-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, TmCDYBmlbwOrrH7iBPKPfCsVNKPtgb6ov6A2+hfxNRojszcFdpchnnAa2s/sz8bZ 36PWxbtlPbz9lonIwz2bsg== 0000950109-94-000552.txt : 19940331 0000950109-94-000552.hdr.sgml : 19940331 ACCESSION NUMBER: 0000950109-94-000552 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940328 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: 34 SEC FILE NUMBER: 001-11285 FILM NUMBER: 94518224 BUSINESS ADDRESS: STREET 1: CENTRE SQUARE WEST STREET 2: 1500 MARKET ST CITY: PHILADELPHIA STATE: PA ZIP: 19101 BUSINESS PHONE: 2159733806 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, 1993 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 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. [ X ] The aggregate market value of voting stock held by non-affiliates of registrant based on the closing sale price on March 4, 1994 was approximately $2,862,484,000. 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 March 4, 1994 was 116,686,245. DOCUMENTS INCORPORATED BY REFERENCE 1. Annual Report to Shareholders for the fiscal year ended December 31, 1993, portions of which are incorporated by reference in Parts I, II and IV of this Report. 2. Definitive Proxy Statement dated March 17, 1994 for the Annual Shareholders' Meeting to be held on April 19, 1994, portions of which are incorporated by reference in Part III 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 Philadelphia National Bank Building, Broad & Chestnut Streets, Philadelphia, Pennsylvania 19107 (telephone number 215-973-3827). At December 31, 1993, CoreStates had total consolidated assets of approximately $23.7 billion and shareholders' equity of approximately $1.96 billion and, based on December 31, 1993 rankings of bank holding companies, was believed to be the 32nd largest bank holding company in the United States at 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. Divisions of CoreStates Bank are marketed as Philadelphia National Bank Division, the wholesale banking unit, CoreStates First Pennsylvania Bank Division, the retail banking unit, and since its merger into CoreStates Bank in August 1993, CoreStates Hamilton Bank, the unit serving central Pennsylvania. Other principal banking subsidiaries of CoreStates are New Jersey National Bank ("NJNB"), a national banking association with its executive offices located in Pennington, New Jersey and CoreStates Bank of Delaware N.A. ("CBD"), a national banking association with its sole 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 has been engaging in the business of providing wholesale banking services, consumer financial services which includes retail banking, trust & investment management services and electronic payment services which are provided through CoreStates' Electronic Payment Services, Inc. affiliate. Other Direct and Indirect Subsidiaries and Affiliates 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 and San Juan. As of December 31, 1993, factored receivables of Congress and its subsidiaries totalled $555.2 million while outstanding commercial finance obligations and other receivables totalled $1,426.4 million. 2 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, 1993, Capital had outstanding commercial paper in the aggregate principal amount of $468.8 million and debt securities in the aggregate outstanding principal amount of $1,433 million, with maturities ranging from 1 month to 11 years. Electronic Payment Services, Inc. ("EPS") is a joint venture formed in late --------------------------------- 1992 that combined the separate consumer electronic transaction processing business of CoreStates, Banc One Corporation, PNC Financial Corp. and 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. CoreStates former electronic payment services business is now conducted by EPS. EPS has announced the signing of a definitive agreement providing for two additional banking companies to enter the joint venture. The transactions are expected to be completed in 1994. 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 21 through 23 of the CoreStates Annual Report to Shareholders for the fiscal year ended December 31, 1993 (Exhibit 13 pages 7 through 10) 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 groups: corporate and institutional banking; investment banking; cash management; international banking; corporate middle market; and specialized finance. Domestic financing services include commercial, industrial and real estate loans, the financing of receivables, inventory, equipment and other requirements of business customers and the provision of financial services for correspondent banks. Foreign and international finance services include the making of loans and acceptances, the issuance and confirmation of letters of credit and related financial services. Also provided are transaction processing services, including cash 3 management, lock box, funds transfer and collection and disbursement management on both a domestic and international basis. International activities are conducted directly by CoreStates Bank through its head office in Philadelphia and 23 foreign offices. In addition, banking and financing activities are conducted through two wholly-owned Edge Act subsidiaries. Advisory services are also provided which relate to loan syndications, private placements, mergers and acquisitions, company valuations and other similar matters. This business also deals in and underwrites obligations of the United States Government, federal agencies and general obligations of States and municipal 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 and specialty products. Specialty products includes credit card, student lending and residential mortgage. 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 and consumer finance line of business is provided primarily by CBD which is the issuer of credit cards and also engages in a direct consumer loan business. Trust & Investment Management This core business provides products through ----------------------------- four business lines: institutional trust, personal trust, private banking and investment management. These products are offered through the Banking Subsidiaries and include fiduciary administration and transaction processing services, corporate trust services and through CoreStates Investment Advisors, Inc., 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 were contributed to EPS on December 4, 1992. Strategic Actions A discussion of strategic actions taken by CoreStates in 1993 is presented in Management's Discussion and Analysis of Financial Condition and Results of Operations at pages 19 through 21 of the CoreStates Annual Report to Shareholders for the fiscal year ended December 31, 1993 (Exhibit 13 pages 4 through 7) which pages of the Annual Report are incorporated herein by reference. 4 Government Supervision and Regulation CoreStates is a registered bank holding company subject to the supervision of, and to regular inspection by, the Board of Governors of the Federal Reserve System ("Federal Reserve"). All three Banking Subsidiaries are organized as national banking associations, which are subject to regulation by the Comptroller of the Currency ("OCC"). The Banking Subsidiaries are also subject to regulation by other federal bank regulatory bodies. In addition to banking laws, regulations and regulatory agencies, CoreStates and its subsidiaries and affiliates are subject to various other laws, regulations and regulatory agencies, all of which directly or indirectly affect CoreStates' operations, management and ability to make distributions. The following discussion summarizes certain aspects of those laws and regulations that affect CoreStates. Proposals to change the laws and regulations governing the banking industry are frequently raised in Congress, in the state legislatures and before the various bank regulatory agencies. The likelihood and timing of any changes and the impact such changes might have on CoreStates and its Banking Subsidiaries are difficult to determine. An important function of the Federal Reserve System is to regulate the national supply of bank credit. Among the instruments of monetary policy used by the Federal Reserve System to implement its objectives are: open market operations in U.S. Government securities; changes in the discount rate on bank borrowings; and changes in reserve requirements on bank deposits. Under the Act, CoreStates' activities, and those of companies which it controls or in which it holds more than 5% of the voting stock, are limited to banking or managing or controlling banks or furnishing services to or performing services for its subsidiaries, or any other activity which the Federal Reserve determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making such determinations, the Federal Reserve is required to consider whether the performance of such activities by a bank holding company or its subsidiaries can reasonably be expected to produce benefits to the public such as greater convenience, increased competition or gains in efficiency that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. Bank holding companies, such as CoreStates, are required to obtain prior approval of the Federal Reserve to engage in any new activity or to acquire more than 5% of any class of voting stock of any company. The Act also requires bank holding companies to obtain the prior approval of the Federal Reserve before acquiring more than 5% of any class of voting shares of any bank which is not already majority-owned. 5 Provisions of federal banking laws restrict the amount of distributions that can be paid to CoreStates by the Banking Subsidiaries. Under applicable federal laws, no dividends may be paid in an amount greater than net profits then on hand, reduced by certain loan losses (as defined in the applicable statutes). In addition, for each of CoreStates' Banking Subsidiaries, prior approval of federal banking authorities is required if dividends declared by a Banking Subsidiary in any calendar year will exceed its net profits (as defined) for that year, combined with its retained net profits for the preceding two calendar years. Based on these regulations, CoreStates' Banking Subsidiaries, without regulatory approval, could declare dividends at December 31, 1993 of $171 million. The OCC, in the cases of the Banking Subsidiaries, also has authority to prohibit payment of a dividend if such payment constitutes what, in the OCC's opinion, is an unsafe or unsound practice. In addition, the ability of CoreStates and its national Banking Subsidiaries to pay dividends may be affected by the various minimum capital requirements and the capital and non- capital standards to be established under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), as described below. The rights of CoreStates, its shareholders and its creditors to participate in any distribution of the assets or earnings of its Banking Subsidiaries is further subject to the prior claims of creditors of the respective Banking Subsidiaries. According to Federal Reserve policy, CoreStates is expected to act as a source of financial strength to each Banking Subsidiary and to commit resources to support each Banking Subsidiary in circumstances in which it might not do so absent such policy. In addition, any capital loans by Corestates to any Banking Subsidiary would be subordinated in right of payment to deposits and certain other indebtedness of each Banking Subsidiary. In addition, CoreStates' Banking Subsidiaries are subject to certain restrictions imposed by Federal law on any extension of credit to, and certain other transactions with CoreStates, Capital and certain other non-bank subsidiaries, on investments in stock or other securities thereof and on the taking of such securities as collateral for loans. Among other things, the aggregate of such loans made by each Banking Subsidiary to CoreStates or to any single non-bank subsidiary generally may not exceed 10% of the sum of such Banking Subsidiaries' capital and surplus, as defined, and all loans by each Banking Subsidiary to CoreStates and its non-bank subsidiaries are limited to 20% of such Banking Subsidiaries' capital and surplus. Such loans must be secured by collateral with a value between 100% and 130% of the loan amount, depending on the type of collateral. The Banking Subsidiaries may extend credit to CoreStates and its non-bank subsidiaries without regard to these restrictions to the extent such extensions of credit are secured by specific kinds of collateral such as obligations of or guaranteed 6 by the U.S. Government or its agencies and certain bank deposits. FDICIA modifies certain provisions of the Federal Deposit Insurance Act and makes revisions to several other banking statutes. In general, FDICIA subjects banks to significantly increased regulation and supervision, and requires the federal banking agencies to take "prompt corrective action" with respect to banks which do not meet minimum capital requirements. Among other things, FDICIA requires a bank which does not meet any one of its capital requirements set by its regulators to submit a capital restoration plan for improving its capital. A holding company of a bank must guarantee that the bank will meet its capital plan, subject to certain limitations. If such a guarantee were deemed to be a commitment to maintain capital under the U.S. federal Bankruptcy Code, a claim under such guarantee in a bankruptcy proceeding involving the holding company would be entitled to a priority over third party creditors of the holding company. In addition, FDICIA prohibits a bank from making a capital distribution to its holding company or otherwise if it fails to meet any capital requirements. Furthermore, under certain circumstances, a holding company of a bank which fails to meet certain of its capital requirements may be prohibited from making any capital distributions to its shareholders or otherwise. Critically undercapitalized banks (which are defined to include banks which still have a positive net worth) are generally subject to the mandatory appointment of a receiver. All of CoreStates' Banking Subsidiaries meet current regulatory capital requirements and are "well capitalized" as defined by regulatory authorities. Pursuant to FDICIA, in 1993 the FDIC issued a regulation entitled "Annual Independent Audits and Reporting Requirements" for banks which requires, among other things, a management assessment on the effectiveness of the internal controls over financial reporting as of the end of fiscal year 1993. CoreStates and the Banking Subsidiaries have complied with this regulation for 1993. The Financial Institution Reform, Recovery, and Enforcement Act ("FIRREA") enacted in August 1989 provides among other things for cross-guarantees of the liabilities of insured depository institutions pursuant to which any bank or savings association subsidiary of a holding company may be required to reimburse the FDIC for any loss or anticipated loss to the FDIC that arises from a default of any of such holding company's other subsidiary banks or savings associations or assistance provided to such an institution in danger of default. The Banking Subsidiaries of CoreStates are subject to such cross-guarantee. The deposits of each of the Banking Subsidiaries are insured up to applicable limits by the FDIC. Accordingly, the Banking Subsidiaries are subject to deposit insurance assessments to maintain the Bank Insurance Fund (the "BIF") of the FDIC. Pursuant to FDICIA, the FDIC has established a risk- based insurance assessment system. This approach is designed to ensure that a banking institution's insurance assessment is based on three factors: the probability that the applicable insurance fund will incur a loss from the institution; the likely amount of the loss; and the revenue needs of the insurance fund. Effective January 1, 1993, the FDIC established a risk related premium assessment system, with assessment rates ranging from .23% of domestic 7 deposits (the same rate as under the previous flat-rate assessment system) for those banks deemed to pose the least risk to the insurance fund, to .31% for those banks deemed to pose the greatest risk (with intermediate rates of .26%, .29% and .30%). All Corestates' Banking Subsidiaries have been notified by the FDIC that, for the semiannual assessment period beginning January 1, 1993, each will be subject to an assessment rate of .23%. 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 23 and 24 of the CoreStates Annual Report to Shareholders for the fiscal year ended December 31, 1993 (Exhibit 13 pages 11 and 12) which pages of the Annual Report are incorporated herein by reference. 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 includes other deposit taking organizations, such as commercial banks, savings and loan associations and credit unions, and so- 8 called "money market" mutual funds. The Banking Subsidiaries also actively compete for funds with U.S. Government securities and in the open money market. Employees As of February 28, 1994, CoreStates and its subsidiaries employed 11,180 persons on a full time basis and 2,855 persons on a part-time basis. CoreStates provides a variety of employment benefits and considers its relations with its employees to be satisfactory. 9 Selected Statistical Information Tables and selected statistical information concerning CoreStates and its subsidiaries as described below and set forth on pages of the CoreStates 1993 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 ............................64-65, 69 71-74, 78 Investment Portfolio .......................75 86 Loan Portfolio .............................25-32, 70-73 14-24, 79-83 Summary of Loan Loss Experience ............29, 72-73 19-20, 82-83 Deposits ...................................64-65, 73 71-74, 83 Return on Average Equity and Average Assets ..................................68 77 Short-Term Borrowings ......................53 55-56
Information illustrating the interest sensitivity of CoreStates interest earning assets and interest bearing liabilities is contained on page 74 of the Annual Report to Shareholders (Exhibit 13 page 84) and on page 11 of this Form 10-K. 10 Corestates Financial Corp And Subsidiaries Interest Sensitivity Analysis at December 31, 1993 (In Millions)
Rate Maturity Period --------------------------------------------------------------------------- 1-90 91-181 182-365 1-2 3-5 >5 Days Days Days Years Years Years Total ------- ------- ------- -------- ------ ------- ------- EARNING ASSETS Federal funds sold, resale agreements and trading account securities............. $ 9 $ 9 Time deposits.......................... 578 $ 533 $ 162 1,273 Investment securities.................. 779 280 347 $ 527 $ 434 $ 365 2,732 Interest rate swaps.................... 637 145 345 691 1,787 695 4,300 Asset financial futures................ 296 79 195 20 15 605 ------- ------- ------- -------- ------ ------- ------- Total discretionary assets......... 2,299 1,037 1,049 1,238 2,236 1,060 8,919 Total loans(a)......................... 11,837 703 826 1,150 1,617 230 16,363 ------- ------- ------- -------- ------ ------- ------- Total earning assets............... 14,136 1,740 1,875 2,388 3,853 1,290 25,282 ------- ------- ------- -------- ------ ------- ------- FUNDING SOURCES Federal funds purchased, repurchase agreements and other short-term funds borrowed........................ 1,825 11 1,836 Domestic and foreign time deposits(b)... 869 21 5 5 4 70 974 Long-term debt............. ............ 616 19 30 122 29 639 1,455 Interest rate swaps..................... 3,761 25 33 149 332 4,300 Liability financial futures............. 530 55 20 605 ------- ------- ------- -------- ------ ------- ------- Total discretionary liabilities..... 7,601 131 88 276 365 709 9,170 ------- ------- ------- -------- ------ ------- ------- Savings certificates.................... 874 610 478 364 370 301 2,997 Money market, savings and NOW accounts.. 3,578 3,396 6,974 ------- ------- ------- -------- ------ ------- ------- Total savings certificates and indefinite maturity liabilities..... 4,452 610 478 364 370 3,697 9,971 ------- ------- ------- -------- ------ ------- ------- Total net funding sources............ 12,053 741 566 640 735 4,406 19,141 ------- ------- ------- -------- ------ ------- ------- Adjusted period gap................. $ 2,083 $ 999 $ 1,309 $ 1,748 $3,118 $(3,116) $ 6,141(c) ======= ======= ======= ======== ====== ======= ======= Cumulative gap....................... $ 2,083 $ 3,082 $ 4,391 $ 6,139 $9,257 $ 6,141 ======= ======= ======= ======== ====== =======
Notes to interest sensitivity analysis: (a) Non-performing loans are included in 1-90 days. (b) Deposit volume exclude time deposits not at interest. (c) Represents the portion of total interest earning assets which are funded by non-interest bearing funding sources including demand deposits and shareholders' equity. 11 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 47 Chairman, Chief Executive Officer, (1988 to present) and Director (1986 to present), President (January 1, 1992 to present, 1986 to March 1990), Chief Operating Officer (1986 to 1988) of the Corporation; Chairman and Director (October 1990 to present) and President (January 1, 1992 to present) of CoreStates Bank; Chairman (1989 to October 1990), Director (1986 to October 1990), and Executive Vice President, 1983 to 1986) of The Philadelphia National Bank ("PNB"). Thomas A. Bracken 47 Chief Executive Officer and President of New Jersey National Bank ("NJNB") (January 1993 to present), Executive Vice President of NJNB (1986 to January 1993). Leslie R. Butler 53 Chief Human Resources Officer (December 1990 to present) of the Corporation; Vice Chairman (1988 to December 1990) and Director (1988 to March 1990) and prior thereto Senior Executive Vice President and Chief Administration Officer of First Pennsylvania Bank.
12 David C. Carney 56 Chief Financial Officer (April 1991 to present) of the Corporation; Philadelphia Area Managing Partner (1989 to March 1991) of Ernst & Young; Prior thereto, Office Managing Partner, Arthur Young & Company. Charles L. Coltman, III 50 Assistant to the Chairman, Corporate Quality (February 1993 to present), Chief Credit Policy Officer (September 1990 to February 1993), Executive Vice President and Credit Policy Officer (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 45 Chief Credit Policy Officer (February 1993 to present) of the Corporation; Executive Vice President (1987 to February 1993) of CoreStates Bank. Donald M. Cooper 55 Chairman, President and Chief Executive Officer (August 1993 to present) of CoreStates Hamilton Bank Division of CoreStates Bank; Chairman, President and Chief Executive Officer (January 1991 to August 1993), Vice Chairman and Chief Operating Officer (1988 to January 1991) of Hamilton Bank; Executive Vice President (1983 to 1988) of the Corporation.
13 Robert N. Gilmore 45 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 47 Chief Retail Services Officer (October 1993 to present) of the Corporation; President and Chief Executive Officer of CoreStates First Pennsylvania Bank Division of CoreStates Bank (March 1991 to Present) and Director (April 1992 to present); President and Director (1987 to March 1991), Chief Executive Officer (September 1990 to March 1991), Executive Vice President (1986 to 1987) of Fidelity Bank; Senior Executive Vice President and Director (1987 to March 1991) of First Fidelity Bancorporation. Albert W. Mandia 46 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. Blair E. McNeill 49 Executive Vice President (March 1987 to present) of the Corporation; Chairman and Chief Executive Officer (July 1991 to present) of CBD.
14 Robert B. Palmer 53 Chairman (February 1991 to present) and President (October 1990 to February 1991) of CoreStates First Pennsylvania Division of CoreStates Bank; Chief Retail Services Officer (February 1991 to October 1993) of the Corporation; Director (April 1992 to present) of CoreStates Bank; President and Chief Executive Officer (March 1990 to October 1990) of First Pennsylvania Bank, N.A.; Chief Executive Officer (1989 to March 1990), President and Chief Operating Officer (1987 to March 1990) and Executive Vice President (1976 to 1987) of PNB; Executive Vice President (1983 to 1987) of the Corporation. Frank E. Reed 58 Chief Wholesale Services Officer (May 1992 to present) of the Corporation; President and Chief Executive Officer (October 1990 to present) of Philadelphia National Bank Division of CoreStates Bank; Director (April 1992 to present) of CoreStates Bank; President and Chief Executive Officer (March 1990 to October 1990) of PNB; President and Chief Operating Officer (1984 to March 1990) of First Pennsylvania Corporation and First Pennsylvania Bank.
15 Mark E. Stalnecker 42 Chief Trust & Investment Services Officer (May 1992 to present) of the Corporation; Executive Vice President CoreStates Trust and Investment Group (March 1990 to present) of CoreStates Bank; Director (April 1992 to present) of CoreStates Bank; Chief Executive Officer of Philadelphia National Limited and Executive Vice President (1988 to March 1990) of the Corporation and PNB; Associate Director, Treasury - J. P. Morgan Securities, Ltd.-London (February 1987 to 1988); Executive Vice President of the Corporation (1986 to 1987).
16 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, owned by Clymer Realty Corporation, a real estate subsidiary of CoreStates Bank, and in leased space located at Centre Square West, 16th and Market Streets, Philadelphia, Pennsylvania. CoreStates and its subsidiaries and affiliates occupy approximately 260,000 square feet of the PNB Building's approximately 400,000 square feet of office space and 547,600 square feet of the office space in the Centre Square complex. Approximately 194,100 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 393,000 square feet in the Penn Mutual Buildings, 510, 520 and 530 Walnut Street, approximately 111,600 square feet in the Curtis Center, 6th and Walnut Streets, and approximately 62,100 square feet in the Graham Building, One Penn Square West. 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 its loss prevention and security, human resources and loan accounting units presently occupy all of the office space in this building. CoreStates Bank also owns a service and warehouse building at 1306 Spring Garden Street in Philadelphia and a six story building at 3020 Market Street in Philadelphia which is used for storage. An administrative center at 1097 Commercial Avenue, Lancaster, Pennsylvania and the executive offices of its CoreStates Hamilton Bank division at 100 North Queen Street, Lancaster, Pennsylvania are also owned by CoreStates Bank. Of 183 CoreStates Bank domestic banking offices at December 31, 1993, 70 were in CoreStates Bank owned premises and 113 were in leased premises. The lease provisions for rented properties generally provide for initial terms of at least 10 to 15 years with varying options for renewal. On May 13, 1977, CoreStates (then National Central Financial Corporation) borrowed $25 million from two institutional lenders at an interest rate of 8 5/8% per annum. The loan is payable over 25 years, with level monthly installments which are set to fully amortize the loan by maturity. The loan is secured by a first lien mortgage on 30 CoreStates Bank owned properties previously owned by Hamilton Bank and occupied by the CoreStates Hamilton Bank division of CoreStates Bank. 17 As of December 31, 1993, NJNB maintained 103 bank and bank-related properties. Of the total, 55 were owned in fee and 48 were leased, of which 13 were owned partially in fee and partially under lease. Of the leased properties most of the leases range from five to 27 years. All real estate and buildings owned by NJNB are free from mortgages. Of the buildings owned by NJNB, four include space leased to others, and of the buildings leased by NJNB, one includes space leased to others. CBD leases space in three office buildings located at 1523 Concord Pike, New Castle County, Delaware. The buildings contain 131,593 square feet of rental space, all of which is occupied by CBD. The leases expire in 1995 and contain three five-year renewal options in favor of CBD. The offices of CoreStates' other direct and indirect subsidiaries and the foreign branch and representative offices of CoreStates Bank are in leased premises. Rental expense, reduced by sublease income, for CoreStates and its subsidiaries in 1993 was $56.6 million. Item 3 - Legal Proceedings In the normal course of business, CoreStates and its subsidiaries are subject to numerous pending and threatened legal actions and proceedings, 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 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". Until December 29, 1993, CoreStates Common Shares were traded in the over-the-counter market and the price quotations were reported on the NASDAQ National Market System. 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 or as quoted on the NASDAQ National Market System, as applicable, and cash dividends declared per share. Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. The information set forth in the table has been adjusted retroactively for a stock dividend in the form of a two-for-one stock split declared on 18 August 17, 1993 and distributed on October 15, 1993 to shareholders of record on September 15, 1993. On March 4, 1994, there were approximately 32,848 registered holders of Common Stock of CoreStates.
CORESTATES -------------------------- DIVIDEND HIGH LOW DECLARED ------- ------- -------- Year ended December 31, 1992: First Quarter............... $25 1/8 $21 7/8 $0.25 Second Quarter.............. 27 21 0.25 Third Quarter............... 26 1/4 23 5/8 0.25 Fourth Quarter.............. 28 7/8 24 1/8 0.27 Year ended December 31, 1993: First Quarter............... 29 3/4 26 3/8 $0.27 Second Quarter.............. 30 1/8 25 1/8 0.27 Third Quarter............... 29 3/4 26 3/4 0.30 Fourth Quarter.............. 29 3/4 25 1/8 0.30
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 further 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 declared in any calendar year exceeds the bank's net profits for that year combined with its retained net profits for the preceding two calendar years. Under this formula CoreStates Bank, NJNB and CBD can declare dividends to CoreStates of approximately $151 million, $19 million and $1 million, respectively, plus an additional amount equal to CoreStates Bank's, NJNB's and CBD's retained net profits for 1994 up to the date of dividend declaration. Item 6 - Selected Financial Data Pursuant to General Instructions G(2), information required by this Item is incorporated by reference from pages 66, 67 and 68 of the CoreStates Annual Report to Shareholders for the fiscal year ended December 31, 1993 (Exhibit 13 pages 75 through 77). Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations Pursuant to General Instructions G(2), information required by this Item is incorporated by reference from pages 18 through 40 of the CoreStates Annual Report to Shareholders for the fiscal year ended December 31, 1993 (Exhibit 13 pages 1 through 37). Item 8 - Financial Statements and Supplementary Data 19 Pursuant to General Instructions G(2), information required by this Item is incorporated by reference from pages 40 through 77 of the CoreStates Annual Report to Shareholders for the fiscal year ended December 31, 1993 (Exhibit 13 pages 38 through 90). 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 pages 1 through 7 of the CoreStates Proxy Statement dated March 17, 1994 and from Part I of this report on Form 10-K. Item 11 - Executive Compensation Pursuant to General Instruction G(3), information required by this Item is incorporated by reference from pages 10 through 18 of the CoreStates Proxy Statement dated March 17, 1994. Such incorporation by reference shall not be deemed to specifically incorporate by reference the information referred to in Item 402(a)(8) of Regulation S-K. Item 12 - Security Ownership of Certain Beneficial Owners and Management Pursuant to General Instruction G(3), information required by this Item is incorporated by reference from pages 2-7, 15-16, and 18 of the CoreStates Proxy Statement dated March 17, 1994. On March 25, 1994 CoreStates received a corrected Schedule 13G from Mellon Bank Corporation which indicates that Mellon Bank Corporation and its subsidiaries and affiliates own 3.06% of the outstanding Shares of Common Stock of CoreStates rather than the 5.34% as reported on the original Schedule 13G dated February 9, 1994 and reflected on page 7 of the CoreStates Proxy Statement dated March 17, 1994. Item 13 - Certain Relationships and Related Transactions Pursuant to General Instruction G(3), information required by this Item is incorporated by reference from page 10 of the CoreStates Proxy Statement dated March 17, 1994. 20 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, 1993, are incorporated by reference in Item 8:
Annual Report Exhibit 13 to Shareholders Page Page Reference Reference --------------- ------------- Consolidated Statement of, Income for each of the years ended December 31, 1993, 1992 and 1991............................ 42 41 Consolidated Balance Sheet at December 31, 1993 and 1992.............................. 43 42 Consolidated Statement of Changes in Shareholders' Equity for each of the years ended December 31, 1993, 1992 and 1991....................................... 44 43 Consolidated Statement of Cash Flows for each of the years ended December 31, 1993, 1992 and 1991........................ 45 44 Notes to the Financial Statements.............. 46-63 45-70
(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 not required under the related instructions or are inapplicable, and therefore have been omitted. (a) 3. Exhibits --------
Exhibit No. Page No. - ----------- -------- 2.1 Agreement and Plan of Merger dated as of August 2, 1993 by and between CoreStates Financial Corp and Constellation Bancorp and filed as Exhibit 2 to Registrants Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 and incorporated herein by reference.
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Exhibit No. Page No. - ----------- -------- 2.2 Agreement and Plan of Merger dated as of November 19, 1993 by and between CoreStates Financial Corp and Independence Bancorp, Inc. 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. 4.2 Distribution Agreement dated January 29, 1991 among CoreStates Financial Corp, CoreStates Capital Corp and Merrill Lynch & Co., Goldman, Sachs & Co., Shearson Lehman Brothers Inc. and J.P. Morgan Securities Inc. Filed as Exhibit 4.5 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991 and incorporated herein by reference. 4.3 Underwriting Agreement dated February 12, 1991 among CoreStates Financial Corp, CoreStates Capital Corp and Shearson Lehman Brothers Inc., Goldman, Sachs & Co., Merrill Lynch & Co. and J.P. Morgan Securities Inc. Filed as Exhibit 4.6 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991 and incorporated herein by reference. 4.4 Indenture dated as of December 1, 1990 between CoreStates Financial Corp, CoreStates Capital Corp and 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.
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Exhibit No. Page No. - ----------- -------- 4.5 Indenture dated as of December 1, 1990 between CoreStates Financial Corp, CoreStates Capital Corp and Bank One, Columbus, N.A. Filed as Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated January 29, 1991 and incorporated herein by reference. 4.6 First Supplemental Indenture dated as of March 1, 1993 to the Indenture dated as of December 1, 1990 by and between CoreStates Capital Corporation, CoreStates Financial Corp and Bank One, 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. 4.7 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. 4.8 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. 4.9 Specimen of Medium-Term Note (Subordinated Fixed Rate). Filed as Exhibit 4.5 to the Registrant's Current Report on Form 8-K dated January 29, 1991 and incorporated herein by reference. 4.10 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. 4.11 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.
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Exhibit No. Page No. - ----------- -------- 4.12 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. 4.13 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. 4.14 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. 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 * Hamilton Bank Directors Deferred Compensation Plan. Filed as Exhibit 1b, File No. 0-6879 to National Central Financial Corporation's Form 10-K for the year ended December 31, 1980 and incorporated herein by reference.
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Exhibit No. Page No. - ----------- -------- 10.4 * Deferred Compensation Plan for Directors of Hamilton Bank as amended and restated effective July 1, 1988. Filed as Exhibit 10.6 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 * Deferred Compensation Plan for Directors of CoreStates Financial Corp and The Philadelphia National Bank as amended and restated effective April 1, 1988. Filed as Exhibit 10.7 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 * Deferred Compensation Plan for Officers of CoreStates Financial Corp and Participating Subsidiaries as amended and restated effective January 1, 1988. Filed as Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987 and incorporated herein by reference. 10.7 * 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. 10.8 * 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. 10.9 Agreement between New Jersey National Bank and Textron Financial - New Jersey, Inc. for the sale and leaseback of the Corporate and operations centers and four branches. Filed as Exhibit 10(i), File No. 0-6002 to the New Jersey National Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 1985 and incorporated herein by reference.
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Exhibit No. Page No. - ----------- -------- 10.10 Agreement and Plan of Reorganization, dated as of September 18, 1989, between First Pennsylvania Corporation and CoreStates Financial Corp. Filed as Appendix I to the Joint Proxy Statement of CoreStates Financial Corp and First Pennsylvania Corporation included in the Registrant's Registration Statement on Form S-4 (File No. 33-31896) and incorporated herein by reference. 10.11 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. 10.12* 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. 10.13 Agreement and Plan of Reorganization dated as of February 13, 1992 between First Peoples Financial Corporation and CoreStates Financial Corp filed as Appendix I to the Proxy Statement of First Peoples Financial Corporation included in the Registrant's Registration Statement on Form S-4 (file No. 33-48422) and incorporated herein by reference. 10.14* 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.
26
Exhibit No. Page No. - ----------- -------- 10.15* 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. 10.16* 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. 10.17 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. 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 18 through 77 of the Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1993. 22 List of Subsidiaries. 23 Consent of Ernst & Young. 99.1 Stock Option Agreement dated August 2, 1993 between CoreStates Financial Corp and Constellation Bancorp filed as Exhibit 99 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 and incorporated herein by reference.
27
Exhibit No. Page No. ----------- -------- 99.2 Stock Option Agreement dated November 19, 1993 between CoreStates Financial Corp and Independence Bancorp, Inc. 99.3 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. (b) Reports on Form 8-K for the quarter ended December 31, 1993: A report on Form 8-K was filed on October 12, 1993 reporting that CoreStates Financial Corp and Constellation Bancorp had entered into a definitive agreement providing for CoreStates to acquire Constellation pursuant to an exchange of stock. In addition, the following financial statements were filed: (1) Interim condensed consolidated statements of Constellation Bancorp as of June 30, 1993 and for the six months ended June 30, 1993 and 1992. (2) Year-End consolidated financial statements of Constellation Bancorp as of and for the year ended December 31, 1992. (3) Pro Forma Financial Information for CoreStates Financial Corp and Constellation Bancorp as follows: (i) Pro Forma Condensed Combined Balance Sheet as of June 30, 1993 (ii) Pro Forma Condensed Combined Statements of Income for: Six months ended June 30, 1993 and 1992 Year ended December 31, 1992, 1991 and 1990 A Report on Form 8-K was filed on October 21, 1993 reporting earnings information contained in the news release of CoreStates Financial Corp dated October 20, 1993. A Report on Form 8-K was filed on November 19, 1993 reporting that CoreStates Financial Corp and Independence Bancorp had entered into a definitive agreement for CoreStates to acquire Independence in an exchange of stock. A Report on Form 8-K was filed on December 13, 1993 reporting that CoreStates Financial Corp and Independence Bancorp had entered into a definitive agreement for CoreStates to acquire Independence in an exchange of stock. In addition, the following financial statements of Independence Bancorp were filed: (1) Interim condensed consolidated statements of Independence Bancorp, Inc. as of September 30, 1993 and for the Nine months ended September 30, 1993 and 1992. 28 (2) Year-end consolidated financial statements of Independence Bancorp, Inc. as of and for the year ended December 31, 1992. 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. 29 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, 1993 and 1992, and the related consolidated statements of income, changes in shareholder' equity, and cash flows for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CoreStates Financial Corp at December 31, 1993 and 1992, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. As discussed in Note 1 to the financial statements, in 1993 the Company changed its methods of accounting for certain investments in debt and equity securities and for postemployment benefits, and in 1992 the Company changed its method of accounting for income taxes and for postretirement benefits other than pensions. /s/Ernst & Young Philadelphia, Pennsylvania February 1, 1994 30 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 28, 1994 - -------------------------- of the Board, Terrence A. Larsen President and Chief Executive Officer (principal executive officer) /s/ David C. Carney Principal financial March 28, 1994 - -------------------------- officer David C. Carney /s/ Albert W. Mandia Principal March 28, 1994 - -------------------------- accounting officer Albert W. Mandia
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 28, 1994 - -------------------------- George A. Butler /s/ Robert H. Campbell Director March 28, 1994 - -------------------------- Robert H. Campbell /s/ Nelson G. Harris Director March 28, 1994 - -------------------------- Nelson G. Harris /s/ Vincent E. Hoyer Director March 28, 1994 - -------------------------- Vincent E. Hoyer
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Signature Capacity Date --------- -------- ---- /s/ Carlton E. Hughes Director March 28, 1994 - --------------------------- Carlton E. Hughes Director March ___, 1994 - --------------------------- Shirley A. Jackson /s/ Ernest E. Jones Director March 28, 1994 - --------------------------- Ernest E. Jones /s/ Joseph C. Ladd Director March 28, 1994 - --------------------------- Joseph C. Ladd /s/ Herbert Lotman Director March 28, 1994 - --------------------------- Herbert Lotman /s/ Patricia A. McFate Director March 28, 1994 - --------------------------- Patricia A. McFate /s/ John A. Miller Director March 28, 1994 - --------------------------- John A. Miller /s/ Marlin Miller, Jr. Director March 28, 1994 - --------------------------- Marlin Miller, Jr. /s/ Seymour S. Preston, III Director March 28, 1994 - --------------------------- Seymour S. Preston, III /s/ J. Lawrence Shane Director March 28, 1994 - --------------------------- J. Lawrence Shane /s/ Raymond W. Smith Director March 28, 1994 - --------------------------- Raymond W. Smith
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Signature Capacity Date --------- -------- ---- /s/ Harold A. Sorgenti Director March 28, 1994 - --------------------------- Harold A. Sorgenti /s/ Peter S. Strawbridge Director March 28, 1994 - --------------------------- Peter S. Strawbridge
33 EX-2.2 2 AGREEMENT AND PLAN Exhibit 2.2 =============================================================================== AGREEMENT AND PLAN OF MERGER DATED AS OF THE 19TH DAY OF NOVEMBER, 1993 BY AND BETWEEN CORESTATES FINANCIAL CORP AND INDEPENDENCE BANCORP, INC. =============================================================================== Table of Contents ----------------- Page ---- Recitals ............................................................... 1 ARTICLE I. The Merger
Section 1.1. Structure of the Merger ...................... 2 Section 1.2. Effect on Outstanding Shares ................. 2 Section 1.3. Exchange Procedures .......................... 4 Section 1.4. Options ...................................... 6 Section 1.5. Stock Option Agreement ....................... 7 Section 1.6. Convertible Debentures ....................... 7 ARTICLE II. Conduct Pending the Merger Section 2.1. Conduct of the Company's Business Prior to the Effective Time ...................... 8 Section 2.2. Forbearance by the Company ................... 8 Section 2.3. Forbearance by Acquiror ...................... 10 ARTICLE III. Representations and Warranties Section 3.1. Representations and Warranties ............... 10 ARTICLE IV. Covenants Section 4.1. Acquisition Proposals ........................ 21 Section 4.2. Employee Benefits ............................ 22 Section 4.3. Access and Information ....................... 23 Section 4.4. Certain Filings, Consents and Arrangements ............................... 24 Section 4.5. Indemnification; Directors' and Officers' Insurance ........................ 24 Section 4.6. Additional Agreements ........................ 26 Section 4.7. Publicity .................................... 26 Section 4.8. Proxy; Registration Statement ................ 27 Section 4.9. Shareholders' Meetings ....................... 27 Section 4.10. Securities Act; Pooling-of-Interests ......... 27 Section 4.11. Pooling-of-Interests and Tax-Free Reorganization Treatment ................... 28 Section 4.12. Executive Advisory Committee; Directorships; Name; Management ............ 28 Section 4.13. Antitakeover Statutes ........................ 29 Section 4.14. Severance Benefits ........................... 29 Section 4.15. Listing ...................................... 29
-i-
Section 4.16 Allowance for Credit Losses .................. 29 Section 4.17 Bank Merger .................................. 30 Section 4.18 Rights Agreement ............................. 32 ARTICLE V. Conditions to Consummation Section 5.1. Conditions to All Parties' Obligations ....... 32 Section 5.2. Conditions to Obligations of Acquiror ........ 34 Section 5.3. Conditions to the Obligation of the Company ................................ 35 ARTICLE VI. Termination Section 6.1. Termination .................................. 36 Section 6.2. Effect of Termination ........................ 40 ARTICLE VII. Effective Date and Effective Time Section 7.1. Effective Date and Effective Time ............ 40 ARTICLE VIII. Other Matters Section 8.1. Certain Definitions; Interpretation .......... 40 Section 8.2. Survival ..................................... 41 Section 8.3. Waiver ....................................... 41 Section 8.4. Counterparts ................................. 41 Section 8.5. Governing Law ................................ 42 Section 8.6. Expenses ..................................... 42 Section 8.7. Notices ...................................... 42 Section 8.8. Entire Agreement; Etc......................... 43 Section 8.9. Assignment.................................... 43
-ii- List of Annexes ---------------
Annex 1 -- Acquiror Rights (Recital C) Annex 2 -- The Company Rights (Recital C) Annex 3 -- Significant Subsidiaries of Acquiror (Section 3.1(d)) Annex 4 -- Significant Subsidiaries of the Company (Section 3.1(d)) Annex 5 -- The Company Employee Benefit Plans (Section 3.1(m)) Annex 6 -- Form of Amendment to Rights Agreement (Section 3.1(u)) Annex 7 -- Severance Policies (Section 4.14)
-iii- Index to Definitions --------------------
Term Location of Definition - ---- ---------------------- Acquiror ............................................ Preamble Acquiror Common Stock ............................... Recital A Acquiror Preferred Stock ............................ Recital A Acquisition Proposal ................................ 4.1 Acquiror Ratio ...................................... 6.1(e) Acquiror Retirement Plan ............................ 4.2(c) Affiliates .......................................... 4.10(a) Average Closing Price ............................... 1.2(b) Bank Regulators ..................................... 3.1(k) Benefit Plans ....................................... 3.1(m) Certificate ......................................... 1.3(a) Code ................................................ Recital D Company ............................................. Preamble Company Common Stock ................................ Recital B Company Meeting ..................................... 4.9 Company Retirement Plan ............................. 4.2(c) Company Preferred Stock ............................. Recital B Control ............................................. 8.1 Conversion Number ................................... 1.2(a) Costs ............................................... 4.5(a) Determination Date .................................. 6.1(e) Effective Date ...................................... 7.1 Effective Time ...................................... 7.1 Environmental Law ................................... 3.1(w) ERISA ............................................... 3.1(m) Exchange Agent ...................................... 1.3(b) Exchange Fund ....................................... 1.3(b) Executive Agreements ................................ 4.2(d) Federal Reserve Board ............................... 5.1(b) Final Index Price ................................... 6.1(e) Final Price ......................................... 6.1(e) Hazardous Substance ................................. 3.1(w) Indemnified Parties ................................. 4.5(a) Index Group ......................................... 6.1(e) Index Ratio ......................................... 6.1(e) Initial Index Price ................................. 6.1(e) IRS ................................................. 3.1(m) material ............................................ 8.1 Material Adverse Effect ............................. 8.1 Maximum Amount ...................................... 4.5(c) Merger .............................................. 1.1 NMS ................................................. 1.2(b) NYSE ................................................ 1.2(b) Pension Plan ........................................ 3.1(m) person .............................................. 8.1 Plan ................................................ Preamble Properties .......................................... 3.1(w)
-iv-
Proxy Statement ..................................... 3.1(s) Proxy Statement/Prospectus .......................... 3.1(s) Registration Statement .............................. 3.1(s) Reports ............................................. 3.1(g) Rights .............................................. Recital C Rights Agreement .................................... Recital C SEC ................................................. 3.1(g) Securities Act ...................................... 3.1(s) Securities Exchange Act ............................. 3.1(g) Significant Subsidiary .............................. 3.1(b) Starting Date ....................................... 6.1(e) Starting Price ...................................... 6.1(e) Subsidiary .......................................... 8.1 Surviving Corporation ............................... 1.1
-v- AGREEMENT AND PLAN OF MERGER, dated as of the 19th day of November, 1993 (this "Plan"), by and between CoreStates Financial Corp ("Acquiror") and Independence Bancorp, Inc. (the "Company"). RECITALS: A. Acquiror. Acquiror has been duly incorpo-rated and is an existing -------- corporation in good standing under the laws of the Commonwealth of Pennsylvania, with its prin-cipal executive offices located in Philadelphia, Pennsylvania. As of November 12, 1993, Acquiror had 200,000,000 authorized shares of common stock, par value $1.00 per share ("Acquiror Common Stock"), of which 117,196,856 shares were outstanding, and 10,000,000 authorized shares of series preferred stock, no par value (the "Acquiror Preferred Stock"), none of which is outstand- ing (no other class of capital stock being authorized). B. The Company. The Company has been duly incorporated and is an ----------- existing corporation in good standing under the laws of the Commonwealth of Pennsylvania, with its principal executive offices located in Perkasie, Pennsylvania. As of the date hereof, the Company has 50,000,000 authorized shares of common stock, par value $2.50 per share (the "Company Common Stock"), of which 11,499,291 shares are outstanding, and 2,500,000 authorized shares of preferred stock, par value $100 per share (the "Company Preferred Stock"), none of which is outstanding (no other class of capital stock being authorized). C. Rights, Etc. None of Acquiror or the Company has any shares of ------------ its capital stock reserved for issuance, any outstanding option, call or commitment relating to shares of its capital stock or any outstanding securities, obligations or agreements convertible into or exchangeable for, or giving any person any right (including, without limitation, pre-emptive rights) to subscribe for or acquire from it, any shares of its capital stock (collectively, "Rights"), except (i) in the case of the Company pursuant to the Rights Agreement, dated as of February 21, 1989, between the Company and The Bank of New York, as Rights Agent (the "Rights Agreement"), and (ii) as set forth on Annex 1 (as to Acquiror) and Annex 2 (as to the Company). D. Intention of the Parties. It is the intention of the parties to ------------------------ this Plan that the Merger (as defined below) (i) for federal income tax purposes shall qualify as a "reorganization" within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) for accounting purposes shall qualify for treatment as a "pooling of interests." E. Board Approvals. The respective Boards of Directors of Acquiror --------------- and the Company have duly approved the Plan and have duly authorized its execution and delivery. F. Stock Option. The Acquiror and the Company will enter into a ------------ Stock Option Agreement. NOW, THEREFORE, in consideration of their mutual promises and obligations hereunder, the parties hereto adopt and make this Plan and prescribe the terms and conditions hereof and the manner and basis of carrying it into effect, which shall be as follows: ARTICLE I. THE MERGER SECTION 1.1. Structure of the Merger. On the Effective Date (as ----------------------- defined in Section 7.1), the Company will merge (the "Merger") with and into Acquiror, with Acquiror being the surviving corporation (the "Surviving Corpora- tion"), pursuant to the provisions of, and with the effect provided in, the Pennsylvania Business Corporation Law (the "PBCL"). At the Effective Time (as defined in Section 7.1), the articles of incorporation and by-laws of the Surviving Corporation shall be the articles of incorporation and by-laws of Acquiror in effect immediately prior to the Effective Time. At the Effective Time, the directors and officers of the Surviving Corporation shall be the directors and officers of Acquiror. SECTION 1.2. Effect on Outstanding Shares. (a) By virtue of the ---------------------------- Merger, automatically and without any action on the part of the holder thereof, each share of the Company Common Stock issued and outstanding at the Effective Time (other than (i) shares which have not been voted in favor of the approval of this Plan and with respect to which appraisal rights, if any, shall have been perfected in accordance with the PBCL (the "Dissenters' Shares"), and (ii) shares held directly or indirectly by Acquiror, excluding shares held in a fiduciary capacity or in satisfaction of a debt previously contracted) shall become and be converted into the number of shares of Acquiror Common Stock (the "Conversion Number") determined as follows: (i) if the Average Closing Price on the Determination Date (as defined in Section 6.1(e)) is less than or equal to $27.00 per share, the Conversion Number will be 1.50; -2- (ii) if the Average Closing Price on the Determination Date is greater than or equal to $28.00 per share, the Conversion Number will be 1.45; or (iii) if the Average Closing Price on the Determination Date is greater than $27.00 but less than $28.00 per share, the Conversion Number will be determined by dividing $40.50 by the Average Closing Price; provided that if Acquiror effects a stock dividend, reclassification, - -------- recapitalization, split-up, combination, exchange of shares or similar transaction, after the date hereof and before the Effective Time, the Conversion Number shall be appropriately adjusted. As of the Effective Time, each share of the Company Common Stock held directly or indirectly by Acquiror, excluding shares held in a fiduciary capacity or in satisfaction of a debt previously contracted and shares held as treasury stock of the Company, shall be cancelled, retired and cease to exist, and no exchange or payment shall be made with respect thereof. (b) No fractional shares of Acquiror Common Stock shall be issued pursuant hereto. In lieu of the issuance of any fractional share of Acquiror Common Stock pursuant to Section 1.2(a), cash adjustments will be paid to holders in respect of any fractional share of Acquiror Common Stock that would otherwise be issuable; the amount of such cash adjustment shall be equal to such fractional proportion of the Average Closing Price of a share of Acquiror Common Stock with respect to the Effective Date. "Average Closing Price" with respect to a day means the average of the closing price per share of Acquiror Common Stock, as reported on the National Association of Securities Dealers Automated Quotation National Market System ("NMS") or the New York Stock Exchange ("NYSE") Composite Transactions reporting system, as the case may be (as reported by The --- Wall Street Journal or, if not reported thereby, another authoritative source), - ------------------- for the 20 NMS or NYSE, as the case may be, trading days ending on the trading day prior to such day. (c) The shares of the Acquiror Common Stock issued and outstanding immediately prior to the Effective Time shall remain outstanding and unchanged after the Merger. (d) Dissenters' Shares, if any, shall be pur-chased and paid for in accordance with the PBCL. SECTION 1.3. Exchange Procedures. (a) At and after the Effective ------------------- Time, each certificate previously representing shares of the Company Common Stock (each a "Certifi-cate") shall represent (i) the number of whole shares of -3- Acquiror Common Stock and (ii) the right to receive cash in lieu of fractional shares into which the Company Common Stock has been converted pursuant to Sections 1.2(a) and (b). Certificates previously representing shares of the Company Common Stock shall be exchanged for certificates representing whole shares of Acquiror Common Stock and cash in lieu of fractional shares issued in consideration therefor upon the surrender of such Certificates in accordance with this Section 1.3, without any interest thereon. (b) As of the Effective Time, Acquiror shall deposit, or shall cause to be deposited, with First Chicago Trust Company of New York (or a bank selected by the Acquiror and reasonably acceptable to the Company) (the "Exchange Agent"), for the benefit of the holders of shares of the Company Common Stock, for exchange in accordance with this Section 1.3, certificates representing the shares of Acquiror Common Stock and the cash in lieu of fractional shares (such cash and certificates for shares of Acquiror Common Stock, together with any dividends or distributions with respect thereto, being hereinafter referred to as the "Exchange Fund") to be issued pursuant to Section 1.2 and paid pursuant to this Section 1.3 in exchange for outstanding shares of the Company Common Stock. (c) Promptly after the Effective Time, Acquiror shall cause the Exchange Agent to mail to each holder of record of a Certificate or Certificates the following: (i) a letter of transmittal specifying that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent, which shall be in a form and contain any other provisions as are mutually agreeable to Acquiror and the Company; and (ii) instructions for use in effecting the surrender of the Certificates in exchange for certificates representing shares of Acquiror Common Stock and cash in lieu of fractional shares. Upon the proper surrender of a Certificate to the Exchange Agent, together with a properly completed and duly executed letter of transmittal, the holder of such Certificate shall be entitled to receive in exchange therefor (x) a certificate representing that number of whole shares of Acquiror Common Stock and (y) a check representing the amount of cash in lieu of any fractional shares and unpaid dividends and distributions, if any, which such holder has the right to receive in respect of the Certificate surrendered pursuant to the provisions of Section 1.2(a), and the Certificate so surrendered shall forthwith be cancelled. No interest will be paid or accrued on the cash in lieu of fractional shares and unpaid dividends and distributions, if any, payable to holders of Certificates. In the event of a transfer of ownership of any shares of the Company Common Stock not registered in the transfer records -4- of the Company, a certificate representing the proper number of shares of Acquiror Common Stock, together with a check for the cash to be paid in lieu of fractional shares, may be issued to the transferee if the Certificate representing such Company Common Stock is presented to the Exchange Agent, accompanied by documents sufficient (1) to evidence and effect such transfer and (2) to evidence that all applicable stock transfer taxes have been paid. (d) Whenever a dividend or other distribution is declared by Acquiror on the Acquiror Common Stock, the record date for which is at or after the Effective Time, the declaration shall include dividends or other distributions on all shares issuable pursuant to this Plan; provided that after the 90th day -------- following the Effective Date no dividend or other distribution declared or made on the Acquiror Common Stock shall be paid to the holder of any unsurrendered Certificate with respect to the shares of Acquiror Common Stock represented thereby until the holder of such Certificate shall duly surrender such Certificate in accordance with this Section 1.3. Following such surrender of any such Certificate, there shall be paid to the holder of the certificates representing whole shares of Acquiror Common Stock issued in exchange therefor, without interest, (i) at the time of such surrender, the amount of dividends or other distributions having a record date after the Effective Time theretofore payable with respect to such whole shares of Acquiror Common Stock and not yet paid and (ii) at the appropriate payment date, the amount of dividends or other distributions having (x) a record date after the Effective Time but prior to surrender and (y) a payment date subsequent to surrender payable with respect to such whole shares of Acquiror Common Stock. (e) From and after the Effective Time, there shall be no transfers on the stock transfer records of the Company of any shares of the Company Common Stock that were outstanding immediately prior to the Effective Time. If after the Effective Time Certificates are presented to Acquiror, they shall be cancelled and exchanged for the shares of Acquiror Common Stock and cash in lieu of fractional shares, if any, deliverable in respect thereof pursuant to this Plan in accordance with the procedures set forth in this Section 1.3. (f) Any portion of the Exchange Fund (including the proceeds of any investments thereof and any Acquiror Common Stock) that remains unclaimed by the shareholders of the Company for six months after the Effective Time shall be repaid to Acquiror. Any shareholders of the Company who have not theretofore complied with this Section 1.3 shall thereafter look only to Acquiror for payment of their shares -5- of Acquiror Common Stock, cash in lieu of fractional shares and any unpaid dividends and distributions on the Acquiror Common Stock deliverable in respect of each share of the Company Common Stock such stockholder holds as determined pursuant to this Plan, in each case, without any interest thereon. If outstanding certificates for shares of the Company Common Stock are not surrendered or the payment for them not claimed prior to the date on which such payments would otherwise escheat to or become the property of any governmental unit or agency, the unclaimed items shall, to the extent permitted by abandoned property and any other applicable law, become the property of Acquiror (and to the extent not in its possession shall be paid over to it), free and clear of all claims or interest of any person previously entitled to such claims. Notwithstanding the foregoing, none of Acquiror, the Exchange Agent or any other person shall be liable to any former holder of the Company Common Stock for any amount delivered to a public body or official pursuant to applicable abandoned property, escheat or similar laws. (g) In the event any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed and, if required by Acquiror, the posting by such person of a bond in such amount as Acquiror may direct as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed Certificate the shares of Acquiror Common Stock and cash in lieu of fractional shares deliverable (and unpaid dividends and distributions) in respect thereof pursuant to this Plan. (h) Notwithstanding anything in this Plan to the contrary, for a period of 90 days after the Effective Date holders of Certificates shall be entitled to vote as holders of shares of Acquiror Common Stock notwithstanding that such Certificates shall not have been exchanged. SECTION 1.4. Options. At the Effective Time, each option granted by ------- the Company to purchase shares of the Company Common Stock, which is outstanding and unexercised immediately prior thereto, shall be converted into an option to purchase shares of Acquiror Common Stock on the same terms and conditions as are in effect immediately prior to the Merger as adjusted as set forth below. Each such option that is converted shall be converted into an option to purchase such number of shares of Acquiror Common Stock at such exercise price as is determined as provided below (and otherwise having the same duration and other terms as the original option): -6- (a) the number of shares of Acquiror Common Stock to be subject to the new option shall be equal to the product of (i) the number of shares of the Company Common Stock subject to the original option and (ii) the Conversion Number, the product being rounded, if necessary, up or down, to the nearest whole share; and (b) the exercise price per share of Acquiror Com-mon Stock under the new option shall be equal to (i) the exercise price per share of the Company Common Stock under the original option divided by (ii) the Conversion Number, rounded, if necessary, up or down, to the nearest cent. The adjustment provided herein with respect to any options which are "incentive stock options" (as defined in Section 422 of the Code) shall be effected in a manner consis-tent with Section 424(a) of the Code. SECTION 1.5. Stock Option Agreement. Immediately after the execution ---------------------- and delivery of this Plan, the Acquiror and the Company will execute a Stock Option Agreement in the form attached hereto as Exhibit A. SECTION 1.6. Convertible Debentures. The Company's 7% Convertible ---------------------- Subordinated Debentures Due 2011 (the "Debentures") outstanding at the Effective Time shall be assumed by Acquiror and thereafter be an obligation of the Acquiror and, from and after the Effective Time, the holders of the Debentures shall have the right to convert such Debentures into such number of shares of Acquiror Common Stock receivable by a holder of the number of shares of Company Common Stock into which such Debentures might have been converted immediately prior to the Merger. Acquiror shall enter into a supplemental indenture with respect to such obligations pursuant to the terms of the indenture pursuant to which the Debentures were issued. ARTICLE II. CONDUCT PENDING THE MERGER SECTION 2.1. Conduct of the Company's Business Prior to the Effective -------------------------------------------------------- Time. Except as expressly provided in this Plan, during the period from the - ---- date of this Plan to the Effective Time, the Company shall, and shall cause each of its subsidiaries to, (i) conduct its business in the usual, regular and ordinary course consistent with past practice, (ii) use its best efforts to maintain and preserve intact its business organization, employees and advantageous business relationships and retain the services of its officers and key employees and (iii) take no action which -7- would adversely affect or delay the ability of the Company or the Acquiror to obtain any necessary approvals, consents or waivers of any governmental authority required for the transactions contemplated hereby or to perform its covenants and agreements on a timely basis under this Plan. SECTION 2.2. Forbearance by the Company. During the period from the -------------------------- date of this Plan to the Effective Time, except as noted in the letter delivered by the Company to Acquiror pursuant to Section 3.1, the Company shall not, and shall not permit any of its subsidiaries, without the prior written consent of Acquiror, to: (a) other than in the ordinary course of business consistent with past practice, incur any indebtedness for borrowed money, assume, guarantee, endorse or otherwise as an accommodation become responsible for the obligations of any other individual, corporation or other entity, or make any loan or advance; (b) adjust, split, combine or reclassify any capital stock; make, declare or pay any dividend other than regular quarterly cash dividends not exceeding $0.29 per share on the Company Common Stock or make any other distribution on, or directly or indirectly redeem, purchase or otherwise acquire, any shares of its capital stock or any securities or obligations convertible into or exchangeable for any shares of its capital stock, or grant any stock appreciation rights or grant any individual, corporation or other entity any right to acquire any shares of its capital stock, except pursuant to the Rights Agreement and except for dividends paid by any of the wholly owned subsidiaries of the Company to the Company or any of its wholly owned subsidiaries; or issue any additional shares of capital stock except pursuant to (i) the exercise of stock options outstanding as of the date hereof or (ii) the Rights Agreement; (c) other than in the ordinary course of business consistent with past practice, sell, transfer, mortgage, encumber or otherwise dispose of any of its material properties or assets to any individual, corporation or other entity other than a direct or indirect wholly owned subsidiary of the Company, or cancel, release or assign any indebtedness of any such person or any claims held by any such person, except in the ordinary course of business consistent with past practice or pursuant to contracts or agreements in force at the date of this Plan; -8- (d) other than in the ordinary course of business consistent with past practice, make any material investment either by purchase of stock or securities, contributions to capital, property transfers, or purchase of any property or assets of any other individual, corporation or other entity other than a wholly owned subsidiary of the Company; (e) other than in the ordinary course of business consistent with past practice, enter into or terminate any material contract or agreement, or make any change in any of its material leases or contracts, other than renewals of contracts and leases without material adverse changes of terms; (f) except as may be required by law, increase in any manner the compensation or fringe benefits of its employees (other than increases not greater than 4.5% in the aggregate over the current level of compensation and in accordance with past practice) or pay any pension or retirement allowance not required by any existing plan or agreement to any such employees, or become a party to, amend or commit itself to any pension, retirement, profit-sharing or welfare benefit plan or agreement or employment agreement with or for the benefit of any employee (other than with respect to new employees in the ordinary course of business), or adopt, amend, modify or terminate any bonus, profit sharing, compensation, severance, termination, stock option, pension, retirement, deferred compensation, employment or other employee benefit agreements, trusts, plans, funds, employee stock ownership, consulting, severance or fringe benefit plan, formal or informal, written or oral, or other arrangements for the benefit or welfare of any director, officer or employee; (g) other than in the ordinary course of business consistent with past practice, settle any claim, action or proceeding involving any liability of the Company or any of its subsidiaries for material money damages or restrictions upon the operations of the Company or any of its subsidiaries; (h) modify in any material respect the manner in which it and its subsidiaries have heretofore conducted or accounted for their business; (i) except as contemplated by this Plan, amend its articles of incorporation, its by-laws or the Rights Agreement; -9- (j) elect or appoint any new director or officer of the Company or any of its subsidiaries, provided that the appointment of an officer to another -------- office of the Company or any of its subsidiaries shall not be deemed to be the appointment of a new officer; or (k) agree to, or make any commitment to, take any of the actions prohibited by this Section 2.2. SECTION 2.3. Forbearance by Acquiror. During the period from the ----------------------- date of this Plan to the Effective Time, without the prior written consent of the Company, Acquiror will not declare or pay any extraordinary or special divi- dend on the Acquiror Common Stock or take any action that would (a) delay or adversely affect in any material respect the ability of the Company or Acquiror to obtain any necessary approvals, consents or waivers of any governmental authority required for the transactions contemplated hereby or (b) adversely affect its ability to perform its covenants and agreements on a timely basis under this Plan. ARTICLE III. REPRESENTATIONS AND WARRANTIES SECTION 3.1. Representations and Warranties. Acquiror represents and ------------------------------ warrants to the Company, and the Company represents and warrants to Acquiror that, except as previously disclosed in a letter of the Acquiror or the Company, respectively, of even date herewith delivered to the other party: (a) Recitals True. The facts set forth in the Recitals of this Plan ------------- with respect to it are true and correct. (b) Capital Stock. All outstanding shares of capital stock of it and ------------- its Significant Subsidiaries (as defined in Rule 1-02 of Regulation S-X, provided that, for purposes of this Plan, any subsidiary that is a bank, -------- savings bank or trust company shall be deemed a Significant Subsidiary) are duly authorized, validly issued and outstanding, fully paid and (subject to 12 U.S.C. (S) 55 in the case of a national bank subsidi-ary and any similar state statute in the case of a subsidiary that is a state-chartered bank, savings bank or trust company) non-assessable, and subject to no preemptive rights. (c) Authority. Each of it and its Significant Subsidiaries has the --------- power and authority, and is duly licensed or qualified in all jurisdictions (except for -10- such qualifications the absence of which, individually or in the aggregate, would not have a Material Adverse Effect (as defined in Section 8.1)) where such license or qualification is required, to carry on its business as it is now being conducted and to own all its material properties and assets, and it has all federal, state, local, and foreign governmental authorizations necessary for it to own or lease its properties and assets and to carry on its business as it is now being conducted, except for such powers and authorizations the absence of which, either individually or in the aggregate, would not have a Material Adverse Effect. (d) Subsidiaries. In the case of Acquiror, a list of its Significant ------------ Subsidiaries is contained in Annex 3; and in the case of the Company, a list of its Significant Subsidiaries is contained in Annex 4. The shares of capital stock of each of its Significant Subsidiaries are owned by it (except for director's qualifying shares and, in the case of Acquiror, a minority interest in Congress Financial Corp) free and clear of all liens, claims, encumbrances and restrictions on transfer and there are no Rights with respect to such capital stock. (e) Approvals. In the case of Acquiror, and subject, in the case of --------- the Company, to the receipt of the required shareholder approval for this Plan, this Plan has been authorized by all necessary corporate action of it. In the case of the Company, the affirmative vote of the holders of a majority of all outstanding shares of the Company Common Stock is the shareholder vote required for approval of this Plan and consummation of the Merger and the other transactions contemplated hereby. Subject to receipt of (A) such shareholder approval and (B) the required approvals, consents or waivers of governmental authorities referred to in Section 5.1(b), this Plan is a valid and binding agreement of it enforceable against it in accordance with its terms, subject as to enforcement to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. (f) No Violations. The execution, delivery and performance of this ------------- Plan by it does not, and the consummation of the transactions contemplated hereby by it will not, constitute (i) a breach or violation of, or a default under, any law, rule or regulation or any judgment, decree, order, governmental permit or license, or agreement, indenture or instrument of it or its subsid- -11- iaries or to which it or its subsidiaries (or any of their respective properties) is subject, which breach, violation or default would have a Material Adverse Effect on it, or enable any person to enjoin the Merger or (ii) a breach or violation of, or a default under, the articles of incorporation or by-laws of it or any of its Significant Subsidiaries; and the consummation of the transactions contemplated hereby will not require any approval, consent or waiver under any such law, rule, regulation, judgment, decree, order, governmental permit or license or the approval, consent or waiver of any other party to any such agreement, indenture or instrument, other than (i) the required approval, consents and waivers of governmental authorities referred to in Section 5.1(b), (ii) the approval of the shareholders of the Company referred to in Section 3.1(e), (iii) such approvals, consents or waivers as are required under the federal and state securities or "Blue Sky" laws in connection with the transactions contemplated by this Plan and (iv) any other approvals, consents or waivers the absence of which, individually or in the aggregate, would not result in a Material Adverse Effect or enable any person to enjoin the Merger. (g) SEC Reports. As of their respective dates, neither its Annual ----------- Report on Form 10-K for the fiscal year ended December 31, 1992, nor any other document filed subsequent to December 31, 1992 under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Securities Exchange Act"), each in the form (including exhibits) filed with the Securities and Exchange Commission (the "SEC") (collectively, its "Reports"), contained or will contain any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading. Each of the balance sheets or statements of condition contained or incorporated by reference in its Reports (including any related notes and schedules) fairly presented or will fairly present the financial position of the entity or entities to which it relates as of its date and each of the statements of operations and retained earnings and of cash flows and changes in financial position or equivalent statements contained or incorporated by reference in its Reports (including any related notes and schedules) fairly presented or will fairly present the results of opera- tions, retained earnings and cash flows of the entity or entities to which it relates for the periods set forth therein (subject, in the case of unaudited -12- interim statements, to normal year-end audit adjustments that are not material in amount or effect), in each case in accordance with generally accepted accounting principles applicable to bank holding companies consistently applied during the periods involved, except as may be noted in the Reports. There exist no material liabilities of it and its consoli- dated subsidiaries, contingent or otherwise, that are required to be disclosed under generally accepted accounting principles, or would be required to be dis-closed in the financial statements contained in its Annual Report on Form 10-K for the year ended December 31, 1992 or its report on Form 10-Q for the quarter ended September 30, 1993, but are not so disclosed in such Reports. (h) Absence of Certain Changes or Events. Except as disclosed in its ------------------------------------ Reports filed prior to the date of this Plan, since September 30, 1993, there has not been any change in the financial condition or results of operations of it or any of its subsidiaries which, individually or in the aggregate, has had a Material Adverse Effect on it (other than as a result of changes in banking laws or regulations of general applicability or interpretations thereof). (i) Taxes. In the case of the Company, except as otherwise would not ----- have a Material Adverse Effect, all federal, state, local, and foreign tax returns required to be filed by or on behalf of it or any of its subsid- iaries have been timely filed or requests for extensions have been timely filed and any such extension shall have been granted and not have expired. In the case of the Company, all taxes shown on returns filed by or on behalf of it or any of its subsidiaries have been paid in full or adequate provision has been made for any such taxes on its balance sheet (in accordance with generally accepted accounting principles). In the case of the Company, as of the date of this Plan, there are no assessments or notices of deficiency or proposed assessments with respect to any taxes of it or any of its subsidiaries that, if resolved in a manner adverse to it, would result in a determination that would have a Material Adverse Effect on it. In the case of the Company, except as otherwise would not have a Material Adverse Effect, it has not executed an extension or waiver of any statute of limitations on the assessment or collection of any tax due that is currently in effect. (j) Absence of Claims. Except in the case of the Company as ----------------- disclosed in the Reports, no material liti- -13- gation, proceeding or controversy before any court or governmental agency is pending, and there is no pending claim, action or proceeding against it or any of its subsidiaries, which is reasonably likely, individually or in the aggregate, to have a Material Adverse Effect or to materially hinder or delay consummation of the transactions contemplated hereby. (k) Absence of Regulatory Actions. Neither it nor any of its ----------------------------- subsidiaries is a party to any cease and desist order, written agreement or memorandum of understanding with, or a party to any commitment letter or similar undertaking to, or is subject to any order or directive by, or is a recipient of any extraordinary supervisory letter from, or has adopted any board resolutions at the request of, federal or state governmental authorities charged with the supervision or regulation of banks or bank holding companies or engaged in the insurance of bank deposits ("Bank Regulators"), nor has it been advised by any Bank Regulator that it is contemplating issuing or requesting (or is considering the appropriateness of issuing or requesting) any such order, directive, written agreement, memorandum of understanding, extraordinary supervisory letter, commitment letter, board resolutions or similar undertaking. (l) Labor Matters. In the case of the Company, neither it nor any of ------------- its subsidiaries is a party to, or is bound by, any collective bargaining agreement, contract, or other agreement or understanding with a labor union or labor organization, nor is it or any of its subsidiaries the subject of any proceeding asserting that it or any such subsidiary has committed an unfair labor practice or seeking to compel it or such subsidiary to bargain with any labor organization as to wages and conditions of employment, nor is there any strike or other labor dispute involving it or any of its subsidiaries pending or threatened. (m) Employee Benefit Plans. In the case of the Company, all ---------------------- "employee benefit plans", as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), that cover any of its or its subsidiaries' employees, comply in all material respects with all applicable requirements of ERISA, the Code and other applicable laws; neither it nor any of its subsidiaries has engaged in a "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) with respect to any such plan which is likely to result in any material penalties or taxes under Section 502(i) of ERISA or -14- Section 4975 of the Code; no material liability to the Pension Benefit Guaranty Corporation has been or is expected by it or them to be incurred with respect to any such plan which is subject to Title IV of ERISA ("Pension Plan"), or with respect to any "single-employer plan" (as defined in Section 4001(a)(15) of ERISA) currently or formerly maintained by it, them or any entity which is considered one employer with it under Section 4001 of ERISA or Section 414 of the Code; no Pension Plan had an "accumulated funding deficiency" (as defined in Section 302 of ERISA (whether or not waived)) as of the last day of the end of the most recent plan year ending prior to the date hereof; the fair market value of the assets of each Pension Plan exceeds the present value of the "benefit liabilities" (as defined in Section 4001(a)(16) of ERISA) under such Pension Plan as of the end of the most recent plan year with respect to the respective Pension Plan ending prior to the date hereof, calculated on the basis of the actuarial assumptions used in the most recent actuarial valuation for such Pension Plan as of the date hereof; no notice of a "reportable event" (as defined in Section 4043 of ERISA) for which the 30- day reporting requirement has not been waived has been required to be filed for any Pension Plan within the 12-month period ending on the date hereof; neither it nor any of its subsidiaries has provided, or is required to provide, security to any Pension Plan pursuant to Section 401(a)(29) of the Code; it and its subsidiaries have not contributed to any "multiemployer plan", as defined in Section 3(37) of ERISA, on or after September 26, 1980; and it and its subsidiaries do not have any obligations for retiree health and life benefits under any benefit plan, contract or arrangement that cannot be amended or terminated without incurring any liability thereunder. In the case of the Company, with respect to each benefit plan for employees that is maintained or contributed to by the Company or any of its subsidiaries, including, but not limited to, "employee benefit plans" within the meaning of Section 3(3) of ERISA (the "Benefit Plans"), it has made available to Acquiror a true and correct copy of (i) the most recent annual report on Form 5500 filed with the Internal Revenue Service (the "IRS"), (ii) such Benefit Plan, (iii) each trust agreement and insurance contract relating to such Benefit Plan, (iv) the most recent summary plan description for such Benefit Plan, (v) the most recent actuarial report or valuation if such Benefit Plan is subject to Title IV of ERISA and (vi) the most recent determination letter issued by the IRS if such Benefit Plan is intended to be qualified under Section 401(a) of the Code and (vii) -15- all outstanding employment contracts or agreements. Annex 5 contains a complete list of the Benefit Plans (other than medical and other similar welfare plans made generally available to employees) as well as all outstanding employment contracts or agreements. (n) Title to Assets. Each of it and its subsidiaries has good and --------------- marketable title to its properties and assets (other than (i) property as to which it is lessee and (ii) real estate owned as a result of fore- closure, transfer in lieu of foreclosure or other transfer in satisfaction of a debtor's obligation previously contracted), except for such defects in title which would not, individually or in the aggregate, have a Material Adverse Effect. (o) Knowledge as to Conditions. It knows of no reason why the -------------------------- approvals, consents and waivers of governmental authorities referred to in Section 5.1(b) should not be obtained without the imposition of any condition of the type referred to in the provisos thereto or why the accountants' letter referred to in Section 5.1(h) cannot be obtained. (p) Compliance with Laws. It and each of its subsidiaries has all -------------------- permits, licenses, certificates of authority, orders, and approvals of, and has made all filings, applications, and registrations with, federal, state, local, and foreign governmental or regulatory bodies that are required in order to permit it to carry on its business as it is presently conducted and the absence of which could, individually or in the aggregate, have a Material Adverse Effect. (q) Acquiror Common Stock. In the case of Acquiror, the shares of --------------------- Acquiror Common Stock to be issued pursuant to this Plan, when issued in accordance with the terms of this Plan, will be duly authorized, validly issued, fully paid and non-assessable and subject to no preemptive rights. (r) Fees. Other than financial advisory services performed for the ---- Company by Alex. Brown & Sons Incorporated (on terms disclosed to Acquiror), neither it nor any of its subsidiaries, nor any of their respec- tive officers, directors, employees or agents has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions, or finder's fees, and no broker or finder has acted directly or indirectly for it or any of its subsidiaries, in connection with the Plan or the transactions contemplated hereby. -16- (s) Registration Statement. The information to be supplied by it for ---------------------- inclusion in (i) the Registration Statement on Form S-4 and/or such other form(s) as may be appropriate to be filed under the Securities Act of 1933, as amended (the "Securities Act"), with the SEC by Acquiror for the purpose of, among other things, registering the Acquiror Common Stock to be issued to the shareholders of the Company in the Merger (the "Registration Statement"), or (ii) the proxy statement to be filed with the SEC by the Company under the Securities Exchange Act and distributed in connection with the Company's meeting of its shareholders to vote upon this Plan (as amended or supplemented from time to time, the "Proxy Statement", and together with the prospectus included in the Registration Statement, as amended or supplemented from time to time, the "Proxy Statement/ Prospectus") will not, at the time such Registration Statement becomes effective, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading, and, in the case of the Proxy Statement/Prospectus, at the time it is mailed and at the time of the Company Meeting (as defined below), contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. (t) Antitakeover Provisions Inapplicable. In the case of the ------------------------------------ Company, the provisions of 15 Pa.C.S.A (S)(S) 2561-2568 and 15 Pa.C.S.A. (S)(S) 2571-2576 of the PBCL do not and will not apply to this Plan or the Merger or the transactions contemplated hereby. (u) Environmental Matters. --------------------- i) For purposes of this Section 3.1(u), the following terms shall have the indicated meaning: "Branch Property" means all real property presently or formerly owned or operated by the Company and each of its subsidiaries on which branches or facilities are or were located. "Environmental Law" means any applicable federal, state or local statute, law, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, order, judgment, decree, injunction, directive, requirement or agreement with any court, governmental authority -17- or other regulatory or administrative agency or commission, domestic or foreign ("Governmental Entity") now existing, relating to: (a) the protection, preservation or restoration of the environment (including, without limitation, air, water vapor, surface water, groundwater, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource), or to human health or safety, or (b) the exposure to, or the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of Hazardous Substances, in each case as amended and (c) any common law or equitable doctrine (including, without limitation, injunctive relief and tort doctrines such as negligence, nuisance, trespass and strict liability) that may impose liability or obligations for injuries or damages due to, or threatened as a result of, the presence of or exposure to any Hazardous Substance. "Hazardous Substance" means any substance, whether liquid, solid or gas, listed, defined, designated or classified as hazardous, toxic, radioactive or dangerous, under any applicable Environmental Law, whether by type or by quantity. Hazardous Substance includes, without limitation, (i) any "hazardous substance" as defined in the Comprehensive Environmental Response, Compensation and Liability Act, as amended, (ii) any "hazardous waste" as defined in the Resource Conservation and Recovery Act, as amended, and (iii) any toxic waste, pollutant, contaminant, hazardous substance, toxic substance, hazardous waste, special waste or petroleum or any derivative or by- product thereof, radon, radioactive material, asbestos, asbestos containing material, urea formaldehyde foam insulation, lead and polychlorinated biphenyls. "Real Property" means the Branch Property, all real property classified by the Company and each of its subsidiaries as other real estate owned ("OREO"), all real property on which the Company holds a lien or security interest and all real property (including property held as trustee or in any other fiduciary capacity) over which the Company and each of its subsidiaries currently or formerly has exercised dominion, management or control. -18- ii) Except as disclosed to Acquiror in writing or as would not individually or in the aggregate have a Material Adverse Effect on the Company, a) each of the Company and its subsidiaries is and has been in substantial compliance with all applicable Environmental Laws, b) the Real Property does not contain any Hazardous Substance in violation of any applicable Environmental Law, c) neither the Company nor any of its subsidiaries has received any written notices, demand letters or written requests for information from any Governmental Entity or any third party indicating that the Company or any subsidiary may be in violation of, or liable under, any Environmental Law, d) there are no civil, criminal or administrative actions, suits, demands, claims, hearings, investigations or proceedings pending or threatened against the Company or any subsidiary alleging that they may be in violation of, or liable under, any Environmental Law, e) no reports have been filed, or are required to be filed, by the Company or any of its subsidiaries concerning the release of any Hazardous Substance or the threatened or actual violation of any Environmental Law on or at the Real Property, f) there are no underground storage tanks on, in or under any of the branch Property and no underground storage tanks have been closed or removed from any Branch Property while such Branch Property was owned or operated by the Company or any of its subsidiaries, and g) to the knowledge of the Company, neither the Company nor any of its subsidiaries has incurred, and none of the Real Property is presently subject to, any liabilities (fixed or, to the knowledge of the Company, contingent) relating to any suit, settlement, court order, administrative order, judgment or claim asserted or arising under any Environmental law. iii) For the purposes of this Section 3.1(u), "to the knowledge of the Company" shall mean to the -19- knowledge of each person with the title of Senior Vice President of the Company or higher. iv) There are no permits or licenses required under any Environmental Law in respect of the Branch Property presently operated by the Company or any of its subsidiaries or in respect of OREO presently held by the Company or in respect of any real property held as trustee or in any other fiduciary capacity that are not held and that the absence of which could, individually or in the aggregate, have a Material Adverse Effect. v) The Company has delivered to Acquiror copies of all documentation representing the Company's environmental policies and procedures and has operated and conducted the Company's business and operations in compliance with all such policies and procedures except where the failure to so operate or conduct would not, individually or in the aggregate, have a Material Adverse Effect. (v) Material Contracts. Neither it nor any of its subsidiaries is in ------------------ default under any material contract, which default is reasonably likely to have, either individually or in the aggregate, a Material Adverse Effect on it, and there has not occurred any event that with the lapse of time or the giving of notice or both would constitute such a default. In the case of the Company, neither it nor any of its subsidiaries is a party to or is bound by any agreement or subject to or bound by any judgment, decree, order, writ or injunction that places any material restriction on the ability of the Company or any of its subsidiaries to engage in their respective businesses in accordance with present practices. (w) Insurance. The assets, properties and operations of the Company --------- and its subsidiaries are insured under various policies of general liability and other forms of insurance, including surety and bonding arrangements. Such policies are in amounts and types of coverage which are adequate in relation to the business and assets of each of them and all premiums due have been paid in full. All such forms of insurance are in full force and effect in accordance with their terms, no notice of cancellation has been received, and there is no existing default or event which, with the giving of notice or lapse of time or both, would constitute a default thereunder, in each such case, except which would not have a Material Adverse Effect on the Company. To the best of the -20- knowledge of the Company, there has been no failure to give any notice or to present any material claim under any insurance arrangement in due and timely fashion. ARTICLE IV. COVENANTS SECTION 4.1. Acquisition Proposals. The Company agrees that neither --------------------- it nor any of its subsidiaries nor any of the respective officers, directors and employees of the Company or its subsidiaries, acting within the scope of their authority shall, and the Company shall direct and use its best efforts to cause its agents and representatives (including, without limitation, any investment banker, attorney or accountant retained by it or any of its subsidiaries) not to, initiate, solicit or encourage, directly or indirectly, any inquiries or the making of any proposal or offer (including, without limitation, any proposal or offer to stockholders of the Company) with respect to a merger, consolidation or similar transaction involving, or any purchase of all or any significant portion of the assets or any equity securities of, the Company or any of its subsidi- aries (any such proposal or offer being hereinafter referred to as an "Acquisition Proposal") or, except as may be legally required for the discharge by the board of directors of its fiduciary duties, engage in any negotiations concern-ing, or provide any confidential information or data to, or have any discussions with, any person relating to an Acquisition Proposal, or otherwise facilitate any effort or attempt to make or implement an Acquisition Proposal. The Company will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted heretofore with respect to any of the foregoing. To the extent not prohibited by a confidentiality agreement executed prior to the date hereof, the Company will provide to Acquiror a copy of any written information provided to any person relating to or in connection with a proposed or potential Acquisition Proposal. As of the time hereof, the Company is not engaged in any negotiations or discussions relating to an Acquisition Proposal. To the extent not prohibited by a confidentiality agreement executed prior to the date hereof, the Company shall promptly notify Acquiror orally and in writing of any proposal or offer regarding an Acquisition Proposal or any inquiries with respect thereto. To the extent not prohibited by a confidentiality agreement executed prior to the date hereof, such written notification shall include the identity of the Person making such inquiry or Acquisition Proposal or offer and such other information with respect thereto as is reasonably necessary to apprise Acquiror of the material terms of such Acquisition Proposal or offer and all other material information relating thereto. To the -21- extent not prohibited by a confidentiality agreement executed prior to the date hereof, the Company shall give Acquiror contemporaneous written notice upon engaging in discussions or negotiations with, or providing any information regarding the Company to, any such person regarding an Acquisition Proposal. SECTION 4.2. Employee Benefits. (a) Acquiror hereby unconditionally ----------------- agrees to, and agrees to cause its subsidiaries to honor, without modification, offset or counterclaim, all contracts, agreements and commitments of the Company or any of its subsidiaries authorized by the Company or any of its subsidiaries prior to the date of this Plan which apply to any current or former employee or current or former director of the Company or any of its subsidiaries including, without limitation, eight employment agreements with certain senior executives of the Company and its subsidiaries. In accordance with the terms of such employment agreements, Acquiror hereby assumes, subject to the consummation of the Merger, all of the Company's and its subsidiaries' obligations under such employment agreements. (b) Acquiror hereby unconditionally agrees to, and to cause its subsidiaries to, provide to officers and employees of the Company and its subsidiaries who become or remain regular (full time) employees of the Acquiror or any of its subsidiaries employee benefits which are no less favorable in the aggregate to those provided from time to time to their respective similarly situated officers and employees. For purposes of this Section 4.2(b), employee benefits shall include, without limitation, pension benefits, health and welfare benefits, life insurance and vacation; but for purposes of determining employee benefits which are no less favorable in the aggregate, Acquiror shall not be obligated to maintain or cause its subsidiaries to maintain any single type of employee benefit of any particular amount. Any employee of the Company or any of its subsidiaries who becomes a participant in any employee benefit plan, program, policy, or arrangement of the Acquiror or any of its subsidiaries shall be given credit under such plan, program, policy, or arrangement for all service prior to becoming such a participant with the Company or any of its subsidiaries for purposes of eligibility and vesting. SECTION 4.3. Access and Information. Upon reasonable notice, each of ---------------------- the parties shall (and shall cause each of the parties' subsidiaries to) afford to the other parties and their representatives (including, without limitation, directors, officers and employees of the parties and their affiliates, and counsel, accountants and other professionals retained) such access during normal business -22- hours throughout the period prior to the Effective Time to the books, records (including, without limitation, tax returns and work papers of independent auditors), properties, personnel and to such other information as any party may reasonably request; provided, however, that no investigation pursuant to this -------- ------- Section 4.3 shall affect or be deemed to modify any representation or warranty made herein. Each party will not, and will cause its representatives not to, use any information obtained pursuant to this Section 4.3 for any purpose unrelated to the consummation of the transactions contemplated by this Plan. Subject to the requirements of law, each party will keep confidential, and will cause its representatives to keep confidential, all information and documents obtained pursuant to this Section 4.3 unless such information (i) was already known to such party, (ii) becomes available to such party from other sources not known by such party to be bound by a confidentiality obligation, (iii) is disclosed with the prior written approval of the party to which such information pertains or (iv) is or becomes readily ascertainable from published information or trade sources. In the event that this Plan is terminated or the transactions contemplated by this Plan shall otherwise fail to be consummated, each party shall promptly cause all copies of documents or extracts thereof containing information and data as to another party hereto to be returned to the party which furnished the same. SECTION 4.4. Certain Filings, Consents and Arrangements. (a) ------------------------------------------ Acquiror and the Company shall (i) as soon as practicable make any filings and applications required to be filed in order to obtain all approvals, consents and waivers of governmental authorities necessary or appropriate for the consummation of the transactions con-templated hereby, (ii) cooperate with one another (1) in promptly determining what filings are required to be made or approvals, consents or waivers are required to be obtained under any relevant federal, state or foreign law or regulation and (2) in promptly making any such filings, furnishing information required in connection therewith and seeking timely to obtain any such approvals, consents or waivers and (iii) deliver to the other copies of the publicly available portions of all such filings and applications promptly after they are filed. (b) To the extent required by applicable law, promptly after the execution of this Plan, the Company shall notify the New Jersey Department of Environmental Protection and Energy ("NJDEPE") of the transactions contemplated by this Plan and shall use its best efforts (including taking any actions required in connection therewith) to obtain a remediation agreement or administrative consent order from the NJDEPE permitting completion of the Merger prior to -23- obtaining a no further action letter under the New Jersey Industrial Site Remediation Act ("ISRA"), and Acquiror will fully cooperate with and assist the Company in connection therewith. SECTION 4.5. Indemnification; Directors' and Officers' Insurance. --------------------------------------------------- (a) From and after the Effective Time, Acquiror agrees to indemnify and hold harmless each present and former director and officer of the Company or its subsidiaries and each officer or employee of the Company or its subsidiaries that is serving or has served as a director or trustee of another entity expressly at the Company's request or direction, determined as of the Effective Time (the "Indemnified Parties"), against any and all costs or expenses (including reasonable attorneys' fees), judgments, fines, losses, claims, damages or liabilities (collectively, "Costs") incurred in connection with any and all claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of or pertaining to matters existing or occurring at or prior to the Effective Time, whether asserted or claimed prior to, at or after the Effective Time, to the fullest extent permitted by applicable law (and also advance expenses incurred to the fullest extent permitted by applicable law). (b) Any Indemnified Party wishing to claim indemnification under Section 4.5(a), upon learning of any such claim, action, suit, proceeding or investigation, shall within forty-five (45) days upon learning of such claim, action, suit, proceeding or investigation, notify Acquiror thereof, but the failure to so notify shall not relieve Acquiror of any liability it may have to such Indemnified Party if such failure does not materially prejudice the indemnifying party. In the event of any such claim, action, suit, proceeding or investigation (whether arising before or after the Effective Time), (i) Acquiror shall have the right to assume the defense thereof and Acquiror shall not be liable to such Indemnified Parties for any legal expenses of other counsel or any other expenses subsequently incurred by such Indemnified Parties in connection with the defense thereof, except that if Acquiror elects not to assume such defense, or counsel for the Indemnified Parties advises that there are issues which raise conflicts of interest between Acquiror and the Indemnified Parties, the Indemnified Parties may retain counsel satisfactory to them, and Acquiror shall pay the reasonable fees and expenses of such counsel for the Indemnified Parties promptly as statements therefor are received; provided, however, that Acquiror shall be obligated pursuant to this paragraph - -------- ------- (b) to pay for only one firm of counsel for all Indemnified Parties in any juris-diction unless the use of one counsel for such Indemnified -24- Parties would present such counsel with a conflict of interest, (ii) the Indemnified Parties will cooperate in the defense of any such matter and (iii) Acquiror shall not be liable for any settlement effected without its prior written consent which shall not be unreasonably withheld; and provided further -------- ------- that Acquiror shall not have any obligation hereunder to any Indemnified Party when and if a court of competent jurisdiction shall ultimately determine, and such determination shall have become final and nonappealable, that the indemnification of such Indemnified Party in the manner contemplated hereby is prohibited by applicable law. If such indemnity is not available with respect to any Indemnified Party, then the Indemnified Party shall contribute to the amount payable in such proportion as is appropriate to reflect the relative benefit received by such Indemnified Party in any transaction which was the subject of, and the relative fault of such Indemnified Party with respect to, such claim, action, suit, proceeding or investigation by the Indemnified Party. (c) For a period of three years after the Effective Time, Acquiror shall use all reasonable efforts to cause to be maintained in effect the current policies of directors' and officers' liability insurance maintained by the Company (provided that Acquiror may substitute therefor policies of at least the same coverage and amounts containing terms and conditions which are substantially no less advantageous to such directors and officers) with respect to claims arising from facts or events which occurred before the Effective Time; provided, however, that in no event shall Acquiror be obligated to expend, in - -------- ------- order to maintain or provide insurance coverage pursuant to this Subsection 4.5(c), any amount per annum in excess of 200% of the amount of the annual premiums paid as of the date hereof by the Company for such insurance (the "Maximum Amount"). If the amount of the annual premiums necessary to maintain or procure such insurance coverage exceeds the Maximum Amount, Acquiror shall use all reasonable efforts to maintain the most advantageous policies of directors' and officers' insurance obtainable for an annual premium equal to the Maximum Amount. In the event that the Acquiror acts as its own insurer for all of its directors and officers with respect to matters typically covered by a directors' and officers' liability insurance policy, the Acquiror's obligations under this subsection (c) of Section 4.5 may be satisfied by such self insurance. SECTION 4.6. Additional Agreements. Subject to the terms and --------------------- conditions herein provided, each of the parties hereto agrees to use all reasonable efforts to take promptly, or cause to be taken promptly, all actions and to do promptly, or cause to be done promptly, all things neces- -25- sary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Plan as promptly as practicable, including using efforts to obtain all necessary actions or non- actions, extensions, waivers, consents and approvals from all applicable governmental entities, effecting all necessary registrations, applications and filings (including, without limitation, filings under any applicable state securities laws) and obtaining any required contractual consents and regulatory approvals. SECTION 4.7. Publicity. The initial press release announcing this --------- Plan shall be a joint press release and thereafter the Company and Acquiror shall consult with each other in issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby and in making any filings with any governmental entity or with any national securities exchange with respect thereto. SECTION 4.8. Proxy; Registration Statement. As soon as practicable ----------------------------- after the date hereof, Acquiror and the Company shall prepare the Proxy Statement, file it with the SEC, respond to comments of the Staff of the SEC, clear the Proxy Statement with the Staff of the SEC and promptly thereafter mail the Proxy Statement to all holders of record (as of the applicable record date) of shares of the Company Common Stock. Acquiror and the Company shall cooperate with each other in the preparation of the Proxy Statement. Acquiror shall promptly prepare the Registration Statement and file it with the SEC as soon as is reasonably practicable following receipt of final comments from the Staff of the SEC on the Proxy Statement (or advice that such Staff will not review such filing) and shall use all reasonable efforts to have the Registration Statement declared effective by the SEC as promptly as practicable and to maintain the effectiveness of such Registration Statement. Acquiror shall also take any action required to be taken under state "Blue Sky" or securities laws in connection with the issu-ance of the Acquiror Common Stock pursuant to the Merger, and the Company shall furnish Acquiror all information concerning the Company and the holders of its capital stock and shall take any action as Acquiror may reasonably request in connection with any such action. SECTION 4.9. Shareholders' Meeting. The Company shall take all --------------------- action necessary, in accordance with applicable law and its articles of incorporation and by-laws, to convene a meeting of the holders of the Company Common Stock (the "Company Meeting") as promptly as practicable for the purpose of considering and taking action required by this Plan. Except to the extent legally required for the dis- -26- charge by the board of directors of its fiduciary duties, the board of directors of the Company shall recommend that the holders of the Company Common Stock vote in favor of and approve the Merger and adopt this Plan at the Company Meeting. SECTION 4.10. Securities Act; Pooling-of-Interests. (a) As soon as ------------------------------------ practicable after the date of the Company Meeting, the Company shall identify to Acquiror all persons who were, at the time of the Company Meeting, possible "affiliates" of the Company as that term is used in paragraphs (c) and (d) of Rule 145 under the Securities Act and for purposes of qualifying for "pooling- of-interests" accounting treatment (the "Affiliates"). (b) The Company shall use its best efforts to obtain a written "affiliate" letter agreement in form and substance satisfactory to each of the Company and Acquiror from each person who is identified as a possible Affiliate pursuant to clause (a) above. The Company shall deliver such written "affiliates" letter agreements to Acquiror as soon as practicable after the Company Meeting. SECTION 4.11. Pooling-of-Interests and Tax-Free Reorganization ------------------------------------------------ Treatment. Neither Acquiror nor the Company shall take or cause to be taken any - --------- action, whether before or after the Effective Time, which would disqualify the Merger as a "pooling-of-interests" for accounting purposes or as a "reorganization" within the meaning of Section 368 of the Code. SECTION 4.12. Executive Advisory Committee; Directorships; Name; -------------------------------------------------- Management. (a) The Acquiror agrees, promptly following the Effective Time, to - ---------- cause all the members of the Company's board of directors, the board of directors of each banking subsidiary of the Company immediately prior to the Effective Time who are nominated by the Company and are willing so to serve if so nominated and willing to serve to be elected or appointed as members of newly formed executive advisory boards of each banking subsidiary of the Company, or if any such banking subsidiary ceases to exist, of CoreStates Bank, N.A., with Mr. Monroe W. Long serving as Chairman of the advisory board with respect to Cheltenham Bank. (b) Acquiror agrees, following the Effective Time, to cause one member of the Company's board of directors immediately prior to the Effective Time, who is nominated by the Company and approved by Acquiror, to be elected or appointed as a director of Acquiror. -27- (c) Acquiror agrees, following the Effective Time, to cause three members of the Company's board of directors immediately prior to the Effective Time, who are nominated by the Company and approved by Acquiror, one of whom shall be Mr. John D. Harding, to be elected or appointed as directors of CoreStates Bank, N.A. (d) Acquiror intends under current competitive, marketing and operating conditions to continue to use the trade names of each banking subsidiary of the Company, in the market served by such banking subsidiary, including use of such trade names at each former branch of such banking subsidiary as the same are used on the date of this Plan. (e) Acquiror intends that the bank market managers of each banking subsidiary of the Company will continue their employment duties similar to those existing on the date of this Plan, including operating responsibilities for the banking franchises in the marketplaces of the branches of such branch market managers, consistent with the terms and conditions of their existing employment contracts. SECTION 4.13. Antitakeover Statutes. The Company shall take all --------------------- reasonable steps (i) to exempt the Company and the Merger from the requirements of any state antitake-over law by action of its board of directors or otherwise and (ii), upon the request of Acquiror, to assist in any challenge by Acquiror to the applicability to the Merger of any state antitakeover law. SECTION 4.14. Severance Benefits. The Acquiror shall provide ------------------ severance benefits to the employees of the Company and its subsidiaries in accordance with the terms and conditions set forth in Annex 7 hereof. SECTION 4.15. Listing. Acquiror shall use its best efforts to list ------- on the NMS or, in the event Acquiror Common Stock is then listed on the NYSE, the NYSE, in each case upon official notice of issuance, the Acquiror Common Stock to be issued in the Merger. SECTION 4.16. Allowance for Credit Losses. (i) The allowance for --------------------------- credit losses included in the consolidated financial statements of the Company included in the Com-pany's September 30, 1993 Form 10-Q was determined in accordance with generally accepted accounting principles to be adequate to provide for losses relating to or inherent in the loan and lease portfolios of, and other extensions of credit (including letters of credit and commitments to make loans or extend credit) by, the Company and its subsidiaries. The Company has disclosed to Acquiror in writing prior to the date hereof the aggregate amounts as of a -28- recent date of all loans, losses, advances, credit enhancements, other extensions of credit, commitments and interest-bearing assets of Company and its subsidiaries that have been classified by any bank examiner (whether regulatory or internal) as "Other Loans Specially Mentioned", "Special Mention", "Substandard", "Doubtful", "Loss", "Classified", "Criticized", "Credit Risk Assets", "Concerned Loans" or words of similar import, and the Company shall promptly on a periodic basis inform Acquiror of any such classification arrived at any time after the date hereof. The OREO included in non-performing assets is carried net of reserves at the lower of cost or market value based on independent appraisals. (ii) The allowance for credit losses included in the consolidated financial statements of Acquiror included in Acquiror's September 30, 1993 Form 10-Q was determined in accordance with generally accepted accounting principles to be adequate to provide for losses relating to or inherent in the loan and lease portfolios of, and other extensions of credit (including letters of credit and commitments to make loans or extend credit) by, Acquiror and its subsidiaries. Acquiror has disclosed to the Company in writing prior to the date hereof the aggregate amounts as of a recent date of all loans, losses, advances, credit enhancements, other extensions of credit, commitments and interest-bearing assets of Acquiror and its subsidiaries that have been classified by any bank examiner (whether regulatory or internal) as "Other Loans Specially Mentioned", "Special Mention", "Substandard", "Doubtful", "Loss", "Classified", "Criticized", "Credit Risk Assets", "Concerned Loans" or words of similar import, and Acquiror shall promptly on a periodic basis inform the Company of any such classification arrived at any time after the date hereof. The OREO included in non-performing assets is carried net of reserves at the lower of cost or market value based on independent appraisals. SECTION 4.17. Bank Merger. During the period from the date of this ----------- Plan to the Effective Time, the Company shall, and shall cause its officers, directors and employees to cooperate with and assist Acquiror in the formulation of a plan or plans of integration for the merger of each of its bank subsidiaries with and into CoreStates Bank, N.A. ("Bank Mergers") as soon after the Effective Time as is practicable. Notwithstanding that the Company believes that it has established all reserves and taken all provisions for possible loan losses required by generally accepted account-ing principles and applicable laws, rules and regulations, the Company recognizes that Acquiror has adopted different -29- loan, accrual and reserve policies (including loan classifications and levels of reserves for possible loan losses). From and after the date of this Plan to the Effective Time and in order to formulate the plan or plans of integration for the Bank Mergers, the Company and Acquiror shall consult and cooperate with each other with respect to (i) conforming, as specified in a written notice from Acquiror to the Company, based upon such consultation, the Company's loan, accrual and reserve policies to those policies of Acquiror to the extent appropriate recognizing that differing policies and regulations may apply to state chartered banks of the Company, (ii) new extensions of credit or material revisions to existing terms of credits by each bank subsidiary in each case where the aggregate exposure exceeds $1,500,000 and (iii) conforming, as specified in a written notice from Acquiror to the Company, based upon such consultation, the composition of the investment portfolio and overall asset/liability management position of the Company and each bank subsidiary to the extent appropriate. In addition, from and after the date of this Plan to the Effective Time and in order to formulate the plan or plans of integration for the Bank Mergers, the Company and Acquiror shall consult and cooperate with each other with respect to determining, as specified in a written notice from Acquiror to the Company, based upon such consultation, appropriate accruals, reserves and charges to establish and take in respect of excess facilities and equipment capacity, severance costs, litigation matters, write-off or write-down of various assets and other appropriate accounting adjustments taking into account the Acquiror's plan or plans of integration and the Bank Mergers. The Company and Acquiror shall consult and cooperate with each other with respect to determining, as specified in a written notice from Acquiror to the Company, based upon such consultation, the amount and the timing for recog- nizing for financial accounting purposes the expense of the Merger and the restructuring charges related to or to be incurred in connection with the Merger. At the request of Acquiror, the Company shall, prior to the Effective Time, use its best efforts to establish and take such reserves and accruals as Acquiror shall request to conform, on a mutually satisfactory basis, the Company's loan, accrual and reserve policies to Acquiror's policies, shall establish and take such accruals, reserves and charges in order to implement such policies in respect of excess facilities and equipment capacity, severance costs, litigation matters, write-off or write-down of various assets and other appropriate accounting adjustments, and to recognize for financial accounting purposes such -30- expenses of the Merger and restructuring charges related to or to be incurred in connection with the Merger; provided, however, that (i) the Company shall not be -------- ------- obligated to take any such action pursuant to this paragraph of Section 4.17 unless and until Acquiror specifies its request in a writing delivered by Acquiror to the Company, and acknowledges and all conditions to its obligations to consummate the Merger set forth in Section 5.1 and 5.2 have been waived (if waivable) or satisfied, (ii) the Company acknowledges that the conditions to its obligation to consummate the Merger set forth in Sections 5.1 and 5.3 have been satisfied or waived by the Company, (iii) the Company shall not be required to take any such action that impairs its regulatory capital, that is inconsistent with any formal or informal undertaking by the Company to any bank regulatory agency that has been disclosed in writing to Acquiror prior to the date hereof or is inconsistent with any bank regulatory requirement applicable to the Company or any of its banking subsidiaries and (iv) the Company shall not be required to take any such action that is not consistent with generally accepted accounting principles. The Company's representations, warranties and covenants contained in this Plan shall not be deemed to be untrue or breached in any respect for any purpose as a consequence of any action undertaken on account of this Section 4.17. SECTION 4.18. Rights Agreement. Promptly following the date hereof, ---------------- the Company will amend its Rights Agreement in substantially the form of Annex 6. ARTICLE V. CONDITIONS TO CONSUMMATION SECTION 5.1. Conditions to All Parties' Obligations. The respective -------------------------------------- obligations of Acquiror and the Company to effect the Merger shall be subject to the satisfaction or waiver prior to the Effective Time of the following conditions: (a) The Plan and the transactions contemplated hereby shall have been approved by the requisite vote of the shareholders of the Company in accordance with applicable law. (b) Acquiror shall have procured the required approval, consent, waiver or other administrative action with respect to the Plan and the transactions contemplated hereby (i) by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") under the Bank Holding Company Act of 1956, (ii) by the Pennsylvania Department of Banking pursuant to Pennsylvania law, (iii) by the Arizona Director of -31- Insurance pursuant to Arizona law and (iv) by the NJDEPE pursuant to ISRA, to the extent required by applicable law, and all applicable statutory waiting periods shall have expired; and the parties shall have procured all other regulatory approvals, consents, waivers or administrative actions of governmental authorities or other persons that are necessary or appropriate to the consummation of the transactions contemplated by the Plan; provided, -------- however, that no approval, consent, waiver or administrative action ------- referred to in this Section 5.1(b) shall be deemed to have been received if it shall include any condition or requirement (other than any condition or requirement imposed on the basis or as a result of the Acquiror's or any of its subsidiaries' compliance with the Community Reinvestment Act of 1977) that would (i) result in a Material Adverse Effect on Acquiror (on a combined basis giving effect to the Merger and the other transactions contemplated by this Plan) or (ii) so materially and adversely affect the economic or business benefits of the Merger that the Acquiror would not have entered into this Plan had such conditions or requirements been known at the date hereof; (c) All other requirements prescribed by law which are necessary to the consummation of the transactions contemplated by this Plan shall have been satisfied. (d) No party hereto shall be subject to any order, decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits the consummation of the Merger or any other transaction contemplated by this Plan. No litigation or proceeding shall be pending against Acquiror or the Company or any of their subsidiaries brought by any governmental agency seeking to prevent consummation of the transactions contemplated hereby. (e) No statute, rule, regulation, order, injunction or decree shall have been enacted, entered, promulgated or enforced by any governmental authority which prohibits, restricts or makes illegal consummation of the Merger or any other transaction contemplated by this Plan. (f) The Registration Statement shall have become effective and no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been initiated or threatened by the SEC. -32- (g) Acquiror and the Company each shall have received the opinion of Sullivan & Cromwell, dated as of the Effective Date, substantially to the effect that, on the basis of facts, representations and assumptions set forth in such opinion which are consistent with the state of facts existing at the Effective Time, the Merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code and that, accordingly: (i) no gain or loss will be recognized by Acquiror or the Company as a result of the Merger; (ii) no gain or loss will be recognized by the shareholders of the Company who exchange their shares of the Company Common Stock solely for shares of Acquiror Common Stock pursuant to the Merger (except with respect to cash received in lieu of a fractional share interest in Acquiror Common Stock); (iii) the tax basis of the shares of Acquiror Common Stock received by shareholders who exchange all of their shares of the Company Common Stock solely for shares of Acquiror Common Stock in the Merger will be the same as the tax basis of the shares of the Company Common Stock surrendered in exchange therefor (reduced by any amount allocable to a fractional share interest for which cash is received); and (iv) the holding period of the shares of Acquiror Common Stock received in the Merger will include the period during which the shares of the Company Common Stock surrendered in exchange therefor were held, provided such shares of the Company Common Stock were held as capital assets at the Effective Time. In rendering their opinion, Sullivan & Cromwell may require and rely upon representations contained in certificates of officers of Acquiror, the Company and others. (h) Acquiror and the Company each shall have received a letter, dated as of the Effective Date, from Acquiror's independent certified public accountants to the effect that the Merger will qualify for pooling-of- interests accounting treatment if closed and consummated in accordance with this Plan. (i) The Board of Directors of the Company shall have received a letter, in form and substance satisfactory to the Company, dated the date of the Proxy Statement/Prospectus, pursuant to which Alex. Brown & Sons Incorporated shall express its opinion that the consideration to be received by the Company's shareholders pursuant to Section 1.2 hereof is fair from a financial point of view. -33- SECTION 5.2. Conditions to Obligations of Acquiror. The obligations ------------------------------------- of Acquiror to effect the Merger shall be subject to the satisfaction or waiver prior to the Effective Time of the following additional conditions: (a) Each of the representations and warranties of the Company contained in this Plan shall, in all material respects, be true on the Effective Date as if made on such date (or on the date when made in the case of any representation or warranty which specifically relates to an earlier date); the Company shall have performed, in all material respects, each of its cove-nants and agreements contained in this Plan; and Acquiror shall have received a certificate signed by the Chief Executive Officer and the Chief Financial Officer of the Company, dated the Effective Date, to the foregoing effect. (b) Acquiror shall have received all state securities laws and "Blue Sky" permits and other authorizations necessary to consummate the transactions contemplated hereby. (c) Acquiror and its directors shall have received from the Company's independent certified public accountants "agreed upon procedures" letters, dated (i) the date of the mailing of the Proxy Statement/Prospectus to the Company's shareholders and (ii) shortly prior to the Effective Date, with respect to certain financial information regarding the Company in the form customarily issued by such accountants at such time in transactions of this type. SECTION 5.3. Conditions to the Obligation of the Company. The ------------------------------------------- obligation of the Company to effect the Merger shall be subject to the satisfaction or waiver prior to the Effective Time of the following additional conditions: (a) Each of the representations, warranties and covenants of Acquiror contained in this Plan shall, in all material respects, be true on the Effective Date as if made on such date (or on the date when made in the case of any representation or warranty which specifically relates to an earlier date); Acquiror shall have performed, in all material respects, each of its cove-nants and agreements contained in this Plan; and the Company shall have received certificates signed by the Chief Executive Officer and the Chief Financial Officer of the Acquiror, dated the Effective Date, to the foregoing effect. (b) The Acquiror Common Stock to be issued in the -34- Merger has been approved for listing on the NMS or the NYSE, as the case may be, subject to official notice of issuance. (c) The Company and its directors shall have received from Acquiror's independent certified public accountants "agreed upon procedures" letters, dated (i) the date of the mailing of the Proxy Statement/ Prospectus to the Company's shareholders and (ii) shortly prior to the Effective Date, with respect to certain financial information regarding Acquiror in the form customarily issued by such accountants at such time in transactions of this type. ARTICLE VI. TERMINATION SECTION 6.1. Termination. This Plan may be terminated, and the ----------- Merger abandoned, prior to the Effective Date, either before or after its approval by the shareholders of the Company: (a) by the mutual consent of Acquiror and the Company, if the board of directors of each so determines by vote of a majority of the members of its entire board; (b) by Acquiror or the Company, if its board of directors so determines by vote of a majority of the members of its entire board, in the event of the failure of the shareholders of the Company to approve the Plan at its meeting called to consider such approval or a material breach by the other party hereto of any representation, warranty, covenant or agreement contained herein which is not cured or not curable within 60 days after written notice of such breach is given to the party committing such breach by the other party; (c) by Acquiror or the Company by written notice to the other party if either (i) any approval, consent or waiver of a governmental authority required to permit consummation of the transactions contemplated hereby shall have been denied or (ii) any governmental authority of competent jurisdiction shall have issued a final, unappealable order enjoining or otherwise prohibiting consummation of the transactions contemplated by this Plan; (d) by Acquiror or the Company, if its board of directors so determines by vote of a majority of the members of its entire board, in the event that the Merger is not consummated by October 31, 1994, unless -35- the failure to so consummate by such time is due to the breach of any representation, warranty or covenant contained in this Plan by the party seeking to terminate; or (e) by the Company, if its board of directors so determines by a majority vote of the members of its entire board, at any time during the ten-day period commencing with the Determination Date if either of the following conditions are satisfied: (X)(i) the Average Closing Price on the Determination Date of shares of Acquiror Common Stock shall be less than an amount equal to the Starting Price multiplied by 0.90 (adjusted as indicated below in this Section 6.1(e)); and (ii) (A) the number obtained by dividing the Average Closing Price on the Determination Date by the Starting Price (the "Acquiror Ratio") shall be less than (B) the number obtained by dividing the Final Index Price on the Determination Date by the Initial Index Price on the Starting Date and subtracting 0.10 from the quotient in this clause (ii)(B) (the "Index Ratio"); or (Y) the Average Closing Price on the Determination Date of shares of Acquiror Common Stock shall be less than an amount equal to the Starting Price multiplied by 0.85. subject, however, to the following three sentences. If the Company elects ------- ------- to exercise its termination right pursuant to this Section 6.1(e), it shall give written notice to Acquiror (provided that such notice of election to -------- terminate may be withdrawn at any time within the aforementioned ten-day period). During the five-day period commencing with its receipt of such notice, Acquiror shall have the option to increase the consideration to be received by the holders of the Company Common Stock hereunder, by adjusting the Conversion Number to equal (calculated to the nearest one one- thousandth), in the case of this Section 6.1(e)(X) the lesser of (x) a number obtained by dividing (A) the product of the Starting Price, 0.90 and the Conversion Number by (B) the Average Closing Price on the Determi- nation Date, and (y) a number equal to a fraction, the numerator of which is the Index Ratio multiplied by the Conversion Number and the denominator of which is the -36- Acquiror Ratio and in the case of this Section 6.1(e)(Y), a number obtained by dividing (A) the product of the Starting Price, 0.85 and the Conversion Number by (B) the Average Closing Price on the Determination Date. If Acquiror so elects within such five-day period, it shall give prompt written notice to the Company of such election and the revised Conversion Number, whereupon no termination shall have occurred pursuant to this Section 6.1(e) and this Plan shall remain in effect in accordance with its terms (except as the Conversion Number shall have been so modified). For purposes of this Section 6.1(e), the following terms shall have the meanings indicated: "Average Closing Price" shall have the meaning specified in Section 1.2(b). "Determination Date" means the fifteenth day after the required approval of the Federal Reserve Board for the Merger. "Final Index Price" means the sum of the Final Price for each company comprising the Index Group multiplied by the appropriate weighting. "Final Price", with respect to any company belonging to the Index Group, means the average of the daily closing sales prices of a share of common stock of such company, as reported on the consolidated transaction reporting system for the market or exchange on which such common stock is principally traded, during the period of 20 trading days ending on the Determination Date. "Index Group" means the fifteen bank holding companies listed below, the common stock of which shall be publicly traded and as to which there shall not have been a publicly announced proposal since the Starting Date and before the Determination Date for any such company to be acquired. In the event that the common stock of any such com-pany ceases to be publicly traded or a proposal to acquire any such company is announced after the Starting Date and before the Determination Date, such company will be removed from the Index Group, and the weights (which have been determined based on the number of outstanding shares of common stock and the market prices of such stock attributed) to the remaining companies will be adjusted proportionately for purposes of determining the Final Index Price. The fifteen bank holding -37- companies and the weights attributed to them are as follows:
Bank Holding Company Weighting -------------------- --------- The Bank of New York Company, Inc. (BK) 7.51% Norwest Corporation (NOB) 9.72% Sun Trust Banks, Inc. (STI) 8.06% First Union Corporation (FTU) 10.06% Fleet Financial Group, Inc. (FLT) 6.22% NBD Bancorp, Inc. (NBD) 6.94% PNC Bank Corp. (PNC) 9.82% U.S. Bancorp (USBC) 3.60% Wachovia Corporation (WB) 8.29% First Bank System, Inc. (FBS) 4.90% First Fidelity Bancorporation (FFB) 4.76% Barnett Banks, Inc. (BBI) 5.42% National City Corporation (NCC) 5.50% Mellon Bank Corporation (MEL) 5.10% Boatmen's Bancshares, Inc. (BOAT) 4.11% _______ 100.00%
"Index Price" on a given date, means the weighted average (weighted in accordance with the factors listed above) of the closing prices on such date of the common stocks of the companies comprising the Index Group. "Initial Index Price" means the sum of each per share closing price of the common stock of each company comprising the Index Group multiplied by the applicable weighting, as such prices are reported on the consolidated transactions reporting system for the market or exchange on which such common stock is principally traded on the Starting Date. "Starting Date" means the last trading day immediately preceding the date of the first public announcement of entry into this Plan. "Starting Price" means the closing price per share of Acquiror Common Stock, as reported on the NMS or the NYSE, as the case may be (as reported by The Wall Street Journal or, if not reported thereby, ----------------------- another authoritative source), for the Starting Date. -38- If Acquiror or any company belonging to the Index Group declares or effects a stock dividend, reclassification, recapitalization, split-up, combination, exchange of shares or similar transaction between the Starting Date and the Determination Date, the prices for the common stock of such company shall be appropriately adjusted for the purposes of applying this Section 6.1(e). SECTION 6.2. Effect of Termination. In the event of the termination --------------------- of this Plan by either Acquiror or the Company, as provided above, this Plan shall thereafter become void and there shall be no liability on the part of any party hereto or their respective officers or directors, except that any such termination shall be without prejudice to the rights of any party hereto arising out of the willful breach by any other party of any covenant or willful misrepresentation contained in this Plan. ARTICLE VII. EFFECTIVE DATE AND EFFECTIVE TIME SECTION 7.1. Effective Date and Effective Time. On the third --------------------------------- business day after the expiration of all applicable waiting periods in connection with approvals of governmental authorities occurs and all conditions to the consummation of this Plan are satisfied or waived, or on such earlier or later date as may be agreed by the parties, articles of merger shall be executed in accordance with all appropriate legal requirements and shall be filed as required by law, and the Merger provided for herein shall become effective upon such filing or on such date (which may not be later than such third business day) as may be specified in such articles of merger. The date of such filing or such later effective date is herein called the "Effective Date". The "Effective Time" of the Merger shall be such time on the Effective Date as may be agreed by the parties. ARTICLE VIII. OTHER MATTERS SECTION 8.1. Certain Definitions; Interpretation. As used in this ----------------------------------- Plan, the following terms shall have the meanings indicated: "Control" shall have the meaning ascribed thereto in the Bank Holding Company Act of 1956, as amended. "material" means material to Acquiror or the Company (as the case may be) and its respective subsidiaries, taken as a whole. -39- "Material Adverse Effect," with respect to a person, means any condition, event, change or occurrence that is reasonably likely to have a material adverse effect upon (A) the financial condition, business or results of operations of such person and its subsidiaries, taken as a whole, or (B) the ability of such person to perform its obligations under, and to consummate the transactions contemplated by, this Plan. "person" includes an individual, corporation, partnership, association, trust or unincorporated organization. "subsidiary," with respect to a person, means any other person controlled by such person. When a reference is made in this Plan to Sections, Annexes or Schedules, such reference shall be to a Section of, or Annex or Schedule to, this Plan unless otherwise indicated. The table of contents, tie sheet and headings contained in this Plan are for ease of reference only and shall not affect the meaning or interpretation of this Plan. Whenever the words "include", "includes", or "including" are used in this Plan, they shall be deemed followed by the words "without limitation". Any singular term in this Plan shall be deemed to include the plural, and any plural term the singular. SECTION 8.2. Survival. Only those agreements and covenants of the -------- parties that are applicable in whole or in part after the Effective Time shall survive the Effective Time. All other representations, warranties, agreements and covenants shall be deemed to be conditions of the Plan and shall not survive the Effective Time. If the Plan shall be terminated, the agreements of the parties in Sections 4.3 and 8.6 shall survive such termination. SECTION 8.3. Waiver. Prior to the Effective Time, any provision of ------ this Plan may be (i) waived by the party benefitted by the provision or by both parties by a writing executed by an executive officer, or (ii) amended or modified at any time (including the structure of the transaction) by an agreement in writing between the parties hereto approved by their respective boards of directors, except that, after the vote by the shareholders of the Company, no such amendment or modification may be made which reduces or changes the form and amount of consideration payable pursuant to this Plan without further shareholder approval. SECTION 8.4. Counterparts. This Plan may be executed in counterparts ------------ each of which shall be deemed to -40- constitute an original, but all of which together shall constitute one and the same instrument. SECTION 8.5. Governing Law. This Plan shall be governed by, and ------------- interpreted in accordance with, the laws of the Commonwealth of Pennsylvania. SECTION 8.6. Expenses. Each party hereto will bear all expenses -------- incurred by it in connection with this Plan and the transactions contemplated hereby, except printing expenses which shall be shared equally. SECTION 8.7. Notices. All notices, requests, acknowledgements and ------- other communications hereunder to a party shall be in writing and shall be deemed to have been duly given when delivered by hand, telecopy, telegram or telex (confirmed in writing) to such party at its address set forth below or such other address as such party may specify by notice to the other party hereto. If to the Company, to: Independence Bancorp, Inc. One Hillendale Road Perkasie, Pennsylvania 18944 Attention: Philip H. Rinnander With copies to: David M. Huggin, Esq. Sullivan & Cromwell 125 Broad Street New York, New York 10004 Telecopy: (212) 558-3588 If to Acquiror, to: CoreStates Financial Corp Broad & Chestnut Street Philadelphia, Pennsylvania 19105 Attention: Terrence A. Larsen, Chairman -41- With copies to: David T. Walker Deputy Chief Counsel CoreStates Financial Corp PNB Building, F.C. 1-1-17-1 Broad & Chestnut Street Philadelphia, Pennsylvania 19107 SECTION 8.8. Entire Agreement; Etc. This Plan, together with the ---------------------- Option Agreement, represents the entire understanding of the parties hereto with reference to the transactions contemplated hereby and supersedes any and all other oral or written agreements heretofore made. All terms and provisions of the Plan shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. Except as to the last sentence of Section 4.2 and Sections 4.5 and 4.12, nothing in this Plan is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Plan. SECTION 8.9. Assignment. This Plan may not be assigned by any party ---------- hereto without the written consent of the other parties. -42- IN WITNESS WHEREOF, the parties hereto have caused this Plan to be executed by their duly authorized officers as of the day and year first above written. CORESTATES FINANCIAL CORP By:s/David C. Carney ------------------------ Chief Financial Officer INDEPENDENCE BANCORP, INC. By:s/John D. Harding ------------------------------- President and Chief Executive Officer -43- EX-11 3 COMP OF PER SHARE 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 -------------------- ------------------- 1993 1992 1993 1992 -------- -------- -------- -------- (A) Income before cumulative effect of a change in accounting principle $ 85,312 $ 69,107 $327,927 $262,404 Cumulative effect of a change in accounting principle (13,010) (80,986) -------- -------- -------- -------- (B) Net income $ 85,312 $ 69,107 $314,917 $181,418 ======== ======== ======== ======== EARNINGS PER SHARE Based on average common shares - ------------------------------ outstanding - ----------- (C) Average shares outstanding 117,269 116,422 117,319 115,600 ======== ======== ======== ======== (A/C) Income before cumulative effect of a Change in accounting principle $ .73 $ .59 $2.80 $2.27 ===== ===== ===== ===== (B/C) Net income $ .73 $ .59 $2.69 $1.57 ===== ===== ===== ===== Based on average common and common - ---------------------------------- equivalent shares outstanding - ----------------------------- Primary: (D) Average common equivalent shares 1,023 1,290 1,176 1,300 ===== ===== ===== ===== (E) Average common and common equivalent shares (C + D) 118,292 117,712 118,495 116,900 ======= ======= ======= ======= (A/E) Income before cumulative effect of a change in accounting principle (1) $ .72 $ .59 $2.77 $2.24 ===== ===== ===== ===== (B/E) Net income (1) $ .72 $ .59 $2.66 $1.55 ===== ===== ===== ===== Fully diluted: (F) Average common equivalent shares 912 1,584 979 1,874 === ===== === ===== (G) Average common and common equivalent shares (C + F) 118,181 118,006 118,298 117,474 ======= ======= ======= ======= (A/G) Income before cumulative effect of a change in accounting principle (1) $ .72 $ .59 $2.77 $2.23 ===== ===== ===== ===== (B/G) Net income (1) $ .72 $ .59 $2.66 $1.54 ===== ===== ===== =====
- ----------------------------------- (1) Dilution is less than 3%. CORESTATES FINANCIAL CORP AND SUBSIDIARIES EX-12.1 4 COMPUTATION OF RATIO EXHIBIT 12.1 COMPUTATION OF RATIO OF EARNINGS FROM CONTINUING OPERATIONS TO FIXED CHARGES OF CONTINUING OPERATIONS CONSOLIDATED Twelve Months Ended December 31, 1993 - -------------------------------------
1. Income from continuing operations before cumulative effect of change in accounting principle and income taxes.................... $487,581 ======== 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.......................... $144,999 B. Interest on deposits............................................ 266,597 -------- C. Total fixed charges (line 2A + line 2B)......................... $411,596 ======== 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)............... $632,580 ======== B. Including interest on deposits (line 1 + line 2C)............... $899,177 ======== 4. Ratio of earnings (as defined) to fixed charges: A. Excluding interest on deposits (line 3A/line 2A).................. 4.36x ==== B. Including interest on deposits (line 3B/line 2C).................. 2.18x ====
EX-12.2 5 COMPUTATION OF RATIO 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, 1993 - -------------------------------------
1. Income before income taxes, equity in undistributed income of subsidiaries and cumulative effect of change in accounting principle...................................................... $190,655 2. Fixed charges - interest expense, amortization of debt issuance costs and one-third of rental expenses, net of income from subleases.......................................... 89,078 -------- 3. Income before taxes, equity in undistributed income of subsidiaries and cumulative effect of change in accounting principle, plus fixed charges.................................. $279,733 ======== 4. Ratio of earnings (as defined) to fixed charges (line 3/ line 2)(a)..................................................... 3.14x ====
(a) Ratio includes the impact of an $80 million special dividend payment from a subsidiary bank. The ratio would be 2.24x if the special dividend were excluded. EX-13 6 ANNUAL REPORT CORESTATES FINANCIAL CORP AND SUBSIDIARIES EXHIBIT 13 - PORTIONS OF THE REGISTRANT'S ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW In 1993, CoreStates Financial Corp ("CoreStates") achieved strong growth in operating income for the third consecutive year, significantly reduced the level of non-performing assets, and established a historical record for net income. Income for 1993, before the cumulative effect of a change in accounting principle, was $327.9 million, or $2.80 per share, reflecting growth of 23.3% on a per share basis when compared to $262.4 million, or $2.27 per share for 1992. Key performance measures improved during 1993 and are among the highest in the banking industry. Returns on average equity and assets were 18.27% and 1.44%, respectively, in 1993, compared to 16.26% and 1.17%, respectively, in 1992. The 1993 Montgomery Securities Regional Bank Composites for returns on average equity and assets were 15.49% and 1.21%, respectively. The growth in income for 1993 reflected continued broad strength in CoreStates' basic banking businesses. Operating results for 1993 were positively influenced by solid growth in the net interest margin and loan demand, significant reductions in non-performing assets and the related improved income statement impact, and increases in non-interest revenues from fee-based services. On a business line basis, CoreStates' 1993 earnings improvement reflects the strong growth achieved by the Wholesale Banking business, as net income increased $45.3 million, or 35.4% for that business. Wholesale Banking experienced a 12.0% increase in net interest income due primarily to substantial reductions in non-performing assets, higher average loan balances and wider interest spreads on prime based loans. Wholesale Banking's non-interest income increased by 14.3%, mostly due to growth in service charges on deposits and fees for international services. For a more detailed analysis of the performance of Wholesale Banking and CoreStates' other business lines, refer to the Business Line Results section beginning on page 7. CoreStates' income statements in 1993 and 1992 reflect the adoption of two new accounting standards. 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 FAS 112 transitional liability of $20.0 million, $13.0 million after-tax or $.11 per share, as the cumulative effect of a change in accounting principle in 1993. 1 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued OVERVIEW - continued In the prior year, CoreStates adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("FAS 106") effective January 1, 1992. FAS 106 requires that employers accrue the costs associated with providing postretirement benefits during the active service periods of employees. CoreStates recognized the January 1, 1992 transitional liability of $122.7 million, $81.0 million after-tax or $.70 per share, as the cumulative effect of a change in accounting principle in 1992. Operating results on a taxable equivalent basis and per share information are summarized in the following table (in millions, except per share):
Percentage increase(decrease) ----------------- 1993 1992 1991 '93/'92 '92/'91 -------- -------- -------- ------- ------- Operating Results Net interest income $1,141.4 $1,084.7 $1,122.0 5.2 % (3.3)% Provision for losses on loans 100.0 119.3 190.6 (16.2) (37.4) Non-interest income 503.1 546.5 541.6 (7.9) .9 Non-financial expenses 1,033.4 1,094.6 1,096.1 (5.6) (.1) -------- -------- -------- Income before income taxes 511.1 417.3 376.9 22.5 10.7 Provision for income taxes 183.2 154.9 149.2 18.3 3.8 -------- -------- -------- Income before the cumula- tive effect of a change in accounting principle 327.9 262.4 227.7 25.0 15.2 Cumulative effect of a change in accounting principle (13.0) (81.0) -------- -------- -------- Net income $ 314.9 $ 181.4 $ 227.7 73.6 (20.3) ======== ======== ======== Operating Ratios Return on average equity (1) 18.27% 16.26% 14.96% Return on average assets (1) 1.44 1.17 .99 Net interest margin 5.82 5.61 5.53 Per Common Share (2) Income before the cumulative effect of a change in accounting principle $ 2.80 $ 2.27 $ 2.00 Net income 2.69 1.57 2.00 Average common shares outstanding 117.319 115.600 113.624
- ----------------------------- (1) Calculated based on income before cumulative effect of a change in accounting principle. (2) Common shares outstanding and per common share data for 1992 and 1991 have been restated to reflect the impact of the Stock Dividend (see Capital Strength section beginning on page 11). 2 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued OVERVIEW - continued Comparison of 1993 to 1992 CoreStates' earnings growth in 1993 primarily resulted from a $56.7 million, or 5.2%, increase in tax equivalent net interest income due to an improved net interest margin, 5.82% in 1993 compared to 5.61% in 1992, and higher average loan outstandings, $15.6 billion in 1993 compared to $15.3 billion in 1992. Also making a substantial contribution to 1993 earnings growth was the significant improvement in asset quality, as non-performing assets declined $134.7 million, or 34.8%, and net loan charge-offs declined $52.9 million, resulting in a $19.3 million, or 16.2%, reduction in the provision for losses on loans. Year-to-year comparisons of non-interest income and non-financial expenses are impacted by the December 1992 restructuring of CoreStates' consumer electronic payment business into Electronic Payment Services, Inc. ("EPS"), a joint venture formed with three other banking companies (see the Business Line Results section beginning on page 7 for further details regarding EPS). As a result of this transaction, CoreStates' income statement for 1993 reflects declines in debit and credit card fee income and in total non-financial expenses. Total non-interest income for 1993 declined $43.4 million, or 7.9%, from 1992. Growth in revenues from CoreStates' fee-based businesses and from a business acquired at the end of 1992 was offset by a decline of $91.3 million, or 61.2%, in debit and credit card fees resulting from the EPS transaction, and the recognition in 1992 of a $41.1 million pre-tax gain on the EPS transaction. Aggregate revenues for CoreStates' three largest fee-based categories, service charges on deposits, trust services and international services, increased $30.6 million, or 10.4% over 1992. Revenues earned in 1993 by Financial Telesis, a third-party provides of lockbox processing and data management services acquired by CoreStates on December 31, 1992, were $17.5 million. Refer to the Review and Analysis of Earnings section beginning on page 32 for a more detailed discussion of revenues and expenses. Comparison of 1992 to 1991 The comparability of CoreStates' 1992 reported revenues and expenses to 1991 was impacted by strategic actions occurring in those years. These actions included the October 1991 sale of approximately $1 billion of credit card receivables and the May 1992 sale of approximately $300 million of consumer installment loans. These two actions were responsible for the 3.3% year-to-year decline in net interest income in 1992 and approximately $60 million of the $71.3 million, or 37.4%, decline in the loan loss provision in 1992. From an operating earnings standpoint, the related business lines (Credit Card and Consumer Finance) experienced a $14.0 million after-tax earnings decline in 1992 that was principally attributable to these asset sales. Strong performances in the Wholesale and Community Banking businesses in 1992 more than offset this unfavorable impact. Also impacting 1992 to 1991 comparability was the adoption of FAS 106 which reduced 1992 operating earnings by $9.1 million, or $.10 per share. 3 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued OVERVIEW - continued Although total 1992 and 1991 year-to-year non-interest income and non- financial expenses were essentially level, there was significant growth in Wholesale Banking non-interest income which was obscured by large gains: in 1991 from the sale of credit card receivables and in 1992 from the EPS transaction. Non-financial expenses in both years also included significant and unusual expenses that substantially offset those gains. Non-performing Assets Non-performing assets at December 31, 1993 totalled $252.1 million, a decline of $134.7 million, or 34.8% from December 31, 1992. The decrease in non-performing assets as compared to the level at December 31, 1992 was principally in non-performing real estate assets which were down $78.1 million, or 32.1% from year-end 1992. Non-performing assets in the commercial portfolio also declined $50.2 million, or 36.9% from year-end 1992. At December 31, 1993 the allowance for loan losses at $347.5 million was 173.0% of non-performing loans. This compares to $322.5 million and 105.2% at December 31, 1992. STRATEGIC ACTIONS IN 1993 Acquisitions On December 17, 1993, CoreStates purchased Inter Community Bancorp ("Inter Community"), a New Jersey bank holding company with $133 million in assets and $110 million in deposits. The four Inter Community branches acquired were merged into CoreStates' New Jersey National Bank ("NJNB") subsidiary providing added presence in an important marketplace and a strategic complement to NJNB's growing middle market business. As a result of this acquisition, 640 thousand CoreStates' common shares were issued out of treasury. The transaction has a total value of approximately $17 million. In August 1993, CoreStates announced a definitive agreement to acquire Constellation Bancorp ("Constellation"), a New Jersey bank holding company with $2.3 billion in assets and $2.1 billion in deposits. Assuming approval by Constellation's shareholders, the transaction is expected to close late in the first quarter of 1994. As a result of this transaction, approximately 11.3 million new shares of CoreStates' common stock will be issued. The transaction has a total value of approximately $300 million and will be accounted for as a pooling of interests. The Constellation acquisition is expected to add to CoreStates' earnings per share in the second year following closing. CoreStates expects to reduce operating costs by approximately one-third of Constellation's non-financial expenses through operations and branch consolidations and support staff efficiencies. Constellation's bank subsidiary will be merged into NJNB. 4 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued STRATEGIC ACTIONS IN 1993 - continued The acquisition of Constellation with its 49 branches in northern and central New Jersey is highly complementary to the branch network and businesses of NJNB, and the combined bank will be the fourth largest in New Jersey with more than $6 billion in assets. The acquisition creates the strength of presence CoreStates considers necessary in the strategically important commercial and industrial middle region of New Jersey. At December 31, 1993, Constellation had non-performing assets of $139.2 million. While Constellation has utilized a long-term workout strategy to deal with its non-performing assets, CoreStates' strategy is to dispose of problem assets in a more accelerated manner. CoreStates anticipates that Constellation will conform to this strategic direction and to CoreStates' consumer lending loan charge-off policies in Constellation's 1993 income statement. CoreStates estimates that conforming to this strategic direction and to the charge-off policies will require Constellation to record an addition to its allowance for possible loan losses of approximately $107 million and an addition to its OREO reserves of approximately $38 million. CoreStates also anticipates that Constellation will record pre-tax charges in excess of $42 million in 1993, which include expenses directly attributable to the acquisition, and certain other costs and expenses. No charges have been recorded on Constellation's books pending receipt of approval of the acquisition by Constellation's shareholders. The aggregate $122 million after-tax impact on shareholders' equity will be partially offset by approximately $40 million of tax benefits that will be recorded as the cumulative effect of applying FAS 109 income tax accounting on a combined basis. In November 1993, CoreStates announced a definitive agreement to acquire Independence Bancorp, Inc. ("Independence"), a $2.6 billion Pennsylvania bank holding company, in a transaction expected to be accounted for as a pooling of interests. Assuming approval by regulators and by Independence's shareholders, the transaction is expected to close in the second quarter of 1994. As a result of this transaction, approximately 16.6 million new shares of CoreStates' common stock will be issued with a total value of approximately $430 million based on the year-end stock price. The 54 branches of Independence's four Pennsylvania bank subsidiaries will be legally merged into CoreStates' lead banking subsidiary, CoreStates Bank, N.A. This in-market acquisition is expected to result in significant operating efficiencies, and after first year charges of approximately $30 million for CoreStates' planned strategic initiatives regarding Independence's problem assets and approximately $24 million for closing and consolidation costs, is expected to add to earnings per share in the second year. 5 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued STRATEGIC ACTIONS IN 1993 - continued A summary of 1993 financial information for Constellation and Independence follows:
Operating Results for the Year Ended December 31, 1993 (in thousands, except per share) Constellation(1) Independence ------------- ------------ Net income............................ $16,504 $22,879 Per common share...................... 0.61 1.98 Average common shares outstanding.......................... 27,197 11,530 Balance Sheet At December 31, 1993 (in millions) Constellation(1) Independence ------------- ------------ Assets................................ $ 2,281 $ 2,603 Loans................................. 1,663 1,745 Deposits.............................. 2,092 2,153 Shareholders' equity.................. 166 222 - --------------------------------------
(1) Does not reflect charges in connection with the change in non- performing asset strategic direction and consumer lending charge-off policies, or charges for expenses attributable to the merger. The recording of these charges is pending Constellation's shareholders approval of the acquisition. In December 1993, CoreStates announced a definitive agreement to purchase Rittenhouse Financial Services, Inc. and Rittenhouse Trust Company ("Rittenhouse") in a transaction involving the issuance of $55 million in equivalent CoreStates' common shares at closing. CoreStates plans to purchase these shares in the open market. The agreement also anticipates the issuance of up to $55 million in additional equivalent common shares based on Rittenhouse earnings growth over a five year period. Assuming approval by regulators, the transaction is expected to close in the second quarter of 1994. Rittenhouse is a leading privately held investment advisory firm and manager of institutional and personal investments including broker sponsored asset management accounts, a growing national product. This transaction will increase CoreStates' assets under discretionary management to $26 billion, from $21 billion, and trust income by more than 25%. This acquisition is consistent with CoreStates' strategic objective of increasing earnings derived from fee- based businesses and is expected to add to earnings per share in 1994. Major Initiatives In September 1993, CoreStates formed a new transaction services business named "Transys". Transys is a stand-alone business and includes 1,100 of staff previously employed in CoreStates' check processing operations. Transys provides banks and other financial institutions with a full range of check processing, electronic check presentment and related payment services. This initiative was undertaken to build on CoreStates' position as a leading provider of third-party payment processing services and as a response to the emerging trend among banking institutions to outsource services that are undifferentiated by customers, but which will require significant investments in technology. Transys is expected to have the technological and operational base to lead its customers in the transition from paper to electronic processing. 6 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued STRATEGIC ACTIONS IN 1993 - continued A related initiative was the November 1993 formation of Synapsys, Inc. ("Synapsys"), a new subsidiary offering credit card and merchant processing services, another area where the industry trend has been to outsource. Synapsys will also serve as one of three development sites for VISA U.S.A. for next- generation, third-party card processing services for commercial card issuers. Both Transys and Synapsys are part of CoreStates' ongoing strategy to provide sophisticated processing to other banks and financial institutions. In August 1993, CoreStates' formerly Pennsylvania state-chartered Hamilton Bank subsidiary was merged into CoreStates Bank, N.A. This action has improved operating efficiencies and customer convenience in the Pennsylvania branch banking business. The Hamilton unit is managed as a division of the lead bank and will continue to be marketed as CoreStates Hamilton Bank in central Pennsylvania. Divestitures On September 30, 1993, CoreStates concluded its sale of five branches from its Virgin Islands operations to Banco Popular de Puerto Rico. The five branches had loans of $131.2 million and deposits of $228.8 million on September 30, 1993. CoreStates recorded a pre-tax gain of $11.0 million on the sale. CoreStates is currently in negotiations concerning the sale of its remaining two branches in the Virgin Islands. The Virgin Island branches are in markets well beyond CoreStates' core consumer strategy. In May 1993, CoreStates completed the sale of its Australian merchant banking unit, PNB Australia Limited. Based in Sydney, PNB Australia Limited had $70 million in assets. The merchant bank was not of a strategic size and its business mix was not consistent with CoreStates' international strategy. 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. Each core business is comprised of well-defined business lines with market or product specific missions. Corporate overhead, processing and support costs are fully 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. The loan loss provision and allowance for loan losses are allocated based on an expected normalized credit environment. 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. The Corporate category includes the income and expense impact of residual equity; residual loan loss reserves and provision; unusual or non-recurring items not attributable to the operating activities of the four major business areas; emerging business activities not directly related to the four major business areas; and miscellaneous items. 7 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued BUSINESS LINE RESULTS - continued The earnings contribution of these Core businesses is reflected in the table below (in millions):
Consumer Trust and Wholesale Financial Investment (taxable equivalent Banking Services Management basis) ------------------- --------------- ------------- 1993 1992 1993 1992 1993 1992 ---- ---- ---- ---- ---- ---- Net interest income $ 546.5 $487.9 $527.0 $534.4 $ 29.9 $ 29.9 Provision for loan losses 59.8 57.8 48.1 52.2 1.0 1.1 Non-interest income 238.1 208.4 114.5 98.1 95.6 91.5 Non-financial expenses 441.2 431.4 441.6 437.5 107.4 103.0 ------- ------ ------ ------ ------ ------ Income before income taxes 283.6 207.1 151.8 142.8 17.1 17.3 Income tax expense 110.5 79.3 57.6 53.6 6.2 6.2 ------- ------ ------ ------ ------ ------ Net income $ 173.1 $127.8 $ 94.2 $ 89.2 $ 10.9 $ 11.1 ======= ====== ====== ====== ====== ====== Percentage contribution 52.8% 48.7% 28.7% 34.0% 3.3% 4.2% Return on assets 1.32 1.00 1.71 1.55 1.65 1.62 Return on equity (2) 24.52 18.28 36.09 31.41 40.37 41.11 Average assets $13,139 $12,737 $5,501 $5,772 $ 661 $ 684 $ 5,501 Average equity (2) 706 699 261 284 27 27 Electronic Payment Services Corporate Total -------------- --------------- -------------------- 1993 1992 1993 1992 1993 1992 -------- ----- ------ ---- ------ ---- Net interest income $ (5.7) $ 1.8 $ 43.7 $ 30.7 $1,141.4 $1,084.7 Provision for loan losses (8.9) 8.2 100.0 119.3 Non-interest income 13.2 109.3 41.7 39.2 503.1 546.5 Non-financial expenses 104.2 43.2 18.5 1,033.4 1,094.6 ------- ------ ------ -------- -------- -------- Income before income taxes 7.5 6.9 51.1 43.2 511.1 417.3 Income tax expense (0.7) 4.9 9.6 10.9 183.2 154.9 ------- ------ ------ -------- -------- -------- Net income $ 8.2 $ 2.0 $ 41.5 $ 32.3 $ 327.9(1) $ 262.4(1) ======= ====== ====== ======== ======== ======== Percentage contribution 2.5% 0.8% 12.7% 12.3% 100.0% 100.0% Return on assets 11.88 1.80 1.20 1.06 1.44(1) 1.17(1) Return on equity (2) 205.00 2.50 5.21 6.16 18.27(1) 16.26(1) Average assets $ 69 $ 111 $3,455 $ 3,045 $ 22,825 $ 22,349 Average equity (2) 4 80 796 524 1,794 1,614
- --------------------------------------------- (1) Based on income before the cumulative effect of a change in accounting principle. (2) Equity is allocated to business lines in the four core businesses by applying a factor of 5.0% against average risk-weighted assets and adding intangible assets. 8 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: Corporate and Institutional Banking; Investment Banking; Cash Management; International Banking; Corporate Middle Market; and Specialized Finance. Wholesale Banking continued its strong performance in 1993 as net income increased $45.3 million, or 35.4% above 1992. This increase was due primarily to growth in net interest income and non-interest income. Net-interest income was $58.6 million, or 12.0% above 1992 due to lower levels of non-performing loans, cash basis interest received on non-performing loans, higher loan and factoring volume and wider spreads on prime based loans. Average non-performing loans declined 27.7% from prior year. Average loan outstandings increased 4.9% from 1992. Fees recognized on loans were also well above 1992 principally resulting from loan prepayments due to the low interest rate environment. Non-interest income was 14.3% above 1992 as continued emphasis on Cash Management products resulted in substantial year-to-year growth in both service charges on deposits and fees for international services. An increase in securities gains also contributed to the year-to-year growth. Consumer Financial Services includes the Community Banking and Specialty Products business lines. Specialty Products includes Credit Card, Student Lending and Residential Mortgage. Community Banking's 1993 results include the Virgin Islands operations center and five branches until their sale on September 30, 1993. Total net income for Consumer Financial Services of $94.2 million in 1993 was $5.0 million or 5.6% above 1992. This increase was primarily the result of significant net interest income growth in the credit card portfolio, strong non-interest income performance in Community Banking, and management's continued emphasis on cost control throughout the Group. Net interest income declined $7.4 million or 1.4% in 1993, reflecting the May 1992 sale of Signal Financial, a $300 million consumer finance subsidiary, and the sale of the Virgin Islands branches in September 1993. Excluding these transactions, net interest income increased by $6.5 million, including growth of 14.0% in credit card interest, partially offset by a declining net interest margin in Community Banking. The Community Banking margin continued to reflect the impact of deposit spread compression in a sustained low interest rate environment in 1993. Average loan volumes decreased 3.6% from 1992, primarily as a result of the two sale transactions and the securitization of $207 million in home equity loans during 1993. Average deposit volumes declined 2.1% compared to 1992, as consumers continue to shift out of certificates of deposits and into more liquid bank deposit products, as well as into higher yielding non-bank investment products. The loan loss provision for 1993 decreased $4.1 million or 7.9%, a direct impact of the decline in loan volumes. Non-interest income reflected strong growth of $16.4 million, or 16.7%, above 1992. Service charges on deposits in Community Banking increased 14.2% compared to 1992, as ongoing emphasis is placed on fee income generation. Additionally, loan securitizations also produced significant fee income for Community Banking in 1993. The 1993 results also reflect revenues from introducing sales of annuities and mutual funds by a third party through the CoreStates branch network. Non-financial expenses of the Group grew by $4.1 million or .9% in 1993. On a normalized basis, excluding the impact of the Signal and Virgin Island sales, non-financial expenses increased 3.3% as management's cost control efforts continued. 9 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. Net income of $10.9 million was down $.2 million from 1992. The slight decline in net income was due to 4.3% growth in non-financial expenses, which was partially offset by 4.5% growth in non-interest income. Net interest income was flat year-to-year. Lower earnings on demand balances due to the low interest rate environment was the primary factor for net interest income of $29.9 million being level with 1992. Non-interest income growth was due principally to growth in Personal Trust, Investment Services and Employee Benefit fees. Asset growth in the CoreFund family of Mutual funds was 10.6% over 1992 contributing most of the fee growth in Investment Services. Growth in trust fees, the largest component of non-interest income, was hampered by lower than anticipated new business, the continued low interest rate environment, and the loss of several large Institutional Custody/Securities Lending relationships in 1992. Electronic Payment Services includes the MAC automated teller machine ("ATM") network and POS processing business lines. On December 4, 1992, the MAC and POS business lines were contributed to Electronic Payment Services, Inc. ("EPS"), a joint venture that combines the separate consumer electronic transaction processing businesses of CoreStates, Banc One Corporation, PNC Financial Corp and Society Corporation into the nation's leading provider of ATM and POS processing services. EPS has announced the signing of definitive agreements providing for two additional banking companies to enter the joint venture. The transactions will significantly expand the MAC network and POS business volume and are expected to be completed in 1994. As a result of the addition of new partners, CoreStates' share in earnings of EPS will decline from the current 31% to an estimated 23%. Full year 1993 net income totaled $8.2 million versus $2.0 million for 1992. The 1992 results include MAC and POS as a CoreStates business group through December 4, 1992 and earnings from EPS for the remainder of the year. The results for 1993 include income from CoreStates' 31% equity interest in the earnings of the EPS joint venture and dividends on EPS preferred stock, 80% of which is tax free, partially offset by an interest carrying charge on the net investment in EPS. 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 does not affect the amount of deferred gain, but changes the timing of deferred gain income recognition from a five- year period beginning in 1996 to a ten- year period beginning in 1994. The Corporate Category's net income increased $9.2 million in 1993. This category included unusual gains for both 1993 and 1992. In 1992 a $41.1 million pre-tax gain was recorded for the EPS transaction and 1993 includes pre-tax gains of $11.0 million on the sale of five branches in the Virgin Islands and $9.1 million on prepayments of long-term debt, and securities gains of $8.6 million. Additionally, there were significant expenses recorded in each year that substantially offset those gains. The loan loss provision in the corporate category was $17.1 million lower than 1992 due to the reduction in the overall corporate provision levels. The provision reduction was not allocated to the core businesses where the loan loss provision is based on a normalized credit environment. The increase in net interest income in the corporate category was largely due to the impact of an increase in unallocated average equity, which has grown year-to-year by $272 million. 10 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued CAPITAL STRENGTH Capital strength must be evaluated in the context of business risk exposures, including asset quality, interest sensitivity, liquidity and earnings diversification. CoreStates places a significant emphasis on the maintenance of strong capital which promotes investor confidence, helps provide access to the credit markets under favorable terms and enhances the flexibility to capitalize on business growth and acquisition opportunities. Capital is managed for each of the CoreStates' subsidiaries based on their 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 is in place for fine tuning the debt structure and adding debt, preferred or convertible preferred equity, if and when appropriate. 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 (In percent) Equity/Assets --------------------------- Montgomery CoreStates Securities ---------- ---------- 1993 7.86% 7.11% 1992 7.22 6.74 1991 6.60 6.03 1990 6.46 5.74 1989 6.60 5.65
At December 31, 1993, common shareholders' equity totaled $1,959 million or 8.3% of total assets, compared with $1,703 million or 7.2% at year-end 1992. The year-end 1993 equity to assets ratio for the Montgomery Securities Regional Bank Composite was 7.2%. CoreStates has achieved steady internal capital generation throughout the past five years. Common shareholders' equity increased over the five years ended December 31, 1993 at a compound annual growth rate of 6.2%, while dividends paid increased at a compound annual growth rate of 8.2%. During 1993, CoreStates increased its quarterly dividend by 8.0% to $.27 per share beginning January 1993, and again by 11.1% to $.30 per share beginning in October 1993. CoreStates' dividend on its common stock was $1.14 per share in 1993 and $1.02 per share in 1992. The common dividend payout ratio was 40.7% for 1993, compared to 44.9% for 1992. On August 17, 1993 the Board of Directors approved a two-for-one common stock split effected in the form of a 100% stock dividend ("the Stock Dividend"). The additional shares resulting from the Stock Dividend were distributed on October 15, 1993 to holders of record on September 15, 1993. All common shares and per common share data have been restated for the impact of the Stock Dividend. CoreStates and its bank subsidiaries are subject to minimum risk-based and leverage capital guidelines issued by the Federal Reserve Board and Comptroller of the Currency. The measurement of risk-based capital takes into account the credit risk of both balance sheet assets and off-balance sheet exposures. These guidelines require minimum risk-based capital ratios of 4% for Tier 1 capital and 8% for total capital. In addition, a minimum leverage ratio of Tier 1 capital to quarterly average total assets of 3% is required for banking organizations that are rated as strong. The following table illustrates CoreStates' risk-based and leverage capital ratios at December 31, 1993 and 1992: 11 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued CAPITAL STRENGTH - continued
Risk-based and Leverage Capital Ratios at ----------------------------------------- At December 31, --------------- ($ in millions) 1993 1992 ---- ---- Capital Tier 1 capital $ 1,873 $ 1,708 Tier 2 capital 888 719 Total qualifying capital 2,761 2,427 Assets Risk-adjusted assets 20,173 19,087 Average assets- leverage capital basis 22,868 22,825 Ratios Tier 1 capital ratio 9.3% 9.0% Total capital ratio 13.7 12.7 Tier 1 leverage ratio 8.2 7.5
Bank regulators have also adopted five capital category definitions which are applicable to the supervision of all insured financial institutions. A bank is considered "well capitalized" 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, 1993.
Bank Regulatory Capital Ratios ------------------------------ At December 31, 1993 Capital Ratios -------------------- ---------------------------------- Total ($ in billions) Tier 1 Total Leverage assets ------ ----- -------- ------ CoreStates Bank, N.A. 8.5% 10.9% 7.3% $17.8 New Jersey National Bank 9.3 11.4 6.5 4.5 CoreStates Bank of Delaware, N.A. 10.9 12.1 13.4 .6
12 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued ASSET QUALITY Risk Management CoreStates manages asset quality and credit risk by maintaining diversification in its loan portfolio and through intensive review processes that include careful analysis of credit requests and ongoing examination of outstandings and delinquencies, with particular attention to portfolio dynamics. CoreStates strives to identify loans experiencing difficulty early enough to correct the problems, to recognize non-performing loans early, to record charge-offs promptly based on realistic assessments of current collateral values, and to maintain reserves that are strong. CoreStates' credit culture has served it well during economic downturns and, while asset quality was impacted by the recent extended recession, it has steadily improved over the past six quarters and remains strong relative to its peers. This same well-developed and ingrained credit culture that has evolved over the past decade will serve CoreStates well in the emerging economic growth environment and for the next inevitable recession. This credit culture has as a cornerstone a team approach that includes well-trained relationship managers supported by: 1) a group of Credit Officers with significant lending experience who have demonstrated the highest level of credit judgment and who have no direct business development or profit responsibility; 2) a credit management process that requires early and broad communication of and action on deteriorating credits, as well as regular, formal, detailed evaluations and projections of non-performing assets and potential losses; and 3) formal guidance through the loan quality committee process in which all criticized credits, all deteriorating credits and other credits with specified risk characteristics are reviewed and addressed by all levels involved in the credit process up through senior management on a regular basis. The team approach and successful use of Credit Officers in CoreStates' Wholesale Banking line of business have been extended into other areas including Trust, Community Banking and Asset and Liability Management. The above process allows CoreStates to make timely credit decisions, to know the customers' needs and evaluate closely all aspects of their businesses, keeping negotiating and structuring close to the customer. It allows for the early detection and reporting of credit problems, which is key to CoreStates' historically high levels of asset quality. Also, the mixing of experienced and less experienced bankers provides excellent training and mentoring, important components of our overall management approach. Underlying CoreStates' credit culture are well tested and defined credit policies and procedures. Approved at the holding company level by the CoreStates Credit Policy Office in concert with each bank's Chief Lending Office, these policies set underwriting standards, approval procedures, limits on exposure by borrower and by industry and such other limits as currently deemed prudent. The credit process is designed to make approval of straightforward credits relatively simple through a dual approval matrix system, but to increase the degree of involvement by experienced approvers as the credit becomes more complex. Some examples of complexities that require sign-offs beyond the dual approval matrix system include: large dollar concentrations, highly leveraged transactions, tenors beyond policy, lower rated credits and loans to customers with specialty characteristics. 13 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued ASSET QUALITY - continued In addition to the management of credit risk, CoreStates manages and controls operating and fraud risks in all of its substantive transactional products through its Transactional Products Exposure Committee ("TPEC"). It is the role of this committee to review and assign risk levels to all significant new products prior to their implementation. In addition, reviews of substantial changes to existing products and regular reviews of the product array offered to customers are part of TPEC's responsibilities. The products reviewed by TPEC include products from CoreStates' normal operating services as well as those arising from Cash Management, Trust and Community Banking services. Through a predetermined risk matrix approach, all products are rated and assigned risk levels. Each product manager is responsible for acting on risk reduction recommendations issued by TPEC. By focusing on the transactional risk in all of its products, TPEC serves as one element in the overall risk management process at CoreStates. Credit quality and the effectiveness of portfolio management are independently and systematically assessed by Credit Review, which reports to the Audit Committee of the Board of Directors. Both its credit rating and process evaluation techniques are consistent with regulatory standards. Because CoreStates considers risk oversight to be an essential element for long-term financial stability, in 1994 CoreStates will more cohesively define its overall risk profile by applying its various well-developed risk analysis approaches to all risk areas within the corporation. Loan Portfolio Wholesale Loans - 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 conservatively 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. CoreStates' largest concentration is in the non-bank finance industry at 41.8% of total equity. Wholesale Loans by Industry - --------------------------- (in multi color bar graph, overlay np1 $ per industry) - ------------------------------------------------------ Plotting Points for Graph - -------------------------
Outstandings % of as of % Outstandings of equity non-performing ------------ -------------- Non-bank finance 41.8% Communications 32.8 0.4% Retail trade 31.2 0.6 Healthcare 21.1 0.2 Depository institutions 19.3 Apparel 18.2 10.6 Trucking and auto leasing 15.5 1.9 Real estate construction 12.9 6.3 Chemical 11.9
14 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued ASSET QUALITY - continued The following discussion highlights specific portfolios that are of interest in the current environment. The discussion focuses on three wholesale portfolios: communications because of its size; healthcare because of the high profile of this industry; and the commercial finance portfolio at a CoreStates non-bank subsidiary, Congress Financial Corp ("Congress"), because of the recent growth in this portfolio. Communications - The communications/media lending activities are in industries which are either regulated by the Federal Communications Commission and/or derive some or all of their revenues from advertising. These industries, which include Cable Television, Telephone, Newspapers, Broadcasting and Cellular, are typically financed based on the cash flows available to repay debt, with less focus on tangible balance sheets. The underlying basis for this focus is the intangible franchise value of the business which generally exceeds the cost of establishing the business. Significant and rapid technological, regulatory and competitive changes are occurring in the communications segments of these businesses which our specialized lenders are closely monitoring. Risks are further mitigated through exposures to generally large, often diversified and highly experienced operators, and conservative debt structures. Three of the specialized portfolios in this industry, Cable Television, Broadcasting and Cellular, are highlighted below. Exposures in these industries are managed within clearly defined parameters regarding total exposure and acceptable tenors /maturities.
Communications Portfolio - ------------------------ At December 31, Cable(1) Broadcasting(1) Cellular - --------------- ----- ------------ -------- (in millions) 1993 - ---- Outstandings.............. $413.2 $62.4 $55.0 Non-performing............ - 2.7 - % of loans.............. - 4.3% - 1992 - ---- Outstandings.............. $482.8 $58.0 $17.9 Non-performing............ - 11.4 - % of loans.............. 19.7% -
- ----------------------------- (1) Does not include $68 million at December 31, 1993 and $56 million at December 31, 1992 outstanding to diversified companies that have cable and broadcasting in their mix of businesses. Healthcare - The specialized healthcare lending activities are to healthcare providers which are heavily dependent upon third-party reimbursement for their revenue base. Two of the subsegments of the industry are the acute care (hospital) sector and the alternate site care sector (rehabilitation, subacute, psychiatric, oncology, etc.). Financing typically supports working capital requirements caused by delays in third-party payments, medium-term financing for the acquisition of equipment and/or merger activity. The industry operates in a highly regulated environment and is currently undergoing significant reform. Our analysis focuses on several key indicators as predictors for success in this evolving industry: management's ability to identify and operate profitably within particular market niches, stable and growing market share, diversified and strong payor mix. The financial analysis emphasizes strong and steady cash flow and conservative leverage. The changing nature of this industry requires close monitoring which includes ongoing analysis of reimbursement by subsegment and geography, assessment of management and their respective strategies and collateral valuations. 15 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: (continued) ASSET QUALITY - continued The following table summarizes CoreStates' exposure in the two Healthcare industry segments discussed above at December 31, 1993 and 1992. There were no non-performing loans in these segments for the periods presented.
Healthcare Outstandings - ----------------------- Alternate At December 31, Acute care site care - --------------- ---------- --------- (in millions) 1993.................... $127.5 $112.2 1992.................... 127.8 101.4
Commercial Finance - The loan portfolio at Congress grew approximately 25% on a year-to-year basis through December 31, 1993. The credit quality of loans generated during this period is consistent with past performance and reflects what would be expected from a high quality commercial finance company. During this period there were unusual market opportunities arising from the constraints and restrictive lending policies in the commercial banking system and the ever increasing nationwide reputation of Congress as a highly expert asset based lender able to structure and syndicate both large and complex transactions. The new business origination was geographically diverse, represented no particular industry concentrations and continued the historical collateral characteristics of the portfolio with its heavy emphasis on working assets such as accounts receivable and inventory.
Commercial Finance Portfolio - ---------------------------- At December 31, - --------------- (in millions) 1993 1992 ---- ---- Outstandings.................. $1,426.5 $1,136.8 Non-performing................ 15.9 4.6 % of loans.................. 1.1% .4%
Real Estate Loans - Although improving over the prior three years, the CoreStates regional real estate market continues to present a mixed picture as it emerges from a severe recession. The residential market has achieved supply/demand balance; marginal developers have been removed and low interest rates have created sales activity. However, the commercial and industrial market remains fundamentally weak, although there has been some increased interest from the investor market. Total real estate related loans outstanding were $4,342 million at December 31, 1993, compared to $4,645 million at December 31, 1992. 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 $253 million or 1.5% of total loans at December 31, 1993. Currently, 6.3% of CoreStates' construction and development loan portfolio is non-performing, compared to 2.4% for the remaining real estate loan portfolio. The table below summarizes CoreStates' real estate loans outstanding and other real estate owned at December 31, 1993 and 1992 by type. 16 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued ASSET QUALITY - continued
Real Estate Loans - ----------------- At December 31, Completed - --------------- projects/ Total (in millions) Construction/ Investment real development properties(1) Residential Other(2) estate ------------- ------------- ----------- -------- ------ 1993 - ---- Year-end outstandings $ 253 $874 $1,709 $1,506 $4,342 Average loans outstanding 283 882 1,798 1,463 4,426 Non-performing loans 16 42 20 36 114 % of year-end loans 6.3% 4.8% 1.2% 2.4% 2.6% Net charge-offs $ 5 $ 11 $ 5 $ 11 $ 32 % of average loans 1.6% 1.2% .3% .8% .7% Other real estate owned $ 22 $ 17 $ 2 $ 10 $ 51 1992 - ---- Year-end outstandings $ 328 $877 $1,908 $1,532 $4,645 Average loans outstanding 427 788 1,832 1,483 4,530 Non-performing loans 33 51 24 55 163 % of year-end loans 10.2% 5.8% 1.3% 3.6% 3.5% Net charge-offs $ 12 $ 21 $ 6 $ 6 $ 45 % of average loans 2.7% 2.7% .3% .4% 1.0% Other real estate owned $ 38 $ 28 $ 2 $ 12 $ 80 - -----------------------------------------------------------------------------------------------------
(1) Completed projects/investment properties included $305 million at December 31, 1993 and $390 million at December 31, 1992 related to loans on completed projects for which net rental receipts are not sufficient to cover 115% of debt service. (2) Principally commercial loans secured by owner-occupied real estate. The largest category within real estate loans is residential mortgages which include home equity loans. Residential mortgages were $1,709 million or 10.4% of total loans at December 31, 1993. Loans in the Other Real Estate Loans category, primarily commercial loans collateralized by owner-occupied real estate, accounted for 34.7% of total real estate loans and 9.2% of total loans. The remaining category of real estate loans, totaling $874 million at December 31, 1993, is comprised of completed projects and investment properties. Included in this category are $569 million of loans, or 65.1%, on properties which have a positive cash flow exceeding 115% of debt service, a measure which generally is indicative of an adequately leased-up building. Also in this category are $305 million of loans, or 34.9%, on properties whose cash flow does not meet the 115% test. Net charge-offs of construction and development loans in 1993 were $4.6 million or 1.6% of related average loans outstanding, compared to net charge- offs of $11.5 million or 2.7% of the average construction and development loans in 1992. 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: 17 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued ASSET QUALITY - continued
Construction and Development and Completed Projects/Investment Properties - ------------------------------------------------------------------------- Loans Outstanding by Project Type - --------------------------------- At December 31, - --------------- (in millions) Construction Completed projects/ and development Investment properties Total ------------------------- ------------------------ ----------------------- Loans % Non- Loans % Non- Loans % Non- outstanding performing outstanding performing outstanding performing ----------- ---------- ----------- ---------- ----------- ---------- 1993 - ---- Residential development........................... $156.3 8.0% $ 156.3 8.0% Commercial: Land and site development......................... 62.9 5.2 62.9 5.2 Apartments........................................ $112.0 1.6% 112.0 1.6 Light industrial.................................. 8.9 122.7 2.9 131.6 2.7 Hotels............................................ 7.3 26.0 7.3 26.0 Office............................................ 5.0 8.0 353.7 7.3 358.7 7.3 Shopping centers.................................. 7.8 202.6 1.7 210.4 1.7 Miscellaneous..................................... 11.7 76.2 6.7 87.9 5.8 ------ ------ ----- Total commercial.............................. 96.3 3.8 874.5 4.8 970.8 4.7 ------ ------ -------- Total......................................... $252.6 6.3% $874.5 4.8% $1,127.1 5.1% ====== ====== ====== ===== ======== ==== 1992 - ---- Residential development........................... $182.0 8.2% $ 182.0 8.2% Commercial: Land and site development......................... 76.1 15.0 76.1 15.0 Apartments........................................ .9 $117.4 .7% 118.3 7.0 Light industrial.................................. 25.4 113.4 6.3 138.8 5.1 Hotels............................................ 10.3 17.5 10.3 17.5 Office............................................ 25.3 27.7 358.7 9.6 384.0 10.8 Shopping centers.................................. 13.5 197.7 2.0 211.2 1.8 Miscellaneous..................................... 4.4 79.9 3.5 84.3 3.3 ------ ------ -------- Total commercial............................... 145.6 12.6 877.4 5.8 1,023.0 6.8 ------ ------ -------- Total.......................................... $327.6 10.2% $877.4 5.8% $1,205.0 7.0% ====== ====== ====== ===== ======== ====
18 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued ASSET QUALITY - continued Geographically, $1,052.2 million or 93.4% of CoreStates' construction and development loans, completed projects and investment properties are financing real estate in CoreStates' market area of Pennsylvania, New Jersey and Maryland/Delaware. Of the $74.9 million of these loans outstanding for projects outside of CoreStates' local market, $9.6 million is in the greater Washington D.C. area, with virtually no outstandings in California, New York City and New England. Allowance for Loan Losses In 1993, CoreStates refined its methodology for determining appropriate levels of allowance for loan losses ("ALLL"). Each subsidiary of CoreStates which extends credit maintains an allowance sufficient to absorb the anticipated loss inherent in its credit portfolio for a minimal one-year horizon. 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, creating a band, below which a bank's ALLL is considered inadequate and 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 the band. Management's evaluation of the adequacy of the ALLL is independently tested by Credit Review. CoreStates believes that the ALLL is an important source of protection against problems in the portfolio. Equally important is the prompt recognition of problem situations and prompt write-downs of these assets to net realizable value. Accordingly, over an economic cycle, CoreStates has experienced relatively high levels of recoveries against these write-downs compared to other banking companies. 19 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued ASSET QUALITY - continued The year-end 1993 allowance for loan losses totaled $347.5 million and represented 2.1% of loans. This compares with a loan loss allowance at year- end 1992 of $322.5 million, also 2.1% of loans. The allowance for loan losses at year-end 1993 was 173.0% of non-performing loans, an increase over the year-end 1992 coverage ratio of 105.2% and a reflection of the lower level of non-performing loans at year-end 1993 and reduced net loan charge-offs during 1993. CoreStates' total provision for loan losses in 1993 was $100.0 million, down $19.3 million from the $119.3 million provided in 1992. The decrease in the 1993 loan loss provision resulted primarily from the overall improvement in asset quality during 1993 as non-performing assets declined 34.8% and net loan charge-offs declined 40.6%. Net charge-offs in 1993, excluding net LDC recoveries of $12.6 million, were $89.9 million or .58% of related average loans. This represents a decrease of $53.4 million when compared to the $143.3 million of net charge-offs excluding $13.1 million LDC recoveries in 1992. The following table reflects the distribution of 1993 and 1992 net charge- offs by loan type:
Distribution of Net Charge-Offs - ------------------------------- For the Year Ended December 31, - ------------------------------- (in millions) 1993 1992 ----------------------------- --------------------------- % 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 $ 30.1 .4% 38.9% $ 51.4 .7 % 39.5% Real estate: Construction 4.6 1.6 6.0 11.5 2.7 8.8 Other 27.2 .7 35.2 33.0 .8 25.4 Consumer: Credit card 23.3 2.4 30.1 31.1 3.5 23.9 Installment 4.8 .4 6.2 13.9 1.1 10.7 Other (1) (.1) (.1) 2.4 .2 1.8 ------ ----- ------ ----- Total domestic 89.9 .6 116.3 143.3 1.0 110.1 ------ ----- ------ ----- Foreign (2) (12.6) (2.3) (16.3) (13.1) (3.1) (10.1) ------ ----- ------ ----- Total net charge-offs $ 77.3 .5% 100.0% $130.2 .8% 100.0% ====== ==== ===== ====== ==== ===== - ------------------------------------------------------------------------------------------------
(1) Includes loans to financial institutions and lease financing. (2) Reflects net recoveries on Less Developed Countries (LDC) assets of $12.6 million in 1993 and $13.1 million in 1992. 20 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued Asset Quality - continued Non-Performing Assets Non-performing assets at year-end 1993 were $252.1 million, or 1.5% of total loans plus other real estate owned ("OREO") and 1.1% of total assets. These levels compared to total non-performing assets at year-end 1992 of $386.8 million, 2.5% of total loans plus OREO and 1.6% of total assets. Management expects a continuing decline in non-performing asset levels during 1994 for current CoreStates' banks. However, with planned acquisitions, CoreStates anticipates increases in both non-performing assets and charge-offs (refer to the Strategic Actions section beginning on page 4). At year-end 1993, total non-performing assets were comprised of $164.4 million of non-accrual loans, $36.5 million of renegotiated loans and $51.2 million of OREO. The $134.7 million, or 34.8%, decline in total non- performing assets as compared to year-end 1992 was principally experienced in CoreStates' two largest portfolios, the commercial loan portfolio, declining $50.2 million, or 36.9%, and the real estate portfolio which declined $78.1 million, or 32.1%. During 1993, loans aggregating $165 million were added to non-performing status, payments of $149 million against non-performing assets were received, loans totaling $46 million were returned to full accrual status and $105 million of non-performing assets were charged off. CoreStates monitors the movements within the non-performing portfolio closely. The following table illustrates the components of the quarterly changes for 1993 and 1992:
Quarterly Changes in Non-performing Assets - ------------------------------------------ (in millions) Quarter Ended ------------------------------------------------- Full March 31 June 30 September 30 December 31 Year -------- ------- ------------ ----------- ---- 1993 - ---- Beginning balance $387 $340 $305 $295 $387 Additions 47 29 35 54 165 Return to accrual (23) (14) (1) (8) (46) Payments (42) (31) (23) (53) (149) Charge-offs (29) (19) (21) (36) (105) ---- ---- ---- ---- ----- Net change (47) (35) (10) (43) (135) ---- ---- ---- ---- ----- Ending balance $340 $305 $295 $252 $ 252 ==== ==== ==== ==== ===== 1992 - ---- Beginning balance $487 $474 $485 $442 $ 487 Additions 63 109 63 38 273 Return to accrual (6) (1) (25) (16) (48) Payments (42) (73) (42) (40) (197) Charge-offs (28) (24) (39) (37) (128) ---- ---- ---- ---- ----- Net change (13) 11 (43) (55) (100) ---- ---- ---- ---- ----- Ending balance $474 $485 $442 $387 $ 387 ==== ==== ==== ==== =====
Non-performing assets at year-end 1992 decreased $100.3 million, or 20.6%, as compared to the 1991 year-end level. The 1992 decline in non-performing assets was principally in the commercial loan portfolio, particularly HLT non- accrual and renegotiated loans, which decreased $54.6 million from year-end 1991. Non-performing assets attributable to the real estate portfolio declined $35.4 million, or 12.7%, from the year-end 1991 level. The chart below illustrates CoreStates' ratio of total non-performing assets to loans plus OREO as compared to the Montgomery Securities Regional Bank Composite Index. 21 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued ASSET QUALITY - continued
Non-performing Assets to Loans Plus OREO - ---------------------------------------- Plotting Points for Graph - ------------------------- (In percent) NPA/Loans Plus OREO ------------------------------ Montgomery CoreStates Securities ---------- ---------- 1993 1.54% 1.86% 1992 2.49 3.23 1991 3.07 3.93 1990 2.55 3.50 1989 2.02 2.72
The following table reflects the distribution of non-performing assets by loan type at December 31, 1993 and 1992:
Distribution of Non-performing Assets - ------------------------------------- At December 31, - --------------- (in millions) 1993 1992 --------------------------------- ----------------------------------- % Total % Total Non- % of non- Non- % of non- Loan type performing Loan type performing performing Loan type performing - --------- ---------- --------- ---------- ---------- --------- ---------- Domestic: Commercial and industrial: Highly leveraged transactions ("HLTs") $ 5.2 1.1% 2.1% $ 8.5 1.7% 2.2% Other 80.5 1.2 31.9 127.4 1.9 32.9 Real estate: Construction 16.0 6.3 6.3 33.3 10.2 8.6 Other loans 98.0 2.4 38.9 129.9 3.0 33.6 OREO 51.2 20.3 80.1 20.7 Other domestic loans(1) 1.0 .1 .4 4.5 .4 1.2 ------ ----- ------ ----- Total domestic 251.9 1.6 99.9 383.7 2.5 99.2 ------ ----- ------ ----- Foreign loans .2 .1 3.1 .8 .8 ------ ----- ------ ----- Total non-performing assets(2)(3) $252.1 1.5% 100.0% $386.8 2.5% 100.0% ====== === ===== ====== ==== ===== % Total assets 1.1% 1.6% === === - --------------------------------------------------------------------------------------------------
(1) Includes loans to financial institutions and lease financing. (2) The table does not include loans of $34 million and $73 million at December 31, 1993 and 1992, 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. (3) There were no non-performing consumer loans at December 31, 1993 or 1992. 22 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued ASSET QUALITY - continued The following table reflects the distribution of non-accrual loans by their respective levels of performance as defined below: Substantial performance - No loss is anticipated on the present book balance and the borrower has paid at least 85% of contractual obligations over the prior six months. Limited performance - Borrower has paid between 25% and 85% of contractual obligations over the prior six months. No performance - Borrower has paid less than 25% of contractual obligations over the prior six months. Full payment is doubtful - Loan is contractually current, however, there is some doubt as to full collectability. Other - Loan is contractually current, however, borrower is in a specified period of demonstrating performance or loan has a prior charge-off.
Performance Levels of Non-Accrual Loans - --------------------------------------- At December 31, 1993 - -------------------- (in millions) Accumulated net charge- offs as % of Book Contractual contractual balance(1) balance balance(1) ------- ----------- ----------- Contractually past due with: Substantial performance $ 4.3 $ 6.9 37.6% Limited performance 18.1 30.5 40.8 No performance 62.3 95.8 34.9 ------ ------ 84.7 133.2 36.4 ------ ------ Contractually current, however: Full payment is doubtful 70.2 97.3 27.8 Other 9.5 12.5 23.4 ------ ------ 79.7 109.8 27.3 ------ ------ Total non-accrual loans $164.4 $243.0 32.3% ====== ====== ==== - -------------------------
(1) Book balance reflects application of $4.0 million of cash basis interest received which was applied to principal. The accumulated net charge-off percentage also includes the impact of interest applied to principal. 23 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued ASSET QUALITY - continued The following OREO portfolio table illustrates the relationship of original contractual balances to accumulated net charge-offs. Accumulated net charge- offs include charge-offs taken against the allowance for loan losses while the asset was classified as a loan and write-downs charged directly to the income statement subsequent to a loan's transfer to OREO. During 1993 and 1992, $12.1 million and $21.3 million, respectively, were charged to the income statement for OREO write-downs.
Other Real Estate Owned - ----------------------- At December 31, 1993 - -------------------- (in millions) Accumulated net charge- offs as % of Book Contractual contractual balance balance balance ------- ----------- ----------- Construction and development $22.0 $ 91.9 76.1% Completed projects 17.0 53.0 67.9 ----- ------ Total(1) $39.0 $144.9 73.1% ===== ====== ==== - ------------------------------------------------------------------
(1) Does not include $2.5 million of OREO from the residential mortgage portfolio or $9.7 million in OREO from other commercial real estate loans, primarily the owner occupied portfolio. The two preceding charts reflect the results of CoreStates' charge-off practices. At year-end 1993, 32.3% of non-accrual loans has been charged off, while 73.1% of the OREO asset original contractual balance has been charged off. These levels of markdowns on OREO reflect CoreStates' approach in handling problem assets. In May 1993, the Financial Accounting Standards Board issued statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("FAS 114"). FAS 114 addresses accounting for impairment of certain loans and requires that impaired loans within the scope of FAS 114 be measured based on the present value of expected cash flows discounted at the loan's effective interest rate, or be measured at the loan's observable market price or the fair value of its collateral. FAS 114 is effective beginning in 1995. The impact that FAS 114 will have on CoreStates' future results of operations cannot be estimated with certainty at the current time. However, the adoption of FAS 114 is not expected to have a material impact on CoreStates' level of allowance for loan losses. 24 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued ASSET AND LIABILITY MANAGEMENT CoreStates manages its balance sheet to achieve maximum shareholder value within the constraints of a conservative interest rate risk discipline, the maintenance of high credit quality, and sound leverage and liquidity positions. CoreStates' asset and liability management is centralized and individual subsidiaries are managed within the context of overall corporate policies. 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. 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 stability and strength of CoreStates' net interest margin over time, despite significant changes in economic conditions, competition and interest rates. CoreStates' net interest margin has remained consistently above industry averages over the last five years as illustrated in the chart "Net Interest Margin".
Net Interest Margin - ------------------- Plotting Points for Graph - ------------------------- (In percent) Net interest margin ------------------------- Montgomery CoreStates Securities ---------- ---------- 1993 5.82% 4.81% 1992 5.61 4.78 1991 5.53 4.40 1990 5.31 4.21 1989 5.09 4.27
25 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued ASSET AND LIABILITY MANAGEMENT - continued At CoreStates, measurement of 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 and controlled through gap analysis. 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 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. 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. As a matter of practice, positions are generally managed to produce significantly lower volatility than policy guidelines would permit. Current simulations show that CoreStates' net interest income volatility over one year due to a 200 basis point change in short-term interest rates is relatively neutral. Reflecting its interest rate risk management philosophy, CoreStates' net interest margin results from strong relationship business profitability rather than a temporarily favorable interest rate environment. There are two key elements to CoreStates' interest rate risk. First, is the broad mismatch between the rate sensitivity of the assets and liabilities in its core businesses. Second, is the spread risk between the rates on those products and financial market rates. CoreStates carries a large portfolio of prime and other short-term rate related assets generated through its core wholesale and retail businesses. As a regional banking company, CoreStates has a significant funding base of consumer deposits with indefinite maturities and non-contractual rates such as savings, NOW and money market accounts. Traditionally, consumer deposits have had a longer term rate sensitivity; 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 would generate 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, and 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 84 demonstrates the basic mismatch of the relationship portfolios and the offsetting discretionary position. The adjustments and the placement of indefinite maturity products within the table reflect the lagged pricing effects of those products, as identified through simulations. 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, 1993 - ---------------------------------------- (in millions) Months Years ------------------------ ------------------------ 0-3 4-6 7-12 1-2 3-5 >5 Total ------- ------ ------ ------- ------- ------ ------- Relationship Portfolios: Total loans............................. $11,587 $ 893 $ 846 $ 1,190 $ 1,617 $ 230 $16,363 Total consumer deposits, net non- interest funding....................... 6,707 1,270 1,344 1,893 2,219 2,679 16,112 Adjustments............................. 395 (619) (318) (397) (1,248) 2,187 -0- ------- ------ ------ ------- ------- ------ ------- Relationship gap...................... 5,275 ( 996) (816) (1,100) (1,850) (262) 251 ------- ------ ------ ------- ------- ------ ------- Discretionary Portfolios: Assets.................................. 2,299 1,037 1,049 1,238 2,236 1,060 8,919 Liabilities............................. 7,601 131 88 276 365 709 9,170 ------- ------ ------ ------- ------- ------ ------- Discretionary gap..................... (5,302) 906 961 962 1,871 351 (251) ------- ------ ------ ------- ------- ------ ------- Combined gap.......................... $ (27) $ (90) $ 145 $ (138) $ 21 $ 89 $ -0- ======= ====== ====== ======= ======= ====== =======
The second major element of CoreStates' interest rate risk is the spread risk between product rates and financial market rates. CoreStates simulates the behavior of individual products under various rate scenarios to determine an appropriate investment or funding strategy to provide a stable spread. Declining interest rates in 1993 provided the opportunity to reprice consumer savings, NOW and money market accounts. This contributed to a wider net interest margin in 1993 to the extent that these deposit balances funded fixed- rate assets. Assuming a stable rate environment, spreads are expected to narrow as the fixed-rate assets mature and are replaced at market rates. There was also growth in those deposit balances in 1993, increasing the significance of the repricing of those products to net interest income. CoreStates has simulated potential changes in pricing and the resultant impact on deposit volumes under a multitude of rate environments. The key simulation assumptions revolve around the ability to reprice those products if rates fall, and the extent to which balances will be maintained and repricing will lag market rates if rates rise. Recognizing that much of the growth in these products represents a temporary liquidity preference, CoreStates has invested additional balances for a shorter term than for those considered to be more permanent. The spread between the prime rate and short-term market rates is also an important component of net interest income. In 1993, that spread averaged well above prior years' experience and, while management does not expect a return to historic levels, some compression of the prime spread is anticipated. CoreStates has approximately $6 billion in loans subject to changes in prime, excluding the credit card portfolio which floats with prime only at higher rate levels. 27 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations:continued ASSET AND LIABILITY MANAGEMENT - continued The low rate environment of 1993 provided refinancing opportunities for many consumers and raised questions concerning the level of prepayment risk in many financial institutions. CoreStates' interest rate risk discipline has been to minimize prepayment risk by selling fixed-rate mortgages as created, and restricting purchases of mortgage related securities to short-term collateralized mortgage obligations, with limited cash flow variability. In 1993, CoreStates completed two transactions in which $207 million in longer term fixed-rate home equity loans were sold and securitized. These securitizations served both CoreStates' customers and shareholders by providing long-term fixed- rate financing to consumers, while reducing both credit and interest rate risk on the balance sheet. Off-Balance Sheet Instruments - CoreStates uses off-balance sheet instruments to hedge interest rate risk. Most activities are designed to be a substitute for the fixed rate assets which are necessary to balance the sensitivity of relationship business portfolios. CoreStates believes the management of interest rate risk must be balanced with the management of liquidity and capital and, therefore, off-balance sheet instruments are used to hedge interest rate risk and avoid unnecessary leverage and liquidity impairment. The required level of fixed-rate asset sensitivity could be achieved principally with on-balance sheet investment securities. The amount recorded in net interest income related to interest rate swaps was income of $114.7 million in 1993, $122.9 million in 1992 and $68.5 million in 1991. If the alternative approach of on-balance sheet assets were used, it would not materially affect net interest income. CoreStates' use of financial futures is concentrated in short-term LIBOR and Eurodollar contracts although longer term contracts are occasionally used to hedge anticipatory transactions. CoreStates uses interest rate swaps in both short and longer term maturities to offset on-balance sheet interest rate risk and, as of December 31, 1993, does not use index amortizing swaps. In addition to its hedging portfolio; CoreStates also offers interest rate swaps as a risk management tool to commercial customers; however, customer transactions represent only 10% of the portfolio and are generally offset with swaps of similar terms. The following table reflects the future repricing schedule of CoreStates' interest rate swap portfolio at December 31, 1993:
Repricing Schedule of Interest Rate Swaps - ----------------------------------------- At December 31, 1993 - -------------------- (in millions) CoreStates receives CoreStates pays --------------- ------------- Notional Notional amount Rate amount Rate -------- ---- -------- ---- 0-1 year $1,126 5.69% $3,818 3.52% 1-2 years 691 6.65 149 6.46 2-3 years 890 7.31 230 6.30 3-4 years 496 6.01 90 4.59 4-5 years 401 5.76 13 6.61 over 5 years 696 6.23 ------ ------ Total $4,300 6.31% $4,300 3.80% ====== ==== ====== ====
28 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued ASSET AND LIABILITY MANAGEMENT - continued In addition to using interest rate swaps to hedge the relationship gap, interest rate swaps have also been used to convert long-term fixed rate debt to a floating rate sensitivity, accounting for most of the swaps maturing beyond five years in the preceding table. CoreStates evaluates the credit worthiness of all off-balance sheet counterparties using the same standards applied in any other loan or credit transaction, and credit risk in these positions is centrally managed and controlled by the Credit Policy Group. The current credit exposure in a derivative transaction is the cost to replace the transaction at current market rates, while potential exposure is the estimated cost to replace the transaction at future rates. CoreStates continually monitors both current and potential risk. As of December 31, 1993, the current cost to replace CoreStates' interest rate swap portfolio was $154 million. 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. 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 67.4% of assets in 1993 compared to 68.4% in 1992. This decline is a result of increased loan volumes and relatively no growth in core deposits. 29 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued ASSET AND LIABILITY MANAGEMENT - continued 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, the non-bank commercial finance subsidiary. In addition to commercial paper, Congress is funded through the issuance of medium-term notes and long-term debt. Growth in loans at Congress during 1993 resulted in increases in these funding sources while loan growth in the banking subsidiaries accounted for the growth in other discretionary sources. CoreStates' liquidity is further enhanced by its ability to raise funds in a variety of domestic and international money and capital markets. During 1993, CoreStates issued $375 million in new subordinated long- term debt with maturities of 10 to 12 years. Under existing shelf registration statements filed with the Securities and Exchange Commission ("SEC"), CoreStates had debt and capital securities that were registered but unissued of approximately $177 million at December 31, 1993. In February 1994, CoreStates' Board of Directors approved the filing of a shelf registration with the SEC that will, when effective, cover the issuance of a broad range of debt and equity securities that will increase available registered but unissued securities to $1 billion. The tables on pages 83 and 85-86 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. 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. CoreStates generally has both the ability and the intent to hold these securities until maturity. In 1993, the Financial Accounting Standards Board issued statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("FAS 115"). As a result of adopting FAS 115 on December 31, 1993, CoreStates has reclassified $545 million of investment securities as "Available-for-Sale". These investment securities were marked to fair value, adding $64.8 million after-tax to shareholders' equity as of December 31, 1993. These securities include a bank stock portfolio and other marketable equity securities, as well as certain debt securities which CoreStates foresees as potential candidates for sale prior to maturity. CoreStates' Available-for-Sale account guidelines establish a minimum and maximum amount of debt and equity securities which can be carried as Available- for-Sale. The intent of the minimum guideline is to establish an amount of debt securities as Available-for-Sale to meet liquidity and balance sheet management concerns. The maximum is established to protect against capital ratio deterioration, while providing portfolio management flexibility. 30 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued SOURCES AND USES OF FUNDS Total assets were $23.7 billion at year-end 1993, substantially unchanged from year-end 1992. However, comparing specific asset categories to year-end 1992 balances reflects recovering loan demand, as loans increased $893 million or 5.8%, and a $122 million, or 4.7%, increase in investment securities, mostly due to the FAS 115 recognition of unrealized net appreciation in Available-for- Sale securities. Time deposits declined $493 million or 27.9%. The increase in loans was primarily due to improved demand across CoreStates' lending products. A $528 million, or 4.9%, decline in interest bearing deposits, principally the result of the September 30, 1993 sale of the five Virgin Islands branches, was offset by growth of $188 million, or 3.2% in demand deposits, an increase of $202 million, or 16.1% in long-term debt, and retained earnings. Total assets averaged $22.8 billion in 1993, an increase of $476 million or 2.1% from 1992. Average loans increased $262 million, or 1.7% and average investment securities increased $327 million or 13.9%. As reflected in the chart on Earning Asset Mix, loans comprised 79.5% of CoreStates' average earning assets in 1993, compared to 79.3% in 1992, ending two consecutive years of declining average loan outstandings. Funding for the increase in average assets was provided by non-interest bearing funding sources. Earning Asset Mix ----------------- Plotting Points for Graph ------------------------- (Percentage of average earning assets)
Earning Asset Mix --------------------------------- Money Investment Market Securities Loans ------- ----------- ----------- 1993 6.9% 13.6% 79.5% 1992 8.6 12.1 79.3 1991 6.7 10.5 82.8 1990 3.9 10.0 86.1 1989 6.1 12.7 81.2
The accompanying chart on Funding Mix illustrates that 54.3% of CoreStates' funds were derived from consumer deposits in 1993, compared with 57.8% in 1992. Funding to accommodate current business needs and future growth at non-bank subsidiaries will continue to be supported by the previously discussed SEC shelf registration. Funding Mix ----------- Plotting Points for Graph ------------------------- (Percentage of average earnings assets*)
Funding Mix ------------------------------- Other Non- Retail Interest Interest Deposits Bearing Bearing --------- --------- --------- 1993 54.3% 15.6% 30.1% 1992 57.8 13.7 28.5 1991 52.8 24.4 22.8 1990 47.3 31.2 21.5 1989 45.5 31.4 23.1
* excluding short-term money market investments 31 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 Although operating revenue for 1993 was significantly impacted by the December 1992 EPS transaction and other significant items, CoreStates' operating revenue reflected strong growth in revenues in Wholesale Banking and in fee- based businesses. Excluding EPS related revenues in 1993 and 1992, net gains on investment securities transactions, pre-tax gains of $11.0 million from the Virgin Islands branch sale and $9.1 million on prepayments of long-term debt in 1993, and the $41.1 million pre-tax gain recorded on the December 1992 EPS transaction, operating revenue increased 7.5% for 1993. Operating revenue has three major components and, as illustrated on the accompanying chart ("Operating Revenue"), net interest income from loans and investments is the largest component. Net interest income is presented excluding the earnings benefit of balances maintained by commercial customers as compensation for transaction oriented non-credit products. The two other components of operating revenue are non-interest income and the previously mentioned earnings benefit of balances maintained as compensation for non-credit products. Net interest income and non-interest income are discussed in further detail on the following pages .
Operating Revenue ----------------- Plotting Points for Graph ------------------------- (tax equivalent net interest income plus non-interest income-in millions) Operating Revenue --------------------------------------- Derived Loan & from Non- Investment Non-credit Interest Interest Balances Income Total ---------- ----------- -------- -------- 1993 $1,031.3 $ 110.1 $ 503.1 $1,644.5 1992 963.1 121.6 546.5 1,631.2 1991 988.0 134.0 541.6 1,663.6 1990 978.7 122.7 412.8 1,514.2 1989 943.5 116.6 379.3 1,439.4
Net Interest Income
Taxable Equivalent Net Interest Income Percentage (in millions) increase(decrease) ------------------ 1993 1992 1991 '93/'92 '92/'91 -------- -------- -------- ------ -------- Total interest income $1,510.5 $1,587.4 $2,021.9 (4.8)% (21.5)% Tax equivalent adjustment 23.5 27.6 35.6 (14.9) (22.5) -------- -------- -------- Tax equivalent interest income 1,534.0 1,615.0 2,057.5 (5.0) (21.5) Total interest expense 392.6 530.3 935.5 (26.0) (43.3) -------- -------- -------- Tax equivalent net interest income $1,141.4 $1,084.7 $1,122.0 5.2 (3.3) ======== ======== ======== Interest rate spread 5.04% 4.65% 4.28% ======== ======== ======== Net interest margin 5.82% 5.61% 5.53% ======== ======== ======
32 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued Net Interest Income - continued 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 $56.7 million, or 5.2% in 1993, following a decrease of $37.3 million, or 3.3% in 1992. The increase in net interest income in 1993 principally reflects the impact of a $288 million increase in average interest earning assets. Also contributing to the increase in net interest income were wider interest rate spreads, a $.5 billion increase in non-interest bearing funding sources, the earnings impact of lower levels of non-performing loans and cash basis interest received on non- performing loans. The interest rate spread increased in 1993 mostly due to a decline in the rates paid on domestic deposits of 105 basis points, while the rates earned on domestic loans decreased 39 basis points. The decrease in net interest income for 1992 was the result of reduced domestic loan volume. On average, domestic loans decreased $1.5 billion from 1991, mostly due to the $1 billion October 1991 credit card sale and the $300 million May 1992 consumer installment loan sale. Partially offsetting the decline in interest income attributable to lower domestic loan volume was the impact of a $.7 billion increase in non-interest bearing funding sources. 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 21 basis points in 1993 to 5.82%. This increase was principally related to improved interest rate spreads which resulted from the continued decline of interest rates in 1993 and from the shift in funding mix to lower cost funding. The migration of consumer deposits from certificates of deposit to more liquid and less costly deposit products contributed to the reduction in 1993 funding costs. The low rate environment in 1993 also provided CoreStates with the opportunity to reprice these deposit products at lower rates and to refinance $325 million in long-term debt. For further detailed information regarding average balances, yields and costs, see the consolidated average balance sheet on pages 71-74, and the rate/volume analysis on page 78. 33 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued
Non-Interest Income Percentage (in millions) increase(decrease) -------------------- 1993 1992 1991 '93/'92 '92/'91 ------- ------ ------ ------ ------ Basic banking transactional services(1) $ 381.2 $349.4 $323.0 9.1% 8.2% EPS related revenues (2) 13.2 92.5 101.6 (85.7) (9.0) Securities gains (losses) 15.7 13.4 (17.5) Other non-interest income 93.0(3) 91.2(4) 134.5(5) 2.0 (32.2) ------- ------ ------ Total non-interest income $ 503.1 $546.5 $541.6 (7.9) .9 ======= ====== ====== - -------------------------------------------------------------------------------------------
(1) Comprised of debit and credit card fees, service charges on deposit accounts, trust income, and fees for international services. (2) Includes EPS joint venture preferred dividends and CoreStates' share in the net income of the EPS joint venture in 1993, and for 1992 and 1991, MAC and POS revenues, the businesses contributed to the joint venture in December 1992. (3) Includes pre-tax gains of $11.0 million recorded on the sale of five Virgin Islands branches and $9.1 million on prepayments of long-term debt. (4) Includes a $41.1 million pre-tax gain recorded on the EPS transaction. (5) Includes an $86.6 million pre-tax gain recorded on the sale of approximately $1 billion of credit card receivables. While reported total non-interest income decreased $43.4 million or 7.9% in 1993, following an increase of $4.9 million, or .9% in 1992, total non-interest income in 1993 excluding unusual and significant items increased more than 13% over 1992. Comparability between 1993 and 1992 was affected by the following items: the $11.0 million gain on the sale of five Virgin Islands branches in 1993; gains of $9.1 million on prepayments of long-term debt in 1993; securities gains; and the December 1992 restructuring of CoreStates' MAC and POS consumer electronic payment business into EPS. As a result of the EPS restructuring, CoreStates' Statement of Income in 1993 reflects a significant decline in debit and credit card fees and includes $13.2 million, reflecting EPS' preferred stock dividends and CoreStates' 31% equity share in the net income of the EPS joint venture. For analytical purposes, fees generated by the MAC and POS businesses have been reclassified from the debit and credit card fee category in the preceding table in 1992 and 1991. POS and MAC revenues in 1993 were recorded by EPS. Included in other non-interest income in 1993 was $17.5 million of fees earned by Financial Telesis, a third-party provider of lockbox processing and data management services, which was acquired by CoreStates on December 31, 1992. Other non-interest income in 1992 included the $41.1 million pre-tax gain recorded on the EPS transaction. Excluding the impact of securities gains and losses, EPS related revenues and the $86.6 million pre-tax gain recorded on the October 1991 credit card sale, total non-interest income in 1992 increased more than 7% over 1991. CoreStates recorded net securities gains of $15.7 million in 1993 and $13.4 million in 1992, compared with net securities losses of $17.5 million in 1991. Investment securities gains for 1993 included $12.8 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. Investment securities gains for 1992 included $3.6 million of gains recorded on sales of certain investments acquired with First Peoples Corporation in September 1992, $5.3 million of gains recorded on the partial sale of a foreign equity investment, and $1.7 million of gains recorded on sales of certain investments in a portfolio of bank stocks. Included in 1991 securities losses were $22.8 million of pre-tax write-downs taken against the portfolio of bank stocks. 34 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 9.1% in 1993, following growth of 8.2% in 1992. Service charges on deposits continued to be the most significant contributor to the growth, increasing $17.9 million, or 12.6%, in 1993 and $22.1 million, or 18.3% in 1992. The components of basic banking transactional services are discussed in detail below. . Service charges on deposit accounts, paid in fees, increased $17.9 million, or 12.6%, in 1993 and $22.1 million, or 18.3%, in 1992 reflecting added volume and many commercial and correspondent customers' decisions to pay fees for banking services in place of maintaining deposit balances. 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 1993 was $270.7 million, up $6.4 million, or 2.4%, from 1992. The benefit derived from deposit balances maintained by commercial and correspondent customers decreased $12.5 million from 1992 due to the decline in the value of maintaining balances in the lower 1993 interest rate environment. Total service charge compensation on this basis for 1992 was $264.3 million, an increase of $9.7 million or 3.8% over 1991. . Fees for international services increased $8.2 million, or 13.6%, in 1993, as compared with an increase of $13.0 million, or 27.4%, in 1992. The high growth in revenues for 1993 was principally due to increased volume from new branch offices opened over the past year. The prior period increase was primarily related to product volume growth for traditional cash management products including: funds transfer; trade payment services; and reimbursement collection services. International non-credit product volume growth, particularly foreign exchange fees, continued to be responsible for high gross revenue increases in 1993 and 1992. . Trust income increased $4.5 million, or 5.0%, in 1993 following a slight decline of $.6 million, or .7%, in 1992. Growth in assets and related fees in the Personal Trust, Investment Services, and Employee Benefit areas contributed to 1993 fee growth. The decline in 1992 trust income was principally attributable to the loss of several large customers and the impact of lower interest rates. . Debit and credit card fees increased $1.2 million, or 2.0% in 1993, following a decrease of $8.0 million, or 12.4%, in 1992. For analytical purposes, fees generated by the MAC and POS businesses, which were contributed to the EPS joint venture in December 1992, have been reclassfied from the debit and credit card fee category in the table on page 34 in 1992 and 1991. Credit card fees were up $.9 million, or 3.4%, for 1993 following a decline of $14.1 million, or 36.2%, for 1992. The 1992 decline was mostly due to the sale of approximately 560,000 accounts in the fourth quarter of 1991. At year-end 1993, CoreStates' credit card portfolio included approximately 575,000 active accounts, compared to 546,000 active accounts at year-end 1992. Merchant processing services fees in 1993 were level with 1992, following growth of $3.1 million or 21.2% in 1992. 35 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued Non-Interest Income - continued Other operating income, including gains on trading account securities and other gains, increased $1.8 million in 1993, following a decrease of $43.3 million in 1992. Other operating income in 1993 included pre-tax gains of $11.0 million on the Virgin Islands branch sale and $9.1 million on prepayments of long-term debt, and $17.5 million of fees earned by Financial Telesis. Other operating income in 1992 included the $41.1 million pre-tax gain recorded on the EPS transaction, while 1991 included the $86.6 million pre-tax gain recorded on the sale of credit cards. Gains on trading account securities were $2.3 million in 1993, as compared with $1.8 million in 1992 and $2.6 million in 1991.
Non-Financial Expenses Percentage (in millions) increase(decrease) --------------------- 1993 1992 1991 '93/'92 '92/'91 -------- -------- -------- ------ ------ Salaries, wages and benefits $ 535.9 $ 537.8 $ 522.8 (.4)% 2.9% Net occupancy expense 99.5 96.8 104.7 2.8 (7.5) Equipment expense 63.5 72.0 72.9 (11.8) (1.2) Other operating expenses 334.5 388.0 395.7 (13.8) (1.9) -------- -------- -------- Total non-financial expenses $1,033.4 $1,094.6 $1,096.1 (5.6) (.1) ======== ======== ========
While reported total non-financial expenses in 1993 of $1,033.4 million reflected a decrease of 5.6% from 1992, excluding significant and unusual items as noted below for both years, non-financial expenses for 1993 increased less than 6% over 1992. Expenses incurred by Financial Telesis in 1993 accounted for one-third, or 2%, of the increase over 1992. Comparability of 1993 and 1992 total non-financial expenses is affected by certain significant expenses recorded in each year. In 1993, total non-financial expenses included: a $10.0 million restructuring charge related to the formation of Transys; and $12.1 million for write-downs against other real estate owned. In 1992, total non- financial expenses included: $16.2 million for systems enhancements and operations consolidations; $21.3 million for write-downs against other real estate owned $7.4 million of expenses associated with personnel related initiatives; and $4.5 million for streamlining business operations. Comparability of 1993 and 1992 is also impacted by the formation of EPS, as total non-financial expenses for 1992 included eleven months of expenses related to the MAC and POS businesses which were contributed to EPS in December 1992. Comparability for 1992 and 1991 is also affected by the significant 1992 operating costs, as described above, by the EPS transaction, as an additional month's expenses for MAC and POS would have added approximately $8.6 million to 1992 non-financial expenses, and by several significant expenses recorded in 1991. In 1991, non-financial expenses included the following items: $29.3 million of write-offs against other real estate owned; and $27.1 million associated with the costs of systems enhancements and conversions, streamlining business operations, and write-downs of certain assets no longer required in the streamlined operations. Excluding these items for both years, non-financial expenses for 1992 were approximately level with 1991. 36 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued Non-Financial Expenses: continued Salaries, wages and benefits decreased .4% in 1993, compared to an increase of 2.9% in 1992. The decrease in 1993 salary expense was principally attributable to the transfer of employees in the MAC and POS businesses to EPS, partially offset by an increase in employee related expenses of $11.7 million due to the acquisition of Financial Telesis. The increase in 1992 was attributable to the $9.1 million impact of adopting FAS 106 in that year, and recording $7.4 million of expenses associated with personnel related initiatives, including a fourth quarter stock distribution making all employees with service of one year or longer shareholders. The number of full-time equivalent employees at December 31, 1993, 1992 and 1991 was: 13,715; 13,782; and 13,997, respectively. Net occupancy expense increased 2.8% in 1993, compared to a decline of 7.5% in 1992. Equipment expenses declined 11.8% in 1993, compared to a decline of 1.2% in 1992. The decline in combined 1993 net occupancy and equipment expense was primarily due to the formation of the EPS joint venture. The 1992 declines were mostly due to the costs recorded in 1991 associated with streamlining business operations and the May 1992 sale of Signal assets. Other operating expenses declined 13.8% in 1993. Comparability of 1993 and 1992 other operating expenses is affected by the formation of EPS and certain significant expenses recorded in each year. The decline in 1993 is principally attributable to $45.4 million of MAC and POS expenses recorded in 1992, partially offset by: a $10.0 million restructuring charge for Transys; $4.2 million of expenses recorded by Financial Telesis; and $12.1 million in write- downs against other real estate owned. Other operating expenses in 1992 included: $16.2 million for systems enhancements and operations consolidations; $21.3 million for write-downs against other real estate owned; and $4.5 million for streamlining business operations. Excluding the impact of these items for both years, other operating expenses increased less than 3% in 1993. Other operating expenses in 1992 declined 1.9%. Much of the decline was due to significant expenses recorded in 1991, including the following items: $34.3 million in acquisition-related operating costs; $29.3 million of write- offs against other real estate owned; and $18.5 million associated with the costs of systems enhancements and conversions, streamlining business operations, and write-downs of certain assets no longer required in the streamlined operations. Excluding the impact of these items for both years, other operating expenses increased less than 1% over 1991. Provision for Income Taxes The provision for income taxes was $159.7 million in 1993 compared to $127.3 million in 1992 and $113.6 million in 1991. The $32.4 million increase in total tax expense for 1993 was primarily the result of a $97.9 million increase in pre-tax income and higher income at subsidiaries subject to state income tax. The provision for income taxes for 1993, 1992 and 1991 were at effective rates of 32.7%, 32.7% and 33.3%, respectively. The impacts of the 1% retroactive increase in the 1993 Federal corporate tax rate, higher state tax expense and lower tax exempt income were offset by the FAS 109 revaluation of CoreStates' net deferred tax asset, reflecting the increased Federal tax rate and a higher dividends received deduction. 37 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, 1993, 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 judgements 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, 1993. 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, 1993. /s/ David C. Carney Chief Financial Officer /s/ Terrence A. Larsen Chairman and Chief Executive Officer 38 CORESTATES FINANCIAL CORP AND SUBSIDIARIES INDEPENDENT ACCOUNTANT'S 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, 1993 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 1993 consolidated financial statements of CoreStates Financial Corp. Over 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, 1993, insofar as management's assertion relates to the internal control structure over the annual financial reporting in the 1993 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 Philadelphia, Pennsylvania March 15, 1994 39 CORESTATES FINANCIAL CORP AND SUBSIDIARIES 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, 1993 and 1992, 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, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CoreStates Financial Corp at December 31, 1993 and 1992, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. As discussed in Note 1 to the financial statements, in 1993 the Company changed its methods of accounting for certain investments in debt and equity securities and for postemployment benefits, and in 1992 the Company changed its method of accounting for income taxes and for postretirement benefits other than pensions. /s/Ernst & Young Philadelphia, Pennsylvania February 1, 1994 40 CoreStates Financial Corp and Subsidiaries CONSOLIDATED STATEMENT OF INCOME (in thousands, except per share amounts)
Year Ended December 31, ------------------------------------ INTEREST INCOME 1993 1992 1991 ---------- ---------- ---------- Interest and fees on loans: Taxable income........... $1,283,310 $1,320,409 $1,718,041 Tax exempt income........ 25,431 31,755 41,198 Interest on investment securities: Taxable income........... 138,033 146,731 148,166 Tax exempt income........ 18,208 21,982 27,983 Interest on time deposits in banks.................. 43,049 55,635 73,132 Interest on Federal funds sold, securities purchased under agreements to resell and other........ 2,480 10,848 13,337 ---------- ---------- ---------- Total interest income.......... 1,510,511 1,587,360 2,021,857 ---------- ---------- ---------- INTEREST EXPENSE Interest on deposits: Domestic savings......... 95,048 158,571 244,373 Domestic time (Note 9)... 153,301 215,956 368,095 Overseas branches and subsidiaries............ 18,248 28,319 76,929 ---------- ---------- ---------- Total interest on deposits..... 266,597 402,846 689,397 Interest on short-term funds borrowed (Note 10).. 64,441 56,709 164,009 Interest on long-term debt (Note 11)................. 61,572 70,759 82,058 ---------- ---------- ---------- Total interest expense......... 392,610 530,314 935,464 ---------- ---------- ---------- Net interest income.......... 1,117,901 1,057,046 1,086,393 Provision for losses on loans (Note 7)............ 100,000 119,300 190,601 ---------- ---------- ---------- Net interest income after provision for losses on loans........ 1,017,901 937,746 895,792 ---------- ---------- ---------- NON-INTEREST INCOME Service charges on deposit accounts.................. 160,578 142,672 120,602 Trust income............... 94,294 89,833 90,482 Fees for international services.................. 68,447 60,247 47,275 Debit and credit card fees. 57,835 149,154 166,231 Income from investment in EPS, Inc. (Note 20)....... 13,159 Gains on trading account securities................ 2,254 1,836 2,613 Securities gains (losses) (Note 5).................. 15,699 13,407 (17,546) Other gains (Notes 6 and 20)....................... 11,000 41,072 86,609 Other operating income..... 79,789 48,288 45,380 ---------- ---------- ---------- Total non-interest income.......... 503,055 546,509 541,646 ---------- ---------- ---------- NON-FINANCIAL EXPENSES Salaries, wages and benefits (Notes 12 and 13) 535,939 537,755 522,828 Net occupancy (Notes 8 and 14)....................... 99,511 96,751 104,667 Equipment expenses (Note 8) 63,491 72,042 72,915 Other operating expenses (Note 16)................. 334,434 388,043 395,709 ---------- ---------- ---------- Total non-financial expenses........ 1,033,375 1,094,591 1,096,119 ---------- ---------- ---------- INCOME BEFORE INCOME TAXES. 487,581 389,664 341,319 Provision for income taxes (Note 16)................. 159,654 127,260 113,573 ---------- ---------- ---------- INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE.... 327,927 262,404 227,746 Cumulative effect of a change in accounting principle, net of income tax benefits of $7,005 in 1993 and $41,720 in 1992 (Note 12)......... (13,010) (80,986) ---------- ---------- ---------- NET INCOME................. $ 314,917 $ 181,418 $ 227,746 ========== ========== ========== PER COMMON SHARE DATA (Based on weighted average shares outstanding of 117.319 million in 1993, 115.600 million in 1992 and 113.624 million in 1991) Income before cumulative effect of a change in accounting principle.... $2.80 $2.27 $2.00 ========== ========== ========== Net Income................. $2.69 $1.57 $2.00 ========== ========== ========== Cash dividends declared.... $1.14 $1.02 $0.97 ========== ========== ==========
See accompanying notes to the financial statements. 41 CoreStates Financial Corp and Subsidiaries
CONSOLIDATED BALANCE SHEET (in thousands) December 31, ------------------------- 1993 1992 ----------- ----------- ASSETS Cash and due from banks (Note 4)........................ $ 2,362,630 $ 2,302,137 Time deposits, principally Eurodollars.................. 1,273,373 1,766,727 Investment securities (market value: 1993-$2,760,608; 1992-$2,700,897) (Note 5)............................. 2,731,771 2,610,191 Total loans, net of unearned discounts of $117,293 in 1993 and $161,070 in 1992 (Note 6)........ 16,362,785 15,469,571 Less: Allowance for loan losses (Note 7).............. (347,547) (322,483) ----------- ----------- Net loans..................................... 16,015,238 15,147,088 Federal funds sold and securities purchased under agreements to resell.................................. 3,027 105,490 Trading account securities.............................. 6,393 2,796 Due from customers on acceptances....................... 331,411 632,564 Premises and equipment (Note 8)......................... 353,584 343,140 Other assets (Note 20).................................. 588,134 788,965 ----------- ----------- Total assets.................................. $23,665,561 $23,699,098 =========== =========== LIABILITIES Deposits: Domestic: Non-interest bearing................................ $ 6,008,016 $ 5,820,098 Interest bearing (Note 9)........................... 10,148,185 10,675,906 Overseas branches and subsidiaries (Note 9)........... 796,902 766,119 ----------- ----------- Total deposits................................ 16,953,103 17,262,123 Short-term funds borrowed (Note 10)..................... 1,836,409 1,778,042 Bank acceptances outstanding............................ 336,357 635,132 Other liabilities (Note 12)............................. 1,125,175 1,066,956 Long-term debt (Note 11)................................ 1,455,036 1,253,359 ----------- ----------- Total liabilities............................. 21,706,080 21,995,612 ----------- ----------- COMMITMENTS AND CONTINGENT LIABILITIES (Note 15) SHAREHOLDERS' EQUITY (Notes 11, 13 and 19) Common stock: $1 par value; authorized 200.0 million shares; issued 117.9 million shares in 1993 and 117.0 million shares in 1992 (including treasury shares of .4 million in 1993 and .2 million in 1992).. 1,959,481 1,703,486 ----------- ----------- Total shareholders' equity.................... 1,959,481 1,703,486 ----------- ----------- Total liabilities and shareholders' equity....................................... $23,665,561 $23,699,098 =========== ===========
See accompanying notes to the financial statements. 42 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, 1990...................... $ 57,322 $510,161 $ 899,973 $(23,815) $1,443,641 Net income................. 227,746 227,746 Net change in unrealized loss on marketable equity securities, net of tax (Note 5)................ 21,390 21,390 Treasury shares acquired (73 shares)............... (3,051) (3,051) Common stock issued under employee benefit plans (397 shares)....... 4 881 (3,038) 14,670 12,517 Common stock issued under dividend reinvestment plan (120 shares)........ 549 4,485 5,034 Foreign currency translation adjustments... 674 674 Common dividends declared.. (109,479) (109,479) --------- -------- ---------- --------- ---------- Balances at December 31, 1991...................... 57,326 511,591 1,037,266 (7,711) 1,598,472 Net income................. 181,418 181,418 Net change in unrealized gain in marketable equity securities, net of tax (Note 5)......... 236 236 Treasury shares acquired (30 shares)............... (1,480) (1,480) Common stock issued under employee benefit plans (944 shares)....... 918 27,262 (79) 777 28,878 Common stock issued under dividend reinvestment plan (390 shares)........ 279 13,030 4,288 17,597 Conversion of subordinated debt...................... (45) 245 200 Foreign currency translation adjustments... (4,384) (4,384) Common dividends declared.. (117,451) (117,451) --------- -------- ---------- --------- ---------- Balances at December 31, 1992...................... 58,523 551,883 1,096,961 (3,881) 1,703,486 Net income................. 314,917 314,917 Issuance of shares in connection with a 100% common stock dividend........... 58,929 (58,929) Net unrealized gain on investments available-for-sale, net of tax (Note 5)...... 64,845 64,845 Acquisition of Inter Community Bancorp (Note 2) (213) 17,459 17,246 Treasury shares acquired (1,060 shares)............ (28,734) (28,734) Common stock issued under employee benefit plans (536 shares)....... 268 9,604 (1,421) 4,156 12,607 Common stock issued under dividend reinvestment plan (276 shares)........ 138 7,433 (101) 3,181 10,651 Foreign currency translation adjustments... (1,758) ( 1,758) Common dividends declared.. (133,779 (133,779) --------- -------- ---------- --------- ---------- Balances at December 31, 1993...................... $ 117,858 $509,991 $1,339,451 $ (7,819) $1,959,481 ========= ======== ========== ========= ==========
See accompanying notes to the financial statements. 43 CoreStates Financial Corp and Subsidiaries CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
Year Ended December 31, ---------------------------------------- 1993 1992 1991 ---------- --------- ---------- OPERATING ACTIVITIES Net income.................................. $ 314,917 $ 181,418 $ 227,746 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of a change in accounting principle (Note 12)........ 13,010 80,986 Provision for losses on loans........... 100,000 119,300 190,601 Depreciation and amortization........... 60,368 80,440 99,331 Deferred income tax expense (benefit)... (17,861) 29,545 43,695 Securities (gains) losses (Note 5) (15,699) (13,407) 17,546 Other gains (Notes 6 and 20)............ (11,000) (41,072) (86,609) Increase in due to factored clients..... 147,072 1,923 12,976 Proceeds from contribution of assets to EPS joint venture (Note 20)........ 79,350 Decrease in interest receivable......... 862 34,907 50,373 Decrease in interest payable............ (3,282) (54,243) (50,909) Other................................... 60,720 90,373 46,901 ------------ ----------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES... 649,107 589,520 551,651 ------------ ----------- ---------- INVESTING ACTIVITIES Net (increase) decrease in loans (Note 6)... (1,207,432) 4,674 495,900 Proceeds from sales of loans (Note 6)....... 518,103 316,876 1,290,264 Loans originated or acquired-non-bank subsidiaries.............................. (24,712,336) (16,561,468) $(11,675,599) Principal collected on loans-non-bank subsidiaries.............................. 24,411,312 16,364,389 11,563,639 Net (increase) decrease in time deposits, principally Eurodollars................... 493,354 (175,463) (445,574) Purchases of investment securities.......... (1,677,635) (1,496,900) (1,018,184) Proceeds from sales of investment securities (Note 5)....................... 368,259 192,911 236,018 Proceeds from maturities of investment securities................................ 1,360,810 972,624 597,521 Net (increase) decrease in Federal funds sold and securities purchased under agreements to resell..................... 102,463 58,010 (9,426) Purchases of premises and equipment......... (102,540) (41,832) (72,064) Proceeds from sales and paydowns on other real estate owned......................... 36,256 41,152 13,614 Other....................................... 3,878 14,445 (86,416) ------------ ----------- ------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.............................. (405,508) (310,582) 889,693 ------------ ----------- ------------ FINANCING ACTIVITIES Net increase (decrease) in deposits......... (309,020) 274,133 (542,513) Long-term debt issued (Note 11)............. 886,371 297,550 626,145 Retirement of long-term debt................ (683,266) (198,130) (258,500) Net increase (decrease) in short-term funds borrowed............................ 58,367 (165,733) (1,571,466) Cash dividends paid......................... (130,082) (113,335) (108,188) Other....................................... (5,476) 44,995 14,500 ------------ ----------- ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.............................. (183,106) 139,480 (1,840,022) ------------ ----------- ------------ INCREASE (DECREASE) IN CASH AND DUE FROM BANKS................................... 60,493 418,418 (398,678) Cash and due from banks at January 1,..... 2,302,137 1,883,719 2,282,397 ------------ ----------- ------------ CASH AND DUE FROM BANKS AT DECEMBER 31,..... $ 2,362,630 $ 2,302,137 $ 1,883,719 ============ =========== ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest................................... $ 395,892 $ 584,557 $ 986,408 ============ =========== ============ Income taxes............................... $ 160,116 $ 117,452 $ 41,343 ============ =========== ============
See accompanying notes to the financial statements. 44 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"); and CoreStates Bank of Delaware, N.A. ("CBD"). All material intercompany transactions have been eliminated. Certain amounts in prior years have been reclassified for comparative purposes. All common shares outstanding and per common share data have been restated to reflect the impact of the Corporation's 100% stock dividend declared on August 17, 1993, and paid on October 15, 1993 to shareholders of record on September 15, 1993 ("the Stock Dividend"). An amount equal to the par value of the shares issued in connection with the Stock Dividend was transferred from capital surplus to common stock. At the annual shareholders' meeting on April 20, 1993, an increase in the number of authorized shares of common stock from 80,000,000 to 200,000,000 was approved. Changes in accounting principles 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 $.11 per share, as the cumulative effect of a change in accounting principle. Effective December 31, 1993, the Corporation adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("FAS 115"). FAS 115 established the accounting and reporting requirements for investments in equity securities that have readily determinable fair values and for all investments in debt securities. All affected investment securities must be classified as either held-to-maturity, trading, or available-for-sale. Held-to-maturity securities are carried at amortized cost basis. Trading securities are carried at fair value with unrealized holding gains and losses reported in the income statement. Available-for-sale securities are carried at fair value with unrealized holding gains and losses reported as a component of shareholders' equity. As a result of adopting FAS 115, securities with an original carrying value of $544,507 were classified as available-for-sale at December 31, 1993 and were written up to their aggregate fair value of $644,269. After the related tax effects, shareholders' equity at December 31, 1993 was increased by $64,845 to reflect the write-up of these securities to fair value. Effective January 1, 1992, the Corporation adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("FAS 106"). FAS 106 requires that employers accrue the costs associated with providing postretirement benefits during the active service periods of employees. As permitted under FAS 106, the Corporation elected to immediately recognize the January 1, 1992 transitional liability of $122,706, $80,986 after-tax or $.70 per share, as the cumulative effect of a change in accounting principle. Income taxes In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). In the first quarter of 1992 the Corporation retroactively adopted FAS 109 as of January 1, 1987. Under the asset and liability method provided for by FAS 109, deferred tax assets and liabilities are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The Corporation and its subsidiaries file a consolidated Federal income tax return. 45 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Continued Investment securities Held-to-maturity securities are carried at cost adjusted for amortization of premiums and accretion of discounts, both computed on the interest method. Held-to-maturity securities primarily consist of debt securities. The Corporation has both the ability and positive intent to hold these securities until maturity. Trading account securities are carried at market values. Gains on trading account securities include both realized and unrealized gains and losses on the portfolio. Debt securities not classified as held-to-maturity or trading and marketable equity securities are classified as available-for-sale. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax, reported as a component of shareholders' equity. The accumulated net unrealized gain on available-for-sale securities included in retained earnings was $64,845 at December 31, 1993. The adjusted cost of a specific certificate sold is the basis for determining realized securities gains and losses as included in the consolidated statement of income in "non-interest income". Interest and dividends on investment securities are recognized as income when earned. Loans Interest on commercial loans is recognized on the daily principal amounts outstanding. Loan fees are generally considered as adjustments of interest rate yields and are amortized into interest income on loans over the terms of the related loans. Interest on installment loans is principally recognized on the interest method. Commercial loans are placed on a non-accrual status, generally recognizing interest as income when received, when, in the opinion of management, the collectibility of principal or interest becomes doubtful. The deferral or non- recognition of interest does not constitute forgiveness of the borrower's obligation. In those cases where collection of principal is in doubt, additions are made to the allowance for loan losses. Allowance for loan losses The allowance for loan losses is based on management's evaluation of the effects on the loan portfolio of current economic and political conditions and other pertinent indicators. Activities in foreign countries may involve special risks not normally a part of domestic operations. Credit review personnel and senior officers evaluate the loan portfolio by determining the net realizable value of collateral and the financial strength of borrowers. Installment and credit card loans are evaluated largely on the basis of delinquency data because of the number of such loans and the relatively small size of each individual loan. Additions to the allowance arise from the provision for loan losses charged to operations or from the recovery of amounts previously charged off. Loan charge- offs reduce the allowance. Loans are charged off when there has been permanent impairment of the related carrying values. 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. 46 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Continued International operations Forward exchange contracts are valued at current rates of exchange. Gains or losses on forward exchange contracts intended to hedge an identifiable foreign currency commitment are deferred and included in the measurement of the related foreign currency transaction. All other gains or losses on forward exchange contracts are included in the consolidated statement of income. Currency gains and losses in connection with foreign loans and deposit contract transactions, which are included in interest income and expenses, are recognized pro rata over the contract terms. Foreign currency translation adjustments are recorded directly to retained earnings. The cumulative foreign currency translation gain (loss) was $(1,623), $135 and $4,519 at December 31, 1993, 1992 and 1991, respectively. Interest rate contracts The Corporation uses various interest rate contracts such as, interest rate swaps, futures, forward rate agreements, caps and floors, primarily as hedges against specific assets, liabilities or anticipated transactions and to provide for the needs of its customers. For contracts designated as hedges, gains or losses are deferred and recognized as adjustments to interest income or expense of the underlying assets or liabilities. Gains or losses resulting from early terminations of 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. Other contracts are valued at market with gains or losses included in the consolidated income statement. Cash dividends declared per share Cash dividends declared per share for the periods prior to the acquisition of First Peoples Financial Corporation on September 3, 1992 assume that the Corporation would have declared cash dividends equal to the cash dividends per share actually declared by the Corporation. 47 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 2. ACQUISITIONS AND PROPOSED ACQUISITIONS On December 17, 1993, the Corporation purchased Inter Community Bancorp ("Inter Community"), a New Jersey bank holding company with $133 million in assets and $110 million in deposits at the time of the acquisition. As a result of this acquisition, 640 thousand shares of the Corporation's common stock was issued. The transaction had a total value of approximately $17 million and was accounted for under the purchase accounting method. Accordingly, the results of operations of Inter Community have been included with the Corporation since the date of acquisition. In December 1993, the Corporation announced a definitive agreement to purchase privately held Rittenhouse Financial Services, Inc. and the $35 million asset Rittenhouse Trust Company ("Rittenhouse") in a transaction involving the issuance of $55 million in equivalent Corporation common shares at closing. The Corporation plans to purchase these shares in the open market. The agreement also anticipates the issuance of up to $55 million in additional equivalent common shares based on Rittenhouse earnings growth over a five year period. Assuming approval by regulators, the transaction is expected to close in the second quarter of 1994. These acquisitions are not material to the financial position or results of operations and accordingly, pro forma information is deemed not necessary. In August 1993, the Corporation announced a definitive agreement to acquire Constellation Bancorp ("Constellation"), a New Jersey bank holding company with $2.3 billion in assets and $2.1 billion in deposits. Assuming approval by Constellation's shareholders, the transaction is expected to close late in the first quarter of 1994. Each of Constellation's $27.2 million shares of common stock will be exchanged for .4137 of a share of the Corporation's common stock resulting in the issuance of approximately 11.3 million new shares. The transaction will be accounted for as a pooling of interests. A summary of unaudited historical financial information for Constellation follows:
1993(a) 1992 1991 ---------- -------- --------- Operating results (in thousands, except per share): Net income (loss)............................. $16,504 $(1,691) $(88,722) Per common share.............................. .61 (.19) (10.82) Average common shares outstanding................................. 27,197 9,065 8,200 1993(a) 1992 ------- ------- Balance sheet at year-end (in millions, except per share): Assets........................................ $ 2,281 $ 2,415 Loans......................................... 1,663 1,760 Deposits...................................... 2,092 2,251 Shareholders' equity.......................... 166 146 Book value per common share................... 6.11 5.39 - -------------------
(a) See note (c) to the unaudited pro forma financial information table. In November 1993, the Corporation announced a definitive agreement to acquire the $2.6 billion asset Independence Bancorp, Inc. ("Independence"), a Pennsylvania bank holding company, in a transaction expected to be accounted for as a pooling of interests. Assuming approval by regulators and by Independence's shareholders, the transaction is expected to close in the second quarter of 1994. For each Independence common share outstanding, a maximum of 1.5 shares of the Corporation's common stock will be issued assuming that the average price per Corporation share over a pre-closing pricing period is less than $27 per share, or a minimum of 1.45 shares of the Corporation's common stock will be issued assuming that the average price per Corporation share is greater than $28 per share. As a result of this transaction up to approximately 16.6 million new shares will be issued. 48 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 2. ACQUISITIONS - (continued) A summary of unaudited historical financial information for Independence follows:
1993 1992 1991 ------- --------- ------- Operating results (in thousands, except per share): Net income........................ $22,879 $7,112(b) $18,956 Per common share.................. 1.98 .63 1.72 Average common shares outstanding..................... 11,530 11,237 11,047 1993 1992 ------- ------- Balance sheet at year-end (in millions, except per share): Assets............................ $ 2,603 $ 2,727 Loans............................. 1,745 1,707 Deposits.......................... 2,153 2,249 Shareholders' equity.............. 222 208 Book value per common share....... 19.26 18.43
(b) Before cumulative effect of a change in accounting principle. A summary of unaudited pro forma financial information for the Corporation, Constellation and Independence combined follows:
1993(c) 1992 1991 ------------- ---------- ---------- Operating results (in thousands, except per share): Net interest income............... $1,325,271 $1,252,478 $1,272,910 Non-interest income............... 574,030 610,664 615,565 Income before cumulative effect of a change in accounting principle....................... 240,554 268,134 180,317 Per common share.................. 1.66 1.98 1.36 Average common shares outstanding..................... 144,925 135,628 133,021 1993(c) 1992 ---------- ---------- Balance sheet at year-end (in millions, except per share): Assets............................ $ 28,380 $ 28,786 Loans............................. 19,771 18,936 Deposits.......................... 21,132 21,673 Shareholders' equity.............. 2,210 2,095 Book value per common share....... 15.26 14.58
(c) At December 31, 1993, Constellation had non-performing assets, loans plus other real estate owned ("OREO"), of $139.2 million. While Constellation has utilized a long-term workout strategy to deal with its non-performing assets, the Corporation's strategy is to dispose of problem assets in a more accelerated manner. The Corporation anticipates that Constellation will conform to this strategic direction and to the Corporation's consumer lending loan charge-off policies in Constellation's 1993 income statement. The Corporation estimates that conforming to this strategic direction and to the charge-off policies will require Constellation to record an addition to its allowance for possible loan losses of approximately $107 million and an addition to its OREO reserves of approximately $38 million. The Corporation also anticipates that Constellation will record pre-tax charges of at least $42 million in 1993, which include expenses directly attributable to the acquisition, and certain other costs and expenses. No charges have been recorded by Constellation pending receipt of approval of the acquisition by Constellation's shareholders. Unaudited pro forma financial information for 1993 reflect the aggregate $121.9 million after- tax impact of these charges. The impact of these charges on shareholders' equity is partially offset by approximately $40 million of tax benefits that will be recorded as the cumulative effect of applying FAS 109 income tax accounting on a combined basis. The impact of FAS 109 on 1993 pro forma net income is a reduction of $5.1 million. Pro forma shareholders' equity at 49 Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 2. ACQUISITIONS - (continued) December 31, 1993 has also been reduced by $35.2 million, the combined after-tax effect of 1994 additions to Independence's allowance for possible loan losses and OREO reserves of $25.0 million and $5.0 million, respectively, for the Corporation's planned strategic initiatives regarding Independence's problem assets, and charges of approximately $24 million, which include expenses directly related to the Independence acquisition. 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. Fair value estimates, methods, and assumptions are set forth below for the Corporation's financial instruments. Cash and due from banks and short-term instruments The carrying amounts reported - -------------------------------------------------- in the balance sheet for cash and due from banks and short-term instruments approximate their fair values. Short-term instruments include: time deposits; Federal funds sold; and securities purchased under agreements to resell, all of which generally have original maturities of less than 90 days. Investment securities Fair values for investment securities are based on quoted - --------------------- market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. See Note 5 for the carrying value and estimated fair value of investment securities. Trading account securities Fair values for the Corporation's trading account - -------------------------- securities, which also are the amounts recognized in the balance sheet, are based on quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans Fair values are estimated for loans in groups with similar financial and - ----- risk characteristics. Loans are segregated by type including: commercial and industrial, commercial real estate; residential real estate; credit card and other consumer; financial institutions; factoring receivables; and foreign. Each loan type is further segmented into fixed and variable rate interest terms and by performing and non-performing categories in order to estimate fair values. 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, 1993 and 1992. 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 discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources. 50 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 3. FAIR VALUES OF FINANCIAL INSTRUMENTS: continued For credit card loans, cash flows and maturities are estimated based on contractual interest rates and historical experience and are discounted using secondary market rates adjusted for differences in servicing and credit costs. For variable rate loans that reprice frequently and which have experienced no significant change in credit risk, fair values are based on carrying amounts. Fair value for non-performing loans is based on discounting estimated cash flows using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding cash flows, and discount rates are determined using available market information and specific borrower information. The following table presents carrying amounts and estimated fair values for loans at December 31, 1993 and 1992. Disclosures about fair value of lease financing receivables, which totaled $554,851 and $436,809 at December 31, 1993 and 1992, respectively, are not required by FAS 107, accordingly, the following table excludes lease financing receivables.
1993 1992 ------------------------ ------------------------ Carrying Fair Carrying Fair Amount Value Amount Value ----------- ----------- ----------- ----------- Domestic loans: Commercial, industrial and other................ $ 7,317,352 $ 7,362,715 $ 6,745,113 $ 6,784,298 Real estate loans......... 4,342,086 4,464,168 4,645,006 4,740,270 Consumer: Installment............. 1,032,320 1,060,620 1,072,804 1,096,575 Credit card............. 1,161,046 1,261,466 939,493 1,024,502 Financial institutions.... 856,837 858,780 775,947 781,648 Factoring receivables..... 555,211 555,211 454,244 454,244 Foreign..................... 543,082 543,127 400,155 401,067 ----------- ----------- ----------- ----------- Total loans, excluding lease financing.......... 15,807,934 16,106,087 15,032,762 15,282,604 Allowance for loan losses... 347,547 322,483 ----------- ----------- ----------- ---------- Net loans, excluding lease financing............... $15,460,387 $16,106,087 $14,710,279 $15,282,604 =========== =========== =========== ===========
The fair value estimate for credit card loans is based on the value of existing loans at December 31, 1993 and 1992. This estimate does not include the benefit that relates to estimated cash flows from new loans expected to be generated from existing cardholders over the remaining life of the portfolio. That benefit is estimated to be approximately $64 million at December 31, 1993 and $62 million at December 31, 1992 and is neither included in the fair value estimate for credit card loans, nor recorded as an intangible asset in the consolidated balance sheet. 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, 1993 and 1992, respectively, to an estimate of aggregate expected maturities for those certificates of deposit. 51 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 3. FAIR VALUES OF FINANCIAL INSTRUMENTS: continued The following table presents carrying amounts and estimated fair values of deposits at December 31, 1993 and 1992:
1993 1992 ------------------------ ------------------------ Carrying Fair Carrying Fair Amount Value Amount Value ----------- ----------- ----------- ----------- Domestic: Non-interest bearing checking................. $ 6,008,016 $ 6,008,016 $ 5,820,098 $ 5,820,098 NOW accounts.............. 1,283,054 1,283,054 1,315,022 1,315,022 Savings accounts.......... 3,463,808 3,463,808 3,657,259 3,657,259 Money market accounts..... 2,126,736 2,126,736 1,868,359 1,868,359 Time deposits............. 3,274,587 3,425,465 3,835,266 3,990,458 ----------- ----------- ----------- ----------- Total domestic deposits........... 16,156,201 16,307,079 16,496,004 16,651,196 Overseas branches and subsidiaries............. 796,902 796,902 766,119 766,119 ----------- ----------- ----------- ----------- Total deposits...... $16,953,103 $17,103,981 $17,262,123 $17,417,315 =========== =========== =========== ===========
The estimated fair values above do not include the benefit that results from the low-cost funding provided by core deposit liabilities as compared to the cost of borrowing funds in the financial markets. That benefit, commonly referred to as a deposit base intangible, is estimated to be approximately $450,000 at December 31, 1993 and $400,000 at December 31, 1992 and is neither considered in the above estimated fair value amounts nor recorded as an intangible asset in the consolidated balance sheet. The core deposit base intangible was determined by using a discounted cash flow approach to value the spread between the cost of core deposit liabilities and the cost of alternative borrowing sources over the estimated lives of the core deposit liabilities. Short-term funds borrowed The carrying amounts of Federal funds purchased, securities sold under agreements to repurchase, commercial paper and other short-term borrowings approximate their fair values. Long-term debt The fair values for long-term debt are based on quoted market prices where available. If quoted market prices are not available, fair values are estimated using discounted cash flow analyses based on the Corporation's borrowing rates at December 31, 1993 and 1992 for comparable types of borrowing arrangements. See Note 11 for additional information regarding the carrying value and estimated fair value of long-term debt. Off-balance sheet instruments Fair values for the Corporation's futures, forwards, interest rate swaps, options, interest rate caps and floors, and foreign exchange contracts are based on quoted market prices (futures); current settlement values (forwards); quoted market prices of comparable instruments (foreign currency exchange contracts); or, if there are no relevant comparable instruments, on pricing models or formulas using current assumptions (interest rate swaps, interest rate caps and floors, and options). The fair value of commitments to extend credit other than credit card is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The value of commitments to extend credit under credit card lines is embodied in the benefit that relates to estimated cash flows from new loans expected to be generated from existing cardholders over the remaining life of the portfolio. The fair value of standby and commercial letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate the agreements or otherwise settle the obligations with the counterparties. See Note 15 for the notional value and estimated fair value of the Corporation's off-balance sheet financial instruments. 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, 1993 and 1992 were approximately $393,000, and $267,000, respectively. 52 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, 1993 and 1992 were as follows:
Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- 1993 - ---- Held-to-Maturity - ---------------- U.S. Treasury................... $ 386,675 $ 6,086 $ 168 $ 392,593 U.S. Government agencies........ 1,318,522 5,481 2,758 1,321,245 State and municipal............. 277,377 16,753 247 293,883 Other: Domestic....................... 83,277 1,193 154 84,316 Foreign........................ 21,651 2,655 4 24,302 ---------- -------- ------ ---------- Total held-to-maturity........ $2,087,502 $ 32,168 $3,331 $2,116,339 ========== ======== ====== ========== Available-for-Sale - ------------------ U.S. Treasury................... $ 433,718 $ 14,317 $ 502 $ 447,533 U.S. Government agencies........ 45,657 1,523 58 47,122 State and municipal............. 12,842 1,406 7 14,241 Other: Domestic....................... 41,157 30,777 70 71,864 Foreign........................ 11,133 52,376 63,509 ---------- -------- ------ ---------- Total available-for-sale..... $ 544,507 $100,399 $ 637 $ 644,269 ========== ======== ====== ========== 1992 - ---- U.S. Treasury................... $ 750,556 $ 16,113 $2,584 $ 764,085 U.S. Government agencies........ 1,331,243 14,250 5,337 1,340,156 State and municipal............. 372,943 17,704 361 390,286 Other: Domestic....................... 121,084 27,085 545 147,624 Foreign........................ 34,365 24,381 58,746 ---------- -------- ------ ---------- Total investment securities... $2,610,191 $ 99,533 $8,827 $2,700,897 ========== ======== ====== ==========
At December 31, 1992, the other domestic investment securities category included marketable equity securities of $29,708, which were carried at the aggregate of their lower of cost or market in 1992. During 1991, the Corporation recorded $22,783 of pre-tax losses for write-downs taken against these securities. These write-downs reflected the amount of market value impairment in the portfolio which management viewed to be due to other than temporary conditions. During 1992, the Corporation recorded pre-tax gains of $1,759 on sales of certain domestic equity securities. At December 31, 1992, the market value of the marketable equity securities portfolio exceeded its carrying value by $22,522. As a result of the December 31, 1993 adoption of FAS 115, these marketable equity securities are carried in the available-for-sale portfolio and have been written up by $30,707, the aggregate of their December 31, 1993 fair values, through an after-tax credit to retained earnings. The Corporation recorded pre- tax gains of $12,840 on sales of certain domestic equity securities in 1993. During 1993 and 1992, the Corporation recorded pre-tax gains of $8,617 and $5,325 on sales of foreign equity securities. At December 31, 1993 and 1992, 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 $1,458,470 were pledged at December 31, 1993 to secure public deposits, trust deposits, and for certain other purposes as required by law. 53 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 5. INVESTMENT SECURITIES - (continued) The amortized cost and estimated fair value of debt securities at December 31, 1993, 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................................. $ 283,881 $ 286,340 Due after one year through five years................... 413,160 426,950 Due after five year through ten years................... 95,941 97,760 Due after ten years..................................... 69,659 75,246 ---------- ---------- 862,641 886,296 Mortgage-backed securities.............................. 1,187,628 1,189,159 ---------- ---------- $2,050,269 $2,075,455 ========== ========== Available-for-Sale - ------------------ Due in one year or less................................. $ 54,128 $ 54,130 Due after one year through five years................... 126,232 128,063 Due after five year through ten years................... 259,293 271,809 Due after ten years..................................... 11,648 12,733 ---------- ---------- 451,301 466,735 Mortgage-backed securities.............................. 44,393 45,778 ---------- ---------- $ 495,694 $ 512,513 ========== ==========
Proceeds from sales of investments in debt securities during 1993, 1992 and 1991 were $329,848, $172,959 and $231,996, respectively. Gross gains of $2,324 in 1993, $5,828 in 1992 and $5,260 in 1991, and gross losses of $65 in 1993, $89 in 1992 and $23 in 1991 were realized on those sales. 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 79 and 81). The book value of real estate loans transferred to other real estate owned during 1993, 1992 and 1991 was $20,011, $57,090 and $89,133 respectively. Other real estate owned includes properties that the Corporation has acquired in foreclosure or that has been determined to be "in substance" foreclosed. At December 31, 1993 and 1992, the Corporation had loans totalling $126,558 and $151,290, 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 1993 additions and reductions were $2,377,538 and $2,402,270, respectively. In October 1991, the Corporation sold $1,017,989 of credit card receivables, representing most of its out-of-region credit card portfolio. The sale resulted in a net gain of $53,524 after $33,085 of income tax expense. The loans were sold net of $27,486 of the allowance for loan losses and the gain also reflects the write-off of $74,748 of intangible assets associated with the loans sold. In May 1992, the Corporation sold the assets of Signal Financial Corp, a consumer finance subsidiary, including approximately $300,000 of consumer installment loans. The loans were sold net of $14,700 of the allowance for loan losses. This transaction had an immaterial impact on the earnings of the Corporation. In September 1993, the Corporation sold five of its seven branches from the Virgin Islands operations. The five branches had loans of $131,200 and deposits of $228,800 at the time of sale. The Corporation recorded a pre-tax gain of $11,000 on the sale. Also in 1993, the Corporation sold $207,000 of fixed-rate home equity loans in two securitization transactions. 54 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, 1993, 1992 and 1991:
1993 1992 1991 ---------- ---------- --------- Balance at beginning of period............... $ 322,483 $ 348,081 $ 407,400 Allowance for loans sold at date of sale..... (353) (14,700) (27,486) Allowance for loans of acquired bank......... 2,703 Provision charged to operating expense....... 100,000 119,300 190,601 Recoveries of loans previously charged off... 77,797 64,142 76,272 Loan charge-offs............................. (155,083) (194,340) (298,706) --------- --------- --------- Balance at end of period..................... $ 347,547 $ 322,483 $ 348,081 ========= ========= =========
8. PREMISES AND EQUIPMENT The consolidated balance sheet includes premises and equipment, net of accumulated depreciation and amortization of $410,629 and $429,442 at December 31, 1993 and 1992, respectively. Depreciation and amortization of premises and equipment for the years ended December 31, 1993, 1992, and 1991 was $50,059, $55,738 and $59,703, respectively. 9. TIME DEPOSITS Domestic time deposits in denominations of $100 or more at December 31, 1993, 1992, and 1991 were:
1993 1992 1991 -------- -------- -------- Commercial certificates of deposit............. $221,922 $504,709 $728,343 Other domestic time deposits, principally savings certificates........... 109,515 158,887 254,112 -------- -------- -------- Total........................... $331,437 $663,596 $982,455 ======== ======== ========
Interest expense on domestic time deposits in denominations of $100 or more for the years ended December 31, 1993, 1992 and 1991 was:
1993 1992 1991 ------ ------- ------- Interest expense: Commercial certificates of deposit......... $ 9,350 $21,190 $59,319 Other domestic time deposits, principally savings certificates.................. 6,521 13,755 18,196 ------ ------- ------- Total........................... $15,871 $34,945 $77,515 ======= ======= =======
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. 10. SHORT-TERM FUNDS BORROWED Short-term funds borrowed at December 31, 1993 and 1992 include the following:
1993 1992 ---------- ---------- Federal funds purchased (a)......................... $ 624,307 $ 854,488 Securities sold under agreements to repurchase (b).. 194,781 307,712 Commercial paper (c)................................ 501,838 566,990 Other short-term funds borrowed (d)................. 515,483 48,852 ---------- ---------- Total short-term funds borrowed (e)....... $1,836,409 $1,778,042 ========== ==========
(a) Federal funds purchased generally represent the overnight Federal funds transactions of banking subsidiaries with correspondent banks. The weighted average interest rate was 3.15% in 1993, 3.38% in 1992 and 5.83% in 1991. The maximum amount outstanding at any month-end was $1,159,306 in 1993, $854,488 in 1992 and $1,385,585 in 1991. (b) Securities sold under agreements to repurchase usually mature within one to thirty days or are due on demand. The weighted average interest rate was 2.75% in 1993, 3.68% in 1992 and 5.15% in 1991. The maximum amount outstanding at any month-end was $253,155 during 1993, $307,712 during 1992 and $568,374 during 1991. (c) Commercial paper issued by CoreStates Capital Corp is used to finance the short-term borrowing requirements of certain banking-related activities. Commercial paper is issued with maturities of not more than nine months and there are no provisions for extension, renewal or automatic rollover. The weighted average interest rate on commercial paper borrowings was 3.14% in 1993, 3.72% in 1992 and 6.28% in 1991. The maximum amount outstanding at any month-end was $714,439 in 1993, $578,364 in 1992 and $1,074,105 in 1991. 55 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 10. SHORT-TERM FUNDS BORROWED At December 31, 1993, the Corporation had fee-based lines of credit facilities from unaffiliated banks totalling $645,000. The lines of credit were established in support of commercial paper borrowings and general corporate purposes. Unless extended by the Corporation in accordance with the terms of the credit agreement, all of the lines expire July 30, 1994. There were no borrowings under these lines at December 31, 1993. 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 funds borrowed were $1,865,000 in 1993, $1,544,000 in 1992 and $2,677,000 in 1991. The weighted average interest rate was 3.46% in 1993, 3.67% in 1992 and 6.13% in 1991. The average interest rate is calculated primarily on a daily average of funds borrowed. 11. LONG-TERM DEBT Long-term debt at December 31, 1993 and 1992 includes the following:
1993 1992 ------------------------ ------------------------- Carrying Fair Carrying Fair CoreStates Financial Corp: Amount Value Amount Value ----------- ----------- ------------ ----------- 8 5/8% Mortgages due 2001.. $ 10,803 $ 12,505 $ 11,555 $ 12,481 5 1/2% Convertible Subordinated Debentures due 1993 (a)............. 19,987 20,145 ---------- ---------- ---------- ----------- 10,803 12,505 31,542 32,626 ---------- ---------- ---------- ----------- CoreStates Capital Corp ("CSCC"): 5 7/8% Guaranteed Subordinated Notes due 2003 (b)....... 200,000 192,480 6 5/8% Guaranteed Subordinated Notes due 2005 (c)....... 175,000 172,358 9 5/8% Guaranteed Subordinated Notes due 2001 (d)....... 150,000 178,395 150,000 167,250 9 3/8% Guaranteed Subordinated Notes due 2003 (e)....... 100,000 118,830 100,000 110,820 Medium Term Notes (f)...... 808,085 812,299 531,070 538,426 8 3/8% Guaranteed Notes due 1996 (g).............. 200,000 205,780 8 1/2% Guaranteed Notes due 1996 (h).............. 125,000 126,138 ---------- ---------- ---------- ----------- 1,433,085 1,474,362 1,106,070 1,148,414 ---------- ---------- ---------- ----------- Other subsidiaries: 9.35% Subordinated Note due July 2003 (i)... 10,000 10,250 10,000 10,300 Senior debt, due September 1993 (j)................. 60,000 60,000 8 1/4% Subordinated Capital Notes due January 1999 (k)..... 25,086 25,274 9 7/8% Mortgages due 2003.. 16,983 19,656 Various other.............. 1,148 1,148 3,678 3,678 ---------- ---------- ---------- ----------- 11,148 11,398 115,747 118,908 ---------- ---------- ---------- ----------- Total long-term debt (l)... $1,455,036 $1,498,265 $1,253,359 $1,299,948 ========== ========== ========== ===========
(a) The Debentures were retired at par plus accrued interest on the June 1, 1993 maturity date. (b) 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. (c) The Notes are not subject to redemption prior to maturity and are unconditionally guraranteed, 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. 56 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 11. LONG-TERM DEBT (continued) (d) The Notes are unconditionally guaranteed, on a subordinated basis, as to payment of principal and interest by the Corporation. The Notes are subordinated to all existing and future senior CSCC indebtedness and the guarantee is subordinated to all existing and future senior indebtedness of the Corporation. (e) The Notes are not subject to redemption prior to maturity and are unconditionally guaranteed, on a subordinated basis, as to payment of principal and interest by the Corporation. The Notes are subordinated to all existing and future senior CSCC indebtedness and the guarantee is subordinated to all existing and future senior Corporation indebtedness. (f) CSCC can issue up to $825,000 in Medium Term Notes (Senior and Subordinated) ranging in maturity from nine months to thirty years 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, 1993, $808,085 of debt was outstanding at interest rates ranging from 4.88% to 8.63% with terms up to three years. Under existing shelf registration statements filed with the Securities and Exchange Commission (SEC), the Corporation had debt and capital securities that were registered but unissued of approximately $177,000 at December 31, 1993. In February 1994, the Board of Directors approved the filing of a shelf registration with the SEC that will (when effective) cover the issuance of a broad range of debt and equity securities that will increase available registered but unissued securities to $1 billion. (g) On November 1, 1993, the Notes were redeemed at the option of CSCC at par plus interest to the date of redemption. (h) On April 1, 1993, the Notes were redeemed at the option of CSCC at par plus interest to the date of redemption. (i) The Note is redeemable at CBNA's option. During 1994, the redemption price is 103.0% through June 30, and 102.5% from July 1 to December 31. (j) In November 1990, CBD entered into an agreement with the Student Loan Marketing Association (Sallie Mae) to borrow $102,000 at a sub-LIBOR rate of interest. This borrowing matured September 15, 1993. (k) The Subordinated Capital Notes were redeemed at par plus interest in January 1994. Accordingly, the Notes were classified as short-term borrowings at December 31, 1993. (l) The consolidated aggregate maturities and sinking fund requirements for long-term debt for the years ended December 31, 1994 through 1998 are: $186,003; $444,412; $170,851; $11,396; and $2,042, respectively. 57 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 12. RETIREMENT AND BENEFIT PLANS Pension expense under the Corporation's pension plans was $11,519 in 1993, $10,091 in 1992 and $9,243 in 1991. The projected benefit obligation exceeded plan assets at fair value by $45,552 at December 31, 1993, 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, -------------------- 1993 1992 --------- --------- Plan assets at fair value(a)............................... $447,549 $420,460 -------- -------- Present value of benefit obligation: Accumulated benefits based on salaries to date, including vested benefits of $350,351 in 1993 and $290,419 in 1992.................................... 384,620 318,199 Additional benefits based on estimated future salary levels.................................................. 108,481 82,081 -------- -------- Projected benefit obligation............................... 493,101 400,280 -------- -------- Amount projected benefit obligation is (over)/under plan assets at fair value at December 31,...................... (45,552) 20,180 Reconciliation: Unrecognized prior service cost.......................... 6,664 7,736 Unrecognized net asset from date of initial application.. (32,739) (37,941) Net deferred actuarial (loss)/gain....................... 40,974 (9,549) -------- -------- Accrued pension expense included in other liabilities...... $(30,653) $(19,574) ======== ========
(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, 1993, 1992 and 1991 included the following expense (income) components:
1993 1992 1991 --------- --------- -------- Service cost benefits earned during the period.. $ 15,316 $ 14,564 $ 12,617 Interest cost on projected benefit obligation... 32,512 30,280 27,623 Actual return on plan assets.................... (45,119) (14,445) (95,769) Net amortization and deferral................... 8,810 (20,308) 64,772 -------- -------- -------- Net pension cost.............................. $ 11,519 $ 10,091 $ 9,243 ======== ======== ========
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.0% and 8.0%, respectively, at December 31, 1993 and 1992. The rate of increase on future compensation levels used was 5.0% to 6.0%. 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 $12,576 in 1993, $12,036 in 1992, and $11,647 in 1991. The Corporation and its subsidiaries provide certain postretirement health care and life insurance benefits for retired employees. The liability for these postretirement benefits is unfunded. Postretirement benefits are provided through an insurance company whose premiums are based on the benefits paid during the year. The postretirement health care plan is contributory, with retiree contributions based on years of service. Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("FAS 106") was issued in December 1990 to establish the accounting for postretirement benefits. FAS 106 requires that employers accrue the costs associated with providing postretirement benefits during the active service periods of employees, rather than the previously accepted accounting practice of recognizing these costs on a pay-as- you-go basis. Effective January 1, 1992, the Corporation adopted FAS 106. As permitted under FAS 106, the Corporation elected to recognize immediately the transitional postretirement benefit liability of $122,706, $80,986 after-tax or $0.70 per share, as the cumulative effect of a change in accounting principle. The impact of FAS 106 on salaries, wages and benefits expense on the Consolidated Statement of Income for the year ended December 31, 1992 versus the pay-as-you-go basis was an increase of $9,132. 58 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 12. RETIREMENT AND BENEFIT PLANS (continued) The liability for postretirement benefits included in other liabilities at December 31, 1993 and 1992 was a follows:
1993 1992 ---------- ---------- Accumulated postretirement benefit obligation: Retirees..................................... $ (96,735) $ (79,199) Fully eligible active plan participants...... (3,278) (3,255) Other active plan participants............... (39,312) (48,284) --------- --------- Accumulated postretirement benefit obligation... (139,325) (130,738) Plan assets at fair value (a)................... 20,006 --------- --------- Unfunded obligation at December 31,............. (119,319) (130,738) Unrecognized net loss........................... 2,829 --------- --------- Accrued postretirement benefit obligation....... $(116,490) $(130,738) ========= =========
(a) Primarily commingled funds managed by subsidiary banks. Net periodic postretirement benefit cost for the year ended December 31, 1993 and 1992 included the following expense (income) components:
1993 1992 -------- ------- Service cost-benefits earned during the period.. $ 2,073 $ 3,061 Interest cost on accumulated postretirement benefit obligation........................... 9,559 9,914 Actual return on plan assets.................... (6) Net amortization and deferral................... 6 ------- ------- Net periodic postretirement benefit cost........ $11,632 $12,975 ======= =======
The cost of providing postretirement benefits in 1991 was recognized by expensing the annual insurance premiums, which were $3,699. For measurement purposes, a 13% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1994; the rate was assumed to decrease gradually to 10.5% for 1997 and remains at that level thereafter. For measurement purposes, a fixed dollar amount was determined as the Corporation's maximum contribution 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, 1993 by $10,247 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $781. The expected long-term rate of return on plan assets was 8.5%. The weighted- average discount rate used in determining the accumulated postretirement benefit obligation was 7.0% and 8.0%, respectively, at December 31, 1993 and 1992. Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("FAS 112") was issued in November 1992 to establish accounting for benefits provided to former or inactive employees after employment but before retirement. FAS 112 requires that employers accrue the costs associated with providing benefits, such as salary and benefit continuation under disability plans, when payment of the benefits is probable and the amount of the obligation can be reasonably estimated. Effective January 1, 1993, the Corporation adopted FAS 112. The Corporation recognized the January 1, 1993 FAS 112 transitional liability of $20,015, $13,010 after-tax or $0.11 per share, as the cumulative effect of a change in accounting principle. The impact of FAS 112 on salaries, wages and benefits expense for the year ended December 31, 1993 was not material. 13. LONG-TERM INCENTIVE PLAN The Corporation has outstanding options granted under the Corporation's long- term incentive plan (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. Information on options for 1993 follows: 59 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS: Continued (dollar amounts in thousands) 13. LONG-TERM INCENTIVE PLAN (continued)
Number of shares ---------------------------------------- Under Option price Available option per share ----------- ---------- --------------- Balance at January 1, 1993.... 4,081,650 4,329,738 $6.51 - $23.19 Options granted............... (1,719,102) 1,719,102 27.50 - 28.50 Options exercised............. (686,098) 7.16 - 23.19 Options cancelled............. 68,736 (68,736) 7.16 - 27.50 ---------- --------- Balance at December 31, 1993.. 2,431,284 5,294,006 6.51 - 28.50 ========== =========
Options under the Plan are granted to purchase the Corporation's common shares at market value on the date of grant and are exercisable one year from the date of grant for a period not exceeding ten years. Stock appreciation rights may be granted in conjunction with the granting of an option. Upon the exercise of stock appreciation rights and the surrender of the related option, an employee may receive in cash or common stock of the Corporation a value equal to the difference between the market price at the date of exercise and the option price of shares. The assumed exercise of the options and other awards under the Plan did not have a materially dilutive effect on the earnings per share in years 1991 through 1993. The preceding option table does not reflect 280,190 performance unit awards outstanding at December 31, 1993, 371,514 at December 31, 1992 and 481,836 at December 31, 1991. 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 1993, 1992 and 1991, respectively, $1,051, $1,557 and $2,265 was expensed in connection with performance unit awards. 14. OPERATING LEASES Rental expense, reduced by sublease rental income, charged to operations was $56,577, $55,782 and $56,641 for 1993, 1992 and 1991, respectively. 15. COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business, there are outstanding commitments and contingent liabilities which are not reflected in the financial statements. These include various financial instruments with off-balance sheet risk used in connection with the Corporation's asset and liability management and to provide for the needs of customers. These involve varying degrees of credit, interest rate and liquidity risk, but do not represent unusual risks for the Corporation and management does not anticipate any significant losses as a result of these transactions. The following is a summary of significant commitments and contingent liabilities as of December 31, 1993 and 1992, including fair values:
1993 1992 --------------------------- --------------------------- Notional Fair Notional Fair or Value or Value Contractual of Asset Contractual of Asset Amount (Liability)(1) Amount (Liability)(1) ----------- -------------- ----------- -------------- Standby letters of credit, net of participations (a) $1,081,690 $ (2,704) $ 886,734 $ (2,217) Commercial letters of credit.......................... 883,304 (2,208) 741,192 (1,853) Commitments to extend credit (b)...................... 6,262,363 (10,775) 4,763,701 (7,933) Unused commitments under credit card lines............ 2,993,233 1,976,773 Futures and forward contracts (c): Commitments to purchase............................ 925,500 365 1,462,000 175 Commitments to purchase foreign and U.S. currencies (d)................................ 1,336,605 1,148 1,422,640 2,538 Interest rate swaps, notional principal amounts (e)........................................ 4,299,619 140,137 4,613,645 153,482 Interest rate caps and floors (f): Written............................................ 622,920 (4,196) 231,577 (558) Purchased.......................................... 571,398 4,759 204,242 386 (1) See Note 3 for discussion of fair value.
60 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS: Continued (dollar amounts in thousands) 15. COMMITMENTS AND CONTINGENT LIABILITIES - (continued) (a) Standby letters of credit (SBLC) are used in various transactions to enhance the credit standing of the Corporation's customers and are subjected to the same risk, credit review and approval process as loans. SBLC's are irrevocable assurances that the Corporation will make payment in the event that a customer cannot perform its contractual obligations to third parties. (b) Commitments to extend credit represent the Corporation's obligation to fund commercial and real estate loans, including home equity lines, lines of credit, revolving lines of credit and other types of commitments. (c) Exchange traded futures contracts and forward rate agreements represent agreements to exchange dollar amounts at a specified future date for interest rate differentials between an agreed interest rate and a reference rate, computed on a notional amount. Credit and market risk exist with respect to these instruments. Exchange traded futures contracts entail daily cash settlement; therefore, the credit risk amount represents a one-day receivable. Gains and losses on these contracts are deferred and amortized over the life of the specific asset, liability or transaction hedged. (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. At December 31, 1993 and 1992, the market value of the Corporation's foreign exchange contracts which has been included in income was $1,160 and $2,543, 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. The differential between the fixed and variable rate is included as interest income or expense of the asset or liability transaction hedged. Credit and market rate risk exist with respect to these instruments. The risk associated with interest rate swaps arises 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, 1993 and 1992, the replacement cost of the Corporation's interest rate swap contracts was $153,624 and $163,482, respectively. The risk of counterparty failure is controlled by limiting transactions to an approved list of counterparties. (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. 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 and the Corporation's legal counsel do not believe the outcome of these actions and proceedings will have a materially adverse effect on the consolidated financial position of the Corporation. 61 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:
1993 1992 1991 --------- -------- -------- Current: Federal..................................... $149,684 $ 82,305 $ 47,445 State....................................... 17,547 11,042 17,097 -------- -------- -------- Total domestic........................ 167,231 93,347 64,542 Foreign..................................... 10,284 4,368 5,336 -------- -------- -------- Total current......................... 177,515 97,715 69,878 Deferred Federal and state expense (benefit).. (17,861) 29,545 43,695 -------- -------- -------- Total provision for income taxes...... $159,654 $127,260 $113,573 ======== ======== ========
The significant components of the Corporation's deferred tax assets and liabilities at December 31, 1993 and 1992 are as follows:
1993 1992 -------- -------- Deferred tax assets: Allowance for loan losses.................... $113,516 $102,534 Postretirement and postemployment benefits. 48,210 44,825 Reserves..................................... 25,757 23,215 Employee compensation........................ 11,610 11,534 Other........................................ 42,744 30,142 -------- -------- Total deferred tax assets............. 241,837 212,250 -------- -------- Deferred tax liabilities: Auto leasing portfolio....................... 63,366 54,058 FAS 115 fair value accounting................ 34,917 Partnership investments...................... 19,660 18,299 Tax over book depreciation................... 15,184 13,476 Affiliate income............................. 14,924 21,090 Other........................................ 10,556 6,987 -------- -------- Total deferred tax liabilities......... 158,607 113,910 -------- -------- Net deferred tax assets........................ $ 83,230 $ 98,340 ======== ========
At December 31, 1993 cumulative deductible temporary differences are approximately $691 million and the related deferred asset is $242 million. The major components include $138 million related to FAS 106 and FAS 112 and $324 million related to the allowance for loan losses. Cumulative taxable temporary differences related to deferred tax credits at December 31, 1993 are estimated at $453 million and are primarily related to leasing, FAS 115 fair value accounting, partnership investments and depreciation. The related deferred tax liability is $159 million. As required by FAS 109, the Corporation has determined that it is not required to establish a valuation reserve for the deferred tax asset since it is more likely than not that the deferred tax asset of $242 million will be principally realized through carryback to taxable income in prior years, and future reversals of existing taxable temporary differences, and to a lesser extent, future taxable income and tax planning strategies. Management believes that future taxable income will be sufficient to realize the benefits of temporary deductible differences that cannot be realized through carryback to prior years or through the reversal of future temporary taxable differences. The Corporation's conclusion that it is "more likely than not" that the deferred tax asset will be realized is based on a history of growth in earnings and the prospects for continued growth including an analysis of potential uncertainties that may affect future operating results. The Corporation will continue to review the tax criteria of "more likely than not", for the recognition of deferred tax assets on a quarterly basis. The consolidated effective tax rates are reconciled to the statutory rate as follows:
1993 1992 1991 ----- ----- ----- Statutory rate......................... 35.0% 34.0% 34.0% Difference resulting from: Tax-exempt income.................... (3.0) (4.5) (7.2) State, local and foreign income tax.. 2.5 2.2 4.2 Other, net........................... (1.8) 1.0 2.3 ---- ---- ---- Effective tax rate..................... 32.7% 32.7% 33.3% ==== ==== ====
62 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS: Continued (dollar amounts in thousands) 16. PROVISION FOR INCOME TAXES: Continued Foreign earnings of certain subsidiaries would be taxed only upon their transfer to the United States. Accumulated earnings of insurance subsidiaries would be taxed only to the extent they are distributed as dividends, or exceed limits prescribed by tax laws. During 1993, earnings of a foreign subsidiary were repatriated and a portion of previously untaxed insurance subsidiary earnings became subject to tax. No further transfers or dividends are contemplated. Taxes payable upon remittance of such accumulated earnings of $22,014 at December 31, 1993 would approximate $7,306. Taxes, other than income taxes, included in other operating expenses for the years ended December 31, 1993, 1992 and 1991 are $65,642, $64,421 and $58,389, respectively. 17. QUARTERLY FINANCIAL DATA (UNAUDITED) The following represents summarized quarterly financial data of the Corporation, which, in the opinion of management, reflects all adjustments (comprising only normal recurring accruals) necessary for a fair presentation:
Three Months Ended ------------------------------------------------- Dec. 31 Sept. 30 June 30 March 31 ---------- ---------- ---------- ------------- 1993 - ---- Interest income...................... $376,940 $381,628 $378,321 $373,622 ======== ======== ======== ======== Interest expense..................... $ 95,602 $ 95,895 $ 98,202 $102,911 ======== ======== ======== ======== Net interest income.................. $281,338 $285,733 $280,119 $270,711 ======== ======== ======== ======== Provision for losses on loans........ $ 25,000 $ 25,000 $ 25,000 $ 25,000 ======== ======== ======== ======== Securities gains (losses)............ $ 10,169 $ 3,318 $ (779) $ 2,991 ======== ======== ======== ======== Income before cumulative effect of a change in accounting principle.. $ 85,312 $ 86,010 $ 83,289 $ 73,316 ======== ======== ======== ======== Cumulative effect of a change in accounting principle........... $(13,010) ======== Net income........................... $ 85,312 $ 86,010 $ 83,289 $ 60,306 ======== ======== ======== ======== Net income per common share.......... $.73 $.73 $.71(b) $.63(a)(b) ==== ==== ==== ==== Average common shares outstanding.... 117,269 117,530 117,403(b) 117,068(b) ======= ======= ======= ======= 1992 - ---- Interest income...................... $384,585 $382,283 $402,602 $417,890 ======== ======== ======== ======== Interest expense..................... $110,668 $122,273 $140,353 $157,020 ======== ======== ======== ======== Net interest income.................. $273,917 $260,010 $262,249 $260,870 ======== ======== ======== ======== Provision for losses on loans........ $ 27,000 $ 27,000 $ 32,150 $ 33,150 ======== ======== ======== ======== Securities gains (losses)............ $ 2 $ 3,731 $ 3,241 $ 6,433 ======== ======== ======== ======== Income before cumulative effect of a change in accounting principle. $ 69,107 $ 67,895 $ 66,396 $ 59,006 ======== ======== ======== ======== Cumulative effect of a change in accounting principle............ $(80,986) ======== Net income (loss).................... $ 69,107 $ 67,895 $ 66,396 $(21,980) ======== ======== ======== ======== Net income per common share.......... $.59(b) $.59(b) $.58(b) $.51(a)(b) ==== ==== ==== ==== Average common shares outstanding.... 116,422(b) 115,884(b) 115,368(b) 114,702(b) ======= ======= ======= ======= - -------------------------------------
(a) Based on an income before cumulative effect of a change in accounting principle. (b) Adjusted to reflect the impact of the Stock Dividend. 63 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 six overseas branches and two Edge Act subsidiaries. The International Banking group engages in foreign banking and international financing activities including loans, acceptances, time deposits, letter of credit financing and related financial services. Total assets and liabilities of the international operations at December 31, 1993 and 1992 are as follows:
1993 1992 ---------- ---------- Assets............... $1,650,159 $1,945,992 ========== ========== Liabilities.......... $1,366,038 $1,704,665 ========== ==========
The following distribution between domestic and international segments involves many judgments because of the integrated operation of the business of the Corporation. 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. 64 CoreStates Financial Corp and Subsidiaries Notes To The Financial Statements: (dollar amounts in thousands) 18. International Operations: Continued
International Operations ----------------------------------------------- Domestic Europe and Latin Asia and Middle East Operations Canada America Australia and Africa Total ----------- ---------- ---------- --------- ----------- ----------- DECEMBER 31, 1993 Assets..................................... $22,015,402 $ 939,631 $173,740(a) $524,375 $12,413 $23,665,561 =========== ========== ======== ======== ======= =========== Total operating income (b)............................... $ 1,865,722 $ 83,226 $ 10,771 $ 53,243 $ 604 $ 2,013,566 =========== ========== ======== ======== ======= =========== Income before income taxes............................. $ 421,742 $ 25,530 $ 16,209 $ 23,889 $ 211 $ 487,581 =========== ========== ======== ======== ======= =========== Income before cumulative effect of a change in accounting principle........... $ 285,131 $ 18,938 $ 7,021 $ 16,684 $ 153 $ 327,927 =========== ========== ======== ======== ======= =========== DECEMBER 31, 1992 Assets..................................... $21,753,106 $1,255,214 $ 86,224 $602,113 $ 2,441 $23,699,098 =========== ========== ======== ======== ======= =========== Total operating income (b)............................... $ 1,991,635 $ 89,038 $ 6,088 $ 46,777 $ 331 $ 2,133,869 =========== ========== ======== ======== ======= =========== Income before income taxes............................. $ 315,745 $ 35,725 $ 15,069 $ 22,982 $ 143 $ 389,664 =========== ========== ======== ======== ======= =========== Income before cumulative effect of a change in accounting principle..................... $ 217,839 $ 20,820 $ 9,750 $ 13,911 $ 84 $ 262,404 =========== ========== ======== ======== ======= =========== DECEMBER 31, 1991 Assets..................................... $21,235,997 $ 970,903 $ 49,772 $437,215 $ 5,967 $22,699,854 =========== ========== ======== ======== ======= =========== Total operating income(b)................................ $ 2,395,820 $ 107,575 $ 10,783 $ 48,487 $ 838 $ 2,563,503 =========== ========== ======== ======== ======= =========== Income before income taxes............................. $ 270,330 $ 29,587 $ 27,383 $ 13,733 $ 286 $ 341,319 =========== ========== ======== ======== ======= =========== Net income................................. $ 181,963 $ 19,101 $ 17,659 $ 8,839 $ 184 $ 227,746 =========== ========== ======== ======== ======= ===========
(a) At December 31, 1993, $130,869 of these assets represent LDC risk related to short-term trade finance. (b) Amounts for operating income include foreign exchange gains of $15,979, $16,887 and $14,283 at December 31, 1993, 1992 and 1991, respectively. 65 CoreStates Financial Corp and Subsidiaries Notes To The Financial Statements: Continued (dollar amounts in thousands) 18. International Operations: Continued
A maturity schedule of selected international assets and liabilities at December 31, 1993 follows: Europe and Latin Asia and Middle East Canada America(a) Australia and Africa Total ---------- ---------- --------- ---------- ------- Eurodollar Time Deposits Placed 1 year or less............. $540,134 $ 5,000 $ 79,868 $625,002 Over 1 year................ ________ ________ ________ ________ $540,134 $ 5,000 $ 79,868 $625,002 ======== ======== ======== ======== Loans and Acceptances 1 year or less............. $304,859 $146,866 $362,374 $11,875 $825,974 Over 1 year................ 28,818 2,182 31,000 -------- -------- -------- ------- -------- $333,677 $149,048 $362,374 $11,875 $856,974 ======== ======== ======== ======= ======== Deposit Liabilities 1 year or less............. $263,739 $125,010 $503,749 $26,014 $918,512 Over 1 year................ ________ ________ ________ _______ ________ $263,739 $125,010 $503,749 $26,014 $918,512 ======== ======== ======== ======= ========
(a) Amounts for Latin America include time deposit placements of $5,000 and deposit liabilities of $5,845 with bank branches in Nassau and the Cayman Islands at December 31, 1993. 66 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS: Continued (dollar amounts in thousands) 19. Financial Statements of the Parent Company
Statement of Income Year Ended December 31, ------------------------------ 1993 1992 1991 -------- -------- -------- REVENUES - -------- Dividends from subsidiaries: Banks....................................... $179,027 $135,660 $244,243 Other subsidiaries.......................... 14,476 10,527 10,653 -------- -------- -------- Total dividends from subsidiaries..... 193,503 146,187 254,896 Interest income from subsidiaries............. 1,580 672 775 Processing and management fees from subsidiaries 123,121 119,965 276,961 Rental income from subsidiaries............... 2,059 2,059 2,409 Securities gains (losses)..................... (1,135) 219 (22,783) Other income.................................. 25 138 364 -------- -------- -------- Total revenues........................... 319,153 269,240 512,622 -------- -------- -------- EXPENSES - -------- Interest on: Funds borrowed.............................. 2,747 2,311 4,376 Long-term debt.............................. 1,527 4,731 17,752 Total interest expense...................... -------- -------- -------- 4,274 7,042 22,128 Salaries, wages and benefits.................. 67,394 64,372 174,174 Net occupancy................................. 29,321 25,995 16,147 Equipment expenses............................ 5,982 3,697 28,214 Other operating expenses...................... 21,527 24,487 76,983 -------- -------- -------- Total expenses........................... 128,498 125,593 317,646 -------- -------- -------- Income before income tax benefit and equity in undistributed income of subsidiaries........ 190,655 143,647 194,976 Income tax benefit............................ (1,369) (754) (20,084) -------- -------- -------- Income before equity in undistributed income of subsidiaries............................. 192,024 144,401 215,060 Equity in undistributed income of subsidiaries: Banks....................................... 74,851 16,770 (4,131) Other subsidiaries.......................... 48,042 21,716 16,817 -------- -------- -------- 122,893 38,486 12,686 -------- -------- -------- INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE........................ 314,917 182,887 227,746 Cumulative effect of a change in accounting principle (Note 12)......................... (1,469) -------- -------- -------- NET INCOME.................................... $314,917 $181,418 $227,746 ======== ======== ========
67 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS: Continued (dollar amounts in thousands) 19. Financial Statements of the Parent Company: Continued
Balance Sheet December 31, ---------------------- 1993 1992 ---------- ---------- ASSETS - ------ Cash.............................................. $ 8,704 $ 53,252 Investments and receivables-subsidiaries: Investments in subsidiaries at equity in underlying net assets: Banks......................................... 1,701,303 1,565,753 Other subsidiaries............................ 229,003 186,865 ---------- ---------- Total investments in subsidiaries........... 1,930,306 1,752,618 Other........................................... 14,271 7,209 ---------- ---------- Total investments and receivables- subsidiaries.............................. 1,944,577 1,759,827 Other investments................................. 54,070 17,572 Premises, net of accumulated depreciation......... 6,416 11,008 Other assets...................................... 2,781 2,800 ---------- ---------- Total assets................................ $2,016,548 $1,844,459 ========== ========== LIABILITIES - ----------- Funds borrowed.................................... $ 69,003 Dividends payable................................. $ 35,171 31,474 Other liabilities................................. 8,905 8,997 Long-term debt.................................... 12,991 31,499 ---------- ---------- Total liabilities............................ 57,067 140,973 ---------- ---------- SHAREHOLDERS' EQUITY - -------------------- Total shareholders' equity................... 1,959,481 1,703,486 ---------- ---------- Total liabilities and shareholders' equity... $2,016,548 $1,844,459 ========== ==========
The approval of the Comptroller of the Currency is required for a nationally chartered bank to pay dividends if the total of all dividends declared in any calendar year exceeds the bank's net profits (as defined) for that year combined with its retained net profits for the preceding two calendar years. Under this formula, CBNA , NJNB and CBD can declare dividends without approval of the Comptroller of the Currency of approximately $151 million, $19 million and $1 million, respectively, plus an additional amount equal to CBNA's, NJNB's and CBD's retained net profits for 1994 up to the date of any such dividend declaration. CBD paid special dividends of $10 million in January 1992 and $25 million in September 1992. In addition, CBD paid $30 million as a return of capital in January 1992. These payments had the prior approval of the Comptroller of the Currency and resulted from CBD's lower capital requirements after the October 1991 sale of credit card receivables (Note 6). 68 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS: Continued (dollar amounts in thousands) 19. Financial Statements of the Parent Company: Continued The Federal Reserve Act requires that extensions of credit by CBNA and NJNB to certain affiliates, including the Corporation, be secured by readily marketable securities, that extensions of credit to any such affiliate be limited to 10% of capital and surplus (as defined) and that extensions of credit to all such affiliates be limited to 20% of capital and surplus. The Corporation has guaranteed certain borrowings of its subsidiaries in the amount of $1,934,923, which includes $501,838 for commercial paper. The maturities for parent company long-term debt for the years ending December 31, 1994 through 1998 are: $956; $1,041; $1,136; $1,237; and $1,349, respectively.
Statement of Cash Flows Year Ended December 31, --------------------------------- 1993 1992 1991 --------- --------- --------- OPERATING ACTIVITIES Net income.............................. $ 314,927 $ 181,418 $ 227,746 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed income of subsidiaries.. (122,893) (38,486) (12,686) Cumulative effect of a change in accounting principle.................. 1,469 Securities (gains) losses.............. 1,135 (219) 22,783 Depreciation and amortization.......... 644 1,043 1,246 Deferred income tax expense (benefit).. 1,705 (1,398) (9,481) Decrease in interest receivable........ 384 Increase (decrease) in interest payable 1,006 (101) (329) Increase (decrease) in due to subsidiaries.......................... (6,875) (47,695) 9,751 Other.................................. 1,194 12,575 5,796 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 190,833 108,606 245,210 --------- --------- --------- INVESTING ACTIVITIES Investment in subsidiaries.............. (1,000) (9,240) (20,000) Increase (decrease) in receivables from subsidiaries........................... (7,060) 16,752 28,954 Purchases of investment securities...... (311,940) (113,449) (72,265) Proceeds from sales of investment securities............................. 275,817 168,159 31,670 Return of capital from subsidiaries..... 34,303 30,000 --------- --------- --------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (9,880) 92,222 (31,641) --------- --------- --------- FINANCING ACTIVITIES Retirement of long-term debt............ (20,940) (907) (152,651) Net increase (decrease) in financing from subsidiaries (69,003) (80,849) 34,843 Cash dividends paid..................... (130,082) (113,335) (108,188) Other................................... (5,476) 44,995 14,465 --------- --------- --------- NET CASH USED IN FINANCING ACTIVITIES............................. (225,501) (150,096) (211,531) INCREASE (DECREASE) IN CASH AND DUE FROM BANKS............................. (44,548) 50,732 2,038 Cash and due from banks at January 1,... 53,252 2,520 482 --------- --------- --------- CASH AND DUE FROM BANKS AT DECEMBER 31.. $ 8,704 $ 53,252 $ 2,520 ========= ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest............................... $ 4,632 $ 8,620 $ 22,457 ========= ========= ========= Income taxes........................... - - - ========= ========= =========
69 CoreStates Financial Corp and Subsidiaries CONDENSED CONSOLIDATED STATEMENT OF INCOME (in thousands, except per share amounts) 20. Joint Venture On December 4, 1992, the Corporation entered into a joint venture with three other banking companies creating Electronic Payment Services, Inc. ("EPS"). The joint venture combines the partners' separate consumer electronic transaction processing businesses and provides automated teller machine ("ATM") and electronic point-of-sale ("POS") processing services. The Corporation contributed to EPS its wholly-owned subsidiaries Money Access Service Inc. ("MAC"), a regional ATM network, and BUYPASS Corporation, a third- party processor of electronic POS transactions. The Corporation has equal ownership with two partners in the joint venture, each with 31%. The fourth partner owns 7%. As part of the transaction, the Corporation received a cash payment of $79,350 and $245,400 of EPS 5% cumulative redeemable preferred stock (additional dividends are tied to EPS performance). The exchange of assets involved in the transaction resulted in a pre-tax gain to the Corporation of $41,072, $25,670 after-tax, which was recorded in other operating income for the year ended December 31, 1992. The exchange also generated a deferred gain of approximately $136,000. 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 does not affect the amount of deferred gain, but changes the timing of deferred gain income recognition from a five-year period beginning in 1996 to a ten-year period beginning in 1994. EPS has announced the signing of definitive agreements providing for two additional banking companies to enter the joint venture. The transactions are expected to be completed in 1994. As a result of the addition of new partners, the Corporation's share in earnings of EPS will decline from the current 31% to an estimated 23%. The Corporation's net investment in EPS, $69,436 at December 31, 1993, is included in other assets. 70 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES
1993 1992 1991 ------------------------------- ------------------------------ ------------------------------ Average Income/ Average Income/ Average Income/ balance Rate expense balance Rate expense balance Rate expense --------- ------ ----------- --------- ------ ----------- --------- ------ ----------- (000,000) (000) (000,000) (000) (000,000) (000) INTEREST EARNING ASSETS Time deposits, principally Eurodollars (a)................... $ 1,275 3.38% $ 43,049 $ 1,367 4.07% $ 55,635 $ 1,127 6.49% $ 73,132 Investment securities (b): U.S. Government.................. 2,160 5.83 125,936 1,688 7.32 123,514 1,293 8.60 111,247 State and municipal.............. 363 8.62 31,305 397 9.55 37,897 430 10.38 44,633 Other............................ 149 5.90 8,796 260 7.16 18,608 401 8.65 34,680 --------- ---------- --------- ---------- --------- ---------- Total investment securities............... 2,672 6.21 166,037 2,345 7.68 180,019 2,124 8.97 190,560 Federal funds sold................. 75 3.23 2,421 285 3.79 10,791 225 5.90 13,286 Trading account securities......... 2 4.15 83 1 7.20 72 1 5.10 51 Loans (b)(c)(d): Domestic: Commercial, industrial and other......................... 6,807 8.06 548,786 6,501 8.19 532,619 7,003 9.55 668,605 Real estate.................... 4,426 7.93 350,786 4,530 8.72 394,791 4,338 9.81 425,547 Consumer....................... 2,059 12.44 256,049 2,137 12.81 273,856 3,262 14.65 478,032 Financial institutions......... 704 6.15 43,325 826 6.26 51,710 882 8.75 77,213 Factoring receivables.......... 554 9.62 53.312 486 9.70 47,154 480 10.69 51,327 Lease financing................ 498 8.62 42,907 421 9.59 40,370 416 10.17 42,303 Foreign.......................... 544 5.01 27,258 429 6.53 28,018 431 8.68 37,429 --------- ---------- --------- ---------- --------- ---------- Total loans, net of discounts............... 15,592 8.48 1,322,423 15,330 8.93 1,368,518 16,812 10.59 1,780,456 --------- ---------- --------- ---------- --------- ---------- Total interest earning assets (d)(e)........... $ 19,616 7.82 1,534,013 $ 19,328 8.36 1,615,035 $ 20,289 10.14 2,057,485 ========= ----- ---------- ========= ----- ---------- ========= ----- ---------- FUNDING SOURCES Interest bearing liabilities (b): Deposits in domestic offices (f): Commercial..................... $ 303 3.14 9,522 $ 568 3.97 22,555 $ 1,002 6.23 62,375 NOW accounts................... 1,197 .45 4,871 1,122 1.98 20,137 972 4.24 36,887 Money Market Accounts.......... 3,199 1.93 61,450 3,236 2.70 87,206 2,923 4.76 139,064 Consumer savings............... 2,279 1.26 28,727 2,001 2.56 51,228 1,514 4.52 68,422 Consumer certificates.......... 3,222 4.46 143,779 3,854 5.02 193,401 4,579 6.68 305,720 Time deposits of overseas branches and subsidiaries....... 711 2.57 18,248 756 3.75 28,319 1,227 6.27 76,929 --------- ---------- --------- ---------- --------- ---------- Total interest bearing deposits................ 10,911 2.47 266,597 11,537 3.52 402,846 12,217 5.69 689,397 Short-term funds borrowed: Federal funds purchased........ 1,040 3.08 32,078 889 3.41 30,336 1,200 5.57 66,841 Commercial paper............... 604 3.14 18,982 539 3.72 20,030 791 6.28 49,657 Other.......................... 221 6.05 13,381 116 5.47 6,343 686 6.93 47,511 --------- ---------- --------- ---------- --------- ---------- Total short-term funds borrowed................ 1,865 3.46 64,441 1,544 3.67 56,709 2,677 6.13 164,009 Long-term debt (g)............... 1,333 4.62 61,572 1,211 5.93 70,759 1,075 7.76 82,058 --------- ---------- --------- ---------- --------- ---------- Total interest bearing liabilities............. 14,109 2.78 392,610 14,292 3.71 530,314 15,969 5.86 935,464 Portion of non-interest bearing funding sources................... 5,507 5,036 4,320 --------- ----- ---------- --------- ----- ---------- --------- ---------- Total funding sources (e) .................... $ 19,616 2.00 392,610 $ 19,328 2.75 530,314 $ 20,289 4.61 935,464 ========= ----- ---------- ========= ----- ---------- ========= ----- ---------- Net interest income and net interest margin................... 5.82% $1,141,403 5.61% $1,084,721 5.53% $1,122,021 ===== ========== ===== ========== ===== ==========
71 Non-Interest Earning Assets Cash....................... $ 2,088 $ 1,854 $ 1,706 Allowance for loan losses.. (343) (340) (382) Other assets............... 1,464 1,507 1,436 ------- ------- ------- Total non-interest earning assets....... $ 3,209 $ 3,021 $ 2,760 ======= ======= ======= Non-Interest Bearing Funding Sources Demand deposits: Domestic................. $ 5,096 $ 4,751 $ 4,094 Foreign.................. 369 324 308 Other liabilities.......... 1,457 1,368 1,156 Shareholders' equity....... 1,794 1,614 1,522 Non-interest bearing funding sources used to fund earning assets...... (5,507) (5,036) (4,320) ------- ------- ------- Total net non-interest bearing funding sources........... $ 3,209 $ 3,021 $ 2,760 ======= ======= ======= Supplementary Averages Net demand deposits........ $ 4,138 $ 3,571 $ 2,914 Net Federal funds purchased $ 965 3.07% $29,657 604 3.24% $19,545 975 5.56% $54,184 Certificates of deposit in domestic offices over $100,000............ 286 3.27 9,350 509 4.16 21,190 915 6.48 59,319 Average prime rate......... 6.00 6.25 8.46
(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 1993-1988, 8%, 10%, 9%, 8%, 7% and 12%, 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. 72 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES
1990 1989 1988 ------------------------------ ----------------------------- ----------------------------- Average Income/ Average Income/ Average Income/ balance Rate expense balance Rate expense balance Rate expense -------- ----- ---------- -------- ----- ---------- -------- ----- ---------- (000,000) (000) (000,000) (000) (000,000) (000) INTEREST EARNING ASSETS Time deposits, principally Eurodollars (a)................... $ 659 8.41% $ 55,412 $ 999 9.17% $ 91,629 $ 1,204 7.96% $ 95,889 Investment securities (b): U.S. Government.................. 1,145 9.05 103,673 1,522 8.80 133,861 1,342 8.09 108,513 State and municipal.............. 420 10.51 44,158 415 10.38 43,093 455 10.18 46,316 Other............................ 515 9.01 46,383 706 9.89 69,833 747 8.61 64,300 --------- ---------- --------- ---------- --------- ---------- Total investment securities.............. 2,080 9.34 194,214 2,643 9.34 246,787 2,544 8.61 219,129 Federal funds sold................. 135 8.45 11,412 232 9.35 21,687 298 7.61 22,673 Trading account securities......... 7 8.66 606 38 8.26 3,138 58 7.04 4,083 Loans (b)(c)(d): Domestic: Commercial, industrial and other......................... 7,365 10.76 792,225 7,033 11.51 809,775 6,350 10.31 654,527 Real estate.................... 4,415 10.84 478,653 4,148 11.39 472,443 3,678 10.79 396,941 Consumer....................... 3,587 14.76 529,592 3,086 14.37 443,410 2,715 13.91 377,558 Financial institutions......... 996 10.13 100,869 946 10.41 98,438 919 9.18 84,333 Factoring receivable........... 478 10.42 49,829 458 11.79 53,983 415 13.20 54,790 Lease financing................ 440 10.44 45,921 386 11.15 43,031 322 11.08 35,666 Foreign.......................... 582 9.77 56,876 874 9.23 80,670 977 9.90 96,733 --------- ---------- --------- ---------- --------- ---------- Total loans, net of discounts............... 17,863 11.50 2,053,965 16,931 11.82 2,001,750 15,376 11.06 1,700,548 --------- ---------- --------- ---------- --------- ---------- Total interest earning assets (d)(e)........... $ 20,744 11.16 2,315,609 $ 20,843 11.35 2,364,991 $ 19,480 10.48 2,042,322 ========= ----- ---------- ========= ----- ---------- ========= ----- ---------- FUNDING SOURCES Interest bearing liabilities (b): Deposits in domestic offices (f): Commercial..................... $ 1,370 8.07 109,238 $ 1,555 8.74 134,536 $ 1,364 7.24 97,207 NOW accounts................... 892 5.13 40,976 871 5.08 40,822 881 5.15 41,797 Money Market Accounts.......... 2,621 6.04 156,752 2,433 6.18 149,506 2,622 5.46 142,335 Consumer savings............... 1,366 4.99 68,052 1,339 5.02 67,002 1,431 5.01 71,424 Consumer certificates.......... 4,562 8.27 377,033 4,260 8.61 366,657 3,353 7.91 264,989 Time deposits of overseas branches and subsidiaries............... 943 8.59 81,039 1,439 9.57 137,653 1,567 7.88 123,549 --------- ---------- --------- ---------- --------- ---------- Total interest bearing deposits................ 11,754 7.17 833,090 11,897 7.60 896,176 11,218 6.67 741,301 Short-term funds borrowed: Federal funds purchased........ 1,814 8.11 147,135 2,223 9.25 205,738 1,800 7.66 137,888 Commercial paper............... 1,160 8.17 94,767 880 9.21 81,069 747 7.67 57,267 Other.......................... 1,004 7.36 73,915 601 9.52 57,231 552 8.36 46,174 --------- ---------- --------- ---------- --------- ---------- Total short-term funds borrowed................ 3,978 7.94 315,817 3,704 9.29 344,038 3,099 7.79 241,329 Long-term debt (g)................ 734 9.13 65,293 722 9.22 64,713 773 8.48 63,763 --------- ---------- --------- ---------- --------- ---------- Total interest bearing liabilities............. 16,466 7.37 1,214,200 16,323 7.99 1,304,927 15,090 6.93 1,046,393 Portion of non-interest bearing funding sources................... 4,278 4,520 4,390 --------- --------- --------- Total funding sources (e)............ $ 20,744 5.85 1,214,200 $ 20,843 6.26 1,304,927 $ 19,480 5.37 1,046,393 ========= ----- ---------- ========= ----- ---------- ========= ----- ---------- Net interest income and net interest margin................... 5.31% $1,101,409 5.09% $1,060,064 5.11% $ 995,929 ===== ========== ===== ========== ===== ==========
73
Non-Interest Earnings Assets Cash........................................... $ 1,852 $ 1,808 $ 1,751 Allowance for loan losses...................... (299) (362) (326) Other assets................................... 1,328 1,370 1,315 ------- ------- ------- Total non-interest earning assets.... $ 2,881 $ 2,816 $ 2,740 ======= ======= ======= Non-Interest Bearing Funding Sources Demand deposits: Domestic..................................... $ 4,172 $ 4,088 $ 4,148 Foreign...................................... 273 275 271 Other liabilities.............................. 1,171 1,312 1,244 Shareholders' equity........................... 1,543 1,661 1,467 Non-interest bearing funding sources used to fund earning assets.......................... (4,278) (4,520) (4,390) ------- ------- ------- Total net non-interest bearing funding sources.................... $ 2,881 $ 2,816 $ 2,740 ======= ======= ======= Supplementary Averages Net demand deposits............................ $ 2,821 $ 2,747 $ 2,839 Net Federal funds purchased.................... 1,679 8.08% $135,723 1,991 9.24% $184,051 1,502 7.67% $115,215 Certificates of deposit in domestic offices over $100,000................................ 1,159 8.25 95,599 1,482 8.86 131,327 1,266 7.59 96,128 Average prime rate............................. 10.01 10.87 9.32
(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 1993-1988, 8%, 10%, 9%, 8%, 7% and 12%, 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. 74 CoreStates Financial Corp and Subsidiaries Supplemental Financial Data: Continued CONDENSED CONSOLIDATED STATEMENT OF INCOME (In thousands, except per share amounts)
Year Ended December 31, ------------------------------------------------------------------------ 1993 1992 1991 1990 1989 1988 ----------- ----------- ---------- ---------- ---------- ---------- Interest income and fees.................. $1,510,511 $1,587,360 $2,021,857 $2,272,587 $2,316,416 $1,995,247 Interest expense.......................... 392,610 530,314 935,464 1,214,200 1,304,927 1,046,479 ---------- ---------- ---------- ---------- ---------- ---------- Net interest income...................... 1,117,901 1,057,046 1,086,393 1,058,387 1,011,489 948,768 Provision for losses on loans............. 100,000 119,300 190,601 327,300 306,600 122,800 ---------- ---------- ---------- ---------- ---------- ---------- Net interest income after provision for losses on loans... 1,017,901 937,746 895,792 731,087 704,889 825,968 Non-interest income....................... 503,055 546,509 541,646 412,758 379,295 344,608 Non-financial expenses.................... 1,033,375 1,094,591 1,096,119 977,061 962,581 850,822 ---------- ---------- ---------- ---------- ---------- ---------- Income from continuing operations before income taxes............................ 487,581 389,664 341,319 166,784 121,603 319,754 Provision for income taxes................ 159,654 127,260 113,573 38,128 5,653 39,677 ---------- ---------- ---------- ---------- ---------- ---------- Income before cumulative effect of a change in accounting principle.......... 327,927 262,404 227,746 128,656 115,950 280,077 Cumulative effect of a change in accounting principle, net of tax........ (13,010) (80,986) ---------- ---------- ---------- ---------- ---------- ---------- Net income................................ 314,917 181,418 227,746 128,656 115,950 280,077 Dividends on preferred stock.............. 1,662 20,973 9,350 ---------- ---------- ---------- ---------- ---------- ---------- Net income applicable to common stock..... $ 314,917 $ 181,418 $ 227,746 $ 126,994 $ 94,977 $ 270,727 ========== ========== ========== ========== ========== ========== Per common share data: Income before cumulative effect of a change in accounting principle....... $2.80 $2.27 $2.00 $1.11 $.83 $2.35 ========== ========== ========== ========== ========== ========== Net income............................. $2.69 $1.57 $2.00 $1.11 $.83 $2.35 ========== ========== ========== ========== ========== ========== Average common shares outstanding......... 117,319 115,600 113,624 113,956 114,850 115,034 ========== ========== ========== ========== ========== ==========
75 CoreStates Financial Corp and Subsidiaries Supplemental Financial Data: Continued CONDENSED CONSOLIDATED BALANCE SHEET (in thousands)
December 31, ------------------------------------------------------------------------------ 1993 1992 1991 1990 1989 1988 ----------- ----------- ----------- ----------- ----------- ----------- ASSETS Cash and due from banks..................... $ 2,362,630 $ 2,302,137 $ 1,883,719 $ 2,282,397 $ 2,401,051 $ 2,022,745 Time deposits, principally Eurodollars...... 1,273,373 1,766,727 1,591,264 1,145,690 733,762 1,577,899 Investment securities....................... 2,731,771 2,610,191 2,264,769 2,060,390 2,422,708 2,676,378 Loans....................................... 16,362,785 15,469,571 15,781,330 17,628,657 17,573,397 15,914,011 Allowance for loan losses................... (347,547) (322,483) (348,081) (407,400) (506,545) (345,499) Funds sold.................................. 3,027 105,490 163,500 117,823 226,076 416,891 Trading account securities.................. 6,393 2,796 1,255 3,883 18,691 3,245 Due from customers on acceptances........... 331,411 632,564 212,024 499,690 371,883 551,516 Premises, equipment and other assets........ 941,718 1,132,105 1,150,074 1,228,400 1,261,470 966,812 ----------- ----------- ----------- ----------- ----------- ----------- Total assets........................ $23,665,561 $23,699,098 $22,699,854 $24,559,530 $24,502,493 $23,783,998 =========== =========== =========== =========== =========== =========== LIABILITIES Deposits: Domestic: Non-interest bearing.................... $ 6,008,016 $ 5,820,098 $ 5,235,907 $ 5,085,421 $ 5,034,754 $ 4,965,017 Interest bearing........................ 10,148,185 10,675,906 10,912,756 11,263,742 10,978,555 10,012,158 Overseas branches and subsidiaries........ 796,902 766,119 839,327 1,181,341 1,296,926 1,709,970 ----------- ----------- ----------- ----------- ----------- ----------- Total deposits...................... 16,953,103 17,262,123 16,987,990 17,530,504 17,310,235 16,687,145 Short-term funds borrowed................... 1,836,409 1,778,042 1,943,775 3,478,989 3,589,608 3,374,964 Bank acceptances outstanding................ 336,357 635,132 213,613 503,049 376,213 567,097 Other liabilities........................... 1,125,175 1,066,956 801,674 816,117 955,999 868,779 Long-term debt.............................. 1,455,036 1,253,359 1,154,330 787,230 710,062 737,505 ----------- ----------- ----------- ----------- ----------- ----------- Total liabilities................... 21,706,080 21,995,612 21,101,382 23,115,889 22,942,117 22,235,490 ----------- ----------- ----------- ----------- ----------- ----------- SHAREHOLDERS' EQUITY Preferred................................... 100,000 100,000 Common...................................... 1,959,481 1,703,486 1,598,472 1,443,641 1,460,376 1,448,508 ----------- ----------- ----------- ----------- ----------- ----------- Total shareholders' equity.......... 1,959,481 1,703,486 1,598,472 1,443,641 1,560,376 1,548,508 ----------- ----------- ----------- ----------- ----------- ----------- Total liabilities and shareholders' equity.............. $23,665,561 $23,699,098 $22,699,854 $24,559,530 $24,502,493 $23,783,998 =========== =========== =========== =========== =========== ===========
76 CoreStates Financial Corp and Subsidiaries Supplemental Financial Data: Continued SHAREHOLDERS' DATA
1993 1992 1991 1990 1989 1988 ------- ------- ------- ------- ------- ------- Earnings and Dividends Per Share Applicable to Common Shares Income before cumulative effect of a change in accounting principle............. $ 2.80 $ 2.27 $ 2.00 $ 1.11 $ .83 $ 2.35 Dividends paid............................... 1.11 1.00 .96 .96 .84 .75 Dividends declared........................... 1.14 1.02 .97 .96 .87 .77 1/4 Common Stock Market Bid Information First quarter: High....................................... $29 3/4 $25 1/8 $18 3/8 $21 5/8 $21 3/4 $20 1/8 Low........................................ 26 3/8 21 7/8 12 18 5/8 20 16 3/4 Second quarter: High....................................... 30 1/8 27 20 3/4 22 24 1/8 20 7/8 Low........................................ 25 1/8 21 17 3/4 18 3/8 21 1/2 19 Third quarter: High....................................... 29 3/4 26 1/4 23 1/2 20 3/4 25 20 5/8 Low........................................ 26 3/4 23 5/8 19 1/4 13 23 1/8 19 3/8 Fourth quarter: High....................................... 29 3/4 28 7/8 24 3/8 15 7/8 23 1/2 20 1/2 Low........................................ 25 1/8 24 1/8 20 7/8 11 3/4 19 1/4 20 Year-end..................................... 26 1/8 28 1/2 24 15 5/8 21 3/8 20 1/4 Year-end bid/net income...................... 9.3x 12.6x 12.0x 14.1x 25.8x 8.6x Book value per share at year-end............. $ 16.68 $ 14.58 $ 14.00 $ 12.74 $ 12.75 $ 12.60 OTHER SELECTED DATA Operating Ratios: Income from continuing operations applicable to common stock 1993 1992 1991 1990 1989 1988 as a percent of: ------- ------- ------- ------- ------- ------- Operating income......................... 16.29% 12.30% 8.88% 4.73% 3.52% 11.58% Average common shareholders' equity...... 18.27 16.26 14.96 8.32 6.08 20.14 Average total assets..................... 1.44 1.17 .99 .54 .40 1.22 Average total shareholders' equity as a percent of average total assets............ 7.86 7.22 6.60 6.53 7.02 6.60 Dividends declared as a percent of income from continuing operations.......... 40.80 44.76 48.07 78.18 72.41 22.42 Full Time Equivalent Staff at Year-End....... 13,715 13,782 13,997 14,024 14,371 14,034 Number of Locations.......................... 365 360 408 387 428 427 Number of Registered Common Shareholders..... 32,825 33,570 35,972 37,706 41,249 44,032
77 CoreStates Financial Corp and Subsidiaries Supplemental Financial Data: continued
Rate/Volume Analysis Taxable Equivalent Basis - (in thousands) 1993 vs. 1992 1992 vs. 1991 ---------------------------------- ------------------------------------ Increase (decrease) in interest Increase (decrease) in interest ---------------------------------- ------------------------------------ Change attributable to Change attributable to Income / ---------------------- Income/ ------------------------ expense Volume Rate expense Volume Rate ----------- ---------- ---------- --------- ---------- ---------- Interest earning assets - ----------------------- Time deposits, principally Eurodollars.......................................... $ (12,586) $ (3,744) $ (8,842) $ (17,497) $ 15,576 $ (33,073) Investment securities.................................. (13,982) 25,114 (39,096) (10,541) 19,824 (30,365) Federal funds sold..................................... (8,370) (7,959) (411) (2,495) 3,540 (6,035) Trading account securities............................. 11 72 (61) 21 21 Loans: Domestic............................................ (45,335) 18,705 (64,040) (402,527) (207,567) (194,960) Foreign............................................. (760) 7,510 (8,270) (9,411) (174) (9,237) --------- -------- --------- --------- --------- --------- Total interest income............................ (81,022) 39,698 (120,720) (442,450) (168,801) (273,649) --------- -------- --------- --------- --------- --------- Interest bearing funds - ---------------------- Deposits: Domestic............................................. (126,178) (20,709) (105,469) (237,941) (11,919) (226,022) Overseas............................................. (10,071) (1,688) (8,383) (48,610) (29,532) (19,078) Short-term funds borrowed: Federal funds purchased.............................. 1,742 5,149 (3,407) (36,505) (17,323) (19,182) Other................................................ 5,990 6,851 (861) (70,795) (54,088) (16,707) Long-term debt......................................... (9,187) 7,235 (16,422) (11,299) 10,554 (21,853) --------- -------- --------- --------- --------- --------- Total interest expense........................... (137,704) (3,162) (134,542) (405,150) (102,308) (302,842) --------- -------- --------- --------- --------- --------- Net interest income.................................... $ 56,682 $ 42,860 $ 13,822 $ (37,300) $ (66,493) $ 29,193 - ------------------- ========= ======== ========= ========= ========= =========
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 $60.2 million, $54.5 million and $55.7 million of loan fees for the years ended 1993, 1992 and 1991, respectively. Non-performing loans are included in interest earning assets. The changes in interest expense on domestic time 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. 78 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, 1993 (in thousands):
1993 1992 1991 1990 1989 ----------- ----------- ----------- ----------- ----------- Domestic loans: Commercial, industrial and other......... $ 7,317,352 $ 6,745,113 $ 6,685,263 $ 7,148,520 $ 7,228,726 ----------- ----------- ----------- ----------- ----------- Real estate loans: Construction and development........... 252,629 327,673 507,427 659,916 812,479 Residential............................ 1,709,343 1,908,355 1,743,415 1,718,820 1,501,400 Other, primarily commercial mortgages and commercial loans secured by owner-occupied real estate........... 2,380,114 2,408,978 2,259,973 2,158,276 1,932,591 ----------- ----------- ----------- ----------- ----------- Total real estate loans............ 4,342,086 4,645,006 4,510,815 4,537,012 4,246,470 ----------- ----------- ----------- ----------- ----------- Consumer loans: Installment............................ 1,032,320 1,072,804 1,460,038 1,627,944 1,717,681 Credit card............................ 1,161,046 939,493 955,850 1,995,441 1,719,360 ----------- ----------- ----------- ----------- ----------- Total consumer loans............... 2,193,366 2,012,297 2,415,888 3,623,385 3,437,041 ----------- ----------- ----------- ----------- ----------- Financial institutions................... 856,837 775,947 973,138 1,017,741 1,049,422 Factoring receivables.................... 555,211 454,244 402,752 418,129 420,565 Lease financing.......................... 554,851 436,809 402,109 421,823 402,193 ----------- ----------- ----------- ----------- ----------- Total domestic loans.............. 15,819,703 15,069,416 15,389,965 17,166,610 16,784,417 ----------- ----------- ----------- ----------- ----------- Foreign loans: Loans to or guaranteed by foreign banks: Government owned and central banks.............................. 257 1,506 7,725 6,778 Other foreign banks.................. 332,149 203,103 130,308 154,158 184,622 ----------- ----------- ----------- ----------- ----------- 332,149 203,360 131,814 161,883 191,400 Commercial and industrial................ 210,573 196,795 242,098 300,164 234,171 Loans to other financial institutions.... 360 17,453 3,950 Loans to or guaranteed by foreign governments/agencies excluding banks.................................. 359,459 ----------- ----------- ----------- ----------- ----------- Total foreign loans................ 543,082 400,155 391,365 462,047 788,980 ----------- ----------- ----------- ----------- ----------- Total loans........................ $16,362,785 $15,469,571 $15,781,330 $17,628,657 $17,573,397 =========== =========== =========== =========== ===========
79 CoreStates Financial Corp and Subsidiaries Supplemental Financial Data: Continued RISK ELEMENT DATA: FOREIGN OUTSTANDINGS At December 31, 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. At December 31, 1992 and 1991, countries where such outstandings exceeded 1% of total assets were as follows (in thousands):
Banks and other Governments Commercial financial and and institutions agencies industrial Total ------------ ----------- ----------- -------- December 31, 1992 United Kingdom................. $180,114 $106,303 $286,417 December 31, 1991 United Kingdom................. 204,300 123,707 328,007
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. Outstandings below 1%, but over .75% of total assets were $185,162 in the United Kingdom at December 31, 1993; $191,724 in France, $197,974 in Germany and $191,368 in Korea at December 31, 1992; and $183,829 in France at December 31, 1991. 80 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, 1993 (in thousands):
1993 1992 1991 1990 1989 --------- --------- --------- --------- --------- Non-accrual loans Domestic.......................... $164,266 $278,592 $365,641 $375,702 $116,728 Foreign........................... 171 3,047 8,797 29,139 217,465 -------- -------- -------- -------- -------- Total non-accrual loans...... 164,437 281,639 374,438 404,841 334,193 -------- -------- -------- -------- -------- Renegotiated loans Domestic.......................... 36,440 25,030 27,108 6,547 8,246 -------- -------- -------- -------- -------- Total renegotiated loans..... 36,440 25,030 27,108 6,547 8,246 -------- -------- -------- -------- -------- Total non-performing loans... 200,877 306,669 401,546 411,388 342,439 -------- -------- -------- -------- -------- Other real estate owned (OREO) Acquired through foreclosure or exchange..................... 29,976 28,612 35,020 31,217 12,731 In-substance foreclosure.......... 15,017 47,570 48,531 8,294 Property formerly used in banking operations.............. 6,202 3,908 2,022 -------- -------- -------- -------- -------- Total OREO................... 51,195 80,090 85,573 39,511 12,731 -------- -------- -------- -------- -------- Total non-performing assets.. $252,072 $386,759 $487,119 $450,899 $355,170 ======== ======== ======== ======== ======== Non-performing assets as a percentage of loans plus OREO... 1.54% 2.49% 3.07% 2.55% 2.02% ======== ======== ======== ======== ======== Non-performing assets as a percentage of total assets...... 1.07% 1.63% 2.15% 1.84% 1.45% ======== ======== ======== ======== ========
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, 1993 (in thousands):
1993 1992 1991 -------- ------- ------- Interest income which would have been recorded in accordance with original terms: Domestic.............................. $20,840 $26,141 $42,482 Foreign............................... 38 324 1,462 ------- ------- ------- Total............................ 20,878 26,465 43,944 ------- ------- ------- Interest income reflected in total operating income: Domestic.............................. 15,628 17,853 11,371 Foreign............................... ------- ------- ------- Total............................ 15,628 17,853 11,371 ------- ------- ------- Net reduction in interest income and net interest income.......................... $ 5,250 $ 8,612 $32,573 ======= ======= =======
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, 1993 were as follows (in thousands):
1993 1992 1991 1990 1989 ------- ------- ------- ------- ------- Domestic.......................... $33,510 $72,569 $72,173 $79,423 $61,131 ------- ------- ------- ------- ------- Total........................... $33,510 $72,569 $72,173 $79,423 $61,131 ======= ======= ======= ======= =======
81 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, 1993 (in thousands):
1993 1992 1991 1990 1989 -------- -------- -------- -------- -------- Balance at beginning of year: Domestic....................................................... $312,483 $338,081 $390,887 $219,778 $187,806 Foreign........................................................ 10,000 10,000 16,513 286,767 157,693 -------- -------- -------- -------- -------- 322,483 348,081 407,400 506,545 345,499 -------- -------- -------- -------- -------- Allowance for loans purchased at date of purchase Domestic.................................................... 2,703 6,146 6,415 -------- -------- -------- 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................................................. 38,579 22,648 22,892 29,415 14,171 Real estate.................................................. 7,194 4,986 5,645 8,582 1,882 Consumer..................................................... 17,133 20,594 19,183 10,004 11,204 Financial institutions....................................... 2,246 2,776 1,966 1,607 12 Foreign........................................................ 12,645 13,138 26,586 17,110 1,618 -------- -------- -------- -------- -------- Total recoveries............................................ 77,797 64,142 76,272 66,718 28,887 -------- -------- -------- -------- -------- Charge-offs, by type of loan: Domestic: Commercial, industrial and other............................................... 68,700 74,013 96,099 65,944 39,699 Real estate.................................................. 38,986 49,528 63,213 76,275 9,893 Consumer..................................................... 46,581 67,599 121,835 86,309 59,829 Financial institutions....................................... 816 3,195 14,669 5,993 3,891 Foreign........................................................ 5 2,890 264,788 67,544 -------- -------- -------- -------- -------- Total loans charged off..................................... 155,083 194,340 298,706 499,309 180,856 -------- -------- -------- -------- -------- Total net charge-offs........................................... 77,286 130,198 222,434 432,591 151,969 -------- -------- -------- -------- -------- Provision charged to operating expense: Domestic....................................................... 112,645 132,433 220,810 349,876 111,600 Foreign........................................................ (12,645)(a) (13,133)(a) (30,209)(a) (22,576)(a) 195,000 -------- -------- -------- -------- -------- 100,000 119,300 190,601 327,300 306,600 -------- -------- -------- -------- -------- Balance at end of year: Domestic....................................................... 337,547 312,483 338,081 390,887 219,778 Foreign........................................................ 10,000 10,000 10,000 16,513 286,767 -------- -------- -------- -------- -------- $347,547 $322,483 $348,081 $407,400 $506,545 ======== ======== ======== ======== ======== Ratios: Net charge-offs as a percentage of average loans outstanding................................... .50% .85% 1.32% 2.42% .90% ===== ===== ===== ===== ===== Allowance for loan losses as a percentage of year-end loans................................... 2.12% 2.08% 2.21% 2.31% 2.88% ===== ===== ===== ===== =====
(a) Reflects reallocation of the foreign allowance for loan losses to the domestic allowance for loan losses. 82 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 such distributions to each loan type at December 31, 1993, 1992, 1991 and 1990 is illustrated in the table below (in millions):
1993 1992 1991 1990 ------------------- ------------------- ------------------- ------------------- % % % % of Loan of Loan of Loan of Loan Allowance type Allowance type Allowance type Allowance type --------- -------- --------- -------- --------- -------- --------- -------- Loan type - --------- Domestic: Commercial and industrial.. $157.0 2.0% $145.0 2.0% $180.7 2.5% $127.6 1.7% Real estate: Construction............. 53.0 21.0 70.7 21.6 60.2 11.9 108.2 16.4 Other.................... 34.0 .8 10.0 .2 15.0 .4 40.0 1.0 Consumer................... 78.5 3.6 68.8 3.4 72.2 3.0 105.1 2.9 Other domestic loans....... 15.0 1.1 18.0 1.5 10.0 .7 10.0 .7 Foreign...................... 10.0 1.8 10.0 2.5 10.0 2.6 16.5 3.6 ------ ------ ------ ------ Total................... $347.5 2.1% $322.5 2.1% $348.1 2.2% $407.4 2.3% ====== ==== ====== ==== ====== ==== ====== ====
- ------------------------------------------ (a) This distribution is made for analytical purposes. It does not represent specific allocations of the allowance. The total allowance is available to absorb losses from any segment of the portfolio. CERTIFICATES OF DEPOSIT OVER $100,000 ISSUED BY DOMESTIC OFFICES (in thousands)
December 31, ---------------------------------------- 1993 1992 -------------------- ------------------ Amount Percent Amount Percent -------- ------- ------- ------- Maturity Distribution 3 months or less.................................................. $154,129 69.5% $272,587 54.0% 3 through 6 months................................................ 30,491 13.7 92,741 18.4 6 through 12 months............................................... 13,769 6.2 66,129 13.1 Over 12 months.................................................... 23,533 10.6 73,252 14.5 -------- ----- -------- ----- $221,922 100.0% $504,709 100.0% ======== ===== ======== =====
83 CoreStates Financial Corp and Subsidiaries Supplemental Financial Data: Continued
INTEREST SENSITIVITY ANALYSIS AT DECEMBER 31, 1993 (in millions) Rate Maturity Period ---------------------------------------------------- 1-90 91-181 182-365 1-2 3-5 > 5 Days Days Days Years Years Years Total ------ ------ ------- ------ ------ ------ ------ EARNING ASSETS Federal funds sold, resale agreements and trading account securities............................... $ 9 $ 9 Time deposits....................................... 578 $ 533 $ 162 1,273 Investment securities............................... 779 280 347 $ 527 $ 434 $ 365 2,732 Interest rate swaps................................. 637 145 345 691 1,787 695 4,300 Asset financial futures............................. 296 79 195 20 15 605 ------- ------- -------- ------ ------- ------- ------- Total discretionary assets..................... 2,299 1,037 1,049 1,238 2,236 1,060 8,919 Total loans(a)...................................... 11,587 893 846 1,190 1,617 230 16,363 ------- ------- -------- ------ ------- ------- ------- Total earning assets........................... 13,886 1,930 1,895 2,428 3,853 1,290 25,282 ------- ------- -------- ------ ------- ------- ------- FUNDING SOURCES Federal funds purchased, repurchase agreements and other short-term funds borrowed......................................... 1,825 11 1,836 Domestic and foreign time deposits(b)............... 869 21 5 5 4 70 974 Long-term debt...................................... 616 19 30 122 29 639 1,455 Interest rate swaps................................. 3,761 25 33 149 332 4,300 Liability financial futures......................... 530 55 20 605 ------- ------- -------- ------ ------- ------- ------- Total discretionary liabilities................ 7,601 131 88 276 365 709 9,170 ------- ------- -------- ------ ------- ------- ------- Savings certificates................................ 874 610 478 364 370 301 2,997 Money market, savings and NOW accounts.............. 2,070 660 866 1,529 1,849 6,974 Net non-interest bearing funds(c)(d)................ 3,763 2,378 6,141 ------- ------- -------- ------ ------- ------- ------- Total savings certificates and indefinite maturity liabilities........................ 6,707 1,270 1,344 1,893 2,219 2,679 16,112 ------- ------- -------- ------ ------- ------- ------- Total net funding sources...................... 14,308 1,401 1,432 2,169 2,584 3,388 25,282 ------- ------- -------- ------ ------- ------- ------- Period gap..................................... (422) 529 463 259 1,269 (2,098) -0- Cumulative gap................................. (422) 107 570 829 2,098 -0- Adjustments(e)................................. 395 (619) (318) (397) (1,248) 2,187 -0- ------- ------- -------- ------ ------- ------- ------- Adjusted period gap............................ $ (27) $ (90) $ 145 $ (138) $ 21 $ 89 $ -0- ======= ======= ======== ====== ======= ======= ======= Cumulative gap................................. $ (27) $ (117) $ 28 $ (110) $ (89) $ -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) Net non-interest bearing funds is the sum of non-interest bearing liabilities and shareholders' equity minus non-interest earning assets. (d) 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, 1993 and the trend volume at the current level of interest rates. (e) 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. 84 CoreStates Financial Corp and Subsidiaries SUPPLEMENTAL FINANCIAL DATA: Continued LOAN MATURITY AND INTEREST SENSITIVITY, NET OF UNEARNED DISCOUNTS The contractual loan maturity of loans outstanding at December 31, 1993 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............... $5,785,160 $1,262,430 $269,762 $ 7,317,352 ---------- ---------- -------- ----------- Real estate loans: Construction and development....................... 132,193 109,422 11,014 252,629 Other, primarily permanent commercial mortgages.... 794,295 1,320,214 383,866 2,498,375 ---------- ---------- -------- ----------- Total real estate loans.................... 926,488 1,429,636 394,880 2,751,004 ---------- ---------- -------- ----------- Loans to financial institutions: Domestic commercial banks and bank holding companies........................... 20,653 2,000 22,653 Other.............................................. 754,167 76,111 3,906 834,184 ---------- ---------- -------- ----------- Total loans to financial institutions...... 754,167 96,764 5,906 856,837 ---------- ---------- -------- ----------- Factoring receivables................................ 555,211 555,211 ---------- ----------- Lease financing...................................... 5,069 44,819 49,888 ---------- ---------- ----------- Foreign loans........................................ 510,490 26,936 5,656 543,082 ---------- ---------- -------- ----------- Total loans (excluding loans to individuals)(a)......................... $8,536,585 $2,860,585 $676,204 $12,073,374 ========== ========== ======== ===========
(a) Loans due after one year totalling $2,546,516 have fixed interest rates. The remaining 28% of such loans or $990,273 have floating or adjustable rates. 85 CoreStates Financial Corp and Subsidiaries Supplemental Financial Data: Continued
INVESTMENT SECURITIES (in thousands) Carrying Value at December 31, 1993(a) 1992 1991 ---------- ---------- ---------- U.S. Treasury........................................ $ 834,208 $ 750,556 $ 600,627 U.S. Government agencies and corporations.................................... 1,365,644 1,331,243 979,478 State and municipal.................................. 291,618 372,943 367,475 Other................................................ 240,301 155,449 317,189 ---------- ---------- ---------- $2,731,771 $2,610,191 $2,264,769 ========== ========== ==========
(a) Held-to-maturity and available-for-sale portfolios.
Maturity Distribution and Weighted Average Yield at December 31, 1993(a) U.S. Government Total Agencies and State and --------------------- U.S. Treasury Corporations Municipal Other Amount Yield(b) ------------- --------------- ---------- ---------- ---------- --------- 1 year or less.................................. $ 206,876 $ 186,290 $ 81,164 $ 49,812 $ 524,142 5.64% 1 year through 5 years.......................... 356,384 1,018,884 143,265 15,248 1,533,781 5.52 5 years through 10 years........................ 270,901 72,795 32,733 2,917 379,346 6.50 After 10 years.................................. 47 87,675 34,456 172,324 294,502 7.21 ---------- ---------- ---------- ---------- ---------- $ 834,208 $1,365,644 $ 291,618 $ 240,301 $2,731,771 5.86 ========== ========== ========== ========== ==========
(a) Held-to-maturity and available-for-sale portfolios. (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 - $2,196; 1 year to 5 years - $5,009; 5 years to 10 years - $1,050 and after 10 years - $2,240. 86 CoreStates Financial Corp and Subsidiaries SUPPLEMENTAL FINANCIAL DATA: Continued FOURTH QUARTER RESULTS CoreStates recorded net income of $85.3 million or $.73 per share in the fourth quarter of 1993, compared to $69.1 million or $.59 per share for the same period in 1992. The 23.7% increase in fourth quarter net income per share was principally attributable to: a $7.4 million improvement in net interest income reflecting strengthened loan demand and an increase in the net financial margin; a $2.0 million reduction in the provision for losses on loans, mostly due to an improving outlook for credit quality including a 14.7% reduction in non- performing assets during the fourth quarter; and increases in income from fee- based services. The net financial margin for the fourth quarter of 1993 was 5.75%, compared to 5.72% for the prior year fourth quarter. Average loans outstanding for the fourth quarter of 1993 were $15.9 billion, up 5.4% from the prior year. Total non-interest income for the fourth quarter of 1993 decreased $27.0 million from the prior year fourth quarter mostly due to the late 1992 restructuring of CoreStates' consumer electronic payment services business into Electronic Payment Services, Inc. (EPS), a joint venture formed with three other banking companies. Included in non-interest income for the fourth quarter of 1993 was $2.5 million for dividends on EPS preferred stock and CoreStates' 31% equity share in fourth quarter net income of EPS. The prior year fourth quarter included fee income from the electronic payment services business and a pre-tax gain of $41.1 million, $25.7 million after tax, resulting from the formation of EPS. Excluding the impact of securities gains and the formation of EPS, non-interest income for the fourth quarter of 1993 grew 26% over the fourth quarter of 1992. The improvement in income from fee-based services was mostly due to: an increase in service charges on deposits of $4.1 million or 11.0% reflecting volume increases and commercial and correspondent customers' decisions to pay fees for banking services in place of maintaining deposit balances; an increase in trust income of $5.4 million or 31.2% due to growth in assets and related fees in the Personal Trust, Investment Services and Employee Benefit areas; and an increase in fees for international services of $1.3 million or 8.1% principally due to increased volume from new foreign branches opened over the past year. Also contributing to the growth in non-interest income was the inclusion of $4.6 million of fees earned by Financial Telesis, a third-party provider of lockbox processing and data management services which was acquired by CoreStates on December 31, 1992. Non-financial expenses for the fourth quarter of 1993 totaled $266.4 million, a decrease of $37.1 million from the fourth quarter of 1992. Comparability of fourth quarter 1993 and 1992 expenses was impacted by: the formation of the EPS joint venture; the acquisition of Financial Telesis; and by certain significant expenses recorded in the fourth quarter of 1992 including $16.2 million for systems enhancements and operations consolidations, $7.4 million of expenses associated with personnel related initiatives; and $4.5 million for streamlining business operations. Excluding the impact of EPS, Financial Telesis and the significant expenses in the fourth quarter of 1992, total non-financial expenses increased less than 3% for the fourth quarter of 1993. 87 CoreStates Financial Corp and Subsidiaries SUPPLEMENTAL FINANCIAL DATA: Continued FOURTH QUARTER RESULTS: Continued
Condensed Consolidated Statement of Income (in thousands, except per share amounts) Three Months Ended December 31, ------------------ 1993 1992 -------- -------- Interest income and fees.............................. $376,940 $384,585 Interest expense...................................... 95,602 110,668 -------- -------- Net interest income............................... 281,338 273,917 Provision for losses on loans......................... 25,000 27,000 -------- -------- Net interest income after provision for losses on loans............................................ 256,338 246,917 Non-interest income................................... 132,537 159,586(a) Non-financial expenses................................ 266,373 303,475 -------- -------- Income before income taxes............................ 122,502 103,028 Provision for income taxes............................ 37,190 33,921 -------- -------- Net income............................................ $ 85,312 $ 69,107 ======== ======== PER COMMON SHARE DATA (Based on weighted average shares of 117.269 million in 1993 and 116.422 million in 1992): Net income............................................ $.73 $.59 ==== ==== Cash dividends declared............................... $.30 $.27 ==== ====
- -------------------------------------- (a) Includes a $41.1 million pre-tax gain recorded on the formation of a joint venture. 88 CoreStates Financial Corp and Subsidiaries Supplemental Financial Data: Continued CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES
Three Months Ended December 31, 1993 September 30, 1993 ---------------------------- ---------------------------- Average Income/ Average Income/ balance Rate expense balance Rate expense --------- ------ --------- --------- ------ --------- (000,000) (000) (000,000) (000) INTEREST EARNING ASSETS Time deposits, principally Eurodollars (a)........ $ 1,145 3.46% $ 9,983 $ 1,158 3.22% $ 9,386 Investment securities(b): U.S. Government................................. 2,200 5.23 29,007 2,163 5.70 31,087 State and municipal............................. 322 8.88 7,150 337 8.72 7,347 Other........................................... 143 2.99 1,078 136 5.10 1,748 ------- -------- ------- -------- Total investment securities........... 2,665 5.54 37,235 2,636 6.05 40,182 Federal funds sold................................ 90 2.84 644 62 3.51 548 Trading account securities........................ 2 5.60 28 2 4.80 24 Loans (b)(c)(d): Domestic: Commercial, industrial and other.............. 7,049 8.05 142,967 7,005 8.12 143,408 Real estate................................... 4,213 7.51 79,726 4,482 7.87 88,878 Consumer...................................... 2,203 12.65 70,256 2,061 11.89 61,785 Financial institutions........................ 756 6.05 11,520 724 5.78 10,547 Factoring receivables......................... 614 8.55 13,233 579 10.26 14,969 Lease financing............................... 541 8.14 11,011 514 8.36 10,738 Foreign......................................... 572 4.69 6,766 505 5.03 6,400 ------- -------- ------- -------- Total loans, net of discounts......... 15,948 8.35 335,479 15,870 8.42 336,725 ------- -------- ------- -------- Total interest earning assets (d)..... $19,850 7.66 383,369 $19,728 7.78 386,865 ======= ----- -------- ======= ----- -------- FUNDING SOURCES Interest bearing liabilities(b): Deposits in domestic offices (e): Commercial.................................... $ 290 3.34 2,443 $ 268 3.14 2,121 NOW accounts.................................. 1,208 .38 1,049 1,180 .30 813 Money Market Accounts......................... 3,216 1.97 15,912 3,181 1.94 15,496 Consumer savings.............................. 2,262 1.07 6,104 2,322 1.22 7,156 Consumer certificates......................... 3,059 4.48 34,577 3,127 4.36 34,383 Time deposits of overseas branches and subsidiaries............................... 707 2.28 4,059 672 2.62 4,442 ------- -------- ------- -------- Total interest bearing deposits......... 10,742 2.39 64,144 10,750 2.40 64,411 Short-term funds borrowed: Federal funds purchased....................... 967 3.27 7,960 983 2.89 7,156 Commercial paper.............................. 554 3.14 4,387 627 3.13 4,943 Other......................................... 310 7.70 6,016 367 3.56 3,289 ------- -------- ------- -------- Total short-term funds borrowed....... 1,831 3.98 18,363 1,977 3.09 15,388 Long-term debt (f).............................. 1,400 3.71 13,095 1,386 4.61 16,096 ------- -------- ------- -------- Total interest bearing liabilities.... 13,973 2.71 95,602 14,113 2.70 95,895 Portion of non-interest bearing funding sources......................................... 5,877 5,615 ------- -------- ------- -------- Total funding sources................. $19,850 1.91 95,602 $19,728 1.93 95,895 ======= ----- -------- ======= ----- -------- Net interest income and net interest margin....... 5.75% $287,767 5.85% $290,970 ===== ======== ===== ========
December 31, 1992 ---------------------------- Average Income/ balance Rate expense --------- ------ --------- (000,000) (000) INTEREST EARNING ASSETS Time deposits, principally Eurodollars (a)........ $ 1,551 3.52% $ 13,713 Investment securities(b): U.S. Government................................. 1,987 6.62 33,060 State and municipal............................. 412 9.49 9,773 Other........................................... 194 5.78 2,871 ------- -------- Total investment securities........... 2,593 7.00 45,650 Federal funds sold................................ 258 3.11 2,016 Trading account securities........................ 1 6.37 26 Loans (b)(c)(d): Domestic: Commercial, industrial and other.............. 6,420 7.95 128,319 Real estate................................... 4,561 8.69 99,657 Consumer...................................... 1,989 12.35 61,737 Financial institutions........................ 749 6.13 11,548 Factoring receivables......................... 520 9.19 12,013 Lease financing............................... 434 9.23 10,014 Foreign......................................... 463 5.96 6,933 ------- -------- Total loans, net of discounts......... 15,136 8.68 330,221 ------- -------- Total interest earning assets (d)..... $19,539 7.97 391,626 ======= ----- -------- FUNDING SOURCES Interest bearing liabilities(b): Deposits in domestic offices (e): Commercial.................................... $ 391 3.21 3,152 NOW accounts.................................. 1,187 1.31 3,550 Money Market Accounts......................... 3,227 2.06 16,628 Consumer savings.............................. 2,196 2.11 11,621 Consumer certificates......................... 3,601 4.69 42,411 Time deposits of overseas branches and subsidiaries............................... 731 2.71 4,986 ------- -------- Total interest bearing deposits......... 11,333 2.92 82,348 Short-term funds borrowed: Federal funds purchased....................... 816 2.95 6,050 Commercial paper.............................. 543 3.21 4,383 Other......................................... 40 11.80 1,186 ------- -------- Total short-term funds borrowed....... 1,399 3.30 11,619 Long-term debt (f).............................. 1,250 5.39 16,701 ------- -------- Total interest bearing liabilities.... 13,982 3.15 110,668 Portion of non-interest bearing funding sources......................................... 5,557 ------- -------- Total funding sources................. $19,539 2.25 110,668 ======= ----- -------- Net interest income and net interest margin....... 5.72% $280,958 ===== ========
89
NON-INTEREST EARNING ASSETS Cash.............................................. $ 2,110 $ 2,054 $ 2,014 Allowance for loan losses......................... (353) (344) (330) Other assets...................................... 1,319 1,393 1,627 ------- ------- ------- Total non-interest earning assets..... $ 3,076 $ 3,103 $ 3,311 ======= ======= ======= NON-INTEREST BEARING FUNDING SOURCES Demand deposits: Domestic........................................ $ 5,287 $ 5,066 $ 5,216 Foreign......................................... 377 385 368 Other liabilities................................. 1,423 1,429 1,602 Shareholders' equity.............................. 1,866 1,838 1,682 Non-interest bearing funding sources used to fund earning assets.................................. (5,877) (5,615) (5,557) ------- ------- ------- Total net non-interest bearing funding sources............................. $ 3,076 $ 3,103 $ 3,311 ======= ======= ======= SUPPLEMENTARY AVERAGES Net demand deposits............................... $ 4,198 $ 4,249 $ 4,374 Net Federal funds purchased....................... 878 3.31% $ 7,316 921 2.85% $ 6,608 558 2.88% $ 4,034 Certificates of deposit in domestic offices over $100,000........................................ 273 3.42 2,350 245 3.41 2,107 322 3.98 3,222 Average prime rate................................ 6.00 6.00 6.00
(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) Average balances on time deposits in domestic offices are reduced by specified reserve amounts for purposes of rate calculations. (f) Rates on long-term debt are based on average balances excluding average capital lease obligations. 90 CoreStates Financial Corp and Subsidiaries GRAPHICS APPENDIX LIST
EDGAR Version Typeset Version - ------------- --------------- Narrative description of graphs from the Management's Discussion and Analysis of Financial Condition and Results of Operations: Page 11 contains the plotting points for the The Average Common Equity to Assets graph is a 1990, 1991, 1992, and 1993 Average Common Equity to Assets Graph five year, vertical bar graph with the years 1989, listed along the x axis. Lines numbering 0 to 8 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 Montgomery Securities Regional Bank index ratio. Page 14 contains the plotting points for the The Wholesale Loans by Industry graph is a horizontal bar graph with 9 Wholesale Loans by Industry Graph 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, 1993 loan outstandings as a percentage of December 31, 1993 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 22 contains the plotting points for the The Non-performing Assets to Loans Plus OREO graph is a five year, vertical Non-performing Assets to Loans Plus OREO Graph vertical bar graph with the years 1989, 1990, 1991, 1992, and 1993 listed along the x axis. Lines numbering 0 to 5 are drawn along the y axis and represent, in percent, the non-performing assets to loans plus OREO ratio. There are 2 bars for each year: the first representing the CoreStates ratio and the second representing the Montgomery Securities Regional Bank Index ratio. Page 25 contains the plotting points for the The Net Interest Margin graph is a five year,vertical bar gralph with the Net Interest Margin Graph years 1989, 1990, 1991, 1992, and 1993 listed along the x axis. Lines numbering 0 to 6 are drawn along the y axis and represent, in percent, the net interest margin ratio. There are 2 bars for each year: the first representing the CoreStates ratio and the second representing the Montgomery Securities Regional Bank Index ratio.
CoreStates Financial Corp and Subsidiaries GRAPHICS APPENDIX LIST - (continued) Page 31 contains the plotting points for the The Earning Asset Mix graph is a five year, vertical bar graph with the Earning Asset Mix Graph years 1989, 1990, 1991, 1992, and 1993 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 31 contains the plotting points for the The Funding Mix graph is a five year, vertical bar graph with the years 1989, Funding Mix Graph 1990, 1991, 1992, and 1993 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) equity and other non-interest bearing sources, 2) long-term debt and other borrowed funds, and 3) Money Market, NOW, consumer savings and certificate accounts to average earning assets. Page 32 contains the plotting points for the The Operating Revenue graph is a five year, vertical bar graph with the years Operating Revenue Graph 1989, 1990, 1991, 1992, and 1993 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-22 7 LIST OF SUBSIDIARIES EXHIBIT 22 ---------- List of Subsidiaries of CoreStates Financial Corp ------------------------------------------------- as of December 31, 1993 ----------------------- Congress Financial Corporation California 96% Congress Credit Corporation New York 100% 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) Congress Talcott Corporation New York 100% Congress Talcott Corporation California 100% (Western) CoreStates Bank of Delaware, N.A. U.S.A. 100% CoreStates Consumer Finance Delaware 100% Company Synapsys Inc. Delaware 100% CoreStates Bank, N.A. U.S.A. 100% Bala Development, Inc. Pennsylvania 100% Centre Properties, Inc. Pennsylvania 100% Clymer Realty Corporation Pennsylvania 100% CoreStates Dealer Services Corp Pennsylvania 100% CoreStates Investment Advisers, Pennsylvania 100% Inc. Fifth and Market Corporation Pennsylvania 100%
Financial Telesis, Inc. Delaware 100% First Penco Realty Inc. Pennsylvania 100% First Pennsylvania Financial Delaware 100% Services, Inc. Philadelphia International Bank U.S.A. 100% Philadelphia International Hong Kong 100% Finance Co. - Hong Kong Limited Philadelphia National LTDA Brazil 100%/1/ Philadelphia International U.S.A. 100% Investment Corporation Established Holdings Limited England 100% New World Development Bahamas 100% Corporation Limited Philadelphia National England 48% Limited Philadelphia International Delaware 100% Equities, Inc. Heritable Group PLC England 50.01% Philadelphia National England 52%/2/ Limited TI Remnaco, Inc. Canada 37.5% Two APM Plaza, Inc. Delaware 89% CoreStates Capital Corp Pennsylvania 100% CoreStates Community Development Pennsylvania Board Corporation, Inc. majority Partnership Homes Pennsylvania 1/2 Board membership CoreStates Export Trading Company Pennsylvania 100% CoreStates Holdings, Inc. Delaware 100%
-------------------- /1/Except for Brazilian resident quote shares /2/The remaining 48% is owned by New World Development Corporation, Ltd. Electronic Payment Services, Inc. Delaware 30.99 2/3%/3/ BUYPASS Corporation Georgia 54% Data NOW National Delaware 100% Services, Inc. MONEY ACCESS SERVICE CORP Ohio 100% Metroteller Security New York 100% Corporation Money Access Service Inc. Delaware 100% NetOps Corp. Pennsylvania 100% CoreStates Securities Corp Pennsylvania 100% First Bank of Philadelphia Pennsylvania 24.81% First Pennsylvania Insurance Virginia 100% Services, Inc. New Jersey National Corporation New Jersey 100% New Jersey National Bank U.S.A. 100% Badeal, Inc. New Jersey 100% ABD Properties, Inc. Pennsylvania 100% North Towne Village, Inc. Pennsylvania 100% Citizens Investments Delaware 100% of Delaware First Peoples Investment Co. Delaware 100% Mercer Development, Co., Inc. New Jersey 100% Yerac Liquors New Jersey 100% Pennamco, Inc., Delaware 100% Pennco Life Insurance Company Arizona 100% Princeton Life Insurance Company Pennsylvania 100%/4/
---------------------- /3/The remaining interests are owned by Banc One Corporation, PNC Financial Corp and Society Corporation. /4/Except for directors' qualifying shares EX-23 8 CONSENT Exhibit 23 Consent of Independent Auditors 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 (Form S-4, No. 33-7286) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options and Convertible Subordinated Debentures, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of New Jersey National Corporation, (f) the Registration Statement (Form S-4, No. 33-31896) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options and stock appreciation rights and outstanding 5-1/2% Convertible Subordinated Debentures, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of First Pennsylvania Corporation, (g) the Registration Statement (Form S-4, 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, (h) the Registration Statement (Form S-3, No. 33-40717) and prospectus relating to shares of the Corporation Common Stock issuable pursuant to the CoreStates Dividend Reinvestment and Share Purchase Plan, and (i) the Registration Statement (Form S-4, 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, of our report dated February 1, 1994, 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, 1993. /s/Ernst & Young Philadelphia, Pennsylvania March 28, 1994 EX-99.2 9 STOCK OPTION AGREEMENT Exhibit 99.2 STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT, dated November 19, 1993, between CoreStates Financial Corp, a Pennsylvania corporation ("Grantee"), and Independence Bancorp, Inc., a Pennsylvania corporation ("Issuer"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Grantee and Issuer have entered into an Agreement and Plan of Merger of even date herewith (the "Merger Agreement"), which agreement has been executed by the parties hereto prior to this Agreement; and WHEREAS, as a condition to Grantee's entering into the Merger Agreement and in consideration therefor, Issuer has agreed to grant Grantee the Option (as hereinafter defined): NOW, THEREFORE, in consideration of the foregoing and the covenants and agreements set forth herein and in the Merger Agreement, the parties hereto agree as follows: 1. Issuer hereby grants to Grantee an unconditional, irrevocable option (the "Option") to purchase, subject to the terms hereof, up to 1,130,000 nonassessable shares of common stock, par value $2.50 per share ("Common Stock"), of Issuer at a price per share equal to $33.50. Such price as adjusted pursuant to Section 5 hereof is hereinafter referred to as the "Option Price." The number of shares of Common Stock that may be received upon the exercise of the Option and the Option Price are subject to adjustment as herein set forth. 2. (a) The Holder (as hereinafter defined) may exercise the Option, in whole or part, if, but only if, both an Initial Triggering Event (as hereinafter defined) and a Subsequent Triggering Event (as hereinafter defined) shall have occurred prior to the occurrence of an Exercise Termination Event (as hereinafter defined), provided that the Holder shall have sent the written -------- notice of such exercise (as provided in subsection (e) of this Section 2) within 30 days following such Subsequent Triggering Event. Each of the following shall be an Exercise Termination Event: (i) the Effective Time of the Merger; (ii) termination of the Merger Agreement in accordance with the provisions thereof if such termination occurs prior to the occurrence of an Initial Triggering Event; or (iii) the passage of nine months after termination of the Merger Agreement if such termination follows the occurrence of an Initial Triggering Event (provided that if an Initial Triggering Event continues or occurs beyond -------- such termination, the Exercise Termination Event shall be nine months from the expiration of the Last Triggering Event but in no event more than twelve months after such termination). The "Last Triggering Event" shall mean the last Initial Triggering Event to occur. The term "Holder" shall mean the holder or holders of the Option. Notwithstanding the foregoing, the Option may not be exercised if, at the time of exercise or repurchase, Grantee is in breach of any covenant or obligation contained in the Merger Agreement. (b) The term "Initial Triggering Event" shall mean any of the following events or transactions occurring after the date hereof: (i) Issuer or any bank or trust company subsidiary of Issuer (an "Issuer Subsidiary"), without having received Grantee's prior written consent, shall have entered into an agreement to engage in an Acquisition Transaction (as hereinafter defined) with any person (the term "person" for purposes of this Agreement having the meaning assigned thereto in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act, and the rules and regulations thereunder) other than Grantee or any of its Subsidiaries (each a "Grantee Subsidiary") or the Board of Directors of Issuer shall have recommended that the shareholders of Issuer approve or accept any Acquisition Transaction other than as contemplated by the Merger Agreement. For purposes of this Agreement, "Acquisition Transaction" shall mean (x) a merger or consolidation, or any similar transaction, involving Issuer or an Issuer Subsidiary, (y) a purchase, lease or other acquisition of all or substantially all of the assets of Issuer or an Issuer Subsidiary, or (z) a purchase or other acquisition (including by way of merger, consolidation, share exchange or otherwise) of securities representing 20% or more of the voting power of Issuer or an Issuer Subsidiary; (ii) Any person other than Grantee, any Grantee Subsidiary or any Subsidiary of Issuer acting in a fiduciary capacity shall have acquired beneficial ownership or the right to acquire beneficial ownership of 20% or more of the outstanding shares of Common Stock (the term "beneficial ownership" for purposes of this Option Agreement having the meaning assigned thereto in Section 13(d) of the Securities Exchange Act and the rules and regulations thereunder); (iii) Any person other than Grantee or any Grantee Subsidiary shall have made a bona fide proposal to Issuer or its shareholders by public announcement or -2- written communication that is or becomes the subject of public disclosure to engage in an Acquisition Transaction; (iv) After a proposal is made by a third party to Issuer or its shareholders to engage in an Acquisition Transaction, Issuer shall have breached any covenant or obligation contained in the Merger Agreement and such breach (x) would entitle Grantee to terminate the Merger Agreement and (y) shall not have been cured prior to the Notice Date (as defined below); or (v) Any person other than Grantee or any Grantee Subsidiary, other than in connection with a transaction to which Grantee has given its prior written consent, shall have filed an application or notice with the Federal Reserve Board, or other federal or state bank regulatory authority, which application or notice has been accepted for processing, for approval to engage in an Acquisition Transaction. (c) The term "Subsequent Triggering Event" shall mean either of the following events or transactions occurring after the date hereof: (i) The acquisition by any person of beneficial ownership of 25% or more of the then outstanding Common Stock; or (ii) The occurrence of the Initial Triggering Event described in clause (i) of subsection (b) of this Section 2, except that the percentage referred to in clause (z) shall be 25%. (d) Issuer shall notify Grantee promptly in writing of the occurrence of any Initial Triggering Event or Subsequent Triggering Event (together, a "Triggering Event") after it becomes aware that such an event has occurred, it being understood that the giving of such notice by Issuer shall not be a condition to the right of the Holder to exercise the Option. (e) In the event the Holder is entitled to and wishes to exercise the Option, it shall send to Issuer a written notice (the date of which being herein referred to as the "Notice Date") specifying (i) the total number of shares it will purchase pursuant to such exercise and (ii) a place and date not earlier than three business days nor later than 30 business days from the Notice Date for the closing of such purchase (the "Closing Date"); provided that if prior -------- notification to or approval of the Federal Reserve -3- Board or any other regulatory agency is required in connection with such purchase, the Holder shall promptly file the required notice or application for approval and shall expeditiously process the same and the period of time that otherwise would run pursuant to this sentence shall run instead from the date on which any required notification periods have expired or been terminated or such approvals have been obtained and any requisite waiting period or periods shall have passed. Any exercise of the Option shall be deemed to occur on the Notice Date relating thereto. (f) At the closing referred to in subsection (e) of this Section 2, the Holder shall pay to Issuer the aggregate purchase price for the shares of Common Stock purchased pursuant to the exercise of the Option in immediately available funds by wire transfer to a bank account designated by Issuer, provided that failure or refusal of Issuer to designate such a bank account - -------- shall not preclude the Holder from exercising the Option. (g) At such closing, simultaneously with the delivery of immediately available funds as provided in subsection (f) of this Section 2, Issuer shall deliver to the Holder a certificate or certificates representing the number of shares of Common Stock purchased by the Holder and, if the Option should be exercised in part only, a new Option evidencing the rights of the Holder thereof to purchase the balance of the shares purchasable hereunder, and the Holder shall deliver to Issuer a copy of this Agreement and a letter agreeing that the Holder will not offer to sell or otherwise dispose of such shares in violation of applicable law or the provisions of this Agreement. (h) Certificates for Common Stock delivered at a closing hereunder may be endorsed with a restrictive legend that shall read substantially as follows: "The transfer of the shares represented by this certificate is subject to certain provisions of an agreement between the registered holder hereof and Issuer and to resale restrictions arising under the Securities Act of 1933, as amended. A copy of such agreement is on file at the principal office of Issuer and will be provided to the holder hereof without charge upon receipt by Issuer of a written request therefor." It is understood and agreed that: (i) the reference to the resale restrictions of the Securities Act in the above legend shall be removed by delivery of substitute certificate(s) without such reference if the Holder shall have -4- delivered to Issuer a copy of a letter from the staff of the SEC, or an opinion of counsel, in form and substance satisfactory to Issuer, to the effect that such legend is not required for purposes of the Securities Act; (ii) the reference to the provisions to this Agreement in the above legend shall be removed by delivery of substitute certificate(s) without such reference if the shares have been sold or transferred in compliance with the provisions of this Agreement and under circumstances that do not require the retention of such reference; and (iii) the legend shall be removed in its entirety if the conditions in the preceding clauses (i) and (ii) are both satisfied. In addition, such certificates shall bear any other legend as may be required by law. (i) Upon the giving by the Holder to Issuer of the written notice of exercise of the Option provided for under subsection (e) of this Section 2 and the tender of the applicable purchase price in immediately available funds, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of Issuer shall then be closed or that certificates representing such shares of Common Stock shall not then be actually delivered to the Holder. Issuer shall pay all expenses, and any and all United States federal, state and local taxes and other charges that may be payable in connection with the preparation, issue and delivery of stock certificates under this Section 2 in the name of the Holder or its assignee, transferee or designee. 3. Issuer agrees: (i) that it shall at all times maintain, free from preemptive rights, sufficient authorized but unissued or treasury shares of Common Stock so that the Option may be exercised without additional authorization of Common Stock after giving effect to all other options, warrants, convertible securities and other rights to purchase Common Stock; (ii) that it will not, by charter amendment or through reorganization, consolidation, merger, dissolution or sale of assets, or by any other voluntary act, avoid or seek to avoid the observance or performance of any of the covenants, stipulations or conditions to be observed or performed hereunder by Issuer; (iii) promptly to take all action as may from time to time be required (including (x) complying with all premerger notification, reporting and waiting period requirements specified in 15 U.S.C. (S) 18a and regulations promulgated thereunder and (y) in the event, under the Bank Holding Company Act of 1956, as amended, or the Change in Bank Control Act of 1978, as amended, or any state banking law, prior approval of or notice to the Federal Reserve Board or to any state regulatory authority -5- is necessary before the Option may be exercised, cooperating fully with the Holder in preparing such applications or notices and providing such information to the Federal Reserve Board or such state regulatory authority as they may require) in order to permit the Holder to exercise the Option and Issuer duly and effectively to issue shares of Common Stock pursuant hereto; and (iv) promptly to take all action provided herein to protect the rights of the Holder against dilution. 4. This Agreement (and the Option granted hereby) is exchangeable, without expense, at the option of the Holder, upon presentation and surrender of this Agreement at the principal office of Issuer, for other Agreements providing for Options of different denominations entitling the holder thereof to purchase, on the same terms and subject to the same conditions as are set forth herein, in the aggregate the same number of shares of Common Stock purchasable hereunder. The terms "Agreement" and "Option" as used herein include any Stock Option Agreements and related Options for which this Agreement (and the Option granted hereby) may be exchanged. Upon receipt by Issuer of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Agreement, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Agreement, if mutilated, Issuer will execute and deliver a new Agreement of like tenor and date. 5. The number of shares of Common Stock purchasable upon the exercise of the Option shall be subject to adjustment from time to time as provided in this Section 5. (a) In the event of any change in Common Stock by reason of stock dividends, split-ups, mergers, recapitalizations, combinations, subdivisions, conversions, exchanges of shares or the like, the type and number of shares of Common Stock purchasable upon exercise hereof shall be appropriately adjusted. (b) Whenever the number of shares of Common Stock purchasable upon exercise hereof is adjusted as provided in this Section 5, the Option Price shall be adjusted by multiplying the Option Price by a fraction, the numerator of which shall be equal to the number of shares of Common Stock purchasable prior to the adjustment and the denominator of which shall be equal to the number of shares of Common Stock purchasable after the adjustment. -6- 6. Upon the occurrence of a Subsequent Triggering Event that occurs prior to an Exercise Termination Event, Issuer shall, at the request of Grantee delivered within 30 days of such Subsequent Triggering Event (or such later period as provided in Section 8) (whether on its own behalf or on behalf of any subsequent holder of this Option (or part thereof) or any of the shares of Common Stock issued pursuant hereto), promptly prepare, file and keep current a shelf registration statement under the Securities Act covering any shares issued and issuable pursuant to this Option and shall use its reasonable efforts to cause such registration statement to become effective and remain current in order to permit the sale or other disposition of any shares of Common Stock issued upon total or partial exercise of this Option ("Option Shares") in accordance with any plan of disposition requested by Grantee; provided, however, -------- ------- that Issuer may postpone filing a registration statement relating to a registration request by Grantee under this Section 6 for a period of time (not in excess of 90 days) if in its judgment such filing would require the disclosure of material information that Issuer has a bona fide business purpose ---- ---- for preserving as confidential. Issuer will use its best efforts to cause such registration statement first to become effective and then to remain effective for such period not in excess of 180 days from the day such registration statement first becomes effective or such shorter time as may be reasonably necessary to effect such sales or other dispositions. Grantee shall have the right to demand two such registrations. The foregoing notwithstanding, if, at the time of any request by Grantee for registration of Option Shares as provided above, Issuer is in registration with respect to an underwritten public offering of shares of Common Stock, and if in the good faith judgment of the managing underwriter or managing underwriters, or, if none, the sole underwriter or underwriters, of such offering the inclusion of the Holder's Option or Option Shares would interfere with the successful marketing of the shares of Common Stock offered by Issuer, the number of Option Shares otherwise to be covered in the registration statement contemplated hereby may be reduced; and provided, -------- however, that after any such required reduction the number of Option Shares to - ------- be included in such offering for the account of the Holder shall constitute at least 25% of the total number of shares to be issued by the Holder and Issuer in the aggregate; and provided further, however, that if such reduction occurs, -------- ------- then the Issuer shall file a registration statement for the balance as promptly as practicable and no reduction shall thereafter occur. Each such Holder shall provide all information reasonably requested by Issuer for inclusion in any registration statement to be filed hereunder. If requested by any such Holder in connection -7- with such registration, Issuer shall become a party to any underwriting agreement relating to the sale of such shares, but only to the extent of obligating itself in respect of representations, warranties, indemnities and other agreements customarily included in such underwriting agreements for the Issuer. 7. (a) In the event that prior to an Exercise Termination Event, Issuer shall enter into an agreement (i) to consolidate with or merge into any person, other than Grantee or a Grantee Subsidiary, and shall not be the continuing or surviving corporation of such consolidation or merger, (ii) to permit any person, other than Grantee or a Grantee Subsidiary, to merge into Issuer and Issuer shall be the continuing or surviving corporation, but, in connection with such merger, the then outstanding shares of Common Stock shall be changed into or exchanged for stock or other securities of any other person or cash or any other property or the then outstanding shares of Common Stock shall after such merger represent less than 50% of the outstanding shares and share equivalents of the merged company, or (iii) to sell or otherwise transfer all or substantially all of its assets to any person, other than Grantee or a Grantee Subsidiary, then, and in each such case, the agreement governing such transaction shall make proper provision so that the Option shall, upon the consummation of any such transaction and upon the terms and conditions set forth herein, be converted into, or exchanged for, an option (the "Substitute Option"), at the election of the Holder, of either (x) the Acquiring Corporation (as hereinafter defined) or (y) any person that controls the Acquiring Corporation. (b) The following terms have the meanings indicated: (1) "Acquiring Corporation" shall mean (i) the continuing or surviving corporation of a consolidation or merger with Issuer (if other than Issuer), (ii) Issuer in a merger in which Issuer is the continuing or surviving person, and (iii) the trans-feree of all or substantially all of Issuer's assets. (2) "Substitute Common Stock" shall mean the common stock issued by the issuer of the Substitute Option upon exercise of the Substitute Option. (3) "Assigned Value" shall mean the highest of (i) the price per share of Common Stock at which a tender offer or exchange offer therefor has been made, (ii) the price per share of Common Stock to be paid by -8- any third party pursuant to an agreement with Issuer, (iii) the highest closing price for shares of Common Stock within the 30 day period prior to the event resulting in the issuance of the Substitute Option, or (iv) in the event of a sale of all or substantially all of Issuer's assets, the sum of the price paid in such sale for such assets and the current market value of the remaining net assets of Issuer as determined by a nationally recognized investment banking firm selected by the Holder or the owner of Option Shares (the "Owner"), as the case may be, divided by the number of shares of Common Stock of Issuer outstanding at the time of such sale. In determining the Assigned Value, the value of consideration other than cash shall be determined by a nationally recognized investment banking firm selected by the Holder or Owner, as the case may be. (4) "Average Price" shall mean the average closing price of a share of the Substitute Common Stock for the one year immediately preceding the consolidation, merger or sale in question, but in no event higher than the closing price of the shares of Substitute Common Stock on the day preceding such consolidation, merger or sale; provided that if Issuer is -------- the issuer of the Substitute Option, the Average Price shall be computed with respect to a share of common stock issued by the person merging into Issuer or by any company which controls or is controlled by such person, as the Holder may elect. (c) The Substitute Option shall have the same terms as the Option, provided, that if the terms of the Substitute Option cannot, for legal reasons, - -------- be the same as the Option, such terms shall be as similar as possible and in no event less advantageous to the Holder. The issuer of the Substitute Option shall also enter into an agreement with the then Holder or Holders of the Substitute Option in substantially the same form as this Agreement, which shall be applicable to the Substitute Option. (d) The Substitute Option shall be exercisable for such number of shares of Substitute Common Stock as is equal to the Assigned Value multiplied by the number of shares of Common Stock for which the Option is then exercisable, divided by the Average Price. The exercise price of the Substitute Option per share of Substitute Common Stock shall then be equal to the Option Price multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock for which the Option is then exercisable and the denominator of which shall be the -9- number of shares of Substitute Common Stock for which the Substitute Option is exercisable. (e) In no event, pursuant to any of the foregoing paragraphs, shall the Substitute Option be exercisable for more than 9.9% of the shares of Substitute Common Stock outstanding prior to exercise of the Substitute Option. In the event that the Substitute Option would be exercisable for more than 9.9% of the shares of Substitute Common Stock outstanding prior to exercise but for this clause (e), the issuer of the Substitute Option (the "Substitute Option Issuer") shall make a cash payment to Holder equal to the excess of (i) the value of the Substitute Option without giving effect to the limitation in this clause (e) over (ii) the value of the Substitute Option after giving effect to the limitation in this clause (e). This difference in value shall be determined by a nationally recognized investment banking firm selected by the Holder or the Owner, as the case may be. 8. The 30-day period for exercise of certain rights under Sections 2, 6 and 10 shall be extended: (i) to the extent necessary to obtain all regulatory approvals for the exercise of such rights and for the expiration of all statutory waiting periods; and (ii) to the extent necessary to avoid liability under Section 16(b) of the Securities Exchange Act by reason of such exercise. Nothing contained in this Agreement shall restrict Grantee from specifying alternative exercising of rights pursuant to Sections 2 or 6 hereof in the event that the exercising of any such rights shall not have occurred due to the failure to obtain any required approval referred to in this Section 8. 9. Issuer hereby represents and warrants to Grantee as follows: (a) Issuer has the corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly approved by the Board of Directors of Issuer and no other corporate proceedings on the part of Issuer are necessary to authorize this Agreement or to consummate the transactions so contemplated. This Agreement has been duly executed and delivered by Issuer. This Agreement is the valid and legally binding obligation of Issuer. (b) Issuer has taken all necessary corporate action to authorize and reserve and to permit it to issue, and at all times from the date hereof through the termination of -10- this Agreement in accordance with its terms will have reserved for issuance upon the exercise of the Option, that number of shares of Common Stock equal to the maximum number of shares of Common Stock at any time and from time to time issuable hereunder, and all such shares, upon issuance pursuant hereto, will be duly authorized, validly issued, fully paid, nonassessable, and will be delivered free and clear of all claims, liens, encumbrance and security interests and not subject to any preemptive rights. 10. Neither of the parties hereto may assign any of its rights or obligations under this Option Agreement or the Option created hereunder to any other person, without the express written consent of the other party, except that in the event a Subsequent Triggering Event shall have occurred prior to an Exercise Termination Event, Grantee, subject to the express provisions hereof, may assign in whole or in part its rights and obligations hereunder within 30 days following such Subsequent Triggering Event (or such later period as provided in Section 8); provided, however, that until the date 30 days following -------- ------- the date on which the Federal Reserve Board approves an application by Grantee under the Bank Holding Company Act to acquire the shares of Common Stock subject to the Option, Grantee may not assign its rights under the Option except in (i) a widely dispersed public distribution, (ii) a private placement in which no one party acquires the right to purchase in excess of 2% of the voting shares of Issuer, (iii) an assignment to a single party (e.g., a broker or investment - - banker) for the purpose of conducting a widely dispersed public distribution on Grantee's behalf, or (iv) any other manner approved by the Federal Reserve Board. 11. Each of Grantee and Issuer will use its best efforts to make all filings with, and to obtain consents of, all third parties and governmental authorities necessary to the consummation of the transactions contemplated by this Agreement, including without limitation applying to the Federal Reserve Board under the Bank Holding Company Act for approval to acquire the shares issuable hereunder. 12. The parties hereto acknowledge that damages would be an inadequate remedy for a breach of this Agreement by either party hereto and that the obligations of the parties hereto shall be enforceable by either party hereto through injunctive or other equitable relief. 13. If any term, provision, covenant or restriction contained in this Agreement is held by a court or a federal or state regulatory agency of competent jurisdiction to be invalid, void or unenforceable, the remainder of the -11- terms, provisions and covenants and restrictions contained in this Agreement shall remain in full force and effect, and shall in no way be affected, impaired or invalidated. If for any reason such court or regulatory agency determines that the Holder is not permitted to acquire the full number of shares of Common Stock provided in Section l(a) hereof (as adjusted pursuant to Section 1(b) or 5 hereof), it is the express intention of Issuer to allow the Holder to acquire or to require Issuer to repurchase such lesser number of shares as may be permissible, without any amendment or modification hereof. 14. All notices, requests, claims, demands and other communications hereunder shall be deemed to have been duly given when delivered in person, by cable, telegram, telecopy or telex, or by registered or certified mail (postage prepaid, return receipt requested) at the respective addresses of the parties set forth in the Merger Agreement. 15. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. 16. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. 17. Except as otherwise expressly provided herein, each of the parties hereto shall bear and pay all costs and expenses incurred by it or on its behalf in connection with the transactions contemplated hereunder, including fees and expenses of its own financial consultants, investment bankers, accountants and counsel. 18. Except as otherwise expressly provided herein or in or pursuant to the Merger Agreement, this Agreement contains the entire agreement between the parties with respect to the transactions contemplated hereunder and supersedes all prior arrangements or understandings with respect thereof, written or oral. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. Nothing in this Agreement, expressed or implied, is intended to confer upon any party, other than the parties hereto, and their respective successors except as assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided herein. -12- 19. Capitalized terms used in this Agreement and not defined herein shall have the meanings assigned thereto in the Merger Agreement. IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed on its behalf by its officers thereunto duly authorized, all as of the date first above written. INDEPENDENCE BANCORP, INC. By:s/John D. Harding --------------------------- President and Chief Executive Officer CORESTATES FINANCIAL CORP By:s/David C. Carney --------------------------- Chief Financial Officer -13- EX-99.3 10 INFO EXHIBIT 99.3 ------------ 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-----