-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K9/FlPCSR03rP6mjDoyA09utn9I4PHYFN9jaU8KApCRpgZHMnbuEo/au7OxfNR+f kfkn5akgDf0B53tlWdleAQ== 0000950109-96-001752.txt : 19960430 0000950109-96-001752.hdr.sgml : 19960430 ACCESSION NUMBER: 0000950109-96-001752 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960326 SROS: NYSE SROS: PHLX 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: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11285 FILM NUMBER: 96538739 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 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (MARK ONE) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 OR [_] TRANSITION REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] Commission File Number 0-6879 CORESTATES FINANCIAL CORP --------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 23-1899716 -------------------------------- ----------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Philadelphia National Bank Building Broad & Chestnut Streets P.O. Box 7618 Philadelphia, Pennsylvania 19101-7618 19101 -------------------------------------------- ------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: 215-973-3827 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Class Upon Which Registered -------------- --------------------- Common Stock, $1.00 par value New York Stock Exchange Common Stock, $1.00 par value The Philadelphia Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- -------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of registrant based on the closing sale price on February 29, 1996 was approximately $5,941,147,333. For this purpose only, all directors and officers of the registrant were assumed to be affiliates. The number of shares of Common Stock outstanding at February 29, 1996 was 138,566,547. DOCUMENTS INCORPORATED BY REFERENCE 1. Annual Report to Shareholders for the fiscal year ended December 31, 1995, portions of which are incorporated by reference in Parts I, II and IV of this Report. PART I Item 1 - Business CoreStates Financial Corp ("CoreStates") is a bank holding company registered under the Federal Bank Holding Company Act of 1956, as amended (the "Act") and incorporated under the laws of Pennsylvania with executive offices at the Philadelphia National Bank Building, 1345 Chestnut Street, Philadelphia, Pennsylvania 19107 (telephone number 215-973-3827). At December 31, 1995, CoreStates had total consolidated assets of approximately $29.6 billion and shareholders' equity of approximately $2.4 billion, and, based on December 31, 1995 rankings of bank holding companies by total consolidated assets, was believed to be the 29th largest bank holding company in the United States at such date. On October 10, 1995, CoreStates entered into a definitive agreement to acquire Meridian Bancorp, Inc. ("Meridian"). See "Strategic Actions" on page 5 of this Form 10K Annual Report. Assuming the consummation of this transaction which is subject to various regulatory approvals, CoreStates will have total consolidated assets of approximately $46.0 billion and shareholders' equity of approximately $3.9 billion, and based on December 31, 1995 rankings of bank holding companies by consolidated total assets, would be approximately the 20th largest bank holding company in the United States had the consummation of the transaction taken place on such date. Banking Subsidiaries The lead banking subsidiary of CoreStates is CoreStates Bank, N.A. ("CoreStates Bank"), a national banking association with executive offices located in Philadelphia, Pennsylvania. Other principal banking subsidiaries of CoreStates are New Jersey National Bank ("NJNB"), a national banking association with its executive offices located in Ewing Township, New Jersey and CoreStates Bank of Delaware, N.A. ("CBD"), a national banking association with its executive office located in New Castle County, Delaware. CoreStates Bank, NJNB and CBD are sometimes referred to herein as the "Banking Subsidiaries". Through CoreStates Bank, NJNB and CBD, CoreStates engages in the business of providing wholesale banking services, consumer financial services which includes retail banking, and trust & investment management services. Electronic Payment Services, Inc. ("EPS"), a joint venture in which CoreStates owns 20%, includes the MAC automated 2 teller machine network and point of sale processing businesses. CoreStates has received approval from the Office of the Comptroller of the Currency ("OCC") to relocate the head office of NJNB from Ewing Township, New Jersey, to Philadelphia, Pennsylvania, to merge NJNB into CoreStates Bank and to establish a branch of the resulting bank at the present location of the head office of NJNB. It is anticipated that the relocation and merger will take place in 1996. After the merger of NJNB into CoreStates Bank, it is CoreStates' present intent to conduct all of its Pennsylvania and New Jersey banking business under the name of CoreStates Bank. As of December 31, 1995, the Banking Subsidiaries operated from 334 full service offices located in eastern and central Pennsylvania and New Jersey and one office located in Delaware. CoreStates Delaware, N.A. operated from one office located in Delaware. CoreStates Bank also operates from five foreign branch offices and twenty foreign representative offices. Other Significant Subsidiaries and Affiliated Companies Congress Financial Corporation ("Congress"), a majority-owned subsidiary of ------------------------------ CoreStates, and its subsidiaries are engaged in commercial financing and factoring with headquarters in New York City and offices in Atlanta, Boston, Chicago, Columbia, Dallas, Los Angeles, Miami, Milwaukee, Portland, Toronto and San Juan. As of December 31, 1995, factored receivables of Congress and its subsidiaries totaled $557 million while outstanding commercial finance obligations and other receivables totaled $2,068 million. CoreStates Capital Corp ("Capital") is CoreStates' designated financing ----------------------- entity to obtain both short-term and long-term financing for CoreStates and its other subsidiaries. At December 31, 1995, Capital had outstanding commercial paper in the aggregate principal amount of $1,216 million and debt securities in the aggregate outstanding principal amount of $1,657 million, with remaining maturities ranging from 1 month to 9.25 years. CoreStates Delaware, N.A. ("CS Delaware") is a national bank subsidiary of ------------------------- CoreStates which in 1995 opened a specialized consumer credit and education financing business at one location in Delaware under the registered trade name of The LearningCurve. As of December 31, 1995, CS Delaware had outstanding accounts receivable of approximately $1.3 million. Electronic Payment Services, Inc. ("EPS") is a joint venture formed in late --------------------------------- 1992 that combined the separate consumer electronic 3 transaction processing businesses of CoreStates, Banc One Corporation, PNC Financial Corp. and KeyCorp (formerly Society Corporation) into the nation's leading provider of automated teller machine and point of sale processing services to individuals, financial institutions and retail stores. On March 27, 1995, National City Corporation was admitted as an additional partner. CoreStates also has several other direct and indirect subsidiaries including companies engaged in discount brokerage services, investment advisory services, lease financing activities, holding real property facilities used by CoreStates' Banking Subsidiaries and companies created solely to facilitate the business of other subsidiaries. For analytical purposes, management has focused CoreStates into four core businesses: Wholesale Banking, Consumer Financial Services, Trust & Investment Management and Electronic Payment Services conducted by EPS. Further information regarding CoreStates' four core businesses is presented in Management's Discussion and Analysis of Financial Condition and Results of Operations at pages 13 through 15 of the CoreStates Annual Report to Shareholders for the fiscal year ended December 31, 1995 (Exhibit 13 pages 10 through 14) which pages of the Annual Report are incorporated herein by reference. A brief discussion of the four core businesses is presented below. There is considerable inter-relationship among these businesses. Wholesale Banking Wholesale banking services are provided through the ----------------- Banking Subsidiaries and Congress by the following six groups: corporate and institutional banking; investment banking; cash management; international banking; corporate middle market; and specialized banking. Domestic financing services include commercial, industrial and real estate loans, the financing of receivables, inventory and equipment, derivative market activities to provide risk management services for customers and other requirements of business customers and the provision of financial services for correspondent banks. Foreign and international financial services include the making of loans, banker's acceptance financing, the issuance and confirmation of letters of credit, check and funds clearings, and related financial services. Also provided are transaction processing services, including cash management, lock box, funds transfer and collection and disbursement management on both a domestic and an international basis. International activities are conducted directly by CoreStates Bank through its head office in Philadelphia and 25 foreign offices. In addition, international banking and financing 4 activities are conducted through two wholly-owned Edge Act subsidiaries with four offices. Advisory services are also provided which relate to loan syndications, private placements, mergers and acquisitions, company valuations and other similar matters. The wholesale banking business also deals in and underwrites obligations of the United States Government and Federal agencies and general obligations of states, municipalities and political sub-divisions and assists individual corporate customers as well as other institutions with the purchase and sale of all types of marketable securities. Consumer Financial Services This core business is provided by the Banking --------------------------- Subsidiaries and includes community banking, mortgage services and specialty products. Community banking services are offered through the branch network of the Banking Subsidiaries in Pennsylvania and New Jersey. This branch banking network provides a full range of products including deposit, loan and related financial products, primarily on a full relationship basis. The specialty products business, which includes consumer and commercial credit cards and other revolving credit, education finance, merchant card services and card processing services for CoreStates and other financial institutions, is provided primarily by CBD from its Delaware location. CS Delaware also conducts certain consumer banking services, including education financing, in Delaware. Trust & Investment Management This core business provides products through ----------------------------- four business lines: institutional trust; personal trust; private banking; and investment management. In 1995, the corporate trust business, included in institutional trust, was divided into its Pennsylvania and New Jersey components and sold to Mellon Bank and Bank of New York, respectively. The products of the four business lines are offered through the Banking Subsidiaries and include fiduciary administration and transaction processing services. CoreStates Investment Advisers, Inc. provides investment management services. Electronic Payment Services This core business includes the MAC --------------------------- automated teller machine network ("MAC"), and point of sale processing ("POS"). Customers for these businesses include individuals, financial institutions and retail stores. The MAC and POS business lines are conducted by EPS. Strategic Actions A discussion of strategic actions, including recent acquisitions, taken by CoreStates in 1995 is presented in Management's Discussion and Analysis of Financial Condition and 5 Results of Operations at pages 11 through 13 of the CoreStates Annual Report to Shareholders for the fiscal year ended December 31, 1995 (Exhibit 13 pages 7 through 10) which pages of the Annual Report are incorporated herein by reference. Acquisitions - CoreStates' strategy for growth focuses first on servicing ------------ its existing customers and second on growing its business. CoreStates evaluates merger and acquisition opportunities of both banks and non-banks where potential for shareholder enhancement, strategic growth and franchise development exist. Emphasis is placed on opportunities which extend existing markets into adjacent geography and deepen market share within existing markets. Pending Acquisition of Meridian Bancorp, Inc. - On October 10, 1995, --------------------------------------------- CoreStates and Meridian announced a definitive agreement to merge. Meridian is a bank holding company with approximately $14.8 billion in assets and $11.2 billion in deposits with executive offices located at 35 North Sixth Street, Reading, PA 19603. Approval by the shareholders of both companies was received on February 6, 1996. The transaction must also be approved by various regulatory authorities. Subject to the receipt of such regulatory approvals, the merger of Meridian and CoreStates is expected to close during the first half of 1996. For each share of Meridian outstanding, 1.225 shares of CoreStates common stock will be issued. Based on closing share prices on October 9, 1995, the transaction would be valued at approximately $3.2 billion. The transaction is structured as an acquisition of Meridian by CoreStates and is expected to be accounted for under the pooling of interests method of accounting. Strategically, this acquisition will: combine two strong performing banking companies, create a leading market position in eastern Pennsylvania, northern Delaware, and central New Jersey, extend the combined company's market and create a company with more resources and capital to support investments in growth and improved services to customers. In June 1995, Meridian completed an internal review of operations and businesses and announced a company-wide plan designed to improve its operating performance and competitive position. Implementation of the Meridian plan began at the end of the second quarter of 1995 and will continue for approximately 12 months from that date. The process implementation is expected to reduce operating expenses and provide recurring revenue enhancements. 6 On February 23, 1996, Meridian acquired United Counties Bancorporation ("United Counties"), a $1.6 billion asset New Jersey bank holding company in a transaction accounted for as a pooling of interests. For each United Counties common share outstanding, 5.0 shares of Meridian's common stock were issued. Pending approvals from various regulatory authorities, consolidations of bank subsidiaries and operations are expected to begin in the third quarter of 1996 with the consolidation of Meridian's Pennsylvania bank subsidiary into CoreStates' lead Pennsylvania bank, CoreStates Bank. Other consolidations also scheduled for the third quarter of 1996 include the combination of Meridian Bank NJ and United Counties Trust Bank into NJNB and the consolidation of Meridian's Delaware Trust Company into CoreStates Bank. The interstate consolidation of CoreStates Bank and NJNB, previously scheduled for January 1996, has been postponed until the fourth quarter of 1996 in order to accommodate the consolidations of the Meridian bank subsidiaries. Major Initiatives - - ----------------- Process Redesign In September 1994, CoreStates announced that management ---------------- had authorized an intensive review of all aspects of CoreStates' operations and businesses. 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 were: (i) to enhance CoreStates' customer focus; (ii) to accelerate the culture changes already in progress; and (iii) to improve productivity. This review has identified activities which do not contribute to value for customers, and has led to reductions in expenses and jobs and to a smaller employee base. The process redesign plan is expected to be implemented within an 18-month period which began in April 1995. The process redesign is expected to generate cost efficiencies and reduce expenses. The following are the major themes of the process redesign: (i) redefine the organizational structure around customers, customer segments and markets, not products; (ii) streamline and consolidate functions and processes; (iii) vacate 1.2 million square feet of occupied space in 45 buildings, including 37 branches to be closed; (iv) use technology to automate services and processes; and (v) employ tiered pricing strategies and streamline product pricing. Government Supervision and Regulation General CoreStates is a bank holding company within the ------- 7 meaning of the Act and is registered as such with the Federal Reserve Board. As a bank holding company, CoreStates is also subject to regulation by applicable state regulatory authorities. The Banking Subsidiaries are national banks and are subject to regulation, supervision and regular examination by the OCC, as well as regulation by the Federal Deposit Insurance Corporation ("FDIC"). Bank holding companies and banks are extensively regulated under both federal and state law. The regulation and supervision of CoreStates and the Banking Subsidiaries are designed primarily for the protection of depositors and not the respective institutions or their stockholders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. A change in applicable law or regulation may have a material effect on the business of CoreStates. CoreStates is required to file an annual report with the Federal Reserve Board containing such information as the Federal Reserve Board may require pursuant to the Act. Copies of annual and other periodic reports are also required to be filed with the applicable state regulatory authorities. The Act requires each bank holding company to obtain the prior approval of the Federal Reserve Board before it may acquire substantially all of the assets of any bank, or before it may acquire ownership or control of any voting shares of any bank, if, after such acquisition, it would own or control, directly or indirectly, more than 5% of the voting shares of such bank. The Act also restricts the types of businesses and operations in which a bank holding company and its non- bank subsidiaries may engage. Generally, permissible activities are limited to banking and activities found by the Federal Reserve Board to be so closely related to banking as to be a proper incident thereto. The operations of the Banking Subsidiaries are subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be made and limits upon the types of services which may be offered. Various consumer laws and regulations also affect the operations of the Banking Subsidiaries. Regulatory approvals are required for branching and for bank mergers. Capital Guidelines A discussion of capital guidelines and capital ------------------ strengths is included in Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 8 15 and 16 of the CoreStates Annual Report to Shareholders for the fiscal year ended December 31, 1995 (Exhibit 13 pages 14 and 15) which pages of the Annual Report are incorporated herein by reference. Potential Enforcement Actions Bank holding companies and national banks ----------------------------- and their institution-affiliated parties may be subject to potential enforcement actions by the Federal Reserve Board, the OCC or the FDIC for unsafe or unsound practices in conducting their businesses, or for violations of any law, rule or regulation or provision, any consent order with any agency, any condition imposed in writing by the agency or any written agreement with the agency. Non- bank holding companies may also be subject to enforcement actions by state regulatory authorities. Enforcement actions may include the imposition of a conservator or receiver, additional cease-and-desist orders and written agreements, the termination of insurance of deposits, the imposition of civil money penalties, and removal and prohibition orders against institution- affiliated parties and the suspension or revocation of state-mandated lending or other licenses. Dividends CoreStates is a legal entity separate and distinct from its --------- Banking Subsidiaries and other subsidiaries. CoreStates' principal source of revenue consists of dividends from its bank and non-bank subsidiaries. Federal law imposes limitations on the payment of dividends by national banks. Provisions of Federal banking law restrict the amount of dividends that can be paid to CoreStates by its nationally chartered bank subsidiaries. Under applicable Federal law, no dividends may be paid in an amount greater than "undivided profits then on hand," after deduction therefrom of certain loan losses. In addition, for each of the Banking Subsidiaries, prior approval of the Comptroller is required if dividends declared by a subsidiary bank in any calendar year will exceed its net profits (as defined) for that year, combined with its retained net profits for the preceding two calendar years, less any required transfers to surplus or a fund for the retirement of preferred stock. Based on these regulations, CBD, without regulatory approval, could declare dividends to CoreStates at December 31, 1995 of $37 million. CoreStates Bank and NJNB will be able to declare dividends without the approval of the Comptroller of the Currency to the extent that and when retained net profits for 1996 exceed $2 million and $7 million, respectively. The payment of dividends by each of CoreStates and the Banking Subsidiaries may also be affected by other factors, such as the maintenance of adequate capital. For example, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") generally 9 prohibits an undercapitalized institution from paying dividends. In addition, if, in the opinion of the applicable regulatory authority, a bank holding company or a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), such authority may require, after notice and hearing, that such organization cease and desist from such practice. The Federal Reserve Board, the OCC and the FDIC have issued policy statements which provide that insured banks and bank holding companies should generally only pay dividends out of current operating earnings. Support of Bank Subsidiaries A depository institution insured by the FDIC ---------------------------- can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC after August 9, 1989 in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default. "Default" is defined generally as the appointment of a conservator or receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that a "default" is likely to occur in the absence of regulatory assistance. Under Federal Reserve Board regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve Board's policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board regulations or both. This doctrine is commonly known as the "source of strength" doctrine. Federal law provides for the enforcement of any pro rata assessment of shareholders of a national bank to cover impairment of capital stock by sale, to the extent necessary, of the stock of any assessed shareholder failing to pay the assessment. Borrowings by Holding Companies Federal law prevents CoreStates and ------------------------------- certain of its affiliates from borrowing from its 10 banking subsidiaries unless such borrowings are secured by specified amounts and types of collateral. Additionally, each such secured loan to an affiliate is generally limited to an amount not exceeding 10% of the bank's capital and surplus, and all such loans between the lending bank and its affiliates are limited to an amount not to exceed 20% of the lending bank's capital and surplus. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. FDICIA ------ Insurance Premiums FDICIA, enacted on December 19, 1991 in connection with ------------------ the recapitalization of the Bank Insurance Fund ("BIF"), requires the FDIC to set semi-annual assessment rates for BIF members at levels sufficient to increase the BIF's reserve ratio to a designated level within a prescribed period of time, not to exceed 15 years from the date that the FDIC promulgates the applicable time schedule. Pursuant to FDICIA, the FDIC has developed a risk-based assessment system, under which the assessment rate for an insured depository institution varies according to the level of risk incurred in its activities. An institution's risk category is based upon whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. Each insured depository institution is also to be assigned to one of the following "supervisory subgroups": Subgroup A, B or C. Subgroup A institutions are financially sound institutions with few minor weaknesses; Subgroup B institutions are institutions that demonstrate weaknesses which, if not corrected, could result in significant deterioration; and Subgroup C institutions are institutions for which there is a substantial probability that the FDIC will suffer a loss in connection with the institution unless effective action is taken to correct the areas of weakness. Based on its capital and supervisory subgroups, each BIF Fund member institution is assigned a semiannual assessment rate beginning January 1, 1996 which ranges from 0% per annum of domestic deposits (for well capitalized Subgroup A institutions) to .27% per annum (for undercapitalized Subgroup C institutions). Each Savings Association Insurance Fund ("SAIF") member institution is assigned a semiannual assessment rate beginning January 1, 1996 which ranges from .23% per annum of domestic deposits (for well capitalized Subgroup A institutions) to .31% per annum (for undercapitalized Subgroup C institutions). Each of the Banking Subsidiaries is considered well capitalized, and has been notified by the FDIC that, for the semiannual assessment period beginning January 1, 1996, each is subject to a BIF assessment rate of 0% and a SAIF assessment rate of .23%. Deposits in the Banking 11 Subsidiaries subject to the SAIF assessment rate were less than $200 million at December 31, 1995. Prompt Corrective Action FDICIA requires Federal banking agencies to ------------------------ broaden the scope of regulatory corrective action taken with respect to depository institutions that do not meet minimum capital requirements and to take such actions promptly in order to minimize losses to the FDIC. In connection with FDICIA, Federal banking agencies are required to establish capital measures (including both a leverage measure and a risk-based capital measure) and to specify for each capital measure the levels at which depository institutions will be considered "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" or "critically undercapitalized". Under FDICIA, the Federal banking regulators have adopted regulations establishing relevant capital measures and relevant capital levels. The relevant capital measures are the Total Capital to risk adjusted assets ratio, Tier 1 Capital to risk adjusted assets ratio and the leverage ratio. Under these regulations, a bank will be (i)"well capitalized" if it has a Total Capital to risk adjusted assets ratio of 10% or greater, a Tier 1 Capital to risk adjusted assets ratio of 6% or greater and a leverage ratio of 5% or greater and is not subject to any order or written directive by its primary Federal regulator to meet and maintain a specific capital level for any capital measure; (ii) "adequately capitalized" if it has a Total Capital to risk adjusted assets ratio of 8% or greater, a Tier 1 Capital to risk adjusted assets ratio of 4% or greater and a leverage ratio of 4% or greater (3% in certain circumstances) and is not well capitalized; (iii) "undercapitalized" if it has a Total Capital to risk adjusted assets ratio of less than 8%, a Tier 1 Capital to risk adjusted assets ratio of less than 4% or a leverage ratio of less than 4% (3% in certain circumstances); (iv) "significantly undercapitalized" if it has a Total Capital to risk adjusted assets ratio of less than 6%, a Tier 1 Capital to risk adjusted assets ratio of less than 3% or a leverage ratio of less than 3%; and (v) "critically undercapitalized" if its tangible equity is equal to or less than 2% of average quarterly tangible assets. Each of the Banking Subsidiaries is considered well capitalized. FDICIA authorizes the appropriate Federal banking agency, after notice and an opportunity for a hearing, to treat a well capitalized, adequately capitalized or undercapitalized insured depository institution as if it had a lower capital-based classification if it is in an unsafe or unsound condition or engaging in an unsafe or unsound practice. Thus, an adequately capitalized institution can be subjected to the restrictions on 12 undercapitalized institutions described below (except that a capital restoration plan cannot be required of the institution) and an undercapitalized institution can be subjected to the restrictions applicable to significantly undercapitalized institutions described below. FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to growth limitations and are required to submit a capital restoration plan. The Federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, for a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to five percent of the depository institution's total assets at the time it became undercapitalized, and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a Federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized institutions are subject to the appointment of a receiver or conservator. Brokered Deposits Under FDICIA, a bank cannot accept brokered deposits ----------------- (which term is defined to include payment of an interest rate more than 75 basis points above prevailing rates) unless (i) it is well capitalized or (ii) it is adequately capitalized and receives a waiver from the FDIC. A bank that cannot receive brokered deposits also cannot offer "pass-through" insurance on certain employee benefit accounts. In addition, a bank that is 13 adequately capitalized may not pay an interest rate on any deposits in excess of 75 basis points over certain prevailing market rates. There are no such restrictions on a bank that is well capitalized. Each of the CoreStates Banking Subsidiaries is well capitalized for purposes of the foregoing. Safety and Soundness Standards Pursuant to FDICIA, each of the Federal bank ------------------------------ regulatory agencies has adopted the Interagency Guidelines Establishing Standards for Safety and Soundness (the "Guidelines"). The Guidelines contain standards relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and employee compensation, fees and benefits and standards specifying minimum earnings sufficient to absorb losses without impairing capital, to the extent feasible a minimum ratio of market value to book value for publicly traded shares and such other standards relating to the foregoing as it deems appropriate. An institution that fails to comply with such standards will be required to submit a plan designed to achieve such compliance. If no such plan is submitted or a failure to implement such a plan exists, the depository institution would become subject to additional regulatory action or enforcement proceedings. Other FDICIA also contains a variety of other provisions that may affect ----- the operations of bank holding companies and banks, including various reporting requirements, revised regulatory standards for real estate lending, "truth in savings" provisions and the requirement that a depository institution give 90 days' prior notice to customers and regulatory authorities before closing any branch. Interstate Banking and Branching Legislation The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Riegle-Neal") which was signed by President Clinton on September 29, 1994, eliminated many restrictions on interstate banking and branching. Riegle-Neal authorized, as of September 29, 1995, interstate acquisitions of banks by bank holding companies without geographic limitations. Beginning June 1, 1997, the legislation will allow interstate branching in states that have not passed legislation prohibiting interstate branching, except that de novo branching or acquisition of a branch in another state without 14 acquisition of the entire bank will only be permitted if expressly permitted by the law of the state in which such branch would be located. Interstate branching prior to June 1, 1997 is possible in states that pass laws affirmatively authorizing such interstate branching. As of December 31, 1995 Pennsylvania and Delaware have enacted such legislation; New Jersey had not enacted such legislation as of that date. Although, under certain circumstances, national banks located in different states have been permitted to merge under authority of the National Bank Act, prior to the Riegle-Neal legislation, other types of interstate acquisitions of banks had required affirmative authorization in state law, and interstate branching had been possible only to a very limited degree. The total effect of this legislation on CoreStates cannot be predicted at this time, although it is clear that certain mergers of CoreStates Banking Subsidiaries are now permitted, including the mergers contemplated in connection with the Meridian merger. Competition The activities in which CoreStates and the Banking Subsidiaries engage are highly competitive. Generally, the lines of activity and markets served involve competition with other banks and non-bank financial institutions, as well as other entities which offer financial services, located both within and without the United States. The methods of competition center around various factors, such as customer services, interest rates on loans and deposits, lending limits and location of offices. The four core business segments in the markets served by the Banking Subsidiaries and EPS are highly competitive and the Banking Subsidiaries and EPS compete with other commercial banks, savings and loan associations and other businesses which provide services similar to those offered by the Banking Subsidiaries and EPS. The Banking Subsidiaries actively compete in wholesale banking with local, regional and international banks and non-bank financial organizations, some of which are significantly larger than certain of the Banking Subsidiaries. In providing consumer financial services, the Banking Subsidiaries' competitors include other banks, savings and loan associations, credit unions, regulated small loan companies and other non-bank organizations offering financial services. In providing trust and investment management services, the Banking Subsidiaries compete with other banks, investment counselors and insurance companies in national markets for institutional funds and corporate pension and profit sharing accounts. The Banking Subsidiaries also compete with other banks, insurance agents, financial counselors and other fiduciaries for personal trust business. The Banking Subsidiaries also actively compete for funding. A primary source of funds is deposits, and competition for deposits 15 includes other deposit taking organizations, such as commercial banks, savings and loan associations and credit unions, and so-called "money market" mutual funds. The Banking Subsidiaries also actively compete for funds with U.S. Government securities and in the open money market. Employees As of February 29, 1996, CoreStates and its subsidiaries employed 11,241 persons on a full time basis and 2,398 part-time persons on a full-time equivalent basis. CoreStates provides a variety of employment benefits and considers its relations with its employees to be satisfactory. Selected Statistical Information Tables and selected statistical information concerning CoreStates and its subsidiaries as described below and set forth on pages of the CoreStates 1995 Annual Report to Shareholders (and Exhibit 13 page numbers) set forth below are incorporated herein by reference:
Annual Report to Exhibit 13 Shareholders Page Page Reference Reference -------------- ---------- Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential..................... 60-61, 64 81-84, 87 Investment Portfolio.................. 70 95 Loan Portfolio........................ 16-23, 16-24, 65-68 88-92 Summary of Loan Loss Experience....... 21-22, 22-23 67-68 91-92 Deposits.............................. 60-61 81-84 68 92 Return on Average Equity and Average Assets........................... 62 85 Short-Term Borrowings................. 49 66
16 Information illustrating the interest sensitivity of CoreStates interest earning assets and interest bearing liabilities is contained on page 69 of the Annual Report to Shareholders (Exhibit 13 page 93) and on page 18 of this Form 10-K. The interest sensitivity table on page 18 of this Form 10-K is different from the table contained in the Annual Report because managerial assumptions related to the appropriate investment maturities for non-interest bearing funding sources and the repricing behavior of non-contractual deposit products which are included in the Annual Report have been eliminated from the table on page 18. 17
Interest Sensitivity Analysis at December 31, 1995 Rate Maturity Period (in millions) ----------------------------------------------------------- (More Than) 1-90 91-181 182-365 1-2 2-5 5 Days Days Days Years Years Years Total -------- --------- -------- -------- -------- -------- ---------- Earning Assets - - -------------- Federal Funds Sold, Resale Agreements and Trading Account Securities $ 596 $ 596 Time Deposits 996 $ 408 $ 438 1,842 Investment Securities 452 155 381 $ 430 $ 439 $ 133 1,990 Interest Rate Swaps 862 812 1,278 1,125 2,788 906 7,771 Asset Financial Futures 0 15 383 21 0 0 419 ------- ------ ------ ------ ------ ------ ------- Total Discretionary Assets 2,906 1,390 2,480 1,576 3,227 1,039 12,618 Total Loans and Lease Financing (a) 15,031 1,240 1,077 1,432 1,871 396 21,047 ------- ------ ------ ------ ------ ------ ------- Total Earning Assets 17,937 2,630 3,557 3,008 5,098 1,435 33,665 ------- ------ ------ ------ ------ ------ ------- Liabilities - - ----------- Federal Funds Purchased, Repurchase Agreements and Other Short-term Funds Borrowed 1,990 102 0 0 0 0 2,092 Domestic and Foreign Time Deposits (b) 1,312 18 12 1 5 0 1,348 Long Term Debt 1,023 20 21 2 7 625 1,698 Interest Rate Swaps 7,246 25 200 71 224 5 7,771 Liability Financial Futures 167 237 15 0 0 0 419 ------- ------ ------ ------ ------ ------ ------- Total Discretionary Liabilities 11,738 402 248 74 236 630 13,328 Savings Certificates 1,382 933 1,724 599 453 255 5,346 Money Market, savings, and NOW accounts 2,347 584 1,008 1,672 2,497 0 8,108 Total Savings Certificates and ------- ------ ------ ------ ------ ------ ------- Indefinite Maturity 3,729 1,517 2,732 2,271 2,950 255 13,454 ------- ------ ------ ------ ------ ------ ------- Total Net Funding Sources 15,467 1,919 2,980 2,345 3,186 885 26,782 ------- ------ ------ ------ ------ ------ ------- Period Gap $ 2,470 $ 711 $ 577 $ 663 $1,912 $ 550 $ 6,883 (c) ======= ====== ====== ====== ====== ====== ======= Cumulative Gap $ 2,470 $3,181 $3,758 $4,421 $6,333 $6,883 ======= ====== ====== ====== ====== ======
Notes to Interest Sensitivity Analysis: - - --------------------------------------- a) Non-performing loans are included in 1-90 days. b) Deposit volumes exclude time not at interest. c) Net non-interest bearing funds is the sum of non-interest bearing liabilities, shareholders' equity minus non-interest earning assets. 18 EXECUTIVE OFFICERS OF THE REGISTRANT The following table shows the name and age of the current executive officers of CoreStates Financial Corp ("Corporation") and their present and previous positions held by them for at least the past five years. NAME AGE PRESENT & PREVIOUS POSITIONS - - ---- --- ---------------------------- Terrence A. Larsen 49 Chairman, Chief Executive Officer, (January 1, 1988 to present) and Director (June 1, 1986 to present), President (January 1, 1992 to August 2, 1994, May 6, 1986 to March 5, 1990), Chief Operating Officer (May 6, 1986 to January 1, 1988) of the Corporation; Chairman and Director (October 1, 1990 to present) and President (January 1, 1992 to August 2, 1994) of CoreStates Bank; Chairman, Director (April 1, 1989 to October 1, 1990), Senior Executive Officer (1987 to 1988), and Executive Vice President, (1983 to 1986) of The Philadelphia National Bank ("PNB"). Christopher J. Carey 41 Senior Vice President (November 1, 1991 to present) and Corporate Controller (July 21, 1992 to present) of the Corporation and of CoreStates Bank, Vice President (November 12, 1985 to November 1, 1991) of CoreStates Bank. Charles L. Coltman, III 52 President and Chief Operating Officer (August 2, 1994 to present), Assistant to the Chairman, Corporate Quality (February 1993 to August 2, 1994), Chief Credit Policy 19 Officer (September 1990 to February 1993), Executive Vice President and Credit Policy Officer (November 21, 1989 to September 1990) of the Corporation; Vice Chairman (March 1990 to September 1990) and Executive Vice President and Credit Policy Officer (1986 to 1989) of PNB. Charles P. Connolly 47 Senior Executive Vice President and Chief Risk Policy Officer (August 2, 1994 to present), Chief Credit Policy Officer (February 1993 to August 2, 1994) of the Corporation; Executive Vice President (1987 to February 1993) of CoreStates Bank. Robert N. Gilmore 47 Chief Technology and Processing Services Officer (August 1991 to present), Executive Vice President (September 1986 to August 1991) of the Corporation; Executive Vice President (September 1986 to present) of CoreStates Bank. Rosemarie B. Greco 49 Chief Banking Officer (August 2, 1994 to present), Chief Retail Services Officer (October 1, 1993 to August 2, 1994) of the Corporation; President and Chief Executive Officer (August 2, 1994 to present) of CoreStates Bank; President and Chief Executive Officer of CoreStates First Pennsylvania Bank Division of CoreStates Bank (March 1991 to August 2, 1994) and Director (April 1992 to present); President and Director (1987 to March 1991), Chief Executive Officer (September 1990 to March 1991), Executive Vice 20 President (1986 to 1987) of Fidelity Bank; Senior Executive Vice President and Director (1987 to March 1991) of First Fidelity Bancorporation. Albert W. Mandia 48 President and Chief Operating Officer (January 2, 1996 to present) of CashFlex, a subsidiary of the Corporation, Executive Vice President (1989 to present) of the Corporation; Executive Vice President (April 1992 to present) of CoreStates Bank; Executive Vice President (1986 to 1989) of PNB. 21 Item 2 - Properties The principal offices of CoreStates and CoreStates Bank are located in a 25-story building known as the Philadelphia National Bank Building ("PNB Building"), located at Broad and Chestnut Streets, Philadelphia, Pennsylvania, leased from One South Broad Limited Partnership pursuant to a lease executed in 1995, and in leased space located at Centre Square West, 16th and Market Streets, Philadelphia, Pennsylvania. CoreStates and its subsidiaries and affiliates occupy approximately 308,358 square feet of the PNB Building's approximately 464,802 square feet of office space and 547,600 square feet of the office space in the Centre Square complex. Approximately 217,400 square feet of office space in the Widener Building adjacent to the PNB Building is leased for use by CoreStates Bank. In addition, office space is leased for use by CoreStates and CoreStates Bank in the following Philadelphia locations: approximately 399,193 square feet in the Penn Mutual Buildings, 510, 520 and 530 Walnut Street, and approximately 111,600 square feet in the Curtis Center, 6th and Walnut Streets. Fifth and Market Corporation, a real estate subsidiary of CoreStates Bank, owns the 11 story building located at Fifth and Market Streets, Philadelphia, Pennsylvania. The building, containing approximately 587,000 square feet, is comprised of almost 493,000 square feet of office space, a branch banking office and an underground garage, in addition to the public access and service areas. CoreStates Bank's operations center and several other units presently occupy all of the office space in this building. As of December 31, 1995, CoreStates had 373 additional properties, of which 159 were owned and 214 were leased. The additional owned properties aggregate approximately 1.7 million square feet, and the leased properties aggregate approximately 1.5 million square feet. Aggregate leased properties in 1995 required approximately $64,995,000 in rental payments net of sublease income. On May 13, 1977, CoreStates borrowed $25 million from two institutional lenders at an interest rate of 8 5/8% per annum. The loan is secured by a first lien mortgage on 27 CoreStates Bank owned properties. Item 3 - Legal Proceedings In the normal course of business, CoreStates and its 22 subsidiaries are subject to numerous pending and threatened legal actions and proceedings, in some of which the relief or damages sought are substantial. Management does not believe the outcome of these actions and proceedings will have a materially adverse effect on the consolidated financial position of CoreStates. Item 4 - Submission of Matters to a Vote of Security Holders Not applicable. PART II Item 5 - Market for the Registrant's Common Stock and Related Stockholder Matters CoreStates Common Shares are traded on the New York Stock Exchange under the symbol "CFL". The table below sets forth, for the periods indicated, the high and low prices for CoreStates Common Shares as reported on the New York Stock Exchange, and cash dividends declared per share. On February 29, 1996, there were approximately 39,828 registered holders of Common Stock of CoreStates.
CORESTATES ------------------------------- DIVIDEND HIGH LOW DECLARED ---- --- -------- Year ended December 31, 1994: First Quarter............. 27 1/8 24 1/2 $0.30 Second Quarter............ 28 25 0.30 Third Quarter............. 29 1/8 25 7/8 0.30 Fourth Quarter............ 27 5/8 22 7/8 0.34 Year ended December 31, 1995: First Quarter............. 33 25 5/8 0.34 Second Quarter............ 36 30 1/2 0.34 Third Quarter............. 38 7/8 34 1/4 0.34 Fourth Quarter............ 40 1/8 34 5/8 0.42
CoreStates currently expects to continue its policy of paying regular cash dividends, although there can be no assurance as to further dividends because they are dependent upon future operating results, capital requirements and financial condition. The approval of the Comptroller of the Currency is required for national banks to pay dividends if the total of all dividends 23 declared in any calendar year exceeds the bank's net profits for that year combined with its retained net profits for the proceeding two calendar years. Under this formula CBD can declare dividends to CoreStates of approximately $37 million plus an additional amount equal to CBD's retained net profits for 1996 up to the date of dividend declaration. CoreStates Bank and NJNB will be able to declare dividends without the approval of the Comptroller of the Currency to the extent that and when retained net profits for 1996 exceed $2 million and $7 million, respectively. Item 6 - Selected Financial Data Pursuant to General Instructions G(2), information required by this Item is incorporated by reference from pages 62 and 63 of the CoreStates Annual Report to Shareholders for the fiscal year ended December 31, 1995 (Exhibit 13 pages 85 and 86). Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operation Pursuant to General Instructions G(2), information required by this Item is incorporated by reference from pages 10 through 34 of the CoreStates Annual Report to Shareholders for the fiscal year ended December 31, 1995 (Exhibit 13 pages 4 through 43). Item 8 - Financial Statements and Supplementary Data Pursuant to General Instructions G(2), information required by this Item is incorporated by reference from pages 37 through 70 of the CoreStates Annual Report to Shareholders for the fiscal year ended December 31, 1995 (Exhibit 13 pages 47 through 95). Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III Item 10 - Directors and Executive Officers of the Registrant Pursuant to General Instruction G(3), information required by this Item is incorporated by reference from Part I of this report on Form 10-K. Set forth below are the names and ages of the directors of CoreStates as of December 31, 1995, their principal occupations and the year each individual began continuous service as a director of 24 CoreStates or one of its predecessors. Each director has held the position or former position shown or other executive positions with the same or an affiliated or predecessor entity for at least the past five years, except as otherwise indicated. Also shown with respect to each director are directorships held in companies (other than CoreStates) which are required to file reports with the Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Exchange Act") or which are registered under the Investment Company Act of 1940 and certain other business or insurance companies. George A. Butler, 67, Director since 1990. Retired; formerly President of CoreStates and CoreStates Bank, N.A.; prior to March 1990, Chairman and Chief Executive Officer of First Pennsylvania Corporation and First Pennsylvania Bank; Director of Betz Laboratories, Inc., General Accident Insurance Company, Peirce Phelps, Inc., and Thomas Jefferson University. Nelson G. Harris, 69, Director since 1990. Retired Chairman of Tasty Baking Company; Chairman of the Executive Committee and Director of Tasty Baking Company (principally a manufacturer of bakery products); Director of American Water Works, Inc., PECO Energy Company, Peirce Phelps, Inc., Penn Fishing Tackle Mfg. Co., and PrimeSource Corporation. Carlton E. Hughes, 64, Director since 1978. Chairman and Director of Stewart-Amos Steel, Inc. (structural steel fabrication); former President, Treasurer and Director of Stewart-Amos Equipment Co.; Director of Irex Corporation and Arnold Industries, Inc. Ernest E. Jones, 51, Director since 1992. Executive Director of Greater Philadelphia Urban Affairs Coalition. Terrence A.Larsen, 49, Director since 1986. Chairman and Chief Executive Officer of CoreStates; Chairman of CoreStates Bank, N.A.; prior to August 1994, Chairman, President, and Chief Executive Officer of CoreStates, and CoreStates Bank, N.A. 25 Herbert Lotman, 62, Director since 1990. Chairman and Chief Executive Officer of Keystone Foods Corporation (food manufacturing and distribution); Director of Getty Petroleum Corporation and PCI Services, Inc. George V. Lynett, 52, Director since 1995. Publisher, The Scranton Times (newspaper company); Secretary/Treasurer, Shamrock Communications, Inc.; President, Towanda Daily Review; and Vice President, Wyoming County Press, Inc. Stephanie W. Naidoff, 54, Director since 1994. Of Counsel, Morgan, Lewis & Bockius (law firm); formerly Vice President and General Counsel of Thomas Jefferson University (Philadelphia). Patricia A. McFate, 63, Director since 1976. Senior Scientist and Program Director, Center for National Security Negotiations of Science Applications International Corporation (a systems engineering company); Senior Scientist of System Planning Corporation from October 1988 to July 1989; prior to October 1988, President and Trustee of The American-Scandinavian Foundation. John A. Miller, 68, Director since 1977. Retired Chairman of Provident Mutual Life Insurance Company of Philadelphia; Chairman of the Executive Committee and Director of Provident Mutual Life Insurance Company of Philadelphia; Director of Betz Laboratories, Inc.; Chairman of the Board of Guaranty Reassurance Corp., Jacksonville, FL. Marlin Miller, Jr., 63, Director since 1988. President, Chief Executive Officer, and Director of Arrow International, Inc. (a manufacturer of medical products); Director of Carpenter Technology Corp. Seymour S. Preston, III, 62, Director since 1978. Chairman and Chief Executive Officer of AAC Engineered Systems, Inc. (manufacturer of equipment to deburr and finish metal parts); Retired President and Chief Executive Officer of Elf Atochem North America, Inc. (manufacturer of industrial, 26 intermediate and specialty chemicals, and commodity and engineering plastics); Director of Scott Specialty Gases, Inc. (manufacturer and marketer of specialty gases); Director of ADCO Technologies, Inc. (manufacturer of adhesives and sealants for the automotive and construction industries). James M. Seabrook, 62, Director since 1994. Chairman and Chief Executive Officer of Seabrook Brothers & Sons, Inc. (frozen food processor); Director of Bell Atlantic New Jersey, New Jersey Manufacturers Insurance Company, and New Jersey Re-Insurance Company. J. Lawrence Shane, 61, Director since 1978. Retired; Formerly Vice Chairman and Director of Scott Paper Company (manufacturer of consumer and industrial paper products); Director of 1838 Bond-Debenture Trading Fund. Raymond W. Smith, 58, Director since 1984. Chairman, Chief Executive Officer and Director of Bell Atlantic Corporation (telecommunications and services corporation); and Director of USAir (commercial aviation). Harold A. Sorgenti, 61, Director since 1981. Chairman of Freedom Chemical Company (manufacturer of specialty chemicals); Partner, The Freedom Group Partnership (chemical industry mergers and acquisitions); prior to 1991, Vice Chairman and Director of ARCO Chemical Company; Director of Provident Mutual Life Insurance Company of Philadelphia and Crown Cork and Seal, Inc. Peter S. Strawbridge, 57, Director since 1979. President and Director of Strawbridge & Clothier (regional merchandising corporation). Agreement to Reconstitute the Board of Directors. The definitive agreement - - ------------------------------------------------- between CoreStates and Meridian requires that, at the effective time of the consummation of the merger or promptly thereafter, the board of directors of CoreStates will cause the size of the board of directors to be 15, comprised of 10 of the current directors of CoreStates and 5 of the directors of Meridian. The 5 directors of Meridian are Samuel A. McCullough, Robert Cardy, Lawrence R. Pugh, George Strawbridge, Jr., and Judith M. Von Seldeneck. The 10 current directors of CoreStates are Terrence A. 27 Larsen, Carlton E. Hughes, Ernest E. Jones, Herbert Lotman, George V. Lynett, Patricia McFate, Marlin Miller, Jr., James M. Seabrook, Raymond W. Smith and Peter S. Strawbridge. It is expected that, subject to regulatory approvals, the merger transaction will be consummated during the first half of 1996. Compliance with Section 16(a) of the Exchange Act - - ------------------------------------------------- Section 16(a) of the Exchange Act requires CoreStates' officers and directors, and persons who own more than ten percent of a registered class of CoreStates' equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC"). Officers, directors and greater than ten-percent shareholders are required by SEC regulation to furnish CoreStates with copies of all Section 16(a) forms they file. There are no ten percent shareholders of CoreStates' equity securities. Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons that no Forms 5 were required for those persons, CoreStates believes that, during the period January 1, 1995 through December 31, 1995, all filing requirements applicable to its officers and directors were complied with except that two reports were amended in October 1995 for Mr. Sorgenti and Mr. Smith for a clerical error in reporting fractional shares as being owned that were actually sold. Item 11 - Executive Compensation Directors' Meetings, Committees and Compensation In 1995, 12 meetings of the Board of Directors of CoreStates were held. Each incumbent director who served as a director of CoreStates during 1995 attended more than 75% of the aggregate number of meetings of the Board of Directors of CoreStates and of the Committees of the Board on which each such director served. The Board of Directors of CoreStates has certain standing committees including an Audit Committee, a Human Resources Committee and a Corporate Governance Committee, the membership and functions of each are described below. The Audit Committee presently consists of Dr. McFate and Messrs. Hughes, M. Miller, Preston (Chairman) and Shane. During 1995, the Audit Committee held 4 meetings. The functions of the Audit Committee include: review and examination of detailed reports of the internal auditors for CoreStates including reports on the 28 fiduciary activities of banking subsidiaries; periodic meetings with the internal auditors and credit review personnel; review of reports of regulatory agencies having jurisdiction over CoreStates and certain banking and other subsidiaries and signing of such reports on behalf of the Board of Directors; evaluation of internal accounting controls for CoreStates and for the management of the fiduciary activities of banking subsidiaries; recommending engagement and continuation of engagement of independent auditors; and meetings with, and receiving and considering recommendations of, independent auditors of CoreStates. The Human Resources Committee presently consists of Messrs. Lotman, M. Miller, Preston, Smith (Chairman) and Strawbridge. During 1995, the Human Resources Committee held 2 meetings. The functions of the Human Resources Committee are to: evaluate the performance of the Chief Executive Officer of CoreStates and report its assessment to the full Board of Directors; review, approve and recommend to the full Board changes in base compensation for senior officers of CoreStates and its banking subsidiaries; review, approve and recommend to the full Board material changes in CoreStates' benefit plans which significantly affect CoreStates' liabilities or the benefits provided to participants; administer the Incentive Compensation Plan for CoreStates Financial Corp and Participating Subsidiaries and the Long-Term Incentive Plan; review annually the salary budget with respect to CoreStates and its banking subsidiaries; review CoreStates' management development plans; and review other compensation and benefit plans of CoreStates and its subsidiaries. The Corporate Governance Committee presently consists of Messrs. Hughes (Chairman), Jones, J. Miller, M. Miller and Dr. McFate. During 1995 the Corporate Governance Committee held six meetings. The functions of the Corporate Governance Committee are to make recommendations to the full Board of Directors with respect to: nominees for election as director at the annual meeting of shareholders; nominees to fill Board vacancies between annual shareholders' meetings; and the composition of membership of the various standing committees of the Board of Directors of CoreStates. The By-laws of CoreStates provide that a shareholder may nominate a director at the annual meeting only if written notice of such shareholder's intent is given by the shareholder and received by the Secretary of CoreStates not less than forty-five days prior to the date fixed for the annual meeting. The notice shall contain and be accompanied by (a) the name and residence of such shareholder; (b) a representation that the shareholder is a holder of CoreStates' voting stock and intends to appear in person or by proxy at the meeting to nominate the person or persons 29 specified in the notice; (c) such information regarding each nominee as would have been required to be included in a proxy statement filed pursuant to Regulation 14A of the rules and regulations established by the Securities and Exchange Commission under the Securities Exchange Act of 1934 (or pursuant to any successor act or regulation) had proxies been solicited with respect to such nominee by the management or Board of Directors of CoreStates; (d) a description of all arrangements or understandings among the shareholder and each nominee and any other person or persons (naming such persons or persons) pursuant to which such nomination(s) are to be made by the shareholder; and (e) the consent of each nominee to serve as director of CoreStates if so elected. CoreStates' Board also has the following additional committees: Executive Committee, Banking Related Committee, Investment and Funding Committee, Corporate Community Development Committee (formerly the Urban Affairs Committee) and Trust Committee. Directors' Compensation - - ----------------------- Directors who are also officers of CoreStates or its subsidiaries do not receive any fees for Board or Committee meetings. For service in 1995 as a member of the Board of Directors of CoreStates, each director receiving fees was paid $15,000 in a fixed sum, 200 shares of Common Stock of CoreStates pursuant to the Stock Compensation Plan for Non-Employee Directors, and a fee of $1,000 for attendance at each meeting of the Board of Directors of CoreStates and, as applicable, each meeting of all committees of the Board of Directors and certain meetings attended at the request of CoreStates. In addition, a fixed sum of $8,000 was paid in 1995 to the Chairman of the Audit Committee, and $1,000 to the Chairman of each other Committee of the Board of Directors. Each member of the Audit Committee was paid an annual retainer of $5,000 in addition to attendance fees. Directors of CoreStates who are also directors of CoreStates Bank, received for services rendered to CoreStates Bank in 1995 an annual retainer of $7,500 and a fee of $750 for attendance at each meeting of the Board of Directors and, as applicable, each meeting of all Committees of the Board of Directors. When there is a joint meeting of a CoreStates committee and a CoreStates Bank committee, a single fee is applicable, (which is the higher of the two fees) except for joint meetings of the Audit Committees. In addition, the sum of $2,000 was paid in 1995 to the Chairman of the CoreStates Bank Audit Committee and $1,000 to the Chairman of each other Committee of the CoreStates Bank Board of Directors. These fees were in addition to those fees described above paid for services to CoreStates. 30 Directors of CoreStates who were also advisory directors of the CoreStates Hamilton Bank region of CoreStates Bank ("Hamilton") received for services rendered to Hamilton during the first six months of 1995 a fixed sum of $2,500 for that six month period and a fee of $750 for attendance at each meeting of the Advisory Board of Directors of Hamilton and, as applicable, each meeting of all committees of the Advisory Board of Directors. During the first six months of 1995, directors of CoreStates who are also advisory directors of Hamilton also received a fee of $125 for attendance at each meeting of the Hamilton Regional Advisory Committees. These fees were in addition to those fees described above paid for services to CoreStates. As a result of CoreStates' redesign process, the compensation paid to Advisory Board Directors was changed. Effective July 1, 1995, Directors of CoreStates who were also Advisory Directors of the CoreStates Hamilton Bank region of CoreStates Bank received an annual honorarium of $1,000 to be paid annually in lieu of retainers and attendance fees. One Director of CoreStates, who was also a member of the Executive Advisory Boards of the former Independence Bancorp, Inc. ("Independence"), and the former Third National Bank and Trust Company of Scranton ("Third of Scranton") received an annual retainer of $12,000 for services rendered to Independence and an annual retainer of $13,500 for services rendered to Third of Scranton. These fees were in addition to those fees described above paid for services to CoreStates. Directors of CoreStates who are also directors of New Jersey National Corporation ("NJNC") and NJNB received for services rendered to such entities in 1995 a fixed sum of $5,000 and a fee of $750 for attendance at each concurrent meeting of the Boards of Directors of NJNC and NJNB and, as applicable, each meeting or concurrent meeting of all committees of the Boards of Directors. These fees were in addition to those fees described above paid for services to CoreStates. Under the Deferred Compensation Plan for Directors of CoreStates and CoreStates Bank (the "Directors' Deferred Plan"), directors of CoreStates and CoreStates Bank may elect prior to commencement of each term of service to defer payment of all or part of their directors' compensation. Amounts deferred are payable, as elected by the director, at the termination of the respective director's service to CoreStates or CoreStates Bank, the reaching of age 65, death, or a specified date, such payment to be made in a lump sum, in up to 10 annual installments or other method. Amounts deferred are credited to an unfunded directors' deferred compensation account. Amounts deferred after April 1, 1988 were credited with interest at an annual rate equal to 60% of the prime rate of CoreStates Bank (the "CoreStates Bank Prime Rate"). 31 Beginning January 1, 1989, interest is credited on deferrals at a rate determined by multiplying the CoreStates Bank Prime Rate by a decimal amount equal to 1 minus 118% of the highest marginal corporate tax rate for Federal income tax purposes. Amounts deferred on or before April 1, 1988 receive earnings based on one or more of three hypothetical investments as selected quarterly by each affected participant. These provide yields equal to the return on, and appreciate or depreciate to the same extent as, funds invested in the CoreStates Bond Fund, the CoreStates Liquidity Fund and the CoreStates Equity Fund, each of which is a collective investment fund managed by CoreStates Investment Advisers, Inc. The right to receive future payments under the Directors' Deferred Plan is an unsecured claim against the general assets of CoreStates or CBNA, as applicable. Payments of deferred compensation may be made only in cash. Directors of CoreStates who also serve as advisory directors of Hamilton are entitled to defer fees paid for services rendered to Hamilton under the Directors' Deferred Plan. Additionally, in 1980, Hamilton established a directors' deferred compensation plan whereby participating directors of Hamilton could elect to forego certain directors' fees or other compensation for a five-year period, from January 1, 1980 through December 31, 1984, in return for the undertaking of Hamilton to pay each participating director a specified amount in 120 equal payments beginning at age 65 or 70, or at death, if earlier. Hamilton has obtained life insurance, of which Hamilton is the beneficiary, on each participating director in an amount which will cover Hamilton's obligation to pay each such director. The directors participating in this plan are Carlton E. Hughes and Marlin Miller, Jr. Total payments to be made over the 10 year distribution period or at death, if earlier, to Messrs. Hughes and Miller are $233,400 and $178,800, respectively. Amounts expensed for 1995 under the plan in respect to Messrs. Hughes and Miller were, respectively, $12,582 and $9,638. Executive Compensation - - ---------------------- HUMAN RESOURCES COMMITTEE REPORT COMPENSATION POLICIES FOR EXECUTIVE OFFICERS FOR 1995 Compensation policies for executive officers are intended to further the earnings of CoreStates and facilitate securing, retaining and motivating management employees of high caliber and potential. The persons eligible to receive awards under these policies are officers and other employees of CoreStates and its subsidiaries who are in positions in which their decisions, actions and counsel significantly impact upon the short and long-term goals and strategies of CoreStates. 32 There are three components to executive compensation: base salary, annual incentive awards, and long-term incentive awards. Base Salaries Base salaries for executives are competitive with incumbent salaries for peer positions in CoreStates' comparator group. The comparator group consists of 25 to 30 companies within the super-regional banking industry that have market, geographic and size similarities to CoreStates. All of these banks are contained within the Keefe, Bruyette, & Woods 50 Index, presented in the Comparative 5 Year Cumulative Total Return graph on page 38 of this 10K Annual Report. CoreStates generally targets base salaries to the median or average rate paid for each job within the group. Published compensation surveys are utilized to monitor competitive pay levels, in addition to compensation information reported in our competitors' proxy statements. Annual Incentive Awards Executive officers participate in an annual cash award program, the Incentive Compensation Plan for CoreStates Financial Corp and Participating Subsidiaries. The Human Resources Committee of the Board of Directors determines the awards granted under the Plan. Award opportunity is based on the individual executive's grade level and a mix of predetermined corporate and individual performance goals. Corporate Performance: One-hundred percent of the annual award for the Chief Executive Officer and for employees who currently report directly to him is based on corporate performance. Eighty percent of the annual award for those who report to current direct reports of the Chief Executive Officer is based on corporate performance, measured the same way. For 1995 this component of the Plan was paid at 144% of the payout target. Three measures are used as indices of corporate performance: net income after capital charge (NIACC), earnings per share, and progress toward achieving cultural change objectives. NIACC measures both the quantity and the quality of corporate earnings. If CoreStates earns more than its required return (and therefore has a positive NIACC) shareholder value is created. The calculation of NIACC requires three pieces of data: net income, the amount of capital employed, and the required return on that capital. The corporate required return of 13% is a risk-adjusted rate of return related to investors' alternatives in the marketplace. Because 33 CoreStates has an unusually high equity to asset ratio, NIACC is normalized for a 5% equity to asset ratio. Five percent is the typical ratio used by the peer comparator group. The NIACC results exceed 1995's goal. Growth in earnings per share is a key measure of financial strength considered by the external financial community. The use of this measure facilitates external comparison and is easily understood. The earnings per share results also exceed 1995's goal. Cultural change improvement is measured based on progress in advancing the corporate culture with reference to: 1) CoreValues--People, Performance, Integrity, Teamwork, Diversity, and Communication, 2) customer focus, and 3) commitment to quality. A combination of quantitative and qualitative measures is used to track results against these objectives. Quantitative measures include several routinely tracked statistics, such as the diversity of our workforce at all levels in our organization, upward and lateral mobility of our people, employee retention, training and development participation, utilization of vendors and services owned by women and people of color, and other pertinent statistics. Qualitative progress on attaining improved implementation of corporate cultural change is measured through an employee survey of a randomly selected diverse employee group. The corporate Incentive Compensation Plan payout for 1995 was determined to be 144%. Individual Performance: Twenty percent of the annual award for employees who report to current direct reports of the Chief Executive Officer is based on individual performance. Individual performance goals are designed to reflect a balance between attainable and "stretch" objectives and are specific to each plan participant. Individual performance objectives are established at the beginning of the year based on the functions and responsibilities of each executive's position (for example, sales targets, income goals, cost reduction objectives, etc.). Also included in the measure of individual performance are objectives that champion CoreValues and reflect or measure managerial performance. These people-focused objectives account for at least one-third of individual performance. Target awards are based on a percentage of the midpoint of the salary grade of each individual. Corporate and individual executive performance are evaluated, and payout levels are determined independently at zero or 50 to 150% of the payout targets. Long-term Incentive Plan This plan is designed to support the long-term strategic goals of CoreStates by providing equity opportunities for individual 34 executives based on their level of responsibility. Ownership aligns the interests of participating officers and executives with the interests of CoreStates' shareholders and ties a significant portion of senior officer compensation to shareholder returns. Under Ownership Guidelines developed in 1993 for achievement by 1998 and approved by the Human Resources Committee, the suggested number of shares to be owned varies according to the executive's salary grade, and ranges from one times salary range midpoint for Executive Vice Presidents up to 2.5 times salary range midpoint for the CEO. Stock held through the CoreStates Savings Plan is counted toward the guidelines, but unexercised stock options are not. The primary award vehicles for 1995 were incentive stock options (ISOs) and non-qualified stock options (NQSOs). The first $100,000 of each stock option award was granted in the form of ISOs, with the remaining portion granted in NQSOs. Stock option grants provide the grantees the opportunity to acquire common stock at a fixed price (the fair market value on the date of the grant) for a specified period of time (ten years). The practice of CoreStates is to keep long-term awards relatively constant from year-to-year. Stock option plans provide upside earnings potential through increases in stock value over the long term. Target awards for stock option grants are expressed as a percentage of the salary range midpoint for each participant. Actual awards may range from 75% up to 125% of the target award based on a present assessment of the long-term value of the participant's ongoing performance contribution to CoreStates. In determining these grants, the Human Resources Committee did not specifically consider the amount and value of stock currently held by individuals. For 1995, stock option awards averaged 100% of target for all participants. Impact of IRS Pay Cap Regulations CoreStates' policy is to make every attempt to comply with Section 162(m) of the Internal Revenue Service Code. Section 162(m) of the Internal Revenue Service Code permits CoreStates to deduct compensation paid to a named executive in excess of $1 million only if such excess qualifies as "performance based compensation". Summary Inherent in our effort to create shareholder value are attention to financial performance and strength, and focused recognition of our people as the cornerstone of the long-range competitive edge. Performance measures support the efforts to further corporate earnings and achieve a positive corporate 35 culture. The ideal culture values all members of the workforce, maintains customer focus, and achieves excellence through commitment to quality. HUMAN RESOURCES COMMITTEE'S BASES FOR DETERMINING THE COMPENSATION OF THE CEO FOR 1995 The CEO's (Chief Executive Officer) base salary, and annual and long-term incentive award components are consistent with the spirit and objectives of CoreStates' executive compensation program and is as follows: Base Salary The CEO's base salary is a function of CoreStates' financial performance against goals. The initial rating is then modified as appropriate by the overall culture/people evaluation, as well as a relative assessment of CoreStates' performance versus its peer group. Finally, the preceding evaluation is further modified by the Board of Directors' assessment of the CEO's performance in such areas as leadership, strategic planning, culture/people initiatives, external relations, communication, and other important factors. The Human Resources Committee prepared a formal evaluation of actual results against these annual goals. The evaluation was supported by documents citing specific reasons for the rating and included an assessment of response to unplanned events or circumstances that required a significant commitment of time and resources. In the Human Resources Committee's evaluation of the CEO's performance, it was specifically noted that his individual actions and leadership have had a significant effect on CoreStates' overall financial and cultural change/people value results, enhancing on-going value to shareholders through stock appreciation and growth in earnings available for dividends. The Committee's overall rating of the CEO's performance for the year was outstanding. Although it is CoreStates' practice to target at the median of the CEO's base salaries reported in the comparative group, the Human Resources Committee has chosen to focus on total compensation rather than solely base pay. Annual Incentive Award 100% of the CEO's annual incentive award is based on corporate performance. For 1995 this was paid at 144% of target, based on NIACC, earnings per share, and corporate culture/people objectives as described in the preceding Annual Incentive Awards--Corporate Performance section on pages 33 and 34 of this Form 10K Annual 36 Report with respect to other executive officers. An evaluation of corporate progress against the goals was reviewed and discussed by the Human Resources Committee, who determined the final payout levels for the Chairman and the rest of the executive officers. Long-term Incentive Plan The CEO participates in the Long-term Incentive Plan described above under "Compensation Policies for Executive Officers for 1995". In February 1995 Mr. Larsen was granted options based on 100% of the target for his position. HUMAN RESOURCES COMMITTEE Raymond W. Smith, Chairman Herbert Lotman Seymour S. Preston, III Marlin Miller, Jr. Peter S. Strawbridge 37 Five-Year Shareholder Return Comparison The following line graph compares five-year cumulative total shareholder return with the Standard & Poor's 500 Composite Index and the Keefe, Bruyette & Woods 50 Index (KBW 50) a published peer-industry index. The KBW 50 is made up of fifty of the nation's significant banking companies, including money-center and most major reginal banks, and is considered representative of the price performance of the nations' largest banks. Both the S&P 500 and the KBW 50 are market-capitalization-weighted indices. The graph assumes an initial investment of $100 and reinvestment of quarterly dividends. Comparative 5 Year Cumulative Total Return 12/31/90 to 12/31/95 CFL v. S&P 500 v. KBW 50 [GRAPH APPEARS HERE]
------------------------------------------------------ 1990 1991 1992 1993 1994 1995 - - ------------------------------------------------------------------------- CoreStates 100 158 196 187 194 294 - - ------------------------------------------------------------------------- S&P 500 100 130 140 154 156 215 - - ------------------------------------------------------------------------- KBW 50 100 158 202 213 202 324 - - -------------------------------------------------------------------------
Comparison of Five Year Cumulative Total Return December 31, 1990 to December 31, 1995 CFL v. S&P 500 Index v. KBW 50 Index
Date CFL S&P 500 KBW 50 ---- --- ------- ------ 4Q90 100 100 100 1Q91 116 114 127 2Q91 125 114 134 3Q91 142 120 156 4Q91 158 130 158 1Q92 149 127 169 2Q92 167 129 178 3Q92 171 134 174 4Q92 196 140 202 1Q93 201 146 217 2Q93 202 147 216 3Q93 204 151 223 4Q93 187 154 213 1Q94 188 149 209 2Q94 188 149 225 3Q94 197 156 220 4Q94 194 156 202 1Q95 242 172 229 2Q95 264 188 262 3Q95 282 203 304 4Q95 294 215 324 5 Year Qtr CGR 24.1% 16.5% 26.5% 4 Year Qtr CGR 16.8% 13.3% 19.6% 3 Year Qtr CGR 14.5% 15.3% 17.1% 2 Year Qtr CGR 25.6% 18.0% 23.3% 1995 Qtr CGR 51.4% 37.4% 60.2% 1994 Qtr CGR 4.2% 1.4% -5.1% 1993 Qtr CGR -4.9% 10.0% 5.5% 1992 Qtr CGR 24.2% 7.6% 27.4% 1991 Qtr CGR 58.0% 30.3% 58.3%
39 SUMMARY COMPENSATION TABLE The following table shows, for the fiscal years ending December 31, 1993, 1994 and 1995, the cash compensation paid by CoreStates and its subsidiaries, as well as certain other compensation paid or accrued for those years, to the chief executive officer and the other four most highly compensated executive officers of CoreStates (collectively, the "Named Executives").
Annual Compensation Long Term --------------------- ----------- Other Annual Awards Payouts -------- --------- All Other Salary Bonus Compensation Options LTIP Compensation Name and Principal Position Year ($)* ($) ($)** (#)*** ($)**** ($)***** - - ----------------------------- ---- -------- --------- ------------ ------- -------- ------------ Terrence A. Larsen, 1995 $687,981 $595,683 $3,396 148,750 $458,544 $33,750 Chairman and Chief 1994 670,692 527,710 2,578 119,000 293,543 33,535 Executive Officer 1993 647,000 483,068 3,373 101,800 287,100 32,350 Rosemarie B. Greco, 1995 387,308 304,344 76,375 339,073 19,000 President and Chief 1994 358,077 278,982 2,745 91,650 16,923 Executive Officer, 1993 327,500 162,360 2,449 27,600 12,365 CoreStates Bank, N.A. Charles L. Coltman, III 1995 387,308 304,344 76,375 127,152 19,000 President and Chief 1994 297,692 278,982 91,650 66,969 14,885 Operating Officer 1993 233,923 122,955 2,224 26,750 51,642 11,696 Charles P. Connolly 1995 275,192 155,866 957 35,125 84,768 13,500 Senior Executive Vice 1994 238,269 142,877 2,862 45,150 50,203 11,913 President 1993 206,154 99,590 1,899 18,260 51,642 10,269 Robert N. Gilmore 1995 265,000 118,037 29,625 127,152 13,000 Chief Technology and 1994 246,154 108,200 35,550 66,969 12,308 Processing Services 1993 233,923 113,119 26,750 57,420 11,696 Officer
* Annual Salary is reported for the calendar year. ** Other Annual Compensation includes Financial Planning. *** There was a stock split on October 15, 1993. These represent post split values. **** Performance Units Awards under prior Long-Term Incentive Plan . 1/2 of award value net of taxes is paid in cash, the other 1/2 in stock The gross value of Performance Units is a function of closing stock price on December 29, 1995. The number of shares granted in the half paid in stock is a function of the closing stock price on February 20, 1996. ***** All Other Compensation consists of compensation from savings and retirement plans as follows: . The CoreStates Savings Plan provides investment choices and company matches to individual contributions. Corporation contributions were as follows: 40 1995: Larsen--$7,500, Greco--$7,500, Coltman--$7,500, Connolly--$7,500, Gilmore--$7,500. 1994: Larsen--$7,500, Greco--$6,519, Coltman--$7,500, Connolly--$7,500, Gilmore--$7,500. 1993: Larsen--$11,792, Greco--$7,907, Coltman--$11,696, Connolly-- $10,269, Gilmore--$11,696. . The 401 Excess Plan was adopted in 1992. It mirrors the CoreStates Savings Plan in that it provides investment choices and company matches for employees whose salaries are above the ERISA limits for the savings plan. Corporation contributions were: 1995: Larsen--$26,250, Greco--$11,500, Coltman--$11,500, Connolly-- $6,000, Gilmore--$5,500. 1994: Larsen--$26,035, Greco--$10,400, Coltman---$7,385, Connolly--- $4,413, Gilmore---$4,808. 1993: Larsen--$20,558, Greco--$4,458. OPTION GRANT TABLE The following table contains information concerning the grant of stock options under CoreStates' 1994 Long-Term Incentive Plan to the Named Executives as of December 31, 1995: Option Grants in 1995*
Individual Grants Grant Date ------------------- Value ---------- % of Total Black Options Options Exercise Scholes Grant Granted Granted to or Base Expiration Grant Date Name Date (#) Employees Price Date Present - - ---- ------ -------- in 1994 -------- ---------- Value** ----------- ---------- Terrence A. Larsen 2/7/95 148,750 8.476% $28.75 2/7/04 $693,188 Rosemarie B. Greco 2/7/95 76,375 4.352 28.75 2/7/04 355,914 Charles L. Coltman, III 2/7/95 76,375 4.352 28.75 2/7/04 355,914 Charles P. Connolly 2/7/95 35,125 2.001 28.75 2/7/04 163,686 Robert N. Gilmore 2/7/95 29,625 1.688 28.75 2/7/04 138,055
* Options reported in the table above are a combination of incentive and non- qualified stock options. All grants become exercisable one year from the date of grant and they must be exercised during employment except in the case of death, disability, retirement or involuntary termination. The term of each option is ten years. ** Results produced by the Black Scholes assumptions, below, are reduced by 10% because the options are nontransferable and 3% for risk of forfeiture: Expected volatility--15.39% Risk-free rate of return--5.9% Dividend yield--3.94% Time to exercise -- 10 years Market Price at Grant -- $28.75 41 OPTION EXERCISES AND YEAR-END TABLE The following table sets forth information with respect to the Named Executives, concerning the exercise of options during 1995 and unexercised options as of December 31, 1995: Aggregated Option Exercises in Last Fiscal Year, and FY-End Option Value
Value of -------- Number of Unexercised Unexercised In-the-Money Options at Options at 12/30/95 (#) 12/30/95 ($) --------------- ($37.875/Share)* --------------------- Shares Acquired Value Exercisable/ Exercisable/ Name on Exercise (#) Realized ($) Unexercisable Unexercisable - - ---- --------------- ----------- --------------- --------------------- Terrence A. Larsen....... 0 $ 0 583,482/148,750 $9,076,943/$1,357,344 Rosemarie B. Greco....... 14,190 307,746 154,132/76,375 1,905,425/696,922 Charles L. Coltman, III.. 8,436 164,634 204,716/76,375 2,197,641/696,922 Charles P. Connolly...... 0 0 106,204/35,125 1,451,638/320,516 Robert N. Gilmore........ 548 10,421 132,180/29,625 1,931,621/270,328
* Values for Larsen, Greco, Coltman, Connolly and Gilmore respectively represent 10, 5, 10, 9 & 10 years cumulative impact of stock option grants and exercises. One stock option grant was awarded per named executive in each year an award was made to that executive, with the exception of 1994, in which R. Greco, C. Coltman, C. Connolly and R. Gilmore each received a second grant, on 8/22/94. 42 PENSION BENEFITS The following table shows for various periods of credited service the estimated annual benefits currently payable upon normal retirement at age sixty- five to a participating employee, assuming final average compensation equaled 1995 compensation and Social Security covered compensation of $27,576, the amount for participants who attain Social Security retirement age during 1995. The plan formula utilizes the Social Security covered compensation as a component to calculate the pension benefit. The table reflects a straight life benefit. Pension Plan Table
Final 15 20 25 30 35 Average -------- -------- -------- -------- -------- Compensation - - -------------- $125,000 $ 35,560 $ 47,410 $ 59,260 $ 65,510 $ 71,760 150,000 43,060 57,410 71,760 79,260 86,760 175,000 50,560 67,410 84,260 93,010 101,760 200,000 58,060 77,410 96,760 106,760 116,760 225,000 65,560 87,410 109,260 120,510 131,760 250,000 73,060 97,410 121,760 134,260 146,760 300,000 88,060 117,410 146,760 161,760 176,760 400,000 118,060 157,410 196,760 216,760 236,760 450,000 133,060 177,410 221,760 244,760 266,760 500,000 148,060 197,410 246,760 271,960 296,760 600,000 178,060 237,410 296,760 326,760 356,760 700,000 208,060 277,410 346,760 381,760 416,760 800,000 238,060 317,410 396,760 436,760 476,760
The Final Average Compensation used in calculating the qualified retirement plan benefit is the average of the highest 60 consecutive months of base pay (excluding all incentive and other non-salary cash payments) during the last ten years of employment, multiplied by 12 to derive an annual salary equivalent. The Final Average Compensation figure corresponds to the elements summarized in the Annual (Salary) Compensation shown in the Summary Compensation Table on pages 40 and 41 of this Form 10K Annual Report. The CoreStates Financial Corp Supplemental Retirement Plan (the "CoreStates Supplemental Plan") covers the excess over the limitations placed on the qualified plan by Federal law. If an employee defers salary, the CoreStates Supplemental Plan also pays the difference between what the employee would have gotten in the 43 qualified plan had he or she not deferred salary and the qualified plan benefit excluding the deferred salary. The First Pennsylvania Retirement Benefit Supplement Plan (The "FP Supplemental Plan") provides selected key executive officers with retirement benefits in addition to those provided to all eligible employees under the Retirement Plan. The FP Supplemental Plan covers two types of retirement benefits. Benefit A is equal to the excess of the amount that would be payable under the Retirement Plan if it did not contain the limitation on the annual amount of pension benefit payments or the amount of recognizable compensation imposed by the Internal Revenue Code over the amount actually payable under the Retirement Plan in accordance with such limitations. Benefit C is equal to 65% of the participant's average annual base salary for the five consecutive years immediately preceding the participant's retirement or other termination of benefit. Benefit C is then reduced by the aggregate of the following amounts: the benefit under Benefit A, the Social Security benefit, the benefit under the Retirement Plan, and the benefit under any retirement plan provided by a former employer, excluding any portion of such benefit attributable to the participant's own contributions to such plan. The CoreStates Retirement Plan is not reduced by Social Security or other offset measures. As of December 31, 1995, the periods of credited service of the CoreStates' executive officers named in the Summary Compensation Table above are as follows:
Period of Credited Service ------------------ Terrence A. Larsen 17 years, 5 months Rosemarie B. Greco 4 years, 9 months Charles L. Coltman, III 25 years,10 months Charles P. Connolly 23 years, 8 months Robert N. Gilmore 14 years, 6 months
TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS The Named Executives are covered by an executive severance program. In the event of termination of employment (other than for cause), each would receive severance pay based on the base salary paid at the time of termination. Each executive terminated would receive 3 weeks of pay for each year of service, with a minimum total payment of 12 months and a maximum of 18 months. 44 In October 1992, the Human Resources Committee of the Board of Directors approved a special severance program to take effect upon a change in control of CoreStates which would involve a 20% change in share ownership and a majority change in Board membership. In the event of termination of employment due to a change in control, the Named Executives would receive 24 months' severance pay, based upon base salary at the time of termination. If after 24 months the executive is still unable to find gainful employment, contingency pay equal to 12 months' pay or 2 weeks' pay for each year of service (whichever is longer) may be awarded. The Named Executives would also receive immediate vesting of long-term incentives and a pro-rata payment of performance units (if any) awarded under the CoreStates' current or prior Long-Term Incentive Plans. In addition, if not yet vested in the CoreStates Retirement Plan, the Named Executives would receive a retirement benefit based upon actual years of service plus the severance pay period. This benefit would be calculated in accordance with the retirement benefit formula(s) in effect at the time in the qualified plan and any supplemental retirement plans that may apply. Item 12 - Security Ownership of Certain Beneficial Owners and Management Set forth below opposite the names of each director is the number of shares of CoreStates Common Stock ("Shares") beneficially owned as of December 31, 1995. Except as otherwise indicated in the Notes to the Director Information, the persons named possess sole voting and investment power with respect to the Shares shown opposite their names. No director owns 1% or more of the outstanding Shares.
Name of Director Number of Shares - - ---------------- ---------------- Terrence A. Larsen......... 838,188 (1) George A. Butler........... 10,552 Nelson G. Harris........... 10,000 Carlton E. Hughes.......... 10,521 (2) Ernest E. Jones............ 753 Herbert Lotman............. 81,914 (3) George V. Lynett........... 22,512 (4) Patricia A. McFate......... 4,600 John A. Miller............. 8,227 Marlin Miller, Jr.......... 17,224 (5) Stephanie W. Naidoff....... 2,195 Seymour S. Preston, III.... 16,600 James M. Seabrook.......... 7,056 (6) J. Lawrence Shane.......... 5,402 Raymond W. Smith........... 4,596 (7) Harold A. Sorgenti......... 9,468 (8) Peter S. Strawbridge 2,152
45 Notes to Director Information (1) This includes 732,232 Shares which Mr. Larsen has the right to acquire pursuant to unexercised stock options. Of the Shares reported as beneficially owned by Mr. Larsen, 3,646 are registered in the name of his son, 1,525 are registered in the name of his daughter, 2,180 are registered in Mr. Larsen's name as custodian for his daughter; as to all such Shares, Mr. Larsen disclaims beneficial ownership. 67,025 of the Shares registered as beneficially owned by Mr. Larsen are registered in the joint names of Mr. Larsen and his wife. (2) 718 of the Shares reported as beneficially owned by Mr. Hughes are held in an irrevocable trust, of which his wife is trustee, for the benefit of their grandchildren. Mr. Hughes disclaims beneficial ownership of such Shares. (3) 40,627 of the Shares reported as beneficially owned by Mr. Lotman are owned by his wife. Mr. Lotman disclaims beneficial ownership of such Shares. (4) 191 of the Shares reported as beneficially owned by Mr. Lynett are owned by his wife. 8,510 of the Shares reported as beneficially owned are registered in the name of his children, as to which Mr. Lynett disclaims beneficial ownership. (5) 1,600 of the Shares reported as owned by Mr. M. Miller are owned by his wife. Mr. Miller disclaims beneficial ownership of such Shares. (6) 2,000 of the Shares reported as beneficially owned by Mr. Seabrook are registered in the name of his daughter. Mr. Seabrook disclaims beneficial ownership of such Shares. (7) 800 of the Shares reported as beneficially owned by Mr. Smith are held in a charitable trust, of which Mr. Smith and his wife are co- trustees. (8) 1,664 of the Shares reported as beneficially owned by Mr. Sorgenti are owned by his wife. 46 Beneficial Ownership of Common Stock The following table shows at December 31, 1995 the number of shares of CoreStates Common Stock beneficially owned, including shares which may be purchased through unexercised options, by the executive officers of CoreStates named in the Summary Compensation Table on page 40 except in respect to Mr. Larsen whose share ownership is reported above in the information concerning directors: Rosemarie B. Greco 244,910 Shares Charles L. Coltman, III 316,487 Shares Charles P. Connolly, Jr. 156,937 Shares Robert N. Gilmore 174,938 Shares At December 31, 1995, the directors and executive officers of the CoreStates as a group beneficially owned 2,077,438 shares of CoreStates Common Stock which represents approximately 1.51% of all outstanding shares. No director or executive officer beneficially owned more than 1% of the outstanding shares. Included in the share amounts shown are 3,673 shares held for Mr. Coltman, and 2,898 shares held for the executive officers (other than Mr. Larsen, Ms. Greco, Mr. Coltman, Mr. Connolly and Mr. Gilmore) as a group by CoreStates Bank, N.A., as trustee under the CoreStates Savings Plan. Also included are options to acquire shares (exercisable immediately or within 60 days after December 31, 1995) held by: Ms. Greco--230,507; Mr. Coltman--281,091; Mr. Connolly--141,329; Mr. Gilmore--161,805; and the executive officers (other than Mr. Larsen, Ms. Greco, Mr. Coltman, Mr. Connolly and Mr. Gilmore) of CoreStates as a group-- 129,308. The named individuals have sole voting and investment powers with respect to the shares owned. The following table sets forth information as of December 31, 1995 regarding the only persons which to CoreStates' knowledge are the beneficial owners of more than 5% of CoreStates Common Stock.
Name and Address Amount and Nature Percent of of Beneficial Owner of Beneficial Common Stock - - ------------------- ------------- ------------ Ownership --------- Wellington Management Company.. 8,294,040(1) 5.96% 75 State Street Boston, MA 02109 - - ----------------
(1) Wellington Management Company has reported that it is deemed the owner of the above Shares in its capacity as investment advisor to a variety of investment advisory clients. Item 13 - Certain Relationships and Related Transactions Indebtedness of Directors and Management 47 CoreStates' subsidiaries have from time to time made loans to some officers and directors of CoreStates and to companies with which they are associated. Such loans 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 others, and did not involve more than normal risk of collectibility or present any other unfavorable features. PART IV Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. Financial Statements: The following consolidated statements of CoreStates Financial Corp included in the Annual Report of the Registrant to its Shareholders for the year ended December 31, 1995 are incorporated by reference in Item 8:
Annual Report Exhibit 13 to Shareholders Page Page Reference Reference --------------- ---------- Consolidated Statements of Income for the years ended December 31, 1995, 1994 and 1993....................... 37 47 Consolidated Balance Sheets as of December 31, 1995 and 1994....................... 38 48 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1995, 1994 and 1993....................... 39 49 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993.............. 40 50-51 Notes to the Consolidated Financial Statements....... 41-59 52-80
(a) 2. Financial Statement Schedules All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are 48 not required under the related instructions or are inapplicable, and therefore have been omitted. 49 (a) 3. Exhibits -------- Exhibit No. Page No. - - ----------- -------- 2.1 Agreement and Plan of Merger dated as of October 10, 1995 by and between CoreStates Financial Corp and Meridian Bancorp Inc. and filed as Annex I to Registrant's Report on Form S-4 No. 333-00067 and incorporated herein by reference. 2.2 Stock Option Agreement dated as of October 10, 1995 by and between CoreStates Financial Corp and Meridian Bancorp, Inc. Filed as Annex II to the Registrant's Report on Form S-4 No. 333-00067 and incorporated herein by reference. 2.3 Meridian Stock Option Agreement dated as of October 10, 1995 by and between Meridian Bancorp, Inc. and CoreStates Financial Corp filed as Annex III to the Registrant's Report on Form S-4 No. 333-00067 and incorporated herein by reference. 3.1 Articles of Incorporation of Registrant as amended through May 3, 1993. Filed as Exhibit 3(a) to the Registrant's Current Report on Form 8-K dated October 21, 1993 and incorporated herein by reference. 3.2 By-laws of Registrant as amended through April 20, 1993. Filed as Exhibit 3(b) to the Registrant's Current Report on Form 8-K dated October 21, 1993 and incorporated herein by reference. 4.1 The Registrant will furnish to the Securities and Exchange Commission, upon request, copies of instruments defining the rights of holders of long-term debt of CoreStates Financial Corp and its subsidiaries. 50 Exhibit No. Page No. - - ----------- -------- 4.2 Indenture dated as of December 1, 1990 between CoreStates Financial Corp, CoreStates Capital Corp and The Bank of New York, as senior trustee and successor to Nations Bank of Georgia, N.A., as successor to Wachovia Bank of Georgia, N.A., (formerly The First National Bank of Atlanta). Filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated January 29, 1991 and incorporated herein by reference. 4.3 Indenture dated as of December 1, 1990 between CoreStates Financial Corp, CoreStates Capital Corp and Bank One, Columbus, NA. Filed as Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated January 29, 1991 and incorporated herein by reference. 4.4 First Supplemental Indenture dated as of March 1, 1993 to the Indenture dated as of December 1, 1990 by and between CoreStates Capital Corp, CoreStates Financial Corp and BankOne, Columbus, N.A. filed as Exhibit 4 to Registrant's Current Report on Form 8-K dated April 20, 1993 and incorporated herein by reference. 4.5 Second Supplemental Indenture dated as of August 1, 1994 among CoreStates Financial Corp, CoreStates Capital Corp, Bank One, Columbus, N.A. and Citibank, N.A. filed as Exhibit 4.5 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. 4.6 Specimen of Medium-Term Note (Senior Fixed Rate). Filed as Exhibit 4.3 to the Registrant's Current Report on Form 8-K dated January 29, 1991 and incorporated herein by reference. 4.7 Specimen of Medium-Term Note (Senior Floating Rate). Filed as Exhibit 4.4 to the Registrant's Current Report on Form 8-K dated January 29, 1991 and incorporated herein by reference. 4.8 Specimen of Medium-Term Note (Subordinated Fixed Rate). Filed as Exhibit 4.5 to the Registrant's Current Report on Form 8-K dated January 29, 1991 and incorporated herein by reference. 51 Exhibit No. Page No. - - ----------- -------- 4.9 Specimen of Medium-Term Note (Subordinated Floating Rate). Filed as Exhibit 4.6 to the Registrant's Current Report on Form 8-K dated January 29, 1991 and incorporated herein by reference. 4.10 Specimen of 9 5/8% Subordinated Note due February 15, 2001. Filed as Exhibit 4.7 to the Registrant's Current Report on Form 8-K dated January 29, 1991 and incorporated herein by reference. 4.11 Specimen of CoreStates Capital Corp 9 3/8% Subordinated Note due April 15, 2003. Filed as Exhibit (4) to the Registrant's Current Report on Form 8-K dated April 21, 1991 and incorporated herein by reference. 4.12 Specimen of 6 5/8% Subordinated Note due March 15, 2005 issued by CoreStates Capital Corp filed as Exhibit 4 to Registrant's Current Report on Form 8-K dated March 18, 1993 and incorporated herein by reference. 4.13 Specimen of 5 7/8% Subordinated Note due October 15, 2003 issued by CoreStates Capital Corp and unconditionally guaranteed as to payment of principal and interest on a subordinated basis by CoreStates Financial Corp. Filed as Exhibit 4 of Registrant's Current Report on Form 8-K dated October 21, 1993 and incorporated herein by reference. 4.14 Specimen of CoreStates Capital Corp Medium-Term Note (Senior Fixed Rate). Filed as Exhibit 4(d) to Registrant's Registration Statement on Form S-3, No. 33-54049 and incorporated herein by reference. 4.15 Specimen of CoreStates Capital Corp Medium-Term Note (Senior Floating Rate). Filed as Exhibit 4(e) to Registrant's Registration Statement on Form S-3, No. 33-54049 and incorporated herein by reference. 52 Exhibit No. Page No. - - ----------- -------- 4.16 Specimen of CoreStates Capital Corp Medium-Term Note (Subordinated Fixed Rate). Filed as Exhibit 4(f) to Registrant's Registration Statement on Form S-3, No. 33-54049 and incorporated herein by reference. 4.17 Specimen of CoreStates Capital Corp Medium-Term Note (Subordinated Floating Rate). Filed as Exhibit 4(g) to Registrant's Registration Statement on Form S-3, No. 33-54049 and incorporated herein by reference. 10.1 * Incentive Compensation Plan for CoreStates Financial Corp and Participating Subsidiaries effective January 1, 1983. Filed as Exhibit 10.5 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1983 and incorporated herein by reference. 10.2 * Long-Term Incentive Compensation Plan of CoreStates Financial Corp as amended through April 18, 1989. Filed as exhibit 10.4 to the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference. 10.3 * Deferred Compensation Plan for Directors of CoreStates Financial Corp and CoreStates Bank, N.A. as amended and restated effective January 1, 1995. 10.4 * The CoreStates Financial Corp Supplemental Retirement Plan. Filed as Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987 and incorporated herein by reference. 10.5 * Profit Sharing Deferral Plan for Officers of CoreStates Financial Corp and Participating Subsidiaries effective November 1, 1987. Filed as Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987 and incorporated herein by reference. 10.6 Agreement between New Jersey National Bank and Textron Financial - New Jersey, Inc. for the sale and leaseback of the Corporate and operations centers and four branches. Filed as 53 Exhibit No. Page No. - - ----------- -------- Exhibit 10(i), File No. 0-6002 to the New Jersey National Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 1985 and incorporated herein by reference. 10.7 Lease between Centre Square, Inc. and Tishman Construction Company of Pennsylvania, Inc. and The First Pennsylvania Banking and Trust Company, dated as of December 13, 1968 as amended through January 31, 1974, for the property known as Centre Square West. Filed as Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference. 10.8 * First Pennsylvania Corporation Amended and Restated Retirement Benefit Supplement Plan filed as Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 and incorporated herein by reference. 10.9 * CoreStates Financial Corp 1992 Long Term Incentive Plan filed as Exhibit 10.18 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 and incorporated herein by reference. 10.10 * CoreStates Financial Corp Stock Compensation Plan For Non-Employee Directors filed as Exhibit 10.19 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 and incorporated herein by reference. 10.11 * CoreStates Financial Corp 401 Excess Plan For Senior Management filed as Exhibit 10.20 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 and incorporated herein by reference. 10.12 Agreement to Form a Joint Venture By and Among Banc One Corporation, CoreStates Financial Corp, PNC Financial Corp and Society Corporation dated as of July 21, 1992 filed as Exhibit 10.21 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 and incorporated herein by reference. 54 Exhibit No. Page No. - - ----------- -------- 10.13 * Incentive Compensation Plan for Designated Executives of CoreStates Financial Corp and Participating Subsidiaries filed as Exhibit 10.18 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference. 10.14 * Independence Bancorp, Inc. Supplemental Executive Retirement Plan filed as Exhibit 10.19 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference. 10.15 Distribution Agreement dated September 16, 1994 among CoreStates Financial Corp, CoreStates Capital Corp and Merrill Lynch & Co., Goldman, Sachs & Co., Lehman Brothers Inc., J.P. Morgan Securities Inc., CS First Boston Corporation and Smith Barney Inc. Filed as Exhibit 1(b) to the Registrant's Registration Statement on Form S-3, No. 33-54049 and incorporated herein by reference. 10.16 Underwriting Agreement dated September 16, 1994 among CoreStates Financial Corp, CoreStates Capital Corp and Lehman Brothers Inc., Goldman, Sachs & Co., Merrill Lynch & Co., J.P. Morgan Securities Inc., CS First Boston Corporation and Smith Barney Inc. Filed as Exhibit 1(a) to the Registrant's Registration Statement on Form S-3, No. 33-54049 and incorporated herein by reference. 11 CoreStates Financial Corp Statement re Computation of Per Share Earnings. 12.1 CoreStates Financial Corp and Subsidiaries Computation of Ratio of Earnings from Continuing Operations to Fixed Charges of Continuing Operations. 12.2 CoreStates Financial Corp Computation of Ratio of Earnings to Fixed Charges Combined CoreStates (Parent Company) and CoreStates Capital 13 Pages 10 through 70 of the Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1995. 55 Exhibit No. Page No. - - ----------- -------- 21 List of Subsidiaries. 23.1 Consent of Ernst & Young LLP 23.2 Consent of KPMG Peat Marwick LLP 23.3 Consent of Coopers & Lybrand L.L.P. 27 Financial Data Schedule. 99.1 Undertaking - Form S-8 Registration Statements. * Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. NOTE: CoreStates Financial Corp will furnish, at cost, any exhibit not accompanying this document upon request. Cost for each document is determined by the number of pages in the document. (b) Reports on Form 8-K for the quarter ended December 31, 1995: A Report on Form 8-K was filed on October 10, 1995 reporting the Agreement and Plan of Merger with Meridian Bancorp, Inc. dated October 10, 1995. A Report on Form 8-K was filed on October 18, 1995 reporting that earnings information contained in the news release of CoreStates Financial Corp dated October 18, 1995. A Report on Form 8-K was filed on November 14, 1995 reporting certain events in connection with the pending merger with Meridian Bancorp, Inc. and Meridian's proposed merger with United Counties Bancorporation. 56 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, 1995 and 1994, 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, 1995. 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 financial statements of Constellation Bancorp and Independence Bancorp. Inc., which statements reflect net interest income constituting 15.6% of the related consolidated total for the year ended December 31, 1993. 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 evaluat- ing 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, 1995 and 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 1 to the financial statements, in 1994 the Company changed its method of accounting for certain investments in debt and equity securities, and in 1993 the Company changed its method of accounting for post-employment benefits. /s/ Ernst & Young LLP Philadelphia, Pennsylvania January 17, 1996 57 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders of Constellation Bancorp: We have audited the consolidated statements of operations, changes in shareholders' equity, and cash flows of Constellation Bancorp and subsidiaries for the year 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 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 results of operations and cash flows of Constellation Bancorp and subsidiaries for the year 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 58 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Independence Bancorp, Inc. We have audited the consolidated statements of income, changes in stockholders' equity, and cash flows of Independence Bancorp, Inc. and Subsidiaries for the year 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 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 results of operations and cash flows of Independence Bancorp, Inc. and Subsidiaries for the year 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. /s/ Coopers & Lybrand L.L.P. January 19, 1994 2400 Eleven Penn Center Philadelphia, Pennsylvania 59 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) CORESTATES FINANCIAL CORP Signature Capacity Date --------- -------- ---- /s/Terrence A. Larsen Director, Chairman March 26, 1996 - - --------------------------- of the Board and Terrence A. Larsen Chief Executive Officer (principal executive officer) /s/ Albert W. Mandia Executive Vice March 26, 1996 - - --------------------------- President and Albert W. Mandia principal financial officer /s/ Christopher J. Carey Senior Vice President March 26, 1996 - - --------------------------- and Corporate Controller Christopher J. Carey and principal accounting officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ George A. Butler Director March 26, 1996 - - --------------------------- George A. Butler /s/ Nelson G. Harris Director March 26, 1996 - - --------------------------- Nelson G. Harris /s/ Carlton E. Hughes Director March 26, 1996 - - --------------------------- Carlton E. Hughes 60 Signature Capacity Date --------- -------- ---- /s/ Ernest E. Jones Director March 26, 1996 - - --------------------------- Ernest E. Jones /s/ Herbert Lotman Director March 26, 1996 - - --------------------------- Herbert Lotman /s/ George V. Lynett Director March 26, 1996 - - --------------------------- George V. Lynett /s/ Patricia A. McFate Director March 26, 1996 - - --------------------------- Patricia A. McFate /s/ John A. Miller Director March 26, 1996 - - --------------------------- John A. Miller /s/ Marlin Miller, Jr. Director March 26, 1996 - - --------------------------- Marlin Miller, Jr. /s/ Stephanie W. Naidoff Director March 26, 1996 - - --------------------------- Stephanie W. Naidoff /s/ Seymour S. Preston, III Director March 26, 1996 - - ---------------------------- Seymour S. Preston, III /s/ James M. Seabrook Director March 26, 1996 - - ---------------------------- James M. Seabrook /s/ J. Lawrence Shane Director March 26, 1996 - - ---------------------------- J. Lawrence Shane /s/ Raymond W. Smith Director March 26, 1996 - - ---------------------------- Raymond W. Smith - 61 - Signature Capacity Date --------- -------- ---- /s/ Harold A. Sorgenti Director March 26, 1996 - - ---------------------------- Harold A. Sorgenti /s/ Peter S. Strawbridge Director March 26, 1996 - - ---------------------------- Peter S. Strawbridge - 62 - EXHIBIT INDEX ------------- 10.3 Deferred Compensation Plan for Directors of CoreStates Financial Corp and CoreStates Bank, N.A. as amended and restated effective January 1, 1995. 11 CoreStates Financial Corp Statement regarding Computation of Per Share Earnings. 12.1 CoreStates Financial Corp and Subsidiaries Computation of Ratio of Earnings from Continuing Operations to Fixed Charges of Continuing Operations. 12.2 CoreStates Financial Corp Computation of Ratio of Earnings to Fixed Charges Combined CoreStates (Parent Company) and CoreStates Capital. 13 Pages 10 through 70 of the Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1995. 21 List of Subsidiaries 23.1 Consent of Ernst & Young LLP 23.2 Consent of KPMG Peat Marwick LLP 23.3 Consent of Coopers & Lybrand L.P.P. 27 Financial Data Schedule 99.1 Undertaking - Form S-8 Registration Statement EX-10.3 2 DEFERRED COMPENSATION PLAN 1/1/95 Exhibit 10.3 ------------ DEFERRED COMPENSATION PLAN FOR DIRECTORS of CORESTATES FINANCIAL CORP and CORESTATES BANK, N.A. (As amended and Restated Effective January 1, 1995) WHEREAS, CoreStates Financial Corp ("CoreStates") and Corestates Bank, N.A. (the "Bank") have established and now maintain the Deferred Compensation Plan For Directors of CoreStates Financial Corp and CoreStates Bank, N.A., most recently amended and restated effective April 1, 1988, (the "Plan"); and WHEREAS, prior to its merger into CoreStates, Independence Bancorp, Inc., ("Independence") established and maintained the Independence Bancorp, Inc. Deferred Compensation Plan for Directors dated January 17, 1984 (the "Independence Plan"); and WHEREAS, prior to their respective mergers into the Bank, (a) Hamilton Bank ("Hamilton") established and maintained the Deferred Compensation Plan for Director, amended and restated effective July 1, 1988, and containing provisions substantially the same as in the Plan (the "Hamilton Plan"), (b) Bucks County Bank and Trust Company ("BCB") established and maintained the Bucks County Bank and Trust Company Deferred Compensation Plan for Directors dated December 22,1983 (the "BCB Plan"), and (c) Lehigh Valley Bank ("LVB") established and maintained the Lehigh Valley Bank Deferred Compensation Plan for Directors (the "LVB Plan"). Herein the Independence Plan, the Hamilton Plan, the BCB Plan, and the LVB Plan are sometimes called the "Other Plans." WHEREAS, Independence has merged with and into CoreStates and Hamilton, BCB, and LVB have merged with and into the Bank; and WHEREAS, CoreStates and the Bank want to amend and restate in their entirety each of the Plan and the Other Plans as permitted by each such plan and to merge the Other Plans with and into the Plan, as set forth herein; NOW THEREFORE, effective January 1, 1995 (except where other effective dates are specifically provided) the Plan is hereby amended and restated in its entirety to provide and continue a method whereby members of the board of directors (a "Director" or the "Directors") of CoreStates or of the Bank or both may elect to defer receipt of compensation to be paid to them for their services as a Director, to merge by amendment and restatement the Other Plans into the Plan and to provide for the satisfaction by CoreStates and the Bank of the obligations under the Plan. Section 1. Deferred Election and Payment Options. Prior to the beginning ------------------------------------- of any term of office for which a Director or a new director nominee is to be elected, a Director may elect to have all or any specified portion of the compensation to be earned as a Director for that and subsequent terms, payment of which is conditioned upon services thereafter to be performed, including compensation for services on committees, plus income as provided in Section 2, paid to the Director or a designated beneficiary of the Director in one of the following ways: (a) Payment in ten approximately equal annual installments beginning at the earlier of the termination of service as a Director or age 65, with any unpaid - - ------- balance at death paid in a lump sum to a designated beneficiary. (b) Payment in ten approximately equal annual installments beginning at the later of termination of service as a Director or age 65, with any unpaid balance - - ----- at death paid in a lump sum to a designated beneficiary. (c) Payment upon death only in a lump sum to a designated beneficiary. (d) Payment in one lump sum on or as soon as practicable after the date for payment (the "Deferred Payment Date") specified by the Director at the time of the election to defer; provided, however, that at any time prior to one year before the Deferred Payment Date, a Director may elect in writing delivered to the Secretary of CoreStates or the Bank to receive payment in approximately equal annual installments over a term not exceeding twenty years, with any unpaid balance at death paid in a lump sum to a designated beneficiary. (e) Any other method of payment upon which the Secretary of CoreStates or the Bank and the Director may agree prior to the time when an election is required. Section 2. Deferred Compensation Account. Compensation deferred by a ----------------------------- Director under the Plan shall be credited quarterly to a deferred compensation account in the name of the Director ("Director's account"). Earnings on each Director's account shall be determined in accordance with this Section 2. In addition, the amounts to be paid pursuant to Section 1 hereof shall be based on the value of each Director's account at the time payments are made, as determined in accordance with this Section 2. 2.1 Income on Deferred Compensation. For purposes of hypothetical ------------------------------- investment under Section 2.2, compensation deferred under this Plan credited to the Director's account shall be considered to be invested and to begin to earn income as of the first day of the calendar quarter following the calendar quarter in which the compensation is earned. 2.2 Hypothetical Investment. Compensation credited to a Director's ----------------------- account on or before April 1, 1988 will be assumed to be invested, without charge, in one or more of the following four hypothetical investments but only the Percentage of Prime Rate hypothetical investment will be available for compensation created to a Director's account after April 1, 1988. 2 Further, any compensation credited to a Director's account on or before April 1, 1988 which is allocated to the Percentage of Prime Rate hypothetical investment may not thereafter be reallocated back to any of the other hypothetical investments. (a) Fixed Income Equivalent. Deferred compensation allocated to ----------------------- the Fixed Income Equivalent hypothetical investment shall be assumed to be invested in units of participation in the CoreStates Bond Fund of the Bank. The value of a hypothetically invested unit of participation shall be the same as the value of a unit of participation in the CoreStates Bond Fund of the Bank. The income on this hypothetical investment shall be equivalent to and at the same rate as income paid on units of participation in such fund as of each Valuation Date (as defined below). (b) Liquidity Equivalent. Deferred compensation allocated to -------------------- the Liquidity Fund hypothetical investment shall be assumed to be invested in units of participation in the CoreStates Liquidity Fund of the Bank. The value of a hypothetically invested unit of participation shall be the same as the value of a unit of participation ($1.00) in the CoreStates Liquidity Fund of the Bank. The income on this hypothetical investment shall be equivalent to and at the same rate as income paid on units of participation in such fund as of each Valuation Date (as defined below). (c) Equity Equivalent. Deferred compensation allocated to the ----------------- Equity Equivalent hypothetical investment shall be assumed to be invested in units of participation in the CoreStates Equity Fund of the Bank. The value of a hypothetically invested unit of participation shall be the same as the value of a unit of participation in the CoreStates Equity Fund of the Bank. Income on this hypothetical investment shall be equivalent to and at the same rate as income paid on units of participation in such fund as of each Valuation Date (as defined below). (d) Percentage of Prime Rate Equivalent. Deferred compensation ----------------------------------- allocated to the Percentage of Prime Rate Equivalent hypothetical investment shall be deemed to earn, and shall be credited with earnings, at a rate per annum (rounded off to three decimal places) from time to time determined by multiplying the prime rate of the Bank by a decimal amount, such decimal amount (rounded off to three decimal places) to be equal to one minus 118 percent of the highest marginal corporate tax rate for Federal income tax purposes. For example, during any time the prime rate of the Bank is 9 1/4% and the highest marginal corporate tax rate for Federal income tax purposes is 34%, the deemed per annum rate of earnings credited to an account will be 0.055 determined as follows: 0.0925 x (1 - 1.18 x 0.34)) = 0.055. The rate of earnings to be credited to a Director's account in accordance with this paragraph (d) shall change each time the Bank's prime rate shall change, effective on and as of the date of such change, and shall also change each time there is a change in the highest marginal corporate tax rate for Federal income tax purposes, effective on and as of the date of such change. 2.3 Time and Manner of Hypothetical Investment. ------------------------------------------ 3 (a) The Hypothetical investment of a Director's deferred compensation in one or more of hypothetical investments (a), (b) and (c) described in Section 2.2 shall be expressed in units. As of the last business day of each calendar quarter (a Valuation Date), the value of each such unit shall be equivalent to the value of a unit in the particular fund to which the investment is assumed to be invested. The number of units of a particular hypothetical investment shall be determined by dividing the dollar amount to be hypothetically invested by the value of a unit in the particular fund in which the investment is assumed to be made at the time of hypothetical investment. (b) The income of the hypothetical investment in the Director's deferred compensation account shall be credited to the Director's account at the end of the calendar quarter and shall be deemed reinvested as of the first day of the next calendar quarter in units of the hypothetical investment fund or funds from which such income derives. 2.4 Allocation of Hypothetical Investment. ------------------------------------- (a) A Director may allocate compensation credited to the Director's account on or before April 1, 1988 to any one of the hypothetical investments or may allocate amounts among two or more of the hypothetical investments. Deferred compensation allocated to the Percentage of Prime Rate Equivalent may not thereafter be allocated to another of the hypothetical investments. The allocation shall be as selected by the Director. Compensation credited to a Director's account after April 1, 1988 may be allocated only to the Percentage of Prime Rate Equivalent investment. (b) An allocation of deferred compensation shall be effective as of the first day of the quarter following the calendar quarter in which the compensation is earned and shall be based upon values in effect on the Valuation Date which immediately precedes the effective date of such allocation. The Secretary of CoreStates or the Bank must receive the participant's written notice of the designated allocation prior to the first day of the calendar quarter following the calendar quarter in which the compensation is earned. (c) The minimum allocated to any hypothetical investment under this Section 2.4 shall be one-fourth of the amount to be deferred. 2.5 Reallocation of Hypothetical Investment. A Director may, prior --------------------------------------- to the end of any calendar quarter, also reallocated among the first three hypothetical investments the amount then allocated among such hypothetical investments in the Director's account. The reallocation shall be effective as of the first day of the calendar quarter following the end of the calendar quarter in which the Secretary of CoreStates or the Bank receives the Participant's written notification indicating the amount to be reallocated to the three hypothetical investments; and shall be based upon unit values existing on the Valuation Date which immediately precedes the effective date of such reallocation. 4 2.6 Statement of Account. A statement of the Director's account -------------------- shall be sent to the Director at least once a calendar year. Section 3. Effect of Deferred Elections. An election by a Director or a ---------------------------- new Director nominee to defer compensation for a future term or office for which the election to defer has been made shall be irrevocable with respect to and for that term, and shall continue to be effective with respect to compensation in each succeeding term thereafter until and unless, before the beginning of any such succeeding term, the Director files a new election or informs the Secretary of CoreStates or the Bank in writing that the Director wishes to receive compensation entirely in cash. An election by a Director to defer compensation with respect to any term of office subsequent to the Director's current term shall be irrevocable after such term begins and the election shall continue to be effective with respect to compensation in each succeeding term until and unless, before the beginning of any such term, the Director files a new election or informs the Secretary of CoreStates or the Bank in writing that the Director wishes to receive compensation entirely in cash. Section 4. Beneficiary Designation. Designations of beneficiary shall be ----------------------- made only by written instruction filed with the Secretary of CoreStates or the Bank during the Director's life-time. All designations shall be revocable and may be changed in the same manner at any time unless expressly stated to be irrevocable. A revocable beneficiary designation (other than one designating a trustee as beneficiary) shall be revoked by the death of the beneficiary. The rights of an irrevocably designated beneficiary (other than a trustee) shall inure to such beneficiary's estate. The rights of a trustee beneficiary shall inure to the successor trustee. If no beneficiary designation is in effect at the death of a Director, payments otherwise due a beneficiary shall be paid to the Director's estate. Section 5. Provisions Applicable Only to the Other Plans. Each of the --------------------------------------------- Other Plans shall be amended and restated to read in its entirety as provided in this Section 5. 5.1 Benefits of Participants. Each participant who on December 31, ------------------------ 1994 was entitled to a benefit under any one or more of the Other Plans (a "Participants" or the "Participants") shall be entitled on January 1, 1995 to a benefit hereunder equivalent to the aggregate of such benefits. A deferred equivalent to the aggregate of such benefits. A deferred compensation account in the name of each Participant (the "Participants' account") shall be established and shall credited with an amount equal to the aggregate undistributed compensation plus earnings thereon accrued to the Participant under the Other Plans as of December 31, 1994. 5.2 Further Deferrals. Each Participant who on January 11, 1995 ----------------- continues to serve on an Advisory Board of CoreStates or the Bank may elect to have all or any specified portion of the compensation to be earned as a member of such Advisory Board after January 1, 1995 deferred and paid under the Plan in the same manner as applicable to a Director hereunder and subject to all of the terms, provisions and limitations hereof. Any such deferrals shall be credited periodically to the Participant's account and thereafter be credited with earnings and be 5 distributed to the Participant in accordance with his election, all as contemplated herein. No further deferrals may be made under an Other Plan. 5.3 Income on Deferred Compensation. The amount credited to a ------------------------------- Participant's account on January 1, 1995 will be assumed to be invested, without charge, in the Percentage of Prime Rate Equivalent hypothetical investment and shall be deemed to earn, and shall be credited with earnings at a rate per annum determined as set forth in Section 2.2(d) above. 5.4 Statement of Account. A statement of a Participant's account -------------------- shall be sent to the Participant at least once a calendar year. 5.5 Beneficiary Designation. All designations of a beneficiary ----------------------- under an Other Plan shall be continue in effect under this Plan until changed by the Participant in the manner described in Section 4 above. 5.6 Distributions. (a) Distributions or payments to a Participant ------------- or a designated beneficiary of a Participant shall commence, if they have not already done so, in 1995 and shall be made in accordance with the form of distribution selected by the Participant pursuant to the Other Plan; provided, however, that (i) if a lump sum payment was selected, the Participant may elect in writing delivered to the Secretary of CoreStates or the Bank at any time prior to one year before the date on which such lump sum payment is to be made to receive payment in approximately equal annual installments over a term not exceeding twenty years, with any unpaid balance at death paid in a lump sum to a designated beneficiary and (ii) if 120 equal monthly installments was selected, CoreStates or the Bank, in order to reduce its administrative burden, may make such payments in approximately equal annual installments rather than monthly installments over the same period of time, each such annual installment to be made as soon as reasonably practicable after the value of the Participant's account is determined at the end of the preceding year and to be in an amount equal to the sum of what would have been the twelve monthly installments. (b) Amendments. A Participant may amend his/her form of ---------- distribution designated under the Other Plan to any payment option set forth in Section 1 above provided that such amendment does not result in an acceleration of the distributions to the Participant and does not result in a deferral of distributions already scheduled to be made to the Participant during the calendar year in which the amendment is made. (c) Death of a Participant. In the event a Participant should ---------------------- die prior to receiving any payments, such payments shall be made to a designated beneficiary in the form selected by the Participant for the beneficiary. In the event of a Participant's death after installment payments have commenced, but prior to receiving the full amount due the Participant, the unpaid balance will continue to be paid in installments to the Participant's designated beneficiary for the unexpired portion of the form of distribution selected by Participant for himself or herself. In the event, however, that there is no beneficiary designated, the unpaid balance shall 6 be paid to the Participant's spouse, if living, otherwise, to the Participant's executor or administrator, in a lump sum. (d) No Election on File. If no form of distribution is selected ------------------- by a Participant for himself/herself or the beneficiary, distribution shall be made in a lump sum. (e) Hardship Withdrawal. A Participant may request an early ------------------- withdrawal of all or a portion of the Participant's account which CoreStates or the Bank in its discretion may grant if the request is based on severe hardship resulting from an emergency caused by an event beyond the control of the Participant and the request is limited to amounts necessary to meet the hardship. A hardship withdrawal shall be paid in a lump sum as soon as practicable after approval by CoreStates or the Bank. 5.7 Interpretation. Unless as otherwise specifically provided in -------------- this Section 5, the provisions of Section 5 are to be interpreted in a manner consistent with the other provisions of the Plan. Section 6. Governing Law. All matters pertaining to the construction, ------------- validity and effect of this Plan shall be determined in accordance with the laws, other than conflicts of law rules, of the Commonwealth of Pennsylvania. Section 7. Rights Unsecured. The rights of Directors, Participants and ---------------- designated beneficiaries or others hereunder to receive future payments shall be an unsecured claim against the general assets of CoreStates or the Bank. Section 8. Binding Agreement. This Plan shall be binding on the ----------------- successors in interest of CoreStates, the Bank, the Directors, the Participants and all beneficiaries of a Director or Participant. Section 9. No Assignments. Amounts payable under this Plan may not be -------------- voluntarily or involuntarily assigned by any Director, Participant or beneficiary. Section 10. Termination. Either CoreStates or the Bank may further amend ----------- or terminate this Plan at any time with respect to its Director's compensation not yet earned. 7 Section 11. Effective Date. The effective date of the Plan was January 3, -------------- 1973. The effective date of the Plan as amended and restated herein is January 1, 1995. CORESTATES FINANCIAL CORP CORESTATES BANK, N.A. /s/ Les Butler /s/ Les Butler - - ----------------------------------- ----------------------------------------- Chairman Chairman /s/ Jackie Ballantine /s/ Jackie Ballantine - - ----------------------------------- ----------------------------------------- Secretary Secretary 8 EX-11 3 COMPUTATION OF PER SHARE EARNINGS CORESTATES FINANCIAL CORP AND SUBSIDIARIES EXHIBIT 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Twelve Months Ended December 31, December 31, -------------------- ---------------------- 1995 1994 1995 1994 --------- --------- ---------- ---------- (A) Income before cumulative effect of a change in accounting principle................. $136,954 $111,475 $452,237 $248,792 Cumulative effect of a change in accounting principle.................... (3,430) -------- -------- -------- --------- (B) Net Income................................. $136,954 $111,475 $452,237 $245,362 ======== ======== ======== ======== EARNINGS PER SHARE Based on average common shares outstandings - - ------------------------------------------- (C) Average shares outstanding................. 138,468 142,252 140,600 142,498 ======== ======== ======== ======== (A/C) Income before cumulative effect of a change in accounting principle.......... $ 0.99 $ 0.78 $ 3.22 $ 1.75 ======== ======== ======== ======== (B/C) Net Income................................. $ 0.99 $ 0.78 $ 3.22 $ 1.73 ======== ======== ======== ======== Based on average common and common - - ---------------------------------- equivalent shares outstandings - - ------------------------------ Primary: - - -------- (D) Average common equivalent shares........... 1,441 922 1,336 1,207 ======== ======== ======== ======== (E) Average common and common equivalent shares (C + D)............... 139,909 143,174 141,936 143,705 ======== ======== ======== ======== (A/E) Income before cumulative effect of a change in accounting principle (1)...... $ 0.98 $ 0.78 $ 3.19 $ 1.73 ======== ======== ======== ======== (B/E) Net Income (1)............................. $ 0.98 $ 0.78 $ 3.19 $ 1.71 ======== ======== ======== ======== Fully diluted: - - -------------- (F) Average common equivalent shares........... 1,449 906 1,696 1,240 ======== ======== ======== ======== (G) Average common and common equivalent shares (C + F)............... 139,917 143,158 142,296 143,738 ======== ======== ======== ======== (I) Interest expense on Subordinated convertible debentures, net of tax...... $ 384 $ 1,821 ======== ======== ((A+I)/G) Income before cumulative effect of a change in accounting principle (1)...... $ 0.98 $ 0.78 $ 3.18 $ 1.74 ======== ======== ======== ======== ((B+I)/G) Net Income (1).......................... $ 0.98 $ 0.78 $ 3.18 $ 1.72 ======== ======== ======== ========
__________________________________ (1) Dilution is less than 3%. EX-12.1 4 COMPUTATION OF RATIO OF EARNINGS CORESTATES FINANCIAL CORP AND SUBSIDIARIES EXHIBIT 12.1 COMPUTATION OF RATIO OF EARNINGS FROM CONTINUING OPERATIONS TO FIXED CHARGES OF CONTINUING OPERATIONS CONSOLIDATED Twelve Months Ended December 31, 1995 - - ------------------------------------- 1. Income from continuing operations before cumulative effect of change in accounting principle and income taxes............... $ 714,802 ========== 2. Fixed charges of continuing operations: A. Interest expense (excluding interest on deposits), amortization of debt issuance costs and one-third of rental expenses, net of income from subleases........................ $ 262,860 B. Interest on deposits................................................. 532,703 ---------- C. Total fixed charges (line 2A + line 2B)............................... $ 795,563 ========== 3. Income from continuing operations before cumulative effect of change in accounting principle and income taxes, plus total fixed charges of continuing operations: A. Excluding interest on deposits (line 1 + line 2A).................... $ 977,662 ========== B. Including interest on deposits (line 1 + line 2C).................... $1,510,365 ========== 4. Ratio of earnings (as defined) to fixed charges: A. Excluding interest on deposits (line 3A/line 2A)..................... 3.72x ===== B. Including interest on deposits (line 3B/line 2C)..................... 1.90x ====
EX-12.2 5 COMPUTATION OF RATIO OF EARNINGS CORESTATES FINANCIAL CORP AND SUBSIDIARIES EXHIBIT 12.2 COMPUTATION OF RATIO OF EARNINGS FROM CONTINUING OPERATIONS TO FIXED CHARGES OF CONTINUING OPERATIONS COMBINED CORESTATES (PARENT ONLY) AND CORESTATES CAPITAL CORPORATION
Twelve Months Ended December 31, 1995 - - ------------------------------------- 1. Income before income taxes, equity in undistributed income of subsidiaries and cumulative effect of change in accounting principle........................................................... $313,581 2. Fixed charges - interest expense, amortization of debt issuance costs and one-third of rental expenses, net of income from subleases............................................... 179,283 -------- 3. Income before taxes, equity in undistributed income of subsidiaries and cumulative effect of change in accounting principle, plus fixed charges....................................... $492,864 ======== 4. Ratio of earnings (as defined) to fixed charges (line 3/ line 2)............................................................ 2.75x ====
EX-13 6 1995 ANNUAL REPORT Exhibit 13 ---------- DRAFT: 03/05/96 1995 ANNUAL REPORT FINANCIAL SECTIONS
PAGE ---- Consolidated Financial Highlights (Inside Cover) 2 Contents of Financial Section 3 MD&A 4 - 43 Management's and Accountants' Reports 44 - 46 Audited Financial Statements 47 - 81 Supplemental Data 81 - 95
1 CORESTATES FINANCIAL CORP AND SUBSIDIARIES CONSOLIDATED FINANCIAL HIGHLIGHTS (dollar amounts in thousands, except per share)
YEAR ENDED DECEMBER 31, 1995 1994 ---------- -------- EARNINGS AND DIVIDENDS APPLICABLE TO COMMON SHARES Income before cumulative effect of a change in accounting principle (a)............................ $ 452,237 $248,792 Net income.................................................... 452,237 245,362 Cash dividends declared....................................... 201,895 175,103 PER SHARE Income before cumulative effect of a change in accounting principle (a).......................... $ 3.22 $ 1.75 Net income.................................................... 3.22 1.73 Cash dividends declared....................................... 1.44 1.24 Book value.................................................... 17.24 16.22 SELECTED FINANCIAL RATIOS Return on average total assets (a)(b)......................... 1.59% 0.90% Return on average common shareholders' equity (a)(b).......... 19.59 10.96 Net interest margin........................................... 5.97 5.80 Tier 1 leverage ratio......................................... 7.62 7.79 Tier 1 capital ratio.......................................... 8.41 8.64 Total capital ratio........................................... 12.09 12.43 Allowance for loan losses to loans............................ 2.35 2.44 Non-performing assets to loans plus OREO...................... 0.81 1.51 Non-performing assets to total assets......................... 0.58 1.06 Allowance for loan losses to non-performing loans............. 341.8 203.3 FINANCIAL POSITION AT DECEMBER 31, 1995 1994 ----------- ----------- Assets........................................................ $29,620,616 $29,325,136 =========== =========== Loans......................................................... $21,046,535 $20,526,216 =========== =========== Deposits...................................................... $21,502,433 $22,040,886 =========== =========== Shareholders' equity.......................................... $ 2,379,419 $ 2,350,114 =========== ===========
___________________________ (a) Selected financial results, excluding a net after-tax restructuring charge of $62.5 million, or $0.44 per share related to a process redesign and an after-tax gain of $11.8 million, or $0.08 per share related to a change in ownership interests in an affiliate joint venture, both recorded in 1995, and after-tax merger-related charges of $167.4 million, or $1.17 per share, recorded in 1994, were as follows:
1995 1994 --------- -------- Income before cumulative effect of a change in accounting principle.......................... $ 502,951 $416,239 Per share................................................ $3.58 $2.92 Return on average total assets (b)....................... 1.77% 1.50% Return on average common shareholders' equity (b).............................................. 21.78 18.34
(b) Return on average total assets and return on average common shareholders' equity are calculated on income before cumulative effect of a change in accounting principle. 2 1995 ANNUAL REPORT CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONTENTS OF FINANCIAL SECTION PAGE ---- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................................... 4 FINANCIAL STATEMENTS Management's Report on Internal Controls Over Financial Reporting............................... 44 Independent Accountants' Report and Report of Independent Auditors.............................. 45-46 Consolidated Statements of Income for the years ended December 31, 1995, 1994 and 1993.......... 47 Consolidated Balance Sheets as of December 31, 1995 and 1994.................................... 48 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1995, 1994 and 1993............................................................. 49 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993...... 50-51 Notes to the Consolidated Financial Statements.................................................. 52-80 SUPPLEMENTAL FINANCIAL DATA Five Year Average Balance Sheet, Statement of Income and Balance Sheet.......................... 81-86 Rate/Volume Analysis Taxable Equivalent Basis................................................... 87 Loan Portfolio, Risk Elements and Allowance for Loan Losses Data................................ 88-92 Selected Maturity and Interest Sensitivity Data................................................. 92-95
3 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW A primary strategic focus for CoreStates Financial Corp ("CoreStates") in 1995 involved Building Exceptional Service Together ("BEST"), its corporate-wide process redesign. Another major strategic accomplishment in 1995 was the signing on October 10, 1995 of a definitive agreement to acquire the $14.8 billion asset Meridian Bancorp, Inc., in a transaction which is expected to enhance shareholder value, strategic growth in products and markets, and franchise value. See "Strategic Actions in 1995" beginning on page 7. EARNINGS - In 1995, CoreStates achieved record earnings due to continued growth - - -------- in basic banking businesses, driven primarily by an increase in net interest income and reductions in operating expenses resulting from the implementation of BEST. CoreStates' "operating earnings" for 1995, defined as net income excluding the BEST related net restructuring charge and a gain related to a change in ownership interests in an affiliate joint venture, were $502.9 million, or $3.58 per share, reflecting growth of 22.6% on a per share basis when compared to operating earnings of $416.2 million, or $2.92 per share in 1994. Operating earnings for 1994 exclude merger-related charges of $167.4 million after-tax, or $1.17 per share, and the cumulative effect of a change in accounting principle. The net restructuring charge, gain on affiliate joint venture and 1994 merger- related charges are discussed below. CoreStates recorded net income of $452.2 million, or $3.22 per share in 1995, compared to net income of $245.4 million, or $1.73 per share in 1994. Operating results, key performance ratios and per share information are summarized in the following table (in millions, except per share):
Percentage Increase (Decrease) ---------------------- 1995 1994 1993 '95/'94 '94/'93 -------- -------- -------- ------- ------- Net interest income (taxable equivalent basis)... $1,505.8 $1,410.6 $1,351.8 6.7% 4.4% ======== ======== ======== Income before the cumulative effect of a change in accounting principle.............. $ 452.2 $ 248.8 $ 362.4 81.8 (31.3) Exclude after-tax effects of: Net restructuring charge.................... 62.5 - - Gain on joint venture....................... (11.8) - - Merger-related charges...................... - 167.4 - -------- -------- -------- Operating earnings............................... $ 502.9 $ 416.2 $ 362.4 20.8 14.8 ======== ======== ======== Operating earnings per share..................... $ 3.58 $ 2.92 $ 2.49 22.6 17.3 ======== ======== ======== Return on average assets (a)..................... 1.77% 1.50% 1.31% Return on average equity (a)..................... 21.78 18.34 16.49 Net interest margin.............................. 5.97 5.80 5.59 Expense/revenue ratio............................ 56.22 60.99 62.70 Average common shares outstanding................ 140.600 142.498 145.398
_________________ (a) Calculated based on "Operating earnings." 4 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED OVERVIEW - continued The largest contributor to the $86.7 million improvement in operating earnings for 1995 was a $95.2 million, or 6.7% increase in taxable equivalent net interest income. The net interest margin for 1995 was 5.97%, 17 basis points above 1994. The increases in taxable equivalent net interest income and net interest margin were primarily related to improved interest rate spreads on deposits and prime-based loans, higher earnings on non-interest bearing funding, reduced non-performing loans, and loan growth, particularly in credit card outstandings and asset-based lending at Congress Financial Corporation ("Congress Financial"), CoreStates' commercial finance subsidiary. Of CoreStates' two sources of operating revenue, net interest income and non- interest income, net interest income is the largest, comprising 71% of total revenue in both 1995 and 1994. Net interest income and the net interest margin at CoreStates continue to benefit from the interest rate risk management strategy of maintaining a relatively neutral interest rate risk sensitivity and avoiding speculative interest rate positions. For a detailed description of CoreStates' interest rate risk management practices, see the "Asset and Liability Management" section beginning on page 25. Also contributing to the improvement in 1995 operating earnings was a $26.7 million, or 2.2%, decrease in non-financial expenses excluding significant and unusual items as discussed on page 41, and a $13.7 million, or 2.4%, increase in non-interest income, excluding the significant and unusual items as discussed on page 39. The financial impact of those aspects of the process redesign implemented during 1995 was to increase revenue by $6.1 million and decrease non-financial expenses by $56.8 million, for an aggregate increase in operating earnings of $62.9 million pre-tax, or $0.28 per share after-tax. Key performance measures based on operating earnings improved again in 1995 and are at their highest in CoreStates history and among the highest in the banking industry. Returns on average equity and assets were 21.78% and 1.77%, respectively, in 1995, compared to 18.34% and 1.50%, respectively, in 1994. The 1995 Salomon Brothers Superregional Bank composites for returns on average equity and assets were 16.90% and 1.33%, respectively. The Salomon Brothers Superregional Bank composite includes CoreStates and is comprised of 19 U.S. Superregional banking companies. CoreStates' expense/revenue ratio (total operating expenses, excluding other real estate owned expenses, as a percentage of total revenues) was 56.2% in 1995. This compares to an expense ratio of 61.0% in 1994. The expense/revenue ratio improved throughout each quarter of 1995 as a result of the process redesign and merger-related efficiencies. The business line segment experiencing the highest growth in 1995 was Consumer Financial Services, which generated a $55.7 million, or 45.5%, increase in its net income for 1995, reflecting a $63.5 million, or 9.4%, increase in net interest income and a $27.0 million, or 4.5%, decline in non-financial expenses. Consumer Financial Services' growth in net interest income was primarily driven by higher average credit card balances and wider deposit spreads. The decline in non-financial expenses resulted from the impact of the process redesign and reduced FDIC premiums. The Wholesale Banking segment, the largest contributor to net income, also made a strong contribution to 1995 operating earnings growth, improving net income by $43.5 million, or 20.4%. For a more detailed analysis of the performance of CoreStates' business lines, refer to the "Business Line Results" section beginning on page 10. RESTRUCTURING CHARGE - In March 1995, CoreStates completed an intensive -------------------- review of its operations and businesses and announced a corporate-wide process redesign plan, which restructured its banking services around customers and enhanced employees' authority to make decisions to benefit customers. As a result of this process redesign, CoreStates recorded a $110.0 million pre-tax restructuring charge, $70.0 million after-tax or $0.49 per share in March 1995. In subsequent quarters, CoreStates recorded restructuring credits of $11.8 million, $7.5 million after-tax or $0.05 per share, primarily related to gains on the curtailment of pension benefits associated with employees displaced during 1995 and gains on the sale of branches which were sold as a result of the process redesign. For a more detailed discussion of the process redesign and related restructuring charge, see "Strategic Action in 1995 - Process Redesign" beginning on page 8. 5 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED OVERVIEW - continued GAIN ON AFFILIATE JOINT VENTURE - In March 1995, Electronic Payment ------------------------------- Services, Inc. ("EPS"), an affiliate joint venture formed in 1992 to combine the consumer electronic transaction processing businesses of CoreStates and three other partners, admitted a fifth partner and increased the ownership interest of an existing partner. As a result of the change in its ownership interest, CoreStates recognized a pre-tax gain of $19.0 million, $11.8 million after-tax or $0.08 per share, in the first quarter of 1995. NON-PERFORMING ASSETS - Non-performing assets at December 31, 1995 totaled --------------------- $171.5 million, a decline of $139.4 million or 44.8% from December 31, 1994. Non-performing real estate assets were down $78.4 million or 40.5% and non- performing commercial loans were down $35.1 million or 40.3%. At December 31, 1995 the allowance for loan losses of $495.1 million was 341.8% of non- performing loans. This compares to $500.6 million and 203.3% at December 31, 1994. 1994 MERGER-RELATED CHARGES - Upon consummation of their respective --------------------------- acquisitions by CoreStates in 1994, Independence Bancorp, Inc. ("Independence") and Constellation Bancorp ("Constellation") recorded merger-related charges in connection with a change in strategic direction related to problem assets and to conform consumer lending charge-off policies to those of CoreStates, and for expenses directly attributable to the acquisition. These merger-related charges totaled $167.4 million after-tax, or $1.17 per share. On a pre-tax basis, the merger-related charges consisted of a $145.0 million provision for loan losses, a $32.0 million addition to the OREO reserve, $13.0 million for the writedown of purchased mortgage servicing rights and related assets, and $63.7 million for expenses directly attributable to the acquisitions including $13.0 million of severance costs related to approximately 715 employees. COMPARISON OF 1994 TO 1993 - CoreStates' operating earnings for 1994 of $416.2 - - -------------------------- million, or $2.92 per share, grew 17.3% on a per share basis when compared to $362.4 million or $2.49 per share in 1993. The growth in 1994 operating earnings was primarily due to a $58.8 million, or 4.4% increase in taxable equivalent net interest income, improved credit quality resulting in a $19.3 million, or 15.9%, reduction in the provision for losses on loans (excluding the $145.0 million of merger-related provisions recorded in 1994) and a $33.0 million decline in non-financial expenses excluding merger-related charges. ACCOUNTING CHANGES AFFECTING PRIOR YEARS' INCOME - 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 writedown to fair value of these securities, which were deemed to be impaired. This resulted from the Financial Accounting Standards Board's ("the 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. Effective January 1, 1993, CoreStates adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("FAS 112"). 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. CoreStates recognized the January 1, 1993 transitional liability of $20.0 million, $13.0 million after-tax or $0.09 per share, as the cumulative effect of a change in accounting principle in 1993. 6 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED STRATEGIC ACTIONS IN 1995 ACQUISITIONS CoreStates' strategy for growth focuses first on servicing existing customers and second on expanding its businesses and customer base. CoreStates evaluates merger and acquisition opportunities of both banks and non-banks where potential for shareholder value enhancement, strategic growth and franchise development exist. CoreStates makes acquisitions to supplement corporate and business line strategies, not solely to drive earnings growth. Emphasis is placed on opportunities which extend existing markets into adjacent geography and deepen market share within existing markets. Acquisition opportunities are evaluated by a specialized staff aided by teams of business line managers who are responsible for planning and executing due diligence and integration activities. PENDING ACQUISITION OF MERIDIAN - On October 10, 1995, CoreStates and Meridian - - ------------------------------- Bancorp, Inc. ("Meridian") announced a definitive agreement to merge. Meridian is a Pennsylvania bank holding company with approximately $14.8 billion in assets and $11.2 billion in deposits. Approval by shareholders of both companies was received on February 6, 1996 and assuming approval by regulators, the transaction is expected to close during the first half of 1996. For each Meridian common share outstanding, 1.225 shares of CoreStates common stock will be issued. Based on the October 9, 1995 closing share price, the transaction would be valued at approximately $3.2 billion. The transaction is expected to be accounted for under the pooling of interests method of accounting. Strategically, this acquisition will: combine two strong performing banking companies; create a leading market position in the region that includes the prime economic centers of eastern Pennsylvania, northern Delaware, and central New Jersey; extend the combined company's market to 47 counties in the three states; and create a company with $3.7 billion of equity having the resources and capital to support investments in growth and in improved services to customers. Similar to CoreStates, in June 1995 Meridian completed an internal review of its operations and businesses and announced a company-wide plan ("59.9") designed to improve its operating performance and competitive position. Implementation of the Meridian plan began at the end of the second quarter of 1995 and will continue over approximately the next twelve months from that date. At the end of that period, this process is expected to reduce net operating expenses on an annualized pre-tax basis by $55 million, while providing recurring revenue enhancements of $13 million, increasing Meridian's net income on an annual basis by $0.78 per Meridian common share. In addition to the cost efficiencies and revenue enhancements expected from implementation of BEST and "59.9", CoreStates expects this in-market acquisition to achieve pre-tax operating efficiencies of approximately $186.0 million, and to add to earnings per share in 1997. Excluding 1996 credit and merger-related charges of approximately $175.0 million, this transaction is expected to be approximately 7% dilutive to 1996 earnings per share. On February 23, 1996, Meridian acquired United Counties Bancorporation ("United Counties"), a $1.6 billion asset New Jersey bank holding company in a transaction accounted for as a pooling of interests. For each United Counties common share outstanding, 5.0 shares of Meridian's common stock were issued. Pending regulatory approvals, consolidations of bank subsidiaries and operations are expected to begin in the third quarter of 1996 with the consolidation of Meridian's Pennsylvania bank subsidiary into CoreStates' lead Pennsylvania bank, CoreStates Bank, N.A. ("CBNA"). Other consolidations also scheduled for the third quarter of 1996 include the combination of Meridian Bank NJ and United Counties Bank into CoreStates New Jersey National Bank ("NJNB") and the consolidation of Meridian's Delaware Trust Company into CBNA. The interstate consolidation of CBNA and NJNB, previously scheduled for January 1996, has been postponed until the fourth quarter of 1996 in order to accommodate the consolidations of the Meridian bank subsidiaries. 7 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED STRATEGIC ACTIONS IN 1995 - continued A summary of 1995 selected unaudited financial information for Meridian and United Counties follows: OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 1995 (in thousands, except per share)
United Meridian Counties -------- -------- Net income............................................ $169,814 (a) $32,189 (b) Per common share...................................... 2.98 (a) 15.00 (b) Average common shares outstanding..................... 55,951 2,146 Excluding Meridian's restructuring charge/United Counties' securities gains: Net income...................................... $199,591 $23,551 Per common share................................ 3.51 10.97 Return on average total assets.................. 1.36% 1.47% Return on average common shareholders' equity........................... 16.08 12.2 BALANCE SHEET AT DECEMBER 31, 1995 (in millions, except per share) Assets................................................ $ 14,758 $ 1,621 Loans................................................. 10,164 387 Deposits.............................................. 11,150 1,312 Shareholders' equity.................................. 1,306 205 Book value per share.................................. 23.24 95.19
_______________ (a) As a result of "59.9", Meridian recorded a restructuring charge in the second quarter of 1995 of $32.0 million ($20.8 million after-tax or $0.37 per Meridian common share). (b) Includes gains of $13.8 million ($8.6 million after-tax or $4.03 per United Counties share) on the exchange of investment securities. NATIONWIDE REMITTANCE CENTERS - On January 27, 1995, CoreStates acquired - - ----------------------------- Nationwide Remittance Centers, Inc. ("NRC"), the largest independent remittance processor in the United States. Fees earned by NRC were approximately $20 million. NRC was merged into CoreStates' third-party remittance processing company, CashFlex, a subsidiary of CBNA, creating the second largest lockbox processor in the country at the time of the acquisition. With the addition of NRC, CashFlex services more than 60 major financial institutions and processes approximately 300 million payment items annually. This acquisition affirmed CoreStates' commitment to growing its fee-based businesses and to building on its expertise in cash management. PROCESS REDESIGN In order to build upon CoreStates' strong financial condition and sustain previous financial successes in the competitive financial services environment in which CoreStates operates, management commenced an intensive review of all aspects of CoreStates' operations and businesses in September 1994. The objectives of the process redesign were: (i) to enhance CoreStates' customer focus; (ii) to accelerate the culture change already in progress at CoreStates; and (iii) to improve productivity. In March 1995, CoreStates completed its review and approved and announced a corporate-wide process redesign plan, which restructured its banking services around customers and enhanced employees' authority to make decisions to benefit customers. 8 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED STRATEGIC ACTIONS IN 1995 - continued 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 December 31, 1995, CoreStates had 13,598 full-time equivalent employees which includes reductions for the impact of the hiring freeze, attrition and 1,600 employee displacements. The components of the restructuring charge and related cash outflow were as follows (in millions):
Restructuring Charge -------------------------- Requiring Cash Cash Outflow Total Outflow To-date(a) ----- ------- ---------- Severance costs........................ $ 72 $72 $28 Office reconfiguration costs........... 16 7 - Branch closing costs................... 15 7 2 Outplacement costs..................... 3 3 2 Miscellaneous.......................... 4 2 1 ----- --- --- Total.......................... $ 110 (b) $91 $33 ===== === ===
______________________________________ (a) CoreStates' liquidity has not been significantly affected by these cash outflows. (b) Subsequent to recording the $110 million restructuring charge, CoreStates recorded restructuring credits of $11.8 million, $7.5 million after-tax or $0.05 per share, primarily related to gains on the curtailment of pension benefits associated with employees displaced during 1995 and gains on the sale of branches which were sold as a result of the process redesign plan. The net restructuring charge recorded in 1995 was $98.2 million, or $0.44 per share. 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 write-offs 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 asset write-offs and lease buyouts incurred in the process of consolidating and closing 37 branch offices. Future cash outflows to be incurred in implementing the process redesign plan, which in accordance with generally accepted accounting principles were not included in the restructuring charge, will include approximately $12 million for capital expenditures and approximately $17 million in operating expenses. Since April 1995, the amount of capital expenditures related to the process redesign were approximately $8 million and the amount of incremental operating expenses that were incurred related to the process redesign were approximately $8 million. The principal themes of the process redesign plan are as follows: . Redefine the organizational structure around customers, customer 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; . Use technology to automate services and processes; and . Employ tiered pricing strategies and streamline product pricing. 9 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED STRATEGIC ACTIONS IN 1995 - CONTINUED Implementation of the process redesign plan is expected to occur within an 18-month period which began in April 1995. By mid 1996, the process redesign is expected to generate cost reductions of approximately $180 million and revenue enhancements which will yield additional revenue of approximately $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 was approximately $0.28 per share, exceeding the original estimate for 1995 by $0.12 per share. The favorable variance to original projections for 1995 is principally related to personnel savings and mostly due to the realization of benefits earlier than planned. 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 estimates, there are factors beyond CoreStates' control that could influence the actual results for 1996, such as changes in economic conditions. As a result, the actual results could differ materially from these estimates. BUSINESS LINE RESULTS CoreStates utilizes a value-based reporting methodology to facilitate management's analysis of performance by defined business lines. This process supports CoreStates' strategic objective of creating superior growth in shareholder value by focusing on the performance and value creation potential of CoreStates' component businesses. This section of management's discussion and analysis presents the performance results of CoreStates' four core businesses: Wholesale Banking; Consumer Financial Services; Trust and Investment Management; and Electronic Payment Services, Inc. ("EPS"), an affiliate. Each core business is comprised of well-defined business lines with market or product specific missions. Corporate overhead, processing and support costs, and the loan loss provision are allocated along with the impact of balance sheet management and hedging activities of CoreStates. A matched maturity transfer pricing system is used to allocate interest income and interest expense. All business lines in the four core businesses are allocated equity utilizing regulatory risk-based capital guidelines as well as each business line's fixed assets and other capital investment requirements. Intangible assets and associated costs are also allocated to relevant business units. The development of these allocation methodologies is a continuous process at CoreStates and as a result, certain amounts in prior years have been reclassified for comparative purposes. The Corporate category includes the income and expense impact of unallocated equity, unusual or non-recurring items not attributable to the operating activities of the major business areas, emerging business activities not directly related to the four major business areas, and miscellaneous items. The earnings contribution of these core businesses is reflected in the table below (in millions): 10 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED BUSINESS LINE RESULTS - continued
CONSUMER TRUST AND WHOLESALE FINANCIAL INVESTMENT (Taxable equivalent basis) BANKING SERVICES MANAGEMENT ----------------------- --------------------------- ---------------------------- 1995 1994 1995 1994 1995 1994 ------- ------- ---------- ---------- ---------- ---------- Net interest income................ $ 666.0 $ 637.5 $ 739.3 $ 675.8 $ 27.4 $ 30.4 Provision for losses on loans...... 44.6 44.2 59.4 56.6 1.0 1.1 Non-interest income................ 229.9 219.9 171.6 175.5 96.6 98.3 Non-financial expenses............. 436.7 462.1 567.5 594.5 100.3 112.9 ------- ------- --------- -------- ------- ------- Income before income taxes......... 414.6 351.1 284.0 200.2 22.7 14.7 Income tax expense................. 157.8 137.8 106.0 77.9 8.5 5.5 ------- ------- --------- -------- ------- ------- Net income......................... $ 256.8 $ 213.3 $ 178.0 $ 122.3 $ 14.2 $ 9.2 ======= ======= ========= ======== ======= ======= Return on average assets........... 1.58 % 1.39% 2.24% 1.66% 2.03 % 1.33% Return on average equity(a)........ 27.09 25.01 49.86 34.07 54.62 34.07 Average assets..................... $16,261 $15,396 $ 7,953 $ 7,364 $ 699 $ 692 Average equity(a).................. 948 853 357 359 26 27
EPS, INC. AFFILIATE CORPORATE TOTAL ------------------------ --------------------------- ----------------------- 1995 1994 1995 1994(d) 1995 1994 --------- --------- ---------- ----------- --------- --------- ................................ Net interest income................ $ (5.3) $ (6.0) $ 78.4 $ 72.9 $1,505.8 $1,410.6 Provision for losses on loans...... - - - 145.0 105.0 246.9 Non-interest income................ 49.1 (b) 31.8 58.4 42.0 605.6 567.5 Non-financial expenses............. - - 169.9 (c) 148.1 (d) 1,274.4 1,317.6 ------- ------- ------ -------- -------- -------- Income (loss) before income taxes.. 43.8 25.8 (33.1) (178.2) 732.0 413.6 Income tax expense (benefit)....... 15.8 9.1 (8.3) (65.5) 279.8 164.8 ------- ------- ------- -------- -------- -------- Net income (loss).................. $ 28.0 $ 16.7 $ (24.8) $ (112.7) $ 452.2 $ 248.8 (e) ======= ======= ======= ======== ======== ======== Return on assets................... 37.33 % 21.41 % (0.72) % (2.72) % 1.59% .90 % Return on equity(a)................ 700.00 417.50 (2.55) (10.97) 19.59 10.96 Average assets..................... $75 $78 $ 3,458 $ 4,137 $ 28,446 $ 27,667 Average equity(a).................. 4 4 974 1,027 2,309 2,270
__________________________ (a) Equity is allocated to business lines in the four core business segments by applying a factor of 5.0% against average risk-weighted assets and adding intangible assets. (b) Includes a gain of $19.0 million pre-tax, $11.8 million after-tax, related to changes in CoreStates' investment in the EPS, Inc. Affiliate joint venture. (c) Includes a net restructuring charge of $98.2 million pre-tax, $62.5 million after-tax, related to a corporate-wide process redesign. (d) Includes $120.0 million in the provision for losses on loans and $75.0 million in other operating expenses related to the Constellation acquisition and $25.0 million in the provision for loan losses and $33.7 million in other operating expenses related to the Independence acquisition. The combined after-tax impact was $167.4 million. (e) Based on income before cumulative effect of a change in accounting principle. 11 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED BUSINESS LINE RESULTS - continued WHOLESALE BANKING is organized into six business lines for reporting purposes: Corporate Middle Market, Corporate and Institutional Banking, Investment Banking, Cash Management, International Banking, and Specialized Banking. Wholesale Banking continued its strong performance in 1995 as net income increased $43.5 million or 20.4% above 1994. Contributing to this increase was growth in net interest income, growth in non-interest income, and a decline in non-financial expenses. Net interest income was $28.5 million or 4.5% above 1994 due to higher loan volumes, lower levels of non-performing loans, and higher loan fees. Average loan outstandings increased 6.0% from the prior year. Average non-performing loans declined 41.3% from the prior year. Cash management revenues (including international service fees) were 7.2% above 1994. Growth in international fees, and the value of collected deposits more than offset an $8.3 million decline in service charges. Non-financial expenses declined $25.4 million or 5.5% largely due to a $3.6 million decline in FDIC expense and expense reductions related to the impact of BEST. Net income contributed to Wholesale Banking by Congress Financial increased $11.3 million for 1995, primarily due to an increase in net interest income resulting from loan growth, partially offset by an increase in the loan loss provision of Congress Financial. CONSUMER FINANCIAL SERVICES includes the following business lines: Community Banking, Specialty Products and Mortgage Banking. Specialty Products ("SPG") includes Credit Card, Student Lending, CardLinx (CoreStates' merchant credit card processing business) and SynapQuest (CoreStates' credit card processing subsidiary). Results for December 1994 and the full year of 1995 include the acquisition of Germantown Savings Bank ("GSB"). Since the GSB transaction was accounted for under the purchase method, restatement of financial information prior to the acquisition was not required. Net income for Consumer Financial Services of $178.0 million in 1995 was $55.7 million or 45.5% over 1994. The increase was primarily experienced in the Community Banking and SPG business lines. The growth in net income was driven by a $63.5 million or 9.4% increase in net interest income along with a $27.0 million or 4.5% decline in non-financial expenses. This growth was partially offset by a decrease in non-interest income of $3.9 million or 2.2% and an increase in the loan loss provision related to increased charge-offs in the credit card portfolio. The increase in net interest income of $63.5 million in 1995 included a $32.8 million increase related to GSB. Net interest income growth of $14.0 million in the credit card portfolio resulted from a $195 million, or 15.3% increase in average credit card outstandings, partially offset by the impact of a 50 basis point reduction in credit card interest rate spreads. In addition to the growth due to the GSB acquisition, net interest income in Community Banking increased $11.4 million, or 2.1%. Favorable deposit spreads in Community Banking, up 24 basis points, generated a $31.8 million increase which was partially offset by declines due to a $460 million decrease in deposits equating to a $13.2 million reduction and narrowing loan spreads, down 25 basis points, for a $12.2 million reduction. Non-interest income was down $3.9 million, or 2.2%. Mortgage Banking income declined by $4.2 million primarily the result of the sale of the Constellation servicing portfolio in 1994. In addition, in March of 1994, Community Banking sold its Marine lending portfolio at a gain of $1.5 million. Revenue generated from third-party sales of annuities and mutual funds was down $0.9 million. A full year of non-interest income in 1995 from the GSB acquisition resulted in an additional $3.4 million when compared to 1994. Non-financial expenses declined by $27.0 million, or 4.5%. Ideas implemented relating to BEST generated savings of $31.9 million. A June 1, 1995 reduction in FDIC premiums from $0.23 to $0.04 per $100 of deposits resulted in an expense decrease of approximately $12.0 million. A full year of expenses in 1995 from the GSB acquisition resulted in an $18.4 million increase in year-to-year expenses. 12 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED BUSINESS LINE RESULTS - continued TRUST AND INVESTMENT MANAGEMENT is organized into four business lines: Institutional Trust, Personal Trust, Private Banking, and Investment Management. The Corporate Trust business, included in Institutional Trust, was divided into its Pennsylvania and New Jersey components and sold to Mellon Bank and Bank of New York, respectively, in October 1995. CoreStates recognized a $7.4 million pre-tax gain on these sales during the fourth quarter of 1995 which is reflected in the Corporate Category. The Corporate Trust transactions provide for potential additional gains in 1996, pending determination of customer retention by the buyers. Net income of $14.2 million in 1995 was $5.0 million above 1994. Net interest income declined by $3.0 million or 9.9% primarily due to lower demand balances in Institutional Custody and Corporate Trust. During the first six months of 1995, Corporate Trust experienced lower balances compared to 1994 due to higher levels of refinancings in 1994. As a result of the Corporate Trust sale, Institutional Trust also experienced lower balances versus 1994 during the last quarter. Non-interest income declined by $1.7 million primarily due to the loss of fourth quarter fee revenues related to the sale of Corporate Trust. Also contributing to the decline was customer attrition in Institutional Trust and lower non- recurring fees in Personal Trust. Partially offsetting these shortfalls was new business and fee growth in Institutional Custody, the impact of 9.6% asset growth in the CoreFund family of mutual funds and approximately $700 thousand of BEST revenue enhancements. Expenses were $12.6 million or 11.2% below 1994 levels due principally to the impact of the BEST program and expense savings related to the sale of Corporate Trust. ELECTRONIC PAYMENT SERVICES, INC. ("EPS") was formed in December 1992 through the contribution of the consumer electronic transaction processing businesses of CoreStates, Banc One Corporation, PNC Bank Corp and KeyCorp. EPS is one of the nation's leading providers of ATM and POS processing services. CoreStates received cash, preferred stock and common stock for the contribution of its MAC ATM network and BUYPASS POS businesses. CoreStates' ownership at formation was 31%. In December 1993, CoreStates and EPS mutually agreed to enter into a recapitalization of EPS involving the EPS preferred stock held by CoreStates. In exchange for substantially all of the preferred stock, CoreStates received from EPS a ten-year 6.45% note providing for equal principal payments over the life of the note. The recapitalization did not affect the amount of the deferred gain generated in the 1992 contribution of the business lines to EPS, but changed the timing of the recognition of that $138 million deferred gain from a five-year period beginning in 1996 to a ten-year period which began in 1994. On March 27, 1995, National City Corp was added as a partner and KeyCorp increased its investment to become a full partner, resulting in a decrease in CoreStates' share of ownership in EPS from 31% to 20%. As a direct result of this change in ownership interests, CoreStates recognized a pre-tax gain of $19.0 million, $11.8 million after-tax in 1995. Net income in 1995 from CoreStates' investment in EPS totaled $28.0 million, including the $11.8 million gain. Excluding the gain, net income in 1995 was substantially unchanged from net income in 1994 as lower interest income realized from the promissory note was offset by higher equity earnings. The 1995 results included $30.1 million of non-interest income from CoreStates' equity interest in EPS' net income, deferred gain recognition, and promissory note interest income, partly offset by interest carrying charges on the net investment in EPS. 13 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED BUSINESS LINE RESULTS - continued THE CORPORATE CATEGORY'S net income for 1995 includes the net restructuring charge of $62.5 million after-tax related to BEST. After adjusting for the BEST restructuring charge and 1994 merger-related costs, the Corporate Category's net income was below 1994 by $17.0 million. The most noteworthy variances year-to- year were a $15.2 million decline in securities gains, partially offset by a $7.4 million gain recognized on the sale of the Corporate Trust business in 1995. Additionally, increases in non-interest income and non-financial expenses, resulted from growth in CoreStates' third party remittance processing company, CashFlex, which, as an emerging business, is currently included in the Corporate Category. The largest contributing factor to CashFlex's growth was the acquisition of NRC in January 1995. Fees earned by NRC were approximately $20 million and expenses added by NRC were approximately $20 million. In 1994, net income includes $167.4 million in merger-related charges recorded in the first half of 1994 for the acquisitions of Constellation and Independence. The merger- related charges included a $145 million loan loss provision. The merger-related charges had an after-tax impact of $127.8 million for Constellation and $39.6 million for Independence. CAPITAL STRENGTH Capital strength must be evaluated in the context of business risk exposures, including asset quality, interest sensitivity, liquidity and earnings diversification. CoreStates places a significant emphasis on the maintenance of strong capital which promotes investor confidence, helps provide access to the credit markets under favorable terms and enhances the flexibility to capitalize on business growth and acquisition opportunities. Capital is managed for each CoreStates subsidiary based on its respective risks and growth opportunities, as well as regulatory requirements. CoreStates is positioned to take advantage of market opportunities to strengthen capital. A shelf registration, which is in place, provides for the issuance of a wide-range of securities including: senior and subordinated debt, straight and convertible preferred securities and equity. The relative strength of CoreStates' capital is reflected in the chart "Average Common Equity/Assets".
Average Common Equity/Assets ---------------------------- Plotting Points for Graph Average Common ------------------------- Equity/Assets (in percent) --------------------------- Superregional CoreStates Composite * ---------- ------------- 1995 8.12% 7.51% 1994 8.20 7.46 1993 7.94 7.34 1992 7.08 6.67 1991 6.50 6.14
* The Salomon Brothers Superregional Bank Composite At December 31, 1995, common shareholders' equity totaled $2,379 million or 8.0% of total assets, compared with $2,350 million or 8.0% at year-end 1994. The year-end 1995 equity to assets ratio for the Salomon Brothers Superregional Bank Composite was 7.7%. CoreStates has achieved steady internal capital generation throughout the past five years. Common shareholders' equity increased over the five years ended December 31, 1995 at a compound annual growth rate of 5.4%, while dividends paid increased at a compound annual growth rate of 7.2%. During 1995, CoreStates increased its quarterly dividend by 23.5% to $0.42 per share beginning January 1996. CoreStates declared dividends on its common stock of $1.44 per share in 1995, $1.24 per share in 1994 and $1.14 per share in 1993. The common dividend payout ratio on an operating earnings basis was 40.2% for 1995, compared to 42.5% for 1994. 14 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED CAPITAL STRENGTH - CONTINUED In March 1995, the Board of Directors approved an expansion of CoreStates' common stock repurchase program from an annual maximum of 2% of outstanding shares to an annual maximum of 5%, excluding purchases for employee benefit plans and CoreStates' dividend reinvestment plan. Given the pending acquisition of Meridian, the common stock repurchase program was suspended indefinitely due to constraints associated with the pooling of interests method of accounting that CoreStates expects to utilize to account for the acquisition of Meridian. During 1995, CoreStates repurchased approximately 10.3 million shares of its common stock and reissued 3.5 million treasury shares under employee benefit plans and the dividend reinvestment plan. CoreStates and its bank subsidiaries are subject to minimum risk-based and leverage capital guidelines issued by the Federal Reserve Board and Comptroller of the Currency. The measurement of risk-based capital takes into account the credit risk of both balance sheet assets and off-balance sheet exposures. These guidelines require minimum risk-based capital ratios of 4% for Tier 1 capital and 8% for total capital. In addition, a minimum leverage ratio of Tier 1 capital to quarterly average total assets of 3% is required for banking organizations that are rated as strong. Internal capital generation continues to be strong and to exceed internal growth requirements. However, capital ratios declined slightly in 1995 due to the common stock repurchase program previously mentioned. The following table illustrates CoreStates' risk-based and leverage capital ratios at December 31, 1995 and 1994: RISK-BASED AND LEVERAGE CAPITAL RATIOS - - -------------------------------------- At December 31, - - --------------- (in millions)
1995 1994 ---- ---- CAPITAL Tier 1 capital (a).............................. $ 2,161 $ 2,129 Tier 2 capital (b).............................. 949 935 Total qualifying capital........................ 3,110 3,064 ASSETS Risk-adjusted assets............................ 25,714 24,645 Average assets-leverage capital basis........... 28,368 27,316 RATIOS Tier 1 capital ratio............................ 8.4% 8.6% Total capital ratio............................. 12.1 12.4 Tier 1 leverage ratio........................... 7.6 7.8
_______________ (a) Consists primarily of common shareholders' equity, less goodwill and certain intangible assets. (b) Consists primarily of qualifying subordinated debt and the allowance for loan losses, within permitted limits. Bank regulators apply substantially the same capital requirements to CoreStates' banking subsidiaries. A bank is considered "well capitalized", the highest regulatory category, if it has minimum Tier 1 and Total risk-based capital ratios of 6% and 10%, respectively, and a minimum Tier 1 leverage ratio of 5%. As illustrated in the following table, all of CoreStates' banking subsidiaries qualified as "well capitalized" at December 31, 1995.
BANK REGULATORY CAPITAL RATIOS Capital Ratios - - ------------------------------ --------------------------------- At December 31, 1995 Tier 1 Total Leverage - - -------------------- ------------ ----- -------- CoreStates Bank, N.A. ................. 7.6% 10.6% 6.8% New Jersey National Bank............... 12.1 15.3 7.6 CoreStates Bank of Delaware, N.A....... 6.6 11.2 6.3
15 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED RISK MANAGEMENT Risk management at CoreStates encompasses the oversight of a broad range of risks undertaken by the company including credit, market, product, processing, systems and general business risk. During 1995, the management of these risks was further integrated within the Risk Policy Office following the BEST process redesign. Also as a result of the process redesign, risk officer positions were created within technology/operations and capital markets to sharpen the focus of risk management within these areas. CoreStates' ongoing evolution of its risk management practices takes place within the framework of a corporate risk management program. The objective of the program is a continued strengthening of CoreStates' risk management culture and its policies, processes and controls for managing risk on an integrated basis throughout the company. The discussion of risk management is covered further in the following sections on "Credit Quality" and "Asset and Liability Management." CREDIT QUALITY CREDIT RISK MANAGEMENT The management of credit risk at CoreStates relies on maintaining a diversified loan portfolio, limiting exposures to a given industry or market segment, and on a well-established credit culture. Early identification and communication of deterioration/problems in the portfolio, early recognition of non-performing assets and charge-offs, maintaining reserves that are strong, and a credit advisory team process that provides all lenders in both wholesale and consumer businesses access to the most senior and experienced credit officers in the organization, are key components of this credit culture. Underlying this credit culture is a tradition of extensive and ongoing credit training and comprehensive and well-communicated policies and procedures. In 1995, a reorganization of the credit process was put into place which moved decision making closer to the customer while maintaining CoreStates' traditional and successful quality maintenance processes. One way this was accomplished was combining the Chief Risk Policy Office and the Chief Lending Offices and by delegating Chief Lending Office authority to a cadre of CoreStates' most experienced credit personnel throughout the organization for exercise in each business group or market. Further, while continuing a successful process of managing individual credits, greater emphasis has been placed on portfolio management issues. In acquiring a company whose businesses include the extension of credit, it is a priority of CoreStates to extend its credit culture to the newly acquired institution. In planning for the integration of Meridian into CoreStates in 1996, CoreStates will continue this policy. CoreStates' credit policies, together with the more informal practices and standards of conduct which define CoreStates' existing credit culture, will be extended to the combined organization through a formal communications and training program. The extensive credit officer structure in place at CoreStates will also be extended to the combined organization. Each significant market will have at least one assigned senior credit officer who would be supported by one or more credit officers. Extension of the CoreStates credit culture to the Meridian organization will also be facilitated through cross fertilization of key personnel. The loan quality process in place at CoreStates, which is designed as an early warning system for problem loan identification and portfolio issues, will be used in the combined organization. CoreStates' favorable experience with these processes and their successful use in the integration of other organizations, along with a stringent due diligence process and early integration of the acquired bank's portfolio, ensure that CoreStates' credit quality standards continue to be maintained. The maintenance of CoreStates' asset quality standards is supported by a comprehensive and independent assessment of credit quality and portfolio management by a Credit Review department, which reports to the Audit Committee of the Board of Directors. The consultative role played by Credit Review with respect to line management and the Risk Policy Office was further enhanced during 1995, broadening the nature of counsel provided to lenders in the area of portfolio review. WHOLESALE LOAN PORTFOLIO 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 a family of industries that have common risk characteristics. This management process is reflected in the following chart, which illustrates each industry that exceeds 10% of total shareholders' equity. 16 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED CREDIT QUALITY - CONTINUED
WHOLESALE LOANS BY INDUSTRY - - --------------------------- At December 31, 1995 Outstandings % of - - -------------------- Plotting Points for a Graph as a % Outstandings - - --------------------------- of equity non-performing ------------- -------------- Non-bank Finance (a).............. 35.8 0.6 Communications.................... 33.8 - Retail Trade...................... 32.2 0.7 Depository Institutions........... 22.1 - Healthcare........................ 21.6 0.6 Trucking and Auto Leasing......... 19.5 0.4 Agri-finance...................... 17.5 0.4 Apparel Manufacturing............. 16.7 0.6 Real Estate Construction.......... 15.4 1.9 Chemical.......................... 13.7 0.7 Automobile Dealers................ 13.1 0.3 Paper Manufacturing............... 12.6 -
_____________ (a) Includes insurance, mortgage, mutual funds and finance companies. The discussion below highlights the following wholesale portfolios: retailing and apparel because of the challenges in these industries today; the Congress Financial portfolio, because of the continued growth in the commercial finance segment; the international financial institutions portfolio, as this is a significant growth business; and real estate loans, due to the overall size of the combined commercial and residential portfolios. Retailing and Apparel - This specialized lending, which includes the retail trade, apparel manufacturing and food retailing industries, is directed to local, regional and national retailing chains and apparel manufacturing. Credit extensions are a major part of an overall product strategy to develop multi- faceted relationships and are primarily used to support customers' working capital requirements. Additionally, emphasis is placed on providing short-term trade letters of credit to customers who purchase product off-shore. The largest concentrations in the portfolio are in apparel retailing and manufacturing, food retailing, specialty stores and general merchandise. Furthermore, the challenges in these industries today present an excellent growth opportunity for Congress Financial. The following table summarizes CoreStates' outstandings in retailing and apparel at December 31, 1995 and 1994.
RETAILING AND APPAREL - - --------------------- At December 31, (in millions) 1995 1994 -------------------------------------- ------------------------------------- NON- % OF Non- % of OUTSTANDINGS PERFORMING LOANS Outstandings performing loans ------------ ---------- ----- ------------ ---------- ----- Congress Financial, various (a)...... $ 647.1 $3.0 0.5% $ 663.3 $ 6.4 1.0% Apparel.............................. 212.2 1.8 0.8 213.5 32.2 15.1 Food Retailing....................... 124.8 0.5 0.4 137.7 8.5 6.2 Specialty Stores..................... 84.5 2.9 3.4 67.4 3.4 5.0 General Merchandise.................. 48.9 - - 67.2 0.3 0.4 Miscellaneous Retail................. 173.4 0.4 0.2 134.6 0.9 0.7 -------- ---- -------- ----- Total............................ $1,290.9 $8.6 0.7 $1,283.7 $51.7 4.0 ======== ==== ======== =====
_____________ (a) Includes commercial finance outstandings of $173.9 million and factoring receivables of $473.2 million at December 31, 1995; comparable amounts at December 31, 1994 were $119.8 million and $543.5 million, respectively. 17 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED CREDIT QUALITY - CONTINUED CONGRESS FINANCIAL - Congress Financial's loan portfolio is a combination of factoring receivables and commercial finance, a significant growth business. The commercial finance portfolio continued to experience strong, geographically diverse growth, increasing 16.3% on a year-to-year basis. Credit quality continues to be consistent with Congress Financial's lending philosophy and historical trends. The ability to structure and syndicate large, complex transactions primarily collateralized by accounts receivable and inventory, remains a mainstay of Congress Financial's loan growth.
CONGRESS FINANCIAL PORTFOLIO - - ---------------------------- At December 31, - - --------------- (in millions) 1995 1994 -------- -------- Commercial finance portfolio: Loans......................... $2,068.4 $1,778.7 Non-performing................ 11.4 16.9 % of loans plus OREO......... 0.6% 0.9% Factoring receivables (a)...... $ 557.3 $ 622.4
________________ (a) There were no non-performing factoring receivables at December 31, 1995 and 1994. INTERNATIONAL FINANCIAL INSTITUTIONS - Lending activities within International Financial Institutions consist principally of dollar-denominated short-term, trade-related credit transactions aimed at enhancing CoreStates' cash management-based relationships with correspondents worldwide. Exposure (which is defined as time balances, loans outstanding, bankers acceptance and letters of credit) in International Financial Institutions at December 31, 1995 and 1994 was distributed geographically as follows (in millions):
1995 1994 -------------------- ----------------- % OF % of EXPOSURE TOTAL Exposure total -------- ----- -------- ----- Europe................. $1,120.8 39% $1,290.0 56% Asia................... 1,016.6 35 515.1 22 Americas............... 681.1 24 453.0 20 Middle East............ 73.3 2 35.0 2 -------- --- -------- --- Total exposure.... $2,891.8 100% $2,293.1 100% ======== === ======== ===
CoreStates' financial analysis focuses on the performance of individual institutions (liquidity, profitability, asset quality, capitalization, management and ownership), the unique attributes of individual markets (banking regulations, central bank support, the domestic economic and political context, balance of payment flows and reserve levels) and the interdependencies of those markets. In higher risk markets, CoreStates' exposure is mitigated through insurance or guarantees of the U.S. Export-Import Bank. The increase in Asia and the Americas was due to the improved political and economic situations in some countries, as well as a concerted and focused marketing effort through our Asian branch network. The following table summarizes CoreStates' exposure by type to international financial institutions at December 31, 1995 and 1994. There were no non- performing loans for the periods presented. 18 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED CREDIT QUALITY - CONTINUED
INTERNATIONAL FINANCIAL INSTITUTIONS' EXPOSURE - - ---------------------------------------------- At December 31, - - --------------- (in millions) 1995 1994 -------- -------- Time deposits............ $1,538.8 $1,396.0 Acceptances.............. 510.3 261.1 Loans outstanding........ 535.3 395.0 Letters of credit........ 307.4 241.0 -------- -------- Total.................. $2,891.8 $2,293.1 ======== ========
REAL ESTATE LOANS - Although continuing to improve, the regional real estate market in which CoreStates operates is still experiencing some problems, particularly in the commercial segment. In this segment, tenant downsizing continues to plague the office building market raising particular concern with current and future office building usage and values. Also, the retail sector continues to require close monitoring due to problems in the retail industry. In the residential market, although home sales leveled off in late 1995 after a surge in mid-year, sales continue at a sufficient pace and the multi-family market continues to be strong. Total real estate related loans outstanding were $5,516 million at December 31, 1995, compared to $6,491 million at December 31, 1994. The decline from year-end 1994 was principally due to the sale of residential mortgage loans. Included within the broad classification of real estate loans are a number of different lending categories with distinctly different risk factors and performance. The construction and development loan portfolio was $367 million or 1.7% of total loans at December 31, 1995. At December 31, 1995, 2.2% of CoreStates' construction and development loan portfolio was non-performing, compared to 1.6% for the remaining real estate loan portfolio. The table below summarizes CoreStates' real estate loans outstanding.
REAL ESTATE LOANS - - ----------------- At December 31, Completed - - --------------- projects/ Total (in millions) Construction/ investment real development properties (a) Residential Other (b) estate ----------- -------------- ----------- --------- --------- 1995 - - ---- Year-end outstandings.............. $ 367 $ 800 $2,572 $1,777 $5,516 Average loans outstanding.......... 340 933 2,751 1,870 5,894 Non-performing loans............... 8 5 29 47 89 % of year-end loans.............. 2.2% 0.6% 1.1% 2.6% 1.6% Net charge-offs.................... $ 1 $ 10 $ 9 $ 9 $ 29 % of average loans............... 0.2% 1.1% 0.3% 0.5% 0.5% 1994 - - ---- Year-end outstandings.............. $ 331 $1,021 $3,180 $1,959 $6,491 Average loans outstanding.......... 341 1,195 2,912 1,817 6,265 Non-performing loans............... 11 33 37 48 129 % of year-end loans.............. 3.2% 3.2% 1.2% 2.5% 2.0% Net charge-offs.................... $ 10 $ 32 $ 25 $ 46 $ 113 % of average loans............... 2.9% 2.7% 0.9% 2.5% 1.8%
_______________________ (a) Completed projects/investment properties included $214 million at December 31, 1995 related to loans on completed projects for which net rental receipts are not sufficient to cover 115% of debt service. (b) Principally commercial loans secured by owner-occupied real estate. 19 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED CREDIT QUALITY - continued The largest category within real estate loans is residential mortgages, which includes home equity loans of $1,465 million and multi-family residential mortgages of $82 million. Total residential mortgages were $2,572 million or 12.2% of total loans at December 31, 1995. Loans in the Other real estate loans category, primarily commercial loans collateralized by owner-occupied real estate, accounted for 32.2% of total real estate loans and 8.4% of total loans. Another key to risk management in this portfolio is diversification by project type. The following table illustrates CoreStates' construction and development portfolio and completed projects/investment properties portfolio by project type. CONSTRUCTION/DEVELOPMENT AND COMPLETED PROJECTS/INVESTMENT PROPERTIES - - --------------------------------------------------------------------- LOANS OUTSTANDING BY PROJECT TYPE - - --------------------------------- At December 31, (in millions)
Construction/ Completed projects/ development investment properties Total ------------------------- ---------------------------- --------------------------- Loans % Non- Loans % Non Loans % Non 1995 outstanding performing outstanding performing outstanding performing - - ---- ----------- ---------- ------------- ----------- ------------ ----------- Residential development.................. $149.3 2.6% $ 149.3 2.6% ------ -------- Commercial: Land and site development.............. 41.6 - 41.6 - Apartments............................. 1.3 - $ 114.8 0.2% 116.1 0.2 Light industrial....................... 14.2 19.0 92.2 - 106.4 2.5 Hotels................................. - - 21.0 6.7 21.0 6.7 Office buildings....................... 34.1 - 279.6 0.5 313.7 0.4 Shopping centers....................... 31.0 - 211.3 0.2 242.3 0.2 Miscellaneous.......................... 95.2 0.2 80.8 1.6 175.9 0.9 ------ -------- -------- Total commercial.................... 217.3 1.3 799.7 0.6 1,017.0 0.7 ------ -------- -------- Total........................... $366.6 1.9 $ 799.7 0.6 $1,166.3 1.0 ====== ======== ======== 1994 - - ---- Residential development................... $197.4 3.7% $ 197.4 3.7% ------ -------- Commercial: Land and site development.............. 58.8 2.0 58.8 2.0 Apartments............................. 0.9 - $ 111.8 1.8% 112.7 1.8 Light industrial....................... 11.2 18.8 149.2 6.8 160.4 7.6 Hotels................................. - - 25.2 9.1 25.2 9.1 Office buildings....................... 6.4 - 352.3 2.4 358.7 2.3 Shopping centers....................... 1.7 - 242.3 0.9 244.0 0.9 Miscellaneous.......................... 55.0 0.4 140.0 5.8 195.0 4.3 ------ -------- -------- Total commercial.................... 134.0 2.5 1,020.8 3.2 1,154.8 3.1 ------ -------- -------- Total........................... $331.4 3.2 $1,020.8 3.2 $1,352.2 3.2 ====== ======== ========
Geographically, $1,115.8 million or 96% of CoreStates' construction/development loans and completed projects/investment properties at December 31, 1995 are financing real estate in CoreStates' market area of Pennsylvania, New Jersey and Maryland/Delaware. 20 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED CREDIT QUALITY - continued CONSUMER LENDING PORTFOLIO Consumer loan outstandings (excluding credit card) decreased by $97.5 million or 2.7% from year-end 1994 and 1.0% on average. The declines primarily reflect sales of approximately $87 million of student loans and approximately $136 million of home equity loans on the secondary market. The home equity loans were sold for asset and liability management purposes. Net loan charge-offs as a percentage of the average portfolio outstandings increased from 23 basis points in 1994 to 38 basis points in 1995. Although higher in 1995, net credit losses in this portfolio are below the average of our competitors. This is an indication of the fundamental strength of CoreStates' credit policies and ability to identify and mitigate risk factors in these retail loan products. CONSUMER LENDING PORTFOLIO - - -------------------------- At December 31, - - --------------- (in millions)
1995 1994 -------- -------- Year-end outstandings: Home equity.................. $1,465.2 $1,534.6 Indirect installment......... 857.0 891.8 Direct installment........... 474.4 495.0 Auto leasing................. 737.6 710.3 -------- -------- Total....................... $3,534.2 $3,631.7 ======== ======== Average loans outstanding........ $3,463.8 $3,499.6 Net charge-offs.................. 13.1 8.1 % of average loans............ 0.38% 0.23%
CREDIT CARD PORTFOLIO - - --------------------- At December 31, - - --------------- (in millions)
1995 1994 -------- -------- Year-end outstandings............ $1,546.9 $1,374.6 Average loans outstanding........ 1,472.0 1,277.0 Net charge-offs.................. 54.3 29.3 % of average loans............ 3.7% 2.3%
Credit card outstandings increased 12.5% from $1,374.6 million at 1994 year end to $1,546.9 million at 1995 year end. Average balance per active account increased by 14.9% to $2,547. Beginning in the fall of 1994, marketing campaigns shifted from pre-approved to invitations-to-apply, to further control risk within the portfolio. Economic conditions have negatively impacted credit card delinquency, bankruptcy and credit losses. Net charge-offs have increased to 3.7% of average loans, which is consistent with industry averages. CoreStates' credit policies and procedures related to the credit card portfolio have been strengthened in anticipation of the economic slowdown. 21 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED CREDIT QUALITY - CONTINUED ALLOWANCE FOR LOAN LOSSES In CoreStates' methodology for determining appropriate levels of allowance for loan losses ("ALLL"), each subsidiary which extends credit maintains an allowance sufficient to absorb the anticipated loss inherent in its credit portfolio. Factors included in management's determination of an adequate level of ALLL are a statistical analysis of historical loss levels throughout an economic cycle and one year of projected charge-offs, establishing a minimum level below which a bank's ALLL is considered inadequate and a maximum level above which is considered inappropriate. A quarterly evaluation of loss potential on specific credits, products, industries, portfolios and markets as well as indicators for loan growth, the economic environment and concentrations assist in validating the position of the ALLL within those boundaries. Management's evaluation of the adequacy of the ALLL is independently tested by Credit Review. Prompt recognition of problem situations and prompt write-downs of these assets to net realizable value is an important source of protection against problems in the portfolio. Accordingly, over an economic cycle, CoreStates has experienced relatively high levels of recoveries of prior charge- offs, recovering approximately 38% of prior year loan charge-offs in 1995 and approxiamtely 31% in 1994. 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. 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. The year-end 1995 allowance for loan losses totaled $495.1 million and represented 2.35% of loans. This compares with a loan loss allowance at year-end 1994 of $500.6 million, or 2.44% of loans. The December 31, 1995 and 1994 Salomon Brothers Superregional Bank Composites for allowance for loan losses as a percentage of loans were 2.16% and 2.40%, respectively. The allowance for loan losses at year-end 1995 was 341.8% of non-performing loans, an increase over the year-end 1994 coverage ratio of 203.3% and a reflection of the lower level of non-performing loans at year-end 1995. CoreStates' provision for loan losses in 1995 was $105.0 million, an increase of $3.1 million from the $101.9 million, excluding $145.0 million of Constellation and Independence merger-related provisions for losses on loans provided in 1994. The increase in the provision for losses on loans was in response to loan growth and higher charge-offs on credit card outstandings. Net loan charge-offs in 1995 were $110.6 million or 0.5% of average loans. Net charge-offs in 1994, excluding $103.1 million of loan charge-offs recorded in the second quarter of 1994 related to problem assets acquired with Constellation, were $117.8 million or 0.6% of average loans. During 1994, Constellation and Independence recorded provisions for loan losses of $120.0 million and $25.0 million, respectively, in connection with a change in strategy related to problem assets, and to conform their consumer lending charge-off policies to those of CoreStates. 22 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED CREDIT QUALITY - continued The following table reflects the distribution of 1995 and 1994 net charge- offs by loan type: DISTRIBUTION OF NET CHARGE-OFFS - - ------------------------------- For the Year Ended December 31, - - -------------------------------
(in millions) 1995 1994 ---------------------------------- ---------------------------------- % OF % of TOTAL Total NET % OF NET Net % of net CHARGE- AVERAGE CHARGE- charge- Average charge- Loan type OFFS LOAN TYPE OFFS offs loan type offs - - --------- ------- --------- ------- ------- --------- ------- Domestic: Commercial and industrial................. $ 13.9 0.1 % 12.6 % $ 75.1 0.9% 34.0% Real estate: Construction................... 0.7 0.2 0.6 9.7 2.9 4.4 Other.......................... 28.2 0.5 25.5 102.9 1.7 46.6 Consumer: Credit card.................... 54.3 3.7 49.1 29.3 2.3 13.3 Installment.................... 10.5 0.8 9.5 5.8 0.4 2.6 Other (a)........................ 3.3 0.2 3.0 0.7 - 0.3 ------ ------ ------ ----- Total domestic............... 110.9 0.6 100.3 223.5 1.2 101.2 Foreign........................... (0.3) - (0.3) (2.6) (0.4) (1.2) ------ ------ ------ ----- Total net charge-offs......... $110.6 0.5 100.0 % $220.9 1.1 100.0% ====== ====== ====== =====
___________________________ (a) Includes loans to financial institutions and lease financing. NON-PERFORMING ASSETS Non-performing assets at year-end 1995 were $171.5 million, or 0.8% of total loans plus other real estate owned ("OREO") and 0.6% of total assets. These levels compared to total non-performing assets at year-end 1994 of $310.9 million, 1.5% of total loans plus OREO and 1.1% of total assets. At year-end 1995, total non-performing assets were comprised of $143.2 million of non-accrual loans, $1.6 million of renegotiated loans and $26.7 million of OREO. The $139.4 million, or 44.8%, decline in total non-performing assets as compared to year-end 1994 was principally experienced in CoreStates' two largest portfolios; the commercial loan portfolio, declining $35.1 million, or 40.3%, and the real estate portfolio which declined $78.4 million, or 40.5%. Most of the decline in non-performing assets in these two portfolios was attributable to improved credit quality and the receipt of payment against two large non-performing credits. CoreStates monitors the movements within the non-performing portfolio closely. The following table illustrates the components of the changes in non- performing assets during 1995, 1994 and 1993: 23 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED CREDIT QUALITY - continued CHANGES IN NON-PERFORMING ASSETS - - -------------------------------- (in millions)
1995 1994 1993 ---- ---- ---- Balance January 1,........... $ 311 $ 439 $ 672 Additions.................... 170 393 247 Return to accrual............ (12) (53) (83) Payments..................... (224) (226) (236) Charge-offs.................. (73) (242) (161) ----- ----- ----- Net change................... (139) (128) (233) ----- ----- ----- Balance December 31,....... $ 172 $ 311 $ 439 ===== ===== =====
The following table reflects the distribution of non-performing assets by loan type at December 31, 1995 and 1994:
DISTRIBUTION OF NON-PERFORMING ASSETS - - ------------------------------------- At December 31, - - --------------- (in millions) 1995 1994 ----------------------------------- ------------------------------- % OF % TOTAL % of % Total NON- LOAN NON- Non- Loan non- Loan type PERFORMING TYPE PERFORMING performing type performing - - --------- ----------- ----- ----------- ----------- ----- ----------- Domestic: Commercial and industrial............. $ 52.1 0.5% 30.3% $ 87.2 1.0% 28.1% Real estate: Construction....................... 8.0 2.2 4.7 10.7 3.2 3.4 Other loans........................ 80.5 1.6 46.9 118.2 1.9 38.0 OREO............................... 26.7 - 15.6 64.7 - 20.8 Consumer............................... - - - 0.7 - 0.2 Other domestic loans (a)............... 4.2 0.2 2.5 29.2 2.1 9.4 ------ ----- ------ ----- Total domestic..................... 171.5 0.9 100.0 310.7 1.6 99.9 Foreign loans.......................... - - - 0.2 - 0.1 ------ ----- ------ ----- Total non-performing assets (b).... $171.5 0.8 100.0% $310.9 1.5 100.0% ====== ===== ====== ===== % of total assets.................. 0.6% 1.1 % === ===
________________________ (a) Includes loans to financial institutions and lease financing. (b) The table does not include loans of $59 million and $53 million at December 31, 1995 and 1994, respectively, that are past due 90 days or more as to principal or interest, but which remain on full accrual since such loans are well secured and in the process of collection. Non-performing assets at year-end 1994 declined $127.8 million, or 29.1%, as compared to year-end 1993. The 1994 decline primarily reflected decreases in non-performing assets in the real estate portfolio which declined $119.4 million or 38.1%. Much of the decline in real estate non-performing assets resulted from a $28 million addition to the Constellation OREO reserve in the first quarter of 1994 and the subsequent bulk sale of problem loans and OREO acquired with Constellation. 24 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED ASSET AND LIABILITY MANAGEMENT Asset and liability management is the process of directing and coordinating activities that effectively control liquidity and interest rate risk. CoreStates' philosophy includes a disciplined approach to asset and liability management which calls for minimizing interest rate risk, maintaining a strong balance sheet and a focus on achieving appropriate product spreads. This disciplined approach contributes to the stability and strength of CoreStates' net interest margin. CoreStates' asset and liability management is centralized and individual subsidiaries are managed within the context of overall corporate policies. CoreStates' management emphasizes stable net interest income throughout rate cycles, with the result that intermediate and longer term considerations take precedence over short-term profitability. This commitment is evidenced by the consistency of CoreStates' net interest margin over time. During the past five years, a period of significant changes in economic conditions, competition and interest rates, CoreStates' net interest margin has remained consistently above industry averages as illustrated in the chart "Net Interest Margin". Net Interest Margin - - ------------------- Plotting Points for a Graph - - --------------------------- (In percent)
Net interest margin -------------------------- Superregional CoreStates Composite * ---------- ------------- 1995 5.97% 4.62% 1994 5.80 4.72 1993 5.59 4.86 1992 5.32 4.82 1991 5.16 4.45
* The Salomon Brothers Superregional Bank Composite CoreStates' net interest margin reflects relationship business activities rather than interest rate risk taking. The strength of CoreStates' net interest margin comes from the combination of healthy spreads on both loans and deposits and a balance sheet which has a relatively high portion of loans and a large base of non-interest bearing funds. (See Charts "Earning Asset Mix" and "Funding Mix" on pages 36.) Areas of business such as credit card, middle market lending, specialized lending and commercial finance at Congress Financial produce attractive lending spreads. CoreStates' cash management business provides a significant source of non-interest bearing funds, while the retail franchise includes a substantial base of low cost funding. Emphasis on profitable relationship business is supported by CoreStates' management practices. CoreStates uses a matched maturity funds transfer pricing system which focuses business managers on profitability, appropriate compensation for embedded risks and overall pricing discipline. In addition to providing a pricing tool, transfer pricing supports performance measurement and analysis of net interest margin components. 25 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED ASSET AND LIABILITY MANAGEMENT - continued INTEREST RATE RISK MANAGEMENT Interest rate risk refers to potential changes in current and future net interest income resulting from changes in interest rates, product spreads and mismatches in the repricing between interest rate sensitive assets and liabilities. At CoreStates, measurement of near term interest rate risk focuses on potential changes in net interest income identified through computer simulations against both rising and falling interest rates. Longer term repricing risks are measured using potential changes in the present value of future income streams inherent in current positions. Gap analysis is used to manage strategy execution. All measurements of interest rate risk include the impact of off-balance sheet activities. Under CoreStates' policy, rate changes of at least 200 basis points in either direction over a six-month period are simulated with rate related negative net interest income volatility over a twelve-month horizon limited to 4% of shareholders' equity. Changes are measured relative to a base forecast in which rates remain constant at current levels. Based on historical data, 95% of the time rates have moved less than 200 basis points over a six-month period. Included in these simulations are all contractual repricing risks, the impact of prepayments in the loan and securities portfolios, potential spread and volume changes on consumer deposits and fluctuations in the value of non-interest bearing funding sources. CoreStates believes that the spread between the prime rate and financial market rates is a function of both interest rates and credit conditions. While changes in the prime spread are included in simulations, only that portion believed to be interest rate related is subject to the policy guidelines. Estimated changes in the present value are based on a 200 basis point parallel shift of the yield curve and negative changes are limited to 10% of equity. As a matter of practice, positions are generally managed to produce significantly lower volatility than policy guidelines would permit. Current net interest income simulations using a 200 basis point change in short term interest rates show that CoreStates' net interest income volatility over the next twelve months would be relatively neutral or less than 1% of shareholders' equity. That level is representative of simulations performed throughout the year. Recognizing that the simulation process is based on a variety of assumptions, management reviews results by category of risk as well as by product and tests the sensitivity of the results to key assumptions. There are two main elements to CoreStates' interest rate risk. The first is the broad mismatch between the rate sensitivity of the assets and liabilities in its core businesses, and the second is the spread risk between the rates on those products and financial market rates. CoreStates' core wholesale and retail businesses generate a large portfolio of prime and other short-term rate related assets. Characteristic of a regional banking company, CoreStates also has a significant funding base of consumer deposits with indefinite maturities and non-contractual rates such as savings, NOW and money market accounts. The repricing characteristics of those deposits tend to be longer term; traditionally, pricing has been relatively stable for long periods and pricing changes lag changes in financial market rates. While this mix of relationship assets and liabilities provides excellent liquidity, it results in considerable interest rate risk. This inherent mismatch (the "relationship gap") of longer term fixed-rate liabilities funding short-term rate sensitive assets generates significant exposure to declining interest rates if not hedged. CoreStates hedges this relationship gap through the use of both on and off- balance sheet discretionary assets and liabilities. The typical offsetting position is created by purchasing fixed-rate investment securities funded by short-term liabilities, or by entering into interest rate swaps in which CoreStates receives a fixed rate and pays a variable rate. The following excerpts from the Interest Sensitivity Analysis shown on page 94 demonstrates the basic mismatch of the relationship portfolios and the offsetting discretionary position. In keeping with CoreStates' interest rate risk discipline, the combined position is relatively balanced so that there is minimal impact on earnings from an interest rate move in either direction. 26 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED ASSET AND LIABILITY MANAGEMENT - continued
SELECTED INTEREST SENSITIVITY BALANCES - - -------------------------------------- At December 31, 1995 - - -------------------- (in millions) Months Years ------------------------------- ------------------------------ 0-3 4-6 7-12 1-2 2-5 over 5 Total ---- ---- ---- ---- ---- ------ ------- RELATIONSHIP PORTFOLIOS: Total loans......................... $15,031 $ 1,240 $ 1,077 $ 1,432 $ 1,871 $ 396 $21,047 Total consumer deposits, net non- interest funding.............. 6,800 1,516 2,732 2,271 2,950 4,068 20,337 Adjustments......................... 727 (726) (586) (655) (1,977) 3,217 0 ------- ------- ------- ------- ------- ------ ------- Relationship gap.................. 8,958 (1,002) (2,241) (1,494) (3,056) (455) 710 ------- ------- ------- ------- ------- ------ ------- DISCRETIONARY PORTFOLIOS: Assets.............................. 2,906 1,390 2,480 1,576 3,227 1,039 12,618 Liabilities......................... 11,738 402 248 74 236 630 13,327 ------- ------- ------- ------- ------- ------ ------- Discretionary gap................. (8,832) 988 2,232 1,502 2,991 409 (710) ------- ------- ------- ------- ------- ------ ------- Combined gap...................... $ 126 $ (14) $ (9) $ 8 $ (65) $ (46) $ 0 ======= ======= ======= ======= ======= ====== ======= Cumulative gap.................... $ 126 $ 112 $ 103 $ 111 $ 46 $ 0 $ 0 ======= ======= ======= ======= ======= ====== =======
The second major element of CoreStates' interest rate risk is the spread risk between product rates and financial market rates. These spreads are a function of competitive and other factors as well as interest rate levels. CoreStates simulates the behavior of individual products under various rate scenarios to determine an appropriate investment or funding strategy to provide a stable spread. Consumer deposit spreads are a key element of net interest income. Rates on savings and similar products have not risen as much as other financial market rates, suggesting less room to lower rates if market rates decline. During 1995, deposit balances shifted from more liquid products to certificates and non-bank alternatives with higher rates. Looking ahead, the spread on total consumer deposits is subject to continued internal shifting to products with narrower spreads such as certificates, balance runoff and potential pricing pressure on liquid deposit accounts. Simulations include assumptions regarding runoff, shifting across products as well as upward repricing of savings type accounts in rising rate scenarios. Narrower spreads are generally assumed in falling rate environments due to limited repricing opportunities. Those assumptions are developed in conjunction with the business managers and, while management believes its current simulation assumptions are realistic, it recognizes that this is an area of potential volatility. The spread between the prime rate and short-term market rates, such as LIBOR, is also an important component of net interest income. That spread has widened over the last several years compared to historic levels. While the risk of a narrowing of the prime spread is not unique to CoreStates, a contraction in that spread would reduce net interest income. CoreStates has approximately $7.3 billion in loans subject to changes in prime, excluding $1.5 billion in credit card outstandings which historically have been priced with a prime-related formula. CoreStates currently is in the process of revising the basis for pricing credit cards from prime to LIBOR, to reduce exposure to the prime spread. 27 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED ASSET AND LIABILITY MANAGEMENT - continued OFF-BALANCE SHEET INSTRUMENTS AND DERIVATIVE ACTIVITIES - CoreStates uses off- balance sheet derivative instruments primarily to manage CoreStates' interest rate risk. CoreStates believes that interest rate risk management must be coordinated with the management of liquidity and capital. Therefore, CoreStates uses off-balance sheet instruments to modify its rate sensitivity and consequently, avoids the unnecessary leverage and liquidity impairment which would result from on-balance sheet alternatives. CoreStates also uses interest rate contracts to provide risk management services for its customers. CoreStates does not use off-balance sheet derivative instruments for speculative investment. Credit risk exists in a derivative transaction to the extent that there is a favorable move in interest rates and the counterparty fails to perform. The current credit exposure in a derivative transaction is the estimated cost to replace the transaction at current market rates, while potential exposure is the estimated cost to replace the transaction at future interest rates. CoreStates monitors both the current and potential risk. CoreStates evaluates the credit worthiness of all off-balance sheet counterparties using the same standards applied in any other loan or credit transaction. In addition, CoreStates requires collateral from counterparties when the risk exceeds an acceptable threshold. Collateral agreements are determined based on the quality of individual counterparties. As of December 31, 1995, the current cost to replace CoreStates' derivatives portfolio was $236 million. This assumes that only counterparties for whom it would be favorable to default would do so. INTEREST RATE RISK RELATED DERIVATIVE ACTIVITIES - CoreStates' use of derivatives for interest rate risk management falls into three categories: interest sensitivity adjustments, spread protection and the hedging of anticipated asset sales. The following schedule reflects by interest rate risk management category, the outstanding derivative positions as of December 31, 1995, the major balance sheet category to which they relate, and the associated unrealized gains/losses: 28 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED ASSET AND LIABILITY MANAGEMENT - continued
OUTSTANDING INTEREST RATE RISK RELATED DERIVATIVES - - -------------------------------------------------- At December 31, 1995 INTEREST INTEREST INTEREST - - -------------------- (in millions) RATE RATE RATE CAPS OTHER SWAPS FUTURES AND FLOORS DERIVATIVES TOTAL ------ ------- ---------- ----------- ----- Interest Sensitivity Adjustment: Assets (primarily loans): Notional amount........................ $3,115 $619 $ 10 $3,744 Unrealized gains....................... 117 1 118 Unrealized losses...................... (1) (1) Deposits and other borrowings: Notional amount........................ 3,762 3,762 Unrealized gains....................... 72 72 Unrealized losses...................... (5) (5) Long-term debt: Notional amount........................ 589 25 614 Unrealized gains....................... 24 24 Unrealized losses...................... (8) (8) Spread Protection: Assets (primarily loans) Notional amount........................ 426 426 Unrealized gains....................... 2 2 Unrealized losses...................... (1) (1) Deposits and other borrowings: Notional amount........................ 100 100 Unrealized gains....................... 1 1 Unrealized losses...................... Anticipated Asset Sales: Notional amount........................ 75 $106 181 Unrealized gains....................... Unrealized losses...................... (1) (2) (3) Total: Notional amount........................ $7,541 $619 $561 $106 $8,827 ====== ==== ==== ==== ====== Unrealized gains....................... $ 213 $ 1 $ 3 $ - $ 217 ====== ==== ==== ==== ====== Unrealized losses...................... $ (15) $ - $ (1) $ (2) $ (18) ====== ==== ==== ==== ====== Net unrealized gains (losses).......... $ 198 $ 1 $ 2 $ (2) $ 199 ====== ==== ==== ==== ======
Although the value of the various derivative instruments will change with interest rates, CoreStates does not consider changes in individual portfolio values to be significant given that the portfolios are used to offset specific risks. As of December 31, 1995, CoreStates' use of off-balance sheet derivative instruments which carry a leveraged exposure to either rising or falling rates or have other complex features is not material. 29 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED ASSET AND LIABILITY MANAGEMENT - continued Interest sensitivity adjustments account for the majority of CoreStates' derivative activities. CoreStates has a naturally asset sensitive balance sheet as a result of its basic loan and deposit businesses. Commercial and consumer loan activities tend to have short-term repricing characteristics versus the longer term repricing nature of CoreStates' funding sources. These relationship portfolios have a positive effect on earnings in a rising rate environment and a negative effect in a falling rate environment. Therefore, CoreStates uses fixed rate assets or off-balance sheet instruments with characteristics similar to fixed rate assets to offset this risk. When off-balance sheet instruments are used, cash balances are invested in shorter time periods and interest rate swaps or other derivatives are used to "fix" the rate for longer terms similar to those of CoreStates' liabilities. By using swaps and futures in this manner, leverage is reduced and liquidity is enhanced. If derivative instruments were not used, CoreStates would invest in longer term assets based on its disciplined interest rate risk management practice of strict matching of asset and liability terms. Therefore, the impact of derivatives on pre-tax income is confined to the spread between the derivative instrument and other instruments of similar terms. Management estimates that this spread is not material relative to pre- tax income. CoreStates also uses derivative instruments to protect spreads on certain balance sheet products. CoreStates' loan and securities portfolios include adjustable rate mortgages which carry interest rate caps limiting the amount of rate increase per year as well as over the life of the mortgage. As interest rates rise and funding costs increase, the spread on that portfolio will compress. CoreStates holds $326 million of interest rate caps which offset that risk by limiting the potential increase in funding costs. For accounting purposes, the income effects of futures or swaps used to adjust interest sensitivity or to protect a product spread are associated with either the asset or the liability being managed. The amount recorded in net interest income related to derivative financial instruments was $41.3 million in 1995 and $82.1 million in 1994. The following table shows the impact of derivatives income on average interest rates: IMPACT OF DERIVATIVES INCOME ON YIELDS AND COSTS - - ------------------------------------------------
For the Years Ended December 31, 1995 1994 ----------------------------------------------- ------------------------------------------- (in millions) REPORTED IMPACT Reported Impact AVERAGE YIELD/ PRODUCT OF Average Yield/ Product of BALANCE COST RATE DERIVATIVES Balance Cost Rate Derivatives -------- -------- ------- ----------- ------- -------- ------- ------------ EARNING ASSETS Time deposits........................ $ 1,843 6.33% 6.33% $ 1,520 4.37% 4.37% Federal funds sold & trading account............................ 231 6.31 6.31 168 4.72 4.72 Investment Securities................ 2,367 6.11 5.96 0.15% 3,014 5.50 5.53 (0.03)% Loans................................ 20,770 9.65 9.56 0.09 19,601 8.73 8.59 0.14 ------- ------- TOTAL EARNING ASSETS................. $25,211 9.04 8.95 0.09 $24,303 8.02 7.92 0.10 ======= ======= INTEREST BEARING FUNDS Savings, NOW, regular MMA............ $ 6,028 1.81 1.94 (0.13) $ 6,653 1.17 1.75 (0.58) Premium MMA.......................... 2,143 3.92 3.92 - 2,140 2.89 2.89 - Certificates......................... 5,529 5.17 5.33 (0.16) 4,361 4.28 4.36 (0.08) ------- ------- Total retail...................... 13,700 3.47 3.59 (0.12) 13,154 2.48 2.80 (0.32) ------- ------- Commercial & foreign deposits........ 1,191 4.78 4.97 (0.19) 1,073 3.58 3.63 (0.05) Federal funds purchased & short-term borrowings.............. 2,073 5.77 5.75 0.02 1,928 4.42 4.42 - Long-term debt....................... 1,814 6.69 6.71 (0.02) 1,657 5.54 6.32 (0.88) ------- ------- Total wholesale................... 5,078 5.87 5.91 (0.04) 4,658 4.59 4.92 (0.33) ------- ------- TOTAL INTEREST BEARING FUNDS......... $18,778 4.12 4.22 (0.10) $17,812 3.03 3.35 (0.32) ======= =======
30 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED ASSET AND LIABILITY MANAGEMENT - continued It is important to note that derivatives usage, its impact on individual balance sheet items and fluctuations in fair value should be viewed in the context of overall risk management. As previously stated, if CoreStates did not use derivatives, it would adjust cash positions to create the same interest sensitivity position with approximately the same income results. However, if cash transactions were used, the income of those activities would not be carried as an income adjustment to other balance sheet products. Fluctuations in the impact of derivatives shown on the above table are a function of market conditions and do not indicate changes in risk positions. The third category of derivative activity is the hedging of anticipated asset sales. As fixed rate assets are accumulated for future sale, CoreStates is exposed to a decline in sale price due to rising interest rates. Therefore, CoreStates will enter into an interest rate swap or a forward rate agreement which will increase in value if rates rise. The increased value on the derivative is used to offset the decline in value of the cash asset. Gains/losses on the derivative are deferred until the asset sale and recognized as part of the sale transaction. In 1995, CoreStates sold fixed rate mortgages; those sales were hedged primarily with fixed-pay mortgage swaps which amortized with a reference portfolio of mortgage-backed securities. These swaps were terminated as the mortgages were sold. CoreStates securitizes and sells its longer term fixed-rate home equity loans and fixed-rate mortgages on a recurring basis. Home equity loans are held for several months prior to sale while sufficient volume for securitization is accumulated. Forward rate locks are used to hedge rate changes during that warehouse period. Options on mortgage- backed securities as well as both mandatory and optional forward sale commitments are used to hedge the mortgage pipeline. Interest rate swaps are agreements between two parties to exchange interest cash flows. Generally, one party receives a fixed rate and pays a variable rate, while the counterparty pays the fixed rate and receives the variable rate. As of December 31, 1995, the rates CoreStates has contracted to receive are fixed for longer time periods than the rates CoreStates has contracted to pay. Therefore, if interest rates fall, this portfolio will provide higher interest income, offsetting a decline in interest income in relationship portfolios; conversely if rates rise, the swap portfolio will produce less interest income which will be offset by increased interest income in the relationship portfolios. CoreStates also uses interest rate futures in a similar manner. While swaps are used in both short and long term maturities, futures are used primarily to extend the rate sensitivity of short-term assets to periods less than one year. CoreStates' use of financial futures is largely concentrated in Eurodollar and LIBOR contracts. Given the direction of its natural interest sensitivity, CoreStates has not historically paid fixed rates on interest rate swaps or used off-balance sheet instruments to extend its liabilities. The repricing schedule below summarizes the notional amount and associated interest rate of CoreStates' interest rate swaps categorized by whether CoreStates receives or pays the rate shown. The swaps are stratified by repricing date or maturity depending on whether the payments are floating or fixed, respectively. Floating rates included in the repricing schedule are based on the rates in effect on December 31, 1995. 31 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED ASSET AND LIABILITY MANAGEMENT - continued REPRICING SCHEDULE OF INTEREST RATE SWAPS - - ----------------------------------------- At December 31, 1995 - - -------------------- (in millions)
YEARS ----------------------------------------------------------- 0-1 1-2 2-3 3-4 4-5 OVER 5 TOTAL --- --- --- --- --- ------ ----- Receive Fixed/Pay Floating: Receive Notional................ $2,646 $1,054 $ 774 $ 969 $ 605 $ 902 $6,950 Rate.................... 6.92% 6.62% 6.46% 7.11% 6.62% 7.08% 6.84% Pay Notional................ $6,950 $6,950 Rate.................... 5.96% 5.96% Pay Fixed/Receive Floating: Pay Notional................ $ 105 $ 20 $ 25 $ 150 Rate.................... 7.57% 8.60% 9.24% 7.99% Receive Notional................ $ 150 $ 150 Rate.................... 5.48% 5.48% Receive Floating/Pay Floating: (Basis Swaps) Notional................ $ 31 $ 31 Receive Rate.................... 4.77% 4.77% Pay Rate.................... 5.38% 5.38% Receive Fixed/Pay Floating(a): (Forward Start) Receive Notional................ $ 205 $ 30 $ 175 $ 410 Rate.................... 6.32% 6.38% 7.03% 6.62% Start Date Notional................ $ 260 $ 100 $ 50 $ 410
_____________________________________ (a) Pay rate will be determined on forward start date. 32 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED ASSET AND LIABILITY MANAGEMENT - continued The following schedule illustrates CoreStates' interest rate risk related derivative activity during 1995: ACTIVITY IN DERIVATIVES PRODUCTS - - -------------------------------- Year Ended December 31, 1995 - - ---------------------------- (in millions)
INTEREST INTEREST INTEREST RATE RATE RATE CAPS OTHER Notional Amounts SWAPS FUTURES AND FLOORS DERIVATIVES TOTAL - - ---------------- -------- -------- ---------- ----------- -------- As of December 31, 1994............. $ 7,850 $ 1,043 $1,053 $ 295 $10,241 Additions........................... 1,875 3,688 58 246 5,867 Terminated contracts(a)............. (580) (4,112) - (125) (4,817) Maturities/amortization............. (1,604) - (550) (310) (2,464) ------- ------- ------ ----- ------- As of December 31, 1995............. $ 7,541 $ 619 $ 561 $ 106 $ 8,827 ======= ======= ====== ===== =======
(a) As of December 31, 1995, CoreStates had no material deferred gains or losses related to terminated derivative contracts. CoreStates' use of off-balance sheet instruments declined during 1995. As various asset sales were consummated (primarily mortgage assets), the related interest rate swaps and/or other derivatives used to protect the sales value were terminated or allowed to expire. In addition, during the latter half of 1995, shifts in funding mix and increased loan volumes resulted in reduced need for fixed rate asset sensitivity. Therefore, matured swaps were not fully replaced and certain interest rate swaps were terminated. CUSTOMER RELATED DERIVATIVE ACTIVITIES - CoreStates also engages in derivative market activities to provide risk management services for its customers. These services include interest rate swaps, caps, and floors. CoreStates offsets protection sold to customers through purchases of similar protection. Customer related derivative activity is marked to market. The following schedule details the outstanding notional amounts and related fair values of customer related derivative transactions as of December 31, 1995 and 1994. CUSTOMER RELATED DERIVATIVES - - ---------------------------- At December 31, - - -------------- (in millions)
1995 1994 ------------------------------ -------------------------- NOTIONAL NET ASSETS Notional Net assets Interest Rate Swaps: AMOUNT (LIABILITY)(a) amount (liability)(a) -------- -------------- -------- -------------- CoreStates receives fixed................... $ 115 $ 1 $ 192 $(4) CoreStates pays fixed....................... 115 (1) 192 4 Rate Locks: CoreStates receives fixed................... 15 - - - CoreStates pays fixed....................... 15 - - - Interest Rate Caps/Floors: Sold........................................ 517 (1) 424 (5) Purchased................................... 517 1 424 5 Foreign exchange contracts.................... 1,660(b) 2(c) 1,817 2 ----- ---- ------ --- Total Customer Related Derivatives............ $2,954 $2 $3,049 $ 2 ====== ==== ====== ===
_______________________________ (a) Average net assets (liabilities) during 1995 and 1994 was substantially the same as the net assets (liabilities) at December 31, 1995 and 1994, respectively. (b) Foreign exchange contracts purchased and sold at December 31, 1995 were $834 million and $826 million, respectively. (c) Gross assets and (liabilities) on foreign exchange contracts at December 31, 1995 were $16 million and $(14) million, respectively. 33 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED ASSET AND LIABILITY MANAGEMENT - continued LIQUIDITY Liquidity management allows a financial institution to meet potential cash needs at a reasonable price under various operating conditions. Liquidity comes from a variety of sources: the maturing of short-term assets, readily marketable unpledged securities, and the ability to attract new funds. The ability to securitize or sell other assets, such as loans, also enhances liquidity, as does the structure and stability of existing funding sources. It is CoreStates' practice to maintain a high degree of liquidity through a strong funding base of core deposits combined with modest and diversified use of market sources and relatively short-term maturities of discretionary asset portfolios. CoreStates maintains sufficient liquidity to meet its obligations in a timely and cost-effective manner. Management monitors current and projected cash flows, and adjusts positions as necessary to maintain adequate levels of liquidity. CoreStates emphasizes diversification of funding sources. By using a variety of markets, limiting funds borrowed from a single investor, and staggering maturities, the risk of potential funding pressure is significantly reduced. Management also maintains a detailed liquidity contingency plan designed to adequately respond to situations such as a decline in asset quality or credit ratings, which could lead to liquidity concerns. Management analyzes potential changes in major funding sources during difficult times, the amount of runoff that may be expected, as well as available options to replace those funds. The plan includes specific action steps to be taken in the event of funding disturbances. The cornerstone of CoreStates' liquidity position is a sizable and stable base of core deposits acquired through customer relationships. Core deposits are comprised of interest-bearing consumer savings products as well as non-interest bearing consumer and commercial deposits. Core deposits averaged 68.6% of assets in 1995 compared to 69.7% in 1994. Core deposits are supplemented by discretionary funding sources from direct customer contacts in both the domestic and international markets. These sources include large denomination certificates of deposit, deposits in foreign branches as well as federal funds, repurchase agreements, commercial paper and long-term debt. Commercial paper is used primarily to fund Congress Financial. In addition to commercial paper, Congress Financial is funded through the issuance of medium-term notes and long-term debt. Growth in loans at Congress Financial during 1995 accounted for most of the growth in discretionary funding sources. At December 31, 1995, CoreStates had a $650 million revolving credit facility from unrelated banks. The facility was established in support of commercial paper borrowings, medium-term notes and general corporate purposes. There were no borrowings under this facility at year-end 1995. CoreStates' liquidity is further enhanced by its ability to raise funds in a variety of domestic and international money and capital markets. Under an existing shelf registration filed with the Securities and Exchange Commission ("the SEC"), CoreStates had a broad range of debt and capital securities that were registered but unissued of approximately $294 million at December 31, 1995. During 1995, approximately $430 million of debt having various terms and interest rates was issued under the shelf registration. Maturities and retirements of long-term debt during 1995 were approximately $520 million. A new shelf registration statement will be filed with the SEC in the first half of 1996 increasing registered but unissued debt and capital securities to $1.75 billion. The tables on pages 93, 95 and 96 illustrate the maturity characteristics of CoreStates' domestic certificates of deposit over $100 thousand, loan portfolio and investment portfolio, respectively. For information regarding the maturity characteristics of CoreStates' short-term funds borrowed and long-term debt, see notes 10 and 11 to the financial statements. 34 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED ASSET AND LIABILITY MANAGEMENT - continued INVESTMENT PORTFOLIO Within the context of the policies and practices previously outlined, CoreStates maintains a portfolio of marketable debt securities to contribute to a balanced interest rate risk position and to provide liquidity reserves. Interest rate risk management disciplines require strict matching of interest rate sensitivities and, therefore, CoreStates generally does not consider changes in the market value of individual portfolios as significant to the management of its interest sensitivity. The investment securities portfolio at December 31, 1995 consisted of investments held-to-maturity with a carrying value of $1,016 million and investments available-for-sale with a carrying value of $975 million, compared to $2,455 million and $426 million, respectively on December 31, 1994. Most of the decline in the investment portfolio from 1994 resulted from maturities. Late in 1995, the FASB permitted all institutions to reassess the appropriateness of the designation of investment securities as held-to-maturity, and reclassify such securities to available-for-sale. CoreStates reclassified $607 million in securities to available-for-sale. The net unrealized gain on the securities reclassified was $0.3 million, for a $0.2 million net of tax increase to shareholders' equity. The available-for-sale portfolio also includes a bank stock portfolio and other marketable equity securities. The accumulated net unrealized gain on available-for-sale securities was $35 million at December 31, 1995, compared to $11 million at December 31, 1994. The increase in the net unrealized gain was primarily due to the decline in interest rates and appreciation in the bank stock portfolio. SOURCES AND USES OF FUNDS Total assets were $29.6 billion at year-end 1995, an increase of $295 million, or 1.0% , from year-end 1994. The increase in year-end 1995 assets principally reflects the net $520 million, or 2.5%, growth experienced in the loan portfolio, particularly in asset-based loans at Congress Financial and credit card outstandings. Loan growth at banking subsidiaries was funded by maturities of investment securities, as the investment portfolio was reduced by $890 million, or 30.9%, from year-end 1994. The book value of loans sold during 1995 was approximately $750 million and was comprised of approximately $530 million of residential mortgages and $136 million of fixed-rate home equity loans. The impact of loan sales on results of operations was not material. Total deposits declined $538 million, or 2.4%, from year-end 1994. Domestic interest-bearing deposits declined $903 million, or 6.2%, from year-end 1994 principally as a result of merger-related attrition and the impact of lower interest rates. Domestic demand deposits increased $338 million, or 5.3%, reflecting a year-end 1995 increase in customer activity. The net decline in deposits was offset by loan sales, the decline in the investment portfolio and a $546 million, or 35.3%, increase in short-term borrowings. The increase in short-term borrowings was also used to fund loan growth at Congress Financial. 35 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED SOURCES AND USES OF FUNDS - continued Total assets averaged $28.4 billion in 1995, up $779 million, or 2.8%, from 1994. Average loans increased $1.2 billion, or 6.0%, while average investment securities decreased $647 million or 21.5%. As reflected in the chart on "Earning Asset Mix", loans comprised 82.4% of CoreStates' average earning assets in 1995, compared to 80.7% in 1994. A $664 million, or 4.7% increase in average interest bearing deposits resulted primarily from the GSB acquisition in December 1994. Earning Asset Mix - - ----------------- Plotting Points for a Graph - - --------------------------- (percentage of average earning assets)
Earning Asset Mix ------------------------------------------- Short-term money market Investment investments securities Loans ------------ ---------- ----- 1995 8.2% 9.4% 82.4% 1994 6.9 12.4 80.7 1993 6.4 14.8 78.8 1992 8.1 13.6 78.3 1991 6.5 12.6 80.9
The accompanying table on Funding Mix illustrates that 59.2% of CoreStates' funds were derived from consumer deposits in 1995, compared with 58.2% in 1994. Funding to accommodate current business needs and future growth at non-bank subsidiaries will continue to be supported by the previously discussed shelf registration. Funding Mix - - ----------- Plotting Points for a Graph - - --------------------------- (percentage of average earnings assets*)
Funding Mix -------------------------------------- Other Non- Retail Interest Interest Deposits Bearing Bearing -------- ------- ------- 1995 59.2% 13.0% 27.8% 1994 58.2 13.0 28.8 1993 59.3 13.3 27.4 1992 63.0 11.6 25.4 1991 58.3 21.1 20.6
* excluding short-term money market investments 36 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED REVIEW AND ANALYSIS OF EARNINGS OPERATING REVENUE Operating revenue has two primary sources, net interest income and non- interest income. On the accompanying chart ("Operating Revenue"), net interest income is presented excluding the earnings benefit of balances maintained by commercial customers as compensation for transaction oriented non-credit products. Non-interest income and the previously mentioned earnings benefit of balances maintained are presented separately. Net interest income and non- interest income are discussed in further detail on the following pages. OPERATING REVENUE - - ----------------- Plotting Points for a Graph - - --------------------------- (tax equivalent net interest income plus non-interest income-in millions)
Operating Revenue -------------------------------------- Derived Loan and from Non- Investment Non-credit Interest Interest Balances Income Total ----------- ---------- ------ ----- 1995 $1,346.4 $159.4 $605.7 $2,111.5 1994 1,262.5 148.1 567.5 1,978.1 1993 1,211.4 140.4 574.0 1,925.8 1992 1,160.7 122.8 610.7 1,894.2 1991 1,190.6 123.1 615.6 1,929.3
Operating revenue for 1995, as adjusted for significant an d unusual items, increased 6.0% over 1994, primarily due to a $95.2 million, or 6.7%, increase in total net interest income. The growth in net interest income for 1995 was primarily experienced in Consumer Financial Services, which experienced growth of 9.4%. The items excluded from the 1995 to 1994 operating revenue comparison were: a $19.0 million 1995 gain related to changes in CoreStates' investment in the EPS affiliate joint venture, a $7.4 million 1995 gain on the sale of the Corporate Trust business, a $1.9 million 1994 gain on the sale of two Virgin Islands branches, and investment securities gains in both years. Operating revenue for 1994 adjusted for significant and unusual items, experienced a 3.6% improvement over 1993, principally in the Wholesale Banking business. The items excluded from the 1994 to 1993 comparison were: a $1.9 million gain from the sale of two Virgin Islands branches in 1994, a gain of $9.1 million on the prepayment of long-term debt in 1993, an $11.0 million gain on the sale of five Virgin Islands branches in 1993, and net securities gains in both years. 37 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED NET INTEREST INCOME The largest source of CoreStates' operating revenue is net interest income. For analytical purposes, net interest income is adjusted to a taxable equivalent basis to recognize the income from tax exempt assets as if the interest were taxable. Net interest income on a taxable equivalent basis increased $95.2 million, or 6.7% in 1995, compared to an increase of $58.8 million, or 4.4% in 1994. The strength of CoreStates' net interest income and net interest margin stems from the combination of wide spreads on both loans and deposits and a balance sheet which has a relatively high portion of loans and a large base of non-interest bearing funding. The following table compares taxable equivalent net interest income for the years ended December 31, 1995, 1994 and 1993. Taxable Equivalent Net Interest Income - - -------------------------------------- For the Years Ended December 31, (in millions)
Percentage increase(decrease) ----------------- 1995 1994 1993 '95/'94 '94/'93 -------- -------- -------- ------- ------- Total interest income................. $2,262.4 $1,929.5 $1,841.9 17.3% 4.8% Tax equivalent adjustment............. 17.2 21.3 26.5 (19.2) (19.6) -------- -------- -------- Tax equivalent interest income........ 2,279.6 1,950.8 1,868.4 16.9 4.4 Total interest expense................ 773.8 540.2 516.6 43.2 4.6 -------- -------- -------- Tax equivalent net interest income.... $1,505.8 $1,410.6 $1,351.8 6.7 4.4 ======== ======== ======== Interest rate spread.................. 4.92% 4.99% 4.85% ==== ==== ==== Net interest margin................... 5.97% 5.80% 5.59% ==== ==== ====
The increase in net interest income for 1995 was driven by improved spreads earned on both deposits and prime-based loans and by improved earnings on non- interest bearing funding sources in 1995's comparatively higher interest rate environment. Also contributing to the increase in 1995 net interest income was the growth in relatively higher yielding loans, particularly commercial finance lending at Congress Financial and credit card outstandings. Average commercial finance loans at Congress Financial grew by $274 million, or 12.2%, in 1995 and credit card outstandings grew by $195 million, or 15.3%, on average. The net interest margin is a key measure of net interest income performance. It represents the difference between tax equivalent interest income, including net loan fees earned, and interest expense, reflected as a percentage of average earning assets. The net interest margin increased 17 basis points in 1995 to 5.97%, following a 21 basis point increase in 1994. The 1995 increase was driven by improved product spreads, increased volumes in higher spread loan categories and improved earnings on non-interest bearing funding sources. The 1994 net interest margin increase was principally attributable to higher yields on loans due to a change in asset mix and the increase in the prime rate during that year, partially offset by a lower yield on the investment portfolio during 1994 as compared to 1993. The cost of interest bearing deposits decreased by 5 basis points in 1994 as changes in the pricing of consumer deposits in the rising rate environment lagged changes in financial market rates. The cost of borrowed funds, more sensitive to rising interest rates, increased during 1994 by 89 basis points. The increase in net interest income in 1994 resulted primarily from an improvement in interest rate spreads. While average total earning assets experienced little growth in 1994, a change in asset mix resulted in the yield on earning assets increasing to 8.03% in 1994 from 7.73%, partially offset by a smaller increase in average cost of liabilities to 3.03% from 2.90% in 1993. The loan portfolio experienced a $566 million increase in 1994 on average, mostly in the higher yield credit card and asset-based lending portfolios, while the comparatively lower yielding investment portfolio was reduced $569 million. An increase in non-interest bearing funding sources of $287 million also contributed to the 1994 increase in net interest income. 38 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED NET INTEREST INCOME - continued For further detailed information regarding average balances, yields and costs, see the consolidated average balance sheet on pages 82-85, and the rate/volume analysis on page 88. NON-INTEREST INCOME For the Years Ended December 31, (in millions)
Percentage increase(decrease) ------------------- 1995 1994 1993 '95/'94 '94/'93 ---- ---- ---- ------- ------- Basic banking transactional services(a)................................ $427.4 $422.3 $412.4 1.2% 2.4% Income from investment in EPS, Inc .................................. 30.1 31.8 13.1 (5.3) 142.7 Third party processing fees(b)............... 47.7 23.5 17.5 103.0 34.3 Securities gains............................. 9.4 18.7 16.1 Other operating income....................... 64.7 69.3 93.4 (6.6) (25.8) ------ ------ ------ Non-interest income before significant and unusual items.............. 579.3 565.6 552.5 2.4 2.4 Significant and unusual items...................................... 26.4(c) 1.9(d) 21.5(e) ------ ------ ------ Total non-interest income.................... $605.7 $567.5 $574.0 6.7 (1.1) ====== ====== ======
_________________________ (a) Comprised of debit and credit card fees, service charges on deposit accounts, trust income, and fees for international services. (b) Includes revenues for CashFlex lockbox processing, Transys check processing, and SynapQuest credit card and merchant processing. (c) Reflects the $19.0 million pre-tax gain related to changes in the investment in the EPS, Inc. affiliate joint venture and the $7.4 million pre-tax gain recorded on the sale of the Corporate Trust business. (d) Includes pre-tax gain of $1.9 million recorded on the sale of two Virgin Islands branches. (e) Includes pre-tax gains of $11.0 million recorded on the sale of five Virgin Islands branches, $9.1 million on prepayments of long-term debt and $1.4 million in excess recoveries from the settlement of a previously charged off loan at Independence. Non-interest income for 1995, excluding significant and unusual items, increased 2.4% from 1994, primarily reflecting an increase in third-party processing fees. Third-party processing fee income for 1995 increased $24.2 million, or 103.0%, principally as a result of the January 27, 1995 acquisition of Nationwide Remittance Centers, Inc. ("NRC"). Revenues in CoreStates' basic banking transactional businesses (discussed in detail below) experienced modest growth in 1995, as a $12.4 million, or 15.6%, increase in fees for international services was partially offset by declines of $4.7 million or 2.6%, in services charges on deposits and $1.6 million, or 1.7% in trust income. The decline in service charges on deposits reflects moderate growth in transaction volume and the election by commercial customers to pay for deposit services by maintaining deposit balances (the value of which is included in net interest income) in lieu of cash fees. For 1994, reported total non-interest income decreased $6.5 million or 1.1%, but total non-interest income in 1994 before significant and unusual items increased $13.1 million or 2.4% over 1993. The growth for 1994 reflects increases in income from CoreStates' investment in EPS, Inc., international service charges and third-party processing fees, partially offset by the election by commercial customers to pay for deposit services by maintaining deposit balances (the value of which is included in net interest income) in lieu of cash fees, declines in income and fees derived from mortgage banking, and a decline in trust income. 39 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED NON-INTEREST INCOME - CONTINUED Income from basic banking transactional services increased modestly in 1995, 1.2%, following growth of 2.4% in 1994. The components of basic banking transactional services are discussed in the following paragraphs: . Service charges on deposit accounts, paid in fees, decreased $4.7 million, or 2.6%, in 1995, compared to an increase of $1.2 million, or 0.7%, in 1994. After adding the value of service charges paid through the maintenance of deposit balances by commercial and correspondent customers, which is included in net interest income, total service charge compensation for 1995 was $335.4 million, up $6.6 million, or 2.0%, from 1994 reflecting moderate growth in transaction volume. Total service charge compensation on this basis for 1994 was $328.8 million, an increase of $9.0 million or 2.8% over 1993. . Fees for international services increased $12.4 million, or 15.6%, in 1995, following an increase of $10.3 million, or 14.8%, in 1994. The growth in revenues for 1995 and 1994 reflects a continuing emphasis on non-credit products and international transaction processing services and resulting volume increases at overseas branches which were opened in recent years. For 1995, foreign exchange fees increased $3.1 million, or 16.5%, and fees on other international transaction processing services increased $9.3 million, or 15.3%. . Trust income decreased $1.6 million, or 1.7%, in 1995 and $4.4 million, or 4.4%, in 1994. The 1995 decline in trust income reflects the impact of CoreStates' October 1995 sale of its Corporate Trust business. Revenues recorded on Corporate Trust services were $6.5 million, $8.4 million and $8.1 million for 1995, 1994 and 1993, respectively. The pre-tax gain recorded in 1995 on the sale of Corporate Trust was $7.4 million. The Corporate Trust transaction provides for potential additional gains in 1996, pending determination of customer retention by the buyers. Excluding Corporate Trust revenues in 1995 and 1994, trust income for 1995 was level with 1994, reflecting the impact of past customer attrition. The 1994 decline in trust income was caused by declines in the financial markets which generated lower asset values and some customer attrition. . Debit and credit card fees decreased $1.0 million, or 1.5% in 1995, following an increase of $2.9 million, or 4.6%, in 1994. Credit card fees for 1995 were $25.5 million, level with 1994 fees. Competitive pricing pressures adversely impacted fee income for this product in 1995. At year-end 1995, CoreStates' credit card portfolio included approximately 614,000 active accounts, compared to 601,000 active accounts at year-end 1994. Debit card fees were down $0.9 million or 2.2% from 1994 primarily due to price sensitivity. CoreStates recorded net securities gains of $9.4 million in 1995, compared to $18.7 million in 1994 and $16.1 million in 1993. Investment securities gains for 1995 included $7.8 million of gains recorded on sales of equity securities acquired in connection with prior loan arrangements. Investment securities gains in 1994 included $5.0 million recorded on sale of certain investments acquired with Constellation and $10.7 million recorded on sales of certain bank stocks. Investment securities gains for 1993 included $13.6 million on sales of domestic equity securities and $8.6 million on sales of foreign equity securities, partially offset by $6.1 million for partial writedowns of foreign equity securities. Other operating income in 1995 decreased by $4.6 million, or 6.6%, primarily as a result of gains on sales of loans (other than mortgages) in 1994. Other operating income in 1994 decreased by $24.1 million, or 25.8% principally as a result of mortgage banking activity which was adversely impacted in 1994 by reduced refinance activity and higher mortgage rates. Gains on sales of mortgages and mortgage servicing fees were down $11.6 million and $4.1 million in 1994, respectively. Gains on trading account securities were $2.3 million in 1995, 1994 and 1993, respectively. 40 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED
NON-FINANCIAL EXPENSES Percentage For the Years Ended December 31, increase(decrease) ------------------ (in millions) 1995 1994 1993 '95/'94 '94/'93 ---- ---- ---- ------- ------- Salaries, wages and benefits............. $ 600.9 $ 631.1 $ 623.0 (4.8)% 1.3% Net occupancy expense.................... 113.5 114.5 115.0 (0.9) (0.4) Equipment expense........................ 78.5 77.1 74.8 1.8 3.1 Amortization of intangible assets........ 28.1 14.1 19.5 99.3 (27.7) FDIC premiums............................ 23.1 43.7 46.2 (47.1) (5.4) Other operating expenses................. 332.1 322.4 318.6 3.0 1.2 -------- -------- -------- Non-financial expenses before significant and unusual items......... 1,176.2 1,202.9 1,197.1 (2.2) 0.5 Significant and unusual items................................. 98.2(a) 114.7(b) 44.8(c) -------- --------- --------- Total non-financial expenses............. $1,274.4 $1,317.6 $1,241.9 (3.3) 6.1 ======== ======== ========
_____________________________ (a) Reflects a net restructuring charge of $98.2 million related to the corporate-wide process redesign. See "Process Redesign" on page 8 for more detail regarding the net restructuring charge. The impact of other real estate owned ("OREO") on non-financial expenses in 1995 was not significant. (b) Includes merger-related costs of $75.0 million and $33.7 million for the Constellation and Independence acquistions, respectively, OREO writedowns of $2.3 million and $3.7 million related to Germantown branch closings and signage. (c) Comprised of OREO writedowns totaling $26.6 million, writedowns of purchased mortgage servicing rights of $8.2 million and $10.0 million related to the establishment of Transys, a check processing business. Total non-financial expenses for 1995, excluding the significant and unusual items as noted in the above table, were $1,176.2 million, a decrease of $26.7 million, or 2.2% from 1994. This decline reflects the impacts of a hiring freeze, the benefits of those aspects of the process redesign implemented to date, merger-related synergies and the approximately $20.6 million impact of reduced Federal Deposit Insurance Corporation ("FDIC") premiums. A further reduction in FDIC premiums is effective January 1, 1996. If that reduced rate is maintained by the FDIC throughout 1996, CoreStates would expect FDIC premium expense for 1996 to be less than $0.5 million. Most of the reduction in FDIC premiums will be used to fund investments in technology to support improved products and services and increased volume. Affecting comparability of expenses period-to-period are the acquisitions of GSB on December 2, 1994 and NRC on January 27, 1995. Excluding the amortization of intangible assets created in the acquisitions, in 1995 GSB added approximately $21.3 million to non-financial expenses and NRC added approximately $19.9 million. Expense for amortization of intangible assets created in the two acquisitions added $13.7 million to 1995 expenses. Excluding the significant and unusual items as noted in the above table and the impact of GSB and NRC related expenses, non-financial expenses for the 1995 declined 6.8% from the prior year. Salaries, wages and benefits decreased 4.8% in 1995 reflecting reduced staff levels resulting from the hiring freeze, the process redesign and full- year impact of merger consolidations, partially offset by increases of $11.4 million and $11.0 million for GSB and NRC, respectively. For 1995, salaries and wages declined 4.1%, while benefits expense declined 7.1%. Contributing to the higher decline in benefits expense for 1995 was reduced employee medical costs arising from efficiencies associated with CoreStates transition to managed care plans in the beginning of the year. The number of full-time equivalent employees at December 31, 1995, 1994 and 1993 was: 13,598; 15,076; and 16,017, respectively. In 1995, net occupancy expense declined $1.0 million or 0.9%, and equipment expense increased $1.4 million, or 1.8%. The decline in net occupancy expense was primarily due to the process redesign and merger-related synergies. The increase in equipment expense reflects investments in technology and NRC expenses. 41 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED NON-FINANCIAL EXPENSES - CONTINUED COMPARISON OF 1994 TO 1993 - Reported total non-financial expenses in 1994 were 6.1% higher than 1993. However, excluding significant and unusual items, non-financial expenses for 1994 were substantially level with 1993. Salaries, wages and benefits increased 1.3% in 1994. The 1994 increase in salary and benefit costs was largely the result of normal salary increases offset by partial year staff reductions due to merger consolidations. At year-end 1994, the number of full-time equivalent employees declined by over 900 as operations and systems mergers were completed for acquired companies. Net occupancy expense decreased 0.4% in 1994. Equipment expenses increased 3.1% in 1994, as technological improvements were made in delivery systems and support areas. Other operating expenses decreased 1.2% in 1994, largely due to reductions in amortization of mortgage servicing rights intangibles which was $8.2 million less than 1993. PROVISION FOR INCOME TAXES The provision for income taxes was $262.6 million in 1995 compared to $143.7 million in 1994 and $173.8 million in 1993. The $118.9 million increase in 1995 tax expense was primarily due to higher pre-tax income. The provision for income taxes for 1995, 1994 and 1993 were at effective rates of 36.7%, 36.6% and 32.4%, respectively. FOURTH QUARTER RESULTS In the fourth quarter of 1995, CoreStates recorded net income of $137.0 million or $0.99 per share. "Operating earnings" for the fourth quarter of 1995, defined as net income excluding a fourth quarter restructuring credit, were $132.9 million, or $0.96 per share. This represents a 23.1% increase on a per share basis when compared to fourth quarter of 1994 operating earnings and net income of $111.5 million, or $0.78 per share. The restructuring credit of $6.4 million, $4.1 million after-tax or $0.03 per share, relates to the process redesign which is discussed on page 8. The $21.4 million improvement in operating earnings for the fourth quarter of 1995, as compared to the fourth quarter of 1994, was primarily due to a 3.9% increase in taxable equivalent net interest income coupled with a $16.1 million or 5.2% decrease in expenses excluding the restructuring credit. The net interest margin for the fourth quarter of 1995 was 5.97% compared to 5.89% for the fourth quarter of 1994. The increase in the level of taxable equivalent net interest income was primarily related to improved interest rate spreads on deposits and prime-based loans, higher earnings on non-interest bearing funding and loan growth. Also contributing to the improvement in fourth quarter operating earnings was a $7.2 million, or 4.9% increase in non-interest income reflecting the $7.4 million gain on the sale of the Corporate Trust business. The financial impact of those aspects of the process redesign implemented since March 31, 1995 resulted in an increase in the fourth quarter of 1995 operating earnings of $33.4 million pre-tax, or $0.15 per share after-tax as compared to the fourth quarter of 1994. This impact principally related to expense savings and exceeded original projections by $0.06 per share due to the realization of benefits earlier than planned. Based on operating earnings, returns on average equity and assets were 22.52% and 1.84%, respectively, in the fourth quarter of 1995 compared to 19.50% and 1.60%, respectively, in the fourth quarter of 1994. ACCOUNTING STANDARDS EFFECTIVE IN 1996 FAS 121 - Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121") was issued in March 1995. FAS 121, which is effective beginning with 1996, addresses the accounting for and the measurement of the impairment of long-lived assets that either will be held and used in operations or that will be disposed of. The impact that FAS 121 will have on CoreStates' future results of operations cannot be estimated with certainty at the current time. However, the adoption of FAS 121 is not expected to have a material impact on CoreStates' financial condition. 42 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED ACCOUNTING STANDARDS EFFECTIVE IN 1996 - continued FAS 122 - Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights - an amendment of FASB Statement No. 65" ("FAS 122") was issued in May 1995 to modify the treatment of capitalized mortgage servicing rights by mortgage banking enterprises. FAS 122, which is effective beginning with 1996, amends FASB Statement No. 65 to eliminate the separate treatment of servicing rights acquired through loan originations versus those acquired through purchase. The adoption of FAS 122 is not expected to have a material impact on CoreStates' results of operations or financial condition. FAS 123 - Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123") was issued in October 1995 to establish accounting and reporting standards for stock-based employee compensation plans such as stock option and restricted stock plans ("stock-based plans"). FAS 123 defines a fair value based method of accounting for measuring compensation expense for stock-based plans and encourages all entities to adopt that method of accounting. However, FAS 123 also permits entities to continue to measure compensation expense for stock-based plans using the intrinsic value based method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to remain with the intrinsic value based method must make pro forma disclosures of net income and earnings per share as if the fair value based method defined by FAS 123 was applied. Under the fair value based method, compensation expense would be measured as the value of an award under a stock-based plan on the date the award is granted, and would be recognized over the vesting period of the award. Under the intrinsic value based method, compensation expense is measured as the excess, if any, of the market price of the stock underlying the award on the date the award is granted, over the exercise price. Under CoreStates' stock-based long-term incentive plan, awards have no intrinsic value on the date of grant as the exercise price equals the market price on that date. Currently, CoreStates does not expect to adopt the FAS 123 fair value based method of accounting for its stock-based plans, but will provide the required pro forma disclosures in the December 31, 1996 financial statements. 43 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING FINANCIAL STATEMENTS CoreStates Financial Corp is responsible for the preparation, integrity, and fair presentation of its published financial statements as of December 31, 1995, and the year then ended. The consolidated financial statements of CoreStates Financial Corp have been prepared in accordance with generally accepted accounting principles and, as such, include some amounts that are based on judgments and estimates of management. INTERNAL CONTROLS OVER FINANCIAL REPORTING Management is responsible for establishing and maintaining an effective internal control structure over financial reporting. The system contains monitoring mechanisms and actions are taken to correct deficiencies identified. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of an internal control system may vary over time. Management assessed CoreStates Financial Corp's internal control structure over financial reporting as of December 31, 1995. This assessment was based on criteria for effective internal control over financial reporting described in "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that CoreStates Financial Corp maintained an effective internal control structure over financial reporting as of December 31, 1995. Principal Financial Officer /s/ Albert W. Mandia Chairman and Chief Executive Officer /s/ Terrence A. Larsen 44 CORESTATES FINANCIAL CORP AND SUBSIDIARIES INDEPENDENT ACCOUNTANTS' REPORT The Board of Directors and Shareholders CoreStates Financial Corp We have examined management's assertion that CoreStates Financial Corp maintained an effective internal control structure over financial reporting as of December 31, 1995 included in the accompanying Management's Report on Internal Controls over Financial Reporting, insofar as management's assertion relates to the internal control structure over the annual financial reporting in the 1995 consolidated financial statements of CoreStates Financial Corp. Our examination was made in accordance with standards established by the American Institute of Certified Public Accountants and, accordingly, included obtaining an understanding of the internal control structure over financial reporting, testing, and evaluating the design and operating effectiveness of the internal control structure, and such other procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion. Because of inherent limitations in any internal control structure, errors or irregularities may occur and not be detected. Also, projections of any evaluation of the internal control structure over financial reporting to future periods are subject to the risk that the internal control structure may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assertion that CoreStates Financial Corp maintained an effective internal control structure over financial reporting as of December 31, 1995, insofar as management's assertion relates to the internal control structure over the annual financial reporting in the 1995 consolidated financial statements of CoreStates Financial Corp, is fairly stated, in all material respects, based upon the criteria established in "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. /s/ ERNST & YOUNG LLP Philadelphia, Pennsylvania January 17, 1996 45 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, 1995 and 1994, 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, 1995. 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 financial statements of Constellation Bancorp and Independence Bancorp, Inc., which statements reflect net interest income constituting 15.6% of the related consolidated total for the year ended December 31, 1993. 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, 1995 and 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 1 to the financial statements, in 1994 the Company changed its method of accounting for certain investments in debt and equity securities, and in 1993 the Company changed its method of accounting for post-employment benefits. /s/ Ernst & Young LLP Philadelphia, Pennsylvania January 17, 1996 46 CORESTATES FINANCIAL CORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, -------------------------------------- INTEREST INCOME 1995 1994 1993 ---------- ---------- ---------- Interest and fees on loans: Taxable income...................................... $1,973,085 $1,675,532 $1,553,865 Tax exempt income................................... 19,851 22,818 31,150 Interest on investment securities: Taxable income...................................... 125,941 140,379 185,866 Tax exempt income................................... 12,169 16,552 19,304 Interest on time deposits in banks.................... 116,689 66,389 44,340 Interest on Federal funds sold, securities purchased under agreements to resell and other...... 14,570 7,857 7,339 ---------- ---------- ---------- Total interest income............................... 2,262,305 1,929,527 1,841,864 ---------- ---------- ---------- INTEREST EXPENSE Interest on deposits: Domestic savings.................................... 189,942 139,703 149,094 Domestic time....................................... 299,264 196,869 212,471 Overseas branches and subsidiaries.................. 43,497 28,286 18,248 ---------- ---------- ---------- Total interest on deposits.......................... 532,703 364,858 379,813 Interest on short-term funds borrowed................. 119,667 85,123 67,001 Interest on long-term debt............................ 121,401 90,177 69,779 ---------- ---------- ---------- Total interest expense.............................. 773,771 540,158 516,593 ---------- ---------- ---------- NET INTEREST INCOME................................. 1,488,534 1,389,369 1,325,271 Provision for losses on loans......................... 105,000 246,900 121,201 ---------- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOSSES ON LOANS.................................. 1,383,534 1,142,469 1,204,070 ---------- ---------- ---------- NON-INTEREST INCOME Service charges on deposit accounts................... 175,991 180,676 179,428 Trust income.......................................... 95,747 97,362 101,793 Fees for international services....................... 92,075 79,682 69,432 Debit and credit card fees............................ 63,619 64,585 61,717 Income from investment in EPS, Inc.................... 30,114 31,800 13,159 Gains on trading account securities................... 2,339 2,347 2,254 Securities gains...................................... 9,388 18,753 16,110 Other gains........................................... 26,400 1,900 11,000 Other operating income................................ 109,993 90,435 119,137 ---------- ---------- ---------- Total non-interest income........................... 605,666 567,540 574,030 ---------- ---------- ---------- NON-FINANCIAL EXPENSES Salaries, wages and benefits.......................... 600,925 631,134 622,969 Net occupancy......................................... 113,478 117,516 114,951 Equipment expenses.................................... 78,482 77,098 74,844 Restructuring and merger-related charges.............. 98,175 108,700 - Other operating expenses.............................. 383,338 383,113 429,098 ---------- ---------- ---------- Total non-financial expenses........................ 1,274,398 1,317,561 1,241,862 ---------- ---------- ---------- INCOME BEFORE INCOME TAXES............................ 714,802 392,448 536,238 Provision for income taxes............................ 262,565 143,656 173,809 ---------- ---------- ---------- INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE...................... 452,237 248,792 362,429 Cumulative effect of a change in accounting principle, net of income tax benefits of $1,846 in 1994, and $7,005 in 1993.................. - (3,430) (13,010) ---------- ---------- ---------- NET INCOME............................................ $ 452,237 $ 245,362 $ 349,419 ========== ========== ========== PER COMMON SHARE DATA (Based on weighted average shares outstanding of 140.600 million in 1995, 142.498 million in 1994 and 145.398 million in 1993)............................................ Income before cumulative effect of a change in accounting principle...................... $3.22 $1.75 $2.49 ===== ===== ===== Net Income............................................ $3.22 $1.73 $2.40 ===== ===== ===== Cash dividends declared............................... $1.44 $1.24 $1.14 ===== ===== =====
See accompanying notes to the financial statements. 47 CORESTATES FINANCIAL CORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (in thousands)
DECEMBER 31, -------------------------------------- 1995 1994 ----------- ------------ ASSETS Cash and due from banks............................................... $ 2,755,636 $ 2,262,512 Time deposits, principally Eurodollars................................ 1,841,799 1,750,458 Federal funds sold and securities purchased under agreements to resell................................................ 594,868 731,820 Trading account securities............................................ 1,336 1,206 Investment securities available-for-sale.............................. 974,711 426,047 Investment securities held-to-maturity (market value: 1995-$1,017,019; 1994-$2,423,830)................................... 1,015,621 2,454,584 Total loans, net of unearned discounts of $123,672 in 1995 and $146,305 in 1994............................... 21,046,535 20,526,216 Less: Allowance for loan losses..................................... (495,075) (500,631) ----------- ------------ Net loans........................................................ 20,551,460 20,025,585 Due from customers on acceptances..................................... 549,557 342,211 Premises and equipment................................................ 406,279 423,832 Other assets.......................................................... 929,349 906,881 ----------- ------------ Total assets..................................................... $29,620,616 $ 29,325,136 =========== ============ LIABILITIES Deposits: Domestic: Non-interest bearing............................................. $ 6,700,599 $ 6,362,470 Interest bearing................................................. 13,661,766 14,565,051 Overseas branches and subsidiaries.................................. 1,140,068 1,113,365 ----------- ------------ Total deposits................................................... 21,502,433 22,040,886 Short-term funds borrowed............................................. 2,091,722 1,546,201 Bank acceptances outstanding.......................................... 549,048 336,103 Other liabilities..................................................... 1,399,660 1,260,722 Long-term debt........................................................ 1,698,334 1,791,110 ----------- ------------ Total liabilities................................................ 27,241,197 26,975,022 ----------- ------------ COMMITMENTS AND CONTINGENT LIABILITIES SHAREHOLDERS' EQUITY 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 1995 and 145.9 million shares in 1994 (including treasury shares of 7.8 million in 1995 and 1.0 million in 1994)........................ 145,875 145,878 Other common shareholders' equity, net................................ 2,233,544 2,204,236 ----------- ------------ Total shareholders' equity....................................... 2,379,419 2,350,114 ----------- ------------ Total liabilities and shareholders' equity....................... $29,620,616 $ 29,325,136 =========== ============
See accompanying notes to the financial statements. 48 CORESTATES FINANCIAL CORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (IN THOUSANDS)
Common Capital Retained Treasury stock surplus earnings stock Total ------------ ------------- ------------ ------------ ------------ 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.................. 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 available-for-sale, net of tax...................................... (52,951) (52,951) Acquisition of Germantown Savings Bank (5,880 treasury shares)......................... (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 Net income........................................ 452,237 452,237 Net change in unrealized gain on investments available-for-sale, net of tax.................. 23,969 23,969 Treasury shares acquired (10,307 shares).......... (335,528) (335,528) Common stock issued under employee benefit plans (3,089 treasury shares)........... (3) 11,388 (30,728) 96,670 77,327 Common stock issued under dividend reinvestment plan (417 treasury shares)......... 560 (2) 12,690 13,248 Cash paid for fractional shares................... (24) (24) Foreign currency translation adjustments.......... (29) (29) Common dividends declared......................... (201,895) (201,895) ----------- ------------ ------------ ------------ ------------ Balances at December 31, 1995..................... $ 145,875 $ 793,714 $ 1,690,295 $ (250,465) $ 2,379,419 =========== ============ ============ ============ ============
See accompanying notes to the financial statements. 49 CORESTATES FINANCIAL CORP AND SUBSIDIARIES PAGE 1 OF 2 CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
Year Ended December 31 -------------------------------------- OPERATING ACTIVITIES 1995 1994 1993 ---------- ---------- ---------- Net income....................................................... $ 452,237 $ 245,362 $ 349,419 Adjustments to reconcile net income to net cash provided by operating activities: Restructuring and merger-related charges....................... 98,175 108,700 - Cumulative effect of a change in accounting principle, net of tax............................. - 3,430 13,010 Provision for losses on loans.................................. 105,000 246,900 121,201 Provision for losses and writedowns on other real estate owned................................... 7,097 12,538 26,614 Depreciation and amortization.................................. 65,735 76,277 84,998 Deferred income tax expense (benefit).......................... 34,047 16,393 (10,656) Securities gains............................................... (9,388) (18,753) (16,110) Other gains.................................................... (26,400) (1,900) (11,000) Increase (decrease) in due to factored clients................. (86,921) 41,262 147,072 (Increase) decrease in interest receivable..................... (123) (25,625) 3,646 Increase (decrease) in interest payable........................ 23,674 23,551 (7,738) Other, net..................................................... 26,892 (21,819) 43,789 ------------ ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES........................ 690,025 706,316 744,245 ------------ ------------ ------------ INVESTING ACTIVITIES Net increase in loans............................................ (1,205,051) (633,013) (1,483,539) Proceeds from sales of loans..................................... 753,345 897,528 790,193 Loans originated or acquired--non-bank subsidiaries.............. (35,767,440) (33,760,035) (24,712,336) Principal collected on loans--non-bank subsidiaries.............. 35,622,742 33,399,764 24,411,312 Net (increase) decrease in time deposits, principally Eurodollars........................................ (89,322) (431,001) 495,615 Purchases of investments held-to-maturity........................ (490,548) (1,030,404) - Purchases of investments available-for-sale...................... (179,658) (422,894) - Proceeds from maturities of investments held-to-maturity............................................... 1,318,571 1,655,885 - Proceeds from maturities of investments available-for-sale............................................. 83,040 308,598 - Proceeds from sales of investments available-for-sale............ 207,655 690,343 - Purchases of investment securities............................... - - (2,252,933) Proceeds from sales of investment securities..................... - - 581,101 Proceeds from maturities of investment securities................ - - 1,819,500 Net (increase) decrease in Federal funds sold and securities purchased under agreements to resell................ 136,952 (549,293) 105,363 Purchases of premises and equipment.............................. (103,616) (92,232) (107,275) Proceeds from sales and paydowns on other real estate owned.............................................. 41,007 59,947 84,389 Purchase of Germantown Savings Bank, net of cash acquired.................................................. - (74,053) - Other, net....................................................... 1,675 19,617 6,689 ------------ ------------ ------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES................................................... 329,352 38,757 (261,921) ------------ ------------ ------------
(continued) 50 CORESTATES FINANCIAL CORP AND SUBSIDIARIES PAGE 2 OF 2 CONSOLIDATED STATEMENT OF CASH FLOWS: CONTINUED (IN THOUSANDS)
Year Ended December 31, -------------------------------------- FINANCING ACTIVITIES 1995 1994 1993 ---------- ---------- ---------- Net decrease in deposits.......................... (542,224) (536,836) (540,605) Long-term debt issued............................. 430,140 478,048 916,519 Retirement of long-term debt...................... (520,646) (242,432) (683,399) Net increase (decrease) in short-term funds borrowed.................................. 545,521 (337,924) (19,919) Cash dividends paid............................... (194,067) (160,122) (143,334) Purchase of treasury stock........................ (335,528) (228,963) (29,449) Common stock issued under employee benefit plans................................... 77,327 11,900 17,648 Other, net........................................ 13,224 12,092 11,890 ---------- ----------- ---------- NET CASH USED IN FINANCING ACTIVITIES............ (526,253) (1,004,237) (470,649) ---------- ----------- ---------- INCREASE (DECREASE) IN CASH AND DUE FROM BANKS.................................... 493,124 (259,164) 11,675 Cash and due from banks at January 1,......... 2,262,512 2,521,676 2,510,001 ---------- ----------- ---------- CASH AND DUE FROM BANKS AT DECEMBER 31,........... $2,755,636 $ 2,262,512 $2,521,676 ========== =========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest...................................... $ 750,097 $ 513,773 $ 524,565 ========== =========== ========== Income taxes.................................. $ 189,732 $ 130,904 $ 167,216 ========== =========== ==========
See accompanying notes to the financial statements. 51 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 ("CSCC"). All material intercompany transactions have been eliminated. Certain amounts in prior years have been reclassified for comparative purposes. The Corporation is a regional bank holding company incorporated under the laws of the Commonwealth of Pennsylvania, primarily operating in the eastern Pennsylvania, northern Delaware and central New Jersey markets. Through its subsidiaries, the Corporation is engaged in the business of providing wholesale banking services (including international banking services), consumer financial services, trust and investment management services and electronic payment services to a diversified customer base. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CHANGES IN ACCOUNTING PRINCIPLES Effective January 1, 1995, the Corporation adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("FAS 114") and Statement No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures" ("FAS 118"). FAS 114 addresses accounting for impairment of certain loans and requires that impaired loans within the scope of FAS 114 be measured based on the present value of expected cash flows discounted at the loan's effective interest rate, or be measured at the loan's observable market price or the fair value of its collateral. FAS 118 amended FAS 114's income recognition policies and clarifies FAS 114's disclosure requirements. 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. During the first quarter of 1994, the Corporation recognized a $3,430 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 ("the 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 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 $0.09 per share, as the cumulative effect of a change in accounting principle. 52 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued INCOME TAXES Under the asset and liability method used by the Corporation to provide for income taxes, deferred tax assets and liabilities are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The Corporation and its subsidiaries file a consolidated Federal income tax return. INVESTMENT SECURITIES Held-to-maturity securities, consisting primarily of debt securities, are carried at cost adjusted for amortization of premiums and accretion of discounts, both computed on the interest method. The Corporation has both the ability and positive intent to hold these securities until maturity. Trading account securities are carried at market value. Gains on trading account securities include both realized and unrealized gains and losses on the portfolio. All other securities are classified as available-for-sale and are carried at fair value, with unrealized gains and losses, net of tax, reported as a component of shareholders' equity. The accumulated net unrealized gain on available-for-sale securities included in retained earnings was $35,075 at December 31, 1995 and $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 adjustments of interest rate yields and are amortized into interest income on loans over the terms of the related loans. Interest on installment loans is principally recognized on the interest method. Commercial loans are placed on a non-accrual status, generally recognizing interest as income when received, when, in the opinion of management, the collectability of principal or interest payments becomes doubtful or when such payments are 90 days or more past due unless the loan is well secured and in the process of collection. The deferral or non-recognition of interest does not constitute forgiveness of the borrower's obligation. In those cases where collection of principal is in doubt, additions are made to the allowance for loan losses. Consumer loans, including residential mortgage loans, are not automatically placed on non-accrual status when principal or interest payments are 90 days past due, but are charged off when deemed uncollectible or after reaching 120 days past due. OTHER REAL ESTATE OWNED When a property is acquired through foreclosure of a loan secured by real estate, that property is recorded at the lower of the cost basis in the loan or the estimated fair value of the property less estimated disposal costs. Writedowns at the time of foreclosure are charged against the allowance for loan losses. Subsequent writedowns for changes in the fair value of the property are charged to other non-financial expense. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level believed adequate by management to absorb estimated probable credit losses. Factors included in management's determination of an adequate level of allowance for loan losses are a statistical analysis of historical loss levels throughout an economic cycle and one year of projected charge-offs, establishing a minimum level below which the allowance for loan losses is considered inadequate and a maximum level above which is considered inappropriate. A quarterly evaluation of loss potential on specific credits, products, industries, portfolios and markets, as well as indicators for loan growth, the economic environment and concentrations assist in validating the position of the allowance for loan losses within those boundaries. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change. 53 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued The Corporation adopted FAS 114 effective January 1, 1995. Under FAS 114 the allowance for loan losses related to "impaired loans" is based on discounted cash flows using the impaired loan's initial effective interest rate as the discount rate, or the fair value of the collateral for collateral dependent loans. A loan is impaired when it meets the criteria to be placed on non- accrual status or is a renegotiated loan. Loans which are evaluated for impairment pursuant to FAS 114 are assessed on a loan-by-loan basis, and include only commercial non-accrual and renegotiated loans. Large groups of smaller balance homogeneous loans, such as credit cards, lease financing receivables, loans secured by first and second liens on residential properties, and other consumer loans are evaluated collectively for impairment. Additions to the allowance arise from the provision for loan losses charged to operations or from the recovery of amounts previously charged off. Loan charge- offs reduce the allowance. Loans are charged off when there has been permanent impairment of the related carrying values. PREMISES AND EQUIPMENT Premises and equipment are stated at cost, less accumulated depreciation and amortization. The provision for depreciation and amortization is computed, generally, on the straight-line method at rates based on the following range of lives: buildings - 10 to 45 years; equipment - 3 to 12 years; and leasehold improvements - 3 to 15 years. RETIREMENT PLANS The Corporation maintains 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. FOREIGN EXCHANGE/CURRENCY Forward exchange contracts are valued at current rates of exchange. Gains or losses on forward exchange contracts intended to hedge an identifiable foreign currency commitment, if any, are deferred and included in the measurement of the related foreign currency transaction. All other gains or losses on forward exchange contracts are included in the consolidated statement of income. Currency gains and losses in connection with non-dollar denominated loans and deposits, which are included in interest income and expenses, are recognized pro rata over the contract terms. Foreign currency translation adjustments are recorded directly to retained earnings. The cumulative foreign currency translation loss was $1,600, $1,571 and $1,623 at December 31, 1995, 1994 and 1993, 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. If the underlying assets or liabilities related to a derivative matures, is sold, extinguished, or terminates, the amount of the previously unrecognized gain or loss is recognized at that time in the consolidated income statement. Contracts held or issued for customers are valued at market with gains or losses included in the consolidated income statement. EARNINGS PER COMMON SHARE Earnings per common share for all periods presented were based on weighted average common shares outstanding as dilution from potentially dilutive common stock equivalents (primarily stock options) did not have a materially dilutive effect on earnings per share. 54 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued CASH DIVIDENDS DECLARED PER SHARE Cash dividends declared per share for the periods prior to the acquisitions of Independence on June 27, 1994 and Constellation on March 16, 1994 assume that the Corporation would have declared cash dividends equal to the cash dividends per share actually declared by the Corporation. 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 since the date of acquisition. Under this method of accounting, the purchase price is allocated to the respective assets acquired and liabilities assumed based on their estimated fair values, net of applicable income tax effects. Intangible assets of $183 million, including $140 million of goodwill, were created in this transaction. Goodwill is being amortized to other operating expense on a straight-line basis over 15 years. A summary of unaudited pro forma combined financial information for the Corporation and Germantown as if the transaction had occurred on January 1, 1993 is as follows:
Year Ended December 31, ------------------------ 1994 1993 ----------- ----------- 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
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. 55 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 on a separate company basis for the year ended December 31, 1993 was as follows:
1993 Corporation Constellation Independence - - ---- ------------ -------------- ------------- (Unaudited) (Unaudited) 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 $0.61 $1.98 Net income per share....................................... 2.69 0.61 1.98 Cash dividends declared.................................... 1.14 - 1.16
_____________________ (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 effect of reducing 1993 restated net income by $5,076, or $0.03 per share, and December 31, 1993 common shareholders' equity by $39,924. 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 totaled $127.8 million after-tax, or $0.89 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 totaled $39.6 million after-tax, or $0.28 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. On October 10, 1995, the Corporation 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. For each Meridian common share outstanding, 1.225 shares of the Corporation's common stock will be issued. As a result of this transaction, approximately 71.2 million new shares will be issued. This agreement has been approved by the shareholders of both the Corporation and Meridian and, pending receipt of approval by certain regulatory authorities, is expected to close during the first half of 1996. Also at the February 6, 1996 shareholders' meeting, the Corporation's shareholders approved an increase in the number of authorized shares from 200 million to 350 million. 56 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 2. ACQUISITIONS - continued 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 in a transaction to be accounted for as a pooling of interests. For each United Counties common share outstanding, 5.0 shares of Meridian's common stock will be issued. As a result of Meridian's acquisition of United Counties, approximately 13.2 million additional shares of the Corporation's common stock will be issued. This transaction closed on February 23, 1996. A summary of selected unaudited historical financial information for Meridian and United Counties on a combined basis reflecting pooling of interests accounting follows:
Meridian and United Counties Combined ------------------------------------- YEAR ENDED DECEMBER 31, 1995 (a) (b) 1994 1993 -------------- ---------- --------- Operating results: Net interest income.......................... $678,394 $678,646 $685,865 Non-interest income.......................... 275,717 234,127 281,641 Income before cumulative effect of a change in accounting principle............ 202,003 185,880 174,733 Per common share data: Income before cumulative effect of a change in accounting principle............ $ 3.03 $ 2.72 $ 2.57 Average common shares outstanding............ 66,682 68,356 67,904 AT DECEMBER 31, 1995 (in millions, except per share amount) Assets.......................................... $ 16,391 Loans........................................... 10,675 Deposits........................................ 12,461 Common shareholders' equity..................... 1,511 Book value per common share..................... 22.57
_____________ (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 $0.31 per Meridian share). (b) Includes a gain of $13.8 million ($8.6 million after-tax or $0.13 per Meridian share) on the exchange of investment securities. A summary of unaudited pro forma financial information for the Corporation, Meridian and United Counties as if both transactions had occurred on January 1, 1993 is as follows:
YEAR ENDED DECEMBER 31, 1995 1994 1993 -------- -------- -------- (in millions, except per share amounts) Net interest income........................... $ 2,167 $ 2,068 $ 2,011 Non-interest income........................... 881 801 856 Income before cumulative effect of a change in accounting principle............. 655 436 538 Per common share.............................. $ 2.95 $ 1.93 $ 2.35 Average common shares outstanding............. 222.285 226.234 228.580
57 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, 1995 and 1994.
1995 1994 --------------------------------- --------------------------------- CARRYING Carrying OR NOTIONAL FAIR or Notional Fair AMOUNT VALUE Amount Value --------------- ---------------- --------------- ---------------- ASSETS: Cash and short-term assets.............. $ 5,192,303 $ 5,192,303 $ 4,744,790 $ 4,744,790 Investment securities................... 1,990,332 1,991,730 2,880,631 2,849,877 Trading account securities.............. 1,336 1,336 1,206 1,206 Net loans, excluding leases............. 19,813,829 19,978,986 19,315,247 19,856,330 LIABILITIES: Demand and savings deposits............. 14,741,389 14,741,389 15,213,517 15,213,517 Time deposits, including overseas....... 6,761,044 6,910,864 6,827,369 6,898,093 branches and subsidiaries Short-term borrowings................... 2,091,722 2,091,722 1,546,201 1,546,201 Long-term debt.......................... 1,698,334 1,740,311 1,791,110 1,741,345 OFF-BALANCE SHEET ASSET (LIABILITY): Letters of credit....................... 2,271,585 (22,716) 2,369,426 (5,923) Commitments to extend credit............ 14,092,523 (15,177) 11,802,714 (13,310) Derivative financial instruments........ 11,781,073 200,610 13,289,463 (204,183)
Fair value estimates, methods, and assumptions for the Corporation's financial instruments are set forth below: CASH AND DUE FROM BANKS AND SHORT-TERM INSTRUMENTS The carrying amounts reported in the balance sheet for cash and due from banks and short-term instruments approximate their fair values. Short-term instruments include: time deposits; Federal funds sold; and securities purchased under agreements to resell, all of which generally have original maturities of less than 90 days. INVESTMENT SECURITIES Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. TRADING ACCOUNT 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. 58 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 3. FAIR VALUES OF FINANCIAL INSTRUMENTS - continued LOANS Fair values are estimated for loans in groups with similar financial and risk characteristics. Loans are segregated by type including: commercial and industrial; commercial real estate; residential real estate; credit card and other consumer; financial institutions; factoring receivables; and foreign. Each loan type is further segmented into fixed and variable rate interest terms and by performing and non-performing categories in order to estimate fair values. The fair value of fixed-rate performing loans is calculated by discounting scheduled principal and interest cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan type at December 31, 1995 and 1994. The estimate of maturity is based on the Corporation's historical experience with repayments for each loan type, modified by an estimate of the effect of current economic and lending conditions. For performing residential mortgage loans, fair value is estimated by referring to secondary market source pricing. For credit card loans, cash flows and maturities are estimated based on contractual interest rates and historical experience and are discounted using secondary market rates adjusted for differences in servicing and credit costs. This estimate does not include the benefit that relates to cash flows which could generate from new loans to existing cardholders over the remaining life of the portfolio. For variable rate loans that reprice frequently and which have experienced no significant change in credit risk, fair values are based on carrying amounts. Fair value for non-performing loans is based on discounting estimated cash flows using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding cash flows, and discount rates are determined using available market information and specific borrower information. DEPOSIT LIABILITIES The fair values disclosed for demand deposits (non-interest bearing checking accounts, NOW accounts, savings accounts, and money market accounts) are, by FAS 107 definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for variable-rate, fixed-term certificates of deposit approximate their fair values. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates offered on certificates at December 31, 1995 and 1994, respectively, to an estimate of aggregate expected maturities for those certificates of deposit. The estimated fair values do not include the benefit that results from funding provided by core deposit liabilities as compared to the cost of borrowing funds in the financial markets. SHORT-TERM FUNDS BORROWED The carrying amounts of Federal funds purchased, securities sold under agreements to repurchase, commercial paper and other short-term borrowings approximate their fair values. LONG-TERM DEBT The fair values for long-term debt are based on quoted market prices where available. If quoted market prices are not available, fair values are estimated using discounted cash flow analyses based on the Corporation's borrowing rates at December 31, 1995 and 1994 for comparable types of borrowing arrangements. 59 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 3. FAIR VALUES OF FINANCIAL INSTRUMENTS - continued 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 lines, is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The value of commitments to extend credit under credit card lines is embodied in the benefit that relates to estimated cash flows from new loans expected to be generated from existing cardholders over the remaining life of the portfolio. The fair value of standby and commercial letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate the agreements or otherwise settle the obligations with the counterparties. 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, 1995 and 1994 were approximately $366,000 and $326,000, respectively. 60 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, 1995 and 1994 were as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- ----------- 1995 - - ---- Held-to-Maturity - - ---------------- U.S. Treasury............................ $ 7,947 $ 229 $ 8,176 U.S. Government agencies................. 578,802 4,652 $ 969 582,485 State and municipal...................... 180,378 7,766 375 187,769 Other: Domestic.............................. 217,111 2,254 12,175 207,190 Foreign............................... 31,383 16 - 31,399 ---------- ------- ------- ---------- Total held-to-maturity............. $1,015,621 $14,917 $13,519 $1,017,019 ========== ======= ======= ========== Available-for-Sale - - ------------------ U.S. Treasury............................ $ 553,268 $ 3,563 $ 349 $ 556,482 U.S. Government agencies................. 170,406 1,346 190 171,562 State and municipal...................... 55,345 683 84 55,944 Other: Domestic.............................. 111,164 32,687 1,434 142,417 Foreign............................... 26,989 21,317 - 48,306 ---------- ------- ------- ---------- Total available-for-sale........... $ 917,172 $59,596 $ 2,057 $ 974,711 ========== ======= ======= ========== 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 ========== ======= ======= ==========
On November 15, 1995, the FASB issued a Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities", which permitted an enterprise to reassess the appropriateness of the classification of all investment securities held between November 15, 1995 and December 31, 1995. Based on its reassessment, the Corporation reclassified $606,552 in investment securities previously classified as held-to-maturity to the available-for-sale category. Unrealized gains on transferred investments were $2,001, unrealized losses were $1,659, and the fair value was $606,894. 61 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 5. INVESTMENT SECURITIES - continued Marketable equity securities are carried in the available-for-sale portfolio and have been written up by $53,385 at December 31, 1995 and $43,989 at December 31, 1994, the aggregate of their excess fair values over cost, through after-tax credits to retained earnings. The Corporation recorded pre-tax gains of $7,654 in 1995, $11,926 in 1994 and $13,594 in 1993 on sales of certain domestic equity securities. During 1995, 1994 and 1993, the Corporation recorded pre-tax gains of $939, $2,567 and $8,617 on sales of foreign equity securities. Included in other domestic securities available-for-sale at December 31, 1995 were mortgage residual securities with an amortized cost and fair value of $3,072 and $3,513, 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 $5,276 pre-tax, $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 1995, which provided more definitive criteria for recognition of impairment losses on these types of securities. At December 31, 1995 and 1994, 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 $1,018,170 were pledged at December 31, 1995 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, 1995, 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.
AMORTIZED FAIR COST VALUE --------- --------- Held-to-Maturity - - ---------------- Due in one year or less............................ $184,790 $185,794 Due after one year through five years.............. 173,584 176,388 Due after five years through ten years............. 98,500 89,191 Due after ten years................................ 48,050 51,280 Mortgage-backed securities......................... 382,671 385,525 -------- -------- $887,595 $888,178 ======== ======== Available-for-Sale - - ------------------ Due in one year or less............................ $292,738 $293,726 Due after one year through five years.............. 397,708 400,159 Due after five years through ten years............. 12,974 13,064 Due after ten years................................ 40,225 40,169 Mortgage-backed securities......................... 130,405 131,086 -------- -------- $874,050 $878,204 ======== ========
Proceeds from sales of investments in debt securities available-for-sale during 1995, 1994, and 1993 were $194,525, $657,361 and $535,267, respectively. Gross gains of $1,948 in 1995, $9,625 in 1994, and $6,069 in 1993, and gross losses of $1,153 in 1995, $4,739 in 1994, and $200 in 1993 were realized on those sales. 62 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 6. LOAN PORTFOLIO For a breakdown of the loan portfolio by type of loan and for information on non-performing loans, refer to Supplemental Financial Data under the captions Loan Portfolio and Non-Performing Assets (pages 89 and 91). The Corporation has traditionally maintained limits on industry, market and borrower concentrations as a way to diversify and manage credit risk. The Corporation's current policy is to limit industry concentrations to 50% of total equity and to limit market segment concentrations to 10% of total assets. The Corporation manages industry concentrations by applying these dollar limits to industries that have common risk characteristics. Derivative financial instruments of $4,251,000 notional value at December 31, 1995 were used to manage interest rate risk associated with loans. At December 31, 1995, unrealized gains on these derivative financial instruments were $104,000 and unrealized losses were $5,000. The effect of these derivative financial instruments on the yield of the loan portfolio for the year ended December 31, 1995 was to increase the yield from 9.56% to 9.65%. The book value of real estate loans transferred to other real estate owned during 1995, 1994 and 1993 was $5,388, $32,215 and $48,124, respectively. At December 31, 1995 and 1994, the Corporation had loans totaling $162,070 and $147,465, 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 1995 additions and reductions were $1,461,953 and $1,447,348, respectively. 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. Included in loans at December 31, 1995 and 1994 were $389,000 and $530,000, respectively, of loans accounted for as held for sale and carried at lower of cost or market. 63 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, 1995, 1994 and 1993:
1995 1994 1993 --------- --------- --------- Balance at beginning of period.................... $ 500,631 $ 450,823 $ 442,267 Allowance for loans sold at date of sale.......... - - (353) Allowance for loans purchased at date of purchase.................................... - 24 - Allowance for loans of bank acquired under purchase method of accounting.................. - 23,739 2,703 Provision charged to operating expense............ 105,000 246,900 121,201 Recoveries of loans previously charged off........ 68,641 63,059 86,738 Loan charge-offs.................................. (179,197) (283,914) (201,733) --------- --------- --------- Balance at end of period.......................... $ 495,075 $ 500,631 $ 450,823 ========= ========= =========
At December 31, 1995, the recorded investment in loans that are considered to be impaired under FAS 114 was $121,960. Included in total impaired loans is $47,834 against which $14,145 of the allowance for loan losses is allocated. During 1995, impaired loans averaged approximately $170,107. For the year ended December 31, 1995, the Corporation recognized interest income of approximately $13,509 on impaired loans. 64 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 8. PREMISES AND EQUIPMENT Premises and equipment on the consolidated balance sheet is net of accumulated depreciation and amortization of $523,226 and $535,126 at December 31, 1995 and 1994, respectively. Depreciation and amortization of premises and equipment for the years ended December 31, 1995, 1994, and 1993, was $67,413, $64,549 and $67,557, respectively. 9. DEPOSITS The following presents a breakdown of deposits at December 31, 1995 and 1994:
1995 1994 ------------ ------------ Domestic: Non-interest bearing checking..................... $ 6,700,599 $ 6,362,470 NOW accounts...................................... 1,715,831 1,875,391 Savings accounts.................................. 3,924,841 4,354,829 Money market accounts............................. 2,400,119 2,620,827 Time deposits..................................... 5,620,977 5,714,004 ----------- ----------- Total domestic deposits....................... 20,362,365 20,927,521 Overseas branches and subsidiaries.................. 1,140,068 1,113,365 ----------- ----------- Total deposits................................ $21,502,433 $22,040,886 =========== ===========
Domestic time deposits in denominations of $100 or more at December 31, 1995, 1994, and 1993 were:
1995 1994 1993 ----------- -------- -------- Commercial certificates of deposit.................. $ 220,032 $268,402 $295,835 Other domestic time deposits, principally savings certificates................ 366,487 371,771 145,195 ---------- -------- -------- Total................................... $ 586,519 $640,173 $441,030 ========== ======== ========
Interest expense on domestic time deposits in denominations of $100 or more for the years ended December 31, 1995, 1994, and 1993 was:
1995 1994 1993 ----------- -------- -------- Interest expense: Commercial certificates of deposit............. $ 12,554 $ 9,547 $ 13,908 Other domestic time deposits, principally savings certificates....................... 20,910 13,231 9,434 ---------- -------- -------- Total................................... $ 33,464 $ 22,778 $ 23,342 ========== ======== ========
Substantially all of the deposits of overseas branches and subsidiaries were time deposits in denominations of $100 or more for each of the three years presented. Derivative financial instruments of $3,862,000 notional value at December 31, 1995 were used to manage interest rate risk associated with deposits. At December 31, 1995, unrealized gains on these derivative financial instruments were $73,000 and unrealized losses were $5,000. The effect of derivative financial instruments on the cost of deposits for the year ended December 31, 1995 was to decrease the cost from 3.74% to 3.61%. 65 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, 1995 and 1994 include the following:
1995 1994 ----------- ----------- Federal funds purchased (a)........................ $ 482,932 $ 252,340 Securities sold under agreements to repurchase (b).................................... 129,145 139,923 Commercial paper (c)............................... 1,255,656 853,947 Other short-term funds borrowed (d)................ 223,989 299,991 ---------- ---------- Total short-term funds borrowed (e)............. $2,091,722 $1,546,201 ========== ==========
______________________ (a) Federal funds purchased generally represent the overnight Federal funds transactions of banking subsidiaries with correspondent banks. The weighted average interest rate paid was 6.11% in 1995, 4.58% in 1994 and 3.15% in 1993. The maximum amount outstanding at any month-end was $1,141,271 during 1995, $961,634 during 1994, and $1,160,951 during 1993. (b) Securities sold under agreements to repurchase usually mature within one to thirty days or are due on demand. The weighted average interest rate paid was 4.82% in 1995, 2.61% in 1994 and 2.73% in 1993. The maximum amount outstanding at any month-end was $190,492 during 1995, $281,327 during 1994, and $386,368 during 1993. (c) Commercial paper issued by CSCC is used to finance the short-term borrowing requirements of certain banking-related activities. Commercial paper is issued with maturities of not more than nine months and there are no provisions for extension, renewal or automatic rollover. The weighted average interest rate on commercial paper borrowings was 5.94% in 1995, 4.24% in 1994, and 3.14% in 1993. The maximum amount outstanding at any month-end was $1,388,927 during 1995, $919,292 during 1994, and $714,439 during 1993. At December 31, 1995, the Corporation had a $650,000 revolving credit facility from unaffiliated banks. The facility was established in support of commercial paper borrowings, Medium Term Note (see Note 11) issuance and general corporate purposes. Unless extended by the Corporation in accordance with the terms of the facility agreement, the facility expires January 1999. There were no borrowings under this facility at December 31, 1995. 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 $2,073,000 in 1995, $1,928,000 in 1994, and $1,962,000 in 1993. The weighted average interest rate was 5.77% in 1995, 4.42% in 1994 and 3.42% in 1993. The average interest rate is calculated primarily on a daily average of short-term funds borrowed. 66 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 11. LONG-TERM DEBT Long-term debt at December 31, 1995 and 1994 includes the following:
CoreStates Financial Corp: 1995 1994 ------------ ------------ 8 5/8% Mortgages due 2001........................... $ 8,823 $ 9,997 ---------- ---------- CSCC: 5 7/8% Guaranteed Subordinated Notes due 2003 (a)................................ 200,000 200,000 6 5/8% Guaranteed Subordinated Notes due 2005 (a)................................ 175,000 175,000 9 5/8% Guaranteed Subordinated Notes due 2001 (a)................................ 150,000 150,000 9 3/8% Guaranteed Subordinated Notes due 2003 (a)................................ 100,000 100,000 Medium Term Notes (b)............................... 1,036,035 1,099,585 Unamortized Discounts............................... (3,631) (3,785) ---------- ---------- 1,657,404 1,720,800 ---------- ---------- Other subsidiaries: Federal Home Loan Bank Borrowings (c).................................... 30,000 55,000 Various other....................................... 2,107 5,313 ---------- ---------- 32,107 60,313 ---------- ---------- Total long-term debt (d)............................ $1,698,334 $1,791,110 ========== ==========
____________________ (a) 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. (b) 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, 1995, $1,036,035 of debt was outstanding with terms up to five years. Interest rates are predominately variable, but include several issues at fixed interest rates ranging from 5.30% to 5.50%. 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 $294,000 at December 31, 1995. A new shelf registration statement will be filed in the first half of 1996 increasing registered but unissued debt and capital securities to $1,750,000. (c) The borrowings range in maturity from February 1996 to June 1996 at fixed interest rates from 4.58% to 4.82%. (d) The consolidated aggregate maturities and sinking fund requirements for long-term debt for the years ending December 31, 1996 through 2000 are: $305,469; $275,497; $326,653; $137,356; and $26,322, respectively. 67 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 11. LONG-TERM DEBT - continued Derivative financial instruments of $614,000 notional value at December 31, 1995 were used to manage interest rate risk associated with long-term debt. At December 31, 1995, unrealized gains on these derivative financial instruments were $24,000 and unrealized losses were $8,000. The effect of these derivative financial instruments on the cost of long-term debt for the year ended December 31, 1995 was to decrease the interest rate from 6.71% to 6.69%. 12. RETIREMENT AND BENEFIT PLANS The projected benefit obligation under the Corporation's defined benefit pension plans exceeded plan assets at fair value by $23,696 at December 31, 1995, 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:
DECEMBER 31, ---------------------- 1995 1994 ---------- ---------- Plan assets at fair value(a)........................................... $588,640 $456,293 -------- -------- Present value of benefit obligation: Accumulated benefits based on salaries to date, including vested benefits of $464,912 in 1995 and $371,570 in 1994............................................................ 492,394 402,772 Additional benefits based on estimated future salary levels......... 119,942 97,867 -------- -------- Projected benefit obligation........................................... 612,336 500,639 -------- -------- Amount projected benefit obligation exceeds plan assets at fair value at December 31,.......................... (23,696) (44,346) Reconciliation: Unrecognized prior service cost.................................... 11,806 5,879 Unrecognized net asset from date of initial application............ (22,336) (27,538) Net deferred actuarial loss........................................ 29,006 19,299 -------- -------- Accrued pension expense included in other liabilities.................. $ (5,220) $(46,706) ======== ========
______________________ (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, 1995, 1994 and 1993 included the following expense (income) components:
1995 1994 1993 ------------ ------------ ------------- Service cost benefits earned during the period...................... $ 16,615 $ 21,260 $ 16,117 Interest cost on projected benefit obligation....................... 40,997 38,773 35,186 Actual (return) loss on plan assets................................. (112,879) 17,746 (49,401) Net amortization and deferral....................................... 69,591 (57,389) 10,105 --------- -------- -------- Net pension cost................................................ $ 14,324 $ 20,390 $ 12,007 ========= ======== ========
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation for the Corporation was 7.0% and 8.0%, respectively, at December 31, 1995 and 1994. 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 $13,192 in 1995, $13,133 in 1994, and $13,576 in 1993. Prior to its acquisition by the Corporation, Independence maintained a defined contribution plan which covered all employees who met age and service requirements. Expense related to this plan was $2,407 in 1994 and $2,636 in 1993. Vested contributions were rolled into the Corporation's savings plan. 68 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. The liability for postretirement benefits included in other liabilities at December 31, 1995 and 1994 was as follows:
1995 1994 ---------- ---------- Accumulated postretirement benefit obligation: Retirees...................................................................... $(110,642) $ (93,547) Fully eligible active plan participants....................................... (1,818) (2,979) Other active plan participants................................................ (28,445) (32,420) --------- --------- Accumulated postretirement benefit obligation.................................. (140,905) (128,946) Plan assets at fair value (a).................................................. 46,974 24,467 --------- --------- Unfunded obligation at December 31,............................................ (93,931) (104,479) Unrecognized prior service cost................................................ 115 - Unrecognized net (gain) loss................................................... (18,722) (27,247) --------- --------- Accrued postretirement benefit obligation included in other liabilities........ $(112,538) $(131,726) ========= =========
_____________________ (a) Primarily municipal bonds and short-term investments. Net periodic postretirement benefit cost for the years ended December 31, 1995, 1994 and 1993 included the following expense (income) components:
1995 1994 1993 ------- -------- -------- Service cost benefits earned during the period.......... $ 2,173 $ 2,323 $ 2,160 Interest cost on accumulated postretirement benefit obligation........................................... 9,638 9,261 10,108 Actual return on plan assets............................ (1,107) (461) (6) Net amortization and deferral........................... (1,436) (736) 6 ------- ------- ------- Net periodic postretirement benefit cost................ $ 9,268 $10,387 $12,268 ======= ======= =======
For measurement purposes, a 10.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1995; 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, 1995 by $9,662 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $663. 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 7.0% and 8.0%, respectively, at December 31, 1995 and 1994. 69 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 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 1995 follows:
SHARES UNDER OPTION PRICE OPTION PER SHARE ------------- ------------ Balance at January 1, 1995........... 7,235,699 $ 3.99 - $54.70 Options granted...................... 1,754,977 28.75 - 28.75 Options exercised.................... (3,069,893) 3.99 - 28.16 Options canceled..................... (118,737) 7.64 - 54.70 ---------- Balance at December 31, 1995......... 5,802,046 3.99 - 28.75 ----------
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 preceding option table does not reflect 122,800 performance unit awards outstanding at December 31, 1995, 214,062 at December 31, 1994 and 280,190 at December 31, 1993. 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 1995, 1994 and 1993, respectively, $1,258, $867 and $1,051 was expensed in connection with performance unit awards. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123") was issued in October 1995 to establish accounting and reporting standards for stock-based employee compensation plans such as stock option and restricted stock plans ("stock-based plans"). FAS 123 defines a fair value based method of accounting for measuring compensation expense for stock- based plans and encourages all entities to adopt that method of accounting. However, FAS 123 also permits entities to continue to measure compensation expense for stock-based plans using the intrinsic value based method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to remain with the intrinsic value based method must begin to make pro forma disclosures of net income and earnings per share in fiscal years beginning after December 31, 1995 as if the fair based method defined by FAS 123 was applied. Under the fair value based method, compensation expense would be measured as the value of an award under a stock-based plan on the date the award is granted, and would be recognized over the vesting period of the award. Under the current intrinsic value based method, compensation expense is measured as the excess, if any, of the market price of the stock underlying the award on the date the award is granted, over the exercise price. Under CoreStates' stock-based long-term incentive plan, awards have no intrinsic value on the date of grant as the exercise price equals the market price on that date. Currently, CoreStates does not expect to adopt the FAS 123 fair value based method of accounting for stock- based plans but will provide the required pro forma disclosures in the December 31, 1996 financial statements. 70 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 14. OPERATING LEASES Rental expense, reduced by sublease rental income, charged to operations was $64,995, $63,901 and $63,055 for 1995, 1994 and 1993, 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. 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, 1995 are summarized by category in the table on page 29. A summary of interest rate swap contracts categorized by whether the Corporation receives or pays fixed rates and stratified by repricing or maturity date is on page 32. 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 trading at December 31, 1995 and 1994 are summarized by type of instrument in the table on page 33. 71 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS AND COMMITMENTS - continued The following is a summary of off-balance sheet commitments and derivative financial instruments as of December 31, 1995 and 1994, including fair values:
1995 1994 --------------------------- --------------------------- NOTIONAL FAIR Notional Fair OR VALUE or Value CONTRACTUAL OF ASSET Contractual of Asset1 AMOUNT (LIABILITY)(1) Amount (Liability)(1) ----------- -------------- ----------- -------------- Standby letters of credit, net of participations (a)............. $ 1,005,261 $(10,053) $1,125,262 $ (2,813) Commercial letters of credit..................................... 1,266,324 (12,663) 1,244,164 (3,110) Commitments to extend credit (b)................................. 10,219,882 (15,177) 8,223,261 (13,310) Unused commitments under credit card lines....................... 3,872,641 - 3,579,453 - Interest rate futures contracts (c): Commitments to purchase....................................... 619,000 538 1,043,000 (1,185) Commitments to purchase foreign and U.S. currencies (d)........................................... 1,659,925 1,545 1,816,549 1,702 Interest rate swaps, notional principal amounts (e)................................................... 7,770,802 198,531 8,234,400 (210,300) Interest rate caps and floors (f): Written....................................................... 647,323 (2,592) 749,857 (15,000) Purchased..................................................... 948,023 4,235 1,150,657 20,200 Other derivatives................................................ 136,000 (1,647) 295,000 400
_________________________ (1) See Note 3 for discussion of fair value. 72 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 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, 1995 and 1994 was $16,394 and $2,275, respectively. Included in fees for international services are net foreign exchange gains of $21,884, $18,863 and $15,979 for the years ended December 31, 1995, 1994 and 1993, 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, 1995 and 1994, the replacement cost of the Corporation's interest rate swap contracts was $214,943 and $17,093, respectively. The risk of counterparty failure is controlled by limiting transactions to an approved list of counterparties and requiring collateral in certain instances. Net cash received on interest rate swaps during 1995 and 1994 totaled $32,080 and $99,928, respectively. (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 totaled $4,235 and $20,200, respectively, at December 31, 1995 and 1994. 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. 73 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:
1995 1994 1993 --------- --------- --------- Current: Federal.......................................... $200,567 $106,053 $155,972 State............................................ 19,928 15,652 18,209 -------- -------- -------- Total domestic.............................. 220,495 121,705 174,181 Foreign.......................................... 8,023 5,558 10,284 -------- -------- -------- Total current............................... 228,518 127,263 184,465 Deferred Federal and state expense (benefit)......................................... 34,047 16,393 (10,656) -------- -------- -------- Total provision for income taxes............ $262,565 $143,656 $173,809 ======== ======== ========
The significant components of the Corporation's deferred tax assets and liabilities at December 31, 1995 and 1994 are as follows:
1995 1994 --------- ---------- Deferred tax assets: Allowance for loan losses....................... $171,756 $171,176 Postretirement and postemployment benefits...... 47,612 65,743 Reserves........................................ 43,523 26,616 Other........................................... 53,667 61,108 -------- -------- Gross deferred tax asset........................ 316,558 324,643 Valuation allowance............................. - (9,102) -------- -------- Total deferred tax assets................... 316,558 315,541 -------- -------- Deferred tax liabilities: Auto leasing portfolio.......................... 103,258 88,570 FAS 115 fair value accounting................... 18,888 5,981 Partnership investments......................... 3,282 744 Tax over book depreciation...................... 16,985 18,040 Affiliate income................................ 30,404 17,716 Other........................................... 10,064 9,984 -------- -------- Total deferred tax liabilities.............. 182,881 141,035 -------- -------- Net deferred tax assets............................ $133,677 $174,506 ======== ========
At December 31, 1995 cumulative deductible temporary differences are approximately $904,000 and the related deferred tax asset is $316,558. The major components of the temporary differences include $491,000 related to the allowance for loan losses and $136,000 related to pension, and other post retirement and post employment benefits. Cumulative taxable temporary differences related to deferred tax credits at December 31, 1995 are estimated at $522,000 and are primarily related to leasing, FAS 115 fair value accounting, affiliate income and depreciation. The related deferred tax liability is $182,881. 74 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 16. PROVISION FOR INCOME TAXES - continued At December 31, 1995, the Corporation has determined that it is not required to establish a valuation allowance for the deferred tax asset since it is more likely than not that the deferred tax asset of $316,558 will be realized principally 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. 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. The Corporation has reversed the $9,102 valuation allowance for the deferred tax asset related to pre-affiliation state income taxes. An estimated $4,000 state benefit for tax purposes will be obtained in future periods. No further benefit will be obtained on the remaining $5,102. The consolidated effective tax rates are reconciled to the statutory rate as follows:
1995 1994 1993 ---- ---- ---- Statutory rate...................................... 35.0% 35.0% 35.0% Difference resulting from: Tax-exempt income................................. (1.5) (3.4) (3.1) State, local and foreign income tax............... 1.8 2.6 2.4 Other, net........................................ 1.4 2.4 (1.9) ---- ---- ---- Effective tax rate.................................. 36.7% 36.6% 32.4% ==== ==== ====
Foreign earnings of certain subsidiaries would be taxed only upon their transfer to the United States. No transfers or dividends are contemplated at this time. Taxes payable upon remittance of such accumulated earnings of $21,323 at December 31, 1995 would approximate $7,065. Taxes, other than income taxes, included in other operating expenses for the years ended December 31, 1995, 1994 and 1993 are $72,013, $70,505 and $76,608, respectively. 75 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:
THREE MONTHS ENDED -------------------------------------------------------- DEC. 31 SEPT. 30 JUNE 30 MARCH 31 ------- -------- ------- -------- 1995 - - ---- Interest income................................................ $ 568,358 $ 566,368 $576,592 $550,987 ============ ========== ======== ======== Interest expense............................................... $ 193,708 $ 195,980 $197,964 $186,119 ============ ========== ======== ======== Net interest income............................................ $ 374,650 $ 370,388 $378,628 $364,868 ============ ========== ======== ======== Provision for losses on loans.................................. $ 27,500 $ 27,500 $ 25,000 $ 25,000 ============ ========== ======== ======== Securities gains............................................... $ 931 $ 470 $ 1,592 $ 6,395 ============ ========== ======== ======== Net income..................................................... $ 136,954(b) $ 133,946(b) $125,970(b) $ 55,367(a) ============ ========== ======== ======== Net income per common share.................................... $0.99(b) $0.96(b) $0.89(b) $0.38(a) ===== ===== ===== ===== Average common shares outstanding.............................. 138,468 139,176 140,914 144,246 ======= ======= ======= ======= Common Stock Market Bid Information: High......................................................... $ 40 1/8 $ 38 7/8 $ 36 $ 33 Low.......................................................... 34 5/8 34 1/4 30 1/2 25 5/8 Quarter-end.................................................. 37 7/8 36 5/8 34 5/8 32 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............................. $0.78 $0.74 $0.44(d) $(0.21)(c)(d) ===== ===== ===== ====== Average common shares outstanding.............................. 142,252 141,033 142,139 144,612 ======= ======= ======= ======= Common Stock Market Bid Information: High......................................................... $ 27 5/8 $ 29 1/8 $ 28 $ 27 1/8 Low.......................................................... 22 7/8 25 7/8 25 24 1/2 Quarter-end.................................................. 26 26 5/8 25 3/4 26
______________________ (a) Includes the impact of an after-tax restructuring charge of $70.0 million, or $0.49 per share related to a process redesign and an after-tax gain of $11.8 million, or $0.08 per share related to a change in ownership interests in a joint venture. (b) Includes the impact of after-tax restructuring credits of $1.9 million or $0.01 per share, $1.5 million or $0.01 per share, and $4.1 million or $0.03 per share recorded in the second, third and fourth quarters of 1995, respectively. (c) Based on income before cumulative effect of a change in accounting principle. (d) Reflects after-tax merger-related charges of $0.89 per share recorded in the first quarter of 1994 for the Constellation acquisition and $0.28 per share recorded in the second quarter of 1994 for the Independence acquisition. 76 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS: CONTINUED (DOLLAR AMOUNTS IN THOUSANDS) 18. INTERNATIONAL OPERATIONS International operations include the international activities of CBNA and its five 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:
Domestic International Operations Operations Total ------------ ------------- ------------ DECEMBER 31, 1995 Assets(a)......................................... $27,222,121 $2,398,495 $29,620,616 =========== ========== =========== Total operating income............................ $ 2,657,357 $ 210,614 $ 2,867,971 =========== ========== =========== Income before income taxes........................ $ 670,728 $ 44,074 $ 714,802 =========== ========== =========== Net income........................................ $ 423,589 $ 28,648 $ 452,237 =========== ========== =========== DECEMBER 31, 1994 Assets(a)......................................... $27,581,360 $1,743,776 $29,325,136 =========== ========== =========== Total operating income............................ $ 2,302,798 $ 194,269 $ 2,497,067 =========== ========== =========== 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 =========== ========== ===========
____________________ (a) The Corporation had no material foreign currency positions at December 31, 1995, 1994 and 1993. Assets primarily consist of Eurodollar time deposit placements, loans and acceptances with maturities of one year or less. 77 CORESTATES FINANCIAL CORP AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 19. JOINT VENTURE In December 1992, the Corporation entered into a joint venture with three other banking companies creating Electronic Payment Services, Inc. ("EPS"). The joint venture combines the partners' separate consumer electronic transaction processing businesses and provides automated teller machine ("ATM") and electronic point-of-sale ("POS") processing services. The Corporation contributed to EPS its wholly-owned subsidiaries Money Access Service Inc. ("MAC"), a regional ATM network, and BUYPASS Corporation, a third- party processor of electronic POS transactions. At the formation of EPS, the Corporation had equal ownership with two partners in the joint venture, each with 31%. The fourth partner owned 7%. As part of the 1992 transaction, the Corporation received a cash payment of $79,350 and $245,400 of EPS 5% cumulative redeemable preferred stock. The exchange of assets involved in the transaction resulted in a 1992 pre-tax gain to the Corporation of $41,072, $25,670 after-tax. The exchange also generated a deferred gain of approximately $138,000. In December 1993, the Corporation and EPS mutually agreed to enter into a recapitalization of EPS involving the EPS preferred stock held by the Corporation. In exchange for substantially all of the preferred stock, the Corporation received from EPS a ten-year 6.45% note providing for equal principal payments over the life of the note. The recapitalization did not affect the amount of deferred gain, but changed the timing of deferred gain income recognition from a five-year period beginning in 1996 to a ten-year period which began in 1994. On March 27, 1995, EPS added a new partner and increased the ownership interests of an existing partner to that of a full partner, resulting in a decrease in the Corporation's share of ownership from 31% to 20%. As a direct result of this change in ownership interests, the Corporation recognized a pre-tax gain of $19,000, $11,800 after-tax or $0.08 per share, in 1995. Included in the pre-tax gain amount was $4,000 related to the acceleration of deferred gain recognition. The Corporation's investment in EPS at December 31, 1995, net of $117,000 deferred gain, is $72,632 and is included in other assets. "Income from investment in EPS, Inc.", which is included in non-interest income, reflects the Corporation's share in EPS net income for all periods presented, interest income on the 6.45% note in 1995 and 1994, dividends on the preferred stock in 1993 and amortization of the deferred gain in 1995 and 1994. 20. RESTRUCTURING CHARGE The Corporation recorded a restructuring charge of $110,000, $70,000 after-tax or $0.49 per share, in the first quarter of 1995 in connection with a process redesign which commenced March 1995 and will continue into 1996. The objectives of the process redesign are : (i) to enhance the Corporation's customer focus; (ii) to accelerate "cultural changes" which were already in progress; and (iii) to improve productivity. The charge included direct and incremental costs associated with the process redesign. The components of the restructuring charge were as follows:
REQUIRING 1995 CASH CASH TOTAL OUTFLOW OUTFLOW --------- --------- -------- Severance costs................................ $ 72,000 $72,000 $28,306 Office reconfiguration costs................... 16,000 7,000 - Branch closing costs........................... 15,000 7,000 1,669 Outplacement costs............................. 2,500 2,500 1,821 Miscellaneous.................................. 4,500 2,500 1,474 -------- ------- ------- Total..................................... $110,000 $91,000 $33,270 ======== ======= =======
Subsequent to recording the March 1995 restructuring charge, the Corporation recorded restructuring credits of $11,825, $7,525 after-tax or $0.05 per share, related to gains on the curtailment of pension benefits associated with employees displaced during 1995 and gains on the sale of branches which were sold as a result of the process redesign. The following table summarizes the activity in the restructuring accrual for the year ended December 31, 1995: Balance at beginning of year.............. $ - Provision charged against income.......... 110,000 Cash outflow.............................. (33,270) Writedowns of assets...................... (7,442) -------- Balance at December 31, 1995.............. $ 69,288 ========
78 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS: Continued (DOLLAR AMOUNTS IN THOUSANDS) 21. FINANCIAL STATEMENTS OF THE PARENT COMPANY
STATEMENT OF INCOME Year Ended December 31, ------------------------------------- 1995 1994 1993 ---------- ---------- --------- REVENUES - - -------- Dividends from subsidiaries: Banks.............................................................. $ 248,131 $ 240,370 $ 204,393 Other subsidiaries................................................. 90,267 20,375 14,648 ---------- ---------- --------- Total dividends from subsidiaries............................... 338,398 260,745 219,041 Management fees and other income from subsidiaries................... 146,011 144,583 143,776 Securities (losses).................................................. - (2) (380) Other income......................................................... 784 119 721 ---------- ---------- --------- Total revenues.................................................. 485,193 405,445 363,158 ---------- ---------- --------- EXPENSES - - -------- Interest on: Funds borrowed..................................................... 19,685 9,709 5,525 Long-term debt..................................................... 927 1,020 8,405 ---------- ---------- --------- Total interest expense.......................................... 20,612 10,729 13,930 Other operating expenses............................................. 151,000 173,157 137,468 ---------- ---------- --------- Total expenses.................................................. 171,612 183,886 151,398 ---------- ---------- --------- Income before income tax benefit and equity in undistributed income of subsidiaries.............................. 313,581 221,559 211,760 Income tax benefit................................................... (8,272) (13,715) (2,882) ---------- ---------- --------- Income before equity in undistributed income of subsidiaries......... 321,853 235,274 214,642 Equity in undistributed income (loss) of subsidiaries: Banks.............................................................. 111,996 (52,590) 89,743 Other subsidiaries................................................. 18,388 62,678 45,034 ---------- ---------- --------- Total equity in undistributed income of subsidiaries............ 130,384 10,088 134,777 ---------- ---------- --------- NET INCOME........................................................... $ 452,237 $ 245,362 $ 349,419 ========== ========== ========= BALANCE SHEET December 31, ------------------------ 1995 1994 ---------- ---------- ASSETS - - ------ Cash................................................................. $ 1,254 $ 3,893 Time deposit......................................................... - 300 Investments: securities available-for-sale........................... 9,982 69,566 Investments and receivables-subsidiaries: Investments in subsidiaries at equity in underlying net assets: Banks.............................................................. 2,255,495 2,279,541 Other subsidiaries................................................. 337,048 308,130 ---------- ---------- Total investments in subsidiaries............................... 2,592,543 2,587,671 Other................................................................ 3,995 9,165 ---------- ---------- Total investments and receivables-subsidiaries.................. 2,596,538 2,596,836 Other assets......................................................... 34,066 31,579 ---------- ---------- Total assets.................................................... $2,641,840 $2,702,174 ========== ========== LIABILITIES - - ----------- Funds borrowed - subsidiaries........................................ $ 176,551 $ 246,609 Dividends payable and other liabilities.............................. 76,012 94,200 Long-term debt....................................................... 9,858 11,251 ---------- ---------- Total liabilities............................................... 262,421 352,060 ---------- ---------- SHAREHOLDERS' EQUITY - - -------------------- Total shareholders' equity...................................... 2,379,419 2,350,114 ---------- ---------- Total liabilities and shareholders' equity...................... $2,641,840 $2,702,174 ========== ==========
79 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS: Continued (DOLLAR AMOUNTS IN THOUSANDS) 21. FINANCIAL STATEMENTS OF THE PARENT COMPANY - CONTINUED The approval of the Comptroller of the Currency is required for a nationally chartered bank to pay dividends if the total of all dividends declared in any calendar year exceeds the bank's net profits (as defined by national banking regulations) for that year combined with its retained net profits for the preceding two calendar years. Under this formula, CBD can declare dividends without approval of the Comptroller of the Currency of approximately $37 million, plus an additional amount equal to CBD's retained net profits for 1996 up to the date of any such dividend declaration. CBNA and NJNB will be able to declare dividends without the approval of the Comptroller of the Currency to the extent that and when 1996 retained net profits exceed $2 million and $7 million, respectively. 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 in that Act) 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, 1995 in the amount of $2,916,691, which includes $1,255,656 for commercial paper. The maturities for parent company long-term debt for the years ending December 31, 1996 through 2000 are: $1,234; $1,345; $1,466; $1,596; and $1,741, respectively.
STATEMENT OF CASH FLOWS Year Ended December 31, ------------------------------------------- 1995 1994 1993 --------- ---------- --------- OPERATING ACTIVITIES Net income.......................................................... $ 452,237 $ 245,362 $ 349,419 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed income of subsidiaries............................. (130,384) (10,088) (143,393) Securities losses................................................ - 2 380 Deferred income tax expense (benefit)............................ (953) (5,428) 1,692 Net (increase) decrease in other assets.......................... (1,895) - 96 Net increase (decrease) in other liabilities..................... (2,020) (419) 1,082 Other, net....................................................... 661 (8,142) (3,147) --------- ---------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 317,646 221,287 206,129 --------- ---------- --------- INVESTING ACTIVITIES Net capital returned from (contributed to) subsidiaries............. 149,000 (15,860) 37,119 (Increase) decrease in receivables from subsidiaries................ 5,170 53,862 (16,962) Purchases of investment securities.................................. (58,001) (202,309) (483,551) Proceeds from maturities and sales of investment securities......... 117,585 188,028 453,002 Purchase of Germantown Savings Bank................................. - (108,061) - Other, net.......................................................... 417 - (188) --------- --------- --------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES....................................................... 214,171 (84,340) (10,580) --------- --------- --------- FINANCING ACTIVITIES Retirement of long-term debt........................................ (1,393) (45,488) (20,940) Net increase (decrease) in financing from and due to subsidiaries... (94,054) 270,587 (75,967) Cash dividends paid................................................. (194,067) (160,122) (143,334) Purchase of treasury stock.......................................... (335,528) (228,963) (29,449) Other, net.......................................................... 90,586 22,178 29,538 --------- --------- --------- NET CASH USED IN FINANCING ACTIVITIES............................. (534,456) (141,808) (240,152) --------- --------- --------- DECREASE IN CASH AND DUE FROM BANKS............................. (2,639) (4,861) (44,603) Cash and due from banks at January 1,............................. 3,893 8,754 53,357 --------- --------- --------- CASH AND DUE FROM BANKS AT DECEMBER 31,........................... $ 1,254 $ 3,893 $ 8,754 ========= ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest........................................................... $ 20,810 $ 10,884 $ 10,712 ========= ========= ========= Income taxes...................................................... - - - ========= ========= =========
80 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES
1995 1994 --------------------------------- -------------------------------- AVERAGE INCOME/ Average Income/ BALANCE RATE EXPENSE balance Rate expense --------- ----- ------------- --------- ----- ------------ (000,000) (000) (000,000) (000) INTEREST EARNING ASSETS Time deposits, principally Eurodollars (a)......... $ 1,843 6.33% $ 116,689 $ 1,520 4.37% $ 66,389 Investment securities (b): U.S. Government................................... 1,661 5.72 94,994 2,235 5.06 112,990 State and municipal............................... 278 8.43 23,428 365 7.65 27,921 Other............................................. 428 6.13 26,235 414 6.02 24,925 --------- ---------- --------- ---------- Total investment securities................... 2,367 6.11 144,657 3,014 5.50 165,836 Federal funds sold................................. 229 6.34 14,527 165 4.70 7,754 Trading account securities......................... 2 2.45 49 3 5.63 169 Loans (b)(c)(d): Domestic: Commercial, industrial and other................. 9,338 9.83 917,635 8,222 8.56 703,985 Real estate...................................... 5,894 8.93 526,163 6,265 8.01 502,048 Consumer......................................... 2,764 12.26 338,839 2,572 11.78 302,951 Financial institutions........................... 708 7.00 49,594 618 8.02 49,571 Factoring receivables............................ 543 10.63 57,747 587 9.95 58,389 Lease financing.................................. 734 7.90 57,988 750 8.27 61,999 Foreign........................................... 789 7.05 55,650 587 5.40 31,683 --------- ---------- --------- ---------- Total loans, net of discounts................ 20,770 9.65 2,003,616 19,601 8.73 1,710,626 --------- ---------- --------- ---------- Total interest earning assets (d)(e)......... $ 25,211 9.04 2,279,538 $ 24,303 8.02 1,950,774 ========= ----- ---------- ========= ------ ---------- FUNDING SOURCES Interest bearing liabilities (b): Deposits in domestic offices (f): Commercial....................................... $ 247 5.42 13,382 $ 269 3.76 10,125 NOW accounts..................................... 1,715 1.09 17,199 1,829 .68 11,470 Money Market Accounts............................ 3,649 3.25 118,010 3,935 2.12 83,167 Consumer savings................................. 2,807 1.95 54,733 3,029 1.49 45,066 Consumer certificates............................ 5,529 5.17 285,882 4,361 4.28 186,744 Time deposits of overseas branches and subsidiaries................................. 944 4.61 43,497 804 3.52 28,286 --------- ---------- --------- ---------- Total interest bearing deposits.............. 14,891 3.61 532,703 14,227 2.59 364,858 --------- ---------- --------- ---------- Short-term funds borrowed: Federal funds purchased.......................... 758 5.88 44,546 861 4.08 35,162 Commercial paper................................. 1,051 5.94 62,459 753 4.24 31,948 Other............................................ 264 4.80 12,662 314 5.74 18,013 --------- ---------- --------- ---------- Total short-term funds borrowed.............. 2,073 5.77 119,667 1,928 4.42 85,123 --------- ---------- --------- ---------- Long-term debt (g)................................ 1,814 6.69 121,401 1,657 5.44 90,177 --------- ---------- --------- ---------- Total interest bearing liabilities........... 18,778 4.12 773,771 17,812 3.03 540,158 Portion of non-interest bearing funding sources.... 6,433 6,491 --------- ---------- --------- ---------- Total funding sources (e).................... $ 25,211 3.07 773,771 $ 24,303 2.22 540,158 ========= ----- ---------- ========= ------ ---------- Net interest income and net interest margin........ 5.97% $1,505,767 5.80% $1,410,616 ===== ========== ====== ========== 1993 -------------------------------- Average Income/ balance Rate expense --------- ----- ------------ (000,000) (000) INTEREST EARNING ASSETS Time deposits, principally Eurodollars (a)......... $ 1,312 3.38% $ 44,340 Investment securities (b): U.S. Government................................... 2,759 5.80 159,950 State and municipal............................... 414 8.28 34,261 Other............................................. 410 5.21 21,347 --------- ---------- Total investment securities................... 3,583 6.02 215,558 Federal funds sold................................. 235 3.10 7,282 Trading account securities......................... 2 4.15 83 Loans (b)(c)(d): Domestic: Commercial, industrial and other................. 7,378 8.07 595,114 Real estate...................................... 6,795 7.89 536,234 Consumer......................................... 2,399 11.93 286,134 Financial institutions........................... 707 6.15 43,475 Factoring receivables............................ 554 9.62 53,312 Lease financing.................................. 658 9.06 59,609 Foreign........................................... 544 5.01 27,258 --------- ---------- Total loans, net of discounts................ 19,035 8.41 1,601,136 --------- ---------- Total interest earning assets (d)(e)......... $ 24,167 7.73 1,868,399 ========= ----- ---------- FUNDING SOURCES Interest bearing liabilities (b): Deposits in domestic offices (f): Commercial....................................... $ 419 3.74 15,656 NOW accounts..................................... 1,793 .94 15,442 Money Market Accounts............................ 4,142 2.13 88,061 Consumer savings................................. 2,982 1.54 45,792 Consumer certificates............................ 4,499 4.37 196,614 Time deposits of overseas branches and subsidiaries................................. 711 2.57 18,248 --------- ---------- Total interest bearing deposits.............. 14,546 2.64 379,813 --------- ---------- Short-term funds borrowed: Federal funds purchased.......................... 1,129 3.05 34,444 Commercial paper................................. 604 3.14 18,982 Other............................................ 229 5.93 13,575 --------- ---------- Total short-term funds borrowed.............. 1,962 3.42 67,001 --------- ---------- Long-term debt (g)................................ 1,455 4.80 69,779 --------- ---------- Total interest bearing liabilities........... 17,963 2.88 516,593 Portion of non-interest bearing funding sources.... 6,204 --------- Total funding sources (e).................... $ 24,167 2.14 516,593 ========= ----- ---------- Net interest income and net interest margin........ 5.59% $1,351,806 ===== ==========
______________________ (a) Yields and income on time deposits include net Eurodollar trading profits. (b) The net impact of interest rate swaps is recognized as an adjustment to interest income or expense of the related hedged asset or liability. (c) Yields and income on loans include fees on loans. (d) Non-performing loans are included in interest earning assets. (e) For the years 1995-1991, 7%, 7%, 7%, 10%, and 9% respectively, of total average assets and liabilities are attributed to foreign operations. (f) Average balances on time deposits in domestic offices are reduced by specified reserve amounts for purposes of rate calculations. (g) Rates on long-term debt are based on average balances excluding capital lease obligations 81 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES
1995 1994 ------------------------------------ ---------------------------------- AVERAGE INCOME/ Average Income/ BALANCE RATE EXPENSE balance Rate expense ------- ---- ------- ------- ---- ------- (000,000) (000) (000,000) (000) NON-INTEREST EARNING ASSETS Cash............................................ $ 2,118 $ 2,256 Allowance for loan losses....................... (501) (506) Other assets.................................... 1,618 1,614 -------- --------- Total non-interest earning assets............. $ 3,235 $ 3,364 ======== ========= TOTAL AVERAGE ASSETS............................ $ 28,446 $ 27,667 ======== ========= NON-INTEREST BEARING FUNDING SOURCES Demand deposits: Domestic...................................... $ 5,404 $ 5,708 Foreign....................................... 420 417 Other liabilities............................... 1,535 1,460 Shareholders' equity............................ 2,309 2,270 Non-interest bearing funding sources used to fund earning assets......................... (6,433) (6,491) -------- --------- Total net non-interest bearing funding sources.......................... $ 3,235 $ 3,364 ========= ========= SUPPLEMENTARY AVERAGES Net demand deposits............................. $ 4,569 $ 4,525 Net Federal funds purchased..................... 529 5.68% $ 30,019 696 3.94% $27,408 Commercial certificates of deposit in domestic offices over $100,000.......................... 247 5.08 12,554 261 3.66 9,547 Average prime rate.............................. 8.84 6.60 1993 ---------------------------- Average Income/ balance Rate expense ------- ---- ------- (000,000) (000) NON-INTEREST EARNING ASSETS Cash............................................ $ 2,263 Allowance for loan losses....................... (457) Other assets.................................... 1,727 -------- Total non-interest earning assets............. $ 3,533 ======== TOTAL AVERAGE ASSETS............................ $ 27,700 ======== NON-INTEREST BEARING FUNDING SOURCES Demand deposits: Domestic...................................... $ 5,714 Foreign....................................... 369 Other liabilities............................... 1,456 Shareholders' equity............................ 2,198 Non-interest bearing funding sources used to fund earning assets......................... (6,204) Total net non-interest bearing -------- funding sources.......................... $ 3,533 ======== SUPPLEMENTARY AVERAGES Net demand deposits............................. $ 4,579 Net Federal funds purchased..................... 894 3.04% $27,162 Commercial certificates of deposit in domestic offices over $100,000.......................... 373 3.73 13,908 Average prime rate.............................. 6.00
82 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES: CONTINUED
1992 1991 ---------------------------------- -------------------------------- Average Income/ Average Income/ balance Rate expense balance Rate expense --------- ---- ------- --------- ----- ----------- (000,000) (000) (000,000) (000) INTEREST EARNING ASSETS Time deposits, principally Eurodollars (a)............. $ 1,435 4.08% $ 58,613 $ 1,213 6.52% $ 79,125 Investment securities (b): U.S. Government....................................... 2,321 6.97 161,760 2,061 8.04 165,700 State and municipal................................... 423 9.40 39,766 466 10.44 48,664 Other.................................................. 550 7.82 43,024 671 9.23 61,945 -------- ---------- -------- ----------- Total investment securities...................... 3,294 7.42 244,550 3,198 8.64 276,309 Federal funds sold..................................... 510 4.43 22,611 450 6.40 28,813 Trading account securities............................. 1 7.20 72 1 5.10 51 Loans (b)(c)(d): Domestic: Commercial, industrial and other.................... 7,234 8.31 601,294 7,993 9.71 776,261 Real estate......................................... 6,854 8.51 583,562 6,571 9.47 622,340 Consumer............................................ 2,471 12.35 305,193 3,653 14.35 524,058 Financial institutions.............................. 832 6.24 51,903 900 8.71 78,420 Factoring receivable................................ 486 9.70 47,154 480 10.69 51,327 Lease financing..................................... 562 8.87 49,848 546 9.50 51,876 Foreign................................................ 429 6.53 28,018 431 8.68 37,429 -------- ---------- -------- ----------- Total loans, net of discounts.................... 18,868 8.83 1,666,972 20,574 10.41 2,141,711 -------- ---------- -------- ----------- Total interest earning assets (d)(e)............. $ 24,108 8.26 1,992,818 $ 25,436 9.93 2,526,009 ======== ----- ---------- ======== ---- ----------- FUNDING SOURCES Interest bearing liabilities (b): Deposits in domestic offices (f): Commercial........................................... $ 796 4.40 34,996 $ 1,466 6.42 94,181 NOW accounts......................................... 1,671 2.44 36,858 1,444 4.54 58,450 Money Market Accounts................................ 4,225 2.89 122,086 3,947 4.91 193,621 Consumer savings..................................... 2,612 2.74 71,495 2,024 4.62 93,408 Consumer certificates................................ 5,446 5.08 276,701 6,449 6.73 433,790 Time deposits of overseas branches and subsidiaries.................................... 756 3.75 28,319 1,227 6.27 76,929 -------- ---------- -------- ----------- Total interest bearing deposits.................. 15,506 3.72 570,455 16,557 5.79 950,379 -------- ---------- -------- ----------- Short-term funds borrowed: Federal funds purchased............................. 990 3.41 33,735 1,321 5.58 73,742 Commercial paper.................................... 539 3.72 20,030 791 6.28 49,657 Other............................................... 128 5.25 6,715 700 6.89 48,206 -------- ---------- -------- ----------- Total short-term funds borrowed.................. 1,657 3.65 60,480 2,812 6.10 171,605 -------- ---------- -------- ----------- Long-term debt (g).................................... 1,312 6.06 78,425 1,168 7.86 90,363 -------- ---------- -------- ----------- Total interest bearing liabilities............... 18,475 3.84 709,360 20,537 5.90 1,212,347 Portion of non-interest bearing funding sources........ 5,633 4,899 -------- -------- Total funding sources (e)........................ $ 24,108 2.94 709,360 $ 25,436 4.77 1,212,347 ======== ---- ---------- ======== ---- ----------- Net interest income and net interest margin............ 5.32% $1,283,458 5.16% $ 1,313,662 ==== ========== ==== ===========
(a) Yields and income on time deposits include net Eurodollar trading profits. (b) The net impact of interest rate swaps is recognized as an adjustment to interest income or expense of the related hedged asset or liability. (c) Yields and income on loans include fees on loans. (d) Non-performing loans are include in interest earning assets. (e) For the years 1995-1991, 7%, 7%, 7%, 10%, and 9%, respectively, of total average assets and liabilities are attributed to foreign operations. (f) Average balances on time deposits in domestic offices are reduced by specified reserve amounts for purposes of rate calculations. (g) Rates on long-term debt are based on average balances excluding capital lease obligations. 83 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES: CONTINUED
1992 1991 --------------------------- -------------------------------- Average Income/ Average Income/ balance Rate expense balance Rate expense ------- ---- ------- ------- ---- ------- (000,000) (000) (000,000) (000) NON-INTEREST EARNING ASSETS Cash.................................... $ 2,114 $ 1,973 Allowance for loan losses............... (463) (512) Other assets............................ 1,795 1,746 --------- -------- Total non-interest earning assets. $ 3,446 $ 3,207 ========= ======== TOTAL AVERAGE ASSETS.................... $ 27,554 $28,643 ========= ======== NON-INTEREST BEARING FUNDING SOURCES Demand deposits: Domestic.............................. $ 5,437 $ 4,752 Foreign............................... 324 308 Other liabilities....................... 1,368 1,184 Shareholders' equity.................... 1,950 1,862 Non-interest bearing funding sources used to fund earning assets............ (5,633) (4,899) --------- -------- Total net non-interest bearing funding sources................ $ 3,446 $ 3,207 ========= ======== SUPPLEMENTARY AVERAGES Net demand deposits..................... $ 3,998 $ 3,306 Net Federal funds purchased............. 480 2.32% $11,124 871 5.16% $44,929 Commercial certificates of deposit in domestic offices over $100,000......... 702 4.38 30,739 1,310 6.47 84,812 Average prime rate...................... 6.25 8.46
84 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA: CONTINUED CONDENSED CONSOLIDATED STATEMENT OF INCOME AND SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31, -------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENT OF INCOME 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- Interest income and fees........................ $2,262,305 $1,929,527 $1,841,864 $1,961,838 $2,485,277 Interest expense................................ 773,771 540,158 516,593 709,360 1,212,367 ---------- ---------- ---------- ---------- ---------- Net interest income.......................... 1,488,534 1,389,369 1,325,271 1,252,478 1,272,910 Provision for losses on loans................... 105,000 246,900 121,201 160,250 291,261 ---------- ---------- ---------- ---------- ---------- Net interest income after provision for losses on loans.............. 1,383,534 1,142,469 1,204,070 1,092,228 981,649 Non-interest income............................. 605,666 567,540 574,030 610,664 615,565 Non-financial expenses.......................... 1,274,398 1,317,561 1,241,862 1,306,593 1,319,465 ---------- ---------- ---------- ---------- ---------- Income before income taxes...................... 714,802 392,448 536,238 396,299 277,749 Provision for income taxes...................... 262,565 143,656 173,809 128,165 97,432 ---------- ---------- ---------- ---------- ---------- Income before cumulative effect of a change in accounting principle..................................... 452,237 248,792 362,429 268,134 180,317 Cumulative effect of a change in accounting principle, net of tax.............. - (3,430) (13,010) (84,946) - ---------- ---------- ---------- ---------- ---------- Net income...................................... $ 452,237 $ 245,362 $ 349,419 $ 183,188 $ 180,317 ========== ========== ========== ========== ========== PER COMMON SHARE DATA: Income before cumulative effect of a change in accounting principle................ $3.22(a) $1.75(b) $2.49 $1.97 $1.35 Net income..................................... 3.22(a) 1.73(b) 2.40 1.35 1.35 Dividends paid................................. 1.36 1.20 1.11 1.00 0.96 Dividends declared............................. 1.44 1.24 1.14 1.02 0.97 Average common shares outstanding............... 140,600 142,498 145,398 135,813 133,237 OPERATING RATIOS: Income before cumulative effect of a change in accounting principle as a percent of: Average common shareholders equity.......... 19.59(a) % 10.96(b)% 16.49% 13.7% 9.68% Average total assets........................ 1.59(a) 0.90(b) 1.31 0.97 0.63 Average total shareholders equity as a percent of average total assets.......................... 8.12 8.20 7.94 7.08 6.50 Dividends declared as a percent of income from continuing operations......................... 44.72(a) 70.86(b) 45.78 51.78 71.85 FULL TIME EQUIVALENT STAFF...................... 13,598 15,076 16,017 16,271 16,571
______________________ (a) Includes the impact of an after-tax net restructuring charge of $62.5 million, or $0.44 per share and an after-tax gain of $0.08 per share related to a change in ownership interests in a joint venture. Excluding the impact of these items, net income per common share was $3.58, return on average common shareholders' equity was 21.78%, and return on average total assets was 1.77%. (b) Includes the impact of after-tax merger-related charges of $0.89 per share recorded for the acquisition of Constellation Bancorp and $0.28 per share recorded for the acquisition of Independence Bancorp, Inc. Excluding the impact of these merger-related charges, per share income before the cumulative effect of a change in accounting principle was $2.92, return on average common shareholders' equity was 18.34%, and return on average total assets was 1.50% (see Note 2 to the Financial Statements). 85 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA: CONTINUED CONDENSED CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
December 31, ----------------------------------------------------------------------- 1995 1994 1993 1992 1991 ----------- ----------- ----------- ----------- ----------- ASSETS Cash and due from banks......................... $ 2,755,636 $ 2,262,512 $ 2,521,676 $ 2,510,001 $ 2,210,383 Time deposits, principally Eurodollars.......... 1,841,799 1,750,458 1,319,457 1,815,394 1,673,553 Federal funds sold.............................. 594,868 731,820 161,527 266,890 376,300 Trading account securities...................... 1,336 1,206 6,393 2,796 1,255 Investment securities........................... 1,990,332 2,880,631 3,599,166 3,588,348 3,298,107 Loans........................................... 21,046,535 20,526,216 19,776,258 18,940,402 19,418,084 Allowance for loan losses....................... (495,075) (500,631) (450,823) (442,267) (473,301) Due from customers on acceptances............... 549,557 342,211 332,234 632,976 212,024 Premises, equipment and other assets............ 1,335,628 1,330,713 1,168,729 1,418,177 1,467,492 ----------- ----------- ----------- ----------- ----------- Total assets............................... $29,620,616 $29,325,136 $28,434,617 $28,732,717 $28,183,897 =========== =========== =========== =========== =========== LIABILITIES Deposits: Domestic: Non-interest bearing......................... $ 6,700,599 $ 6,362,470 $ 6,649,367 $ 6,460,415 $ 5,930,296 Interest bearing............................. 13,661,766 14,565,051 13,686,027 14,446,043 15,147,941 Overseas branches and subsidiaries............ 1,140,068 1,113,365 796,902 766,119 839,327 ----------- ----------- ----------- ----------- ----------- Total deposits............................. 21,502,433 22,040,886 21,132,296 21,672,577 21,917,564 Short-term funds borrowed....................... 2,091,722 1,546,201 1,884,125 1,904,044 2,069,451 Bank acceptances outstanding.................... 549,048 336,103 337,180 635,544 213,613 Other liabilities............................... 1,399,660 1,260,722 1,123,342 1,068,395 814,888 Long-term debt.................................. 1,698,334 1,791,110 1,589,290 1,357,598 1,240,970 ----------- ----------- ----------- ----------- ----------- Total liabilities.......................... 27,241,197 26,975,022 26,066,233 26,638,158 26,256,486 ----------- ----------- ----------- ----------- ----------- SHAREHOLDERS' EQUITY Preferred....................................... - - - - - Common.......................................... 2,379,419 2,350,114 2,368,384 2,094,559 1,927,411 ----------- ----------- ----------- ----------- ----------- Total shareholders' equity................. 2,379,419 2,350,114 2,368,384 2,094,559 1,927,411 ----------- ----------- ----------- ----------- ----------- Total liabilities and shareholders equity.................... $29,620,616 $29,325,136 $28,434,617 $28,732,717 $28,183,897 =========== =========== =========== =========== =========== Book value per common share..................... $17.24 $16.22 $16.29 $14.48 $14.40 ====== ====== ====== ====== ======
86 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA: CONTINUED RATE/VOLUME ANALYSIS TAXABLE EQUIVALENT BASIS (in thousands)
1995 VS. 1994 1994 vs. 1993 ------------------------------------- ----------------------------------- INCREASE (DECREASE) IN INTEREST Increase (decrease) in interest ------------------------------------- ----------------------------------- INCOME/ CHANGE ATTRIBUTABLE TO Income/ Change attributable to ----------------------- ----------------------- EXPENSE VOLUME RATE expense Volume Rate ----------- ---------- ---------- --------- ---------- ---------- INTEREST EARNING ASSETS - - ----------------------- Time deposits, principally Eurodollars................................ $ 50,300 $ 14,115 $ 36,185 $ 22,049 $ 7,030 $ 15,019 Investment securities........................ (21,179) (34,857) 13,678 (49,722) (34,241) (15,481) Federal funds sold........................... 6,773 3,008 3,765 472 (2,170) 2,642 Trading account securities................... (120) (56) (64) 86 42 44 Loans: Domestic.................................. 269,023 99,464 169,559 105,065 52,969 52,096 Foreign................................... 23,967 10,908 13,059 4,425 2,154 2,271 -------- -------- -------- -------- -------- -------- Total interest income.................. 328,764 92,582 236,182 82,375 25,784 56,591 -------- -------- -------- -------- -------- -------- INTEREST BEARING FUNDS - - ---------------------- Deposits: Domestic................................... 152,634 38,958 113,676 (24,993) (14,796) (10,197) Overseas................................... 15,211 4,928 10,283 10,038 2,390 7,648 Short-term funds borrowed: Federal funds purchased.................... 9,384 (4,202) 13,586 718 (8,174) 8,892 Other...................................... 25,160 9,765 15,395 17,404 9,720 7,684 Long-term debt............................... 31,224 8,541 22,683 20,398 9,696 10,702 -------- -------- -------- -------- -------- -------- Total interest expense................. 233,613 57,990 175,623 23,565 (1,164) 24,729 -------- -------- -------- -------- -------- -------- NET INTEREST INCOME.......................... $ 95,151 $ 34,592 $ 60,559 $ 58,810 $ 26,948 $ 31,862 - - ------------------- ======== ======== ======== ======== ======== ========
NOTES TO RATE/VOLUME ANALYSIS Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to rate variances due to the interest sensitivity of consolidated assets and liabilities. Included in interest income is $58.7 million, $66.2 million, $62.1 million of loan fees for the years ended 1995, 1994 and 1993, respectively. Non-performing loans are included in interest earning assets. The changes in interest expense on domestic deposits attributable to volume and rate are adjusted by specific reserves as average balances are reduced by such reserve amounts for purposes of rate calculations. 87 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA: CONTINUED LOAN PORTFOLIO The following are summaries of certain loan categories, net of unearned discounts, for the five years ended December 31, 1995 (in thousands):
1995 1994 1993 1992 1991 ------------ ------------ ------------ ------------ ------------ Domestic loans: Commercial, industrial and other...... $ 9,440,727 $ 8,688,733 $ 7,879,451 $ 7,354,666 $ 7,503,223 ----------- ----------- ----------- ----------- ----------- Real estate loans: Construction and development........ 366,576 331,369 367,364 501,404 754,089 Residential......................... 2,571,788 3,180,227 3,121,008 3,314,111 3,106,984 Other, primarily commercial mortgages and commercial loans secured by owner-occupied real estate....................... 2,577,755 2,979,053 3,175,284 3,212,582 2,984,798 ----------- ----------- ----------- ----------- ----------- Total real estate loans......... 5,516,119 6,490,649 6,663,656 7,028,097 6,845,871 ----------- ----------- ----------- ----------- ----------- Consumer loans: Installment......................... 1,331,442 1,386,776 1,356,633 1,379,760 1,762,210 Credit card......................... 1,546,900 1,374,598 1,178,972 957,168 979,327 ----------- ----------- ----------- ----------- ----------- Total consumer loans............ 2,878,342 2,761,374 2,535,605 2,336,928 2,741,537 ----------- ----------- ----------- ----------- ----------- Financial institutions................ 950,943 668,119 870,489 783,125 996,500 Factoring receivables................. 557,272 622,380 555,211 454,244 402,752 Lease financing....................... 737,631 710,338 728,764 583,187 536,836 ----------- ----------- ----------- ----------- ----------- Total domestic loans........... 20,081,034 19,941,593 19,233,176 18,540,247 19,026,719 ----------- ----------- ----------- ----------- ----------- Foreign loans: Loans to or guaranteed by foreign banks: Government owned and central banks........................... - - - 257 1,506 Other foreign banks............... 614,901 300,590 332,149 203,103 130,308 ----------- ----------- ----------- ----------- ----------- 614,901 300,590 332,149 203,360 131,814 Commercial and industrial............. 350,600 274,720 210,573 196,795 242,098 Loans to other financial institutions. - 9,313 360 - 17,453 ----------- ----------- ----------- ----------- ----------- Total foreign loans............. 965,501 584,623 543,082 400,155 391,365 ----------- ----------- ----------- ----------- ----------- Total loans............. $21,046,535 $20,526,216 $19,776,258 $18,940,402 $19,418,084 =========== =========== =========== =========== ===========
88 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA: CONTINUED RISK ELEMENT DATA: FOREIGN OUTSTANDINGS - (IN THOUSANDS) 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, 1995, 1994 and 1993, there were no aggregate foreign outstandings (defined as loans, investments, acceptances and time deposits) to borrowers in a foreign country that exceeded 1% of total assets. Outstandings below 1%, but over .75% of total assets were $239,000 in France and $232,000 in Germany at December 31, 1995, and $223,000 in the United Kingdom at December 31, 1994. There were no outstandings below 1%, but over .75% at December 31, 1995. 89 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA: CONTINUED NON-PERFORMING ASSETS The following represents the Corporation's non-accrual loans, renegotiated loans and other real estate owned for the five years ended December 31, 1995 (in thousands):
1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- NON-ACCRUAL LOANS Domestic......................... $ 143,240 $ 244,406 $ 246,512 $ 411,120 $ 565,644 Foreign.......................... - 158 171 3,047 8,797 --------- --------- --------- --------- --------- Total non-accrual loans..... 143,240 244,564 246,683 414,167 574,441 --------- --------- --------- --------- --------- RENEGOTIATED LOANS (a)........... 1,615 1,657 56,457 63,074 46,611 --------- --------- --------- --------- --------- Total non-performing loans.. 144,855 246,221 303,140 477,241 621,052 --------- --------- --------- --------- --------- OTHER REAL ESTATE OWNED (OREO)... 26,647 64,663 135,528 194,312 181,546 --------- --------- --------- --------- --------- Total non-performing assets...... $ 171,502 $ 310,884 $ 438,668 $ 671,553 $ 802,598 ========= ========= ========= ========= ========= Non-performing assets as a percentage of loans plus OREO.. 0.81% 1.51% 2.20% 3.51% 4.09% ==== ==== ==== ==== ==== Non-performing assets as a percentage of total assets..... 0.58% 1.06% 1.54% 2.34% 2.85% ==== ==== ==== ==== ====
_______________________ (a) There were no foreign renegotiated loans in any periods presented. The following reflects the effect of non-accrual and renegotiated loans on both interest income and net interest income for the three years ended December 31, 1995 (in thousands):
1995 1994 1993 -------- -------- -------- Interest income which would have been recorded in accordance with original terms: Domestic............................... $ 19,022 $ 25,347 $ 30,838 Foreign................................ 8 9 38 -------- -------- -------- Total................................. 19,030 25,356 30,876 -------- -------- -------- Interest income reflected in total operating income: Domestic............................... 13,509 12,003 17,300 Foreign................................ - - - -------- -------- -------- Total................................. 13,509 12,003 17,300 -------- -------- -------- Net reduction in interest income and net interest income.................... $ 5,521 $ 13,353 $ 13,576 ======== ======== ========
ACCRUING LOANS PAST DUE 90 DAYS OR MORE Accruing loans 90 days or more past due as to payment of interest or principal for the five years ended December 31, 1995 were as follows (in thousands):
1995 1994 1993 1992 1991 -------- -------- -------- -------- --------- Total (a)............................... $58,942 $53,104 $53,524 $95,866 $110,143 ======= ======= ======= ======= ========
______________________ (a) There were no foreign loans past due 90 days or more in any periods presented. 90 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA: CONTINUED CONSOLIDATED ALLOWANCE FOR LOAN LOSSES The following table summarizes the distribution of loan charge-offs and recoveries by type of loan for the five years ended December 31, 1995 (in thousands):
1995 1994 1993 1992 1991 --------- -------- --------- --------- --------- Balance at beginning of year: Domestic............................................ $480,631 $440,823 $432,267 $463,301 $495,775 Foreign............................................. 20,000 10,000 10,000 10,000 16,513 -------- -------- -------- -------- -------- 500,631 450,823 442,267 473,301 512,288 -------- -------- -------- -------- -------- Allowance for loans purchased at date of purchase: Domestic........................................ - 23,763 2,703 1,028 - -------- -------- -------- -------- -------- Allowance for loans sold at date of sale: Domestic........................................ - - - (14,700) (27,486) Foreign......................................... - - (353) - - -------- -------- -------- -------- -------- - - (353) (14,700) (27,486) -------- -------- -------- -------- -------- Recoveries, by type of loan: Domestic: Commercial, industrial and other.............. 31,637 25,893 45,207 25,865 26,636 Real estate................................... 19,087 13,596 8,470 6,438 5,874 Consumer...................................... 17,393 20,300 18,170 21,852 20,729 Financial institutions........................ 231 654 2,246 2,776 1,966 Foreign....................................... 293 2,616 12,645 13,138 26,586 -------- -------- -------- -------- -------- Total recoveries............................ 68,641 63,059 86,738 70,069 81,791 -------- -------- -------- -------- -------- Charge-offs, by type of loan: Domestic: Commercial, industrial and other.............. 45,555 101,313 91,785 103,000 136,363 Real estate................................... 47,934 126,189 59,191 69,896 99,650 Consumer...................................... 83,656 56,371 49,941 71,585 130,981 Financial institutions........................ 2,052 41 816 3,195 14,669 Foreign......................................... - - - 5 2,890 -------- -------- -------- -------- -------- Total loans charged off..................... 179,197 283,914 201,733 247,681 384,553 -------- -------- -------- -------- -------- Total net charge-offs............................... 110,556 220,855 114,995 177,612 302,762 -------- -------- -------- -------- -------- Provision charged to operating expense: Domestic........................................ 100,293 239,516 133,493 173,383 321,470 Foreign......................................... 4,707 7,384 (12,292)(a) (13,133)(a) (30,209)(a) -------- -------- --------- --------- --------- 105,000 246,900 121,201 160,250 291,261 -------- -------- -------- -------- -------- Balance at end of year: Domestic........................................ 470,075 480,631 440,823 432,267 463,301 Foreign......................................... 25,000 20,000 10,000 10,000 10,000 -------- -------- -------- -------- -------- $495,075 $500,631 $450,823 $442,267 $473,301 ======== ======== ======== ======== ======== RATIOS Net charge-offs as a percentage of average loans outstanding...................... 0.53% 1.13% 0.60% 0.94% 1.47% ==== ==== ==== ==== ==== Allowance for loan losses as a percentage of year-end loans...................... 2.35% 2.44% 2.28% 2.34% 2.44% ==== ==== ==== ==== ====
________________________ (a) Reflects reallocation of the foreign allowance for loan losses to the domestic allowance for loan losses. 91 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA: CONTINUED DISTRIBUTION OF ALLOWANCE FOR LOAN LOSSES (a) The distribution of the allowance for loan losses and the percentage of each loan type to total loans for the five years ended December 31, 1995 is illustrated in the table below (in millions): December 31,
1995 1994 1993 --------------------------- ---------------------------- -------------------------- % % % OF LOAN OF LOAN OF LOAN CATEGORY CATEGORY CATEGORY TO TO TO TOTAL TOTAL TOTAL ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS --------- -------- --------- -------- --------- -------- Loan type - - --------- Domestic: Commercial and industrial $230.0 47% $212.9 45% $208.3 42% Real estate: Construction.......... 30.0 2 55.9 2 69.0 2 Other................. 70.0 24 79.9 30 63.4 32 Consumer................. 120.5 14 101.9 13 83.1 13 Other domestic loans..... 19.6 8 30.0 7 17.0 8 Foreign.................... 25.0 5 20.0 3 10.0 3 ------ --- ------ --- ------ --- Total................. $495.1 100% $500.6 100% $450.8 100% ====== === ====== === ====== === 1992 1991 --------------------------- --------------------------- % % OF LOAN OF LOAN CATEGORY CATEGORY TO TO TOTAL TOTAL ALLOWANCE LOANS ALLOWANCE LOANS --------- -------- --------- -------- Loan type - - --------- Domestic: Commercial and industrial $206.7 42% $238.1 41% Real estate: Construction.......... 94.7 3 88.0 4 Other................. 36.9 34 45.5 31 Consumer................. 73.8 12 79.6 14 Other domestic loans..... 20.2 7 12.1 8 Foreign.................... 10.0 2 10.0 2 ------ --- ------ --- Total................. $442.3 100% $473.3 100% ====== === ====== ===
________________ (a) This portfolio. distribution is made for analytical purposes. It does not represent specific allocations of the allowance. The total allowance is available to absorb losses from any segment of the portfolio. COMMERCIAL CERTIFICATES OF DEPOSIT OVER $100,000 ISSUED BY DOMESTIC OFFICES (in thousands)
DECEMBER 31, ---------------------------------------------- 1995 1994 --------------------- -------------------- AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- MATURITY DISTRIBUTION 3 months or less........... $177,411 80.6% $225,348 84.0% 3 through 6 months......... 17,531 8.0 24,016 8.9 6 through 12 months........ 15,808 7.2 16,432 6.1 Over 12 months............. 9,282 4.2 2,606 1.0 -------- ----- -------- ----- Total................... $220,032 100.0% $268,402 100.0% ======== ===== ======== =====
92 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA: CONTINUED INTEREST SENSITIVITY ANALYSIS AT DECEMBER 31, 1995 (in millions)
Rate Maturity Period -------------------------------------------------------------------- 1-90 91-181 182-365 1-2 2-5 greater than 5 Days Days Days Years Years Years Total -------- ------- -------- ------- ----- ----- ------- EARNING ASSETS Federal funds sold, resale agreements and trading account securities............... $ 596 $ 596 Time deposits............................... 996 $ 408 $ 438 1,842 Investment securities....................... 452 155 381 $ 430 $ 439 $ 133 1,990 Interest rate swaps......................... 862 812 1,279 1,125 2,788 906 7,771 Asset financial futures..................... - 15 383 21 - - 419 ------- -------- -------- ------ ------- ------- -------- Total discretionary assets............. 2,906 1,390 2,481 1,576 3,227 1,039 12,619 Total loans(a).............................. 15,030 1,240 1,076 1,432 1,871 396 21,046 ------- -------- -------- ------ ------- ------- -------- Total earning assets........................ 17,936 2,630 3,558 3,009 5,097 1,435 33,665 ------- -------- -------- ------ ------- ------- -------- FUNDING SOURCES Federal funds purchased, repurchase agreements and other short-term funds borrowed................................. 1,990 102 - - - - 2,092 Domestic and foreign time deposits(b)....... 1,312 18 12 1 5 - 1,348 Long-term debt.............................. 1,023 20 21 2 7 625 1,698 Interest rate swaps......................... 7,246 25 200 71 224 4 7,771 Liability financial futures................. 167 237 15 - - - 419 ------- -------- -------- ------ ------- ------- -------- Total discretionary liabilities........ 11,738 402 248 74 236 630 13,327 ------- -------- -------- ------ ------- ------- -------- Savings certificates........................ 1,382 933 1,724 599 453 255 5,347 Money market, savings and NOW accounts(c)... 2,347 584 1,008 1,672 2,497 - 8,108 Net non-interest bearing funds(d)(e)........ 3,070 - - - - 3,813 6,883 ------- -------- -------- ------ ------- ------- -------- Total savings certificates and indefinite maturity liabilities................... 6,800 1,516 2,732 2,271 2,950 4,068 20,337 ------- -------- -------- ------ ------- ------- -------- Total net funding sources................... 18,538 1,919 2,980 2,345 3,185 4,698 33,665 ------- -------- -------- ------ ------- ------- -------- Period gap.................................. (602) 711 577 664 1,912 (3,263) -0- Cumulative gap.............................. (602) 110 687 1,351 3,263 - -0- Adjustments(f).............................. 727 (726) (586) (656) (1,977) 3,217 -0- ------- -------- -------- ------ ------- ------- -------- Adjusted period gap......................... $ 125 $ (14) $ (9) $ 8 $ (64) $ (46) $ -0- ======= ======== ======== ====== ======= ======= ======== Cumulative gap.............................. $ 125 $ 111 $ 102 $ 110 $ 46 $ -0- $ -0- ======= ======== ======== ====== ======= ======= ========
Notes to interest sensitivity analysis: (a) Non-performing loans are included in 1-90 days. (b) Deposit volumes exclude time deposits not at interest. (c) Adjustments to the interest sensitivity of savings and NOW account balances reflect managerial assumptions based on historical experience, simulation results as to the behavior of both the balances and rates on these products in potential future rate environments and CoreStates' intent for positioning these products. (d) Net non-interest bearing funds is the sum of non-interest bearing liabilities and shareholders' equity minus non-interest earning assets. (e) The estimated volume of stable net non-interest bearing funds is allocated to the over 1 year interest sensitivity period. Allocations to the under 1 year periods include: estimated volumes that are expected to vary inversely with interest rates; and the temporary difference between the actual volume of total net non-interest bearing funds on December 31, 1995 and the trend volume at the current level of interest rates. (f) Adjustments reflect managerial assumptions as to the appropriate investment maturities for non-interest bearing funding sources, along with the funding of current investment and loan commitments. 93 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA: CONTINUED LOAN MATURITY AND INTEREST SENSITIVITY, NET OF UNEARNED DISCOUNTS The contractual maturity of loans outstanding at December 31, 1995 was as follows (in thousands):
Due after one Due in one year through Due after year or less five years five years Total ------------ ------------- ---------- ---------- Commercial, industrial and other loans........ $ 8,941,922 $1,652,337 $354,683 $10,948,942 ----------- ---------- -------- ----------- Real estate loans: Construction and development.................. 209,826 117,896 38,854 366,576 Other, primarily permanent commercial mortgages............... 965,932 1,247,158 446,908 2,659,998 ----------- ---------- -------- ----------- Total real estate loans................. 1,175,758 1,365,054 485,762 3,026,574 ----------- ---------- -------- ----------- Foreign loans................................. 913,874 43,646 7,981 965,501 ----------- ---------- -------- ----------- Total loans (excluding loans to individuals)(a)............................. $11,031,554 $3,061,037 $848,426 $14,941,017 =========== ========== ======== ===========
_________________________ (a) Loans due after one-year totaling $2,187,140 have fixed interest rates. The remaining 43% of such loans or $1,647,254 have floating or adjustable rates. 94 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA: CONTINUED INVESTMENT SECURITIES (in thousands) CARRYING VALUE AT DECEMBER 31,
1995(a) 1994(a) 1993(a) ----------- ----------- ----------- U.S. Treasury........................... $ 564,429 $ 914,009 $ 972,076 U.S. Government agencies and corporations....................... 750,364 1,246,780 1,767,212 State and municipal..................... 236,322 306,117 356,438 Other................................... 439,217 413,725 503,440 ---------- ---------- ---------- Total............................... $1,990,332 $2,880,631 $3,599,166 ========== ========== ==========
_____________________ (a) Held-to-maturity and available-for-sale portfolios combined. MATURITY DISTRIBUTION AND WEIGHTED AVERAGE YIELD AT DECEMBER 31, 1995(a)
U.S. Government Total Agencies and State and ----------------------- U.S. Treasury Corporations Municipal Other Amount Yield(b) ------------- --------------- --------- ------- ------------- -------- 1 year or less.......................... $ 262,139 $ 244,245 $ 90,957 $ 22,884 $ 620,225 6.21% 1 year through 5 years.................. 301,933 335,616 106,975 69,490 814,014 6.15% 5 years through 10 years................ 357 75,522 16,767 76,849 169,495 6.53% After 10 years.......................... - 94,981 21,623 269,994 386,598 6.39% ---------- ---------- ---------- ---------- ---------- Total.............................. $ 564,429 $ 750,364 $ 236,322 $ 439,217 $1,990,332 6.25% ========== ========== ========== ========== ==========
_______________________ (a) Held-to-maturity and available-for-sale portfolios combined. (b) The weighted average yield has been computed on a tax equivalent basis using an effective tax rate of 35%. The amount of the tax equivalent adjustment by range of maturity is as follows: 1 year or less - $2,371; 1 year to 5 years-$2,888; 5 years to 10 years - $482 and after 10 years - $3,188. 95 CORESTATES FINANCIAL CORP AND SUBSIDIARIES GRAPHICS APPENDIX LIST TO EXHIBIT 13 Narrative description of graphs from the Management's Discussion and Analysis of Financial Condition and Results of Operations:
EDGAR VERSION TYPESET VERSION ------------- --------------- Page 14 contains the plotting points for the Page 16 AVERAGE COMMON EQUITY TO ASSETS GRAPH The Average Common Equity to Assets graph is a five year, vertical bar graph with the years 1991, 1992, 1993, 1994 and 1995 listed along the x axis. Lines numbering 0 to 9 are drawn along the y axis and represent, in percent, the average common equity to assets ratio. There are 2 bars for each year: the first representing the CoreStates ratio and the second representing the Salomon Brothers Superregional Bank Composite Index ratio. Page 17 contains the plotting points for the Page 17 WHOLESALE LOANS BY INDUSTRY GRAPH The Wholesale Loans by Industry graph is a horizontal bar graph with 12 wholesale loan industries listed down the y axis. One bar extends out from each industry, parallel to the x axis and represents the industry's December 31, 1995 loan outstandings as a percentage of December 31, 1995 equity. A second bar is overlayed on top of the first bar and represents the percentage of the industry's loan outstandings that are non-performing. Page 25 contains the plotting points for the Page 23 NET INTEREST MARGIN GRAPH The Net Interest Margin graph is a five year, vertical bar graph with the years 1991, 1992, 1993, 1994 and 1995 listed along the x axis. Lines numbering 0 to 6 are drawn along the y axis and represent, in percent, the net interest margin. There are 2 bars for each year: the first representing the CoreStates margin and the second representing the Salomon Brothers Superregional Bank Composite Index margin.
CORESTATES FINANCIAL CORP AND SUBSIDIARIES GRAPHICS APPENDIX LIST TO EXHIBIT 13 - (CONTINUED) Narrative description of graphs from the Management's Discussion and Analysis of Financial Condition and Results of Operations:
EDGAR VERSION TYPESET VERSION ------------- --------------- Page 36 contains the plotting points for the Page 30 EARNING ASSET MIX GRAPH The Earning Asset Mix graph is a five year, vertical bar graph with the years 1991, 1992, 1993, 1994 and 1995 listed along the x axis. One bar is drawn in each year to represent 100% of average earning assets. Each bar is divided into three sections along the y axis, representing the percentage of average earning assets comprised of: 1) loans; 2) investment securities; and 3) short-term money market investments. Page 36 contains the plotting points for the Page 30 FUNDING MIX GRAPH The Funding Mix graph is a five year, vertical bar graph with the years 1991, 1992, 1993, 1994 and 1995 listed along the x axis. One bar is drawn in each year to represent 100% of average earning assets, excluding short-term money market investments. Each bar is divided into three sections along the y axis, representing the percentage of: 1) retail deposits; 2) other interest bearing sources; and 3) non-interest bearing sources to average earning assets, excluding short-term money market investments. Page 37 contains the plotting points for the Page 31 OPERATING REVENUE GRAPH The Operating Revenue graph is a five year, vertical bar graph with the years 1991, 1992, 1993, 1994 and 1995 listed along the x axis. One bar is drawn in each year to represent the total dollar amount of operating revenue (tax equivalent net interest income plus non-interest income) recorded, in millions. Each bar is divided into three sections along the y axis, representing the dollar amount of operating revenue derived from: 1) loan and investment related net interest income; 2) net interest income derived from non-credit balances; and 3) non-interest income.
EX-21 7 LIST OF SUBSIDIARIES - 12/31/95 Exhibit 21 ---------- List of Subsidiaries of CoreStates Financial Corp as of December 31, 1995 Congress Financial Corporation California 87% Congress Credit Corporation New York 100% Congress Financial Corporation Ontario 100% (Canada) Congress Financial Corporation Illinois 100% (Central) Congress Financial Corporation Florida 100% (Florida) Congress Financial Corporation Wisconsin 100% (Midwest) Congress Financial Corporation Massachusetts 100% (New England) Congress Financial Corporation Oregon 100% (Northwest) Congress Financial Corporation Georgia 100% (Southern) Congress Financial Corporation Texas 100% (Southwest) Congress Financial Corporation California 100% (Western) Laundry, Inc. California 100% Congress Talcott Corporation Pennsylvania 100%
1 List of Subsidiaries of CoreStates Financial Corp as of December 31, 1995 Congress Talcott Corporation California 100% (Western) CoreStates Bank of Delaware, N.A. U.S.A. 100% SynapQuest, Inc. (formerly Delaware 100% Synapsis, Inc.) CoreStates Bank, N.A. U.S.A. 100% Bala Development, Inc. Pennsylvania 100% Centre Properties, Inc. Pennsylvania 100% Clymer Realty Corporation Pennsylvania 100% CoreStates Bank International U.S.A. 100% Philadelphia International Hong Kong 100% Finance Co - Hong Kong Limited Philadelphia National LTDA Brazil 100% CoreStates Dealer Services Corp Pennsylvania 100% CoreStates Enterprise Capital, Inc. Pennsylvania 100% CoreStates Investment Advisers, Delaware 100% Inc. CoreStates Mortgage Services Pennsylvania 100% Corporation Corporate Trust Services, Inc. Pennsylvania 100% DMR Realty Corp Pennsylvania 100%
2 List of Subsidiaries of CoreStates Financial Corp as of December 31, 1995 Fifth and Market Corporation Pennsylvania 100% First Penco Realty Inc. Pennsylvania 100% First Pennsylvania Financial Delaware 100% Services, Inc. GSB Investment, Inc. Pennsylvania 100% Philadelphia International U.S.A. 100% Investment Corporation Corporacion Financiera Columbia less than 1% del Norte Columbia Established Holdings Ltd United Kingdom 100% Internationale Bank fur Austria 10% Aussenhandel, A.G. Joh. Berenberg Gossler & Germany 15% Co. New World Development Bahamas 100% Corporation Ltd. New World Group Canada 37.5% Holdings Ltd Philadelphia National England 100% Ltd Philadelphia International Delaware 100% Equities, Inc.
3 List of Subsidiaries of CoreStates Financial Corp as of December 31, 1995 Aberdeen Trust PLC United Kingdom 14.5% Accel Group Llc Czech Republic 17.25% Banco Internacional Panama 20% de Panama Banco Mello Portugal 3.0% Banco Surinvest Uruguay 13.41% Bank of East Asia Hong Kong less than .5% BR & Associes Luxembourg 10.4% Banquiers S.A. Canadian Venture Canada 25M non-voting preferred shs Capital Corp Empresa Minera Chile 1.1% De Mantos Blancos Hana Bank Korea 0.5% Heritable Group PLC United Kingdom 50.1% Multi-Credit Corp of Thailand 7.5% Thailand Multi-Risk Thailand 10% Consultants (Thailand) Ltd. Norinvest Bank Grand Cayman 13.41% TI Remnaco, Inc. Canada 39.8% Philadelphia National Corporation Pennsylvania 100% PNB Leasing Corporation Delaware 100% QuestPoint Holdings, Inc. Delaware 100% (formerly Financial Telesis, Inc.) Centillion Holdings, Inc. Delaware 100% National Remittance Delaware 100% Centers, Inc. QuestPoint G. P., Inc. Delaware 100% QuestPoint L. P., Inc. Pennsylvania 100% QuestPoint, L.P. Delaware 100%
4 List of Subsidiaries of CoreStates Financial Corp as of December 31, 1995 CashFlex, L.P. Delaware 100% Centillion, L.P. Delaware 100% Transys, L.P. Delaware 100% Two APM Plaza, Inc. Delaware 89% CoreStates Capital Corp Pennsylvania 100% CoreStates Community Development Pennsylvania 51% Corporation, Inc. Bd maj Partnership Homes Pennsylvania 1/2 Bd CoreStates Delaware, N.A. Delaware 100% CoreStates Export Trading Company Pennsylvania 100% CoreStates Financial Corp (DE) Delaware 100% CoreStates Holdings, Inc. Delaware 100% Electronic Payment Services, Inc. Delaware 20% Electronic Payment Services 1, Inc. Delaware 80.6% Electronic Payment Services 2, Inc. Delaware 80% Electronic Payment Service Corp Delaware 100% MAS Inco Corporation Delaware 100% Metroteller Security, Inc. New York 100% Money Access Service, Inc. Delaware 100% Money Access Service Corp. Ohio 100% BUYPASS Corporation Georgia 100% BUYPASS Electronic Georgia 100% Transaction Systems, Inc. BUYPASS Inco Corporation Delaware 100% BUYPASS Petroleum Georgia 100% Systems, Inc. Data NOW National Delaware 100%
5 List of Subsidiaries of CoreStates Financial Corp as of December 31, 1995 Services, Inc. EPS Network Services Corp. Georgia 100% CoreStates Services Corp. Pennsylvania 100% CoreStates Securities Corp Pennsylvania 100% First Pennsylvania Insurance Services, Inc. Virginia 100% First Pennsylvania International Capital Delaware 100% Corporation First Pennsylvania Investments Company Pennsylvania 100% First Pennsylvania Leasing, Inc. Delaware 100% Home Investors Mortgage Co. New Jersey 100% IBI Capital Corp. Pennsylvania 100% Independence Life Insurance Company Arizona 100% Independence Resources, Inc. Pennsylvania 100% New Jersey National Corporation New Jersey 100% Bancorps International Trading New Jersey 33.33% Company New Jersey National Bank U.S.A. 100% Badeal, Inc. New Jersey 100% North Towne Village, Inc. Pennsylvania 100% Bamegat Hills Corporation New Jersey 50% Blazing Star Realty Corp. New Jersey 100% BOMAST Corporation New Jersey 100% Citizens Investments of Delaware 100% Delaware Eagle 1851, Inc. New Jersey 100% First Leasing Company New Jersey 100% Five Hundred Ridgecreek Georgia 50%
6 List of Subsidiaries of CoreStates Financial Corp as of December 31, 1995 Properties Four Hundred Ridgefield Georgia 50% Properties, Inc. First Peoples Investment Co. Delaware 100% J.V. Del Ran, Inc. New Jersey 100% Lin Park Properties, Inc. New Jersey 100% Mercer Development Co., Inc. New Jersey 100% Morris Avenue Corporation New Jersey 50% NSB Investment Co. Delaware 100% Ocean Pointe Properties, Inc. New Jersey 100% One Hundred Avondale Estates Georgia 50% Properties, Inc. Seven Hundred Town Lake Georgia 54% Properties, Inc Sungate Boulevard Corporation New Jersey 50% TGTG Corporation New York 100% Three Hundred Paces Mill Georgia 37% Properties, Inc. 2021 Properties, Inc. New Jersey 100% Two Hundred Henderson Place Georgia 37% Properties, Inc. United Armored Services, Inc. New Jersey 100% Vikings Terrace Corporation New Jersey 100% Westpark Walk, Inc. Georgia 50% Yerac Liquors New Jersey 100% New Jersey National Leasing New Jersey 100% Corporation Underwood Mortgage and Title New Jersey 100% Company PENNAMCO, Inc. Delaware 100% Pennco Life Insurance Company Arizona 100% Princeton Life Insurance Company Pennsylvania 100% Servilease Corporation Pennsylvania 100%
7 List of Subsidiaries of CoreStates Financial Corp as of December 31, 1995 Signal Financial Corporation Pennsylvania 100% Grabuck Agency, Inc. Pennsylvania 100% Signal Finance Corporation Delaware 100% Signal Finance Corporation Pennsylvania 100% Signal Finance of Maryland, Inc. Maryland 100% Signal Management Corporation Delaware 100%
8 EX-23.1 8 CONSENT OF INDEPENDENT AUDITORS 3/25/96 Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the following registration statements of our report dated January 17, 1996 with respect to the consolidated financial statements of CoreStates Financial Corp incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 1995: (a) The Registration Statement (Form S-8 No. 33-5874), in Post-Effective Amendment No. 1 to the Registration Statement (Form S-8 No. 2-91176), the Registration Statement (Form S-8 No. 33-28808) and in the related prospectuses, each pertaining to the CoreStates Financial Corp Long- Term Incentive Plan, (b) The Registration Statement (Form S-8 No. 33-32934) and prospectus relating to the CoreStates Savings Plan, (c) The Registration Statement (Form S-3 No. 33-50324) pertaining to the CoreStates Financial Corp 1992 Long-Term Incentive Plan, (d) The Registration Statement (Form S-3 No. 33-57034) and prospectus and prospectus supplement pertaining to $1,000,000,000 in aggregate amount of Debt Securities issuable by CoreStates Capital Corp and the related guarantees of the corporation, and Preferred Stock, Depository Shares, Common Stock, and Capital Securities, issuable by the Corporation, (e) The Registration Statement (Form S-3 No. 33-54049) and prospectus and prospectus supplement pertaining to $1,000,000,000 in aggregate amount of Debt Securities and warrants issuable by CoreStates Capital Corp and the related guarantees of the Corporation and Preferred Stock, Depository Shares and Common Stock issuable by the Corporation, (f) The Registration Statement (Form S-4, as amended by Form S-8, No. 33- 48422) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of First Peoples Corporation, (g) The Registration Statement (Form S-3, as amended by Post Effective Amendment No. 2, No. 33-40717) and prospectus relating to shares of the Corporation Common Stock issuable pursuant to the CoreStates Dividend Reinvestment and Share Purchase Plan, (h) The Registration Statement (Form S-4, as amended by Form S-8, No. 33- 51429) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of Constellation Bancorp, (i) The Registration Statement (Form S-4, as amended by Form S-8, No. 33- 53539) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of Independence Bancorp, Inc., (j) The Registration Statement (Form S-4, as amended by Form S-8, No. 33- 55505) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of Germantown Savings Bank, and (k) The Registration Statement (Form S-4, No. 333-00067) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of Meridian Bancorp, Inc. /s/ Ernst & Young LLP Philadelphia, Pennsylvania March 25, 1996 EX-23.2 9 INDEPENDENT AUDITORS CONSENT Exhibit 23.2 INDEPENDENCE AUDITORS' CONSENT ------------------------------ We consent to the incorporation by reference in (a) the Registration Statement (Form S-8 No. 33-5874), in Post-Effective Amendment No. 1 to the Registration Statement (Form S-8 No. 2-91176), the Registration Statement (Form S-8 No. 33- 28808) and in the related prospectuses, each pertaining to the CoreStates Financial Corp Long-Term Incentive Plan, (b) the Registration Statement (Form S- 8 No. 33-32934) and prospectus relating to the CoreStates Savings Plan, (c)the Registration Statement (Form S-8 No. 33-50324) pertaining to the CoreStates Financial Corp 1992 Long-Term Incentive Plan, (d) the Registration Statement (Form S-3 No. 33-57034) and prospectus and prospectus supplement pertaining to $1,000,000,000 in aggregate amount of Debt Securities issuable by CoreStates Capital Corp and the related guarantees of the Corporation, and Preferred Stock, Depository Shares, Common Stock, and Capital Securities, issuable by the Corporation, (e) the Registration Statement (From S-3 No. 33-54049) and prospectus and prospectus supplement pertaining to $1,000,000,000 in aggregate amount of Debt Securities and warrants issuable by CoreStates Capital Corp and the related guarantees of the Corporation and Preferred Stock, Depository Shares and Common Stock issuable by the Corporation, (f) the Registration Statement (Form S-4, as amended by Form S-8, No. 33-48422) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of First Peoples Corporation, (g) the Registration Statement (Form S-3, as amended by Post-Effective Amendment No. 2, No. 33-40717) and prospectus relating to shares of the Corporation Common Stock issuable pursuant to the CoreStates Dividend Reinvestment and Share Purchase Plan, (h) the Registration Statement (Form S-4, as amended by Form S-8, No. 33-51429) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options, the obligation in respect to which were assumed by the Corporation in connection with the acquisition of Constellation Bancorp, (i) the Registration Statement (Form S-4, as amended by Form S-8, No. 33-53539) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of Independence Bancorp, Inc., (j) the Registration Statement (Form S-4, as amended by Form S-8, No. 33-55505) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of Germantown Savings Bank, and (k) the Registration Statement (Form S-4, No. 333-00067 and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options, the obligations in to which were assumed by the Corporation in connection with the acquisition of Meridian Bancorp, Inc. of our report dated 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 relating to the consolidated statements of operations, changes in shareholders' equity and cash flows of Constellation Bancorp and subsidiaries for the year ended December 31, 1993. Our report refers to a restatement of the 1993 financial statements to remove certain merger-related charges, and to a change in accounting for postretirement benefits, other than pensions, income taxes, and certain investments in debt and equity securities in 1993. The financial statements referred to above are not separately presented in the 1995 Annual Report on Form 10-K of CoreStates Financial Corp. /s/ KPMG Peat Marwick LLP Short Hills, New Jersey March 25, 1996 EX-23.3 10 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23.3 ------------ CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in (a) the Registration Statement on Form S-8 (No. 33-5874), the Post-Effective Amendment No. 1 to the Registration Statement on Form S-8 (No. 2-91176), the Registration Statement on Form S-8 (No. 33-28808) and in the related prospectuses, each pertaining to the CoreStates Financial Corp Long-Term Incentive Plan, (b) the Registration Statement on Form S-8 (No. 33-32934) and prospectus relating to the CoreStates Savings Plan, (c) the Registration Statement on Form S-8 (No. 33-50324) pertaining to the CoreStates Financial Corp 1992 Long-Term Incentive Plan, (d) the Registration Statement on Form S-3 (No. 33-57034) and related prospectus and prospectus supplements pertaining to $1,000,000,000 in aggregate amount of Debt Securities issuable by CoreStates Capital Corp and the related guarantees of the Corporation, and Preferred Stock, Depository Shares, Common Stock and Capital Securities issuable by the Corporation, (e) the Registration Statement on Form S-3 (No. 33-54049) and the related prospectus and prospectus supplements pertaining to $1,000,000,000 in aggregate amount of Debt Securities and warrants issuable by CoreStates Capital Corp and the related guarantees of the Corporation and Preferred Stock, Depository Shares and Common Stock, and Capital Securities, issuable by the Corporation, (f) the Registration Statement on Form S-4, as amended by Form S-8, (No. 33-48422) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options, the obligation in respect to which were assumed by the Corporation in connection with the acquisition of First Peoples Corporation, (g) the Registration Statement on Form S-3, as amended by Post Effective Amendment No. 2 (No. 33-40717) and prospectus relating to shares of the Corporation Common Stock issuable pursuant to the CoreStates Dividend Reinvestment and Share Purchase Plan, (h) the Registration Statement on Form S-4, as amended by Form S-8 (No. 33-51429) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options, the obligation in respect to which were assumed by the Corporation in connection with the acquisition of Constellation Bancorp, (i) the Registration Statement on Form S-4, as amended by Form S-8 (No. 33-53539) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options, the obligation in respect to which were assumed by the Corporation in connection with the acquisition on Independence Bancorp, Inc., (j) the Registration Statement on Form S-4, as amended by Form S-8 (No. 33-55505) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options, the obligation in respect to which were assumed by the Corporation in connection with the acquisition of Germantown Savings Bank and (k) the Registration Statement Form S-4 (No. 333-00067) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of Meridian Bancorp, Inc., of our report, which includes an explanatory paragraph related to changes in the method of accounting for investments in 1993, dated January 19, 1994, on our audit of the consolidated financial statements of Independence Bancorp, Inc. as of and for the year ended December 31, 1993, incorporated by reference in CoreStates Annual Report on Form 10-K for the year ended December 31, 1995. /s/ Coopers & Lybrand L.L.P. Philadelphia, Pennsylvania March 25, 1996 EX-27 11 FINANCIAL DATA SCHEDULE
9 This Schedule contains summary financial information extracted from the CoreStates Financial Corp consolidated balance sheet as of December 31, 1995, and the related consolidated statement of income, changes in shareholders' equity, and other supplemental financial data included within management's discussion and analysis of financial condition and results of operations for the year ended December 31, 1995 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 2,755,636 1,841,799 594,868 1,336 974,711 1,015,621 1,017,019 21,046,535 495,075 29,620,616 21,502,433 2,091,722 1,399,660 1,698,334 0 0 145,875 2,233,544 29,620,616 1,992,936 138,110 131,259 2,262,305 532,703 773,771 1,488,534 105,000 9,388 1,274,398 714,802 452,237 0 0 452,237 3.22 3.22 5.97 143,240 58,942 1,615 0 500,631 179,197 68,641 495,075 470,075 25,000 0
EX-99.1 12 ITEM 9 - UNDERTAKINGS EXHIBIT 99.1 ------------ The undertaking set forth below is filed for purposes of incorporation by reference into Part II of the registration statements on Form S-8, File Nos. 33-28808, 33-5874, 33-32934 and 33-50324. ITEM 9. UNDERTAKINGS. - - ------- ------------- (a) The undersigned registrant hereby undertakes: Insofar as indemnification for liabilities rising under the Securities Act of 1933 (the "Securities Act") may be permitted to directors, officers or persons controlling the registrant pursuant to the provisions described in this registration statement, or otherwise, CoreStates Financial Corp (the "Company") has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. -----END PRIVACY-ENHANCED MESSAGE-----