<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended September 30, 1997 Commission file number 0-6879
CORESTATES FINANCIAL CORP
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1899716
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
N.E. Corner Broad and Chestnut Streets
Philadelphia, Pennsylvania 19101
- --------------------------------------- -------------------------------
(Address of principal executive offices) (Zip Code)
215-973-3827
-------------------------------
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X . No .
----- -----
Number of Shares of Common Stock Outstanding at November 3, 1997: 197,813,302
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Item 1 - FINANCIAL INFORMATION
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996................................................. 3
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1997 and 1996.......................... 4
Consolidated Statements of Changes in Shareholders'
Equity for the Nine Months Ended September 30, 1997 and 1996...... 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1997 and 1996..................... 6
Notes to the Consolidated Financial Statements.................... 7-8
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 9-37
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K.................................. 38
SIGNATURE.................................................................. 39
EXHIBITS 3.1, 11, 12.1, 12.2, 27
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(Unaudited) (Note)
ASSETS
- ------
<S> <C> <C>
Cash and due from banks.............................................. $ 3,166,454 $ 3,462,287
Time deposits, principally Eurodollars............................... 3,043,723 2,443,154
Federal funds sold and securities purchased under
agreements to resell............................................. 138,699 509,694
Trading account assets............................................... 326,717 122,317
Investments available-for-sale, at fair value........................ 2,211,382 2,394,166
Investments held-to-maturity (fair value:
1997 - $1,417,351; 1996 - $1,692,243)............................ 1,413,351 1,689,058
Loans, net of unearned discounts of $220,485 in 1997
and $234,607 in 1996 ............................................ 35,085,285 32,777,032
Less: Allowance for loan losses................................. (679,415) (710,327)
------------ ------------
Net loans.............................................. 34,405,870 32,066,705
------------ ------------
Due from customers on acceptances.................................... 790,548 738,077
Premises and equipment............................................... 626,760 625,876
Other assets ........................................................ 1,467,105 1,442,860
------------ ------------
Total assets........................................... $47,590,609 $ 45,494,194
============ ============
LIABILITIES
- -----------
Deposits:
Domestic:
Non-interest bearing......................................... $ 8,942,224 $ 9,330,445
Interest bearing............................................. 23,401,727 22,986,955
Overseas branches and subsidiaries............................... 1,396,731 1,409,756
------------ ------------
Total deposits......................................... 33,740,682 33,727,156
------------ ------------
Funds borrowed....................................................... 4,239,227 2,633,157
Bank acceptances outstanding......................................... 789,169 727,728
Other liabilities.................................................... 1,924,257 1,661,162
Long-term debt....................................................... 3,784,179 3,049,297
------------ ------------
Total liabilities...................................... 44,477,514 41,798,500
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES
- --------------------------------------
SHAREHOLDERS' EQUITY
- --------------------
Preferred stock: authorized 10.0 million shares; no
shares issued.................................................... - -
Common stock: $1 par value; authorized 350.0 million
shares; issued 223.599 million shares in 1997 and
1996 (including treasury shares of 23.820 million
in 1997 and 8.900 million in 1996, and unallocated
shares held by the Employee Stock Ownership Plan
("ESOP") of 2.182 million in 1997 and 2.267 million
in 1996)......................................................... 223,599 223,599
Other common shareholders' equity, net............................... 2,889,496 3,472,095
------------ ------------
Total shareholders' equity............................. 3,113,095 3,695,694
------------ ------------
Total liabilities and shareholders' equity............. $ 47,590,609 $ 45,494,194
============ ============
</TABLE>
Note: The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date.
See accompanying notes to the consolidated financial statements.
3
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1997 1996 1997 1996
-------- --------- -------- --------
INTEREST INCOME
- ---------------
<S> <C> <C> <C> <C>
Interest and fees on loans:
Taxable income ...................................... $ 760,590 $ 716,075 $2,221,554 $2,118,771
Tax exempt income ................................... 5,201 6,009 15,759 19,409
Interest on investment securities:
Taxable income ...................................... 51,890 58,363 157,064 198,952
Tax exempt income ................................... 3,950 5,855 13,006 17,952
Interest on time deposits in banks ....................... 43,234 33,277 112,619 85,969
Interest on Federal funds sold, securities purchased under
agreements to resell and other ....................... 8,169 3,504 20,719 21,503
---------- ---------- ---------- ----------
Total interest income ...................... 873,034 823,083 2,540,721 2,462,556
---------- ---------- ---------- ----------
INTEREST EXPENSE
- ----------------
Interest on deposits ..................................... 229,291 207,391 646,273 629,811
Interest on short-term funds borrowed .................... 53,586 35,780 132,035 111,379
Interest on long-term debt ............................... 59,663 39,564 171,463 116,969
---------- ---------- ---------- ----------
Total interest expense ..................... 342,540 282,735 949,771 858,159
---------- ---------- ---------- ----------
NET INTEREST INCOME ........................ 530,494 540,348 1,590,950 1,604,397
Provision for losses on loans ............................ 50,000 40,000 143,000 188,767
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOSSES ON LOANS ................ 480,494 500,348 1,447,950 1,415,630
---------- ---------- ---------- ----------
NON-INTEREST INCOME
- -------------------
Service charges on deposit accounts ...................... 63,039 57,863 180,958 172,779
Trust income ............................................. 47,453 42,102 137,620 124,877
Fees for international services .......................... 31,445 27,130 84,194 74,805
Debit and credit card fees ............................... 25,261 22,417 70,729 65,041
Third party processing ................................... 19,389 14,075 58,136 42,543
Income from investment in EPS, Inc. ...................... 7,499 7,469 22,109 22,192
Income from trading activities ........................... 9,591 2,763 25,377 15,880
Securities gains ......................................... 5,023 31,135 14,857 55,476
Other operating income ................................... 26,777 31,677 82,872 101,105
---------- ---------- ---------- ----------
Total non-interest income .................. 235,477 236,631 676,852 674,698
---------- ---------- ---------- ----------
NON-FINANCIAL EXPENSES
- ----------------------
Salaries, wages and benefits ............................. 206,467 204,945 614,201 619,725
Net occupancy ............................................ 36,286 39,856 110,876 120,201
Equipment expenses ....................................... 30,320 29,427 92,717 90,360
Restructuring and merger-related charges ................. - 12,298 - 130,100
Other operating expenses ................................. 136,749 145,327 386,906 399,154
---------- ---------- ---------- ----------
Total non-financial expenses ............... 409,822 431,853 1,204,700 1,359,540
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES ............................... 306,149 305,126 920,102 730,788
- --------------------------
Provision for income taxes ............................... 107,335 108,269 323,449 277,190
---------- ---------- ---------- ----------
NET INCOME ............................................... $ 198,814 $ 196,857 $ 596,653 $ 453,598
- ---------- ========== ========== ========== ==========
Average common shares outstanding ........................ 199,817 220,409 205,316 219,802
========== ========== ========== ==========
PER COMMON SHARE DATA
- ---------------------
Net income ............................................... $ 1.00 $ 0.89 $ 2.91 $ 2.06
========== ========== ========== ==========
Cash dividends declared .................................. $ 0.47 $ 0.42 $ 1.41 $ 1.26
========== ========== ========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)
(in thousands)
<TABLE>
<CAPTION>
Common Capital Retained
stock surplus earnings
--------- ---------- -----------
<S> <C> <C> <C>
Nine Months Ended September 30, 1996
- ------------------------------------
Balances at beginning of year ................................... $230,231 $1,225,167 $2,724,298
Net income ...................................................... 453,598
Net change in unrealized gain on investments
available-for-sale, net of tax................................ (33,264)
Treasury shares acquired (741 shares)............................
Treasury shares issued in merger (7,300 shares).................. (7,300) (33,288) (192,042)
Repurchase and retirement of common stock (1,340 shares)........ (1,340) (43,559) (12,804)
Common stock issued under employee benefit plans
(1,575 new shares; 928 treasury shares)....................... 1,575 55,521 (14,668)
Common stock issued under dividend reinvestment plan
(31 new shares) (347 treasury shares)......................... 31 1,727 (68)
ESOP shares committed for release (92 shares).................... 1,454
Cash paid for fractional shares issued........................... (341)
Foreign currency translation adjustments......................... 1,037
Common dividends declared........................................ (272,658)
-------- ---------- ----------
Balances at end of period........................................ $223,197 $1,207,022 $2,653,088
======== ========== ==========
Nine Months Ended September 30, 1997
- ------------------------------------
Balances at beginning of year.................................... $223,599 $1,234,522 $2,729,310
Net income....................................................... 596,653
Net change in unrealized gain on investments
available-for-sale, net of tax................................ 8,406
Treasury shares acquired (17,098 shares).........................
Common stock issued under employee benefit plans
(1,734 treasury shares)....................................... 15,510 (49,740)
Common stock issued under dividend reinvestment plan
(444 treasury shares)......................................... 330 (1,058)
ESOP shares committed for release (85 shares).................... 2,587
Foreign currency translation adjustments......................... (1,194)
Common dividends declared........................................ (291,802)
-------- ---------- ----------
Balances at end of period........................................ $223,599 $1,252,949 $2,990,575
======== ========== ==========
<CAPTION>
Unallocated
Treasury ESOP
Nine Months Ended September 30, 1996 stock shares Total
- ------------------------------------ -------- ----------- -----------
<S> <C> <C> <C>
Balances at beginning of year ................................... $ (250,465) $(53,666) $3,875,565
Net income ...................................................... 453,598
Net change in unrealized gain on investments
available-for-sale, net of tax................................ (33,264)
Treasury shares acquired (741 shares)............................ (28,294) (28,294)
Treasury shares issued in merger (7,300 shares).................. 232,630 -
Repurchase and retirement of common stock (1,340 shares)........ (57,703)
Common stock issued under employee benefit plans
(1,575 new shares; 928 treasury shares)....................... 33,079 75,507
Common stock issued under dividend reinvestment plan
(31 new shares) (347 treasury shares)......................... 13,050 14,740
ESOP shares committed for release (92 shares).................... 2,250 3,704
Cash paid for fractional shares issued........................... (341)
Foreign currency translation adjustments......................... 1,037
Common dividends declared........................................ (272,658)
----------- -------- -----------
Balances at end of period........................................ $ - $(51,416) $4,031,891
=========== ======== ==========
Nine Months Ended September 30, 1997
- ------------------------------------
Balances at beginning of year.................................... $ (437,580) $(54,157) $3,695,694
Net income....................................................... 596,653
Net change in unrealized gain on investments
available-for-sale, net of tax................................ 8,406
Treasury shares acquired (17,098 shares)......................... (986,575) (986,575)
Common stock issued under employee benefit plans
(1,734 treasury shares)....................................... 98,986 64,756
Common stock issued under dividend reinvestment plan
(444 treasury shares)......................................... 23,277 22,549
ESOP shares committed for release (85 shares).................... 2,021 4,608
Foreign currency translation adjustments......................... (1,194)
Common dividends declared........................................ (291,802)
----------- -------- ----------
Balances at end of period........................................ $(1,301,892) $(52,136) $3,113,095
=========== ======== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
(in thousands) Nine Months Ended
September 30,
------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Operating Activities
- --------------------
Net income ..................................................................... $ 596,653 $ 453,598
Adjustments to reconcile net income to net cash
provided by operating activities:
Restructuring and merger-related charges.................................... - 130,100
Provision for losses on loans............................................... 143,000 188,767
Provision for losses and writedowns on OREO................................. 2,012 2,753
Depreciation and amortization............................................... 93,459 88,448
Deferred income tax expense (benefit)....................................... 32,250 (10,525)
Securities gains............................................................ (14,857) (55,476)
(Increase) decrease in trading account assets............................... (204,400) 90,418
Increase (decrease) in due to factored clients.............................. 77,028 (16,292)
(Increase) decrease in interest receivable.................................. (13,895) 44,813
Increase (decrease) in interest payable..................................... 8,776 (5,519)
Other, net.................................................................. 80,356 181,460
----------- -----------
Net Cash Provided by Operating Activities................................ 800,382 1,092,545
----------- -----------
Investing Activities
- --------------------
Net increase in loans........................................................... (2,462,447) (1,895,346)
Proceeds from sales of loans.................................................... 491,506 843,260
Loans originated or acquired - non-bank subsidiaries............................ (27,289,355) (28,572,504)
Principal collected on loans - non-bank subsidiaries............................ 26,758,059 28,274,066
Net increase in time deposits, principally Eurodollars.......................... (600,569) (685,213)
Purchases of investments held-to-maturity....................................... (445,244) (372,596)
Purchases of investments available-for-sale..................................... (549,954) (1,430,753)
Proceeds from maturities of investments held-to-maturity........................ 739,006 1,164,746
Proceeds from maturities of investments available-for-sale...................... 678,077 767,581
Proceeds from sales of investments available-for-sale........................... 89,092 856,474
Net decrease in Federal funds sold and securities purchased under
agreements to resell........................................................ 370,995 551,235
Purchases of premises and equipment............................................. (63,050) (77,435)
Proceeds from sales and paydowns on OREO........................................ 12,398 26,536
Other, net...................................................................... 32,187 27,475
----------- -----------
Net Cash Used in Investing Activities.................................... (2,239,299) (522,474)
----------- -----------
Financing Activities
- --------------------
Net increase (decrease) in deposits............................................. 13,312 (1,251,670)
Payment for sale of deposits.................................................... - (368,110)
Proceeds from issuance of long-term debt........................................ 1,138,145 533,070
Retirement of long-term debt.................................................... (402,154) (225,973)
Net increase in short-term funds borrowed....................................... 1,606,070 325,374
Cash dividends paid............................................................. (297,510) (236,987)
Purchases of treasury stock..................................................... (986,575) (28,294)
Repurchase and retirement of common stock....................................... - (57,703)
Common stock issued under employee benefit plans................................ 49,247 48,448
Other, net...................................................................... 22,549 14,399
----------- -----------
Net Cash Provided by (Used in) Financing Activities...................... 1,143,084 (1,247,446)
----------- -----------
Decrease In Cash And Due From Banks...................................... (295,833) (677,375)
------------------------------------
Cash and due from banks at January 1,.................................... 3,462,287 3,662,143
----------- -----------
Cash and due from banks at September 30,................................. $ 3,166,454 $ 2,984,768
=========== ===========
Supplemental Disclosure of Cash Flow Information
- ------------------------------------------------
Cash paid during the period for:
Interest................................................................. $ 940,995 $ 863,678
=========== ===========
Income taxes............................................................. $ 191,007 $ 248,505
=========== ===========
Net cash received on interest rate swaps........................................ $ 44,983 $ 46,253
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
6
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 1997
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of CoreStates
Financial Corp ("CoreStates") have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (comprising only normal recurring accruals)
necessary for a fair presentation have been included. Certain amounts in prior
periods have been reclassified for comparative purposes. Operating results for
the nine-month period ended September 30, 1997 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1997.
NOTE B -- CHANGE IN ACCOUNTING PRINCIPLES
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("FAS 128") was issued in February 1997. FAS 128, which must be adopted on
December 31, 1997, requires entities to change the method currently used to
compute earnings per share and to restate earnings per share for all prior
periods presented. Under FAS 128, primary earnings per share will exclude the
dilutive effect of stock options and fully diluted earnings per share must
include the dilutive effect of stock options even if the dilutive effect is
immaterial. The impact of FAS 128 on the calculation of primary earnings per
share and fully diluted earnings per share is not expected to be material.
NOTE C -- LOAN PORTFOLIO
Loans, net of unearned discounts, consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------------- ------------
<S> <C> <C>
Domestic:
Commercial, industrial and other................ $ 15,800,229 $ 13,906,646
Real estate:
Construction and development................. 625,910 554,924
Residential.................................. 4,312,171 4,226,980
Other........................................ 4,284,944 4,541,697
------------ ------------
Total real estate....................... 9,223,025 9,323,601
------------ ------------
Consumer:
Installment.................................. 3,260,034 3,319,970
Credit card.................................. 1,686,941 1,674,921
------------ ------------
Total consumer.......................... 4,946,975 4,994,891
------------ ------------
Financial institutions.......................... 1,362,525 1,153,715
Factoring receivables........................... 564,877 411,280
Lease financing................................. 1,217,578 1,232,213
------------ ------------
Total domestic.......................... 33,115,209 31,022,346
------------ ------------
Foreign ............................................. 1,970,076 1,754,686
------------ ------------
Total loans............................. $ 35,085,285 $ 32,777,032
============ ============
</TABLE>
7
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -- continued
September 30, 1997
NOTE D -- OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS AND COMMITMENTS
In the normal course of business, there are outstanding commitments and
contingent liabilities which are not reflected in the financial statements.
These include various financial instruments with off-balance sheet risk used in
connection with CoreStates' asset and liability management and to provide for
the needs of customers. These involve varying degrees of credit, interest rate
and liquidity risk, but do not represent unusual risks for the Corporation and
management does not anticipate any significant losses as a result of these
transactions. See tables and discussion under "Interest Rate Risk Management"
beginning on page 27 for more details on off-balance sheet instruments and
derivative activities.
The following is a summary of contractual or notional amounts of off-
balance sheet commitments and derivative financial instruments (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Standby letters of credit, net of participations.................. $ 1,889,145 $ 1,630,621
Commercial letters of credit...................................... 1,503,337 1,262,593
Commitments to extend credit...................................... 17,250,051 15,396,553
Unused commitments under credit card lines........................ 4,493,830 4,173,013
When-issued securities:
Commitments to purchase...................................... 15,990 1,770
Commitments to sell.......................................... 110,000 75,120
Whole mortgage loans and securities:
Commitments to purchase...................................... 17,048 17,280
Commitments to sell.......................................... 41,195 7,965
Loans sold with recourse and loan servicing
acquired with recourse....................................... 316,038 361,410
Interest rate futures contracts:
Commitments to purchase...................................... 1,825,900 4,489,800
Commitments to purchase foreign and U. S. currencies.............. 2,728,984 1,766,122
Interest rate swaps, notional principal amounts................... 11,068,963 9,850,708
Interest rate caps and floors:
Written...................................................... 1,728,073 908,799
Purchased.................................................... 2,802,353 2,039,331
Tender option bonds............................................... 471,395 148,711
Treasury float contracts.......................................... 256,546 270,358
Other derivative financial instruments............................ 864,199 597,261
</TABLE>
8
<PAGE>
PART I. FINANCIAL INFORMATION -- continued
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SUMMARY
- -------
Earnings Review - In the third quarter of 1997, CoreStates Financial Corp
---------------
("CoreStates") recorded net income of $198.8 million, or $1.00 per share,
compared to third quarter of 1996 net income of $196.9 million and operating
earnings of $194.9 million, both equaling $0.89 per share. On a per share basis,
third quarter of 1997 net income represented a 12.4% increase over the prior
year third quarter. The increase in earnings per share primarily resulted from
strong growth in non-interest income before 1996 significant and unusual items
and from the decline in average common shares outstanding due to the common
stock repurchase program, which added $0.04 to earnings per share after
considering the unfavorable impact of $18.2 million of costs incurred to fund
the repurchase program in the third quarter of 1997. For more detail regarding
the common stock repurchase program see page 11. "Operating earnings" for the
third quarter of 1996 have been defined for purposes of this earnings review as
net income excluding net restructuring and merger-related charges, certain net
investment gains and the SAIF Fund special assessment, all as discussed on pages
10 and 11.
Net income, operating earnings, key financial ratios and per share
information are summarized in the following table (in millions, except per
share):
<TABLE>
<CAPTION>
Three Nine
Three Months Ended Month Nine Months Ended Month
September 30, % September 30, %
---------------------- Increase ----------------------- Increase
1997 1996 (Decrease) 1997 1996 (Decrease)
-------- -------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Net interest income (taxable equivalent
basis) ................................ $ 536.0 $ 546.7 (2.0)% $ 1,607.9 $ 1,624.6 (1.0)%
======== ======== ========= ========
Net income ............................ $ 198.8 $ 196.9 1.0 $ 596.7 $ 453.6 31.5
Exclude the following after-tax items:
Net restructuring and merger-related
charges ............................ - 7.7 - 144.8
Certain net investment gains ....... - (18.6) - (28.1)
SAIF Fund Special Assessment ....... - 8.9 - 8.9
-------- -------- --------- --------
Operating earnings .................... $ 198.8 $ 194.9 2.0 $ 596.7 $ 579.2 3.0
======== ======== ========= ========
Operating earnings per share .......... $ 1.00 $ 0.89 12.4 $ 2.91 $ 2.64 10.2
======== ======== ========= ========
Return on average equity .............. 24.53% 19.53%(a) 23.27% 19.76%(a)
Return on average assets .............. 1.71 1.79(a) 1.77 1.77(a)
Net interest margin ................... 5.13 5.58 5.32 5.55
Average common shares outstanding ..... 199.817 220.409 205.316 219.802
</TABLE>
- ---------------------
(a) Calculated based on "Operating earnings."
The $3.9 million improvement in third quarter of 1997 operating earnings
was primarily due to a $27.6 million, or 13.3%, increase in non-interest income
before certain net investment gains. The increase in non-interest income was
mainly due to growth in revenues from fee-based services particularly income
from trading activities, trust income, third party processing fees,
international fees and service charges on deposits. This improvement was
partially offset by a $9.8 million, or 1.8%, decrease in net interest income
primarily due to $18.2 million of funding costs associated with the common stock
repurchase program, a $4.4 million, or 1.1%, increase in non-financial expenses
primarily related to higher technology expenses, and a $10.0 million increase in
the provision for loan losses due to increased year to year levels of charge-
offs against credit card and other consumer loans and a rise in commercial loan
charge-offs.
Returns on average equity and assets were 24.53% and 1.71%, respectively,
in the third quarter of 1997, compared to 19.53% and 1.79%, respectively, in the
third quarter of 1996. The return on average equity was positively affected by
the common stock repurchase program.
9
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
SUMMARY - continued
- -------
For the nine months ended September 30, 1997, net income was $596.7 million, or
$2.91 per share. This compares to net income of $453.6 million, or $2.06 per
share, and operating earnings of $579.2 million, or $2.64 per share for the 1996
nine-month period. The 10.2% increase in earnings per share for the 1997 nine-
month period as compared to 1996 operating earnings per share primarily resulted
from a $45.5 million, or 7.2%, increase in non-interest income, non-financial
expense reductions of $10.5 million, or 0.9%, and from the decline in average
common shares outstanding due to the common stock repurchase program, which
added $0.10 to earnings per share after considering the unfavorable impact of
$39.4 million of costs incurred to fund the repurchase program in the 1997 nine-
month period. Operating earnings for the nine months ended September 30, 1996
exclude restructuring and merger-related charges, certain net investment gains
and the SAIF Fund special assessment.
Technology Initiatives - In November 1997, CoreStates announced the
----------------------
creation of a 10-year strategic technology alliance with Andersen Consulting
designed to help CoreStates expand its access to improved technology skills and
capabilities, strengthen CoreStates' competitive position by improving
responsiveness and flexibility of the technologies that underlie CoreStates
products and services, and increase the return on CoreStates' investments in
those technologies. The alliance is a key part of CoreStates' strategy for
growth, and is comprised of three major components: a program to develop new
strategic technology applications; a business process management contract for
applications development and maintenance; and a Year 2000 Initiative, already
underway at CoreStates, as more fully described below.
CoreStates has undertaken a corporate-wide program to prepare and convert
CoreStates' computer systems and applications for year 2000 compliance. The cost
for the Year 2000 Initiative to be incurred over 1997, 1998, and 1999 is
estimated to be between $40 million and $60 million. CoreStates could also be
affected by the century change to the extent that other entities not affiliated
with CoreStates are unsuccessful in addressing this issue.
Restructuring and Merger-Related Charges - In the second and third quarters
----------------------------------------
of 1996, CoreStates recorded pre-tax net restructuring and merger-related
charges of $173.7 million and $12.3 million, respectively, primarily in
connection with the acquisition of Meridian Bancorp, Inc. ("Meridian"). Included
in the second quarter of 1996 charge was a $70.0 million provision for loan
losses recorded in connection with a change in strategic direction related to
Meridian's problem assets and to conform Meridian's consumer lending charge-off
policies to those of CoreStates. The second and third quarter of 1996
restructuring and merger-related charges were net of pre-tax credits of $45.2
million related to gains on sales of branches in the second quarter and gains on
the curtailment of pension benefits in both quarters. In the first quarter of
1996, CoreStates acquired United Counties Bancorporation, and recorded pre-tax
net restructuring and merger-related charges of $14.1 million, $13.8 million or
$0.06 per share after tax, primarily in connection with that transaction. The
first quarter of 1996 restructuring and merger-related charges were net of pre-
tax credits of $2.5 million related to gains on the curtailment of pension
benefits and sales of branches resulting from prior process redesigns.
The following table summarizes the activity in the restructuring accrual
for the three and nine months ended September 30, 1997 (in millions):
<TABLE>
<CAPTION>
Third Nine
Quarter Months
1997 1997
---- ----
<S> <C> <C>
Balance at beginning of period................ $54 $108
Provision charged against income.............. - -
Cash outflow(a)............................... (9) (41)
Writedowns of assets.......................... (8) (30)
---- ----
Balance at end of period...................... $37 $37
==== ====
</TABLE>
- ---------------------
(a) CoreStates' liquidity has not been significantly affected by these
cashflows.
10
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
SUMMARY - continued
- -------
Certain Net Investment Gains - In the third quarter of 1996, CoreStates
----------------------------
recorded net pre-tax gains of $28.7 million, principally on the exchange of
equity securities. In the second quarter of 1996, CoreStates recorded net
pre-tax gains of $14.6 million on sales of investment securities, including an
$18.8 million pre-tax gain on the sale of an equity investment in a foreign
consumer finance company. That foreign equity investment gain was partially
offset during the second quarter of 1996 by losses on the sale of a portion of a
second foreign equity investment and on the sale of securities related to a
realignment of Meridian's investment portfolio to conform to CoreStates'
interest rate risk policies.
SAIF Fund Special Assessment - On September 30, 1996, the Deposits
----------------------------
Insurance Fund Act of 1996 mandated a special one-time assessment on
institutions carrying Savings Association Insurance Fund ("SAIF Fund") insured
deposits. In the third quarter of 1996, CoreStates expensed $14.2 million,
pre-tax, for that special assessment.
Common Stock Repurchase Program - On October 15, 1996, the Board of
-------------------------------
Directors authorized the management of CoreStates to repurchase up to 22 million
shares of common stock, or approximately 10% of outstanding shares, through
December 31, 1997. Acting under that authorization, 8.8 million shares of
CoreStates' common stock were repurchased in 1996 and 12.3 million shares in the
first nine months of 1997.
On July 15, 1997, the Board of Directors authorized an extension of the
common stock repurchase program permitting management to repurchase up to an
additional 6 million shares, or approximately 3% of outstanding shares.
Management is also authorized to repurchase additional shares to fulfill
requirements of employee benefit and dividend reinvestment plans. Acting under
the July 1997 authorization, 3.0 million shares of CoreStates' common stock were
repurchased in the third quarter of 1997.
Cautionary Statement
Certain statements contained herein are not based on historical fact and
are "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements which are based on
various assumptions (some of which are beyond CoreStates' control), may be
identified by reference to a future period, or periods, or by the use of
forward-looking terminology such as "may", "will", "believe", "expect",
"estimate", "anticipate", "continue", or similar terms or variations on those
terms, or the negative of those terms. Actual results could differ materially
from those set forth in forward-looking statements. Factors that could cause
actual results to differ materially from those in the forward-looking statements
include, but are not limited to: the global, national and regional economies
where CoreStates conducts operations; economic growth; governmental monetary
policy including interest rate policies of the Federal Reserve Board; sources
and costs of funds; levels of interest rates; inflation rates; market capital
spending; technological change; the state of securities and capital markets;
acquisitions; consumer spending and savings; expense levels; and tax,
securities, and banking laws and prospective legislation.
11
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
BUSINESS LINE RESULTS
- ---------------------
CoreStates utilizes a value-based reporting methodology to facilitate
management's analysis of performance by defined business lines. This process
supports CoreStates' strategic objectives of creating superior growth in
shareholder value by focusing on the performance and value creation potential of
CoreStates' component businesses.
CoreStates' five core businesses are: Global and Specialized Banking;
Regional Banking; Retail Credit Services; Trust and Asset Management; and Third
Party Processing. The following tables present the earnings contribution for the
three and nine months ended September 30, 1997 and 1996. Each core business is
comprised of well-defined business lines with market or product-specific
missions.
Three Months Ended September 30,
($ in millions, taxable equivalent basis)
<TABLE>
<CAPTION>
Global and Specialized Regional Retail Trust and Asset
Banking Banking Credit Services Management
---------------------- ----------------------- ---------------------- ------------------------
1997 1996 1997 1996 1997 1996 1997 1996
---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income ............. $ 153.4 $ 142.9 $ 282.2 $ 280.2 $ 75.4 $ 76.3 $ 16.5 $ 13.2
Provision for losses on loans ... 3.5 8.0 1.7 7.1 44.2 24.7 0.6 0.6
Non-interest income ............. 69.1 57.3 63.9 58.4 22.6 21.4 47.9 42.2
Non-financial expenses .......... 100.3 93.2 190.2 201.1 42.0 50.7 35.0 37.5
---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Income before income taxes ...... 118.7 99.0 154.2 130.4 11.8 22.3 28.8 17.3
Income tax expense .............. 45.8 38.9 56.8 47.4 4.1 8.7 10.4 6.1
---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Net income ...................... $ 72.9 $ 60.1 $ 97.4 $ 83.0 $ 7.7 $ 13.6 $ 18.4 $ 11.2
========== ========== ========== =========== ========== ========== =========== ===========
Return on assets ................ 1.60% 1.67% 3.00% 2.37% 0.41% 0.69% 5.54% 3.44%
Return on equity ................ 24.49% 24.80% 58.02% 43.97% 8.91% 15.07% 98.65% 55.70%
Average assets .................. $ 18,095 $ 14,278 $ 12,880 $ 13,958 $ 7,431 $ 7,871 $ 1,318 $ 1,295
Average equity .................. 1,181 964 666 751 343 359 74 80
<CAPTION>
Third Party
Processing Corporate Center Total
---------------------- --------------------------- ----------------------
1997 1996 1997 1996 1997 1996
---------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net interest income................ $ 5.4 $ 5.0 $ 3.1 $ 29.1 $ 536.0 $ 546.7
Provision for losses on loans...... - - - (0.4) 50.0 40.0
Non-interest income................ 56.9 54.0 (24.9)(a) 3.3 (a,c) 235.5 236.6
Non-financial expenses............. 55.3 51.0 (13.0)(a) (1.7)(a,b) 409.8 431.8
---------- ---------- ---------- ----------- ---------- ----------
Income (loss) before income taxes.. 7.0 8.0 (8.8) 34.5 311.7 311.5
Income tax expense (benefit)....... 1.8 2.8 (6.0) 10.7 112.9 114.6
---------- ---------- ---------- ----------- ---------- ----------
Net income (loss).................. $ 5.2 $ 5.2 $ (2.8) $ 23.8 $ 198.8 $ 196.9
========== ========== ========== =========== ========== ==========
Return on assets................... 7.76% 6.31% (0.18)% 1.67% 1.71% 1.80%
Return on equity................... 68.77% 60.84% (1.20)% 5.32% 24.53% 19.74%
Average assets..................... $ 266 $ 328 $ 6,162 $ 5,682 $ 46,152 $ 43,412
Average equity..................... 30 34 922 1,780 3,216 3,968
</TABLE>
- -------------------
(a) Includes eliminations for intercompany third party processing fees of $26.3
million and $28.2 million in 1997 and 1996, respectively.
(b) Includes net restructuring and merger-related charges of $12.3 million and
the SAIF Fund special assessment of $14.2 million.
(c) Includes a net gain of $28.7 million principally from the exchange of
equity securities.
12
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
BUSINESS LINE RESULTS - continued
- ---------------------------------
Nine Months Ended September 30,
($ in millions, taxable equivalent basis)
<TABLE>
<CAPTION>
Global and Specialized Regional Retail Trust and Asset
Banking Banking Credit Services Management
--------------------- ------------------- ------------------- ---------------------
1997 1996 1997 1996 1997 1996 1997 1996
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income.............. $ 443.4 $ 410.3 $ 841.2 $ 840.3 $ 229.0 $ 221.0 $ 42.3 $ 38.1
Provision for losses on loans.... 25.8 22.9 14.8 21.5 101.6 74.0 1.6 1.7
Non-interest income.............. 197.9 171.6 183.8 177.7 63.2 65.5 139.1 125.4
Non-financial expenses........... 290.1 268.5 562.1 593.6 127.1 144.6 105.0 114.1
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes....... 325.4 290.5 448.1 402.9 63.5 67.9 74.8 47.7
Income tax expense............... 124.8 114.1 164.5 146.4 22.4 25.8 27.0 17.2
-------- -------- -------- -------- -------- -------- -------- --------
Net income....................... $ 200.6 $ 176.4 $ 283.6 $ 256.5 $ 41.1 $ 42.1 $ 47.8 $ 30.5
======== ======== ======== ======== ======== ======== ======== ========
Return on assets................. 1.57% 1.70% 2.94% 2.36% 0.73% 0.71% 5.04% 2.88%
Return on equity................. 24.16% 26.45% 56.93% 46.18% 15.84% 15.16% 91.30% 58.20%
Average assets................... $ 17,131 $ 13,856 $ 12,891 $ 14,533 $ 7,514 $ 7,946 $ 1,269 $ 1,416
Average equity................... 1,110 891 666 742 347 371 70 70
<CAPTION>
Third Party
Processing Corporate Center Total
---------------------- ------------------------ -------------------------
1997 1996 1997 1996 1997 1996
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net interest income.............. $ 14.5 $ 13.3 $ 37.5 $ 101.6 $ 1,607.9 $ 1,624.6
Provision for losses on loans.... 0.1 0.1 (0.9) 68.6 (b) 143.0 188.8
Non-interest income.............. 171.2 153.9 (78.3)(a) (19.4)(a,c) 676.9 674.7
Non-financial expenses........... 166.9 144.7 (46.5)(a) 94.0 (a,b,d) 1,204.7 1,359.5
--------- --------- --------- --------- --------- ---------
Income (loss)before income taxes. 18.7 22.4 6.6 (80.4) 937.1 751.0
Income tax expense (benefit)..... 6.0 7.8 (4.3) (13.9) 340.4 297.4
--------- --------- --------- --------- --------- ---------
Net income (loss)................ $ 12.7 $ 14.6 $ 10.9 $ (66.5) $ 596.7 $ 453.6
========= ========= ========= ========= ========= =========
Return on assets................. 5.90% 5.67% 0.24% (1.61)% 1.77% 1.39%
Return on equity................. 54.77% 62.91% 1.21% (4.91)% 23.27% 15.48%
Average assets................... $ 288 $ 344 $ 6,041 $ 5,508 $ 45,134 $ 43,603
Average equity................... 31 31 1,204 1,810 3,428 3,915
</TABLE>
- ---------------------
(a) Includes eliminations for intercompany third party processing fees of $81.3
million and $77.1 million in 1997 and 1996, respectively.
(b) Includes net restructuring and merger-related charges of $70.0 million in
the provision for losses on loans and $130.1 million in non-financial
expenses.
(c) Includes net investment gains of $43.3 million.
(d) Includes the SAIF Fund special assessment of $14.2 million.
13
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
BUSINESS LINE RESULTS - continued
- ---------------------------------
Corporate overhead, processing and support costs, and the loan loss
provision are allocated along with the impact of balance sheet management and
hedging activities of CoreStates. A matched maturity transfer pricing system is
used to allocate interest income and interest expense. All business lines in the
five core businesses, except for the QuestPoint third party processing units,
are allocated equity utilizing regulatory risk-based capital guidelines as well
as each business line's requirements for fixed assets and other capital
investments. Equity at the QuestPoint processing units has been assigned based
on estimated amounts necessary on a stand-alone company basis. Intangible assets
and associated costs are also allocated to relevant business units. The
development of these allocation methodologies is a continuous process at
CoreStates, and as a result, certain amounts in prior periods have been
reclassified for comparative purposes.
The Corporate Center includes the income and expense impact of unallocated
equity; unusual or non-recurring items (such as restructuring, merger-related
charges and the SAIF Fund special assessment) not attributable to the operating
activities of the major business areas; emerging business activities not
directly related to the five major business areas; eliminations of intercompany
business line transactions; and miscellaneous items.
Global and Specialized Banking includes the following business lines:
------------------------------
Specialized Banking, Secured Lending, Real Estate, Large Corporate Banking,
Congress Financial Corporation ("Congress Financial"), International Banking,
Investment Banking and Cash Management. Net income for third quarter of 1997
increased $12.8 million, or 21.3%, above the third quarter of 1996. For the 1997
nine-month period, net income increased $24.2 million, or 13.7%, above 1996
year-to-date. The favorable variances for both the quarter and nine-month
period were due to increases in net interest income and non-interest income,
partially offset by increases in non-financial expenses and the provision for
losses on loans.
Net interest income for the third quarter of 1997 increased $10.5 million,
or 7.3%, over the third quarter of 1996 and $33.1 million, or 8.1%, above 1996
year-to-date primarily due to the impacts of increases in average loans, average
demand deposits, and fees on loans. Average loan volume increased $2.8 billion,
or 22.4%, over third quarter 1996, and $2.7 billion, or 23.1%, above 1996 year-
to-date, due to growth in Specialized Lending, International Banking, and the
Healthcare and Retail & Apparel Banking Groups within Large Corporate. Average
demand balances increased $119.0 million, or 6.8%, above the third quarter of
1996, and $47.5 million, or 2.6%, over 1996 year-to-date due largely to higher
balances maintained by customers to pay for services. Fees on loans increased
$0.8 million, or 8.8%, above third quarter 1996, and $4.3 million, or 27.5%,
above prior year-to-date due to fees collected on new loans and several large
termination fees.
Non-interest income increased $11.8 million, or 20.6%, from the third
quarter of 1996, and $26.3 million, or 15.3%, above 1996 year-to-date due
primarily to increases in international service fees, service charges on
deposits and income from trading activities. International service fees
increased $3.9 million or 14.6% for the third quarter of 1997 and $8.9 million
or 12.1% for the nine-month period principally due to increased trade payment
activity in the offshore branches. Service charges on deposits increased $2.3
million or 13.8% for the third quarter 1997 and $4.6 million or 9.2% for the
1997 nine-month period primarily reflecting increases in cash management
activities.
Non-financial expenses increased $7.1 million, or 7.6%, from the third
quarter of 1996, and $21.6 million, or 8.0%, over 1996 year-to-date due to
increases in personnel expenses, Congress Financial direct expenses and
processing costs.
Regional Banking includes Retail Banking and Delivery, Small Business
----------------
Lending, Commercial Business Lending and Middle Market Lending. Net income for
the third quarter of 1997 was $97.4 million, up $14.4 million, or 17.3%, from
the third quarter of 1996. The increase was principally due to declines in
operating expenses resulting from merger synergies and branch closings/sales, an
increase in non-interest income related to ATM surcharging and price increases
on service charges on deposits and an increase in net interest income primarily
resulting from increases in deposit interest rate spreads. For the 1997 nine-
month period, net income was $283.6 million, up $27.1 million, or 10.6%, from
1996 year-to-date. The increase for the nine-month period was primarily the
result of reduced non-financial expenses.
14
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
BUSINESS LINE RESULTS - continued
- ---------------------------------
Net interest income for the third quarter of 1997 increased $2.0 million,
or 0.7%, from the third quarter of 1996. The increase was mainly attributable to
the impact of a 15 basis point increase in the interest rate spreads earned on
deposits driven by pricing strategies implemented in the second quarter of 1997.
Quarter-to-quarter increases also occurred in installment and revolving credit
loan interest rate spreads which increased 28 basis points and 41 basis points,
respectively. Partially offsetting the impacts of improved interest rate spreads
were declines in average deposit volumes of $1.5 billion, or 6.0%, and in
average loan outstandings of $338 million, or 2.9%. The deposit decline resulted
from a combination of runoff resulting from the Meridian merger and overall
competitive pressures in the market. The loan decline mainly resulted from the
securitization of $382 million in home equity loans during 1996 and run-off in
revolving credit loans.
For the 1997 nine-month period, net interest income increased $0.9 million,
or 0.1%, from the same period in 1996. Deposit spreads rose by 18 basis points
while installment and revolving loan spreads were up 34 basis points and 26
basis points, respectively. Offsetting the favorable impacts of wider interest
rate spreads were declines in average deposit volumes of $1.2 billion, or 4.7%,
and average loan outstandings of $466 million, or 4.0%. Combined commercial
loan/commercial real estate loan spreads declined 9 basis points.
Non-interest income for the third quarter of 1997 increased $5.5 million,
or 9.4%, from the third quarter of 1996. Service charges on deposits increased
$2.8 million quarter-to-quarter mainly due to price increases implemented on
business deposit accounts. Delivery channel income (including ATM, PC banking,
and telephone banking fees) rose $1.8 million influenced by ATM surcharges
levied on all non-CoreStates Bank customer ATM transactions. CoreStates began
surcharging in the fourth quarter of 1996. Year-to-date, non-interest income in
1997 rose $6.1 million, or 3.4%, from the same period in 1996. The improvement
was driven by increases in delivery channel income and service charges on
deposits, partially offset by a decline in income from home equity loan
securitizations.
Non-financial expenses for the third quarter of 1997 declined $10.9
million, or 5.4%, from the third quarter of 1996. Personnel expenses declined
$5.2 million, or 6.8%, while non-personnel expenses declined $5.7 million, or
4.6%, primarily due to branch closings/sales and operational efficiencies
related to the Meridian merger. Year-to-date, non-financial expenses in 1997
declined $31.5 million, or 5.3%, from the same period in 1996 for the reasons
noted above.
Retail Credit Services includes the following major business lines: Credit
----------------------
Card, Dealer Services, Educational Lending, Mortgage Services, Card Linx
(CoreStates' merchant processing business) and SynapQuest (CoreStates' consumer
and commercial card processing company). Net income for Retail Credit Services
was $7.7 million in the third quarter of 1997, which was $5.9 million, or 43.4%,
below the third quarter of 1996. For the 1997 nine-month period net income was
$41.1 million, which was $1.0 million, or 2.4%, below 1996 year-to-date. Prior
year results have been restated for the reclassification of SynapQuest into
Retail Credit Services from Third Party Processing. The decrease in net income
is primarily attributable to a higher provision for losses on loans (primarily
Credit Card).
Net interest income for the third quarter of 1997 decreased $0.9 million,
or 1.2%, from the third quarter of 1996. This decrease is primarily due to the
compression of interest rate spreads earned on the indirect auto and auto
leasing portfolios. On a year-to-date basis, net interest income was $8.0
million, or 3.6%, above 1996, due primarily to a $100 million increase in
average outstandings. Credit Card net interest income is a key driver to this
favorable variance and is $6.7 million higher than 1996.
The provision for loan losses for the third quarter of 1997 increased by
$19.5 million, or 78.9%, over the third quarter of 1996. The increase was
primarily due to higher credit card loan charge-offs. Higher credit card charge-
offs are an industry-wide trend also being experienced by CoreStates. Credit
card outstandings past due 90 days or more as to the payment of principal or
interest were $23 million at September 30, 1997. On a year-to-date basis, the
provision for loan losses was $27.6 million, or 37.3%, above 1996.
15
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
BUSINESS LINE RESULTS - continued
- ---------------------------------
Non-interest income for the third quarter of 1997 increased by $1.2
million, or 5.6%, from 1996. This increase was primarily due to higher credit
card fees. Non-interest income on a year-to-date basis was $2.3 million, or
3.5%, below 1996 primarily due to a $2.4 million decrease in merchant fee
income. The decrease resulted from customer attrition during the second and
third quarters of 1996 due to bank acquisitions, systems conversions and
repricing of unprofitable relationships. Also, credit life insurance fee income
for the 1997 nine-month period was $2.0 million lower than 1996. Partially
offsetting these year-to-date unfavorable variances was higher credit card fees
of $2.1 million.
Non-financial expenses for the third quarter of 1997 decreased by $8.7
million, or 17.2%, from 1996. The decline in expenses was primarily due to
merger-related efficiencies that impacted personnel, occupancy and outside
services hired expenses. A reduction in marketing expense also contributed to
the decline. The expense savings were partially offset by volume related expense
growth. On a year-to-date basis, non-financial expenses were below 1996 by $17.5
million, or 12.1%, essentially for the same reasons stated above.
Trust and Asset Management is organized into four business lines: Personal
--------------------------
Trust (including Private Banking), Institutional Trust, Retirement Plan Services
and Investment Management. CoreStates' remaining Corporate Trust Business,
previously included in Institutional Trust, was sold in the fourth quarter of
1996. Net income of $18.4 million in the third quarter of 1997 increased $7.2
million, or 64.3%, over the third quarter of 1996. For the 1997 nine-month
period, net income of $47.8 million increased $17.3 million, or 56.7%, over the
same period of 1996. Increases in net interest income and trust fee income as
well as reduced non-financial expenses all contributed to the improvement in net
income.
Net interest income increased $3.3 million, or 25.0%, in the third quarter
of 1997 compared to the same period in 1996 and increased $4.2 million, or
11.0%, on a year-to-date basis. These increases were due to increased
partnership investment income related to market value increases, commercial loan
growth in Private Banking, increased money market account deposits related to
additional customer sweep balances and increased demand deposit balances. These
favorable variances are partially offset by increased overdraft balances.
Non-interest income increased $5.7 million, or 13.5%, in the third quarter
of 1997 compared to the same period in 1996 and increased $13.7 million, or
10.9%, on a year-to-date basis. Excluding Corporate Trust fees for all periods,
non-interest income increased $6.3 million, or 15.1%, for the third quarter and
$15.3 million, or 12.4%, on a year-to-date basis. These improvements resulted
primarily from increases in Personal and Institutional fees primarily due to
increased asset values.
Non-financial expenses decreased $2.5 million, or 6.7%, in the third
quarter of 1997 compared to the same period in 1996, and decreased $9.1 million,
or 8.0%, on a year-to-date basis. Excluding Corporate Trust, expenses would have
decreased $2.2 million, or 5.9%, for the third quarter and $8.2 million, or
7.3%, on a year-to-date basis. These expense reductions are associated with
savings achieved in all business lines related to merger-related efficiencies.
Third Party Processing consists of the QuestPoint specialty transaction
----------------------
processing units, earnings from CoreStates' investment in Electronic Payment
Services, Inc. ("EPS") and earnings from CoreStates Bank's Financial
Institutions Division ("FID"). The QuestPoint processing units include:
QuestPoint Check Services ("Check Services"), a provider of check processing and
payment services to CoreStates and other financial institutions, and QuestPoint
Remittance Services ("Remittance Services"), a leading supplier of remittance
processing services nationwide with processing sites in key markets in the
United States and Canada. EPS, Inc. is a leading provider of ATM and POS
processing services. FID sells correspondent bank services to financial
institutions in the United States. FID cash letter volumes are processed by
contract with Check Services.
16
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
BUSINESS LINE RESULTS - continued
- ---------------------------------
Third Party Processing ("TPP") net income for the third quarter of 1997 was
$5.2 million which was level with the same period last year. Net income for the
nine months ended September 30, 1997 was $12.7 million compared to $14.5 million
for the same period last year. Prior year results have been restated for the re-
classification of SynapQuest into Retail Credit Services and for the inclusion
of FID in Third Party Processing.
TPP net interest income for the third quarter of 1997 was $5.4 million, an
increase of $0.4 million, or 8.0%, from the same period last year. For the 1997
nine-month period, net interest income increased $1.2 million, or 9.0%, over
year-to-date 1996. The increase over prior year is due primarily to the impact
of higher average demand deposit balances within FID.
TPP non-interest income for the third quarter of 1997 totaled $56.9 million
including $26.0 million for the CoreStates intercompany business, $7.5 million
for EPS, Inc. and $23.4 million of other external QuestPoint/FID revenue. This
compares to a third quarter of 1996 revenue total of $54.0 million including
$28.2 million for the CoreStates intercompany business, $7.5 million of EPS
revenue and $18.3 million of other external QuestPoint/FID revenue. The
CoreStates intercompany business, which contributes 46.0% of the TPP revenue
base, decreased $2.2 million, or 8.0%. External QuestPoint/FID revenue accounts
for 41.0% of the revenue base and increased $5.1 million or 28.0% for 1997. The
investment in EPS, Inc. contributes the remaining revenue stream and was
unchanged from the same period last year.
Revenue from the CoreStates intercompany business declined slightly from
the same period last year due to the repricing of services on January 1, 1997.
The acquisition of five check processing centers in October 1996 contributed
$2.3 million to the external revenue growth. The remaining increase is primarily
the result of new business within Check Services and Remittance Services. Income
from the investment in EPS reflects CoreStates' share in EPS net income,
interest income on a 6.45% note and income from the amortization of a deferred
gain. Year-to-year, the lower interest income on the note, which is being paid
down at a rate of $6.5 million per quarter by EPS, is offset by higher EPS
equity related income.
TPP revenue for the first nine months of 1997 totaled $170.9 million
including $81.1 million for the CoreStates intercompany business, $67.7 million
of external QuestPoint/FID revenue and $22.1 million for EPS. This compares to a
1996 revenue total for the same period of $153.9 million including $78.0 million
for the CoreStates intercompany business, $53.7 million of external
QuestPoint/FID revenue and $22.2 million for EPS. The year-to-date revenue
growth for the first nine months of 1997 was $17.0 million or 11%. The
CoreStates intercompany business increased $3.1 million or 4% year-to-year.
External QuestPoint/FID gained $14.0 million or 21% year-to-year, primarily due
to the same reasons as above. Revenues for EPS were level with prior years.
TPP non-financial expenses for the third quarter 1997 were $55.3 million,
an increase of $4.3 million, or 8.4%, from the third quarter of 1996. For the
1997 nine-month period, non-financial expenses increased $22.2 million, or
15.3%, from 1996 year-to-date. Most of the increase supports the addition of new
business; including the check processing centers acquisition in Check Services
and overall Remittance Services volume growth. Higher benefit cost within
Remittance Services also contributes to the year-to-year increase.
NET INTEREST INCOME
- -------------------
The largest source of CoreStates' operating revenue is net interest income.
For analytical purposes, net interest income is adjusted to a "taxable
equivalent" basis to recognize the income tax savings on tax exempt assets. The
strength of CoreStates' net interest income and net interest margin stems from
the combination of wide spreads on both loans and deposits and a balance sheet
which has a relatively high portion of loans and a large base of non-interest
bearing funding.
17
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
NET INTEREST INCOME - continued
- -------------------------------
Net interest income on a taxable equivalent basis for the third quarter of
1997 was $536.0 million, a decrease of $10.7 million, or 2.0%, as compared to
the third quarter of 1996, principally due to $18.2 million of funding costs
associated with the common stock repurchase program. The net interest margin was
5.13% for the third quarter of 1997, a decrease of 45 basis points compared to
the third quarter of 1996. The decrease in the net interest margin was primarily
the result of the impacts of the cost of funding the common stock repurchase
program; the higher replacement cost of funding due to a decline of $1.2
billion, or 5.2%, in average customer savings, NOW, money market savings
deposits and customer certificates; and a narrowing of interest rate spreads
earned on loans. These decreases were partially offset by the impacts of an
increase in average loan volume of $2.4 billion, or 7.4%, and the repricing of
deposits in the second quarter of 1997.
Compared to the second quarter of 1997 tax equivalent net interest income
for the third quarter of 1997 decreased $4.6 million, or 0.9%, and the net
interest margin declined 24 basis points principally due to the higher
replacement cost of funding due to a $677 million, or 3.1%, decrease in average
deposit volumes, higher funding costs associated with the common stock
repurchase plan, and narrowing interest rate spreads earned on loans. These
decreases were partially offset by the repricing of deposits and the impact of
one more day in the quarter which resulted in a $3.3 million increase in net
interest income.
Taxable equivalent net interest income for the nine months ended September
30, 1997 decreased $16.7 million, or 1.0%, and the net interest margin declined
23 basis points to 5.32% as compared to the 1996 nine-month period. The declines
in the net interest income and net interest margin resulted from $39.4 million
of funding costs associated with the common stock repurchase program, one less
day in the 1997 nine-month period and a $1.1 billion, or 4.9%, decline in
average consumer savings, NOW and money market account deposits as well as
customer certificates.
The following table compares taxable equivalent net interest income for
the three months ended September 30, 1997 versus the third quarter of 1996 and
the second quarter of 1997, and for the nine months ended September 30, 1997
versus the 1996 nine-month period, respectively (in millions):
Taxable Equivalent Net Interest Income
- --------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Increase (decrease)
-------------------------------------- -----------------------------
Sept. 30, Sept. 30, June 30, Sept. 1997/ Sept. 1997/
1997 1996 1997 Sept. 1996 June 1997
--------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total interest income............ $873.0 $823.1 $850.3 $ 49.9 $22.7
Tax equivalent adjustment........ 5.5 6.3 6.3 (0.8) (0.8)
------ ------ ------ ------ -----
Tax equivalent interest income... 878.5 829.4 856.6 49.1 21.9
Total interest expense........... 342.5 282.7 316.0 59.8 26.5
------ ------ ------ ------ -----
Taxable equivalent net
interest income.............. $536.0 $546.7 $540.6 $(10.7) $(4.6)
====== ====== ====== ====== =====
Interest rate spread............. 4.21% 4.63% 4.46%
Net interest margin.............. 5.13% 5.58% 5.37%
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
------------------------
Sept. 30, Sept. 30, Increase/
1997 1996 (decrease)
--------- --------- ----------
<S> <C> <C> <C>
Total interest income............ $2,540.7 $2,462.5 $ 78.2
Tax equivalent adjustment........ 17.0 20.2 (3.2)
-------- -------- ------
Tax equivalent interest income... 2,557.7 2,482.7 75.0
Total interest expense........... 949.8 858.1 91.7
-------- -------- ------
Taxable equivalent net
interest income.............. $1,607.9 $1,624.6 $(16.7)
======== ======== ======
Interest rate spread............. 4.40% 4.62%
Net interest margin.............. 5.32% 5.55%
</TABLE>
18
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
NET INTEREST INCOME - continued
The following rate/volume analyses on a taxable equivalent basis
illustrate the underlying factors producing these increases (decreases) in tax
equivalent net interest income (in millions):
<TABLE>
<CAPTION>
Rate/Volume Analysis Increase (decrease) in interest Increase (decrease) in interest
- -------------------- ------------------------------------- --------------------------------------
Three Months Ended Three Months Ended
September 30, 1997/1996 September 30, 1997/June 30, 1997
------------------------------------- --------------------------------------
Income/ Change attributable to Income/ Change attributable to
expense ---------------------- expense ----------------------
------- Volume Rate ------- Volume Rate
------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets
- -----------------------
Time deposits-Eurodollars....... $ 10.0 $ 8.0 $ 2.0 $ 8.4 $ 6.4 $ 2.0
Investment securities........... (9.4) (10.0) 0.6 (1.8) (0.9) (0.9)
Federal funds sold.............. (0.8) (1.3) 0.5 (0.5) (0.8) 0.3
Trading account securities...... 6.0 2.5 3.5 0.4 - 0.4
Loans:
- Domestic.................. 32.7 42.6 (9.9) 15.9 14.9 1.0
- Foreign................... 10.6 10.3 0.3 (0.5) 0.4 (0.9)
------ ------ ----- ---- ----- -----
Total interest income... 49.1 52.1 (3.0) 21.9 20.0 1.9
------ ------ ----- ---- ----- -----
Interest bearing funds
- ----------------------
Deposits:
Domestic:
Commercial.............. 25.0 19.9 5.1 12.0 11.5 0.5
Other................... (7.9) (8.3) 0.4 2.4 (1.1) 3.5
Overseas.................... 4.8 3.9 0.9 1.8 1.9 (0.1)
Funds borrowed:
Federal funds purchased..... (1.4) (2.7) 1.3 (0.4) 0.5 (0.9)
Other....................... 19.2 9.0 10.2 8.5 8.5 -
Long-term debt.................. 20.1 17.4 2.7 2.2 - 2.2
------ ------ ------ ---- ---- -----
Total interest expense...... 59.8 39.2 20.6 26.5 21.3 5.2
------ ------ ------ ---- ---- -----
Net interest income............. $(10.7) $ 12.9 $(23.6) $(4.6) $(1.3) $(3.3)
- ------------------- ====== ====== ====== ===== ===== =====
</TABLE>
- - Changes in interest income or expense not arising solely as a result of
volume or rate variances are allocated to rate variances due to the
interest sensitivity of consolidated assets and liabilities.
- - Non-performing loans are included in interest earning assets.
- - The changes in interest expense on domestic deposits attributable to volume
and rates are adjusted by specific reserves as average balances are reduced
by such reserve amounts for purposes of rate calculations.
- - The income effects of off-balance sheet derivatives used for managing
interest rate risk are associated with the interest income or expense of
the related hedged asset or liability.
19
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
NET INTEREST INCOME - continued
- -------------------
<TABLE>
<CAPTION>
Rate/Volume Analysis Increase (decrease) in interest
- -------------------- -----------------------------------
Nine Months Ended
September 30, 1997/1996
-----------------------------------
Change attributable to
Income/ ----------------------
expense Volume Rate
------- ------- -------
<S> <C> <C> <C>
Interest earning assets
- -----------------------
Time deposits-Eurodollars....... $ 26.7 $ 24.4 $ 2.3
Investment securities........... (49.5) (51.1) 1.6
Federal funds sold.............. (10.0) (10.2) 0.2
Trading account securities...... 10.6 8.2 2.4
Loans:
- Domestic.................. 60.4 89.1 (28.7)
- Foreign................... 36.8 36.6 0.2
----- ------ ------
Total interest income... 75.0 97.0 (22.0)
----- ------ ------
Interest bearing funds
- ----------------------
Deposits:
Domestic:
Commercial.............. 38.7 34.0 4.7
Other................... (36.1) (16.9) (19.2)
Overseas.................... 13.9 11.5 2.4
Funds borrowed:
Federal funds purchased..... (4.5) (7.8) 3.3
Other....................... 25.2 14.6 10.6
Long-term debt.................. 54.5 49.8 4.7
----- ------ ------
Total interest expense...... 91.7 85.2 6.5
----- ------ ------
Net interest income............. $(16.7) $ 11.8 $(28.5)
====== ====== ======
</TABLE>
- -------------------
- - Changes in interest income or expenses not arising solely as a result of
volume or rate variances are allocated to rate variances due to the
interest sensitivity of consolidated assets and liabilities.
- - Non-performing loans are included in interest earning assets.
- - The changes in interest expense on domestic time deposits attributable to
volume and rates are adjusted by specific reserves as average balances are
reduced by such reserves for purposes of rate calculations.
- - The income effects of off-balance sheet derivatives used for managing
interest rate risk are associated with the interest income or expense of
the related hedged asset or liability.
The effect of non-performing loans on interest income and net interest
income for the three and nine-month periods ended September 30, 1997 and 1996
was as follows (in millions):
<TABLE>
<CAPTION>
Three Nine
Months Ended Months Ended
September 30, September 30,
-------------- ---------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income due on non-performing loans in accordance with
their original terms............................................ $5.4 $5.0 $15.6 $13.9
Interest income on non-performing loans reflected in total
interest income................................................. 2.3 4.7 7.4 9.1
---- ---- ----- -----
Net reduction in interest income..................................... $3.1 $0.3 $ 8.2 $ 4.8
==== ==== ===== =====
</TABLE>
20
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
PROVISION AND ALLOWANCE FOR LOAN LOSSES
- ---------------------------------------
The provision for loan losses for the third quarter of 1997 was $50.0
million, up $10.0 million from the provision recorded in prior year third
quarter. The increase in the provision was primarily due to continued increases
in the level of charge-offs against credit card and other consumer loans and
higher commercial loan charge-offs experienced in the third quarter of 1997. The
third quarter of 1997 provision for loan losses was level with the second
quarter of 1997 provision.
In the second quarter of 1996, CoreStates recorded a $70.0 million
provision for loan losses in connection with a change in strategy related to
Meridian's problem assets, and to conform Meridian's consumer lending charge-off
policies to those of CoreStates.
The following table presents an analysis of changes in the allowance for
loan losses for the three and nine-month periods ended September 30, 1997 and
1996 (in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- --------------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance at beginning of period ........... $691.4 $705.1 $710.3 $670.3
Provision charged to expense ............. 50.0 40.0 143.0 188.7(a)
Loan charge-offs ......................... (78.9) (57.8) (235.3) (217.6)
Recoveries of loans previously charged off 16.9 20.9 61.4 66.8
------ ------ ------ ------
Net loan charge-offs ................. (62.0) (36.9) (173.9) (150.8)
------ ------ ------ ------
Balance at end of period ................. $679.4 $708.2 $679.4 $708.2
====== ====== ====== ======
Ratios:
Net charge-offs (annualized) as a percentage of average
total loans........................................... 0.72% 0.46% 0.69% 0.63%
Allowance for loan losses as a percentage of loans at
end of period.................................... 1.94 2.16
Allowance for loan losses as a percentage of non-
performing loans................................. 276.94 299.77
</TABLE>
- ----------------------
(a) Includes a provision of $70.0 million related to the second quarter of 1996
Meridian acquisition.
21
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
PROVISION AND ALLOWANCE FOR LOAN LOSSES - continued
- ---------------------------------------
The following tables reflect the distribution of net loan charge-offs by
loan type for the three and nine-month periods ended September 30, 1997 and 1996
(in millions):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1997 September 30, 1996
--------------------------------- -------------------------------
% of % of
% of Total % of Total
Net Average Net Net Average Net
Charge- Loan Charge- Charge- Loan Charge-
offs Type (a) offs offs Type (a) offs
-------- --------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Domestic:
Commercial, industrial and other........ $16.0 0.40% 25.8% $ 6.1 0.17% 16.5%
Real estate:
Construction and development loans.... - - - (0.9) (0.64) (2.4)
Other................................. 2.3 0.11 3.7 4.1 0.18 11.1
Consumer:
Credit card........................... 28.9 6.89 46.6 17.1 4.35 46.3
Installment........................... 11.4 1.41 18.4 9.3 1.27 25.2
Other (b)............................... 3.4 0.64 5.5 1.2 0.23 3.3
----- ----- ----- -----
Total net charge-offs(d).............. $62.0 0.72 100.0% $36.9 0.46 100.0%
===== ===== ===== =====
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
--------------------------------- -------------------------------
% of % of
% of Total % of Total
Net Average Net Net Average Net
Charge- Loan Charge- Charge- Loan Charge-
offs Type (a) offs offs Type (a) offs
-------- --------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Domestic:
Commercial, industrial and other........ $ 40.6 0.35% 23.3% $ 27.6 0.27% 18.3%
Real estate:
Construction and development loans.... 1.4 0.31 0.8 1.4 0.31 0.9
Other................................. 11.1 0.17 6.4 31.9 0.44 21.2
Consumer:
Credit card........................... 79.0 6.28 45.4 61.2(c) 4.98 40.6
Installment........................... 35.6 1.49 20.5 22.5 1.06 14.9
Other (b)............................... 6.2 0.40 3.6 6.2 0.41 4.1
------ ----- ------ -----
Total net charge-offs (d)............. $173.9 0.69 100.0% $150.8 0.63 100.0%
====== ===== ====== =====
</TABLE>
- ------------------------------------
(a) Annualized.
(b) Includes loans to financial institutions and lease financing.
(c) In the second quarter of 1996, $5.8 million of credit card loans were
charged off as the result of a change in policy to charge off delinquent
credit card loans at 150 days past due, instead of 180 days past due.
(d) There were no charge-offs or recoveries of foreign loans in the three and
nine month periods ended September 30, 1997 and 1996.
22
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
NON-PERFORMING LOANS AND OTHER REAL ESTATE OWNED
- ------------------------------------------------
Non-performing assets at September 30, 1997 were $261.7 million, 0.75% of
total loans plus other real estate owned and 0.55% of total assets.
Non-performing assets increased $16.7 million, or 6.8%, from December 31, 1996,
but declined $20.0 million, or 7.1%, from June 30, 1997. The increase from
December 31, 1996 was primarily related to the addition of two large commercial
loans to non-accrual status. The decrease from June 30, 1997 was principally due
to charge-offs against commercial non-performing loans and the sale of a $12.0
million non-performing credit.
The following table summarizes non-performing assets at September 30, 1997
and December 31, 1996 (in millions):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Non-accrual loans................................ $245.3 $220.8
Renegotiated loans............................... - -
------ ------
Total non-performing loans................ 245.3 220.8
Other real estate owned ("OREO")................. 16.4 24.2
------ ------
Total non-performing assets............... $261.7 $245.0
====== ======
</TABLE>
The following table reflects the distribution of non-performing assets by
loan type at September 30, 1997 and December 31, 1996 (in millions):
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
--------------------- ---------------------
% of % of
Non- Loan Non- Loan
performing Type performing Type
---------- ---- ---------- ----
<S> <C> <C> <C> <C>
Domestic:
Commercial, industrial and other.......................... $124.3 0.76% $ 92.6 0.65%
------ ------
Real estate:
Construction and development ........................... 3.5 0.56 5.6 1.00
Other loans............................................. 111.3 1.29 118.5 1.29
OREO.................................................... 16.4 - 24.2 -
------ ------
Total real estate..................................... 131.2 1.24 148.3 1.52
------ ------
Other domestic loans (a).................................. 6.1 0.24 4.1 0.17
------ ------
Total domestic non-performing assets.................... 261.6 0.79 245.0 0.79
------ ------
Foreign loans................................................. 0.1 - - -
------ ------
Total non-performing assets (b) (c)..................... $261.7 0.75 $245.0 0.75
====== ======
% Total assets.......................................... 0.55% 0.54%
====== ======
</TABLE>
- ---------------------------
(a) Includes loans to financial institutions and lease financing.
(b) The table does not include loans of $110 million and $113 million at
September 30, 1997 and December 31, 1996, respectively, that are past due
90 days or more as to principal or interest, but which remain on full
accrual.
(c) At September 30, 1997 and December 31, 1996, there were no non-performing
consumer loans. Non-performing residential first and second lien mortgage
loans are included in other real estate loans in the above table.
23
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
NON-PERFORMING LOANS AND OTHER REAL ESTATE OWNED - continued
- ------------------------------------------------
The following table summarizes the components of the change in
non-performing assets for 1997 (in millions):
<TABLE>
<CAPTION>
Quarter
---------------------------- Nine
First Second Third Months
----- ------ ----- ------
<S> <C> <C> <C> <C>
Beginning balance.................. $245 $259 $282 $245
Additions.......................... 72 107 54 233
Return to accrual.................. (2) - (1) (3)
Payments........................... (35) (49) (50) (134)
Charge-offs........................ (21) (35) (23) (79)
---- ---- ---- ----
Net change.................... 14 23 (20) 17
---- ---- ---- ----
Ending balance..................... $259 $282 $262 $262
==== ==== ==== ====
</TABLE>
NON-INTEREST INCOME
- -------------------
(in millions)
<TABLE>
<CAPTION>
Three Nine
Three Months Ended Month Nine Months Ended Month
September 30, % September 30, %
---------------------- Increase ------------------------ Increase
1997 1996 (Decrease) 1997 1996 (Decrease)
--------- -------- ---------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Service charges on deposit accounts....... $ 63.0 $ 57.9 8.8% $181.0 $172.8 4.7%
Trust income.............................. 47.5 41.3 15.0 137.6 122.8 12.1
Fees for international services........... 31.4 27.1 15.9 84.2 74.8 12.6
Debit and credit card fees................ 25.3 22.4 12.9 70.7 65.0 8.8
Third party processing fees (a)........... 19.4 14.0 38.6 58.1 42.5 36.7
Income from trading activities............ 9.6 2.8 242.9 25.4 15.9 59.7
Income from investment in EPS, Inc........ 7.5 7.5 - 22.1 22.2 (0.5)
Investment banking fees................... 6.1 5.9 3.4 19.1 17.4 9.8
Mortgage banking income................... 2.6 2.8 (7.1) 6.4 10.1 (36.6)
Investment securities gains............... 5.0 2.4 14.9 12.2
Corporate trust fees (b).................. - 0.8 - 2.1
Other non-interest income................. 18.1 23.0 (21.3) 57.4 73.6 (22.0)
------ ------ ------ ------
Non-interest income before
significant and unusual items......... 235.5 207.9 13.3 676.9 631.4 7.2
Significant and unusual items............. - 28.7(c) - 43.3(c)
------ ------ ------ ------
Total non-interest income............. $235.5 $236.6 (0.5) $676.9 $674.7 0.3
====== ====== ====== ======
</TABLE>
- --------------------------------
(a) Includes revenues from QuestPoint lockbox processing and check processing,
and SynapQuest credit card and merchant processing.
(b) For presentation purposes, 1996 fee income on the corporate trust business
was presented on a separate line. CoreStates' and Meridian's corporate
trust businesses were sold in the fourth quarters of 1995 and 1996,
respectively.
(c) See "Certain Net Investment Gains" on page 11 for more detail.
24
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
NON-INTEREST INCOME - continued
- -------------------
Non-interest income for the third quarter of 1997 increased $27.6 million,
or 13.3%, from the prior year third quarter before 1996 significant and unusual
items. The increase primarily reflected growth in revenues from fee-based
services. The largest contributors to that growth were income from trading
activities which increased $6.8 million, or 242.9%, trust income which increased
$6.2 million, or 15%, and third party processing which increased $5.4 million,
or 38.6%. The increase in income from trading activities was due to a higher
level of trading account gains. Growth in trust income was primarily the result
of increased asset values in Personal and Institutional Trust. The increase in
third party processing fees was mostly due to the acquisition of five check
processing centers in October 1996. Also contributing solid growth to third
quarter of 1997 non-interest income were fees for international services, debit
and credit card fees, and service charges on deposit accounts. Third quarter
growth was partially offset by declines in mortgage banking income and lower
gains on sales of loans.
Non-interest income for the 1997 nine-month period increased $45.5
million, or 7.2% from 1996 non-interest income before significant and unusual
items. The nine-month increase also reflected growth in revenues from fee-based
services which was partially offset by declines in mortgage banking income and
lower gains on sales of loans.
NON-FINANCIAL EXPENSES
- ----------------------
(in millions)
<TABLE>
<CAPTION>
Three Nine
Three Months Ended Month Nine Months Ended Month
September 30, % September 30, %
-------------------- Increase -------------------- Increase
1997 1996 (Decrease) 1997 1996 (Decrease)
------ ------ ---------- ------ -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Salaries, wages and benefits................... $206.5 $204.9 0.8% $ 614.2 $ 619.7 (0.9)%
Outside services hired......................... 42.5 39.3 8.1 114.9 115.3 (0.3)
Net occupancy expense.......................... 36.3 39.9 (9.0) 110.9 120.2 (7.7)
Equipment expense.............................. 30.3 29.4 3.1 92.7 90.4 2.5
Amortization of intangible assets.............. 9.3 10.2 (8.8) 28.5 30.2 (5.6)
FDIC premiums.................................. 1.3 1.5 (13.3) 3.9 4.3 (9.3)
OREO expense................................... 0.4 1.3 0.4 1.6
Other operating expenses....................... 83.2 78.9 5.4 239.2 233.5 2.4
------ ------ -------- -------
Non-financial expense before restructuring
and merger-related charges.................. 409.8 405.4 1.1 1,204.7 1,215.2 (0.9)
Net restructuring and merger-related
charges..................................... - 12.3 (a) - 130.1 (a)
SAIF Fund special assessment................... - 14.2 (b) - 14.2 (b)
------ ------ -------- --------
Total non-financial expense................. $409.8 $431.9 (5.1) $1,204.7 $1,359.5 (11.4)
====== ====== ======== ========
</TABLE>
- ----------------------------------
(a) See "Restructuring and Merger-Related Changes" on page 10 for more detail.
(b) See "SAIF Fund Special Assessment" on page 11 for more detail.
Before 1996 restructuring and merger-related charges and SAIF Fund special
assessment, total non-financial expenses for the third quarter of 1997 increased
$4.4 million, or 1.1%, from the prior year third quarter. The quarter to quarter
increase was primarily due to higher outside services hired expenses which
includes expenses related to the Year 2000 Initiative and other technology
related projects. Total non-financial expenses, before 1996 restructuring and
merger-related charges and SAIF Fund special assessment, for the nine months
ended September 30, 1997 decreased $10.5 million, or 0.9%, from the comparable
1996 period. This decrease primarily reflects the impact of merger-related
synergies.
25
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
CAPITAL AND LIQUIDITY MANAGEMENT
- --------------------------------
Capital - CoreStates' capital strength provides the resources and
-------
flexibility to capitalize on business growth and acquisition opportunities.
CoreStates' capital position at September 30, 1997 under risk-based capital
guidelines was $3.6 billion, or 8.3%, of risk-weighted assets for Tier 1
capital, and $5.2 billion, or 11.9%, for total risk-based capital. Tier 1
capital consists primarily of common shareholders' equity and cumulative
preferred instruments less goodwill and certain intangible assets, while total
risk-based capital adds qualifying subordinated debt and the allowance for loan
losses, within permitted limits, to Tier 1 capital. Risk-weighted assets are
determined by assigning various levels of risk to different categories of assets
and off-balance sheet activities.
On October 21, 1996, the Federal Reserve Board approved the limited use of
certain cumulative preferred instruments ("Trust Capital Securities") as Tier 1
capital for consolidated purposes. While these Trust Capital Securities are
classified as long-term debt on the Consolidated Balance Sheet, CoreStates uses
these Trust Capital Securities in managing its total capital mix. CoreStates
Bank, N.A. issued $300 million of these securities in December 1996 and an
additional $450 million was issued in January 1997. This type of security
issuance provides CoreStates more flexibility in managing its capital. For bank
level risk-based capital calculations, Trust Capital Securities qualify as Tier
2 capital.
Under the Federal Reserve Board's consolidated capital leverage guidelines,
which require a minimum leverage ratio of 3.0% (Tier 1 capital to quarterly
average total assets), CoreStates had a leverage ratio of 7.9% at September 30,
1997. The minimum 3.0% leverage requirement applies only to top rated banking
organizations without any operating, financial or supervisory deficiencies.
Other organizations (including those experiencing or anticipating significant
growth) are expected to hold an additional capital cushion of at least 100 to
200 basis points of Tier 1 capital, and in all cases, banking organizations
should hold capital commensurate with the level and nature of all the risks,
including the volume and severity of problem loans, to which they are exposed.
Substantially the same capital requirements are applied to CoreStates'
banking subsidiaries under guidelines issued by the Office of the Comptroller of
the Currency and the Federal Deposit Insurance Corporation (see Trust Capital
Securities above for an exception). As illustrated in the following table, at
September 30, 1997, CoreStates and its banking subsidiaries were "well
capitalized" as defined by regulatory authorities.
<TABLE>
<CAPTION>
Regulatory Capital Ratios
------------------------------------------
Tier 1 Total Leverage
------ ----- --------
<S> <C> <C> <C>
CoreStates Financial Corp and
subsidiaries.................... 8.3% 11.9% 7.9%
CoreStates Bank, N.A.............. 6.9 11.0 6.5
CoreStates Bank of Delaware, N.A.. 6.7 11.3 5.8
Regulatory Guidelines:
Minimum...................... 4.0 8.0 3.0
Well-capitalized............. 6.0 10.0 5.0
</TABLE>
On October 15, 1996, the Board of Directors authorized the management of
CoreStates to repurchase up to 22 million shares of common stock, or
approximately 10% of outstanding shares, through December 31, 1997. Acting under
that authorization, 8.8 million shares of CoreStates' common stock were
repurchased in 1996 and 12.3 million in 1997. On July 15, 1997, the Board of
Directors authorized an extension of the common stock repurchase program
permitting management to repurchase up to an additional 6 million shares, or
approximately 3% of outstanding shares. Acting under the July 1997
authorization, 3.0 million shares of CoreStates' common stock were repurchased
in the third quarter of 1997. Management is also authorized to repurchase
additional shares to fulfill requirements of employee benefit and dividend
reinvestment plans.
CoreStates' dividend on its common stock was $0.47 per share in the third
quarter of 1997 and $0.42 per share in the third quarter of 1996. The common
dividend payout ratio was 47.0% for the third quarter of 1997, compared to
47.2%, for the third quarter of 1996.
26
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
CAPITAL AND LIQUIDITY MANAGEMENT -- continued
- --------------------------------
Liquidity - On October 3, 1997, CoreStates Capital Corp, CoreStates Financial
- ---------
Corp (as guarantor of the Notes issued by CoreStates Capital Corp) and
CoreStates Bank, N.A. established an European Medium Term Note Programme under
which each of CoreStates Capital Corp and CoreStates Bank, N.A. may issue up to
a maximum aggregate principal amount outstanding of $2 billion of Notes with
maturities of 30 days to 30 years in various currencies. The net proceeds of the
Notes will be used for general corporate purposes. On October 29, 1997,
CoreStates Bank, N.A. issued $500 million five year, floating rate Notes under
this Programme. The Notes are a direct, unconditional and unsecured general
obligation of the issuer which has issued such Note.
On November 7, 1997, CoreStates Bank, N.A. and CoreStates Bank of Delaware,
N.A., established a program for the issuance of Senior and Subordinated Bank
Notes with maturities from 7 days to 30 years in an aggregate principal amount
not to exceed $3 billion. CoreStates Bank may offer from time to time Bank Notes
in an aggregate principal amount not to exceed $2.5 billion and CoreStates Bank
of Delaware may offer from time to time Bank Notes in an aggregate principal
amount not to exceed $500 million. The net proceeds of the Bank Notes will be
used for general corporate purposes.
INTEREST RATE RISK MANAGEMENT
- -----------------------------
Interest rate risk refers to potential changes in current and future net
interest income resulting from changes in interest rates, product spreads and
mismatches in the repricing between interest rate sensitive assets and
liabilities. At CoreStates, measurement of near term interest rate risk focuses
on potential changes in net interest income identified through computer
simulations against both rising and falling interest rates. Longer term
repricing risks are measured using potential changes in the present value of
future income streams inherent in current positions. While present value
sensitivity is used to measure risk in longer time periods, gap analysis is used
to manage strategy execution.
All measurements of interest rate risk include the impact of off-balance
sheet activities. Under CoreStates' policy, rate changes of at least 200 basis
points in either direction over a six-month period are simulated with rate
related negative net interest income volatility over a twelve-month horizon
limited to 4% of Tier 1 Capital. Changes are measured relative to a base
forecast in which rates remain constant at current levels. Based on historical
data, 95% of the time rates have moved less than 200 basis points over a
six-month period. Included in these simulations are all contractual repricing
risks, the impact of prepayments in the loan and securities portfolios,
potential spread and volume changes on consumer deposits and fluctuations in the
value of non-interest bearing funding sources. Potential changes in the spread
between the prime rate and financial market rates are monitored, and when
changes are believed to be interest rate related are subject to the interest
rate risk policy guidelines. CoreStates believes that the prime spread is more a
function of credit conditions than interest rate changes. Estimated changes in
the present value of future income streams are based on a 200 basis point
parallel shift of the yield curve and negative changes are limited to 10% of
Tier 1 Capital.
As a matter of practice, positions are generally managed to produce
significantly lower volatility than policy guidelines would permit. Current net
interest income simulations using a 200 basis point change in short-term
interest rates show that CoreStates' net interest income volatility over the
next twelve months would be relatively neutral or less than 1% of Tier 1
Capital. That level is representative of simulations performed throughout the
last twelve months. Recognizing that the simulation process is based on a
variety of assumptions, management reviews results by category of risk as well
as by product and tests the sensitivity of the results to key assumptions.
Present value changes are also managed well within policy guidelines and
represented less than 5% of Tier 1 Capital at quarter-end.
27
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
INTEREST RATE RISK MANAGEMENT - continued
- -----------------------------
There are two main elements to CoreStates' interest rate risk. The first is
the broad mismatch between the rate sensitivity of the assets and liabilities in
its core businesses and the second is the spread risk between the rates on those
products and financial market rates.
CoreStates' core wholesale and retail businesses generate a large portfolio
of prime and other short-term rate related assets. Characteristic of a regional
banking company, CoreStates also has a significant funding base of consumer
deposits with indefinite maturities and non-contractual rates such as savings
and money market accounts. This inherent mismatch of longer term fixed-rate
liabilities funding short-term rate sensitive assets generates significant
exposure to declining interest rates if not hedged. CoreStates manages this
position through the use of both on and off-balance sheet discretionary assets
and liabilities. In keeping with CoreStates' interest rate risk discipline, the
combined position is relatively balanced so that there is minimal impact on
earnings from an interest rate move in either direction.
The second major element of CoreStates' interest rate risk is the spread
risk between product rates and financial market rates. These spreads are a
function of competitive and other factors as well as interest rate levels.
CoreStates simulates the behavior of individual products under various rate
scenarios to determine an appropriate investment or funding strategy to provide
a stable spread.
Off-balance Sheet Instruments and Derivative Activities
CoreStates uses off-balance sheet derivative instruments primarily to
manage CoreStates' interest rate risk. CoreStates believes that interest rate
risk management must be coordinated with the management of liquidity and
capital. Therefore, CoreStates uses off-balance sheet instruments to modify its
rate sensitivity and consequently, avoids the unnecessary leverage and liquidity
impairment which would result from on-balance sheet alternatives. CoreStates
also uses interest rate contracts to provide risk management services for its
customers.
Credit risk exists in a derivative transaction to the extent that there is
a favorable move in interest rates and the counterparty fails to perform. The
current credit exposure in a derivative transaction is the estimated cost to
replace the transaction at current market rates, while potential exposure is the
estimated cost to replace the transaction at future interest rates. CoreStates
monitors both the current and potential risk. CoreStates evaluates the credit
worthiness of all off-balance sheet counterparties using the same standards
applied in any other loan or credit transaction. In addition, CoreStates uses
collateral agreements to manage credit risk in its derivatives portfolio. Under
those agreements, collateral is transferred between counterparties when exposure
exceeds an agreed upon threshold. Collateral agreements and thresholds are
determined based on the quality of individual counterparties. As of September
30, 1997, the current cost to replace CoreStates' derivatives portfolio was $189
million. This assumes that only counterparties for whom it would be favorable to
default would do so.
Interest Rate Risk Related Derivative Activities - CoreStates' use of
derivatives for interest rate risk management falls into three categories:
interest sensitivity adjustments, spread protection and the hedging of
anticipated asset sales. The schedule on the following page reflects by interest
rate risk management category, the outstanding derivative positions as of
September 30, 1997, the major balance sheet category to which they relate, and
the associated unrealized gains/losses:
28
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
INTEREST RATE RISK MANAGEMENT - continued
- -----------------------------
<TABLE>
<CAPTION>
Outstanding Interest Rate Risk Related Derivatives
- --------------------------------------------------
At September 30, 1997
- --------------------- Interest Interest Interest
(in millions) rate rate rate caps Other
swaps futures and floors derivatives Total
-------- -------- ---------- ----------- -----
<S> <C> <C> <C> <C> <C>
Interest Sensitivity Adjustment:
Assets (primarily loans):
Notional amount.................. $4,664 $1,748 $ 7 $ 6,419
Unrealized gains................. 67 - - 67
Unrealized losses................ (12) - - (12)
Deposits and other borrowings:
Notional amount.................. 2,870 - 925 $ 100 3,895
Unrealized gains................. 22 6 - 28
Unrealized losses................ (10) - - - (10)
Long-term debt:
Notional amount.................. 1,056 - - 150 1,206
Unrealized gains................. 13 - - 2 15
Unrealized losses................ (10) - - - (10)
Spread Protection:
Assets (primarily loans)
Notional amount.................. 78 - 516 - 594
Unrealized gains................. 1 - 2 - 3
Unrealized losses................ - - - - -
Deposits and other borrowings:
Notional amount.................. 32 - 86 - 118
Unrealized gains................. - - - - -
Unrealized losses................ - - - - -
Anticipated Asset Sales:
Notional amount.................. - - - 178 178
Unrealized gains................. - - - - -
Unrealized losses................ - - - (2) (2)
Total:
Notional amount.................. $ 8,700 $1,748 $1,534 $ 428 $ 12,410
======== ====== ====== ====== =========
Unrealized gains................. $ 103 $ - $ 8 $ 2 $ 113
======== ====== ====== ====== =========
Unrealized losses................ $ (32) $ - $ - $ (2) $ (34)
======== ====== ====== ====== =========
Net unrealized gains (losses).... $ 71 $ - $ 8 $ - $ 79
======== ====== ====== ====== =========
</TABLE>
Although the value of the various derivative instruments will change with
interest rates, CoreStates does not consider changes in individual portfolio
values to be significant given that the portfolios are used to offset specific
risks. As of September 30, 1997, CoreStates' use of off-balance sheet derivative
instruments which carry a leveraged exposure to either rising or falling rates
or have other complex features is not material.
Interest sensitivity adjustments account for the majority of CoreStates'
derivative activities. CoreStates has a naturally asset sensitive balance sheet
as a result of its basic loan and deposit businesses. Commercial and consumer
loan activities tend to have short-term repricing characteristics versus the
longer term repricing nature of CoreStates' funding sources.
29
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
INTEREST RATE RISK MANAGEMENT - continued
- -----------------------------
These relationship portfolios have a positive effect on earnings in a rising
rate environment and a negative effect in a falling rate environment. Therefore,
CoreStates uses fixed-rate assets or off-balance sheet instruments with
characteristics similar to fixed-rate assets to offset this risk. When
off-balance sheet instruments are used, cash balances are invested in shorter
time periods and interest rate swaps or other derivatives are used to "fix" the
rate for longer terms similar to those of CoreStates' liabilities. The risks in
certain products, particularly non-contractual deposits, are sometimes greater
in one direction of rate change than the other. To the extent that marginal
amounts of deposits need protection from falling rates but are likely to shift
to higher rate instruments as interest rates rise, caps and/or floors are a more
appropriate hedge. CoreStates has used interest rate floors in this manner to
augment the risk protection provided by the swaps and futures portfolios. By
using swaps and futures in this manner, leverage is reduced and liquidity is
enhanced. If derivative instruments were not used, CoreStates would invest in
longer term assets based on its disciplined interest rate risk management
practice of strict matching of asset and liability terms. Therefore, the impact
of derivatives on pre-tax income is confined to the spread between the
derivative instrument and other instruments of similar terms. Management
estimates that this spread is not material relative to pre-tax income.
CoreStates also uses derivative instruments to protect spreads on certain
balance sheet products. CoreStates' loan and securities portfolios include
adjustable rate mortgages which carry interest rate caps limiting the amount of
rate increase per year as well as over the life of the mortgage. As interest
rates rise and funding costs increase, the spread on that portfolio will
compress. CoreStates holds $429 million of interest rate caps which offset that
risk by limiting the potential increase in funding costs. CoreStates has issued
retail certificates of deposits with floating rates which carry a guaranteed
minimum rate. CoreStates has used caps and floors to offset that risk.
For accounting purposes, the income effects of derivatives used to adjust
interest sensitivity or to protect a product spread are associated with either
the asset or the liability being managed. The amount recorded in net interest
income related to derivative financial instruments was $15.2 million in the
quarter ended September 30, 1997 and $19.3 million in the quarter ended
September 30, 1996. The following table shows the impact of derivatives income
on average interest rates:
<TABLE>
<CAPTION>
Impact of Derivatives Income on Yields and Costs
- ------------------------------------------------
For the Quarter Ended September 30,
- ----------------------------------
(in millions)
1997 1996
--------------------------------------------- ---------------------------------------------
Reported Impact Reported Impact
Average Yield/ Product of Average Yield/ Product of
Balance Cost Rate Derivatives Balance Cost Rate Derivatives
-------- -------- ------- ----------- ------- -------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earning Assets
Time deposits.................... $ 2,924 5.87% 5.87% - $ 2,358 5.61% 5.61% -
Federal funds sold & trading
account assets................. 434 8.09 8.09 - 276 5.04 5.04 -
Investment securities............ 3,699 6.22 6.16 0.06% 4,329 6.19 6.11 0.08%
Loans............................ 34,396 8.87 8.76 0.11 32,030 9.01 8.91 0.10
------- -------
Total Earning Assets............. $41,453 8.41 8.32 0.09 $38,993 8.46 8.37 0.09
======= =======
Interest Bearing Funds
Savings, NOW, regular MMA........ $ 7,434 0.95 1.15 (0.20) $ 9,848 1.57 1.85 (0.28)
Premium MMA...................... 5,521 3.95 3.95 - 3,517 3.80 3.80 -
Certificates..................... 8,416 5.15 5.17 (0.02) 9,073 5.14 5.26 (0.12)
------- -------
Total retail................... 21,371 3.38 3.46 (0.08) 22,438 3.36 3.54 (0.18)
------- -------
Commercial & foreign deposits.... 3,556 5.35 5.35 - 1,544 4.68 4.70 (0.02)
Federal funds purchased &
short-term borrowings.......... 3,831 5.55 5.58 (0.03) 2,886 4.93 4.95 (0.02)
Long-term debt................... 3,583 6.61 6.74 (0.13) 2,491 6.32 6.46 (0.14)
------- -------
Total wholesale................ 10,970 5.83 5.88 (0.05) 6,921 5.37 5.44 (0.07)
------- -------
Total Interest Bearing Funds..... $32,341 4.20 4.27 (0.07) $29,359 3.83 3.98 (0.15)
======= =======
</TABLE>
30
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
INTEREST RATE RISK MANAGEMENT - continued
- -----------------------------
It is important to note that derivatives usage, its impact on individual
balance sheet items and fluctuations in fair value should be viewed in the
context of overall interest rate risk management. As previously stated, if
CoreStates did not use derivatives, it would adjust cash positions to create the
same interest sensitivity position with approximately the same income results.
However, if cash transactions were used, the income of those activities would
not be carried as an income adjustment to other balance sheet products.
Fluctuations in the impact of derivatives shown in the preceding table are a
function of market conditions and do not indicate changes in risk positions.
The third category of derivative activity is the hedging of anticipated
asset sales. As fixed-rate assets are accumulated for future sale, CoreStates is
exposed to a decline in sale price due to rising interest rates. Therefore,
CoreStates will enter into an interest rate swap or a forward rate agreement
which will increase in value if rates rise. The increased value on the
derivative is used to offset the decline in value of the cash asset.
Gains/losses on the derivative are deferred until the asset sale and recognized
as part of the sale transaction. CoreStates securitizes and sells its longer
term fixed-rate home equity loans and fixed-rate mortgages on a recurring basis.
Home equity loans are held for several months prior to sale while sufficient
volume for securitization is accumulated. Forward rate locks are used to hedge
rate changes during that warehouse period. Options on mortgage-backed securities
as well as both mandatory and optional forward sale commitments are used to
hedge the mortgage pipeline.
Interest rate swaps are agreements between two parties to exchange interest
cash flows. Generally, one party receives a fixed-rate and pays a variable rate,
while the counterparty pays the fixed-rate and receives the variable rate. As of
September 30, 1997, the rates CoreStates has contracted to receive are fixed for
longer time periods than the rates CoreStates has contracted to pay. Therefore,
if interest rates fall, this portfolio will provide higher interest income,
offsetting a decline in interest income in relationship portfolios; conversely
if rates rise, the swap portfolio will produce less interest income which will
be offset by increased interest income in the relationship portfolios.
CoreStates also uses interest rate futures in a similar manner. While swaps are
used in both short and long-term maturities, futures are used primarily to
extend the rate sensitivity of short-term assets to periods less than one year.
CoreStates' use of financial futures is largely concentrated in Eurodollar and
LIBOR contracts. CoreStates' use of interest rate futures is a function of the
mix of maturities/resets on short-term lending portfolios, volumes and terms of
short-term retail certificates and market funding sources and the availability
and attractiveness of other short-term assets. These portfolios include
significant volumes and the terms are subject to maturity shifts between one
month and one year.
The following repricing schedule summarizes the notional amount and
associated interest rate of CoreStates' interest rate swaps categorized by
whether CoreStates receives or pays the rate shown. The swaps are stratified by
repricing date or maturity depending on whether the payments are floating or
fixed, respectively. Floating rates included in the repricing schedule are based
on the rates in effect on September 30, 1997.
31
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
INTEREST RATE RISK MANAGEMENT - continued
- -----------------------------
<TABLE>
<CAPTION>
Repricing Schedule of Interest Rate Swaps
- -----------------------------------------
At September 30, 1997
- ---------------------
(in millions)
Years
--------------------------------------------------------------------
0-1 1-2 2-3 3-4 4-5 over 5 Total
-------- -------- ------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Receive Fixed/Pay Floating:
Receive Notional........... $ 1,336 $1,605 $ 1,452 $ 1,661 $642 $1,042 $ 7,738
Rate............... 6.33% 6.50% 6.70% 6.36% 6.73% 6.71% 6.53%
Pay Notional........... $ 7,738 $ 7,738
Rate............... 5.77% 5.77%
Pay Fixed/Receive Floating:
Pay Notional........... $ 14 $ 25 $ 39
Rate............... 8.27% 9.26% 8.91%
Receive Notional........... $ 39 $ 39
Rate............... 5.78% 5.78%
Receive Floating/Pay Floating:
(Basis Swaps)
Notional........... $ 481 $ 481
Receive Rate............... 5.76% 5.76%
Pay Rate............... 5.71% 5.71%
Receive Fixed/Pay Floating(a):
(Forward Start)
Receive Notional........... $ 150 $ 185 $ 75 $ 32 $ 442
Rate............... 7.14% 6.48% 6.86% 7.37% 6.83%
Start Date Notional........... $ 132 $ 310 $ 442
</TABLE>
----------------------------------------
(a) Pay rate will be determined on forward start date.
The following schedule illustrates CoreStates' interest rate risk related
derivative activity during the third quarter of 1997:
<TABLE>
<CAPTION>
Activity in Derivatives Products
- --------------------------------
For the Quarter Ended September 30, 1997
- ----------------------------------------
(in millions)
Interest Interest Interest
rate rate rate caps Other
Notional Amounts swaps futures and floors derivatives Total
- ---------------- ------- -------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
As of June 30, 1997................... $8,879 $1,709 $1,533 $393 $12,514
Additions............................. 453 1,830 24 38 2,345
Terminated/restructured contracts(a).. (23) (1,791) - - (1,814)
Maturities/amortization............... (609) - (23) (3) (635)
------ ------ ------ ---- -------
As of September 30, 1997.............. $8,700 $1,748 $1,534 $428 $12,410
====== ====== ====== ==== =======
</TABLE>
- --------------------
(a) As of September 30, 1997, CoreStates had $1.6 million of deferred gains
and $6.9 million of deferred losses related to terminated derivative
contracts.
32
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued
INTEREST RATE RISK MANAGEMENT - continued
- -----------------------------------------
The outstanding notional amount of derivatives was relatively flat from
quarter end to quarter end. New additions to the swap portfolio were primarily
basis swaps used to adjust the index on short-term floating rate instruments
either for term (3 months to 1 month) or instrument (Treasury Bills to LIBOR).
Futures activity represents rollovers of short-term contracts.
Trading and Customer Related Derivative Activities - CoreStates also
engages in derivative market activities to provide risk management services for
its customers and to manage securities trading positions in the securities unit.
The securities unit underwrites, brokers, and distributes securities to
municipalities, institutional, and individual investors. In addition, the unit
buys, sells, and securitizes mortgage loans and brokers loan servicing
portfolios. The following schedule details the outstanding notional amounts and
related fair values of trading and customer related derivative transactions as
of September 30, 1997.
<TABLE>
<CAPTION>
Trading and Customer Related Derivatives
- ----------------------------------------
At September 30, 1997
- ---------------------
(in millions) Notional Net assets Positive Negative
amount (liability)(a) Market Value Market Value
-------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Interest Rate Swaps:
CoreStates receives fixed........... $ 1,047 $ 9.7 $11.0 $ (1.3)
CoreStates pays fixed............... 1,322 (17.9) 2.0 (19.9)
Rate Locks:
CoreStates receives fixed........... 192 0.1 0.2 (0.1)
CoreStates pays fixed............... 192 (0.1) 0.1 (0.2)
Interest Rate Caps/Floors:
Sold................................ 1,525 (2.7) - (2.7)
Purchased........................... 1,472 2.7 2.7 -
Futures................................. 78 (0.7) 0.1 (0.8)
Commitments to purchase/sell
whole mortgage loans and
securities (including when-issued
securities):
Sold............................. 151 (0.9) - (0.9)
Purchased........................ 33 - - -
Other Options:
Sold................................ 502 19.9 20.1 (0.2)
Purchased........................... 278 0.7 0.7 -
Foreign exchange contracts.............. 2,729 3.7 38.6 (34.9)
------- ----- ----- ------
Total Trading and Customer Related
Derivatives......................... $ 9,521 $14.5 $75.5 $(61.0)
======= ===== ===== ======
</TABLE>
- --------------------
(a) Average net assets (liabilities) during 1997 were substantially the same as
the net assets (liabilities) at September 30, 1997.
33
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEETS AND TAXABLE EQUIVALENT INCOME/EXPENSE AND
RATES
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------------------
September 30, 1997 June 30, 1997 September 30, 1996
-------------------------- ---------------------------- ---------------------------
Average Income/ Average Income/ Average Income/
balance Rate expense balance Rate expense balance Rate expense
------- ------ -------- --------- ------ -------- --------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(000,000) (000) (000,000) (000) (000,000) (000)
INTEREST EARNING ASSETS
- -----------------------
Time deposits, principally Eurodollars (a). $ 2,924 5.87% $ 43,234 $ 2,471 5.65% $ 34,823 $ 2,358 5.61% $ 33,277
Investment securities (b):
U.S. Government......................... 2,275 6.07 34,811 2,228 6.16 34,220 3,020 5.97 45,304
State and municipal..................... 386 7.71 7,441 418 7.59 7,928 472 8.25 9,736
Other................................... 1,038 6.01 15,713 1,100 6.43 17,625 837 5.86 12,328
------- -------- ------- -------- ------- -------
Total investment securities........... 3,699 6.22 57,965 3,746 6.40 59,773 4,329 6.19 67,368
------- -------- ------- -------- ------- -------
Federal funds sold......................... 118 7.06 2,100 172 6.01 2,576 212 5.38 2,865
Trading account securities................. 316 8.42 6,654 317 7.91 6,265 64 3.93 629
Loans (b) (c) (d):
Domestic:
Commercial, industrial and other...... 15,420 8.78 341,386 14,891 8.98 333,208 13,678 9.00 309,436
Real estate........................... 9,305 8.11 190,217 9,300 8.16 189,096 9,818 8.21 202,641
Consumer.............................. 4,922 12.03 149,283 4,859 12.13 146,899 4,504 12.50 141,524
Financial institutions................ 948 7.22 17,245 849 6.68 14,133 904 5.97 13,556
Factoring receivables................. 480 10.33 12,502 490 9.55 11,664 462 9.75 11,322
Lease financing....................... 1,202 7.91 23,763 1,192 7.88 23,481 1,183 7.84 23,189
Foreign................................. 2,119 6.40 34,193 2,094 6.65 34,732 1,481 6.35 23,649
------- -------- ------- -------- ------- -------
Total loans, net of discounts...... 34,396 8.87 768,589 33,675 8.97 753,213 32,030 9.01 725,317
------- -------- ------- -------- ------- -------
Total interest earning assets (d).. $41,453 8.41 878,542 $40,381 8.51 856,650 $38,993 8.46 829,456
======= ----- -------- ======= ---- -------- ======= ---- -------
FUNDING SOURCES
- ---------------
Interest Bearing Liabilities (b):
Deposits in domestic offices:
Commercial............................ $ 2,190 5.60 30,928 $ 1,364 5.57 18,952 $ 508 4.68 5,973
NOW accounts (e)...................... 364 1.05 869 411 1.03 946 654 1.37 2,135
Money Market Accounts (e)............. 9,142 2.71 61,996 9,056 2.53 56,660 8,224 2.52 52,012
Consumer savings...................... 3,449 1.06 9,196 3,851 1.10 10,597 4,487 1.59 17,932
Consumer certificates................. 8,416 5.15 109,272 8,628 5.15 110,699 9,073 5.14 117,147
Time deposits of overseas branches
and subsidiaries...................... 1,366 4.95 17,030 1,213 5.04 15,249 1,036 4.68 12,192
------- -------- ------- -------- ------- -------
Total interest bearing deposits (e) 24,927 3.66 229,291 24,523 3.50 213,103 23,982 3.45 207,391
------- -------- -------- -------- ------- -------
Short-term funds borrowed:
Federal funds purchased............... 1,512 5.35 20,372 1,475 5.66 20,803 1,728 5.02 21,801
Commercial paper...................... 984 5.58 13,851 872 5.64 12,268 886 5.40 12,018
Other................................. 1,335 5.75 19,363 858 5.80 12,414 272 2.87 1,961
------- -------- ------- -------- ------- -------
Total short-term funds borrowed.... 3,831 5.55 53,586 3,205 5.69 45,485 2,886 4.93 35,780
------- -------- ------- -------- ------- -------
Long-term debt.......................... 3,583 6.61 59,663 3,579 6.43 57,418 2,491 6.32 39,564
------- -------- ------- -------- ------- -------
Total interest bearing liabilities. 32,341 4.20 342,540 31,307 4.05 316,006 29,359 3.83 282,735
Portion of non-interest bearing funding
sources.................................. 9,112 9,074 9,634
------- -------- ------- -------- ------- -------
Total funding sources.............. $41,453 3.28 342,540 $40,381 3.14 316,006 $38,993 2.88 282,735
======= ----- -------- ======= ---- -------- ======= ---- -------
Net interest income and net interest margin 5.13% $536,002 5.37% $540,644 5.58% $546,721
===== ======== ==== ======== ==== ========
</TABLE>
(a) Yields and income on deposits include net Eurodollar trading profits.
(b) The net impact of off-balance sheet derivatives used for managing interest
rate risk is recognized as an adjustment to interest income or expense of
the related hedged asset or liability.
(c) Yields and income on loans include fees on loans.
(d) Non performing loans are included in interest earning assets.
(e) Average interest bearing demand deposit in domestic offices are reduced by
specified reserve amounts for purposes of rate calculations.
34
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEETS AND TAXABLE EQUIVALENT INCOME/EXPENSE AND
RATES - continued
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------------
September 30, 1997 June 30, 1997 September 30, 1996
------------------------- ------------------------- --------------------------
Average Income/ Average Income/ Average Income/
balance Rate expense balance Rate expense balance Rate expense
--------- ----- ------- --------- ----- ------- --------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(000,000) (000) (000,000) (000) (000,000) (000)
NON-INTEREST EARNING ASSETS
- ---------------------------
Cash..................................... $ 2,759 $ 2,838 $ 2,762
Allowance for loan losses................ (691) (701) (709)
Other assets............................. 2,631 2,606 2,366
------- ------- -------
Total non-interest earning assets.... $ 4,699 $ 4,743 $ 4,419
======= ======= =======
TOTAL AVERAGE ASSETS..................... $46,152 $45,124 $43,412
- -------------------- ======= ======= =======
NON-INTEREST BEARING FUNDING SOURCES
- ------------------------------------
Demand deposits:
Domestic............................. $ 7,913 $ 7,779 $ 7,690
Foreign.............................. 390 379 365
Other liabilities........................ 2,292 2,255 2,030
Shareholders' equity..................... 3,216 3,404 3,968
Non-interest bearing funding sources used
to fund earning assets................. (9,112) (9,074) (9,634)
------- ------- -------
Total net non-interest bearing
funding sources.................. $ 4,699 $ 4,743 $ 4,419
======= ======= =======
SUPPLEMENTARY AVERAGES
- ----------------------
Net Federal funds purchased.............. $ 1,394 5.20% $18,272 $ 1,303 5.61% $18,227 $ 1,516 4.97% $18,936
Certificates of deposit in domestic
offices over $100,000................ 2,851 5.44 39,109 1,954 5.52 26,890 986 5.28 13,075
Average prime rate....................... 8.50 8.50 8.25
</TABLE>
35
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEETS AND TAXABLE EQUIVALENT INCOME/EXPENSE AND
RATES
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------------------------------------------------------------
September 30, 1997 September 30, 1996
---------------------------------------- ---------------------------------------
Average Income/ Average Income/
balance Rate expense balance Rate expense
--------- -------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
(000,000) (000) (000,000) (000)
INTEREST EARNING ASSETS
- -----------------------
Time deposits, principally Eurodollars (a) $ 2,619 5.75% $ 112,619 $ 2,040 5.63% $ 85,969
Investment securities (b):
U.S. Government......................... 2,313 6.11 105,730 3,440 6.03 155,335
State and municipal..................... 405 7.64 23,220 514 8.09 31,175
Other................................... 1,044 6.16 48,117 900 5.94 40,052
------- ---------- ------- ----------
Total investment securities........... 3,762 6.29 177,067 4,854 6.23 226,562
------- ---------- ------- ----------
Federal funds sold......................... 156 5.81 6,782 396 5.65 16,757
Trading account securities................. 258 7.98 15,445 96 6.71 4,829
Loans (b) (c) (d):
Domestic:
Commercial, industrial and other...... 14,850 8.87 985,322 13,196 9.02 891,038
Real estate........................... 9,351 8.20 573,271 10,273 8.49 653,257
Consumer.............................. 4,857 12.06 438,028 4,452 11.87 395,549
Financial institutions................ 865 6.86 44,393 838 6.00 37,664
Factoring receivables................. 467 10.18 35,553 496 10.39 38,565
Lease financing....................... 1,202 7.90 71,179 1,180 8.05 71,282
Foreign................................. 2,038 6.43 98,045 1,275 6.42 61,267
------- ---------- ------- ----------
Total loans, net of discounts...... 33,630 8.93 2,245,791 31,710 9.05 2,148,622
------- ---------- ------- ----------
Total interest earning assets (d).. $40,425 8.46 2,557,704 $39,096 8.48 2,482,739
======= ---- ---------- ======= ---- ----------
FUNDING SOURCES
- ---------------
Interest Bearing Liabilities (b):
Deposits in domestic offices:
Commercial............................ $ 1,485 5.53 61,467 $ 597 5.11 22,836
NOW accounts (e)...................... 404 0.99 2,634 1,750 1.12 13,499
Money Market Accounts (e)............. 8,938 2.54 168,760 7,288 2.70 146,675
Consumer savings...................... 3,829 1.20 34,304 4,651 1.80 62,633
Consumer certificates................. 8,612 5.15 331,789 9,106 5.15 350,759
Time deposits of overseas branches
and subsidiaries...................... 1,292 4.90 47,319 961 4.64 33,409
------- ---------- ------- ----------
Total interest bearing deposits (e) 24,560 3.53 646,273 24,353 3.48 629,811
------- ---------- ------- ----------
Short-term funds borrowed:
Federal funds purchased............... 1,401 5.41 56,732 1,605 5.09 61,219
Commercial paper...................... 862 5.57 35,917 996 5.42 40,442
Other................................. 935 5.63 39,386 306 4.24 9,718
------- ---------- ------- ----------
Total short-term funds borrowed.... 3,198 5.52 132,035 2,907 5.12 111,379
------- ---------- ------- ----------
Long-term debt.......................... 3,507 6.54 171,463 2,460 6.35 116,969
------- ---------- ------- ----------
Total interest bearing liabilities. 31,265 4.06 949,771 29,720 3.86 858,159
Portion of non-interest bearing funding
sources 9,160 9,376
------- ---------- ------- ----------
Total funding sources.............. $40,425 3.14 949,771 $39,096 2.93 858,159
======= ----- ---------- ======= ---- ----------
Net interest income and net interest margin 5.32% $1,607,933 5.55% $1,624,580
===== ========== ==== ==========
</TABLE>
(a) Yields and income on deposits include net Eurodollar trading profits.
(b) The net impact of off-balance sheet derivatives used for managing interest
rate risk is recognized as an adjustment to interest income or expense of
the related hedged asset or liability.
(c) Yields and income on loans include fees on loans.
(d) Non-performing loans are included in interest earning assets.
(e) Average interest bearing demand deposits in domestic offices are reduced by
specified reserve amounts for purposes of rate calculations.
36
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEETS AND TAXABLE
EQUIVALENT INCOME/EXPENSE AND RATES - continued
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------------------------------------------------------
September 30, 1997 September 30, 1996
-------------------------------------- -----------------------------------
Average Income/ Average Income/
balance Rate expense balance Rate expense
-------- ---- ------- ------- ---- -------
<S> <C> <C> <C> <C> <C> <C>
(000,000) (000) (000,000) (000)
NON-INTEREST EARNING ASSETS
- ---------------------------
Cash..................................... $ 2,798 $ 2,830
Allowance for loan losses................ (700) (699)
Other assets............................. 2,611 2,376
------- -------
Total non-interest earning assets.... $ 4,709 $ 4,507
======= =======
TOTAL AVERAGE ASSETS..................... $45,134 $43,603
- -------------------- ======= =======
NON-INTEREST BEARING FUNDING SOURCES
- ------------------------------------
Demand deposits:
Domestic............................. $ 7,810 $ 7,653
Foreign.............................. 388 376
Other liabilities........................ 2,243 1,939
Shareholders' equity..................... 3,428 3,915
Non-interest bearing funding sources used
to fund earning assets............... (9,160) (9,376)
------- ------
Total net non-interest bearing
funding sources.................. $ 4,709 $ 4,507
======= =======
SUPPLEMENTARY AVERAGES
- ----------------------
Net Federal funds purchased.............. $ 1,245 5.36% $49,950 $ 1,209 4.91% $44,462
Certificates of deposit in domestic
offices over $100,000................ 2,100 5.45 85,619 1,105 5.16 42,634
Average prime rate....................... 8.42 8.28
</TABLE>
37
<PAGE>
PART II. OTHER INFORMATION
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Item 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The following exhibits are filed herewith in connection
with registration statements filed from time to time by the
Corporation:
3.1 Articles of Incorporation
11 Computation of Per Share Earnings
12.1 Computation of Ratio of Earnings to Fixed Charges
(Consolidated)
12.2 Computation of Ratio of Earnings to Fixed Charges (Combined
CoreStates Parent Company and CoreStates Capital Corp)
27 Financial Data Schedule
(b) The following Reports on Form 8-K were filed by CoreStates
Financial Corp during the quarter:
1. Date of Report: July 16, 1997
--------------
Item(s) Reported: Reporting under Item 5 the information set
----------------
forth in the earnings news release of CoreStates Financial
Corp.
2. Date of Report: August 4, 1997
--------------
Item(s) Reported: Reporting under Item 5 the information set
----------------
forth in the news release of CoreStates Financial Corp
regarding Rosemarie B. Greco and new senior management
assignments.
38
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
SIGNATURE
- ---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CORESTATES FINANCIAL CORP
Date: November 12, 1997 By: /s/ Christopher J. Carey
------------------------
Christopher J. Carey
Senior Vice President and Controller
(Principal Accounting Officer)
39
<PAGE>
Exhibit 3.1
ARTICLES OF INCORPORATION
of
CORESTATES FINANCIAL CORP
(as amended April 9, 1996)
FIRST. The name of the Corporation is CORESTATES FINANCIAL CORP.
SECOND. The location and post office address of the registered office of
the Corporation in this Commonwealth is N.E. Corner Broad and Chestnut Streets,
Philadelphia, Pennsylvania 19101.
THIRD. The purpose or purposes for which the Corporation is incorporated
under the Business Corporation Law of the Commonwealth of Pennsylvania are to
engage in, and to do any lawful act concerning, any or all lawful business for
which corporations may be incorporated under said Business Corporation Law.
FOURTH. The term of existence of the Corporation is perpetual.
FIFTH. The aggregate number of shares which the Corporation shall have
authority to issue is 360,000,000 shares, divided into 350,000,000 shares of
Common Stock, par value $1.00 per share, and 10,000,000 shares of Series
Preferred Stock, without par value. The Board of Directors of the Corporation
shall have the full authority permitted by law to fix by resolution full,
limited, multiple or fractional, or no voting rights, and such designations,
preferences, qualifications, privileges, limitations, restrictions, options,
conversion rights, and other special or relative rights of any class or any
series of any class that may be desired.
A. General Terms and Series Preferred Stock
Except as otherwise provided by an amendment to the Articles or a
resolution or resolutions of the Board of Directors creating a series of the
Series Preferred Stock (either action being hereinafter referred to as a
"Creating Resolution"), the following provisions (the "Series Preferred Stock
General Terms") shall fix certain voting rights, designations, preferences,
qualifications, privileges, limitations, options, conversion rights and other
special rights applicable to all of the shares of Series Preferred Stock,
without par value (such class being herein called "Series Preferred Stock") and
shall determine the extent to which such shares may be divided and issued in
series and the extent to which shares of one series of Series Preferred Stock
may vary from shares of other series thereof.
1. Series and Limitations of Variations between Series.
1
<PAGE>
The shares of Series Preferred Stock may be divided into and issued in
series from time to time, as herein provided. All shares of any particular
series of Series Preferred Stock shall be identical to all other shares of that
series. Except as otherwise provided in a Creating Resolution, all shares of
Series Preferred Stock of all series shall rank ratably as to dividends and
assets according to the respective rates and amounts provided herein and in any
Creating Resolution. Subject to any applicable provisions of law, the shares of
Series Preferred Stock of different series may vary as to the following terms
and provisions, which shall be fixed in the case of each such series at any time
prior to the issuance of any shares thereof by a Creating Resolution:
(a) Distinctive designation of such series and the number of shares
which shall constitute such series, which number may be increased or
decreased (but not below the number of shares thereof then outstanding)
from time to time by action of the Board of Directors;
(b) Dividend rate per annum of shares of such series, and the date or
dates from which dividends on shares of such series shall be cumulative
(hereinafter called the "Date of Cumulation");
(c) Provisions for redemption, and, if the shares of such series are
subject to redemption, the Redemption Price or Prices (as hereinafter
defined) at which, and the terms and conditions on which, the shares of
such series may be redeemed;
(d) Amount or amounts payable upon the shares of such series in the
event of the liquidation, dissolution or winding up of the Corporation,
which amount or amounts may vary depending on whether the liquidation,
dissolution or winding up is voluntary or involuntary and, if voluntary, be
subject to other terms and conditions;
(e) Provisions, if any, entitling the shares of such series to the
benefit of a sinking fund or a purchase fund to be applied to the purchase
or redemption of shares of such series, and, if so provided, the amount,
terms and conditions of such fund;
(f) Provisions, if any, as to convertibility into, or exchangeability
for, shares of any other class or of any other series of the same or any
other class of stock of the Corporation, and, if so provided, the
conversion price or prices, and terms and conditions of such conversion or
exchange;
(g) Provisions, if any, granting to the shares of such series voting
rights in addition to the voting rights provided for herein;
(h) Provisions, if any, entitling the shares of such series to the
benefit of limitations restricting the creation of indebtedness or upon the
issue of any additional
2
<PAGE>
shares ranking on a parity with or prior to the shares of such series as to
dividends or assets in addition to the restrictions provided for herein;
(i) Provisions, if any, entitling the shares of such series to the
benefit of limitations restricting the purchase of, the payment of
dividends on, or the making of other distributions in respect of, any
shares of Junior Stock (as hereinafter defined) and, if so provided, the
terms and conditions of any such restrictions; and
(j) Provisions, if any, entitling the shares of such series to any
other rights, preferences and limitations permitted by applicable law.
2. Definitions.
(a) The term "Junior Stock" as used herein with respect to Series Preferred
Stock or a series thereof shall be deemed to mean the Common Stock (as
hereinafter defined) and all other stock of the Corporation ranking junior to
the Series Preferred Stock or such series thereof, as the case may be, as to the
payment of dividends and the distribution of assets. The term "Dividend Junior
Stock" as used herein with respect to Series Preferred Stock or a series thereof
shall be deemed to mean the Common Stock and all other stock of the Corporation
ranking junior to the Series Preferred Stock or such series thereof, as the case
may be, as to the payment of dividends. The term "Liquidation Junior Stock" as
used herein with respect to Series Preferred Stock or a series thereof shall be
deemed to mean the Common Stock and all other stock of the Corporation ranking
junior to the Series Preferred Stock or such series thereof, as the case may be,
as to distributions upon liquidation.
(b) The term "Dividend Parity Stock" as used herein with respect to a
series of Series Preferred Stock shall be deemed to mean all other stock of the
Corporation ranking equally therewith as to the payment of dividends. The term
"Liquidation Parity Stock" as used herein with respect to a series of Series
Preferred Stock shall be deemed to mean all other stock of the Corporation
ranking equally therewith as to distributions upon liquidation.
(c) The term "Senior Stock" as used herein with respect to a series of
Series Preferred Stock shall be deemed to mean all other stock of the
Corporation ranking senior thereto as to the payment of dividends or
distributions upon liquidation.
(d) The term "Common Stock" as used herein shall be deemed to mean stock of
the Corporation of any class, whether now or hereafter authorized, which has the
right to participate in the distribution of either earnings or assets of the
Corporation without limit as to the amount or percentage.
(e) The term "Full Cumulative Dividends" whenever used herein with
reference to any share of any series of the Series Preferred Stock shall mean
(whether or not in any dividend period
3
<PAGE>
or any part thereof in respect of which such term is used there shall have been
any funds of the Corporation legally available for the payment of such
dividends) that amount which shall be equal to dividends at the rate per share
fixed by the Creating Resolution for such series, for the period of time elapsed
from the Date of Cumulation of such series to the date as of which Full
Cumulative Dividends are to be computed, but without interest, less the amount
of all dividends paid or declared and set apart for payment upon such share.
3. Dividends.
(a) Out of any funds of the Corporation legally available therefor the
holders of shares of Series Preferred Stock of each series shall be entitled to
receive, when and as declared by the Board of Directors, dividends in cash at
the rate per share per annum for such series fixed by the Creating Resolution
and no more, and such dividends shall be cumulative (whether or not in any
dividend period there shall be funds of the Corporation legally available for
the payment of such dividends) but accruals of dividends will not bear interest.
Dividends on shares of Series Preferred Stock shall be payable on the first days
of January, April, July and October in each year, in each case from the Date of
Cumulation for such shares; provided that the initial dividend with respect to
any particular share of a series shall be payable on such of said dates as next
succeeds the date of issue of such share, unless otherwise determined by the
Creating Resolution. Until Full Cumulative Dividends on the outstanding shares
of a series of Series Preferred Stock to the end of the last preceding quarterly
dividend period shall have been paid or declared and set apart for payment, the
Corporation shall not (i) pay or declare and set apart for payment any dividend
on, or make any other distribution in respect of, any shares of Dividend Junior
Stock, other than dividends or distributions payable in Junior Stock, or (ii)
purchase, redeem, or otherwise acquire any shares of Dividend Junior Stock,
other than by exchange therefor of Junior Stock or the use of proceeds of a
substantially concurrent sale of Junior Stock.
(b) No dividends shall be paid or declared and set apart for payment on
shares of any particular series of Series Preferred Stock to the exclusion of
the shares of any Dividend Parity Stock. In the event that the stated dividends
upon any series of Series Preferred Stock and all Dividend Parity Stock are not
paid in full all shares of such series and all Dividend Parity Stock shall
participate ratably in the payment of dividends, including accumulations, if
any, in accordance with the sums which would be payable thereon if all dividends
thereon were declared and paid in full. The provisions of this paragraph shall
not prevent the payment of any dividend within 60 days after the declaration
thereof if such declaration when made complied with the provisions hereof.
4. Preference on Liquidation, etc.
In the event of any liquidation, dissolution or winding up of the
Corporation, voluntary or involuntary, the holders of shares of Series Preferred
Stock of each series shall be entitled to receive, out of the assets of the
Corporation available for distribution to its shareholders, before
4
<PAGE>
any distribution of assets shall be made to the holders of shares of Liquidation
Junior Stock, the amounts to which such holders are entitled as fixed by the
Creating Resolution for such series. If upon any liquidation, dissolution or
winding up of the Corporation the net assets of the Corporation shall be
insufficient to pay the holders of all outstanding shares of a series of Series
Preferred Stock and all Liquidation Parity Stock the full amounts to which they
shall be entitled, the holders of shares of such series of Series Preferred
Stock and all Liquidation Parity Stock shall share ratably in any distribution
of assets according to the respective amounts which would be payable in respect
of the shares held by them upon such distribution if all amounts payable on or
with respect to such shares were paid in full. The holders of shares of Series
Preferred Stock shall not be entitled to receive any amounts with respect
thereto upon any liquidation, dissolution or winding up of the Corporation other
than the amounts provided for in this Section 4. Neither the merger or
consolidation of the Corporation into or with any other corporation, nor the
merger or consolidation of any other corporation into or with the Corporation,
nor a sale, transfer or lease of all or any part of the assets of the
Corporation, shall be deemed to be a liquidation, dissolution or winding up of
the Corporation for the purposes of this Section 4.
5. Redemption.
(a) Unless otherwise prohibited by any Creating Resolution for any
outstanding series of Series Preferred Stock, the Corporation, may, at its
option expressed by resolution of its Board of Directors, redeem at any time or
from time to time the whole or any part of the shares of Series Preferred Stock
or of any series thereof at the time outstanding by paying in cash the
Redemption Price or Prices fixed by the Creating Resolution for such series,
plus an amount equal to Full Cumulative Dividends thereon to the date fixed for
redemption (the aggregate of such Redemption Price and Full Cumulative Dividends
is hereinafter in this Section 5 called the "Full Redemption Price"); provided
that the Corporation may not purchase or redeem less than all the shares of
Series Preferred Stock of a series then outstanding unless Full Cumulative
Dividends to the end of the last preceding quarterly dividend period upon the
shares of any Dividend Parity Stock, Liquidation Parity Stock and Senior Stock
then outstanding shall have been paid or declared and set apart for payment and
all sums required to be set aside as a sinking fund or purchase fund in respect
of such shares shall have been set aside in accordance with the terms of the
applicable sinking or purchase fund. If less than all the outstanding shares of
a series of Series Preferred Stock are to be redeemed, the selection of shares
for redemption may be made either by lot or pro rata in such manner as may be
prescribed by resolution of the Board of Directors.
(b) Notice of every such redemption shall be given by mail to the holders
of record of the shares to be redeemed and may be given in such other manner as
may be prescribed by resolution of the Board of Directors, at least thirty days
and not more than sixty days prior to the date fixed for redemption (which date,
when fixed in each case and specified in the notice of redemption, is
hereinafter called the "Redemption Date"). Any notice to be given by mail shall
be deemed given when mailed to the holders of the shares of Series Preferred
Stock to be redeemed of record
5
<PAGE>
at the time of mailing, at their respective addresses as the same shall appear
on the books of the Corporation, but in the case of notice by mail, no
accidental failure to mail such notice to any one or more holders shall affect
the validity of the redemption of any shares of Series Preferred Stock so to be
redeemed.
(c) The Board of Directors shall have full power and authority, subject to
the limitations and provisions contained herein to prescribe the manner in
which, and the terms and conditions upon which, the shares of Series Preferred
Stock shall be redeemed from time to time. If notice of redemption shall have
been given, and if on or before the Redemption Date specified in such notice all
funds necessary for such redemption shall have been set aside by the
Corporation, in trust for the account of the holders of the shares to be
redeemed, so as to be and continue to be available therefor, then
notwithstanding that any certificate for such shares so called for redemption
shall not have been surrendered for cancellation, from and after the Redemption
Date, the shares represented thereby shall no longer be deemed outstanding, the
right to receive dividends thereon shall cease to accrue and all rights with
respect to such shares so called for redemption shall forthwith on such
Redemption Date cease and terminate, except only the right of the holders
thereof to receive, out of the funds so set aside in trust, the Full Redemption
Price per share; provided that the Corporation may, if it shall so elect,
deposit the amount of the Redemption Price for the account of the holders of
shares of Series Preferred Stock entitled thereto with a bank or trust company
doing business in the Commonwealth of Pennsylvania, or in the State of New York;
and having capital and surplus of at least $10,000,000, at any time prior to the
Redemption Date (the date of such deposit being hereinafter in this Section 5
referred to as the "Date of Deposit"). Notice of the Corporation's election to
make such deposit, including the date on which the Full Redemption Price per
share will be available, and the name and address of the bank or trust company
with which the deposit has been or will be made, shall be included in the notice
of redemption. If the Corporation shall make such deposit on or before the date
specified therefor in the notice of redemption, then on and after the Date of
Deposit, and, notwithstanding that any certificate for shares of Series
Preferred Stock so called for redemption shall not have been surrendered for
cancellation, the shares with respect to which such deposit shall have been made
shall no longer be deemed outstanding and all rights of the holders thereof as
shareholders of the Corporation shall cease and terminate, except the right to
receive out of the funds so deposited in trust from and after the Date of
Deposit, the Full Redemption Price per share as herein provided and except any
conversion, exchange or subscription rights not theretofore expired. Such
conversion or exchange rights, however, in any event shall cease and terminate
upon the Redemption Date or upon any earlier date duly fixed for the termination
of such rights. At any time on or after the Redemption Date, or, if the
Corporation shall elect to deposit the moneys for such redemption as herein
provided, then at any time on or after the Date of Deposit, which time shall not
be later than the Redemption Date, the respective holders of record of the
shares of Series Preferred Stock to be redeemed shall be entitled to receive the
Full Redemption Price per share upon actual delivery to the Corporation or, in
the event of such deposit, to the bank or trust company with which such deposit
shall be made, of certificates for the shares to be redeemed, such certificates,
if required, to be duly endorsed in blank or
6
<PAGE>
accompanied by proper instruments of assignment and transfer thereof duly
endorsed in blank and including any necessary transfer stamps. Any moneys so
deposited which shall remain unclaimed by the holders of such shares of Series
Preferred Stock so redeemed at the end of two years after the Redemption Date
shall be paid by such bank or trust company to the Corporation; provided that
all moneys so deposited which shall not be required for such redemption because
of the exercise of any right of conversion or exchange shall be returned to the
Corporation forthwith. Any interest accrued on moneys so deposited shall belong
to and be paid to the Corporation from time to time.
(d) Except as otherwise provided by law or as otherwise provided herein or
in any Creating Resolution, the Corporation may purchase or acquire any shares
of Series Preferred Stock at a price not exceeding the applicable Full
Redemption Price for such shares at the time of such purchase. Any shares of
Series Preferred Stock redeemed, purchased or acquired by the Corporation shall
be canceled and restored to the status of authorized but unissued shares of
Series Preferred Stock without series designation and may thereafter, in the
discretion of the Board of Directors, be reissued or otherwise disposed of at
any time or from time to time as part of another series, subject to the terms
and conditions herein set forth.
6. No Preemptive Rights.
No holder of shares of Series Preferred Stock shall be entitled to
subscribe for or purchase any part of any new or additional issue of stock, or
securities convertible into stock, of any class, series or kind whatsoever,
whether now or hereafter authorized, and whether issued for cash, property,
services, by way of dividends, or otherwise.
7. Voting Rights.
(a) Except as otherwise required by law or as otherwise provided in these
Series Preferred Stock General Terms or in any Creating Resolution, the holders
of shares of Series Preferred Stock shall have no voting rights and shall not be
entitled to notice of any meeting of the shareholders of the Corporation.
Except as otherwise provided by law, or in any Creating Resolution, upon any
matter on which the shares of Series Preferred Stock of any series have voting
rights provided herein, each holder of shares of Series Preferred Stock of such
series shall be entitled to one vote for each $25 which would be payable with
respect to the holder's shares of Series Preferred Stock of such series upon any
involuntary liquidation, dissolution or winding up of the Corporation.
(b) Except as otherwise provided in the Creating Resolution, in the event
that dividends upon any series of the Series Preferred Stock shall be in arrears
to an amount equal to six full quarterly dividends thereon, the holders of such
series shall become entitled to the extent hereinafter provided to vote
noncumulatively at all elections of directors of the Corporation, and to receive
notice of all shareholders' meetings to be held for such purpose. At such
meetings the
7
<PAGE>
holders of such series voting as a class together with the holders of any other
series then having the right to elect directors under such circumstances, shall
be entitled solely to elect two members of the Board of Directors of the
Corporation; and all other directors of the Corporation shall be elected by the
other shareholders of the Corporation entitled to vote in the election of
directors. Such voting rights of the holders of such series shall continue until
all accumulated and unpaid dividends thereon shall have been paid or funds
sufficient therefor set aside, whereupon all such voting rights of the holders
of shares of such series shall cease, subject to being again revived from time
to time upon the reoccurrence of the conditions above described as giving rise
thereto.
At any time when such right to elect directors separately as a class shall
have so vested, the Corporation may, and upon the written request of the holders
of record of not less than 20% of the then outstanding total number of shares of
all the Series Preferred Stock having the right to elect directors in such
circumstances shall call a special meeting of holders of such Series Preferred
Stock for the election of directors. In the case of such a written request, such
special meeting shall be held within 90 days after the delivery of such request,
and, in either case, at the place and upon the notice provided by law and in the
By-laws of the Corporation; provided that the Corporation shall not be required
to call such a special meeting if such request is received less than 120 days
before the date fixed for the next ensuing annual or special meeting of
shareholders of the Corporation. Upon the mailing of the notice of such special
meeting to the holders of such Series Preferred Stock, or, if no such meeting be
held, then upon the mailing of the notice of the next annual or special meeting
of shareholders for the election of directors, the number of directors of the
Corporation shall, ipso facto, be increased to the extent, but only to the
extent, necessary to provide sufficient vacancies to enable the holders of such
Series Preferred Stock to elect the two directors hereinabove provided for, and
all such vacancies shall be filled only by vote of the holders of such Series
Preferred Stock as hereinabove provided. Whenever the number of directors of the
Corporation shall have been increased, the number as so increased may thereafter
be further increased or decreased in such manner as may be permitted by the By-
laws and without the vote of the holders of Series Preferred Stock, provided
that no such action shall impair the right of the holders of Series Preferred
Stock to elect and to be represented by two directors as herein provided.
So long as the holders of any series of Series Preferred Stock are entitled
hereunder to voting rights, any vacancy in the Board of Directors caused by the
death or resignation of any director elected by the holders of Series Preferred
Stock, shall, until the next meeting of shareholders for the election of
directors, in each case be filled by the remaining director elected by the
holders of Series Preferred Stock having the right to elect directors in such
circumstances.
Upon termination of the voting rights of the holders of any series of
Series Preferred Stock, so long as no other Series Preferred Stock then
outstanding has the right to elect directors in such circumstances, the terms of
office of all persons who shall have been elected directors of the Corporation
by vote of the holders of Series Preferred Stock or by a director elected by
such holders shall forthwith terminate.
8
<PAGE>
(c) Except when some mandatory provision of law shall be controlling and
except as expressly provided in Section 8 hereof, as long as two or more series
of Series Preferred Stock are outstanding, no particular series of Series
Preferred Stock shall be entitled to vote as a separate series on any matter and
all shares of Series Preferred Stock of all series shall be deemed to constitute
but one class for any purpose for which a vote of the shareholders of the
Corporation by classes may now or hereafter be required.
8. Restrictions on Certain Corporate Action.
(a) Majority Consent. Without the consent of the holders of at least a
majority of the shares of Series Preferred Stock at the time outstanding, given
in person or by proxy, either in writing according to law or at a meeting of
shareholders called for the purpose, the Corporation shall not
(i) authorize any new class or series of shares or any series of
Series Preferred Stock, or an increase in the authorized amount of any
class or series of shares or any series of Series Preferred Stock, which
shall rank senior to any series of the Series Preferred Stock with respect
to payment of dividends or distributions upon liquidation; provided,
however, that if shares of such class or series would rank prior to one or
more but not all of the several series of the Series Preferred Stock at the
time outstanding, the consent of the holders of a majority of the shares of
all series with respect to which shares of such class or series would rank
prior shall be required in lieu of the consent of holders of all Series
Preferred Stock; or
(ii) increase the authorized Series Preferred Stock to any amount in
excess of 5,000,000; or
(iii) merge or consolidate with any other corporation if the
corporation resulting from such merger or consolidation would have after
such merger or consolidation any authorized class of shares ranking prior
to or equal with the Series Preferred Stock with respect to payment of
dividends or distributions upon liquidation, except for classes having the
same number of shares with the same rights and preferences as the
authorized shares of the Corporation immediately preceding such merger or
consolidation.
(b) Two-thirds Consent. Without the consent of the holders of at least
two-thirds of the shares of Series Preferred Stock outstanding, given in person
or by proxy, either in writing according to law or at a meeting of shareholders
called for the purpose, the Corporation shall not adopt or effect any amendment
to its Articles which would adversely affect the rights or preferences of the
Series Preferred Stock (except as may be expressly permitted under subsection
(a) of this Section 8 with the consent of the holders of a majority of the
shares of Series Preferred Stock); provided, however, that if any such amendment
shall adversely affect the rights or preferences of one or more, but not all, of
the several series of Series Preferred Stock at the time outstanding, the
consent of the holders of at least two-thirds of the shares of all series
adversely
9
<PAGE>
affected, similarly given, shall be required in lieu of the consent of the
holders of two-thirds of the shares of Series Preferred Stock.
9. Powers of Board of Directors.
Unless otherwise provided in any resolution hereafter adopted by the Board
of Directors pursuant to this Article Fifth and filed in the manner provided by
law, the number of shares of any series of Series Preferred Stock established
and designated hereunder may be increased (within the then total authorized
amount of Series Preferred Stock of all series) or decreased (but not below the
number of shares thereof then outstanding) by a statement filed pursuant to law
setting forth a resolution adopted by the Board of Directors increasing or
decreasing the authorized number of shares of such series. In like manner,
unless otherwise provided in this Article Fifth or in any such resolution, the
Board of Directors may from time to time, within the then total authorized
amount of Series Preferred Stock of all series, establish and designate any
reacquired or unissued shares of Series Preferred Stock (whether or not
theretofore established and designated as a part of any existing series) as
shares of Series Preferred Stock of one or more existing or additional series
and fix and determine the relative rights and preferences thereof.
B. Specific Terms of Series A Preferred Stock
There shall be a series of the Series Preferred Stock which shall consist
of 3,041,000 shares and shall be designated as Series A Preferred Stock (such
series being herein called the "Series A Stock"), which shall have a stated
value of $25 per share.
1. Dividends.
The holders of Series A Stock shall be entitled to receive out of any funds
legally available for the purpose when and as declared by the Board of Directors
cash dividends thereon at an annual per share rate equal to the product of $25
multiplied by the sum of 0.65% and the arithmetic mean of Moody's Investors
Service, Inc.'s Public Utility Preferred Stock Yield Averages for "a" rated
preferred stocks for the four weeks immediately preceding the Effective Date, as
defined in the Agreement and Plan of Reorganization, dated October 26, 1982,
between the Corporation and Philadelphia National Corporation, and no more. The
Date of Cumulation with respect to shares of Series A Stock shall be the
dividend payment date next preceding the date of issue of such share, unless (a)
the date of issue of such share is a dividend payment date in which case the
Date of Cumulation shall be such dividend payment date or (b) at the date of
issuance of such share there are unpaid Full Cumulative Dividends on any
outstanding share of Series A Stock, in which case the Date of Cumulation shall
be the most recent date when all Full Cumulative Dividends on all shares of
Series A Stock were paid.
2. Preference on liquidation, etc.
10
<PAGE>
In the event of any liquidation, dissolution or winding up of the
Corporation, voluntary or involuntary, the holders of Series A Stock shall be
entitled to payment in cash of $25 per share, plus a further amount equal to
Full Cumulative Dividends to the date when such payments shall be made available
to the holders thereof, and no more.
3. Redemption.
The Series A Stock shall not be redeemable until after the fifth
anniversary of the Effective Date. After the fifth anniversary of the Effective
Date, the Series A Stock may be called for redemption and redeemed by the
payment therefor of $25.75 per share until the tenth anniversary of the
Effective Date and $25 per share on the tenth anniversary of the Effective Date,
or at any time thereafter, plus an amount equal to Full Cumulative Dividends to
the date fixed by the Board of Directors as the Redemption Date.
SIXTH. The shareholders of the Corporation shall not have the right to
cumulate their votes for the election of directors of the Corporation.
SEVENTH.
1. Number of directors.
The Board of Directors shall consist of such number of directors as shall
be determined from time to time by resolution of the Board of Directors.
2. Classification of Board of Directors.
The directors shall be classified in respect of the time for which they
shall severally hold office as follows:
(a) Each class shall be as nearly equal in number as possible.
(b) The term of office of at least one class shall expire in each year.
(c) The members of each class shall be elected for a period of three
years.
EIGHTH. These Articles may be amended in the manner at the time prescribed
by statute, and all rights conferred upon shareholders herein are granted
subject to this reservation.
NINTH.
1. Directors and officers as fiduciaries.
11
<PAGE>
A director or officer of the Corporation shall stand in a fiduciary
relation to the Corporation and shall perform his or her duties as a director or
officer, including his or her duties as a member of any committee of the board
upon which he or she may serve, in good faith, in a manner he or she reasonably
believes to be in the best interests of the Corporation, and with such care,
including reasonable inquiry, skill and diligence, as a person of ordinary
prudence would use under similar circumstances. In performing his or her
duties, a director or officer shall be entitled to rely in good faith on
information, opinions, reports or statements, including financial statements and
other financial data, in each case prepared or presented by (a) one or more
officers or employees of the Corporation whom the director or officer reasonably
believes to be reliable and competent with respect to the matters presented, (b)
counsel, public accountants or other persons as to matters that the director or
officer reasonably believes to be within the professional or expert competence
of such person, or (c) a committee of the board of directors upon which the
director or officer does not serve, duly designated in accordance with law, as
to matters within its designated authority, which committee the director or
officer reasonably believes to merit confidence. A director or officer shall
not be considered to be acting in good faith if he or she has knowledge
concerning the matter in question that would cause his or her reliance to be
unwarranted. Absent breach of fiduciary duty, lack of good faith or self-
dealing, actions taken as a director or officer of the Corporation, or any
failure to take any action, shall be presumed to be in the best interests of the
Corporation.
2. Personal liability of directors.
A director of the Corporation shall not be personally liable, as such, for
monetary damages (including, without limitation, any judgment, amount paid in
settlement, penalty, punitive damages or expense of any nature (including,
without limitation, attorneys' fees and disbursements)) for any action taken, or
any failure to take any action, unless the director has breached or failed to
perform the duties of his or her office under these Articles, the By-laws or
applicable provisions of law and the breach or failure to perform constitutes
self-dealing, willful misconduct or recklessness.
3. Personal liability of officers.
An officer of the Corporation shall not be personally liable, as such, to
the Corporation or its shareholders for monetary damages (including, without
limitation, any judgment, amount paid in settlement, penalty, punitive damages
or expense of any nature (including, without limitation, attorneys' fees and
disbursements)) for any action taken, or any failure to take any action, unless
the officer has breached or failed to perform the duties of his or her office
under these Articles, the By-laws or applicable provisions of law and the breach
or failure to perform constitutes self-dealing, willful misconduct or
recklessness.
4. Interpretation of article.
12
<PAGE>
The provisions of Sections 2 and 3 of this Article Ninth shall not apply to
the responsibility or liability of a director or officer, as such, pursuant to
any criminal statute or for the payment of taxes pursuant to local, state or
Federal law. The provisions of this Article Ninth have been adopted pursuant to
the authority of sections 204A (10) and 801 of the Pennsylvania Business
Corporation Law, shall be deemed to be a contract with each director or officer
of the Corporation who serves as such at any time while this Article is in
effect, and such provisions are cumulative of and shall be in addition to and
independent of any and all other limitations of the liabilities of directors or
officers of the Corporation, as such, or rights of indemnification by the
Corporation to which a director or officer of the Corporation may be entitled,
whether such limitations or rights arise under or are created by any statute,
rule of law, By-law, agreement, vote of shareholders or disinterested directors
or otherwise. Each person who serves as a director or officer of the
Corporation while this Article Ninth is in effect shall be deemed to be doing so
in reliance on the provisions of this Article. No amendment to or repeal of
this Article Ninth, nor the adoption of any provision of these Articles
inconsistent with this Article, shall apply to or have any effect on the
liability or alleged liability of any director or officer of the Corporation for
or with respect to any acts or omissions of such director or officer occurring
prior to such amendment, repeal or adoption of an inconsistent provision. In
any action, suit or proceeding involving the application of the provisions of
this Article Ninth, the party or parties challenging the right of a director or
officer to the benefits of this Article have the burden of proof.
13
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1997 1996 1997 1996
--------- -------- --------- --------
<S> <C> <C> <C> <C>
(A) Net Income .............................................. $ 198,814 $ 196,857 $ 596,653 $453,598
========= ========= ========= ========
EARNINGS PER SHARE
Based on average common shares outstanding
- ------------------------------------------
(B) Average shares outstanding............................... 199,817 220,409 205,316 219,802
========= ========= ========= =========
(A/B) Net income................................................ $1.00 $0.89 $2.91 $2.06
========= ========= ========= =========
Based on average common and common
- ----------------------------------
equivalent shares outstanding
- -----------------------------
Primary:
(C) Average common equivalent shares......................... 2,682 1,932 2,543 2,174
========= ========= ========= =========
(D) Average common and common equivalent
shares (B + C)......................................... 202,499 222,341 207,859 221,976
========= ========= ========= =========
(A/D) Net income................................................ $0.98(1) $0.89(1) $2.87(1) $2.04(1)
========= ========= ========= =========
Fully diluted:
(E) Average common equivalent shares......................... 2,937 2,136 3,244 2,415
========= ========= ========= =========
(F) Average common and common equivalent
shares (B + E)......................................... 202,754 222,545 208,560 222,217
========= ========= ========= =========
(A/F) Net Income ............................................... $0.98(1) $0.88(1) $2.86(1) $2.04(1)
========= ========= ========= =========
</TABLE>
- ------------------------------------
(1) Dilution is less than 3%.
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS FROM CONTINUING OPERATIONS
TO FIXED CHARGES OF CONTINUING OPERATIONS
CONSOLIDATED
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1997
- ------------------------------------
(in thousands)
<S> <C>
1. Income from continuing operations before extraordinary items and
income taxes........................................................................ $ 920,102
===========
2. Fixed charges of continuing operations:
A. Interest expense (excluding interest on deposits), amortization of
debt issuance costs and one-third of rental expenses, net of income
from subleases................................................................ $ 325,563
B. Interest on deposits.......................................................... 646,273
-----------
C. Total fixed charges (line 2A + line 2B)....................................... $ 971,836
===========
3. Income from continuing operations before extraordinary items and income
taxes, plus total fixed charges of continuing operations:
A. Excluding interest on deposits (line 1 + line 2A)............................. $ 1,245,665
===========
B. Including interest on deposits (line 1 + line 2C)............................. $ 1,891,938
===========
4. Ratio of earnings (as defined) to fixed charges:
A. Excluding interest on deposits (line 3A/line 2A).............................. 3.83x
B. Including interest on deposits (line 3B/line 2C).............................. 1.95
</TABLE>
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
EXHIBIT 12.2
COMPUTATION OF RATIO OF EARNINGS FROM CONTINUING OPERATIONS
TO FIXED CHARGES OF CONTINUING OPERATIONS
COMBINED CORESTATES (PARENT ONLY) AND CORESTATES CAPITAL CORP
<TABLE>
<CAPTION>
Nine Months ended September 30, 1997
- ------------------------------------
(in thousands)
<S> <C>
1. Income before income taxes and equity in undistributed income
of subsidiaries...................................................................... $542,804
2. Fixed charges - interest expense, amortization of debt issuance costs and
one-third of rental expenses, net of income from subleases........................... 159,281
--------
3. Income before income taxes and equity in undistributed income of
subsidiaries, plus fixed charges..................................................... $702,085
========
4. Ratio of earnings (as defined) to fixed charges (line 3/line 2)...................... 4.41x
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
CoreStates Financial Corp consolidated balance sheet as of September 30, 1997,
and the related consolidated statement of income, changes in shareholders'
equity, and other financial data included within management's discussion and
analysis of financial condition and results of operations for the nine months
ended September 30, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,166,454
<INT-BEARING-DEPOSITS> 3,043,723
<FED-FUNDS-SOLD> 138,699
<TRADING-ASSETS> 326,717
<INVESTMENTS-HELD-FOR-SALE> 2,211,382
<INVESTMENTS-CARRYING> 1,413,351
<INVESTMENTS-MARKET> 1,417,351
<LOANS> 35,085,285
<ALLOWANCE> 679,415
<TOTAL-ASSETS> 47,590,609
<DEPOSITS> 33,740,682
<SHORT-TERM> 4,239,227
<LIABILITIES-OTHER> 1,924,257
<LONG-TERM> 3,784,179
0
0
<COMMON> 223,599
<OTHER-SE> 2,889,496
<TOTAL-LIABILITIES-AND-EQUITY> 47,590,609
<INTEREST-LOAN> 2,237,313
<INTEREST-INVEST> 170,070
<INTEREST-OTHER> 133,338
<INTEREST-TOTAL> 2,540,721
<INTEREST-DEPOSIT> 646,273
<INTEREST-EXPENSE> 949,771
<INTEREST-INCOME-NET> 1,590,950
<LOAN-LOSSES> 143,000
<SECURITIES-GAINS> 14,857
<EXPENSE-OTHER> 386,906
<INCOME-PRETAX> 920,102
<INCOME-PRE-EXTRAORDINARY> 596,653
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 596,653
<EPS-PRIMARY> 2.91
<EPS-DILUTED> 2.91
<YIELD-ACTUAL> 5.32
<LOANS-NON> 245,300
<LOANS-PAST> 110,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 710,300
<CHARGE-OFFS> 235,300
<RECOVERIES> 61,400
<ALLOWANCE-CLOSE> 679,400
<ALLOWANCE-DOMESTIC> 644,400
<ALLOWANCE-FOREIGN> 35,000
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
