<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event report): December 28, 1995
MERIDIAN BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 0-12364 23-2237529
- ------------------------------ ---------------- -----------------
(State of other jurisdiction (Commission (IRS Employee
of incorporation) File Number) Ident. No.)
35 North Sixth Street Reading, Pennsylvania 19601
- -------------------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 655-2000
--------------
N/A
________________________________________________________________________________
(Former name or former address, if changed since last report.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Item 5. Other Events.
------------
As previously reported in a Current Report on Form 8-K dated October 10,
1995, on October 10, 1995 Meridian Bancorp, Inc. ("Meridian") and CoreStates
Financial Corp ("CoreStates") entered into an Agreement and Plan of Merger
pursuant to which Meridian will be merged into CoreStates with CoreStates as the
surviving corporation. In the merger, each share of Meridian common stock will,
subject to certain adjustments, be exchanged for 1.225 shares of CoreStates
common stock. The merger is expected to close during the second quarter of 1996,
subject to the satisfaction of certain conditions, including among others,
approval of the merger by the shareholders of both Meridian and CoreStates and
receipt of required regulatory approvals. The transaction is expected to be
accounted for as a pooling of interests.
There is included at Item 7 of this Current Report on Form 8-K certain
historical financial information regarding CoreStates.
Item 7. Financial Statements and Exhibits.
---------------------------------
(c) Exhibits.
--------
99.1 Agreement and Plan of Merger, dated as of October 10, 1995, by
and between Meridian Bancorp, Inc, and CoreStates Financial
Corp. (Incorporated herein by reference to Exhibit 99.2 to the
Current Report on Form 8-K of Meridian Bancorp, Inc., filed on
October 20, 1995).
99.2 Unaudited consolidated balance sheets of CoreStates Financial
Corp as of September 30, 1995 and the related consolidated
unaudited statements of income, changes in shareholders' equity
and cash flows for the nine-month periods ended September 30,
1995 and 1994.
99.3 Consolidated balance sheets of CoreStates Financial Corp as of
December 31, 1994 and 1993, and the related consolidated
statements of income, changes in shareholders' equity and cash
flows for each of the years in the three-year period ended
December 31, 1994.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MERIDIAN BANCORP, INC.
Dated: December 28, 1995
By /s/ Samuel A. McCullough
---------------------------------
Samuel A. McCullough
Chairman and Chief Executive
Officer
2
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1995 1994
---------- ----------
<S> <C> <C>
INTEREST INCOME
- ---------------
Interest and fees on loans:
Taxable income................................... $1,472,978 $1,227,510
Tax exempt income................................ 15,019 17,225
Interest on investment securities:
Taxable income................................... 99,178 104,539
Tax exempt income................................ 9,354 12,530
Interest on time deposits in banks................. 89,729 44,911
Other interest income.............................. 7,689 4,856
---------- ----------
Total interest income......................... 1,693,947 1,411,571
---------- ----------
INTEREST EXPENSE
- ----------------
Interest on deposits............................... 400,622 258,540
Interest on funds borrowed......................... 87,284 62,768
Interest on long-term debt......................... 92,157 60,141
---------- ----------
Total interest expense........................ 580,063 381,449
---------- ----------
NET INTEREST INCOME........................... 1,113,884 1,030,122
Provision for losses on loans...................... 77,500 221,900
---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOSSES ON LOANS......................... 1,036,384 808,222
---------- ----------
NON-INTEREST INCOME
- -------------------
Service charges on deposit accounts................ 132,057 137,454
Trust income....................................... 72,154 72,379
Fees for international services.................... 69,048 59,321
Debit and credit card fees......................... 47,017 47,068
Income from investment in EPS, Inc................. 41,566 23,802
Gains on trading account securities................ 1,763 1,887
Securities gains................................... 8,457 14,143
Other operating income............................. 80,135 65,225
---------- ----------
Total non-interest income..................... 452,197 421,279
---------- ----------
NON-FINANCIAL EXPENSES
- ----------------------
Salaries, wages and benefits....................... 457,013 477,883
Net occupancy...................................... 86,830 87,484
Equipment expenses................................. 58,051 57,081
Restructuring and merger-related charges........... 104,563 108,700
Other operating expenses........................... 283,726 279,710
---------- ----------
Total non-financial expenses.................. 990,183 1,010,858
---------- ----------
INCOME BEFORE INCOME TAXES......................... 498,398 218,643
- --------------------------
Provision for income taxes......................... 183,115 81,326
---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF A
- ------------------------------------
CHANGE IN ACCOUNTING PRINCIPLE................... 315,283 137,317
- -------------------------------
Cumulative effect of a change in
accounting principle, net of
income tax benefits of $1,846.................... - (3,430)
---------- ----------
NET INCOME......................................... $ 315,283 $ 133,887
- ---------- ========== ==========
Average common shares outstanding.................. 141,427 142,581
========== ==========
PER COMMON SHARE DATA
- ---------------------
Income before cumulative effect of a
change in accounting principle.................... $2.23 $0.97
===== =====
Net income......................................... $2.23 $0.95
===== =====
Cash dividends declared............................ $1.02 $0.90
===== =====
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Common Capital Retained Treasury
stock surplus earnings stock Total
-------- -------- ---------- --------- ----------
Nine Months Ended September 30, 1994
- ----------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at beginning of year..................... $145,740 $778,498 $1,451,965 $ (7,819) $2,368,384
Net income........................................ 133,887 133,887
Net change in unrealized gain on
investments available-for-sale, net of tax...... (37,394) (37,394)
Treasury shares acquired (5,849 shares)........... (157,543) (157,543)
Purchase and retirement of common stock........... (166) (994) (3,583) (4,743)
Common stock issued under employee
benefit plans (279 new shares;
559 treasury shares)........................... 279 4,159 (6,313) 15,069 13,194
Common stock issued under dividend
reinvestment plan (338 treasury shares)......... 8 (474) 9,315 8,849
Conversion of subordinated debentures
(30 new shares)................................. 30 684 714
Cash paid for fractional shares issued............ (83) (83)
Foreign currency translation adjustments.......... 90 90
Common dividends declared......................... (125,170) (125,170)
-------- -------- ---------- --------- ----------
Balances at end of period......................... $145,883 $782,355 $1,412,925 $(140,978) $2,200,185
======== ======== ========== ========= ==========
Nine Months Ended September 30, 1995
- ------------------------------------
Balances at beginning of year..................... $145,878 $781,766 $1,446,767 $ (24,297) $2,350,114
Net income........................................ 315,283 315,283
Net change in unrealized gain on
investments available-for-sale, net of tax....... 14,926 14,926
Treasury shares acquired (8,987 shares)........... (287,760) (287,760)
Common stock issued under employee
benefit plans (2,714 treasury shares)............ (3) (61) (26,449) 83,685 57,172
Common stock issued under dividend
reinvestment plan (330 treasury shares).......... 200 (2) 9,801 9,999
Cash paid for fractional shares issued............ (24) (24)
Foreign currency translation adjustments.......... 27 27
Common dividends declared......................... (143,947) (143,947)
-------- -------- ---------- --------- ----------
Balances at end of period......................... $145,875 $781,905 $1,606,581 $(218,571) $2,315,790
======== ======== ========== ========= ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1995 1994
------------ ------------
<S> <C> <C>
Operating Activities
- --------------------
Net income....................................... $ 315,283 $ 133,887
Adjustments to reconcile net income to
net cash provided by operating activities:
Restructuring and merger-related
charges...................................... 104,563 108,700
Cumulative effect of a change in
accounting principle......................... - 3,430
Provision for losses on loans.................. 77,500 221,900
Provision for losses and writedowns on
OREO......................................... 6,464 33,181
Depreciation and amortization.................. 44,919 53,008
Securities gains, net.......................... (8,457) (14,143)
Other gains.................................... (19,000) -
Deferred income tax benefit.................... (38,028) (24,310)
Increase in due to factored clients............ 43,039 146,480
(Increase) decrease in accrued
interest receivable.......................... (2,176) 18,357
Increase in accrued interest payable........... 32,193 7,011
Other assets and liabilities, net.............. (127,178) (169,863)
------------ ------------
Net Cash Provided by Operating
Activities................................ 429,122 517,638
------------ ------------
Investing Activities
- --------------------
Net increase in loans............................ (972,950) (250,613)
Proceeds from sales of loans..................... 678,234 664,362
Loans originated or acquired -- non-bank
subsidiary..................................... (26,573,505) (25,895,781)
Principal collected on loans -- non-bank
subsidiary..................................... 26,178,636 25,309,901
Net increase in time deposits,
principally eurodollars........................ (3,049) (282,037)
Purchases of investments
held-to-maturity............................... (401,243) (798,748)
Purchases of investments
available-for-sale............................. (81,449) (350,166)
Proceeds from maturities of investments
available-for-sale............................. 12,738 306,083
Proceeds from maturities of investments
held-to-maturity............................... 1,103,030 1,054,808
Proceeds from sales of investments
available-for-sale............................. 144,674 465,641
Net decrease in Federal funds sold and
securities purchased under agreements
to resell...................................... 436,904 34,821
Purchases of premises and equipment.............. (79,398) (72,239)
Proceeds from sales and paydowns on OREO......... 23,337 26,664
Other............................................ 4,784 17,096
------------ ------------
Net Cash Provided by Investing
Activities................................ 470,743 229,792
------------ ------------
Financing Activities
- --------------------
Net decrease in deposits......................... (1,349,949) (1,620,909)
Proceeds from issuance of long-term debt......... 430,952 267,115
Retirement of long-term debt..................... (360,109) (130,634)
Net increase in short-term funds
borrowed....................................... 699,037 314,756
Cash dividends paid.............................. (146,762) (113,089)
Purchases of treasury stock...................... (287,760) (157,543)
Other............................................ 67,147 17,217
------------ ------------
Net Cash Used in Financing Activities....... (947,444) (1,423,087)
------------ ------------
Decrease in Cash and Due from Banks......... (47,579) (675,657)
-----------------------------------
Cash and due from banks at January 1,....... 2,262,512 2,521,676
------------ ------------
Cash and due from banks at September
30,....................................... $ 2,214,933 $ 1,846,019
============ ============
Supplemental Disclosure of Cash Flow
- ------------------------------------
Information
-----------
Cash paid during the period for:
Interest....................................... $ 547,870 $ 374,438
============ ============
Income taxes................................... $ 138,314 $ 104,776
============ ============
Net cash received on interest rate swaps......... $ 17,768 $ 81,020
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
6
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1995
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of CoreStates
Financial Corp ("CoreStates") have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (comprising only normal recurring accruals)
necessary for a fair presentation have been included. Certain amounts in prior
periods have been reclassified for comparative purposes. Operating results for
the nine-month period ended September 30, 1995 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1995.
During the first quarter of 1994, CoreStates recognized a $3.4 million
after-tax, or $0.02 per share, impairment loss on certain mortgage securities as
a cumulative effect of a change in accounting principle. The loss was the result
of a write-down to fair value of these securities, which were deemed to be
impaired. This resulted from a Financial Accounting Standards Board ("FASB")
1994 interpretation of Statement of Financial Accounting Standards No. 115 ("FAS
115"). The interpretation, reached by a consensus of the FASB Emerging Issues
Task Force in March 1994, provides more definitive criteria for recognition of
impairment losses on these types of securities.
NOTE B -- PENDING ACQUISITION
On October 10, 1995, CoreStates announced a definitive agreement to acquire
Meridian Bancorp, Inc. ("Meridian") in a transaction expected to be accounted
for under the pooling of interests method of accounting (the "Merger"). For each
Meridian common share outstanding, 1.225 shares of CoreStates' common stock will
be issued. As a result of this transaction, approximately 81.6 million new
shares will be issued. This agreement is subject to, among other conditions,
approval by the shareholders of both CoreStates and Meridian and certain
regulatory authorities.
In May 1995, Meridian announced a definitive agreement to acquire United
Counties Bancorporation ("United Counties"), a $1.6 billion asset New Jersey
bank holding company. For each United Counties common share outstanding, 5.0
shares of Meridian's common stock will be issued. This agreement is also subject
to, among other conditions, approval by shareholders and certain regulatory
authorities.
7
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1995
NOTE B -- PROPOSED MERGER - CONTINUED
<TABLE>
<CAPTION>
A summary of selected unaudited historical financial information for Meridian follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ----------------
<S> <C> <C> <C> <C>
Operating results: 1995 1994 1995 1994
---- ---- ---- ----
(in millions, except per share amounts)
Net interest income......................... $ 156 $ 156 $ 459 $ 459
Non-interest income......................... 63 57 188 171
Income before cumulative effect of a change
in accounting principle.................. 54 37 122(a) 118
Per common share data:
Income before cumulative effect of a
change in accounting principle........ 0.96 0.63 2.14(a) 2.03
Cash dividends declared.................. 0.37 0.34 1.08 1.00
Average common shares outstanding........... 55.848 57.804 55.928 57.798
</TABLE>
<TABLE>
<CAPTION>
September 30,
1995
-------------
<S> <C>
Balance sheet (at period-end):
(in millions, except per share amount)
Assets............................... $ 14,581
Loans................................ 10,246
Deposits............................. 11,104
Common shareholders' equity.......... 1,266
Book value per common share.......... 22.65
</TABLE>
- ---------------------
(a) In June 1995, Meridian completed an internal review of its operations and
businesses and announced a company-wide plan designed to improve its
operating performance and competitive position. As a result of this
review, Meridian recorded a restructuring charge in the second quarter of
1995 of $32.0 million ($20.8 million after-tax or $0.37 per share).
A summary of selected unaudited historical financial information for United
Counties follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ----------------
<S> <C> <C> <C> <C>
Operating results: 1995 1994 1995 1994
---- ---- ---- ----
(in millions, except per share amounts)
Net interest income......................... $ 16 $ 17 $ 47 $ 50
Non-interest income......................... 2 2 16(b) 4
Income before cumulative effect of a change
in accounting principle.................. 6 6 26 18
Per common share data:
Income before cumulative effect of a
change in accounting principle........ 2.87 2.80 11.89(b) 8.30
Cash dividends declared.................. 1.85 0.80 3.45 2.20
Average common shares outstanding........... 2.146 2.138 2.145 2.136
</TABLE>
<TABLE>
<CAPTION>
September 30,
1995
-------------
<S> <C>
Balance sheet (at period-end):
(in millions, except per share amount)
Assets............................... $ 1,630
Loans................................ 389
Deposits............................. 1,303
Common shareholders' equity.......... 199
Book value per common share.......... 92.68
</TABLE>
- ---------------------
(b) Includes a gain of $12.0 million ($7.6 million after-tax or $3.56 per
share) on the exchange of investment securities.
8
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1995
NOTE C - LOAN PORTFOLIO
Loans, net of unearned discounts, at September 30, 1995 consists of the
following (in thousands):
<TABLE>
<CAPTION>
September 30,
1995
-------------
<S> <C>
Domestic:
Commercial, industrial and other:
Highly leveraged transactions ("HLTs"). $ 539,693
Other.................................. 9,141,537
-----------
Total commercial, industrial and 9,681,230
other................................ -----------
Real estate:
Construction and development........... 330,619
Residential............................ 2,493,735
Other.................................. 2,739,302
-----------
Total real estate..................... 5,563,656
-----------
Consumer:
Installment............................ 1,396,684
Credit card............................ 1,485,761
-----------
Total consumer........................ 2,882,445
-----------
Financial institutions................... 942,039
Factoring receivables.................... 555,169
Lease financing.......................... 742,251
-----------
Total domestic........................ 20,366,790
-----------
Foreign................................... 801,236
-----------
Total loans........................... $21,168,026
===========
</TABLE>
In May 1993, the FASB issued Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan" ("FAS 114") and in
October 1994, the FASB issued Statement No. 118, "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures" ("FAS 118"). FAS 114
addresses accounting for impairment of certain loans and requires that impaired
loans within the scope of FAS 114 be measured based on the present value of
expected cash flows discounted at the loan's effective interest rate, or be
measured at the loan's observable market price or the fair value of its
collateral. FAS 118 amended FAS 114's income recognition policies and clarifies
FAS 114's disclosure requirements. Both FAS 114 and 118 are effective beginning
in 1995. As required, CoreStates adopted FAS 114 and 118 in the first quarter of
1995. The adoption of these standards did not have an impact on CoreStates'
provision for loan losses or allowance for loan losses, nor change CoreStates'
methodology for recognizing income on impaired loans.
9
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -- continued
September 30, 1995
NOTE D -- OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS AND COMMITMENTS
In the normal course of business, there are outstanding commitments and
contingent liabilities which are not reflected in the financial statements.
These include various financial instruments with off-balance sheet risk used in
connection with CoreStates' asset and liability management and to provide for
the needs of customers. These involve varying degrees of credit, interest rate
and liquidity risk, but do not represent unusual risks for the Corporation and
management does not anticipate any significant losses as a result of these
transactions.
The following is a summary of contractual or notional amounts of off-balance
sheet commitments and derivative financial instruments as of September 30, 1995
(in thousands):
<TABLE>
<CAPTION>
September 30,
1995
-------------
<S> <C>
Standby letters of credit, net of
participations......................... $ 949,577
Commercial letters of credit............ 1,211,765
Commitments to extend credit............ 9,332,230
Unused commitments under credit card
lines.................................. 3,865,837
Interest rate futures contracts:
Commitments to purchase................ 659,000
Commitments to purchase foreign and
U.S. currencies........................ 2,608,756
Interest rate swaps, notional principal
amounts................................ 7,868,041
Interest rate caps and floors:
Written................................ 583,986
Purchased.............................. 900,435
Other derivatives....................... 222,000
</TABLE>
NOTE E -- PROCESS REDESIGN
In order to build upon CoreStates' strong financial condition and sustain
previous financial successes, and to accomplish this goal in the competitive
financial services environment in which CoreStates operates, management had
commenced an intensive review of all aspects of CoreStates' operations and
businesses in September 1994. In March 1995, CoreStates completed its review and
approved and announced a corporate-wide process redesign plan, which
restructures its banking services around customers and enhances employees'
authority to make decisions to benefit customers. The objectives of the process
redesign are: (i) to enhance CoreStates' customer focus; (ii) to accelerate the
culture change already in progress at CoreStates; and (iii) to improve
productivity.
As a result of the process redesign, CoreStates recorded a $110 million
restructuring charge, $70 million after-tax or $0.49 per share, in March 1995.
When complete, the process redesign will result in the elimination of 2,800
positions, or 2,600 full-time equivalent employees. The breakdown of the
eliminated positions is as follows: (i) 450 positions resulting from a hiring
freeze in place from September 1994 to April 1995; (ii) 530 positions resulting
from expected attrition during implementation of the process redesign; (iii) 930
employees who have elected to accept an enhanced severance package; and (iv) 890
layoffs. At September 30, 1995, CoreStates had 13,700 full-time equivalent
employees which includes reductions for the impact of the hiring freeze and
1,400 employee terminations during the second and third quarters. The components
of the restructuring charge and related cash outflow were as follows (in
millions):
<TABLE>
<CAPTION>
Restructuring Charge
--------------------
Requiring Cash
Cash Outflow
Total Outflow To-date(a)
----- ------- ----------
<S> <C> <C> <C>
Severance costs................. $ 72 $72 $17
Office reconfiguration costs.... 16 7 -
Branch closing costs............ 15 7 1
Outplacement costs.............. 3 3 2
Miscellaneous................... 4 2 2
----- --- ---
Total.................. $ 110 $91 $22
===== === ===
</TABLE>
- -------------------------------------------
(a) CoreStates' liquidity has not been significantly affected by these cash
outflows.
CoreStates believes that the restructuring charges recorded through
September 30, 1995 will be sufficient to absorb the remaining restructuring
related costs.
The severance charge relates to the separation package which will be paid to
those employees who have elected to accept that package and to those employees
laid off. Cash payments under separation packages commenced in April 1995 and
will continue for varying terms. No lump sum severance payments will be made.
The office reconfiguration charge relates to the costs of asset writeoffs and
lease buyouts that will be incurred principally in the process of streamlining
and consolidating center city Philadelphia operations. This streamlining and
consolidating process will occur over the 18-month period which began in April
1995. The branch closing charge relates to the costs of asset writeoffs and
lease buyouts that will be incurred in the process of consolidating and closing
37 branch offices.
CoreStates recorded restructuring credits of $3.0 million, $1.9 million
after-tax or $0.01 per share in the second quarter of 1995 and $2.4 million,
$1.5 million after-tax or $0.01 per share in the third quarter of 1995, related
to gains on the curtailment of future pension benefits associated with the 1,400
employees terminated during the second and third quarters. CoreStates
anticipates the recognition of an additional curtailment gain in the fourth
quarter of 1995, as more employees reach their work-through dates.
Future cash outflows to be incurred in implementing the process redesign
plan, which were not included in the restructuring charge, will include
approximately $25 million for capital expenditures and approximately $16 million
in operating expenses. Since April 1995, the amount of incremental operating
expenses that were incurred related to the process redesign were approximately
$4 million.
The principal themes of the process redesign plan are as follows:
. Redefine the organizational structure around customers, customers
segments and markets, not products;
. Streamline and consolidate functions and processes;
. Vacate 1.2 million square feet of occupied space in 45 buildings,
including the 37 branches to be closed;
. Use technology to automate services and processes; and
. Employ tiered pricing strategies and streamline product pricing.
Implementation of the process redesign plan will occur over the 18-month
period which began in April 1995. By late 1996, the process design is expected
to generate cost efficiencies which will reduce expenses by $180 million and
revenue enhancements which will net an addition of $30 million, combining to
improve CoreStates' net income at an annual rate of $0.90 per share. The process
redesign was originally expected to have a positive impact on net income of
approximately $0.16 per share in 1995 (excluding the restructuring charge and
subsequent credits) and $0.72 per share in 1996. Due to timing, the impact of
the process redesign on 1995 net income is expected to exceed $0.16 per share.
For the third quarter of 1995, the impact of the process redesign on net income
(excluding the restructuring credit) was approximately $0.10 per share. This
impact principally related to expense savings and exceeded original projections
for the third quarter by $0.05 per share. The impact on net income for the nine
months ended September 30, 1995 (excluding the net restructuring charge) was
approximately $0.13 per share, $0.06 per share above original projections. The
favorable variances to original projections are principally due to personnel
savings, and mostly due to timing. CoreStates does not anticipate exceeding the
annual run rate of $0.90 per share. A breakdown of expected expense reductions
is as follows: personnel related - $98 million; professional and outside
services - $20 million; occupancy - $18 million; office supplies - $9 million;
telecommunications - $5 million; travel and entertainment - $5 million;
furnishings - $4 million; and all other - $21 million. As with any earnings
estimates, there are factors beyond CoreStates' control that could influence the
actual results for 1995-1996, such as changes in economic conditions. As a
result, the actual results could differ materially from these estimates.
10
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
December 31,
-------------------------
1994 1993
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks (Note 4)....................... $ 2,262,512 $ 2,521,676
Time deposits, principally Eurodollars................. 1,750,458 1,319,457
Investment securities held-to-maturity (market value:
1994-$2,423,830; 1993-$2,257,513) (Note 5)........... 2,454,584 2,228,560
Investment securities available-for-sale (Note 5)...... 426,047 1,370,606
Total loans, net of unearned discounts of
$146,305 in 1994 and $151,994 in 1993 (Note 6)....... 20,526,216 19,776,258
Less: Allowance for loan losses (Note 7)............. (500,631) (450,823)
----------- -----------
Net loans.................................... 20,025,585 19,325,435
Federal funds sold and securities purchased under
agreements to resell................................. 731,820 161,527
Trading account securities............................. 1,206 6,393
Due from customers on acceptances...................... 342,211 332,234
Premises and equipment (Note 8)........................ 423,832 410,022
Other assets (Note 20)................................. 906,881 758,707
----------- -----------
Total assets................................. $29,325,136 $28,434,617
=========== ===========
LIABILITIES
Deposits:
Domestic:
Non-interest bearing............................... $ 6,362,470 $ 6,649,367
Interest bearing (Note 9).......................... 14,565,051 13,686,027
Overseas branches and subsidiaries (Note 9).......... 1,113,365 796,902
----------- -----------
Total deposits............................... 22,040,886 21,132,296
Short-term funds borrowed (Note 10).................... 1,546,201 1,884,125
Bank acceptances outstanding........................... 336,103 337,180
Other liabilities (Note 12)............................ 1,260,722 1,123,342
Long-term debt (Note 11)............................... 1,791,110 1,589,290
----------- -----------
Total liabilities............................ 26,975,022 26,066,233
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 15)
SHAREHOLDERS' EQUITY (NOTES 11, 13 AND 19)
Preferred stock: authorized 10.0 million
shares; no shares issued................................ - -
Common stock: $1 par value; authorized 200.0 million
shares; issued 145.9 million shares in 1994 and
145.8 million shares in 1993 (including treasury
shares of 1.0 million in 1994 and .4 million in 1993). 2,350,114 2,368,384
----------- -----------
Total shareholders' equity...................... 2,350,114 2,368,384
----------- -----------
Total liabilities and shareholders' equity...... $29,325,136 $28,434,617
=========== ===========
</TABLE>
See accompanying notes to the financial statements.
12
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON CAPITAL RETAINED TREASURY
STOCK SURPLUS EARNINGS STOCK TOTAL
-------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1991............................ $ 77,017 $713,283 $1,144,822 $ (7,711) $1,927,411
Net income............................................... 183,188 183,188
Net change in unrealized gain in marketable
equity securities, net of tax (Note 5)................. 1,331 1,331
Treasury shares acquired (30 shares)..................... (1,480) (1,480)
Stock issued in public offering (7,842 shares)........... 7,842 59,739 67,581
Common stock issued under employee benefit
plans (1,230 new shares; 52 treasury shares)........... 1,190 30,286 131 777 32,384
Common stock issued under dividend reinvestment
plan (449 new shares; 220 treasury shares)............. 338 14,083 4,288 18,709
Conversion of subordinated debt (16 treasury shares)..... (45) 245 200
Foreign currency translation adjustments................. (4,384) (4,384)
Common dividends declared................................ (130,381) (130,381)
-------- -------- ---------- --------- ----------
Balances at December 31, 1992............................ 86,387 817,391 1,194,662 (3,881) 2,094,559
Net income............................................... 349,419 349,419
Issuance of shares in connection with a 100% common
stock dividend......................................... 58,929 (58,929)
Net unrealized gain on investments available-for-sale,
net of tax (Note 5).................................... 64,305 64,305
Acquisition of Inter Community Bancorp (640 treasury
shares)................................................ (213) 17,459 17,246
Treasury shares acquired (1,060 shares).................. (29,449) (29,449)
Repurchase and retirement of common stock................ (382) (2,255) (5,808) (8,445)
Common stock issued under employee benefit
plans (857 new shares; 175 treasury shares)............ 586 13,701 (1,510) 4,871 17,648
Common stock issued under dividend reinvestment
plan (358 new shares; 111 treasury shares)............. 220 8,590 (101) 3,181 11,890
Foreign currency translation adjustments................. (1,758) (1,758)
Common dividends declared................................ (147,031) (147,031)
-------- -------- ---------- --------- ----------
Balances at December 31, 1993............................ 145,740 778,498 1,451,965 (7,819) 2,368,384
Net income............................................... 245,362 245,362
Net change in unrealized gain on investments avaliable-
for-sale, net of tax (Note 5).......................... (52,951) (52,951)
Acquisition of Germantown Savings Bank (5,880 treasury
shares) (Note 2)....................................... (8,605) 156,361 147,756
Treasury shares acquired (8,598 shares).................. (228,963) (228,963)
Repurchase and retirement of common stock................ (177) (981) (3,583) (2) (4,743)
Common stock issued under employee benefit
plans (279 new shares; 688 treasury shares)............ 279 4,172 (7,803) 18,456 15,104
Common stock issued under dividend reinvestment and
stock purchase plans (450 treasury shares)............. 77 (483) 12,306 11,900
Conversion of subordinated debt (36 new shares;
909 treasury shares)................................... 36 (2,001) 25,364 23,399
Cash paid for fractional shares.......................... (83) (83)
Foreign currency translation adjustments................. 52 52
Common dividends declared................................ (175,103) (175,103)
-------- -------- ---------- --------- ----------
Balances at December 31, 1994............................ $145,878 $781,766 $1,446,767 $ (24,297) $2,350,114
======== ======== ========== ========= ==========
</TABLE>
See accompanying notes to the financial statements.
13
<PAGE>
CoreStates Financial Corp and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1994 1993 1992
------------ ------------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................. $ 245,362 $ 349,419 $ 183,188
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of a change in
accounting principle (Note 12)........ 3,430 13,010 84,946
Provision for losses on loans............. 246,900 121,201 160,250
Provision for losses and writedowns
on other real estate owned............... 44,538 26,614 34,253
Depreciation and amortization............. 76,277 84,998 106,111
Deferred income tax expense (benefit)..... 16,393 (10,656) 26,864
Securities gains (Note 5)................. (18,753) (16,110) (13,805)
Other gains (Notes 6 and 20).............. (1,900) (11,000) (41,072)
Increase in due to factored clients....... 41,262 147,072 1,923
Proceeds from contribution of assets
to EPS joint venture (Note 20)........... - - 79,350
(Increase) decrease in interest receivable (25,625) 3,646 44,398
Increase (decrease) in interest payable... 23,551 (7,738) (62,667)
Other, net................................ 54,881 43,789 80,004
----------- ------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 706,316 744,245 683,743
----------- ------------ -----------
INVESTING ACTIVITIES
Purchase of Germantown Saving Bank, net of
cash acquired (Note 2).................... (74,053) - -
Net (increase) decrease in loans (Note 6)... (633,013) (1,483,539) (191,780)
Proceeds from sales of loans (Note 6)....... 897,528 790,193 568,698
Loans originated or acquired--non-bank
subsidiaries.............................. (33,760,035) (24,712,336) (16,561,468)
Principal collected on loans--non-bank
subsidiaries.............................. 33,399,764 24,411,312 16,364,389
Net (increase) decrease in time deposits,
principally Eurodollars................... (431,001) 495,615 (131,596)
Purchases of investments held-to-maturity... (1,030,404) - -
Purchases of investments available-for-sale. (422,894)
Proceeds from maturities of investments held-
to-maturity............................... 1,655,885 - -
Proceeds from maturities of investments
available-for-sale........................ 308,598 - -
Proceeds from sales of investments
available-for-sale........................ 690,343 - -
Purchases of investment securities.......... - (2,252,933) (2,169,341)
Proceeds from sales of investment
securities................................ - 581,101 408,341
Proceeds from maturities of investment
securities................................ - 1,819,500 1,440,311
Net (increase) decrease in Federal funds
sold and securities purchased under
agreements to resell...................... (549,293) 105,363 109,410
Purchases of premises and equipment......... (92,232) (107,275) (47,221)
Proceeds from sales and paydowns on other
real estate owned......................... 59,947 84,389 79,073
Other, net.................................. 19,617 6,689 49,505
----------- ------------ -----------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES.............................. 38,757 (261,921) (81,679)
----------- ------------ -----------
FINANCING ACTIVITIES
Net decrease in deposits.................... (536,836) (540,605) (244,987)
Long-term debt issued (Note 11)............. 478,048 916,519 332,775
Retirement of long-term debt................ (242,432) (683,399) (215,756)
Net proceeds from issuance of common
stock in public offering.................. - - 67,581
Net decrease in short-term funds
borrowed.................................. (337,924) (19,919) (165,407)
Cash dividends paid......................... (160,122) (143,334) (126,265)
Purchase of treasury stock.................. (228,963) (29,449) (1,480)
Other, net.................................. 23,992 29,538 51,093
----------- ------------ -----------
NET CASH USED IN FINANCING ACTIVITIES..... (1,004,237) (470,649) (302,446)
----------- ------------ -----------
INCREASE (DECREASE) IN CASH AND DUE
FROM BANKS............................... (259,164) 11,675 299,618
Cash and due from banks at January 1,..... 2,521,676 2,510,001 2,210,383
----------- ------------ -----------
CASH AND DUE FROM BANKS AT DECEMBER 31,..... $ 2,262,512 $ 2,521,676 $ 2,510,001
=========== ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest.................................. $ 513,773 $ 524,565 $ 771,780
============ ============ ============
Income taxes.............................. $ 130,904 $ 167,216 $ 124,952
============ ============ ============
</TABLE>
See accompanying notes to the financial statements.
14
<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"); New Jersey National Bank ("NJNB"); CoreStates
Bank of Delaware, N.A. ("CBD"); Congress Financial Corporation; and CoreStates
Capital Corp. All material intercompany transactions have been eliminated. The
financial statements include the consolidated accounts of Independence Bancorp,
Inc. ("Independence"), which was acquired on June 27, 1994, and Constellation
Bancorp ("Constellation"), which was acquired on March 16, 1994 for all periods
presented. Both transactions were accounted for under the pooling of interests
method of accounting. Certain amounts in prior years have been reclassified for
comparative purposes.
CHANGES IN ACCOUNTING PRINCIPLES.
During the first quarter of 1994, Independence recognized a $3,430 after-tax, or
$.02 per share, impairment loss on certain mortgage securities as a cumulative
effect of a change in accounting principle. The loss was the result of a write-
down to fair value of these securities, which were deemed to be impaired. This
resulted from a Financial Accounting Standards Board ("FASB") 1994
interpretation of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("FAS 115").
The interpretation, reached by consensus of the FASB Emerging Issues Task Force
in March 1994, provides more definitive criteria for recognition of impairment
losses on these types of securities.
Effective December 31, 1993, the Corporation adopted FAS 115. FAS 115
established the accounting and reporting requirements for investments in equity
securities that have readily determinable fair values and for all investments in
debt securities. All affected investment securities must be classified as
either held-to-maturity, trading, or available-for-sale. Held-to-maturity
securities are carried at amortized cost. Trading securities are carried at
fair value with unrealized holding gains and losses reported in the income
statement. Available-for-sale securities are carried at fair value with
unrealized holding gains and losses reported as a component of shareholders'
equity. As a result of adopting FAS 115, securities with an original carrying
value of $1,272,138 were classified as available-for-sale at December 31, 1993
and were written up to their aggregate fair value of $1,370,606. After the
related tax effects, shareholders' equity at December 31, 1993 was increased by
$64,305 to reflect the write-up of these securities to fair value.
Effective January 1, 1993, the Corporation adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits" ("FAS 112"). FAS 112 established the accounting requirements for
benefits provided to former or inactive employees after employment but before
retirement. FAS 112 requires that employers accrue the costs associated with
providing benefits, such as salary and benefit continuation under disability
plans, when payment of the benefits is probable and the amount of the obligation
can be reasonably estimated. The Corporation recognized the January 1, 1993 FAS
112 transitional liability of $20,015, $13,010 after-tax or $.09 per share, as
the cumulative effect of a change in accounting principle.
Effective January 1, 1992, the Corporation adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions" ("FAS 106"). FAS 106 requires that employers accrue the
costs associated with providing postretirement benefits during the active
service periods of employees. As permitted under FAS 106, the Corporation
elected to immediately recognize the January 1, 1992 transitional liability of
$128,706, $84,946 after-tax or $.62 per share, as the cumulative effect of a
change in accounting principle.
15
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"). In the first quarter of 1992 the Corporation retroactively adopted FAS
109 as of January 1, 1987. Under the asset and liability method provided for by
FAS 109, 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.
INVESTMENT SECURITIES
Held-to-maturity securities are carried at cost adjusted for amortization of
premiums and accretion of discounts, both computed on the interest method.
Held-to-maturity securities primarily consist of debt securities. The
Corporation has both the ability and positive intent to hold these securities
until maturity. Trading account securities are carried at market values. Gains
on trading account securities include both realized and unrealized gains and
losses on the portfolio.
Debt securities not classified as held-to-maturity or trading and marketable
equity securities are classified as available-for-sale. Available-for-sale
securities are carried at fair value, with unrealized gains and losses, net of
tax, reported as a component of shareholders' equity. The accumulated net
unrealized gain on available-for-sale securities included in retained earnings
was $11,354 at December 31, 1994.
The adjusted cost of a specific certificate sold is the basis for determining
realized securities gains and losses as included in the consolidated statement
of income in "non-interest income".
Interest and dividends on investment securities are recognized as income when
earned.
LOANS
Interest on commercial loans is recognized on the daily principal amounts
outstanding. Loan fees are generally considered as 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 becomes doubtful. The deferral or non-
recognition of interest does not constitute forgiveness of the borrower's
obligation. In those cases where collection of principal is in doubt, additions
are made to the allowance for loan losses.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is based on management's evaluation of the effects
on the loan portfolio of current economic and political conditions and other
pertinent indicators. Activities in foreign countries may involve special risks
not normally a part of domestic operations. Credit review personnel and senior
officers evaluate the loan portfolio by determining the net realizable value of
collateral and the financial strength of borrowers. Installment and credit card
loans are evaluated largely on the basis of delinquency data because of the
number of such loans and the relatively small size of each individual loan.
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.
16
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 a non-contributory defined benefit pension plan 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 plan. It is the Corporation's policy to fund the
plan on a current basis to the extent deductible under existing tax regulations.
The Corporation provides certain postretirement health care and life insurance
benefits for retired employees. In order to participate in the health care
plan, an employee must retire with at least 10 years of service. The
postretirement health care plan is contributory, with retiree contributions
based on years of service. It is the Corporation's policy to fund the health
care plan on a current basis to the extent deductible under existing tax
regulations.
INTERNATIONAL OPERATIONS
Forward exchange contracts are valued at current rates of exchange. Gains or
losses on forward exchange contracts intended to hedge an identifiable foreign
currency commitment, if any, are deferred and included in the measurement of the
related foreign currency transaction. All other gains or losses on forward
exchange contracts are included in the consolidated statement of income.
Currency gains and losses in connection with foreign loans and deposit contract
transactions, 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 $(1,571), $(1,623) and $135 at December 31, 1994,
1993 and 1992, respectively.
DERIVATIVE INTEREST RATE CONTRACTS
The Corporation uses various interest rate contracts such as, interest rate
swaps, futures, forward rate agreements, caps and floors, primarily to manage
the interest rate risk of specific assets, liabilities or anticipated
transactions 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.
Contracts held or issued for customers are valued at market with gains or losses
included in the consolidated income statement.
CASH DIVIDENDS DECLARED PER SHARE
Cash dividends declared per share for the periods prior to the acquisitions of
Independence on June 27, 1994, Constellation on March 16, 1994 and First Peoples
Financial Corporation on September 3, 1992 assume that the Corporation would
have declared cash dividends equal to the cash dividends per share actually
declared by the Corporation.
STOCK DIVIDEND
All common shares outstanding and per common share data reflect the impact of
the Corporation's 100% stock dividend declared on August 17, 1993, and paid on
October 15, 1993 to shareholders of record on September 15, 1993 ("the Stock
Dividend"). An amount equal to the par value of the shares issued in connection
with the Stock Dividend was transferred from capital surplus to common stock.
17
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
2. ACQUISITIONS
On December 2, 1994, the Corporation purchased Germantown Savings Bank
("Germantown") a Pennsylvania chartered stock savings bank with $1.6 billion in
assets and $1.4 billion in deposits at the time of the acquisition. Under the
terms of the transaction, each of Germantown's 4.15 million shares of common
stock was exchanged for a combination of the Corporation's common stock, equal
to approximately 55% of the $62 per Germantown share purchase price, and cash,
equal to approximately 45% of the purchase price. As a result of this
acquisition, 5.9 million shares of the Corporation's common stock were issued
out of treasury stock. The transaction had a total value of approximately $260
million and was accounted for under the purchase method of accounting.
Accordingly, the results of operations of Germantown have been included with the
Corporation 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 $191 million, including $148 million of goodwill,
were created in this transaction. Goodwill will be amortized to other operating
expense on a straight-line basis over 15 years.
A summary of unaudited pro forma combined financial information for the
Corporation and Germantown combined follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1994 1993
---------- ---------
<S> <C> <C>
Operating results (in thousands,
except per share):
Net interest income............... $1,457,323 $1,395,883
Non-interest income............... 571,738 580,445
Income before cumulative effect
of a change in accounting
principle....................... 263,219 374,178
Per common share.................. 1.77 2.47
Average common shares
outstanding..................... 148,444 151,261
</TABLE>
On March 16, 1994, the Corporation acquired Constellation Bancorp
("Constellation"), a New Jersey bank holding company with $2.3 billion in assets
and $2.1 billion in deposits. The Corporation issued approximately 11.3 million
shares of common stock to shareholders of Constellation based on an exchange
ratio of .4137 of a share of the Corporation's common stock for each share of
Constellation common stock.
On June 27, 1994, the Corporation acquired Independence Bancorp, Inc.
("Independence"), a Pennsylvania bank holding company with $2.6 billion in
assets and $2.1 billion in deposits. The Corporation issued approximately 16.6
million shares of common stock to shareholders of Independence based on an
exchange ratio of 1.5 shares of the Corporation's common stock for each share of
Independence common stock.
18
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
2. ACQUISITIONS - (continued)
The Constellation and Independence acquisitions were both accounted for under
the pooling of interests method of accounting; accordingly, the consolidated
financial statements have been restated to include the consolidated accounts of
Constellation and Independence for all periods presented. Previously reported
information was as follows:
<TABLE>
<CAPTION>
1993 CORPORATION CONSTELLATION INDEPENDENCE
- ---- ----------- ------------- ------------
<S> <C> <C> <C>
Net interest income........................... $1,117,901 $100,753 $106,617
Provision for losses on loans................. 100,000 10,000 11,201
Non-interest income........................... 503,055 41,599 29,376
Non-financial expenses........................ 1,033,375 115,186 93,601
Provision for income taxes.................... 159,654 662 (a) 8,312
Income before cumulative effect of a change
in accounting principle..................... 327,927 16,504 22,879
Cumulative effect of a change in accounting
principle, net of tax....................... (13,010) -
Net income.................................... 314,917 16,504 22,879
Income per share before cumulative effect of a
change in accounting principle.............. 2.80 .61 1.98
Net income per share.......................... 2.69 .61 1.98
Cash dividends declared....................... 1.14 - 1.16
1992
- ----
Net interest income........................... $1,057,046 $ 86,304 $109,128
Provision for losses on loans................. 119,300 10,000 30,950
Non-interest income........................... 546,509 40,585 23,941
Non-financial expenses........................ 1,094,591 118,527 93,250
Provision for income taxes.................... 127,260 53 (a) 1,757
Income (loss) before cumulative effect of a
change in accounting principle.............. 262,404 (1,691) 7,112
Cumulative effect of a change in accounting
principle, net of tax....................... (80,986) - (c) 4,378 (b)
Net income (loss)............................. 181,418 (1,691) 11,490
Income (loss) per share before cumulative
effect of a change in accounting principle 2.27 (.19) .63
Net income (loss) per share................... 1.57 (.19) 1.02
Cash dividends declared....................... 1.02 - 1.16
</TABLE>
_____________________________
(a) In 1993, Constellation prospectively adopted FAS 109. However, restated
financial information is prepared as if Constellation retroactively adopted
FAS 109 as of January 1, 1987. The impact of applying pooling of interests
accounting rules and retroactively applying FAS 109 to Constellation had
the following effects on restated net income and period-end common
shareholders' equity:
<TABLE>
<CAPTION>
Increase (decrease)
in net income Cumulative increase
--------------------- in common
Amount Per Share shareholders' equity
------ --------- --------------------
<S> <C> <C> <C>
Year ended:
December 31, 1993........................................... $(5,076) $(.03) $39,924
December 31, 1992........................................... 702 .01 45,000
</TABLE>
19
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
2. ACQUISITIONS - (continued)
(b) Independence prospectively adopted FAS 109 on January 1, 1992, recognizing
a cumulative benefit of $4.4 million as the cumulative effect of a change in
accounting principle. However, restated financial information is prepared as if
Independence retroactively adopted FAS 109 as of January 1, 1987. The impact of
applying pooling of interests accounting rules and retroactively applying FAS
109 to Independence had the following effects on restated net income and period-
end common shareholders' equity:
<TABLE>
<CAPTION>
Increase (decrease)
in net income Cumulative increase
------------------- in common
Amount Per Share shareholders' equity
------ --------- --------------------
<S> <C> <C> <C>
Year ended:
December 31, 1993............................... - - -
December 31, 1992............................... $(4,378) $(.03) -
</TABLE>
(c) Constellation adopted FAS 106 on January 1, 1993, the date required under
that statement. Constellation elected not to recognize immediately is $6.0
million transitional liability, but to amortize that liability over 20 years. As
permitted under FAS 106 and pooling accounting, the restated financial
information is prepared as if Constellation adopted FAS 106 effective January 1,
1992 and immediately recognized the $6.0 million, $4.0 million after-tax,
transitional liability. Salaries, wages and benefits have been adjusted
accordingly.
Subsequent to the March 16, 1994 consummation of the Constellation acquisition,
Constellation recorded merger-related charges in the first quarter of 1994 in
connection with a change in strategic direction related to problem assets and to
conform its consumer lending charge-off policies to those of the Corporation,
and charges for expenses attributable to the acquisition. These merger-related
charges totalled $127.8 million after-tax, or $.89 per share. On a pre-tax
basis, the merger-related charges consisted of a $120.0 million provision for
loan losses, a $28.0 million addition to the OREO reserve, $13.0 million for the
writedown of purchased mortgage servicing rights and related assets, and $34.0
million for expenses directly attributable to the acquisition including
severance costs of $8.0 million related to approximately 370 employees.
Subsequent to the June 27, 1994 consummation of the Independence acquisition,
Independence recorded merger-related charges in the second quarter of 1994 in
connection with a change in strategic direction related to problem assets and to
conform its consumer lending charge-off policies to those of the Corporation,
and charges for expenses attributable to the acquisition. These merger-related
charges totalled $39.6 million after-tax, or $.28 per share. On a pre-tax basis,
the merger-related charges consisted of a $25.0 million provision for loan
losses, a $4.0 million addition to the OREO reserve, and $29.7 million for
expenses directly attributable to the acquisition including severance costs of
$5.0 million related to approximately 345 employees.
20
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
3. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" ("FAS 107"), requires disclosure of fair value
information about financial instruments, whether or not required to be
recognized in the balance sheet, for which it is practicable to estimate that
value. FAS 107 defines a financial instrument as cash, evidence of ownership
interest in an entity, or a contractual obligation or right that will be settled
with another financial instrument.
In cases where quoted market prices are not available, fair values are based on
estimates using discounted cash flow or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Fair value estimates derived
through those techniques cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. FAS 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the
Corporation.
The following table summarizes the carrying amount and fair value estimates of
financial instruments at December 31, 1994 and 1993.
<TABLE>
<CAPTION>
1994 1993
------------------------------ -------------------------
Carrying Carrying
or Notional Fair or Notional Fair
Amount Value Amount Value
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Cash and short-term assets..................... $ 4,744,790 $ 4,744,790 $ 4,002,660 $ 4,002,660
Investment securities.......................... 2,880,631 2,849,877 3,599,166 3,628,119
Trading account securities..................... 1,206 1,206 6,393 6,393
Net loans, excluding leases.................... 19,315,247 19,856,330 18,596,671 19,190,044
LIABILITIES:
Demand deposits................................ 15,213,517 15,213,517 15,788,786 15,788,786
Time deposits.................................. 6,827,369 6,898,093 5,343,510 5,505,362
Short-term borrowings.......................... 1,546,201 1,546,201 1,884,125 1,884,125
Long-term debt................................. 1,791,110 1,741,345 1,589,290 1,637,098
OFF-BALANCE SHEET ASSET
(LIABILITY):
Letters of credit.............................. 2,369,426 (5,923) 2,015,753 (4,111)
Commitments to extend credit................... 11,802,714 (13,310) 9,993,922 (13,000)
Derivative financial
instruments.................................. 13,289,463 (204,183) 8,142,583 135,709
</TABLE>
Fair value estimates, methods, and assumptions are set forth below for the
Corporation's financial instruments.
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. See Note 5
for the carrying value and estimated fair value of investment securities.
TRADING ACCOUNT SECURITIES Fair values for the Corporation's trading account
securities, 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.
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.
21
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
3. FAIR VALUES OF FINANCIAL INSTRUMENTS - (continued)
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, 1994 and 1993. 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.
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.
The following table presents carrying amounts and estimated fair values for
loans at December 31, 1994 and 1993. Disclosures about fair value of lease
financing receivables, which totaled $710,338 and $728,764 at December 31, 1994
and 1993, respectively, are not required by FAS 107, accordingly, the following
table excludes lease financing receivables.
<TABLE>
<CAPTION>
1994 1993
-------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Domestic loans:
Commercial, industrial and other.................. $ 8,688,733 $8,678,995 $ 7,879,451 $ 7,869,217
Real estate loans 6,490,649 6,426,174 6,663,656 6,695,595
Consumer:
Installment..................................... 1,386,776 1,396,125 1,356,633 1,380,210
Credit card..................................... 1,374,598 1,481,430 1,178,972 1,274,288
Financial institutions............................ 668,119 666,554 870,489 872,396
Factoring receivables............................. 622,380 622,380 555,211 555,211
Foreign............................................. 584,623 584,672 543,082 543,127
----------- ----------- ----------- -----------
Total loans, excluding lease
financing......................................... 19,815,878 19,856,330 19,047,494 19,190,044
Allowance for loan losses........................... (500,631) - (450,823) -
----------- ----------- ----------- -----------
Net loans, excluding lease
financing........................................... $19,315,247 $19,856,330 $18,596,671 $19,190,044
=========== =========== =========== ===========
</TABLE>
The fair value estimate for credit card loans is based on the value of existing
loans at December 31, 1994 and 1993. This estimate does not include 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. That
benefit is estimated to be approximately $59 million at December 31, 1994 and
$64 million at December 31, 1993 and is neither included in the fair value
estimate for credit card loans, nor recorded as an intangible asset in the
consolidated balance sheet.
CoreStates has traditionally maintained limits on industry, market and borrower
concentrations as a way to diversify and manage credit risk. Management's
current policy is to limit industry concentrations to 50% of total equity and to
limit market segment concentrations to 10% of total assets. CoreStates
manages industry concentrations by applying these dollar limits to industries
that have common risk characteristics.
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, 1994 and 1993, respectively, to an estimate of
aggregate expected maturities for those certificates of deposit.
22
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
3. FAIR VALUES OF FINANCIAL INSTRUMENTS - (continued)
The following table presents carrying amounts and estimated fair values of
deposits at December 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
------------------------------ ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Domestic:
Non-interest bearing checking......................... $ 6,362,470 $ 6,362,470 $ 6,649,367 $ 6,649,367
NOW accounts.......................................... 1,875,391 1,875,391 1,907,537 1,907,537
Savings accounts...................................... 4,354,829 4,354,829 4,188,103 4,188,103
Money market accounts................................. 2,620,827 2,620,827 3,043,779 3,043,779
Time deposits......................................... 5,714,004 5,784,728 4,546,608 4,708,460
----------- ----------- ----------- -----------
Total domestic deposits......................... 20,927,521 20,998,245 20,335,394 20,497,246
Overseas branches and
subsidiaries......................................... 1,113,365 1,113,365 796,902 796,902
----------- ----------- ----------- -----------
Total deposits.................................. $22,040,886 $22,111,610 $21,132,296 $21,294,148
=========== =========== =========== ===========
</TABLE>
The estimated fair values above 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. That benefit, commonly referred to as
a deposit base intangible, is estimated to be approximately $600,000 at December
31, 1994 and $570,000 at December 31, 1993 and is neither considered in the
above estimated fair value amounts nor recorded as an intangible asset in the
consolidated balance sheet. The core deposit base intangible was determined by
using a discounted cash flow approach to value the spread between the cost of
core deposit liabilities and the cost of alternative borrowing sources over the
estimated lives of the core deposit liabilities.
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, 1994 and 1993 for comparable types of borrowing
arrangements. See Note 11 for additional information regarding the carrying
value and estimated fair value of long-term debt.
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, and foreign exchange 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 relevant comparable instruments, on pricing models or formulas using current
assumptions (interest rate swaps, interest rate caps and floors, and options).
The fair value of commitments to extend credit other than credit card 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. See
Note 15 for the notional value and estimated fair value of the Corporation's
off-balance sheet derivative financial instruments and commitments.
4. CASH AND DUE FROM BANKS
The Corporation's banking subsidiaries are required to maintain reserve balances
with the Federal Reserve Bank. The average amount of those reserve balances for
the years ended December 31, 1994 and 1993 were approximately $326,000, and
$462,000, respectively.
23
<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, 1994 and
1993 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1994
- ----
Held-to-Maturity
- ----------------
U.S. Treasury................ $ 736,613 $ 202 $13,545 $ 723,270
U.S. Government agencies..... 1,107,550 923 16,572 1,091,901
State and municipal.......... 297,890 6,602 5,562 298,930
Other:
Domestic.................... 284,466 331 3,133 281,664
Foreign..................... 28,065 - - 28,065
---------- -------- ------- ----------
Total held-to-maturity..... $2,454,584 $ 8,058 $38,812 $2,423,830
========== ======== ======= ==========
Available-for-Sale
- ------------------
U.S. Treasury................ $ 185,411 $ 8,015 $ 177,396
U.S. Government agencies..... 147,996 $ 89 8,855 139,230
State and municipal.......... 8,218 99 90 8,227
Other:
Domestic.................... 35,914 17,041 2,067 50,888
Foreign..................... 23,229 27,109 32 50,306
---------- -------- ------- ----------
Total available-for-sale.. $ 400,768 $ 44,338 $19,059 $ 426,047
========== ======== ======= ==========
1993
- ----
Held-to-Maturity
- ----------------
U.S. Treasury................ $ 522,537 $ 6,203 $ 169 $ 528,571
U.S. Government agencies..... 1,318,522 5,481 2,758 1,321,245
State and municipal.......... 277,377 16,753 247 293,883
Other:
Domestic.................... 88,423 1,193 154 89,462
Foreign..................... 21,701 2,655 4 24,352
---------- -------- ------- ----------
Total held-to-maturity..... $2,228,560 $ 32,285 $ 3,332 $2,257,513
========== ======== ======= ==========
Available-for-Sale
- ------------------
U.S. Treasury................ $ 435,721 $ 14,320 $ 502 $ 449,539
U.S. Government agencies..... 439,496 9,815 621 448,690
State and municipal.......... 77,050 2,185 174 79,061
Other:
Domestic.................... 308,488 26,988 5,919 329,557
Foreign..................... 11,383 52,376 - 63,759
---------- -------- ------- ----------
Total available-for-sale.. $1,272,138 $105,684 $ 7,216 $1,370,606
========== ======== ======= ==========
</TABLE>
At December 31, 1992, marketable equity securities of $37,204 were carried at
the aggregate of their lower of cost or market. During 1992, the Corporation
recorded pre-tax gains of $2,636 on sales of certain domestic marketable equity
securities. At December 31, 1992, the market value of the marketable equity
securities portfolio exceeded its carrying value by $20,592. These marketable
equity securities are carried in the available-for-sale portfolio and have been
written up by $43,989 at December 31, 1994 the aggregate of their excess fair
values over cost, through an after-tax credit to retained earnings. The
Corporation recorded pre-tax gains of $11,926 in 1994 and $13,594 in 1993 on
sales of certain domestic equity securities. During 1994, 1993 and 1992, the
Corporation recorded pre-tax gains of $2,567, $8,617 and $5,325 on sales of
foreign equity securities.
Included in other domestic securities available-for-sale at December 31, 1993
were mortgage residual securities with an amortized cost and fair value of
$13,251 and $8,339, respectively. Pre-tax write-downs of $3,961 were recognized
in 1993 on these investments and were included in securities gains and losses.
During the first quarter of 1994, a $3,430 after-tax impairment loss was
recognized on these mortgage residual securities as the cumulative effect of a
change in accounting principle. The loss was the result of a write-down to fair
value of these securities which were deemed to be impaired. This write-down
resulted from a FASB interpretation of FAS 115 reached by a consensus of the
FASB Emerging Issues Task Force in March 1994, which provided more definitive
criteria for recognition of impairment losses on these types of securities.
24
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
5. INVESTMENT SECURITIES - (continued)
At December 31, 1994 and 1993, 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 $1,579,588 were pledged at December 31, 1994
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,
1994, 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................. $ 721,604 $ 717,867
Due after one year through five years... 617,953 606,435
Due after five years through ten years.. 147,964 146,205
Due after ten years..................... 105,699 107,466
Mortgage-backed securities.............. 789,479 773,952
---------- ----------
$2,382,699 $2,351,925
========== ==========
Available-for-Sale
- ------------------
Due in one year or less................. $ 76,069 $ 76,079
Due after one year through five years... 96,703 90,907
Due after five years through ten years.. 27,967 25,157
Due after ten years..................... 6,446 6,327
Mortgage-backed securities.............. 158,408 148,413
---------- ----------
$ 365,593 $ 346,883
========== ==========
</TABLE>
Proceeds from sales of investments in debt securities available-for-sale during
1994, 1993, and 1992 were $657,361, $535,267 and $344,605, respectively. Gross
gains of $9,625 in 1994, $6,069 in 1993 and $8,475 in 1992, and gross losses of
$4,739 in 1994, $200 in 1993 and $808 in 1992 were realized on those sales.
6. LOAN PORTFOLIO
For a breakdown of the loan portfolio by type of loan see footnote 3 on page 22.
Real estate loans at December 31, 1994 and 1993 were comprised of the following:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Construction and development............... $ 331,369 $ 367,364
Residential................................ 3,180,227 3,121,008
Other, primarily commercial
mortgages and commercial
loans secured by owner-
occupied real estate.................... 2,979,053 3,175,284
----------- -----------
$6,490,649 $6,663,656
=========== ===========
</TABLE>
The following represents the Corporation's non-accrual loans, renegotiated loans
and other real estate owned for December 31, 1994 and 1993 (in thousands):
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
NON-ACCRUAL LOANS
Domestic.......................... $244,406 $246,512
Foreign........................... 158 171
-------- --------
Total non-accrual loans...... 244,564 246,683
-------- --------
RENEGOTIATED LOANS
Domestic.......................... 1,657 56,457
-------- --------
Total renegotiated loans..... 1,657 56,457
-------- --------
Total non-performing loans... 246,221 303,140
-------- --------
OTHER REAL ESTATE OWNED (OREO)
Acquired through foreclosure
or exchange..................... 53,900 72,907
In-substance foreclosure.......... 6,687 56,419
Property formerly used in
banking operations.............. 4,076 6,202
-------- --------
Total OREO................... 64,663 135,528
-------- --------
Total non-performing assets.. $310,884 $438,668
======== ========
</TABLE>
The following reflects the effect of non-accrual and renegotiated loans on both
interest income and net interest income for the years ending December 31, 1994,
1993, and 1992
(in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Interest income which would have
been recorded in accordance
with original terms:
Domestic......................... $25,347 $30,838 $38,375
Foreign.......................... 9 38 324
------- ------- -------
Total....................... 25,356 30,876 38,699
------- ------- -------
Interest income reflected in
total operating income:
Domestic......................... 12,003 17,300 20,479
Foreign.......................... - - -
------- ------- -------
Total....................... 12,003 17,300 20,479
------- ------- -------
Net reduction in interest income
and net interest income.............. $13,353 $13,576 $18,220
======= ======= =======
</TABLE>
ACCRUING LOANS PAST DUE 90 DAYS OR MORE
Accruing loans 90 days or more past due as to payment of interest or principal
at December 31, 1994 and 1993 were as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Domestic........................... $53,104 $53,524
------- -------
Total............................ $53,104 $53,524
======= =======
</TABLE>
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, 1994 and 1993, aggregate foreign outstandings (defined as loans,
investments, acceptances and time deposits) to borrowers in a foreign country
that exceeded 1% of total assets were as follows:
<TABLE>
<CAPTION>
Banks
and other Governments Commercial
financial and and
institutions agencies industrial Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994
United Kingdom......... $ 262,891 -- $ 48,209 $ 311,100
DECEMBER 31, 1993
United Kingdom......... 269,109 -- 43,798 312,907
</TABLE>
Outstandings below 1%, but over .75% of total assets were $267,816 in the
Cayman Islands at December 31, 1994, and $286,417 in the United Kingdom at
December 31, 1992.
Other real estate owned includes both formally foreclosed and in-substance
foreclosed property. When a property is acquired through foreclosure or in-
substance foreclosure, it is reported at the lower of its cost basis or
estimated fair market value less estimated liquidation costs. The book value of
real estate loans transferred to other real estate owned during 1994, 1993, and
1992 was $32,215, $48,124 and $126,184, respectively.
At December 31, 1994 and 1993, the Corporation had loans totalling $149,996 and
$119,099, respectively, to its directors, officers and companies in which the
directors had a 10% or more voting interest. These loans were made on
substantially the same terms, including interest rates and collateral as those
prevailing at the time for comparable transactions with unrelated persons and do
not involve more than normal risk of collectibility. The 1994 additions and
reductions were $2,081,641 and $2,050,744, respectively.
In May 1992, the Corporation sold the assets of Signal Financial Corp, a
consumer finance subsidiary, including approximately $300,000 of consumer
installment loans. The loans were sold net of $14,700 of the allowance for loan
losses. This transaction had an immaterial impact on the earnings of the
Corporation.
In September 1993, the Corporation sold five of its seven branches from the
Virgin Islands operations. The five branches had loans of $131,200 and deposits
of $228,800 at the time of sale. The Corporation recorded a pre-tax gain of
$11,000 on the sale. In December 1994, the remaining two branches were sold at
a pre-tax gain of $1,900.
In 1994 and 1993, the Corporation sold $317,000 and $207,000, respectively, of
fixed-rate home equity loans in securitization transactions.
Included in the loan portfolio are $530 million of residential mortgage loans
which will be sold in the second quarter of 1995. These loans are being
accounted for as assets held for sale and are carried at lower of cost or market
at December 31, 1994.
25
<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, 1994, 1993 and 1992:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of period............... $ 450,823 $ 442,267 $ 473,301
Allowance for loans sold at date of sale..... - (353) (14,700)
Allowance for loans purchased at date
of purchase............................... 24 - 1,028
Allowance for loans of bank acquired under
purchase method of accounting............. 23,739 2,703 -
Provision for losses on loans................ 246,900 121,201 160,250
Recoveries of loans previously charged off. 63,059 86,738 70,069
Loan charge-offs............................. (283,914) ( 201,733) (247,681)
--------- --------- -------
Balance at end of period..................... $ 500,631 $ 450,823 $442,267
========= ========= =======
</TABLE>
Included in the provision for losses on loans are additions of $120,000 and
$25,000, respectively, related to Constellation and Independence, recorded in
connection with changes in strategic direction related to problem assets
acquired with Constellation and Independence and to conform their consumer
lending charge-off policies to those of the Corporation.
In May 1993, the Financial Accounting Standards Board issued statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan" ("FAS 114"). 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 114 is effective beginning in 1995. The
adoption of FAS 114 is not expected to have a material impact on CoreStates'
level of allowance for loan losses.
8. PREMISES AND EQUIPMENT
The consolidated balance sheet includes premises and equipment, net of
accumulated depreciation and amortization of $535,126 and $525,889 at December
31, 1994 and 1993, respectively. Depreciation and amortization of premises and
equipment for the years ended December 31, 1994, 1993, and 1992, was $56,919,
$59,792, and $67,384, respectively.
9. TIME DEPOSITS
Domestic time deposits in denominations of $100 or more at December 31, 1994,
1993, and 1992 were:
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Commercial certificates of deposit......... $268,402 $295,835 $638,258
Other domestic time deposits,
principally savings certificates....... 371,771 145,195 209,637
-------- -------- --------
Total....................... $640,173 $441,030 $847,895
======== ======== ========
</TABLE>
Interest expense on domestic time deposits in denominations of $100 or more for
the years ended December 31, 1994, 1993, and 1992 was:
<TABLE>
<CAPTION>
1994 1993 1992
-------- ------- -------
Interest expense:
<S> <C> <C> <C>
Commercial certificates of deposit................. $ 9,547 $13,908 $30,739
Other domestic time deposits, principally
savings certificates........................ 13,231 9,434 17,956
------- ------- -------
Total................................... $22,778 $23,342 $48,695
======= ======= =======
</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.
26
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
10. SHORT-TERM FUNDS BORROWED
Short-term funds borrowed at December 31, 1994 and 1993 include the following:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Federal funds purchased (a)......................... $ 252,340 $ 606,617
Securities sold under agreements to repurchase (b).. 139,923 249,731
Commercial paper (c)................................ 853,947 501,838
Other short-term funds borrowed (d)................. 299,991 525,939
---------- ----------
Total short-term funds borrowed (e)....... $1,546,201 $1,884,125
========== ==========
</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 4.58% in 1994, 3.15% in 1993 and 3.39% in 1992.
The maximum amount outstanding at any month-end was $961,634 during 1994,
$1,160,951 during 1993, and $848,953 during 1992.
(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
2.61% in 1994, 2.73% in 1993 and 3.57% in 1992. The maximum amount outstanding
at any month-end was $281,327 during 1994, $386,368 during 1993 and $427,349
during 1992.
(c) Commercial paper issued by CoreStates Capital Corp 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 4.24% in 1994,
3.14% in 1993 and 3.72% in 1992. The maximum amount outstanding at any month-end
was $919,292 during 1994, $714,439 during 1993 and $578,364 during 1992.
At December 31, 1994, the Corporation had fee-based lines of credit facilities
from unaffiliated banks totalling $645,000. The lines of credit were
established in support of commercial paper borrowings, Medium Term Note issuance
and general corporate purposes. In January 1995, the Corporation replaced these
bi-lateral lines of credit with a $650,000 revolving credit facility. Unless
extended by the Corporation in accordance with the terms of the facility
agreement, the facility expires January 1999. There were no borrowings under
these lines at December 31, 1994. The interest rate charged for usage of these
lines varies with money market conditions.
(d) Other short-term funds borrowed include term Federal funds purchased and
demand notes payable to the U.S. Treasury.
(e) The aggregate average short-term funds borrowed were $1,928,000 in 1994,
$1,962,000 in 1993 and $1,657,000 in 1992. The weighted average interest rate
was 4.42% in 1994, 3.42% in 1993 and 3.65% in 1992. The average interest rate is
calculated primarily on a daily average of short-term funds borrowed.
27
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
11. LONG-TERM DEBT
Long-term debt at December 31, 1994 and 1993 includes the following:
<TABLE>
<CAPTION>
1994 1993
----------------------------- -----------------------
Carrying Fair Carrying Fair
CoreStates Financial Corp: Amount Value Amount Value
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
8 5/8% Mortgages due 2001........... $ 9,997 $ 10,068 $ 10,803 $ 12,505
7% Convertible Subordinated
Debentures due 2011 (a)........... -- -- 42,147 44,813
Subordinated Debentures due
2000 (b).......................... -- -- 25,000 25,000
---------- --------- -------- ------
9,997 10,068 77,950 82,318
---------- --------- -------- --------
CoreStates Capital Corp ("CSCC"):
5 7/8% Guaranteed Subordinated
Notes due 2003 (c)................ 200,000 165,900 200,000 192,480
6 6/8% Guaranteed Subordinated
Notes due 2005 (c)................ 175,000 150,535 175,000 172,358
9 6/8% Guaranteed Subordinated
Notes due 2001 (d)................ 150,000 157,230 150,000 178,395
9 1/8% Guaranteed Subordinated
Notes due 2003 (e)................ 100,000 104,130 100,000 118,830
Medium Term Notes (f)............... 1,099,585 1,097,998 808,085 812,299
---------- ---------- ---------- ----------
1,724,585 1,675,793 1,433,085 1,474,362
---------- ---------- ---------- ----------
Other subsidiaries:
Federal Home Loan Bank
Borrowings (g).................... 55,000 53,956 65,000 66,801
9.35% Subordinated
Note due July 2003 (h)............ -- -- 10,000 10,250
Various other....................... 1,528 1,528 3,255 3,367
---------- ---------- ---------- ----------
56,528 55,484 78,255 80,418
---------- ---------- ---------- ----------
Total long-term debt (i)............ $1,791,110 $1,741,345 $1,589,290 $1,637,098
========== ========== ========== ==========
</TABLE>
(a) The Debentures were called for redemption at 101.4% plus accrued interest in
November 1994. As a result of this call, 945,000 common shares were issued on
conversion of $23,000 of the debentures.
(b) The debentures were retired at par plus accrued interest in January 1994.
(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.
(d) The Notes 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 existing and future senior indebtedness of the
Corporation.
(e) 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
existing and future senior Corporation indebtedness.
(f) CSCC can issue Medium Term Notes (Senior and Subordinated) ranging in
maturity of more than nine months from date of issue. The interest rate or
interest rate formula on each Note is established by CSCC at the time of
issuance. The Senior Notes are 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,
1994, $1.1 billion of debt was outstanding with terms up to five years at fixed
interest rates ranging from 4.90% to 6.51% and various floating interest rates.
28
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
11. LONG-TERM DEBT - continued
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 $674.0 million at December 31, 1994.
(g) The borrowings range in maturity from May 1995 to June 1996 at floating
interest rates of three month LIBOR less .10% and fixed interest rates from
4.58% to 5.89%.
(h) On December 16, 1994, the Note was called. The redemption price was 102%.
(i) The consolidated aggregate maturities and sinking fund requirements for
long-term debt for the years ending December 31, 1995 through 1999 are:
$470,375; $305,965; $137,616; $111,743; and $137,222, respectively.
12. RETIREMENT AND BENEFIT PLANS
Pension expense under the Corporation's defined benefit pension plans was
$20,390 in 1994, $12,007 in 1993 and $10,926 in 1992. The projected benefit
obligation exceeded plan assets at fair value by $44,346 at December 31, 1994,
based on current and estimated future salary levels. The excess of the projected
benefit obligation is reconciled to the accrued pension cost included in other
liabilities as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1994 1993
-------- --------
<S> <C> <C>
Plan assets at fair value(a)........................... $456,293 $484,273
-------- --------
Present value of benefit obligation:
Accumulated benefits based on salaries to date,
including vested benefits of $371,570 in 1994 and
$384,469 in 1993................................... 402,772 419,943
Additional benefits based on estimated future
salary levels...................................... 97,867 110,675
-------- --------
Projected benefit obligation........................... 500,639 530,618
-------- --------
Amount projected benefit obligation exceeds
plan assets at fair value at December 31,............ (44,346) (46,345)
Reconciliation:
Unrecognized prior service cost...................... 5,879 5,736
Unrecognized net asset from date of initial
application........................................ (27,538) (31,551)
Net deferred actuarial loss.......................... 19,299 44,172
-------- --------
Accrued pension expense included in other liabilities.. $(46,706) $(27,988)
======== ========
</TABLE>
_____________________________________
(a) Primarily U.S. Government securities, U.S. agency securities, fixed income
securities and commingled funds managed by subsidiary banks.
Net pension cost for the years ended December 31, 1994, 1993 and 1992 included
the following expense (income) components:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Service cost benefits earned during the period.. $ 21,260 $ 16,117 $ 15,384
Interest cost on projected benefit obligation... 38,773 35,186 32,933
Actual (return) loss on plan assets............. 17,746 (49,401) (16,426)
Net amortization and deferral................... (57,389) 10,105 (20,965)
-------- -------- --------
Net pension cost.............................. $ 20,390 $ 12,007 $ 10,926
======== ======== ========
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation for the Corporation was 8.0% and 7.0%,
respectively, at December 31, 1994 and 1993. The rate of increase on future
compensation levels was 5.0%. The expected long-term rate of return on plan
assets was 8.5% to 9.5%.
The Corporation sponsors a savings plan for its employees. Contributions to the
savings plan for the employers' match were $13,133 in 1994, $13,576 in 1993, and
$13,117 in 1992.
Prior to its acquisition by the Corporation, Independence maintained a defined
contribution plan which covered all employees who meet age and service
requirements. Expense related to this plan was $2,407 in 1994, $2,636 in 1993,
and $2,861 in 1992. Vested contributions were rolled into the Corporation's
savings plan.
29
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
12. RETIREMENT AND BENEFIT PLANS - (continued)
The Corporation and its subsidiaries provide certain postretirement health care
and life insurance benefits for retired employees. Postretirement benefits are
provided through an insurance company whose premiums are based on the benefits
paid during the year. The postretirement health care plan is contributory, with
retiree contributions based on years of service.
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" ("FAS 106") requires that employers
accrue the costs associated with providing postretirement benefits during the
active service periods of employees, rather than the previously accepted
accounting practice of recognizing these costs on a pay-as-you-go basis.
Effective January 1, 1992, the Corporation adopted FAS 106. As permitted under
FAS 106, the Corporation elected to recognize immediately the transitional
postretirement benefit liability of $128,706, $84,946 after-tax or $.62 per
share, as the cumulative effect of a change in accounting principle.
The liability for postretirement benefits included in other liabilities at
December 31, 1994 and 1993 was as follows:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees..................................... $ (93,547) $(102,143)
Fully eligible active plan participants...... (2,979) (3,662)
Other active plan participants............... (32,420) (41,056)
--------- ---------
Accumulated postretirement benefit obligation (128,946) (146,861)
Plan assets at fair value (a)................... 24,467 20,006
--------- ---------
Unfunded obligation at December 31,............. (104,479) (126,855)
Unrecognized net (gain) loss.................... (27,247) 3,795
--------- --------
Accrued postretirement benefit obligation....... $(131,726) $(123,060)
========= =========
</TABLE>
- ------------------------------------
(a) Primarily municipal bonds and short-term investments.
Net periodic postretirement benefit cost for the years ended December 31, 1994
and 1993 included the following expense (income) components:
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Service cost-benefits earned during the period.. $ 2,323 $ 2,160
Interest cost on accumulated postretirement
benefit obligation........................... 9,261 10,108
Actual return on plan assets.................... (461) (6)
Net amortization and deferral................... (736) 6
------- -------
Net periodic postretirement benefit cost........ $10,387 $12,268
======= =======
</TABLE>
For measurement purposes, an 11% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 1994; the rate was assumed to
decrease gradually to 9.5% for 1997 and remains at that level thereafter. For
measurement purposes, a fixed dollar amount was determined as the Corporation's
maximum cost per employee. This fixed dollar amount was established at the
projected cost level for medical expenses in 1997. The health care cost trend
rate assumption has a significant effect on the amounts reported. To
illustrate, increasing the assumed health care cost trend rates by 1 percentage
point in each year would increase the accumulated postretirement benefit
obligation as of December 31, 1994 by $9,217 and the aggregate of the service
and interest cost components of net periodic postretirement benefit cost for the
year then ended by $730.
The expected long-term rate of return on plan assets was 6.0%. The weighted-
average discount rate used in determining the accumulated postretirement benefit
obligation was 8.0% and 7.0%, respectively, at December 31, 1994 and 1993.
30
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
12. RETIREMENT AND BENEFIT PLANS - (continued)
Statement of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" ("FAS 112") was issued in November 1992 to establish
accounting for benefits provided to former or inactive employees after
employment but before retirement. FAS 112 requires that employers accrue the
costs associated with providing benefits, such as salary and benefit
continuation under disability plans, when payment of the benefits is probable
and the amount of the obligation can be reasonably estimated. Effective January
1, 1993, the Corporation adopted FAS 112. The Corporation recognized the January
1, 1993 FAS 112 transitional liability of $20,015, $13,010 after-tax or $.09 per
share, as the cumulative effect of a change in accounting principle. The impact
of FAS 112 on salaries, wages and benefits expense for the year ended December
31, 1994 and 1993 was not material.
13. LONG-TERM INCENTIVE PLAN
The Corporation has outstanding options granted under the Corporation's long-
term incentive plan (the "Plan"). As provided in the Plan, a variety of
incentives can be issued to eligible participants including restricted stock
awards, incentive stock options, non-qualified stock options, stock appreciation
rights, performance units and cash awards. Constellation, Independence and
Germantown had maintained similar plans. Options granted under those plans were
assumed by the Corporation upon consummation of their respective acquisitions.
The Plan provides for a maximum number of options available to be granted each
year equal to 2% of outstanding common shares as of January 1 of that year.
Information on options for 1994 follows:
<TABLE>
<CAPTION>
Shares
under Option price
option per share
---------- ---------------
<S> <C> <C>
Balance at January 1, 1994.......... 6,419,579 $ 3.21 - $54.70
Options granted..................... 1,896,925 26.38 - 28.00
Options exercised................... (936,294) 3.21 - 27.50
Options cancelled................... (144,511) 7.64 - 54.70
---------
Balance at December 31, 1994........ 7,235,699 3.99 - 54.70
=========
</TABLE>
Options under the Plan are granted to purchase the Corporation's common shares
at market value on the date of grant and are exercisable one year from the date
of grant for a period not exceeding ten years. Stock appreciation rights may be
granted in conjunction with the granting of an option. Upon the exercise of
stock appreciation rights and the surrender of the related option, an employee
may receive in cash or common stock of the Corporation a value equal to the
difference between the market price at the date of exercise and the option price
of shares.
The assumed exercise of the options and other awards under the Plan did not have
a materially dilutive effect on the earnings per share in years 1992 through
1994.
The preceding option table does not reflect 214,062 performance unit awards
outstanding at December 31, 1994, 280,190 at December 31, 1993 and 371,514 at
December 31, 1992. Performance unit awards are earned subject to specific
performance of the Corporation over specified performance periods as defined in
the Plan. The payment value of each performance unit earned for the applicable
performance period is the fair market value of one share of common stock of the
Corporation based on the formula contained in the Plan. During 1994, 1993 and
1992, respectively, $867, $1,051 and $1,557 was expensed in connection with
performance unit awards.
14. OPERATING LEASES
Rental expense, reduced by sublease rental income, charged to operations was
$59,820, $63,055 and $62,042 for 1994, 1993 and 1992, respectively.
15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS AND COMMITMENTS
In the normal course of business, there are outstanding commitments and
contingent liabilities which are not reflected in the financial statements.
These include various financial instruments with off-balance sheet risk used in
connection with the Corporation's asset and liability management 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.
31
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS AND COMMITMENTS -
continued
DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING
The Corporation uses off-balance sheet derivative financial instruments, such as
interest rate swaps, futures and caps, to manage interest rate risk. The
Corporation's exposure to interest rate risk stems from the mismatch between the
sensitivity to movements in interest rates of the Corporation's assets and
liabilities and from the spread risk between the rates on those assets and
liabilities and financial market rates. The use of derivatives to manage
interest rate risk falls into three categories: interest sensitivity
adjustments, interest rate spread protection and hedging anticipated asset
sales.
Interest rate swaps and futures are generally used to lengthen the interest rate
sensitivity of short-term assets and to shorten the repricing characteristics of
longer term liabilities. Interest rate caps are used to manage spread risk.
Interest rate caps are also used to offset the risk of upward interest rate
movement on adjustable rate mortgages and other products with imbedded caps as
well as to reduce the risk that interest rate spreads narrow on prime based
products. Gains or losses are used to adjust the basis of the related asset or
liability and interest differentials are adjustments of the related interest
income or expense.
In connection with anticipated sales of longer term assets acquired through
merger or generated in the loan origination process, the Corporation uses
interest rate swaps and option agreements to reduce interest rate sensitivity as
the assets are readied for sale. Hedge gains or losses are used to adjust the
basis of the assets held for sale.
Derivative financial instruments used in the management of interest rate risk at
December 31, 1994 are summarized by category in the table below.
<TABLE>
<CAPTION>
Interest Interest Interest
rate rate rate Other
swaps futures caps derivatives Total
----------- -------- -------- ----------- -------
<S> <C> <C> <C> <C> <C>
Interest Sensitivity Adjustment:
Assets:
Notional amount.................... $2,920 $1,043 $ 51 $125 $ 4,139
Unrealized gains................... 5 1 6
Unrealized losses.................. (70) (1) (71)
Deposits and other borrowings:
Notional amount..................... 3,714 3,714
Unrealized gains.................... 4 4
Unrealized losses................... (96) (96)
Long-term debt:
Notional amount..................... 788 25 813
Unrealized gains.................... 3 3
Unrealized losses................... (57) (1) (58)
Spread Protection:
Assets:
Notional amount.................... 677 677
Unrealized gains................... 4 4
Unrealized losses.................. (9) (9)
Deposits and other borrowings:
Notional amount..................... 300 300
Unrealized gains.................... 10 10
Unrealized losses...................
Anticipated Asset Sales:
Notional amount..................... 428 170 598
Unrealized gains 1 1 2
Unrealized losses...................
Total:
Notional amount..................... $7,850 $1,043 $1,053 $295 $10,241
====== ====== ====== ==== =======
Unrealized gains.................... $ 13 $ - $ 15 $ 1 $ 29
====== ====== ====== ==== =======
Unrealized losses................... $ (223) $ (1) $ (10) $ - $ (234)
====== ====== ====== ==== =======
Net unrealized gains (losses) $ (210) $ (1) $ 5 $ 1 $ (205)
====== ====== ====== ==== =======
</TABLE>
The following table summarizes interest rate risk related derivative activity
during 1994:
<TABLE>
<CAPTION>
Interest Interest Interest
rate rate rate Other
Notional Amounts swaps futures caps derivatives Total
- ---------------- -------- -------- -------- ----------- -------
<S> <C> <C> <C> <C> <C>
As of December 31, 1993........... $4,125 $ 926 $ 701 $ 39 $ 5,791
Additions......................... 4,477 8,420 476 976 14,349
Terminated contracts(a)........... (8,303) (8,303)
Maturities/
amortization.................... (752) (124) (720) (1,596)
------- ------ ------ ------ -------
As of December 31, 1994........... $7,850 $1,043 $1,053 $ 295 $10,241
======= ====== ====== ====== =======
</TABLE>
- ---------------------------------------
(a) As of December 31, 1994, CoreStates had no material deferred gains or
losses related to terminated derivative contracts.
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 as
follows:
<TABLE>
<CAPTION>
Years
-----------------------------------------------------------
0-1 1-2 2-3 3-4 4-5 over 5 Total
--- --- --- --- --- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Receive Fixed/Pay Floating
Receive Notional........... $1,411 $2,153 $ 767 $ 672 $ 979 $ 975 $6,957
Rate............... 6.30% 6.95% 6.58% 6.57% 7.04% 6.92% 6.75%
Pay Notional........... $6,957 $6,957
Rate............... 6.16% 6.16%
Pay Fixed/Receive Floating(a)
Pay Notional........... $ 346 $ 30 $ 40 $ 37 $ 90 $ 543
Rate............... 7.79% 8.78% 8.33% 8.09% 8.42% 8.01%
Receive Notional........... $ 543 $ 543
Rate............... 5.49% 5.49%
Receive Floating/Pay Floating
(Basis Swaps)
Notional........... $ 90 $ 90
Receive Rate............... 4.96% 4.96%
Pay Rate............... 6.23% 6.23%
Receive Fixed/Pay Floating(b)
(Forward Start)
Receive Notional........... $ 205 $ 30 $ 25 $ 260
Rate............... 6.32% 6.38% 6.37% 6.33%
Start Date Notional........... $ 260 $ 260
</TABLE>
_________________________________________
(a) Includes $306 million swaps which CoreStates has agreed with counterparty
to terminate in 1995.
(b) Pay rate will be determined on forward start date.
Foreign currency derivatives used for hedging activities have not had a
material impact on income or liquidity of the Corporation for any of the years
presented.
DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR TRADING PURPOSES
In its business of providing risk management services for its customers, the
Corporation engages in derivative activities including interest rate swaps, caps
and floors. In addition, as part of its international business, the Corporation
enters into foreign exchange contracts on behalf of customers. These contracts
are matched against forward sale or purchase contracts. All customer related
derivative financial instrument transactions are marked to market and any gains
or losses are recorded in the income statement.
The Corporation does not maintain a regular trading business where unbalanced
positions are taken in any financial derivative instrument.
Customer related derivative financial instruments accounted for as held for
trading at December 31, 1994 are summarized by type of instrument in the table
below:
<TABLE>
<CAPTION>
Notional Net gain
amount (loss)(a)
-------- ---------
<S> <C> <C>
Interest Rate Swaps:
CoreStates receives fixed............. $ 192 $ (4)
CoreStates pays fixed................. 192 4
Interest Rate Caps/Floors:
Sold.................................. 424 (5)
Purchased............................. 424 5
Foreign exchange contracts.............. 1,817 2
------ ----
Total Customer Related Derivatives...... $3,049 $ 2
====== ====
</TABLE>
- -----------------
(a) Average net gain (loss) during 1994 was substantially the same as the net
gain (loss) at December 31, 1994.
The current replacement cost for the customer related derivatives portfolio was
$11.2 million at December 31, 1994. This assumes that only counterparties for
whom it would be favorable to default would do so.
The following is a summary of off-balance sheet commitments and derivative
financial instruments as of December 31, 1994 and 1993, including fair values:
<TABLE>
<CAPTION>
1994 1993
-------------------------- -------------------------
Notional Fair Notional Fair
or Value or Value
Contractual of Asset Contractual of Asset
Amount (Liability)(1) Amount (Liability)(1)
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Standby letters of credit, net of participations (a)........... $1,125,262 $ (2,813) $1,123,303 $ (1,884)
Commercial letters of credit................................... 1,244,164 (3,110) 892,450 (2,227)
Commitments to extend credit (b)............................... 8,223,261 (13,310) 7,000,689 (13,000)
Unused commitments under credit card lines..................... 3,579,453 2,993,233
Interest rate futures and forward contracts (c):
Commitments to purchase..................................... 1,043,000 (1,185) 925,500 365
Commitments to purchase foreign and
U.S. currencies (d)......................................... 1,816,549 1,702 1,336,646 1,148
Interest rate swaps, notional principal
amounts (e)................................................. 8,234,400 (210,300) 4,597,119 133,163
Interest rate caps and floors (f):
Written..................................................... 749,857 (15,000) 622,920 (4,196)
Purchased................................................... 1,150,657 20,200 621,398 5,004
Other derivatives.............................................. 295,000 400 39,000 225
</TABLE>
- ------------------------------------
(1) See Note 3 for discussion of fair value.
32
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS AND COMMITMENTS -
continued
(a) Standby letters of credit ("SBLC") are used in various transactions to
enhance the credit standing of the Corporation's customers and are subjected to
the same risk, credit review and approval process as loans. SBLC's are
irrevocable assurances that the Corporation will make payment in the event that
a customer cannot perform its contractual obligations to third parties.
(b) Commitments to extend credit represent the Corporation's obligation to fund
commercial and real estate loans, including home equity lines, lines of credit,
revolving lines of credit and other types of commitments.
(c) Exchange traded futures contracts and forward rate agreements 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.
(d) 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, 1994 and 1993 was $2,275 and $1,160, respectively. Included in
fees for international services are net foreign exchange gains of $18,863,
$15,979 and $16,887 for the years ended December 31, 1994, 1993 and 1992,
respectively.
(e) 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, 1994 and 1993, the replacement cost of the
Corporation's interest rate swap contracts was $17,093 and $160,598,
respectively. The risk of counterparty failure is controlled by limiting
transactions to an approved list of counterparties. In addition, Corestates
requires collateral from counter parties when the risk exceeds an acceptable
threshold. Net cash received on interest rate swaps during 1994 totaled $99,928.
(f) 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 minimizes this 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. 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
totalled $20,200 and $5,004, respectively, at December 31, 1994 and 1993.
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.
33
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
16. PROVISION FOR INCOME TAXES
The provision for income taxes in the consolidated statement of income consists
of the following:
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal..................................... $106,053 $155,972 $ 85,838
State....................................... 15,652 18,209 11,095
-------- -------- --------
Total domestic........................ 121,705 174,181 96,933
Foreign..................................... 5,558 10,284 4,368
-------- -------- --------
Total current......................... 127,263 184,465 101,301
Deferred Federal and state expense (benefit).. 16,393 (10,656) 26,864
-------- -------- --------
Total provision for income taxes...... $143,656 $173,809 $128,165
======== ======== ========
</TABLE>
The significant components of the Corporation's deferred tax assets and
liabilities at December 31, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1994 1993
--------- ---------
Deferred tax assets:
<S> <C> <C>
Allowance for loan losses.................... $171,176 $149,097
Postretirement and postemployment benefits... 65,743 56,346
Reserves..................................... 26,616 30,931
Other........................................ 61,108 71,388
-------- --------
Gross deferred tax asset..................... 324,643 307,762
Valuation allowance.......................... (9,102) (9,102)
-------- --------
Total deferred tax assets............. 315,541 298,660
-------- --------
Deferred tax liabilities:
Auto leasing portfolio....................... 88,570 69,721
FAS 115 fair value accounting................ 5,981 34,916
Partnership investments...................... 744 19,660
Tax over book depreciation................... 18,040 16,689
Affiliate income............................. 17,716 14,924
Other........................................ 9,984 15,692
-------- --------
Total deferred tax liabilities......... 141,035 171,602
-------- --------
Net deferred tax assets........................ $174,506 $127,058
======== ========
</TABLE>
At December 31, 1994 cumulative deductible temporary differences are
approximately $928 million and the related deferred tax asset is $325 million.
The major components of the temporary differences include $489 million related
to the allowance for loan losses and $188 million related to pension, FAS 106
and FAS 112. Cumulative taxable temporary differences related to deferred tax
credits at December 31, 1994 are estimated at $403 million and are primarily
related to leasing, FAS 115 fair value accounting, affiliate income and
depreciation. The related deferred tax liability is $141 million.
34
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
16. PROVISION FOR INCOME TAXES - (continued)
The Corporation has determined that it is not required to establish a valuation
reserve for the Federal deferred tax asset since it is more likely than not that
the deferred tax asset of $315 million will be principally realized through
carryback to taxable income in prior years, and future reversals of existing
taxable temporary differences, and to a lesser extent, future taxable income and
tax planning strategies. Management believes that future taxable income will be
sufficient to realize the benefits of temporary deductible differences that
cannot be realized through carryback to prior years or through the reversal of
future temporary taxable differences. 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.
As required by FAS 109, the Corporation has determined that it is required to
establish a $9 million valuation reserve for the deferred tax asset related to
pre-affiliation state income taxes.
The consolidated effective tax rates are reconciled to the statutory rate as
follows:
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Statutory rate......................... 35.0% 35.0% 34.0%
Difference resulting from:
Tax-exempt income.................... (3.4) (3.1) (5.0)
State, local and foreign income tax.. 2.6 2.4 2.2
Other, net........................... 2.4 (1.9) 1.1
---- ---- ----
Effective tax rate..................... 36.6% 32.4% 32.3%
==== ==== ====
</TABLE>
Foreign earnings of certain subsidiaries would be taxed only upon their transfer
to the United States. Accumulated earnings of insurance subsidiaries would be
taxed only to the extent they are distributed as dividends, or exceed limits
prescribed by tax laws. No transfers or dividends are contemplated at this
time. Taxes payable upon remittance of such accumulated earnings of $22,014 at
December 31, 1994 would approximate $7,306.
Taxes, other than income taxes, included in other operating expenses for the
years ended December 31, 1994, 1993 and 1992 are $70,505, $76,608 and $75,382,
respectively.
35
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS: Continued
(DOLLAR AMOUNTS IN THOUSANDS)
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents summarized quarterly financial data of the Corporation,
which, in the opinion of management, reflects all adjustments (comprising only
normal recurring accruals) necessary for a fair presentation:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------
DEC.31 SEPT.30 JUNE 30 MARCH 31
------ ------- ------- --------
<S> <C> <C> <C> <C>
1994
- -----
Interest income...................... $517,956 $488,406 $473,956 $449,209
======== ======== ======== ========
Interest expense..................... $158,709 $136,287 $124,291 $120,871
======== ======== ======== ========
Net interest income.................. $359,247 $352,119 $349,665 $328,338
======== ======== ======== ========
Provision for losses on loans........ $ 25,000 $ 25,000 $ 49,995 $146,905
======== ======== ======== ========
Securities gains..................... $ 4,610 $ 4,223 $ 3,023 $ 6,897
======== ======== ======== ========
Income (loss) before cumulative
effect of a change in accounting
principle.......................... $111,475 $104,221 $ 63,091 $(29,995)
======== ======== ======== ========
Cumulative effect of a change
in accounting principle............ $ (3,430)
========
Net income (loss).................... $111,475 $104,221 $ 63,091 $(33,425)
======== ======== ======== ========
Net income (loss) per common share... $.78 $.74 $.44(b) $(.21)(a)(b)
==== ==== ==== =====
Average common shares outstanding.... 142,252 141,033 142,139 144,612
======== ======== ======== ========
1993
- ----
Interest income...................... $457,021 $464,164 $461,521 $459,158
======== ======== ======== ========
Interest expense..................... $123,601 $125,930 $129,844 $137,218
======== ======== ======== ========
Net interest income.................. $333,420 $338,234 $331,677 $321,940
======== ======== ======== ========
Provision for losses on loans........ $ 29,646 $ 30,005 $ 30,825 $ 30,725
======== ======== ======== ========
Securities gains (losses)............ $ 10,649 $ 3,306 $ (694) $ 2,849
======== ======== ======== ========
Income before cumulative
effect of a change in accounting
principle......................... $ 94,676 $ 96,081 $ 91,391 $ 80,281
======== ======== ======== ========
Cumulative effect of a change
in accounting principle........... $(13,010)
========
Net income........................... $ 94,676 $ 96,081 $ 91,391 $ 67,271
======== ======== ======== ========
Net income per common share.......... $.65 $.66 $.63 $.55(a)
==== ==== ==== ====
Average common shares outstanding.... 145,372 145,702 145,476 145,109
======== ======== ======== ========
</TABLE>
____________________________________
(a) Based on income before cumulative effect of a change in accounting
principle.
(b) Reflects after-tax merger-related charges of $.89 per share recorded in the
first quarter of 1994 for the Constellation acquisition and $.28 per share
recorded in the second quarter for the Independence acquisition.
18. INTERNATIONAL OPERATIONS
International operations include the international activities of CBNA and its
six overseas branches and two Edge Act subsidiaries. The International Banking
group engages in foreign banking and international financing activities
including loans, acceptances, time deposits, letter of credit financing and
related financial services.
Due to the complex nature of the Corporation's businesses and because its
revenue from customers domiciled outside the U.S. is recorded in both domestic
and foreign offices, it is impossible to segregate with precision the respective
contributions to income from the domestic and international operations. As
these operations are highly integrated, estimates and subjective assumptions
have been made to apportion revenue and expenses between domestic and
international operations. Charges for funds used by one segment provided by
another segment are based on a pooled cost of purchased funds. Geographic
distributions of earnings are based upon average interest earning assets.
Expenses are charged to international operations as directly incurred by such
activities plus allocated charges consistent with internal allocation policies.
Subject to the above limitations, estimates and assumptions, the following
tables present information attributable to international operations:
36
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS: CONTINUED
(DOLLAR AMOUNTS IN THOUSANDS)
18. INTERNATIONAL OPERATIONS - (continued)
<TABLE>
<CAPTION>
Domestic International
Operations Operations Total
----------- -------------- -----------
<S> <C> <C> <C>
DECEMBER 31, 1994
Assets(a)................. $27,581,360 $ 1,743,776(b) $29,325,136
=========== =========== ===========
Total operating
income.................. $ 2,297,773 $ 194,269 $ 2,492,042
=========== =========== ===========
Income before
income taxes............ $ 349,473 $ 42,975 $ 392,448
=========== =========== ===========
Income before cumulative
effect of a change in
accounting principle.... $ 220,859 $ 27,933 $ 248,792
=========== =========== ===========
DECEMBER 31, 1993
Assets(a)................. $26,784,458 $1,650,159 $28,434,617
=========== =========== ===========
Total operating
income.................. $ 2,258,689 $ 157,205 $ 2,415,894
=========== =========== ===========
Income before
income taxes............ $ 492,450 $ 43,788 $ 536,238
=========== =========== ===========
Income before cumulative
effect of a change in
accounting principle.... $ 333,967 $ 28,462 $ 362,429
=========== =========== ===========
DECEMBER 31, 1992
Assets(a)................. $26,786,725 $1,945,992 $28,732,717
=========== =========== ===========
Total operating
income.................. $ 2,411,954 $ 160,548 $ 2,572,502
=========== =========== ===========
Income before
income taxes............ $ 351,224 $ 45,075 $ 396,299
=========== =========== ===========
Income before cumulative
effect of a change in
accounting principle.... $ 238,835 $ 29,299 $ 268,134
=========== =========== ===========
</TABLE>
____________________
(a) The Corporation had no material foreign currency position at December 31,
1994, 1993 and 1992. Assets primarily consist of Eurodollar time deposit
placements, loans and acceptances with maturities of one year or less.
(b) At December 31, 1994, $227,772 of these assets represent LDC risk related to
short-term trade finance.
37
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS: Continued
(DOLLAR AMOUNTS IN THOUSANDS)
19. FINANCIAL STATEMENTS OF THE PARENT COMPANY
Statement of Income
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
REVENUES
- --------
Dividends from subsidiaries:
Banks........................................... $240,370 $204,393 $151,016
Other subsidiaries.............................. 20,375 14,648 20,527
-------- -------- --------
Total dividends from subsidiaries......... 260,745 219,041 171,543
Interest income from subsidiaries................. 1,702 6,238 6,724
Processing and management fees from subsidiaries 140,558 133,114 128,917
Rental income from subsidiaries................... 2,059 2,059 2,059
Securities gains (losses)......................... (2) (380) 806
Other income...................................... 119 721 828
-------- -------- --------
Total revenues............................... 405,181 360,793 310,877
-------- -------- --------
EXPENSES
- --------
Interest on:
Funds borrowed.................................. 5,142 2,738 2,311
Long-term debt.................................. 5,323 8,827 18,348
-------- -------- --------
Total interest expense.......................... 10,465 11,565 20,659
Salaries, wages and benefits...................... 79,055 75,031 71,327
Net occupancy..................................... 29,230 29,827 25,995
Equipment expenses................................ 7,520 6,493 3,697
Other operating expenses.......................... 57,352 26,117 29,210
-------- -------- --------
Total expenses............................... 183,622 149,033 150,888
-------- -------- --------
Income before income tax benefit and equity in
undistributed income of subsidiaries............ 221,559 211,760 159,989
Income tax benefit................................ (13,715) (2,882) (3,840)
-------- -------- --------
Income before equity in undistributed income
of subsidiaries................................. 235,274 214,642 163,829
Equity in undistributed income (loss) of
subsidiaries:
Banks........................................ (52,590) 89,743 3,767
Other subsidiaries........................... 62,678 45,034 17,061
-------- -------- --------
10,088 134,777 20,828
-------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE............................ 245,362 349,419 184,657
Cumulative effect of a change in accounting
principle....................................... - - (1,469)
-------- -------- --------
NET INCOME........................................ $245,362 $349,419 $183,188
======== ======== ========
</TABLE>
38
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS: Continued
(DOLLAR AMOUNTS IN THOUSANDS)
19. FINANCIAL STATEMENTS OF THE PARENT COMPANY - (continued)
<TABLE>
<CAPTION>
Balance Sheet December 31,
-------------------------
1994 1993
---------- -----------
<S> <C> <C>
ASSETS
- ------
Cash.............................................. $ 3,893 $ 8,754
Time deposit...................................... 300 300
Investments and receivables-subsidiaries:
Investments in subsidiaries at equity
in underlying net assets:
Banks......................................... 2,279,541 2,116,076
Other subsidiaries............................ 308,130 228,630
---------- ----------
Total investments in subsidiaries........... 2,587,671 2,344,706
Other........................................... 9,165 69,427
---------- ----------
Total investments and receivables-
subsidiaries.............................. 2,596,836 2,414,133
Investments: securities available-for-sale....... 69,566 55,317
Premises, net of accumulated depreciation......... 6,457 7,187
Other assets...................................... 9,282 5,823
---------- ----------
Total assets................................ $2,686,334 $2,491,514
========== ==========
LIABILITIES
- -----------
Funds borrowed - subsidiaries..................... $ 246,609
Dividends payable................................. 50,152 $ 35,171
Other liabilities................................. 28,208 7,821
Long-term debt.................................... 11,251 80,138
---------- ----------
Total liabilities............................ 336,220 123,130
SHAREHOLDERS' EQUITY
- --------------------
Total shareholders' equity................... 2,350,114 2,368,384
---------- ----------
Total liabilities and shareholders' equity... $2,686,334 $2,491,514
========== ==========
</TABLE>
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) 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 $139 million and $18 million, respectively,
plus an additional amount equal to CBNA's and CBD's retained net profits for
1995 up to the date of any such dividend declaration. Due to merger-related
charges recorded in 1994 by Constellation, which was merged into NJNB,NJNB is
unable to pay dividends without the prior approval of the Comptroller of the
Currency.
The Federal Reserve Act requires that extensions of credit by CBNA and NJNB 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) and that
extensions of credit to all such affiliates be limited to 20% of capital and
surplus.
The Corporation has guaranteed certain borrowings of its subsidiaries at
December 31, 1994 in the amount of $2,577,507, which includes $852,922 for
commercial paper.
The maturities for parent company long-term debt for the years ending December
31, 1995 through 1999 are: $1,133; $1,234; $1,345; $1,465; and $1,596,
respectively.
39
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS: CONTINUED
(DOLLAR AMOUNTS IN THOUSANDS)
19. FINANCIAL STATEMENTS OF THE PARENT COMPANY - (continued)
<TABLE>
<CAPTION>
Statement of Cash Flows
Year Ended December 31,
------------------------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................................ $ 245,362 $ 349,419 $ 183,188
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed income of subsidiaries............ (10,088) (143,393) (32,823)
Cumulative effect of a change in
accounting principle.......................... - - 1,469
Securities (gains) losses....................... 2 380 (806)
Depreciation and amortization................... 1,524 938 1,328
Deferred income tax expense (benefit)........... (5,428) 1,692 (1,563)
Decrease in interest receivable................. - 96 291
Increase (decrease) in interest payable......... (419) 1,082 60
Increase (decrease) in due to subsidiaries...... 23,978 (6,875) (47,695)
Other........................................... (9,666) (4,085) 14,223
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES...... 245,265 199,254 117,672
--------- --------- ---------
INVESTING ACTIVITIES
Purchase of Germantown Savings Bank............... (108,061) - -
Investment in subsidiaries........................ (96,860) (5,460) (72,240)
(Increase) decrease in receivables from
subsidiaries..................................... 53,862 (16,962) 11,142
Purchases of investment securities................ (202,309) (483,551) (232,313)
Proceeds from maturities and sales of investment
securities...................................... 188,028 453,002 292,956
Premises and equipment expenditures............... - (188) (271)
Return of capital from subsidiaries............... 81,000 42,579 42,165
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES................................... (84,340) (10,580) 41,439
--------- --------- ---------
FINANCING ACTIVITIES
Retirement of long-term debt...................... (45,488) (20,940) (18,407)
Net increase (decrease) in financing from
subsidiaries..................................... 246,609 (69,092) (80,849)
Proceeds from public issuance of common stock..... - - 67,581
Cash dividends paid............................... (160,122) (143,334) (126,265)
Purchase of treasury stock........................ (228,963) (29,449) (1,480)
Other............................................. 22,178 29,538 51,093
--------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES........ (165,786) (233,277) (108,327)
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND DUE
FROM BANKS................................. (4,861) (44,603) 50,784
Cash and due from banks at January 1,........ 8,754 53,357 2,573
--------- --------- ---------
CASH AND DUE FROM BANKS AT DECEMBER 31....... $ 3,893 $ 8,754 $ 53,357
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest........................................ $ 10,884 $ 10,712 $ 15,965
========= ========= =========
Income taxes.................................... - - -
========= ========= =========
</TABLE>
20. JOINT VENTURE
On December 4, 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 Money Access
Service Inc. ("MAC"), a regional ATM network, and BUYPASS Corporation, a third-
party processor of electronic POS transactions.
The Corporation has equal ownership with two partners in the joint venture, each
with 31%. The fourth partner owns 7%. As part of the 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 pre-tax gain to the Corporation of $41,072, $25,670 after-tax,
which was recorded in other operating income for the year ended December 31,
1992. The exchange also generated a deferred gain of approximately $138,000.
40
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
20. JOINT VENTURE - continued
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 does not
affect the amount of deferred gain, but changes the timing of deferred gain
income recognition from a five-year period beginning in 1996 to a ten-year
period beginning in 1994.
The Corporation's net investment in EPS, $60,610 at December 31, 1994, is
included in other assets. "Income from investment in EPS, Inc.", which is
included in Non-interest Income, reflects the Corporation's 31% share in EPS net
income, interest income on the $250,000 note and $13,666 for recognition of the
deferred gain in 1994.
41
<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, 1994 and 1993, 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, 1994. 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 1993 and 1992 financial statements of
Constellation Bancorp and Independence Bancorp, Inc., which statements reflect
total assets constituting 17.2% of the related consolidated totals as of
December 31, 1993, and net interest income constituting 15.6% of the related
consolidated totals for each of the years ended December 31, 1993 and 1992.
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
Constellation Bancorp and Independence Bancorp, Inc., is based solely on the
reports of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of CoreStates Financial Corp at December 31,
1994 and 1993, and the consolidated results of its operations and its cash flows
for each of the three years in the period ended December 31, 1994, in conformity
with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1994 and 1993 the Company
changed its method of accounting for certain investments in debt and equity
securities, in 1993 the Company changed its method of accounting for post-
employment benefits, and in 1992 the Company changed its methods of accounting
for income taxes and for post-retirement benefits other than pensions.
/s/Ernst & Young LLP
Philadelphia, Pennsylvania
February 7, 1995
42
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
Constellation Bancorp:
We have audited the consolidated statement of condition of Constellation Bancorp
and subsidiaries as of December 31, 1993 and the related consolidated statements
of operations, changes in shareholders' equity, and cash flows for each of the
years in the two-year period ended December 31, 1993 (not presented separately
herein). These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our 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 Constellation
Bancorp and subsidiaries at December 31, 1993 and 1992 and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1993, in conformity with generally accepted accounting
principles.
As explained in Note 1 to the consolidated financial statements, Constellation
Bancorp adopted the provisions of the Financial Accounting Standards Board's
Statements of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions," No. 109, "Accounting for Income
Taxes," and No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," in 1993.
As discussed in Note 1, the accompanying 1993 Consolidated Financial Statements
have been restated to remove certain merger related charges.
/s/ KPMG Peat Marwick LLP
Short Hills, New Jersey
March 16, 1994, except as to the
third paragraph of Note 1 and
the last paragraph of Note 16,
which are as of July 19, 1994
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Independence Bancorp, Inc.
We have audited the consolidated balance sheet of Independence Bancorp. Inc. and
Subsidiaries as of December 31, 1993 and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for each of the two
years in the period ended December 31, 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Independence Bancorp, Inc. and Subsidiaries at December 31, 1993 and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1993 in conformity with generally
accepted accounting principles.
As discussed in the notes to the Consolidated Financial Statements, the Company
changed its method of accounting for investments in 1993 and method of
accounting for income taxes in 1992.
/s/ Coopers & Lybrand L.L.P.
January 19, 1994
2400 Eleven Penn Center
Philadelphia, Pennsylvania
<PAGE>
Exhibit 99.2
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30,
1995
-------------
(Unaudited)
<S> <C>
ASSETS
- ------
Cash and due from banks........................... $ 2,214,933
Time deposits, principally Eurodollars............ 1,755,526
Investments held-to-maturity (fair value:
$1,756,417)...................................... 1,745,784
Investments available-for-sale, at fair
value........................................... 390,828
Loans, net of unearned discounts of
$129,728 (Note C)............................... 21,168,026
Less: Allowance for loan losses................ (501,392)
-------------
Net loans.................................... 20,666,634
-------------
Federal funds sold and securities
purchased under agreements to resell............ 294,916
Trading account securities, at fair
value........................................... 349
Due from customers on acceptance.................. 493,212
Premises and equipment............................ 427,003
Other assets...................................... 856,547
-------------
Total assets................................. $28,845,732
=============
LIABILITIES
- -----------
Deposits:
Domestic:
Non-interest bearing......................... $ 6,051,497
Interest bearing............................. 13,718,685
Overseas branches and subsidiaries.............. 923,930
-------------
Total deposits............................... 20,694,112
Funds borrowed.................................... 2,245,238
Bank acceptances outstanding...................... 490,520
Other liabilities................................. 1,238,126
Long-term debt.................................... 1,861,946
-------------
Total liabilities............................ 26,529,942
-------------
COMMITMENTS AND CONTINGENT LIABILITIES
(Note D)
- --------------------------------------
SHAREHOLDERS' EQUITY
- --------------------
Preferred stock: authorized 10.0 million shares;
no shares issued................................ -
Common stock: $1 par value; authorized
200.0 million shares; issued 145.875
million shares (including treasury
shares of 6.966 million)........................ 2,315,790
-------------
Total shareholders' equity................... 2,315,790
-------------
Total liabilities and shareholders'
equity..................................... $28,845,732
=============
</TABLE>
See accompanying notes to the consolidated financial statements.
3
<PAGE>
Exhibit 99.3
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
INTEREST INCOME 1994 1993 1992
----------- ---------- ----------
<S> <C> <C> <C>
Interest and fees on loans:
Taxable income..................................... $1,675,532 $1,553,865 $1,609,209
Tax exempt income.................................. 22,818 31,150 38,554
Interest on investment securities:
Taxable income..................................... 140,379 185,866 216,074
Tax exempt income.................................. 16,552 19,304 22,777
Interest on time deposits in banks................... 66,389 44,340 58,613
Interest on Federal funds sold, securities purchased
under agreements to resell and other............... 7,857 7,339 16,611
----------- ---------- ----------
Total interest income............................ 1,929,527 1,841,864 1,961,838
----------- ---------- ----------
INTEREST EXPENSE
Interest on deposits:
Domestic savings................................... 139,703 149,094 230,166
Domestic time (Note 9)............................. 196,869 212,471 311,970
Overseas branches and subsidiaries................. 28,286 18,248 28,319
----------- ---------- ----------
Total interest on deposits....................... 364,858 379,813 570,455
Interest on short-term funds borrowed (Note 10)...... 85,123 67,001 60,480
Interest on long-term debt (Note 11)................. 90,177 69,779 78,425
----------- ---------- ----------
Total interest expense........................... 540,158 516,593 709,360
----------- ---------- ----------
Net interest income.............................. 1,389,369 1,325,271 1,252,478
Provision for losses on loans (Note 7)............... 246,900 121,201 160,250
----------- ---------- ----------
Net interest income after provision for
losses on loans................................. 1,142,469 1,204,070 1,092,228
----------- ---------- ----------
NON-INTEREST INCOME
Service charges on deposit accounts.................. 180,676 179,428 163,132
Trust income......................................... 97,362 101,793 96,731
Fees for international services...................... 79,682 69,432 60,247
Debit and credit card fees........................... 64,585 61,717 152,078
Income from investment in EPS, Inc. (Note 20)........ 31,800 13,159 -
Gains on trading account securities.................. 2,347 2,254 1,836
Securities gains (Note 5)............................ 18,753 16,110 13,805
Other gains (Notes 6 and 20)......................... 1,900 11,000 41,072
Other operating income............................... 90,435 119,137 81,763
----------- ---------- ----------
Total non-interest income........................ 567,540 574,030 610,664
----------- ---------- ----------
NON-FINANCIAL EXPENSES
Salaries, wages and benefits (Notes 12 and 13)....... 631,134 622,969 627,904
Net occupancy (Notes 8 and 14)....................... 117,516 114,951 112,765
Equipment expenses (Note 8).......................... 77,098 74,844 85,589
Other operating expenses (Note 16)................... 491,813 429,098 480,335
----------- ---------- ----------
Total non-financial expenses..................... 1,317,561 1,241,862 1,306,593
----------- ---------- ----------
INCOME BEFORE INCOME TAXES....................... 392,448 536,238 396,299
Provision for income taxes (Note 16)................. 143,656 173,809 128,165
----------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE.............................. 248,792 362,429 268,134
Cumulative effect of a change in accounting
principle, net of income tax benefits of $1,846
in 1994, $7,005 in 1993 and $43,760 in 1992........ (3,430) (13,010) (84,946)
----------- ---------- ----------
NET INCOME..................................... $ 245,362 $ 349,419 $ 183,188
=========== ========== ==========
PER COMMON SHARE DATA (Based on weighted average
shares outstanding of 142.498 million in 1994,
145.398 million in 1993, and 135.813 million
in 1992)..........................................
Income before cumulative effect of a change in
accounting principle.............................. $1.75 $2.49 $1.97
===== ===== =====
Net Income.......................................... $1.73 $2.40 $1.35
===== ===== =====
Cash dividends declared............................. $1.24 $1.14 $1.02
===== ===== =====
</TABLE>
See accompanying notes to the financial statements.
11
