<PAGE>
Securities and Exchange Commission
Washington, D.C. 20549
Form 8-K
Current Report
Pursuant to Section 13 or 15(d) of
The Securities Act of 1934
Date of Report (Date of earliest event reported): June 13, 1996
CoreStates Financial Corp
---------------------------------------------------
(Exact name of registrant specified in its Charter)
Pennsylvania 0-6879 23-1899716
----------------- ------ ----------
(State or other (Commission (IRS Employee
jurisdiction of File Number) identification No.)
incorporation)
Centre Square West, 1500 Market Street
Philadelphia, Pennsylvania 19101
-------------------------------------------------
(Address of principal executive offices-zip code)
Registrant's telephone, including area code: (215) 973-3806
--------------
- --------------------------------------------------------------
(Former name and former address, if changed since last report)
1
<PAGE>
Item 7. Financial Statements and Exhibits
---------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(A) Consolidated Financial Statements of CoreStates
Financial Corp and Subsidiaries
(1) Consolidated Statements of Income for the years ended December 31,
1995, 1994, and 1993..................................................................... 4
(2) Consolidated Balance Sheets as of December 31, 1995 and 1994............................. 5
(3) Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1995, 1994, and 1993............................................ 6-7
(4) Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1994, and 1993..................................................................... 8-9
(5) Notes to the Consolidated Financial Statements........................................... 10-42
(6) Report of Independent Auditors........................................................... 43
(7) Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................... 44-83
(8) Supplemental Financial Data
(a) Three Year Average Balance Sheet, Five Year Statement of Income and Balance Sheet... 84-87
(b) Rate/Volume Analysis................................................................ 88
(c) Loan Portfolio, Risk Elements and Allowance for Loan Losses Data.................... 89-92
(d) Selected Maturity and Interest Sensitivity Data..................................... 93-95
(B) Exhibits
Computation of Ratio of Earnings from Continuing Operations
to Fixed Charges of Continuing Operations
12.1 Consolidated
12.2 Combined CoreStates (Parent Only) and CoreStates Capital Corporation
23.1 Consent of Ernst & Young LLP
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Coopers & Lybrand LLP
27 Financial Data Schedule
99.1 Report of Independent Auditors - KPMG Peat Marwick LLP
99.2 Report of Independent Auditors - KPMG Peat Marwick LLP
99.3 Report of Independent Auditors - KPMG Peat Marwick LLP
99.4 Report of Independent Auditors - Coopers & Lybrand LLP
</TABLE>
2
<PAGE>
Item 7. Financial Statements and Exhibits
---------------------------------
Exhibit Index
-------------
Exhibit No.
- -----------
Computation of Ratio of Earnings from Continuing Operations
to Fixed Charges of Continuing Operations:
12.1 Consolidated
12.2 Combined CoreStates (Parent Only) and CoreStates Capital Corporation
23.1 Consent of Ernst & Young LLP
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Coopers & Lybrand LLP
27 Financial Data Schedule
99.1 Report of Independent Auditors - KPMG Peat Marwick LLP
99.2 Report of Independent Auditors - KPMG Peat Marwick LLP
99.3 Report of Independent Auditors - KPMG Peat Marwick LLP
99.4 Report of Independent Auditors - Coopers & Lybrand LLP
3
<PAGE>
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 hereunto duly authorized.
CORESTATES FINANCIAL CORP
(Registrant)
By /s/Christopher J. Carey
-----------------------
Christopher J. Carey
Senior Vice President and
Principal Accounting Officer
Dated: June 13, 1996
4
<PAGE>
CoreStates Financial Corp and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
INTEREST INCOME 1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Interest and fees on loans:
Taxable income............................................ $2,902,265 $2,484,660 $2,313,118
Tax exempt income......................................... 30,390 34,023 45,861
Interest on investment securities:
Taxable income............................................ 349,138 365,298 432,446
Tax exempt income......................................... 31,018 38,180 44,437
Interest on time deposits in banks......................... 121,993 70,996 48,214
Interest on Federal funds sold, securities purchased
under agreements to resell and other...................... 40,276 21,402 20,873
---------- ---------- ----------
Total interest income..................................... 3,475,080 3,014,559 2,904,949
---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits:
Domestic savings.......................................... 396,176 280,532 275,518
Domestic time............................................. 492,610 370,373 401,316
Overseas branches and subsidiaries........................ 52,261 29,602 18,453
---------- ---------- ----------
Total interest on deposits............................ 941,047 680,507 695,287
Interest on short-term funds borrowed...................... 214,119 149,618 98,689
Interest on long-term debt................................. 152,989 116,419 99,837
---------- ---------- ----------
Total interest expense................................ 1,308,155 946,544 893,813
---------- ---------- ----------
Net interest income....................................... 2,166,925 2,068,015 2,011,136
Provision for losses on loans.............................. 144,002 279,195 189,372
---------- ---------- ----------
Net interest income after provisions for losses on loans.. 2,022,923 1,788,820 1,821,764
---------- ---------- ----------
NON-INTEREST INCOME
Service charges on deposit accounts........................ 244,439 239,811 236,535
Trust income............................................... 162,776 153,214 144,573
Fees for international services............................ 94,396 87,364 75,879
Debit and credit card fees................................. 83,812 80,482 74,975
Income from investment in EPS, Inc......................... 30,114 31,800 13,159
Trading gains.............................................. 35,403 23,360 44,496
Securities gains........................................... 31,475 18,283 43,264
Other gains................................................ 26,400 1,900 11,663
Other operating income..................................... 173,407 152,273 188,176
---------- ---------- ----------
Total non-interest income................................. 882,222 788,487 832,720
---------- ---------- ----------
NON-FINANCIAL EXPENSES
Salaries, wages and benefits............................... 904,377 947,903 938,594
Net occupancy.............................................. 159,530 162,003 159,432
Equipment expenses......................................... 118,532 117,659 114,783
Restructuring and merger-related charges................... 138,600 107,119 17,500
Other operating expenses................................... 564,489 583,558 639,235
---------- ---------- ----------
Total non-financial expenses.............................. 1,885,528 1,918,242 1,869,544
---------- ---------- ----------
INCOME BEFORE INCOME TAXES................................. 1,019,617 659,065 784,940
Provision for income taxes................................. 364,441 225,859 246,854
---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE................................... 655,176 433,206 538,086
Cumulative effect of a change in accounting principle, net
of income tax benefit of $8,475........................... - - (15,740)
---------- ---------- ----------
NET INCOME................................................. $ 655,176 $ 433,206 $ 522,346
========== ========== ==========
PER COMMON SHARE DATA (Based on weighted average shares
outstanding of 222.268 million in 1995, 226.234 million
in 1994 and 228.580 million in 1993)
Income before cumulative effect of a change in accounting
principle................................................. $2.95 $1.91 $2.35
Net income................................................. $2.95 $1.91 $2.29
Cash dividends declared.................................... $1.44 $1.24 $1.14
</TABLE>
See accompanying notes to the financial statements.
5
<PAGE>
CoreStates Financial Corp and Subsidiaries
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------------
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks.................. $ 3,662,143 $ 3,024,589
Time deposits, principally Eurodollars... 1,909,260 1,874,066
Federal funds sold and securities
purchased under agreements to resell.... 719,937 923,630
Trading account assets................... 147,218 347,376
Investment securities available-for-sale. 2,572,315 963,666
Investment securities held-to-maturity
(market value: 1995-$3,075,964;
1994-$6,114,773)........................ 3,059,917 6,298,239
Total loans, net of unearned discounts of
$232,077 in 1995 and $258,630 in 1994... 31,714,152 30,755,394
Less: Allowance for loan losses......... (670,265) (681,124)
----------- ------------
Net loans........................... 31,043,887 30,074,270
Due from customers on acceptances........ 560,707 352,347
Premises and equipment................... 664,279 699,169
Other assets............................. 1,657,579 1,490,721
----------- -----------
Total assets........................ $45,997,242 $46,048,073
=========== ===========
LIABILITIES
Deposits:
Domestic:
Non-interest bearing............... $ 8,937,147 $ 8,625,125
Interest bearing................... 23,883,726 25,023,283
Overseas branches and subsidiaries...... 1,142,947 1,125,997
----------- -----------
Total deposits..................... 33,963,820 34,774,405
Short-term funds borrowed................ 3,677,013 3,461,249
Bank acceptances outstanding............. 549,048 346,239
Other liabilities........................ 1,719,697 1,571,985
Long-term debt........................... 2,212,099 2,163,263
----------- -----------
Total liabilities.................. 42,121,677 42,317,141
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY
Preferred stock: authorized 10.0 million
shares; no shares issued................ - -
Common stock: $1 par value; issued
230.2 million shares in 1995 and
229.8 million shares in 1994
(including treasury shares of 7.8
million in 1995 and 1.0 million
in 1994, and unallocated shares
held by Employee Stock Ownership
Plan (ESOP) of 2.3 million
in 1995 and 1.6 million in 1994)........ 230,231 229,827
Other common shareholders' equity, net... 3,645,334 3,501,105
----------- ----------
Total shareholders' equity......... 3,875,565 3,730,932
----------- ----------
Total liabilities and shareholders'
equity............................ $45,997,242 $46,048,073
=========== ===========
</TABLE>
See accompanying notes to the financial statements.
6
<PAGE>
CoreStates Financial Corp and Subsidiaries Page 1 of 2
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Capital Retained
stock surplus earnings
----------- ---------- ----------
<S> <C> <C> <C>
Balances at December 31, 1992, as previously reported.......................... $ 86,387 $ 817,391 $1,194,662
Impact of Meridian Bancorp, Inc. acquisition................................... 82,389 387,383 719,590
----------- ---------- ----------
Balances at December 31, 1992 - Restated....................................... 168,776 1,204,774 1,914,252
Net income..................................................................... 522,346
Issuance of shares in connection with a 100% common stock dividend............. 58,929 (58,929)
Net unrealized gain on investments available-for-sale, net of tax
at December 31, 1993......................................................... 77,162
Stock issued in acquisitions (1,276 new shares; 640 treasury shares).......... 1,276 15,619 2,955
Treasury shares acquired (1,060 shares)........................................
Repurchase and retirement of common stock (573 shares)......................... (573) (4,805) (5,808)
Common stock issued under employee benefit
plans (1,624 new shares; 175 treasury shares)................................ 1,279 28,190 (1,510)
Common stock issued under dividend reinvestment
plan (427 new shares; 111 treasury shares)................................... 363 10,023 (101)
Foreign currency translation adjustments....................................... (1,758)
Common dividends declared...................................................... (220,132)
----------- ---------- ----------
Balances at December 31, 1993.................................................. 230,050 1,194,872 2,287,406
Net income..................................................................... 433,206
Net change in unrealized gain on investments available-for-sale, net of tax.... (66,095)
Acquisition of Germantown Savings Bank (5,880 treasury shares)................. (8,605)
Stock issued in other acquisitions (190 new shares)............................ 190 6,782
Treasury shares acquired (8,598 shares)........................................
Repurchase and retirement of common stock (1,016 shares)....................... (1,016) (6,646) (17,226)
Common stock issued under employee benefit
plans (567 new shares; 688 treasury shares).................................. 567 6,097 (6,410)
Common stock issued under dividend reinvestment
plan (450 treasury shares)................................................... (447) (483)
Purchase of shares for Employee Stock Ownership Plan (1,574 shares)............
Conversion of subordinated debt (36 new shares;
909 treasury shares)......................................................... 36 (2,001)
Cash paid for fractional shares................................................ (83)
Foreign currency translation adjustments....................................... 52
Common dividends declared...................................................... (259,449)
----------- ---------- ----------
Balances at December 31, 1994.................................................. 229,827 1,200,658 2,360,312
<CAPTION>
Treasury Unallocated
stock ESOP Shares Total
----------- ----------- -----------
<S> <C> <C> <C>
Balances at December 31, 1992, as previously reported.......................... $ (3,881) $2,094,559
Impact of Meridian Bancorp, Inc. acquisition................................... - 1,189,362
----------- ----------
Balances at December 31, 1992 - Restated....................................... (3,881) 3,283,921
Net income..................................................................... 522,346
Issuance of shares in connection with a 100% common stock dividend............. -
Net unrealized gain on investments available-for-sale, net of tax
at December 31, 1993......................................................... 77,162
Stock issued in acquisitions (1,276 new shares; 640 treasury shares).......... 17,459 37,309
Treasury shares acquired (1,060 shares)........................................ (29,449) (29,449)
Repurchase and retirement of common stock (573 shares)......................... (11,186)
Common stock issued under employee benefit
plans (1,624 new shares; 175 treasury shares)................................ 4,871 32,830
Common stock issued under dividend reinvestment
plan (427 new shares; 111 treasury shares)................................... 3,181 13,466
Foreign currency translation adjustments....................................... (1,758)
Common dividends declared...................................................... (220,132)
----------- ----------
Balances at December 31, 1993.................................................. (7,819) 3,704,509
Net income..................................................................... 433,206
Net change in unrealized gain on investments available-for-sale, net of tax.... (66,095)
Acquisition of Germantown Savings Bank (5,880 treasury shares)................. 156,361 147,756
Stock issued in other acquisitions (190 new shares)............................ 6,972
Treasury shares acquired (8,598 shares)........................................ (228,963) (228,963)
Repurchase and retirement of common stock (1,016 shares)....................... (24,888)
Common stock issued under employee benefit
plans (567 new shares; 688 treasury shares).................................. 18,456 18,710
Common stock issued under dividend reinvestment
plan (450 treasury shares)................................................... 12,306 11,376
Purchase of shares for Employee Stock Ownership Plan (1,574 shares)............ $(35,568) (35,568)
Conversion of subordinated debt (36 new shares;
909 treasury shares)......................................................... 25,362 23,397
Cash paid for fractional shares................................................ (83)
Foreign currency translation adjustments....................................... 52
Common dividends declared...................................................... (259,449)
----------- ----------- ----------
Balances at December 31, 1994.................................................. (24,297) (35,568) 3,730,932
</TABLE>
(continued)
7
<PAGE>
CoreStates Financial Corp and Subsidiaries Page 2 of 2
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Capital Retained
stock surplus earnings
----------- ----------- ------------
<S> <C> <C> <C>
Net income..................................................................... 655,176
Net change in unrealized gain on investments available-for-sale, net of tax.... 41,187
Treasury shares acquired (10,307 shares).......................................
Repurchase and retirement of common stock (595 shares)......................... (595) (4,093) (12,446)
Common stock issued under employee benefit plans (1,002 new shares;
3,089 treasury shares)...................................................... 999 26,825 (25,483)
Common stock issued under dividend reinvestment plan
(417 treasury shares)........................................................ (9) (2)
Purchase of shares for Employee Stock Ownership Plan (876 shares)..............
Employee Stock Ownership Plan shares committed for release (123 shares)........ 1,786
Cash paid for fractional shares................................................ (24)
Foreign currency translation adjustments....................................... (29)
Common dividends declared...................................................... (294,393)
----------- ---------- ----------
Balances at December 31, 1995.................................................. $ 230,231 $1,225,167 $2,724,298
=========== ========== ==========
<CAPTION>
Treasury Unallocated
stock ESOP Shares Total
------------ ----------- -----------
<S> <C> <C> <C>
Net income..................................................................... 655,176
Net change in unrealized gain on investments available-for-sale, net of tax.... 41,187
Treasury shares acquired (10,307 shares)....................................... (335,528) (335,528)
Repurchase and retirement of common stock (595 shares)......................... (17,134)
Common stock issued under employee benefit plans (1,002 new shares;
3,089 treasury shares)...................................................... 96,670 99,011
Common stock issued under dividend reinvestment plan
(417 treasury shares)........................................................ 12,690 12,679
Purchase of shares for Employee Stock Ownership Plan (876 shares).............. (20,922) (20,922)
Employee Stock Ownership Plan shares committed for release (123 shares)........ 2,824 4,610
Cash paid for fractional shares................................................ (24)
Foreign currency translation adjustments....................................... (29)
Common dividends declared...................................................... (294,393)
----------- ----------- ----------
Balances at December 31, 1995.................................................. $(250,465) $(53,666) $3,875,565
=========== =========== ==========
</TABLE>
See accompanying notes to the financial statements.
8
<PAGE>
CoreStates Financial Corp and Subsidiaries Page 1 of 2
CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
OPERATING ACTIVITIES 1995 1994 1993
------------- -------------- ---------------
<S> <C> <C> <C>
Net income................................................................ $ 655,176 $ 433,206 $ 522,346
Adjustments to reconcile net income to net
cash provided by operating activities:
Restructuring and merger-related charges.............................. 138,600 107,119 17,500
Cumulative effect of a change in
accounting principle, net of tax.................................... - - 15,740
Provision for losses on loans......................................... 144,002 279,195 189,372
Provision for losses and writedowns
on other real estate owned........................................... 15,971 14,596 24,550
Depreciation and amortization......................................... 122,996 139,305 176,811
Deferred income tax expense (benefit)................................. 28,420 41,847 (12,002)
Securities gains...................................................... (31,475) (18,283) (43,264)
Gains on sale of mortgage servicing.................................... (2,387) (867) (21,606)
Other gains........................................................... (26,400) (1,900) (11,663)
(Increase) decrease in trading account assets......................... 200,833 (18,392) 25,044
Increase (decrease) in due to factored clients........................ (86,921) 41,262 147,072
(Increase) decrease in interest receivable............................ 2,009 (33,548) 3,340
Increase (decrease) in interest payable............................... 45,044 26,026 (8,953)
Other, net............................................................ (117,411) (100,995) 207,204
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES................................. 1,088,457 908,571 1,231,491
------------ ------------ ------------
INVESTING ACTIVITIES
Net increase in loans..................................................... (1,832,179) (1,310,777) (2,031,645)
Proceeds from sales of loans.............................................. 1,087,732 1,130,918 790,193
Loans originated or acquired--non-bank subsidiaries....................... (35,767,440) (33,760,035) (24,712,336)
Principal collected on loans--non-bank subsidiaries....................... 35,407,667 33,399,764 24,411,312
Net (increase) decrease in time deposits,
principally Eurodollars............................................... (33,172) (452,747) 559,804
Purchases of investments held-to-maturity................................. (686,652) (2,386,505) -
Purchases of investments available-for-sale............................... (589,327) (711,227) -
Proceeds from maturities of investments held-to-maturity.................. 2,175,780 2,911,632 -
Proceeds from maturities of investments available-for-sale................ 161,477 386,142 -
Proceeds from sales of investments available-for-sale..................... 546,728 767,453 -
Purchases of investment securities........................................ - - (4,527,811)
Proceeds from sales of investment securities.............................. - - 1,432,083
Proceeds from maturities of investment securities......................... - - 3,561,527
Net (increase) decrease in Federal funds sold and
securities purchased under agreements to resell....................... 203,693 (646,409) 150,929
Purchases of premises and equipment....................................... (125,216) (147,308) (144,959)
Proceeds from sales and paydowns on other
real estate owned..................................................... 66,834 78,057 115,889
Purchase of Germantown Savings Bank, net of
cash acquired........................................................... - (74,053) -
Net cash provided by other acquisitions................................... - 379,318 52,900
Other, net................................................................ 11,303 39,357 28,487
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES.............................................................. 627,228 (396,420) (313,627)
------------ ------------ ------------
</TABLE>
(continued)
9
<PAGE>
CoreStates Financial Corp and Subsidiaries Page 2 of 2
CONSOLIDATED STATEMENT OF CASH FLOWS: continued
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
FINANCING ACTIVITIES 1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Net decrease in deposits........................................ (815,105) (1,013,622) (1,029,650)
Long-term debt issued........................................... 582,251 480,433 1,114,126
Retirement of long-term debt.................................... (533,480) (306,452) (775,476)
Net increase (decrease) in short-term funds borrowed............ 215,764 694,499 (109,756)
Cash dividends paid............................................. (286,565) (245,962) (218,327)
Purchase of treasury stock...................................... (335,528) (228,963) (29,449)
Purchases of ESOP shares........................................ - (35,568) -
Funds transferred to Trust for future ESOP purchases............ - (24,432) -
Repurchase and retirement of common stock....................... (17,134) (24,888) (11,186)
Common stock issued under employee benefit plans................ 99,011 18,710 32,830
Other, net...................................................... 12,655 11,293 13,466
----------- ----------- -----------
NET CASH USED IN FINANCING ACTIVITIES.......................... (1,078,131) (674,952) (1,013,422)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND DUE
FROM BANKS................................................... 637,554 (162,801) (95,558)
Cash and due from banks at January 1, ....................... 3,024,589 3,187,390 3,282,948
----------- ----------- -----------
CASH AND DUE FROM BANKS AT DECEMBER 31, ........................ $ 3,662,143 $ 3,024,589 $ 3,187,390
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest..................................................... $ 1,263,681 $ 918,503 $ 901,830
=========== =========== ===========
Income taxes................................................. $ 284,987 $ 189,918 $ 248,494
=========== =========== ===========
See accompanying notes to the financial statements.
</TABLE>
10
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements include the accounts of CoreStates
Financial Corp ("the Corporation") and all of its subsidiaries, including:
CoreStates Bank, N.A. ("CBNA"); Meridian Bank, PA ("Meridian PA"); New Jersey
National Bank ("NJNB"); Delaware Trust Company; CoreStates Bank of Delaware,
N.A. ("CBD"); Meridian Bank New Jersey ("Meridian NJ"); Congress Financial
Corporation; and CoreStates Capital Corp ("CSCC"). All material intercompany
transactions have been eliminated. The financial statements include the
consolidated accounts of Meridian Bancorp, Inc. ("Meridian") which was acquired
on April 9, 1996 in a transaction accounted for under the pooling of interests
method of accounting. On February 23, 1996, Meridian acquired United Counties
Bancorporation ("United Counties") in a transaction accounted for as a pooling
of interests. The consolidated accounts of Meridian include United Counties for
all periods presented. Certain amounts in prior years have been reclassified
for comparative purposes.
The Corporation is a regional bank holding company incorporated under the laws
of the Commonwealth of Pennsylvania, primarily operating in the eastern
Pennsylvania, northern Delaware and the central and southern New Jersey markets.
Through its subsidiaries, the Corporation is engaged in the business of
providing wholesale banking services (including international banking services),
consumer financial services, trust and investment management services and
electronic payment services to a diversified customer base.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Changes in accounting principles
Effective January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
("FAS 114") and Statement No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures" ("FAS 118"). FAS 114 addresses
accounting for impairment of certain loans and requires that impaired loans
within the scope of FAS 114 be measured based on the present value of expected
cash flows discounted at the loan's effective interest rate, or be measured at
the loan's observable market price or the fair value of its collateral. FAS 118
amended the income recognition policies and clarified disclosure requirements of
FAS 114. The adoption of these standards did not have an impact on CoreStates'
provision for loan losses or allowance for loan losses, nor change CoreStates'
methodology for recognizing income on impaired loans.
Effective January 1, 1993, the Corporation adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits" ("FAS 112"). FAS 112 established the accounting requirements for
benefits provided to former or inactive employees after employment but before
retirement. FAS 112 requires that employers accrue the costs associated with
providing benefits, such as salary and benefit continuation under disability
plans, when payment of the benefits is probable and the amount of the obligation
can be reasonably estimated. The Corporation recognized the January 1, 1993 FAS
112 transitional liability of $24,215, $15,740 after-tax or $0.06 per share, as
the cumulative effect of a change in accounting principle.
Treasury Stock
The purchase of the Corporation's common stock is recorded at cost. At the date
of subsequent reissue, the treasury stock account is reduced by the cost of
shares reissued on a first-in-first-out basis.
11
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Income taxes
Under the asset and liability method used by the Corporation to provide for
income taxes, deferred tax assets and liabilities are recognized for the tax
consequences of temporary differences by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
The Corporation and its subsidiaries file a consolidated Federal income tax
return.
Investments
Held-to-maturity securities, consisting primarily of debt securities, are
carried at cost adjusted for amortization of premiums and accretion of
discounts, both computed on the interest method. The Corporation has both the
ability and positive intent to hold these securities until maturity. Trading
account assets are carried at market value. Gains on trading account assets
include both realized and unrealized gains and losses on the portfolio. All
other securities are classified as available-for-sale and are carried at fair
value, with unrealized gains and losses, net of tax, reported as a component of
shareholders' equity. The accumulated net unrealized gain on available-for-sale
securities included in retained earnings was $51,858 at December 31, 1995 and
$10,919 at December 31, 1994.
The adjusted cost of a specific certificate sold is the basis for determining
realized securities gains and losses as included in the consolidated statement
of income in "non-interest income".
Interest and dividends on investment securities are recognized as income when
earned.
Loans
Interest on commercial loans is recognized on the daily principal amounts
outstanding. Loan fees are generally considered adjustments of interest rate
yields and are amortized into interest income on loans over the terms of the
related loans. Interest on installment loans is principally recognized on the
interest method.
Commercial loans are placed on a non-accrual status, generally recognizing
interest as income when received, when, in the opinion of management, the
collectability of principal or interest payments becomes doubtful or when such
payments are 90 days or more past due, unless the loan is well secured and in
the process of collection. The deferral or non-recognition of interest does not
constitute forgiveness of the borrower's obligation.
Generally, consumer loans are not automatically placed on non-accrual status
when principal or interest payments are 90 days past due. Consumer loans,
excluding residential mortgage loans and credit card loans, are charged off
after reaching 90 days past due. Residential mortgate loans are placed on non-
accrual status after reaching 120 days past due and are written down to the fair
value of underlying collateral at that time. Credit card loans are charged off
after reaching 180 days past due.
Other Real Estate Owned
When a property is acquired through foreclosure of a loan secured by real
estate, that property is recorded at the lower of the cost basis in the loan or
the estimated fair value of the property less estimated disposal costs.
Writedowns at the time of foreclosure are charged against the allowance for loan
losses. Subsequent writedowns for changes in the fair value of the property are
charged to other non-financial expense.
Allowance for loan losses
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated probable credit losses. Factors included in
management's determination of an adequate level of allowance for loan losses are
a statistical analysis of historical loss levels throughout an economic cycle
and one year of projected charge-offs, establishing a minimum level below which
the allowance for loan losses is considered inadequate and a maximum level above
which is considered inappropriate. A quarterly evaluation of loss potential on
specific credits, products, industries, portfolios and markets, as well as
indicators for loan growth, the economic environment and concentrations assist
in validating the position of the allowance for loan losses within those
boundaries. This evaluation is inherently subjective as it requires material
estimates that may be susceptible to significant change.
12
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
The Corporation adopted FAS 114 effective January 1, 1995. Under FAS 114, the
allowance for loan losses related to "impaired loans" is based on discounted
cash flows using the impaired loan's initial effective interest rate as the
discount rate, or the fair value of the collateral for collateral dependent
loans. A loan is impaired when it meets the criteria to be placed on non-accrual
status or is a renegotiated loan. Loans which are evaluated for impairment
pursuant to FAS 114 are assessed on a loan-by-loan basis, and include only
commercial non-accrual and renegotiated loans. Large groups of smaller balance
homogeneous loans, such as credit cards, lease financing receivables, loans
secured by first and second liens on residential properties, and other consumer
loans are evaluated collectively for impairment.
Additions to the allowance arise from the provision for loan losses charged to
operations or from the recovery of amounts previously charged off. Loan charge-
offs reduce the allowance. Loans are charged off when there has been permanent
impairment of the related carrying values.
Premises and equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. The provision for depreciation and amortization is computed,
generally, on the straight-line method at rates based on the following range of
lives: buildings - 10 to 45 years; equipment - 3 to 12 years; and leasehold
improvements - 3 to 15 years.
Retirement plans
The Corporation maintains non-contributory defined benefit pension plans for
substantially all employees. Benefits are primarily based on the employee's
years of credited service, average annual salary and primary social security
benefit, as defined in the plans. It is the Corporation's policy to fund the
plans on a current basis to the extent deductible under existing tax
regulations.
The Corporation provides certain postretirement health care and life insurance
benefits for retired employees. In order to participate in the health care
plan, an employee must retire with at least 10 years of service. The
postretirement health care plan is contributory, with retiree contributions
based on years of service. It is the Corporation's policy to fund the health
care plan on a current basis to the extent deductible under existing tax
regulations.
Employee Stock Ownership Plan ("ESOP")
Effective January 1, 1995, employees of Meridian with two years service began
participating in a non-contributory ESOP. Compensation expense is recognized
based on the fair value of shares committed to be released to employees.
Foreign exchange/currency
Forward exchange contracts are valued at current rates of exchange. Gains or
losses on forward exchange contracts intended to hedge an identifiable foreign
currency commitment, if any, are deferred and included in the measurement of the
related foreign currency transaction. All other gains or losses on forward
exchange contracts are included in the consolidated statement of income.
Currency gains and losses in connection with non-dollar denominated loans and
deposits, which are included in interest income and expenses, are recognized pro
rata over the contract terms. Foreign currency translation adjustments are
recorded directly to retained earnings. The cumulative foreign currency
translation loss was $1,600, $1,571 and $1,623 at December 31, 1995, 1994 and
1993, respectively.
Derivative interest rate contracts
The Corporation uses various interest rate contracts such as, interest rate
swaps, futures, forward rate agreements, caps and floors, tender option bonds,
Treasury float agreements, and forward commitments to purchase and sell loans
and securities, primarily to manage the interest rate risk of specific assets,
liabilities or anticipated transactions , to manage interest rate risk in
securities trading positions and to provide for the needs of its customers. For
contracts held for purposes other than trading, gains or losses are deferred and
recognized as adjustments to interest income or expense of the underlying assets
or liabilities and the interest differentials are recognized as adjustments of
the related interest income or expense. Gains or losses resulting from early
terminations of these contracts are deferred and amortized over the remaining
term of the underlying assets or liabilities. Any fees received or disbursed
which represent adjustments to the yield on interest rate contracts are
capitalized and amortized over the term of the interest rate contracts. If the
underlying assets or liabilities related to a derivative matures, is sold,
extinguished, or terminates, the amount of the previously unrecognized gain or
loss is recognized at that time in the consolidated income statement. Derivative
products used in securities trading positions mostly include tender option
bonds, treasury float agreements, and forward commitments to purchase and sell
loans and securities. Tender option bonds represent a contingent liability to
purchase securities. Realized gains and losses and net interest spread earned on
these products are included in non-interest income. Treasury float agreements
represent purchased option contracts. The premiums paid for these contracts are
amortized over the option periods. Forward commitments to purchase and sell
loans and securities consist primarily of forward commitments to sell mortgage-
backed securities, which are used to hedge mortgage loans held in the trading
account. These commitments are marked to fair value with unrealized gains and
losses recorded in non-interest income. Contracts held or issued for customers
are valued at market with gains or losses included in the consolidated
income statement.
13
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Earnings per common share
Earnings per common share for all periods presented were based on weighted
average common shares outstanding as dilution from potentially dilutive common
stock equivalents (primarily stock options) did not have a materially dilutive
effect on earnings per share. For purposes of computing earnings per share,
shares committed to be released and shares allocated in the ESOP are considered
outstanding.
Cash dividends declared per share
Cash dividends declared per share for the periods prior to the acquisitions of
Meridian on April 9, 1996, Independence on June 27, 1994 and Constellation on
March 16, 1994 assume that the Corporation would have declared cash dividends
equal to the cash dividends per share actually declared by the Corporation.
2. ACQUISITIONS
On December 2, 1994, the Corporation purchased Germantown Savings Bank
("Germantown") a Pennsylvania chartered stock savings bank with $1.6 billion in
assets and $1.4 billion in deposits at the time of the acquisition. Under the
terms of the transaction, each of Germantown's 4.15 million shares of common
stock was exchanged for a combination of the Corporation's common stock, equal
to approximately 55% of the $62 per Germantown share purchase price, and cash,
equal to approximately 45% of the purchase price. As a result of this
acquisition, 5.9 million shares of the Corporation's common stock were issued
out of treasury stock. The transaction had a total value of approximately $260
million and was accounted for under the purchase method of accounting.
Accordingly, the results of operations of Germantown have been included since
the date of acquisition. Under this method of accounting, the purchase price is
allocated to the respective assets acquired and liabilities assumed based on
their estimated fair values, net of applicable income tax effects. Intangible
assets of $183 million, including $140 million of goodwill, were created in this
transaction. Goodwill is being amortized to other operating expense on a
straight-line basis over 15 years.
A summary of unaudited pro forma combined financial information for the
Corporation and Germantown as if the transaction had occurred on January 1, 1993
is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1994 1993
----------- ----------
<S> <C> <C>
Net interest income.............. $2,135,969 $2,081,748
Non-interest income.............. 797,961 849,782
Income before cumulative effect
of a change in accounting
principle...................... 451,063 549,835
Per common share................. $ 1.94 $ 2.35
Average common shares
outstanding.................... 232,180 234,443
</TABLE>
On March 16, 1994, the Corporation acquired Constellation Bancorp
("Constellation"), a New Jersey bank holding company with $2.3 billion in assets
and $2.1 billion in deposits. The Corporation issued approximately 11.3 million
shares of common stock to shareholders of Constellation based on an exchange
ratio of .4137 of a share of the Corporation's common stock for each share of
Constellation common stock.
On June 27, 1994, the Corporation acquired Independence Bancorp, Inc.
("Independence"), a Pennsylvania bank holding company with $2.6 billion in
assets and $2.1 billion in deposits. The Corporation issued approximately 16.6
million shares of common stock to shareholders of Independence based on an
exchange ratio of 1.5 shares of the Corporation's common stock for each share of
Independence common stock.
14
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
2. ACQUISITIONS - continued
On April 9, 1996, the Corporation acquired Meridian, a Pennsylvania bank holding
company with $15.2 billion in assets and $12.1 billion in deposits. The
Corporation issued approximately 81.1 million shares of common stock to
shareholders of Meridian based on an exchange ratio of 1.225 shares of the
Corporation's common stock for each share of Meridian common stock. At a
February 6, 1996 shareholders' meeting, the Corporation's shareholders approved
an increase in the number of authorized shares from 200 million to 350 million.
On February 23, 1996, Meridian acquired United Counties, a $1.6 billion asset
New Jersey bank holding company in a transaction accounted for as a pooling of
interests. Accordingly, the consolidated accounts of Meridian include United
Counties for all periods presented. For each United Counties common share
outstanding, 5.0 shares of Meridian's common stock was issued.
The Constellation, Independence and Meridian acquisitions were each accounted
for under the pooling of interests method of accounting; accordingly, the
consolidated financial statements include the consolidated accounts of
Constellation, Independence and Meridian for all periods presented. Financial
information on a separate company basis for the three years ended December 31,
1995 for the Corporation and Meridian (including United Counties) and for the
year ended December 31, 1993 for Constellation and Independence was as follows:
<TABLE>
<CAPTION>
The (Unaudited)
1995 Corporation Meridian
- ---- ----------- --------
<S> <C> <C>
Net interest income..................... $1,488,534 $678,391
Provision for losses on loans........... 105,000 38,877
Non-interest income..................... 605,666 276,556
Non-financial expenses.................. 1,274,398 612,695
Provision for income taxes.............. 262,565 101,372
Net income.............................. 452,237 202,003
Net income per share.................... $3.22 $3.03
Cash dividends declared................. 1.44 1.45
1994
- ----
Net interest income..................... $1,389,369 $678,646
Provision for losses on loans........... 246,900 27,261
Non-interest income..................... 562,264 226,223
Non-financial expenses.................. 1,317,561 608,736
Provision for income taxes.............. 141,810 82,992
Income before cumulative effect of a
change in accounting principle........ 245,362 185,880
Cumulative effect of a change in
accounting principle................... - (2,730)(a)
Net income.............................. 245,362 183,150
Income per share before cumulative effect
of a change in accounting principle.... $1.73 $2.72
Net income per share.................... $1.73 $2.68
Cash dividends declared................. 1.24 1.34
- ----------
</TABLE>
(a) Meridian adopted FAS 112 on January 1, 1994, the date required under that
statement, and recognized a charge of $4,200, $2,730 after-tax, as the
cumulative effect of a change in accounting principle. CoreStates adopted FAS
112 on January 1, 1993. As permitted under pooling of interests accounting, the
restated financial statements are prepared as if Meridian also adopted FAS 112
effective January 1, 1993.
15
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
2. ACQUISITIONS - (continued)
<TABLE>
<CAPTION>
1993 The (Unaudited)
- ---- Corporation Meridian Constellation Independence
----------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net interest income..................... $1,117,901 $685,865 $100,753 $106,617
Provision for losses on loans........... 100,000 58,956 10,000 11,201
Non-interest income..................... 503,055 258,690 41,599 29,376
Non-financial expenses.................. 1,033,375 638,318 115,186 93,601
Provision for income taxes.............. 159,654 72,548 662 (c) 8,312
Income before cumulative effect of a
change in accounting principle........ 327,927 174,733 16,504 22,879
Cumulative effect of a change in
accounting principle, net of tax....... (13,010) 6,642(b) - -
Net income.............................. 314,917 181,375 16,504 22,879
Income per share before cumulative effect
of a change in accounting principle... $2.80 $2.57 $0.61 $1.98
Net income per share.................... 2.69 2.67 0.61 1.98
Cash dividends declared................. 1.14 1.26 - 1.16
</TABLE>
____________
(b) CoreStates retroactively adopted FAS 109 in the first quarter of 1992,
effective January 1, 1987. Meridian elected to prospectively adopt
FAS 109 on January 1, 1993 and recognize a cumulative benefit of $6,642 as
the cumulative effect of a change in accounting principle. As permitted
under pooling of interests accounting, the restated financial statements
are prepared as if Meridian also retroactively adopted FAS 109 effective
January 1, 1987 which had the effect of reducing 1993 restated net income
by $6,642, or $0.03 per share.
(c) In 1993, Constellation prospectively adopted FAS 109. However, restated
financial information is prepared as if Constellation retroactively adopted
FAS 109 as of January 1, 1987. The impact of applying pooling of interests
accounting rules and retroactively applying FAS 109 to Constellation had
the effect of reducing 1993 restated net income by $5,076, or $0.02 per
share, and December 31, 1993 common shareholders' equity by $39,924.
The restated statements of income for 1995, 1994 and 1993 reflect a conforming
accounting adjustment for Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" ("FAS
106"). The Corporation elected to recognize immediately the January 1, 1992
transitional liability of $128,706 pre-tax, $84,946 after tax, as the cumulative
effect of a change in accounting principle in the first quarter of 1992.
Meridian adopted FAS 106 on January 1, 1993, the date required under that
statement. As permitted by FAS 106, Meridian elected not to recognize
immediately its $28,827 transitional liability, but to amortize that
liability over 20 years. As permitted under pooling of interests accounting, the
pro forma financial information is prepared as if Meridian adopted FAS 106
effective January 1, 1992 and immediately recognized the $28,827, $18,738
after-tax, transitional liability. Pro forma salaries, wages and benefits have
been adjusted accordingly.
Upon consummation of their respective acquisitions, Constellation and
Independence recorded merger-related charges in 1994 in connection with a change
in strategic direction related to problem assets and to conform its consumer
lending charge-off policies to those of the Corporation, and charges for
expenses attributable to the acquisition. These merger-related charges totaled
$167.4 million after-tax, or $0.74 per share. On a pre-tax basis, the merger-
related charges consisted of a $145.0 million provision for loan losses, a $32.0
million addition to the reserve for other real estate owned ("OREO"), $13.0
million for the writedown of purchased mortgage servicing rights and related
assets, and $63.7 million for expenses directly attributable to the acquisition,
including severance costs of $13.0 million related to approximately 715
employees.
16
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
3. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" ("FAS 107"), requires disclosure of fair value
information about financial instruments, whether or not required to be
recognized in the balance sheet, for which it is practicable to estimate that
value. FAS 107 defines a financial instrument as cash, evidence of ownership
interest in an entity, or a contractual obligation or right that will be settled
with another financial instrument.
In cases where quoted market prices are not available, fair values are based on
estimates using discounted cash flow or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Fair value estimates derived
through those techniques cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. FAS 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the
Corporation.
The following table summarizes the carrying amount and fair value estimates of
financial instruments at December 31, 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
--------------------------------- ---------------------------------
Carrying Carrying
or Notional Fair or Notional Fair
Amount Value Amount Value
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Assets:
Cash and short-term assets.............. $ 6,291,340 $ 6,291,340 $ 5,822,285 $ 5,822,285
Investment securities................... 5,632,232 5,648,279 7,261,905 7,078,439
Trading account assets.................. 147,218 147,218 347,376 347,376
Net loans, excluding leases............. 29,876,531 30,293,254 29,030,338 29,568,576
Liabilities:
Demand and savings deposits............. 23,063,053 23,063,053 23,987,236 23,987,236
Time deposits, including overseas
branches and subsidiaries........... 10,900,767 11,065,260 10,787,169 10,745,394
Short-term borrowings................... 3,677,013 3,677,013 3,461,249 3,461,249
Long-term debt.......................... 2,212,099 2,266,725 2,163,263 2,089,888
Off-balance sheet asset (liability):
Letters of credit....................... 2,873,265 (27,659) 2,891,450 (10,838)
Commitments to extend credit............ 18,438,277 (16,135) 15,667,491 (14,142)
Mortgage loans sold and loan servicing
acquired with recourse.............. 434,628 (12,260) 541,840 (11,710)
Derivative financial instruments........ 16,091,322 237,649 18,256,860 (295,632)
</TABLE>
Fair value estimates, methods, and assumptions for the Corporation's financial
instruments are set forth below:
Cash and due from banks and short-term instruments The carrying amounts reported
in the balance sheet for cash and due from banks and short-term instruments
approximate their fair values. Short-term instruments include: time deposits;
Federal funds sold; and securities purchased under agreements to resell, all of
which generally have original maturities of less than 90 days.
Investment securities Fair values for investment securities are based on quoted
market prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
Trading account assets Fair values for the Corporation's trading account assets,
which also are the amounts recognized in the balance sheet, are based on quoted
market prices where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments or are
derived from pricing models or formulas using discounted cash flows.
17
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
3. FAIR VALUES OF FINANCIAL INSTRUMENTS - continued
Loans Fair values are estimated for loans in groups with similar financial and
risk characteristics. Loans are segregated by type including: commercial and
industrial; commercial real estate; residential real estate; credit card and
other consumer; financial institutions; factoring receivables; and foreign.
Each loan type is further segmented into fixed and variable rate interest terms
and by performing and non-performing categories in order to estimate fair
values.
The fair value of fixed-rate performing loans is calculated by discounting
scheduled principal and interest cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and interest rate risk
inherent in the loan type at December 31, 1995 and 1994. The estimate of
maturity is based on the Corporation's historical experience with repayments for
each loan type, modified by an estimate of the effect of current economic and
lending conditions. For performing residential mortgage loans, fair value is
estimated by referring to secondary market source pricing.
For credit card loans, cash flows and maturities are estimated based on
contractual interest rates and historical experience and are discounted using
secondary market rates adjusted for differences in servicing and credit costs.
This estimate does not include the benefit that relates to cash flows which
could generate from new loans to existing cardholders over the remaining life of
the portfolio.
For variable rate loans that reprice frequently and which have experienced no
significant change in credit risk, fair values are based on carrying amounts.
Fair value for non-performing loans is based on discounting estimated cash flows
using a rate commensurate with the risk associated with the estimated cash
flows. Assumptions regarding cash flows and discount rates are determined using
available market information and specific borrower information.
Deposit liabilities The fair values disclosed for demand deposits (non-interest
bearing checking accounts, NOW accounts, savings accounts, and money market
accounts) are, by FAS 107 definition, equal to the amount payable on demand at
the reporting date (i.e., their carrying amounts). The carrying amounts for
variable-rate, fixed-term certificates of deposit approximate their fair values.
Fair values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates offered on
certificates at December 31, 1995 and 1994, respectively, to an estimate of
aggregate expected maturities for those certificates of deposit.
The estimated fair values do not include the benefit that results from funding
provided by core deposit liabilities as compared to the cost of borrowing funds
in the financial markets.
Short-term funds borrowed The carrying amounts of Federal funds purchased,
securities sold under agreements to repurchase, commercial paper and other
short-term borrowings approximate their fair values.
Long-term debt The fair values for long-term debt are based on quoted market
prices where available. If quoted market prices are not available, fair values
are estimated using discounted cash flow analyses based on the Corporation's
borrowing rates at December 31, 1995 and 1994 for comparable types of borrowing
arrangements.
18
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
3. FAIR VALUES OF FINANCIAL INSTRUMENTS - continued
Off-balance sheet derivative financial instruments and commitments Fair values
for the Corporation's futures, forwards, interest rate swaps, options, interest
rate caps and floors, foreign exchange contracts, tender option bonds and
Treasury float contracts are based on quoted market prices (futures); current
settlement values (forwards); quoted market prices of comparable instruments
(foreign currency exchange contracts); or, if there are no directly comparable
instruments, on pricing models or formulas using current assumptions (interest
rate swaps, interest rate caps and floors, tender option bonds, Treasury float
contracts and options). The fair value of commitments to extend credit, other
than credit card lines, is estimated using the fees currently charged to enter
into similar agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the counterparties. For fixed-
rate loan commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. The value of commitments to
extend credit under credit card lines is embodied in the benefit that relates to
estimated cash flows from new loans expected to be generated from existing
cardholders over the remaining life of the portfolio.
The fair value of standby and commercial letters of credit is based on fees
currently charged for similar agreements or on the estimated cost to terminate
the agreements or otherwise settle the obligations with the counterparties.
4. CASH AND DUE FROM BANKS
The Corporation's banking subsidiaries are required to maintain reserve balances
with the Federal Reserve Bank. The average amount of those reserve balances for
the years ended December 31, 1995 and 1994 were approximately $516,000 and
$506,000, respectively.
19
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
5. INVESTMENT SECURITIES
The carrying and fair values of investment securities at December 31, 1995 and
1994 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1995
- ----
Held-to-Maturity
- ----------------
U.S. Treasury and
Government agencies......... $ 978,603 $12,198 $ 1,310 $ 989,491
State and municipal............ 469,330 13,276 552 482,054
Mortgage-backed................ 1,136,486 5,587 4,950 1,137,123
Other:
Domestic.................... 444,090 4,107 12,323 435,874
Foreign..................... 31,408 16 2 31,422
---------- ------- -------- ----------
Total held-to-maturity.... $3,059,917 $35,184 $ 19,137 $3,075,964
========== ======= ======== ==========
Available-for-Sale
- ------------------
U.S. Treasury and
Government agencies......... $1,570,689 $17,098 $ 1,744 $1,586,043
State and municipal............ 78,625 1,174 94 79,705
Mortgage-backed................ 620,727 6,508 4,838 622,397
Other:
Domestic.................... 186,409 45,555 955 231,009
Foreign..................... 31,844 21,317 - 53,161
---------- ------- -------- ----------
Total available-for-sale.. $2,488,294 $91,652 $ 7,631 $2,572,315
========== ======= ======== ==========
1994
- ----
Held-to-Maturity
- ----------------
U.S. Treasury and
Government agencies......... $2,575,953 $ 1,812 $ 72,031 $2,505,734
State and municipal............ 654,066 9,408 15,958 647,516
Mortgage-backed................ 2,400,874 1,131 94,687 2,307,318
Other:
Domestic.................... 635,451 621 13,760 622,312
Foreign.................... 31,895 - 2 31,893
---------- ------- -------- ----------
Total held-to-maturity.... $6,298,239 $12,972 $196,438 $6,114,773
========== ======= ======== ==========
Available-for-Sale
- ------------------
U.S. Treasury and
Government agencies......... $ 545,967 $ 271 $ 18,556 $ 527,682
State and municipal............ 40,748 1,057 216 41,589
Mortgage-backed................ 279,998 72 15,806 264,264
Other:
Domestic.................... 48,384 32,053 1,012 79,425
Foreign..................... 23,629 27,109 32 50,706
---------- ------- -------- ----------
Total available-for-sale.. $ 938,726 $60,562 $ 35,622 $ 963,666
========== ======= ======== ==========
</TABLE>
On November 15, 1995, the FASB issued a Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities", which permitted an enterprise to reassess the
appropriateness of the classification of all investment securities held between
November 15, 1995 and December 31, 1995. Based on its reassessment, the
Corporation reclassified $1,726,739 in investment securities previously
classified as held-to-maturity to the available-for-sale category. Unrealized
gains on transferred investments were $12,160, unrealized losses were $8,340,
and the fair value was $1,730,559.
20
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
5. INVESTMENT SECURITIES - continued
Marketable equity securities are carried in the available-for-sale portfolio and
have been written up by $66,061 at December 31, 1995 and $58,476 at December 31,
1994, the aggregate of their excess fair values over cost, through after-tax
credits to retained earnings. The Corporation recorded pre-tax gains of $7,654
in 1995, $14,167 in 1994 and $22,313 in 1993 on sales of certain domestic equity
securities. During 1995, the Corporation recorded pre-tax gains of $13,596, on
the exchange of certain domestic equity securities. During 1995, 1994 and 1993,
the Corporation recorded pre-tax gains of $939, $2,567 and $8,617 on sales of
foreign equity securities.
Included in mortgage-backed securities available-for-sale at December 31, 1995
were mortgage residual securities with an amortized cost and fair value of
$9,421 and $10,103, respectively. Pre-tax write-downs of $5,276 and $9,377 were
recognized in 1994 and 1993, respectively, on these investments and were
included in securities gains and losses.
At December 31, 1995 and 1994, there were no investments in securities of any
single, non-Federal issuer in excess of 10% of shareholders' equity.
Securities with a carrying value of $3,161,737 were pledged at December 31, 1995
to secure public deposits, trust deposits, and for certain other purposes as
required by law.
The amortized cost and estimated fair value of debt securities at December 31,
1995, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to prepay
obligations without prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
Held-to-Maturity
- ----------------
Due in one year or less.................. $ 667,665 $ 670,157
Due after one year through five years.... 856,276 871,414
Due after five years through ten years... 198,828 191,508
Due after ten years...................... 72,636 76,921
Mortgage-backed securities............... 1,136,486 1,137,123
---------- ----------
$2,931,891 $2,947,123
========== ==========
Available-for-Sale
- ------------------
Due in one year or less.................. $ 681,574 $ 685,600
Due after one year through five years.... 1,045,289 1,059,898
Due after five years through ten years... 18,355 18,526
Due after ten years...................... 49,553 49,692
Mortgage-backed securities............... 620,727 622,397
---------- ----------
$2,415,498 $2,436,113
========== ==========
</TABLE>
Proceeds from sales of investments in debt securities during
1995, 1994, and 1993 were $560,022, $739,457 and $1,277,093, respectively.
Gross gains of $11,180 in 1995, $14,646 in 1994, and $14,028 in 1993, and gross
losses of $1,894 in 1995, $5,005 in 1994, and $372 in 1993 were realized on
those sales.
21
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
6. LOAN PORTFOLIO
For a breakdown of the loan portfolio by type of loan and for information on
non-performing loans, refer to Supplemental Financial Data under the captions
Loan Portfolio and Non-Performing Assets (pages 89 and 90).
The Corporation has traditionally maintained limits on industry, market and
borrower concentrations as a way to diversify and manage credit risk. The
Corporation's current policy is to limit industry concentrations to 50% of total
equity and to limit market segment concentrations to 10% of total assets. The
Corporation manages industry concentrations by applying these dollar limits to
industries that have common risk characteristics.
Derivative financial instruments of $4,251,000 notional value at December 31,
1995 were used to manage interest rate risk associated with loans. At December
31, 1995, unrealized gains on these derivative financial instruments were
$104,000 and unrealized losses were $5,000. The effect of these derivative
financial instruments on the yield of the loan portfolio for the year ended
December 31, 1995 was to increase the yield from 9.37% to 9.43%.
At December 31, 1995 and 1994, the Corporation had loans totaling $200,652 and
$188,519, respectively, to its directors, officers and companies in which the
directors had a 10% or more voting interest. These loans were made on
substantially the same terms, including interest rates and collateral as those
prevailing at the time for comparable transactions with unrelated persons and do
not involve more than normal risk of collectibility. The 1995 additions and
reductions were $1,470,328 and $1,458,195, respectively.
Included in loans at December 31, 1995 and 1994 were $514,000 and $621,000,
respectively, of loans accounted for as held for sale and carried at lower of
cost or market.
In September 1993, the Corporation sold five of its seven branches from its
Virgin Islands operations. The five branches had loans of $131,200 and deposits
of $228,800 at the time of sale. The Corporation recorded a pre-tax gain of
$11,000 on the sale. In December 1994, the remaining two branches were sold at
a pre-tax gain of $1,900.
The book value of real estate loans transferred to other real estate owned
during 1995, 1994 and 1993 was $29,337, $79,539 and $90,375, respectively.
During 1994, loans totalling $286,000 were transferred to trading account
assets.
22
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
7. ALLOWANCE FOR LOAN LOSSES
The following represents an analysis of changes in the allowance for loan losses
for the years ended December 31, 1995, 1994
and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of period........... $ 681,124 $ 636,915 $ 620,039
Allowance for loans sold at date of sale. - (2,377) (353)
Allowance for loans purchased at date
of purchase........................... - 1,192 3,094
Allowance for loans of bank acquired
under purchase method of accounting..... - 23,739 2,703
Provision charged to operating expense... 144,002 279,195 189,372
Recoveries of loans previously charged... 85,226 83,914 98,562
off Loan charge-offs.................... (240,087) (341,454) (276,502)
--------- --------- ---------
Balance at end of period................. $ 670,265 $ 681,124 $ 636,915
========= ========= =========
</TABLE>
At December 31, 1995, the recorded investment in loans that are considered to be
impaired under FAS 114 was $203,399. Included in total impaired loans is
$88,973 against which $24,445 of the allowance for loan losses is allocated.
During 1995, impaired loans averaged approximately $257,746. For the year ended
December 31, 1995, the Corporation recognized interest income of approximately
$14,354 on impaired loans.
23
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
8. PREMISES AND EQUIPMENT
Premises and equipment on the consolidated balance sheet is net of accumulated
depreciation and amortization of $711,830 and $715,576 at December 31, 1995 and
1994, respectively. Depreciation and amortization of premises and equipment for
the years ended December 31, 1995, 1994, and 1993, was $98,033, $95,240 and
$95,443, respectively.
9. DEPOSITS
The following presents a breakdown of deposits at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Domestic:
Non-interest bearing checking $ 8,937,147 $ 8,625,125
NOW accounts 3,428,850 3,628,477
Savings accounts 6,024,424 6,705,922
Money market accounts 4,672,632 5,027,712
Time deposits 9,757,820 9,661,172
----------- ----------
Total domestic deposits 32,820,873 33,648,408
Overseas branches and subsidiaries 1,142,947 1,125,997
----------- ----------
Total deposits $33,963,820 $33,774,405
=========== ==========
Domestic time deposits in denominations of $100 or more at December 31, 1995,
1994, and 1993 were:
1995 1994 1993
----------- ---------- --------
Commercial certificates of deposit....... $ 695,970 $ 611,206 $664,369
Other domestic time deposits,
principally savings certificates........ 501,058 533,336 273,099
----------- ---------- --------
Total................................ $ 1,197,028 $1,144,542 $937,468
=========== ========== ========
Interest expense on domestic time deposits in denominations of $100 or more
for the years ended December 31, 1995, 1994, and 1993 was:
1995 1994 1993
----------- ---------- --------
Interest expense:
Commercial certificates of deposit...... $ 36,520 $ 22,499 $ 27,004
Other domestic time deposits,
principally savings certificates....... 30,057 24,138 24,711
----------- ---------- --------
Total................................ $ 66,577 $ 46,637 $ 51,715
=========== ========== ========
</TABLE>
Substantially all of the deposits of overseas branches and subsidiaries were
time deposits in denominations of $100 or more for each of the three years
presented.
Derivative financial instruments of $6,962,000 notional value at December 31,
1995 were used to manage interest rate risk associated with deposits. At
December 31, 1995, unrealized gains on these derivative financial instruments
were $106,000 and unrealized losses were $8,000. The effect of derivative
financial instruments on the cost of deposits for the year ended December 31,
1995 was to increase the cost from 3.75% to 3.76%.
24
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
10. SHORT-TERM FUNDS BORROWED
Short-term funds borrowed at December 31, 1995 and 1994 include the following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Federal funds purchased (a).......... $1,129,432 $1,026,340
Securities sold under agreements to
repurchase (b)...................... 812,281 1,025,217
Commercial paper (c)................. 1,255,656 853,947
Other short-term funds borrowed (d).. 479,644 555,745
---------- ----------
Total short-term funds borrowed (e) $3,677,013 $3,461,249
========== ==========
</TABLE>
(a) Federal funds purchased generally represent the overnight Federal funds
transactions of banking subsidiaries with correspondent banks. The weighted
average interest rate paid was 6.02% in 1995, 4.58% in 1994 and 3.12% in 1993.
The maximum amount outstanding at any month-end was $2,060,375 during 1995,
$1,646,440 during 1994, and $1,345,450 during 1993.
(b) Securities sold under agreements to repurchase usually mature within one to
thirty days or are due on demand. The weighted average interest rate paid was
5.03% in 1995, 3.44% in 1994 and 2.79% in 1993. The maximum amount outstanding
at any month-end was $863,937 during 1995, $1,025,217 during 1994, and
$1,113,278 during 1993.
(c) Commercial paper issued by CSCC is used to finance the short-term borrowing
requirements of certain banking-related activities. Commercial paper is issued
with maturities of not more than nine months and there are no provisions for
extension, renewal or automatic rollover. The weighted average interest rate
on commercial paper borrowings was 5.94% in 1995, 4.24% in 1994, and 3.14% in
1993. The maximum amount outstanding at any month-end was $1,388,927 during
1995, $919,292 during 1994, and $714,439 during 1993.
At December 31, 1995, the Corporation had a $650,000 revolving credit
facility from unaffiliated banks. The facility was established in support of
commercial paper borrowings, Medium Term Note (see Note 11) issuance and
general corporate purposes. Unless extended by the Corporation in accordance
with the terms of the facility agreement, the facility expires January 1999.
There were no borrowings under this facility at December 31, 1995. The interest
rate charged for usage of these lines varies with money market conditions.
(d) Other short-term funds borrowed include term Federal funds purchased and
demand notes payable to the U.S. Treasury.
(e) The aggregate average short-term funds borrowed were $3,751,518 in 1995,
$3,435,972 in 1994, and $3,037,007 in 1993. The weighted average interest rate
was 5.71% in 1995, 4.35% in 1994 and 3.25% in 1993. The average interest rate
is calculated primarily on a daily average of short-term funds borrowed.
25
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
11. LONG-TERM DEBT
Long-term debt at December 31, 1995 and 1994 includes the following:
<TABLE>
<CAPTION>
CoreStates Financial Corp: 1995 1994
------------ -----------
<S> <C> <C>
6 5/8% Note due 2000 (a)................ $ 149,902 $ -
7 7/8% Subordinated Notes due 2002 (b).. 99,773 98,977
Floating Rate Subordinated Notes due
1996 (c)............................... 75,000 75,000
8 5/8% Mortgages due 2001............... 8,823 9,997
---------- ----------
333,498 183,974
---------- ----------
CSCC:
5 7/8% Guaranteed Subordinated
Notes due 2003 (d).................... 200,000 200,000
6 5/8% Guaranteed Subordinated
Notes due 2005 (d).................... 175,000 175,000
9 5/8% Guaranteed Subordinated
Notes due 2001 (d).................... 150,000 150,000
9 3/8% Guaranteed Subordinated
Notes due 2003 (d).................... 100,000 100,000
Medium Term Notes (e)................... 1,036,035 1,099,585
Unamortized Discounts................... (3,631) (3,785)
---------- ----------
1,657,404 1,720,800
---------- ----------
Other subsidiaries:
6 5/8% Subordinated Notes due 2003 (f).. 149,287 147,945
Federal Home Loan Bank Borrowings (g)... 42,888 75,000
Various other........................... 29,022 35,544
---------- ----------
221,197 258,489
---------- ----------
Total long-term debt (h)................ $2,212,099 $2,163,263
========== ==========
</TABLE>
(a) The Notes are unsecured and senior in right of payment to all
subordinated indebtedness of the Corporation. The Notes are not redeemable by
the Corporation or the holders prior to the maturing date and are not entitled
to the benefit of any sinking fund.
(b) The Notes are unsecured and subordinate in right of payment to
all present and future senior indebtedness of the Corporation. The Notes are not
redeemable by the Corporation or the holders prior to the maturity date and are
not entitled to the benefit of any sinking fund.
(c) The Notes bear interest at a rate of 1/8 of 1% above the
arithmetic mean of London interbank offering quotations for three-
month Eurodollar deposits, determined quarterly. The Notes carry a floor
interest rate of 5 1/4%. The Notes are subordinate and junior in right of
payment to senior indebtedness of the Corporation. Since December 1, 1988, the
Corporation has had the option to exchange the Notes for capital securities or,
under certain circumstances, cash, prior to the maturity of the Notes on
December 1, 1996. In December 1993, the Corporation received approval from the
Federal Reserve Bank to revoke its obligation to exchange the Notes for capital
securities at maturity.
(d) The Notes are not subject to redemption prior to maturity and are
unconditionally guaranteed, on a subordinated basis, as to payment of principal
and interest by the Corporation. The Notes are subordinated to all existing
and future senior CSCC indebtedness and the guarantee is subordinated to all
outstanding senior Corporation indebtedness.
26
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
11. LONG-TERM DEBT - continued
(e) CSCC can issue Medium Term Notes (Senior and Subordinated) ranging in
maturity of more than nine months from date of issue. The interest rate or
interest rate formula on each Note is established by CSCC at the time of
issuance. The Senior Notes are unconditonally guaranteed as to payment of
principal and interest by the Corporation. The Subordinated Notes are
unconditionally guaranteed, on a subordinated basis, as to payment of
principal and interest by the Corporation. The Subordinated Notes are
subordinated to all existing and future senior CSCC indebtedness and the
guarantee is subordinated to all existing and future senior Corporation
indebtedness. At December 31, 1995, $1,036,035 of debt was outstanding with
terms up to five years. Interest rates are predominately variable, but
include several issues at fixed interest rates ranging from 5.30% to 5.50%.
Under an existing shelf registration statement filed with the Securities and
Exchange Commission, the Corporation had debt and capital securities that
were registered but unissued of approximately $294,000 at December 31, 1995.
A new shelf registration statement is expected to become effective in the
second quarter of 1996 increasing registered but unissued debt and capital
securities to $1,750,000.
(f) The Notes were issued by Meridian PA and are unsecured and subordinate to
the claims of depositors and other creditors. The Notes are not redeemable
by Meridian PA or the holders prior to the maturity date and are not
entitled to the benefit of any sinking fund.
(g) The borrowings range in maturity from February 1996 to July 2016 at fixed
interest rates from 4.58% to 7.19%. These borrowings require membership in
the Federal Home Loan Bank of Pittsburgh and the maintenance of available
collateral with a fair value which approximates the total amount of the
outstanding debt.
(h) The consolidated aggregate maturities and sinking fund requirements for
long-term debt for the years ending December 31, 1996 through 2000 are:
$402,576; $278,491; $327,977; $138,460; and $176,808, respectively.
Derivative financial instruments of $614,000 notional value at December 31,
1995 were used to manage interest rate risk associated with long-term debt. At
December 31, 1995, unrealized gains on these derivative financial instruments
were $24,000 and unrealized losses were $8,000. The effect of these derivative
financial instruments on the cost of long-term debt for the year ended December
31, 1995 was to decrease the interest rate from 6.78% to 6.76%.
27
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
12. RETIREMENT AND BENEFIT PLANS
The projected benefit obligation under the Corporation's defined benefit pension
plans exceeded plan assets at fair value by $7,576 at December 31, 1995, based
on current and estimated future salary levels. The excess of the projected
benefit obligation is reconciled to the accrued pension cost included in other
liabilities as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Plan assets at fair value(a).............. $815,621 $640,111
-------- --------
Present value of benefit obligation:
Accumulated benefits based on salaries
to date, including vested benefits of
$611,077 in 1995 and $476,017 in 1994. 647,743 513,388
Additional benefits based on
estimated future salary levels........ 175,454 142,010
-------- --------
Projected benefit obligation.............. 823,197 655,398
-------- --------
Amount projected benefit obligation exceeds
plan assets at fair value at December 31, (7,576) (15,287)
Reconciliation:
Unrecognized prior service cost........ 11,676 5,730
Unrecognized net asset from date of
initial application................... (25,357) (31,415)
Net deferred actuarial loss (gain)..... 22,151 (615)
-------- --------
Prepaid (accrued) pension expense
included in other liabilities............ $ 894 $(41,587)
======== ========
- ---------------
</TABLE>
(a) Primarily U.S. Government securities, U.S. agency securities, fixed income
securities, common stock, and commingled funds managed by subsidiary banks.
<TABLE>
<CAPTION>
Net pension cost for the years ended December 31, 1995, 1994 and 1993 included
the following expense (income) components:
1995 . 1994 . 1993 .
---------------- --------------- ---------------
<S> <C> <C> <C>
Service cost benefits
earned during the period... $ 24,492 $ 30,411 $ 23,890
Interest cost on projected
benefit obligation......... 54,497 51,881 47,134
Actual (return) loss on
plan assets................ (162,143) 22,038 (66,062)
Net amortization and
deferral................... 96,484 (80,394) 8,971
--------- -------- --------
Net pension cost.......... $ 13,330 $ 23,936 $ 13,933
========= ======== ========
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation for the Corporation was 7.0% -7.5% and
7.5% - 8.25%; respectively, at December 31, 1995 and 1994. The rate of increase
on future compensation levels was 5.0% to 6%. The expected long-term rate of
return on plan assets was 7.5% -9.5%.
The Corporation sponsors a savings plan for its employees. Contributions to the
savings plan for the employers' match were $18,192 in 1995, $23,140 in 1994, and
$23,312 in 1993.
28
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
12. RETIREMENT AND BENEFIT PLANS - continued
The Corporation and its subsidiaries provide certain postretirement health care
and life insurance benefits for retired employees. Postretirement benefits are
provided through an insurance company whose premiums are based on the benefits
paid during the year. The postretirement health care plan is contributory, with
retiree contributions based on years of service.
The liability for postretirement benefits included in other liabilities at
December 31, 1995 and 1994 was as follows:
<TABLE>
<CAPTION>
1995 . 1994 .
------------ -----------
<S> <C> <C>
Accumulated postretirement benefit
obligation:
Retirees.................................... $(125,502) $(127,226)
Fully eligible active plan participants..... (3,864) (3,410)
Other active plan participants.............. (39,709) (35,841)
--------- ---------
Accumulated postretirement benefit obligation.. (169,075) (166,477)
Plan assets at fair value (a).................. 46,974 24,467
--------- ---------
Unfunded obligation at December 31, ........... (122,101) (142,010)
Unrecognized prior service cost................ 115 -
Unrecognized net gain.......................... (22,638) (29,110)
Accrued postretirement benefit obligation --------- ---------
included in other liabilities................. $(144,624) $(171,120)
========= =========
- ------------------
</TABLE>
(a) Primarily municipal bonds and short-term investments.
Net periodic postretirement benefit cost for the years ended December 31, 1995,
1994 and 1993 included the following expense (income) components:
<TABLE>
<CAPTION>
1995 . 1994 . 1993 .
--------- ---------- ---------
<S> <C> <C> <C>
Service cost benefits earned during the period.. $ 3,044 $ 3,602 $ 3,190
Interest cost on accumulated postretirement
benefit obligation........................... 11,932 11,931 12,937
Actual return on plan assets.................... (1,107) (461) (6)
Net amortization and deferral................... (1,436) (730) 54
------- ------- -------
Net periodic postretirement benefit cost........ $12,433 $14,342 $16,175
======= ======= =======
</TABLE>
For measurement purposes, a 10.5% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 1995; the rate was assumed to
decrease gradually to 9.5% for 1997 and remains at that level thereafter. For
measurement purposes, a fixed dollar amount was determined as the Corporation's
maximum cost per employee. This fixed dollar amount was established at the
projected cost level for medical expenses in 1997. The health care cost trend
rate assumption has a significant effect on the amounts reported. To
illustrate, increasing the assumed health care cost trend rates by 1 percentage
point in each year would increase the accumulated postretirement benefit
obligation as of December 31, 1995 by $10,392 and the aggregate of the service
and interest cost components of net periodic postretirement benefit cost for the
year then ended by $731.
The expected long-term rate of return on plan assets was 6.0%. The weighted-
average discount rate used in determining the Corporation's accumulated
postretirement benefit obligation was 7.0% and 8.0% - 8.5%, respectively, at
December 31, 1995 and 1994.
Effective January 1, 1995, employees of Meridian and its subsidiaries with two
years of service participated in a non-contributory employee stock ownership
plan ("ESOP"). The ESOP is a leveraged plan and was funded through a direct
loan from Meridian. The ESOP has acquired a total of 2,450,000 shares of common
stock for distribution to eligible employees ratably over a 20 year period.
Compensation cost has been recognized based on the fair market value of the
shares committed to be released to employees. Total compensation cost
recognized in 1995 was $3.6 million. Dividends on allocated shares will be paid
to participants and will be charged to retained earnings. Dividends on
unallocated shares will be used by the ESOP to reduce its loan from Meridian.
29
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
13. LONG-TERM INCENTIVE PLAN
The Corporation has outstanding options granted under the Corporation's long-
term incentive plan (the "Plan"). As provided in the Plan, a variety of
incentives can be issued to eligible participants including restricted stock
awards, incentive stock options, non-qualified stock options, stock appreciation
rights, performance units and cash awards. Meridian, Constellation,
Independence, United Counties and Germantown had maintained similar plans.
Options granted under those plans were assumed by the Corporation upon
consummation of their respective acquisitions. The Plan provides for a maximum
number of options available to be granted each year equal to 2% of outstanding
common shares as of January 1 of that year. Information on options for 1995
follows:
<TABLE>
<CAPTION>
Shares under Option price
option per share
-------------- ----------------
<S> <C> <C>
Balance at January 1, 1995.... 10,283,538 $ 3.99 - $54.70
Options granted............... 2,702,717 18.29 - 29.95
Options exercised............. (4,186,515) 3.99 - 28.16
Options canceled.............. (218,186) 7.64 - 54.70
----------
Balance at December 31, 1995.. 8,581,554 3.99 - 29.95
==========
</TABLE>
Options under the Plan are granted to purchase the Corporation's common shares
at market value on the date of grant and are exercisable one year from the date
of grant for a period not exceeding ten years. Stock appreciation rights may be
granted in conjunction with the granting of an option. Upon the exercise of
stock appreciation rights and the surrender of the related option, an employee
may receive in cash or common stock of the Corporation a value equal to the
difference between the market price at the date of exercise and the option price
of shares.
The preceding option table does not reflect 122,800 performance unit awards
outstanding at December 31, 1995, 214,062 at December 31, 1994 and 280,190 at
December 31, 1993. Performance unit awards are earned subject to specific
performance of the Corporation over specified performance periods as defined in
the Plan. The payment value of each performance unit earned for the applicable
performance period is the fair market value of one share of common stock of the
Corporation based on the formula contained in the Plan. During 1995, 1994 and
1993, respectively, $1,258, $867 and $1,051 was expensed in connection with
performance unit awards.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123") was issued in October 1995 to establish accounting and
reporting standards for stock-based employee compensation plans such as stock
option and restricted stock plans ("stock-based plans"). FAS 123 defines a fair
value based method of accounting for measuring compensation expense for stock-
based plans and encourages all entities to adopt that method of accounting.
However, FAS 123 also permits entities to continue to measure compensation
expense for stock-based plans using the intrinsic value based method prescribed
by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Entities
electing to remain with the intrinsic value based method must begin to make pro
forma disclosures of net income and earnings per share in fiscal years beginning
after December 31, 1995 as if the fair based method defined by FAS 123 was
applied.
Under the fair value based method, compensation expense would be measured as the
value of an award under a stock-based plan on the date the award is granted, and
would be recognized over the vesting period of the award. Under the current
intrinsic value based method, compensation expense is measured as the excess, if
any, of the market price of the stock underlying the award on the date the award
is granted, over the exercise price. Under the Corporation's stock-based long-
term incentive plan, awards have no intrinsic value on the date of grant as the
exercise price equals the market price on that date. Currently, the Corporation
does not expect to adopt the FAS 123 fair value based method of accounting for
stock-based plans, but will provide the required pro forma disclosures in the
December 31, 1996 financial statements.
30
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
14. OPERATING LEASES
Rental expense, reduced by sublease rental income, charged to operations was
$85,419, $85,554 and $83,583 for 1995, 1994 and 1993, respectively.
15. 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 the Corporation's asset and liability management, the management
of interest rate risk in securities trading positions 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.
Derivative Financial Instruments Held or Issued for Purposes Other Than Trading
The Corporation uses off-balance sheet derivative financial instruments, such as
interest rate swaps, futures and caps, to manage interest rate risk. The
Corporation's exposure to interest rate risk stems from the mismatch between the
sensitivity to movements in interest rates of the Corporation's assets and
liabilities and from the spread risk between the rates on those assets and
liabilities and financial market rates. The use of derivatives to manage
interest rate risk falls into three categories: interest sensitivity
adjustments, interest rate spread protection and hedging anticipated asset
sales.
Interest rate swaps and futures are generally used to lengthen the interest rate
sensitivity of short-term assets and to shorten the repricing characteristics of
longer term liabilities. Interest rate caps are used to manage spread risk.
Interest rate caps are also used to offset the risk of upward interest rate
movement on adjustable rate mortgages and other products with imbedded caps as
well as to reduce the risk that interest rate spreads narrow on prime based
products. Gains or losses are used to adjust the basis of the related asset or
liability and interest differentials are adjustments of the related interest
income or expense.
In connection with anticipated sales of longer term assets acquired through
merger or generated in the loan origination process, the Corporation uses
interest rate swaps and option agreements to reduce interest rate sensitivity as
the assets are readied for sale. Hedge gains or losses are used to adjust the
basis of the assets held for sale.
Derivative financial instruments used in the management of interest rate risk at
December 31, 1995 are summarized by category in the table on page 71. A summary
of interest rate swap contracts categorized by whether the Corporation receives
or pays fixed rates and stratified by repricing or maturity date is on page 74.
Foreign currency derivatives used for hedging activities have not had a material
impact on income or liquidity of the Corporation for any of the years presented.
Derivative Financial Instruments Held or Issued for Trading Purposes
In its business of providing risk management services for its customers, the
Corporation engages in derivative activities including interest rate swaps, caps
and floors. In addition, as part of its international business, the Corporation
enters into foreign exchange contracts on behalf of customers. These contracts
are matched against forward sale or purchase contracts. Customer related
derivative financial instrument transactions are generally marked to market and
any gains or losses are recorded in the income statement. The Corporation also
holds derivatives in connection with its securities trading activities and, at
times, as a position taken in the expectation of profiting from favorable
movements in interest rates.
Customer and trading related derivative financial instruments at December 31,
1995 and 1994 are summarized by type of instrument in the table on page 75.
31
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS AND COMMITMENTS -
continued
The following is a summary of off-balance sheet commitments and derivative
financial instruments as of December 31, 1995 and 1994, including fair values:
<TABLE>
<CAPTION>
1995 1994
------------------------------ ------------------------------
Notional Fair Notional Fair
or Value or Value
Contractual of Asset Contractual of Asset
Amount (Liability)(1) Amount (Liability)(1)
------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Standby letters of credit, net of participations (a).... $ 1,548,551 $(14,502) $ 1,586,219 $ (7,138)
Commercial letters of credit............................. 1,324,714 (13,157) 1,305,231 (3,700)
Commitments to extend credit (b)......................... 14,565,636 (16,135) 12,053,619 (14,142)
Unused commitments under credit card lines............... 3,872,641 3,613,872
When-issued securities (c):
Commitments to purchase............................ 500 - - -
Commitments to sell................................ 145,000 (1,411) 121,125 (217)
Commitments to purchase/sell whole mortgage
loans and securities (c):
Commitments to purchase............................. 109,714 2,071 56,400 497
Commitments to sell................................. 47,259 (1,738) 47,830 115
Mortgage loans sold and loan servicing acquired
with recourse (d)..................................... 434,628 (12,260) 541,840 (11,710)
Interest rate futures contracts (e):
Commitments to purchase............................... 621,000 658 1,043,000 (1,185)
Commitments to purchase foreign and
U.S. currencies (f)................................... 1,695,148 1,567 1,841,857 1,732
Interest rate swaps, notional principal
amounts (g)........................................... 9,945,840 206,186 11,127,400 (311,206)
Interest rate caps and floors (h):
Written............................................... 847,323 (1,229) 749,857 (15,000)
Purchased............................................. 1,673,023 25,021 1,650,657 20,273
Tender option bonds (i).................................. 208,103 4,995 255,948 5,709
Treasury float contracts (j)............................. 623,738 884 1,021,075 4,345
Other derivatives........................................ 174,674 645 341,711 (695)
</TABLE>
(1) See Note 3 for discussion of fair value.
32
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS AND COMMITMENTS -
continued
(a) Standby letters of credit ("SBLC") are used in various transactions to
enhance the credit standing of the Corporation's customers and are
subjected to the same risk, credit review and approval process as loans.
SBLC's are irrevocable assurances that the Corporation will make payment in
the event that a customer cannot perform its contractual obligations to
third parties.
(b) Commitments to extend credit represent the Corporation's obligation to fund
commercial and real estate loans, including home equity lines, lines of
credit, revolving lines of credit and other types of commitments.
(c) The Corporation has commitments to purchase/sell mortgage-backed securities
or loans with delivery at a future date but typically within 120 days. The
risk associated with these instruments is one of interest rate risk. In a
declining interest rate environment, commitments to sell mortgage-backed
securities or loans will decline in value. In a rising interest rate
environment, commitments to buy mortgage-backed securities or loans will
increase in value. Forward agreements to sell securities are used in
transactions with municipalities that generally have a debt payment due in
the future. Under these agreements, the Corporation agrees to deliver
primarily United States Treasury securities that will mature on or before
the required payment date. The type and associated interest rate of these
securities is established when the agreement is entered. The principal
risk associated with forward agreements is interest rate risk to the extent
the required securities have not been purchased. If interest rates fall,
securities yielding the higher agreed upon fixed rate will be more
expensive for the Corporation to purchase. Included in when-issued
securities and commitments to purchase/sell whole mortgage loans and
securities are customer and trading-related products with a notional value
of $223,873 and $214,630 at December 31, 1995 and 1994, respectively.
(d) The Corporation originates and sells residential mortgage loans as part of
various mortgage-backed security programs sponsored by the United States
government agencies or government-sponsored agencies, such as the
Government National Mortgage Association, Federal Home Loan Mortgage
Corporation and the Federal National Mortgage Association. Certain sales
and other servicing acquired are subject to recourse provisions in the
event of default by the borrower. The Corporation provides for potential
losses against these mortgage-backed securities by establishing reserves at
the time of sale and evaluates the adequacy of these reserves on an ongoing
basis.
(e) Exchange traded futures contracts represent agreements to exchange dollar
amounts at a specified future date for interest rate differentials between
an agreed interest rate and a reference rate, computed on a notional
amount. Credit and market risk exist with respect to these instruments.
Exchange traded futures contracts entail daily cash settlement; therefore,
the credit risk amount represents a one-day receivable.
(f) Commitments to purchase foreign and U.S. currencies are primarily executed
for the needs of customers. These foreign exchange contracts are
structured similar to interest rate futures and forward contracts. The
risk associated with a foreign exchange contract arises from the
counterparty's ability to make payment at settlement and that the value of
a foreign currency might change in relation to the U.S. dollar. The
Corporation's exposure, if any, to counterparty failure equals the current
market value of the contract, which at December 31, 1995 and 1994 was
$16,434 and $2,305, respectively. Included in fees for international
services are net foreign exchange gains of $22,943, $19,783 and $16,651 for
the years ended December 31, 1995, 1994 and 1993, respectively.
(g) Interest rate swaps generally represent the contractual exchange of fixed
and variable rate interest payments based on a notional principal amount
and an interest reference rate. Credit risk exists with respect to these
instruments arising from the possible failure of the counterparty to make
required payments on those contracts which are favorable to the
Corporation. The Corporation's exposure to counterparty failure equals the
current replacement cost of the contract. At December 31, 1995 and 1994,
the replacement cost of the Corporation's interest rate swap contracts was
$225,140 and $17,999, respectively. The risk of counterparty failure is
controlled by limiting transactions to an approved list of counterparties
and requiring collateral in certain instances. Net cash received on
interest rate swaps during 1995 and 1994 totaled $7,493 and $120,083,
respectively.
33
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS AND COMMITMENTS -
continued
(h) Interest rate caps and floors are written by the Corporation to enable
customers to transfer, modify or reduce their interest rate risk. Interest
rate caps and floors are similar to interest rate swaps except that
payments are made only if current interest rates move above or below a
predetermined rate. The risk associated with interest rate caps and floors
is an unfavorable change in interest rates. As a writer of interest rate
caps and floors, the Corporation receives a premium in exchange for bearing
the risk of an unfavorable change in interest rates. The Corporation
generally reduces risk by entering into offsetting cap and floor positions
that essentially counterbalance each other. The Corporation also enters
interest rate caps to offset the risk of upward interest rate movement on
assets with embedded caps as well as to limit spread risk. As a purchaser
of interest rate caps, the Corporation pays a premium in exchange for the
right to receive payments if interest rates rise above predetermined
levels. The Corporation has also purchased interest rate floors in which
the Corporation has paid a fee for the right to receive payments if rates
fall below a predetermined level. Similar to interest rate swaps, credit
risk exists with respect to the possible failure of the counterparty to
make required payments on those contracts which are favorable to the
Corporation. Exposure to counterparty failure equals the current
replacement cost of the contract which totaled $26,384 and $20,555,
respectively, at December 31, 1995 and 1994.
(i) Tender option bonds are instruments associated with municipalities. A
municipality generally issues a tax-free, fixed rate, long-term security in
order to finance the origination of single family residential mortgages.
The municipality enters into a tender option bond program with the
Corporation, which converts the fixed rate long-term instrument into a
variable rate short-term product. Under the terms of this agreement, the
municipality will pay a fixed rate to the Corporation over the life of the
underlying bond. The Corporation, in turn, pays a short-term variable rate
to the ultimate bondholder, who has the option to sell the bonds back to
the Corporation. The Corporation also receives the right to remarket any
purchased bonds at a short-term, tax-exempt, variable rate. The risk to
the Corporation in tender option bonds is one of interest rate risk in a
rising rate environment. If interest rates increase, the rate paid on the
short-term instrument will also increase and the spread between the fixed
rate that the Corporation receives and the short-term rate the Corporation
pays to bondholders will decrease. If short-term rates exceed the fixed
rate on the long-term instrument, then the short-term instrument will be
sold at a discount and the Corporation would incur a loss. At December 31,
1995 and 1994, the replacement cost of the Corporation's tender option
bonds was $5,023 and $7,513, respectively.
(j) A treasury float contract is created because a municipality, which has
defeased a bond issue with government securities, has a mismatch in the
timing of the maturity of the securities and the date the funds are needed
to pay the debt service. The Corporation will pay an up-front fee for the
right to sell government securities to the municipality, generally at par.
The Corporation retains any profit between the sales price and the price at
which the Corporation acquired the securities. The maximum risk of loss
cannot exceed the premium paid for these contracts which was $858 thousand
at December 31, 1995 and is included on the consolidated balance sheets.
At December 31, 1995 and 1994, the replacement cost of the Corporation's
treasury float contracts was $905 and $4,345 respectively.
In the normal course of business, the Corporation and its subsidiaries are
subject to numerous pending and threatened legal actions and proceedings, some
for which the relief or damages sought are substantial. Management does not
believe the outcome of these actions and proceedings will have a materially
adverse effect on the consolidated financial position of the Corporation.
34
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
16. PROVISION FOR INCOME TAXES
The provision for income taxes in the consolidated statement of income consists
of the following:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ----------
<S> <C> <C> <C>
Current:
Federal...................................... $303,647 $158,771 $225,728
State........................................ 24,134 19,683 22,844
-------- -------- --------
Total domestic........................... 327,781 178,454 248,572
Foreign...................................... 8,240 5,558 10,284
-------- -------- --------
Total current............................ 336,021 184,012 258,856
Deferred Federal and state expense (benefit).. 28,420 41,847 (12,002)
-------- -------- --------
Total provision for income taxes...... $364,441 $225,859 $246,854
======== ======== ========
</TABLE>
The significant components of the Corporation's deferred tax assets and
liabilities at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ----------
Deferred tax assets:
<S> <C> <C>
Allowance for loan losses.......................... $241,487 $241,061
Postretirement and postemployment benefits......... 54,127 69,638
Reserves........................................... 54,779 30,250
Other.............................................. 70,928 75,119
-------- --------
Gross deferred tax asset........................... 421,321 416,068
Valuation allowance................................ - (9,102)
-------- --------
Total deferred tax assets......................... 421,321 406,966
-------- --------
Deferred tax liabilities:
Auto leasing portfolio............................. 119,894 102,899
FAS 115 fair value accounting...................... 25,405 9,925
Partnership investments............................ 3,980 2,124
Tax over book depreciation......................... 30,626 30,986
Affiliate income................................... 30,404 17,716
Other.............................................. 49,596 45,107
-------- --------
Total deferred tax liabilities.................... 259,905 208,757
-------- --------
Net deferred tax assets............................. $161,416 $198,209
======== ========
</TABLE>
At December 31, 1995 cumulative deductible temporary differences are
approximately $1,204,000 and the related deferred tax asset is $421,321. The
major components of the temporary differences include $690,000 related to the
allowance for loan losses and $155,000 related to pension, and other post
retirement and post employment benefits. Cumulative taxable temporary
differences related to deferred tax credits at December 31, 1995 are estimated
at $743,000 and are primarily related to leasing, FAS 115 fair value accounting,
affiliate income and depreciation. The related deferred tax liability is
$259,905.
35
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
16. PROVISION FOR INCOME TAXES - continued
At December 31, 1995, the Corporation has determined that it is not required to
establish a valuation allowance for the deferred tax asset since it is more
likely than not that the deferred tax asset of $421,321 will be realized
principally through carryback to taxable income in prior years, future reversals
of existing taxable temporary differences, and to a lesser extent, future
taxable income and tax planning strategies. The Corporation's conclusion that it
is "more likely than not" that the deferred tax asset will be realized is based
on a history of growth in earnings and the prospects for continued growth,
including an analysis of potential uncertainties that may affect future
operating results. The Corporation will continue to review the tax criteria of
"more likely than not" for the recognition of deferred tax assets on a quarterly
basis.
The Corporation has reversed the $9,102 valuation allowance for the deferred tax
asset related to pre-affiliation state income taxes. An estimated $4,000 state
benefit for tax purposes will be obtained in future periods. No further benefit
will be obtained on the remaining $5,102.
The consolidated effective tax rates are reconciled to the statutory rate as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ ----- -----
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
Difference resulting from:
Tax-exempt income (2.0) (3.6) (3.8)
State, local and foreign income tax 1.5 1.9 2.0
Other, net 1.2 1.0 (1.7)
----- ---- ----
Effective tax rate 35.7 % 34.3% 31.5%
===== ==== ====
</TABLE>
Foreign earnings of certain subsidiaries would be taxed only upon their
transfer to the United States. No transfers or dividends are contemplated at
this time. Taxes payable upon remittance of such accumulated earnings of
$21,323 at December 31, 1995 would approximate $7,065.
Taxes, other than income taxes, included in other operating expenses for the
years ended December 31, 1995, 1994 and 1993 are $105,913, $104,805 and
$113,308, respectively.
36
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents summarized quarterly financial data of the Corporation,
which, in the opinion of management, reflects all adjustments (comprising only
normal recurring accruals) necessary for a fair presentation:
<TABLE>
<CAPTION>
Three Months Ended
----------------------
Dec. 31 . Sept. 30. June 30 March 31
------------------------- ---------------------- ------------------------ ----------------------
1995
- ----
<S> <C> <C> <C> <C>
Interest income............. $868,521 $871,164 $884,807 $850,588
======== ======== ======== ========
Interest expense............ $322,095 $329,592 $337,203 $319,265
======== ======== ======== ========
Net interest income......... $546,426 $541,572 $547,604 $531,323
======== ======== ======== ========
Provision for losses on loans $ 38,225 $ 38,050 $ 34,661 $ 33,066
======== ======== ======== ========
Securities gains............ $ 5,729 (a) $ 2,230 $ 5,512 $ 18,004 (a)
======== ======== ======== ========
Net income.................. $192,145 (d)(e) $194,712 (d) $158,150 (c)(d) $110,169 (b)(c)
======== ======== ======== ========
Net income per common share. $ 0.87 (d)(e) $ 0.88 (d) $ 0.71 (c)(d) $ 0.49 (b)(c)
======== ======== ======== ========
Average common shares outstanding 219,915 220,718 222,440 226,091
======== ======== ======== ========
Common Stock Market Bid Information:
High....................... $ 40 1/8 $ 38 7/8 $ 36 $ 33
Low........................ 34 5/8 34 1/4 30 1/2 25 5/8
Quarter-end................ 37 7/8 36 5/8 34 5/8 32
1994
- ----
Interest income............. $806,903 $771,206 $740,738 $695,712
======== ======== ======== ========
Interest expense............ $277,958 $246,160 $218,605 $203,821
======== ======== ======== ========
Net interest income......... $528,945 $525,046 $522,133 $491,891
======== ======== ======== ========
Provision for losses on loans $ 36,103 $ 31,293 $ 56,369 (g) $155,430 (f)
======== ======== ======== ========
Securities gains............ $ 6,931 $ 6,069 $ 2,979 $ 2,304
======== ======== ======== ========
Net income.................. $163,657 $146,822 $109,875 (g) $ 12,852 (f)
======== ======== ======== ========
Net income per common share. $0.72 $0.65 $ 0.49 (g) $ 0.05 (f)
======== ======== ======== ========
Average common shares outstanding 225,531 224,922 225,953 228,445
======== ======== ======== ========
Common Stock Market Bid Information:
High....................... $ 27 5/8 $ 29 1/8 $ 28 $ 27 1/8
Low........................ 22 7/8 25 7/8 25 24 1/2
Quarter-end................ 26 26 5/8 25 3/4 26
</TABLE>
(a) Includes gains on the exchange of equity securities of $12.1 million pre-
tax, $7.6 million after-tax or $0.04 per share, and $1.5 million pre-tax,
$1.0 million after-tax recorded by United Counties in the first and fourth
quarters, respectively.
(b) Includes a gain of $19.0 million pre-tax, $11.8 million after-tax or $0.05
per share, recognized on the increase in ownership interests of an existing
partner and the admittance of a new partner in the EPS joint venture.
(c) Includes restructuring charges of $110.0 million pre-tax, $70.0 million
after-tax or $0.31 per share recorded by CoreStates, and $32.0 million pre-
tax, $20.8 million after-tax or $0.09 per share recorded by Meridian related
to corporate-wide process redesigns, in the first and second quarters,
respectively.
(d) Includes net restructuring credits of $3.0 million pre-tax, $1.9 million
after-tax, $2.4 million pre-tax, $1.5 million after-tax, and $8.0 million
pre-tax, $5.2 million after-tax or $0.02 per share, recorded in the second,
third and fourth quarters, respectively, primarily related to gains on the
curtailment of future pension benefits associated with employees displaced
and sales of branches which were sold as a result of process redesigns.
(e) Includes non-deductible merger-related charges of $10.0 million or $0.05
per share related to the merger with Meridian .
(f) Includes merger-related charges of $120.0 million in the provision for
losses on loans and $75.0 million in other operating expenses related to the
Constellation acquisition ($0.56 per share after-tax).
(g) Includes merger-related charges of $25.0 million in the provision for losses
on loans and $33.7 million in other operating expenses related to the
Independence acquisition ($0.18 per share after-tax).
37
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
18 JOINT VENTURE
In December 1992, the Corporation entered into a joint venture with three other
banking companies creating Electronic Payment Services, Inc. ("EPS"). The joint
venture combines the partners' separate consumer electronic transaction
processing businesses and provides automated teller machine ("ATM") and
electronic point-of-sale ("POS") processing services.
The Corporation contributed to EPS its wholly-owned subsidiaries of Money Access
Service Inc. ("MAC"), a regional ATM network, and BUYPASS Corporation, a third-
party processor of electronic POS transactions.
At the formation of EPS, the Corporation had equal ownership with two partners
in the joint venture, each with 31%. The fourth partner owned 7%. As part of
the 1992 transaction, the Corporation received a cash payment of $79,350 and
$245,400 of EPS 5% cumulative redeemable preferred stock. The exchange of
assets involved in the transaction resulted in a 1992 pre-tax gain to the
Corporation of $41,072, $25,670 after-tax. The exchange also generated a
deferred gain of approximately $138,000.
In December 1993, the Corporation and EPS mutually agreed to enter into a
recapitalization of EPS involving the EPS preferred stock held by the
Corporation. In exchange for substantially all of the preferred stock, the
Corporation received from EPS a ten-year 6.45% note providing for equal
principal payments over the life of the note. The recapitalization did not
affect the amount of deferred gain, but changed the timing of deferred gain
income recognition from a five-year period beginning in 1996 to a ten-year
period which began in 1994.
On March 27, 1995, EPS added a new partner and increased the ownership interests
of an existing partner to that of a full partner, resulting in a decrease in the
Corporation's share of ownership from 31% to 20%. As a direct result of this
change in ownership interests, the Corporation recognized a pre-tax gain of
$19,000, $11,800 after-tax or $0.05 per share, in 1995. Included in the pre-tax
gain amount was $4,000 related to the acceleration of deferred gain recognition.
The Corporation's investment in EPS at December 31, 1995, net of $117,000
deferred gain, is $72,632 and is included in other assets. "Income from
investment in EPS, Inc.", which is included in non-interest income, reflects the
Corporation's share in EPS net income for all periods presented, interest income
on the 6.45% note in 1995 and 1994, dividends on the preferred stock in 1993 and
amortization of the deferred gain in 1995 and 1994.
19. RESTRUCTURING CHARGE
CoreStates Financial Corp ("CoreStates") recorded a restructuring charge of
$110,000, $70,000 after-tax or $0.31 per share, in the first quarter of 1995 in
connection with a process redesign which commenced March 1995 and will continue
into 1996. The objectives of the process redesign are : (i) to enhance
CoreStates' customer focus; (ii) to accelerate "cultural changes" which were
already in progress; and (iii) to improve productivity. The charge included
direct and incremental costs associated with the process redesign. The
components of the restructuring charge were as follows:
<TABLE>
<CAPTION>
Requiring 1995
Cash Cash
Total Outflow Outflow
--------- --------- --------
<S> <C> <C> <C>
Severance costs................ $ 72,000 $72,000 $28,306
Office reconfiguration costs... 16,000 7,000 -
Branch closing costs........... 15,000 7,000 1,669
Outplacement costs............. 2,500 2,500 1,821
Miscellaneous.................. 4,500 2,500 1,474
-------- ------- -------
Total..................... $110,000 $91,000 $33,270
======== ======= =======
</TABLE>
Subsequent to recording the March 1995 restructuring charge, CoreStates recorded
restructuring credits of $11,825, $7,525 after-tax or $0.03 per share, related
to gains on the curtailment of pension benefits associated with employees
displaced during 1995 and gains on the sale of branches which were sold as a
result of the process redesign.
38
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
19. RESTRUCTURING CHARGE - continued
Meridian recorded a restructuring charge of $32,000, $20,800 after-tax or $0.09,
in the second quarter of 1995 in connection with an internal review of its
operations and business and announced a company-wide plan designed to improve
operating performance and competitive position. The charge included direct and
incremental costs associated with the process redesign. The components of the
restructuring charge were as follows:
<TABLE>
<CAPTION>
Requiring 1995
Cash Cash
Total Outflow Outflow
------- --------- -------
<S> <C> <C> <C>
Severance and other employee related costs............................ $15,900 $15,900 $ 9,300
Lease and other contract termination costs............................ 2,600 2,600 400
Building and other asset writedowns................................... 10,700 - -
Professional fees..................................................... 2,800 2,800 2,800
------- ------- -------
Total............................................................ $32,000 $21,300 $12,500
======= ======= =======
</TABLE>
Subsequent to recording its June 1995 restructuring charge, Meridian recorded a
net restructuring credit of $1,575, $1,024 after-tax, related to gains on the
curtailment of future pension benefits associated with employees displaced
during 1995.
The following table summarizes the activity in the combined restructuring
accrual for the year ended December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
Balance at beginning of year $ -
Provision charged against income 142,000
Cash outflow (45,770)
Writedowns of assets (13,458)
--------
Balance at December 31, 1995 $ 82,772
========
</TABLE>
39
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
<TABLE>
<CAPTION>
20. FINANCIAL STATEMENTS OF THE PARENT COMPANY
Statement of Income Year Ended December 31,
--------------------------------------------
1995 1994 1993
-------------- -------------- ------------
<S> <C> <C> <C>
REVENUES
- --------
Dividends from subsidiaries:
Banks................................................... $ 373,023 $ 389,733 $281,713
Other subsidiaries...................................... 91,917 27,575 15,498
---------- ---------- --------
Total dividends from subsidiaries.................... 464,940 417,308 297,211
Management fees and other income from subsidiaries........ 190,027 186,092 205,770
Securities gains.......................................... 16,343 259 55
Other income.............................................. 3,241 1,483 8,433
---------- ---------- --------
Total revenues....................................... 674,551 605,142 511,469
---------- ---------- --------
EXPENSES
- --------
Interest on:
Funds borrowed.......................................... 19,685 11,613 5,525
Long-term debt.......................................... 21,578 13,137 20,895
---------- ---------- --------
Total interest expense............................. 41,263 24,750 26,420
Other operating expenses.................................. 219,463 210,629 213,061
---------- ---------- --------
Total expenses....................................... 260,726 235,379 239,481
---------- ---------- --------
Income before income tax benefit and equity in
undistributed income of subsidiaries................. 413,825 369,763 271,988
Income tax benefit........................................ (11,977) (15,357) (7,767)
---------- ---------- --------
Income before equity in undistributed income of subsidiaries 425,802 385,120 279,755
---------- ---------- --------
Equity in undistributed income (loss) of subsidiaries:
Banks................................................ 203,909 (9,827) 198,153
Other subsidiaries................................... 25,465 57,913 47,168
---------- ---------- --------
Total equity in undistributed income of subsidiaries 229,374 48,086 245,321
---------- ---------- --------
Income before cumulative effect of a change in
accounting principal.................................... 655,176 433,206 525,076
Cumulative effect of a change in accounting principle.... - - (2,730)
---------- ---------- --------
NET INCOME................................................ $ 655,176 $ 433,206 $522,346
- ---------- ========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet December 31,
--------------------------
1995 1994
---------- ----------
ASSETS
- ------
<S> <C> <C>
Cash.................................................................... $ 1,340 $ 3,987
Time deposit............................................................ - 300
Investment-securities available-for-sale................................ 148,009 95,504
Investments and receivables-subsidiaries:
Investments in subsidiaries at equity in underlying net assets:
Banks................................................................ 3,769,779 3,674,220
Other subsidiaries.................................................. 427,451 436,375
---------- ----------
Total investments in subsidiaries.................................. 4,197,230 4,110,595
Other................................................................ 108,827 112,420
---------- ----------
Total investments and receivables-subsidiaries..................... 4,306,057 4,223,015
Other assets............................................................ 76,453 98,965
---------- ----------
Total assets....................................................... $4,531,859 $4,421,771
========== ==========
LIABILITIES
- -----------
Funds borrowed - subsidiaries........................................... $ 177,827 $ 247,358
Funds borrowed - external............................................... - 75,000
Dividends payable and other liabilities................................. 143,575 181,995
Long-term debt.......................................................... 334,892 186,486
---------- ----------
Total liabilities.................................................. 656,294 690,839
---------- ----------
SHAREHOLDERS' EQUITY
- --------------------
Total shareholders' equity......................................... 3,875,565 3,730,932
---------- ----------
Total liabilities and shareholders' equity......................... $4,531,859 $4,421,771
========== ==========
40
</TABLE>
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
20. FINANCIAL STATEMENTS OF THE PARENT COMPANY - continued
The approval of the Comptroller of the Currency is required for a nationally
chartered bank to pay dividends if the total of all dividends declared in any
calendar year exceeds the bank's net profits (as defined by national banking
regulations) for that year combined with its retained net profits for the
preceding two calendar years. Under this formula, CBD can declare dividends
without approval of the Comptroller of the Currency of approximately $37
million, plus an additional amount equal to CBD's retained net profits for 1996
up to the date of any such dividend declaration. CBNA and NJNB will be able to
declare dividends without the approval of the Comptroller of the Currency to the
extent that and when 1996 retained net profits exceed $2 million and $7 million,
respectively.
The approval of various regulatory agencies is required for state chartered
banks to declare dividends in excess of preapproved limits. Under current
regulations, Meridian PA without prior approval of bank regulators, may declare
dividends in 1996 totaling $121 million plus additional amounts equal to the net
profits earned for the period of January 1, 1996 through the date of
declaration, less dividends previously paid in 1996. Meridian NJ and Delaware
Trust Company dividends may not exceed current year earnings for 1996.
The Federal Reserve Act requires that extensions of credit by CBNA, Meridian
PA, Meridian NJ and NJNB to certain affiliates, including the Corporation, be
secured by specified amounts and types of collateral, that extensions of credit
to all such affiliate generally be limited to 10% of capital and surplus (as
defined in that Act) and that extensions of credit to all such affiliates be
limited to 20% of capital and surplus.
The Corporation has guaranteed certain borrowings of its subsidiaries at
December 31, 1995 in the amount of $2,935,292, which includes $1,255,656 for
commercial paper.
The maturities for parent company long-term debt for the years ending December
31, 1996 through 2000 are: $76,318; $1,429; $1,550; $1,680; and $151,666,
respectively.
41
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS: Continued
(dollar amounts in thousands)
20. FINANCIAL STATEMENTS OF THE PARENT COMPANY - continued
<TABLE>
<CAPTION>
Statement of Cash Flows
Year Ended December 31,
---------------------------------------------
1995 1994 1993
--------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................................. $ 655,176 $ 433,206 $ 522,346
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed income of subsidiaries......................... (229,374) (48,086) (245,521)
Securities (gains) losses....................................... (16,343) (259) (55)
Deferred income tax expense (benefit)........................... (785) (3,895) (3,108)
Net (increase) decrease in other assets......................... 24,265 6,360 (14,119)
Net increase (decrease) in other liabilities.................... (22,761) 13,921 20,517
Other, net...................................................... 7,840 (8,865) 5,540
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES........................... 418,018 392,382 285,600
--------- --------- ---------
INVESTING ACTIVITIES
Net capital returned from (contributed to) subsidiaries................ 190,900 (99,903) 29,474
(Increase) decrease in receivables from subsidiaries................... (3,593) 53,862 (16,962)
Purchases of investment securities..................................... (170,988) (202,424) (485,205)
Proceeds from maturities and sales of investment securities............ 118,483 188,028 458,185
Purchase of Germantown Savings Bank.................................... - (108,061) -
Other, net............................................................. (1,380) (1,428) (6,339)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES................................................... 133,422 (169,926) (20,847)
--------- --------- ---------
FINANCING ACTIVITIES
Issuance (repayment) of funds borrowed................................. (75,000) 75,000 -
Retirement of long-term debt........................................... (1,471) (45,568) (21,018)
Proceeds from issuance of long-term debt............................... 149,877 - 15
Net increase (decrease) in financing from and due to subsidiaries...... (94,054) 270,587 (83,106)
Cash dividends paid.................................................... (286,565) (245,962) (218,327)
Purchase of treasury stock............................................. (335,528) (228,963) (29,449)
Purchase of ESOP shares................................................ - (35,568) -
Repurchase and retirement of common stock.............................. (17,134) (24,888) (11,186)
Common stock issued under employee benefit plans....................... 99,011 18,710 32,830
Funds transferred to Trust for future ESOP purchases................... - (24,432) -
Other, net............................................................. 6,777 11,294 23,285
--------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES............................. (554,087) (229,790) (306,956)
--------- --------- ---------
DECREASE IN CASH AND DUE FROM BANKS............................. (2,647) (7,334) (42,203)
Cash and due from banks at January 1, ............................ 3,987 11,321 53,524
--------- --------- ---------
CASH AND DUE FROM BANKS AT DECEMBER 31, .......................... $ 1,340 $ 3,987 $ 11,321
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest............................................................ $ 40,745 $ 24,500 $ 21,394
========= ========= =========
Income taxes........................................................ $ 43 $ (626) -
========= ========= =========
</TABLE>
42
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
CoreStates Financial Corp
We have audited the accompanying consolidated balance sheets of CoreStates
Financial Corp as of December 31, 1995 and 1994, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the 1995, 1994, or 1993 financial statements of
Meridian Bancorp, Inc. and United Counties Bancorporation, or the 1993 financial
statements of Constellation Bancorp and Independence Bancorp, Inc., which
statements reflect combined total assets of 35.6% and 36.3% as of December 31,
1995 and 1994, respectively, and combined net interest income constituting
31.3%, 32.8%, and 44.4% of the related consolidated totals for the years ended
December 31, 1995, 1994, and 1993, respectively. Those statements were audited
by other auditors whose reports thereon have been furnished to us, and our
opinion, insofar as it relates to data included for Meridian Bancorp, Inc.,
United Counties Bancorporation, Constellation Bancorp, and Independence Bancorp,
Inc., is based solely on the reports of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of CoreStates Financial Corp at December 31,
1995 and 1994, and the consolidated results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1993 the Company changed
its method of accounting for post-employment benefits.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
January 17, 1995,
except for Note 2, as to which the date is April 9, 1996
43
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
OVERVIEW
CoreStates Financial Corp ("CoreStates") consummated its acquisition of
Meridian Bancorp, Inc. ("Meridian") on April 9, 1996 ("the Acquisition"). The
Acquisition was accounted for under the pooling of interests method of
accounting. CoreStates' originally reported results of operations have been
restated herein to include Meridian's results of operations for 1995 and all
other periods presented. Meridian's results of operations for all periods
presented include United Counties Bancorporation ("United Counties"), which was
acquired by Meridian on February 23, 1996 in a transaction accounted for under
the pooling of interests method of accounting.
Subsequent to the Acquisition, certain merger-related charges will be recorded
in 1996 in connection with a change in strategic direction related to Meridian's
problem assets, to conform Meridian's consumer lending charge-off policies to
those of CoreStates, and for expenses directly attributable to the Acquisition.
These charges will be partially offset by gains on the sale of branches and
gains on the curtailment of pension benefits. These merger-related charges and
gains are expected to net approximately $175.0 million pre-tax in 1996, or $0.57
per share after-tax. On a pre-tax basis, it is expected that the merger-related
charges will consist of a $70.0 million provision for loan losses, severance
costs of $55.0 million related to approximately 1,350 employees, $50.0 million
for the costs of consolidating and closing branches and other duplicate
facilities, and $45.0 million for other expenses directly attributable to the
Acquisition.
A primary strategic focus for CoreStates in 1995 involved Building Exceptional
Service Together ("BEST"), its corporate-wide process redesign. Similarly,
Meridian developed a process redesign plan ("59.9") of its own in 1995. See
"Strategic Actions in 1995" beginning on page 47.
Earnings - In 1995, CoreStates achieved record earnings due to continued growth
- --------
in basic banking businesses, driven primarily by an increase in net interest
income and reductions in operating expenses resulting from the implementation of
BEST and 59.9. CoreStates' "operating earnings" for 1995, defined as net income
excluding the BEST and 59.9 related net restructuring charges, merger-related
charges, gains on exchange of equity securities, and a gain related to a change
in ownership interests in an affiliate joint venture, were $727.0 million, or
$3.28 per share, reflecting growth of 23.8% on a per share basis when compared
to operating earnings of $599.6 million, or $2.65 per share in 1994. Operating
earnings for 1994 exclude merger-related charges and a restructuring credit. The
net restructuring charges, gain on affiliate joint venture, gains on exchange of
equity securities and merger-related charges are discussed below. CoreStates
recorded net income of $655.2 million, or $2.95 per share in 1995, compared to
net income of $433.2 million, or $1.91 per share in 1994.
Operating results, key performance ratios and per share information are
summarized in the following table (in millions, except per share):
<TABLE>
<CAPTION>
Percentage
increase (decrease)
-------------------------
<S> <C> <C> <C> <C> <C>
1995 1994 1993 '95/'94 '94/'93
-------- -------- -------- ------ ------
Net interest income (taxable equivalent..... $2,200.2 $2,107.5 $2,060.6 4.4% 2.3%
basis) ======== ======== ========
Net Income.................................. $ 655.2 $ 433.2 $ 538.1 51.2 (19.5)
Exclude after-tax effects of:
Net restructuring charge (credit)......... 82.2 (1.0) 11.4
Gain on joint venture..................... (11.8) - -
Merger-related charges.................... 10.0 167.4 -
Gains on exchange of equity securities.... (8.6) - -
-------- -------- --------
Operating earnings.......................... $ 727.0 $ 599.6 $ 549.5 21.2 9.1
======== ======== ========
Operating earnings per share................ $ 3.28 $ 2.65 $ 2.40 23.8 10.4
======== ======== ========
Return on average assets (a)................ 1.63% 1.37% 1.27%
Return on average equity (a)................ 19.43 16.54 15.95
Net interest margin......................... 5.47 5.33 5.27
Expense/revenue ratio(a).................... 57.70 62.94 63.40
Average common shares outstanding........... 222.268 226.234 228.580
</TABLE>
(a) Calculated based on "Operating earnings."
44
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
OVERVIEW - continued
The largest contributor to the $127.4 million improvement in operating
earnings for 1995 was a $92.7 million, or 4.4% increase in taxable equivalent
net interest income. The net interest margin for 1995 was 5.47%, 14 basis
points above 1994. The increases in taxable equivalent net interest income and
net interest margin were primarily related to improved interest rate spreads on
deposits and prime-based loans, higher earnings on non-interest bearing funding,
reduced non-performing loans, and loan growth, particularly in credit card
outstandings and asset-based lending at Congress Financial Corporation
("Congress Financial"), CoreStates' commercial finance subsidiary. Of
CoreStates' two sources of operating revenue, net interest income and non-
interest income, net interest income is the largest, comprising 71% and 72% of
total revenue in 1995 and 1994, respectively. Net interest income and the net
interest margin at CoreStates continue to benefit from the interest rate risk
management strategy of maintaining a relatively neutral interest rate risk
sensitivity and avoiding speculative interest rate positions. For a detailed
description of CoreStates' interest rate risk management practices, see the
"Asset and Liability Management" section beginning on page 67.
Also contributing to the improvement in 1995 operating earnings was a $49.9
million, or 2.8%, decrease in non-financial expenses excluding significant and
unusual items as discussed on page 82, and a $55.6 million, or 7.1%, increase in
non-interest income, excluding the significant and unusual items as discussed on
page 80. The financial impact of those aspects of the process redesigns
implemented during 1995 was to increase revenue by $9.5 million and decrease
non-financial expenses by $79.8 million, for an aggregate increase in operating
earnings of $89.3 million pre-tax, or $0.25 per share after-tax.
Key performance measures based on operating earnings are among the highest in
the banking industry. Returns on average equity and assets were 19.43% and
1.63%, respectively, in 1995, compared to 16.54% and 1.37%, respectively, in
1994. The 1995 Salomon Brothers Superregional Bank composites for returns on
average equity and assets were 16.90% and 1.33%, respectively. The Salomon
Brothers Superregional Bank composite includes CoreStates and is comprised of
19 U.S. Superregional banking companies.
CoreStates' expense/revenue ratio (total operating expenses, excluding other
real estate owned expenses, as a percentage of total revenues) was 57.7% in
1995. This compares to an expense ratio of 62.9% in 1994. The expense/revenue
ratio improved throughout each quarter of 1995 as a result of the process
redesigns and merger-related efficiencies.
The business line segment experiencing the highest growth in 1995 was Consumer
Financial Services, which generated a $55.7 million, or 45.5%, increase in its
net income for 1995, reflecting a $63.5 million, or 9.4%, increase in net
interest income and a $27.0 million, or 4.5%, decline in non-financial expenses.
Consumer Financial Services' growth in net interest income was primarily driven
by higher average credit card balances and wider deposit spreads. The decline
in non-financial expenses resulted from the impact of the process redesign and
reduced FDIC premiums. The Wholesale Banking segment, the largest contributor
to net income, also made a strong contribution to 1995 operating earnings
growth, improving net income by $43.5 million, or 20.4%. Meridian results have
not been integrated into business line reporting for 1995 and 1994. For a more
detailed analysis of the performance of CoreStates' business lines, refer to the
"Business Line Results" section beginning on page 51.
Restructuring Charges - In March 1995, CoreStates completed an intensive
---------------------
review of its operations and businesses and announced a corporate-wide process
redesign plan, which restructured its banking services around customers and
enhanced employees' authority to make decisions to benefit customers. As a
result of this process redesign, CoreStates recorded a $110.0 million pre-tax
restructuring charge, $70.0 million after-tax or $0.31 per share in March 1995.
In subsequent quarters, CoreStates recorded restructuring credits of $11.8
million, $7.5 million after-tax or $0.03 per share, primarily related to gains
on the curtailment of pension benefits associated with employees displaced
during 1995 and gains on the sale of branches which were sold as a result of the
process redesign. In June 1995, Meridian completed an internal review of its
operations and business and announced a company-wide plan designed to improve
operating performance and competitive position. As a result of this review,
Meridian recorded a $32.0 million pre-tax restructuring charge, $20.8 million
after-tax or $0.09 per share in the second quarter of 1995. Subsequently,
Meridian recorded a net restructuring credit of $1.6 million, $1.0 million
after-tax, primarily related to gains on the curtailment of pension benefits
associated with employees displaced during 1995. For a more detailed discussion
of the process redesign and related restructuring charge, see "Strategic Action
in 1995 - Process Redesign" beginning on page 48.
45
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
OVERVIEW - continued
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 other
partners, admitted a fifth partner and increased the ownership interest of an
existing partner. As a result of the change in its ownership interest,
CoreStates recognized a pre-tax gain of $19.0 million, $11.8 million after-tax
or $0.05 per share, in the first quarter of 1995.
1995 Merger-Related Charges - In the fourth quarter of 1995, Meridian paid
---------------------------
$10.0 million, or $0.05 per share, of non-deductible costs associated with the
Acquisition.
Gains on Exchange of Securities - During 1995, United Counties recorded pre-
-------------------------------
tax gains of $13.6 million, $8.6 million after-tax or $0.04 per share, on the
exchange of equity securities.
1994 Merger-Related Charges - Upon consummation of their respective
---------------------------
acquisitions by CoreStates in 1994, Independence Bancorp, Inc. ("Independence")
and Constellation Bancorp ("Constellation") recorded merger-related charges in
connection with a change in strategic direction related to problem assets and to
conform consumer lending charge-off policies to those of CoreStates, and for
expenses directly attributable to the acquisition. These merger-related charges
totaled $167.4 million after-tax, or $0.74 per share. On a pre-tax basis, the
merger-related charges consisted of a $145.0 million provision for loan losses,
a $32.0 million addition to the OREO reserve, $13.0 million for the writedown of
purchased mortgage servicing rights and related assets, and $63.7 million for
expenses directly attributable to the acquisitions including $13.0 million of
severance costs related to approximately 715 employees.
1993 Restructuring Charge - In 1993, Meridian downsized its mortgage banking
-------------------------
operations and as a result, recorded a pre-tax restructuring charge of $17.5
million, $11.4 million after-tax or $0.05 per share. Subsequently, in 1994
Meridian recorded a gain of $1.6 million pre-tax, $1.0 million after-tax, on the
curtailment of pension benefits.
Comparison of 1994 to 1993 - CoreStates' operating earnings for 1994 of
--------------------------
$599.6 million, or $2.65 per share, grew 10.4% on a per share basis when
compared to $549.5 million or $2.40 per share in 1993. The growth in 1994
operating earnings was primarily due to a $46.9 million, or 2.3% increase in
taxable equivalent net interest income, improved credit quality resulting in a
$55.2 million, or 29.1%, reduction in the provision for losses on loans
(excluding the $145.0 million of merger-related provisions recorded in 1994) and
a $40.9 million decline in non-financial expenses excluding restructuring and
merger-related charges.
Accounting Change in 1993 - Effective January 1, 1993, CoreStates adopted
-------------------------
Statement of Financial Accounting Standards No. 112, "Employers' Accounting for
Post Employment Benefits" ("FAS 112"). FAS 112 requires that employers accrue
the costs associated with providing benefits, such as salary and benefit
continuation under disability plans, when payment of the benefits is probable
and the amount of the obligation can be reasonably estimated. CoreStates
recognized the January 1, 1993 transitional liability of $24.2 million, $15.7
million after-tax or $0.06 per share, as the cumulative effect of a change in
accounting principle in 1993.
Non-performing Assets - Non-performing assets at December 31, 1995 totaled
$268.3 million, a decline of $172.4 million or 39.1% from December 31, 1994.
Non-performing real estate assets were down $105.6 million or 35.7% and non-
performing commercial loans were down $40.5 million or 35.8%. At December 31,
1995 the allowance for loan losses of $670.3 million was 290.4% of non-
performing loans. This compares to $681.1 million and 190.7% at December 31,
1994.
46
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
STRATEGIC ACTIONS IN 1995
Acquisitions
CoreStates' strategy for growth focuses first on servicing existing customers
and second on expanding its businesses and customer base. CoreStates evaluates
merger and acquisition opportunities of both banks and non-banks where potential
for shareholder value enhancement, strategic growth and franchise development
exist. CoreStates makes acquisitions to supplement corporate and business line
strategies, not solely to drive earnings growth. Emphasis is placed on
opportunities which extend existing markets into adjacent geography and deepen
market share within existing markets. Acquisition opportunities are evaluated
by a specialized staff aided by teams of business line managers who are
responsible for planning and executing due diligence and integration activities.
Acquisition of Meridian - On April 9, 1996, CoreStates acquired Meridian
-----------------------
Bancorp, Inc. ("Meridian"). Meridian was a Pennsylvania bank holding company
with approximately $15.2 billion in assets and $12.1 billion in deposits at
March 31, 1996. In this transaction, approximately 81.1 million shares of
CoreStates' common stock were issued to Meridian shareholders. The transaction
is being accounted for under the pooling of interests method of accounting.
Strategically, this acquisition combines two strong performing banking
companies; creates a leading market position in the region that includes the
prime economic centers of eastern Pennsylvania, northern Delaware, and central
and southern New Jersey; extends the combined company's market to 47 counties in
the three states; and creates a company with $3.9 billion of equity having the
resources and capital to support investments in growth and in improved services
to customers.
In addition to the cost efficiencies and revenue enhancements expected from
implementation of BEST and "59.9", CoreStates expects this in-market acquisition
to achieve pre-tax operating efficiencies of approximately $186.0 million, and
to add to earnings per share in 1997. The complexities of merger and
restructuring activities may have an impact on the timing of earnings, expense,
and operating efficiencies.
On February 23, 1996, Meridian acquired United Counties Bancorporation
("United Counties"), a $1.6 billion asset New Jersey bank holding company in a
transaction accounted for as a pooling of interests. For each United Counties
common share outstanding, 5.0 shares of Meridian's common stock were issued.
Pending regulatory approvals, consolidations of bank subsidiaries and
operations are expected to begin in the second quarter of 1996 with the
consolidation of Meridian's Pennsylvania bank subsidiary into CoreStates' lead
Pennsylvania bank, CoreStates Bank, N.A. ("CBNA"). Other consolidations also
scheduled for the second quarter of 1996 include the combination of Meridian
Bank NJ, CoreStates New Jersey National Bank ("NJNB") and the consolidation of
Meridian's Delaware Trust Company into CBNA. The interstate consolidation of
CBNA and NJNB, previously scheduled for January 1996, has been postponed until
the fourth quarter of 1996 in order to accommodate the consolidations of the
Meridian bank subsidiaries.
47
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
STRATEGIC ACTIONS IN 1995 - continued
Nationwide Remittance Centers - On January 27, 1995, CoreStates acquired
-----------------------------
Nationwide Remittance Centers, Inc. ("NRC"), the largest independent remittance
processor in the United States. Fees earned by NRC were approximately $20
million. NRC was merged into CoreStates' third-party remittance processing
company, CashFlex, a subsidiary of CBNA, creating the second largest lockbox
processor in the country at the time of the acquisition. With the addition of
NRC, CashFlex services more than 60 major financial institutions and processes
approximately 300 million payment items annually. This acquisition affirmed
CoreStates' commitment to growing its fee-based businesses and to building on
its expertise in cash management.
Process Redesign
BEST - In order to build upon CoreStates' strong financial condition and
----
sustain previous financial successes in the competitive financial services
environment in which CoreStates operates, management commenced an intensive
review of all aspects of CoreStates' operations and businesses in September
1994. The objectives of the process redesign were: (i) to enhance CoreStates'
customer focus; (ii) to accelerate the culture change already in progress at
CoreStates; and (iii) to improve productivity. In March 1995, CoreStates
completed its review and approved and announced a corporate-wide process
redesign plan, which restructured its banking services around customers and
enhanced employees' authority to make decisions to benefit customers.
As a result of the BEST process redesign, CoreStates recorded a $110 million
restructuring charge, $70 million after-tax or $0.31 per share, in March 1995.
When complete, the process redesign will result in the elimination of 2,800
positions, or 2,600 full-time equivalent employees. The breakdown of the
eliminated positions was as follows: (i) 450 positions resulting from a hiring
freeze in place from September 1994 to April 1995; (ii) 530 positions resulting
from expected attrition during implementation of the process redesign; (iii) 930
employees who have elected to accept an enhanced severance package; and (iv) 890
layoffs. At December 31, 1995, CoreStates had 13,598 full-time equivalent
employees which includes reductions for the impact of the hiring freeze,
attrition and 1,600 employee displacements. The components of the restructuring
charge and related cash outflow were as follows (in millions):
<TABLE>
<CAPTION>
Restructuring Charge
--------------------------
Requiring Cash
Cash Outflow
Total Outflow To-date(a)
------------ ------------ ----------
<S> <C> <C> <C>
Severance costs................. $72 $72 $28
Office reconfiguration costs.... 16 7 -
Branch closing costs............ 15 7 2
Outplacement costs.............. 3 3 2
Miscellaneous................... 4 2 1
--- --- ---
Total.......................... $ 110 (b) $91 $33
=========== === ===
- -------------------------
</TABLE>
(a) CoreStates' liquidity has not been significantly affected by these cash
outflows.
(b) Subsequent to recording the $110 million restructuring charge, CoreStates
recorded restructuring credits of $11.8 million, $7.5 million after-tax or
$0.03 per share, primarily related to gains on the curtailment of pension
benefits associated with employees displaced during 1995 and gains on the
sale of branches which were sold as a result of the process redesign plan.
The net BEST pre-tax restructuring charge recorded in 1995 was $98.2
million, or $0.28 per share.
The severance charge relates to the separation package which will be paid to
those employees who have elected to accept that package and to those employees
laid off. Cash payments under separation packages commenced in April 1995 and
will continue for varying terms. 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 streamlining
and consolidating center city Philadelphia operations. This streamlining and
consolidating process will occur over the 18-month period which began in April
1995. The branch closing charge relates to asset write-offs and lease buyouts
incurred in the process of consolidating and closing 37 branch offices.
48
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
STRATEGIC ACTIONS IN 1995 - continued
Future cash outflows to be incurred in implementing the BEST process redesign
plan, which in accordance with generally accepted accounting principles were not
included in the restructuring charge, will include approximately $12 million for
capital expenditures and approximately $17 million in operating expenses. Since
April 1995, the amount of capital expenditures related to the process redesign
were approximately $8 million and the amount of incremental operating expenses
that were incurred related to the process redesign were approximately $8
million.
The principal themes of the BEST process redesign plan are as follows:
. Redefine the organizational structure around customers, customer segments
and markets, not products;
. Streamline and consolidate functions and processes;
. Vacate 1.2 million square feet of occupied space in 45 buildings,
including the 37 branches;
. Use technology to automate services and processes; and
. Employ tiered pricing strategies and streamline product pricing.
Implementation of the BEST process redesign plan is expected to occur within
an 18-month period which began in April 1995. By mid 1996, the process redesign
is expected to generate cost reductions of approximately $180 million and
revenue enhancements which will yield additional revenue of approximately $30
million, combining to improve CoreStates' net income at an annual rate of $0.57
per share. The process redesign was originally expected to have a positive
impact on net income of approximately $0.11 per share in 1995 (excluding the
restructuring charge and subsequent credits) and $0.45 per share in 1996. Due
to timing, the impact of the process redesign on 1995 net income was
approximately $0.18 per share, exceeding the original estimate for 1995 by $0.07
per share. The favorable variance to original projections for 1995 is
principally related to personnel savings and mostly due to the realization of
benefits earlier than planned. CoreStates does not anticipate exceeding the
annual run rate of $0.90 per share. A breakdown of expected expense reductions
is as follows: personnel related - $98 million; professional and outside
services - $20 million; occupancy - $18 million; office supplies - $9 million;
telecommunications - $5 million; travel and entertainment - $5 million;
furnishings - $4 million; and all other - $21 million.
59.9 - In January 1995, Meridian commenced an internal review of its
operations and businesses. The purpose of this review was to improve the
company's operating performance and competitive position by streamlining and
consolidating functions and work processes and by increasing the focus on
customers and service levels. The improvement is to be measured by Meridian's
expense to revenue ratio (non-interest expenses as a percentage of non-interest
income and net interest income on a taxable-equivalent basis), with a goal of
reducing the ratio to 59.9% or lower by the end of the first quarter of 1996. In
June 1995, Meridian completed this review and announced a company-wide plan to
be implemented over a period of approximately twelve months from that date.
The expense to revenue ratio goal, however, was reached ahead of schedule,
with the ratio improving to 57.3% for the third quarter of 1995 and 56.7% for
the fourth quarter of 1995. The ratio was 60.6% for the year 1995 and 67.6% for
1994. Without the reduction in FDIC deposit insurance premiums in the second
half of 1995, the ratio would have been 59.8% for the third quarter of 1995,
58.5% for the fourth quarter of 1995, and 61.4% for the year 1995.
As a result of this review, Meridian recorded a net restructuring charge of
$30.4 million in 1995. A restructuring charge of $32.0 million, $20.8 million
after-tax or $0.09 per share, was recorded in the second quarter of 1995. This
charge was reduced by a net gain of $1.6 million on the curtailment of employee
benefits, as discussed later. The components of the restructuring charge
and related cash outflow were as follows (in millions):
49
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
STRATEGIC ACTIONS IN 1995 - continued
<TABLE>
<CAPTION>
Requiring Cash Outflow
Cash Through
Total Outflow December 31
--------- --------- ------------
<S> <C> <C> <C>
Severance and Other Employee Related
Costs................................... $16 $16 $ 9
Lease and Other Contract Terminations.... 2 2 1
Building and Other Asset Write-Downs..... 11 - -
Professional Fees........................ 3 3 3
--- --- ---
Total................................. $32 $21 $13
=== === ===
</TABLE>
The severance charge relates to a separation package given to eligible
employees based on years of service. Cash payments commenced in July 1995 and
will continue for varying terms. Lease and other contract terminations include
estimated payments related to bank branch closings and the consolidation of
brokerage activities.
Building and other asset write-downs include amounts related to buildings,
equipment, and intangible assets written-off as a result of branch closings and
other consolidations. Professional fees include consulting fees and legal
expenses incurred during the review process. At December 31, 1995, cash
payments of $12.5 million and non-cash charges of $6.0 million have been charged
against the restructuring reserve. Meridian believes that the balance remaining
in this reserve at December 31, 1995 of $13.5 million will be sufficient to
absorb remaining expenses.
In the second half of 1995, Meridian recorded a restructuring gain of $3.8
million related to the curtailment of future pension benefits associated with
employees terminated during that period. This gain was partially offset by a
curtailment loss of $2.2 million related to healthcare and other post-retirement
benefits for employees terminated and those expected to be terminated in the
future as a result of the "59.9" program, resulting in a net gain of $1.6
million.
Implementation of the plan began at the end of the second quarter of 1995 and
will continue over approximately the next twelve months from that date. Over
that period, the process is expected to reduce net operating expenses on an
annualized pre-tax basis by $55 million while providing recurring revenue
enhancements of $13 million, increasing after-tax earnings on an annual basis by
$44 million, or $0.20 per share. The gross reduction in operating expenses is
expected to approximate $73.2 million and is composed of salaries and benefits
of $54.2 million, furniture and fixtures expense of $16.1 million, and occupancy
of $2.9 million. Offsetting these savings are foregone revenues, which are
directly related to expense reductions, mainly in branches, of $7.5 million and
one-time implementation costs of $10.7 million, resulting in net expense
reductions of $55 million.
The process was expected to result in the elimination of approximately 1,100
positions of approximately 7,100 then-existing positions. The eliminations were
to result from attrition and a partial hiring freeze in effect from January 1995
to June 1995, from strategic alliances with outside firms and from layoffs. At
December 31, 1995, Meridian had 5,779 full-time equivalent employees which
reflects approximately 450 employee layoffs, as well as other types of
reductions.
Cautionary Statement
Certain statements contained herein are not based on historical fact 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 the securities and capital
markets; acquisitions; consumer spending and savings; expense levels; and tax,
securities, and banking laws and incentives.
50
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
STRATEGIC ACTIONS IN 1995 - 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 objective of creating superior growth in
shareholder value by focusing on the performance and value creation potential of
CoreStates' component businesses.
This section of management's discussion and analysis presents the performance
results of CoreStates' four core businesses: Wholesale Banking; Consumer
Financial Services; Trust and Investment Management; and Electronic Payment
Services, Inc. ("EPS"), an affiliate. Each core business is comprised of well-
defined business lines with market or product specific missions.
For the 1995 and 1994 reporting periods, Meridian is shown as a separate
entity. During 1996, as Meridian is integrated into CoreStates, Meridian's
respective business components will be blended into CoreStates' business line
reporting. It is expected that there will be a one to two quarter transition
period before complete business line reporting can be established.
Corporate overhead, processing and support costs, and the loan loss provision
are allocated along with the impact of balance sheet management and hedging
activities of CoreStates. A matched maturity transfer pricing system is used to
allocate interest income and interest expense. All business lines in the four
core businesses are allocated equity utilizing regulatory risk-based capital
guidelines as well as each business line's fixed assets and other capital
investment requirements. Intangible assets and associated costs are also
allocated to relevant business units. The development of these allocation
methodologies is a continuous process at CoreStates and as a result, certain
amounts in prior years have been reclassified for comparative purposes.
The Corporate category includes the income and expense impact of unallocated
equity, unusual or non-recurring items not attributable to the operating
activities of the major business areas, emerging business activities not
directly related to the four major business areas, and miscellaneous items.
The earnings contribution of these core businesses is reflected in the table
below (in millions):
51
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
<TABLE>
<CAPTION>
BUSINESS LINE RESULTS - continued
Consumer Trust and
Wholesale Financial Investment
(taxable equivalent basis) Banking Services Management
-------------------- -------------------- --------------------
1995 1994 1995 1994 1995 1994
--------- --------- -------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income............. $ 666.0 $ 637.5 $ 739.3 $ 675.8 $ 27.4 $ 30.4
Provision for losses on loans... 44.7 49.2 59.4 56.6 1.0 1.1
Non-interest income............. 229.9 219.9 171.6 175.5 96.6 98.3
Non-financial expenses.......... 436.6 457.1 567.5 594.5 100.3 112.9
------- -------- ------- ------- ------- --------
Income before income taxes...... 414.6 351.1 284.0 200.2 22.7 14.7
Income tax expense.............. 157.8 137.8 106.0 77.9 8.5 5.5
------- -------- ------- ------- ------- --------
Net income...................... $ 256.8 $ 213.3 $ 178.0 $ 122.3 $ 14.2 $ 9.2
======= ======== ======= ======= ======= ========
Return on average assets........ 1.58% 1.39% 2.24% 1.66% 2.03% 1.33%
Return on average equity (a).... 27.09 25.01 49.86 34.07 54.62 34.07
Average assets.................. $16,261 $ 15,396 $ 7,953 $ 7,364 $ 699 $ 692
Average equity (a).............. 948 853 357 359 26 27
<CAPTION>
EPS, Inc.
Affiliate Corporate Meridian Total
-------------------- -------------------- -------------------- --------------------
1995 1994 1995 1994(d) 1995 1994 1995 1994
------- ------- -------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income............. $ (5.3) $ (6.0) $ 78.4 $ 72.9 $ 694.4 $ 696.9 $2,200.2 $2,107.5
Provision for losses on
loans.......................... - - - 145.0 38.9 27.3 144.0 279.2
Non-interest income............. 49.1(b) 31.8 58.4 36.7 276.6 226.3 882.2 788.5
Non-financial expenses.......... - - 169.9 (c) 148.1 611.2 (c) 605.7 1,885.5 1,918.3
------- ------- --------- ------- -------- ------- -------- --------
Income (loss) before
income taxes................... 43.8 25.8 (33.1) (183.5) 320.9 290.2 1,052.9 698.5
Income tax expense
(benefit)...................... 15.8 9.1 (8.3) (67.4) 117.9 102.4 397.7 265.3
------- ------- -------- ------- ------- ------- -------- --------
Net income (loss)............... $ 28.0 $ 16.7 $ (24.8) $(116.1) $ 203.0 $ 187.8 $ 655.2 $ 433.2
======= ======= ======== ======= ======= ======= ======== ========
Return on assets................ 37.33% 21.41% (0.72)% (2.81)% 1.25% 1.16% 1.47% 0.99%
Return on equity (a)............ 700.00 417.50 (2.55) (11.30) 14.17 13.85 17.51 11.95
Average assets.................. $ 75 $ 78 $ 3,458 $ 4,137 $16,259 $16,164 $ 44,705 $ 43,831
Average equity (a).............. 4 4 974 1,027 1,433 1,356 3,742 3,626
</TABLE>
(a) Equity is allocated to business lines in the four core business segments by
applying a factor of 5.0% against average risk-weighted assets and adding
intangible assets.
(b) Includes a gain of $19.0 million pre-tax, $11.8 million after-tax, related
to changes in CoreStates' investment in the EPS, Inc. Affiliate joint
venture.
(c) Includes net restructuring charges of $98.2 million pre-tax, $62.5 million
after-tax, and $30.4 million pre-tax, $19.7 million after-tax, for
Corporate and Meridian, respectively, related to process redesigns.
(d) Includes $120.0 million in the provision for losses on loans and $75.0
million in other operating expenses related to the Constellation
acquisition and $25.0 million in the provision for loan losses and $33.7
million in other operating expenses related to the Independence
acquisition. The combined after-tax impact was $167.4 million.
52
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
BUSINESS LINE RESULTS - continued
Wholesale Banking is organized into six business lines for reporting purposes:
Corporate Middle Market, Corporate and Institutional Banking, Investment
Banking, Cash Management, International Banking, and Specialized Banking.
Wholesale Banking continued its strong performance in 1995 as net income
increased $43.5 million or 20.4% above 1994. Contributing to this increase was
growth in net interest income, growth in non-interest income, a decline in the
provision for losses on loans, and a decline in non-financial expenses. Net
interest income was $28.5 million or 4.5% above 1994 due to higher loan volumes,
lower levels of non-performing loans, and higher loan fees. Average loan
outstandings increased 6.0% from the prior year. Average non-performing loans
declined 41.3% from the prior year. Cash management revenues (including
international service fees) were 7.2% above 1994. Growth in international fees,
and the value of collected deposits more than offset an $8.3 million decline in
service charges. Non-financial expenses declined $20.5 million or 4.5% largely
due to a $3.6 million decline in FDIC expense and expense reductions related to
the impact of BEST.
Net income contributed to Wholesale Banking by Congress Financial increased
$11.3 million for 1995, primarily due to an increase in net interest income
resulting from loan growth, partially offset by an increase in the loan loss
provision of Congress Financial.
Consumer Financial Services includes the following business lines: Community
Banking, Specialty Products and Mortgage Banking. Specialty Products ("SPG")
includes Credit Card, Student Lending, CardLinx (CoreStates' merchant credit
card processing business) and SynapQuest (CoreStates' credit card processing
subsidiary). Results for December 1994 and the full year of 1995 include the
acquisition of Germantown Savings Bank ("GSB"). Since the GSB transaction was
accounted for under the purchase method, restatement of financial information
prior to the acquisition was not required.
Net income for Consumer Financial Services of $178.0 million in 1995 was $55.7
million or 45.5% over 1994. The increase was primarily experienced in the
Community Banking and SPG business lines. The growth in net income was driven
by a $63.5 million or 9.4% increase in net interest income along with a $27.0
million or 4.5% decline in non-financial expenses. This growth was partially
offset by a decrease in non-interest income of $3.9 million or 2.2% and an
increase in the loan loss provision related to increased charge-offs in the
credit card portfolio.
The increase in net interest income of $63.5 million in 1995 included a $32.8
million increase related to GSB. Net interest income growth of $14.0 million
in the credit card portfolio resulted from a $195 million, or 15.3% increase in
average credit card outstandings, partially offset by the impact of a 50 basis
point reduction in credit card interest rate spreads. In addition to the growth
due to the GSB acquisition, net interest income in Community Banking increased
$11.4 million, or 2.1%. Favorable deposit spreads in Community Banking, up 24
basis points, generated a $31.8 million increase which was partially offset by
declines due to a $460 million decrease in deposits equating to a $13.2 million
reduction and narrowing loan spreads, down 25 basis points, for a $12.2 million
reduction.
Non-interest income was down $3.9 million, or 2.2%. Mortgage Banking income
declined by $4.2 million primarily the result of the sale of the Constellation
servicing portfolio in 1994. In addition, in March of 1994, Community Banking
sold its Marine lending portfolio at a gain of $1.5 million. Revenue generated
from third-party sales of annuities and mutual funds was down $0.9 million. A
full year of non-interest income in 1995 from the GSB acquisition resulted in an
additional $3.4 million when compared to 1994.
Non-financial expenses declined by $27.0 million, or 4.5%. Ideas implemented
relating to BEST generated savings of $31.9 million. A June 1, 1995 reduction
in FDIC premiums from $0.23 to $0.04 per $100 of deposits resulted in an expense
decrease of approximately $12.0 million. A full year of expenses in 1995 from
the GSB acquisition resulted in an $18.4 million increase in year-to-year
expenses.
53
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
BUSINESS LINE RESULTS - continued
Trust and Investment Management is organized into four business lines:
Institutional Trust, Personal Trust, Private Banking, and Investment Management.
The Corporate Trust business, included in Institutional Trust, was divided into
its Pennsylvania and New Jersey components and sold to Mellon Bank and Bank of
New York, respectively, in October 1995. CoreStates recognized a $7.4 million
pre-tax gain on these sales during the fourth quarter of 1995 which is reflected
in the Corporate Category. The Corporate Trust transactions provide for
potential additional gains in 1996, pending determination of customer retention
by the buyers.
Net income of $14.2 million in 1995 was $5.0 million above 1994. Net interest
income declined by $3.0 million or 9.9% primarily due to lower demand balances
in Institutional Custody and Corporate Trust. During the first six months of
1995, Corporate Trust experienced lower balances compared to 1994 due to higher
levels of refinancings in 1994. As a result of the Corporate Trust sale,
Institutional Trust also experienced lower balances versus 1994 during the last
quarter.
Non-interest income declined by $1.7 million primarily due to the loss of fourth
quarter fee revenues related to the sale of Corporate Trust. Also contributing
to the decline was customer attrition in Institutional Trust and lower non-
recurring fees in Personal Trust. Partially offsetting these shortfalls was new
business and fee growth in Institutional Custody, the impact of 9.6% asset
growth in the CoreFund family of mutual funds and approximately $700 thousand of
BEST revenue enhancements. Expenses were $12.6 million or 11.2% below 1994
levels due principally to the impact of the BEST program and expense savings
related to the sale of Corporate Trust.
Electronic Payment Services, Inc. ("EPS") was formed in December 1992 through
the contribution of the consumer electronic transaction processing businesses of
CoreStates, Banc One Corporation, PNC Bank Corp and KeyCorp. EPS is one of the
nation's leading providers of ATM and POS processing services. CoreStates
received cash, preferred stock and common stock for the contribution of its MAC
ATM network and BUYPASS POS businesses. CoreStates' ownership at formation was
31%.
In December 1993, CoreStates and EPS mutually agreed to enter into a
recapitalization of EPS involving the EPS preferred stock held by CoreStates.
In exchange for substantially all of the preferred stock, CoreStates received
from EPS a ten-year 6.45% note providing for equal principal payments over the
life of the note. The recapitalization did not affect the amount of the
deferred gain generated in the 1992 contribution of the business lines to EPS,
but changed the timing of the recognition of that $138 million deferred gain
from a five-year period beginning in 1996 to a ten-year period which began in
1994.
On March 27, 1995, National City Corp was added as a partner and KeyCorp
increased its investment to become a full partner, resulting in a decrease in
CoreStates' share of ownership in EPS from 31% to 20%. As a direct result of
this change in ownership interests, CoreStates recognized a pre-tax gain of
$19.0 million, $11.8 million after-tax in 1995.
Net income in 1995 from CoreStates' investment in EPS totaled $28.0 million,
including the $11.8 million gain. Excluding the gain, net income in 1995 was
substantially unchanged from net income in 1994 as lower interest income
realized from the promissory note was offset by higher equity earnings. The
1995 results included $30.1 million of non-interest income from CoreStates'
equity interest in EPS' net income, deferred gain recognition, and promissory
note interest income, partly offset by interest carrying charges on the net
investment in EPS.
54
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
BUSINESS LINE RESULTS - continued
The Corporate Category's net income for 1995 includes the net restructuring
charge of $62.5 million after-tax related to BEST. After adjusting for the
BEST restructuring charge and 1994 merger-related costs, the Corporate
Category's net income was below 1994 by $17.0 million. The most noteworthy
variances year-to-year were a $20.5 million decline in securities gains,
partially offset by a $7.4 million gain recognized on the sale of the Corporate
Trust business in 1995. Additionally, increases in non-interest income and non-
financial expenses, resulted from growth in CoreStates' third party remittance
processing company, CashFlex, which, as an emerging business, is currently
included in the Corporate Category. The largest contributing factor to
CashFlex's growth was the acquisition of NRC in January 1995. Fees earned by
NRC were approximately $20 million and expenses added by NRC were approximately
$20 million. In 1994, net income includes $167.4 million in merger-related
charges recorded in the first half of 1994 for the acquisitions of Constellation
and Independence. The merger-related charges included a $145 million loan loss
provision. The merger-related charges had an after-tax impact of $127.8
million for Constellation and $39.6 million for Independence.
Meridian recorded income, before restructuring and merger-related charges (net
of taxes), of $232.7 million in 1995 compared to net income of $187.8 million in
1994, an increase of 24%. The return on average assets for 1995 was 1.43%
before these charges compared to 1.16% a year ago, and the return on average
equity reached 16.24% compared to 13.85% in 1994. After restructuring and
merger-related charges of $40.4 million ($29.7 million after-tax), net income in
1995 was $203.0 million. The growth in net income reflects primarily the
underlying strength of the core banking operations and the success of the "59.9"
process redesign.
Restructuring and merger-related charges include $30.4 million related to
Meridian's process redesign, and $10.0 million of non-tax deductible expenses
associated with the Acquisition.
Net interest income was $694.4 million in 1995 compared to $696.9 million in
1994. The net interest margin was 4.67% in 1995 compared to 4.73% in 1994. The
decline in the net interest margin in 1995 resulted from asset and liability
repricing in an interest rate environment that was slightly higher than in 1994.
The impact of repricing was partially offset by a change in the mix of interest-
earning assets, as growth in the loan portfolio was funded by a decline in the
investment portfolio.
The provision for possible loan losses was $38.9 million in 1995 compared to
$27.3 million in 1994. The higher provision reflects the growth in loans over
the past year.
Non-interest income was $276.6 million in 1995 compared to $226.3 million in
1994, an increase of $50.3 million or 22%. Non-interest income for 1995
included $13.6 million of gains on the exchange of equity securities. Trust
revenues increased by $11.3 million between the two years, partially as a result
of the acquisition of McGlinn Capital Management, an investment advisory firm,
in July 1994. Broker-dealer and investment banking revenues increased by $8.0
million because of increased trading volumes. Such revenues were impacted in
1994 by a valuation adjustment of the trading portfolios. Service charges on
deposits and fees from other customer services increased by $12.4 million over
last year, mainly as the result of the introduction of new consumer-related
demand deposit products. Mortgage-banking fees declined by $4.7 million,
reflecting lower servicing volumes due to a reduction in scope of Meridian's
mortgage banking activities.
Excluding restructuring and merger-related charges, non-interest expenses were
$570.8 million in 1995 compared to $605.7 million in 1994, a decrease of $34.9
million, or 6%. The implementation of process redesign, including significant
reductions in staff levels, the restructuring and downsizing of Meridian's
mortgage banking activities, and a reduction in FDIC deposit insurance premiums
contributed to the decline in expenses.
55
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
CAPITAL STRENGTH
Capital strength must be evaluated in the context of business risk exposures,
including asset quality, interest sensitivity, liquidity and earnings
diversification. CoreStates places a significant emphasis on the maintenance of
strong capital which promotes investor confidence, helps provide access to the
credit markets under favorable terms and enhances the flexibility to capitalize
on business growth and acquisition opportunities. Capital is managed for each
CoreStates subsidiary based on its respective risks and growth opportunities, as
well as regulatory requirements. CoreStates is positioned to take advantage of
market opportunities to strengthen capital. A shelf registration, which is in
place, provides for the issuance of a wide-range of securities including:
senior and subordinated debt, straight and convertible preferred securities and
equity. The relative strength of CoreStates' capital is reflected in the chart
"Average Common Equity/Assets".
<TABLE>
<CAPTION>
Average Common Equity/Assets Average Common
------------------------------ Equity/Assets
(in percent) ------------------------------
<S> <C> <C>
Superregional
CoreStates Composite *
------------ --------------
1995 8.37% 7.51%
1994 8.27 7.46
1993 7.93 7.34
1992 7.20 6.67
1991 6.68 6.14
</TABLE>
* The Salomon Brothers Superregional Bank Composite
At December 31, 1995, common shareholders' equity totaled $3,876 million or 8.4%
of total assets, compared with $3,731 million or 8.1% at year-end 1994. The
year-end 1995 equity to assets ratio for the Salomon Brothers Superregional Bank
Composite was 7.7%. CoreStates has achieved steady internal capital generation
throughout the past five years. Common shareholders' equity increased over the
five years ended December 31, 1995 at a compound annual growth rate of 6.9%,
while dividends paid increased at a compound annual growth rate of 7.2%.
During 1995, CoreStates increased its quarterly dividend by 23.5% to $0.42 per
share beginning January 1996. CoreStates declared dividends on its common stock
of $1.44 per share in 1995, $1.24 per share in 1994 and $1.14 per share in
1993. The common dividend payout ratio on an operating earnings basis was 43.9%
for 1995, compared to 46.4% for 1994.
In March 1995, the Board of Directors approved an expansion of CoreStates'
common stock repurchase program from an annual maximum of 2% of outstanding
shares to an annual maximum of 5%, excluding purchases for employee benefit
plans and CoreStates' dividend reinvestment plan. Given the acquisition of
Meridian, the common stock repurchase program was terminated due to constraints
associated with the pooling of interests method of accounting that CoreStates is
using to account for the acquisition of Meridian. During 1995, CoreStates
repurchased approximately 10.3 million shares of its common stock and reissued
3.5 million treasury shares under employee benefit plans and the dividend
reinvestment plan.
56
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
CAPITAL STRENGTH - continued
CoreStates and its bank subsidiaries are subject to minimum risk-based and
leverage capital guidelines issued by the Federal Reserve Board and Comptroller
of the Currency. The measurement of risk-based capital takes into account the
credit risk of both balance sheet assets and off-balance sheet exposures. These
guidelines require minimum risk-based capital ratios of 4% for Tier 1 capital
and 8% for total capital. In addition, a minimum leverage ratio of Tier 1
capital to quarterly average total assets of 3% is required for banking
organizations that are rated as strong. Internal capital generation continues
to be strong and to exceed internal growth requirements. The following table
illustrates CoreStates' risk-based and leverage capital ratios at December 31,
1995 and 1994:
<TABLE>
<CAPTION>
Risk-based and Leverage Capital Ratios
- ----------------------------------------
At December 31,
- ----------------------------------------
(in millions)
<S> <C> <C>
1995 1994
------- -------
Capital
Tier 1 capital (a)....................... $ 3,534 $ 3,387
Tier 2 capital (b)....................... 1,357 1,352
Total qualifying capital................. 4,891 4,739
Assets
Risk-adjusted assets..................... 38,431 36,816
Average assets-leverage capital basis.... 44,247 43,631
Ratios
Tier 1 capital ratio..................... 9.2% 9.2%
Total capital ratio...................... 12.7 12.9
Tier 1 leverage ratio.................... 8.0 7.8
</TABLE>
- ------
(a) Consists primarily of common shareholders' equity, less goodwill and
certain intangible assets.
(b) Consists primarily of qualifying subordinated debt and the allowance for
loan losses, within permitted limits.
Bank regulators apply substantially the same capital requirements to
CoreStates' banking subsidiaries. A bank is considered "well capitalized", the
highest regulatory category, if it has minimum Tier 1 and Total risk-based
capital ratios of 6% and 10%, respectively, and a minimum Tier 1 leverage ratio
of 5%. As illustrated in the following table, all of CoreStates' banking
subsidiaries qualified as "well capitalized" at December 31, 1995.
<TABLE>
<CAPTION>
Bank Regulatory Capital Ratios Capital Ratios
- ------------------------------ -------------------------------
At December 31, 1995 Tier 1 Total Leverage
- -------------------- ------ ----- --------
<S> <C> <C> <C>
CoreStates Bank, N.A.................. 7.6% 10.6% 6.8%
New Jersey National Bank.............. 12.1 15.3 7.6
CoreStates Bank of Delaware, N.A...... 6.6 11.2 6.3
Meridian Bank Pa...................... 10.3 13.0 9.0
Delaware Trust Company................ 14.8 16.1 11.2
Meridian Bank New Jersey.............. 23.6 24.8 9.1
</TABLE>
57
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
RISK MANAGEMENT
Risk management at CoreStates encompasses the oversight of a broad range of
risks undertaken by the company including credit, market, product, processing,
systems and general business risk. During 1995, the management of these risks
was further integrated within the Risk Policy Office following the BEST process
redesign. Also as a result of the process redesign, risk officer positions were
created within technology/operations and capital markets to sharpen the focus of
risk management within these areas. CoreStates' ongoing evolution of its risk
management practices takes place within the framework of a corporate risk
management program. The objective of the program is a continued strengthening
of CoreStates' risk management culture and its policies, processes and controls
for managing risk on an integrated basis throughout the company. The discussion
of risk management is covered further in the following sections on "Credit
Quality" and "Asset and Liability Management."
CREDIT QUALITY
Credit Risk Management
The management of credit risk at CoreStates relies on maintaining a diversified
loan portfolio, limiting exposures to a given industry or market segment, and on
a well-established credit culture. Early identification and communication of
deterioration/problems in the portfolio, early recognition of non-performing
assets and charge-offs, maintaining reserves that are strong, and a credit
advisory team process that provides all lenders in both wholesale and consumer
businesses access to the most senior and experienced credit officers in the
organization, are key components of this credit culture. Underlying this credit
culture is a tradition of extensive and ongoing credit training and
comprehensive and well-communicated policies and procedures. In 1995, a
reorganization of the credit process was put into place which moved decision
making closer to the customer while maintaining CoreStates' traditional and
successful quality maintenance processes. One way this was accomplished was
combining the Chief Risk Policy Office and the Chief Lending Offices and by
delegating Chief Lending Office authority to a cadre of CoreStates' most
experienced credit personnel throughout the organization for exercise in each
business group or market. Further, while continuing a successful process of
managing individual credits, greater emphasis has been placed on portfolio
management issues.
In acquiring a company whose businesses include the extension of credit, it is a
priority of CoreStates to extend its credit culture to the newly acquired
institution. In planning for the integration of Meridian into CoreStates in
1996, CoreStates will continue this policy. CoreStates' credit policies,
together with the more informal practices and standards of conduct which define
CoreStates' existing credit culture, will be extended to the combined
organization through a formal communications and training program. The
extensive credit officer structure in place at CoreStates will also be extended
to the combined organization. Each significant market will have at least one
assigned senior credit officer who would be supported by one or more credit
officers. Extension of the CoreStates credit culture to the Meridian
organization will also be facilitated through cross fertilization of key
personnel. The loan quality process in place at CoreStates, which is designed
as an early warning system for problem loan identification and portfolio issues,
will be used in the combined organization. CoreStates' favorable experience
with these processes and their successful use in the integration of other
organizations, along with a stringent due diligence process and early
integration of the acquired bank's portfolio, ensure that CoreStates' credit
quality standards continue to be maintained.
The maintenance of CoreStates' asset quality standards is supported by a
comprehensive and independent assessment of credit quality and portfolio
management by a Credit Review department, which reports to the Audit Committee
of the Board of Directors. The consultative role played by Credit Review with
respect to line management and the Risk Policy Office was further enhanced
during 1995, broadening the nature of counsel provided to lenders in the area of
portfolio review.
Wholesale Loan Portfolio
CoreStates has traditionally maintained limits on industry, market and borrower
concentrations as a way to diversify and manage credit risk. Management's
current policy is to limit industry concentrations to 50% of total equity and to
limit market segment concentrations to 10% of total assets. CoreStates manages
industry concentrations by applying these dollar limits to a family of
industries that have common risk characteristics. This management process is
reflected in the following chart, which illustrates each industry that exceeds
10% of total shareholders' equity.
58
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
<TABLE>
<CAPTION>
CREDIT QUALITY - continued
<S> <C> <C>
Wholesale Loans by Industry
- -----------------------------
At December 31, 1995 Outstandings % of
- -----------------------------
Plotting Points for a Graph as a % Outstandings
- -----------------------------
of equity non-performing
------------- --------------
Retail Trade................. 26.2 0.8
Communications............... 23.7 0.2
Non-bank Finance (a)......... 23.6 0.6
Healthcare................... 21.3 0.5
Automobile Dealers........... 20.4 0.1
Agri-finance................. 17.1 0.5
Real Estate Construction..... 15.7 1.9
Depository Institutions...... 15.3 -
Trucking and Auto Leasing.... 14.0 0.4
Apparel Manufacturing........ 12.4 2.0
</TABLE>
(a) Includes insurance, mortgage, mutual funds and finance companies.
The discussion below highlights the following wholesale portfolios: retailing
and apparel because of the challenges in these industries today; the Congress
Financial portfolio, because of the continued growth in the commercial finance
segment; the international financial institutions portfolio, as this is a
significant growth business; and real estate loans, due to the overall size of
the combined commercial and residential portfolios.
Retailing and Apparel - This specialized lending, which includes the retail
trade, apparel manufacturing and food retailing industries, is directed to
local, regional and national retailing chains and apparel manufacturing. Credit
extensions are a major part of an overall product strategy to develop multi-
faceted relationships and are primarily used to support customers' working
capital requirements. Additionally, emphasis is placed on providing short-term
trade letters of credit to customers who purchase product off-shore. The
largest concentrations in the portfolio are in apparel retailing and
manufacturing, food retailing, specialty stores and general merchandise.
Furthermore, the challenges in these industries today present an excellent
growth opportunity for Congress Financial.
The following table summarizes CoreStates' outstandings in retailing and
apparel at December 31, 1995 and 1994.
<TABLE>
<CAPTION>
Retailing and Apparel
- ---------------------------------
At December 31,
(in millions) 1995 1994
------------------------------------- ---------------------------------
Non- % of Non- % of
------------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstandings performing loans Outstandings performing loans
-------------- ------------ ------- ------------- ----------- -----
Congress Financial, various (a).. $ 647.1 $ 3.0 0.5 $ 663.3 $ 6.4 1.0%
Apparel.......................... 306.1 9.5 3.1 334.9 34.1 10.2
Food Retailing................... 185.9 0.6 0.3 200.7 8.8 4.4
Specialty Stores................. 169.8 3.6 2.1 142.9 4.6 3.2
General Merchandise.............. 87.4 0.5 0.6 108.9 0.4 0.4
Miscellaneous Retail............. 287.6 0.8 0.3 215.5 1.2 0.6
-------- ----- -------- -----
Total.......................... $1,683.9 $18.0 1.1 $1,666.2 $55.5 3.3
======== ===== ======== =====
</TABLE>
(a) Includes commercial finance outstandings of $173.9 million and factoring
receivables of $473.2 million at December 31, 1995; comparable amounts at
December 31, 1994 were $119.8 million and $543.5 million, respectively.
59
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
CREDIT QUALITY - continued
Congress Financial - Congress Financial's loan portfolio is a combination of
factoring receivables and commercial finance, a significant growth business.
The commercial finance portfolio continued to experience strong, geographically
diverse growth, increasing 16.3% on a year-to-year basis. Credit quality
continues to be consistent with Congress Financial's lending philosophy and
historical trends.
The ability to structure and syndicate large, complex transactions primarily
collateralized by accounts receivable and inventory, remains a mainstay of
Congress Financial's loan growth.
<TABLE>
<CAPTION>
Congress Financial Portfolio
- -------------------------------
At December 31,
- -------------------------------
(in millions) 1995 1994
---------- ----------
Commercial finance portfolio:
<S> <C> <C>
Loans...................... $2,068.4 $1,778.7
Non-performing............. 11.4 16.9
% of loans plus OREO..... 0.6% 0.9%
Factoring receivables (a).... $ 557.3 $ 622.4
</TABLE>
- --------
(a) There were no non-performing factoring receivables at December 31, 1995 and
1994.
International Financial Institutions - Lending activities within International
Financial Institutions consist principally of dollar-denominated short-term,
trade-related credit transactions aimed at enhancing CoreStates' cash
management-based relationships with correspondents worldwide.
Exposure (which is defined as time balances, loans outstanding, bankers
acceptance and letters of credit) in International Financial Institutions at
December 31, 1995 and 1994 was distributed geographically as follows (in
millions):
<TABLE>
<CAPTION>
1995 1994
---------------------- -------------------
% of % of
-------- -------
Exposure total Exposure total
------------ -------- ---------- -------
<S> <C> <C> <C> <C>
Europe............. $1,124.4 38% $1,292.6 56%
Asia............... 1,017.8 35 518.8 23
Americas........... 730.2 25 453.0 20
Middle East........ 73.3 2 35.0 1
-------- --- -------- ---
Total exposure... $2,945.7 100% $2,299.4 100%
======== === ======== ===
</TABLE>
CoreStates' financial analysis focuses on the performance of individual
institutions (liquidity, profitability, asset quality, capitalization,
management and ownership), the unique attributes of individual markets (banking
regulations, central bank support, the domestic economic and political context,
balance of payment flows and reserve levels) and the interdependencies of those
markets. In higher risk markets, CoreStates' exposure is mitigated through
insurance or guarantees of the U.S. Export-Import Bank. The increase in Asia
and the Americas was due to the improved political and economic situations in
some countries, as well as a concerted and focused marketing effort through our
Asian branch network.
The following table summarizes CoreStates' exposure by type to international
financial institutions at December 31, 1995 and 1994. There were no non-
performing loans for the periods presented.
60
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
<TABLE>
<CAPTION>
CREDIT QUALITY - continued
International Financial Institutions' Exposure
- ----------------------------------------------
At December 31,
- ---------------
(in millions)
<S> <C> <C>
1995 1994
-------- --------
Time deposits....................... $1,538.8 $1,396.0
Acceptances......................... 513.5 261.1
Loans outstanding................... 582.2 395.0
Letters of credit................... 311.2 247.3
-------- --------
Total.............................. $2,945.7 $2,299.4
======== ========
</TABLE>
Real Estate Loans - Although continuing to improve, the regional real estate
market in which CoreStates operates is still experiencing some problems,
particularly in the commercial segment. In this segment, tenant downsizing
continues to plague the office building market raising particular concern with
current and future office building usage and values. Also, the retail sector
continues to require close monitoring due to problems in the retail industry.
In the residential market, although home sales leveled off in late 1995 after a
surge in mid-year, sales continue at a sufficient pace and the multi-family
market continues to be strong.
Total real estate related loans outstanding were $10,969 million at December
31, 1995, compared to $11,807 million at December 31, 1994. The decline from
year-end 1994 was principally due to the sale of residential mortgage loans.
Included within the broad classification of real estate loans are a number of
different lending categories with distinctly different risk factors and
performance. The construction and development loan portfolio was $608 million
or 1.9% of total loans at December 31, 1995. At December 31, 1995, 1.5% of
CoreStates' construction and development loan portfolio was non-performing,
compared to 1.4% for the remaining real estate loan portfolio. The table below
summarizes CoreStates' real estate loans outstanding.
<TABLE>
<CAPTION>
Real Estate Loans Completed
- -----------------
At December 31, projects/ Total
- ---------------
(in millions) real Construction/ investment real
development properties Residential Other (a) estate
--------------- -------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
1995
- ----
Year-end outstandings................. $ 608 $1,847 $5,649 $2,865 $10,969
Average loans outstanding............. 604 1,941 5,899 3,103 11,547
Non-performing loans.................. 9 37 49 57 152
% of year-end loans................. 1.5% 2.0% 0.9% 2.0% 1.4%
Net charge-offs....................... $ 1 $ 12 $ 17 $ 11 $ 41
% of average loans.................. 0.2% 0.6% 0.3% 0.4% 0.4%
1994
- ----
Year-end outstandings................. $ 599 $2,035 $6,148 $3,025 $11,807
Average loans outstanding............. 626 2,162 6,239 2,951 11,978
Non-performing loans.................. 15 50 60 87 212
% of year-end loans................. 2.5% 2.5% 1.0% 2.9% 1.8%
Net charge-offs....................... $ 11 $ 40 $ 28 $ 47 $ 126
% of average loans.................. 1.8% 1.9% 0.4% 1.6% 1.1%
</TABLE>
- -------------
(a) Principally commercial loans secured by owner-occupied real estate.
61
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
CREDIT QUALITY - continued
The largest category within real estate loans is residential mortgages, which
includes home equity loans of $2,579 million and multi-family residential
mortgages of $249 million. Total residential mortgages were $5,649 million or
17.8% of total loans at December 31, 1995. Loans in the Other real estate loans
category, primarily commercial loans collateralized by owner-occupied real
estate, accounted for 9.0% of total loans.
Another key to risk management in this portfolio is diversification by project
type. The following table illustrates CoreStates' construction and development
portfolio and completed projects/investment properties portfolio by project
type.
<TABLE>
<CAPTION>
Construction/Development and Completed Projects/Investment Properties
- ---------------------------------------------------------------------
Loans Outstanding by Project Type
- ---------------------------------
At December 31,
(in millions)
Construction/ Completed projects/
development investment properties Total
----------------------- -------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans % Non- Loans % Non Loans % Non
1995 outstanding performing outstanding performing outstanding performing
- ---- ----------- ---------- ------------- ----------- ------------ -----------
Residential development......... $268.2 3.2% $ 268.2 3.2%
------ --------
Commercial:
Land and site development..... 74.8 0.4 74.8 0.4
Apartments.................... 5.2 - $ 325.4 1.8% 330.6 1.8
Light industrial.............. 29.4 8.8 208.3 - 237.7 1.1
Hotels........................ 2.4 - 150.5 2.2 152.9 2.2
Office buildings.............. 49.6 - 469.5 3.9 519.1 3.5
Shopping centers.............. 42.3 - 411.7 1.0 454.0 0.9
Miscellaneous................. 135.9 0.1 281.8 1.8 417.7 1.2
------ -------- --------
Total commercial....... 339.6 0.9 1,847.2 2.0 2,186.8 1.8
------ -------- --------
Total............... $607.8 1.5 $1,847.2 2.0 $2,455.0 2.0
====== ======== ========
1994
- ----
Residential development......... $309.2 3.9% $ 309.2 3.9%
------ --------
Commercial:
Land and site development..... 90.1 3.3 90.1 3.3
Apartments.................... 2.1 - $ 352.8 1.9% 354.9 1.9
Light industrial.............. 39.4 5.3 251.6 6.1 291.0 6.0
Hotels........................ 2.5 11.8 148.7 2.8 151.2 3.0
Office buildings.............. 37.3 - 526.1 1.9 563.4 1.8
Shopping centers.............. 34.0 - 421.6 1.1 455.6 1.0
Miscellaneous................. 84.7 0.5 334.2 2.8 418.9 2.2
------ -------- --------
Total commercial....... 290.1 1.9 2,035.0 2.5 2,325.1 2.4
------ -------- --------
Total............... $599.3 2.5 $2,035.0 2.5 $2,634.3 2.6
====== ======== ========
</TABLE>
62
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
CREDIT QUALITY - continued
Consumer Lending Portfolio
Consumer loan outstandings (excluding credit card) increased by $145.5 million
or 2.3% from year-end 1994. The modest growth in the portfolio was impacted by
sales of approximately $141 million of student loans and approximately $132
million of home equity loans on the secondary market. The home equity loans were
sold for asset and liability management purposes.
Net loan charge-offs as a percentage of the average portfolio outstandings
increased from 23 basis points in 1994 to 52 basis points in 1995. Although
higher in 1995, net credit losses in this portfolio are below the average of our
competitors. This is an indication of the fundamental strength of CoreStates'
credit policies and ability to identify and mitigate risk factors in these
retail loan products.
<TABLE>
<CAPTION>
Consumer Lending Portfolio
- --------------------------
At December 31,
- ---------------
(in millions)
1995 1994
-------- --------
<S> <C> <C>
Year-end outstandings:
Home equity............... $2,579.2 $2,643.9
Indirect installment...... 1,771.6 1,716.0
Direct installment........ 996.5 965.3
Auto leasing.............. 1,167.3 1,043.9
-------- --------
Total.................. $6,514.6 $6,369.1
======== ========
Average loans outstanding.. $6,441.9 $6,323.8
Net charge-offs............ 33.3 14.3
% of average loans....... 0.52% 0.23%
<CAPTION>
Credit Card Portfolio
- ---------------------
At December 31,
- ---------------
(in millions)
1995 1994
-------- --------
<S> <C> <C>
Year-end outstandings...... $1,681.6 $1,492.0
Average loans outstanding.. 1,546.0 1,372.1
Net charge-offs............ 56.5 30.4
% of average loans........ 3.65% 2.22%
</TABLE>
Credit card outstandings increased 12.7% from $1,492.0 million at 1994 year
end to $1,681.6 million at 1995 year end. Average balance per active account
increased by 14.9% to $2,547. Beginning in the fall of 1994, marketing
campaigns shifted from pre-approved to invitations-to-apply, to further control
risk within the portfolio.
Economic conditions have negatively impacted credit card delinquency,
bankruptcy and credit losses. Net charge-offs have increased to 3.6% of average
loans, which is consistent with industry averages. CoreStates' credit policies
and procedures related to the credit card portfolio have been strengthened in
anticipation of the economic slowdown.
63
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
CREDIT QUALITY - continued
Allowance for Loan Losses
In CoreStates' methodology for determining appropriate levels of allowance for
loan losses ("ALLL"), each subsidiary which extends credit maintains an
allowance sufficient to absorb the anticipated loss inherent in its credit
portfolio. Factors included in management's determination of an adequate level
of ALLL are a statistical analysis of historical loss levels throughout an
economic cycle and one year of projected charge-offs, establishing a minimum
level below which a bank's ALLL is considered inadequate and a maximum level
above which is considered inappropriate. A quarterly evaluation of loss
potential on specific credits, products, industries, portfolios and markets as
well as indicators for loan growth, the economic environment and concentrations
assist in validating the position of the ALLL within those boundaries.
Management's evaluation of the adequacy of the ALLL is independently tested by
Credit Review. Prompt recognition of problem situations and prompt write-downs
of these assets to net realizable value is an important source of protection
against problems in the portfolio. Accordingly, over an economic cycle,
CoreStates has experienced relatively high levels of recoveries of prior charge-
offs, recovering approximately 38% of prior year loan charge-offs in 1995 and
approximately 31% in 1994.
In May 1993, the FASB issued Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan" ("FAS 114") and in
October 1994, the FASB issued Statement No. 118, "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures" ("FAS 118"). FAS 114
addresses accounting for impairment of certain loans and requires that impaired
loans within the scope of FAS 114 be measured based on the present value of
expected cash flows discounted at the loan's effective interest rate, or be
measured at the loan's observable market price or the fair value of its
collateral. FAS 118 amended FAS 114's income recognition policies and clarifies
FAS 114's disclosure requirements. As required, CoreStates adopted FAS 114 and
118 in the first quarter of 1995. The adoption of these standards did not have
an impact on CoreStates' provision for loan losses or allowance for loan losses,
nor change CoreStates' methodology for recognizing income on impaired loans.
The year-end 1995 allowance for loan losses totaled $670.3 million and
represented 2.11% of loans. This compares with a loan loss allowance at year-
end 1994 of $681.1 million, or 2.21% of loans. The allowance for loan losses
at year-end 1995 was 290.4% of non-performing loans, an increase over the year-
end 1994 coverage ratio of 190.7% and a reflection of the lower level of non-
performing loans at year-end 1995.
CoreStates' provision for loan losses in 1995 was $144.0 million, an increase
of $9.8 million from the $134.2 million, excluding $145.0 million of
Constellation and Independence merger-related provisions for losses on loans
provided in 1994. The increase in the provision for losses on loans was in
response to loan growth and higher charge-offs on credit card outstandings. Net
loan charge-offs in 1995 were $154.9 million or 0.5% of average loans. Net
charge-offs in 1994, excluding $103.1 million of loan charge-offs recorded in
the second quarter of 1994 related to problem assets acquired with
Constellation, were $154.4 million or 0.5% of average loans.
During 1994, Constellation and Independence recorded provisions for loan
losses of $120.0 million and $25.0 million, respectively, in connection with a
change in strategy related to problem assets, and to conform their consumer
lending charge-off policies to those of CoreStates.
64
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
CREDIT QUALITY - continued
The following table reflects the distribution of 1995 and 1994 net charge-offs
by loan type:
<TABLE>
<CAPTION>
Distribution of Net Charge-Offs
- ---------------------------------
For the Year Ended December 31,
- ---------------------------------
(in millions) 1995 1994
------------------------------- -------------------------------
% of % of
Total Total
Net % of net Net % of net
charge- Average charge- charge- Average charge-
Loan type offs loan type offs offs loan type offs
- --------- -------- ---------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Domestic:
Commercial
and industrial............. $ 35.7 0.3% 23.1% $ 94.8 0.8% 36.8%
Real estate:
Construction............... 0.8 0.1 0.5 10.9 1.7 4.2
Other...................... 39.9 0.4 25.8 114.8 1.0 44.6
Consumer:
Credit card................ 56.5 3.5 36.5 30.4 2.2 11.8
Installment................ 20.5 0.9 13.2 9.8 0.4 3.8
Other (a).................... 1.8 0.1 1.2 (0.6) - (0.2)
------ ----- ------ -----
Total domestic........... 155.2 0.5 100.3 260.1 0.9 101.0
Foreign....................... (0.3) - (0.3) (2.6) (0.4) (1.0)
------ ----- ------ -----
Total net charge-offs..... $154.9 0.5 100.0% $257.5 0.9 100.0%
====== ===== ====== =====
</TABLE>
- ------------
(a) Includes loans to financial institutions and lease financing.
Non-Performing Assets
Non-performing assets at year-end 1995 were $268.3 million, or 0.8% of total
loans plus other real estate owned ("OREO") and 0.6% of total assets. These
levels compared to total non-performing assets at year-end 1994 of $440.7
million, 1.4% of total loans plus OREO and 1.0% of total assets.
At year-end 1995, total non-performing assets were comprised of $223.6
million of non-accrual loans, $7.2 million of renegotiated loans and $37.5
million of OREO. The $172.4 million, or 39.1%, decline in total non-performing
assets as compared to year-end 1994 was principally experienced in CoreStates'
two largest portfolios; the commercial loan portfolio, declining $40.5 million,
or 35.8%, and the real estate portfolio which declined $105.6 million, or 35.7%.
Most of the decline in non-performing assets in these two portfolios was
attributable to improved credit quality and the receipt of payment against two
large non-performing credits.
CoreStates monitors the movements within the non-performing portfolio closely.
The following table illustrates the components of the changes in non-performing
assets during 1995, 1994 and 1993:
65
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
<TABLE>
<CAPTION>
CREDIT QUALITY - continued
Changes in Non-performing Assets
- ----------------------------------
(in millions)
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Balance January 1,.......... $ 441 $ 626 $ 897
Additions................... 274 522 392
Return to accrual........... (30) (74) (96)
Payments.................... (299) (350) (337)
Charge-offs................. (118) (283) (230)
------- ------- -------
Net change.................. (173) (185) (271)
------- ------- -------
Balance December 31,........ $ 268 $ 441 $ 626
======= ======= =======
</TABLE>
The following table reflects the distribution of non-performing assets by loan
type at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
Distribution of Non-performing Assets
- -------------------------------------
At December 31,
- ---------------
(in millions) 1995 1994
------------------------------- -------------------------------
% of % Total % of % Total
Non- Loan non- Non- Loan non-
Loan type performing type performing performing type performing
- --------- ----------- ----- ----------- ----------- ----- -----------
<S> <C> <C> <C> <C> <C> <C>
Domestic:
Commercial and industrial......... $ 72.7 0.6% 27.1% $113.2 0.9% 25.7
Real estate:
Construction...................... 8.8 1.5 3.3 15.4 2.6 3.5
Other loans....................... 143.6 1.4 53.5 196.6 1.8 43.4
OREO.............................. 37.5 - 14.0 83.5 - 20.2
Consumer........................... - - - - - -
Other domestic loans (a)........... 5.7 0.3 2.1 31.8 1.9 7.2
------ ----- ------ -----
Total domestic.................... 268.3 0.9 100.0 440.5 1.5 100.0
Foreign loans....................... - - - 0.2 - -
------ ----- ------ -----
Total non-performing assets (b)... $268.3 0.8 100.0% $440.7 1.4 100.0%
====== ===== ====== =====
% of total assets.................. 0.6% 1.0%
====== ======
</TABLE>
(a) Includes loans to financial institutions and lease financing.
(b) The table does not include loans of $89 million and $78 million at December
31, 1995 and 1994, respectively, that are past due 90 days or more as to
principal or interest, but which remain on full accrual since such loans are
well secured and in the process of collection.
Non-performing assets at year-end 1994 declined $185.1 million, or 29.6%, as
compared to year-end 1993. The 1994 decline primarily reflected decreases in
non-performing assets in the real estate portfolio.
66
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is the process of directing and coordinating
activities that effectively control liquidity and interest rate risk.
CoreStates' philosophy includes a disciplined approach to asset and liability
management which calls for minimizing interest rate risk, maintaining a strong
balance sheet and a focus on achieving appropriate product spreads. This
disciplined approach contributes to the stability and strength of CoreStates'
net interest margin. CoreStates' asset and liability management is centralized
and individual subsidiaries are managed within the context of overall corporate
policies.
CoreStates' management emphasizes stable net interest income throughout rate
cycles, with the result that intermediate and longer term considerations take
precedence over short-term profitability. This commitment is evidenced by the
consistency of CoreStates' net interest margin over time. During the past three
years, a period of significant changes in economic conditions, competition and
interest rates, CoreStates' net interest margin has remained consistently above
industry averages as illustrated in the chart "Net Interest Margin".
<TABLE>
<CAPTION>
Net Interest Margin
- ---------------------
(In percent)
Net interest margin
------------------------------
Superregional
CoreStates Composite *
------------- ---------------
<S> <C> <C>
1995 5.47% 4.62%
1994 5.33 4.72
1993 5.27 4.86
</TABLE>
* The Salomon Brothers Superregional Bank Composite
CoreStates' net interest margin reflects relationship business activities
rather than interest rate risk taking. The strength of CoreStates' net interest
margin comes from the combination of healthy 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 funds. Areas of business such as credit card,
middle market lending, specialized lending and commercial finance at Congress
Financial produce attractive lending spreads. CoreStates' cash management
business provides a significant source of non-interest bearing funds, while the
retail franchise includes a substantial base of low cost funding. Emphasis on
profitable relationship business is supported by CoreStates' management
practices. CoreStates uses a matched maturity funds transfer pricing system
which focuses business managers on profitability, appropriate compensation for
embedded risks and overall pricing discipline. In addition to providing a
pricing tool, transfer pricing supports performance measurement and analysis of
net interest margin components.
67
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT - continued
Interest Rate Risk Management
Interest rate risk refers to potential changes in current and future net
interest income resulting from changes in interest rates, product spreads and
mismatches in the repricing between interest rate sensitive assets and
liabilities. At CoreStates, measurement of near term interest rate risk focuses
on potential changes in net interest income identified through computer
simulations against both rising and falling interest rates. Longer term
repricing risks are measured using potential changes in the present value of
future income streams inherent in current positions. Gap analysis is used to
manage strategy execution. All measurements of interest rate risk include the
impact of off-balance sheet activities. Under CoreStates' policy, rate changes
of at least 200 basis points in either direction over a six-month period are
simulated with rate related negative net interest income volatility over a
twelve-month horizon limited to 4% of shareholders' equity. Changes are
measured relative to a base forecast in which rates remain constant at current
levels. Based on historical data, 95% of the time rates have moved less than
200 basis points over a six-month period. Included in these simulations are all
contractual repricing risks, the impact of prepayments in the loan and
securities portfolios, potential spread and volume changes on consumer deposits
and fluctuations in the value of non-interest bearing funding sources.
CoreStates believes that the spread between the prime rate and financial market
rates is a function of both interest rates and credit conditions. While changes
in the prime spread are included in simulations, only that portion believed to
be interest rate related is subject to the policy guidelines. Estimated changes
in the present value are based on a 200 basis point parallel shift of the yield
curve and negative changes are limited to 10% of equity.
As a matter of practice, positions are generally managed to produce
significantly lower volatility than policy guidelines would permit. At December
31, 1995, net interest income simulations using a 200 basis point change in
short term interest rates showed 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. The repricing characteristics of those deposits
tend to be longer term; traditionally, pricing has been relatively stable for
long periods and pricing changes lag changes in financial market rates. While
this mix of relationship assets and liabilities provides excellent liquidity, it
results in considerable interest rate risk. This inherent mismatch (the
"relationship gap") of longer term fixed-rate liabilities funding short-term
rate sensitive assets generates significant exposure to declining interest rates
if not hedged.
CoreStates hedges this relationship gap through the use of both on and off-
balance sheet discretionary assets and liabilities. The typical offsetting
position is created by purchasing fixed-rate investment securities funded by
short-term liabilities, or by entering into interest rate swaps in which
CoreStates receives a fixed rate and pays a variable rate. The following
excerpts from the Interest Sensitivity Analysis shown on page 93 demonstrates
the basic mismatch of the relationship portfolios and the offsetting
discretionary position. 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.
68
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT - continued
<TABLE>
<CAPTION>
Selected Interest Sensitivity Balances
- --------------------------------------
At December 31, 1995
- --------------------
(in millions)
Months Years
---------------------------- ---------------------------
0-3 4-6 7-12 1-2 2-5 over 5 Total
-------- ------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Relationship Portfolios:
Total loans................ $ 20,226 $ 1,736 $ 2,035 $ 2,606 $ 3,924 $1,187 $31,714
Total consumer
deposits, net non-
interest funding.......... 9,297 3,051 4,563 3,541 4,798 7,136 32,386
Adjustments................ 775 (272) (422) (1,779) (4,155) 5,853 -
-------- ------- ------- ------- ------- ------ -------
Relationship gap......... 11,704 (1,587) (2,950) (2,714) (5,029) (96) (672)
-------- ------- ------- ------- ------- ------ -------
Discretionary Portfolios:
Assets..................... 4,554 1,961 3,693 2,859 4,629 1,286 18,982
Liabilities................ 16,093 486 329 83 414 905 18,310
-------- ------- ------- ------- ------- ------ -------
Discretionary gap........ (11,539) 1,475 3,364 2,776 4,215 381 672
-------- ------- ------- ------- ------- ------ -------
Combined gap............. $ 165 $ (112) $ 414 $ 62 $ (814) $ 285 $ -
======== ======= ======= ======= ======= ====== ==========
Cumulative gap........... $ 165 $ 53 $ 467 $ 529 $ (285) $ - $ -
======== ======= ======= ======= ======= ======= ==========
</TABLE>
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.
Consumer deposit spreads are a key element of net interest income. Rates on
savings and similar products have not risen as much as other financial market
rates, suggesting less room to lower rates if market rates decline. During
1995, deposit balances shifted from more liquid products to certificates and
non-bank alternatives with higher rates. Looking ahead, the spread on total
consumer deposits is subject to continued internal shifting to products with
narrower spreads such as certificates, balance runoff and potential pricing
pressure on liquid deposit accounts. Simulations include assumptions regarding
runoff, shifting across products as well as upward repricing of savings type
accounts in rising rate scenarios. Narrower spreads are generally assumed in
falling rate environments due to limited repricing opportunities. Those
assumptions are developed in conjunction with the business managers and, while
management believes its current simulation assumptions are realistic, it
recognizes that this is an area of potential volatility.
The spread between the prime rate and short-term market rates, such as LIBOR,
is also an important component of net interest income. That spread has widened
over the last several years compared to historic levels. While the risk of a
narrowing of the prime spread is not unique to CoreStates, a contraction in that
spread would reduce net interest income. In 1996, CoreStates intends to revise
the basis for pricing credit cards from prime to LIBOR, to reduce exposure to
the prime spread.
69
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT - continued
Off-balance Sheet Instruments and Derivative Activities - CoreStates uses off-
balance sheet derivative instruments primarily to manage CoreStates' interest
rate risk. CoreStates believes that interest rate risk management must be
coordinated with the management of liquidity and capital. Therefore, CoreStates
uses off-balance sheet instruments to modify its rate sensitivity and
consequently, avoids the unnecessary leverage and liquidity impairment which
would result from on-balance sheet alternatives. CoreStates also uses interest
rate contracts to provide risk management services for its customers.
Credit risk exists in a derivative transaction to the extent that there is a
favorable move in interest rates and the counterparty fails to perform. The
current credit exposure in a derivative transaction is the estimated cost to
replace the transaction at current market rates, while potential exposure is the
estimated cost to replace the transaction at future interest rates. CoreStates
monitors both the current and potential risk. CoreStates evaluates the credit
worthiness of all off-balance sheet counterparties using the same standards
applied in any other loan or credit transaction. In addition, CoreStates
requires collateral from counterparties when the risk exceeds an acceptable
threshold. Collateral agreements are determined based on the quality of
individual counterparties. As of December 31, 1995, the current cost to replace
CoreStates' derivatives portfolio was $278.7 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 December 31,
1995, the major balance sheet category to which they relate, and the associated
unrealized gains/losses:
70
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT - continued
<TABLE>
<CAPTION>
Outstanding Interest Rate Risk Related Derivatives
- --------------------------------------------------
At December 31, 1995
- -------------------- Interest Interest Interest
(in millions) rate rate rate caps Other
swaps futures and floors derivatives Total
--------- -------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Interest Sensitivity Adjustment:
Assets (primarily loans):
Notional amount...................... $3,115 $619 $ 10 $ 3,744
Unrealized gains..................... 117 1 118
Unrealized losses.................... (1) (1)
Deposits and other borrowings:
Notional amount...................... 5,937 925 6,862
Unrealized gains..................... 83 22 105
Unrealized losses.................... (8) (8)
Long-term debt:
Notional amount...................... 589 25 614
Unrealized gains..................... 24 24
Unrealized losses.................... (8) (8)
Spread Protection:
Assets (primarily loans)
Notional amount...................... 426 426
Unrealized gains..................... 2 2
Unrealized losses.................... (1) (1)
Deposits and other borrowings:
Notional amount...................... 100 100
Unrealized gains..................... 1 1
Unrealized losses....................
Anticipated Asset Sales:
Notional amount...................... 75 $106 181
Unrealized gains.....................
Unrealized losses.................... (1) (2) (3)
Total:
Notional amount............... $9,716 $619 $1,486 $106 $11,927
====== ======== ====== =========== =======
Unrealized gains.............. $ 224 $ 1 $ 25 $ - $ 250
====== ======== ====== =========== =======
Unrealized losses............. $ (18) $ - $ (1) $ (2) $ (21)
====== ======== ====== =========== =======
Net unrealized gains (losses). $ 206 $ 1 $ 24 $ (2) $ 229
====== ======== ====== =========== =======
</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 December 31, 1995, 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.
71
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT - continued
Interest sensitivity adjustments account for the majority of CoreStates'
derivative activities. CoreStates has a naturally asset sensitive balance sheet
as a result of its basic loan and deposit businesses. Commercial and consumer
loan activities tend to have short-term repricing characteristics versus the
longer term repricing nature of CoreStates' funding sources. These relationship
portfolios have a positive effect on earnings in a rising rate environment and a
negative effect in a falling rate environment. Therefore, CoreStates uses fixed
rate assets or off-balance sheet instruments with characteristics similar to
fixed rate assets to offset this risk. When off-balance sheet instruments are
used, cash balances are invested in shorter time periods and interest rate swaps
or other derivatives are used to "fix" the rate for longer terms similar to
those of CoreStates' liabilities. The risks in certain products, particularly
non-contractual deposits, are sometimes greater in one direction of rate change
than the other. To the extent that marginal amounts of deposits need protection
from falling rates but are likely to shift to higher rate instruments as
interest rates rise, caps and/or floors are a more appropriate hedge. CoreStates
has used interest rate floors in this manner to augment the risk protection
provided by the swaps and futures portfolios. By using swaps, futures and
options 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 $326 million of interest rate caps which offset that
risk by limiting the potential increase in funding costs.
For accounting purposes, the income effects of futures or swaps used to adjust
interest sensitivity or to protect a product spread are associated with either
the asset or the liability being managed. The amount recorded in net interest
income related to derivative financial instruments was $20.7 million in 1995 and
$93.4 million in 1994. 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 Year Ended
December 31,
(in millions) 1995 1994
----------------------------------------------- -------------------------------------------
Reported Impact Reported Impact
Average Yield/ Product of Average Yield/ Product of
Balance Cost Rate Derivatives Balance Cost Rate Derivatives
--------- ---------- ---------- ------------ -------- --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earning Assets
Time deposits..................... $ 1,929 6.32% 6.32% $ 1,623 4.37% 4.37%
Federal funds sold & trading
account.......................... 602 6.72 6.72 428 5.16 5.16
Investment Securities............. 6,430 6.17 6.11 0.06% 7,363 5.76 5.77 (0.01)%
Loans............................. 31,267 9.43 9.37 0.06 30,110 8.43 8.34 0.09
------- -------
Total Earning Assets.............. $40,228 8.72 8.66 0.06 $39,524 7.73 7.66 0.07
======= =======
Interest Bearing Funds
Savings, NOW, regular MMA......... $14,440 2.54 2.49 0.05 $15,435 1.88 2.17 (0.29)
Certificates...................... 9,132 5.39 5.42 (0.03) 7,993 4.28 4.40 (0.12)
------- -------
Total retail..................... 23,572 3.66 3.64 0.02 23,428 2.71 2.94 (0.23)
------- -------
Commercial & foreign deposits..... 1,758 5.10 5.23 (0.13) 1,411 3.80 3.84 (0.04)
Federal funds purchased &
short-term borrowings.......... 3,752 5.71 5.69 0.02 3,436 4.35 4.36 (0.01)
Long-term debt.................... 2,262 6.76 6.78 (0.02) 2,040 5.71 6.42 (0.71)
------- -------
Total wholesale.................. 7,772 5.88 5.91 (0.03) 6,887 4.64 4.86 (0.22)
------- -------
Total Interest Bearing Funds...... $31,344 4.17 4.17 - $30,315 3.12 3.35 (0.23)
======= =======
</TABLE>
72
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT - continued
It is important to note that derivatives usage, its impact on individual
balance sheet items and fluctuations in fair value should be viewed in the
context of overall risk management. As previously stated, if CoreStates did not
use derivatives, it would adjust cash positions to create the same interest
sensitivity position with approximately the same income results. However, if
cash transactions were used, the income of those activities would not be carried
as an income adjustment to other balance sheet products. Fluctuations in the
impact of derivatives shown on the above table are a function of market
conditions and do not indicate changes in risk positions.
The third category of derivative activity is the hedging of anticipated asset
sales. As fixed rate assets are accumulated for future sale, CoreStates is
exposed to a decline in sale price due to rising interest rates. Therefore,
CoreStates will enter into an interest rate swap or a forward rate agreement
which will increase in value if rates rise. The increased value on the
derivative is used to offset the decline in value of the cash asset.
Gains/losses on the derivative are deferred until the asset sale and recognized
as part of the sale transaction. In 1995, CoreStates sold fixed rate mortgages;
those sales were hedged primarily with fixed-pay mortgage swaps which amortized
with a reference portfolio of mortgage-backed securities. These swaps were
terminated as the mortgages were 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 December 31, 1995, the rates CoreStates has contracted to receive are
fixed for longer time periods than the rates CoreStates has contracted to pay.
Therefore, if interest rates fall, this portfolio will provide higher interest
income, offsetting a decline in interest income in relationship portfolios;
conversely if rates rise, the swap portfolio will produce less interest income
which will be offset by increased interest income in the relationship
portfolios. CoreStates also uses interest rate futures in a similar manner.
While swaps are used in both short and long term maturities, futures are used
primarily to extend the rate sensitivity of short-term assets to periods less
than one year. CoreStates' use of financial futures is largely concentrated in
Eurodollar and LIBOR contracts. Given the direction of its natural interest
sensitivity, CoreStates has not historically paid fixed rates on interest rate
swaps or used off-balance sheet instruments to extend its liabilities.
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 December 31, 1995.
73
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT - continued
<TABLE>
<CAPTION>
Repricing Schedule of Interest Rate Swaps
- -----------------------------------------
At December 31, 1995
- --------------------
(in millions)
Years
------------------------------------------------------
0-1 1-2 2-3 3-4 4-5 over 5 Total
------ ------- ------ ------ ----- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Receive Fixed/Pay Floating:
Receive Notional................... $3,596 $1,454 $1,191 $1,019 $ 605 $1,010 $8,875
Rate....................... 6.70% 6.36% 6.18% 7.08% 6.62% 6.95% 6.62%
Pay Notional................... $8,875 $8,875
Rate....................... 5.94% 5.94%
Pay Fixed/Receive Floating:
Pay Notional................... $ 105 $ 20 $ 25 $ 150
Rate....................... 7.57% 8.60% 9.24% 7.99%
Receive Notional................... $ 150 $ 150
Rate....................... 5.48% 5.48%
Receive Floating/Pay Floating:
(Basis Swaps)
Notional................... $ 281 $ 281
Receive Rate....................... 5.78% 5.78%
Pay Rate....................... 5.81% 5.81%
Receive Fixed/Pay Floating(a):
(Forward Start)
Receive Notional................... $ 205 $ 30 $ 175 $ 410
Rate....................... 6.32% 6.38% 7.03% 6.62%
Start Date Notional................... $ 260 $ 100 $ 50 $ 410
- ------------------------------------------
</TABLE>
(a) Pay rate will be determined on forward start date.
74
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT - continued
The following schedule illustrates CoreStates' interest rate risk related
derivative activity during 1995:
<TABLE>
<CAPTION>
Activity in Derivatives Products
- --------------------------------
Year Ended December 31, 1995
- ----------------------------
(in millions) Interest
Interest Interest rate caps
rate rate and Other
Notional Amounts swaps futures floors derivatives Total
- ---------------- -------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
As of December 31, 1994......... $10,743 $ 1,043 $1,553 $ 295 $13,634
Additions....................... 2,475 3,688 583 246 6,992
Terminated contracts(a)......... (855) (4,112) (100) (125) (5,192)
Maturities/amortization......... (2,647) - (550) (310) (3,507)
------- ------- ------ ----- -------
As of December 31, 1995......... $ 9,716 $ 619 $1,486 $ 106 $11,927
======= ======= ====== ===== =======
- --------------------
</TABLE>
(a) As of December 31, 1995, CoreStates had $2.4 deferred gains and $1.8
deferred losses related to terminated derivative contracts.
CoreStates' use of off-balance sheet instruments declined during 1995. As
various asset sales were consummated (primarily mortgage assets), the related
interest rate swaps and/or other derivatives used to protect the sales value
were terminated or allowed to expire. In addition, during the latter half of
1995, shifts in funding mix and increased loan volumes resulted in reduced need
for fixed rate asset sensitivity. Therefore, matured swaps were not fully
replaced and certain interest rate swaps were terminated.
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 December 31, 1995 and 1994.
<TABLE>
<CAPTION>
Trading and Customer Related Derivatives
- ----------------------------------------
At December 31,
- ---------------
(in millions)
1995 1994
---------------------------- ----------------------------
Notional Net assets Notional Net assets
amount (liability)(a) amount (liability)(a)
Interest Rate Swaps: ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
CoreStates receives fixed........... $ 115 $ 2 $ 192 $(4)
CoreStates pays fixed............... 115 (2) 192 4
Futures.............................. 2 - - -
Rate Locks:
CoreStates receives fixed........... 15 - - -
CoreStates pays fixed............... 15 - - -
Interest Rate Caps/Floors:
Sold................................ 517 (1) 424 (5)
Purchased........................... 517 1 424 5
Commitments to purchase/sell whole
mortgage loans and securities
(including when-issued securities):
Sold................................ 117 (2) 159 -
Purchased........................... 106 2 56 -
Other Options:
Sold................................ 247 6 295 5
Purchased........................... 624 1 1,028 4
Foreign exchange contracts........... 1,695 (b) 2(c) 1,842 2
------ --- ------ ---
Total Trading and Customer Related
Derivatives......................... $4,085 $ 9 $4,612 $11
====== === ====== ===
- -----------------
</TABLE>
(a) Average net assets (liabilities) during 1995 and 1994 were substantially the
same as the net assets (liabilities) at December 31, 1995 and 1994,
respectively.
(b) Foreign exchange contracts purchased and sold at December 31, 1995 were $853
million and $842 million, respectively.
(c) Gross assets and (liabilities) on foreign exchange contracts at December
31, 1995 were $16 million and $14 million, respectively.
75
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT - continued
Trading and Customer Related Derivative Activities - continued
Interest rate risk in interest rate swaps is generally offset by executing
similar transactions with other counterparties. Similarly, interest rate risk
in written caps and floors is largely offset.
Other options sold includes $200 million in "tender option bonds" for which
CoreStates is the remarketing agent. A municipality issues a fixed rate long
term bond which is sold with a shorter term variable rate to investors along
with an option to sell the bonds back to CoreStates prior to maturity at an
agreed upon price. CoreStates has the right to remarket any bonds it has
purchased. CoreStates receives the differential between the fixed rate paid by
the municipality and the short term rate paid to the investor. As interest rate
rise, the investor is likely to sell the bond to CoreStates who in turn will
remarket it at a higher rate. This reduces the spread earned by CoreStates. If
short term rates exceed the fixed rates paid by the municipality, CoreStates
will remarket the bonds at a discount and incur a loss. At December 31, 1995,
the average fixed rate outstanding on tender option bonds was 7.94% compared to
an average rate paid to investors of 4.59%.
Other options purchased includes $624 million of Treasury Float contracts.
These contracts give CoreStates the right to sell Treasury securities at future
dates at predetermined prices. Generally, the Treasury float contract customer
is a municipality which has defeased a bond issue with government securities and
has a mismatch in the timing of the maturity of the securities and the date the
funds are needed to pay the debt service. The fees paid for these contracts
represent CoreStates' maximum potential loss; at December 31, 1995 the
unamortized fees totaled $0.8 million which was carried in other assets.
Liquidity
Liquidity management allows a financial institution to meet potential cash
needs at a reasonable price under various operating conditions. Liquidity comes
from a variety of sources: the maturing of short-term assets, readily marketable
unpledged securities, and the ability to attract new funds. The ability to
securitize or sell other assets, such as loans, also enhances liquidity, as does
the structure and stability of existing funding sources. It is CoreStates'
practice to maintain a high degree of liquidity through a strong funding base of
core deposits combined with modest and diversified use of market sources and
relatively short-term maturities of discretionary asset portfolios.
CoreStates maintains sufficient liquidity to meet its obligations in a timely
and cost-effective manner. Management monitors current and projected cash
flows, and adjusts positions as necessary to maintain adequate levels of
liquidity. CoreStates emphasizes diversification of funding sources. By using
a variety of markets, limiting funds borrowed from a single investor, and
staggering maturities, the risk of potential funding pressure is significantly
reduced. Management also maintains a detailed liquidity contingency plan
designed to adequately respond to situations such as a decline in asset quality
or credit ratings, which could lead to liquidity concerns. Management analyzes
potential changes in major funding sources during difficult times, the amount of
runoff that may be expected, as well as available options to replace those
funds. The plan includes specific action steps to be taken in the event of
funding disturbances.
The cornerstone of CoreStates' liquidity position is a sizable and stable base
of core deposits acquired through customer relationships. Core deposits are
comprised of interest-bearing consumer savings products as well as non-interest
bearing consumer and commercial deposits. Core deposits averaged 70.1% of
assets in 1995 compared to 72.0% in 1994.
Core deposits are supplemented by discretionary funding sources from direct
customer contacts in both the domestic and international markets. These sources
include large denomination certificates of deposit, deposits in foreign branches
as well as federal funds, repurchase agreements, commercial paper and long-term
debt. Commercial paper is used primarily to fund Congress Financial. In
addition to commercial paper, Congress Financial is funded through the issuance
of medium-term notes and long-term debt. Growth in loans at Congress Financial
during 1995 accounted for most of the growth in discretionary funding sources.
At December 31, 1995, CoreStates had a $650 million revolving credit facility
from unrelated banks. The facility was established in support of commercial
paper borrowings, medium-term notes and general corporate purposes. There were
no borrowings under this facility at year-end 1995. CoreStates' liquidity is
further enhanced by its ability to raise funds in a variety of domestic and
international money and capital markets.
76
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT - continued
Liquidity - continued
Under a shelf registration filed with the Securities and Exchange Commission
("the SEC"), CoreStates had a broad range of debt and capital securities that
were registered but unissued of approximately $294 million at December 31, 1995.
During 1995, approximately $430 million of debt having various terms and
interest rates was issued under the shelf registration. Maturities and
retirements of long-term debt during 1995 were approximately $533 million. A
new shelf registration statement is expected to become effective in the first
half of 1996 increasing registered but unissued debt and capital securities to
$1.75 billion.
The tables on pages 92, 94 and 95 illustrate the maturity characteristics of
CoreStates' domestic certificates of deposit over $100 thousand, loan portfolio
and investment portfolio, respectively. For information regarding the maturity
characteristics of CoreStates' short-term funds borrowed and long-term debt, see
notes 10 and 11 to the financial statements.
Investment Portfolio
Within the context of the policies and practices previously outlined,
CoreStates maintains a portfolio of marketable debt securities to contribute to
a balanced interest rate risk position and to provide liquidity reserves.
Interest rate risk management disciplines require strict matching of interest
rate sensitivities and, therefore, CoreStates generally does not consider
changes in the market value of individual portfolios as significant to the
management of its interest sensitivity. The investment securities portfolio at
December 31, 1995 consisted of investments held-to-maturity with a carrying
value of $3,060 million and investments available-for-sale with a carrying
value of $2,572 million, compared to $6,298 million and $964 million,
respectively on December 31, 1994. Most of the decline in the investment
portfolio from 1994 resulted from maturities. Late in 1995, the FASB permitted
all institutions to reassess the appropriateness of the designation of
investment securities as held-to-maturity, and reclassify such securities to
available-for-sale. CoreStates reclassified $1,727 million in securities to
available-for-sale. The net unrealized gain on the securities reclassified was
$3.8 million, for a $2.5 million net of tax increase to shareholders' equity.
The available-for-sale portfolio also includes a bank stock portfolio and other
marketable equity securities. The accumulated net unrealized gain on available-
for-sale securities was $52 million at December 31, 1995, compared to $11
million at December 31, 1994. The increase in the net unrealized gain was
primarily due to the decline in interest rates and appreciation in the bank
stock portfolio.
SOURCES AND USES OF FUNDS
Total assets were $46.0 billion at year-end 1995, down slightly from year-end
1994. The loan portfolio grew to $31.7 billion at year-end 1995, up $959
million, or 3.1%, from year-end 1994. The increase in loans was primarily in
the commercial portfolio, including asset-based loans at Congress Financial, and
credit card outstandings. Loan growth at banking subsidiaries was funded by
maturities of investment securities, as the investment portfolio was reduced by
$1.6 million, or 22.4%, from year-end 1994. The book value of loans sold during
1995 was approximately $1.1 billion and was comprised of approximately $814
million of residential mortgages, $141 million of student loans and $132 million
of fixed-rate home equity loans. The impact of loan sales on results of
operations was not material.
Total deposits declined $811 million, or 2.3%, from year-end 1994. Domestic
interest-bearing deposits declined $1.1 billion, or 4.6%, from year-end 1994
principally as a result of merger-related attrition and the impact of lower
interest rates. Domestic non-interest bearing deposits increased $312 million,
or 3.6%, reflecting a year-end 1995 increase in customer activity. The net
decline in deposits was offset by loan sales and the decline in the investment
portfolio.
Total assets averaged $44.7 billion in 1995, up $874 million, or 2.0%, from
1994. Average loans increased $1.2 billion, or 3.8%, while average investment
securities decreased $933 million or 12.7%. Loans comprised 77.7% of
CoreStates' average earning assets in 1995, compared to 76.2% in 1994. A $491
million, or 2.0% increase in average interest bearing deposits resulted
primarily from the Germantown Savings Bank acquisition in December 1994.
77
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
REVIEW AND ANALYSIS OF EARNINGS
Operating Revenue
Operating revenue has two primary sources, net interest income and non-
interest income. On the accompanying chart ("Operating Revenue"), net interest
income is presented excluding the earnings benefit of balances maintained by
commercial customers as compensation for transaction oriented non-credit
products. Non-interest income and the previously mentioned earnings benefit of
balances maintained are presented separately. Net interest income and non-
interest income are discussed in further detail on the following pages.
Operating Revenue
- -----------------
(tax equivalent net interest income plus non-interest income-in millions)
<TABLE>
<CAPTION>
Operating Revenue
------------------------------------
Derived
Loan and from Non-
Investment Non-credit Interest
Interest Balances Income Total
------------- ----------- -------- ---------
<S> <C> <C> <C> <C>
1995 $1,993.8 $206.4 $882.2 $3,082.4
1994 1,923.5 184.0 788.5 2,896.0
1993 1,892.7 167.9 832.7 2,893.3
</TABLE>
Operating revenue for 1995, as adjusted for significant and unusual items,
increased 5.4% over 1994, primarily due to a $92.7 million, or 4.4%, increase in
total net interest income. The growth in net interest income for 1995 was
primarily in Consumer Financial Services, which experienced growth of 9.4%. The
items excluded from the 1995 to 1994 operating revenue comparison were: a $19.0
million 1995 gain related to changes in CoreStates' investment in the EPS
affiliate joint venture, a $7.4 million 1995 gain on the sale of the Corporate
Trust business, a $1.9 million 1994 gain on the sale of two Virgin Islands
branches, and investment securities gains in both years.
Operating revenue for 1994 adjusted for significant and unusual items,
experienced a 1.5% improvement over 1993, principally in the Wholesale Banking
business. The items excluded from the 1994 to 1993 comparison were gains of: a
$1.9 million from the sale of two Virgin Islands branches in 1994, $9.1 million
on the prepayment of long-term debt in 1993, $11.0 million on the sale of five
Virgin Islands branches in 1993, and net investment securities gains in both
years.
78
<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 from tax exempt assets as if the interest were
taxable. Net interest income on a taxable equivalent basis increased $92.7
million, or 4.4% in 1995, compared to an increase of $46.9 million, or 2.3% in
1994. 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. The following table compares taxable equivalent
net interest income for the years ended December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
Taxable Equivalent Net Interest Income
- --------------------------------------
For the Years Ended December 31,
(in millions)
Percentage
increase(decrease)
------------------
1995 1994 1993 '95/'94 '94/'93
-------- -------- -------- ------ ------
<S> <C> <C> <C> <C> <C>
Total interest income.............. $3,475.1 $3,014.6 $2,904.9 15.3% 3.8%
Tax equivalent adjustment.......... 33.3 39.4 49.5 (15.5) (20.4)
-------- -------- --------
Tax equivalent interest income..... 3,508.4 3,054.0 2,954.4 14.9 3.4
Total interest expense............. 1,308.2 946.5 893.8 38.2 5.9
-------- -------- --------
Tax equivalent net interest income.. $2,200.2 $2,107.5 $2,060.6 4.4 2.3
======== ======== ========
Interest rate spread................ 4.55% 4.61% 4.60%
Net interest margin................. 5.47% 5.33% 5.27%
</TABLE>
The increase in net interest income for 1995 was driven by improved spreads
earned on both deposits and prime-based loans and by improved earnings on non-
interest bearing funding sources in 1995's comparatively higher interest rate
environment. Also contributing to the increase in 1995 net interest income were
reduced non-performing loans and growth in relatively higher yielding loans,
particularly in the commercial portfolio including commercial finance lending at
Congress Financial, and credit card outstandings. Average commercial finance
loans at Congress Financial grew by $274 million, or 12.2%, in 1995 and average
credit card outstandings grew by $174 million, or 12.7%, on average.
The net interest margin is a key measure of net interest income performance.
It represents the difference between tax equivalent interest income, including
net loan fees earned, and interest expense, reflected as a percentage of average
earning assets. The net interest margin increased 14 basis points in 1995 to
5.47%, following a 6 basis point increase in 1994. The 1995 increase was driven
by improved product spreads in consumer financial services, increased volumes in
higher spread loan categories and improved earnings on non-interest bearing
funding sources. The 1994 net interest margin increase was principally
attributable to higher yields on loans due to a change in asset mix and the
increase in the prime rate during that year, partially offset by a lower yield
on the investment portfolio during 1994 as compared to 1993. The cost of
interest bearing deposits decreased by 2 basis points in 1994 as changes in the
pricing of consumer deposits in the rising rate environment lagged changes in
financial market rates. The cost of borrowed funds, which are more sensitive to
rising interest rates, increased during 1994 by 83 basis points.
The increase in net interest income in 1994 resulted primarily from an
improvement in interest rate spreads. While average total earning assets
experienced little growth in 1994, a change in asset mix resulted in the yield
on earning assets increasing to 7.73% in 1994 from 7.56%, partially offset by an
increase in the average cost of liabilities to 3.12% from 2.96% in 1993. The
loan portfolio experienced a $947 million increase in 1994 on average, mostly in
the higher yield credit card and asset-based lending portfolios, while the
comparatively lower yielding investment portfolio was reduced $670 million. An
increase in non-interest bearing funding sources of $308 million also
contributed to the 1994 increase in net interest income.
79
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
Net Interest Income - continued
For further detailed information regarding average balances, yields and
costs, see the consolidated average balance sheet on pages 84-85, and the
rate/volume analysis on page 88.
<TABLE>
<CAPTION>
Non-Interest Income
For the Years Ended December 31,
(in millions)
Percentage
increase(decrease)
------------------
1995 1994 1993 '95/'94 '94/'93
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Basic banking transactional
services(a)........................... $585.4 $560.9 $532.0 4.4% 5.4%
Income from investment in
EPS, Inc.............................. 30.1 31.8 13.2 (5.3) 140.9
Third party processing fees(b).......... 47.7 23.5 17.5 103.0 34.3
Mortgage banking income................. 16.1 11.8 29.7 36.4 (60.3)
Investment banking fees................. 18.1 20.5 30.5 (11.7) (32.8)
Trading gains........................... 35.4 23.4 44.5
Securities gains........................ 17.9 18.3 43.3
Other operating income.................. 91.5 96.4 99.9 (5.1) (3.5)
------ ------ ------
Non-interest income before
significant and unusual items......... 842.2 786.6 810.6 7.1 (3.0)
Significant and unusual
items................................. 40.0(c) 1.9(d) 22.1(e)
------- ------- -------
Total non-interest income............... $882.2 $788.5 $832.7 11.9 (5.3)
====== ====== ======
- ---------------------
</TABLE>
(a) Comprised of debit and credit card fees, service charges on deposit
accounts, trust income, and fees for international services.
(b) Includes revenues for CashFlex lockbox processing, Transys check
processing, and SynapQuest credit card and merchant processing.
(c) Reflects the $19.0 million pre-tax gain related to changes in the
investment in the EPS, Inc. affiliate joint venture, $13.6
million of pre-tax gains recorded on the exchange of equity securities, and
the $7.4 million pre-tax gain recorded on the sale of
the Corporate Trust business.
(d) Includes pre-tax gain of $1.9 million recorded on the sale of two Virgin
Islands branches.
(e) Includes pre-tax gains of $11.0 million recorded on the sale of five
Virgin Islands branches, $9.1 million on prepayments of long-term debt,
$1.4 million in excess recoveries from the settlement of a previously
charged off loan at Independence, and $0.6 million recorded on the sale of
United Counties' merchant credit card operations.
Non-interest income for 1995, excluding significant and unusual items,
increased 7.1% from 1994, primarily reflecting an increase in third-party
processing fees. Third-party processing fee income for 1995 increased $24.2
million, or 103.0%, principally as a result of the January 27, 1995 acquisition
of Nationwide Remittance Centers, Inc. ("NRC"). Revenues in CoreStates' basic
banking transactional businesses (discussed in detail below) grew 4.4% in 1995
as fees for international services increased $7.0 million, or 8.0%, trust income
increased $9.6 million, or 6.2%, and service charges on deposit accounts
increased $4.6 million, or 1.9%.
For 1994, reported total non-interest income decreased $44.2 million or 5.3%,
and total non-interest income in 1994 before significant and unusual items
decreased $24.0 million or 3.0%. The decline is primarily due to a reduction in
mortgage banking activities. Mortgage banking income declined $17.9 million or
60.3% due to lower origination and servicing volumes due to rising interest
rates and the sale of most of the mortgage loan servicing portfolio. Investment
banking revenues declined $10.0 million or 32.8% and trading gains declined
$21.1 million or 47.4% due to financial market conditions and an unfavorable
interest rate environment which resulted in reduced trading volumes and a
valuation adjustment of the trading portfolio. Partially offsetting these
declines were increases in fees from basic banking transactional services,
income from CoreStates' investment in EPS, Inc. and third party processing fees.
80
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
Non-Interest Income - continued
Income from basic banking transactional services increased 4.4% in 1995,
following growth of 5.4% in 1994. The components of basic banking transactional
services are discussed in the following paragraphs:
. Service charges on deposit accounts, paid in fees, increased $4.6 million, or
1.9%, in 1995, compared to an increase of $3.3 million, or 1.4%, in 1994. The
increase in service charges on deposits is attributable to increases in
certain fees for deposit products as well as the introduction of new consumer-
related demand deposit products. After adding the value of service charges
paid through the maintenance of deposit balances by commercial and
correspondent customers, which is included in net interest income, total
service charge compensation for 1995 was $450.8 million, up $27.0 million, or
6.4%, from 1994 reflecting growth in transaction volume. Total service charge
compensation on this basis for 1994 was $423.8 million, an increase of $19.4
million or 4.8% over 1993.
. Fees for international services increased $7.0 million, or 8.0%, in 1995,
following an increase of $11.5 million, or 15.1%, in 1994. The growth in
revenues for 1995 and 1994 reflects a continuing emphasis on non-credit
products and international transaction processing services and resulting
volume increases at overseas branches which were opened in recent years. For
1995, foreign exchange fees increased $3.1 million, or 16.5%, and fees on
other international transaction processing services increased $3.9 million, or
4.5%.
. Trust income increased $9.6 million, or 6.2%, in 1995 and $8.6 million, or
6.0%, in 1994. The 1995 and 1994 increases are due to the acquisition of
McGlinn Capital Management, Inc. in July 1994, as well as increases in
personal trust and investment advisory fees. Partially offsetting the
increase in 1995 is the impact of the October 1995 sale of CoreStates'
corporate trust business. Revenues recorded on CoreStates' Corporate Trust
services were $6.5 million, $8.4 million and $8.1 million for 1995, 1994 and
1993, respectively. The pre-tax gain recorded in 1995 on the sale of
Corporate Trust was $7.4 million. The Corporate Trust transaction provides
for potential additional gains in 1996, pending determination of customer
retention by the buyers. Impacting the 1994 increase was the decline in the
financial markets which generated lower asset values and some customer
attrition.
. Debit and credit card fees increased $3.3 million, or 4.1% in 1995, following
an increase of $5.5 million, or 7.3%, in 1994. Credit card fees for 1995
were $25.5 million, level with 1994 fees. Competitive pricing pressures
adversely impacted fee income for this product in 1995. At year-end 1995,
CoreStates' credit card portfolio included approximately 614,000 active
accounts, compared to 601,000 active accounts at year-end 1994. Debit card
fees were up $3.4 million or 6.2% from 1994.
CoreStates recorded net securities gains of $17.9 million in 1995, compared
to $18.3 million in 1994 and $43.3 million in 1993. Investment securities gains
for 1995 included $7.8 million of gains recorded on sales of equity securities
acquired in connection with prior loan arrangements. Included as a significant
and unusual item in 1995 is $13.6 million of gains recorded by United Counties
on the exchange of equity securities. Investment securities gains in 1994
included $5.0 million recorded on sale of certain investments acquired with
Constellation and $10.7 million recorded on sales of certain bank stocks.
Investment securities gains for 1993 included $22.2 million on sales of domestic
equity securities, $8.6 million on sales of foreign equity securities and $8.3
million for gains on sales of mortgage-backed securities, partially offset by
$6.1 million for partial writedowns of foreign equity securities.
81
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
<TABLE>
<CAPTION>
Non-Financial Expenses Percentage
For the Years Ended December 31, increase(decrease)
(in millions) -----------------
1995 1994 1993 '95/'94 '94/'93
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Salaries, wages and benefits....... $ 904.4 $ 947.9 $ 938.6 (4.6)% 1.0 %
Net occupancy expense.............. 159.5 162.0 159.4 (1.5) 1.6
Equipment expense.................. 118.5 117.7 114.8 0.7 2.5
Amortization of intangible assets.. 44.8 29.4 31.3 52.4 (6.1)
FDIC premiums...................... 40.1 69.6 78.8 (42.4) (11.7)
OREO expense....................... 6.4 5.8 33.3 10.3 (82.6)
Other operating expenses........... 473.2 464.5 462.0 1.9 0.5
-------- -------- --------
Non-financial expenses before
significant and unusual items... 1,746.9 1,796.9 1,818.2 (2.8) (1.2)
Significant and unusual
items........................... 138.6(a) 121.3(b) 51.3(c)
--------- --------- ---------
Total non-financial expenses....... $1,885.5 $1,918.2 $1,869.5 (1.7) 2.6
======== ======== ========
- --------------------------
</TABLE>
(a) Reflects net restructuring charges of $128.6 million related to the 1995
process redesigns and a $10 million merger related charge. See "Process
Redesign" on page 48 for more detail regarding the net restructuring
charges.
(b) Includes merger-related costs of $75.0 million and $33.7 million for the
Constellation and Independence acquisitions, respectively, writedowns of
purchased mortgage servicing rights of $10.5 million, a restructuring
credit of $1.6 million and $3.7 million related to Germantown branch
closings and signage.
(c) Comprised of purchased mortgage servicing rights writedowns of $23.8
million, $10.0 million related to the establishment of Transys, a check
processing business, and a restructuring charge of $17.5 million related
to the Meridian mortgage banking unit.
Total non-financial expenses for 1995, excluding the significant and
unusual items as noted in the above table, were $1,746.9 million, a decrease of
$49.9 million, or 2.8% from 1994. This decline reflects the impacts of a hiring
freeze, the benefits of those aspects of the process redesign implemented to
date, merger-related synergies and the approximately $29.5 million impact of
reduced Federal Deposit Insurance Corporation ("FDIC") premiums. A further
reduction in FDIC premiums is effective January 1, 1996. Most of the reduction
in FDIC premiums will be used to fund investments in technology to support
improved products and services and increased volume. Affecting comparability of
expenses period-to-period are the acquisitions of GSB on December 2, 1994 and
NRC on January 27, 1995. Excluding the amortization of intangible assets
created in the acquisitions, in 1995 GSB added approximately $21.3 million to
non-financial expenses and NRC added approximately $19.9 million. Expense for
amortization of intangible assets created in the two acquisitions added $13.7
million to 1995 expenses. Excluding the significant and unusual items as noted
in the above table and the impact of GSB and NRC related expenses, non-financial
expenses for 1995 declined 5.8% from the prior year.
Salaries, wages and benefits decreased 4.6% in 1995 reflecting reduced staff
levels resulting from the hiring freeze, the process redesigns and full-year
impact of merger consolidations, partially offset by increases of $11.4
million and $11.0 million for GSB and NRC, respectively. For 1995, salaries and
wages declined 4.5%, while benefits expense declined 5.0%. Contributing to the
higher decline in benefits expense for 1995 was reduced employee medical costs
arising from efficiencies associated with CoreStates transition to managed care
plans in the beginning of the year. The number of full-time equivalent
employees at December 31, 1995, 1994 and 1993 was: 19,957; 22,621; and 23,569,
respectively.
In 1995, net occupancy expense declined $2.5 million or 1.5%, and equipment
expense increased $0.8 million, or 0.7%. The decline in net occupancy expense
was primarily due to the process redesign and merger-related synergies. The
increase in equipment expense reflects investments in technology and NRC
expenses.
82
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
Non-Financial Expenses - continued
Comparison of 1994 to 1993 - Reported total non-financial expenses in 1994
were 2.6% higher than 1993. However, excluding significant and unusual items,
non-financial expenses for 1994 were 1.2% lower than 1993 primarily due to lower
OREO expense. Salaries, wages and benefits increased 1.0% in 1994 largely as the
result of normal salary increases offset by partial year staff reductions due to
merger consolidations. At year-end 1994, the number of full-time equivalent
employees declined by over 900 as operations and systems mergers were completed
for acquired companies. Net occupancy expense increased 1.6% in 1994. Equipment
expenses increased 2.5% in 1994, as technological improvements were made in
delivery systems and support areas. FDIC premium expense was lower by 11.7%.
Provision for Income Taxes
The provision for income taxes was $364.4 million in 1995 compared to $225.9
million in 1994 and $246.9 million in 1993. The $138.5 million increase in 1995
tax expense was primarily due to higher pre-tax income. The provision for
income taxes for 1995, 1994 and 1993 were at effective rates of 35.7%, 34.3% and
31.5%, respectively.
Accounting Standards Effective in 1996
FAS 121 - Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("FAS 121") was issued in March 1995. FAS 121, which is effective beginning
with 1996, addresses the accounting for and the measurement of the impairment of
long-lived assets that either will be held and used in operations or that will
be disposed of. The impact that FAS 121 will have on CoreStates' future results
of operations cannot be estimated with certainty at the current time. However,
the adoption of FAS 121 is not expected to have a material impact on CoreStates'
financial condition.
FAS 122 - Statement of Financial Accounting Standards No. 122, "Accounting for
Mortgage Servicing Rights - an amendment of FASB Statement No. 65" ("FAS 122")
was issued in May 1995 to modify the treatment of capitalized mortgage servicing
rights by mortgage banking enterprises. FAS 122, which is effective beginning
with 1996, amends FASB Statement No. 65 to eliminate the separate treatment of
servicing rights acquired through loan originations versus those acquired
through purchase. The adoption of FAS 122 is not expected to have a material
impact on CoreStates' results of operations or financial condition.
FAS 123 - Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123") was issued in October 1995 to establish
accounting and reporting standards for stock-based employee compensation plans
such as stock option and restricted stock plans ("stock-based plans"). FAS 123
defines a fair value based method of accounting for measuring compensation
expense for stock-based plans and encourages all entities to adopt that method
of accounting. However, FAS 123 also permits entities to continue to measure
compensation expense for stock-based plans using the intrinsic value based
method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Entities electing to remain with the intrinsic value based method
must make pro forma disclosures of net income and earnings per share as if the
fair value based method defined by FAS 123 was applied.
Under the fair value based method, compensation expense would be measured as
the value of an award under a stock-based plan on the date the award is granted,
and would be recognized over the vesting period of the award. Under the
intrinsic value based method, compensation expense is measured as the excess, if
any, of the market price of the stock underlying the award on the date the award
is granted, over the exercise price. Under CoreStates' stock-based long-term
incentive plan, awards have no intrinsic value on the date of grant as the
exercise price equals the market price on that date. Currently, CoreStates does
not expect to adopt the FAS 123 fair value based method of accounting for its
stock-based plans, but will provide the required pro forma disclosures in the
December 31, 1996 financial statements.
83
<PAGE>
<TABLE>
<CAPTION>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES Page 1 of 2
SUPPLEMENTAL FINANCIAL DATA
CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES
1995 1994 1993
-------------------------------- --------------------------------- --------------------------------
Average Income/ Average Income/ Average Income/
balance Rate expense balance Rate expense balance Rate expense
----------- ------- ---------- ---------- --------- ---------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS (000,000) (000) (000,000) (000) (000,000) (000)
Time deposits, principally
Eurodollars (a)............ $ 1,929 6.32% $ 121,993 $ 1,623 4.37% $ 70,996 $ 1,423 3.39% $ 48,214
Investment securities (b):
U.S. Government........... 4,946 5.87 290,474 5,498 5.48 301,515 6,120 6.09 372,738
State and municipal....... 665 8.42 56,018 778 7.97 62,027 890 8.26 73,500
Other..................... 819 6.15 50,366 1,087 5.54 60,252 1,023 5.34 54,649
--------- ---------- --------- ---------- --------- ----------
Total investment
securities........ 6,430 6.17 396,858 7,363 5.76 423,794 8,033 6.24 500,887
Federal funds sold and
securities purchased
under agreement to
resell................. 322 6.12 19,695 289 4.38 12,652 336 3.26 10,959
Trading account securities.. 280 7.42 20,785 139 6.78 9,419 150 7.38 11,072
Loans (b)(c)(d):
Domestic:
Commercial, industrial
and other.............. 12,743 9.39 1,196,623 11,164 8.30 927,082 10,135 7.80 790,553
Real estate............. 11,547 8.84 1,021,029 11,978 7.95 951,681 12,459 7.78 968,967
Consumer................ 3,773 12.66 477,713 4,117 10.44 429,832 3,851 10.79 415,390
Financial institutions.. 716 7.03 50,320 626 8.00 50,106 716 6.15 44,058
Factoring receivables... 543 10.63 57,747 587 9.95 58,389 554 9.62 53,312
Lease financing......... 1,125 7.93 89,284 1,041 8.45 87,982 897 9.31 83,466
Foreign................... 820 6.87 56,303 597 5.39 32,155 551 5.00 27,565
--------- ---------- --------- ---------- --------- ----------
Total loans, net
of discounts..... 31,267 9.43 2,949,019 30,110 8.43 2,537,227 29,163 8.17 2,383,311
--------- ---------- --------- ---------- --------- ----------
Total interest
earning assets(d). $ 40,228 8.72 3,508,350 $ 39,524 7.73 3,054,088 $ 39,105 7.56 2,954,443
========= ----- ---------- ========= ----- ---------- ========= ----- ----------
FUNDING SOURCES
Interest bearing
liabilities (b):
Deposits in domestic
offices (e):
Commercial.............. $ 669 5.58% $ 37,321 $ 580 4.15% $ 24,061 $ 752 3.97% $ 29,842
NOW accounts............ 3,377 1.51 46,724 3,540 1.15 37,384 3,343 1.43 43,308
Money Market Accounts... 6,023 3.29 197,431 6,386 2.27 144,475 6,672 2.01 134,091
Consumer savings........ 5,040 2.28 114,700 5,509 1.87 103,142 5,269 1.93 101,471
Consumer certificates... 9,132 5.39 492,610 7,993 4.28 341,843 8,519 4.32 368,122
Time deposits of
overseas branches
and subsidiaries........ 1,089 4.80 52,261 831 3.56 29,602 718 2.57 18,453
--------- ---------- --------- ---------- --------- ----------
Total interest
bearing deposits. 25,330 3.76 941,047 24,839 2.77 680,507 25,273 2.79 695,287
Short-term funds
borrowed:
Federal funds
purchased and
securities sold
under agreements to
repurchase........... 2,203 5.68 125,117 2,092 4.17 87,276 1,951 2.99 58,291
Commercial paper........ 1,051 5.94 62,459 757 4.24 32,089 606 3.14 19,051
Other................... 498 5.33 26,543 587 5.15 30,253 480 4.45 21,347
--------- ---------- --------- ---------- --------- ----------
Total short-term
funds borrowed... 3,752 5.71 214,119 3,436 4.35 149,618 3,037 3.25 98,689
Long-term debt (b)(f)..... 2,262 6.76 152,989 2,040 5.71 116,419 1,894 5.27 99,837
--------- ---------- --------- ---------- --------- ----------
Total interest
bearing
liabilities...... 31,344 4.17 1,308,155 30,315 3.12 946,544 30,204 2.96 893,813
Portion of non-interest
bearing funding sources.... 8,884 9,209 8,901
--------- ---------- --------- ---------- --------- ----------
Total funding
sources.......... $ 40,228 3.25 1,308,155 $ 39,524 2.40 946,544 $ 39,105 2.29 893,813
========= ----- ---------- ========= ----- ---------- ========= ----- ----------
Net interest income and
net interest margin........ 5.47% $2,200,195 5.33% $2,107,544 5.27% $2,060,630
===== ========== ===== ========== ===== ==========
- --------------------
</TABLE>
(a) Yields and income on time 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 interest bearing demand deposits in domestic offices
are reduced by specified reserve amounts for purposes of rate calculations.
(f) Rates on long-term debt are based on average balances excluding capital
lease obligations.
84
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES Page 2 of 2
SUPPLEMENTAL FINANCIAL DATA
CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND
RATES
<TABLE>
<CAPTION>
1995 1994 1993
-------------------------------- --------------------------------- --------------------------------
Average Income/ Average Income/ Average Income/
balance Rate expense balance Rate expense balance Rate expense
----------- ------- ---------- ---------- --------- ---------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(000,000) (000) (000,000) (000) (000,000) (000)
Non-Interest Earning Assets
Cash....................... $ 2,779 $ 2,982 $ 2,956
Allowance for loan losses.. (685) (692) (641)
Other assets............... 2,383 2,017 2,016
--------- --------- ---------
Total non-interest
earning assets....... $ 4,477 $ 4,307 $ 4,331
========= ========= =========
Total average assets....... $ 44,705 $ 43,831 $ 43,436
========= ========= =========
Non-Interest Bearing
Funding Sources
Demand deposits:
Domestic................. $ 7,352 $ 7,698 $ 7,646
Foreign.................. 420 417 369
Other liabilities.......... 1,847 1,775 1,771
Shareholders' equity....... 3,742 3,626 3,446
Non-interest bearing
funding sources used
to fund earning assets... (8,884) (9,209) (8,901)
--------- --------- ---------
Total net
non-interest
bearing
funding sources... $ 4,477 $ 4,307 $ 4,331
========= ========= =========
Supplementary Averages
Net demand deposits........ $ 6,190 $ 6,189 $ 6,194
Net Federal funds
purchased and
securities sold under
agreements to
repurchase.............. 1,881 5.60% $105,422 1,803 4.14% $74,624 1,615 2.93% $47,332
Commercial certificates
of deposit in domestic
offices over $100,000.... 669 5.46 36,520 550 4.09 22,499 680 3.97 27,004
Average prime rate......... 8.84 6.60 6.00
</TABLE>
85
<PAGE>
<TABLE>
<CAPTION>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: Continued
CONDENSED CONSOLIDATED STATEMENT OF INCOME
AND SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
Condensed Consolidated Statement of Income
Year Ended December 31,
---------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Interest income and fees......... $3,475,080 $3,014,559 $2,904,949 $3,086,072 $3,716,204
Interest expense................. 1,308,155 946,544 893,813 1,197,856 1,895,051
---------- ---------- ---------- ---------- ----------
Net interest income............. 2,166,925 2,068,015 2,011,136 1,888,216 1,821,153
Provision for losses on loans.... 144,002 279,195 189,372 260,809 429,870
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for losses
on loans.................... 2,022,923 1,788,820 1,821,764 1,627,407 1,391,283
Non-interest income.............. 882,222 788,487 832,720 854,051 878,908
Non-financial expenses........... 1,885,528 1,918,242 1,869,544 1,867,602 1,806,383
---------- ---------- ---------- ---------- ----------
Income before income taxes....... 1,019,617 659,065 784,940 613,856 463,808
Provision for income taxes....... 364,441 225,859 246,854 187,424 145,549
---------- ---------- ---------- ---------- ----------
Income from continuing
operations before cumulative
effect of a change in
accounting principle.......... 655,176 433,206 538,086 426,432 318,259
Loss from discontinued
operations, net of tax.......... - - - - (6,500)
---------- ---------- ---------- ---------- ----------
Income before cumulative
effect of a change in accounting
principle...................... 655,176 433,206 538,086 426,432 311,759
Cumulative effect of a
change in accounting principle,
net of tax..................... - - (15,740) (107,715) -
---------- ---------- ---------- ---------- ----------
Net income....................... $ 655,176 $ 433,206 $ 522,346 $ 318,717 $ 311,759
========== ========== ========== ========== ==========
Per common share data:
Income from continuing
operations before
cumulative effect of a
change in accounting
principle................. $2.95(a) $1.91(b) $ 2.35 $ 1.97 $ 1.51
Income before cumulative
effect of a change in
accounting principle........ 2.95(a) 1.91(b) 2.35 1.97 1.48
Net income..................... 2.95(a) 1.91(b) 2.29 1.47 1.48
Dividends paid................. 1.36 1.20 1.11 1.00 0.96
Dividends declared (c)......... 1.44 1.24 1.14 1.02 0.97
Average common shares
outstanding.................... 222,268 226,234 228,580 216,707 210,422
Operating Ratios:
Income before cumulative
effect of a change in
accounting principle as a
percent of:
Average common
shareholders' equity...... 17.51%(a) 11.95%(b) 15.61% 13.87% 11.11%
Average total assets....... 1.47(a) 0.99(b) 1.24 1.00 0.74
Average total shareholders'
equity as a percent of average
total assets.................. 8.37 8.27 7.93 7.20 6.68
Dividends declared as a
percent of income from
continuing operations......... 48.81(a) 64.92(b) 48.51 51.78 64.24
Full Time Equivalent Staff...... 19,957 22,621 23,569 23,652 23,483
</TABLE>
(a) Includes the impact of after-tax net restructuring charges of $0.37 per
share, merger-related charges of $0.05 per share, after-tax gains of $0.04
per share on the exchange of equity securities, and an after-tax gain of
$0.05 per share related to a change in ownership interests in a joint
venture. Excluding the impact of these items, net income per common share
was $3.28, return on average common shareholders' equity was 19.43%, and
return on average total assets was 1.63%.
(b) Includes the impact of after-tax merger-related charges of $0.74 per share
recorded for the acquisitions of Constellation Bancorp and Independence
Bancorp, Inc. Excluding the impact of these merger-related charges, per
share income before the cumulative effect of a change in accounting
principle was $2.65, return on average common shareholders' equity was
16.54%, and return on average total assets was 1.37%.
(c) Cash dividends declared per share for the periods prior to the acquisitions
of Meridian on April 9, 1996, Independence on June 27, 1994 and
Constellation on March 16, 1994 assume that the Corporation would have
declared cash dividends equal to the cash dividends per share actually
declared by the Corporation.
86
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: Continued
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
December 31,
-------------------------------------------------------------------------
1995 1994 1993 1992 1991
-------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks................. $ 3,662,143 $ 3,024,589 $ 3,187,390 $ 3,282,948 $ 2,925,512
Time deposits, principally Eurodollars.. 1,909,260 1,874,066 1,421,317 1,981,443 1,852,468
Federal funds sold...................... 719,937 923,630 256,221 407,150 426,850
Trading account securities.............. 147,218 347,376 43,009 68,053 61,032
Investment securities................... 5,632,232 7,261,905 7,768,755 8,036,613 7,097,860
Loans................................... 31,714,152 30,755,394 29,838,397 28,524,547 28,768,804
Allowance for loan losses............... (670,265) (681,124) (636,915) (620,039) (662,770)
Due from customers on acceptances....... 560,707 352,347 342,065 666,351 221,923
Premises, equipment and other assets.... 2,321,858 2,189,890 1,988,353 2,344,210 2,249,678
----------- ----------- ----------- ----------- -----------
Total assets.................... $45,997,242 $46,048,073 $44,208,592 $44,691,276 $42,941,357
=========== =========== =========== =========== ===========
LIABILITIES
Deposits:
Domestic:
Non-interest bearing................ $ 8,937,147 $ 8,625,125 $ 8,767,602 $ 8,531,732 $ 7,673,469
Interest bearing.................... 23,883,726 25,023,283 24,298,434 25,506,339 25,688,542
Overseas branches and subsidiaries.... 1,142,947 1,125,997 797,987 781,622 839,327
----------- ----------- ----------- ----------- -----------
Total deposits.................. 33,963,820 34,774,405 33,864,023 34,819,693 34,201,338
Short-term funds borrowed............... 3,677,013 3,461,249 2,766,750 2,876,506 3,041,047
Bank acceptances outstanding............ 549,048 346,239 347,011 668,919 223,512
Other liabilities....................... 1,719,697 1,571,985 1,515,718 1,370,861 1,075,151
Long-term debt.......................... 2,212,099 2,163,263 2,010,581 1,671,376 1,385,656
----------- ----------- ----------- ----------- -----------
Total liabilities............... 42,121,677 42,317,141 40,504,083 41,407,355 39,926,704
----------- ----------- ----------- ----------- -----------
SHAREHOLDERS' EQUITY
Common.................................. 3,875,565 3,730,932 3,704,509 3,283,921 3,014,653
----------- ----------- ----------- ----------- -----------
Total shareholders' equity...... 3,875,565 3,730,932 3,704,509 3,283,921 3,014,653
----------- ----------- ----------- ----------- -----------
Total liabilities and
shareholders' equity........... $45,997,242 $46,048,073 $44,208,592 $44,691,276 $42,941,357
=========== =========== =========== =========== ===========
Book value per common share............. $17.45 $16.23 $16.13 $14.46 $14.04
=========== =========== =========== =========== ===========
</TABLE>
87
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: continued
<TABLE>
<CAPTION>
Rate/Volume Analysis Taxable Equivalent Basis
(in thousands)
1995 vs. 1994 1994 vs. 1993
----------------------------------------- -----------------------------------------
Increase (decrease) in interest Increase (decrease) in interest
----------------------------------------- -----------------------------------------
Income/ Change attributable to Income/ Change attributable to
---------------------- ----------------------
expense Volume Rate expense Volume Rate
-------------- ----------- ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets
- -----------------------
Time deposits, principally
Eurodollars..................... $ 50,997 $ 13,372 $ 37,625 $ 22,782 $ 6,780 $ 16,002
Investment securities.............. (26,936) (54,103) 27,167 (77,093) (43,713) (33,380)
Federal funds sold................. 7,043 1,445 5,598 1,693 (1,532) 3,225
Trading account securities......... 11,366 9,560 1,806 (1,653) (812) (841)
Loans:
Domestic........................ 387,644 70,798 316,846 149,326 82,587 66,739
Foreign......................... 24,148 12,020 12,128 4,590 2,300 2,290
-------- -------- -------- -------- -------- --------
Total interest income........ 454,262 53,092 401,170 99,645 45,610 54,035
-------- -------- -------- -------- -------- --------
Interest bearing funds
- ----------------------
Deposits:
Domestic......................... 237,881 33,558 204,323 (25,929) (27,851) 1,922
Overseas......................... 22,659 9,185 13,474 11,149 2,904 8,245
Short-term funds borrowed:
Federal funds purchased.......... 37,841 4,629 33,212 28,985 4,216 24,769
Other............................ 26,660 7,882 18,778 21,944 9,503 12,441
Long-term debt..................... 36,570 12,676 23,894 16,582 7,694 8,888
-------- -------- -------- -------- -------- --------
Total interest expense....... 361,611 67,930 293,681 52,731 (3,534) 56,265
-------- -------- -------- -------- -------- --------
Net interest income................ $ 92,651 $(14,838) $107,489 $ 46,914 $ 49,144 $ (2,230)
- ------------------- ======== ======== ======== ======== ======== ========
</TABLE>
Notes to Rate/Volume Analysis
Changes in interest income or expense 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.
Included in interest income is $69.8 million, $80.6 million, $76.9 million of
loan fees for the years ended 1995, 1994 and 1993, respectively.
Non-performing loans are included in interest earning assets.
The changes in interest expense on domestic deposits attributable to volume and
rate are adjusted by specific reserves as average balances are reduced by such
reserve amounts for purposes of rate calculations.
88
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: Continued
LOAN PORTFOLIO
The following are summaries of certain loan categories, net of unearned
discounts, for the five years ended December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Domestic loans:
Commercial, industrial and other.... $12,597,470 $11,834,603 $10,707,727 $10,141,267 $10,699,269
Real estate loans:
Construction and development...... 607,845 599,331 652,940 832,014 1,218,551
Residential....................... 5,648,661 6,148,469 6,329,149 6,404,682 5,634,324
Other, primarily commercial
mortgages and commercial loans
secured by owner-occupied
real estate.................... 4,712,473 5,059,676 5,165,790 5,056,874 4,746,057
----------- ----------- ----------- ----------- -----------
Total real estate loans....... 10,968,979 11,807,476 12,147,879 12,293,570 11,598,932
Consumer loans:
Installment....................... 2,758,468 2,686,024 2,727,286 2,578,420 2,874,110
Credit card....................... 1,681,649 1,492,004 1,269,980 1,056,153 1,077,063
----------- ----------- ----------- ----------- -----------
Total consumer loans.......... 4,440,117 4,178,028 3,997,266 3,634,573 3,951,173
Financial institutions.............. 961,289 675,047 879,700 795,033 1,009,603
Factoring receivables............... 557,272 622,380 555,211 454,244 402,752
Lease financing..................... 1,167,356 1,043,932 999,311 800,603 710,358
----------- ----------- ----------- ----------- -----------
Total domestic loans......... 30,692,483 30,161,466 29,287,094 28,119,290 28,372,087
Foreign loans:
Loans to or guaranteed by foreign
banks:
Government owned and central
banks......................... - - - 257 1,506
Other foreign banks............. 615,166 301,080 332,288 203,572 135,279
Commercial and industrial........... 406,503 283,535 218,655 201,428 242,479
Loans to other
financial institutions............. - 9,313 360 17,453
----------- ----------- ----------- ----------- -----------
Total foreign loans........... 1,021,669 593,928 551,303 405,257 396,717
----------- ----------- ----------- ----------- -----------
Total loans.... $31,714,152 $30,755,394 $29,838,397 $28,524,547 $28,768,804
=========== =========== =========== =========== ===========
</TABLE>
89
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: Continued
Risk Elements
NON-PERFORMING ASSETS
The following represents the Corporation's non-accrual loans, renegotiated loans
and other real estate owned for the five years ended December 31, 1995 (in
thousands):
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans
Domestic......................... $223,602 $348,885 $449,340 $713,559 $ 888,840
Foreign.......................... - 158 171 3,047 8,797
-------- -------- -------- -------- ----------
Total non-accrual loans..... 223,602 349,043 449,511 716,606 897,637
-------- -------- -------- -------- ----------
Renegotiated loans (a)........... 7,202 8,067 66,399 73,041 62,531
-------- -------- -------- -------- ----------
Total non-performing loans.. 230,804 357,110 515,910 789,647 960,168
-------- -------- -------- -------- ----------
Other real estate owned (OREO)... 37,502 83,546 109,871 107,494 100,587
-------- -------- -------- -------- ----------
Total non-performing assets...... $268,306 $440,656 $625,781 $897,141 $1,060,755
======== ======== ======== ======== ==========
Non-performing assets as a
percentage of loans plus OREO.. 0.85% 1.43% 2.09% 3.13% 3.67%
======== ======== ======== ======== ==========
Non-performing assets as a
percentage of total assets..... 0.58% 0.96% 1.42% 2.01% 2.47%
======== ======== ======== ======== ==========
- -------------------
</TABLE>
(a) There were no foreign renegotiated loans in any periods presented.
The following reflects the effect of non-accrual and renegotiated loans on both
interest income and net interest income for the three years ended December 31,
1995 (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------- -------- -------
<S> <C> <C> <C>
Interest income which would have been
recorded in accordance with
original terms:
Domestic.......................... $27,452 $35,554 $41,053
Foreign........................... 8 9 38
------- ------- -------
Total.......................... 27,460 35,563 41,091
------- ------- -------
Interest income reflected in total
operating income:
Domestic.......................... 14,354 12,599 18,006
Foreign........................... - - -
------- ------- -------
Total.......................... 14,354 12,599 18,006
------- ------- -------
Net reduction in interest income and
net interest income.................. $13,106 $22,964 $23,085
======= ======= =======
</TABLE>
ACCRUING LOANS PAST DUE 90 DAYS OR MORE
Accruing loans 90 days or more past due as to payment of interest or principal
for the five years ended December 31, 1995 were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Total (a).......... $88,671 $77,860 $80,718 $138,615 $165,869
======= ======= ======= ======== ========
- -------------------
</TABLE>
(a) There were no foreign loans past due 90 days or more in any periods
presented.
90
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: Continued
CONSOLIDATED ALLOWANCE FOR LOAN LOSSES
The following table summarizes the distribution of loan charge-offs and
recoveries by type of loan for the five years ended December 31, 1995 (in
thousands):
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---------- ---------- -------------- ------------- -------------
Balance at beginning of year:
<S> <C> <C> <C> <C> <C>
Domestic............................ $661,124 $626,915 $610,039 $652,770 $661,332
Foreign............................. 20,000 10,000 10,000 10,000 16,513
-------- -------- -------- -------- --------
681,124 636,915 620,039 662,770 677,845
-------- -------- -------- -------- --------
Allowance for loans purchased at date
of purchase:
Domestic......................... - 24,931 5,797 3,182 -
-------- -------- -------- -------- --------
Allowance for loans sold at date of
sale:
Domestic......................... - (2,377) - (14,700) (27,486)
Foreign.......................... - - (353) - -
-------- -------- -------- -------- --------
- (2,377) (353) (14,700) (27,486)
-------- -------- -------- -------- --------
Recoveries, by type of loan:
Domestic:
Commercial, industrial and other. 35,535 29,845 48,659 30,296 28,841
Real estate...................... 26,477 24,058 12,438 9,485 6,980
Consumer......................... 22,690 26,741 22,574 26,708 25,151
Financial institutions........... 231 654 2,246 2,776 1,966
Foreign............................. 293 2,616 12,645 13,138 26,586
-------- -------- -------- -------- --------
Total recoveries............. 85,226 83,914 98,562 82,403 89,524
-------- -------- -------- -------- --------
Charge-offs, by type of loan:
Domestic:
Commercial, industrial and other. 71,199 124,610 123,661 155,742 203,281
Real estate...................... 67,184 149,738 91,103 129,123 132,202
Consumer......................... 99,652 67,065 60,922 86,360 153,941
Financial institutions........... 2,052 41 816 3,195 14,669
Foreign............................. - - - 5 2,890
-------- -------- -------- -------- --------
Total loans charged off...... 240,087 341,454 276,502 374,425 506,983
-------- -------- -------- -------- --------
Total net charge-offs................ 154,861 257,540 177,940 292,022 417,459
-------- -------- -------- -------- --------
Provision charged to operating expense:
Domestic............................ 139,295 271,811 201,664 273,942 460,079
Foreign............................. 4,707 7,384 (12,292)(a) (13,133)(a) (30,209)(a)
-------- -------- ---------- --------- ---------
144,002 279,195 189,372 260,809 429,870
-------- -------- -------- -------- --------
Balance at end of year:
Domestic............................ 645,265 661,124 626,915 610,039 652,770
Foreign............................. 25,000 20,000 10,000 10,000 10,000
-------- -------- -------- -------- --------
$670,265 $681,124 $636,915 $620,039 $662,770
======== ======== ======== ======== ========
Ratios
Net charge-offs as a percentage
of average loans outstanding........ 0.50% 0.86% 0.61 % 1.01% 1.42%
======== ======== ======== ======== ========
Allowance for loan losses as a
percentage of year-end loans........ 2.11% 2.21% 2.14% 2.17 % 2.30%
======== ======== ======== ======== ========
- ---------------------
</TABLE>
(a) Reflects reallocation of the foreign allowance for loan losses to the
domestic allowance for loan losses.
91
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: Continued
DISTRIBUTION OF ALLOWANCE FOR LOAN LOSSES (a)
The distribution of the allowance for loan losses and the percentage of each
loan type to total loans for the five years ended December 31, 1995 is
illustrated in the table below (in millions):
<TABLE>
<CAPTION>
December 31,
1995 1994 1993 1992 1991
-------------------- ----------------- ------------------ ----------------- -----------------
% % % % %
of Loan of Loan of Loan of Loan of Loan
category category category category category
to to to to to
total total total total total
Allowance loans Allowance loans Allowance loans Allowance loans Allowance loans
------------ -------- --------- -------- ---------- ------ ----------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loan type
- ---------
Domestic:................... $ 321.4 41% $314.5 41% $314.9 38% $313.8 37% $358.3 39%
Commercial and
industrial
Real estate:
Construction......... 33.7 20 60.9 22 74.0 23 110.8 25 108.7 24
Other................ 118.6 15 127.8 16 105.1 17 65.5 18 70.7 16
Consumer............... 151.1 14 125.1 13 113.4 13 99.7 13 103.0 14
Other domestic loans... 20.5 7 32.8 6 19.5 7 20.2 6 12.1 6
Foreign..................... 25.0 3 20.0 2 10.0 2 10.0 1 10.0 1
-------- ----- ------ --- ------ --- ------ --- ------ ---
Total............... $ 670.3 100% $681.1 100% $636.9 100% $620.0 100% $662.8 100%
======== ===== ====== === ====== === ====== === ====== ===
</TABLE>
(a) This distribution is made for analytical purposes. It does not represent
specific allocations of the allowance. The total allowance is available
to absorb losses from any segment of the portfolio.
COMMERCIAL CERTIFICATES OF DEPOSIT OVER $100,000 ISSUED BY DOMESTIC OFFICES
(in thousands)
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
1995 1994
------------------------ ------------------------------
Amount Percent Amount Percent
------------ ---------- ------------ ----------------
<S> <C> <C> <C> <C>
Maturity Distribution
3 months or less......... $547,738 78.7% $486,247 79.6%
3 through 6 months....... 78,725 11.3 67,757 11.1
6 through 12 months...... 55,445 8.0 50,012 8.2
Over 12 months........... 14,062 2.0 7,190 1.1
-------- -------- ------- --------
Total................. $695,970 100.0% $611,206 100.0%
======== ======== ======== ========
</TABLE>
92
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: Continued
<TABLE>
<CAPTION>
INTEREST SENSITIVITY ANALYSIS AT DECEMBER 31, 1995
(in millions)
Rate Maturity Period
----------------------------------------------------------------------------
Greater
1-90 91-181 182-365 1-2 2-5 than 5
Days Days Days Years Years Years Total
---------- -------- --------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Federal funds sold, resale agreements
and trading account securities.......... $ 867 $ 867
Time deposits............................ 1,063 $ 408 $ 438 1,909
Investment securities.................... 949 527 1,100 $ 1,246 $ 1,486 $ 324 5,632
Interest rate swaps...................... 1,668 1,003 1,759 1,561 3,042 914 9,947
Asset financial futures.................. 7 23 396 52 101 48 627
------- ------- -------- ------- ------- ------- --------
Total discretionary assets.......... 4,554 1,961 3,693 2,859 4,629 1,286 18,982
Total loans(a)........................... 20,226 1,736 2,035 2,606 3,924 1,187 31,714
------- ------- -------- ------- ------- ------- --------
Total earning assets..................... 24,780 3,697 5,728 5,465 8,553 2,473 50,696
------- ------- -------- ------- ------- ------- --------
FUNDING SOURCES
Federal funds purchased, repurchase
agreements and other short-term funds
borrowed.............................. 3,564 103 10 - - - 3,677
Domestic and foreign time deposits(b).... 1,659 78 55 8 28 19 1,847
Long-term debt........................... 1,120 21 23 4 162 882 2,212
Interest rate swaps...................... 9,423 25 200 71 224 4 9,947
Liability financial futures.............. 327 259 41 - - - 627
------- ------- -------- ------- ------- ------- --------
Total discretionary liabilities..... 16,093 486 329 83 414 905 18,310
------- ------- -------- ------- ------- ------- --------
Savings certificates..................... 2,426 1,547 2,352 1,411 906 332 8,974
Money market, savings and NOW............ 3,753 1,498 2,217 2,102 3,751 885 14,206
accounts(c)
Net non-interest bearing funds(d)(e)..... 3,118 6 (6) 28 141 5,919 9,206
------- ------- -------- ------- ------- ------- --------
Total savings certificates and
indefinite
maturity liabilities................. 9,297 3,051 4,563 3,541 4,798 7,136 32,386
------- ------- -------- ------- ------- ------- --------
Total net funding sources................ 25,390 3,537 4,892 3,624 5,212 8,041 50,696
------- ------- -------- ------- ------- ------- --------
Period gap............................... (610) 160 836 1,841 3,341 (5,568) -
Cumulative gap........................... (610) (450) 386 2,227 5,568 - -
Adjustments(f)........................... 775 (272) (422) (1,779) (4,155) 5,853 -
------- ------- -------- ------- ------- ------- --------
Adjusted period gap...................... $ 165 $ (112) $ 414 $ 62 $ (814) $ 285 $ -
======= ======= ======== ======= ======= ======= ========
Cumulative gap............................ $ 165 $ 53 $ 467 $ 529 $ (285) - $ -
======= ======= ======== ======= ======= ======= ========
</TABLE>
Notes to interest sensitivity analysis:
(a) Non-performing loans are included in 1-90 days.
(b) Deposit volumes exclude time deposits not at interest.
(c) Adjustments to the interest sensitivity of savings and NOW account balances
reflect managerial assumptions based on historical experience, simulation
results as to the behavior of both the balances and rates on these
products in potential future rate environments and CoreStates' intent for
positioning these products.
(d) Net non-interest bearing funds is the sum of non-interest bearing
liabilities and shareholders' equity minus non-interest earning assets.
(e) The estimated volume of stable net non-interest bearing funds is allocated
to the over 1 year interest sensitivity period. Allocations to
the under 1 year periods include: estimated volumes that are expected to
vary inversely with interest rates; and the temporary difference
between the actual volume of total net non-interest bearing funds on
December 31, 1995 and the trend volume at the current level of
interest rates.
(f) Adjustments reflect managerial assumptions as to the appropriate investment
maturities for non-interest bearing funding sources, along with the
funding of current investment and loan commitments.
93
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: Continued
Loan Maturity and Interest Sensitivity, Net of Unearned Discounts
The contractual maturity of loans outstanding at December 31, 1995 was as
follows (in thousands):
<TABLE>
<CAPTION>
Due after one
Due in one year through Due after
year or less five years five years Total
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Commercial (includes Real Estate -
Commercial Mortgage)........... $13,402,199 $4,784,551 $2,381,080 $20,567,830
Real Estate - Construction......... 345,260 217,516 46,335 609,111
----------- ---------- ---------- -----------
Total loans (excluding loans to
individuals)(a).................... $13,747,459 $5,002,067 $2,427,415 $21,176,941
=========== ========== ========== ===========
</TABLE>
- -----------------
(a) Loans due after one-year totaling $4,013,413 have fixed interest rates.
The remaining 46% of such loans or $3,416,069 have floating or adjustable
rates.
94
<PAGE>
<TABLE>
<CAPTION>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: Continued
INVESTMENT SECURITIES
(in thousands)
Carrying Value at December 31,
1995(a) 1994(a) 1993(a)
--------------- ----------- -----------
<S> <C> <C> <C>
U.S. Treasury and government agencies..... $2,564,646 $3,103,635 $2,795,191
State and municipal....................... 549,035 695,655 779,270
Mortgage-backed........................... 1,758,883 2,665,138 3,354,546
Other..................................... 759,668 797,477 839,748
---------- ---------- ----------
Total.................................. $5,632,232 $7,261,905 $7,768,755
========== ========== ==========
</TABLE>
- ----------------------------
(a) Held-to-maturity and available-for-sale portfolios combined.
<TABLE>
<CAPTION>
Maturity Distribution and Weighted Average Yield at December 31, 1995(a)
U.S. Treasury
and Government State and Total
------------------------
Agencies Municipal Other Amount Yield(b)
--------------- ----------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
1 year or less........................... $1,029,768 $ 175,526 $ 149,835 $1,355,129 6.09%
1 year through 5 years................... 1,459,424 207,146 250,469 1,917,039 6.21
5 years through 10 years................. 33,061 111,019 73,350 217,430 7.16
After 10 years........................... 42,393 55,344 286,014 383,751 6.34
---------- ---------- ---------- ----------
Subtotal............................... $2,564,646 $ 549,035 $ 759,668 3,873,349 6.23
========== ========== ==========
Mortgage-backed.......................... 1,758,883 5.89
----------
Total.................................. $5,632,232 6.13
==========
</TABLE>
(a) Held-to-maturity and available-for-sale portfolios combined.
(b) The weighted average yield has been computed on a tax equivalent basis using
an effective tax rate of 35%. The amount of the tax equivalent adjustment by
range of maturity is as follows: 1 year or less - $4,479; 1 year to 5 years -
$5,750; 5 years to 10 years - $2,995 and after 10 years - $4,339.
95
<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
Year Ended December 31 1995 1994 1993 1992 1991
- ---------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1. Income from continuing operations
before cumulative effect of change
in accounting principle and income
taxes............................. $1,019,617 $ 659,065 $ 784,940 $ 613,856 $ 463,808
========== ========== ========== ========== ==========
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...................... $ 396,104 $ 293,662 $ 226,657 $ 214,408 $ 361,440
B. Interest on deposits.............. 941,047 680,507 695,287 1,010,202 1,559,950
---------- ---------- ---------- ---------- ----------
C. Total fixed charges (line 2A +
line 2B)............................ $1,337,151 $ 974,169 $ 921,944 $1,224,610 $1,921,390
========== ========== ========== ========== ==========
3. Income from continuing operations
before cumulative effect of change
in accounting principle and income
taxes, plus total fixed charges of
continuing operations:
A. Excluding interest on deposits
(line 1 + line 2A).................. $1,415,721 $ 952,727 $1,011,597 $ 828,264 $ 825,248
========== ========== ========== ========== ==========
B. Including interest on deposits
(line 1 + line 2C).................. $2,356,768 $1,633,234 $1,706,884 $1,838,466 $2,385,198
========== ========== ========== ========== ==========
4. Ratio of earnings (as defined) to
fixed charges:
A. Excluding interest on deposits
(line 3A/line 2A)................... 3.57x 3.24x 4.46x 3.86x 2.28x
B. Including interest on deposits
(line 3B/line 2C)................... 1.76 1.68 1.85 1.50 1.24
</TABLE>
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
EXHIBIT 12.2
COMPUTATION OF RATIO OF EARNINGS FROM CONTINUING OPERATIONS
TO FIXED CHARGES OF CONTINUING OPERATIONS
COMBINED CORESTATES (PARENT ONLY) AND CORESTATES CAPITAL CORPORATION
<TABLE>
<CAPTION>
Year Ended December 31 1995 1994 1993 1992 1991
- ---------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
1. Income before income taxes, equity
in undistributed income of
subsidiaries and cumulative
effect of change in accounting
principle $413,825 $369,763 $271,988 $157,028 $202,847
2. Fixed charges - interest
expense, amortization of
debt issuance costs and
one-third of rental expenses,
net of income from subleases 201,911 138,068 113,438 104,578 131,148
-------- -------- -------- -------- --------
3. Income before taxes, equity
in undistributed income
of subsidiaries and
cumulative effect of change
in accounting principle,
plus fixed charges $615,736 $507,831 $385,426 $261,606 $333,995
======== ======== ======== ======== ========
4. Ratio of earnings (as defined)
to fixed charges (line 3/
line 2) 3.05x 3.68x 3.40x 2.50x 2.55.x
</TABLE>
<PAGE>
Exhibit 23.1
Page 1 of 2
Consent of Independent Auditors
We consent to the incorporation by reference in the following registration
statements of our report dated January 17, 1996, except for Note 2, as to which
the date is April 9, 1996 with respect to the consolidated financial statements
of CoreStates Financial Corp included in this Current Report on Form 8-K for the
year ended December 31, 1995:
(a) The Registration Statement (Form S-8, No. 33-5874), in Post-Effective
Amendment No. 1 to the Registration Statement (Form S-8 No. 2-91176), the
Registration Statement (Form S-8, No. 33-28808) and in the related
prospectuses, each pertaining to the CoreStates Financial Corp Long-Term
Incentive Plan,
(b) The Registration Statement (Form S-8, No. 33-32934) and prospectus
relating to the CoreStates Savings Plan,
(c) The Registration Statement (Form S-3, No. 33-50324) pertaining to the
CoreStates Financial Corp 1992 Long-Term Incentive Plan,
(d) The Registration Statement (Form S-3, No. 33-57034) and prospectus and
prospectus supplement pertaining to $1,000,000,000 in aggregate amount of
Debt Securities issuable by CoreStates Capital Corp and the related
guarantees of the Corporation, and Preferred Stock, Depository Shares,
Common Stock, and Capital Securities, issuable by the Corporation,
(e) The Registration Statement (Form S-3 No. 33-54049) and prospectus and
prospectus supplement pertaining to $1,000,000,000 in aggregate amount of
Debt Securities and warrants issuable by CoreStates Capital Corp and the
related guarantees of the Corporation and Preferred Stock, Depository
Shares and Common Stock issuable by the Corporation,
(f) The Registration Statement (Form S-4, as amended by Form S-8, No. 33-
48422) and prospectus relating to shares of the Corporation Common Stock
issuable upon the exercise of stock options, the obligations in respect to
which were assumed by the Corporation in connection with the acquisition
of First Peoples Corporation,
(g) The Registration Statement (Form S-3), as amended by Post Effective
Amendment No. 2, No. 33-40717) and prospectus relating to shares of the
Corporation Common Stock issuable pursuant to the CoreStates Dividend
Reinvestment and Share Purchase Plan,
(h) The Registration Statement (Form S-4, as amended by Form S-8, No. 33-
51429) and prospectus relating to shares of the Corporation Common Stock
issuable upon the exercise of stock options, the obligations in respect to
which were assumed by the Corporation in connection with the acquisition
of Constellation Bancorp,
(i) The Registration Statement (Form S-4, as amended by Form S-8, No. 33-
53539) and prospectus relating to shares of the Corporation Common Stock
issuable upon the exercise of stock options, the obligations in respect to
which were assumed by the Corporation in connection with the acquisition
of Independence Bancorp, Inc.,
(j) The Registration Statement (Form S-4, as amended by Form S-8, No. 33-
55505) and prospectus relating to shares of the Corporation Common Stock
issuable upon the exercise of stock options, the obligations in respect to
which were assumed by the Corporation in connection with the acquisition
of Germantown Savings Bank,
(k) The Registration Statement (Form S-4, No. 33-300067, as amended by Form S-
8, No. 33-300067) and prospectus relating to shares of the Corporation
Common Stock issuable upon the exercise of stock options, the obligations
in respect to which were assumed by the Corporation in connection with the
acquisition of Meridian Bancorp, Inc.,
<PAGE>
Exhibit 23.1
Page 2 of 2
Consent of Independent Auditors
(l) The Registration Statements (Form S-3, Nos. 33-54049 and 333-2297) and
prospectus and prospectus supplement pertaining to
$1,750,000,000 in aggregate amount of Debt Securities issuable by CoreStates
Capital Corp and the related guarantees of the Corporation and Preferred
Stock, Depository Shares and Common Stock issuable by the Corporation.
(m) The Registration Statement (Form S-3, No. 033-40717) and prospectus relating
to shares of the Corporation's Common Stock issuable under the Dividend
Reinvestment Plan,
(n) The Registration Statement (Form S-8, No. 333-02949) and prospectus relating
to shares of the Corporation Common Stock issuable under the Meridian
Savings Plan.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
June 13, 1996
<PAGE>
Exhibit 23.2
page 1 of 3
The Board of Directors
CoreStates Financial Corp:
We consent to the incorporation by reference in the following Registration
Statements of CoreStates Financial Corp, of those reports, included herein on
Form 8-K of CoreStates Financial Corp and described below under the caption
Reports:
- -------
. The Registration Statement (No. 33-5874) on Form S-8, in Post-Effective
Amendment No. 1 to the Registration Statement (No. 2-91176) on Form S-8, the
Registration Statement (No. 33-28808) on Form S-8 and in the related
prospectuses, each pertaining to CoreStates Financial Corp Long-Term
Incentive Plans,
. The Registration Statement (No. 33-32934) on Form S-8 and prospectus relating
to the CoreStates Savings Plan,
. The Registration Statement (No. 33-50324) on Form S-3 pertaining to the
CoreStates Financial Corp 1992 Long-Term Incentive Plan,
. The Registration Statement (No. 33-57034) on Form S-3 and prospectus and
prospectus supplement pertaining to $1,000,000,000 in aggregate amount of
Debt Securities issuable by CoreStates Capital Corp and the related
guarantees of the Corporation, and Preferred Stock, Depository Shares, Common
Stock and Capital Securities, issuable by the Corporation,
. The Registration Statement (No. 33-54049) on Form S-3 and prospectus and
prospectus supplement pertaining to $1,000,000,000 in aggregate amount of
Debt Securities and Warrants issued by CoreStates Capital Corp and the
related guarantees of the Corporation, and Preferred Stock, Depository Shares
and Common Stock issuable by the Corporation,
<PAGE>
Exhibit 23.2
page 2 of 3
. The Registration Statement (No. 33-48422) on Form S-4, as amended by
Form S-8, and prospectus relating to shares of the Corporation Common Stock
issuable upon the exercise of stock options, the obligations in respect to
which were assumed by the Corporation in connection with the acquisition of
First Peoples Corporation,
. The Registration Statement (No. 33-40717) on Form S-3, as amended by Post-
Effective Amendment No. 2, and prospectus relating to shares of the
Corporation Common Stock issuable pursuant to the CoreStates Dividend
Reinvestment and Share Purchase Plan,
. The Registration Statement (No. 33-51429) on Form S-4, as amended by
Form S-8, and prospectus relating to shares of the Corporation Common Stock
issuable upon the exercise of stock options, the obligations in respect to
which were assumed by the Corporation in connection with the acquisition of
Constellation Bancorp,
. The Registration Statement (No. 33-53539) on Form S-4, as amended by
Form S-8, and prospectus relating to shares of the Corporation Common Stock
issuable upon the exercise of stock options, the obligations in respect to
which were assumed by the Corporation in connection with the acquisition of
Independence Bancorp, Inc.,
. The Registration Statement (No. 33-55505) on Form S-4, as amended by
Form S-8, and prospectus relating to shares of the Corporation Common Stock
issuable upon the exercise of stock options, the obligations in respect to
which were assumed by the Corporation in connection with the acquisition of
Germantown Savings Bank,
. The Registration Statement (No. 33-300067) on Form S-4, as amended by
Registration Statement (No. 33-300067) on Form S-8, and prospectus relating
to shares of the Corporation Common Stock issuable upon the exercise of stock
options, the obligations in respect to which were assumed by the Corporation
in connection with the acquisition of Meridian Bancorp, Inc.,
. The Registration Statements (Nos. 33-54049 and 333-2297) on Form S-3 and
prospectus and prospectus supplement pertaining to $1,750,000,000 in
aggregate amount of Debt Securities issuable by CoreStates Capital Corp and
the related guarantees of the Corporation, and Preferred Stock, Depository
Stocks and Common Stock issuable by the Corporation,
. The Registration Statement (No. 033-40717) on Form S-3 and prospectus
relating to shares of the Corporation's Common Stock issuable under the
Dividend Reinvestment Plan, and
<PAGE>
Exhibit 23.2
page 3 of 3
. The Registration Statement (No. 333-02949) on Form S-8 and prospectus
relating to shares of the Corporation Common Stock issuable under the
Meridian Savings Plan.
Reports
-------
. Our report dated January 17, 1996, except as to note 2, which is as of
February 23, 1996, with respect to the consolidated balance sheets of
Meridian Bancorp, Inc. and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of income, changes in shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1995. The report of KPMG Peat Marwick LLP covering the
aforementioned financial statements contains an explanatory paragraph which
discusses that Meridian Bancorp, Inc. adopted the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No.
115, Accounting for Certain Investments in Debt and Equity Securities, and
No. 112, Employers' Accounting for Postemployment Benefits, in 1994, and No.
106, Employers' Accounting for Postretirement Benefits Other Than Pensions,
and No. 109, Accounting for Income Taxes, in 1993.
. Our report dated January 16, 1996, except for note 20, which is as of
February 23, 1996, with respect to the consolidated balance sheets of United
Counties Bancorporation and subsidiaries as of December 31, 1995 and 1994,
and the related consolidated statements of income, changes in stockholders'
equity and cash flows, for each of the years in the three-year period ended
December 31, 1995. The report of KPMG Peat Marwick LLP covering the
aforementioned financial statements contains an explanatory paragraph which
discusses that United Counties Bancorporation adopted the provisions of the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities, in 1994, and No. 109, Accounting for Income Taxes, in 1993.
. Our report dated March 16, 1994, except as to the third paragraph of Note 1
and the last paragraph of Note 16 which are as of July 19, 1994, relating to
the consolidated statements of operations, changes in shareholders' equity
and cash flows of Constellation Bancorp and subsidiaries for the year ended
December 31, 1993, which report appears in the 1995 Annual Report on Form
10-K of CoreStates Financial Corp. Our report refers to a restatement of the
1993 financial statements to remove merger-related charges, and to a change
in accounting for postretirement benefits, other than pensions, income taxes
and certain investments in debt and equity securities in 1993.
June 13, 1996
/s/ KPMG Peat Marwick LLP
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in (a) the Registration Statement
on Form S-8 (No. 33-5874), the Post-Effective Amendment No. 1 to the
Registration Statement on Form S-8 (No. 2-91176), the Registration Statement on
Form S-8 (No. 33-28808) and in the related prospectuses, each pertaining to the
CoreStates Financial Corp Long-Term Incentive Plan, (b) the Registration
Statement on Form S-8 ( No. 33-32934) and prospectus relating to the CoreStates
Savings Plan, (c) the Registration Statement on Form S-8 (No. 33-50324)
pertaining to the CoreStates Financial Corp 1992 Long-Term Incentive Plan, (d)
the Registration Statement on Form S-3 (No. 33-57034) and related prospectus and
prospectus supplements pertaining to $1,000,000,000 in aggregate amount of Debt
Securities issuable by CoreStates Capital Corp and the related guarantees of the
Corporation, and Preferred Stock, Depository Shares, Common Stock and Capital
Securities issuable by the Corporation, (e) the Registration Statement on
Form S-3 (No. 33-54049) and the related prospectus and prospectus supplements
pertaining to $1,000,000,000 in aggregate amount of Debt Securities and Warrants
issuable by CoreStates Capital Corp and the related guarantees of the
Corporation and Preferred Stock, Depository Shares and Common Stock, and Capital
Securities, issuable by the Corporation , (f) the Registration Statement on Form
S-4, as amended by Form S-8 (No. 33-48422) and prospectus relating to shares of
the Corporation Common Stock issuable upon the exercise of stock options, the
obligation in respect to which were assumed by the Corporation in connection
with the acquisition of First Peoples Corporation, (g) the Registration
Statement on Form S-3, as amended by Post-Effective Amendment No. 2 (No. 33-
40717) and prospectus relating to shares of the Corporation Common Stock
issuable pursuant to the CoreStates Dividend Reinvestment and Share Purchase
Plan, (h) the Registration statement on Form S-4, as amended by Form S-8
(No. 33-51429) and prospectus relating to shares of the Corporation Common Stock
issuable upon the exercise of stock options, the obligation in respect to which
were assumed by the Corporation in connection with the acquisition of
Constellation Bancorp, (i) the Registration Statement on Form S-4, as amended by
Form S-8 (No. 33-53539) and prospectus relating to shares of the Corporation
Common Stock issuable upon the exercise of stock options, the obligation in
respect to which were assumed by the Corporation in connection with the
acquisition of Independence Bancorp, Inc., (j) the Registration Statement on
Form S-4, as amended by Form S-8 (No. 33-55505) and prospectus relating to
shares of the Corporation Common Stock issuable upon the exercise of stock
options, the obligation in respect to which were assumed by the Corporation in
connection with the acquisition of Germantown Savings Bank, (k) the Registration
Statement on Form S-4 (No. 333-00067, as amended by Form S-8 No. 33-00067) and
prospectus relating to shares of the Corporation Common Stock issuable upon the
exercise of stock options, the obligations in respect to which were assumed by
the Corporation in connection with the acquisition of Meridian Bancorp, Inc.,
(l) the Registration Statements Form S-3 (Nos. 33-54049 and 333-2297) and
prospectus and prospectus supplement pertaining to $1,750,000,000 in aggregate
amount of Debt Securities issuable by CoreStates Capital Corp and the related
guarantees' of the Corporation and Preferred Stock, Depository Shares and Common
Stock issuable by the Corporation, (m) the Registration Statement Form S-3 (No.
033-04717) and prospectus relating to shares of the Corporation's Common Stock
issuable under the Dividend Reinvestment Plan and (n) the Registration
Statement Form S-8 (No. 333-02949) and prospectus relating to shares of the
Corporation Common Stock issuable under the Meridian Savings Plan of our report,
which includes an explanatory paragraph related to changes in the method of
accounting for investments in 1993, dated January 19, 1994, on our audit of the
consolidated financial statements of Independence Bancorp, Inc. as of and for
the year ended December 31, 1993, incorporated by reference in this Form 8-K.
/s/ Coopers & Lybrand LLP
Philadelphia, Pennsylvania
June 13, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9 Exhibit 27
<LEGEND>
This Schedule contains summary financial information extracted from the
CoreStates Financial Corp consolidated balance sheet as of December 31, 1995,
and the related consolidated statement of income, changes in shareholders'
equity, and other supplemental financial data included within management's
discussion and analysis of financial condition and results of operations for
the year ended December 31, 1995 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 3,662,143
<INT-BEARING-DEPOSITS> 1,909,260
<FED-FUNDS-SOLD> 719,937
<TRADING-ASSETS> 147,218
<INVESTMENTS-HELD-FOR-SALE> 2,572,315
<INVESTMENTS-CARRYING> 3,059,917
<INVESTMENTS-MARKET> 3,075,964
<LOANS> 31,714,152
<ALLOWANCE> 670,265
<TOTAL-ASSETS> 45,997,242
<DEPOSITS> 33,963,820
<SHORT-TERM> 3,677,013
<LIABILITIES-OTHER> 1,719,697
<LONG-TERM> 2,212,099
0
0
<COMMON> 230,231
<OTHER-SE> 3,645,334
<TOTAL-LIABILITIES-AND-EQUITY> 45,997,242
<INTEREST-LOAN> 2,932,655
<INTEREST-INVEST> 380,156
<INTEREST-OTHER> 162,269
<INTEREST-TOTAL> 3,475,080
<INTEREST-DEPOSIT> 941,047
<INTEREST-EXPENSE> 1,308,155
<INTEREST-INCOME-NET> 2,166,925
<LOAN-LOSSES> 144,002
<SECURITIES-GAINS> 31,475
<EXPENSE-OTHER> 1,885,528
<INCOME-PRETAX> 1,019,617
<INCOME-PRE-EXTRAORDINARY> 655,176
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 655,176
<EPS-PRIMARY> 2.95
<EPS-DILUTED> 2.95
<YIELD-ACTUAL> 5.47
<LOANS-NON> 223,602
<LOANS-PAST> 88,671
<LOANS-TROUBLED> 7,202
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 681,124
<CHARGE-OFFS> 240,087
<RECOVERIES> 85,226
<ALLOWANCE-CLOSE> 670,265
<ALLOWANCE-DOMESTIC> 645,265
<ALLOWANCE-FOREIGN> 25,000
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
Exhibit 99.1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Meridian Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Meridian
Bancorp, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the years in the three year period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Meridian Bancorp,
Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
As described in Notes 1 and 8, respectively, to the consolidated financial
statements, the Company adopted the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities and Statement
of Financial Accounting Standards No. 112, Employers' Accounting for
Postemployment Benefits, in 1994. Also, as described in Notes 8 and 10,
respectively, to the consolidated financial statements, the Company adopted the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits
Other Than Pensions, and Statement of Financial Standards No. 109, Accounting
for Income Taxes, in 1993.
/s/ KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
January 17, 1996,
Except as to note 2, which is as of February 23, 1996
<PAGE>
Exhibit 99.2
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
United Counties Bancorporation:
We have audited the accompanying consolidated balance sheets of United Counties
Bancorporation and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flow for each of the years in the three-year period ended December 3, 1995.
These consolidated financial statements are the responsibility of the
Bancorporation's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of United Counties
Bancorporation and subsidiaries at December 31, 1995 and 1994, and the results
of their operations and their cash flow for each of the years in the three-year
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in notes 1, 3, and 15 to the consolidated financial statements,
the Bancorporation adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," in 1994, and
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," in 1993.
/s/ KPMG PEAT MARWICK LLP
Short Hills, New Jersey
January 16, 1996, except for note 20,
which is as of February 23, 1996.
<PAGE>
Exhibit 99.3
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
Constellation Bancorp:
We have audited the consolidated statements of operations, changes in
shareholders' equity, and cash flows of Constellation Bancorp and subsidiaries
for the year ended December 31, 1993 (not presented separately herein). These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Constellation Bancorp and subsidiaries for the year ended December 31, 1993, in
conformity with generally accepted accounting principles.
As explained in Note 1 to the consolidated financial statements, Constellation
Bancorp adopted the provisions of the Financial Accounting Standards Board's
Statements of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions," No. 109, "Accounting for Income
Taxes," and No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," in 1993.
As discussed in Note 1, the accompanying 1993 Consolidated Financial Statements
have been restated to remove certain merger-related charges.
/s/ KPMG Peat Marwick LLP
Short Hills, New Jersey
March 16, 1994, except as to the
third paragraph of Note 1 and
the last paragraph of Note 16,
which are as of July 19, 1994
<PAGE>
Exhibit 99.4
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Independence Bancorp, Inc.:
We have audited the consolidated statements of income, changes in stockholder's
equity, and cash flows of Independence Bancorp, Inc. and Subsidiaries for the
year ended December 31, 1993. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Independence Bancorp, Inc. and Subsidiaries for the year ended
December 31, 1993 in conformity with generally accepted accounting principles.
As discussed in the Notes to the Consolidated Financial Statements, the
Company changed its method of accounting for investments in 1993.
/s/ Coopers & Lybrand LLP
January 19, 1994
2400 Eleven Penn Center
Philadelphia, Pennsylvania
