<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 June 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
-------------------------
(Registrants telephone
number, including area
code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X . No .
----------- ----------
Number of Shares of Common Stock Outstanding at August 1, 1997: 202,405,869
1
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
-----
Item 1 - FINANCIAL INFORMATION
<S> <C>
Consolidated Balance Sheets as of
June 30, 1997 and December 31, 1996.... 3
Consolidated Statements of Income
for the Three and Six Months Ended
June 30, 1997 and 1996................. 4
Consolidated Statements of Changes
in Shareholders' Equity for the Six
Months Ended June 30, 1997 and 1996.... 5
Consolidated Statements of Cash
Flows for the Six Months Ended June
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.................. 9-38
PART II. OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of
Security Holders....................... 39
Item 6 - Exhibits and Reports on Form 8-K........ 40
SIGNATURE........................................ 41
EXHIBITS 11, 12.1, 12.2, 27..................... 42-46
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------- ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
- ------
Cash and due from banks.............................................. $ 3,121,012 $ 3,462,287
Time deposits, principally Eurodollars............................... 2,767,001 2,443,154
Federal funds sold and securities purchased under
agreements to resell................................................ 333,896 509,694
Trading account assets............................................... 301,851 122,317
Investments available-for-sale, at fair value........................ 2,113,698 2,394,166
Investments held-to-maturity (fair value:
1997 - $1,608,859; 1996 - $1,692,243)............................... 1,606,059 1,689,058
Loans, net of unearned discounts of $220,471 in
1997 and $204,521 in 1996........................................... 34,448,032 32,777,032
Less: Allowance for loan losses.................................... (691,380) (710,327)
----------- -----------
Net loans....................................................... 33,756,652 32,066,705
----------- -----------
Due from customers on acceptances.................................... 791,351 738,077
Premises and equipment............................................... 630,823 625,876
Other assets......................................................... 1,424,349 1,442,860
----------- -----------
Total assets.................................................... $46,846,692 $45,494,194
=========== ===========
LIABILITIES
- -----------
Deposits:
Domestic:
Non-interest bearing.............................................. $ 9,412,095 $ 9,330,445
Interest bearing.................................................. 23,213,515 22,986,955
Overseas branches and subsidiaries.................................. 1,587,071 1,409,756
----------- -----------
Total deposits.................................................. 34,212,681 33,727,156
----------- -----------
Funds borrowed....................................................... 3,348,031 2,633,157
Bank acceptances outstanding......................................... 786,115 727,728
Other liabilities.................................................... 1,627,033 1,661,162
Long-term debt....................................................... 3,695,230 3,049,297
----------- -----------
Total liabilities............................................... 43,669,090 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 21.436 million in
1997 and 8.900 million in 1996, and unallocated shares
held by the Employee Stock Ownership Plan ("ESOP") of
2.211 million in 1997 and 2.267 million in 1996).................... 223,599 223,599
Other common shareholders' equity, net............................... 2,954,003 3,472,095
----------- -----------
Total shareholders' equity...................................... 3,177,602 3,695,694
----------- -----------
Total liabilities and shareholders' equity...................... $46,846,692 $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 Six Months Ended
June 30, June 30,
-------------------------- ------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME
- ---------------
Interest and fees on loans:
Taxable income...................................... $ 745,289 $ 699,391 $ 1,460,964 $1,402,696
Tax exempt income................................... 5,152 6,322 10,558 13,400
Interest on investment securities:
Taxable income...................................... 52,349 68,492 105,174 140,589
Tax exempt income................................... 4,827 5,954 9,056 12,097
Interest on time deposits in banks................... 34,823 27,449 69,385 52,692
Interest on Federal funds sold, securities
purchased under agreements to resell and other...... 7,918 8,147 12,550 17,999
---------- ------------ ------------ ------------
Total interest income........................... 850,358 815,755 1,667,687 1,639,473
---------- ------------ ------------ ------------
INTEREST EXPENSE
- ----------------
Interest on deposits................................. 213,103 207,962 416,982 422,420
Interest on short-term funds borrowed................ 45,485 35,842 78,449 75,599
Interest on long-term debt........................... 57,418 38,556 111,800 77,405
---------- ------------ ------------ ------------
Total interest expense.......................... 316,006 282,360 607,231 575,424
---------- ------------ ------------ ------------
NET INTEREST INCOME............................. 534,352 533,395 1,060,456 1,064,049
Provision for losses on loans........................ 50,000 110,000 93,000 148,767
---------- ------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOSSES ON LOANS......................... 484,352 423,395 967,456 915,282
---------- ------------ ------------ ------------
NON-INTEREST INCOME
- -------------------
Service charges on deposit accounts.................. 61,452 60,951 117,919 120,277
Trust income......................................... 45,852 41,601 90,167 82,775
Fees for international services...................... 26,589 24,772 52,749 47,675
Debit and credit card fees........................... 23,798 18,946 45,468 37,263
Third party processing............................... 18,688 14,636 38,747 28,468
Income from investment in EPS, Inc................... 7,311 7,335 14,610 14,723
Income from trading activities....................... 9,878 6,455 15,786 13,117
Securities gains..................................... 5,015 17,393 9,834 24,341
Other operating income............................... 27,781 36,538 56,095 69,428
---------- ------------ ------------ ------------
Total non-interest income....................... 226,364 228,627 441,375 438,067
---------- ------------ ------------ ------------
NON-FINANCIAL EXPENSES
- ----------------------
Salaries, wages and benefits......................... 204,145 206,541 407,734 414,780
Net occupancy........................................ 37,352 37,561 74,590 80,345
Equipment expenses................................... 31,148 30,909 62,397 60,933
Restructuring and merger-related charges............. - 103,676 - 117,802
Other operating expenses............................. 130,329 132,818 250,157 253,827
---------- ------------ ------------ ------------
Total non-financial expenses.................... 402,974 511,505 794,878 927,687
---------- ------------ ------------ ------------
INCOME BEFORE INCOME TAXES........................... 307,742 140,517 613,953 425,662
- --------------------------
Provision for income taxes........................... 108,016 60,920 216,114 168,921
---------- ------------ ------------ ------------
NET INCOME .......................................... $ 199,726 $ 79,597 $ 397,839 $ 256,741
- ---------- ========== ============ ============ ============
Average common shares outstanding.................... 204,982 219,478 208,111 219,495
========== ============ ============ ============
PER COMMON SHARE DATA
- ---------------------
Net income........................................... $0.97 $0.36 $1.91 $1.17
========== ============ ============ ============
Cash dividends declared............................. $0.47 $0.42 $0.94 $0.84
========== ============ ============ ============
</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>
Unallocated
Common Capital Retained Treasury ESOP
stock surplus earnings stock shares Total
--------- ---------- ---------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1996
- ------------------------------
Balances at beginning of year............. $230,231 $1,225,167 $2,724,298 $ (250,465) $(53,666) $3,875,565
Net income................................ 256,741 256,741
Net change in unrealized gain on
investments available-for-sale,
net of tax............................... (20,837) (20,837)
Treasury shares acquired (712 shares)..... (28,294) (28,294)
Treasury shares issued in merger (7,300
shares).................................. (7,300) (33,288) (192,042) 232,630 -
Repurchase and retirement of common
stock (1,340 shares)..................... (1,340) (43,559) (12,804) (57,703)
Common stock issued under employee
benefit plans (438 new shares; 890
treasury shares)......................... 438 23,301 (14,676) 33,079 42,142
Common stock issued under dividend
reinvestment plan (202 treasury
shares).................................. 557 (1) 7,368 7,924
ESOP shares committed for release
(61 shares).............................. 886 1,571 2,457
Cash paid for fractional shares........... (296) (296)
Foreign currency translation adjustments 867 867
Common dividends declared................. (179,533) (179,533)
-------- ---------- ---------- ----------- -------- ----------
Balances at end of period............... $222,029 $1,173,064 $2,561,717 $ (5,682) $(52,095) $3,899,033
======== ========== ========== =========== ======== ==========
SIX MONTHS ENDED JUNE 30, 1997
- ------------------------------
Balances at beginning of year........... $223,599 $1,234,522 $2,729,310 $ (437,580) $(54,157) $3,695,694
Net income.............................. 397,839 397,839
Net change in unrealized gain on
investments available-for-sale,
net of tax............................. 77 77
Treasury shares acquired (14,032 shares) (778,746) (778,746)
Common stock issued under employee
benefit plans (1,188 treasury shares).. 9,607 (32,030) 65,417 42,994
Common stock issued under dividend
reinvestment plan (308 treasury
shares)................................ 308 (666) 15,507 15,149
ESOP shares committed for release (56
shares)................................ 1,515 1,335 2,850
Foreign currency translation adjustments (706) (706)
Common dividends declared............... (197,549) (197,549)
-------- ---------- ---------- ----------- -------- ----------
Balances at end of period............... $223,599 $1,245,952 $2,896,275 $(1,135,402) $(52,822) $3,177,602
======== ========== ========== =========== ======== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------
OPERATING ACTIVITIES 1997 1996
- -------------------- ------------ ------------
<S> <C> <C>
Net income.......................................................... $ 397,839 $ 256,741
Adjustments to reconcile net income to net cash
provided by operating activities:
Restructuring and merger-related charges........................... - 117,802
Provision for losses on loans...................................... 93,000 148,767
Provision for losses and writedowns on OREO........................ 1,239 2,359
Depreciation and amortization...................................... 60,104 63,197
Deferred income tax expense (benefit).............................. 19,295 (34,778)
Securities gains................................................... (9,834) (24,341)
(Increase) decrease in trading account assets...................... (179,534) 59,984
Decrease in due to factored clients................................ (24,923) (279)
(Increase) decrease in interest receivable......................... (13,621) 43,560
Increase in interest payable....................................... 9,139 70,639
Other, net......................................................... (6,659) 55,975
------------ ------------
Net Cash Provided by Operating Activities......................... 346,045 759,626
------------ ------------
INVESTING ACTIVITIES
- --------------------
Net increase in loans............................................... (1,893,565) (1,052,437)
Proceeds from sales of loans........................................ 308,964 672,115
Loans originated or acquired - non-bank subsidiaries................ (18,121,771) (18,539,137)
Principal collected on loans - non-bank subsidiaries................ 17,903,676 18,477,044
Net increase in time deposits, principally Eurodollars.............. (323,847) (163,837)
Purchases of investments held-to-maturity........................... (378,525) (161,735)
Purchases of investments available-for-sale......................... (244,806) (692,551)
Proceeds from maturities of investments held-to-maturity............ 458,415 737,662
Proceeds from maturities of investments available-for-sale.......... 461,384 418,255
Proceeds from sales of investments available-for-sale............... 76,186 686,393
Net decrease in Federal funds sold and securities purchased under
agreements to resell............................................... 175,798 515,162
Purchases of premises and equipment................................. (44,665) (52,624)
Proceeds from sales and paydowns on OREO............................ 10,509 13,759
Other, net.......................................................... 9,198 16,038
------------ ------------
Net Cash Provided by (Used in) Investing Activities................ (1,603,049) 874,107
------------ ------------
FINANCING ACTIVITIES
- --------------------
Net increase (decrease) in deposits................................. 485,357 (1,033,921)
Payment for sale of deposits........................................ - (368,110)
Proceeds from issuance of long-term debt............................ 767,181 381,070
Retirement of long-term debt........................................ (120,648) (115,719)
Net increase (decrease) in short-term funds borrowed................ 714,874 (1,034,826)
Cash dividends paid................................................. (200,826) (144,352)
Purchases of treasury stock......................................... (778,746) (28,294)
Repurchase and retirement of common stock........................... - (57,703)
Common stock issued under employee benefit plans.................... 33,388 42,142
Other, net.......................................................... 15,149 7,628
------------ ------------
Net Cash Provided by (Used in) Financing Activities................ 915,729 (2,352,085)
------------ ------------
Decrease In Cash And Due From Banks................................ (341,275) (718,352)
-----------------------------------
Cash and due from banks at January 1, ............................. 3,462,287 3,662,143
------------ ------------
Cash and due from banks at June 30, ............................... $ 3,121,012 $ 2,943,791
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
- ------------------------------------------------
Cash paid during the period for:
Interest.......................................................... $ 598,092 $ 504,785
============ ============
Income taxes...................................................... $ 188,901 $ 150,588
============ ============
Net cash received on interest rate swaps............................ $ 34,785 $ 35,256
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
6
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 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 six-month period ended June 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>
June 30, December 31,
Domestic: 1997 1996
------------ ------------
<S> <C> <C>
Commercial, industrial and other.. $15,140,794 $13,906,646
Real estate:
Construction and development.... 585,158 554,924
Residential..................... 4,310,294 4,226,980
Other........................... 4,425,491 4,541,697
----------- -----------
Total real estate.............. 9,320,943 9,323,601
----------- -----------
Consumer:
Installment..................... 3,223,079 3,319,970
Credit card..................... 1,670,150 1,674,921
----------- -----------
Total consumer................. 4,893,229 4,994,891
----------- -----------
Financial institutions............ 1,367,536 1,153,715
Factoring receivables............. 477,574 411,280
Lease financing................... 1,201,997 1,232,213
----------- -----------
Total domestic................. 32,402,073 31,022,346
----------- -----------
Foreign............................ 2,045,959 1,754,686
----------- -----------
Total loans.................... $34,448,032 $32,777,032
=========== ===========
</TABLE>
7
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
JUNE 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 28 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>
June 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Standby letters of credit, net of
participations......................... $ 1,806,141 $ 1,630,621
Commercial letters of credit............ 1,619,556 1,262,593
Commitments to extend credit............ 16,438,714 15,396,553
Unused commitments under credit card
lines.................................. 4,462,212 4,173,013
When-issued securities:
Commitments to purchase................ 4,925 1,770
Commitments to sell.................... 83,275 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....... 329,977 361,410
Interest rate futures contracts:
Commitments to purchase................ 1,805,500 4,489,800
Commitments to purchase foreign and
U.S. currencies........................ 2,540,506 1,766,122
Interest rate swaps, notional principal
amounts................................ 10,389,595 9,850,708
Interest rate caps and floors:
Written................................ 1,230,556 908,799
Purchased.............................. 2,455,510 2,039,331
Tender option bonds..................... 271,772 148,711
Treasury float contracts................ 258,963 270,358
Other derivatives....................... 916,904 597,261
</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 second quarter of 1997, CoreStates Financial Corp
---------------
("CoreStates") recorded net income of $199.7 million, or $0.97 per share,
compared to $79.6 million, or $0.36 per share, in the second quarter of 1996.
Second quarter net income represents a 10.2% increase on a per share basis when
compared to second quarter of 1996 "operating earnings" of $0.88 per share. The
year-to-year growth in earnings per share primarily resulted from the impact of
the common stock repurchase program announced in October 1996. Also contributing
to the second quarter growth in earnings per share were increases in non-
interest revenue and expense reductions. "Operating earnings" for the second
quarter of 1996 have been defined for purposes of the earnings review discussion
as net income excluding net restructuring and merger-related charges and certain
net investment gains as discussed on page 10.
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 Months Ended Six Months Ended
June 30, Percentage June 30, Percentage
-------------------- Increase ------------------ Increase
1997 1996 (Decrease) 1997 1996 (Decrease)
-------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net interest income (taxable equivalent
basis)................................. $ 540.6 $ 540.0 0.1% $1,071.9 $1,077.9 (0.6)%
======== ======== ======== ========
Net income.............................. $ 199.7 $ 79.6 150.9 $ 397.8 $ 256.7 55.0
Exclude the following after-tax items:
Net restructuring and merger-related
charges................................ - 123.3 - 137.1
Certain net investment gains............ - (9.5) - (9.5)
-------- -------- -------- --------
Operating earnings...................... $ 199.7 $ 193.4 3.3 $ 397.8 $ 384.3 3.5
======== ========= ======== ========
Operating earnings per share............ $ 0.97 $ 0.88 10.2 $ 1.91 $ 1.75 9.1
======== ========= ======== ========
Return on average equity................ 23.54% 20.22%(a) 22.69% 19.88%(a)
Return on average assets................ 1.78 1.78 (a) 1.80 1.77 (a)
Net interest margin..................... 5.37 5.56 5.42 5.54
Average common shares outstanding....... 204.982 219.478 208.111 219.495
- -----------------
</TABLE>
(a) Calculated based on "Operating earnings."
The $6.3 million improvement over second quarter of 1996 operating earnings
was primarily due to a $12.4 million, or 5.8%, increase in non-interest income
before certain net investment gains. Also contributing to the improvement in
second quarter operating earnings was a $4.8 million, or 1.2%, decline in non-
financial expenses primarily reflecting the impact of merger efficiencies. The
increase in non-interest income was mainly due to growth in revenue from trust
and asset management activities, third party processing fees and service charges
on deposits. Partially offsetting these items was a $10.0 million increase in
the provision for loan losses made in response to continued increases in the
level of charge-offs against credit card and other consumer loans and a second
quarter increase in commercial loan charge-offs.
Returns on average equity and assets were 23.54% and 1.78%, respectively, in
the second quarter of 1997, compared to 20.22% and 1.78%, respectively, in the
second 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 six months ended June 30, 1997, CoreStates recorded net income of
$397.8 million, or $1.91 per share. This compares to net income of $256.7
million, or $1.17 per share, and operating earnings of $384.3 million, or $1.75
per share, for the first six months of 1996. The 9.1% increase in earnings per
share for the 1997 six-month period compared to 1996 operating earnings
primarily resulted from the impact of the common stock repurchase program,
increased non-interest income and expense reductions. Operating earnings for the
six months ended June 30, 1996 exclude restructuring and merger-related charges
and certain net investment gains.
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 shares 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.
Management is also authorized to repurchase additional shares to fulfill
requirements of employee benefit and dividend reinvestment plans.
RESTRUCTURING AND MERGER-RELATED CHARGES - In the second quarter of 1996,
----------------------------------------
CoreStates recorded pre-tax net restructuring and merger-related charges of
$173.7 million primarily in connection with the acquisition of Meridian Bancorp,
Inc. ("Meridian"). Included in that amount was a $70.0 million provision for
loan losses recorded in connection with a change in strategic direction related
to Meridian's problem assets and to conform Meridian's consumer lending charge-
off policies to those of CoreStates. The second 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 and the curtailment of pension benefits. On
February 23, 1996, CoreStates acquired United Counties Bancorporation, a $1.6
billion asset New Jersey bank holding company, in a transaction accounted for as
a pooling of interests. In the first quarter of 1996, CoreStates 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 six months ended June 30, 1997 (in millions):
<TABLE>
<CAPTION>
Second Six
Quarter Months
1997 1997
-------- -------
<S> <C> <C>
Balance at beginning of period.... $ 81 $ 108
Provision charged against income.. - -
Cash outflow(a)................... (13) (32)
Writedowns of assets.............. (14) (22)
----- ------
Balance at end of period.......... $ 54 $ 54
===== ======
- ---------------------
</TABLE>
(a) CoreStates' liquidity has not been significantly affected by these
cashflows.
CERTAIN NET INVESTMENT GAINS - 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 gain was partially offset 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.
10
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED
SUMMARY - continued
- -------
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.
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 six months ended June 30, 1997 and 1996. Each core business is
comprised of well-defined business lines with market or product-specific
missions.
11
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED
BUSINESS LINE RESULTS - continued
- ---------------------
THREE MONTHS ENDED JUNE 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........ $ 148.0 $ 135.2 $ 280.5 $ 277.7 $ 77.5 $ 71.4 $ 14.0 $ 12.0
Provision for losses on
loans..................... 11.4 7.5 6.6 7.1 30.8 24.4 0.5 0.5
Non-interest income........ 67.7 56.9 63.3 62.9 20.8 21.8 46.3 41.7
Non-financial expenses..... 98.3 89.1 187.2 195.1 42.9 47.6 35.0 38.1
------- ------- ------- ------- -------- ------- ------- ------
Income before income taxes. 106.0 95.5 150.0 138.4 24.6 21.2 24.8 15.1
Income tax expense......... 40.6 37.5 55.0 50.2 8.6 8.0 9.0 5.5
------- ------- ------- ------- -------- ------- ------- ------
Net income................. $ 65.4 $ 58.0 $ 95.0 $ 88.2 $ 16.0 $ 13.2 $ 15.8 $ 9.6
======= ======= ======= ======= ======== ======= ======= ======
Return on assets........... 1.47% 1.73% 2.95% 2.41% 0.85% 0.67% 5.07% 2.74%
Return on equity........... 23.74% 26.75% 57.30% 48.46% 18.66% 14.16% 91.85% 61.29%
Average assets............. $17,865 $13,462 $12,932 $14,744 $ 7,552 $ 7,884 $ 1,249 $1,407
Average equity............. 1,105 872 665 732 344 375 69 63
</TABLE>
<TABLE>
<CAPTION>
Third Party
Processing Corporate Center Total
------------------ -------------------- ------------------
1997 1996 1997 1996 1997 1996
------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net interest income....................... $ 4.3 $ 4.0 $ 16.3 $ 39.7 $ 540.6 $ 540.0
Provision for losses on loans............. - - 0.7 70.5(b) 50.0 110.0
Non-interest income....................... 56.5 54.8 (28.2)(a) (9.5)(a) 226.4 228.6
Non-financial expenses.................... 55.9 50.8 (16.3)(a) 90.8(a,b) 403.0 511.5
------- ------- --------- ------- ------- -------
Income (loss) before income taxes......... 4.9 8.0 3.7 (131.1) 314.0 147.1
Income tax expense (benefit).............. 1.7 2.8 (0.6) (36.5) 114.3 67.5
------- ------- ------- ------- ------- -------
Net income (loss)......................... $ 3.2 $ 5.2 $ 4.3 $ (94.6) $ 199.7 $ 79.6
======= ======= ======= ======= ======= =======
Return on assets.......................... 4.29% 6.12% 0.33% (6.61)% 1.78% 0.73%
Return on equity.......................... 41.40% 65.36% 1.45% (21.46)% 23.54% 8.32%
Average assets............................ $ 299 $ 342 $ 5,227 $ 5,756 $45,124 $43,595
Average equity............................ 31 32 1,190 1,773 3,404 3,847
- -------------------
</TABLE>
(a) Includes eliminations for intercompany third party processing fees of
$27.8 million and $29.2 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 $103.7 million in non-financial
expenses.
12
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED
BUSINESS LINE RESULTS - CONTINUED
- ---------------------------------
SIX MONTHS ENDED JUNE 30,
($ 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............ $ 290.0 $ 267.4 $ 559.0 $ 560.1 $ 153.5 $ 144.7 $ 25.9 $ 24.8
Provision for losses on loans.. 22.3 14.8 13.2 14.4 57.5 49.4 1.1 1.0
Non-interest income............ 128.9 114.3 120.0 119.3 40.6 44.1 91.2 83.1
Non-financial expenses......... 189.8 175.3 371.9 392.5 85.0 93.8 70.0 76.6
------- ------- ------- ------- ------- -------- ------ ------
Income before income taxes..... 206.8 191.6 293.9 272.5 51.6 45.6 46.0 30.3
Income tax expense............. 79.2 75.2 107.6 98.9 19.4 17.1 16.6 11.0
------- ------- ------- ------- ------- -------- ------ ------
Net income..................... $ 127.6 $ 116.4 $ 186.3 $ 173.6 $ 32.2 $ 28.5 $ 29.4 $ 19.3
======= ======= ======= ======= ======= ======== ====== ======
Return on assets............... 1.49% 1.72% 2.91% 2.36% 0.86% 0.72% 4.77% 2.63%
Return on equity............... 23.96% 27.41% 56.41% 47.37% 18.66% 15.20% 87.19% 60.64%
Average assets................. $17,307 $13,643 $12,895 $14,823 $ 7,556 $ 7,984 $1,244 $1,478
Average equity................. 1,074 854 666 737 348 377 68 64
</TABLE>
<TABLE>
<CAPTION>
Third Party
Processing Corporate Center Total
----------------------- ------------------------ ---------------------
1997 1996 1997 1996 1997 1996
---------- ------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net interest income............ $ 9.1 $ 8.2 $ 34.4 $ 72.7 $1,071.9 $1,077.9
Provision for losses on loans.. - 0.1 (1.1) 69.1 (b) 93.0 148.8
Non-interest income............ 114.3 99.9 (53.6)(a) (22.6)(a) 441.4 438.1
Non-financial expenses......... 111.7 93.7 (33.5)(a) 95.8(a,b) 794.9 927.7
---------- ------- --------- ---------- -------- --------
Income (loss)before income taxes 11.7 14.3 15.4 (114.8) 625.4 439.5
Income tax expense (benefit)... 4.1 5.0 0.7 (24.4) 227.6 182.8
---------- ------- ------- ------- -------- --------
Net income (loss).............. $ 7.6 $ 9.3 $ 14.7 $ (90.4) $ 397.8 $ 256.7
========== ======= ======= ======= ======== ========
Return on assets............. 5.11% 5.31% 0.56% (3.35)% 1.80% 1.18%
Return on equity............... 49.44% 64.49% 2.20% (9.95)% 22.69% 13.28%
Average assets................. $ 300 $ 352 $ 5,314 $ 5,420 $ 44,616 $ 43,700
Average equity................. 31 29 1,349 1,827 3,536 3,888
- -------------------
</TABLE>
(a) Includes eliminations for intercompany third party processing fees of
$55.1 million and $49.8 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 $117.8 million in non-financial
expenses.
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 and merger-related
charges) 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 second quarter of 1997
was $65.4 million, an increase of $7.4 million, or 12.8%, from the second
quarter of 1996. For the 1997 six-month period, net income was $127.6 million,
an increase of $11.2 million, or 9.6%, from 1996 year-to-date. The increase in
earnings in both periods was due to strong revenue growth, partially offset by
higher expenses, as described below.
Net interest income for the second quarter of 1997 increased $12.8 million,
or 9.5%, from the second quarter of 1996 and $22.6 million, or 8.4%, from 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 24.2%, over second quarter of 1996, and $2.6 billion, or 23.5%, above 1996
year-to-date, due to growth in Congress Financial, Specialized Lending,
International Banking, Large Corporate, Healthcare, and the Retail & Apparel
Banking Groups. Average non-performing loans declined $7.6 million, or 10.0%,
from the second quarter of 1996, and $3.6 million, or 5.2%, below 1996 year-to-
date. Average demand balances increased $30.2 million, or 1.7%, above second
quarter of 1996, and $11.4 million, or 0.6%, above 1996 year-to-date. Fees on
loans increased $1.6 million, or 21.1%, above second quarter of 1996, and $3.5
million, or 22.7%, above prior year-to-date due to fees collected on new loans
and several significant termination fees.
The provision for loan losses increased $3.9 million, or 52.0%, from the
second quarter of 1996, and $7.5 million, or 50.7%, above 1996 year-to-date due
to increased loan volume and loan charge-offs.
Non-interest income increased $10.8 million, or 19.0%, from the second
quarter of 1996, and $14.6 million, or 12.8%, from 1996 year-to-date primarily
due to increases in international service fees, securities gains, and service
charges on deposits. International service fees increased $2.2 million, or
9.4%, for the second quarter of 1997 and $5.0 million, or 10.6%, for the 1997
six-month period principally due to increased trade payment services activity in
the offshore branches. Service charges on deposits increased $1.9 million, or
11.5%, for the second quarter of 1997 and $2.3 million, or 7.5%, for the 1997
six-month period primarily reflecting increases in cash management activities.
14
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED
BUSINESS LINE RESULTS - continued
- ---------------------------------
Non-financial expenses increased $9.2 million, or 10.3%, over the second
quarter of 1996, and $14.5 million, or 8.3%, over 1996 year-to-date due to
increases in Congress Financial expenses, outside services hired and processing
costs.
REGIONAL BANKING includes Retail Banking and Delivery, Small Business
----------------
Lending, Commercial Business Lending, and Middle Market Lending. Net income for
the second quarter of 1997 was $95.0 million, up $6.8 million, or 7.7%, from the
second quarter of 1996. The increase was principally due to declines in
operating expenses resulting from merger synergies and branch closings/sales and
an increase in net interest income primarily resulting from the impact of
increases in deposit interest rate spreads. For the 1997 six-month period, net
income was $186.3 million, up $12.7 million, or 7.3%, from 1996 year-to-date.
The increase for the six-month period was primarily the result of reduced non-
financial expenses and increased net interest income.
Net interest income for the second quarter of 1997 increased $2.8 million, or
1.0%, from the second quarter of 1996. The increase was mainly attributable to
the impact of a 33 basis point increase in deposit spreads driven by pricing
strategies implemented in the second quarter of 1997. Quarter-to-quarter
increases also occurred in consumer and revolving credit loan spreads which
increased 44 basis points and 18 basis points, respectively. Partially
offsetting the impacts of improved interest rate spreads were declines in
average deposit volumes of $1.4 billion, or 5.3%, and in average loan
outstandings of $450 million, or 3.9%. The deposit decline resulted from a
combination of the divestiture of eleven branches in the second quarter of 1996
and run-off related to both the Meridian Bancorp, Inc. ("Meridian") merger in
1996, pricing strategies implemented in 1997, and competitive pressures. The
loan decline mainly resulted from the securitization of $382 million in home
equity loans during 1996 and run-off in revolving credit loans. Combined
commercial loan/commercial real estate spreads declined 16 basis points
influenced by increased market competition.
For the 1997 six-month period, net interest income decreased $1.1 million, or
0.2%, below the 1996 six-month period. This decrease was attributable to
declines in average deposit volumes of $1.1 billion, or 4.4%, and in average
loan outstandings of $532 million, or 4.6%. Combined commercial loan/commercial
real estate spreads declined 12 basis points. Partially offsetting these items
were increases in deposit spreads, up 23 basis points, and increases in consumer
and revolving credit loan spreads, up 37 basis points and 19 basis points,
respectively.
Non-interest income for the second quarter of 1997 was flat compared with the
second quarter of 1996. In the fourth quarter of 1996, CoreStates implemented an
ATM surcharge on all non-CoreStates Bank customer ATM transactions. Second
quarter of 1997 ATM transaction fees totaled $2.6 million. This income was
offset by a $2.7 million, or 53%, decrease in income from home equity loan
securitizations (a securitization transaction was executed in the first half of
1996, but none occurred in the first half of 1997). Year-to-date, non-interest
income in 1997 was flat with the same period in 1996 for the reasons noted
above.
Non-financial expenses for the second quarter of 1997 declined $7.9 million, or
4.1%, from the second quarter of 1996. Personnel expenses declined $2.1
million, or 2.9%, while non-personnel expenses declined $6.4 million, or 5.4%,
primarily due to branch closings/sales and operational efficiencies related to
the Meridian merger. Year-to-date, non-financial expenses in 1997 declined $20.6
million, or 5.3%, from the same period in 1996 for the reasons noted
above.
15
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED
BUSINESS LINE RESULTS - continued
- ---------------------------------
RETAIL CREDIT SERVICES includes the following major business lines: Credit
----------------------
Card, Dealer Services, Educational Lending, Mortgage Services, Card Linx
(CoreStates' merchant credit card processing business) and SynapQuest
(CoreStates' consumer and commercial card processing company). Net income for
Retail Credit Services was $16.0 million in the second quarter of 1997, which
was $2.8 million, or 21.2%, above the second quarter of 1996. For the 1997 six-
month period net income was $32.2 million, which was $3.7 million, or 13.0%,
above 1996 year-to-date. Prior year results have been restated for the
reorganization of SynapQuest into Retail Credit Services. The increases in net
income are primarily attributable to loan growth and a reduction in non-
financial expenses, partially offset by a higher provision for losses on loans
and a decline in non-interest income.
Net interest income for the second quarter of 1997 increased $6.1 million, or
8.5%, above the second quarter of 1996. This increase was due to the impact of
growth in average indirect auto loans ($243 million or 14.2%), credit card loans
($98 million or 7.5%), and floor plan loans ($78 million or 14.8%). The
reduction in the average mortgage loan portfolio (due to sales of $827 million
in the latter part of 1996) has partially offset the favorable impact of the
noted loan growth. On a year-to-date basis, net interest income was $8.8
million, or 6.1%, above 1996.
The provision for loan losses for the second quarter of 1997 increased by
$6.4 million, or 26.2%, over the second 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 $21 million and $22 million at June 30, 1997, and December 31,
1996, respectively. On a year-to-date basis, the provision for loan losses was
$8.1 million, or 16.4%, above 1996.
Non-interest income for the second quarter of 1997 decreased by $1.0 million,
or 4.6%, from 1996. This decline was primarily due to a $0.4 million decrease
in merchant fee income resulting from the effects of third quarter 1996 customer
attrition and a $0.2 million decrease stemming from lower lease originations.
Non-interest income on a year-to-date basis was $3.5 million, or 7.9%, below
1996, primarily due to a $2.6 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.
Non-financial expenses for the second quarter of 1997 decreased by $4.7
million, or 9.9%, 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 $8.8 million, or 9.4%, 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 Asset Management. CoreStates' remaining Corporate Trust Business,
previously included in Institutional Trust, was sold in the fourth quarter of
1996. Net income of $15.8 million in the second quarter of 1997 increased $6.2
million, or 64.6%, over the second quarter of 1996. For the 1997 six-month
period, net income was $29.4 million, an increase of $10.1 million, or 52.3%,
over the same period in 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 for both 1997 periods.
Net interest income increased $2.0 million, or 16.7%, in the second quarter
of 1997 compared to the same period in 1996 and increased $1.1 million, or 4.4%,
on a year-to-date basis. These increases were due to increased partnership
investment income related to market increases, increased money market balances
related to additional customer sweep balances, and increased demand deposit
balances. These favorable variances were partially offset by narrowing spreads
on commercial loans in Private Banking.
16
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED
BUSINESS LINE RESULTS - continued
- ---------------------------------
TRUST AND ASSET MANAGEMENT - continued
- --------------------------------------
Non-interest income increased $4.6 million, or 11.0%, in the second quarter
of 1997 compared to the same period in 1996 and increased $8.1 million, or 9.8%,
on a year-to-date basis. Excluding the Corporate Trust fees recorded in the
1996 periods, non-interest income increased $5.1 million, or 12.5%, for the
second quarter and $9.0 million, or 11%, on a year-to-date basis. These
improvements resulted from increases in Personal and Institutional Trust fees
primarily due to increased asset values.
Non-financial expenses decreased $3.1 million, or 8.1%, in the second quarter
of 1997 compared to the same period in 1996, and decreased $6.6 million, or
8.6%, on a year-to-date basis. Excluding Corporate Trust, expenses would have
decreased $2.7 million, or 7.1%, for the second quarter and $6.1 million, or
8.1%, on a year-to-date basis. These expense reductions are associated with
savings achieved in all business lines due 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 Department ("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 QuestPoint Check Services.
Third Party Processing ("TPP") net income for the second quarter of 1997 was
$3.2 million, a decrease of $2.0 million, or 38.5%, from the same period last
year. For the 1997 six-month period, net income was $7.6 million, a decrease of
$1.7 million, or 18.3%, from 1996 year-to-date. Prior year results have been
restated for the reorganization of SynapQuest into Retail Credit Services and
for the inclusion of FID in Third Party Processing.
TPP net interest income for the second quarter of 1997 increased $0.3
million, or 7.5%, from the second quarter of 1996. For the 1997 six-month
period, net interest income increased $0.9 million, or 11.0%, over year-to-date
1996. The increases for both 1997 periods were due to both higher demand
balances within FID and lower average interest costs on the EPS investment.
TPP revenue for the second quarter of 1997 totaled $56.5 million including
$27.8 million for CoreStates' intercompany business, $7.3 million for EPS, Inc.
and $21.4 million of other external QuestPoint/FID revenue. This compares to a
second quarter of 1996 revenue total of $54.8 million including $29.2 million
for CoreStates' intercompany business, $7.3 million of EPS revenue and $18.3
million of other external QuestPoint/FID revenue. Year-to-year second quarter
revenue growth was $1.7 million, or 3%. The CoreStates' intercompany business,
which contributes 49% of the TPP revenue base, decreased $1.4 million, or 5%.
External QuestPoint revenue accounts for 41% of the revenue base and increased
$3.4 million, or 17%, for 1997. The investment in EPS, Inc. contributes the
remaining revenue stream and was unchanged from the same period last year.
Revenue from 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 from the Bisys Group, Inc.
("Bisys") in October 1996 contributed $2.4 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. Compared to the prior year,
the lower interest income on the note, which is being paid down at a rate of
$6.25 million per quarter by EPS, was offset by higher EPS equity related
income.
17
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED
BUSINESS LINE RESULTS - continued
- ---------------------------------
TPP non-financial expenses for the second quarter of 1997 increased $5.1
million, or 10.0%, from the second quarter of 1996. For the 1997 six-month
period, non-financial expenses increased $18.0 million, or 19.2%, from 1996
year-to-date. Most of the increase supported the addition of new business; such
as, the processing of Meridian volume, the acquisition of the Bisys check
processing centers by Check Services, and overall Remittance Services volume
growth.
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.
Net interest income on a taxable equivalent basis for the second quarter of
1997 was $540.6 million, essentially level with the second quarter of 1996. The
net interest margin was 5.37% for the second quarter of 1997, a decrease of 19
basis points compared to the second 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 and a decline of $1.0 billion, or 4.5%, in
average consumer savings, NOW and money market account deposits, primarily due
to the branch divestiture late in the second quarter of 1996. These decreases
were partially offset by the impacts of an increase in average loan volume of
$2.0 billion, or 6.3%, and favorable repricing of deposits.
Compared to the first quarter of 1997, taxable equivalent net interest income
for the second quarter of 1997 increased $9.3 million, or 1.8%, principally
reflecting the impact of one more day in the quarter which resulted in a $3.3
million increase in net interest income, an $872 million, or 2.7%, increase in
average loans and favorable repricing of domestic deposits in the second
quarter. These increases were partially offset by the funding costs associated
with the common stock repurchase program. Taxable equivalent net interest income
for the six months ended June 30, 1997 decreased $6.0 million, or 0.6%, and the
net interest margin declined 12 basis points to 5.42% as compared to the 1996
six-month period. The declines in net interest income and net interest margin
resulted from the impact of the common stock repurchase program, one less day in
the period and a decline in average consumer savings, NOW and money market
account deposits.
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 table compares taxable equivalent net interest income for the
three months ended June 30, 1997 versus the second quarter of 1996 and the first
quarter of 1997, and for the six months ended June 30, 1997 versus the 1996 six-
month period, respectively (in millions):
Taxable Equivalent Net Interest Income
- --------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Increase (decrease)
-------------------------------------- -------------------------------
June 30, June 30, Mar 31, June 1997/ June 1997/
1997 1996 1997 June 1996 Mar 1997
----------- ------------ ----------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Total interest income................... $ 850.3 $ 815.8 $817.3 $34.5 $33.0
Tax equivalent adjustment............... 6.3 6.6 5.2 (0.3) 1.1
-------- -------- ------ ------------- ---------------
Tax equivalent interest income.......... 856.6 822.4 822.5 34.2 34.1
Total interest expense.................. 316.0 282.4 291.2 33.6 24.8
-------- -------- ------ ------------- ---------------
Taxable equivalent net
interest income........................ $ 540.6 $ 540.0 $531.3 $ 0.6 $ 9.3
======== ======== ====== ============= ===============
Interest rate spread.................... 4.46% 4.65% 4.54%
Net interest margin..................... 5.37% 5.56% 5.47%
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
----------------------
June 30, June 30, Increase/
1997 1996 (decrease)
-------- -------- ----------
<S> <C> <C> <C>
Total interest income................... $1,667.6 $1,639.5 $ 28.1
Tax equivalent adjustment............... 11.5 13.8 (2.3)
-------- -------- ------
Tax equivalent interest income.......... 1,679.1 1,653.3 25.8
Total interest expense.................. 607.2 575.4 31.8
-------- -------- ------
Taxable equivalent net
interest income........................ $1,071.9 $1,077.9 $ (6.0)
======== ======== ======
Interest rate spread.................... 4.50% 4.62%
Net interest margin..................... 5.42% 5.54%
CORESTATES FINANCIAL CORP AND
SUBSIDIARIES
</TABLE>
19
<PAGE>
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
June 30, 1997/1996 June 30, 1997/March 31, 1997
------------------------------------------ ----------------------------------------
Change attributable to Change attributable to
Income/ ---------------------------- Income/ ----------------------------
expense Volume Rate expense Volume Rate
------------ -------------- ------------ ---------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
- -----------------------
Time deposits-Eurodollars... $ 7.4 $ 7.2 $ 0.2 $ 0.3 $ 0.2 $ 0.1
Investment securities....... (17.9) (17.6) (0.3) 0.4 (1.4) 1.8
Federal funds sold.......... (3.9) (4.0) 0.1 0.5 (0.1) 0.6
Trading account securities.. 4.6 5.0 (0.4) 3.7 3.2 0.5
Loans:
- Domestic................ 29.1 29.5 (0.4) 23.6 15.2 8.4
- Foreign................. 14.9 13.3 1.6 5.6 3.0 2.6
------ ------ ------ ----- ----- -----
Total interest income.... 34.2 33.4 0.8 34.1 20.1 14.0
------ ------ ------ ----- ----- -----
INTEREST BEARING FUNDS
- ----------------------
Deposits:
Domestic................... 0.7 (3.1) 3.8 9.0 8.5 0.5
Overseas................... 4.4 3.2 1.2 0.2 (1.0) 1.2
Funds borrowed:
Federal funds purchased.... 2.5 0.2 2.3 5.3 3.4 1.9
Other...................... 7.1 4.4 2.7 7.3 5.2 2.1
Long-term debt.............. 18.9 17.8 1.1 3.0 3.6 (0.6)
------ ------ ------ ----- ----- -----
Total interest expense..... 33.6 22.5 11.1 24.8 19.7 5.1
------ ------ ------ ----- ----- -----
NET INTEREST INCOME......... $ 0.6 $ 10.9 $(10.3) $ 9.3 $ 0.4 $ 8.9
- ---------------------------- ====== ====== ====== ===== ===== =====
</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.
20
<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
- ---------------------------- -----------------------------------------------
Six Months Ended
June 30, 1997/1996
-----------------------------------------------
Change attributable to
Income/ ------------------------------
expense Volume Rate
-------------- ------------- -------------
<S> <C> <C> <C>
INTEREST EARNING ASSETS
- -----------------------
Time deposits-Eurodollars... $ 16.7 $ 16.4 $ 0.3
Investment securities....... (40.1) (41.2) 1.1
Federal funds sold.......... (9.2) (8.9) (0.3)
Trading account securities.. 4.6 4.3 0.3
Loans:
- Domestic................ 27.6 46.7 (19.1)
- Foreign................. 26.2 26.6 (0.4)
------ ------ ------
Total interest income.... 25.8 43.9 (18.1)
------ ------ ------
INTEREST BEARING FUNDS
- ----------------------
Deposits:
Domestic................... (14.5) (7.0) (7.5)
Overseas................... 9.1 7.6 1.5
Funds borrowed:
Federal funds purchased.... (3.1) (5.0) 1.9
Other...................... 5.9 3.0 2.9
Long-term debt.............. 34.4 32.4 2.0
------ ------ ------
Total interest expense..... 31.8 31.0 0.8
------ ------ ------
NET INTEREST INCOME......... $ (6.0) $ 12.9 $(18.9)
- ------------------- ====== ====== ======
</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 six-month periods ended June 30, 1997 and 1996 was as follows
(in millions):
<TABLE>
<CAPTION>
Three Six
Months Ended Months Ended
June 30, June 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 $ 4.0 $ 10.2 $ 8.9
Interest income on non-performing loans
reflected in total
interest income....................... 2.4 2.3 5.0 4.4
------ ------ ------ ------
Net reduction in interest income........ $ 3.0 $ 1.7 $ 5.2 $ 4.5
====== ====== ====== ======
</TABLE>
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
- ---------------------------------------
The provision for loan losses for the second quarter of 1997 was $50.0
million, up $10.0 million from the provision recorded in the prior year second
quarter (excluding the $70 million Meridian merger-related provision discussed
below), and up $7.0 million over the provision recorded for the first quarter of
1997. 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 an
increase in commercial loan charge-offs experienced in the second quarter of
1997.
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 six-month periods ended June 30, 1997 and 1996 (in
millions):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- -------------------------
1997 1996 1997 1996
------------ -------------- ----------- ------------
<S> <C> <C> <C> <C>
Balance at beginning of period.......... $ 704.1 $ 665.9 $ 710.3 $ 670.3
Provision charged to expense............ 50.0 110.0(a) 93.0 148.8(a)
Loan charge-offs........................ (85.5) (94.6) (156.4) (159.1)
Recoveries of loans previously charged 22.8 23.9 44.5 45.2
off.................................... ------- ------- ------- -------
Net loan charge-offs.................. (62.7) (70.7) (111.9) (113.9)
------- ------- ------- -------
Balance at end of period................ $ 691.4 $ 705.2 $ 691.4 $ 705.2
======= ======= ======= =======
Ratios:
Net charge-offs (annualized) as a
percentage of average total loans...... 0.74% 0.89% 0.67% 0.72%
Allowance for loan losses as a
percentage of loans at 2.01 2.21
end of period.........................
Allowance for loan losses as a
percentage of non- 261.96 323.75
performing loans......................
</TABLE>
(a) Includes a provision of $70.0 million related to the second quarter of 1996
Meridian acquisition.CORESTATES FINANCIAL CORP AND SUBSIDIARIES
22
<PAGE>
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 six-month periods ended June 30, 1997 and 1996
(in millions):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1997 June 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..... $ 17.1 0.44% 27.3% $ 11.2 0.33% 15.9%
Real estate:
Construction and development loans.. 1.6 1.08 2.6 1.5 1.04 2.1
Other............................... 4.4 0.21 7.0 22.8 0.93 32.2
Consumer:
Credit card......................... 26.8 6.38 42.7 25.2(c) 5.98 35.6
Installment......................... 10.7 1.32 17.1 8.2 1.20 11.6
Other (b)............................ 2.1 0.41 3.3 1.8 0.37 2.6
------ ----- ------ -----
Total domestic...................... 62.7 0.79 100.0 70.7 0.93 100.0
------ ----- ------ -----
Foreign............................... - - - - - -
------ ----- ------ -----
Total net charge-offs............... $ 62.7 0.74 100.0% $ 70.7 0.89 100.0%
====== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1997 June 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..... $ 24.6 0.33% 22.0% $ 21.5 0.32% 18.9%
Real estate:
Construction and development loans.. 1.4 0.48 1.2 2.3 0.79 2.0
Other............................... 8.7 0.20 7.8 27.8 0.56 24.4
Consumer:
Credit card......................... 50.2 6.07 44.9 44.1(c) 5.28 38.7
Installment......................... 24.2 1.53 21.6 13.2 0.96 11.6
Other (b)............................ 2.8 0.27 2.5 5.0 0.50 4.4
------ ----- ------ -----
Total domestic...................... 111.9 0.72 100.0 113.9 0.75 100.0
------ ----- ------ -----
Foreign............................... - - - - - -
------ ----- ------ -----
Total net charge-offs............... $111.9 0.67 100.0% $113.9 0.72 100.0%
====== ===== ====== =====
- -------------------
</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.
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
- ------------------------------------------------
Non-performing assets at June 30, 1997 were 0.82% of total loans plus other
real estate owned and 0.60% of total assets. Total non-performing assets at
June 30, 1997 increased $36.7 million, or 15.0%, from December 31, 1996 and
$22.8 million, or 8.8% from March 31, 1997 primarily due to the addition of
three commercial loans totaling $51 million to non-accrual status.
The following table summarizes non-performing assets at June 30, 1997 and
December 31, 1996 (in millions):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------------- ------------
<S> <C> <C>
Non-accrual loans............... $263.9 $220.8
Renegotiated loans.............. - -
------ ------
Total non-performing loans.... 263.9 220.8
Other real estate owned (OREO).. 17.8 24.2
------ ------
Total non-performing assets... $281.7 $245.0
====== ======
</TABLE>
The following table reflects the distribution of non-performing assets by
loan type at June 30, 1997 and December 31, 1996 (in millions):
<TABLE>
<CAPTION>
June 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....... $143.1 0.92% $ 92.6 0.65%
------ ------
Real estate:
Construction and development.......... 5.1 0.87 5.6 1.00
Other loans........................... 111.2 1.27 118.5 1.29
OREO.................................. 17.8 - 24.2 -
------ ------
Total real estate.................... 134.1 1.44 148.3 1.52
------ ------
Other domestic loans (a)............... 4.4 0.17 4.1 0.17
------ ------
Total domestic non-performing assets.. 281.6 0.87 245.0 0.79
------ ------
Foreign loans........................... 0.1 - - -
------ ------
Total non-performing assets (b) (c)... $281.7 0.82 $245.0 0.75
====== ======
% Total assets........................ 0.60% 0.54%
====== ======
</TABLE>
(a) Includes loans to financial institutions and lease financing.
(b) Includes non-accrual loans, loans to purchase securities, and other real
estate owned. The table does not include loans of $110 million and $113
million at June 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 since such loans are well secured and in the process of collection.
(c) At June 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.
24
<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):
Quarter Six
---------------
First Second Months
------ ------- -------
Beginning balance.. $245 $259 $245
Additions.......... 72 107 179
Return to accrual.. (2) - (2)
Payments........... (35) (49) (84)
Charge-offs........ (21) (35) (56)
---- ---- ----
Net change........ 14 23 37
---- ---- ----
Ending balance..... $259 $282 $282
==== ==== ====
<TABLE>
<CAPTION>
NON-INTEREST INCOME
- -------------------
(in millions)
Three Months Ended Six Months Ended
June 30, % June 30, %
------------------ Increase -------------------- Increase
1997 1996 (Decrease) 1997 1996 (Decrease)
-------- -------- --------- ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Service charges on deposit accounts..... $ 61.5 $ 57.8 6.4% $ 117.9 $ 114.9 2.6%
Trust income............................ 45.9 40.9 12.2 90.2 81.4 10.8
Fees for international services......... 26.6 24.8 7.3 52.7 47.7 10.5
Debit and credit card fees.............. 23.8 22.1 7.7 45.5 42.6 6.8
Third party processing fees (a)......... 18.7 14.6 28.1 38.7 28.5 35.8
Income from investment in EPS, Inc...... 7.3 7.3 - 14.6 14.7 (0.7)
Income from trading activities.......... 9.9 6.5 52.3 15.8 13.1 20.6
Investment banking fees................. 8.0 6.1 31.1 13.0 11.5 13.0
Mortgage banking income................. 1.5 3.8 (60.5) 3.9 7.4 (47.3)
Investment securities gains............. 5.0 2.8 9.8 9.7
Corporate trust fees (b)................ - 0.7 - 1.4
Other non-interest income............... 18.2 26.6 (31.6) 39.3 50.6 (22.3)
------- ------- ------- ------
Non-interest income before
significant and unusual items.......... 226.4 214.0 5.8 441.4 423.5 4.2
Significant and unusual items........... - 14.6(c) - 14.6(c)
------- -------- ------- -------
Total non-interest income.............. $ 226.4 $ 228.6 (1.0) $ 441.4 $ 438.1 0.8
======= ======= ======= =======
</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 10 for more detail.
25
<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 second quarter of 1997 increased $12.4 million,
or 5.8%, from the prior year second quarter before significant and unusual
items. The increase primarily reflected growth in revenues from fee-based
services. The largest contributors to that growth were trust income which
increased $5.0 million, or 12.2%, third party processing fees which increased
$4.1 million, or 28.1%, and service charges on deposits which increased $3.7
million, or 6.4%. Growth in trust and asset management fees were primarily the
result of increased asset values in Personal Trust and Institutional Trust. The
increase in third party processing fees was mostly due to the acquisition of
five check processing centers and the growth in service charges on deposits was
primarily related to product repricing effective April 1, 1997. Also
contributing solid growth to second quarter of 1997 non-interest income were
fees for international services, debit and credit card fees, income from trading
activities and investment banking fees. Second quarter growth was partially
offset by declines in mortgage banking income and lower gains on sales of loans.
Non-interest income for the 1997 six-month period increased $17.9 million, or
4.2%, from 1996 six month non-interest income before significant and unusual
items. The six month increase also reflected growth in fee-based services,
partially offset by declines in mortgage banking income and lower gains on sales
of loans.
<TABLE>
<CAPTION>
NON-FINANCIAL EXPENSES
- ----------------------------------------
(in millions)
Three Months Ended
June 30, % Six Months Ended %
--------------------- Increase June 30, Increase
1997 1996 (Decrease) 1997 1996 (Decrease)
------- ------- ---------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Salaries, wages and benefits................. $ 204.1 $ 206.5 (1.2)% $ 407.7 $ 414.8 (1.7)%
Outside services hired....................... 39.7 40.5 (2.0) 72.5 76.0 (4.6)
Net occupancy expense........................ 37.4 37.6 (0.5) 74.6 80.3 (7.1)
Equipment expense............................ 31.1 30.9 0.6 62.4 60.9 2.5
Amortization of intangible assets............ 9.6 10.2 (5.9) 19.2 20.3 (5.4)
FDIC premiums................................ 1.3 1.5 (13.3) 2.7 3.0 (10.0)
OREO expense (income)........................ (0.1) 1.0 - 0.2
Other operating expenses..................... 79.9 79.6 0.4 155.8 154.4 0.9
------- ------- ------- -------
Non-financial expense before
restructuring and merger-related charges.... 403.0 407.8 (1.2) 794.9 809.9 (1.9)
Restructuring and merger-related charges..... - 103.7 (a) - 117.8 (a,b)
------- ------- ------- -------
Total non-financial expense................ $ 403.0 $ 511.5 (21.2) $ 794.9 $ 927.7 (14.3)
======= ======= ======= =======
</TABLE>
(a) Reflects charges of $148.9 million related to the second quarter of 1996
acquisition of Meridian, partially offset by credits of $45.2 million
related to gains on sales of branches and the curtailment of pension
benefits.
(b) Reflects charges of $16.6 million related to the first quarter of 1996
acquisition of United Counties Bancorporation, partially offset by credits
of $2.5 million related to gains on the curtailment of pension benefits and
sales of branches resulting from prior process redesigns.
Before 1996 restructuring and merger-related charges, total non-financial
expenses for the second quarter of 1997 and 1997 six-month period declined $4.8
million, or 1.2%, and $15.0 million, or 1.9%, respectively, from the comparable
1996 periods. These decreases primarily reflected the impact of merger-related
synergies.
26
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED
CAPITAL MANAGEMENT
- ------------------
CoreStates' capital strength provides the resources and flexibility to,
capitalize on business growth and acquisition opportunities. CoreStates'
capital position at June 30, 1997 under risk-based capital guidelines was $3.7
billion, or 8.7%, of risk-weighted assets, for Tier 1 capital and $5.2 billion,
or 12.4%, 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 Boards 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 8.2% at June 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
June 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 8.7% 12.4% 8.2%
subsidiaries...........................
CoreStates Bank, N.A.................... 6.9 11.1 6.6
CoreStates Bank of Delaware, N.A........ 6.8 11.4 5.9
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. 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 second
quarter of 1997 and $0.42 per share in the second quarter of 1996. The common
dividend payout ratio was 48.5% for the second quarter of 1997, compared to
47.7%, for the second quarter of 1996.
27
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED
INTEREST RATE RISK MANAGEMENT
- -----------------------------
Interest rate risk refers to potential changes in current and future net
interest income resulting from changes in interest rates, product spreads and
mismatches in the repricing between interest rate sensitive assets and
liabilities. At CoreStates, measurement of near term interest rate risk focuses
on potential changes in net interest income identified through computer
simulations against both rising and falling interest rates. Longer term
repricing risks are measured using potential changes in the present value of
future income streams inherent in current positions. 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.
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.
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
- -----------------------------
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 June 30,
1997, the current cost to replace CoreStates' derivatives portfolio was $160,
million. This assumes that only counterparties for whom it would be favorable
to default would do so.
Interest Rate Risk Related Derivative Activities - CoreStates' use of
derivatives for interest rate risk management falls into three categories:
interest sensitivity adjustments, spread protection and the hedging of
anticipated asset sales. The following schedule reflects by interest rate risk
management category, the outstanding derivative positions as of June 30, 1997,
the major balance sheet category to which they relate, and the associated
unrealized gains/losses:
29
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED
INTEREST RATE RISK MANAGEMENT - continued
- -----------------------------
<TABLE>
<CAPTION>
OUTSTANDING INTEREST RATE RISK RELATED DERIVATIVES
- --------------------------------------------------
At June 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................... $4,772 $1,709 $ 8 - $ 6,489
Unrealized gains.................. 49 1 - - 50
Unrealized losses................. (29) - - - (29)
Deposits and other borrowings:
Notional amount................... 2,908 - 924 $ 100 3,932
Unrealized gains.................. 18 7 - 25
Unrealized losses................. (18) - - - (18)
Long-term debt:
Notional amount................... 1,061 - - 150 1,211
Unrealized gains.................. 10 - - 3 13
Unrealized losses................. (27) - - - (27)
SPREAD PROTECTION:
Assets (primarily loans)
Notional amount................... 76 - 515 - 591
Unrealized gains.................. - - 2 - 2
Unrealized losses................. - - - - -
Deposits and other borrowings:
Notional amount................... 62 - 86 - 148
Unrealized gains.................. - - 3 - 3
Unrealized losses................. - - - - -
ANTICIPATED ASSET SALES:
Notional amount................... - - - 143 143
Unrealized gains.................. - - - 2 2
Unrealized losses................. - - - - -
TOTAL:
Notional amount..................... $8,879 $1,709 $1,533 $ 393 $12,514
====== ====== ====== ====== =======
Unrealized gains.................... $ 77 $ 1 $ 12 $ 5 $ 95
====== ====== ====== ====== =======
Unrealized losses................... $ (74) $ - $ - $ - $ (74)
====== ====== ====== ====== =======
Net unrealized gains (losses)....... $ 3 $ 1 $ 12 $ 5 $ 21
====== ====== ====== ====== =======
</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 June 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.
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
- -----------------------------
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 $453 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 June 30, 1997 and $21.5 million in the quarter ended June 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 June 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................ $ 2,471 5.65% 5.65% - $ 1,961 5.63% 5.63% -
Federal funds sold &
trading account assets...... 489 7.25 7.25 - 522 6.31 6.31 -
Investment securities........ 3,746 6.40 6.35 0.05% 4,883 6.40 6.33 0.07%
Loans........................ 33,675 8.97 8.86 0.11 31,665 9.01 8.90 0.11
------- -------
TOTAL EARNING ASSETS......... $40,381 8.51 8.41 0.10 $39,031 8.47 8.38 0.09
======= =======
INTEREST BEARING FUNDS
Savings, NOW, regular MMA.... $ 8,254 0.79 0.97 (0.18) $10,585 1.66 1.95 (0.29)
Premium MMA.................. 5,064 4.17 4.17 - 3,155 3.83 3.83 -
Certificates................. 8,628 5.15 5.17 (0.02) 9,230 5.08 5.22 (0.14)
------- -------
Total retail................ 21,946 3.29 3.36 (0.07) 22,970 3.34 3.53 (0.19)
------- -------
Commercial & foreign deposits 2,577 5.32 5.32 - 1,531 4.84 4.85 (0.01)
Federal funds purchased &
short-term borrowings....... 3,205 5.69 5.69 - 2,808 5.13 5.18 (0.05)
Long-term debt............... 3,579 6.43 6.60 (0.17) 2,449 6.33 6.53 (0.20)
------- -------
Total wholesale............. 9,361 5.87 5.93 (0.06) 6,788 5.50 5.59 (0.09)
------- -------
TOTAL INTEREST BEARING FUNDS. $31,307 4.05 4.12 (0.07) $29,758 3.82 3.98 (0.16)
======= =======
</TABLE>
31
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED
INTEREST RATE RISK MANAGEMENT - continued
- -----------------------------
It is important to note that derivatives usage, its impact on individual
balance sheet items and fluctuations in fair value should be viewed in the
context of overall 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 June 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 June 30, 1997.
32
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED
INTEREST RATE RISK MANAGEMENT - continued
- -----------------------------
Repricing Schedule of Interest Rate Swaps
- -----------------------------------------
At June 30, 1997
- ----------------
(in millions)
<TABLE>
<CAPTION>
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............. $1,320 $1,621 $1,398 $1,608 $1,142 $1,049 $8,138
Rate................. 6.27% 6.37% 6.75% 6.46% 6.62% 6.71% 6.52%
Pay Notional............. $8,138 $8,138
Rate................. 5.83% 5.83%
Pay Fixed/Receive Floating:
Pay Notional............. $ 10 $ 34 $ 44
Rate................. 8.60% 8.95% 8.87%
Receive Notional............. $ 44 $ 44
Rate................. 5.91% 5.91%
Receive Floating/Pay Floating:
(Basis Swaps)
Notional............. $ 151 $ 151
Receive Rate................. 5.75% 5.75%
Pay Rate................. 5.58% 5.58%
Receive Fixed/Pay Floating(a):
(Forward Start)
Receive Notional............. $ 50 $ 285 $ 211 $ 546
Rate................. 7.45% 6.66% 6.01% 6.48%
Start Date Notional............. $ 104 $ 392 $ 50 $ 546
- --------------------
</TABLE>
(a) Pay rate will be determined on forward start date.
The following schedule illustrates CoreStates' interest rate risk related
derivative activity during the second quarter of 1997:
Activity in Derivatives Products
- --------------------------------
For the Quarter Ended June 30, 1997
- -----------------------------------
(in millions)
<TABLE>
<CAPTION>
Interest Interest Interest
rate rate rate caps Other
Notional Amounts swaps futures and floors derivatives Total
- ---------------- -------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
As of March 31, 1997................. $8,893 $ 4,715 $1,551 $ 368 $15,527
Additions............................. 506 1,193 19 150 1,868
Terminated/restructured contracts(a).. (36) - - - (36)
Maturities/amortization............... (484) (4,199) (37) (125) (4,845)
------ ------- ------ ----- -------
As of June 30, 1997................... $8,879 $ 1,709 $1,533 $ 393 $12,514
====== ======= ====== ===== =======
- --------------------
</TABLE>
(a)Gains and losses resulting from early terminations of these contracts are
deferred and amortized over the remaining term of the underlying assets or
liabilities. As of June 30, 1997, CoreStates had $2.4 million of deferred
gains and $7.1 million of deferred losses related to terminated derivative
contracts
33
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED
INTEREST RATE RISK MANAGEMENT - continued
- -----------------------------
The most significant change in CoreStates' derivatives position during the
quarter was the decline in interest rate futures. A decrease in retail savings
certificates activity along with increased placement and loan volumes reduced
the need for short-term hedges.
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 June 30, 1997.
<TABLE>
<CAPTION>
TRADING AND CUSTOMER RELATED DERIVATIVES
- ----------------------------------------
At June 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.......... $ 691 $ 2.3 $ 4.0 $ (1.7)
CoreStates pays fixed.............. 820 (4.1) 2.0 (6.1)
Rate Locks:
CoreStates receives fixed.......... 220 0.2 0.2 -
CoreStates pays fixed.............. 210 (0.1) - (0.1)
Interest Rate Caps/Floors:
Sold............................... 1,027 (3.4) - (3.4)
Purchased.......................... 1,126 3.4 3.4 -
Futures............................. 96 0.5 0.6 (0.1)
Commitments to purchase/sell
whole mortgage loans and
securities (including when-issued
securities):
Sold.............................. 46 (0.1) 0.1 (0.2)
Purchased......................... 100 - - -
Other Options:
Sold............................... 309 10.8 11.0 (0.2)
Purchased.......................... 316 0.8 0.8 -
Foreign exchange contracts.......... 2,541 1.3 42.8 (41.5)
------ ----- ----- ------
Total Trading and Customer Related
Derivatives........................ $7,502 $11.6 $64.9 $(53.3)
====== ====== ====== ======
- --------------------
</TABLE>
(a) Average net assets (liabilities) during 1997 were substantially the same as
the net assets (liabilities) at June 30, 1997.
34
<PAGE>
<TABLE>
<CAPTION>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEETS AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES
Three Months Ended
-----------------------------------------------------------------------------------------------------
June 30, 1997 March 31, 1997 June 30, 1996
--------------------------------- -------------------------------- ------------------------------
Average Income/ Average Income/ Average Income/
balance Rate expense balance Rate expense balance Rate expense
---------- ------ ----------- ---------- ------ ---------- --------- ----- ----------
(000,000) (000) (000,000) (000) (000,000) (000)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
- ---------------------------
Time deposits, principally
Eurodollars (a)........... $ 2,471 5.65% $ 34,823 $ 2,457 5.70% $ 34,562 $ 1,961 5.63% $ 27,449
Investment securities (b):
U.S. Government............ 2,228 6.16 34,220 2,440 6.10 36,699 3,484 6.08 52,684
State and municipal........ 418 7.59 7,928 409 7.68 7,851 506 8.43 10,661
Other...................... 1,100 6.43 17,625 993 6.04 14,779 893 6.44 14,304
--------- -------- --------- -------- --------- --------
Total investment
securities............... 3,746 6.40 59,773 3,842 6.26 59,329 4,883 6.40 77,649
--------- -------- --------- -------- --------- --------
Federal funds sold......... 172 6.01 2,576 178 4.80 2,106 442 5.92 6,509
Trading account securities. 317 7.91 6,265 139 7.27 2,526 80 8.39 1,677
Loans (b) (c) (d):
Domestic:
Commercial, industrial
and other................ 14,891 8.98 333,208 14,225 8.86 310,728 13,132 8.96 292,575
Real estate............... 9,300 8.16 189,096 9,450 8.32 193,958 10,353 8.59 221,000
Consumer.................. 4,859 12.13 146,899 4,790 12.01 141,846 4,401 11.48 125,583
Financial institutions.... 849 6.68 14,133 797 6.62 13,015 814 6.10 12,345
Factoring receivables..... 490 9.55 11,664 430 10.74 11,387 525 10.50 13,710
Lease financing........... 1,192 7.88 23,481 1,214 7.89 23,935 1,186 8.12 24,078
Foreign.................... 2,094 6.65 34,732 1,897 6.23 29,120 1,254 6.36 19,823
--------- -------- --------- -------- --------- --------
Total loans, net of
discounts.............. 33,675 8.97 753,213 32,803 8.95 723,989 31,665 9.01 709,114
--------- -------- --------- -------- --------- --------
Total interest earning
assets (d)............. $ 40,381 8.51 856,650 $ 39,419 8.46 822,512 $ 39,031 8.47 822,398
========= ----- -------- ========= ----- -------- ========= ----- --------
FUNDING SOURCES
- ---------------
Interest Bearing
Liabilities (b):
Deposits in domestic offices:
Commercial................ $ 1,364 5.57 18,952 $ 885 5.31 11,587 $ 596 5.12 7,582
NOW accounts (e).......... 411 1.03 946 439 0.84 819 1,713 0.86 3,375
Money Market Accounts (e). 9,056 2.53 56,660 8,610 2.37 50,104 7,307 2.66 48,095
Consumer savings.......... 3,851 1.10 10,597 4,195 1.40 14,511 4,720 1.82 21,412
Consumer certificates..... 8,628 5.15 110,699 8,797 5.15 111,818 9,230 5.08 116,648
Time deposits of overseas
branches and subsidiaries. 1,213 5.04 15,249 1,298 4.70 15,040 935 4.67 10,850
--------- -------- --------- -------- --------- --------
Total interest bearing
deposits (e)........... 24,523 3.50 213,103 24,224 3.42 203,879 24,501 3.44 207,962
--------- -------- --------- -------- --------- --------
Short-term funds borrowed:
Federal funds purchased... 1,475 5.66 20,803 1,214 5.20 15,557 1,460 5.03 18,254
Commercial paper.......... 872 5.64 12,268 728 5.46 9,798 1,059 5.35 14,093
Other..................... 858 5.80 12,414 603 5.12 7,609 289 4.86 3,495
--------- -------- --------- -------- --------- --------
Total short-term funds
borrowed............... 3,205 5.69 45,485 2,545 5.25 32,964 2,808 5.13 35,842
--------- -------- --------- -------- --------- --------
Long-term debt............. 3,579 6.43 57,418 3,355 6.57 54,382 2,449 6.33 38,556
--------- -------- --------- -------- --------- --------
Total interest bearing
liabilities............ 31,307 4.05 316,006 30,124 3.92 291,225 29,758 3.82 282,360
Portion of non-interest
bearing funding sources... 9,074 9,295 9,273
--------- -------- --------- -------- --------- --------
Total funding sources... $ 40,381 3.14 316,006 $ 39,419 2.99 291,225 $ 39,031 2.91 282,360
========= ----- -------- ========= ----- -------- ========= ----- --------
Net interest income and
net interest margin....... 5.37% $540,644 5.47% $531,287 5.56% $540,038
===== ======== ===== ======== ===== ========
</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.
35
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEETS AND TAXABLE EQUIVALENT INCOME/EXPENSE AND
RATES - CONTINUED
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------------------------------
June 30, 1997 March 31, 1997 June 30, 1996
---------------------------------- --------------------------------- ----------------------------
Average Income/ Average Income/ Average Income/
balance Rate expense balance Rate expense balance Rate expense
----------- ------ ----------- ----------- ------ ---------- --------- ----- --------
(000,000) (000) (000,000) (000) (000,000) (000)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NON-INTEREST EARNING ASSETS
- ---------------------------
Cash....................... $ 2,838 $ 2,796 $ 2,833
Allowance for loan losses.. (701) (707) (712)
Other assets............... 2,606 2,595 2,443
--------- --------- ---------
Total non-interest
earning assets........... $ 4,743 $ 4,684 $ 4,564
========= ========= =========
TOTAL AVERAGE ASSETS....... $ 45,124 $ 44,103 $ 43,595
- --------------------------- ========= ========= =========
NON-INTEREST BEARING
FUNDING SOURCES
- ---------------------------
Demand deposits:
Domestic.................. $ 7,779 $ 7,737 $ 7,637
Foreign................... 379 395 372
Other liabilities.......... 2,255 2,177 1,981
Shareholders' equity....... 3,404 3,670 3,847
Non-interest bearing
funding sources used to
fund earning assets....... (9,074) (9,295) (9,273)
--------- --------- ---------
Total net non-interest
bearing funding
sources................. $ 4,743 $ 4,684 $ 4,564
========= ========= =========
SUPPLEMENTARY AVERAGES
- ---------------------------
Net Federal funds purchased $ 1,303 5.61% $18,227 $ 1,036 5.27% $13,451 $ 1,018 4.64% $11,745
Certificates of deposit in
domestic
offices over $100,000..... 1,954 5.52 26,890 1,481 5.37 19,620 1,123 4.95 $13,834
Average prime rate......... 8.50 8.27 8.25
</TABLE>
36
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEETS AND TAXABLE EQUIVALENT INCOME/EXPENSE AND
RATES
<TABLE>
<CAPTION>
Six Months Ended
----------------------------------------------------------------------------------
June 30, 1997 June 30, 1996
-------------------------------------- -----------------------------------------
Average Income/ Average Income/
balance Rate expense balance Rate expense
------------ --------- ----------- ----------- ---------- --------------
(000,000) (000) (000,000) (000)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
- -----------------------
Time deposits, principally Eurodollars
(a).................................... $ 2,464 5.68% $ 69,385 $ 1,880 5.64% $ 52,692
Investment securities (b):
U.S. Government......................... 2,334 6.13 70,919 3,652 6.06 110,031
State and municipal..................... 414 7.62 15,779 536 8.00 21,439
Other................................... 1,047 6.24 32,404 932 5.98 27,724
--------- ---------- --------- ----------
Total investment securities............ 3,795 6.33 119,102 5,120 6.25 159,194
--------- ---------- --------- ----------
Federal funds sold...................... 175 5.40 4,682 488 5.72 13,892
Trading account securities.............. 228 7.71 8,791 113 7.43 4,200
Loans (b) (c) (d):
Domestic:
Commercial, industrial and other....... 14,560 8.92 643,936 12,952 9.03 581,602
Real estate............................ 9,374 8.24 383,054 10,503 8.63 450,616
Consumer............................... 4,825 12.07 288,745 4,426 11.54 254,025
Financial institutions................. 823 6.65 27,148 805 6.02 24,108
Factoring receivables.................. 460 10.11 23,051 513 10.68 27,243
Lease financing........................ 1,203 7.88 47,416 1,179 8.16 48,093
Foreign................................. 1,996 6.45 63,852 1,170 6.47 37,618
--------- ---------- --------- ----------
Total loans, net of discounts........ 33,241 8.96 1,477,202 31,548 9.07 1,423,305
--------- ---------- --------- ----------
Total interest earning assets (d).... $ 39,903 8.49 1,679,162 $ 39,149 8.49 1,653,283
========= ----- ---------- ========= ----- ----------
FUNDING SOURCES
- ---------------
Interest Bearing Liabilities (b):
Deposits in domestic offices:
Commercial............................. $ 1,126 5.47 30,539 $ 642 5.28 16,863
NOW accounts (e)....................... 425 0.93 1,765 2,304 1.09 11,364
Money Market Accounts (e).............. 8,834 2.45 106,764 6,815 2.80 94,663
Consumer savings....................... 4,022 1.26 25,108 4,734 1.90 44,701
Consumer certificates.................. 8,712 5.15 222,517 9,122 5.15 233,612
Time deposits of overseas branches
and subsidiaries....................... 1,255 4.87 30,289 923 4.62 21,217
--------- ---------- --------- ----------
Total interest bearing deposits (e).. 24,374 3.46 416,982 24,540 3.49 422,420
--------- ---------- --------- ----------
Short-term funds borrowed:
Federal funds purchased................ 1,346 5.45 36,360 1,542 5.14 39,418
Commercial paper....................... 800 5.56 22,066 1,052 5.43 28,424
Other.................................. 731 5.52 20,023 324 4.81 7,757
--------- ---------- --------- ----------
Total short-term funds borrowed...... 2,877 5.50 78,449 2,918 5.21 75,599
--------- ---------- --------- ----------
Long-term debt.......................... 3,468 6.50 111,800 2,444 6.37 77,405
--------- ---------- --------- ----------
Total interest bearing liabilities... 30,719 3.99 607,231 29,902 3.87 575,424
Portion of non-interest bearing funding
sources................................ 9,184 9,247
--------- ---------- --------- ----------
Total funding sources................ $ 39,903 3.07 607,231 $ 39,149 2.95 575,424
========= ----- ---------- ========= ----- ----------
Net interest income and net interest
margin................................. 5.42% $1,071,931 5.54% $1,077,859
===== ========== ===== ==========
</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.
37
<PAGE>
<TABLE>
<CAPTION>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEETS AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES - CONTINUED
Six Months Ended
--------------------------------------------------------------------------------------
June 30, 1997 June 30, 1996
---------------------------------------- -------------------------------------------
Average Income/ Average Income/
balance Rate expense balance Rate expense
------------ ----------- ----------- ------------- ------------ ------------
(000,000) (000) (000,000) (000)
<S> <C> <C> <C> <C> <C> <C>
NON-INTEREST EARNING ASSETS
- ---------------------------
Cash.................................... $ 2,817 $ 2,864
Allowance for loan losses............... (704) (693)
Other assets............................ 2,600 2,380
--------- ---------
Total non-interest earning assets...... $ 4,713 $ 4,551
========= =========
TOTAL AVERAGE ASSETS.................... $ 44,616 $ 43,700
- -------------------- ========= =========
NON-INTEREST BEARING FUNDING SOURCES
- ------------------------------------
Demand deposits:
Domestic............................... $ 7,758 $ 7,635
Foreign................................ 387 381
Other liabilities....................... 2,216 1,894
Shareholders' equity.................... 3,536 3,888
Non-interest bearing funding sources
used to fund earning assets............ (9,184) (9,247)
--------- ---------
Total net non-interest bearing funding
sources.............................. $ 4,713 $ 4,551
========= =========
SUPPLEMENTARY AVERAGES
- ----------------------
Net Federal funds purchased............. $ 1,170 5.46% $31,678 $ 1,054 4.87% $25,526
Certificates of deposit in domestic
offices over $100,000.................. 1,719 5.46 46,510 1,165 5.11 29,568
Average prime rate...................... 8.43 8.29
</TABLE>
38
<PAGE>
PART II. OTHER INFORMATION
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------
The 1997 Annual Meeting of Shareholders ("the Meeting") of CoreStates was held
on April 15, 1997. Notice of the Meeting was mailed to shareholders on or
about March 4, 1997, together with proxy solicitation materials prepared in
accordance with Section 14(a) of the Securities Exchange Act of 1934, as
amended, and the regulations promulgated thereunder.
The matters voted on at the Meeting were as follows:
1. the election of five directors (Matter No. 1);
2. the approval of the adoption of the Amended and Restated Directors'
Stock Plan (1997) (Matter No. 2);
3. the approval of the adoption of the Amended and Restated Long-Term
Incentive Plan (1997) (Matter No. 3); and
4. the ratification of the selection of Ernst & Young LLP as
CoreStates' independent auditors for the fiscal year ending
December 31, 1997 (Matter No. 4).
Matter No. 1
------------
There was no solicitation in opposition to management's nominees for election
to the Board of Directors as listed in the Proxy Statement dated March 4,
1997. All nominees for election to the Board of Directors were elected at the
Meeting. The number of votes cast for or withheld for each of the nominees
for election to the Board of Directors were as follows:
Nominee For Withheld
------- ----------- ---------
Ernest E. Jones 166,743,010 1,679,108
Marlin Miller, Jr. 166,919,815 1,502,303
James M. Seabrook 166,987,975 1,434,143
Peter S. Strawbridge 166,843,133 1,578,985
Judith M. von Seldeneck 166,880,540 1,541,578
Matter Nos. 2, 3, and 4 were approved by shareholders at the Meeting. The
votes cast on each of these matters were as follows:
Abstentions and
Matter For Against Broker Nonvotes
- -------- ----------- ---------- ---------------
No. 2 143,632,099 6,569,738 2,482,471
No. 3 119,742,208 30,507,345 2,434,756
No. 4 166,716,543 879,439 826,135
39
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES - CONTINUED
Item 6: EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------
(a) Exhibits - The following exhibits are filed herewith in connection with
registration statement filed from time to time by the
Corporation:
11 Computation of Per Share Earnings
12.1 Computation of Ratio of Earnings to Fixed Charges (Consolidated)
12.2 Computation of Ratio of Earnings to Fixed Charges (Combined
CoreStates Parent Company and Corestates Capital 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: April 15, 1997
---------------
Item(s) Reported: Reporting under Item 5 the information set forth in
-----------------
the earnings news release of CoreStates Financial Corp and the
consolidated financial highlights (unaudited) of CoreStates Financial
Corp.
2. Date of Report: May 20, 1997
---------------
Item(s) Reported: Reporting under Item 5 the information set forth
-----------------
in the news release of CoreStates Financial Corp announcing the
resignation of Samuel A. McCullough from the board of directors of
CoreStates Financial Corp.
40
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
SIGNATURE
- ---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CORESTATES FINANCIAL CORP
Date: August 13, 1997 By: /s/ Christopher J. Carey
----------------------------
Christopher J. Carey
Senior Vice President and Controller
(Principal Accounting Officer)
41
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ----------------------------
1997 1996 1997 1996
------------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
(A) Net Income....................... $199,726 $ 79,597 $397,839 $256,741
======== ======== ======== ========
EARNINGS PER SHARE
Based on average common shares
- ------------------------------
outstanding
- -----------
(B) Average shares outstanding....... 204,982 219,478 208,111 219,495
======== ======== ======== ========
(A/B) Net income........................ $ 0.97 $ 0.36 $ 1.91 $ 1.17
======== ======== ======== ========
Based on average common and common
- ----------------------------------
equivalent shares outstanding
- -----------------------------
Primary:
(C) Average common equivalent shares. 1,840 1,963 1,813 2,300
======== ======== ======== ========
(D) Average common and common
equivalent shares (B + C)....... 206,822 221,441 209,924 221,795
======== ======== ======== ========
(A/D) Net income........................ $ 0.97(1) $ 0.36(1) $ 1.90(1) $ 1.16(1)
======== ======== ======== ========
Fully diluted:
(E) Average common equivalent shares. 1,724 2,096 1,805 2,300
======== ======== ======== ========
(F) Average common and common
equivalent shares (B + E)...... 206,706 221,574 209,916 221,795
======== ======== ======== ========
(A/F) Net Income........................ $ 0.97(1) $ 0.36(1) $ 1.90(1) $ 1.16(1)
======== ======== ======== ========
- -----------------------------------------
</TABLE>
(1) Dilution is less than 3%.
42
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS FROM CONTINUING OPERATIONS
TO FIXED CHARGES OF CONTINUING OPERATIONS
CONSOLIDATED
Six Months Ended June 30, 1997
- ------------------------------
(in thousands)
1. Income from continuing operations before extraordinary
items and income taxes...................................... $ 613,953
==========
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............ $ 204,920
B. Interest on deposits........................................ 416,982
----------
C. Total fixed charges (line 2A + line 2B)..................... $ 621,902
==========
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).......... $ 818,873
==========
B. Including interest on deposits (line 1 + line 2C).......... $1,235,855
==========
4. Ratio of earnings (as defined) to fixed charges:
A. Excluding interest on deposits (line 3A/line 2A)........ 4.00x
B. Including interest on deposits (line 3B/line 2C)........ 1.99
43
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
EXHIBIT 12.2
COMPUTATION OF RATIO OF EARNINGS FROM CONTINUING OPERATIONS
TO FIXED CHARGES OF CONTINUING OPERATIONS
COMBINED CORESTATES (PARENT ONLY) AND CORESTATES CAPITAL CORP
Six Months ended June 30, 1997
- ------------------------------
(in thousands)
1. Income before income taxes and equity in undistributed
income of subsidiaries....................................... $ 296,377
2. Fixed charges - interest expense, amortization of debt
issuance costs and one-third of rental expenses, net of
income from subleases........................................ 103,121
-------
3. Income before taxes and equity in undistributed income of
subsidiaries, plus fixed charges............................. $ 399,498
=======
4. Ratio of earnings (as defined) to fixed charges
(line 3/line 2).............................................. 3.87x
44
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CORESTATES FINANCIAL CORP CONSOLIDATED BALANCE SHEET AS
OF JUNE 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 SIX MONTHS
ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,121,012
<INT-BEARING-DEPOSITS> 2,767,001
<FED-FUNDS-SOLD> 333,896
<TRADING-ASSETS> 301,851
<INVESTMENTS-HELD-FOR-SALE> 2,113,698
<INVESTMENTS-CARRYING> 1,606,059
<INVESTMENTS-MARKET> 1,608,859
<LOANS> 34,448,032
<ALLOWANCE> 691,380
<TOTAL-ASSETS> 46,846,692
<DEPOSITS> 34,212,681
<SHORT-TERM> 3,348,031
<LIABILITIES-OTHER> 1,627,033
<LONG-TERM> 3,695,230
0
0
<COMMON> 223,599
<OTHER-SE> 2,954,003
<TOTAL-LIABILITIES-AND-EQUITY> 46,846,692
<INTEREST-LOAN> 1,471,522
<INTEREST-INVEST> 114,230
<INTEREST-OTHER> 81,935
<INTEREST-TOTAL> 1,667,687
<INTEREST-DEPOSIT> 416,982
<INTEREST-EXPENSE> 607,231
<INTEREST-INCOME-NET> 1,060,456
<LOAN-LOSSES> 93,000
<SECURITIES-GAINS> 9,834
<EXPENSE-OTHER> 250,157
<INCOME-PRETAX> 613,953
<INCOME-PRE-EXTRAORDINARY> 613,953
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 397,839
<EPS-PRIMARY> 1.91
<EPS-DILUTED> 1.91
<YIELD-ACTUAL> 5.42
<LOANS-NON> 263,900
<LOANS-PAST> 110,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 710,300
<CHARGE-OFFS> 156,400
<RECOVERIES> 44,500
<ALLOWANCE-CLOSE> 691,400
<ALLOWANCE-DOMESTIC> 656,400
<ALLOWANCE-FOREIGN> 35,000
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
