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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[_] TRANSITION REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File Number 0-6879
CORESTATES FINANCIAL CORP
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-1899716
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Philadelphia National Bank Building
Broad & Chestnut Streets
P.O. Box 7618
Philadelphia, Pennsylvania 19101-7618 19101
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 215-786-1364
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Class Upon Which Registered
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Common Stock, $1.00 par value New York Stock Exchange
Common Stock, $1.00 par value The Philadelphia Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of registrant
based on the closing sale price on February 28, 1997 was approximately
$11,042,988,376.50. For this purpose only, all directors and executive officers
of the registrant were assumed to be affiliates. The number of shares of Common
Stock outstanding at February 28, 1997 was 214,617,361.
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DOCUMENTS INCORPORATED BY REFERENCE
1. Annual Report to Shareholders for the fiscal year ended December 31, 1996,
portions of which are incorporated by reference in Parts I, II and IV of
this Report.
2. CoreStates Financial Corp 1997 Proxy Statement, portions of which are
incorporated by reference in Part III of this Annual Report. The
incorporation by reference herein of portions of the Proxy Statement shall
not be deemed to specifically incorporate by reference the information
referred to in Item 402(a)(8) of Regulation S-K.
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INDEX
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PART I PAGE
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Item 1 Business 2
Item 2 Properties 23
Item 3 Legal Proceedings 24
Item 4 Submission of Matters to a Vote of Security Holders 24
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 24
Item 6 Selected Financial Data 25
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 25
Item 8 Financial Statements and Supplementary Data 25
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure *
PART III
Item 10 Directors and Executive Officers of the Registrant 26
Item 11 Executive Compensation 26
Item 12 Security Ownership of Certain Beneficial Owners and
Management 26
Item 13 Certain Relationships and Related Transactions 26
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K 27-28
SIGNATURES 41-42
EXHIBIT INDEX 43
*Not Applicable
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PART I
Item 1 - Business
CoreStates Financial Corp ("CoreStates") is a bank holding company
registered under the Federal Bank Holding Company Act of 1956, as amended (the
"Act") and incorporated under the laws of Pennsylvania. At December 31, 1996,
CoreStates had total consolidated assets of approximately $45.5 billion and
shareholders' equity of approximately $3.7 billion. Based on December 31, 1996
rankings of bank holding companies by total consolidated assets, CoreStates was
believed to be the 21st largest bank holding company in the United States at
such date.
Effective April 9, 1996, Meridian Bancorp, Inc. ("Meridian"), a regional
bank holding company headquartered in Reading, Pennsylvania, was merged with and
into CoreStates. Approximately 81.1 million shares of CoreStates' common stock
were issued in connection with the merger, which was accounted for as a pooling
of interests. Accordingly, all financial information has been restated as if
the entities were combined for all periods presented. On February 23, 1996,
United Counties Bancorporation ("United Counties"), a $1.6 billion asset New
Jersey bank holding company, was merged with and into Meridian in a transaction
also accounted for as a pooling of interests.
The in-market acquisition of Meridian has combined two solidly performing
banking organizations, and has strengthened CoreStates' market positions in
consumer, small business and middle market banking in eastern Pennsylvania,
northern Delaware, and central and southern New Jersey. Operating efficiencies
achieved in 1996 as a result of the merger were approximately $47 million on a
pre-tax basis.
Banking Subsidiaries
The lead banking subsidiary of CoreStates is CoreStates Bank, N.A.
("CoreStates Bank"), a national banking association with executive offices
located in Philadelphia, Pennsylvania. In its continuing effort to streamline
and eliminate duplicate services, and to further the goal of effectively
consolidating all acquisitions under the CoreStates name, CoreStates proceeded
throughout 1996 on a course of merger activity related to the
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acquired entities. Accordingly, on February 23, 1996, United Counties Trust
Company merged with and into Meridian Bank, New Jersey. On June 14, l996,
Meridian Bank, New Jersey, merged with and into New Jersey National Bank
("NJNB"), a national bank with executive offices located in Ewing Township, New
Jersey. On June 27, 1996, Meridian Bank merged with and into CoreStates Bank.
Finally, on December 6, 1996, NJNB merged with and into CoreStates Bank.
Related to this merger process, the former Meridian Pennsylvania and Delaware
banking branches were consolidated into CoreStates' branch system in the third
quarter of 1996 and the former Meridian and United Counties New Jersey branches
were consolidated into CoreStates' system in the fourth quarter of 1996.
CoreStates Bank of Delaware, N.A. ("CBD"), a national banking association
with its executive office located in New Castle County, Delaware, remains as a
principal banking subsidiary of CoreStates. CoreStates Bank and CBD are
sometimes referred to herein as the "Banking Subsidiaries". Through CoreStates
Bank and CBD, CoreStates engages in the business of providing wholesale banking
services, consumer financial services which includes retail banking, and trust &
investment management services.
As of December 31, 1996, the Banking Subsidiaries operated from 571 full
service offices located in eastern and central Pennsylvania and New Jersey and
one office located in Delaware. CoreStates Delaware, N.A. operated from one
office located in Delaware. CoreStates Bank also operates from 5 foreign branch
offices and 23 foreign representative offices.
Other Significant Subsidiaries and Affiliated Companies
Congress Financial Corporation ("Congress"), a majority-owned subsidiary of
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CoreStates, and its subsidiaries are engaged in commercial financing and
factoring with headquarters in New York City and offices in Atlanta, Boston,
Chicago, Columbia, Dallas, Los Angeles, Miami, Milwaukee, Portland, Toronto and
San Juan. As of December 31, 1996, factored receivables of Congress and its
subsidiaries totaled $411 million while outstanding commercial finance
obligations and other receivables totaled $2,270 million.
CoreStates Capital Corp ("Capital") is CoreStates' designated financing
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entity to obtain both short-term and long-term financing
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for CoreStates and its subsidiaries. At December 31, 1996, Capital had
outstanding commercial paper in the aggregate principal amount of $625 million
and debt securities in the aggregate outstanding principal amount of $2,329
million, with maturities ranging from 1 month to 10 years.
CoreStates Delaware, N.A. ("CS Delaware") is a national bank subsidiary of
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CoreStates which in 1995 opened a specialized consumer credit and education
financing business at one location in Delaware under the registered trade name
of The LearningCurve. As of December 31, 1996, CS Delaware had outstanding
accounts receivable of approximately $3.0 million.
Electronic Payment Services, Inc. ("EPS") is a joint venture formed in late
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1992 that combined the separate consumer electronic transaction processing
businesses of CoreStates, Banc One Corporation, PNC Financial Corp. and KeyCorp
(formerly Society Corporation) into the nation's leading provider of automated
teller machine and point of sale processing services to individuals, financial
institutions and retail stores. On March 27, 1995, National City Corporation
was admitted as an additional partner.
Other Subsidiaries. CoreStates also has several other direct and indirect
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subsidiaries including companies engaged in discount brokerage services,
processing services, investment advisory services, lease financing activities,
holding real property facilities used by CoreStates' Banking Subsidiaries and
companies created solely to facilitate the business of other subsidiaries.
Core Business Sectors. For analytical purposes, management has focused
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CoreStates into five core business sectors: Global and Specialized Banking;
Regional Banking; Retail Credit Services; Trust and Asset Management; and Third
Party Processing. Further information regarding CoreStates' five core business
sectors is presented in Management's Discussion and Analysis of Financial
Condition and Results of Operations at pages 13 through 15 of the CoreStates
Annual Report to Shareholders for the fiscal year ended December 31, 1996
(Exhibit 13 pages 9 through 13), which pages of the Annual Report are
incorporated herein by reference. A brief discussion of the five core
businesses is presented below. There is considerable inter-relationship among
these businesses.
Global and Specialized Banking. Global and Specialized
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banking services are provided through the Banking Subsidiaries and Congress and
include the following business lines: Specialized Banking, Secured Lending, Real
Estate, Large Corporate Banking, Congress, International Banking, Investment
Banking and Cash Management. Domestic financing services include commercial,
industrial and real estate loans; the financing of receivables, inventory and
equipment; derivative market activities to provide risk management services for
customers; and the provision of financial services for correspondent banks.
Foreign and international financial services include the making of loans;
banker's acceptance financing; the issuance and confirmation of letters of
credit; check and funds clearings, and related financial services. Also
provided are transaction processing services, including cash management, lock
box, funds transfer and collection and disbursement management on both a
domestic and an international basis.
International activities are conducted directly by CoreStates Bank through
its head office in Philadelphia and 28 foreign offices. In addition,
international banking and financing activities are conducted through two wholly-
owned Edge Act subsidiaries with five offices.
Advisory services are also provided which relate to loan syndications,
private placements, mergers and acquisitions, company valuations and other
similar matters. The Global and Specialized banking business also deals in and
underwrites obligations of the United States Government and Federal agencies
and general obligations of states, municipalities and political sub-divisions
and assists individual corporate customers as well as other institutions with
the purchase and sale of all types of marketable securities.
Regional Banking This core business is provided by the Banking
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Subsidiaries and includes the following business lines: Retail Banking and
Delivery, Small Business Lending and Middle Market Lending. Retail Banking
services are offered through the branch network of the Banking Subsidiaries in
Pennsylvania, New Jersey, and Delaware. This branch banking network provides a
full range of products including deposit, loan and related financial products,
primarily on a full relationship basis.
Trust & Asset Management This core business provides products
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through four business lines: Institutional Trust; Personal Trust; Private
Banking; and Investment Management. Meridian's corporate trust business was
sold in the fourth quarter of 1996. The products of the four business lines are
offered through the Banking Subsidiaries and include fiduciary administration
and transaction processing services. CoreStates Investment Advisers, Inc.
provides investment management services.
Retail Credit Services This core business includes the following major
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business lines: Credit Card, Dealer Services, Educational Lending, Mortgage
Services and Card Linx (CoreStates' merchant credit card processing business).
Third Party Processing This core business includes the QuestPoint
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processing companies, all wholly-owned entities, and earnings from CoreStates'
investment in Electronic Payment Services, Inc. ("EPS"). The QuestPoint
companies include: QuestPoint Check Services, L.P. (formerly known as Transys)--
a provider of check processing and payment services to CoreStates and other
financial institutions; QuestPoint Remittance Services, L.P. (formerly CashFlex,
L.P.)--a leading supplier of remittance processing services nationwide to
corporations, CoreStates, and other financial institutions; and SynapQuest--a
provider of retail credit card processing services to CoreStates and other
financial institutions. On November 7, 1996, QuestPoint acquired five check
processing centers from the Bisys Group, Inc. The acquisition enhances
QuestPoint's position as a national check processing company and provides an
expanded customer base for other QuestPoint products.
Government Supervision and Regulation
General CoreStates is a bank holding company within the meaning of the Act
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and is registered as such with the Federal Reserve Board. As a bank holding
company, CoreStates is also subject to regulation by applicable state regulatory
authorities. The Banking Subsidiaries are national banks and are subject to
regulation, supervision and regular examination by the OCC, as well as
regulation by the Federal Deposit Insurance Corporation ("FDIC").
Bank holding companies and banks are extensively regulated under both
federal and state law. The regulation and supervision
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of CoreStates and the Banking Subsidiaries are designed primarily for the
protection of depositors and not the respective institutions or their
stockholders. To the extent that the following information describes statutory
and regulatory provisions, it is qualified in its entirety by reference to the
particular statutory and regulatory provisions. A change in applicable law or
regulation may have a material effect on the business of CoreStates.
CoreStates is required to file an annual report with the Federal Reserve
Board containing such information as the Federal Reserve Board may require
pursuant to the Act. Copies of annual and other periodic reports are also
required to be filed with the applicable state regulatory authorities. The Act
requires each bank holding company to obtain the prior approval of the Federal
Reserve Board before it may acquire substantially all of the assets of any bank,
or before it may acquire ownership or control of any voting shares of any bank,
if, after such acquisition, it would own or control, directly or indirectly,
more than 5% of the voting shares of such bank. The Act also restricts the
types of businesses and operations in which a bank holding company and its non-
bank subsidiaries may engage. Generally, permissible activities are limited to
banking and activities found by the Federal Reserve Board to be so closely
related to banking as to be a proper incident thereto.
The operations of the Banking Subsidiaries are subject to requirements and
restrictions under federal and state law, including requirements to maintain
reserves against deposits, restrictions on the types and amounts of loans that
may be made and limits upon the types of services which may be offered. Various
consumer laws and regulations also affect the operations of the Banking
Subsidiaries. Regulatory approvals are required for branching and for bank
mergers.
Capital Guidelines A discussion of capital guidelines and capital strength
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is included in Management's Discussion and Analysis of Financial Condition and
Results of Operations on pages 15 and 16 of the CoreStates Annual Report to
Shareholders for the fiscal year ended December 31, 1996 (Exhibit 13 pages 14
and 15) and in Footnote 6 "Regulatory and Capital Matters" on page 46 of the
CoreStates Annual Report to Shareholders (Exhibit 13 pages 62 and 63), which
pages of the Annual Report are incorporated herein
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by reference.
Potential Enforcement Actions Bank holding companies and national banks
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and their institution-affiliated parties may be subject to potential enforcement
actions by the Federal Reserve Board, the OCC or the FDIC for unsafe or unsound
practices in conducting their businesses, or for violations of any law, rule or
regulation or provision, any consent order with any agency, any condition
imposed in writing by the agency or any written agreement with the agency. Non-
bank holding companies may also be subject to enforcement actions by state
regulatory authorities. Enforcement actions may include the imposition of a
conservator or receiver, additional cease-and-desist orders and written
agreements, the termination of insurance of deposits, the imposition of civil
money penalties, and removal and prohibition orders against institution-
affiliated parties and the suspension or revocation of state-mandated lending or
other licenses.
Dividends CoreStates is a legal entity separate and distinct from its
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Banking Subsidiaries and other subsidiaries. CoreStates' principal source of
revenue consists of dividends from its bank and non-bank subsidiaries.
Provisions of Federal banking law restrict the amount of dividends that can
be paid to CoreStates by the Banking Subsidiaries. Under applicable Federal
law, no dividends may be paid in an amount greater than "undivided profits then
on hand," after deduction therefrom of certain loan losses. In addition, for
each of the Banking Subsidiaries, prior approval of the Comptroller is required
if the total of all dividends declared by a subsidiary bank in any calendar year
will exceed its net profits (as defined) for that year, combined with its
retained net profits for the preceding two calendar years. Based on these
regulations, CoreStates Bank and CBD can declare dividends without approval of
the Comptroller of the Currency of approximately $112,000,000 and $18,000,000,
respectively, plus an additional amount equal to CoreStates Bank's and CBD's
retained net profits for 1997 up to the date of any such dividend declaration.
See Footnote 6 "Regulatory and Capital Matters" on page 46 of the CoreStates
Annual Report to Shareholders (Exhibit 13 pages 62 and 63) which pages of the
Annual Report are incorporated herein by reference.
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The payment of dividends by each of CoreStates and the Banking Subsidiaries
may also be affected by other factors, such as the maintenance of adequate
capital. For example, the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") generally prohibits an undercapitalized institution from
paying dividends. In addition, if, in the opinion of the applicable regulatory
authority, a bank holding company or a bank under its jurisdiction is engaged in
or is about to engage in an unsafe or unsound practice (which, depending on the
financial condition of the bank, could include the payment of dividends), such
authority may require, after notice and hearing, that such organization cease
and desist from such practice. The Federal Reserve Board, the OCC and the FDIC
have issued policy statements which provide that insured banks and bank holding
companies should generally pay dividends only out of current operating earnings.
Support of Bank Subsidiaries A depository institution insured by the FDIC
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can be held liable for any loss incurred by, or reasonably expected to be
incurred by, the FDIC after August 9, 1989 in connection with (i) the default of
a commonly controlled FDIC-insured depository institution or (ii) any assistance
provided by the FDIC to a commonly controlled FDIC-insured depository
institution in danger of default. "Default" is defined generally as the
appointment of a conservator or receiver and "in danger of default" is defined
generally as the existence of certain conditions indicating that a "default" is
likely to occur in the absence of regulatory assistance.
Under Federal Reserve Board regulations, a bank holding company is required
to serve as a source of financial and managerial strength to its subsidiary
banks and may not conduct its operations in an unsafe or unsound manner. In
addition, it is the Federal Reserve Board's policy that in serving as a source
of strength to its subsidiary banks, a bank holding company should stand ready
to use available resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's failure
to meet its obligations to serve as a source of strength to its subsidiary banks
will generally be considered by the Federal Reserve Board to be an unsafe and
unsound banking practice or a violation of the Federal Reserve Board regulations
or both. This
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doctrine is commonly known as the "source of strength" doctrine.
Federal law provides for the enforcement of any pro rata assessment of
shareholders of a national bank to cover impairment of capital stock by sale, to
the extent necessary, of the stock of any assessed shareholder failing to pay
the assessment.
Borrowings by Holding Companies Federal law prevents CoreStates and
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certain of its affiliates from borrowing from its banking subsidiaries unless
such borrowings are secured by specified amounts and types of collateral.
Additionally, each such secured loan to an affiliate is generally limited to an
amount not exceeding 10% of the bank's capital and surplus, and all such loans
between the lending bank and its affiliates are limited to an amount not to
exceed 20% of the lending bank's capital and surplus. Further, a bank holding
company and its subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services.
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FDICIA
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Insurance Premiums Deposits of the Banking Subsidiaries are insured by the
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FDIC and are subject to FDIC insurance assessments. The Deposits Insurance Fund
Act of 1996 ("Funds Act") became effective on September 30, 1996. A special one-
time assessment was made on institutions carrying Savings Association Insurance
Fund ("SAIF") insured deposits. Pursuant to this assessment, CoreStates in the
third quarter of 1996 expensed $14.2 million pre-tax, or $8.9 million after-tax,
for this special assessment on its SAIF insured deposits. In general, effective
SAIF rates range from 0 to 27 basis points as of October 1, 1996. In general,
effective Bank Insurance Fund ("BIF") rates range from 0 to 27 basis points as
of October 1, 1996. Limited adjustments in the base assessment rates for both
the SAIF and for the BIF may be done by rulemaking without notice and comment.
In general, the range of assessment is dependent upon capitalization and other
risk factors related to the institution. Each of the Banking Subsidiaries has
been notified by the FDIC that, for the semiannual assessment period beginning
January 1, 1997, each is subject to a BIF semi-annual assessment rate of .00648%
and a SAIF semi-annual assessment rate of .0324%. Deposits in the Banking
Subsidiaries subject to the SAIF assessment were approximately $3 billion at
December 31, 1996; and deposits in the Banking Subsidiaries subject to the BIF
assessment were approximately $28 billion at December 31, 1996.
Prompt Corrective Action FDICIA requires Federal banking agencies to
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broaden the scope of regulatory corrective action taken with respect to
depository institutions that do not meet minimum capital requirements and to
take such actions promptly in order to minimize losses to the FDIC. In
connection with FDICIA, Federal banking agencies are required to establish
capital measures (including both a leverage measure and a risk-based capital
measure) and to specify for each capital measure the levels at which depository
institutions will be considered "well capitalized", "adequately capitalized",
"undercapitalized", "significantly undercapitalized" or "critically
undercapitalized".
Under FDICIA, the Federal banking regulators have adopted regulations
establishing relevant capital measures and relevant capital levels. The
relevant capital measures are the Total Capital to risk adjusted assets ratio,
Tier 1 Capital to risk
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adjusted assets ratio and the leverage ratio. Under these regulations, a bank
will be (i) "well capitalized" if it has a Total Capital to risk adjusted assets
ratio of 10% or greater, a Tier 1 Capital to risk adjusted assets ratio of 6% or
greater and a leverage ratio of 5% or greater and is not subject to any order or
written directive by its primary Federal regulator to meet and maintain a
specific capital level for any capital measure; (ii) "adequately capitalized" if
it has a Total Capital to risk adjusted assets ratio of 8% or greater, a Tier 1
Capital to risk adjusted assets ratio of 4% or greater and a leverage ratio of
4% or greater (3% in certain circumstances) and is not well capitalized; (iii)
"undercapitalized" if it has a Total Capital to risk adjusted assets ratio of
less than 8%, a Tier 1 Capital to risk adjusted assets ratio of less than 4% or
a leverage ratio of less than 4% (3% in certain circumstances); (iv)
"significantly undercapitalized" if it has a Total Capital to risk adjusted
assets ratio of less than 6%, a Tier 1 Capital to risk adjusted assets ratio of
less than 3% or a leverage ratio of less than 3%; and (v) "critically
undercapitalized" if its tangible equity is equal to or less than 2% of average
quarterly tangible assets. Each of the Banking Subsidiaries is considered well
capitalized.
FDICIA authorizes the appropriate Federal banking agency, after notice and
an opportunity for a hearing, to treat a well capitalized, adequately
capitalized or undercapitalized insured depository institution as if it had a
lower capital-based classification if it is in an unsafe or unsound condition or
engaging in an unsafe or unsound practice. Thus, an adequately capitalized
institution can be subjected to the restrictions on undercapitalized
institutions described below (except that a capital restoration plan cannot be
required of the institution) and an undercapitalized institution can be
subjected to the restrictions applicable to significantly undercapitalized
institutions described below.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to growth
limitations and are required to submit a capital restoration plan. The Federal
banking agencies may not accept a capital plan without determining, among other
things, that the plan is based on
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realistic assumptions and is likely to succeed in restoring the depository
institution's capital. In addition, for a capital restoration plan to be
acceptable, the depository institution's parent holding company must guarantee
that the institution will comply with such capital restoration plan. The
aggregate liability of the parent holding company is limited to the lesser of
(i) an amount equal to five percent of the depository institution's total assets
at the time it became undercapitalized, and (ii) the amount which is necessary
(or would have been necessary) to bring the institution into compliance with all
capital standards applicable with respect to such institution as of the time it
fails to comply with the plan. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a Federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment. If a
depository institution fails to submit an acceptable plan, it is treated as if
it is significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, requirements to reduce total
assets and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized institutions are subject to the appointment of a
receiver or conservator.
Brokered Deposits Under FDICIA, a bank cannot accept brokered deposits
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(which term is defined to include payment of an interest rate more than 75 basis
points above prevailing rates) unless (i) it is well capitalized or (ii) it is
adequately capitalized and receives a waiver from the FDIC. A bank that cannot
receive brokered deposits also cannot offer "pass-through" insurance on certain
employee benefit accounts. In addition, a bank that is adequately capitalized
may not pay an interest rate on any deposits in excess of 75 basis points over
certain prevailing market rates. There are no such restrictions on a bank that
is well capitalized. Each of the CoreStates Banking Subsidiaries is well
capitalized for purposes of the foregoing.
Safety and Soundness Standards Pursuant to FDICIA each of the Federal bank
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regulatory agencies has adopted the Interagency Guidelines Establishing
Standards for Safety and Soundness (the
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"Guidelines"). The Guidelines contain standards relating to internal controls,
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, and employee compensation,
fees and benefits and standards specifying minimum earnings sufficient to absorb
losses without impairing capital, to the extent feasible a minimum ratio of
market value to book value for publicly traded shares and such other standards
relating to the foregoing as it deems appropriate. An institution that fails to
comply with such standards will be required to submit a plan designed to achieve
such compliance. If no such plan is submitted or a failure to implement such a
plan exists, the depository institution would become subject to additional
regulatory action or enforcement proceedings.
Other FDICIA also contains a variety of other provisions that may affect
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the operations of bank holding companies and banks, including various reporting
requirements, revised regulatory standards for real estate lending, "truth in
savings" provisions and the requirement that a depository institution give 90
days' prior notice to customers and regulatory authorities before closing any
branch.
Interstate Banking and Branching Legislation
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Riegle-Neal") eliminated many restrictions on interstate banking and
branching. Riegle-Neal authorized, as of September 29, 1995, interstate
acquisitions of banks by bank holding companies without geographic limitations.
Beginning June 1, 1997, the legislation will allow interstate branching in
states that have not passed legislation prohibiting interstate branching, except
that de novo branching or acquisition of a branch in another state without
acquisition of the entire bank will only be permitted if expressly permitted by
the law of the state in which such branch would be located. Interstate
branching prior to June 1, 1997 is possible in states that pass laws
affirmatively authorizing such interstate branching. As of December 31, 1996
Pennsylvania, New Jersey and Delaware have enacted such legislation. Although,
under certain circumstances, national banks located in different states have
been permitted to merge under authority of the National Bank Act, prior to the
Riegle-Neal legislation other types of interstate acquisitions of banks had
required affirmative authorization in state law, and interstate branching had
been
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possible only to a very limited degree.
Securities and Related Regulation
The Corporation's subsidiaries engaged in securities-related activities are
regulated by the Securities and Exchange Commission ("SEC"). The activities of
the Corporation's two subsidiaries which are registered broker dealers are also
monitored by the Federal Reserve Board. Each such company is also subject to
rules and regulations promulgated by the National Association of Securities
Dealers, Inc., the Securities Investors Protection Corporation and various state
securities commissions and with respect to public finance activities the
Municipal Securities Rulemaking Board.
Non-bank subsidiaries of CoreStates that are registered as investment
advisers are subject to the regulations of the SEC and may be subject to
regulations of one or more state securities commissions. Additionally, an
investment adviser which is a subsidiary of a national bank is subject to
supervision by the OCC. Investment Companies (as defined in the Investment
Company Act of 1940, as amended) advised by an investment adviser subsidiary of
CoreStates are registered with the SEC.
Legislative and Regulatory Proposals and Reforms
The banking industry is a frequent subject of legislative and regulatory
proposals and reforms. In 1996, some of these reform measures included the
possibility for non-bank subsidiaries to engage in activities not permissible
for the parent national bank to conduct directly. Early in 1997, the Federal
Reserve Board issued proposals which would expand the ability of bank holding
companies to engage in securities underwriting and dealing. It is premature to
predict what effect, if any, measures such as these may have on CoreStates and
its subsidiaries.
Competition
The activities in which CoreStates and the Banking Subsidiaries engage are
highly competitive. Generally, the lines of activity and markets served involve
competition with other banks and non-bank financial institutions, as well as
other entities which offer financial services, located both within and without
the
15
<PAGE>
United States. The methods of competition center around various factors, such
as customer services, interest rates on loans and deposits, lending limits and
location of offices.
The five core business segments in the markets served by the Banking
Subsidiaries and EPS are highly competitive and the Banking Subsidiaries and EPS
compete with other commercial banks, savings and loan associations and other
businesses which provide services similar to those offered by the Banking
Subsidiaries and EPS. The Banking Subsidiaries actively compete in Global and
Specialized Banking with local, regional and international banks and non-bank
financial organizations, some of which are significantly larger than the Banking
Subsidiaries. In providing consumer financial services (Regional Banking and
Retail Credit Services), the Banking Subsidiaries' competitors include other
banks, savings and loan associations, credit unions, regulated small loan
companies and other non-bank organizations offering financial services. In
providing Trust and Asset Management services, the Banking Subsidiaries compete
with other banks, investment counselors and insurance companies in national
markets for institutional funds and corporate pension and profit sharing
accounts. The Banking Subsidiaries also compete with other banks, insurance
agents, financial counselors and other fiduciaries for personal trust business.
The Banking Subsidiaries also actively compete for funding. A primary
source of funds is deposits, and competition for deposits includes other deposit
taking organizations, such as commercial banks, savings and loan associations
and credit unions, and so-called "money market" mutual funds. The Banking
Subsidiaries also actively compete for funds with U.S. Government securities and
in the open money market.
Employees
As of February 28, 1997, CoreStates and its subsidiaries employed 15,835
persons on a full time basis and 3,505 part-time persons on a full-time
equivalent basis. CoreStates provides a variety of employment benefits and
considers its relations with its employees to be satisfactory.
16
<PAGE>
Selected Statistical Information
Tables and selected statistical information concerning CoreStates and its
subsidiaries as described below and set forth on pages of the CoreStates 1996
Annual Report to Shareholders (and Exhibit 13 page numbers) set forth below are
incorporated herein by reference:
<TABLE>
<CAPTION>
Annual Report to Exhibit 13
Shareholders Page
Page Reference Reference
-------------- ---------
<S> <C> <C>
Distribution of Assets, Liabilities
and Stockholders' Equity;
Interest Rates and Interest
Differential.......................... 60-61, 64 83-86, 89
Investment Portfolio.................. 70 95
Loan Portfolio........................ 16-21 16-23
65-68 90-93
Summary of Loan Loss Experience....... 19-20 21-22
67-68 92-93
Deposits.............................. 60-61 83-86
68 93
Return on Equity and Assets........... 62 87
Short-Term Borrowings................. 47-48 66
</TABLE>
RISK ELEMENTS
The following is a description of the risk elements related to foreign
outstandings in addition to the risk elements described under the Loan Portfolio
references to the Annual Report noted above:
Foreign Outstandings
While the associated risks are clearly recognized, international lending is
a part of the Corporation's wide range of international services. It is the
Corporation's intent to remain involved in providing the international financial
services needed for the increasingly global competition faced by customers. At
December 31, 1996, 1995 and 1994, there were no aggregate foreign outstandings
(defined as loans, investments, acceptances and time deposits) to borrowers in a
foreign country that exceeded 1% of total assets. Outstandings below 1%, but
over .75% of total assets were $389 million in Japan at December 31, 1996. There
were no outstandings below 1%, but over .75% at December 31, 1995 and 1994.
INTEREST SENSITIVITY ANALYSIS
Information illustrating the interest sensitivity of CoreStates' interest
earning assets and interest bearing liabilities is contained on page 69 of the
Annual Report to Shareholders (Exhibit 13 page 94) and on page 18 of this Form
10-K. The interest sensitivity table on page 18 of this Form 10-K is different
from the table contained in the Annual Report because managerial assumptions
related to the appropriate investment maturities for non-interest bearing
funding sources and the repricing behavior of non-contractual deposit products
which are included in the Annual Report have been eliminated from the table on
page 18.
17
<PAGE>
<TABLE>
<CAPTION>
Interest Sensitivity Analysis at December 31, 1996 Rate Maturity Period
(in millions) -------------------------------------------------------------
1-90 91-181 182-365 1-2 2-5 Greater than
Days Days Days Years Years 5 Years Total
---- ---- ---- ----- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Earning Assets
- --------------
Federal Funds Sold, Resale Agreements and Trading
Account Securities $ 632 $ 632
Time Deposits 1,400 $ 590 $ 453 2,443
Investment Securities 854 368 627 $ 1,065 $ 945 $ 224 4,083
Interest Rate Swaps 1,139 412 1,050 1,384 4,802 1,331 10,118
Asset Financial Futures 328 345 1,111 15 0 0 1,799
------- ------ ------ ------- -------- -------- -------
Total Discretionary Assets 4,353 1,715 3,241 2,464 5,747 1,555 19,075
Total Loans and Lease Financing (a) 21,695 1,814 1,892 2,592 3,759 1,025 32,777
------- ------ ------ ------- -------- -------- -------
Total Earning Assets 26,048 3,529 5,133 5,056 9,506 2,580 51,852
------- ------ ------ ------- -------- -------- -------
Liabilities
- -----------
Federal Funds Purchased, Repurchase Agreements and
Other Short-term Funds Borrowed 2,628 5 0 0 0 0 2,633
Domestic and Foreign Time Deposits (b) 2,044 27 78 1 11 2 2,163
Long Term Debt 1,427 3 2 4 389 1,224 3,049
Interest Rate Swaps 9,023 140 95 227 377 256 10,118
Liability Financial Futures 1,787 12 0 0 0 0 1,799
------- ------ ------ ------- -------- -------- -------
Total Discretionary Liabilities 16,909 187 175 232 777 1,482 19,762
Savings Certificates 2,491 1,317 2,527 1,136 1,043 228 8,742
Money Market, savings, and NOW accounts 3,674 881 1,602 2,727 4,393 0 13,277
------- ------ ------ ------- -------- -------- -------
Total Savings Certificates and Indefinite Maturity 6,165 2,198 4,129 3,863 5,436 228 22,019
------- ------ ------ ------- -------- -------- -------
Total Net Funding Sources 23,074 2,385 4,304 4,095 6,213 1,710 41,781
------- ------ ------ ------- -------- -------- -------
Period Gap $ 2,974 $1,144 $ 829 $ 961 $ 3,293 $ 870 $10,071 (c)
======= ====== ====== ======= ======== ======== =======
Cumulative Gap $ 2,974 $4,118 $4,947 $ 5,908 $ 9,201 $ 10,071
======= ====== ====== ======= ======== ========
</TABLE>
Notes to Interest Sensitivity Analysis:
- ---------------------------------------
a) Non-performing loans are included in 1-90 days.
b) Deposit volumes exclude time deposits not at interest.
c) Net non-interest bearing funds is the sum of non-interest bearing
liabilities, shareholders' equity minus non-interest earning assets.
18
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table shows the name and age of the current executive
officers of CoreStates Financial Corp (the "Corporation") and their present and
previous positions held by them for at least the past five years.
NAME AGE PRESENT & PREVIOUS POSITIONS
- ---- --- ----------------------------
Terrence A. Larsen 50 Chairman, Chief Executive Officer, (January
1, 1988 to present) and Director (June 1,
1986 to present), President (January 1, 1992
to August 2, 1994, May 6, 1986 to March 5,
1990), Chief Operating Officer (May 6, 1986
to January 1, 1988) of the Corporation;
Chairman and Director (October 1, 1990 to
present) and President (January 1, 1992 to
August 2, 1994) of CoreStates Bank;
Chairman, Director (April 1, 1989 to October
1, 1990), Senior Executive Officer (1987 to
1988), and Executive Vice President, (1983
to 1986) of The Philadelphia National Bank
("PNB"); Director (January 1, 1986 to
December 6, 1996, CoreStates New Jersey
National Bank.
Christopher J. Carey 42 Chief Financial Officer of CoreStates Bank
(February 18, 1997 to present); Corporate
Controller (July 21, 1992 to present) of the
Corporation and CoreStates Bank; Senior Vice
President, (November 1, 1991 to present) of
the Corporation and CoreStates Bank; Vice
President
19
<PAGE>
(November 12, 1985 to November 1, 1991)
of CoreStates Bank.
Charles L. Coltman III 54 President and Chief Operating Officer
(August 2, 1994 to April 9, 1996), Assistant
to the Chairman, Corporate Quality (February
16, 1993 to August 2, 1994), Chief Credit
Policy Officer (September 18, 1990 to
February 1993), Executive Vice President and
Credit Policy Officer (November 21, 1989 to
September 18, 1990) of the Corporation; Vice
Chairman and Director (May 21, 1996 to
present) and Senior Executive Officer
(August 2, 1994 to April 9, 1996) of
CoreStates Bank; Director (April 22, 1992 to
December 6, 1996) CoreStates New Jersey
National Bank.
Charles P. Connolly 48 Senior Executive Vice President and Chief
Risk Policy Officer (August 2, 1994 to
October 15, 1996), Chief Credit Policy
Officer (February 16, 1993 to August 2,
1994) of the Corporation; Vice Chairman
(October 15, 1996 to present), Senior
Executive Officer (August 2, 1994 to October
15, 1996), Executive Vice President (1987 to
February 1993) of CoreStates Bank.
20
<PAGE>
Rosemarie B. Greco 50 President (June 30, 1996 to present), Chief
Banking Officer (August 2, 1994 to June 30,
1996), Chief Retail Services Officer
(October 1, 1993 to August 2, 1994) of the
Corporation; President, Director and Chief
Executive Officer (August 2, 1994 to
present) of CoreStates Bank; President and
Chief Executive Officer of CoreStates First
Pennsylvania Bank Division of CoreStates
Bank (March 1991 to August 2, 1994) and
Director (April 1, 1992 to August 2, 1994).
Carol A. Leisenring 46 Chief Economist and Executive Vice President
(1987 to present), Director, Financial
Services and Planning (June 1, 1996 to
present) of the Corporation and CoreStates
Bank.
Albert W. Mandia 49 Chief Financial Officer (February 18, 1997
to present) and Executive Vice President
(1989 to present) of the Corporation;
President and Chief Operating Officer of
CashFlex (January 2, 1996 to February 18,
1997) a subsidiary of the Corporation;
Executive Vice President (April 1992 to
present) of CoreStates Bank.
21
<PAGE>
Paul W. McGloin 49 Chief Risk Policy Officer (October 15, 1996
to present), Executive Vice President (April
9, 1996 to present) of the Corporation and
CoreStates Bank. President, Meridian's
Delaware Valley division (1995 to 1996) and
Executive Vice President, Credit Policy
(1991 to 1995) of Meridian Bank.
22
<PAGE>
Item 2 - Properties
The principal offices of CoreStates and CoreStates Bank are located in
Philadelphia, Pennsylvania in leased space located at Centre Square West
(547,600 square feet), 15th and Market Streets, and the Philadelphia National
Bank Building (308,358 square feet) located at Broad and Chestnut Streets. In
addition, office space is leased for use by CoreStates and CoreStates Bank in
the following Philadelphia locations: the Penn Mutual Building (289,800 square
feet) at 5th and Walnut Streets, the Curtis Building (111,600 square feet) at
6th and Walnut Streets, the Widener Building (217,400 square feet) adjacent to
the PNB Building, and 801 Arch Street Building (57,500 square feet).
CoreStates Bank owns several major buildings which support operational
activities. They are as follows: the CoreStates Plaza Building (464,802 square
feet) located at 5th and Market Streets in Philadelphia, Pennsylvania; the
Spring Ridge Building (395,000 square feet) located at One Meridian Boulevard in
Wyomissing, Pennsylvania; the CoreStates Bank of Delaware Building (275,000
square feet) located at 3 Beaver Valley Road in Wilmington, Delaware; and the
CoreStates Building at One Hillendale Drive (33,000 square feet) in Perkasie,
Pennsylvania. CoreStates' operational units occupy all the space at each of
these buildings.
CoreStates Bank also owns or leases approximately 20 other regional
area headquarters in Pennsylvania, New Jersey and Delaware to support its
banking activities. At each of its Regional Headquarters various units support
retail banking, commercial lending, trust, and other banking functions.
As of December 31, 1996, CoreStates Bank had 572 operating retail
banking branches located in Pennsylvania, New Jersey and Delaware, of which 284
branches were owned and 288 were leased. Aggregate leased properties in 1996
required approximately $90,982,000 in rental payments net of sublease income.
Closed branch locations resulting from merger consolidations are either being
sold, or the leases are being terminated.
On May 13, 1977, CoreStates borrowed $25 million from two institutional
lenders at an interest rate of 8 5/8% per annum. The loan is secured by a first
lien mortgage on 25 CoreStates Bank owned properties.
23
<PAGE>
Item 3 - Legal Proceedings
In the normal course of business, CoreStates and its subsidiaries are
subject to numerous pending and threatened legal actions and proceedings, in
some of which the relief or damages sought are substantial. Management does not
believe the outcome of these actions and proceedings will have a materially
adverse effect on the consolidated financial position of CoreStates.
Item 4 - Submission of Matters to a Vote of Security Holders
No matters were submitted to security holders for vote during the fourth
quarter of 1996.
PART II
Item 5 - Market for the Registrant's Common Stock and Related Stockholder
Matters
CoreStates Common Shares are traded on the New York Stock Exchange under
the symbol "CFL". The table below sets forth, for the periods indicated, the
high and low prices for CoreStates Common Shares as reported on the New York
Stock Exchange, and cash dividends declared per share. On February 28, 1997,
there were approximately 63,700 registered holders of Common Stock of
CoreStates.
<TABLE>
<CAPTION>
CORESTATES
-------------------------------
DIVIDEND
HIGH LOW DECLARED
---- --- --------
<S> <C> <C> <C>
Year ended December 31, 1996:
First Quarter.................. 44 36 1/8 $0.42
Second Quarter................. 43 1/8 35 3/4 0.42
Third Quarter.................. 44 35 1/2 0.42
Fourth Quarter................. 55 3/8 42 3/4 0.47
Year ended December 31, 1995:
First Quarter.................. 33 25 5/8 0.34
Second Quarter................. 36 30 1/2 0.34
Third Quarter.................. 38 7/8 34 1/4 0.34
Fourth Quarter................. 40 1/8 34 5/8 0.42
</TABLE>
24
<PAGE>
CoreStates currently expects to continue its policy of paying regular
cash dividends, although there can be no assurance as to further dividends
because they are dependent upon future operating results, capital requirements
and financial condition.
The approval of the Comptroller of the Currency is required for
national banks to pay dividends in certain circumstances. See the discussion
under Government Supervision and Regulation--Dividends, supra., and the
discussion in Footnote 6 "Regulatory and Capital Matters" on page 46 of the
CoreStates Annual Report to Shareholders (Exhibit 13 pages 62 and 63), which
pages are incorporated herein by reference.
Item 6 - Selected Financial Data
Pursuant to General Instructions G(2), information required by this
Item is incorporated by reference from pages 62 to 63 of the CoreStates Annual
Report to Shareholders for the fiscal year ended December 31, 1996 (Exhibit 13
pages 87 and 88).
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operation
Pursuant to General Instructions G(2), information required by this
Item is incorporated by reference from pages 10 through 33 of the CoreStates
Annual Report to Shareholders for the fiscal year ended December 31, 1996
(Exhibit 13 pages 4 through 42).
Item 8 - Financial Statements and Supplementary Data
Pursuant to General Instructions G(2), information required by this
Item is incorporated by reference from pages 36 through 70 of the CoreStates
Annual Report to Shareholders for the fiscal year ended December 31, 1996
(Exhibit 13 pages 46 through 95).
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
25
<PAGE>
PART III
Item 10 - Directors and Executive Officers of the Registrant
Information relating to the principal occupations of the directors of
the Corporation, their ages, directorships in other companies, and respective
terms of office is contained under the heading "Election of Directors" in the
1997 Proxy Statement and is incorporated herein by reference.
Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934 is set forth under the heading "Section 16(a) Beneficial
Ownership Reporting Compliance" in the 1997 Proxy Statement is incorporated
herein by reference.
Information regarding executive officers of the Corporation is
included in Part I of this Form 10-K under the caption "Executive Officers of
the Registrant".
Item 11 - Executive Compensation
The information required by this Item is included in the 1997 Proxy
Statement in the Directors' Compensation section on pages 9 to 11; in the Five-
Year Shareholder Return Comparison appearing on page 19, and in the compensation
sections presented on pages 11 through 18, and is incorporated herein by
reference.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is included in the 1997 Proxy
Statement on pages 2 to 6 under the heading "Election of Directors", and on
pages 6 and 7 under the headings "Beneficial Ownership of Common Stock" and
"Security Ownership of Certain Beneficial Owners", and is incorporated herein by
reference.
Item 13 - Certain Relationships and Related Transactions
The information required by this Item is included in the 1997 Proxy
Statement on page 11 under the heading "Certain Relationships and Related
Transactions" and is incorporated herein by reference.
26
<PAGE>
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements:
The following report of independent auditors of the Corporation and
consolidated financial statements, included in the Annual Report to
Shareholders, are incorporated herein by reference.
<TABLE>
<CAPTION>
Annual Report EXHIBIT
to Shareholders 13 Page
Page Reference Reference
----------------- ---------
<S> <C> <C>
Consolidated Statements of Income
for the years ended December 31,
1996, 1995 and 1994................. 36 46
Consolidated Balance Sheets as of
December 31, 1996 and 1995.......... 37 47
Consolidated Statements of Changes
in Shareholders' Equity for the
years ended December 31, 1996,
1995 and 1994....................... 38 48-49
Consolidated Statements of Cash
Flows for the years ended
December 31, 1996, 1995 and 1994.... 39 50-51
Notes to the Consolidated
Financial Statements................ 40-59 52-82
Report of Independent Auditors...... 35 45
Selected Quarterly Data............. 55 77
</TABLE>
27
<PAGE>
(a) 2. Financial Statement Schedules
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
(b) Current Reports on Form 8-K during the fourth quarter of 1996:
A report dated October 16, l996, which included the Corporation's press release
regarding third quarter and year-to-date financial results; and information
regarding a common stock repurchase program and dividend increase.
(c) Exhibits
The exhibits listed on the Index to Exhibits on pages __ to __ hereof are
incorporated by reference or filed herewith in response to this item.
<TABLE>
<CAPTION>
(a) 3. Exhibits
--------
Exhibit No. Page No.
- ----------- --------
<S> <C> <C>
2.1 Agreement and Plan of Merger dated as of
October 10, 1995 by and between CoreStates
Financial Corp and Meridian Bancorp Inc. and
filed as Annex I to Registrant's Report on
Form S-4 No. 333-00067 and incorporated
herein by reference.
2.2 Stock Option Agreement dated as of October
10, 1995 by and between CoreStates Financial
Corp and Meridian Bancorp, Inc. Filed as
Annex II to the Registrant's Report on Form
S-4 No. 333-00067 and incorporated herein by
reference.
2.3 Meridian Stock Option Agreement dated as of
October 10, 1995 by and between Meridian
Bancorp, Inc. and CoreStates Financial Corp
filed as Annex III to the Registrant's
Report on Form S-4 No. 333-00067 and
incorporated herein by reference.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Page No.
- ----------- --------
<S> <C> <C>
3.1 Articles of Incorporation of Registrant as
amended through April 9,1996.
3.2 By-laws of Registrant as amended through
January 21, 1997.
4.1 The Registrant will furnish to the Securities
and Exchange Commission, upon request, copies
of instruments defining the rights of holders
of long-term debt of CoreStates Financial Corp
and its subsidiaries.
4.2 Indenture dated as of December 1, 1990 between
CoreStates Financial Corp, CoreStates Capital
Corp and The Bank of New York, as senior trustee
and successor to Nations Bank of Georgia, N.A.,
as successor to Wachovia Bank of Georgia, N.A.,
(formerly The First National Bank of Atlanta).
Filed as Exhibit 4.1 to the Registrant's Current
Report on Form 8-K dated January 29, 1991
and incorporated herein by reference.
4.3 Indenture dated as of December 1, 1990 between
CoreStates Financial Corp, CoreStates Capital
Corp and Bank One, Columbus, NA. Filed as
Exhibit 4.2 to the Registrant's Current Report
on Form 8-K dated January 29, 1991 and
incorporated herein by reference.
4.4 First Supplemental Indenture dated as of
March 1, 1993 to the Indenture dated as of
December 1, 1990 by and between CoreStates
Capital Corp, CoreStates Financial Corp and
BankOne, Columbus,N.A. filed as Exhibit 4
to Registrant's Current Report on Form 8-K
dated April 20, 1993 and incorporated herein
by reference.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Page No.
- ----------- --------
<S> <C> <C>
4.5 Second Supplemental Indenture dated as of
August 1, 1994 among CoreStates Financial
Corp, CoreStates Capital Corp, Bank One,
Columbus, N.A. and Citibank, N.A. filed as
Exhibit 4.5 to Registrant's Annual Report on
Form 10-K for the year ended December 31,
1994 and incorporated herein by reference.
4.6 Specimen of Medium-Term Note (Senior Fixed
Rate). Filed as Exhibit 4.3 to the
Registrant's Current Report on Form 8-K
dated January 29, 1991 and incorporated
herein by reference.
4.7 Specimen of Medium-Term Note (Senior
Floating Rate). Filed as Exhibit 4.4 to the
Registrant's Current Report on Form 8-K
dated January 29, 1991 and incorporated
herein by reference.
4.8 Specimen of Medium-Term Note (Subordinated
Fixed Rate). Filed as Exhibit 4.5 to the
Registrant's Current Report on Form 8-K
dated January 29, 1991 and incorporated
herein by reference.
4.9 Specimen of Medium-Term Note (Subordinated
Floating Rate). Filed as Exhibit 4.6 to the
Registrant's Current Report on Form 8-K
dated January 29, 1991 and incorporated
herein by reference.
4.10 Specimen of 9 5/8% Subordinated Note due
February 15, 2001. Filed as Exhibit 4.7 to
the Registrant's Current Report on Form 8-K
dated January 29, 1991 and incorporated
herein by reference.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Page No.
- ----------- --------
<S> <C> <C>
4.11 Specimen of CoreStates Capital Corp 9 3/8%
Subordinated Note due April 15, 2003. Filed
as Exhibit (4) to the Registrant's Current
Report on Form 8-K dated April 21, 1991 and
incorporated herein by reference.
4.12 Specimen of 6 5/8% Subordinated Note due
March 15, 2005 issued by CoreStates Capital
Corp filed as Exhibit 4 to Registrant's
Current Report on Form 8-K dated March 18,
1993 and incorporated herein by reference.
4.13 Specimen of 5 7/8% Subordinated Note due
October 15, 2003 issued by CoreStates
Capital Corp and unconditionally guaranteed
as to payment of principal and interest on
a subordinated basis by CoreStates Financial
Corp. Filed as Exhibit 4 of Registrant's
Current Report on Form 8-K dated October 21,
1993 and incorporated herein by reference.
4.14 Specimen of CoreStates Capital Corp
Medium-Term Note (Senior Fixed Rate). Filed
as Exhibit 4(d) to Registrant's Registration
Statement on Form S-3, No. 33-54049 and
incorporated herein by reference.
4.15 Specimen of CoreStates Capital Corp
Medium-Term Note (Senior Floating Rate).
Filed as Exhibit 4(e) to Registrant's
Registration Statement on Form S-3, No.
33-54049 and incorporated herein by
reference.
4.16 Specimen of CoreStates Capital Corp
Medium-Term Note (Subordinated Fixed Rate).
Filed as Exhibit 4(f) to Registrant's
Registration Statement on Form S-3, No.
33-54049 and incorporated herein by
reference.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Page No.
- ----------- --------
<S> <C> <C>
4.17 Specimen of CoreStates Capital Corp
Medium-Term Note (Subordinated Floating
Rate). Filed as Exhibit 4(g) to
Registrant's Registration Statement on
Form S-3, No. 33-54049 and incorporated herein
by reference.
4.18 Form of Medium Term Note (Senior Fixed
Rate). Filed as Exhibit 4 (d)(5) to
Registrant's Registration Statement on Form
S-3/A, Nos. 333-2297 and 33-54049 and
incorporated herein by reference.
4.19 Form of Medium Term Note (Senior Floating
Rate). Filed as Exhibit 4(e)(5) to
Registrant's Registration Statement on Form
S-3/A, Nos. 333-2297 and 33-54049 and
incorporated herein by reference.
4.20 Form of Medium Term Note (Subordinated Fixed
Rate). Filed as Exhibit 4(f)(5) to
Registrant's Registration Statement on Form
S-3/A, Nos. 333-2297 and 33-54049 and
incorporated herein by reference.
4.21 Form of Medium Term Note (Subordinated
Floating Rate). Filed as Exhibit 4(g)(5) to
Registrant's Registration Statement on Form
S-3/A, Nos. 333-2297 and 33-54049 and
incorporated herein by reference.
4.22 Form of Warrant. Filed as Exhibit 4(h) to
Registrant's Registration Statement on Form
S-3/A, Nos. 333-2297 and 33-54049 and
incorporated herein by reference.
4.23 Form of Warrant Agreement. Filed as Exhibit
4(i) to Registrant's Registration Statement
on Form S-3/A, Nos. 333-2297 and 33-54049
and incorporated herein by reference.
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Page No.
- ----------- --------
<S> <C> <C>
4.24 Form of Certificate of Designation of
$__________ Preferred Stock. Filed as
Exhibit 4(j) to Registrant's Registration
Statement on Form S-3/A, Nos. 333-2297
and 33-54049 and incorporated herein by
reference.
4.25 Form of $___________ Preferred Stock filed
as Exhibit 4(k) to Registrant's Registration
Statement on Form S-3/A, Nos. 333-2297 and
33-54049 and incorporated herein by reference.
4.26 Form of Common Stock. Filed as Exhibit 4(1)
to Registrant's Registration Statement on
Form S-3/A, Nos. 333-2297 and 33-54049 and
incorporated herein by reference.
10.1 * Incentive Compensation Plan for
CoreStates Financial Corp and Participating
Subsidiaries effective January 1, 1983.
Filed as Exhibit 10.5 to the Registrant's
Annual Report on Form 10-K for the fiscal
year ended December 31, 1983 and incorporated
herein by reference.
10.2 * Long-Term Incentive Compensation Plan of
CoreStates Financial Corp as amended
through April 18, 1989. Filed as Exhibit
10.4 to the Registrant's Report on Form 10-K
for the fiscal year ended December 31, 1989
and incorporated herein by reference.
10.3 * Deferred Compensation Plan for
Directors of CoreStates Financial Corp and
CoreStates Bank, N.A. as amended and
restated effective January 1, 1995.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Page No.
- ----------- --------
<S> <C> <C>
10.4 * The CoreStates Financial Corp
Supplemental Retirement Plan. Filed as
Exhibit 10.9 to the Registrant's Annual
Report on Form 10-K for the fiscal year
ended December 31, 1987 and incorporated
herein by reference.
10.5 * Profit Sharing Deferral Plan for
Officers of CoreStates Financial Corp and
Participating Subsidiaries effective
November 1, 1987. Filed as Exhibit 10.10 to
the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1987
and incorporated herein by reference.
10.6 Agreement between New Jersey National Bank
and Textron Financial - New Jersey, Inc. for
the sale and leaseback of the Corporate and
operations centers and four branches. Filed
as. Exhibit 10(i), File No. 0-6002 to the
New Jersey National Corporation Annual
Report on Form 10-K for the fiscal year
ended December 31, 1985 and incorporated
herein by reference.
10.7 Lease between Centre Square, Inc. and
Tishman Construction Company of
Pennsylvania, Inc. and The First
Pennsylvania Banking and Trust Company,
dated as of December 13, 1968 as amended
through January 31, 1974, for the property
known as Centre Square West. Filed as
Exhibit 10.15 to the Registrant's Annual
Report on Form 10-K for the fiscal year
ended December 31, 1989 and incorporated
herein by reference.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Page No.
- ----------- --------
<S> <C> <C>
10.8 * First Pennsylvania Corporation Amended
and Restated Retirement Benefit Supplement
Plan filed as Exhibit 10.16 to the
Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992 and
incorporated herein by reference.
10.9 * CoreStates Financial Corp 1992 Long
Term Incentive Plan filed as Exhibit 10.18
to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992
and incorporated herein by reference.
10.10 * CoreStates Financial Corp Stock Compensation
Plan For Non-Employee Directors filed as Exhibit
10.19 to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992 and
incorporated herein by reference.
10.11 * CoreStates Financial Corp 401 Excess Plan
For Senior Management filed as Exhibit 10.20 to
Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992 and
incorporated herein by reference.
10.12 Agreement to Form a Joint Venture By and Among
Banc One Corporation, CoreStates Financial Corp,
PNC Financial Corp and Society Corporation dated
as of July 21, 1992 filed as Exhibit 10.21 to
Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992 and
incorporated herein by reference.
10.13 * Incentive Compensation Plan for Designated
Executives of CoreStates Financial Corp and
Participating Subsidiaries filed as Exhibit 10.18
to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994 and
incorporated herein by reference.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Page No.
- ----------- --------
<S> <C> <C>
10.14 * Independence Bancorp, Inc. Supplemental
Executive Retirement Plan filed as Exhibit 10.19
to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994 and
incorporated herein by reference.
10.15 Distribution Agreement dated September 16, 1994
among CoreStates Financial Corp, CoreStates
Capital Corp and Merrill Lynch & Co., Goldman,
Sachs & Co., Lehman Brothers Inc., J.P. Morgan
Securities Inc., CoreStates First Boston
Corporation and Smith Barney Inc. Filed as
Exhibit 1(b) to the Registrant's Registration
Statement on Form S-3, No. 33-54049 and
incorporated herein by reference.
10.16 Underwriting Agreement dated September 16, 1994
among CoreStates Financial Corp, CoreStates
Capital Corp and Lehman Brothers Inc., Goldman,
Sachs & Co., Merrill Lynch & Co., J.P. Morgan
Securities Inc., CORESTATES First Boston
Corporation and Smith Barney Inc. Filed as
Exhibit 1(a) to the Registrant's Registration
Statement on Form S-3, No. 33-54049 and
incorporated herein by reference.
10.17 * Agreement with Samuel A. McCullough dated
April 18, 1996. Filed as Exhibit 10.1 to
Registrant's June 30, 1996 10-Q and incorporated
herein by reference.
10.18 * Amendment to Termination Agreement dated
July 1, 1986. Filed as Exhibit 10.2 to
Registrant's June 30, 1996 10-Q and incorporated
herein by reference.
10.19 * Form of Termination Agreement for Samuel A.
McCullough dated July 1, 1986. Filed as Exhibit
10.3 to Registrant's June 30, 1996 10-Q and
incorporated herein by reference.
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Page No.
- ----------- --------
<S> <C> <C>
10.20 * Form of Termination Agreement for Executive
Officers. Filed as Exhibit 10.4(A) to
Registrant's June 30, 1996 10-Q and incorporated
herein by reference.
10.21 * Schedule of named Executive Officers and
Executive Officers who are parties to a
Termination Agreement.
11 CoreStates Financial Corp Statement re
Computation of Per Share Earnings.
12.1 CoreStates Financial Corp and Subsidiaries
Computation of Ratio of Earnings from
Continuing Operations to Fixed Charges of
Continuing Operations.
12.2 CoreStates Financial Corp Computation of
Ratio of Earnings from Continuing Operations
to Fixed Charges Combined CoreStates (Parent
Only) and CoreStates Capital.
13 Financial section and inside cover of Registrant's Annual Report
to Shareholders for fiscal year ended 12/31/96, as listed on page
3 of Exhibit 13. Only those portions of the Annual Report
specifically incorporated herein shall be deemed to be "filed" as
part of this 10-K.
13a Graphics Appendix List to Exhibit 13.
21 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP
23.2 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule.
99.1 Undertaking - Form S-8 Registration Statements.
</TABLE>
37
<PAGE>
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
NOTE: CoreStates Financial Corp will furnish, at cost, any exhibit not
accompanying this document upon request. Cost for each document is determined by
the number of pages in the document.
38
<PAGE>
Independent Auditors' Report
The Board of Directors
Meridian Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Meridian
Bancorp, Inc. and subsidiaries as December 31, 1995 and 1994, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the years in the two year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the accounts and discloures in the financial statements. An audit also includes
asserting the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Meridian Bancorp,
Inc. and subsidiaries as of December 31, 1995 and 1994 and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
As described in Notes 1 and 8, respectively, to the consolidated financial
statements, the Company adopted the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities and Statement
of Financial Accounting Standards No. 112, Employers' Accounting for
Postemployment Benefits, in 1994.
Philadelphia, Pa.
January 17, 1996,
Except as to note 2, which is as of February 23, 1996
/s/ KPMG Peat Marwick LLP
39
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
United Counties Bancorporation:
We have audited the accompanying consolidated balance sheets of United Counties
Bancorporation and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, changes in stockholders' equity,
and cash flow for each of the years in the two-year period ended December 31,
1995. These consolidated financial statements are the responsibility of the
Bancorporation's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of United Counties
Bancorporation and subsidiaries at December 31, 1995 and 1994, and the results
of their operations and their cash flow for each of the years in the two-year
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in notes 1 and 3 to the consolidated financial statements, the
Bancorporation adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," in 1994.
/s/ KPMG Peat Marwick LLP
Short Hills, New Jersey
January 16, 1996, except for note 20,
which is as of February 23, 1996
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 21, 1997 By: /s/ Terrence A. Larsen
-----------------------
Terrence A. Larsen
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Terrence A. Larsen Director, Chairman of the March 21, 1997
- ------------------------
Terrence A. Larsen Board and Chief Executive
Officer
/s/ Christopher J. Carey Controller (Principal March 21, 1997
- ------------------------ Accounting Officer)
Christopher J. Carey
/s/ Robert W. Cardy Director March 21, 1997
- ------------------------
Robert W. Cardy
/s/ Carlton E. Hughes Director March 21, 1997
- ------------------------
Carlton E. Hughes
/s/ Ernest E. Jones Director March 21, 1997
- ------------------------
Ernest E. Jones
/s/ Herbert Lotman Director March 21, 1997
- ------------------------
Herbert Lotman
</TABLE>
41
<PAGE>
SIGNATURES
(Continued)
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ George V. Lynett Director March 21, 1997
- ------------------------
George V. Lynett
Director March __, 1997
- ------------------------
Marlin Miller, Jr.
/s/ Samuel A. McCullough Director March 21, 1997
- ------------------------
Samuel A. McCullough
/s/ Patricia McFate Director March 21, 1997
- ------------------------
Patricia McFate
/s/ James M. Seabrook, Sr. Director March 21, 1997
- ------------------------
James M. Seabrook, Sr.
/s/ Raymond W. Smith Director March 21, 1997
- ------------------------
Raymond W. Smith
/s/ George Strawbridge, Jr. Director March 21, 1997
- ------------------------
George Strawbridge, Jr.
/s/ Peter S. Strawbridge Director March 21, 1997
- ------------------------
Peter S. Strawbridge
/s/ Judith M. von Seldeneck Director March 21, 1997
- ------------------------
Judith M. von Seldeneck
/s/ Albert W. Mandia Chief Financial Officer March 21, 1997
- ------------------------
Albert W. Mandia (Principal Financial
Officer)
</TABLE>
42
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<S> <C>
3.1 Articles Incorporation of Registrant as amended through April 9,
1996.
3.2 By-Laws of Registrant as amended through January 21, 1997.
10.21 Schedule of Named Executive Officers and Executive Officers who are
Parties to a Termination Agreement.
11 CoreStates Financial Corp Statement regarding Computation of Per
Share Earnings.
12.1 CoreStates Financial Corp and Subsidiaries Computation of Ratio of
Earnings from Continuing Operations to Fixed Charges of Continuing
Operations.
12.2 CoreStates Financial Corp Computation of Ratio of Earnings from
Continuing Operations to Fixed Charges Combined CoreStates (Parent
Only) and CoreStates Capital.
13 Financial section and inside cover of Registrant's Annual Report to
Shareholders for fiscal year ended 12/31/96, as listed on page 3 of
Exhibit 13.
21 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP
23.2 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
99.1 Undertaking - Form S-8 Registration Statement
</TABLE>
43
<PAGE>
Exhibit 3.1
ARTICLES OF INCORPORATION
of
CORESTATES FINANCIAL CORP
(as amended April 9, 1996)
FIRST. The name of the Corporation is CORESTATES FINANCIAL CORP.
SECOND. The location and post office address of the registered office of
the Corporation in this Commonwealth is N.E. Corner Broad and Chestnut Streets,
Philadelphia, Pennsylvania 19101.
THIRD. The purpose or purposes for which the Corporation is incorporated
under the Business Corporation Law of the Commonwealth of Pennsylvania are to
engage in, and to do any lawful act concerning, any or all lawful business for
which corporations may be incorporated under said Business Corporation Law.
FOURTH. The term of existence of the Corporation is perpetual.
FIFTH. The aggregate number of shares which the Corporation shall have
authority to issue is 360,000,000 shares, divided into 350,000,000 shares of
Common Stock, par value $1.00 per share, and 10,000,000 shares of Series
Preferred Stock, without par value. The Board of Directors of the Corporation
shall have the full authority permitted by law to fix by resolution full,
limited, multiple or fractional, or no voting rights, and such designations,
preferences, qualifications, privileges, limitations, restrictions, options,
conversion rights, and other special or relative rights of any class or any
series of any class that may be desired.
A. General Terms and Series Preferred Stock
Except as otherwise provided by an amendment to the Articles or a
resolution or resolutions of the Board of Directors creating a series of the
Series Preferred Stock (either action being hereinafter referred to as a
"Creating Resolution"), the following provisions (the "Series Preferred Stock
General Terms") shall fix certain voting rights, designations, preferences,
qualifications, privileges, limitations, options, conversion rights and other
special rights applicable to all of the shares of Series Preferred Stock,
without par value (such class being herein called "Series Preferred Stock") and
shall determine the extent to which such shares may be divided and issued in
series and the extent to which shares of one series of Series Preferred Stock
may vary from shares of other series thereof.
1. Series and Limitations of Variations between Series.
1
<PAGE>
The shares of Series Preferred Stock may be divided into and issued in
series from time to time, as herein provided. All shares of any particular
series of Series Preferred Stock shall be identical to all other shares of that
series. Except as otherwise provided in a Creating Resolution, all shares of
Series Preferred Stock of all series shall rank ratably as to dividends and
assets according to the respective rates and amounts provided herein and in any
Creating Resolution. Subject to any applicable provisions of law, the shares of
Series Preferred Stock of different series may vary as to the following terms
and provisions, which shall be fixed in the case of each such series at any time
prior to the issuance of any shares thereof by a Creating Resolution:
(a) Distinctive designation of such series and the number of shares
which shall constitute such series, which number may be increased or
decreased (but not below the number of shares thereof then outstanding)
from time to time by action of the Board of Directors;
(b) Dividend rate per annum of shares of such series, and the date or
dates from which dividends on shares of such series shall be cumulative
(hereinafter called the "Date of Cumulation");
(c) Provisions for redemption, and, if the shares of such series are
subject to redemption, the Redemption Price or Prices (as hereinafter
defined) at which, and the terms and conditions on which, the shares of
such series may be redeemed;
(d) Amount or amounts payable upon the shares of such series in the
event of the liquidation, dissolution or winding up of the Corporation,
which amount or amounts may vary depending on whether the liquidation,
dissolution or winding up is voluntary or involuntary and, if voluntary, be
subject to other terms and conditions;
(e) Provisions, if any, entitling the shares of such series to the
benefit of a sinking fund or a purchase fund to be applied to the purchase
or redemption of shares of such series, and, if so provided, the amount,
terms and conditions of such fund;
(f) Provisions, if any, as to convertibility into, or exchange ability
for, shares of any other class or of any other series of the same or any
other class of stock of the Corporation, and, if so provided, the
conversion price or prices, and terms and conditions of such conversion or
exchange;
(g) Provisions, if any, granting to the shares of such series voting
rights in addition to the voting rights provided for herein;
(h) Provisions, if any, entitling the shares of such series to the
benefit of limitations restricting the creation of indebtedness or upon the
issue of any additional
2
<PAGE>
shares ranking on a parity with or prior to the shares of such series as to
dividends or assets in addition to the restrictions provided for herein;
(i) Provisions, if any, entitling the shares of such series to the
benefit of limitations restricting the purchase of, the payment of
dividends on, or the making of other distributions in respect of, any
shares of Junior Stock (as hereinafter defined) and, if so provided, the
terms and conditions of any such restrictions; and
(j) Provisions, if any, entitling the shares of such series to any
other rights, preferences and limitations permitted by applicable law.
2. Definitions.
(a) The term "Junior Stock" as used herein with respect to Series Preferred
Stock or a series thereof shall be deemed to mean the Common Stock (as
hereinafter defined) and all other stock of the Corporation ranking junior to
the Series Preferred Stock or such series thereof, as the case may be, as to the
payment of dividends and the distribution of assets. The term "Dividend Junior
Stock" as used herein with respect to Series Preferred Stock or a series thereof
shall be deemed to mean the Common Stock and all other stock of the Corporation
ranking junior to the Series Preferred Stock or such series thereof, as the case
may be, as to the payment of dividends. The term "Liquidation Junior Stock" as
used herein with respect to Series Preferred Stock or a series thereof shall be
deemed to mean the Common Stock and all other stock of the Corporation ranking
junior to the Series Preferred Stock or such series thereof, as the case may be,
as to distributions upon liquidation.
(b) The term "Dividend Parity Stock" as used herein with respect to a
series of Series Preferred Stock shall be deemed to mean all other stock of the
Corporation ranking equally therewith as to the payment of dividends. The term
"Liquidation Parity Stock" as used herein with respect to a series of Series
Preferred Stock shall be deemed to mean all other stock of the Corporation
ranking equally therewith as to distributions upon liquidation.
(c) The term "Senior Stock" as used herein with respect to a series of
Series Preferred Stock shall be deemed to mean all other stock of the
Corporation ranking senior thereto as to the payment of dividends or
distributions upon liquidation.
(d) The term "Common Stock" as used herein shall be deemed to mean stock
of the Corporation of any class, whether now or hereafter authorized, which has
the right to participate in the distribution of either earnings or assets of the
Corporation without limit as to the amount or percentage.
(e) The term "Full Cumulative Dividends" whenever used herein with
reference to any share of any series of the Series Preferred Stock shall mean
(whether or not in any dividend period
3
<PAGE>
or any part thereof in respect of which such term is used there shall have been
any funds of the Corporation legally available for the payment of such
dividends) that amount which shall be equal to dividends at the rate per share
fixed by the Creating Resolution for such series, for the period of time elapsed
from the Date of Cumulation of such series to the date as of which Full
Cumulative Dividends are to be computed, but without interest, less the amount
of all dividends paid or declared and set apart for payment upon such share.
3. Dividends.
(a) Out of any funds of the Corporation legally available therefor the
holders of shares of Series Preferred Stock of each series shall be entitled to
receive, when and as declared by the Board of Directors, dividends in cash at
the rate per share per annum for such series fixed by the Creating Resolution
and no more, and such dividends shall be cumulative (whether or not in any
dividend period there shall be funds of the Corporation legally available for
the payment of such dividends) but accruals of dividends will not bear interest.
Dividends on shares of Series Preferred Stock shall be payable on the first days
of January, April, July and October in each year, in each case from the Date of
Cumulation for such shares; provided that the initial dividend with respect to
any particular share of a series shall be payable on such of said dates as next
succeeds the date of issue of such share, unless otherwise determined by the
Creating Resolution. Until Full Cumulative Dividends on the outstanding shares
of a series of Series Preferred Stock to the end of the last preceding quarterly
dividend period shall have been paid or declared and set apart for payment, the
Corporation shall not (i) pay or declare and set apart for payment any dividend
on, or make any other distribution in respect of, any shares of Dividend Junior
Stock, other than dividends or distributions payable in Junior Stock, or (ii)
purchase, redeem, or otherwise acquire any shares of Dividend Junior Stock,
other than by exchange therefor of Junior Stock or the use of proceeds of a
substantially concurrent sale of Junior Stock.
(b) No dividends shall be paid or declared and set apart for payment on
shares of any particular series of Series Preferred Stock to the exclusion of
the shares of any Dividend Parity Stock. In the event that the stated dividends
upon any series of Series Preferred Stock and all Dividend Parity Stock are not
paid in full all shares of such series and all Dividend Parity Stock shall
participate ratably in the payment of dividends, including accumulations, if
any, in accordance with the sums which would be payable thereon if all dividends
thereon were declared and paid in full. The provisions of this paragraph shall
not prevent the payment of any dividend within 60 days after the declaration
thereof if such declaration when made complied with the provisions hereof.
4. Preference on Liquidation, etc.
In the event of any liquidation, dissolution or winding up of the
Corporation, voluntary or involuntary, the holders of shares of Series Preferred
Stock of each series shall be entitled to receive, out of the assets of the
Corporation available for distribution to its shareholders, before
4
<PAGE>
any distribution of assets shall be made to the holders of shares of Liquidation
Junior Stock, the amounts to which such holders are entitled as fixed by the
Creating Resolution for such series. If upon any liquidation, dissolution or
winding up of the Corporation the net assets of the Corporation shall be
insufficient to pay the holders of all outstanding shares of a series of Series
Preferred Stock and all Liquidation Parity Stock the full amounts to which they
shall be entitled, the holders of shares of such series of Series Preferred
Stock and all Liquidation Parity Stock shall share ratably in any distribution
of assets according to the respective amounts which would be payable in respect
of the shares held by them upon such distribution if all amounts payable on or
with respect to such shares were paid in full. The holders of shares of Series
Preferred Stock shall not be entitled to receive any amounts with respect
thereto upon any liquidation, dissolution or winding up of the Corporation
other than the amounts provided for in this Section 4. Neither the merger or
consolidation of the Corporation into or with any other corporation, nor the
merger or consolidation of any other corporation into or with the Corporation,
nor a sale, transfer or lease of all or any part of the assets of the
Corporation, shall be deemed to be a liquidation, dissolution or winding up of
the Corporation for the purposes of this Section 4.
5. Redemption.
(a) Unless otherwise prohibited by any Creating Resolution for any
outstanding series of Series Preferred Stock, the Corporation, may, at its
option expressed by resolution of its Board of Directors, redeem at any time or
from time to time the whole or any part of the shares of Series Preferred Stock
or of any series thereof at the time outstanding by paying in cash the
Redemption Price or Prices fixed by the Creating Resolution for such series,
plus an amount equal to Full Cumulative Dividends thereon to the date fixed for
redemption (the aggregate of such Redemption Price and Full Cumulative Dividends
is hereinafter in this Section 5 called the "Full Redemption Price"); provided
that the Corporation may not purchase or redeem less than all the shares of
Series Preferred Stock of a series then outstanding unless Full Cumulative
Dividends to the end of the last preceding quarterly dividend period upon the
shares of any Dividend Parity Stock, Liquidation Parity Stock and Senior Stock
then outstanding shall have been paid or declared and set apart for payment and
all sums required to be set aside as a sinking fund or purchase fund in respect
of such shares shall have been set aside in accordance with the terms of the
applicable sinking or purchase fund. If less than all the outstanding shares of
a series of Series Preferred Stock are to be redeemed, the selection of shares
for redemption may be made either by lot or pro rata in such manner as may be
prescribed by resolution of the Board of Directors.
(b) Notice of every such redemption shall be given by mail to the holders
of record of the shares to be redeemed and may be given in such other manner as
may be prescribed by resolution of the Board of Directors, at least thirty days
and not more than sixty days prior to the date fixed for redemption (which date,
when fixed in each case and specified in the notice of redemption, is
hereinafter called the "Redemption Date"). Any notice to be given by mail shall
be deemed given when mailed to the holders of the shares of Series Preferred
Stock to be redeemed of record
5
<PAGE>
at the time of mailing, at their respective addresses as the same shall appear
on the books of the Corporation, but in the case of notice by mail, no
accidental failure to mail such notice to any one or more holders shall affect
the validity of the redemption of any shares of Series Preferred Stock so to be
redeemed.
(c) The Board of Directors shall have full power and authority, subject to
the limitations and provisions contained herein to prescribe the manner in
which, and the terms and conditions upon which, the shares of Series Preferred
Stock shall be redeemed from time to time. If notice of redemption shall have
been given, and if on or before the Redemption Date specified in such notice all
funds necessary for such redemption shall have been set aside by the
Corporation, in trust for the account of the holders of the shares to be
redeemed, so as to be and continue to be available therefor, then
notwithstanding that any certificate for such shares so called for redemption
shall not have been surrendered for cancellation, from and after the Redemption
Date, the shares represented thereby shall no longer be deemed outstanding, the
right to receive dividends thereon shall cease to accrue and all rights with
respect to such shares so called for redemption shall forthwith on such
Redemption Date cease and terminate, except only the right of the holders
thereof to receive, out of the funds so set aside in trust, the Full Redemption
Price per share; provided that the Corporation may, if it shall so elect,
deposit the amount of the Redemption Price for the account of the holders of
shares of Series Preferred Stock entitled thereto with a bank or trust company
doing business in the Commonwealth of Pennsylvania, or in the State of New York;
and having capital and surplus of at least $10,000,000, at any time prior to the
Redemption Date (the date of such deposit being hereinafter in this Section 5
referred to as the "Date of Deposit"). Notice of the Corporation's election to
make such deposit, including the date on which the Full Redemption Price per
share will be available, and the name and address of the bank or trust company
with which the deposit has been or will be made, shall be included in the notice
of redemption. If the Corporation shall make such deposit on or before the date
specified therefor in the notice of redemption, then on and after the Date of
Deposit, and, notwithstanding that any certificate for shares of Series
Preferred Stock so called for redemption shall not have been surrendered for
cancellation, the shares with respect to which such deposit shall have been made
shall no longer be deemed outstanding and all rights of the holders thereof as
shareholders of the Corporation shall cease and terminate, except the right to
receive out of the funds so deposited in trust from and after the Date of
Deposit, the Full Redemption Price per share as herein provided and except any
conversion, exchange or subscription rights not theretofore expired. Such
conversion or exchange rights, however, in any event shall cease and terminate
upon the Redemption Date or upon any earlier date duly fixed for the termination
of such rights. At any time on or after the Redemption Date, or, if the
Corporation shall elect to deposit the moneys for such redemption as herein
provided, then at any time on or after the Date of Deposit, which time shall not
be later than the Redemption Date, the respective holders of record of the
shares of Series Preferred Stock to be redeemed shall be entitled to receive the
Full Redemption Price per share upon actual delivery to the Corporation or, in
the event of such deposit, to the bank or trust company with which such deposit
shall be made, of certificates for the shares to be redeemed, such certificates,
if required, to be duly endorsed in blank or accompanied by proper
6
<PAGE>
instruments of assignment and transfer thereof duly endorsed in blank and
including any necessary transfer stamps. Any moneys so deposited which shall
remain unclaimed by the holders of such shares of Series Preferred Stock so
redeemed at the end of two years after the Redemption Date shall be paid by such
bank or trust company to the Corporation; provided that all moneys so deposited
which shall not be required for such redemption because of the exercise of any
right of conversion or exchange shall be returned to the Corporation forthwith.
Any interest accrued on moneys so deposited shall belong to and be paid to the
Corporation from time to time.
(d) Except as otherwise provided by law or as otherwise provided herein or
in any Creating Resolution, the Corporation may purchase or acquire any shares
of Series Preferred Stock at a price not exceeding the applicable Full
Redemption Price for such shares at the time of such purchase. Any shares of
Series Preferred Stock redeemed, purchased or acquired by the Corporation shall
be canceled and restored to the status of authorized but unissued shares of
Series Preferred Stock without series designation and may thereafter, in the
discretion of the Board of Directors, be reissued or otherwise disposed of at
any time or from time to time as part of another series, subject to the terms
and conditions herein set forth.
6. No Preemptive Rights.
No holder of shares of Series Preferred Stock shall be entitled to
subscribe for or purchase any part of any new or additional issue of stock, or
securities convertible into stock, of any class, series or kind whatsoever,
whether now or hereafter authorized, and whether issued for cash, property,
services, by way of dividends, or otherwise.
7. Voting Rights.
(a) Except as otherwise required by law or as otherwise provided in these
Series Preferred Stock General Terms or in any Creating Resolution, the holders
of shares of Series Preferred Stock shall have no voting rights and shall not be
entitled to notice of any meeting of the shareholders of the Corporation.
Except as otherwise provided by law, or in any Creating Resolution, upon any
matter on which the shares of Series Preferred Stock of any series have voting
rights provided herein, each holder of shares of Series Preferred Stock of such
series shall be entitled to one vote for each $25 which would be payable with
respect to the holder's shares of Series Preferred Stock of such series upon any
involuntary liquidation, dissolution or winding up of the Corporation.
(b) Except as otherwise provided in the Creating Resolution, in the event
that dividends upon any series of the Series Preferred Stock shall be in arrears
to an amount equal to six full quarterly dividends thereon, the holders of such
series shall become entitled to the extent hereinafter provided to vote
noncumulatively at all elections of directors of the Corporation, and to receive
notice of all shareholders' meetings to be held for such purpose. At such
meetings the holders of such series voting as a class together with the holders
of any other series then having
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the right to elect directors under such circumstances, shall be entitled solely
to elect two members of the Board of Directors of the Corporation; and all other
directors of the Corporation shall be elected by the other shareholders of the
Corporation entitled to vote in the election of directors. Such voting rights of
the holders of such series shall continue until all accumulated and unpaid
dividends thereon shall have been paid or funds sufficient therefor set aside,
whereupon all such voting fights of the holders of shares of such series shall
cease, subject to being again revived from time to time upon the reoccurrence of
the conditions above described as giving rise thereto.
At any time when such right to elect directors separately as a class shall
have so vested, the Corporation may, and upon the written request of the holders
of record of not less than 20% of the then outstanding total number of shares of
all the Series Preferred Stock having the right to elect directors in such
circumstances shall call a special meeting of holders of such Series Preferred
Stock for the election of directors. In the case of such a written request,
such special meeting shall be held within 90 days after the delivery of such
request, and, in either case, at the place and upon the notice provided by law
and in the By-laws of the Corporation; provided that the Corporation shall not
be required to call such a special meeting if such request is received less than
120 days before the date fixed for the next ensuing annual or special meeting of
shareholders of the Corporation. Upon the mailing of the notice of such special
meeting to the holders of such Series Preferred Stock, or, if no such meeting be
held, then upon the mailing of the notice of the next annual or special meeting
of shareholders for the election of directors, the number of directors of the
Corporation shall, ipso facto, be increased to the extent, but only to the
extent, necessary to provide sufficient vacancies to enable the holders of such
Series Preferred Stock to elect the two directors hereinabove provided for, and
all such vacancies shall be filled only by vote of the holders of such Series
Preferred Stock as hereinabove provided. Whenever the number of directors of
the Corporation shall have been increased, the number as so increased may
thereafter be further increased or decreased in such manner as may be permitted
by the By-laws and without the vote of the holders of Series Preferred Stock,
provided that no such action shall impair the right of the holders of Series
Preferred Stock to elect and to be represented by two directors as herein
provided.
So long as the holders of any series of Series Preferred Stock are entitled
hereunder to voting rights, any vacancy in the Board of Directors caused by the
death or resignation of any director elected by the holders of Series Preferred
Stock, shall, until the next meeting of shareholders for the election of
directors, in each case be filled by the remaining director elected by the
holders of Series Preferred Stock having the right to elect directors in such
circumstances.
Upon termination of the voting rights of the holders of any series of
Series Preferred Stock, so long as no other Series Preferred Stock then
outstanding has the right to elect directors in such circumstances, the terms of
office of all persons who shall have been elected directors of the Corporation
by vote of the holders of Series Preferred Stock or by a director elected by
such holders shall forthwith terminate.
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(c) Except when some mandatory provision of law shall be controlling and
except as expressly provided in Section 8 hereof, as long as two or more series
of Series Preferred Stock are outstanding, no particular series of Series
Preferred Stock shall be entitled to vote as a separate series on any matter and
all shares of Series Preferred Stock of all series shall be deemed to constitute
but one class for any purpose for which a vote of the shareholders of the
Corporation by classes may now or hereafter be required.
8. Restrictions on Certain Corporate Action.
(a) Majority Consent. Without the consent of the holders of at least a
majority of the shares of Series Preferred Stock at the time outstanding, given
in person or by proxy, either in writing according to law or at a meeting of
shareholders called for the purpose, the Corporation shall not
(i) authorize any new class or series of shares or any series of
Series Preferred Stock, or an increase in the authorized amount of any
class or series of shares or any series of Series Preferred Stock, which
shall rank senior to any series of the Series Preferred Stock with respect
to payment of dividends or distributions upon liquidation; provided,
however, that if shares of such class or series would rank prior to one or
more but not all of the several series of the Series Preferred Stock at the
time outstanding, the consent of the holders of a majority of the shares of
all series with respect to which shares of such class or series would rank
prior shall be required in lieu of the consent of holders of all Series
Preferred Stock; or
(ii) increase the authorized Series Preferred Stock to any amount in
excess of 5,000,000; or
(iii) merge or consolidate with any other corporation if the
corporation resulting from such merger or consolidation would have after
such merger or consolidation any authorized class of shares ranking prior
to or equal with the Series Preferred Stock with respect to payment of
dividends or distributions upon liquidation, except for classes having the
same number of shares with the same rights and preferences as the
authorized shares of the Corporation immediately preceding such merger or
consolidation.
(b) Two-thirds Consent. Without the consent of the holders of at least
two-thirds of the shares of Series Preferred Stock outstanding, given in person
or by proxy, either in writing according to law or at a meeting of shareholders
called for the purpose, the Corporation shall not adopt or effect any amendment
to its Articles which would adversely affect the rights or preferences of the
Series Preferred Stock (except as may be expressly permitted under subsection
(a) of this Section 8 with the consent of the holders of a majority of the
shares of Series Preferred Stock); provided, however, that if any such amendment
shall adversely affect the rights or preferences of one or more, but not all, of
the several series of Series Preferred Stock at the time outstanding, the
consent of the holders of at least two-thirds of the shares of all series
adversely
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affected, similarly given, shall be required in lieu of the consent of the
holders of two-thirds of the shares of Series Preferred Stock.
9. Powers of Board of Directors.
Unless otherwise provided in any resolution hereafter adopted by the Board
of Directors pursuant to this Article Fifth and filed in the manner provided by
law, the number of shares of any series of Series Preferred Stock established
and designated hereunder may be increased (within the then total authorized
amount of Series Preferred Stock of all series) or decreased (but not below the
number of shares thereof then outstanding) by a statement filed pursuant to law
setting forth a resolution adopted by the Board of Directors increasing or
decreasing the authorized number of shares of such series. In like manner,
unless otherwise provided in this Article Fifth or in any such resolution, the
Board of Directors may from time to time, within the then total authorized
amount of Series Preferred Stock of all series, establish and designate any
reacquired or unissued shares of Series Preferred Stock (whether or not
theretofore established and designated as a part of any existing series) as
shares of Series Preferred Stock of one or more existing or additional series
and fix and determine the relative rights and preferences thereof.
B. Specific Terms of Series A Preferred Stock
There shall be a series of the Series Preferred Stock which shall consist
of 3,041,000 shares and shall be designated as Series A Preferred Stock (such
series being herein called the "Series A Stock"), which shall have a stated
value of $25 per share.
1. Dividends.
The holders of Series A Stock shall be entitled to receive out of any funds
legally available for the purpose when and as declared by the Board of Directors
cash dividends thereon at an annual per share rate equal to the product of $25
multiplied by the sum of 0.65% and the arithmetic mean of Moody's Investors
Service, Inc.'s Public Utility Preferred Stock Yield Averages for "a" rated
preferred stocks for the four weeks immediately preceding the Effective Date, as
defined in the Agreement and Plan of Reorganization, dated October 26, 1982,
between the Corporation and Philadelphia National Corporation, and no more. The
Date of Cumulation with respect to shares of Series A Stock shall be the
dividend payment date next preceding the date of issue of such share, unless (a)
the date of issue of such share is a dividend payment date in which case the
Date of Cumulation shall be such dividend payment date or (b) at the date of
issuance of such share there are unpaid Full Cumulative Dividends on any
outstanding share of Series A Stock, in which case the Date of Cumulation shall
be the most recent date when all Full Cumulative Dividends on all shares of
Series A Stock were paid.
2. Preference on liquidation, etc.
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In the event of any liquidation, dissolution or winding up of the
Corporation, voluntary or involuntary, the holders of Series A Stock shall be
entitled to payment in cash of $25 per share, plus a further amount equal to
Full Cumulative Dividends to the date when such payments shall be made available
to the holders thereof, and no more.
3. Redemption.
The Series A Stock shall not be redeemable until after the fifth
anniversary of the Effective Date. After the fifth anniversary of the Effective
Date, the Series A Stock may be called for redemption and redeemed by the
payment therefor of $25.75 per share until the tenth anniversary of the
Effective Date and $25 per share on the tenth anniversary of the Effective Date,
or at any time thereafter, plus an amount equal to Full Cumulative Dividends to
the date fixed by the Board of Directors as the Redemption Date.
SIXTH. The shareholders of the Corporation shall not have the right to
cumulate their votes for the election of directors of the Corporation.
SEVENTH.
1. Number of directors.
The Board of Directors shall consist of such number of directors as shall
be determined from time to time by resolution of the Board of Directors.
2. Classification of Board of Directors.
The directors shall be classified in respect of the time for which they
shall severally hold office as follows:
(a) Each class shall be as nearly equal in number as possible.
(b) The term of office of at least one class shall expire in each year.
(c) The members of each class shall be elected for a period of three
years.
EIGHTH. These Articles may be amended in the manner at the time prescribed
by statue, and all rights conferred upon shareholders herein are granted subject
to this reservation.
NINTH.
1. Directors and officers as fiduciaries.
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A director or officer of the Corporation shall stand in a fiduciary
relation to the Corporation and shall perform his or her duties as a director or
officer, including his or her duties as a member of any committee of the board
upon which he or she may serve, in good faith, in a manner he or she reasonably
believes to be in the best interests of the Corporation, and with such care,
including reasonable inquiry, skill and diligence, as a person of ordinary
prudence would use under similar circumstances. In performing his or her
duties, a director or officer shall be entitled to rely in good faith on
information, opinions, reports or statements, including financial statements and
other financial data, in each case prepared or presented by (a) one or more
officers or employees of the Corporation whom the director or officer reasonably
believes to be reliable and competent with respect to the matters presented, (b)
counsel, public accountants or other persons as to matters that the director or
officer reasonably believes to be within the professional or expert competence
of such person, or (c) a committee of the board of directors upon which the
director or officer does not serve, duly designated in accordance with law, as
to matters within its designated authority, which committee the director or
officer reasonably believes to merit confidence. A director or officer shall
not be considered to be acting in good faith if he or she has knowledge
concerning the matter in question that would cause his or her reliance to be
unwarranted. Absent breach of fiduciary duty, lack of good faith or self-
dealing, actions taken as director or officer of the Corporation, or any failure
to take any action, shall be presumed to be in the best interests of the
Corporation.
2. Personal liability of directors.
A director of the Corporation shall not be personally liable, as such, for
monetary damages (including, without limitation, any judgement, amount paid in
settlement, penalty, punitive damages or expense of any nature (including,
without limitation, attorney's fees and disbursements)) for any action taken, or
any failure to take any action, unless the director has breached or failed to
perform the duties of his or her office under these Articles, the By-laws or
applicable provisions of law and the breach or failure to perform constitutes
self-dealing, willful misconduct or recklessness.
3. Personal liability of officers.
An officer of the Corporation shall not be personally liable, as such, to
the Corporation or its shareholders for monetary damages (including, without
limitation, any judgement amount paid in settlement, penalty, punitive damages
or expense of any nature (including, without limitation, attorneys' fees and
disbursements)) for any action taken, or any failure to take any action, unless
the director has breached or failed to perform the duties of his or her office
under these Articles, the By-laws or applicable provisions of law and the breach
or failure to perform constitutes self-dealing, willful misconduct or
recklessness.
4. Interpretation of article.
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The provisions of Sections 2 and 3 of this Article Ninth shall not apply to
the responsibility or liability of a director or officer, as such, pursuant to
any criminal statute or for the payment of taxes pursuant to local state or
Federal law. The provisions of this Article Ninth have been adopted pursuant to
the authority of Sections 204A (10) and 801 of the Pennsylvania Business
Corporation Law, shall be deemed to be a contract with each director or officer
of the Corporation who serves as such at any time while this Article is in
effect, and such provisions are cumulative of and shall be in addition to and
independent of any and all other limitations of the liabilities of directors or
officers of the Corporation, as such, or rights of indemnification by the
Corporation to which a director or officer of the Corporation may be entitled,
whether such limitations or rights arise under or are created by any statute,
rule of law, By-law, agreement, vote of shareholders or disinterested directors
or otherwise. Each person who serves as a director or officer of the
Corporation while this Article Ninth is in effect shall be deemed to be doing so
in reliance on the provisions of this Article. No amendment to or repeal of
this Article Ninth, nor the adoption of any provision of these Articles
inconsistent with this Article, shall apply to or have any effect on the
liability or alleged liability of any director or officer of the Corporation for
or with respect to any acts or omissions of such director or officer occurring
prior to such amendment, repeal or adoption of an inconsistent provision. In
any action, suit or proceeding involving the application of the provisions of
this Article Ninth, the party or parties challenging the right of a director or
officer to the benefits of this Article have the burden of proof.
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Exhibit 3.2
BYLAWS
OF
CORESTATES FINANCIAL CORP
(a Pennsylvania Registered Corporation)
(as amended January 21, 1997)
ARTICLE I
Offices and Fiscal Year
Section 1.01. Registered Office. - The registered office of the corporation
in the Commonwealth of Pennsylvania shall be at the northeast corner of Broad
and Chestnut Streets, Philadelphia, Pennsylvania until otherwise established by
the board of directors and a record of such change is filed with the Department
of State in the manner provided by law.
Section 1.02. Other Offices. - The corporation may also have offices at
such other places within or without the Commonwealth of Pennsylvania as the
board of directors may from time to time appoint or the business of the
corporation may require.
Section 1.03. Fiscal Year. - The fiscal year of the corporation shall
begin on the first day of January in each year.
ARTICLE II
Notice - Waivers - Meetings Generally
Section 2.01. Manner of Giving Notice.
(a) General Rule. - Whenever written notice is required to be given to any
person under the provisions of the Business Corporation Law or by the articles
or these bylaws, it may be given to the person either personally or by sending a
copy thereof by first class or express mail, postage prepaid, or by telegram
(with messenger services specified), telex or TWX (with answerback received) or
courier service, charges prepaid, or by telecopier, to the address (or the
telex, TWX, telecopier or telephone number) of the person appearing on the books
of the corporation or, in the case of directors, supplied by the director to the
corporation for the purpose of notice. If the notice is sent by mail, telegraph
or courier service, it shall be deemed to have been given to the person entitled
thereto when deposited in the United States mail or with a telegraph office or
courier service for delivery to that person or, in the case of telex or TWX,
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when dispatched. A notice of meeting shall specify the place, day and hour of
the meeting and any other information required by any other provision of the
Business Corporation Law, the articles or these bylaws.
(b) Adjourned Shareholder Meetings. - When a meeting of shareholders is
adjourned, it shall not be necessary to give any notice of the adjourned meeting
or of the business to be transacted at an adjourned meeting, other than by
announcement at the meeting at which the adjournment is taken, unless the board
fixes a new record date for the adjourned meeting.
(c) Notice. - Notice given by mail of any regular or special meeting of the
shareholders (or any other notice required by Chapter 17, Subchapter A of
PA.C.S.A. or by the articles or bylaws to be given to all shareholders or to all
holders of a class of series of shares) at least 20 days prior to the day named
for the meeting of any corporate or shareholder action specified in the notice
may use any class of postpaid mail.
Section 2.02. Notice of Meetings of Board of Directors. - Notice of a
regular meeting of the board of directors need not be given. Notice of every
special meeting of the board of directors shall be given to each director by
telephone or in writing at least 24 hours (in the case of notice by telephone,
telex or TWX) or 48 hours (in the case of notice by telecopier, telegraph,
courier service or express mail) or five days (in the case of notice by first
class mail) before the time at which the meeting is to be held. Every such
notice shall state the time and place of the meeting. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the board
need be specified in a notice of the meeting.
Section 2.03. Notice of Meetings of Shareholders.
(a) General Rule. - Written notice of every meeting of the shareholders
shall be given by, or at the direction of, the secretary to each shareholder of
record entitled to vote at the meeting at least (1) ten days prior to the day
named for a meeting called to consider amendment of the articles or adoption of
a plan of merger, consolidation, exchange, asset transfer, division or
conversion or adoption of a proposal of dissolution or (2) five days prior to
the day named for the meeting in any other case. If the secretary neglects or
refuses to give notice of a meeting, the person or persons calling the meeting
may do so. In the case of a special meeting of shareholders, the notice shall
specify the general nature of the business to be transacted.
(b) Notice of Action by Shareholders on Bylaws. - In the case of a meeting
of shareholders that has as one of its purposes action on the bylaws, written
notice shall be given to each shareholder that the purpose, or one of the
purposes, of the meeting is to consider the adoption, amendment or repeal of the
bylaws. There shall be included in, or enclosed with, the notice a copy of the
proposed amendment or a summary of the changes to be effected thereby.
Section 2.04. Waiver of Notice.
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(a) Written Waiver. - Whenever any written notice is required to be given
under the provisions of the Business Corporation Law, the articles or these
bylaws, a waiver thereof in writing, signed by the person or persons entitled to
the notice, whether before or after the time stated therein, shall be deemed
equivalent to the giving of the notice. Except as otherwise required by this
subsection, neither the business to be transacted at, nor the purpose of, a
meeting need be specified in the waiver of notice of the meeting. In the case
of a special meeting of shareholders, the waiver of notice shall specify the
general nature of the business to be transacted.
(b) Waiver by Attendance. - Attendance of a person at any meeting shall
constitute a waiver of notice of the meeting except where a person attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting was not lawfully called
or convened.
Section 2.05. Modification of Proposal Contained in Notice. - Whenever
the language of a proposed resolution is included in a written notice of a
meeting required to be given under the provisions of the Business Corporation
Law or the articles or these bylaws, the meeting considering the resolution may
without further notice adopt it with such clarifying or other amendments as do
not enlarge its original purpose.
Section 2.06. Exception to Requirement of Notice.
(a) General Rule. - Whenever any notice or communication is required to be
given to any person under the provisions of the Business Corporation Law or by
the articles or these bylaws or by the terms of any agreement or other
instrument or as a condition precedent to taking any corporate action and
communication with that person is then unlawful, the giving of the notice or
communication to that person shall not be required.
(b) Shareholders Without Forwarding Addresses. - Notice or other
communications shall not be sent to any shareholder with whom the corporation
has been unable to communicate for more than 24 consecutive months because
communications to the shareholder are returned unclaimed or the shareholder has
otherwise failed to provide the corporation with a current address. Whenever
the shareholder provides the corporation with a current address, the corporation
shall commence sending notice and other communications to such shareholder in
the same manner as to other shareholders.
Section 2.07. Use of Conference Telephone and Similar Equipment. - The
board of directors may provide by resolution with respect to a specific meeting
or with respect to a class of meetings that one or more persons may participate
in a meeting of the board of directors or of the shareholders of the corporation
by means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other.
Participation in a meeting pursuant to this section shall constitute presence in
person at the meeting.
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ARTICLE III
Shareholders
Section 3.01. Place of Meeting. - All meetings of the shareholders of the
corporation shall be held at the registered office of the corporation unless
another place is designated by the board of directors in the notice of such
meeting.
Section 3.02. Annual Meeting. - The board of directors may fix and
designate the date and time of the annual meeting of the shareholders, but if no
such date and time is fixed and designated by the board, the meeting for any
calendar year shall be held on the third Tuesday of April in such year, if not a
legal holiday under the laws of Pennsylvania, and, if a legal holiday, then on
the next succeeding business day, not a Saturday, at 9:30 o'clock A.M., and at
said meeting the shareholders then entitled to vote shall elect directors and
shall transact such other business as may properly be brought before the
meeting. If the annual meeting shall not have been called and held within six
months after the designated time, any shareholder may call the meeting at any
time thereafter.
Section 3.03. Special Meetings. - Special meetings of the shareholders may
be called at any time by the chairman of the board, the president or the board
of directors, who may fix the date, time and place of the meeting. If the date,
time or place of the meeting is not so fixed, it shall be the duty of the
secretary to do so. A date fixed by the secretary shall not be more than 60
days after the date of the calling of the special meeting.
Section 3.04. Quorum and Adjournment.
(a) General Rule. - A meeting of shareholders of the corporation duly
called shall not be organized for the transaction of business unless a quorum is
present. The presence of shareholders entitled to cast at least a majority of
the votes that all shareholders are entitled to cast on a particular matter to
be acted upon at the meeting shall constitute a quorum for the purposes of
consideration and action on the matter. Shares of the corporation owned,
directly or indirectly, by it and controlled, directly or indirectly, by the
board of directors of this corporation, as such, shall not be counted in
determining the total number of outstanding shares for quorum purposes at any
given time.
(b) Withdrawal of a Quorum. - The shareholders present at a duly organized
meeting can continue to do business until adjournment notwithstanding the
withdrawal of enough shareholders to leave less than a quorum.
(c) Adjournments Generally. - Any regular or special meeting of the
shareholders, including one at which directors are to be elected and one which
cannot be organized because of
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the absence of a quorum, may be adjourned for such period and to such place as
the shareholders present and entitled to vote shall direct.
(d) Electing Directors at Adjourned Meeting. - Those shareholders entitled
to vote who attend a meeting called for the election of directors that has been
previously adjourned for lack of a quorum, although less than a quorum as fixed
in this section, shall nevertheless constitute a quorum for the purpose of
electing directors.
(e) Other Action in Absence of Quorum. - Those shareholders entitled to
vote who attend a meeting of shareholders that has been previously adjourned for
one or more periods aggregating at least 15 days because of an absence of a
quorum, although less than a quorum as fixed in this section, shall nevertheless
constitute a quorum for the purpose of acting upon any matter set forth in the
notice of the meeting if the notice states that those shareholders who attend
the adjourned meeting shall nevertheless constitute a quorum for the purpose of
acting upon the matter.
Section 3.05. Action by Shareholders. - Except as otherwise provided in
the Business Corporation Law or the articles or these bylaws, whenever any
corporate action is to be taken by vote of the shareholders of the corporation,
it shall be authorized by a majority of the votes cast at a duly organized
meeting of shareholders by the holders of shares entitled to vote thereon.
Unless otherwise provided in the articles, except when acting by unanimous
consent to remove a director or directors, the shareholders of the corporation
may act only at a duly organized meeting.
Section 3.06. Organization. - At every meeting of the shareholders, the
chairman of the board, if there be one, or in the case of vacancy in office or
absence of the chairman of the board, one of the following officers present in
the order stated: the president or a chairman chosen by vote of the shareholders
present, shall act as chairman. The secretary, or, in the absence of the
secretary, a person appointed by the chairman, shall act as secretary.
Section 3.07. Voting Rights of Shareholders. - Unless otherwise provided
in the articles, every shareholder of the corporation shall be entitled to one
vote for every share standing in the name of the shareholder on the books of the
corporation.
Section 3.08. Voting and Other Action by Proxy.
(a) General Rule.
(1) Every shareholder entitled to vote at a meeting of shareholders
may authorize another person to act for the shareholder by proxy.
(2) The presence of, or vote or other action at a meeting of
shareholders by a proxy of a shareholder shall constitute the presence of,
or vote or action by the
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shareholder.
(3) Where two or more proxies of a shareholder are present, the
corporation shall, unless otherwise expressly provided in the proxy, accept
as the vote of all shares represented thereby the vote cast by a majority
of them and, if a majority of the proxies cannot agree whether the shares
represented shall be voted or upon the manner of voting the share, the
voting of the shares shall be divided equally among those persons.
(b) Minimum Requirements. - Every proxy shall be executed in writing by the
shareholder or by the duly authorized attorney-in-fact of the shareholder and
filed with the secretary of the corporation. A proxy, unless coupled with an
interest, shall be revocable at will, notwithstanding any other agreement or any
provision in the proxy to the contrary, but the revocation of a proxy shall not
be effective until written notice thereof has been given to the secretary of the
corporation. An unrevoked proxy shall not be valid after three years from the
date of its execution unless a longer time is expressly provided therein. A
proxy shall not be revoked by the death or incapacity of the maker unless,
before the voter is counted or the authority is exercised, written notice of the
death or incapacity is given to the secretary of the corporation.
(c) Expenses. - The corporation shall pay the reasonable expenses of
solicitation of votes, proxies or consents of shareholders by or on behalf of
the board of directors or its nominees for election to the board, including
solicitation by professional proxy solicitors and otherwise.
Section 3.09. Voting by Fiduciaries and Pledgees. - Shares of the
corporation standing in the name of a trustee or other fiduciary and shares held
by an assignee for the best benefit of creditors or by a receiver may be voted
by the trustee, fiduciary, assignee or receiver. A shareholder whose shares are
pledged shall be entitled to vote the shares until the shares have been
transferred into the name of the pledgee, or a nominee of the pledgee, but
nothing in this section shall affect the validity of a proxy given to a pledgee
or nominee.
Section 3.10. Voting by Joint Holders of Shares.
(a) General Rule. - Where shares of the corporation are held jointly or as
tenants in common by two or more persons, as fiduciaries or otherwise:
(1) if only one or more of such persons is present in person or by
proxy, all of the shares standing in the names of such persons shall be
deemed to be represented for the purpose of determining a quorum and the
corporation shall accept as the vote of all the shares the vote cast by a
joint owner or a majority of them; and
(2) if the persons are equally divided upon whether the shares held by
them shall be voted or upon the manner of voting the shares, the voting of
the shares shall be divided equally among the persons without prejudice to
the rights of the joint owners or
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the beneficial owners thereof among themselves.
(b) Exception. - If there has been filed with the secretary of the
corporation a copy, certified by an attorney at law to be correct, of the
relevant portions of the agreement under which the shares are held or the
instrument by which the trust or estate was created or the order of court
appointing them or of an order of court directing the voting of the shares, the
persons specified as having such voting power in the document latest in date of
operative effect so filed, and only those persons, shall be entitled to vote the
shares but only in accordance therewith.
Section 3.11. Voting by Corporations
(a) Voting by Corporate Shareholders. - Any corporation that is a
shareholder of this corporation may vote at meetings of shareholders of this
corporation by any of its officers or agents, or by proxy appointed by any
officer or agent, unless some other person, by resolution of the board of
directors of the other corporation or a provision of its articles or bylaws, a
copy of which resolution or provision certified to be correct by one of its
officers has been filed with the secretary of this corporation, is appointed its
general or special proxy in which case that person shall be entitled to vote the
shares.
(b) Controlled Shares. - Shares of this corporation owned, directly or
indirectly, by it and controlled, directly or indirectly, by the board of
directors of this corporation, as such, shall not be voted at any meeting and
shall not be counted in determining the total number of outstanding shares for
voting purposes at any given time.
Section 3.12. Determination of Shareholders of Record.
(a) Fixing Record Date. - The board of directors may fix a time prior to
the date of any meeting of shareholders as a record date for the determination
of the shareholders entitled to notice of, or to vote at, the meeting, which
time, except in the case of an adjourned meeting, shall be not more than 90 days
prior to the date of the meeting of shareholders. Only shareholders of record on
the date fixed shall be so entitled notwithstanding any transfer of shares on
the books of the corporation after any record date fixed as provided in this
subsection. The board of directors may similarly fix a record date for the
determination of shareholders of record for any other purpose. When a
determination of shareholders of record has been made as provided in this
section for purposes of a meeting, the determination shall apply to any
adjournment thereof unless the board fixes a new record date for the adjourned
meeting.
(b) Determination When No Record Date Fixed. - If a record date is not
fixed:
(1) The record date for determining shareholders entitled to notice of
or to vote at a meeting of shareholders shall be at the close of business
on the day next preceding the day on which notice is given.
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(2) The record date for determining shareholders for any other purpose
shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
(c) Certification by Nominee. - The board of directors may adopt a
procedure whereby a shareholder of the corporation may certify in writing to the
corporation that all or a portion of the shares registered in the name of the
shareholder are held for the account of a specified person or persons. Upon
receipt by the corporation of a certification complying with the procedure, the
persons specified in the certification shall be deemed, for the purposes set
forth in the certification, to be the holders of record of the number of shares
specified in place of the shareholder making the certification.
Section 3.13. Voting Lists.
(a) General Rule. - The officer or agent having charge of the transfer
books for shares of the corporation shall make a complete list of the
shareholders entitled to vote at any meeting of shareholders, arranged in
alphabetical order, with the address of and the number of shares held by each.
The list shall be produced and kept open at the time and place of the meeting
and shall be subject to the inspection of any shareholder during the whole time
of the meeting for the purposes thereof except that, if the corporation has
5,000 or more shareholders, in lieu of the making of the list the corporation
may make the information therein available at the meeting by any other means.
(b) Effect of List. - Failure to comply with the requirements of this
section shall not affect the validity of any action taken at a meeting prior to
a demand at the meeting by any shareholder entitled to vote thereat to examine
the list. The original share register or transfer book, or a duplicate thereof
kept in the Commonwealth of Pennsylvania, shall be prima facie evidence as to
who are the shareholders entitled to examine the list or share register or
transfer book or to vote at any meeting of shareholders.
Section 3.14. Judges of Election.
(a) Appointment. - In advance of any meeting of shareholders of the
corporation, the board of directors may appoint judges of election, who need not
be shareholders, to act at the meeting or any adjournment thereof. If judges of
election are not so appointed, the presiding officer of the meeting may, and on
the request of any shareholder shall, appoint judges of election at the meeting.
The number of judges shall be one or three. A person who is a candidate for
office to be filled at the meeting shall not act as a judge.
(b) Vacancies. - In case any person appointed as a judge fails to appear or
fails or refuses to act, the vacancy must be filled by appointment made by the
board of directors in advance of the convening of the meeting or at the meeting
of the presiding officer thereof.
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(c) Duties. - The judges of election shall determine the number of shares
outstanding and the voting power of each, the shares represented at the meeting,
the existence of a quorum, the authenticity, validity and effect of proxies,
receive votes or ballots, hear and determine all challenges and questions in any
way arising in connection with the right to vote, count and tabulate all votes,
determine the result and do such acts as may be proper to conduct the election
or vote with fairness to all shareholders. The judges of election shall perform
their duties impartially, in good faith, to the best of their ability and as
expeditiously as is practical. If there are three judges of election, the
decision, act or certificate of a majority shall be effective in all respects as
the decision, act or certificate of all.
(d) Report. - On request of the presiding officer of the meeting or of any
shareholder, the judges shall make a report in writing of any challenge or
question or matter determined by them, and execute a certificate of any fact
found by them. Any report or certificate made by them shall be prima facie
evidence of the facts stated therein.
Section 3.15. Minors as Securityholders. - The corporation may treat a
minor who holds shares or obligations of the corporation as having capacity to
receive and to empower others to receive dividends, interest, principal and
other payments or distributions, to vote or express consent or dissent and to
make elections and exercise rights relating to such shares or obligations
unless, in the case of payments or distributions on shares, the corporate
officer responsible for maintaining the list of shareholders or the transfer
agent of the corporation or, in the case of payments or distributions on
obligations, the treasurer or paying officer or agent has received written
notice that the holder is a minor.
Section 3.16. Nominating Procedure for Directors. - Nominations for
election of directors may be made by any shareholder entitled to vote for the
election of directors only if written notice (the "Notice") of such
shareholder's intent to nominate a director at the meeting is given by the
shareholder and received by the Secretary of the corporation in the manner and
within the time specified herein. The Notice shall be delivered to the
Secretary of the corporation no less than 45 days prior to the date fixed by
these Bylaws for the annual meeting of shareholders; provided, however, that if
directors are to be elected by the shareholders at any other time, the Notice
shall be delivered to the Secretary of the corporation not later than the
seventh day following the day on which notice of the meeting was first mailed to
shareholders. In lieu of delivery to the Secretary of the corporation, the
Notice may be mailed to the Secretary of the corporation by certified mail,
return receipt requested, but shall be deemed to have been given only upon
actual receipt by the Secretary of the corporation.
The Notice shall be in writing and shall contain or be accompanied by:
(a) the name and residence of such shareholder;
(b) a representation that the shareholder is a holder of the corporation's
voting stock
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and intends to appear in person or by proxy at the meeting to nominate the
person or persons specified in the Notice;
(c) such information regarding each nominee as would have been required to
be included in a proxy statement filed pursuant to Regulation 14A of the rules
and regulations established by the Securities and Exchange Commission under the
Securities Exchange Act of 1934 (or pursuant to any successor act or regulation)
had proxies been solicited with respect to such nominee by the management or
Board of Directors of the corporation;
(d) a description of all arrangements or understandings among the
shareholder and each nominee and any other person or persons (naming such
persons or persons) pursuant to which such nomination or nominations are to be
made by the shareholder; and
(e) the consent of each nominee to serve as director of the corporation if
so elected.
The chairman of the meeting may, if the facts warrant, determine and
declare to the meeting that any nomination made at the meeting was not made in
accordance with the foregoing procedures and, in such event, the nomination
shall be disregarded.
ARTICLE IV
Board of Directors
Section 4.01. Powers; Personal Liability.
(a) General Rule. - Unless otherwise provided by the Business Corporation
Law, all powers vested by law in the corporation shall be exercised by or under
the authority of, and the business and affairs of the corporation shall be
managed under the direction of, the board of directors.
(b) Personal Liability of Directors. -
(1) A director of the corporation shall not be personally liable, for
monetary damages as such, for any action taken, or any failure to take any
action, unless:
(i) the director has breached or failed to perform the duties of
his or her office under 42 Pa. C.S. Section 8363;* and
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* 42 Pa. C.S. Section 8363 was reenacted as Section 1721 of the Business
Corporation Law.
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(ii) the breach or failure to perform constitutes self-dealing,
willful misconduct or recklessness.
(2) The provisions of this subsection shall not apply to the
responsibility or liability of a director pursuant to any criminal statute,
or the liability of a director for the payment of taxes pursuant to local,
State or Federal law.
(3) The provisions of this subsection shall be effective January 27,
1987, but shall not apply to any action filed prior to that date nor to any
breach of performance of duty or any failure of performance of duty by a
director occurring prior to that date.
(The provisions of this subsection (b) were first adopted by the
shareholders of the corporation on April 21, 1987.)
(c) Notation of Dissent. - A director who is present at a meeting of the
board of directors, or of a committee of the board, at which action on any
corporate matter is taken shall be presumed to have assented to the action taken
unless his or her dissent is entered in the minutes of the meeting or unless the
director files a written dissent to the action with the secretary of the meeting
before the adjournment thereof or transmits the dissent in writing to the
secretary of the corporation immediately after the adjournment of the meeting.
The right to dissent shall not apply to a director who voted in favor of the
action. Nothing in this section shall bar a director from asserting that
minutes of the meeting incorrectly omitted his or her dissent if, promptly upon
receipt of a copy of such minutes, the director notifies the secretary, in
writing, of the asserted omission or inaccuracy.
Section 4.02. Qualifications and Selection of Directors.
(a) Qualifications. - Each director of the corporation shall be a natural
person of full age who need not be a resident of the Commonwealth of
Pennsylvania or a shareholder of the corporation.
(b) Selection. - Except as otherwise provided in these bylaws, directors of
the corporation shall be elected by the shareholders.
Section 4.03. Number and Term of Office.
(a) Number. - The board of directors shall consist of such number of
directors, not less than five nor more than 30, as may be determined from time
to time by resolution of the board of directors.
(b) Term of Office. - Each director shall hold office until the expiration
of the term for which he or she was selected and until a successor has been
selected and qualified or until his
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or her earlier death, resignation or removal. A decrease in the number of
directors shall not have the effect of shortening the term of any incumbent
director.
(c) Resignation. - Any director may resign at any time upon written notice
to the corporation. The resignation shall be effective upon receipt thereof by
the corporation or at such subsequent time as shall be specified in the notice
of resignation.
Section 4.04. Vacancies. - Vacancies in the board of directors, including
vacancies resulting from an increase in the number of directors, may be filled
by a majority vote of the remaining members of the board though less than a
quorum, or by a sole remaining director, and each person so selected shall be a
director to serve until the next selection of the class for which such director
has been chosen, and until a successor has been selected and qualified or until
his or her earlier death, resignation or removal.
Section 4.05. Removal of Directors.
(a) Removal by the Shareholders. - The entire board of directors, or any
class of the board, or any individual director may be removed from office by
vote of the shareholders entitled to vote thereon without assigning any cause;
provided, however, that, if the articles or bylaw adopted by the shareholders
provided for a classified board of directors, the entire board of directors, or
any class of the board, or any individual director may be removed from office by
vote of the shareholders entitled to vote thereon only for cause. In case the
board or a class of the board or any one or more directors are so removed, new
directors may be elected at the same meeting.
(b) Removal by the Board. - The board of directors may declare vacant the
office of a director who has been judicially declared of unsound mind or who has
been convicted of an offense punishable by imprisonment for a term of more than
one year or if, within 60 days after notice of his or her selection, the
director does not accept the office either in writing or by attending a meeting
of the board of directors.
Section 4.06. Place of Meetings. - Meetings of the board of directors may
be held at such place within or without the Commonwealth of Pennsylvania as the
board of directors may from time to time appoint or as may be designated in the
notice of the meeting.
Section 4.07. Organization of Meetings. - At every meeting of the board of
directors, the chairman of the board, or, in the case of a vacancy in the office
or absence of the chairman of the board, one of the following officers present
in the order stated: the president or a chairman chosen by a majority of the
directors present, shall preside. The secretary, or, in the absence of the
secretary, any person appointed by the chairman of the meeting, shall act as
secretary.
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Section 4.08. Regular Meetings. - Regular meetings of the board of
directors shall be held at such time and place as shall be designated from time
to time by resolution of the board of directors.
Section 4.09. Special Meetings. - Special meetings of the board of
directors shall be held whenever called by the chairman or by two or more of the
directors.
Section 4.10. Quorum of and Action by Directors.
(a) General Rule. - A majority of the directors in office of the
corporation shall be necessary to constitute a quorum for the transaction of
business and the acts of a majority of the directors present and voting at a
meeting at which a quorum is present shall be the acts of the board of
directors.
(b) Action by Written Consent. - Any action required or permitted to be
taken at a meeting of the directors may be taken without a meeting if, prior or
subsequent to the action, a consent or consents thereto by all of the directors
in office is filed with the secretary of the corporation.
Section 4.11. Executive and Other Committees.
(a) Establishment and Powers. - The board of directors may, by resolution
adopted by a majority of the directors in office, establish an Executive
Committee and one or more other committees, each committee to consist of one or
more directors of the corporation. Except as provided in this Section, the
Executive Committee shall have and exercise the authority of the board to the
extent provided in the resolution of the board of directors establishing the
committee. No such committee shall have any power or authority as to the
following:
(1) The submission to shareholders of any action requiring approval of
shareholders under the Business Corporation Law.
(2) The creation or filling of vacancies in the board of directors.
(3) The adoption, amendment or repeal of these bylaws.
(4) The amendment or repeal of any resolution of the board that by its
terms is amendable or repealable only by the board.
(5) Action on matters committed by a resolution of the board of
directors to another committee of the board.
(b) Alternate Committee Members. - The board may designate one or more
directors
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as alternate members of any committee who may replace any absent or disqualified
member at any meeting of the committee or for the purposes of any written action
by the committee. In the absence or disqualification of a member and alternate
member or members of a committee, the member or members thereof present at any
meeting and not disqualified from voting, whether or not constituting a quorum,
may unanimously appoint another director to act at the meeting in the place of
the absent or disqualified member.
(c) Term. - Each committee of the board shall serve at the pleasure of the
board.
(d) Committee Procedures. - The term "board of directors" or "board," when
used in any provision of these bylaws relating to the organization or procedures
of or the manner of taking action by the board of directors, shall be construed
to include and refer to any executive or other committee of the board.
Section 4.12. Compensation. - The board of directors shall have the
authority to fix the compensation of directors for their services as directors
and a director may be a salaried officer of the corporation.
ARTICLE V
Officers
Section 5.01. Officers Generally.
(a) Number, Qualifications and Designation. - The officers of the
corporation shall be a chairman of the board, a president, one or more executive
vice presidents, a secretary, a treasurer, and such other officers as may be
elected in accordance with the provisions of Section 5.03. Officers may but
need not be directors or shareholders of the corporation. The president and
secretary shall be natural persons of full age. The treasurer may be a
corporation, but if a natural person shall be of full age. Any number of
offices may be held by the same person.
(b) Bonding. - The corporation may secure the fidelity of any or all of its
officers by bond or otherwise.
(c) Chief Functional Officers. - The board of directors may also from time
to time designate the offices of certain executive or senior officers having
principal management responsibilities for particular corporate or business
functions with the title "Chief" followed by the identification of the
particular corporate or business function (e.g. Chief Financial Officer), such
designation to be in addition to or in lieu of other official titles specified
in Section 5.01(a) and, subject to direction by the chairman of the board or
president, any officer so designated shall have authority as necessary and
appropriate in regard to management of the particular corporate or business
function.
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Section 5.02. Election, Term of Office and Resignations.
(a) Election and Term of Office. -The officers of the corporation, except
those elected by delegated authority pursuant to Section 5.03, shall be elected
annually by the board of directors, and each such officer shall hold office for
a term of one year and until a successor has been selected and qualified or
until his or her earlier death, resignation or removal.
(b) Resignations. - Any officer may resign at any time upon written notice
to the corporation. The resignation shall be effective upon receipt thereof by
the corporation or at such subsequent time as may be specified in the notice of
resignation.
Section 5.03. Subordinate Officers, Committee and Agents. - The board of
directors may from time to time elect such other officers and appoint such
committees, employees or other agents as the business of the corporation may
require, including one or more assistant secretaries, and one or more assistant
treasurers, each of whom shall hold office for such period, have such authority,
and perform such duties as are provided in these bylaws, or as the board of
directors may from time to time determine. The board of directors may delegate
to any officer or committee the power to elect subordinate officers and to
retain or appoint employees or other agents, or committees thereof, and to
prescribe the authority and duties of such subordinate officers, committees,
employees, or other agents.
Section 5.04. Removal of Officers and Agents. - Any officer, committee,
employee or agent of the corporation may be removed by the board of directors
with or without cause. The removal shall be without prejudice to the contract
rights, if any, of any person so removed. Election or appointment of an officer,
committee, employee or agent shall not of itself create contract rights.
Section 5.05. Vacancies. - A vacancy in the office because of death,
resignation, removal, disqualification, or any other cause, shall be filled by
the board of directors or by the officer or committee to which the power to fill
such office has been delegated pursuant to Section 5.03, as the case may be, and
if the office is one for which these bylaws prescribe a term, shall be filled
for the unexpired portion of the term.
Section 5.06. Authority. - All officers of the corporation, as between
themselves and the corporation, shall have such authority and perform such
duties in the management of the corporation as may be provided by or pursuant to
resolutions or orders of the board of directors or, in the absence of
controlling provisions in the resolutions or orders of the board of directors,
as may be determined by or pursuant to these bylaws.
Section 5.07. The Chairman of the Board. - The chairman of the board shall
be the chief executive officer of the corporation and shall have general
supervision over the business and operations of the corporation, subject,
however, to the control of the board of directors. The
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chairman of the board shall preside at all meetings of the shareholders and of
the board of directors and in the absence of the chairman of the board, the
president shall preside at such meetings. The chairman of the board shall
perform such duties as may from time to time be assigned by the board of
directors.
Section 5.08. The President. - The president shall be the chief operating
officer of the corporation and shall assist the chairman of the board in
supervising the operation of the business of the corporation. The president
shall perform all duties incident to the office of president and such other
duties as may from time to time be assigned by the chairman of the board or the
board of directors. In the absence of the chairman of the board, the president
shall preside at all meetings of the shareholders and of the board of directors.
Section 5.09. The Vice Presidents. - The vice presidents shall perform the
duties of the president in the absence of the president and such other duties as
may from time to time be assigned to them by the board of directors or the
president.
Section 5.10. The Secretary. - The secretary or an assistant secretary
shall attend all meetings of the shareholders and of the board of directors and
shall record all the votes of the shareholders and of the directors and the
minutes of the meetings of the shareholders and of the board of directors and of
committees of the board in a book or books to be kept for that purpose; shall
see that notices are given and records and reports properly kept and filed by
the corporation as required by law; shall be the custodian of the seal of the
corporation and see that it is affixed to all documents to be executed on behalf
of the corporation under its seal; and, in general, shall perform all duties
incident to the office of secretary, and such other duties as may from time to
time be assigned by the board of directors or the president.
Section 5.11. The Treasurer. - The treasurer or an assistant treasurer
shall have or provide for the custody of the funds or other property of the
corporation; shall collect and receive or provide for the collection and receipt
of moneys earned by or in any manner due to or received by the corporation;
shall deposit all funds in his or her custody as treasurer in such banks or
other places of deposit as the board of directors may from time to time
designate; shall, whenever so required by the board of directors, render an
account showing all transactions as treasurer, and the financial condition of
the corporation; and, in general, shall discharge such other duties as may from
time to time be assigned by the board of directors or the president.
Section 5.12. Salaries. - The salaries of the officers elected by the
board of directors shall be fixed from time to time by the board of directors or
by such officer as may be designated by resolution of the board. The salaries
or other compensation of any other officers, employees and other agents shall be
fixed from time to time by the officer or committee to which the power to elect
such officers or to retain or appoint such employees or other agents has been
delegated pursuant to Section 5.03. No officer shall be prevented from
receiving such salary or other compensation by reason of the fact that the
officer is also director of the corporation.
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ARTICLE VI
Certificates of Stock, Transfer, Etc.
Section 6.01. Share Certificates. - Certificates for shares of the
corporation shall be in such form as approved by the board of directors, and
shall state that the corporation is incorporated under the laws of the
Commonwealth of Pennsylvania, the name of the person to whom issued, and the
number and class of shares and the designation of the series (if any) that the
certificate represents. The share record books and blank share certificates
shall be kept by the secretary or by any transfer agent or registrar designated
by the board of directors for that purpose.
Section 6.02. Issuance. - The share certificates of the corporation shall
be numbered and registered in the share ledger and transfer books of the
corporation as they are issued. They shall be signed by the president or a
vice president and by the secretary or an assistant secretary or the treasurer
or an assistant treasurer, and shall bear the corporate seal, which may be a
facsimile, engraved or printed; but where such certificate is signed by a
transfer agent or a registrar the signature of any corporate officer upon such
certificate may be a facsimile, engraved or printed. In case any officer who has
signed, or whose facsimile signature has been placed upon any share certificate
shall have ceased to be such officer because of death, resignation or otherwise,
before the certificate is issued, it may be issued with the same effect as if
the officer had not ceased to be such at the date of its issue. The provision
of this Section 6.02 shall be subject to any inconsistent or contrary agreement
at the time between the corporation and any transfer agent or registrar.
Section 6.03. Transfer. - Transfers of shares shall be made on the books
of the corporation upon surrender of the certificates therefor, endorsed by the
person named in the certificate or by attorney lawfully constituted in writing.
No transfer shall be made inconsistent with the provisions of the Uniform
Commercial Code, 13 Pa. C.S. Sections 8101 et seq, and its amendments and
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supplements.
Section 6.04. Record Holder of Shares. - The corporation shall be entitled
to treat the person in whose name any share or shares of the corporation stand
on the books of the corporation as the absolute owner thereof, and shall not be
bound to recognize any equitable or other claim to, or interest in, such share
or shares on the part of any other person.
Section 6.05. Lost, Destroyed or Mutilated Certificates. - The holder of
any shares of the corporation shall immediately notify the corporation of any
loss, destruction or mutilation of the certificate therefor, and the board of
directors may, in its discretion, cause a new certificate or certificates to be
issued to such holder, in case of mutilation of the certificate, upon the
surrender of the mutilated certificate, or, in case of loss or destruction of
the certificate, upon satisfactory proof of such loss or destruction, and, if
the board of directors shall so determine, the deposit of
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a bond in such form and in such sum, and with such surety or sureties, as it may
direct.
ARTICLE VII
Indemnification of Directors, Officers and
Other Authorized Representatives
Section 7.01. Scope of Indemnification.
(a) General Rule. - The corporation shall indemnify an indemnified
representative against any liability incurred in connection with any proceeding
in which the indemnified representative may be involved as a party or otherwise,
by reason of the fact that such person is or was serving in an indemnified
capacity, including, without limitation, liabilities resulting from any actual
or alleged breach or neglect of duty, error, misstatement or misleading
statement, negligence, gross negligence or act giving rise to strict or products
liability, except:
(1) where such indemnification is expressly prohibited by applicable
law; or
(2) where the conduct of the indemnified representative has been
determined pursuant to Section 7.06 to constitute willful misconduct or
recklessness within the meaning of 42 Pa. C.S. Section 8365(b)* or any
superseding provision of law, sufficient in the circumstance to bar
indemnification against liabilities arising from the conduct.
(b) Partial Payment. If an indemnified representative is entitled to
indemnification in respect of a portion, but not all, of any liabilities to
which such person may be subject, the corporation shall indemnify such
indemnified representative to the maximum extent for such portion of the
liabilities.
(c) Presumption. - The termination of a proceeding by judgement, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent shall
not, of itself, create a presumption that the indemnified representative is not
entitled to indemnification.
(d) Definitions. - For purposes of this Article:
(1) "indemnified capacity" means any and all past, present and future
service by an indemnified representative in one or more capacities as a
director, officer, employee or agent of the corporation, or, at the request of
the corporation, as a director, officer, employee, agent, fiduciary or trustee
of another corporation, partnership, joint venture, trust, employee benefit plan
or other entity or enterprise;
(2) "indemnified representative" means any and all directors and officers
of the
* 42 Pa. C.S. Section 8365(b) was reenacted as Section 1726(b) of the Business
Corporation Law.
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corporation and any other person designated as an indemnified representative by
the board of directors of the corporation (which may, but need not, include any
person serving at the request of the corporation, as a director, officer,
employee, agent, fiduciary or trustee of another corporation, partnership, joint
venture, trust, employee benefit plan or other entity or enterprise);
(3) "liability" means any damage, judgement, amount paid in settlement,
fine, penalty, punitive damages, excise tax assessed with respect to an employee
benefit plan, or cost or expense of any nature (including, without limitation,
attorneys' fees and disbursements); and
(4) "proceeding" means any threatened, pending or completed action, suit,
appeal or other proceeding of any nature, whether civil, criminal,
administrative or investigative, whether formal or informal, and whether brought
by or in the right of the corporation, a class of its security holders or
otherwise.
Section 7.02. Proceedings Initiated by Indemnified Representatives. -
Notwithstanding any other provision of this Article, the corporation shall not
indemnify under this Article an indemnified representative for any liability
incurred in a proceeding initiated (which shall not be deemed to include
counter-claims or affirmative defenses) or participated in as an intervenor or
amicus curiae by the person seeking indemnification unless such initiation of or
- -------------
participation in the proceeding is authorized, either before or after its
commencement, by the affirmative vote of a majority of the directors in office.
This section does not apply to reimbursement of expenses incurred in
successfully prosecuting or defending an arbitration under Section 7.06 or
otherwise successfully prosecuting or defending the rights of an indemnified
representative granted by or pursuant to this Article.
Section 7.03. Advancing Expenses. - The corporation shall pay the expenses
(including attorneys' fees and disbursements) incurred in good faith by an
indemnified representative in advance of the final disposition of a proceeding
described in Section 7.01 or 7.02 upon receipt of an undertaking by or on behalf
of the indemnified representative to repay such amount if it shall ultimately be
determined pursuant to Section 7.06 of this Article that such person is not
entitled to be indemnified by the corporation pursuant to this Article. The
financial ability of an indemnified representative to repay an advance shall not
be a prerequisite to the making of such advance.
Section 7.04. Securing of Indemnification Obligations. - To further
effect, satisfy or secure the indemnification obligations provided herein or
otherwise, the corporation may maintain insurance, obtain a letter of credit,
act as self-insurer, create a reserve, trust, escrow, cash collateral or other
fund or account, enter into indemnification agreements, pledge or grant a
security interest in any assets or properties of the corporation, or use any
other mechanism or arrangement whatsoever in such amounts, at such costs, and
upon such other terms and conditions as the board of directors shall deem
appropriate. Absent fraud, the determination of the board of directors with
respect to such amounts, costs, terms and conditions shall be conclusive against
all
19
<PAGE>
security holders, officers and directors and shall not be subject to
voidability.
Section 7.05. Payment of Indemnification. - An indemnified representative
shall be entitled to indemnification within 30 days after a written request for
indemnification has been delivered to the secretary of the corporation.
Section 7.06. Arbitration. - Any dispute related to the right to
indemnification or advancement of expenses as indemnification for liabilities
arising under the Securities Act of 1933 which the corporation has undertaken to
submit to a court for adjudication, shall be decided only by arbitration in the
metropolitan area in which the principal executive offices of the corporation
are located at the time, in accordance with the commercial arbitration rules
then in effect of the American Arbitration Association, before a panel of three
arbitrators, one of whom shall be selected by the corporation, the second of
whom shall be selected by the indemnified representative and the third of whom
shall be selected by the other two arbitrators. In the absence of the American
Arbitration Association, or if for any reason arbitration under the arbitration
rules of the American Arbitration Association cannot be initiated, or if one of
the parties fails or refuses to select an arbitrator, or if the arbitrators
selected by the corporation and the indemnified representative cannot agree on
the selection of the third arbitrator within 30 days after such time the
corporation and the indemnified representative have each been notified of the
selection of the other's arbitrator, the necessary arbitrator or arbitrators
shall be selected by the presiding judge of the court of general jurisdiction in
such metropolitan area. Each arbitrator selected as provided herein is required
to be or have been a director or executive officer of a corporation whose shares
of common stock were listed during at least one year of such service on the New
York Stock Exchange or the American Stock Exchange or quoted on the National
Association of Securities Dealers Automated Quotations System. The party or
parties challenging the right of an indemnified representative to the benefits
of this Article shall have the burden of proof. The corporation shall reimburse
an indemnified representative for the expenses (including attorneys' fees and
disbursements) incurred in successfully prosecuting or defending such
arbitration. Any award entered by the arbitrators shall be final, binding and
nonappealable and judgement may be entered thereon by any party in accordance
with applicable law in any court of competent jurisdiction. This arbitration
provision shall be specifically enforceable.
Section 7.07. Discharge of Duty. - An indemnified representative shall be
deemed to have discharged such person's duty to the corporation if he or she has
relied in good faith on information, opinions, reports or statements, including
financial statements and other financial data, in each case prepared or
presented by any of the following:
(1) one or more officers or employees of the corporation whom such
indemnified representative reasonably believes to be reliable and competent
with respect to the matter presented;
(2) legal counsel, public accountants or other persons as to matters
that the
20
<PAGE>
indemnified representative reasonably believes are within the person's
professional or expert competence; or
(3) a committee of the board of directors on which he or she
does not serve as to matters within its area of designated authority,
which committee he or she reasonably believes to merit confidence.
Section 7.08. Contract Rights; Amendment or Repeal. - All rights under
this Article shall be deemed a contract between the corporation and the
indemnified representative pursuant to which the corporation and each
indemnified representative intend to be legally bound. Any repeal, amendment or
modification hereof shall be prospective only as to conduct of an indemnified
representative occurring thereafter, and shall not affect any rights or
obligations then existing.
Section 7.09. Scope of Article. - The rights granted by this Article
shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any statute,
agreement, vote of shareholders or disinterested directors or otherwise, both as
to action in an indemnified capacity and as to action in any other capacity. The
indemnification and advancement of expenses provided by or granted pursuant to
this Article shall continue as to a person who has ceased to be an indemnified
representative in respect of matters arising prior to such time, and shall inure
to the benefit of representatives of such a person.
Section 7.10. Reliance on Provisions. - Each person who shall act as
an indemnified representative of the corporation shall be deemed to be doing so
in reliance upon the rights provided by this Article.
Section 7.11. Interpretation. - The provisions of this Article have
been adopted by the shareholders of the corporation and are intended to
constitute bylaws authorized by Section 410F* of the Pennsylvania Business
Corporation Law and Section 8365 of the Directors' Liability Act (42 Pa. C.S.
Section 8365).
ARTICLE VIII
Miscellaneous
Section 8.01. Corporate Seal. - The corporation shall have a corporate
seal in the form of a circle containing the name of the corporation, the year of
incorporation and such other details as may be approved by the board of
directors.
Section 8.02. Checks. - All checks, notes, bills of exchange or other
orders in writing shall be signed by such person or persons as the board of
directors or any person authorized by
21
* Superseded by Section 1746 of the Business Corporation Law.
<PAGE>
resolution of the board of directors may from time to time designate.
Section 8.03. Contracts. - Except as otherwise provided in the Business
Corporation Law in the case of transactions which require action by the
shareholders, the board of directors may authorize any officer or agent to enter
into any contract or to execute or deliver any instrument on behalf of the
corporation, and such authority may be general or confined to specific
instances.
Section 8.04. Interested Directors or Officers; Quorum.
(a) General Rule. - A contract or transaction between the corporation and
one or more of its directors or officers or between the corporation and another
corporation, partnership, joint venture, trust or other enterprise in which one
or more of its directors or officers are directors or officers or have financial
or other interest, shall not be void or voidable solely for that reason, or
solely because the director or officer is present at or participates in the
meeting of the board of directors that authorizes the contract or transaction,
or solely because his or her or their votes are counted for that purpose, if:
(1) the material facts as to the relationship or interest and as to the
contract or transaction are disclosed or are known to the board of
directors and the board authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors even though
the disinterested directors are less than a quorum;
(2) the material facts as to his or her relationship or interest and as
to the contract or transaction are disclosed or are known to the
shareholders entitled to vote thereon and the contract or transaction is
specifically approved in good faith by vote of those shareholders; or
(3) the contract or transaction is fair as to the corporation as of the
time it is authorized, approved or ratified by the board of directors or
the shareholders.
(b) Quorum. - Common or interested directors may be counted in determining
the presence of a quorum at the meeting of the board which authorizes a contract
or transaction specified in subsection (a).
Section 8.05. Deposits. - All funds of the corporation shall be deposited
from time to time to the credit of the corporation in such banks, trust
companies or other depositaries as the board of directors may approve or
designate, and all such funds shall be withdrawn only upon checks signed by such
one or more officers or employees as the board of directors shall from time to
time determine.
Section 8.06. Corporate Records.
22
<PAGE>
(a) Required Records. - The corporation shall keep complete and accurate
books and records of account, minutes of the proceedings of the shareholders and
directors and a share register giving the names and addresses of all
shareholders and the number and class of shares held by each. The share
register shall be kept at either the registered office of the corporation in the
Commonwealth of Pennsylvania or at its principal place of business wherever
situated or at the office of its registrar or transfer agent. Any books,
minutes or other records may be in written form or any other form capable of
being converted into written form within a reasonable time.
(b) Right of Inspection. Every shareholder shall, upon written verified
demand stating the purpose thereof, have a right to examine, in person or by
agent or attorney, during the usual hours for business for any proper purpose,
the share register, books and records of account, and records of the proceedings
of the shareholders and directors and to make copies of extracts therefrom. A
proper purpose shall mean a purpose reasonably related to the interest of the
person as a shareholder. In every instance where an attorney or other agent is
the person who seeks the right of inspection, the demand shall be accompanied by
a verified power of attorney or other writing that authorizes the attorney or
other agent to so act on behalf of the shareholder. The demand shall be
directed to the corporation at its registered office in the Commonwealth of
Pennsylvania or at its principal place of business wherever situated.
Section 8.07. Amendment of Bylaws. - These bylaws may be amended or
repealed, or new bylaws may be adopted, either (i) by vote of the shareholders
at any duly organized annual or special meeting of shareholders, or (ii) with
respect to those matters which are not by statute committed expressly to the
shareholders and regardless of whether the shareholders have previously adopted
or approved the bylaw being amended or repealed, by vote of a majority of the
board of directors of the corporation in office at any regular or special
meeting of directors. Any change in these bylaws shall take effect when adopted
unless otherwise provided in the resolution effecting the change. See Section
2.03 (b) (relating to notice of action by shareholders on bylaws).
ARTICLE IX
Elections Pursuant to Act No. 1990-36
Amending the Business Corporation Law
Section 9.01. Election under Subchapter G. - Subchapter G of the Business
Corporation Law of 1988, as amended, shall not be applicable to the corporation.
Section 9.02. Election under Subchapter H. - Subchapter H of the Business
Corporation Law of 1988, as amended, shall not be applicable to the corporation.
23
<PAGE>
EXHIBIT 10.21
Schedule of Named Executive Officers and Executive Officers who are Parties to a
- --------------------------------------------------------------------------------
Termination Agreement
- ---------------------
<TABLE>
<S> <C>
Charles A. Coltman, III Vice Chairman
Charles P. Connolly Chief Risk Policy Officer
Rosemarie B. Greco President & Chief Operating Officer
Terrence A. Larsen Chairman & Chief Executive Officer
Carol A. Leisenring Executive Vice President
Robert N. Gilmore Chief Processing Services Officer
Albert W. Mandia Chief Financial Officer
Paul W. McGloin Executive Vice President & Chief Risk
Officer
</TABLE>
<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 Twelve Months Ended
December 31, December 31,
-------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(A) Net Income ........................... $195,546 $192,145 $649,144 $655.176
======== ======== ======== ========
EARNINGS PER SHARE
Based on average common shares outstanding
- ------------------------------------------
(B) Average shares outstanding ........... 215,866 219,915 218,812 222,268
(A/B) Net Income ........................ $ 0.91 $ 0.87 $ 2.97 $ 2.95
======== ======== ======== ========
Based on average common and common
- ----------------------------------
equivalent shares outstanding
- -----------------------------
Primary:
(C) Average common equivalent shares ..... 2,156 2,438 2,184 2,398
(D) Average common and common equivalent
shares (B + C) ................ 218,022 222,353 220,996 224,666
(A/D) Net Income (1) ..................... $ 0.90 $ 0.86 $ 2.94 $ 2.92
======== ======== ======== ========
Fully diluted:
(E) Average common equivalent shares ..... 2,283 2,399 2,888 2,747
(F) Average common and common equivalent
shares (B + E) ................ 218,149 222,314 221,700 225,015
(A/F) Net Income (1) .................... $ 0.90 $ 0.86 $ 2.93 $ 2.91
======== ======== ======== ========
</TABLE>
- ----------------------------------
(1) Dilution is less than 3%.
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS FROM CONTINUING OPERATIONS
TO FIXED CHARGES OF CONTINUING OPERATIONS
CONSOLIDATED
<TABLE>
<CAPTION>
Twelve Months Ended December 31, 1996
- -------------------------------------
(in thousands)
<S> <C>
1. Income from continuing operations before extraordinary
items and income taxes..................................... $1,034,964
==========
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.......... $ 345,288
B. Interest on deposits..................................... 841,780
----------
C. Total fixed charges (line 2A + line 2B).................. $1,187,068
==========
3. Income from continuing operations before extraordinary
items and income taxes, plus total fixed charges of
continuing operations:
A. Excluding interest on deposits (line 1 + line 2A)........ $1,380,252
==========
B. Including interest on deposits (line 1 + line 2C)........ $2,222,032
==========
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)......... 1.87x
====
</TABLE>
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
EXHIBIT 12.2
COMPUTATION OF RATIO OF EARNINGS FROM CONTINUING OPERATIONS
TO FIXED CHARGES OF CONTINUING OPERATIONS
COMBINED CORESTATES (PARENT ONLY) AND CORESTATES CAPITAL CORPORATION
Twelve Months Ended December 31, 1996
- -------------------------------------
(in thousands)
<TABLE>
<CAPTION>
<S> <C>
1. Income before income taxes and equity in undistributed income
of subsidiaries........................................................... $591,887
2. Fixed charges - interest expense, amortization of debt
issuance costs and one-third of rental expenses, net of
income from subleases..................................................... $202,422
--------
3. Income before taxes and equity in undistributed income of
subsidiaries, plus fixed charges.......................................... $794,309
========
4.Ratio of earnings (as defined) to fixed charges (line 3/line 2)........... 3.92x
=====
</TABLE>
<PAGE>
EXHIBIT 13
1996
ANNUAL REPORT
FINANCIAL SECTIONS
<TABLE>
<CAPTION>
Page
-------
<S> <C>
Consolidated Financial Highlights (Inside Cover) 2
Contents of Financial Section 3
MD&A 4 - 42
Management's and Auditor's Reports 43 - 45
Audited Financial Statements 46 - 82
Supplemental Data 83 - 95
</TABLE>
1
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED FINANCIAL HIGHLIGHTS
(dollar amounts in thousands, except per share)
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995
------------- -------------
<S> <C> <C>
Earnings and Dividends Applicable to Common Shares
Net income (a)................................................. $ 649,144 $ 655,176
Cash dividends declared........................................ 371,135 294,393
Per Share
Net income (a)................................................. $ 2.97 $ 2.95
Cash dividends declared........................................ 1.73 1.44
Book value..................................................... 17.40 17.61
Selected Financial Ratios
Return on average total assets (a)............................. 1.48% 1.47%
Return on average common shareholders' equity (a).............. 16.69 17.51
Net interest margin............................................ 5.53 5.47
Tier 1 leverage ratio.......................................... 8.46 7.99
Tier 1 capital ratio........................................... 9.45 9.20
Total capital ratio............................................ 13.23 12.71
Allowance for loan losses to loans............................. 2.17 2.11
Non-performing assets to loans plus OREO....................... 0.75 0.85
Non-performing assets to total assets.......................... 0.54 0.58
Allowance for loan losses to non-performing loans.............. 321.7 290.4
Financial Position at December 31, 1996 1995
----------- -----------
Assets......................................................... $45,494,194 $45,997,242
=========== ===========
Loans.......................................................... $32,777,032 $31,714,152
=========== ===========
Deposits....................................................... $33,727,156 $33,963,820
=========== ===========
Shareholders' equity........................................... $ 3,695,694 $ 3,875,565
=========== ===========
- ---------------------------
</TABLE>
(a) Selected financial results, excluding the significant items listed below,
were as follows:
<TABLE>
<CAPTION>
1996 1995
------------- -----------
<S> <C> <C>
Net income..................................................... $649,144 $655,176
Excluding the following after-tax items:
Net restructuring and merger-related charges................. 150,840 92,251
Certain net investment gains................................. (28,115) (8,638)
SAIF special assessment...................................... 8,920 -
Gain on affiliate joint venture.............................. - (11,761)
-------- --------
Operating earnings............................................. $780,789 $727,028
======== ========
Operating earnings per share................................... $ 3.57 $ 3.28
======== ========
Return on average total assets................................. 1.78 % 1.63 %
Return on average common shareholders' equity.................. 20.07 19.43
</TABLE>
2
<PAGE>
CoreStates Financial Corp and Subsidiaries
<TABLE>
<CAPTION>
CONTENTS OF FINANCIAL SECTION PAGE
-------
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................................................... 4 - 42
FINANCIAL STATEMENTS
Management's Report on Internal Controls Over Financial Reporting..................................... 43 - 44
Report of Independent Auditors........................................................................ 45
Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994............... 46
Consolidated Balance Sheets as of December 31, 1996 and 1995.......................................... 47
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994................................................................. 48 - 49
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994............ 50 - 51
Notes to the Consolidated Financial Statements........................................................ 52 - 82
SUPPLEMENTAL FINANCIAL DATA
Five Year Average Balance Sheet, Statement of Income and Balance Sheet................................ 83 - 88
Rate/Volume Analysis Taxable Equivalent Basis......................................................... 89
Loan Portfolio, Risk Elements and Allowance for Loan Losses Data...................................... 90 - 93
Selected Maturity and Interest Sensitivity Data....................................................... 93 - 95
</TABLE>
3
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
OVERVIEW
For CoreStates Financial Corp ("CoreStates"), 1996 was a productive year
measured by solid earnings performance and the successful completion of several
strategic initiatives designed to enhance shareholder value. During 1996,
CoreStates completed its acquisition of Meridian Bancorp, Inc. ("Meridian"), the
integration of the businesses and operations of Meridian and the major process
redesign programs begun in 1995. CoreStates consummated its acquisition of
Meridian on April 9, 1996 ("the Acquisition"). The Acquisition was accounted
for under the pooling of interests method of accounting. CoreStates' originally
reported results of operations have been restated herein to include Meridian's
results of operations for all periods presented.
Other 1996 actions enhancing shareholder value were the Board of Directors'
authorizations to increase the quarterly dividend amount on CoreStates' common
stock by 11.9%, from $0.42 per share to $0.47 per share and to repurchase up to
22 million shares of common stock, or approximately 10% of outstanding shares
through December 31, 1997.
Earnings - In a year when the banking industry continued to be impacted by
--------
consolidations and rapid changes in technology, products and services,
CoreStates increased 1996 operating earnings by 8.8% on a per share basis.
"Operating earnings" for 1996, which has been defined for purposes of this
discussion as net income excluding net restructuring and merger-related charges,
a special assessment on deposits insured under the Savings Associations
Insurance Fund ("SAIF"), and certain net investment gains, were $780.8 million,
or $3.57 per share. Operating earnings for 1995 were $727.0 million, or $3.28
per share. The growth in operating earnings for 1996 was primarily driven by
expense reductions resulting from process redesigns and merger-related
efficiencies. CoreStates recorded net income of $649.2 million, or $2.97 per
share in 1996, compared to net income of $655.2 million, or $2.95 per share in
1995. The restructuring and merger-related charges, SAIF special assessment and
the net investment gains are discussed below.
Operating earnings, key performance ratios and per share information are
summarized in the following table (in millions, except per share):
<TABLE>
<CAPTION>
Percentage
increase (decrease)
-------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1994 '96/'95 '95/'94
-------- -------- -------- ------ ------
Net interest income (taxable equivalent basis).... $2,167.7 $2,200.2 $2,107.5 (1.5)% 4.4%
======== ======== ========
Net income........................................ $ 649.2 $ 655.2 $ 433.2 (0.9) 51.2
Exclude after-tax effects of:
Net restructuring and merger-related charges..... 150.8 92.2 166.4
Certain net investment gains..................... (28.1) (8.6) -
SAIF special assessment.......................... 8.9 - -
Gain on affiliate joint venture.................. - (11.8) -
-------- -------- --------
Operating earnings................................ $ 780.8 $ 727.0 $ 599.6 7.4 21.2
======== ======== ========
Operating earnings per share...................... $ 3.57 $ 3.28 $ 2.65 8.8 23.8
======== ======== ========
Return on average assets (a)...................... 1.78% 1.63% 1.37%
Return on average equity (a)...................... 20.07 19.43 16.54
Net interest margin............................... 5.53 5.47 5.33
Expense/revenue ratio(a).......................... 53.71 57.07 62.08
Average common shares outstanding................. 218.812 222.268 226.234
</TABLE>
- ----------
(a) Calculated based on "Operating earnings."
4
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
OVERVIEW - continued
Operating earnings for 1996 improved $53.8 million primarily as a result of a
$124.0 million, or 7.1% reduction in non-financial expenses (see the detailed
discussion of "Non-Financial Expenses" on page 41). CoreStates' expense/revenue
ratio (total operating expenses, excluding other real estate owned expenses, as
a percentage of total revenues) was 53.7% in 1996. This compares to
expense/revenue ratios of 57.1% in 1995 and 62.1% in 1994. The expense/revenue
ratio improved quarterly during 1996 and 1995 as a result of process redesigns
and merger-related efficiencies. Merger-related efficiencies achieved in 1996
were approximately $47 million pre-tax, $30 million after-tax, or $0.14 per
share. Merger efficiencies were impacted by approximately $9 million in revenue
losses. A slight decline in net interest income, an increase in the provision
for losses on loans, and modest growth in non-interest income tempered the
impact of reduced non-financial expenses in 1996. For detailed discussions of
net interest income, the provision for losses on loans and non-interest income,
see pages 38, 21 and 39, respectively.
Key performance measures based on operating earnings remained strong and
continued to be among the highest in the banking industry. Returns on average
equity and assets were 20.07% and 1.78%, respectively, in 1996, compared to
19.43% and 1.63%, respectively, in 1995. The 1996 Salomon Brothers
Superregional Bank composites for returns on average equity and assets were
16.40% and 1.38%, respectively. The Salomon Brothers Superregional Bank
composite includes CoreStates and is comprised of 18 U.S. superregional
banking companies.
1996 Business Line Highlights - The business line segments contributing to the
-----------------------------
operating earnings growth in 1996 were Global and Specialized Banking and
Regional Banking. Global and Specialized Banking generated a $26.0 million, or
11.6%, increase in its net income for 1996, primarily driven by a $29.9 million,
or 5.4%, increase in net interest income and a $20.2 million, or 5.0%, decline
in non-financial expenses. Global and Specialized Banking's improvement in net
interest income was primarily due to growth in average loans and deposits.
Regional Banking generated an $18.1 million, or 5.5%, increase in its net income
for 1996, reflecting a $46.3 million, or 5.5%, decline in non-financial expenses
and a $16.1 million, or 7.0% increase in non-interest income, partially offset
by lower net interest income. The increase in non-interest income included $7.7
million for gains on home equity loan securitizations. The decline in non-
financial expenses for both business line segments resulted from the impact of
process redesigns, merger-related efficiencies and reduced FDIC premiums. For a
more detailed analysis of the performance of CoreStates' business lines, refer
to the "Business Line Results" section beginning on page 9.
Acquisition and Integration of Meridian - On April 9, 1996, CoreStates
---------------------------------------
acquired Meridian. Meridian was a Pennsylvania bank holding company with
approximately $15.2 billion in assets and $12.1 billion in deposits at March 31,
1996. In this transaction, approximately 81.1 million shares of CoreStates'
common stock were issued to Meridian shareholders. The transaction was
accounted for under the pooling of interests method of accounting.
Strategically, this acquisition combined two strong performing banking
companies and strengthened CoreStates' leading market positions in consumer,
small business and middle market banking in the region that includes the prime
economic centers of eastern and central Pennsylvania, northern Delaware, and
central and southern New Jersey. CoreStates originally expected this in-market
acquisition to achieve pre-tax operating efficiencies of approximately $186.0
million and to contribute to earnings per share in 1997. The complexities of
merger and restructuring activities may have an impact on the timing of
earnings, expenses and operating efficiencies. CoreStates expects to incur
expenses in 1997 of $15 to $20 million related to combined operations that were
not originally anticipated. Operating efficiencies achieved in 1996 were
approximately $47 million.
On February 23, 1996, Meridian acquired United Counties Bancorporation
("United Counties"), a $1.6 billion asset New Jersey bank holding company in a
transaction accounted for as a pooling of interests. For each United Counties
common share outstanding, 5.0 shares of Meridian's common stock were issued.
The consolidation and integration of Meridian's businesses and operations
were completed in the fourth quarter of 1996. The former Meridian Pennsylvania
and Delaware banking branches were consolidated into CoreStates' branch system
in the third quarter of 1996 and the former Meridian and United Counties New
Jersey branches were consolidated into CoreStates' system in the fourth quarter
of 1996.
5
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
OVERVIEW - continued
CoreStates' Pennsylvania and New Jersey bank subsidiaries were merged into a
single bank, CoreStates Bank, N.A. ("CBNA"), in the fourth quarter of 1996.
CBNA is the lead bank subsidiary of CoreStates. This action achieves a
previously stated goal of merging the Pennsylvania and New Jersey banks to unify
marketing and advertising under one name and to significantly increase customer
convenience.
Restructuring and Merger-Related Charges - In 1996, CoreStates recorded pre-tax
- ----------------------------------------
net restructuring and merger-related charges of $209.7 million, $150.8 million
or $0.68 per share after-tax, primarily in connection with the Acquisition.
Included in that amount, in addition to the $161.6 million merger-related
restructuring charge detailed in a following table, were: a $70.0 million
provision for loan losses recorded in connection with a change in strategic
direction related to Meridian's problem assets and to conform Meridian's
consumer lending charge-off policies to those of CoreStates (See "Provision for
Losses on Loans" on page 21), $29.0 million of implementation costs that were
incurred in the process of consolidating Meridian businesses and operations, and
$50.9 million of credits for gains on the curtailment of pension benefits and
sales of branches resulting from the merger and completion of the process
redesigns.
The credits on the sales of branches resulted primarily from the sale of
eleven former Meridian Bank PA branches in Berks and Lebanon counties in
Southeastern Pennsylvania. The sale was necessary to satisfy a condition of
regulatory approval of the Acquisition contained in an agreement between
CoreStates, the U.S. Department of Justice and the Attorney General for the
Commonwealth of Pennsylvania. Approximately $380 million of deposits and $120
million of loans were included in the sale, which generated a pre-tax gain of
$40.1 million. Additional gains of $3.0 million were recorded as restructuring
credits in 1996 on the sale of branches which were sold as a result of the 1995
process redesigns.
A summary of 1996 and 1995 pre-tax restructuring and merger-related charges
(credits), excluding the $70.0 million provision for loan losses in 1996, was as
follows (in millions):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Meridian merger-related restructuring charge............. $ 161.6 $ 10.0
Meridian merger-related implementation costs............. 29.0 -
Process redesign restructuring charges................... - 142.0
Gains on sales of branches............................... (43.1) (4.0)
Pension curtailment gains................................ (7.8) (9.4)
------- -------
Total................................................. $ 139.7 $ 138.6
======= =======
</TABLE>
The components of the $161.6 million Meridian merger-related restructuring
charges recorded in 1996 were as follows (in millions):
<TABLE>
<CAPTION>
Requiring Cash
Total Cash Outflow
Provision Outflow(a) to-date (a)
---------- ----------- -----------
<S> <C> <C> <C>
Severance costs.......................................... $ 70.5 $ 70.5 $33.9
Branch closing costs..................................... 33.5 15.1 3.8
Office reconfiguration costs............................. 19.0 2.8 -
Merger transaction costs................................. 14.6 14.6 13.3
Systems consolidation writedowns......................... 6.4 - -
Miscellaneous............................................ 17.6 17.6 9.7
------ ------ -----
Total................................................. $161.6 $120.6 $60.7
====== ====== =====
</TABLE>
- --------------------
(a) CoreStates' liquidity has not been significantly affected by these cash
outflows.
6
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
OVERVIEW - continued
The severance costs relate to the separation packages which are being paid to
approximately 1,350 employees who have been displaced as a result of the
Meridian consolidations. Cash payments under separation packages commenced in
February 1996 and will continue for varying terms. The office reconfiguration
charge relates to the costs of asset write-offs and lease buyouts that will be
incurred principally in the process of consolidating operations and support
staff. The branch closing charge relates to the costs of asset write-offs and
lease buyouts that will be incurred in the process of consolidating and closing
approximately 95 branch offices. Through December 31, 1996, 82 branches have
been consolidated or closed.
Cash outflows to be incurred in implementing the Meridian consolidation were
expected to include approximately $35 million for capital expenditures, of which
$23 million was incurred through December 31, 1996. These expenditures were not
included in the restructuring charge.
In 1995, CoreStates and Meridian completed intensive reviews of their
operations and businesses and announced corporate-wide process redesign plans.
As a result of these process redesigns, CoreStates recorded net pre-tax
restructuring charges of $128.6 million, $82.2 million after-tax or $0.37 per
share in 1995. In the fourth quarter of 1995, Meridian paid $10.0 million, or
$0.05 per share, of non-deductible costs associated with the Acquisition.
In 1994, upon consummation of their respective acquisitions by CoreStates,
Independence Bancorp, Inc. ("Independence") and Constellation Bancorp
("Constellation") recorded merger-related charges in connection with a change in
strategic direction related to problem assets, to conform consumer lending
charge-off policies to those of CoreStates and for expenses directly
attributable to the acquisitions. These merger-related charges totaled $166.4
million after-tax, or $0.74 per share. On a pre-tax basis, the merger-related
charges consisted of a $145.0 million provision for loan losses, a $32.0 million
addition to the OREO reserve, $13.0 million for the writedown of purchased
mortgage servicing rights and related assets, and $63.7 million for expenses
directly attributable to the acquisitions including $13.0 million of severance
costs related to approximately 715 employees.
Certain Net Investment Gains - Excluded from operating earnings in 1996 are
----------------------------
net pre-tax gains of $43.3 million, $28.1 million after-tax or $0.12 per share,
which consist of a $28.7 million pre-tax gain on the exchange of domestic
equity securities and a net $14.6 million pre-tax gain on the sale of foreign
equity securities. In 1995, CoreStates recorded pre-tax gains which are also
excluded from operating earnings of $13.6 million, $8.6 million after-tax or
$0.04 per share, on the exchange of domestic equity securities.
SAIF Special Assessment - On September 30, 1996, the Deposits Insurance Fund
-----------------------
Act of 1996 ("Funds Act") became law. A key element of the Funds Act was to
fully capitalize the Savings Association Insurance Fund by mandating a special
one-time assessment on institutions carrying SAIF insured deposits. In the
third quarter of 1996, CoreStates expensed $14.2 million pre-tax, $8.9 million
after-tax or $0.04 per share, for the special assessment on its SAIF insured
deposits.
Gain on Affiliate Joint Venture - In March 1995, Electronic Payment Services,
-------------------------------
Inc. ("EPS"), an affiliate joint venture formed in 1992 to combine the consumer
electronic transaction processing businesses of CoreStates and three other
partners, admitted a fifth partner and increased the ownership interest of an
existing partner. As a result of the change in its ownership interest,
CoreStates recognized a pre-tax gain of $19.0 million, $11.8 million after-tax
or $0.05 per share, in the first quarter of 1995.
Comparison of Earnings: 1995 to 1994 - In 1995, CoreStates improved its
------------------------------------
operating earnings by 23.8% on a per-share basis due to growth in basic banking
businesses and reductions in operating expenses resulting from the
implementation of 1995 process redesigns. CoreStates' operating earnings for
1995 were $727.0 million, or $3.28 per share, compared to operating earnings of
$599.6 million, or $2.65 per share in 1994. CoreStates recorded net income of
$655.2 million, or $2.95 per share in 1995, compared to net income of $433.2
million, or $1.91 per share in 1994.
7
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
OVERVIEW - continued
The largest contributor to the $127.4 million improvement in operating
earnings for 1995 was a $92.7 million, or 4.4% increase in taxable equivalent
net interest income. The net interest margin for 1995 was 5.47%, 14 basis
points above 1994. The increases in taxable equivalent net interest income and
net interest margin were primarily related to improved interest rate spreads on
deposits and prime-based loans, higher earnings on non-interest bearing funding,
reduced non-performing loans, and loan growth, particularly in credit card
outstandings and asset-based lending at Congress Financial Corporation
("Congress Financial"), CoreStates' commercial finance subsidiary.
Also contributing to the improvement in 1995 operating earnings was a $50.0
million, or 2.8%, decrease in non-financial expenses excluding significant and
unusual items as discussed on page 41, and a $61.1 million, or 7.7%, increase in
non-interest income, as discussed on page 39. The financial impact of those
aspects of the process redesigns implemented during 1995 was to increase revenue
by $9.5 million and decrease non-financial expenses by $79.8 million, for an
aggregate increase in 1995 operating earnings of $89.3 million pre-tax, or
$0.25 per share after-tax.
Non-Performing Assets - Non-performing assets at December 31, 1996 totaled
---------------------
$245.0 million, a decline of $23.3 million or 8.7% from December 31, 1995. Non-
performing real estate assets were down $41.7 million or 21.9%, while non-
performing commercial loans increased $19.9 million or 27.4%. At December 31,
1996 the allowance for loan losses of $710.3 million was 321.7% of non-
performing loans. This compares to $670.3 million and 290.4% at December 31,
1995. For more information on non-performing assets, see "Non-Performing Assets"
beginning on page 22.
Cautionary Statement
Certain statements contained herein are not based on historical fact and are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements which are based on
various assumptions (some of which are beyond CoreStates' control), may be
identified by reference to a future period, or periods, or by the use of
forward-looking terminology such as "may", "will", "believe", "expect",
"estimate", "anticipate", "continue", or similar terms or variations on those
terms, or the negative of those terms. Actual results could differ materially
from those set forth in forward-looking statements. Factors that could cause
actual results to differ materially from those in the forward-looking statements
include, but are not limited to: the global, national and regional economies
where CoreStates conducts operations; economic growth; governmental monetary
policy including interest rate policies of the Federal Reserve Board; sources
and costs of funds; levels of interest rates; inflation rates; market capital
spending; technological change; the state of the securities and capital markets;
acquisitions; consumer spending and savings; expense levels; and tax,
securities, and banking laws and prospective legislation.
8
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
BUSINESS LINE RESULTS
CoreStates utilizes a value-based reporting methodology to facilitate
management's analysis of performance by defined business lines. This process
supports CoreStates' strategic objective of creating superior growth in
shareholder value by focusing on the performance and value creation potential of
CoreStates' component businesses.
This section of management's discussion and analysis presents the performance
results of CoreStates' five core businesses: Global and Specialized Banking;
Regional Banking; Retail Credit Services; Trust and Asset Management; and Third
Party Processing. Each core business is comprised of well-defined business
lines with market or product specific missions.
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 QuestPoint, are allocated equity utilizing
regulatory risk-based capital guidelines as well as each business line's fixed
assets and other capital investment requirements. Equity at QuestPoint 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 years have been
reclassified for comparative purposes. Meridian's businesses have been
incorporated into the business line results for 1995 using certain allocation
methodologies previously employed by Meridian.
The Corporate Center includes the income and expense impact of unallocated
equity, unusual or non-recurring items (such as restructuring and merger-related
charges, the SAIF special assessment and certain net investment gains) 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 transactions, and miscellaneous items.
9
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
BUSINESS LINE RESULTS - continued
The earnings contribution of these core businesses is reflected in the table
below (in millions):
<TABLE>
<CAPTION>
Retail
Global and Regional Credit
(taxable equivalent basis) Specialized Banking Banking Services
----------------------------- ---------------------------- ------------------------
1996 1995 1996 1995 1996 1995
-------------- ------------- -------------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Net interest income.......... $ 583.9 $ 554.0 $1,117.6 $1,148.4 $ 292.0 $ 283.0
Provision for losses on
loans...................... 29.3 40.8 25.0 22.6 102.3 78.4
Non-interest income.......... 235.1 247.5 245.0 228.9 84.9 90.1
Non-financial expenses....... 383.8 404.0 794.6 840.9 186.2 187.7
------- ------- -------- -------- -------- -------
Income before income taxes... 405.9 356.7 543.0 513.8 88.4 107.0
Income tax expense........... 155.1 131.9 197.1 186.0 32.6 39.4
------- ------- -------- -------- -------- -------
Net income................... $ 250.8 $ 224.8 $ 345.9 $ 327.8 $ 55.8 $ 67.6
======= ======= ======== ======== ======== =======
Return on average assets..... 1.76% 1.68% 2.37% 2.31% 0.76% 0.99%
Return on average equity..... 27.03 28.56 46.87 45.59 16.46 20.00
Average assets............... $14,289 $13,345 $ 14,614 $ 14,180 $ 7,344 $ 6,844
Average equity............... 928 787 738 719 339 338
Trust and
Asset
(taxable equivalent basis) Management
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Net interest income.......... $ 51.9 $ 55.2
Provision for losses on
loans....................... 2.2 2.2
Non-interest income.......... 169.1 165.6
Non-financial expenses....... 155.3 162.8
------- -------
Income before income taxes... 63.5 55.8
Income tax expense........... 22.6 20.8
------- -------
Net income................... $ 40.9 $ 35.0
======= =======
Return on average assets..... 3.05% 2.27%
Return on average equity..... 43.05 36.46
Average assets............... $ 1,339 $ 1,541
Average equity............... 95 96
<CAPTION>
Third Party
Processing Corporate Center Total
------------------------ ---------------------------- ------------------------
1996 1995 1996 1995 1996 1995
------- ------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net interest income.......... $ (5.0) $ (5.2) $ 127.3 $ 164.8 $2,167.7 $2,200.2
Provision for losses on
loans....................... - - 70.0 (b) - 228.8 144.0
Non-interest income.......... 223.1 207.4(a) (58.1)(c) (57.3)(c) 899.1 882.2
Non-financial expenses....... 210.4 175.6 46.5 (b) 114.5 (d) 1,776.8 1,885.5
------- ------- -------- -------- -------- --------
Income (loss) before
income taxes................ 7.7 26.6 (47.3) (7.0) 1,061.2 1,052.9
Income tax expense........... 2.7 9.9 1.9 9.7 412.0 397.7
------- ------- -------- -------- -------- --------
Net income (loss)............ $ 5.0 $ 16.7 $ (49.2) $ (16.7) $ 649.2 $ 655.2
======= ======= ======== ======== ======== ========
Return on assets............. 3.42% 11.60% (0.81)% (0.19)% 1.48% 1.47%
Return on equity............. 16.67 57.59 (2.80) (0.94) 16.69 17.51
Average assets............... $ 146 $ 144 $ 6,062 $ 8,651 $ 43,794 $44,705
Average equity............... 30 29 1,760 1,773 3,890 3,742
</TABLE>
(a) Includes a gain of $19.0 million pre-tax, $11.8 million after-tax, related
to changes in CoreStates' investment in the EPS, Inc. affiliate joint
venture.
(b) Includes net restructuring and merger-related charges of $70.0 million in
the provision for losses on loans and $139.7 million in non-financial
expenses, combined $150.8 million after-tax, and a SAIF special assessment
of $14.2 million, $8.9 million after-tax, in non-financial expenses.
(c) Includes certain net investment gains of $43.3 million, $28.1 million
after-tax, in 1996 and $13.6 million, $8.6 million after-tax, in 1995.
(d) Includes net restructuring and merger-related charges of $138.6 million
pre-tax, $92.2 million after-tax, primarily related to process redesigns.
10
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
BUSINESS LINE RESULTS - continued
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 1996 increased $26.0
million or 11.6% above 1995. The favorable variance was primarily due to an
increase in net interest income and declines in non-financial expenses and the
provision for losses on loans.
Net interest income for 1996 increased $29.9 million, or 5.4%, from 1995
primarily due to increases in average loans and deposits. Congress Financial's
net interest income increased $3.1 million, or 1.4%, due to a $206.9 million,
or 8.2%, increase in average loan volume. Excluding Congress Financial, average
loan volume increased $650 million, or 6.6%, primarily due to growth in
Specialized Banking, International Banking, and Large Corporate Banking. The
impact of increased loan volume was partially offset by the impact of lower
interest spreads on loans due to competitive pressures on pricing. Non-
performing loans declined $20.5 million, or 25.2% , from the prior year. Deposit
balances increased $912.8 million, or 37.5%, from 1995 due to increases in non-
interest bearing demand deposit balances and overseas time deposits.
The provision for losses on loans declined $11.5 million, or 28.2% , from the
prior year due to an improvement in credit quality.
Non-interest income for 1996 was $12.4 million, or 5.0%, below the prior year
due to declines in income from trading activities, loan syndication income and
service charges on deposits, which were partially offset by increased
international service fees. Cash management revenues were level with the prior
year, as increases in volume were offset by pricing pressures. Increases in
collected demand balances maintained by customers to pay for services offset the
decline in service charges on deposits.
Non-financial expenses for 1996 were $20.2 million, or 5.0%, below the 1995
level due to declines in personnel expenses, FDIC expense, OREO expense, and
other miscellaneous expenses. The decline in personnel and miscellaneous
expenses primarily resulted from the process redesigns and merger-related
efficiencies.
Regional Banking includes Retail Banking and Delivery, Small Business Lending
----------------
and Middle Market Lending. Net income for Regional Banking was $345.9 million,
up $18.1 million, or 5.5%, from 1995. The increase for 1996 was primarily the
result of declines in non-financial expenses and gains on home equity loan
securitizations, partially offset by lower net interest income due to narrowing
deposit spreads and declines in deposit volumes.
Net interest income for 1996 was $30.8 million, or 2.7%, below 1995. This
decline was mainly attributable to lower deposit volume and spreads. Average
deposits declined $689 million compared to 1995 and deposit spreads were 8 basis
points below prior year. The deposit decline was primarily due to the sale of
several branches in the last quarter of 1995 and the divestiture of eleven
branches in the second quarter of 1996. The 1996 divestiture was the result of
the merger with Meridian. The narrowing spreads resulted from more aggressive
pricing related to a focus on customer retention. The spread compression was
concentrated in certificates of deposit and certain types of money market
deposits. A decrease in commercial loan spreads resulting from aggressive
competitor pricing also contributed to the net interest income decline.
Partially offsetting these negative impacts to net interest income were
increases in consumer loan spreads and volumes.
Non-interest income increased $16.1 million, or 7.0%, over 1995 mainly due
to $7.7 million in home equity loan securitization gains and increased home
equity loan servicing income. In the fourth quarter of 1996, CoreStates
implemented an ATM surcharge on all non-CoreStates bank customer ATM
transactions. Increases in various other non-interest income categories totaled
$7.3 million.
Non-financial expenses for 1996 declined $46.3 million, or 5.5%. Personnel
expenses declined $13.4 million, or 4.3% primarily due to branch closings/sales
and organizational streamlining achieved through merger integration and process
redesigns. Non-personnel expenses declined $30.0 million, or 5.7% resulting
from reduced FDIC premiums in 1996 as well as branch closings/sales and
streamlining achieved through merger integration and process redesigns.
11
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
BUSINESS LINE RESULTS - continued
Retail Credit Services includes the following major business lines: Credit
----------------------
Card, Dealer Services, Educational Lending, Mortgage Services and Card Linx
(CoreStates merchant credit card processing business). Net income for Retail
Credit Services was $55.8 million in 1996, $11.8 million, or 17.5%, below 1995.
The decline for 1996 was primarily attributed to an increase in the provision
for losses on credit card loans and a reduction of merchant fee income.
Net interest income for 1996 was $9.0 million, or 3.2%, above 1995. This
increase was driven by growth in average loans in the following categories:
credit card loans ($150 million or 10.7% growth), indirect auto loans ($100
million or 6% growth), and educational lending loans ($66 million or 21.8%
growth). Excluding the impact of loan sales, average loans increased
approximately $400 million, or 5.5%. The impact of narrowing spreads on these
products due to competitive pricing pressures and a $436 million reduction of
residential mortgage loans due to sales, partially offset the favorable impacts
of loan growth. Additionally, fees for auto lease terminations and credit card
late and over limit fees increased $3.5 million over 1995.
The provision for losses on loans increased $23.9 million or 30.5% over
1995. This increase was primarily due to an increase in credit card loan
charge-offs due to a policy change in 1996 and loss experience. Increases in
credit card charge-offs is an industry-wide trend also being experienced by
CoreStates.
Non-interest income for 1996 decreased by $5.2 million, or 5.8%, from 1995.
This decline was primarily due to a $9.0 million decrease in merchant fee income
resulting from customer attrition from bank acquisitions, systems conversions,
and repricing of unprofitable customer relationships. This was partially offset
by an increase of $1.4 million in gains recorded on sales of student loans and
an increase of $1.6 million in credit card fee income.
Non-financial expenses for 1996 declined $1.5 million, or 0.8%, primarily
due to savings achieved through the recent process redesigns and merger-related
efficiencies.
Trust and Asset Management is organized into four business lines:
--------------------------
Institutional Trust, Personal Trust, Private Banking and Investment Management.
CoreStates' Corporate Trust business (bond issuer services), previously included
in Institutional Trust, was sold during the fourth quarter of 1995. Meridian's
Corporate Trust business was sold in the fourth quarter of 1996. Net income of
$40.9 million for 1996 increased by $5.9 million, or 16.9%, over 1995. An
increase in non-interest income and reduced non-financial expenses contributed
to the improvement in 1996 net income.
Net interest income declined by $3.3 million, or 6.0%, in 1996 primarily
due to the loss of demand deposit balances related to the sales of the Corporate
Trust businesses. Excluding Corporate Trust earnings on demand deposit balances
in both years, net interest income increased $1.7 million, or 3.5%, for 1996.
Non-interest income for 1996 increased $3.5 million, or 2.1% over 1995.
Excluding Corporate Trust fees for both years, non-interest income increased
$11.0 million, or 7.1% in 1996. This improvement was related to growth in
Investment Management fees generated from the implementation of the process
redesign and appreciation of asset market values. Partially offsetting these
favorable variances was a decline in fees from the Employee Benefit business.
Non-financial expenses in 1996 declined by $7.5 million, or 4.6%, from
1995. The expense reductions are associated with the sales of the Corporate
Trust businesses and savings in all four business lines related to the process
redesigns and merger-related efficiencies.
12
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
BUSINESS LINE RESULTS - continued
Third Party Processing consists of the QuestPoint specialty transaction
----------------------
processing units, and earnings from CoreStates' investment in Electronic Payment
Services, Inc. ("EPS"). The QuestPoint processing units include: Check Services
(previously Transys), a provider of check processing and payment services to
CoreStates and other financial institutions, Remittance and Document Services
(previously CashFlex), a leading supplier of remittance processing services
nationwide with processing sites in key markets within the United States and
Canada, and SynapQuest, a provider of both retail credit card processing
services to CoreStates and other financial institutions.
On November 7, 1996, QuestPoint acquired five check processing centers from
The Bisys Group, Inc. ("Bisys"). The acquisition enhances QuestPoint's position
as a national check processing company and provides an expanded customer base
for other QuestPoint products. The acquired centers are expected to add
revenues of approximately $10 million annually.
Third Party Processing ("TPP") net income for 1996 was $5.0 million
compared to net income of $16.7 million for 1995. Prior period results do not
reflect the TPP net income contribution that Meridian would have provided as a
TPP customer. The 1995 results included an $11.8 million after-tax gain related
to changes in CoreStates' investment in EPS.
Third Party Processing revenue for 1996 totaled $223.1 million including
$115.6 million for the CoreStates intercompany business, $29.9 million for EPS
and $77.6 million of other external QuestPoint revenue. This compares to a 1995
revenue total of $207.4 million including $94.0 million for the CoreStates
intercompany business, $30.1 million of EPS revenue, $64.3 million of other
external QuestPoint revenue and the $19.0 million gain related to changes in
CoreStates' investment in EPS. Excluding the EPS gain, revenue growth for 1996
was $34.7 million or 18.4%. The CoreStates intercompany business, which
contributes 52% of the TPP revenue base, increased $21.6 million or 23%. The
1996 revenue growth within the CoreStates intercompany business was a result of
the addition of Meridian processing.
External QuestPoint business accounts for 35% of the revenue base and
increased $13.3 million or 21% for 1996. The investment in EPS contributes the
remaining 13% of the revenue stream. The external revenue growth was primarily
a result of new business within Check Services, including the impact of the
Bisys transaction for two months, and within Remittance and Document Services.
In addition, about $1.8 million of the external TPP revenue increase was due to
one additional month of revenue from Nationwide Remittance Centers, Inc.
("NRC"), a lockbox processing subsidiary acquired by QuestPoint on January 27,
1995. Income from the investment in EPS reflects CoreStates' share of EPS's net
income, interest income on a 6.45% note and income from amortization of a
deferred gain.
Third Party Processing non-financial expenses for 1996 were $210.4 million,
up $34.8 million, or 19.8%, from 1995. Most of the increase supports the
addition of new business, such as the processing of Meridian volume in Check
Services, Bisys for two months, and overall Remittance and Document Services
volume growth. One additional month of NRC expenses, as well as higher benefits
and administrative costs, also contributed to the QuestPoint expense growth.
13
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
CAPITAL STRENGTH
Capital strength must be evaluated in the context of business risk
exposures, including asset quality, interest sensitivity, liquidity and earnings
diversification. CoreStates places a significant emphasis on the maintenance of
strong capital which promotes investor confidence, helps provide access to the
credit markets under favorable terms and enhances the flexibility to capitalize
on business growth and acquisition opportunities. Capital is managed for each
CoreStates subsidiary based on its respective risks and growth opportunities, as
well as regulatory requirements. CoreStates is positioned to take advantage of
market opportunities to strengthen capital. A shelf registration, which is in
place, provides for the issuance of a wide-range of securities including:
senior and subordinated debt, straight and convertible preferred securities and
equity. At December 31, 1996, CoreStates had $1,085 million of registered but
unissued securities under the shelf. Through the implementation of its capital
policies, CoreStates has achieved a strong capital position. The relative
strength of CoreStates' capital is reflected in the chart "Average Common
Equity/Assets."
<TABLE>
<CAPTION>
Average Common Equity/Assets Average Common
------------------------------
Plotting Points for a Chart Equity/Assets
------------------------------ -------------------------------------
(in percent) Superregional
CoreStates Composite *
----------- ----------------
<S> <C> <C>
1996 8.88% 8.18%
1995 8.37 7.59
1994 8.27 7.53
1993 7.93 7.41
1992 7.23 6.77
</TABLE>
* The Salomon Brothers Superregional Bank Composite
14
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
CAPITAL STRENGTH - continued
At December 31, 1996, common shareholders' equity totaled $3,696 million or
8.1% of total assets, compared with $3,876 million or 8.4% at year-end 1995.
The year-end 1996 equity to assets ratio for the Salomon Brothers Superregional
Bank Composite was 8.1%. CoreStates has achieved steady internal capital
generation throughout the past five years. Common shareholders' equity
increased over the five years ended December 31, 1996 at a compound annual
growth rate of 4.2%, while dividends paid increased at a compound annual growth
rate of 11.8%.
During 1996, CoreStates increased its quarterly dividend by 11.9% to $0.47
per share beginning with the fourth quarter declaration. CoreStates declared
dividends on its common stock of $1.73 per share in 1996, $1.44 per share in
1995 and $1.24 per share in 1994. The common dividend payout ratio on an
operating earnings per share basis was 48.5% for 1996, compared to 43.9% for
1995.
On October 15, 1996, the Board of Directors authorized the management of
CoreStates to repurchase up to 22 million shares of common stock, or
approximately 10% of outstanding shares, through December 31, 1997. Acting
under that authorization, 8.8 million shares of CoreStates' common stock were
repurchased on November 6, 1996 in a privately negotiated transaction.
Management is also authorized to repurchase additional shares to fulfill
requirements of employee benefit and dividend reinvestment plans.
CoreStates and its bank subsidiaries are subject to minimum risk-based and
leverage capital guidelines issued by the Federal Reserve Board and Comptroller
of the Currency. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on CoreStates. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, CoreStates must meet specific capital guidelines that involve
quantitative measures of CoreStates' assets, liabilities, and certain off-
balance-sheet items as calculated under regulatory accounting practices.
CoreStates' capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
On October 21, 1996, the Federal Reserve Board approved the limited use of
certain cumulative preferred instruments ("Trust Capital Securities") as Tier 1
capital. While these Trust Capital Securities are classified as long-term debt
on the Consolidated Balance Sheet (see Note 12 to the Financial Statements for
further description of these securities), CoreStates intends to utilize these
Trust Capital Securities in managing its total capital mix. CBNA issued $300
million of these securities on December 19, 1996 (an additional $450 million was
issued in January, 1997). This type of security issuance provides CoreStates
more flexibility in managing its capital.
CoreStates Capital Corp issued $200 million of subordinated debt under the
shelf registration on November 21, 1996. The proceeds from the subordinated
debt, the Trust Capital Securities, as well as internal capital generation, will
be used to finance common stock repurchases and other general funding needs. At
December 31, 1996, management believes that CoreStates exceeds all capital
adequacy requirements to which it is subject. The following table illustrates
CoreStates' risk-based and leverage capital ratios compared to regulatory
guidelines at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Risk-based and Leverage Capital Ratios
- --------------------------------------
At December 31,
- ---------------
(in millions)
Regulatory Guidelines
----------------------
Well-
1996 1995 Minimum Capitalized
---- ---- ------- -----------
<S> <C> <C> <C> <C>
Tier 1 capital ratio........... 9.4% 9.2% 4.0% 6.0%
Total capital ratio............ 13.2 12.7 8.0 10.0
Tier 1 leverage ratio.......... 8.5 8.0 3.0 5.0
</TABLE>
15
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
RISK MANAGEMENT
Risk management at CoreStates encompasses the oversight of a broad range of
risks undertaken by CoreStates including credit, market (including interest
rate, trading and liquidity risks), product, compliance, operations, systems,
technology and general business risk. CoreStates' ongoing refinement of its risk
management practices takes place within the framework of a corporate risk
management program. The objective of the program is a continued strengthening
of CoreStates' risk management culture and its policies, processes and controls
for managing risk on an integrated basis throughout the company. The following
sections, "Credit Quality" and "Asset and Liability Management", discuss two
components of risk management.
CREDIT QUALITY
Credit Risk Management
The management of credit risk at CoreStates relies on maintaining a diversified
loan portfolio, limiting exposures to any given borrower, industry or market
segment, and on upholding a well-established credit culture. Early
identification and communication of deterioration/problems in the portfolio,
early recognition of non-performing assets and charge-offs, maintaining reserves
that are strong, and a credit advisory team process that provides all lenders in
both wholesale and consumer businesses access to the most senior and experienced
credit officers in the organization, are key components of this credit culture.
In addition, CoreStates has established a wide range of specialized lending
areas staffed with industry experts and experienced lending resources.
Underlying this credit culture is a tradition of extensive and ongoing credit
training and comprehensive and well-communicated policies and procedures.
Further, while CoreStates maintains a successful process of managing individual
credits, it continues to place a greater emphasis on portfolio management
issues.
In acquiring a company whose businesses include the extension of credit, it is a
priority of CoreStates to extend its credit culture to the newly acquired
institution. In executing the integration of Meridian into CoreStates,
CoreStates continued this policy. CoreStates' credit policies and standards of
conduct, which define CoreStates' existing credit culture, were extended to the
combined organization with only minor policy changes. The extensive credit
officer structure in place at CoreStates was also extended to the combined
organization. Each significant market now has assigned at least one senior
credit officer who is supported by one or more credit officers. Extension of
the CoreStates credit culture to the Meridian organization was also facilitated
through integration of key CoreStates and Meridian personnel. The existing loan
quality process, which is designed as an early warning system for problem loan
identification and portfolio issues, is now used in the combined organization.
CoreStates' favorable experience with these processes and their successful use
in the integration of other organizations, ensures that CoreStates' credit
quality standards continue to be maintained.
The maintenance of CoreStates' credit quality standards is supported by a
comprehensive and independent assessment of credit quality and portfolio
management by a Credit Review department, which reports to the Audit Committee
of the Board of Directors.
Wholesale Loan Portfolio
CoreStates has traditionally maintained limits on industry, market, country and
borrower concentrations as a way to diversify and manage credit risk.
Management's current policy is to limit industry concentrations to 50% of total
shareholders' equity and to limit market segment concentrations to 10% of total
assets. CoreStates manages industry concentrations by applying these dollar
limits to a family of industries that have common risk characteristics. This
management process is reflected in the following chart, "Wholesale Loans by
Industry", which illustrates each industry that exceeds 10% of total
shareholders' equity. The chart reflects favorable performance as measured by
the percentage of outstandings which are non-performing, with a minimal number
of non-performing loans in excess of $5 million within the concentrated
industries.
16
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
CREDIT QUALITY - continued
<TABLE>
<CAPTION>
Wholesale Loans by Industry
- ---------------------------
Plotting Points for a Graph
- ---------------------------
At December 31, 1996
- --------------------
Outstandings % of
Outstandings as a % Outstandings
(in million) equity non-performing
------------ ------------- --------------
<S> <C> <C> <C>
Completed Real Estate Projects (a).... $1,758.7 47.6% 2.3%
Retail Trade.......................... 1,229.7 33.3 0.3
Communications........................ 1,152.2 31.2 0.2
Non-bank Finance (b).................. 1,040.7 28.2 0.2
Depository Institutions............... 1,018.6 27.6 -
Healthcare............................ 916.2 24.8 1.1
Automobile Dealers.................... 798.1 21.6 0.2
Agri-Finance.......................... 665.9 18.0 2.3
Real Estate Construction.............. 554.9 15.0 1.0
Chemicals and Allied Products......... 508.6 13.8 0.3
Trucking and Auto Leasing............. 478.7 13.0 0.3
Apparel Manufacturing................. 413.9 11.2 0.3
</TABLE>
(a) Consists of loans on commercial real estate to investors on completed
properties.
(b) Includes insurance, mortgage, mutual funds and finance companies.
The following highlights three portfolios: the Congress Financial portfolio,
due to its growth opportunities and significant contribution to CoreStates'
performance; the international financial institutions portfolio, as this is a
significantly expanded business; and real estate loans, due to the overall size
of the combined commercial and residential portfolios.
Congress Financial - Congress Financial's loan portfolio is a combination
of asset-based lending and factoring. The asset-based loan portfolio continues
to grow despite a very competitive marketplace, while the factoring portfolio is
constantly challenged because of the massive changes taking place in the
domestic textile industry. The asset-based portfolio, enhanced by Congress'
expertise in syndicating large multi-faceted transactions, achieved a growth
rate of 9.7% on a year-to-year basis, while the factoring portfolio, down year-
to-year, experienced an increase in loan activity in the last three months of
the year, averaging $500 million for the fourth quarter. Credit quality, as
reflected in the strong historical trends noted in the following table,
continues to be consistent with Congress Financial's lending philosophy.
<TABLE>
<CAPTION>
Congress Financial Portfolio
- ----------------------------
At December 31,
- ---------------
(in millions)
1996 1995
---------- ----------
<S> <C> <C>
Asset-based lending portfolio:
Loans............................. $2,269.8 $2,068.4
Non-performing.................... 12.2 11.4
% of loans plus OREO............ 0.5% 0.6%
Net charge-offs................... 5.5 10.2
% of average loans............. 0.2% 0.5%
Factoring receivables (a)............. $ 411.3 $ 557.3
</TABLE>
- ----------------
(a) There were no non-performing factoring receivables at December 31, 1996 and
1995.
17
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
CREDIT QUALITY - continued
International Financial Institutions - CoreStates' International Financial
Institutions business serves a portfolio of over 1,100 international
relationships in 74 countries. In the correspondent banking business,
CoreStates continues to focus on global multicurrency payment flows and on
global trade collections and disbursements. In addition to facilitating the
short term, trade related businesses of correspondents, CoreStates also provides
treasury support, foreign exchange and, in selected cases, medium-term
financing. CoreStates is one of the most active banks in the United States in
working with correspondents to facilitate their access to Eximbank financing,
particularly for small and medium-sized transactions.
The portfolio's growth in 1996 in various geographic areas, as well as in
certain product categories, is primarily attributable to generally improved
political and economic conditions worldwide, which have encouraged international
financial institutions to expand their activities and portfolios.
Apart from limits on exposures to individual banks and countries, which are
extended after thorough analysis and on-site visits, CoreStates manages its
international portfolio through concentration limits for certain industries,
tenors, and risk-rated assets which are determined through a stringent credit
approval and monitoring process.
International Financial Institutions' exposure consists of deposit
placements, bankers' acceptances, letters of credit and loans outstanding. Total
exposure at December 31, 1996 of $4.6 billion represented a $1.6 billion or 52%
increase above $3.0 billion at year-end 1995. For both 1996 and 1995,
approximately 50% of the total exposures were deposit placements. Non-trade
exposures in 1996 approximated 10% of total exposure. Exposure in the
International Financial Institutions portfolio at December 31, 1996 and 1995 was
distributed geographically as follows:
<TABLE>
<CAPTION>
International Financial Institutions Portfolio
- ----------------------------------------------
At December 31,
- ---------------
(in millions)
1996 1995
--------------------- ------------------
% of % of
Exposure Total Exposure Total
-------- ----- -------- ------
<S> <C> <C> <C> <C>
Europe/Africa......... $1,751 38% $1,207 40%
Asia.................. 1,692 37 1,067 35
Americas.............. 1,030 23 682 23
Middle East........... 109 2 61 2
------ --- ------ ---
Total exposure..... $4,582 100% $3,017 100%
====== === ====== ===
</TABLE>
18
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
CREDIT QUALITY - continued
Real Estate Loans - The regional market in which CoreStates operates has
generally stabilized for both the residential and commercial segments.
Competition for customers in the market continues from both bank and non-bank
lenders. Total real estate loans outstanding were $9,772.6 million at December
31, 1996, compared to $10,969.0 million at December 31, 1995. The decline from
year-end 1995 was principally due to sales of approximately $1.4 billion of
residential mortgages including home equity loans.
The construction and development loan portfolio was $554.9 million or 1.7% of
total loans at December 31, 1996. At December 31, 1996, 1.0% of CoreStates'
construction and development loan portfolio was non-performing, compared to 1.5%
at December 31, 1995.
The largest category within real estate loans is residential mortgages, which
includes home equity loans of $2,301.8 million, one-to-four family mortgages of
$2,102.1 million, and multi-family residential mortgages of $272.2 million.
Total residential mortgages were $4,676.0 million or 14.3% of total loans at
December 31, 1996. Residential mortgage loan quality remained consistent as
measured against 1995's performance.
CoreStates' commercial real estate portfolio includes both completed property
investor loans and loans collateralized by owner-occupied real estate. The
commercial real estate portfolio totaled $4,541.7 million or 13.8% of total
loans at December 31, 1996. The percentage of non-performing commercial real
estate loans to year-end commercial real estate loans improved from 2.0% at
December 31, 1995 to 1.7% at December 31, 1996. Net charge-offs for the
commercial real estate portfolio declined slightly in 1996. This improvement in
non-performing loans and charge-offs reflects a continued emphasis on loan
quality in the commercial real estate portfolio. The non-performing loans and
net charge-offs did not include any significant individual borrower exposure.
The commercial real estate portfolio continues to exhibit diversity by product
type.
Real Estate Loans
- -----------------
At December 31,
- ---------------
(in millions)
<TABLE>
<CAPTION>
Construction/
Development Residential Commercial (a) Total
----------- ----------- -------------- -----
<S> <C> <C> <C> <C>
1996
- ----
Year-end outstandings.............. $554.9 $4,676.0 $4,541.7 $ 9,772.6
Average loans outstanding.......... 589.0 5,203.8 4,300.9 10,093.7
Non-performing loans............... 5.6 41.2 77.3 124.1
% of year-end loans............... 1.0% 0.9% 1.7% 1.3%
Net charge-offs.................... $ (0.1) $ 21.1 $ 15.6 $ 36.6
% of average loans................ - 0.4% 0.4% 0.4%
1995
- ----
Year-end outstandings.............. $607.8 $5,648.7 $4,712.5 $10,969.0
Average loans outstanding.......... 586.5 5,730.3 4,966.5 11,283.3
Non-performing loans............... 8.9 48.9 94.7 152.5
% of year-end loans............... 1.5% 0.9% 2.0% 1.4%
Net charge-offs.................... $ 0.8 $ 17.0 $ 22.9 $ 40.7
% of average loans................ 0.1% 0.3% 0.5% 0.4%
</TABLE>
- --------------------
(a) Includes loans on completed properties to investors and commercial loans
secured by owner-occupied real estate.
19
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
CREDIT QUALITY - continued
Consumer Lending Portfolio
Consumer Lending Portfolio (excluding credit card) - This portfolio declined
--------------------------------------------------
$1,074.5 million or 11.6% from year-end 1995. Excluding sales of approximately
$1.5 billion of consumer loans, principally residential mortgages, home equity
loans and student loans, this portfolio experienced modest growth in 1996.
Residential mortgages and home equity loans are sold on a recurring basis
primarily for asset and liability management purposes.
Net loan charge-offs as a percentage of the average portfolio outstandings
increased from 38 basis points in 1995 to 63 basis points in 1996. Although
higher in 1996, net credit losses in this portfolio were impacted by
approximately $8 million of charge-offs taken to conform Meridian consumer
lending charge-off policies to those of CoreStates and $6.8 million on a bulk
sale of non-accrual residential mortgages. CoreStates continues to operate
within a framework of strong credit policies and maintains the ability to
identify and mitigate risk factors in these retail loan products.
<TABLE>
<CAPTION>
Consumer Lending Portfolio (Excluding Credit Card)
- --------------------------------------------------
At December 31,
- ---------------
(in millions)
1996 1995
-------- --------
<S> <C> <C>
Year-end outstandings:
Home equity (a)...................... $2,301.8 $2,578.5
Indirect installment................. 1,931.4 1,916.2
Residential first mortgages (a)...... 2,102.1 2,826.2
Direct installment................... 939.5 996.5
Auto leasing......................... 888.4 920.3
-------- --------
Total............................... $8,163.2 $9,237.7
======== ========
Average loans outstanding.............. $8,773.7 $9,300.8
Net charge-offs........................ 55.1 35.7
% of average loans.................. 0.63% 0.38%
</TABLE>
- ----------------
(a) These loans have also been included in the "Real Estate Loans" discussion on
page 19.
Credit Card Portfolio - Credit card outstandings grew $147.5 million, or
---------------------
9.7%, from $1,527.4 million at 1995 year end to $1,674.9 million at 1996 year
end. The credit card portfolio was impacted in 1996 by the significant increase
in personal bankruptcies experienced nationwide and industry-wide. Net charge-
offs have increased, which is consistent with industry averages, to 5.3% of
average loans. CoreStates' credit policies and procedures have been
strengthened to better manage the risks identified in the credit card portfolio.
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 at 180 days past due. Credit card
outstandings past due 90 days or more as to payment of principal or interest
were $22 million and $25 million at December 31, 1996 and 1995, respectively.
Credit Card Portfolio
- ---------------------
At December 31,
- ---------------
(in millions)
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Year-end outstandings....... $1,674.9 $1,527.4
Average loans outstanding... 1,556.0 1,406.0
Net charge-offs............. 82.9 54.3
% of average loans........ 5.3% 3.9%
</TABLE>
20
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
CREDIT QUALITY - continued
Allowance for Loan Losses
In CoreStates' methodology for determining appropriate levels of allowance for
loan losses ("the Allowance"), each subsidiary which extends credit maintains an
allowance sufficient to absorb the anticipated loss inherent in its credit
portfolio. Factors included in management's determination of an adequate level
of Allowance are a statistical analysis of historical loss levels throughout an
economic cycle and one year of projected charge-offs, establishing a minimum
level below which the Allowance is considered inadequate and a maximum level
above which is considered inappropriate. A quarterly evaluation of loss
potential on specific credits, products, industries, and portfolios, as well as
indicators for loan growth, the economic environment and concentrations, assist
in validating the position of the Allowance within those boundaries.
Management's evaluation of the adequacy of the Allowance is independently tested
by Credit Review. Prompt recognition of problem situations and prompt write-
downs of these assets to net realizable value is an important source of
protection against problems in the portfolio. Accordingly, over an economic
cycle, CoreStates has experienced relatively high levels of recoveries of prior
charge-offs, recovering approximately 39% of prior year loan charge-offs in 1996
and approximately 36% in 1995.
The year-end 1996 Allowance totaled $710.3 million and represented 2.17% of
loans. This compares with an Allowance at year-end 1995 of $670.3 million, or
2.11% of loans. The Allowance at year-end 1996 was 321.7% of non-performing
loans, an increase over the year-end 1995 coverage ratio of 290.4% and a
reflection of both the $40 million increase in the Allowance and the $10 million
decrease from year-end 1995 in non-performing loans.
Provision for Losses on Loans - CoreStates' provision for loan losses in 1996
-----------------------------
was $158.8 million, excluding the $70.0 million merger-related provision for
losses on loans discussed below, an increase of $14.8 million over 1995. The
increase in the provision for losses on loans was made in response to loan
growth and higher charge-offs on credit card outstandings. Charge-offs on
credit cards increased to $82.9 million, or 5.3% of average outstandings in
1996, from $54.3 million or 3.9% of average outstandings in 1995. Total net
loan charge-offs in 1996 were $188.7 million or 0.6% of average loans. Net
charge-offs in 1995 were $154.9 million or 0.5% of average loans.
As a result of the Acquisition, CoreStates recorded a $70.0 million provision
for losses on loans 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. Historically for CoreStates, a strategy that
involves the accelerated resolution of problem assets has been more economical
than a long-term work out approach. It has been CoreStates' general experience
that the costs of working out assets as well as other carrying costs typically
outweigh any improvement in those assets' realized value. It is CoreStates'
judgment that such a change in strategy maximizes the total value of the
Acquisition and allows CoreStates to concentrate upon new franchise initiatives
and revenue generation. Furthermore, the process of working out problem assets
diverts resources and management time and attention from building the business
and creating long-term franchise value. Loan charge-offs recorded in 1996 that
related to actions taken in connection with the change in strategic direction
and to conform consumer lending charge-off policies were approximately $42
million.
21
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
CREDIT QUALITY - continued
The following table reflects the distribution of 1996 and 1995 net charge-offs
by loan type:
<TABLE>
<CAPTION>
Distribution of Net Charge-Offs
- -------------------------------
For the Years Ended December 31,
- --------------------------------
(in millions) 1996 1995
-------------------------------- --------------------------------------
% of % of
Total Total
Net % of net Net % of net
charge- Average charge- charge- Average charge-
Loan type offs loan type offs offs loan type offs
- --------- --------- ---------- --------- -------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Domestic:
Commercial
and industrial............. $ 27.4 0.2% 14.5% $ 35.7 0.3% 23.0%
Real estate:
Construction............... (0.1) - - 0.8 0.1 0.5
Other...................... 36.7 0.4 19.4 39.9 0.4 25.8
Consumer:
Credit card................ 82.9 5.3 43.9 54.3 3.9 35.1
Installment................ 33.8 1.1 17.9 19.6 0.8 12.6
Other (a).................... 10.1 0.5 5.4 4.9 0.3 3.2
------ ----- ------ -----
Total domestic........... 190.8 0.6 101.1 155.2 0.5 100.2
Foreign....................... (2.1) (0.2) (1.1) (0.3) - (0.2)
------ ----- ------ -----
Total net charge-offs..... $188.7 0.6 100.0% $154.9 0.5 100.0%
====== ===== ====== =====
</TABLE>
- ------------------
(a) Includes loans to financial institutions and lease financing.
Non-Performing Assets
Non-performing assets at year-end 1996 were $245.0 million, or 0.7% of total
loans plus other real estate owned ("OREO") and 0.5% of total assets. These
levels compared to total non-performing assets at year-end 1995 of $268.3
million, 0.8% of total loans plus OREO and 0.6% of total assets. The $23.3
million, or 8.7%, decline in total non-performing assets as compared to year-end
1995 was principally experienced in CoreStates' real estate portfolio which
declined $41.7 million, or 21.9%. Most of the decline in non-performing assets
was attributable to collections, and bulk sales of non-performing residential
mortgages. Non-performing loans in the commercial loan portfolio at year-end
1996 increased $19.9 million, or 27.4%, from year-end 1995, primarily due to the
addition of two large credits to non-accrual loans during the year. At year-end
1996, total non-performing assets were comprised of $220.8 million of non-
accrual loans and $24.2 million of OREO.
Non-performing assets at year-end 1995 declined $172.4 million, or 39.1%, as
compared to year-end 1994. The 1995 decline reflected decreases of $105.6
million, or 35.7% in the real estate portfolio and $40.5 million, or 35.8% in
the commercial loan portfolio. Most of the 1995 decline in non-performing
assets in these two portfolios was attributable to improved credit quality and
the receipt of payments against two large non-performing credits.
22
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
CREDIT QUALITY - continued
CoreStates monitors the movements within the non-performing portfolio closely.
The following table illustrates the components of the changes in non-performing
assets during 1996, 1995 and 1994:
Changes in Non-Performing Assets
- --------------------------------
For the Years Ended December 31,
- --------------------------------
(in millions)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Balance at January 1,.................. $ 268 $ 441 $ 626
Additions.............................. 287 274 522
Return to accrual...................... (18) (30) (74)
Payments............................... (184) (299) (350)
Charge-offs............................ (108) (118) (283)
------- ------- -------
Net change............................. (23) (173) (185)
------- ------- -------
Balance at December 31,................ $ 245 $ 268 $ 441
======= ======= =======
</TABLE>
The following table reflects the distribution of non-performing assets by loan
type at December 31, 1996 and 1995:
Distribution of Non-Performing Assets
- -------------------------------------
At December 31,
- ---------------
(in millions)
<TABLE>
<CAPTION>
1996 1995
-------------------------------- --------------------------------------
% of % Total % of % Total
Non- Loan non- Non- Loan non-
Loan type performing type performing performing type performing
- --------- ---------- ------ ---------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Domestic:
Commercial and industrial............ $ 92.6 0.6% 37.8% $ 72.7 0.6% 27.1%
Real estate:
Construction....................... 5.6 1.0 2.3 8.9 1.5 3.3
Other loans........................ 118.5 1.3 48.4 143.6 1.4 53.5
OREO............................... 24.2 - 9.9 37.5 - 14.0
Other domestic loans (a)............. 4.1 0.2 1.6 5.6 0.3 2.1
------ ----- ------ -----
Total domestic.................... 245.0 0.8 100.0 268.3 0.9 100.0
Foreign loans......................... - - - - - -
------ ----- ------ -----
Total non-performing
assets (b) (c).................... $245.0 0.7 100.0% $268.3 0.8 100.0%
====== ===== ====== =====
% of total assets................... 0.5% 0.6%
=== ===
</TABLE>
- -----------------
(a) Includes loans to financial institutions and lease financing.
(b) The table does not include loans of $113 million and $89 million at
December 31, 1996 and 1995, respectively, that are past due 90 days or more
as to principal or interest.
(c) At December 31, 1996 and 1995, there were no non-performing consumer loans.
Non-performing residential mortgage loans are included in other real estate
loans in the above table.
23
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is the process of directing and coordinating
activities that effectively control liquidity and interest rate risk.
CoreStates' philosophy includes a disciplined approach to asset and liability
management which calls for minimizing interest rate risk, maintaining a strong
balance sheet and a focus on achieving appropriate product spreads. This
disciplined approach contributes to the stability and strength of CoreStates'
net interest margin. CoreStates' asset and liability management is centralized
and individual subsidiaries are managed within the context of overall corporate
policies.
CoreStates' management emphasizes stable net interest income throughout rate
cycles, with the result that intermediate and longer term considerations take
precedence over short-term profitability. This commitment is evidenced by the
consistency of CoreStates' net interest margin over time. During the past five
years, a period of significant changes in economic conditions, competition and
interest rates, CoreStates' net interest margin has remained consistently above
industry averages as illustrated in the chart "Net Interest Margin".
Net Interest Margin
- -------------------
Plotting Points for a Chart
- ---------------------------
(In percent)
<TABLE>
<CAPTION>
Net interest margin
------------------------------
Superregional
CoreStates Composite *
------------- ---------------
<S> <C> <C>
1996 5.53% 4.65%
1995 5.47 4.56
1994 5.33 4.70
1993 5.27 4.86
1992 5.03 4.82
</TABLE>
* The Salomon Brothers Superregional Bank Composite
CoreStates' net interest margin reflects relationship business activities
rather than interest rate risk taking. The strength of CoreStates' net interest
margin comes from the combination of healthy spreads on both loans and deposits
and a balance sheet which has a relatively high portion of loans and a large
base of non-interest bearing funds. Areas of business such as credit card,
middle market lending, specialized lending and commercial finance at Congress
Financial produce attractive lending spreads. CoreStates' cash management
business provides a significant source of non-interest bearing funds, while the
retail franchise includes a substantial base of low cost funding. Emphasis on
profitable relationship business is supported by CoreStates' management
practices. CoreStates uses a matched maturity funds transfer pricing system
which focuses business managers on profitability, appropriate compensation for
embedded risks and overall pricing discipline. In addition to providing a
pricing tool, transfer pricing supports performance measurement and analysis of
net interest margin components.
24
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT - continued
Interest Rate Risk Management
Interest rate risk refers to potential changes in current and future net
interest income resulting from changes in interest rates, product spreads and
mismatches in the repricing between interest rate sensitive assets and
liabilities. At CoreStates, measurement of near term interest rate risk focuses
on potential changes in net interest income identified through computer
simulations against both rising and falling interest rates. Longer term
repricing risks are measured using potential changes in the present value of
future income streams inherent in current positions. 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 shareholders' equity. Changes are
measured relative to a base forecast in which rates remain constant at current
levels. Based on historical data, 95% of the time rates have moved less than
200 basis points over a six-month period. Included in these simulations are all
contractual repricing risks, the impact of prepayments in the loan and
securities portfolios, potential spread and volume changes on consumer deposits
and fluctuations in the value of non-interest bearing funding sources.
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 are based on a 200 basis point
parallel shift of the yield curve and negative changes are limited to 10% of
equity.
As a matter of practice, positions are generally managed to produce
significantly lower volatility than policy guidelines would permit. At December
31, 1996, net interest income simulations using a 200 basis point change in
short-term interest rates showed that CoreStates' net interest income volatility
over the next twelve months would be relatively neutral or less than 1% of
shareholders' equity. That level is representative of simulations performed
throughout the year. Recognizing that the simulation process is based on a
variety of assumptions, management reviews results by category of risk as well
as by product and tests the sensitivity of the results to key assumptions.
Present value changes are also managed well within policy guidelines and
represented less than 5% of equity at year-end.
There are two main elements to CoreStates' exposure to 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. Option risk, such as
prepayment risk on consumer lending products, has increased in recent years.
CoreStates' core wholesale and retail businesses generate a large portfolio of
prime and other short-term rate related assets. Characteristic of a regional
banking company, CoreStates also has a significant funding base of consumer
deposits with indefinite maturities and non-contractual rates such as savings,
NOW and money market accounts. The repricing characteristics of those deposits
tend to be longer term; traditionally, pricing has been relatively stable for
long periods and pricing changes lag changes in financial market rates. While
this mix of relationship assets and liabilities provides excellent liquidity, it
results in considerable interest rate risk. This inherent mismatch (the
"relationship gap") of longer term fixed-rate liabilities funding short-term
rate sensitive assets generates significant exposure to declining interest rates
if not managed.
CoreStates manages this relationship gap through the use of both on and off-
balance sheet discretionary assets and liabilities. The typical offsetting
position is created by purchasing fixed-rate investment securities funded by
short-term liabilities, or by entering into interest rate swaps in which
CoreStates receives a fixed rate and pays a variable rate. The following
excerpts from the Interest Sensitivity Analysis shown on page 94 demonstrates
the basic mismatch of the relationship portfolios and the offsetting
discretionary position. In keeping with CoreStates' interest rate risk
discipline, the combined position is relatively balanced so that there is
minimal impact on earnings from an interest rate move in either direction.
25
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT - continued
Selected Interest Sensitivity Balances
- --------------------------------------
At December 31, 1996
- --------------------
(in millions)
<TABLE>
<CAPTION>
Months Years
---------------------------- ---------------------------
0-3 4-6 7-12 1-2 2-5 over 5 Total
-------- ------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Relationship Portfolios:
Total loans................... $ 21,695 $ 1,814 $ 1,892 $ 2,592 $ 3,759 $1,025 $32,777
Total consumer deposits, net
non-interest funding....... 9,995 2,198 4,129 3,863 5,436 6,469 32,090
Adjustments................... 765 (1,128) (760) (1,069) (3,186) 5,378 -
-------- ------- ------- ------- ------- ------ -------
Relationship gap............ 12,465 (1,512) (2,997) (2,340) (4,863) (66) 687
-------- ------- ------- ------- ------- ------ -------
Discretionary Portfolios:
Assets........................ 4,353 1,715 3,241 2,464 5,747 1,555 19,075
Liabilities................... 16,909 187 175 232 777 1,482 19,762
-------- ------- ------- ------- ------- ------ -------
Discretionary gap........... (12,556) 1,528 3,066 2,232 4,970 73 (687)
-------- ------- ------- ------- ------- ------ -------
Combined gap................ $ (91) $ 16 $ 69 $ (108) $ 107 $ 7 $ -
======== ======= ======= ======= ======= ====== =======
Cumulative gap.............. $ (91) $ (75) $ (6) $ (114) $ (7) $ - $ -
======== ======= ======= ======= ======= ======= =======
</TABLE>
The second major element of CoreStates' interest rate risk is the spread risk
between product rates and financial market rates. These spreads are a function
of competitive and other factors as well as interest rate levels. CoreStates
simulates the behavior of individual products under various rate scenarios to
determine an appropriate investment or funding strategy to provide a stable
spread.
Consumer deposit spreads are a key element of net interest income. Interest
rates on savings and similar products were slightly lower in 1996 versus 1995,
while financial market rates were slightly higher. Deposit balances continued
to shift from these products to certificates and non-bank alternatives with
higher rates. Given this pricing trend and the relatively low level of absolute
rates on these products, there is likely to be resistance to lowering these
rates should market rates decline. However, if rates rise, there may be
increased pressure to raise rates and/or an acceleration of the balance shift to
products with narrower spreads. Simulations incorporate pricing and volume
assumptions including runoff and shifting across products for various rate
changes. Those assumptions are developed in conjunction with the business
managers, and while management believes its simulation assumptions are
realistic, it recognizes this as an area of potential volatility. It should be
noted that these products are also influenced by the changing nature of the
consumer product line and the positioning of these products within that line.
The spread between the prime rate and short-term market rates, such as LIBOR,
is also an important component of net interest income. CoreStates uses a blend
of short term maturities to fund prime related assets which should help preserve
a stable spread provided that spread relationships in the financial market, such
as Prime/LIBOR, remain stable. While the risk of a narrowing of the prime
spread is not unique to CoreStates, a contraction in that spread would reduce
net interest income. CoreStates currently has approximately $10 billion in
loans subject to changes in the prime rate.
While it is not a significant exposure, option risk has increased in the last
few years. The primary source of option risk in CoreStates' balance sheet is
prepayment risk in residential mortgages, home equity and other consumer lending
products and, to a lesser extent, loans to commercial customers and investment
securities. CoreStates mitigates most of this risk through sales and
securitizations. Risks that are retained are managed with a combination of
caps, floors and other derivative instruments. The second type of option risk
is from caps and floors embedded in loan and deposit products. CoreStates
offsets those risks with purchases of similar caps and floors.
26
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT - continued
Off-balance Sheet Instruments and Derivative Activities - CoreStates uses off-
balance sheet derivative instruments primarily to manage CoreStates' interest
rate risk. CoreStates believes that interest rate risk management must be
coordinated with the management of liquidity and capital. Therefore, CoreStates
uses off-balance sheet instruments to modify its rate sensitivity and
consequently, avoids the unnecessary leverage and liquidity impairment which
would result from on-balance sheet alternatives. CoreStates also uses interest
rate contracts to provide risk management services for its customers and to
hedge the interest rate risk in its trading positions.
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 December
31, 1996, the current cost to replace CoreStates' derivatives portfolio was $177
million. This assumes that only counterparties for whom it would be favorable
to default would do so.
Interest Rate Risk Related Derivative Activities - CoreStates' use of
derivatives for interest rate risk management falls into three categories:
interest sensitivity adjustments, spread protection and the hedging of
anticipated asset sales. The following schedule reflects by interest rate risk
management category, the outstanding derivative positions as of December 31,
1996, the major balance sheet category to which they relate, and the associated
unrealized gains/losses:
27
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT - continued
<TABLE>
<CAPTION>
Outstanding Interest Rate Risk Related Derivatives
- --------------------------------------------------
At December 31, 1996
-------------------- 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.............. $4,092 $4,451 $ 8 $ 80 $ 8,631
Unrealized gains............. 64 2 - - 66
Unrealized losses............ (19) - - - (19)
Deposits and other borrowings:
Notional amount.............. 4,132 925 150 5,207
Unrealized gains............. 35 13 2 50
Unrealized losses............ (16) - - (16)
Long-term debt:
Notional amount.............. 869 150 1,019
Unrealized gains............. 13 3 16
Unrealized losses............ (13) - (13)
Spread Protection:
Assets (primarily loans):
Notional amount.............. 50 500 550
Unrealized gains............. 3 2 5
Unrealized losses............ - - -
Deposits and other borrowings:
Notional amount.............. 107 107
Unrealized gains............. - -
Unrealized losses............ - -
Anticipated Asset Sales:
Notional amount.............. 37 37
Unrealized gains............. - -
Unrealized losses............ - -
Total:
Notional amount.............. $9,143 $4,451 $1,540 $ 417 $15,551
====== ====== ====== ===== =======
Unrealized gains............. $ 115 $ 2 $ 15 $ 5 $ 137
====== ====== ====== ===== =======
Unrealized losses............ $ (48) $ - $ - $ - $ (48)
====== ====== ====== ===== =======
Net unrealized gains......... $ 67 $ 2 $ 15 $ 5 $ 89
====== ====== ====== ===== =======
</TABLE>
Although the value of the various derivative instruments will change with
interest rates, CoreStates does not consider changes in individual portfolio
values to be significant given that the portfolios are used to offset specific
risks. As of December 31, 1996, CoreStates' use of off-balance sheet derivative
instruments which carry a leveraged exposure to either rising or falling rates
or have other complex features is not material.
28
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT - continued
Interest sensitivity adjustments account for the majority of CoreStates'
derivative activities. CoreStates has a naturally asset sensitive balance sheet
as a result of its basic loan and deposit businesses. Commercial and consumer
loan activities tend to have short-term repricing characteristics versus the
longer term repricing nature of CoreStates' funding sources. These relationship
portfolios have a positive effect on earnings in a rising rate environment and a
negative effect in a falling rate environment. Therefore, CoreStates uses fixed
rate assets or off-balance sheet instruments with characteristics similar to
fixed rate assets to offset this risk. When off-balance sheet instruments are
used, cash balances are invested in shorter time periods and interest rate swaps
or other derivatives are used to "fix" the rate for longer terms similar to
those of CoreStates' liabilities. The risks in certain products, particularly
non-contractual deposits, are sometimes greater in one direction of rate change
than the other. To the extent that marginal amounts of deposits need protection
from falling rates but are likely to shift to higher rate instruments as
interest rates rise, caps and/or floors are a more appropriate hedge. CoreStates
has used interest rate floors in this manner to augment the risk protection
provided by the swaps and futures portfolios. By using swaps, futures and
options in this manner, leverage is reduced and liquidity is enhanced. If
derivative instruments were not used, CoreStates would invest in longer term
assets based on its disciplined interest rate risk management practice of strict
matching of asset and liability terms. Therefore, the impact of derivatives on
pre-tax income is confined to the spread between the derivative instrument and
other instruments of similar terms. Management estimates that this spread is not
material relative to pre-tax income.
CoreStates also uses derivative instruments to protect spreads on certain
balance sheet products. CoreStates' loan and securities portfolios include
adjustable rate mortgages which carry interest rate caps limiting the amount of
rate increase per year as well as over the life of the mortgage. As interest
rates rise and funding costs increase, the spread on that portfolio will
compress. At December 31, 1996, CoreStates holds $481 million of interest rate
caps which offset that risk by limiting the potential increase in funding costs.
For accounting purposes, the income effects of futures or swaps used to
adjust interest sensitivity or to protect a product spread are associated with
either the asset or the liability being managed. The amount recorded in net
interest income related to derivative financial instruments was $75.5 million in
1996 and $20.7 million in 1995. The following table shows the impact of
derivatives income on average interest rates:
<TABLE>
<CAPTION>
Impact of Derivatives Income on Yields and Costs
- ------------------------------------------------
For the Year Ended 1996 1995
- ------------------- ------------------------------------------ -------------------------------------------
December 31, Reported Impact Reported Impact
- ------------ Average Yield/ Product of Average Yield/ Product of
(in millions) Balance Cost Rate Derivatives Balance Cost Rate Derivatives
------- -------- ------- ----------- ------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earning Assets
Time deposits..................... $ 2,163 5.68% 5.68% $ 1,929 6.32% 6.32%
Federal funds sold & trading
account......................... 444 5.98 5.98 602 6.72 6.72
Investment securities............. 4,662 6.22 6.15 0.07% 6,430 6.17 6.11 0.06%
Loans............................. 31,939 9.03 8.92 0.11 31,267 9.43 9.37 0.06
------- -------
Total Earning Assets.............. $39,208 8.48 8.38 0.10 $40,228 8.72 8.66 0.06
======= =======
Interest Bearing Funds
Savings, NOW, regular MMA......... $10,072 1.61 1.85 (0.24) $11,139 2.12 2.05 0.07
Premium MMA....................... 3,515 3.87 3.87 - 3,301 3.93 3.93 -
Certificates...................... 9,067 5.15 5.27 (0.12) 9,132 5.39 5.42 (0.03)
------- -------
Total retail..................... 22,654 3.39 3.54 (0.15) 23,572 3.66 3.64 0.02
------- -------
Commercial & foreign deposits..... 1,635 4.83 4.83 - 1,758 5.10 5.23 (0.13)
Federal funds purchased &
short-term borrowings........... 2,958 5.18 5.18 - 3,752 5.71 5.69 0.02
Long-term debt.................... 2,536 6.38 6.53 (0.15) 2,262 6.76 6.78 (0.02)
------- -------
Total wholesale.................. 7,129 5.53 5.58 (0.05) 7,772 5.88 5.91 (0.03)
------- -------
Total Interest Bearing Funds...... $29,783 3.88 4.01 (0.13) $31,344 4.17 4.17 -
======= =======
</TABLE>
29
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT - continued
It is important to note that derivatives usage, its impact on individual
balance sheet items and fluctuations in fair value should be viewed in the
context of overall risk management. As previously stated, if CoreStates did not
use derivatives, it would adjust cash positions to create the same interest
sensitivity position with approximately the same income results. However, if
cash transactions were used, the income of those activities would not be carried
as an income adjustment to other balance sheet products. Fluctuations in the
impact of derivatives shown on the above table are a function of market
conditions and do not indicate changes in risk positions.
The third category of derivative activity is the hedging of anticipated asset
sales. As fixed rate assets are accumulated for future sale, CoreStates is
exposed to a decline in sale price due to rising interest rates. Therefore,
CoreStates will enter into an interest rate swap or a forward rate agreement
which will increase in value if rates rise. The increased value on the
derivative is used to offset the decline in value of the cash asset.
Gains/losses on the derivative are deferred until the asset sale and recognized
as part of the sale transaction. CoreStates securitizes and sells its longer
term fixed-rate home equity loans and fixed-rate mortgages on a recurring basis.
Home equity loans are held for several months prior to sale while sufficient
volume for securitization is accumulated. Forward rate locks are used to hedge
rate changes during that warehouse period. Options on mortgage-backed securities
as well as both mandatory and optional forward sale commitments are used to
hedge the mortgage pipeline.
Interest rate swaps are agreements between two parties to exchange interest
cash flows. Generally, one party receives a fixed rate and pays a variable rate,
while the counterparty pays the fixed rate and receives the variable rate. As of
December 31, 1996, the rates CoreStates has contracted to receive are fixed for
longer time periods than the rates CoreStates has contracted to pay. Therefore,
if interest rates fall, this portfolio will provide higher interest income,
offsetting a decline in interest income in relationship portfolios; conversely
if rates rise, the swap portfolio will produce less interest income which will
be offset by increased interest income in the relationship portfolios.
CoreStates also uses interest rate futures in a similar manner. While swaps are
used in both short and long term maturities, futures are used primarily to
extend the rate sensitivity of short-term assets to periods less than one year
and are 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 repricing schedule below summarizes the notional amount and associated
interest rate of CoreStates' interest rate swaps categorized by whether
CoreStates receives or pays the rate shown. The swaps are stratified by
repricing date or maturity depending on whether the payments are floating or
fixed, respectively. Floating rates included in the repricing schedule are based
on the rates in effect on December 31, 1996.
30
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT - continued
<TABLE>
<CAPTION>
Repricing Schedule of Interest Rate Swaps
- -----------------------------------------
At December 31, 1996
- --------------------
(in millions)
Years
---------------------------------------------------------------
0-1 1-2 2-3 3-4 4-5 over 5 Total
------- ------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Receive Fixed/Pay Floating:
Receive Notional................ $1,775 $1,271 $1,346 $1,402 $1,538 $1,050 $8,382
Rate.................... 6.32% 6.30% 6.79% 6.41% 6.50% 6.74% 6.50%
Pay Notional................ $8,382 $8,382
Rate.................... 5.68% 5.68%
Pay Fixed/Receive Floating:
Pay Notional................ $ 15 $ 9 $ 25 $ 49
Rate.................... 8.60% 8.09% 9.26% 8.84%
Receive Notional................ $ 49 $ 49
Rate.................... 5.60% 5.60%
Receive Floating/Pay Floating:
(Basis Swaps)
Notional................ $ 230 $ 230
Receive Rate.................... 5.54% 5.54%
Pay Rate.................... 5.58% 5.58%
Receive Fixed/Pay Floating(a):
(Forward Start)
Receive Notional................ $ 160 $ 275 $ 47 $ 482
Rate.................... 7.07% 6.48% 7.05% 6.73%
Start Date
Notional................ $ 115 $ 132 $ 235 $ 482
</TABLE>
- --------------------------------------------------
(a) Pay rate will be determined on forward start date.
31
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT - continued
The following schedule illustrates CoreStates' interest rate risk related
derivative activity during 1996 and 1995:
<TABLE>
<CAPTION>
Activity in Derivatives Products
- --------------------------------
Years Ended December 31, 1996 and 1995
- --------------------------------------
(in millions) Interest
Interest Interest rate caps
rate rate and Other
Notional Amounts swaps futures floors derivatives Total
- ---------------- -------- -------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
At December 31, 1994.................... $10,743 $ 1,043 $1,553 $ 295 $13,634
Additions............................... 2,475 3,688 583 246 6,992
Terminated contracts.................... (855) (4,112) (100) (125) (5,192)
Maturities/amortization................. (2,647) - (550) (310) (3,507)
------- ------- ------ ----- -------
At December 31, 1995.................... 9,716 619 1,486 106 11,927
Additions............................... 3,712 14,260 341 761 19,074
Terminated/restructured contracts(a).... (213) (10,428) - - (10,641)
Maturities/amortization................. (4,072) - (287) (450) (4,809)
------- ------- ------ ----- -------
At December 31, 1996.................... $ 9,143 $ 4,451 $1,540 $ 417 $15,551
======= ======= ====== ===== =======
</TABLE>
- --------------------
(a) At December 31, 1996, CoreStates had $2.9 million deferred gains and $10.1
million deferred losses related to terminated derivative contracts.
CoreStates' use of off-balance sheet instruments, particularly interest rate
futures, increased during 1996. Interest rate swaps outstanding have not changed
significantly, however, approximately one-third of the portfolio matured and was
replaced during the year. A small amount of interest rate swaps were terminated
during the year as longer term assets acquired through the Meridian merger
replaced the need for those swaps. Interest rate futures are used extensively in
the management of short term positions (under one year). Usage in 1996 was
increased primarily due to changes in the composition of short term
discretionary asset portfolios and consumer certificates of deposit. The
maturity and volumes of investment assets were shortened, while the maturities
and volumes of retail certificates of deposit under one year increased. Interest
rate futures were used to offset the mismatches created by that activity. The
notional amount of futures contracts outstanding is higher than the amount of
the balance sheet position being hedged. Futures contracts used are for shorter
terms than the mismatch period being hedged so that it requires a greater
notional amount of contracts to cover the longer time period. The LIBOR contract
has a one-month term and the Eurodollar contract has a three-month term. The
increase in other derivatives represents the purchase of "swaptions" which give
CoreStates the right to enter a pay fixed swap at a future date. The swaptions
were used to offset options in the interest rate risk related derivatives
portfolio acquired with Meridian and to hedge prepayment in longer term
mortgages.
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 investors and individual investors. In addition,
the unit buys, sells and securitizes mortgage loans and brokers loan servicing
portfolios. The following schedule details the outstanding notional amounts and
related fair values of trading and customer related derivative transactions as
of December 31, 1996 and 1995.
32
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT - continued
<TABLE>
<CAPTION>
Trading and Customer Related Derivatives
- ----------------------------------------
At December 31,
- ---------------
(in millions)
1996 1995
-------------------------------------------------- -------------------------
Positive Negative
Notional Net assets Market Market Notional Net assets
amount (liability)(a) Value Value amount (liability)(a)
-------- -------------- -------- -------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Interest Rate Swaps:
CoreStates receives fixed........... $ 355 $ 1.5 $ 2.7 $ (1.2) $ 115 $ 2
CoreStates pays fixed............... 353 (1.0) 1.3 (2.3) 115 (2)
Futures...................................... 39 0.4 0.4 - 2 -
Rate Locks:
CoreStates receives fixed........... 30 (0.1) - (0.1) 15 -
CoreStates pays fixed............... 30 0.1 0.1 - 15 -
Interest Rate Caps/Floors:
Sold................................ 705 (2.7) - (2.7) 517 (1)
Purchased........................... 704 2.7 2.7 - 517 1
Commitments to purchase/sell whole mortgage
loans and securities (including when-issued
securities):
Sold................................ 83 (0.2) 0.1 (0.3) 117 (2)
Purchased........................... 19 - - - 106 2
Other Options:
Sold................................ 206 6.5 7.1 (0.6) 247 6
Purchased........................... 334 0.8 0.8 - 624 1
Foreign exchange contracts(b)................ 1,766 (0.5) 28.0 (28.5) 1,695 2(c)
------ ----- ----- ------ ------ ---
Total Trading and Customer Related
Derivatives......................... $4,624 $ 7.5 $43.2 $(35.7) $4,085 $ 9
====== ===== ===== ====== ====== ===
</TABLE>
(a) Average net assets (liabilities) during 1996 and 1995 were substantially the
same as the net assets (liabilities) at December 31, 1996 and 1995,
respectively.
(b) Foreign exchange contracts purchased and sold at December 31, 1996 were $836
million and $930 million, respectively, and at December 31, 1995 were $853
million and $842 million, respectively.
(c) Gross assets and (liabilities) on foreign exchange contracts at December 31,
1995 were $16 million and $14 million, respectively.
Interest rate risk in interest rate swaps is generally offset by executing
similar transactions with other counterparties. Similarly, interest rate risk in
written caps and floors is largely offset.
Other options purchased includes $270 million of Treasury float
contracts. These contracts give CoreStates the right to sell Treasury securities
at future dates at predetermined prices. Generally, the Treasury float contract
customer is a municipality which has defeased a bond issue with government
securities and has a mismatch in the timing of the maturity of the securities
and the date the funds are needed to pay the debt service.
33
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT - continued
Liquidity
Liquidity management allows a financial institution to meet potential cash
needs at a reasonable price under various operating conditions. Liquidity comes
from a variety of sources: the maturing of short-term assets, readily marketable
unpledged securities, and the ability to attract new funds. The ability to
securitize or sell other assets, such as loans, also enhances liquidity, as does
the structure and stability of existing funding sources. It is CoreStates'
practice to maintain a high degree of liquidity through a strong funding base of
core deposits combined with modest and diversified use of market sources and
relatively short-term maturities of discretionary asset portfolios.
CoreStates maintains sufficient liquidity to meet its obligations in a timely
and cost-effective manner. Management monitors current and projected cash flows,
and adjusts positions as necessary to maintain adequate levels of liquidity.
CoreStates emphasizes diversification of funding sources. By using a variety of
markets, limiting funds borrowed from a single investor, and staggering
maturities, the risk of potential funding pressure is significantly reduced.
Management also maintains a detailed liquidity contingency plan designed to
adequately respond to situations such as a decline in asset quality or credit
ratings, which could lead to liquidity concerns. Management analyzes potential
changes in major funding sources during difficult times, the amount of runoff
that may be expected, as well as available options to replace those funds. The
plan includes specific action steps to be taken in the event of funding
disturbances.
The cornerstone of CoreStates' liquidity position is a sizable and stable
base of core deposits acquired through customer relationships. Core deposits are
comprised of interest-bearing consumer savings products as well as non-interest
bearing consumer and commercial deposits. Core deposits averaged 70.2% of assets
in 1996 compared to 70.1% in 1995. Core deposits are supplemented by
discretionary funding sources from direct customer contacts in both the domestic
and international markets. These sources include large denomination certificates
of deposit, deposits in foreign branches as well as Federal funds, repurchase
agreements, commercial paper and long-term debt.
While both core deposits and discretionary sources appear to remain stable
based on annual averages, the trend within those averages suggests an increased
reliance on market funding sources. In general, Meridian had a greater
proportion of discretionary market funding sources to total assets than
CoreStates. Consistent with the integration plan, early in 1996 CoreStates
reduced the combined entity's dependence on market funding sources by reducing
investment securities held by the former Meridian. In the fourth quarter of
1996, requirements for market funding sources began to increase as the common
stock repurchase program became effective and loan demand improved. Those
requirements have been met primarily with instruments having longer terms, such
as ten year subordinated debt and thirty year Trust Capital Securities.
CoreStates' liquidity is further enhanced by its ability to raise funds in a
variety of domestic and international money and capital markets. During 1996,
CoreStates issued $300 million of Trust Capital Securities and an additional
$450 million was issued in January, 1997. These securities were marketed to
institutional investors, both domestically and internationally. Under a shelf
registration filed with the Securities and Exchange Commission, CoreStates had a
broad range of debt and capital securities that were registered but unissued of
approximately $1,085 million at December 31, 1996. During 1996, approximately
$1,040 million of debt having various terms and interest rates was issued under
the shelf registration. Maturities and retirements of long-term debt during 1996
were approximately $500 million. In 1996, CoreStates increased its revolving
credit facility from unrelated banks to $700 million from $650 million. The
facility was established in support of commercial paper borrowings, medium-term
notes and general corporate purposes. There were no borrowings under this
facility at year-end 1996.
The tables on pages 93 and 95 illustrate the maturity characteristics of
CoreStates' domestic certificates of deposit over $100 thousand, loan portfolio
and investment portfolio, respectively. For information regarding the maturity
characteristics of CoreStates' short-term funds borrowed and long-term debt, see
notes 11 and 12 to the financial statements.
34
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
ASSET AND LIABILITY MANAGEMENT - continued
Investment Portfolio
Within the context of the policies and practices previously outlined,
CoreStates maintains a portfolio of marketable debt securities to contribute to
a balanced interest rate risk position and to provide liquidity reserves.
Interest rate risk management disciplines require strict matching of interest
rate sensitivities and, therefore, CoreStates generally does not consider
changes in the market value of individual portfolios as significant to the
management of its interest sensitivity. The investment securities portfolio at
December 31, 1996 consisted of investments held-to-maturity with a carrying
value of $1,689 million and investments available-for-sale with a carrying value
of $2,394 million, compared to $3,060 million and $2,572 million, respectively
on December 31, 1995. During 1996, the level of investment securities carried on
the balance sheet was reduced as part of an overall balance sheet restructuring
which reduced CoreStates' reliance on discretionary market funding and was
related to the Acquisition. The reduction was accomplished principally through
maturities and sales of available-for-sale investment securities. In addition to
debt securities, the available-for-sale portfolio also includes a bank stock
portfolio and other marketable equity securities. The accumulated net unrealized
gain on available-for-sale securities was $43 million at December 31, 1996,
compared to $84 million at December 31, 1995. The decline in the net unrealized
gain was primarily due to realization of certain gains in the bank stock
portfolio and on foreign equity securities.
SOURCES AND USES OF FUNDS
Total assets were $45.5 billion at year-end 1996, down 1.1% from year-end
1995. The loan portfolio grew to $32.8 billion at year-end 1996, up $1,063
million, or 3.4%, from year-end 1995. The increase in loans was primarily in the
commercial portfolio and international loans. Loan growth at banking
subsidiaries was funded primarily by reductions in investment securities, as the
investment portfolio was reduced by $1,549 million, or 27.5%, from year-end
1995. The book value of loans sold during 1996 was approximately $1.6 billion
and was primarily comprised of approximately $1.1 billion of residential
mortgages, $150 million of student loans and $375 million of fixed-rate home
equity loans. The impact of loan sales on results of operations was not
material.
Total deposits declined $237 million, or 0.7%, from year-end 1995 principally
as the result of the sale of eleven former Meridian branches and $380 million of
related deposits. Domestic interest-bearing deposits declined $897 million, or
3.8%, from year-end 1995 principally as a result of merger-related attrition and
the branch sale. Domestic non-interest bearing deposits increased $393 million,
or 4.4%, reflecting a year-end 1996 increase in customer activity and foreign
deposits increased $267 million, or 23.3%, reflecting continuing growth in
international business relationships. The net decline in deposits was offset by
loan sales and the decline in the investment portfolio.
Total assets averaged $43.8 billion in 1996, down $911 million, or 2.0%, from
1995. Average loans increased $672 million, or 2.1%, while average investment
securities decreased $1,768 million or 27.5%. As reflected in the chart,
"Earning Asset Mix", loans comprised 81.5% of CoreStates' average earning assets
in 1996, compared to 77.7% in 1995.
<TABLE>
<CAPTION>
Earning Asset Mix
- -----------------
Plotting Points for a Graph
- ---------------------------
(percentage of average earning assets)
Earning Asset Mix
----------------------------------------------------------
Short-term
money market Investment
investments securities Loans
----------- ---------- -----
<S> <C> <C> <C>
1996 6.6% 11.9% 81.5%
1995 6.3 16.0 77.7
1994 5.2 18.6 76.2
1993 4.9 20.5 74.6
1992 6.0 19.4 74.6
</TABLE>
35
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
SOURCES AND USES OF FUNDS - continued
The accompanying chart, "Funding Mix", illustrates that 61.9% of CoreStates'
funds were derived from consumer deposits in 1996, compared with 62.5% in 1995.
Funding to accommodate current business needs and future growth at non-bank
subsidiaries will continue to be supported by the previously discussed shelf
registration.
Funding Mix
- -----------
Plotting Points for a Graph
- ---------------------------
(percentage of average earning assets*)
<TABLE>
<CAPTION>
Funding Mix
-----------------------------------------
Other Non-
Retail Interest Interest
Deposits Bearing Bearing
-------- ------- -------
<S> <C> <C> <C>
1996 61.9% 12.3% 25.8%
1995 62.5 13.9 23.6
1994 62.5 12.9 24.6
1993 64.0 12.1 23.9
1992 66.8 11.0 22.2
</TABLE>
* excluding short-term money market investments
36
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
REVIEW AND ANALYSIS OF EARNINGS
Operating Revenue
Operating revenue has two primary sources, net interest income and non-
interest income. Net interest income comprised 71% of CoreStates' total revenue
in both 1996 and 1995. On the accompanying chart ("Operating Revenue"), net
interest income is presented excluding the earnings benefit of balances
maintained by commercial customers as compensation for transaction oriented non-
credit products. Non-interest income and the previously mentioned earnings
benefit of balances maintained are presented separately. Net interest income
and non-interest income are discussed in further detail on the following pages.
Operating Revenue
- -----------------
Plotting Points for a Chart
- ---------------------------
(tax equivalent net interest income plus non-interest income-in millions)
<TABLE>
<CAPTION>
Operating Revenue
------------------------------------
Derived
Loan and from Non-
Investment Non-credit Interest
Interest Balances Income Total
---------- ---------- -------- -------
<S> <C> <C> <C> <C>
1996 $1,941.0 $226.7 $899.1 $3,066.8
1995 1,993.6 206.6 882.2 3,082.4
1994 1,921.0 186.5 788.5 2,896.0
1993 1,888.0 172.6 832.7 2,893.3
1992 1,728.4 148.6 854.0 2,731.0
</TABLE>
Operating revenue for 1996, as adjusted for the significant and unusual items
listed in the table "Non-Interest Income" on page 39, was down $26.3 million, or
0.9% in comparison to 1995 due to a decline in tax equivalent net interest
income of $32.5 million, or 1.5%. The decline in net interest income for 1996
was primarily due to the impact of a $1.0 billion reduction in average interest
earning assets and the impact of reduced spreads on loans and deposits.
Adjusted for significant and unusual items, operating revenue for 1995
increased 5.3% over 1994, primarily due to a $92.7 million, or 4.4%, increase
in total net interest income. The growth in net interest income for 1995 was
primarily experienced in Regional Banking and Retail Credit.
37
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
Net Interest Income
For analytical purposes, net interest income is adjusted to a taxable
equivalent basis to recognize the income from tax exempt assets as if the
interest were taxable. Net interest income on a taxable equivalent basis
decreased $32.5 million, or 1.5% in 1996, following an increase of $92.7
million, or 4.4% in 1995. The decline in net interest income for 1996 was
primarily due to the impact of a $1.0 billion, or 2.5%, reduction in average
interest earning assets and the impacts of reduced spreads on loans and deposits
due to competitive pricing pressures. Compared to 1995, the relatively lower-
yielding investment portfolio was reduced $1.8 billion, or 27.5%, on average
during 1996, while the loan portfolio grew $0.7 billion, or 2.1%, on average.
This adjustment in asset mix, combined with a $0.5 billion increase in interest
free funding sources, resulted in a 6 basis point increase in the net interest
margin for 1996. The strength of CoreStates' net interest income and net
interest margin stems from the combination of wide spreads on both loans and
deposits and on a balance sheet which has a relatively high portion of loans and
a large base of non-interest bearing funding. The following table compares
taxable equivalent net interest income for the years ended December 31, 1996,
1995 and 1994.
Taxable Equivalent Net Interest Income
- --------------------------------------
For the Years Ended December 31,
- ---------------------------------
(in millions)
<TABLE>
<CAPTION>
Percentage
increase(decrease)
------------------
1996 1995 1994 '96/'95 '95/'94
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Total interest income................ $3,298.2 $3,475.1 $3,014.6 (5.1)% 15.3%
Tax equivalent adjustment............ 26.2 33.3 39.4 (21.3) (15.5)
-------- -------- --------
Tax equivalent interest income....... 3,324.4 3,508.4 3,054.0 (5.2) 14.9
Total interest expense............... 1,156.7 1,308.2 946.5 (11.6) 38.2
-------- -------- --------
Tax equivalent net interest income... $2,167.7 $2,200.2 $2,107.5 (1.5) 4.4
======== ======== ========
Interest rate spread (a)............. 4.60% 4.55% 4.61%
======== ======== ========
Net interest margin (b).............. 5.53% 5.47% 5.33%
======== ======== ========
</TABLE>
- ------------------------
(a) The interest rate spread represents the difference between the average
yield on total interest earning assets and the average cost on total
interest bearing liabilities.
(b) The net interest margin is a key measure of net interest income
performance. It represents the difference between tax equivalent interest
income and interest expense (i.e., taxable equivalent net interest income)
reflected as a percentage of average earning assets.
The increase in net interest income for 1995 was driven by improved spreads
earned on both deposits and prime-based loans and by improved earnings on non-
interest bearing funding sources in 1995's comparatively higher interest rate
environment. Also contributing to the increase in 1995 net interest income were
reduced non-performing loans and growth in relatively higher yielding loans,
particularly in the commercial portfolio including commercial finance lending at
Congress Financial, and credit card outstandings. Average commercial finance
loans at Congress Financial grew by $274 million, or 12.2%, in 1995 and average
credit card outstandings grew by $207 million, or 17.3%. The net interest
margin for 1995 increased 14 basis points over 1994. The increase in the 1995
net interest margin was driven by improved product spreads in Regional Banking,
increased volumes in higher spread loan categories and improved earnings on non-
interest bearing funding sources.
38
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
Net Interest Income - continued
For further detailed information regarding average balances, yields and costs,
see the consolidated average balance sheet on pages 83-86, and the rate/volume
analysis on page 89.
Non-Interest Income
- -------------------
For the Years Ended December 31,
- --------------------------------
(in millions)
<TABLE>
<CAPTION>
Percentage
increase(decrease)
------------------
1996 1995 1994 '96/'95 '95/' 94
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Service charges on deposits.......... $ 243.7 $ 244.4 $ 239.8 (0.3)% 1.9%
Trust income (a)..................... 164.9 153.2 141.3 7.6 8.4
International services fees.......... 101.8 94.3 87.3 8.0 8.0
Debit and credit card fees........... 74.7 83.8 80.5 (10.9) 4.1
Third party processing fees (b)...... 58.0 47.7 23.5 21.6 103.0
Income from investment in
EPS, Inc............................ 29.9 30.1 31.8 (0.7) (5.3)
Income from trading activities...... 25.2 35.4 23.4 (28.8) 51.3
Investment banking fees.............. 14.1 18.1 20.5 (22.1) (11.7)
Mortgage banking income.............. 11.3 16.1 11.8 (29.8) 36.4
Securities gains..................... 16.2 17.9 18.3
Corporate trust fees (a)............. 2.3 9.7 12.0
Gains on sales of corporate trust.... 8.2 7.4 -
Other operating income............... 105.5 91.5 98.3 15.3 (6.9)
------- ------- -------
Non-interest income before
significant and
unusual items.................... 855.8 849.6 788.5 0.7 7.7
------- ------- -------
Certain net investment gains (c)..... 43.3 13.6 -
Gain on sale of affiliate
joint venture...................... - 19.0 -
------- ------- -------
Total non-interest income.......... $ 899.1 $ 882.2 $ 788.5 1.9 11.9
======= ======= =======
</TABLE>
- ---------------------
(a) For presentation purposes, 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.
(b) Includes revenues for QuestPoint lockbox processing, document processing,
check processing, and SynapQuest credit card and merchant processing.
(c) See "Certain Net Investment Gains" on page 7 for more detail.
Non-interest income for 1996, before the significant and unusual items noted
in the above table, increased $6.2 million, or 0.7%. Increases in third party
processing fees of 21.6%, international service charges of 8.0%, trust income
of 7.6%, and gains on the securitization of home equity loans were mostly offset
by a 29.8% decrease in mortgage banking income, a 28.8% decline in income from
trading activities, a 22.1% decrease in investment banking income and a 10.9%
decline in debit and credit card fees.
Non-interest income for 1995, before significant and unusual items, increased
7.7% from 1994, primarily reflecting an increase in third-party processing fees.
Third-party processing fee income for 1995 increased $24.2 million, or 103.0%,
principally as a result of the January 27, 1995 acquisition of Nationwide
Remittance Centers, Inc. ("NRC"). Also contributing to the growth for 1995 was a
36.4% increase in mortgage banking income, an 8.0% increase in fees for
international services, and an 8.4% increase in trust income.
39
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
Non-Interest Income - continued
The following is a discussion of the more significant components of non-
interest income:
. Service charges on deposit accounts, paid in fees, decreased $0.7 million,
or 0.3%, in 1996, compared to an increase of $4.6 million, or 1.9%, in 1995.
After adding the value of service charges paid through the maintenance of
deposit balances by commercial and correspondent customers, which is
included in net interest income, total service charge compensation for 1996
was $470.4 million, up $19.6 million, or 4.4%, from 1995 reflecting growth
in transaction volume. Total service charge compensation on this basis for
1995 was $450.8 million, an increase of $27.0 million or 6.4% over 1994. The
1995 increase in service charges on deposits is attributable to increases in
certain fees for deposit products as well as the introduction of new
consumer demand deposit products.
. Fees for international services increased $7.5 million, or 8.0%, in 1996,
following an increase of $7.0 million, or 8.0%, in 1995. The growth in
revenues for 1996 and 1995 reflects a continuing emphasis on non-credit
products and international transaction processing services and resulting
volume increases at overseas branches which were opened in recent years. For
1996, foreign exchange fees decreased $0.7 million, or 2.0%, following an
increase of $3.1 million, or 16.5% for 1995. Fees for international
transaction processing services increased $8.2 million, or 12.8%, in 1996
and $3.9 million, or 4.5%, in 1995.
. Trust income increased $11.7 million, or 7.6%, in 1996 and $11.9 million, or
8.4%, in 1995. Improvements in 1996 trust fees related to increased revenues
from investment management generated from the implementation of the process
redesigns and appreciation of asset market values, partially offset by a
decline in fees from the employee benefit plan business. The 1995 increase
was due to the acquisition of McGlinn Capital Management, Inc. in July 1994,
as well as increases in personal trust and investment advisory fees.
. Debit and credit card fees decreased $9.1 million, or 10.9% in 1996,
following an increase of $3.3 million, or 4.1%, in 1995. Credit card fees
were $31.9 million, $25.5 million, and $25.6 million for 1996, 1995 and
1994, respectively. Debit card fees for the same periods were $42.8 million,
$58.3 million and $54.9 million, respectively. The improvement in credit
card fees for 1996 reflected increased volume on transaction-based fees,
partially offset by pricing pressures on annual credit card fees. The
decline in debit card fees for 1996 is attributable to a decrease in
merchant fee income due to customer attrition from bank acquisitions,
systems conversions, and repricing of unprofitable customers. Competitive
pricing pressures adversely impacted fee income for both debit and credit
cards in 1995. At year-end 1996, CoreStates' credit card portfolio included
approximately 607,000 active accounts, compared to 614,000 at year-end 1995,
and 601,000 at year-end 1994.
. Third party processing fees increased $10.3 million, or 21.6% in 1996
primarily as a result of increased check processing and lockbox business and
reflects CoreStates' continuing emphasis on non-credit products. Third party
processing fees for 1995 increased $24.2 million, or 103.0%, principally as
a result of the NRC acquisition.
Excluding "certain net investment gains," CoreStates recorded net securities
gains of $16.2 million in 1996, compared to $17.9 million in 1995 and $18.3
million in 1994. Investment securities gains for 1996 included $3.9 million
recorded on sales of equity securities acquired in connection with prior loan
arrangements, $4.6 million recorded on sales of certain bank stocks, and $1.4
million on the sale of foreign equity securities. Investment securities gains
for 1995 included $7.8 million of gains recorded on sales of equity securities
acquired in connection with prior loan arrangements. Investment securities
gains in 1994 included $5.0 million recorded on sales of certain investments
acquired with Constellation and $10.7 million recorded on sales of certain bank
stocks.
Other non-interest income for 1996 included gains on securitization of home
equity loans of $7.7 million, compared to $0.5 million in 1995 and $3.7 million
in 1994.
40
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
<TABLE>
<CAPTION>
Non-Financial Expenses
- ---------------------- Percentage
For the Years Ended December 31, increase(decrease)
- -------------------------------- ------------------
(in millions) 1996 1995 1994 '96/'95 '95/'94
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Salaries, wages and benefits........ $ 826.4 $ 904.4 $ 947.9 (8.6)% (4.6)%
Net occupancy expense............... 157.4 159.5 162.0 (1.3) (1.5)
Outside services hired.............. 155.0 146.3 139.7 5.9 4.7
Equipment expense................... 120.6 118.5 117.7 1.8 0.7
Amortization of intangible assets... 40.0 44.8 29.4 (10.7) 52.4
FDIC premiums....................... 18.0 40.1 69.6 (55.1) (42.4)
OREO expense (income)............... (0.8) 6.4 5.8 10.3
Other operating expenses............ 306.3 326.9 324.8 (6.3) 0.6
-------- -------- --------
Non-financial expenses before
significant and unusual items.... 1,622.9 1,746.9 1,796.9 (7.1) (2.8)
-------- -------- --------
Restructuring and merger-related
charges.......................... 139.7(a) 138.6(c) 107.1(d)
Other significant and unusual
items............................ 14.2(b) - 14.2(e)
-------- -------- --------
Total non-financial expenses..... $1,776.8 $1,885.5 $1,918.2 (5.8) (1.7)
======== ======== ========
</TABLE>
- --------------------------
(a) Consists of net restructuring charges of $110.7 million primarily related
to the Acquisition and charges of $29.0 million for merger implementation
costs. See "Restructuring and Merger-related Charges" on page 6 for more
detail.
(b) Reflects the SAIF special assessment. See page 7 for more detail.
(c) Reflects net restructuring charges of $128.6 million related to the 1995
process redesigns and a $10 million charge related to the Acquisition.
See "Restructuring and Merger-related Charges" on page 6 for more detail.
(d) Reflects net merger-related charges for the Constellation and Independence
acquisitions.
(e) Includes charges of $10.5 million for writedowns of purchased mortgage
servicing rights and $3.7 million related to Germantown Savings Bank branch
closings and signage.
Comparison of 1996 to 1995 - Total non-financial expenses for 1996, before the
--------------------------
significant and unusual items as noted in the above table, were $1,622.9
million, a decrease of $124.0 million, or 7.1% from 1995. This decline reflects
the impacts of the process redesigns, merger-related efficiencies and a
reduction in Federal Deposit Insurance Corporation ("FDIC") premiums. For the
1996 full year, CoreStates was not assessed premiums on deposits insured under
the Bank Insurance Fund. SAIF deposits were assessed premiums during the first
three quarters of 1996 and a special assessment as of September 30, 1996.
Partially offsetting these declines, was an increase in expense for outside
services hired of $8.7 million, or 5.9%, primarily due to the impacts of
outsourcing certain functions and costs for competitive and technology
investments.
Salaries, wages and benefits decreased $78.0 million, or 8.6%, in 1996
reflecting reduced staff levels from the process redesigns and merger
consolidations. For 1996, salaries and wages declined by 6.8%, while benefits
expense declined 15.1%. The larger percentage decline in benefits expense was
primarily due to reduced retiree medical expense. The number of full-time
equivalent employees at December 31, 1996, 1995 and 1994 was: 19,114; 19,957;
and 22,621, respectively.
Comparison of 1995 to 1994 - Total non-financial expenses for 1995, before
--------------------------
significant and unusual items, were $1,746.9 million, a decrease of $50.0
million, or 2.8% from 1994. This decline reflected the impacts of a hiring
freeze, the benefits of those aspects of the process redesigns implemented
through December 31, 1995, merger-related synergies and a reduction in FDIC
premiums. Affecting comparability of expenses period-to-period were the
acquisitions of Germantown Savings Bank ("GSB") on December 2, 1994 and NRC on
January 27, 1995. Excluding the amortization of intangible assets created in the
acquisitions, in 1995 GSB added approximately $21.3 million to non-financial
expenses and NRC added approximately $19.9 million. Expense for amortization of
intangible assets created in the two acquisitions added $13.7 million to 1995
expenses.
41
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations: continued
Non-Financial Expenses - continued
Salaries, wages and benefits decreased 4.6% in 1995 reflecting reduced staff
levels resulting from the hiring freeze, the process redesigns and full-year
impact of merger consolidations, partially offset by increases of $11.4 million
and $11.0 million for GSB and NRC, respectively. For 1995, salaries and wages
declined 4.5%, while benefits expense declined 5.0%. Contributing to the higher
decline in benefits expense for 1995 was reduced employee medical costs arising
from efficiencies associated with CoreStates' transition to managed care plans
in the beginning of 1995.
Provision for Income Taxes
The provision for income taxes was $385.8 million in 1996 compared to $364.4
million in 1995 and $225.9 million in 1994. The $21.4 million increase in 1996
tax expense was principally due to higher pre-tax income and non-deductible
expenses. The provision for income taxes for 1996, 1995 and 1994 were at
effective rates of 37.3%, 35.7%, and 34.3%, respectively.
Accounting Standards Effective in 1997
FAS 125 - Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
("FAS 125"), was issued in June 1996. FAS 125 requires an entity to recognize
the financial and servicing assets it controls and the liabilities it has
incurred and to derecognize financial assets when control has been surrendered
in accordance with the criteria provided in the Statement. FAS 125 is applicable
to transactions occurring after December 31, 1996, except for provisions
dealing with securities lending, repurchase and dollar repurchase agreements,
which will become effective after December 31, 1997. The adoption of FAS 125 is
not expected to have a material impact on CoreStates' results of operations or
financial condition.
Fourth Quarter Results
In the fourth quarter of 1996, CoreStates recorded net income of $195.5 million,
or $0.91 per share, compared to $192.1 million, or $0.87 per share, in the
fourth quarter of 1995. "Operating earnings," defined as net income before
restructuring and merger-related charges, was $201.6 million, or $0.93 per
share, for the fourth quarter of 1996, an increase of 4.5% on a per share basis
over fourth quarter of 1995 operating income of $196.1 million, or $0.89 per
share. The increase in fourth quarter of 1996 operating earnings was driven by
reductions in non-financial expenses resulting from merger-related efficiencies
and the impact of process redesigns.
Selected financial results for the three months ended December 31, 1996 and
1995 based on operating earnings, which exclude the significant items listed
below, were as follows (in millions, except per share):
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-------------------------
1996 1995
-------------------------
<S> <C> <C>
Net income................................... $ 195.5 $ 192.1
Exclude the following after-tax items:
Restructuring and merger-related
charges................................ 6.1 4.9
Certain net investment gains............ - (0.9)
------- -------
Operating earnings........................... $ 201.6 $ 196.1
======= =======
Operating earnings per share................. $ 0.93 $ 0.89
Return on average total assets............... 1.81% 1.74%
Return on average shareholders' equity....... 21.03% 20.36%
</TABLE>
42
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Report on Internal Controls Over Financial Reporting
Financial Statements
CoreStates Financial Corp is responsible for the preparation, integrity, and
fair presentation of its published financial statements as of December 31,
1996, and the year then ended. The consolidated financial statements of
CoreStates Financial Corp have been prepared in accordance with generally
accepted accounting principles and, as such, include some amounts that are
based on judgments and estimates of management.
Internal Controls over Financial Reporting
Management is responsible for establishing and maintaining an effective internal
control structure over financial reporting. The system contains monitoring
mechanisms and actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any system of internal
control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal control system
can provide only reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions, the effectiveness of an
internal control system may vary over time.
43
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Report on Internal Controls Over Financial Reporting: continued
Management assessed CoreStates Financial Corp's internal control structure over
financial reporting as of December 31, 1996. This assessment was based on
criteria for effective internal control over financial reporting described in
"Internal Control - Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes that CoreStates Financial Corp maintained an effective internal
control structure over financial reporting as of December 31, 1996.
Principal Financial Officer
/s/ Christopher J. Carey
Chairman and Chief Executive Officer
/s/ Terrence A. Larsen
44
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
CoreStates Financial Corp
We have audited the accompanying consolidated balance sheets of CoreStates
Financial Corp as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the 1995 or 1994 financial statements of Meridian
Bancorp, Inc. and United Counties Bancorporation, which statements reflect
combined total assets of 35.6% as of December 31, 1995 and combined net
interest income constituting 31.3% and 32.8% of the related consolidated totals
for the years ended December 31, 1995 and 1994, respectively. Those statements
were audited by other auditors whose reports thereon have been furnished to us,
and our opinion, insofar as it relates to data included for Meridian Bancorp,
Inc. and United Counties Bancorporation, is based solely on the reports of other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of CoreStates Financial Corp at December 31,
1996 and 1995, and the consolidated results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
January 22, 1997
45
<PAGE>
<TABLE>
<CAPTION>
CoreStates Financial Corp and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share amounts)
Year Ended December 31,
---------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans:
Taxable income.................... $2,845,898 $2,902,265 $2,484,660
Tax exempt income................. 25,335 30,390 34,023
Interest on investment securities:
Taxable income.................... 254,576 349,138 365,298
Tax exempt income................. 23,190 31,018 38,180
Interest on time deposits in banks.. 122,752 121,993 70,996
Interest on Federal funds sold,
securities purchased
under agreements to resell and
other.............................. 26,453 40,276 21,402
---------- ---------- ----------
Total interest income............. 3,298,204 3,475,080 3,014,559
---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits:
Domestic savings.................. 295,650 396,176 280,532
Domestic time..................... 497,956 492,610 370,373
Overseas branches and subsidiaries 48,174 52,261 29,602
---------- ---------- ----------
Total interest on deposits..... 841,780 941,047 680,507
Interest on short-term funds
borrowed........................... 153,129 214,119 149,618
Interest on long-term debt.......... 161,811 152,989 116,419
---------- ---------- ----------
Total interest expense......... 1,156,720 1,308,155 946,544
---------- ---------- ----------
Net interest income............... 2,141,484 2,166,925 2,068,015
Provision for losses on loans....... 228,767 144,002 279,195
---------- ---------- ----------
Net interest income after
provision for losses on loans..... 1,912,717 2,022,923 1,788,820
---------- ---------- ----------
NON-INTEREST INCOME
Service charges on deposit accounts. 243,696 244,439 239,811
Trust income........................ 167,138 162,776 153,214
Fees for international services..... 101,761 94,396 87,364
Debit and credit card fees.......... 74,707 83,812 80,482
Income from investment in EPS, Inc.. 29,902 30,114 31,800
Income from trading activities...... 25,216 35,403 23,360
Securities gains.................... 59,512 31,475 18,283
Other gains......................... 8,200 26,400 -
Other operating income.............. 188,943 173,407 154,173
---------- ---------- ----------
Total non-interest income......... 899,075 882,222 788,487
---------- ---------- ----------
NON-FINANCIAL EXPENSES
Salaries, wages and benefits........ 826,442 904,377 947,903
Net occupancy....................... 157,358 159,530 162,003
Equipment expenses.................. 120,602 118,532 117,659
Restructuring and merger-related
charges............................ 139,702 138,600 107,119
Other operating expenses............ 532,724 564,489 583,558
---------- ---------- ----------
Total non-financial expenses...... 1,776,828 1,885,528 1,918,242
---------- ---------- ----------
INCOME BEFORE INCOME TAXES.......... 1,034,964 1,019,617 659,065
Provision for income taxes.......... 385,820 364,441 225,859
---------- ---------- ----------
NET INCOME.......................... $ 649,144 $ 655,176 $ 433,206
========== ========== ==========
PER COMMON SHARE DATA (Based on
weighted average shares
outstanding of 218.812 million in
1996, 222.268 million in 1995 and
226.234 million in 1994)
Net income.......................... $2.97 $2.95 $1.91
===== ===== =====
Cash dividends declared............. $1.73 $1.44 $1.24
===== ===== =====
</TABLE>
See accompanying notes to the financial statements.
46
<PAGE>
CoreStates Financial Corp and Subsidiaries
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
----------- ----------
<S> <C> <C>
ASSETS
Cash and due from banks............................... $ 3,462,287 $ 3,662,143
Time deposits, principally Eurodollars................ 2,443,154 1,909,260
Federal funds sold and securities
purchased under agreements to resell................. 509,694 719,937
Trading account assets................................ 122,317 147,218
Investment securities available-for-sale.............. 2,394,166 2,572,315
Investment securities held-to-maturity
(market value: 1996-$1,692,243;
1995-$3,075,964)..................................... 1,689,058 3,059,917
Total loans, net of unearned discounts
of $204,521 in 1996 and $232,077 in 1995............. 32,777,032 31,714,152
Less: Allowance for loan losses...................... (710,327) (670,265)
----------- ----------
Net loans....................................... 32,066,705 31,043,887
----------- ----------
Due from customers on acceptances..................... 738,077 560,707
Premises and equipment................................ 625,876 664,279
Other assets.......................................... 1,442,860 1,657,579
----------- ----------
Total assets.................................... $45,494,194 $ 45,997,242
=========== ==========
LIABILITIES
Deposits:
Domestic:
Non-interest bearing............................ $ 9,330,445 $ 8,937,147
Interest bearing................................ 22,986,955 23,883,726
Overseas branches and subsidiaries................... 1,409,756 1,142,947
----------- ----------
Total deposits............................ 33,727,156 33,963,820
----------- ----------
Short-term funds borrowed............................. 2,633,157 3,677,013
Bank acceptances outstanding.......................... 727,728 549,048
Other liabilities..................................... 1,661,162 1,719,697
Long-term debt........................................ 3,049,297 2,212,099
----------- ----------
Total liabilities............................... 41,798,500 42,121,677
----------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY
Preferred stock: authorized 10.0 million
shares; no shares issued............................. - -
Common stock: $1 par value; authorized
350.0 million shares; issued 223.6
million shares in 1996 and 230.2 million
shares in 1995 (including treasury
shares of 8.9 million in 1996 and
7.8 million in 1995, and unallocated
shares held by Employee Stock Ownership
Plan ("ESOP") of 2.3 million in 1996 and
2.3 million in 1995)................................. 223,599 230,231
Other common shareholders' equity, net................ 3,472,095 3,645,334
----------- -----------
Total shareholders' equity...................... 3,695,694 3,875,565
----------- -----------
Total liabilities and
shareholders' equity........................... $45,494,194 $45,997,242
=========== ===========
</TABLE>
See accompanying notes to the financial statements.
47
<PAGE>
CoreStates Financial Corp and Subsidiaries Page 1 0f 2
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Capital Retained Treasury Unallocated
stock surplus earnings stock ESOP shares Total
------------ ----------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993........... $ 230,050 $1,194,872 $ 2,287,406 $ (7,819) $3,704,509
Net income.............................. 433,206 433,206
Net change in unrealized gain on
investments available-for-sale, net of
tax.................................... (66,095) (66,095)
Acquisition of Germantown Savings Bank
(5,880 treasury shares)................ (8,605) 156,361 147,756
Stock issued in other acquisitions (190
new shares)............................ 190 6,782 6,972
Treasury shares acquired (8,598 shares). (228,963) (228,963)
Repurchase and retirement of common
stock (1,016 shares)................... (1,016) (6,646) (17,226) (24,888)
Common stock issued under employee
benefit plans (567 new shares; 688
treasury shares)....................... 567 6,097 (6,410) 18,456 18,710
Common stock issued under dividend
reinvestment plan (450 treasury shares) (447) (483) 12,306 11,376
Purchase of shares for Employee Stock
Ownership Plan (1,574 shares).......... $(35,568) (35,568)
Conversion of subordinated debt (36 new
shares; 909 treasury shares)........... 36 (2,001) 25,362 23,397
Cash paid for fractional shares......... (83) (83)
Foreign currency translation adjustments 52 52
Common dividends declared............... (259,449) (259,449)
---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1994........... 229,827 1,200,658 2,360,312 (24,297) (35,568) 3,730,932
Net income.............................. 655,176 655,176
Net change in unrealized gain on
investments available-for-sale, net of
tax.................................... 41,187 41,187
Treasury shares acquired (10,307 shares) (335,528) (335,528)
Repurchase and retirement of common
stock (595 shares)..................... (595) (4,093) (12,446) (17,134)
Common stock issued under employee
benefit plans (1,002 new shares;
3,089 treasury shares)............ 999 26,825 (25,483) 96,670 99,011
Common stock issued under dividend
reinvestment plan (417 treasury shares) (9) (2) 12,690 12,679
Purchase of shares for Employee Stock
Ownership Plan (876 shares)............ (20,922) (20,922)
Employee Stock Ownership Plan shares
committed for release (123 shares)..... 1,786 2,824 4,610
Cash paid for fractional shares......... (24) (24)
Foreign currency translation adjustments (29) (29)
Common dividends declared............... (294,393) (294,393)
---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1995........... 230,231 1,225,167 2,724,298 (250,465) (53,666) 3,875,565
</TABLE>
(continued)
48
<PAGE>
CoreStates Financial Corp and Subsidiaries Page 2 of 2
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Capital Retained Treasury Unallocated
stock surplus earnings stock ESOP shares Total
------------ ----------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net income.............................. 649,144 649,144
Net change in unrealized gain on
investments
available-for-sale, net of tax........ (25,070) (25,070)
Treasury shares acquired (11,055 shares) (533,932) (533,932)
Treasury shares issued in merger (7,300
shares)................................ (7,300) (33,288) (192,042) 232,630 -
Repurchase and retirement of common
stock (1,340 shares)................... (1,340) (43,559) (12,804) (57,703)
Common stock issued under employee
benefit plans (1,824 new shares;
2,330 treasury shares)................. 1,824 75,618 (48,119) 100,826 130,149
Common stock issued under dividend
reinvestment plan (184 new shares;
353 treasury shares)................... 184 8,225 (68) 13,361 21,702
Purchase of shares for Employee Stock
Ownership Plan (65 shares)............. (38) (3,509) (3,547)
Employee stock ownership plan shares
committed for release (126 shares)..... 2,397 3,018 5,415
Cash paid for fractional shares......... (342) (342)
Foreign currency translation adjustments 5,448 5,448
Common dividends declared............... (371,135) (371,135)
------------ ----------- ------------ ---------- ----------- -----------
Balances at December 31, 1996........... $ 223,599 $1,234,522 $2,729,310 $(437,580) $(54,157) $3,695,694
============ =========== ============ ========== =========== ===========
</TABLE>
See accompanying notes to the financial statements.
49
<PAGE>
CoreStates Financial Corp and Subsidiaries Page 1 of 2
CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
OPERATING ACTIVITIES 1996 1995 1994
------------- -------------- ---------------
<S> <C> <C> <C>
Net income............................................ $ 649,144 $ 655,176 $ 433,206
Adjustments to reconcile net income to net
cash provided by operating activities:
Restructuring and merger-related charges........... 139,702 138,600 107,119
Provision for losses on loans...................... 228,767 144,002 279,195
Provision for losses and writedowns
on other real estate owned....................... 3,387 15,971 14,596
Depreciation and amortization...................... 110,512 122,996 139,305
Deferred income tax expense........................ 9,156 28,420 41,847
Securities gains................................... (59,512) (31,475) (18,283)
Gains on sale of mortgage servicing................ - (2,387) (867)
Other gains........................................ (8,200) (26,400) -
(Increase) decrease in trading account assets...... 24,901 200,833 (18,392)
Increase (decrease) in due to factored clients..... 1,805 (86,921) 41,262
(Increase) decrease in interest receivable......... 45,046 2,009 (33,548)
Increase in interest payable....................... 10,163 45,044 26,026
Other, net......................................... 115,877 (117,411) (102,895)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............. 1,270,748 1,088,457 908,571
------------ ------------ ------------
INVESTING ACTIVITIES
Net increase in loans................................. (2,896,402) (1,832,179) (1,310,777)
Proceeds from sales of loans.......................... 1,577,270 1,087,732 1,130,918
Loans originated or acquired--non-bank
subsidiaries......................................... (39,054,032) (35,767,440) (33,760,035)
Principal collected on loans--non-bank
subsidiaries......................................... 39,039,627 35,407,667 33,399,764
Net increase in time deposits, principally
Eurodollars.......................................... (533,894) (33,172) (452,747)
Purchases of investments held-to-maturity............. (490,995) (686,652) (2,386,505)
Purchases of investments available-for-sale........... (2,062,012) (589,327) (711,227)
Proceeds from maturities of investments
held-to-maturity..................................... 1,524,670 2,175,780 2,911,632
Proceeds from maturities of investments
available-for-sale................................... 854,898 161,477 386,142
Proceeds from sales of investments
available-for-sale................................... 1,500,504 546,728 767,453
Net (increase) decrease in Federal funds
sold and securities purchased under
agreements to resell................................. 210,243 203,693 (646,409)
Purchases of premises and equipment................... (101,469) (125,216) (147,308)
Proceeds from sales and paydowns on other
real estate owned.................................... 31,465 66,834 78,057
Purchase of Germantown Savings
Bank, net of cash acquired........................... - - (74,053)
Net cash provided by other acquisitions............... - - 379,318
Other, net............................................ 141,063 11,303 39,357
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES........................................ (259,064) 627,228 (396,420)
------------ ------------ ------------
</TABLE>
(continued)
50
<PAGE>
CoreStates Financial Corp and Subsidiaries Page 2 of 2
CONSOLIDATED STATEMENT OF CASH FLOWS: continued
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net increase (decrease) in deposits................. 172,155 (660,745) (1,013,622)
Payment for sales of deposits....................... (368,110) (154,360) -
Proceeds from issuance of long-term debt............ 1,340,099 582,251 480,433
Retirement of long-term debt........................ (501,165) (533,480) (306,452)
Net increase (decrease) in short-term
funds borrowed..................................... (1,043,856) 215,764 694,499
Cash dividends paid................................. (328,114) (286,565) (245,962)
Purchases of treasury stock......................... (533,932) (335,528) (228,963)
Purchases of ESOP shares............................ - - (35,568)
Funds transferred to Trust for future
ESOP purchases..................................... - - (24,432)
Repurchase and retirement of common stock........... (57,703) (17,134) (24,888)
Common stock issued under employee benefit
plans.............................................. 87,726 99,011 18,710
Other, net.......................................... 21,360 12,655 11,293
----------- ----------- -----------
NET CASH USED IN FINANCING ACTIVITIES............... (1,211,540) (1,078,131) (674,952)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND DUE
FROM BANKS....................................... (199,856) 637,554 (162,801)
Cash and due from banks at January 1,............... 3,662,143 3,024,589 3,187,390
----------- ----------- -----------
CASH AND DUE FROM BANKS AT DECEMBER 31,............. $ 3,462,287 $ 3,662,143 $ 3,024,589
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest......................................... $ 1,146,557 $ 1,263,681 $ 918,503
=========== =========== ===========
Income taxes..................................... $ 331,940 $ 284,987 $ 189,918
=========== =========== ===========
</TABLE>
See accompanying notes to the financial statements.
51
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements include the accounts of CoreStates
Financial Corp ("the Corporation") and all of its subsidiaries, including:
CoreStates Bank, N.A. ("CBNA"); CoreStates Bank of Delaware, N.A. ("CBD");
Congress Financial Corporation; and CoreStates Capital Corp ("CSCC"). All
material intercompany transactions have been eliminated. The financial
statements include the consolidated accounts of Meridian Bancorp, Inc.
("Meridian") which was acquired on April 9, 1996 in a transaction accounted for
under the pooling of interests method of accounting. On February 23, 1996,
Meridian acquired United Counties Bancorporation ("United Counties") in a
transaction accounted for as a pooling of interests. The consolidated accounts
of Meridian include United Counties for all periods presented. Certain amounts
in prior years have been reclassified for comparative purposes.
The Corporation is a bank holding company incorporated under the laws of the
Commonwealth of Pennsylvania, primarily operating in the eastern Pennsylvania,
northern Delaware and the central and southern New Jersey markets. Through its
subsidiaries, the Corporation is engaged in the business of providing global and
specialized banking (including international banking services), regional
banking, retail credit services, trust and asset management and third party
processing services to a diversified customer base.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Changes in accounting principles
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123") was issued in October 1995 to establish accounting and
reporting standards for stock-based employee compensation plans such as stock
option and restricted stock plans ("stock-based plans"). FAS 123 defines a fair
value method of accounting for measuring compensation expense for stock-based
plans and encourages all entities to adopt that method of accounting. However,
FAS 123 also permits entities to continue to measure compensation expense for
stock-based plans using the intrinsic value method prescribed by APB Opinion No.
25, "Accounting for Stock Issued to Employees."
Under the fair value method, compensation expense would be measured as the value
of an award under a stock-based plan on the date the award is granted, and would
be recognized over the vesting period of the award. Under the intrinsic value
method, compensation expense is measured as the excess, if any, of the market
price of the stock underlying the award on the date the award is granted, over
the exercise price. Under the Corporation's stock-based long-term incentive
plan, awards have no intrinsic value on the date of grant as the exercise price
equals the market price on that date. The Corporation did not adopt the fair
value method of accounting for stock-based plans, and will continue to use the
intrinsic value method to measure compensation expense.
Effective January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
("FAS 114") and Statement No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures" ("FAS 118"). FAS 114 addresses
accounting for impairment of certain loans and requires that impaired loans
within the scope of FAS 114 be measured based on the present value of expected
cash flows discounted at the loan's effective interest rate, or be measured at
the loan's observable market price or the fair value of its collateral. FAS 118
amended the income recognition policies and clarified disclosure requirements of
FAS 114. The adoption of these standards did not have an impact on CoreStates'
provision for loan losses or allowance for loan losses, nor change CoreStates'
methodology for recognizing income on impaired loans.
52
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Income taxes
Under the asset and liability method used by the Corporation to provide for
income taxes, deferred tax assets and liabilities are recognized for the tax
consequences of temporary differences by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
The Corporation and its subsidiaries file a consolidated Federal income tax
return.
Investments
Held-to-maturity securities, consisting primarily of debt securities, are
carried at cost adjusted for amortization of premiums and accretion of
discounts, both computed on the interest method. The Corporation has both the
ability and positive intent to hold these securities until maturity. Trading
account assets are carried at market value. Gains on trading account assets
include both realized and unrealized gains and losses on the portfolio. All
other securities are classified as available-for-sale and are carried at fair
value, with unrealized gains and losses, net of tax, reported as a component of
shareholders' equity. The net unrealized gain on available-for-sale securities
included in retained earnings was $26,555 at December 31, 1996 and $51,625 at
December 31, 1995. Realized securities gains and losses are determined using
the adjusted cost of a specific security sold.
Interest and dividends on investment securities are recognized as income when
earned.
Loans
Interest on commercial loans is recognized on the daily principal amounts
outstanding. Loan fees are generally considered adjustments of interest rate
yields and are amortized into interest income on loans over the terms of the
related loans. Interest on installment loans is principally recognized on the
interest method.
Commercial loans are placed on a non-accrual status, generally recognizing
interest as income when received, when, in the opinion of management, the
collectability of principal or interest payments becomes doubtful or when such
payments are 90 days or more past due, unless the loan is well secured and in
the process of collection. The deferral or non-recognition of interest does not
constitute forgiveness of the borrower's obligation.
Consumer loans, excluding residential mortgage loans and credit card loans, are
charged off after reaching 90 days past due. Residential mortgage loans are
placed on non-accrual status after reaching 120 days past due and are written
down to the fair value of underlying collateral at that time. Credit card loans
are charged off after reaching 150 days past due. Prior to the second quarter
of 1996, credit card loans were charged off after reaching 180 days past due.
Other real estate owned
When a property is acquired through foreclosure of a loan secured by real
estate, that property is recorded at the lower of the cost basis in the loan or
the estimated fair value of the property less estimated disposal costs.
Writedowns at the time of foreclosure are charged against the allowance for loan
losses. Subsequent writedowns for changes in the fair value of the property are
charged to other non-financial expense.
Allowance for loan losses
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated probable credit losses. Factors included in
management's determination of an adequate level of allowance for loan losses are
a statistical analysis of historical loss levels throughout an economic cycle
and one year of projected charge-offs, establishing a minimum level below which
the allowance for loan losses is considered inadequate and a maximum level above
which is considered inappropriate. A quarterly evaluation of loss potential on
specific credits, products, industries, portfolios and markets, as well as
indicators for loan growth, the economic environment and concentrations assist
in validating the position of the allowance for loan losses within those
boundaries. This evaluation is inherently subjective as it requires material
estimates that may be susceptible to significant change.
53
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
The Corporation adopted FAS 114 effective January 1, 1995. Under FAS 114, the
allowance for loan losses related to "impaired loans" is based on discounted
cash flows using the impaired loan's initial effective interest rate as the
discount rate, or the fair value of the collateral for collateral dependent
loans. A loan is impaired when it meets the criteria to be placed on non-
accrual status or is a renegotiated loan. Loans which are evaluated for
impairment pursuant to FAS 114 are assessed on a loan-by-loan basis, and include
only commercial non-accrual and renegotiated loans. Large groups of smaller
balance homogeneous loans, such as credit cards, lease financing receivables,
loans secured by first and second liens on residential properties, and other
consumer loans are evaluated collectively for impairment.
Additions to the allowance arise from the provision for loan losses charged to
operations or from the recovery of amounts previously charged off. Loan charge-
offs reduce the allowance. Loans are charged off when there has been permanent
impairment of the related carrying values.
Premises and equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. The provision for depreciation and amortization is computed,
generally, on the straight-line method at rates based on the following range of
lives: buildings - 10 to 45 years; equipment - 3 to 12 years; and leasehold
improvements - 3 to 15 years.
Retirement plans
The Corporation maintains non-contributory defined benefit pension plans for
substantially all employees. Benefits are primarily based on the employee's
years of credited service, average annual salary and primary social security
benefit, as defined in the plans. It is the Corporation's policy to fund the
plans on a current basis to the extent deductible under existing tax
regulations.
The Corporation provides postretirement health care and life insurance benefits
for substantially all retired employees. In order to participate in the health
care plan, an employee must retire with at least 10 years of service. The
postretirement health care plan is contributory, with retiree contributions
based on years of service. It is the Corporation's policy to fund these plans
on a current basis to the extent deductible under existing tax regulations.
Employee Stock Ownership Plan ("ESOP")
Compensation expense was recognized based on the average fair value of shares
committed to be released to employees. Effective January 1, 1997, the ESOP was
combined with the Corporation's 401(k) Savings Plan. The remaining shares in
the ESOP will be released to substantially all employees and will be recorded as
a portion of the Corporation's match of employee contributions to the 401(k)
Savings Plan.
Foreign exchange/currency
Forward exchange contracts are valued at current rates of exchange. Gains or
losses on forward exchange contracts intended to hedge an identifiable foreign
currency commitment, if any, are deferred and included in the measurement of the
related foreign currency transaction. All other gains or losses on forward
exchange contracts are included in fees for international services.
Currency gains and losses in connection with non-dollar denominated loans and
deposits, which are included in interest income and expenses, are recognized pro
rata over the contract terms. Foreign currency translation adjustments are
recorded directly to retained earnings. The cumulative foreign currency
translation gain (loss) was $3,848, $(1,600) and $(1,571) at December 31, 1996,
1995 and 1994, respectively.
Derivative interest rate contracts
The Corporation uses various interest rate contracts such as, interest rate
swaps, futures, forward rate agreements, caps and floors, tender option bonds,
Treasury float agreements, and forward commitments to purchase and sell loans
and securities, primarily to manage the interest rate risk of specific assets,
liabilities or anticipated transactions, to manage interest rate risk in
securities trading positions and to provide for the needs of its customers. For
contracts held for purposes other than trading, gains or losses are deferred and
recognized as adjustments to interest income or expense of the underlying assets
or liabilities and the interest differentials are recognized as adjustments of
the related interest income or expense. Gains or losses resulting from early
terminations of these contracts are deferred and amortized over the remaining
term of the underlying assets or liabilities. Any fees received or disbursed
which represent adjustments to the yield on interest rate contracts are
capitalized and amortized over the term of the interest rate contracts. If the
underlying assets or liabilities related to a derivative matures, is sold,
extinguished, or terminates, the amount of the previously unrecognized gain or
loss is recognized at that time in the consolidated income statement.
54
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
The Corporation's trading and customer-related derivative positions mostly
include tender option bonds, Treasury float agreements, and forward commitments
to purchase and sell loans and securities, and interest rate caps, floors, and
swaps. Tender option bonds represent a contingent liability to purchase
securities. Gains and losses and net interest spread earned on these products
are included in non-interest income. Treasury float agreements represent
purchased option contracts. Forward commitments to purchase and sell loans and
securities consist primarily of forward commitments to sell mortgage-backed
securities, which are used to hedge mortgage loans held in the trading account.
These commitments are marked to fair value with unrealized gains and losses
recorded in income from trading activities. Contracts held or issued for
customers are valued at market with gains or losses included in income from
trading activities.
Earnings per common share
Earnings per common share for all periods presented are based on weighted
average common shares outstanding as dilution from potentially dilutive common
stock equivalents (primarily stock options) does not have a materially dilutive
effect on earnings per share. For purposes of computing earnings per share,
shares committed to be released and shares allocated in the ESOP are considered
outstanding.
Treasury stock
The purchase of the Corporation's common stock is recorded at cost. At the date
of subsequent reissuance, the treasury stock account is reduced by the cost of
shares reissued on a last-in-first-out basis.
Cash dividends declared per share
Cash dividends declared per share for the periods prior to the acquisitions of
Meridian on April 9, 1996, Independence Bancorp, Inc. on June 27, 1994 and
Constellation Bancorp on March 16, 1994 assume that the Corporation would have
declared cash dividends equal to the cash dividends per share actually declared
by the Corporation.
2. ACQUISITIONS
Purchase acquisition
On December 2, 1994, the Corporation purchased Germantown Savings Bank
("Germantown"), a Pennsylvania chartered stock savings bank with $1.6 billion in
assets and $1.4 billion in deposits at the time of the acquisition. Under the
terms of the transaction, each of Germantown's 4.15 million shares of common
stock was exchanged for a combination of the Corporation's common stock, equal
to approximately 55% of the $62 per Germantown share purchase price, and cash,
equal to approximately 45% of the purchase price. As a result of this
acquisition, 5.9 million shares of the Corporation's common stock were issued
out of treasury stock. The transaction had a total value of approximately $260
million and was accounted for under the purchase method of accounting.
Accordingly, the results of operations of Germantown have been included since
the date of acquisition. Under this method of accounting, the purchase price is
allocated to the respective assets acquired and liabilities assumed based on
their estimated fair values, net of applicable income tax effects. Intangible
assets of $183 million, including $140 million of goodwill, were created in this
transaction. Goodwill is being amortized to other operating expense on a
straight-line basis over 15 years.
A summary of unaudited pro forma combined financial information for the year
ended December 31, 1994 for the Corporation and Germantown as if the transaction
had occurred on January 1, 1994 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Net interest income..... $2,135,969
Non-interest income..... 797,961
Net income.............. 451,063
Per common share........ $1.94
Average common shares
outstanding........... 232,180
</TABLE>
55
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
2. ACQUISITIONS - continued
Pooling acquisition
On April 9, 1996, the Corporation acquired Meridian, a Pennsylvania bank holding
company with $15.2 billion in assets and $12.1 billion in deposits. The
Corporation issued approximately 81.1 million shares of common stock to
shareholders of Meridian based on an exchange ratio of 1.225 shares of the
Corporation's common stock for each share of Meridian common stock. At a
February 6, 1996 shareholders' meeting, the Corporation's shareholders approved
an increase in the number of authorized shares from 200 million to 350 million.
On February 23, 1996, Meridian acquired United Counties, a New Jersey bank
holding company with $1.6 billion in assets in a transaction accounted for as a
pooling of interests. Accordingly, the consolidated accounts of Meridian include
United Counties for all periods presented.
The Meridian acquisition was accounted for under the pooling of interests method
of accounting; accordingly, the consolidated financial statements include the
consolidated accounts of Meridian for all periods presented. Financial
information on a separate company basis for the two years ended December 31,
1995 for the Corporation and Meridian (including United Counties) was as
follows:
<TABLE>
<CAPTION>
1995 1994
-------------------------- ----------------------------
The (Unaudited) The (Unaudited)
Corporation Meridian Corporation Meridian
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Net interest income..................... $1,488,534 $678,391 $1,389,369 $678,646
Provision for losses on loans........... 105,000 38,877 246,900 27,261
Non-interest income..................... 605,666 276,556 562,264 226,223
Non-financial expenses.................. 1,274,398 612,695 1,317,561 608,736
Provision for income taxes.............. 262,565 101,372 141,810 82,992
Income before cumulative effect of a
change in accounting principle......... 452,237 202,003 245,362 185,880
Cumulative effect of a change in
accounting principle................... - - (2,730)(a)
Net income.............................. 452,237 202,003 245,362 183,150
Income per share before cumulative
effect of a change in accounting
principle.............................. $ 3.22 $ 3.03 $ 1.73 $ 2.72
Net income per share.................... 3.22 3.03 1.73 2.68
Cash dividends declared................. 1.44 1.45 1.24 1.34
- ----------
</TABLE>
(a) Meridian adopted FAS 112 on January 1, 1994, the date required under that
statement, and recognized a charge of $4,200, $2,730 after-tax, as the
cumulative effect of a change in accounting principle. CoreStates adopted FAS
112 on January 1, 1993. As permitted under pooling of interests accounting, the
restated consolidated financial statements are prepared as if Meridian also
adopted FAS 112 effective January 1, 1993.
The restated consolidated statements of income for 1995 and 1994 reflect a
conforming accounting adjustment for Statement of Financial Accounting Standards
No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions"
("FAS 106"). The Corporation elected to recognize immediately the January 1,
1992 transitional liability of $128,706 pre-tax, $84,946 after-tax, as the
cumulative effect of a change in accounting principle in the first quarter of
1992. Meridian adopted FAS 106 on January 1, 1993, the date required under that
statement. As permitted by FAS 106, Meridian elected to amortize its liability
over 20 years. As permitted under pooling of interests accounting, the restated
financial information is prepared as if Meridian adopted FAS 106 effective
January 1, 1992 and immediately recognized the $28,827, $18,738 after-tax,
transitional liability. Restated salaries, wages and benefits have been
adjusted accordingly.
56
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
3. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" ("FAS 107"), requires disclosure of fair value
information about financial instruments, whether or not required to be
recognized in the balance sheet, for which it is practicable to estimate that
value. FAS 107 defines a financial instrument as cash, evidence of ownership
interest in an entity, or a contractual obligation or right that will be settled
with another financial instrument.
In cases where quoted market prices are not available, fair values are based on
estimates using discounted cash flow or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Fair value estimates derived
through those techniques cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. FAS 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the
Corporation.
<TABLE>
<CAPTION>
The following table summarizes the carrying amount and fair value estimates of financial instruments at
December 31, 1996 and 1995.
1996 1995
--------------------------------- ---------------------------------
Carrying Carrying
or Notional Fair or Notional Fair
Amount Value Amount Value
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Assets:
Cash and short-term assets............... $ 6,415,135 $ 6,415,135 $ 6,291,340 $ 6,291,340
Investment securities.................... 4,083,224 4,086,409 5,632,232 5,648,279
Trading account assets................... 122,317 122,317 147,218 147,218
Net loans, excluding leases.............. 30,834,492 30,837,703 29,876,531 30,293,254
Liabilities:
Demand and savings deposits.............. 22,629,513 22,629,513 23,063,053 23,063,053
Time deposits, including overseas
branches and subsidiaries............... 11,097,643 11,321,471 10,900,767 11,065,260
Short-term borrowings.................... 2,633,157 2,633,157 3,677,013 3,677,013
Long-term debt........................... 3,049,297 3,059,173 2,212,099 2,266,725
Off-balance sheet asset (liability):
Letters of credit........................ 2,893,214 (28,931) 2,873,265 (27,659)
Commitments to extend credit............. 19,569,566 (21,204) 18,438,277 (16,135)
Mortgage loans sold and loan servicing
acquired with recourse................ 361,410 (9,637) 434,628 (12,260)
Derivative financial instruments......... 20,173,225 96,629 16,091,322 237,649
</TABLE>
Fair value estimates, methods, and assumptions for the Corporation's financial
instruments are set forth below:
Cash and due from banks and short-term instruments - The carrying amounts
reported in the balance sheet for cash and due from banks and short-term
instruments approximate their fair values. Short-term instruments include: time
deposits; Federal funds sold; and securities purchased under agreements to
resell, all of which generally have original maturities of less than 90 days.
Investment securities - Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Trading account assets - Fair values for the Corporation's trading account
assets, which also are the amounts recognized in the balance sheet, are based on
quoted market prices where available. If quoted market prices are not available,
fair values are based on quoted market prices of comparable instruments or are
derived from pricing models or formulas using discounted cash flows.
57
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
3. FAIR VALUES OF FINANCIAL INSTRUMENTS - continued
Loans - Fair values are estimated for loans in groups with similar financial and
risk characteristics. Loans are segregated by type including: commercial and
industrial; commercial real estate; residential real estate; credit card and
other consumer; financial institutions; factoring receivables; and foreign.
Each loan type is further segmented into fixed and variable rate interest terms
and by performing and non-performing categories in order to estimate fair
values.
The fair value of fixed-rate performing loans is calculated by discounting
scheduled principal and interest cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and interest rate risk
inherent in the loan type at December 31, 1996 and 1995. The estimate of
maturity is based on the Corporation's historical experience with repayments for
each loan type, modified by an estimate of the effect of current economic and
lending conditions. For performing residential mortgage loans, fair value is
estimated by referring to secondary market source pricing.
For credit card loans, cash flows and maturities are estimated based on
contractual interest rates and historical experience and are discounted using
secondary market rates adjusted for differences in servicing and credit costs.
This estimate does not include the benefit that relates to cash flows which
could generate from new loans to existing cardholders over the remaining life of
the portfolio.
For variable rate loans that reprice frequently and which have experienced no
significant change in credit risk, fair values are based on carrying amounts.
Fair value for non-performing loans is based on discounting estimated cash flows
using a rate commensurate with the risk associated with the estimated cash
flows. Assumptions regarding cash flows and discount rates are determined using
available market information and specific borrower information.
Deposit liabilities - The fair values disclosed for demand deposits (non-
interest bearing checking accounts, NOW accounts, savings accounts, and money
market accounts) are, by FAS 107 definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). The carrying
amounts for variable-rate, fixed-term certificates of deposit approximate their
fair values. Fair values for fixed-rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates offered on
certificates at December 31, 1996 and 1995, respectively, to an estimate of
aggregate expected maturities for those certificates of deposit.
The estimated fair values do not include the benefit that results from funding
provided by core deposit liabilities as compared to the cost of borrowing funds
in the financial markets.
Short-term funds borrowed - The carrying amounts of Federal funds purchased,
securities sold under agreements to repurchase, commercial paper and other
short-term borrowings approximate their fair values.
Long-term debt - The fair values for long-term debt are based on quoted market
prices where available. If quoted market prices are not available, fair values
are estimated using discounted cash flow analyses based on the Corporation's
borrowing rates at December 31, 1996 and 1995 for comparable types of borrowing
arrangements.
Off-balance sheet derivative financial instruments and commitments - Fair values
for the Corporation's futures, forwards, interest rate swaps, options, interest
rate caps and floors, foreign exchange contracts, tender option bonds and
Treasury float contracts are based on quoted market prices (futures); current
settlement values (forwards); quoted market prices of comparable instruments
(foreign currency exchange contracts); or, if there are no directly comparable
instruments, on pricing models or formulas using current assumptions (interest
rate swaps, interest rate caps and floors, tender option bonds, Treasury float
contracts and options). The fair value of commitments to extend credit, other
than credit card lines, is estimated using the fees currently charged to enter
into similar agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the counterparties. For fixed-
rate loan commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. The value of commitments to
extend credit under credit card lines is embodied in the benefit that relates to
estimated cash flows from new loans expected to be generated from existing
cardholders over the remaining life of the portfolio.
The fair value of standby and commercial letters of credit is based on fees
currently charged for similar agreements or on the estimated cost to terminate
the agreements or otherwise settle the obligations with the counterparties.
58
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
4. LOAN PORTFOLIO
For a breakdown of the loan portfolio by type of loan and for information on
non-performing loans, refer to Supplemental Financial Data under the captions
Loan Portfolio and Non-Performing Assets (pages 90 and 91).
The Corporation has traditionally maintained limits on industry, market and
borrower concentrations as a way to diversify and manage credit risk. The
Corporation's current policy is to limit industry concentrations to 50% of total
equity and to limit market segment concentrations to 10% of total assets. The
Corporation manages industry concentrations by applying these dollar limits to
industries that have common risk characteristics.
At December 31, 1996 and 1995, the Corporation had loans totaling $110,948 and
$152,436, respectively, to its officers, directors and companies in which the
directors had a 10% or more voting interest. These loans were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unrelated persons and do
not involve more than normal risk of collectibility. The 1996 additions and
reductions were $376,984 and $418,472, respectively.
Included in loans at December 31, 1996 and 1995 were $446,000 and $514,000,
respectively, of loans held for sale and carried at lower of cost or market.
The book value of real estate loans transferred to other real estate owned
during 1996, 1995 and 1994 was $19,536, $29,337 and $79,539, respectively.
The following presents information on derivative financial instruments used to
manage interest rate risk associated with loans:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
At December 31,
Notional value................ $9,118,000 $4,251,000
Unrealized gains.............. 64,000 104,000
Unrealized losses............. 19,000 5,000
Effect on loan yield for the
years ended December 31,
From.......................... 8.92% 9.37%
To............................ 9.03% 9.43%
</TABLE>
59
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
5. INVESTMENT SECURITIES
The carrying and fair values of investment securities at December 31, 1996 and
1995 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1996
- ----
Held-to-Maturity
- ----------------
U.S. Treasury and
Government agencies.......... $ 362,736 $ 3,501 $ 815 $ 365,422
State and municipal............. 366,012 8,548 95 374,465
Mortgage-backed................. 463,796 52 1,023 462,825
Other:
Domestic..................... 442,082 340 7,529 434,893
Foreign...................... 54,432 224 18 54,638
---------- ------- ------- ----------
Total held-to-maturity..... $1,689,058 $12,665 $ 9,480 $1,692,243
========== ======= ======= ==========
Available-for-Sale
- ------------------
U.S. Treasury and
Government agencies.......... $1,512,966 $ 9,207 $ 1,061 $1,521,112
State and municipal............. 59,864 468 335 59,997
Mortgage-backed................. 505,527 4,494 4,854 505,167
Other:
Domestic..................... 186,029 14,096 939 199,186
Foreign...................... 87,741 20,974 11 108,704
---------- ------- ------- ----------
Total available-for-sale... $2,352,127 $49,239 $ 7,200 $2,394,166
========== ======= ======= ==========
1995
- ----
Held-to-Maturity
- ----------------
U.S. Treasury and
Government agencies.......... $ 978,603 $12,198 $ 1,310 $ 989,491
State and municipal............. 469,330 13,276 552 482,054
Mortgage-backed................. 1,136,486 5,587 4,950 1,137,123
Other:
Domestic..................... 444,090 4,107 12,323 435,874
Foreign..................... 31,408 16 2 31,422
---------- ------- ------- ----------
Total held-to-maturity..... $3,059,917 $35,184 $19,137 $3,075,964
========== ======= ======= ==========
Available-for-Sale
- ------------------
U.S. Treasury and
Government agencies.......... $1,570,689 $17,098 $ 1,744 $1,586,043
State and municipal............. 78,625 1,174 94 79,705
Mortgage-backed................. 620,727 6,508 4,838 622,397
Other:
Domestic..................... 186,409 45,555 955 231,009
Foreign...................... 31,844 21,317 - 53,161
---------- ------- ------- ----------
Total available-for-sale... $2,488,294 $91,652 $ 7,631 $2,572,315
========== ======= ======= ==========
</TABLE>
On November 15, 1995, the FASB issued a Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities", which permitted an enterprise to reassess the
appropriateness of the classification of all investment securities held between
November 15, 1995 and December 31, 1995. Based on its reassessment, the
Corporation reclassified $1,726,739 in investment securities previously
classified as held-to-maturity to the available-for-sale category. Unrealized
gains on transferred investments were $12,160, unrealized losses were $8,340,
and the fair value was $1,730,559.
60
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
5. INVESTMENT SECURITIES - continued
Marketable equity securities are carried in the available-for-sale portfolio and
have been written up by $34,808 at December 31, 1996 and $66,061 at December 31,
1995, the aggregate of their excess fair values over cost, through after-tax
credits to retained earnings. The Corporation recorded pre-tax gains of $13,210
in 1996, $7,654 in 1995 and $14,167 in 1994 on sales of certain domestic equity
securities. During 1996 and 1995, the Corporation recorded pre-tax gains of
$28,656 and $13,596, on the exchange of certain domestic equity securities.
During 1996, 1995 and 1994, the Corporation recorded pre-tax gains of $18,924,
$939 and $2,567 on sales of foreign equity securities.
Included in mortgage-backed securities available-for-sale at December 31, 1996
were mortgage residual securities with an amortized cost and fair value of
$5,989 and $7,569, respectively. Pre-tax write-downs of $5,276 were recognized
in 1994 on these investments and were included in securities gains and losses.
At December 31, 1996 and 1995, there were no investments in securities of any
single, non-Federal issuer in excess of 10% of shareholders' equity.
Securities with a carrying value of $1,734,355 were pledged at December 31, 1996
to secure public deposits, trust deposits, and for certain other purposes as
required by law.
The amortized cost and estimated fair value of debt securities at December 31,
1996, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to prepay
obligations without prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
Held-to-Maturity
- ----------------
Due in one year or less.................. $ 220,553 $ 221,808
Due after one year through five years.... 595,215 599,835
Due after five years through ten years... 94,845 97,802
Due after ten years...................... 46,533 49,385
Mortgage-backed securities............... 463,796 462,825
---------- ----------
$1,420,942 $1,431,655
========== ==========
Available-for-Sale
- ------------------
Due in one year or less.................. $ 562,884 $ 564,608
Due after one year through five years.... 1,100,626 1,106,603
Due after five years through ten years... 11,591 11,627
Due after ten years...................... 26,130 26,161
Mortgage-backed securities............... 505,527 505,167
---------- ----------
$2,206,758 $2,214,166
========== ==========
</TABLE>
Proceeds from sales of investments in debt securities during 1996, 1995, and
1994 were $1,411,398, $560,022, and $739,457,respectively. Gross gains of
$4,100 in 1996, $11,180 in 1995, and $14,646 in 1994, and gross losses of
$5,378 in 1996, $1,894 in 1995, and $5,005 in 1994 were realized on those sales.
61
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
6. REGULATORY AND CAPITAL MATTERS
The Corporation and its subsidiaries are subject to the regulations of certain
Federal and state agencies including minimum risk-based and leverage capital
guidelines issued by the Federal Reserve Board and Comptroller of the Currency.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Corporation's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation must meet specific capital guidelines that
involve quantitative measures of the Corporation's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Corporation's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
At December 31, 1996, management believes that the Corporation and its principal
bank subsidiary, CBNA, meet all capital adequacy requirements to which they are
subject. The following table illustrates the Corporation's and CBNA's risk-
based and leverage capital ratios at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Per Regulatory Guidelines
---------------------------------------------------------------
Actual Minimum "Well-Capitalized"
------------------------ ----------------------------- --------------------------------
December 31, 1996 Amount Ratio Amount Ratio Amount Ratio
-------------- -------- --------------- ------------ ----------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital (a):
Consolidated......... $ 3,725,318 9.45% $ 1,576,914 4% $ 2,365,372 6%
CBNA................. 3,270,045 8.90 1,471,992 4 2,207,987 6
Total capital (b):
Consolidated......... 5,215,789 13.23 3,153,829 8 3,942,286 10
CBNA................. 4,206,434 11.43 2,943,983 8 3,679,979 10
Tier 1 leverage ratio:
Consolidated......... 3,725,318 8.46 1,321,090 3 2,201,817 5
CBNA................. 3,270,045 7.80 1,257,745 3 2,096,241 5
December 31, 1995
Tier 1 capital (a):
Consolidated......... 3,534,144 9.20 1,537,225 4 2,305,838 6
CBNA................. 1,404,622 7.57 742,217 4 1,113,326 6
Total capital (b):
Consolidated......... 4,890,929 12.71 3,074,450 8 3,843,063 10
CBNA................. 1,966,829 10.60 1,484,434 8 1,855,543 10
Tier 1 leverage ratio:
Consolidated......... 3,534,144 7.99 1,327,425 3 2,212,374 5
CBNA................. 1,404,622 6.83 616,934 3 1,028,223 5
</TABLE>
(a) Consists primarily of common shareholders' equity and Trust Capital
Securities, less goodwill and certain intangible assets.
(b) Consists of Tier 1 capital plus qualifying subordinated debt and the
allowance for loan losses, within permitted limits.
62
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
6. REGULATORY AND CAPITAL MATTERS (continued)
The primary source of funds for cash dividend payments by the Corporation to its
shareholders is dividends received from its banking subsidiaries. The approval
of the Comptroller of the Currency is required for a nationally chartered bank
to pay dividends if the total of all dividends declared in any calendar year
exceeds the bank's net profits (as defined by national banking regulations) for
that year combined with its retained net profits for the preceding two calendar
years. Under this formula, CBNA and CBD can declare dividends without approval
of the Comptroller of the Currency of approximately $112,000 and $18,000,
respectively, plus an additional amount equal to CBNA's and CBD's retained net
profits for 1997 up to the date of any such dividend declaration.
The Federal Reserve Act requires that extensions of credit by CBNA to certain
affiliates, including the Corporation, be secured by specified amounts and types
of collateral, that extensions of credit to any such affiliate generally be
limited to 10% of capital and surplus (as defined in that Act) and that
extensions of credit to all such affiliates be limited to 20% of capital and
surplus.
The Corporation's banking subsidiaries are required to maintain reserve balances
with the Federal Reserve Bank. The average amount of those reserve balances for
the years ended December 31, 1996 and 1995 were approximately $257,000 and
$429,000, respectively.
63
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
7. ALLOWANCE FOR LOAN LOSSES
The following represents an analysis of changes in the allowance for loan losses
for the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of period................. $ 670,265 $ 681,124 $ 636,915
Provision charged to operating expense......... 228,767 144,002 279,195
Recoveries of loans previously charged off..... 92,985 85,226 83,914
Loan charge-offs............................... (281,690) (240,087) (341,454)
Allowance for loans sold at date of sale....... - - (2,377)
Allowance for loans purchased at date
of purchase................................. - - 1,192
Allowance for loans of bank acquired
under purchase method of accounting........... - - 23,739
--------- --------- ---------
Balance at end of period....................... $ 710,327 $ 670,265 $ 681,124
========= ========= =========
</TABLE>
The following presents information on loans that are considered impaired under
FAS 114:
<TABLE>
<CAPTION>
At December 31, 1996 1995
--------- ---------
<S> <C> <C>
Recorded investment in impaired loans......... $183,330 $203,399
Impaired loans against which a portion
of the allowance for loan losses is
specifically allocated..................... 74,609 88,973
Amount of allowance for loan losses
specifically allocated to impaired loans... 15,105 24,445
For the years ended December 31,
Average recorded investment in impaired
loans...................................... 197,854 257,746
Interest income recognized on impaired
loans...................................... 8,977 14,354
</TABLE>
8. PREMISES AND EQUIPMENT
Premises and equipment on the consolidated balance sheet is presented net of
accumulated depreciation and amortization of $667,412 and $711,830 at December
31, 1996 and 1995, respectively. Depreciation and amortization of premises and
equipment for the years ended December 31, 1996, 1995, and 1994, was $95,897,
$98,033 and $95,240, respectively.
9. OPERATING LEASES
Rental expense, reduced by sublease rental income, charged to operations was
$90,982, $85,419 and $85,554 for 1996, 1995 and 1994, respectively.
64
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
10. DEPOSITS
The following presents a breakdown of deposits at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Domestic:
Non-interest bearing checking.... $ 9,330,445 $ 8,937,147
Savings, NOW and money
market accounts................ 13,299,068 14,125,906
Time deposits.................... 9,687,887 9,757,820
----------- -----------
Total domestic deposits....... 32,317,400 32,820,873
Overseas branches and subsidiaries.. 1,409,756 1,142,947
----------- -----------
Total deposits................ $33,727,156 $33,963,820
=========== ===========
<CAPTION>
Domestic time deposits in denominations of $100 or more at December 31, 1996,
1995, and 1994 were:
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Commercial certificates of deposit.. $ 754,437 $ 695,970 $ 611,206
Other domestic time deposits,
principally savings certificates... 613,126 501,058 533,336
----------- ---------- ----------
Total........................... $ 1,367,563 $1,197,028 $1,144,542
=========== ========== ==========
<CAPTION>
Interest expense on domestic time deposits in denominations of $100 or more for
the years ended December 31, 1996, 1995, and 1994 was:
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Interest expense:
Commercial certificates of
deposit........................... $ 30,857 $ 36,520 $ 22,499
Other domestic time deposits,
principally savings certificates.. 25,451 30,057 24,138
----------- ---------- ----------
Total........................... $ 56,308 $ 66,577 $ 46,637
=========== ========== ==========
</TABLE>
Substantially all of the deposits of overseas branches and subsidiaries were
time deposits in denominations of $100 or more for each of the three years
presented.
The following presents information on derivative financial instruments used to
manage interest rate risk associated with deposits:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
At December 31,
Notional value................. $5,314,000 $6,962,000
Unrealized gains............... 50,000 106,000
Unrealized losses.............. 16,000 8,000
Effect on deposit cost for the
year ended December 31,
From........................... 3.62% 3.75%
To............................. 3.49% 3.76%
</TABLE>
65
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
11. SHORT-TERM FUNDS BORROWED
Short-term funds borrowed at December 31, 1996 and 1995 include the following:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Federal funds purchased (a)................ $ 532,334 $1,129,432
Securities sold under agreements to
repurchase (b)............................ 656,397 812,281
Commercial paper (c)....................... 675,181 1,255,656
Other short-term funds borrowed (d)........ 769,245 479,644
---------- ----------
Total short-term funds borrowed (e)..... $2,633,157 $3,677,013
========== ==========
</TABLE>
(a) Federal funds purchased generally represent the overnight Federal funds
transactions of banking subsidiaries with correspondent banks. The weighted
average interest rate paid was 5.54% in 1996, 6.02% in 1995 and 4.58% in
1994. The maximum amount outstanding at any month-end was $1,977,950 during
1996, $2,060,375 during 1995, and $1,646,440 during 1994.
(b) Securities sold under agreements to repurchase usually mature within one to
thirty days or are due on demand. The weighted average interest rate paid
was 4.52% in 1996, 5.03% in 1995 and 3.44% in 1994. The maximum amount
outstanding at any month-end was $836,722 during 1996, $863,937 during
1995, and $1,025,217 during 1994.
(c) Commercial paper issued by CSCC is used to finance the short-term borrowing
requirements of certain banking-related activities. Commercial paper is
issued with maturities of not more than nine months and there are no
provisions for extension, renewal or automatic rollover. The weighted
average interest rate on commercial paper borrowings was 5.44% in 1996,
5.94% in 1995, and 4.24% in 1994. The maximum amount outstanding at any
month-end was $1,106,078 during 1996, $1,388,927 during 1995, and $919,292
during 1994.
At December 31, 1996, the Corporation had a $700,000 revolving credit
facility from unaffiliated banks. The facility was established in support
of commercial paper borrowings, Medium Term Note (see Note 12) issuance and
general corporate purposes. Unless extended by the Corporation in
accordance with the terms of the facility agreement, the facility expires
February 2000. There were no borrowings under this facility at December 31,
1996. The interest rate charged for usage of these lines varies with money
market conditions.
(d) Other short-term funds borrowed include term Federal funds purchased,
short-term Bank Notes and demand notes payable to the U.S. Treasury.
(e) The aggregate average short-term funds borrowed were $2,958,655 in 1996,
$3,751,518 in 1995, and $3,435,972 in 1994. The weighted average interest
rate was 5.18% in 1996, 5.71% in 1995 and 4.35% in 1994. The average
interest rate is calculated primarily on a daily average of short-term
funds borrowed.
66
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
12. LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1995 includes the following:
<TABLE>
<CAPTION>
CoreStates Financial Corp: 1996 1995
------------ ------------
<S> <C> <C>
6 5/8% Notes due 2000 (a)......................... $ 150,000 $ 150,000
7 7/8% Subordinated Notes due 2002 (b)............ 100,000 100,000
7 7/8% Subordinated Notes due 1996................ - 75,000
8 5/8% Mortgages due 2001......................... 6,603 8,823
Unamortized Discounts............................. (271) (325)
---------- ----------
256,332 333,498
---------- ----------
CSCC:
6 3/4% Guaranteed Subordinated
Notes due 2006 (c).............................. 200,000 -
5 7/8% Guaranteed Subordinated
Notes due 2003 (c).............................. 200,000 200,000
6 5/8% Guaranteed Subordinated
Notes due 2005 (c).............................. 175,000 175,000
9 5/8% Guaranteed Subordinated
Notes due 2001 (c).............................. 150,000 150,000
9 3/8% Guaranteed Subordinated
Notes due 2003 (c).............................. 100,000 100,000
Medium Term Notes (d)............................. 1,509,000 1,036,035
Unamortized Discounts............................. (4,990) (3,631)
---------- ----------
2,329,010 1,657,404
---------- ----------
CoreStates Capital I:
8% Trust Capital Securities due 2026(e)........... 300,000
Unamortized Discounts............................. (6,491)
----------
293,509
----------
Other subsidiaries:
6 5/8% Subordinated Notes due 2003 (f)............ 150,000 150,000
Federal Home Loan Bank Borrowings (g)............. 2,888 42,888
Various other..................................... 18,175 29,022
Unamortized Discounts............................. (617) (713)
---------- ----------
170,446 221,197
---------- ----------
Total long-term debt (h).......................... $3,049,297 $2,212,099
========== ==========
</TABLE>
(a) The Notes are unsecured and senior in right of payment to all subordinated
indebtedness of the Corporation. The Notes are not redeemable by the
Corporation or the holders prior to the maturity date and are not entitled
to the benefit of any sinking fund.
(b) The Notes are unsecured and subordinate in right of payment to all present
and future senior indebtedness of the Corporation. The Notes are not
redeemable by the Corporation or the holders prior to the maturity date and
are not entitled to the benefit of any sinking fund.
(c) The Notes are not subject to redemption prior to maturity and are
unconditionally guaranteed, on a subordinated basis, as to payment of
principal and interest by the Corporation. The Notes are subordinated to
all existing and future senior CSCC indebtedness and the guarantee is
subordinated to all outstanding senior Corporation indebtedness.
67
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
12. LONG-TERM DEBT - continued
(d) CSCC can issue Medium Term Notes (Senior and Subordinated) with maturities
of nine months or greater from date of issue. The interest rate or interest
rate formula on each Note is established by CSCC at the time of issuance.
The Senior Notes are unconditionally guaranteed as to payment of principal
and interest by the Corporation. The Subordinated Notes are unconditionally
guaranteed, on a subordinated basis, as to payment of principal and
interest by the Corporation. The Subordinated Notes are subordinated to all
existing and future senior CSCC indebtedness and the guarantee is
subordinated to all existing and future senior Corporation indebtedness. At
December 31, 1996, $1,509,000 of debt is outstanding with maturities up to
five years. Interest rates are predominately variable.
Under an existing shelf registration statement filed with the Securities
and Exchange Commission, the Corporation had debt and capital securities
that were registered but unissued of approximately $1,085,000 at December
31, 1996.
(e) The Trust Capital Securities evidence a preferred ownership interest in a
trust, of which 100% of the common equity is owned by CBNA. The Trust
Capital Securities are unconditionally guaranteed by CBNA. The proceeds
from issuance of the Trust Capital Securities are invested in 8% Junior
Subordinated Deferrable Interest Debentures of CBNA due 2026. These
Subordinated Debt Securities have provisions enabling certain actions such
as redemption or the deferment of the semiannual payments of interest,
which will impact the Trust Capital Securities. CBNA may redeem the
Subordinated Debt Securities in whole or in part, on or after December 15,
2006. In addition, Subordinated Debt Securities may be redeemed by CBNA at
any time upon the occurrence of certain events. In the event of such a
redemption of the Subordinated Debt Securities, the proceeds of such
payment or repayment shall concurrently be applied to redeem the Trust
Capital Securities.
(f) The Notes were issued by CBNA and are unsecured and subordinate to the
claims of depositors and other creditors. The Notes are not redeemable by
CBNA or the holders prior to the maturity date and are not entitled to the
benefit of any sinking fund.
(g) The borrowing matures in July 2016 and carries a fixed interest rate of
6.66%. These borrowings require membership in the Federal Home Loan Bank of
Pittsburgh and the maintenance of available collateral with a fair value
which approximates the total amount of the outstanding debt.
(h) The consolidated aggregate maturities for long-term debt for the years
ending December 31, 1997 through 2001 are: $376,637; $528,562; $395,740;
$216,672; and $298,203, respectively.
The following presents information on derivative financial instruments used to
manage interest rate risk associated with long-term debt:
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
At December 31,
Notional value........................... $1,019,000 $614,000
Unrealized gains......................... 16,000 24,000
Unrealized losses........................ 13,000 8,000
Effect on long-term debt cost for
the years ended December 31,
From..................................... 6.53% 6.78%
To....................................... 6.38% 6.76%
</TABLE>
68
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
13. RETIREMENT AND BENEFIT PLANS
The fair value of the assets in the Corporation's defined benefit pension plans
exceeded the projected benefit obligation by $57,158 at December 31, 1996, based
on current and estimated future salary levels. The excess of the fair value of
plan assets is reconciled to the accrued pension cost included in other
liabilities as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
--------- --------
<S> <C> <C>
Plan assets at fair value(a)...................... $902,947 $815,621
-------- --------
Present value of benefit obligation:
Accumulated benefits based on salaries to date,
including vested benefits of $667,536 in 1996
and $611,077 in 1995.......................... 688,102 647,743
Additional benefits based on estimated future
salary levels................................. 157,687 175,454
-------- --------
Projected benefit obligation...................... 845,789 823,197
-------- --------
Amount the fair value of plan assets exceeds (is
less than) the projected benefit obligation at
December 31,................................... 57,158 (7,576)
Reconciliation:
Unrecognized prior service cost................ 30,770 11,676
Unrecognized net asset from date of initial
application................................... (20,016) (25,357)
Net deferred actuarial loss (gain)............. (91,835) 22,151
-------- --------
Prepaid (accrued) pension expense included in
other liabilities................................ $(23,923) $ 894
======== ========
- ---------------
</TABLE>
(a) Primarily U.S. Government securities, U.S. agency securities, fixed income
securities, common stock, and commingled funds managed by subsidiary banks.
Net pension cost for the years ended December 31, 1996, 1995 and 1994 included
the following expense (income) components:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
Service cost benefits earned during
the period.......................... $ 29,020 $ 24,492 $ 30,411
Interest cost on projected benefit
obligation.......................... 60,793 54,497 51,881
Actual (return) loss on plan assets... (121,868) (162,143) 22,038
Net amortization and deferral......... 53,887 96,484 (80,394)
--------- --------- --------
Net pension cost.................... $ 21,832 $ 13,330 $ 23,936
========= ========= ========
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation for the Corporation was 7.5% and
7.0%-7.5%; respectively, at December 31, 1996 and 1995. The rate of increase on
future compensation levels was 5.0% to 6.0% in both 1996 and 1995. The expected
long-term rate of return on plan assets was 7.5%-9.5% in both 1996 and 1995.
The Corporation sponsors a 401(k) savings plan for substantially all its
employees. Contributions to the savings plan for the employer's match were
$18,955 in 1996, $18,192 in 1995, and $23,140 in 1994.
The ESOP is a leveraged plan funded through a direct loan from the Corporation.
The ESOP has acquired a total of 2,450,000 shares of common stock for
distribution to eligible employees ratably over a 20 year period. Compensation
cost has been recognized based on the fair market value of the shares committed
to be released to employees. Total compensation cost recognized was $5,378 in
1996 and $3,600 in 1995. Dividends on allocated shares are paid to participants
and are charged to retained earnings. Dividends on unallocated shares are used
by the ESOP to reduce its loan. Effective January 1, 1997 the ESOP was combined
with the Corporation's 401(k) savings plan.
69
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
13. RETIREMENT AND BENEFIT PLANS - continued
The Corporation and its subsidiaries provide postretirement health care and life
insurance benefits for substantially all retired employees. Postretirement
benefits are provided through an insurance company whose premiums are based on
the benefits paid during the year. The postretirement health care plan is
contributory, with retiree contributions based on years of service.
The liability for postretirement benefits included in other liabilities at
December 31, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees...................................... $ (68,702) $(125,502)
Fully eligible active plan participants....... (1,827) (3,864)
Other active plan participants................ (29,748) (39,709)
--------- ---------
Accumulated postretirement benefit obligation.... (100,277) (169,075)
Plan assets at fair value (a).................... 52,591 46,974
--------- ---------
Unfunded obligation at December 31,.............. (47,686) (122,101)
Unrecognized prior service cost.................. (45,239) 115
Unrecognized net gain............................ (51,157) (22,638)
--------- ---------
Accrued postretirement benefit obligation
included in other liabilities................... $(144,082) $(144,624)
========= =========
</TABLE>
- ------------------
(a) Primarily municipal bonds and short-term investments.
Net periodic postretirement benefit cost for the years ended December 31, 1996,
1995 and 1994 included the following expense (income) components:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Service cost benefits earned during
the period............................. $ 2,769 $ 3,044 $ 3,602
Interest cost on accumulated
postretirement benefit obligation...... 7,947 11,932 11,931
Actual return on plan assets............. (1,527) (1,107) (461)
Net amortization and deferral............ (6,069) (1,436) (730)
------- ------- -------
Net periodic postretirement benefit
cost................................... $ 3,120 $12,433 $14,342
======= ======= =======
</TABLE>
For measurement purposes, the rate of increase in the per capita cost of covered
health care benefits was assumed to be 5.5% per year and remains at that level
until a predetermined benefit cap is reached. This fixed dollar cap was
established as the per capita projected cost level in 1997 associated with the
Corporation's indemnity medical plan. The health care cost trend rate
assumption has an effect on the amounts reported. To illustrate, increasing the
assumed health care cost trend rates by 1 percentage point in each year would
increase the accumulated postretirement benefit obligation as of December 31,
1996 by $4,479 and the aggregate of the service and interest cost components of
net periodic postretirement benefit cost for the year then ended by $745.
The expected long-term rate of return on plan assets was 6.0%. The weighted-
average discount rate used in determining the Corporation's accumulated
postretirement benefit obligation was 7.5% and 7.0%, respectively, at December
31, 1996 and 1995.
70
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
14. LONG-TERM INCENTIVE PLAN
The Corporation has outstanding options granted under the Corporation's long-
term incentive plan (the "Plan"). As provided in the Plan, a variety of
incentives can be issued to eligible participants including restricted stock
awards, incentive stock options, non-qualified stock options, stock appreciation
rights, performance units and cash awards. Meridian, Constellation,
Independence, United Counties and Germantown had maintained similar plans.
Options granted under those plans were assumed by the Corporation upon
consummation of their respective acquisitions. The Plan provides for a maximum
number of options available to be granted each year equal to 2% of outstanding
common shares as of January 1 of that year. Options under the Plan are granted
to purchase the Corporation's common shares at market value on the date of grant
and are exercisable one year from the date of grant for a period not exceeding
ten years from the date of grant. Stock appreciation rights may be granted in
conjunction with the granting of an option.
Information on option activity for 1996 follows:
<TABLE>
<CAPTION>
Shares under Weighted-Average
Option Exercise Price
------------ ----------------
<S> <C> <C>
Balance at January 1, 1996....... 8,581,554 $23.86
Options granted.................. 1,968,001 (a) 41.49
Options exercised................ (4,519,411) 23.27
Options canceled................. (241,080) 31.84
----------
Balance at December 31, 1996..... 5,789,064 29.98
==========
</TABLE>
- -----------------
(a) The fair value of options granted during 1996 was $12.6 million.
The following table summarizes information about options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- ------------------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 3.99 to $15.67 293,947 2.69 years $13.34 293,947 $13.34
$16.12 to $23.27 912,288 6.20 21.51 912,288 21.51
$25.41 to $29.95 2,977,462 7.94 27.74 2,977,462 27.74
$37.96 to $42.63 1,605,367 9.13 41.98 221,843 37.96
--------- ---------
$ 3.99 to $42.63 5,789,064 7.73 29.98 4,405,540 25.37
========= =========
</TABLE>
The Corporation uses the intrinsic value method of accounting to measure
compensation expense. If the fair value method had been used to measure
compensation expense, net income would have been reduced by $7.4 million, or
$0.04 per share and $7.2 million, or $0.03 per share, to $641.8 million, or
$2.93 per share, and $647.9 million, or $2.92 per share, for the years ended
December 31, 1996 and 1995, respectively.
The fair value of options granted in 1996 and 1995 was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted-
average assumptions, respectively: risk-free interest rates of 5.49% to 7.80%,
dividend yield of 4.0%, volatility factors of the expected market price of the
Corporation's common stock of .148 to .223, and a weighted-average expected life
of the options of 6 years.
71
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
14. LONG-TERM INCENTIVE PLAN - continued
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Corporation's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS, COMMITMENTS AND
CONTINGENT LIABILITIES
In the normal course of business, there are outstanding commitments and
contingent liabilities which are not reflected in the financial statements.
These include various financial instruments with off-balance sheet risk used in
connection with the Corporation's asset and liability management, the management
of interest rate risk in securities trading positions and to provide for the
needs of customers. These involve varying degrees of credit, interest rate and
liquidity risk, but do not represent unusual risks for the Corporation and
management does not anticipate any significant losses as a result of these
transactions.
Derivative Financial Instruments Held or Issued for Purposes Other Than Trading
The Corporation uses off-balance sheet derivative financial instruments, such as
interest rate swaps, futures and caps, to manage interest rate risk. The
Corporation's exposure to interest rate risk stems from the mismatch between the
sensitivity to movements in interest rates of the Corporation's assets and
liabilities and from the spread risk between the rates on those assets and
liabilities and financial market rates. The use of derivatives to manage
interest rate risk falls into three categories: interest sensitivity
adjustments, interest rate spread protection and hedging anticipated asset
sales.
Interest rate swaps and futures are generally used to lengthen the interest rate
sensitivity of short-term assets and to shorten the repricing characteristics of
longer term liabilities. Interest rate caps are used to manage spread risk.
Interest rate caps are also used to offset the risk of upward interest rate
movement on adjustable rate mortgages and other products with imbedded caps as
well as to reduce the risk that interest rate spreads narrow on prime based
products. Gains or losses are used to adjust the basis of the related asset or
liability and interest differentials are adjustments of the related interest
income or expense.
In connection with anticipated sales of longer term assets acquired through
merger or generated in the loan origination process, the Corporation uses
interest rate swaps, rate locks and option agreements to reduce interest rate
sensitivity as the assets are readied for sale. Hedge gains or losses are used
to adjust the basis of the assets held for sale.
Derivative financial instruments used in the management of interest rate risk at
December 31, 1996 are summarized by category in the table on page 28. A summary
of interest rate swap contracts categorized by whether the Corporation receives
or pays fixed rates and stratified by repricing or maturity date is on page 31.
Foreign currency derivatives used for hedging activities have not had a material
impact on income or liquidity of the Corporation for any of the years presented.
72
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS, COMMITMENTS AND
CONTINGENT LIABILITIES - continued
Derivative Financial Instruments Held or Issued for Trading Purposes
In its business of providing risk management services for its customers, the
Corporation purchases and sells certain derivatives including interest rate
swaps, caps and floors. In addition, as part of its international business, the
Corporation enters into foreign exchange contracts on behalf of customers.
These contracts are matched against forward sale or purchase contracts.
Customer related derivative financial instrument transactions are generally
marked to market and any gains or losses are recorded in the income statement.
The Corporation also holds derivatives in connection with its securities trading
activities and, at times, as a position taken in the expectation of profiting
from favorable movements in interest rates. These products include tender
option bonds and Treasury float contracts. Included in the income statement are
trading revenues from derivatives of $29,242 of which $22,557 represents net
foreign exchange gains included in fees for international services.
Customer and trading related derivative financial instruments at December 31,
1996 and 1995 are summarized by type of instrument in the table on page 33.
The following is a summary of off-balance sheet commitments and derivative
financial instruments as of December 31, 1996 and 1995, including fair values.
See Note 3 for a discussion of fair value.
<TABLE>
<CAPTION>
1996 1995
------------------------- --------------------------
Notional Fair Notional Fair
or Value or Value
Contractual of Asset Contractual of Asset
Amount (Liability) Amount (Liability)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Standby letters of credit, net of participations (a)...... $ 1,630,621 $(16,306) $ 1,548,551 $(14,502)
Commercial letters of credit.............................. 1,262,593 (12,625) 1,324,714 (13,157)
Commitments to extend credit (b).......................... 15,396,553 (21,204) 14,565,636 (16,135)
Unused commitments under credit card lines................ 4,173,013 - 3,872,641 -
When-issued securities (c):
Commitments to purchase................................ 1,770 - 500 -
Commitments to sell.................................... 75,120 (140) 145,000 (1,411)
Commitments to purchase/sell whole mortgage loans and
securities (c):
Commitments to purchase................................ 17,280 30 109,714 2,071
Commitments to sell.................................... 7,965 (70) 47,259 (1,738)
Mortgage loans sold and loan servicing acquired with
recourse (d)............................................ 361,410 (9,637) 434,628 (12,260)
Interest rate futures contracts (e):
Commitments to purchase................................ 4,489,800 2,781 621,000 658
Commitments to purchase foreign and U.S. currencies (f).. 1,766,122 (488) 1,695,148 1,567
Interest rate swaps, notional principal amounts (g)....... 9,850,708 67,673 9,945,840 206,186
Interest rate caps and floors (h):
Written................................................ 908,799 (2,842) 847,323 (1,229)
Purchased.............................................. 2,039,331 17,383 1,673,023 25,021
Tender option bonds (i)................................... 148,711 5,976 208,103 4,995
Treasury float contracts (j).............................. 270,358 682 623,738 884
Other derivatives......................................... 597,261 5,644 174,674 645
</TABLE>
73
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS, COMMITMENTS AND
CONTINGENT LIABILITIES - continued
(a) Standby letters of credit ("SBLC") are used in various transactions to
enhance the credit standing of the Corporation's customers and are
subjected to the same risk, credit review and approval process as loans.
SBLC's are irrevocable assurances that the Corporation will make payment in
the event that a customer cannot perform its contractual obligations to
third parties.
(b) Commitments to extend credit represent the Corporation's obligation to fund
various types of loans, including home equity lines, lines of credit,
revolving lines of credit and other types of commitments.
(c) The Corporation has commitments to purchase/sell mortgage-backed securities
or loans with delivery at a future date but typically within 120 days. The
fair value of these instruments is affected by interest rates. In a
declining interest rate environment, commitments to sell mortgage-backed
securities or loans will decline in value. In a rising interest rate
environment, commitments to buy mortgage-backed securities or loans will
increase in value.
Forward agreements to sell securities are used in transactions with
municipalities that generally have a debt payment due in the future. Under
these agreements, the Corporation agrees to deliver primarily United States
Treasury securities that will mature on or before the required payment
date. The type and associated interest rate of these securities is
established when the agreement is entered. The primary risk associated with
forward agreements is interest rate risk to the extent the required
securities have not been purchased. If interest rates fall, securities
yielding the higher agreed upon fixed rate will be more expensive for the
Corporation to purchase.
Included in when-issued securities and commitments to purchase/sell whole
mortgage loans and securities are customer and trading-related products
with a notional value of $102,135 and $223,873 at December 31, 1996 and
1995, respectively.
(d) The Corporation originates and sells residential mortgage loans as part of
various mortgage-backed security programs sponsored by the United States
government agencies or government-sponsored agencies, such as the
Government National Mortgage Association, Federal Home Loan Mortgage
Corporation and the Federal National Mortgage Association. Certain sales
and other servicing acquired are subject to recourse provisions in the
event of default by the borrower. The Corporation provides for potential
losses under these recourse provisions by establishing reserves at the time
of sale and evaluates the adequacy of these reserves on an ongoing basis.
(e) Exchange traded futures contracts represent agreements to exchange dollar
amounts at a specified future date for interest rate differentials between
an agreed interest rate and a reference rate, computed on a notional
amount. Credit and market risk exist with respect to these instruments.
Exchange traded futures contracts entail daily cash settlement; therefore,
the credit risk amount represents a one-day receivable.
(f) Commitments to purchase foreign and U.S. currencies are primarily executed
for the needs of customers. These foreign exchange contracts are
structured similar to interest rate futures and forward contracts. The
risk associated with a foreign exchange contract arises from the
counterparty's ability to make payment at settlement and that the value of
a foreign currency might change in relation to the U.S. dollar. The
Corporation's exposure, if any, to counterparty failure equals the current
market value of the contract, which at December 31, 1996 and 1995 was
$27,962 and $16,434, respectively. Included in fees for international
services are net foreign exchange gains of $22,557, $22,943, and $19,783
for the years ended December 31, 1996, 1995 and 1994, respectively.
(g) Interest rate swaps generally represent the contractual exchange of fixed
and variable rate interest payments based on a notional principal amount
and an interest reference rate. Credit risk exists with respect to these
instruments arising from the possible failure of the counterparty to make
required payments on those contracts which are favorable to the
Corporation. The Corporation's exposure to counterparty failure equals the
current replacement cost of the contract. At December 31, 1996 and 1995,
the replacement cost of the Corporation's interest rate swap contracts was
$118,929 and $225,140, respectively. The risk of counterparty failure is
controlled by limiting transactions to an approved list of counterparties
and requiring collateral in certain instances. Net cash received on
interest rate swaps during 1996 and 1995 totaled $68,103 and $7,493,
respectively.
74
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS, COMMITMENTS AND
CONTINGENT LIABILITIES - continued
(h) Interest rate caps and floors are written by the Corporation to enable
customers to transfer, modify or reduce their interest rate risk. Interest
rate caps and floors are similar to interest rate swaps except that
payments are made only if current interest rates move above or below a
predetermined rate. The risk associated with interest rate caps and floors
is an unfavorable change in interest rates. As a writer of interest rate
caps and floors, the Corporation receives a premium in exchange for bearing
the risk of an unfavorable change in interest rates. The Corporation
generally reduces risk by entering into offsetting cap and floor positions
that essentially counterbalance each other. The Corporation also enters
interest rate caps to offset the risk of upward interest rate movement on
assets with embedded caps as well as to limit spread risk. As a purchaser
of interest rate caps, the Corporation pays a premium in exchange for the
right to receive payments if interest rates rise above predetermined
levels. The Corporation has also purchased interest rate floors in which
the Corporation has paid a fee for the right to receive payments if rates
fall below a predetermined level. Similar to interest rate swaps, credit
risk exists with respect to the possible failure of the counterparty to
make required payments on those contracts which are favorable to the
Corporation. Exposure to counterparty failure equals the current
replacement cost of the contract which totaled $17,383 and $26,384,
respectively, at December 31, 1996 and 1995.
(i) Tender option bonds are instruments associated with municipalities. A
municipality generally issues a tax-free, fixed rate, long-term security in
order to finance the origination of single family residential mortgages.
The municipality enters into a tender option bond program with the
Corporation, which converts the fixed rate long-term instrument into a
variable rate short-term product.
(j) A Treasury float contract is created because a municipality, which has
defeased a bond issue with government securities, has a mismatch in the
timing of the maturity of the securities and the date the funds are needed
to pay the debt service. The Corporation will pay an up-front fee for the
right to sell government securities to the municipality, generally at par.
The Corporation retains any profit between the sales price and the price at
which the Corporation acquired the securities.
Contingent Liabilities
In the normal course of business, the Corporation and its subsidiaries are
subject to numerous pending and threatened legal actions and proceedings, some
for which the relief or damages sought are substantial. Management does not
believe the outcome of these actions and proceedings will have a materially
adverse effect on the consolidated financial position of the Corporation.
75
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
16. PROVISION FOR INCOME TAXES
The provision for income taxes for the years ended December 31, 1996, 1995, and
1994 consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal.............................. $344,142 $303,647 $158,771
State................................ 20,401 24,134 19,683
-------- -------- --------
Total domestic.................. 364,543 327,781 178,454
Foreign.............................. 12,121 8,240 5,558
-------- -------- --------
Total current................... 376,664 336,021 184,012
Deferred Federal and state expense...... 9,156 28,420 41,847
-------- -------- --------
Total provision for income taxes $385,820 $364,441 $225,859
======== ======== ========
</TABLE>
The significant components of the Corporation's deferred tax assets and
liabilities at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses............... $261,180 $241,487
Postretirement and postemployment
benefits............................... 57,191 54,127
Reserves................................ 56,489 54,779
Other................................... 77,181 70,928
-------- --------
Total deferred tax assets.............. 452,041 421,321
-------- --------
Deferred tax liabilities:
Auto leasing portfolio.................. 142,196 119,894
FAS 115 fair value accounting........... 14,298 15,596
Partnership investments................. 3,781 3,980
Tax over book depreciation.............. 38,446 30,626
Affiliate income........................ 32,873 30,404
Other................................... 71,802 59,405
-------- --------
Total deferred tax liabilities......... 303,396 259,905
-------- --------
Net deferred tax assets.................. $148,645 $161,416
======== ========
</TABLE>
At December 31, 1996, cumulative deductible temporary differences related to the
deferred tax asset are approximately $1,292,000. Cumulative taxable temporary
differences related to deferred tax liabilities at December 31, 1996 are
estimated at $867,000.
At December 31, 1996, the Corporation has determined that it is not required to
establish a valuation allowance for the deferred tax asset since it is more
likely than not that the deferred tax asset of $452,041 will be realized
principally through carryback to taxable income in prior years, future reversals
of existing taxable temporary differences, future taxable income and to a
lesser extent, tax planning strategies. The Corporation's conclusion that it is
"more likely than not" that the deferred tax asset will be realized is based on
a history of growth in earnings and the prospects for continued growth,
including an analysis of potential uncertainties that may affect future
operating results. The Corporation will continue to review the tax criteria of
"more likely than not" for the recognition of deferred tax assets on a quarterly
basis.
76
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
16. PROVISION FOR INCOME TAXES - continued
The consolidated effective tax rates are reconciled to the statutory rate as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ------ -----
<S> <C> <C> <C>
Statutory rate.................................... 35.0% 35.0% 35.0%
Difference resulting from:
Tax-exempt income............................... (1.6) (2.0) (3.6)
State, local and foreign income tax............. 1.6 1.5 1.9
Other, net...................................... 2.3 1.2 1.0
---- ----- ----
Effective tax rate................................ 37.3% 35.7 % 34.3%
==== ===== ====
</TABLE>
Foreign earnings of certain subsidiaries would be taxed only upon their transfer
to the United States. No transfers or dividends are contemplated at this time.
Taxes payable upon remittance of such accumulated earnings of $21,323 at
December 31, 1996 would approximate $7,065.
Taxes, other than income taxes, included in other operating expenses for the
years ended December 31, 1996, 1995 and 1994 are $101,109, $105,913 and
$104,805, respectively.
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents summarized quarterly financial data of the Corporation,
which, in the opinion of management, reflects all adjustments (comprising only
normal recurring accruals) necessary for a fair presentation:
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------------------
Dec. 31 Sept. 30 June 30 March 31
------- -------- ------- --------
1996
- ----
<S> <C> <C> <C> <C>
Interest income....................... $835,649 $823,082 $815,755 $823,718
======== ======== ======== ========
Interest expense...................... $298,561 $282,735 $282,360 $293,064
======== ======== ======== ========
Net interest income................... $537,088 $540,347 $533,395 $530,654
======== ======== ======== ========
Provision for losses on loans......... $ 40,000 $ 40,000 $110,000(a) $ 38,767
======== ======== ======== ========
Securities gains...................... $ 4,036 $ 31,135 $ 17,393 $ 6,948
======== ======== ======== ========
Net income............................ $195,546 $196,857 $ 79,597(a) (b) $177,144
======== ======== ======== ========
Net income per common share........... $0.91 $0.89 $0.36(a) (b) $0.81
======== ======== ======== ========
Average common shares
outstanding.......................... 215,866 220,409 219,478 219,512
======== ======== ======== ========
Common Stock Price Information:
High................................. $ 55 3/8 $ 44 $ 43 1/8 $ 44
Low.................................. 42 3/4 35 1/2 35 3/4 36 1/8
Quarter-end.......................... 51 7/8 43 1/4 38 1/2 42 3/8
1995
- ----
Interest income....................... $868,521 $871,164 $884,807 $850,588
======== ======== ======== ========
Interest expense...................... $322,095 $329,592 $337,203 $319,265
======== ======== ======== ========
Net interest income................... $546,426 $541,572 $547,604 $531,323
======== ======== ======== ========
Provision for losses on loans......... $ 38,225 $ 38,050 $ 34,661 $ 33,066
======== ======== ======== ========
Securities gains...................... $ 5,729 $ 2,230 $ 5,512 $ 18,004
======== ======== ======== ========
Net income............................ $192,145 $194,712 $158,150 (c) $110,169 (c)
======== ======== ======== ========
Net income per common share........... $0.87 $0.88 $0.71 (c) $0.49 (c)
======== ======== ======== ========
Average common shares
outstanding.......................... 219,915 220,718 222,440 226,091
======== ======== ======== ========
Common Stock Price Information:
High................................. $ 40 1/8 $ 38 7/8 $ 36 $ 33
Low.................................. 34 5/8 34 1/4 30 1/2 25 5/8
Quarter-end.......................... 37 7/8 36 5/8 34 5/8 32
- -------------------------------
</TABLE>
(a) Includes a provision for loan losses of $70.0 million, $45.5 million after-
tax or $0.20 per share, related to the Meridian acquisition.
(b) Includes net restructuring and merger-related charges of $139.7 million,
$105.3 million after-tax or $0.48 per share, primarily recorded in the
second quarter and related to costs associated with the Meridian
acquisition.
(c) Includes restructuring charges of $110.0 million pre-tax, $70.0 million
after-tax or $0.31 per share, recorded by CoreStates, and $32.0 million
pre-tax, $20.8 million after-tax or $0.09 per share, recorded by Meridian
related to corporate-wide process redesigns in the first and second
quarters, respectively.
77
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
18. JOINT VENTURE
In December 1992, the Corporation entered into a joint venture with three other
banking companies creating Electronic Payment Services, Inc. ("EPS"). The joint
venture combines the partners' separate consumer electronic transaction
processing businesses and provides automated teller machine ("ATM") and
electronic point-of-sale ("POS") processing services. The Corporation
contributed to EPS its wholly-owned subsidiaries of Money Access Service Inc.
("MAC"), a regional ATM network, and BUYPASS Corporation, a third-party
processor of electronic POS transactions.
At the formation of EPS, the Corporation had equal ownership with two partners
in the joint venture, each with 31%. The fourth partner owned 7%. As part of
the 1992 transaction, the Corporation received a cash payment of $79,350 and
$245,400 of EPS 5% cumulative redeemable preferred stock. The exchange of
assets involved in the transaction resulted in a 1992 pre-tax gain to the
Corporation of $41,072, $25,670 after-tax. The exchange also generated a
deferred gain of approximately $138,000.
In December 1993, the Corporation and EPS mutually agreed to enter into a
recapitalization of EPS involving the EPS preferred stock held by the
Corporation. In exchange for substantially all of the preferred stock, the
Corporation received from EPS a ten-year 6.45% note providing for equal
principal payments over the life of the note. The recapitalization did not
affect the amount of deferred gain, but changed the timing of deferred gain
income recognition from a five-year period beginning in 1996 to a ten-year
period which began in 1994.
On March 27, 1995, EPS added a new partner and increased the ownership interests
of an existing partner to that of a full partner, resulting in a decrease in the
Corporation's share of ownership from 31% to 20%. As a direct result of this
change in ownership interests, the Corporation recognized a pre-tax gain of
$19,000, $11,800 after-tax or $0.05 per share, in 1995. Included in the pre-tax
gain amount was $4,000 related to the acceleration of deferred gain recognition.
The Corporation's investment in EPS at December 31, 1996, net of $104,000
deferred gain, is $65,304 and is included in other assets. "Income from
investment in EPS, Inc.", which is included in non-interest income, reflects the
Corporation's share in EPS net income, interest income on the 6.45% note and
amortization of the deferred gain.
78
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
19. RESTRUCTURING AND MERGER-RELATED CHARGES
A summary of restructuring and merger-related charges for the years ended
December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Meridian and United Counties merger-related
restructuring charges.............................. $161,598 $ 10,000
Meridian merger-related implementation costs........ 29,019 -
Process redesign restructuring charges.............. - 142,000
Gains on sales of branches.......................... (43,064) (3,988)
Pension curtailment gains........................... (7,851) (9,412)
-------- --------
Total............................................ $139,702 $138,600
======== ========
</TABLE>
In 1996, the Corporation recorded merger-related restructuring charges of
$161,598, $120,150 after-tax or $0.55 per share, in connection with the
acquisitions of Meridian and United Counties. The charges included direct and
incremental costs associated with these acquisitions. The components of the
merger-related restructuring charges were as follows:
<TABLE>
<CAPTION>
Requiring 1996
Cash Cash
Provision Outflow Outflow
--------- --------- ----------
<S> <C> <C> <C>
Severance costs........................... $ 70,469 $ 70,469 $33,939
Branch closing costs...................... 33,469 15,102 3,815
Office reconfiguration costs.............. 19,059 2,792 21
Merger transaction costs.................. 14,624 14,624 13,328
System consolidation writedowns........... 6,391 - -
Miscellaneous............................. 17,586 17,593 9,634
-------- -------- -------
Total................................... $161,598 $120,580 $60,737
======== ======== =======
</TABLE>
Restructuring and merger-related charges in 1996 also included $29,019, $18,263
after-tax or $0.07 per share, of implementation costs that were incurred in the
process of consolidating Meridian and United Counties businesses and operations.
The Corporation recorded restructuring credits of $50,915, $33,096 after-tax or
$0.14 per share and $13,400, $8,549 after-tax or $0.03 per share in 1996 and
1995, respectively, related to gains on the curtailment of pension benefits
associated with employees displaced during 1996 and 1995 and gains on the sale
of branches which were sold as a result of consolidating the Meridian and United
Counties branches and the process redesigns.
Upon consummation of the merger, the Corporation recorded a $70 million
provision for loan losses in connection with a change in strategic direction
related to Meridian's problem assets and to conform its consumer lending charge-
off policies to those of the Corporation.
In 1995, the Corporation recorded restructuring charges of $142,000, $90,800
after-tax or $0.40 per share, in connection with process redesigns commenced
during that year. The objectives of the process redesigns were: (i) to enhance
customer focus; (ii) to accelerate "cultural changes" which were already in
progress; and (iii) to improve productivity. The charges included direct and
incremental costs associated with the process redesigns. The components of the
process redesign restructuring charges were as follows:
<TABLE>
<CAPTION>
Requiring Cash
Cash Outflow
Provision Outflow to Date
---------- --------- ---------
<S> <C> <C> <C>
Severance costs............................... $ 87,900 $ 87,900 $74,944
Office reconfiguration and branch
closing costs.............................. 44,300 16,600 3,881
Outplacement costs............................ 2,500 2,500 2,002
Miscellaneous................................. 7,300 5,300 4,464
-------- -------- -------
Total...................................... $142,000 $112,300 $85,291
======== ======== =======
</TABLE>
79
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
19. RESTRUCTURING AND MERGER-RELATED CHARGES - continued
The following table summarizes the activity in the restructuring and merger-
related accrual for the year ended December 31, 1996:
<TABLE>
<CAPTION>
1996
----------
<S> <C>
Balance at beginning of year..................... $ 82,772
Provision charged against income................. 161,598
Cash outflow..................................... (100,258)
Writedowns of assets............................. (35,907)
---------
Balance at December 31,.......................... $ 108,205
=========
</TABLE>
20. FINANCIAL STATEMENTS OF THE PARENT COMPANY
<TABLE>
<CAPTION>
STATEMENT OF INCOME Year Ended December 31,
-------------------------------------------
1996 1995 1994
------------- -------------- ------------
<S> <C> <C> <C>
REVENUES
- --------
Dividends from subsidiaries:
Banks...................................................... $657,744 $373,023 $389,733
Other subsidiaries......................................... 27,217 91,917 27,575
-------- -------- --------
Total dividends from subsidiaries........................ 684,961 464,940 417,308
Management fees and other income from subsidiaries............ 178,179 190,027 186,092
Securities gains (losses)..................................... (22) 16,343 259
Other income.................................................. 3,054 3,241 1,483
-------- -------- --------
Total revenues........................................... 866,172 674,551 605,142
-------- -------- --------
EXPENSES
- --------
Interest on:
Funds borrowed............................................. 5,606 19,685 11,613
Long-term debt............................................. 22,843 21,578 13,137
-------- -------- --------
Total interest expense................................. 28,449 41,263 24,750
Other operating expenses...................................... 245,836 219,463 210,629
-------- -------- --------
Total expenses........................................... 274,285 260,726 235,379
-------- -------- --------
Income before income tax benefit and equity in
undistributed income of subsidiaries....................... 591,887 413,825 369,763
Income tax benefit............................................ (14,911) (11,977) (15,357)
-------- -------- --------
Income before equity in
undistributed income of subsidiaries......................... 606,798 425,802 385,120
Equity in undistributed income (excess dividends) -------- -------- --------
of subsidiaries:
Banks.................................................... (52,497) 203,909 (9,827)
Other subsidiaries....................................... 94,843 25,465 57,913
-------- -------- --------
Total equity in
undistributed income of
subsidiaries........................................ 42,346 229,374 48,086
-------- -------- --------
NET INCOME.................................................... $649,144 $655,176 $433,206
======== ======== ========
</TABLE>
80
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
20. FINANCIAL STATEMENTS OF THE PARENT COMPANY - continued
<TABLE>
<CAPTION>
BALANCE SHEET December 31,
-------------------------
1996 1995
------------ -----------
<S> <C> <C>
ASSETS
- ------
Cash........................................... $ 1,374 $ 1,340
Time deposits.................................. 887 -
Investment-securities available-for-sale....... 97,786 148,009
Investments and receivables-subsidiaries:
Investments in subsidiaries at equity
in underlying net assets:
Banks...................................... 3,389,148 3,769,779
Other subsidiaries......................... 558,062 427,451
---------- ----------
Total investments in subsidiaries......... 3,947,210 4,197,230
Receivables - subsidiaries................... 40,814 108,827
---------- ----------
Total investments and
receivables-subsidiaries................. 3,988,024 4,306,057
Other assets................................... 80,039 76,453
---------- ----------
Total assets.............................. $4,168,110 $4,531,859
========== ==========
LIABILITIES
- -----------
Funds borrowed - subsidiaries.................. $ - $ 177,827
Dividends payable and other liabilities........ 214,925 143,575
Long-term debt................................. 257,491 334,892
---------- ----------
Total liabilities......................... 472,416 656,294
---------- ----------
SHAREHOLDERS' EQUITY
- --------------------
Total shareholders' equity................ 3,695,694 3,875,565
---------- ----------
Total liabilities and
shareholders' equity..................... $4,168,110 $4,531,859
========== ==========
</TABLE>
The Corporation has guaranteed certain borrowings of its subsidiaries at
December 31, 1996 in the amount of $3,259,181, which includes $675,181 for
commercial paper.
The maturities for parent company long-term debt for the years ending December
31, 1997 through 2001 are: $1,475; $1,607; $1,751; $1,908; and $697,
respectively.
81
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
20. FINANCIAL STATEMENTS OF THE PARENT COMPANY - continued
<TABLE>
<CAPTION>
Statement of Cash Flows
Year Ended December 31,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income....................................................... $ 649,144 $ 655,176 $ 433,206
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed income of subsidiaries......................... (42,346) (229,374) (48,086)
Securities (gains) losses.................................... 22 (16,343) (259)
Deferred income tax expense (benefit)........................ 180 (785) (3,895)
Net (increase) decrease in other assets...................... (6,969) 24,265 6,360
Net increase (decrease) in other liabilities................. 8,454 (22,761) 13,921
Other, net................................................... 7,288 7,840 (8,865)
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES..................... 615,773 418,018 392,382
---------- ---------- ----------
INVESTING ACTIVITIES
Net capital returned from (contributed to) subsidiaries.......... 270,226 190,900 (99,903)
(Increase) decrease in receivables from subsidiaries............. 107,069 (3,593) 53,862
Purchases of investment securities............................... (707,008) (170,988) (202,424)
Proceeds from maturities and sales of investment
securities...................................................... 717,536 118,483 188,028
Purchase of Germantown Savings Bank.............................. - - (108,061)
Other, net....................................................... - (1,380) (1,428)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES.................................................... 387,823 133,422 (169,926)
---------- ---------- ----------
FINANCING ACTIVITIES
Issuance (repayment) of funds borrowed........................... - (75,000) 75,000
Retirement of long-term debt..................................... (77,401) (1,471) (45,568)
Proceeds from issuance of long-term debt......................... - 149,877 -
Net increase (decrease) in financing from and due to
subsidiaries.................................................... (115,498) (94,054) 270,587
Cash dividends paid.............................................. (328,114) (286,565) (245,962)
Purchases of treasury stock...................................... (533,932) (335,528) (228,963)
Purchases of ESOP shares......................................... - - (35,568)
Repurchase and retirement of common stock........................ (57,703) (17,134) (24,888)
Common stock issued under employee benefit plans................. 87,726 99,011 18,710
Funds transferred to Trust for future ESOP purchases............. - - (24,432)
Other, net....................................................... 21,360 6,777 11,294
---------- ---------- ----------
NET CASH USED IN FINANCING ACTIVITIES.............................. (1,003,562) (554,087) (229,790)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS.................... 34 (2,647) (7,334)
Cash and due from banks at January 1,............................. 1,340 3,987 11,321
---------- ---------- ----------
CASH AND DUE FROM BANKS AT DECEMBER 31,........................... $ 1,374 $ 1,340 $ 3,987
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest....................................................... $ 25,267 $ 40,745 $ 24,500
========== ========== ==========
Income taxes................................................... $ - $ 43 $ (626)
========== ========== ==========
</TABLE>
82
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES Page 1 of 2
SUPPLEMENTAL FINANCIAL DATA
CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND
RATES
<TABLE>
<CAPTION>
1996
--------------------------------
Average Income/
balance Rate expense
--------- ------ ---------
INTEREST EARNING ASSETS (000,000) (000)
<S> <C> <C> <C>
Time deposits, principally Eurodollars (a)....................... $ 2,163 5.68% $ 122,752
Investment securities (b):
U.S. Government................................................. 3,262 6.02 196,511
State and municipal............................................. 497 8.05 40,008
Other........................................................... 903 5.95 53,723
--------- ----------
Total investment securities................................ 4,662 6.23 290,242
--------- ----------
Federal funds sold and securities purchased
under agreements to resell................................... 332 5.71 18,966
Trading account securities....................................... 112 6.77 7,581
Loans (b)(c)(d):
Domestic:
Commercial, industrial and other.............................. 13,398 9.03 1,209,870
Real estate................................................... 10,094 8.49 857,105
Consumer...................................................... 4,536 11.67 529,503
Financial institutions........................................ 847 6.45 54,648
Factoring receivables......................................... 497 10.09 50,156
Lease financing............................................... 1,180 8.05 95,018
Foreign......................................................... 1,387 6.39 88,563
--------- ----------
Total loans, net of discounts............................. 31,939 9.03 2,884,863
--------- ----------
Total interest earning assets (d)......................... $ 39,208 8.48 3,324,404
========= ----- ----------
FUNDING SOURCES
Interest bearing liabilities (b):
Deposits in domestic offices (e):
Commercial.................................................... $ 601 5.13 30,857
NOW accounts.................................................. 1,439 1.14 15,112
Money Market Accounts......................................... 7,585 2.64 199,566
Consumer savings.............................................. 4,563 1.77 80,972
Consumer certificates......................................... 9,067 5.15 467,099
Time deposits of overseas branches
and subsidiaries.............................................. 1,034 4.66 48,174
--------- ----------
Total interest bearing deposits........................... 24,289 3.49 841,780
--------- ----------
Short-term funds borrowed:
Federal funds purchased and securities sold
under agreements to repurchase.............................. 1,622 5.07 82,214
Commercial paper.............................................. 962 5.44 52,353
Other......................................................... 374 4.96 18,562
--------- ----------
Total short-term funds borrowed........................... 2,958 5.18 153,129
--------- ----------
Long-term debt (b)............................................... 2,536 6.38 161,811
--------- ----------
Total interest bearing liabilities........................ 29,783 3.88 1,156,720
Portion of non-interest bearing funding sources.................. 9,425
--------- ----------
Total funding sources..................................... $ 39,208 2.95 1,156,720
========= ----- ----------
Net interest income and net interest margin...................... 5.53% $2,167,684
===== ==========
<CAPTION>
1995
--------------------------------
Average Income/
balance Rate expense
--------- ------ ---------
INTEREST EARNING ASSETS (000,000) (000)
<S> <C> <C> <C>
Time deposits, principally Eurodollars (a)....................... $ 1,929 6.32% $ 121,993
Investment securities (b):
U.S. Government................................................. 4,946 5.87 290,474
State and municipal............................................. 665 8.42 56,018
Other........................................................... 819 6.15 50,366
--------- ----------
Total investment securities................................ 6,430 6.17 396,858
--------- ----------
Federal funds sold and securities purchased
under agreements to resell................................... 322 6.12 19,695
Trading account securities....................................... 280 7.42 20,785
Loans (b)(c)(d):
Domestic:
Commercial, industrial and other.............................. 12,526 9.52 1,192,478
Real estate................................................... 11,283 9.09 1,025,924
Consumer...................................................... 4,238 11.11 470,771
Financial institutions........................................ 715 7.04 50,307
Factoring receivables......................................... 577 10.65 61,442
Lease financing............................................... 1,094 8.16 89,290
Foreign......................................................... 834 7.05 58,807
--------- ----------
Total loans, net of discounts............................. 31,267 9.43 2,949,019
--------- ----------
Total interest earning assets (d)......................... $ 40,228 8.72 3,508,350
========= ----- ----------
FUNDING SOURCES
Interest bearing liabilities (b):
Deposits in domestic offices (e):
Commercial.................................................... $ 669 5.58 37,321
NOW accounts.................................................. 3,377 1.51 46,724
Money Market Accounts......................................... 6,023 3.29 197,431
Consumer savings.............................................. 5,040 2.28 114,700
Consumer certificates......................................... 9,132 5.39 492,610
Time deposits of overseas branches
and subsidiaries.............................................. 1,089 4.80 52,261
--------- ----------
Total interest bearing deposits........................... 25,330 3.76 941,047
--------- ----------
Short-term funds borrowed:
Federal funds purchased and securities sold
under agreements to repurchase.............................. 2,203 5.68 125,117
Commercial paper.............................................. 1,051 5.94 62,459
Other......................................................... 498 5.33 26,543
--------- ----------
Total short-term funds borrowed........................... 3,752 5.71 214,119
--------- ----------
Long-term debt (b).............................................. 2,262 6.76 152,989
--------- ----------
Total interest bearing liabilities........................ 31,344 4.17 1,308,155
Portion of non-interest bearing funding sources.................. 8,884
--------- ----------
Total funding sources..................................... $ 40,228 3.25 1,308,155
========= ----- ----------
Net interest income and net interest margin...................... 5.47% $2,200,195
===== ==========
<CAPTION>
1994
--------------------------------
Average Income/
balance Rate expense
--------- ------ ---------
INTEREST EARNING ASSETS (000,000) (000)
<S> <C> <C> <C>
Time deposits, principally Eurodollars (a)....................... $ 1,623 4.37% $ 70,996
Investment securities (b):
U.S. Government................................................. 5,498 5.48 301,515
State and municipal............................................. 778 7.97 62,027
Other........................................................... 1,087 5.54 60,252
--------- ----------
Total investment securities................................ 7,363 5.76 423,794
--------- ----------
Federal funds sold and securities purchased
under agreements to resell................................... 289 4.38 12,652
Trading account securities....................................... 139 6.78 9,419
Loans (b)(c)(d):
Domestic:
Commercial, industrial and other.............................. 11,164 8.30 927,082
Real estate................................................... 11,978 7.95 951,681
Consumer...................................................... 4,117 10.44 429,832
Financial institutions........................................ 626 8.00 50,106
Factoring receivables......................................... 587 9.95 58,389
Lease financing............................................... 1,041 8.45 87,982
Foreign......................................................... 597 5.39 32,155
--------- ----------
Total loans, net of discounts............................. 30,110 8.43 2,537,227
--------- ----------
Total interest earning assets (d)......................... $ 39,524 7.73 3,054,088
========= ----- ----------
FUNDING SOURCES
Interest bearing liabilities (b):
Deposits in domestic offices (e):
Commercial.................................................... $ 580 4.15 24,061
NOW accounts.................................................. 3,540 1.15 37,384
Money Market Accounts......................................... 6,386 2.27 144,475
Consumer savings.............................................. 5,509 1.87 103,142
Consumer certificates......................................... 7,993 4.28 341,843
Time deposits of overseas branches
and subsidiaries.............................................. 831 3.56 29,602
--------- ----------
Total interest bearing deposits........................... 24,839 2.77 680,507
--------- ----------
Short-term funds borrowed:
Federal funds purchased and securities sold
under agreements to repurchase.............................. 2,092 4.17 87,276
Commercial paper.............................................. 757 4.24 32,089
Other......................................................... 587 5.15 30,253
--------- ----------
Total short-term funds borrowed........................... 3,436 4.35 149,618
--------- ----------
Long-term debt (b).............................................. 2,040 5.71 116,419
--------- ----------
Total interest bearing liabilities........................ 30,315 3.12 946,544
Portion of non-interest bearing funding sources.................. 9,209
--------- ----------
Total funding sources..................................... $ 39,524 2.40 946,544
========= ----- ----------
Net interest income and net interest margin...................... 5.33% $2,107,544
===== ==========
</TABLE>
- -------------
(a) Yields and income on time 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.
83
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES Page 2 of 2
SUPPLEMENTAL FINANCIAL DATA
CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND
RATES
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------- --------------------------------- ------------------------------
Average Income/ Average Income/ Average Income/
balance Rate expense balance Rate expense balance Rate expense
--------- ---- ------- --------- ---- ------- --------- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(000,000) (000) (000,000) (000) (000,000) (000)
NON-INTEREST EARNING ASSETS
Cash......................... $ 2,845 $ 2,779 $ 2,982
Allowance for loan losses.... (701) (685) (692)
Other assets................. 2,442 2,383 2,017
--------- --------- ---------
Total non-interest
earning assets......... $ 4,586 $ 4,477 $ 4,307
========= ========= =========
Total average assets......... $ 43,794 $ 44,705 $ 43,831
========= ========= =========
NON-INTEREST BEARING
FUNDING SOURCES
Demand deposits:
Domestic................... $ 7,699 $ 7,352 $ 7,698
Foreign.................... 379 420 417
Other liabilities............ 2,043 1,847 1,775
Shareholders' equity......... 3,890 3,742 3,626
Non-interest bearing
funding sources used
to fund earning assets...... (9,425) (8,884) (9,209)
--------- --------- ---------
Total net non-interest
bearing funding
sources............. $ 4,586 $ 4,477 $ 4,307
========= ========= =========
SUPPLEMENTARY AVERAGES
Net demand deposits.......... $ 6,241 $ 6,190 $ 6,189
Net Federal funds
purchased and securities
sold under agreements to
repurchase.................. 1,290 4.90% $63,248 1,881 5.60% $105,422 1,803 4.14% $74,624
Certificates of deposit in
domestic offices over
$100,000.................... 1,090 5.17 56,308 1,170 5.69 66,577 1,157 4.03 46,637
Average prime rate........... 8.27 8.84 6.60
</TABLE>
84
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES Page 1 of 2
SUPPLEMENTAL FINANCIAL DATA CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE
EQUIVALENT INCOME/EXPENSE AND RATES
<TABLE>
<CAPTION>
1993 1992
------------------------------------ ----------------------------------------
Average Income/ Average Income/
balance Rate expense balance Rate expense
--------- ------ --------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS (000,000) (000) (000,000) (000)
Time deposits, principally
Eurodollars (a)....................... $ 1,423 3.39% $ 48,214 $ 1,624 4.12% $ 66,939
Investment securities (b):
U.S. Government..................... 6,120 6.09 372,738 5,638 7.13 401,740
State and municipal................. 890 8.26 73,500 856 9.25 79,163
Other............................... 1,023 5.34 54,649 985 7.20 70,874
--------- ---------- --------- ----------
Total investment securities....... 8,033 6.24 500,887 7,479 7.38 551,777
--------- ---------- --------- ----------
Federal funds sold and
securities purchased under
agreements to resell................. 336 3.26 10,959 589 4.32 25,462
Trading account securities............ 150 7.38 11,072 85 5.54 4,706
Loans (b)(c)(d):
Domestic:
Commercial, industrial and other.. 10,135 7.80 790,553 10,032 8.07 810,048
Real estate....................... 12,459 7.78 968,967 12,458 8.37 1,042,828
Consumer.......................... 3,851 10.79 415,390 3,806 11.49 437,279
Financial institutions............ 716 6.15 44,058 847 6.33 53,576
Factoring receivables............. 554 9.62 53,312 486 9.70 47,154
Lease financing................... 897 9.31 83,466 755 9.42 71,090
Foreign............................. 551 5.00 27,565 432 6.51 28,124
--------- ---------- --------- ----------
Total loans, net of discounts..... 29,163 8.17 2,383,311 28,816 8.64 2,490,099
--------- ---------- --------- ----------
Total interest earning assets (d). $ 39,105 7.56 2,954,443 $ 38,593 8.13 3,138,983
========= ----- ---------- ========= ----- ----------
FUNDING SOURCES
Interest bearing liabilities (b):
Deposits in domestic offices (e):
Commercial........................ $ 752 3.97 29,842 $ 1,393 4.85 67,502
NOW accounts...................... 3,343 1.43 43,308 3,020 2.76 75,833
Money Market Accounts............. 6,672 2.01 134,091 6,701 2.74 183,472
Consumer savings.................. 5,269 1.93 101,471 4,594 3.09 141,915
Consumer certificates............. 8,519 4.32 368,122 9,921 5.17 512,792
Time deposits of overseas branches
and subsidiaries.................. 718 2.57 18,453 767 3.74 28,688
--------- ---------- --------- ----------
Total interest bearing deposits... 25,273 2.79 695,287 26,396 3.87 1,010,202
--------- ---------- --------- ----------
Short-term funds borrowed:
Federal funds purchased and
securities sold under agreements to
repurchase......................... 1,951 2.99 58,291 1,712 3.42 58,500
Commercial paper................... 606 3.14 19,051 549 3.72 20,404
Other.............................. 480 4.45 21,347 305 4.22 12,861
--------- ---------- --------- ----------
Total short-term funds
borrowed.................... 3,037 3.25 98,689 2,566 3.58 91,765
--------- ---------- --------- ----------
Long-term debt (b)................... 1,894 5.27 99,837 1,553 6.24 95,889
--------- ---------- --------- ----------
Total interest bearing
liabilities................. 30,204 2.96 893,813 30,515 3.93 1,197,856
Portion of non-interest bearing
funding sources....................... 8,901 8,078
--------- --------- ----------
Total funding sources........ $ 39,105 2.29 893,813 $ 38,593 3.10 1,197,856
========= ----- ---------- ========= ----- ----------
Net interest income and
net interest margin................... 5.27% $2,060,630 5.03% $1,941,127
===== ========== ===== ==========
</TABLE>
(a) Yields and income on time 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.
85
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES Page 2 of 2
SUPPLEMENTAL FINANCIAL DATA
CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND
RATES
<TABLE>
<CAPTION>
1993 1992
----------------------------------- ------------------------------------
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.............................................. $ 2,956 $ 2,784
Allowance for loan losses......................... (641) (659)
Other assets...................................... 2,016 1,994
--------- ---------
Total non-interest earning assets............ $ 4,331 $ 4,119
========= =========
TOTAL AVERAGE ASSETS.............................. $ 43,436 $ 42,712
========= =========
NON-INTEREST BEARING FUNDING SOURCES
Demand deposits:
Domestic........................................ $ 7,646 $ 7,189
Foreign......................................... 369 324
Other liabilities................................. 1,771 1,596
Shareholders' equity.............................. 3,446 3,088
Non-interest bearing funding sources
used to fund earning assets..................... (8,901) (8,078)
--------- ---------
Total net non-interest bearing
funding sources.......................... $ 4,331 $ 4,119
========= =========
Supplementary Averages
Net demand deposits............................... $ 6,194 $ 5,463
Net Federal funds purchased and
securities sold under
agreements to repurchase........................ 1,615 2.93% $47,332 1,123 2.94% $ 33,028
Certificates of deposit in domestic
offices over $100,000........................... 1,346 3.84 51,715 2,189 4.72 103,333
Average prime rate................................ 6.00 6.25
</TABLE>
86
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: Continued
CONDENSED CONSOLIDATED STATEMENT OF INCOME
AND SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
Condensed Consolidated Statement of Income Year Ended December 31,
------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> C>
Interest income and fees................ $3,298,204 $3,475,080 $3,014,559 $2,904,949 $3,086,072
Interest expense........................ 1,156,720 1,308,155 946,544 893,813 1,197,856
---------- ---------- ---------- ---------- ----------
Net interest income................... 2,141,484 2,166,925 2,068,015 2,011,136 1,888,216
Provision for losses on loans........... 228,767 144,002 279,195 189,372 260,809
---------- ---------- ---------- ---------- ----------
Net interest income
after provision for losses
on loans............................ 1,912,717 2,022,923 1,788,820 1,821,764 1,627,407
Non-interest income..................... 899,075 882,222 788,487 832,720 854,051
Non-financial expenses.................. 1,776,828 1,885,528 1,918,242 1,869,544 1,867,602
---------- ---------- ---------- ---------- ----------
Income before income taxes.............. 1,034,964 1,019,617 659,065 784,940 613,856
Provision for income taxes.............. 385,820 364,441 225,859 246,854 187,424
---------- ---------- ---------- ---------- ----------
Income before cumulative
effect of a change in accounting
principle.............................. 649,144 655,176 433,206 538,086 426,432
Cumulative effect of a
change in accounting principle,
net of tax............................. - - - (15,740)(e) (107,715)(e)
---------- ---------- ---------- ---------- ----------
Net income.............................. $ 649,144 $ 655,176 $ 433,206 $ 522,346 $ 318,717
========== ========== ========== ========== ==========
Per common share data:
Income before cumulative
effect of a change in accounting
principle............................ $2.97 (a) $2.95(b) $1.91(c) $2.35 (e) $1.97 (e)
Net income............................ 2.97 (a) 2.95(b) 1.91(c) 2.29 1.47
Dividends paid........................ 1.68 1.36 1.20 1.11 1.00
Dividends declared (d)................ 1.73 1.44 1.24 1.14 1.02
Average common shares outstanding..... 218,812 222,268 226,234 228,580 216,707
Operating Ratios:
Income before cumulative effect of a
change in accounting principle as
a percent of:
Average common shareholders' equity 16.69% (a) 17.51%(b) 11.95% (c) 15.61% 13.81%
Average total assets............... 1.48 (a) 1.47(b) 0.99 (c) 1.24 1.00
Average total shareholders' equity as a
percent of average total assets....... 8.88 8.37 8.27 7.93 7.23
Dividends declared as a percent of
income before cumulative effect of a
change in accounting principle........ 58.25 48.81 64.92 48.51 51.78
Full Time Equivalent Staff.............. 19,114 19,957 22,621 23,569 23,652
</TABLE>
(a) Includes the impact of after-tax net restructuring and merger-related
charges of $0.68 per share, after-tax gains of $0.12 per share on certain
net investment gains, and an after-tax charge of $0.04 per share resulting
from a special assessment on deposits insured under the SAIF. Excluding
the impact of these items, net income per common share was $3.57, return on
average common shareholders' equity was 20.07%, and return on average total
assets was 1.78%.
(b) Includes the impact of after-tax net restructuring charges of $0.37 per
share, merger-related charges of $0.05 per share, after-tax gains of $0.04
per share on the exchange of equity securities, and an after-tax gain of
$0.05 per share related to a change in ownership interests in a joint
venture. Excluding the impact of these items, net income per common share
was $3.28, return on average common shareholders' equity was 19.43%, and
return on average total assets was 1.63%.
(c) Includes the impact of after-tax merger-related charges of $0.74 per share
recorded for the acquisitions of Constellation and Independence. Excluding
the impact of these merger-related charges, per share income before
the cumulative effect of a change in accounting principle was $2.65, return
on average common shareholders' equity was 16.54%, and return on average
total assets was 1.37%.
(d) Cash dividends declared per share for the periods prior to the acquisitions
of Meridian on April 9, 1996, Independence on June 27, 1994 and
Constellation on March 16, 1994 assume that the Corporation would have
declared cash dividends equal to the cash dividends per share actually
declared by the Corporation.
(e) In 1993, the Corporation changed its method of accounting for
post-employment benefits; and in 1992 the Corporation changed its method of
accounting for post-retirement benefits.
87
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: Continued
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
December 31,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks.................. $ 3,462,287 $ 3,662,143 $ 3,024,589 $ 3,187,390 $ 3,282,948
Time deposits, principally Eurodollars... 2,443,154 1,909,260 1,874,066 1,421,317 1,981,443
Federal funds sold....................... 509,694 719,937 923,630 256,221 407,150
Trading account securities............... 122,317 147,218 347,376 43,009 68,053
Investment securities.................... 4,083,224 5,632,232 7,261,905 7,768,755 8,036,613
Loans.................................... 32,777,032 31,714,152 30,755,394 29,838,397 28,524,547
Allowance for loan losses................ (710,327) (670,265) (681,124) (636,915) (620,039)
Due from customers on acceptances........ 738,077 560,707 352,347 342,065 666,351
Premises, equipment and other assets..... 2,068,736 2,321,858 2,189,890 1,988,353 2,344,210
----------- ----------- ----------- ----------- -----------
Total assets..................... $45,494,194 $45,997,242 $46,048,073 $44,208,592 $44,691,276
=========== =========== =========== =========== ===========
LIABILITIES
Deposits:
Domestic:
Non-interest bearing................. $ 9,330,445 $ 8,937,147 $ 8,625,125 $ 8,767,602 $ 8,531,732
Interest bearing..................... 22,986,955 23,883,726 25,023,283 24,298,434 25,506,339
Overseas branches and subsidiaries..... 1,409,756 1,142,947 1,125,997 797,987 781,622
----------- ----------- ----------- ----------- -----------
Total deposits................... 33,727,156 33,963,820 34,774,405 33,864,023 34,819,693
----------- ----------- ----------- ----------- -----------
Short-term funds borrowed................ 2,633,157 3,677,013 3,461,249 2,766,750 2,876,506
Bank acceptances outstanding............. 727,728 549,048 346,239 347,011 668,919
Other liabilities........................ 1,661,162 1,719,697 1,571,985 1,515,718 1,370,861
Long-term debt........................... 3,049,297 2,212,099 2,163,263 2,010,581 1,671,376
----------- ----------- ----------- ----------- -----------
Total liabilities................ 41,798,500 42,121,677 42,317,141 40,504,083 41,407,355
----------- ----------- ----------- ----------- -----------
SHAREHOLDERS' EQUITY
Common................................... 3,695,694 3,875,565 3,730,932 3,704,509 3,283,921
----------- ----------- ----------- ----------- -----------
Total shareholders' equity....... 3,695,694 3,875,565 3,730,932 3,704,509 3,283,921
----------- ----------- ----------- ----------- -----------
Total liabilities and
shareholders' equity............ $45,494,194 $45,997,242 $46,048,073 $44,208,592 $44,691,276
=========== =========== =========== =========== ===========
Book value per common share.............. $17.40 $17.61 $16.23 $16.13 $14.46
====== ====== ====== ====== ======
</TABLE>
88
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: continued
<TABLE>
<CAPTION>
Rate/Volume Analysis Taxable Equivalent Basis
(in thousands)
1996 vs. 1995 1995 vs. 1994
----------------------------------------- -----------------------------------------
Increase (decrease) in interest Increase (decrease) in interest
----------------------------------------- -----------------------------------------
Income/ Change attributable to Income/ Change attributable to
----------------------- ------------------------
expense Volume Rate expense Volume Rate
--------------- ---------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets
- -----------------------
Time deposits, principally
Eurodollars.................. $ 759 $ 14,789 $ (14,030) $ 50,997 $ 13,372 $ 37,625
Investment securities.............. (106,616) (107,831) 1,215 (26,936) (54,103) 27,167
Federal funds sold................. (729) 612 (1,341) 7,043 1,445 5,598
Trading account securities......... (13,204) (12,466) (738) 11,366 9,560 1,806
Loans:
Domestic......................... (96,416) 35,955 (132,371) 387,644 70,798 316,846
Foreign.......................... 32,260 38,953 (6,693) 24,148 12,020 12,128
--------- --------- --------- -------- -------- --------
Total interest income........ (183,946) (29,988) (153,958) 454,262 53,092 401,170
--------- --------- --------- -------- -------- --------
Interest bearing funds
- ----------------------
Deposits:
Domestic......................... (95,180) (21,301) (73,879) 237,881 33,558 204,323
Overseas......................... (4,087) (2,640) (1,447) 22,659 9,185 13,474
Short-term funds borrowed:
Federal funds purchased.......... (42,903) (33,001) (9,902) 37,841 4,629 33,212
Other............................ (18,087) (11,896) (6,191) 26,660 7,882 18,778
Long-term debt..................... 8,822 18,522 (9,700) 36,570 12,676 23,894
--------- --------- --------- -------- -------- --------
Total interest expense....... (151,435) (50,316) (101,119) 361,611 67,930 293,681
--------- --------- --------- -------- -------- --------
Net interest income................ $ (32,511) $ 20,328 $ (52,839) $ 92,651 $(14,838) $107,489
- ------------------- ========= ========= ========= ======== ======== ========
</TABLE>
Notes to Rate/Volume Analysis
Changes in interest income or expense not arising solely as a result of volume
or rate variances are allocated to rate variances due to the interest
sensitivity of consolidated assets and liabilities.
Included in interest income is $70.7 million, $69.8 million and $80.6 million of
loan fees for the years ended 1996, 1995 and 1994, respectively.
Non-performing loans are included in interest earning assets.
The changes in interest expense on domestic deposits attributable to volume and
rate are adjusted by specific reserves as average balances are reduced by such
reserve amounts for purposes of rate calculations.
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.
89
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: Continued
LOAN PORTFOLIO
The following are summaries of certain loan categories, net of unearned
discounts, for the five years ended December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Domestic loans:
Commercial, industrial and other....... $13,906,646 $12,597,470 $11,834,603 $10,707,727 $10,141,267
Real estate loans:
Construction and development.......... 554,924 607,845 599,331 652,940 832,014
Residential........................... 4,676,016 5,648,661 6,148,469 6,329,149 6,404,682
Other, primarily commercial mortgages
and commercial loans secured by
owner-occupied real estate........... 4,541,697 4,712,473 5,059,676 5,165,790 5,056,874
----------- ----------- ----------- ----------- -----------
Total real estate loans............. 9,772,637 10,968,979 11,807,476 12,147,879 12,293,570
----------- ----------- ----------- ----------- -----------
Consumer loans:
Installment........................... 2,870,934 2,912,670 2,686,024 2,727,286 2,578,420
Credit card........................... 1,674,921 1,527,447 1,492,004 1,269,980 1,056,153
----------- ----------- ----------- ----------- -----------
Total consumer loans................ 4,545,855 4,440,117 4,178,028 3,997,266 3,634,573
----------- ----------- ----------- ----------- -----------
Financial institutions................. 1,153,715 961,289 675,047 879,700 795,033
Factoring receivables.................. 411,280 557,272 622,380 555,211 454,244
Lease financing........................ 1,232,213 1,167,356 1,043,932 999,311 800,603
----------- ----------- ----------- ----------- -----------
Total domestic loans............... 31,022,346 30,692,483 30,161,466 29,287,094 28,119,290
=========== =========== =========== =========== ===========
Foreign loans:
Loans to or guaranteed by foreign
banks:
Government owned and central
banks............................... - - - - 257
Other foreign banks.................. 1,369,015 615,166 301,080 332,288 203,572
Commercial and industrial.............. 385,426 406,503 283,535 218,655 201,428
Loans to other financial institutions.. 245 - 9,313 360 -
----------- ----------- ----------- ----------- -----------
Total foreign loans................. 1,754,686 1,021,669 593,928 551,303 405,257
----------- ----------- ----------- ----------- -----------
Total loans....................... $32,777,032 $31,714,152 $30,755,394 $29,838,397 $28,524,547
=========== =========== =========== =========== ===========
</TABLE>
90
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: Continued
Risk Elements
NON-PERFORMING ASSETS
The following represents the Corporation's non-accrual loans, renegotiated loans
and other real estate owned for the five years ended December 31, 1996 (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Non-accrual loans
Domestic............................... $220,770 $223,602 $348,885 $449,340 $713,559
Foreign................................ - - 158 171 3,047
-------- -------- -------- -------- --------
Total non-accrual loans........... 220,770 223,602 349,043 449,511 716,606
-------- -------- -------- -------- --------
Renegotiated loans (a)................. 18 7,202 8,067 66,399 73,041
-------- -------- -------- -------- --------
Total non-performing loans........ 220,788 230,804 357,110 515,910 789,647
-------- -------- -------- -------- --------
Other real estate owned (OREO)......... 24,175 37,502 83,546 109,871 107,494
-------- -------- -------- -------- --------
Total non-performing assets............ $244,963 $268,306 $440,656 $625,781 $897,141
======== ======== ======== ======== ========
Non-performing assets as a
percentage of loans plus OREO........ 0.75% 0.85% 1.43% 2.09% 3.13%
======== ======== ======== ======== ========
Non-performing assets as a
percentage of total assets........... 0.54% 0.58% 0.96% 1.42% 2.01%
======== ======== ======== ======== ========
- -------------------
</TABLE>
(a) There were no foreign renegotiated loans in any periods presented.
The following reflects the effect of non-accrual and renegotiated loans on both
interest income and net interest income for the three years ended December 31,
1996 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Interest income which would have been
recorded in accordance with
original terms:
Domestic.......................... $20,244 $27,452 $35,554
Foreign........................... - 8 9
------- ------- -------
Total......................... 20,244 27,460 35,563
------- ------- -------
Interest income reflected in total
operating income:
Domestic.......................... 8,977 14,354 12,599
------- ------- -------
Total......................... 8,977 14,354 12,599
------- ------- -------
Net reduction in interest income and
net interest income................... $11,267 $13,106 $22,964
======= ======= =======
</TABLE>
ACCRUING LOANS PAST DUE 90 DAYS OR MORE
Accruing loans 90 days or more past due as to payment of interest or principal
for the five years ended December 31, 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Total (a)............................. $113,268 $88,671 $77,860 $80,718 $138,615
========== =========== ========== ============ ===========
- -------------------
</TABLE>
(a) There were no foreign loans past due 90 days or more in any periods
presented.
91
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: Continued
CONSOLIDATED ALLOWANCE FOR LOAN LOSSES
The following table summarizes the distribution of loan charge-offs and
recoveries by type of loan for the five years ended December 31, 1996 (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year:
Domestic.................................. $645,265 $661,124 $626,915 $610,039 $652,770
Foreign................................... 25,000 20,000 10,000 10,000 10,000
-------- -------- -------- -------- --------
670,265 681,124 636,915 620,039 662,770
-------- -------- -------- -------- --------
Allowance for loans purchased at date
of purchase:
Domestic................................ - - 24,931 5,797 3,182
-------- -------- -------- -------- --------
Allowance for loans sold at date of
sale:
Domestic................................ - - (2,377) - (14,700)
Foreign................................. - - - (353) -
-------- -------- -------- -------- --------
- - (2,377) (353) (14,700)
-------- -------- -------- -------- --------
Recoveries, by type of loan:
Domestic:
Commercial, industrial and other....... 39,726 35,535 29,845 48,659 30,296
Real estate............................ 27,870 26,477 24,058 12,438 9,485
Consumer............................... 16,140 15,599 18,613 17,157 21,355
Financial institutions................. 837 231 654 2,246 2,776
Lease financing........................ 6,283 7,091 8,128 5,417 5,353
Foreign................................... 2,129 293 2,616 12,645 13,138
-------- -------- -------- -------- --------
Total recoveries................... 92,985 85,226 83,914 98,562 82,403
-------- -------- -------- -------- --------
Charge-offs, by type of loan:
Domestic:
Commercial, industrial and other....... 67,181 71,199 124,610 123,661 155,742
Real estate............................ 64,459 67,184 149,738 91,103 129,123
Consumer............................... 132,798 89,472 57,208 53,222 77,854
Financial institutions................. 5,776 2,052 41 816 3,195
Lease financing........................ 11,476 10,180 9,857 7,700 8,506
Foreign................................... - - - - 5
-------- -------- -------- -------- --------
Total loans charged off............ 281,690 240,087 341,454 276,502 374,425
-------- -------- -------- -------- --------
Total net charge-offs....................... 188,705 154,861 257,540 177,940 292,022
-------- -------- -------- -------- --------
Provision charged to operating expense:
Domestic.................................. 220,896 139,295 271,811 201,664 273,942
Foreign................................... 7,871 4,707 7,384 (12,292)(a) (13,133)(a)
-------- -------- -------- -------- --------
228,767 144,002 279,195 189,372 260,809
-------- -------- -------- -------- --------
Balance at end of year:
Domestic.................................. 675,327 645,265 661,124 626,915 610,039
Foreign................................... 35,000 25,000 20,000 10,000 10,000
-------- -------- -------- -------- --------
$710,327 $670,265 $681,124 $636,915 $620,039
======== ======== ======== ======== ========
Ratios
Net charge-offs as a percentage
of average loans outstanding............... 0.59% 0.50% 0.86% 0.61% 1.01%
======== ======== ======== ======== ========
Allowance for loan losses as a
percentage of year-end loans............... 2.17% 2.11% 2.21% 2.13% 2.17%
======== ======== ======== ======== ========
- ---------------------
</TABLE>
(a) Reflects reallocation of the foreign allowance for loan losses to the
domestic allowance for loan losses.
92
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: Continued
DISTRIBUTION OF ALLOWANCE FOR LOAN LOSSES(a)
The distribution of the allowance for loan losses and the percentage of each
loan type to total loans for the five years ended December 31, 1996 is
illustrated in the table below (in millions):
<TABLE>
<CAPTION>
1996 1995 1994 1993
-------------------- -------------------- --------------------- --------------------
% % % %
of Loan of Loan of Loan of Loan
category category category category
to to to to
total total total total
Allowance loans Allowance loans Allowance loans Allowance loans
--------- -------- --------- -------- --------- --------- --------- ---------
Loan type
- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic:
Commercial and industrial.. $300.2 44% $321.4 41% $314.5 41% $314.9 38%
Real estate:
Construction............. 48.7 2 33.7 2 60.9 2 74.0 2
Other.................... 125.4 28 118.6 33 127.8 36 105.1 39
Consumer................... 161.0 14 151.1 14 125.1 13 113.4 13
Other domestic loans....... 40.0 7 20.5 7 32.8 6 19.5 6
Foreign...................... 35.0 5 25.0 3 20.0 2 10.0 2
------ --- ------ --- ------ --- ------ ---
Total...................... $710.3 100% $670.3 100% $681.1 100% $636.9 100%
====== === ====== === ====== === ====== ===
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1992
--------------------
%
of Loan
category
to
total
Allowance loans
--------- --------
Loan type
- ---------
<S> <C> <C>
Domestic:
Commercial and industrial.. $313.8 37%
Real estate:
Construction............. 110.8 3
Other.................... 65.5 40
Consumer................... 99.7 13
Other domestic loans....... 20.2 6
Foreign...................... 10.0 1
------ ---
Total...................... $620.0 100%
====== ===
- ----------------------------------------------------------
</TABLE>
(a) This distribution is made for analytical purposes. It does not represent
specific allocations of the allowance. The total allowance is available to
absorb losses from any segment of the portfolio.
COMMERCIAL CERTIFICATES OF DEPOSIT OVER $100,000 ISSUED BY DOMESTIC OFFICES
(in thousands)
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1996 1995
---------------------- ---------------------
Amount Percent Amount Percent
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Maturity Distribution
3 months or less............. $654,313 86.7% $547,738 78.7%
3 through 6 months........... 19,539 2.6 78,725 11.3
6 through 12 months.......... 75,951 10.1 55,445 8.0
Over 12 months............... 4,634 0.6 14,062 2.0
-------- ----- -------- -----
Total....................... $754,437 100.0% $695,970 100.0%
======== ===== ======== =====
</TABLE>
93
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: Continued
INTEREST SENSITIVITY ANALYSIS AT DECEMBER 31, 1996
(in millions)
<TABLE>
<CAPTION>
Rate Maturity Period
-------------------------------------------------------------------------------
1-90 91-181 182-365 1-2 2-5 greater than 5
Days Days Days Years Years Years Total
------ ------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Federal funds sold, resale agreements and
trading account securities................... $ 632 $ 632
Time deposits................................. 1,400 $ 590 $ 453 2,443
Investment securities......................... 854 368 627 $ 1,065 $ 945 $ 224 4,083
Interest rate swaps........................... 1,139 412 1,050 1,384 4,802 1,331 10,118
Asset financial futures....................... 328 345 1,111 15 - - 1,799
------- ------- -------- ------- ------- ------- -------
Total discretionary assets.................. 4,353 1,715 3,241 2,464 5,747 1,555 19,075
Total loans(a)................................ 21,695 1,814 1,892 2,592 3,759 1,025 32,777
------- ------- -------- ------- ------- ------- -------
Total earning assets.......................... 26,048 3,529 5,133 5,056 9,506 2,580 51,852
------- ------- -------- ------- ------- ------- -------
FUNDING SOURCES
Federal funds purchased, repurchase
agreements and other short-term funds
borrowed...................................... 2,628 5 - - - - 2,633
Domestic and foreign time deposits(b).......... 2,044 27 78 1 11 2 2,163
Long-term debt................................. 1,427 3 2 4 389 1,224 3,049
Interest rate swaps............................ 9,023 140 95 227 377 256 10,118
Liability financial futures.................... 1,787 12 - - - - 1,799
------- ------- -------- ------- ------- ------- -------
Total discretionary liabilities.............. 16,909 187 175 232 777 1,482 19,762
------- ------- -------- ------- ------- ------- -------
Savings certificates........................... 2,491 1,317 2,527 1,136 1,043 228 8,742
Money market, savings and NOW accounts(c)...... 3,674 881 1,602 2,727 4,393 - 13,277
Net non-interest bearing funds(d)(e)........... 3,830 - - - - 6,241 10,071
------- ------- -------- ------- ------- ------- -------
Total savings certificates and indefinite
maturity liabilities...................... 9,995 2,198 4,129 3,863 5,436 6,469 32,090
------- ------- -------- ------- ------- ------- -------
Total net funding sources...................... 26,904 2,385 4,304 4,095 6,213 7,951 51,852
------- ------- -------- ------- ------- ------- -------
Period gap..................................... (856) 1,144 829 961 3,293 (5,371) -0-
Cumulative gap................................. (856) 288 1,117 2,078 5,371 - -0-
Adjustments(f)................................. 765 (1,128) (760) (1,069) (3,186) 5,378 -0-
------- ------- -------- ------- ------- ------- -------
Adjusted period gap............................ $ (91) $ 16 $ 69 $ (108) $ 107 $ 7 $ -0-
======= ======= ======== ======= ======= ======= =======
Cumulative gap................................. $ (91) $ (75) $ (6) $ (114) $ (7) $ -0- $ -0-
======= ======= ======== ======= ======= ======= =======
</TABLE>
Notes to Interest Sensitivity Analysis:
- --------------------------------------
(a) Non-performing loans are included in 1-90 days.
(b) Deposit volumes exclude time deposits not at interest.
(c) Adjustments to the interest sensitivity of savings, NOW and money market
account balances reflect managerial assumptions based on historical
experience, simulation results as to the behavior of both the balances and
rates on these products in potential future rate environments, and
CoreStates' intent for positioning the products. Certain items classified as
savings certificates on the balance sheet are classified as money market,
savings and NOW accounts on the Interest Sensitivity Analysis.
(d) Net non-interest bearing funds is the sum of non-interest bearing
liabilities, shareholders' equity minus non-interest earnings assets.
(e) The estimated volume of stable net non-interest bearing funds is allocated
to the over 1 year interest sensitivity period. Allocations to the under 1
year periods include: estimated volumes that are expected to vary inversely
with interest rates; and the temporary difference between the actual volume
of total net non-interest bearing funds on December 31, 1996 and the trend
volume at the current level of interest rates.
(f) Adjustments reflect managerial assumptions as to the appropriate investment
maturities for non-interest bearing funding sources, along with the funding
of current investment and loan commitments.
94
<PAGE>
CoreStates Financial Corp and Subsidiaries
Supplemental Financial Data: Continued
Loan Maturity and Interest Sensitivity, Net of Unearned Discounts
The contractual maturity of commercial loans outstanding at December 31, 1996
was as follows (in thousands):
<TABLE>
<CAPTION>
Due after one
Due in one year through Due after
year or less five years five years Total
------------ ------------- ---------- ------------
<S> <C> <C> <C> <C>
Commercial (includes Real Estate -
Commercial Mortgages and Foreign Loans).... $15,355,474 $5,125,952 $1,558,664 $22,040,090
Real Estate - Construction................... 254,677 229,309 70,938 554,924
----------- ---------- ---------- -----------
Total loans (excluding loans to
individuals)(a)............................ $15,610,151 $5,355,261 $1,629,602 $22,595,014
=========== ========== ========== ===========
</TABLE>
- ------------------
(a) Loans due after one-year totaling $4,508,940 have fixed interest rates.
The remaining 35% of such loans or $2,475,923 have floating or adjustable
rates.
INVESTMENT SECURITIES
(in thousands)
<TABLE>
<CAPTION>
Carrying Value at December 31,
1996 (a) 1995 (a) 1994 (a)
---------- ---------- ----------
<S> <C> <C> <C>
U.S. Treasury and government agencies........... $1,883,848 $2,564,646 $3,103,635
State and municipal............................. 426,009 549,035 695,655
Mortgage-backed................................. 968,963 1,758,883 2,665,138
Other........................................... 804,404 759,668 797,477
---------- ---------- ----------
Total........................................ $4,083,224 $5,632,232 $7,261,905
========== ========== ==========
</TABLE>
(a) Held-to-maturity and available-for-sale portfolios combined.
Maturity Distribution and Weighted Average Yield at December 31, 1996(a)
<TABLE>
<CAPTION>
U.S. Treasury Total
and Government State and ------------------------
Agencies Municipal Other Amount Yield (b)
-------------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1 year or less........................ $ 623,582 $114,732 $ 64,280 $ 802,594 5.80%
1 year through 5 years................ 1,223,564 197,451 269,332 1,690,347 6.31
5 years through 10 years.............. 5,470 82,104 67,115 154,689 6.97
After 10 years........................ 31,232 31,722 403,677 466,631 6.34
---------- -------- -------- ----------
Subtotal.......................... $1,883,848 $426,009 $804,404 3,114,261 6.22
========== ======== ========
Mortgage-backed....................... 968,963 6.03
----------
Total............................. $4,083,224 6.17
==========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Held-to-maturity and available-for-sale portfolios combined.
(b) The weighted average yield has been computed on a tax equivalent basis using
an effective tax rate of 35%. The amount of the tax equivalent adjustment by
range of maturity is as follows: 1 year or less - $2,719; 1 year to 5
years - $5,086; 5 years to 10 years - $2,333 and after 10 years - $5,353.
95
<PAGE>
EXHIBIT 13a
CoreStates Financial Corp and Subsidiaries
GRAPHICS APPENDIX LIST TO EXHIBIT 13
Narrative description of graphs from the Management's Discussion and Analysis of
Financial Condition and Results of Operations:
<TABLE>
<CAPTION>
EDGAR Version Typeset Version
------------- ---------------
<S> <C>
Page 14 contains the plotting points for the Page 15
Average Common Equity to Assets Graph The Average Common Equity to Assets graph is a five year,
horizontal bar graph with the years 1992, 1993, 1994, 1995
and 1996 listed along the y axis. Lines numbering 6 to 9
are drawn along the x axis and represent, in percent, the
average common equity to assets ratio. There are 2 bars for
each year: the first representing the CoreStates ratio and
the second representing the Salomon Brothers Superregional
Bank Composite Index ratio.
Page 17 contains the plotting points for the Page 17
Wholesale Loans by Industry Graph The Wholesale Loans by Industry graph is a horizontal bar
graph with 12 wholesale loan industries listed down the y
axis. Two bars extend out from each industry, parallel to
the x axis. The first bar represents the industry's
December 31, 1996 loan outstandings as a percentage of
December 31, 1996 equity. The second bar represents the
percentage of the industry's loan outstandings that are
non-performing.
Page 24 contains the plotting points for the Page 21
Net Interest Margin Graph The Net Interest Margin graph is a five year, horizontal bar
graph with the years 1992, 1993, 1994, 1995 and 1996 listed
along the y axis. Lines numbering 3.5 to 6.5 are drawn
along the x axis and represent, in percent, the net interest
margin. There are 2 bars for each year: the first
representing the CoreStates margin and the second
representing the Salomon Brothers Superregional Bank
Composite Index margin.
</TABLE>
<PAGE>
EXHIBIT 13a - continued
CoreStates Financial Corp and Subsidiaries
GRAPHICS APPENDIX LIST TO EXHIBIT 13 - (continued)
Narrative description of graphs from the Management's Discussion and Analysis of
Financial Condition and Results of Operations:
<TABLE>
<CAPTION>
EDGAR Version Typeset Version
------------- ---------------
<S> <C>
Page 35 contains the plotting points for the Page 29
Earning Asset Mix Graph The Earning Asset Mix graph is a five year, horizontal bar
graph with the years 1992, 1993, 1994, 1995 and 1996 listed
along the y axis. Three bars are drawn in each year to
represent 100% of average earning assets. The x axis is
drawn with lines from 0% to 100%. One of the three bars in
each year represents either the percentage of average
earning assets comprised of: 1) short-term money market
investments; 2) investment securities; or 3) loans.
Page 36 contains the plotting points for the Page 29
Funding Mix Graph The Funding Mix graph is a five year, horizontal bar graph
with the years 1992, 1993, 1994, 1995 and 1996 listed along
the y axis. Three bars are drawn in each year to represent
100% of average earning assets, excluding short-term money
market investments. The x axis is drawn with lines from 0%
to 100%. One of the three bars in each year represents
either the percentage of: 1) retail deposits; 2) other
interest bearing sources; or 3) non-interest bearing sources
to average earning assets, excluding short-term money market
investments.
Page 37 contains the plotting points for the Page 30
Operating Revenue Graph The Operating Revenue graph is a five year, horizontal bar
graph with the years 1992, 1993, 1994, 1995 and 1996 listed
along the y axis. One bar is drawn in each year to
represent the total dollar amount of operating revenue (tax
equivalent net interest income plus non-interest income)
recorded, in millions. The x axis is drawn with lines from
$0 to $3,000+. Each bar is divided into three sections
along the x axis, representing the dollar amount of
operating revenue derived from: 1) loan and investment
related net interest income; 2) net interest income derived
from non-credit balances; and 3) non-interest income.
</TABLE>
<PAGE>
EXHIBIT 21
List of Subsidiaries of CoreStates Financial Corp
as of December 31, 1996
<TABLE>
<S> <C> <C>
Bancorp International Trading Company New Jersey *23.33%
Congress Financial Corporation California 97%
Congress Credit Corporation New York 100%
Congress Financial Corporation
(Canada) Ontario 100%
Congress Financial Corporation
(Central) Illinois 100%
Congress Financial Corporation
(Florida) Florida 100%
Congress Financial Corporation
(New England) Massachusetts 100%
Congress Financial Corporation
(Northwest) Oregon 100%
Congress Financial Corporation
(Southern) Georgia 100%
Congress Financial Corporation
(Southwest) Texas 100%
Congress Financial Corporation
(Western) California 100%
Laundry, Inc. California 100%
Congress Talcott Corporation Pennsylvania 100%
Congress Talcott Corporation
(Western) California 100%
CoreStates Bank of Delaware, N.A. U.S.A. 100%
CoreStates Bank, N.A. U.S.A. 100%
Badeal, Inc. New Jersey 100%
North Towne Village, Inc. Pennsylvania 100%
Barnegat Hills Corp. New Jersey 50%
Berks Title Company Pennsylvania 100%
BHCC Holdings, Inc. Pennsylvania 100%
Blazing Star Realty Corporation New Jersey 100%
BOMAST Corporation New Jersey 100%
Callowhill Consumer Discount Company Pennsylvania 100%
Camac Street Properties, Inc. Pennsylvania 100%
Centre Properties, Inc. Pennsylvania 100%
</TABLE>
*Voting Control
1
<PAGE>
List of Subsidiaries of CoreStates Financial Corp
as of December 31, 1996
<TABLE>
<S> <C> <C>
C.F. Holdings, Inc. Pennsylvania 100%
C.H.N.B., Inc. New Jersey 100%
Charlestown Road Properties, Inc. Pennsylvania 100%
Citizens Investments of Delaware,
Inc. Delaware 100%
Clymer Realty Corporation Pennsylvania 100%
CoreStates Bank International U.S.A. 100%
Philadelphia International
Finance Co - Hong Kong Limited Hong Kong 100%
Philadelphia National LTDA Brazil 100%
CoreStates Capital I Delaware 100%
CoreStates Dealer Services Corp Pennsylvania 100%
CoreStates Enterprise Capital, Inc. Pennsylvania 100%
CoreStates Investment Advisers,
Inc. Delaware 100%
CoreStates Leasing, Inc. Pennsylvania 100%
CoreStates Mortgage Services
Corporation Pennsylvania 100%
CoreStates Real Estate Investment
Corporation Delaware 100%
Delaware Trust Capital Management, Inc. Delaware 100%
Griffin Corporate Services, Inc. Delaware 100%
Dickinson Street, Inc. Pennsylvania 100%
DMR Realty Corp Pennsylvania 100%
Eagle 1851, Inc. New Jersey 50%
1808 Corp. Pennsylvania 100%
Fairview Properties, Inc. Pennsylvania 100%
F.C. Properties, Inc. Delaware 100%
Fifth and Market Corporation Pennsylvania 100%
First Leasing Company New Jersey 100%
First Penco Realty Inc. Pennsylvania 100%
First Pennsylvania Financial
Services, Inc. Delaware 100%
Five Hundred Ridgecreek
Properties, Inc. Georgia 50%
4639 Umbria Street, Inc. Pennsylvania 100%
441 North 5th Street Properties, Inc. Pennsylvania 100%
Four Hundred Ridgefield
</TABLE>
2
<PAGE>
List of Subsidiaries of CoreStates Financial Corp
as of December 31, 1996
<TABLE>
<S> <C> <C>
Properties, Inc. Georgia 50%
GSB Investment, Inc. Pennsylvania 100%
Hopewell Holdings, Inc. New Jersey 100%
J.V. Del Ran, Inc. New Jersey 100%
KKM, Inc. Pennsylvania 100%
Locust Holdings, Inc. Pennsylvania 100%
WCC Holdings, Inc. Pennsylvania 100%
Lin Park Properties, Inc. New Jersey 100%
Mercer Development Co., Inc. New Jersey 100%
Meridian Campus Developer, Inc. Pennsylvania 100%
Meridian Capital Markets, Inc. Pennsylvania 100%
Meridian Community Partnership
Development Corporation Pennsylvania 100%
Limited Holdings Corporation Pennsylvania 100%
Meridian Mortgage Corporation Pennsylvania 100%
Devon Square Holdings, Inc. Pennsylvania 100%
Garden State Assets, Inc. New Jersey 100%
Meridian Properties, Inc. Pennsylvania 100%
Morris Avenue Corporation New Jersey 50%
NAZ Market, Inc. Pennsylvania 100%
Ocean Pointe Properties, Inc. New Jersey 100%
One Hundred Avondale Estates
Properties, Inc. Georgia 50%
Philadelphia International
Investment Corporation U.S.A. 100%
Corporacion Financiera
del Norte, S.A. Colombia (less than) 1%
CVCC Remnaco Inc. Canada 25M non-voting preferred shs
Internationale Bank fur
Aussenhandel, A.G. Austria 10%
Joh. Berenberg, Gossler &
Co. Germany 15%
New World Development
Corp., Ltd. Bahamas 100%
New World Group
Holdings Ltd. Canada 42.6%
Philadelphia National
Limited England 100%
</TABLE>
3
<PAGE>
List of Subsidiaries of CoreStates Financial Corp
as of December 31, 1996
<TABLE>
<S> <C> <C>
Philadelphia International
Equities, Inc. Delaware 100%
Aberdeen Trust plc United Kingdom 14.85%
Accel Group LLC Czech Republic 17.25%
Banco Internacional
de Panama, S.A. Panama 20%
Banco Mello Comercial, S.A. Portugal 1.01%
BR & Associes
Banquiers S.A. Luxembourg 10.46%
CashFlex, Inc. Canada 100%
CoreStates Fund Management
(Ireland) Ltd. Ireland 100%
CoreFund Umbrella
Cash Fund, plc Ireland 100%
Crosby Financial Holdings
Limited British Virgin Islands 8.83%
CSB Information Services
(Pte) Ltd. Singapore 100%
Empresa Minera
De Mantos Blancos Chile 1.1%
Established Holdings Limited United Kingdom 100%
Hana Bank Korea 0.5%
The Heritable and General
Investment Bank Limited United Kingdom 69.51%
Beeson Gregory Holdings
Limited United Kingdom 10.2%
Medical Equipment Credit
Pte Ltd. Singapore 20.0%
Multi-Credit Corporation of
Thailand, PCL Thailand 7.5%
Multi-Risk
Consultants (Thailand) Ltd. Thailand 10%
Surinvest International
Limited Grand Cayman 13.76%
TI Remnaco, Inc. Canada 39.8%
Philadelphia National Corporation Pennsylvania 100%
Pinnhahn, Inc. Pennsylvania 100%
PNB Leasing Corporation Delaware 100%
</TABLE>
4
<PAGE>
List of Subsidiaries of CoreStates Financial Corp
as of December 31, 1996
<TABLE>
<S> <C> <C>
Property Holdings of N.J., Inc. New Jersey 100%
QuestPoint Holdings, Inc. Delaware 100%
Centillion Holdings, Inc. Delaware 100%
Nationwide Remittance
Centers, Inc. Delaware 100%
QuestPoint Document
Processing, Inc. Delaware 100%
QuestPoint G.P., Inc. Delaware 100%
QuestPoint L.P., Inc. Pennsylvania 100%
QuestPoint, L.P. Delaware 100%
Centillion, L.P. Delaware 100%
QuestPoint Check
Services, L.P. Delaware 100%
QuestPoint Remittance
Services, L.P. Delaware 100%
SynapQuest, L.P. Delaware 100%
Ridingbrook, Inc. Pennsylvania 100%
Seven Hundred Town Lake
Properties, Inc Georgia 54%
721 Sansom Street Corp. Pennsylvania 100%
South Fourth Street, Inc. Pennsylvania 100%
Sungate Boulevard Corp. New Jersey 50%
Swedesboro Properties, Inc. Pennsylvania 100%
Tall Oaks Corp. New Jersey 100%
TBC Corporation Pennsylvania 100%
TGTG Corporation New York 100%
Three Hundred Paces Mill
Properties, Inc. Georgia 37%
2009 Chestnut Corp. Pennsylvania 100%
2021 Properties, Inc. New Jersey 100%
Two Hundred Henderson Place
Properties, Inc. Georgia 37%
Two APM Plaza, Inc. Delaware 89%
United Armored Service, Inc. New York 100%
United Counties Service
Corporation New Jersey 100%
Viking Terrace Corp. New Jersey 100%
Washington Street Properties, Inc. Pennsylvania 100%
</TABLE>
5
<PAGE>
List of Subsidiaries of CoreStates Financial Corp
as of December 31, 1996
<TABLE>
<S> <C> <C>
Westpark Walk, Inc. Georgia 50%
CoreStates Capital Corp Pennsylvania 100%
CoreStates Community Development
Corporation, Inc. Pennsylvania 51%
Bd maj
Partnership Homes Pennsylvania 1/2 Bd
CoreStates Delaware, N.A. U.S.A. 100%
CoreStates Export Trading Company Pennsylvania 100%
CoreStates Financial Corp (DE) Delaware 100%
CoreStates Holdings, Inc. Delaware 100%
Electronic Payment Services, Inc. Delaware 20%
Electronic Payment Service Corp. Delaware 100%
First Commercial Bank of Philadelphia Pennsylvania 24.9%
MAS Inco Corporation Delaware 100%
Metroteller Security, Inc. New York 100%
Money Access Service, Inc. Delaware 100%
Money Access Service Corp. Ohio 100%
BUYPASS Corporation Georgia 100%
BUYPASS Electronic
Transaction Systems, Inc. Georgia 100%
BUYPASS Inco Corporation Delaware 100%
BUYPASS Petroleum
Systems, Inc. Georgia 100%
Data NOW National
Services, Inc. Delaware 100%
EPS Network Services Corp. Georgia 100%
United Bancshares, Inc. Pennsylvania 6.23%
United Bank of Philadelphia Pennsylvania 100%
CoreStates Services Corp. Pennsylvania 100%
</TABLE>
6
<PAGE>
List of Subsidiaries of CoreStates Financial Corp
as of December 31, 1996
<TABLE>
<S> <C> <C>
CoreStates Securities Corp Pennsylvania 100%
First Pennsylvania Insurance Services, Inc. Virginia 100%
First Pennsylvania International Capital
Corporation Delaware 100%
First Pennsylvania Investments Company Pennsylvania 100%
Home Investors Mortgage Co. New Jersey 100%
IBI Capital Corp. Pennsylvania 100%
Independence Resources, Inc. Pennsylvania 100%
McGlinn Capital Management, Inc. Pennsylvania 100%
Meridian Acceptance Corporation New Jersey 100%
Meridian Asset Acceptance Corporation Delaware 100%
Meridian Asset Management, Inc. Pennsylvania 100%
Meridian Investment Company Pennsylvania 100%
Meridian Trust Company Pennsylvania 100%
Meridian Trust Company of California California 100%
Meridian Capital Corp. Pennsylvania 100%
Meridian Commercial Finance Corporation Pennsylvania 100%
Meridian Funding Corp. Pennsylvania 100%
Meridian Life Insurance Company Arizona 100%
Meridian Securities, Inc. Pennsylvania 100%
PENNAMCO, Inc. Delaware 100%
</TABLE>
7
<PAGE>
List of Subsidiaries of CoreStates Financial Corp
as of December 31, 1996
<TABLE>
<S> <C> <C>
Pennco Life Insurance Company Arizona 100%
Princeton Life Insurance Company Pennsylvania 100%
Servilease Corporation Pennsylvania 100%
Signal Financial Corporation Pennsylvania 100%
Grabuck Agency, Inc. Pennsylvania 100%
Signal Finance Corporation Pennsylvania 100%
Signal Finance of Maryland, Inc. Maryland 100%
Signal Management Corporation Delaware 100%
Spring Ridge Holdings, Inc. Pennsylvania 100%
</TABLE>
8
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the following registration
statements of our report dated January 22, 1997 with respect to the consolidated
financial statements of CoreStates Financial Corp incorporated by reference in
this Annual Report (Form 10-K) for the year ended December 31, 1996:
(a) The Registration Statement (Form S-8, No. 33-5874), in Post-
Effective Amendment No. 1 to the Registration Statement (Form S-8,
No. 2-91176), the Registration Statement (Form S-8, No. 33-28808)
and in the related prospectuses, each pertaining to the CoreStates
Financial Corp Long-Term Incentive Plan,
(b) The Registration Statement (Form S-8, No. 33-32934) and prospectus
relating to shares of the Corporation's Common Stock issuable under
the CoreStates Employee Stock Ownership and Savings Plan,
(c) The Registration Statement (Form S-3, No. 33-50324) pertaining to
the CoreStates Financial Corp 1992 Long-Term Incentive Plan,
(d) The Registration Statement (Form S-3, No. 33-57034) and prospectus
and prospectus supplement pertaining to $1,000,000,000 in aggregate
amount of Debt Securities issuable by CoreStates Capital Corp and
the related guarantees of the Corporation, and Preferred Stock,
Depository Shares, Common Stock, and Capital Securities, issuable
by the Corporation,
(e) The Registration Statement (Form S-3, No. 33-54049) and prospectus
and prospectus supplement pertaining to $1,000,000,000 in aggregate
amount of Debt Securities and warrants issuable by CoreStates
Capital Corp and the related guarantees of the Corporation and
Preferred Stock, Depository Shares and Common Stock issuable by the
Corporation,
<PAGE>
(f) The Registration Statement (Form S-4, as amended by Form S-8, No.
33-48422) and prospectus relating to shares of the Corporation's
Common Stock issuable upon the exercise of stock options, the
obligations in respect to which were assumed by the Corporation in
connection with the acquisition of First Peoples Corporation,
(g) The Registration Statement (Form S-4, as amended by Form S-8, No.
33-51429) and prospectus relating to shares of the Corporation's
Common Stock issuable upon the exercise of stock options, the
obligations in respect to which were assumed by the Corporation in
connection with the acquisition of Constellation Bancorp,
(h) The Registration Statement (Form S-4, as amended by Form S-8, No.
33-53539) and prospectus relating to shares of the Corporation's
Common Stock issuable upon the exercise of stock options, the
obligations in respect to which were assumed by the Corporation in
connection with the acquisition of Independence Bancorp, Inc.,
(i) The Registration Statement (Form S-4, as amended by Form S-8, No.
33-55505) and prospectus relating to shares of the Corporation's
Common Stock issuable upon the exercise of stock options, the
obligations in respect to which were assumed by the Corporation in
connection with the acquisition of Germantown Savings Bank,
(j) The Registration Statement (Form S-4, as amended by Form S-8,
No. 33-300067) and prospectus relating to shares of the
Corporation's Common Stock issuable upon the exercise of stock
options, the obligations in respect to which were assumed by the
Corporation in connection with the acquisition of Meridian Bancorp,
Inc.,
(k) The Registration Statements (Form S-3, Nos. 33-54049 and 333-2297)
and prospectus and prospectus supplement pertaining to
$1,750,000,000 in aggregate amount of Debt Securities issuable by
CoreStates Capital Corp and the related guarantees of the
Corporation and Preferred Stock, Depository Shares and Common Stock
issuable by the Corporation,
<PAGE>
(l) The Registration Statement (Form S-3, No. 033-40717) and prospectus
relating to shares of the Corporation's Common Stock issuable under
the Dividend Reinvestment Plan,
(m) The Registration Statement (Form S-8, No. 333-16569) and prospectus
relating to shares of the Corporation's Common Stock issuable under
the QuestPoint Savings Plan.
/s/ Ernst & Young LLP
Philadelphia, Pennyslvania
March 21, 1997
<PAGE>
EXHIBIT 23.2
Consent of Certified Public Accountants
We consent to the incorporation by reference of those reports described below
under the caption Reports, in the December 31, 1996 Form 10-K in the following
registration statements of CoreStates Financial Corp.:
(a) The Registration Statement (Form S-8, No. 33-5874), in Post-
Effective Amendment No. 1 to the Registration Statement (Form S-8
No. 2-91176), the Registration Statement (Form S-8 No. 33-28808)
and in the related prospectuses, each pertaining to the CoreStates
Financial Corp Long-Term Incentive Plan,
(b) The Registration Statement (Form S-8, No. 33-32934) and prospectus
relating to shares of the Corporation's Common Stock issuable under
the CoreStates Employee Stock Ownership and Savings Plan,
(c) The Registration Statement (Form S-3, No. 33-50324) pertaining to
the CoreStates Financial Corp 1992 Long-Term Incentive Plan,
(d) The Registration Statement (Form S-3, No. 57034) and prospectus and
prospectus supplement pertaining to $1,000,000,000 in aggregate
amount of Debt Securities issuable by CoreStates Capital Corp and
the related guarantees of the Corporation, and Preferred Stock,
Depository Shares, Common Stock, and Capital Securities, issuable
by the Corporation,
(e) The Registration Statement (Form S-3, No. 33-54049) and prospectus
and prospectus supplement pertaining to $1,000,000,000 in aggregate
amount of Debt Securities and warrants issuable by CoreStates
Capital Corp and the related guarantees of the Corporation and
Preferred Stock, Depository Shares and Common Stock issuable by the
Corporation,
<PAGE>
(f) The Registration Statement (Form S-4, as amended by Form S-8, No.
33-48422) and prospectus relating to shares of the Corporation's
Common Stock issuable upon the exercise of stock options, the
obligations in respect to which were assumed by the Corporation in
connection with the acquisition of First Peoples Corporation,
(g) The Registration Statement (Form S-4, as amended by Form S-8, No.
33-51429) and prospectus relating to shares of the Corporation's
Common Stock issuable upon the exercise of stock options, the
obligations in respect to which were assumed by the Corporation in
connection with the acquisition of Constellation Bancorp,
(h) The Registration Statement (Form S-4, as amended by Form S-8, No.
33-53539) and prospectus relating to shares of the Corporation's
Common Stock issuable upon the exercise of stock options, the
obligations in respect to which were assumed by the Corporation in
connection with the acquisition of Independence Bancorp, Inc.,
(i) The Registration Statement (Form S-4, as amended by Form S-8, No.
33-55505) and prospectus relating to shares of the Corporation's
Common Stock issuable upon the exercise of stock options, the
obligations in respect to which were assumed by the Corporation in
connection with the acquisition of Germantown Savings Bank,
(j) The Registration Statement (Form S-4, as amended by Form S-8,
No. 33-300067) and prospectus relating to shares of the
Corporation's Common Stock issuable upon the exercise of stock
options, the obligations in respect to which were assumed by the
Corporation in connection with the acquisition of Meridian Bancorp,
Inc.,
(k) The Registration Statements (Form S-3, Nos. 33-54049 and 333-2297)
and prospectus and prospectus supplement pertaining to
$1,750,000,000 in aggregate amount of Debt Securities issuable by
CoreStates Capital Corp and the related guarantees of the
Corporation and Preferred Stock, Depository Shares and Common Stock
issuable by the Corporation,
<PAGE>
(l) The Registration Statement (Form S-3, No. 033-40717) and prospectus
relating to shares of the Corporation's Common Stock issuable under
the Dividend Reinvestment Plan,
(m) The Registration Statement (Form S-8, No. 333-16569) and prospectus
relating to shares of the Corporation's Common Stock issuable under
the QuestPoint Savings Plan.
Reports
-------
. Our report dated January 17, 1996, except as to Note 2, which is as
of February 23, 1996, with respect to the consolidated balance
sheets of Meridian Bancorp, Inc. and subsidiaries as of December
31, 1995 and 1994, and the related consolidated statements of
income, changes in shareholders' equity and cash flows for each of
the years in the two-year period ended December 31, 1995. The
report of KPMG Peat Marwick LLP covering the aforementioned
financial statements contains an explanatory paragraph which
discusses that Meridian Bancorp, Inc. adopted the provisions of the
Financial Accounting Standards Board's Statements of Financial
Accounting Standards No. 115, Accounting for Certain Investments
in Debt and Equity Securities, and No. 112, Employers' Accounting
for Post employment Benefits, in 1994.
. Our report dated January 16, 1996, except for Note 20, which is as
of February 23, 1996, with respect to the consolidated balance
sheets of United Counties Bancorporation and subsidiaries as of
December 31, 1995 and 1994, and the related consolidated statements
of income, changes in stockholders' equity and cash flows, for each
of the years in the two-year period ended December 31, 1995. The
report of KPMG Peat Marwick LLP covering the aforementioned
financial statements contains an explanatory paragraph which
discusses that United Counties Bancorporation adopted the
provisions of the Financial Accounting Standards Board's Statements
of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, in 1994.
/s/ KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
March 21, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
CoreStates Financial Corp. consolidated balance sheet as of December 31, 1996,
and the related consolidated statement of income, changes in shareholders'
equity, and other financial data included within management's discussion and
analysis of financial condition and results of operations for the year ended
December 31, 1996 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,462,287
<INT-BEARING-DEPOSITS> 2,443,154
<FED-FUNDS-SOLD> 509,694
<TRADING-ASSETS> 122,317
<INVESTMENTS-HELD-FOR-SALE> 2,394,166
<INVESTMENTS-CARRYING> 1,689,058
<INVESTMENTS-MARKET> 1,692,243
<LOANS> 32,777,032
<ALLOWANCE> 710,327
<TOTAL-ASSETS> 45,494,194
<DEPOSITS> 33,727,156
<SHORT-TERM> 2,633,157
<LIABILITIES-OTHER> 1,661,162
<LONG-TERM> 3,049,297
0
0
<COMMON> 223,599
<OTHER-SE> 3,472,095
<TOTAL-LIABILITIES-AND-EQUITY> 45,494,194
<INTEREST-LOAN> 2,871,233
<INTEREST-INVEST> 277,766
<INTEREST-OTHER> 149,205
<INTEREST-TOTAL> 3,298,204
<INTEREST-DEPOSIT> 841,780
<INTEREST-EXPENSE> 1,156,720
<INTEREST-INCOME-NET> 2,141,484
<LOAN-LOSSES> 228,767
<SECURITIES-GAINS> 59,512
<EXPENSE-OTHER> 1,776,828
<INCOME-PRETAX> 1,034,964
<INCOME-PRE-EXTRAORDINARY> 649,144
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 649,144
<EPS-PRIMARY> 2.97
<EPS-DILUTED> 2.97
<YIELD-ACTUAL> 5.53
<LOANS-NON> 220,770
<LOANS-PAST> 113,268
<LOANS-TROUBLED> 18
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 670,265
<CHARGE-OFFS> 281,690
<RECOVERIES> 92,985
<ALLOWANCE-CLOSE> 710,327
<ALLOWANCE-DOMESTIC> 675,327
<ALLOWANCE-FOREIGN> 35,000
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
EXHIBIT 99.1
The undertaking set forth below is filed for purposes of incorporation by
reference into Part II of the Registration Statements on Form S-8, File Nos. 33-
28808, 33-5874, 33-32934, 33-50324, and 333-16569.
Item 9. Undertakings
------------
(a) The undersigned Registrant hereby undertakes:
Insofar as indemnification for liabilities rising under the
Securities Act of 1933 (the "Securities Act") may be permitted to
directors, officers or persons controlling the registrant pursuant to
the provisions described in this registration statement, or otherwise,
CoreStates Financial Corp (the "Company") has been advised that in the
opinion of the Commission such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable. In
the event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or paid by a
director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it
is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
