,667,737 $ 45,997,242
============= =============
</TABLE>
Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date.
See accompanying notes to the consolidated financial statements.
3
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ----------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME
- ---------------------------
Interest and fees on loans:
Taxable income........................................ $ 699,391 $ 732,869 $1,402,696 $1,432,688
Tax exempt income..................................... 6,322 7,751 13,400 15,370
Interest on investment securities:
Taxable income........................................ 68,492 92,607 140,589 186,779
Tax exempt income..................................... 5,954 8,058 12,097 16,426
Interest on time deposits in banks......................... 27,449 34,615 52,692 65,542
Other interest income...................................... 8,147 8,907 17,999 18,590
--------- --------- ---------- ----------
Total interest income....................... 815,755 884,807 1,639,473 1,735,395
--------- --------- ---------- ----------
INTEREST EXPENSE
- ----------------
Interest on deposits....................................... 207,962 242,911 422,420 470,931
Interest on funds borrowed................................. 35,842 56,373 75,599 110,598
Interest on long-term debt................................. 38,556 37,919 77,405 74,939
--------- --------- ---------- ----------
Total interest expense...................... 282,360 337,203 575,424 656,468
--------- --------- ---------- ----------
NET INTEREST INCOME......................... 533,395 547,604 1,064,049 1,078,927
Provision for losses on loans.............................. 110,000 34,661 148,767 67,727
--------- --------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOSSES ON LOANS................... 423,395 512,943 915,282 1,011,200
--------- --------- ---------- ----------
NON-INTEREST INCOME
- -------------------
Service charges on deposit accounts........................ 60,951 61,155 120,277 120,194
Trust income............................................... 41,601 40,856 82,775 81,108
Fees for international services............................ 24,772 23,823 47,675 46,352
Debit and credit card fees................................. 18,946 21,470 37,263 40,221
Income from investment in EPS, Inc......................... 7,335 7,503 14,723 33,996
Gains on trading account securities........................ 6,455 9,451 13,117 18,644
Securities gains........................................... 17,393 5,512 24,341 23,516
Other operating income..................................... 51,174 44,127 97,896 83,469
--------- --------- ---------- ----------
Total non-interest income................... 228,627 213,897 438,067 447,500
--------- --------- ---------- ----------
NON-FINANCIAL EXPENSES
- ----------------------
Salaries, wages and benefits............................... 206,541 229,354 414,780 468,381
Net occupancy.............................................. 37,561 40,472 80,345 81,914
Equipment expenses......................................... 30,909 29,645 60,933 58,525
Restructuring and merger-related charges................... 103,676 28,963 117,802 138,963
Other operating expenses................................... 132,818 152,529 253,827 296,210
--------- --------- ---------- ----------
Total non-financial expenses................ 511,505 480,963 927,687 1,043,993
--------- --------- ---------- ----------
INCOME BEFORE INCOME TAXES................................. 140,517 245,877 425,662 414,707
- ---------------------------
Provision for income taxes................................. 60,920 87,727 168,921 146,388
--------- --------- ---------- ----------
NET INCOME................................................. $ 79,597 $ 158,150 $ 256,741 $ 268,319
- ---------- ========= ========= ========== ==========
Average common shares outstanding.......................... 219,478 222,440 219,495 224,255
========= ========= ========== ==========
PER COMMON SHARE DATA
- ---------------------
Net income................................................. $0.36 $0.71 $1.17 $1.20
===== ===== ===== =====
Cash dividends declared.................................... $0.42 $0.34 $0.84 $0.68
===== ===== ===== =====
</TABLE>
See accompanying notes to the consolidated financial statements.
4
a
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (unaudited)
(in thousands)
<TABLE>
<CAPTION>
Common Capital Retained
stock surplus earnings
----- ------- --------
<S> <C> <C> <C>
Six Months Ended June 30, 1995
- ------------------------------
Balances at beginning of year................................... $229,827 $1,200,658 $2,360,312
Net income...................................................... 268,319
Net change in unrealized gain on investments
available-for-sale, net of tax................................. 26,889
Treasury shares acquired (8,133 shares).........................
Repurchase and retirement of common stock (156 shares).......... (156) (1,371) (1,416)
Common stock issued under employee benefit plans
(184 new shares; 2,247 treasury shares)........................ 182 1,469 (21,458)
Common stock issued under dividend reinvestment
plan (234 treasury shares)..................................... (221) (2)
Purchases of shares for ESOP (876 shares).......................
ESOP shares committed for release (61 shares)................... 130
Cash paid for fractional shares issued.......................... (24)
Foreign currency translation adjustments........................ 58
Common dividends declared....................................... (139,940)
-------- ---------- ----------
Balances at end of period....................................... $229,853 $1,200,665 $2,492,738
======== ========== ==========
Six Months Ended June 30, 1996
- ------------------------------
Balances at beginning of year................................... $230,231 $1,225,167 $2,724,298
Net income...................................................... 256,741
Net change in unrealized gain on investments
available-for-sale, net of tax................................. (20,837)
Treasury shares acquired (712 shares)...........................
Treasury shares issued in merger (7,300 shares)................. (7,300) (33,288) (192,042)
Repurchase and retirement of common stock (1,340 shares)........ (1,340) (43,559) (12,804)
Common stock issued under employee benefit plans
(438 new shares ) (890 treasury shares)........................ 438 23,301 (14,676)
Common stock issued under dividend reinvestment plan
(202 treasury shares).......................................... 557 (1)
ESOP shares committed for release (61 shares)................... 886
Cash paid for fractional shares issued.......................... (296)
Foreign currency translation adjustments........................ 867
Common dividends declared....................................... (179,533)
-------- ---------- ----------
Balances at end of period....................................... $222,029 $1,173,064 $2,561,717
======== ========== ==========
<CAPTION>
Unallocated
Treasury ESOP
stock shares Total
---------- ----------- -------
<S> <C> <C> <C>
Six Months Ended June 30, 1995
- ------------------------------
Balances at beginning of year................................... $ (24,297) $(35,568) $3,730,932
Net income...................................................... 268,319
Net change in unrealized gain on investments
available-for-sale, net of tax................................. 26,889
Treasury shares acquired (8,133 shares)......................... (256,538) (256,538)
Repurchase and retirement of common stock (156 shares).......... (2,943)
Common stock issued under employee benefit plans
(184 new shares; 2,247 treasury shares)........................ 68,253 48,446
Common stock issued under dividend reinvestment
plan (234 treasury shares)..................................... 6,612 6,389
Purchases of shares for ESOP (876 shares)....................... (20,922) (20,922)
ESOP shares committed for release (61 shares)................... 1,412 1,542
Cash paid for fractional shares issued.......................... (24)
Foreign currency translation adjustments........................ 58
Common dividends declared....................................... (139,940)
--------- -------- ----------
Balances at end of period....................................... $(205,970) $(55,078) $3,662,208
========= ======== ==========
Six Months Ended June 30, 1996
- ------------------------------
Balances at beginning of year................................... $(250,465) $(53,666) $3,875,565
Net income...................................................... 256,741
Net change in unrealized gain on investments
available-for-sale, net of tax................................. (20,837)
Treasury shares acquired (712 shares)........................... (28,294) (28,294)
Treasury shares issued in merger (7,300 shares)................. 232,630 0
Repurchase and retirement of common stock (1,340 shares)........ (57,703)
Common stock issued under employee benefit plans
(438 new shares ) (890 treasury shares)........................ 33,079 42,142
Common stock issued under dividend reinvestment plan
(202 treasury shares).......................................... 7,368 7,924
ESOP shares committed for release (61 shares)................... 1,571 2,457
Cash paid for fractional shares issued.......................... (296)
Foreign currency translation adjustments........................ 867
Common dividends declared....................................... (179,533)
--------- -------- ----------
Balances at end of period....................................... $ (5,682) $(52,095) $3,899,033
========= ======== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
(in thousands) Six Months Ended
June 30,
-----------------------------
Operating Activities 1996 1995
- -------------------- -------- --------
<S> <C> <C>
Net income................................................................. $ 256,741 $ 268,319
Adjustments to reconcile net income to net cash
provided by operating activities:
Restructuring and merger-related charges................................ 117,802 138,963
Provision for losses on loans........................................... 148,767 67,727
Provision for losses and writedowns on OREO............................. 2,359 8,862
Depreciation and amortization........................................... 63,197 65,537
Securities gains........................................................ (24,341) (23,516)
Other gains............................................................. -- (19,000)
Deferred income tax benefit............................................. (34,778) (38,698)
Increase in due to factored clients..................................... (279) (118,764)
(Increase) decrease in accrued interest receivable...................... 43,560 (1,710)
Decrease in trading account assets...................................... 59,984 97,165
Increase in accrued interest payable.................................... 70,639 37,583
Other................................................................... 55,975 (116,694)
---------- ----------
Net Cash Provided By Operating Activities............................ 759,626 365,774
---------- ----------
Investing Activities
- --------------------
Net increase in loans...................................................... (1,052,437) (1,090,277)
Proceeds from sales of loans............................................... 672,115 591,503
Loans originated or acquired - non-bank subsidiary......................... (18,539,137) (17,461,898)
Principal collected on loans - non-bank subsidiary......................... 18,477,044 17,211,619
Net increase in time deposits, principally eurodollars..................... (163,837) (138,396)
Purchases of investments held-to-maturity.................................. (161,735) (440,622)
Purchases of investments available-for-sale................................ (692,551) (225,092)
Proceeds from maturities of investments available-for-sale................. 418,255 21,740
Proceeds from maturities of investments held-to-maturity................... 737,662 1,107,875
Proceeds from sales of investments available-for-sale...................... 686,393 303,241
Net decrease in Federal funds sold and securities purchased under agreements
to resell................................................................ 515,162 668,290
Purchases of premises and equipment........................................ (52,624) (53,097)
Proceeds from sales and paydowns on OREO................................... 13,759 35,628
Other...................................................................... 16,038 (5,087)
---------- ----------
Net Cash Provided by Investing Activities................................ 874,107 525,427
---------- ----------
Financing Activities
- --------------------
Net decrease in deposits................................................... (1,033,921) (891,425)
Payment for sales of deposits.............................................. (368,110) __
Proceeds from issuance of long-term debt................................... 381,070 355,159
Retirement of long-term debt............................................... (115,719) (186,660)
Net increase (decrease) in short-term funds borrowed....................... (1,034,826) 304,448
Cash dividends paid........................................................ (144,352) (142,486)
Purchases of treasury stock................................................ (28,294) (256,538)
Repurchase and retirement of common stock.................................. (57,703) (2,943)
Common stock issued under employee benefit plans........................... 42,142 48,446
Other...................................................................... 7,628 6,365
---------- ----------
Net Cash Used In Financing Activities (2,352,085) (765,634)
---------- ----------
Decrease In Cash And Due From Banks...................................... (718,352) 125,567
-----------------------------------
Cash and due from banks at January 1,.................................... 3,662,143 3,024,589
---------- ----------
Cash and due from banks at June 30,...................................... $ 2,943,791 $ 3,150,156
=========== ===========
Supplemental Disclosure of Cash Flow Information
- ------------------------------------------------
Cash paid during the period for:
Interest................................................................. $ 504,785 $ 619,110
=========== ===========
Income taxes............................................................. $ 150,588 $ 148,028
=========== ===========
Net cash received (paid) on interest rate swaps............................ $ 35,256 $ (3,671)
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
6
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 1996
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of CoreStates
Financial Corp ("CoreStates") have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (comprising only normal recurring accruals)
necessary for a fair presentation have been included. The financial statements
include the consolidated accounts of Meridian Bancorp, Inc. ("Meridian") which
was acquired on April 9, 1996 in a transaction accounted for under the pooling
of interests method of accounting. On February 23, 1996, Meridian acquired
United Counties Bancorporation ("United Counties") in a transaction accounted
for as a pooling of interests. The consolidated accounts of Meridian include
United Counties for all periods presented. Certain amounts in prior periods have
been reclassified for comparative purposes. Operating results for the six-month
period ended June 30, 1996 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1996.
NOTE B -- LOAN PORTFOLIO
Loans, net of unearned discounts, at June 30, 1996 and December 31, 1995
consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
Domestic: 1996 1995
------------ -----------------
<S> <C> <C>
Commercial, industrial and other............................... $13,298,495 $12,597,470
Real estate:
Construction and development................................ 570,544 607,845
Residential................................................. 5,191,707 5,648,661
Other....................................................... 4,435,718 4,712,473
----------- -----------
Total real estate....................................... 10,197,969 10,968,979
----------- -----------
Consumer:
Installment................................................. 2,773,985 2,758,468
Credit card................................................. 1,702,988 1,681,649
----------- -----------
Total consumer.......................................... 4,476,973 4,440,117
----------- -----------
Financial institutions......................................... 1,053,651 961,289
Factoring receivables.......................................... 465,780 557,272
Lease financing................................................ 1,194,353 1,167,356
----------- -----------
Total domestic.......................................... 30,687,221 30,692,483
----------- -----------
Foreign........................................................... 1,262,860 1,021,669
----------- -----------
Total loans............................................. $31,950,081 $31,714,152
=========== ===========
</TABLE>
7
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -- continued
June 30, 1996
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 and
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 June 30, 1996 and
December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- -------------
<S> <C> <C>
Standby letters of credit, net of participations............. $ 1,417,204 $ 1,548,551
Commercial letters of credit................................. 1,641,536 1,324,714
Commitments to extend credit................................. 14,894,750 14,565,636
Unused commitments under credit card lines................... 4,009,513 3,872,641
When-issued securities:
Commitments to purchase................................... 58,062 500
Commitments to sell....................................... 138,982 145,000
Whole mortgage loans and securities:
Commitments to purchase................................... 35,673 109,714
Commitments to sell....................................... 14,288 47,259
Loans sold and loan servicing
acquired with recourse.................................... 397,318 434,628
Interest rate futures contracts:
Commitments to purchase................................... 3,163,900 621,000
Commitments to purchase foreign and U. S. currencies......... 2,306,150 1,695,148
Interest rate swaps, notional principal amounts.............. 9,658,212 9,945,840
Interest rate caps and floors:
Written................................................... 716,626 847,323
Purchased................................................. 1,817,789 1,673,023
Tender option bonds.......................................... 176,371 208,103
Treasury float contracts..................................... 384,888 623,738
Other derivatives............................................ 423,156 174,674
</TABLE>
8
<PAGE>
PART I. FINANCIAL INFORMATION -- continued
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY
- -------
Earnings Review - In the second quarter of 1996, CoreStates Financial Corp
---------------
("CoreStates") recorded net income of $79.6 million or $0.36, per share.
"Operating earnings" for the second quarter of 1996, which has been defined for
purposes of this discussion as net income excluding restructuring and merger-
related charges and certain net investment gains, was $193.4 million, or $0.88
per share. This represents a 10.0% increase on a per share basis when compared
to second quarter of 1995 operating earnings of $177.0 million, or $0.80 per
share. Operating earnings for the second quarter of 1995 exclude a net
restructuring charge. The restructuring and merger-related charges and the net
investment gains are discussed below. All financial information herein has been
restated to include Meridian Bancorp, Inc. (Meridian) which was acquired on
April 9, 1996 in a transaction accounted for under the pooling of interests
method of accounting. The financial information for Meridian includes United
Counties Bancorporation (United Counties) which was acquired by Meridian on
February 23, 1996 in a transaction that was accounted for as a pooling of
interests.
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 Six Months Ended
June 30, Percentage June 30, Percentage
-------------------- Increase ---------------- Increase
1996 1995 (Decrease) 1996 1995 (Decrease)
--------- --------- ---------- --------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net interest income (taxable equivalent basis)..... $ 540.0 $ 556.2 (2.9)% $1,077.9 $1,096.1 (1.7)%
======== ======== ======== ========
Net income......................................... $ 79.6 $ 158.1 (49.7) $ 256.7 $ 268.3 (4.3)
Exclude the following after-tax items:
Restructuring and merger-related charges.......... 123.3 18.9 137.1 88.9
Net investment gains.............................. (9.5) - (9.5) (7.6)
EPS joint venture gain............................ - - - (11.8)
-------- -------- -------- --------
Operating earnings................................. $ 193.4 $ 177.0 9.3 $ 384.3 $ 337.8 13.8
======== ======== ======== ========
Operating earnings per share....................... $ 0.88 $ 0.80 10.0 $ 1.75 $ 1.51 15.9
======== ======== ======== ========
Return on average equity (a)....................... 20.22% 19.29% 19.88% 18.37%
Return on average assets (a)....................... 1.78 1.58 1.77 1.52
Net interest margin................................ 5.56 5.52 5.54 5.47
Average common shares outstanding.................. 219.478 222.440 219.495 224.255
</TABLE>
- ----------------------
(a) Calculated based on "Operating earnings."
The $16.4 million improvement in operating earnings for the second quarter of
1996, as compared to the second quarter of 1995, was primarily due to a $44.2
million, or 9.8%, decrease in non-financial expenses. CoreStates' expense to
revenue ratio (total operating expenses, excluding other real estate owned
expenses, as a percentage of total revenue) was 53.95% in the second quarter of
1996. This compares to an expense ratio of 58.40% in the second quarter of 1995.
A steady decline in CoreStates' expense ratio has resulted from process redesign
and merger-related efficiencies. Partially offsetting the impact of reduced non-
financial expenses was a decline in net interest income. Net interest income for
the second quarter of 1996 was down $16.2 million, or 2.9% from the second
quarter of 1995 primarily as a result of a $1.4 billion decrease in average
earning assets. The net interest margin for the second quarter of 1996 increased
four basis points to 5.56% as the impact of a $1.8 billion reduction on average
in the relatively lower yielding investment securities portfolio was offset by
an increase of $540 million in average loans.
Key performance measures, based on operating earnings, continued to be
strong. Returns on average equity and assets were 20.22% and 1.78%,
respectively, in the second quarter of 1996, compared to 19.29% and 1.58%,
respectively, in the second quarter of 1995.
9
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
SUMMARY - continued
- -------
For the six months ended June 30, 1996, CoreStates recorded net income of
$256.7 million or $1.17 per share. Operating earnings for the 1996 six-month
period, defined as net income excluding restructuring and merger-related charges
and certain net investment gains, were $384.3 million, or $1.75 per share. This
represents a 15.9% increase on a per share basis when compared to operating
earnings of $337.8 million, or $1.51 per share for the 1995 six-month period.
Operating earnings for the 1995 six-month period exclude net restructuring
charges, gains on the exchange of equity securities and a gain related to
changes in an investment in an affiliate joint venture. The $46.5 million
improvement in operating earnings for the first six months of 1996 was primarily
due to a 10.5% decrease in non-financial expenses.
Merger of Meridian Bancorp, Inc. - On April 9, 1996, CoreStates acquired
- -------------------------------
Meridian Bancorp, Inc. ("Meridian") in a transaction accounted for under the
pooling of interests method of accounting. Meridian was a Pennsylvania bank
holding company with approximately $15.2 billion in assets and $12.1 billion in
deposits at March 31, 1996. Based on the closing share price of April 9, 1996,
the transaction was valued at approximately $3.2 billion. In this transaction,
approximately 81.1 million shares of CoreStates common stock were issued to
Meridian shareholders. This in-market acquisition is expected to achieve annual
pre-tax operating efficiencies of approximately $186.0 million, and is expected
to add to earnings per share in 1997.
Restructuring and Merger-Related Charges - In the second quarter of 1996,
- ----------------------------------------
CoreStates recorded net restructuring and merger-related charges of $174.7
million pre-tax resulting from the Meridian acquisition. Included in that amount
was a $70.0 million provision for loan losses recorded in connection with a
change in strategic direction related to Meridian's problem assets and to
conform Meridian's consumer lending charge-off policies to those of CoreStates.
(See Provision and Allowance for Loan Losses on page 23.) In the first and
second quarters of 1995, restructuring charges related to corporate-wide process
redesign plans were recorded at CoreStates and Meridian, respectively. A summary
of net restructuring and merger-related charges (credits), excluding the $70.0
million provision for loan losses, recorded for the three and six months ended
June 30, 1996 and 1995 were as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Meridian merger-related restructuring charge................... $ 144.9 $ - $ 144.9 $ -
Meridian merger-related implementation costs................... 4.0 - 4.0 -
United Counties merger-related charge.......................... - - 16.6 -
Process redesign restructuring charges........................ - 32.0 - 142.0
Gains on sales of branches.................................... (41.1) - (43.0) -
Pension curtailment gains..................................... (4.1) (3.0) (4.7) (3.0)
------ ------ ------ ------
Total.................................................... $ 103.7 $ 29.0 $ 117.8 $ 139.0
======= ======= ======= =======
</TABLE>
The components of the $144.9 million Meridian merger-related
charge recorded in the second quarter of 1996 were as follows (in millions):
<TABLE>
<CAPTION>
Requiring
Cash
Total Outflow(a)
----- ---------
<S> <C> <C>
Severance costs.................... $ 60 $ 60
Branch closing costs............... 34 13
Office reconfiguration costs....... 19 3
Merger transaction costs........... 10 10
Systems consolidation writedowns... 7 -
Miscellaneous...................... 15 15
---- ----
Total......................... $145 $101
==== ====
</TABLE>
- -------------------
(a) CoreStates' liquidity will not be significantly affected by these cash
outflows.
10
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
SUMMARY - continued
- -------
Restructuring and Merger-Related Charges - continued
- ----------------------------------------
The sale of eleven former Meridian Bank PA branches in Berks and Lebanon
counties in Southeastern Pennsylvania was completed on June 28, 1996. The sale
was necessary to satisfy a condition of regulatory approval of the Meridian
merger contained in an agreement between CoreStates, the U.S. Department of
Justice and the Attorney General for the Commonwealth of Pennsylvania.
Approximately $380 million of deposits and $120 million of loans were included
in the sale, which generated a pre-tax gain of $40.1 million. An additional gain
of $1.0 million was recorded in the second quarter of 1996 on the sale of
branches which were sold as a result of the 1995 process redesigns.
The severance costs relate to the separation package which will be paid to
approximately 1,350 employees who have been displaced as a result of the
Meridian consolidation. Cash payments under separation packages commenced in
April 1996 and will continue for varying terms. Generally, no lump sum severance
payments will be made. The office reconfiguration charge relates to the costs of
asset write-offs and lease buyouts that will be incurred principally in the
process of consolidating CoreStates and Meridian operations and support staff.
The branch closing charge relates to the costs of asset write-offs and lease
buyouts that will be incurred in the process of consolidating and closing
approximately 95 branch offices.
Future cash outflows to be incurred in implementing the Meridian
consolidation, which were not included in the second quarter of 1996
restructuring charge, are expected to include approximately $28 million for
capital expenditures and approximately $21 million in implementation costs.
Since April 1996, the amount of capital expenditures and implementation costs
that were incurred related to the Meridian consolidation were approximately $7
and $4 million, respectively. As implementation costs are incurred, such costs
will be recorded in the restructuring and merger-related charges line in the
income statement. Implementation of the Meridian consolidation is expected to be
essentially complete by the end of 1996. By early 1997, the consolidation is
expected to generate cost efficiencies which will reduce expenses by $186
million.
Implementation of the 1995 process redesign plans was substantially completed
during the second quarter of 1996. Certain implementation costs associated with
the 1995 process redesign plans will be charged against future operating
earnings, but such charges are not expected to be material.
The following table summarizes the activity in the aggregate accrual for
restructuring and merger-related charges for the second quarter of 1996 and the
first six months of 1996 (in millions):
<TABLE>
<CAPTION>
Second Six
Quarter Months
-------- -------
<S> <C> <C>
Balance at beginning of period....... $ 66 $ 83
Provision charged against income..... 145 145
Cash outflow(a)...................... (28) (44)
Writedowns of assets................. (6) (7)
---- ----
Balance at end of period............. $177 $177
==== ====
</TABLE>
- --------------------
(a) CoreStates' liquidity has not been significantly affected by these
cashflows.
11
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
SUMMARY - continued
- -------
Net Investment Gains - In the second quarter of 1996, CoreStates recorded
--------------------
net pre-tax gains of $14.6 million on sales of investment securities, including
an $18.8 million pre-tax gain on the sale of an equity investment in a foreign
consumer finance company. That gain was partially offset by losses on the sale
of a portion of a second foreign equity investment and on the sale of securities
related to a realignment of Meridian's investment porfolio to conform to
CoreStates' interest rate risk policies. In the first quarter of 1995,
CoreStates recorded pre-tax gains of $12.0 million on the exchange of equity
securities.
Gain on Affiliate Joint Venture - 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, in the first quarter of 1995.
Cautionary Statement
Certain statements contained herein are not based on historical facts and are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements which are based on
various assumptions (some of which are beyond CoreStates' control), may be
identified by reference to a future period, or periods, or by the use of
forward-looking terminology such as "may","will", "believe", "expect",
"estimate", "anticipate", "continue", or similar terms or variations on those
terms, or the negative of those terms. Actual results could differ materially
from those set forth in forward-looking statements. Factors that could cause
actual results to differ materially from those in the forward-looking statements
include, but are not limited to: the global, national and regional economies
where CoreStates conducts operations; economic growth; governmental monetary
policy including interest rate policies of the Federal Reserve Board; sources
and costs of funds; levels of interest rates; inflation rates; market capital
spending; technological change; the state of securities and capital markets;
acquisitions; consumer spending and savings; expense levels; and tax,
securities, and banking laws and incentives.
12
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
BUSINESS LINE RESULTS
- ---------------------
CoreStates' five core business segments are: Corporate Banking; Regional
Banking; Retail Credit; Trust and Asset Management; and Third Party Processing.
The following tables present the performance results for the three and six
months ended June 30, 1996 and 1995. Each segment is comprised of well defined
business lines with market or product-specific missions.
Meridian is shown as a separate entity. During 1996, as the new company is
fully integrated into CoreStates, the respective business components of Meridian
will be blended into the existing business lines. It is expected that there will
be a one to two quarter transition period before complete business line
reporting can be established.
Three Months Ended June 30,
($ in millions, taxable equivalent basis)
<TABLE>
<CAPTION>
Corporate Regional Retail Trust and Asset
Banking Banking Credit Management
------------------- --------------------- ------------------- ------------------
1996 1995 1996 1995 1996 1995 1996 1995
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income................ $ 126.5 $ 128.3 $ 162.8 $ 179.1 $ 54.1 $ 53.4 $ 6.0 $ 7.4
Provision for losses on loans...... 5.0 6.9 2.8 1.9 20.6 16.0 0.2 0.3
Non-interest income................ 41.8 42.1 39.1 38.3 14.3 16.0 25.0 24.2
Non-financial expenses............. 76.3 84.4 122.4 138.4 31.6 32.6 22.3 25.6
------- ------- -------- ------- ------- ------- ------- -------
Income before income taxes......... 87.0 79.1 76.7 77.1 16.2 20.8 8.5 5.7
Income tax expense................. 32.1 29.3 27.9 28.4 5.3 7.9 3.1 2.1
------- ------- -------- ------- ------- ------- ------- -------
Net income......................... $ 54.9 $ 49.8 $ 48.8 $ 48.7 $ 10.9 $ 12.9 $ 5.4 $ 3.6
======= ======= ======== ======= ======= ======= ======= =======
Return on assets................... 1.77% 1.72% 2.33% 2.50% 1.12% 1.39% 4.03% 2.99%
Return on equity................... 28.27 29.12 47.18 47.64 21.39 26.13 98.72 57.76
Average assets..................... $12,483 $11,600 $ 8,435 $ 7,818 $ 3,917 $ 3,714 $ 539 $ 483
Average equity..................... $ 781 $ 686 $ 416 $ 410 $ 205 $ 198 $ 22 $ 25
<CAPTION>
Third Party
Processing Corporate Center Meridian Total
------------------- --------------------- ------------------- ------------------
1996 1995 1996 1995 1996 1995 1996 1995
------ ------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income................ $ (1.2) $ (1.4) $ 16.6 $ 16.4 $ 175.2 $ 173.0 $ 540.0 $ 556.2
Provision for losses on loans...... - - 70.0(a) - 11.4 9.6 110.0 34.7
Non-interest income................ 58.6 47.0 (12.9) (22.5) 62.7 68.8 228.6 213.9
Non-financial expenses............. 53.8 44.2 84.5(a) 6.5 120.6 149.3(b) 511.5 481.0
------- ----- -------- ----- ------- ------- ------- -------
Income (loss) before
income taxes.................... 3.6 1.4 (150.8) (12.6) 105.9 82.9 147.1 254.4
Income tax expense (benefit)....... 1.2 0.5 (43.4) (2.9) 41.3 31.0 67.5 96.3
------- ----- -------- ----- ------- ------- ------- -------
Net income (loss).................. $ 2.4 $ 0.9 $ (107.4) $ (9.7) $ 64.6 $ 51.9 $ 79.6 $ 158.1
======= ===== ======== ===== ======= ======= ======= =======
Return on assets................... 6.52% 2.54% (13.10)% (0.83)% 1.76% 1.27% 0.73% 1.41%
Return on equity................... 33.29 12.45 (42.64) (4.27) 18.81 14.63 8.32 17.22
Average assets..................... $148 $142 $3,297 $4,664 $14,776 $16,449 $43,595 $44,870
Average equity..................... $29 $29 $1,013 $911 $1,381 $1,423 $3,847 $3,682
</TABLE>
- -------------------
(a) Includes Meridian merger-related charges of $70.0 million in the provision
for losses on loans and $103.7 million in non-financial expenses. The
combined merger-related charges totaled $123.3 million after-tax.
(b) Includes a restructuring charge of $32.0 million pre-tax, $20.8 million
after-tax, related to corporate-wide process redesigns.
13
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
BUSINESS LINE RESULTS - continued
- ---------------------------------
Six Months Ended June 30,
($ in millions, taxable equivalent basis)
<TABLE>
<CAPTION>
Corporate Regional Retail Trust and Asset
Banking Banking Credit Management
------------------- --------------------- ------------------- ------------------
1996 1995 1996 1995 1996 1995 1996 1995
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income................ $ 249.9 $ 245.8 $ 329.2 $ 353.2 $ 110.1 $ 109.9 $ 12.2 $ 13.7
Provision for losses on loans...... 10.6 13.6 5.6 4.2 39.5 31.7 0.4 0.6
Non-interest income................ 84.7 86.8 73.7 73.2 29.4 30.0 48.7 48.3
Non-financial expenses............. 149.0 162.1 242.5 277.1 63.6 67.1 44.5 52.4
------- ------- ------- ------- ------- ------- ------ ------
Income before income taxes......... 175.0 156.9 154.8 145.1 36.4 41.1 16.0 9.0
Income tax expense................. 64.7 58.1 56.5 53.4 12.0 15.5 5.8 3.4
------- ------- ------- ------- ------- ------- ------ ------
Net income......................... $ 110.3 $ 98.8 $ 98.3 $ 91.7 $ 24.4 $ 25.6 $ 10.2 $ 5.6
======= ======= ======= ======= ======= ======= ======= =======
Return on assets................... 1.82% 1.76% 2.35% 2.43% 1.27% 1.32% 3.40% 2.29%
Return on equity................... 29.15 29.78 47.52 46.23 23.94 24.82 85.47 45.17
Average assets..................... $12,206 $11,297 $ 8,409 $ 7,625 $ 3,864 $ 3,912 $ 604 $ 493
Average equity..................... $ 761 $ 669 $ 416 $ 400 $ 205 $ 208 $ 24 $ 25
<CAPTION>
Third Party
Processing Corporate Center Meridian Total
------------------- --------------------- ------------------- ------------------
1996 1995 1996 1995 1996 1995 1996 1995
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income............... $ (2.5) $ (2.6) $ 30.1 $ 32.4 $ 348.9 $ 343.7 $1,077.9 $1,096.1
Provision for losses on loans..... - - 70.0(b) - 22.7 17.6 148.8 67.7
Non-interest income............... 107.1 110.1(a) (30.8) (27.5) 125.3 126.6 438.1 447.5
Non-financial expenses............ 99.4 83.6 76.8(b) 103.0(c) 251.9(d) 298.7(e) 927.7 1,044.0
------- ------- ------- ------- ------- ------- -------- -------
Income (loss) before
income taxes................... 5.2 23.9 (147.5) (98.1) 199.6 154.0 439.5 431.9
Income tax expense (benefit)...... 1.8 9.0 (34.6) (32.1) 76.5 56.3 182.7 163.6
------- ------- ------- ------- ------- ------- -------- -------
Net income (loss)................. $ 3.4 $ 14.9 $(112.9) $ (66.0) $ 123.1 $ 97.7 $ 256.8 $ 268.3
======= ======= ======= ======= ======= ======= ======== ========
Return on assets.................. 4.72% 20.58% (6.73)% (2.74)% 1.64% 1.20% 1.18% 1.21%
Return on equity.................. 23.58 103.61 (22.41) (13.71) 17.19 14.01 13.28 14.59
Average assets.................... $ 145 $ 146 $ 3,374 $ 4,866 $15,098 $16,444 $ 43,700 $ 44,783
Average equity.................... $ 29 $ 29 $ 1,013 $ 971 $ 1,440 $ 1,406 $ 3,888 $ 3,708
</TABLE>
- ----------------------
(a) Includes a gain of $19.0 million pre-tax, $11.8 million after-tax, related
to changes in the investment in the EPS affiliate joint venture.
(b) Includes net restructuring and merger-related charges of $70.0 million in
the provision for losses on loans and $104.7 million in non-financial
expenses. The combined restructuring and merger-related charges totaled
$123.8 million after-tax.
(c) Includes net restructuring charges of $107.0 million pre-tax, $70.0 million
after-tax, related to corporate-wide process redesigns.
(d) Includes net restructuring and merger-related charges of $13.1 million,
$13.1 million after tax, primarily related to the United Counties
acquisition.
(e) Includes net restructing charges of $32.0 million pre-tax, $20.8 million
after-tax, related to corporate-wide process redesigns.
14
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENTS 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 five
core businesses, except for the Questpoint third party processing companies, are
allocated equity utilizing regulatory risk-based capital guidelines. Equity at
the Questpoint companies has been assigned based on estimated amounts necessary
on a stand-alone company basis. Fixed assets and other capital investment
requirements along with 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 Center 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; eliminations of intercompany business
areas transactions; and miscellaneous items.
Corporate Banking is organized into six business lines: Large Corporate,
-----------------
Specialized Lending, Congress Financial Corporation ("Congress Financial"),
International Banking, Investment Banking, and Cash Management. Net income for
the second quarter of 1996 was $54.9 million, $5.1 million, or 10.2% above
second quarter of 1995. Year-to-date net income was $110.3 million which was
$11.5 million, or 11.6% above the prior year six-month period. The increase over
the second quarter of 1995 was attributable to declines in the loan loss
provision and non-financial expenses. The increase for the 1996 six-month period
was attributable to increases in net interest income, and declines in non-
financial expenses and the loan loss provision.
For the second quarter of 1996, net interest income was down $1.8 million, or
1.4%, from the second quarter of 1995, primarily due to declines in spreads on
loans caused by increased competition. Corporate Banking average loan volume
increased $840 million, or 9.2%, due to loan volume increases at Congress
Financial, International Banking and Specialized Banking. Partially offsetting
the impact of the loan volume increases were declines in the fixed and floating
rate spreads due to increased competitive pressure on pricing and a decline in
the prime spread. Average non-performing loan volume declines from the second
quarter of 1995 of $26.6 million, or 30.8% were partially offset by a decline in
interest income recognized on a cash basis from non-performing loans.
For the 1996 six-month period, net interest income increased $4.1 million, or
1.7%, over 1995 year-to-date primarily due to higher average loan volume.
Congress Financial average loan volume increased $153 million, or 6.3%.
Excluding Congress Financial, loan volume increased $635 million, or 9.8%,
primarily due to growth in Specialized Lending, International Banking, and Large
Corporate. Average non-performing loans declined $28.6 million, or 35.5% from
prior year-to-date. Partially offsetting the impact of increased average loan
volume was a decline in the fixed and floating rate spreads due to increased
competitive pressure on rates. Collected demand balances also increased from
prior year by $136 million, or 7.2%, largely due to balances held in the Large
Corporate, and Financial Services Industry division.
The loan loss provision declined $1.9 million or 27.5%, and $3.0 million or
22.1% for the quarter and year-to-date, respectively. This was primarily due to
an improvement in credit quality.
For the second quarter of 1996, non-interest income was $0.3 million, or
0.7%, below the second quarter of 1995 largely due to declines in service
charges on deposits, loan syndication income and loan servicing income earned by
the CoreStates Enterprise Fund, partially offset by an increase in international
service fees and foreign exchange income.
15
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
BUSINESS LINE RESULTS - continued
- ---------------------
For the 1996 six-month period, non-interest income was $2.1 million, or 2.4%,
below prior year. A decline of $1.3 million in service charges on deposits and
lower securities gains were partially offset by increased international service
fees and loan syndication income.
For the second quarter of 1996, non-financial expenses were $8.1 million, or
9.6%, below the second quarter of 1995 due to declines in personnel expenses
(resulting from the recent process redesign), OREO expense, FDIC expense, and
processing expenses. Non-financial expenses were $13.1 million, or 8.1%, below
prior year-to-date for the same reasons as the second quarter.
Regional Banking includes Retail Banking and Delivery, Commercial Banking (Small
- ----------------
Business Lending) and Middle Market Lending. Net income for the second quarter
of 1996 was $48.8 million which was essentially level with the second quarter of
1995. The negative impacts of narrowing deposit spreads and declines in deposit
volumes on net interest income were offset by reduced FDIC premiums and declines
in personnel and other expenses due to attrition, branch closings/sales and
streamlining achieved by the company-wide process redesign. For the 1996 six-
month period, net income was $98.3 million, up $6.6 million, or 7.2% from 1995
year-to-date. The increase for the 1996 six-month period was primarily the
result of reduced non-financial expenses, partially offset by lower net interest
income.
For the second quarter of 1996, net interest income decreased $16.3 million,
or 9.1%, when compared to the second quarter of 1995. This decrease was driven
by a 29 basis points narrowing in deposit spreads and a decline in average
deposit volumes of $150 million. The deposit decline was primarily due to the
sale of several branches in the last quarter of 1995. The narrowing spreads
resulted from more aggressive pricing related to the focus on customer
retention. The spread compression was concentrated in certificates of deposit
and certain money market deposits. Additionally, a 17 basis point decline in
loan spreads contributed to the net interest income decline. The pressure on
loan spreads was related to more aggressive pricing by competitors and was
concentrated in commercial loans.
For the 1996 six-month period net interest income was $24.0 million, or 6.8%,
below June 1995 year-to-date. This decline was mainly attributed to deposit
volume and spreads. Average deposits declined $346 million compared to June 1995
year-to-date and deposit spreads were 22 basis points under prior year. As
stated above, the branch sales, as well as movement of deposits to non-bank
financial instruments were the main contributors to these declines.
Additionally, movement of deposits from high profit products (i.e. demand,
savings and MMA) to higher yielding market products was the major contributor to
the spread decline. The increased competitive pressure on loan pricing was the
major contributor to a decline in loan spreads of 11 basis points. Partially
offsetting the impact of this decline was an increase in average loan
outstandings of $96 million.
For the second quarter of 1996, non-interest income increased $0.8 million,
or 2.1%, on a quarter-to-quarter basis. Gains recorded on home equity loan
securitizations increased $2.9 million in the second quarter of 1996 vs. prior
year.Partially offsetting this increase were revenue declines in service charges
on deposits and debit card fees. Business service charges declined $1.4 million,
or 19.4%, primarily due to the 1996 reduction in the FDIC premium charged to
banks and passed on to customers in prior years, and volume declines in fee
generating deposits. For the 1996 six-month period, non-interest income
increased $0.5 million, or 0.7%, over 1995 mainly due to an increase in gains on
home equity loan securitizations of $3.4 million. Revenue declines occurred in
business service charges of $2.7 million and debit card fees of $0.6 million.
16
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
BUSINESS LINE RESULTS - continued
- ---------------------
For the second quarter of 1996, non-financial expenses declined $16.0
million, or 11.6%, from the prior year second quarter. Personnel expenses
declined $4.8 million, or 10.3%, due to attrition, branch closings/sales and
streamlining achieved through the process redesign. Reduced FDIC premiums in
1996 resulted in a $9.4 million decline in expenses. Other non-personnel
expenses were down $1.7 million also resulting from branch closings/sales and
the process redesign. Year-to-date non-financial expenses for 1996 declined
$34.6 million, or 12.5%, as a result of an $18.6 million FDIC premium decrease,
lower personnel expenses of $11.1 million and other non-personnel expenses of
$4.8 million.
Retail Credit Services includes the following major business lines: Credit
----------------------
Card, Indirect Auto and Leasing, Educational Lending, Mortgage Services and Card
Linx (CoreStates merchant credit card processing business). Net income for
Retail Credit Services was $10.9 million in the second quarter of 1996 which was
$2.0 million, or 15.5%, below the second quarter of 1995. For the 1996 six-month
period net income was $24.4 million, which was $1.2 million below 1995 year-to-
date. Declines for both the quarter end and year-to-date are primarily due to
increased provisions for losses on credit card loans, partially offset by
declines in non-financial expenses.
Net interest income for the second quarter of 1996 was $0.7 million above the
second quarter of 1995. Contributing to this improvement was the impact of
increases in credit card outstandings of $162 million and in student loans
outstandings of $32 million or 14%. The impacts of declines in the credit card
spread, narrowing spreads on the indirect and leasing portfolios, and run-off of
the leasing and floor plan portfolios partially offset the favorable impacts of
the credit card and student loan growth. On a year-to-date basis net interest
income was $0.2 million above the prior year.
For the second quarter of 1995, non-interest income decreased by $1.7
million, or 10.6%, from the second quarter of 1995. This decline was primarily
due to a $2.4 million, or 37%, decrease in merchant fee income due to customer
attrition from bank acquisitions, systems conversions, and repricing of
unprofitable customers. Partially offsetting these declines were increases of
$0.5 million in mortgage service fees and $0.2 million in credit card fees. Non-
interest income on a year-to-date basis was $0.6 million below 1995.
For the second quarter of 1995, non-financial expenses declined $1.0 million,
or 3.1%, from the second quarter 1995. The decline is primarily related to ideas
implemented through the process redesign program, and lower expenses in merchant
card due to reduced volumes. On a year-to-date basis, non-financial expenses
were below 1995 by $3.5 million, essentially for the same reasons as stated
above.
Trust and Investment Management is organized into four business lines:
-------------------------------
Institutional Trust, Personal Trust, Private Banking, and Investment Management.
CoreStates' Corporate Trust business, previously included in Institutional
Trust, was sold during the fourth quarter of 1995. Net income of $5.4 million
for the second quarter of 1996 increased by $1.8 million, or 50.0%, over the
second quarter of 1995. For the 1996 six-month period, net income of $10.2
million increased $4.6 million, or 82.1%, over the same period of 1995.
Net interest income declined by $1.4 million or 18.9% in the second quarter
of 1996 when compared to the same period in 1995 and declined $1.5 million or
10.9% on a year-to-date basis. The decline in net interest income was due
primarily to the loss of demand balances related to the sale of the Corporate
Trust business. Excluding Corporate Trust earnings on demand balances in 1995,
net interest income decreased $0.3 million, or 4.8%, for the quarter and $0.4
million, or 3.2%, on a year-to-date basis.
Non-interest income increased $0.8 million, or 3.3%, in the second quarter of
1996 when compared to the same period in 1995. On a year-to-date basis,
non-interest income increased $0.4 million. Excluding Corporate Trust fees,
non-interest income increased $2.9 million, or 13.1%, on a quarter to quarter
basis and $3.9 million, or 8.7%, on a year-to-date basis. These improvements are
related to increased revenues in Investment Management generated from the
implementation of the process redesign and increased asset values. Partially
offsetting these favorable variances are declining Employee Benefits business
and lower annual tax fees.
17
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
BUSINESS LINE RESULTS - continued
- ---------------------
Non-financial expense levels in the second quarter of 1996 declined by $3.3
million, or 12.9% from the second quarter of 1995, and on a year-to-date basis
declined $7.9 million, or 15.1%, from the comparable period in 1995. These
expense reductions are associated with the sale of the Corporate Trust business
and savings in all four business lines related to the process redesign.
Third Party Processing consists of the QuestPoint processing companies that
----------------------
have been formed over the past two years and earnings from CoreStates'
investment in Electronic Payment Services, Inc. ("EPS"). The QuestPoint
companies include: Transys - a provider of check processing and payment services
activity to CoreStates and other financial institutions; CashFlex - a leading
supplier of Remittance Processing services nationwide with processing sites in
key markets within the United States and with recent expansion into Canada; and
SynapQuest -a provider of both retail credit card processing for CoreStates' and
commercial card processing services to CoreStates and other financial
institutions.
Third Party Processing ("TPP") net income for the second quarter of 1996 was
$2.4 million which was $1.5 million, or 167%, higher than the second quarter of
1995. The earnings improvement was attributable to both increased CoreStates
volume resulting from the Meridian acquisition and incremental external business
growth. Prior period results are not restated for Meridian. Net income for the
six months ended June 30, 1996 was $3.4 million or $11.5 million (77.2%) less
than reported in the first half of 1995. The 1995 six-month period included an
$11.8 million non-recurring after-tax gain related to changes in CoreStates
investment in EPS. Excluding the non-recurring EPS gain, year-to-year net income
growth for the 1996 six-month period was $.3 million or 10%.
TPP revenue for the second quarter of 1996 was $58.6 million versus $47.0
million for the second quarter of 1995, an increase of $11.6 million, or 25%.
Second quarter of 1996 revenues included $51.3 million for the QuestPoint
processing companies and $7.3 million for EPS, while the prior year period
consisted of $39.5 million for the QuestPoint processing companies and $7.5
million for EPS. The CoreStates intercompany business at QuestPoint, which
includes Meridian revenues, accounted for $7.9 million of the QuestPoint revenue
increase, an increase of 33% from the prior year, while external TPP business
grew by $3.7 million, an increase of 16% from the second quarter of 1995.
TPP revenue for the first half of 1996 totaled $107.1 million including $92.4
million for the Questpoint companies and $14.7 million for EPS. Revenue for the
first six months of 1995 of $110.1 million included a $19.0 million non-
recurring gain related to changes in CoreStates' investment in EPS and $15.0
million for EPS. Excluding the non-recurring EPS gain, year-to-year revenue
growth for the first six months of 1996 was $16.0 million, or 18%. The
CoreStates (including Meridian) intercompany business, which contributed 51% of
the TPP revenue base, increased $8.5 million, or 19%. External TPP business
accounted for the remaining 49% of the revenue base and gained $7.5 million, or
17%.
Most of the increase in CoreStates intercompany business is within Transys,
which gained $7.0 million in new Meridian revenue in the six-month period ending
June 30, 1996. CashFlex accounted for $7.2 million of the increase in external
TPP business. About $1.8 million of the external TPP revenue increase was due to
one additional month of revenue from National Remittance Centers, Inc. ("NRC"),
a lockbox processing subsidiary acquired by CashFlex on January 27, 1995. The
remaining revenue growth was mainly attributable to normal business growth at
CashFlex. At Transys, increases in external check processing revenues were
largely offset by lower cash letter income.
18
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
BUSINESS LINE RESULTS - continued
- ---------------------
Income from the investment in EPS, excluding the $19.0 million pre-tax gain
recognized in 1995, decreased by $.3 million to $14.7 million. Income from the
investment in EPS reflects CoreStates share in EPS net income, interest income
on a 6.45% note and income from amortization of a deferred gain. The decrease
from the prior year is due to lower interest income on the note, which is being
paid down at the rate of $6.25 million per quarter by EPS.
Meridian net income for the second quarter of 1996 was $64.6 million which
--------
was $12.7 million, or 24.5% above the second quarter of 1995. On a year-to-date
basis Meridian net income was $123.1 million which was $25.4 million or 26%
above 1995. The increase in net income for both the second quarter and year-to-
date was primarily due to lower non-financial expenses. Non-financial expenses
for the second quarter of 1996 were $120.6 million or $28.7 million below the
second quarter of 1995. On a year-to-date basis non-financial expenses were
$251.9 million which was $46.8 million below 1995. Non-financial expenses for
the second quarter of 1995 and 1995 year-to-date included a restructuring charge
of $32.0 million related to a corporate-wide process redesign. Non-financial
expenses for the 1996 six month period include net restructuring and merger-
related charges of $13.1 million. The decline in non-financial expenses for the
second quarter and year-to-date was primarily due to savings achieved from the
company-wide process redesign.
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 second quarter of 1996
was $540.0 million, a decrease of $16.2 million, or 2.9%, from the second
quarter of 1995. The net interest margin was 5.56% for the second quarter of
1996, compared to 5.52% for the second quarter of 1995. The decrease in net
interest income was primarily the result of a $1.4 billion decline in average
earning assets. Compared to the second quarter of 1995, average investment
securities were reduced $1.8 billion, or 27.0%, while average loans for the
second quarter of 1996 increased $0.5 billion, or 1.7%, over the second
quarter of 1995. The change in the mix of earning assets from relatively lower
yielding investment securities to higher yielding loans resulted in the four
basis point increase in the net interest margin. 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.
Compared to the first quarter of 1996, taxable equivalent net interest income
for the second quarter of 1996 increased slightly, $2.2 million, or 0.4%. The
net interest margin increased five basis points from 5.51% in March 1996 to
5.56% in June 1996. The increase in second quarter net interest income and the
net interest margin, as compared to the first quarter of 1996, principally
reflected the impact of the change in the mix of earning assets from relatively
lower yielding investment securities to higher yielding loans.
19
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
NET INTEREST INCOME - continued
- -------------------
Taxable equivalent net interest income for the six months ended June 30, 1996
decreased $18.2 million, or 1.7%, while the net interest margin increased seven
basis points to 5.54%, as compared to the 1995 six-month period. The decline in
net interest income was due to a $1.2 billion decrease in average interest
earning assets, primarily caused by a $1.7 billion decrease in average
investment securities compared to the prior year six-month average. The increase
in the net interest margin reflects an increase of $514 million in average non-
interest bearing funding sources and the change in mix of interest earning
assets from lower yielding investment securities to higher yielding loans.
The following table compares taxable equivalent net interest income for the
three months ended June 30, 1996 versus the second quarter of 1995 and the first
quarter of 1996, and for the six months ended June 30, 1996 versus the 1995 six-
month period, respectively (in millions):
Taxable Equivalent Net Interest Income
- --------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Increase (decrease)
-------------------------------- -----------------------
June 30, June 30, Mar 30, June 1996/ June 1996/
1996 1995 1996 June 1995 Mar 1996
--------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Total interest income.............. $ 815.8 $ 884.8 $823.7 $(69.0) $ (7.9)
Tax equivalent adjustment.......... 6.6 8.6 7.2 (2.0) (0.6)
-------- -------- ------ ------ -----
Tax equivalent interest income..... 822.4 893.4 830.9 (71.0) (8.5)
Total interest expense............. 282.4 337.2 293.1 (54.8) (10.7)
-------- -------- ------ ------ -----
Taxable equivalent net.............
interest income.................. $ 540.0 $ 556.2 $537.8 $(16.2) $ 2.2
======== ======== ====== ====== =====
Interest rate spread............... 4.65% 4.61% 4.59%
Net interest margin................ 5.56% 5.52% 5.51%
<CAPTION>
Six Months Ended
June 30, June 30, Increase/
1996 1995 (decrease)
-------- -------- ---------
<S> <C> <C> <C>
Total interest income.............. $1,639.5 $1,735.4 $(95.9)
Tax equivalent adjustment.......... 13.8 17.2 (3.4)
-------- -------- ------
Tax equivalent interest income..... 1,653.3 1,752.6 (99.3)
Total interest expense............. 575.4 656.5 (81.1)
-------- -------- ------
Taxable equivalent net
interest income................... $1,077.9 $1,096.1 $(18.2)
======== ======== ======
Interest rate spread............... 4.62% 4.57%
Net interest margin................ 5.54% 5.47%
</TABLE>
20
<PAGE>
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 analyses on a taxable equivalent basis illustrates
the underlying factors producing these increases (decreases) in tax equivalent
net interest income (in millions):
<TABLE>
<CAPTION>
Rate/Volume Analysis Increase (decrease) in interest Increase (decrease) in interest
- -------------------- --------------------------------------- ---------------------------------------
Three Months Ended Three Months Ended
June 30, 1996/1995 June 30, 1996/March 31, 1996
--------------------------------------- ----------------------------------------
Income/ Change attributable to Income/ Change attributable to
expense ---------------------- expense ----------------------
------- Volume Rate ------- Volume Rate
------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets
- -----------------------
Time deposits-Eurodollars.............. $ (7.1) $ (1.6) $ (5.5) $ 2.2 $ 2.3 $(0.1)
Investment securities.................. (27.4) (27.2) (0.2) (3.9) (7.4) 3.5
Federal funds sold..................... 3.9 3.7 0.2 (0.9) (1.3) 0.4
Trading account securities............. (4.7) (4.9) 0.2 (0.8) (1.1) 0.3
Loans:
- Domestic.......................... (42.1) 0.7 (42.8) (7.1) 2.5 (9.6)
- Foreign........................... 6.4 9.3 (2.9) 2.0 2.7 (0.7)
------ ------ ------ ------ ------ -----
Total interest income........... (71.0) (20.0) (51.0) (8.5) (2.3) (6.2)
------ ------ ------ ------ ------ -----
Interest bearing funds
- ----------------------
Deposits:
Domestic............................. (29.5) 2.1 (31.6) (7.0) 5.5 (12.5)
Overseas............................. (5.5) (4.0) (1.5) 0.5 0.3 0.2
Funds borrowed:
Federal funds purchased.............. (15.7) (12.9) (2.8) (2.9) (2.2) (0.7)
Other................................ (4.8) (2.4) (2.4) (1.0) (0.6) (0.4)
Long-term debt......................... 0.7 4.0 (3.3) (0.3) 0.2 (0.5)
------ ------ ------ ------ ------ -----
Total interest expense............... (54.8) (13.2) (41.6) (10.7) 3.2 (13.9)
------ ------ ------ ------ ------ -----
Net interest income.................... $(16.2) $ (6.8) $ (9.4) $ 2.2 $ (5.5) $ 7.7
- ------------------- ====== ====== ====== ====== ====== =====
- ------------------------------------------
</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 rates are adjusted by specific reserves as average balances are
reduced by such reserves for purposes of rate calculations.
21
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
NET INTEREST INCOME - continued
- -------------------
<TABLE>
<CAPTION>
Rate/Volume Analysis Increase (decrease) in interest
- -------------------- ---------------------------------------
Six Months Ended
June 30, 1996/1995
---------------------------------------
Income/ Change attributable to
----------------------
expense Volume Rate
------- ------ ----
<S> <C> <C> <C>
Interest earning assets
- -----------------------
Time deposits-Eurodollars.............. $(12.9) $ (5.0) $ (7.9)
Investment securities.................. (52.8) (52.7) (0.1)
Federal funds sold..................... 8.0 7.8 0.2
Trading account securities............. (8.6) (8.6) -
Loans:
- Domestic........................... (45.2) (15.6) (29.6)
- Foreign............................ 12.2 15.9 (3.7)
------ ------ ------
Total interest income............ (99.3) (58.2) (41.1)
------ ------ ------
Interest bearing funds
- ----------------------
Deposits:
Domestic............................. (42.2) (2.2) (40.0)
Overseas............................. (6.3) (5.0) (1.3)
Funds borrowed:
Federal funds purchased.............. (29.1) (23.9) (5.2)
Other................................ (5.9) (2.0) (3.9)
Long-term debt......................... 2.4 8.8 (6.4)
------ ------ ------
Total interest expense............... (81.1) (24.3) (56.8)
------ ------ ------
Net interest income.................... $(18.2) $(33.9) $ 15.7
- ------------------- ====== ====== ======
- -------------------------------------------------------
</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 rates 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 and nine-month periods ended June 30, 1996
and 1995 was as follows (in millions):
<TABLE>
<CAPTION>
Three Six
Months Ended Months Ended
June 30, June 30,
-------------------------- --------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income due on non-performing loans in accordance with
their original terms............................................ $ 4.0 $ 7.1 $ 8.9 $ 15.1
Interest income on non-performing loans reflected in total
interest income................................................. 2.3 2.9 4.4 6.0
------ ------ ------ ------
Net reduction in interest income.................................... $ 1.7 $ 4.2 $ 4.5 $ 9.1
====== ====== ====== ======
</TABLE>
22
<PAGE>
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 second quarter of 1996, excluding the
$70.0 million merger-related provision, was $40.0 million, up $5.4 million from
the provision recorded in the prior year second quarter. The increase in the
provision for the second quarter of 1996 reflects loan growth and higher charge-
offs on credit card outstandings.
In the second quarter of 1996, CoreStates recorded a $70.0 million provision
for loan losses in connection with a change in strategy related to Meridian's
problem assets, and to conform Meridian's consumer lending charge-off policies
to those of CoreStates. It is CoreStates' philosophy that such a change in
strategy maximizes the total value of the Meridian acquisition and allows
CoreStates to concentrate upon new franchise initiatives and revenue generation.
In CoreStates' general experience, a strategy that involves the accelerated
resolution of problem assets has been more economical than a long-term work out
approach. It has been CoreStates' general experience that the costs of working
out assets as well as other carrying costs typically outweigh any improvement in
those assets' realized value. Furthermore, the process of working out problem
assets diverts resources and management time and attention from building the
business and creating long-term franchise value.
Net loan charge-offs for the second quarter of 1996 included $33.7 million of
loan charge-offs related to problem assets acquired with Meridian. The Meridian
charge-offs related to actions taken in connection with the change in strategic
direction including a bulk sale of $24 million of non-accrual residential
mortgage loans.
Also included in second quarter of 1996 loan charge-offs was $5.8 million
related to a policy change to charge off delinquent credit card loans at 150
days past due instead of 180 days past due.
The following table presents an analysis of changes in the allowance for loan
losses for the three and six-month periods ended June 30, 1996 and 1995 (in
millions):
<TABLE>
<CAPTION>
Three Six
Months Ended Months Ended
June 30, June 30,
-------------------------- --------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at beginning of period.................................. $665.9 $ 678.4 $ 670.3 $ 681.1
Provision charged to expense.................................... 110.0 (a) 34.6 148.8 (a) 67.7
Loan charge-offs................................................ (94.6)(b) (58.3) (159.1)(b) (113.9)
Recoveries of loans previously charged off...................... 23.9 24.1 45.2 43.9
------ ------- ------- -------
Net loan charge-offs......................................... (70.7) (34.2) (113.9) (70.0)
------ ------- ------- -------
Balance at end of period........................................ $705.2 $ 678.8 $ 705.2 $ 678.8
====== ======= ======= =======
Ratios:
Net charge-offs (annualized) as a percentage of average
total loans................................................ 0.89% 0.44% 0.72% 0.45%
Allowance for loan losses as a percentage of loans at
end of period............................................. 2.21 2.16
Allowance for loan losses as a percentage of non-
performing loans.......................................... 323.75 221.32
</TABLE>
- ----------------------------------
(a) Includes a merger-related provision of $70.0 million related to the second
quarter of 1996 Meridian acquisition.
(b) Includes loan charge-offs of $33.7 million related to problem assets
acquired with Meridian and $5.8 million related to a policy change to charge
off delinquent credit card loans at 150 days past due instead of 180 days
past due.
23
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
PROVISION AND ALLOWANCE FOR LOAN LOSSES - continued
- ---------------------------------------
The following tables reflect the distribution of net loan charge-offs by loan
type for the three and nine-month periods ended June 30, 1996 and 1995 (in
millions):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1996 June 30, 1995
---------------------------------- ---------------------------------
% 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............... $ 11.2 0.3% 15.9% $ 3.3 0.1% 9.6%
Real estate:
Construction and development loans......... 1.5 1.0 2.1 (0.3) (0.2) (0.8)
Other....................................... 22.8 0.9 32.2 13.7 0.5 40.1
Consumer:
Credit card................................. 25.2 6.0 35.6 13.1 3.5 38.3
Installment................................. 8.2 1.2 11.6 3.3 0.5 9.6
Other (b)..................................... 1.8 0.4 2.6 1.1 0.2 3.2
------ ----- ----- -----
Total domestic.............................. 70.7 0.9 100.0% 34.2 0.4 100.0
------ ----- ----- -----
Foreign.......................................... - - - - - -
------ ----- ----- -----
Total net charge-offs....................... $ 70.7(c) 0.9% 100.0% $ 34.2 0.4% 100.0%
====== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1996 June 30, 1995
---------------------------------- ---------------------------------
% 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.............. $ 21.5 0.3% 18.9% $ 12.2 0.2% 17.4%
Real estate:
Construction and development loans.......... 2.3 0.8 2.0 2.2 0.8 3.1
Other....................................... 27.8 0.6 24.4 25.6 0.5 36.6
Consumer:
Credit card................................. 44.1 5.3 38.7 23.8 3.2 34.0
Installment................................. 13.2 1.0 11.6 4.7 0.4 6.7
Other (b)..................................... 5.0 0.5 4.4 1.5 0.2 2.2
------ ----- ------ -----
Total domestic.............................. 113.9 0.7 100.0 70.0 0.5 100.0
------ ----- ------ -----
Foreign.......................................... - - - - -
------ ----- ------ -----
Total net charge-offs....................... $113.9(c) 0.7% 100.0% $ 70.0 0.5% 100.0%
====== ===== ======= ======
</TABLE>
- --------------------------------------------------------
(a) Annualized.
(b) Includes loans to financial institutions and lease financing.
(c) Reflects loan charge-offs of $33.7 million recorded in the second quarter
of 1996 related to problem assets acquired with Meridian and $5.8 million
related to a policy change to charge-off delinquent credit card loans at
150 days past due instead of 180 days past due.
24
<PAGE>
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 June 30, 1996 decreased $14.7 million, or 5.5%,
from December 31, 1995. The decrease in non-performing assets from December 31,
1995 resulted primarily from charge off activity, particularly related to
actions taken in connection with the change in strategic direction related to
Meridian's problem assets. Those actions included the bulk sale of a $24 million
non-accrual residential mortgage loan portfolio.
The following table summarizes non-performing assets at June 30, 1996 and
December 31, 1995 (in millions):
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Non-accrual loans................................ $216.2 $223.6
Renegotiated loans............................... 1.6 7.2
------ ------
Total non-performing loans............... 217.8 230.8
Other real estate owned (OREO)................... 35.8 37.5
------ ------
Total non-performing assets.............. $253.6 $268.3
====== ======
</TABLE>
The following table reflects the distribution of non-performing assets by
loan type at June 30, 1996 and December 31, 1995 (in millions):
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
----------------- -------------------
% of % of
Non- Loan Non- Loan
performing Type performing Type
----------- ---- ---------- ----
<S> <C> <C> <C> <C>
Domestic:
Commercial, industrial and other............... $ 77.5 0.6% $ 77.8 0.6%
------ ------
Real estate:
Construction and development................. 13.1 2.3 9.0 1.5
Other loans.................................. 120.6 1.3 139.8 1.4
Other real estate owned...................... 35.7 37.5
------ ------
Total real estate.......................... 169.4 186.3
------ ------
Consumer....................................... - - - -
------ ------
Other domestic loans (a)....................... 6.7 0.3 4.2 0.3
------ ------
Total domestic non-performing assets......... 253.6 0.8 268.3 0.9
------ ------
Foreign loans.................................... - - - -
------ ------
Total non-performing assets (b).............. $253.6 0.8 $268.3 0.8
====== ======
% Total assets............................... 0.6% 0.6%
==== ====
</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 $105 million and $89 million at June
30, 1996 and December 31, 1995, 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.
25
<PAGE>
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 1996 (in millions):
<TABLE>
<CAPTION>
Quarter Six
-------
First Second Months
----- ------ ------
<S> <C> <C> <C>
Beginning balance...................... $ 268 $ 281 $ 268
Additions.............................. 52 75 127
Return to accrual...................... (4) - (4)
Payments............................... (21) (58) (79)
Charge-offs............................ (14) (44) (58)
------ ------ ------
Net change.......................... 13 (27) (14)
------ ------ ------
Ending balance......................... $ 281 $ 254 $ 254
====== ====== ======
<CAPTION>
NON-INTEREST INCOME
- -------------------
(in millions)
Percentage
Three Months Ended Six Months Ended Increase (decrease)
June 30, June 30, -------------------
------------------ ---------------- Three Six
1996 1995 1996 1995 Months Months
----- ------ ----- ----- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Basic banking transactional services (a)................... $145.6 $144.6 $286.6 $282.3 0.7% 1.5%
Income from investment in EPS, Inc......................... 7.3 7.5 14.7 15.0 (2.7) (2.0)
Third party processing fees (b)............................ 14.7 11.4 28.5 21.3 28.9 33.8
Mortgage banking income.................................... 4.2 3.2 8.3 6.6 31.3 25.8
Investment banking fees.................................... 3.7 4.5 7.5 8.2 (17.8) (8.5)
Trading gains.............................................. 6.5 9.5 13.1 18.6 (31.6) (29.6)
Investment securities gains................................ 2.8 5.5 9.8 11.5
Other non-interest income.................................. 28.5 25.0 53.6 47.4 14.0 13.1
------ ------ ------ ------
Non-interest income before significant
and unusual items....................................... 213.3 211.2 422.1 410.9 1.0 2.7
Corporate trust fees (a)................................... 0.7 2.7 1.4 5.6
Significant and unusual items.............................. 14.6(c) - 14.6(c) 31.0(d)
------ ------ ------ ------
Total non-interest income................................. $228.6 $213.9 $438.1 $447.5 6.9% (2.1)%
====== ====== ====== ======
</TABLE>
- -------------------------------------------------
(a) Comprised of debit and credit card fees, service charges on deposit
accounts, trust income, and fees for international services. For
presentation purposes, fee income on the corporate trust business, which
was sold in the fourth quarter of 1995, was reclassed to a separate line.
(b) Includes revenues for CashFlex lockbox processing, Transys check
processing, and Synapquest credit card and merchant processing.
(c) Certain net investment gains.
(d) Reflects the $19.0 million pre-tax gain related to the changes in the
investment in the EPS, Inc. affiliate joint venture and $12.0 million pre-
tax gains on the exchange of equity securities.
26
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
NON-INTEREST INCOME - continued
- -------------------
Non-interest income, before significant and unusual items as noted in the
above table, for the second quarter of 1996 increased 1.0% from the second
quarter of 1995, reflecting a $3.4 million increase in third-party processing
fees, modest growth of $1.0 million in revenues in CoreStates' basic banking
transactional businesses and a $3.5 million increase in other non-interest
income mainly due to an increase in gains on home equity loan securitizations of
$3.8 million. These improvements were partially offset by a decline in trading
gains of $3.0 million. Within revenues from basic banking transactional
businesses, a $1.0 million, or 4.0%, increase in fees for international
services and a $2.7 million, or 7.1%, increase in trust fees were partially
offset by a decline of $2.5 million, or 11.8%, in debit and credit card fees.
Improvements in trust fees related to increased revenues in Investment
Management generated from the implementation of the process redesign and
increased asset values. The decline in debt and credit card fees was primarily
due to a decrease in merchant fee income due to customer attrition from bank
acquisitions, systems conversions, and repricing of unprofitable customers.
Total non-interest income for the six months ended June 30, 1996 decreased
2.1% from the 1995 six-month period. Before significant and unusual items, non-
interest income for the 1996 six-month period increased 2.7%, primarily
reflecting growth of $7.2 million in third-party processing fee income; $1.7
million in mortgage banking income; $4.3 million in basic banking transactional
services, primarily due to the same reasons as in the second quarter; and an
increase of $6.2 million in other non-interest income, primarily due to an
increase of gains on home equity loan securitizations of $3.8 million.
Excluding significant and unusual gains, investment securities gains in the
second quarter of 1996 were $2.8 million compared to $5.5 million in the prior
year second quarter and for the six months ended June 30, 1996 were $9.8 million
compared to $11.5 million in the 1995 six-month period.
<TABLE>
<CAPTION>
NON-FINANCIAL EXPENSES
- ----------------------
(in millions)
Percentage
Three Months Ended Six Months Ended Increase (decrease)
June 30, June 30, -------------------
------------------ ---------------- Three Six
1996 1995 1996 1995 Months Months
----- ------ ----- ----- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Salaries, wages and benefits.......................... $206.5 $229.4 $414.8 $ 468.4 (10.0)% (11.4)%
Net occupancy expense................................. 37.6 40.5 80.3 81.9 (7.2) (2.0)
Equipment expense..................................... 30.9 29.6 60.9 58.5 4.4 4.1
Amortization of intangible assets..................... 10.2 11.4 20.3 22.8 (10.5) (11.0)
FDIC premiums......................................... 1.5 18.9 3.0 37.7 (92.1) (92.0)
OREO expense.......................................... 1.0 2.3 0.2 4.3 (56.5) (95.3)
Other operating expenses.............................. 120.1 119.9 230.4 231.4 0.2 (0.4)
------ ------ ------ --------
Non-financial expense before significant and
unusual items........................................ 407.8 452.0 809.9 905.0 (9.8) (10.5)
Restructuring and merger-related charges (a).......... 103.7 29.0 117.8 139.0
------ ------ ------ --------
Total non-financial expenses.......................... $511.5 $481.0 $927.7 $1,044.0 6.3% (11.1)%
====== ====== ====== ========
</TABLE>
- ------------------------------------------
(a) See "Restructuring and Merger-Related charges" on page 10 for more detail.
Total non-financial expenses for the second quarter of 1996, excluding
restructuring and merger-related charges as noted in the above table, were
$407.8 million, a decrease of $44.2 million, or 9.8% from the second quarter of
1995. This decline reflects the impacts of the process redesigns, merger-related
synergies and the impact of reduced Federal Deposit Insurance Corporation
("FDIC") premiums for the second quarter of 1996. Much of the reduction in FDIC
premiums will be used to fund investments in technology to support improved
products and services and increased volume.
27
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
CAPITAL MANAGEMENT
- ------------------
CoreState's capital provides the resources and flexibility for anticipated
growth. CoreState's capital position at June 30, 1996 under risk-based capital
guidelines was $3.6 billion or 9.5% of risk-weighted assets, for Tier 1 capital
and $4.9 billion, or 12.9%, 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. CoreState's
ratios at June 30, 1996 exceed 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 8.3% at June 30, 1996. 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.
Substantially the same capital requirements are applied to CoreState's
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 June 30, 1996 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. ....................... 8.5% 11.3% 7.8%
New Jersey National Bank..................... 11.5 14.0 7.1
CoreStates Bank of Delaware, N.A. ........... 7.1 12.0 6.5
</TABLE>
CoreState's dividend on its common stock was $0.42 per share in the second
quarter of 1996 and $0.34 per share in the second quarter of 1995. The common
dividend payout ratio, based on operating earnings, was 47.7% for the second
quarter of 1996, compared to 42.5%, for the second quarter of 1995.
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 near term interest rate risk focuses
on potential changes in net interest income identified through computer
simulations against both rising and falling interest rates. Longer term
repricing risks are measured using potential changes in the present value of
future income streams inherent in current positions. Gap analysis is used to
manage strategy execution. 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 in either direction 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.
CoreStates believes that the spread between the prime rate and financial market
rates is a function of both interest rates and credit conditions. While changes
in the prime spread are included in simulations, only that portion believed to
be interest rate related is subject to the policy guidelines. Estimated changes
in the present value are based on a 200 basis point parallel shift of the yield
curve and negative changes are limited to 10% of equity.
28
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
INTEREST RATE RISK MANAGEMENT- continued
- -----------------------------
As a matter of practice, positions are generally managed to produce
significantly lower volatility than policy guidelines would permit. Current net
interest income 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 the simulation process is based on a variety of
assumptions, 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.
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 with indefinite maturities and non-contractual rates such as savings,
NOW and money market accounts. This inherent mismatch of longer term fixed-rate
liabilities funding short-term rate sensitive assets generates significant
exposure to declining interest rates if not hedged. 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 coordinated 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.
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 June 30, 1996, the current cost to replace
CoreStates' derivatives portfolio was $154 million. This assumes that only
counterparties for whom it would be favorable to default would do so.
29
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
- ---------------------------------------------
INTEREST RATE RISK MANAGEMENT - continued
- -----------------------------
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 June 30, 1996,
the major balance sheet category to which they relate, and the associated
unrealized gains/losses:
<TABLE>
<CAPTION>
Outstanding Interest Rate Risk Related Derivatives
- --------------------------------------------------------
At June 30, 1996 Interest Interest Interest
---------------- rate rate rate caps Other
(in millions) swaps futures and floors derivatives Total
------- ------- ---------- ----------- -----
<S> <C> <C> <C> <C> <C>
Interest Sensitivity Adjustment:
Assets (primarily loans):
Notional amount.................... $3,433 $3,162 $ 10 $6,605
Unrealized gains................... 53 - - 53
Unrealized losses.................. (26) - - (26)
Deposits and other borrowings:
Notional amount.................... 5,173 924 $ 100 6,197
Unrealized gains................... 35 12 1 48
Unrealized losses.................. (36) - (36)
Long-term debt:
Notional amount.................... 671 25 696
Unrealized gains................... 12 - 12
Unrealized losses.................. (26) - (26)
Spread Protection:
Assets (primarily loans).............
Notional amount.................... 571 571
Unrealized gains................... 4 4
Unrealized losses.................. - -
Deposits and other borrowings:
Notional amount.................... 132 132
Unrealized gains................... - -
Unrealized losses.................. - -
Anticipated Asset Sales:
Notional amount.................... 9 191 200
Unrealized gains................... - - -
Unrealized losses.................. - (1) (1)
Total:
Notional amount.................... $9,286 $3,162 $1,662 $ 291 $14,401
====== ====== ====== ====== =======
Unrealized gains................... $ 100 $ - $ 16 $ 1 $ 117
====== ====== ====== ====== =======
Unrealized losses.................. $ (88) $ - $ - $ (1) $ (89)
====== ====== ====== ====== =======
Net unrealized gains (losses)...... $ 12 $ - $ 16 $ - $ 28
====== ====== ====== ====== =======
</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 June 30, 1996, CoreStates' use of off-balance sheet derivative
instruments which carry a leveraged exposure to either rising or falling rates
or have other complex features is not material.
30
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
INTEREST RATE RISK MANAGEMENT - continued
- -----------------------------
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. The risks in certain products, particularly
non-contractual deposits, are sometimes greater in one direction of rate change
than the other. To the extent that marginal amounts of deposits need
protection from falling rates but are likely to shift to higher rate instruments
as interest rates rise, caps and/or floors are a more appropriate hedge.
CoreStates has used interest rate floors in this manner to augment the risk
protection provided by the swaps and futures portfolios. 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.
CoreStates also uses derivative instruments to protect spreads on certain
balance sheet products. CoreStates' loan and securities portfolios include
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 $511 million of interest rate caps which offset that
risk by limiting the potential increase in funding costs. CoreStates has issued
retail certificates of deposits with floating rates which carry a guaranteed
minimum rate. CoreStates has used caps and floors to offset that risk.
For accounting purposes, the income effects of derivatives used to adjust
interest sensitivity or to protect a product spread are associated with either
the asset or the liability being managed. The amount recorded in net interest
income related to derivative financial instruments was $21.5 million in the
quarter ended June 30, 1996 and $2.7 million in the quarter ended June 30, 1995.
The following table shows the impact of derivatives income on average interest
rates:
<TABLE>
<CAPTION>
Impact of Derivatives Income on Yields and Costs
- ------------------------------------------------
For the Quarter Ended June 30,
- ------------------------------
(in millions) 1996 1995
----------------------------------------- ------------------------------------------
Reported Impact Reported Impact
Average Yield/ Product of Average Yield/ Product of
Balance Cost Rate Derivatives Balance Cost Rate Derivatives
------- -------- ------- ----------- ------- -------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earning Assets
Time deposits................... $ 1,961 5.63% 5.63% - $ 2,059 6.74% 6.74% -
Federal funds sold & trading
account assets................. 522 6.31 6.31 - 531 6.76 6.76 -
Investment securities........... 4,883 6.40 6.33 0.07% 6,687 6.30 6.25 0.05%
Loans........................... 31,665 9.01 8.90 0.11 31,125 9.60 9.55 0.05
------- -------
Total Earning Assets............ $39,031 8.47 8.38 0.09 $40,402 8.87 8.82 0.05
======= =======
Interest Bearing Funds
Savings, NOW, regular MMA....... $10,585 1.66 1.95 (0.29) $11,562 2.27 2.16 0.11
Premium MMA..................... 3,155 3.83 3.83 - 2,939 3.80 3.80 -
Certificates.................... 9,230 5.08 5.22 (0.14) 9,210 5.47 5.48 (0.01)
------- -------
Total retail................. 22,970 3.34 3.53 (0.19) 23,711 3.72 3.67 0.05
------- -------
Commercial & foreign deposits... 1,531 4.84 4.85 (0.01) 1,897 5.42 5.61 (0.19)
Federal funds purchased &
short-term borrowings........ 2,808 5.13 5.18 (0.05) 3,891 5.81 5.78 0.03
Long-term debt.................. 2,449 6.33 6.53 (0.20) 2,216 6.86 6.90 (0.04)
------- -------
Total wholesale.............. 6,788 5.50 5.59 (0.09) 8,004 6.01 6.05 (0.04)
------- -------
Total Interest Bearing Funds.... $29,758 3.82 3.98 (0.16) $31,715 4.26 4.24 0.02
======= =======
</TABLE>
31
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
INTEREST RATE RISK MANAGEMENT - continued
- -----------------------------
It is important to note that derivatives usage, its impact on individual
balance sheet items and fluctuations in fair value should be viewed in the
context of overall risk management. As previously stated, if CoreStates did not
use derivatives, it would adjust cash positions to create the same interest
sensitivity position with approximately the same income results. However, if
cash transactions were used, the income of those activities would not be carried
as an income adjustment to other balance sheet products. Fluctuations in the
impact of derivatives shown on the above table are a function of market
conditions and do not indicate changes in risk positions.
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. Therefore,
CoreStates will enter into an interest rate swap or a forward rate agreement
which will increase in value if rates rise. The increased value on the
derivative is used to offset the decline in value of the cash asset.
Gains/losses on the derivative are deferred until the asset sale and recognized
as part of the sale transaction. CoreStates has used fixed-pay mortgage swaps
which amortize with a reference portfolio of mortgage-backed securities to hedge
anticipated mortgage sales. These swaps are terminated as the mortgages are
sold. CoreStates securitizes and sells its longer term fixed-rate home equity
loans and fixed-rate mortgages on a recurring 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. Options on mortgage-backed securities as well as both
mandatory and optional forward sale commitments are used to hedge the mortgage
pipeline.
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 June 30, 1996, 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.
The repricing schedule below summarizes the notional amount and associated
interest rate of CoreStates' interest rate swaps categorized by whether
CoreStates receives or pays the rate shown. The swaps are stratified by
repricing date or maturity depending on whether the payments are floating or
fixed, respectively. Floating rates included in the repricing schedule are
based on the rates in effect on June 30, 1996.
32
<PAGE>
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 June 30, 1996
- ----------------
(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............ $2,443 $1,300 $1,310 $1,132 $1,397 $ 673 $8,255
Rate................ 6.87% 6.26% 6.28% 6.90% 6.27% 6.82% 6.58%
Pay Notional............ $8,255 $8,255
Rate................ 5.54% 5.54%
Pay Fixed/Receive Floating:
Pay Notional............ $ 10 $ 20 $ 34 $ 64
Rate................ 9.05% 8.60% 8.95% 8.85%
Receive Notional............ $ 64 $ 64
Rate................ 5.58% 5.58%
Receive Floating/Pay Floating:
(Basis Swaps)
Notional............ $ 281 $ 281
Receive Rate................ 5.49% 5.49%
Pay Rate................ 5.52% 5.52%
Receive Fixed/Pay Floating(a):
(Forward Start)
Receive Notional............ $ 155 $ 71 $ 400 $ 61 $ 687
Rate................ 6.15% 7.05% 6.60% 7.60% 6.64%
Start Date Notional............ $ 320 $ 367 $ 687
- --------------------------------------------------
</TABLE>
(a) Pay rate will be determined on forward start date.
The following schedule illustrates CoreStates' interest rate risk related
derivative activity for the current quarterly reporting period:
<TABLE>
<CAPTION>
Activity in Derivatives Products
- --------------------------------
For the Quarter Ended June 30, 1996
- -------------------------------------
(in millions)
Interest Interest Interest
rate rate rate caps Other
Notional Amounts swaps futures and floors derivatives Total
- ---------------- ------- --------- ------------ ------------- -------
<S> <C> <C> <C> <C> <C>
As of March 31, 1996.............. $9,555 $ 1,150 $1,483 $ 182 $12,370
Additions......................... 674 3,337 291 291 4,593
Terminated contracts(a)........... - - - - -
Maturities/amortization........... (943) (1,325) (112) (182) (2,562)
------ ------- ------ ----- -------
As of June 30, 1996............... $9,286 $ 3,162 $1,662 $ 291 $14,401
====== ======= ====== ===== =======
- --------------------
</TABLE>
(a) As of June 30, 1996, CoreStates had $4 million of deferred gains and $2.8
Million of deferred losses related to terminated derivative contracts.
33
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
INTEREST RATE RISK MANAGEMENT - continued
- -----------------------------
CoreStates' overall use of off-balance sheet instruments increased during the
second quarter. Interest rate futures were used to create fixed rate assets to
offset increased activity in the issuance of retail certificates of deposits.
Caps, floors and other derivatives increased due to the purchase of option
protection for various instruments issued by Meridian.
Trading and Customer Related Derivative Activities - CoreStates also engages
in derivative market activities to provide risk management services for its
customers and to manage securities trading positions in the securities unit.
The securities unit underwrites, brokers and distributes securities to
municipalities, institutional and individual investors. In addition the unit
buys, sells and securitizes mortgage loans and brokers loan servicing
portfolios. The following schedule details the outstanding notional amounts and
related fair values of trading and customer related derivative transactions as
of June 30, 1996.
<TABLE>
<CAPTION>
Trading and Customer Related Derivatives
- ----------------------------------------
At June 30, 1996
- ----------------
(in millions) Notional Net assets Positive Negative
amount (liability)(a) Market Value Market Value
-------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Interest Rate Swaps:
CoreStates receives fixed.......... $ 186 $ 1.9 $ 2.5 $ (0.6)
CoreStates pays fixed.............. 186 (1.7) 0.7 (2.4)
Rate Locks:
CoreStates receives fixed.......... 47 (1.3) 0.1 (1.4)
CoreStates pays fixed.............. 47 1.4 1.5 (0.1)
Interest Rate Caps/Floors:
Sold............................... 436 1.1 1.1 -
Purchased.......................... 436 (1.1) - (1.1)
Futures.............................. 2 - - -
Commitments to purchase/sell
whole mortgage loans and
securities (including when-issued
securities):
Sold............................. 153 - - -
Purchased........................ 94 - - -
Other Options:
Sold............................. 214 7.4 7.5 (0.1)
Purchased........................ 385 0.9 0.9 -
Foreign exchange contracts 2,306 5.0 21.3 (16.3)
----- ------ ----- ------
Total Trading and Customer Related
Derivatives...................... $4,492 $13.6 $ 35.6 $(22.0)
====== ===== ====== ======
- --------------------
</TABLE>
(a) Average net assets (liabilities) during 1996 was substantially the same as
the net assets (liabilities) at June 30, 1996.
34
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEETS AND TAXABLE EQUIVALENT INCOME/EXPENSE AND
RATES
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------------------------------------
June 30, 1996 March 31, 1996 June 30, 1995
---------------------------- ---------------------------- ----------------------------
Average Income/ Average Income/ Average Income/
balance Rate expense balance Rate expense balance Rate expense
------- ------ ------- ------- ------ ------- ------- ------ -------
(000,000) (000) (000,000) (000) (000,000) (000)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
- ---------------------------
Time deposits, principally
Eurodollars (a)................. $ 1,961 5.63% $ 27,449 $ 1,799 5.64% $ 25,243 $ 2,059 6.74% $ 34,615
Investment securities (b):
U.S. Government................ 3,484 6.08 52,684 3,986 6.03 59,750 5,194 5.85 75,729
State and municipal............ 506 8.43 10,661 566 7.62 10,778 684 8.43 14,408
Other.......................... 893 6.44 14,304 805 5.50 11,017 809 7.37 14,863
------- -------- --------- -------- -------- --------
Total investment
securities................... 4,883 6.40 77,649 5,357 6.12 81,545 6,687 6.30 105,000
------- -------- --------- -------- -------- --------
Federal funds sold............... 442 5.92 6,509 534 5.56 7,383 182 5.68 2,577
Trading account securities....... 80 8.39 1,677 146 6.91 2,523 349 7.31 6,377
Loans (b) (c) (d):
Domestic:
Commercial, industrial
and other.................... 13,132 8.96 292,575 12,771 9.10 289,027 12,520 9.76 304,741
Real estate.................. 10,353 8.59 221,000 10,654 8.67 229,616 11,359 9.25 261,912
Consumer..................... 4,401 11.48 125,583 4,450 11.61 128,442 4,148 11.08 114,548
Financial institutions....... 814 6.10 12,345 796 5.94 11,763 681 7.42 12,590
Factoring receivables........ 525 10.50 13,710 501 10.86 13,533 601 10.52 15,767
Lease financing.............. 1,186 8.12 24,078 1,172 8.20 24,015 1,077 8.10 21,800
Foreign........................ 1,254 6.36 19,823 1,086 6.59 17,795 739 7.29 13,432
------- -------- --------- -------- -------- --------
Total loans, net of
discounts.................. 31,665 9.01 709,114 31,430 9.14 714,191 31,125 9.60 744,790
------- -------- --------- -------- -------- --------
Total interest earning
assets (d)................. $39,031 8.47 822,398 $ 39,266 8.51 830,885 $ 40,402 8.87 893,359
======= ----- -------- ========= ----- -------- ======== ----- --------
FUNDING SOURCES
- ---------------
Interest Bearing
Liabilities (b):
Deposits in domestic
offices:
Commercial................... $ 596 5.12 7,582 $ 687 5.43 9,281 $ 660 5.70 9,382
NOW accounts (e)............. 1,713 0.86 3,375 2,895 1.22 7,989 3,407 1.56 12,101
Money Market Accounts (e).... 7,307 2.66 48,095 6,323 2.97 46,568 5,977 3.35 49,761
Consumer savings............. 4,720 1.82 21,412 4,748 1.97 23,289 5,117 2.33 29,736
Consumer certificates........ 9,230 5.08 116,648 9,015 5.22 116,964 9,210 5.47 125,663
Time deposits of overseas
branches
and subsidiaries............. 935 4.67 10,850 911 4.58 10,367 1,237 5.27 16,268
------- -------- --------- -------- -------- --------
Total interest
bearing deposits (e)...... 24,501 3.44 207,962 24,579 3.55 214,458 25,608 3.85 242,911
------- -------- --------- -------- -------- --------
Short-term funds borrowed:
Federal funds purchased...... 1,460 5.03 18,254 1,625 5.24 21,164 2,358 5.78 34,001
Commercial paper............. 1,059 5.35 14,093 1,045 5.52 14,331 991 6.12 15,109
Other........................ 289 4.86 3,495 358 4.79 4,262 542 5.37 7,263
------- -------- --------- -------- -------- --------
Total short-term
funds borrowed............. 2,808 5.13 35,842 3,028 5.28 39,757 3,891 5.81 56,373
------- -------- --------- -------- -------- --------
Long-term debt................. 2,449 6.33 38,556 2,439 6.41 38,849 2,216 6.86 37,919
------- -------- --------- -------- -------- --------
Total interest
bearing liabilities....... 29,758 3.82 282,360 30,046 3.92 293,064 31,715 4.26 337,203
Portion of non-interest
bearing funding sources.......... 9,273 9,220 8,687
------- --------- --------
Total funding
sources................... $39,031 2.91 282,360 $ 39,266 3.00 293,064 $ 40,402 3.35 337,203
======= ----- -------- ========= ----- -------- ======== ----- --------
Net interest income and
net interest margin............. 5.56% $540,038 5.51% $537,821 5.52% $556,156
===== ======== ===== ======== ===== ========
</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.
35
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEETS AND TAXABLE EQUIVALENT INCOME/EXPENSE AND
RATES - continued
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------------
June 30, 1996 March 31, 1996 June 30, 1995
------------------------- -------------------------- -----------------------
Average Income/ Average Income/ Average Income/
balance Rate expense balance Rate expense balance Rate expense
------- ---- ------- ------- ---- ------- ------- ---- -------
(000,000) (000) (000,000) (000) (000,000) (000)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NON-INTEREST EARNING ASSETS
- ---------------------------
Cash............................................. $ 2,833 $ 2,896 $ 2,747
Allowance for loan losses........................ (712) (675) (679)
Other assets..................................... 2,443 2,317 2,401
------- ------- -------
Total non-interest earning assets............ $ 4,564 $ 4,538 $ 4,469
======= ======= =======
TOTAL AVERAGE ASSETS............................. $43,595 $43,804 $44,871
- -------------------- ======= ======= =======
NON-INTEREST BEARING FUNDING
- ---------------------------
SOURCES
- -------
Demand deposits:
Domestic..................................... $ 7,637 $ 7,631 $ 7,312
Foreign...................................... 372 391 385
Other liabilities................................ 1,981 1,807 1,777
Shareholders' equity............................. 3,847 3,929 3,682
Non-interest bearing funding sources used to fund
earning assets............................... (9,273) (9,220) (8,687)
------- ------- -------
Total net non-interest bearing funding
sources.................................. $ 4,564 $ 4,538 $ 4,469
======= ======= =======
SUPPLEMENTARY AVERAGES
- ----------------------
Net demand deposits.............................. $ 6,374 $ 6,297 $ 6,083
Net Federal funds purchased...................... 1,018 4.64% $ 11,745 1,091 5.08% $13,781 2,176 5.79% $31,424
Commercial certificates of deposit in domestic
offices over $100,000........................ 596 5.12 7,582 687 5.43 9,281 660 5.70 9,381
Average prime rate............................... 8.25 8.34 8.81
</TABLE>
36
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEETS AND TAXABLE EQUIVALENT INCOME/EXPENSE AND
RATES - continued
<TABLE>
<CAPTION>
Six Months Ended
----------------------------------------------------------------------------
June 30, 1996 June 30, 1995
---------------------------------- ---------------------------------
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)........ $ 1,880 5.64% $ 52,692 $ 2,036 6.49% $ 65,542
Investment securities (b):
U.S. Government................................. 3,652 6.06 110,031 5,095 5.88 148,488
State and municipal............................. 536 8.00 21,439 696 8.46 29,435
Other........................................... 932 5.98 27,724 1,054 6.53 34,119
------- ---------- -------- ----------
Total investment securities................... 5,120 6.25 159,194 6,845 6.25 212,042
------- ---------- -------- ----------
Federal funds sold................................ 488 5.72 13,892 212 5.65 5,939
Trading account securities........................ 113 7.43 4,200 342 7.46 12,764
Loans (b) (c) (d):
Domestic:
Commercial, industrial and other.............. 12,952 9.03 581,602 12,262 9.59 583,005
Real estate................................... 10,503 8.63 450,616 11,507 9.11 519,888
Consumer...................................... 4,426 11.54 254,025 4,161 11.14 229,773
Financial institutions........................ 805 6.02 24,108 673 7.28 24,309
Factoring receivables......................... 513 10.68 27,243 568 10.87 30,626
Lease financing............................... 1,179 8.16 48,093 1,064 8.14 43,321
Foreign......................................... 1,170 6.47 37,618 719 7.13 25,405
------- ---------- -------- ----------
Total loans, net of discounts............... 31,548 9.07 1,423,305 30,954 9.49 1,456,327
------- ---------- -------- ----------
Total interest earning assets (d)........... $39,149 8.49 1,653,283 $ 40,389 8.75 1,752,614
======= ----- ---------- ======== ----- ----------
FUNDING SOURCES
- ---------------
Interest Bearing Liabilities (b):
Deposits in domestic offices:
Commercial.................................... $ 642 5.28 16,863 $ 647 5.62 18,021
NOW accounts (e).............................. 2,304 1.09 11,364 3,440 1.59 24,861
Money Market Accounts (e)..................... 6,815 2.80 94,663 6,075 3.30 99,337
Consumer savings.............................. 4,734 1.90 44,701 5,205 2.33 60,134
Consumer certificates......................... 9,122 5.15 233,612 9,136 5.32 241,029
Time deposits of overseas branches
and subsidiaries.............................. 923 4.62 21,217 1,129 4.92 27,549
------- ---------- -------- ----------
Total interest bearing deposits (e)......... 24,540 3.49 422,420 25,632 3.75 470,931
------- ---------- -------- ----------
Short-term funds borrowed:
Federal funds purchased....................... 1,542 5.14 39,418 2,369 5.83 68,484
Commercial paper.............................. 1,052 5.43 28,424 927 6.05 27,796
Other......................................... 324 4.81 7,757 541 5.34 14,318
------- ---------- -------- ----------
Total short-term funds borrowed............. 2,918 5.21 75,599 3,837 5.81 110,598
------- ---------- -------- ----------
Long-term debt.................................. 2,444 6.37 77,405 2,187 6.91 74,939
------- ---------- -------- ----------
Total interest bearing liabilities.......... 29,902 3.87 575,424 31,656 4.18 656,468
Portion of non-interest bearing funding sources... 9,247 8,733
------- ---------- -------- ----------
Total funding sources....................... $39,149 2.95 575,424 $ 40,389 3.28 656,468
======= ----- ---------- ======== ----- ----------
Net interest income and net interest margin....... 5.54% $1,077,859 5.47% $1,096,146
===== ========== ===== ==========
</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.
37
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEETS AND TAXABLE EQUIVALENT INCOME/EXPENSE AND
RATES - continued
<TABLE>
<CAPTION>
Six Months Ended
----------------------------------------------------------------------------
June 30, 1996 June 30, 1995
---------------------------------- ---------------------------------
Average Income/ Average Income/
balance Rate expense balance Rate expense
------- ------ ------- ------- ------ -------
(000,000) (000) (000,000) (000)
<S> <C> <C> <C> <C> <C> <C>
NON-INTEREST EARNING ASSETS
- ---------------------------
Cash............................................. $ 2,864 $ 2,692
Allowance for loan losses........................ (693) (684)
Other assets..................................... 2,380 2,387
------- -------
Total non-interest earning assets............ $ 4,551 $ 4,395
======= =======
TOTAL AVERAGE ASSETS............................. $43,700 $44,784
- -------------------- ======= =======
NON-INTEREST BEARING FUNDING
- -----------------------------
SOURCES
- -------
Demand deposits:
Domestic..................................... $ 7,635 $ 7,325
Foreign...................................... 381 377
Other liabilities................................ 1,894 1,718
Shareholders equity ............................. 3,888 3,708
Non-interest bearing funding sources used to fund
earning assets............................... (9,247) (8,733)
------- -------
Total net non-interest bearing funding
sources.................................. $ 4,551 $ 4,395
======= =======
SUPPLEMENTARY AVERAGES
- ----------------------
Net demand deposits.............................. $ 6,336 $ 6,216
Net Federal funds purchased...................... 1,054 4.87% $25,526 2,157 5.85% $62,545
Commercial certificates of deposit in domestic
offices over $100,000........................ 641 5.29 16,863 647 5.62 18,020
Average prime rate............................... 8.29 8.91
</TABLE>
38
<PAGE>
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:
10.1 Agreement with Samuel A. McCullough dated April 8, 1996
10.2 Amendment to Termination Agreement dated July 1, 1986
10.3 Form of Termination Agreement for Samuel McCullough dated
July 1, 1986
10.4(A)Form of Termination Agreement for Executive Officers
10.4(B)Schedule of Named Executive Officers and Executive Officers
who are Parties to a Termination Agreement
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: April 3, 1996
--------------
Item(s) Reported: Reporting under Item 7 Pro Forma Financial
----------------
Information of CoreStates Financial Corp and subsidiaries,
Consolidated Financial Statements of Meridian Bancorp and
subsidiaries, and Consolidated Financial Statements of United
Counties Bancorporation and subsidiaries.
2. Date of Report: April 9, 1996
--------------
Item(s) Reported: Reporting under Item 5 the information set
----------------
forth in the news releases of CoreStates Financial Corp
announcing the agreement for Commonwealth Savings Bank to
acquire 11 Meridian Bancorp branch offices and the completion
of its merger with Meridian Bancorp, Inc.
3. Date of Report: April 17, 1996
--------------
Item(s) Reported: Reporting under Item 5 the information set
----------------
forth in the earnings news release of CoreStates Financial
Corp.
4. Date of Report: June 13, 1996
--------------
Item(s) Reported: Reporting under Item 7 Consolidated
----------------
Financial Statements of CoreStates Financial Corp and
Subsidiaries (restated to include 1995 financial information
for Meridian Bancorp, Inc. and United Counties Bancorporation,
which were acquired on April 9, 1996 and accounted for as a
pooling of interests).
5. Date of Report: June 28, 1996
--------------
Item(s) Reported: Reporting under Item 5 the information
----------------
regarding the completion of 11 former Meridian Bank branch
sales to Commonwealth Savings Bank.
39
<PAGE>
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: August 13, 1996 By: /s/ Christopher J. Carey
----------------------------------
Christopher J. Carey
Senior Vice President and Controller
(Principal Accounting Officer)
40
<PAGE>
EXHIBIT 10.1
A G R E E M E N T
- - - - - - - - -
AGREEMENT dated this 8th day of April, 1996, by and among Meridian Bancorp,
Inc. ("the Company"), CoreStates Financial Corp ("CoreStates") and Samuel A.
McCullough ("Executive").
WHEREAS, the Company and Executive entered into a Termination Agreement
dated July 1, 1986 (the "Termination Agreement"); and
WHEREAS, the Company and Corestates have entered into an Agreement and Plan
of Merger (the "Merger");
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and intending to be legally bound, the parties agree as follows:
1. The Termination Agreement is hereby amended to add the following
Sections 3(f) and 3(g):
3. (f) Notwithstanding the foregoing provisions of this Section 3, the
present value (determined in accordance with the provisions of Section 280G
of the Internal Revenue Service Code of 1986, as amended (the "Code")) of
the total amount of all payments under this Termination Agreement, when
aggregated with any other payments to Executive which constitute parachute
payments (within the meaning of Section 280G of the Code) shall in no event
exceed 2.99 times the Executive's "base amount" (as determined under
Section 280G of the Code). To the extent that payments or benefits are
reduced hereunder, Executive may designate which payments or benefits shall
be reduced. In the event Executive fails to make such designation in a
reasonably timely fashion, CoreStates shall be entitled to do so.
3. (g) The payments made under this Section 3 of the Termination
Agreement shall not be taken into account as compensation for purposes of
computing benefits under the Meridian Bancorp, Inc. Supplemental Executive
Retirement Plan (the "SERP"). Executive hereby waives any right to have
such payments taken
<PAGE>
into account for purposes of the SERP, and agrees that this waiver shall be
considered an effective waiver under Section 9.1(h) of the SERP.
2. Notwithstanding anything in the Termination Agreement to the
contrary, the Termination Agreement, as amended herein, is hereby terminated by
mutual agreement among Executive, the Company and CoreStates effective June 30,
1996. The execution of this Agreement by Executive shall constitute the Notice
of Termination referred to in Section 2(a) of the Termination Agreement. On
July 1, 1996 Executive shall commence receipt of the compensation and benefits
set forth in Section 3 of the Termination Agreement, as amended herein, for a
period of thirty-six (36) months ending on June 30, 1999. Pursuant to Section 5
of the Termination Agreement, any contrary or inconsistent provisions of
Section 1, 2 or 3 of the Termination Agreement are hereby modified or deleted in
order to accomplish the foregoing.
3. Notwithstanding the fact that he will not be in the status of
employee, the Company and Corestates agree that Executive shall be permitted to
exercise all of his vested stock options, to the extent not previously
exercised, during the 90-day period commencing on and including the last day of
his employment with CoreStates, in accordance with the terms, conditions and
limitations set forth in the CoreStates Stock Option Plan.
4. Commencing on July 1, 1996 and ending on June 30, 1997 (the
"Consultancy Period"), Executive shall provide
-2-
<PAGE>
consulting services on an exclusive basis to CoreStates. Such services shall be
supplied by Executive as an independent contractor and not as an employee. If
prior to June 30, 1996 Executive accepts employment with another entity, or
enters into any other relationship or commitment inconsistent with his
obligation to provide exclusive services to CoreStates, the consultancy
relationship and the payments therefor shall not commence. The consultancy
relationship shall terminate automatically on June 30, 1997, unless earlier
terminated by CoreStates for Cause. As used herein, "Cause" shall mean: (i) a
documented repeated and willful failure by Executive to perform his duties as a
Consultant after written demand; (ii) his unappealable conviction of a felony;
or (iii) the issuance by the federal regulators of CoreStates of unappealable
orders to the effect that he be permanently prohibited from providing services
to CoreStates. If the consultancy relationship is terminated for Cause, no
further payments shall be made thereafter under Section 5 of this Agreement.
Termination for Cause shall be effective upon written notice delivered to
Executive or mailed by certified mail to his home address.
5. For all of the services to be rendered by Executive as a
consultant, CoreStates shall pay Executive a total fee of One Million Dollars
($1,000,000.00), to be paid bi-weekly in twenty-six equal installments of
$38,461.53, subject to the provisions of Section 4 above. Notwithstanding
anything herein to the contrary, the consultancy payments described in
-3-
<PAGE>
this Section 5 shall not be paid to the extent that, in the judgment of the
Company's or CoreStates' independent public accountant, the payment would
adversely affect pooling of interest accounting treatment with respect to the
Merger or would jeopardize any other aspect of the Merger Agreement.
6. The terms upon which consulting services will be rendered by
Executive are as follows:
(a) Executive shall make himself available to CoreStates for a
maximum of two hundred (200) days during the Consultancy Period, for a maximum
of ten (10) hours per day; provided, however, that Executive shall not be
required to make himself available for more than a total of one thousand, six
hundred (1,600) hours during the Consultancy Period;
(b) Executive's services shall be provided on a schedule mutually
agreed upon between Executive and the Chairman of the Board of Directors of
CoreStates;
(c) Executive's duties shall include calling on former customers
of Meridian and other large customers of CoreStates as mutually agreed; advising
the top management group of CoreStates as requested; the representation of
CoreStates with public bodies, industry associations and other persons or
organizations as mutually agreed; and other activities as mutually agreed;
(d) Executive shall be reimbursed for reasonable expenses
incurred in connection with his consulting services in
-4-
<PAGE>
accordance with the CoreStates Travel and Entertainment Policy, a copy of which
will be provided to Executive.
7. Confidential Information. Executive agrees that all of the
provisions of CoreStates' Employee Handbook relating to the definition and
protection of Confidential Information, Business Relations, Financial
Information, Proprietary Information and Examination Information (including, but
not limited to, those provisions appearing at pages 3 through 5 of the
Handbook), and his obligations to comply therewith and to protect such
information, will continue to apply to him after the termination of his
employment with the Company or CoreStates, regardless of the reason for
termination, and that he will continue to be contractually bound by those
provisions after the termination of his employment.
8. Non-Competition. Executive agrees that for a period of twelve months
after Executive's employment with the Company or CoreStates terminates,
regardless of the reason for termination, Executive shall not, directly or
indirectly, anywhere within the United States, engage in (as principal, partner,
director, officer, agent, employee, consultant, owner, independent contractor or
otherwise, with or without compensation) or hold a financial interest in any
organization engaged in the business of banking (including, but not limited to,
the providing of wholesale banking services, consumer financial services, retail
banking, trust and investment management services, electronic payment services,
secured and
- 5 -
<PAGE>
unsecured loan and financing services, real estate financing services, asset and
investment management and fiduciary services, securities brokerage services,
bank-eligible municipal securities, dealing and underwriting services,
investment banking services, cash management services, international banking
services, financial risk management services, financing bankers' acceptances,
investment advisory services, underwriting services, consumer and commercial
credit card services, merchant card services, card processing services, and
electronic transaction processing services) or which otherwise is engaged in
competition with the Company or CoreStates, or their subsidiaries or
affiliates.
The foregoing restriction and the exclusivity provision of Section 4
herein shall not be construed to prohibit the ownership by Executive of not more
than five percent (5%) of any class of securities of any corporation which is
engaged in any of the foregoing businesses having a class of securities
registered pursuant to the Securities Exchange Act of 1934, provided that such
ownership represents a passive investment and that neither Executive nor any
group of persons including Executive in any way, either directly or indirectly,
manages or exercises control of any such corporation, guarantees any of its
financial obligations, otherwise takes part in its business, other than
exercising his rights as a shareholder, or seeks to do any of the foregoing.
- 6 -
<PAGE>
9. No Solicitation. Executive agrees that for a period of twelve
months after Executive's employment with the Company or CoreStates terminates,
regardless of the reason for the termination, he will not, either directly or
indirectly, (i) solicit the employment of any person who was employed by the
Company or Corestates on a full or part-time basis at the time Executive last
performed services for the Company or CoreStates unless such person (a) was
involuntarily discharged by the Company or CoreStates or such affiliate; or (b)
voluntarily terminated his or her relationship with the Company or CoreStates or
such affiliate prior to Executive's termination of employment; or (ii) call on
or solicit any person, firm, corporation or other entity who or which at the
time of such termination was, or within five years prior thereto had been, a
customer of the Company or CoreStates or any of their subsidiaries or affiliates
with respect to the activities prohibited by Section 8 hereof.
10. Equitable Relief.
(a) Executive acknowledges that the restrictions contained in
Sections 7, 8, 9 and hereof are reasonable and necessary to protect the
legitimate interests of the Company and CoreStates, that the Company and
CoreStates would not have entered into this Agreement in the absence of such
restrictions, and that any violation of any provision of those Sections will
result in irreparable injury to the Company or CoreStates. Executive represents
that his experience and capabilities are such that the restrictions contained in
Sections 8 and 9 hereof
- 7 -
<PAGE>
will not prevent Executive from obtaining employment or otherwise earning a
living at the same general level of economic benefit as anticipated by this
Agreement. Executive further represents and acknowledges that (i) he has been
advised by the Company to consult his own legal counsel in respect to this
Agreement; and (ii) that he has, prior to execution of this Agreement, reviewed
thoroughly this Agreement with his counsel.
(b) Executive agrees that the Company or CoreStates shall be entitled
to preliminary and permanent injunctive relief, without the necessity of proving
actual damages, as well as to an equitable accounting of all earnings, profits
and other benefits arising from any violations of Sections 7, 8, or 9 hereof,
which rights shall be cumulative and in addition to any other rights or remedies
to which the Company or CoreStates may be entitled. In the event that any of the
provisions of Sections 7, 8 or 9 hereof should ever be adjudicated to exceed the
time, geographic, product or service, or other limitations permitted by
applicable law in any jurisdiction, then such provisions shall be deemed
reformed in such jurisdiction to the maximum time, geographic, product or
service, or other limitations permitted by applicable law.
(c) Executive irrevocably and unconditionally (i) agrees that any suit,
action or other legal proceeding arising out of this Agreement in which any
party is seeking in whole or in part any form of equitable relief, including
without limitation, any action commenced by the Company or CoreStates for
- 8 -
<PAGE>
preliminary and permanent injunctive relief and other equitable relief, may be
brought in any court of competent jurisdiction in Philadelphia County,
Pennsylvania; (ii) consents to the non-exclusive jurisdiction of any court in
any such suit, action or proceeding; and (iii) waives any objection which
Executive may have to the laying of venue of any such suit, action or proceeding
in any such court.
(d) Executive agrees that CoreStates may provide a copy of Sections 7,
8 and 9 of this Agreement to any business or enterprise (i) which he may
directly or indirectly own, manage, operate, finance, join, control or
participate in the ownership, management, operation, financing, control or
control of; or (ii) with which he may be connected as an officer, director,
employee, partner, principal, agent, representative, consultant or otherwise, or
in connection with which he may use or permit his name to be used; provided,
however, that this provision shall not apply in respect of Sections 8 and 9 of
this Agreement after expiration of the time periods set forth herein. Executive
agrees to notify CoreStates promptly upon the establishment of any relationship
between him and any such business or enterprise covered by this Section 10(d).
11. Arbitration. Any controversy arising out of, or relating to the
operation, of this Agreement, or any modification or extension hereof, which
involves a claim for purely legal, and not equitable, relief shall be settled by
arbitration in accordance with the rules then obtaining of the American
- 9 -
<PAGE>
Arbitration Association regarding commercial disputes. The award of the
arbitrators shall be final and binding. All proceedings in such arbitration
shall be conducted in Philadelphia, Pennsylvania. Any such arbitration
proceedings must be instituted within the first to occur of (i) one year after
knowledge that the claimed wrong or breach occurred, or (ii) three years after
the claimed wrong or breach occurred. The failure to institute arbitration
proceedings within such period shall constitute an absolute bar to the
institution of any proceedings and a waiver of all claims.
12. In the event that CoreStates institutes judicial proceedings
seeking equitable relief, or institutes arbitration proceedings, in which it
contends that Executive has violated any of his obligations under this
Agreement, CoreStates' right, if any, to discontinue payments during the
pendency of those proceedings will be limited to those payments described in
Section 5 herein. This Section 12 does not constitute an acknowledgement by
Executive that CoreStates has, or will have, any right to discontinue such
payments under any circumstances.
13. Waiver. No provision of this Agreement may be modified, waived, or
discharged unless such waiver, modification, or discharge is agreed to in
writing and signed by Executive and CoreStates. No waiver by either party hereto
at any time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar
- 10 -
<PAGE>
provisions or conditions at the same or at any prior or subsequent time.
14. Assignment. This Agreement shall not be assignable by either
party, except by CoreStates to any successor in interest to CoreStates'
business.
15. Entire Agreement. This Agreement contains the entire agreement of
the parties relating to the subject matter of this Agreement. Any other
Agreements are hereby superseded to the extent that they limit, qualify
duplicate, or are inconsistent with this Agreement.
16. Successors: Binding Agreement. CoreStates will require any
successor (whether direct or indirect, by purchase, merger, consolidation, or
otherwise) to all or substantially all of the business and/or assets of
CoreStates to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that CoreStates would be required to perform it if
no such succession had taken place. Failure by CoreStates to obtain such
assumption and agreement prior to the effectiveness as of any such succession
shall constitute a breach of this Agreement.
17. Validity. The invalidity or unenforceability of any provisions of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
18. Applicable Law. This Agreement shall be governed by and construed
in accordance with the domestic laws (but not the law of conflicts of law) of
the Commonwealth of Pennsylvania.
- 11 -
<PAGE>
19. Headings. The headings of the Sections of this Agreement are for
convenience only and shall not control or affect the meaning or construction or
limit the scope of intent of any of the provisions of this Agreement.
20. Execution in Counterparts. This Agreement may be executed in one
or more counterparts and shall be effective upon such execution. Any original
executed in counterpart shall be deemed an executed original. Executed
counterparts which have been communicated by facsimile transmission shall be as
fully effective as an original executed counterpart.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
MERIDIAN BANCORP, INC.
By:
--------------------------
Title
Attest:
----------------------
Title
/s/ Samuel A. McCullough (SEAL)
-----------------------------
Witness:
---------------------
CORESTATES FINANCIAL CORP
By:
---------------------------
Title:
Attest:
-----------------------
Title
- 12 -
<PAGE>
Exhibit 10.2
Amendment to Termination Agreement
Dated July 1, 1986
AGREEMENT dated this 5th day of April, 1996, by and between Meridan
Bancorp, Inc. ("the Company") and Samuel A. McCullough ("Executive").
WHEREAS, the Company and Executive entered into a Termination Agreement
dated July 1, 1986 (the "Termination Agreement"); and
WHEREAS, the Company and CoreStates Financial Corp ("CoreStates") have
entered into an Agreement and Plan of Merger (the "Merger"); and
WHEREAS, the Company, CoreStates (as successor by merger to the Company)
and Executive mutually desire to amend the Termination Agreement as set forth
herein;
NOW, THEREFORE, in the consideration of the mutual covenants herein
contained, and intending to be legally bound, the parties (with the Concurrence
of CoreStates) agree as follows:
1. Section 1(a) of the Termination Agreement is hereby amended by
deleting the language "at least sixty (60) days prior to an Annual Renewal Date
in which case this Agreement shall continue in effect for a term ending three
(3) years from the Annual Renewal Date immediately following such notice.", and
<PAGE>
replacing it with the language "at least fourteen (14) days prior to an Annual
Renewal Date in which case this Agreement shall continue in effect until
December 31, 1996. Executive shall have the right to resign from employment
with the Company at any time prior to December 31, 1996 (with appropriate notice
as required herein), by delivering a Notice of Termination to the Company and
the provisions of Section 3 of the Termination Agreement, as amended, shall
apply. Such Notice shall be given in writing at least fourteen (14) days prior
to the effective date of Executive's resignation, and no later than December 17,
1996. If such Notice is not delivered on or before December 17, 1996, the
Termination Agreement shall automatically terminate on December 31, 1996, and
under no circumstances shall it continue beyond that date."
2. The execution of this Amendment to Termination Agreement Dated
July 1, 1996 by Executive, the Company and CoreStates shall constitute notice
of nonrenewal by the Company pursuant to Section 1(a) of the Termination
Agreement, which notice shall be effective as of the date first written above.
3. The Termination Agreement is hereby amended to delete all
references to the "Board of Directors of the Company,"
- 2 -
<PAGE>
and to substitute in all cases the phrase "Board of Directors of CoreStates."
4. Section 3 of the Termination Agreement is hereby deleted and
the following language inserted:
3. Rights in Event Of Termination Following Change in Control.
-----------------------------------------------------------
(a) The parties agree that a change of control (as defined in Section 2(b)
of the Termination Agreement) will occur as the result of the Merger
between the Company and Corestates, and that in the event that the
Executive delivers a Notice of Termination to the Company on or before
December 17, 1996 (which Notice will be considered timely under Section
2(a) of the Termination Agreement), Executive shall be entitled to receive,
subject to the conditions of Section 3(e) herein, the compensation and
benefits set forth below for a period of thirty-six (36) months following
the Executive's termination of employment, as follows:
(i) the Executive shall continue to receive payments of
annual base salary at the highest amount in effect during the three
(3) calendar years preceding the year in which the Notice of
Termination is delivered, payable in the same manner as salaries paid
to other executive employees of the Company;
(ii) the Executive shall receive, no later than the fifth
(5th) calendar day of each month, an amount equal to one-twelfth
(1/12) of the annual dollar amount the Executive would have received
under the Meridian Bancorp, Inc. Executive Annual Incentive Plan, in
accordance with the terms of that plan as it may be modified or
amended from time to time, based on the Executive's highest annual
base salary in effect during, and based on the highest percentage
award of annual base salary received by the Executive under such Plan
during,
- 3 -
<PAGE>
the three (3) calendar years preceding the year in which the Notice of
Termination is delivered;
(iii) the Executive shall continue to receive, no later than
the fifth (5th) calendar day or each month, an amount equal to one-
twelfth (1/12) of the largest annual contribution made to the Meridian
Bancorp, Inc. Payroll-Based Employer Stock Ownership Plan on behalf of
the Executive during the two (2) calendar years preceding the year in
which the Notice of Termination is delivered.
(iv) the Executive shall receive, no later than the fifth
(5th) calendar day of each month, an amount equal to one-twelfth
(1/12) of the amount of the contribution made by the Company to the
Meridian Bancorp, Inc. Salary Reduction Deferred Savings Plan on
behalf of the Executive for the calendar year prior to the year in
which the Notice of Termination is delivered;
(v) the Executive shall be entitled to continue to
participate in the Meridian Bancorp, Inc. Employee Retirement Plan and
the Meridian Bancorp, Inc. Retirement Restoration Plan, or any other
supplemental executive retirement plan or other plan in effect as of
December 31, 1995 designed to supplement payments made under the
Meridian Bancorp, Inc. Employee Retirement Plan (subject to the
provisions of Section 3(f) hereof), and in accordance with the terms
of each plan as it may be modified or amended from time to time, as if
the Executive's employment had not terminated; and
(vi) the Company shall provide the Executive with life,
disability, and medical insurance benefits at levels equivalent to the
highest levels in effect for the Executive during the two (2) calendar
years preceding the year in which the Notice of Termination is
delivered.
- 4 -
<PAGE>
(b) In the event that the Executive is ineligible to continue
participation in the Meridian Bancorp, Inc. Employees Retirement Plan or in
any of the life, disability, or medical insurance plans or programs listed
in Section 3(a) of this Agreement, the Company shall, in lieu of such
participation, and subject to the conditions of Section 3(e) herein, pay
the Executive a dollar amount equal to the dollar amount of the benefit
forfeited by the Executive as a result of such ineligibility in the case of
the Retirement Plan or a dollar amount equal to the cost to the Executive
to obtain such benefits in the case of any life, disability, or medical
insurance plans or programs.
(c) The Company shall pay to the Executive all legal fees and
expenses incurred by the Executive as a result of the Executive's delivery
of a Notice of Termination (including all such fees and expenses, if any,
incurred in contesting or disputing any termination of employment or in
seeking to obtain or enforce any right or benefit provided by this
Agreement).
(d) The Executive shall not be required to mitigate the amount
of any payment provided for in this Section 3 by seeking other employment
or otherwise, nor shall the amount of any payment or benefit provided for
in this Section 3 be reduced by any compensation earned by the Executive as
the result of employment by another employer or by reason of the
Executive's receipt of or right to receive any retirement or other benefits
after the date of termination of employment or otherwise; provided,
however, that the payments provided for in this Section 3 shall be reduced
by the amount actually received by the Executive under the severance
policy of the Company then in effect.
(e) Notwithstanding the foregoing provisions of this Section 3,
the present value (determined in accordance with the provisions of Section
280G of the Internal Revenue Code of 1986, as amended (the "Code")) of the
total amount of all payments under this Termination Agreement (including
the bonus payment referred to in Section 4), when aggregated with any other
payments
- 5 -
<PAGE>
to Executive, which constitute parachute payments (within the meaning of
Section 280G of the Code) shall in no event exceed 2.99 times the
Executive's "base amount" (as determined under Section 280G of the Code).
To the extent that payments or benefits are reduced hereunder, Executive
may designate which payments or benefits shall be reduced. In the event
Executive fails to make such designation in a reasonably timely fashion,
the Company shall be entitled to do so.
(f) The payments made under this Section 3 of the Termination
Agreement shall not be taken into account as compensation for purposes of
computing benefits under the Meridian Bancorp, Inc. Supplemental Executive
Retirement Plan (the "SERP"). Executive hereby waives any right to have
such payments taken into account for purposes of the SERP, and agrees that
this waiver shall be considered an effective waiver under Section 9.1(h) of
the SERP.
5. The following Section 12 is hereby added to the Termination
Agreement:
During the period of time commencing on the date of the closing of the
Merger between Meridian and CoreStates and ending on December 31, 1996,
unless this Agreement is earlier terminated ("the Transition Period"),
Executive's title shall be President and Chief Relationship Officer of
Corestates. The specific duties and performance criteria of this position
shall be mutually agreed upon and may be changed from time to time by the
parties, but shall include principal responsibility for Meridian's customer
retention efforts. Executive hereby agrees to relinquish all titles, duties
and responsibilities assigned to him pursuant to the Merger Agreement dated
October 10, 1995, between CoreStates and Meridian (the "Merger Agreement"),
except to the extent than any such titles, duties and responsibilities
shall hereafter be assigned to him by mutual agreement.
- 6 -
<PAGE>
6. The following Sections 13 through 19 are hereby added to the
Termination Agreement:
13. In consideration of Executive's undertakings in Sections 14 through
17 herein, and other good and valuable consideration, the Company or
CoreStates shall pay to Executive a bonus in the amount of $800,000,
payable as described below and subject to the following conditions:
(a) The bonus shall not be taken into consideration, nor shall it
be considered compensation, for purposes of computing the compensation and
benefit payments under Section 3 of the Termination Agreement, as amended,
or for purposes of computing compensation or benefits under the SERP or any
other incentive, retirement or benefit plan or agreements of the Company or
CoreStates.
(b) On or before __________, 1996, the Company or CoreStates will
enter into a grantor trust agreement (the "Trust Agreement"), which shall
provide for the holding, investment, reinvestment, and payment by an
independent trustee to or on behalf of Executive of the amount held therein
at any relevant time in accordance with the provisions of this Agreement
and the Trust Agreement. To the extent the provisions of this Agreement are
construed as inconsistent with the executed Trust Agreement, the terms of
the latter shall prevail.
(c) On or before __________, 1996, the Company or CoreStates will
deposit $800,000 with the trustee under the Trust Agreement.
(d) Payment of the entire trust corpus (i.e., the amount initially
----
deposited therein) and accumulated and accrued income thereon (the "Trust
Fund") shall be made to Executive in one lump sum during January of the
calendar year immediately following his termination of employment with the
Company. In the event Executive's employment terminates by reason of his
death, the Trust
- 7 -
<PAGE>
Fund shall be paid to his surviving spouse, or if there is none, to his estate.
(e) Notwithstanding anything herein to the contrary, and subject to
the last two sentences of Section 3(e) herein, the amount payable to or on
behalf of Executive hereunder shall be reduced if and to the extent necessary so
that the "present value" (as determined in accordance with the provision of
Section 280G of the Internal Revenue Code of 1986 (the "Code")) of the benefit
hereunder and all other payments and benefits otherwise provided to or on his
behalf (including the payments referred to in Section 3 herein), which benefits
and payments constitute "parachute payments" (within the meaning of Code Section
280G), shall not exceed 2.99 times his "base amount" (as determined under Code
Section 280G). This Section 13(e) does not constitute an acknowledgement that
the payment to the Executive hereunder constitutes such a "parachute payment."
(f) Executive acknowledges and agrees that, whether or not the bonus
awarded hereunder is deposited in a trust, his right to receive such bonus and
any earnings or interest thereon shall be limited to the right of a general
unsecured creditor of the Company or CoreStates.
(g) Notwithstanding anything herein to the contrary, the bonus shall
not be paid to the extent that, in the judgement of the Company's or CoreStates'
independent public accountant, the payment would adversely affect pooling of
interest accounting treatment with respect to the Merger or would jeopardize any
other aspect of the Merger Agreement.
14. Confidential Information. Executive agrees to all of the provisions
------------------------
of CoreStates' Employee Handbook relating to the definition and protection of
Confidential Information, Business Relations, Financial Information, Proprietary
Information and Examination Information (including, but not limited to, those
provisions appearing at pages 3 through 5 of the Handbook), and his obligations
to comply therewith and
- 8 -
<PAGE>
to protect such information will continue to apply to him after the termination
of his employment with CoreStates, regardless of the reason for termination, and
that he will continue to be contractually bound by those provisions after the
termination of his employment.
15. Non-Competition. Executive agrees that for a period of twelve months
---------------
after Executive's employment with the Company or CoreStates terminates,
regardless of the reason for termination, Executive shall not, directly or
indirectly, anywhere within the United States, engage in (as principal, partner,
director, officer, agent, employee, consultant, owner, independent contractor or
otherwise, with or without compensation) or hold a financial interest in any
organization engaged in the business of banking (including, but not limited to,
the providing of wholesale banking services, consumer financial services, retail
banking, trust and investment management services, electronic payment services,
secured and unsecured loan and financing services, real estate financing
services, asset and investment management and fiduciary services, securities
brokerage services, bank-eligible municipal securities, dealing and underwriting
services, investment banking services, cash management services, international
banking services, financial risk management services, financing bankers'
acceptances, investment advisory services, underwriting services, consumer and
commercial credit card services, merchant card services, card processing
services, and electronic transaction processing services) or which otherwise is
engaged in competition with the Company or CoreStates, or their subsidiaries or
affiliates.
The foregoing restriction shall not be construed to prohibit the ownership
by Executive of not more than five percent (5%) of any class of securities of
any corporation which is engaged in any of the foregoing businesses having a
class of securities registered pursuant to the Securities Exchange Act of 1934,
provided that such ownership represents a passive investment and that neither
Executive nor any group of
-9-
<PAGE>
persons including Executive in any way, either directly or indirectly, manages
or exercises control of any such corporation, guarantees any of its financial
obligations, otherwise takes part in its business, other than exercising his
rights as a shareholder, or seeks to do any of the foregoing.
16. No Solicitation. Executive agrees that for a period of twelve months
---------------
after Executive's employment with the Company or CoreStates terminates,
regardless of the reason for the termination, he will not, either directly or
indirectly, (i) solicit the employment of any person who was employed by the
Company or CoreStates on a full or part-time basis at the time Executive last
performed services for the Company or CoreStates unless such person (a) was
involuntarily discharged by the Company or CoreStates or such affiliate; or (b)
voluntarily terminated his or her relationship with the Company or CoreStates or
such affiliate prior to Executive's termination of employment; or (ii) call on
or solicit any person, firm, corporation or other entity who or which at the
time of such termination was, or within five years prior thereto had been, a
customer of the Company or CoreStates or any of their subsidiaries or affiliates
with respect to the activities prohibited by Section 15 hereof.
17. Equitable Relief.
----------------
(a) Executive acknowledges that the restrictions contained in Sections
14, 15, and 16 hereof are reasonable and necessary to protect the legitimate
interests of the Company and CoreStates, that the Company and CoreStates would
not have entered into this Agreement in the absence of such restrictions, and
that any violation of any provision of those Sections will result in irreparable
injury to the Company or CoreStates. Executive represents that his experience
and capabilities are such that the restrictions contained in Sections 15 and 16
hereof will not prevent Executive from obtaining employment or otherwise earning
a living at the same general level of economic benefit as anticipated by this
Agreement. Executive further
-10-
<PAGE>
represents and acknowledges that (i) he has been advised by the Company to
consult his own legal counsel in respect to this Agreement; and (ii) that he
has, prior to execution of this Agreement, reviewed thoroughly this Agreement
with his counsel.
(b) Executive agrees that the Company or CoreStates shall be entitled
to preliminary and permanent injunctive relief, without the necessity of proving
actual damages, as well as to an equitable accounting of all earnings, profits
and other benefits arising from any violations of Sections 14, 15 or 16 hereof,
which rights shall be cumulative and in addition to any other rights or remedies
to which the Company or CoreStates may be entitled. In the event that any of the
provisions of Sections 14, 15 or 16 hereof should ever be adjudicated to exceed
the time, geographic, product or service, or other limitations permitted by
applicable law in any jurisdiction, then such provisions shall be deemed
reformed in such jurisdiction to the maximum time, geographic, product or
service, or other limitations permitted by applicable law.
(c) Executive irrevocably and unconditionally (i) agrees that any
suit, action or other legal proceeding arising out of this Agreement in which
any party is seeking in whole or in part any form of equitable relief, including
without limitation, any action commenced by the Company or CoreStates for
preliminary and permanent injunctive relief and other equitable relief, may be
brought in any court of competent jurisdiction in Philadelphia County,
Pennsylvania; (ii) consents to the non-exclusive jurisdiction of any court in
any such suit, action or proceeding; and (iii) waives any objection which
Executive may have to the laying of venue of any such suit, action or proceeding
in any such court. Executive also irrevocably and unconditionally consents to
the service of any process, pleadings, notices or other papers in a manner
permitted by the notice provisions of Section 4 hereof.
- 11 -
<PAGE>
(d) Executive agrees that he will provide, and that the
Company or CoreStates may similarly provide, a copy of Sections 14, 15 and 16 of
this Agreement to any business or enterprise (i) which he may directly or
indirectly own, manage, operate, finance, join, control or participate in the
ownership, management, operation, financing, control or control of; or (ii) with
which he may be connected with as an officer, director, employee, partner,
principal, agent, representative, consultant or otherwise, or in connection with
which he may use or permit his name to be used; provided, however, that this
provision shall not apply in respect of Sections 15 and 16 of this Agreement
after expiration of the time periods set forth herein. Executive agrees to
notify CoreStates promptly upon the establishment of any relationship between
him and any such business or enterprise covered by this Section 17(d).
18. Survival of Obligations. Executive acknowledges and agrees that
-----------------------
following the Merger he will become employed by CoreStates as successor by
merger to the Company. Executive further acknowledges and agrees that: (i) the
obligations and restrictions of Sections 14 through 17 hereof shall continue
throughout his employment with CoreStates (or any successor to CoreStates) and
following the termination of his employment with CoreStates, regardless of the
reason for termination, in accordance with their terms; and (ii) the obligations
and restrictions of Sections 14 through 17 hereof shall not be affected,
diminished or waived by the execution of any new Termination Agreement,
Employment Agreement or other agreement between Executive and CoreStates (or any
successor to CoreStates).
19. Arbitration. Any controversy arising out of, or relating to the
-----------
operation of this Agreement, or any modification or extension hereof, which
involves a claim for purely legal, and not equitable, relief, shall be settled
by arbitration in accordance with the rules then obtaining of the American
Arbitration Association regarding commercial disputes. The award of the
arbitrators shall be final and binding. All proceedings in such arbitration
shall be conducted in Philadelphia,
- 12 -
<PAGE>
Pennsylvania. Any such arbitration proceedings must be instituted within
the first to occur of (i) one year after knowledge that the claimed
wrong or breach occurred, or (ii) three years after the claimed wrong or
breach occurred. The failure to institute arbitration proceedings within
such period shall constitute an absolute bar to the institution of any
proceedings and a waiver of all claims.
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date first above written.
MERIDIAN BANCORP, INC.
By:
---------------------------
Title
Attest:
(SEAL) -----------------------
Secretary
Witness:
(SEAL)
- -------------------------- ------------------------------
("Executive")
Agreed to as of this day
----
of , 1996.
----------
CORESTATES FINANCIAL CORP
By:
----------------------
Title:
- 13 -
<PAGE>
Exhibit 10.3
FORM OF TERMINATION AGREEMENT FOR SAMUEL A. McCULLOUGH
TERMINATION AGREEMENT
---------------------
THIS AGREEMENT made as of this 1st day of July 1986, by and between
MERIDIAN BANCORP, INC. (the "Company"), a Pennsylvania business corporation
having its principal office at 35 North Sixth Street, Reading, Berks County,
Pennsylvania, and SAMUEL A. McCULLOUGH (the "Executive"), an individual residing
in the Borough of Wyomissing, Berks County, Pennsylvania.
WITNESSETH:
----------
WHEREAS, the Executive is presently serving as President and Chief
Executive Officer of the Company; and
WHEREAS, the Company considers the continued services of the Executive
to be in the best interests of the Company and its stockholders and desires to
induce the Executive to remain in the employ of the Company on an impartial and
objective basis in the event of a nonnegotiated tender or exchange offer for the
Company's securities, a proxy contest for control of the Company, or certain
other nonnegotiated attempts to obtain control of the Company.
AGREEMENT:
---------
NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Term of Agreement. (a) This Agreement shall be for a four (4) year
-----------------
period commencing on July 1, 1986 and ending on June 30, 1990; provided however,
that this Agreement shall be
<PAGE>
automatically renewed on July 1, 1987 for the four (4) year period commencing
July 1, 1987 and ending on June 30, 1991 unless either party shall give written
notice of nonrenewal to the other party on or before May 1, 1987 in which case
this Agreement shall continue in effect through June 30, 1990; and further
provided that if this Agreement is renewed on July 1, 1987 it shall be
automatically renewed on July 1 of each subsequent year (the "Annual Renewal
Date") for a period ending four (4) years from each Annual Renewal Date unless
either party shall give written notice of nonrenewal to the other party at least
sixty (60) days prior to an Annual Renewal Date in which case this Agreement
shall continue in effect for a term ending three (3) years from the Annual
Renewal Date immediately following such notice.
(b) Notwithstanding the provisions of Section 1(a) of this
Agreement, this Agreement shall terminate automatically upon termination by the
Company of the Executive's employment for Cause. As used in this Agreement,
"Cause" shall mean the following:
(i) prior to a Change in Control (as defined in Section
2(b) of this Agreement) Cause shall mean termination by the Company of the
Executive's employment for any reason if such termination is deemed by the
Board of Directors of the Company to be in the best interests of the Company
and its stockholders; or
(ii) following a Change in Control (as defined in
Section 2(b) of this Agreement) Cause shall mean (A) the Executive's
conviction of or plea of guilty or nolo contendere to a felony or the actual
incarceration of the Executive for a period of forty-five (45) consecutive
days or (B) the issuance by any federal or state banking authority of an
order directing that the Company terminate the Executive's
<PAGE>
employment with the Company or relieve the Executive of the duties being
performed by the Executive for the Company.
If the Executive's employment is terminated for Cause, the Executive's rights
under this Agreement shall cease as of the effective date of such termination.
(c) Notwithstanding the provisions of Section 1(a) of this
Agreement, this Agreement shall terminate automatically upon termination of the
Executive's employment as a result of the Executive's voluntary termination
(other than in accordance with Section 2 of this Agreement), retirement at the
Executive's election, or death and the Executive's rights under this Agreement
shall cease as of the date of such voluntary termination, retirement at the
Executive's election, or death; provided, however, that if the Executive dies
after a Notice of Termination (as defined in Section 2(a) of this Agreement) is
delivered by the Executive, the provisions of Section 8(b) of this Agreement
shall apply.
(d) Notwithstanding the provisions of Section 1(a) of this
Agreement, this Agreement shall terminate automatically upon termination of the
Executive's employment as a result of the Executive's disability and the
Executive's rights under this Agreement shall cease as of the date of such
termination; provided, however, that, if the Executive becomes disabled after a
Notice of Termination (as defined in Section 2(a) of this Agreement) is
delivered by the Executive, the Executive shall nevertheless be absolutely
entitled to receive all of the compensation and benefits provided for, and for
the term set forth in, Section 3 of this Agreement. For purposes of this
Agreement, "disability" shall mean the Executive's incapacitation by accident,
sickness, or otherwise which renders the Executive mentally or physically
incapable of performing the services
<PAGE>
required of the Executive for three hundred sixty (360) consecutive days.
2. Termination following Change in Control.
---------------------------------------
(a) If a Change in Control (as defined in section 2(b) of this
Agreement) shall occur and if thereafter, at any time during the term of this
Agreement, there shall be:
(i) any involuntary termination of the Executive (other
than as set forth in 1(b), 1(c), or 1(d) of this Agreement);
(ii) any reduction in the Executive's title,
responsibilities, including reporting responsibilities, or authority, such
title, responsibilities, or authority as such title, responsibilities, or
authority may be increased from time to time during the term of this
Agreement;
(iii) the assignment to the Executive of duties
inconsistent with the Executive's office on the date of a Change in Control
or as the same may be increased from time to time after a Change in Control;
(iv) any reassignment of the Executive to a location
greater than one hundred (100) miles from 35 North Sixth Street, Reading,
Pennsylvania;
(v) any reduction in the Executive's annual base salary
in effect on the date of a Change in Control or as the same may be increased
from time to time after a Change in Control;
4
<PAGE>
(vi) any failure to continue the Executive's participation, on
substantially similar terms, in any of the Company's incentive compensation or
bonus plans in which the Executive participated at the time of the Change in
Control or any change or amendment to any of the substantive provisions of any
of such plans which would materially decrease the potential benefits to the
Executive under any of such plans;
(vii) any failure to provide the Executive with benefits at
least as favorable as those enjoyed by the Executive under any of the Company's
pension, life insurance, medical, health and accident, disability or other
employee plans in which the Executive participated at the time of the Change in
Control, or the taking of any action that would materially reduce any of such
benefits in effect at the time of the Change in Control, unless such reduction
relates to a reduction in benefits applicable to all employees generally;
(viii) any requirement that the Executive travel in performance
of his duties on behalf of the Company for a significantly greater period of
time during any year than was required of the Executive during the year
preceding the year in which the Change in Control occurred;
(ix) any sustained pattern of interruption or disruption of the
Executive for matters substantially unrelated to the Executive's discharge of
the Executive's duties on behalf of the Company; or
(x) any breach of this Agreement of any nature whatsoever on
the part of the Company;
5
<PAGE>
then, at the option of the Executive, exercisable by the Executive within ninety
(90) days of the occurrence of each and every of the foregoing events, the
Executive may resign from employment with the Company (or, if involuntarily
terminated, give notice of intention to collect benefits under this Agreement)
by delivering a notice in writing (the "Notice of Termination") to the Company
and the provisions of Section 3 of this Agreement shall apply.
(b) As used in this Agreement, "Change in Control" shall mean
the occurrence of any of the following:
(i) any "person" or "group" (as those terms are defined or
used in Section 13(d) of the Securities Exchange Act of 1934 (the "Exchange
Act"), as enacted and in force on the date hereof) is or becomes the
"beneficial owner" (as that term is defined in Rule 13d-3 under the
Exchange Act, as enacted and in force on the date hereof) of securities of
the Company representing 24.99% or more of the combined voting power of the
Company's securities then outstanding;
(ii) there occurs a merger, consolidation, or other
reorganization involving the Company and another entity or a sale,
exchange, transfer, or other disposition of substantially all of the stock
or assets of the Company (a sale of the Company's banking subsidiary to be
deemed a sale of substantially all of the Company's assets) to another
entity or other person, or a purchase by the Company of substantially all
of the stock or assets of another entity, unless (A) such merger,
consolidation, reorganization, sale, exchange, transfer, purchase or
disposition is approved in advance by eighty percent (80%) or more of the
members of the Company's Board of Directors who are not interested in the
transaction, and (B) stockholders who held at least a majority of the
---
voting power of the Company's outstanding
6
<PAGE>
securities immediately prior to consummation of any such transaction hold at
least a majority of the voting power of the outstanding securities of the legal
entity resulting from or existing after any such transaction, and (C) the
---
Executive is the chief executive officer of the legal entity resulting from or
existing after any such transaction, and (D) a majority of the members of the
---
Board of Directors of the legal entity resulting from or existing after any such
transaction are former members of the Board of Directors of the Company;
(iii) there occurs a contested proxy solicitation of the Company's
stockholders which results in the contesting party obtaining the ability to
elect twenty-five percent (25%) or more of the members of the Board of Directors
standing for election at any meeting of the Company's stockholders;
(iv) at any meeting of the Company's stockholders at which
directors are elected, less than fifty-one percent (51%) of the directors
nominated for election were nominated by the members of the Board of Directors
in office at the time of such meeting; or
(v) there occurs a change in control of a nature that would be
required to be reported in response to Item 5(f) of Schedule 14A of Regulation
14A promulgated under the Exchange Act, as enacted and in force on the date
hereof, whether or not the Company is then subject to such reporting
requirement.
7
<PAGE>
3. Rights in Event of Termination Following Change in Control.
(a) In the event that the Executive delivers a Notice of Termination to
the Company, the Executive shall be absolutely entitled to receive the
compensation and benefits set forth below for the remaining term of this
Agreement, but not exceeding thirty-six (36) months, as follows:
(i) the Executive shall continue to receive payments of
annual base salary at the highest amount in effect during the three (3)
calendar years preceding the year in which the Notice of Termination is
delivered, payable in the same manner as salaries paid to other executive
employees of the Company;
(ii) the Executive shall receive, no later than the fifth
(5th) calendar day of each month, an amount equal to one-twelfth (1/12) of
the annual dollar amount the Executive would have received under the
Meridian Bancorp, Inc. Executive Annual Incentive Plan, based on the
Executive's highest annual base salary in effect during, and based on the
highest percentage award of annual base salary received by the Executive
under such Plan during, the three (3) calendar years preceding the year in
which the Notice of Termination is delivered;
(iii) the Executive shall receive, no later than the fifth
(5th) calendar day of each month, an amount equal to one-twelfth (1/12) of
the largest annual contribution made to the Meridian Bancorp, Inc. Payroll-
Based Employee Stock Ownership Plan on behalf of the Executive during the
two (2) calendar years preceding the year in which the Notice of
Termination is delivered;
8
<PAGE>
(iv) the Executive shall receive, no later than the fifth (5th)
calendar day of each month, an amount equal to one-twelth (1/12) of the amount
of the contribution made by the Company to the Meridian Bancorp, Inc. Salary
Reduction Deferred Savings Plan on behalf of the Executive for the calendar year
prior to the year in which the Notice of Termination is delivered;
(v) the Executive shall be entitled to continue to participate in
the Meridian Bancorp, Inc. Employee Retirement Plan and the Merdian Bancorp,
Inc. Retirement Restoration Plan, or any other supplemental executive retirement
plan or other supplemental executive retirement plan or other plan in effect
during the term of this Agreement designed to supplement payments made under the
Meridian Bancorp, Inc. Employee Retirement Plan, as if the Executive's
employment had not terminated; and
(vi) the Company shall provide the Executive with life, disability,
and medical insurance benefits at levels equivalent to the highest levels in
effect for the Executive during the two (2) calendar years preceding the year in
which the Notice of Termination is delivered.
(b) In the event that the Executive is ineligible to continue
participation in the Meridian Bancorp, Inc. Employees Retirement Plan or in any
of the life, disability, or medical insurance plans or programs listed in
Section 3(a) of this Agreement, the Company shall, in leau of such
participation, pay the Executive a dollar amount equal to the dollar amount of
the benefit forfeited by the Executive as a result of such ineligibility in the
case of the Retirement Plan or a dollar amount equal to the cost to the
Executive to obtain such benefits in the case of any life, disability, or
medical insurance plans or programs.
<PAGE>
(c) The Company shall pay to the Executive all legal fees and
expenses incurred by the Executive as a result of the Executive's delivery
of a Notice of Termination (including all such fees and expenses, if any,
incurred in contesting or disputing any termination of employment or in
seeking to obtain or enforce any right or benefit provided by this
Agreement).
(d) The Executive shall not be required to mitigate the amount
of any payment provided for in this Section 3 by seeking other employment or
otherwise, nor shall the amount of any payment or benefit provided for in
this Section 3 be reduced by any compensation earned by the Executive as the
result of employment by another employer or by reason of the Executive's
receipt of or right to receive any retirement or other benefits after the
date of termination of employment or otherwise; provided, however, that the
payments provided for in this Section 3 shall be reduced by the amount
actually received by the Executive under the severance policy of the Company
then in effect.
(e) Upon written request of the Executive, the Company's
obligation to make payments under this Section 3 shall be secured in total
(i) by a stand-by letter of credit obtained by the Company from a recognized
financial institution the long-term obligations of which are rated, on the
date of such request, investment grade or better by Standard & Poor's
Corporation or Moody's Investors Service, Inc. or (ii) by such other
security as the Executive shall approve.
(f) The Executive's right to receive payments under this
Agreement shall not decrease the amount of, or otherwise adversely affect,
any benefits payable to the Executive under any plan, agreement, or
arrangement relating to employee benefits provided by the Company.
10
<PAGE>
4. Notices. Except as otherwise provided in this Agreement,
-------
any notice required or permitted to be given under this Agreement shall be
deemed properly given if in writing and if mailed by registered or certified
mail, postage prepaid with return receipt requested, to the Executive's
residence, in the case of notices to the Executive, and to the principal office
of the Company, in the case of notices to the Company.
5. Waiver. No provision of this Agreement may be modified,
------
waived, or discharged unless such waiver, modification, or discharge is agreed
to in writing and signed by the Executive and an executive officer specifically
designated by the Board of Directors of the Company. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such
other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.
6. Assignment. This Agreement shall not be assignable by either
----------
party, except by the Company to any successor in interest to the Company's
business.
7. Entire Agreement. This Agreement contains the entire
----------------
agreement of the parties relating to the subject matter of this Agreement.
8. Successors; Binding Agreement.
----------------------------
(a) The Company will require any successor (whether direct
or indirect, by purchase, merger, consolidation, or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the
11
<PAGE>
Company would be required to perform it if no such succession had taken place.
Failure by the Company to obtain such assumption and agreement prior to the
effectiveness of any such succession shall constitute a breach of this Agreement
and the provisions of Section 3 of this Agreement shall apply. As used in this
Agreement, "Company" shall mean the Company as defined previously and any
successor to its business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law or otherwise.
(b) This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives, executors,
administrators, heirs, distributees, devisees, and legatees. If the Executive
should die after a Notice of Termination is delivered by the Executive and any
amounts would be payable to the Executive under this Agreement if the Executive
had continued to live, all such amounts shall be paid in accordance with the
terms of this Agreement to the Executive's devisee, legatee, or other designee,
or, if there is no such designee, to the Executive's estate.
9. Validity. The invalidity or unenforceability of any provision of
--------
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
10. Applicable Law. This Agreement shall be governed by and construed
--------------
in accordance with the domestic laws (but not the law of conflicts of law) of
the Commonwealth of Pennsylvania.
11. Headings. The headings of the Sections of this Agreement are for
--------
convenience only and shall not control or affect the meaning or construction or
limit the scope or intent of any of the provisions of this Agreement.
12
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
MERIDIAN BANCORP, INC.
By
---------------------------
Chairman
(SEAL)
Attest:
--------------------------
Secretary
("Company")
Witness:
(SEAL)
- ------------------------- ------------------------
Samuel A. McCullough
("Executive")
13
<PAGE>
Exhibit 10.4(A)
FORM OF TERMINATION AGREEMENT
-----------------------------
THIS AGREEMENT made as of this 9th day of April, 1996, by and between
CORESTATES FINANCIAL CORP. (the "Company"), a Pennsylvania business corporation
and ("Executive").
-----------------
WITNESSETH
----------
WHEREAS, the Executive is presently serving as a senior executive of the
Company; and
WHEREAS, the Company considers the continued services of the Executive to
be in the best interests of the Company and its stockholders and desires to
induce the Executive to remain in the employ of the Company; and
WHEREAS, the Company desires to secure the continued employment of
Executive by providing for termination payments to the Executive under the
circumstances set forth in this Agreement.
AGREEMENT:
---------
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. Term of Agreement
-----------------
(a) This Agreement shall be for a three (3) year period commencing on the
Effective Date of the Merger (the "Effective Date") and ending on the third
anniversary of the Effective Date.
(b) Notwithstanding the provisions of Section 1(a) of this Agreement,
this Agreement shall terminate automatically upon termination by the Company of
the Executive's employment for Cause. As used in this Agreement, "Cause" shall
mean (A) the Executive's conviction of or plea of guilty or nolo contendere to a
felony or the actual incarceration of the Executive for a period of forty-five
(45) consecutive days, (B) the issuance by any federal or state banking
authority of an order directing that the Company terminate the Executive's
employment with the Company or relieve the Executive of the duties being
performed by the Executive for the Company or (C) Executive's willful misconduct
or gross negligence in the performance of Executive's duties.
If the Executive's employment is terminated for Cause, the Executive's rights
under this Agreement shall cease as of the effective date of such termination.
1
<PAGE>
(c) Notwithstanding the provisions of Section 1(a) of this Agreement,
this Agreement shall terminate automatically upon termination of the Executive's
employment as a result of the Executive's voluntary termination (other than in
accordance with Section 2 of this Agreement), retirement at the Executive's
election, or death and the Executive's rights under this Agreement shall cease
as of the date of such voluntary termination, retirement at the Executive's
election, or death; provided, however, that if the Executive dies after a Notice
of Termination (as defined in Section 2 of this Agreement) is delivered by the
Executive, the provisions of Section 8(b) of this Agreement shall apply.
(d) Notwithstanding the provisions of Section 1(a) of this Agreement,
this Agreement shall terminate automatically upon termination of the Executive's
employment as a result of the Executive's disability and the Executive's rights
under this Agreement shall cease as of the date of such termination; provided,
however, that, if the Executive becomes disabled after a Notice of Termination
(as defined in Section 2 of this Agreement) is delivered by the Executive, the
Executive shall nevertheless be absolutely entitled to receive all of the
compensation and benefits provided for in, and for the term set forth in,
Section 3 of this Agreement. For purposes of this Agreement, "disability" shall
mean the Executive's incapacitation by accident, sickness, or otherwise which
renders the Executive mentally or physically incapable of performing the
services required by the Executive for three hundred sixty (360) consecutive
days.
2. Termination Provisions. If at any time during the term of this
----------------------
Agreement, there shall be:
(i) any involuntary termination of the Executive (other than
as set forth in Section 1(b), 1(c), or 1(d) of this Agreement);
(ii) the assignment to the Executive of duties materially
inconsistent with the Executive's office immediately after the
Effective Date or as the same may be increased from time to time after
the Effective Date;
(iii) any reduction in the sum of Executive's annual base salary
and target bonus in effect on the Effective Date or as the same may be
increased from time to time after the Effective Date;
(iv) any failure to provide the Executive with a target bonus
comparable to similarly situated executives at the Company;
(v) any failure to provide the Executive with benefits at
least as favorable as those enjoyed by similarly situated executives at
the Company under the Company's pension, life insurance, medical,
health and accident, disability or other employee plans;
2
<PAGE>
(vi) any requirement that the Executive travel in performance of
Executive's duties on behalf of the Company for a significantly greater
period of time during any year than was required by the Executive during
the year preceding the year in which the Effective Date occurred;
(vii) any material breach of this Agreement on the part of the
Company;
then, at the option of the Executive, exercisable by the Executive within thirty
(30) days after the occurrence of each and every of the foregoing events, the
Executive may resign from employment with the Company (or, if involuntarily
terminated, give notice of intention to collect benefits under this Agreement)
by delivering a notice in writing (the "Notice of Termination") to the Company
and the provisions of Section 3 of this Agreement shall apply.
3. Rights in Event of Termination.
------------------------------
(a) In the event that the Executive delivers a Notice of Termination to
the Company in accordance with Section 2 above, the Executive shall be entitled
to receive the compensation and benefits set forth below for a period of
twenty-four (24) months:
(i) the Executive shall continue to receive payments of annual
base salary at the highest amount in effect during the two (2) calendar
years preceding the year in which the Notice of Termination is delivered,
payable in the same manner as salaries paid to other executive employees
of the Company;
(ii) the Executive shall receive, no later than the fifth (5th)
calendar day of each month, an amount equal to one-twelfth (1/12) of the
highest annual bonus received by executive under the annual incentive plan
of the Company or Meridian Bancorp Inc. during the two (2) calendar years
preceding the year in which the Notice of Termination is delivered; and
(iii) the Company shall provide the Executive with life, disability,
and medical insurance benefits at levels equivalent to the levels to which
Executive would have been entitled had the Executive remained in the
Company's employ during such period.
(b) The Executive shall not be required to mitigate the amount of any
payment provided for in this Section 3 by seeking other employment or otherwise,
nor shall the amount of any payment or benefit provided for in this Section 3 be
reduced by any compensation earned by the Executive as the result of employment
by another employer or by reason of the Executive's receipt of or right to
receive any retirement or other benefits after the date of termination of
employment or otherwise; provided, however, that the payments provided for in
this Section 3 shall be reduced by the amount actually received by the Executive
under the severance policy of the Company then in effect.
3
<PAGE>
(c) Except as otherwise provided in this Agreement, the Executive's
right to receive payments under this Agreement shall not decrease the amount of,
or otherwise adversely affect, any benefits payable to the Executive under any
plan, agreement, or arrangement relating to employee benefits provided by the
Company.
(d) Notwithstanding the foregoing provisions of this Section 3, the
present value (determined in accordance with the provisions of Section 280G of
the Internal Revenue Code of 1986, as amended (the "Code") of the total amount
of all payments under this Section 3 when aggregated with any other payments to
Executive which constitute parachute payments (within the meaning of Section
280G of the Code) shall in no event exceed 2.99 times the Executive's "base
amount" (as determined under Section 280G of the Code).
(e) Notwithstanding the foregoing provisions of this Section 3, the
Executive's right to receive any of the payments or benefits set forth in this
Section 3 shall be conditioned upon Executive's execution of a separation
agreement and general release in a form satisfactory to the Company.
4. Notices. Except as otherwise provided in this Agreement, any
-------
notice required or permitted to be given under this Agreement shall be deemed
properly given if in writing and if mailed by registered or certified mail,
postage prepaid with return receipt requested, to the Executive's residence, in
the case of notices to the Executive, and to the principal office of the
Company, Attention: General Counsel, in the case of notices to the Company.
5. Waiver. No provision of this Agreement may be modified,
------
waived, or discharged unless such waiver, modification, or discharge is agreed
to in writing and signed by the Executive and the Company. No waiver by either
party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.
6. Assignment. This Agreement shall not be assignable by either
----------
party, except by the Company to any successor in interest to the Company's
business.
7. Entire Agreement. This Agreement contains the entire agreement of
----------------
the parties relating to the subject matter of this Agreement.
8. Successors; Binding Agreement.
-----------------------------
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation, or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure by the Company to obtain such assumption and agreement
prior to the
4
<PAGE>
effectiveness of any such succession shall constitute a breach of this Agreement
and the provisions of Section 3 of this Agreement shall apply. As used in this
Agreement, "Company" shall mean the Company as defined previously and any
successor to its business and /or assets as aforesaid which assumes and agrees
to perform this Agreement by operation of law or otherwise.
(b) This Agreement shall inure to the benefit of and be enforceable
by the Executive's personal or legal representatives, executors, administrators,
heirs, distributees, devisees, and legatees. If the Executive should die after a
Notice of Termination is delivered by the Executive and any amounts would be
payable to the Executive under this Agreement if the Executive had continued to
live, all such amounts shall be paid in accordance with the terms of this
Agreement if paid in accordance with the terms of this Agreement to the
Executive's devisee, legatee, or other designee, or, if there is no such
designee, to the Executive's estates.
9. Validity. The invalidity or unenforceability of any provision
--------
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
10. Applicable Law. This Agreement shall be governed by and
--------------
construed in accordance with the domestic laws (but not the law of conflicts of
law) of the Commonwealth of Pennsylvania.
11. Headings. The headings of the Sections of this Agreement are
--------
for convenience only and shall not control of affect the meaning or construction
or limit the scope of intent of any of the provisions of this agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
CORESTATES FINANCIAL CORP.
By
----------------------------
Title:
(SEAL) Attest:
-----------------------
Secretary
WITNESS:
- ---------------------------------- ------------------------------
5
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
EXHIBIT 10.4(B)
Schedule of Named Executive Officers and Executive Officers who are Parties
---------------------------------------------------------------------------
to a Termination Agreement
- --------------------------
Charles A. Coltman, III Vice Chairman
Charles P. Connolly Chief Risk Policy Officer
Rosemarie B. Greco President & Chief Operating Officer
Terrence A. Larsen Chairman & Chief Executive Officer
Carol A. Leisenring Executive Vice President
Robert N. Gilmore Chief Processing Services Officer
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1996 1995 1996 1995
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
(A) Net Income.............................................. $ 79,597 $158,150 $256,741 $268,319
======== ======== ======== ========
EARNINGS PER SHARE
Based on average common shares outstanding
- ------------------------------------------
(B) Average shares outstanding.............................. 219,478 222,440 219,495 224,255
(A/B) Net income.............................................. $0.36 $0.71 $1.17 $1.20
===== ===== ===== =====
Based on average common and common
- ----------------------------------
equivalent shares outstanding
- -----------------------------
Primary:
(C) Average common equivalent shares........................ 1,963 2,565 2,300 2,134
(D) Average common and common equivalent
shares (B + C)......................................... 221,441 225,005 221,795 226,389
(A/D) Net income.............................................. $0.36 (1) $0.70 (1) $1.16 (1) $1.19 (1)
===== ===== ===== =====
Fully diluted:
(E) Average common equivalent shares........................ 2,096 2,694 2,300 2,749
(F) Average common and common equivalent
shares (B + E)......................................... 221,574 225,134 221,795 227,004
(A/F) Net Income.............................................. $0.36 (1) $0.70 (1) $1.16 (1) $1.18 (1)
===== ===== ===== =====
- ----------------------------------------
</TABLE>
(1) Dilution is less than 3%.
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS FROM CONTINUING OPERATIONS
TO FIXED CHARGES OF CONTINUING OPERATIONS
CONSOLIDATED
<TABLE>
<CAPTION>
Six Months Ended June 30, 1996
- ------------------------------
(in thousands)
<S> <C>
1. Income from continuing operations before extraordinary items and $ 425,662
income taxes.............................................................................. ==========
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....................................................................... $ 167,935
B. Interest on deposits................................................................. 422,420
----------
C. Total fixed charges (line 2A + line 2B).............................................. $ 590,355
==========
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).................................... $ 593,597
==========
B. Including interest on deposits (line 1 + line 2C)................................... $1,016,017
==========
4. Ratio of earnings (as defined) to fixed charges:
A. Excluding interest on deposits (line 3A/line 2A)..................................... 3.53x
B. Including interest on deposits (line 3B/line 2C)..................................... 1.72x
</TABLE>
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
EXHIBIT 12.2
COMPUTATION OF RATIO OF EARNINGS FROM CONTINUING OPERATIONS
TO FIXED CHARGES OF CONTINUING OPERATIONS
COMBINED CORESTATES (PARENT ONLY) AND CORESTATES CAPITAL CORPORATION
<TABLE>
<CAPTION>
Six Months ended June 30, 1996
- ------------------------------
(in thousands)
<S> <C>
1. Income before income taxes and equity in undistributed income
of subsidiaries................................................................................ $ 29,565
2. Fixed charges - interest expense, amortization of income of debt issuance costs and
one-third of rental expenses, net from subleases............................................... 58,246
--------
3. Income before taxes and equity in undistributed income of
subsidiaries, plus fixed charges............................................................... $ 87,811
========
4. Ratio of earnings (as defined) to fixed charges (line 3/line 2)................................ 1.51x
</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 June 30, 1996,
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 six
months ended June 30, 1996 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,943,791
<INT-BEARING-DEPOSITS> 2,073,097
<FED-FUNDS-SOLD> 204,775
<TRADING-ASSETS> 87,234
<INVESTMENTS-HELD-FOR-SALE> 2,377,510
<INVESTMENTS-CARRYING> 2,218,930
<INVESTMENTS-MARKET> 2,216,784
<LOANS> 31,950,081
<ALLOWANCE> 705,178
<TOTAL-ASSETS> 43,667,737
<DEPOSITS> 32,520,860
<SHORT-TERM> 2,642,020
<LIABILITIES-OTHER> 1,711,208
<LONG-TERM> 2,477,773
0
0
<COMMON> 222,029
<OTHER-SE> 3,677,004
<TOTAL-LIABILITIES-AND-EQUITY> 43,667,737
<INTEREST-LOAN> 1,416,096
<INTEREST-INVEST> 152,686
<INTEREST-OTHER> 70,691
<INTEREST-TOTAL> 1,639,473
<INTEREST-DEPOSIT> 422,420
<INTEREST-EXPENSE> 575,424
<INTEREST-INCOME-NET> 1,064,049
<LOAN-LOSSES> 148,767
<SECURITIES-GAINS> 24,341
<EXPENSE-OTHER> 927,687
<INCOME-PRETAX> 425,662
<INCOME-PRE-EXTRAORDINARY> 256,741
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 256,741
<EPS-PRIMARY> 1.17
<EPS-DILUTED> 1.17
<YIELD-ACTUAL> 5.54
<LOANS-NON> 216,200
<LOANS-PAST> 105,000
<LOANS-TROUBLED> 1,600
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 670,300
<CHARGE-OFFS> 159,100
<RECOVERIES> 45,200
<ALLOWANCE-CLOSE> 705,200
<ALLOWANCE-DOMESTIC> 680,200
<ALLOWANCE-FOREIGN> 25,000
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
