<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended March 31, 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 May 6, 1996: 221,583,035
1
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Page
----
Item 1 - FINANCIAL INFORMATION
Consolidated Balance Sheets as of March 31, 1996 and
December 31, 1995 3
Consolidated Statements of Income for the Three
Months Ended March 31, 1996 and 1995 4
Consolidated Statements of Changes in Shareholders'
Equity for the Three Months Ended March 31, 1996 and 1995 5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1996 and 1995 6
Notes to the Consolidated Financial Statements 7-13
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-36
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 37
SIGNATURE 38
EXHIBITS 11, 12.1, 12.2 39-41
2
<PAGE>
PART I. FINANCIAL INFORMATION
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------- ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
- ------
Cash and due from banks.......................... $ 2,245,560 $ 2,755,636
Time deposits, principally Eurodollars........... 1,742,432 1,841,799
Federal funds sold and securities
purchased under agreements to resell............ 164,328 594,868
Trading account securities, at fair
value........................................... 409 1,336
Investments available-for-sale, at fair
value........................................... 838,239 974,711
Investments held-to-maturity (fair value:
1996 - $998,736; 1995 - $1,017,019)............. 989,615 1,015,621
Loans, net of unearned discounts of
$119,912 in 1996 and $123,672 in 1995........... 21,564,457 21,046,535
Less: Allowance for loan losses................ (493,959) (495,075)
----------- ------------
Net loans................................... 21,070,498 20,551,460
----------- ------------
Due from customers on acceptance................. 432,900 549,557
Premises and equipment........................... 404,629 406,279
Other assets..................................... 828,321 929,349
----------- ------------
Total assets................................ $28,716,931 $29,620,616
=========== ============
LIABILITIES
- -----------
Deposits:
Domestic:
Non-interest bearing.......................... $ 5,841,730 $ 6,700,599
Interest bearing.............................. 13,621,374 13,661,766
Overseas branches and subsidiaries.............. 971,109 1,140,068
----------- ------------
Total deposits.............................. 20,434,213 21,502,433
Funds borrowed................................... 2,244,308 2,091,722
Bank acceptances outstanding..................... 432,981 549,048
Other liabilities................................ 1,160,683 1,399,660
Long-term debt................................... 1,968,557 1,698,334
----------- ------------
Total liabilities........................... 26,240,742 27,241,197
----------- ------------
COMMITMENTS AND CONTINGENT LIABILITIES
- --------------------------------------
SHAREHOLDERS' EQUITY
- --------------------
Preferred stock: authorized 10.0
million shares; no shares issued................ - -
Common stock: $1 par value; authorized
200.0 million shares; issued 145.875
million shares in 1996 and 1995
(including treasury shares of 7.401
million in 1996 and 7.824 million in 1995)...... 145,875 145,875
Other common shareholders' equity, net........... 2,330,314 2,233,544
----------- ------------
Total shareholders' equity.................. 2,476,189 2,379,419
----------- ------------
Total liabilities and shareholders'
equity..................................... $28,716,931 $29,620,616
=========== ============
</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
March 31,
--------------------------
1996 1995
----------- ------------
<S> <C> <C>
INTEREST INCOME
- ---------------
Interest and fees on loans:
Taxable income......................... $ 478,165 $ 476,900
Tax exempt income...................... 4,578 4,917
Interest on investment securities:
Taxable income......................... 26,141 34,636
Tax exempt income...................... 2,210 3,313
Interest on time deposits in banks...... 24,593 29,130
Other interest income................... 6,630 2,091
----------- ------------
Total interest income.............. 542,317 550,987
----------- ------------
INTEREST EXPENSE
- ----------------
Interest on deposits.................... 124,001 128,390
Interest on funds borrowed.............. 27,790 27,298
Interest on long-term debt.............. 30,005 30,431
----------- ------------
Total interest expense............. 181,796 186,119
----------- ------------
NET INTEREST INCOME................ 360,521 364,868
Provision for losses on loans........... 27,500 25,000
----------- ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOSSES ON LOANS............ 333,021 339,868
----------- ------------
NON-INTEREST INCOME
- -------------------
Service charges on deposit accounts..... 42,436 43,930
Trust income............................ 23,454 24,330
Fees for international services......... 22,289 21,972
Debit and credit card fees.............. 13,717 14,344
Income from investment in EPS, Inc...... 7,388 26,493
Gains on trading account securities..... 748 668
Securities gains........................ 4,254 6,395
Other operating income.................. 32,525 24,169
----------- ------------
Total non-interest income.......... 146,811 162,301
----------- ------------
NON-FINANCIAL EXPENSES
- ----------------------
Salaries, wages and benefits............ 138,109 158,059
Net occupancy........................... 29,950 29,407
Equipment expenses...................... 20,385 19,488
Restructuring charge.................... - 110,000
Other operating expenses................ 81,770 97,116
----------- ------------
Total non-financial expenses....... 270,214 414,070
----------- ------------
INCOME BEFORE INCOME TAXES.............. 209,618 88,099
- --------------------------
Provision for income taxes.............. 77,389 32,732
----------- ------------
NET INCOME.............................. $ 132,229 $ 55,367
- ---------- =========== ============
Average common shares outstanding....... 138,381 144,246
=========== ============
PER COMMON SHARE DATA
- ---------------------
Net income.............................. $0.96 $0.38
=========== ============
Cash dividends declared................. $0.42 $0.34
=========== ============
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)
(in thousands)
<TABLE>
<CAPTION>
Common Capital Retained Treasury
stock surplus earnings stock Total
----------- ----------- ------------ ---------- -----------
Three Months Ended March 31, 1995
- ---------------------------------
<S> <C> <C> <C> <C> <C>
Balances at beginning of year.................... $ 145,878 $ 781,766 $ 1,446,767 $ (24,297) $2,350,114
Net income....................................... 55,367 55,367
Net change in unrealized gain on
investments available-for-sale,
net of tax...................................... 724 724
Treasury shares acquired (3,038 shares).......... (88,696) (88,696)
Common stock issued under employee
benefit plans (1,137 treasury shares)........... (12,065) 32,526 20,461
Common stock issued under dividend
reinvestment plan (127 treasury shares)......... 19 (2) 3,353 3,370
Cash paid for fractional shares issued........... (24) (24)
Foreign currency translation adjustments......... 108 108
Common dividends declared........................ (49,083) (49,083)
----------- ----------- ------------ ---------- -----------
Balances at end of period........................ $ 145,878 $ 781,785 $ 1,441,792 $ (77,114) $2,292,341
=========== =========== ============ ========== ===========
<CAPTION>
Three Months Ended March 31, 1996
- ---------------------------------
<S> <C> <C> <C> <C> <C>
Balances at beginning of year.................... $ 145,875 $ 793,714 $ 1,690,295 $(250,465) $2,379,419
Net income....................................... 132,229 132,229
Net change in unrealized gain on
investments available-for-sale,
net of tax...................................... (2,629) (2,629)
Treasury shares acquired (208 shares)............ (8,529) (8,529)
Common stock issued under employee
benefit plans (523 treasury shares)............. 16,615 (5,685) 18,914 29,844
Common stock issued under dividend
reinvestment plan (109 treasury shares)......... 125 3,991 4,116
Foreign currency translation adjustments......... (25) (25)
Common dividends declared........................ (58,236) (58,236)
----------- ----------- ------------ ---------- -----------
Balances at end of period........................ $ 145,875 $ 810,454 $ 1,755,949 $(236,089) $2,476,189
=========== =========== ============ ========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Operating Activities
- --------------------
Net income........................................................... $ 132,229 $ 55,367
Adjustments to reconcile net income to net cash
provided by operating activities:
Restructuring charge................................................ - 110,000
Provision for losses on loans....................................... 27,500 25,000
Provision for losses and writedowns on OREO......................... 325 2,973
Depreciation and amortization....................................... 19,777 17,849
Securities gains.................................................... (4,254) (6,395)
Other gains......................................................... - (19,000)
Deferred income tax expense (benefit)............................... 4,856 (27,840)
Increase in due to factored clients................................. (5,715) (76,190)
Decrease in accrued interest receivable............................. 17,932 5,119
Increase (decrease) in accrued interest payable..................... (14,065) 10,175
Other............................................................... (39,738) 17,147
----------- -----------
Net Cash Provided By Operating Activities.......................... 138,847 114,205
----------- -----------
Investing Activities
- --------------------
Net increase in loans................................................ (651,825) (285,157)
Proceeds from sales of loans......................................... 60,996 132,003
Loans originated or acquired - non-bank subsidiary................... (8,730,417) (8,356,128)
Principal collected on loans - non-bank subsidiary................... 8,678,829 8,103,859
Net (increase) decrease in time deposits, principally eurodollars.... 99,367 (116,229)
Purchases of investments held-to-maturity............................ (103,454) (150,273)
Purchases of investments available-for-sale.......................... (53,751) (62,049)
Proceeds from maturities of investments available-for-sale........... 168,928 3,551
Proceeds from maturities of investments held-to-maturity............. 130,192 375,935
Proceeds from sales of investments available-for-sale................ 20,490 91,028
Net decrease in Federal funds sold and securities purchased
under agreements to resell.......................................... 430,540 687,860
Purchases of premises and equipment.................................. (34,284) (15,641)
Proceeds from sales and paydowns on OREO............................. 5,658 7,214
Other................................................................ 7,793 (14,516)
----------- -----------
Net Cash Provided by Investing Activities........................... 29,062 401,457
----------- -----------
Financing Activities
- --------------------
Net decrease in deposits............................................. (1,068,461) (1,131,116)
Proceeds from issuance of long-term debt............................. 283,070 105,000
Retirement of long-term debt......................................... (12,798) (92,612)
Net increase in short-term funds borrowed............................ 152,753 389,462
Cash dividends paid.................................................. (57,980) (50,152)
Purchases of treasury stock.......................................... (8,529) (88,696)
Other................................................................ 33,960 23,807
----------- -----------
Net Cash Used In Financing Activities............................... (677,985) (844,307)
----------- -----------
Decrease In Cash And Due From Banks................................ (510,076) (328,645)
- -------------------------------------
Cash and due from banks at January 1,............................... 2,755,636 2,262,512
----------- -----------
Cash and due from banks at March 31,................................ $ 2,245,560 $ 1,933,867
=========== ===========
Supplemental Disclosure of Cash Flow Information
- ------------------------------------------------
Cash paid during the period for:
Interest............................................................ $ 195,861 $ 175,944
=========== ===========
Income taxes........................................................ $ 2,750 $ 2,914
=========== ===========
Net cash received on interest rate swaps............................. $ 11,830 $ 9,727
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
6
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31, 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. Certain amounts in prior
periods have been reclassified for comparative purposes. Operating results for
the three-month period ended March 31, 1996 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1996.
At a February 6, 1996 shareholders' meeting, an increase in the number of
authorized shares of common stock from 200,000,000 to 350,0000,000 was approved,
effective April 9, 1996.
NOTE B -- 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
(the "Merger"). For each Meridian common share outstanding, 1.225 shares of
CoreStates' common stock were issued. As a result of this transaction,
approximately 83.4 million shares of CoreStates common stock were issued.
The following unaudited condensed combined financial statements reflect the
restatement for the acquisition of Meridian under the application of the pooling
of interests method of accounting. Under the pooling of interests method of
accounting, the historical book values of the assets, liabilities and
shareholders' equity of Meridian, as reported on its Consolidated Balance Sheet,
are carried over onto the Consolidated Balance Sheet of CoreStates after
addressing conformity issues, and no goodwill or other intangible assets are
created. CoreStates will include in its Consolidated Statement of Income the
consolidated results of operations of Meridian for all periods presented, after
addressing conformity issues.
The following unaudited restated condensed combined financial statements do
not include net credit and merger-related charges of approximately $175.0
million expected to be recorded in 1996.
Meridian's financial statements have been restated to reflect its acquisition
of United Counties Bancorporation ("UCB") on February 23, 1996, under the
pooling of interests method of accounting. Meridian's financial statements
reflect for each UCB common share value outstanding, 5.0 Meridian common shares
were issued.
7
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)
March 31, 1996
NOTE B -- MERGER OF MERIDIAN BANCORP, INC. (continued)
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
RESTATED CONDENSED COMBINED BALANCE SHEET
March 31, 1996
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
CoreStates Meridian
and and CoreStates
Subsidiaries Subsidiaries Adjustments Restated
-------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks................ $ 2,245,560 $ 673,520 $ 2,919,080
Time deposits.......................... 1,742,432 16,825 1,759,257
Investment securities held-to-maturity. 989,615 1,599,758 2,589,373
Investment securities 838,239 1,710,574 2,548,813
available-for-sale....................
Loans.................................. 21,564,457 10,432,534 $ 1,675 (b) 31,998,666
Allowance for loan losses.............. (493,959) (171,916) (665,875)
Federal funds sold and securities......
purchased under agreements to resell 164,328 24,172 (20,000) (a) 168,500
Trading account securities............. 409 74,926 75,335
Due from customers on acceptances...... 432,900 14,636 447,536
Premises and equipment................. 409,753 247,614 657,367
Other assets........................... 823,197 541,532 (1,675) (b) 1,363,054
----------- ----------- --------- -----------
Total assets................... $28,716,931 $15,164,175 $ (20,000) $43,861,106
=========== =========== ========= ===========
LIABILITIES
Deposits:
Domestic:
Non-interest bearing............. $ 5,841,730 $ 2,036,846 $ 7,878,576
Interest bearing................. 13,621,374 10,080,189 23,701,563
Overseas branches and subsidiaries.. 971,109 755 971,864
----------- ----------- --------- -----------
Total deposits................. 20,434,213 12,117,790 32,552,003
Funds borrowed......................... 2,244,308 789,558 $ (20,000) (a) 3,013,866
Bank acceptances outstanding........... 432,981 14,636 447,617
Other liabilities...................... 1,160,683 282,940 14,680 (d) 1,458,303
Long-term debt......................... 1,968,557 494,710 2,463,267
----------- ----------- --------- -----------
Total liabilities.............. 26,240,742 13,699,634 (5,320) 39,935,056
----------- ----------- --------- -----------
SHAREHOLDERS' EQUITY
Common stock............................ 145,875 343,194 (259,767) (c) 229,302
Capital surplus......................... 810,453 119,614 255,056 (c) 1,185,123
Retained earnings....................... 1,755,950 1,071,750 (27,026) (c) (d) 2,800,674
Treasury Stock.......................... (236,089) (17,057) 17,057 (c) (236,089)
Unallocated shares held by ESOP......... - (52,960) - (52,960)
----------- ----------- --------- -----------
Total shareholders' equity..... 2,476,189 1,464,541 (14,680) 3,926,050
----------- ----------- --------- -----------
Total liabilities and
shareholders' equity.......... $28,716,931 $15,164,175 $ (20,000) $43,861,106
=========== =========== ========= ===========
Book value per share.................... $17.88 $22.11 $17.88
=========== =========== ===========
</TABLE>
See footnotes to the Restated Condensed Combined Balance Sheet on page 9.
8
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)
March 31, 1996
NOTE B -- MERGER OF MERIDIAN BANCORP, INC. (continued)
FOOTNOTES TO RESTATED CONDENSED COMBINED BALANCE SHEET
(a) Reflects elimination of intercompany Federal funds transactions.
(b) In connection with Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("FAS 114"), CoreStates
prospectively adopted effective January 1, 1995 the provisions of FAS 114 as
they relate to the classification of loans previously determined to be "in
substance foreclosed." In accordance with FAS 114, loans determined to be in
substance foreclosed should be reclassified to loans and the charges
associated with writedowns against in substance foreclosed loans should be
reclassified to the provision for losses on loans from non-financial
expenses. As in substance foreclosed loans are immaterial, CoreStates
historical information reflects in substance foreclosed loans as a component
of other real estate owned ("OREO") in other assets and the charges
associated with writedowns against in substance foreclosed loans in other
non-financial expenses.
Meridian adopted FAS 114 on January 1, 1995 and reclassified in substance
foreclosed loans in its historical financial information from OREO/other
assets to loans, and writedowns against in substance foreclosed loans from
other non-financial expenses to the provision for losses on loans.
As permitted under pooling of interests accounting, the restated financial
information is presented as if CoreStates reclassified in substance
foreclosed loans to loans.
(c) Reflects the conversion of 68.104 million shares of Meridian Common Stock
into 83.427 million shares of CoreStates Common Stock on March 31, 1996
after giving effect to the retirement of 535 thousand shares of Meridian
Common Stock held as treasury stock.
(d) Reflects the conforming accounting adjustment related to the adoption by
Meridian of the FAS 106 transitional liability of $28.8 million, $18.7
million after-tax, effective January 1, 1992. See footnote (b) to Restated
Condensed Combined Statements of Income on page 12.
9
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)
March 31, 1996
NOTE B -- MERGER OF MERIDIAN BANCORP, INC. (continued)
CORESTATES FINANCIAL CORP
RESTATED CONDENSED COMBINED STATEMENT OF INCOME
For the Three Months Ended
March 31, 1996
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
CoreStates Meridian
and and CoreStates
Subsidiaries Subsidiaries Adjustments Restated
---------------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans............. $482,743 $227,640 $710,383
Interest on investment securities...... 28,351 49,889 78,240
Interest on time deposits in banks..... 24,593 650 25,243
Other interest income.................. 6,630 3,419 $(197) (a) 9,852
-------- -------- ------ --------
Total interest income........... 542,317 281,598 (197) 823,718
-------- -------- ------ --------
INTEREST EXPENSE
Interest on deposits................... 124,001 90,457 214,458
Interest on funds borrowed............. 27,790 12,164 (197) (a) 39,757
Interest on long-term debt............. 30,005 8,844 38,849
-------- -------- ------ --------
Total interest expense.......... 181,796 111,465 (197) 293,064
-------- -------- ------ --------
Net interest income.................... 360,521 170,133 530,654
Provision for losses on loans.......... 27,500 11,267 38,767
-------- -------- ------ --------
Net interest income after provision
for losses on loans................... 333,021 158,866 491,887
-------- -------- ------ --------
NON-INTEREST INCOME
Securities gains....................... 4,254 2,694 6,948
Other operating income................. 142,557 59,935 202,492
-------- -------- ------ --------
Total non-interest income....... 146,811 62,629 209,440
-------- -------- ------ --------
NON-FINANCIAL EXPENSES
Restructuring and merger related
charges (d)........................... - 14,126 14,126
Other operating expenses............... 270,214 132,202 (360) (b) 402,056
-------- -------- ------ --------
Total non-financial expenses.... 270,214 146,328 (360) 416,182
-------- -------- ------ --------
Income before income taxes............. 209,618 75,167 360 285,145
Provision for income taxes............. 77,389 30,486 126 (b) 108,001
-------- -------- ------ --------
Net Income............................. $132,229 $ 44,681 $ 234 $177,144
======== ======== ====== ========
Average common shares outstanding...... 138,381 66,229 219,512
PER COMMON SHARE DATA (c)
Net Income............................. $0.96 $0.67 $0.81
Cash dividends declared (e)........... $0.42 $0.42 $0.42
</TABLE>
See Footnotes to the Restated Condensed Combined Statements of Income on
page 12.
10
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)
March 31, 1996
NOTE B -- MERGER OF MERIDIAN BANCORP, INC. (continued)
CORESTATES FINANCIAL CORP
RESTATED CONDENSED COMBINED STATEMENT OF INCOME
For the Three Months Ended
March 31, 1995
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
CoreStates Meridian
and and CoreStates
Subsidiaries Subsidiaries Adjustments Restated
----------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans............. $481,817 $225,621 $707,438
Interest on investment securities...... 37,949 64,591 102,540
Interest on time deposits in banks..... 29,130 1,797 30,927
Other interest income.................. 2,091 7,759 ($167) (a) 9,683
-------- -------- ------ --------
Total interest income........... 550,987 299,768 (167) 850,588
-------- -------- ------ --------
INTEREST EXPENSE
Interest on deposits................... 128,390 99,630 228,020
Interest on funds borrowed............. 27,298 27,094 (167) (a) 54,225
Interest on long-term debt............. 30,431 6,589 37,020
-------- -------- ------ --------
Total interest expense.......... 186,119 133,313 (167) 319,265
-------- -------- ------ --------
Net interest income.................... 364,868 166,455 531,323
Provision for losses on loans.......... 25,000 8,021 45 (f) 33,066
-------- -------- ------ --------
Net interest income after provision
for losses on loans................... 339,868 158,434 (45) 498,257
-------- -------- ------ --------
NON-INTEREST INCOME
Securities gains....................... 6,395 11,609 18,004
Other operating income................. 155,906 59,693 215,599
-------- -------- ------ --------
Total non-interest income....... 162,301 71,302 233,603
-------- -------- ------ --------
NON-FINANCIAL EXPENSES
Restructuring and merger related
charges (d)........................... 110,000 - 110,000
Other operating expenses............... 304,070 149,365 (405) (b,f) 453,030
-------- -------- ------ --------
Total non-financial expenses.... 414,070 149,365 (405) 563,030
-------- -------- ------ --------
Income before income taxes............. 88,099 80,371 360 168,830
Provision for income taxes............. 32,732 25,803 126 (b) 58,661
-------- -------- ------ --------
Net Income............................. $ 55,367 $ 54,568 $ 234 $110,169
======== ======== ====== ========
Average common shares outstanding...... 144,246 66,825 226,091
PER COMMON SHARE DATA (c)
Net Income............................. $0.38 $0.82 $0.49
Cash dividends declared (e)........... $0.34 $0.34 $0.34
</TABLE>
See Footnotes to the Restated Condensed Combined Statements of Income on
page 12.
11
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)
March 31, 1996
NOTE B -- MERGER OF MERIDIAN BANCORP, INC. (continued)
FOOTNOTES TO RESTATED CONDENSED COMBINED STATEMENTS OF INCOME
(a) Reflects the elimination of intercompany interest on Federal funds
transactions.
(b) Meridian adopted FAS 106 "Employers Accounting for Postretirement Benefits
Other Than Pensions" on January 1, 1993, the date required under that
statement. As permitted by FAS 106, Meridian elected not to recognize
immediately its $28.8 million transitional liability, but to amortize that
liability over 20 years. As permitted under pooling of interests accounting,
the restated financial information is prepared as if Meridian adopted FAS
106 effective January 1, 1992, the date on which CoreStates adopted FAS 106,
and immediately recognized the $28.8 million, $18.7 million after-tax,
transitional liability. Restated salaries, wages and benefits have been
adjusted accordingly.
(c) Restated earnings per common share were based on weighted average common
shares outstanding as dilution from potentially dilutive common stock
equivalents was less than 3% for each period.
(d) In March 1995, CoreStates completed an intensive review of its operations
and businesses and announced a corporate-wide process redesign plan, which
restructured its banking services around customers and enhanced employees'
authority to make decisions to benefit customers. As a result of this
process redesign, CoreStates recorded a $110 million pre-tax restructuring
charge, $70.0 million after-tax or $0.49 per share, in March 1995.
In March 1996, Meridian recorded charges of approximately $16.6 million,
$15.4 million after the related tax effects, which include expenses directly
attributable to Meridian's acquisition of UCB. These expenses include $10.9
million of human resources related costs, including employment contracts and
severance; $1.5 million for elimination of duplicate operations and data
processing facilities; and $4.2 million of other expenses, including
investment banker fees and legal expenses. Also in the first quarter of
1996, Meridian recorded restructuring credits of approximately $2.5 million,
$1.6 million after-tax, related to gains on the curtailment of pension
benefits and branch sales both related to a process redesign which Meridian
completed in the second quarter of 1995.
(e) Cash dividends declared per share for the respective periods prior to
CoreStates' acquisition of Meridian assume that CoreStates would have
declared cash dividends per share equal to the cash dividends per share
actually declared by CoreStates.
(f) CoreStates' historical Condensed Combined Statements of Income reflect the
charges associated with writedowns against in-substance foreclosed loans in
other non-financial expenses. In connection with its adoption of FAS 114,
Meridian elected to reclassify writedowns against in substance foreclosed
loans from other non-financial expenses to the provision for losses on
loans. As permitted under pooling of interests accounting, the restated
financial information for all periods presented is prepared as if
CoreStates reclassified writedowns against in substance foreclosed loans
from other non-financial expenses to the provision for losses on loans.
12
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)
March 31, 1996
Loans, net of unearned discounts, at March 31, 1996 and December 31, 1995
consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
Domestic: 1996 1995
------------ ------------
<S> <C> <C>
Commercial, industrial and other.. $ 9,944,807 $ 9,440,727
----------- -----------
Real estate:
Construction and development.... 343,232 366,576
Residential..................... 2,542,055 2,571,788
Other........................... 2,492,080 2,577,755
----------- -----------
Total real estate.............. 5,377,367 5,516,119
----------- -----------
Consumer:
Installment..................... 1,387,770 1,331,442
Credit card..................... 1,529,598 1,546,900
----------- -----------
Total consumer................. 2,917,368 2,878,342
----------- -----------
Financial institutions............ 1,048,757 950,943
Factoring receivables............. 515,737 557,272
Lease financing................... 736,806 737,631
----------- -----------
Total domestic................. 20,540,842 20,081,034
----------- -----------
Foreign............................ 1,023,615 965,501
----------- -----------
Total loans.................... $21,564,457 $21,046,535
=========== ===========
</TABLE>
NOTE D -- 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 March 31, 1996 and
December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Standby letters of credit, net of
participations......................... $ 974,854 $ 1,005,261
Commercial letters of credit............ 1,333,597 1,266,324
Commitments to extend credit............ 10,402,785 10,219,882
Unused commitments under credit card
lines.................................. 4,010,234 3,872,641
Interest rate futures contracts:
Commitments to purchase................ 1,150,000 619,000
Commitments to purchase foreign and U.S.
currencies.......................... 1,730,520 1,659,925
Interest rate swaps, notional principal
amounts................................ 8,342,696 7,770,802
Interest rate caps and floors:
Written................................ 640,402 647,323
Purchased.............................. 928,502 948,023
Other derivatives....................... 308,415 136,000
</TABLE>
13
<PAGE>
PART I. FINANCIAL INFORMATION -- continued
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY
- -------
Earnings Review - In the first quarter of 1996, CoreStates Financial Corp
---------------
("CoreStates") recorded net income of $132.2 million or $0.96 per share,
compared to $55.4 million or $0.38 per share in the first quarter of 1995.
"Operating earnings" for the first quarter of 1995, which has been defined for
purposes of the earnings review discussion as net income excluding the
restructuring charge and a gain related to changes in an investment in an
affiliate joint venture (Electronic Processing Services, Inc., - "EPS"), were
$113.6 million, or $0.79 per share. First quarter net income represents a 21.5%
increase on a per share basis when compared to first quarter of 1995 operating
earnings of $0.79 per share.
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
March 31, Percentage
--------------------------- Increase
1996 1995 (Decrease)
-------- -------- ----------
<S> <C> <C> <C>
Net interest income (taxable equivalent $ 364.2 $ 369.3 (1.4)%
basis)................................. ======== ========
Net income.............................. $ 132.2 $ 55.4 138.6
Exclude:
After-tax EPS gain..................... - (11.8)
After-tax restructuring charge......... - 70.0
-------- --------
Operating earnings...................... $ 132.2 $ 113.6 16.4
======== ========
Operating earnings per share............ $ 0.96 $ 0.79 21.5
======== ========
Return on average equity................ 21.89% 19.63%(a)
Return on average assets................ 1.87 1.63 (a)
Net interest margin..................... 5.84 5.93
Average common shares outstanding....... 138.381 144.246
- -----------------
</TABLE>
(a) Calculated based on "Operating earnings" defined above.
The $18.6 million improvement in operating earnings for the first quarter of
1996, as compared to the first quarter of 1995, was primarily due to a $33.9
million, or 11.1%, decrease in non-financial expenses excluding the 1995
restructuring charge. Also contributing to the improvement in first quarter
operating earnings was a $5.5 million, or 3.9% increase in non-interest income
excluding the 1995 affiliate joint venture gain and 1995 corporate trust fees.
The $33.9 million decline in non-financial expense reflects the impact of the
process redesign and the impact of reduced Federal Deposit Insurance ("FDIC")
premiums. The financial impact of those aspects of the process redesign (see
"Restructuring Charge/Process Redesign" beginning on page 15) implemented since
March 31, 1995 was to increase first quarter of 1996 operating income by $42.7
million pre-tax, or $0.19 per share after-tax. This impact principally related
to expense savings.
Key performance measures, based on operating earnings, continued to improve
on already strong ratios. Returns on average equity and assets were 21.89% and
1.87%, respectively, in the first quarter of 1996, compared to 19.63% and 1.63%,
respectively, in the first quarter of 1995.
14
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
SUMMARY - continued
- -------
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 closing share prices of April 9, 1996, the
transaction was valued at approximately $3.2 billion. 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. Excluding 1996 net credit and merger-related charges of approximately
$175.0 million, this transaction is expected to be approximately 7% dilutive to
1996 earnings per share.
On a combined basis, CoreStates and Meridian recorded first quarter net
income of $177.1 million or $0.81 per share, up from $110.2 million or $0.49 per
share a year earlier. Combined operating earnings, excluding significant and
unusual items in both years that are detailed below, were $190.9 million or
$0.87 per share in the first quarter of 1996 and $160.8 million or $0.71 per
share for the first quarter of 1995. Based on operating earnings, combined
earnings per share, for the first quarter of 1996 were up 22.5% from the prior
year and return on average assets of 1.75% and return on equity of 19.54% were
up from 1.46% and 17.46%, respectively. The principal factor in the year-to-year
improvement in combined operating earnings was an 11% decrease in non-financial
expenses, largely resulting from the process redesign at CoreStates and the
similar process redesign at Meridian.
Significant and unusual items excluded from combined operating earnings in
the 1996 and 1995 first quarters were as follows: in the first quarter of 1996,
a restructuring credit of $1.6 million after-tax related to Meridian's process
redesign and charges of $15.4 million after-tax associated with the February 23,
1996 acquisition of United Counties Bancorporation ("United Counties") by
Meridian; and in the first quarter of 1995, a gain of $11.8 million after-tax
related to changes in CoreStates' investment in its EPS, Inc. affiliate joint
venture; a $70.0 million after-tax restructuring charge associated with
CoreStates' process redesign; and a $7.6 million after-tax gain on an exchange
of available-for-sale securities at United Counties.
Restructuring Charge/Process Redesign - In March 1995, CoreStates completed
-------------------------------------
an intensive review of its operations and businesses and announced a corporate-
wide process redesign plan, which restructured its banking services around
customers and enhanced employees authority to make decisions to benefit
customers. The objectives of the process redesign were: (i) to enhance
CoreStates' customer focus; (ii) to accelerate the culture change already in
progress at CoreStates; and (iii) to improve productivity.
As a result of the process redesign, CoreStates recorded a $110 million
restructuring charge, $70 million after-tax or $0.49 per share, in March 1995.
The components of the restructuring charge were as follows (in millions):
<TABLE>
<CAPTION>
Total
-----
<S> <C>
Severance costs............... $ 72
Office reconfiguration costs.. 16
Branch closing costs.......... 15
Outplacement costs............ 3
Miscellaneous................. 4
----
Total...................... $110
====
</TABLE>
15
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
SUMMARY - continued
- -------
The following table summarizes the activity in the restructuring accrual for
the three months ended March 31, 1996 and the year ended December 31, 1995 (in
millions):
<TABLE>
<CAPTION>
First Full
Quarter Year
1996 1995
--------- ----------
<S> <C> <C>
Balance at beginning of year...... $ 69 $ -
Provision charged against income.. - 110
Cash outflow (a).................. (12) (33)
Writedowns of assets.............. (1) (8)
------ ------
Balance at end of period.......... $ 56 $ 69
====== ======
- -------------------------
</TABLE>
(a) CoreStates' liquidity has not been significantly affected by these
cashflows.
Implementation of the process redesign plan is expected to occur within an
18-month period which began in April 1995. Future cash outflows to be incurred
in implementing the process redesign plan, which were not included in the
restructuring charge, will include approximately $6.0 million for capital
expenditures and approximately $13.0 million in operating expenses. During the
first quarter of 1996, the amount of capital expenditures related to the process
redesign was $6.0 million and the amount of incremental operating expenses that
were incurred related to the process redesign were approximately $4.0 million.
CoreStates recorded restructuring credits of $3.0 million, $1.9 million
after-tax or $0.01 per share in the second quarter of 1995, $2.4 million, $1.5
million after-tax or $0.01 per share in the third quarter of 1995, and $6.4
million, $4.1 million after-tax or $0.03 per share in the fourth quarter of
1995, related to gains on the curtailment of pension benefits associated with
employees displaced and gains on sales of branches which were sold as a result
of the process redesign.
The process redesign is expected to generate by mid 1996, cost reductions of
approximately $180 million and revenue enhancements which will yield additional
revenue of approximately $30 million, combining to improve CoreStates' net
income at an annual rate of $0.90 per share (over the 1994 process redesign
levels). For the first quarter of 1996, the impact of the process redesign on
net income was approximately $0.19 per share. This impact principally related to
expense savings and exceeded the original projections for the first quarter of
1996 which was $0.12 per share. The favorable variances to original projections
are principally due to timing. CoreStates does not currently anticipate
exceeding the annual run rate of $0.90 per share. As with any earnings
estimates, there are factors beyond CoreStates' control that could influence the
actual results for 1996, such as changes in economic conditions. As a result,
the actual results could differ materially from these estimates.
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 $0.08 per
share, in the first quarter of 1995.
16
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
BUSINESS LINE RESULTS
- ---------------------
CoreStates' five core business segments are: Corporate Banking; Regional
Banking; Retail Credit; Trust and Asset Management; and Third Party Processing.
The core business segments have changed from previous disclosures to reflect the
new business areas as defined during the company-wide process redesign program.
The following table presents the performance results for the three months ended
March 31, 1996 and 1995. Each segment is comprised of well defined business
lines with market or product-specific missions.
Three Months Ended March 31,
($ in millions, taxable equivalent basis)
<TABLE>
<CAPTION>
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......... $ 123.4 $ 117.5 $166.4 $ 174.1 $ 55.9 $ 56.4 $ 6.2 $ 7.3
Provision for losses
on loans................... 5.6 6.7 2.8 2.3 18.9 15.7 0.2 0.3
Non-interest income......... 42.9 44.7 34.6 34.9 15.1 14.0 23.7 24.5
Non-financial expenses...... 72.7 77.7 120.1 138.7 32.0 34.6 22.2 26.3
------- ------- ------ ------- ------- ------ ------- ------
Income before income taxes.. 88.0 77.8 78.1 68.0 20.1 20.1 7.5 5.2
Income tax expense.......... 32.6 28.8 28.6 25.0 7.4 7.3 2.7 2.0
------- ------- ------ ------- ------- ------ ------- ------
Net income.................. $ 55.4 $ 49.0 $ 49.5 $ 43.0 $ 12.7 $ 12.8 $ 4.8 $ 3.2
======= ======= ====== ======= ======= ====== ======= ======
Return on assets............ 1.87% 1.81% 2.50% 2.35% 1.18% 1.06% 2.89% 2.58%
Return on equity............ 30.07 30.48 47.86 44.83 25.54 23.70 77.22 49.91
Average assets.............. $11,929 $10,991 $7,951 $ 7,429 $4,343 $4,910 $ 668 $ 503
Average equity.............. $ 741 $ 652 $ 416 $ 389 $ 200 $ 219 $ 25 $ 26
</TABLE>
<TABLE>
<CAPTION>
Third Party
Processing Corporate Center Total
------------------------- --------------------------- ----------------------
1996 1995 1996 1995 1996 1995
----------- ------------ ----------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net interest income.................. $ (1.3) $ (1.2) $ 13.6 $ 15.2 $ 364.2 $ 369.3
Provision for losses
on loans............................ - - - - 27.5 25.0
Non-interest income.................. 48.5 63.1(a) (18.0) (18.9) 146.8 162.3
Non-financial expenses............... 45.6 39.5 (22.4) 97.3(b) 270.2 414.1
------- ------- ------ ------- ------- ------
Income (loss) before income taxes.... 1.6 22.4 18.0 (101.0) 213.3 92.5
Income tax expense (benefit)......... 0.6 8.3 9.2 (34.3) 81.1 37.1
------- ------- ------ ------- ------- ------
Net income (loss).................... $ 1.0 $ 14.1 $ 8.8 $ (66.7) $ 132.2 $ 55.4
======= ======= ====== ======= ======= ======
Return on assets..................... 3.56% 62.84 % 1.04% (6.23)% 1.87% 0.79%
Return on equity..................... 11.49 163.38 3.49 (26.37) 21.89 9.57
Average assets....................... $ 113 $ 91 $3,396 $ 4,344 $28,400 $28,268
Average equity....................... $ 35 $ 35 $1,013 $ 1,026 $ 2,430 $ 2,347
- -------------------
</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 a net restructuring charge of $110.0 million pre-tax, $70.0 million
after-tax, related to a corporate-wide process redesign.
17
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
BUSINESS LINE RESULTS - continued
- ---------------------------------
Corporate overhead, processing and support costs, and the loan loss provision
are allocated along with the impact of balance sheet management and hedging
activities of CoreStates. A matched maturity transfer pricing system is used to
allocate interest income and interest expense. All business lines in the 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 legal company
requirements. 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. Corporate
Banking experienced strong first quarter of 1996 performance as net income
increased $6.4 million or 13.1% above the prior year. This increase was due
primarily to growth in net interest income and a decline in non-financial
expenses.
Net interest income was $5.9 million or 5.0% above the prior year, largely
due to higher loan volume and lower levels of non-performing loans. Average
loan outstandings increased 8.5% from the first quarter of 1995 largely due to
increases in fixed-rate loans, which have much narrower spreads than prime
related loans. Congress Financial's average loans increased 7.1%. Non-performing
loans declined 47.6% from the first quarter of 1995 largely due to declines in
loans to finance companies and the real estate portfolio. Partially offseting
these improvements in net interest income was the impact of declines in interest
rate spreads which has become commonplace in an industry competing for quality
asset retention and growth.
Non-financial expenses declined $5.0 million or 6.4% from the prior year
first quarter largely due to declines in staff expense (resulting from the
recent process redesign), legal and other consulting expenses, FDIC expenses,
and OREO expenses. Non-interest income decreased $1.8 million or 4.0% from the
prior year, largely due to a $6.2 million securities gain recorded by the
Corporate Finance Group in the first quarter of 1995 on the sale of equity
securities acquired in connection with a prior loan arrangement. Excluding
securities gains, non-interest income increased $4.5 million, or 11.7% due to
increases in international service fees and other miscellaneous income.
International service fees (excluding foreign exchange) increased $1.4 million
or 8.8% above the first quarter of 1995 due to increases in revenue from the
Global Financial Institutions segment. Foreign exchange income declined
approximately $0.8 million or 15% when compared to the first quarter of 1995.
Other miscellaneous income increased $3.6 million due to increases in loan
syndication fees, and other Corporate Banking income. Total cash management
revenue (which includes service charge income, international service fees, and
the value of demand deposit volumes) increased 3.9%, largely due to an increase
in demand deposit volumes.
Regional Banking includes Retail Banking and Delivery, Commercial Banking
----------------
(Small Business Lending) and Middle Market Lending. Net income for the first
quarter of 1996 was $49.5 million which was $6.5 million or 15.1% over the first
quarter of 1995. This increase was primarily due to a decline in non-financial
expenses.
Net interest income declined $7.7 million or 4.4%. The decrease was driven by
narrowing deposit spreads, down 18 basis points resulting in a $5.9 million
reduction in net interest income, and a decline in deposit volumes of $445
million resulting in a net interest income reduction of $3.2 million. The volume
decline was partially influenced by several branch sales in late 1995, which
included $150 million in deposits, and some expected runoff from acquisitions
completed in 1994. In addition, loan spreads declined 6 basis points for a $1.0
million impact. Loan outstandings grew $192 million contributing a $1.4 million
favorable impact to net interest income. Commercial loans increased $156
million, while home equity loans grew by $61 million.
18
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
BUSINESS LINE RESULTS - continued
- ---------------------------------
Non-interest income declined $0.3 million or 0.9%. Service charges declined
$1.2 million from the first quarter of 1995, driven by a decline in deposit
levels and a migration of customers into package accounts. Branch sales in
1995 also affected service charges resulting in a $0.2 million quarter-to-
quarter decline. These declines were partially offset by a $0.5 million
increase in loan servicing income generated from previous loan securitizations.
Non-financial expenses decreased $18.6 million or 13.4%. The discontinuance
of FDIC premiums in 1996 resulted in a $7.4 million quarter-to-quarter decrease
in expenses. Personnel expenses declined $6.3 million due to branch
closings/sales and streamlining achieved by the company-wide process redesign.
Non-personnel expenses were down $4.9 million also resulting from branch
closings/sales and the process redesign.
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 $12.7 million in the first quarter
of 1996, almost level with the first quarter of 1995. The impacts of an increase
in non-interest income and a reduction in non-financial expenses were offset by
a $3.2 million increase in the provision for losses on loans and lower net
interest income.
Total Retail Credit Services net interest income declined by $0.5 million
when compared to 1995. A 15% increase in the Credit Card Portfolio loan
outstandings and a $0.8 million increase in Credit Card loan fees, was offset
by declines in the interest rate spreads on the Credit Card Portfolio and the
Indirect Auto and Leasing portfolios. Also contributing to the decline in net
interest income was the sale of $500 million in mortgage loans in 1995.
Non-interest income increased by $1.1 million or 8.3% in the first quarter of
1996 to $15.1 million. This was primarily due to an increase in Mortgage
Services non-interest income of $1.6 million partially offset by a $0.5 million
decrease in CARD LINX merchant fee income. Non-financial expenses declined $2.6
million or 7.5% from the first quarter of 1995, primarily as a result of the
process redesign.
Trust and Investment Management is organized into four business lines:
-------------------------------
Institutional Trust, Personal Trust, Private Banking, and Investment Management.
The Corporate Trust business, previously included in Institutional Trust, was
sold during the fourth quarter of 1995. Net income of $4.8 million for the
first quarter of 1996 increased by $1.6 million or 50% over 1995.
Net interest income declined by $1.1 million or 15.1% primarily due to the
loss of demand balances related to the sale of the Corporate Trust business.
Similarly, a $0.8 million shortfall in non-interest income occurred principally
due to a $2.0 million loss of fee revenue related to the Corporate Trust
business. Partially offsetting the loss of Corporate Trust fees were increases
in Investment Management fees related to increased asset values and additional
revenues generated from the implementation of the process redesign. Expense
levels declined by $4.1 million or 15.6% from the first quarter of 1995 due to
savings related to the process redesign and reductions in expenses associated
with the sale of the Corporate Trust business.
19
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
BUSINESS LINE RESULTS - continued
- ---------------------------------
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") revenue for the first quarter of 1996 totaled
$48.5 million including $41.1 million for the QuestPoint processing companies
and $7.4 million for EPS. The first quarter of 1995 revenue of $63.1 million
included a $19.0 million non-recurring gain related to changes in CoreStates'
investment in EPS and $7.5 million for EPS. Excluding the non-recurring EPS
gain, year-to-year revenue growth for the first quarter of 1996 was $4.4 million
or 10%. The CoreStates intercompany business, which accounts for 47% of the TPP
revenue base, gained $0.6 million or 3%. External TPP business accounts for the
remaining 53% of the revenue base and increased $3.8 million or 17%.
The increase in TPP revenue reflects one additional month of income in 1996,
worth $1.8 million, due to the acquisition of Nationwide Remittance Centers,
Inc. ("NRC"), a lockbox processing subsidiary, on January 27, 1995. The
remaining revenue growth was due to normal business expansion at CashFlex.
Higher external check processing revenues at Transys were offset by lower cash
letter income. Income from the investment in EPS, excluding the $19.0 million
gain recognized in 1995, was down $0.1 million. Income from the investment in
EPS reflects CoreStates' share in EPS net income, interest income on a 6.45%
note and $3.4 million for amortization of a deferred gain.
Net income for the first quarter of 1996 was $1.0 million compared to net
income of $14.1 million for the prior year. The first quarter of 1996 net income
is $1.3 million less than first quarter of 1995 net income excluding the EPS
non-recurring gain. Operating expenses were higher in the first quarter of 1996
compared to the same period last year. This was due primarily to increased costs
related to business growth, capacity expansion and investments in capital and
new products. Included in operating expenses was noncash expenses for
depreciation and amortization of intangible assets, totalling $2.6 million in
the first quarter of 1996, compared to $2.1 million in the first quarter of
1995.
20
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
NET INTEREST INCOME
- -------------------
The largest source of CoreStates' operating revenue is net interest income.
For analytical purposes, net interest income is adjusted to a "taxable
equivalent" basis to recognize the income tax savings on tax exempt assets. Net
interest income on a taxable equivalent basis for the first quarter of 1996 was
$364.2 million, a decrease of $5.1 million, or 1.4%, from the first quarter of
1995. The net interest margin was 5.84% for the first quarter of 1996, compared
to 5.93% for the first quarter of 1995. The decreases in net interest income and
the net interest margin principally reflects the impact of narrower spreads on
loans and deposits offset slightly by increased loan volume and lower levels of
non-performing assets. Loan volume increases occurred at Congress Financial, the
asset-based financing subsidiary, in other commercial loans, and in the credit
card portfolio. 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.
Compared to the fourth quarter of 1995, taxable equivalent net interest
income for the first quarter of 1996 decreased $14.6 million, or 3.9%. The
decline in first quarter interest income, as compared to the fourth quarter of
1995, also reflected narrower spreads on domestic loans and deposits as the
average rate earned on loans decreased 25 basis points, versus a decrease of
only 15 basis points in the rate paid on deposits.
The following table compares taxable equivalent net interest income for the
three months ended March 31, 1996 versus the first quarter of 1995 and the
fourth quarter of 1995, respectively (in millions):
Taxable Equivalent Net Interest Income
- --------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Increase (decrease)
-------------------------------------- --------------------------------
Mar 31, Mar 31, Dec 31, Mar 1996/ Mar 1996/
1996 1995 1995 Mar 1995 Dec 1995
----------- ----------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
Total interest income........... $542.3 $551.0 $568.4 $(8.7) $(26.1)
Tax equivalent adjustment....... 3.7 4.4 4.1 (0.7) (0.4)
------ ------ ------- ----- ------
Tax equivalent interest income.. 546.0 555.4 572.5 (9.4) (26.5)
Total interest expense.......... 181.8 186.1 193.7 (4.3) (11.9)
------ ------ ------- ----- ------
Taxable equivalent net
interest income................ $364.2 $369.3 $378.8 $(5.1) $(14.6)
====== ====== ======= ===== ======
Interest rate spread............ 4.79% 4.91% 4.89%
====== ====== =======
Net interest margin............. 5.84% 5.93% 5.97%
====== ====== =======
</TABLE>
21
<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 analysis on a taxable equivalent basis illustrates
the underlying factors producing these increases (decreases) in tax equivalent
net interest income (in millions):
<TABLE>
<CAPTION>
Increase (decrease) in interest Increase (decrease) in interest
------------------------------------------------ ------------------------------------------------
Three Months Ended Three Months Ended
March 31,1996/1995 March 31, 1996/December 31, 1995
------------------------------------------------ ------------------------------------------------
Change attributable to Change attributable to
Income/ ---------------------- Income/ ----------------------
expense Volume Rate expense Volume Rate
---------------- -------------- -------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets
- -----------------------
Time deposits-Eurodollar.... $ (4.5) $ (2.2) $ (2.3) $ (2.4) $ 0.2 $ (2.6)
Investment securities....... (10.2) (10.9) 0.7 (1.6) (1.9) 0.3
Federal funds sold.......... 4.4 4.7 (0.3) (0.3) 1.2 (1.5)
Trading account securities.. 0.1 0.1 - 0.1 - 0.1
Loans:
- Domestic................ (4.2) 5.0 (9.2) (22.4) (3.2) (19.2)
- Foreign................. 5.0 5.7 (0.7) 0.1 1.0 (0.9)
------ ------ ------ ------ ----- ------
Total interest income.... (9.4) 2.4 (11.8) (26.5) (2.7) (23.8)
------ ------ ------ ------ ----- ------
Interest bearing funds
- ----------------------
Deposits:
Domestic................... (4.9) (2.6) (2.3) (7.6) 0.8 (8.4)
Overseas................... 0.5 (0.1) 0.6 (0.5) (0.2) (0.3)
Funds borrowed:
Federal funds purchased.... (0.5) 0.7 (1.2) (0.4) (0.1) (0.3)
Other...................... 1.0 2.0 (1.0) (4.2) (2.9) (1.3)
Long-term debt.............. (0.4) 2.4 (2.8) 0.8 2.6 (1.8)
------ ------ ------ ------ ----- ------
Total interest expense..... (4.3) 2.4 (6.7) (11.9) 0.2 (12.1)
------ ------ ------ ------ ----- ------
Net interest income......... $ (5.1) $ -- $ (5.1) $(14.6) $(2.9) $(11.7)
- ------------------- ====== ====== ====== ====== ===== ======
</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.
22
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
NET INTEREST INCOME - continued
- -------------------------------
The effect of cash basis and other non-performing loans on interest income and
net interest income for the three months ended March 31, 1996 and 1995 was as
follows (in millions):
<TABLE>
<CAPTION>
Three
Months Ended
March 31,
--------------
1996 1995
------ ------
<S> <C> <C>
Interest income due on non-performing
loans in accordance with their
original terms.................. $ 3.1 $ 5.9
Interest income on non-performing loans
reflected in total interest income..... 2.1 3.1
------ ------
Net reduction in interest income........ $ 1.0 $ 2.8
====== ======
</TABLE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES
- ---------------------------------------
The provision for loan losses for the first quarter of 1996 was $27.5
million, up $2.5 million from the provision recorded in the prior year first
quarter, but equal to the provision for the fourth quarter of 1995. The
increase in the provision over the comparable period in 1995 is due primarily to
an increase in the rate of loan charge-offs in the credit card portfolio and
growth in credit card loans outstanding.
The following table presents an analysis of changes in the allowance for loan
losses for the three-month period ended
March 31, 1996 and 1995 (in millions):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1996 1995
---------- ---------
<S> <C> <C>
Balance at beginning of period.......... $495.1 $500.6
Provision charged to operating expense.. 27.5 25.0
Loan charge-offs........................ (45.9) (43.3)
Recoveries of loans previously charged 17.3 16.4
off.................................... ------ ------
Net loan charge-offs.................. (28.6) (26.9)
------ ------
Balance at end of period................ $494.0 $498.7
====== ======
Ratios:
Net charge-offs (annualized) as a
percentage of average total loans...... 0.55% 0.52%
Allowance for loan losses as a
percentage of loans at
end of period......................... 2.29 2.38
Allowance for loan losses as a
percentage of non-performing loans..... 310.7 206.2
</TABLE>
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
(recoveries) by loan type for the three-month period ended March 31, 1996 and
1995 (in millions):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1996 March 31, 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..... $ 6.0 0.3% 21.0% $ 5.9 0.3% 21.9%
Real estate:
Construction and development loans.. (0.3) (0.4) (1.0) 1.1 1.3 4.1
Other............................... 0.6 - 2.1 9.5 0.5 35.3
Consumer:
Credit Card......................... 17.8 4.5 62.2 10.4 3.1 38.7
Installment......................... 2.6 0.8 9.1 0.2 0.1 0.7
Other (b)............................ 1.9 0.4 6.6 (0.2) - (0.7)
----- ----- ----- ---------
Total domestic...................... 28.6 0.6 100.0 26.9 0.5 100.0
----- ----- ----- ---------
Foreign.............................. - - - - - -
----- ----- ----- ---------
Total net charge-offs............... $28.6 0.5% 100.0% $26.9 0.5% 100.0%
===== ===== ===== =========
</TABLE>
- ----------------
(a) Annualized.
(b) Includes loans to financial institutions and lease financing.
24
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
Total non-performing assets at March 31, 1996 increased $10.0 million, or
5.8%, from December 31, 1995. The increase in non-performing assets from
December 31, 1995 was primarily due to the placement on non-accrual status of a
single commercial loan of approximately $15.5 million. Compared to the first
quarter 1995, non-performing assets decreased $117.2 million, or 39.2%
primarily in the commercial loan and real estate portfolios. The $117.2 million
decrease was due to improved credit quality and the receipt of payment against
two large non-performing assets.
The following table summarizes non-performing assets at March 31, 1996 and
December 31, 1995 (in millions):
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------------------ ----------------
<S> <C> <C>
Non-accrual loans....................... $ 157.5 $143.2
Renegotiated loans...................... 1.5 1.6
------ ------
Total non-performing loans............ 159.0 144.8
Other real estate owned (OREO).......... 22.5 26.7
------ ------
Total non-performing assets........... $ 181.5 $171.5
====== ======
</TABLE>
The following table reflects the distribution of non-performing assets by loan
type at March 31, 1996 and December 31, 1995 (in millions):
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
----------------------- ------------------------
% of % of
Non- Loan Non- Loan
Domestic: performing Type performing Type
------------- ------- --------------- ------
<S> <C> <C> <C> <C>
Commercial, industrial and other....... $ 64.3 0.6% $ 52.1 0.5%
------ ------
Real estate:
Construction and development.......... 10.4 3.0 8.0 2.2
Other loans........................... 82.8 1.6 80.5 1.6
Other real estate owned............... 22.5 - 26.7 -
------ ------
Total real estate.................... 115.7 2.2 115.2 1.6
------ ------
Other domestic loans (a)............... 1.5 0.1 4.2 0.2
------ ------
Total domestic non-performing assets.. 181.5 0.9 171.5 0.9
------ ------
Foreign loans........................... - - - -
------ ------
Total non-performing assets (b)....... $181.5 0.8 $171.5 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 $66 million and $59 million at March 31,
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 the first quarter of 1996 (in millions):
<TABLE>
<S> <C>
Beginning balance.............. $ 172
Additions...................... 49
Return to accrual.............. (4)
Payments....................... (21)
Charge-offs.................... (14)
------
Net change.................... 10
------
Ending balance................. $ 182
======
</TABLE>
NON-INTEREST INCOME
- -------------------
(in millions)
<TABLE>
<CAPTION>
Three Months Ended Percentage
March 31, Increase (decrease)
--------------------- ---------------------
1996 1995
------ ------
<S> <C> <C> <C>
Basic banking transactional $101.9 $102.6 (0.7) %
services (a)..................
Income from investment in EPS, 7.4 7.5 (1.3)
Inc...........................
Third party processing fees (b) 13.8 10.1 36.6
Investment securities gains.... 4.3 6.4
Other non-interest income...... 19.4 14.7 32.0
------ ------
Non-interest income before
significant and unusual
items......................... 146.8 141.3 3.9
Corporate trust fees........... - 2.0(a)
Significant and unusual items.. - 19.0(c)
------ --------
Total non-interest income...... $146.8 $162.3 (9.6)
====== ======
</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) Reflects the $19.0 million pre-tax gain related to the changes in the
investment in the EPS, Inc. affiliate joint venture.
Non-interest income before significant and unusual items for the first
quarter of 1996 increased 3.9% from the first quarter of 1995, reflecting an
increase in third party processing fees. Revenues from CoreStates' basic banking
transactional services declined slightly, as a $0.3 million, or 1.4%, increase
in fees for international services and a $1.1 million, or 5.4% increase in trust
income were offset by declines of $1.5 million, or 3.4%, in service charges on
deposits, and $0.6 million, or 4.4%, in debit and credit card fees. The increase
in trust income, excluding the loss of $2.0 million in fee revenue resulting
from the sale of the corporate trust business in the fourth quarter of 1995, was
due to increases in investment management fees related to increased asset values
and additional revenues generated from the implementation of the process
redesign. The decline in service charges on deposits is driven by a decline in
deposit volumes and was also affected by the branch sales in late 1995. The
decrease in debit and credit card fees was principally caused by a decline in
merchant fee income. The increase in third party processing fee income primarily
reflected one additional month of income in 1996, $1.8 million, due to the
acquisition of Nationwide Remittance Centers, Inc. ("NRC") on January 27, 1995;
$0.6 million of revenues due to new business development at Transys; and the
remaining increase was due to growth in business at CashFlex.
26
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
NON-INTEREST INCOME - continued
- ---------------------------------
Other non-interest income for the first quarter of 1996 increased $4.7
million, or 30.2%, principally as a result of a $1.4 million increase in loan
syndication fees, a $0.7 million gain on sale of mortgages and an increase of
$0.5 million over first quarter 1995 on installment loan securitizations.
Investment securities gains in the first quarter of 1996 were $4.3 million
compared to $6.4 million in the prior year first quarter. Investment securities
gains in the first quarter of 1996 includes gains of $1.3 million recorded on
sales of certain foreign investments and $1.5 million gain on sale of certain
bank stocks. The first quarter of 1995 included a $6.2 million gain recorded
on the sale of equity securities acquired in connection with a prior loan
arrangement.
NON-FINANCIAL EXPENSES
- ----------------------------------------
(in millions)
<TABLE>
<CAPTION>
Three Months Ended Percentage
March 31, Increase (decrease)
--------------------- ------------------
1996 1995
------ ------
<S> <C> <C> <C>
Salaries, wages and benefits............ $138.1 $158.1 (12.7)%
Net occupancy expense................... 29.9 29.4 1.7
Equipment expense....................... 20.4 19.5 4.6
Amortization of intangible assets....... 6.3 7.1 (11.3)
FDIC premiums........................... 0.1 11.0 (99.1)
Other operating expenses................ 75.4 79.0 (4.6)
------ ------
Non-financial expense before
significant and unusual items.......... 270.2 304.1 (11.1)
Significant and unusual items........... - 110.0(a)
------ --------
Total non-financial expenses............ $270.2 $414.1 (34.8)
====== ======
</TABLE>
(a) Reflects the $110.0 million restructuring charge related to the corporate-
wide process redesign. See "Restructuring Charge/Process Redesign" on page
15 for more detail.
Total non-financial expenses before significant and unusual items for the
first quarter of 1996 were $270.2 million, a decrease of $33.9 million, or
11.1%, from the first quarter of 1995. This decline reflects the impacts of the
benefits of those aspects of the process redesign implemented to date, branch
closings/sales, and a $10.9 million reduction in FDIC premiums. Most of the
reduction in FDIC premiums will be used to fund investments in technology to
support improved products and services and increased volume.
CAPITAL MANAGEMENT
- ------------------
CoreStates' capital provides the resources and flexibility for anticipated
growth. CoreStates' capital position at March 31, 1996 under risk-based capital
guidelines was $2.3 billion or 8.7% of risk-weighted assets, for Tier 1 capital
and $3.2 billion, or 12.3%, for total risk-based capital. Tier 1 capital
consists primarily of common shareholders equity less goodwill and certain
intangible assets, while total risk-based capital adds qualifying subordinated
debt and the allowance for loan losses, within permitted limits, to Tier 1
capital. Risk-weighted assets are determined by assigning various levels of risk
to different categories of assets and off-balance sheet activities. CoreStates'
ratios at March 31, 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%.
27
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
CAPITAL MANAGEMENT - continued
- ------------------
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 8.1% at March 31, 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 CoreStates'
banking subsidiaries under guidelines issued by the Office of the Comptroller of
the Currency and the Federal Deposit Insurance Corporation. A bank is considered
"well capitalized", the highest regulatory category, if it has minimum Tier 1
and Total risk-based capital ratios of 6% and 10%, respectively, and a minimum
Tier 1 leverage ratio of 5%. As illustrated in the following table, the banking
subsidiaries of CoreStates were "well capitalized" at March 31, 1996.
<TABLE>
<CAPTION>
Regulatory Capital Ratios
--------------------------------------------
Tier 1 Total Leverage
------------- ------------ ---------------
<S> <C> <C> <C>
CoreStates Bank, N.A............... 7.4% 10.3% 6.7%
New Jersey National Bank........... 12.7 16.0 7.8
CoreStates Bank of Delaware, N.A... 7.1 11.9 6.5
</TABLE>
CoreStates' dividend on its common stock was $0.42 per share in the first
quarter of 1996 and $0.34 per share in the first quarter of 1995. The common
dividend payout ratio was 43.8% for the first quarter of 1996, compared to
43.0%, for the first 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.
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.
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
- -----------------------------
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. CoreStates does not use off-balance sheet derivative instruments for
speculative investment.
Credit risk exists in a derivative transaction to the extent that there is a
favorable move in interest rates and the counterparty fails to perform. The
current credit exposure in a derivative transaction is the estimated cost to
replace the transaction at current market rates, while potential exposure is the
estimated cost to replace the transaction at future interest rates. CoreStates
monitors both the current and potential risk. CoreStates evaluates the credit
worthiness of all off-balance sheet counterparties using the same standards
applied in any other loan or credit transaction. In addition, CoreStates
requires collateral from counterparties when the risk exceeds an acceptable
threshold. Collateral agreements are determined based on the quality of
individual counterparties. As of March 31, 1996, the current cost to replace
CoreStates' derivatives portfolio was $162 million. This assumes that only
counterparties for whom it would be favorable to default would do so.
Interest Rate Risk Related Derivative Activities - CoreStates' use of
derivatives for interest rate risk management falls into three categories:
interest sensitivity adjustments, spread protection and the hedging of
anticipated asset sales. The following schedule reflects by interest rate risk
management category, the outstanding derivative positions as of March 31, 1996,
the major balance sheet category to which they relate, and the associated
unrealized gains/losses:
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
- ------------------------------------------
Outstanding Interest Rate Risk Related Derivatives
- -----------------------------------------------------
<TABLE>
<CAPTION>
At March 31, 1996 Interest Interest Interest
(in millions) rate rate rate caps Other
swaps futures and floors derivatives Total
------------- --------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
Interest Sensitivity Adjustment:
Assets (primarily loans):
Notional amount................... $3,643 $1,150 $ 10 $4,803
Unrealized gains.................. 78 - - 78
Unrealized losses................. (19) (1) - (20)
Deposits and other borrowings:
Notional amount................... 3,635 3,635
Unrealized gains.................. 41 41
Unrealized losses................. (11) (11)
Long-term debt:
Notional amount................... 671 25 696
Unrealized gains.................. 13 - 13
Unrealized losses................. (21) - (21)
Spread Protection:
Assets (primarily loans)
Notional amount................... 414 414
Unrealized gains.................. 2 2
Unrealized losses................. (1) (1)
Deposits and other borrowings:
Notional amount................... 100 100
Unrealized gains.................. 1 1
Unrealized losses................. - -
Anticipated Asset Sales:
Notional amount................... 74 $182 256
Unrealized gains.................. - 1 1
Unrealized losses................. (1) - (1)
Total:
Notional amount................... $8,023 $1,150 $549 $182 $9,904
====== ======== ==== ==== ======
Unrealized gains.................. $ 132 $ - $ 3 $ 1 $ 136
====== ======== ==== ==== ======
Unrealized losses................. $ (52) $ (1) $ (1) $ - $ (54)
====== ======== ==== ==== ======
Net unrealized gains (losses)..... $ 80 $ (1) $ 2 $ 1 $ 82
====== ======== ==== ==== ======
</TABLE>
Although the value of the various derivative instruments will change with
interest rates, CoreStates does not consider changes in individual portfolio
values to be significant given that the portfolios are used to offset specific
risks. As of March 31, 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
MANAGEMENT'S 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. 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 $314 million of interest rate caps which offset that
risk by limiting the potential increase in funding costs.
For accounting purposes, the income effects of futures or swaps 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 $17.5 million in
the quarter ended March 31, 1996 and $5.3 million in the quarter ended March 31,
1995. The following table shows the impact of derivatives income on average
interest rates:
Impact of Derivatives Income on Yields and Costs
- ------------------------------------------------------
<TABLE>
<CAPTION>
For the Quarter Ended March 31,
- -------------------------------
(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.................. $ 1,753 5.64% 5.64% - $ 1,894 6.24% 6.24% -
Federal funds sold & trading
account....................... 477 5.60 5.60 - 145 5.87 5.87 -
Investment Securities.......... 1,935 6.14 5.96 0.18% 2,688 5.99 5.88 0.11%
Loans.......................... 20,904 9.34 9.18 0.16 20,532 9.57 9.55 0.02
------- -------
Total Earning Assets........... $25,069 8.76 8.61 0.15 $25,259 8.92 8.89 0.03
======= =======
Interest Bearing Funds
Savings, NOW, regular MMA...... $ 5,607 1.60 1.90 (0.30) $ 6,357 1.82 1.92 (0.10)
Premium MMA.................... 2,309 3.88 3.88 - 2,112 3.73 3.73 -
Certificates................... 5,443 4.98 5.20 (0.22) 5,513 4.92 5.02 (0.10)
------- -------
Total retail................. 13,359 3.38 3.60 (0.22) 13,982 3.33 3.41 (0.08)
------- -------
Commercial & foreign deposits 1,082 4.71 4.71 - 1,193 4.59 4.94 (0.35)
Federal funds purchased &
short-term borrowings......... 2,038 5.48 5.54 (0.06) 1,866 5.93 5.92 0.01
Long-term debt................. 1,929 6.26 6.45 (0.19) 1,789 6.90 6.85 0.05
------- -------
Total wholesale.............. 5,049 5.61 5.71 (0.10) 4,848 5.96 6.02 (0.06)
------- -------
Total Interest Bearing Funds... $18,408 3.97 4.15 (0.18) $18,830 4.01 4.09 (0.08)
======= =======
</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 March 31, 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 March 31, 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
- -----------------------------
Repricing Schedule of Interest Rate Swaps
- -----------------------------------------
<TABLE>
<CAPTION>
At March 31, 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............ $2,429 $1,002 $ 823 $1,062 $1,085 $ 707 $7,108
Rate................ 6.96% 6.48% 6.58% 7.14% 6.33% 6.89% 6.77%
Pay Notional............ $7,108 $7,108
Rate................ 5.47% 5.47%
Pay Fixed/Receive Floating:
Pay Notional............ $ 85 $ 20 $ 109 $ 125 $ 339
Rate................ 7.44% 8.60% 6.92% 6.18% 6.93%
Receive Notional............ $ 339 $ 339
Rate................ 5.30% 5.30%
Receive Floating/Pay Floating:
(Basis Swaps)
Notional............ $ 31 $ 31
Receive Rate................ 4.61% 4.61%
Pay Rate................ 4.88% 4.88%
Receive Fixed/Pay Floating(a):
(Forward Start)
Receive Notional............ $ 155 $ 50 $ 340 $ 545
Rate................ 6.15% 7.45% 6.47% 6.47%
Start Date Notional............ $ 180 $ 100 $ 215 $ 50 $ 545
</TABLE>
- -------------------------------------------------
(a) Pay rate will be determined on forward start date.
The following schedule illustrates CoreStates' interest rate risk related
derivative activity during 1995:
Activity in Derivatives Products
- --------------------------------
<TABLE>
<CAPTION>
For the Quarter Ended March 31, 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 December 31, 1995........... $7,541 $ 619 $561 $106 $ 8,827
Additions......................... 1,092 1,173 - 77 2,342
Terminated contracts(a)........... (38) - - - (38)
Maturities/amortization........... (572) (642) (12) (1) (1,227)
------ ------ ---- ---- -------
As of March 31, 1996.............. $8,023 $1,150 $549 $182 $ 9,904
====== ====== ==== ==== =======
</TABLE>
- --------------------
(a) As of March 31, 1996, CoreStates had no material deferred gains or losses
related to terminated derivative contracts.
33
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
INTEREST RATE RISK MANAGEMENT - continued
- -----------------------------
CoreStates' use of off-balance sheet instruments increased during the first
quarter. The growth in interest rate futures was due to increased short term
deposit gathering activities. During the quarter ended March 31, 1996, Meridian
executed several interest rate swaps with CoreStates in which Meridian receives
a fixed rate (and CoreStates pays the fixed rate).
Customer Related Derivative Activities - CoreStates also engages in
derivative market activities to provide risk management services for its
customers. These services include interest rate swaps, caps, and floors.
CoreStates offsets protection sold to customers through purchases of similar
protection. Customer related derivative activity is marked to market. The
following schedule details the outstanding notional amounts and related fair
values of customer related derivative transactions as of March 31, 1996.
<TABLE>
<CAPTION>
Customer Related Derivatives
- ----------------------------
At March 31, 1996
- -----------------
(in millions) Notional Net assets
amount (liability)(a)
--------- --------------
<S> <C> <C>
Interest Rate Swaps:
CoreStates receives fixed.......... $ 160 $ (1)
CoreStates pays fixed.............. 160 1
Rate Locks:
CoreStates receives fixed.......... 38 -
CoreStates pays fixed.............. 38 -
Interest Rate Caps/Floors:
Sold............................... 510 (2)
Purchased.......................... 510 2
Options:
Sold............................... 25 -
Purchased.......................... 25 -
Foreign exchange contracts.......... 1,731 3 (b)
------ ---
Total Customer Related Derivatives.. $3,197 $ 3
====== ===
- --------------------
</TABLE>
(a) Average net assets (liabilities) during 1996 was substantially the same as
the net assets (liabilities) at March 31, 1996.
(b) Gross assets and (liabilities) on foreign exchange contracts at March 31,
1996 were $22 million and $(19) million, respectively.
34
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEETS AND TAXABLE EQUIVALENT INCOME/EXPENSE
AND RATES
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------------------------------
March 31, 1996 December 31, 1995 March 31, 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)........... $ 1,753 5.64% $ 24,593 $ 1,741 6.14% $ 26,960 $ 1,894 6.24% $ 29,130
Investment securities (b):
U.S. Government........... 1,265 6.06 19,075 1,350 5.94 20,213 1,986 5.62 27,510
State and municipal....... 230 7.68 4,417 258 8.32 5,367 297 8.60 6,388
Other..................... 440 5.52 6,042 445 4.95 5,548 405 5.83 5,827
--------- -------- --------- -------- --------- --------
Total investment
securities............... 1,935 6.14 29,534 2,053 6.02 31,128 2,688 5.99 39,725
Federal funds sold......... 470 5.58 6,520 398 6.81 6,835 143 5.85 2,063
Trading account securities. 7 6.69 117 3 0.80 6 2 7.20 36
Loans (b) (c) (d):
Domestic:
Commercial, industrial
and other................ 9,637 9.44 226,136 9,609 9.84 238,243 8,847 9.66 210,668
Real estate............... 5,415 8.18 110,124 5,543 8.89 124,158 6,343 8.83 138,098
Consumer.................. 2,874 13.15 93,961 2,850 12.21 87,709 2,766 12.31 83,944
Financial institutions.... 785 5.91 11,529 731 6.77 12,481 658 7.13 11,561
Factoring receivables..... 446 10.94 12,135 567 9.64 13,772 521 11.21 14,398
Lease financing........... 737 8.01 14,750 740 7.94 14,693 721 7.88 14,209
Foreign.................... 1,011 6.59 16,573 951 6.87 16,476 676 6.95 11,587
--------- -------- --------- -------- --------- --------
Total loans, net of
discounts.............. 20,905 9.34 485,208 20,991 9.59 507,532 20,532 9.57 484,465
--------- -------- --------- -------- --------- --------
Total interest earning
assets (d)............. $ 25,070 8.76 545,972 $ 25,186 9.02 572,461 $ 25,259 8.92 555,419
========= ----- -------- ========= ----- -------- ========= ----- --------
FUNDING SOURCES
- ---------------
Interest Bearing
Liabilities (b):
Deposits in domestic
offices:
Commercial................ $ 173 5.41 2,327 $ 219 5.32 2,934 $ 270 5.48 3,651
NOW accounts (e).......... 1,223 0.87 2,410 1,666 1.08 4,158 1,782 1.13 4,587
Money Market Accounts (e). 4,061 2.97 29,816 3,652 3.21 29,431 3,720 3.19 29,157
Consumer savings.......... 2,632 1.78 11,650 2,650 1.92 12,838 2,967 1.95 14,292
Consumer certificates..... 5,443 4.98 67,461 5,491 5.19 71,879 5,513 4.92 66,865
Time deposits of overseas
branches and subsidiaries. 909 4.57 10,337 923 4.66 10,841 923 4.32 9,838
--------- -------- --------- -------- --------- --------
Total interest bearing
deposits (e)........... 14,441 3.48 124,001 14,601 3.63 132,081 15,175 3.47 128,390
Short-term funds borrowed:
Federal funds purchased... 755 5.71 10,721 764 5.77 11,115 708 6.44 11,235
Commercial paper.......... 1,044 5.52 14,331 1,289 5.83 18,931 863 5.96 12,687
Other..................... 239 4.61 2,738 186 4.98 2,337 295 4.64 3,376
--------- -------- --------- -------- --------- --------
Total short-term funds
borrowed............... 2,038 5.48 27,790 2,239 5.74 32,383 1,866 5.93 27,298
Long-term debt(b).......... 1,929 6.26 30,005 1,772 6.55 29,244 1,789 6.90 30,431
--------- -------- --------- -------- --------- --------
Total interest bearing
liabilities............ 18,408 3.97 181,796 18,612 4.13 193,708 18,830 4.01 186,119
Portion of non-interest
bearing funding sources... 6,662 6,574 6,429
--------- -------- --------- -------- --------- --------
Total funding sources... $ 25,070 2.92 181,796 $ 25,186 3.05 193,708 $ 25,259 2.99 186,119
========= ----- -------- ========= ----- -------- ========= ----- --------
Net interest income and
net interest margin....... 5.84% $364,176 5.97% $378,753 5.93% $369,300
===== ======== ===== ======== ===== ========
- --------------------------
</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
-----------------------------------------------------------------------------------------------------
March 31, 1996 December 31, 1995 March 31, 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....................... $ 2,239 $ 2,268 $ 1,975
Allowance for loan losses.. (496) (498) (505)
Other assets............... 1,587 1,677 1,539
--------- --------- ---------
Total non-interest $ 3,330 $ 3,447 $ 3,009
earning assets........... ========= ========= =========
TOTAL AVERAGE ASSETS....... $ 28,400 $ 28,633 $ 28,268
- -------------------- ========= ========= =========
NON-INTEREST BEARING
FUNDING SOURCES
- --------------------
Demand deposits:
Domestic.................. $ 5,642 $ 5,563 $ 5,268
Foreign................... 429 404 497
Other liabilities.......... 1,491 1,714 1,326
Shareholders equity........ 2,430 2,340 2,347
Non-interest bearing
funding sources used to (6,662) (6,574) (6,429)
fund earning assets....... --------- --------- ---------
Total net non-interest
bearing funding $ 3,330 $ 3,447 $ 3,009
sources................. ========= ========= =========
SUPPLEMENTARY AVERAGES
- ---------------------------
Net demand deposits........ $ 4,673 $ 4,573 $ 4,735
Net Federal funds purchased 285 5.93% $4,201 366 4.64% $4,280 565 6.58% $9,172
Commercial certificates of
deposit in domestic 173 5.41 2,326 219 5.30 2,923 270 5.48 3,650
offices over $100,000.....
Average prime rate......... 8.34 8.72 8.83
</TABLE>
36
<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:
11 Computation of Per Share Earnings
12.1 Computation of Ratio of Earnings to Fixed Charges
(Consolidated)
12.2 Computation of Ratio of Earnings to Fixed Charges (Combined
CoreStates Parent Company and CoreStates Capital Corporation)
27 Financial Data Schedule
(b) The following Reports on Form 8-K were filed by CoreStates
Financial Corp during the quarter:
1. Date of Report: January 8, 1996
---------------
Item(s) Reported: Reporting under Item 7, Pro Forma
-----------------
Financial Information of CoreStates Financial Corp, Meridian
Bancorp, Inc. and United Counties Bancorporation.
2. Date of Report: January 17, 1996
---------------
Item(s) Reported: Reporting under Item 5, the information
-----------------
set forth in the earnings news release of CoreStates Financial
Corp.
37
<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: May 14, 1996 By: /s/ Christopher J. Carey
-------------------------------------------
Christopher J. Carey
Senior Vice President and Controller
(Principal Accounting Officer)
38
<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
March 31,
----------------------
1996 1995
-------- --------
<S> <C> <C>
(A) Net Income................................. $132,229 $ 55,367
======== ========
EARNINGS PER SHARE
Based on average common shares outstanding
- ------------------------------------------
(B) Average shares outstanding................. 138,381 144,246
======== ========
(A/B) Net income.................................. $ 0.96 $ 0.38
======== ========
Based on average common and common
- ----------------------------------
equivalent shares outstanding
- -----------------------------
Primary:
(C) Average common equivalent shares........... 1,527 889
======== ========
(D) Average common and common equivalent
shares (B + C)............................ 139,908 145,135
======== ========
(A/D) Net income.................................. $ 0.95(1) $ 0.38(1)
======== ========
Fully diluted:
(E) Average common equivalent shares........... 1,617 1,370
======== ========
(F) Average common and common equivalent
shares (B + E)............................ 139,998 145,616
======== ========
(A/F) Net Income.................................. $ 0.94(1) $ 0.38(1)
======== ========
</TABLE>
- ------------
(1) Dilution is less than 3%.
39
<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>
Three Months Ended March 31, 1996
- ---------------------------------
(in thousands)
<S> <C>
1. Income from continuing operations before extraordinary items and
income taxes............................................................................. $209,618
========
2. Fixed charges of continuing operations:
A. Interest expense (excluding interest on deposits), amortization of
debt issuance costs and one-third of rental expenses, net of income
from subleases..................................................................... $ 63,484
B. Interest on deposits............................................................... 124,001
--------
C. Total fixed charges (line 2A + line 2B)............................................ $187,485
========
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).................................. $273,102
========
B. Including interest on deposits (line 1 + line 2C).................................. $397,103
========
4. Ratio of earnings (as defined) to fixed charges:
A. Excluding interest on deposits (line 3A/line 2A)...................................... 4.30x
B. Including interest on deposits (line 3B/line 2C)...................................... 2.12x
</TABLE>
40
<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>
Three Months ended March 31, 1996
- ---------------------------------
(in thousands)
<S> <C>
1. Income before income taxes and equity in undistributed income
of subsidiaries.......................................................................... $ 5,400
2. Fixed charges - interest expense, amortization of debt issuance costs and
one-third of rental expenses, net of income from subleases............................... 43,989
--------
3. Income before taxes and equity in undistributed income of
subsidiaries, plus fixed charges......................................................... $ 49,389
========
4. Ratio of earnings (as defined) to fixed charges (line 3/line 2).......................... 1.12x
</TABLE>
41
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CORESTATES FINANCIAL CORP CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 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 THREE MONTHS ENDED
MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 2,245,560
<INT-BEARING-DEPOSITS> 1,742,432
<FED-FUNDS-SOLD> 164,328
<TRADING-ASSETS> 409
<INVESTMENTS-HELD-FOR-SALE> 838,239
<INVESTMENTS-CARRYING> 989,615
<INVESTMENTS-MARKET> 998,736
<LOANS> 21,564,457
<ALLOWANCE> 493,959
<TOTAL-ASSETS> 28,716,931
<DEPOSITS> 20,434,213
<SHORT-TERM> 2,244,308
<LIABILITIES-OTHER> 1,160,683
<LONG-TERM> 1,968,557
0
0
<COMMON> 145,875
<OTHER-SE> 2,330,314
<TOTAL-LIABILITIES-AND-EQUITY> 28,716,931
<INTEREST-LOAN> 482,743
<INTEREST-INVEST> 28,351
<INTEREST-OTHER> 31,223
<INTEREST-TOTAL> 542,317
<INTEREST-DEPOSIT> 124,001
<INTEREST-EXPENSE> 181,796
<INTEREST-INCOME-NET> 360,521
<LOAN-LOSSES> 27,500
<SECURITIES-GAINS> 4,254
<EXPENSE-OTHER> 81,770
<INCOME-PRETAX> 209,618
<INCOME-PRE-EXTRAORDINARY> 209,618
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 132,229
<EPS-PRIMARY> 0.96
<EPS-DILUTED> 0.96
<YIELD-ACTUAL> 5.84
<LOANS-NON> 157,470
<LOANS-PAST> 65,814
<LOANS-TROUBLED> 1,509
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 495,075
<CHARGE-OFFS> 45,929
<RECOVERIES> 17,313
<ALLOWANCE-CLOSE> 493,959
<ALLOWANCE-DOMESTIC> 468,959
<ALLOWANCE-FOREIGN> 25,000
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
