<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended September 30, 1996 Commission file number 0-6879
CORESTATES FINANCIAL CORP
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1899716
- ---------------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
N.E. Corner Broad and Chestnut Streets
Philadelphia, Pennsylvania 19101
- ---------------------------------------- ------------------------------
(Address of principal executive offices) (Zip Code)
215-973-3827
------------
(Registrant's 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 November 1, 1996: 223,582,906
1
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1 - FINANCIAL INFORMATION
Consolidated Balance Sheets as of September 30, 1996 and
December 31, 1995............................................. 3
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1996 and 1995...................... 4
Consolidated Statements of Changes in Shareholders'
Equity for the Nine Months Ended September 30, 1996 and 1995.. 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1996 and 1995................. 6
Notes to the Consolidated Financial Statements................ 7-8
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 9-39
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K.............................. 40
SIGNATURE.............................................................. 41
</TABLE>
EXHIBITS 11, 12.1, 12.2, 27
2
<PAGE>
PART I. FINANCIAL INFORMATION
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
- ------
Cash and due from banks........................................ $ 2,984,768 $ 3,662,143
Time deposits, principally Eurodollars......................... 2,594,473 1,909,260
Federal funds sold and securities purchased under
agreements to resell.......................................... 168,702 719,937
Trading account securities, at fair value...................... 56,800 147,218
Investments available-for-sale, at fair value.................. 2,740,040 2,572,315
Investments held-to-maturity (fair value:
1996 - $1,967,407; 1995 - $3,075,964)......................... 1,964,254 3,059,917
Loans, net of unearned discounts of $199,254 in 1996
and $232,077 in 1995.......................................... 32,833,999 31,714,152
Less: Allowance for loan losses.............................. (708,239) (670,265)
------------ ------------
Net loans........................................... 32,125,760 31,043,887
------------ ------------
Due from customers on acceptance............................... 670,045 560,707
Premises and equipment......................................... 638,184 664,279
Other assets................................................... 1,255,075 1,657,579
------------ ------------
Total assets........................................ $ 45,198,101 $ 45,997,242
============ ============
LIABILITIES
- -----------
Deposits:
Domestic:
Non-interest bearing........................................ $ 8,454,000 $ 8,937,147
Interest bearing............................................ 22,718,732 23,883,726
Overseas branches and subsidiaries............................ 1,130,523 1,142,947
------------ ------------
Total deposits...................................... 32,303,255 33,963,820
Funds borrowed................................................. 4,002,220 3,677,013
Bank acceptances outstanding................................... 668,803 549,048
Other liabilities.............................................. 1,673,852 1,719,697
Long-term debt................................................. 2,518,080 2,212,099
------------ ------------
Total liabilities................................... 41,166,210 42,121,677
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES
- --------------------------------------
SHAREHOLDERS' EQUITY
- --------------------
Preferred stock: authorized 10.0 million shares; no
shares issued................................................. - -
Common stock: $1 par value; authorized 350.0 million
shares; issued 223.197 million shares in 1996 and
230.231 million shares in 1995 (including treasury shares of
7.824 million in 1995 and unallocated shares held by the
Employee Stock Ownership Plan ("ESOP") of
2.236 million in 1996 and 2.328 million in 1995).............. 223,197 230,231
Other common shareholders' equity, net......................... 3,808,694 3,645,334
------------ ------------
Total shareholders' equity.......................... 4,031,891 3,875,565
------------ ------------
Total liabilities and shareholders' equity.......... $ 45,198,101 $ 45,997,242
============ ============
</TABLE>
Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date.
See accompanying notes to the consolidated financial statements.
3
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
1996 1995 1996 1995
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
INTEREST INCOME
- ---------------
Interest and fees on loans:
Taxable income.................................... $ 716,075 $ 733,125 $ 2,118,771 $2,165,813
Tax exempt income................................. 6,009 7,623 19,409 22,993
Interest on investment securities:
Taxable income.................................... 58,363 84,451 198,952 271,230
Tax exempt income................................. 5,855 7,563 17,952 23,989
Interest on time deposits in banks................. 33,277 28,561 85,969 94,103
Other interest income.............................. 3,504 9,841 21,503 28,431
---------- ------------ ------------ ------------
Total interest income 823,083 871,164 2,462,556 2,606,559
---------- ------------ ------------ ------------
INTEREST EXPENSE
- ----------------
Interest on deposits.............................. 207,391 238,740 629,811 709,671
Interest on funds borrowed........................ 35,780 51,028 111,379 161,626
Interest on long-term debt........................ 39,564 39,824 116,969 114,763
---------- ------------ ------------ ------------
Total interest expense....................... 282,735 329,592 858,159 986,060
---------- ------------ ------------ ------------
NET INTEREST INCOME.......................... 540,348 541,572 1,604,397 1,620,499
Provision for losses on loans..................... 40,000 38,050 188,767 105,777
---------- ------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOSSES ON LOANS...................... 500,348 503,522 1,415,630 1,514,722
---------- ------------ ------------ ------------
NON-INTEREST INCOME
- -------------------
Service charges on deposit accounts............... 61,492 62,362 181,769 182,556
Trust income...................................... 42,102 39,913 124,877 121,021
Fees for international services................... 27,130 24,548 74,805 70,900
Debit and credit card fees........................ 18,788 21,147 56,051 61,368
Income from investment in EPS, Inc................ 7,469 7,570 22,192 41,566
Gains on trading account securities............... 2,763 8,101 15,880 26,745
Securities gains.................................. 31,135 2,230 55,476 25,746
Other operating income............................ 45,752 43,499 143,648 126,968
---------- ------------ ------------ ------------
Total non-interest income.................... 236,631 209,370 674,698 656,870
---------- ------------ ------------ ------------
NON-FINANCIAL EXPENSES
- ----------------------
Salaries, wages and benefits...................... 204,945 217,345 619,725 685,726
Net occupancy..................................... 39,856 39,420 120,201 121,334
Equipment expenses................................ 29,427 29,124 90,360 87,649
Restructuring and merger-related charges.......... 12,298 (2,400) 130,100 136,563
Other operating expenses.......................... 145,327 127,586 399,154 423,796
---------- ------------ ------------ ------------
Total non-financial expenses................. 431,853 411,075 1,359,540 1,455,068
---------- ------------ ------------ ------------
INCOME BEFORE INCOME TAXES........................ 305,126 301,817 730,788 716,524
- --------------------------
Provision for income taxes........................ 108,269 107,105 277,190 253,493
---------- ------------ ------------ ------------
NET INCOME........................................ $ 196,857 $ 194,712 $ 453,598 $ 463,031
- ---------- ========== ============ ============ ============
Average common shares outstanding................. 220,409 220,718 219,802 223,063
======= ======= ======= =======
PER COMMON SHARE DATA
- ---------------------
Net income........................................ $0.89 $0.88 $2.06 $2.08
===== ===== ===== =====
Cash dividends declared........................... $0.42 $0.34 $1.26 $1.02
===== ===== ===== =====
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (unaudited)
(in thousands)
Unallocated
Common Capital Retained Treasury ESOP
stock surplus earnings stock shares Total
---------- ---------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Nine Months Ended September 30, 1995
- ------------------------------------
Balances at beginning of year......... $229,827 $1,200,658 $ 2,360,312 $ (24,297) $ (35,568) $3,730,932
Net income............................ 463,031 463,031
Net change in unrealized gain on
investments available-for-sale,
net of tax............................ 27,684 27,684
Treasury shares acquired (8,987 shares) (287,760) (287,760)
Repurchase and retirement
of common stock (506 shares)........ (506) (3,530) (9,663) (13,699)
Common stock issued under employee
benefit plans (547 new shares; 2,714
treasury shares)..................... 544 3,756 (21,497) 83,685 66,488
Common stock issued under dividend
reinvestment plan (330 treasury
shares)............................... (222) (2) 9,801 9,577
Purchases of shares for ESOP
(876 shares).......................... (20,922) (20,922)
ESOP shares committed for release
(92 shares)........................... 374 2,118 2,492
Cash paid for fractional shares
issued................................ (24) (24)
Foreign currency translation
adjustments........................... 27 27
Common dividends declared............. (211,782) (211,782)
-------- ---------- ---------- ---------- --------- ------------
Balances at end of period............. $229,865 $1,201,036 $2,608,086 $(218,571) $(54,372) $3,766,044
======== ========== ========== ========== ========= ============
Nine Months Ended September 30, 1996
- ---------------------------------------
Balances at beginning of year.......... $230,231 $1,225,167 $2,724,298 $(250,465) $(53,666) $3,875,565
Net income............................. 453,598 453,598
Net change in unrealized gain on
investments available-for-sale, net of
tax................................... (33,264) (33,264)
Treasury shares acquired
(741 shares).......................... (28,294) (28,294)
Treasury shares issued in
merger (7,300 shares) (7,300) (33,288) (192,042) 232,630 -
Repurchase and retirement
of common stock (1,340
shares)............................... (1,340) (43,559) (12,804) (57,703)
Common stock issued under
employee benefit plans
(1,575 new shares ) (928
treasury shares)...................... 1,575 55,521 (14,668) 33,079 75,507
Common stock issued under
dividend reinvestment plan
(31 new shares) (347
treasury shares)...................... 31 1,727 (68) 13,050 14,740
ESOP shares committed for
release (92 shares)................... 1,454 2,250 3,704
Cash paid for fractional
shares issued......................... (341) (341)
Foreign currency
translation adjustments............... 1,037 1,037
Common dividends declared.............. (272,658) (272,658)
-------- ---------- ------------ ----------- ------------ -----------
Balances at end of period.. $223,197 $1,207,022 $2,653,088 $ - $ (51,416) $4,031,891
======== ========== ============ =========== ============ ===========
</TABLE>
See accompaanying notes to the consolidated financial statements.
5
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
(in thousands) Nine Months Ended
September 30,
---------------------------------
Operating Activities 1996 1995
- -------------------- ------------ ------------
<S> <C> <C>
Net income.................................................. $ 453,598 $ 463,031
Adjustments to reconcile net income to net cash
provided by operating activities:
Restructuring and merger-related charges................... 130,100 136,563
Provision for losses on loans.............................. 188,767 105,777
Provision for losses and writedowns on OREO................ 2,753 13,891
Depreciation and amortization.............................. 88,448 88,156
Securities gains........................................... (55,476) (25,746)
Other gains................................................ - (19,000)
Deferred income tax benefit................................ (10,525) (42,987)
Increase (decrease) in due to factored clients............. (16,292) 43,039
Decrease in accrued interest receivable.................... 44,813 5,956
Decrease in trading account assets......................... 90,418 231,254
Increase (decrease) in accrued interest payable............ (5,519) 51,767
Other...................................................... 154,401 (107,410)
------------ ------------
Net Cash Provided by Operating Activities................. 1,065,486 944,291
------------ ------------
Investing Activities
- --------------------
Net increase in loans....................................... (1,895,346) (1,569,401)
Proceeds from sales of loans................................ 843,260 691,843
Loans originated or acquired - non-bank subsidiary.......... (28,572,504) (26,573,505)
Principal collected on loans - non-bank subsidiary.......... 28,274,066 26,178,636
Net (increase) decrease in time deposits, principally
eurodollars................................................ (685,213) 57,005
Purchases of investments held-to-maturity................... (372,596) (560,230)
Purchases of investments available-for-sale................. (1,430,753) (334,055)
Proceeds from maturities of investments available-for-sale.. 767,581 36,777
Proceeds from maturities of investments held-to-maturity.... 1,164,746 1,729,900
Proceeds from sales of investments available-for-sale....... 856,474 446,052
Net decrease in Federal funds sold and securities purchased
under agreements to resell................................. 551,235 544,718
Purchases of premises and equipment......................... (77,435) (94,527)
Proceeds from sales and paydowns on OREO.................... 26,536 45,499
Other....................................................... 27,475 12,841
------------ ------------
Net Cash Provided by (Used in) Investing Activities........ (522,474) 611,553
------------ ------------
Financing Activities
- --------------------
Net decrease in deposits.................................... (1,251,670) (1,676,470)
Payment for sales of deposits............................... (368,110) -
Proceeds from issuance of long-term debt.................... 533,070 583,062
Retirement of long-term debt................................ (225,973) (372,183)
Net increase in short-term funds borrowed................... 325,374 226,008
Cash dividends paid......................................... (236,987) (214,597)
Purchases of treasury stock................................. (28,294) (287,760)
Repurchase and retirement of common stock................... (57,703) (13,699)
Common stock issued under employee benefit plans............ 75,507 66,488
Other....................................................... 14,399 9,553
------------ ------------
Net Cash Used In Financing Activities..................... (1,220,387) (1,679,598)
------------ ------------
Decrease In Cash And Due From Banks...................... (677,375) (123,754)
------------------------------------
Cash and due from banks at January 1,..................... 3,662,143 3,024,589
------------ ------------
Cash and due from banks at September 30,.................. $ 2,984,768 $ 2,900,835
============ ============
Supplemental Disclosure of Cash Flow Information
- ------------------------------------------------
Cash paid during the period for:
Interest.................................................. $ 863,678 $ 934,642
============ ============
Income taxes.............................................. $ 248,505 $ 182,481
============ ============
Net cash received (paid) on interest rate swaps............. $ 46,253 $ (1,761)
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
6
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 1996
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of CoreStates
Financial Corp ("CoreStates") have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (comprising only normal recurring accruals)
necessary for a fair presentation have been included. Certain amounts in prior
periods have been reclassified for comparative purposes. Operating results for
the nine-month period ended September 30, 1996 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1996.
NOTE B -- LOAN PORTFOLIO
Loans, net of unearned discounts, at September 30, 1996 and December 31,
1995 consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
Domestic: 1996 1995
------------- ------------
<S> <C> <C>
Domestic:
Commercial, industrial and other.. $13,846,536 $12,597,470
Real estate:
Construction and development.... 624,560 607,845
Residential..................... 4,904,128 5,648,661
Other........................... 4,456,985 4,712,473
----------- -----------
Total real estate.............. 9,985,673 10,968,979
----------- -----------
Consumer:
Installment..................... 3,112,740 2,913,793
Credit card..................... 1,585,885 1,526,324
----------- -----------
Total consumer................. 4,698,625 4,440,117
----------- -----------
Financial institutions............ 1,246,994 961,289
Factoring receivables............. 447,564 557,272
Lease financing................... 1,179,379 1,167,356
----------- -----------
Total domestic................. 31,404,771 30,692,483
----------- -----------
Foreign............................ 1,429,228 1,021,669
----------- -----------
Total loans.................... $32,833,999 $31,714,152
=========== ===========
</TABLE>
7
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -- continued
June 30, 1996
NOTE C -- OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS AND COMMITMENTS
In the normal course of business, there are outstanding commitments and
contingent liabilities which are not reflected in the financial statements.
These include various financial instruments with off-balance sheet risk used in
connection with CoreStates' asset and liability management and to provide for
the needs of customers. These involve varying degrees of credit, interest rate
and liquidity risk, but do not represent unusual risks for the Corporation and
management does not anticipate any significant losses as a result of these
transactions. See tables and discussion under "Interest Rate Risk Management"
beginning on page 30 for more details on off - balance sheet instruments and
derivative activities.
The following is a summary of contractual or notional amounts of off-balance
sheet commitments and derivative financial instruments as of September 30, 1996
and December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Standby letters of credit, net of
participations......................... $ 1,546,593 $ 1,548,551
Commercial letters of credit............ 1,507,855 1,324,714
Commitments to extend credit............ 14,604,679 14,565,636
Unused commitments under credit card
lines.................................. 4,027,500 3,872,641
When-issued securities:
Commitments to purchase................ 99,125 500
Commitments to sell.................... 144,550 145,000
Whole mortgage loans and securities:
Commitments to purchase................ 18,563 109,714
Commitments to sell.................... 10,544 47,259
Loans sold and loan servicing
acquired with recourse................. 390,074 434,628
Interest rate futures contracts:
Commitments to purchase................ 5,647,300 621,000
Commitments to purchase foreign and
U.S. currencies........................ 2,051,106 1,695,148
Interest rate swaps, notional principal
amounts................................ 9,443,428 9,945,840
Interest rate caps and floors:
Written................................ 823,085 847,323
Purchased.............................. 1,950,675 1,673,023
Tender option bonds..................... 156,991 208,103
Treasury float contracts................ 379,886 623,738
Other derivatives....................... 809,124 174,674
</TABLE>
8
<PAGE>
PART I. FINANCIAL INFORMATION -- continued
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY
- -------
Earnings Review - In the third quarter of 1996, CoreStates Financial Corp
---------------
("CoreStates") recorded net income of $196.9 million or $0.89, per share.
"Operating earnings" for the third quarter of 1996, which has been defined for
purposes of this discussion as net income excluding restructuring and merger-
related charges, a special assessment on deposits insured under the SAIF Fund,
and certain net investment gains, was $194.9 million, also $0.89 per share.
Operating earnings per share for the third quarter of 1996 increased slightly,
1.1%, when compared to third quarter of 1995 operating earnings of $193.1
million, or $0.88 per share. Operating earnings for the third quarter of 1995
exclude a net restructuring credit. The restructuring and merger-related
charges, SAIF Fund special assessment, and the net investment gains are
discussed below. All financial information herein has been restated to include
Meridian Bancorp, Inc. ("Meridian") which was acquired on April 9, 1996 in a
transaction accounted for under the pooling of interests method of accounting.
The financial information for Meridian includes United Counties Bancorporation
("United Counties") which was acquired by Meridian on February 23, 1996 in a
transaction that was accounted for as a pooling of interests.
Operating earnings, key financial ratios and per share information are
summarized in the following table (in millions, except per share):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Percentage
September 30, Percentage September 30, Increase
---------------------- Increase ---------------------
1996 1995 (Decrease) 1996 1995 (Decrease)
---------- ---------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net interest income (taxable equivalent $ 546.7 $ 549.8 (0.6)% $1,624.6 $1,645.9 (1.3)%
basis)................................. ======== ======== ======== ========
Net income.............................. $ 196.9 $ 194.7 1.1 $ 453.6 $ 463.0 (2.0)
Exclude the following after-tax items:
Restructuring and merger-related
charges.............................. 7.7 (1.6) 144.8 87.3
Net investment gains.................. (18.6) - (28.1) (7.6)
SAIF Fund special assessment.......... 8.9 - 8.9 -
EPS joint venture gain................ - - - (11.8)
-------- -------- -------- --------
Operating earnings...................... $ 194.9 $ 193.1 0.9 $ 579.2 $ 530.9 9.1
======== ======== ======== ========
Operating earnings per share............ $ 0.89 $ 0.88 1.1 $ 2.64 $ 2.39 10.5
======== ======== ======== ========
Dividends per share..................... $ 0.42 $ 0.34 $ 1.26 $ 1.02
======== ======== ======== ========
Return on average equity (a)............ 19.53% 20.55% 19.76% 19.11%
Return on average assets (a)............ 1.79 1.72 1.77 1.59
Net interest margin..................... 5.58 5.43 5.55 5.46
Average common shares outstanding....... 220.409 220.718 219.802 223.063
- -----------------
</TABLE>
(a) Calculated based on "Operating earnings."
Operating earnings for the third quarter of 1996 improved $1.8 million, or
0.9%, primarily due to an $8.1 million decline in non-financial expenses.
CoreStates' expense to revenue ratio (total operating expenses, excluding other
real estate owned expenses, as a percentage of total revenue) was 53.5% in the
third quarter of 1996. This compares to an expense ratio of 54.3% in the third
quarter of 1995. A steady decline in CoreStates' expense ratio has resulted
from process redesigns and merger-related efficiencies. Partially offsetting
the impact of reduced non-financial expenses in the third quarter were a decline
in net interest income and a $2.0 million, or 5.1%, increase in the provision
for losses on loans. Taxable equivalent net interest income for the third
quarter of 1996 was down $3.1 million, or 0.6%, from the third quarter of 1995
primarily as a result of a $1.2 billion decrease in average earning assets. The
net interest margin for the third quarter of 1996 increased 15 basis points to
5.58% as the impact of a $1.9 billion reduction on average in the relatively
lower yielding investment securities portfolio was offset by the impacts of an
increase of $525 million in average loans and an increase of $703 million in
average non-interest bearing funding sources. The increase in the provision for
losses on loans for the third quarter of 1996 reflected loan growth.
9
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
SUMMARY - continued
- -------------------
Key performance measures, based on operating earnings, continued to be
strong. Returns on average equity and assets were 19.53% and 1.79%,
respectively, in the third quarter of 1996, compared to 20.55% and 1.72%,
respectively, in the third quarter of 1995.
For the nine months ended September 30, 1996, CoreStates recorded net income
of $453.6 million or $2.06 per share. Operating earnings for the 1996 nine-
month period, defined as net income excluding restructuring and merger-related
charges, the SAIF Fund special assessment and certain net investment gains, were
$579.2 million, or $2.64 per share. This represents a 10.5% increase on a per
share basis when compared to operating earnings of $530.9 million, or $2.39 per
share for the 1995 nine-month period. Operating earnings for the 1995 nine-
month period exclude net restructuring charges, gains on the exchange of equity
securities and a gain related to changes in an investment in an affiliate joint
venture. The $48.3 million improvement in operating earnings for the first nine
months of 1996 was primarily due to a $103.2 million, or 7.8%, decrease in non-
financial expenses.
Merger of Meridian Bancorp, Inc. - On April 9, 1996, CoreStates acquired
- --------------------------------
Meridian Bancorp, Inc. ("Meridian") in a transaction accounted for under the
pooling of interests method of accounting. Meridian was a Pennsylvania bank
holding company with approximately $15.2 billion in assets and $12.1 billion in
deposits at March 31, 1996. Based on the closing share price on April 9, 1996,
the transaction was valued at approximately $3.2 billion. In this transaction,
approximately 81.1 million shares of CoreStates' common stock were issued to
Meridian shareholders. This in-market acquisition is expected to achieve annual
pre-tax operating efficiencies of approximately $186.0 million, and is expected
to add to earnings per share in 1997. During the third quarter of 1996, the
Pennsylvania and Delaware banking branches of the former banking subsidiaries of
Meridian were consolidated into CoreStates' branch systems.
Restructuring and Merger-Related Charges - In the second and third quarters of
- ----------------------------------------
1996, CoreStates recorded pre-tax net restructuring and merger-related charges
of $174.7 million and $12.3 million, respectively, resulting from the Meridian
acquisition. Included in the second quarter of 1996 amount was a $70.0 million
provision for loan losses recorded in connection with a change in strategic
direction related to Meridian's problem assets and to conform Meridian's
consumer lending charge-off policies to those of CoreStates. (See Provision and
Allowance for Loan Losses on page 24.) In the second and third quarters of 1995,
restructuring charges related to corporate-wide process redesign plans were
recorded at CoreStates and Meridian, respectively. A summary of net
restructuring and merger-related charges (credits), excluding the $70.0 million
provision for loan losses, recorded for the three and nine months ended
September 30, 1996 and 1995 were as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Meridian merger-related
restructuring charge...... $ - $ - $144.9 $ -
Meridian merger-related
implementation costs...... 14.4 - 18.4 -
United Counties
merger-related charge..... - - 16.6 -
Process redesign
restructuring charges..... - - 142.0
Gains on sales of branches. - - (43.0) -
Pension curtailment gains.. (2.1) (2.4) (6.8) (5.4)
------ ------ ------ ------
Total.................... $ 12.3 $ (2.4) $130.1 $136.6
====== ====== ====== ======
</TABLE>
10
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
SUMMARY - continued
- -------
Restructuring and Merger-Related Charges - continued
- ----------------------------------------
The components of the $144.9 million Meridian merger-related restructuring
charge recorded in the second quarter of 1996 were as follows (in millions):
<TABLE>
<CAPTION>
Requiring
Cash
Total Outflow(a)
----- ------------
<S> <C> <C>
Severance costs................... $ 60 $ 60
Branch closing costs.............. 34 13
Office reconfiguration costs...... 19 3
Merger transaction costs.......... 10 10
Systems consolidation writedowns.. 7 -
Miscellaneous..................... 15 15
---- ----
Total........................... $145 $101
==== ====
- -------------------
</TABLE>
(a) CoreStates' liquidity will not be significantly affected by these cash
outflows.
The severance costs relate to the separation package which will be paid to
approximately 1,350 employees who have been displaced as a result of the
Meridian consolidation. Cash payments under separation packages commenced in
April 1996 and will continue for varying terms. Generally, no lump sum
severance payments will be made. The office reconfiguration charge relates to
the costs of asset write-offs and lease buyouts that will be incurred
principally in the process of consolidating CoreStates and Meridian operations
and support staff. The branch closing charge relates to the costs of asset
write-offs and lease buyouts that will be incurred in the process of
consolidating and closing approximately 95 branch offices. Through September
30, 1996, 69 branches have been consolidated or closed.
The sale of eleven former Meridian Bank PA branches in Berks and Lebanon
counties in Southeastern Pennsylvania was completed on June 28, 1996. The sale
was necessary to satisfy a condition of regulatory approval of the Meridian
merger contained in an agreement between CoreStates, the U.S. Department of
Justice and the Attorney General for the Commonwealth of Pennsylvania.
Approximately $380 million of deposits and $120 million of loans were included
in the sale, which generated a pre-tax gain of $40.1 million. Additional gains
of $2.9 million were recorded in the first and second quarters of 1996 on the
sale of branches which were sold as a result of the 1995 process redesigns.
11
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
SUMMARY - continued
- -------
Restructuring and Merger-Related Charges - continued
- ----------------------------------------
Future cash outflows to be incurred in implementing the Meridian
consolidation, which were not included in the second or third quarter of 1996
restructuring and merger-related charges, are expected to include approximately
$25 million for capital expenditures and approximately $10 million in
implementation costs. Since April 1996, the amount of capital expenditures and
implementation costs that were incurred related to the Meridian consolidation
were approximately $10 and $18 million, respectively. As implementation costs
are incurred, such costs are recorded in the restructuring and merger-related
charges line in the income statement. Implementation of the Meridian
consolidation is expected to be essentially complete by the end of 1996. By
early 1997, the consolidation is expected to generate cost efficiencies which
will reduce annual expenses by $186 million.
The following table summarizes the activity in the aggregate accrual for
restructuring and merger-related charges for the third quarter of 1996 and the
first nine months of 1996 (in millions):
<TABLE>
<CAPTION>
Third Nine
Quarter Months
-------- -------
<S> <C> <C>
Balance at beginning of period.... $177 $ 83
Provision charged against income.. - 145
Cash outflow(a)................... (22) (66)
Writedowns of assets.............. (19) (26)
---- ----
Balance at end of period.......... $136 $136
==== ====
- ---------------------
</TABLE>
(a) CoreStates' liquidity has not been significantly affected by these
cashflows.
12
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
SUMMARY - continued
- -------
Net Investment Gains - In the third quarter of 1996, CoreStates recorded net
--------------------
pre-tax gains of $28.7 million, principally on the exchange of equity
securities. In the second quarter of 1996, CoreStates recorded net pre-tax gains
of $14.6 million on sales of investment securities, including an $18.8 million
pre-tax gain on the sale of an equity investment in a foreign consumer finance
company. That foreign equity investment gain was partially offset during the
second quarter by losses on the sale of a portion of a second foreign equity
investment and on the sale of securities related to a realignment of Meridian's
investment portfolio to conform to CoreStates interest rate risk policies. In
the first quarter of 1995, CoreStates recorded pre-tax gains of $12.0 million on
the exchange of equity securities.
SAIF Fund Special Assessment - On September 30, 1996, the Deposits Insurance
----------------------------
Fund Act of 1996 ("Funds Act") became law. A key element of the Funds Act was to
fully capitalize the Savings Association Insurance Fund ("SAIF Fund") by
mandating a special one-time assessment on institutions carrying SAIF Fund
insured deposits. In the third quarter of 1996, CoreStates expensed $14.2
million, pre-tax, for the special assessment to be paid on its SAIF Fund insured
deposits.
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 in the first quarter of
1995.
Common Stock Repurchase Program and Dividend Increase - On October 15, 1996,
-----------------------------------------------------
the Board of Directors authorized the management of CoreStates to repurchase up
to 22 million shares of common stock, or approximately 10% of outstanding
shares, through December 31, 1997. Acting under that authorization, on November
6, 1996, management purchased 8.8 million shares of CoreStates' common stock in
a privately negotiated transaction. Management is also authorized to repurchase
additional shares to fulfill requirements of employee benefit and dividend
reinvestment plans.
Also on October 15, 1996, the Board of Directors increased the quarterly
dividend on CoreStates' common stock to $0.47 per share, from $0.42 per share.
The increase is effective for the quarterly dividend payable on January 1, 1997.
Cautionary Statement
Certain statements contained herein are not based on historical facts and are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements which are based on
various assumptions (some of which are beyond CoreStates control), may be
identified by reference to a future period, or periods, or by the use of
forward-looking terminology such as "may", "will", "believe", "expect",
"estimate", "anticipate", "continue", or similar terms or variations on those
terms, or the negative of those terms. Actual results could differ materially
from those set forth in forward-looking statements. Factors that could cause
actual results to differ materially from those in the forward-looking statements
include, but are not limited to: the global, national and regional economies
where CoreStates conducts operations; economic growth; governmental monetary
policy including interest rate policies of the Federal Reserve Board; sources
and costs of funds; levels of interest rates; inflation rates; market capital
spending; technological change; the state of securities and capital markets;
acquisitions; consumer spending and savings; expense levels; and tax,
securities, and banking laws and incentives.
13
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
BUSINESS LINE RESULTS
- ---------------------
CoreStates utilizes a value-based reporting methodology to facilitate
management's analysis of performance by defined business lines. This process
supports CoreStates' strategic objectives of creating superior growth in
shareholder value by focusing on the performance and value creation potential of
CoreStates' component businesses.
CoreStates' five core business segments are: Corporate Banking; Regional
Banking; Retail Credit; Trust and Asset Management; and Third Party Processing.
The following tables present the performance results for the three and nine
months ended September 30, 1996 and 1995. Each segment is comprised of well
defined business lines with market or product-specific missions. Beginning with
the third quarter of 1996, the respective business components of Meridian were
blended into the existing business lines for all periods presented. Due to the
size and scope of the integration, it was necessary to make estimates of certain
data to conform with CoreStates' reporting methodologies.
Three Months Ended September 30,
($ in millions, taxable equivalent basis)
<TABLE>
<CAPTION>
Corporate Regional Retail Trust and Asset
Banking Banking Credit Management
-------------------- --------------------- -------------------- -------------------
1996 1995 1996 1995 1996 1995 1996 1995
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income............ $ 146.4 $ 143.1 $ 283.6 $ 289.0 $ 76.5 $ 71.8 $ 13.6 $ 14.4
Provision for losses on loans.. 4.5 9.5 7.8 7.4 27.1 20.7 0.6 0.5
Non-interest income............ 56.2 57.8 58.5 59.5 20.7 24.1 42.8 40.1
Non-financial expenses......... 97.9 96.5 197.5 200.9 42.8 42.2 37.8 39.6
------- ------- ------- ------- ------- ------- ------- ------
Income before income taxes..... 100.2 94.9 136.8 140.2 27.3 33.0 18.0 14.4
Income tax expense............. 38.3 35.1 49.7 51.6 10.1 12.2 6.5 4.7
------- ------- ------- ------- ------- ------- ------- ------
Net income..................... $ 61.9 $ 59.8 $ 87.1 $ 88.6 $ 17.2 $ 20.8 $ 11.5 $ 9.7
======= ======= ======= ======= ======= ======= ======= ======
Return on assets............... 1.62% 1.68% 2.40% 2.46% 0.94% 1.22% 3.59% 2.52%
Return on equity............... 25.33 29.07 44.54 48.55 20.67 24.78 43.16 40.51
Average assets................. $15,184 $14,113 $14,416 $14,275 $ 7,309 $ 6,781 $ 1,276 $1,525
Average equity................. $ 972 $ 816 $ 778 $ 724 $ 331 $ 333 $ 106 $ 95
<CAPTION>
Third Party
Processing Corporate Center Total
------------------- ------------------------- --------------------
1996 1995 1996 1995 1996 1995
------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net interest income............ $ (1.1) $ (1.5) $ 27.7 $ 33.0 $ 546.7 $ 549.8
Provision for losses on loans.. 0.0 0.0 0.0 0.0 40.0 38.1
Non-interest income............ 57.7 47.4 0.7 (a) (19.5) 236.6 209.4
Non-financial expenses......... 54.1 43.8 1.7 (b,c) (11.9)(d) 431.8 411.1
------- ------- ------- ------- -------- --------
Income before income taxes..... 2.5 2.1 26.7 25.4 311.5 310.0
Income tax expense............. 0.9 0.1 9.1 11.6 114.6 115.3
------- ------- ------- ------- -------- --------
Net income..................... $ 1.6 $ 2.0 $ 17.6 $ 13.8 $ 196.9 $ 194.7
======= ======= ======= ======= ======== ========
Return on assets............... 4.39% 5.43% 1.38% 0.70% 1.80% 1.73%
Return on equity............... 19.29 27.36 4.01 3.16 19.74 20.72
Average assets................. $ 145 $ 146 $ 5,082 $ 7,783 $ 43,412 $ 44,623
Average equity................. $ 33 $ 29 $ 1,748 $ 1,731 $ 3,968 $ 3,728
- -------------------
</TABLE>
(a) Includes a net gain of $28.7 million, $18.6 million after-tax, principally
on the exchange of equity securities.
(b) Reflects merger-related charges of $14.4 million, $9.1 million after-tax,
related to implementation costs associated with Meridian consolidations, and
gains of $2.1 million, $1.4 million after-tax, on the curtailment of pension
benefits.
(c) Includes the SAIF Fund special assessment of $14.2 million, $8.9 million
after-tax.
(d) Includes net restructuring credits of $2.4 million pre-tax, $1.5 million
after-tax, primarily related to gains on the curtailment of future pension
benefits associated with employees displaced.
14
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
BUSINESS LINE RESULTS - continued
- ---------------------------------
Nine Months Ended September 30,
($ in millions, taxable equivalent basis)
<TABLE>
<CAPTION>
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............ $ 423.6 $ 416.1 $ 840.2 $ 860.1 $ 217.9 $211.5 $ 38.6 $ 42.0
Provision for losses on loans.. 23.1 28.7 22.6 17.4 71.5 58.1 1.6 1.6
Non-interest income............ 170.1 186.7 177.8 172.3 64.5 63.5 126.5 122.4
Non-financial expenses......... 280.5 302.9 588.9 641.1 134.1 139.3 117.3 124.0
------- ------- ------- ------- ------- ------ -------- ------
Income before income taxes..... 290.1 271.2 406.5 373.9 76.8 77.6 46.2 38.8
Income tax expense............. 110.8 100.3 147.6 135.7 28.3 28.6 16.4 14.4
------- ------- ------- ------- ------- ------ -------- ------
Net income..................... $ 179.3 $ 170.9 $ 258.9 $ 238.2 $ 48.5 $ 49.0 $ 29.8 $ 24.4
======= ======= ======= ======= ======= ====== ======== ======
Return on assets............... 1.64% 1.66% 2.30% 2.26% 0.87% 0.97% 2.83% 2.13%
Return on equity............... 26.82 29.14 44.97 44.54 18.83 19.67 40.62 33.63
Average assets................. $14,581 $13,787 $15,037 $14,112 $ 7,417 $6,781 $ 1,409 $1,532
Average equity................. $ 893 $ 784 $ 769 $ 715 $ 344 $ 333 $ 98 $ 97
<CAPTION>
Third Party
Processing Corporate Center Total
--------------------- ----------------------- --------------------
1996 1995 1996 1995 1996 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net interest income............ $ (3.6) $ (4.0) $ 107.9 $ 120.2 $1,624.6 1,645.9
Provision for losses on loans.. 0.0 0.0 70.0 (b) 0.0 188.8 105.8
Non-interest income............ 164.8 158.4(a) (29.0)(c) (46.4)(c) 674.7 656.9
Non-financial expenses......... 153.5 127.5 85.2 (b,e) 120.3 (d) 1,359.5 1,455.1
------- ------- ------- ------- -------- --------
Income (loss) before
income taxes.................. 7.7 26.9 (76.3) (46.5) 751.0 741.9
Income tax expense (benefit)... 2.7 10.5 (8.4) (10.6) 297.4 278.9
------- ------- ------- ------- -------- --------
Net income (loss).............. $ 5.0 $ 16.4 $ (67.9) $ (35.9) $ 453.6 $ 463.0
======= ======= ======= ======= ======== ========
Return on assets............... 4.61% 15.12% (1.81)% (0.57)% 1.39% 1.38%
Return on equity............... 24.74 75.61 (5.08) (2.73) 15.48 16.66
Average assets................. $ 145 $ 145 $ 5,014 $ 8,372 $ 43,603 $ 44,729
Average equity................. $ 27 $ 29 $ 1,784 $ 1,757 $ 3,915 $ 3,715
- -------------------
</TABLE>
(a) Includes a gain of $19.0 million pre-tax, $11.8 million after-tax, related
to changes in the investment in the EPS affiliate joint venture.
(b) Includes net restructuring and merger-related charges of $70.0 million in
the provision for losses on loans and $130.1 million in non-financial
expenses.
(c) Includes a net gain of $28.7 million, $18.6 million after-tax, in 1996 and
$12.0 million pre-tax, $7.6 million after-tax, in 1995, principally on the
exchange of equity securities.
(d) Includes net restructuring and merger-related charges of $136.6 million,
$87.3 million after-tax, in non-financial expenses, related to process
redesigns.
(e) Includes the SAIF Fund special assessment of $14.2 million, $8.9 million
after tax.
15
<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 amounts necessary
on a stand-alone company basis. Fixed assets and other capital investment
requirements along with intangible assets and associated costs are also
allocated to relevant business units. The development of these allocation
methodologies is a continuous process at CoreStates.
The Corporate Center includes the income and expense impact of unallocated
equity; unusual or non-recurring items not attributable to the operating
activities of the major business areas; eliminations of intercompany business
areas transactions; and miscellaneous items.
Corporate Banking includes the following business lines: Specialized
-----------------
Banking, Secured Lending, Real Estate, Large Corporate Banking, Congress
Financial Corporation ("Congress"), International Banking, Investment Banking
and Cash Management. Net income for the third quarter of 1996 increased $2.1
million or 3.5% above the third quarter of 1995, and for the 1996 nine-month
period was $8.4 million or 4.9% above prior year-to-date. The favorable variance
for the third quarter of 1996 is largely attributable to an increase in net
interest income and a decline in the provision for loan losses. The year-to-date
increase was primarily due to increases in net interest income and declines in
non-financial expenses.
For the third quarter of 1996, net interest income was $3.3 million, or 2.3%,
above the third quarter of 1995, largely due to an increase in loan volume
partially offset by the impact of a decline in spreads. Loan volume increased
$1.1 billion, or 9.9%, on average due to increases at Congress, International
Banking, and Specialized Banking. Partially offsetting the favorable impact of
loan volume increases were declines in the fixed and floating interest rate
spreads due to increased competitive pressure on pricing. Also contributing to
the increase in net interest income, non-performing loans declined $41.6
million, or 42.1%, from the third quarter of 1995.
Net interest income for the 1996 nine-month period increased $7.5 million,
or 1.8%, from 1995 year-to-date primarily due to increases in loans and
deposits. Congress net interest income increased $2.3 million, or 1.4%, due
to a $158.4 million, or 6.4%, increase in average loan volume. Excluding
Congress, average loan volume increased $740 million, or 8.9%, primarily due to
growth in Specialized Lending, International Banking, and Corporate Banking.
Non-performing loans declined $52.3 million, or 45.2% , from prior year-to-date.
Deposit balances increased $693 million, or 26.6%, from prior year due to
increases in demand deposit balances and overseas time deposits.
The loan loss provision declined $5.0 million, or 52.6% from the prior year
third quarter and $5.6 million, or 19.5%, from the prior year nine-month period
due to an improvement in credit quality.
For the third quarter, non-interest income was $1.6 million, or 2.8%, below
the third quarter of 1995 largely due to declines in trading gains and service
charges on deposits, partially offset by increased international service fees.
Cash management revenue (service charges on deposits and the value of collected
demand deposits) declined $1.2 million or 2.5% largely due to pricing
concessions necessitated by increased competition for cash management business.
Non-interest income for the 1996 nine-month period was $16.6 million, or
8.9%, below the prior year due to declines in trading gains, loan syndication
income and service charges on deposits, which were partially offset by increased
international service fees and foreign exchange income. Cash management revenues
were level with prior year. Increases in collected demand balances offset the
decline in service charge revenue and the decline in the spread on demand.
16
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
BUSINESS LINE RESULTS - continued
- ---------------------------------
For the third quarter of 1996, non-financial expenses were $1.4 million, or
1.5%, above the third quarter of 1995 due to increases in Congress expenses,
equipment expenses, legal and other consulting expenses, and travel expenses.
Non-financial expenses for the 1996 nine-month period were $22.4 million, or
7.4%, below prior year to date due to declines in personnel expenses (primarily
resulting from the recent process redesigns and merger-related efficiencies),
FDIC expense, OREO expense, and other miscellaneous expenses.
Regional Banking includes Retail Banking and Delivery, Small Business
----------------
Lending and Middle Market Lending. Net income for the third quarter of 1996 was
$87.1 million which was $1.5 million, or 1.7%, below the third quarter of 1995.
The impacts of narrowing deposit spreads and declines in deposit volumes on net
interest income had a major impact on the quarter-to-quarter decline. These
negative impacts were partially offset by declines in personnel and other
expenses which were due to attrition, branch closings/sales and organizational
streamlining. For the nine-month period, net income was $258.9 million, up $20.7
million, or 8.7%, from 1995 year-to-date. The increase for the 1996 nine-month
period was primarily the result of reduced non-financial expenses, partially
offset by lower net interest income.
For the third quarter of 1996, net interest income decreased $5.4 million, or
1.9%, compared to the third quarter of 1995. This decrease was driven by a 5
basis points narrowing in deposit spreads and a decline in average deposit
volume of $685 million. The deposit decline was primarily due to the sale of
several branches in the last quarter of 1995 and the divestiture of eleven
branches in the second quarter of 1996. The 1996 divestiture was the result of
the merger with Meridian. The narrowing spreads resulted from more aggressive
pricing related to a focus on customer retention. The spread compression was
concentrated in certificates of deposit and certain types of money market
deposits. A 5 basis points decline in loan spreads also contributed to the net
interest income decline. The pressure on loan spreads was related to more
aggressive pricing by competitors and was concentrated in commercial loans.
For the 1996 nine-month period, net interest income was $19.9 million, or
2.3%, below the 1995 nine-month period. This decline, similar to the third
quarter decline, was mainly attributable to deposit volume and spreads. Average
deposits declined $688 million compared to September 1995 year-to-date and
deposit spreads were 5 basis points below prior year. As stated above, branch
sales/divestitures as well as the more aggressive pricing strategy to retain
customers were major contributors to the decline. Movement of deposits from
high margin products (i.e. demand, savings and MMA) to higher yielding market
products also influenced the decline. Partially offsetting the impact of these
deposit related declines was an increase in average loan outstandings of $192
million mainly on the growth in consumer loans.
For the third quarter of 1996, non-interest income decreased $1.0 million, or
1.7%, from the third quarter of 1995. Service charges on deposits declined $1.1
million driven by lower business service charges due to declines in fee
generating deposits and by the 1996 reduction in the FDIC premium charged to
banks and passed along to customers in prior years. For the nine-month period,
non-interest income increased $5.5 million, or 3.2%, over 1995 mainly due to an
increase in gains on home equity loan securitizations of $3.5 million.
Increases in various other non-interest income categories, including
ATM/merchant and trust fees, totaled $2.6 million. Service charges declined
$0.6 million.
For the third quarter of 1996, non-financial expenses declined $3.4 million,
or 1.7%, from the prior year third quarter. On a quarter-to-quarter basis,
personnel expenses declined $0.5 million, or 0.7%, while non-personnel expenses
declined $2.9 million, or 2.3%, primarily due to branch closings/sales and
organizational streamlining. Year-to-date non-financial expenses for 1996
declined $52.2 million, or 8.1%. Reduced FDIC premiums in 1996 resulted in a
$30.0 million decline in expenses, primarily during the first six months of
1996. Personnel expenses declined $14.2 million, or 5.9%, and other non-
personnel expenses were down $4.6 million, or 1.3%, primarily due to attrition,
branch closings/sales and streamlining achieved through the process redesigns.
17
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
BUSINESS LINE RESULTS - continued
- ---------------------------------
Retail Credit Services includes the following major business lines: Credit
----------------------
Card, Dealer Services, Educational Lending, Mortgage Services and Card Linx
(CoreStates merchant credit card processing business). Net income for Retail
Credit Services was $17.2 million in the third quarter of 1996, which was $3.6
million, or 17.3%, below the third quarter of 1995. For the 1996 nine-month
period net income was $48.5 million, which was $0.5 million, or 1.0%, under 1995
year-to-date. Declines for the third quarter were primarily due to an increase
in the provision for losses on credit card loans and a reduction of merchant fee
income, partially offset by an increase in credit card net interest income. The
year-to-date variance was also impacted by the aforementioned, but was further
offset by declines in non-financial expenses.
Net interest income for the third quarter of 1996 was $4.7 million, or 6.5%,
above the third quarter of 1995. Contributing to this improvement was the impact
of increases of $142 million in credit card outstandings and $42 million in
student loan outstandings. The impacts of narrowing spreads on the indirect auto
lending and leasing portfolios, and run-off of the leasing and floor plan
portfolios partially offset the favorable impacts of the credit card and student
loan growth. On a year-to-date basis net interest income was $6.4 million, or
3.0%, above the prior year.
For the third quarter of 1996, non-interest income decreased by $3.4
million, or 14.1%, from the third quarter of 1995. This decline was primarily
due to a $2.4 million decrease in merchant fee income due to customer attrition
from bank acquisitions, systems conversions, and repricing of unprofitable
customers. Non-interest income for the 1996 nine-month period was $1.0 million,
or 1.6%, above 1995.
For the third quarter of 1996, non-financial expenses increased $0.6
million, or 1.4%, from the third quarter of 1995. The increase is due to volume
related expense growth. On a year-to-date basis, non-financial expense declined
$5.2 million, or 3.7%, primarily due to savings achieved through the recent
process redesigns and merger-related efficiencies.
Trust and Investment Management is organized into four business lines:
-------------------------------
Institutional Trust, Personal Trust, Private Banking and Investment Management.
CoreStates' Corporate Trust business, previously included in Institutional
Trust, was sold during the fourth quarter of 1995. Meridian's Corporate Trust
business in California was sold in the first quarter of 1995 and its remaining
Corporate Trust business in Pennsylvania, Delaware and New Jersey was recently
sold in the fourth quarter of 1996. Net income of $11.5 million for the third
quarter of 1996 increased by $1.8 million, or 18.6%, over the third quarter of
1995. For the 1996 nine-month period, net income of $29.8 million increased $5.4
million, or 22.1%, over the same period of 1995.
Net interest income declined by $0.8 million, or 5.6%, in the third quarter
of 1996 compared to the same period in 1995 and declined $3.4 million, or 8.1%,
on a year-to-date basis. The declines in net interest income for both periods
were primarily due to the loss of demand deposit balances related to the sale of
the Corporate Trust business. Excluding Corporate Trust earnings on demand
deposit balances in 1995, net interest income increased $0.6 million, or 4.7%,
for the third quarter and $0.1 million, or 0.3%, on a year-to-date basis.
Non-interest income increased $2.7 million, or 6.7% in the third quarter of
1996 compared to the same period in 1995. On a year-to-date basis, non-interest
income increased $4.1 million, or 3.3%. Excluding Corporate Trust fees for all
periods, non-interest income increased $5.2 million, or 13.8%, for the third
quarter and $9.8 million, or 8.4%, on a year-to-date basis. These improvements
were related to growth in Investment Management fees generated from the
implementation of the process redesign and increased asset values. Partially
offsetting these favorable variances was a decline in the Employee Benefit
business.
Non-financial expenses in the third quarter of 1996 declined by
$1.8 million, or 4.5%, from the third quarter of 1995, and for the 1996 nine-
month period declined $6.7 million, or 5.4%, from the comparable period in 1995.
These expense reductions are associated with the partial sale of the Corporate
Trust business and savings in all four business lines related to the process
redesigns and merger-related efficiencies.
18
<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
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 Canada; and SynapQuest - a provider of both retail
credit card processing services to CoreStates and other financial institutions.
Third Party Processing ("TPP") net income for the third quarter of 1996 was
$1.6 million. Net Income for the nine months ended September 30, 1996 was $5.0
million compared to net income of $16.9 million for the same period in 1995.
Prior period results do not reflect Meridian as a TPP customer. The 1995 results
included an $11.8 million non-recurring after-tax gain related to changes in
CoreStates' investment in EPS. Excluding the non-recurring EPS gain, year-to-
year net income growth for the 1996 nine-month period was $0.4 million or 9%.
Third Party Processing revenue for the third quarter of 1996 was $57.7
million compared to $47.4 million for the third quarter of 1995, an increase of
$10.3 million or 19%. Third quarter of 1996 revenues included $50.2 million for
the QuestPoint processing companies and $7.5 million for EPS, while the prior
year consisted of $39.9 million for the QuestPoint processing companies and $8.4
million for EPS. The CoreStates intercompany business accounted for $7.7 million
of the period-to-period QuestPoint revenue growth, due principally to the
addition of Meridian processing in 1996. External QuestPoint revenues grew by
$2.6 million or 15%, while EPS revenues declined by $0.9 million. The external
revenue growth resulted primarily from the addition of new customers within
CashFlex and Transys.
Third Party Processing revenue for the first nine months of 1996 totaled
$164.8 million including $85.0 million for the CoreStates intercompany
business, $22.2 million for EPS and $57.6 million of other external QuestPoint
revenue. This compares to a 1995 revenue total for the same period of
$157.6 million including $68.8 million for the CoreStates intercompany business,
$23.4 million of EPS revenue, $47.2 million of other external QuestPoint
revenue and a $19.0 million non-recurring gain related to changes in
CoreStates' investment in EPS. Excluding the non-recurring EPS gain, year-to-
year revenue growth for the first nine months of 1996 was $25.4 million or 18%.
The CoreStates intercompany business, which contributes 52% of the TPP revenue
base, increased $16.2 million or 24% year-to-year. External QuestPoint business
accounts for the 35% of the revenue base and gained $10.4 million or 22% year-
to-year. The investment in EPS contributes the remaining revenue stream and was
$1.2 million lower than the comparable period in the prior year.
The revenue growth within the CoreStates intercompany business was a result
of the addition of Meridian processing. The external revenue growth was
primarily a result of new business growth within Transys and CashFlex. In
addition, about $1.8 million of the external TPP revenue increase was due to one
additional month of revenue from National Remittance Centers, Inc. ("NRC"), a
lockbox processing subsidiary acquired by CashFlex on January 27, 1995. Income
from the investment in EPS reflects CoreStates' share in EPS net income,
interest income on a 6.45% note and income from amortization of a deferred gain.
The decrease from the prior year is primarily due to lower interest income on
the note, which is being paid down at the rate of $6.25 million per quarter by
EPS.
Third Party Processing non-financial expenses for the third quarter of 1996
totaled $54.1 million, an increase of $10.3 million, or 23.5%, from the third
quarter of 1995. The increase was due to Meridian processing volume in Transys,
CashFlex volume growth, and capital investments. Non-financial expenses for the
first nine months of 1996 were $153.5 million, up $26 million, or 20.4%, from
the first nine months of 1995. Most of the increase supports the addition of
new business, such as the processing of Meridian volume in Transys and overall
CashFlex volume growth. One additional month of NRC expenses, as well as higher
benefits and administrative costs, also contributed to the CashFlex expense
growth.
19
<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 third quarter of 1996 was
$546.7 million, a decrease of $3.1 million, or 0.6%, from the third quarter of
1995. The net interest margin was 5.58% for the third quarter of 1996, an
increase of 15 basis points compared to the third quarter of 1995. The decrease
in net interest income was primarily the result of a $1.2 billion decline in
average earning assets. Compared to the third quarter of 1995, average
investment securities were reduced $1.9 billion, or 30.7%, while average loans
for the third quarter of 1996 increased $525 million, or 1.7%, over the third
quarter of 1995. An increase of $703 million in average non-interest bearing
funding sources and the change in the mix of earning assets from relatively
lower yielding investment securities to higher yielding loans resulted in the 15
basis point increase in the net interest margin. The strength of CoreStates' net
interest income and net interest margin stems from the combination of wide
spreads on both loans and deposits and a balance sheet which has a relatively
high portion of loans and a large base of non-interest bearing funding
principally generated by our processing and cash management businesses.
Compared to the second quarter of 1996, taxable equivalent net interest
income for the third quarter of 1996 increased $6.7 million, or 1.2%. The net
interest margin increased two basis points from 5.56% in the second quarter of
1996. The increase in third quarter net interest income and the net interest
margin, as compared to the second quarter of 1996, principally reflects the
impact of loan growth, higher non-interest bearing funding and a $3.1 million
impact of an extra day in the third quarter. Loans for the third quarter
increased $365 million, or 1.2%, and non-interest bearing funding grew
$361 million, or 3.9%, on average from the second quarter of 1996.
20
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
NET INTEREST INCOME - continued
- -------------------
Taxable equivalent net interest income for the nine months ended September
30, 1996 decreased $21.3 million, or 1.3%, while the net interest margin
increased nine basis points to 5.55%, as compared to the 1995 nine-month period.
The decrease in net interest income was due to a $1.2 billion decrease in
average interest earning assets, primarily caused by a $1.8 billion decrease in
average investment securities compared to the prior year nine-month average.
The increase in the net interest margin reflects the impact of an increase of
$577 million in average non-interest bearing funding sources and a change in mix
of interest earning assets from lower yielding investment securities to higher
yielding loans.
The following table compares taxable equivalent net interest income for the
three months ended September 30, 1996 versus the third quarter of 1995 and the
second quarter of 1996, and for the nine months ended September 30, 1996 versus
the 1995 nine-month period, respectively (in millions):
<TABLE>
<CAPTION>
Taxable Equivalent Net Interest Income
- --------------------------------------
Three Months Ended Increase (decrease)
--------------------------------------- -------------------------------
Sept 30, Sept 30, June 30, Sept 1996/ Sept 1996/
1996 1995 1996 Sept 1995 June 1996
------------ ------------ ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Total interest income................... $ 823.1 $ 871.2 $ 815.8 $(48.1) $ 7.3
Tax equivalent adjustment............... 6.3 8.2 6.6 (1.9) (0.3)
-------- -------- ------- ------- ------
Tax equivalent interest income.......... 829.4 879.4 822.4 (50.0) 7.0
Total interest expense.................. 282.7 329.6 282.4 (46.9) 0.3
-------- -------- ------- ------- ------
Taxable equivalent net
interest income........................ $ 546.7 $ 549.8 $ 540.0 $ (3.1) $ 6.7
======== ======== ======= ======= ======
Interest rate spread.................... 4.63% 4.50% 4.65%
Net interest margin..................... 5.58% 5.43% 5.56%
<CAPTION>
Nine Months Ended
------------------------------------
Sept 30, Sept 30, Increase/
1996 1995 (decrease)
-------- -------- ----------
<S> <C> <C> <C>
Total interest income................... $2,462.5 $2,606.6 $(144.1)
Tax equivalent adjustment............... 20.2 25.4 (5.2)
-------- -------- -------
Tax equivalent interest income.......... 2,482.7 2,632.0 (149.3)
Total interest expense.................. 858.1 986.1 (128.0)
-------- -------- -------
Taxable equivalent net
interest income........................ $1,624.6 $1,645.9 $ (21.3)
======== ======== =======
Interest rate spread.................... 4.62% 4.55%
Net interest margin..................... 5.55% 5.46%
</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 analyses on a taxable equivalent basis illustrates
the underlying factors producing these increases (decreases) in tax equivalent
net interest income (in millions):
<TABLE>
<CAPTION>
Rate/Volume Analysis Increase (decrease) in interest Increase (decrease) in interest
- -------------------- -------------------------------------- ---------------------------------------------
Three Months Ended Three Months Ended
September 30, 1996/1995 September 30, 1996/June 30, 1996
--------------------------------------- ---------------------------------------------
Change attributable to Change attributable to
Income/ ----------------------- Income/ ----------------------
expense Volume Rate expense Volume Rate
------- ---------- ------ --------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets
- -----------------------
Time deposits-Eurodollars.... $ 4.7 $ 7.9 $ (3.2) $ 5.8 $ 5.5 $ 0.3
Investment securities........ (28.7) (29.4) 0.7 (10.3) (8.6) (1.7)
Federal funds sold........... (2.5) (2.2) (0.3) (3.6) (3.4) (0.2)
Trading account securities... (3.9) (3.3) (0.6) (1.0) (0.3) (0.7)
Loans:
- Domestic................. (27.5) 0.9 (28.4) 12.3 3.7 8.6
- Foreign.................. 7.9 10.8 (2.9) 3.8 3.6 0.2
------ ------ ------ ------ ----- -----
Total interest income.. (50.0) (15.3) (34.7) 7.0 0.5 6.5
------ ------ ------ ------ ----- -----
Interest bearing funds
- ----------------------
Deposits:
Domestic.................... (30.8) 2.7 (33.5) (1.9) (0.1) (1.8)
Overseas.................... (0.5) (0.7) 0.2 1.3 1.2 0.1
Funds borrowed:
Federal funds purchased..... (6.3) (4.1) (2.2) 3.5 3.3 0.2
Other....................... (9.0) (6.1) (2.9) (3.6) (2.5) (1.1)
Long-term debt............... (0.3) 1.8 (2.1) 1.0 0.7 0.3
------ ------ ------ ------ ----- -----
Total interest expense...... (46.9) (6.4) (40.5) 0.3 2.6 (2.3)
------ ------ ------ ------ ----- -----
Net interest income.......... $ (3.1) $ (8.9) $ 5.8 $ 6.7 $(2.1) $ 8.8
- ------------------- ====== ====== ====== ====== ===== =====
</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
- -------------------------------
<TABLE>
<CAPTION>
Rate/Volume Analysis Increase (decrease) in interest
- -------------------- ---------------------------------------------
Nine Months Ended
September 30, 1996/1995
---------------------------------------------
Income/ Change attributable to
expense Volume Rate
------------- ------------- -------------
<S> <C> <C> <C>
Interest earning assets
- -----------------------
Time deposits-Eurodollars... $ (8.1) $ 3.3 $ (11.4)
Investment securities....... (81.5) (82.3) 0.8
Federal funds sold.......... 5.4 5.9 (0.5)
Trading account securities.. (12.4) (11.8) (0.6)
Loans:
- Domestic................ (72.8) 15.5 (88.3)
- Foreign................. 20.1 26.8 (6.7)
------- ------ -------
Total interest income.... (149.3) (42.6) (106.7)
------- ------ -------
Interest bearing funds
- ----------------------
Deposits:
Domestic................... (73.0) 0.2 (73.2)
Overseas................... (6.9) (5.7) (1.2)
Funds borrowed:
Federal funds purchased.... (35.4) (27.8) (7.6)
Other...................... (14.9) (8.2) (6.7)
Long-term debt.............. 2.2 10.5 (8.3)
------- ------ -------
Total interest expense..... (128.0) (31.0) (97.0)
------- ------ -------
Net interest income......... $ (21.3) $(11.6) $ (9.7)
- ------------------- ======= ====== =======
</TABLE>
- ----------------------------------------------------
- - Changes in interest income or expenses not arising solely as a result of
volume or rate variances are allocated to rate variances due to the interest
sensitivity of consolidated assets and liabilities.
- - Non-performing loans are included in interest earning assets.
- - The changes in interest expense on domestic time deposits attributable to
volume and rates are adjusted by specific reserves as average balances are
reduced by such reserves for purposes of rate calculations.
The effect of cash basis and other non-performing loans on interest income and
net interest income for the three and nine-month periods ended September 30,
1996 and 1995 was as follows (in millions):
<TABLE>
<CAPTION>
Three Nine
Months Ended Months Ended
September 30, September 30,
--------------- ------------------
1996 1995 1996 1995
------ ------- -------- --------
<S> <C> <C> <C> <C>
Interest income due on non-performing
loans in accordance with
their original terms.................. $ 5.0 $ 6.4 $ 13.9 $ 21.5
Interest income on non-performing loans
reflected in total
interest income....................... 4.7 3.3 9.1 9.3
------ ------ ------ ------
Net reduction in interest income........ $ 0.3 $ 3.1 $ 4.8 $ 12.2
====== ====== ====== ======
</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
- ---------------------------------------
The provision for loan losses for the third quarter of 1996, was $40.0
million, up $2.0 million from the provision recorded in the prior year third
quarter. The increase in the provision for the third quarter of 1996 reflects
loan growth. Excluding the $70.0 million merger-related provision recorded in
the second quarter of 1996, the third quarter of 1996 provision was level with
the second quarter provision. The provision for loan losses for the 1996 nine-
month period, excluding the $70.0 million merger-related provision, was $118.7
million, up $12.9 million from the 1995 nine-month period, due to loan growth
and increased credit card charge-offs.
In the second quarter of 1996, CoreStates recorded a $70.0 million provision
for loan losses in connection with a change in strategy related to Meridian's
problem assets, and to conform Meridian's consumer lending charge-off policies
to those of CoreStates. It is CoreStates' philosophy that such a change in
strategy maximizes the total value of the Meridian acquisition and allows
CoreStates to concentrate upon new franchise initiatives and revenue generation.
In CoreStates' general experience, a strategy that involves the accelerated
resolution of problem assets has been more economical than a long-term work out
approach. It has been CoreStates' general experience that the costs of working
out assets as well as other carrying costs typically outweigh any improvement in
those assets' realized value. Furthermore, the process of working out problem
assets diverts resources and management time and attention from building the
business and creating long-term franchise value.
Net loan charge-offs for the second and third quarters of 1996 included $33.7
million and $4.7 million, respectively, of loan charge-offs related to problem
assets acquired with Meridian. The Meridian charge-offs related to actions
taken in connection with the change in strategic direction including a bulk sale
of $24 million of non-accrual residential mortgage loans in the second quarter.
Also included in 1996 nine-month loan charge-offs was $5.8 million related to
a second quarter policy change to charge off delinquent credit card loans at 150
days past due instead of 180 days past due.
The following table presents an analysis of changes in the allowance for loan
losses for the three and nine-month periods ended September 30, 1996 and 1995
(in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- --------------------------
1996 1995 1996 1995
----------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at beginning of $ 705.1 $ 678.9 $ 670.3 $ 681.1
period....................
Provision charged to 40.0 38.1 188.7(a) 105.8
expense...................
Loan charge-offs........... (57.8) (53.1) (217.6)(b) (167.0)
Recoveries of loans 20.9 22.7 66.8 66.7
previously charged off.... ------- ------- ------- -------
Net loan charge-offs..... (36.9) (30.4) (150.8) (100.3)
------- ------- ------- -------
Balance at end of period... $ 708.2 $ 686.6 $ 708.2 $ 686.6
======= ======= ======= =======
Ratios:
Net charge-offs
(annualized) as a
percentage of average
total loans............... 0.46% 0.39% 0.63% 0.43%
Allowance for loan losses
as a percentage of loans
at end of period.......... 2.16 2.15
Allowance for loan losses
as a percentage of non-
performing loans......... 299.77 256.26
</TABLE>
- -------------------------------
(a) Includes a merger-related provision of $70.0 million related to the second
quarter of 1996 Meridian acquisition.
(b) Includes loan charge-offs of $38.4 million related to problem assets
acquired with Meridian and $5.8 million related to a policy change to
charge off delinquent credit card loans at 150 days past due instead of 180
days past due.
24
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
PROVISION AND ALLOWANCE FOR LOAN LOSSES - continued
- ---------------------------------------
The following tables reflect the distribution of net loan charge-offs by loan
type for the three and nine-month periods ended September 30, 1996 and 1995 (in
millions):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1996 September 30, 1995
-------------------------------- ---------------------------------
% of % of
% of Total % of Total
Net Average Net Net Average Net
Charge- Loan Charge- Charge- Loan Charge-
offs Type(a) offs offs Type(a) offs
---------- -------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Domestic:
Commercial, industrial and other..... $ 6.1 0.2% 16.5% $ 3.0 0.1% 9.9%
Real estate:
Construction and development loans.. (0.9) (0.6) (2.4) (1.3) (0.9) (4.3)
Other............................... 4.1 0.2 11.1 7.1 0.3 23.4
Consumer:
Credit card......................... 17.1 4.4 46.3 14.5 4.1 47.7
Installment......................... 9.3 1.3 25.2 5.0 0.7 16.4
Other (b)............................ 1.2 0.2 3.3 2.4 0.5 7.9
------ ----- ------ ---------
Total domestic...................... 36.9 0.5 100.0 30.7 0.4 101.0
------ ------
Foreign.............................. - - - (0.3) (0.1) (1.0)
------ ----- ------ ---------
Total net charge-offs............... $ 36.9 0.5 100.0% $ 30.4 0.4 100.0%
====== ===== ====== =========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1995
-------------------------------- ---------------------------------
% of % of
% of Total % of Total
Net Average Net Net Average Net
Charge- Loan Charge- Charge- Loan Charge-
offs Type(a) offs offs Type(a) offs
---------- -------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Domestic:
Commercial, industrial and other..... $ 27.6 0.3% 18.3% $ 15.2 0.2% 15.1%
Real estate:
Construction and development loans.. 1.4 0.3 0.9 0.9 0.2 0.9
Other............................... 31.9 0.4 21.2 32.7 0.4 32.6
Consumer:
Credit card......................... 61.2 5.0 40.6 37.7 3.6 37.6
Installment......................... 22.5 1.1 14.9 10.3 0.5 10.3
Other (b)............................ 6.2 0.4 4.1 3.8 0.3 3.8
------ ----- ------ ---------
Total domestic...................... 150.8 0.7 100.0 100.6 0.4 100.3
------ ----- ------ ---------
Foreign.............................. - - (0.3) (0.1) (0.3)
------ ----- ------ ---------
Total net charge-offs............... $150.8(c) 0.6 100.0% $100.3 0.4 100.0%
====== ===== ====== =========
</TABLE>
- ------------------------------------------------
(a) Annualized.
(b) Includes loans to financial institutions and lease financing.
(c) Reflects loan charge-offs of $38.4 million related to problem assets
acquired with Meridian and $5.8 million related to a policy change to
charge-off delinquent credit card loans at 150 days past due instead of 180
days past due.
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
- ------------------------------------------------
Credit quality indicators remained strong during the third quarter. Total
non-performing assets at September 30, 1996 decreased $4.6 million, or 1.7%,
from December 31, 1995. The following table summarizes non-performing assets at
September 30, 1996 and December 31, 1995 (in millions):
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
--------------- ------------
<S> <C> <C>
Non-accrual loans............... $234.8 $223.6
Renegotiated loans.............. 1.5 7.2
------ ------
Total non-performing loans.... 236.3 230.8
Other real estate owned (OREO).. 27.4 37.5
------ ------
Total non-performing assets... $263.7 $268.3
====== ======
</TABLE>
The following table reflects the distribution of non-performing assets by
loan type at September 30, 1996 and December 31, 1995 (in millions):
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
----------------------- ----------------------
% of % of
Non- Loan Non- Loan
performing Type performing Type
-------------- ------- ------------- -------
<S> <C> <C> <C> <C>
Domestic:
Commercial, industrial and $ 91.2 0.6% $ 77.8 0.6%
other....................... ------ ------
Real estate:
Construction and development 9.4 1.5 9.0 1.5
Other loans................. 131.7 1.4 139.8 1.4
Other real estate owned..... 27.4 37.5
------ ------
Total real estate.......... 168.5 186.3
------ ------
Consumer..................... - - - -
------ ------
Other domestic loans (a)..... 4.0 0.2 4.2 0.3
------ ------
Total domestic 263.7 0.8 268.3 0.9
non-performing assets...... ------ ------
Foreign loans................. - - - -
------ ------
Total non-performing assets $263.7 0.8 $268.3 0.8
(b)........................ ====== ======
% 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 $109 million and $89 million at
September 30, 1996 and December 31, 1995, respectively, that are past due 90
days or more as to principal or interest, but which remain on full accrual
since such loans are well secured and in the process of collection.
26
<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
- ------------------------------------------------
<TABLE>
<CAPTION>
The following table summarizes the components of the change in non-performing
assets for 1996 (in millions):
Quarter
------------------------------- Nine
First Second Third Months
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Beginning balance....................... $ 268 $ 281 $ 254 $ 268
Additions............................... 52 75 82 209
Return to accrual....................... (4) - (7) (11)
Payments................................ (21) (58) (45) (124)
Charge-offs............................. (14) (44) (20) (78)
------ ------ ------ ------
Net change............................. 13 (27) 10 (4)
------ ------ ------ ------
Ending balance.......................... $ 281 $ 254 $ 264 $ 264
====== ====== ====== ======
NON-INTEREST INCOME
- -------------------
(in millions)
Percentage
Three Months Ended Nine Months Ended Increase (decrease)
September 30, September 30, ----------------------
----------------- ----------------- Three Nine
1996 1995 1996 1995 Months Months
------ ------ ------ ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic banking transactional services (a) $148.7 $145.0 $435.4 $427.2 2.6% 1.9%
Income from investment in EPS, Inc...... 7.5 7.6 22.2 22.6 (1.3) (1.8)
Third party processing fees (b)......... 14.0 12.1 42.5 33.4 15.7 27.2
Mortgage banking income................. 4.3 4.0 12.9 10.6 7.5 21.7
Investment banking fees................. 3.5 4.5 11.0 12.7 (22.2) (13.4)
Trading gains........................... 2.8 8.1 15.9 26.7 (65.4) (40.4)
Investment securities gains............. 2.4 2.2 12.2 13.7 9.1 (10.9)
Other non-interest income............... 23.9 22.9 77.2 70.3 4.4 9.8
------ ------ ------ ------
Non-interest income before significant
and unusual items...................... 207.1 206.4 629.3 617.2 0.3 2.0
Corporate trust fees (a)................ 0.8 3.0 2.1 8.6
Significant and unusual items........... 28.7 (c) - 43.3 (c) 31.1(d)
------ ------ ------ ------
Total non-interest income............... $236.6 $209.4 $674.7 $656.9 13.0% 2.7%
====== ====== ====== ======
- ----------------------------------------------------
</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 was
reclassed to a separate line. Corestates' corporate trust business was sold
in the fourth quarter of 1995 and Meridian's corporate trust business was
recently sold in the fourth quarter of 1996.
(b) Includes revenues for CashFlex lockbox processing, Transys check processing,
and Synapquest credit card and merchant processing.
(c) Certain net investment gains. See "Net Investment Gains" on page 13 for
more detail.
(d) Reflects the $19.0 million pre-tax gain related to the changes in the
investment in the EPS, Inc. affiliate joint venture and $12.1 million pre-
tax gains on the exchange of equity securities.
27
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
NON-INTEREST INCOME - continued
- -------------------
Non-interest income for the third quarter of 1996, before significant and
unusual items as noted in the preceding table, increased 0.3% from the third
quarter of 1995, primarily reflecting an increase of $3.7 million in revenues
from CoreStates' basic banking transactional businesses and a $1.9 million
increase in third party processing fees. These improvements were offset by a
decrease in trading gains of $5.3 million. Within revenues from basic banking
transactional businesses, a $2.6 million, or 10.5%, increase in fees for
international services and a $2.2 million, or 5.5%, increase in trust fees were
partially offset by a decrease of $2.4 million, or 11.2%, in debit and credit
card fees. Growth in fees for international services resulted from higher
volume and the opening of a new branch office. Improvements in trust fees
related to increased revenues in Investment Management generated from the
implementation of the process redesign and increased asset values. The decrease
in debit and credit card fees was primarily due to a decrease in merchant fee
income due to customer attrition from bank acquisitions, systems conversions,
and repricing of unprofitable customers.
Total non-interest income for the nine months ended September 30, 1996
increased 2.7% from the 1995 nine-month period. Before significant and unusual
items, non-interest income for the 1996 nine-month period increased 2.0%,
primarily reflecting growth of $9.1 million in third-party processing fee
income; $2.3 million in mortgage banking income; $8.2 million in basic banking
transactional services, primarily due to the same reasons as in the third
quarter; and an increase of $6.9 million in other non-interest income, primarily
due to gains on home equity loan securitizations recorded in the second quarter
of 1996.
NON-FINANCIAL EXPENSES
- ----------------------
(in millions)
<TABLE>
<CAPTION>
Percentage
Three Months Ended Nine Months Ended Increase (decrease)
September 30, September 30, ----------------------
----------------- ----------------- Three Nine
1996 1995 1996 1995 Months Months
------ ------ ------ ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Salaries, wages and benefits............ $204.9 $217.4 $ 619.7 $ 685.7 (5.7)% (9.6)%
Net occupancy expense................... 39.9 39.4 120.2 121.3 1.3 (0.9)
Equipment expense....................... 29.4 29.1 90.4 87.7 1.0 3.1
Amortization of intangible assets....... 10.2 11.0 30.2 33.8 (7.3) (10.7)
FDIC premiums........................... 1.5 (0.5) 4.3 37.2 (88.4)
OREO expense............................ 1.3 1.7 1.6 5.9 (23.5) (72.9)
Other operating expenses................ 118.2 115.4 348.8 346.9 2.4 0.6
------ ------ -------- --------
Non-financial expense before
significant and
unusual items......................... 405.4 413.5 1,215.2 1,318.5 (2.0) (7.8)
SAIF Fund special assessment (a)........ 14.2 - 14.2 -
Restructuring and merger-related 12.3 (2.4) 130.1 136.6
charges (b)............................ ------ ------ -------- --------
Total non-financial expenses............ $431.9 $411.1 $1,359.5 $1,455.1 5.1% (6.6)%
====== ====== ======== ========
</TABLE>
- --------------------------------------------------
(a) See "SAIF Fund Special Assessment" on page 13 for more detail.
(b) See "Restructuring and Merger-Related charges" on page 10 for more detail.
Total non-financial expenses for the third quarter of 1996, before
significant and unusual items as noted in the above table, were $405.4 million,
a decrease of $8.1 million, or 2.0% from the third quarter of 1995. This
decrease reflects the impacts of the process redesigns and merger-related
synergies.
28
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
CAPITAL MANAGEMENT
- ------------------
CoreStates' capital provides the resources and flexibility for anticipated
growth. CoreStates' capital position at September 30, 1996 under risk-based
capital guidelines was $3.8 billion or 9.5% of risk-weighted assets, for Tier 1
capital and $5.1 billion, or 12.9%, for total risk-based capital. Tier 1 capital
consists primarily of common shareholders' equity less goodwill and certain
intangible assets, while total risk-based capital adds qualifying subordinated
debt and the allowance for loan losses, within permitted limits, to Tier 1
capital. Risk-weighted assets are determined by assigning various levels of risk
to different categories of assets and off-balance sheet activities. CoreStates'
ratios at September 30, 1996 exceed the risk-based capital standards that
require all banks to have Tier 1 capital of at least 4% and total capital of 8%.
Under the Federal Reserve Board's capital leverage guidelines, which require a
minimum leverage ratio of 3.0% (Tier 1 capital to quarterly average total
assets), CoreStates had a leverage ratio of 8.7% at September 30, 1996. The
minimum 3.0% leverage requirement applies only to top rated banking
organizations without any operating, financial or supervisory deficiencies.
Other organizations (including those experiencing or anticipating significant
growth) are expected to hold an additional capital cushion of at least 100 to
200 basis points of Tier 1 capital, and in all cases, banking organizations
should hold capital commensurate with the level and nature of all the risks,
including the volume and severity of problem loans, to which they are exposed.
Substantially the same capital requirements are applied to CoreStates' banking
subsidiaries under guidelines issued by the Office of the Comptroller of the
Currency and the Federal Deposit Insurance Corporation. As illustrated in the
following table, at September 30, 1996 the banking subsidiaries of CoreStates
were "well capitalized" as defined by regulatory authorities.
<TABLE>
<CAPTION>
Regulatory Capital Ratios
------------------------------------------
Tier 1 Total Leverage
------------- ----------- --------------
<S> <C> <C> <C>
CoreStates Bank, N.A............... 7.7% 10.4% 7.2%
New Jersey National Bank........... 10.1 13.0 5.7
CoreStates Bank of Delaware, N.A... 6.4 10.9 5.7
</TABLE>
CoreStates' dividend on its common stock was $0.42 per share in the third
quarter of 1996 and $0.34 per share in the third quarter of 1995. The common
dividend payout ratio, based on operating earnings per share, was 47.2% for the
third quarter of 1996, compared to 38.6%, for the third quarter of 1995.
On October 15, 1996, the Board of Directors authorized the management of
CoreStates to repurchase up to 22 million shares of common stock, or
approximately 10% of outstanding shares, through December 31, 1997. Acting under
that authorization, on November 6, 1996, management purchased 8.8 million shares
of CoreStates' common stock in a privately negotiated transaction. Management is
also authorized to repurchase additional shares to fulfill requirements of
employee benefit and dividend reinvestment plans.
Also on October 15, 1996, the Board of Directors increased the quarterly
dividend on CoreStates' common stock to $0.47 per share, from $0.42 per share.
The increase is effective for the quarterly dividend payable on January 1, 1997.
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.
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
- -----------------------------
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.
There are two main elements to CoreStates' interest rate risk. The first is
the broad mismatch between the rate sensitivity of the assets and liabilities in
its core businesses, and the second is the spread risk between the rates on
those products and financial market rates.
CoreStates' core wholesale and retail businesses generate a large portfolio of
prime and other short-term rate related assets. Characteristic of a regional
banking company, CoreStates also has a significant funding base of consumer
deposits with indefinite maturities and non-contractual rates such as savings,
NOW and money market accounts. This inherent mismatch of longer term fixed-rate
liabilities funding short-term rate sensitive assets generates significant
exposure to declining interest rates if not hedged. CoreStates manages this
position through the use of both on and off-balance sheet discretionary assets
and liabilities. In keeping with CoreStates' interest rate risk discipline, the
combined position is relatively balanced so that there is minimal impact on
earnings from an interest rate move in either direction.
The second major element of CoreStates' interest rate risk is the spread risk
between product rates and financial market rates. These spreads are a function
of competitive and other factors as well as interest rate levels. CoreStates
simulates the behavior of individual products under various rate scenarios to
determine an appropriate investment or funding strategy to provide a stable
spread.
Off-balance Sheet Instruments and Derivative Activities
CoreStates uses off-balance sheet derivative instruments primarily to manage
CoreStates' interest rate risk. CoreStates believes that interest rate risk
management must be coordinated with the management of liquidity and capital.
Therefore, CoreStates uses off-balance sheet instruments to modify its rate
sensitivity and consequently, avoids the unnecessary leverage and liquidity
impairment which would result from on-balance sheet alternatives. CoreStates
also uses interest rate contracts to provide risk management services for its
customers.
Credit risk exists in a derivative transaction to the extent that there is a
favorable move in interest rates and the counterparty fails to perform. The
current credit exposure in a derivative transaction is the estimated cost to
replace the transaction at current market rates, while potential exposure is the
estimated cost to replace the transaction at future interest rates. CoreStates
monitors both the current and potential risk. CoreStates evaluates the credit
worthiness of all off-balance sheet counterparties using the same standards
applied in any other loan or credit transaction. In addition, CoreStates
requires collateral from counterparties when the risk exceeds an acceptable
threshold. Collateral agreements are determined based on
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
- -----------------------------
the quality of individual counterparties. As of September 30, 1996, the current
cost to replace CoreStates' derivatives portfolio was $187 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 September 30,
1996, the major balance sheet category to which they relate, and the associated
unrealized gains/losses:
<TABLE>
<CAPTION>
Outstanding Interest Rate Risk Related Derivatives
- --------------------------------------------------
At September 30, 1996 Interest Interest Interest
- --------------------- rate rate rate caps Other
(in millions) swaps futures and floors derivatives Total
------- ------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C>
Interest Sensitivity Adjustment:
Assets (primarily loans):
Notional amount................... $3,537 $5,559 $ 9 $ 9,105
Unrealized gains.................. 56 2 - 58
Unrealized losses................. (25) - - (25)
Deposits and other borrowings:
Notional amount.................... 4,665 - 925 $100 5,690
Unrealized gains................... 30 - 11 - 41
Unrealized losses.................. (32) - - - (32)
Long-term debt:
Notional amount.................... 589 - 25 150 764
Unrealized gains................... 10 - - 4 14
Unrealized losses.................. (19) - - - (19)
Spread Protection:
Assets (primarily loans)
Notional amount.................... 40 - 567 - 607
Unrealized gains................... - - 3 - 3
Unrealized losses.................. - - - - -
Deposits and other borrowings:
Notional amount.................... - - 162 - 162
Unrealized gains................... - - - - -
Unrealized losses.................. - - - - -
Anticipated Asset Sales:
Notional amount.................... 9 - - 231 240
Unrealized gains................... - - - - -
Unrealized losses.................. - - - (1) (1)
Total:
Notional amount.................... $8,840 $5,559 $1,688 $ 481 $16,568
====== ====== ====== ====== =======
Unrealized gains................... $ 96 $ 2 $ 14 $ 4 $ 116
====== ====== ====== ====== =======
Unrealized losses.................. $ (76) $ - $ - $ (1) $ (77)
====== ====== ====== ====== =======
Net unrealized gains (losses)...... $ 20 $ 2 $ 14 $ 3 $ 39
====== ====== ====== ====== =======
</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 September 30, 1996, CoreStates use of off-balance sheet derivative
instruments which carry a leveraged exposure to either rising or falling rates
or have other complex features is not material.
31
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
INTEREST RATE RISK MANAGEMENT - continued
- -----------------------------
Interest sensitivity adjustments account for the majority of CoreStates'
derivative activities. CoreStates has a naturally asset sensitive balance sheet
as a result of its basic loan and deposit businesses. Commercial and consumer
loan activities tend to have short-term repricing characteristics versus the
longer term repricing nature of CoreStates' funding sources. These relationship
portfolios have a positive effect on earnings in a rising rate environment and a
negative effect in a falling rate environment. Therefore, CoreStates uses fixed
rate assets or off-balance sheet instruments with characteristics similar to
fixed rate assets to offset this risk. When off-balance sheet instruments are
used, cash balances are invested in shorter time periods and interest rate swaps
or other derivatives are used to "fix" the rate for longer terms similar to
those of CoreStates' liabilities. The risks in certain products, particularly
non-contractual deposits, are sometimes greater in one direction of rate change
than the other. To the extent that margingal amounts of deposits need
protection from falling rates but are likely to shift to higher rate instruments
as interest rates rise, caps and/or floors are a more appropriate hedge.
CoreStates has used interest rate floors in this manner to augment the risk
protection provided by the swaps and futures portfolios. By using swaps and
futures in this manner, leverage is reduced and liquidity is enhanced. If
derivative instruments were not used, CoreStates would invest in longer term
assets based on its disciplined interest rate risk management practice of strict
matching of asset and liability terms. Therefore, the impact of derivatives on
pre-tax income is confined to the spread between the derivative instrument and
other instruments of similar terms. Management estimates that this spread is
not material relative to pre-tax income.
CoreStates also uses derivative instruments to protect spreads on certain
balance sheet products. CoreStates' loan and securities portfolios include
adjustable rate mortgages which carry interest rate caps limiting the amount of
rate increase per year as well as over the life of the mortgage. As interest
rates rise and funding costs increase, the spread on that portfolio will
compress. CoreStates holds $498 million of interest rate caps which offset that
risk by limiting the potential increase in funding costs. CoreStates has issued
retail certificates of deposits with floating rates which carry a guaranteed
minimum rate. CoreStates has used caps and floors to offset that risk.
For accounting purposes, the income effects of derivatives used to adjust
interest sensitivity or to protect a product spread are associated with either
the asset or the liability being managed. The amount recorded in net interest
income related to derivative financial instruments was $19.3 million in the
quarter ended September 30, 1996 and $9.6 million in the quarter ended September
30, 1995. The following table shows the impact of derivatives income on average
interest rates:
<TABLE>
<CAPTION>
Impact of Derivatives Income on Yields and Costs
- ------------------------------------------------
For the Quarter Ended September 30,
- -----------------------------------
(in millions) 1996 1995
--------------------------------------------- -------------------------------------------------
Reported Impact Reported Impact
Average Yield/ Product of Average Yield/ Product of
Balance Cost Rate Derivatives Balance Cost Rate Derivatives
------- -------- ------- ----------- ------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earning Assets
Time deposits................. $ 2,358 5.61% 5.61% - $ 1,844 6.14% 6.14% -
Federal funds sold & trading
account assets............... 276 5.04 5.04 - 590 6.65 6.65 -
Investment securities........ 4,329 6.19 6.11 .08% 6,251 6.10 6.04 .06%
Loans........................ 32,030 9.01 8.91 .10 31,505 9.38 9.29 .09
------- -------
Total Earning Assets......... $38,993 8.46 8.37 .09 $40,190 8.68 8.60 .08
======= =======
Interest Bearing Funds
Savings, NOW, regular MMA.... $ 9,848 1.57 1.85 (.28) $10,973 2.07 2.05 .02
Premium MMA.................. 3,517 3.80 3.80 - 3,293 4.01 4.01 -
Certificates................. 9,073 4.96 5.08 (.12) 9,191 5.50 5.56 (.06)
------- -------
Total retail............... 22,438 3.29 3.47 (.18) 23,457 3.71 3.72 (.01)
------- -------
Commercial & foreign deposits 1,544 5.72 5.73 (.01) 1,794 4.96 5.05 (.09)
Federal funds purchased &
short-term borrowings....... 2,886 4.93 4.95 (.02) 3,624 5.59 5.56 .03
Long-term debt............... 2,491 6.32 6.46 (.14) 2,384 6.63 6.70 (.07)
------- -------
Total wholesale............ 6,921 5.61 5.67 (.06) 7,802 5.76 5.79 (.03)
------- -------
Total Interest Bearing Funds. $29,359 3.83 3.98 (.15) $31,259 4.18 4.20 (.02)
======= =======
</TABLE>
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
- -----------------------------
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 interest rate 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 September 30, 1996, the rates CoreStates has contracted to receive are
fixed for longer time periods than the rates CoreStates has contracted to pay.
Therefore, if interest rates fall, this portfolio will provide higher interest
income, offsetting a decline in interest income in relationship portfolios;
conversely if rates rise, the swap portfolio will produce less interest income
which will be offset by increased interest income in the relationship
portfolios. CoreStates also uses interest rate futures in a similar manner.
While swaps are used in both short and long term maturities, futures are used
primarily to extend the rate sensitivity of short-term assets to periods less
than one year. CoreStates' use of financial futures is largely concentrated in
Eurodollar and LIBOR contracts.
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 September 30, 1996.
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
- -----------------------------
<TABLE>
<CAPTION>
Repricing Schedule of Interest Rate Swaps
- -----------------------------------------
At September 30, 1996
- ---------------------
(in millions)
Years
----------------------------------------------------------------
0-1 1-2 2-3 3-4 4-5 over 5 Total
------- ------- -------- ------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Receive Fixed/Pay Floating:
Receive Notional............... $1,810 $1,422 $1,426 $1,214 $1,558 $ 514 $7,944
Rate................... 6.82% 6.24% 6.43% 6.82% 6.26% 7.15% 6.56%
Pay Notional............... $7,944 $7,944
Rate................... 5.51% 5.51%
Pay Fixed/Receive Floating:
Pay Notional............... $ 10 $ 15 $ 34 $ 59
Rate................... 8.90% 8.48% 8.84% 8.76%
Receive Notional............... $ 59 $ 59
Rate................... 5.56% 5.56%
Receive Floating/Pay Floating:
(Basis Swaps)
Notional............... $ 320 $ 320
Receive Rate................... 5.52% 5.52%
Pay Rate................... 5.51% 5.51%
Receive Fixed/Pay Floating(a):
(Forward Start)
Receive Notional............... $ 10 $ 160 $ 315 $ 32 $ 517
Rate................... 5.69% 7.70% 6.48% 7.37% 6.70%
Start Date Notional............ $ 150 $ 132 $ 235 $ 517
</TABLE>
- ----------------------------------------------
(a) Pay rate will be determined on forward start date.
The following schedule illustrates CoreStates' interest rate risk related
derivative activity for the current quarterly reporting period:
<TABLE>
<CAPTION>
Activity in Derivatives Products
- --------------------------------
For the Quarter Ended September 30, 1996
- ----------------------------------------
(in millions)
Interest Interest Interest
rate rate rate caps Other
Notional Amounts swaps futures and floors derivatives Total
- ---------------- -------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
As of June 30, 1996..................... $9,286 $ 3,162 $1,662 $291 $14,401
Additions............................... 538 4,961 41 191 5,731
Terminated/restructured contracts(a).... (175) - - - (175)
Maturities/amortization................. (809) (2,564) (15) (1) (3,389)
------ ------- ------ ---- -------
As of September 30, 1996................ $8,840 $ 5,559 $1,688 $481 $16,568
====== ======= ====== ==== =======
</TABLE>
- --------------------
(a) As of September 30, 1996, CoreStates had $3.5 million of deferred gains and
$8.4 million of deferred losses related to terminated derivative contracts.
34
<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' overall use of off-balance sheet instruments increased during the
third quarter. In particular, CoreStates' use of interest rate futures has
increased over the last several quarters due to an increasing need to extend the
rate sensitivity of short-term fixed-rate assets. This need is primarily for
6-12 month term assets and is due to retail deposit activities.
Trading and Customer Related Derivative Activities - CoreStates also engages
in derivative market activities to provide risk management services for its
customers and to manage securities trading positions in the securities unit.
The securities unit underwrites, brokers and distributes securities to
municipalities, institutional and individual investors. In addition the unit
buys, sells and securitizes mortgage loans and brokers loan servicing
portfolios. The following schedule details the outstanding notional amounts and
related fair values of trading and customer related derivative transactions as
of September 30, 1996.
<TABLE>
<CAPTION>
Trading and Customer Related Derivatives
- ----------------------------------------
<S> <C> <C> <C> <C>
At September 30, 1996
- ---------------------
(in millions) Notional Net assets Positive Negative
amount (liability)(a) Market Value Market Value
-------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Interest Rate Swaps:
CoreStates receives fixed............ $ 302 $ 1 $ 2 $ (1)
CoreStates pays fixed................ 302 (1) 1 (2)
Rate Locks:
CoreStates receives fixed............ 70 1 1 -
CoreStates pays fixed................ 70 (1) - (1)
Interest Rate Caps/Floors:
Sold................................. 543 (2) - (2)
Purchased............................ 543 2 2 -
Futures............................... 88 - - -
Commitments to purchase/sell
whole mortgage loans and
securities (including when-issued
securities):
Sold................................ 155 5 5 -
Purchased........................... 118 (2) - (2)
Other Options:
Sold................................. 295 7 7 -
Purchased............................ 430 1 1 -
Foreign exchange contracts............ 2,051 7 45 (38)
------ --- --- ----
Total Trading and Customer Related
Derivatives.......................... $4,967 $18 $64 $(46)
====== === === ====
</TABLE>
- --------------------
(a) Average net assets (liabilities) during 1996 was substantially the same as
the net assets (liabilities) at September 30, 1996.
35
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEETS AND TAXABLE EQUIVALENT INCOME/EXPENSE
AND RATES
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------
September 30, 1996 June 30, 1996
------------------------------ -----------------------------
Average Income/ Average Income/
balance Rate expense balance Rate expense
------- ---- ------- ------- ---- -------
(000,000) (000) (000,000) (000)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
- -----------------------
Time deposits, principally Eurodollars (a).. $ 2,358 5.61% $ 33,277 $ 1,961 5.63% $ 27,449
Investment securities (b):
U.S. Government........................... 3,020 5.97 45,304 3,484 6.08 52,684
State and municipal....................... 472 8.25 9,736 506 8.43 10,661
Other..................................... 837 5.86 12,328 893 6.44 14,304
--------- -------- --------- --------
Total investment securities............. 4,329 6.19 67,368 4,883 6.40 77,649
--------- -------- --------- --------
Federal funds sold.......................... 212 5.38 2,865 442 5.92 6,509
Trading account securities.................. 64 3.93 629 80 8.39 1,677
Loans (b) (c) (d):
Domestic:
Commercial, industrial and other........... 13,678 9.00 309,436 13,132 8.96 292,575
Real estate................................ 9,818 8.21 202,641 10,353 8.59 221,000
Consumer................................... 4,504 12.50 141,524 4,401 11.48 125,583
Financial institutions..................... 904 5.97 13,556 814 6.10 12,345
Factoring receivables...................... 462 9.75 11,322 525 10.50 13,710
Lease financing............................ 1,183 7.84 23,189 1,186 8.12 24,078
Foreign..................................... 1,481 6.35 23,649 1,254 6.36 19,823
--------- -------- --------- --------
Total loans, net of discounts............ 32,030 9.01 725,317 31,665 9.01 709,114
--------- -------- --------- --------
Total interest earning assets (d)........ $ 38,993 8.46 829,456 $ 39,031 8.47 822,398
========= ---- -------- ========= ----- --------
FUNDING SOURCES
- ---------------------------
Interest Bearing Liabilities (b):
Deposits in domestic offices:
Commercial................................. $ 508 7.82 9,992 $ 596 5.12 7,582
NOW accounts (e)........................... 654 1.37 2,135 1,713 0.86 3,375
Money Market Accounts (e).................. 8,224 2.52 52,012 7,307 2.66 48,095
Consumer savings........................... 4,487 1.59 17,932 4,720 1.82 21,412
Consumer certificates...................... 9,073 4.96 113,128 9,230 5.08 116,648
Time deposits of overseas branches
and subsidiaries........................... 1,036 4.68 12,192 935 4.67 10,850
--------- -------- --------- --------
Total interest bearing deposits (e)...... 23,982 3.45 207,391 24,501 3.44 207,962
--------- -------- --------- --------
Short-term funds borrowed:
Federal funds purchased.................... 1,728 5.02 21,801 1,460 5.03 18,254
Commercial paper........................... 886 5.40 12,018 1,059 5.35 14,093
Other...................................... 272 2.87 1,961 289 4.86 3,495
--------- -------- --------- --------
Total short-term funds borrowed.......... 2,886 4.93 35,780 2,808 5.13 35,842
--------- -------- --------- --------
Long-term debt.............................. 2,491 6.32 39,564 2,449 6.33 38,556
--------- -------- --------- --------
Total interest bearing liabilities....... 29,359 3.83 282,735 29,758 3.82 282,360
Portion of non-interest bearing
funding sources............................ 9,634 9,273
--------- ------- ---------
Total funding sources.................... $ 38,993 2.88 282,735 $ 39,031 2.91 282,360
========= ---- -------- ========= ---- --------
Net interest income and net
interest margin............................ 5.58% $546,721 5.56% $540,038
==== ======== ==== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
September 30, 1995
---------------------------
Average Income/
balance Rate expense
------- ---- -------
(000,000) (000)
<S> <C> <C> <C>
INTEREST EARNING ASSETS
- -----------------------
Time deposits, principally Eurodollars (a).. $ 1,844 6.14% $ 28,561
Investment securities (b):
U.S. Government........................... 4,537 5.81 66,486
State and municipal....................... 652 8.48 13,829
Other..................................... 1,062 5.89 15,768
--------- --------
Total investment securities............. 6,251 6.10 96,083
--------- --------
Federal funds sold.......................... 357 6.01 5,405
Trading account securities.................. 233 7.69 4,479
Loans (b) (c) (d):
Domestic:
Commercial, industrial and other........... 12,791 9.41 303,222
Real estate................................ 11,162 9.09 255,709
Consumer................................... 4,233 11.10 118,482
Financial institutions..................... 773 6.82 13,286
Factoring receivables...................... 560 11.16 15,752
Lease financing............................ 1,109 8.17 22,663
Foreign..................................... 877 7.12 15,735
--------- --------
Total loans, net of discounts............ 31,505 9.38 744,849
--------- --------
Total interest earning assets (d)........ $ 40,190 8.68 879,377
========= ----- --------
FUNDING SOURCES
- ---------------------------
Interest Bearing Liabilities (b):
Deposits in domestic offices:
Commercial................................. $ 694 5.55 9,706
NOW accounts (e)........................... 3,324 1.47 11,251
Money Market Accounts (e).................. 5,978 3.30 49,601
Consumer savings........................... 4,964 2.24 28,049
Consumer certificates...................... 9,191 5.50 127,390
Time deposits of overseas branches
and subsidiaries........................... 1,100 4.60 12,743
--------- --------
Total interest bearing deposits (e)
deposits (e)............................ 25,251 3.80 238,740
--------- --------
Short-term funds borrowed:
Federal funds purchased.................... 2,026 5.50 28,093
Commercial paper........................... 1,057 5.90 15,732
Other...................................... 541 5.28 7,203
--------- --------
Total short-term funds borrowed.......... 3,624 5.59 51,028
--------- --------
Long-term debt.............................. 2,384 6.63 39,824
--------- --------
Total interest bearing liabilities
liabilities............................. 31,259 4.18 329,592
Portion of non-interest bearing
funding sources............................ 8,931 -------
---------
Total funding sources.................... $ 40,190 3.25 329,592
========= ----- --------
Net interest income and net
interest margin............................ 5.43% $549,785
===== ========
</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.
36
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEETS AND TAXABLE EQUIVALENT INCOME/EXPENSE
AND RATES - continued
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------------------
September 30, 1996 June 30, 1996 September 30, 1995
------------------------ ------------------------ --------------------------
Average Income/ Average Income/ Average Income/
balance Rate expense balance Rate expense balance Rate expense
------- ---- ------- ------- ---- ------- ------- ---- -------
(000,000) (000) (000,000) (000) (000,000) (000)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NON-INTEREST EARNING ASSETS
- ---------------------------
Cash...................................... $ 2,762 $ 2,833 $ 2,790
Allowance for loan losses................. (709) (712) (687)
Other assets.............................. 2,366 2,443 2,330
--------- --------- ---------
Total non-interest earning assets........ $ 4,419 $ 4,564 $ 4,433
========= ========= =========
TOTAL AVERAGE ASSETS...................... $ 43,412 $ 43,595 $ 44,623
========= ========= =========
NON-INTEREST BEARING FUNDING
SOURCES
- -------
Demand deposits:
Domestic................................. $ 7,690 $ 7,637 $ 7,354
Foreign.................................. 365 372 385
Other liabilities......................... 2,030 1,981 1,897
Shareholders' equity...................... 3,968 3,847 3,728
Non-interest bearing funding sources
used to fund earning assets.............. (9,634) (9,273) (8,931)
--------- --------- ---------
Total net non-interest bearing funding
sources................................ $ 4,419 $ 4,564 $ 4,433
========= ========= =========
SUPPLEMENTARY AVERAGES
- ----------------------
Net demand deposits....................... $ 6,351 $ 6,374 $ 6,108
Net Federal funds purchased............... 1,516 4.97% $18,936 1,018 4.64% $11,745 1,669 5.39% $22,688
Certificates of deposit in
domestic offices over $100,000........... 986 6.32 15,660 1,123 4.95 13,825 1,198 5.36% 16,171
Average prime rate........................ 8.25 8.25 8.77
</TABLE>
37
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEETS AND TAXABLE EQUIVALENT INCOME/EXPENSE
AND RATES - continued
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------------------------
September 30, 1996
------------------------------------------------
Average Income/
balance Rate expense
------- ------ -------
(000,000) (000)
<S> <C> <C> <C>
INTEREST EARNING ASSETS
- -----------------------
Time deposits, principally Eurodollars (a)......... $ 2,040 5.63% $ 85,969
Investment securities (b):
U.S. Government................................... 3,440 6.03 155,335
State and municipal............................... 514 8.09 31,175
Other............................................. 900 5.94 40,052
--------- ----------
Total investment securities....................... 4,854 6.23 226,562
--------- ----------
Federal funds sold................................. 396 5.65 16,757
Trading account securities......................... 96 6.71 4,829
Loans (b) (c) (d):
Domestic:
Commercial, industrial and other.................. 13,196 9.02 891,038
Real estate....................................... 10,273 8.49 653,257
Consumer.......................................... 4,452 11.87 395,549
Financial institutions............................ 838 6.00 37,664
Factoring receivables............................. 496 10.39 38,565
Lease financing................................... 1,180 8.05 71,282
Foreign............................................ 1,275 6.42 61,267
--------- ----------
Total loans, net of discounts................... 31,710 9.05 2,148,622
--------- ----------
Total interest earning assets (d)............... $ 39,096 8.48 2,482,739
========= ----- ----------
FUNDING SOURCES
- ---------------
Interest Bearing Liabilities (b):
Deposits in domestic offices:
Commercial........................................ $ 597 6.01 26,855
NOW accounts (e).................................. 1,750 1.12 13,499
Money Market Accounts (e)......................... 7,288 2.70 146,675
Consumer savings.................................. 4,651 1.80 62,633
Consumer certificates............................. 9,106 5.09 346,740
Time deposits of overseas branches
and subsidiaries.................................. 961 4.64 33,409
--------- ----------
Total interest bearing deposits (e)............. 24,353 3.48 629,811
--------- ----------
Short-term funds borrowed:
Federal funds purchased........................... 1,605 5.09 61,219
Commercial paper.................................. 996 5.42 40,442
Other............................................. 306 4.24 9,718
--------- ----------
Total short-term funds borrowed................. 2,907 5.12 111,379
--------- ----------
Long-term debt..................................... 2,460 6.35 116,969
--------- ----------
Total interest bearing liabilities.............. 29,720 3.86 858,159
Portion of non-interest bearing funding sources.... 9,376
--------- ----------
Total funding sources........................... $ 39,096 2.93 858,159
========= ----- ----------
Net interest income and net interest margin........ 5.55% $1,624,580
===== ==========
</TABLE>
<TABLE>
<CAPTION>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEETS AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES - continued
Nine Months Ended
---------------------------------------------
September 30, 1995
---------------------------------------------
Average Income/
balance Rate expense
------- ------ -------
(000,000) (000)
<S> <C> <C> <C>
INTEREST EARNING ASSETS
- -----------------------
Time deposits, principally Eurodollars (a)......... $ 1,971 6.38% $ 94,103
Investment securities (b):
U.S. Government.................................... 4,907 5.86 214,974
State and municipal................................ 682 8.46 43,264
Other.............................................. 1,056 6.32 49,887
--------- ----------
Total investment securities....................... 6,645 6.20 308,125
--------- ----------
Federal funds sold................................. 260 5.83 11,344
Trading account securities......................... 306 7.51 17,243
Loans (b) (c) (d):
Domestic:
Commercial, industrial and other.................. 12,440 9.52 886,227
Real estate....................................... 11,391 9.10 775,597
Consumer.......................................... 4,185 11.13 348,255
Financial institutions............................ 707 7.11 37,595
Factoring receivables............................. 566 10.96 46,378
Lease financing................................... 1,079 8.15 65,984
Foreign............................................ 772 7.12 41,140
--------- ----------
Total loans, net of discounts................... 31,140 9.45 2,201,176
--------- ----------
Total interest earning assets (d)............... $ 40,322 8.73 2,631,991
========= ----- ----------
FUNDING SOURCES
- ---------------
Interest Bearing Liabilities (b):
Deposits in domestic offices:
Commercial........................................ $ 663 5.59 27,727
NOW accounts (e).................................. 3,401 1.55 36,112
Money Market Accounts (e)......................... 6,042 3.30 148,938
Consumer savings.................................. 5,124 2.30 88,183
Consumer certificates............................. 9,155 5.38 368,419
Time deposits of overseas branches
and subsidiaries.................................. 1,119 4.81 40,292
--------- ----------
Total interest bearing deposits (e)............. 25,504 3.76 709,671
--------- ----------
Short-term funds borrowed:
Federal funds purchased........................... 2,253 5.73 96,577
Commercial paper.................................. 971 5.99 43,528
Other............................................. 541 5.32 21,521
--------- ----------
Total short-term funds borrowed................. 3,765 5.74 161,626
--------- ----------
Long-term debt..................................... 2,254 6.81 114,763
--------- ----------
Total interest bearing liabilities.............. 31,523 4.18 986,060
Portion of non-interest bearing funding sources.... 8,799
---------
Total funding sources........................... $ 40,322 3.27 986,060
========= ----- ----------
Net interest income and net interest margin........ 5.46% $1,645,931
===== ==========
</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.
38
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEETS AND TAXABLE EQUIVALENT INCOME/EXPENSE
AND RATES - continued
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------------------------------------------------------------------
September 30, 1996 September 30, 1995
------------------------------------------- -------------------------------------------
Average Income/ Average Income/
balance Rate expense balance Rate expense
------- ------ ------- ------- ------ -------
(000,000) (000) (000,000) (000)
<S> <C> <C> <C> <C> <C> <C>
NON-INTEREST EARNING ASSETS
- ---------------------------
Cash.................................... $ 2,830 $ 2,725
Allowance for loan losses............... (699) (685)
Other assets............................ 2,376 2,367
--------- ---------
Total non-interest earning assets...... $ 4,507 $ 4,407
========= =========
TOTAL AVERAGE ASSETS.................... $ 43,603 $ 44,729
========= =========
NON-INTEREST BEARING FUNDING SOURCES
- ----------------------------------------
Demand deposits:
Domestic............................... $ 7,653 $ 7,334
Foreign................................ 376 379
Other liabilities....................... 1,939 1,778
Shareholders' equity.................... 3,915 3,715
Non-interest bearing funding sources
used to fund earning assets............ (9,376) (8,799)
--------- ---------
Total net non-interest bearing funding
sources.............................. $ 4,507 $ 4,407
========= =========
SUPPLEMENTARY AVERAGES
- ----------------------
Net demand deposits..................... $ 6,126 $ 6,180
Net Federal funds purchased............. 1,209 4.91 $44,462 1,993 5.72% $85,233
Certificates of deposit in
domestic offices over $100,000......... 1,105 5.47 45,228 1,167 5.40 47,180
Average prime rate...................... 8.28 8.86
</TABLE>
39
<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 the Corporation: herewith
in connection with registration statements filed
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 Company and
CoreStates Capital Corporation) (Combined CoreStates Parent
27 Financial Data Schedule
(b) The following Reports on Form 8-K were filed by CoreStates Financial
Corp during the quarter:
1. Date of Report: July 17, 1996
--------------
Item(s) Reported: Reporting under Item 5 the information set
----------------
forth in the earnings news release of CoreStates Financial
Corp.
2. Date of Report: July 17, 1996 (Form 8-K/A)
--------------
Item(s) Reported: Reporting under Item 5 the information set
----------------
forth in the amended earnings news release of CoreStates
Financial Corp.
40
<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: November 12, 1996 By: /s/ Christopher J. Carey
-------------------------------------------
Christopher J. Carey
Senior Vice President and Controller
(Principal Financial & Accounting Officer)
41
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
1996 1995 1996 1995
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
(A) Net Income........................... $196,857 $194,712 $453,598 $463,031
======== ======== ======== ========
EARNINGS PER SHARE
Based on average common shares outstanding
- ------------------------------------------
(B) Average shares outstanding........... 220,409 220,718 219,802 223,061
(A/B) Net income............................ $0.89 $0.88 $2.06 $2.08
===== ===== ===== =====
Based on average common and common
- ----------------------------------
equivalent shares outstanding
- -----------------------------
Primary:
(C) Average common equivalent shares..... 1,932 2,709 2,174 2,358
(D) Average common and common equivalent
shares (B + C)..................... 222,341 223,427 221,976 225,419
(A/D) Net income............................ $0.89 (1) $0.87 $2.04 (1) $2.05
===== ===== ===== =====
Fully diluted:
(E) Average common equivalent shares..... 2,136 2,702 2,415 2,895
(F) Average common and common equivalent
shares (B + E)..................... 222,545 223,420 222,217 225,956
(A/F) Net Income............................ $0.88 (1) $0.87 $2.04 (1) $2.05
===== ==== ===== =====
</TABLE>
- -------------------------------------
(1) Dilution is less than 3%.
42
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS FROM CONTINUING OPERATIONS
TO FIXED CHARGES OF CONTINUING OPERATIONS
<TABLE>
<CAPTION>
CONSOLIDATED
Nine Months Ended September 30, 1996
- ------------------------------------
(in thousands)
<S> <C>
1. Income from continuing operations before extraordinary items and
income taxes.............................................................. $ 730,788
==========
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...................................................... $ 250,947
B. Interest on deposits................................................ 629,811
----------
C. Total fixed charges (line 2A + line 2B)............................. $ 880,758
==========
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)................... $ 981,735
==========
B. Including interest on deposits (line 1 + line 2C)................... $1,611,546
==========
4. Ratio of earnings (as defined) to fixed charges:
A. Excluding interest on deposits (line 3A/line 2A).................... 3.91x
B. Including interest on deposits (line 3B/line 2C).................... 1.83x
</TABLE>
43
<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>
Nine Months ended September 30, 1996
- ------------------------------------
(in thousands)
<S> <C>
1. Income before income taxes and equity in undistributed income
of subsidiaries............................................................ $ 434,568
2. Fixed charges - interest expense, amortization of debt issuance costs and
one-third of rental expenses, net of income from subleases................. 151,050
----------
3. Income before taxes and equity in undistributed income of
subsidiaries, plus fixed charges........................................... $ 585,618
==========
4. Ratio of earnings (as defined) to fixed charges (line 3/line 2)............ 3.88x
</TABLE>
44
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CORESTATES FINANCIAL CORP CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 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 NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,984,768
<INT-BEARING-DEPOSITS> 2,594,473
<FED-FUNDS-SOLD> 168,702
<TRADING-ASSETS> 56,800
<INVESTMENTS-HELD-FOR-SALE> 2,740,040
<INVESTMENTS-CARRYING> 1,964,254
<INVESTMENTS-MARKET> 1,967,407
<LOANS> 32,833,999
<ALLOWANCE> 708,239
<TOTAL-ASSETS> 45,198,101
<DEPOSITS> 32,303,255
<SHORT-TERM> 4,002,220
<LIABILITIES-OTHER> 1,673,852
<LONG-TERM> 2,518,080
0
0
<COMMON> 223,197
<OTHER-SE> 3,808,694
<TOTAL-LIABILITIES-AND-EQUITY> 45,198,101
<INTEREST-LOAN> 2,138,180
<INTEREST-INVEST> 216,904
<INTEREST-OTHER> 107,472
<INTEREST-TOTAL> 2,462,556
<INTEREST-DEPOSIT> 629,811
<INTEREST-EXPENSE> 858,159
<INTEREST-INCOME-NET> 1,604,397
<LOAN-LOSSES> 188,767
<SECURITIES-GAINS> 55,476
<EXPENSE-OTHER> 1,359,540
<INCOME-PRETAX> 730,788
<INCOME-PRE-EXTRAORDINARY> 453,598
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 453,598
<EPS-PRIMARY> 2.06
<EPS-DILUTED> 2.06
<YIELD-ACTUAL> 5.55
<LOANS-NON> 234,800
<LOANS-PAST> 109,000
<LOANS-TROUBLED> 1,500
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 670,300
<CHARGE-OFFS> 217,600
<RECOVERIES> 66,800
<ALLOWANCE-CLOSE> 708,200
<ALLOWANCE-DOMESTIC> 683,200
<ALLOWANCE-FOREIGN> 25,000
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
