-----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, TRWBKHFS2SBWU1WiBzG0EvmSn9LlZo24svysZ/wfCiizB5kXSk4OWPm21FvZTEfZ RqVIpfsCENgqPGVH/vdh3Q== 0000950109-94-001687.txt : 19940914 0000950109-94-001687.hdr.sgml : 19940914 ACCESSION NUMBER: 0000950109-94-001687 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19940505 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19940913 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORESTATES FINANCIAL CORP CENTRAL INDEX KEY: 0000069952 STANDARD INDUSTRIAL CLASSIFICATION: 6021 IRS NUMBER: 231899716 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-11285 FILM NUMBER: 94548782 BUSINESS ADDRESS: STREET 1: CENTRE SQ W STREET 2: 1500 MARKET ST CITY: PHILADELPHIA STATE: PA ZIP: 19101 BUSINESS PHONE: 2159733806 MAIL ADDRESS: STREET 1: 1500 MARKET ST CITY: PHILADELPHIA STATE: PA ZIP: 19101 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL CENTRAL FINANCIAL CORP DATE OF NAME CHANGE: 19830517 8-K/A 1 FORM 8-K/A TO 5/5/94 8-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A Amendment No.1 CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): May 5, 1994 CORESTATES FINANCIAL CORP - -------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT SPECIFIED IN ITS CHARTER) PENNSYLVANIA 0-6879 23-1899716 - -------------------------------------------------------------------------------- (STATE OR OTHER (COMMISSION (IRS EMPLOYEE JURISDICTION OF FILE NUMBER) IDENTIFICATION NO.) INCORPORATION) CENTRE SQUARE WEST, 1500 MARKET STREET PHILADELPHIA, PENNSYLVANIA 19101 - -------------------------------------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE, INCLUDING AREA CODE: (215) 973-3806 -------------- - -------------------------------------------------------------------------------- (FORMER NAME AND FORMER ADDRESS, IF CHANGED SINCE LAST REPORT) PAGE 1 OF 92 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS --------------------------------- (A) Restated Consolidated Financial Statements of CoreStates PAGE ---- Financial Corp and Subsidiaries (1) Consolidated Statements of Income for the years ended December 31, 1993, 1992, and 1991............. 5 (2) Consolidated Balance Sheets as of December 31, 1993 and 1992....................................... 6 (3) Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1993, 1992, and 1991............................................ 7 (4) Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1992, and 1991............. 8 (5) Notes to the Consolidated Financial Statements...... 9 to 35 (6) Reports of Independent Auditors..................... 36 and 37 (7) Management's Discussion and Analysis of Financial Condition and Results of Operations................. 38 to 75 (8) Supplemental Financial Data (a) Five Year Average Balance Sheet, Statement of Income and Balance Sheet 76 to 81 (b) Shareholders' and Other Selected Data 82 (c) Rate/Volume Analysis 83 (d) Loan Portfolio, Risk Elements and Allowance 84 to 88 for Loan Losses Data (e) Selected Maturity and Interest Sensitivity Data 88 to 90 (B) Exhibits 23.1 Consent of Ernst & Young LLP 23.2 Consent of KPMG Peat Marwick LLP Exhibit Index -------------
Exhibit No. ----------- 23.1 Consent of Ernst & Young LLP........................ 91 23.2 Consent of KPMG Peat Marwick LLP.................... 92
PAGE 2 OF 92 SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 on Form 8-K/A to its current report on Form 8-K dated May 5, 1994 to be signed on its behalf by the undersigned hereunto duly authorized. CORESTATES FINANCIAL CORP (Registrant) By /s/Albert W. Mandia ------------------------ Albert W. Mandia Executive Vice President, Finance (Principal Accounting Officer) Dated: September 13, 1994 PAGE 3 OF 92 CoreStates Financial Corp and Subsidiaries FINANCIAL STATEMENTS (a) PAGE ---- Consolidated Statements of Income for the years ended December 31, 1993, 1992, and 1991........... 5 Consolidated Balance Sheets as of December 31, 1993 and 1992................................................ 6 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1993, 1992 and 1991........................................... 7 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1992, and 1991....................... 8 Notes to the Consolidated Financial Statements............. 9 to 35 Reports of Independent Auditors............................ 36 and 37 Management's Discussion and Analysis of Financial Condition and Results of Operations........... 38 to 75 Supplemental Financial Data 76 to 90 - ------------------------------------ (a) The accompanying Financial Statements have been restated to include the consolidated accounts of Constellation Bancorp, which was acquired on March 16, 1994 and accounted for on a pooling of interests basis. PAGE 4 OF 92 CoreStates Financial Corp and Subsidiaries CONSOLIDATED STATEMENT OF INCOME (in thousands, except per share amounts)
Year Ended December 31, --------------------------------------- INTEREST INCOME 1993 1992 1991 Restated (See Note 1) ------------ ----------- ----------- Interest and fees on loans: Taxable income......................................... $1,414,135 $ 1,461,958 $ 1,900,037 Tax exempt income...................................... 28,659 35,450 46,043 Interest on investment securities: Taxable income......................................... 154,540 171,933 178,703 Tax exempt income...................................... 18,208 22,096 30,306 Interest on time deposits in banks....................... 43,049 55,635 73,775 Interest on Federal funds sold, securities purchased under agreements to resell and other................... 6,178 15,679 25,609 ---------- ----------- ----------- Total interest income.......................... 1,664,769 1,762,751 2,254,473 ---------- ----------- ----------- INTEREST EXPENSE Interest on deposits: Domestic savings....................................... 119,643 194,587 300,608 Domestic time (Note 9)................................. 182,195 266,597 458,163 Overseas branches and subsidiaries..................... 18,248 28,319 76,929 ---------- ----------- ----------- Total interest on deposits..................... 320,086 489,503 835,700 Interest on short-term funds borrowed (Note 10).......... 64,457 57,070 166,487 Interest on long-term debt (Note 11)..................... 61,572 72,828 84,418 ---------- ----------- ----------- Total interest expense......................... 446,115 619,401 1,086,605 ---------- ----------- ----------- NET INTEREST INCOME............................ 1,218,654 1,143,350 1,167,868 Provision for losses on loans (Note 7)................... 110,000 129,300 272,596 ---------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOSSES ON LOANS............................. 1,108,654 1,014,050 895,272 ---------- ----------- ----------- NON-INTEREST INCOME Service charges on deposit accounts...................... 170,786 154,667 135,148 Trust income............................................. 97,306 92,654 93,386 Fees for international services.......................... 69,432 60,247 47,275 Debit and credit card fees............................... 59,500 149,892 166,167 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)....................... 15,748 15,085 (14,175) Other gains (Notes 6 and 20)............................. 11,000 41,072 86,609 Other operating income................................... 105,469 71,270 70,090 ---------- ----------- ----------- Total non-interest income...................... 544,654 586,723 587,113 ---------- ----------- ----------- NON-FINANCIAL EXPENSES Salaries, wages and benefits (Notes 12 and 13)........... 576,470 582,067 575,438 Net occupancy (Notes 8 and 14)........................... 108,295 106,203 115,462 Equipment expenses (Note 8).............................. 69,072 79,350 83,091 Other operating expenses (Note 16)....................... 394,424 445,723 455,265 ---------- ----------- ----------- Total non-financial expenses................... 1,148,261 1,213,343 1,229,256 ---------- ----------- ----------- INCOME BEFORE INCOME TAXES............................... 505,047 387,430 253,129 Provision for income taxes (Note 16)..................... 165,497 126,408 90,503 ---------- ----------- ----------- INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE.................................. 339,550 261,022 162,626 Cumulative effect of a change in accounting principle, net of income tax benefits of $7,005 in 1993 and $43,760 in 1992 (Note 12).................... (13,010) (84,946) - ---------- ----------- ----------- NET INCOME............................................... $ 326,540 $ 176,076 $ 162,626 ========== =========== =========== PER COMMON SHARE DATA (Based on weighted average shares outstanding of 128.570 million in 1993, 119.350 million in 1992 and 117.016 million in 1991) Income before cumulative effect of a change in accounting principle.................................. $2.64 $2.19 $1.39 ========== =========== =========== Net Income............................................... $2.54 $1.48 $1.39 ========== =========== =========== Cash dividends declared.................................. $1.14 $1.02 $0.97 ========== =========== ===========
See accompanying notes to the financial statements. 5 CoreStates Financial Corp and Subsidiaries CONSOLIDATED BALANCE SHEET (in thousands)
December 31, ------------------------- 1993 1992 Restated (See Note 1) ----------- ----------- ASSETS Cash and due from banks (Note 4)......................... $ 2,466,867 $ 2,445,283 Time deposits, principally Eurodollars................... 1,273,373 1,766,727 Investment securities (market value: 1993-$3,042,559; 1992-$3,008,165) (Note 5).............................. 3,013,606 2,913,686 Total loans, net of unearned discounts of $120,244 in 1993 and $167,920 in 1992 (Note 6)......... 18,026,142 17,229,407 Less: Allowance for loan losses (Note 7)............... (417,767) (407,633) ----------- ----------- Net loans...................................... 17,608,375 16,821,774 Federal funds sold and securities purchased under agreements to resell................................... 148,527 215,490 Trading account securities............................... 6,393 2,796 Due from customers on acceptances........................ 332,234 632,976 Premises and equipment (Note 8).......................... 376,115 369,577 Other assets (Note 20)................................... 706,588 946,173 ----------- ----------- Total assets................................... $25,932,078 $26,114,482 =========== =========== LIABILITIES Deposits: Domestic: Non-interest bearing................................. $ 6,331,130 $ 6,184,010 Interest bearing (Note 9)............................ 11,916,852 12,562,535 Overseas branches and subsidiaries (Note 9)............ 796,902 766,119 ----------- ----------- Total deposits................................. 19,044,884 19,512,664 Short-term funds borrowed (Note 10)...................... 1,830,495 1,782,271 Bank acceptances outstanding............................. 337,180 635,544 Other liabilities (Note 12).............................. 1,102,770 1,040,191 Long-term debt (Note 11)................................. 1,455,036 1,253,359 ----------- ----------- Total liabilities.............................. 23,770,365 24,224,029 ----------- ----------- COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 15) SHAREHOLDERS' EQUITY (NOTES 11, 13 AND 19) Common stock: $1 par value; authorized 200.0 million shares; issued 129.2 million shares in 1993 and 128.2 million shares in 1992 (including treasury shares of .4 million in 1993 and .2 million in 1992)............. 2,161,713 1,890,453 ----------- ----------- Total shareholders' equity..................... 2,161,713 1,890,453 ----------- ----------- Total liabilities and shareholders' equity..... $25,932,078 $26,114,482 =========== ===========
See accompanying notes to the financial statements. 6 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 January 1, 1991................................ $ 57,322 $510,161 $ 899,973 $(23,815) $1,443,641 Acquisition of Constellation Bancorp (Note 2).............. 3,381 109,841 75,192 188,414 -------- -------- ---------- -------- ---------- Balances at January 1, 1991, restated...................... 60,703 620,002 975,165 (23,815) 1,632,055 Net income................................................. 162,626 162,626 Net change in unrealized loss on marketable equity securities, net of tax (Note 5).......................... 22,028 22,028 Treasury shares acquired (73 shares)....................... (3,051) (3,051) Common stock issued under employee benefit plans (397 shares)....................................... 2 1,325 (3,038) 14,670 12,959 Common stock issued under dividend reinvestment and stock purchase plans (136 shares)........................ 16 778 4,485 5,279 Foreign currency translation adjustments................... 674 674 Common dividends declared.................................. (109,479) (109,479) -------- -------- ---------- -------- ---------- Balances at December 31, 1991.............................. 60,721 622,105 1,047,976 (7,711) 1,723,091 Net income................................................. 176,076 176,076 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) Stock issued in public offering (7,842 shares)............. 7,842 59,739 67,581 Common stock issued under employee benefit plans (944 shares)....................................... 906 27,383 (79) 777 28,987 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.............................. 69,748 722,257 1,102,329 (3,881) 1,890,453 Net income................................................. 326,540 326,540 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)...................................... 68,331 68,331 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 (518 shares)....................................... 250 9,386 (1,509) 4,156 12,283 Common stock issued under dividend reinvestment plan (347 shares)........................................ 209 7,842 (101) 3,181 11,131 Foreign currency translation adjustments................... (1,758) (1,758) Common dividends declared.................................. (133,779) (133,779) -------- -------- ---------- -------- ---------- Balances at December 31, 1993 Restated (See Note 1)........ $129,136 $680,556 $1,359,840 $ (7,819) $2,161,713 ======== ======== ========== ======== ==========
See accompanying notes to the financial statements. 7 CoreStates Financial Corp and Subsidiaries CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
Year Ended December 31, --------------------------------------- 1993 Restated (See Note 1) 1992 1991 ------------ ------------ ----------- OPERATING ACTIVITIES Net income.......................................... $ 326,540 $ 176,076 $ 162,626 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of a change in accounting principle (Note 12)................ 13,010 84,946 Provision for losses on loans..................... 110,000 129,300 272,596 Provision for losses and writedowns on other real estates owned...................... 24,189 31,386 35,999 Depreciation and amortization..................... 74,267 98,956 115,451 Deferred income tax expense (benefit)............. (12,680) 28,640 34,264 Securities (gains) losses (Note 5)................ (15,748) (15,085) 14,175 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................... 2,952 41,405 57,292 Decrease in interest payable...................... (4,022) (56,670) (52,205) Other, net........................................ 41,391 90,633 12,020 ------------ ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 695,971 649,788 578,585 ------------ ------------ ------------ INVESTING ACTIVITIES Net (increase) decrease in loans (Note 6)........... (1,154,544) 92,062 651,207 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) (400,571) Purchases of investment securities.................. (1,795,635) (1,693,138) (1,339,035) Proceeds from sales of investment securities (Note 5).......................................... 372,006 274,146 329,429 Proceeds from maturities of investment securities........................................ 1,502,056 1,230,052 784,965 Net (increase) decrease in Federal funds sold and securities purchased under agreements to resell......................................... 66,963 158,010 (109,951) Purchases of premises and equipment................. (104,328) (42,878) (74,661) Proceeds from sales and paydowns on other real estate owned...................................... 76,089 67,142 23,627 Other, net.......................................... 4,428 16,671 (89,284) ------------ ------------ ------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES...................................... (322,532) 46,401 954,030 ------------ ------------ ------------ FINANCING ACTIVITIES Net decrease in deposits............................ (467,780) (220,619) (644,566) Long-term debt issued (Note 11)..................... 886,371 297,550 626,145 Retirement of long-term debt........................ (683,266) (215,630) (261,000) Net proceeds from issuance of common stock in public offering.......................... 67,581 Net increase (decrease) in short-term funds borrowed.......................................... 48,224 (182,347) (1,603,041) Cash dividends paid................................. (130,082) (113,335) (108,188) Other, net.......................................... (5,322) 44,995 14,745 ------------ ------------ ------------ NET CASH USED IN FINANCING ACTIVITIES............. (351,855) (321,805) (1,975,905) ------------ ------------ ------------ INCREASE DECREASE IN CASH AND DUE FROM BANKS 21,584 374,384 (443,290) Cash and due from banks at January 1,............. 2,445,283 2,070,899 2,514,189 ------------ ------------ ------------ CASH AND DUE FROM BANKS AT DECEMBER 31,............. $ 2,466,867 $ 2,445,283 $ 2,070,899 ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest.......................................... $ 450,316 $ 676,071 $ 1,138,845 ============ ============ ============ Income taxes...................................... $ 160,116 $ 117,452 $ 41,458 ============ ============ ============
See accompanying notes to the financial statements. 8 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"); Constellation Bank, N.A. ("Constellation Bank"); and CoreStates Bank of Delaware, N.A. ("CBD"). All material intercompany transactions have been eliminated. The financial statements have been restated to include Constellation Bancorp ("Constellation"), which was acquired on March 16, 1994 in a transaction accounted for as a pooling of interests. Certain amounts in prior years have been reclassified for comparative purposes. The accompanying financial statements as of and for the year ended December 31, 1993 have been restated subsequent to the release of March 31, 1994 financial statements to reflect merger-related charges of $127.8 million after-tax, or $.89 per share, related to the Constellation acquisition in the first quarter of 1994, rather than in the fourth quarter of 1993 as previously reported. This restatement was made after discussions with the Securities and Exchange Commission staff, which resulted in these charges being reflected in the quarter that the acquisition was consummated. The restatement has no effect on CoreStates' basic operating results for 1993 or 1994 excluding the one-time merger-related charges. On a pre-tax basis, the merger-related charges consisted of a $120.0 million provision for loan losses, a $28.0 million addition to the OREO reserve, $13.0 million for the writedown of purchased mortgage servicing rights and related assets, and $34.0 million for expenses directly attributable to the acquisition. The effects of this restatement on the accompanying consolidated financial statements as of and for the year ended December 31, 1993 are summarized as follows:
As Previously As Reported Restated ---------- ---------- Total Common Shareholders' Equity $2,033,913 $2,161,713 Provision for Loan Losses 230,000 110,000 Net Interest Income After Provision for Loan Losses 988,654 1,108,654 Other Operating Expenses 469,424 394,424 Net Income 198,740 326,540 Net Income Per Share $1.55 $2.64
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 $.10 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 $680,000 were classified as available-for-sale at December 31, 1993 and were written up to their aggregate fair value of $785,046. After the related tax effects, shareholders' equity at December 31, 1993 was increased by $68,331 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 $128,706, $84,946 after-tax or $.71 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. 9 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 $68,331 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. 10 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 acquisitions of Constellation Bancorp on March 16, 1994 and First Peoples Financial Corporation on September 3, 1992 assume that the Corporation would have declared cash dividends equal to the cash dividends per share actually declared by the Corporation. 11 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. This acquisition is not material to the financial position or results of operations and accordingly, pro forma information is deemed not necessary. On March 16, 1994, the Corporation acquired Constellation Bancorp ("Constellation"), a New Jersey bank holding company with $2.1 billion in assets and $2.1 billion in deposits. The Corporation issued approximately 11.3 million shares of common stock to shareholders of Constellation based on an exchange ratio of .4137 of a share of the Corporation's common stock for each share of Constellation common stock. The merger was accounted for as a pooling of interests, accordingly, the consolidated financial statements have been restated to include the consolidated accounts of Constellation for all periods presented. Previously reported information is as follows:
CONSTELLATION RESTATED 1993 CORPORATION (SEE NOTE 1) - ---- ----------- ------------- Net interest income................................... $1,117,901 $100,753 Provision for losses on loans......................... 100,000 10,000 (a) Non-interest income................................... 503,055 41,599 Non-financial expenses................................ 1,033,375 115,186 (a) Provision for income taxes ........................... 159,654 662 (b) Income (loss) before cumulative effect of a change in accounting principle...................... 327,927 16,504 (a) Cumulative effect of a change in accounting principle........................................... (13,010) Net income (loss)..................................... 314,917 16,504 (a) Income (loss) per share before cumulative effect of a change in accounting principle.......... 2.80 $.61 Net income (loss) per share........................... 2.69 $.61 Cash dividends declared............................... 1.14 1992 - ---- Net interest income................................... $1,057,046 $ 86,304 Provision for losses on loans......................... 119,300 10,000 Non-interest income................................... 546,509 40,585 Non-financial expenses................................ 1,094,591 118,527 Provision for income taxes............................ 127,260 53 (b) Income (loss) before cumulative effect of a change in accounting principle...................... 262,404 (1,691) Cumulative effect of a change in accounting principle........................................... (80,986) (c) Net income (loss)..................................... 181,418 (1,691) Income (loss) per share before cumulative effect of a change in accounting principle.......... 2.27 (.19) Net income (loss) per share........................... 1.57 (.19) Cash dividends declared............................... 1.02
12 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 2. ACQUISITIONS AND PROPOSED ACQUISITIONS: continued
1991 - ---- Net interest income................................... $1,086,393 $ 81,475 Provision for losses on loans......................... 190,601 81,995 Non-interest income................................... 541,646 46,285 Non-financial expenses................................ 1,096,119 133,955 Provision for income taxes............................ 113,573 532 (b) Net income (loss)..................................... 227,746 (88,722) Net income (loss) per share........................... 2.00 (10.82) Cash dividends declared............................... 0.97 - ------------------------------------------------------
(a) At December 31, 1993, Constellation had non-performing assets, non- performing loans plus other real estate owned ("OREO"), of $120.6 million. While Constellation had 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. In the first quarter of 1994, subsequent to the consummation of its acquisition by the Corporation, Constellation recorded an addition to its allowance for possible loan losses of $120 million and an addition to its OREO reserves of $28 million as a result of conforming to the Corporation's strategic direction and consumer lending loan charge-off policies. Constellation also recorded pre-tax charges of $47 million, which include expenses directly attributable to the acquisition, and certain other costs and expenses. (b) In 1993, Constellation prospectively adopted FAS 109. However, restated financial information is prepared as if Constellation retroactively adopted FAS 109 as of January 1, 1987. The impact of applying pooling of interests accounting rules and retroactively applying FAS 109 to Constellation had the following effects on restated net income and period-end common shareholders' equity:
Increase Cumulative in net income increase -------------------- in common Amount Per Share shareholders' equity -------- ---------- --------------------- Year ended: December 31, 1993.. $(5,076) $ (.03) $39,924 December 31, 1992.. 702 0.01 45,000 December 31, 1991.. 23,602 0.02 44,298
(c) Constellation adopted FAS 106 on January 1, 1993, the date required under that statement. Constellation elected not to recognize immediately its $6.0 million transitional liability, but to amortize that liability over 20 years. As permitted under FAS 106 and pooling accounting, the restated financial information is prepared as if Constellation adopted FAS 106 effective January 1, 1992 and immediately recognized the $6.0 million, $4.0 million after-tax, traditional liability. Restated salaries, wages and benefits have been adjusted accordingly. 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. 13 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(d) $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
(d) Before cumulative effect of a change in accounting principle. In March 1994, the Corporation announced a definitive agreement to acquire Germantown Savings Bank ("GSB"), a $1.6 billion Pennsylvania chartered stock savings bank. The total purchase price of approximately $260 million will be paid, 55% in the Corporation's common stock and 45% in cash, and the acquisition will be accounted for as a purchase creating an intangible of approximately $141 million. The Corporation plans to purchase in the market 100% of the shares to be issued. The transaction is expected to close late in the third quarter of 1994, assuming approval by regulators and GSB shareholders. A summary of unaudited historical financial information for GSB follows:
1993 1992(e) 1991(d) ------- --------- --------- Operating results (in thousands, except per share): Net income........................ $20,498 $15,183 $8,345 Per common share.................. 4.68 3.54 2.06 Average common shares outstanding. 4,377 4,287 4,061 Balance sheet at year-end (in millions, except per share): Assets............................ $ 1,637 $ 1,555 Loans............................. 1,039 1,017 Deposits.......................... 1,476 1,419 Shareholders' equity.............. 142 120 Book value per common share....... 33.89 29.26
(e) Before extraordinary item and cumulative effect of a change in accounting principle. A summary of unaudited pro forma financial information for the Corporation, Independence and GSB combined follows. Independence has been combined for all periods presented and GSB has been combined for 1993.
1993(e) Restated (See Note 1) 1992 1991 ------------- ---------- ---------- Operating results (in thousands, except per share): Net interest income.......................... $1,382,777 $1,252,478 $1,272,910 Non-interest income.......................... 580,445 610,664 615,565 Income before cumulative effect of a change in accounting principle................... 370,755 268,134 180,317 Per common share............................. 2.45 1.97 1.35 Average common shares outstanding............ 151,032 135,813 133,534
14 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 2. ACQUISITIONS: continued
1993(e) 1992 Restated (See Note 1) ---------- ---------- Balance sheet at year-end (in millions, except per share): Assets....................................... $ 30,238 $ 28,841 Loans........................................ 20,828 18,890 Deposits..................................... 22,617 21,762 Shareholders' equity......................... 2,474 2,095 Book value per common share.................. 16.41 14.48
(e) Pro forma shareholders' equity at December 31, 1993 has been reduced by $35.2 million, the combined after-tax effect of anticipated 1994 additions to Independence's allowance for possible loan losses and OREO reserves of approximately $25.0 million and $4.0 million, respectively, for the Corporation's planned strategic initiatives regarding Independence's problem assets, and charges of approximately $24.2 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. 15 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 3. FAIR VALUES OF FINANCIAL INSTRUMENTS: continued The fair value of fixed-rate performing loans is calculated by discounting scheduled principal and interest cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan type at December 31, 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. 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 $656,620 and $527,925 at December 31, 1993 and 1992, respectively, are not required by FAS 107, accordingly, the following table excludes lease financing receivables.
1993 Restated (See Note 1) 1992 ------------------------ ------------------------ Carrying Fair Carrying Fair Amount Value Amount Value ----------- ----------- ----------- ----------- Domestic loans: Commercial, industrial and other.. $ 7,538,474 $ 7,524,489 $ 6,969,279 $ 6,971,678 Real estate loans................. 5,647,856 5,664,174 6,050,434 6,110,015 Consumer: Installment..................... 1,058,359 1,072,743 1,103,911 1,115,332 Credit card..................... 1,161,046 1,261,466 944,789 1,029,796 Financial institutions............ 865,494 867,401 778,670 784,312 Factoring receivables............. 555,211 555,211 454,244 454,244 Foreign............................. 543,082 543,127 400,155 401,067 ----------- ----------- ----------- ----------- Total loans, excluding lease financing......................... 17,369,522 17,488,611 16,701,482 16,866,444 Allowance for loan losses........... (417,767) 407,633 ----------- ----------- Net loans, excluding lease financing....................... $16,951,755 $17,488,611 $16,293,849 $16,866,444 =========== =========== =========== ===========
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. 16 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.. $ 6,331,130 $ 6,331,130 $ 6,184,010 $ 6,184,010 NOW accounts................... 1,659,342 1,659,342 1,672,760 1,672,760 Savings accounts............... 3,842,567 3,842,567 4,023,741 4,023,741 Money market accounts.......... 2,491,718 2,491,718 2,229,648 2,229,648 Time deposits.................. 3,923,225 4,078,742 4,636,386 4,798,766 ----------- ----------- ----------- ----------- Total domestic deposits.. 18,247,982 18,403,499 18,746,545 18,908,925 Overseas branches and subsidiaries.................. 796,902 796,902 766,119 766,119 ----------- ----------- ----------- ----------- Total deposits........... $19,044,884 $19,200,401 $19,512,664 $19,675,044 =========== =========== =========== ===========
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 $510,000 at December 31, 1993 and $460,000 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 $421,000, and $290,000, respectively. 17 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................... $ 522,537 $ 6,203 $ 169 $ 528,571 U.S. Government agencies........ 1,318,522 5,481 2,758 1,321,245 State and municipal............. 277,377 16,753 247 293,883 Other: Domestic....................... 88,423 1,193 154 89,462 Foreign........................ 21,701 2,655 4 24,352 ---------- -------- ------ ---------- Total held-to-maturity........ $2,228,560 $ 32,285 $3,332 $2,257,513 ========== ======== ====== ========== Available-for-Sale - ------------------ U.S. Treasury................... $ 433,718 $ 14,317 $ 502 $ 447,533 U.S. Government agencies........ 178,575 6,823 58 185,340 State and municipal............. 12,856 1,406 7 14,255 Other: Domestic....................... 43,718 30,797 106 74,409 Foreign........................ 11,133 52,376 63,509 ---------- -------- ------ ---------- Total available-for-sale..... $ 680,000 $105,719 $ 673 $ 785,046 ========== ======== ====== ========== 1992 - ---- U.S. Treasury................... $ 885,998 $ 16,548 $2,754 $ 899,792 U.S. Government agencies........ 1,490,414 18,175 5,714 1,502,875 State and municipal............. 372,966 17,705 361 390,310 Other: Domestic....................... 129,793 27,154 656 156,291 Foreign........................ 34 515 24,382 58,897 ---------- -------- ------ ---------- Total investment securities. $2,913,686 $103,964 $9,485 $3,008,165 ========== ======== ====== ==========
At December 31, 1992, the other domestic investment securities category included marketable equity securities of $33,344, which were carried at the aggregate of their lower of cost or market in 1992. During 1991, the Corporation recorded $24,589 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 $2,822 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 $22,536. 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 $30,705, the aggregate of their December 31, 1993 fair values, through an after-tax credit to retained earnings. The Corporation recorded pre- tax gains of $12,848 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 $1,647,767 were pledged at December 31, 1993 to secure public deposits, trust deposits, and for certain other purposes as required by law. 18 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.................................. $ 374,557 $ 377,083 Due after one year through five years.................... 458,311 472,150 Due after five year through ten years.................... 95,941 97,760 Due after ten years...................................... 69,659 75,246 ---------- ---------- 998,468 1,022,239 Mortgage-backed securities............................... 1,187,628 1,189,159 ---------- ---------- $2,186,096 $2,211,398 ========== ========== Available-for-Sale - ------------------ Due in one year or less.................................. $ 54,237 $ 54,239 Due after one year through five years.................... 127,631 129,457 Due after five year through ten years.................... 260,224 272,738 Due after ten years...................................... 11,784 12,860 ---------- ---------- 453,876 469,294 Mortgage-backed securities............................... 177,311 183,996 ---------- ---------- $ 631,187 $ 653,290 ========== ==========
Proceeds from sales of investments in debt securities during 1993, 1992 and 1991 were $333,336, $247,077 and $324,238, respectively. Gross gains of $2,369 in 1993, $6,675 in 1992 and $10,504 in 1991, and gross losses of $68 in 1993, $297 in 1992 and $56 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 84 and 86). The book value of real estate loans transferred to other real estate owned during 1993, 1992 and 1991 was $38,672, $109,993 and $142,824 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 $147,381 and $200,145, 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 $2,463,230 and $2,515,994, 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. 19 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 Restated (See Note 1) ----------- --------- --------- Balance at beginning of period............... $407,633 $446,332 $488,718 Allowance for loans sold at date of sale..... (353) (14,700) (27,486) Allowance for loans of bank acquired under purchase method of accounting............. 2,703 Provision charged to operating expense....... 110,000 129,300 272,596 Recoveries of loans previously charged off. 82,165 67,870 80,105 Loan charge-offs............................. 184,381 221,169 367,601 --------- -------- -------- Balance at end of period..................... $ 417,767 $407,633 $446,332 ======== ======== ========
8. PREMISES AND EQUIPMENT The consolidated balance sheet includes premises and equipment, net of accumulated depreciation and amortization of $491,982 and $509,128 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 $54,902, $62,365 and $68,258, 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............ $227,545 $520,850 $ 930,759 Other domestic time deposits, principally savings certificates.......... 109,515 158,887 254,112 -------- -------- ---------- Total.......................... $337,060 $679,737 $1,184,871 ======== ======== ==========
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........ $ 8,799 $25,360 $75,798 Other domestic time deposits, principally savings certificates............... 7,401 13,755 18,196 ----- ------- ------- Total.......................... $16,200 $39,115 $93,994 ======= ======= =======
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)......................... $ 615,217 $ 856,553 Securities sold under agreements to repurchase (b).. 197,957 309,876 Commercial paper (c)................................ 501,838 566,990 Other short-term funds borrowed (d)................. 515,483 48,852 Total short-term funds borrowed (e)....... ---------- ---------- $1,830,495 $1,782,271 ========== ==========
(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 $1,160,951 in 1993, $856,553 in 1992 and $1,393,750 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 2.74% in 1993, 3.67% in 1992 and 5.14% in 1991. The maximum amount outstanding at any month-end was $256,367 during 1993, $309,876 during 1992 and $564,223 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. 20 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 $1,867,000 in 1993, $1,553,000 in 1992 and $2,720,000 in 1991. The weighted average interest rate was 3.45% in 1993, 3.67% in 1992 and 6.12% 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 Amount Value Amount Value --------------------- --------------------- ---------------------- --------------------- CoreStates Financial Corp: 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. 21 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. 22 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 $11,945 in 1993, $10,910 in 1992 and $10,578 in 1991. The projected benefit obligation exceeded plan assets at fair value by $46,345 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)..................................... $484,273 $454,039 Present value of benefit obligation: -------- -------- Accumulated benefits based on salaries to date, including vested benefits of $384,469 in 1993 and $317,243 in 1992....... 419,943 345,907 Additional benefits based on estimated future salary levels.... 110,675 84,359 -------- -------- Projected benefit obligation..................................... 530,618 430,266 Amount projected benefit obligation is (over)/under plan assets -------- -------- at fair value at December 31,................................. (46,345) 23,773 Reconciliation: Unrecognized prior service cost................................ 5,736 6,712 Unrecognized net asset from date of initial application........ (31,551) (36,679) Net deferred actuarial (loss)/gain............................. 44,172 (10,598) -------- -------- Accrued pension expense included in other liabilities............ $(27,988) $(16,792) ======== ========
(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.. $ 16,117 $ 15,384 $ 13,819 Interest cost on projected benefit obligation... 35,124 32,917 30,406 Actual return on plan assets.................... (49,401) (16,426) (99,173) Net amortization and deferral................... 10,105 (20,965) 65,526 -------- -------- -------- Net pension cost.............................. $ 11,945 $ 10,910 $ 10,578 ======== ======== ========
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation for the Corporation was 7.0% and 8.0%, respectively, at December 31, 1993 and 1992. The discount rate used in the Constellation plan was 7.0% and 9.0%, respectively, at December 31, 1993 and 1992. The rate of increase on future compensation levels used for both plans was 5.0% to 6.0%. The expected long-term rate of return on plan assets for both plans 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 $12,763 in 1993, $12,303 in 1992, and $12,326 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 $128,706, $84,946 after-tax or $.71 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 $9,288. 23 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..................................... $(102,143) $ (83,511) Fully eligible active plan participants...... (3,662) (3,548) Other active plan participants............... (41,056) (49,613) --------- --------- Accumulated postretirement benefit obligation (146,861) (136,672) Plan assets at fair value (a)................... 20,006 --------- --------- Unfunded obligation at December 31,............. (126,855) (136,672) Unrecognized net loss........................... 3,795 --------- --------- Accrued postretirement benefit obligation....... $ 123,060 $(136,672) ========= =========
(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.. $ 2,160 $ 3,145 Interest cost on accumulated postretirement benefit obligation........................... 10,108 10,426 Actual return on plan assets.................... (6) Net amortization and deferral................... 6 ------- ------- Net periodic postretirement benefit cost........ $12,268 $13,571 ======= =======
The cost of providing postretirement benefits in 1991 was recognized by expensing the annual insurance premiums, which were $4,179. 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 $10,584 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $805. 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. The discount rate used in the Constellation plan was 7.0% and 9.0%, 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 $0.10 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. Constellation had maintained a similar plan. Options granted under that plan were carried over into the Corporation's Plan upon consummation of the Constellation acquisition. Information on options for 1993 follows: 24 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.... 4,294,706 4,467,210 $3.21 - $54.70 Options granted............... (1,932,158) 1,932,158 9.06 - 28.50 Options exercised............. (740,072) 3.21 - 23.19 Options cancelled............. 68,736 (72,790) 7.16 - 46.41 ---------- --------- Balance at December 31, 1993.. 2,431,284 5,586,506 3.21 - 54.70 ========== =========
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 $61,338, $60,163 and $61,874 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) $1,089,696 $ (2,724) $ 895,703 $ (2,239) Commercial letters of credit.......................... 890,917 (2,227) 747,279 (1,868) Commitments to extend credit (b)...................... 6,502,059 (11,132) 4,994,491 (8,398) 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)................................ 1,336,646 1,148 1,422,806 2,555 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. 25 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. 26 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:
Current: 1993 Restated (See Note 1) 1992 1991 ------------ -------- -------- Federal..................................... $149,684 $ 82,305 $33,274 State....................................... 18,209 11,095 17,629 -------- -------- ------- Total domestic........................ 167,893 93,400 50,903 Foreign..................................... 10,284 4,368 5,336 -------- -------- ------- Total current......................... 178,177 97,768 56,239 Deferred Federal and state expense (benefit) (12,680) 28,640 34,264 -------- -------- ------- Total provision for income taxes...... $165,497 $126,408 $90,503 ======== ======== =======
The significant components of the Corporation's deferred tax assets and liabilities at December 31, 1993 and 1992 are as follows:
1993 Restated (See Note 1) 1992 ------------ -------- Deferred tax assets: Allowance for loan losses.................... $137,732 $134,999 Postretirement and postemployment benefits. 48,210 44,825 Reserves..................................... 25,802 23,456 Employee compensation........................ 11,610 11,534 Other........................................ 54,887 39,090 Net Operating loss carry forward............. 16,393 15,396 -------- -------- Gross deferred tax asset..................... 294,634 269,300 Valuation allowance.......................... (9,102) (8,317) -------- -------- Total deferred tax assets............. 285,532 260,983 -------- -------- Deferred tax liabilities: Auto leasing portfolio....................... 63,366 54,058 FAS 115 fair value accounting................ 34,916 Partnership investments...................... 19,660 18,229 Tax over book depreciation................... 16,689 15,291 Affiliate income............................. 14,924 21,090 Other........................................ 14,806 8,905 -------- -------- Total deferred tax liabilities......... 164,361 117,573 -------- -------- Net deferred tax assets........................ $121,171 $143,410 ======== ========
At December 31, 1993 cumulative deductible temporary differences are approximately $842 million and the related deferred asset is $295 million before any valuation allowance. The major components include $394 million related to allowance for loan losses and $138 million related to post retirement benefits. Constellation has a federal net operating loss at December 31, 1993 which can be carried forward and used to offset CoreStates future income. The benefit of the net operating loss is approximately $16 million. Cumulative taxable temporary differences related to deferred tax credits as of December 31, 1993 are estimated at $469 million are primarily related to leasing, fair value accounting, partnership investments and depreciation. The related deferred tax liability is $164 million. As required by FAS 109, the Corporation has determined that it is required to establish a valuation reserve for the deferred tax asset of $9 million related to Constellation's New Jersey income taxes. It is more likely than not that the deferred tax asset of $286 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. 27 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS: Continued (dollar amounts in thousands) 16. PROVISION FOR INCOME TAXES: Continued The consolidated effective tax rates are reconciled to the statutory rate as follows:
1993 1992 1991 ----- ----- ------ Restated (See Note 1) Statutory rate......................... 35.0% 34.0% 34.0% Difference resulting from: Tax-exempt income.................... (3.0) (4.9) (10.4) State, local and foreign income tax.. 2.5 2.2 5.9 Other, net........................... (1.7) 1.3 6.4 ---- ---- ----- Effective tax rate..................... 32.8% 32.6% 35.9% ==== ==== =====
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 insurance subsidiary previously untaxed 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 $70,374, $69,655 and $62,876, 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 ------- -------- ------- -------- Restated (See Note 1) 1993 - ---- Interest income...................... $414,290 $420,355 $416,646 $413,478 ======== ======== ======== ======== Interest expense..................... $107,167 $108,610 $112,021 $118,317 ======== ======== ======== ======== Net interest income.................. $307,123 $311,745 $304,625 $295,161 ======== ======== ======== ======== Provision for losses on loans........ $ 27,500 $ 27,500 $ 27,500 $ 27,500 ======== ======== ======== ======== Securities gains (losses)............ $ 10,182 $ 3,332 $ (788) $ 3,022 ======== ======== ======== ======== Income before cumulative effect of a change in accounting principle.... $ 88,853 $ 90,053 $ 85,594 $ 75,050 ======== ======== ======== ======== Cumulative effect of a change in accounting principle........... $(13,010) ======== Net income........................... $ 88,853 $ 90,053 $ 85,594 $ 62,040 ======== ======== ======== ======== Net income per common share.......... $ .69 $.70 $.67(b) $.58(a)(b) ======== ======== ========= ========= Average common shares outstanding.... 128,539 128,791 128,644(b) 128,300(b) ======== ======== ========= ========= 1992 - ---- Interest income...................... $425,108 $425,050 $447,482 $465,111 ======== ======== ======== ======== Interest expense..................... $128,883 $142,495 $163,847 $184,176 ======== ======== ======== ======== Net interest income.................. $296,225 $282,555 $283,635 $280,935 ======== ======== ======== ======== Provision for losses on loans........ $ 28,500 $ 30,500 $ 36,150 $ 34,150 ======== ======== ======== ======== Securities gains..................... $ 47 $ 4,860 $ 3,617 $ 6,561 ======== ======== ======== ======== Income before cumulative effect of a change in accounting principle. $ 70,340 $ 62,562 $ 67,963 $ 60,157 ======== ======== ======== ======== Cumulative effect of a change in accounting principle............ $(84,946) ======== Net income (loss).................... $ 70,340 $ 62,562 $ 67,963 $(24,789) ======== ======== ======== ======== Net income per common share.......... $.58(b) $.52(b) $.57(b) $.51(a)(b) ========= ========= ========= ========= Average common shares outstanding.... 121,255(b) 119,270(b) 118,754(b) 118,091(b) ========= ========= ========= ========= - -------------------------------------
(a) Based on income before cumulative effect of a change in accounting principle. (b) Adjusted to reflect the impact of the Stock Dividend. 28 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. 29 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 Restated (See Note 1) Assets..................................... $24,281,919 $ 939,631 $173,740(a) $524,375 $12,413 $25,932,078 =========== ========== ========== ======== ======= =========== Total operating income (b)............................... $ 2,061,579 $ 83,226 $10,771 $ 53,243 $ 604 $ 2,209,423 =========== ========== ======= ======== ======= =========== Income before income taxes............................. $ 439,208 $ 25,530 $16,209 $ 23,889 $ 211 $ 505,047 =========== ========== ======= ======== ======= =========== Income before cumulative effect of a change in accounting principle..................... $ 296,754 $ 18,938 $ 7,021 $ 16,684 $ 153 $ 339,550 =========== ========== ======= ======== ======= =========== DECEMBER 31, 1992 Assets..................................... $24,168,490 $1,255,214 $86,224 $602,113 $ 2,441 $26,114,482 =========== ========== ======= ======== ======= =========== Total operating income (b)............................... $ 2,207,240 $ 89,038 $ 6,088 $ 46,777 $ 331 $ 2,349,474 =========== ========== ======= ======== ======= =========== Income before income taxes............................. $ 313,511 $ 35,725 $15,069 $ 22,982 $ 143 $ 387,430 =========== ========== ======= ======== ======= =========== Income before cumulative effect of a change in accounting principle..................... $ 216,457 $ 20,820 $ 9,750 $ 13,911 $ 84 $ 261,022 =========== ========== ======= ======== ======= =========== DECEMBER 31, 1991 Assets..................................... $24,121,114 $ 970,903 $49,772 $437,215 $ 5,967 $25,584,971 =========== ========== ======= ======== ======= =========== Total operating income(b)................................ $ 2,673,903 $ 107,575 $10,783 $ 48,487 $ 838 $ 2,841,586 =========== ========== ======= ======== ======= =========== Income before income taxes............................. $ 182,140 $ 29,587 $27,383 $ 13,733 $ 286 $ 253,129 =========== ========== ======= ======== ======= =========== Net income................................. $ 116,843 $ 19,101 $17,659 $ 8,839 $ 184 $ 162,626 =========== ========== ======= ======== ======= ===========
(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. 30 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. 31 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 -------- -------- -------- Restated (See Note 1) 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............. 1,726 1,972 2,303 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)..................... (1,128) 946 (24,319) Other income.................................. 25 331 609 -------- -------- -------- Total revenues........................... 319,306 271,460 512,859 -------- -------- -------- EXPENSES - -------- Interest on: Funds borrowed.............................. 2,738 2,311 4,376 Long-term debt.............................. 1,527 6,802 20,112 Total interest expense...................... -------- -------- -------- 4,265 9,113 24,488 Salaries, wages and benefits.................. 67,501 64,663 174,756 Net occupancy................................. 29,321 25,995 16,147 Equipment expenses............................ 5,982 3,697 28,214 Other operating expenses...................... 21,995 24,538 77,313 -------- -------- -------- Total expenses........................... 129,064 128,006 320,918 -------- -------- -------- Income before income tax benefit and equity in undistributed income of subsidiaries........ 190,242 143,454 191,941 Income tax benefit............................ (1,371) (783) (20,048) -------- -------- -------- Income before equity in undistributed income of subsidiaries............................. 191,613 144,237 211,989 Equity in undistributed income of subsidiaries: Banks....................................... 86,651 11,608 (66,155) Other subsidiaries.......................... 48,276 21,700 16,792 -------- -------- -------- 134,927 33,308 (49,363) -------- -------- -------- INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE........................ 326,540 177,545 162,626 Cumulative effect of a change in accounting principle (Note 12)......................... (1,469) -------- NET INCOME.................................... $326,540 $176,076 $162,626 ======== ======== ========
32 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 Restated (See Note 1) ---------- ---------- ASSETS - ------ Cash.............................................. $ 8,754 $ 53,296 Investments and receivables-subsidiaries: Investments in subsidiaries at equity in underlying net assets: Banks......................................... 1,896,412 1,745,575 Other subsidiaries............................ 230,053 187,681 ---------- ---------- Total investments in subsidiaries........... 2,126,465 1,933,256 Other........................................... 20,407 15,291 ---------- ---------- Total investments and receivables- subsidiaries.............................. 2,146,872 1,948,547 Other investments................................. 54,070 17,681 Premises, net of accumulated depreciation......... 6,416 11,008 Other assets...................................... 3,428 3,201 ---------- ---------- Total assets................................ $2,219,540 $2,033,733 ========== ========== LIABILITIES - ----------- Funds borrowed.................................... $ 69,003 Dividends payable................................. $ 35,171 31,474 Other liabilities................................. 9,665 11,304 Long-term debt.................................... 12,991 31,499 ---------- ---------- Total liabilities............................ 57,827 143,280 ---------- ---------- SHAREHOLDERS' EQUITY - -------------------- Total shareholders' equity................... 2,161,713 1,890,453 ---------- ---------- Total liabilities and shareholders' equity... $2,219,540 $2,033,733 ========== ==========
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). Constellation Bank has been prohibited from paying dividends since 1991 without the approval of the Comptroller of the Currency and other regulatory agencies. 33 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 -------- -------- -------- Restated (See Note 1) OPERATING ACTIVITIES Net income.................................. $326,540 $176,076 $162,626 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed (income) losses of subsidiaries.............................. (134,927) (33,308) 49,363 Cumulative effect of a change in accounting principle..................... 1,469 Securities (gains) losses................. 1,128 (946) 24,319 Depreciation and amortization............. 678 1,099 1,286 Deferred income tax expense (benefit)..... 1,707 (1,369) (9,517) Decrease in interest receivable........... 4 335 506 Increase (decrease) in interest payable... 1,006 (101) (329) Increase (decrease) in due to subsidiaries............................. (6,875) (47,695) 9,751 Other..................................... (547) 14,755 (972) -------- -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 188,714 110,315 237,033 -------- -------- -------- INVESTING ACTIVITIES Investment in subsidiaries.................. (1,000) (67,240) (20,000) Increase (decrease) in receivables from subsidiaries............................... (7,060) 16,752 28,954 Purchases of investment securities................................. (481,400) (225,624) (238,259) Proceeds from maturities and sales of investment securities...................... 447,337 286,535 208,114 Return of capital from subsidiaries......... 34,303 30,000 -------- -------- -------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (7,820) 40,423 (21,191) -------- -------- -------- FINANCING ACTIVITIES Retirement of long-term debt................ (20,940) (18,407) (155,151) Net increase (decrease) in financing from subsidiaries.......................... (69,003) (80,849) 34,843 Proceeds from public issuance of common stock...................................... 67,581 Cash dividends paid......................... (130,082) (113,335) (108,188) Other....................................... (5,411) 44,995 14,710 -------- -------- -------- NET CASH USED IN FINANCING ACTIVITIES...... (225,436) (100,015) (213,786) -------- -------- -------- INCREASE (DECREASE) IN CASH AND DUE FROM BANKS................................ (44,542) 50,723 2,056 Cash and due from banks at January 1,...... 53,296 2,573 517 -------- -------- -------- CASH AND DUE FROM BANKS AT DECEMBER 31..... $ 8,754 $ 53,296 $ 2,573 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest................................... $ 4,632 $ 11,029 $ 24,911 ======== ======== ======== Income taxes............................... - - - ======== ======== ========
34 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. 35 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 did not audit the financial statements of Constellation Bancorp, which statements reflect total assets of 8.8% and 9.3% as of December 31, 1993 and 1992, respectively, and net interest income of 8.3%, 7.6% and 7.0% for the years ended December 31, 1993, 1992 and 1991, respectively. Those statements were audited by other auditors whose report, which has been furnished to us, included an explanatory paragraph that explains that those statements were restated to remove certain merger-related charges. Our opinion, insofar as it relates to data included for Constellation Bancorp, is based solely on the report of other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CoreStates Financial Corp at December 31, 1993 and 1992, and the consolidated results of their operations and their 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 methods of accounting for income taxes and for postretirement benefits other than pensions. As discussed in Note 1 to the financial statements, the accompanying 1993 financial statements have been restated to remove certain merger-related charges. /s/Ernst & Young LLP Philadelphia, Pennsylvania February 1, 1994, except for the third paragraph of Note 2, as to which the date is March 16, 1994, and the second paragraph of Note 1, as to which the date is July 19, 1994 36 CORESTATES FINANCIAL CORP AND SUBSIDIARIES REPORT OF INDEPENDENT AUDITORS KPMG Peat Marwick LLP Certified Public Accountants 150 John F. Kennedy Parkway Short Hills, New Jersey 07078 The Board of Directors and Shareholders of Constellation Bancorp: We have audited the consolidated statements of condition of Constellation Bancorp and subsidiaries 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 years in the three-year period ended December 31, 1993 (not presented separately herein). These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Constellation Bancorp and subsidiaries at December 31, 1993 and 1992 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993, in conformity with generally accepted accounting principles. As explained in Note 1 to the consolidated financial statements. Constellation Bancorp adopted the provisions of the Financial Accounting Standards Board's Statements of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions," No. 109, "Accounting for Income Taxes," and No. 115, "Accounting for Certain Investments in Debt and Equity Securities," in 1993. As discussed in Note 1, the accompanying 1993 consolidated financial statements have been restated to remove certain merger-related charges. /s/ KPMG Peat Marwick LLP March 16, 1994, except as to the third paragraph of Note 1 and the last paragraph of Note 16, which are as of July 19, 1994 37 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations The Financial Information for 1993 Has Been Restated Where Applicable (See Note 1) OVERVIEW In August 1993, CoreStates Financial Corp ("CoreStates") entered into an agreement to acquire Constellation Bancorp ("Constellation"), a bank holding company with $2.3 billion in assets. On March 16, 1994, CoreStates consummated its acquisition of Constellation and has accounted for this transaction as a pooling of interests. The following Management's Discussion and Analysis of Financial Condition and Results of Operations have been revised to include Constellation for 1993 and all other periods presented. The accompanying financial information as of and for the year ended December 31, 1993 has been restated to reflect merger-related charges of $127.8 million after-tax, or $.89 per share, related to the Constellation acquisition in the first quarter of 1994, rather than in the fourth quarter of 1993 as previously reported. This restatement was made after discussions with the Securities and Exchange Commission staff which resulted in these charges being reflected in the quarter that the acquisition was consummated. The restatement has no effect on CoreStates' basic operating results, excluding the one-time merger-related charges. On a pre-tax basis, the merger-related charges consisted of a $120.0 million provision for loan losses, a $28.0 million addition to the OREO reserve, $13.0 million for the writedown of purchased mortgage servicing rights and related assets, and $34.0 million for expenses directly attributable to the Constellation acquisition. Income for 1993, before the cumulative affect of a change in accounting principle, was $339.5 million, or $2.64 per share, reflecting growth of 21% on a per share basis when compared to $261.0 million, or $2.19 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 17.09% and 1.35% respectively, in 1993, compared to 14.98% and 1.05%, respectively in 1992. The 1993 Montgomery Securities Regional Bank Composites for returns on average equity and assets were 15.49% and 1.21%, respectively. 38 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW - continued 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 (this excludes Constellation which is treated as a separate line of business), 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 46. 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 $.10 per share, as the cumulative effect of a change in accounting principle in 1993. 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 $128.7 million, $84.9 million after- tax or $.71 per share, as the cumulative effect of a change in accounting principle in 1992. 39 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued OVERVIEW - continued Fully combined 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............ $1,243.3 $1,172.4 $1,206.3 6.0 % (2.8)% Provision for losses on loans.. 110.0 129.3 272.6 (14.9) (52.6) Non-interest income............ 544.6 586.7 587.1 (7.2) (.1) Non-financial expenses......... 1,148.3 1,213.3 1,229.3 (5.4) (1.3) -------- -------- -------- Income before income taxes... 529.6 416.5 291.5 27.2 42.9 Provision for income taxes..... 190.1 155.5 128.9 22.3 20.6 -------- -------- -------- Income before the cumula- tive effect of a change in accounting principle...... 339.5 261.0 162.6 30.1 60.5 Cumulative effect of a change in accounting principle...... (13.0) (84.9) -------- -------- -------- Net income........... $ 326.5 $ 176.1 $ 162.6 85.4 8.3 ======== ======== ======== Operating Ratios Return on average equity (1)... 17.09 14.98% 9.75% Return on average assets (1)... 1.35 1.05 .62 Net interest margin............ 5.72 5.41 5.24 Per Common Share (2) Income before the cumulative effect of a change in accounting principle......... $ 2.64 $ 2.19 $ 1.39 Net income..................... 2.54 1.48 1.39 Average common shares outstanding................. 128.570 119.350 117.016 - -----------------------------
(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 51). 40 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued OVERVIEW - continued 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 2.8% year-to-year decline in net interest income in 1992 and approximately $60 million of the $143.3 million, or 52.6%, 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. Most of the remaining decline in the 1992 loan loss provision was due to the $72.0 million reduction at Constellation. 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 $9.3 million, or $.08 per share. 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 $400.6 million, a decline of $217.1 million, or 35.1% 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 $168.1 million, or 36.8% from year-end 1992. Non-performing assets in the commercial portfolio also declined $43.2 million, or 28.2% from year-end 1992. At December 31, 1993 the allowance for loan losses at $417.8 million was 148.6% of non-performing loans. This compares to $407.6 million and 92.4% at December 31, 1992. 41 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued 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. On March 16, 1994, CoreStates acquired Constellation Bancorp ("Constellation"), a New Jersey bank holding company with $2.3 billion in assets and $2.1 billion in deposits. As a result of this transaction, approximately 11.3 million new shares of CoreStates' common stock were issued. The transaction had a total value of approximately $300 million and was 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 is being merged into NJNB on April 29, 1994. 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. 42 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued STRATEGIC ACTIONS IN 1993 - continued 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 following the acquisition. In March 1994, CoreStates announced a definitive agreement to acquire Germantown Savings Bank ("GSB"), a $1.6 billion Pennsylvania chartered stock savings bank. The transaction has a total value of approximately $260 million, of which 55% will be paid in CoreStates common stock and 45% will be paid in cash, and will be accounted for as a purchase creating an intangible of approximately $141 million. CoreStates plans to purchase in the market 100% of the shares to be issued. The transaction is expected to close late in the third quarter of 1994, assuming approval by regulators and GSB shareholders. The 32 branches of GSB will be legally merged into CoreStates' lead banking subsidiary, CoreStates Bank, N.A. This in-market acquisition is expected to result in signficant operating efficiencies, and is expected to add to earnings per share in the second year following the acquisition. 43 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 Independence and GSB follows:
Operating Results for the Year Ended December 31, 1993 (in thousands, except per share) Independence GSB ------------ ------- Net income............................ $22,879 $20,498 Per common share...................... 1.98 4.68 Average common shares outstanding.......................... 11,530 4,377 Balance Sheet At December 31, 1993 (in millions) Independence GSB ------------ ------- Assets................................ $ 2,603 $ 1,637 Loans................................. 1,745 1,039 Deposits.............................. 2,153 1,476 Shareholders' equity.................. 222 142
In December 1993, the Corporation announced a definitive agreement to purchase the privately held Rittenhouse Financial Services, Inc. and the $35 million asset Rittenhouse Trust Company. That agreement was terminated on June 8, 1994 by mutual consent. 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. 44 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. On April 22, 1994, CoreStates executed a purchase and assumption agreement for the sale of its remaining banking operations 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. 45 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued BUSINESS LINE RESULTS CoreStates utilizes a value-based reporting methodology to facilitate management's analysis of performance by defined business lines. This process supports CoreStates' strategic objective of creating superior growth in shareholder value by focusing on the performance and value creation potential of CoreStates' component businesses. This section of management's discussion and analysis presents the performance results of CoreStates' 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. For the current reporting period, Constellation is shown as a separate entity. During 1994, as the new company is fully integrated into CoreStates, the respective business components of Constellation will be blended into the existing business lines. It is expected that there will be a one to two quarter transition period following each acquisition prior to when complete business line reporting can be established. During the transition period, a new acquisition will be reported separately from the existing lines of business. Corporate overhead, processing and support costs are allocated along with the impact of balance sheet management and hedging activities of CoreStates. A matched maturity transfer pricing system is used to allocate interest income and interest expense. 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 unallocated equity; unallocated 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. 46 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 and Constellation is reflected in the table below (in millions):
Consumer Trust and Electronic Wholesale Financial Investment Payment (taxable equivalent Banking Services Management Services -------------------- ------------------ ------------------------ ------------------- basis) 1993 1992 1993 1992 1993 1992 1993 1992 ---------- -------- ---------- ------- ----------- ----------- --------- -------- Net interest income........ $ 546.5 $ 487.9 $527.0 $534.4 $ 29.9 $ 29.9 $ (5.7) $ 1.8 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 13.2 109.3 Non-financial expenses..... 441.2 431.4 441.6 437.5 107.4 103.0 104.2 ------- ------- ------ ------ ------ ------ ------ Income before income taxes............. 283.6 207.1 151.8 142.8 17.1 17.3 7.5 6.9 Income tax expense......... 110.5 79.3 57.6 53.6 6.2 6.2 (0.7) 4.9 ------- ------- ------ ------ ------ ------ ------- ------ Net income ................ $ 173.1 $ 127.8 $ 94.2 $ 89.2 $ 10.9 $ 11.1 $ 8.2 $ 2.0 ======= ======= ====== ====== ====== ====== ======= ====== Percentage contribution.... 51.0% 49.0% 27.8% 34.2% 3.2% 4.3% 2.4% 0.8% Return on assets........... 1.32 1.00 1.71 1.55 1.65 1.62 11.88 1.80 Return on equity (2)....... 24.52 18.28 36.09 31.41 40.37 41.11 205.00 2.50 Average assets............. $13,139 $12,737 $5,501 $5,772 $ 661 $ 684 $ 69 $ 111 Average equity (2)......... 706 699 261 284 27 27 4 80
Constellation (taxable equivalent Bancorp Corporate Total ----------------- ---------------- ----------------------------- basis) 1993 1992 1993 1992 1993 1992 -------- ------- ------- ------- ------------- -------------- Net interest income........ $ 101.9 $ 87.7 $ 43.7 $ 30.7 $1,243.3 $1,172.4 Provision for loan losses................... 10.0 10.0 (8.9) 8.2 110.0 129.3 Non-interest income........ 41.5 40.2 41.7 39.2 544.6 586.7 Non-financial expenses..... 114.9 118.7 43.2 18.5 1,148.3 1,213.3 ------- ------ ------ ------ -------- -------- Income before income taxes............. 18.5 (.8) 51.1 43.2 529.6 416.5 Income tax expense......... 6.9 .6 9.6 10.9 190.1 155.5 ------- ------ ------ ------ -------- -------- Net income................. $ 11.6 $ (1.4) $ 41.5 $ 32.3 $339.5(1) $261.0(1) ======= ====== ====== ====== ======== ======== Percentage contribution.... (3.4)% (0.4)% 12.2% 12.4% 100.0% 100.0% Return on assets........... .49 (.05) 1.20 1.06 1.35(1) 1.05(1) Return on equity (2)....... 6.01 (1.09) 5.21 6.16 17.09(1) 14.98(1) Average assets............. $2,346 $2,583 $3,455 $3,045 $ 25,171 $ 24,931 Average equity (2)......... 193 128 796 524 1,987 1,742
- --------------------------------------------- (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. Equity for Constellation Bancorp reflects that entity's legal equity. 47 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. 48 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. 49 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued BUSINESS LINE RESULTS - continued Constellation net income in 1993 was $11.6 million as compared to a loss of $1.4 million in 1992. The increase was primarily due to a $14.2 million increase in net interest income and a $3.8 million decline in non-financial expenses. The primary reason for the improvement in net interest income was due to the earnings on new capital, a more rapid decline in average rates on interest bearing liabilities than on interest earning assets, a lower level of non-performing assets and the extinguishment of Constellation's high cost debt. The decrease in non-financial expenses was primarily the result of lower salaries and employee benefits, net occupancy expense, furniture and equipment expense, and amortization of purchased assets partially offset by higher legal and non-performing asset related expenses. 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. 50 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 table "Average Common Equity/Assets".
Average Common Equity/Assets - ------------------------------ Average Common (In percent) Equity/Assets - ------------------------------ ------------- Montgomery CoreStates Securities* ------------- ---------- 1993 7.89% 7.11% 1992 6.99 6.74 1991 6.41 6.03 1990 6.70 5.74 1989 6.99 5.65
* The Montgomery Securities Regional Bank Composite At December 31, 1993, common shareholders' equity totaled $2,162 million or 8.3% of total assets, compared with $1,890 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 5.9%, 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 $1.02 per share in 1992. The common dividend payout ratio was 69.1% for 1993, compared to 46.6% for 1992. On August 17, 1993 the Board of Directors approved a two-for-one common stock split effected in the form of a 100% stock dividend ("the Stock Dividend"). The additional shares resulting from the Stock Dividend were distributed on October 15, 1993 to holders of record on September 15, 1993. All common shares and per common share data have been restated for the impact of the Stock Dividend. CoreStates and its bank subsidiaries are subject to minimum risk-based and leverage capital guidelines issued by the Federal Reserve Board and Comptroller of the Currency. The measurement of risk-based capital takes into account the credit risk of both balance sheet assets and off-balance sheet exposures. These guidelines require minimum risk-based capital ratios of 4% for Tier 1 capital and 8% for total capital. In addition, a minimum leverage ratio of Tier 1 capital to quarterly average total assets of 3% is required for banking organizations that are rated as strong. The following table illustrates CoreStates' risk-based and leverage capital ratios at December 31, 1993 and 1992: 51 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued CAPITAL STRENGTH - continued
Risk-based and Leverage Capital Ratios at - ------------------------------------------- At December 31, - -------------- ($ in millions) 1993 1992 ------ ------ Capital Tier 1 capital $ 2,068 $ 1,892 Tier 2 capital 909 739 Total qualifying capital 2,977 2,631 Assets Risk-adjusted assets 21,767 20,717 Average assets- leverage capital basis 25,165 25,285 Ratios Tier 1 capital ratio 9.5% 9.1% 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 Constellation Bank, N.A. 9.9 11.2 6.7 2.3 CoreStates Bank of Delaware, N.A. 10.9 12.1 13.4 .6
52 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. 53 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 table, which illustrates each industry that exceeds 10% of total shareholders' equity. CoreStates' largest concentration is in the non-bank finance industry at 38.6% of total equity.
Wholesale Loans by Industry - --------------------------- Outstandings % of as of % Outstandings of equity non-performing ------------ -------------- Non-bank finance 38.6% 0.2% Communications 29.8 0.4 Retail trade 28.9 0.8 Healthcare 19.8 0.2 Depository institutions 17.6 Apparel 16.5 10.6 Trucking and auto leasing 14.2 1.9 Real estate construction 15.1 5.8 Chemical 10.8
54 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. 55 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.................... $127.6 $117.1 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 $5,648 million at December 31, 1993, compared to $6,050 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 $327 million or 1.8% of total loans at December 31, 1993. Currently, 5.8% of CoreStates' construction and development loan portfolio is non-performing, compared to 2.8% for the remaining real estate loan portfolio. The table below summarizes CoreStates' real estate loans outstanding. 56 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, - -------------- (in millions) Completed projects/ Total Construction/ Investment real 1993 development properties Residential Other(1) estate - ---- -------------- ----------- ------------ --------- ------- Year-end outstandings..... $ 327 $1,063 $2,524 $1,734 $5,648 Average loans outstanding 373 1,084 2,300 2,020 5,777 Non-performing loans..... 19 46 41 63 169 % of year-end loans.... 5.8% 4.3% 1.6% 3.6% 3.0% Net charge-offs........ $ 7 $ 11 $ 5 $ 24 $ 47 % of average loans..... 2.0% 1.0% .2% 1.2% .8% 1992 - ---- Year-end outstandings.... $ 450 $1,058 $2,782 $1,760 $6,050 Average loans outstanding 570 987 2,699 1,712 5,968 Non-performing loans..... 54 59 53 114 280 % of year-end loans.... 11.9% 5.6% 1.9% 6.5% 4.6% Net charge-offs.......... $ 13 $ 21 $ 7 $ 18 $ 59 % of average loans..... 2.3% 2.1% .3% 1.1% 1.0% - --------------------------------------------------------------------------------------
(1) 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 $2,524 million or 14.0% 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 30.7% of total real estate loans and 9.6% of total loans. The remaining category of real estate loans, totaling $1,063 million at December 31, 1993, is comprised of completed projects and investment properties. Net charge-offs of construction and development loans in 1993 were $7 million compared to net charge-offs of $13 million in 1992. 57 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued ASSET QUALITY - continued 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. 58 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 $417.8 million and represented 2.3% of loans. This compares with a loan loss allowance at year-end 1992 of $407.6 million, or 2.4% of loans. The allowance for loan losses at year-end 1993 was 148.6% of non-performing loans, an increase over the year-end 1992 coverage ratio of 92.4% 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 $110.0 million, a decrease of $19.3 million from the $129.3 million provided in 1992. Subsequent to the March 16, 1994 consummation of the Constellation acquisition, Constellation recorded a $120.0 million provision for loan losses in the first quarter of 1994 in connection with a change in strategy related to problem assets and to conform its consumer lending charge-off policies to those of CoreStates. Net charge-offs in 1993, excluding net LDC recoveries of $12.6 million, were $114.9 million or .7% of related average loans. This represents a decrease of $51.5 million when compared to the $166.4 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 $ 38.4 0.5% 37.5% $ 58.2 0.8% 38.0% Real estate: Construction 7.4 2.0 7.3 13.3 2.3 8.6 Other 39.8 0.7 38.9 45.9 0.9 29.9 Consumer: Credit card 23.3 2.3 22.8 31.1 3.8 22.6 Installment 5.1 0.5 5.0 14.0 1.1 9.1 Other (1) .8 0.1 .8 3.9 0.3 ------ ----- ------ ----- Total domestic 114.8 0.7 112.3 166.4 108.5 ------ ----- ------ ----- Foreign (2) (12.6) (2.3) (12.3) (13.1) (3.1) (8.5) ------ ----- ------ ----- Total net charge-offs $102.2 0.6% 100.0% $153.3 0.9% 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. 59 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 $400.6 million, or 2.2% of total loans plus other real estate owned ("OREO") and 1.5% of total assets. These levels compared to total non-performing assets at year-end 1992 of $617.7 million, 3.5% of total loans plus OREO and 2.4% 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 42). At year-end 1993, total non-performing assets were comprised of $226.3 million of non-accrual loans, $54.9 million of renegotiated loans and $119.4 million of OREO. The $217.1 million, or 35.1%, 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 $43.2 million, or 28.2%, and the real estate portfolio which declined $168.1 million, or 36.8%. During 1993, loans aggregating $227 million were added to non-performing status, payments of $218 million against non-performing assets were received, loans totaling $81 million were returned to full accrual status and $145 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.......... $618 $538 $483 $451 $ 618 Additions.................. 64 43 48 72 227 Return to accrual.......... (46) (14) (8) (13) (81) Payments................... (61) (55) (35) (67) (218) Charge-offs................ (37) (29) (37) (42) (145) ---- ---- ---- ---- ----- Net change................. (80) (55) (32) (50) (217) ---- ---- ---- ---- ----- Ending balance............. $538 $483 $451 $401 $ 401 ==== ==== ==== ==== ===== 1992 - ---- Beginning balance.......... $758 $745 $737 $684 $ 758 Additions.................. 87 126 87 64 364 Return to accrual.......... (14) (12) (40) (16) (82) Payments................... (49) (89) (50) (68) (256) Charge-offs................ (37) (33) (50) (46) (166) ---- ---- ---- ---- ----- Net change................. (13) (8) (53) (66) (140) ---- ---- ---- ---- ----- Ending balance............. $745 $737 $684 $618 $ 618 ==== ==== ==== ==== =====
60 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-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").. $ 5.1 1.1% 1.4% $ 8.5 1.7% 1.4% Other................... 104.8 1.4 28.1 144.6 2.1 23.4 Real estate: Construction............ 19.4 5.8 5.2 53.7 11.9 8.7 Other loans............. 149.4 2.8 40.1 226.2 4.0 36.6 OREO.................... 119.4 24.5 176.4 28.6 Consumer.................. .7 .2 .1 Other domestic loans(1)... 1.6 .1 .4 5.2 .4 .8 ------ ----- ------ ----- Total domestic.......... 400.4 2.2 99.9 614.7 3.6 99.5 ------ ----- ------ ----- Foreign loans.............. .2 .1 3.0 .8 .5 ------ ----- ------ ----- Total non-performing assets(2).............. $400.6 2.2% 100.0% $617.7 3.5% 100.0% ====== ==== ===== ====== ==== ===== % Total assets.......... 1.5% 2.4% === ===
- -------------------------------------------------------------------------------- (1) Includes loans to financial institutions and lease financing. (2) The table does not include loans of $47 million and $89 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. 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. 61 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 table "Net Interest Margin".
Net Interest Margin - --------------------- (In percent) Net interest margin --------------------------- Montgomery CoreStates Securities* ---------- ---------- 1993 5.72% 4.81% 1992 5.41 4.78 1991 5.24 4.40 1990 5.18 4.21 1989 5.04 4.27
* The Montgomery Securities Regional Bank Composite 62 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 89 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. 63 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 ------- ------ ------ ------- ------- ------- ----- Total loans............................. $12,047 $1,347 $1,109 $ 1,334 $ 1,893 $ 296 $18,026 Total consumer deposits, net non- interest funding....................... 7,636 1,536 1,635 2,146 2,571 2,679 18,203 Adjustments............................. 401 (630) (289) (390) (1,267) 2,175 0 ------- ------ ------ ------- ------- ------ ------- Relationship gap...................... 4,812 (819) (815) (1,202) (1,945) (208) (177) ------- ------ ------ ------- ------- ------ ------- Discretionary Portfolios Assets.................................. 2,511 1,090 1,096 1,301 2,270 1,094 9,362 Liabilities............................. 7,616 131 88 276 365 709 9,185 ------- ------ ------ ------- ------- ------ ------- Discretionary gap..................... (5,105) 959 1,008 1,025 1,905 385 177 ------- ------ ------ ------- ------- ------ ------- Combined gap.......................... $ (293) $ 140 $ 193 $ (177) $ (40) $ 177 $ -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 $6.5 billion in loans subject to changes in prime, excluding the credit card portfolio which floats with prime only at higher rate levels. 64 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% ====== ==== ====== ====
65 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 69.0% of assets in 1993 compared to 70.2% in 1992. This decline is a result of increased loan volumes and relatively no growth in core deposits. 66 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 88 and 90 illustrate the maturity characteristics of CoreStates' domestic certificates of deposit over $100 thousand 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 $680 million of investment securities as "Available-for-Sale". These investment securities were marked to fair value, adding $68.3 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. Constellation's classifications will be reviewed in the second quarter and reclassifications will be made as appropriate. 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. 67 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 $25.9 billion at year-end 1993, down $182 million or 0.70% from year-end 1992. However, comparing specific asset categories to year-end 1992 balances reflects recovering loan demand, as loans increased $797 million or 4.6%, and a $100 million, or 3.4%, 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 $646 million, or 5.1%, decline in interest bearing deposits, principally the result of the September 30, 1993 sale of the five Virgin Islands branches, was partially offset by growth of $147 million, or 2.4% in demand deposits, and an increase of $202 million, or 16.1% in long-term debt. Total assets averaged $25.2 billion in 1993, an increase of $239 million or 1.0% from 1992. Average loans increased $163 million, or 1.0% and average investment securities increased $288 million or 10.8%. As reflected in the table on Earning Asset Mix, loans comprised 79.6% of CoreStates' average earning assets in 1993, compared to 79.2% 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 ----------------- (Percentage of average earning assets)
Earning Asset Mix --------------------------------- Money Investment Market Securities Loans ------- ----------- ----------- 1993 6.8% 13.6% 79.6% 1992 8.5 12.3 79.2 1991 6.8 11.2 82.0 1990 4.1 10.5 85.4 1989 6.4 12.6 81.0
The accompanying table on Funding Mix illustrates that 57.4% of CoreStates' funds were derived from consumer deposits in 1993, compared with 61.4% 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 ----------- (Percentage of average earnings assets*)
Funding Mix ------------------------------- Other Non- Retail Interest Interest Deposits Bearing Bearing --------- --------- --------- 1993 57.4% 13.7% 28.9% 1992 61.4 11.9 26.7 1991 56.5 22.2 21.3 1990 50.4 28.9 20.7 1989 48.4 29.3 22.3
* excluding short-term money market investments 68 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 8.0% for 1993. Operating revenue has three major components and, as illustrated on the accompanying table ("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 - ----------------------------------- (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 $1,243.3 $115.9 $544.7 $1,903.9 1992 1,172.4 128.2 586.7 1,887.3 1991 1,206.3 141.6 587.1 1,935.0 1990 1,216.9 130.3 454.3 1,801.5 1989 1,187.2 121.7 419.7 1,728.6
69 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued
Net Interest Income Taxable Equivalent Net Interest Income Percentage (in millions) increase(decrease) ------------------ 1993 1992 1991 '93/'92 '92/'91 -------- -------- -------- ------ ------ Total interest income $1,664.8 $1,762.8 $2,254.5 (5.6)% (21.8)% Tax equivalent adjustment 24.6 29.0 38.4 (15.2) (24.5) -------- -------- -------- Tax equivalent interest income 1,689.4 1,791.8 2,292.9 (5.7) (21.9) Total interest expense 446.1 619.4 1,086.6 (28.0) (43.0) -------- -------- -------- Tax equivalent net interest income $1,243.3 $1,172.4 $1,206.3 6.0 (2.8) ======== ======== ======== Interest rate spread 4.97% 4.50% 4.08% ======== ======== ======== Net interest margin 5.72% 5.41% 5.24% ======== ======== ========
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 $70.9 million, or 6.0% in 1993, following a decrease of $33.9 million, or 2.8% in 1992. The increase in net interest income in 1993 principally reflects the impact of a $77 million increase in average interest earning assets. Also contributing to the increase in net interest income were wider interest rate spreads, a $.2 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 109 basis points, while the rates earned on domestic loans decreased 36 basis points. The decrease in net interest income for 1992 was the result of reduced domestic loan volume. On average, domestic loans decreased $1.7 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 31 basis points in 1993 to 5.72%. 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 76-79, and the rate/volume analysis on page 83. 70 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) $397.0 $365.0 $340.4 8.8 % 7.2 % EPS related revenues (2) 13.2 92.5 101.6 (85.7) (9.0) Securities gains (losses) 15.7 15.1 (14.2) Other non-interest income 98.7 71.2 72.7 38.6 (2.1) ------ ------ ------ Non-interest income before non-recurring items 524.6 543.8 500.5 (3.5) 8.6 Non-recurring items 20.1(3) 42.9(4) 86.6(5) ------ ------ ------ Total non-interest income $544.7 $586.7 $587.1 (7.2) (.1) ====== ====== ======
- ------------------------------- (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, and a $1.8 million gain on the sale of a Constellation branch. (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 $42.0 million or 7.2% in 1993, following a slight decline of $.4 million, or .1% in 1992, total non- interest income in 1993 before non-recurring items and EPS related revenues increased more than $60 million or 13.3% 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; the $1.8 million gain on the sale of a Constellation branch in 1992; 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 5% over 1991. 71 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued Non-Interest Income - continued CoreStates recorded net securities gains of $15.7 million in 1993 and $15.1 million in 1992, compared with net securities losses of $14.2 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. Income from basic banking transactional services increased 8.8% in 1993, following growth of 7.2% in 1992. The components of basic banking transactional services are discussed in detail below. . Service charges on deposit accounts, paid in fees, increased $16.1 million, or 10.4%, in 1993 and $19.5 million, or 14.4%, 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 $286.7 million, up $3.8 million, or 1.3%, from 1992. The benefit derived from deposit balances maintained by commercial and correspondent customers decreased $12.3 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 $282.9 million, an increase of $6.2 million or 2.2% over 1991. . Fees for international services increased $9.2 million, or 15.2%, 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 $4.6 million, or 5.0%, in 1993 following a slight decline of $.7 million, or .8%, 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. 72 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued Non-Interest Income - continued . Debit and credit card fees increased $2.1 million, or 3.6% in 1993, following a decrease of $7.2 million, or 11.1%, 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 71 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. Other operating income, including gains on trading account securities and other gains but excluding pre-tax gains of $11.0 million on the Virgin Islands branch sale and $9.1 million on prepayments of long-term debt, increased $27.5 million in 1993, following a decrease of $1.5 million in 1992. Other operating income in 1993 included $17.5 million of fees earned by Financial Telesis. 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. 73 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued
Non-Financial Expenses Percentage (in millions) increase(decrease) ------------------ 1993 1992 1991 '93/'92 '92/'91 -------- -------- -------- ------- ------- Salaries, wages and benefits $ 567.5 $ 565.6 $ 561.6 .3 % .7 % Net occupancy expense 104.9 106.2 112.0 (1.2) (5.2) Equipment expense 68.2 79.4 78.4 (14.1) 1.3 Other operating expenses 385.6 382.4 356.2 .8 7.4 -------- -------- -------- Non-financial expenses before significant and unusual items 1,126.2 1,133.6 1,108.2 (.7) 2.3 Significant and unusual items 22.1 79.7 121.1 (72.3) (34.2) -------- -------- -------- Total non-financial expenses $1,148.3 $1,213.3 $1,229.3 (5.4) (1.3) ======== ======== ========
While reported total non-financial expenses in 1993 of $1,148.3 million reflected a decrease of 5.4% from 1992; excluding significant and unusual items as noted below for both years, non-financial expenses for 1993 decreased less than 1% from 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 reserves and write- downs against other real estate owned. In 1992, total non-financial expenses included: $16.2 million for systems enhancements and operations consolidations; $40.0 million for reserves and write-downs against other real estate owned; $7.4 million of expenses associated with personnel related initiatives; $9.1 million impact of adopting FAS 106; $4.5 million for streamlining business operations; and a $2.5 million reserve for PMSR write-downs. 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 the years 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: $44.3 million of write-offs against other real estate owned; $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; and $6.6 million in charges related to branch consolidations. Excluding these items for both years, non-financial expenses for 1992 were somewhat lower than 1991. 74 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 increased .3% in 1993, compared to an increase of .7% in 1992. A decrease in 1993 salary expense was attributable to the transfer of employees in the MAC and POS businesses to EPS, was partially offset by an increase in employee related expenses of $11.7 million due to the acquisition of Financial Telesis. The number of full-time equivalent employees at December 31, 1993, 1992 and 1991 was: 14,728; 14,887; and 15,176, respectively. Net occupancy expense decreased 1.2% in 1993, compared to a decline of 5.2% in 1992. Equipment expenses declined 14.1% in 1993, compared to a modest increase 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. Other operating expenses increased slightly .8% in 1993, following an increase of 7.4% in 1992 compared to 1991. Provision for Income Taxes The provisions for income taxes was $165.5 million in 1993 compared to $126.4 million in 1992 and $90.5 million in 1991. The $39.1 million increase in 1993 total tax expense was primarily the result of higher pre-tax book income of $117.6 million. The provisions for income taxes for 1993, 1992 and 1991 were at effective rates of 32.8%, 32.6% and 35.9% respectively. The 1% retroactive increase in the 1993 federal corporate tax rate, higher state tax expense, and lower tax exempt income were largely offset by the FAS 109 revaluation of the net deferred tax asset reflecting the increased federal tax rate and a higher dividend received deduction. 75 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.................. 2,440 5.82 141,913 1,992 7.08 141,093 1,720 8.16 140,385 State and municipal.............. 363 8.62 31,305 399 9.54 38,070 461 10.44 48,150 Other............................ 157 5.94 9,327 281 7.19 20,214 401 8.65 34,680 --------- ---------- --------- ---------- --------- ---------- Total investment securities............... 2,960 6.17 182,545 2,672 7.46 199,377 2,582 8.65 223,215 Federal funds sold................. 197 3.11 6,119 480 4.52 21,679 427 6.46 27,597 Trading account securities......... 2 4.15 83 1 7.20 72 1 5.10 51 Loans (b)(c)(d): Domestic: Commercial, industrial and other......................... 7,048 8.02 565,362 6,747 8.23 555,541 7,347 9.58 704,158 Real estate.................... 5,777 7.88 455,124 5,968 8.55 509,973 5,902 9.60 566,856 Consumer....................... 2,091 12.40 259,264 2,187 12.73 278,337 3,340 14.57 486,479 Financial institutions......... 706 6.15 43,427 826 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................ 595 9.05 53,826 509 8.70 44,285 487 9.34 45,488 Foreign.......................... 544 5.01 27,258 429 6.53 28,018 431 8.68 37,429 --------- ---------- --------- ---------- --------- ---------- Total loans, net of discounts............... 17,315 8.42 1,457,573 17,152 8.83 1,515,018 18,869 10.43 1,968,950 --------- ---------- --------- ---------- --------- ---------- Total interest earning assets (d)(e)........... $ 21,749 7.77 1,689,369 $ 21,672 8.27 1,791,781 $ 23,006 9.96 2,292,945 ========= ----- ---------- ========= ----- ---------- ========= ----- ---------- FUNDING SOURCES Interest bearing liabilities (b): Deposits in domestic offices (f): Commercial..................... $ 312 3.16 9,851 $ 663 4.03 26,725 $ 1,258 6.27 78,854 NOW accounts................... 1,558 0.77 10,900 1,459 2.25 29,778 1,269 4.46 50,615 Money Market Accounts.......... 3,573 1.99 71,112 3,645 2.78 101,393 3,436 4.87 167,228 Consumer savings............... 2,655 1.42 37,631 2,361 2.69 63,408 1,797 4.61 82,772 Consumer certificates.......... 3,931 4.38 172,344 4,752 5.05 239,880 5,658 6.70 379,302 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................ 12,740 2.54 320,086 13,636 3.63 489,503 14,645 5.76 835,700 Short-term funds borrowed: Federal funds purchased........ 1,042 3.08 32,094 897 3.41 30,605 1,240 5.58 69,144 Commercial paper............... 604 3.14 18,982 539 3.72 20,030 791 6.28 49,657 Other.......................... 221 6.05 13,381 117 5.50 6,435 689 6.92 47,686 --------- ---------- --------- ---------- --------- ---------- Total short-term funds borrowed................ 1,867 3.45 64,457 1,553 3.67 57,070 2,720 6.12 166,487 Long-term debt (g)............... 1,333 4.62 61,572 1,227 6.01 72,828 1,094 7.84 84,418 --------- ---------- --------- ---------- --------- ---------- Total interest bearing liabilities............. 15,940 2.80 446,115 16,416 3.77 619,401 18,459 5.89 1,086,605 Portion of non-interest bearing funding sources........................... 5,809 5,256 4,547 --------- ---------- --------- ---------- --------- ---------- Total funding sources (e) ............ $ 21,749 2.05 446,115 $ 21,672 2.86 619,401 $ 23,006 4.72 1,086,605 ========= ----- ---------- ========= ----- ---------- ========= ----- ---------- Net interest income and net interest margin................... 5.72% $1,243,254 5.41% $1,172,380 5.24% $1,206,340 ===== ========== ===== ========== ===== ==========
76 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) Non-Interest Earning Assets Cash............................................. $ 2,213 $ 1,987 $ 1,857 Allowance for loan losses........................ (422) (433) (486) Other assets..................................... 1,631 1,705 1,659 --------- ------- -------- Total non-interest earning assets........... $ 3,422 $ 3,259 $ 3,030 ========= ======== ======== Non-Interest Bearing Funding Sources Demand deposits: Domestic....................................... $ 5,441 $ 5,113 $ 4,461 Foreign........................................ 369 324 308 Other liabilities................................ 1,434 1,336 1,140 Shareholders' equity............................. 1,987 1,742 1,668 Non-interest bearing funding sources used to fund earning assets............................ (5,809) (5,256) (4,547) --------- --------- --------- Total net non-interest bearing funding sources................................. $ 3,422 $ 3,259 $ 3,030 ========= ======== ======== Supplementary Averages Net demand deposits.............................. $ 4,358 $ 3,801 $ 3,131 Net Federal funds purchased...................... 846 3.07% $25,975 416 2.15% $ 8,926 812 5.19% $42,176 Certificates of deposit in domestic offices over $100,000.................................. 295 3.28 9,678 603 4.21 25,360 1,170 6.48 75,798 Average prime rate............................... 6.00 6.25 8.46 (a) Yields and income on time deposits include net Eurodollar trading (e) For the years 1993-1988, 8%, 10%, 9%, 8%, 7% and profits. 12%, respectively, of total average assets and (b) The net impact of interest rate swaps is recognized as an adjustment liabilities are attributed to foreign operations. to interest income or expense of the related hedged asset or liability. (f) Average balances on time deposits in domestic (c) Yields and income on loans include fees on loans. offices are reduced by specified reserve amounts (d) Non-performing loans are included in interest earning assets. for purposes of rate calculations. (g) Rates on long-term debt are based on average balances excluding capital lease obligations.
77 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES: continued
1990 1989 ------------------------------ ------------------------------ Average Income/ Average Income/ balance Rate expense balance Rate expense --------- ------ ----------- --------- ------ ----------- (000,000) (000) (000,000) (000) INTEREST EARNING ASSETS Time deposits, principally Eurodollars (a)....... $ 659 8.41% $ 55,412 $ 999 9.17% $ 91,629 Investment securities (b): U.S. Government................................ 1,400 8.87 124,139 1,728 8.74 150,953 State and municipal............................ 544 10.77 58,565 540 10.63 57,377 Other.......................................... 515 9.01 46,383 706 9.89 69,833 --------- ---------- --------- ---------- Total investment securities............ 2,459 9.32 229,087 2,974 9.35 278,163 Federal funds sold............................... 300 8.51 25,528 472 8.73 41,199 Trading account securities....................... 7 8.66 606 038 8.26 3,138 Loans (b)(c)(d): Domestic: Commercial, industrial and other............. 7,748 10.89 843,728 7,410 11.66 863,815 Real estate.................................. 6,076 10.64 646,200 5,698 11.33 645,662 Consumer..................................... 3,711 14.62 542,366 3,263 14.17 462,338 Financial institutions....................... 996 10.13 100,869 946 10.41 98,438 Factoring receivable......................... 478 10.42 49,829 458 11.79 53,983 Lease financing.............................. 497 9.81 48,779 414 10.99 45,505 Foreign.......................................... 582 9.77 56,876 874 9.23 80,670 --------- ---------- --------- ---------- Total loans, net of discounts.......... 20,088 11.39 2,288,647 19,063 11.81 2,250,411 --------- ---------- --------- ---------- Total interest earning assets (d)(e)... $ 23,513 11.06 2,599,280 $ 23,546 11.31 2,664,540 ========= ----- ---------- ========= ----- ---------- FUNDING SOURCES Interest bearing liabilities (b): Deposits in domestic offices (f): Commercial................................... $ 1,722 8.15 138,037 $ 1,924 8.87 168,276 NOW accounts................................. 1,170 5.23 54,709 1,128 5.22 53,883 Money Market Accounts........................ 3,039 6.08 183,511 2,958 6.12 180,548 Consumer savings............................. 1,632 5.03 81,899 1,620 5.06 81,755 Consumer certificates........................ 5,568 8.14 453,435 4,983 8.61 429,143 Time deposits of overseas branches and subsidiaries............................. 943 8.59 81,039 1,439 9.57 137,653 --------- ---------- --------- ---------- Total interest bearing deposits........ 14,074 7.14 992,630 14,052 7.55 1,051,258 Short-term funds borrowed: Federal funds purchased...................... 1,889 8.11 153,144 2,382 9.25 220,350 Commercial paper............................. 1,160 8.17 94,767 880 9.21 81,069 Other........................................ 1,006 7.36 74,122 605 9.52 57,571 --------- ---------- --------- ---------- Total short-term funds borrowed........ 4,055 7.94 322,033 3,867 9.28 358,990 Long-term debt (g).............................. 754 9.21 67,700 741 9.30 67,120 --------- ---------- --------- ---------- Total interest bearing liabilities..... 18,883 7.32 1,382,363 18,660 7.92 1,477,368 Portion of non-interest bearing funding sources.. 4,630 4,886 --------- --------- Total funding sources (e).............. $ 23,513 5.88 1,382,363 $ 23,546 6.27 1,477,368 ========= ----- ---------- ========= ----- ---------- Net interest income and net interest margin...... 5.18% $1,216,917 5.04% $1,187,172 ===== ========== ===== ==========
78 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES: continued
1990 1989 ------------------------------ ----------------------------- Average Income/ Average Income/ balance Rate expense balance Rate expense --------- ------ ---------- --------- ------ ---------- (000,000) (000) (000,000) (000) Non-Interest Earnings Assets Cash.............................................. $ 2,021 $ 1,990 Allowance for loan losses......................... (335) (382) Other assets...................................... 1,487 1,506 --------- -------- Total non-interest earning assets....... $ 3,173 $ 3,114 ========= ======== Non-Interest Bearing Funding Sources Demand deposits: Domestic........................................ $ 4,561 $ 4,530 Foreign......................................... 273 275 Other liabilities................................. 1,182 1,331 Shareholders' equity.............................. 1,787 1,864 Non-interest bearing funding sources used to fund earning assets............................. (4,630) (4,886) --------- -------- Total net non-interest bearing funding sources............................... $ 3,173 $ 3,114 ========= ======== Supplementary Averages Net demand deposits............................... $ 3,044 $ 3,007 Net Federal funds purchased....................... 1,588 8.04% $127,616 1,909 9.38% $179,151 Certificates of deposit in domestic offices over $100,000................................... 1,510 8.24 124,398 1,850 8.90 164,697 Average prime rate................................ 10.01 10.87
(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. 79 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 Restated (See Note 1) 1992 1991 1990 1989 1988 ------------ ----------- ---------- ---------- ---------- ---------- Interest income and fees.................. $1,664,769 $1,762,751 $2,254,473 $2,549,267 $2,608,651 $2,236,092 Interest expense.......................... 446,115 619,401 1,086,605 1,382,363 1,477,368 1,182,178 ---------- ---------- ---------- ---------- ---------- ---------- Net interest income...................... 1,218,654 1,143,350 1,167,868 1,166,904 1,131,283 1,053,914 Provision for losses on loans............. 110,000 129,300 272,596 424,644 322,166 131,085 ---------- ---------- ---------- ---------- ---------- ---------- Net interest income after provision for losses on loans... 1,108,654 1,014,050 895,272 742,260 809,117 922,829 Non-interest income....................... 544,654 586,723 587,113 454,349 419,695 379,495 Non-financial expenses.................... 1,148,261 1,213,343 1,229,256 1,101,613 1,071,026 947,623 ---------- ---------- ---------- ---------- ---------- ---------- Income from continuing operations before income taxes............................ 505,047 387,430 253,129 94,996 157,786 354,701 Provision for income taxes................ 165,497 126,408 90,503 6,365 14,894 49,363 ---------- ---------- ---------- ---------- ---------- ---------- Income before cumulative effect of a change in accounting principle.......... 339,550 261,022 162,626 88,631 142,892 305,338 Cumulative effect of a change in accounting principle, net of tax........ (13,010) (84,946) ---------- ---------- ---------- ---------- ---------- ---------- Net income................................ 326,540 176,076 162,626 88,631 142,892 305,338 Dividends on preferred stock.............. 0 0 0 1,662 20,973 9,350 ---------- ---------- ---------- ---------- ---------- ---------- Net income applicable to common stock..... $ 326,540 $ 176,076 $ 162,626 $ 86,969 $ 121,919 $ 295,988 ========== ========== ========== ========== ========== ========== Per common share data: Income before cumulative effect of a change in accounting principle....... $2.64 $2.19 $1.39 $.74 $1.03 $2.50 ===== ===== ===== ==== ===== ===== Net income............................. $2.54 $1.48 $1.39 $.74 $1.03 $2.50 ===== ===== ===== ==== ===== ===== Average common shares outstanding......... 128,570 119,350 117,016 117,293 118,128 118,215 ======= ======= ======= ======= ======= =======
80 CoreStates Financial Corp and Subsidiaries Supplemental Financial Data: Continued CONDENSED CONSOLIDATED BALANCE SHEET (in thousands)
December 31, --------------------------------------------------------------------------- 1993 1992 1991 1990 1989 1988 Restated (See Note 1) ----------- ----------- ----------- ----------- ----------- ----------- ASSETS Cash and due from banks................. $2,466,867 $ 2,445,283 $ 2,070,899 $ 2,514,189 $ 2,600,903 $ 2,283,598 Time deposits, principally Eurodollars.. 1,273,373 1,766,727 1,591,264 1,190,693 733,762 1,577,899 Investment securities................... 3,013,606 2,913,686 2,709,011 2,461,265 2,947,901 3,221,107 Loans................................... 18,026,142 17,229,407 17,704,559 19,831,352 19,791,422 17,970,693 Allowance for loan losses............... (417,767) (407,633) (446,332) (488,718) (532,514) (364,421) Funds sold.............................. 148,527 215,490 373,500 227,298 240,426 426,966 Trading account securities.............. 6,393 2,796 1,255 3,883 18,691 3,245 Due from customers on acceptances....... 332,234 632,976 212,024 499,690 371,883 551,516 Premises, equipment and other assets.... 1,082,703 1,315,750 1,368,791 1,423,917 1,410,403 1,094,551 ----------- ----------- ----------- ----------- ----------- ----------- Total assets........................ $25,932,078 $26,114,482 $25,584,971 $27,663,569 $27,582,877 $26,765,154 =========== =========== =========== =========== =========== =========== LIABILITIES Deposits: Domestic: Non-interest bearing.............. $6,331,130 $ 6,184,010 $ 5,610,780 $ 5,494,828 $ 5,502,524 $ 5,491,019 Interest bearing.................. 11,916,852 12,562,535 13,283,176 13,701,681 13,210,639 12,094,395 Overseas branches and subsidiaries.. 796,902 766,119 839,327 1,181,341 1,296,926 1,709,970 ----------- ----------- ----------- ----------- ----------- ----------- Total deposits................ 19,044,884 19,512,664 19,733,283 20,377,850 20,010,089 19,295,384 Short-term funds borrowed............. 1,830,495 1,782,271 1,964,618 3,531,407 3,697,524 3,534,352 Bank acceptances outstanding.......... 337,180 635,544 213,613 503,049 376,213 567,097 Other liabilities..................... 1,102,770 1,040,191 778,536 811,978 970,905 886,931 Long-term debt........................ 1,455,036 1,253,359 1,171,830 807,230 730,062 757,505 ----------- ----------- ----------- ----------- ----------- ----------- Total liabilities............. 23,770,365 24,224,029 23,861,880 26,031,514 25,784,793 25,041,269 ----------- ----------- ----------- ----------- ----------- ----------- SHAREHOLDERS' EQUITY Preferred............................. 100,000 100,000 Common................................ 2,161,713 1,890,453 1,723,091 1,632,055 1,698,084 1,623,885 ----------- ----------- ----------- ----------- ----------- ----------- Total shareholders' equity.... 2,161,713 1,890,453 1,723,091 1,632,055 1,798,084 1,723,885 ----------- --------- --------- --------- --------- --------- Total liabilities and shareholders' equity........ $25,932,078 $26,114,482 $25,584,971 $27,663,569 $27,582,877 $26,765,154 =========== =========== =========== =========== =========== ===========
81 CoreStates Financial Corp and Subsidiaries Supplemental Financial Data: Continued SHAREHOLDERS' DATA
1993 Restated (See Note 1) 1992 1991 1990 1989 ------- ------- ------- ------- ------- Earnings and Dividends Per Share Applicable to Common Shares Income before cumulative effect of a change in accounting principle...... $ 2.64 $ 2.19 $ 1.39 $ .74 $ 1.03 Dividends paid............... 1.11 1.00 .96 .96 .84 Dividends declared........... 1.14 1.02 .97 .96 .87 Common Stock Market Bid Information First quarter: High....................... $29 3/4 $25 1/8 $18 3/8 $21 5/8 $21 3/4 Low........................ 26 3/8 21 7/8 12 18 5/8 20 Second quarter: High....................... 30 1/8 27 20 3/4 22 24 1/8 Low........................ 25 1/8 21 17 3/4 18 3/8 21 1/2 Third quarter: High....................... 29 3/4 26 1/4 23 1/2 20 3/4 25 Low........................ 26 3/4 23 5/8 19 1/4 13 23 1/8 Fourth quarter: High....................... 29 3/4 28 7/8 24 3/8 15 7/8 23 1/2 Low........................ 25 1/8 24 1/8 20 7/8 11 3/4 19 1/4 Year-end..................... 26 1/8 28 1/2 24 15 5/8 21 3/8 Year-end bid/net income...... 9.9x 13.0x 17.3x 21.1x 16.7x Book value per share at year-end.................... $ 16.79 $ 14.76 $ 14.65 $ 13.99 $ 14.41 OTHER SELECTED DATA Operating Ratios: Income from continuing operations applicable to common stock as a percent of: Operating income......... 15.37% 11.11% 5.72% 2.95% 4.72% Average common shareholders' equity.... 17.09 14.98 9.75 4.91 6.91 Average total assets..... 1.35 1.05 .62 .33 .54 Average total shareholders' equity as a percent of average total assets....... 7.89 6.81 6.28 6.66 6.99 Dividends declared as a percent of income from continuing operations...... 43.18 46.58 69.78 129.73 84.47 Full Time Equivalent Staff at Year-End................. 14,728 14,887 15,176 15,723 16,129 Number of Locations.......... 424 422 479 494 511 Number of Registered Common Shareholders................ 36,769 37,921 40,303 42,218 45,676
82 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 ----------------------------------- ----------------------------------- Income / Change attributable to Income/ Change attributable to ------------------------- ----------------------- 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.................................. (16,832) 21,485 (38,317) (23,838) 7,785 (31,623) Federal funds sold..................................... (15,560) (12,792) (2,768) (5,918) 3,424 (9,342) Trading account securities............................. 11 72 (61) 21 21 Loans: Domestic............................................ (56,685) 4,267 (60,952) (444,521) (179,732) (264,789) Foreign............................................. (760) 7,510 (8,270) (9,411) (174) (9,237) --------- -------- --------- --------- --------- --------- Total interest income............................ $(102,412) $ 16,798 $(119,210) $(501,164) $(153,121) $(348,043) --------- -------- --------- --------- --------- --------- Interest bearing funds - ---------------------- Deposits: Domestic............................................. $(159,346) $(31,132) $(128,214) $(297,587) $ (31,062) $(266,525) Overseas............................................. (10,071) (1,688) (8,383) (48,610) (29,532) (19,078) Short-term funds borrowed: Federal funds purchased.............................. 1,489 4,945 (3,456) (38,539) (19,139) (19,400) Other................................................ 5,898 6,811 (913) (70,878) (54,219) (16,659) Long-term debt......................................... (11,256) 7,332 (18,588) (11,590) 10,506 (22,096) --------- -------- --------- --------- --------- --------- Total interest expense........................... (173,286) (13,732) (159,554) (467,204) (123,446) (343,758) --------- -------- --------- --------- --------- --------- Net interest income.................................... $ 70,874 $ 30,530 $ 40,344 $ (33,960) $ (29,675) $ (4,285) - ------------------- ========= ======== ========= ========= ========= =========
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 $61.7 million, $56.2 million and $56.4 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. 83 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......... $ 7,538,474 $ 6,969,279 $ 6,970,081 $ 7,498,512 $ 7,608,801 ----------- ----------- ----------- ----------- ----------- Real estate loans: Construction and development........... 326,658 450,186 689,634 919,137 1,085,121 Residential............................ 2,524,471 2,782,165 2,615,997 2,629,611 2,346,801 Other, primarily commercial mortgages and commercial loans secured by owner-occupied real estate........... 2,796,727 2,818,083 2,701,519 2,682,459 2,444,923 ----------- ----------- ----------- ----------- ----------- Total real estate loans............ 5,647,856 6,050,434 6,007,150 6,231,207 5,876,845 ----------- ----------- ----------- ----------- ----------- Consumer loans: Installment............................ 1,053,411 1,103,911 1,512,784 1,712,532 1,869,516 Credit card............................ 1,165,994 944,789 961,683 2,000,941 1,724,982 ----------- ----------- ----------- ----------- ----------- Total consumer loans............... 2,219,405 2,048,700 2,474,467 3,713,473 3,594,498 ----------- ----------- ----------- ----------- ----------- Financial institutions................... 865,494 778,670 975,447 1,020,859 1,052,604 Factoring receivables.................... 555,211 454,244 402,752 418,129 420,565 Lease financing.......................... 656,620 527,925 483,297 487,125 449,129 ----------- ----------- ----------- ----------- ----------- Total domestic loans.............. 17,483,060 16,829,252 17,313,194 19,369,305 19,002,442 ----------- ----------- ----------- ----------- ----------- 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........................ $18,026,142 $17,229,407 $17,704,559 $19,831,352 $19,791,422 =========== =========== =========== =========== ===========
84 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 $197,974 in Germany at December 31, 1992. 85 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 Restated (See Note 1) 1992 1991 1990 1989 --------- --------- --------- --------- --------- Non-accrual loans Domestic.......................... $226,166 $380,817 $537,927 $521,992 $158,486 Foreign........................... 171 3,047 8,797 29,139 217,465 -------- -------- -------- -------- -------- Total non-accrual loans...... 226,337 383,864 546,724 551,131 375,951 -------- -------- -------- -------- -------- Renegotiated loans Domestic.......................... 54,871 57,494 46,611 6,547 8,358 -------- -------- -------- -------- -------- Total renegotiated loans..... 54,871 57,494 46,611 6,547 8,358 -------- -------- -------- -------- -------- Total non-performing loans... 281,208 441,358 593,335 557,678 384,309 -------- -------- -------- -------- -------- Other real estate owned (OREO) Acquired through foreclosure or exchange..................... 64,413 63,427 63,002 50,107 19,294 In-substance foreclosure.......... 48,799 109,045 99,983 31,853 Property formerly used in banking operations.............. 6,202 3,908 2,022 -------- -------- -------- -------- -------- Total OREO................... 119,414 176,380 165,007 81,960 19,294 -------- -------- -------- -------- -------- Total non-performing assets.. $400,622 $617,738 $758,342 $639,638 $403,603 ======== ======== ======== ======== ======== Non-performing assets as a percentage of loans plus OREO... 2.21% 3.55% 4.24% 3.21% 2.04% ==== ==== ==== ==== ==== Non-performing assets as a percentage of total assets...... 1.54% 2.37% 2.96% 2.31% 1.46% ==== ==== ==== ==== ====
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................................... $ 28,567 $ 35,830 $59,202 Foreign.................................... 38 324 1,462 -------- -------- ------- Total................................. 28,605 36,154 60,664 -------- -------- ------- Interest income reflected in total operating income: Domestic................................... 16,836 19,804 15,180 Foreign.................................... -------- -------- ------- Total................................. 16,836 19,804 15,180 -------- -------- ------- Net reduction in interest income and net interest income. $ 11,769 $ 16,350 $45,484 ======== ======== =======
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......................... $46,645 $89,353 $100,223 $139,111 $80,567 ------- ------- -------- -------- ------- Total.......................... $46,645 $89,353 $100,223 $139,111 $80,567 ======= ======= ======== ======== =======
86 CoreStates Financial Corp and Subsidiaries Supplemental Fianncial 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 Restated (See Note 1) ------------ ------------ ------------ ------------ --------- Balance at beginning of year: Domestic....................................................... $397,633 $436,332 $472,205 $245,747 $206,728 Foreign........................................................ 10,000 10,000 16,513 286,767 157,693 -------- -------- -------- -------- -------- 407,633 446,332 488,718 532,514 364,421 -------- -------- -------- -------- -------- 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................................................. 41,463 24,814 25,669 30,078 15,204 Real estate.................................................. 8,281 6,241 5,798 8,688 1,882 Consumer..................................................... 17,530 20,901 20,086 10,716 12,122 Financial institutions....................................... 2,246 2,776 1,966 1,607 12 Foreign........................................................ 12,645 13,138 26,586 17,110 1,618 -------- -------- -------- -------- -------- Total recoveries............................................ 82,165 67,870 80,105 68,199 30,838 -------- -------- -------- -------- -------- Charge-offs, by type of loan: Domestic: Commercial, industrial and other............................................... 79,842 83,014 125,613 98,208 46,939 Real estate.................................................. 55,515 65,396 97,568 84,495 11,238 Consumer..................................................... 48,208 69,559 126,861 89,301 61,714 Financial institutions....................................... 816 3,195 14,669 5,993 3,891 Foreign........................................................ 5 2,890 264,788 67,544 -------- -------- -------- -------- -------- Total loans charged off..................................... 184,381 221,169 367,601 542,785 191,326 -------- -------- -------- -------- -------- Total net charge-offs........................................... 102,216 153,299 287,496 474,586 160,488 -------- -------- -------- -------- -------- Provision charged to operating expense: Domestic....................................................... 122,645 142,433 302,805 447,220 127,166 Foreign........................................................ (12,645)(a) (13,133)(a) (30,209)(a) (22,576)(a) 195,000 -------- -------- -------- -------- -------- 110,000 129,300 272,596 424,644 322,166 -------- -------- -------- -------- -------- Balance at end of year: Domestic....................................................... 407,767 397,633 436,332 472,205 245,747 Foreign........................................................ 10,000 10,000 10,000 16,513 286,767 -------- -------- -------- -------- -------- $417,767 $407,633 $446,332 $488,718 $532,514 ======== ======== ======== ======== ======== Ratios Net charge-offs as a percentage of average loans outstanding................................... .59% .89% 1.52% 2.36% .84% ==== ==== ==== ==== === Allowance for loan losses as a percentage of year-end loans................................... 2.32% 2.37% 2.52% 2.46% 2.69% ==== ==== ==== ==== ====
(a) Reflects reallocation of the foreign allowance for loan losses to the domestic allowance for loan losses. 87 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 Restated (See Note 1) 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.. $182.8 2.3% $179.3 2.4% $217.8 3.0% $156.7 2.0% Real estate: Construction............. 67.0 20.5 92.6 20.6 86.1 12.5 132.7 14.4 Other.................... 60.5 1.1 33.2 .6 43.9 .8 62.6 1.2 Consumer................... 81.0 3.6 72.7 3.5 77.3 3.1 109.2 2.9 Other domestic loans....... 16.5 1.1 19.8 1.5 11.2 .8 11.0 .7 Foreign...................... 10.0 1.8 10.0 2.5 10.0 2.6 16.5 3.6 ------ ------ ------ ------ Total................... $417.8 2.3% $407.6 2.4% $446.3 2.5% $488.7 2.5% ====== ==== ====== ==== ====== ==== ====== ====
- ------------------------------------ (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......................... $159,752 70.2% $282,807 54.3% 3 through 6 months....................... 30,491 13.4 96,562 18.5 6 through 12 months...................... 13,769 6.1 68,229 13.1 Over 12 months........................... 23,533 10.3 73,252 14.1 -------- ----- -------- ----- $227,545 100.0% $520,850 100.0% ======== ===== ======== =====
88 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.............................. $ 170 $ 170 Time deposits...................................... 578 $ 533 $ 162 1,273 Investment securities.............................. 830 333 394 $ 590 $ 468 $ 399 3,014 Interest rate swaps................................ 637 145 345 691 1,787 695 4,300 Asset financial futures........................... 296 79 195 20 15 605 ------- ------- -------- ------ ------- ------- ------- Total discretionary assets.................... 2,511 1,090 1,096 1,301 2,270 1,094 9,362 Total loans(a)..................................... 12,047 1,347 1,109 1,334 1,893 296 18,026 ------- ------- -------- ------ ------- ------- ------- Total earning assets.......................... 14,558 2,437 2,205 2,635 4,163 1,390 27,388 ------- ------- -------- ------ ------- ------- ------- FUNDING SOURCES Federal funds purchased, repurchase agreements and other short-term funds borrowed........................................ 1,834 11 1,845 Domestic and foreign time deposits(b).............. 875 21 5 5 4 70 980 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............... 7,616 131 88 276 365 709 9,185 ------- ------- -------- ------ ------- ------- ------- Savings certificates............................... 1,098 786 617 424 414 301 3,640 Money market, savings and NOW accounts............. 2,447 750 1,018 1,722 2,157 8,094 Net non-interest bearing funds(c)(d)............... 4,091 2,378 6,469 ------- ------- -------- ------ ------- ------- ------- Total savings certificates and indefinite maturity liabilities....................... 7,636 1,536 1,635 2,146 2,571 2,679 18,203 ------- ------- -------- ------ ------- ------- ------- Total net funding sources..................... 15,252 1,667 1,723 2,422 2,936 3,388 27,388 ------- ------- -------- ------ ------- ------- ------- Period gap.................................... (694) 770 482 213 1,227 (1,998) -0- Cumulative gap................................ (694) 76 558 771 1,998 -0- Adjustments(e)................................ 401 (630) (289) (390) (1,267) 2,175 -0- ------- ------- -------- ------ ------- ------- ------- Adjusted period gap........................... $ (293) $ 140 $ 193 $ (177) $ (40) $ 177 $ -0- ======= ======= ======== ====== ======= ======= ======= Cumulative gap................................ $ (293) $ (153) $ 40 $ (137) $ (177) $ -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. 89 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........................................ $ 970,070 $ 885,998 $ 853,485 U.S. Government agencies and corporations.................................... 1,503,862 1,490,414 1,122,660 State and municipal.................................. 291,632 372,966 371,190 Other................................................ 248,042 164,308 361,676 ---------- ---------- ---------- $3,013,606 $2,913,686 $2,709,011 ========== ========== ==========
(a) Held-to-maturity and available-for-sale portfolios. Maturity Distribution and Weighted Average Yield at December 31, 1993(a)
U.S. Government Total U.S. Agencies and State and ------------------- Treasury Corporations Municipal Other Amount Yield(b) -------- ------------ ---------- --------- --------- --------- 1 year or less....................................... $ 297,587 $ 186,290 $ 81,173 $ 49,912 $ 614,962 5.34% 1 year through 5 years............................... 401,535 1,018,942 143,269 16,638 1,580,384 5.48 5 years through 10 years............................. 270,901 79,627 32,734 3,845 387,107 6.48 After 10 years....................................... 47 219,003 34,456 177,647 431,153 7.17 ---------- ---------- ---------- ---------- ---------- $970,070 $1,503,862 $ 291,632 $ 248,042 $3,013,606 5.82% ========== ========== ========== ========== ==========
(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. 90 EX-23.1 2 ERNST & YOUNG CONSENT Exhibit 23.1 Consent of Independent Auditors We consent to the use of our report dated February 1, 1994, except for the third paragraph of Note 2, as to which the date is March 16, 1994, and the second paragraph of Note 1, as to which the date is July 19, 1994, included in the Form 8-K/A, Amendment No.1, to the Corestates Form 8-K dated May 5, 1994. /s/ Ernst & Young LLP Philadelphia, Pennsylvania September 12, 1994 91 EX-23.2 3 KPMG PEAT MARWICK CONSENT Exhibit 23.2 Independent Auditors' Consent ----------------------------- We consent to the report dated March 16, 1994, except as to the third paragraph of Note 1 and the last paragraph of Note 16 which are as of July 19, 1994, relating to the consolidated statements of condition of Constellation Bancorp and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1993, which report appears in the May 5, 1994 report on Form 8-K, as amended, of CoreStates Financial Corp. Our report refers to the restatement of the 1993 financial statements to remove certain merger-related charges and to a change in accounting for postretirement benefits, other than pensions, income taxes and certain investments in debt and equity securities in 1993. The financial statements referred to above are not separately presented in such report on Form 8-K. /s/ KPMG Peat Marwick LLP Short Hills, New Jersey September 12, 1994 92 -----END PRIVACY-ENHANCED MESSAGE-----