0000950109-95-003197.txt : 19950815 0000950109-95-003197.hdr.sgml : 19950815 ACCESSION NUMBER: 0000950109-95-003197 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950814 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11285 FILM NUMBER: 95563432 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-Q 1 FORM 10-Q Page 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarter ended June 30, 1995 Commission file number 0-6879 CORESTATES FINANCIAL CORP --------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 23-189716 -------------------------------- ----------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) N.E. Corner Broad and Chestnut Streets Philadelphia, Pennsylvania 19101 ---------------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) 215-973-3827 ------------ (Registrant's telephone number, including area code) 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 . ---------- ---------- Number of Shares of Common Stock Outstanding at August 1, 1995: 139,451,577 Page 2 CORESTATES FINANCIAL CORP AND SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION
Page ----- Item 1 - FINANCIAL INFORMATION Consolidated Balance Sheets as of June 30, 1995 and December 31, 1994 3 Consolidated Statements of Income for the Three and Six Months Ended June 30, 1995 and 1994 4 Consolidated Statements of Changes in Shareholders' Equity for the Six Months Ended June 30, 1995 and 1994 5 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1995 and 1994 6 Notes to the Consolidated Financial Statements 7-8 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 9-35 PART II. OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K 36 SIGNATURE 37 EXHIBITS 11, 12.1, 12.2, 27 38-42
Page 3 PART I. FINANCIAL INFORMATION
CORESTATES FINANCIAL CORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (in thousands) June 30, December 31, 1995 1994 -------- ----------- (Unaudited) (Note) ASSETS ------ Cash and due from banks............................. $ 2,434,798 $ 2,262,512 Time deposits, principally Eurodollars.............. 1,950,663 1,750,458 Investments held-to-maturity (fair value: 1995 - $2,044,186; 1994 - $2,463,488.............. 2,040,548 2,454,584 Investments available-for-sale, at fair value....... 395,770 426,047 Loans, net of unearned discounts of $137,093 in 1995 and $146,305 in 1994 (Note B)..................... 20,896,889 20,526,216 Less: Allowance for loan losses................... (497,400) (500,631) ---------- ----------- Net loans.................................... 20,399,489 20,025,585 ---------- ----------- Federal funds sold and securities purchased under agreements to resell.............................. 193,348 731,820 Trading account securities, at fair value........... 68 1,206 Due from customers on acceptance.................... 386,836 342,211 Premises and equipment.............................. 425,324 423,832 Other assets........................................ 804,617 906,881 ---------- ----------- Total assets................................. $29,031,461 $29,325,136 ========== =========== LIABILITIES ----------- Deposits: Domestic: Non-interest bearing......................... $ 6,093,288 $ 6,362,470 Interest bearing............................. 13,939,809 14,565,051 Overseas branches and subsidiaries................. 1,012,469 1,113,365 ---------- ----------- Total deposits............................... 21,045,566 22,040,886 Funds borrowed...................................... 2,364,536 1,546,201 Bank acceptances outstanding........................ 387,684 336,103 Other liabilities................................... 1,163,670 1,260,722 Long-term debt...................................... 1,822,045 1,791,110 ---------- ----------- Total liabilities............................ 26,783,501 26,975,022 ---------- ----------- COMMITMENTS AND CONTINGENT LIABILITIES (Note C) -------------------------------------- SHAREHOLDERS' EQUITY -------------------- Preferred stock: authorized 10.0 million shares; no shares issued..................................... - - Common stock: $1 par value; authorized 200.0 million shares; issued 145.876 million shares in 1995 and 145.878 million shares in 1994 (including treasury shares of 6.675 million in 1995 and 1.023 million in 1994)........................................... 2,247,960 2,350,114 ---------- ----------- Total shareholders' equity................... 2,247,960 2,350,114 ---------- ----------- Total liabilities and shareholders' equity........................ $29,031,461 $29,325,136 ========== ===========
Note: The balance sheet at December 31, 1994 has been derived from the audited financial statements at that date. See accompanying notes to the consolidated financial statements. Page 4 CORESTATES FINANCIAL CORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (unaudited) (in thousands, except per share amounts)
Three Months Ended Six Months Ended June 30, June 30, --------------------- ------------------------ 1995 1994 1995 1994 -------- -------- ----------- --------- INTEREST INCOME --------------- Interest and fees on loans: Taxable income.......................... $499,368 $415,363 $ 976,258 $ 801,173 Tax exempt income....................... 5,048 5,781 9,975 11,881 Interest on investment securities: Taxable income.......................... 34,725 35,691 69,361 71,378 Tax exempt income....................... 3,118 4,365 6,431 8,703 Interest on time deposits in banks........ 32,946 11,549 62,076 26,345 Other interest income..................... 1,387 1,207 3,478 3,685 -------- -------- ---------- --------- Total interest income................ 576,592 473,956 1,127,579 923,165 -------- -------- ---------- --------- INTEREST EXPENSE ---------------- Interest on deposits...................... 137,156 82,097 265,546 168,838 Interest on funds borrowed................ 29,906 22,640 57,204 39,599 Interest on long-term debt................ 30,902 19,554 61,333 36,725 -------- -------- ---------- --------- Total interest expense............... 197,964 124,291 384,083 245,162 -------- -------- ---------- --------- NET INTEREST INCOME.................. 378,628 349,665 743,496 678,003 Provision for losses on loans............. 25,000 49,995 50,000 196,900 -------- -------- ---------- --------- NET INTEREST INCOME AFTER PROVISION FOR LOSSES ON LOANS................. 353,628 299,670 693,496 481,103 -------- -------- ---------- --------- NON-INTEREST INCOME ------------------- Service charges on deposit accounts....... 44,170 46,984 88,100 93,006 Trust income.............................. 24,405 24,620 48,735 49,213 Fees for international services........... 23,162 19,301 45,134 37,440 Debit and credit card fees................ 16,513 16,105 30,857 30,503 Income from investment in EPS, Inc........ 7,503 7,765 33,996 15,677 Gains on trading account securities....... 555 863 1,223 1,173 Securities gains.......................... 1,592 3,023 7,987 9,920 Other operating income.................... 27,266 23,376 51,435 51,052 -------- -------- ---------- --------- Total non-interest income............ 145,166 142,037 307,467 287,984 -------- -------- ---------- --------- NON-FINANCIAL EXPENSES ---------------------- Salaries, wages and benefits.............. 152,667 161,020 310,726 319,948 Net occupancy............................. 29,109 28,429 58,516 58,621 Equipment expenses........................ 19,407 19,262 38,895 38,466 Restructuring and merger-related charges (credit)................................ (3,037) 33,700 106,963 108,700 Other operating expenses.................. 101,821 98,707 198,937 186,717 -------- -------- ---------- --------- Total non-financial expenses......... 299,967 341,118 714,037 712,452 -------- -------- ---------- --------- INCOME BEFORE INCOME TAXES................ 198,827 100,589 286,926 56,635 -------------------------- Provision for income taxes................ 72,857 37,498 105,589 23,539 -------- -------- ---------- --------- INCOME BEFORE CUMULATIVE EFFECT OF A ------------------------------------ CHANGE IN ACCOUNTING PRINCIPLE............ 125,970 63,091 181,337 33,096 ------------------------------ Cumulative effect of a change in accounting principle, net of income tax benefits of $1,846............ - - - (3,430) -------- -------- ---------- --------- NET INCOME................................ $125,970 $ 63,091 $ 181,337 $ 29,666 ---------- ======== ======== ========== ========= Average common shares outstanding......... 140,914 142,139 142,571 143,368 ======== ======== ========== ========= PER COMMON SHARE DATA --------------------- Income before cumulative effect of a change in accounting principle........... $0.89 $0.44 $1.27 $0.23 ======== ======== ========== ========= Net income................................ $0.89 $0.44 $1.27 $0.21 ======== ======== ========== ========= Cash dividends declared................... $0.34 $0.30 $0.68 $0.60 ======== ======== ========== =========
See accompanying notes to the consolidated financial statements. Page 5 CORESTATES FINANCIAL CORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited) (in thousands)
Common Capital Retained Treasury stock surplus earnings stock Total ---------- ---------- ------------ ---------- ----------- Six Months Ended June 30, 1994 ------------------------------ Balances at beginning of year............... $145,740 $778,498 $ 1,451,965 $ (7,819) $2,368,384 Net income.................................. 29,666 29,666 Net change in unrealized gain on investments available-for-sale, net of tax. (36,262) (36,262) Treasury shares acquired (4,706 shares)..... (125,703) (125,703) Purchase and retirement of common stock.... (165) (979) (3,583) (4,727) Common stock issued under employee benefit plans (267 new shares; 289 treasury shares)........................... 267 3,844 (2,686) 7,789 9,214 Common stock issued under dividend reinvestment plan (231 treasury shares).... 1 (431) 6,452 6,022 Conversion of subordinated debentures....... 7 152 159 Cash paid for fractional shares issued...... (50) (50) Foreign currency translation adjustments.... 155 155 Common dividends declared................... (82,669) (82,669) -------- -------- ----------- --------- ----------- Balances at end of period................... $145,849 $781,516 $ 1,356,105 $(119,281) $2,164,189 ======== ======== =========== ========= =========== Six Months Ended June 30, 1995 ------------------------------ Balances at beginning of year............... $145,878 $781,766 $ 1,446,767 $ (24,297) $2,350,114 Net income.................................. 181,337 181,337 Net change in unrealized gain on investments available-for-sale, net of tax............. 17,050 17,050 Treasury shares acquired (8,133 shares)..... (256,538) (256,538) Common stock issued under employee benefit plans (2,247 treasury shares)..... (2) (31) (22,206) 68,253 46,014 Common stock issued under dividend reinvestment plan (234 treasury shares).... 56 (2) 6,612 6,666 Cash paid for fractional shares issued...... (24) (24) Foreign currency translation adjustments.... 58 58 Common dividends declared................... (96,717) (96,717) -------- -------- ----------- -------- ----------- Balances at end of period................... $145,876 $781,791 $ 1,526,263 $(205,970) $2,247,960 ======== ======== =========== ========= ===========
See accompanying notes to the consolidated financial statements. Page 6 CORESTATES FINANCIAL CORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)
(in thousands) Six Months Ended June 30, ---------------------------- 1995 1994 ------------ ------------ Operating Activities -------------------- Net income........................................ $ 181,337 $ 29,666 Adjustments to reconcile net income to net cash provided by operating activities: Restructuring and merger-related charges......... 106,969 108,700 Cumulative effect of a change in accounting principle....................................... - 3,430 Provision for losses on loans.................... 50,000 196,900 Provision for losses and writedowns on OREO...... 4,941 - Depreciation and amortization.................... 36,447 35,614 Securities gains, net............................ (7,987) (9,920) Other gains...................................... (19,000) - Deferred income tax expense (benefit)............ (38,732) (41,590) Decrease in due to factored clients.............. (118,764) (39,547) (Increase) decrease in accrued interest receivable............................. (5,491) 5,948 Increase (decrease) in accrued interest payable................................ 25,409 (15,582) Other assets and liabilities, net................ 35,333 (31,412) ------------ ------------ Net Cash Provided By Operating Activities... 250,462 242,207 ------------ ------------ Investing Activities -------------------- Net (increase) decrease in loans.................. (759,844) 213,571 Proceeds from sales of loans...................... 577,894 151,258 Loans originated or acquired - non-bank subsidiary....................................... (17,461,898) (17,393,875) Principal collected on loans - non-bank subsidiary....................................... 17,234,321 17,009,148 Net increase in time deposits, principally eurodollars.......................... (198,186) (367,005) Purchases of investments held-to-maturity......... (319,068) (602,145) Purchases of investments available-for-sale....... (76,632) (163,881) Proceeds from maturities of investments available-for-sale............................... 7,622 160,004 Proceeds from maturities of investments held-to-maturity................................. 723,147 747,310 Proceeds from sales of investments available-for-sale............................... 143,208 433,643 Net decrease in Federal funds sold and securities purchased under agreements to resell............. 538,472 103,674 Purchases of premises and equipment............... (45,298) (43,557) Proceeds from sales and paydowns on OREO.......... 18,178 21,948 Other............................................. (8,510) 5,771 ------------ ------------ Net Cash Provided by Updated Investing Activities..................................... 373,406 275,864 ------------ ------------ Financing Activities -------------------- Net decrease in deposits.......................... (997,625) (1,006,724) Proceeds from issuance of long-term debt.......... 205,936 151,849 Retirement of long-term debt...................... (175,083) (84,028) Net increase in short-term funds borrowed......... 818,335 302,180 Cash dividends paid............................... (99,263) (70,588) Purchases of treasury stock....................... (256,538) (130,430) Other............................................. 52,656 15,186 ------------ ------------ Net Cash Used In Financing Activities............ (451,582) (822,555) ------------ ------------ Increase (decrease) In Cash And Due From Banks... 172,286 (304,484) ---------------------------------------------- Cash and due from banks at January 1,............ 2,262,512 2,521,676 ------------ ------------ Cash and due from banks at June 30,.............. $ 2,434,798 $ 2,217,192 ============ ============ Supplemental Disclosure of Cash Flow Information ------------------------------------------------ Cash paid during the period for: Interest......................................... $ 384,083 $ 260,744 ============ ============ Income taxes..................................... $ 114,603 $ 88,899 ============ ============ Net cash received on interest rate swaps.......... $ 10,231 $ 54,261 ============ ============
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. Page 7 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) JUNE 30, 1995 NOTE A -- BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of CoreStates Financial Corp ("CoreStates") have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (comprising only normal recurring accruals) necessary for a fair presentation have been included. Certain amounts in prior periods have been reclassified for comparative purposes. Operating results for the six-month period ended June 30, 1995 are not necessarily indicative of the results that may be expected for the year ending December 31, 1995. In March 1995, CoreStates completed an intensive review of its operations and businesses and announced a corporate-wide process redesign plan, which restructures its banking services around customers and enhances employees' authority to make decisions to benefit customers. As a result of this process redesign, CoreStates recorded a $110 million pre-tax restructuring charge, $70.0 million after-tax or $0.49 per share, in March 1995. In the second quarter of 1995, CoreStates recorded a restructuring credit of $3.0 million, $1.9 million after-tax or $0.01 per share, related to a gain on the curtailment of future pension benefits associated with the 900 employees terminated during the second quarter. CoreStates anticipates the recognition of additional curtailment gains in the third and fourth quarters of 1995, as more employees reach their work- through dates. The process redesign is expected to generate by late 1996, efficiencies which will reduce expenses by approximately $180 million and revenue enhancements which will net an addition of approximately $30 million to revenues, combining to improve net income at an annual rate of $0.90 per share. During the first quarter of 1994, CoreStates recognized a $3.4 million after- tax, or $0.02 per share, impairment loss on certain mortgage securities as a cumulative effect of a change in accounting principle. The loss was the result of a 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 ("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. NOTE B -- LOAN PORTFOLIO Loans, net of unearned discounts, at June 30, 1995 and December 31, 1994 consist of the following (in thousands):
June 30, December 31, 1995 1994 ------------ ------------ Domestic: Commercial, industrial and other: Highly leveraged transactions ("HLTs")......................... $ 459,495 $ 497,972 Other............................. 9,221,780 8,190,761 ----------- ----------- Total commercial, industrial and other..................... 9,681,275 8,688,733 ----------- ----------- Real estate: Construction and development...... 348,514 331,369 Residential....................... 2,524,732 3,180,227 Other............................. 2,807,397 2,979,053 ----------- ----------- Total real estate.............. 5,680,643 6,490,649 ----------- ----------- Consumer: Installment....................... 1,395,728 1,386,776 Credit card....................... 1,408,311 1,374,598 ----------- ----------- Total consumer................. 2,804,039 2,761,374 ----------- ----------- Financial institutions................. 845,510 668,119 Factoring receivables.................. 509,986 622,380 Lease financing........................ 739,247 710,338 ----------- ----------- Total domestic................. 20,260,700 19,941,593 ----------- ----------- Foreign.................................. 636,189 584,623 ----------- ----------- Total loans.................... $20,896,889 $20,526,216 =========== ===========
Page 8 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -- continued June 30, 1995 NOTE B -- LOAN PORTFOLIO - CONTINUED In May 1993, the FASB issued Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("FAS 114") and in October 1994, the FASB issued Statement No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures" ("FAS 118"). FAS 114 addresses accounting for impairment of certain loans and requires that impaired loans within the scope of FAS 114 be measured based on the present value of expected cash flows discounted at the loan's effective interest rate, or be measured at the loan's observable market price or the fair value of its collateral. FAS 118 amended FAS 114's income recognition policies and clarifies FAS 114's disclosure requirements. Both FAS 114 and 118 are effective beginning in 1995. As required, CoreStates adopted FAS 114 and 118 in the first quarter of 1995. The adoption of these standards did not have an impact on CoreStates' provision for loan losses or allowance for loan losses, nor change CoreStates' methodology for recognizing income on impaired loans. NOTE C -- 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 CoreStates' asset and liability management and to provide for the needs of customers. These involve varying degrees of credit, interest rate and liquidity risk, but do not represent unusual risks for the Corporation and management does not anticipate any significant losses as a result of these transactions. The following is a summary of contractual or notional amounts of off-balance sheet commitments and derivative financial instruments as of June 30, 1995 and December 31, 1994 (in thousands):
June 30, December 31, 1995 1994 ------------ ------------ Standby letters of credit, net of participations......................... $ 986,143 $1,125,262 Commercial letters of credit............ 1,358,824 1,244,164 Commitments to extend credit............ 8,879,328 8,223,261 Unused commitments under credit card lines.................................. 3,772,590 3,579,453 Interest rate futures contracts: Commitments to purchase............... 1,223,000 1,043,000 Commitments to purchase foreign and U.S. currencies............................ 2,143,102 1,816,549 Interest rate swaps, notional principal amounts................................ 8,416,527 8,234,400 Interest rate caps and floors: Written............................... 705,237 749,857 Purchased............................. 1,085,337 1,150,657 Other derivatives....................... 103,000 295,000
Page 9 PART I. FINANCIAL INFORMATION -- CONTINUED CORESTATES FINANCIAL CORP AND SUBSIDIARIES ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY ------- EARNINGS REVIEW - In the second quarter of 1995, CoreStates Financial Corp --------------- ("CoreStates") recorded net income of $125.9 million or $0.89 per share. "Operating earnings" for the second quarter of 1995, which has been defined for purposes of this discussion as net income excluding a restructuring credit, was $124.0 million, or $0.88 per share. This represents a 22.2% increase on a per share basis when compared to second quarter of 1994 operating earnings of $102.7 million, or $0.72 per share. Operating earnings for the second quarter of 1994 exclude merger-related charges of $39.6 million after-tax, or $0.28 per share. The restructuring credit and merger-related charges are discussed below. The $21.3 million improvement in operating earnings for the second quarter of 1995, as compared to the second quarter of 1994, was primarily due to an increase in taxable equivalent net interest income of $27.9 million or 7.9%. The net interest margin for the second quarter of 1995 was 6.10% , an increase of 24 basis points when compared to 5.86% for the second quarter of 1994. The increase in the level of taxable equivalent net interest income and the net interest margin were primarily related to improved interest rate spreads on deposits and prime-based loans, higher earnings on non-interest bearing funding and loan growth. Also contributing to the improvement in second quarter operating earnings was a $3.1 million , or 2.3% increase in non-interest income and a $4.4 million, or 1.4% decrease in non-financial expenses excluding the restructuring credit and merger-related charges. The financial impact of those aspects of the process redesign (see "Process Redesign" beginning on page 11) implemented during the second quarter was to increase second quarter of 1995 operating income by $7.5 million pre-tax, or $0.03 per share after-tax. This impact principally related to expense savings and exceeded original projections by $0.01 per share due to timing. Key performance measures, based on operating earnings, continued to improve on already strong ratios. Returns on average equity and assets were 22.03% and 1.75%, respectively, in the second quarter of 1995, compared to 18.55% and 1.48%, respectively, in the second quarter of 1994. Return on average equity was postively affected by the common stock repurchase program (see "Capital Management" beginning on page 25). For the six months ended June 30, 1995, CoreStates recorded net income of $181.3 million or $1.27 per share. Operating earnings for the first six months of 1995, defined as net income excluding the net restructuring charge and a gain related to changes in an investment in an affiliate joint venture, were $237.6 million, or $1.67 per share. This represents a 19.3% increase on a per share basis when compared to operating earnings of $200.5 million, or $1.40 per share for the 1994 six-month period. Operating earnings for the first six months of 1994 exclude merger-related charges of $167.4 million after-tax, or $1.17 per share, and the cumulative effect of a change in accounting principle. The $37.1 million improvement in operating earnings for the first six months of 1995 also was primarily due to an increase in taxable equivalent net interest income. Taxable equivalent net interest income for the first six months of 1995 increased $63.2 million, or 9.2%, over the 1994 six-month period. In March 1995, CoreStates completed an intensive review of its operations and businesses and announced a corporate-wide process redesign plan, which restructures its banking services around customers and enhances employees' authority to make decisions to benefit customers. As a result of this process redesign, CoreStates recorded a $110.0 million pre-tax restructuring charge, $70.0 million after-tax or $0.49 per share in March 1995. In the second quarter of 1995, CoreStates recorded a restructuring credit of $3.0 million, $1.9 million after-tax or $0.01 per share, related to a gain on the curtailment of future pension benefits associated with the 900 employees terminated during the second quarter. CoreStates anticipates the recognition of additional curtailment gains in the third and fourth quarters of 1995, as more employees reach their work-through dates. For a more detailed discussion of the process redesign and related restructuring charge see "Process Redesign" beginning on page 11. Also in March 1995, Electronic Payment Services, Inc. ("EPS") an affiliate joint venture formed in 1992 to combine the consumer electronic transaction processing businesses of CoreStates and three partners, admitted a fifth partner and increased the ownership interest of an existing partner. As a direct result of this change in its ownership interest, CoreStates recognized a pre-tax gain of $19.0 million, $11.8 million after-tax or $0.08 per share, in the first quarter of 1995. Page 10 CORESTATES FINANCIAL CORP AND SUBSIDIARIES ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued SUMMARY - continued ------- Upon consummation of its acquisition by CoreStates on June 27, 1994, Independence Bancorp, Inc. ("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 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 $0.28 per share. On a pre-tax basis, the merger-related charges consisted of a $25.0 million provision for loan losses, a $4.0 million addition to the OREO reserve, and $29.7 million for expenses directly attributable to the acquisition including $5.0 million of severance costs related to approximately 345 employees. Upon consummation of its acquisition by CoreStates on March 16, 1994, Constellation Bancorp ("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 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 $0.89 per share. On a pre-tax basis, these 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. During the first quarter of 1994, CoreStates recognized a $3.4 million after- tax, or $0.02 per share, impairment loss on certain mortgage securities as a cumulative effect of a change in accounting principle. The loss was the result of a writedown to fair value of these securities, which were deemed to be impaired. This resulted from the Financial Accounting Standards Board's ("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. Operating results, key financial ratios and per share information are summarized in the following table (in millions, except per share):
Three Months Ended Six Months Ended June 30, Percentage June 30, Percentage -------------------- Increase -------------------- Increase 1995 1994 (Decrease) 1995 1994 (Decrease) --------- --------- ----------- --------- --------- ----------- Net interest income (taxable equivalent basis)..................................... $ 383.0 $ 355.1 7.9% $ 752.3 $ 689.1 9.2% ======== ======== ======== ======== Income before the cumulative effect of a change in accounting principle............ $ 125.9 $ 63.1 99.5 $ 181.3 $ 33.1 447.7 Exclude: After-tax restructuring charge (credit)... (1.9) - 68.1 - After-tax EPS gain........................ - - (11.8) - After-tax merger-related charges.......... - 39.6 - 167.4 -------- -------- -------- -------- Operating earnings.......................... $ 124.0 $ 102.7 20.7 $ 237.6 $ 200.5 18.5 ======== ======== ======== ======== Operating earnings per share................ $ 0.88 $ 0.72 22.2 $ 1.67 $ 1.40 19.3 ======== ======== ======== ======== Return on average equity (a)................ 22.03% 18.55% 20.81% 17.41% Return on average assets (a)................ 1.75 1.48 1.69 1.46 Net interest margin......................... 6.10 5.86 6.01 5.71 Average common shares outstanding........... 140.914 142.139 142.571 143.368 -----------------
(a) Calculated based on "Operating earnings." Page 11 CORESTATES FINANCIAL CORP AND SUBSIDIARIES ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued SUMMARY - continued ------- PROCESS REDESIGN - In order to build upon CoreStates' strong financial ---------------- condition and sustain previous financial successes, and to accomplish this goal in the competitive financial services environment in which CoreStates operates, management had commenced an intensive review of all aspects of CoreStates' operations and businesses in September 1994. In March 1995, CoreStates completed its review and approved and announced a corporate-wide process redesign plan, which restructures its banking services around customers and enhances employees' authority to make decisions to benefit customers. The objectives of the process redesign are: (i) to enhance CoreStates' customer focus; (ii) to accelerate the culture change already in progress at CoreStates; and (iii) to improve productivity. As a result of the process redesign, CoreStates recorded a $110 million restructuring charge, $70 million after-tax or $0.49 per share, in March 1995. The process redesign will result in the elimination of 2,800 positions, or 2,600 full-time equivalent employees. The breakdown of the eliminated positions is as follows: (i) 450 positions resulting from a hiring freeze in place from September 1994 to April 1995; (ii) 530 positions resulting from expected attrition during implementation of the process redesign; (iii) 930 employees who have elected to accept an enhanced severance package; and (iv) 890 layoffs. At June 30, 1995, CoreStates had 14,015 full-time equivalent employees which reflect reductions for the impact of the hiring freeze and 900 employee terminations during the second quarter. The components of the restructuring charge and related cash outflow were as follows (in millions):
Restructuring Charge ------------------------ Second Requiring Quarter Cash Cash Total Outflow Outflow (a) ---------- ------------- ----------- Severance costs.................... $ 72 $72 $7 Office reconfiguration costs....... 16 7 - Branch closing costs............... 15 7 - Outplacement costs................. 3 3 1 Miscellaneous...................... 4 2 1 ---- --- -- Total............................ $110 $91 $9 ==== === == -------------------------
(a) CoreStates' liquidity has not been significantly affected by these cash outflows. CoreStates believes that the restructuring charges recorded through June 30, 1995 will be sufficient to absorb the remaining restructuring related costs. The severance charge relates to the separation package which will be paid to those employees who have elected to accept that package and to those employees laid off. Cash payments under separation packages commenced in April 1995 and will continue for varying terms. No lump sum severance payments will be made. The office reconfiguration charge relates to the costs of asset writeoffs and lease buyouts that will be incurred principally in the process of streamlining and consolidating center city Philadelphia operations. This streamlining and consolidating process will occur over the 18 month period which began in April 1995. The branch closing charge relates to the costs of asset writeoffs and lease buyouts that will be incurred in the process of consolidating and closing 37 branch offices, most by the end of the third quarter of 1995. In the second quarter of 1995, CoreStates recorded a restructuring credit of $3.0 million, $1.9 million after-tax or $0.01 per share, related to a gain on the curtailment of future pension benefits associated with the 900 employees terminated during the second quarter. CoreStates anticipates the recognition of additional curtailment gains in the third and fourth quarter of 1995, as more employees reach their work-through dates. Future cash outflows to be incurred in implementing the process redesign plan, which were not included in the restructuring charge, will include approximately $25 million for capital expenditures and approximately $20 million in operating expenses. During the second quarter of 1995,the amount of incremental operating expenses that were incurred related to the process redesign were insignificant. Page 12 CORESTATES FINANCIAL CORP AND SUBSIDIARIES ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued SUMMARY - continued ------- The principal themes of the process redesign plan are as follows: . Redefine the organizational structure around customers, customer segments and markets, not products; . Streamline and consolidate functions and processes; . Vacate 1.2 million square feet of occupied space in 45 buildings, including the 37 branches to be closed; . Use technology to automate services and processes; and . Employ tiered pricing strategies and streamline product pricing. Implementation of the process redesign plan will occur over the 18 month period which began in April 1995. The process redesign is expected to generate by late 1996, cost efficiencies which will reduce expenses by $180 million and revenue enhancements which will net an addition of $30 million to recurring fee income, combining to improve CoreStates' net income at an annual rate of $0.90 per share. The process redesign is expected to have a positive impact on net income of approximately $0.16 per share in 1995 (excluding the restructuring charge and subsequent credits) and $0.72 per share in 1996. For the second quarter of 1995, the impact of the process redesign on net income (excluding the restructuring credit) was approximately $0.03 per share. This impact principally related to expense savings and exceeded original projections for the second quarter by $0.01 per share. A breakdown of expected expense reductions is as follows: personnel related - $98 million; professional and outside services - $20 million; occupancy - $18 million; office supplies - $9 million; telecommunications - $5 million; travel and entertainment - $5 million; furnishings - $4 million; and all other - $21 million. As with any earnings estimates, there are factors beyond CoreStates' control that could influence the actual results for 1995-1996, such as changes in economic conditions. As a result, the actual results could differ materially from these estimates. Page 13 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued BUSINESS LINE RESULTS --------------------- The following tables present the performance results of CoreStates' four core business segments; Wholesale Banking; Consumer Financial Services; Trust and Investment Management; and Electronic payment Services, Inc. ("EPS"), an affiliate, for the three and six-month periods ended June 30, 1995 and 1994. Each segment is comprised of well defined business lines with market or product- specific missions. Three Months Ended June 30, ($ in millions, taxable equivalent basis)
Consumer Trust and Wholesale Financial Investment Banking Services Management ----------------------- --------------------- ----------------------- 1995 1994 1995 1994 1995 1994 --------- --------- --------- --------- ----------- ---------- Net interest income....................... $ 168.6 $ 159.2 $ 186.1 $ 167.0 $ 7.0 $ 7.5 Provision for loan losses................. 10.9 10.9 13.9 13.8 0.2 0.3 Non-interest income....................... 57.9 56.4 43.9 43.6 24.6 25.0 Non-financial expenses.................... 116.8 116.8 142.5 148.1 25.7 28.5 ------- ------- ------- ------- ------- ------- Income before income taxes................ 98.8 87.9 73.6 48.7 5.7 3.7 Income tax expense........................ 39.4 34.4 28.5 18.9 2.1 1.4 ------- ------- ------- ------- ------- ------- Net income................................ $ 59.4 $ 53.5 $ 45.1 $ 29.8 $ 3.6 $ 2.3 ======= ======= ======= ======= ======= ======= Return on assets.......................... 1.50% 1.38% 2.60% 1.59% 2.14% 1.32% Return on equity (a)...................... 25.67 24.95 50.39 32.75 57.76 34.17 Average assets............................ $15,919 $15,604 $ 6,960 $ 7,508 $ 676 $ 697 Average equity (a)........................ 928 860 359 365 25 27 EPS, Inc. Affiliate Corporate Total ---------------------- ------------------- -------------------- 1995 1994 1995 1994(c) 1995 1994 ------- ------- ------- --------- ------- ------- Net interest income....................... $ (1.4) $ (1.5) $ 22.7 $ 22.9 $ 383.0 $ 355.1 Provision for loan losses................. - - - 25.0 25.0 50.0 Non-interest income....................... 7.5 7.8 11.3 9.3 145.2 142.1 Non-financial expenses.................... - - 15.0(b) 47.7 300.0 341.1 ------- ------- --------- ------- ------- ------- Income (loss) before income taxes......... 6.1 6.3 19.0 (40.5) 203.2 106.1 Income tax expense........................ 2.1 2.2 5.1 (13.9) 77.2 43.0 ------- ------- ------- ------- ------- ------- Net income (loss)......................... $ 4.0 $ 4.1 $ 13.9 $ (26.6) $ 126.0 $ 63.1 ======= ======= ======= ======= ======= ======= Return on assets.......................... 20.05% 22.53% 1.16% (2.66)% 1.78% .91% Return on equity (a)...................... 401.10 411.13 5.92 (11.06) 22.38 11.39 Average assets............................ $ 80 $ 73 $ 4,789 $ 4,007 $28,424 $27,889 Average equity (a)........................ 4 4 942 965 2,258 2,221 -------------------
(a) Equity is allocated to business lines in the four core business segments by applying a factor of 5.0% against average risk-weighted assets and adding intangible assets. (b) Includes a restructuring credit of $3.0 million pre-tax, $1.9 million after-tax or $0.01 per share. (c) Includes after-tax merger-related charges of $39.6 million for the Independence Bancorp acquisition. or $0.28 per share recorded in the first quarter of 1994 for the Independence Bancorp acquisition. Page 14 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued BUSINESS LINE RESULTS - continued ---------------------- Six Months Ended June 30, ($ in millions, taxable equivalent basis)
Consumer Trust and Wholesale Financial Investment Banking Services Management --------------------- -------------------- -------------------- 1995 1994 1995 1994 1995 1994 ------- -------- ------ ------- ------- ------- Net interest income..................... $ 325.4 $ 307.1 $ 371.6 $ 328.3 $ 14.0 $ 15.0 Provision for loan losses............... 21.4 23.5 28.1 27.9 0.5 0.5 Non-interest income..................... 117.3 112.8 84.1 89.8 49.2 49.8 Non-financial expenses.................. 227.2 233.2 288.7 297.3 52.7 55.9 ------- ------- ------- ------- ------- ------- Income before income taxes.............. 194.1 163.2 138.9 92.9 10.0 8.4 Income tax expense...................... 76.8 64.0 52.1 36.0 3.7 3.1 ------- ------- ------- ------- ------- ------- Net income.............................. $ 117.3 $ 99.2 $ 86.8 $ 56.9 $ 6.3 $ 5.3 ======= ======= ======= ======= ======= ======= Return on assets........................ 1.49% 1.30% 2.45% 1.51% 1.84% 1.55% Return on equity (a).................... 25.74 24.10 47.44 31.18 48.86 38.17 Average assets.......................... $15,864 $15,339 $ 7,140 $ 7,591 $ 692 $ 691 Average equity (a)...................... 919 830 369 368 26 28 EPS, Inc. Affiliate Corporate Total --------------------- -------------------- -------------------- 1995 1994 1995 1994(d) 1995 1994 ------- -------- ------ ------- ------- ------- Net interest income..................... $ (2.6) $ (2.9) $ 43.9 $ 41.6 $ 752.3 $ 689.1 Provision for loan losses............... - - - 145.0 50.0 196.9 Non-interest income..................... 34.0(b) 15.7 22.8 19.9 307.4 288.0 Non-financial expenses.................. - - 145.4(c) 126.0 714.0 712.4 ------- ------- ------- ------- ------- ------- Income (loss) before income taxes...... 31.4 12.8 (78.7) (209.5) 295.7 67.8 Income tax expense...................... 11.6 4.5 (29.8) (72.9) 114.4 34.7 ------- ------- ------- ------- ------- ------- Net income (loss)....................... $ 19.8 $ 8.3 $ (48.9) $(136.6) $ 181.3 $ 33.1(e) ======= ======= ======= ======= ======= ========== Return on assets........................ 51.85% 22.62% (2.16)% (6.75)% 1.29% 0.24% Return on equity (a).................... 998.20 418.44 (10.01) (25.20) 15.88 2.88 Average assets.......................... $ 77 $ 74 $ 4,574 $ 4,082 $28,347 $27,777 Average equity (a)...................... 4 4 985 1,093 2,303 2,323 -------------------
(a) Equity is allocated to business lines in the four core business segments by applying a factor of 5.0% against average risk-weighted assets and adding intangible assets. (b) Includes a gain of $19.0 million pre-tax, $11.8 million after-tax or $0.08 per share, related to changes in the investment in the EPS affiliate joint venture. (c) Includes a restructuring charge of $110.0 million pre-tax, $70.0 million after-tax or $0.49 per share, in the first quarter and a restructuring credit of $3.0 million pre-tax, $1.9 million after-tax or $0.01 per share, in the second quarter related to a corporate-wide process redesign. (d) Includes after-tax merger-related charges of $127.8 million or $0.89 per share recorded in the first quarter of 1994 for the Constellation acquisition and $39.6 million or $0.28 per share recorded in the second quarter of 1994 for the Independence acquisition. (e) Based on income before cumulative effect of a change in accounting principle. Page 15 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued BUSINESS LINE RESULTS - CONTINUED --------------------------------- 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 major business areas; emerging business activities not directly related to the four major business areas; and miscellaneous items. WHOLESALE BANKING is organized into six business lines: Corporate Middle Market, Corporate and Institutional Banking, Investment Banking, Cash Management, International Banking, and Specialized Banking (including Congress Financial Corporation, CoreStates' commercial finance subsidiary). Wholesale Banking continued its strong performance in 1995 as net income increased $5.9 million or 11.0% above second quarter 1994, and $18.1 million or 18.2% above prior year-to-date. This increase was due primarily to growth in net interest income and non-interest income for both periods and declines in the provision for loan losses and non-financial expenses for the six-month period. Net interest income was $9.4 million or 5.9% above second quarter 1994, and $18.3 million or 6.0% above prior year-to-date, largely due to higher loan and factoring volumes (primarily at Congress), higher loan spreads, lower levels of non-performing loans, and higher loan fees. Average loan outstandings increased 4.9% from the second quarter 1994, and 5.1% above prior year-to-date. Average non-performing loans declined 51.3% from second quarter 1994. Non-interest revenue increased $1.5 million or 2.7% for the second quarter, and $4.5 million or 4.0% for the six-month period due to growth in international service fees and securities gains. Non-financial expenses declined $6.0 million or 2.6% from prior year-to-date largely due to declines in personnel and processing expenses. The provision for loan losses declined 8.9% year-to-date as the overall quality of the loan portfolio improved. CONSUMER FINANCIAL SERVICES includes the following business lines: Community Banking, Specialty Products and Mortgage Banking. Specialty Products ("SPG") includes Credit Card, Student Lending and CardLinx. Results for 1995 include Germantown Savings Bank ("GSB") which was acquired on December 2, 1994. Since the GSB transaction was accounted for under the purchase method, restatement of 1994 was not required. Net income for the second quarter of 1995 was $45.1 million which was $15.3 million or 51.3% over the second quarter of 1994. Excluding the contribution of GSB to the second quarter of 1995, net income was $42.4 million or $12.6 million (42.3%) over the second quarter of 1994. Net income for the six months ended June 30, 1995 was $86.8 million or $29.9 million (52.5%) over the same period in 1994. Excluding GSB, net income was $81.9 million or $25.0 million (43.9%) over the 1994 six-month period. Net interest income for the quarter grew by $19.1 million or 11.4% when compared to prior year. Excluding GSB, net interest income was up by $9.9 million or 5.9%. Net interest income in the Community Banking Line, excluding GSB, increased by $4.2 million. Favorable deposit spreads, up 36 basis points, generated an $11.8 million increase, which was partially offset by narrowing loan spreads which were down 28 basis points for a $3.4 million impact, and a $388 million decrease in deposits equating to a $2.6 million decline. SPG net interest income grew by $4.6 million driven by a 17.5% increase in credit card outstandings. On a year-to-date basis net interest income increased by $43.3 million. Excluding GSB, the increase was $23.3 million, primarily as a result of favorable deposit spreads and increased credit card outstandings, contributing $31.3 million and $9.6 million, respectively. These were partially offset by decreasing loan and deposit volumes as well as narrowing loan spreads. Page 16 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued BUSINESS LINE RESULTS - continued --------------------------------- Non-interest income for the second quarter increased by $0.3 million in comparison to 1994. Excluding GSB, non-interest income actually declined by $0.7 million or 1.6%. Mortgage related fee income declined by $1.5 million primarily resulting from the sale of the Constellation portfolio in the second quarter of 1994. In addition, revenue from third party sales of annuities and mutual funds declined due, in part, to customer shifts from these products to certificates of deposits as rates became more attractive in the latter half of 1994. These declines were partially offset by an increase generated from home equity loan securitization transactions in 1995. Year-to-date non-interest income decreased by $5.7 million. Without GSB, the decrease was $7.5 million or 8.4%. Mortgage related income declined by $5.5 million accounting for most of this decline and in March 1994, Community Banking sold its Marine lending portfolio at a one-time gain of $1.5 million. Non-financial expenses for the second quarter decreased by $5.6 million or 3.8% when compared to 1994. Excluding GSB, the decline was $11.1 million or 7.5%. The decline occurred in Community Banking where expenses were down $11.4 million. Savings gained from the hiring freeze and heightened expense controls resulting from the company-wide process redesign program were the major reasons for the decline. Year-to-date non-financial expenses declined $8.6 million. Excluding GSB, expenses declined $21.2 million or 7.1%. Community Banking expenses were down $22.0 million mainly due to the hiring freeze and expense controls implemented. TRUST AND INVESTMENT MANAGEMENT is organized into four business lines: Institutional Trust, Personal Trust, Private Banking, and Investment Management. Net income for the second quarter was $3.6 million which was up $1.3 million over the second quarter of 1994. Year-to-date net income of $6.3 million was $1.0 million above the 1994 level. Net interest income declined $0.5 million or 6.7% for the quarter, compared to 1994 and declined $1.0 million or 6.7% on a year-to-date basis. The decline in net interest income was due primarily to lower demand balances in Institutional Custody and shortfalls in Corporate Trust balances resulting from extraordinary levels of refinancing activity in 1994. Non-interest income declined $0.4 million or 1.6% for the quarter and $0.6 million or 1.2% year-to-date. The decline in non-interest income is due primarily to customer attrition in Employee Benefits and lower non-recurring fees in Personal Trust. New business and fee growth in Institutional Custody partially offset these shortfalls. Non-financial expenses were $2.8 million or 9.8% below 1994 levels for the second quarter and $3.2 million or 5.7% below year-to-date. The favorable expense variance is primarily due to reductions in personnel expenses as a result of the corporate-wide process redesign. On August 2, 1995, CoreStates announced the signing of agreements for the sale of its corporate trust business. The transactions, which are expected to close in the third quarter, are not expected to have a material impact on net income. ELECTRONIC PAYMENT SERVICES, INC. ("EPS"), the nation's leading provider of ATM and POS processing services, 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). 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 recaptialization of EPS involving the EPS preferred stock then held by CoreStates. In exchange for substantially all of the preferred stock, CoreStates received from EPS a ten-year note providing for equal quarterly 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 the $138 million deferred gain from a five-year period beginning in 1996 to a ten-year period which began in 1994. Page 17 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued BUSINESS LINE RESULTS - continued --------------------------------- On March 2, 1995, National City Corp was added as a partner and KeyCorp increased its investment to become a full partner, decreasing CoreStates' share of ownership from 31% to 20%. As a direct result of this change in ownership interests, CoreStates recognized a pre-tax gain of $19.0 million, $11.8 million after-tax or $0.08 per share. Net income of $4.0 million for the second quarter of 1995 results from non- interest income from CoreStates' equity interest in EPS net income, recognition of the deferred gain, and interest income on the promissory note; partly offset by interest carrying charges on the net investment in EPS. Net income for the second quarter of 1994 totaled $4.1 million. Net income of $19.8 million for the first six months of 1995 includes the $19.0 million gain, $11.8 million after-tax, related to the National City/KeyCorp transactions. The 1995 results also include non-interest income from CoreStates' 20% equity interest in EPS' net income, deferred gain recognition, and promissory note interest income; partly offset by interest carrying charges on the net investment in EPS. Net income for the first half of 1994 totaled $8.3 million. NET INTEREST INCOME ------------------- The largest source of CoreStates' operating revenue is net interest income. For analytical purposes, net interest income is adjusted to a "taxable equivalent" basis to recognize the income tax savings on tax exempt assets. Net interest income on a taxable equivalent basis for the second quarter of 1995 was $383.0 million, an increase of $27.9 million, or 7.9%, from the second quarter of 1994. The net interest margin at 6.10% improved 24 basis points from the second quarter of 1994. The increase in the level of taxable equivalent net interest income and the net interest margin were primarily driven by improved spreads on deposits and prime-based loans and higher earnings on non-interest bearing funding. In addition, net interest income and the net interest margin benefited from growth in loans particularly at Congress Financial Corp, CoreStates' commercial finance subsidiary, and credit card outstandings. Average loans for the second quarter of 1995 were $20.7 billion, an increase of $944 million or 4.8% over the second quarter of 1994. The strength of CoreStates' net interest income and net interest margin stems from the combination of wide spreads on both loans and deposits and a balance sheet which has a relatively high portion of loans and a large base of non-interest bearing funding principally generated by our processing and cash management businesses. Taxable equivalent net interest income for the second quarter of 1995 increased $13.7 million, or 3.7%, compared to the first quarter of 1995. The growth in second quarter interest income, as compared to the first quarter of 1995, principally reflected the impact of slightly higher average loan outstandings, one additional day in the second quarter and improved interest rate spreads. Page 18 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued NET INTEREST INCOME - continued ------------------------------- Taxable equivalent net interest income for the first six months of 1995 increased $63.2 million, or 9.2%, and the net interest margin increased 30 basis points to 6.01%, as compared to the 1994 six-month period. The increases were primarily due to improved interest spreads on deposits and prime-based loans, higher earnings on non-interest bearing funding and loan growth. The following table compares taxable equivalent net interest income for the three months ended June 30, 1995 versus the second quarter of 1994 and the first quarter of 1995, and for the six months ended June 30, 1995 versus the 1994 six- month period, respectively (in millions): Taxable Equivalent Net Interest Income --------------------------------------
Three Months Ended Increase (decrease) ------------------------------------- ------------------------------ June 30, June 30, March 31, June 1995/ June 1995/ 1995 1994 1995 June 1994 March 1995 ----------- ---------- ------------ --------------- ------------- Total interest income............ $ 576.6 $ 474.0 $ 551.0 $102.6 $25.6 Tax equivalent adjustment........ 4.4 5.4 4.4 (1.0) - -------- ------- ------- -------------- ------------- Tax equivalent interest income... 581.0 479.4 555.4 101.6 25.6 Total interest expense........... 198.0 124.3 186.1 73.7 11.9 -------- ------- ------- -------------- ------------- Taxable equivalent net interest income................ $ 383.0 $ 355.1 $ 369.3 $ 27.9 $13.7 ======== ======= ======= ============== ============= Interest rate spread............. 5.04% 5.11% 4.91% ======== ======= ======= Net interest margin.............. 6.10% 5.86% 5.93% ======== ======= ======= Six Months Ended --------------------------------- June 30, June 30, Increase/ 1995 1994 (decrease) -------- ------- ----------- Total interest income............ $1,127.6 $ 923.2 $ 204.4 Tax equivalent adjustment........ 8.8 11.1 (2.3) -------- ------- ------- Tax equivalent interest income... 1,136.4 934.3 202.1 Total interest expense........... 384.1 245.2 138.9 -------- ------- ------- Taxable equivalent net interest income................. $ 752.3 $ 689.1 $ 63.2 ======== ======= ======= Interest rate spread............. 4.97% 4.96% ======== ======= Net interest margin.............. 6.01% 5.71% ======== =======
Page 19 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued NET INTEREST INCOME - continued ------------------------------- The following rate/volume analysis on a taxable equivalent basis illustrates the underlying factors producing these increases (decreases) in tax equivalent net interest income (in millions):
Increase (decrease) in interest Increase (decrease) in interest ----------------------------------------- ----------------------------------------- Three Months Ended Three Months Ended June 30, 1995/1994 June 30, 1995/March 31, 1995 ----------------------------------------- ----------------------------------------- Income/ Change attributable to Income/ Change attributable to ----------------------- ------------------------ expense Volume Rate expense Volume Rate -------------- ------------ ----------- -------------- ----------- ------------ INTEREST EARNING ASSETS ----------------------- Time deposits-Eurodollar................ $ 21.4 $ 4.1 $17.3 $ 3.8 $ 0.9 $ 2.9 Investment securities................... (2.9) (7.6) 4.7 (0.2) (3.2) 3.0 Federal funds sold...................... 0.2 (0.1) 0.3 (0.7) (0.7) - Trading account securities.............. - - - - - - Loans: - Domestic............................ 77.6 20.6 57.0 21.4 4.3 17.1 - Foreign............................. 5.3 1.8 3.5 1.3 0.6 0.7 ------ ----- ----- ----- ----- ----- Total interest income....... 101.6 18.8 82.8 25.6 1.9 23.7 ----- ----- ----- ----- ----- ---- INTEREST BEARING FUNDS ---------------------- Deposits: Domestic............................... 47.0 11.2 35.8 6.6 (1.1) 7.7 Overseas............................... 8.1 1.1 7.0 2.2 0.4 1.8 Funds borrowed: Federal funds purchased................ 2.4 (1.0) 3.4 0.2 1.4 (1.2) Other.................................. 4.9 1.3 3.6 2.4 1.8 0.6 Long-term debt.......................... 11.3 2.3 9.0 0.5 0.6 (0.1) ------ ----- ----- ----- ----- ----- Total interest expense................. 73.7 14.9 58.8 11.9 3.1 8.8 ------ ----- ----- ----- ----- ----- NET INTEREST INCOME..................... $ 27.9 $ 3.9 $24.0 $13.7 $(1.2) $14.9 ====== ===== ===== ===== ===== ===== -----------
- Changes in interest income or expenses 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. - Non-performing loans are included in interest earning assets. - The changes in interest expense on domestic time deposits attributable to volume and rates are adjusted by specific reserves as average balances are reduced by such reserves for purposes of rate calculations. Page 20 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued NET INTEREST INCOME - continued -------------------
Increase (decrease) in interest ----------------------------------------- Six Months Ended June 30, 1995/1994 ----------------------------------------- Income/ Change attributable to ----------------------- expense Volume Rate -------------- ------------ ----------- INTEREST EARNING ASSETS ----------------------- Time deposits-Eurodollars............... $ 35.7 $ 9.9 $ 25.8 Investment securities................... (5.5) (16.3) 10.8 Federal funds sold...................... (0.2) (1.2) 1.0 Trading account securities.............. - - - Loans: - Domestic............................ 161.7 42.4 119.3 - Foreign............................. 10.4 3.5 6.9 ------ ------ ------ Total interest income........... 202.1 38.3 163.8 ------ ------ ------ INTEREST BEARING FUNDS ---------------------- Deposits: Domestic............................... 87.3 22.2 65.1 Overseas............................... 9.4 3.3 6.1 Funds borrowed: Federal funds purchased................ 6.0 (3.3) 9.3 Other.................................. 11.6 2.5 9.1 Long-term debt.......................... 24.6 4.5 20.1 ------ ------ ------ Total interest expense................. 138.9 29.2 109.7 ------ ------ ------ NET INTEREST INCOME..................... $ 63.2 $ 9.1 $ 54.1 ---------------------------------------- ====== ====== ======
- Changes in interest income or expenses 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. - Non-performing loans are included in interest earning assets. - The changes in interest expense on domestic time deposits attributable to volume and rates are adjusted by specific reserves as average balances are reduced by such reserves for purposes of rate calculations. The effect of cash basis and other non-performing loans on interest income and net interest income for the three and six-month periods ended June 30, 1995 and 1994 was as follows (in millions):
Three Six Months Ended Months Ended June 30, June 30, ---------------- ----------------- 1995 1994 1995 1994 ------ -------- -------- ------- Interest income due on non-performing loans in accordance with their original terms.................................. $ 4.8 $ 5.4 $ 10.7 $ 13.9 Interest income on non-performing loans reflected in total interest income..... 2.9 6.0 6.0 10.1 ------ ------- ------- ------- Net reduction (increase) in interest income................................. $ 1.9 $ (0.6) $ 4.7 $ 3.8 ====== ======= ======= =======
Page 21 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued PROVISION AND ALLOWANCE FOR LOAN LOSSES --------------------------------------- The provision for loan losses for the second quarter of 1995 was $25.0 million, unchanged from the provisions recorded in the prior year second quarter (excluding the $25.0 million Independence merger-related provision) and the 1995 first quarter. In the second quarter of 1994 Independence recorded a $25.0 million provision for loan losses and in the first quarter of 1994 Constellation recorded a $120.0 million provision for loan losses, both in connection with a change in strategy related to problem assets, and to conform their consumer lending charge-off policies to those of CoreStates. Net loan charge-offs of $140.3 million in the second quarter of 1994 included $103.1 million of net charge-offs related to problem assets acquired with Constellation. The Constellation charge-offs related to actions taken in connection with the change in strategic direction including a bulk sale of $62 million of real estate loans. The following table presents an analysis of changes in the allowance for loan losses for the three and six-month periods ended June 30, 1995 and 1994 (in millions):
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ------------------------ 1995 1994 1995 1994 ---------- ----------- ---------- ------------ Balance at beginning of period........ $ 498.7 $ 565.6 $ 500.6 $ 450.8 Provision charged to operating expense... 25.0 50.0(a) 50.0 196.9(a)(b) Loan charge-offs......................... (46.4) (156.6) (89.8) (202.1) Recoveries of loans previously charged off..................................... 20.1 16.3 36.6 29.7 ------- ------- ------- ------- Net loan charge-offs..................... (26.3) (140.3) (53.2) (172.4) ------- ------- ------- ------- Balance at end of period................. $ 497.4 $ 475.3 $ 497.4 $ 475.3 ======= ======= ======= ======= Ratios: Net charge-offs (annualized) as a percentage of average total loans....... 0.51% 2.84% 0.52% 1.76% Allowance for loan losses as a percentage of loans at end of period.... 2.38 2.43 Allowance for loan losses as a percentage of non-performing loans...... 254.39 179.5 -------------------------------------------------------------------------------------------
(a) Includes a merger-related provision of $25.0 million related to the second quarter of 1994 Independence acquisition. (b) Includes a merger-related provision of $120.0 million related to the first quarter of 1994 Constellation acquisition. Page 22 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED PROVISION AND ALLOWANCE FOR LOAN LOSSES - CONTINUED --------------------------------------- The following tables reflect the distribution of net loan charge-offs by loan type for the three and six-month periods ended June 30, 1995 and 1994 (in millions):
Three Months Ended Three Months Ended June 30, 1995 June 30, 1994 -------------------------------- --------------------------------- % of % of % of Total % of Total Net Average Net Net Average Net Charge- Loan Charge- Charge- Loan Charge- offs Type (a) offs offs Type (a) offs --------- -------- -------- -------- -------- --------- Domestic: Commercial, industrial and other... $ 1.6 0.1% 6.1% $ 49.3 2.2% 35.1% Real estate: Construction and development loans.. (0.3) (0.4) (1.1) 2.6 3.0 1.9 Other............................... 10.8 0.8 41.0 77.7 5.1 55.4 Consumer: Credit Card......................... 12.8 3.7 48.7 7.1 2.4 5.0 Installment......................... 1.3 0.4 4.9 3.6 1.1 2.6 Other (b)............................ 0.1 0.4 ----- ----- --------- --------- Total domestic.................. 26.3 0.5 100.0 140.3 2.9 100.0 ----- ----- ------ --------- Foreign.............................. - - - - - ----- ----- ------ --------- Total net charge-offs........... $26.3 0.5% 100.0% $140.3 2.8% 100.0% ===== ==== ===== ====== === ========= Six Months Ended Six Months Ended June 30, 1995 June 30, 1994 -------------------------------- --------------------------------- % of % of % of Total % of Total Net Average Net Net Average Net Charge- Loan Charge- Charge- Loan Charge- offs Type (a) off offs Type (a) offs --------- ------- --------- --------- ------- ----------- Domestic: Commercial, industrial and other..... $ 7.5 0.2% 14.1% $ 66.7 1.5% 38.7% Real estate: Construction and development loans.. 0.7 0.4 1.3 3.9 2.2 2.3 Other............................... 20.4 0.7 38.4 83.4 2.7 48.3 Consumer: Credit Card......................... 23.2 3.3 43.6 13.2 2.2 7.7 Installment......................... 1.4 0.2 2.6 5.0 0.8 2.9 Other (b)............................ - - - 0.2 - 0.1 ----- ----- ------ --------- Total domestic.................. 53.2 0.5 100.0 172.4 1.8 100.0 ----- ----- ------ --------- Foreign.............................. - - - - - - ----- ----- ------ --------- Total net charge-offs........... $53.2 0.5% 100.0% $172.4 1.8% 100.0% ===== ==== ===== ====== === =========
(a) Annualized. (b) Includes loans to financial institutions and lease financing. Page 23 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued NON-PERFORMING LOANS AND OTHER REAL ESTATE OWNED ------------------------------------------------ Total non-performing assets at June 30, 1995 decreased $68.0 million, or 21.9%, from December 31, 1994. The decrease in non-performing assets from December 31, 1994 was divided between the non-performing commercial loan portfolio, which decreased $32.0 million or 36.7%, and the non-performing real estate portfolio, which declined by $34.2 million or 17.7%. Most of the decline from December 31, 1994 occurred during the second quarter of 1995 as credit quality continued to improve and a single non-performing credit of approximately $26.7 million was paid off. The following table summarizes non-performing assets at June 30, 1995 and December 31, 1994 (in millions):
June 30, December 31, 1995 1994 -------- ------------ Non-accrual loans................. $ 193.9 $ 244.6 Renegotiated loans................ 1.6 1.6 ------- ------- Total non-performing loans... 195.5 246.2 ------- ------- Other real estate owned (OREO).... 47.4 64.7 ------- ------- Total non-performing assets.. $ 242.9 $ 310.9 ======= =======
The following table reflects the distribution of non-performing assets by loan type at June 30, 1995 and December 31, 1994 (in millions):
June 30, 1995 December 31, 1994 --------------------- ---------------------- % of % of Non- Loan Non- Loan Domestic: performing Type performing Type ------------- ------ ------------- ------- Commercial, industrial and other: HLTs................................. $ 1.5 0.3% $ 3.0 0.6% Other................................ 53.7 0.6 84.2 1.0 ------ ------ Total commercial, industrial and other............................. 55.2 0.5 87.2 1.0 ------ ------ Real estate: Construction and development......... 9.3 2.7 10.7 3.2 Other loans.......................... 102.7 1.9 118.2 1.9 Other real estate owned.............. 47.4 64.7 ------ ------ Total real estate.................. 159.4 2.0 193.6 2.0 ------ ------ Consumer................................ 0.6 - 0.7 - ------ ------ Other domestic loans (a)................ 27.5 1.7 29.2 2.1 ------ ------ Total domestic non-performing assets. 242.7 1.2 310.7 1.6 ------ ------ Foreign loans............................. 0.2 - 0.2 - ------ ------ Total non-performing assets (b)...... $242.9 1.2% $310.9 1.5% ====== === ====== === % Total assets....................... 0.8% 1.1% ====== ======
(a) Includes loans to financial institutions and lease financing. (b) Includes non-accrual loans, renegotiated loans and other real estate owned. The table does not include loans of $55 million and $53 million at June 30, 1995 and December 31, 1994, respectively, that are past due 90 days or more as to principal or interest, but which remain on full accrual since such loans are well secured and in the process of collection. Page 24 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued NON-PERFORMING LOANS AND OTHER REAL ESTATE OWNED - continued ------------------------------------------------ The following table summarizes the components of the change in non-performing assets for 1995 (in millions):
Quarter --------------------- Six First Second Months ---------- --------- ------------------- Beginning balance..................... $ 311 $ 299 $ 311 Additions............................. 54 35 89 Return to accrual..................... (3) (2) (5) Payments.............................. (38) (74) (112) Charge-offs........................... (25) (15) (40) ------- ------- ------- Net change......................... (12) (56) (68) ------- ------- ------- Ending balance........................ $ 299 $ 243 $ 243 ======= ======= =======
NON-INTEREST INCOME ------------------- (in millions) Percentage Three Months Ended Six Months Ended Increase (decrease) June 30, June 30, ---------------------- ----------------------------------------- Three Six 1995 1994 1995 1994 Months Months -------- ------- ------- ------- ---------- --------- Basic banking transactional services (a)... $ 108.3 $ 107.0 $ 212.8 $ 210.2 1.2% 1.2% Income from investment in EPS, Inc......... 7.5 7.8 15.0 15.7 (3.8) (4.5) Securities gains........................... 1.6 3.0 8.0 9.9 Other non-interest income.................. 27.8 24.2 52.7 52.2 14.9 1.0 ------- ------- ------- ------- Non-interest income before significant and unusual items.......................... 145.2 142.0 288.5 288.0 2.3 0.2 Significant and unusual items.............. - - 19.0(b) - ------- ------- -------- ------- Total non-interest income.................. $ 145.2 $ 142.0 $ 307.5 $ 288.0 2.3% 6.8% ======= ======= ======= ======= === ===
--------- (a) Comprised of debit and credit card fees, service charges on deposit accounts, trust income, and fees for international services. (b) Reflects the $19.0 million pre-tax gain related to the changes in the investment in the EPS, Inc. affiliate joint venture. Non-interest income for the second quarter of 1995 increased 2.3% from the second quarter of 1994, reflecting an increase in third-party processing fees and modest growth in revenues in CoreStates' basic banking transaction businesses, as a $3.9 million, or 20.0%, increase in fees for international services was partially offset by a $2.8 million, or 6.0%, decrease in service charges on deposits. The decline in service charges on deposits 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. Other non-interest income for the second quarter of 1995 increased $3.6 million, or 14.9%, principally as a result of growth of $5.4 million in third-party processing fee income due to the acquisition of National Remittance Centers, Inc. ("NRC") on January 27, 1995. While total non-interest income for the six months ended June 30, 1995 increased 6.8% from the 1994 six-month period, non-interest income before significant and unusual items increased by only 0.2%, reflecting relatively flat revenues in basic banking transaction revenues on a comparative basis. Page 25 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued NON-INTEREST INCOME - continued ------------------- Investment securities gains in the second quarter of 1995 were $1.6 million compared to $3.0 million in the prior year second quarter and for the six months ended June 30, 1995 were $8.0 million compared to $9.9 million in the 1994 six- month period. Investment securities gains in the six months ended June 30, 1995 included $7.2 million of gains recorded on sales of equity securities acquired in connection with prior loan arrangements. The first six months of 1994 included gains of $5.0 million recorded on sales of certain investments acquired with Constellation and $4.6 million of gains on sales of certain bank stock investments.
NON-FINANCIAL EXPENSES ---------------------- (in millions) Percentage Three Months Ended Six Months Ended Increase (decrease) June 30, June 30, ---------------------- ----------------------- --------------------- Three Six 1995 1994 1995 1994 Months Months --------- ------- ------- ------- ---------- -------- Salaries, wages and benefits.......... $ 152.7 $ 161.0 $ 310.7 $ 319.9 (5.2)% (2.9)% Net occupancy expense................. 29.1 28.4 58.5 58.6 2.4 (0.2) Equipment expense..................... 19.4 19.3 38.9 38.5 0.8 1.1 Other operating expenses.............. 101.8 98.7 198.9 186.8 3.1 6.5 ------- ------- ------- ------- Non-financial expense before significant and unusual items........ 303.0 307.4 607.0 603.8 (1.4) 0.5 Significant and unusual items......... (3.0)(a) 33.7(b) 107.0(a)(c) 108.7(b)(d) --------- -------- -------- -------- Total non-financial expenses.......... $ 300.0 $ 341.1 $ 714.0 $ 712.5 (12.1)% 0.2% ======= ======= ======= ======= =====
(a) Reflects a $3.0 million restructuring credit related to a gain on the curtailment of future pension benefits associated with employees terminated during the second quarter. See "Process Redesign" on page 11 for more detail. (b) Reflects merger-related costs of $33.7 million for the Independence acquisition. (c) Includes a $110.0 million restructuring charge related to the corporate-wide process redesign. See "Process Redesign" on page 11 for more detail. (d) Includes merger-related costs of $75.0 million for the Constellation acquisition. Total non-financial expenses for the second quarter of 1995, excluding the significant and unusual items as noted in the above table, were $303.0 million, a decrease of $4.4 million, or 1.4% from the second quarter of 1994. This decline reflects the impacts of the hiring freeze, the benefits of those aspects of the process redesign implemented during the second quarter and merger-related synergies. Affecting comparability of expenses period-to-period are the acquisitions of Germantown Savings Bank ("Germantown") on December 2, 1994 and National Remittance Centers, Inc. ("NRC") on January 27, 1995. Excluding the amortization of intangible assets created in the acquisitions, Germantown added approximately $4.0 million to non-financial expenses and NRC added approximately $4.7 million. Expense for amortization of intangible assets created in the two acquisitions added $3.8 million to second quarter of 1995 expenses. Excluding the significant and unusual items as noted in the above table and the impact of Germantown and NRC related expenses, non-financial expenses for the second quarter of 1995 declined 5.5% from the prior year second quarter. CAPITAL MANAGEMENT ------------------ CoreStates' capital provides the resources and flexibility for anticipated growth. CoreStates' capital position at June 30, 1995 under risk-based capital guidelines was $2.0 billion or 7.9% of risk-weighted assets, for Tier I capital and $3.0 billion, or 11.6%, for total risk-based capital. Tier I capital consists primarily of common shareholders' equity less goodwill and certain intangible assets, while total risk-based capital adds qualifying subordinated debt and the allowance for loan losses, within permitted limits, to Tier I capital. Risk-weighted assets are determined by assigning various levels of risk to different categories of assets and off-balance sheet activities. CoreStates' ratios at June 30, 1995 exceed the risk-based capital standards that require all banks to have Tier I capital of at least 4% and total capital of 8%. Page 26 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued CAPITAL MANAGEMENT - continued ------------------ Under the Federal Reserve Board's capital leverage guidelines, which require a minimum leverage ratio of 3.0% (Tier I capital to quarterly average total assets), CoreStates had a leverage ratio of 7.2% at June 30, 1995. The minimum 3.0% leverage requirement applies only to top rated banking organizations without any operating, financial or supervisory deficiencies. Other organizations (including those experiencing or anticipating significant growth) are expected to hold an additional capital cushion of at least 100 to 200 basis points of Tier 1 capital, and in all cases, banking organizations should hold capital commensurate with the level and nature of all the risks, including the volume and severity of problem loans, to which they are exposed. Substantially the same capital requirements are applied to CoreStates' banking subsidiaries under guidelines issued by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. As illustrated in the following table, at June 30, 1995 the banking subsidiaries of CoreStates were "well capitalized" as defined by regulatory authorities.
Regulatory Capital Ratios ------------------------------------------ Tier I Total Leverage ------------- ----------- -------------- CoreStates Bank, N.A................... 7.9% 10.1% 7.2% New Jersey National Bank............... 10.7 14.0 6.6 CoreStates Bank of Delaware, N.A....... 11.8 14.2 12.0
CoreStates' dividend on its common stock was $0.34 per share in the second quarter of 1995 and $0.30 per share in the second quarter of 1994. The common dividend payout ratio was 38.6% for the second quarter of 1995, compared to 41.7%, excluding merger-related charges, for the second quarter of 1994. In March 1995, the Board of Directors approved an expansion of CoreStates' common stock repurchase program from an annual maximum of 2% of outstanding shares to a maximum of 5%, excluding purchases for benefit plans and the dividend reinvestment plan. During the six months ended June 30, 1995, CoreStates repurchased approximately 8.1 million shares of its common stock, including 5.1 million shares in the second quarter, and reissued 2.5 million treasury shares under employee benefit plans and the dividend reinvestment plan. 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. It should be noted that CoreStates believes 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. Page 27 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED INTEREST RATE RISK MANAGEMENT - CONTINUED ----------------------------- 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 on which pricing changes have traditionally lagged changes in financial market rates. This inherent mismatch of longer term fixed-rate liabilities funding short-term rate sensitive assets generates significant exposure to declining interest rates if not managed. CoreStates manages this position through the use of both on and off-balance sheet discretionary assets and liabilities. 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. 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. 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 using on-balance sheet alternatives. CoreStates also uses interest rate contracts to provide risk management services for its customers. CoreStates does not use off-balance sheet derivative instruments for speculative investment. Credit risk exists in a derivative transaction to the extent that there is a move in interest rates favorable to CoreStates 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 June 30, 1995, the current cost to replace CoreStates' derivatives portfolio was $202 million of which more than 50% is collateralized. This assumes that only counterparties for whom it would be favorable to default would do so. INTEREST RATE RISK RELATED DERIVATIVE ACTIVITIES - CoreStates' use of derivatives for interest rate risk management falls into three categories: interest sensitivity adjustments, spread protection, and the hedging of anticipated asset sales. The following schedule reflects by interest rate risk management category, the outstanding derivative positions as of June 30, 1995, the major balance sheet category to which they relate, and the associated unrealized gains/losses: Page 28 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued INTEREST RATE RISK MANAGEMENT - continued -----------------------------
OUTSTANDING INTEREST RATE RISK RELATED DERIVATIVES -------------------------------------------------- AT JUNE 30, 1995 ---------------- (in millions) Interest Interest Interest rate caps rate rate and Other swaps futures floors derivatives Total ------------ -------- -------------- ----------- -------- INTEREST SENSITIVITY ADJUSTMENT: Assets: Notional amount................. $3,106 $1,223 $ 62 $ 4,391 Unrealized gains................ 91 2 - 93 Unrealized losses............... (8) - - (8) Deposits and other borrowings: Notional amount................. 4,165 4,165 Unrealized gains................ 55 55 Unrealized losses............... (14) (14) Long-term debt: Notional amount................. 689 25 714 Unrealized gains................ 15 - 15 Unrealized losses............... (20) - (20) SPREAD PROTECTION: Assets: Notional amount................. 606 606 Unrealized gains................ 3 3 Unrealized losses............... (4) (4) Deposits and Other borrowings: Notional amount................. 250 250 Unrealized gains................ 4 4 Unrealized losses............... - - ANTICIPATED ASSET SALES: Notional amount................. 63 $ 3 66 Unrealized gains................ - - - Unrealized losses............... (4) - (4) TOTAL: Notional amount................. $8,023 $ 1,223 $943 $ 3 $10,192 ====== ======== ==== === ======= Unrealized gains................ $ 161 $ 2 $ 7 $ - $ 170 ====== ======== ==== === ======= Unrealized losses............... $ (46) $ - $ (4) $ - $ (50) ====== ======== ==== === ======= Net unrealized gains............ $ 115 $ 2 $ 3 $ - $ 120 ====== ======== ==== === =======
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 June 30, 1995, 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 Page 29 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- continued INTEREST RATE RISK MANAGEMENT - continued ----------------------------- 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 June 30, 1995, the rates CoreStates has contracted to receive are fixed for longer time periods than the rates CoreStates has contracted to pay. Therefore, if interest rates fall, this portfolio will provide higher interest income, offsetting a decline in interest income in relationship portfolios; conversely if rates rise, the swap portfolio will produce less interest income which will be offset by increased interest income in the relationship portfolios. CoreStates also uses interest rate futures in a similar manner. While swaps are used in both short and long term maturities, futures are used primarily to extend the rate sensitivity of short-term assets to periods less than one year. CoreStates' use of financial futures is largely concentrated in Eurodollar and LIBOR contracts. Given the direction of its natural interest sensitivity, CoreStates has not historically paid fixed rates on interest rate swaps or used off-balance sheet instruments to extend its liabilities. However, its current position includes fixed rate pay positions acquired through mergers which relate to specific assets and liabilities also acquired. 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 $356 million of interest rate caps which offset that risk by limiting the potential increase in funding costs. CoreStates also owns a combination of caps which were designed to reduce the risk of a narrowing spread on prime rate indexed assets in a rising rate environment; CoreStates sold $250 million of interest rate caps indexed to prime rate and purchased an identical amount of caps indexed to LIBOR. 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 June 30, 1995, CoreStates held $63 million in fixed-rate pay swaps to hedge a portion of the residential mortgage portfolio. The interest rate swaps are intended to be terminated as the mortgage sales are completed. If rates rise, the swaps will increase in value and offset 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. Page 30 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED INTEREST RATE RISK MANAGEMENT - CONTINUED ----------------------------- The following repricing schedule 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 June 30, 1995. The amount recorded in net interest income related to interest rate swaps was $8.0 million in the second quarter of 1995, compared to $22.6 million in the 1994 second quarter and $12.9 million for the six months ended June 30, 1995, compared to $49.3 million in the 1994 six-month period.
REPRICING SCHEDULE OF INTEREST RATE SWAPS ---------------------------------------------- AT JUNE 30, 1995 --------------------------------- (in millions) Years ----------------------------------------------------------------------- 0-1 1-2 2-3 3-4 4-5 over 5 Total ------ --------- ----- ----- ----- -------- -------- Receive Fixed/Pay Floating Receive Notional............. $2,090 $1,835 $ 731 $ 940 $ 829 $1,020 $7,445 Rate................. 6.71% 7.11% 6.49% 6.78% 7.25% 6.94% 6.89% Pay Notional............. $7,445 $7,445 Rate................. 6.17% 6.17% Pay Fixed/Receive Floating Pay Notional............. $ 66 $ 10 $ 20 $ 20 $ 62 $ 178 Rate................. 8.97% 9.05% 8.60% 8.07% 8.56% 8.69% Receive Notional............. $ 178 $ 178 Rate................. 6.06% 6.06% Receive Floating/Pay Floating (Basis Swaps) Notional............. $ 90 $ 90 Receive Rate................. 5.23% 5.23% Pay Rate................. 6.20% 6.20% Receive Fixed/Pay Floating (a) (Forward Start) Receive Notional............. $ 50 $ 185 $ 50 $ 25 $ 310 Rate................. 6.82% 6.19% 7.45% 6.37% 6.51% Start Date Notional............. $ 80 $ 180 $ 50 $ 310 --------
(a) Pay rate will be determined on forward start date. Page 31 CORESTATES FINANCIAL CORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED INTEREST RATE RISK MANAGEMENT - CONTINUED ----------------------------- The following schedule illustrates CoreStates' interest rate risk related derivative activity during the quarter ended June 30, 1995:
ACTIVITY IN DERIVATIVES PRODUCTS ---------------------------------- THREE MONTHS ENDED JUNE 30, 1995 ---------------------------------- (in millions) Interest Interest Interest rate caps rate rate and Other swaps futures floors derivatives Total -------- --------- --------- ----------- ---------- Notional Amounts ---------------------------------- As of March 31, 1995............... $8,067 $1,068 $1,047 $ 205 $10,387 Additions.......................... 593 859 11 103 1,566 Terminated contracts (a)........... (257) - - - (257) Maturities/amortization............ (380) (704) (115) (305) (1,504) ------ ------ ------ ----- ------- As of June 30, 1995................ $8,023 $1,223 $ 943 $ 3 $10,192 ====== ====== ====== ===== ======= ----------------
(a) As of June 30, 1995 CoreStates had no material deferred gains or losses related to terminated derivative contracts. Changes in the notional amount of CoreStates' interest rate swaps during the second quarter include the termination of $257 million in swaps related to the sale of mortgages which were hedged with those swaps as well as a net increase of approximately $200 million in swaps to replace the fixed-rate sensitivity lost through maturity of investment securities. The decline in other derivatives reflects the expiration of Treasury rate locks which had been used to hedge an anticipated home equity loan securitization. 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 June 30, 1995.
CUSTOMER RELATED DERIVATIVES ------------------------------------ AT JUNE 30, 1995 ------------------------------------ (in millions) Notional Net gain amount (loss) (a) ----------- --------- Interest Rate Swaps: CoreStates receives fixed......... $ 197 $(1) CoreStates pays fixed............. 197 1 Rate Locks: Receive fixed..................... 50 - Pay fixed......................... 50 - Interest Rate Caps/Floors: Sold.............................. 424 (2) Purchased......................... 424 2 Foreign Exchange Contracts.......... 2,143 (1) ------ --- Total Customer Related Derivatives.. $3,485 $(1) ====== === -------------------------------------------------------------
(a) Average net gain (loss) during 1995 was substantially the same as the net gain (loss) at June 30, 1995. Page 32
CORESTATES FINANCIAL CORP AND SUBSIDIARIES CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES Three Months Ended ------------------------------------------------------------------------------------------------------ June 30, 1995 March 31, 1995 June 30, 1994 -------------------------------- -------------------------------- -------------------------------- 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)............. $ 1,954 6.76% $ 32,946 $ 1,894 6.24% $ 29,130 $ 1,445 3.21% $ 11,549 Investment securities(b): U.S. Government............ 1,771 5.64 24,923 1,986 5.62 27,510 2,212 4.91 27,102 State and municipal........ 281 8.45 5,939 297 8.60 6,388 388 7.68 7,448 Other...................... 414 8.40 8,668 405 5.83 5,827 424 7.43 7,854 --------- -------- --------- -------- --------- -------- Total investment securities............... 2,466 6.43 39,530 2,688 5.99 39,725 3,024 5.62 42,404 --------- -------- --------- -------- --------- -------- Federal funds sold.......... 96 5.78 1,383 143 5.85 2,063 105 4.56 1,195 Trading account securities.. 1 3.02 2 2 7.20 36 3 4.00 30 Loans (b) (c) (d): Domestic: Commercial, industrial and other................ 9,316 10.09 234,283 8,847 9.66 210,668 8,189 8.32 169,902 Real estate............... 5,966 9.10 135,408 6,343 8.83 138,098 6,472 8.00 129,028 Consumer.................. 2,710 12.25 82,750 2,766 12.31 83,944 2,497 11.63 72,405 Financial institutions.... 673 7.40 12,422 658 7.13 11,561 628 8.96 14,028 Factoring receivables..... 567 10.56 14,923 521 11.21 14,398 605 10.08 15,202 Lease financing........... 735 7.88 14,474 721 7.88 14,209 770 8.39 16,144 Foreign.................... 709 7.29 12,879 676 6.95 11,587 571 5.30 7,545 --------- -------- --------- -------- --------- -------- Total loans, net of discounts.............. 20,676 9.84 507,139 20,532 9.57 484,465 19,732 8.62 424,254 --------- -------- --------- -------- --------- -------- Total interest earning assets (d)................. $ 25,193 9.25 581,000 $ 25,259 8.92 555,419 $ 24,309 7.91 479,432 ========= ----- -------- ========= ----- -------- ========= ----- -------- FUNDING SOURCES --------------------------- Interest Bearing Liabilities (b): Deposits in domestic offices: Commercial................ $ 262 5.62 3,668 $ 270 5.48 3,651 $ 272 3.90 2,644 NOW accounts (e).......... 1,736 1.10 4,376 1,782 1.13 4,587 1,866 0.53 2,364 Money Market Accounts (e). 3,600 3.32 29,732 3,720 3.19 29,157 4,012 2.08 20,811 Consumer savings.......... 2,856 2.00 14,221 2,967 1.95 14,292 3,080 1.21 9,267 Consumer certificates..... 5,562 5.27 73,076 5,513 4.92 66,865 4,170 4.14 43,016 Time deposits of overseas branches and subsidiaries.. 963 5.03 12,083 923 4.32 9,838 759 2.11 3,995 --------- -------- --------- -------- --------- -------- Total interest bearing deposits (e).......... 14,979 3.71 137,156 15,175 3.47 128,390 14,159 2.34 82,097 --------- -------- --------- -------- --------- -------- Short-term funds borrowed: Federal funds purchased... 798 5.75 11,447 708 6.44 11,235 902 4.02 9,033 Commercial paper.......... 991 6.12 15,109 863 5.96 12,687 756 3.93 7,416 Other..................... 285 4.71 3,350 295 4.64 3,376 343 7.24 6,191 --------- -------- --------- -------- --------- -------- Total short-term funds borrowed.............. 2,074 5.78 29,906 1,866 5.93 27,298 2,001 4.54 22,640 --------- -------- --------- -------- --------- -------- Long-term debt............. 1,824 6.80 30,902 1,789 6.90 30,431 1,626 4.82 19,554 --------- -------- --------- -------- --------- -------- Total interest bearing liabilities................ 18,877 4.21 197,964 18,830 4.01 186,119 17,786 2.80 124,291 Portion of non-interest bearing funding sources.... 6,316 6,429 6,523 --------- --------- --------- -------- Total funding sources....... $ 25,193 3.15 197,964 $ 25,259 2.99 186,119 $ 24,309 2.05 124,291 ========= ----- -------- ========= ----- -------- ========= ----- -------- Net interest income and net interest margin........ 6.10% $383,036 5.93% $369,300 5.86% $355,141 ===== ======== ===== ======== ===== ========
(a) Yields and income on 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 NOW and Money Market Accounts in domestic offices are reduced by specified reserve amounts for purposes of rate calculations. Page 33 CORESTATES FINANCIAL CORP AND SUBSIDIARIES CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES - CONTINUED
Three Months Ended ------------------------------------------------------------------------------------------------------ June 30, 1995 March 31, 1995 June 30, 1994 ---------------------------------- --------------------------------- ------------------------------- 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......................... $ 2,087 $ 1,975 $ 2,353 Allowance for loan losses.... (497) (505) (541) Other assets................. 1,641 1,539 1,768 --------- --------- --------- Total non-interest earning assets............. $ 3,231 $ 3,009 $ 3,580 ========= ========= ========= TOTAL AVERAGE ASSETS......... $ 28,424 $ 28,268 $ 27,889 --------------------------- ========= ========= ========= NON-INTEREST BEARING FUNDING SOURCES --------------------------- Demand deposits: Domestic.................... $ 5,372 $ 5,268 $ 5,745 Foreign..................... 402 497 412 Other liabilities............ 1,515 1,326 1,725 Shareholders' equity......... 2,258 2,347 2,221 Non-interest bearing funding sources used to fund earning assets......... (6,316) (6,429) (6,523) --------- --------- --------- Total net non-interest bearing funding sources.. $ 3,231 $ 3,009 $ 3,580 ========= ========= ========= SUPPLEMENTARY AVERAGES ---------------------- Net demand deposits.......... $ 4,482 $ 4,735 $ 4,472 Net Federal funds purchased.. 702 5.75% $10,064 565 6.58% $9,172 797 3.94% $7,838 Commercial certificates of deposit in domestic offices over $100,000...... 262 5.27 3,443 270 5.15% 3,430 272 3.90 2,642 Average prime rate........... 9.00 8.83% 6.90
Page 34 CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES - CONTINUED Six Months Ended ------------------------------------------------------------------------------------------------------ June 30, 1995 June 30, 1994 ------------------------------------------------- ------------------------------------------------ Average Income/ Average Income/ balance Rate expense balance Rate expense --------------- ------------- ---------------- --------------- ------------ --------------- (000,000) (000) (000,000) (000) INTEREST EARNING ASSETS --------------------------- Time deposits, principally Eurodollars (a)............... $ 1,924 6.51% $ 62,076 $ 1,397 3.80% $ 26,345 Investment securities (b): U.S. Government............... 1,878 5.63 52,433 2,315 4.95 56,795 State and municipal........... 289 8.53 12,327 393 7.72 15,160 Other......................... 409 7.15 14,495 467 5.53 12,808 --------- ---------- --------- -------- Total investment securities................. 2,576 6.20 79,255 3,175 5.38 84,763 --------- ---------- --------- -------- Federal funds sold............. 120 5.79 3,446 181 4.07 3,652 Trading account securities..... 1 6.14 38 2 6.90 69 Loans (b) (c) (d): Domestic: Commercial, industrial and other................... 9,083 9.88 444,951 8,060 8.01 319,990 Real estate.................. 6,153 8.96 273,506 6,527 7.94 257,011 Consumer..................... 2,738 12.28 166,694 2,514 11.57 144,297 Financial institutions....... 666 8.88 29,321 611 8.12 24,592 Factoring receivables........ 544 8.89 23,983 570 9.92 28,027 Lease financing.............. 728 7.88 28,683 755 8.33 31,456 Foreign....................... 693 7.12 24,466 556 5.10 14,073 --------- ---------- --------- -------- Total loans, net of discounts ................ 20,605 9.70 991,604 19,593 8.43 819,446 --------- ---------- --------- -------- Total interest earning assets (d)................ $ 25,226 9.08 1,136,419 $ 24,348 7.74 934,275 ========= ----- ---------- ========= ----- -------- FUNDING SOURCES --------------- Interest Bearing Liabilities (b): Deposits in domestic offices: Commercial................... $ 266 5.55 7,319 $ 276 3.64 4,976 NOW accounts (e)............. 1,759 1.12 8,963 1,882 0.53 4,677 Money Market Accounts (e).... 3,660 3.25 58,889 4,074 2.09 42,176 Consumer savings............. 2,911 1.98 28,513 3,072 1.19 18,157 Consumer certificates........ 5,538 5.10 139,941 4,181 4.16 86,290 Time deposits of overseas branches and subsidiaries.... 943 4.69 21,921 747 3.39 12,562 --------- ---------- --------- -------- Total interest bearing deposits (e)............. 15,077 3.59 265,546 14,232 2.41 168,838 --------- ---------- --------- -------- Short-term funds borrowed: Federal funds purchased...... 753 6.07 22,682 937 3.59 16,662 Commercial paper............. 927 6.05 27,796 653 3.65 11,831 Other........................ 290 4.68 6,726 371 6.04 11,106 --------- ---------- --------- -------- Total short-term funds borrowed............... 1,970 5.86 57,204 1,961 4.07 39,599 --------- ---------- --------- -------- Long-term debt................ 1,807 6.84 61,333 1,608 4.61 36,725 --------- ---------- --------- -------- Total interest bearing liabilities............. 18,854 4.11 384,083 17,801 2.78 245,162 Portion of non-interest bearing funding sources........ 6,372 6,547 --------- --------- Total funding sources.......... $ 25,226 3.07 384,083 $ 24,348 2.03 245,162 ========= ----- ---------- ========= ----- -------- Net interest income and net interest margin........... 6.01% $ 752,336 5.71% $689,113 ===== ========== ===== ========
(a) Yields and income on 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 NOW and Money Market Accounts in domestic offices are reduced by specified reserve amounts for purposes of rate calculations. Page 35 CORESTATES FINANCIAL CORP AND SUBSIDIARIES CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES - CONTINUED
Six Months Ended ------------------------------------------------------------------------------------------------ June 30, 1995 June 30, 1994 ------------------------------------------------ ---------------------------------------------- Average Income/ Average Income/ balance Rate expense balance Rate expense ---------------- -------------- -------------- --------------- ------------- -------------- (000,000) (000) (000,000) (000) NON-INTEREST EARNING ASSETS --------------------------------- Cash.............................. $ 2,031 $ 2,338 Allowance for loan losses......... (501) (527) Other assets...................... 1,591 1,618 --------- --------- Total non-interest earning....... $ 3,121 $ 3,429 assets.......................... ========= ========= TOTAL AVERAGE ASSETS.............. $ 28,347 $ 27,777 --------------------------------- ========= ========= NON-INTEREST BEARING FUNDING SOURCES --------------------------------- Demand deposits: Domestic......................... $ 5,319 $ 5,774 Foreign.......................... 450 392 Other liabilities................. 1,421 1,487 Shareholders' equity.............. 2,303 2,323 Non-interest bearing funding sources used to fund earning assets................... (6,372) (6,547) --------- --------- Total net non-interest bearing funding sources................ $ 3,121 $ 3,429 ========= ========= SUPPLEMENTARY AVERAGES --------------------------------- Net demand deposits............... $ 4,608 $ 4,533 Net Federal funds purchased....... 633 6.13% $19,236 756 3.47% $13,010 Commercial certificates of deposit in domestic offices over $100,000............ 266 5.21 6,873 253 3.57 4,485 Average prime rate................ 8.91 6.33
Page 36 PART II. OTHER INFORMATION CORESTATES FINANCIAL CORP AND SUBSIDIARIES ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K ------ (a) Exhibits - The following exhibits are filed herewith in connection with registration statements filed from time to time by the Corporation: 11 Computation of Per Share Earnings 12.1 Computation of Ratio of Earnings to Fixed Charges (Consolidated) 12.2 Computation of Ratio of Earnings to Fixed Charges (Combined CoreStates Parent company and CoreStates Capital Corporation) 27 Financial Data Schedule (b) The following Reports on Form 8-K were filed by CoreStates Financial Corp during the quarter: 1. Date of Report: April 18, 1995 -------------- Item(s) Reported: Reporting under Item 5 the information set forth ---------------- in the earnings news release of CoreStates Financial Corp. Page 37 CORESTATES FINANCIAL CORP AND SUBSIDIARIES SIGNATURE --------- Pursuant to the requirements 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. CORESTATES FINANCIAL CORP Date: August 11, 1995 By: /s/ Christopher J. Carey ------------------------------ Christopher J. Carey Senior Vice President and Controller (Principal Accounting Officer) EX-11 2 COMPUTATION OF PER SHARE EARNINGS CORESTATES FINANCIAL CORP AND SUBSIDIARIES EXHIBIT 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (in thousands, except per share amounts)
Three Months Ended Six Months Ended June 30, June 30, ----------------------- -------------------------- 1995 1994 1995 1994 ----------- ---------- ------------ ------------ (A) Income before cumulative effect of a change in accounting principle........... $125,970 $ 63,091 $181,337 $ 33,096 Cumulative effect of a change in accounting principle........................ - - - (3,430) -------- -------- -------- -------- (B) Net Income................................. $125,970 $ 63,091 $181,337 $ 29,666 ======== ======== ======== ======== EARNINGS PER SHARE Based on average common shares outstanding ---------------------------------------- (C) Average shares outstanding................. 140,914 142,139 142,571 143,368 ======== ======== ======== ======== (A/C) Income before cumulative effect of a change in accounting principle....... $ 0.89 $ 0.44 $ 1.27 $ 0.23 ======== ======== ======== ======== (B/C) Net income.................................. $ 0.89 $ 0.44 $ 1.27 $ 0.21 ======== ======== ======== ======== Based on average common and common ---------------------------------------- equivalent shares outstanding ---------------------------------------- Primary: (D) Average common equivalent shares........... 465 1,165 676 1,097 ======== ======== ======== ======== (E) Average common and common equivalent shares (C + D)................. 141,379 143,304 143,247 144,465 ======== ======== ======== ======== (A/E) Income before cumulative effect of a change in accounting principle....... $ 0.89(1) $0.44(1 ) 1.27(1) $ 0.23(1) ======== ======== ======== ======== (B/E) Net income.................................. $ 0.89(1) $ 0.44(1) 1.27(1) $ 0.21(1) ======== ======== ======== ======== Fully diluted: (F) Average common equivalent shares........... 664 1,068 1,172 1,014 ======== ======== ======== ======== (G) Average common and common equivalent shares (C + F)................. 141,578 143,207 143,743 144,382 ======== ======== ======== ======== (I) Interest expense on subordinated convertible debentures, net of tax........ - 479 - 958 ======== ======== ======== ======== ((A+I)/G) Income before cumulative effect effect of a change in accounting principle............................. $ 0.89(1) $ 0.44(1) $ 1.26(1) $ 0.23(2) ======== ======== ======== ======== ((B+I)/G) Net Income.............................. $ 0.89(1) $ 0.44(1) $ 1.26(1) $ 0.21(2) ======== ======== ======== ======== ------------
(1) Dilution is less than 3%. (2) Antidilutive. EX-12.1 3 COMPUTATION OF RATIO OF EARNINGS CORESTATES FINANCIAL CORP AND SUBSIDIARIES EXHIBIT 12.1 COMPUTATION OF RATIO OF EARNINGS FROM CONTINUING OPERATIONS TO FIXED CHARGES OF CONTINUING OPERATIONS
CONSOLIDATED Six Months Ended June 30, 1995 ---------------------------------------- (in thousands) 1. Income from continuing operations before extraordinary items and income taxes................................... $286,926 ======== 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............................... $129,311 B. Interest on deposits......................... 265,546 -------- C. Total fixed charges (line 2A + line 2B)...... $394,857 ======== 3. Income from continuing operations before extraordinary items and income taxes, plus total fixed charges of continuing operations: A. Excluding interest on........................ $416,237 deposits (line 1 + line 2A).................. ======== B. Including interest on deposits (line 1 + line 2C).................. $681,783 ======== 4. Ratio of earnings (as defined) to fixed charges: A. Excluding interest on deposits (line 3A/line 2A)................... 3.22x B. Including interest on deposits (line 3B/line 2C)................... 1.73x
EX-12.2 4 COMPUTATION OF RATIO OF EARNINGS CORESTATES FINANCIAL CORP AND SUBSIDIARIES EXHIBIT 12.2 COMPUTATION OF RATIO OF EARNINGS FROM CONTINUING OPERATIONS TO FIXED CHARGES OF CONTINUING OPERATIONS COMBINED CORESTATES (PARENT ONLY) AND CORESTATES CAPITAL CORPORATION
Six Months ended June 30, 1995 ---------------------------------------- (in thousands) 1. Income before income taxes and equity in undistributed income of subsidiaries.............................. $134,250 2. Fixed charges - interest expense, amortization of debt issuance costs and one-third of rental expenses, net of income from subleases........................ 83,713 -------- 3. Income before taxes and equity in undistributed income of subsidiaries, plus fixed charges............. $217,963 ======== 4. Ratio of earnings (as defined) to fixed charges (line 3/line 2)................ 2.60x
EX-27 5 ARTICLE 9 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from the CoreStates Financial Corp consolidated balance sheet as of June 30, 1995, and the related consolidated statement of income, changes in shareholders' equity, and other financial data included within management's discussion and analysis of financial condition and results of operations for the six months ended June 30, 1995 and is qualified in its entirety by reference to such financial statements. 6-MOS DEC-31-1995 JUN-30-1995 2434798 1950663 193348 68 395770 2040548 2040186 20896889 497400 29031461 21045566 2364536 1163670 1822045 145876 0 0 2102084 29031461 986233 75792 65554 1127579 265546 384083 743496 50000 7987 714037 286926 181337 0 0 181337 1.27 1.26 6.01 193900 55000 1600 0 500600 89800 36600 497400 477400 20000 0