-----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, oRLi6i1r0wjjCa/gBgrCGfS+TGJXjffGwLk+0mv1g2NwrD+oUS29e/ysqaOZvuku vm5B5QK9IvwvzbN1zHP+yQ== 0000950109-95-000714.txt : 19950615 0000950109-95-000714.hdr.sgml : 19950615 ACCESSION NUMBER: 0000950109-95-000714 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950315 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORESTATES FINANCIAL CORP CENTRAL INDEX KEY: 0000069952 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 231899716 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11285 FILM NUMBER: 95520983 BUSINESS ADDRESS: STREET 1: CENTRE SQ W STREET 2: 1500 MARKET ST CITY: PHILADELPHIA STATE: PA ZIP: 19101 BUSINESS PHONE: 2159733806 MAIL ADDRESS: STREET 1: 1500 MARKET ST CITY: PHILADELPHIA STATE: PA ZIP: 19101 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL CENTRAL FINANCIAL CORP DATE OF NAME CHANGE: 19830517 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (MARK ONE) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 OR [_] TRANSITION REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] Commission File Number 0-6879 CORESTATES FINANCIAL CORP - ---------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 23-1899716 - -------------------------------- ----------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Philadelphia National Bank Building Broad & Chestnut Streets P.O. Box 7618 Philadelphia, Pennsylvania 19101-7618 19101 - ------------------------------------------- ------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: 215-973-3827 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Class Upon Which Registered -------------- --------------------- Common Stock, $1.00 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No________ -------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of registrant based on the closing sale price on March 7, 1995 was approximately $4,160,965,000. For this purpose only, all directors and officers of the registrant were assumed to be affiliates. The number of shares of Common Stock outstanding at March 7, 1995 was 144,442,476. DOCUMENTS INCORPORATED BY REFERENCE 1. Annual Report to Shareholders for the fiscal year ended December 31, 1994, portions of which are incorporated by reference in Parts I, II and IV of this Report. 2. Definitive Proxy Statement dated March 15, 1995 for the Annual Shareholders' Meeting to be held on April 18, 1995, portions of which are incorporated by reference in Part III of this Report. PART I ITEM 1 - BUSINESS CoreStates Financial Corp ("CoreStates") is a bank holding company registered under the Federal Bank Holding Company Act of 1956, as amended (the "Act") and incorporated under the laws of Pennsylvania with executive offices at the Philadelphia National Bank Building, 1345 Chestnut Street, Philadelphia, Pennsylvania 19107 (telephone number 215-973-3827). At December 31, 1994, CoreStates had total consolidated assets of approximately $29.3 billion and shareholders' equity of approximately $2.35 billion, and, based on December 31, 1994 rankings of bank holding companies by total consolidated assets, was believed to be the 29th largest bank holding company in the United States at such date. BANKING SUBSIDIARIES The lead banking subsidiary of CoreStates is CoreStates Bank, N.A. ("CoreStates Bank"), a national banking association with executive offices located in Philadelphia, Pennsylvania. Divisions of CoreStates Bank have been marketed as Philadelphia National Bank Division, the wholesale banking unit, CoreStates First Pennsylvania Bank Division, the retail banking unit, and CoreStates Hamilton Bank, the unit serving central Pennsylvania. Other principal banking subsidiaries of CoreStates are New Jersey National Bank ("NJNB"), a national banking association with its executive offices located in Ewing Township, New Jersey and CoreStates Bank of Delaware, N.A. ("CBD"), a national banking association with its sole office located in New Castle County, Delaware. CoreStates Bank, NJNB and CBD are sometimes referred to herein as the "Banking Subsidiaries". Through CoreStates Bank, NJNB and CBD, CoreStates engages in the business of providing wholesale banking services, consumer financial services which includes retail banking, and trust & investment management services. Electronic Payment Services, Inc. ("EPS"), a joint venture in which CoreStates owns 20%, includes the MAC automated teller machine network and point of sale processing businesses. During 1994, CoreStates, as a part of an ongoing process of consolidation, began phasing out the use of the trade names "Philadelphia National Bank" and "CoreStates First Pennsylvania Bank" and using only the name CoreStates Bank. It is presently anticipated that the trade name "CoreStates Hamilton Bank" will be phased out during 1995. In addition, Constellation Bank N.A., acquired on March 16, 1994, was merged into NJNB; Bucks County Bank and Trust Company, Cheltenham Bank, Lehigh Valley Bank and Third National Bank and Trust Company of Scranton, all acquired as a result of the acquisition of Independence Bancorp, Inc. on June 27, 1994, were merged into CoreStates Bank; and Germantown Savings Bank was merged into CoreStates Bank effective with its acquisition on 2 December 2, 1994. CoreStates has received approval from the Office of the Comptroller of the Currency ("OCC") to relocate the head office of CoreStates Bank from Philadelphia, Pennsylvania to Ewing Township, New Jersey, to merge NJNB into CoreStates Bank and to establish a CoreStates Bank branch at the present location of the head office of CoreStates Bank. It is anticipated that the relocation and merger will take place in 1995. After the merger of NJNB into CoreStates Bank, it is CoreStates' present intent to conduct all of its Pennsylvania and New Jersey banking business under the name of CoreStates Bank. As of December 31, 1994, the Banking Subsidiaries operated from 400 full service offices located in eastern and central Pennsylvania and New Jersey and one office located in Delaware. CoreStates Bank also operates from five foreign branch offices and nineteen foreign representative offices. OTHER SIGNIFICANT SUBSIDIARIES AND AFFILIATED COMPANIES Congress Financial Corporation ("Congress"), a majority-owned subsidiary of ------------------------------ CoreStates, and its subsidiaries are engaged in commercial financing and factoring with headquarters in New York City and offices in Atlanta, Boston, Chicago, Columbia, Dallas, Los Angeles, Miami, Milwaukee, Portland, Toronto and San Juan. As of December 31, 1994, factored receivables of Congress and its subsidiaries totalled $523.6 million while outstanding commercial finance obligations and other receivables totalled $1.778 billion. CoreStates Capital Corp ("Capital") is CoreStates' designated financing ----------------------- entity to obtain both short-term and long-term financing for CoreStates and its other subsidiaries. At December 31, 1994, Capital had outstanding commercial paper in the aggregate principal amount of $827.9 million and debt securities in the aggregate outstanding principal amount of $1.725 billion, with remaining maturities ranging from 1 month to 10.25 years. Electronic Payment Services, Inc. ("EPS") is a joint venture formed in late --------------------------------- 1992 that combined the separate consumer electronic transaction processing businesses of CoreStates, Banc One Corporation, PNC Financial Corp. and KeyCorp (formerly Society Corporation) into the nation's leading provider of automated teller machine and point of sale processing services to individuals, financial institutions and retail stores. On March 2, 1995, National City Corporation was admitted as an additional partner and the ownership of KeyCorp was increased with the result that each partner now owns 20% of EPS. CoreStates also has several other direct and indirect subsidiaries including companies engaged in discount brokerage services, investment advisory services, lease financing activities, holding real property facilities used by CoreStates' Banking Subsidiaries and companies created solely to facilitate the business of other subsidiaries. 3 For analytical purposes, management has focused CoreStates into four core businesses: Wholesale Banking, Consumer Financial Services, Trust & Investment Management and Electronic Payment Services conducted by EPS. Further information regarding CoreStates' four core businesses is presented in Management's Discussion and Analysis of Financial Condition and Results of Operations at pages 13 and 14 of the CoreStates Annual Report to Shareholders for the fiscal year ended December 31, 1994 (Exhibit 13 pages 8 through 12) which pages of the Annual Report are incorporated herein by reference. A brief discussion of the four core businesses is presented below. There is considerable inter- relationship among these businesses. Wholesale Banking Wholesale banking services are provided through the ----------------- Banking Subsidiaries and Congress by the following six groups: corporate and institutional banking; investment banking; cash management; international banking; corporate middle market; and specialized finance. Domestic financing services include commercial, industrial and real estate loans, the financing of receivables, inventory and equipment, derivative market activities to provide risk management services for customers and other requirements of business customers and the provision of financial services for correspondent banks. Foreign and international finance services include the making of loans, banker's acceptance financing, the issuance and confirmation of letters of credit and related financial services. Also provided are transaction processing services, including cash management, lock box, funds transfer and collection and disbursement management on both a domestic and an international basis. International activities are conducted directly by CoreStates Bank through its head office in Philadelphia and 24 foreign offices. In addition, international banking and financing activities are conducted through two wholly owned Edge Act subsidiaries with four offices. Advisory services are also provided which relate to loan syndications, private placements, mergers and acquisitions, company valuations and other similar matters. This business also deals in and underwrites obligations of the United States Government and federal agencies and general obligations of States and municipal sub-divisions and assists individual corporate customers as well as other institutions with the purchase and sale of all types of marketable securities. Consumer Financial Services This core business is provided by the Banking --------------------------- Subsidiaries and includes community banking, mortgage services and specialty products. Community banking services are offered through the branch network of the Banking Subsidiaries in Pennsylvania and New Jersey. This branch banking network provides a full range of products including deposit, loan and related financial products, primarily on a full relationship basis. The 4 specialty products business, which includes consumer and commercial credit cards and other revolving credit, education finance, merchant card services and card processing services for CoreStates and other financial institutions is provided by CBD primarily from its Delaware location. In late 1994 CoreStates acquired a Delaware-chartered savings and loan association which has been converted to a national bank and which it is positioning to offer enhanced consumer banking services in Delaware in 1995. Trust & Investment Management This core business provides products through ----------------------------- four business lines: institutional trust; personal trust; private banking; and investment management. These products are offered through the Banking Subsidiaries and include fiduciary administration and transaction processing services, corporate trust services and through CoreStates Investment Advisors, Inc. which provides investment management services. Electronic Payment Services This core business includes the MAC --------------------------- automated teller machine network ("MAC"), and point of sale processing ("POS"). Customers for these businesses include individuals, financial institutions and retail stores. The MAC and POS business lines are conducted by EPS. STRATEGIC ACTIONS A discussion of strategic actions, including recent acquisitions, taken by CoreStates in 1994 is presented in Management's Discussion and Analysis of Financial Condition and Results of Operations at pages 11 through 13 of the CoreStates Annual Report to Shareholders for the fiscal year ended December 31, 1994 (Exhibit 13 pages 5 through 7) which pages of the Annual Report are incorporated herein by reference. Process Redesign In September 1994, CoreStates announced that management ---------------- had authorized an intensive review of all aspects of CoreStates' operations and businesses. Based upon this review CoreStates will redesign its processes, as appropriate, to achieve the following objectives: (i) to enhance CoreStates' customer focus; (ii) to accelerate the culture changes already in progress; and (iii) to improve productivity. It is anticipated that this review will identify activities which do not contribute to value for customers, and that this, in turn, will lead to reductions in expenses and jobs and to a smaller employee base. The review will be completed by the end of the first quarter of 1995 and the resulting decisions implemented over the following year. 5 GOVERNMENT SUPERVISION AND REGULATION General CoreStates is a bank holding company within the meaning of the Act ------- and is registered as such with the Federal Reserve Board. As a bank holding company, CoreStates is also subject to regulation by applicable state regulatory authorities. The Banking Subsidiaries are national banks and are subject to regulation, supervision and regular examination by the OCC, as well as regulation by the Federal Deposit Insurance Corporation ("FDIC"). Bank holding companies and banks are extensively regulated under both federal and state law. The regulation and supervision of CoreStates and the Banking Subsidiaries are designed primarily for the protection of depositors and not the respective institutions or their stockholders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. A change in applicable law or regulation may have a material effect on the business of CoreStates. CoreStates is required to file an annual report with the Federal Reserve Board containing such additional information as the Federal Reserve Board may require pursuant to the Act. Copies of annual and other periodic reports are also required to be filed with the applicable state regulatory authorities. The Act requires each bank holding company to obtain the prior approval of the Federal Reserve Board before it may acquire substantially all of the assets of any bank, or before it may acquire ownership or control of any voting shares of any bank, if, after such acquisition, it would own or control, directly or indirectly, more than 5% of the voting shares of such bank. The Act also restricts the types of businesses and operations in which a bank holding company and its non-bank subsidiaries may engage. Generally, permissible activities are limited to banking and activities found by the Federal Reserve Board to be so closely related to banking as to be a proper incident thereto. The operations of the Banking Subsidiaries are subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be made and limits upon the types of services which may be offered. Various consumer laws and regulations also affect the operations of the Banking Subsidiaries. Regulatory approvals are required for branching and for bank mergers. Capital Guidelines A discussion of capital guidelines and capital ------------------ strengths is included in Management's Discussion and Analysis of Financial Condition and Results of Operations on page 15 of the CoreStates Annual Report to Shareholders for the 6 fiscal year ended December 31, 1994 (Exhibit 13 pages 12 and 13) which pages of the Annual Report are incorporated herein by reference. Potential Enforcement Actions Bank holding companies and banks and their ----------------------------- institution-affiliated parties may be subject to potential enforcement actions by the Federal Reserve Board, the OCC or the FDIC for unsafe or unsound practices in conducting their businesses, or for violations of any law, rule or regulation or provision, any consent order with any agency, any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, additional cease-and-desist orders and written agreements, the termination of insurance of deposits, the imposition of civil money penalties and removal and prohibition orders against institution-affiliated parties. Dividends CoreStates is a legal entity separate and distinct from its bank --------- and other subsidiaries. CoreStates' principal source of revenue consists of dividends from its bank and non-bank subsidiaries. Federal law imposes limitations on the payment of dividends by national banks. Provisions of federal banking law restrict the amount of dividends that can be paid to CoreStates by its nationally chartered bank subsidiaries, while state banking regulations limit the amount of dividends that can be paid to CoreStates by its state chartered bank subsidiaries. Under applicable federal law, no dividends may be paid in an amount greater than "undivided profits then on hand," after deduction therefrom of certain loan losses. In addition, for each of the Banking Subsidiaries, prior approval of the Comptroller is required if dividends declared by a subsidiary bank in any calendar year will exceed its net profits (as defined) for that year, combined with its retained net profits for the preceding two calendar years, less any required transfers to surplus or a fund for the retirement of preferred stock. Under applicable state law, dividends may be declared and paid only out of accumulated net earnings, which are the undistributed net profits recorded on the books of an institution for the last complete calendar or fiscal year. Based on these regulations, the Banking Subsidiaries, without regulatory approval, could declare dividends at December 31, 1994 of $157 million. The payment of dividends by each of CoreStates and the Banking Subsidiaries may also be affected by other factors, such as the maintenance of adequate capital. For example, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") generally prohibits an undercapitalized institution from paying dividends. In addition, if, in the opinion of the applicable regulatory authority, a bank holding company or a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, 7 could include the payment of dividends), such authority may require, after notice and hearing, that such organization cease and desist from such practice. The Federal Reserve Board, the OCC and the FDIC have issued policy statements which provide that insured banks and bank holding companies should generally only pay dividends out of current operating earnings. Support of Bank Subsidiaries A depository institution insured by the FDIC ---------------------------- can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC after August 9, 1989 in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default. "Default" is defined generally as the appointment of a conservator or receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that a "default" is likely to occur in the absence of regulatory assistance. Under Federal Reserve Board regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve Board's policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board regulations or both. This doctrine is commonly known as the "source of strength" doctrine. Federal law provides for the enforcement of any pro rata assessment of shareholders of a national bank to cover impairment of capital stock by sale, to the extent necessary, of the stock of any assessed shareholder failing to pay the assessment. Borrowings by Holding Companies Federal law prevents CoreStates and ------------------------------- certain of its affiliates from borrowing from its banking subsidiaries unless such borrowings are secured by specified amounts and types of collateral. Additionally, each such secured loan to an affiliate is generally limited to an amount not exceeding 10% of the bank's capital and surplus, and all such loans between the lending bank and its affiliates are limited to an amount not to exceed 20% of the lending bank's capital and surplus. Further, a bank holding company and its subsidiaries are prohibited 8 from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. FDICIA ------ Insurance Premiums FDICIA, enacted on December 19, 1991 in connection with ------------------ the recapitalization of the Bank Insurance Fund ("BIF"), requires the FDIC to set semi-annual assessment rates for BIF members at levels sufficient to increase the BIF's reserve ratio to a designated level within a prescribed period of time, not to exceed 15 years from the date that the FDIC promulgates the applicable time schedule. Pursuant to FDICIA, the FDIC has developed a risk- based assessment system, under which the assessment rate for an insured depository institution varies according to the level of risk incurred in its activities. An institution's risk category is based upon whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. Each insured depository institution is also to be assigned to one of the following "supervisory subgroups": Subgroup A, B or C. Subgroup A institutions are financially sound institutions with few minor weaknesses; Subgroup B institutions are institutions that demonstrate weaknesses which, if not corrected, could result in significant deterioration; and Subgroup C institutions are institutions for which there is a substantial probability that the FDIC will suffer a loss in connection with the institution unless effective action is taken to correct the areas of weakness. Based on its capital and supervisory subgroups, each BIF or Savings Association Insurance Fund member institution is assigned an annual FDIC assessment rate varying between 0.23% per annum (for well capitalized Subgroup A institutions) and 0.31% per annum (for undercapitalized Subgroup C institutions). Each of the Banking Subsidiaries is considered well capitalized. Prompt Corrective Action FDICIA requires federal banking agencies to ------------------------ broaden the scope of regulatory corrective action taken with respect to depository institutions that do not meet minimum capital requirements and to take such actions promptly in order to minimize losses to the FDIC. In connection with FDICIA, federal banking agencies are required to establish capital measures (including both a leverage measure and a risk-based capital measure) and to specify for each capital measure the levels at which depository institutions will be considered "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" or "critically undercapitalized". Under FDICIA, the Federal banking regulators have adopted regulations establishing relevant capital measures and relevant capital levels. The relevant capital measures are the Total Capital to risk adjusted assets ratio, Tier 1 Capital to risk adjusted assets ratio and the leverage ratio. Under these regulations, a bank will be (i) well capitalized if it has a Total 9 Capital to risk adjusted assets ratio of 10% or greater, a Tier 1 Capital to risk adjusted assets ratio of 6% or greater and a leverage ratio of 5% or greater and is not subject to any order or written directive by its primary Federal regulator to meet and maintain a specific capital level for any capital measure; (ii) adequately capitalized if it has a Total Capital to risk adjusted assets ratio of 8% or greater, a Tier 1 Capital to risk adjusted assets ratio of 4% or greater and a leverage ratio of 4% or greater (3% in certain circumstances) and is not well capitalized; (iii) undercapitalized if it has a Total Capital to risk adjusted assets ratio of less than 8%, a Tier 1 Capital to risk adjusted assets ratio of less than 4% or a leverage ratio of less than 4% (3% in certain circumstances); (iv) significantly undercapitalized if it has a Total Capital to risk adjusted assets ratio of less than 6%, a Tier 1 Capital to risk adjusted assets ratio of less than 3% or a leverage ratio of less than 3%; and (v) critically undercapitalized if its tangible equity is equal to or less than 2% of average quarterly tangible assets. Each of the Banking Subsidiaries is considered well capitalized. FDICIA authorizes the appropriate federal banking agency, after notice and an opportunity for a hearing, to treat a well capitalized, adequately capitalized or undercapitalized insured depository institution as if it had a lower capital-based classification if it is in an unsafe or unsound condition or engaging in an unsafe or unsound practice. Thus, an adequately capitalized institution can be subjected to the restrictions on undercapitalized institutions described below (except that a capital restoration plan cannot be required of the institution) and an undercapitalized institution can be subjected to the restrictions applicable to significantly undercapitalized institutions described below. FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to growth limitations and are required to submit a capital restoration plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, for a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to five percent of the depository institution's total assets at the time it became undercapitalized, and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply 10 with the plan. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized institutions are subject to the appointment of a receiver or conservator. Brokered Deposits Under FDICIA, a bank cannot accept brokered deposits ----------------- (which term is defined to include payment of an interest rate more than 75 basis points above prevailing rates) unless (i) it is well capitalized or (ii) it is adequately capitalized and receives a waiver from the FDIC. A bank that cannot receive brokered deposits also cannot offer "pass-through" insurance on certain employee benefit accounts. In addition, a bank that is adequately capitalized may not pay an interest rate on any deposits in excess of 75 basis points over certain prevailing market rates. There are no such restrictions on a bank that is well capitalized. Each of the CoreStates Banking Subsidiaries is well capitalized for purposes of the foregoing. Safety and Soundness Standards FDICIA requires that each of the Federal ------------------------------ bank regulatory agencies prescribe by regulation or guideline the depository institution and depository institution holding company standards relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and employee compensation, fees and benefits and standards specifying minimum earnings sufficient to absorb losses without impairing capital, to the extent feasible a minimum ratio of market value to book value for publicly traded shares and such other standards relating to the foregoing as it deems appropriate. A holding company or institution that fails to comply with such standards will be required to submit a plan designed to achieve such compliance. If no such plan is submitted or a failure to implement such a plan exists, the depository institution or holding company would become subject to additional regulatory action or enforcement proceedings. FDICIA provides that final regulations under such provisions should have become effective no later than December 1, 1993. Since the standards have not yet been prescribed in final form, CoreStates can not assess the significance of the impact such standards will have on their respective operations, which could be material. 11 Other FDICIA also contains a variety of other provisions that may affect ----- the operations of bank holding companies and banks, including new reporting requirements, revised regulatory standards for real estate lending, "truth in savings" provisions and the requirement that a depository institution give 90 days' prior notice to customers and regulatory authorities before closing any branch. INTERSTATE BANKING AND BRANCHING LEGISLATION Legislation was passed, and signed by President Clinton on September 29, 1994, which will eliminate many currently existing restrictions on interstate banking and branching. The legislation will authorize interstate acquisitions of banks by bank holding companies without geographic limitations one year after enactment. Beginning June 1, 1997, the legislation will allow interstate branching in states that have not passed legislation prohibiting interstate branching, except that de novo branching or acquisition of a branch in another state without acquisition of the entire bank will only be permitted if expressly permitted by the law of the state in which such branch would be located. Interstate branching prior to June 1, 1997 will be possible in states that pass laws affirmatively authorizing such interstate branching. As of December 31, 1994 no such legislation had been enacted in Pennsylvania, New Jersey or Delaware. Prior to this legislation, interstate acquisitions of banks have required affirmative authorization in state law, and interstate branching has been possible only to a very limited degree. The effect of this legislation on CoreStates cannot be predicted at this time. COMPETITION The activities in which CoreStates and the Banking Subsidiaries engage are highly competitive. Generally, the lines of activity and markets served involve competition with other banks and non-bank financial institutions, as well as other entities which offer financial services, located both within and without the United States. The methods of competition center around various factors, such as customer services, interest rates on loans and deposits, lending limits and location of offices. The four core business segments in the markets served by the Banking Subsidiaries and EPS are highly competitive and the Banking Subsidiaries and EPS compete with other commercial banks, savings and loan associations and other businesses which provide services similar to those offered by the Banking Subsidiaries and EPS. The Banking Subsidiaries actively compete in wholesale banking with local, regional and international banks and non-bank financial organizations, some of which are significantly larger than certain of the Banking Subsidiaries. In providing consumer financial services, the Banking Subsidiaries' competitors include other banks, savings and loan associations, credit unions, regulated 12 small loan companies and other non-bank organizations offering financial services. In providing trust and investment management services, the Banking Subsidiaries compete with other banks, investment counselors and insurance companies in national markets for institutional funds and corporate pension and profit sharing accounts. The Banking Subsidiaries also compete with other banks, insurance agents, financial counselors and other fiduciaries for personal trust business. The Banking Subsidiaries also actively compete for funding. A primary source of funds is deposits, and competition for deposits includes other deposit taking organizations, such as commercial banks, savings and loan associations and credit unions, and so-called "money market" mutual funds. The Banking Subsidiaries also actively compete for funds with U.S. Government securities and in the open money market. Employees As of February 28, 1995, CoreStates and its subsidiaries employed 12,393 persons on a full time basis and 3,352 persons on a part-time basis. CoreStates provides a variety of employment benefits and considers its relations with its employees to be satisfactory. 13 Selected Statistical Information Tables and selected statistical information concerning CoreStates and its subsidiaries as described below and set forth on pages of the CoreStates 1994 Annual Report to Shareholders (and Exhibit 13 page numbers) set forth below are incorporated herein by reference:
Annual Report to Exhibit 13 Shareholders Page Page Reference Reference -------------- ---------- Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential........................... 56-57, 61 76-79, 83 Investment Portfolio......................... 67 91 Loan Portfolio............................... 16-22, 62-65 14-26, 84-88 Summary of Loan Loss Experience.............. 19-20, 64-65 21-22, 87-88 Deposits..................................... 56-57, 65 76-79, 88 Return on Average Equity and Average Assets.................................. 60 82 Short-Term Borrowings........................ 46 61
Information illustrating the interest sensitivity of CoreStates interest earning assets and interest bearing liabilities is contained on page 66 of the Annual Report to Shareholders (Exhibit 13 page 89) and on page 15 of this Form 10-K. The interest sensitivity table on page 15 of this Form 10-K is different from the table contained in the Annual Report because managerial assumptions related to the appropriate investment maturities for non-interest bearing funding sources and the repricing behavior of non-contractual deposit products which are included in the Annual Report have been eliminated from the table on page 15. 14 CoreStates Financial Corp and Subsidiaries
INTEREST SENSITIVITY ANALYSIS AT DECEMBER 31, 1994 (in millions) Rate Maturity Period ------------------------------------------------------------------------ 1-90 91-181 182-365 1-2 2-5 > 5 Days Days Days Years Years Years Total ------- -------- ---------- ------ ----- ----- ------- EARNING ASSETS Federal funds sold, resale agreements and trading account securities................... $ 733 $ 733 Time deposits................................... 853 $ 620 $ 255 $ 22 1,750 Investment securities........................... 604 353 559 555 $ 631 $ 179 2,881 Interest rate swaps............................. 1,229 378 742 2,163 2,717 1,005 8,234 Asset financial futures......................... 25 199 305 - - - 529 ------- -------- ------ ------ ------- ------- ------- Total discretionary assets................. 3,444 1,550 1,861 2,740 3,348 1,184 14,127 Total loans(a).................................. 13,847 1,554 1,176 1,420 2,061 468 20,526 ------- -------- ------ ------ ------- ------- ------- Total earning assets....................... 17,291 3,104 3,037 4,160 5,409 1,652 34,653 ------- -------- ------ ------ ------- ------- ------- LIABILITIES Federal funds purchased, repurchase agreements and other short-term funds borrowed..................................... 1,538 7 1 1,546 Domestic and foreign time deposits(b)........... 1,300 26 17 8 1 25 1,377 Long-term debt.................................. 1,024 32 37 54 7 637 1,791 Interest rate swaps............................. 7,258 306 134 300 141 95 8,234 Liability financial futures..................... 359 170 - - - - 529 ------- -------- ------ ------ ------- ------- ------- Total discretionary liabilities............ 11,479 541 189 362 149 757 13,477 ------- -------- ------ ------ ------- ------- ------- Savings certificates............................ 1,159 1,023 1,130 1,231 521 280 5,344 Money market, savings and NOW accounts.......... 3,830 - - - - 5,127 8,957 ------- -------- ------ ------ ------- ------- ------- Total savings certificates and indefinite maturity liabilities.................... 4,989 1,023 1,130 1,231 521 5,407 14,301 ------- -------- ------ ------ ------- ------- ------- Total net funding sources.................. 16,468 1,564 1,319 1,593 670 6,164 27,778 ------- -------- ------ ------ ------- ------- ------- Adjusted period gap........................ $ 823 $ 1,540 $1,718 $2,567 $ 4,739 $(4,512) $ 6,875(c) ======= ======== ====== ====== ======= ======= ======= Cumulative gap............................. $ 823 $ 2,363 $4,081 $6,648 $11,387 $ 6,875 ======= ======== ====== ====== ======= =======
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) Represents the portion of total interest earning assets which are funded by non-interest bearing funding sources including demand deposits and shareholders' equity. 15 EXECUTIVE OFFICERS OF THE REGISTRANT (Information to be updated) The following table shows the name and age of the current executive officers of CoreStates Financial Corp ("Corporation") and their present and previous positions held by them for at least the past five years.
NAME AGE PRESENT & PREVIOUS POSITIONS - ---- --- ---------------------------- Terrence A. Larsen 48 Chairman, Chief Executive Officer, (1988 to present) and Director (1986 to present), President (January 1, 1992 to August 2, 1994, 1986 to March 1990), Chief Operating Officer (1986 to 1988) of the Corporation; Chairman and Director (October 1990 to present) and President (January 1, 1992 to August 2, 1994) of CoreStates Bank; Chairman (1989 to October 1990), Director (1986 to October 1990), and Executive Vice President, 1983 to 1986) of The Philadelphia National Bank ("PNB"). Thomas A. Bracken 48 Chief Executive Officer and President of New Jersey National Bank ("NJNB") (January 1993 to present), Executive Vice President of NJNB (1986 to January 1993). Leslie R. Butler 54 Chief Human Resources Officer (December 1990 to present) of the Corporation; Vice Chairman (1988 to December 1990) and Director (1988 to March 1990) and prior thereto Senior Executive Vice President and Chief Administration Officer of First Pennsylvania Bank.
16 David C. Carney 57 Chief Financial Officer (April 1991 to present) of the Corporation; Philadelphia Area Managing Partner (1989 to March 1991) of Ernst & Young; Prior thereto, Office Managing Partner, Arthur Young & Company. Charles L. Coltman, III 51 President and Chief Operating Officer (August 2, 1994 to present), Assistant to the Chairman, Corporate Quality (February 1993 to August 2, 1994), Chief Credit Policy Officer (September 1990 to February 1993), Executive Vice President and Credit Policy Officer (1989 to September 1990) of the Corporation; Vice Chairman (March 1990 to September 1990) and Executive Vice President and Credit Policy Officer (1986 to 1989) of PNB. Charles P. Connolly 46 Senior Executive Vice President (August 2, 1994 to present), Chief Credit Policy Officer (February 1993 to August 2, 1994) of the Corporation; Executive Vice President (1987 to February 1993) of CoreStates Bank. Donald M. Cooper 56 President and Chief Executive Officer (August 1993 to present) of CoreStates Hamilton Bank Division of CoreStates Bank; Chairman, President and Chief Executive Officer (January 1991 to August 1993), Vice Chairman and Chief Operating Officer (1988 to January 1991) of Hamilton Bank; Executive Vice President (1983 to 1988) of the Corporation.
17 Robert N. Gilmore 46 Chief Technology and Processing Services Officer (August 1991 to present), Executive Vice President (September 1986 to August 1991) of the Corporation; Executive Vice President (September 1986 to present) of CoreStates Bank. Rosemarie B. Greco 48 Chief Retail Services Officer (October 1993 to present) of the Corporation; President and Chief Executive Officer (August 2, 1994 to present) of CoreStates Bank; President and Chief Executive Officer of CoreStates First Pennsylvania Bank Division of CoreStates Bank (March 1991 to August 2, 1994) and Director (April 1992 to present); President and Director (1987 to March 1991), Chief Executive Officer (September 1990 to March 1991), Executive Vice President (1986 to 1987) of Fidelity Bank; Senior Executive Vice President and Director (1987 to March 1991) of First Fidelity Bancorporation. John D. Harding 50 President (September 20, 1994 to present) CoreStates Bank Northern Region, Director (October 18, 1994 to present) CoreStates Bank; President and Chief Executive Officer, (1989 to June 27, 1994) President and Chief Operating Officer, (1988 to 1989) Independence Bancorp, Inc. Albert W. Mandia 47 Executive Vice President (1989 to present) of the Corporation; Executive Vice President (April 1992 to present) of CoreStates Bank; Executive Vice President (1986 to 1989) of PNB.
18 Mark E. Stalnecker 43 Chief Trust & Investment Services Officer (May 1992 to present) of the Corporation; Executive Vice President CoreStates Trust and Investment Group (March 1990 to present) of CoreStates Bank; Director (April 1992 to present) of CoreStates Bank; Chief Executive Officer of Philadelphia National Limited and Executive Vice President (1988 to March 1990) of the Corporation and PNB; Associate Director, Treasury - J. P. Morgan Securities, Ltd.-London (February 1987 to 1988); Executive Vice President of the Corporation (1986 to 1987).
19 ITEM 2 - PROPERTIES The principal offices of CoreStates and CoreStates Bank are located in a 25-story building known as the Philadelphia National Bank Building ("PNB Building"), located at Broad and Chestnut Streets, Philadelphia, Pennsylvania, owned by Clymer Realty Corporation, a real estate subsidiary of CoreStates Bank, and in leased space located at Centre Square West, 16th and Market Streets, Philadelphia, Pennsylvania. CoreStates and its subsidiaries and affiliates occupy approximately 260,000 square feet of the PNB Building's approximately 400,000 square feet of office space and 547,600 square feet of the office space in the Centre Square complex. Approximately 217,400 square feet of office space in the Widener Building adjacent to the PNB Building is leased for use by CoreStates Bank. In addition, office space is leased for use by CoreStates and CoreStates Bank in the following Philadelphia locations: approximately 402,000 square feet in the Penn Mutual Buildings, 510, 520 and 530 Walnut Street, and approximately 111,600 square feet in the Curtis Center, 6th and Walnut Streets. Fifth and Market Corporation, a real estate subsidiary of CoreStates Bank, owns the 11 story building located at Fifth and Market Streets, Philadelphia, Pennsylvania. The building, containing approximately 587,000 square feet, is comprised of almost 493,000 square feet of office space, a branch banking office and an underground garage, in addition to the public access and service areas. CoreStates Bank's operations center and several other units presently occupy all of the office space in this building. As of December 31, 1994, CoreStates had 441 additional properties, of which 186 were owned and 255 were leased. The additional owned properties aggregate approximately 1.70 million square feet, and the leased properties aggregate approximately 1.75 million square feet. Aggregate leased properties in 1994 required approximately $59,820,000 in rental payments net of sublease income. On May 13, 1977, CoreStates borrowed $25 million from two institutional lenders at an interest rate of 8 5/8% per annum. The loan is secured by a first lien mortgage on 30 CoreStates Bank owned properties. ITEM 3 - LEGAL PROCEEDINGS In the normal course of business, CoreStates and its subsidiaries are subject to numerous pending and threatened legal actions and proceedings, some for which the relief or damages sought are substantial. Management does not believe the outcome of these actions and proceedings will have a materially adverse effect on the consolidated financial position of CoreStates. 20 ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS CoreStates Common Shares are traded on the New York Stock Exchange under the symbol "CFL". Until December 29, 1993, CoreStates Common Shares were traded in the over-the-counter market and the price quotations were reported on the NASDAQ National Market System. The table below sets forth, for the periods indicated, the high and low prices for CoreStates Common Shares as reported on the New York Stock Exchange or as quoted on the NASDAQ National Market System, as applicable, and cash dividends declared per share. Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. The information set forth in the table has been adjusted retroactively for a stock dividend in the form of a two-for-one stock split declared on August 17, 1993 and distributed on October 15, 1993 to shareholders of record on September 15, 1993. On March 7, 1995, there were approximately 43,500 registered holders of Common Stock of CoreStates.
CORESTATES ------------------------------- DIVIDEND HIGH LOW DECLARED ---- --- -------- Year ended December 31, 1993: First Quarter............. 29 3/4 26 3/8 $0.27 Second Quarter............ 30 1/8 25 1/8 0.27 Third Quarter............. 29 3/4 26 3/4 0.30 Fourth Quarter............ 29 3/4 25 1/8 0.30 Year ended December 31, 1994: First Quarter............. 27 1/8 24 1/2 $0.30 Second Quarter............ 28 25 0.30 Third Quarter............. 29 1/8 25 7/8 0.30 Fourth Quarter............ 27 5/8 22 7/8 0.34
CoreStates currently expects to continue its policy of paying regular cash dividends, although there can be no assurance as to further dividends because they are dependent upon further operating results, capital requirements and financial condition. The approval of the Comptroller of the Currency is required for national banks to pay dividends if the total of all dividends declared in any calendar year exceeds the bank's net profits for that year combined with its retained net profits for the proceeding two calendar years. Under this formula CoreStates Bank and CBD can 21 declare dividends to CoreStates of approximately $139 million and $18 million, respectively, plus an additional amount equal to CoreStates Bank's and CBD's retained net profits for 1995 up to the date of dividend declaration. Due to merger-related charges recorded by Constellation Bancorp in 1994, NJNB is currently unable to pay dividends without the prior approval of the OCC. ITEM 6 - SELECTED FINANCIAL DATA Pursuant to General Instructions G(2), information required by this Item is incorporated by reference from pages 58, 59 and 60 of the CoreStates Annual Report to Shareholders for the fiscal year ended December 31, 1994 (Exhibit 13 pages 80 through 82). ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Pursuant to General Instructions G(2), information required by this Item is incorporated by reference from pages 10 through 32 of the CoreStates Annual Report to Shareholders for the fiscal year ended December 31, 1994 (Exhibit 13 pages 3 through 41). ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Pursuant to General Instructions G(2), information required by this Item is incorporated by reference from pages 32 through 69 of the CoreStates Annual Report to Shareholders for the fiscal year ended December 31, 1994 (Exhibit 13 pages 42 through 95). ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to General Instruction G(3), information required by this Item is incorporated by reference from pages 1 through 7 of the CoreStates Proxy Statement dated March 15, 1995 and from Part I of this report on Form 10-K. ITEM 11 - EXECUTIVE COMPENSATION Pursuant to General Instruction G(3), information required by this Item is incorporated by reference from pages 10 through 20 of the CoreStates Proxy Statement dated March 15, 1995. Such incorporation by reference shall not be deemed to specifically incorporate by reference the information referred to in Item 402(a)(8) of Regulation S-K. 22 ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Pursuant to General Instruction G(3), information required by this Item is incorporated by reference from pages 2-7, 15-17, and 19 of the CoreStates Proxy Statement dated March 15, 1995. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Pursuant to General Instruction G(3), information required by this Item is incorporated by reference from page 9 of the CoreStates Proxy Statement dated March 15, 1995. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements: The following consolidated statements of CoreStates Financial Corp included in the Annual Report of the Registrant to its Shareholders for the year ended December 31, 1994 are incorporated by reference in Item 8:
Annual Report Exhibit 13 to Shareholders Page Page Reference Reference --------------- ----------- Consolidated Statements of Income for the years ended December 31, 1994, 1993 and 1992........................................... 34 45 Consolidated Balance Sheets as of December 31, 1994 and 1993......................... 35 46 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1994, 1993 and 1992............. 36 47 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992...................................... 37 48-49 Notes to the Financial Statements.................. 38-55 50-75
(a) 2. Financial Statement Schedules All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 23 (a) 3. Exhibits --------
Exhibit No. Page No. - ----------- -------- 2.1 Agreement and Plan of Merger dated as of August 2, 1993 by and between CoreStates Financial Corp and Constellation Bancorp and filed as Exhibit 2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 and incorporated herein by reference. 2.2 Agreement and Plan of Merger dated as of November 19, 1993 by and between CoreStates Financial Corp and Independence Bancorp, Inc. and filed as Exhibit 2.2 to Registrant's Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. 2.3 Agreement and Plan of Merger dated as of March 7, 1994 by and between CoreStates Financial Corp and Germantown Savings Bank and filed as Exhibit 2(a) to Registrant's Registration Statement on Form S-4, No. 33-55505 and incorporated herein by reference. 3.1 Articles of Incorporation of Registrant as amended through May 3, 1993. Filed as Exhibit 3(a) to the Registrant's Current Report on Form 8-K dated October 21, 1993 and incorporated herein by reference. 3.2 By-laws of Registrant as amended through April 20, 1993. Filed as Exhibit 3(b) to the Registrant's Current Report on Form 8-K dated October 21, 1993 and incorporated herein by reference. 4.1 The Registrant will furnish to the Securities and Exchange Commission, upon request, copies of instruments defining the rights of holders of long-term debt of CoreStates Financial Corp and its subsidiaries.
24
Exhibit No. Page No. - ----------- -------- 4.2 Indenture dated as of December 1, 1990 between CoreStates Financial Corp, CoreStates Capital Corp and Nations Bank of Georgia, N.A., as successor to Wachovia Bank of Georgia, N.A., (formerly The First National Bank of Atlanta). Filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated January 29, 1991 and incorporated herein by reference. 4.3 Indenture dated as of December 1, 1990 between CoreStates Financial Corp, CoreStates Capital Corp and Bank One, Columbus, NA. Filed as Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated January 29, 1991 and incorporated herein by reference. 4.4 First Supplemental Indenture dated as of March 1, 1993 to the Indenture dated as of December 1, 1990 by and between CoreStates Capital Corp, CoreStates Financial Corp and BankOne, Columbus, N.A. filed as Exhibit 4 to Registrant's Current Report on Form 8-K dated April 20, 1993 and incorporated herein by reference. 4.5 Second Supplemental Indenture dated as of August 1, 1994 among CoreStates Financial Corp, CoreStates Capital Corp, Bank One, Columbus, N.A. and Citibank, N.A. 4.6 Specimen of Medium-Term Note (Senior Fixed Rate). Filed as Exhibit 4.3 to the Registrant's Current Report on Form 8-K dated January 29, 1991 and incorporated herein by reference. 4.7 Specimen of Medium-Term Note (Senior Floating Rate). Filed as Exhibit 4.4 to the Registrant's Current Report on Form 8-K dated January 29, 1991 and incorporated herein by reference. 4.8 Specimen of Medium-Term Note (Subordinated Fixed Rate). Filed as Exhibit 4.5 to the Registrant's Current Report on Form 8-K dated January 29, 1991 and incorporated herein by reference.
25
Exhibit No. Page No. - ----------- -------- 4.9 Specimen of Medium-Term Note (Subordinated Floating Rate). Filed as Exhibit 4.6 to the Registrant's Current Report on Form 8-K dated January 29, 1991 and incorporated herein by reference. 4.10 Specimen of 9 5/8% Subordinated Note due February 15, 2001. Filed as Exhibit 4.7 to the Registrant's Current Report on Form 8-K dated January 29, 1991 and incorporated herein by reference. 4.11 Specimen of CoreStates Capital Corp 9 3/8% Subordinated Note due April 15, 2003. Filed as Exhibit (4) to the Registrant's Current Report on Form 8-K dated April 21, 1991 and incorporated herein by reference. 4.12 Specimen of 6 5/8% Subordinated Note due March 15, 2005 issued by CoreStates Capital Corp filed as Exhibit 4 to Registrant's Current Report on Form 8-K dated March 18, 1993 and incorporated herein by reference. 4.13 Specimen of 5 7/8% Subordinated Note due October 15, 2003 issued by CoreStates Capital Corp and unconditionally guaranteed as to payment of principal and interest on a subordinated basis by CoreStates Financial Corp. Filed as Exhibit 4 of Registrant's Current Report on Form 8-K dated October 21, 1993 and incorporated herein by reference. 4.14 Specimen of CoreStates Capital Corp Medium-Term Note (Senior Fixed Rate). Filed as Exhibit 4(d) to Registrant's Registration Statement on Form S-3, No. 33- 54049 and incorporated herein by reference. 4.15 Specimen of CoreStates Capital Corp Medium-Term Note (Senior Floating Rate). Filed as Exhibit 4(e) to Registrant's Registration Statement on Form S-3, No. 33- 54049 and incorporated herein by reference.
26
Exhibit No. Page No. - ----------- -------- 4.16 Specimen of CoreStates Capital Corp Medium-Term Note (Subordinated Fixed Rate). Filed as Exhibit 4(f) to Registrant's Registration Statement on Form S-3, No. 33- 54049 and incorporated herein by reference. 4.17 Specimen of CoreStates Capital Corp Medium-Term Note (Subordinated Floating Rate). Filed as Exhibit 4(g) to Registrant's Registration Statement on Form S-3, No. 33- 54049 and incorporated herein by reference. 10.1 * Incentive Compensation Plan for CoreStates Financial Corp and Participating Subsidiaries effective January 1, 1983. Filed as Exhibit 10.5 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1983 and incorporated herein by reference. 10.2 * Long-Term Incentive Compensation Plan of CoreStates Financial Corp as amended through April 18, 1989. Filed as Exhibit 10.4 to the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference. 10.3 * Hamilton Bank Directors Deferred Compensation Plan. Filed as Exhibit 1b, File No. 0-6879 to National Central Financial Corporation's Form 10-K for the year ended December 31, 1980 and incorporated herein by reference. 10.4 * Deferred Compensation Plan for Directors of Hamilton Bank as amended and restated effective July 1, 1988. Filed as Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987 and incorporated herein by reference.
27
Exhibit No. Page No. - ----------- -------- 10.5 * Deferred Compensation Plan for Directors of CoreStates Financial Corp and The Philadelphia National Bank as amended and restated effective April 1, 1988. Filed as Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987 and incorporated herein by reference. 10.6 * Deferred Compensation Plan for Officers of CoreStates Financial Corp and Participating Subsidiaries as amended and restated effective January 1, 1988. Filed as Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987 and incorporated herein by reference. 10.7 * The CoreStates Financial Corp Supplemental Retirement Plan. Filed as Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987 and incorporated herein by reference. 10.8 * Profit Sharing Deferral Plan for Officers of CoreStates Financial Corp and Participating Subsidiaries effective November 1, 1987. Filed as Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987 and incorporated herein by reference. 10.9 Agreement between New Jersey National Bank and Textron Financial- New Jersey, Inc. for the sale and leaseback of the Corporate and operations centers and four branches. Filed as Exhibit 10(i), File No. 0-6002 to the New Jersey National Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 1985 and incorporated herein by reference.
28
Exhibit No. Page No. - ----------- -------- 10.10 Agreement and Plan of Reorganization, dated as of September 18, 1989, between First Pennsylvania Corporation and CoreStates Financial Corp. Filed as Appendix I to the Joint Proxy Statement of CoreStates Financial Corp and First Pennsylvania Corporation included in the Registrant's Registration Statement on Form S-4 (File No. 33-31896) and incorporated herein by reference. 10.11 Lease between Centre Square, Inc. and Tishman Construction Company of Pennsylvania, Inc. and The First Pennsylvania Banking and Trust Company, dated as of December 13, 1968 as amended through January 31, 1974, for the property known as Centre Square West. Filed as Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference. 10.12 * First Pennsylvania Corporation Amended and Restated Retirement Benefit Supplement Plan filed as Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 and incorporated herein by reference. 10.13 Agreement and Plan of Reorganization dated as of February 13, 1992 between First Peoples Financial Corporation and CoreStates Financial Corp filed as Exhibit 2(b) to the Registrant's Registration Statement on Form S-3 (File No. 33-54049) and incorporated herein by reference. 10.14 * CoreStates Financial Corp 1992 Long Term Incentive Plan filed as Exhibit 10.18 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 and incorporated herein by reference. 10.15 * CoreStates Financial Corp Stock Compensation Plan For Non-Employee Directors filed as Exhibit 10.19 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 and incorporated herein by reference.
29
Exhibit No. Page No. - ----------- -------- 10.16 * CoreStates Financial Corp 401 Excess Plan For Senior Management filed as Exhibit 10.20 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 and incorporated herein by reference. 10.17 Agreement to Form a Joint Venture By and Among Banc One Corporation, CoreStates Financial Corp, PNC Financial Corp and Society Corporation dated as of July 21, 1992 filed as Exhibit 10.21 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 and incorporated herein by reference. 10.18 * Incentive Compensation Plan for Designated Executives of CoreStates Financial Corp and Participating Subsidiaries. 10.19 * Independence Bancorp, Inc. Supplemental Executive Retirement Plan. 10.20 Distribution Agreement dated January 29, 1991 among CoreStates Financial Corp, CoreStates Capital Corp and Merrill Lynch & Co., Goldman, Sachs & Co., Shearson Lehman Brothers Inc. and J.P. Morgan Securities Inc. Filed as Exhibit 4.5 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991 and incorporated herein by reference. 10.21 Underwriting Agreement dated February 12, 1991 among CoreStates Financial Corp, CoreStates Capital Corp and Shearson Lehman Brothers Inc., Goldman, Sachs & Co., Merrill Lynch & Co. and J.P. Morgan Securities Inc. Filed as Exhibit 4.6 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991 and incorporated herein by reference.
30
Exhibit No. Page No. - ----------- -------- 10.22 Distribution Agreement dated September 16, 1994 among CoreStates Financial Corp, CoreStates Capital Corp and Merrill Lynch & Co., Goldman, Sachs & Co., Lehman Brothers Inc., J.P. Morgan Securities Inc., CS First Boston Corporation and Smith Barney Inc. Filed as Exhibit 1(b) to the Registrant's Registration Statement on Form S-3, No. 33-54049 and incorporated herein by reference. 10.23 Underwriting Agreement dated September 16, 1994 among CoreStates Financial Corp, CoreStates Capital Corp and Lehman Brothers Inc., Goldman, Sachs & Co., Merrill Lynch & Co., J.P. Morgan Securities Inc., CS First Boston Corporation and Smith Barney Inc. Filed as Exhibit 1(a) to the Registrant's Registration Statement on Form S-3, No. 33-54049 and incorporated herein by reference. 11 CoreStates Financial Corp Statement re Computation of Per Share Earnings. 12.1 CoreStates Financial Corp and Subsidiaries Computation of Ratio of Earnings from Continuing Operations to Fixed Charges of Continuing Operations. 12.2 CoreStates Financial Corp Computation of Ratio of Earnings to Fixed Charges Combined CoreStates (Parent Company) and CoreStates Capital 13 Pages 10 through 69 of the Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1994. 21 List of Subsidiaries. 23.1 Consent of Ernst & Young LLP 23.2 Consent of KPMG Peat Marwick LLP 23.3 Consent of Coopers & Lybrand L.L.P.
31
Exhibit No. Page No. - ----------- -------- 27 Financial Data Schedule. 99.1 Undertaking - Form S-8 Registration Statements.
* Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. NOTE: CoreStates Financial Corp will furnish, at cost, any exhibit not accompanying this document upon request. Cost for each document is determined by the number of pages in the document. (b) Reports on Form 8-K for the quarter ended December 31, 1994: A Report on Form 8-K was filed on October 19, 1994 reporting earnings information contained in the news release of CoreStates Financial Corp dated October 19, 1994. A Report on Form 8-K was filed on December 2, 1994 reporting that CoreStates Financial Corp had completed the acquisition of Germantown Savings Bank on December 2, 1994. 32 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders CoreStates Financial Corp We have audited the accompanying consolidated balance sheets of CoreStates Financial Corp as of December 31, 1994 and 1993, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the 1993 and 1992 financial statements of Constellation Bancorp and Independence Bancorp, Inc., which statements reflect total assets constituting 17.2% of the related consolidated totals as of December 31, 1993, and net interest income constituting 15.6% of the related consolidated totals for each of the years ended December 31, 1993 and 1992. Those statements were audited by other auditors whose reports thereon have been furnished to us, and our opinion, insofar as it relates to data included for Constellation Bancorp and Independence Bancorp, Inc. is based solely on the reports of other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CoreStates Financial Corp at December 31, 1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in Note 1 to the financial statements, in 1994 and 1993 the Company changed its methods of accounting for certain investments in debt and equity securities, in 1993 the Company changed its method of accounting for post- employment benefits, and in 1992 the Company changed its method of accounting for income taxes and for post-retirement benefits other than pensions. /s/Ernst & Young LLP Philadelphia, Pennsylvania February 7, 1995 33 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders of Constellation Bancorp: We have audited the consolidated statement of condition of Constellation Bancorp and subsidiaries as of December 31, 1993 and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the years in the two-year period ended December 31, 1993 (not presented separately herein). These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Constellation Bancorp and subsidiaries at December 31, 1993 and 1992 and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1993, in conformity with generally accepted accounting principles. As explained in Note 1 to the consolidated financial statements, Constellation Bancorp adopted the provisions of the Financial Accounting Standards Board's Statements of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions," No. 109, "Accounting for Income Taxes," and No. 115, "Accounting for Certain Investments in Debt and Equity Securities," in 1993. As discussed in Note 1, the accompanying 1993 Consolidated Financial Statements have been restated to remove certain merger-related charges. /s/KPMG Peat Marwick LLP Short Hills, New Jersey March 16, 1994, except as to the third paragraph of Note 1 and the last paragraph of Note 16, which are as of July 19, 1994 34 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Independence Bancorp, Inc. We have audited the consolidated balance sheet of Independence Bancorp, Inc. and Subsidiaries as of December 31, 1993 and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the two years in the period ended December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Independence Bancorp, Inc. and Subsidiaries at December 31, 1993 and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. As discussed in the Notes to the Consolidated Financial Statements, the Company changed its method of accounting for investments in 1993 and method of accounting for income taxes in 1992. /s/Coopers & Lybrand L.L.P. January 19, 1994 2400 Eleven Penn Center Philadelphia, Pennsylvania 35 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) CORESTATES FINANCIAL CORP
Signature Capacity Date --------- -------- ---- /s/Terrence A. Larsen Director, Chairman March 15, 1995 - -------------------------- of the Board and Terrence A. Larsen Chief Executive Officer (principal executive officer) /s/David C. Carney Principal financial March 15, 1995 - -------------------------- officer David C. Carney /s/Albert W. Mandia Principal March 15, 1995 - -------------------------- accounting officer Albert W. Mandia Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/George A. Butler Director March 15, 1995 - -------------------------- George A. Butler /s/Nelson G. Harris Director March 15, 1995 - -------------------------- Nelson G. Harris /s/Carlton E. Hughes Director March 15, 1995 - -------------------------- Carlton E. Hughes /s/Shirley A. Jackson Director March 15, 1995 - -------------------------- Shirley A. Jackson
36
Signature Capacity Date --------- -------- ---- /s/Ernest E. Jones Director March 15, 1995 - -------------------------- Ernest E. Jones /s/Herbert Lotman Director March 15, 1995 - -------------------------- Herbert Lotman /s/George V. Lynett Director March 15, 1995 - -------------------------- George V. Lynett /s/Patricia A. McFate Director March 15, 1995 - -------------------------- Patricia A. McFate /s/John A. Miller Director March 15, 1995 - -------------------------- John A. Miller /s/Marlin Miller, Jr. Director March 15, 1995 - -------------------------- Marlin Miller, Jr. /s/Stephanie W. Naidoff Director March 15, 1995 - -------------------------- Stephanie W. Naidoff /s/Seymour S. Preston, III Director March 15, 1995 - -------------------------- Seymour S. Preston, III /s/James M. Seabrook Director March 15, 1995 - -------------------------- James M. Seabrook /s/J. Lawrence Shane Director March 15, 1995 - -------------------------- J. Lawrence Shane /s/Raymond W. Smith Director March 15, 1995 - -------------------------- Raymond W. Smith
37
Signature Capacity Date --------- -------- ---- /s/Harold A. Sorgenti Director March 15, 1995 - -------------------------- Harold A. Sorgenti /s/Peter S. Strawbridge Director March 15, 1995 - -------------------------- Peter S. Strawbridge
38 EX-4.5 2 2ND SUPPLEMENTAL INDENTURE EXHIBIT 4.5 ----------- SECOND SUPPLEMENTAL INDENTURE THIS SECOND SUPPLEMENTAL INDENTURE, dated as of August 1, 1994, by and between CoreStates Capital Corp, a corporation organized and existing under the laws of the Commonwealth of Pennsylvania (the "Company"), CoreStates Financial Corp, a corporation duly organized and existing under the laws of the Commonwealth of Pennsylvania (the "Guarantor") Citibank, N.A., a national banking association organized under the laws of the United States of America (the "New Trustee") and Bank One, Columbus, NA, a national banking association organized under the laws of the United States of America (the "Original Trustee"), WITNESSETH: WHEREAS, the Company and the Guarantor have heretofore duly executed and delivered to the Original Trustee their Indenture dated as of December 1, 1990, as supplemented by a First Supplemental Indenture dated as of March 1, 1993 (collectively, the "Indenture"), to provide for the issuance from time to time by the Company of Securities and the guarantee thereof by the Guarantor; and WHEREAS, by the provisions of Article Ten, Section 10.01(5), of the Indenture, the Company and the Guarantor, when authorized by Board Resolutions, and the Original Trustee may, together with the New Trustee, enter into an indenture supplemental to the Indenture without the consent of any Holders of Securities to provide for or facilitate the administration of the trusts thereunder by more than one Trustee, pursuant to the requirements of Section 711(b) thereof; and WHEREAS, the parties hereto desire to execute and deliver to the Original Trustee and the New Trustee a supplemental indenture by the terms of which the Original Trustee shall remain as Trustee with respect to all Securities issued prior to the date hereof and the New Trustee shall accept the appointment as Trustee with respect to all Securities issued from and after the date hereof; and WHEREAS, all acts and things necessary to constitute these presents a valid supplemental indenture and agreement have been done and performed, and the execution of this Second Supplemental Indenture has in all respects been duly authorized, and the Company, the Guarantor, the Original Trustee and the New Trustee, in the exercise of the legal right and power vested in each, execute this Second Supplemental Indenture. NOW THEREFORE, THIS SECOND SUPPLEMENTAL INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of Securities from and after the date hereof as follows: ARTICLE ONE DEFINITIONS Section 1.01. For all purposes of this Second Supplemental Indenture, ------------ except as otherwise expressly provided in this Article One or unless the context otherwise requires, terms used herein that are defined in the Indenture, either directly or by reference therein, have the meanings ascribed to them therein. Section 1.02. The definitions of "Business Day" and "Corporate Trust ------------ Office" are hereby deleted and in their places are inserted the following: "Business Day", except as may otherwise be provided in the form of ------------ Securities of any particular series pursuant to the provisions in this Indenture, means, with respect to the applicable Trustee and the Securities for which it is acting in such capacity, and for any Place of Payment, each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions or trust companies in the city of Columbus, Ohio, in the case of the Original Trustee, or in The City of New York, in the case of the New Trustee, and in the Place of Payment are authorized or obligated by law to close. "Corporate Trust Office" means the principal office of the applicable ---------------------- Trustee, at which at any particular time its corporate trust business shall be administered, which office, at the date of execution of this Second Supplemental Indenture is, for the Original Trustee, located at 100 East Broad Street, Columbus, Ohio 43271-0181, Attention: Corporate Trust Division and is, for the New Trustee, located at 120 Wall Street, 13th Floor, New York, New York 10043, Attention: Corporate Trust Department. ARTICLE TWO APPOINTMENT Section 2.01. The New Trustee hereby accepts the appointment as Trustee ------------ under the Indenture for all Securities issued from and after the date of this Second Supplemental Indenture and shall exercise all rights, powers, trusts and duties pertaining thereto with respect to such Securities as set forth in the Indenture. 2 Section 2.02. The rights, powers, trusts and duties of the Original ------------ Trustee under the Indenture with respect to all Securities issued pursuant thereto prior to the date of this Second Supplemental Indenture are hereby confirmed and shall continue to be vested in the Original Trustee. Section 2.03. Nothing contained herein or in the Indenture shall cause the ------------ New Trustee and the Original Trustee to be considered cotrustees of the same trust. The New Trustee and the Original Trustee shall each be trustee of a trust or trusts for the Securities for which they are acting as Trustee under the Indenture, separate and apart from any trust or trusts administered thereunder by such other Trustee. Section 2.04. Upon execution and delivery of this Second Supplemental ------------ Indenture, the Original Trustee shall have no further responsibility for the exercise of rights and powers or for the performance of the duties and obligations vested in the Trustee under the Indenture for any Securities issued on or after the date hereof. ARTICLE THREE OBLIGATIONS CONCERNING TRUSTEES Section 3.01. Each of the Original Trustee and the New Trustee hereby ------------ accept this Second Supplemental Indenture, but only upon the terms and conditions set forth in the Indenture as supplement hereby. The Original Trustee and the New Trustee shall be entitled to, may exercise, and shall be protected by, where, and to the full extent that the same are applicable, all the rights, powers, privileges, immunities and exemptions provided in the Indenture as if the provisions concerning the same were incorporated herein at length. The recitals and statements in this Second Supplemental Indenture shall be taken as statements of the Company and the Guarantor, and shall not be considered as made by, or imposing any obligation or liability upon, the Original Trustee or the New Trustee, nor shall the Original Trustee or the New Trustee be held responsible for the legality or validity of this Second Supplemental Indenture, and neither the Original Trustee nor the New Trustee make any covenant or representation nor shall either of them be responsible as to or for the effect, authorization, execution, delivery or validity hereof. ARTICLE FOUR MISCELLANEOUS PROVISIONS Section 4.01. This Second Supplemental Indenture shall take effect, ------------ without further action of the parties hereto, immediately upon execution by all of the parties. 3 Section 4.02. Except as herein expressly provided, the Indenture is in all ------------ respects ratified and confirmed and all the terms, provisions and conditions thereof shall be and remain in full force and effect. Section 4.03. The recitals contained herein shall be taken as the ------------ statements of the Company and the Guarantor, and neither the Original Trustee nor the New Trustee assume any responsibility for their correctness. Neither the Original Trustee nor the New Trustee make any representations as to the validity or sufficiency of this Second Supplemental Indenture. Section 4.04. This Second Supplemental Indenture may be executed in ------------ several counterparts, and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. Section 4.05. This Second Supplemental Indenture shall be governed by and ------------ construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental Indenture to be duly executed, all as of the day and year first above written. CORESTATES CAPITAL CORP [Corporate Seal] Attest__________________ By_____________________________ Secretary Vice President and Treasurer CORESTATES FINANCIAL CORP [Corporate Seal] Attest__________________ By_____________________________ Secretary Executive Vice President BANK ONE, Columbus, NA [Corporate Seal] Attest__________________ By_____________________________ Authorized Signer Authorized Signer CITIBANK, N.A. [Corporate Seal] Attest__________________ By_____________________________ Authorized Signer Authorized Signer 4 EX-10.18 3 INCENTIVE COM PLAN 1/1/95 EXHIBIT 10.18 ------------- INCENTIVE COMPENSATION PLAN FOR DESIGNATED EXECUTIVES OF CORESTATES FINANCIAL CORP AND PARTICIPATING SUBSIDIARIES EFFECTIVE AS OF JANUARY 1, 1995 1. PURPOSE The purpose of the Incentive Compensation Plan for Designated Executives (the "Plan") is to support the business goals and earnings of CoreStates Financial Corp ("CoreStates") and its participating subsidiaries by providing additional, variable and contingent incentive compensation to attract, retain and motivate key members of executive management whose performance has and will continue to have a substantial impact on the earnings performance and growth of the Corporation. 2. DEFINITIONS (a) "AWARD RECIPIENT" shall mean an Eligible Participant who has continued in the full time employ of the Corporation during the respective Incentive Year, who remains so employed at the time of the granting of awards under the Plan and who is selected for an award pursuant to the Plan; provided that an Eligible Participant who retires under, and begins receiving an immediate pension benefit from, the CoreStates Retirement Plan shall be eligible to receive a pro-rated award under the Plan for the year of retirement (including early retirement). Any Eligible Participant who ceases to be a full time Employee of the Corporation during an Incentive Year or who is not so employed at the time of the granting of awards under the Plan for any reason other than retirement as stated above shall not be eligible for an award for such Incentive Year. (b) "BOARD OF DIRECTORS" shall mean the Board of Directors of CoreStates. (c) "CHIEF EXECUTIVE OFFICER" shall mean the Chief Executive Officer of CoreStates. (d) "CORPORATION" shall mean CoreStates Financial Corp and its Participating Subsidiaries. (e) "ELIGIBLE PARTICIPANT" shall mean the Chief Executive Officer and any executive officer employed by the Corporation whose cash compensation opportunity, as determined by the Human Resources Committee, places her or him in the group of highly compensated officers subject to section 162(m) of the Internal Revenue Code, as it applies to the tax deductibility of compensation paid to executives. An award Recipient under the Incentive Compensation Plan for CoreStates Financial Corp and Participating Subsidiaries is ineligible to receive an award under this Plan. (f) "HUMAN RESOURCES COMMITTEE" shall mean a committee appointed by, and serving at the pleasure of, the Board of Directors, composed of not less than three members of such Board, none of whom shall be eligible for an award under the Plan. (g) "INCENTIVE YEAR" shall mean any respective fiscal year of CoreStates beginning on or after January 1, 1995, during which the Plan shall be in effect. (h) "MAXIMUM AWARD" shall mean: 1) For the Chief Executive Officer: an amount not greater than 150% of salary and no more than $1,500,000 per year; 2) For any other designated executive: an amount not greater than 100% of salary and no more than $700,000 per year. (i) "PARTICIPATING SUBSIDIARY" shall mean CoreStates Bank, N.A., and any other Subsidiary which has been admitted to participation in the Plan with the approval of the boards of directors of CoreStates and the respective Subsidiary. (j) "SALARY" shall mean regular fixed compensation in the currency of the United States which is paid by the Corporation to any Eligible Participant during any year of service rendered to the Corporation but such term shall not include any payment for overtime, bonus, incentive award, profit sharing distribution, stock options, stock awards, stock appreciation rights, supplemental compensation, retirement benefit or similar type payment. (k) "SALARY GRADE MIDPOINT" shall mean the respective midpoint of the salary grades or equivalent thereof of the Corporation as of January 1 of the respective Incentive Year. (l) "SUBSIDIARY" shall mean any corporation at least 50% of the outstanding voting stock of which is owned directly or indirectly by CoreStates. (m) "TARGET AWARD" shall mean such amount expressed as a percent of Salary Grade Midpoint of an Eligible Participant projected for award to such Eligible Participant as of the commencement of and for such Incentive Year on the assumption that the performance objectives of the Corporation for the Incentive Year as determined by the Human Resources Committee will in each case be fully achieved. 3. ADMINISTRATION AND GENERAL CONDITIONS (a) The Plan shall be administered by the Human Resources Committee. (b) As soon as practicable after the commencement of each Incentive Year, the Human Resources Committee shall consult with 2 the Chief Executive Officer of CoreStates and shall determine the Eligible Participants and the Target Award for each Eligible Participant. The Human Resources Committee may during any Incentive Year revise the Target Award for an Eligible Participant based on changes in such person's salary grade, responsibilities or other factors, but in no case shall the revised Target Award result in an award opportunity in excess of the Maximum Award allowable under the Plan. (c) The Human Resources Committee shall adopt such rules and procedures and shall make such determinations and interpretations of the Plan thereunder as it shall deem desirable. All such rules, procedures and determinations shall be conclusive and binding upon all parties. (d) Classification as an Eligible Participant or determination of a Target Award shall not in themselves be deemed to create any rights or interests under the Plan, and the interest of an Award Recipient in the Plan shall not be assignable either by voluntary or involuntary assignment or by operation of the law. (e) An award under the Plan shall not confer any right on the Award Recipient to continue in the employ of the Corporation or limit in any way the right of the Corporation to terminate employment at any time. (f) The Plan shall be effective as of January 1, 1995, subject to approval by CoreStates' shareholders, and shall continue from year to year until terminated by the Board of Directors. (g) The Board of Directors may amend, suspend or terminate the Plan at any time, but may in no way reduce amounts previously awarded under the Plan and to which Award Recipients are entitled. 4. DETERMINATION OF AWARDS The selection among Eligible Participants for awards and the amount of the award to each such Eligible Participant shall be determined by the Human Resources Committee after consultation with the Chief Executive Officer. The Human Resources Committee shall determine the amount of the award to the Chief Executive Officer. The actual award paid to an Individual Participant shall not exceed either 150% of her or his Target Award, or the Maximum Award allowable under the Plan. With respect to the determination of the amount of any awards for any Incentive Year, the Human Resources Committee may take into account the profitability of the operation of the Corporation in comparison with a prior year or years and/or in 3 comparison with other corporations and/or generally prevailing economic conditions, the presence or absence of nonrecurring or extraordinary items of income, gain, expense or loss (including security gains and losses) and any and all other factors which, in its sole discretion, it may deem relevant. Such factors may result in the Human Resources Committee adjusting the amount of any awards paid downward, but in no case will upward adjustments be made. 5. PERFORMANCE OBJECTIVES The Human Resources Committee no later than 90 days after the commencement of the Incentive Year shall determine the performance objectives for the Incentive Year. The Human Resources Committee shall determine the quantitative objectives (i.e. earnings per share, net income after capital charge, return on equity, return on assets, return on investment, total shareholder return), and the qualitative objectives, if any, for the Incentive Year. The weighting of the selected objectives shall also be determined by the Human Resources Committee. 6. PAYMENT OF AWARDS Awards shall be payable in cash as soon as practicable after the consolidated financial results and the assessment of achievement of qualitative objectives, if any, for the Corporation have been determined and certified. At the discretion of the Human Resources Committee, an Award Recipient may request that any amount shall be deferred in such manner and subject to such conditions as the Human Resources 4 Committee shall determine. Such request shall be made in writing in accordance with guidelines adopted by the Human Resources Committee to conform with applicable tax law. Any such deferred awards shall be retained as part of the general assets of the Corporation. Interest shall be credited annually on any deferred amounts at a reasonable rate established from time to time by the Human Resources Committee. Interest credits shall be payable in the same manner as amounts elected to be deferred by the Award Recipient. 7. APPLICABLE TAXES Payment of all awards hereunder shall be subject to withholding of all Federal, state or local taxes which, by law, must be withheld in respect to such payment. 5 EX-10.19 4 INDEPENDENT BAN. SUP. EX RET PLAN EXHIBIT 10.19 ------------- INDEPENDENCE BANCORP, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN PURPOSE ------- In accordance with a Resolution passed on November 18, 1986, Independence Bancorp, Inc. has adopted this Supplemental Executive Retirement Plan to provide eligible participants with a supplemental benefit equal to the difference between the amount of benefit a participant would have received under the Independence Capital Accumulation Plan and the Independence Savings Plan as determined by the Plan formulas without maximum limitations and the amount they have actually received as limited by the maximum contribution limitations set forth in such plans. ARTICLE I DEFINITIONS ----------- "CAPITAL ACCUMULATION PLAN" shall mean the Independence Capital Accumulation Plan. "CODE" shall mean the Internal Revenue Code of 1954, as amended. "COMPENSATION" shall mean earnings for the taxable year ending with or within the Plan Year which are subject to tax under Section 3101(a) of the Code without the dollar limitations of Section 3121(a). Compensation shall not include commissions, nor shall it include non-cash earnings such as insurance, the use of vehicles or stock awards. All compensation that is deferred by a Participant through a salary reduction agreement to the Savings Plan, through a Deferral Compensation Agreement under this Supplemental Plan or through any other deferred compensation arrangement between the Employee and the Employer shall be included as compensation under this Plan. Any deferred compensation which is taken down by the Employee shall not be counted twice in determining the benefits under this Plan. "COMMITTEE" shall mean a group of individuals appointed by the Employer. "COMPENSATION LIMIT" shall mean the limit imposed on the amount of includable compensation for the purposes of contribution amount by the Participant and the Employer under Section 401(a) of the code. "DEFERRED COMPENSATION AGREEMENT" shall mean an agreement executed by a Participant and the Employer by which the Participant indicates the percentage of his Compensation that is to be deferred in conjunction with the Savings Plan and this Supplemental Plan. "EFFECTIVE DATE" shall mean January 1, 1986. "EMPLOYER" shall mean Independence Bancorp, Inc. and all of its subsidiaries. "MAXIMUM ANNUAL ADDITION LIMIT" shall mean the limitations imposed on contributions made by or on behalf of a Participant under Section 415 of the Code. "PARTICIPANT" shall mean a Participant in this Supplemental Plan as provided in Article III. "PLAN YEAR" shall mean the twelve month period commencing with January 1 of each year and ending with the following December 31. "SALARY DEFERRAL LIMIT" shall mean the limit imposed on the amount of salary a Participant may defer as contribution to the Savings Plan under Section 402(h) of the Code. "SAVINGS PLAN" shall mean the Independence Savings Plan. "SUPPLEMENTAL PLAN" shall mean this Supplemental Executive Retirement Plan as set forth herein. ARTICLE II PURPOSE ------- 2.1 The Employer hereby establishes this Supplemental Plan effective January 1, 1986 to provide the benefits which a Participant would have received under the Capital Accumulation Plan and Savings Plan but for the Maximum Annual Addition Limit, Salary Deferral Limit, and Compensation Limit provided for in the Capital Accumulation Plan and Savings Plan. ARTICLE III ELIGIBILITY AND PARTICIPATION ----------------------------- 3.1 An individual is eligible to participate in this Supplemental Plan if the individual's annual Compensation is in excess of $87,500 and is either: 2 a. A Participant of the Capital Accumulation Plan, as defined in such plan, whose contributions are limited thereunder by reason of either the Maximum Annual Addition Limit, the Salary Deferral Limit or the Compensation Limit provided under the Capital Accumulation Plan. b. A Participant of the Savings Plan as defined by such Plan, and i. his contributions are limited under the Savings Plan for reasons described in Section 3.1(a) and ii. the individual executes a Deferred Compensation agreement, if necessary, prior to the period of service for which the compensation is payable in 1986, or prior to the prior January 1 of each subsequent for such year. c. A member of Senior Management designated by the Committee as eligible for immediate participation. ARTICLE IV CONTRIBUTION AMOUNTS -------------------- 4.1 Participant Contributions - The Participant shall contribute to this Supplemental Plan the excess, if any, of (a) over (b) where: a. The percentage of Compensation such Participant elected to defer under the Savings Plan times the definition of Compensation defined under this Supplemental Plan. b. The amount actually deferred into the Savings Plan on his behalf. 4.2 Participant Contributions to this Supplemental Plan shall be made through a Deferred Compensation Agreement that shall be executed prior to the period of service for which the compensation is payable in 1986, or prior to the prior January 1 of each subsequent for such year. 4.3 The Employer shall contribute the excess, if any, of (a) over (b) where: a. The amount of Employer contributions the Participant would be entitled under the Capital Accumulation Plan and Savings Plan times the definition of Compensation defined under this Supplemental Plan. 3 b. The amount of Employer contribution actually made on behalf of the Participant to the Capital Accumulation Plan and Savings Plan. 4.4 The Committee, at the beginning of each Plan Year, shall establish an investment rate of return. The Employer will credit the Employee's account balance with an amount equal to the investment income that would have been earned had the account balance been invested at the aforementioned rate. ARTICLE V WITHDRAWALS ----------- 5.1 A Participant may withdraw while in the employ of the Employer the vested accrued amounts under Article IV provided that the reason for such withdrawal is hardship, as defined by Section 401(k) of the Code, and approved by the Committee. ARTICLE VI TIME AND METHOD OF PAYMENT -------------------------- 6.1 Upon the Participant's retirement, death, disability, or separation from employment, accrued vested amounts under Article IV shall be paid to such Participant and/or his spouse or other beneficiary in a single sum or in period payments, at the Participant's discretion. In the event the Participant elects to receive periodic payments, this election must be in writing and irrevocable with respect to the length of the period. 6.2 The payments described in Section 6.1 shall commence no later than 60 days following the valuation date, as defined in the Capital Accumulation Plan and Savings Plan, subsequent to retirement, death, disability, or separation from employment. The contributions defined in Section 4.4 shall be accrued through such valuation date. ARTICLE VII VESTING ------- 7.1 Participant contributions as described in Section 4.1 and the Employer contributions representing the amount of investment income attributable to such contributions as described in Section 4.4 shall be 100% vested at all times. 4 7.2 Employer contributions as described in Section 4.3 and the Employer contributions representing the amount of investment income attributable to such contributions as described in Section 4.4 shall vest according to the schedule under the Savings Plan. In addition, those events that automatically fully vest a Participant's account in the Savings Plan will do likewise in this Supplemental Plan. 5 EX-11 5 COMP. PER SHARE EARNINGS CORESTATES FINANCIAL CORP AND SUBSIDIARIES EXHIBIT 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (in thousands, except per share amounts)
Three Months Ended Twelve Months Ended December 31, December 31, -------------------- -------------------- 1994 1993 1994 1993 -------- -------- ---------- -------- (A) Income before cumulative effect of a change in accounting principle.......... $111,475 $ 94,672 $248,792 $362,429 Cumulative effect of a change in accounting principle.................... (3,430) (13,010) -------- -------- -------- -------- (B) Net Income.............................. $111,475 $ 94,672 $245,362 $349,419 ======== ======== ======== ======== EARNINGS PER SHARE Based on average common shares outstanding - ------------------------------------------ (C) Average shares outstanding.............. 142,252 145,372 142,498 145,398 ======== ======== ======== ======== (A/C) Income before cumulative effect of a change in accounting principle...... $0.78 $0.65 $1.75 $2.49 ======== ======== ======== ======== (B/C) Net Income............................ $0.78 $0.65 $1.73 $2.40 ======== ======== ======== ======== Based on average common and common - ---------------------------------- equivalent shares outstanding - ----------------------------- Primary: (D) Average common equivalent shares........ 922 1,604 1,207 1,809 ===== ===== ===== ===== (E) Average common and common equivalent shares (C + D)................ 143,174 146,976 143,705 147,207 ======= ======= ======= ======= (A/E) Income before cumulative effect of a change in accounting principle (1). $0.78 $0.64 $1.73 $2.46 ===== ===== ===== ===== (B/E) Net Income (1)........................ $0.78 $0.64 $1.71 $2.37 ===== ===== ===== ===== Fully diluted: (F) Average common equivalent shares........ 906 1,996 1,240 2,269 ===== ===== ===== ===== (G) Average common and common equivalent shares (C + F)................ 143,158 147,368 143,738 147,667 ======= ======= ======= ======= (I) Interest expense on Subordinated convertible debentures, net of tax......... $ 384 $ 480 $1,821 $1,918 ===== ===== ====== ====== ((A+I)/G) Income before cumulative effect of a change in accounting principle (1)........................ $0.78 $0.65 $1.74 $ 2.47 ===== ===== ====== ====== ((B+I)/G) Net Income (1)..................... $0.78 $0.65 $1.72 $ 2.38 ===== ===== ====== ======
- ------------------------------- (1) Dilution is less than 3%. EX-12.1 6 RATIO EARN CONT.OPS CORESTATES FINANCIAL CORP AND SUBSIDIARIES EXHIBIT 12.1 COMPUTATION OF RATIO OF EARNINGS FROM CONTINUING OPERATIONS TO FIXED CHARGES OF CONTINUING OPERATIONS CONSOLIDATED
Twelve Months Ended December 31, 1994 - ------------------------------------- 1. Income from continuing operations before cumulative effect of change in accounting principle and income taxes.................... $392,448 ======== 2. Fixed charges of continuing operations: A. Interest expense (excluding interest on deposits), amortization of debt issuance costs and one-third of rental expenses, net of income from subleases.......................... $195,367 B. Interest on deposits............................................ 364,858 -------- C. Total fixed charges (line 2A + line 2B)......................... $560,225 ======== 3. Income from continuing operations before cumulative effect of change in accounting principle and income taxes, plus total fixed charges of continuing operations: A. Excluding interest on deposits (line 1 + line 2A)............... $587,815 ======== B. Including interest on deposits (line 1 + line 2C)............... $952,673 ======== 4. Ratio of earnings (as defined) to fixed charges: A. Excluding interest on deposits (line 3A/line 2A)................ 3.01x ==== B. Including interest on deposits (line 3B/line 2C)................ 1.70x ====
EX-12.2 7 RATIO EARN TO FIX CHG CORESTATES FINANCIAL CORP AND SUBSIDIARIES EXHIBIT 12.2 COMPUTATION OF RATIO OF EARNINGS FROM CONTINUING OPERATIONS TO FIXED CHARGES OF CONTINUING OPERATIONS COMBINED CORESTATES (PARENT ONLY) AND CORESTATES CAPITAL CORPORATION
Twelve Months Ended December 31, 1994 - ------------------------------------- 1. Income before income taxes, equity in undistributed income of subsidiaries and cumulative effect of change in accounting principle...................................................... $221,559 2. Fixed charges - interest expense, amortization of debt issuance costs and one-third of rental expenses, net of income from subleases.......................................... 122,087 -------- 3. Income before taxes, equity in undistributed income of subsidiaries and cumulative effect of change in accounting principle, plus fixed charges.................................. $343,646 ======== 4. Ratio of earnings (as defined) to fixed charges (line 3/ line 2)........................................................ 2.81x ====
EX-13 8 PORT. OF CORESTATES ANNUAL REPORT CoreStates Financial Corp and Subsidiaries Exhibit 13 - Portions of the Registrant's Annual Report 1 1994 Annual Report CoreStates Financial Corp and Subsidiaries
CONTENTS OF FINANCIAL SECTION PAGE ---- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 3-41 FINANCIAL STATEMENTS Management's Report on Internal Controls over Financial Reporting................................... 42 Independent Accountants' Report and Report of Independent Auditors.................................. 43-44 Consolidated Statements of Income for the years ended December 31, 1994, 1993 and 1992.......... 45 Consolidated Balance Sheets as of December 31, 1994 and 1993.............................................. 46 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1994, 1993 and 1992......................................... 47 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992...................... 48 Notes to the Consolidated Financial Statements............. 49-75 SUPPLEMENTAL FINANCIAL DATA Six Year Average Balance Sheet, Statement of Income and Balance Sheet..................................... 76-81 Shareholders' and Other Selected Data...................... 82 Rate/Volume Analysis Taxable Equivalent Basis.............. 83 Loan Portfolio, Risk Elements and Allowance for Loan Losses Data...................................... 84-88 Selected Maturity and Interest Sensitivity Data............ 88-91 Fourth Quarter Results..................................... 92-95
2 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW In 1994, CoreStates Financial Corp ("CoreStates") achieved solid earnings performance amid the challenges of rising interest rates, merger consolidations and a moderate business climate. Driving 1994 earnings performance were a strong net interest margin, improved credit quality and expense management. CoreStates' operating income for 1994, defined as net income excluding merger- related charges and the cumulative effect of a change in accounting principle was $416.2 million, or $2.92 per share, reflecting growth of 17.3% on a per share basis, when compared to operating income of $362.4 million, or $2.49 per share in 1993. See "Strategic Actions in 1994 - Acquisitions" beginning on page 5 for a detailed discussion of merger-related charges. CoreStates recorded net income, before the cumulative effect of a change in accounting principle, of $248.8 million, or $1.75 per share in 1994. Key performance measures based on operating income continued to improve in 1994, and are among the highest in the banking industry. Returns on average equity and assets were 18.34% and 1.50%, respectively, in 1994, compared to 16.49% and 1.31%, respectively, in 1993. The 1994 Montgomery Securities Regional Bank composites for returns on average equity and assets were 15.84% and .88%, respectively. The Montgomery Securities Regional Bank composite is comprised of the 41 largest regional banking companies, in terms of assets, in the United States including CoreStates. The improvement in 1994 operating income was primarily due to an increase in taxable equivalent net interest income of $58.8 million, or 4.4%. The net interest margin in 1994 was 5.80%, compared to 5.59% in 1993. The increases in the level of taxable equivalent net interest income and in the net interest margin were primarily the result of improved average loan demand, wider interest rate spreads and a lower level of non-performing loans. While the rising interest rate environment experienced during 1994 has negatively impacted earnings and net interest margin at some banking companies, CoreStates' interest rate risk management practices have continued to generate a strong and stable net interest margin. CoreStates strives to maintain a neutral interest rate risk sensitivity and avoids taking speculative positions based on interest rate movement. For a detailed discussion of CoreStates' interest rate risk management practices, see the "Asset and Liability Management" section beginning on page 27. Also contributing to the 1994 improvement was a reduction of $19.3 million, or 15.9%, in CoreStates' provision for loan losses excluding $145.0 million of merger-related provisions recorded in 1994. This decrease resulted primarily from the improved credit environment at CoreStates, as evidenced by a 29.1% decline in non-performing assets from December 31, 1993. CoreStates' total operating expenses, excluding other real estate owned expenses, as a percentage of total revenues, were 61.0% in 1994. This compares to an expense ratio of 62.7% in 1993. The expense ratio improved throughout each quarter of 1994 resulting from continued progress in achieving merger efficiencies and from the heightened attention to expense management created by the process redesign program (see "Strategic Actions in 1994 - Process Redesign" on page 7). For the fourth quarter of 1994, the expense ratio was below 60%. 3 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED OVERVIEW - continued Two 1994 acquisitions had a significant impact on 1994 results; Constellation Bancorp ("Constellation") acquired on March 16, 1994 and Independence Bancorp, Inc. ("Independence") acquired on June 27, 1994. The Constellation and Independence acquisitions were both accounted for as poolings of interests. After-tax merger-related charges totaling $127.8 million, or $.89 per share, for Constellation and $39.6 million, or $.28 per share, for Independence were recorded in connection with changes in strategic direction related to problem assets and to conform those banks' consumer lending charge-off policies to those of CoreStates, and for expenses directly attributable to the acquisitions. Excluding the impact of merger-related charges, these two acquisitions resulted in approximately $.17 dilution to CoreStates' 1994 earnings per share. All prior period data have been restated to include Independence and Constellation. On a business line basis, CoreStates' 1994 earnings improvement reflects another year of strong growth achieved by the Wholesale Banking business, as that business line's net income increased $40.2 million, or 23.2% over 1993. This growth was primarily driven by a 6.8% increase in net interest income due to higher average loan balances, wider interest rate spreads on prime-based loans and substantial reductions in non-performing assets. The growth in average loans was principally in the higher yielding asset-based lending portfolio at Congress Financial Corporation. Wholesale Banking's provision for loan losses was reduced 28.9% due to improvements in credit quality. 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 8. Operating results, key financial ratios and per share information are summarized in the following table (in millions, except per share):
Percentage increase(decrease) ------------------ 1994 1993 1992 '94/'93 '93/'92 -------- -------- -------- ------- ---------- OPERATING RESULTS Net interest income (taxable equivalent basis)........... $1,410.6 $1,351.8 $1,283.5 4.4% 5.3% ======== ======== ======== Income before the cumulative effect of a change in accounting principle, net of tax.................. $ 248.8 $ 362.4 $ 268.1 (31.3) 35.2 Add back after-tax merger- related charges............. 167.4 -------- -------- -------- Operating income.............. $ 416.2 $ 362.4 $ 268.1 14.8 35.2 ======== ======== ======== Operating income per share.... $ 2.92 $ 2.49 $ 1.97 17.3 26.4 Return on average equity (a).. 18.34% 16.49% 13.75% Return on average assets (a).. 1.50 1.31 .97 Net interest margin........... 5.80 5.59 5.32 Average common shares outstanding................ 142.498 145.398 135.813
- ------------------------ (a) Calculated based on "Operating income." 4 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED OVERVIEW - continued COMPARISON OF 1993 TO 1992 Income before the cumulative effect of a change in accounting principle of $362.4 million, or $2.49 per share for 1993 grew 26.4% on a per share basis when compared to $268.1 million, or $1.97 per share for 1992. The growth in earnings for 1993 reflected the broad strength in CoreStates' basic banking businesses. Contributing to the growth in 1993 earnings were similar factors as those contributing to 1994 growth. Increases in net interest income and the net interest margin were primarily due to loan demand and significant reductions in non-performing assets, and a reduction in the provision for loan losses resulted from improvements in credit quality. NON-PERFORMING ASSETS Non-performing assets at December 31, 1994 totalled $310.9 million, a decline of $127.8 million, or 29.1% from December 31, 1993. The decrease in non- performing assets as compared to the level at December 31, 1993 was principally in non-performing real estate assets which were down $119.4 million, or 38.1% from year-end 1993. At December 31, 1994 the allowance for loan losses at $500.6 million was 203.3% of non-performing loans. This compares to $450.8 million and 148.7% at December 31, 1993. ACCOUNTING CHANGES AFFECTING INCOME During the first quarter of 1994, Independence recognized a $3.4 million after- tax, or $.02 per share, impairment loss on certain mortgage securities as a cumulative effect of a change in accounting principle. The loss was the result of a writedown to fair value of these securities, which were deemed to be impaired. This resulted from the Financial Accounting Standards Board's ("FASB") 1994 interpretation of Statement of Financial Accounting Standards No. 115 ("FAS 115"). The interpretation, reached by a consensus of the FASB Emerging Issues Task Force in March 1994, provides more definitive criteria for recognition of impairment losses on these types of securities. Effective January 1, 1993, CoreStates adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("FAS 112"). FAS 112 requires that employers accrue the costs associated with providing benefits, such as salary and benefit continuation under disability plans, when payment of the benefits is probable and the amount of the obligation can be reasonably estimated. CoreStates recognized the January 1, 1993 FAS 112 transitional liability of $20.0 million, $13.0 million after-tax or $.09 per share, as the cumulative effect of a change in accounting principle in 1993. In 1992, 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 $.62 per share, as the cumulative effect of a change in accounting principle in 1992. STRATEGIC ACTIONS IN 1994 ACQUISITIONS CoreStates evaluates merger and acquisition opportunities where potential for shareholder value enhancement, strategic growth and franchise development exist. CoreStates makes acquisitions to supplement corporate and business line strategies, not solely to drive earnings growth. Acquisition opportunities are evaluated by a specialized staff aided by teams of business line managers who are responsible for planning and executing due diligence and integration activities. The following discussion summarizes CoreStates' more significant acquisition activity during 1994. CONSTELLATION - 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 was accounted for as a pooling of interests. 5 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED STRATEGIC ACTIONS IN 1994 - CONTINUED The acquisition of Constellation, which operates mostly in northern and central New Jersey, is highly complementary to the branch network and businesses of CoreStates' New Jersey National Bank ("NJNB") subsidiary and the merged bank is the fifth 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. Subsequent to the March 16, 1994 consummation of the Constellation acquisition, Constellation recorded merger-related charges in the first quarter of 1994 in connection with a change in strategic direction related to problem assets and to conform its consumer lending charge-off policies to those of CoreStates, and for expenses directly attributable to the acquisition. These merger-related charges totaled $127.8 million after-tax, or $.89 per share. On a pre-tax basis, the merger-related charges consisted of a $120.0 million provision for loan losses, a $28.0 million addition to the OREO reserve, $13.0 million for the writedown of purchased mortgage servicing rights and related assets, and $34.0 million for expenses directly attributable to the acquisition including $8.0 million of severance costs related to approximately 370 employees. In addition to the impact of the merger-related charges, the Constellation acquisition resulted in approximately $.02 dilution to CoreStates' 1994 earnings per share. With the successful integration and consolidation of Constellation's operations, 49 branches and other businesses into NJNB on April 29, 1994, CoreStates expects to realize pre-tax expense efficiencies of approximately $35 million annually and a positive contribution to earnings per share in 1995. INDEPENDENCE - On June 27, 1994, CoreStates acquired Independence Bancorp, Inc. ("Independence"), a Pennsylvania bank holding company with $2.6 billion in assets and $2.1 billion in deposits. As a result of this transaction, approximately 16.6 million new shares of CoreStates' common stock were issued. The transaction was accounted for as a pooling of interests. Subsequent to the June 27, 1994 consummation of the Independence acquisition, Independence recorded merger-related charges in the second quarter of 1994 in connection with a change in strategic direction related to problem assets and to conform its consumer lending charge-off policies to those of CoreStates, and for expenses directly attributable to the acquisition. These merger-related charges totaled $39.6 million after-tax, or $.28 per share. On a pre-tax basis, the merger-related charges consisted of a $25.0 million provision for loan losses, a $4.0 million addition to the OREO reserve, and $29.7 million for expenses directly attributable to the acquisition including $5.0 million of severance costs related to approximately 345 employees. The 54 branches of Independence's four Pennsylvania bank subsidiaries were merged into CoreStates' lead banking subsidiary, CoreStates Bank, N.A. ("CBNA") on November 18, 1994. Independence's operating areas and other businesses also were integrated successfully into CoreStates on that date. In addition to the impact of the merger-related charges, the Independence acquisition resulted in approximately $.15 dilution to CoreStates' 1994 earnings per share. With the November 18th integration, CoreStates expects to realize pre-tax expense efficiencies of approximately $35 million annually and earnings per share dilution will be eliminated by the fourth quarter of 1995. 6 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED STRATEGIC ACTIONS IN 1994 - CONTINUED GERMANTOWN - On December 2, 1994, CoreStates acquired Germantown Savings Bank ("Germantown"), a $1.6 billion Pennsylvania chartered stock savings bank. Germantown was purchased for approximately $260 million, of which approximately 55% was paid in CoreStates common stock and 45% was paid in cash. The acquisition was accounted for under the purchase method of accounting and accordingly, the results of operations of Germantown were combined with CoreStates' results since the date of acquisition. Intangible assets of approximately $191 million were created in this acquisition. For the period January 1, 1994 through the date of acquisition, Germantown recorded net income of $20.7 million. As a result of this acquisition, CoreStates issued approximately 5.9 million shares of common stock out of treasury shares. The 32 branches of Germantown were merged legally into CBNA on December 2, 1994 and will be merged operationally into CBNA's branch network on March 17, 1995. This in-market acquisition is expected to result in annual pre-tax expense savings of approximately $23 million, partially offset by approximately $12 million of annual after-tax amortization expense related to the intangible assets created as a result of purchase accounting. The Germantown acquisition is expected to add to earnings per share in the first quarter of 1995. As a result of this acquisition, approximately 200 employees are expected to be displaced. NATIONAL REMITTANCE CENTERS - On January 27, 1995, CoreStates acquired Nationwide Remittance Centers, Inc. ("NRC"), the largest independent remittance processor in the United States. NRC will join CoreStates' third-party remittance processing company, CashFlex, a subsidiary of CBNA, to create the second largest lockbox processor in the country. Upon completion of this transaction, CashFlex will service more than 60 major financial institutions and will be processing 300 million payment items annually. This acquisition affirms CoreStates' commitment to growing its fee-based businesses and to building on its expertise in cash management. Fees earned by NRC were approximately $20 million on an annual basis. MAJOR INITIATIVES PROCESS REDESIGN - In order to build upon CoreStates' strong financial condition and sustain previous financial successes, and accomplish this goal in the competitive financial services environment in which CoreStates operates, management has authorized an intensive review of all aspects of CoreStates' operations and businesses. Based upon this review, CoreStates will redesign its processes, as appropriate, to achieve the following objectives: (i) to enhance CoreStates' customer focus; (ii) to accelerate the culture changes already in progress at CoreStates; and (iii) to improve productivity. CoreStates expects that this review will identify many current processes which do not contribute value for customers and that the resulting process redesign will lead to reductions in the number of jobs and future expense levels, and increases in future revenues. CoreStates has designed this process to be completed at the end of the first quarter of 1995. CoreStates further expects to record a charge against earnings in the first quarter of 1995 for the costs associated with the process redesign. The amount of the restructuring charge and the impact of the process redesigns on future results cannot be determined at this time. ONE BANK, ONE NAME, ONE MISSION - The branches and trade divisions of CBNA which previously had been operating and marketing under separate identities, have adopted the name CoreStates Bank as the new identity for their banking businesses. Upon merging CBNA with NJNB, that combined entity also will operate under the name CoreStates Bank. Regulatory approval for this interstate combination has been received. The benefits of replacing the various trade names will be less customer confusion and unified marketing and advertising under one name. The combination of the Pennsylvania and New Jersey banking subsidiaries will significantly increase customer convenience. 7 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, Inc. ("EPS"), an affiliate . Each core business is comprised of well- defined business lines with market or product specific missions. Corporate overhead, processing and support costs, and the loan loss provision are allocated along with the impact of balance sheet management and hedging activities of CoreStates. A matched maturity transfer pricing system is used to allocate interest income and interest expense. All business lines in the four core businesses are allocated equity utilizing regulatory risk-based capital guidelines as well as each business line's fixed assets and other capital investment requirements. Intangible assets and associated costs are also allocated to relevant business units. The development of these allocation methodologies is a continuous process at CoreStates. The Corporate category includes the income and expense impact of unallocated equity; unusual or non-recurring items not attributable to the operating activities of the four major business areas; emerging business activities not directly related to the four major business areas; and miscellaneous items. The earnings contribution of these core businesses is reflected in the table below (in millions): 8 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED BUSINESS LINE RESULTS - continued
Consumer Trust and Wholesale Financial Investment EPS, Inc. taxable equivalent Banking Services Management Affiliate Corporate --------------- ----------------- ---------------- --------------- ----------------- basis) 1994 1993 1994 1993 1994 1993 1994 1993 1994(b) 1993 ------ ------- ------ -------- ----- ------- ------ ------- ------- ------- Net interest income............ $ 637.5 $ 596.7 $ 671.6 $ 650.3 $ 30.4 $ 31.0 $ (6.0) $ (5.7) $ 77.1 $ 79.5 Provision for loan losses....................... 44.2 62.2 56.6 58.0 1.1 1.0 145.0 Non-interest income............ 219.9 216.9 175.0 189.0 98.3 104.4 31.8 13.2 42.5 50.5 Non-financial expenses......... 462.1 469.7 591.0 593.7 112.9 113.4 151.6 65.1 ----- ----- ----- ----- ----- ----- ---- ---- ------ ---- Income (loss) before income taxes................. 351.1 281.7 199.0 187.6 14.7 21.0 25.8 7.5 (177.0) 64.9 Income tax expense (benefit)... 137.8 108.6 77.5 71.6 5.5 7.7 9.1 (0.7) (65.1) 13.1 ----- ----- ----- ----- ----- ----- ---- ---- ------ ---- Net income (loss).............. $ 213.3 $ 173.1 $ 121.5 $ 116.0 $ 9.2 $ 13.3 $ 16.7 $ 8.2 $(111.9) $ 51.8 ======= ======= ======= ======= ====== ====== ====== ====== ======= ======= Return on assets............... 1.39% 1.17% 1.65% 1.51% 1.33% 1.93% 21.41% 11.88% (2.70)% 1.17% Return on equity (a)........... 25.01 21.86 33.84 31.69 34.07 47.50 417.50 205.00 (10.90) 5.14 Average assets................. $15,396 $14,829 $ 7,358 $ 7,674 $ 692 $ 689 $ 78 $ 69 $ 4,143 $ 4,439 Average equity (a)............. 853 792 359 366 27 28 4 4 1,027 1,008 taxable equivalent Total -------------------- basis) 1994 1993 -------- -------- Net interest income............ $1,410.6 $1,351.8 Provision for loan losses....................... 246.9 121.2 Non-interest income............ 567.5 574.0 Non-financial expenses......... 1,317.6 1,241.9 ------- ------- Income (loss) before income taxes................. 413.6 562.7 Income tax expense (benefit)... 164.8 200.3 ------- ------- Net income (loss).............. $ 248.8(c) $ 362.4(c) ======= ======= Return on assets............... .90% 1.31% Return on equity (a)........... 10.96 16.49 Average assets................. $ 27,667 $ 27,700 Average equity (a)............. 2,270 2,198
____________________________________ (a) Equity is allocated to business lines in the four core business segments by applying a factor of 5.0% against average risk-weighted assets and adding intangible assets. (b) Includes $120.0 million in the provision for loan losses and $75.0 million in other operating expenses related to the Constellation acquisition and $25.0 million in the provision for loan losses and $33.7 million in other operating expenses related to the Independence acquisition. (c) Based on income before cumulative effect of a change in accounting principle. 9 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 Middle Market; Corporate and Institutional Banking; Investment Banking; Cash Management; International Banking; and Specialized Banking. Wholesale Banking continued its strong performance in 1994 as net income increased $40.2 million, or 23.2% above 1993. This increase was due primarily to growth in net interest income and a decline in the provision for loan losses. Net interest income was $40.8 million, or 6.8% above 1993 due to higher loan outstandings, higher interest rate spreads on loans, lower levels of non-performing loans, and higher loan fees. Average loan outstandings increased 5.4% from the prior year, principally due to growth in the higher yielding asset-based lending portfolio at Congress. Average non-performing loans declined 31.1% from the prior year. The increase in loan fees principally resulted from loan prepayments and fees collected on new loans. The provision for loan losses declined 28.9% as the overall quality of the loan portfolio improved. Also contributing to the growth in net income for 1994 was a $3.0 million, or 1.4%, increase in non-interest revenue. The growth in non-interest income was attributable to cash management revenues (including international service fees) which were 5.1% above 1993. Growth in international service fees, and the value of deposit balances maintained by customers in lieu of paying cash fees for deposit services, which is included in net interest income, more than offset a 3.5% year-to-year decline in service charges on deposits related to the rising interest rate environment in 1994. CONSUMER FINANCIAL SERVICES includes the Community Banking, Mortgage Services and Specialty Products business lines. Specialty Products includes Credit Card, Student Lending, Card Linx (CoreStates' merchant credit card processing business), and Synapsys (CoreStates' credit card processing subsidiary). Community Banking's 1993 results include the Virgin Islands operation center and five branches until their sale on September 30, 1993. The Virgin Islands operation, for the remainder of 1993 and the entire year of 1994, consisted of two branches. Those two branches were sold on December 30, 1994 at a pre-tax gain of $1.9 million. Net income for Consumer Financial Services of $121.5 million in 1994 was $5.5 million, or 4.7% above 1993. This increase reflects growth in Specialty Products and Community Banking, partially offset by a decline in income from Mortgage Services. The growth in combined net income was primarily due to a $21.3 million increase in net interest income, which was partially offset by a $14.0 million decline in non-interest income. Also contributing to 1994 net income growth was management's continued emphasis on cost control, as well as synergies realized from the Constellation acquisition, which resulted in a $2.7 million decline in non-financial expenses. The increase in net interest income of $21.3 million, or 3.3% in 1994, would have been greater if not for the impact of the $6.4 million decline in the Virgin Islands net interest income due to the sale of five branches in the third quarter of 1993. Excluding the impact of the sale, Consumer net interest income grew $27.7 million, or 4.3%. The single most important factor for this increase was the strong growth of $24.0 million, or 22.0% in net interest income from the credit card portfolio, resulting from a $209.0 million, or 19.6% increase in average credit card outstandings. Community Banking net interest income, excluding the Virgin Islands impact, was approximately $5.8 million higher than 1993. Favorable deposit spreads in the latter part of the year more than offset declines in the net interest income due to lower loan outstandings. Community Banking average loan outstandings, excluding the Virgin Islands, were down $.2 billion, or 3.8% from 1993 due in part to portfolio sales and to weak consumer loan demand. Average deposits, excluding the Virgin Islands, were approximately level with 1993. Non-interest income was down $14.0 million, or 7.4% compared to 1993. The decline was principally due to gains on sales of mortgage portfolios realized in 1993, as well as reduced mortgage servicing fees resulting from the portfolio sales. Community Banking service charges on deposit accounts and securitization gains and fees were both slightly higher than 1993. Non-financial expenses declined by $2.7 million, or .5%. Excluding the impact of the Virgin Islands sale, non-financial expenses increased by only $4.9 million, or .8%, reflecting management's ongoing cost control efforts, as well as merger-related synergies. 10 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 $9.2 million was down $4.1 million, or 30.8% from 1993. The decline in net income was due to a $6.1 million, or 5.8% decline in non-interest income and a $.6 million, or 1.9% decline in net interest income. The decline in net interest income was due to soft loan demand and narrower loan spreads in Private Banking, and lower balance credits in Corporate Trust. Bond refunding levels of early 1993 have not been repeated in 1994, thus reducing the level of balances that generate credits in Corporate Trust. The decline in non-interest income was caused by declines in the financial markets which generated lower asset values, as well as customer attrition principally in Institutional Trust. Fee growth was hampered by lower than anticipated new business and the instability of the equity and bond markets. Fee growth in Investment Management partially offset the declines in Personal Trust and Institutional Trust. Asset growth in the CoreFund family of Mutual Funds was 4.0%, contributing to much of the fee growth in Investment Management. ELECTRONIC PAYMENT SERVICES, INC. ("EPS") was formed on December 4, 1992 through a separate contribution of the consumer electronic transaction processing businesses of CoreStates, Banc One Corporation, PNC Bank Corp and KeyCorp (formerly Society Corporation). EPS is the nation's leading provider of ATM and POS processing services. CoreStates received cash, preferred stock and common stock for the contribution of its MAC ATM network and BUYPASS POS businesses. CoreStates' ownership at formation was 31%. In December 1993, CoreStates and EPS mutually agreed to enter into a recapitalization of EPS involving the EPS preferred stock held by CoreStates. In exchange for substantially all of the preferred stock, CoreStates received from EPS a ten-year 6.45% note providing for equal principal payments over the life of the note. The recapitalization does not affect the amount of the deferred gain generated in the 1992 contribution of the business lines to EPS, but does change the timing of the recognition of that $138 million deferred gain from a five-year period beginning in 1996 to a ten-year period beginning in 1994. EPS is pursuing a strategy of selective expansion through the entry of new banking companies into the joint venture. As a result of adding any new partners, CoreStates' share in the earnings of EPS would decline proportionately from the current 31%, but the income from businesses contributed by new partners is expected to increase EPS' earnings. Full year 1994 net income for CoreStates totaled $16.7 million versus $8.2 million in 1993. Most of the increase from the prior year is due to the recognition of one-tenth of the deferred gain. The 1994 results include non- interest income from CoreStates' 31% equity interest, recognition of the deferred gain, and interest income on the $250 million promissory note, partly offset by interest carrying charges on the net investment in EPS. 11 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED BUSINESS LINE RESULTS - continued THE CORPORATE CATEGORY'S net income reflects $167.4 million in merger- related charges recorded in the first half of the year for the acquisitions of Constellation and Independence. The merger-related charges include a $145 million loan loss provision. The merger-related charges had an after-tax impact of $127.8 million for Constellation and $39.6 million for Independence. After adjusting for the acquisition costs, the Corporate Category's net income was above 1993 by $3.7 million. Non-interest income and non-financial expenses, after adjusting for merger-related costs of $108.7 million, are below 1993 levels. Unusual gains and expenses occurring in 1993 were not repeated in 1994. In 1993, an $11.0 million gain on the sale of five Virgin Island branches was reported. An expense of $10.0 million was recognized for the Transys start-up costs for the new check processing company. CAPITAL STRENGTH Capital strength must be evaluated in the context of business risk exposures, including asset quality, interest sensitivity, liquidity and earnings diversification. CoreStates places a significant emphasis on the maintenance of strong capital which promotes investor confidence, helps provide access to the credit markets under favorable terms and enhances the flexibility to capitalize on business growth and acquisition opportunities. Capital is managed for each CoreStates subsidiary based on its respective risks and growth opportunities, as well as regulatory requirements. CoreStates is positioned to take advantage of market opportunities to strengthen capital. A shelf registration statement, which is in place, provides for a universal range of securities issuance, including: senior and subordinated debt, straight and convertible preferred securities and equity. The relative strength of CoreStates' capital is reflected in the chart "Average Common Equity/Assets". Average Common Equity/Assets - ---------------------------- Plotting Points for Graph - ------------------------- (In percent)
Average Common Equity/Assets ----------------------- Montgomery CoreStates Securities* ----------- ------------ 1994 8.20% 5.30% 1993 7.94 6.87 1992 7.08 6.54 1991 6.50 6.09 1990 6.69 5.77
* The Montgomery Securities Regional Bank Composite At December 31, 1994, common shareholders' equity totaled $2,350 million or 8.0% of total assets, compared with $2,368 million or 8.3% at year-end 1993. The year-end 1994 equity to assets ratio for the Montgomery Securities Regional Bank Composite was 7.1%. CoreStates has achieved steady internal capital generation throughout the past five years. Common shareholders' equity increased over the five years ended December 31, 1994 at a compound annual growth rate of 4.4%, while dividends paid increased at a compound annual growth rate of 7.4%. During 1994, CoreStates increased its quarterly dividend by 13.3% to $.34 per share beginning January 1995. CoreStates' dividend on its common stock was $1.24 per share in 1994, $1.14 per share in 1993 and $1.02 per share in 1992. The common dividend payout ratio was 42.5% for 1994 excluding merger-related charges, compared to 45.8% for 1993. In the fourth quarter of 1994, CoreStates called for redemption all of its $42 million of convertible subordinated debentures. As a result of the call, approximately .9 million common shares were issued on conversion of $22 million of the debentures. The conversion and redemption of these debentures is expected to result in lower future financing costs and elimination of potential future dilution. 12 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED CAPITAL STRENGTH - CONTINUED As a result of the mergers with Constellation and Independence, both accounted for as a poolings of interests, CoreStates issued approximately 27.9 million new shares of common stock in exchange for the common stock of the acquired banks. During 1994, CoreStates repurchased approximately 8.6 million shares of its own common stock. About 8.0 million of these shares in the aggregate were reissued for the dividend reinvestment plan, stock-based benefit plans, redemption of convertible subordinated debentures and the purchase of Germantown. Approximately 1.0 million shares remained as treasury shares at December 31, 1994. CoreStates and its bank subsidiaries are subject to minimum risk-based and leverage capital guidelines issued by the Federal Reserve Board and Comptroller of the Currency. The measurement of risk-based capital takes into account the credit risk of both balance sheet assets and off-balance sheet exposures. These guidelines require minimum risk-based capital ratios of 4% for Tier 1 capital and 8% for total capital. In addition, a minimum leverage ratio of Tier 1 capital to quarterly average total assets of 3% is required for banking organizations that are rated as strong. CoreStates' risk-based and leverage capital ratios decreased slightly in 1994 as a consequence of acquisition related activities, although the ratios remained well above the regulatory minimums. The following table illustrates CoreStates' risk-based and leverage capital ratios at December 31, 1994 and 1993: RISK-BASED AND LEVERAGE CAPITAL RATIOS - ---------------------------------------- At December 31, - --------------- ($ in millions)
1994 1993 ------ ------ CAPITAL Tier 1 capital.......................... $ 2,129 $ 2,279 Tier 2 capital.......................... 935 1,002 Total qualifying capital................ 3,064 3,281 ASSETS Risk-adjusted assets.................... 24,645 23,863 Average assets- leverage capital basis................. 27,316 27,603 RATIOS Tier 1 capital ratio.................... 8.6% 9.5% Total capital ratio..................... 12.4 13.7 Tier 1 leverage ratio................... 7.8 8.3
Bank regulators apply substantially the same capital requirements to CoreStates' banking subsidiaries. A bank is considered "well capitalized", the highest regulatory category, if it has minimum Tier 1 and Total risk-based capital ratios of 6% and 10%, respectively, and a minimum Tier 1 leverage ratio of 5%. As illustrated in the following table, all of CoreStates' banking subsidiaries qualified as "well capitalized" at December 31, 1994. BANK REGULATORY CAPITAL RATIOS - ------------------------------ At December 31, 1994 - --------------------
Capital Ratios -------------------------- Tier 1 Total Leverage ------ ----- -------- CoreStates Bank, N.A.............. 8.3% 10.5% 7.6% New Jersey National Bank.......... 9.5 12.7 5.8 CoreStates Bank of Delaware, N.A.. 10.5 13.0 12.0
13 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED RISK MANAGEMENT As communicated in the third quarter of 1994, the risk management functions of CoreStates, including interest rate risk, credit risk, operating risk and other risk components of our businesses, were brought under the management umbrella of CoreStates' Chief Risk Policy Office. A Risk Policy Council was established to focus on risk strategy. This Council has designed a comprehensive program for integrated risk management which will begin to be implemented during 1995. This structure better supports management's goal of developing a comprehensive and all-inclusive risk profile for CoreStates which will enhance management's ability to make informed decisions about the direction and complexion of CoreStates' portfolio and to price equitably its products and services. The discussion of risk management is covered in the following sections on "CREDIT QUALITY" and "ASSET AND LIABILITY MANAGEMENT." CREDIT QUALITY CREDIT RISK MANAGEMENT The management of credit risk at CoreStates relies on maintaining a diversified loan portfolio, limiting exposures to a given industry or market segment, and on a well-established credit culture. Early identification and communication of deterioration/problems in the portfolio, early recognition of non-performing assets, maintaining reserves that are strong, and a credit advisory team process that provides all lenders access to the most senior and experienced credit officers in the organization, are key components of this credit culture. Underlying this credit culture is a tradition of extensive and ongoing credit training and comprehensive and well-communicated policies and procedures. In acquiring a company whose businesses include the extension of credit, it is a priority of CoreStates to extend this credit culture to the newly acquired institution. This is done by immediately placing highly experienced CoreStates lenders and/or credit officers into the acquired bank. These individuals teach CoreStates' credit policies, procedures and process and actively participate in the credit decision-making process at the acquired company. This extension of CoreStates' credit culture, coupled with an intensive due diligence process and early integration of the acquired bank's portfolio, ensures that CoreStates' credit quality standards continue to be maintained. During 1994, the portfolios of Constellation, Independence and Germantown were integrated into CoreStates through this approach. Maintaining CoreStates' asset quality standards is further supported by a comprehensive and independent assessment of credit quality and portfolio management by Credit Review, which reports to the Audit Committee of the Board of Directors. 14 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED CREDIT QUALITY - CONTINUED LOAN PORTFOLIO WHOLESALE LOANS - CoreStates has traditionally maintained limits on industry, market and borrower concentrations as a way to diversify and manage credit risk. Management's current policy is to limit industry concentrations to 50% of total equity and to limit market segment concentrations to 10% of total assets. CoreStates conservatively manages industry concentrations by applying these dollar limits to a family of industries that have common risk characteristics. This management process is reflected in the following chart, which illustrates each industry that exceeds 10% of total shareholders' equity. WHOLESALE LOANS BY INDUSTRY - --------------------------- At December 31, 1994 - -------------------- Plotting Points for a Graph - -----------------------------
Outstandings % of as a % Outstandings of equity non-performing ----------- ---------------- Communications............... 32.8% 0.2% Non-bank Finance............. 31.3% 3.8% Retail Trade................. 28.3% 1.7% Healthcare................... 20.4% 0.4% Depository Institutions...... 19.2% 0.1% Apparel...................... 16.2% 8.4% Trucking and Auto Leasing.... 15.3% 1.6% Real Estate Construction..... 14.1% 3.2% Chemical..................... 13.3% 0.1%
The following discussion highlights these portfolios: non-bank finance because it represents a large percentage of equity; the commercial finance portfolio at a CoreStates' non-bank subsidiary, Congress Financial Corporation ("Congress"), because of the continued growth in this portfolio; the credit card portfolio due to recent growth and anticipated future growth; and real estate loans, due to the overall size of the combined commercial and residential portfolios. 15 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED CREDIT QUALITY - CONTINUED NON-BANK FINANCE - This specialized lending is directed at non-bank providers of credit, including insurance, mortgage, mutual funds, and finance companies. There are opportunities for significant overall relationships with relatively large customers, and considerable business volume for CoreStates. Credit extension strategies for insurance firms aim at the initiation of larger relationships with extensive accompanying cash management activities. The customer base is typically large national firms providing life and/or property and casualty insurance, with regulation by both the state and the National Association of Insurance Commissioners. Although most relationships involve cash management operating services rather than credit, CoreStates also provides well- structured acquisition financing and lease financing. With respect to mortgage banking, CoreStates provides mortgage warehousing lines of credit to numerous customers throughout the east coast. CoreStates also supports large facilities for customers who use electronic payment services. For large, well-capitalized servicers, general corporate financing may also be provided. Due to rising interest rates during 1994, and a resultant industry- wide decline in refinancing activity, the mortgage banking segment of the portfolio declined to $266.7 million in outstandings from $565.3 million at year end 1993. Credit extension to mutual funds, which are regulated by the Securities and Exchange Commission, also strongly relates to cash management operating services. The rise in outstandings to $71.4 million, from $11.0 million at year-end 1993, was due to acquisition financing and liquidity lines. CoreStates' credit activities in the finance company industry are generally to small and medium sized consumer finance companies, and loans are usually secured by the customers' loan portfolio. The year-to-year increase in outstandings to finance companies was the result of both new customer relationships and growth in the existing customer base. The following table summarizes CoreStates' outstandings in the four non-bank finance industry segments discussed above at December 31, 1994. NON-BANK FINANCE PORTFOLIO - -------------------------- At December 31, - --------------- (in millions)
Insurance Mortgage Mutual Finance Companies Companies Funds Companies Total --------- --------- ------ --------- ------ 1994 - ---- Outstandings....................... $162.4 $266.7 $71.4 $235.4 $735.9 Non-performing..................... 2.1 25.9(a) 28.0 % of loans....................... 1.3% 11.0% 3.8% 1993 - ---- Outstandings....................... $169.7 $565.3 $11.0 $213.3 $959.3 Non-performing..................... .2 .2
- ------------------- (a) Represents one non-performing credit. 16 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED CREDIT QUALITY - CONTINUED COMMERCIAL FINANCE - Congress continued to enhance its position as a leader in providing asset-based financing in an increasingly competitive market. The loan portfolio reflects strong, geographically diverse growth of approximately 25% on a year-to-year basis. Credit quality exhibited consistent characteristics in keeping with Congress' historical trends. Congress' sustained growth is attributed to its ability to structure and syndicate large, complex transactions primarily collateralized by accounts receivable and inventory. COMMERCIAL FINANCE PORTFOLIO - ---------------------------- At December 31, - --------------- (in millions)
1994 1993 -------- -------- Outstandings.................. $1,778.7 $1,426.5 Non-performing................ 16.9 15.9 % of loans.................. .9% 1.1%
17 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED CREDIT QUALITY - CONTINUED CREDIT CARDS - Credit card outstandings grew 20% on average during 1994. Of the $209 million in growth, 46% was the result of a new pre-approved marketing technology. In 1994, credit card sales activities increased the number of accounts by 11%, and average balances per account by 15% from $1,695 per account to $1,955 per account. A new fee-based product, Commercial Card lines, was introduced in 1994 to participate in this growing market. CoreStates is pleased with the high early acceptance of this product in the marketplace. Most of the growth in 1994 outstandings was developed with risk-based scoring technology. CoreStates experienced a modest increase in the level of net credit losses to 2.3% of average outstandings in 1994 from 2.2% in 1993. Net credit losses continue to be below industry averages. During 1995, CoreStates will adjust the risk scoring criteria in further pre-approved campaigns in anticipation of a slowdown in the economy during 1996. CREDIT CARD PORTFOLIO - --------------------- At December 31, - --------------- (in millions)
1994 1993 -------- -------- Year-end outstandings.. $1,374.6 $1,179.0 Average outstandings... 1,277.0 1,068.0 Net charge-offs........ 29.3 23.6 % of average loans.... 2.3% 2.2%
REAL ESTATE LOANS - Although continuing to improve, the CoreStates regional real estate market continues to present a mixed picture. The residential market has achieved supply/demand balance; however, rising interest rates have had a negative impact on residential sales in the latter half of 1994. The commercial and industrial market remains fundamentally weak, with tenant lease renewals and downsizings continuing to create pressures. Total real estate related loans outstanding were $6,491 million at December 31, 1994, compared to $6,664 million at December 31, 1993. 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 $331 million or 1.6% of total loans at December 31, 1994. At December 31, 1994, 3.2% of CoreStates' construction and development loan portfolio was non-performing, compared to 1.9% for the remaining real estate loan portfolio. The table below summarizes CoreStates' real estate loans outstanding. 18 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED CREDIT QUALITY - CONTINUED REAL ESTATE LOANS - ----------------- At December 31, - --------------- (in millions)
Completed projects/ Total Construction/ Investment real development properties(a) Residential Other(b) estate ------------- ---------- ----------- ------ ------ 1994 - ----- Year-end outstandings....... $331 $1,021 $3,180 $1,959 $6,491 Average loans outstanding 341 1,195 2,912 1,817 6,265 Non-performing loans........ 11 33 37 48 129 % of year-end loans....... 3.2% 3.2% 1.2% 2.5% 2.0% Net charge-offs . 10 32 25 46 113 % of average loans........ 2.9% 2.7% .9% 2.5% 1.8% 1993 - ----- Year-end outstandings....... $367 $1,321 $3,121 $1,855 $6,664 Average loans outstanding 421 1,351 2,867 2,156 6,795 Non-performing loans........ 20 47 43 68 178 % of year-end loans....... 5.4% 3.6% 1.4% 3.7% 2.7% Net charge-offs............. 8 13 6 24 51 % of average loans........ 1.9% 1.0% .2% 1.1% .8%
- ------------- (a) Completed projects/investment properties included $299 million at December 31, 1994 related to loans on completed projects for which net rental receipts are not sufficient to cover 115% of debt service. (b) Principally commercial loans secured by owner-occupied real estate. The largest category within real estate loans is residential mortgages which include home equity loans. Residential mortgages were $3,180 million or 15.5% of total loans at December 31, 1994. Loans in the Other Real Estate Loans category, primarily commercial loans collateralized by owner-occupied real estate, accounted for 30.2% of total real estate loans and 9.5% of total loans. 19 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED CREDIT QUALITY - CONTINUED Another key to risk management in this portfolio is diversification by project type. The following table illustrates CoreStates' construction and development portfolio and completed projects/investment properties portfolio by project type. CONSTRUCTION AND DEVELOPMENT AND COMPLETED PROJECTS/INVESTMENT PROPERTIES - ------------------------------------------------------------------------- LOANS OUTSTANDING BY PROJECT TYPE - --------------------------------- At December 31, (in millions)
Construction/ Completed projects/ development investment properties Total --------------------------- ------------------------------ ------------------------ Loans % Non- Loans % Non- Loans % Non- outstanding performing outstanding performing outstanding performing ----------- ------------ ----------- ----------- ------------ --------- 1994 - ----- Residential development.......... $197.4 3.7% $ 197.4 3.7% Commercial: Land and site development. 58.8 2.0 58.8 2.0 Apartments....................... .9 $ 111.8 1.8% 112.7 1.8 Light industrial................. 11.2 18.8 149.2 6.8 160.4 7.6 Hotels........................... 25.2 9.1 25.2 9.1 Office........................... 6.4 352.3 2.4 358.7 2.3 Shopping centers................. 1.7 242.3 .9 244.0 .9 Miscellaneous.................... 55.0 .4 140.0 5.8 195.0 4.3 ---- -------- ----- Total commercial............... 134.0 2.5 1,020.8 3.2 1,154.8 3.1 ------ ------- -------- Total........................ $331.4 3.2% $1,020.8 3.2% $1,352.2 3.2% ====== === ======== === ======== === 1993 - ---- Residential development............ $188.3 7.5% $ 188.3 7.5% Commercial: Land and site development. 65.9 5.3 65.9 5.3 Apartments....................... $ 128.9 1.7% 128.9 1.7 Light industrial................. 29.9 3.3 165.6 2.7 195.5 2.8 Hotels........................... 21.2 10.4 21.2 10.4 Office........................... 19.0 5.8 414.4 6.5 433.4 6.5 Shopping centers................. 10.8 1.9 202.6 1.7 213.4 1.7 Miscellaneous.................... 53.4 .2 388.4 1.9 441.8 1.7 ------ -------- -------- Total commercial............... 179.0 3.2 1,321.1 3.6 1,500.1 3.5 ------ -------- -------- Total........................ $367.3 5.4% $1,321.1 3.6% $1,688.4 4.0% ====== ==== ======== ==== ======== ====
Geographically, $1,270.4 million or 94% of CoreStates' construction/development loans and completed projects/investment properties are financing real estate in CoreStates' market area of Pennsylvania, New Jersey and Maryland/Delaware. 20 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED CREDIT QUALITY - CONTINUED ALLOWANCE FOR LOAN LOSSES In CoreStates' methodology for determining appropriate levels of allowance for loan losses ("ALLL"), each subsidiary which extends credit maintains an allowance sufficient to absorb the anticipated loss inherent in its credit portfolio. Factors included in management's determination of an adequate level of ALLL are a statistical analysis of historical loss levels throughout an economic cycle and one year of projected charge-offs, establishing a minimum level below which a bank's ALLL is considered inadequate and a maximum level above which is considered inappropriate. A quarterly evaluation of loss potential on specific credits, products, industries, portfolios and markets as well as indicators for loan growth, the economic environment and concentrations assist in validating the position of the ALLL within those boundaries. Management's evaluation of the adequacy of the ALLL is independently tested by Credit Review. Prompt recognition of problem situations and prompt write-downs of these assets to net realizable value is an important source of protection against problems in the portfolio. Accordingly, over an economic cycle, CoreStates has experienced relatively high levels of recoveries of prior charge- offs compared to other banking companies. In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("FAS 114"). FAS 114 addresses accounting for impairment of certain loans and requires that impaired loans within the scope of FAS 114 be measured based on the present value of expected cash flows discounted at the loan's effective interest rate, or be measured at the loan's observable market price or the fair value of its collateral. FAS 114 is effective beginning in 1995. The adoption of FAS 114 is not expected to have a material impact on CoreStates' level of allowance for loan losses. The year-end 1994 allowance for loan losses totaled $500.6 million and represented 2.4% of loans. This compares with a loan loss allowance at year-end 1993 of $450.8 million, or 2.3% of loans. The December 31, 1994 and 1993 Montgomery Securities Regional Bank Composites for allowance for loan losses as a percentage of loans were 2.2% and 2.4%, respectively. The allowance for loan losses at year-end 1994 was 203.3% of non-performing loans, an increase over the year-end 1993 coverage ratio of 148.7% and a reflection of the lower level of non-performing loans at year-end 1994. CoreStates' provision for loan losses in 1994, excluding $145.0 million of Constellation and Independence merger-related provisions for loan losses, was $101.9 million, a decrease of $19.3 million from the $121.2 million provided in 1993. Net charge-offs in 1994, excluding $103.1 million related to problem assets acquired with Constellation, were $117.8 million or .6% of average loans. This compares to $115.0 million, or .6% of net charge-offs in 1993. During 1994, Constellation and Independence recorded provisions for loan losses of $120.0 million and $25.0 million, respectively, in connection with a change in strategy related to problem assets, and to conform their consumer lending charge-off policies to those of CoreStates. 21 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED CREDIT QUALITY - CONTINUED The following table reflects the distribution of 1994 and 1993 net charge- offs by loan type: DISTRIBUTION OF NET CHARGE-OFFS - --------------------------------- For the Year Ended December 31, - --------------------------------- (in millions)
1994 1993 ----------------------------- ----------------------------- % 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............... $ 75.1 .9% 34.0% $ 46.6 .6% 40.5% Real estate: Construction................. 9.7 2.9 4.4 8.1 1.9 7.0 Other........................ 102.9 1.7 46.6 42.6 .7 37.0 Consumer: Credit card.................. 29.3 2.3 13.3 23.6 2.2 20.5 Installment.................. 5.8 .4 2.6 5.7 .4 5.0 Other (a)...................... .7 - .3 1.0 .1 .9 ------ ----- ------ ----- Total domestic............. 223.5 1.2 101.2 127.6 .7 110.9 ------ --- ----- ------ ---- ----- Foreign (b)..................... (2.6) (.4) (1.2) (12.6) (2.3) (10.9) ------ ----- ------ ----- Total net charge-offs....... $220.9 1.1% 100.0% $115.0 .6% 100.0% ====== === ===== ====== ==== =====
- ----------------------------- (a) Includes loans to financial institutions and lease financing. (b) Reflects net recoveries on Less Developed Countries (LDC) assets of $2.6 million in 1994 and $12.6 million in 1993. 22 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED CREDIT QUALITY - CONTINUED NON-PERFORMING ASSETS Non-performing assets at year-end 1994 were $310.9 million, or 1.5% of total loans plus other real estate owned ("OREO") and 1.1% of total assets. These levels compared to total non-performing assets at year-end 1993 of $438.7 million, 2.2% of total loans plus OREO and 1.5% of total assets. Management expects a continuing decline in non-performing asset levels during 1995. At year-end 1994, total non-performing assets were comprised of $244.6 million of non-accrual loans, $1.6 million of renegotiated loans and $64.7 million of OREO. The $127.8 million, or 29.1%, decline in total non-performing assets as compared to year-end 1993 was principally experienced in CoreStates' two largest portfolios, the commercial loan portfolio, declining $35.5 million, or 28.9%, and the real estate portfolio which declined $119.4 million, or 38.1%. Much of the decline in real estate non-performing assets resulted from a $28 million addition to the Constellation OREO reserve in the first quarter of 1994 and the subsequent bulk sale of problem loans and OREO acquired with Constellation. During 1994, loans aggregating $393 million were added to non- performing status, payments of $226 million against non-performing assets were received, loans totaling $53 million were returned to full accrual status and $242 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 changes in non- performing assets for 1994, 1993 and 1992: ANNUAL CHANGES IN NON-PERFORMING ASSETS - ------------------------------------------ (in millions)
1994 1993 1992 ---- ---- ---- Beginning balance.......... $ 439 $ 672 $ 802 Additions.................. 393 247 405 Return to accrual.......... (53) (83) (83) Payments................... (226) (236) (277) Charge-offs................ (242) (161) (175) ----- ----- ----- Net change................. (128) (233) (130) ----- ----- ----- Ending balance............. $ 311 $ 439 $ 672 ===== ===== =====
23 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED CREDIT QUALITY - CONTINUED The following table reflects the distribution of non-performing assets by loan type at December 31, 1994 and 1993:
DISTRIBUTION OF NON-PERFORMING ASSETS - ------------------------------------- At December 31, - --------------- (in millions) 1994 1993 --------------------------------- ---------------------------------- % of % Total % of % Total Non- Loan non- Non- Loan non- Loan type performing type performing performing type performing - --------- ---------- ---- ---------- ---------- ---- ---------- Domestic: Commercial and industrial: Highly leveraged transactions ("HLTs"). $ 3.0 .6% 1.0% $ 5.1 1.1% 1.2% Other.................... 84.2 1.0 27.1 117.6 1.5 26.8 Real estate: Construction............. 10.7 3.2 3.4 19.7 5.4 4.5 Other loans.............. 118.2 1.9 38.0 157.8 2.5 36.0 OREO..................... 64.7 20.8 135.5 30.9 Consumer................... .7 .2 1.0 .2 Other domestic loans(a).... 29.2 2.1 9.4 1.8 .1 .4 ------ ----- ------ ----- Total domestic........... 310.7 1.6 99.9 438.5 2.3 100.0 Foreign loans............... .2 .1 .2 ------ ----- ------ ----- Total non-performing assets(b)............... $310.9 1.5% 100.0% $438.7 2.2% 100.0% ====== ==== ===== ====== === ===== % Total assets........... 1.1% 1.5% ====== ======
________________________________________________________________________________ (a) Includes loans to financial institutions and lease financing. (b) The table does not include loans of $53 million and $54 million at December 31, 1994 and 1993, respectively, that are past due 90 days or more as to principal or interest, but which remain on full accrual since such loans are well secured and in the process of collection. Non-performing assets at year-end 1993 declined $232.9 million, or 34.7%, as compared to year-end 1992. The 1993 decline also reflected decreases in non- performing assets in the commercial loan portfolio, which declined $56.2 million, or 31.4%, and in the real estate portfolio which declined $170.8 million or 35.3%. 24 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED CREDIT QUALITY - CONTINUED The following table reflects the distribution of non-accrual loans by their respective levels of performance as defined below: Substantial performance - No loss is anticipated on the present book balance and the borrower has paid at least 85% of contractual obligations over the prior six months. Limited performance - Borrower has paid between 25% and 85% of contractual obligations over the prior six months. No performance - Borrower has paid less than 25% of contractual obligations over the prior six months. Full payment is doubtful - Loan is contractually current, however, there is some doubt as to full collectability. Other - Loan is contractually current, however, borrower is in a specified period of demonstrating performance or loan has a prior charge-off.
PERFORMANCE LEVELS OF NON-ACCRUAL LOANS - --------------------------------------------- At December 31, 1994 - --------------------------------- (in millions) Accumulated net charge- offs as % of Book Contractual contractual balance(a) balance balance (a) ---------- ----------- ------------ Contractually past due with: Substantial performance........ $ 12.4 $ 16.7 25.7% Limited performance............ 21.3 31.3 31.9 No performance................. 148.9 221.8 32.9 ------ ------ 182.6 269.8 32.3 ------ ------ Contractually current, however: Full payment is doubtful....... 33.9 63.3 46.5 Other.......................... 28.1 38.0 26.2 ------ ------ 62.0 101.3 38.8 ------ ------ Total non-accrual loans...... $244.6 $371.1 34.1% ====== ====== ====
__________________________ (a) Book balance reflects application of $8.6 million of cash basis interest received which was applied to principal. The accumulated net charge-off percentage also includes the impact of interest applied to principal. 25 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED CREDIT QUALITY - CONTINUED The following OREO portfolio table illustrates the relationship of original contractual balances to accumulated net charge-offs. Accumulated net charge- offs include charge-offs taken against the allowance for loan losses while the asset was classified as a loan and write-downs charged directly to the income statement subsequent to a loan's transfer to OREO. During 1994 and 1993, $44.3 million and $26.6 million, respectively, were charged to the income statement for OREO write-downs. The charge for 1994 included the $28.0 million addition to Constellation's OREO reserve.
OTHER REAL ESTATE OWNED - ----------------------- At December 31, 1994 - -------------------- (in millions) Accumulated net charge- offs as % of Book Contractual contractual balance balance balance ------- ----------- ----------- Construction and development.. $14.0 $ 68.4 79.5% Completed projects............ 27.4 90.2 69.6 ----- ------ Total(a)..................... $41.4 $158.6 73.9% ===== ====== ====
______________________ (a) Does not include $11.6 million of OREO from the residential mortgage portfolio or $11.7 million in OREO from other commercial real estate loans, primarily the owner occupied portfolio. The two preceding charts reflect the results of CoreStates' charge-off practices. At year-end 1994, 34.1% of non-accrual loans had been charged off, while 73.9% of OREO assets' original contractual balances had been charged off. These levels of markdowns reflect CoreStates' approach in handling problem assets. 26 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED ASSET AND LIABILITY MANAGEMENT Asset and liability management is the process of directing and coordinating activities that effectively control liquidity and interest rate risk. CoreStates' philosophy includes a disciplined approach to asset and liability management which calls for minimizing interest rate risk, maintaining a strong balance sheet and a focus on achieving appropriate product spreads. This disciplined approach contributes to the stability and strength of CoreStates' net interest margin. The sharply rising rate environment of 1994 has highlighted the value of CoreStates' strong interest rate risk management approach. CoreStates manages its balance sheet to achieve maximum shareholder value within the constraints of conservative interest rate risk policies, 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. CoreStates' management emphasizes stable net interest income throughout rate cycles, with the result that intermediate and longer term considerations take precedence over short-term profitability. This commitment is evidenced by the consistency of CoreStates' net interest margin over time. During the past five years, a period of significant changes in economic conditions, competition and interest rates, CoreStates' net interest margin has remained consistently above industry averages as illustrated in the chart "Net Interest Margin". During that time interest rates, as measured by the monthly average Federal Funds Rate, declined 525 basis points from 8.25% in early 1990 to 3.00% at the end of 1992 then remained flat during 1993 before rising 250 basis points during 1994 to end the year at 5.50%. Net Interest Margin - ------------------- Plotting Points for a Graph - --------------------------- (In percent)
Net interest margin ------------------------ Montgomery CoreStates Securities* ---------- ----------- 1994 5.80% 4.52% 1993 5.59 4.75 1992 5.32 4.75 1991 5.16 4.38 1990 5.08 4.22
* The Montgomery Securities Regional Bank Composite CoreStates' net interest margin reflects relationship business activities rather than interest rate risk taking. The strength of CoreStates' net interest margin comes from the combination of healthy spreads on both loans and deposits and a balance sheet which has a relatively high proportion of loans and a large base of non-interest bearing funds. (See Charts "Earning Asset Mix" and "Funding Mix" on pages 35 and 36.) In addition to the wide spread achieved in recent years between the prime rate and other market rates, areas such as credit card, middle market lending, specialized lending and commercial finance at Congress produce attractive lending spreads. CoreStates' cash management business provides a significant source of non-interest bearing funds, while the retail franchise includes a substantial base of low cost funding. Emphasis on profitable relationship business is supported by CoreStates' management practices. CoreStates uses a matched maturity funds transfer pricing system which focuses business managers on profitability, appropriate compensation for embedded risks and overall pricing discipline. In addition to providing a pricing tool, transfer pricing supports performance measurement and analysis of net interest margin components. 27 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED ASSET AND LIABILITY MANAGEMENT - continued INTEREST RATE RISK MANAGEMENT Interest rate risk refers to potential changes in current and future net interest income resulting from changes in interest rates, product spreads and mismatches in the repricing between interest rate sensitive assets and liabilities. At CoreStates, measurement of interest rate risk focuses on potential changes in net interest income identified through monthly computer simulations against both rising and falling interest rates. Longer term repricing risks are measured 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. Changes are measured relative to a base forecast in which rates remain constant at current levels. Based on historical data, 95% of the time rates have moved less than 200 basis points over a six-month period. Included in these simulations are all contractual repricing risks, the impact of prepayments in the loan and securities portfolios, potential spread and volume changes on consumer deposits and fluctuations in the value of non-interest bearing funding sources. CoreStates believes that the spread between the prime rate and financial market rates is a function of both interest rates and credit conditions. While changes in the prime spread are included in simulations, only that portion believed to be interest rate related is subject to the policy guidelines. As a matter of practice, positions are generally managed to produce significantly lower volatility than policy guidelines would permit. Current simulations using a 200 basis point change in short term interest rates show that CoreStates' net interest income volatility over the next twelve months would be relatively neutral or less than 1% of shareholders' equity. That level is representative of simulations performed throughout the year. Recognizing that simulation is a very assumption driven process, management reviews results by category of risk as well as by product and tests the sensitivity of the results to key assumptions. There are two main elements to CoreStates' interest rate risk. The first is the broad mismatch between the rate sensitivity of the assets and liabilities in its core businesses, and the second is the spread risk between the rates on those products and financial market rates. CoreStates' core wholesale and retail businesses generate a large portfolio of prime and other short-term rate related assets. Characteristic of a regional banking company, CoreStates also has a significant funding base of consumer deposits with indefinite maturities and non-contractual rates such as savings, NOW and money market accounts. The repricing characteristics of those deposits tend to be longer term; traditionally, pricing has been relatively stable for long periods and pricing changes lag changes in financial market rates. While this mix of relationship assets and liabilities provides excellent liquidity, it results in considerable interest rate risk. This inherent mismatch (the "relationship gap") of longer term fixed-rate liabilities funding short-term rate sensitive assets generates significant exposure to declining interest rates if not hedged. CoreStates hedges this relationship gap through the use of both on and off- balance sheet discretionary assets and liabilities. The typical offsetting position is created by purchasing fixed-rate investment securities funded by short-term liabilities, or by entering into interest rate swaps in which CoreStates receives a fixed rate and pays a variable rate. The following excerpts from the Interest Sensitivity Analysis shown on page 89 demonstrates the basic mismatch of the relationship portfolios and the offsetting discretionary position. In keeping with CoreStates' interest rate risk discipline, the combined position is relatively balanced so that there is minimal impact on earnings from an interest rate move in either direction. 28 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, 1994 - -------------------- (in millions) Months Years --------------------------- -------------------------- 0-3 4-6 7-12 1-2 2-5 over 5 Total ------- ------- ------- ------- ------- ------ ------- RELATIONSHIP PORTFOLIOS: Total loans................ $13,847 $ 1,554 $ 1,176 $ 1,420 $ 2,061 $ 468 $20,526 Total consumer deposits, net non- interest funding.......... 6,183 1,811 2,372 3,183 3,319 4,308 21,176 Adjustments................ 493 (881) (492) (642) (1,934) 3,456 - ------- ------- ------- ------- ------- ------ ------- Relationship gap......... 8,157 (1,138) (1,688) (2,405) (3,192) (384) (650) ------- ------- ------- ------- ------- ------ ------- DISCRETIONARY PORTFOLIOS: Assets..................... 3,444 1,550 1,861 2,740 3,348 1,184 14,127 Liabilities................ 11,479 541 189 362 149 757 13,477 ------- ------- ------- ------- ------- ------ ------- Discretionary gap........ (8,035) 1,009 1,672 2,378 3,199 427 650 ------- ------- ------- ------- ------- ------ ------- Combined gap............. $ 122 $ (129) $ (16) $ (27) $ 7 $ 43 $ -0- ======= ======= ======= ======= ======= ====== ======= Cumulative gap........... $ 122 $ (7) $ (23) $ (50) $ (43) $ -0- $ -0- ======= ======= ======= ======= ======= ====== =======
While CoreStates maintains a balanced position, the recently acquired Germantown generally carried a negative gap comprised of mortgages and mortgage- backed securities funded by shorter term deposits. In anticipation of the Germantown acquisition, CoreStates adjusted its longer term gap position early in 1994 to mitigate the exposure to higher rates inherent on Germantown's balance sheet. The second major element of CoreStates' interest rate risk is the spread risk between product rates and financial market rates. These spreads are a function of competitive and other factors as well as interest rate levels. CoreStates simulates the behavior of individual products under various rate scenarios to determine an appropriate investment or funding strategy to provide a stable spread. Consumer deposit spreads are a key element of net interest income. As interest rates rose in 1994, changes in the pricing of consumer deposit products lagged changes in financial market rates resulting in wider spreads. The prior year's trend of deposit balances shifting from certificates to more liquid deposit products began to reverse. Looking ahead, the spread on total consumer deposits is subject to internal shifting to products with narrower spreads such as certificates, balance runoff and potential pricing pressure on liquid deposit accounts. Simulations include assumptions regarding runoff, shifting across products as well as upward repricing of savings type accounts in rising rate scenarios. Narrower spreads are generally assumed in falling rate environments due to limited repricing opportunities. Those assumptions are developed in conjunction with the business managers and, while management believes its current simulation assumptions are realistic, it recognizes that this is an area of potential volatility. The spread between the prime rate and short-term market rates is also an important component of net interest income. That spread has been very wide over the last several years compared to historic levels. While the risk of a narrowing of the prime spread is not unique to CoreStates, a contraction in that spread would reduce net interest income. CoreStates has approximately $9.0 billion in loans subject to changes in prime, including the credit card portfolio. 29 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED ASSET AND LIABILITY MANAGEMENT - continued OFF-BALANCE SHEET INSTRUMENTS AND DERIVATIVE ACTIVITIES CoreStates uses off-balance sheet derivative instruments primarily to manage CoreStates' interest rate risk. CoreStates believes that interest rate risk management must be balanced with the management of liquidity and capital. Therefore, CoreStates uses off-balance sheet instruments to modify its rate sensitivity and consequently, avoids the unnecessary leverage and liquidity impairment which would result from on-balance sheet alternatives. CoreStates also uses interest rate contracts to provide risk management services for its customers. CoreStates does not use off-balance sheet derivative instruments for speculative investment. INTEREST RATE RISK RELATED DERIVATIVE ACTIVITIES - CoreStates' use of derivatives for interest rate risk management falls into three categories: interest sensitivity adjustments, spread protection and the hedging of anticipated asset sales. The following schedule reflects by interest rate risk management category, the outstanding derivative positions as of December 31, 1994, the major balance sheet category to which they relate, and the associated unrealized gains/losses: OUTSTANDING INTEREST RATE RISK RELATED DERIVATIVES - -------------------------------------------------- At December 31, 1994 - -------------------- (in millions)
Interest Interest Interest rate rate rate Other swaps futures caps derivatives Total ----------- -------- -------- ----------- ------- Interest Sensitivity Adjustment: Assets: Notional amount.................... $2,920 $1,043 $ 51 $125 $ 4,139 Unrealized gains................... 5 1 6 Unrealized losses.................. (70) (1) (71) Deposits and other borrowings: Notional amount..................... 3,714 3,714 Unrealized gains.................... 4 4 Unrealized losses................... (96) (96) Long-term debt: Notional amount..................... 788 25 813 Unrealized gains.................... 3 3 Unrealized losses................... (57) (1) (58) Spread Protection: Assets: Notional amount.................... 677 677 Unrealized gains................... 4 4 Unrealized losses.................. (9) (9) Deposits and other borrowings: Notional amount..................... 300 300 Unrealized gains.................... 10 10 Unrealized losses................... Anticipated Asset Sales: Notional amount..................... 428 170 598 Unrealized gains 1 1 2 Unrealized losses................... Total: Notional amount..................... $7,850 $1,043 $1,053 $295 $10,241 ====== ====== ====== ==== ======= Unrealized gains.................... $ 13 $ - $ 15 $ 1 $ 29 ====== ====== ====== ==== ======= Unrealized losses................... $ (223) $ (1) $ (10) $ - $ (234) ====== ====== ====== ==== ======= Net unrealized gains (losses) $ (210) $ (1) $ 5 $ 1 $ (205) ====== ====== ====== ==== =======
30 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED ASSET AND LIABILITY MANAGEMENT - continued Although the value of the various derivative instruments will change with interest rates, CoreStates does not consider changes in individual portfolio values to be significant given that the portfolios are used to offset specific risks. As of December 31, 1994, CoreStates off-balance sheet portfolios do not include any instruments which carry a leveraged exposure to either rising or falling rates. Interest sensitivity adjustments account for the majority of CoreStates' derivative activities. CoreStates has a naturally asset sensitive balance sheet as a result of its basic loan and deposit businesses. Commercial and consumer loan activities tend to have short-term repricing characteristics versus the longer term repricing nature of CoreStates' funding sources. These relationship portfolios have a positive effect on earnings in a rising rate environment and a negative effect in a falling rate environment. Therefore, CoreStates uses fixed rate assets or off-balance sheet instruments with characteristics similar to fixed rate assets to offset this risk. When off-balance sheet instruments are used, cash balances are invested in shorter time periods and interest rate swaps or other derivatives are used to "fix" the rate for longer terms similar to those of CoreStates' liabilities. By using swaps and futures in this manner, leverage is reduced and liquidity is enhanced. If derivative instruments were not used, CoreStates would invest in longer term assets based on its disciplined interest rate risk management practice of strict matching of asset and liability terms. Therefore, the impact of derivatives on pre-tax income is confined to the spread between the derivative instrument and other instruments of similar terms. Management estimates that this spread is not material relative to pre- tax income. For accounting purposes, the income effects of futures or swaps is associated with either the asset or the liability contributing to the mismatch. When CoreStates is adjusting the interest sensitivity of an asset with interest rate swaps or futures contracts, it is generally to lengthen the interest rate sensitivity of short-term assets. Conversely, when they are associated with deposits and other borrowings or long-term debt, it is generally to shorten the repricing characteristics of longer term liabilities. Interest rate swaps are agreements between two parties to exchange interest cash flows. Generally, one party receives a fixed rate and pays a variable rate, while the counterparty pays the fixed rate and receives the variable rate. As of December 31, 1994, the rates CoreStates has contracted to receive are fixed for longer time periods than the rates CoreStates has contracted to pay. Therefore, if interest rates fall, this portfolio will provide higher interest income, offsetting a decline in interest income in relationship portfolios; conversely if rates rise, the swap portfolio will produce less interest income which will be offset by increased interest income in the relationship portfolios. CoreStates also uses interest rate futures in a similar manner. While swaps are used in both short and long term maturities, futures are used primarily to extend the rate sensitivity of short-term assets to periods less than one year. CoreStates' use of financial futures is largely concentrated in Eurodollar and LIBOR contracts. Given the direction of its natural interest sensitivity, CoreStates has not historically paid fixed rates on interest rate swaps or used off-balance sheet instruments to extend its liabilities. However, its current position includes fixed rate pay positions acquired through mergers which relate to specific assets and liabilities also acquired. 31 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED ASSET AND LIABILITY MANAGEMENT - continued CoreStates also uses derivative instruments to protect spreads on certain balance sheet products. CoreStates' loan portfolio includes adjustable rate mortgages which carry interest rate caps limiting the amount of rate increase per year as well as over the life of the mortgage. As interest rates rise and funding costs increase, the spread on that portfolio will compress. CoreStates holds $377 million of interest rate caps which offset that risk by limiting the potential increase in funding costs. CoreStates has sold $300 million of interest rate caps indexed to prime rate in combination with the purchase of an identical amount of caps indexed to LIBOR; this combination reduces the risk of a narrowing spread on prime rate indexed assets in rising rate environments. The third category of derivative activity is the hedging of anticipated asset sales. As fixed rate assets are accumulated for future sale, CoreStates is exposed to a decline in sale price due to rising interest rates. At December 31, 1994, CoreStates held $585 million in fixed-rate pay swaps and forward rate locks to hedge a portion of the residential mortgage portfolio. This included $306 million of swaps which will amortize with a reference portfolio of mortgage-backed securities. CoreStates anticipates sale of a portion of the mortgage portfolio in the second quarter of 1995. The interest rate swaps, which are intended to be terminated as the mortgage sale is completed, will increase in value if rates rise offsetting any loss in value on the mortgage portfolio. CoreStates securitizes and sells its longer term fixed-rate home equity loans and fixed-rate mortgages on an ongoing basis. Home equity loans are held for several months prior to sale while sufficient volume for securitization is accumulated. Forward rate locks are used to hedge rate changes during that warehouse period. Options on mortgage-backed securities as well as both mandatory and optional forward sale commitments are used to hedge the mortgage pipeline. The repricing schedule below summarizes the notional amount and associated interest rate of CoreStates' interest rate swaps categorized by whether CoreStates receives or pays the rate shown. The swaps are stratified by repricing date or maturity depending on whether the payments are floating or fixed, respectively. Floating rates included in the repricing schedule are based on the rates in effect on December 31, 1994. The amount recorded in net interest income related to interest rate swaps was $82.3 million in 1994 and $116.2 million in 1993. REPRICING SCHEDULE OF INTEREST RATE SWAPS - ----------------------------------------- At December 31, 1994 - -------------------- (in millions)
Years ----------------------------------------------------------- 0-1 1-2 2-3 3-4 4-5 over 5 Total --- --- --- --- --- ------ ------ Receive Fixed/Pay Floating Receive Notional........... $1,411 $2,153 $ 767 $ 672 $ 979 $ 975 $6,957 Rate............... 6.30% 6.95% 6.58% 6.57% 7.04% 6.92% 6.75% Pay Notional........... $6,957 $6,957 Rate............... 6.16% 6.16% Pay Fixed/Receive Floating(a) Pay Notional........... $ 346 $ 30 $ 40 $ 37 $ 90 $ 543 Rate............... 7.79% 8.78% 8.33% 8.09% 8.42% 8.01% Receive Notional........... $ 543 $ 543 Rate............... 5.49% 5.49% Receive Floating/Pay Floating (Basis Swaps) Notional........... $ 90 $ 90 Receive Rate............... 4.96% 4.96% Pay Rate............... 6.23% 6.23% Receive Fixed/Pay Floating(b) (Forward Start) Receive Notional........... $ 205 $ 30 $ 25 $ 260 Rate............... 6.32% 6.38% 6.37% 6.33% Start Date Notional........... $ 260 $ 260
_________________________________________ (a) Includes $306 million swaps which CoreStates has agreed with counterparty to terminate in 1995. (b) Pay rate will be determined on forward start date. 32 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED ASSET AND LIABILITY MANAGEMENT - continued Credit risk exists in a derivative transaction to the extent that there is a favorable move in interest rates and the counterparty fails to perform. The current credit exposure in a derivative transaction is the estimated cost to replace the transaction at current market rates, while potential exposure is the estimated cost to replace the transaction at future interest rates. CoreStates monitors both the current and potential risk. CoreStates evaluates the credit worthiness of all off-balance sheet counterparties using the same standards applied in any other loan or credit transaction. In addition, CoreStates requires collateral from counterparties when the risk exceeds an acceptable threshold. Collateral agreements are determined based on the quality of individual counterparties. As of December 31, 1994, the current cost to replace CoreStates' derivatives portfolio was $29.3 million. This assumes that only counterparties for whom it would be favorable to default would do so. The following schedule illustrates CoreStates' interest rate risk related derivative activity during 1994: ACTIVITY IN DERIVATIVES PRODUCTS - -------------------------------- Year Ended December 31, 1994 - ---------------------------- (in millions)
Interest Interest Interest rate rate rate Other Notional Amounts swaps futures caps derivatives Total - ---------------- -------- -------- -------- ----------- ------- As of December 31, 1993........... $4,125 $ 926 $ 701 $ 39 $ 5,791 Additions......................... 4,477 8,420 476 976 14,349 Terminated contracts(a)........... (8,303) (8,303) Maturities/....................... amortization.................... (752) (124) (720) (1,596) ------- ------ ------ ------ ------- As of December 31, 1994........... $7,850 $1,043 $1,053 $ 295 $10,241 ======= ====== ====== ====== =======
- --------------------------------------- (a) As of December 31, 1994, CoreStates had no material deferred gains or losses related to terminated derivative contracts. The notional amount of CoreStates' interest rate swaps increased $3.7 billion versus December 31, 1993. This increase offsets increases in fixed-rate deposits and replaces the fixed-rate sensitivity lost through the sale and runoff of investment securities. Swaps were also used to restructure the interest sensitivity positions of acquired institutions and to hedge expected asset sales. The interest rate cap activity in 1994 relates to hedging the adjustable rate mortgage portfolios acquired with Constellation and Germantown. CUSTOMER RELATED DERIVATIVE ACTIVITIES - CoreStates also engages in derivative market activities to provide risk management services for its customers. These services include interest rate swaps, caps, and floors. CoreStates offsets protection sold to customers through purchases of similar protection. Customer related derivative activity is marked to market. The following schedule details the outstanding notional amounts of customer related derivative transactions as of December 31, 1994. CUSTOMER RELATED DERIVATIVES - ---------------------------- At December 31, 1994 - -------------------- (in millions) Interest Rate Swaps:
Notional Net gain amount (loss)(a) -------- --------- CoreStates receives fixed............. $ 192 $ (4) CoreStates pays fixed................. 192 4 Interest Rate Caps/Floors: Sold.................................. 424 (5) Purchased............................. 424 5 Foreign exchange contracts.............. 1,817 2 ------ ---- Total Customer Related Derivatives...... $3,049 $ 2 ====== ====
- ----------------- (a) Average net gain (loss) during 1994 was substantially the same as the net gain (loss) at December 31, 1994. The current replacement cost for the customer related derivatives portfolio was $11.2 million at December 31, 1994. This assumes that only counterparties for whom it would be favorable to default would do so. 33 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED ASSET AND LIABILITY MANAGEMENT - continued LIQUIDITY Liquidity management allows a financial institution to meet potential cash needs at a reasonable price under various operating conditions. Liquidity comes from a variety of sources: the maturing of short-term assets, readily marketable unpledged securities, and the ability to attract new funds. The ability to securitize or sell other assets, such as loans, also enhances liquidity, as does the structure and stability of existing funding sources. It is CoreStates' practice to maintain a high degree of liquidity through a strong funding base of core deposits combined with modest and diversified use of market sources and relatively short-term maturities of discretionary asset portfolios. CoreStates maintains sufficient liquidity to meet its obligations in a timely and cost-effective manner. Management monitors current and projected cash flows, and adjusts positions as necessary to maintain adequate levels of liquidity. CoreStates emphasizes diversification of funding sources. By using a variety of markets, limiting funds borrowed from a single investor, and staggering maturities, the risk of potential funding pressure is significantly reduced. Management also maintains a detailed liquidity contingency plan designed to adequately respond to situations such as a decline in asset quality or credit ratings, which could lead to liquidity concerns. Management analyzes potential changes in major funding sources during difficult times, the amount of runoff that may be expected, as well as available options to replace those funds. The plan includes specific action steps to be taken in the event of funding disturbances. The cornerstone of CoreStates' liquidity position is a sizable and stable base of core deposits acquired through customer relationships. Core deposits are comprised of interest bearing consumer savings products as well as non-interest bearing consumer and commercial deposits. Core deposits averaged 69.7% of assets in 1994 compared to 70.4% in 1993. This decline is a result of a modest reduction in the average balance of interest bearing relationship deposits. 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 1994 accounted for most of the growth in discretionary funding sources. CoreStates' liquidity is further enhanced by its ability to raise funds in a variety of domestic and international money and capital markets. Under an existing shelf registration statement filed with the Securities and Exchange Commission ("SEC"), CoreStates had a broad range of debt and capital securities that were registered but unissued of approximately $674 million at December 31, 1994. The tables on pages 88, 90 and 91 illustrate the maturity characteristics of CoreStates' domestic certificates of deposit over $100 thousand, loan portfolio and investment portfolio, respectively. For information regarding the maturity characteristics of CoreStates' short-term funds borrowed and long-term debt, see notes 10 and 11 to the financial statements. INVESTMENT PORTFOLIO Within the context of the policies and practices previously outlined, CoreStates maintains a portfolio of marketable debt securities to contribute to a balanced interest rate risk position and to provide liquidity reserves. Interest rate risk management disciplines require strict matching of interest rate sensitivities and, therefore, CoreStates generally does not consider changes in the market value of individual portfolios as significant to the management of its interest sensitivity. CoreStates generally has both the ability and the intent to hold these securities until maturity. 34 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED ASSET AND LIABILITY MANAGEMENT - continued 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"). FAS 115 requires that certain types of securities as well as any other securities which CoreStates foresees as potential candidates for sale prior to maturity be classified as "available-for- sale" and carried at fair market value. 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. At December 31, 1994, the available-for-sale portfolio was $426 million. These securities include a bank stock portfolio and other marketable equity securities, as well as certain debt securities which CoreStates views as possible sale candidates. SOURCES AND USES OF FUNDS Total assets were $29.3 billion at year-end 1994, up $890 million or 3.1% from year-end 1993. However, excluding the $1.6 billion of assets acquired with Germantown, total assets reflect a decline of $734 million, or 2.6% from year- end 1993. Comparing specific asset categories to year-end 1993 balances and excluding the impact of assets acquired with Germantown, reflects a $205 million, or 1.0%, decline in loans and a $1.0 billion, or 28.3%, reduction in investment securities. The decline in loans resulted from 1994 sales of low profit and problem loans from portfolios acquired during 1994. The impact of these sales was largely offset by growth in the credit card portfolio and asset- based lending portfolio of Congress. The decline in investment securities reflects the restructuring of acquired portfolios and the sale of fixed-rate securities in anticipation of the purchase of Germantown. Excluding the $1.4 billion of deposits acquired with Germantown, total deposits declined $527 million, or 2.5%, from year-end 1993. A $338 million, or 17.9%, decline in short-term borrowings was partially offset by a $202 million, or 12.7%, increase in long-term debt. Approximately $110 million of the increase in long-term debt was issued to fund the cash portion of the Germantown purchase price. Total assets averaged $27.7 billion in 1994, substantially the same as in 1993. Average loans increased $566 million, or 3.0%, while average investment securities decreased $569 million or 15.9%. As reflected in the chart on "Earning Asset Mix", loans comprised 80.7% of CoreStates' average earning assets in 1994, compared to 78.8% in 1993. A $319 million, or 2.2% decline in average interest bearing deposits was offset by an increase in non-interest bearing funding sources. Earning Asset Mix ----------------- Plotting Points for a Graph --------------------------- (percentage of average earning assets)
Earning Asset Mix ------------------------------------------ Short-term money market Investment investments securities Loans ------------- ---------- --------- 1994 6.9% 12.4% 80.7% 1993 6.4 14.8 78.8 1992 8.1 13.6 78.3 1991 6.5 12.6 80.9 1990 4.2 11.8 84.0
35 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED SOURCES AND USES OF FUNDS - continued The accompanying table on Funding Mix illustrates that 58.2% of CoreStates' funds were derived from consumer deposits in 1994, compared with 59.3% in 1993. Funding to accommodate current business needs and future growth at non-bank subsidiaries will continue to be supported by the previously discussed SEC shelf registration. Funding Mix ----------- Plotting Points for a Graph --------------------------- (percentage of average earnings assets*)
Funding Mix ------------------------------- Other Non- Retail Interest Interest Deposits Bearing Bearing -------- -------- --------- 1994 58.2% 13.0% 28.8% 1993 59.3 13.3 27.4 1992 63.0 11.6 25.4 1991 58.3 21.1 20.6 1990 52.4 27.5 20.1
* excluding short-term money market investments REVIEW AND ANALYSIS OF EARNINGS OPERATING REVENUE Operating revenues for 1994, adjusted for unusual items, experienced a 3.6% improvement over 1993, principally in the Wholesale Banking business. The usual items excluded from the 1994 to 1993 comparison were: a $1.9 million gain from the sale of the final two Virgin Islands branches in 1994, a gain of $9.1 million on the prepayment of long-term debt in 1993, the $11.0 million gain on the sale of five Virgin Islands branches in 1993, and net securities gains in both years. While operating revenue for 1993, as compared to 1992, was significantly impacted by the December 1992 EPS transaction and other significant items, CoreStates' operating revenue for 1993 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, 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 gain recorded on the December 1992 EPS transaction, operating revenue increased 7.4% for 1993. Operating revenue has three major components and, as illustrated on the accompanying chart ("Operating Revenue"), net interest income from loans and investments is the largest component. Net interest income is presented excluding the earnings benefit of balances maintained by commercial customers as compensation for transaction oriented non-credit products. The two other components of operating revenue are non-interest income and the previously mentioned earnings benefit of balances maintained as compensation for non-credit products. Net interest income and non-interest income are discussed in further detail on the following pages. OPERATING REVENUE - ----------------- Plotting Points for a Graph - --------------------------- (tax equivalent net interest income plus non-interest income-in millions)
Operating Revenue ----------------------------------------------------- Derived Loan and from Non- Investment Non-credit Interest Interest Balances Income Total ---------- -------------- -------- --------- 1994 $1,262.5 $148.1 $567.5 $1,978.1 1993 1,211.4 140.4 574.0 1,925.8 1992 1,160.7 122.8 610.7 1,894.2 1991 1,190.6 123.1 615.6 1,929.3 1990 1,203.9 115.5 475.0 1,794.4
36 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED NET INTEREST INCOME For analytical purposes, net interest income is adjusted to a taxable equivalent basis to recognize the income from tax exempt assets as if the interest were taxable. Net interest income on a taxable equivalent basis increased $58.8 million, or 4.4% in 1994, compared to an increase of $68.3 million, or 5.3% in 1993. The strength of CoreStates' net interest income and net interest margin stems from the combination of wide spreads on both loans and deposits and a balance sheet which has a relatively high portion of loans and a large base of non-interest bearing funding. The following table compares taxable equivalent net interest income for the years ended December 31, 1994, 1993 and 1992. Taxable Equivalent Net Interest Income - ----------------------------------------- (in millions)
Percentage increase(decrease) ------------------ 1994 1993 1992 '94/'93 '93/'92 -------- -------- -------- ------- ------- Total interest income $1,929.5 $1,841.9 $1,961.8 4.8% (6.1)% Tax equivalent adjustment 21.3 26.5 31.0 (19.6) (14.5) -------- -------- -------- Tax equivalent interest income 1,950.8 1,868.4 1,992.8 4.4 (6.2) Total interest expense 540.2 516.6 709.3 4.6 (27.2) -------- -------- -------- Tax equivalent net interest income $1,410.6 $1,351.8 $1,283.5 4.4 5.3 ======== ======== ======== Interest rate spread 4.99% 4.85% 4.42% ==== ==== ==== Net interest margin 5.80% 5.59% 5.32% ==== ==== ====
The increase in net interest income in 1994 continues the improvement in interest rate spread of the previous years. While average total earning assets showed little growth in 1994, a change in asset mix resulted in the yield on earning assets increasing to 8.03% in 1994 from 7.73%, partially offset by a smaller increase in average cost of liabilities to 3.03% from 2.90% in 1993. The loan portfolio experienced a $566 million increase on average, mostly in the higher yield credit card and asset-based lending portfolios, while the comparatively lower yielding investment portfolio was reduced $569 million. An increase in non-interest bearing funding sources of $287 million also contributed to the 1994 increase in net interest income. The increase in net interest income in 1993 principally reflected the impact of wider interest rate spreads. Also contributing to the increase in 1993 net interest income were a $59 million increase in average interest earning assets, a $.6 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 131 basis points, while the rates earned on domestic loans decreased 38 basis points. The net interest margin is a key measure of net interest income performance. It represents the difference between tax equivalent interest income, including net loan fees earned, and interest expense, reflected as a percentage of average earning assets. The net interest margin increased 21 basis points in 1994 to 5.80% following a 27 basis point increase in 1993. The 1994 increase was principally attributable to higher yields on loans due to the change in asset mix and the increase in the prime rate during the year, partially offset by the lower yield on the investment portfolio. The cost of interest bearing deposits decreased by 5 basis points in 1994 as changes in the pricing of consumer deposits in the rising rate environment lagged changes in financial market rates. The cost of borrowed funds, more sensitive to rising interest rates, increased during 1994 by 89 basis points. The 1993 increase in the net interest margin was principally related to improved interest rate spreads which resulted from the 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. 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. 37 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) ------------------ 1994 1993 1992 '94/'93 '93/'92 ------ ------ ------ ------- ------- Basic banking transactional services(a) $422.3 $412.4 $379.7 2.4% 8.6% EPS related revenues (b) 31.8 13.1 92.5 142.7 (85.8) Securities gains 18.7 16.1 13.8 Other non-interest income 92.8 110.9 81.8 (16.3) 35.6 ------ ------ ------ Non-interest income before non-recurring items 565.6 552.5 567.8 2.4 (2.7) Non-recurring items 1.9(c) 21.5(d) 42.9(e) ------ ------ ------ Total non-interest income $567.5 $574.0 $610.7 (1.1) (6.0) ====== ====== ======
- -------------------------------------------- (a) Comprised of debit and credit card fees, service charges on deposit accounts, trust income, and fees for international services. (b) Includes income related to CoreStates' investment in the EPS joint venture in 1994 and 1993, and for 1992, MAC and POS revenues, the businesses contributed to the joint venture in December 1992. (c) Includes the pre-tax gain of $1.9 million recorded on the sale of the two remaining Virgin Islands branches. (d) Includes pre-tax gains of $11.0 million recorded on the sale of five Virgin Islands branches, $9.1 million on prepayments of long-term debt and $1.4 million in excess recoveries from the settlement of a previously charged off loan at Independence. (e) 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. While reported total non-interest income decreased $6.5 million or 1.1% in 1994, following a decline of $36.7 million, or 6.0% in 1993, total non-interest income in 1994 before non-recurring items increased $13.1 million or 2.4% over 1993. The relatively low growth rate for 1994 reflects the election by commercial customers to pay for deposit services by maintaining deposit balances (the value of which is included in net interest income) in lieu of cash fees, declines in income and fees derived from mortgage banking, and a decline in trust income. Comparability between the three years was affected by the December 1992 restructuring of CoreStates' MAC and POS consumer electronic payment business into EPS. Also in December 1993, CoreStates exchanged substantially all of its preferred stock in EPS for a ten-year 6.45% note providing for equal payments over the life of the note. While the deferred gain generated in 1992 was unchanged, the gain began to be recognized in 1994 and is the principal reason for the increase in EPS related revenues for 1994. As a result of the original EPS restructuring in 1992, 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 that year. 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. POS and MAC revenues in 1994 and 1993 were recorded by EPS. Included in other non-interest income in 1994 and 1993, respectively, are $23.1 million and $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. CoreStates recorded net securities gains of $18.7 million in 1994, $16.1 million in 1993 and $13.8 million in 1992. Investment securities gains in 1994 included $5.0 million recorded on sale of certain investments acquired with Constellation and $10.7 million recorded on sales of certain bank stocks. Investment securities gains for 1993 included $13.6 million on sales of domestic equity securities and $8.6 million on sales of foreign equity securities, partially offset by $6.1 million for partial writedowns of foreign equity securities. Investment securities gains for 1992 were $2.6 million, including $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 domestic equity securities. 38 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED NON-INTEREST INCOME - CONTINUED Income from basic banking transactional services increased 2.4% in 1994, following growth of 8.6% in 1993. The components of basic banking transactional services are discussed in detail below. . Service charges on deposit accounts, paid in fees, increased $1.2 million, or .7%, in 1994, compared to $16.3 million, or 10.0%, in 1993. 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 1994 was $328.8 million, up $9.0 million, or 2.8%, from 1993. Although the underlying activity related to this combined revenue stream was up over 10%, the revenue growth was much lower because 1993 revenues included the partial benefit of a wider spread on a portion of these balances invested on a longer term basis. This spread narrowed significantly in 1994. Total service charge compensation on this basis for 1993 was $319.8 million, an increase of $33.9 million or 11.9% over 1992. . Fees for international services increased $10.3 million, or 14.8%, in 1994, as compared with an increase of $9.2 million, or 15.2%, in 1993. The growth in revenues for 1994 reflects a continuing emphasis on international services. The growth in revenues for 1993 was principally due to increased volume from new branch offices. International non-credit product volume growth, particularly foreign exchange fees, continued to be responsible for high gross revenue increases in 1994 and 1993. . Trust income decreased $4.4 million, or 4.4%, in 1994 following an increase of $5.1 million, or 5.2%, in 1993. The 1994 decline in trust income was caused by declines in the financial markets which generated lower asset values and some customer attrition. Growth in assets and related fees in the Personal Trust, Investment Services, and Employee Benefit areas contributed to 1993 fee growth. . Debit and credit card fees increased $2.9 million, or 4.6% in 1994, following an increase of $2.1 million, or 3.5%, in 1993. For analytical purposes, fees generated by the MAC and POS businesses, which were contributed to the EPS joint venture in December 1992, have been reclassified from the debit and credit card fee category in the table on page 38 in 1992. Credit card fees were up $.9 million, or 3.4%, for 1993. At year-end 1994, CoreStates' credit card portfolio included approximately 601,000 active accounts, compared to 575,000 active accounts at year-end 1993. Merchant processing services fees in 1993 were level with 1992. Other operating income decreased by $18.1 million, or 16.3% principally as a result of mortgage banking activity which was adversely impacted by reduced refinance activity and higher mortgage rates. Gains on sales of mortgages and mortgage servicing fees were down $11.6 million and $4.1 million in 1994, respectively. Other operating income in 1993 increased $29.1 million, or 35.6%, primarily due to $17.5 million of fees earned by Financial Telesis. Gains on trading account securities were $2.3 million in 1994, as compared with $2.3 million in 1993 and $1.8 million in 1992. 39 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) ------------------ 1994 1993 1992 '94/'93 '93/'92 -------- -------- -------- ------- ------- Salaries, wages and benefits $ 631.1 $ 623.0 $ 620.5 1.3% 0.4% Net occupancy expense 114.5 115.0 112.8 (.4) 2.0 Equipment expense 77.1 74.8 85.6 3.1 (12.6) Other operating expenses 380.2 384.3 414.6 (1.1) (7.3) -------- -------- -------- Non-financial expenses before significant and unusual items 1,202.9 1,197.1 1,233.5 (.5) (3.0) Significant and unusual items 114.7(a) 44.8(b) 73.1(c) -------- -------- -------- Total non-financial expenses $1,317.6 $1,241.9 $1,306.6 6.1 (5.0) ======== ======== ========
- ---------------------------- (a) Includes merger-related costs at $75.0 million and $33.7 million for Constellation and Independence, respectively; other real estate writedowns of $2.3 million and $3.7 million related to Germantown branch closings and signage. (b) Comprised of other real estate writedowns totalling $26.6 million; writedowns of purchased mortgage servicing rights of $8.2 million and $10.0 million related to the establishment of Transys, a new transaction services business. (c) Includes $34.3 million of other real estate writedowns; writedown of $10.7 million of purchased mortgage servicing rights; $4.5 million for streamlining business operations; $7.4 million of expenses associated with personnel related initiatives; and $16.2 million for systems enhancements and operations consolidations. Reported total non-financial expenses in 1994 were 6.1% higher than 1993. However, excluding significant and unusual items, non-financial expenses for 1994 were substantially unchanged from 1993. While reported total non-financial expenses in 1993 of $1,241.9 million reflected a decrease of 5.0% from 1992, excluding significant and unusual items as noted for both years in the table above, non-financial expenses for 1993 decreased 3.0% from 1992. 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. Salaries, wages and benefits increased 1.3% in 1994, compared to an increase of 0.4% in 1993. The 1994 increase in salary and benefit costs was largely the result of normal salary increases offset by partial year staff reductions due to merger consolidations. At year-end 1994, the number of full-time equivalent employees declined by over 900 as operations and systems mergers were completed for acquired companies. A decrease in 1993 salary expense 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, 1994, 1993 and 1992 was: 15,076; 16,017; and 16,271, respectively. Net occupancy expense decreased .4% in 1994, compared to an increase of 2.0% in 1993. Equipment expenses increased 3.1% in 1994, compared to a decrease of 12.6% in 1993. Equipment expense showed increases in 1994 as continued technological improvements were made in delivery systems and support areas. The decline in combined 1993 net occupancy and equipment expense was primarily due to the formation of the EPS joint venture. Other operating expenses decreased 1.1% in 1994, following a decline of 7.3% in 1993 compared to 1992. The decrease in 1994 was largely due to reductions in amortization of mortgage servicing rights intangibles which was $8.2 million less than 1993. 40 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONTINUED PROVISION FOR INCOME TAXES The provision for income taxes was $143.7 million in 1994 compared to $173.8 million in 1993 and $128.2 million in 1992. The $30.1 million decrease in 1994 total tax expense was primarily the result of lower pre-tax book income. The provision for income taxes for 1994, 1993 and 1992 were at effective rates of 36.6%, 32.4%, and 32.3%, respectively. The increase in the effective rate is primarily due to a lower dividend received deduction resulting from the EPS recapitalization. 41 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING FINANCIAL STATEMENTS CoreStates Financial Corp is responsible for the preparation, integrity, and fair presentation of its published financial statements as of December 31, 1994, and the year then ended. The consolidated financial statements of CoreStates Financial Corp have been prepared in accordance with generally accepted accounting principles and, as such, include some amounts that are based on judgments and estimates of management. INTERNAL CONTROLS OVER FINANCIAL REPORTING Management is responsible for establishing and maintaining an effective internal control structure over financial reporting. The system contains monitoring mechanisms, and actions are taken to correct deficiencies identified. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of an internal control system may vary over time. Management assessed CoreStates Financial Corp's internal control structure over financial reporting as of December 31, 1994. This assessment was based on criteria for effective internal control over financial reporting described in "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that CoreStates Financial Corp maintained an effective internal control structure over financial reporting as of December 31, 1994. Chief Financial Officer /s/ David C. Carney Chairman and Chief Executive Officer /s/ Terrence A. Larsen 42 CORESTATES FINANCIAL CORP AND SUBSIDIARIES INDEPENDENT ACCOUNTANTS' REPORT The Board of Directors and Shareholders CoreStates Financial Corp We have examined managements assertion that CoreStates Financial Corp maintained an effective internal control structure over financial reporting as of December 31, 1994 included in the accompanying Management's Report on Internal Controls over Financial Reporting, insofar as management's assertion relates to the internal control structure over the annual financial reporting in the 1994 consolidated financial statements of CoreStates Financial Corp. Our examination was made in accordance with standards established by the American Institute of Certified Public Accountants and, accordingly, included obtaining an understanding of the internal control structure over financial reporting, testing, and evaluating the design and operating effectiveness of the internal control structure, and such other procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion. Because of inherent limitations in any internal control structure, errors or irregularities may occur and not be detected. Also, projections of any evaluation of the internal control structure over financial reporting to future periods are subject to the risk that the internal control structure may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assertion that CoreStates Financial Corp maintained an effective internal control structure over financial reporting as of December 31, 1994, insofar as management's assertion relates to the internal control structure over the annual financial reporting in the 1994 consolidated financial statements of CoreStates Financial Corp, is fairly stated, in all material respects, based upon the criteria established in "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. /s/ ERNST & YOUNG LLP Philadelphia, Pennsylvania March 7, 1995 43 REPORT OF INDEPENDENT AUDITORS THE BOARD OF DIRECTORS AND SHAREHOLDERS CORESTATES FINANCIAL CORP We have audited the accompanying consolidated balance sheets of CoreStates Financial Corp as of December 31, 1994 and 1993, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the 1993 and 1992 financial statements of Constellation Bancorp and Independence Bancorp, Inc., which statements reflect total assets constituting 17.2% of the related consolidated totals as of December 31, 1993, and net interest income constituting 15.6% of the related consolidated totals for each of the years ended December 31, 1993 and 1992. Those statements were audited by other auditors whose reports thereon have been furnished to us, and our opinion, insofar as it relates to data included for Constellation Bancorp and Independence Bancorp, Inc., is based solely on the reports of other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CoreStates Financial Corp at December 31, 1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in Note 1 to the financial statements, in 1994 and 1993 the Company changed its method of accounting for certain investments in debt and equity securities, in 1993 the Company changed its method of accounting for post- employment benefits, and in 1992 the Company changed its methods of accounting for income taxes and for post-retirement benefits other than pensions. /s/Ernst & Young LLP Philadelphia, Pennsylvania February 7, 1995 44 CORESTATES FINANCIAL CORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (in thousands, except per share amounts)
Year Ended December 31, ----------------------------------- INTEREST INCOME 1994 1993 1992 ----------- ---------- ---------- Interest and fees on loans: Taxable income..................................... $1,675,532 $1,553,865 $1,609,209 Tax exempt income.................................. 22,818 31,150 38,554 Interest on investment securities: Taxable income..................................... 140,379 185,866 216,074 Tax exempt income.................................. 16,552 19,304 22,777 Interest on time deposits in banks................... 66,389 44,340 58,613 Interest on Federal funds sold, securities purchased under agreements to resell and other............... 7,857 7,339 16,611 ----------- ---------- ---------- Total interest income............................ 1,929,527 1,841,864 1,961,838 ----------- ---------- ---------- INTEREST EXPENSE Interest on deposits: Domestic savings................................... 139,703 149,094 230,166 Domestic time (Note 9)............................. 196,869 212,471 311,970 Overseas branches and subsidiaries................. 28,286 18,248 28,319 ----------- ---------- ---------- Total interest on deposits....................... 364,858 379,813 570,455 Interest on short-term funds borrowed (Note 10)...... 85,123 67,001 60,480 Interest on long-term debt (Note 11)................. 90,177 69,779 78,425 ----------- ---------- ---------- Total interest expense........................... 540,158 516,593 709,360 ----------- ---------- ---------- Net interest income.............................. 1,389,369 1,325,271 1,252,478 Provision for losses on loans (Note 7)............... 246,900 121,201 160,250 ----------- ---------- ---------- Net interest income after provision for losses on loans................................. 1,142,469 1,204,070 1,092,228 ----------- ---------- ---------- NON-INTEREST INCOME Service charges on deposit accounts.................. 180,676 179,428 163,132 Trust income......................................... 97,362 101,793 96,731 Fees for international services...................... 79,682 69,432 60,247 Debit and credit card fees........................... 64,585 61,717 152,078 Income from investment in EPS, Inc. (Note 20)........ 31,800 13,159 - Gains on trading account securities.................. 2,347 2,254 1,836 Securities gains (Note 5)............................ 18,753 16,110 13,805 Other gains (Notes 6 and 20)......................... 1,900 11,000 41,072 Other operating income............................... 90,435 119,137 81,763 ----------- ---------- ---------- Total non-interest income........................ 567,540 574,030 610,664 ----------- ---------- ---------- NON-FINANCIAL EXPENSES Salaries, wages and benefits (Notes 12 and 13)....... 631,134 622,969 627,904 Net occupancy (Notes 8 and 14)....................... 117,516 114,951 112,765 Equipment expenses (Note 8).......................... 77,098 74,844 85,589 Other operating expenses (Note 16)................... 491,813 429,098 480,335 ----------- ---------- ---------- Total non-financial expenses..................... 1,317,561 1,241,862 1,306,593 ----------- ---------- ---------- INCOME BEFORE INCOME TAXES....................... 392,448 536,238 396,299 Provision for income taxes (Note 16)................. 143,656 173,809 128,165 ----------- ---------- ---------- INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE.............................. 248,792 362,429 268,134 Cumulative effect of a change in accounting principle, net of income tax benefits of $1,846 in 1994, $7,005 in 1993 and $43,760 in 1992........ (3,430) (13,010) (84,946) ----------- ---------- ---------- NET INCOME..................................... $ 245,362 $ 349,419 $ 183,188 =========== ========== ========== PER COMMON SHARE DATA (Based on weighted average shares outstanding of 142.498 million in 1994, 145.398 million in 1993, and 135.813 million in 1992).......................................... Income before cumulative effect of a change in accounting principle.............................. $1.75 $2.49 $1.97 ===== ===== ===== Net Income.......................................... $1.73 $2.40 $1.35 ===== ===== ===== Cash dividends declared............................. $1.24 $1.14 $1.02 ===== ===== =====
See accompanying notes to the financial statements. 45 CORESTATES FINANCIAL CORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (in thousands)
December 31, ------------------------- 1994 1993 ----------- ----------- ASSETS Cash and due from banks (Note 4)....................... $ 2,262,512 $ 2,521,676 Time deposits, principally Eurodollars................. 1,750,458 1,319,457 Investment securities held-to-maturity (market value: 1994-$2,423,830; 1993-$2,257,513) (Note 5)........... 2,454,584 2,228,560 Investment securities available-for-sale (Note 5)...... 426,047 1,370,606 Total loans, net of unearned discounts of $146,305 in 1994 and $151,994 in 1993 (Note 6)....... 20,526,216 19,776,258 Less: Allowance for loan losses (Note 7)............. (500,631) (450,823) ----------- ----------- Net loans.................................... 20,025,585 19,325,435 Federal funds sold and securities purchased under agreements to resell................................. 731,820 161,527 Trading account securities............................. 1,206 6,393 Due from customers on acceptances...................... 342,211 332,234 Premises and equipment (Note 8)........................ 423,832 410,022 Other assets (Note 20)................................. 906,881 758,707 ----------- ----------- Total assets................................. $29,325,136 $28,434,617 =========== =========== LIABILITIES Deposits: Domestic: Non-interest bearing............................... $ 6,362,470 $ 6,649,367 Interest bearing (Note 9).......................... 14,565,051 13,686,027 Overseas branches and subsidiaries (Note 9).......... 1,113,365 796,902 ----------- ----------- Total deposits............................... 22,040,886 21,132,296 Short-term funds borrowed (Note 10).................... 1,546,201 1,884,125 Bank acceptances outstanding........................... 336,103 337,180 Other liabilities (Note 12)............................ 1,260,722 1,123,342 Long-term debt (Note 11)............................... 1,791,110 1,589,290 ----------- ----------- Total liabilities............................ 26,975,022 26,066,233 ----------- ----------- COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 15) SHAREHOLDERS' EQUITY (NOTES 11, 13 AND 19) Preferred stock: authorized 10.0 million shares; no shares issued................................ - - Common stock: $1 par value; authorized 200.0 million shares; issued 145.9 million shares in 1994 and 145.8 million shares in 1993 (including treasury shares of 1.0 million in 1994 and .4 million in 1993). 2,350,114 2,368,384 ----------- ----------- Total shareholders' equity...................... 2,350,114 2,368,384 ----------- ----------- Total liabilities and shareholders' equity...... $29,325,136 $28,434,617 =========== ===========
See accompanying notes to the financial statements. 46 CORESTATES FINANCIAL CORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (IN THOUSANDS)
COMMON CAPITAL RETAINED TREASURY STOCK SURPLUS EARNINGS STOCK TOTAL -------- -------- ---------- --------- ---------- Balances at December 31, 1991............................ $ 77,017 $713,283 $1,144,822 $ (7,711) $1,927,411 Net income............................................... 183,188 183,188 Net change in unrealized gain in marketable equity securities, net of tax (Note 5)................. 1,331 1,331 Treasury shares acquired (30 shares)..................... (1,480) (1,480) Stock issued in public offering (7,842 shares)........... 7,842 59,739 67,581 Common stock issued under employee benefit plans (1,230 new shares; 52 treasury shares)........... 1,190 30,286 131 777 32,384 Common stock issued under dividend reinvestment plan (449 new shares; 220 treasury shares)............. 338 14,083 4,288 18,709 Conversion of subordinated debt (16 treasury shares)..... (45) 245 200 Foreign currency translation adjustments................. (4,384) (4,384) Common dividends declared................................ (130,381) (130,381) -------- -------- ---------- --------- ---------- Balances at December 31, 1992............................ 86,387 817,391 1,194,662 (3,881) 2,094,559 Net income............................................... 349,419 349,419 Issuance of shares in connection with a 100% common stock dividend......................................... 58,929 (58,929) Net unrealized gain on investments available-for-sale, net of tax (Note 5).................................... 64,305 64,305 Acquisition of Inter Community Bancorp (640 treasury shares)................................................ (213) 17,459 17,246 Treasury shares acquired (1,060 shares).................. (29,449) (29,449) Repurchase and retirement of common stock................ (382) (2,255) (5,808) (8,445) Common stock issued under employee benefit plans (857 new shares; 175 treasury shares)............ 586 13,701 (1,510) 4,871 17,648 Common stock issued under dividend reinvestment plan (358 new shares; 111 treasury shares)............. 220 8,590 (101) 3,181 11,890 Foreign currency translation adjustments................. (1,758) (1,758) Common dividends declared................................ (147,031) (147,031) -------- -------- ---------- --------- ---------- Balances at December 31, 1993............................ 145,740 778,498 1,451,965 (7,819) 2,368,384 Net income............................................... 245,362 245,362 Net change in unrealized gain on investments avaliable- for-sale, net of tax (Note 5).......................... (52,951) (52,951) Acquisition of Germantown Savings Bank (5,880 treasury shares) (Note 2)....................................... (8,605) 156,361 147,756 Treasury shares acquired (8,598 shares).................. (228,963) (228,963) Repurchase and retirement of common stock................ (177) (981) (3,583) (2) (4,743) Common stock issued under employee benefit plans (279 new shares; 688 treasury shares)............ 279 4,172 (7,803) 18,456 15,104 Common stock issued under dividend reinvestment and stock purchase plans (450 treasury shares)............. 77 (483) 12,306 11,900 Conversion of subordinated debt (36 new shares; 909 treasury shares)................................... 36 (2,001) 25,364 23,399 Cash paid for fractional shares.......................... (83) (83) Foreign currency translation adjustments................. 52 52 Common dividends declared................................ (175,103) (175,103) -------- -------- ---------- --------- ---------- Balances at December 31, 1994............................ $145,878 $781,766 $1,446,767 $ (24,297) $2,350,114 ======== ======== ========== ========= ==========
See accompanying notes to the financial statements. 47 CoreStates Financial Corp and Subsidiaries CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
Year Ended December 31, --------------------------------------------- 1994 1993 1992 ------------ ------------- ------------ OPERATING ACTIVITIES Net income.................................. $ 245,362 $ 349,419 $ 183,188 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of a change in accounting principle (Note 12)........ 3,430 13,010 84,946 Provision for losses on loans............. 246,900 121,201 160,250 Provision for losses and writedowns on other real estate owned............... 44,538 26,614 34,253 Depreciation and amortization............. 76,277 84,998 106,111 Deferred income tax expense (benefit)..... 16,393 (10,656) 26,864 Securities gains (Note 5)................. (18,753) (16,110) (13,805) Other gains (Notes 6 and 20).............. (1,900) (11,000) (41,072) Increase in due to factored clients....... 41,262 147,072 1,923 Proceeds from contribution of assets to EPS joint venture (Note 20)........... - - 79,350 (Increase) decrease in interest receivable (25,625) 3,646 44,398 Increase (decrease) in interest payable... 23,551 (7,738) (62,667) Other, net................................ 54,881 43,789 80,004 ----------- ------------ ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 706,316 744,245 683,743 ----------- ------------ ----------- INVESTING ACTIVITIES Purchase of Germantown Saving Bank, net of cash acquired (Note 2).................... (74,053) - - Net (increase) decrease in loans (Note 6)... (633,013) (1,483,539) (191,780) Proceeds from sales of loans (Note 6)....... 897,528 790,193 568,698 Loans originated or acquired--non-bank subsidiaries.............................. (33,760,035) (24,712,336) (16,561,468) Principal collected on loans--non-bank subsidiaries.............................. 33,399,764 24,411,312 16,364,389 Net (increase) decrease in time deposits, principally Eurodollars................... (431,001) 495,615 (131,596) Purchases of investments held-to-maturity... (1,030,404) - - Purchases of investments available-for-sale. (422,894) Proceeds from maturities of investments held- to-maturity............................... 1,655,885 - - Proceeds from maturities of investments available-for-sale........................ 308,598 - - Proceeds from sales of investments available-for-sale........................ 690,343 - - Purchases of investment securities.......... - (2,252,933) (2,169,341) Proceeds from sales of investment securities................................ - 581,101 408,341 Proceeds from maturities of investment securities................................ - 1,819,500 1,440,311 Net (increase) decrease in Federal funds sold and securities purchased under agreements to resell...................... (549,293) 105,363 109,410 Purchases of premises and equipment......... (92,232) (107,275) (47,221) Proceeds from sales and paydowns on other real estate owned......................... 59,947 84,389 79,073 Other, net.................................. 19,617 6,689 49,505 ----------- ------------ ----------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.............................. 38,757 (261,921) (81,679) ----------- ------------ ----------- FINANCING ACTIVITIES Net decrease in deposits.................... (536,836) (540,605) (244,987) Long-term debt issued (Note 11)............. 478,048 916,519 332,775 Retirement of long-term debt................ (242,432) (683,399) (215,756) Net proceeds from issuance of common stock in public offering.................. - - 67,581 Net decrease in short-term funds borrowed.................................. (337,924) (19,919) (165,407) Cash dividends paid......................... (160,122) (143,334) (126,265) Purchase of treasury stock.................. (228,963) (29,449) (1,480) Other, net.................................. 23,992 29,538 51,093 ----------- ------------ ----------- NET CASH USED IN FINANCING ACTIVITIES..... (1,004,237) (470,649) (302,446) ----------- ------------ ----------- INCREASE (DECREASE) IN CASH AND DUE FROM BANKS............................... (259,164) 11,675 299,618 Cash and due from banks at January 1,..... 2,521,676 2,510,001 2,210,383 ----------- ------------ ----------- CASH AND DUE FROM BANKS AT DECEMBER 31,..... $ 2,262,512 $ 2,521,676 $ 2,510,001 =========== ============ =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest.................................. $ 513,773 $ 524,565 $ 771,780 ============ ============ ============ Income taxes.............................. $ 130,904 $ 167,216 $ 124,952 ============ ============ ============
See accompanying notes to the financial statements. 48 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of CoreStates Financial Corp ("the Corporation") and all of its subsidiaries, including: CoreStates Bank, N.A. ("CBNA"); New Jersey National Bank ("NJNB"); CoreStates Bank of Delaware, N.A. ("CBD"); Congress Financial Corporation; and CoreStates Capital Corp. All material intercompany transactions have been eliminated. The financial statements include the consolidated accounts of Independence Bancorp, Inc. ("Independence"), which was acquired on June 27, 1994, and Constellation Bancorp ("Constellation"), which was acquired on March 16, 1994 for all periods presented. Both transactions were accounted for under the pooling of interests method of accounting. Certain amounts in prior years have been reclassified for comparative purposes. CHANGES IN ACCOUNTING PRINCIPLES. During the first quarter of 1994, Independence recognized a $3,430 after-tax, or $.02 per share, impairment loss on certain mortgage securities as a cumulative effect of a change in accounting principle. The loss was the result of a write- down to fair value of these securities, which were deemed to be impaired. This resulted from a Financial Accounting Standards Board ("FASB") 1994 interpretation of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("FAS 115"). The interpretation, reached by consensus of the FASB Emerging Issues Task Force in March 1994, provides more definitive criteria for recognition of impairment losses on these types of securities. Effective December 31, 1993, the Corporation adopted FAS 115. FAS 115 established the accounting and reporting requirements for investments in equity securities that have readily determinable fair values and for all investments in debt securities. All affected investment securities must be classified as either held-to-maturity, trading, or available-for-sale. Held-to-maturity securities are carried at amortized cost. Trading securities are carried at fair value with unrealized holding gains and losses reported in the income statement. Available-for-sale securities are carried at fair value with unrealized holding gains and losses reported as a component of shareholders' equity. As a result of adopting FAS 115, securities with an original carrying value of $1,272,138 were classified as available-for-sale at December 31, 1993 and were written up to their aggregate fair value of $1,370,606. After the related tax effects, shareholders' equity at December 31, 1993 was increased by $64,305 to reflect the write-up of these securities to fair value. Effective January 1, 1993, the Corporation adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("FAS 112"). FAS 112 established the accounting requirements for benefits provided to former or inactive employees after employment but before retirement. FAS 112 requires that employers accrue the costs associated with providing benefits, such as salary and benefit continuation under disability plans, when payment of the benefits is probable and the amount of the obligation can be reasonably estimated. The Corporation recognized the January 1, 1993 FAS 112 transitional liability of $20,015, $13,010 after-tax or $.09 per share, as the cumulative effect of a change in accounting principle. Effective January 1, 1992, the Corporation adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("FAS 106"). FAS 106 requires that employers accrue the costs associated with providing postretirement benefits during the active service periods of employees. As permitted under FAS 106, the Corporation elected to immediately recognize the January 1, 1992 transitional liability of $128,706, $84,946 after-tax or $.62 per share, as the cumulative effect of a change in accounting principle. 49 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) INCOME TAXES In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). In the first quarter of 1992 the Corporation retroactively adopted FAS 109 as of January 1, 1987. Under the asset and liability method provided for by FAS 109, deferred tax assets and liabilities are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The Corporation and its subsidiaries file a consolidated Federal income tax return. INVESTMENT SECURITIES Held-to-maturity securities are carried at cost adjusted for amortization of premiums and accretion of discounts, both computed on the interest method. Held-to-maturity securities primarily consist of debt securities. The Corporation has both the ability and positive intent to hold these securities until maturity. Trading account securities are carried at market values. Gains on trading account securities include both realized and unrealized gains and losses on the portfolio. Debt securities not classified as held-to-maturity or trading and marketable equity securities are classified as available-for-sale. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax, reported as a component of shareholders' equity. The accumulated net unrealized gain on available-for-sale securities included in retained earnings was $11,354 at December 31, 1994. The adjusted cost of a specific certificate sold is the basis for determining realized securities gains and losses as included in the consolidated statement of income in "non-interest income". Interest and dividends on investment securities are recognized as income when earned. LOANS Interest on commercial loans is recognized on the daily principal amounts outstanding. Loan fees are generally considered as adjustments of interest rate yields and are amortized into interest income on loans over the terms of the related loans. Interest on installment loans is principally recognized on the interest method. Commercial loans are placed on a non-accrual status, generally recognizing interest as income when received, when, in the opinion of management, the collectability of principal or interest becomes doubtful. The deferral or non- recognition of interest does not constitute forgiveness of the borrower's obligation. In those cases where collection of principal is in doubt, additions are made to the allowance for loan losses. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is based on management's evaluation of the effects on the loan portfolio of current economic and political conditions and other pertinent indicators. Activities in foreign countries may involve special risks not normally a part of domestic operations. Credit review personnel and senior officers evaluate the loan portfolio by determining the net realizable value of collateral and the financial strength of borrowers. Installment and credit card loans are evaluated largely on the basis of delinquency data because of the number of such loans and the relatively small size of each individual loan. Additions to the allowance arise from the provision for loan losses charged to operations or from the recovery of amounts previously charged off. Loan charge- offs reduce the allowance. Loans are charged off when there has been permanent impairment of the related carrying values. 50 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) PREMISES AND EQUIPMENT Premises and equipment are stated at cost, less accumulated depreciation and amortization. The provision for depreciation and amortization is computed, generally, on the straight-line method at rates based on the following range of lives: buildings - 10 to 45 years; equipment - 3 to 12 years; and leasehold improvements - 3 to 15 years. RETIREMENT PLANS The Corporation maintains a non-contributory defined benefit pension plan for substantially all employees. Benefits are primarily based on the employee's years of credited service, average annual salary and primary social security benefit, as defined in the plan. It is the Corporation's policy to fund the plan on a current basis to the extent deductible under existing tax regulations. The Corporation provides certain postretirement health care and life insurance benefits for retired employees. In order to participate in the health care plan, an employee must retire with at least 10 years of service. The postretirement health care plan is contributory, with retiree contributions based on years of service. It is the Corporation's policy to fund the health care plan on a current basis to the extent deductible under existing tax regulations. INTERNATIONAL OPERATIONS Forward exchange contracts are valued at current rates of exchange. Gains or losses on forward exchange contracts intended to hedge an identifiable foreign currency commitment, if any, are deferred and included in the measurement of the related foreign currency transaction. All other gains or losses on forward exchange contracts are included in the consolidated statement of income. Currency gains and losses in connection with foreign loans and deposit contract transactions, which are included in interest income and expenses, are recognized pro rata over the contract terms. Foreign currency translation adjustments are recorded directly to retained earnings. The cumulative foreign currency translation gain (loss) was $(1,571), $(1,623) and $135 at December 31, 1994, 1993 and 1992, respectively. DERIVATIVE INTEREST RATE CONTRACTS The Corporation uses various interest rate contracts such as, interest rate swaps, futures, forward rate agreements, caps and floors, primarily to manage the interest rate risk of specific assets, liabilities or anticipated transactions and to provide for the needs of its customers. For contracts held for purposes other than trading, gains or losses are deferred and recognized as adjustments to interest income or expense of the underlying assets or liabilities and the interest differentials are recognized as adjustments of the related interest income or expense. Gains or losses resulting from early terminations of these contracts are deferred and amortized over the remaining term of the underlying assets or liabilities. Any fees received or disbursed which represent adjustments to the yield on interest rate contracts are capitalized and amortized over the term of the interest rate contracts. Contracts held or issued for customers are valued at market with gains or losses included in the consolidated income statement. CASH DIVIDENDS DECLARED PER SHARE Cash dividends declared per share for the periods prior to the acquisitions of Independence on June 27, 1994, Constellation on March 16, 1994 and First Peoples Financial Corporation on September 3, 1992 assume that the Corporation would have declared cash dividends equal to the cash dividends per share actually declared by the Corporation. STOCK DIVIDEND All common shares outstanding and per common share data reflect the impact of the Corporation's 100% stock dividend declared on August 17, 1993, and paid on October 15, 1993 to shareholders of record on September 15, 1993 ("the Stock Dividend"). An amount equal to the par value of the shares issued in connection with the Stock Dividend was transferred from capital surplus to common stock. 51 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 2. ACQUISITIONS On December 2, 1994, the Corporation purchased Germantown Savings Bank ("Germantown") a Pennsylvania chartered stock savings bank with $1.6 billion in assets and $1.4 billion in deposits at the time of the acquisition. Under the terms of the transaction, each of Germantown's 4.15 million shares of common stock was exchanged for a combination of the Corporation's common stock, equal to approximately 55% of the $62 per Germantown share purchase price, and cash, equal to approximately 45% of the purchase price. As a result of this acquisition, 5.9 million shares of the Corporation's common stock were issued out of treasury stock. The transaction had a total value of approximately $260 million and was accounted for under the purchase method of accounting. Accordingly, the results of operations of Germantown have been included with the Corporation since the date of acquisition. Under this method of accounting, the purchase price is allocated to the respective assets acquired and liabilities assumed based on their estimated fair values, net of applicable income tax effects. Intangible assets of $191 million, including $148 million of goodwill, were created in this transaction. Goodwill will be amortized to other operating expense on a straight-line basis over 15 years. A summary of unaudited pro forma combined financial information for the Corporation and Germantown combined follows:
Year Ended December 31, ----------------------- 1994 1993 ---------- --------- Operating results (in thousands, except per share): Net interest income............... $1,457,323 $1,395,883 Non-interest income............... 571,738 580,445 Income before cumulative effect of a change in accounting principle....................... 263,219 374,178 Per common share.................. 1.77 2.47 Average common shares outstanding..................... 148,444 151,261
On March 16, 1994, the Corporation acquired Constellation Bancorp ("Constellation"), a New Jersey bank holding company with $2.3 billion in assets and $2.1 billion in deposits. The Corporation issued approximately 11.3 million shares of common stock to shareholders of Constellation based on an exchange ratio of .4137 of a share of the Corporation's common stock for each share of Constellation common stock. On June 27, 1994, the Corporation acquired Independence Bancorp, Inc. ("Independence"), a Pennsylvania bank holding company with $2.6 billion in assets and $2.1 billion in deposits. The Corporation issued approximately 16.6 million shares of common stock to shareholders of Independence based on an exchange ratio of 1.5 shares of the Corporation's common stock for each share of Independence common stock. 52 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 2. ACQUISITIONS - (continued) The Constellation and Independence acquisitions were both accounted for under the pooling of interests method of accounting; accordingly, the consolidated financial statements have been restated to include the consolidated accounts of Constellation and Independence for all periods presented. Previously reported information was as follows:
1993 CORPORATION CONSTELLATION INDEPENDENCE - ---- ----------- ------------- ------------ Net interest income........................... $1,117,901 $100,753 $106,617 Provision for losses on loans................. 100,000 10,000 11,201 Non-interest income........................... 503,055 41,599 29,376 Non-financial expenses........................ 1,033,375 115,186 93,601 Provision for income taxes.................... 159,654 662 (a) 8,312 Income before cumulative effect of a change in accounting principle..................... 327,927 16,504 22,879 Cumulative effect of a change in accounting principle, net of tax....................... (13,010) - Net income.................................... 314,917 16,504 22,879 Income per share before cumulative effect of a change in accounting principle.............. 2.80 .61 1.98 Net income per share.......................... 2.69 .61 1.98 Cash dividends declared....................... 1.14 - 1.16 1992 - ---- Net interest income........................... $1,057,046 $ 86,304 $109,128 Provision for losses on loans................. 119,300 10,000 30,950 Non-interest income........................... 546,509 40,585 23,941 Non-financial expenses........................ 1,094,591 118,527 93,250 Provision for income taxes.................... 127,260 53 (a) 1,757 Income (loss) before cumulative effect of a change in accounting principle.............. 262,404 (1,691) 7,112 Cumulative effect of a change in accounting principle, net of tax....................... (80,986) - (c) 4,378 (b) Net income (loss)............................. 181,418 (1,691) 11,490 Income (loss) per share before cumulative effect of a change in accounting principle 2.27 (.19) .63 Net income (loss) per share................... 1.57 (.19) 1.02 Cash dividends declared....................... 1.02 - 1.16
_____________________________ (a) In 1993, Constellation prospectively adopted FAS 109. However, restated financial information is prepared as if Constellation retroactively adopted FAS 109 as of January 1, 1987. The impact of applying pooling of interests accounting rules and retroactively applying FAS 109 to Constellation had the following effects on restated net income and period-end common shareholders' equity:
Increase (decrease) in net income Cumulative increase --------------------- in common Amount Per Share shareholders' equity ------ --------- -------------------- Year ended: December 31, 1993........................................... $(5,076) $(.03) $39,924 December 31, 1992........................................... 702 .01 45,000
53 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 2. ACQUISITIONS - (continued) (b) Independence prospectively adopted FAS 109 on January 1, 1992, recognizing a cumulative benefit of $4.4 million as the cumulative effect of a change in accounting principle. However, restated financial information is prepared as if Independence retroactively adopted FAS 109 as of January 1, 1987. The impact of applying pooling of interests accounting rules and retroactively applying FAS 109 to Independence had the following effects on restated net income and period- end common shareholders' equity:
Increase (decrease) in net income Cumulative increase ------------------- in common Amount Per Share shareholders' equity ------ --------- -------------------- Year ended: December 31, 1993............................... - - - December 31, 1992............................... $(4,378) $(.03) -
(c) Constellation adopted FAS 106 on January 1, 1993, the date required under that statement. Constellation elected not to recognize immediately is $6.0 million transitional liability, but to amortize that liability over 20 years. As permitted under FAS 106 and pooling accounting, the restated financial information is prepared as if Constellation adopted FAS 106 effective January 1, 1992 and immediately recognized the $6.0 million, $4.0 million after-tax, transitional liability. Salaries, wages and benefits have been adjusted accordingly. Subsequent to the March 16, 1994 consummation of the Constellation acquisition, Constellation recorded merger-related charges in the first quarter of 1994 in connection with a change in strategic direction related to problem assets and to conform its consumer lending charge-off policies to those of the Corporation, and charges for expenses attributable to the acquisition. These merger-related charges totalled $127.8 million after-tax, or $.89 per share. On a pre-tax basis, the merger-related charges consisted of a $120.0 million provision for loan losses, a $28.0 million addition to the OREO reserve, $13.0 million for the writedown of purchased mortgage servicing rights and related assets, and $34.0 million for expenses directly attributable to the acquisition including severance costs of $8.0 million related to approximately 370 employees. Subsequent to the June 27, 1994 consummation of the Independence acquisition, Independence recorded merger-related charges in the second quarter of 1994 in connection with a change in strategic direction related to problem assets and to conform its consumer lending charge-off policies to those of the Corporation, and charges for expenses attributable to the acquisition. These merger-related charges totalled $39.6 million after-tax, or $.28 per share. On a pre-tax basis, the merger-related charges consisted of a $25.0 million provision for loan losses, a $4.0 million addition to the OREO reserve, and $29.7 million for expenses directly attributable to the acquisition including severance costs of $5.0 million related to approximately 345 employees. 54 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 3. FAIR VALUES OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" ("FAS 107"), requires disclosure of fair value information about financial instruments, whether or not required to be recognized in the balance sheet, for which it is practicable to estimate that value. FAS 107 defines a financial instrument as cash, evidence of ownership interest in an entity, or a contractual obligation or right that will be settled with another financial instrument. In cases where quoted market prices are not available, fair values are based on estimates using discounted cash flow or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Fair value estimates derived through those techniques cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. FAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation. The following table summarizes the carrying amount and fair value estimates of financial instruments at December 31, 1994 and 1993.
1994 1993 ------------------------------ ------------------------- Carrying Carrying or Notional Fair or Notional Fair Amount Value Amount Value ----------- ------------ ----------- ----------- ASSETS: Cash and short-term assets..................... $ 4,744,790 $ 4,744,790 $ 4,002,660 $ 4,002,660 Investment securities.......................... 2,880,631 2,849,877 3,599,166 3,628,119 Trading account securities..................... 1,206 1,206 6,393 6,393 Net loans, excluding leases.................... 19,315,247 19,856,330 18,596,671 19,190,044 LIABILITIES: Demand deposits................................ 15,213,517 15,213,517 1,788,786 15,788,786 Time deposits.................................. 6,827,369 6,898,093 5,343,510 5,505,362 Short-term borrowings.......................... 1,546,201 1,546,201 1,884,125 1,884,125 Long-term debt................................. 1,791,110 1,741,345 1,589,290 1,637,098 OFF-BALANCE SHEET ASSET (LIABILITY): Letters of credit.............................. 2,369,426 (5,923) 2,015,753 (4,111) Commitments to extend credit................... 11,802,714 (13,310) 9,993,922 (13,000) Derivative financial instruments.................................. 13,289,463 (204,183) 8,142,583 135,709
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. 55 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 3. FAIR VALUES OF FINANCIAL INSTRUMENTS - (continued) The fair value of fixed-rate performing loans is calculated by discounting scheduled principal and interest cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan type at December 31, 1994 and 1993. The estimate of maturity is based on the Corporation's historical experience with repayments for each loan type, modified by an estimate of the effect of current economic and lending conditions. For performing residential mortgage loans, fair value is estimated by referring to secondary market source pricing. For credit card loans, cash flows and maturities are estimated based on contractual interest rates and historical experience and are discounted using secondary market rates adjusted for differences in servicing and credit costs. For variable rate loans that reprice frequently and which have experienced no significant change in credit risk, fair values are based on carrying amounts. Fair value for non-performing loans is based on discounting estimated cash flows using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding cash flows, and discount rates are determined using available market information and specific borrower information. The following table presents carrying amounts and estimated fair values for loans at December 31, 1994 and 1993. Disclosures about fair value of lease financing receivables, which totaled $710,338 and $728,764 at December 31, 1994 and 1993, respectively, are not required by FAS 107, accordingly, the following table excludes lease financing receivables.
1994 1993 -------------------------- ------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------ ----------- ------------ ----------- Domestic loans: Commercial, industrial and other.................. $ 8,688,733 $8,678,995 $ 7,879,451 $ 7,869,217 Real estate loans 6,490,649 6,426,174 6,663,656 6,695,595 Consumer: Installment..................................... 1,386,776 1,396,125 1,356,633 1,380,210 Credit card..................................... 1,374,598 1,481,430 1,178,972 1,274,288 Financial institutions............................ 668,119 666,554 870,489 872,396 Factoring receivables............................. 622,380 622,380 555,211 555,211 Foreign............................................. 584,623 584,672 543,082 543,127 ----------- ----------- ----------- ----------- Total loans, excluding lease financing......................................... 19,815,878 19,856,330 19,047,494 19,190,044 Allowance for loan losses........................... (500,631) - (450,823) - ----------- ----------- ----------- ----------- Net loans, excluding lease financing........................................... $19,315,247 $19,856,330 $18,596,671 $19,190,044 =========== =========== =========== ===========
The fair value estimate for credit card loans is based on the value of existing loans at December 31, 1994 and 1993. This estimate does not include the benefit that relates to estimated cash flows from new loans expected to be generated from existing cardholders over the remaining life of the portfolio. That benefit is estimated to be approximately $59 million at December 31, 1994 and $64 million at December 31, 1993 and is neither included in the fair value estimate for credit card loans, nor recorded as an intangible asset in the consolidated balance sheet. DEPOSIT LIABILITIES The fair values disclosed for demand deposits (non-interest bearing checking accounts, NOW accounts, savings accounts, and money market accounts) are, by FAS 107 definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amounts). The carrying amounts for variable-rate, fixed-term certificates of deposit approximate their fair values. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates offered on certificates at December 31, 1994 and 1993, respectively, to an estimate of aggregate expected maturities for those certificates of deposit. 56 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 3. FAIR VALUES OF FINANCIAL INSTRUMENTS - (continued) The following table presents carrying amounts and estimated fair values of deposits at December 31, 1994 and 1993:
1994 1993 ------------------------------ ------------------------------ Carrying Fair Carrying Fair Amount Value Amount Value ----------- ----------- ----------- ----------- Domestic: Non-interest bearing checking......................... $ 6,362,470 $ 6,362,470 $ 6,649,367 $ 6,649,367 NOW accounts.......................................... 1,875,391 1,875,391 1,907,537 1,907,537 Savings accounts...................................... 4,354,829 4,354,829 4,188,103 4,188,103 Money market accounts................................. 2,620,827 2,620,827 3,043,779 3,043,779 Time deposits......................................... 5,714,004 5,784,728 4,546,608 4,708,460 ----------- ----------- ----------- ----------- Total domestic deposits......................... 20,927,521 20,998,245 20,335,394 20,497,246 Overseas branches and subsidiaries......................................... 1,113,365 1,113,365 796,902 796,902 ----------- ----------- ----------- ----------- Total deposits.................................. $22,040,886 $22,111,610 $21,132,296 $21,294,148 =========== =========== =========== ===========
The estimated fair values above do not include the benefit that results from funding provided by core deposit liabilities as compared to the cost of borrowing funds in the financial markets. That benefit, commonly referred to as a deposit base intangible, is estimated to be approximately $600,000 at December 31, 1994 and $570,000 at December 31, 1993 and is neither considered in the above estimated fair value amounts nor recorded as an intangible asset in the consolidated balance sheet. The core deposit base intangible was determined by using a discounted cash flow approach to value the spread between the cost of core deposit liabilities and the cost of alternative borrowing sources over the estimated lives of the core deposit liabilities. SHORT-TERM FUNDS BORROWED The carrying amounts of Federal funds purchased, securities sold under agreements to repurchase, commercial paper and other short-term borrowings approximate their fair values. LONG-TERM DEBT The fair values for long-term debt are based on quoted market prices where available. If quoted market prices are not available, fair values are estimated using discounted cash flow analyses based on the Corporation's borrowing rates at December 31, 1994 and 1993 for comparable types of borrowing arrangements. See Note 11 for additional information regarding the carrying value and estimated fair value of long-term debt. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS AND COMMITMENTS Fair values for the Corporation's futures, forwards, interest rate swaps, options, interest rate caps and floors, and foreign exchange contracts are based on quoted market prices (futures); current settlement values (forwards); quoted market prices of comparable instruments (foreign currency exchange contracts); or, if there are no relevant comparable instruments, on pricing models or formulas using current assumptions (interest rate swaps, interest rate caps and floors, and options). The fair value of commitments to extend credit other than credit card is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The value of commitments to extend credit under credit card lines is embodied in the benefit that relates to estimated cash flows from new loans expected to be generated from existing cardholders over the remaining life of the portfolio. The fair value of standby and commercial letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate the agreements or otherwise settle the obligations with the counterparties. See Note 15 for the notional value and estimated fair value of the Corporation's off-balance sheet derivative financial instruments and commitments. 4. CASH AND DUE FROM BANKS The Corporation's banking subsidiaries are required to maintain reserve balances with the Federal Reserve Bank. The average amount of those reserve balances for the years ended December 31, 1994 and 1993 were approximately $326,000, and $462,000, respectively. 57 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 5. INVESTMENT SECURITIES The carrying and fair values of investment securities at December 31, 1994 and 1993 were as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- 1994 - ---- Held-to-Maturity - ---------------- U.S. Treasury................ $ 736,613 $ 202 $13,545 $ 723,270 U.S. Government agencies..... 1,107,550 923 16,572 1,091,901 State and municipal.......... 297,890 6,602 5,562 298,930 Other: Domestic.................... 284,466 331 3,133 281,664 Foreign..................... 28,065 - - 28,065 ---------- -------- ------- ---------- Total held-to-maturity..... $2,454,584 $ 8,058 $38,812 $2,423,830 ========== ======== ======= ========== Available-for-Sale - ------------------ U.S. Treasury................ $ 185,411 $ 8,015 $ 177,396 U.S. Government agencies..... 147,996 $ 89 8,855 139,230 State and municipal.......... 8,218 99 90 8,227 Other: Domestic.................... 35,914 17,041 2,067 50,888 Foreign..................... 23,229 27,109 32 50,306 ---------- -------- ------- ---------- Total available-for-sale.. $ 400,768 $ 44,338 $19,059 $ 426,047 ========== ======== ======= ========== 1993 - ---- Held-to-Maturity - ---------------- U.S. Treasury................ $ 522,537 $ 6,203 $ 169 $ 528,571 U.S. Government agencies..... 1,318,522 5,481 2,758 1,321,245 State and municipal.......... 277,377 16,753 247 293,883 Other: Domestic.................... 88,423 1,193 154 89,462 Foreign..................... 21,701 2,655 4 24,352 ---------- -------- ------- ---------- Total held-to-maturity..... $2,228,560 $ 32,285 $ 3,332 $2,257,513 ========== ======== ======= ========== Available-for-Sale - ------------------ U.S. Treasury................ $ 435,721 $ 14,320 $ 502 $ 449,539 U.S. Government agencies..... 439,496 9,815 621 448,690 State and municipal.......... 77,050 2,185 174 79,061 Other: Domestic.................... 308,488 26,988 5,919 329,557 Foreign..................... 11,383 52,376 - 63,759 ---------- -------- ------- ---------- Total available-for-sale.. $1,272,138 $105,684 $ 7,216 $1,370,606 ========== ======== ======= ==========
At December 31, 1992, marketable equity securities of $37,204 were carried at the aggregate of their lower of cost or market. During 1992, the Corporation recorded pre-tax gains of $2,636 on sales of certain domestic marketable equity securities. At December 31, 1992, the market value of the marketable equity securities portfolio exceeded its carrying value by $20,592. These marketable equity securities are carried in the available-for-sale portfolio and have been written up by $43,989 at December 31, 1994 the aggregate of their excess fair values over cost, through an after-tax credit to retained earnings. The Corporation recorded pre-tax gains of $11,926 in 1994 and $13,594 in 1993 on sales of certain domestic equity securities. During 1994, 1993 and 1992, the Corporation recorded pre-tax gains of $2,567, $8,617 and $5,325 on sales of foreign equity securities. Included in other domestic securities available-for-sale at December 31, 1993 were mortgage residual securities with an amortized cost and fair value of $13,251 and $8,339, respectively. Pre-tax write-downs of $3,961 were recognized in 1993 on these investments and were included in securities gains and losses. During the first quarter of 1994, a $3,430 after-tax impairment loss was recognized on these mortgage residual securities as the cumulative effect of a change in accounting principle. The loss was the result of a write-down to fair value of these securities which were deemed to be impaired. This write-down resulted from a FASB interpretation of FAS 115 reached by a consensus of the FASB Emerging Issues Task Force in March 1994, which provided more definitive criteria for recognition of impairment losses on these types of securities. 58 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 5. INVESTMENT SECURITIES - (continued) At December 31, 1994 and 1993, there were no investments in securities of any single, non-Federal issuer in excess of 10% of shareholders' equity. Securities with a carrying value of $1,579,588 were pledged at December 31, 1994 to secure public deposits, trust deposits, and for certain other purposes as required by law. The amortized cost and estimated fair value of debt securities at December 31, 1994, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations without prepayment penalties.
Amortized Fair Cost Value ---------- ---------- Held-to-Maturity - ---------------- Due in one year or less................. $ 721,604 $ 717,867 Due after one year through five years... 617,953 606,435 Due after five years through ten years.. 147,964 146,205 Due after ten years..................... 105,699 107,466 Mortgage-backed securities.............. 789,479 773,952 ---------- ---------- $2,382,699 $2,351,925 ========== ========== Available-for-Sale - ------------------ Due in one year or less................. $ 76,069 $ 76,079 Due after one year through five years... 96,703 90,907 Due after five years through ten years.. 27,967 25,157 Due after ten years..................... 6,446 6,327 Mortgage-backed securities.............. 158,408 148,413 ---------- ---------- $ 365,593 $ 346,883 ========== ==========
Proceeds from sales of investments in debt securities available-for-sale during 1994, 1993, and 1992 were $657,361, $535,267 and $344,605, respectively. Gross gains of $9,625 in 1994, $6,069 in 1993 and $8,475 in 1992, and gross losses of $4,739 in 1994, $200 in 1993 and $808 in 1992 were realized on those sales. 6. LOAN PORTFOLIO For a breakdown of the loan portfolio by type of loan 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 1994, 1993, and 1992 was $32,215, $48,124 and $126,184, respectively. Other real estate owned includes properties that the Corporation has acquired in foreclosure or that have been determined to be "in substance" foreclosed. At December 31, 1994 and 1993, the Corporation had loans totalling $149,996 and $119,099, respectively, to its directors, officers and companies in which the directors had a 10% or more voting interest. These loans were made on substantially the same terms, including interest rates and collateral as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectibility. The 1994 additions and reductions were $2,081,641 and $2,050,744, respectively. In May 1992, the Corporation sold the assets of Signal Financial Corp, a consumer finance subsidiary, including approximately $300,000 of consumer installment loans. The loans were sold net of $14,700 of the allowance for loan losses. This transaction had an immaterial impact on the earnings of the Corporation. In September 1993, the Corporation sold five of its seven branches from the Virgin Islands operations. The five branches had loans of $131,200 and deposits of $228,800 at the time of sale. The Corporation recorded a pre-tax gain of $11,000 on the sale. In December 1994, the remaining two branches were sold at a pre-tax gain of $1,900. In 1994 and 1993, the Corporation sold $317,000 and $207,000, respectively, of fixed-rate home equity loans in securitization transactions. Included in the loan portfolio are $530 million of residential mortgage loans which will be sold in the second quarter of 1995. These loans are being accounted for as assets held for sale and are carried at lower of cost or market at December 31, 1994. 59 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 7. ALLOWANCE FOR LOAN LOSSES The following represents an analysis of changes in the allowance for loan losses for the years ended December 31, 1994, 1993 and 1992:
1994 1993 1992 --------- --------- --------- Balance at beginning of period............... $ 450,823 $ 442,267 $ 473,301 Allowance for loans sold at date of sale..... - (353) (14,700) Allowance for loans purchased at date of purchase............................... 24 - 1,028 Allowance for loans of bank acquired under purchase method of accounting............. 23,739 2,703 - Provision charged to operating expense....... 246,900 121,201 160,250 Recoveries of loans previously charged off. 63,059 86,738 70,069 Loan charge-offs............................. (283,914) ( 201,733) (247,681) --------- --------- ------- Balance at end of period..................... $ 500,631 $ 450,823 $442,267 ========= ========= =======
In May 1993, the Financial Accounting Standards Board issued statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("FAS 114"). FAS 114 addresses accounting for impairment of certain loans and requires that impaired loans within the scope of FAS 114 be measured based on the present value of expected cash flows discounted at the loan's effective interest rate, or be measured at the loan's observable market price or the fair value of its collateral. FAS 114 is effective beginning in 1995. The adoption of FAS 114 is not expected to have a material impact on CoreStates' level of allowance for loan losses. 8. PREMISES AND EQUIPMENT The consolidated balance sheet includes premises and equipment, net of accumulated depreciation and amortization of $535,126 and $525,889 at December 31, 1994 and 1993, respectively. Depreciation and amortization of premises and equipment for the years ended December 31, 1994, 1993, and 1992, was $56,919, $59,792, and $67,384, respectively. 9. TIME DEPOSITS Domestic time deposits in denominations of $100 or more at December 31, 1994, 1993, and 1992 were:
1994 1993 1992 -------- -------- -------- Commercial certificates of deposit......... $268,402 $295,835 $638,258 Other domestic time deposits, principally savings certificates....... 371,771 145,195 209,637 -------- -------- -------- Total....................... $640,173 $441,030 $847,895 ======== ======== ========
Interest expense on domestic time deposits in denominations of $100 or more for the years ended December 31, 1994, 1993, and 1992 was:
1994 1993 1992 -------- ------- ------- Interest expense: Commercial certificates of deposit................. $ 9,547 $13,908 $30,739 Other domestic time deposits, principally savings certificates........................ 13,231 9,434 17,956 ------- ------- ------- Total................................... $22,778 $23,342 $48,695 ======= ======= =======
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. 60 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 10. SHORT-TERM FUNDS BORROWED Short-term funds borrowed at December 31, 1994 and 1993 include the following:
1994 1993 ---------- ---------- Federal funds purchased (a)......................... $ 252,340 $ 606,617 Securities sold under agreements to repurchase (b).. 139,923 249,731 Commercial paper (c)................................ 853,947 501,838 Other short-term funds borrowed (d)................. 299,991 525,939 ---------- ---------- Total short-term funds borrowed (e)....... $1,546,201 $1,884,125 ========== ==========
(a) Federal funds purchased generally represent the overnight Federal funds transactions of banking subsidiaries with correspondent banks. The weighted average interest rate paid was 4.58% in 1994, 3.15% in 1993 and 3.39% in 1992. The maximum amount outstanding at any month-end was $961,634 during 1994, $1,160,951 during 1993, and $848,953 during 1992. (b) Securities sold under agreements to repurchase usually mature within one to thirty days or are due on demand. The weighted average interest rate paid was 2.61% in 1994, 2.73% in 1993 and 3.57% in 1992. The maximum amount outstanding at any month-end was $281,327 during 1994, $386,368 during 1993 and $427,349 during 1992. (c) Commercial paper issued by CoreStates Capital Corp is used to finance the short-term borrowing requirements of certain banking-related activities. Commercial paper is issued with maturities of not more than nine months and there are no provisions for extension, renewal or automatic rollover. The weighted average interest rate on commercial paper borrowings was 4.24% in 1994, 3.14% in 1993 and 3.72% in 1992. The maximum amount outstanding at any month-end was $919,292 during 1994, $714,439 during 1993 and $578,364 during 1992. At December 31, 1994, the Corporation had fee-based lines of credit facilities from unaffiliated banks totalling $645,000. The lines of credit were established in support of commercial paper borrowings, Medium Term Note issuance and general corporate purposes. In January 1995, the Corporation replaced these bi-lateral lines of credit with a $650,000 revolving credit facility. Unless extended by the Corporation in accordance with the terms of the facility agreement, the facility expires January 1999. There were no borrowings under these lines at December 31, 1994. The interest rate charged for usage of these lines varies with money market conditions. (d) Other short-term funds borrowed include term Federal funds purchased and demand notes payable to the U.S. Treasury. (e) The aggregate average short-term funds borrowed were $1,928,000 in 1994, $1,962,000 in 1993 and $1,657,000 in 1992. The weighted average interest rate was 4.42% in 1994, 3.42% in 1993 and 3.65% in 1992. The average interest rate is calculated primarily on a daily average of short-term funds borrowed. 61 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 11. LONG-TERM DEBT Long-term debt at December 31, 1994 and 1993 includes the following:
1994 1993 ----------------------------- ----------------------- Carrying Fair Carrying Fair CoreStates Financial Corp: Amount Value Amount Value ------------ ---------- ---------- ---------- 8 5/8% Mortgages due 2001........... $ 9,997 $ 10,068 $ 10,803 $ 12,505 7% Convertible Subordinated Debentures due 2011 (a)........... -- -- 42,147 44,813 Subordinated Debentures due 2000 (b).......................... -- -- 25,000 25,000 ---------- --------- -------- ------ 9,997 10,068 77,950 82,318 ---------- --------- -------- -------- CoreStates Capital Corp ("CSCC"): 5 7/8% Guaranteed Subordinated Notes due 2003 (c)................ 200,000 165,900 200,000 192,480 6 6/8% Guaranteed Subordinated Notes due 2005 (c)................ 175,000 150,535 175,000 172,358 9 6/8% Guaranteed Subordinated Notes due 2001 (d)................ 150,000 157,230 150,000 178,395 9 1/8% Guaranteed Subordinated Notes due 2003 (e)................ 100,000 104,130 100,000 118,830 Medium Term Notes (f)............... 1,099,585 1,097,998 808,085 812,299 ---------- ---------- ---------- ---------- 1,724,585 1,675,793 1,433,085 1,474,362 ---------- ---------- ---------- ---------- Other subsidiaries: Federal Home Loan Bank Borrowings (g).................... 55,000 53,956 65,000 66,801 9.35% Subordinated Note due July 2003 (h)............ -- -- 10,000 10,250 Various other....................... 1,528 1,528 3,255 3,367 ---------- ---------- ---------- ---------- 56,528 55,484 78,255 80,418 ---------- ---------- ---------- ---------- Total long-term debt (i)............ $1,791,110 $1,741,345 $1,589,290 $1,637,098 ========== ========== ========== ==========
(a) The Debentures were called for redemption at 101.4% plus accrued interest in November 1994. As a result of this call, 945,000 common shares were issued on conversion of $23,000 of the debentures. (b) The debentures were retired at par plus accrued interest in January 1994. (c) The Notes are not subject to redemption prior to maturity and are unconditionally guaranteed, on a subordinated basis, as to payment of principal and interest by the Corporation. The Notes are subordinated to all existing and future senior CSCC indebtedness and the guarantee is subordinated to all outstanding senior Corporation indebtedness. (d) The Notes are unconditionally guaranteed, on a subordinated basis, as to payment of principal and interest by the Corporation. The Notes are subordinated to all existing and future senior CSCC indebtedness and the guarantee is subordinated to all existing and future senior indebtedness of the Corporation. (e) The Notes are not subject to redemption prior to maturity and are unconditionally guaranteed, on a subordinated basis, as to payment of principal and interest by the Corporation. The Notes are subordinated to all existing and future senior CSCC indebtedness and the guarantee is subordinated to all existing and future senior Corporation indebtedness. (f) CSCC can issue Medium Term Notes (Senior and Subordinated) ranging in maturity of more than nine months from date of issue. The interest rate or interest rate formula on each Note is established by CSCC at the time of issuance. The Senior Notes are unconditionally guaranteed as to payment of principal and interest by the Corporation. The Subordinated Notes are unconditionally guaranteed, on a subordinated basis, as to payment of principal and interest by the Corporation. The Subordinated Notes are subordinated to all existing and future senior CSCC indebtedness and the guarantee is subordinated to all existing and future senior Corporation indebtedness. At December 31, 1994, $1.1 billion of debt was outstanding with terms up to five years at fixed interest rates ranging from 4.90% to 6.51% and various floating interest rates. 62 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 11. LONG-TERM DEBT - continued Under an existing shelf registration statement filed with the Securities and Exchange Commission, the Corporation had debt and capital securities that were registered but unissued of approximately $674.0 million at December 31, 1994. (g) The borrowings range in maturity from May 1995 to June 1996 at floating interest rates of three month LIBOR less .10% and fixed interest rates from 4.58% to 5.89%. (h) On December 16, 1994, the Note was called. The redemption price was 102%. (i) The consolidated aggregate maturities and sinking fund requirements for long-term debt for the years ending December 31, 1995 through 1999 are: $470,375; $305,965; $137,616; $111,743; and $137,222, respectively. 12. RETIREMENT AND BENEFIT PLANS Pension expense under the Corporation's defined benefit pension plans was $20,390 in 1994, $12,007 in 1993 and $10,926 in 1992. The projected benefit obligation exceeded plan assets at fair value by $44,346 at December 31, 1994, based on current and estimated future salary levels. The excess of the projected benefit obligation is reconciled to the accrued pension cost included in other liabilities as follows:
December 31, ---------------------- 1994 1993 -------- -------- Plan assets at fair value(a)........................... $456,293 $484,273 -------- -------- Present value of benefit obligation: Accumulated benefits based on salaries to date, including vested benefits of $371,570 in 1994 and $384,469 in 1993................................... 402,772 419,943 Additional benefits based on estimated future salary levels...................................... 97,867 110,675 -------- -------- Projected benefit obligation........................... 500,639 530,618 -------- -------- Amount projected benefit obligation exceeds plan assets at fair value at December 31,............ (44,346) (46,345) Reconciliation: Unrecognized prior service cost...................... 5,879 5,736 Unrecognized net asset from date of initial application........................................ (27,538) (31,551) Net deferred actuarial loss.......................... 19,299 44,172 -------- -------- Accrued pension expense included in other liabilities.. $(46,706) $(27,988) ======== ========
_____________________________________ (a) Primarily U.S. Government securities, U.S. agency securities, fixed income securities and commingled funds managed by subsidiary banks. Net pension cost for the years ended December 31, 1994, 1993 and 1992 included the following expense (income) components:
1994 1993 1992 --------- --------- --------- Service cost benefits earned during the period.. $ 21,260 $ 16,117 $ 15,384 Interest cost on projected benefit obligation... 38,773 35,186 32,933 Actual (return) loss on plan assets............. 17,746 (49,401) (16,426) Net amortization and deferral................... (57,389) 10,105 (20,965) -------- -------- -------- Net pension cost.............................. $ 20,390 $ 12,007 $ 10,926 ======== ======== ========
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation for the Corporation was 8.0% and 7.0%, respectively, at December 31, 1994 and 1993. The rate of increase on future compensation levels was 5.0%. The expected long-term rate of return on plan assets was 8.5% to 9.5%. The Corporation sponsors a savings plan for its employees. Contributions to the savings plan for the employers' match were $13,133 in 1994, $13,576 in 1993, and $13,117 in 1992. Prior to its acquisition by the Corporation, Independence maintained a defined contribution plan which covered all employees who meet age and service requirements. Expense related to this plan was $2,407 in 1994, $2,636 in 1993, and $2,861 in 1992. Vested contributions were rolled into the Corporation's savings plan. 63 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 12. RETIREMENT AND BENEFIT PLANS - (continued) The Corporation and its subsidiaries provide certain postretirement health care and life insurance benefits for retired employees. Postretirement benefits are provided through an insurance company whose premiums are based on the benefits paid during the year. The postretirement health care plan is contributory, with retiree contributions based on years of service. Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("FAS 106") requires that employers accrue the costs associated with providing postretirement benefits during the active service periods of employees, rather than the previously accepted accounting practice of recognizing these costs on a pay-as-you-go basis. Effective January 1, 1992, the Corporation adopted FAS 106. As permitted under FAS 106, the Corporation elected to recognize immediately the transitional postretirement benefit liability of $128,706, $84,946 after-tax or $.62 per share, as the cumulative effect of a change in accounting principle. The liability for postretirement benefits included in other liabilities at December 31, 1994 and 1993 was as follows:
1994 1993 ---------- ---------- Accumulated postretirement benefit obligation: Retirees..................................... $ (93,547) $(102,143) Fully eligible active plan participants...... (2,979) (3,662) Other active plan participants............... (32,420) (41,056) --------- --------- Accumulated postretirement benefit obligation (128,946) (146,861) Plan assets at fair value (a)................... 24,467 20,006 --------- --------- Unfunded obligation at December 31,............. (104,479) (126,855) Unrecognized net (gain) loss.................... (27,247) 3,795 --------- -------- Accrued postretirement benefit obligation....... $(131,726) $(123,060) ========= =========
- ------------------------------------ (a) Primarily municipal bonds and short-term investments. Net periodic postretirement benefit cost for the years ended December 31, 1994 and 1993 included the following expense (income) components:
1994 1993 -------- -------- Service cost-benefits earned during the period.. $ 2,323 $ 2,160 Interest cost on accumulated postretirement benefit obligation........................... 9,261 10,108 Actual return on plan assets.................... (461) (6) Net amortization and deferral................... (736) 6 ------- ------- Net periodic postretirement benefit cost........ $10,387 $12,268 ======= =======
For measurement purposes, an 11% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1994; the rate was assumed to decrease gradually to 9.5% for 1997 and remains at that level thereafter. For measurement purposes, a fixed dollar amount was determined as the Corporation's maximum cost per employee. This fixed dollar amount was established at the projected cost level for medical expenses in 1997. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by 1 percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1994 by $9,217 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $730. The expected long-term rate of return on plan assets was 6.0%. The weighted- average discount rate used in determining the accumulated postretirement benefit obligation was 8.0% and 7.0%, respectively, at December 31, 1994 and 1993. 64 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 12. RETIREMENT AND BENEFIT PLANS - (continued) Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("FAS 112") was issued in November 1992 to establish accounting for benefits provided to former or inactive employees after employment but before retirement. FAS 112 requires that employers accrue the costs associated with providing benefits, such as salary and benefit continuation under disability plans, when payment of the benefits is probable and the amount of the obligation can be reasonably estimated. Effective January 1, 1993, the Corporation adopted FAS 112. The Corporation recognized the January 1, 1993 FAS 112 transitional liability of $20,015, $13,010 after-tax or $.09 per share, as the cumulative effect of a change in accounting principle. The impact of FAS 112 on salaries, wages and benefits expense for the year ended December 31, 1994 and 1993 was not material. 13. LONG-TERM INCENTIVE PLAN The Corporation has outstanding options granted under the Corporation's long- term incentive plan (the "Plan"). As provided in the Plan, a variety of incentives can be issued to eligible participants including restricted stock awards, incentive stock options, non-qualified stock options, stock appreciation rights, performance units and cash awards. Constellation, Independence and Germantown had maintained similar plans. Options granted under those plans were assumed by the Corporation upon consummation of their respective acquisitions. The Plan provides for a maximum number of options available to be granted each year equal to 2% of outstanding common shares as of January 1 of that year. Information on options for 1994 follows:
Shares under Option price option per share ---------- --------------- Balance at January 1, 1994.......... 6,419,579 $ 3.21 - $54.70 Options granted..................... 1,896,925 26.38 - 28.00 Options exercised................... (936,294) 3.21 - 27.50 Options cancelled................... (144,511) 7.64 - 54.70 --------- Balance at December 31, 1994........ 7,235,699 3.99 - 54.70 =========
Options under the Plan are granted to purchase the Corporation's common shares at market value on the date of grant and are exercisable one year from the date of grant for a period not exceeding ten years. Stock appreciation rights may be granted in conjunction with the granting of an option. Upon the exercise of stock appreciation rights and the surrender of the related option, an employee may receive in cash or common stock of the Corporation a value equal to the difference between the market price at the date of exercise and the option price of shares. The assumed exercise of the options and other awards under the Plan did not have a materially dilutive effect on the earnings per share in years 1992 through 1994. The preceding option table does not reflect 214,062 performance unit awards outstanding at December 31, 1994, 280,190 at December 31, 1993 and 371,514 at December 31, 1992. Performance unit awards are earned subject to specific performance of the Corporation over specified performance periods as defined in the Plan. The payment value of each performance unit earned for the applicable performance period is the fair market value of one share of common stock of the Corporation based on the formula contained in the Plan. During 1994, 1993 and 1992, respectively, $867, $1,051 and $1,557 was expensed in connection with performance unit awards. 14. OPERATING LEASES Rental expense, reduced by sublease rental income, charged to operations was $59,820, $63,055 and $62,042 for 1994, 1993 and 1992, respectively. 15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS AND COMMITMENTS In the normal course of business, there are outstanding commitments and contingent liabilities which are not reflected in the financial statements. These include various financial instruments with off-balance sheet risk used in connection with the Corporation's asset and liability management and to provide for the needs of customers. These involve varying degrees of credit, interest rate and liquidity risk, but do not represent unusual risks for the Corporation and management does not anticipate any significant losses as a result of these transactions. 65 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS AND COMMITMENTS - continued DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING The Corporation uses off-balance sheet derivative financial instruments, such as interest rate swaps, futures and caps, to manage interest rate risk. The Corporation's exposure to interest rate risk stems from the mismatch between the sensitivity to movements in interest rates of the Corporation's assets and liabilities and from the spread risk between the rates on those assets and liabilities and financial market rates. The use of derivatives to manage interest rate risk falls into three categories: interest sensitivity adjustments, interest rate spread protection and hedging anticipated asset sales. Interest rate swaps and futures are generally used to lengthen the interest rate sensitivity of short-term assets and to shorten the repricing characteristics of longer term liabilities. Interest rate caps are used to manage spread risk. Interest rate caps are also used to offset the risk of upward interest rate movement on adjustable rate mortgages and other products with imbedded caps as well as to reduce the risk that interest rate spreads narrow on prime based products. Gains or losses are used to adjust the basis of the related asset or liability and interest differentials are adjustments of the related interest income or expense. In connection with anticipated sales of longer term assets acquired through merger or generated in the loan origination process, the Corporation uses interest rate swaps and option agreements to reduce interest rate sensitivity as the assets are readied for sale. Hedge gains or losses are used to adjust the basis of the assets held for sale. Derivative financial instruments used in the management of interest rate risk at December 31, 1994 are summarized by category in the table on page 30. A summary of interest rate swap contracts categorized by whether the Corporation receives or pays fixed rates and stratified by repricing or maturity date is on page 32. Foreign currency derivatives used for hedging activities have not had a material impact on income or liquidity of the Corporation for any of the years presented. DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR TRADING PURPOSES In its business of providing risk management services for its customers, the Corporation engages in derivative activities including interest rate swaps, caps and floors. In addition, as part of its international business, the Corporation enters into foreign exchange contracts on behalf of customers. These contracts are matched against forward sale or purchase contracts. All customer related derivative financial instrument transactions are marked to market and any gains or losses are recorded in the income statement. The Corporation does not maintain a regular trading business where unbalanced positions are taken in any financial derivative instrument. Customer related derivative financial instruments accounted for as held for trading at December 31, 1994 are summarized by type of instrument in the table on page 33. The following is a summary of off-balance sheet commitments and derivative financial instruments as of December 31, 1994 and 1993, including fair values:
1994 1993 -------------------------- ------------------------- 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)........... $1,125,262 $ (2,813) $1,123,303 $ (1,884) Commercial letters of credit................................... 1,244,164 (3,110) 892,450 (2,227) Commitments to extend credit (b)............................... 8,223,261 (13,310) 7,000,689 (13,000) Unused commitments under credit card lines..................... 3,579,453 2,993,233 Interest rate futures and forward contracts (c): Commitments to purchase..................................... 1,043,000 (1,185) 925,500 365 Commitments to purchase foreign and U.S. currencies (d)......................................... 1,816,549 1,702 1,336,646 1,148 Interest rate swaps, notional principal amounts (e)................................................. 8,234,400 (210,300) 4,597,119 133,163 Interest rate caps and floors (f): Written..................................................... 749,857 (15,000) 622,920 (4,196) Purchased................................................... 1,150,657 20,200 621,398 5,004 Other derivatives.............................................. 295,000 400 39,000 225
- ------------------------------------ (1) See Note 3 for discussion of fair value. 66 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS AND COMMITMENTS - continued (a) Standby letters of credit ("SBLC") are used in various transactions to enhance the credit standing of the Corporation's customers and are subjected to the same risk, credit review and approval process as loans. SBLC's are irrevocable assurances that the Corporation will make payment in the event that a customer cannot perform its contractual obligations to third parties. (b) Commitments to extend credit represent the Corporation's obligation to fund commercial and real estate loans, including home equity lines, lines of credit, revolving lines of credit and other types of commitments. (c) Exchange traded futures contracts and forward rate agreements represent agreements to exchange dollar amounts at a specified future date for interest rate differentials between an agreed interest rate and a reference rate, computed on a notional amount. Credit and market risk exist with respect to these instruments. Exchange traded futures contracts entail daily cash settlement; therefore, the credit risk amount represents a one-day receivable. (d) Commitments to purchase foreign and U.S. currencies are primarily executed for the needs of customers. These foreign exchange contracts are structured similar to interest rate futures and forward contracts. The risk associated with a foreign exchange contract arises from the counterparty's ability to make payment at settlement and that the value of a foreign currency might change in relation to the U.S. dollar. The Corporation's exposure, if any, to counterparty failure equals the current market value of the contract, which at December 31, 1994 and 1993 was $2,275 and $1,160, respectively. Included in fees for international services are net foreign exchange gains of $18,863, $15,979 and $16,887 for the years ended December 31, 1994, 1993 and 1992, respectively. (e) Interest rate swaps generally represent the contractual exchange of fixed and variable rate interest payments based on a notional principal amount and an interest reference rate. Credit risk exists with respect to these instruments arising from the possible failure of the counterparty to make required payments on those contracts which are favorable to the Corporation. The Corporation's exposure to counterparty failure equals the current replacement cost of the contract. At December 31, 1994 and 1993, the replacement cost of the Corporation's interest rate swap contracts was $17,093 and $160,598, respectively. The risk of counterparty failure is controlled by limiting transactions to an approved list of counterparties. Net cash received on interest rate swaps during 1994 totaled $99,928. (f) Interest rate caps and floors are written by the Corporation to enable customers to transfer, modify or reduce their interest rate risk. Interest rate caps and floors are similar to interest rate swaps except that payments are made only if current interest rates move above or below a predetermined rate. The risk associated with interest rate caps and floors is an unfavorable change in interest rates. As a writer of interest rate caps and floors, the Corporation receives a premium in exchange for bearing the risk of an unfavorable change in interest rates. The Corporation generally minimizes this risk by entering into offsetting cap and floor positions that essentially counterbalance each other. The Corporation also enters interest rate caps to offset the risk of upward interest rate movement on assets with embedded caps as well as to limit spread risk. As a purchaser of interest rate caps, the Corporation pays a premium in exchange for the right to receive payments if interest rates rise above predetermined levels. Similar to interest rate swaps, credit risk exists with respect to the possible failure of the counterparty to make required payments on those contracts which are favorable to the Corporation. Exposure to counterparty failure equals the current replacement cost of the contract which totalled $20,200 and $5,004, respectively, at December 31, 1994 and 1993. In the normal course of business, the Corporation and its subsidiaries are subject to numerous pending and threatened legal actions and proceedings, some for which the relief or damages sought are substantial. Management does not believe the outcome of these actions and proceedings will have a materially adverse effect on the consolidated financial position of the Corporation. 67 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:
1994 1993 1992 -------- -------- -------- Current: Federal..................................... $106,053 $155,972 $ 85,838 State....................................... 15,652 18,209 11,095 -------- -------- -------- Total domestic........................ 121,705 174,181 96,933 Foreign..................................... 5,558 10,284 4,368 -------- -------- -------- Total current......................... 127,263 184,465 101,301 Deferred Federal and state expense (benefit).. 16,393 (10,656) 26,864 -------- -------- -------- Total provision for income taxes...... $143,656 $173,809 $128,165 ======== ======== ========
The significant components of the Corporation's deferred tax assets and liabilities at December 31, 1994 and 1993 are as follows:
1994 1993 --------- --------- Deferred tax assets: Allowance for loan losses.................... $171,176 $149,097 Postretirement and postemployment benefits... 65,743 56,346 Reserves..................................... 26,616 30,931 Other........................................ 61,108 71,388 -------- -------- Gross deferred tax asset..................... 324,643 307,762 Valuation allowance.......................... (9,102) (9,102) -------- -------- Total deferred tax assets............. 315,541 298,660 -------- -------- Deferred tax liabilities: Auto leasing portfolio....................... 88,570 69,721 FAS 115 fair value accounting................ 5,981 34,916 Partnership investments...................... 744 19,660 Tax over book depreciation................... 18,040 16,689 Affiliate income............................. 17,716 14,924 Other........................................ 9,984 15,692 -------- -------- Total deferred tax liabilities......... 141,035 171,602 -------- -------- Net deferred tax assets........................ $174,506 $127,058 ======== ========
At December 31, 1994 cumulative deductible temporary differences are approximately $928 million and the related deferred tax asset is $325 million. The major components of the temporary differences include $489 million related to the allowance for loan losses and $188 million related to pension, FAS 106 and FAS 112. Cumulative taxable temporary differences related to deferred tax credits at December 31, 1994 are estimated at $403 million and are primarily related to leasing, FAS 115 fair value accounting, affiliate income and depreciation. The related deferred tax liability is $141 million. 68 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 16. PROVISION FOR INCOME TAXES - (continued) The Corporation has determined that it is not required to establish a valuation reserve for the Federal deferred tax asset since it is more likely than not that the deferred tax asset of $315 million will be principally realized through carryback to taxable income in prior years, and future reversals of existing taxable temporary differences, and to a lesser extent, future taxable income and tax planning strategies. Management believes that future taxable income will be sufficient to realize the benefits of temporary deductible differences that cannot be realized through carryback to prior years or through the reversal of future temporary taxable differences. The Corporation's conclusion that it is "more likely than not" that the deferred tax asset will be realized is based on a history of growth in earnings and the prospects for continued growth including an analysis of potential uncertainties that may affect future operating results. The Corporation will continue to review the tax criteria of "more likely than not", for the recognition of deferred tax assets on a quarterly basis. As required by FAS 109, the Corporation has determined that it is required to establish a $9 million valuation reserve for the deferred tax asset related to pre-affiliation state income taxes. The consolidated effective tax rates are reconciled to the statutory rate as follows:
1994 1993 1992 ----- ----- ----- Statutory rate......................... 35.0% 35.0% 34.0% Difference resulting from: Tax-exempt income.................... (3.4) (3.1) (5.0) State, local and foreign income tax.. 2.6 2.4 2.2 Other, net........................... 2.4 (1.9) 1.1 ---- ---- ---- Effective tax rate..................... 36.6% 32.4% 32.3% ==== ==== ====
Foreign earnings of certain subsidiaries would be taxed only upon their transfer to the United States. Accumulated earnings of insurance subsidiaries would be taxed only to the extent they are distributed as dividends, or exceed limits prescribed by tax laws. No transfers or dividends are contemplated at this time. Taxes payable upon remittance of such accumulated earnings of $22,014 at December 31, 1994 would approximate $7,306. Taxes, other than income taxes, included in other operating expenses for the years ended December 31, 1994, 1993 and 1992 are $70,505, $76,608 and $75,382, respectively. 69 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS: Continued (DOLLAR AMOUNTS IN THOUSANDS) 17. QUARTERLY FINANCIAL DATA (UNAUDITED) The following represents summarized quarterly financial data of the Corporation, which, in the opinion of management, reflects all adjustments (comprising only normal recurring accruals) necessary for a fair presentation:
THREE MONTHS ENDED ------------------------------------------------------------ DEC.31 SEPT.30 JUNE 30 MARCH 31 ------ ------- ------- -------- 1994 - ----- Interest income...................... $517,956 $488,406 $473,956 $449,209 ======== ======== ======== ======== Interest expense..................... $158,709 $136,287 $124,291 $120,871 ======== ======== ======== ======== Net interest income.................. $359,247 $352,119 $349,665 $328,338 ======== ======== ======== ======== Provision for losses on loans........ $ 25,000 $ 25,000 $ 49,995 $146,905 ======== ======== ======== ======== Securities gains..................... $ 4,610 $ 4,223 $ 3,023 $ 6,897 ======== ======== ======== ======== Income (loss) before cumulative effect of a change in accounting principle.......................... $111,475 $104,221 $ 63,091 $(29,995) ======== ======== ======== ======== Cumulative effect of a change in accounting principle............ $ (3,430) ======== Net income (loss).................... $111,475 $104,221 $ 63,091 $(33,425) ======== ======== ======== ======== Net income (loss) per common share... $.78 $.74 $.44(b) $(.21)(a)(b) ==== ==== ==== ===== Average common shares outstanding.... 142,252 141,033 142,139 144,612 ======== ======== ======== ======== 1993 - ---- Interest income...................... $457,021 $464,164 $461,521 $459,158 ======== ======== ======== ======== Interest expense..................... $123,601 $125,930 $129,844 $137,218 ======== ======== ======== ======== Net interest income.................. $333,420 $338,234 $331,677 $321,940 ======== ======== ======== ======== Provision for losses on loans........ $ 29,646 $ 30,005 $ 30,825 $ 30,725 ======== ======== ======== ======== Securities gains (losses)............ $ 10,649 $ 3,306 $ (694) $ 2,849 ======== ======== ======== ======== Income before cumulative effect of a change in accounting principle......................... $ 94,676 $ 96,081 $ 91,391 $ 80,281 ======== ======== ======== ======== Cumulative effect of a change in accounting principle........... $(13,010) ======== Net income........................... $ 94,676 $ 96,081 $ 91,391 $ 67,271 ======== ======== ======== ======== Net income per common share.......... $.65 $.66 $.63 $.55(a) ==== ==== ==== ==== Average common shares outstanding.... 145,372 145,702 145,476 145,109 ======== ======== ======== ========
____________________________________ (a) Based on income before cumulative effect of a change in accounting principle. (b) Reflects after-tax merger-related charges of $.89 per share recorded in the first quarter of 1994 for the Constellation acquisition and $.28 per share recorded in the second quarter for the Independence acquisition. 18. INTERNATIONAL OPERATIONS International operations include the international activities of CBNA and its six overseas branches and two Edge Act subsidiaries. The International Banking group engages in foreign banking and international financing activities including loans, acceptances, time deposits, letter of credit financing and related financial services. Due to the complex nature of the Corporation's businesses and because its revenue from customers domiciled outside the U.S. is recorded in both domestic and foreign offices, it is impossible to segregate with precision the respective contributions to income from the domestic and international operations. As these operations are highly integrated, estimates and subjective assumptions have been made to apportion revenue and expenses between domestic and international operations. Charges for funds used by one segment provided by another segment are based on a pooled cost of purchased funds. Geographic distributions of earnings are based upon average interest earning assets. Expenses are charged to international operations as directly incurred by such activities plus allocated charges consistent with internal allocation policies. Subject to the above limitations, estimates and assumptions, the following tables present information attributable to international operations: 70 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS: CONTINUED (DOLLAR AMOUNTS IN THOUSANDS) 18. INTERNATIONAL OPERATIONS - (continued)
Domestic International Operations Operations Total ----------- -------------- ----------- DECEMBER 31, 1994 Assets(a)................. $27,581,360 $ 1,743,776(b) $29,325,136 =========== =========== =========== Total operating income.................. $ 2,297,773 $ 194,269 $ 2,492,042 =========== =========== =========== Income before income taxes............ $ 349,473 $ 42,975 $ 392,448 =========== =========== =========== Income before cumulative effect of a change in accounting principle.... $ 220,859 $ 27,933 $ 248,792 =========== =========== =========== DECEMBER 31, 1993 Assets(a)................. $26,784,458 $1,650,159 $28,434,617 =========== =========== =========== Total operating income.................. $ 2,258,689 $ 157,205 $ 2,415,894 =========== =========== =========== Income before income taxes............ $ 492,450 $ 43,788 $ 536,238 =========== =========== =========== Income before cumulative effect of a change in accounting principle.... $ 333,967 $ 28,462 $ 362,429 =========== =========== =========== DECEMBER 31, 1992 Assets(a)................. $26,786,725 $1,945,992 $28,732,717 =========== =========== =========== Total operating income.................. $ 2,411,954 $ 160,548 $ 2,572,502 =========== =========== =========== Income before income taxes............ $ 351,224 $ 45,075 $ 396,299 =========== =========== =========== Income before cumulative effect of a change in accounting principle.... $ 238,835 $ 29,299 $ 268,134 =========== =========== ===========
____________________ (a) The Corporation had no material foreign currency position at December 31, 1994, 1993 and 1992. Assets primarily consist of Eurodollar time deposit placements, loans and acceptances with maturities of one year or less. (b) At December 31, 1994, $227,772 of these assets represent LDC risk related to short-term trade finance. 71 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, ------------------------------- 1994 1993 1992 --------- --------- --------- REVENUES - -------- Dividends from subsidiaries: Banks........................................... $240,370 $204,393 $151,016 Other subsidiaries.............................. 20,375 14,648 20,527 -------- -------- -------- Total dividends from subsidiaries......... 260,745 219,041 171,543 Interest income from subsidiaries................. 1,702 6,238 6,724 Processing and management fees from subsidiaries 140,558 133,114 128,917 Rental income from subsidiaries................... 2,059 2,059 2,059 Securities gains (losses)......................... (2) (380) 806 Other income...................................... 119 721 828 -------- -------- -------- Total revenues............................... 405,181 360,793 310,877 -------- -------- -------- EXPENSES - -------- Interest on: Funds borrowed.................................. 5,142 2,738 2,311 Long-term debt.................................. 5,323 8,827 18,348 -------- -------- -------- Total interest expense.......................... 10,465 11,565 20,659 Salaries, wages and benefits...................... 79,055 75,031 71,327 Net occupancy..................................... 29,230 29,827 25,995 Equipment expenses................................ 7,520 6,493 3,697 Other operating expenses.......................... 57,352 26,117 29,210 -------- -------- -------- Total expenses............................... 183,622 149,033 150,888 -------- -------- -------- Income before income tax benefit and equity in undistributed income of subsidiaries............ 221,559 211,760 159,989 Income tax benefit................................ (13,715) (2,882) (3,840) -------- -------- -------- Income before equity in undistributed income of subsidiaries................................. 235,274 214,642 163,829 Equity in undistributed income (loss) of subsidiaries: Banks........................................ (52,590) 89,743 3,767 Other subsidiaries........................... 62,678 45,034 17,061 -------- -------- -------- 10,088 134,777 20,828 -------- -------- -------- INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE............................ 245,362 349,419 184,657 Cumulative effect of a change in accounting principle....................................... - - (1,469) -------- -------- -------- NET INCOME........................................ $245,362 $349,419 $183,188 ======== ======== ========
72 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, ------------------------- 1994 1993 ---------- ----------- ASSETS - ------ Cash.............................................. $ 3,893 $ 8,754 Time deposit...................................... 300 300 Investments and receivables-subsidiaries: Investments in subsidiaries at equity in underlying net assets: Banks......................................... 2,279,541 2,116,076 Other subsidiaries............................ 308,130 228,630 ---------- ---------- Total investments in subsidiaries........... 2,587,671 2,344,706 Other........................................... 9,165 69,427 ---------- ---------- Total investments and receivables- subsidiaries.............................. 2,596,836 2,414,133 Investments: securities available-for-sale....... 69,566 55,317 Premises, net of accumulated depreciation......... 6,457 7,187 Other assets...................................... 9,282 5,823 ---------- ---------- Total assets................................ $2,686,334 $2,491,514 ========== ========== LIABILITIES - ----------- Funds borrowed - subsidiaries..................... $ 246,609 Dividends payable................................. 50,152 $ 35,171 Other liabilities................................. 28,208 7,821 Long-term debt.................................... 11,251 80,138 ---------- ---------- Total liabilities............................ 336,220 123,130 SHAREHOLDERS' EQUITY - -------------------- Total shareholders' equity................... 2,350,114 2,368,384 ---------- ---------- Total liabilities and shareholders' equity... $2,686,334 $2,491,514 ========== ==========
The approval of the Comptroller of the Currency is required for a nationally chartered bank to pay dividends if the total of all dividends declared in any calendar year exceeds the bank's net profits (as defined) for that year combined with its retained net profits for the preceding two calendar years. Under this formula, CBNA and CBD can declare dividends without approval of the Comptroller of the Currency of approximately $139 million and $18 million, respectively, plus an additional amount equal to CBNA's and CBD's retained net profits for 1995 up to the date of any such dividend declaration. Due to merger-related charges recorded in 1994 by Constellation, which was merged into NJNB,NJNB is unable to pay dividends without the prior approval of the Comptroller of the Currency. The Federal Reserve Act requires that extensions of credit by CBNA and NJNB to certain affiliates, including the Corporation, be secured by specified amounts and types of collateral, that extensions of credit to any such affiliate generally be limited to 10% of capital and surplus (as defined) and that extensions of credit to all such affiliates be limited to 20% of capital and surplus. The Corporation has guaranteed certain borrowings of its subsidiaries at December 31, 1994 in the amount of $2,577,507, which includes $852,922 for commercial paper. The maturities for parent company long-term debt for the years ending December 31, 1995 through 1999 are: $1,133; $1,234; $1,345; $1,465; and $1,596, respectively. 73 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS: CONTINUED (DOLLAR AMOUNTS IN THOUSANDS) 19. FINANCIAL STATEMENTS OF THE PARENT COMPANY - (continued)
Statement of Cash Flows Year Ended December 31, ------------------------------------------------ 1994 1993 1992 ---------- ---------- ---------- OPERATING ACTIVITIES Net income........................................ $ 245,362 $ 349,419 $ 183,188 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed income of subsidiaries............ (10,088) (143,393) (32,823) Cumulative effect of a change in accounting principle.......................... - - 1,469 Securities (gains) losses....................... 2 380 (806) Depreciation and amortization................... 1,524 938 1,328 Deferred income tax expense (benefit)........... (5,428) 1,692 (1,563) Decrease in interest receivable................. - 96 291 Increase (decrease) in interest payable......... (419) 1,082 60 Increase (decrease) in due to subsidiaries...... 23,978 (6,875) (47,695) Other........................................... (9,666) (4,085) 14,223 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES...... 245,265 199,254 117,672 --------- --------- --------- INVESTING ACTIVITIES Purchase of Germantown Savings Bank............... (108,061) - - Investment in subsidiaries........................ (96,860) (5,460) (72,240) (Increase) decrease in receivables from subsidiaries..................................... 53,862 (16,962) 11,142 Purchases of investment securities................ (202,309) (483,551) (232,313) Proceeds from maturities and sales of investment securities...................................... 188,028 453,002 292,956 Premises and equipment expenditures............... - (188) (271) Return of capital from subsidiaries............... 81,000 42,579 42,165 --------- --------- --------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES................................... (84,340) (10,580) 41,439 --------- --------- --------- FINANCING ACTIVITIES Retirement of long-term debt...................... (45,488) (20,940) (18,407) Net increase (decrease) in financing from subsidiaries..................................... 246,609 (69,092) (80,849) Proceeds from public issuance of common stock..... - - 67,581 Cash dividends paid............................... (160,122) (143,334) (126,265) Purchase of treasury stock........................ (228,963) (29,449) (1,480) Other............................................. 22,178 29,538 51,093 --------- --------- --------- NET CASH USED IN FINANCING ACTIVITIES........ (165,786) (233,277) (108,327) --------- --------- --------- INCREASE (DECREASE) IN CASH AND DUE FROM BANKS................................. (4,861) (44,603) 50,784 Cash and due from banks at January 1,........ 8,754 53,357 2,573 --------- --------- --------- CASH AND DUE FROM BANKS AT DECEMBER 31....... $ 3,893 $ 8,754 $ 53,357 ========= ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest........................................ $ 10,884 $ 10,712 $ 15,965 ========= ========= ========= Income taxes.................................... - - - ========= ========= =========
20. JOINT VENTURE On December 4, 1992, the Corporation entered into a joint venture with three other banking companies creating Electronic Payment Services, Inc. ("EPS"). The joint venture combines the partners' separate consumer electronic transaction processing businesses and provides automated teller machine ("ATM") and electronic point-of-sale ("POS") processing services. The Corporation contributed to EPS its wholly-owned subsidiaries Money Access Service Inc. ("MAC"), a regional ATM network, and BUYPASS Corporation, a third- party processor of electronic POS transactions. The Corporation has equal ownership with two partners in the joint venture, each with 31%. The fourth partner owns 7%. As part of the transaction, the Corporation received a cash payment of $79,350 and $245,400 of EPS 5% cumulative redeemable preferred stock. The exchange of assets involved in the transaction resulted in a pre-tax gain to the Corporation of $41,072, $25,670 after-tax, which was recorded in other operating income for the year ended December 31, 1992. The exchange also generated a deferred gain of approximately $138,000. 74 CORESTATES FINANCIAL CORP AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 20. JOINT VENTURE - continued In December 1993, the Corporation and EPS mutually agreed to enter into a recapitalization of EPS involving the EPS preferred stock held by the Corporation. In exchange for substantially all of the preferred stock, the Corporation received from EPS a ten-year 6.45% note providing for equal principal payments over the life of the note. The recapitalization does not affect the amount of deferred gain, but changes the timing of deferred gain income recognition from a five-year period beginning in 1996 to a ten-year period beginning in 1994. The Corporation's net investment in EPS, $60,610 at December 31, 1994, is included in other assets. "Income from investment in EPS, Inc.", which is included in Non-interest Income, reflects the Corporation's 31% share in EPS net income, interest income on the $250,000 note and $13,666 for recognition of the deferred gain in 1994. 75 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES
1994 1993 ------------------------------------ ------------------------------------ Average Income/ Average Income/ balance Rate expense balance Rate expense ---------- ------ ---------- ---------- ------ ----------- (000,000) (000) (000,000) (000) INTEREST EARNING ASSETS Time deposits, principally Eurodollars (a)................... $ 1,520 4.37% $ 66,389 $ 1,312 3.38% $ 44,340 Investment securities (b): U.S. Government.................. 2,235 5.06 112,990 2,759 5.80 159,950 State and municipal.............. 365 7.65 27,921 414 8.28 34,261 Other............................ 414 6.02 24,925 410 5.21 21,347 --------- --------- --------- ---------- Total investment securities............... 3,014 5.50 165,836 3,583 6.02 215,558 Federal funds sold................. 165 4.70 7,754 235 3.10 7,282 Trading account securities......... 3 5.63 169 2 4.15 83 Loans (b)(c)(d): Domestic: Commercial, industrial and other......................... 8,222 8.56 703,985 7,378 8.07 595,114 Real estate.................... 6,265 8.01 502,048 6,795 7.89 536,234 Consumer....................... 2,572 11.78 302,951 2,399 11.93 286,134 Financial institutions......... 618 8.02 49,571 707 6.15 43,475 Factoring receivables.......... 587 9.95 58,389 554 9.62 53,312 Lease financing................ 750 8.27 61,999 658 9.06 59,609 Foreign.......................... 587 5.40 31,683 544 5.01 27,258 --------- ---------- --------- ---------- Total loans, net of discounts............... 19,601 8.73 1,710,626 19,035 8.41 1,601,136 --------- ---------- --------- ---------- Total interest earning assets (d)(e)........... $ 24,303 8.02 1,950,774 $ 24,167 7.73 1,868,399 ========= ----- ---------- ========= ----- ---------- FUNDING SOURCES Interest bearing liabilities (b): Deposits in domestic offices (f): Commercial..................... $ 269 3.76 10,125 $ 419 3.74 15,656 NOW accounts................... 1,829 .68 11,470 1,793 .94 15,442 Money Market Accounts.......... 3,935 2.12 83,167 4,142 2.13 88,061 Consumer savings............... 3,029 1.49 45,066 2,982 1.54 45,792 Consumer certificates.......... 4,361 4.28 186,744 4,499 4.37 196,614 Time deposits of overseas branches and subsidiaries............... 804 3.52 28,286 711 2.57 18,248 --------- ---------- --------- ---------- Total interest bearing deposits................ 14,227 2.59 364,858 14,546 2.64 379,813 Short-term funds borrowed: Federal funds purchased........ 861 4.08 35,162 1,129 3.05 34,444 Commercial paper............... 753 4.24 31,948 604 3.14 18,982 Other.......................... 314 5.74 18,013 229 5.93 13,575 --------- ---------- --------- ---------- Total short-term funds borrowed................ 1,928 4.42 85,123 1,962 3.42 67,001 Long-term debt (g)............... 1,657 5.44 90,177 1,455 4.80 69,779 --------- ---------- --------- ---------- Total interest bearing liabilities............. 17,812 3.03 540,158 17,963 2.88 516,593 Portion of non-interest bearing funding sources................... 6,491 6,204 --------- --------- ---------- Total funding sources (e). $ 24,303 2.22 540,158 $ 24,167 2.14 516,593 ========= ----- ---------- ========= ----- ---------- Net interest income and net interest margin................... 5.80% $1,410,616 5.59% $1,351,806 ===== ========== ===== ========== 1992 ---------------------------------------- Average Income/ balance Rate expense ---------- ------ ------------ (000,000) (000) INTEREST EARNING ASSETS Time deposits, principally Eurodollars (a)................... $ 1,435 4.08% $ 58,613 Investment securities (b): U.S. Government.................. 2,321 6.97 161,760 State and municipal.............. 423 9.40 39,766 Other............................ 550 7.82 43,024 --------- ---------- Total investment securities............... 3,294 7.42 244,550 Federal funds sold................. 510 4.43 22,611 Trading account securities......... 1 7.20 72 Loans (b)(c)(d): Domestic: Commercial, industrial and other......................... 7,234 8.31 601,294 Real estate.................... 6,854 8.51 583,562 Consumer....................... 2,471 12.35 305,193 Financial institutions......... 832 6.24 51,903 Factoring receivables.......... 486 9.70 47,154 Lease financing................ 562 8.87 49,848 Foreign.......................... 429 6.53 28,018 --------- ---------- Total loans, net of discounts............... 18,868 8.83 1,666,972 --------- ---------- Total interest earning assets (d)(e)........... $ 24,108 8.26 1,992,818 ========= ----- ---------- FUNDING SOURCES Interest bearing liabilities (b): Deposits in domestic offices (f): Commercial..................... $ 796 4.40 34,996 NOW accounts................... 1,671 2.44 36,858 Money Market Accounts.......... 4,225 2.89 122,086 Consumer savings............... 2,612 2.74 71,495 Consumer certificates.......... 5,446 5.08 276,701 Time deposits of overseas branches and subsidiaries............... 756 3.75 28,319 --------- ---------- Total interest bearing deposits................ 15,506 3.72 570,455 Short-term funds borrowed: Federal funds purchased........ 990 3.41 33,735 Commercial paper............... 539 3.72 20,030 Other.......................... 128 5.25 6,715 --------- ---------- Total short-term funds borrowed................ 1,657 3.65 60,480 Long-term debt (g)............... 1,312 6.06 78,425 --------- ---------- Total interest bearing liabilities............. 18,475 3.84 709,360 Portion of non-interest bearing funding sources................... 5,633 --------- Total funding sources (e). $ 24,108 2.94 709,360 ========= ----- ---------- Net interest income and net interest margin................... 5.32% $1,283,458 ===== ==========
(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 1994-1989, 7%, 7%, 10%, 9%, 8%, and 7%. 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. 76 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES
1994 1993 1992 -------------------------- --------------------------- ------------------------- 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............................................ $ 2,256 $ 2,263 $ 2,114 Allowance for loan losses....................... (506) (457) (463) Other assets.................................... 1,614 1,727 1,795 --------- --------- ------- Total non-interest earning assets.......... $ 3,364 $ 3,533 $ 3,446 ========= ========= ======= NON-INTEREST BEARING FUNDING SOURCES Demand deposits: Domestic...................................... $ 5,708 $ 5,714 $ 5,437 Foreign....................................... 417 369 324 Other liabilities............................... 1,460 1,456 1,368 Shareholders' equity............................ 2,270 2,198 1,950 Non-interest bearing funding sources used to fund earning assets........................ (6,491) (6,204) (5,633) --------- --------- ------- Total net non-interest bearing funding sources........................ $ 3,364 $ 3,533 $ 3,446 ========= ========= ======= SUPPLEMENTARY AVERAGES Net demand deposits............................. $ 4,525 $ 4,579 $ 3,998 Net Federal funds purchased..................... 696 3.94% $27,408 894 3.04% $27,162 480 2.32% $11,124 Commercial certificates of deposit in domestic offices over $100,000......................... 261 3.66 9,547 373 3.73 13,908 702 4.38 30,739 Average prime rate.............................. 6.60 6.00 6.25
77 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES: CONTINUED
1991 1990 1989 ---------------------------- ----------------------------- ------------------------------- 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)................... $ 1,213 6.52% $ 79,125 $ 744 8.43% $ 62,706 $ 1,043 9.17% $ 95,592 Investment securities (b): U.S. Government.................. 2,061 8.04 165,700 1,761 8.73 153,707 2,144 8.71 186,756 State and municipal.............. 466 10.44 48,664 560 10.74 60,151 576 10.64 61,279 Other............................ 671 9.23 61,945 752 9.17 68,931 974 9.33 90,827 --------- ---------- --------- ---------- --------- ---------- Total investment securities.............. 3,198 8.64 276,309 3,073 9.20 282,789 3,694 9.17 338,862 Federal funds sold................. 450 6.40 28,813 328 8.47 27,787 500 8.75 43,766 Trading account securities......... 1 5.10 51 7 8.66 606 38 8.26 3,138 Loans (b)(c)(d): Domestic: Commercial, industrial and other......................... 7,993 9.71 776,261 8,436 10.91 920,406 8,061 11.69 942,247 Real estate.................... 6,571 9.47 622,340 6,563 10.77 707,084 6,165 11.43 704,631 Consumer....................... 3,653 14.35 524,058 4,159 14.06 584,594 3,773 13.60 513,167 Financial institutions......... 900 8.71 78,420 1,025 10.08 103,306 966 10.38 100,285 Factoring receivable........... 480 10.69 51,327 478 10.42 49,829 458 11.79 53,983 Lease financing................ 546 9.50 51,876 566 9.92 56,175 496 10.97 54,392 Foreign............................ 431 8.68 37,429 582 9.77 56,876 874 9.23 80,670 --------- ---------- --------- ---------- --------- ---------- Total loans, net of discounts............... 20,574 10.41 2,141,711 21,809 11.36 2,478,270 20,793 11.78 2,449,375 --------- ---------- --------- ---------- --------- ---------- Total interest earning assets (d)(e)........... $ 25,436 9.93 2,526,009 $ 25,961 10.98 2,852,158 $ 26,068 11.24 2,930,733 ========= ----- ---------- ========= ----- ---------- ========= ----- ---------- FUNDING SOURCES Interest bearing liabilities (b): Deposits in domestic offices (f): Commercial..................... $ 1,466 6.42 94,181 $ 1,976 8.23 159,832 $ 2,387 8.96 210,408 NOW accounts................... 1,444 4.54 58,450 1,327 5.25 62,115 1,272 5.27 61,062 Money Market Accounts.......... 3,947 4.91 193,621 3,520 6.09 213,098 3,387 6.11 206,564 Consumer savings............... 2,024 4.62 93,408 1,854 5.03 93,049 1,854 5.07 93,769 Consumer certificates.......... 6,449 6.73 433,790 6,337 8.15 516,574 5,628 8.59 483,381 Time deposits of overseas branches and subsidiaries............... 1,227 6.27 76,929 943 8.59 81,039 1,439 9.57 137,653 --------- ---------- --------- ---------- --------- ---------- Total interest bearing deposits................ 16,557 5.79 950,379 15,957 7.14 1,125,707 15,967 7.55 1,192,837 Short-term funds borrowed: Federal funds purchased........ 1,321 5.58 73,742 1,993 8.11 161,588 2,500 9.24 230,991 Commercial paper............... 791 6.28 49,657 1,179 8.18 96,435 947 9.24 87,529 Other.......................... 700 6.89 48,206 1,016 7.37 74,843 617 9.48 58,502 --------- ---------- --------- ---------- --------- ---------- Total short-term funds borrowed................ 2,812 6.10 171,605 4,188 7.95 332,866 4,064 9.28 377,022 Long-term debt (g)................ 1,168 7.86 90,363 825 9.20 74,162 798 9.17 71,380 --------- ---------- --------- ---------- --------- ---------- Total interest bearing liabilities............. 20,537 5.90 1,212,347 20,970 7.31 1,532,735 20,829 7.88 1,641,239 Portion of non-interest bearing funding sources................... 4,899 4,991 5,239 --------- --------- --------- Total funding sources (e). $ 25,436 4.77 1,212,347 $ 25,961 5.90 1,532,735 $ 26,068 6.29 1,641,239 ========= ---- ---------- ========= ----- ---------- ========= ----- ---------- Net interest income and net interest margin................... 5.16% $1,313,662 5.08% $1,319,423 4.95% $1,289,494 ==== ========== ===== ========== ===== ==========
(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 1994-1989, 7%, 7%, 10%, 9%, 8%,and 7%, 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. 78 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES: CONTINUED
1991 1990 --------------------------- ----------------------------- AVERAGE INCOME/ AVERAGE INCOME/ BALANCE RATE EXPENSE BALANCE RATE EXPENSE ---------- ------ ------- -------- ------ --------- (000,000) (000) (000,000) (000) NON-INTEREST EARNINGS ASSETS Cash............................................ $ 1,973 $ 2,136 Allowance for loan losses....................... (512) (358) Other assets.................................... 1,746 1,573 --------- --------- Total non-interest earning assets..... $ 3,207 $ 3,351 ========= ========= NON-INTEREST BEARING FUNDING SOURCES Demand deposits: Domestic...................................... $ 4,752 $ 4,860 Foreign....................................... 308 273 Other liabilities............................... 1,184 1,231 Shareholders' equity............................ 1,862 1,978 Non-interest bearing funding sources used to fund earning assets........................... (4,899) (4,991) --------- --------- Total net non-interest bearing funding sources..................... $ 3,207 $ 3,351 ========= ========= SUPPLEMENTARY AVERAGES Net demand deposits............................. $ 3,306 $ 3,228 Net Federal funds purchased..................... 871 5.16% $44,929 1,665 8.04% $133,801 Commercial certificates of deposit in domestic offices over $100,000......................... 1,310 6.47 84,812 1,700 8.24 140,084 Average prime rate.............................. 8.46 10.01 1989 ----------------------------- AVERAGE INCOME/ BALANCE RATE EXPENSE ---------- ------ --------- (000,000) (000) NON-INTEREST EARNINGS ASSETS Cash............................................ $ 2,113 Allowance for loan losses....................... (405) Other assets.................................... 1,600 --------- Total non-interest earning assets..... $ 3,308 ========= NON-INTEREST BEARING FUNDING SOURCES Demand deposits: Domestic...................................... $ 4,839 Foreign....................................... 275 Other liabilities............................... 1,387 Shareholders' equity............................ 2,046 Non-interest bearing funding sources used to fund earning assets........................... (5,239) --------- Total net non-interest bearing funding sources..................... $ 3,308 ========= SUPPLEMENTARY AVERAGES Net demand deposits............................. $ 3,193 Net Federal funds purchased..................... 2,000 9.36% $187,225 Commercial certificates of deposit in domestic offices over $100,000......................... 2,253 8.93 201,124 Average prime rate.............................. 10.87
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, -------------------------------------------------------------------------------- 1994 1993 1992 1991 1990 1989 ---------- ---------- ---------- ---------- ---------- ---------- Interest income and fees................. $1,929,527 $1,841,864 $1,961,838 $2,485,277 $2,799,141 $2,870,616 Interest expense......................... 540,158 516,593 709,360 1,212,367 1,532,735 1,641,239 ---------- ---------- ---------- ---------- ---------- ---------- Net interest income..................... 1,389,369 1,325,271 1,252,478 1,272,910 1,266,406 1,229,377 Provision for losses on loans............ 246,900 121,201 160,250 291,261 437,860 327,181 ---------- ---------- ---------- ---------- ---------- ---------- Net interest income after provision for losses on loans.. 1,142,469 1,204,070 1,092,228 981,649 828,546 902,196 Non-interest income...................... 567,540 574,030 610,664 615,565 474,971 430,915 Non-financial expenses................... 1,317,561 1,241,862 1,306,593 1,319,465 1,186,319 1,156,107 ---------- ---------- ---------- ---------- ---------- ---------- Income before income taxes............... 392,448 536,238 396,299 277,749 117,198 177,004 Provision for income taxes............... 143,656 173,809 128,165 97,432 11,998 18,708 ---------- ---------- ---------- ---------- ---------- ---------- Income before cumulative effect of a change in accounting principle......... 248,792 362,429 268,134 180,317 105,200 158,296 Cumulative effect of a change in accounting principle, net of tax....... (3,430) (13,010) (84,946) - - - ---------- ---------- ---------- ---------- ---------- ---------- Net income............................... 245,362 349,419 183,188 180,317 105,200 158,296 Dividends on preferred stock............. - - - - 1,662 20,973 ---------- ---------- ---------- ---------- ---------- ---------- Net income applicable to common stock.... $ 245,362 $ 349,419 $ 183,188 $ 180,317 $ 103,538 $ 137,323 ========== ========== ========== ========== ========== ========== Per common share data: Income before cumulative effect of a change in accounting principle...... $1.75(a) $2.49 $1.97 $1.35 $0.78 $1.02 Net income............................ $1.73(a) $2.40 $1.35 $1.35 $0.78 $1.02 Average common shares outstanding........ 142,498 145,398 135,813 133,237 133,525 134,066
______________________________________ (a) Includes after-tax merger-related charges of $.89 per share recorded for the acquisition of Constellation Bancorp and $.28 per share recorded for the acquisition of Independence Bancorp, Inc. (See Note 2 to the Financial Statements). 80 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA: CONTINUED CONDENSED CONSOLIDATED BALANCE SHEET (IN THOUSANDS)
December 31, --------------------------------------------------------------------------------- 1994 1993 1992 1991 1990 1989 ----------- ----------- ----------- ----------- ----------- ----------- ASSETS Cash and due from banks..................... $ 2,262,512 $ 2,521,676 $ 2,510,001 $ 2,210,383 $ 2,642,911 $ 2,743,216 Time deposits, principally Eurodollars...... 1,750,458 1,319,457 1,815,394 1,673,553 1,289,925 815,125 Investment securities....................... 2,880,631 3,599,166 3,588,348 3,298,107 3,086,687 3,579,390 Loans....................................... 20,526,216 19,776,258 18,940,402 19,418,084 21,543,536 21,548,468 Allowance for loan losses................... (500,631) (450,823) (442,267) (473,301) (512,288) (555,427) Funds sold.................................. 731,820 161,527 266,890 376,300 234,298 260,226 Trading account securities.................. 1,206 6,393 2,796 1,255 3,883 18,691 Due from customers on acceptances........... 342,211 332,234 632,976 212,024 499,690 371,883 Premises, equipment and other assets........ 1,330,713 1,168,729 1,418,177 1,467,492 1,514,522 1,502,717 ----------- ----------- ----------- ----------- ----------- ----------- Total assets........................ $29,325,136 $28,434,617 $28,732,717 $28,183,897 $30,303,164 $30,284,289 =========== =========== =========== =========== =========== =========== LIABILITIES Deposits: Domestic: Non-interest bearing.................... $ 6,362,470 $ 6,649,367 $ 6,460,415 $ 5,930,296 $ 5,813,027 $ 5,857,767 Interest bearing........................ 14,565,051 13,686,027 14,446,043 15,147,941 15,616,028 15,100,264 Overseas branches and subsidiaries........ 1,113,365 796,902 766,119 839,327 1,181,341 1,296,926 ----------- ----------- ----------- ----------- ----------- ----------- Total deposits...................... 22,040,886 21,132,296 21,672,577 21,917,564 22,610,396 22,254,957 Short-term funds borrowed................... 1,546,201 1,884,125 1,904,044 2,069,451 3,628,797 3,860,900 Bank acceptances outstanding................ 336,103 337,180 635,544 213,613 503,049 376,213 Other liabilities........................... 1,260,722 1,123,342 1,068,395 814,888 849,085 1,017,493 Long-term debt.............................. 1,791,110 1,589,290 1,357,598 1,240,970 882,271 781,187 ----------- ----------- ----------- ----------- ----------- ----------- Total liabilities................... 26,975,022 26,066,233 26,638,158 26,256,486 28,473,598 28,290,750 ----------- ----------- ----------- ----------- ----------- ----------- SHAREHOLDERS' EQUITY Preferred................................... - - - - - 100,000 Common...................................... 2,350,114 2,368,384 2,094,559 1,927,411 1,829,566 1,893,539 ----------- ----------- ----------- ----------- ----------- ----------- Total shareholders' equity.......... 2,350,114 2,368,384 2,094,559 1,927,411 1,829,566 1,993,539 ----------- ----------- ----------- ----------- ----------- ----------- Total liabilities and shareholders' equity.............. $29,325,136 $28,434,617 $28,732,717 $28,183,897 $30,303,164 $30,284,289 =========== =========== =========== =========== =========== ===========
81 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA: CONTINUED SHAREHOLDERS' DATA
1994 1993 1992 1991 1990 1989 ------ ------ ------ ------ ------ ------ EARNINGS AND DIVIDENDS PER SHARE APPLICABLE TO COMMON SHARES Income before cumulative effect of a change in accounting principle............. $1.75(a) $2.49 $1.97 $1.35 $ .78 $1.02 Dividends paid............................... 1.20 1.11 1.00 .96 .96 .84 Dividends declared........................... 1.24 1.14 1.02 .97 .96 .87 COMMON STOCK MARKET BID INFORMATION First quarter: High....................................... $27 1/8 $29 3/4 $25 1/8 $18 3/8 $21 5/8 $21 3/4 Low........................................ 24 1/2 26 3/8 21 7/8 12 18 5/8 20 Second quarter: High....................................... 28 30 1/8 27 20 3/4 22 24 1/8 Low........................................ 25 25 1/8 21 17 3/4 18 3/8 21 1/2 Third quarter: High....................................... 29 1/8 29 3/4 26 1/4 23 1/2 20 3/4 25 Low........................................ 25 7/8 26 3/4 23 5/8 19 1/4 13 23 1/8 Fourth quarter: High....................................... 27 5/8 29 3/4 28 7/8 24 3/8 15 7/8 23 1/2 Low........................................ 22 7/8 25 1/8 24 1/8 20 7/8 11 3/4 19 1/4 Year-end..................................... 26 26 1/8 28 1/2 24 15 5/8 21 3/8 Year-end bid/net income...................... 14.9x 10.5x 14.5x 17.8x 20.0x 21.0x Book value per share at year-end............. $16.22 $16.29 $14.48 $14.40 $13.77 $14.13 OTHER SELECTED DATA OPERATING RATIOS: Income from continuing operations applicable to common stock as a percent of: Operating income......................... 9.96% 15.00% 10.42% 5.82% 3.16% 4.16% Average common shareholders' equity...... 10.96(a) 16.49 13.75 9.68 5.28 7.06 Average total assets..................... .90(a) 1.31 .97 .63 .35 .47 Average total shareholders' equity as a percent of average total assets............ 8.20 7.94 7.08 6.50 6.75 6.96 Dividends declared as a percent of income from continuing operations.......... 70.86(a) 45.78 51.78 71.85 123.08 85.29 FULL TIME EQUIVALENT STAFF AT YEAR-END....... 15,076 16,017 16,271 16,571 17,144 17,572 NUMBER OF LOCATIONS...................... 472 483 482 540 554 573 NUMBER OF REGISTERED COMMON SHAREHOLDERS. 43,287 44,128 45,209 48,701 51,076 55,512
- ------------------------------- (a) Includes the impact of after-tax merger-related charges of $.89 per share recorded for the acquisition of Constellation Bancorp and $.28 per share recorded for the acquisition of Independence Bancorp, Inc. Excluding the impact of these merger-related charges, per share income before the cumulative effect of a change in accounting principle was $2.92, return on average common shareholders' equity was 18.34%, and return on average total assets was 1.50% (see Note 2 to the Financial Statements). 82 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA: CONTINUED Rate/Volume Analysis Taxable Equivalent Basis - (in thousands)
1994 vs. 1993 1993 vs. 1992 ------------------------------------ ------------------------------------ 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................... $ 22,049 $ 7,030 $ 15,019 $ (14,273) $ (5,018) $ (9,255) Investment securities........... (49,722) (34,241) (15,481) (28,992) 21,444 (50,436) Federal funds sold.............. 472 (2,170) 2,642 (15,329) (12,183) (3,146) Trading account securities...... 86 42 44 11 72 (61) Loans: Domestic..................... 105,065 52,969 52,096 (65,076) 4,623 (69,699) Foreign...................... 4,425 2,154 2,271 (760) 7,510 (8,270) -------- -------- -------- --------- -------- --------- Total interest income..... 82,375 25,784 56,591 (124,419) 16,448 (140,867) -------- -------- -------- --------- -------- --------- Interest bearing funds - ---------------------- Deposits: Domestic...................... (24,993) (14,796) (10,197) (180,570) (34,596) (145,974) Overseas...................... 10,038 2,390 7,648 (10,071) (1,688) (8,383) Short-term funds borrowed: Federal funds purchased....... 718 (8,174) 8,892 709 4,740 (4,031) Other......................... 17,404 9,720 7,684 5,812 6,657 (845) Long-term debt.................. 20,398 9,696 10,702 (8,647) 9,696 (18,343) -------- -------- -------- --------- -------- --------- Total interest expense.... 23,565 (1,164) 24,729 (192,767) (15,191) (177,576) -------- -------- -------- --------- -------- --------- Net interest income............. $ 58,810 $ 26,948 $ 31,862 $ 68,348 $ 31,639 $ 36,709 - ------------------- ======== ======== ======== ========= ======== =========
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 $66.2 million, $62.1 million and $57.2 million of loan fees for the years ended 1994, 1993 and 1992, respectively. Non-performing loans are included in interest earning assets. The changes in interest expense on domestic deposits attributable to volume and rate are adjusted by specific reserves as average balances are reduced by such reserve amounts for purposes of rate calculations. 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, 1994 (in thousands):
1994 1993 1992 1991 1990 ----------- ----------- ----------- ----------- ----------- Domestic loans: Commercial, industrial and other......... $ 8,688,733 $ 7,879,451 $ 7,354,666 $ 7,503,223 $ 8,002,759 ----------- ----------- ----------- ----------- ----------- Real estate loans: Construction and development........... 331,369 367,364 501,404 754,089 1,016,830 Residential............................ 3,180,227 3,121,008 3,314,111 3,106,984 3,065,826 Other, primarily commercial mortgages and commercial loans secured by owner-occupied real estate........... 2,979,053 3,175,284 3,212,582 2,984,798 2,954,493 ----------- ----------- ----------- ----------- ----------- Total real estate loans............ 6,490,649 6,663,656 7,028,097 6,845,871 7,037,149 ----------- ----------- ----------- ----------- ----------- Consumer loans: Installment............................ 1,386,776 1,356,633 1,379,760 1,762,210 1,998,889 Credit card............................ 1,374,598 1,178,972 957,168 979,327 2,000,941 ----------- ----------- ----------- ----------- ----------- Total consumer loans............... 2,761,374 2,535,605 2,336,928 2,741,537 3,999,830 ----------- ----------- ----------- ----------- ----------- Financial institutions................... 668,119 870,489 783,125 996,500 1,077,419 Factoring receivables.................... 622,380 555,211 454,244 402,752 418,129 Lease financing.......................... 710,338 728,764 583,187 536,836 546,203 ----------- ----------- ----------- ----------- ----------- Total domestic loans.............. 19,941,593 19,233,176 18,540,247 19,026,719 21,081,489 ----------- ----------- ----------- ----------- ----------- Foreign loans: Loans to or guaranteed by foreign banks: Government owned and central banks.............................. - - 257 1,506 7,725 Other foreign banks.................. 300,590 332,149 203,103 130,308 154,158 ----------- ----------- ----------- ----------- ----------- 300,590 332,149 203,360 131,814 161,883 Commercial and industrial................ 274,720 210,573 196,795 242,098 300,164 Loans to other financial institutions.... 9,313 360 - 17,453 - ----------- ----------- ----------- ----------- ----------- Total foreign loans................ 584,623 543,082 400,155 391,365 462,047 ----------- ----------- ----------- ----------- ----------- Total loans........................ $20,526,216 $19,776,258 $18,940,402 $19,418,084 $21,543,536 =========== =========== =========== =========== ===========
84 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA: CONTINUED RISK ELEMENT DATA: FOREIGN OUTSTANDINGS - (IN THOUSANDS) While the associated risks are clearly recognized, international lending is a part of the Corporation's wide range of international services. It is the Corporation's intent to remain involved in providing the international financial services needed for the increasingly global competition faced by customers. At December 31, 1994 and 1993, aggregate foreign outstandings (defined as loans, investments, acceptances and time deposits) to borrowers in a foreign country that exceeded 1% of total assets were as follows:
Banks and other Governments Commercial financial and and institutions agencies industrial Total ------------ ----------- ---------- ----- DECEMBER 31, 1994 United Kingdom......... $ 262,891 -- $ 48,209 $ 311,100 DECEMBER 31, 1993 United Kingdom......... 269,109 -- 43,798 312,907
Outstandings below 1%, but over .75% of total assets were $267,816 in the Cayman Islands at December 31, 1994, and $286,417 in the United Kingdom at December 31, 1992. 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, 1994 (in thousands):
1994 1993 1992 1991 1990 -------- -------- -------- -------- -------- NON-ACCRUAL LOANS Domestic.......................... $244,406 $246,512 $411,120 $565,644 $539,766 Foreign........................... 158 171 3,047 8,797 29,139 -------- -------- -------- -------- -------- Total non-accrual loans...... 244,564 246,683 414,167 574,441 568,905 -------- -------- -------- -------- -------- RENEGOTIATED LOANS Domestic.......................... 1,657 56,457 63,074 46,611 6,547 -------- -------- -------- -------- -------- Total renegotiated loans..... 1,657 56,457 63,074 46,611 6,547 -------- -------- -------- -------- -------- Total non-performing loans... 246,221 303,140 477,241 621,052 575,452 -------- -------- -------- -------- -------- OTHER REAL ESTATE OWNED (OREO) Acquired through foreclosure or exchange..................... 53,900 72,907 72,140 76,138 58,213 In-substance foreclosure.......... 6,687 56,419 118,264 103,386 31,853 Property formerly used in banking operations.............. 4,076 6,202 3,908 2,022 - -------- -------- -------- -------- -------- Total OREO................... 64,663 135,528 194,312 181,546 90,066 -------- -------- -------- -------- -------- Total non-performing assets.. $310,884 $438,668 $671,553 $802,598 $665,518 ======== ======== ======== ======== ======== Non-performing assets as a percentage of loans plus OREO... 1.51% 2.20% 3.51% 4.09% 3.08% ===== ===== ==== ==== ==== Non-performing assets as a percentage of total assets...... 1.06% 1.54% 2.34% 2.85% 2.20% ==== ==== ==== ==== ====
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, 1994 (in thousands):
1994 1993 1992 ------- ------- ------- Interest income which would have been recorded in accordance with original terms: Domestic......................... $25,347 $30,838 $38,375 Foreign.......................... 9 38 324 ------- ------- ------- Total....................... 25,356 30,876 38,699 ------- ------- ------- Interest income reflected in total operating income: Domestic......................... 12,003 17,300 20,479 Foreign.......................... - - - ------- ------- ------- Total....................... 12,003 17,300 20,479 ------- ------- ------- Net reduction in interest income and net interest income.............. $13,353 $13,576 $18,220 ======= ======= =======
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, 1994 were as follows (in thousands):
1994 1993 1992 1991 1990 ------- ------- ------- -------- -------- Domestic........................... $53,104 $53,524 $95,866 $110,143 $147,218 ------- ------- ------- -------- -------- Total............................ $53,104 $53,524 $95,866 $110,143 $147,218 ======= ======= ======= ======== ========
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, 1994 (in thousands):
1994 1993 1992 1991 1990 -------- -------- -------- -------- -------- Balance at beginning of year: Domestic........................ $440,823 $432,267 $463,301 $495,775 $268,660 Foreign......................... 10,000 10,000 10,000 16,513 286,767 -------- -------- -------- -------- -------- 450,823 442,267 473,301 512,288 555,427 -------- -------- -------- -------- -------- Allowance for loans purchased at date of purchase: Domestic..................... 23,763 2,703 1,028 6,146 -------- -------- -------- -------- Allowance for loans sold at date of sale: Domestic..................... - (14,700) (27,486) (657) Foreign...................... (353) - - - -------- -------- -------- -------- (353) (14,700) (27,486) (657) -------- -------- -------- -------- Recoveries, by type of loan: Domestic: Commercial, industrial and other.................. 25,893 45,207 25,865 26,636 30,853 Real estate................... 13,596 8,470 6,438 5,874 8,690 Consumer...................... 20,300 18,170 21,852 20,729 11,343 Financial institutions........ 654 2,246 2,776 1,966 1,607 Foreign......................... 2,616 12,645 13,138 26,586 17,110 -------- -------- -------- -------- -------- Total recoveries............. 63,059 86,738 70,069 81,791 69,603 -------- -------- -------- -------- -------- Charge-offs, by type of loan: Domestic: Commercial, industrial and other................ 101,313 91,785 103,000 136,363 105,240 Real estate................... 126,189 59,191 69,896 99,650 87,074 Consumer...................... 56,371 49,941 71,585 130,981 92,996 Financial institutions........ 41 816 3,195 14,669 5,993 Foreign......................... - - 5 2,890 264,788 -------- -------- -------- -------- -------- Total loans charged off...... 283,914 201,733 247,681 384,553 556,091 -------- -------- -------- -------- -------- Total net charge-offs............ 220,855 114,995 177,612 302,762 486,488 -------- -------- -------- -------- -------- Provision charged to operating expense: Domestic........................ 239,516 133,493 173,383 321,470 460,436 Foreign......................... 7,384 (12,292)(a) (13,133)(a) (30,209)(a) (22,576)(a) -------- -------- -------- -------- -------- 246,900 121,201 160,250 291,261 437,860 -------- -------- -------- -------- -------- Balance at end of year: Domestic........................ 480,631 440,823 432,267 463,301 495,775 Foreign......................... 20,000 10,000 10,000 10,000 16,513 -------- -------- -------- -------- -------- $500,631 $450,823 $442,267 $473,301 $512,288 ======== ======== ======== ======== ======== RATIOS Net charge-offs as a percentage of average loans outstanding.... 1.13% .60% .94% 1.47% 2.23% ==== === === ==== ==== Allowance for loan losses as a percentage of year-end loans.... 2.44% 2.28% 2.34% 2.44% 2.38% ==== ==== ==== ==== ====
- ------------------------------------ (a) Reflects reallocation of the foreign allowance for loan losses to the domestic allowance for loan losses. 87 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FIANNCIAL 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 for the five years ended December 31, 1994 is illustrated in the table below (in millions): December 31,
1994 1993 1992 1991 ------------------- ------------------- ------------------- ------------------- % % % % of Loan of Loan of Loan of Loan Allowance type Allowance type Allowance type Allowance type --------- -------- --------- -------- --------- -------- --------- -------- Loan type - --------- Domestic: Commercial and industrial.. $212.9 2.3% $208.3 2.5% $206.7 2.6% $238.1 3.0% Real estate: Construction............. 55.9 16.9 69.0 18.8 94.7 18.9 88.0 11.7 Other.................... 79.9 1.3 63.4 1.0 36.9 .6 45.5 .7 Consumer................. 101.9 3.7 83.1 3.3 73.8 3.2 79.6 2.9 Other domestic loans..... 30.0 2.2 17.0 1.1 20.2 1.5 12.1 .8 Foreign...................... 20.0 3.4 10.0 1.8 10.0 2.5 10.0 2.6 ------ ------ ------ ------ Total.................... $500.6 2.4% $450.8 2.3% $442.3 2.3% $473.3 2.4% ====== ==== ====== ==== ====== ==== ====== ==== 1990 ------------------- % of Loan Allowance type ---------- -------- Loan type - --------- Domestic: Commercial and industrial.. $173.2 2.1% Real estate: Construction............. 134.3 13.2 Other.................... 65.3 1.1 Consumer................. 111.0 2.8 Other domestic loans..... 12.0 .7 Foreign...................... 16.5 3.6 ------ Total.................... $512.3 2.4% ====== ==== - ----------------------------------
(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. COMMERCIAL CERTIFICATES OF DEPOSIT OVER $100,000 ISSUED BY DOMESTIC OFFICES
(in thousands) December 31, -------------------------------------------------- 1994 1993 ----------------- ----------------------- Amount Percent Amount Percent ------ ------- ------ ------- MATURITY DISTRIBUTION 3 months or less....................... $225,348 84.0% $205,582 69.5% 3 through 6 months..................... 24,016 8.9 47,010 15.9 6 through 12 months.................... 16,432 6.1 16,884 5.7 Over 12 months......................... 2,606 1.0 26,359 8.9 ------- --- -------- ----- Total............................... $268,402 100.0% $295,835 100.0% ======= ====== ======== =====
88 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA: CONTINUED INTEREST SENSITIVITY ANALYSIS AT DECEMBER 31, 1994 (in millions)
Rate Maturity Period ------------------------------------------------------------------- 1-90 91-181 182-365 1-2 2-5 > 5 Days Days Days Years Years Years Total ------- ------- -------- ------ ------- ------- ------- EARNING ASSETS Federal funds sold, resale agreements and trading account securities.............................. $ 733 $ 733 Time deposits...................................... 853 $ 620 $ 255 $ 22 1,750 Investment securities.............................. 604 353 559 555 $ 631 $ 179 2,881 Interest rate swaps................................ 1,229 378 742 2,163 2,717 1,005 8,234 Asset financial futures............................ 25 199 305 - - - 529 ------- ------- -------- ------ ------- ------- ------- Total discretionary assets.................... 3,444 1,550 1,861 2,740 3,348 1,184 14,127 Total loans(a)..................................... 13,847 1,554 1,176 1,420 2,061 468 20,526 ------- ------- -------- ------ ------- ------- ------- Total earning assets............................... 17,291 3,104 3,037 4,160 5,409 1,652 34,653 ------- ------- -------- ------ ------- ------- ------- FUNDING SOURCES Federal funds purchased, repurchase agreements and other short-term funds borrowed........................................ 1,538 7 1 1,546 Domestic and foreign time deposits(b).............. 1,300 26 17 8 1 25 1,377 Long-term debt..................................... 1,024 32 37 54 7 637 1,791 Interest rate swaps................................ 7,258 306 134 300 141 95 8,234 Liability financial futures........................ 359 170 - - - - 529 ------- ------- -------- ------ ------- ------- ------- Total discretionary liabilities............... 11,479 541 189 362 149 757 13,477 ------- ------- -------- ------ ------- ------- ------- Savings certificates............................... 1,159 1,023 1,130 1,231 521 280 5,344 Money market, savings and NOW accounts(c).......... 2,177 788 1,242 1,952 2,798 - 8,957 Net non-interest bearing funds(d)(e)............... 2,847 - - - - 4,028 6,875 ------- ------- -------- ------ ------- ------- ------- Total savings certificates and indefinite maturity liabilities.......................... 6,183 1,811 2,372 3,183 3,319 4,308 21,176 ------- ------- -------- ------ ------- ------- ------- Total net funding sources.......................... 17,662 2,352 2,561 3,545 3,468 5,065 34,653 ------- ------- -------- ------ ------- ------- ------- Period gap......................................... (371) 752 476 615 1,941 (3,413) -0- Cumulative gap..................................... (371) 381 857 1,472 3,413 - -0- Adjustments(f)..................................... 493 (881) (492) (642) (1,934) 3,456 -0- ------- ------- -------- ------ ------- ------- ------- Adjusted period gap................................ $ 122 $ (129) $ (16) $ (27) $ 7 $ 43 $ -0- ======= ======= ======== ====== ======= ======= ======= Cumulative gap..................................... $ 122 $ (7) $ (23) $ (50) $ (43) $ -0- $ -0- ======= ======= ======== ====== ======= ======= =======
Notes to interest sensitivity analysis: (a) Non-performing loans are included in 1-90 days. (b) Deposit volumes exclude time deposits not at interest. (c) Adjustments to the interest sensitivity of savings and NOW account balances reflect managerial assumptions based on historical experience, simulation results as to the behavior of both the balances and rates on these products in potential future rate environments and CoreStates' intent for positioning these products. (d) Net non-interest bearing funds is the sum of non-interest bearing liabilities and shareholders' equity minus non-interest earning assets. (e) The estimated volume of stable net non-interest bearing funds is allocated to the over 1 year interest sensitivity period. Allocations to the under 1 year periods include: estimated volumes that are expected to vary inversely with interest rates; and the temporary difference between the actual volume of total net non-interest bearing funds on December 31, 1994 and the trend volume at the current level of interest rates. (f) Adjustments reflect managerial assumptions as to the appropriate investment maturities for non-interest bearing funding sources, along with the funding of current investment and loan commitments. 89 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA: CONTINUED LOAN MATURITY AND INTEREST SENSITIVITY, NET OF UNEARNED DISCOUNTS The contractual loan maturity of loans outstanding at December 31, 1994 was as follows (in thousands):
Due after one Due in one year through Due after year or less five years five years Total ------------ ------------- ---------- ----------- Commercial, industrial and other loans........ $6,803,080 $1,558,919 $ 326,734 $ 8,688,733 ---------- ---------- ---------- ----------- Real estate loans: Construction and development................ 186,468 133,044 11,857 331,369 Other, primarily permanent commercial mortgages................................. 866,743 1,195,932 1,037,810 3,100,485 ---------- ---------- ---------- ----------- Total real estate loans................. 1,053,211 1,328,976 1,049,667 3,431,854 ---------- ---------- ---------- ----------- Loans to financial institutions: Domestic commercial banks and bank holding companies................................. - 8,170 750 8,920 Other....................................... 491,985 135,806 31,408 659,199 ---------- ---------- ---------- ----------- Total loans to financial institutions..... 491,985 143,976 32,158 668,119 ---------- ---------- ---------- ----------- Factoring receivables......................... 622,380 - - 622,380 ---------- ---------- ---------- ----------- Lease financing............................... 6,489 57,379 - 63,868 ---------- ---------- ---------- ----------- Foreign loans................................. 549,178 28,996 6,089 584,263 ---------- ---------- ---------- ----------- Total loans (excluding loans to individuals)(a)......................... $9,526,323 $3,118,246 $1,414,648 $14,059,217 ========== ========== ========== ===========
- --------------------------------- (a) Loans due after one-year totalling $2,711,939 have fixed interest rates. The remaining 40% of such loans or $1,820,955 have floating or adjustable rates. 90 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA: CONTINUED INVESTMENT SECURITIES (in thousands) CARRYING VALUE AT DECEMBER 31,
1994(a) 1993(a) 1992 ---------- ---------- ---------- U.S. Treasury.................................... $ 914,009 $ 972,076 $ 887,055 U.S. Government agencies and corporations.................................... 1,246,780 1,767,212 1,848,837 State and municipal.............................. 306,117 356,438 419,303 Other............................................ 413,725 503,440 433,153 ---------- ---------- ---------- $2,880,631 $3,599,166 $3,588,348 ========== ========== ==========
- ------------------------------------ (a) Held-to-maturity and available-for-sale portfolios combined. MATURITY DISTRIBUTION AND WEIGHTED AVERAGE YIELD AT DECEMBER 31, 1994(a)
U.S. Government Total Agencies and State and ------------------ U.S. Treasury Corporations Municipal Other Amount Yield(b) ------------- --------------- --------- ---------- ---------- ----- 1 year or less................................... $502,621 $ 537,409 $ 56,644 $ 20,892 $1,117,566 4.80% 1 year through 5 years........................... 387,569 509,096 185,780 94,052 1,176,497 6.28 5 years through 10 years......................... 23,779 79,684 29,871 88,100 221,434 6.53 After 10 years................................... 40 120,591 33,822 210,681 365,134 8.21 -------- ---------- -------- ---------- ---------- $914,009 $1,246,780 $306,117 $ 413,725 $2,880,631 5.97 ======== ========== ======== ========== ==========
- ------------------------------------ (a) Held-to-maturity and available-for-sale portfolios combined. (b) The weighted average yield has been computed on a tax equivalent basis using an effective tax rate of 35%. The amount of the tax equivalent adjustment by range of maturity is as follows: 1 year or less - $1,412; 1 year to 5 years - $5,396; 5 years to 10 years - $861 and after 10 years - $2,276. 91 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA: CONTINUED FOURTH QUARTER RESULTS CoreStates recorded net income of $111.5 million or $.78 per share in the fourth quarter of 1994, compared to $94.7 million or $.65 per share for the same period in 1993. Returns on average assets and average shareholders' equity for the fourth quarter of 1994 were 1.60% and 19.50%, respectively, compared to 1.35% and 16.47%, respectively, in the 1993 fourth quarter. The 20.0% increase in fourth quarter net income per share was principally attributable to: a $25.8 million, or 7.7% improvement in net interest income reflecting an increase in the net interest margin mostly due to increases in average credit card outstandings and asset-based loans; a $4.6 million reduction in the provision for losses on loans, mostly due to improved credit quality including a 12.8% reduction in non-performing assets during the fourth quarter; and a $10.0 million, or 3.1%, decline in non-financial expenses. The net financial margin for the fourth quarter of 1994 was 5.89%, compared to 5.55% for the prior year fourth quarter. Average loans outstanding for the fourth quarter of 1994 were $19.8 billion, up 2.3% from the prior year fourth quarter. Excluding the impact of securities gains, non-interest income for the fourth quarter of 1994 grew 2.8% over the fourth quarter of 1993. Non- interest income for the fourth quarter of 1994 reflects minimal growth in revenues from CoreStates' fee-based businesses as a $2.5 million, or 14.0%, increase in fees for international services and a $1.3 million, or 8.0% increase in debit and credit card fees were mostly offset by a $2.5 million, or 5.4% decline in service charges on deposits. The decline in service charges on deposits reflects the decision by commercial customers to maintain deposit balances with CoreStates in lieu of paying cash for transaction services. The value of these deposit balances is included in net interest income. Investment securities gains in the fourth quarter of 1994 were $4.6 million, compared to $10.6 million in the prior year fourth quarter. Non-financial expenses for the fourth quarter of 1994 totaled $306.7 million, a decrease of 3.1% from the fourth quarter of 1993. CoreStates' total non-financial expenses, excluding other real estate owned expenses, as a percentage of total revenues were 59.7%, compared to 63.2% for the prior year fourth quarter. The decline in non-financial expenses reflects some progress toward achieving efficiencies from recent acquisitions and the heightened attention to expense management created by the process redesign program initiated in September 1994 (see "Strategic Actions in 1994" beginning on page 5 of Management's Discussion and Analysis of Financial Condition and Results of Operations). 92 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL DATA: CONTINUED FOURTH QUARTER RESULTS: Continued
CONDENSED CONSOLIDATED STATEMENT OF INCOME (in thousands, except per share amounts) Three Months Ended December 31, ------------------ 1994 1993 -------- -------- Interest income and fees...................................... $517,956 $457,021 Interest expense.............................................. 158,709 123,601 -------- -------- Net interest income....................................... 359,247 333,420 Provision for losses on loans................................. 25,000 29,646 -------- -------- Net interest income after provision for losses on loans... 334,247 303,774 Non-interest income........................................... 146,261 148,428 Non-financial expenses........................................ 306,703 316,656 -------- -------- Income before income taxes.................................... 173,805 135,546 Provision for income taxes.................................... 62,330 40,870 -------- -------- Net income.................................................... $111,475 $ 94,676 ======== ======== PER COMMON SHARE DATA (Based on weighted average shares of 142.252 million in 1994 and 145.372 million in 1993): Net income.................................................... $ .78 $ .65 ===== ===== Cash dividends declared....................................... $ .34 $ .30 ===== =====
93 CoreStates Financial Corp and Subsidiaries Supplemental Financial Data: Continued CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES
THREE MONTHS ENDED December 31, 1994 September 30, 1994 December 31, 1993 ----------------------------- ------------------------------ ----------------------------- 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)..................... $ 1,722 4.95% $ 21,478 $ 1,562 4.72% $ 18,566 $ 1,185 3.46% $ 10,323 Investment securities(b): U.S. Government.................... 2,147 5.49 29,706 2,166 4.85 26,489 2,713 5.26 35,996 State and municipal................ 330 6.97 5,749 344 8.15 7,012 381 8.34 7,944 Other.............................. 363 7.18 6,571 381 5.78 5,546 403 3.77 3,831 ------- -------- ------- -------- ------- -------- Total investment securities.............. 2,840 5.87 42,026 2,891 5.36 39,047 3,497 5.42 47,771 Federal funds sold................... 224 5.26 2,972 76 5.90 1,130 308 2.95 2,293 Trading account securities........... 3 5.20 39 3 8.13 61 2 5.60 28 Loans (b)(c)(d): Domestic: Commercial, industrial and other. 8,490 9.34 199,854 8,274 8.83 184,141 7,608 8.05 154,395 Real estate...................... 5,977 8.20 123,590 6,037 7.98 121,447 6,528 7.59 124,899 Consumer......................... 2,701 11.96 81,419 2,556 11.99 77,235 2,546 12.09 77,568 Financial institutions........... 637 7.76 12,455 612 8.12 12,524 762 6.03 11,574 Factoring receivables............ 631 9.67 15,376 577 10.30 14,986 614 8.55 13,233 Lease financing.................. 703 8.01 14,085 786 8.38 16,458 711 8.61 15,297 Foreign............................ 640 6.10 9,845 596 5.17 7,765 572 4.69 6,766 ------- -------- ------- -------- ------- -------- Total loans, net of discounts............... 19,779 9.16 456,624 19,438 8.87 434,556 19,341 8.28 403,732 ------- -------- ------- -------- ------- -------- Total interest earning assets (d).............. $24,568 8.45 523,139 $23,970 8.17 493,360 $24,333 7.57 464,147 ======= -------- -------- ======= -------- -------- ======= -------- -------- FUNDING SOURCES Interest bearing liabilities(b): Deposits in domestic offices (e): Commercial....................... $ 265 4.22 2,819 $ 260 3.56 2,330 $ 400 3.78 3,815 NOW accounts..................... 1,786 .94 3,876 1,771 .72 2,917 1,820 .79 3,300 Money Market Accounts............ 3,749 2.19 20,686 3,848 2.10 20,305 4,146 2.12 22,161 Consumer savings................. 2,957 2.21 16,472 3,014 1.37 10,437 2,989 1.35 10,140 Consumer certificates............ 4,798 4.53 54,815 4,278 4.23 45,639 4,252 4.31 46,214 Time deposits of overseas branches and subsidiaries.................. 901 3.37 7,650 820 3.91 8,074 707 2.28 4,059 ------- -------- ------- -------- ------- -------- Total interest bearing deposits................ 14,456 2.95 106,318 13,991 2.57 89,702 14,314 2.52 89,689 Short-term funds borrowed: Federal funds purchased.......... 591 4.75 7,076 984 4.61 11,424 1,010 3.21 8,166 Commercial paper................. 878 4.82 10,675 825 4.54 9,442 554 3.14 4,387 Other............................ 234 7.81 4,604 280 3.26 2,303 316 7.60 6,052 ------- -------- ------- -------- ------- -------- Total short-term funds borrowed................ 1,703 5.21 22,355 2,089 4.40 23,169 1,880 3.93 18,605 Long-term debt (f)................. 1,769 6.74 30,036 1,640 5.66 23,416 1,534 3.96 15,307 ------- -------- ------- -------- ------- -------- Total interest bearing liabilities............. 17,928 3.51 158,709 17,720 3.05 136,287 17,728 2.77 123,601 Portion of non-interest bearing funding sources............................ 6,640 6,250 6,605 ------- ------- ------- Total funding sources.... $24,568 2.56 158,709 $23,970 2.26 136,287 $24,333 2.02 123,601 ======= -------- -------- ======= -------- -------- ======= -------- -------- Net interest income and net interest margin.............................. 5.89% $364,430 5.91% $357,073 5.55% $340,546 ======== ======== ======== ======== ======== ========
(a)Yields and income on time deposits include net Eurodollar trading profits. (b)The net impact of interest rate swaps is recognized as an adjustment to interest income or expense of the related hedged asset or liability. (c)Yields and income on loans include fees on loans. (d)Non-performing loans are included in interest earning assets. (e)Average balances on time deposits in domestic offices are reduced by specified reserve amounts for purposes of rate calculations. (f)Rates on long-term debt are based on average balances excluding average capital lease obligations. 94 CoreStates Financial Corp and Subsidiaries Supplemental Financial Data: Continued CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES
THREE MONTHS ENDED December 31, 1994 September 30, 1994 ------------------------------- -------------------------------- Average Income/ Average Income/ balance Rate expense balance Rate expense ---------- ------- ---------- ---------- -------- ---------- (000,000) (000) (000,000) (000) NON-INTEREST EARNING ASSETS Cash................................ $ 2,061 $ 2,286 Allowance for loan losses........... (489) (482) Other assets........................ 1,435 1,708 --------- --------- Total non-interest earning assets $ 3,007 $ 3,512 ========= ========= NON-INTEREST BEARING FUNDING SOURCES Demand deposits: Domestic.......................... $ 5,577 $ 5,711 Foreign........................... 452 431 Other liabilities................... 1,350 1,434 Shareholders' equity................ 2,268 2,186 Non-interest bearing funding sources used to fund earning assets.................... (6,640) (6,250) --------- --------- Total net non-interest bearing funding sources............... $ 3,007 $ 3,512 ========= ========= SUPPLEMENTARY AVERAGES Net demand deposits................. $ 4,679 $ 4,357 Net Federal funds purchased......... 367 4.44% $4,104 908 4.50% $10,294 Commercial certificates of deposit in domestic offices over $100,000............. 261 4.15 2,729 260 3.55 2,325 Average prime rate.................. 8.13 7.50 THREE MONTHS ENDED December 31, 1993 ------------------------------- Average Income/ balance Rate expense ---------- ------- --------- (000,000) (000) NON-INTEREST EARNING ASSETS Cash................................ $ 2,289 Allowance for loan losses........... (460) Other assets........................ 1,566 --------- Total non-interest earning assets $ 3,395 ========= NON-INTEREST BEARING FUNDING SOURCES Demand deposits: Domestic.......................... $ 5,918 Foreign........................... 377 Other liabilities................... 1,425 Shareholders' equity................ 2,280 Non-interest bearing funding sources used to fund earning assets.................... (6,605) --------- Total net non-interest bearing funding sources............... $ 3,395 ========= SUPPLEMENTARY AVERAGES Net demand deposits................. $ 4,651 Net Federal funds purchased......... 702 3.32% $5,873 Commercial certificates of deposit in domestic offices over $100,000............. 347 3.74 3,274 Average prime rate.................. 6.00
95 CoreStates Financial Corp and Subsidiaries GRAPHICS APPENDIX LIST TO EXHIBIT 13 Narrative description of graphs from the Management's Discussion and Analysis of Financial Condition and Results of Operations: EDGAR VERSION TYPESET VERSION - ------------- --------------- Page 12 contains the plotting points for the Page 15 AVERAGE COMMON EQUITY TO ASSETS GRAPH The Average Common Equity to Assets graph is a five year, vertical bar graph with the years 1990, 1991, 1992, 1993 and 1994 listed along the x axis. Lines numbering 0 to 9 are drawn along they y axis and represent, in percent, the average common equity to assets ratio. There are 2 bars for each year: the first representing the CoreStates ratio and the second representing the Montgomery Securities Regional Bank Composite Index ratio. Page 15 contains the plotting points for the Page 16 WHOLESALE LOANS BY INDUSTRY GRAPH The Wholesale Loans by Industry graph is a horizontal bar graph with 9 wholesale loan industries listed down the y axis. One bar extends out from each industry, parallel to the x axis and represents the industry's December 31, 1994 loan outstandings as a percentage of December 31, 1994 equity. A second bar is overlayed on top of the first bar and represents the percentage of the industry's loan outstandings that are non-performing. Page 27 contains the plotting points for the Page 22 NET INTEREST MARGIN GRAPH The Net Interest Margin graph is a five year, vertical bar graph with the years 1990, 1991, 1992, 1993 and 1994 listed along the x axis. Lines numbering 0 to 6 are drawn along the y axis and represent, in percent, the net interest margin. There are 2 bars for each year: the first representing the CoreStates margin and the second representing the Montgomery Securities Regional Bank Composite Index margin. 96 CoreStates Financial Corp and Subsidiaries GRAPHICS APPENDIX LIST TO EXHIBIT 13 - (CONTINUED) EDGAR VERSION TYPESET VERSION - ------------- --------------- Page 35 contains the plotting points for the Page 29 EARNING ASSET MIX GRAPH The Earning Asset Mix graph is a five year, vertical bar graph with the years 1990, 1991, 1992, 1993 and 1994 listed along the x axis. One bar is drawn in each year to represent 100% of average earning assets. Each bar is divided into three sections along the y axis, representing the percentage of average earning assets comprised of: 1) loans; 2) investment securities; and 3) short-term money market investments. Page 36 contains the plotting points for the Page 29 FUNDING MIX GRAPH The Funding Mix graph is a five year, vertical bar graph with the years 1990, 1991, 1992, 1993, and 1994 listed along the x axis. One bar is drawn in each year to represent 100% of average earning assets, excluding short-term money market investments. Each bar is divided into three sections along the y axis, representing the percentage of : 1) retail deposits; 2) other interest bearing sources; and 3) non- interest bearing sources to average earning assets, excluding short-term money market investments. Page 36 contains the plotting points for the Page 29 OPERATING REVENUE GRAPH The Operating Revenue graph is a five year, vertical bar graph with the years 1990, 1991, 1992, 1993 and 1994 listed along the x axis. One bar is drawn in each year to represent the total dollar amount of operating revenue (tax equivalent net interest income plus non- interest income) recorded, in millions. Each bar is divided into three sections along the y axis, representing the dollar amount of operating revenue derived from: 1) loan and investment related net interest income; 2) net interest income derived from non-credit balances; and 3) non-interest income. 97 EX-21 9 LIST OF SUBS. CORE. FIN. CO EXHIBIT 21 ---------- List of Subsidiaries of CoreStates Financial Corp ------------------------------------------------- as of December 31, 1994 ----------------------- Congress Financial Corporation California 97% Congress Credit Corporation New York 100% Congress Financial Corporation Ontario 100% (Canada) Congress Financial Corporation Illinois 100% (Central) Congress Financial Corporation Florida 100% (Florida) Congress Financial Corporation Wisconsin 100% (Midwest) Congress Financial Corporation Massachusetts 100% (New England) Congress Financial Corporation Oregon 100% (Northwest) Congress Financial Corporation Georgia 100% (Southern) Congress Financial Corporation Texas 100% (Southwest) Congress Financial Corporation California 100% (Western) Congress Talcott Corporation Pennsylvania 100% Congress Talcott Corporation California 100% CoreStates Bank of Delaware, N.A. U.S.A. 100% Synapsys Inc. Delaware 100% CoreStates Bank, N.A. U.S.A. 100% Clymer Realty Corporation Pennsylvania 100%
CoreStates Bank International USA 100% Philadelphia International Hong Kong 100% Finance Co. - Hong Kong Limited Philadelphia National LTDA Brazil 100%/1/ CoreStates Dealer Services Corp Pennsylvania 100% CoreStates Investment Advisers, Pennsylvania 100% Inc. CoreStates Mortgage Services Pennsylvania 100% Corporation DMR Realty Corp. Pennsylvania 100% Fifth and Market Corporation Pennsylvania 100% Financial Telesis, Inc. Delaware 100% First Penco Realty Inc. Pennsylvania 100% First Pennsylvania Financial Delaware 100% Services, Inc. Philadelphia International U.S.A. 100% Investment Corporation Established Holdings Limited England 100% New World Development Bahamas 100% Corporation Limited New World Group Holdings Canada 37.5% Limited Philadelphia National England 100% Limited Philadelphia International Delaware 100% Equities, Inc. Heritable Group PLC England 50.01% TI Remnaco, Inc. Canada 39.8% Two APM Plaza, Inc. Delaware 89% CoreStates Capital Corp Pennsylvania 100%
___________________________ /1/Except for Brazilian resident quote shares CoreStates Community Development Pennsylvania Board Corporation, Inc. majority Partnership Homes Pennsylvania 1/2 Board membership CoreStates Delaware Delaware 100% CoreStates Export Trading Company Pennsylvania 100% CoreStates Holdings, Inc. Delaware 100% Electronic Payment Services, Inc. Delaware 20%/2/ BUYPASS Corporation Georgia 54% Data NOW National Delaware 100% Services, Inc. Electronic Payment Service Delaware 100% Corp MONEY ACCESS SERVICE CORP Ohio 100% Metroteller Security New York 100% Corporation Money Access Service Inc. Delaware 100% CoreStates Securities Corp Pennsylvania 100% First Bank of Philadelphia Pennsylvania 24.81% First Pennsylvania Insurance Virginia 100% Services, Inc. Independence Investment Corp. Delaware 100% Independence Life Insurance Arizona 100% Company Independence Resources, Inc. Pennsylvania 100%
_______________________________ /2/The remaining interests are owned by Banc One Corporation, PNC Financial Corp, KeyCorp and National City Corporation. New Jersey National Corporation New Jersey 100% New Jersey National Bank U.S.A. 100% Badeal, Inc. New Jersey 100% ABD Properties, Inc. Pennsylvania 100% Citizens Investments Delaware 100% of Delaware Eagle 1851, Inc. New Jersey 100% First Peoples Investment Co Delaware 100% Mercer Development Co., Inc. New Jersey 100% Pennamco, Inc., Delaware 100% Pennco Life Insurance Company Arizona 100% Princeton Life Insurance Company Pennsylvania 100%/3/
_______________________ /3/Except for directors' qualifying shares EX-23.1 10 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 ------------ Consent of Independent Auditors We consent to the incorporation by reference in the following registration statements of our report dated February 7, 1995 with respect to the consolidated financial statements of CoreStates Financial Corp incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 1994: (a) The Registration Statement (Form S-8 No. 33-5874), in Post-Effective Amendment No. 1 to the Registration Statement (Form S-8 No. 2-91176), the Registration Statement (Form S-8 No. 33-28808) and in the related prospectuses, each pertaining to the CoreStates Financial Corp Long- Term Incentive Plan, (b) The Registration Statement (Form S-8 No. 33-32934) and prospectus relating to the CoreStates Savings Plan, (c) The Registration Statement (Form S-8 No. 33-50324) pertaining to the CoreStates Financial Corp 1992 Long-Term Incentive Plan, (d) The Registration Statement (Form S-3 No. 33-57034) and prospectus and prospectus supplement pertaining to $1,000,000,000 in aggregate amount of Debt Securities issuable by CoreStates Capital Corp and the related guarantees of the Corporation, and Preferred Stock, Depository Shares, Common Stock, and Capital Securities, issuable by the Corporation, (e) The Registration Statement (Form S-3 No. 33-54049) and prospectus and prospectus supplement pertaining to $1,000,000,000 in aggregate amount of Debt Securities and warrants issuable by CoreStates Capital Corp and the related guarantees of the Corporation and Preferred Stock, Depository Shares and Common Stock issuable by the Corporation, (f) The Registration Statement (Form S-4 No. 33-7286) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options and Convertible Subordinated Debentures, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of New Jersey National Corporation, (g) The Registration Statement (Form S-4, as amended by Form S-8, No. 33-31896) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options and stock appreciation rights and outstanding 5-1/2% Convertible Subordinated Debentures, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of First Pennsylvania Corporation, (h) The Registration Statement (Form S-4, as amended by Form S-8, No. 33-48422) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of First Peoples Corporation, (i) The Registration Statement (Form S-3, as amended by Post Effective Amendment No. 1, No. 33-40717) and prospectus relating to shares of the Corporation Common Stock issuable pursuant to the CoreStates Dividend Reinvestment and Share Purchase Plan, (j) The Registration Statement (Form S-4, as amended by Form S-8, No. 33-51429) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options, the obligation in respect to which were assumed by the Corporation in connection with the acquisition of Constellation Bancorp, (k) The Registration Statement (Form S-4, as amended by Form S-8, No. 33-53539) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of Independence Bancorp, Inc., and (l) The Registration Statement (Form S-4, as amended by Form S-8, No. 33-55505) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of Germantown Savings Bank. /s/Ernst & Young LLP Philadelphia, Pennsylvania March 15, 1995 EX-23.2 11 INDEPENDENT AUDITORS CONSENT EXHIBIT 23.2 ------------ INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in (a) the Registration Statement (Form S-8 No. 33-5874), in Post-Effective Amendment No. 1 to the Registration Statement (Form S-8 No. 2-91176), the Registration Statement (Form S-8 No. 33-28808) and in the related prospectuses, each pertaining to the CoreStates Financial Corp Long-Term Incentive Plan, (b) the Registration Statement (Form S-8 No. 33-32934) and prospectus relating to the CoreStates Savings Plan, (c) the Registration Statement (Form S-8 No. 33-50324) pertaining to the CoreStates Financial Corp 1992 Long-Term Incentive Plan, (d) the Registration Statement (Form S-3 No. 33-57034) and prospectus and prospectus supplement pertaining to $1,000,000,000 in aggregate amount of Debt Securities issuable by CoreStates Capital Corp and the related guarantees of the Corporation, and Preferred Stock, Depository Shares, Common Stock, and Capital Securities, issuable by the Corporation, (e) the Registration Statement (Form S-3 No. 33-54049) and prospectus supplement pertaining to $1,000,000,000 in aggregate amount of Debt Securities and warrants issuable by CoreStates Capital Corp and the related guarantees of the Corporation and Preferred Stock, Depository Shares and Common Stock issuable by the Corporation, (f) the Registration Statement (Form S-4 No.33-7286) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options and Convertible Subordinated Debentures, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of New Jersey National Corporation, (g) the Registration Statement (Form S-4, as amended by Form S-8, No. 33-31896) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options and stock appreciation rights and outstanding 5-1/2% Convertible Subordinated Debentures, the obligation in respect to which were assumed by the Corporation in connection with the acquisition of First Pennsylvania Corporation, (h) the Registration Statement (Form S-4, as amended by Form S-8, No. 33-48422) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of First Peoples Corporation, (i) the Registration Statement (Form S-3, as amended by Post Effective Amendment No.1, No. 33-40717) and prospectus relating to shares of the Corporation Common Stock issuable pursuant to the CoreStates Dividend Reinvestment and Share Purchase Plan, (j) the Registration Statement (Form S-4, as amended by Form S-8, No. 33-51429) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options, the obligation in respect to which were assumed by the Corporation in connection with the acquisition of Constellation Bancorp, (k) the Registration Statement (Form S-4, as amended by Form S-8, No. 33-53539) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of Independence Bancorp, Inc., and (l) the Registration Statement (Form S-4, as amended by Form S-8, No. 33-55505) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of Germantown Savings Bank of our report dated March 16, 1994, except as to the third paragraph of Note 1 and the last paragraph of Note 16 which are as of July 19, 1994 relating to the consolidated statement of condition of Constellation Bancorp and subsidiaries as of December 31, 1993, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the years in the two-year period ended December 31, 1993, which report appears in the 1994 Annual Report on Form 10-K of CoreStates Financial Corp. Our report refers to a restatement of the 1993 financial statements to remove certain merger-related charges, and to a change in accounting for postretirement benefits, other than pensions, income taxes, and certain investments in debt and equity securities in 1993. The financial statements referred to above are not separately presented in such report on Form 10-K. /s/KPMG Peat Marwick LLP Short Hills, New Jersey March 13, 1995 EX-23.3 12 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.3 ------------ CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in (a) the Registration Statement on Form S-8 (No. 33-5874), the Post-Effective Amendment No. 1 to the Registration Statement on Form S-8 (No. 2-91176), the Registration Statement on Form S-8 (No. 33-28808) and in the related prospectuses, each pertaining to the CoreStates Financial Corp Long-Term Incentive Plan, (b) the Registration Statement on Form S-8 (No. 33-32934) and prospectus relating to the CoreStates Savings Plan, (c) the Registration Statement on Form S-8 (No. 33-50324) pertaining to the CoreStates Financial Corp 1992 Long-Term Incentive Plan, (d) the Registration Statement on Form S-3 (No. 33-57034) and related prospectus and prospectus supplements pertaining to $1,000,000,000 in aggregate amount of Debt Securities issuable by CoreStates Capital Corp and the related guarantees of the Corporation, and Preferred Stock, Depository Shares, Common Stock and Capital Securities issuable by the Corporation, (e) the Registration Statement on Form S-3 (No. 33-54049) and the related prospectus and prospectus supplements pertaining to $1,000,000,000 in aggregate amount of Debt Securities and warrants issuable by CoreStates Capital Corp and the related guarantees of the Corporation and Preferred Stock, Depository Shares and Common Stock issuable by the Corporation, (f) the Registration Statement on Form S-4 (No. 33-7286) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options and Convertible Subordinated Debentures, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of New Jersey National Corporation, (g) the Registration Statement on Form S-4, as amended by Form S-8 (No. 33-31896) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options and common stock appreciation rights and outstanding 5-1/2% Convertible Subordinated Debentures, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of First Pennsylvania Corporation, (h) the Registration Statement on Form S-4, as amended by Form S-8 (No. 33-48422) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options, the obligation in respect to which were assumed by the Corporation in connection with the acquisition of First Peoples Corporation, (i) the Registration Statement on Form S-4, as amended by Form S-8 (No. 33-51429) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options, the obligation in respect to which were assumed by the Corporation in connection with the acquisition of Constellation Bancorp, (j) the Registration Statement on Form S-4, as amended by Form S-8 (No. 33-53539) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options, the obligation in respect to which were assumed by the Corporation in connection with the acquisition of Independence Bancorp, Inc., (k) the Registration Statement on Form S-4, as amended by Form S-8 (No. 33-55505) and prospectus relating to shares of the Corporation Common Stock issuable upon the exercise of stock options, the obligation in respect to which were assumed by the Corporation in connection with the acquisition of Germantown Savings Bank, and (l) the Registration Statement on Form S-3 (No. 33-40717) and prospectus relating to shares of the Corporation Common Stock issuable pursuant to the CoreStates Dividend Reinvestment and Share Purchase Plan, of our report, which includes an explanatory paragraph related to changes in the method of accounting for investments in 1993 and method of accounting for income taxes in 1992, dated January 19, 1994, on our audit of the consolidated financial statements of Independence Bancorp, Inc. as of December 31, 1993 and for the years ended December 31, 1993 and 1992, incorporated by reference in CoreStates Annual Report on Form 10-K for the year ended December 31, 1994. /s/Coopers & Lybrand L.L.P. Philadelphia, Pennsylvania March 13, 1995 EX-27 13 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from the CoreStates Financial Corp consolidated balance sheet as of December 31, 1994, and the related consolidated statement of income, changes in shareholders' equity, and other supplemental financial data included within management's discussion and analysis of financial condition and results of operations for the year ended December 31, 1994 and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1994 JAN-01-1994 DEC-31-1994 $ 2,262,512 1,750,458 731,820 1,206 426,047 2,454,584 2,423,830 20,526,216 500,631 29,325,136 22,040,886 1,546,201 1,260,722 1,791,110 145,878 0 0 2,204,236 29,325,136 1,698,350 156,931 74,246 1,929,527 364,858 540,158 1,389,369 246,900 18,753 1,317,561 392,448 248,792 0 (3,430) 245,362 1.73 1.73 5.80 244,564 53,104 1,657 0 450,823 283,914 63,059 500,631 480,631 20,000 0
EX-99.1 14 UNDERTAKINGS EXHIBIT 99.1 ------------ The undertaking set forth below is filed for purposes of incorporation by reference into Part II of the registration statements on Form S-8, File Nos. 33- 28808, 33-5874, 33-32934 and 33-50324. ITEM 9. UNDERTAKINGS. - ------- ------------ (a) The undersigned registrant hereby undertakes: Insofar as indemnification for liabilities rising under the Securities Act of 1933 (the "Securities Act") may be permitted to directors, officers or persons controlling the registrant pursuant to the provisions described in this registration statement, or otherwise, CoreStates Financial Corp (the "Company") has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. -----END PRIVACY-ENHANCED MESSAGE-----