<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): April 3, 1996
CORESTATES FINANCIAL CORP
(EXACT NAME OF REGISTRANT SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C> <C>
PENNSYLVANIA 0-6879 23-1899716
(STATE OR OTHER (COMMISSION (IRS EMPLOYEE
JURISDICTION OF FILE NUMBER) IDENTIFICATION NO.)
INCORPORATION)
</TABLE>
CENTRE SQUARE WEST,
1500 MARKET STREET
PHILADELPHIA, PENNSYLVANIA 19101
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICERS) (ZIP CODE)
REGISTRANT'S TELEPHONE, INCLUDING AREA CODE: (215) 973-3806
(FORMER NAME AND FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
<PAGE>
ITEM 5. OTHER EVENTS.
As previously announced, CoreStates Financial Corp ("CoreStates") and Meridian
Bancorp, Inc. ("Meridian") have entered into a definitive agreement, dated
October 10, 1995, providing for CoreStates to acquire Meridian pursuant to an
exchange of stock ("the Merger"). Under the terms of the agreement, each of
Meridian's 55.9 million shares of common stock will be exchanged for 1.225
shares of CoreStates' common stock. CoreStates also has received an option to
purchase up to 19.9% of Meridian's common stock if certain contingencies occur.
On February 23, 1996, Meridian acquired United Counties Bancorporation
("UCB"), a $1.6 billion asset New Jersey bank holding company in a transaction
accounted for as a pooling of interests ("the UCB Acquisition"). For each UCB
share outstanding, 5.0 shares of Meridian's common stock were issued.
The Merger is expected to be accounted for as a pooling of interests. All
regulatory approvals have been obtained, subject to certain conditions which
CoreStates is expected to fulfill.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(1) Pro Forma Financial Information of CoreStates Page
----
Financial Corp and Subsidiaries (Unaudited):
(i) Introductory Note to Pro Forma Financial 3
Information (Unaudited)
(ii) Pro Forma Condensed Combined Balance Sheet 4
(Unaudited) as of December 31, 1995
(iii)Footnotes to Pro Forma Condensed Combined 5-6
Balance Sheet
(iv) Pro Forma Condensed Combined Statements of 7-9
Income (Unaudited) for three years ended
December 31, 1995, 1994 and 1993
(v) Footnotes to Pro Forma Condensed Combined 10-11
Statements of Income
(2) Consolidated financial statements of Meridian
Bancorp, Inc. and subsidiaries:
(i) Consolidated Balance Sheets as of December 12
31, 1995 and 1994
(ii) Consolidated Statements of Income for the three 13
years ended December 31, 1995
(iii)Consolidated Statements of Changes in 14
Shareholders' Equity for the three years
ended December 31, 1995
(iv) Consolidated Statements of Cash Flows for the 15
three years ended December 31, 1995
(v) Notes to the December 31, 1995 Consolidated 16-65
Financial Statements
(vi) Report of KPMG Peat Marwick LLP 66
(3) Consolidated financial statements of United Counties
Bancorporation and subsidiaries:
(i) Consolidated Balance Sheets as of December 31, 67
1995 and 1994
(ii) Consolidated Statements of Income for the 68
three years ended December 21, 1995
(iii) Consolidated Statements of Changes in
Shareholders' Equity for the three years
ended December 31, 1995 69
(iv) Consolidated Statements of Cash Flows for
the three years ended December 31, 1995 70
(v) Notes to the December 31, 1995 Consolidated
Financial Statements 71-91
(vi) Report of KPMG Peat Marwick LLP 92
CoreStates Financial Corp
(Registrant)
By: /s/ David T. Walker
--------------------------------
David T. Walker
Counsel
Date: April 3, 1996
<PAGE>
PRO FORMA FINANCIAL INFORMATION
(UNAUDITED)
The following unaudited pro forma condensed combined financial statements
reflect the Merger under the application of the pooling of interests method of
accounting. Under the pooling of interests method of accounting, the historical
book values of the assets, liabilities and shareholders' equity of Meridian as
reported on its Consolidated Balance Sheet, will be carried over onto the
Consolidated Balance Sheet of CoreStates after addressing conformity issues, and
no goodwill or other intangible assets will be created. CoreStates will include
in its Consolidated Statement of Income the consolidated results of operations
of Meridian for the entire fiscal year in which the Effective Date of the Merger
occurs after addressing conformity issues and will combine and restate its
results of operations for prior periods to include the reported consolidated
results of operations of Meridian for prior periods after addressing conformity
issues.
The unaudited pro forma condensed combined financial statements also reflect
Meridian's February 23, 1996 acquisition of UCB, which was accounted for
under the pooling of interests method of accounting.
This pro forma financial information is based on the estimates and assumptions
set forth in the notes to such statements. The pro forma adjustments made in
connection with the development of the pro forma financial information are
preliminary and have been made solely for purposes of developing such pro forma
financial information as necessary to comply with the disclosure requirements of
the Commission. Where applicable, the pro forma adjustments have been separately
tax effected at a 35% statutory rate. The pro forma financial information has
been prepared using the historical consolidated financial statements and notes
thereto. The unaudited pro forma condensed combined financial statements do not
purport to be indicative of the combined financial position or results of
operations of future periods or indicative of the results that actually would
have been realized had the entities been a single entity during these periods.
The Merger Agreement provides for an Exchange Ratio of 1.225 shares of
CoreStates Common Stock for each share of Meridian Common Stock. The Exchange
Ratio of 1.225 is subject to possible increase in certain limited circumstances.
The accompanying unaudited pro forma financial information reflects an
equivalent per share of Meridian Common Stock at that Exchange Ratio. The
accompanying unaudited pro forma financial information also reflects the 5.0
shares of Meridian Common Stock that were issued for each share of UCB common
stock in the UCB acquisition.
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED BALANCE SHEET
(UNAUDITED)
DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CoreStates
CoreStates Meridian Meridian and Meridian
and and Pro Forma Meridian and
Subsidiaries Subsidiaries Adjustments Pro Forma Subsidiaries
-------------- -------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $2,755,636 $839,010 $3,594,646 $839,010
Time deposits 1,841,799 67,461 1,909,260 67,461
Investment securities held-to-maturity 1,015,621 1,338,548 2,354,169 1,338,548
Investment securities available-for-sale 974,711 1,289,570 2,264,281 1,289,570
Loans 21,046,535 10,163,851 $126,267 (B,I) 31,336,653 10,163,851
Allowance for loan losses (495,075) (164,151) (70,000) (C) (729,226) (164,151)
Federal funds sold and securities
purchased under agreements to resell 594,868 5,069 599,937 5,069
Trading account securities 1,336 145,882 147,218 145,882
Due from customers on acceptances 549,557 11,128 560,685 11,128
Premises and equipment 406,279 246,731 653,010 246,731
Other assets 929,349 826,255 (63,829) (B,D,I) 1,691,775 826,255
-------------- -------------- ------------- ------------ --------------
Total assets $29,620,616 $14,769,354 ($7,562) $44,382,408 $14,769,354
============== ============== ============= ============ ==============
LIABILITIES
Deposits:
Domestic:
Non-interest bearing $6,700,599 $1,966,168 $8,666,767 $1,966,168
Interest bearing 13,661,766 9,180,799 22,842,565 9,180,799
Overseas branches and subsidiaries 1,140,068 2,879 1,142,947 2,879
-------------- -------------- ------------- ------------ --------------
Total deposits 21,502,433 11,149,846 32,652,279 11,149,846
Funds borrowed 2,091,722 1,518,181 3,609,903 1,518,181
Bank acceptances outstanding 549,048 11,128 560,176 11,128
Other liabilities 1,399,660 270,003 127,945 (C,H) 1,797,608 270,003
Long-term debt 1,698,334 513,765 2,212,099 513,765
-------------- -------------- ------------- ------------ --------------
Total liabilities 27,241,197 13,462,923 127,945 40,832,065 13,462,923
-------------- -------------- ------------- ------------ --------------
SHAREHOLDERS' EQUITY
Common stock 145,875 293,440 (222,251) (E) 217,064 293,440
Capital surplus 793,714 222,801 203,602 (E) 1,220,117 222,801
Retained earnings 1,690,295 862,505 (135,507) (C,H) 2,417,293 862,505
Treasury Stock (250,465) (18,649) 18,649 (E) (250,465) (18,649)
Unallocated shares held by ESOP - (53,666) (53,666) (53,666)
-------------- -------------- ------------- ------------ --------------
Total shareholders' equity 2,379,419 1,306,431 (135,507) 3,550,343 1,306,431
-------------- -------------- ------------- ------------ --------------
Total liabilities and
shareholders' equity $29,620,616 $14,769,354 ($7,562) $44,382,408 $14,769,354
============== ============== ============= ============ ==============
Book value per share (3) $17.24 $23.24 $17.16 $23.24
============== ============== ============ ==============
<CAPTION>
Pro Forma
UCB UCB Meridian Combined
and Pro Forma and UCB All
Subsidiaries Adjustments Pro Forma Transactions
-------------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $67,498 $906,508 $3,662,144
Time deposits - 67,461 1,909,260
Investment securities held-to-maturity 696,395 2,034,943 3,050,564
Investment seucrities available-for-sale 304,415 1,593,985 2,568,696
Loans 386,852 10,550,703 31,723,505
Allowance for loan losses (11,037) (175,188) (740,263)
Federal funds sold and securities
purchased under agreements to resell 137,619 142,688 723,556 (A)
Trading account securities - 145,882 147,218
Due from customers on acceptances - 11,128 560,685
Premises and equipment 11,267 257,998 664,277
Other assets 28,242 $1,500 (J) 855,997 1,721,517
-------------- ------------- ------------ --------------
Total assets $1,621,251 $ 1,500 $16,392,105 $45,991,159
============== ============= ============ ==============
LIABILITIES
Deposits:
Domestic:
Non-interest bearing $270,430 $2,236,598 $8,937,197
Interest bearing 1,041,160 10,221,959 23,883,725
Overseas branches and subsidiaries - 2,879 1,142,947
-------------- ------------- ------------ --------------
Total deposits 1,311,590 12,461,436 33,963,869
Funds borrowed 81,109 1,599,290 3,677,012 (A)
Bank acceptances outstanding - 11,128 560,176
Other liabilities 23,923 $16,000 (J) 309,926 1,837,531
Long-term debt - 513,765 2,212,099
-------------- ------------- ------------ --------------
Total liabilities 1,416,622 16,000 14,895,545 42,250,687
-------------- ------------- ------------ --------------
SHAREHOLDERS' EQUITY
Common stock 2,531 51,210 (F) 347,181 230,231 (G)
Capital surplus 24,323 (73,443) (F) 173,681 1,211,571 (G)
Retained earnings (3) 200,008 (14,500) (J) 1,048,013 2,602,801
Treasury Stock (22,233) 22,233 (F) (18,649) (250,465) (G)
Unallocated shares held by ESOP (53,666) (53,666)
-------------- ------------- ------------ --------------
Total shareholders' equity 204,629 (14,500) 1,496,560 3,740,472
-------------- ------------- ------------ --------------
Total liabilities and
shareholders' equity $1,621,251 $1,500 $16,392,105 $45,991,159
============== ============= ============ ==============
Book value per share (3) $95.19 $22.35 $17.00
============== ============ ==============
</TABLE>
See footnotes to the Pro Forma Condensed Combined Balance Sheet.
<PAGE>
FOOTNOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET
(UNAUDITED)
(A) Reflects elimination of intercompany Federal funds transactions between
CoreStates and UCB.
(B) In connection with Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("FAS 114"), CoreStates
prospectively adopted effective January 1, 1995 the provisions of FAS 114
as they relate to the classification of loans previously determined to be
"in substance foreclosed." In accordance with FAS 114, loans determined to
be in substance foreclosed should be reclassified to loans and the charges
associated with write downs against in substance foreclosed loans should be
reclassified to the provision for losses on loans from non-financial
expenses. As in substance foreclosed loans are immaterial to CoreStates,
CoreStates' historical financial information reflects in substance
foreclosed loans as a component of other real estate owned ("OREO") in
other assets and the charges associated with write downs against in
substance foreclosed loans in other non-financial expenses.
Meridian adopted FAS 114 on January 1, 1995 and reclassified in substance
foreclosed loans in its historical financial information from OREO/other
assets to loans, and writedowns against in substance foreclosed loans from
other non-financial expenses to the provision for losses on loans.
As permitted under pooling of interests accounting, the pro forma financial
information is presented as if CoreStates reclassified in substance
foreclosed loans to loans, and writedowns against in substance foreclosed
loans from other non-financial expenses to the provision for losses on
loans for all periods presented.
In substance foreclosed loans for UCB are immaterial.
(C) Based on a preliminary review of Meridian's loan portfolio, CoreStates has
decided to take a different approach to the workout of certain assets. It
is CoreStates' philosophy that this change maximizes the total value of the
Merger and allows the Continuing Corporation to concentrate upon new
franchise initiatives and revenue generation. In CoreStates' general
experience, a strategy that involves the accelerated resolution of problem
assets has been more economical than a long-term work out approach. It has
been CoreStates' general experience that the costs of working out assets as
well as other carrying costs typically outweigh any improvement in those
assets' realized value. Furthermore, the process of working out problem
assets diverts resources and management time and attention from building
the business and creating long-term franchise value. CoreStates currently
estimates that in connection with the change in strategic direction and to
conform Meridian's consumer lending charge-off policies to those of
CoreStates, CoreStates will take an addition to the allowance for possible
loan losses of approximately $70 million and, accordingly, has adjusted
December 31, 1995 pro forma shareholders' equity by $70.0 million, $45.5
million after-tax. Based on the preliminary review, CoreStates currently
estimates that $66 million of the estimated provision relates to this
change in strategy and approximates 25% to 30% of the carrying value of
these assets. It is also estimated that the conforming adjustments, mostly
related to consumer lending charge-off policies, will comprise
approximately $4 million of the $70 million estimated provision.
Pro forma shareholders' equity at December 31, 1995 also reflects net
charges of approximately $105.0 million. These charges, which are based on
preliminary review, include: $40.0 million to $60.0 million for employee
severance costs; $25.0 million for the costs of consolidating and closing
branches and other duplicate facilities (net of anticipated gains on
branches expected to be sold); and $30.0 million for other expenses
directly attributable to the Merger. Accordingly, pro forma shareholders'
equity at December 31, 1995 has been reduced by $75.1 million, the net
after-tax effect of the charges and expenses directly attributable to the
Merger (net of anticipated gains on branches expected to be sold).
(D) Reflects deferred taxes receivable at statutory rates totaling $54.4
million related to the approximately $105.0 million of expenses directly
attributable to the Merger (net of anticipated gains on branches expected
to be sold) and the $70.0 million addition to Meridian's allowance for
possible loan losses.
5
<PAGE>
FOOTNOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET
(UNAUDITED)
(E) Reflects the conversion of 58.114 million outstanding shares of Meridian
Common Stock on into 71.189 million shares of CoreStates Common Stock on
December 31, 1995 after giving effect to the cancellation of 574 thousand
shares of Meridian Common Stock held as treasury stock.
(F) Reflects the conversion of 2.150 million outstanding shares of UCB Common
Stock into 10.748 million shares of Meridian Common Stock on December 31,
1995 after giving effect to the cancellation of 381 thousand shares of UCB
Common Stock held as treasury stock.
(G) Reflects the conversion of 68.862 million pro forma shares of Meridian
Common Stock into 84.356 million shares of CoreStates Common Stock on
December 31, 1995 after giving effect to the cancellation of 574 thousand
shares of Meridian Common Stock held as treasury stock.
(H) Reflects the conforming accounting adjustment related to the pro forma
adoption by Meridian of the FAS 106 transitional liability of $28.8
million, $18.7 million after-tax, effective January 1, 1992. See footnote C
to Pro Forma Condensed Combined Statements of Income on page 10.
(I) Loans held for sale in CoreStates' historical financial information have
not exceeded the requirements for separate balance sheet disclosure and
accordingly have been included in total loans. Meridian's historical
financial information reflects loans held for sale as a separate caption on
the balance sheet (or in other assets in a condensed balance sheet). In the
pro forma financial information, combined loans held for sale do not exceed
the requirements for separate balance sheet disclosure and therefore
Meridian's loans held for sale have been reclassified to total loans.
(J) Reflects charges of approximately $16.0 million, $14.5 million after the
related tax effects, which include expenses directly attributable to
Meridian's acquisition of UCB. These expenses include $10.3 million
of human resources related costs, including employment contracts and
severance; $1.5 million for elimination of duplicate operations and data
processing facilities; and $4.2 million of other expenses, including
investment banker fees and legal expenses. Deferred taxes receivable, at
statutory rates, totaling $1.5 million are reflected in other assets.
6
<PAGE>
<TABLE>
<CAPTION>
CORESTATES FINANCIAL CORP
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
(UNAUDITED)
TWELVE MONTHS ENDED DECEMBER 31, 1995
(in thousands, except per share amounts)
CoreStates
CoreStates Meridian Meridian and Meridian
and and Pro Forma Meridian and
Subsidiaries Subsidiaries Adjustments Pro Forma Subsidiaries
-------------- -------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $1,992,936 $907,005 $2,899,941 $907,005
Interest on investment securities 138,110 175,986 314,096 175,986
Interest on time deposits in banks 116,689 5,293 121,982 5,293
Other interest income 14,570 22,138 36,708 22,138
-------------- -------------- ------------- ------------ --------------
Total interest income 2,262,305 1,110,422 0 3,372,727 1,110,422
-------------- -------------- ------------- ------------ --------------
INTEREST EXPENSE
Interest on deposits 532,703 371,727 904,430 371,727
Interest on funds borrowed 119,667 91,426 211,093 91,426
Interest on long-term debt 121,401 31,587 152,988 31,587
-------------- -------------- ------------- ------------ --------------
Total interest expense 773,771 494,740 0 1,268,511 494,740
-------------- -------------- ------------- ------------ --------------
Net interest income 1,488,534 615,682 0 2,104,216 615,682
Provision for losses on loans 105,000 39,377 $125 (J) 144,502 39,377
-------------- -------------- ------------- ------------ --------------
Net interest income after provision for
losses on loans 1,383,534 576,305 (125) 1,959,714 576,305
-------------- -------------- ------------- ------------ --------------
NON-INTEREST INCOME
Securities gains 9,388 8,321 17,709 8,321
Other operating income 596,278 248,244 844,522 248,244
-------------- -------------- ------------- ------------ --------------
Total non-interest income 605,666 256,565 0 862,231 256,565
-------------- -------------- ------------- ------------ --------------
NON-FINANCIAL EXPENSES
Restructuring and merger related charges (G) 98,175 40,425 138,600 40,425
Other operating expenses 1,176,223 537,994 (1,565) (C,J) 1,712,652 537,994
-------------- -------------- ------------- ------------ --------------
Total non-financial expenses 1,274,398 578,419 (1,565) 1,851,252 578,419
-------------- -------------- ------------- ------------ --------------
Income before income taxes 714,802 254,451 1,440 970,693 254,451
Provision for income taxes 262,565 84,637 504 (C) 347,706 84,637
-------------- -------------- ------------- ------------ --------------
Net Income $452,237 $169,814 $936 $622,987 $169,814
============== ============== ============= ============ ==============
Average common shares outstanding 140,600 55,951 209,139 55,951
PER COMMON SHARE DATA (D)(H)
Income before cumulative effect of a change
in accounting principle $3.22 $3.04 $2.98 $3.04
Cash dividends declared $1.44 $1.45 $1.44 $1.45
<CAPTION>
Pro Forma
UCB Meridian Combined
UCB AND Pro Forma AND UCB All
Subsidiaries Adjustments Pro Forma Transactions(A)
-------------- ------------- ----------- --------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $33,031 $940,036 $2,932,972
Interest on investment securities 65,521 241,507 379,617
Interest on time deposits in banks - 5,293 121,982
Other interest income 4,373 26,511 40,513 (B)
-------------- ------------- ----------- --------------
Total interest income 102,925 0 1,213,347 3,475,084
-------------- ------------- ----------- --------------
INTEREST EXPENSE
Interest on deposits 36,620 408,347 941,050
Interest on funds borrowed 3,593 95,019 214,118 (B)
Interest on long-term debt - 31,587 152,988
-------------- ------------- ----------- --------------
Total interest expense 40,213 0 534,953 1,308,156
-------------- ------------- ----------- --------------
Net interest income 62,712 0 678,394 2,166,928
Provision for losses on loans (500) 38,877 144,002
-------------- ------------- ----------- --------------
Net interest income after provision for
losses on loans 63,212 0 639,517 2,022,926
-------------- ------------- ----------- --------------
NON-INTEREST INCOME
Securities gains 13,768 22,089 31,477
Other operating income 5,384 253,628 849,906
-------------- ------------- ----------- --------------
Total non-interest income 19,152 0 275,717 881,383
-------------- ------------- ----------- --------------
NON-FINANCIAL EXPENSES
Restructuring and merger related charges(G) _ 40,425 138,600
Other operating expenses 34,507 572,501 1,747,159
-------------- ------------- ----------- --------------
Total non-financial expenses 34,507 0 612,926 1,885,759
-------------- ------------- ----------- --------------
Income before income taxes 47,857 0 302,308 1,018,550
Provision for income taxes 15,668 100,305 363,374
-------------- ------------- ----------- --------------
Net Income $32,189 $0 $202,003 $655,176
============== ============= =========== ==============
Average common shares outstanding 2,146 66,682 222,285
PER COMMON SHARE DATA (D)(H)
Income before cumulative effect of a
change in accounting principle $15.00 $3.03 $2.95
Cash dividends declared $5.30 $1.45 $1.44
</TABLE>
See Footnotes to Pro Forma Condensed Combined Statements of Income.
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
UNAUDITED
TWELVE MONTHS ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CoreStates
CoreStates Meridian Meridian and
and and Pro Forma Meridian
Subsidiaries Subsidiaries Adjustments Pro Forma
-------------- -------------- ------------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $1,698,350 $789,290 $2,487,640
Interest on investment securities 156,931 179,568 336,499
Interest on time deposits in banks 66,389 4,607 70,996
Other interest income 7,857 11,575 19,432
-------------- -------------- ------------- -----------
Total interest income 1,929,527 985,040 2,914,567
-------------- -------------- ------------- -----------
INTEREST EXPENSE
Interest on deposits 364,858 283,256 648,114
Interest on funds borrowed 85,123 63,126 148,249
Interest on long-term debt 90,177 26,242 116,419
-------------- -------------- ------------- -----------
Total interest expense 540,158 372,624 912,782
-------------- -------------- ------------- -----------
Net interest income 1,389,369 612,416 2,001,785
Provision for losses on loans 246,900 28,086 $5,034 (J) 280,020
-------------- -------------- ------------- -----------
Net interest income after
provision for losses on loans 1,142,469 584,330 (5,034) 1,721,765
-------------- -------------- ------------- -----------
NON-INTEREST INCOME
Securities gains 18,753 4,807 23,560
Other operating income 548,787 223,219 772,006
-------------- -------------- ------------- -----------
Total non-interest income 567,540 228,026 795,566
-------------- -------------- ------------- -----------
NON-FINANCIAL EXPENSES
Restructuring and merger related
charges 108,700 - 108,700
Other operating expenses 1,208,861 579,668 (6,474) (C,J) 1,782,055
-------------- -------------- ------------- -----------
Total non-financial expenses 1,317,561 579,668 (6,474) 1,890,755
-------------- -------------- ------------- -----------
Income before income taxes 392,448 232,688 1,440 626,576
Provision for income taxes 143,656 70,600 504 (C) 214,760
-------------- -------------- ------------- -----------
Income before cumulative effect
of a change in accounting
principle (E)(F) $248,792 $162,088 $936 $411,816
============== ============== ============= ===========
Average common shares outstanding 142,498 57,661 213,133
PER COMMON SHARE DATA (D)
Income before cumulative effect
of a change in accounting
principle (E,F) $1.75 $2.81 $1.93
Cash dividends declared (H) $1.24 $1.34 $1.24
<CAPTION>
Meridian Pro Forma
Meridian UCB UCB and Combined
and and Pro Forma UCB All
Subsidiaries Subsidiaries Adjustments Pro Forma Transactions
-------------- -------------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $789,290 $31,196 $820,486 $2,518,836
Interest on investment securities 179,568 66,637 246,205 403,136
Interest on time deposits in banks 4,607 - 4,607 70,996
Other interest income 11,575 2,977 14,552 21,591 (B)
-------------- -------------- ------------- ----------- --------------
Total interest income 985,040 100,810 1,085,850 3,014,559
-------------- -------------- ------------- ----------- --------------
INTEREST EXPENSE
Interest on deposits 283,256 32,393 315,649 680,507
Interest on funds borrowed 63,126 2,187 65,313 149,618 (B)
Interest on long-term debt 26,242 - 26,242 116,419
-------------- -------------- ------------- ----------- --------------
Total interest expense 372,624 34,580 407,204 946,544
-------------- -------------- ------------- ----------- --------------
Net interest income 612,416 66,230 678,646 2,068,015
Provision for losses on loans 28,086 (825) 27,261 279,195
-------------- -------------- ------------- ----------- --------------
Net interest income after
provision for losses on loans 584,330 67,055 651,385 1,788,820
-------------- -------------- ------------- ----------- --------------
NON-INTEREST INCOME
Securities gains 4,807 - 4,807 23,560
Other operating income 223,219 6,101 229,320 778,107
-------------- -------------- ------------- ----------- --------------
Total non-interest income 228,026 6,101 234,127 801,667
-------------- -------------- ------------- ----------- --------------
NON-FINANCIAL EXPENSES
Restructuring and merger related
charges - - - 108,700
Other operating expenses 579,668 38,326 617,994 1,820,381
-------------- -------------- ------------- ----------- --------------
Total non-financial expenses 579,668 38,326 617,994 1,929,081
-------------- -------------- ------------- ----------- --------------
Income before income taxes 232,688 34,830 267,518 661,406
Provision for income taxes 70,600 11,038 81,638 225,798
-------------- -------------- ------------- ----------- --------------
Income before cumulative effect
of a change in accounting
principle (E)(F) $162,088 $23,792 $0 $185,880 $435,608
============== ============== ============= =========== ==============
Average common shares outstanding 57,661 2,139 68,356 226,234
PER COMMON SHARE DATA (D)
Income before cumulative effect
of a change in accounting
principle (E,F) $2.81 $11.12 $2.72 $1.93
Cash dividends declared (H) $1.34 $3.29 $1.34 $1.24
</TABLE>
See Footnotes to Pro Forma Condensed Combined Statements of Income.
8
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
UNAUDITED
TWELVE MONTHS ENDED DECEMBER 31, 1993
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CoreStates
CoreStates Meridian Meridian and Meridian
and and Pro Forma Meridian and
Subsidiaries Subsidiaries Adjustments Pro Forma Subsidiaries
-------------- -------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $1,585,015 $742,298 $2,327,313 $742,298
Interest on investment securities 205,170 203,399 408,569 203,399
Interest on time deposits in banks 44,340 3,874 48,214 3,874
Other interest income 7,339 12,119 19,458 12,119
-------------- -------------- ------------- ------------ --------------
Total interest income 1,841,864 961,690 2,803,554 961,690
-------------- -------------- ------------- ------------ --------------
INTEREST EXPENSE
Interest on deposits 379,813 283,822 663,635 283,822
Interest on funds borrowed 67,001 30,518 97,519 30,518
Interest on long-term debt 69,779 30,058 99,837 30,058
-------------- -------------- ------------- ------------ --------------
Total interest expense 516,593 344,398 860,991 344,398
-------------- -------------- ------------- ------------ --------------
Net interest income 1,325,271 617,292 1,942,563 617,292
Provision for losses on loans 121,201 58,781 $9,215 (J) 189,197 58,781
-------------- -------------- ------------- ------------ --------------
Net interest income after provision for
losses on loans 1,204,070 558,511 (9,215) 1,753,366 558,511
-------------- -------------- ------------- ------------ --------------
NON-INTEREST INCOME
Securities gains 16,110 27,326 43,436 27,326
Other operating income 557,920 247,297 805,217 247,297
-------------- -------------- ------------- ------------ --------------
Total non-interest income 574,030 274,623 848,653 274,623
-------------- -------------- ------------- ------------ --------------
NON-FINANCIAL EXPENSES
Restructuring charge - 17,500 17,500 17,500
Other operating expenses 1,241,862 606,026 (10,636)(C,J) 1,837,252 606,026
-------------- -------------- ------------- ------------ --------------
Total non-financial expenses 1,241,862 623,526 (10,636) 1,854,752 623,526
-------------- -------------- ------------- ------------ --------------
Income before income taxes 536,238 209,608 1,421 747,267 209,608
Provision for income taxes 173,809 59,068 497 (C) 233,374 59,068
-------------- -------------- ------------- ------------ --------------
Income before cumulative effect of a
change in accounting principle (E,I) $362,429 $150,540 $924 $513,893 $150,540
============== ============== ============= ============ ==============
Average common shares outstanding 145,398 57,194 215,461 57,194
PER COMMON SHARE DATA (D)
Income before cumulative effect of a
change in accounting principle (E,I) $2.49 $2.63 $2.39 $2.63
Cash dividends declared (H) $1.14 $1.26 $1.14 $1.26
<CAPTION>
Meridian Pro Forma
UCB UCB and Combined
and Pro Forma UCB All
Subsidiaries Adjustments Pro Forma Transactions
-------------- ------------- ----------- --------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $31,666 $773,964 $2,358,979
Interest on investment securities 68,207 271,606 476,776
Interest on time deposits in banks - 3,874 48,214
Other interest income 2,099 14,218 20,980 (B)
-------------- ------------- ----------- --------------
Total interest income 101,972 1,063,662 2,904,949
-------------- ------------- ----------- --------------
INTEREST EXPENSE
Interest on deposits 31,652 315,474 695,287
Interest on funds borrowed 1,747 32,265 98,689 (B)
Interest on long-term debt - 30,058 99,837
-------------- ------------- ----------- --------------
Total interest expense 33,399 377,797 893,813
-------------- ------------- ----------- --------------
Net interest income 68,573 685,865 2,011,136
Provision for losses on loans 175 58,956 189,372
-------------- ------------- ----------- --------------
Net interest income after provision for
losses on loans 68,398 626,909 1,821,764
-------------- ------------- ----------- --------------
NON-INTEREST INCOME
Securities gains (losses) (172) 27,154 43,264
Other operating income 7,190 254,487 812,407
-------------- ------------- ----------- --------------
Total non-interest income 7,018 281,641 855,671
-------------- ------------- ----------- --------------
NON-FINANCIAL EXPENSES
Restructuring charge - 17,500 17,500
Other operating expenses 39,556 645,582 1,876,808
-------------- ------------- ----------- --------------
Total non-financial expenses 39,556 663,082 1,894,308
-------------- ------------- ----------- --------------
Income before income taxes 35,860 245,468 783,127
Provision for income taxes 11,667 70,735 245,041
-------------- ------------- ----------- --------------
Income before cumulative effect of a
change in accounting principle (E,I) $24,193 $0 $174,733 $538,086
============== ============= =========== ==============
Average common shares outstanding 2,142 67,904 228,580
PER COMMON SHARE DATA (D)
Income before cumulative effect of a
change in accounting principle (E,I) $11.29 $2.57 $2.35
Cash dividends declared (H) $2.60 $1.26 $1.14
</TABLE>
See Footnotes to Pro Forma Condensed Combined Statements of Income
9
<PAGE>
FOOTNOTES TO PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
(UNAUDITED)
(A) The Pro Forma Condensed Combined Statements of Income do not reflect the
estimated $70.0 million provision for losses on loans related to Meridian's
loan portfolio, or charges and expenses of approximately $105.0 million
directly attributable to the Merger since these charges are non-recurring.
See footnote C on page 5. The Pro Forma Condensed Combined Statements of
Income also do not reflect the $16.0 million of charges and expenses
directly attributable to Meridian's acquisition of UCB. Were these expenses
reflected in the Pro Forma Condensed Combined Statement of Income for the
twelve months ended December 31, 1995, net income would decrease by $135.1
million, or $0.61 per share.
(B) Reflects the elimination of intercompany interest on Federal funds
transactions between CoreStates and UCB.
(C) Reflects the adoption of FAS 106, "Employers Accounting for Postretirement
Benefits Other Than Pensions." As permitted under FAS 106, CoreStates
elected to recognize immediately the January 1, 1992 transitional liability
of $128.7 million pre-tax, $84.9 million 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 $28.8 million 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
$28.8 million, $18.7 million after-tax, transitional liability. Pro forma
salaries, wages and benefits have been adjusted accordingly.
UCB adopted FAS 106 effective January 1, 1992 and elected to recognize
immediately the transitional liability of $6.2 million, $4.0 million after-
tax, as the cumulative effect of a change in accounting principle.
(D) CoreStates, Meridian, UCB and pro forma earnings per common share for the
years ended December 31, 1995, 1994 and 1993 were based on weighted average
common shares outstanding as dilution from potentially dilutive common
stock equivalents was less than 3% for each period.
(E) Effective January 1, 1993, CoreStates adopted FAS 112, "Employers'
Accounting for Postemployment Benefits." CoreStates recognized the January
1, 1993 FAS 112 transitional liability of $20.0 million, $13.0 million
after-tax as the cumulative effect of a change in accounting principle.
Meridian adopted FAS 112 on January 1, 1994, the date required under the
statement. The adoption of FAS 112 resulted in a charge of $4.2 million,
$2.7 million after-tax, in the first quarter of 1994. As permitted under
pooling of interests accounting, the pro forma information is prepared as
if Meridian adopted FAS 112 effective January 1, 1993.
The impact of FAS 112 on UCB is immaterial.
(F) During the first quarter of 1994, CoreStates recognized a $3.4 million
after-tax impairment loss on certain mortgage securities. The loss was the
result of a write-down to fair value of these securities which were deemed
to be impaired. This accounting treatment resulted from a Financial
Accounting Standards Board ("FASB") interpretation of FAS 115. The
interpretation, reached by a consensus of the FASB Emerging Issues Task
Force in March 1994, requires more definitive criteria for recognition of
impairment losses on these types of securities.
10
<PAGE>
FOOTNOTES TO PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
(UNAUDITED) (con't)
(G) In March 1995, CoreStates completed an intensive review of its operations
and businesses and announced a corporate-wide process redesign plan, which
restructures its banking services around customers and enhances 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 $0.49 per share, in March
1995. Subsequently, CoreStates recorded restructuring credits of $11.8
million, $7.5 million after-tax or $0.05 per share, related to gains on the
curtailment of pension benefits associated with employees terminated during
1995 and gains on the sale of branches which were as a result of the
process redesign.
In June 1995, Meridian completed an internal review of its operations and
businesses and announced a company-wide plan designed to improve its
operating performance and competitive position. As a result of this review
Meridian recorded a restructuring charge in the second quarter of 1995 of
$32.0 million ($20.8 million after-tax or $0.37 per share). Subsequent to
recording the June 1995 restructuring charge, Meridian recorded
restructuring credits of $1.6 million, $1.0 million after-tax or $0.02 per
share, related to gains on the curtailment of pension benefits associated
with employees terminated during 1995. In the fourth quarter of 1995,
Meridian recorded a $10.0 million charge for non-deductible expenses
associated with the Merger.
(H) Cash dividends declared per share for the respective periods prior to
CoreStates' acquisition of First Peoples Corporation (on September 3,
1992), Constellation Bancorp (on March 16, 1994), Independence Bancorp,
Inc. (on June 27, 1994) and Meridian assume that CoreStates would have
declared cash dividends per share equal to the cash dividends per share
actually declared by CoreStates.
Cash dividends declared per share for the respective periods prior to
Meridian's acquisition of Commonwealth Bancshares Corporation (on
August 31, 1993) and UCB assume that Meridian would have declared cash
dividends per share equal to the cash dividends declared per share actually
declared by Meridian.
Meridian's historical cash dividends declared per share for the year ended
December 31, 1992, reflect a new dividend payment schedule adopted in the
first quarter of 1992. Dividends paid in 1992 aggregated $1.20 per share.
(I) CoreStates retroactively adopted FAS 109 in the first quarter of
1992, effective January 1, 1987. Meridian and UCB elected to prospectively
adopt FAS 109 on January 1, 1993 and recognize a cumulative
benefit/(expense) of $7.2 million and $(579) thousand, respectively, as the
cumulative effect of a change in accounting principle. As permitted under
pooling of interests accounting, the pro forma financial information is
prepared as if Meridian and UCB also retroactively adopted FAS 109
effective January 1, 1987.
(J) CoreStates historical Condensed Combined Statements of Income reflect the
charges associated with writedowns against in substance foreclosed loans in
other non-financial expenses. In connection with its adoption of FAS 114,
Meridian elected to reclassify writedowns against in substance foreclosed
loans from other non-financial expenses to the provision for losses on
loans. As permitted under pooling of interests accounting, the pro forma
financial information for all periods presented is prepared as if
CoreStates reclassified writedowns against in substance foreclosed loans
from other non-financial expenses to the provision for losses on loans for
all periods presented prior to 1995.
In substance foreclosed loans for UCB are immaterial.
11
<PAGE>
MERIDIAN BANCORP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
December 31,
(Dollars In Thousands)
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Cash and Due from Banks.......................................... $839,010 $669,642
Short-Term Investments
Interest-Bearing Deposits in Other Banks....................... 67,461 123,608
Federal Funds Sold and Securities
Purchased Under Agreements to Resell......................... 5,069 96,810
----------- -----------
Total Short-Term Investments................................. 72,530 220,418
----------- -----------
Trading Account Assets........................................... 145,882 346,170
Investment Securities Available for Sale (Amortized Cost
$1,277,957 and $445,783 in 1995 and 1994, Respectively)..... 1,289,570 434,994
Investment Securities
(Fair Value $1,343,170 and $2,753,307 in 1995 and 1994,
Respectively)................................................. 1,338,548 2,872,419
Loans and Other Assets Held for Sale............................. 124,592 90,590
Total Loans, Net of Unearned Discount............................ 10,163,851 9,763,523
Less Allowance for Possible Loan Losses.................... 164,151 169,402
----------- -----------
Net Loans................................................ 9,999,700 9,594,121
----------- -----------
Premises and Equipment........................................... 246,731 263,583
Accrued Interest Receivable...................................... 112,151 111,936
Other Assets..................................................... 589,512 448,774
----------- -----------
Total Assets................................................. $14,758,226 $15,052,647
=========== ===========
LIABILITIES
Deposits
Non-Interest Bearing Deposits.................................. $1,966,168 $1,998,660
Interest-Bearing Deposits...................................... 9,183,678 9,380,907
----------- -----------
Total Deposits............................................... 11,149,846 11,379,567
----------- -----------
Short-Term Borrowings
Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase.......................... 1,271,517 1,569,153
Other Short-Term Borrowings.................................... 246,664 243,413
----------- -----------
Total Short-Term Borrowings.................................. 1,518,181 1,812,566
----------- -----------
Long-Term Debt and Other Borrowings.............................. 513,765 372,153
Accrued Interest Payable......................................... 82,438 62,344
Other Liabilities................................................ 187,565 210,932
----------- -----------
Total Liabilities............................................ 13,451,795 13,837,562
----------- -----------
Commitments and Contingencies (Note 12)
SHAREHOLDERS' EQUITY
Preferred Stock (Par Value $25.00)
Authorized - 25,000,000 Shares
Common Stock (Par Value $5.00)
Authorized - 200,000,000 Shares
Issued - 58,687,937 and 58,316,978 shares in 1995 and 1994,
Respectively.................................................. 293,440 291,585
Surplus.......................................................... 222,801 211,011
Retained Earnings................................................ 854,957 771,150
Net Unrealized Gains (Losses) on Securities...................... 7,548 (7,182)
Treasury Stock - 574,188 and 525,336 shares in 1995 and 1994,
Respectively.................................................. (18,649) (15,911)
Unallocated Shares Held by Employee Stock Ownership
Plan (ESOP) Trust - 1,900,000 and 1,285,000 Shares in
1995 and 1994, Respectively................................... (53,666) (35,568)
----------- -----------
Total Shareholders' Equity................................... 1,306,431 1,215,085
----------- -----------
Total Liabilities and Shareholders' Equity.............. $14,758,226 $15,052,647
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
12
<PAGE>
Meridian Bancorp, Inc.
Consolidated Statements of Income
Year Ended December 31,
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
-------------- -------------- --------------
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Interest Income
Interest and Fees on Loans.......................................... $896,976 $760,672 $705,893
Interest on Trading Account Assets.................................. 20,538 8,647 9,857
Interest on Investment Securities Available for Sale................ 33,182 23,884 51,963
Interest on Investment Securities................................... 142,804 155,684 151,436
Interest on Loans Held for Sale..................................... 10,029 28,618 36,405
Other Interest Income............................................... 6,893 7,535 6,136
-------------- -------------- --------------
Total Interest Income............................................. 1,110,422 985,040 961,690
-------------- -------------- --------------
Interest Expense
Interest on Deposits................................................ 371,727 283,256 283,822
Interest on Short-Term Borrowings................................... 91,426 63,126 30,518
Interest on Long-Term Debt and Other Borrowings..................... 31,587 26,242 30,058
-------------- -------------- --------------
Total Interest Expense............................................ 494,740 372,624 344,398
-------------- -------------- --------------
Net Interest Income................................................... 615,682 612,416 617,292
Provision for Possible Loan Losses.................................... 39,377 28,086 58,781
-------------- -------------- --------------
Net Interest Income After Provision for Possible Loan Losses 576,305 584,330 558,511
-------------- -------------- --------------
NON-INTEREST INCOME
Trust............................................................... 65,980 54,724 41,679
Mortgage Banking.................................................... 12,836 17,603 69,683
Amortization of and Reserves For Purchased Mortgage
Servicing Rights and Other Servicing-Related Assets.......... - (114) (33,713)
-------------- -------------- --------------
Net Mortgage Banking...................................... 12,836 17,489 35,970
Broker-Dealer and Investment Banking................................ 50,824 42,849 69,371
Service Charges on Deposit Accounts................................. 66,373 56,075 53,827
Fees for Other Customer Services ................................... 36,092 34,060 32,708
Net Securities Gains................................................ 7,965 2,998 25,280
Other Income........................................................ 16,495 19,831 15,788
-------------- -------------- --------------
Total Non-Interest Income......................................... 256,565 228,026 274,623
-------------- -------------- --------------
NON-INTEREST EXPENSES
Salaries and Employee Benefits...................................... 284,836 297,472 296,126
Net Occupancy Expense............................................... 43,996 45,351 42,578
Equipment Expense................................................... 38,665 38,745 38,005
Restructuring and Merger-Related Charges............................ 40,425 - 17,500
Other Expenses...................................................... 170,497 198,100 229,317
-------------- -------------- --------------
Total Non-Interest Expenses....................................... 578,419 579,668 623,526
-------------- -------------- --------------
Income Before Income Taxes and Cumulative Effect of Changes in
Accounting Principles............................................... 254,451 232,688 209,608
Provision for Income Taxes.......................................... 84,637 70,600 59,068
-------------- -------------- --------------
Income Before Cumulative Effect of Changes in Accounting Principles... 169,814 162,088 150,540
Cumulative After-Tax Effect of Changes in Accounting Principles..... - (2,730) 7,221
-------------- -------------- --------------
Net Income............................................................ $169,814 $159,358 $157,761
============== ============== ==============
Per Common Share
Income Before Cumulative Effect of Changes in Accounting Principles
Primary............................................................. $3.00 $2.80 $2.61
Fully Diluted....................................................... 2.98 2.80 2.61
Cumulative Effect on Prior Years of Changes in Accounting Principles
Primary............................................................. - (0.05) 0.13
Fully Diluted....................................................... - (0.05) 0.13
Net Income
Primary............................................................. 3.00 2.75 2.74
Fully Diluted....................................................... 2.98 2.75 2.74
Dividends Declared.................................................... 1.45 1.34 1.26
Average Shares Outstanding
Primary............................................................. 56,572,757 58,040,310 57,674,058
Fully Diluted....................................................... 57,000,499 58,040,310 57,674,058
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
13
<PAGE>
MERIDIAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in Thousands)
<TABLE>
<CAPTION>
Common Stock
--------------
Shares Retained
Outstanding Amount Surplus Earnings
-------------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
Balance at January 1,1993................................................ 56,491,396 $282,445 $180,352 $596,670
Net Income............................................................... -- -- -- 157,761
Common Stock Dividends Declared.......................................... -- -- -- (67,541)
Sales of Stock Under Dividend Reinvestment, Stock Option
and Employee Benefit Plans............................................. 621,453 3,107 13,135 --
Unrealized Loss on Marketable Equity Securities.......................... -- -- -- --
Common Stock Issued in Merger............................................ 1,041,637 5,208 11,687 3,168
-------------- -------------- -------------- ------------
Balance at December 31,1993............................................. 58,154,486 290,760 205,174 690,058
Net Income............................................................... -- -- -- 159,358
Common Stock Dividends Declared.......................................... -- -- -- (77,303)
Sales of Stock Under Dividend Reinvestment, Stock Option
and Employee Benefit Plans............................................. 121,298 51 (361) (963)
Purchases of Treasury Stock.............................................. (638,854) -- -- --
Purchases of Shares for Employee Stock Ownership Plan (ESOP)............. (1,285,000) -- -- --
Unrealized After - Tax Loss on Investment Securities Available for Sale.. -- -- -- --
Common Stock Warrants Issued in Acquisition.............................. -- -- 4,000 --
Common Stock Issued in Merger............................................ 154,712 774 2,198 --
-------------- -------------- -------------- ------------
Balance at December 31, 1994............................................. 56,506,642 291,585 211,011 771,150
Net Income............................................................... -- -- -- 169,814
Common Stock Dividends Declared.......................................... -- -- -- (81,115)
Sales of Stock Under Dividend Reinvestment, Stock Option
and Employee Benefit Plans............................................. 783,269 1,855 10,004 (4,892)
Purchases of Treasury Stock.............................................. (461,162) -- -- --
Purchases of Shares for Employee Stock Ownership Plan (ESOP)............. (715,000) -- -- --
Employee Stock Ownership Plan (ESOP) Shares Committed to be
Released to Participants............................................... 100,000 -- 1,786 --
Unrealized After - Tax Gain on Investment Securities Available for Sale.. -- -- -- --
-------------- -------------- -------------- ------------
Balance at December 31, 1995............................................. 56,213,749 $293,440 $222,801 $854,957
============== ============== ============== ============
<CAPTION>
Net Unrealized Unallocated
Gains / (Losses) Treasury ESOP
on Securities Stock Shares Total
--------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Balance at January 1,1993................................................ ($148) -- -- $1,059,319
Net Income............................................................... -- -- -- 157,761
Common Stock Dividends Declared.......................................... -- -- -- (67,541)
Sales of Stock Under Dividend Reinvestment, Stock Option
and Employee Benefit Plans............................................. -- -- -- 16,242
Unrealized Loss on Marketable Equity Securities.......................... (211) -- -- (211)
Common Stock Issued in Merger............................................ -- -- -- 20,063
--------------- ------------ -------------- -------------
Balance at December 31,1993............................................. (359) -- -- 1,185,633
Net Income............................................................... -- -- -- 159,358
Common Stock Dividends Declared.......................................... -- -- -- (77,303)
Sales of Stock Under Dividend Reinvestment, Stock Option
and Employee Benefit Plans............................................. -- $3,355 -- 2,082
Purchases of Treasury Stock.............................................. -- (19,266) -- (19,266)
Purchases of Shares for Employee Stock Ownership Plan (ESOP)............. -- -- ($35,568) (35,568)
Unrealized After - Tax Loss on Investment Securities Available for Sale.. (6,823) -- -- (6,823)
Common Stock Warrants Issued in Acquisition.............................. -- -- -- 4,000
Common Stock Issued in Merger............................................ -- -- -- 2,972
--------------- ------------ -------------- -------------
Balance at December 31, 1994............................................. (7,182) (15,911) (35,568) 1,215,085
Net Income............................................................... -- -- -- 169,814
Common Stock Dividends Declared.......................................... -- -- -- (81,115)
Sales of Stock Under Dividend Reinvestment, Stock Option
and Employee Benefit Plans............................................. -- 13,765 -- 20,732
Purchases of Treasury Stock.............................................. -- (16,503) -- (16,503)
Purchases of Shares for Employee Stock Ownership Plan (ESOP)............. -- -- (20,922) (20,922)
Employee Stock Ownership Plan (ESOP) Shares Committed to be
Released to Participants............................................... -- -- 2,824 4,610
Unrealized After - Tax Gain on Investment Securities Available for Sale.. 14,730 -- -- 14,730
--------------- ------------ -------------- -------------
Balance at December 31, 1995............................................. $7,548 ($18,649) ($53,666) $1,306,431
=============== ============ ============== =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
14
<PAGE>
MERIDIAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------- ---------
1995 1994 1993
--------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income............................................................................ $169,814 $159,358 $157,761
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Restructuring Charge............................................................... 17,893 -- 17,500
Depreciation and Amortization...................................................... 51,952 53,768 81,855
Deferred Tax (Benefit) Expense..................................................... (11,767) 28,305 929
Cumulative (After-Tax) Effect of Changes in Accounting Principles.................. -- 2,730 (7,221)
Provision for Possible Loan Losses................................................. 39,377 28,086 58,781
Provision for Other Real Estate Losses and Mortgage Servicing Recourse............. 10,494 17,522 16,938
Net Gains - Investment Securities.................................................. (4,091) (361) (12,694)
Net Gains - Investment Securities Available for Sale............................... (1,130) (4,446) (14,632)
Gains On Sales Of Mortgage Servicing............................................... (2,387) (867) (21,606)
Gain On Sale Of Student Loans...................................................... -- (8,984) --
Decrease (Increase) in Trading Account Assets...................................... 200,963 (23,579) 28,641
Decrease (Increase) in Loans and Other Assets Held for Sale........................ (30,864) 329,994 (123,848)
Decrease (Increase) in Other Assets................................................ (165,600) 49,429 117,848
Increase (Decrease) in Other Liabilities........................................... 71,322 (80,133) 63,707
Other, Net......................................................................... 5,020 4,199 14,380
--------- -------- ---------
Net Cash Provided by Operating Activities...................................... 350,996 555,021 378,339
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease (Increase) in Short-Term Investments......................................... 56,150 (21,746) 64,189
Proceeds from Sales of Investment Securities.......................................... 29,524 4,986 109,156
Proceeds from Maturities, Calls and Paydowns of Investment Securities................. 649,741 989,623 1,319,468
Purchases of Investment Securities.................................................... (84,809) (1,106,094) (1,320,142)
Proceeds from Sales of Investment Securities Available for Sale....................... 335,075 77,110 741,151
Proceeds from Maturities, Calls, Paydowns of Investment Securities Available for Sale. 62,995 63,779 165,945
Purchases of Investment Securities Available for Sale................................. (404,405) (288,218) (642,886)
Net Principal Disbursed on Loans to Customers......................................... (469,755) (1,064,515) (482,769)
Proceeds from Sale of Student Loans................................................... -- 231,984 --
Proceeds from Sales of Premises and Equipment......................................... 6,587 11,541 5,386
Purchases of Premises and Equipment................................................... (20,828) (54,487) (36,948)
Proceeds from Sales of Mortgage Servicing............................................. 3,041 8,199 18,528
Purchases of Mortgage Servicing....................................................... -- -- (2,116)
Proceeds from Sales of Assets Acquired in Foreclosures................................ 25,827 18,110 31,500
Net Cash Provided By Acquisitions..................................................... -- 379,318 52,900
--------- -------- ---------
Net Cash Provided by (Used For) Investing Activities........................... 189,143 (750,410) 23,362
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Decrease in Deposits.............................................................. (230,519) (445,161) (502,208)
Net Increase (Decrease) in Short Term Borrowings ..................................... (294,384) 1,020,843 (85,371)
Proceeds from Issuance of Long-Term Debt.............................................. 152,111 2,385 197,607
Repayment of Long-Term Debt........................................................... (12,834) (64,020) (92,077)
Purchases of Treasury Stock and ESOP Shares........................................... (16,503) (54,834) --
Funds Transferred to Trust for Future ESOP Purchases.................................. -- (24,432) --
Proceeds from Issuance of Common Stock................................................ 20,732 2,082 16,242
Cash Dividends Paid to Common Shareholders............................................ (81,115) (77,303) (69,635)
--------- -------- ---------
Net Cash Provided by (Used For) Financing Activities............................... (462,512) 359,560 (535,442)
--------- -------- ---------
CASH AND CASH EQUIVALENTS
Net Increase (Decrease) During the Period.......................................... 77,627 164,171 (133,741)
Balance at Beginning of the Period................................................. 766,452 602,281 736,022
--------- -------- ---------
Balance at End of the Period....................................................... $844,079 $766,452 $602,281
========= ======== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
15
<PAGE>
MERIDIAN BANCORP, INC.
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the more significant accounting policies
and reporting practices of Meridian Bancorp, Inc. and its subsidiaries
(Meridian). They are in accordance with generally accepted accounting
principles and have been followed on a consistent basis, except for the
accounting changes described in the following notes.
Basis of Presentation
The consolidated financial statements include the accounts of Meridian
Bancorp, Inc. and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated. Certain amounts in prior years
have been reclassified for comparative purposes.
Meridian is a regional bank holding company incorporated under the laws of
the Commonwealth of Pennsylvania, primarily operating in the eastern half of
Pennsylvania, as well as Delaware and southern New Jersey. Through its
subsidiaries, Meridian is engaged in providing a full range of retail and
corporate banking, trust and asset management services and broker-dealer
activities to a diversified customer base.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to
16
<PAGE>
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash and Cash Equivalents
In the accompanying Consolidated and Parent Company Statements of Cash
Flows, cash and cash equivalents include cash on hand, amounts due from banks,
federal funds sold, and securities purchased under agreements to resell. The
original maturities of such instruments are less than 90 days. Federal funds
are sold and securities are purchased under agreements to resell for generally
one-day periods.
Relative to the Consolidated Statements of Cash Flows, income tax payments
totaled $83.0 million in 1995, $45.0 million in 1994, and $66.1 million in 1993.
Interest payments totaled $474.6 million in 1995, $369.9 million in 1994, and
$345.0 million in 1993. Non-cash operating activity in 1994 includes a transfer
of $286.0 million from loans and other assets held for sale to trading account
assets. Non-cash investing activity consists of net transfers of loans in
liquidation to other real estate aggregating $23.9 million in 1995, $29.8
million in 1994, and $45.8 million in 1993; transfers of investment securities
to investment securities available for sale of $921.2 million in 1995, $18.3
million in 1994 and $415.0 million in 1993; a transfer of non-accrual
residential mortgage loans of $8.0 million and foreclosed real estate of $7.3
17
<PAGE>
million to loans and other assets held for sale in 1994; and a transfer of
purchased mortgage servicing rights and related assets of $36.0 million from
other assets to loans and other assets held for sale in 1993. Noncash financing
activity consists of stock and a warrant aggregating $7.0 million in 1994 and
stock of $20.1 million in 1993 issued as a result of acquisitions.
Investment Securities
Effective in the first quarter of 1994, Meridian adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities",which requires investments in equity securities with
a readily determinable fair value and investments in all debt securities to be
classified, at the date of adoption, in one of three categories. The three
categories are (1) held to maturity -- carried at amortized cost; (2) available
for sale -- carried at fair value (with unrealized gains and losses, net of
related tax effect, recorded as a separate component of shareholders' equity);
and (3) trading account - carried at fair value (with unrealized gains and
losses recorded in the income statement).
The amortization of premiums and accretion of discounts to the expected
maturity date of the related debt obligations are based on a method which
approximates a constant yield.
When a determination is made that the decline in fair value
18
<PAGE>
below cost for a marketable equity or debt security is other than temporary, the
cost basis of the individual security is written down to a new cost basis and
the amount of the write-down is accounted for as a realized loss.
Gains and losses on the sales of securities and unrealized gains and losses
on securities are computed on the specific identification method. Trading
account securities are carried at fair value and unrealized gains or losses are
included in the Consolidated Statements of Income.
Interest Rate Swaps
Interest rate swaps, the principal derivative product used by Meridian, are
a tool used mainly to alter the repricing characteristics of a portion of the
core deposit base. There is no effect on the recorded total assets or
liabilities of Meridian. Net amounts receivable or payable under agreements
designated for risk management purposes are recorded as adjustments to the
interest income or expense of the associated asset or liability. Gains or
losses resulting from the termination of interest rate swaps entered into for
risk management purposes are deferred and amortized over the remaining term of
the swap contract.
Loans
19
<PAGE>
Loans are stated net of deferred fees and costs and unearned discount.
Loan interest income is accrued using various methods which approximate a
constant yield.
Interest income is not accrued on commercial loans where management has
determined that borrowers may be unable to meet contractual principal or
interest payments, or where such payments are 90 or more days past due unless
the loan is well secured and in the process of collection. Interest on loans
that have been restructured is recognized according to the renegotiated terms.
Residential mortgages which are 180 days or more delinquent are placed on
nonaccrual status when total principal, interest, and escrow owed exceeds 80% of
the property's appraised value. Properties are re-appraised when foreclosure
proceedings are initiated. Consumer loans are not placed on non-accrual status,
but the borrower's ability to comply with payment terms is closely monitored by
management. Loans are charged-off when deemed uncollectible, which is generally
at a time no later than 120 days past due.
Loan origination and commitment fees and direct loan origination costs are
deferred and recognized over the life of the related loans as an element of the
yield.
Effective January 1, 1995, Meridian adopted Statement of
20
<PAGE>
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan", and Statement No. 118, "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures". Statement No. 114 requires that
certain impaired loans be measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or fair value of the
loan if the loan is collateral dependent. Statement No. 118 amends Statement
No. 114 to allow a creditor to use existing methods for recognizing interest
income on an impaired loan. There was no impact on consolidated net income
resulting from the implementation of these statements. Prior period financial
information has been restated to reflect the reclassification of in-substance
foreclosures to non-performing loans.
A loan is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. This category
currently includes all commercial loans on non-accrual status and certain
restructured loans. Large groups of smaller-balance, homogeneous loans such as
residential mortgage and consumer loans that are collectively evaluated for
impairment are not included in impaired loans.
The average recorded investment in impaired loans was $82.9 million in
1995. The recorded investment in impaired loans at
21
<PAGE>
December 31, 1995 was $76.7 million. The recorded investment for which there is
a related allowance for possible loan losses was $36.4 million at December 31,
1995 and the related allowance was $10.3 million. The recorded investment for
which there is no related allowance for possible loan losses was $40.3 million.
Interest income is not accrued on commercial loans where management has
determined that borrowers may be unable to meet contractual principal or
interest payments, or where such payments are 90 or more days past due unless
the loan is well secured and in the process of collection. Interest collections
on nonaccrual loans for which the ultimate collectibility of principal is
uncertain are applied as principal reductions. Otherwise, such collections are
credited to income when received. Interest on loans that have restructured is
recognized according to the renegotiated terms. The amount of interest income
recognized on impaired loans, using the cash-basis method of accounting, was
$845.4 thousand for the year ended December 31, 1995.
Allowance for Possible Loan Losses
The allowance for possible loan losses is established through provisions
for possible loan losses charged against income. Loans deemed to be
uncollectible are charged against the allowance. Subsequent recoveries, if any,
are credited to the allowance. The balance in the allowance is based on a
periodic
22
<PAGE>
evaluation of the loan portfolio and reflects an amount that in management's
opinion is adequate to absorb losses inherent in the portfolio.
When establishing the appropriate levels for the provision and the
allowance for possible loan losses, management performs an analysis of the loan
portfolio by considering a variety of factors. This analysis includes periodic
reviews by loan officers, credit review and loan workout personnel of all
borrowers with aggregate balances of $500,000 or greater. Meridian also
reviews, at least on a quarterly basis, problem borrowers with balances of
$250,000 or greater, as well as selected lower balance loans. Consideration is
given to the impact of current and anticipated economic conditions, the
diversification of the loan portfolio, historical loss experience, delinquency
statistics, reviews performed by loan officers who are primarily responsible for
compliance with established lending policy, the perceived financial strength of
borrowers, and the perceived adequacy of underlying collateral. Consideration
is also given to examinations performed by regulatory authorities.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed on the straight line method and is
charged to operations over the
23
<PAGE>
estimated useful lives of the related assets. Leasehold improvements are
amortized on a straight line basis over the terms of the respective leases or
the estimated useful lives of the improvements, whichever is shorter.
Other Assets
Goodwill is the excess of the purchase price over the fair value of net
assets of companies acquired through business combinations accounted for as
purchases. Included in other assets is $85.2 million of goodwill that is being
amortized using the straight line method over various periods not exceeding 15
years.
Core deposit intangibles are a measure of the value of consumer demand and
savings deposits acquired in business combinations accounted for as purchases.
Included in other assets is $27.6 million of core deposit intangibles which are
being amortized on an accelerated method, with at least two-thirds of the
original balance being amortized within seven years following the date of
acquisition.
The recoverability of the carrying value of intangible assets is evaluated
on an ongoing basis and permanent declines in value, if any, are charged to
expense.
Statement of Financial Accounting Standards No. 121,
24
<PAGE>
"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
Meridian's 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 Meridian's financial condition.
Assets acquired in foreclosures consist of real estate acquired through
foreclosure or in settlement of debt. These assets are carried at the lower of
cost or fair value less estimated costs of disposal.
Trust Assets
Assets held by Meridian in a fiduciary or agency capacity for customers are
not included in the consolidated financial statements since such items are not
assets of Meridian or its subsidiaries. Trust income is reported on the accrual
method.
Mortgage Banking
Prior to the third quarter of 1993, mortgage servicing fees received from
permanent investors for servicing their loan
25
<PAGE>
portfolios were recorded as income when received. Mortgage loan servicing
included collecting monthly mortgagor payments, forwarding payments and related
accounting reports to investors, collecting escrow deposits for the payment of
mortgagor property taxes and insurance, and paying taxes and insurance from
escrow funds when due.
In the third quarter of 1993 Meridian decided to refocus its mortgage
activities on the origination of residential loans and to substantially reduce
the scope of its mortgage servicing business. Mortgage servicing intangibles
and other related assets were carried at fair value and were included in
mortgage loans and other assets held for sale in the consolidated balance sheet
at December 31, 1993. The majority of these assets were sold in 1994.
Acquisition costs of mortgage servicing rights purchased prior to the third
quarter of 1993 were capitalized and amortized in proportion to, and over the
period of, estimated net servicing revenue (undiscounted servicing revenues in
excess of undiscounted servicing costs). There was an insignificant amount of
amortization in 1994 and none in 1995 since all purchased mortgage servicing
rights have been sold or written-off.
Excess servicing fees were computed as the present value of the difference
between the estimated future net revenues and normal servicing revenues as
established by the federally
26
<PAGE>
sponsored secondary market makers. Resultant premiums were deferred and
amortized over the estimated life of the related mortgages using the constant
yield method.
The amortization of both purchased mortgage servicing rights and excess
servicing fees was recorded as a reduction of servicing revenue.
Loans and other assets held for sale are carried at the lower of aggregate
cost or fair value, with resulting gains and losses included in other income.
The fair value calculation includes consideration of all open positions,
outstanding commitments from investors and related fees paid.
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 Meridian's results of operations or financial condition.
Securities Operations
27
<PAGE>
Off-balance sheet derivative products used by the securities operations
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. Collateralized mortgage obligation residuals, rights acquisition
contracts and guaranteed interest rate contracts are other financial instruments
and are included in the consolidated financial statements in investment
securities, investment securities available for sale, and interest-bearing
deposits, respectively.
Income Taxes
Certain items of income and expense are included in one reporting period
for financial accounting purposes and another reporting period for income tax
purposes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
28
<PAGE>
temporary differences between the financial statement and tax bases of existing
assets and liabilities.
Employee Benefits
Meridian has a non-contributory defined benefit pension plan covering
substantially all employees who qualify as to age and length of service. The
plan benefits are based on years of service and an earnings formula that
considers average salaries during a defined period prior to retirement.
The projected unit credit method is used to measure net periodic pension
cost over employees' service lives. The plan is funded using the projected unit
credit method to the extent deductible under existing federal income tax
regulations.
Meridian currently provides postretirement health care and life insurance
benefits to its employees. The medical portion is contributory and life
insurance coverage is non-contributory to the participants. The expected cost
of these benefits is accrued over the period the employee earns the benefits.
There are currently no plan assets attributable to these postretirement
benefits.
Effective January 1, 1995, all employees of Meridian and its subsidiaries
with two years of service began participating in a non-contributory employee
stock ownership plan. Compensation
29
<PAGE>
cost is being recognized based on the fair market value of the shares committed
to be released to employees.
Treasury Stock
The purchase of Meridian's common stock is recorded at cost. At the date
of subsequent reissue, the treasury stock account is reduced by the cost of such
stock on a first-in-first-out basis.
Preferred Stock
Meridian has 25 million shares of preferred stock authorized that carries a
$25.00 par value per share. No shares of preferred stock were issued and
outstanding as of December 31, 1995. Meridian's Board of Directors has the
authority to issue the preferred stock from time to time as a class without
series, or in one or more series.
Earnings Per Share
Primary earnings per share is computed by dividing net income by the
weighted average number of common stock and common stock equivalents outstanding
during the year. Stock options and warrants are considered common stock
equivalents and are included in the computation of the number of outstanding
shares using the treasury stock method, unless such options are anti-dilutive.
Fully diluted earnings per share gives effect to the assumed conversion of any
convertible preferred stock as well as to the exercise of stock options. For the
purposes of computing primary and fully diluted earnings per share, committed to
be released and allocated shares in the employee stock ownership plan are
considered outstanding.
30
<PAGE>
Note 2: Mergers and Acquisitions
On May 24, 1995, Meridian and United Counties Bancorporation announced a
definitive agreement to merge in a transaction which was accounted for as a
pooling-of-interests. Under the terms of the agreement, the transaction was a
tax-free exchange of five shares of Meridian stock for each share of United
Counties stock. Shareholders of United Counties approved the merger at a
meeting on February 7, 1996. The transaction closed on February 23, 1996.
On October 10, 1995, Meridian and CoreStates Financial Corp. announced a
definitive agreement to merge in a transaction expected to be accounted for as a
pooling-of-interests. The transaction would be a tax-free exchange of 1.225
shares of CoreStates common stock for each share of Meridian common stock.
Shareholders of both corporations approved the merger at separate meetings on
February 6, 1996. The merger, which is subject to approval by regulators, is
expected to close in the second quarter of 1996.
A summary of selected unaudited historical financial information for
CoreStates and United Counties follows:
31
<PAGE>
<TABLE>
<CAPTION>
CoreStates United Counties
Year Ended December 31, 1995 (a) 1994 1993 1995 (b) 1994 1993
(in thousands, except per share amounts) ---------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating results:
Net interest income $1,488,534 $1,389,369 $1,325,271 $62,712 $66,230 $68,573
Non-interest income 605,666 567,540 574,030 19,152 7,108 8,408
Income before cumulative effect of a change
in accounting principle 452,237 248,792 362,429 32,189 23,792 24,193
Per common share data:
Income before cumulative effect of a change
in accounting principle 3.22 1.75 2.49 15.00 11.12 11.29
Average common shares outstanding 140,600 142,498 145,398 2,146 2,139 2,142
At December 31
(in millions, except per share amounts)
Assets $29,621 $29,325 $28,435 $1,621 $1,681 $1,687
Loans 21,047 20,526 19,776 387 374 376
Deposits 21,502 22,041 21,132 1,312 1,355 1,393
Common shareholders' equity 2,379 2,350 2,368 205 182 158
Book value per common share 17.24 16.22 16.29 95.19 84.55 74.02
</TABLE>
(a) In March 1995, CoreStates completed an intensive review of its operations
and businesses and announced a corporate-wide process redesign plan, which
restructures its banking services around customers and enhances employees'
authority to make decisions to benefit customers. As a result of this
process redesign, CoreStates recorded a $110 million pre-tax restructuring
charge, $70.0 million after-tax or $0.49 per share, in March 1995.
CoreStates recorded restructuring-credits of $3.0 million, $1.9 million
after-tax or $0.01 per share in the second quarter of 1995 and $2.4
million, $1.5 million after-tax or $0.01 per share in the third quarter of
1995, related to gains on the curtailment of future pension benefits
associated with employees terminated during the second and third quarters.
(b) Includes a gain of $12.0 million ($7.6 million after-tax or $3.56 per
share) on the exchange of investment securities.
32
<PAGE>
A summary of unaudited pro forma financial information for Meridian and
United Counties and for Meridian, CoreStates and United Counties as if both
transactions had occurred on January 1, 1993 is as follows:
<TABLE>
<CAPTION>
Meridian and United Counties Meridian, CoreStates and United Counties
Year Ended December 31, 1995 1994 1993 1995 1994 1993
(in millions, except per share amounts) ------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $678 $679 $686 $2,167 $2,068 $2,011
Non-interest income 276 234 282 881 801 856
Income before cumulative effect of a
change in accounting principle 202 186 175 655 436 538
Per common share 3.03 2.72 2.57 2.95 1.93 2.35
Average common shares outstanding 66,682 68,356 67,904 222,285 226,234 228,580
Assets 16,391 16,744 15,781 46,011 46,069 44,216
Deposits 12,461 12,734 12,739 33,964 34,775 33,871
</TABLE>
33
<PAGE>
NOTE 3: Investment Securities, Investment Securities Available for Sale and
Securities Gains
Investment Securities
A summary of the amortized cost and approximate fair value of investment
securities included in the Consolidated Balance Sheets is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------------------- ----------------------- -----------------------
Approximate Approximate Approximate
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
(Dollars in Thousands) ---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
United States Government Securities........... $203,187 $204,822 $667,031 $638,476 $630,338 $635,047
Mortgage-Backed Securities
Collateralized Mortgage Obligations........ 753,815 751,598 1,380,105 1,311,068 1,240,901 1,241,026
Other...................................... - - 231,290 222,298 314,221 324,372
---------- ---------- ---------- ---------- ---------- ----------
Total Mortgage-Backed Securities....... 753,815 751,598 1,611,395 1,533,366 1,555,122 1,565,398
State and Municipal Securities................ 264,295 269,630 335,401 327,811 375,582 387,298
Other Securities.............................. 117,251 117,120 258,592 253,654 223,442 225,357
---------- ---------- ---------- ---------- ---------- ----------
Total Investment Securities............... $1,338,548 $1,343,170 $2,872,419 $2,753,307 $2,784,484 $2,813,100
========== ========== ========== ========== ========== ==========
</TABLE>
A summary of the gross unrealized gains and losses of investment securities is
as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------------------- ----------------------- -----------------------
Gross Gross Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses Gains Losses
(Dollars in Thousands) ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
United States Government Securities........... $2,018 $383 $162 $28,717 $5,644 $935
Mortgage-Backed Securities
Collateralized Mortgage Obligations........ 1,360 3,577 75 69,112 4,957 4,832
Other...................................... - - 1,056 10,048 10,492 341
---------- ---------- ---------- ---------- ---------- ----------
Total Mortgage-Backed Securities....... 1,360 3,577 1,131 79,160 15,449 5,173
State and Municipal Securities................ 5,510 175 2,802 10,392 11,942 226
Other Securities.............................. 264 395 128 5,066 2,624 709
---------- ---------- ---------- ---------- ---------- ----------
Total Investment Securities............... $9,152 $4,530 $4,223 $123,335 $35,659 $7,043
========== ========== ========== ========== ========== ==========
</TABLE>
The amortized cost and approximate fair value of investment securities at
December 31, 1995 by contractual maturity are shown below. Expected maturities
may differ from contractual maturities because certain borrowers have the right
to call or prepay obligations.
<TABLE>
<CAPTION>
Approximate
Amortized Fair
(Dollars in Thousands) Cost Value
---------- ----------
<S> <C> <C>
Other Than Mortgage-Backed Securities
Due in one year or less....................... $197,764 $197,858
Due after one year but within five years...... 270,108 274,222
Due after five years but within ten years..... 92,631 94,205
Due after ten years........................... 24,230 25,287
---------- ----------
Total..................................... 584,733 591,572
Mortgage-Backed Securities
Collateralized Mortgage Obligations........ 753,815 751,598
Other...................................... - -
---------- ----------
Total Mortgage-Backed Securities....... 753,815 751,598
---------- ----------
Total Investment Securities............... $1,338,548 $1,343,170
========== ==========
</TABLE>
Investment securities carried at approximately $2.0 billion at December 31,
1995 were pledged as collateral for public deposits, trust deposits, repurchase
agreements, and certain other deposits required by law. No securities of an
individual issuer aggregated more than 10% of shareholders' equity at December
31, 1995. Tax-free income on investment securities and investment securities
available for sale for 1995, 1994 and 1993 amounted to $18.3 million, $21.0
million and $24.3 million, respectively.
During December 1995, as permitted by the Financial Accounting Standards
Board in its "Guide to the Implementation of Statement No. 115 on Accounting for
Certain Investments in Debt and Equity Securities." Meridian transferred
investment securities of $921.2 million to investment securities available for
sale. The unrealized loss on these securities at the date of transfer was $915
thousand.
34
<PAGE>
Investment Securities Available For Sale
A summary of the amortized cost and approximate fair value of investment
securities available for sale included in the Consolidated Balance Sheets
is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------------------- ---------------------- ----------------------
Approximate Approximate Approximate
Amortized Fair Amortized Fair Amortized Fair
(Dollars in Thousands) Cost Value Cost Value Cost Value
---------- ----------- --------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
United States Government Securities.................... $684,490 $691,601 $282,500 $274,594 $103,086 $105,997
Mortgage-Backed Securities
Collateralized Mortgage Obligations................. 336,999 336,403 25,089 24,260 2,856 2,865
Other............................................... 153,323 154,908 96,501 91,678 122,297 125,971
---------- ----------- --------- ------------ ---------- -----------
Total Mortgage-Backed Securities................ 490,322 491,311 121,590 115,938 125,153 128,836
State and Municipal Securities......................... 23,280 23,761 32,530 33,362 34,306 37,029
Other Securities....................................... 79,865 82,897 9,163 11,100 13,118 16,290
---------- ----------- --------- ------------ ---------- -----------
Total Investment Securities Available for Sale..... $1,277,957 $1,289,570 $445,783 $434,994 $275,663 $288,152
========== =========== ========= ============ ========== ===========
</TABLE>
A summary of the gross unrealized gains and losses of investment securities
available for sale is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------------------- ----------------------- ----------------------
Gross Gross Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses Gains Losses
(Dollars in Thousands) ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
United States Government Securities..................... $8,143 $1,032 $105 $8,011 $2,998 $87
Mortgage-Backed Securities
Collateralized Mortgage Obligations.................. 2,973 3,569 - 829 9 -
Other................................................ 1,933 348 72 4,895 3,773 99
---------- ---------- ---------- ---------- ---------- ----------
Total Mortgage-Backed Securities................. 4,906 3,917 72 5,724 3,782 99
State and Municipal Securities.......................... 491 10 958 126 2,723 -
Other Securities........................................ 3,288 256 2,121 184 3,189 17
---------- ---------- ---------- ---------- ---------- ----------
Total Investment Securities......................... $16,828 $5,215 $3,256 $14,045 $12,692 $203
========== ========== ========== ========== ========== ==========
</TABLE>
The amortized cost and approximate fair value of investment securities
available for sale at December 31, 1995 by contractual maturity are shown
below. Expected maturities may differ from contractual maturities because
certain borrowers have the right to call or prepay obligations.
<TABLE>
<CAPTION>
Approximate
Amortized Fair
Cost Value
(Dollars in Thousands) ----------- -----------
<S> <C> <C>
Other Than Mortgage-Backed Securities
Due in one year or less................................ $365,114 $368,052
Due after one year but within five years............... 407,812 415,222
Due after five years but within ten years.............. 5,381 5,462
Due after ten years.................................... 9,328 9,523
----------- -----------
Total.............................................. 787,635 798,259
Mortgage-Backed Securities
Collateralized Mortgage Obligations..................... 336,999 336,403
Other................................................... 153,323 154,908
----------- -----------
Total Mortgage-Backed Securities.................... 490,322 491,311
----------- -----------
Total Investment Securities Available for Sale..... $1,277,957 $1,289,570
=========== ===========
</TABLE>
Total Securities Gains
Total gains from securities transactions (excluding trading account
securities), which were included in the following categories in the non-interest
income section of the Consolidated Statements of Income, are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Broker-Dealer and Investment Banking Income.................... $356 $1,809 $2,046
Net Securities Gains........................................... 7,965 2,998 25,280
------ ------ ------
Total Securities Gains................................. $8,321 $4,807 $27,326
====== ====== =======
</TABLE>
Proceeds from the sale of securities for the years ended December 31, 1995,
1994 and 1993 were $364.6 million, $82.1 million and $850.3 million. Gross gains
on these sales were $9.1 million, $5.1 million and $27.6 million and gross
losses were $741 thousand, $266 thousand and $203 thousand in 1995, 1994 and
1993, respectively.
35
<PAGE>
NOTE 4: LOANS
A summary of loans included in the Consolidated Balance Sheets
is as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
(Dollars in Thousands) 1995 1994
------------- -------------
<S> <C> <C>
Commercial Loans
Real Estate - Commercial Mortgage........... $1,665,138 $1,702,816
Real Estate - Construction.................. 227,867 278,271
Commercial, Financial and Agricultural...... 4,215,005 4,006,360
---------- ----------
Total Commercial Loans.................... 6,108,010 5,987,447
---------- ----------
Real Estate - Residential.................... 1,297,505 1,217,359
Consumer Loans
Real Estate - Home Equity................... 1,137,360 744,022
Revolving Credit............................ 148,757 110,049
Other Consumer Loans........................ 1,580,301 1,816,716
---------- ----------
Total Consumer Loans...................... 2,866,418 2,670,787
---------- ----------
Total Loans, Gross........................... 10,271,933 9,875,593
Less Unearned Discount..................... 108,082 112,070
---------- ----------
Total Loans, Net of
Unearned Discount.......................... $10,163,851 $9,763,523
=========== ==========
</TABLE>
Included within the loan portfolio are restructured loans and loans on
which Meridian has discontinued the accrual of interest. Such loans amounted to
$76.7 million, $96.2 million, and $149.7 million at December 31, 1995, 1994, and
1993, respectively. If these non-performing loans had been current in accordance
with their original terms and had been outstanding throughout the period, gross
interest income for 1995, 1994, and 1993 would have increased $7.6 million, $9.6
million, and $9.5 million, respectively. Interest income on these non-performing
loans included in income for 1995, 1994, and 1993 amounted to $1.2 million,
$868.0 thousand, and $706.0 thousand, respectively.
Tax-free income on loans for 1995, 1994, and 1993 amounted to $10.6
million, $10.8 million, and $14.4 million, respectively.
Loan concentrations are considered to exist when there are amounts loaned
to a multiple number of borrowers engaged in similar activities which would
cause their ability to meet contractual obligations to be similarly impacted by
economic or other conditions. At December 31, 1995, Meridian's commercial loans
and commitments did not have any industry concentration or other known
concentration (as defined) that exceeded 10% of total loans and commitments.
36
<PAGE>
NOTE 5: ALLOWANCE FOR POSSIBLE LOAN LOSSES
A summary of activity in the allowance for possible loan
losses follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
(Dollars in Thousands)
Balance at Beginning of Period........... $169,402 $175,078 $166,842
Additions (Deductions)
Acquired Allowances.................. - 1,168 3,094
Other Deductions..................... - (2,377) -
Loans Charged-Off.................... (60,255) (52,233) (64,830)
Recoveries on Charged-Off Loans...... 15,627 19,680 11,191
-------- -------- --------
Net Loans Charged-Off.................... (44,628) (32,553) (53,639)
-------- -------- --------
Provision Charged to Operating Expense... 39,377 28,086 58,781
-------- -------- --------
Balance at End of Period................. $164,151 $169,402 $175,078
======== ======== ========
</TABLE>
37
<PAGE>
NOTE 6: LONG-TERM DEBT AND OTHER BORROWINGS
Long-term debt and other borrowings consisted of the following:
<TABLE>
<CAPTION>
December 31, 1995 1994
(Dollars in Thousands) ---------- ----------
<S> <C> <C>
Floating Rate Subordinated Notes, Due 1996..... $75,000 $75,000
6.625% Subordinated Notes, Due 2003............ 149,287 147,945
7.875% Subordinated Notes, Due 2002............ 99,773 98,977
7.06% Note, Due 1997........................... 2,223 2,223
6.625% Note, Due 2000.......................... 149,902 -
Mortgages Payable and Capitalized Lease
Obligations (See Note 9)..................... 16,292 18,623
Federal Home Loan Bank Advances Due 1995-1996
with Fixed Rates from 6.61% to 7.19%......... 10,000 20,000
Federal Home Loan Bank Community Investment
Program, 6.66% Fixed Rate Note, Due 2016..... 2,888 -
4.80% Fixed Rate Note, Due 1996................ 8,400 8,400
Other Borrowings............................... - 985
---------- ----------
Total..................................... $513,765 $372,153
========== ==========
</TABLE>
The floating rate subordinated 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
Meridian. Since December 1, 1988, Meridian 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. The effect of
the capital securities which may be issued in connection with these notes
has not been included in the computation of earnings per share. In
December 1993, Meridian received approval from the Federal Reserve
Bank to revoke its obligation to exchange the notes for capital securities
at maturity.
Meridian has long-term borrowings from the Federal Home Loan
Bank which total $12.9 million. 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.
38
<PAGE>
Meridian also has $8.4 million of collateralized borrowings from the
Student Loan Marketing Association, due March 20, 1996, at a rate of 4.80%.
The remaining long-term debt consists of debt of Meridian's banking
subsidiaries and is subordinated in the right of payment to the depositors
of such subsidiaries. Substantially all of the notes are redeemable
prior to maturity at certain amounts based on sinking fund provisions or,
when applicable, approval of the appropriate regulatory agency.
Meridian had unused lines of credit of $10 million at December 31, 1995
and $30 million at December 31, 1994.
Meridian has short-term borrowings, primarily federal funds purchased and
securities sold under agreement to repurchase, amounting to $1,518 million and
$1,813 million at December 31, 1995 and 1994, respectively. The weighted
average interest rate on these borrowings at December 31,1995, was 4.93%. The
average interest paid on these borrowings was 5.66% and 4.31% for the years
ended December 31, 1995 and 1994, respectively. The maximum amount outstanding
at any month-end was $2,032 million in 1995, $1,946 million in 1994 and $1,209
million in 1993.
39
<PAGE>
Note 7: DIVIDEND, CAPITAL AND OTHER REGULATORY RESTRICTIONS
Various laws restrict the amount of dividends that can be paid to Meridian
by its subsidiary banks without regulatory approval. Under current regulations,
Meridian's subsidiary banks, without prior approval of bank regulators, may
declare dividends to Meridian in 1996 totalling $121.1 million plus additional
amounts equal to the net profits earned by such subsidiary banks for the period
of January 1, 1996 through the date of declaration, less dividends previously
paid in 1996.
The Federal Reserve Act also places restrictions on the amount of credit
that may be extended to Meridian by its subsidiary banks. During 1995, there
were no loans or advances made to Meridian by any of its subsidiary banks.
Meridian's banking subsidiaries are required to maintain reserve balances
with the Federal Reserve. These balances totalled $245.8 million at December
31, 1995 and averaged $127.7 million for the year then ended.
NOTE 8: EMPLOYEE BENEFIT PLANS
Pension Plans
Total pension expense for 1995, which includes several informal pension
arrangements in addition to the Meridian plan, was $3.9 million. Total pension
expense for 1994 and 1993 was $4.3 million and $2.9 million, respectively.
Net periodic pension expense (credit) of the Meridian plan includes the
following components:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Service Cost-Benefits
Earned During the Year $ 7,454 $ 8,743 $ 7,299
Interest Cost on Projected
Benefit Obligation 12,632 12,288 11,167
Actual Return on
Plan Assets (47,667) 4,425 (15,985)
Amortization of Unrecognized
Net Assets and Other
Deferred Amounts - Net 26,541 (21,859) (530)
-------- -------- --------
NET PERIODIC PENSION
EXPENSE (CREDIT) $ (1,040) $ 3,597 $ 1,951
======== ======== ========
</TABLE>
The following table sets forth the funded status of the Meridian plan and
amounts recognized in the Consolidated Balance Sheets at December 31.
<TABLE>
<CAPTION>
(Dollars In Thousands) 1995 1994
---- ----
<S> <C> <C>
Projected Benefit Obligation
Accumulated Benefit Obligation
Vested Benefits $136,265 $ 94,647
Non-Vested Benefits 9,084 5,969
Effect of Projected Future
Compensation Increases 53,497 42,276
-------- --------
PROJECTED BENEFIT OBLIGATION 198,846 142,892
Less Fair Value of Plan Assets 212,003 169,794
-------- --------
PLAN ASSETS IN EXCESS OF
PROJECTED BENEFIT OBLIGATION 13,157 26,902
</TABLE>
40
<PAGE>
<TABLE>
<S> <C> <C>
Less Unrecognized Net Gain Due
to Past Experience Different
from Assumptions Made 4,027 17,956
Less Unrecognized Net Transition Asset
Amortized Over Employee
Service Lives 3,021 3,877
------ -------
NET PENSION ASSET RECOGNIZED
IN BALANCE SHEET AT
DECEMBER 31 $6,109 $ 5,069
====== =======
</TABLE>
Net periodic pension expense is determined using certain assumptions as of
the beginning of the year whereas the funded status of the plan is determined
using assumptions as of the end of the year.
The discount rate used in determining the actuarial present value of
Meridian's projected benefit obligation was 7.0% in 1995, 8.25% in 1994, and
7.0% in 1993. The expected long-term rate of return on plan assets was 9.5% in
1995, 1994 and 1993. The rate of increase in future compensation levels was
5.3% in 1995, 1994 and 1993.
The assets of the Meridian plan are administered by Meridian Asset
Management, Inc., and consist primarily of common stock, fixed income securities
such as obligations of the United States government and corporations, and units
of certain common trust funds.
Meridian provides postretirement health care and life insurance plans to
its employees. The medical portion is contributory and life insurance coverage
is noncontributory to the participants. Effective January 1, 1993, Meridian
adopted Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions". The new accounting
rules require the accrual of the expected cost of these benefits over the period
the employee earns the benefits. Meridian elected to defer and amortize over 20
years the cumulative obligation for such benefits at the beginning of 1993.
The annual expense of Meridian's postretirement benefits other than
pensions under these new accounting rules was $2.7 million in 1995 and $4.6
million in 1994. The health care trend rate assumption used to determine
accumulated benefit obligations applicable to these benefits was 9.0% for 1996
decreasing over time to an annual rate of 5.5% and remaining at that level
thereafter. The discount rate used in determining the present value of the
projected benefit obligation was 7.0%.
41
<PAGE>
Net periodic expense of the Meridian postretirement healthcare and life
insurance plans includes the following components:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994
------ ------
<S> <C> <C>
Service Cost-Benefits $ 653 $1,060
Earned During the Year
Interest Cost on Accumulated
Postretirement Benefit Obligation 1,688 2,100
Amortization of Unrecognized
Net Transition Obligation
Over 20 Years 824 1,440
------ ------
NET PERIODIC EXPENSE $3,165 $4,600
====== ======
</TABLE>
The following table sets forth the funded status of the Meridian
postretirement healthcare and life insurance plans and amounts recognized in the
Consolidated Balance Sheets at December 31. There are currently no plan assets
attributable to these postretirement benefits.
<TABLE>
<CAPTION>
(Dollars In Thousands) 1995 1994
------- -------
<S> <C> <C>
Accumulated Postretirement Benefit
Obligation $18,483 $30,274
Less Fair Value of Plan Assets - -
------- -------
ACCUMULATED BENEFIT OBLIGATION
IN EXCESS OF PLAN ASSETS 18,483 30,274
Plus Unrecognized Net Gain Due
to Past Experience Different
from Assumptions Made 5,802 1,983
Less Unrecognized Net Transition
Obligation 11,436 24,385
------- -------
NET LIABILITY RECOGNIZED IN BALANCE
SHEET AT DECEMBER 31 $12,849 $ 7,872
======= =======
</TABLE>
A change in the health care trend rate assumption of one percent would
increase annual service cost by approximately $5,000 and the accumulated
postretirement benefit obligation at December 31, 1995 by approximately $50,000.
Effective January 1, 1994, Meridian adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits". This statement establishes
42
<PAGE>
standards for employers who provide benefits to former employees after
employment but before retirement. Such benefits include, among other things,
severance, disability, and workers' compensation benefits. The implementation
of these new accounting rules resulted in a charge of $4.2 million ($2.7 million
after-tax or $.05 per share) in the first quarter of 1994. Total postemployment
benefits expense was $221 thousand for 1995.
Savings Plan
Meridian also offers a savings plan which covers substantially all
employees who qualify as to age and length of service. A participating employee
must contribute at least 1% and may contribute a maximum of 10% of his or her
compensation. Meridian will match up to the first 4% that each employee
contributes. In 1994 Meridian matched up to the first 6% that each employee
contributed. Investment options include Meridian common stock. Contributions
are charged to current expense. The total expense relating to the Meridian
savings plan was $5.0 million in 1995, $7.6 million in 1994, and $7.1 million in
1993.
Employee Stock Ownership Plan
Effective January 1, 1995, all employees of Meridian and its subsidiaries
with two years of service are participating in a non-contributory employee stock
ownership plan (ESOP). The ESOP is a leveraged plan and is funded through a
direct loan from Meridian. The ESOP has acquired a total of 2,000,000 shares of
Meridian common stock for distribution to eligible employees ratably over a 20
year period. Compensation cost will be 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. No compensation cost was recognized in
1994. Dividends on allocated shares will be paid to participants and will be
charged to retained earnings. Dividends on unallocated shares and additional
cash contributions from Meridian will be used by the ESOP for debt service.
Stock Option Plan
Under Meridian's stock option plan, options to acquire a maximum of
3,500,000 shares of common stock may be granted to key officers. The plan
provides for the granting of options at the fair market value of Meridian's
common stock at the time the options are granted. Each option granted under the
plan may be exercised within a period of ten years from the date of the grant;
however, no option may be exercised within one year from the date of grant.
A stock appreciation rights (SARs) plan grants SARs in tandem with stock
option grants, up to a maximum of 750,000 units. The exercise of SARs reduces
the stock options otherwise exercisable;
43
<PAGE>
similarly, the exercise of stock options cancels the corresponding SARs. There
were no SARs outstanding at December 31, 1995.
Under Meridian's stock option plan, the exercisable option prices ranged
from $10.50 to $33.00 at December 31, 1995. An analysis of the activity in this
plan for the last three years follows:
<TABLE>
<CAPTION>
Number of Common Shares 1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Outstanding, January 1 2,239,437 2,318,032 1,521,507
Granted 701,100 78,553 1,279,658
Exercised (876,053) (123,286) (468,463)
Lapsed (35,608) ( 33,862) ( 14,670)
--------- --------- ---------
Outstanding, December 31 2,208,876 2,239,437 2,318,032
========= ========= =========
Exercisable, December 31 1,339,876 2,206,937 1,770,632
========= ========= =========
</TABLE>
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation". This statement encourages the
adoption of fair value accounting for stock options issued to employees.
Further, in the event that fair value accounting is not adopted, the statement
requires proforma disclosure of net income and earnings per share as if fair
value accounting had been adopted. SFAS No. 123 is required to be adopted by
Meridian in 1996. Management currently expects that it will not adopt fair value
accounting for stock options issued to employees and, therefore, does not expect
the adoption of this statement to materially affect Meridian's results of
operations or financial condition.
44
<PAGE>
NOTE 9: LEASES
Meridian and its subsidiaries are committed under a
number of capital and non-cancelable operating leases for
facilities and equipment with initial or remaining terms in
excess of one year. The minimum annual rental commitments
under these leases at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ---------
(Dollars in Thousands)
<S> <C> <C>
1996.......................... $3,659 $12,194
1997.......................... 2,980 9,758
1998.......................... 1,971 9,165
1999.......................... 1,629 8,214
2000.......................... 1,087 7,764
2001 and Subsequent........... 17,238 22,436
-------- --------
Total Minimum Lease
Payments.................... 28,564 $69,531
-------- ========
Amounts Representing
Interest.................... 14,617
--------
Present Value of Net Minimum
Lease Payments.............. $13,947
========
</TABLE>
Total rental expense for all operating leases for 1995, 1994 and 1993
amounted to $20.4 million, $21.7 million, and $20.5 million, respectively.
45
<PAGE>
NOTE 10: INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ --------------
<S> <C> <C> <C>
(Dollars in Thousands)
Current Expense - Federal.................................................... $92,941 $41,586 $57,017
State Expense................................................................ 3,463 2,607 2,677
Deferred Expense (Benefit) - Federal......................................... (11,767) 26,407 (626)
------------ ------------ --------------
Total Income Tax Expense..................................................... $84,637 $70,600 $59,068
============ ============ ==============
</TABLE>
Effective January 1, 1993, Meridian adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109),
which requires a change from the deferred method of accounting for income taxes
to the liability method. Under the liability method, deferred tax assets and
liabilities are recognized for future tax consequences attributable to temporary
differences between the financial statement and tax bases of existing assets and
liabilities. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date of the rate change.
As permitted by SFAS No. 109, Meridian has elected not to restate the
financial statements of any prior years. The implementation of these new tax
accounting rules resulted in an increase in consolidated net income of $7.2
million in the first quarter of 1993. This amount represents the cumulative
effect of adopting SFAS No. 109 at the beginning of 1993.
At December 31, 1995, deferred tax assets amounted to $97.4 million and
deferred tax liabilities amounted to $67.0 million. No valuation allowance has
been established for deferred tax assets because managment believes that it is
more likely than not that the deferred tax assets will be realized. Deferred tax
assets are realizable primarily through carryback of existing deductible
temporary differences to recover taxes paid in prior years and through future
reversal of existing taxable temporary differences.
46
<PAGE>
The effective tax rate is less than the federal statutory rate in each year as a
result of the following items:
(Dollars in Thousands)
<TABLE>
<CAPTION>
1995 1994 1993
--------------------- --------------------- ---------------------
% Of % Of % Of
Pre-Tax Pre-Tax Pre-Tax
Amount Income Amount Income Amount Income
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Federal Income Tax at Statutory Rate........................ $89,058 35.0% $81,441 35.0% $73,355 35.0%
Increase (Decrease) in Tax Rates Resulting from
Tax-Exempt Interest Income on Investment Securities....... (6,832) (2.7) (7,567) (3.3) (9,218) (4.4)
Tax-Exempt Interest Income on Loans....................... (3,684) (1.4) (3,768) (1.6) (5,022) (2.4)
Interest Disallowance on Tax-Exempt Assets................ 877 .4 945 .4 1,457 0.7
Non-deductible Merger Related Expenses.................... 3,500 1.4 0 0
Other, Net................................................ 1,718 .6 (451) (.2) (1,504) (0.7)
---------- ---------- ---------- ---------- ---------- ----------
Total Income Tax Expense.................................... $84,637 33.3% $70,600 30.3% $59,068 28.2%
========== ========== ========== ========== ========== ==========
</TABLE>
47
<PAGE>
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31, 1995 1994
(Dollars in thousands) ____________ ____________
<S> <C> <C>
Deferred Tax Assets
Provision for Possible Credit Related Losses in Excess of Charge-offs...... $61,187 $61,065
Interest Income on Non-Accrual Loans....................................... 852 1,181
Deferred Compensation...................................................... 5,812 5,865
Deferred Fees for Financial Accounting Purposes
Recognized for Tax Purposes........................................... 7,726 7,653
Expense Accruals not Deductible Until Paid for Tax Purposes................ 16,280 3,793
Differences Related to Financial and Tax Treatment
of Other Real Estate Owned ........................................... 4,293 4,217
Other...................................................................... 1,242 348
------------ ------------
Total Deferred Tax Assets.................................................... 97,392 84,122
------------ ------------
Deferred Tax Liabilities
Differences Related to Financial and Tax
Treatment of Leasing Activities....................................... 33,687 29,832
Accelerated Tax Depreciation............................................... 14,229 13,442
Differences Related to Financial and Tax
Treatment of Investment Activities.................................... 960 4,812
Differences Related to Financial and Tax
Treatment of Mortgage Banking Operations.............................. 1,263 1,443
Expenses Accelerated for Tax Purposes...................................... 10,352 9,206
Other...................................................................... 6,497 6,750
------------ ------------
Total Deferred Tax Liabilities............................................... 66,988 65,485
------------ ------------
Net Deferred Tax Asset....................................................... $30,404 $18,637
============ ============
</TABLE>
48
<PAGE>
NOTE 11: FAIR VALUES AND OTHER INFORMATION FOR FINANCIAL
INSTRUMENTS, INCLUDING DERIVATIVES
Statement of Financial Accounting Standards No. 105 "Disclosure of
Information about Financial Instruments with Off-Balance Risk and Financial
Instruments with Concentrations of Credit Risk", Statement No. 107 "Disclosures
about Fair Value of Financial Instruments" and Statement No. 119 "Disclosure
about Derivative Financial Instruments and Fair Value of Financial Instruments"
require the disclosure of estimated fair value of all asset, liability and off-
balance sheet financial instruments, including derivatives, in addition to risks
related to off-balance sheet instruments.
Fair value estimates of Meridian's financial instruments are made at a
point in time, based on relevant market information and available information
about the financial instrument. Fair values are based on quoted market prices
for financial instruments where prices exist in the market. In cases where
quoted market prices are not available, fair values are derived from estimates
using discounted cash flow or other valuation techniques. Because a quoted
market price does not exist for a significant portion of Meridian's financial
instruments, fair value estimates are based on judgments regarding future cash
flow expectations, perceived credit risk, interest rate risk, prepayment risk,
economic conditions, and other factors. The estimates are therefore subjective
and may not reflect the amount that could be realized upon immediate sale of the
instrument. Changes in the assumptions could also significantly affect the
estimates. Also, the estimates do not reflect any additional premium or
49
<PAGE>
discount that could result from the sale of Meridian's entire holdings of a
particular financial instrument.
Only existing on and off-balance sheet financial instruments are subject to
fair value estimates. A value is not assigned to fee-based businesses such as
Meridian's asset management and trust operations. In addition, Meridian
retains demand and savings deposits which aggregated $7.3 billion or 65% of all
deposits at December 31, 1995. The value of such deposits results from the low-
cost funding provided by these liabilities as compared to other funding sources.
The substantial value of these deposits is not reflected in the fair value
estimates because it is not a requirement of SFAS 107. The value of other non-
financial instruments, such as property, plant and equipment is also not
considered. In addition, tax implications related to the realization of
unrealized gains and losses can significantly affect fair value and have not
been considered in these estimates.
Because of these reasons, the aggregate fair values presented are not meant
to represent an estimate of the underlying value of Meridian taken as a whole at
December 31, 1995 and 1994. The carrying and estimated fair values of financial
instruments of Meridian are as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
Carrying/ Carrying/
Notional Estimated Notional Estimated
(in thousands) Amount Fair Value Amount Fair Value
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
TRADING FINANCIAL INSTRUMENTS
- -----------------------------
On-Balance Sheet Financial Assets
- ---------------------------------
Mortgage Loans $64,244 $64,244 $285,975 $285,975
Investment Securities 81,638 81,638 60,195 60,195
Off-Balance Sheet Financial Instruments
- ---------------------------------------
Derivatives
- -----------
Commitments to Purchase and
Sell Mortgages $139,803 ($125) $120,817 ($150)
NONTRADING FINANCIAL INSTRUMENTS
- --------------------------------
On-Balance Sheet Financial Assets
- ---------------------------------
Cash and Due from Banks $839,010 $839,010 $669,642 $669,642
Short-term Investments 72,530 72,530 220,418 220,418
Investment Securities 1,338,548 1,343,170 2,872,419 2,753,307
Investment Securities Available 1,289,570 1,289,570 434,994 434,994
for Sale
Loans and Other Assets 124,592 124,592 90,590 90,590
Held for Sale
Loans, Net 9,614,337 9,861,665 9,322,365 9,323,043
Other Assets 136,631 136,631 129,256 129,254
On-Balance Sheet Financial
Liabilities
- --------------------------
Demand and Savings
Deposits $7,265,418 $7,265,418 $7,656,291 $7,656,291
Time Deposits 3,884,428 3,898,015 3,723,276 3,612,024
</TABLE>
50
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Short-Term Borrowings 1,518,181 1,518,181 1,812,566 1,812,566
Long-Term Debt and Other 500,192 512,841 358,529 334,919
Borrowings
Accrued Interest Payable 82,438 82,438 62,344 62,344
</TABLE>
Certain non-financial assets and liabilities as defined in SFAS 107 have not
been included in the accompanying table. Therefore, loans and long-term debt
will not agree to the Consolidated Balance Sheet.
<TABLE>
<S> <C> <C> <C> <C>
Off-Balance Sheet Financial Instruments
- ---------------------------------------
Derivatives
- -----------
Commitments to Purchase and
Sell Mortgages and Securities
(Including Forward Rate
Agreements) $ 150,904 $ 1,814 $ 134,869 ($506)
Tender Option Bonds 208,103 4,995 255,948 5,709
Treasury Float Contracts 623,738 884 1,021,075 4,345
Interest Rate Swap Agreements 2,175,038 7,655 2,893,000 (100,906)
Purchased Interest Rate Floors 725,000 (1) 20,786 500,000 73
Caps Written as Part of
Interest Rate Collars 200,000 1,363 ------ ------
Interest Rate Caps and Floors 188,322 ------ 267,103 ------
for Customers
Other Interest Rate Contracts 33,734 0 32,308 (20)
Other
- -----
Commitments to Extend Credit $ 4,187,960 ($958) $3,686,257 ($832)
Standby and Commercial Letters 597,145 (4,943) 514,697 (4,915)
of Credit
Mortgage Loans Sold and Loan
Servicing Acquired with
Recourse 427,798 (12,041) 533,438 (11,500)
</TABLE>
(1) Includes $200,000 of floors purchased as part of interest rate collars.
51
<PAGE>
The following methods and assumptions were used by Meridian in estimating the
fair value of its financial instruments:
Cash and Due from Banks. The carrying amounts reported in the balance sheet
approximate fair value due to the short-term nature of these assets.
Short-Term Investments. The carrying amounts of short-term investments on
the balance sheet approximate fair value since the maturity of these
instruments is generally 90 days or less. For short-term investments with
maturities of greater than 90 days, fair value estimates are based on market
quotes for similar instruments, adjusted for such differences between the quoted
instruments and the instruments being valued as to maturity and credit quality.
Trading Account Assets. Trading account assets are marked-to-market for
financial reporting purposes and therefore already approximate fair value. The
fair value of investment securities held for trading are based on quoted market
prices. The fair value of mortgage loans held for trading are based on market
prices for comparable instruments, adjusted for differences between the two
instruments such as credit quality.
Investment Securities and Investment Securities Available for Sale. The fair
values of investment securities and investment securities available for sale are
based on quoted market prices as of the balance sheet date. For certain
instruments, fair value is estimated by obtaining quotes from independent
securities dealers.
In accordance with SFAS No. 115, investment securities available for sale are
marked-to-
52
<PAGE>
market for financial reporting purposes and therefore already approximate fair
value.
Loans. Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are aggregated by commercial, residential real
estate, and consumer categories. Each loan portfolio is further classified by
variable rate or fixed rate loans and by performing or nonperforming loans.
For performing variable-rate loans, carrying amounts approximate fair value,
as these loans reprice frequently as market rates change. Additionally, most
variable rate commercial loans are reviewed and extended on at least an annual
basis. At the time of that review, these loans are repriced to reflect the
current credit risk inherent in the loan. For performing fixed-rate loans, the
fair value methodology varies according to each loan portfolio. Fair values for
residential real estate and consumer loans are estimated using quoted market
prices, where available. Where quoted market prices are not available,
quotations are obtained for similar instruments and adjusted for such
differences in loan characteristics as maturity and credit quality. The fair
value of performing fixed-rate commercial loans is estimated by discounting the
expected cash flows by a discount rate that reflects the interest rate and
credit risk inherent in the loan. The estimated maturity of these loans
reflects both contractual maturity and management's assessment of prepayments,
economic conditions, and other factors that may affect the maturity of the
portfolio. The discount rate is based on the rate that would be currently
offered for loans with similar terms to borrowers of similar credit quality.
Nonperforming loans are included in each of the loan portfolios previously
described. The fair
53
<PAGE>
value of nonperforming loans is estimated by discounting the expected return of
principal over the period of time Meridian anticipates receiving principal
payments on the loan. The discount rate used is a rate reflective of the higher
risk surrounding these assets compared to a performing loan.
Accrued Interest Receivable and Other Assets. The carrying value of certain
financial instruments included in these categories, such as accrued interest
receivable, approximates fair value. For other financial instruments, such as
assets related to servicing certain loans, fair value is estimated by
discounting the scheduled cash flows through estimated maturity by a discount
rate that reflects the interest rate and credit risk inherent in the instrument.
Deposits. The fair value of deposits with no stated maturity, such as non-
interest bearing deposits, NOW accounts, savings, and money market deposit
accounts, is the amount payable on demand as of year end.
For time deposits, fair value is estimated by discounting the contractual
cash flows using a discount rate equal to the incremental borrowing rate for
similar maturities.
Short-Term Borrowings. The carrying values of federal funds purchased,
securities sold under agreements to repurchase, and other short-term borrowings
approximate fair values.
Long-Term Debt and Other Borrowings. The fair values of long-term debt and
other borrowings are estimated by discounting the contractual cash flows for
each instrument. The discount rate applied is based on the current incremental
borrowing rates for similar arrangements with similar maturities.
54
<PAGE>
Accrued Interest Payable and Other Liabilities. The carrying value of
certain financial instruments included in these categories, such as accrued
interest payable, approximates fair value.
Off-Balance Sheet Financial Instruments, Including Derivatives. Meridian uses
various off-balance sheet financial instruments, including derivatives, in
conducting its business activities and in managing its balance sheet risks. The
section of Management's Discussion and Analysis of Earnings and Financial
Position titled Derivatives on pages 13 through 19 contains additional
information on derivatives and is restated below.
Derivatives. Meridian uses off-balance sheet derivative products as
follows:
. For interest rate risk management
. In the securities unit (broker-dealer activities)
Tables 4 and 5 from Management's Discussion and Analysis of Earnings and
Financial Position provide information on derivative positions at December 31,
1995 and are restated below.
Table 4 OFF-BALANCE SHEET DERIVATIVES
MATURITIES AND OTHER INFORMATION
<TABLE>
<CAPTION>
December 31, 1994
(Dollars in Thousands) 1999
and
Consolidated Notional Amount 1995 1996 1997 1998 Beyond
---------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Related to Interest Rate Risk Management $968,908 $1,153,200 $768,700 $310,700 $482,903
Related to Securities Unit (Broker-Dealer Activities) 352,889 123,073 132,517 88,992 843,238
---------- ---------- ---------- ---------- ----------
Consolidated Derivatives $1,321,797 $1,276,273 $901,217 $399,692 $1,326,141
========== ========== ========== ========== ==========
Related to Interest Rate Risk Management
----------------------------------------
Interest Rate Swaps
Fixed Rate Receive
Notional Amount $850,000 $1,150,000 $535,000 $300,000 -
Weighted Average Fixed Rate Receive 5.51% 5.54% 5.58% 5.30% -
Weighted Average Floating Rate Pay 6.25% 6.09% 5.89% 5.88% -
Fixed Rate Pay
Notional Amount 50,000 - - - -
Weighted Average Floating Rate Receive 8.50% - - - -
Weighted Average Fixed Rate Pay 6.81% - - - -
Purchased Interest Rate Floors
Notional Amount - - 200,000 - $300,000
Weighted Average Rate - - 7.50% - 6.67%
Notional Amount of Other Contracts
Interest Rate Caps and Floors for Customers 36,600 3,200 33,700 10,700 182,903
Other 32,308 - - - -
---------- ---------- ---------- ---------- ----------
Total Interest Rate Risk Management $968,908 $1,153,200 $768,700 $310,700 $482,903
---------- ---------- ---------- ---------- ----------
<CAPTION>
December 31, 1994 Net
(Dollars in Thousands) Unrealized
Unrealized Unrealized Gains
Consolidated Notional Amount Total Gains Losses (Losses)
---------------------------- ---------- ---------- ---------- ----------
Related to Interest Rate Risk Management $3,684,411 $1,260 ($101,793) ($100,533)
Related to Securities Unit (Broker-Dealer Activities) 1,540,709 12,918 (3,840) 9,078
---------- ---------- ---------- ----------
Consolidated Derivatives $5,225,120 $14,178 ($105,633) ($91,455)
========== ========== ========== ==========
Related to Interest Rate Risk Management
Interest Rate Swaps
Fixed Rate Receive
Notional Amount $2,835,000 - ($101,491) ($101,491)
Weighted Average Fixed Rate Receive 5.52%
Weighted Average Floating Rate Pay 6.08%
Fixed Rate Pay
Notional Amount 50,000 $905 - 905
Weighted Average Floating Rate Receive 8.50%
Weighted Average Fixed Rate Pay 6.81%
Purchased Interest Rate Floors
Notional Amount 500,000 355 (282) 73
Weighted Average Rate 7.00%
Notional Amount of Other Contracts
Interest Rate Caps and Floors for Customers 267,103 - - -
Other 32,308 - (20) (20)
---------- ---------- ---------- ----------
Total Interest Rate Risk Management $3,684,411 $1,260 ($101,793) ($100,533)
---------- ---------- ---------- ----------
</TABLE>
Notes
1. Maturity information reflects contractual terms based on interest rates
in effect at December 31, 1994.
2. Fixed rate receive swaps convert retail deposits to floating rates.
3. Fixed rates shown are rates over the life of the swaps; floating rates
represent rates in effect at December 31, 1994.
4. Fixed rate receive swaps contain (1) $225 million of indexed amortizing
swaps, where amortization of the notional amount is dependent upon the
level of short term interest rates and (2) $50 million of forward starting
swaps.
5. Weighted average rates shown for purchased floors are the exercise rates;
payments will be received when market rates are below these predetermined
exercise rates.
6. Other contracts include customer caps and floors, forward delivery
instruments to manage risks from mortgage operations, and foreign
exchange contracts.
55
<PAGE>
<TABLE>
<CAPTION>
Related to Securities Unit (Broker-Dealer Activities)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Rate Swaps
Fixed Rate Receive
Notional Amount - - - - $8,000
Weighted Average Fixed Rate Receive - - - - 7.09%
Weighted Average Floating Rate Pay - - - - 4.85%
Tender Option Bonds
Notional Amount $51,236 $73,310 $84,710 $3,195 43,497
Weighted Average Fixed Rate Receive 8.08% 7.94% 7.85% 6.75% 8.04%
Weighted Average Floating Rate Pay 3.74% 3.84% 4.16% 4.75% 3.81%
Treasury Float Contracts 110,205 44,065 42,970 82,221 741,614
Commitments to Purchase or
Sell Mortgages and Securities 191,448 5,698 4,837 3,576 50,127
--------- --------- --------- -------- ---------
Total Securities Unit $352,889 $123,073 $132,517 $88,992 $843,238
========= ========= ========= ======== =========
<CAPTION>
Related to Securities Unit (Broker-Dealer Activities)
-----------------------------------------------------
<S> <C> <C> <C> <C>
Interest Rate Swaps
Fixed Rate Receive
Notional Amount $8,000 - ($320) ($320)
Weighted Average Fixed Rate Receive 7.09%
Weighted Average Floating Rate Pay 4.85%
Tender Option Bonds
Notional Amount 255,948 $7,513 (1,804) 5,709
Weighted Average Fixed Rate Receive 7.94%
Weighted Average Floating Rate Pay 3.93%
Treasury Float Contracts 1,021,075 4,345 - 4,345
Commitments to Purchase or
Sell Mortgages and Securities 255,686 1,060 (1,716) (656)
---------- ------- ------- ------
Total Securities Unit $1,540,709 $12,918 ($3,840) $9,078
========== ======= ======= ======
</TABLE>
Notes
1. Maturity information reflects expected maturity based on interest rates
in effect at December 31, 1994.
2. Fixed rates shown are rates over the life of the swaps; floating rates
represent rates in effect at December 31, 1994.
Table 5: ACTIVITY IN DERIVATIVES RELATED TO INTEREST RATE RISK MANAGEMENT
<TABLE>
<CAPTION>
NOTIONAL AMOUNTS
(Dollars in Thousands)
FIXED RATE FIXED RATE
RECEIVE SWAPS RECEIVE SWAPS FIXED RATE BASIS PURCHASED
OUTSTANDING FORWARD START PAY SWAPS SWAPS FLOORS COLLARS TOTAL
-------------- -------------- ---------- -------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1993 $2,060,000 $150,000 $100,000 - - - $2,310,000
Maturities (550,000) - (50,000) - - - (600,000)
Terminations (225,000) - - - - - (225,000)
New contracts 875,000 525,000 - - $500,000 - 1,900,000
Forwards becoming effective 625,000 (625,000) - - - - -
-------------- -------------- ---------- -------- ----------- --------- ----------
December 31, 1994 2,785,000 50,000 50,000 - 500,000 - 3,385,000
Maturities (992,962) - (50,000) - - - (1,042,962)
Terminations (275,000) - - - (100,000) - (375,000)
New contracts 200,000 150,000 - $250,000 125,000 $200,000 925,000
Forwards becoming effective 100,000 (100,000) - - - - -
-------------- -------------- ---------- -------- ----------- --------- ----------
December 31, 1995 $1,817,038 $100,000 - $250,000 $525,000 $200,000 $2,892,038
============== ============== ========== ======== =========== ========= ==========
</TABLE>
56
<PAGE>
Derivatives Used for Interest Rate Risk Management. Meridian's core
banking businesses generate a mix of loans and deposits that tends to create an
asset sensitive interest rate risk profile, primarily because retail core
deposits do not reprice as quickly as loans. An asset sensitive position
generally indicates that net interest income would increase in periods of rising
interest rates and decrease in periods of declining interest rates. Meridian
manages this tendency towards asset sensitivity through its securities and
purchased funding portfolios and by the use of off-balance sheet derivative
products. The gap position at December 31, 1995, as previously discussed, was
moderately asset sensitive.
Meridian utilizes a variety of derivative instruments in managing interest
rate risk, including interest rate swaps, options, forwards, caps, floors and
collars. These instruments provide an efficient means to achieve risk management
goals, while supporting liquidity and capital management objectives.
Interest rate swaps account for approximately 70% of the derivative
products used for interest rate risk management purposes. Interest rate swaps
involve the exchange of fixed and variable interest payments based on an
underlying notional amount. Meridian will generally receive a fixed rate and pay
a variable rate in order to reduce the asset sensitive position associated with
its core banking businesses. Meridian uses interest rate swaps primarily to
alter the repricing characteristics of its retail core deposits, including time
deposits, interest-bearing checking accounts, and savings and money market
deposits.
Interest rate swaps totaled $2.2 billion at December 31, 1995 compared to
$2.8 billion at December 31, 1994. Because of the nature of risk being managed,
the impact on net interest income of swaps for which Meridian receives a fixed
and pays a variable interest rate will be positive during periods of declining
rates and negative in periods of rising rates. Consistent with this profile, the
impact of interest rate swaps was to increase interest expense on deposits by
$23.5 million in 1995 compared to a reduction of $11.3 million in interest
expense in 1994.
As financial market conditions and balance sheet mix changes, management
may elect to modify its interest rate risk profile. One means for achieving this
objective is to terminate existing derivatives contracts. Accounting rules
require that any gains or losses resulting from terminations be amortized over
the remaining life of the terminated contract. Deferred losses on terminated
interest rate swaps were $338 thousand at December 31, 1995 and will be
completely amortized into income by early 1996. Deferred gains on terminated
interest rate floors contracts totaled $2.4 million at December 31, 1995 and
will be completely amortized into income by year-end 1997.
Meridian purchases interest rate floors to protect net interest income from
the effects of declining interest rates or a flattening of the yield curve. In
interest rate floor contracts, Meridian pays a premium to a counterparty for the
right to receive payments if interest rates associated with a particular index
fall below a predetermined level. Meridian has no future obligation to make
additional premium or other payments to the counterparty. Premiums paid are
amortized over the life of the contract. As of December 31, 1995, Meridian had
$525 million of purchased floors based on London Inter-Bank Offered Rate (LIBOR)
rates.
Meridian also utilizes interest rate collars to manage interest rate risk.
Interest rate collars combine the purchase of a floor with the sale of a cap.
Payments are received when market rates are below a predetermined level and
payments are made when market rates are above a predetermined level. At
December 31, 1995, Meridian had $200 million of collars outstanding.
The favorable impact of the interest rate floors and collars, net of
premium amortization, was $2.3 million in 1995 compared to a negative impact of
$93 thousand in 1994.
Derivative financial instruments of $2.9 billion notional value at December
31, 1995 were used to manage interest rate risk associated with deposits. On
December 31, 1995, unrealized gains on these derivative financial instruments
were $31.7 million and unrealized losses were $2.5 million. The effect of these
derivative financial instruments on the interest cost of deposits for the year
ended December 31, 1995 was an increase of .23%.
Derivative products, as with all financial instruments, contain elements of
risk. A derivative product is subject to market risk in that the value of a
contract will increase or decrease as a result of movements in market interest
rates. Meridian continually monitors the sensitivity of its derivative contracts
to changing interest rates. Unrealized gains and losses are calculated based on
the replacement costs of the contracts. The increase in the market value of
Meridian's interest rate contracts from year-end 1994 to 1995 is consistent with
the declining interest rate environment throughout 1995.
Unrealized gains and losses on derivative positions should be viewed in the
context of the overall balance sheet. An unrealized loss on a derivative
product used for interest rate risk management purposes is generally offset or
mitigated by an unrealized gain on the asset or liability to which the
derivative contract is assigned. Meridian, as part of its asset and liability
management process, continually monitors the impact of interest rate movements
on the market value of not only its derivative positions, but also all other on
and off-balance sheet positions. In a rising rate environment, fixed rate loan,
investment and off-balance sheet positions will decline in market value, while
core deposits and longer term borrowings will appreciate in value.
Credit risk exists to the extent that a derivatives contract has a positive
market value and the counterparty to the transaction fails to perform under the
terms of the contract. Current exposure is measured by calculating the cost to
replace a derivative contract at current market rates. For those contracts where
it would be favorable for the counterparty to default, the current cost to
replace Meridian's derivatives portfolio was $32 million as of December 31,
1995. Potential exposure is estimated by calculating projected changes in
replacement costs under different interest rate environments. Current and
potential exposures are calculated and reviewed by management at least monthly.
Credit limits, considering both current and potential exposures, are approved by
the Meridian Credit Policy Committee. Credit risk is further managed by
restricting counterparties to a select group of high quality institutions, by
entering into netting arrangements and, where appropriate, by establishing
collateral requirements.
Meridian offers interest rate caps and floors to its banking customers, who
typically request these products in conjunction with their management of
variable rate loans. The total of customer interest rate caps and floors was
$188 million at December 31, 1995. The repricing characteristics of loans made
with optional features are monitored and considered in the asset and liability
management and risk measurement processes previously discussed.
Derivatives Used in the Securities Unit (Broker-Dealer Activities).
Meridian uses various off-balance sheet derivative products to support customer
needs and manage the market risks associated with the broker-dealer business.
The securities unit acts as remarketing agent on tender option bonds totaling
$208 million at year-end 1995 compared to $256 million at December 31, 1994. The
premium paid for Treasury float contracts, which is included on the balance
sheet in other assets, was $858 thousand at December 31, 1995 and represents the
maximum exposure to Meridian from such contracts. Other derivative products used
to manage risks associated with trading account positions include forward
commitments to sell securities, which totaled $70 million at December 31, 1995
and averaged $68 million for the year.
The value of these instruments is based on the amount that Meridian would
either pay or receive to replace Meridian's position in these contracts. Fair
values for Meridian's off-balance sheet financial instruments are calculated
based on (1) market prices (forward rate agreements and interest rate swaps);
(2) market prices for comparable instruments, adjusted for differences between
the two instruments such as credit quality (mortgage loans sold or loan
servicing acquired with recourse, commitments to purchase or sell securities,
tender option bonds, treasury float contracts, purchased interest rate
contracts, interest rate collars and other interest rate contracts); and
(3) fees currently charged to enter into similar agreements, taking into account
the remaining term of the agreement and the present credit risk assessment of
the counterparty (commitments to extend credit and standby and commercial
letters of credit).
A discussion of each type of off-balance sheet financial instrument and its
related risks is as follows:
57
<PAGE>
Meridian extends binding loan commitments to prospective borrowers. Such
commitments assure the borrower of financing for a specified period of time or
at a specified rate and usually require the payment of a fee. The risk to
Meridian in an undrawn loan commitment is limited by the terms of the contract.
For example, Meridian may not be obligated to advance funds if the customer's
financial condition deteriorates or if the customer fails to meet specific
covenants. An undrawn loan commitment represents both a potential credit risk
once the funds are advanced to the customer and liquidity risk since the
customer may demand immediate cash that would require a funding source.
Meridian's credit review and approval process for loan commitments is the same
as the process used for loans. In addition, Meridian's Credit Policy Committee
reviews customer requests for loan commitments and monitors outstanding
commitments on an ongoing basis. Meridian's current liquidity position
continues to satisfy its needs for funds. In addition, since a portion of these
loan commitments normally expire unused, the total amount of outstanding
commitments at any point in time will not require a funding source.
Standby and commercial letters of credit are instruments issued by a bank
that represents an obligation to guarantee payments on certain transactions of
its customers. Meridian evaluates the creditworthiness of each of its letter of
credit customers, using the same review and approval process that is used for
loans. In addition, Meridian has established guidelines limiting the amount of
total outstanding standby letters of credit to a specified percentage of its
shareholders' equity. Compliance with these guidelines is monitored on a
monthly basis.
The amount of collateral received on loan commitments and on standby
letters of credit is dependent upon the individual transaction and the
creditworthiness of the customer.
56
<PAGE>
. Meridian originates and sells residential mortgage loans as part of various
mortgage-backed security programs sponsored by 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. Meridian 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.
. Meridian has commitments to buy/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 decline in value.
. Forward rate agreements are used in transactions with municipalities that
generally have a debt payment due in the future. Under these agreements,
Meridian agrees to deliver primarily securities, usually 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 into.
The principal risk associated with forward rate 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 Meridian to purchase.
57
<PAGE>
. Tender option bonds are also 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 Meridian, either
through a contractural arrangement or a tax-exempt trust structure 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 Meridian over the life of the underlying bond. Meridian, in turn, pays
a short-term variable rate to the ultimate bondholder, who has the option to
sell the bonds back to Meridian. Meridian also receives the right to remarket
any purchased bonds at a short-term, tax-exempt, variable rate.
The risk to Meridian 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 Meridian receives and the short-term rate Meridian 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
Meridian would incur a loss.
Meridian's position in forward rate agreements and tender option bonds is
sometimes hedged through the use of other interest rate sensitive financial
instruments such as options. In addition, these two instruments have interest
rate sensitivities that move in opposite directions. However, tender option
bonds have not been entered into as hedges of specific transactions.
. 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
58
<PAGE>
date the funds are needed to pay the debt service. Meridian will pay an up-
front fee for the right to sell government securities to the municipality,
generally at par. Meridian retains any profit between the sales price and the
price at which Meridian 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.
. Interest rate swap agreements, the principal derivative product used by
Meridian, involve the exchange of fixed and floating rate interest payments
without the exchange of the underlying contractual or notional amounts. These
agreements are used as part of the asset and liability management process to
alter the repricing characteristics of a portion of the core deposit base. Risk
in these transactions involves the risk of counterparty nonperformance under the
terms of the contract. The notional or contract amount does not represent the
risks inherent in these agreements. The risk of loss can be approximated by
estimating the cost, on a present value basis, of replacing an instrument at
current market interest rates. Credit risk is managed by performing credit
reviews and through ongoing credit monitoring procedures.
. Purchased interest rate floors are also used as part of the asset and
liability management process to protect net interest income from the effects of
declining interest rates or a flattening of the yield curve. In an interest
rate floor contract, Meridian pays a premium to a counterparty for the right to
receive payments if interest rates associated with a particular index fall below
a predetermined level. Risk in these transactions involves the risk of
counterparty nonperformance under the terms of the contract. The notional or
contract amount does not represent the risks inherent in these agreements. The
maximum risk of loss cannot exceed the premium paid.
59
<PAGE>
. Interest rate collars are instruments whereby Meridian combines the
purchase of a floor with the sale of a cap to hedge against interest rates
movements. Payments would be received when market rates are below a
predetermined level and payments would be made when market rates are above a
predetermined level. Risk in these transactions involves the risk of
counterparty nonperformance under the terms of the contract and a rise in
interest rates above the predetermined cap.
. Interest rate options, caps, and floors involve the receipt of a fee by
Meridian in exchange for assumption of the risk of interest rate movements
beyond a predetermined level. Interest rate caps or floors are written to
enable customers to manage their interest rate risks.
60
<PAGE>
NOTE 12: COMMITMENTS AND CONTINGENCIES
Concentrations of Credit Risk
Loan concentrations are considered to exist when a multiple number of
borrowers are engaged in similar activities and have similar economic
characteristics which would cause their ability to meet contractual obligations
to be similarly impacted by economic or other conditions. At December 31, 1995,
Meridian's commercial loans and commitments did not have any industry
concentration or other known concentration that exceeded 10% of total loans and
commitments.
Legal
Meridian and certain of its subsidiaries were party (plaintiff or
defendant) to a number of lawsuits. While any litigation has an element of
uncertainty, management, after reviewing these actions with its legal counsel,
is of the opinion that the liability, if any, resulting from all legal actions
will not have a material effect on the consolidated financial condition or
results of operations of Meridian.
61
<PAGE>
NOTE 13: INDUSTRY SEGMENTS
Meridian operates principally in two business segments - banking and
securities (broker-dealer activities). Selected financial information for these
segments is as follows (ratios unaudited).
<TABLE>
<CAPTION>
(Dollars in Thousands)
Net Income Assets at December 31,
----------------------------------- -----------------------------
1995 1994 1993 1995 1994
-------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Banking....................................... $166,646 $155,650 $139,036 $14,425,635 $14,550,315
Securities (Broker-Dealer Activities)......... 3,168 3,708 18,725 332,591 502,332
-------- -------- -------- ----------- -----------
Consolidated ................................. $169,814 $159,358 $157,761 $14,758,226 $15,052,647
======== ======== ======== =========== ===========
Income before Restructuring
and Merger-Related Charges (net of taxes):
Banking..................................... $193,164 $150,411
Securities (Broker-Dealer Activities)....... 6,427 18,725
-------- --------
Consolidated ............................... $199,591 $169,136
======== ========
<CAPTION>
BANKING 1995 1994 1993
- ---------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Net Interest Income (1)....................... $626,188 $623,148 $629,887
Provision for Possible Loan Losses............ 39,498 28,147 57,635
Non-Interest Income........................... 205,710 185,812 204,474
Non-Interest Expenses......................... 526,607 536,155 573,698
Before Restructuring and
Merger-Related Charges.................... 491,197 536,155 556,198
Net Interest Margin (1)....................... 4.75% 4.85% 5.04%
Return on Average Assets...................... 1.17% 1.11% 1.01%
Before Restructuring and
Merger-Related Charges.................... 1.35% 1.11% 1.01%
Return on Average Equity...................... 13.61% 13.05% 12.60%
Before Restructuring and
Merger-Related Charges.................... 15.78% 13.05% 12.60%
Loans
Commercial.................................. 6,064,785 5,946,787 5,468,107
Real Estate-Residential..................... 1,297,353 1,217,142 993,459
Consumer.................................... 2,801,713 2,598,509 2,547,475
Deposits......................................11,149,846 11,335,103 11,268,615
Equity........................................ 1,288,005 1,204,767 1,171,435
Equity to Assets.............................. 8.93% 8.28% 8.52%
</TABLE>
(1) Taxable Equivalent Basis
<TABLE>
<CAPTION>
SECURITIES (BROKER-DEALER ACTIVITIES) 1995 1994 1993
- ---------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Net Revenues (1).............................. $55,544 $48,263 $77,376
Operating Expenses............................ 51,812 43,513 49,829
Before Restructuring Charges................ 46,797 43,513 49,829
Par Value of Bonds Underwritten............... 447,108 807,648 1,121,501
Number of Trades.............................. 39,176 32,350 42,548
Tender Option Bonds........................... 208,103 255,948 435,243
</TABLE>
(1) Gross revenues less interest expense.
62
<PAGE>
Note 14. MERIDIAN BANCORP, INC.
(PARENT COMPANY ONLY)
Condensed Balance Sheets
<TABLE>
<CAPTION>
-------------------------------
December 31, 1995 1994
(Dollars In Thousands) ---------- ----------
<S> <C> <C>
Assets
Cash....................................... $10 $3
Short-Term Investments..................... 4,010 15,180
Investment in Subsidiaries
Banking................................... 1,360,813 1,237,526
Non-Banking............................... 90,092 127,843
Investment Securities Available for Sale... 98,332 -
Premises and Equipment..................... 11,655 12,493
Intercompany Note Receivable............... 80,993 83,155
Other Assets............................... 23,727 27,898
---------- ----------
Total Assets............................. $1,669,632 $1,504,098
========== ==========
Liabilities and Shareholders' Equity
Short-Term Borrowings...................... - $75,000
Long-Term Debt and Other Borrowings........ $325,034 174,464
Accrued Interest Payable................... 4,461 4,375
Other Liabilities.......................... 33,706 35,174
Shareholders' Equity....................... 1,306,431 1,215,085
---------- ----------
Total Liabilities and
Shareholders' Equity..................... $1,669,632 $1,504,098
========== ==========
</TABLE>
63
<PAGE>
Condensed Statements of Income
<TABLE>
<CAPTION>
-------------------------------------------------------------
Year ended December 31, 1995 1994 1993
(Dollars in Thousands) ----------------- ---------------- -------------
<S> <C> <C> <C>
Income
Interest Income from Subsidiaries.................................. $10,297 $4,966 $4,570
Management Fees from Subsidiaries.................................. 33,010 35,822 57,383
Interest and Fees on Loans......................................... 224 224 4,160
Investment Securities Income....................................... 308 552 955
Net Securities Gains............................................... 2,574 261 607
Intercompany Service Fees.......................................... 74 616 578
Other Non-Interest Income.......................................... 205 - 1,414
----------------- ---------------- -------------
Total Income...................................................... 46,692 42,441 69,667
Expenses
Interest on Borrowings............................................. 20,651 14,021 12,489
Salaries and Benefits.............................................. 26,738 25,197 35,627
Net Occupancy Expense.............................................. 5,610 4,578 5,528
Equipment Expense.................................................. 2,028 2,520 3,446
Restructuring and Merger-Related Charges........................... 13,937 - -
Other Non-Interest Expenses........................................ 19,741 4,782 30,808
----------------- ---------------- -------------
Total Expenses.................................................... 88,705 51,098 87,898
----------------- ---------------- -------------
Loss Before Taxes and Earnings of Subsidiaries..................... (42,013) (8,657) (18,231)
Credit For Income Taxes............................................ (9,355) (1,602) (4,803)
----------------- ---------------- -------------
Loss Before Earnings of Subsidiaries............................... (32,658) (7,055) (13,428)
Dividend Income from Subsidiaries
Banking Subsidiaries.............................................. 97,035 141,150 68,101
Non-Banking Subsidiaries.......................................... 1,600 7,200 850
Undistributed Earnings of Subsidiaries............................. 103,837 20,793 100,753
----------------- ---------------- -------------
Income Before Cumulative Effect of Changes in
Accounting Principles............................................ 169,814 162,088 156,276
Cumulative After-Tax Effect of Changes in
Accounting Principles............................................ - (2,730) 1,485
----------------- ---------------- -------------
Net Income......................................................... $169,814 $159,358 $157,761
================= ================ =============
</TABLE>
64
<PAGE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
----------------- ----------------- -----------------
Year ended December 31, 1995 1994 1993
----------------- ----------------- -----------------
(Dollars in Thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income.................................................. $169,814 $159,358 $157,761
Adjustments to Reconcile to Net Cash Provided by
Operating Activities
Earnings of Subsidiaries.................................. (202,472) (169,143) (169,704)
Cash Dividends Received from Subsidiaries................. 98,635 148,350 68,951
Cumulative Effect of Changes in Accounting Principles..... - 2,730 (1,485)
Depreciation and Amortization............................. 4,958 5,372 5,309
Other, Net................................................ 3,441 1,892 (2,072)
Decrease (Increase) in Other Operating Assets............. 938 31,817 (23,253)
Increase (Decrease) in Other Operating Liabilities........ (1,382) (19,286) 29,536
----------------- ----------------- -----------------
Net Cash Provided by Operating Activities............. 73,932 161,090 65,043
----------------- ----------------- -----------------
Cash Flows from Investing Activities
Sales of Investment Securities.............................. - - 64,508
Purchase of Investment Securities........................... - - (1,529)
Purchases of Investment Securities Available for Sale....... (98,292) - -
Capital Contributions and Advances to Subsidiaries.......... (122,590) (229,684) (53,036)
Repayment of Advances to Subsidiaries....................... 144,557 112,778 -
Purchases of Premises and Equipment......................... (913) (863) (3,803)
Proceeds from Sales of Premises and Equipment............... 143 917 19
----------------- ----------------- -----------------
Net Cash Provided by (Used for) Investing Activities.. (77,095) (116,852) 6,159
----------------- ----------------- -----------------
Cash Flows from Financing Activities
Cash Dividends Paid to Common Shareholders.................. (81,115) (77,303) (69,635)
Proceeds from issuances of Common Stock..................... 15,473 2,082 16,242
Purchases of Treasury Stock and ESOP Shares................. (16,503) (54,834) -
Funds Transferred to Trust for Future ESOP Purchases........ - (24,432) -
Proceeds from Borrowings.................................... - 75,000 -
Repayment of Long-Term Debt and Other Borrowings............ (75,078) (80) (43)
Proceeds from Issuance of Long Term Debt.................... 149,223 - -
----------------- ----------------- -----------------
Net Cash Used for Financing Activities................ (8,000) (79,567) (53,436)
----------------- ----------------- -----------------
Cash and Cash Equivalents
Net Increase (Decrease) During the Year..................... (11,163) (35,329) 17,766
Balance at Beginning of Year................................ 15,183 50,512 32,746
----------------- ----------------- -----------------
Balance at End of Year...................................... $4,020 $15,183 $50,512
================= ================= =================
</TABLE>
Interest payments totaled $20,565, $13,616 and $10,682 in 1995, 1994 and 1993,
respectively. Noncash financing activity consists of stock and warrants
aggregating $6,972 in 1994 and stock of $20,063 in 1993 issued as a result of
mergers. Income tax payments were $43 in 1995 and refunds were $626 in 1994.
65
<PAGE>
Independent Auditors' Report
The Board of Directors
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 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 audits.
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 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.
January 17, 1996,
Except as to note 2, which is as of February 23, 1996
66
<PAGE>
United Counties Bancorporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1994
------------ ----------
<S> <C> <C>
Assets
Cash and due from banks (Note 2) $ 67,498 $ 93,221
Money market investments 3,619 2,555
Securities available-for-sale (Note 3) 304,415 100,070
Investment securities (market value:
1995-$706,422;1994-$931,639)(Note 3) 696,395 965,239
Federal funds sold 134,000 115,000
Loans, net of unearned discounts of $323 in
1995 and $255 in 1994 (Note 4) 386,852 374,375
Less: Allowance for loan losses (Note 5) 11,037 11,091
---------- ----------
Net loans 375,815 363,284
Premises and equipment, net (Note 6) 11,267 11,754
Accrued interest receivable 18,942 21,289
Other assets (Note 15) 9,300 8,528
---------- ----------
Total assets $1,621,251 $1,680,940
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Demand $ 270,430 $ 264,781
Savings 703,918 770,977
Time 337,242 318,980
---------- ----------
Total deposits (Note 7) 1,311,590 1,354,738
Securities sold under repurchase agreements
(Note 8) 72,119 110,141
Other borrowed funds (Note 9) 8,990 12,341
Other liabilities (Note 13) 23,923 22,137
---------- ----------
Total liabilities 1,416,622 1,499,357
Commitments and contingent liabilities
(Notes 14 and 16)
Stockholders' equity (Notes 10 and 11):
Preferred stock: no par value, no stated
value; authorized 3,000,000 shares; zero
shares issued and outstanding - -
Common stock: no par value, $1 stated value;
authorized 6,000,000 shares; issued 2,531,071
shares in 1995 and 2,523,976 shares in 1994 2,531 2,524
Additional paid-in capital 24,323 23,947
Retained earnings 190,773 169,967
Net unrealized gain on securities available-
for-sale, net of income taxes 9,235 6,747
---------- ----------
226,862 203,185
Less: treasury stock, at cost -
381,438 shares in 1995 and 376,270
shares in 1994 22,233 21,602
---------- ----------
Total stockholders' equity 204,629 181,583
---------- ----------
Total liabilities and stockholders'
equity $1,621,251 $1,680,940
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
67
<PAGE>
United Counties Bancorporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Interest income
Interest and fees on loans:
Taxable income $ 32,541 $ 30,612 $ 30,771
Tax-exempt income 490 584 895
Interest and dividends on securities
available-for-sale 6,037 6,075 -
Interest on investment securities:
Taxable income 58,949 60,080 67,421
Tax-exempt income 535 482 786
Interest on money market investments 228 189 107
Interest on federal funds sold 4,145 2,788 1,992
-------- -------- --------
Total interest income 102,925 100,810 101,972
-------- -------- --------
Interest expense
Savings and time deposits (Note 7) 36,620 32,393 31,652
Securities sold under repurchase
agreements (Note 8) 3,166 1,841 1,507
Other borrowed funds (Note 9) 427 346 240
-------- -------- --------
Total interest expense 40,213 34,580 33,399
-------- -------- --------
Net interest income 62,712 66,230 68,573
Provision for loan losses (Note 5) (500) (825) 175
-------- -------- --------
Net interest income after
provision for loan losses 63,212 67,055 68,398
-------- -------- --------
Other operating income
Service charges on deposit accounts 2,955 3,060 3,280
Trust fees 1,050 1,128 1,101
Net security gains (losses) 13,768 - (172)
Gain on sale of merchant credit card
operations -0- -0- 663
Other income (Note 12) 1,379 2,920 3,536
-------- -------- --------
Total other operating income 19,152 7,108 8,408
-------- -------- --------
Net interest and other operating
income 82,364 74,163 76,806
-------- -------- --------
Other operating expenses
Salaries and employee benefits (Note 13) 20,056 20,737 20,920
Net occupancy expense (Notes 6 and 14) 3,418 3,601 3,616
Equipment expense (Notes 6 and 14) 1,659 1,816 1,934
FDIC insurance premium 1,727 3,054 2,998
Other expense (Note 12) 6,581 8,771 9,665
-------- -------- --------
Total other operating expenses 33,441 37,979 39,133
-------- -------- --------
Income before income taxes and cumulative
effect of change in accounting principles 48,923 36,184 37,673
Income taxes (Note 15) 16,734 12,392 13,480
-------- -------- --------
Income before cumulative effect of change in
accounting principles 32,189 23,792 24,193
Cumulative effect of change in accounting
principles (Notes 1 and 15) - - (579)
-------- -------- --------
Net income $ 32,189 $ 23,792 $ 23,614
======== ======== ========
Income per share before cumulative effect
of change in accounting principles $15.00 $11.12 $11.29
Cumulative effect of change in accounting
principles, per share - - (.27)
-------- -------- --------
Net income per share of common stock $15.00 $11.12 $11.02
======== ======== ========
Average number of outstanding shares 2,146 2,139 2,142
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
68
<PAGE>
United Counties Bancorporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Net Unrealized
Gain on Securities
Available-for-Sale
Additional Net of
Preferred Common Paid-in Retained Income Treasury
Stock Stock Capital Earnings Taxes Stock Total
---------- -------- -------- ---------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1992 -- $ 2,489 $22,466 $135,164 -- $(17,980) $142,139
Shares issued under the Incentive Stock
Option Plans (Note 10) 12 504 516
Net income 23,614 23,614
Dividends declared (5,560) (5,560)
Treasury stock acquired - 31,035 shares (2,741) (2,741)
---------- -------- -------- ---------- -------- --------- --------
Balances at
December 31, 1993 -- 2,501 22,970 153,218 -- (20,721) 157,968
Shares issued under the Incentive Stock
Option Plans (Note 10) -- 23 977 1,000
Net income 23,792 23,792
Dividends declared (7,043) (7,043)
Net unrealized gain on securities
available-for-sale, net of income taxes $ 6,747 6,747
Treasury stock acquired - 8,929 shares (881) (881)
---------- -------- -------- ---------- -------- --------- --------
Balance at
December 31, 1994 -- 2,524 23,947 169,967 6,747 (21,602) 181,583
Shares issued under the Incentive Stock
Option Plans (Note 10) -- 7 376 383
Net income 32,189 32,189
Dividends declared (11,383) (11,383)
Net change in unrealized gain on securities
available-for-sale, net of income taxes 2,488 2,488
Treasury stock acquired - 5,168 shares (631) (631)
---------- -------- -------- ---------- -------- --------- --------
Balances at
December 31, 1995 -- $2,531 $24,323 $190,773 $ 9,235 $(22,233) $204,629
========== ====== ======= ======== ======== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
69
<PAGE>
United Counties Bancorporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1995 1994 1993
---------- -------- --------
<S> <C> <C> <C>
Operating Activities:
Net income $ 32,189 $ 23,792 $ 23,614
Adjustments to reconcile net income to
net cash from operating activities:
Gain on exchange of securities
available-for-sale (13,596) - -
Amortization of premiums and discounts, net 4,283 7,793 8,272
Depreciation 1,259 1,462 1,546
Provision for loan losses (500) (825) 175
Deferred income tax expense (benefit) 5,635 (164) (1,217)
Amortization of deferred loan fees (233) 5 140
Gain on sale of merchant credit card
operations - - (663)
(Gains) losses on sales of securities (172) - 172
Cumulative adjustment - change in
accounting principles - - 579
Decrease in interest receivable 2,347 765 991
Increase (decrease) in interest payable 1,276 (288) (659)
(Increase) decrease in other assets (2,789) (435) 699
Increase (decrease) in other liabilities (4,715) (1,255) 797
Increase (decrease) in current income tax
payable (499) 534 51
---------- -------- --------
Total adjustments (7,704) 7,592 10,883
---------- -------- --------
Net cash from operating activities 24,485 31,384 34,497
---------- -------- --------
Investing Activities:
Proceeds from sale of securities available-
for-sale 898 - -
Proceeds from maturities of securities
available-for-sale 15,442 10,000 -
Purchases of securities available-for-sale (4,200) (115) -
Proceeds from sales of investment securities 0 0 675
Proceeds from maturities of investment
securities 177,944 261,138 256,239
Purchases of investment securities (111,295) (250,007) (311,850)
Net (increase) decrease in short-term
investments (1,064) 3,765 375
Net increase in federal funds sold (19,000) (15,000) (10,000)
Net (increase) decrease in credit card
receivables and other short-term loans 3,359 8,249 (2,586)
Principal collected on longer term loans 101,535 121,168 129,671
Longer term loans originated or acquired (116,903) (127,223) (126,456)
Purchases of premises and equipment, net (772) (589) (736)
---------- -------- --------
Net cash from (applied to) investing
activities 45,944 11,386 (64,668)
---------- -------- --------
Financing Activities:
Net increase (decrease) in demand deposits,
NOW accounts, and savings accounts (61,410) (51,920) 35,967
Net increase (decrease) in open time
accounts 3,966 4,723 (522)
Proceeds from sales of certificates of
deposit 136,561 107,252 87,674
Payments for maturing certificates of deposit (122,265) (98,154) (102,745)
Net increase (decrease) in short-term
borrowings (41,373) 11,580 15,534
Payments to acquire treasury stock (631) (881) (2,741)
Dividends paid (11,383) (8,537) (5,358)
Proceeds from exercise of stock options 383 1,000 516
---------- -------- --------
Net cash from (applied to) financing
activities (96,152) (34,937) 28,325
---------- -------- --------
Net increase (decrease) in cash and cash
equivalents (25,723) 7,833 (1,846)
---------- -------- --------
Cash and cash equivalents at beginning of year 93,221 85,388 87,234
---------- -------- --------
Cash and cash equivalents at end of year $ 67,498 $ 93,221 $ 85,388
========== ======== ========
Cash paid during the year for:
Interest $ 38,937 $ 34,869 $ 32,311
========== ======== ========
Income taxes $ 12,289 $ 14,040 $ 15,206
========== ======== ========
Transfer from investment securities to
securities available-for-sale $ 198,960 $100,054 --
========== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
70
<PAGE>
United Counties Bancorporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements of United Counties Bancorporation include
the accounts of the parent company and subsidiaries, United Capital Corporation
and United Counties Trust Company (Bank) and its subsidiaries. All material
intercompany transactions have been eliminated.
Investment Securities
Investments classified as held-to-maturity consist of debt securities, and are
carried at cost, adjusted for accretion of discounts and amortization of
premiums, both computed on the level yield method. The Bancorporation has both
the ability and positive intent to hold these securities to maturity.
Debt securities not classified as held-to-maturity and marketable equity
securities are categorized as available-for-sale and carried at fair value.
Unrealized gains and losses, net of related tax effects, are reported as a
separate component of stockholders equity.
The adjusted cost of a specific security is the basis for calculating the gain
or loss on the sale of a security as reported in the consolidated statements of
income.
Interest and dividends on investment securities are recognized as income when
earned.
Loans
Loans are stated at the principal amount outstanding, net of unearned discounts.
Unearned discount, where appropriate, is recognized on a monthly basis using the
actuarial method, which approximates the level yield method. Interest is
accrued monthly on other non-discounted loans based upon the principal amount
outstanding. Loan origination fees are recognized over the estimated life of
the loan and as an adjustment to yield.
When a loan is past due in excess of 90 days or doubt exists in the opinion of
management as to the collectibility of principal or interest, it is placed on a
nonaccrual basis, recognizing interest income as received. At the same time,
previously accrued but unpaid interest is reversed and charged against current
earnings.
Allowance for Loan Losses
The Allowance for Loan Losses account is an estimate and may be subject to
variance based upon economic conditions throughout our trade area as well as
periodic fluctuations in the financial condition of individual loans.
71
<PAGE>
Additions to the Allowance arise from charges to operations through the
Provision for Loan Losses or from the recovery of amounts previously charged
off. The Allowance is reduced by loan charge-offs. Loans are charged off when
management believes there has been permanent impairment to the values at which
loans are carried.
Premises and Equipment
Land is carried at cost. Premises, furniture, equipment, and leasehold
improvements are stated at cost less accumulated depreciation. Depreciation is
computed on the straight-line and declining balance methods over the estimated
useful lives, which generally range from three to forty years. Leasehold
improvements are carried at cost less accumulated amortization computed on a
straight-line basis over the terms of the leases or the estimated useful lives
of the assets, if shorter. Maintenance and repairs are expensed as incurred.
Other Real Estate Owned
When a property is acquired through foreclosure, it is reported at its estimated
fair market value and subsequently reported at the lower of its new cost basis
or estimated fair market value less estimated liquidation costs.
Income Taxes
Certain items of income and expense are recognized over different periods for
financial reporting purposes than for income tax purposes. Deferred taxes are
provided in recognition of these temporary differences. The Bancorporation
files a consolidated federal income tax return. The applicable income taxes of
the parent and subsidiaries generally are computed individually and reflected as
such for financial statement purposes.
Retirement Benefit Plans
Retirement benefit plan costs, based on actuarial computations of current and
future benefits for employees, are charged to expense and generally funded based
on the maximum amount that can be deducted for federal income tax purposes.
Income Per Share
Income per share of common stock is calculated based on the average daily number
of common shares outstanding. Shares issuable under the 1984 Incentive Stock
Option Plan and the 1989 Incentive Stock Option Plan have no materially dilutive
effect and are not included in the average number of shares outstanding.
Reclassifications
Certain amounts in previous periods have been reclassified to conform to the
current periods presentation. These reclassifications have no material effect
on net income or total assets.
72
<PAGE>
Adoption of Recent Accounting Pronouncements
Effective January 1, 1995, the Bancorporation adopted FASB Statement No. 114,
"Accounting by Creditors for Impairment of a Loan". This Standard applies to
contractual rights to receive money on demand or on fixed or determinable dates
that are recognized as assets on creditors' balance sheets, including accounts
receivable due in more than one year. A loan is considered impaired if, based
upon current information and events, it is probable that the creditor will not
be able to collect all principal and interest due in accordance with the terms
of the agreement. Once a loan is considered impaired, the Standard requires
calculation of the present value of expected future cash flows using the
effective rate of the loan. If the calculated present value is less than the
recorded investment in the loan, the difference is to be charged to bad debt
expense with a corresponding credit to a valuation allowance account. Loans for
which repayment is expected to be provided by the underlying collateral, the
fair value of the collateral of the loan may be used.
Also effective January 1, 1995, the Bancorporation adopted FASB Statement No.
118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures". This Standard amends the income recognition and disclosure
requirements of FASB No. 114.
The adoption of these Standards did not have a material effect on the financial
position of the Bancorporation.
FASB No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", was adopted on January 1, 1994. This Standard applies to equity
securities having readily determinable fair values and to all debt securities.
For accounting and financial reporting purposes, securities are to be classified
into one of the following three categories: 1) held-to-maturity; 2) trading
securities; or 3) available-for-sale. Only debt securities may be classified as
held-to-maturity. Those securities that are classified as held-to-maturity are
to be carried at amortized cost while unrealized gains/losses from the changes
in market value for investments categorized as available-for-sale are to be
reported as a separate component of stockholders' equity net of related tax
effects. See Note 3.
During 1993, the Bancorporation adopted FASB No. 109, "Accounting for Income
Taxes". This Standard changed the method of accounting for income taxes from the
"deferred" method previously required under generally accepted accounting
principles to the "asset and liability" method. The Statement addresses various
matters related to temporary differences from financial statement basis versus
tax basis of assets and liabilities. See Note 15.
2. Cash and Due from Banks
The average reserve requirement of the bank amounted to $22,799,000 and
$26,569,000 at December 31, 1995 and 1994, respectively.
73
<PAGE>
3. Investment Securities and Securities Available-for-Sale
On January 1, 1994, FASB No. 115 was adopted. During December 1995, in response
to the recently released Financial Accounting Standards Board Guide to
Implementation of this Statement, the Bancorporation transferred $198,960,000
from securities held-to-maturity to securities available-for-sale. The
following tables present information related to the portfolio of investment
securities held-to-maturity and available-for-sale of the Bancorporation at
December 31, 1995 and December 31, 1994 (in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1995
- -----
Investment Securities
Held-to-Maturity
- -------------------------------
United States Treasury securities
and obligations of United States
government corporations and agencies $548,036 $ 8,384 $ 853 $555,567
Obligations of states and
political subdivisions 15,304 -0- 2 15,302
Corporate obligations 133,055 2,731 233 135,553
-------- ------- ------- --------
Total $696,395 $11,115 $ 1,088 $706,422
======== ======= ======= ========
Gross Gross Book/
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ------
Securities Available-for-Sale
- -------------------------------
United States Treasury securities and
obligations of United States government
corporations and agencies $259,872 $ 5,207 $ 359 $264,720
Marketable equity securities 29,674 10,021 -0- 39,695
-------- ------- ------- --------
Total $289,546 $15,228 $ 359 $304,415
======== ======= ======= ========
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- ----------
1994
- -------------------------------
Investment Securities
Held-to-Maturity
- -------------------------------
United States Treasury securities and
obligations of United States government
corporations and agencies $810,182 $ 525 $27,433 $783,274
Obligations of states and political
subdivisions 14,778 4 4 14,778
Corporate obligations 140,279 162 6,854 133,587
-------- ------- ------- --------
Total $965,239 $ 691 $34,291 $931,639
======== ======= ======= ========
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
Gross Gross Book/
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ------
Securities Available-for-Sale
- -------------------------------
<S> <C> <C> <C> <C>
United States Treasury securities and obligations
of United States government corporations
and agencies $ 76,574 $ 77 $ 2,518 $ 74,133
Marketable equity securities 13,046 12,891 -0- 25,937
-------- ------- ------- --------
Total $ 89,620 $12,968 $ 2,518 $100,070
======== ======= ======= ========
</TABLE>
The carrying value of securities pledged to secure public funds and for other
purposes as required by law was $171,643,000 at December 31, 1995, and
$209,635,000 at December 31, 1994.
The amortized cost and estimated market value of investment securities held-to-
maturity and available-for-sale at December 31, 1995 and December 31, 1994, by
contractual maturity, are shown in the table below. Expected maturities may
differ from contractual maturities since certain borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties (in
thousands):
<TABLE>
<CAPTION>
Investment Securities
Held-to-Maturity
------------------------------------------
December 31, 1995 December 31, 1994
-------------------- -------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---------- --------- ------ ----------
<S> <C> <C> <C> <C>
Due in one year or less $276,426 $277,820 $144,914 $144,896
Due after one year through
five years 412,353 420,573 757,617 728,328
Due after five years through
ten years 7,260 7,675 62,193 57,904
Due after ten years 356 354 515 511
-------- -------- -------- --------
Total $696,395 $706,422 $965,239 $931,639
======== ======== ======== ========
<CAPTION>
Securities
Available-for-Sale
------------------------------------------
December 31, 1995 December 31, 1994
-------------------- -------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Due in one year or less $ 20,103 $ 20,203 $ 15,062 $ 15,117
Due after one year through
five years 239,769 244,517 61,512 59,016
-------- -------- -------- --------
Total $259,872 $264,720 $ 76,574 $ 74,133
======== ======== ======== ========
</TABLE>
75
<PAGE>
Proceeds from sale of securities during 1995 were $898,000. Gross gains of
$172,000 were realized. Proceeds from sales of securities during 1994 were
zero. Proceeds from sales of investment securities during 1993 were $675,000.
Gross losses of $172,000 were realized.
Fixed income investment securities are traded in liquid markets and are of
investment quality as rated by nationally recognized rating services.
4. Loans
The following summarizes the loan categories, net of unearned discounts, at
December 31, 1995 and 1994 (in thousands);
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Real estate loans:
Construction $ 14,668 $ 15,214
Commercial 124,576 115,829
Residential:
Conventional 100,826 99,028
Insured or guaranteed 870 1,067
Home equity & secondary mortgage 92,598 87,568
Economic Development Authority 6,368 7,013
Term 3,673 2,555
-------- --------
Total real estate loans 343,579 328,274
Consumer loans 16,584 16,905
Credit card 1,162 3,075
Commercial and industrial 25,308 26,005
Lease financing receivables 219 116
-------- --------
Total loans, net of unearned
discounts $386,852 $374,375
======== ========
</TABLE>
The primary lending marketplace of the Bancorporation includes the New Jersey
Counties of Middlesex, Monmouth, Morris, Somerset, and Union.
Loans to principal officers, directors, and their affiliates are made in the
ordinary course of business and are on substantially the same terms, including
interest rates and collateral, as loans to other customers of the Bank. These
loans aggregated $19,361,000 and $17,472,000 at December 31, 1995 and 1994,
respectively. During 1995, loan activity to principal officers, directors, and
their affiliates consisted of new loans amounting to $6,306,000 and principal
payments on outstanding loans of $4,417,000.
A significant portion of the loan portfolio of the Bank is secured by real
estate. At December 31, 1995, real estate loans amounted to 88.8% of the total
loan portfolio compared to 87.7% at December 31, 1994.
Risk elements, which include nonaccrual loans, restructured loans, and loans
past due 90 days or more at December 31, 1995 and 1994, were as follows (in
thousands):
76
<PAGE>
<TABLE>
<CAPTION>
1995 1994
------ -------
<S> <C> <C>
Nonaccrual loans $2,787 $ 2,769
Restructured loans 4,739 5,265
Loans past due 90 days or more 2,375 2,401
------ -------
Total $9,901 $10,435
====== =======
</TABLE>
5. Allowance for Loan Losses
The following is an analysis of changes in the Allowance for Loan Losses for the
years ended December 31, 1995, 1994, and 1993 (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year $11,091 $11,014 $10,930
Provision (credited) charged to
operating expense (500) (825) 175
Recoveries of loans previously
charged off 956 1,175 633
Loans charged off (510) (273) (724)
------- ------- -------
Balance at end of year $11,037 $11,091 $11,014
======= ======= =======
</TABLE>
The Allowance for Loan Losses account for federal income tax purposes amounted
to $2,456,000 at December 31, 1995, $2,323,000 at December 31, 1994, and
$2,236,000 at December 31, 1993.
6. Premises and Equipment
Premises and equipment at December 31, 1995 and 1994, is detailed below (in
thousands):
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Land $ 4,426 $ 4,293
Premises 18,532 18,258
Furniture and equipment 11,713 11,534
Leasehold improvements 744 744
------- -------
35,415 34,829
Less: Accumulated depreciation
and amortization 24,148 23,075
------- -------
Premises and equipment, net $11,267 $11,754
======= =======
</TABLE>
Depreciation and amortization charged to operating expense for the years ended
December 31, 1995, 1994, and 1993, amounted to $1,259,000, $1,462,000, and
$1,546,000, respectively.
7. Deposits
Time deposits in denominations of $100,000 and over at December 31, 1995 and
1994, consisted of the following (in thousands):
77
<PAGE>
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Certificates of deposit $15,790 $12,095
Other time deposits 8,243 6,896
------- -------
Total $24,033 $18,991
======= =======
</TABLE>
Interest expense relating to time deposits in denominations of $100,000 and
over, totalled $1,189,000 in 1995, $682,000 in 1994, and $653,000 in 1993.
8. Securities Sold Under Repurchase Agreements
Balances and rates of securities sold under repurchase agreements for the years
ended December 31, 1995 and 1994, were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- ---------
<S> <C> <C>
Balance at end of year $72,119 $110,141
Average during year 65,805 55,228
Maximum month-end balance during year 91,536 110,141
Average rate during year 4.81% 3.34%
Rate at end of year 4.28 4.98
</TABLE>
9. Other Borrowed Funds
Other borrowed funds consist of Treasury tax and loan obligations due on demand.
Interest on the Treasury tax and loan notes is computed at a rate equal to 25
basis points below the weekly average federal funds rate. Balances and rates
for the years ended December 31, 1995 and 1994, were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Balance at end of year $ 8,990 $12,341
Average during year 7,644 8,669
Maximum month-end balance during year 11,363 14,153
Average rate during year 5.59% 3.98%
Rate at end of year 5.07 5.11
</TABLE>
10. Incentive Stock Option Plans
The United Counties Bancorporation 1984 and 1989 Incentive Stock Option Plans
became effective after approval by stockholders on December 13, 1984, and
January 12, 1989, respectively. The Plans are designed to provide long-term
equity incentives to key officers and executives to foster the growth and
profitability of the Bancorporation and its subsidiaries. The Plans are
administered by a Committee of the Board of Directors. The 1989 Plan provides
that a maximum of 100,000 shares of common stock may be granted in the form of
Incentive Stock Options, whereas the 1984 Plan provides that a maximum of
125,000 shares of common stock may be granted. Options are granted at the fair
market value of the stock on the date of the grant. Options are exercisable in
full or in installments as specified by the Committee, provided a minimum of 10%
of the eligible shares are exercised. The 1984 Plan terminated during December
1994. The 1989 Plan terminates on December 31, 1999.
78
<PAGE>
Transactions in the Plans were as follows:
<TABLE>
<CAPTION>
Number of Shares
--------------------- ---------------
Available Under Option price
for Option Option per share
----------- -------- ---------------
<S> <C> <C> <C>
1989 Plan
Balance at December 31, 1992 71,320 33,280 $ 50.25-$ 73.00
Options granted (7,325) 7,325 $ 86.50
Options cancelled 1,200 (1,200) $ 54.00-$ 73.00
Options exercised (1,925) $ 54.00
-------- ------- ---------------
Balance at December 31, 1993 65,195 37,480 $ 50.25-$ 86.50
Options granted (1,900) 1,900 $104.25-$134.75
Options cancelled 1,475 (1,475) $ 54.00-$ 73.00
Options exercised (4,883) $ 54.00
-------- ------- ---------------
Balance at December 31, 1994 64,770 33,022 $ 50.25-$134.75
Options granted (14,513) 14,513 $112.00-$125.75
Options cancelled 5,750 (5,750) $ 54.00-$134.75
Options exercised (4,732) $ 53.50-$ 54.50
-------- ------- ---------------
Balance at December 31, 1995 56,007 37,053 $ 50.25-$134.75
======== ======= ===============
1984 Plan
Balance at December 31, 1992 2,523 42,988 $ 28.75-$ 69.75
Options granted (1,585) 1,585 $ 86.50
Options cancelled 1,072 (1,072) $ 54.00-$ 86.50
Options exercised (10,110) $ 28.75-$ 54.00
-------- ------- ---------------
Balance at December 31, 1993 2,010 33,391 $ 28.75-$ 86.50
Options granted (1,600) 1,600 $ 134.75
Options cancelled 542 (542) $ 54.00
Options terminated (952) -
Options exercised (17,752) $ 28.75-$ 54.00
-------- ------- ---------------
Balance at December 31, 1994 0 16,697 $ 28.75-$134.75
Options granted - -
Options cancelled 3,365 (3,365) $ 54.00-$134.75
Options terminated (3,365) -
Options exercised (2,363) $ 54.00
-------- ------- ---------------
Balance at December 31, 1995 0 10,969 $ 28.75-$134.75
======== ======= ===============
</TABLE>
The number of shares that were exercisable at December 31, 1995, were 560.
79
<PAGE>
11. Dividend Restrictions
Certain limitations are imposed by New Jersey statutes on the availability of a
subsidiary bank's undistributed net assets for the payment of dividends to the
parent company without prior approval of the regulatory authorities. The Bank
may pay dividends only if, following the payment of each such dividend, the
capital stock of the subsidiary bank will not be impaired and (1) the Bank will
have additional paid-in capital of not less than 50% of its capital stock, or,
if not, (2) the payment of such dividends will not reduce the additional paid-in
capital of the Bank. The Bank is also subject to the Federal Deposit Insurance
Corporation regulations that require the Bank to maintain minimum capital
ratios. Under current law, a minimum leverage ratio of 4%, Tier 1 risk-based
capital ratio of 4% and total risk-based capital ratio of 8% must be maintained.
At December 31, 1995, the capital accounts of the Bank totalled $154,399,000 of
which $88,420,000 was available for the payment of dividends to the parent
company.
12. Other Income and Expense
Included in other income and expense for the years ended December 31, 1995,
1994, and 1993, are the following major components, which represent more than
one percent of total interest income and other operating income (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
Other income:
Credit card merchant fees $ 3 $1,465 $1,813
====== ====== ======
Other expense:
Credit card merchant expenses
(refunds) $ (32) $1,007 $1,390
====== ====== ======
Telephone, postage, and
communication expenses $2,064 $2,210 $2,494
====== ====== ======
</TABLE>
80
<PAGE>
13. Retirement and Profit Sharing Plans
The Bank has a trusteed noncontributory retirement plan for its eligible
employees. Plan assets consist primarily of common stock, United States
government and corporate obligations.
Pension costs for 1995 and 1994 are based on data from the September 30, 1995
and 1994, evaluation data. They include the following components (in
thousands):
<TABLE>
<CAPTION>
September 30,
--------------------------
1995 1994 1993
-------- -------- ------
<S> <C> <C> <C>
Service cost-benefits earned during
the period $ 423 $ 408 $ 474
Interest cost on projected benefit
obligation 868 820 781
Return on assets (1,597) (133) (676)
Amortization of net gain (loss) 352 (1,146) (604)
------- ------- -----
Pension expense (credit) $ 46 $ (51) (25)
======= ======= =====
</TABLE>
The funded status of the pension plan is as follows:
<TABLE>
<CAPTION>
September 30,
-------------------
1995 1994
-------- --------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation $ 9,900 $ 9,800
======== ========
Accumulated benefit obligation $ 10,000 $ 10,000
======== ========
Projected benefit obligation $(12,015) $(11,867)
Plan assets at fair value 14,978 14,024
-------- --------
Excess of plan assets over projected
benefit obligation 2,963 2,157
Unrecognized prior service credit (130) (149)
Unrecognized market value over book
value of assets (1,649) (582)
Unrecognized gain (1,179) (1,376)
-------- --------
Accrued pension credit $ 5 $ 50
======== ========
</TABLE>
The projected benefit obligation was determined using an assumed discount rate
of 7.50%, an assumed long-term rate of compensation increase of 6.00%, and an
expected long-term rate of return on plan assets of 7.50% for 1995 and 1994.
In addition to the pension plan, the Bank has a defined profit sharing plan
which provides for annual contributions based on net operating income.
Substantially all employees of the Bank are eligible. Profit sharing expense
was $1,618,000, $1,996,000, and $2,109,000 for 1995, 1994, and 1993,
respectively.
81
<PAGE>
The Bank also provides certain health care and life insurance benefits for
retired employees. Current eligible employees must satisfy certain service and
age requirements in order to be covered for post-retirement benefits other than
pensions. Currently, the Plan is not required to fund a separate trusteed
account. The assumed health care cost trend is 12% per annum.
Postretirement costs for 1995 and 1994 are based on data from the January 1,
1995 and 1994 evaluation data. They include the following components (in
thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1994 1993
-------- -------- -----
<S> <C> <C> <C>
Service cost $ 218 $ 219 $ 206
Interest cost 606 570 549
Amortization of net loss -0- 6 48
------- ------- -----
Net periodic postretirement benefit cost $ 824 $ 795 $ 803
======= ======= =====
</TABLE>
The unfunded status of the postretirement plan is as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1995 1994
------- -------
<S> <C> <C>
Fair value of assets $ -0- $ -0-
Accumulated Postretirement Benefit
Obligation:
A) Retirees (3,931) (3,405)
B) Other fully eligible plan
participants (617) (431)
C) Other active plan participants (5,139) (3,421)
------- -------
Unfunded status (9,687) (7,257)
------- -------
Unrecognized loss 1,886 120
Unrecognized transition obligation -0- -0-
------- -------
Accrued postretirement benefit cost $(7,801) $(7,137)
======= =======
Effect of a 1% increase in the medical inflation rate:
Increase in the aggregate of the service and
interest cost components of net periodic
postretirement benefit cost $ 63 $ 61
Increase in the accumulated postretirement
benefit obligation 680 490
------- -------
Total $ 743 $ 551
======= =======
</TABLE>
The present value of the accumulated benefit obligation assumed a discount rate
of 7.00% in 1995 and 8.50% in 1994. The rate of increase used in future
compensation levels was 6.00% for both 1995 and 1994.
82
<PAGE>
14. Leases
Future minimum rental payments under noncancellable leasehold commitments as of
December 31, 1995, are not material in relation to the consolidated financial
statements.
15. Income Taxes
Effective January 1, 1993, the Bancorporation adopted FASB No. 109, "Accounting
for Income Taxes". The cumulative effect of this accounting change reduced net
income by $579,000. As permitted, prior year financial statements have not been
restated. However, certain deferred tax information for 1994 has been adjusted
from amounts previously presented to conform with tax returns filed for these
periods.
The current and deferred amounts of income tax expense (benefit) at December 31,
1995, 1994, and 1993, were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------- -------- --------
<S> <C> <C> <C>
Current:
Federal $10,139 $11,132 $12,739
State 743 1,424 1,958
Foreign 217 - -
Deferred:
Federal 5,312 (94) (1,072)
State 323 (70) (145)
------- ------- -------
Total income tax expense $16,734 $12,392 $13,480
======= ======= =======
</TABLE>
The Bancorporation has established a deferred tax liability of $5,634,000 as a
result of the net unrealized gains on securities designated as available-for-
sale under the provisions of FASB No. 115, "Accounting for Certain Investments
in Debt and Equity Securities". See Notes 1 and 3.
The significant components of the Corporations deferred tax assets and
liabilities at December 31, 1995, and 1994, were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- ------
<S> <C> <C>
Deferred tax liabilities:
Accretion on bond discounts, net $ 1,023 $ 401
Net unrealized gain on securities
available-for-sale 5,634 3,703
Gain on exchange of securities
available-for-sale 4,957 -
------- ------
Total deferred tax liabilities 11,614 4,104
------- ------
</TABLE>
83
<PAGE>
<TABLE>
<CAPTION>
1995 1994
-------- ------
<S> <C> <C>
Deferred tax assets:
Excess book bad debt 3,359 3,382
Postretirement benefits 3,428 3,108
New Jersey Corporate business tax 941 1,281
Book over tax depreciation 588 496
Book over tax core deposit premium
amortization 540 696
Other 93 207
------- ------
Total deferred tax assets 8,949 9,170
------- ------
Net deferred tax asset (liability) $(2,665) $5,066
======= ======
</TABLE>
As required by FASB 109, the Bancorporation has determined that it is not
required to establish a valuation reserve for the deferred tax asset account
since it is "more likely than not" that the deferred tax asset will be realized
through a carryback to taxable income in prior years, future reversals of
existing taxable temporary differences, future taxable income and tax planning
strategies. The conclusion that it is "more likely than not" that the deferred
tax asset will be realized is based on the history of earnings and the prospects
for continued growth including an analysis of potential uncertainties that may
affect future operating results. Management believes that future taxable income
will be sufficient to realize the benefits of temporary deductible differences
that cannot be realized through carryback to prior years or through the reversal
of future temporary taxable differences. Management will continue to review the
tax criteria related to the recognition of deferred tax assets.
The significant components of the 1995 and 1994 deferred expense (benefit) were
as follows (in thousands):
1995 1994 1993
------ ------ --------
Deferred income tax expense (benefit) $5,635 $(164) $(1,217)
====== ====== ========
A reconciliation between the amount of reported total income tax expense and the
amount computed by multiplying the applicable statutory federal income tax rate
to income before taxes is as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Tax expense at statutory rate 35.0 % 35.0 % 35.0 %
Tax-exempt interest (0.7) (1.0) (1.5)
State income taxes,
net of federal income
tax benefit 1.4 2.4 3.1
Other - net (1.5) (0.7) (0.8)
----- ----- -----
Total 34.2 % 35.7 % 35.8 %
===== ===== =====
</TABLE>
84
<PAGE>
Income tax expense (benefit) applicable to securities gains (losses) for the
years ended December 31, 1995, 1994, and 1993, was $5,020,000, zero, and
$(63,000), respectively.
16. Commitments and Contingent Liabilities
The Bancorporation may, from time to time, be a defendant in legal proceedings
relating to the conduct of its business. In the normal course of business there
also are outstanding various contingent liabilities, such as commitments to
extend credit (including standby letters of credit in the amount of $7,128,000
at December 31, 1995, and $7,327,000 at December 31, 1994) which are not
reflected in the accompanying consolidated financial statements. In the
judgement of management, the consolidated financial position of the
Bancorporation and its subsidiaries will not be affected materially by the final
outcome of any present legal proceedings or other contingent liability.
The Bancorporation is party to financial obligations with off-balance sheet risk
incurred in the normal course of business. These instruments are commitments to
extend credit in the form of loans totalling $164,922,000 at December 31, 1995,
and $185,847,000 at December 31, 1994. The exposure of the Bancorporation to
credit loss in the event of non-performance by the other party to these
financial instruments is equal to the contractual amount. The Bancorporation
uses the same credit policies in granting these commitments as it does for loans
presently outstanding. Collateral is obtained when deemed appropriate. These
commitments do not necessarily represent future obligations. A substantial
portion of the commitments historically have remained unused, or if used, would
be secured by mortgages on real estate.
17. Parent Company Only Financial Statements
The condensed financial statements of the parent company only are presented
below (in thousands):
85
<PAGE>
<TABLE>
<CAPTION>
December 31,
-----------------------------
1995 1994
--------- ---------
<S> <C> <C>
Balance Sheets
Assets:
Cash $ 76 $ 91
Securities available-for-sale 39,695 25,938
Investment in subsidiaries 154,712 156,184
Repurchase agreements 18,950 4,075
Other assets 24 19
-------- --------
Total assets $213,457 $186,307
======== ========
Liabilities and Stockholders' Equity:
Liabilities $ 8,828 $ 4,724
Stockholders' Equity 226,862 203,185
Less: treasury stock, at cost -
381,438 shares in 1995 and
376,270 shares in 1994 22,233 21,602
-------- --------
Total stockholders' equity 204,629 181,583
-------- --------
Total liabilities and
stockholders' equity $213,457 $186,307
======== ========
Year ended December 31,
--------------------------------
1995 1994 1993
--------- -------- ---------
Statements of Income
Income:
Dividends from subsidiaries $ 27,907 $ 8,212 $ 9,219
Net security gains (losses) 13,768 -0- (172)
Other dividend income 1,721 589 605
Interest income 635 105 41
--------- -------- --------
Total income 44,031 8,906 9,693
--------- -------- --------
Expense:
Interest expense -0- -0- 1
Other expenses 409 395 184
--------- -------- --------
Total expenses 409 395 185
Income before income tax (benefit) expense
and equity in undistributed income of
subsidiaries 43,622 8,511 9,508
Income tax (benefit) expense 5,650 (40) (82)
--------- -------- --------
Income before equity in undistributed
income of subsidiaries 37,972 8,551 9,590
Equity in undistributed income of
subsidiaries (5,783) 15,241 14,024
--------- -------- --------
Net income $ 32,189 $ 23,792 $ 23,614
========= ======== ========
</TABLE>
86
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
Statements of Cash Flow
Operating Activities:
Net income $ 32,189 $ 23,792 $ 23,614
Adjustments to reconcile net income
to net cash from operating activities
Equity in undistributed income
of subsidiaries 7,764 (15,241) (14,024)
Gain on exchanges of securities
available-for-sale (13,596) - -
(Gains) losses on sales of securities (172) -0- 172
(Increase) decrease in other assets 13 1,934 (254)
Increase (decrease) in other liabilities 3,152 (14) (12)
--------- --------- --------
Total adjustments (2,839) (13,321) (14,118)
--------- --------- --------
Net cash from operating activities 29,350 10,471 9,496
--------- --------- --------
Investing Activities:
Purchases of securities
available-for-sale (3,757) (115) -
Proceeds from sales of investment
securities 898 -0- 675
Purchase of investment securities -0- -0- (131)
Net (increase) decrease in short-term
investments (14,875) (1,945) (2,130)
--------- --------- --------
Net cash from (applied to) investing
activities (17,734) (2,060) (1,586)
--------- --------- --------
Financing Activities:
Net increase (decrease) in short-term
borrowings -0- -0- (260)
Payments to acquire treasury stock (631) (881) (2,741)
Dividends paid (11,383) (8,537) (5,358)
Proceeds from exercise of stock options 383 1,000 516
--------- --------- --------
Net cash applied to financing activities (11,631) (8,418) (7,843)
--------- --------- --------
Net increase (decrease) in cash and
cash equivalents (15) (7) 67
--------- --------- --------
Cash and cash equivalents at beginning
of year 91 98 31
--------- --------- --------
Cash and cash equivalents at end
of year $ 76 $ 91 $ 98
========= ========= ========
</TABLE>
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<PAGE>
18. Quarterly Financial Data (unaudited)
The following is a summary of quarterly financial data of the Bancorporation
and, in the opinion of management, reflects necessary adjustments for a fair
presentation of such data (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------
1995 Dec. 31 Sept. 30 June 30 March 31
-------- --------- ------- ---------
<S> <C> <C> <C> <C>
Total interest income $25,139 $25,914 $25,832 $26,040
Total interest expense 9,715 10,299 10,144 10,055
------- ------- ------- -------
Net interest income $15,424 $15,615 $15,688 $15,985
======= ======= ======= =======
Provision for loan losses $ -0- $ -0- $ (500) $ -0-
======= ======= ======= =======
Security gains $ 1,505 $ 255 $ - $12,008
======= ======= ======= =======
Income before income taxes $10,075 $ 9,335 $ 8,952 $20,561
Income taxes 3,395 3,176 2,935 7,228
------- ------- ------- -------
Net income $ 6,680 $ 6,159 $ 6,017 $13,333
======= ======= ======= =======
Net income per share $3.11 $2.87 $2.81 $6.21
======= ======= ======= =======
Average number of shares
outstanding 2,149 2,146 2,143 2,147
======= ======= ======= =======
Three Months Ended
-----------------------------------------------
1994 Dec. 31 Sept. 30 June 30 March 31
-------- --------- ------- ---------
Total interest income $25,644 $25,590 $25,058 $24,518
Total interest expense 9,179 9,074 8,434 7,893
------- ------- ------- -------
Net interest income $16,465 $16,516 $16,624 $16,625
======= ======= ======= =======
Provision for loan losses $ -0- $ (200) $ (325) $ (300)
======= ======= ======= =======
Income before income taxes $ 8,690 $ 8,746 $ 9,563 $ 9,185
Income taxes 2,617 2,765 3,563 3,447
------- ------- ------- -------
Net income $ 6,073 $ 5,981 $ 6,000 $ 5,738
======= ======= ======= =======
Net income per share $2.82 $2.80 $2.81 $2.69
======= ======= ======= =======
Average number of shares
outstanding 2,148 2,138 2,136 2,134
======= ======= ======= =======
</TABLE>
88
<PAGE>
19. Fair Value of Financial Instruments
A financial instrument is defined as cash, evidence of an ownership interest, or
participation in certain contracts. This definition would include virtually all
assets, liabilities, and off-balance sheet instruments. Fair value is defined
as the amount at which an instrument could be exchanged in a current arms length
transaction between willing parties other than in a forced or liquidation sale
and given sufficient exposure to the marketplace.
The fair value estimates presented are determined based upon relevant
information as well as knowledge about the financial instrument at a particular
time. The Bancorporation utilizes quoted market prices when available. Since
only a limited market exists for a portion of the Bancorporations financial
instruments, fair value estimates are based on the discounted cash flow method.
This technique takes account current economic conditions, risk characteristics,
and other factors which warrant consideration. These estimates are subjective
in nature, involve uncertainties, and matters of significant judgement; and
therefore; cannot be determined with exact accuracy. Changes in assumptions
could significantly affect the estimates presented. Additionally, the fair
value estimates disclosed are based upon existing on and off-balance sheet
financial instruments without attempting to estimate the value of any
anticipated future business and only consider assets and liabilities that are
financial instruments.
The methods and assumptions used to estimate the fair value of significant
financial instruments were as follows. Book value is considered to approximate
fair value for cash and due from banks, money market investments, federal funds
sold, and deposit liabilities with no defined maturity. Quoted market prices
are generally used to ascertain fair values of investment securities and
securities available-for-sale.
The fair value of loans is calculated by discounting estimated future cash flows
at applicable rates. For time deposit liabilities and securities sold under
repurchase agreements, fair value was estimated by discounting future cash flows
using currently offered market rates for obligations of similar remaining
maturities.
The fair value of both commitments to extend credit and standby letters of
credit are estimated using fees currently charged to enter into similar
agreements. The value of these amounts, which are considered immaterial, are
deemed to approximate fair value and are included in the value of the related
financial instrument. If funded, the fair value of these commitments is equal
to the commitment amount. The estimated fair value of financial instruments and
their related carrying values at December 31, 1995 and 1994 were as follows (in
thousands):
89
<PAGE>
<TABLE>
<CAPTION>
Estimated Carrying
1995 Fair Value Value
- ----- ---------- ----------
<S> <C> <C>
Financial assets:
Cash and due from banks $ 67,498 $ 67,498
Money market investments 3,619 3,619
Securities available-for-sale 304,415 304,415
Investment securities 706,422 696,395
Federal funds sold 134,000 134,000
Net loans 380,053 375,815
Financial liabilities:
Deposits $1,312,676 $1,311,590
Securities sold under
repurchase agreements 72,860 72,199
Other borrowed funds 8,990 8,990
1994
- -----
Financial assets:
Cash and due from banks $ 93,221 $ 93,221
Money market investments 2,555 2,555
Securities available-for-sale 100,070 100,070
Investment securities 931,639 965,239
Federal funds sold 115,000 115,000
Net loans 359,761 363,284
Financial liabilities:
Deposits $1,353,491 $1,354,738
Securities sold under
repurchase agreements 110,457 110,141
Other borrowed funds 12,341 12,341
</TABLE>
20. Pending Acquisition
On May 24, 1995 United Counties Bancorporation announced that it signed a
definitive merger agreement with Meridian Bancorp, Inc., Reading, Pennsylvania,
pursuant to which United Counties Bancorporation will be acquired in a tax-free,
stock-for-stock Merger. Pursuant to the Merger, each of the outstanding shares
of United Counties Bancorporation common stock will be exchanged for five (5)
shares of Meridian common stock. United Counties Bancorporation will be merged
into Meridian and United Counties Bancorporation's wholly-owned subsidiary,
United Counties Trust Company will be merged into Meridian's wholly-owned
subsidiary, Meridian Bank, New Jersey. The acquisition became effective on
February 23, 1996.
On October 10, 1995, Meridian Bancorp, Inc. announced the signing of a
definitive merger agreement with CoreStates Financial Corp (CoreStates)of
Philadelphia, Pennsylvania. Under the terms of this agreement, each share of
Meridian common stock will be exchanged for 1.225 shares of CoreStates common
stock and is dependent upon necessary bank regulatory and shareholder approvals
and other customary terms and conditions.
90
<PAGE>
At the effective date of the Merger between Meridian Bancorp, Inc. and United
Counties Bancorporation a non-recurring charge of approximately $16.0 million,
$14.5 million after the related tax effects, will be incurred. These expenses
relate directly to the Merger and include $10.3 million of human resources-
related costs, including employment contracts and severance; $1.5 million of
operations and data processing integration-related expenses; and $4.2 million of
other expenses, including investment banker fees and legal expenses. Deferred
taxes receivable, at statutory rates, totalling $1.5 million are reflected in
other assets.
91
<PAGE>
Independent Auditors' Report
----------------------------
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 31,
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.
KPMG PEAT MARWICK LLP
Short Hills, New Jersey
January 16, 1996, except for note 20,
which is as of February 23, 1996
