-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, miN42AAJMcYGweYH+0Qc4lMxHEkwX/+Hw6sR67X/GcasjW3zexeSCkjICnzl4t5X DecKPbeKrD+EimrAsns/xQ== 0000950109-94-000954.txt : 19940609 0000950109-94-000954.hdr.sgml : 19940609 ACCESSION NUMBER: 0000950109-94-000954 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940608 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19940608 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORESTATES FINANCIAL CORP CENTRAL INDEX KEY: 0000069952 STANDARD INDUSTRIAL CLASSIFICATION: 6021 IRS NUMBER: 231899716 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11285 FILM NUMBER: 94533435 BUSINESS ADDRESS: STREET 1: CENTRE SQ W STREET 2: 1500 MARKET ST CITY: PHILADELPHIA STATE: PA ZIP: 19101 BUSINESS PHONE: 2159733806 MAIL ADDRESS: STREET 1: 1500 MARKET ST CITY: PHILADELPHIA STATE: PA ZIP: 19101 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL CENTRAL FINANCIAL CORP DATE OF NAME CHANGE: 19830517 8-K 1 FORM 8-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 8-K ---------------- CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JUNE 8, 1994 CORESTATES FINANCIAL CORP (EXACT NAME OF REGISTRANT SPECIFIED IN ITS CHARTER) PENNSYLVANIA 0-6879 23-1899716 (STATE OR OTHER (COMMISSION (IRS EMPLOYEE JURISDICTION OF FILE NUMBER) IDENTIFICATION NO.) INCORPORATION) CENTRE SQUARE WEST, 1500 MARKET STREET PHILADELPHIA, PENNSYLVANIA 19101 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE, INCLUDING AREA CODE: (215) 973-3806 (FORMER NAME AND FORMER ADDRESS, IF CHANGED SINCE LAST REPORT) ================================================================================ ITEM 5. OTHER EVENTS. As previously announced, CoreStates Financial Corp ("CoreStates") and Independence Bancorp, Inc. ("Independence") have entered into a definitive agreement, dated November 19, 1993, providing for CoreStates to acquire Independence pursuant to an exchange of stock ("the Merger"). Under the terms of the agreement, each of Independence's 11.7 million shares of common stock will be exchanged for 1.5 shares of CoreStates' common stock, assuming that the average price of CoreStates' common stock over a pricing period prior to closing is $27 per share or less. If the average price of CoreStates' common stock is $28 or more, the exchange ratio will be 1.45 shares of CoreStates' common stock for each Independence share. If the average price of CoreStates' common stock falls between $27 and $28, the exchange ratio will be determined by dividing $40.50 by the average price of CoreStates' common stock. CoreStates also has received an option to purchase up to 9.9% of Independence's common stock if certain contingencies occur. The transaction, which will be accounted for as a pooling of interests, is subject to certain conditions, including the receipt of regulatory and shareholder approval. The special meeting of shareholders of Independence will be held on June 27, 1994. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements (1.) Interim condensed consolidated financial statements of Independence Bancorp, Inc.: Page (i) Consolidated Balance Sheet as of March 31, 1994 (Unaudited) 3 (ii) Consolidated Statements of Income For the Three Months Ended March 31, 1994 and 1993 (Unaudited) 4 (iii) Consolidated Statements of Changes in Shareholders' Equity For the Three Months Ended March 31, 1994 and 1993 (Unaudited) 5 (iv) Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1994 and 1993 (Unaudited) 6 (v) Notes to Interim Consolidated Financial Statements (Unaudited) 7-10 (2.) Year-end consolidated financial statements of Independence Bancorp, Inc.: Page (i) Consolidated Balance Sheet as of December 31, 1993 11 (ii) Consolidated Statement of Income for the Year Ended December 31, 1993 12 (iii) Consolidated Statement of Changes in Shareholders' Equity for the Year Ended December 31, 1993 13 (iv) Consolidated Statement of Cash Flows for the Year Ended December 31, 1993 14 (v) Notes to the December 31, 1993 Consolidated Financial Statements 15-30 (vi) Report of Coopers & Lybrand 31 Corestates Financial Corp (Registrant) By: /s/ David T. Walker --------------------------------- David T. Walker Deputy Chief Counsel Dated: June 8, 1994 2 Independence Bancorp, Inc. and Subsidiaries Consolidated Balance Sheet (Unaudited) (Dollars in thousands, except per share data)
March 31, 1994 - ----------------------------------------------------------------------- Assets Cash and due from banks $114,600 Interest-bearing deposits with banks 42,395 Federal funds sold (including term federal funds sold of $16,000) 88,500 Other short-term investments 7,469 Mortgages held for sale 22,448 Investments available-for-sale 559,160 Loans (net of unearned income of $31,620) 1,652,945 Less: Allowance for possible loan losses 33,016 - ----------------------------------------------------------------------- Net loans 1,619,929 Premises and equipment, net 33,051 Accrued income and other assets 67,925 - ----------------------------------------------------------------------- Total Assets $2,555,477 ============== Liabilities Deposits Demand - non-interest-bearing $374,626 Demand - interest-bearing 249,246 Savings 913,759 Time 538,629 Time over $100,000 52,409 - ----------------------------------------------------------------------- Total deposits 2,128,669 Short-term borrowings Securities sold under agreements to repurchase 41,246 Other short-term borrowings 10,160 - ----------------------------------------------------------------------- Total short-term borrowings 51,406 Long-term borrowings 132,880 Accrued expenses and other liabilities 28,870 - ----------------------------------------------------------------------- Total Liabilities 2,341,825 -------------- Commitment and Contingent Liabilities Shareholders' Equity Preferred stock, par value $100 per share; authorized 2,500,000 shares, none issued --- Common stock, par value $2.50 per share; authorized 50,000,000; issued 11,718,502 29,296 Surplus 92,606 Retained earnings 94,140 Treasury stock, 152,742 shares at cost (2,390) - ----------------------------------------------------------------------- Total Shareholders' Equity 213,652 -------------- Total Liabilities and Shareholders' Equity $2,555,477 ==============
The accompanying notes are an integral part of these financial statements. 3 Independence Bancorp, Inc. and Subsidiaries Consolidated Statements of Income (Unaudited) (Dollars in thousands, except per share data)
Three Months Ended March 31, 1994 1993 - --------------------------------------------------------------------------------------------------- Interest Income Interest and fees on loans $33,179 $34,709 Interest on investment securities Taxable 7,314 9,153 Exempt from federal income tax 337 244 Dividends 132 163 Interest on mortgages held for sale 658 697 Interest on other investments 777 753 - --------------------------------------------------------------------------------------------------- Total Interest Income 42,397 45,719 ------------------------ Interest Expense Demand - interest-bearing 962 1,218 Savings 5,913 6,485 Time 5,390 7,323 Time over $100,000 833 1,160 Short-term borrowings 317 865 Long-term borrowings 2,168 1,889 - --------------------------------------------------------------------------------------------------- Total Interest Expense 15,583 18,940 ------------------------ Net Interest Income 26,814 26,779 Provision for possible loan losses 1,905 3,225 - --------------------------------------------------------------------------------------------------- Net Interest Income after Provision for Possible Loan Losses 24,909 23,554 ------------------------ Non-Interest Income Trust income 1,227 1,163 Service charges on deposit accounts 2,423 2,249 Other service charges and fees 1,891 1,791 Securities gains (losses) (13) (173) Gains on sales of mortgages held for sale 586 891 Other income 449 667 - --------------------------------------------------------------------------------------------------- Total Non-Interest Income 6,563 6,588 ------------------------ Non-Interest Expense Salaries 8,828 9,265 Employee benefits 2,702 2,448 Net occupancy expense 1,741 1,663 Furniture and equipment expense 1,415 1,545 Data processing expense 1,329 1,325 Insurance expense 1,541 1,565 Other real estate expense 1,257 322 Other expense 4,119 4,620 - --------------------------------------------------------------------------------------------------- Total Non-Interest Expense 22,932 22,753 ------------------------ Income Before Taxes and Effect of Cumulative Change in Accounting Method 8,540 7,389 Income taxes 2,647 2,158 ------------------------ Income Before Effect of Cumulative Change in Accounting Method 5,893 5,231 Cumulative change in accounting method for recognition of impairment losses, net of tax (3,430) --- ------------------------ Net Income $2,463 $5,231 ======================== Per Share Data Primary Income before effect of cumulative change in accounting method $0.50 $0.46 Cumulative change in accounting method for recognition of impairment losses (0.29) --- Net Income 0.21 0.46 Cash dividends paid 0.29 0.29 Average Primary Common Shares Outstanding 11,683,928 11,493,009
The accompanying notes are an integral part of these financial statements. 4 Independence Bancorp, Inc. and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity (Unaudited) (Dollars in thousands, except per share data)
Common Retained Treasury Three Months Ended March 31, 1993 and 1994 Stock Surplus Earnings Stock Total - ------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1992 $28,611 $86,828 $95,009 ($2,393) $208,055 Net income 5,231 5,231 Cash dividends paid ($1.16 per share) (3,289) (3,289) Change in unrealized loss on marketable equity securities 250 250 Exercise of stock options (91,838 shares) 229 1,525 1,754 Dividend reinvestment plan and employee stock purchase plan (21,133 shares) 53 437 490 - ------------------------------------------------------------------------------------------------------------------------------ Balance at March 31, 1993 $28,893 $88,790 $97,201 ($2,393) $212,491 ==================================================================== Balance at December 31, 1993 $29,188 $91,659 $103,521 ($2,390) $221,978 Net income 2,463 2,463 Cash dividends paid ($1.16 per share) (3,343) (3,343) Cash dividends declared, unpaid ($1.16 per share) (3,351) (3,351) Unrealized holding loss of investments available-for-sale, net of tax of $2,773 (5,150) (5,150) Conversion of subordinated debentures (827 shares) 2 28 30 Exercise of stock options (42,575 shares) 106 919 1,025 - ------------------------------------------------------------------------------------------------------------------------------ Balance at March 31, 1994 $29,296 $92,606 $94,140 ($2,390) $213,652 ====================================================================
The accompanying notes are an integral part of these financial statements. 5 Independence Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) (Dollars in thousands)
Three Months Ended March 31, 1994 1993 - ------------------------------------------------------------------------------------- Operating Activities Net income $2,463 $5,231 Adjustments to reconcile net income to net cash provided by operating activities: Net amortization of premiums and discounts 808 1,281 Amortization of deferred fees and costs (180) (236) Provision for possible loan losses 1,905 3,225 Securities losses 13 173 Impairment losses on residuals 5,276 --- Provision for depreciation and amortization 1,197 1,249 Provision net of (gains) losses on sales of other real estate owned 934 287 Proceeds from sales of mortgages held for sale 63,553 54,610 Gains on sales of mortgages (581) (891) Originations of mortgages held for sale (30,863) (34,413) Gains on sales of portfolio loans (114) (112) Net increase in taxes receiveable 2,647 2,118 Net decrease in deferred tax debits (1,846) --- Net (increase) decrease in accrued income and other assets (5,087) 654 Net decrease in accrued expense and other liabilities (6,379) (7,445) - ------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 33,746 25,731 - ------------------------------------------------------------------------------------- Investing Activities Net (increase) decrease in term federal funds sold (11,000) 4,000 Net decrease in interest-bearing deposits with banks 3,636 2,520 Net decrease in other short-term investments 7,239 5,199 Proceeds from sales of investments held for sale --- 519 Purchases of investment securities (57,961) (103,616) Proceeds from sales of securities available-for-sale 6,378 --- Proceeds from maturities and calls of investment securities 66,609 79,193 Proceeds from sale of other real estate owned 1,299 2,486 Proceeds from sales of portfolio loans 10,401 3,542 Net decrease in loans 23,995 3,804 Premises and equipment expenditures (341) (729) - ------------------------------------------------------------------------------------- Net Cash Provided (Used) by Investing Activities 50,255 (3,082) - ------------------------------------------------------------------------------------- Financing Activities Net increase (decrease) in demand and savings deposits 7,949 (34,720) Net decrease in time deposits (32,426) (68,654) Net increase (decrease) in short-term borrowings (10,824) 11,166 Proceeds from issuance of long-term debt --- 10,000 Repayment of long-term borrowings (1,344) (28) Proceeds from dividend reinvestment and employee stock purchase and option plans 1,025 2,244 Cash dividends paid (3,343) (3,289) - ------------------------------------------------------------------------------------- Net Cash Used by Financing Activities (38,963) (83,281) - ------------------------------------------------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents 45,038 (60,632) Cash and Cash Equivalents at Beginning of Year 142,062 212,932 - ------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $187,100 $152,300 =========================== Supplemental disclosures Interest paid $16,187 $19,191 Net income taxes paid --- --- Noncash transactions: Transfer of loans to other real estate owned 1,300 2,015 Transfer of mortgages held for sale to residential mortgages 2,562 1,547
The accompanying notes are an integral part of these financial statements. 6 INDEPENDENCE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 ACCOUNTING AND REPORTING POLICIES The accounting and financial reporting policies of Independence Bancorp, Inc. (Independence) and its subsidiaries conform to generally accepted accounting principles and to general practice within the banking industry. The consolidated financial statements include the accounts of Independence and its subsidiaries, all of which are wholly owned. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. Additional significant accounting policies are presented in the notes to the financial statements included in the Independence 1993 Annual Report to Shareholders. During the first quarter of 1994, Independence recognized a $3.4 million after- tax impairment loss on certain mortgage securities. The loss was the result of a write-down to fair value of these securities, which were deemed to be impaired. This resulted from a recent Financial Accounting Standards Board (FASB) interpretation of a 1993 accounting change, Statement of Financial Accounting Standards No. 115 (SFAS No. 115). The interpretation, reached by a consensus of the FASB Emerging Issues Task Force in March 1994, requires more definitive criteria for recognition of impairment losses on these types of securities. Certain data for prior years has been reclassified to conform to the current year's presentation. These reclassifications had no effect on net income. Tabular information below is presented in thousands of dollars. NOTE 2 PROPOSED TRANSACTION In the fourth quarter of 1993, Independence and CoreStates Financial Corp ("CoreStates") entered into an agreement and plan of merger (the "Merger Agreement") and a stock option agreement (the "Stock Option Agreement"). This transaction is subject to approval by various regulatory agencies and Independence's shareholders and the satisfaction of all closing conditions. The following information is qualified in its entirety by reference to the Merger Agreement and Stock Option Agreement which were filed in the Independence Form 8-K of November 19, 1993. Under the terms of the Merger Agreement, each shareholder of Independence will receive for each Independence Common Share a number of CoreStates Common Shares determined as follows: (i) if the Average Closing Price (as defined in the Merger Agreement) of CoreStates Common Shares on the Determination Date (as defined in the Merger Agreement) is less than or equal to $27.00 per share, the exchange ratio will be 1.50; (ii) if the Average Closing Price of CoreStates Common Shares on the Determination Date is greater than or equal to $28.00 per share, the exchange ratio will be 1.45; or, (iii) if the Average Closing Price of CoreStates Common Shares on the Determination Date is greater than $27.00 but less than $28.00 per share, the exchange ratio will be determined by dividing $40.50 by the Average Closing Price. As a condition to CoreStates entering into the Merger Agreement, and in consideration thereof, Independence and CoreStates entered into the Stock Option Agreement, entitling CoreStates, under certain circumstances to purchase up to 1,130,000 authorized but unissued shares of Independence Common Stock at an exercise price of $33.50, subject to termination within certain periods, in cash. While Independence has utilized a long-term work out strategy for all of its assets in the belief that value could be maximized over time, CoreStates' strategy is to seek to dispose of certain assets via bulk sale, individual credit direct negotiation or foreclosure, in an accelerated manner. It is CoreStates' philosophy that this change maximizes the total value of the proposed transaction and allows the ongoing institution to concentrate upon new franchise initiatives and revenue generation. In CoreStates' experience, a strategy that involves the accelerated resolution of problem assets has been more economical than a long-term work out approach. It has been CoreStates' experience that the costs of working out assets as well as other carrying costs typically outweigh any improvement in an asset's realized value. Furthermore, resources and management time and attention are diverted away from building the business and creating long-term franchise value. CoreStates currently estimates that in connection with the change 7 in strategic direction and to conform Independence's loan, accrual and reserve policies to those of CoreStates, it will take an addition to the allowance for possible loan losses of approximately $25.0 million and an addition to the reserve against other real estate owned of approximately $5.0 million. Accordingly, pro forma shareholders' equity will be reduced by $19.5 million, the after-tax effect of the estimated provisions. CoreStates currently estimates that the assets related to the $30.0 million in estimated aggregate provisions will be disposed of within eighteen months of the effective date of the proposed transaction. The carrying value of these assets is approximately $120.0 million and the estimated provisions represent 25% of this amount. NOTE 3 CASH AND DUE FROM BANKS The Federal Reserve requires maintenance of certain average reserve balances for all financial institutions. In addition, commercial banks maintain compensating balances, most of which are not required, but are used to offset specific charges for check clearing and other services. At March 31, 1994, required compensating and reserve balances were $41.5 million. NOTE 4 INVESTMENT SECURITIES The carrying values and fair values of investments available-for-sale as of March 31, 1994, were as follows:
Unrealized Unrealized Carrying Holding Holding Fair Value Gains Losses Value -------------------------------------------- U.S. Treasury $ 3,159 $ --- $ (28) $ 3,131 U.S. Government agencies and corporations 13,144 87 (73) 13,158 State and municipal 74,561 140 (1,112) 73,589 Foreign Government securities 250 --- --- 250 Corporate securities 69,774 --- (1,066) 68,708 Mortgage-backed securities 306,875 916 (7,793) 299,998 Other securities 90,657 139 (1,223) 89,573 Equity securities 10,763 46 (56) 10,753 -------------------------------------------- Subtotal 569,183 $1,328 $(11,351) $559,160 =============================== Less: Net unrealized holding losses (10,023) -------- Total $559,160 ========
Proceeds from sales of investments held for sale were $519,000 for the first quarter of 1993. Gains of $6,000 and losses of $7,000 were realized on these sales in the first quarter of 1993. Proceeds from sales of debt securities for the first quarter of 1994 were $6.4 million. Gains of $25,000 and losses of $38,000 were realized on these sales. There were no sales of debt securities in the first quarter of 1993. There were no sales of marketable equity securities during the first quarters of 1994 and 1993. At March 31, 1994, the amortized cost and fair value of mortgage residual securities were $7.3 million and $7.7 million, respectively. An impairment loss of $5.3 million was recognized against these securities during the first quarter of 1994. As discussed in Note 1, this resulted from a recent FASB interpretation of SFAS No. 115. At March 31, 1993, write-downs of $172,000 were recognized on these investments and were included in securities gains and losses. At March 31, 1994, assets having a book value of $162.0 million were pledged to collateralize deposits of public funds and for other purposes. 8 NOTE 5 LOANS AND LEASE FINANCING Loans and lease financing at March 31, 1994 were classified as follows:
March 31, 1994 --------------- Commercial $ 569,744 Real estate--construction 36,308 Mortgage--commercial 247,603 Mortgage--residential 92,432 Installment loans 649,150 Lease financing 89,328 ---------- Total 1,684,565 Unearned income (31,620) ---------- Total net loans $1,652,945 ==========
NOTE 6 ALLOWANCE FOR POSSIBLE LOAN LOSSES Independence reviews the adequacy of its allowance for possible loan losses each quarter through a detailed analysis of various factors. Consideration is given to changes in the nature and volume of the portfolio, overall portfolio quality, specific problem loans and current and anticipated economic conditions that may affect borrowers' ability to pay. Transactions in the allowance for possible loan losses are summarized below:
Three months ended March 31, 1994 - --------------------------------------------- Balance at beginning of period $33,056 Charge-offs: Commercial 1,840 Real estate--construction --- Mortgage--commercial 94 Mortgage--residential 11 Installment loans 346 Lease financing 96 - --------------------------------------------- Total charge-offs 2,387 - --------------------------------------------- Recoveries: Commercial 231 Real estate--construction 9 Mortgage--commercial 10 Installment loans 153 Lease financing 39 - --------------------------------------------- Total recoveries 442 - --------------------------------------------- Net charge-offs 1,945 Provision for possible loan losses 1,905 - --------------------------------------------- Balance at end of period $33,016 =======
9 NOTE 7 NONPERFORMING ASSETS The following table presents risk elements in the loan portfolio by type. Nonperforming assets consist of nonaccrual loans, restructured loans and holdings of other real estate. Loans are placed in nonaccrual status when management determines that uncertainty of interest collection exists, but payment of principal is not impaired. When uncertainty of collection of principal exists, the asset is written down to its net realizable value. Restructured loans are those that have been formally renegotiated due to the financial weakness of the borrower.
March 31, 1994 -------------- Accruing loans 90 days past due $ 4,732 Nonaccrual loans 19,894 Restructured debt 1,586 Other real estate owned 15,170
NOTE 8 INCOME TAXES The provision for federal income taxes is less than the amount determined using the statutory rate of 35% due primarily to tax-exempt interest on certain loans and investment securities. NOTE 9 COMMITMENTS AND CONTINGENCIES Various legal proceedings are pending against Independence and its subsidiaries. Management does not anticipate any material financial impact as a result of these actions. In the normal course of business, Independence uses off-balance-sheet instruments to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, recourse arrangements, commitments to sell and purchase mortgage loans and mortgage-backed securities, interest rate swaps, caps and forward rate agreements. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements.
Contract or Notional Amount March 31, 1994 -------------- Financial instruments whose contract amounts represent potential risk: Commitments to extend credit $459,519 Standby letters of credit 33,315 Loans sold with recourse 9,143 Financial instruments whose contractual or notional amounts exceed the amount of potential credit risk: Interest rate swaps maturing within one year 80,000 Interest rate swaps maturing beyond one year 312,500 Purchased option contacts 80,000 Commitments to sell mortgage loans and mortgage-backed securities 17,430
10 Independence Bancorp, Inc. and Subsidiaries Consolidated Balance Sheet (Dollars in thousands, except per share data)
December 31, 1993 - ------------------------------------------------------------------------------------------ Assets Cash and due from banks $120,462 Interest-bearing deposits with banks 46,084 Federal funds sold (including term federal funds sold of $5,000) 26,600 Other short-term investments 14,430 Mortgages held for sale 57,119 Investments available-for-sale 588,004 Loans (net of unearned income of $31,750) 1,687,997 Less: Allowance for possible loan losses 33,056 - ------------------------------------------------------------------------------------------ Net loans 1,654,941 Premises and equipment, net 33,907 Accrued income and other assets 61,878 - ------------------------------------------------------------------------------------------ Total Assets $2,603,425 ============ Liabilities Deposits Demand - non-interest-bearing $383,890 Demand - interest-bearing 248,195 Savings 897,597 Time 554,493 Time over $100,000 68,890 - ------------------------------------------------------------------------------------------ Total deposits 2,153,065 Short-term borrowings Securities sold under agreements to repurchase 51,774 Other short-term borrowings 10,456 - ------------------------------------------------------------------------------------------ Total short-term borrowings 62,230 Long-term borrowings 134,254 Accrued expenses and other liabilities 31,898 - ------------------------------------------------------------------------------------------ Total Liabilities 2,381,447 ------------ Commitments and Contingent Liabilities Shareholders' Equity Preferred stock, par value $100 per share; authorized 2,500,000 shares, none issued --- Common stock, par value $2.50 per share; authorized 50,000,000; issued 11,675,100 29,188 Surplus 91,659 Retained earnings 103,521 Treasury stock, 152,742 shares at cost (2,390) - ------------------------------------------------------------------------------------------ Total Shareholders' Equity 221,978 ------------ Total Liabilities and Shareholders' Equity $2,603,425 ============
The accompanying notes are an integral part of these financial statements. 11 Independence Bancorp, Inc. and Subsidiaries Consolidated Statement of Income (Dollars in thousands, except per share data)
Year Ended December 31, 1993 - ----------------------------------------------------------------------------------------- Interest Income Interest and fees on loans $138,935 Interest on investment securities Taxable 30,242 Exempt from federal income tax 1,094 Dividends 724 Interest on mortgages held for sale 3,234 Interest on other investments 3,056 - ----------------------------------------------------------------------------------------- Total Interest Income 177,285 -------- Interest Expense Demand - interest-bearing 4,543 Savings 24,908 Time 26,018 Time over $100,000 4,258 Short-term borrowings 2,652 Long-term borrowings 8,289 - ----------------------------------------------------------------------------------------- Total Interest Expense 70,668 -------- Net Interest Income 106,617 Provision for possible loan losses 11,201 - ----------------------------------------------------------------------------------------- Net Interest Income after Provision for Possible Loan Losses 95,416 -------- Non-Interest Income Trust income 4,487 Service charges on deposit accounts 9,510 Other service charges and fees 6,824 Securities gains 362 Recoveries on certain bonds 155 Gains on sales of mortgages 3,958 Other income 4,080 - ----------------------------------------------------------------------------------------- Total Non-Interest Income 29,376 -------- Non-Interest Expense Salaries 37,444 Employee benefits 9,054 Net occupancy expense 6,656 Furniture and equipment expense 5,772 Data processing expense 5,363 Insurance expense 6,113 State taxes 2,669 Other real estate expense 2,425 Other expense 18,105 - ----------------------------------------------------------------------------------------- Total Non-Interest Expense 93,601 -------- Income Before Taxes 31,191 Income taxes 8,312 -------- Net Income $22,879 ======== Per Share Data Net income $1.98 Cash dividends paid 1.16 Average Common Shares Outstanding 11,529,824
The accompanying notes are an integral part of these financial statements. 12 Independence Bancorp, Inc. and Subsidiaries Consolidated Statement of Changes in Shareholders' Equity (Dollars in thousands, except per share data)
Common Retained Treasury Year Ended December 31, 1993 Stock Surplus Earnings Stock Total - ----------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1993 $28,611 $86,828 $95,009 ($2,393) $208,055 Net income 22,879 22,879 Cash dividends paid ($1.16 per share) (13,252) (13,252) Change in unrealized loss on marketable equity securities 250 250 Adjustment to unrealized holding loss of investments available-for-sale, net of tax of $735 (1,365) (1,365) Treasury stock issued (217 shares) 3 3 Corporate tax benefit related to exercise stock options 445 445 Exercise of stock options (160,678 shares) 402 2,823 3,225 Dividend reinvestment plan and employee stock purchase plan (70,119 shares) 175 1,563 1,738 - ----------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1993 $29,188 $91,659 $103,521 ($2,390) $221,978 ==================================================================
The accompanying notes are an integral part of these financial statements. 13 Independence Bancorp, Inc. and Subsidiaries Consolidated Statement of Cash Flows (Dollars in thousands)
Year Ended December 31, 1993 - ------------------------------------------------------------------------------------------ Operating Activities Net income $22,879 Adjustments to reconcile net income to net cash provided by operating activities: Net amortization of premiums and discounts 6,204 Amortization of deferred fees and costs (363) Provision for possible loan losses 11,201 Securities (gains) losses (362) Recoveries on certain bonds (155) Gains on sales of loans (542) Provision for depreciation and amortization 4,890 Provision net of (gains) losses on sales of other real estate owned 2,425 Proceeds from sales of mortgages held for sale 262,223 Gains on sales of mortgages (3,958) Originations of mortgages held for sale (278,894) Net increase (decrease) in taxes receiveable 1,672 Net increase in deferred tax debits (717) Net (increase) decrease in accrued income and other assets 10,304 Net decrease in accrued expense and other liabilities (4,217) - ------------------------------------------------------------------------------------------ Net Cash Provided by Operating Activities 32,590 - ------------------------------------------------------------------------------------------ Investing Activities Net (increase) decrease in term federal funds sold (1,000) Net decrease in interest-bearing deposits with banks 2,261 Net decrease in other short-term investments 2,935 Proceeds from sales of investments held for sale 2,832 Purchases of investment securities (457,972) Proceeds from sales of investment securities 206,263 Proceeds from maturities and calls of investment securities 317,444 Proceeds from sale of other real estate owned 8,300 Net (increase) decrease in loans (39,776) Premises and equipment expenditures (2,947) - ------------------------------------------------------------------------------------------ Net Cash Provided by Investing Activities 38,340 - ------------------------------------------------------------------------------------------ Financing Activities Net increase in demand and savings deposits 56,829 Net decrease in time deposits (153,215) Net increase (decrease) in short-term borrowings (67,143) Proceeds from issuance of long-term debt 30,148 Repayment of long-term borrowings (133) Proceeds from dividend reinvestment and employee stock purchase and option plans 4,966 Cash dividends paid (13,252) - ------------------------------------------------------------------------------------------ Net Cash Used by Financing Activities (141,800) - ------------------------------------------------------------------------------------------ Increase (Decrease) in Cash and Cash Equivalents (70,870) Cash and Cash Equivalents at Beginning of Year 212,932 - ------------------------------------------------------------------------------------------ Cash and Cash Equivalents at End of Year $142,062 ============ Supplemental disclosures Interest paid $74,249 Net income taxes paid 7,100 Noncash transactions: Transfer of loans to other real estate owned 9,452 Transfer of mortgages held for sale to residential mortgages 10,249
The accompanying notes are an integral part of these financial statements. 14 INDEPENDENCE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and financial reporting policies of Independence Bancorp, Inc. ("Independence") and its subsidiaries conform to generally accepted accounting principles and to general practice within the banking industry. The following is a description of the more significant of these policies. Tabular information is presented in thousands of dollars. Basis of Presentation The consolidated financial statements include the accounts of Independence and its subsidiaries, all of which are wholly-owned. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. Mortgages Held for Sale Mortgages held for sale are carried at the lower of aggregate cost or market value, net of the effect of hedging transactions. Gains and losses on mortgages held for sale are included in non-interest income. Investments In the fourth quarter of 1993, Independence adopted Statement of Financial Accounting Standards ("SFAS") No. 115. Prior year's investment securities and investments held for sale were not changed. The effect of adopting SFAS No. 115 resulted in an unrealized holding loss of $2.1 million against the investment portfolio. Retained earnings was affected by the unrealized holding loss, net of tax, of $1.4 million. Adoption of SFAS No. 115 had no effect on net income. The decision to purchase or sell investments is based on management's assessment of various factors such as foreseeable economic conditions, including interest rates, and the interest rate risk, liquidity and capital position of Independence. Independence has classified all investments as available-for-sale since it anticipates that these securities would be available to be sold in response to the above foreseeable economic conditions. Investments available- for-sale are held at fair value; unrealized holding gains and losses are recognized in non-interest income when these securities are sold. Investments consist of debt and equity securities. Debt securities are adjusted for amortization of premiums and accretion of discounts to maturity date. Income is recognized on stated rates or rates computed by estimating future cash flows of the instrument. Gains and losses on sales of investment securities, including write-downs on mortgage residual securities, are included in securities gains and losses and are calculated on a specific identification basis. Financial Futures, Swaps and Options Financial futures contracts, interest rate swaps, caps, forward rate agreements and option contracts are principally used to hedge assets and liabilities from changes in interest rates. Gains and losses on financial futures contracts, and the results of interest rate swaps, caps, forward rate agreements and options contracts designated as hedges, are deferred, recorded on the balance sheet and recognized over the life of the hedged asset or liability as an adjustment to the related interest income or expense. If the asset or liability being hedged is disposed of, any unamortized gain or loss on the hedging instrument is included in the determination of the gain or loss from the disposition. 15 Loans and Lease Financing Loans are stated at the principal amount outstanding, net of unearned income and net deferred loan fees and costs. Income is accrued on the principal amount outstanding. Accrual of interest is discontinued when, in management's judgement, collection of interest or principal is questionable. Loan origination fees and direct loan origination costs are deferred and amortized by the interest method over the life of each loan. The unamortized balance of these fees and costs are included as part of the loan balance to which it relates. The amortized amounts recognized as an adjustment of yield are reported in interest income. Certain other loan fees are amortized on a straight-line basis and are reported in non-interest income. Allowance for Possible Loan Losses The allowance for loan losses is established through a provision for loan losses charged to operations. Loan losses are charged against the allowance when management believes that the collectibility of the loan principal is unlikely. Recoveries on loans previously charged-off are credited to the allowance. The allowance is an amount that management believes will be adequate to absorb possible loan losses based on evaluations of loan collectibility and prior loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, specific problem loans and current and anticipated economic conditions that may affect borrowers' ability to pay. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated over the estimated useful life of the asset, limited in the case of leasehold improvements to the lease term, using the straight-line method. Other Real Estate Owned Other real estate owned represents properties acquired through customers' loan defaults. The real estate is stated at an amount equal to the loan balance prior to foreclosure, plus costs incurred for improvements to the property, but no more than the fair market value of the property, less estimated costs to sell. Income Taxes Independence accounts for income taxes under the asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in Independence's financial statements or tax returns. In estimating future tax consequences, Independence generally considers all expected future events other than enactments of changes in the tax law or rates. A valuation allowance may be provided for the deferred tax assets to the extent that it is more likely than not that they will not be realized. Earnings Per Share Earnings per share are computed by dividing net income by the weighted average number of shares outstanding and the assumed exercise of stock options using the treasury stock method to the extent that the effect is dilutive. Fully diluted earnings per share are based on net income increased by interest expense (net of tax) on outstanding convertible subordinated debentures, unless the effect on fully diluted earnings per share is antidilutive. The weighted average number of shares outstanding is increased by the assumed conversion of outstanding convertible subordinated debentures and the assumed exercise of stock 16 options using the treasury stock method to the extent that the effect is dilutive. Fully-diluted earnings are not presented on the income statement if the reduction is less than three percent. Cash Flow Statement For purposes of the statement of cash flows, Independence considers cash and due from banks and federal funds sold, excluding term federal funds sold, as cash and cash equivalents. NOTE 2 PROPOSED TRANSACTION In the fourth quarter of 1993, Independence and CoreStates Financial Corp ("CoreStates") entered into an agreement and plan of merger (the "Merger Agreement") and a stock option agreement (the "Stock Option Agreement"). This transaction is subject to approval by various regulatory agencies and Independence's shareholders and the satisfaction of all closing conditions. The following information is qualified in its entirety by reference to the Merger Agreement and Stock Option Agreement which were filed in the Independence Form 8-K of November 19, 1993. Under the terms of the Merger Agreement, each shareholder of Independence will receive for each Independence Common Share a number of CoreStates Common Shares determined as follows: (i) if the Average Closing Price (as defined in the Merger Agreement) of CoreStates Common Shares on the Determination Date (as defined in the Merger Agreement) is less than or equal to $27.00 per share, the exchange ratio will be 1.50; (ii) if the Average Closing Price of CoreStates Common Share on the Determination Date is greater than or equal to $28.00 per share, the exchange ratio will be 1.45; or, (iii) if the Average Closing Price of CoreStates Common Shares on the Determination Date is greater than $27.00 but less than $28.00 per share, the exchange ratio will be determined by dividing $40.50 by the Average Closing Price. As a condition to CoreStates entering into the Merger Agreement, and in consideration thereof, Independence and CoreStates entered into the Stock Option Agreement, entitling CoreStates, under certain circumstances to purchase up to 1,130,000 authorized but unissued shares of Independence Common Stock at an exercise price of $33.50, subject to termination within certain periods, in cash. While Independence has utilized a long-term workout strategy for all of its assets in the belief that value could be maximized over time, CoreStates' strategy is to seek to dispose of certain assets via bulk sale, individual credit direct negotiation or foreclosure, in an accelerated manner. It is CoreStates' philosophy that this change maximizes the total value of the proposed transaction and allows the ongoing institution to concentrate upon new franchise initiatives and revenue generation. In CoreStates' experience, a strategy that involves the accelerated resolution of problem assets has been more economical than a long-term workout approach. It has been CoreStates' experience that the costs of working out assets as well as other carrying costs typically outweigh any improvement in an asset's realized value. Furthermore, resources and management time and attention are diverted away from building the business and creating long-term franchise value. Independence currently estimates that in connection with the change in strategic direction and to conform its loan, accrual and reserve policies to those of CoreStates, Independence will make an addition to the allowance for possible loan losses of $25.0 million and an addition to the reserve against other real estate owned of approximately $5.0 million. Independence currently estimates that the assets related to the $30.0 million in estimated aggregate provisions will be disposed of within eighteen months of the effective date of the merger. The carrying value of these assets is approximately $120.0 million and the estimated provisions represent 25% of this amount. In addition, $24.2 million of closing and consolidation costs are 17 expected due to the merger. Accordingly, pro forma shareholders' equity will be reduced by $35.2 million, the after-tax effect of the estimated provisions and costs. NOTE 3 CASH AND DUE FROM BANKS The Federal Reserve Bank requires maintenance of certain average reserve balances for all financial institutions. In addition, commercial banks maintain compensating balances, most of which are not required, but are used to offset specific charges for check clearing and other services. At December 31, 1993, required compensating and reserve balances were $41.5 million. NOTE 4 INVESTMENT SECURITIES The carrying values and fair values of investments available-for-sale as of December 31, 1993 were as follows:
Unrealized Unrealized Carrying Holding Holding Fair Value Gains Losses Value -------------------------------------------- U.S. Treasury $ 2,003 $ 3 $ --- $ 2,006 U.S. Government agencies and corporations 13,651 250 (9) 13,892 State and municipal 64,194 779 (167) 64,806 Foreign Government securities 250 --- --- 250 Corporate securities 80,327 8 (279) 80,056 Mortgage-backed securities 311,828 2,863 (5,711) 308,980 Other securities 107,559 477 (344) 107,692 Equity securities 10,292 63 (33) 10,322 -------------------------------------------- Subtotal 590,104 $ 4,443 $ (6,543) $588,004 ============================= Less: Net unrealized holding losses (2,100) -------- Total $588,004 ========
The amortized cost and fair value of debt securities by contractual maturity at December 31, 1993 are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage- backed securities are shown separately due to the amortization and prepayment of principal occurring throughout the life of these instruments.
DECEMBER 31, 1993 ------------------- Amortized Fair Cost Value ------------------- Due in one year or less $ 72,630 $ 72,635 Due after one year through five years 112,261 112,246 Due after five years through ten years 22,281 22,432 Due after ten years 60,812 61,389 Mortgage-backed securities 311,828 308,980 ------------------ Total debt securities $579,812 $577,682 ==================
The amortized cost and fair value of mortgage residual securities were $13.3 million and $8.3 million at December 31, 1993. Write-downs of $4.0 million were recognized in 1993 on these investments and are included in securities gains and losses. 18 Proceeds from sales and calls of debt securities and investments held for sale were $201.9 million during 1993. Gains of $3.7 million and losses of $132,000 were realized on these sales in 1993. Net realized gains of $746,000 on the sales of marketable equity securities were recognized in 1993. In 1993, Independence received additional payments due to previous settlements on certain bonds of $155,000, which were recorded in non-interest income. At December 31, 1993, assets having a book value of $187.2 million were pledged to collateralize deposits of public funds and for other purposes. In 1993, Independence held no securities that, in the aggregate from any issuer (excluding the U.S. Government and its agencies), were in excess of 10.0% of shareholders' equity. Independence held $18.1 million, or 3.1% of total investment securities at December 31, 1993, of bank or bank holding company securities which could be affected by the condition of the general economy and the banking industry. Independence's investment policy requires that all new purchases have at least a long-term rating of A. In addition, Independence held interest-bearing deposits with banks, federal funds sold, bank notes, banker's acceptances and commercial paper totaling $87.1 million at December 31, 1993 which would be similarly affected by the status of the banking industry. These investments are principally short-term in nature and require a minimum A2/P2 rating at the time of purchase. NOTE 5 LOANS AND LEASE FINANCING Loans were classified as follows:
DECEMBER 31, 1993 ------------------ Commercial $ 577,516 Real estate - construction 40,706 Mortgages - commercial 257,710 Mortgages - residential 103,946 Installment loans to individuals 655,538 Lease financing 84,331 ---------- Total 1,719,747 Unearned income (31,750) ---------- Total net loans $1,687,997 ==========
It is the practice of Independence to lend primarily in its trade area which consists principally of eastern Pennsylvania. Independence, to a large extent, extends credit collateralized by real estate. This includes residential and commercial mortgages, residential and commercial construction loans, home equity loans and commercial loans collateralized by real estate. These lending activities could be similarly affected changes in the general economy, the regional economy or real estate values. At December 31, 1993 nonaccrual loans were $20.3 million. The gross amount of interest that would have been earned at original rates on nonaccrual loans was $2.3 million in 1993, of which $464,000 was received in 1993 and recorded in interest income. At December 31, 1993, restructured commercial mortgages were $1.6 million. The gross amount of interest that would have been earned in 1993 if there had been no restructuring was $95,000 of which $83,000 was received and recorded in interest income. There are no commitments to lend additional funds to any debtor who is a party to a restructured loan. 19 The following table presents the amounts due from directors, principal officers, and their related interests. All of these transactions were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and they did not involve a more than normal risk of collectibility or present any other unfavorable features.
YEAR ENDED DECEMBER 31, 1993 ----------------------------- Balance at beginning of year $ 37,321 Additions 11,289 Repayments and other changes (23,816) -------- Balance at end of year $ 24,794 ========
NOTE 6 ALLOWANCE FOR POSSIBLE LOAN LOSSES Transactions in the allowance for possible loan losses are summarized below:
YEAR ENDED DECEMBER 31, 1993 ---------------------------- Balance at beginning of year $ 34,634 Charge-offs (17,352) Recoveries 4,573 -------- Net charge-offs (12,779) Provision for possible loan losses 11,201 -------- Balance at end of year $ 33,056 ========
NOTE 7 PREMISES AND EQUIPMENT Premises and equipment, stated at cost less accumulated depreciation and amortization, are summarized as follows:
DECEMBER 31, 1993 ----------------- Land and buildings $ 36,214 Furniture and equipment 32,113 Leasehold improvements 7,153 Assets held under capital leases 372 -------- Gross book value 75,852 Accumulated depreciation and amortization (41,945) -------- Net book value $ 33,907 ========
Depreciation and amortization expense on premises and equipment amounted to $4.9 million in 1993. Certain facilities and equipment are leased under short- and long-term lease agreements expiring at various dates to the year 2003. Substantially all such leases are accounted for as operating leases. In certain cases, these leases contain renewal options and generally provide that Independence pays for insurance, taxes and maintenance. Rental expense on operating leases amounted to $1.7 million in 1993. Required minimum annual rentals due on noncancelable leases expiring after one year approximate $8.9 million in the aggregate at December 31, 1993. Minimum annual rentals for each of the years 1994 through 1998 are approximately $1.6 million, $1.4 million, $1.2 million, $1.1 million and $752,000, respectively. 20 NOTE 8 OTHER ASSETS At December 31, 1993, Independence had $16.1 million of other real estate owned. Other real estate expense was $2.4 million in 1993. NOTE 9 SHORT-TERM BORROWINGS Federal funds purchased represent overnight borrowings. Securities sold under agreements to repurchase represent borrowings which may range from one day to three months in maturity. Other short-term borrowings consist of demand notes, and Treasury, tax and loan note options payable upon demand. The following table presents certain information for federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings:
DECEMBER 31, 1993 ---------------------- Average Amount Rate ---------------------- Federal funds purchased: At December 31 $ --- ---% Average amount outstanding 221 3.62 Maximum month-end balance --- Securities sold under agreements to repurchase: At December 31 $ 51,774 2.29% Average amount outstanding 89,718 2.73 Maximum month-end balance 130,278 Other short-term borrowings: At December 31 $ 10,456 2.85% Average amount outstanding 7,705 2.63 Maximum month-end balance 13,898
NOTE 10 LONG-TERM BORROWINGS Long-term borrowings represent obligations with original maturities exceeding one year. A summary of these borrowings is presented below:
DECEMBER 31, 1993 ----------------- Mortgage loans, secured by bank premises $ 1,821 Subordinated convertible debentures 42,147 Subordinated debentures 25,000 Obligations under capital leases 286 Federal Home Loan Bank borrowings 65,000 -------- Total $134,254 ========
Mortgage loans range in maturity from 1994 to 1999 at fixed rates of 7.50% and floating interest rates up to 70% of prime. The aggregate amount of maturities for all long-term borrowings due in each of the five years 1994 through 1998 are $1.4 million, $25.1 million, $30.1 million, $10.0 million and $10,000, respectively. 21 Independence has $42.1 million outstanding in 7.0% convertible subordinated debentures due in 2011. Interest is paid semi-annually. The debentures are convertible at any time prior to maturity, unless previously redeemed, into shares of common stock at a conversion price of $36.25 per share. The debentures are redeemable at Independence's option at a price of 102.1% of par on or after June 15, 1993, declining annually thereafter to par on and after June 15, 1996, together in each case with accrued interest. Independence must comply with covenants under this agreement. These covenants include restrictions upon the issuance of capital stock of significant subsidiaries (as defined), and limitations on liens, as security for indebtedness for money borrowed, upon any shares of stock of any significant subsidiary. In 1990, Independence issued for general purposes $25.0 million in subordinated debentures due in 2000 with a floating interest rate of prime plus 0.25%. Optional repayments may begin after the third year. This agreement contains certain covenants which include limitations on the issuance of funded and senior indebtedness (as defined), the creation of encumbrances, sale and leaseback transactions, investments in subsidiaries, long-term lease rentals, the issuance of certificates of deposit greater than $100,000 and deposit notes, transactions with affiliates, the issuance of preferred stock by certain subsidiaries, acquisition and disposition of assets including consolidations and mergers, the purchase of treasury stock, the payment of cash dividends and the maintenance of specified ratios. At December 31, 1993, under the most restrictive limitations, consolidated retained earnings of $14.8 million were unrestricted and available for dividends, the amount of additional funded indebtedness, as defined, that could be issued was $41.7 million, and the minimum net worth requirement was $165.0 million. Federal Home Loan Bank ("FHLB") borrowings of $65.0 million were borrowed at rates ranging from one-month LIBOR less 0.10% to 5.89% and are used for general corporate purposes. At a subsidiary bank, these borrowings are collateralized by a pledge of the bank's portfolio of the unencumbered investment securities, mortgaged-backed securities, certain mortgage loans and a lien on the bank's FHLB stock. NOTE 11 FEDERAL INCOME TAXES Applicable income taxed consisted of:
YEAR ENDED DECEMBER 31, 1993 ---------------------------- Current income taxes $6,288 Deferred income taxes 2,024 ------ Total $8,312 ======
22 Temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that represent the significant portions of the deferred tax asset or liability at December 31, 1993 were as follows:
December 31, 1993 ------------------ Provision for possible loan losses ($11,365) Lease financing deduction 6,355 Investment income (1,763) Other, net 886 --------- Net deferred tax asset ($ 5,887) =========
The reconciliation between the statutory and effective tax rate for net income was as follows:
YEAR ENDED DECEMBER 31, 1993 ---------------------------- Statutory tax rate 35% Tax exempt interest (4) Other (4) ----- Effective tax rate 27% =====
NOTE 12 SHAREHOLDERS' EQUITY Independence had a dividend reinvestment and stock purchase plan for shareholders in which 3,000,000 shares of common stock were authorized for issuance. This plan was terminated on December 31, 1993, as required under the agreement and plan of merger with CoreStates. Additional shares of common stock were able to be purchased with reinvested dividends at a 5% discount from the market price. Common stock was also able to be purchased with voluntary cash payments at the market price. The number of shares purchased pursuant to this plan were 53,997 shares in 1993. During 1993, Independence had an employee stock purchase plan in which 600,000 shares of common stock were authorized for issuance to persons who have been continuously employed by Independence for one year and who participated through payroll deductions; this plan was also terminated on December 31, 1993, as required under the agreement and plan of merger with CoreStates. Option periods under the employee stock purchase plan covered a six-month period from January 1 to June 30, and July 1 to December 31. Common stock was purchased under the plan at the lesser of 85% of the fair market value of the common stock on the first or last day of the offering period. During 1993, 16,122 shares were issued to participants at $19.98 and $21.89 per share. Independence has a 1992 employee long-term incentive plan under which 600,000 shares were registered on May 21, 1992 for issuance as stock options, stock appreciation rights, share awards or stock grants. Independence also has a 1992 non-employee director stock option plan under which 150,000 shares were registered on May 21, 1992. In 1993, 21,000 options were granted under the non- employee director stock option plan; no options were granted under the 1992 employee long-term incentive plan. These options have been granted for a term up to five years at a minimum fair market value of the shares at the date of 23 grant. Under the Merger Agreement, future stock option grants are not authorized. Changes in total options outstanding during 1993 were as follows:
Shares Options Option Price Available Outstanding Per Share ------------------------------------------ January 1, 1993 844,102 690,928 $13.50 to $31.00 Granted during year ( 21,000) 21,000 25.75 Exercised during year --- (163,763) 13.50 to 31.00 Forfeited during year 25,100 (25,100) 13.50 to 31.00 ----------------------------------------- December 31, 1993 848,202 523,065 $13.50 to $31.00 ========================================= Options exercisable at end of year 470,915 $13.50 to $31.00 ===========================
Independence has a shareholders rights plan under which each share of common stock has a right to purchase 1/100th of a share of Series A preferred stock. The exercise price is $80.00 after any person or group acquires 20.0% or more of Independence's common stock or in certain other circumstances. The rights are redeemable by Independence for $0.01 per right until the earlier of the expiration date of February 21, 1999 or their exercise. Under the Merger Agreement, several amendments were made to this rights plan exempting CoreStates from the applications of the plan. The rights do not have voting or dividend rights and, until they become exercisable, have no dilutive effect on the earnings of Independence. As discussed in Note 2, as a condition to CoreStates entering into the Merger Agreement, and in consideration thereof, Independence and CoreStates entered into the Stock Option Agreement, entitling CoreStates, under certain circumstances to purchase up to 1,130,000 authorized but unissued shares of Independence Common Stock at an exercise price of $33.50, subject to termination within certain periods, in cash. NOTE 13 RETIREMENT PLANS Independence has a defined contribution plan which covers all employees who meet the age and service requirements. Independence made contributions of 9.0% of covered compensation in 1993 according to the plan's vesting schedule. Independence also has a savings plan pursuant to the provisions of 401(k) of the Internal Revenue Code. The savings plan covers substantially all employees who meet the age and service requirements. The plan provides for elective employee contributions up to 8.0% of compensation and a full matching company contribution limited to 3.0%. The total expense relating to current retirement plans was $3.4 million in 1993. NOTE 14 DIVIDEND AND LOAN RESTRICTIONS The dividends that may be paid to the parent company by its banking subsidiaries are subject to certain legal limitations. Based on these limitations, the amount available for payment of dividends by all subsidiary banks was $83.7 million at December 31, 1993. Under current Federal Reserve regulations, the banking subsidiaries are limited in the amount they may loan to their affiliates, including the parent company. Such loans must be secured by specified obligations. In addition, any such loans to a single affiliate may not exceed 10.0%, and the aggregate of all loans to all affiliates may not exceed 20.0% of each banking subsidiary's regulatory capital. At December 31, 1993, the maximum amount available for transfer from the banking subsidiaries to the parent company in the form of loans and dividends approximated 49.3% of consolidated shareholders' equity. 24 Independence has certain restrictive covenants in its loan agreements which include limitations on the payment of cash dividends. At December 31, 1993, $14.8 million of consolidated retained earnings were unrestricted and available for dividend payments. NOTE 15 COMMITMENTS AND CONTINGENCIES Various legal proceedings are pending against Independence and its subsidiaries. Management does not anticipate any material losses as a result of these actions. Independence is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, recourse arrangements, commitments to sell and purchase mortgage loans and mortgage-backed securities, and interest rate swaps, caps and forward rate agreements. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. Credit risk is defined as the possibility of sustaining a loss due to the failure of the other parties to a financial instrument to perform in accordance with the terms of the contract. The maximum exposure to credit loss under commitments to extend credit, standby letters of credit, and loans sold with recourse is represented by the contractual amount of these instruments. Independence uses the same underwriting standards and policies in making credit commitments as it does for on-balance-sheet instruments. For interest rate swaps, caps, forward rate agreements and purchased option contracts, the notional amounts do not reflect exposure to credit loss. The credit risk of these instruments is controlled through credit approvals, risk control limits and monitoring procedures.
CONTRACT OR NOTIONAL AMOUNT DECEMBER 31, 1993 ----------------- Financial instruments whose contract amounts represent potential risk: Commitments to extend credit $498,630 Standby letters of credit 33,607 Loans sold with recourse 9,834 Financial instruments whose notional or contractual amounts exceed the amount of potential credit risk: Floating rate basis swaps 15,000 Interest rate swaps maturing within one year 75,000 Interest rate swaps maturing beyond one year 302,500 Purchased Option Contracts 89,000 Commitments to sell mortgage loans and mortgage-backed securities 37,580
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and many require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Independence evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management's credit evaluation of the customer. Collateral held varies but may include real estate, accounts receivable, marketable securities, pledged deposits, inventory, and equipment. 25 Standby letters of credit are conditional commitments issued that guarantee the performance of a customer to a third party. The credit risk and collateral policy involved in issuing letters of credit is essentially the same as that involved in extending loan commitments. The amount of collateral obtained is based on management's credit evaluation of the customer. Collateral held varies but may include real estate, accounts receivable, marketable securities, pledged deposits, inventory, and equipment. Independence has retained credit risk on certain residential mortgage loans sold. The investor may require that Independence repurchase the individual loans if they become 90 days past due. The loans sold with recourse totaled $9.8 million December 31, 1993. Independence enters into interest rate swaps, forward rate agreements and purchased option contracts to manage the interest rate exposure of its balance sheet. These transactions generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. Entering into interest rate swaps, forward rate agreements and purchased option contracts involves not only the risk of default by the other party, but also the interest rate risk associated with unmatched positions. Independence enters into only matched or hedged positions. The amounts potentially subject to credit risk are the streams of payments under the agreements and not the notional amounts used to express the volume of these transactions. The exposure to credit loss from interest rate swaps, forward rate agreements and purchased option contracts can be estimated by calculating the cost, on a present value basis, to replace at current market rates all profitable contracts outstanding at year-end. On that basis, the estimate of exposure on outstanding interest rate swaps, forward rate agreements and purchased option contracts was $4.8 million at December 31, 1993. In conjunction with its mortgage banking activities, Independence commits to sell mortgage loans and mortgage-backed securities. These forward contracts are entered into for the purposes of reducing the market risk associated with originating residential mortgage loans for sale. Additional risks may arise if Independence is unable to originate loans to fulfill the contracts, in which case Independence would repurchase mortgage-backed securities to deliver against the contracts. In addition, options and futures contracts may be used to offset the interest rate risk. Unrealized gains or losses on these purchased option contracts are included in the lower of cost or market valuation of the mortgages held for sale at year-end. NOTE 16 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards #107, "Disclosures about Fair Value of Financial Instruments", requires all entities to disclose the estimated fair value of its financial instrument assets and liabilities. For Independence, as for most financial institutions, approximately 98.0% of its assets and liabilities are considered financial instruments; however, many of these instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. It is also Independence's general practice and intent to hold its financial instruments to maturity and not to engage in trading or sales activities. Therefore, significant estimations and present value calculations were used by the company for the purpose of this disclosure. Estimated fair values have been determined by Independence using the best available data, and an estimated methodology suitable for each category of financial instruments. For those loans and deposits with floating interest rates, it is presumed that estimated fair values generally approximate the recorded book balances. The estimated methodologies used, the estimated fair values and recorded book balances at December 31, 1993, were as follows: 26 The carrying amounts of cash and due from banks and short-term investments approximate fair value because of the short maturity of these instruments.
Estimated Recorded Fair Value Book Balance ------------------------ Cash and due from banks $ 120,462 $ 120,462 Short-term investments 87,114 87,144
Financial instruments actively traded in a secondary market have been valued using quoted available market prices. Investments available-for-sale are carried at fair value.
Estimated Recorded Fair Value Book Balance ------------------------ Mortgages held for sale $ 57,572 $ 57,119 Investments available-for-sale 588,004 588,004
Financial instruments with stated maturities have been valued using present value discounted cash flow with a discount rate approximating the current market for similar assets and liabilities.
Estimated Recorded Fair Value Book Balance ------------------------ Deposits with stated maturities $629,718 $623,383 Short-term borrowings 62,217 62,230 Long-term debt 138,833 134,254
Financial instrument liabilities with no stated maturities have an estimated fair value equal to the amount payable on demand which is the recorded book balance.
Estimated Recorded Fair Value Book Balance ------------------------- Deposits with no stated maturities $1,529,682 $1,529,682
The net loan portfolio has been valued using a present value discounted cash flow. The discount rate used in these calculations is the Treasury yield curve adjusted for non-interest operating costs, credit loss and assumed prepayment risk.
Estimated Recorded Fair Value Book Balance ------------------------ Loans, net of unearned income $1,713,555 $1,687,997
27 Changes in assumptions or estimated methodologies may have a material effect on these estimated fair values. Independence's remaining assets and liabilities which are not considered financial instruments have not been valued differently than has been customary with historical cost accounting. The fair values of off-balance-sheet instruments have been determined based on fees, net of costs, currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties.
Fair Value of Asset (Liability) DECEMBER 31, 1993 ------------------------------- Commitments to extend credit $(1,868) Standby letters of credit 840 Interest rate swap agreements (6,974) Purchased option contracts 470
Management is concerned that reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values. Therefore, these values may not be realizable. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of Independence. 28 NOTE 17 FINANCIAL STATEMENTS OF INDEPENDENCE BANCORP, INC. (PARENT ONLY)
BALANCE SHEET - ------------------------------------------------------------------------------------- December 31, 1993 - ------------------------------------------------------------------------------------- Assets Cash and due from banks $ --- Investments in subsidiary banks 219,964 Investments in nonbank subsidiaries 13,884 Advances to and notes receivable from subsidiary banks 37,755 Advances to and notes receivable from nonbank subsidiaries 11,141 Other investments 1,247 Other assets 7,095 - ------------------------------------------------------------------------------------- Total Assets $291,086 ========= Liabilities Long-term borrowings $67,147 Other liabilities 1,961 Total Liabilities 69,108 Shareholders' Equity Preferred stock --- Common stock 29,188 Surplus 91,659 Retained earnings 103,521 Treasury stock (2,390) - ------------------------------------------------------------------------------------- Total Shareholders' Equity 221,978 - ------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $291,086 ========= STATEMENT OF INCOME - ----------------------------------------------------------------------- Year Ended December 31, 1993 - ----------------------------------------------------------------------- Dividends from subsidiary banks $25,366 Dividends from nonbank subsidiaries 172 Interest income from subsidiary banks 1,352 Interest income from nonbank subsidiaries 3,160 Other income and dividends 696 Management fees charged to subsidiary banks 9,759 Management fees charged to nonbank subsidiaries 234 Gains (losses) on sales of investment securities 748 - ----------------------------------------------------------------------- Total income 41,487 - ----------------------------------------------------------------------- Salaries and employee benefits 7,530 Interest expense 7,300 Other expenses 5,139 - ----------------------------------------------------------------------- Total expense 19,969 - ----------------------------------------------------------------------- Income before applicable income tax benefit and equity in undistributed earnings of subsidiaries 21,518 Income taxes (benefit) (1,511) - ----------------------------------------------------------------------- Income before equity in undistributed earnings of subsidiary banks 23,029 Equity in undistributed earnings (losses) of subsidiary banks 3,092 Equity in undistributed earnings (losses) of nonbank subsidiaries (3,242) - ----------------------------------------------------------------------- Net Income $22,879 ========
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STATEMENT OF CASH FLOW - --------------------------------------------------------------------------- Year Ended December 31, 1993 - --------------------------------------------------------------------------- Operating Activities Net income $22,879 Adjustments to reconcile net income to net cash provided by operating activities: Securities (gains) losses (748) Recoveries on certain bonds (4) Provision for depreciation 260 Equity in undistributed earnings of subsidiaries (8,466) Net (increase) decrease in accrued income and other assets (2,107) Net decrease in accrued expense and other liabilities (829) - --------------------------------------------------------------------------- Net cash provided by operating activities 10,985 - --------------------------------------------------------------------------- Investing Activities Net (increase) decrease in advances and notes receivable with subidiaries (9,902) Purchases of investment securities (2,151) Proceeds from sales of investment securities 5,665 Return of capital from subsidiaries 8,276 Additional capitalization of subsidiaries (4,460) Premises and equipment expenditures (188) - --------------------------------------------------------------------------- Net cash provided (used) by investing activities (2,760) - --------------------------------------------------------------------------- Financing Activities Proceeds from dividend reinvestment and employee stock purchase plans 4,966 Cash dividends paid (13,252) - --------------------------------------------------------------------------- Net cash used by financing activities (8,286) - --------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents (61) Cash and cash equivalents at beginning of year 61 - --------------------------------------------------------------------------- Cash and cash equivalents at end of year $0 ======== Supplemental disclosures: Interest paid $6,080 Income taxes paid --- Noncash transactions: Conversion of note receivable to investment in subsidiary 15,400 Securities transferred from bank subsidiaries as dividend payment 340
NOTES TO PARENT COMPANY ONLY FINANCIAL STATEMENTS 1. The financial statements of Independence Bancorp, Inc. (Parent Only) shown above should be read in conjunction with the consolidated financial statements and the footnotes to the consolidated financial statements. 2. There is no federal income tax applicable to the dividends and other income received from the subsidiaries since the parent company and its subsidiaries file a consolidated federal income tax return. 3. Interest expense includes $2.7 million of interest rate swap expense in 1993. 30 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Independence Bancorp, Inc.: We have audited the accompanying consolidated balance sheet of Independence Bancorp, Inc. and Subsidiaries as of December 31, 1993 and the related consolidated statements of income, changes in shareholders' equity, and cash flows for the year then ended. 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 audit. 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 audit provides 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 the year then ended in conformity with generally accepted accounting principles. As discussed in Notes 1 and 4 to the Consolidated Financial Statements, the Company changed its method of accounting for investments in 1993. COOPERS & LYBRAND January 19, 1994 2400 Eleven Penn Center Philadelphia, Pennsylvania 31 -----END PRIVACY-ENHANCED MESSAGE-----