-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N8IHLl/Wyh4MGVX+MJs+Y/EFgzvu4NncsdzFfl0ijO0Bs5P0tY38dKeuJZ+No74u gJMtbnY0O4WRjROHLDiQyA== 0001036050-98-000484.txt : 19980331 0001036050-98-000484.hdr.sgml : 19980331 ACCESSION NUMBER: 0001036050-98-000484 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NYSE SROS: PHLX FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORESTATES FINANCIAL CORP CENTRAL INDEX KEY: 0000069952 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 231899716 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11285 FILM NUMBER: 98577366 BUSINESS ADDRESS: STREET 1: CENTRE SQ W STREET 2: 1500 MARKET ST CITY: PHILADELPHIA STATE: PA ZIP: 19101 BUSINESS PHONE: 2159733806 MAIL ADDRESS: STREET 1: 1500 MARKET ST CITY: PHILADELPHIA STATE: PA ZIP: 19101 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL CENTRAL FINANCIAL CORP DATE OF NAME CHANGE: 19830517 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____ Commission File Number 0-6879 CORESTATES FINANCIAL CORP - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 23-1899716 - -------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Philadelphia National Bank Building Broad & Chestnut Streets P. O. Box 7618 Philadelphia, Pennsylvania 19101-7618 19101 - ------------------------------------------- ------------ (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: 215-973-7488 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- --------------------- Common Stock, $1.00 par value New York Stock Exchange Common Stock, $1.00 par value The Philadelphia Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _______ ------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the voting stock held by non-affiliates of the registrant based on the closing sale price on February 27, 1998 was approximately $17.1 billion. For this purpose only, all directors and executive officers of the registrant were assumed to be affiliates. The number of shares of common stock outstanding at February 27, 1998 was 202,105,003. INDEX
PART I PAGE ---- ITEM 1 Business 2 ITEM 2 Properties 14 ITEM 3 Legal Proceedings 15 ITEM 4 Submission of Matters to a Vote of Security Holders 15 PART II ITEM 5 Market for Registrant's Common Equity and Related 16 Stockholder Matters ITEM 6 Selected Financial Data 16 ITEM 7 Management's Discussion and Analysis of Financial 16 Condition and Results of Operations ITEM 7A Quantitative and Qualitative Disclosures About Market Risk 17 ITEM 8 Financial Statements and Supplementary Data 17 ITEM 9 Changes in and Disagreements with Accountants on * Accounting and Financial Disclosure PART III ITEM 10 Directors and Executive Officers of the Registrant 18 ITEM 11 Executive Compensation 24 ITEM 12 Security Ownership of Certain Beneficial Owners and 41 Management ITEM 13 Certain Relationships and Related Transactions 45 PART IV ITEM 14 Exhibits, Financial Statement Schedules and Reports on 45 Form 8-K SIGNATURES 59 EXHIBIT INDEX 61
*Not Applicable PART I ITEM 1 - BUSINESS CoreStates Financial Corp ("CoreStates") is a bank holding company registered under the Federal Bank Holding Company Act of 1956, as amended (the "Act") and incorporated under the laws of Pennsylvania. At December 31, 1997, CoreStates had total consolidated assets of approximately $48.5 billion and shareholders' equity of approximately $3.2 billion. Based on December 31, 1997 rankings of bank holding companies by total consolidated assets, CoreStates was believed to be the 22nd largest bank holding company in the United States at such date. On November 18, 1997, CoreStates entered into an Agreement and Plan of Mergers (the "Merger Agreement"), which provides for the merger (the "Merger") of CoreStates into First Union Corporation ("First Union"). Pursuant to the Merger Agreement, each outstanding share of CoreStates common stock would be converted into 1.62 shares of First Union's common stock, subject to possible adjustment under certain circumstances. Based on the December 31, 1997 closing price of First Union's common stock, the transaction would have a value of approximately $16.5 billion. The Merger is expected to be accounted for as a pooling of interests, and pending receipt of shareholders' and regulatory approval, and other customary conditions of closing, is expected to close in the second quarter of 1998. The Merger will create a $205 billion financial services company having a leading banking presence on the eastern seaboard. The combined company will create the sixth largest banking company in the United States. BANKING SUBSIDIARIES The lead banking subsidiary of CoreStates is CoreStates Bank, N.A. ("CoreStates Bank"), a national banking association with executive offices located in Philadelphia, Pennsylvania. CoreStates Bank of Delaware, N.A. ("CBD"), a national banking association with its executive office located in Wilmington, Delaware, is a principal banking subsidiary of CoreStates. CoreStates Bank and CBD are sometimes referred to herein as the "Banking Subsidiaries". Through CoreStates Bank and CBD, CoreStates engages in the business of providing wholesale banking services, consumer financial services which includes retail banking, and trust & investment management services. 2 As of December 31, 1997, the Banking Subsidiaries operated from 562 full service offices located in eastern and central Pennsylvania, New Jersey and Delaware. CoreStates Bank also operates from 6 foreign branch offices and 25 foreign representative offices. OTHER SIGNIFICANT SUBSIDIARIES AND AFFILIATED COMPANIES Congress Financial Corporation ("Congress"), a majority-owned subsidiary of ------------------------------ CoreStates, and its subsidiaries are engaged in commercial financing and factoring with headquarters in New York City and offices in Atlanta, Boston, Chicago, Columbia, MD, Dallas, Los Angeles, Miami, Portland, OR, Pleasantville, CA, Houston, Hato Rey, PR, Montreal, Toronto and Calgary, Canada and London, England. As of December 31, 1997, factored receivables of Congress and its subsidiaries totaled $455 million while outstanding commercial finance obligations and other receivables totaled $2,373 million. CoreStates Capital Corp ("Capital") is CoreStates' designated financing ----------------------- entity to obtain both short-term and long-term financing for CoreStates and its subsidiaries. At December 31, 1997, Capital had outstanding commercial paper in the aggregate principal amount of $730 million and debt securities in the aggregate outstanding principal amount of $2,462 million, with remaining maturities ranging from one month to nine years. CoreStates Holdings, Inc. ("CHI") is a wholly-owned subsidiary of --------------------------------- CoreStates that holds ownership of non-voting stock and other securities held for investment purposes. CHI owns 20% of Electronic Payment Services, Inc. of Wilmington, Delaware (EPS). EPS and its subsidiaries provide data processing and transmission services to retail merchants using Point-of-Sale ("POS") terminals and to banks who are members of EPS's Automated Teller Machine ("ATM") Network. EPS owns 100% of MONEY ACCESS SERVICES, INC., Wilmington, Delaware (MAS), which operated the MAC(R) network, an electronic funds transfer network. Other Subsidiaries. CoreStates also has several other direct and indirect ------------------- subsidiaries including companies engaged in brokerage services, processing services, investment advisory services, lease financing activities, holding real property facilities used by CoreStates' Banking Subsidiaries and companies created solely to facilitate the business of other subsidiaries. Core Business Sectors. For analytical purposes, management has focused ---------------------- CoreStates into five core business sectors: Global and Specialized Banking; Regional Banking; Retail Credit Services; Trust and Asset Management; and Third Party Processing. Further information regarding CoreStates' five core business 3 sectors is presented in Management's Discussion and Analysis of Financial Condition and Results of Operations at Exhibit 99.2 pages 8 through 12, which pages are incorporated by reference. A brief discussion of the five core businesses is presented below. There is considerable inter-relationship among these businesses. Global and Specialized Banking. Global and Specialized banking services ------------------------------- are provided through the Banking Subsidiaries and Congress and include the following business lines: Specialized Banking, Secured Lending, Real Estate, Large Corporate Banking, Congress, International Banking, Investment Banking and Cash Management. Domestic financing services include commercial, industrial and real estate loans; the financing of receivables, inventory and equipment; derivative market activities to provide risk management services for customers; and the provision of financial services for correspondent banks. Foreign and international financial services include the making of loans; banker's acceptance financing; the issuance and confirmation of letters of credit; check and funds clearings, and related financial services. Also provided are transaction processing services, including cash management, lock box, funds transfer and collection and disbursement management on both a domestic and an international basis. International activities are conducted directly by CoreStates Bank through its head office in Philadelphia and 31 foreign offices. In addition, international banking and financing activities are conducted through two wholly- owned Edge Act subsidiaries with five offices. Advisory services are also provided which relate to loan syndications, private placements, mergers and acquisitions, company valuations and other similar matters. The Global and Specialized banking business also deals in and underwrites obligations of the United States Government and Federal agencies and general obligations of states, municipalities and political sub-divisions and assists individual corporate customers as well as other institutions with the purchase and sale of all types of marketable securities. Regional Banking This core business is provided by the Banking ---------------- Subsidiaries and includes the following business lines: Retail Banking and Delivery, Small Business Lending and Middle Market Lending. Retail Banking services are offered through the branch network of the Banking Subsidiaries in Pennsylvania, New Jersey, and Delaware. This branch banking network provides a full range of products including deposit, loan and related financial products, primarily on a full relationship basis. 4 Trust & Asset Management This core business provides products through four ------------------------ business lines: Institutional Trust; Personal Trust (including Private Banking); Retirement Plan Services; and Investment Management. The products of the four business lines are offered through the Banking Subsidiaries and include fiduciary administration and transaction processing services. CoreStates Investment Advisers, Inc. provides investment management services. Retail Credit Services This core business includes the following major ---------------------- business lines: Credit Card, Dealer Services, Educational Lending, Mortgage Services, Card Linx (CoreStates' merchant credit card processing business), and SynapQuest, CoreStates' Consumer and Commercial card processing company. Third Party Processing This core business includes the QuestPoint ---------------------- processing companies, all wholly-owned entities, earnings from CoreStates' investment in Electronic Payment Services, Inc. ("EPS"), and the Financial Institutions Division ("FID"), a provider of correspondent bank services to financial institutions in the United States. The QuestPoint companies include: QuestPoint Check Services, L.P. (formerly known as Transys)--a provider of check processing and payment services to CoreStates and other financial institutions; QuestPoint Remittance Services, L.P. (formerly CashFlex, L.P.)--a leading supplier of remittance processing services nationwide to corporations, CoreStates, and other financial institutions. GOVERNMENT SUPERVISION AND REGULATION General CoreStates is a bank holding company within the meaning of the Act ------- and is registered as such with the Federal Reserve Board. As a bank holding company, CoreStates is also subject to regulation by applicable state regulatory authorities. The Banking Subsidiaries are national banks and are subject to regulation, supervision and regular examination by the OCC, as well as regulation by the Federal Deposit Insurance Corporation ("FDIC"). Bank holding companies and banks are extensively regulated under both federal and state law. The regulation and supervision of CoreStates and the Banking Subsidiaries are designed primarily for the protection of depositors and not the respective institutions or their stockholders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. A change in applicable law or regulation may have a material effect on the business of CoreStates. 5 CoreStates is required to file an annual report with the Federal Reserve Board containing such information as the Federal Reserve Board may require pursuant to the Act. Copies of annual and other periodic reports are also required to be filed with the applicable state regulatory authorities. The Act requires each bank holding company to obtain the prior approval of the Federal Reserve Board before it may acquire substantially all of the assets of any bank, or before it may acquire ownership or control of any voting shares of any bank, if, after such acquisition, it would own or control, directly or indirectly, more than 5% of the voting shares of such bank. The Act also restricts the types of businesses and operations in which a bank holding company and its non- bank subsidiaries may engage. Generally, permissible activities are limited to banking and activities found by the Federal Reserve Board to be so closely related to banking as to be a proper incident thereto. The operations of the Banking Subsidiaries are subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be made and limits upon the types of services which may be offered. Various consumer laws and regulations also affect the operations of the Banking Subsidiaries. Regulatory approvals are required for branching and for bank mergers. Capital Guidelines A discussion of capital guidelines and capital strength ------------------ is included in Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 13 and 14 of Exhibit 99.2, and in Footnote 6 "Regulatory and Capital Matters" on page 62 of Exhibit 99.2, which pages are incorporated by reference. Potential Enforcement Actions Bank holding companies and national banks ----------------------------- and their institution-affiliated parties may be subject to potential enforcement actions by the Federal Reserve Board, the OCC or the FDIC for unsafe or unsound practices in conducting their businesses, or for violations of any law, rule or regulation or provision, any consent order with any agency, any condition imposed in writing by the agency or any written agreement with the agency. Non- bank holding companies may also be subject to enforcement actions by state regulatory authorities. Enforcement actions may include the imposition of a conservator or receiver, additional cease-and-desist orders and written agreements, the termination of insurance of deposits, the imposition of civil money penalties, and removal and prohibition orders against institution- affiliated parties and the suspension or revocation of state-mandated lending or other licenses. 6 Dividends CoreStates is a legal entity separate and distinct from its --------- Banking Subsidiaries and other subsidiaries. CoreStates' principal source of revenue consists of dividends from its bank and non-bank subsidiaries. Provisions of Federal banking law restrict the amount of dividends that can be paid to CoreStates by the Banking Subsidiaries. Under applicable Federal law, no dividends may be paid in an amount greater than "undivided profits then on hand," after deduction therefrom of certain loan losses. In addition, for each of the Banking Subsidiaries, prior approval of the Comptroller is required if the total of all dividends declared by a subsidiary bank in any calendar year will exceed its net profits (as defined) for that year, combined with its retained net profits for the preceding two calendar years. Based on these regulations, CoreStates Bank can declare dividends without approval of the Comptroller of the Currency of approximately $32,000,000 plus an additional amount equal to CoreStates Bank's retained net profits for 1998 up to the date of any such dividend declaration. Due to the special provision for losses on credit card outstandings recorded in the fourth quarter of 1997, CBD is unable to pay dividends without prior approval of the Comptroller of the Currency. See Footnote 6 "Regulatory and Capital Matters" on page 62 of Exhibit 99.2, which page is incorporated by reference. The payment of dividends by each of CoreStates and the Banking Subsidiaries may also be affected by other factors, such as the maintenance of adequate capital. For example, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") generally prohibits an undercapitalized institution from paying dividends. In addition, if, in the opinion of the applicable regulatory authority, a bank holding company or a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), such authority may require, after notice and hearing, that such organization cease and desist from such practice. The Federal Reserve Board, the OCC and the FDIC have issued policy statements which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings. Support of Bank Subsidiaries A depository institution insured by the FDIC ---------------------------- can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC after August 9, 1989 in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default. "Default" is defined generally as the appointment of a 7 conservator or receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that a "default" is likely to occur in the absence of regulatory assistance. Under Federal Reserve Board regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve Board's policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board regulations or both. This doctrine is commonly known as the "source of strength" doctrine. Federal law provides for the enforcement of any pro rata assessment of shareholders of a national bank to cover impairment of capital stock by sale, to the extent necessary, of the stock of any assessed shareholder failing to pay the assessment. Borrowings by Holding Companies Federal law prevents CoreStates and ------------------------------- certain of its affiliates from borrowing from its banking subsidiaries unless such borrowings are secured by specified amounts and types of collateral. Additionally, each such secured loan to an affiliate is generally limited to an amount not exceeding 10% of the bank's capital and surplus, and all such loans between the lending bank and its affiliates are limited to an amount not to exceed 20% of the lending bank's capital and surplus. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. 8 FDICIA ------ Insurance Premiums Deposits of the Banking Subsidiaries are insured by the ------------------ FDIC and are subject to FDIC insurance assessments. Each financial institution is assigned to one of three capital groups -- well capitalized, adequately capitalized or undercapitalized -- and further assigned into one of three subgroups within a capital group, on the basis of supervisory evaluations by the institution's primary federal and, if applicable, state supervisors and other information relevant to the institution's financial condition and the risk posed to the applicable insurance fund. The assessment rate applicable to the Banking Subsidiaries in the future will depend in part upon the risk assessment classification assigned to the Banking Subsidiaries by the FDIC and in part on the Bank Insurance Fund ("BIF") assessment schedule adopted by the FDIC. The Deposit Insurance Funds Act of 1996 ("DIFA") provides that deposit insurance premiums assessed by the BIF are to be assessed at a rate of between 0 cents and 27 cents per $100 of deposits. DIFA also separated, effective January 1, 1997, the Financing Corporation ("FICO") assessment to service the interest on its bond obligations from the BIF and the Savings Association Insurance Fund ("SAIF") assessments. The amount assessed on individual institutions by the FICO will be in addition to the amount, if any, paid for deposit insurance according to the FDIC's risk-related assessment rate schedules. FICO assessment rates are determined quarterly. Currently, the annual FICO rate for 1997 is set at 1.26 basis points for BIF- assessable deposits. The rate may be adjusted quarterly to reflect a change in assessment base for the BIF. By law, the FICO rate on BIF-assessable deposits must be one-fifth the rate of SAIF-assessable deposits until the insurance funds are merged or until January 1,2000, whichever occurs first. Prompt Corrective Action FDICIA requires Federal banking agencies to ------------------------ broaden the scope of regulatory corrective action taken with respect to depository institutions that do not meet minimum capital requirements and to take such actions promptly in order to minimize losses to the FDIC. In connection with FDICIA, Federal banking agencies are required to establish capital measures (including both a leverage measure and a risk-based capital measure) and to specify for each capital measure the levels at which depository institutions will be considered "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" or "critically undercapitalized". 9 Under FDICIA, the Federal banking regulators have adopted regulations establishing relevant capital measures and relevant capital levels. The relevant capital measures are the Total Capital to risk adjusted assets ratio, Tier 1 Capital to risk adjusted assets ratio and the leverage ratio. Under these regulations, a bank will be (i) "well capitalized" if it has a Total Capital to risk adjusted assets ratio of 10% or greater, a Tier 1 Capital to risk adjusted assets ratio of 6% or greater and a leverage ratio of 5% or greater and is not subject to any order or written directive by its primary Federal regulator to meet and maintain a specific capital level for any capital measure; (ii) "adequately capitalized" if it has a Total Capital to risk adjusted assets ratio of 8% or greater, a Tier 1 Capital to risk adjusted assets ratio of 4% or greater and a leverage ratio of 4% or greater (3% in certain circumstances) and is not well capitalized; (iii) "undercapitalized" if it has a Total Capital to risk adjusted assets ratio of less than 8%, a Tier 1 Capital to risk adjusted assets ratio of less than 4% or a leverage ratio of less than 4% (3% in certain circumstances); (iv) "significantly undercapitalized" if it has a Total Capital to risk adjusted assets ratio of less than 6%, a Tier 1 Capital to risk adjusted assets ratio of less than 3% or a leverage ratio of less than 3%; and (v) "critically undercapitalized" if its tangible equity is equal to or less than 2% of average quarterly tangible assets. Each of the Banking Subsidiaries is considered well capitalized. FDICIA authorizes the appropriate Federal banking agency, after notice and an opportunity for a hearing, to treat a well capitalized, adequately capitalized or undercapitalized insured depository institution as if it had a lower capital-based classification if it is in an unsafe or unsound condition or engaging in an unsafe or unsound practice. Thus, an adequately capitalized institution can be subjected to the restrictions on undercapitalized institutions described below (except that a capital restoration plan cannot be required of the institution) and an undercapitalized institution can be subjected to the restrictions applicable to significantly undercapitalized institutions described below. FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to growth limitations and are required to submit a capital restoration plan. The Federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring 10 the depository institution's capital. In addition, for a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to five percent of the depository institution's total assets at the time it became undercapitalized, and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a Federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized institutions are subject to the appointment of a receiver or conservator. Brokered Deposits Under FDICIA, a bank cannot accept brokered deposits ----------------- (which term is defined to include payment of an interest rate more than 75 basis points above prevailing rates) unless (i) it is well capitalized or (ii) it is adequately capitalized and receives a waiver from the FDIC. A bank that cannot receive brokered deposits also cannot offer "pass-through" insurance on certain employee benefit accounts. In addition, a bank that is adequately capitalized may not pay an interest rate on any deposits in excess of 75 basis points over certain prevailing market rates. There are no such restrictions on a bank that is well capitalized. Each of the CoreStates Banking Subsidiaries is well capitalized for purposes of the foregoing. Safety and Soundness Standards Pursuant to FDICIA each of the Federal bank ------------------------------ regulatory agencies has adopted the Interagency Guidelines Establishing Standards for Safety and Soundness (the "Guidelines"). The Guidelines contain standards relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and employee compensation, fees and benefits and standards specifying minimum earnings sufficient to absorb losses without impairing capital, to the extent feasible a minimum ratio 11 of market value to book value for publicly traded shares and such other standards relating to the foregoing as it deems appropriate. An institution that fails to comply with such standards will be required to submit a plan designed to achieve such compliance. If no such plan is submitted or a failure to implement such a plan exists, the depository institution would become subject to additional regulatory action or enforcement proceedings. Other FDICIA also contains a variety of other provisions that may affect ----- the operations of bank holding companies and banks, including various reporting requirements, revised regulatory standards for real estate lending, "truth in savings" provisions and the requirement that a depository institution give 90 days' prior notice to customers and regulatory authorities before closing any branch. SECURITIES AND RELATED REGULATION The Corporation's subsidiaries engaged in securities-related activities are regulated by the Securities and Exchange Commission ("SEC"). The activities of the Corporation's two subsidiaries which are registered broker dealers are also monitored by the Federal Reserve Board. Each such company is also subject to rules and regulations promulgated by the National Association of Securities Dealers, Inc., the Securities Investors Protection Corporation and various state securities commissions and with respect to public finance activities, the Municipal Securities Rulemaking Board. Non-bank subsidiaries of CoreStates that are registered as investment advisers are subject to the regulations of the SEC and may be subject to regulations of one or more state securities commissions. Additionally, an investment adviser which is a subsidiary of a national bank is subject to supervision by the OCC. Investment Companies (as defined in the Investment Company Act of 1940, as amended) advised by an investment adviser subsidiary of CoreStates are registered with the SEC. FUTURE LEGISLATION Legislation, including proposals to fundamentally revise the bank regulatory system, allow banking organizations to engage in a broader range of activities, and permit commercial organizations to engage in banking, is from time to time introduced in Congress. Such legislation may substantially change the competitive environment in which the Banking Subsidiaries operate. The Banking Subsidiaries cannot predict the ultimate effect that potential legislation, if enacted, would have upon 12 the financial condition or results of operations of the Banking Subsidiaries. COMPETITION The activities in which CoreStates and the Banking Subsidiaries engage are highly competitive. Generally, the lines of activity and markets served involve competition with other banks and non-bank financial institutions, as well as other entities which offer financial services, located both within and without the United States. The methods of competition center around various factors, such as customer services, interest rates on loans and deposits, lending limits and location of offices. The five core business segments in the markets served by the Banking Subsidiaries and their affiliates are highly competitive and the Banking Subsidiaries and their affiliates compete with other commercial banks, savings and loan associations and other businesses which provide services similar to those offered by the Banking Subsidiaries and their affiliates. The Banking Subsidiaries actively compete in Global and Specialized Banking with local, regional and international banks and non-bank financial organizations, some of which are significantly larger than the Banking Subsidiaries. In providing consumer financial services (Regional Banking and Retail Credit Services), the Banking Subsidiaries' competitors include other banks, savings and loan associations, credit unions, regulated small loan companies and other non-bank organizations offering financial services. In providing Trust and Asset Management services, the Banking Subsidiaries compete with other banks, investment counselors and insurance companies in national markets for institutional funds and corporate pension and profit sharing accounts. The Banking Subsidiaries also compete with other banks, insurance agents, financial counselors and other fiduciaries for personal trust business. The Banking Subsidiaries also actively compete for funding. A primary source of funds is deposits, and competition for deposits includes other deposit taking organizations, such as commercial banks, savings and loan associations and credit unions, and so-called "money market" mutual funds. The Banking Subsidiaries also actively compete for funds with U.S. Government securities and in the open money market. Employees As of February 27, 1998, CoreStates and its subsidiaries employed 15,878 persons on a full time basis and 2,832 part-time persons on a full-time equivalent basis. CoreStates provides a 13 variety of employment benefits and considers its relations with its employees to be satisfactory. Selected Statistical Information Tables and selected statistical information concerning CoreStates and its subsidiaries appear as indicated below on Exhibit 99.2, which pages are incorporated by reference.
Exhibit 99.2 Page Reference --------- Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential.......................... 85-88, 91 Investment Portfolio.................. 97 Loan Portfolio........................ 15-22 92-95, 97 Summary of Loan Loss Experience....... 20-21 94-95 Deposits.............................. 85-88 95 Return on Average Equity and Average Assets................................ 89 Short-Term Borrowings................. 65
ITEM 2 - PROPERTIES The principal offices of CoreStates and CoreStates Bank are located in Philadelphia, Pennsylvania in leased space located at Centre Square West (547,600 square feet), 15th and Market Streets, and the Philadelphia National Bank Building ("PNB Building") (292,219 square feet) located at Broad and Chestnut Streets. In addition, office space is leased for use by CoreStates and CoreStates Bank in the following Philadelphia locations: the Penn Mutual Building (289,800 square feet) at 5th and Walnut Streets, the Curtis Building (111,600 square feet) at 6th and Walnut Streets, the Widener Building (242,309 square feet) adjacent to the PNB Building, and 801 Arch Street Building (57,500 square feet). CoreStates Bank owns several major buildings which support 14 operational activities. They are as follows: the CoreStates Plaza Building (576,656 square feet) located at 5th and Market Streets in Philadelphia, Pennsylvania; the Spring Ridge Building (395,000 square feet) located at One Meridian Boulevard in Wyomissing, Pennsylvania; the CoreStates Bank of Delaware Building (275,000 square feet) located at 3 Beaver Valley Road in Wilmington, Delaware; and the CoreStates Building at One Hillendale Drive (33,000 square feet) in Perkasie, Pennsylvania. CoreStates' operational units occupy all the space at each of these buildings. CoreStates Bank also owns or leases approximately 20 other regional area headquarters in Pennsylvania, New Jersey and Delaware to support its banking activities. At each of its Regional Headquarters various units support retail banking, commercial lending, trust and other banking functions. As of December 31, 1997, CoreStates Bank had 562 operating retail banking branches located in Pennsylvania, New Jersey and Delaware. Aggregate leased properties in 1997 required approximately $89,300,000 in rental payments net of sublease income. Closed branch locations resulting from merger consolidations are either being sold, or the leases are being terminated. On May 13, 1977, CoreStates borrowed $25 million from two institutional lenders at an interest rate of 8 5/8% per annum. The loan is secured by a first lien mortgage on 25 CoreStates Bank owned properties. ITEM 3 - LEGAL PROCEEDINGS In the normal course of business, CoreStates and its subsidiaries are subject to numerous pending and threatened legal actions and proceedings, in some of which the relief or damages sought are substantial. Management does not believe the outcome of these actions and proceedings will have a materially adverse effect on the consolidated financial position of CoreStates. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to security holders for vote during the fourth quarter of 1997. 15 PART II ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS CoreStates Common Shares are traded on the New York Stock Exchange under the symbol "CFL". The table below sets forth, for the periods indicated, the high and low prices for CoreStates Common Shares as reported on the New York Stock Exchange, and cash dividends declared per share. On February 27, 1998, there were approximately 55,800 registered holders of Common Stock of CoreStates.
CORESTATES -------------------------------- DIVIDEND HIGH LOW DECLARED ---- --- -------- Year ended December 31, 1997: First Quarter...................... $55 $47 1/2 $0.47 Second Quarter..................... 57 7/8 46 1/2 0.47 Third Quarter...................... 68 13/16 53 1/4 0.47 Fourth Quarter..................... 81 3/8 65 11/16 0.50 Year ended December 31, 1996: First Quarter...................... $44 $36 1/8 $0.42 Second Quarter..................... 43 1/8 35 3/4 0.42 Third Quarter...................... 44 35 1/2 0.42 Fourth Quarter..................... 55 3/8 42 3/4 0.47
Following the Merger, the Dividend Policy would be that of First Union. The approval of the Comptroller of the Currency is required for national banks to pay dividends in certain circumstances. See the discussion under Government Supervision and Regulation--Dividends, supra., and the discussion in Footnote 6 "Regulatory and Capital Matters" (Exhibit 99.2 page 62, which page is incorporated by reference). ITEM 6 - SELECTED FINANCIAL DATA Information required by this Item is contained on pages 89 and 90 of Exhibit 99.2, which pages are incorporated by reference. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Information required by this Item is contained on pages 3 through 42 of Exhibit 99.2, which pages are incorporated by reference. 16 ITEMS 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information required by this Item is contained on pages 23 through 34 of Exhibit 99.2, which pages are incorporated by reference. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information required by this item is contained on pages 45 through 97 of Exhibit 99.2, which pages are incorporated by reference. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 17 PART III Item 10 - EXECUTIVE OFFICERS OF THE REGISTRANT The following table shows the name and age of the current executive officers of CoreStates Financial Corp ("Corporation") and the present and previous positions held by them for at least the past five years.
NAME AGE PRESENT & PREVIOUS POSITIONS - ---- --- ---------------------------- Terrence A. Larsen 51 Chairman, Chief Executive Officer, (January 1, 1988 to present), Director (June 1, 1986 to present), and President (August 4, 1997 to present, January 1, 1992 to August 2, 1994, May 6, 1986 to March 5, 1990), Chief Operating Officer (May 6, 1986 to January 1, 1988) of the Corporation; Chairman and Director (October 1, 1990 to present), Chief Executive Officer, (August 4, 1997 to present) and President (August 4, 1997 to present and January 1, 1992 to August 2, 1994) of CoreStates Bank; Chairman, Director (April 1, 1989 to October 1, 1990), Senior Executive Officer (1987 to 1988), and Executive Vice President, (1983 to 1986) of The Philadelphia National Bank ("PNB"); Director (January 1, 1986 to December 6, 1996) CoreStates New Jersey National Bank. Christopher J. Carey 43 Chief Financial Officer of CoreStates Bank (February 18, 1997 to present); Corporate Controller (July 21, 1992 to present) of the Corporation and CoreStates Bank; Senior Vice President, (November 1, 1991 to present) of the
18 Corporation and CoreStates Bank; Vice President (November 12, 1985 to November 1, 1991) of CoreStates Bank. Charles L. Coltman III 55 Vice Chairman (April 9, 1996 to present), President and Chief Operating Officer (August 2, 1994 to April 9, 1996), Assistant to the Chairman, Corporate Quality (February 16, 1993 to August 2, 1994), Chief Credit Policy Officer (September 18, 1990 to February 16, 1993), Executive Vice President and Credit Policy Officer (November 21, 1989 to September 18, 1990) of the Corporation; Vice Chairman and Director (May 21, 1996 to present) and Senior Executive Officer (August 2, 1994 to April 9, 1996) of CoreStates Bank; Vice Chairman (March 1990 to September 1990), and Executive Vice President and Credit Policy Officer (1986 to 1989) of PNB; Director (April 22, 1992 to December 6, 1996) of CoreStates New Jersey National Bank. Charles P. Connolly, Jr. 49 Senior Executive Vice President (August 2, 1994 to present) and Chief Risk Policy Officer (August 2, 1994 to October 15, 1996), Chief Credit Policy Officer and Executive Vice President (February 16, 1993 to August 2, 1994) of the Corporation; Vice Chairman (October 15, 1996 to present), Senior Executive Officer (August 2, 1994 to October 15, 1996) and Executive Vice President (June 1989 to February 16, 1993) of CoreStates Bank. Rosemarie B. Greco 51 Executive Officer (August 4,
19 1997 to January 30, 1998), President (June 30, 1996 to August 4, 1997), Chief Banking Officer (August 2, 1994 to June 30, 1996), Chief Retail Services Officer (October 1, 1993 to August 2, 1994) of the Corporation; Executive Officer (August 4, 1997 to January 30, 1998) President, Chief Executive Officer, and Director (August 2, 1994 to August 4, 1997) of CoreStates Bank; President and Chief Executive Officer of CoreStates First Pennsylvania Bank Division of CoreStates Bank (March 1991 to August 2, 1994) and Director (April 1992 to August 2, 1994); President and Director (1987 to March 1991), Chief Executive Officer (September 1990 to March 1991), Executive Vice President (1986 to 1987) of Fidelity Bank; Senior Executive Vice President and Director (1987 to March 1991) of First Fidelity Bancorporation. Carol A. Leisenring 47 Chief Economist and Executive Vice President (1987 to present), Director, Financial Services and Planning (June 1, 1996 to February 18, 1997) of the Corporation and CoreStates Bank. Albert W. Mandia 50 Chief Financial Officer (February 18, 1997 to present) and Executive Vice President (1989 to present) of the Corporation; President and Chief Operating Officer of CashFlex (January 2, 1996 to February 18, 1997), a subsidiary of the Corporation; Executive Vice President
20 (April 1992 to present) of CoreStates Bank. Paul W. McGloin 50 Executive Vice President (April 9, 1996 to present) and Chief Risk Policy Officer (October 15, 1996 to present) of the Corporation; President, Meridian's Delaware Valley Division (1995 to 1996) and Executive Vice President, Credit Policy (1991 to 1995) of Meridian Bancorp. P. Sue Perrotty 44 Executive Vice President and Chief Information Technology Officer (April 9, 1996 to present) of the Corporation; Group Executive Vice President, Strategic Marketing and Distribution (August 1994 to April 9, 1996) and Executive Vice President, Retail Banking (December 1991 to August 1994) of Meridian Bancorp. Set forth below are the names and ages of the directors of CoreStates as of December 31, 1997, their principal occupations and the year each individual began continuous service as a director of CoreStates or one of its predecessors. Each director has held the position or former position shown or other executive positions with the same or an affiliated or predecessor entity for at least the past five years, except as otherwise indicated. Also shown with respect to each director are directorships held in companies (other than CoreStates) which are required to file reports with the Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Exchange Act") or which are registered under the Investment Company Act of 1940 and certain other business or insurance companies. Upon the Merger, Terrence A. Larsen and five additional mutually agreed upon CoreStates' directors shall be elected or appointed to the First Union Board of Directors. 21 ROBERT W. CARDY, 61, DIRECTOR SINCE 1996. Chairman, President, Chief Executive Officer and Director, Carpenter Technology Corp. (specialty steel and alloys manufacturer) since July 1, 1992; prior thereto, President, Chief Operating Officer and Director, Carpenter Technology Corp. from November 1, 1990; Director of Meridian from April 20, 1993 until April 9, 1996. CARLTON E. HUGHES, 66, DIRECTOR SINCE 1978. Chairman and Director of Stewart-Amos Steel, Inc. (structural steel fabrication); former President, Treasurer and Director of Stewart-Amos Equipment Co.; Director of Irex Corporation and Arnold Industries, Inc. ERNEST E. JONES, 53, DIRECTOR SINCE 1992. Executive Director of Greater Philadelphia Urban Affairs Coalition. TERRENCE A. LARSEN, 51, DIRECTOR SINCE 1986. Chairman, President and Chief Executive Officer of CoreStates; Chairman, President and Chief Executive Officer of CoreStates Bank, N.A. HERBERT LOTMAN, 64, DIRECTOR SINCE 1990. Chairman and Chief Executive Officer of Keystone Foods Corporation (food manufacturing and distribution), President from March 1982 to May 1, 1997; Director of Getty Petroleum Corporation from 1988 to 1996 and PCI Services, Inc. from 1991 to 1996. GEORGE V. LYNETT, 54, DIRECTOR SINCE 1995. Publisher, The Scranton Times (newspaper company); Secretary/Treasurer, Shamrock Communications, Inc.; President, Towanda Daily Review; and President, Wyoming County Press, Inc. PATRICIA A. MCFATE, 65, DIRECTOR SINCE 1976. Senior Scientist and Program Director, Center for National Security Negotiations of Science Applications International Corporation (a systems engineering company); Senior Scientist of System Planning Corporation from October 1988 to July 1989; prior to October 1988, President and Trustee of The American-Scandinavian Foundation. 22 MARLIN MILLER, JR., 65, DIRECTOR SINCE 1988. President, Chief Executive Officer, and Director of Arrow International, Inc. (a manufacturer of medical products); Director of Carpenter Technology Corp. JAMES M. SEABROOK, 64, DIRECTOR SINCE 1994. Chairman and Chief Executive Officer of Seabrook Brothers & Sons, Inc. (frozen food processor); Director of Bell Atlantic New Jersey until January 2, 1996; New Jersey Manufacturers Insurance Company; and New Jersey Re-Insurance Company. RAYMOND W. SMITH, 60, DIRECTOR SINCE 1984. Chairman, Chief Executive Officer and Director of Bell Atlantic Corporation (telecommunications and services corporation); Director of US Airways (commercial aviation) and CBS Corporation. GEORGE STRAWBRIDGE, JR., 60, DIRECTOR SINCE 1996. Private Investor; Adjunct Professor of Widener University; Director of Campbell Soup Company; Director of Delaware Trust Company From December 1978 until August 29, 1996; Director of Meridian from January, 1988 until April 9, 1996; President, GAR Inc., and President, Margaret Dorrance Strawbridge Foundation of PA 1, Inc. PETER S. STRAWBRIDGE, 59, DIRECTOR SINCE 1979. Retired President and Director of Strawbridge & Clothier (regional merchandising corporation), as of July 15, 1996. JUDITH M. VON SELDENECK, 57, DIRECTOR SINCE 1996. President and Chief Executive Officer of The Diversified Search Companies (an executive search firm); Director of Keystone Corporation, Tasty Baking Company; and Director of Meridian Bancorp, Inc., ("Meridian") from June 19, 1980 until April 9, 1996. Compliance with Section 16(a) of the Exchange Act - ------------------------------------------------- Section 16(a) of the Exchange Act requires CoreStates' officers and directors, and persons who own more than ten percent of a registered class of CoreStates' equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC"). Officers, directors and greater 23 than ten-percent shareholders are required by SEC regulation to furnish CoreStates with copies of all Section 16(a) forms they file. There are no ten percent shareholders of CoreStates' equity securities. Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons that no Forms 5 were required for those persons, CoreStates believes that, during the period January 1, 1997 through December 31, 1997, all filing requirements applicable to its officers and directors were complied with except for a late filing of a Form 4 regarding one transaction for Mr. P. Strawbridge and a late Form 3 initial filing for Ms. Perrotty. ITEM 11 - EXECUTIVE COMPENSATION DIRECTORS' MEETINGS, COMMITTEES AND COMPENSATION In 1997, ten meetings of the Board of Directors of CoreStates were held. Each incumbent director who served as a director of CoreStates during 1997 attended at least 75% of the aggregate number of meetings of the Board of Directors of CoreStates and of the Committees of the Board on which each such director served. The Board of Directors of CoreStates has certain standing committees including an Audit Committee, a Human Resources Committee, a Corporate Governance Committee, Executive Committee, and an Investment and Funding Committee, the membership and functions of each of which are described below. The Audit Committee consists of Dr. McFate (Chairperson) and Messrs. Cardy, Hughes and Miller. During 1997, the Audit Committee held four meetings. The functions of the Audit Committee include: review and examination of detailed reports of the internal auditors for CoreStates including reports on the fiduciary activities of banking subsidiaries; periodic meetings with the internal auditors and credit review personnel; review of reports of regulatory agencies having jurisdiction over CoreStates and certain banking and other subsidiaries and signing of such reports on behalf of the Board of Directors; evaluation of internal accounting controls for CoreStates and for the management of the fiduciary activities of banking subsidiaries; recommending engagement and continuation of engagement of independent auditors; and meetings with, and receiving and considering recommendations of, independent auditors of CoreStates. The Human Resources Committee consists of Ms. von Seldeneck (Chairperson) and Messrs. Cardy, Lotman, Miller, Seabrook and P. 24 Strawbridge. During 1997, the Human Resources Committee held four meetings. The Human Resources Committee's function is to: evaluate the performance of the Chief Executive Officer of CoreStates and report its assessment to the full Board of Directors; review, approve and recommend to the full Board changes in base compensation for senior officers of CoreStates and its banking subsidiaries; review, approve and recommend to the full Board material changes in CoreStates' benefit plans which significantly affect CoreStates' liabilities or the benefits provided to participants; administer the Incentive Compensation Plan for CoreStates Financial Corp and Participating Subsidiaries and the Long- Term Incentive Plan; review annually the salary budget with respect to CoreStates and its banking subsidiaries; review CoreStates' management development plans; and review other compensation and benefit plans of CoreStates and its subsidiaries. The Corporate Governance Committee consists of Messrs. Jones (Chairperson), Lotman, Lynett, Seabrook, G. Strawbridge and Ms. von Seldeneck. During 1997, the Corporate Governance Committee held two meetings. The Corporate Governance Committee's function is to make recommendations to the full Board of Directors with respect to: nominees for election as director at the Annual Meeting of shareholders; nominees to fill Board vacancies between annual shareholders' meetings; the composition of membership of the various standing committees of the Board of Directors of CoreStates; and other selected corporate governance matters. The Investment and Funding Committee consists of Mr. Lynett (Chairperson), Dr. McFate and Mr. G. Strawbridge. During 1997, the Investment and Funding Committee held four meetings. The Committee exercises general supervision over the investment portfolio and is responsible for the approval of policies and general supervision of the asset/liability management activities of CoreStates and its subsidiary banks. The Committee also exercises primary oversight responsibility for certain CoreStates' subsidiaries. The Executive Committee consisted of Messrs. Larsen (Chairperson), Hughes, Smith and Dr. McFate until October 21, 1997, at which time the Committee was expanded to also include Messrs. Cardy, Jones, Lynett, Seabrook and Ms. von Seldeneck. During 1997, the Executive Committee held ten meetings. The primary functions of the Executive Committee include: to act on behalf of the Board of Directors in between meetings; to provide the initial forum for discussion of management's major policy recommendations; oversight responsibility for the processing companies; and preliminary review of merger and acquisition activity. 25 The By-laws of CoreStates provide that a shareholder may nominate a director at the Annual Meeting only if written notice (the "Notice") of such shareholder's intent is given by the shareholder and received by the Secretary of CoreStates not less than forty-five days prior to the date fixed for the Annual Meeting. The Notice shall contain or be accompanied by (a) the name and residence of such shareholder; (b) a representation that the shareholder is a holder of CoreStates' voting stock and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the Notice; (c) such information regarding each nominee as would have been required to be included in a proxy statement filed pursuant to Regulation 14A of the rules and regulations established by the Securities and Exchange Commission under the Exchange Act (or pursuant to any successor act or regulation) had proxies been solicited with respect to such nominee by the management or Board of Directors of CoreStates; (d) a description of all arrangements or understandings among the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which such nomination(s) are to be made by the shareholder; and (e) the consent of each nominee to serve as director of CoreStates if so elected. DIRECTORS' COMPENSATION Directors who are also officers of CoreStates Financial Corp or its subsidiaries do not receive any fees for Board or Committee meetings. In April 1997, the shareholders approved the Amended and Restated Stock Compensation Plan for Non-Employee Directors (1997) to provide that, effective January 1, 1997, all eligible non-employee directors of CoreStates Financial Corp ("CoreStates") or CoreStates Bank, N.A. ("CBNA") on or before the date of an annual meeting of shareholders receive a whole number of shares of CoreStates Common Stock equal in value to 50% of his or her retainer fee payable for services as a director during such calendar year (including any additional retainer fee payable for service as a chairperson of a committee of the CoreStates Board or the CBNA Board of Directors) in lieu of payment of such percentage of retainer fee in cash. Therefore, in 1997, non-employee Directors of CoreStates received an annual retainer of $40,000, 50% of which was paid in the Common Stock of CoreStates on June 1, 1997. Meeting fees of $500 were paid for each meeting of the Board of Directors and each meeting of any Committee of the Board of Directors. The Chairman of the Audit Committee continued to receive an annual fixed sum of $8,000, 50% payable in CoreStates' Common Stock, and 26 the annual fixed sum paid to the Chairman of each other Committee of the CoreStates Board of Directors was $5,000, 50% payable in CoreStates Common Stock. The $5,000 annual fixed sum paid to each member of the Audit Committee remains unchanged and was paid 100% in cash. In 1997, non-employee Directors of CBNA received an annual retainer of $15,000, 50% of which was paid in Common Stock of CoreStates on June 1, 1997. Meeting fees of $500 were paid for each meeting of the Board of Directors and each meeting of any Committee of the Board of Directors. The Chairman of the Audit Committee continued to receive an annual fixed sum of $5,000, 50% payable in CoreStates' Common Stock, and the annual fixed sum paid to the Chairman of each other Committee of the CoreStates Board of Directors was $2,500, 50% payable in CoreStates Common Stock. The $2,500 annual fixed sum paid to each member of the Audit Committee remains unchanged and was paid 100% in cash. During 1997, Directors of CoreStates who were directors of CBNA regional advisory boards received an honorarium of $1,000 to be paid in lieu of retainer and attendance fees. Under the Deferred Compensation Plan for Directors of CoreStates and CBNA (the "Directors' Deferred Plan"), directors of CoreStates and CBNA may elect prior to commencement of each term of service to defer payment of all or part of their directors' compensation. Amounts deferred are payable, as elected by the director, at the termination of the respective director's service to CoreStates or CBNA, the reaching of age 65, death, or a specified date, such payment to be made in a lump sum in up to 10 annual installments or other method. Amounts deferred are credited to an unfunded directors' deferred compensation account. Amounts deferred after April 1, 1988 were credited with interest at an annual rate equal to 60% of the prime rate of CBNA (the "CBNA Prime Rate"). Beginning January 1, 1989, interest has been credited on deferrals at a rate determined by multiplying the CBNA Prime Rate by a decimal amount equal to 1 minus 118% of the highest marginal corporate tax rate for Federal income tax purposes. Amounts deferred on or before April 1, 1988 receive earnings based on one or more of three hypothetical investments as selected quarterly by each affected participant. These provide yields equal to the return on, and appreciate or depreciate to the same extent as, funds invested in the CoreStates Bond Fund, the CoreStates Liquidity Fund and the CoreStates Equity Fund, each of which is a collective investment fund managed by CoreStates Investment Advisers, Inc. The right to receive future payments under the Directors' Deferred Plan is an unsecured claim against the general assets of CoreStates or CBNA, as applicable, Payments of deferred compensation may be 27 made only in cash. Additionally, in 1980, Hamilton Bank ("Hamilton") established a directors' deferred compensation plan whereby participating directors of Hamilton could elect to forego certain directors' fees or other compensation for a five-year period, from January 1, 1980 through December 31, 1984, in return for the undertaking of Hamilton to pay each participating director a specified amount in 120 equal payments beginning at age 65 or 70, or at death, if earlier. Hamilton has obtained life insurance, of which Hamilton is the beneficiary, on each participating director in an amount which will cover Hamilton's obligation to pay each such director. The directors participating in this plan are Carlton E. Hughes and Marlin Miller, Jr. Total payments to be made over the 10 year distribution period or at death, if earlier, to Messrs. Hughes and Miller are $233,400 and $178,800, respectively. Amounts expensed for 1997 under the plan in respect to Messrs. Hughes and Miller were respectively $15,317 and $12,090. HUMAN RESOURCES COMMITTEE REPORT COMPENSATION POLICIES FOR EXECUTIVE OFFICERS FOR 1997 The Human Resources Committee of the Board of Directors (the "Committee") is composed entirely of independent, outside Directors, none of whom is a current officer or employee of CoreStates or any of its subsidiaries. The Board of Directors has delegated to the Committee the responsibility for establishing and administering CoreStates' executive compensation plans. The Committee consults with outside compensation consultants, attorneys and other specialists. The Committee's unanimous approval of CoreStates' executive compensation programs in 1997 was based on each Committee member's judgment and evaluation of the various factors underlying the overall compensation philosophy described below. Compensation policies for executive officers are intended to further the earnings of CoreStates and facilitate securing, retaining and motivating management employees of high caliber and potential. The persons eligible to receive awards under these policies are officers and other employees of CoreStates and its subsidiaries who are in positions in which their decisions, actions and counsel significantly impact upon the short and long-term goals and strategies of CoreStates. There are three components to executive compensation: base 28 salary, annual incentive awards, and long-term incentive awards. Base Salaries Base salaries for executives are competitive with incumbent salaries for peer positions in CoreStates' comparator group. The comparator group consists of 14 companies within the super-regional banking industry that have market, geographic and size similarities to CoreStates. All of these banks are contained within the Keefe, Bruyette, & Woods 50 Index, presented in the Comparative 5 year Cumulative Total Return graph on page 40 of this annual report on Form 10- K. CoreStates generally targets base salaries at or near the median or average rate paid for each job within the group. Published compensation surveys are utilized to monitor competitive pay levels, in addition to compensation information reported in competitors' proxy statements. Annual Incentive Awards Executive officers participate in an annual cash award program, the Incentive Compensation Plan for CoreStates Financial Corp and Participating Subsidiaries. The Human Resources Committee of the Board of Directors determines the awards granted under the Incentive Compensation Plan. Award opportunity is based on the individual executive's grade level and a mix of predetermined corporate and individual performance goals. Corporate Performance One-Hundred percent of the annual award for the Chief Executive Officer and for the other four most highly compensated executive officers of CoreStates is based on corporate performance. Eighty percent of the annual award for eligible officers other than the named executive officers is based on corporate performance measured the same way. For 1997 this component of the Incentive Compensation Plan was paid at 100% of the payout target. Three measures are used as indices of corporate performance: net income after capital charge (NIACC), earnings per share (EPS), and progress toward achieving cultural change objectives. NIACC measures both the quantity and the quality of corporate earnings. If CoreStates earns more than its required return (and therefore has a positive NIACC) shareholder value is created. The calculation of NIACC requires three pieces of data: net income, the amount of capital employed, and the required return on that capital. The corporate required return of 13% is a risk-adjusted rate of return related to investors' alternatives in the marketplace. Because CoreStates has an unusually high 29 equity to asset ratio, NIACC is normalized for a 5% equity to asset ratio. Growth in EPS is a key measure of financial strength considered by the external financial community. The use of this measure facilitates external comparison and is easily understood. Cultural change improvement is measured based on progress in advancing the corporate culture with reference to: 1) CoreValues--People, Performance, Integrity, Teamwork, Diversity, and Communication, 2) customer focus, 3) commitment to quality, 4) leadership, 5) growth and learning, 6) employee satisfaction, 7) productivity, and 8) alignment measures. A combination of quantitative and qualitative measures is used to track results against these objectives including several routinely tracked statistics, such as the diversity of our workforce at all levels in CoreStates' organization, upward and lateral mobility of employees, employee retention, training and development participation, utilization of vendors and services owned by women and people of color, employee survey results, and other pertinent statistics. Quantitative progress on attaining improved implementation of corporate cultural change is measured through a survey of all CoreStates employees; or through sample surveys throughout the company. Individual Performance For eligible officers other than for the named executive officers, twenty percent of the annual award is based on individual performance. Individual performance goals are designed to reflect a balance between attainable and "stretch" objectives and are specific to each plan participant. Individual performance objectives are established at the beginning of the year based on the functions and responsibilities of each executive's position (for example, sales targets, income goals, cost reduction objectives, etc.). Also included in the measure of individual performance are objectives that champion CoreValues and reflect or measure managerial performance. These people-focused objectives count for at least one-third of individual performance. Target awards are based on a percentage of the midpoint of the salary grade of each individual. Corporate and individual executive performance are evaluated, and payout levels are determined independently at zero or 50 to 150% of the payout targets. 30 Long-Term Incentive Plan This plan is designed to support the long-term strategic goals of CoreStates by providing equity opportunities for individual executives based on their level of responsibility. Ownership aligns the interests of participating officers and executives with the interests of CoreStates' shareholders and ties a significant portion of senior officer compensation to shareholder returns. Under Ownership Guidelines developed in 1993 for achievement by 1998 and approved by the Human Resources Committee, the suggested number of shares to be owned varies according to the executive's salary grade, and ranges from one times salary range midpoint for Executive Vice Presidents up to 2.5 times salary range midpoint for the CEO. Stock held through the CoreStates Employee Stock Ownership and Savings Plan is counted toward the guidelines, but unexercised stock options are not. The primary award vehicles for 1997 were incentive stock options (ISOs) and non-qualified stock options (NQSOs). The first $100,000 of each stock option award was granted in the form of ISOs, with the remaining portion granted in NQSOs. Stock option grants provide the grantees the opportunity to acquire common stock at a fixed price (the fair market value on the date of the grant) for a specified period of time (ten years). Stock option plans provide upside earnings potential through increases in stock value over the long term. Target awards for stock option grants are expressed as a percentage of the salary range midpoint for each participant. Actual awards may range from 0% up to 150% of the target award based on a present assessment of the long-term value of the participant's ongoing performance contribution to CoreStates. In determining these grants, the Human Resources Committee did not specifically consider the amount and value of stock currently held by individuals. For 1997 stock option awards averaged 100% of target for all participants. The Committee, together with the assistance of an outside consultant, reviewed the 1997 total compensation, compared to the 14 bank peer group, for the CEO and the other four most highly compensated individuals who are executive officers as of the end of the year. In June, 1997 the Committee then recommended a one-time restricted stock award to be made in early 1998. The value of the grant was expressed as a dollar value, with corporate and peer group relative performance measures which determine the value of the grant which was made on January 20, 1998. Year end corporate performance measures produced an award at 94% of target. 31 Deductibility of Executive Compensation Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to public companies for compensation of $1 million paid to the Chief Executive Officer and the other four most highly compensated individuals who are executive officers as of the end of the year. Qualifying performance-based compensation is not subject to the deduction limit if certain requirements are met. While it is the Committee's policy to preserve corporate tax deductions by qualifying compensation paid over $1 million to named executive officers, it also maintains the flexibility to approve compensation arrangements that it deems to be in the best interests of CoreStates and its stockholders but which may not always qualify for full tax deductibility. Summary Inherent in CoreStates' effort to create shareholder value are attention to financial performance and strength, and focused recognition of CoreStates' people as the cornerstone of the long-range competitive edge. Performance measures support the efforts to further corporate earnings and achieve a positive corporate culture. The ideal culture values all members of the workforce, maintains customer focus, and achieves excellence through commitment to quality. HUMAN RESOURCES COMMITTEE'S BASES FOR DETERMINING THE COMPENSATION OF THE CEO FOR 1997 The CEO's (Chief Executive Officer) base salary, and annual and long-term incentive award components are consistent with the spirit and objectives of CoreStates' executive compensation program as follows: Base Salary In the Human Resources Committee's evaluation of the CEO's performance, it was specifically noted that his individual actions and leadership have had a significant effect on CoreStates' overall financial and cultural change/people value results, enhancing ongoing value to shareholders through stock appreciation and growth in earnings available for dividends. Although it is CoreStates' practice to target at or near the median of the CEO's base salaries reported in the comparative group, the Human Resources Committee has chosen to focus on total compensation rather than solely on base pay. 32 Annual Incentive Award 100% of the CEO's annual incentive award is based on corporate performance. For 1997 this was paid at 100% of target, based on NIACC, earnings per share, and corporate culture/people objectives as described in the preceding Annual Incentive Award--Corporate Performance section on pages 29 and 30 of this annual report on Form 10-K section with respect to other executive officers. Long-Term Incentive Plan The CEO participates in the Long-Term Incentive Plan described above under "Compensation Policies for Executive Officers for 1997". In February 1997 the CEO was granted options based on 100% of the target for his position. The CEO is a participant in the restricted stock program described above under "Compensation Policies for Executive Officers for 1997". In January 1998 the CEO was granted restricted stock based on 94% of target for his position. 33 SUMMARY COMPENSATION TABLE The following table shows, for the fiscal years ending December 31, 1995, 1996 and 1997, the cash compensation paid by CoreStates and its subsidiaries, as well as certain other compensation paid or accrued for those years, to the chief executive officer and the other four most highly compensated executive officers of CoreStates (collectively, the "Named Executives"). SUMMARY COMPENSATION TABLE
Long Term -------------------- Annual Compensation Other Annual Awards Payouts All Other ------------------------------------ -------------------- Salary Bonus Compensation Options LTIP Compensation Name & Principal Position Years ($)* ($) ($)** (#) ($)*** ($)**** Terrence A. Larsen 1997 770,000 767,800 4,241 78,607 0 34,591 Chairman and Chief 1996 755,385 335,808 3,277 102,581 0 37,769 Executive Officer 1995 687,981 575,683 3,396 148,750 458,544 33,750 Rosemarie B. Greco 1997 440,000 385,800 0 49,124 0 26,400 President and Chief 1996 423,846 246,912 0 52,713 0 21,192 Executive Officer, 1995 387,308 304,344 2,745 76,375 339,073 19,000 CoreStates Bank, N.A. Charles L. Coltman, III 1997 420,000 266,280 0 40,393 0 25,200 Vice Chairman, CoreStates 1996 413,846 177,520 2,558 52,713 0 20,692 Financial Corp 1995 387,308 304,344 0 76,375 127,152 19,000 Charles P. Connolly, Jr. 1997 300,000 229,200 2,140 28,562 0 17,969 Senior Executive Vice 1996 295,385 105,632 962 24,164 0 14,769 President and Chief Risk 1995 275,192 155,866 957 35,125 84,758 13,500 Policy Officer P. Sue Perrotty 1997 261,450 142,050 0 14,101 0 15,634 Executive 1996 251,450 62,828 0 12,600 0 13,974 Vice President 1995 236,077 122,682 0 18,375 0 9,400
*Annual Salary is reported for the calendar year **Other Annual Compensation includes Financial Planning ***Performance Units Awards No remaining performance unit awards to be paid out Half of award value net of taxes was paid in cash, the other half in stock ****All other compensation consists of compensation from savings and retirement plans as follows: -The CoreStates Employee Stock Ownership and Savings Plan provides investment choices and company contributions. Corporation contributions were as follows: 1997:Larsen-$7,200, Greco-$9,600, Coltman-$9,600, Connolly-$9,600, Perrotty-$9,600 1996:Larsen-$7,500, Greco-$7,500, Coltman-$7,500, Connolly-$7,500, Perrotty-$12,794.10 1995:Larsen-$7,500, Greco-$7,500, Coltman-$7,500, Connolly-$7,500, Perrotty-$9,240 in 1995 and 1996 Ms. Perrotty participated in the Meridian Supplemental Salary Reduction Plan The 401 Excess Plan was adopted in 1992. It mirrors the CoreStates Employee Stock Ownership and Savings Plan in that it provides investment choices and company matches for employees whose salaries are above ERISA limits for the savings plan. Corporation contribution were: 1997:Larsen-$27,390.55, Greco-$16,799.93, Coltman-$15,600.15, Connolly- $8,369.26, Perrotty-$6,033.50 1996:Larsen-$30,269.25, Greco-$13,692.25, Coltman-$13,192.27, Connolly- $7,269.19, Perrotty-$1,179.75 1995:Larsen-$26,250, Greco-$11,500, Coltman-$11,500, Connolly-$6,000, Perrotty- $159 In 1995 and 1996 Ms. Perrotty participated in the Meridian Supplemental Salary Reduction Plan. 34 OPTION GRANT TABLE The following table contains information concerning the grant of stock options to the Named Executives as of December 31, 1997. OPTION GRANTS IN 1997 *
Grant Date Value ---------- Options % of Total Options Exercise Black Scholes Grant Granted Granted to Employees or Base Expiration Grant Date Name Date (#) in 1997 Price Date Present Value** Terrence A. Larsen 01/21/97 78,607 4.854% $51.500 01/21/07 $699,602 Rosemarie B. Greco 01/21/97 49,124 3.034% $51.500 01/21/07 $437,204 Charles L. Coltman, III 01/21/97 40,393 2.494% $51.500 01/21/07 $359,498 Charles P. Connolly, Jr. 01/21/97 28,562 1.764% $51.500 01/21/07 $254,202 P. Sue Perrotty 01/21/97 14,101 0.871% $51.500 01/21/07 $125,499
*Options reported in the table above are a combination of incentive and non- qualified stock options. All grants become exercisable one year from the date of grant and they must be exercised during employment except in the case of death, disability, retirement or involuntary termination. The term of each option is ten years. **Results produced by the Black Scholes assumptions: Risk-free rate of return -- 6.39 Dividend yield -- 4.00 Expected Time of Exercise -- 6 years Market Price at Grant -- $51.50 Expected Volatility -- .169 35 OPTION EXERCISES AND YEAR-END TABLE The following table sets forth information with respect to the Named Executives, concerning the exercise of options during 1997 and unexercised options as of December 31, 1997: OPTION EXERCISES AND YEAR-END TABLE*
Number of Value of Unexercised Shares Unexercised In-the-Money Options Acquired Options at at 12/31/97 on Value 12/31/97 (#) ($)(/share)* Exercise Realized ----------------------------------------------------------- Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable - ---- ------- ---------- ----------- ------------- ----------- ------------- Terrence A. Larsen 0 $ 0 472,131 78,607 23,419,342 2,279,603 Rosemarie B. Greco 187,142 $6,013,825 0 49,124 0 1,424,596 Charles L. Coltman, III 74,932 $3,943,330 220,738 40,393 10,808,677 1,171,397 Charles P. Connolly, Jr. 34,003 $1,579,792 112,430 28,562 5,576,551 828,298 P. Sue Perrotty 9,800 $ 530,425 19,950 14,101 956,396 408,929
*Values for Larsen, Greco, Coltman, Connolly, and Perrotty respectively represent the cumulative impact of stock options granted over, 10, 7, 10, 10, and 10 years respectively. One stock option grant was awarded per named executive in each year an award was made to the executive, with the exception of 1994, in which R. Greco, C. Coltman, and C. Connolly each received a second grant on 8/22/94. 36 PENSION BENEFITS CoreStates maintains the CoreStates Retirement Plan, a tax-qualified defined benefit plan, which generally covers employees of CoreStates and its participating subsidiaries and affiliates. The Retirement Plan is funded solely by contributions made by CoreStates on an actuarial basis to the Retirement Plan Trust. The normal retirement age under the Retirement Plan is age 65; however, participants may elect early retirement (in some circumstance without actuarial reduction) if certain requirements are met. For credited service through December 31, 1996, the Retirement Plan benefit formula is 1.5% of Final Average Compensation ("FAC") up to Social Security Covered Compensation ("SSCC") plus 2.0% of FAC over SSCC, multiplied by years of credited service to a maximum of 25; plus 1.0% of FAC, multiplied by years of credited service over 25 to a maximum of 40. (For years of credited service after December 31, 1996, the Retirement Plan formula has been reduced to 1.25% of FAC up to SSCC plus 1.75% of FAC over SSCC, multiplied by years of credited service to a maximum of 25; plus 0.75% of FAC, multiplied by years of credited service over 25 to a maximum of 40). The Final Average Compensation used in calculating the qualified Retirement Plan benefit is the annual average of the highest 60 consecutive months of base pay (excluding all incentive and other non-salary cash payments) during the last ten years of employment. The Final Average Compensation figure corresponds to the elements summarized in the Annual (Salary) Compensation shown in the Summary Compensation Table on page 34 of this annual report on Form 10-K. The Internal Revenue Code (the "Code") limits the amount of benefits which tax-qualified plans such as the Retirement Plan can pay to officers and other highly compensated employees. The CoreStates Financial Corp Supplemental Retirement Plan (the "CoreStates Supplemental Plan") provides benefit amounts which cannot be paid from the qualified Retirement Plan because of such Code limits. If an employee defers salary, the CoreStates Supplemental Plan also pays the difference between what the employee would have gotten in the qualified plan had he or she not deferred salary and the qualified plan benefit excluding the deferred salary. (Certain key executives who came from First Pennsylvania are covered under the First Pennsylvania Retirement Benefit Supplemental Plan, described below, instead of the CoreStates Supplemental Plan.) 37 The following table shows, for various of credited service and compensation levels, the amount of straight life annuity benefits produced by the Retirement Plan benefit formula for a person retiring at normal retirement age in 1997 (with SSCC of $29,304). The table reflects the combined benefit payable under the qualified Retirement Plan and the CoreStates Supplemental Plan (or Benefit A of the First Pennsylvania Retirement Benefit Supplemental Plan, described below). PENSION PLAN TABLE
Final Average Estimated Annual Pension For Representative Years of Credited Services ---------------------------------------------------------------------- Compensation 5 10 15 20 25 30 - ------------ - -- -- -- -- -- $125,000 $11,460 $ 23,220 $ 34,990 $ 46,757 $ 58,524 64,775 $150,000 $13,896 $ 28,164 $ 42,427 $ 56,695 $ 70,962 $ 78,462 $175,000 $16,332 $ 33,096 $ 49,865 $ 66,632 $ 83,400 $ 92,150 $200,000 $18,768 $ 38,040 $ 57,302 $ 76,570 $ 95,837 $105,837 $225,000 $21,204 $ 42,972 $ 64,740 $ 86,507 $108,275 $119,525 $250,000 $23,640 $ 47,904 $ 72,177 $ 96,445 $120,712 $133,212 $300,000 $28,512 $ 57,780 $ 87,052 $116,320 $145,587 $160,587 $400,000 $38,268 $ 77,532 $116,802 $156,070 $195,337 $215,337 $450,000 $43,140 $ 87,408 $131,677 $175,945 $220,212 $242,712 $500,000 $48,012 $ 97,284 $146,552 $195,820 $245,087 $270,087 $600,000 $57,768 $117,036 $176,302 $235,570 $294,837 $324,837 $700,000 $67,512 $136,788 $206,052 $275,320 $344,587 $379,587 $800,000 $77,268 $156,540 $235,802 $315,070 $394,337 $434,337
The First Pennsylvania Retirement Benefit Supplemental Plan (The "FP Supplemental Plan") provides selected key executive officers with retirement benefits in addition to those provided to all eligible employees under the Retirement Plan. The FP Supplement Plan covers two types of retirement benefits. Benefit A is equal to the excess of the amount that would be payable under the Retirement Plan if it did not contain the limitation on the annual amount of pension benefit payments or the amount of recognizable compensation imposed by the Internal Revenue Code over the amount actually payable under the Retirement Plan in accordance with such limitations. Benefit C is equal to 65% of the participant's average annual base salary for the five consecutive years immediately preceding the participant's retirement or other termination of benefits. Benefit C is then reduced by the aggregate of the following amounts: the benefit under Benefit A, the Social Security benefit, the benefit under the Retirement Plan, and the benefit under any retirement plan provided by a former employer, excluding any portion of such benefit attributable to the participant's own contributions to such plan. As of December 31, 1996, the period of credited service of the CoreStates' executive officers named in the Summary Compensation Table above are as follows: 38 PERIOD OF CREDITED SERVICE ------------------ Terrence A. Larsen......................................... 19 years, 5 months Rosemarie B. Greco......................................... 5 years, 9 months Charles L. Coltman III..................................... 27 years, 10 months Charles P. Connolly, Jr.................................... 25 years, 8 months P. Sue Perrotty............................................ 16 years, 5 months Ms. Perrotty is additionally entitled to a supplemental pension benefit under the Meridian Supplemental Retirement Plan (the "Meridian SERP"). The benefit provided under this plan is equal to 50% of final average salary as of April 1996 less the benefit payable from Social Security less the benefits payable from the Retirement Plan and CoreStates Supplemental Plan. This benefit is payable as early as age 55. TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS In February 1996, the Human Resources Committee of the Board of Directors approved the terms of termination of employment contracts for the Named Executives and certain other officers of CoreStates. Each Named Executive or identified officer terminated (as defined in the contract) would receive severance pay equal to two times the highest base salary and bonus during the preceding two years. In addition, each Named Executive or identified officer would be provided with employee benefits equivalent to those benefits received immediately prior to termination for a two year period following such termination. Payments are limited by the provisions of Section 280G of the Internal Revenue Code of 1986 and are offset by amounts which may be paid under any other CoreStates severance policy. The contracts are for a three year period from April 9, 1996. Additional information is contained in the "Interests of Certain Persons" Sections on pages 9 to 10 and 46 through 49 of Exhibit 99.3, the CoreStates January 9, 1998, Merger Proxy Statement, which sections are incorporated herein by reference. 39 Five-Year Shareholder Return Comparison The following line graph compares five-year cumulative total shareholder return with the Standard & Poor's 500 Composite Index and the Keefe, Bruyette & Woods 50 Index (KBW 50) a published peer-industry index. The KBW 50 is made up of fifty of the nation's most significant banking companies, including money-center and most major regional banks, and is considered representative of the price performance of the nations' largest banks. Both the S&P 500 and the KBW 50 are market-capitalization-weighted indices. The graph assumes an initial investment of $100 and reinvestment of quarterly dividends. COMPARATIVE 5 YEAR CUMULATIVE TOTAL RETURN 12/31/92 to 12/31/97 [GRAPH APPEARS HERE] Comparison of Five Year Cumulative Total Return December 31, 1992 to 1997 CoreStates v. S&P 500 v. KBW 50
----------------------------------------------------------------- 1992 1993 1994 1995 1996 1997 - -------------------------------------------------------------------------------- CoreStates 100 95 99 150 214 342 - -------------------------------------------------------------------------------- S&P 500 100 110 112 153 188 251 - -------------------------------------------------------------------------------- KBW 50 100 106 100 160 227 332 - --------------------------------------------------------------------------------
40 ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Set forth below opposite the names of each director is the number of shares of CoreStates Common Stock ("Shares") beneficially owned as of February 27, 1998. Except as otherwise indicated in the Notes to the Director Information, the persons named possess sole voting and investment power with respect to the Shares shown opposite their names. 41
Name of Director Number of Shares - ---------------- ---------------- Robert W. Cardy 1,563 (1) Carlton E. Hughes 11,738 (2) Ernest E. Jones 1,499 Terrence A. Larsen 536,216 (3) Herbert Lotman 89,575 (4) George V. Lynett 35,420 (5) Patricia A. McFate 5,259 Marlin Miller, Jr. 12,807 (6) James M. Seabrook 7,639 (7) Raymond W. Smith 6,115 (8) George Strawbridge, Jr. 5,146,084 (9) Peter S. Strawbridge 3,129 Judith M. von Seldeneck 3,777(10)
Notes to Director Information (1) 490 of the Shares reported as beneficially owned by Mr. Cardy are owned by his wife. Mr. Cardy disclaims beneficial ownership of such Shares. (2) 735 of the Shares reported as beneficially owned by Mr. Hughes are held in an irrevocable trust, of which his wife is trustee, for the benefit of their grandchildren. Mr. Hughes disclaims beneficial ownership of such Shares. (3) This includes 176,901 Shares which Mr. Larsen has the right to acquire immediately pursuant to presently exercisable stock options. 313,224 of the Shares registered as beneficially owned by Mr. Larsen are registered in the joint names of Mr. Larsen and his wife. 68 shares are held for Mr. Larsen by CoreStates Bank, N.A. as trustee under the CoreStates Employee Stock Ownership and Savings Plan (ESOP). (4) 44,110 of the Shares reported as beneficially owned by Mr. Lotman are owned by his wife. Mr. Lotman disclaims beneficial ownership of such Shares. (5) 206 of the Shares reported as beneficially owned by Mr. Lynett are owned by his wife. 9,380 of the Shares reported as beneficially owned are registered in the name of his children, as to which Mr. Lynett disclaims beneficial ownership. (6) 1,600 of the Shares reported as owned by Mr. Miller are owned by his wife. Mr. Miller disclaims beneficial ownership of such Shares. 42 (7) 2,000 of the Shares reported as beneficially owned by Mr. Seabrook are registered in the name of his daughter. Mr. Seabrook disclaims beneficial ownership of such Shares. (8) 800 of the Shares reported as beneficially owned by Mr. Smith are held in a charitable trust, of which Mr. Smith and his wife are co-trustees. (9) This includes (i) 5,145,962 Shares reported as beneficially owned by Mr. G. Strawbridge which are held by a trust of which Mr. Strawbridge is co-trustee and has the power to revoke and (ii) 122 Shares owned jointly with one of his children. Additionally, Mr. G. Strawbridge disclaims beneficial ownership of (a) 6,125 Shares held by a trust revocable by Mrs. Strawbridge of which Mr. Strawbridge is co-trustee; (b) 6,417 Shares held by a trust created by Mr. Strawbridge's son of which he is co-trustee; (c) 1,225 Shares held by a trust for the benefit of his stepdaughter of which he is the co-trustee; and (d) 4,000 Shares held by a trust for the benefit of his nephew of which he is the co- trustee. (10) 1,604 of the Shares reported as beneficially owned by Ms. von Seldeneck are registered in her name as custodian for Kevin Clay von Seldeneck. BENEFICIAL OWNERSHIP OF COMMON STOCK Information concerning the beneficial ownership of CoreStates Common Stock by directors is set forth above opposite the name of each director. The following table shows, as of February 27, 1998, the number of shares of CoreStates Common Stock beneficially owned, including shares which may be purchased through unexercised options, by the executive officers of CoreStates named in the Summary Compensation Table on page 34 except in respect to Mr. Larsen whose share ownership is reported above in the information concerning directors: Charles L. Coltman III 237,076 Shares Charles P. Connolly, Jr. 174,042 Shares P. Susan Perrotty 58,247 Shares Rosemarie B. Greco 80,416 Shares At February 27, 1998, the directors and executive officers of CoreStates as a group (21 persons) beneficially owned 6,566,386 shares of CoreStates Common Stock which represents approximately 3.25% of all outstanding shares. Mr. George Strawbridge, Jr. owned approximately 2.55% of the outstanding 43 shares. No other director or officer beneficially owned more than 1% of the outstanding shares. Included in the share amounts shown are 4,068 shares held for Mr. Coltman, 67 shares held for Mr. Connolly, 69 shares held for Ms. Greco, 13,912 shares held for Ms. Perrotty and 15,807 shares held for other executive officers (other than Mr. Larsen) as a group by CoreStates Bank, N.A., as trustee under the CoreStates Employee Stock Ownership and Savings Plan. Also included are options to acquire shares (exercisable immediately or within 60 days after February 27, 1998) held by: Mr. Coltman -- 118,940; Mr. Connolly -- 140,992; Ms. Greco -- 0; Ms. Perrotty -- 34,551 and the other executive officers (other than Mr. Larsen) of CoreStates as a group - 97,734. The named individuals have sole voting and investment powers with respect to the shares owned. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS As of February 27, 1998, the following persons are known to CoreStates to be the beneficial owners of more than five percent of CoreStates' Common Stock. In preparing the table shown below, CoreStates has relied, without further investigation, on the information contained in the copy of the Schedule 13G delivered to it, which was filed jointly by the respective reporting persons with the SEC under the Securities and Exchange Act of 1934. The numbers shown on the table should be interpreted in light of the related footnotes.
Name and Address Amount and Nature Percent of Of Beneficial Owner of Beneficial Ownership Class ------------------- ----------------------- ----- The Capital Group Companies, Inc. (/1/).... 15,478,350(/2/) 7.8%(/2/) Capital Research and Management Company 333 Hope Street Los Angeles, CA 90071
(1) The shares reported by The Capital Group Companies, Inc. relate to those attributable to Capital Research and Management Company ("Capital Research") and other subsidiaries of The Capital Group Companies, Inc. on a Schedule 13G filed with the Securities and Exchange Commission. (2) The Capital Group Companies report sole voting power as to 850 shares and sole dispositive power as to 15,478,350 44 shares. These shares do not include any shares as to which Capital Research reports sole voting power, but do include 15,477,500 shares as to which Capital Research reports sole dispositive power. Capital Research is the beneficial owner of 15,477,500 shares as a result of acting as investment adviser to various investment companies registered under Section 8 of the Act. Beneficial ownership is disclaimed by the reporting persons pursuant to Rule 13d-4 of the Exchange Act. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS CoreStates' subsidiaries have from time to time made loans to some officers and directors of CoreStates and to companies with which they are associated. Such loans were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others, and did not involve more than normal risk of collectibility or present any unfavorable features. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements: The following Consolidated Statements and Deposits appear as indicated in Exhibit 99.2, which pages are incorporated by reference.
EXHIBIT 99.2 Page Reference --------- Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995................. 45 Consolidated Balance Sheets as of December 31, 1997 and 1996.......... 46 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995....................... 47 - 48 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995. 49 - 50
45
EXHIBIT 99.2 Page Reference --------- Notes to the Consolidated Financial Statements..................... 51-84 Report of Independent Auditors........... 44 Selected Quarterly Data.................. 78
(a) 2. Financial Statement Schedules All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (b) Current Reports on Form 8-K during the fourth quarter of 1997: A report dated October 22, 1997, which included the Corporation's press release regarding third quarter and year-to-date financial information. A report dated October 30, 1997, which included the Corporation's press release regarding its 10-year strategic technology alliance with Andersen Consulting. A report dated November 18, 1997, which included the Corporation's press release regarding its entering into a merger agreement with first Union Corporation. A report dated November 18, 1997, with respect to Changes in Control of Registrant, pursuant to the Corporation's entering into a merger agreement with First Union Corporation (Exhibit 2 Agreement and Plan of Mergers is incorporated by reference to the Current Report on Form 8-K filed by First Union Corporation on November 28, 1997). (c) Exhibits The exhibits listed on the Index to Exhibits on pages 47 to 55 hereof are incorporated by reference or filed herewith in response to this item. 46 (a) 3. Exhibits --------
Exhibit No. Page No. - ----------- -------- 2.1 Agreement and Plan of Merger dated as of October 10, 1995 by and between CoreStates Financial Corp and Meridian Bancorp Inc. and filed as Annex I to Registrant's Report on Form S-4 No. 333-00067 and incorporated herein by reference. 2.2 Stock Option Agreement dated as of October 10, 1995 by and between CoreStates Financial Corp and Meridian Bancorp, Inc. and filed as Annex II to the Registrant's Report on Form S-4 No. 333- 00067 and incorporated herein by reference. 2.3 Meridian Stock Option Agreement dated as of October 10, 1995 by and between Meridian Bancorp, Inc. and CoreStates Financial Corp and filed as Annex III to the Registrant's Report on Form S-4 No. 333-00067 and incorporated herein by reference. 2.4 Agreement and Plan of Mergers dated as of the 18th day of November, 1997 by and between CoreStates Financial Corp and First Union Corporation and filed as Annex A to First Union Corporation's Form S-4 No. 333-44015 and incorporated herein by reference. 2.5 CoreStates Stock Option Agreement dated as of November 18, 1997 between First Union Corporation and CoreStates Financial Corp and filed as Annex B to First Union Corporation's Form S-4 No. 333-44015 and incorporated herein by reference. 2.6 First Union Stock Option Agreement dated as of November 18, 1997 between CoreStates Financial Corp and First Union Corporation and filed as Annex C to First Union Corporation's Form S-4 No. 333-44015 and incorporated herein by reference. 3.1 Articles of Incorporation of Registrant as amended through April 9,1996 and filed as Exhibit 3.1 to the Registrant's Form 10-Q for the third quarter ended September 30, 1997 and incorporated herein by reference.
47 Exhibit No. Page No. - ----------- -------- 3.2 By-laws of Registrant as amended through January 21, 1997 and filed as Exhibit 3.2 to the Registrant's Form 10-K dated March 21, 1997 and incorporated herein by reference. 4.1 The Registrant will furnish to the Securities and Exchange Commission, upon request, copies of instruments defining the rights of holders of long-term debt of CoreStates Financial Corp and its subsidiaries. 4.2 Indenture dated as of December 1, 1990 between CoreStates Financial Corp, CoreStates Capital Corp and The Bank of New York, as senior trustee and successor to Nations Bank of Georgia, N.A., as successor to Wachovia Bank of Georgia, N.A., (formerly The First National Bank of Atlanta). Filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated January 29, 1991 and incorporated herein by reference. 4.3 Indenture dated as of December 1, 1990 between CoreStates Financial Corp, CoreStates Capital Corp and Bank One, Columbus, NA. Filed as Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated January 29, 1991 and incorporated herein by reference. 4.4 First Supplemental Indenture dated as of March 1, 1993 to the Indenture dated as of December 1, 1990 by and between CoreStates Capital Corp, CoreStates Financial Corp and BankOne, Columbus, N.A. filed as Exhibit 4 to Registrant's Current Report on Form 8- K dated April 20, 1993 and incorporated herein by reference. 4.5 Second Supplemental Indenture dated as of August 1, 1994 among CoreStates Financial Corp, CoreStates Capital Corp, Bank One, Columbus, N.A. and Citibank, N.A. filed as
48 Exhibit No. Page No. - ----------- -------- Exhibit 4.5 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. 4.6 Specimen of Medium-Term Note (Senior Fixed Rate). Filed as Exhibit 4.3 to the Registrant's Current Report on Form 8-K dated January 29, 1991 and incorporated herein by reference. 4.7 Specimen of Medium-Term Note (Senior Floating Rate). Filed as Exhibit 4.4 to the Registrant's Current Report on Form 8-K dated January 29, 1991 and incorporated herein by reference. 4.8 Specimen of Medium-Term Note (Subordinated Fixed Rate). Filed as Exhibit 4.5 to the Registrant's Current Report on Form 8-K dated January 29, 1991 and incorporated herein by reference. 4.9 Specimen of Medium-Term Note (Subordinated Floating Rate). Filed as Exhibit 4.6 to the Registrant's Current Report on Form 8-K dated January 29, 1991 and incorporated herein by reference. 4.10 Specimen of 9 5/8% Subordinated Note due February 15, 2001. Filed as Exhibit 4.7 to the Registrant's Current Report on Form 8-K dated January 29, 1991 and incorporated herein by reference. 4.11 Specimen of CoreStates Capital Corp 9 3/8% Subordinated Note due April 15, 2003. Filed as Exhibit (4) to the Registrant's Current Report on Form 8-K dated April 21, 1991 and incorporated herein by reference. 4.12 Specimen of 6 5/8% Subordinated Note due March 15, 2005 issued by CoreStates Capital Corp filed as Exhibit 4 to Registrant's Current Report on Form 8-K dated March 18, 1993 and incorporated
49 Exhibit No. Page No. - ----------- -------- herein by reference. 4.13 Specimen of 5 7/8% Subordinated Note due October 15, 2003 issued by CoreStates Capital Corp and unconditionally guaranteed as to payment of principal and interest on a subordinated basis by CoreStates Financial Corp. Filed as Exhibit 4 of Registrant's Current Report on Form 8-K dated October 21, 1993 and incorporated herein by reference. 4.14 Specimen of CoreStates Capital Corp Medium-Term Note (Senior Fixed Rate). Filed as Exhibit 4(d) to Registrant's Registration Statement on Form S-3, No. 33-54049 and incorporated herein by reference. 4.15 Specimen of CoreStates Capital Corp Medium-Term Note (Senior Floating Rate). Filed as Exhibit 4(e) to Registrant's Registration Statement on Form S-3, No. 33-54049 and incorporated herein by reference. 4.16 Specimen of CoreStates Capital Corp Medium-Term Note (Subordinated Fixed Rate). Filed as Exhibit 4(f) to Registrant's Registration Statement on Form S-3, No. 33-54049 and incorporated herein by reference. 4.17 Specimen of CoreStates Capital Corp Medium-Term Note (Subordinated Floating Rate). Filed as Exhibit 4(g) to Registrant's Registration Statement on Form S-3, No. 33-54049 and incorporated herein by reference. 4.18 Form of Medium Term Note (Senior Fixed Rate). Filed as Exhibit 4 (d)(5) to Registrant's Registration Statement on Form S-3/A, Nos. 333-2297 and 33-54049 and incorporated herein by reference. 4.19 Form of Medium Term Note (Senior Floating
50 Exhibit No. Page No. - ----------- -------- Rate). Filed as Exhibit 4(e)(5) to Registrant's Registration Statement on Form S-3/A, Nos. 333-2297 and 33-54049 and incorporated herein by reference. 4.20 Form of Medium Term Note (Subordinated Fixed Rate). Filed as Exhibit 4(f)(5) to Registrant's Registration Statement on Form S- 3/A, Nos. 333-2297 and 33-54049 and incorporated herein by reference. 4.21 Form of Medium Term Note (Subordinated Floating Rate). Filed as Exhibit 4(g)(5) to Registrant's Registration Statement on Form S-3/A, Nos. 333-2297 and 33-54049 and incorporated herein by reference. 4.22 Form of Warrant. Filed as Exhibit 4(h) to Registrant's Registration Statement on Form S-3/A, Nos. 333-2297 and 33-54049 and incorporated herein by reference. 4.23 Form of Warrant Agreement. Filed as Exhibit 4(i) to Registrant's Registration Statement on Form S-3/A, Nos. 333-2297 and 33-54049 and incorporated herein by reference. 4.24 Form of Certificate of Designation of $__________ Preferred Stock. Filed as Exhibit 4(j) to Registrant's Registration Statement on Form S-3/A, Nos. 333-2297 and 33-54049 and incorporated herein by reference. 4.25 Form of $___________ Preferred Stock filed as Exhibit 4(k) to Registrant's Registration Statement on Form S-3/A, Nos. 333-2297 and 33-54049 and incorporated herein by reference. 4.26 Form of Common Stock. Filed as Exhibit 4(1) to Registrant's Registration Statement on Form S-3/A, Nos. 333-2297 and
51 Exhibit No. Page No. - ----------- -------- 33-54049 and incorporated herein by reference. 10.1 * Incentive Compensation Plan for CoreStates Financial Corp and Participating Subsidiaries effective January 1, 1983. Filed as Exhibit 10.5 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1983 and incorporated herein by reference. 10.3(A)(i) Amended and Restated Stock Compensation Plan for Non-Employee Directors (1997) of CoreStates Financial Corp. Filed as Annex B to Registrant's Proxy Statement dated March 4, 1997 and incorporated herein by reference. 10.3(A)(ii) Amended and Restated Long-Term Incentive Plan (1997) of CoreStates Financial Corp as amended through January 20, 1998. 10.3 * Deferred Compensation Plan for Directors of CoreStates Financial Corp and CoreStates Bank, N.A. as amended and restated effective January 1, 1995. 10.4 * The CoreStates Financial Corp Supplemental Retirement Plan. Filed as Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987 and incorporated herein by reference. 10.5 * Profit Sharing Deferral Plan for Officers of CoreStates Financial Corp and Participating Subsidiaries effective November 1, 1987. Filed as Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987 and incorporated herein by reference. 10.6 Agreement between New Jersey National Bank and Textron Financial- New Jersey, Inc. for the sale and leaseback of the Corporate and operations centers and four
52 Exhibit No. Page No. - ----------- -------- branches. Filed as. Exhibit 10(I), File No. 0-6002 to the New Jersey National Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 1985 and incorporated herein by reference. 10.7 Lease between Centre Square, Inc. and Tishman Construction Company of Pennsylvania, Inc. and The First Pennsylvania Banking and Trust Company, dated as of December 13, 1968 as amended through January 31, 1974, for the property known as Centre Square West. Filed as Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by reference. 10.8 * First Pennsylvania Corporation Amended and Restated Retirement Benefit Supplement Plan filed as Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 and incorporated herein by reference. 10.9 * CoreStates Financial Corp 1992 Long Term Incentive Plan filed as Exhibit 10.18 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 and incorporated herein by reference. 10.10 * CoreStates Financial Corp Stock Compensation Plan For Non- Employee Directors filed as Exhibit 10.19 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 and incorporated herein by reference. 10.11 * CoreStates Financial Corp 401 Excess Plan For Senior Management filed as Exhibit 10.20 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 and incorporated herein by reference. 10.12 Agreement to Form a Joint Venture By and Among Banc One Corporation, CoreStates Financial Corp, PNC Financial Corp and Society
53 Exhibit No. Page No. - ----------- -------- Corporation dated as of July 21, 1992 filed as Exhibit 10.21 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 and incorporated herein by reference. 10.13 * Incentive Compensation Plan for Designated Executives of CoreStates Financial Corp and Participating Subsidiaries filed as Exhibit 10.18 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference. 10.14 * Independence Bancorp, Inc. Supplemental Executive Retirement Plan filed as Exhibit 10.19 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference. 10.15 Distribution Agreement dated September 16, 1994 among CoreStates Financial Corp, CoreStates Capital Corp and Merrill Lynch & Co., Goldman, Sachs & Co., Lehman Brothers Inc., J.P. Morgan Securities Inc., CoreStates First Boston Corporation and Smith Barney Inc. Filed as Exhibit 1(b) to the Registrant's Registration Statement on Form S- 3, No. 33-54049 and incorporated herein by reference. 10.16 Underwriting Agreement dated September 16, 1994 among CoreStates Financial Corp, CoreStates Capital Corp and Lehman Brothers Inc., Goldman, Sachs & Co., Merrill Lynch & Co., J.P. Morgan Securities Inc., CORESTATES First Boston Corporation and Smith Barney Inc. Filed as Exhibit 1(a) to the Registrant's Registration Statement on Form S- 3, No. 33-54049 and incorporated herein by reference. 10.17 * Agreement with Samuel A. McCullough dated April 18, 1996. Filed as Exhibit 10.1 to Registrant's June 30, 1996 10-Q and incorporated herein by reference. 10.18 * Amendment to Termination Agreement dated
54 July 1, 1986. Filed as Exhibit 10.2 to Registrant's June 30, 1996 10- Q and incorporated herein by reference. 10.19 * Form of Termination Agreement for Samuel A. McCullough dated July 1, 1986. Filed as Exhibit 10.3 to Registrant's June 30, 1996 10- Q and incorporated herein by reference. 10.20 * Form of Termination Agreement for Executive Officers. Filed as Exhibit 10.4(A) to Registrant's June 30, 1996 10-Q and incorporated herein by reference. 10.21 * Schedule of named Executive Officers and Executive Officers who are parties to a Termination Agreement. 12.1 Computation of Ratio of Earnings from Continuing Operations to Fixed Charges of Continuing Operations -- Consolidated. 12.2 Computation of Ratio of Earnings from Continuing Operations to Fixed Charges of Continuing Operations -- Combined CoreStates (Parent Only) and CoreStates Capital Corp. 21 List of Subsidiaries. 23(a) Consent of Ernst & Young LLP 23(b) Consent of KPMG Peat Marwick LLP 27.1 Financial Data Schedule. 27.2 Financial Data Schedule. 27.3 Financial Data Schedule. 99.1 Undertaking - Form S-8 Registration Statements. 99.2 Registrant's December 31, 1997 Form 10-K Financial Sections. 99.3 Pages 9 to 10 and 46 through 49 of the Registrant's January 9, 1998 Merger Proxy Statement.
* Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. 55 NOTE: CoreStates Financial Corp will furnish, at cost, any exhibit not accompanying this document upon request. Cost for each document is determined by the number of pages in the document. 56 Independent Auditors' Report ---------------------------- The Board of Directors Meridian Bancorp, Inc.: We have audited the accompanying consolidated balance sheet of Meridian Bancorp, Inc. and subsidiaries as of December 31, 1995, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the year ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Meridian Bancorp, Inc. and subsidiaries as of December 31, 1995 and the results of their operations and their cash flows for the year ended December 31, 1995, in conformity with generally accepted accounting principles. Philadelphia, PA January 17, 1996, Except as to note 2, which is as of February 23, 1996 /s/ KPMG Peat Marwick LLP 57 INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- The Board of Directors and Stockholders United Counties Bancorporation We have audited the accompanying consolidated balance sheet of United Counties Bancorporation and subsidiaries as of December 31, 1995, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the year ended December 31, 1995. These consolidated financial statements are the responsibility of the Bancorporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Counties Bancorporation and subsidiaries at December 31, 1995 and the results of their operations and their cash flows for the year ended December 31, 1995 in conformity with generally accepted accounting principles. Short Hills, New Jersey January 16, 1996, except for note 20, which is as of February 23, 1996 /s/ KPMG Peat Marwick LLP 58 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CORESTATES FINANCIAL CORP Date: March 30, 1998 By: /s/ Terrence A. Larsen -------------------------- Terrence A. Larsen Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated. SIGNATURES TITLE DATE - ---------- ----- ---- /s/Terrence A. Larsen ____________________ Director, Chairman of the March 30, 1998 Terrence A. Larsen Board and Chief Executive Officer /s/Albert W. Mandia ____________________ Chief Financial Officer March 30, 1998 Albert W. Mandia (Principal Financial Officer) /s/Christopher J. Carey ____________________ Controller March 30, 1998 Christopher J. Carey (Principal Accounting Officer) /s/Robert W. Cardy ____________________ Director March 30, 1998 Robert W. Cardy /s/Carlton E. Hughes ____________________ Director March 30, 1998 Carlton E. Hughes /s/Ernest E. Jones ____________________ Director March 30, 1998 Ernest E. Jones ____________________ Director March __, 1998 Herbert Lotman 59 SIGNATURES (Continued) SIGNATURES TITLE DATE - ---------- ----- ---- /s/George V. Lynett ____________________ Director March 30, 1998 George V. Lynett ____________________ Director March __, 1998 Marlin Miller, Jr. /s/Patricia McFate ____________________ Director March 30, 1998 Patricia McFate /s/James M. Seabrook ____________________ Director March 30, 1998 James M. Seabrook /s/Raymond W. Smith ____________________ Director March 30, 1998 Raymond W. Smith ____________________ Director March __, 1998 George Strawbridge, Jr. ____________________ Director March __, 1998 Peter S. Strawbridge ____________________ Director March __, 1998 Judith M. von Seldeneck 60 EXHIBIT INDEX ------------- 10.3 (A)(ii) Amended and Restated Long-Term Incentive Plan (1997) of CoreStates Financial Corp as amended through January 20, 1998. 10.21 Schedule of Named Executive Officers who are parties to a Termination Agreement. 12.1 Computation of Ratio of Earnings from Continuing Operations to Fixed Charges of Continuing Operations -- Consolidated. 12.2 Computation of Ratio of Earnings from Continuing Operations to Fixed Charges of Continuing Operations -- Combined CoreStates (Parent Only) and CoreStates Capital Corp. 21 List of Subsidiaries. 23(a) Consent of Ernst & Young LLP 23(b) Consent of KPMG Peat Marwick LLP 27.1 Financial Data Schedule 27.2 Financial Data Schedule 27.3 Financial Data Schedule 99.1 Undertaking - Form S-8 Registration Statement 99.2 Registrant's December 31, 1997 Form 10-K Financial Sections 99.3 Pages 9 to 10 and 46 through 49 of the Registrant's January 9, 1998 Merger Proxy Statement 61 EX-10.3(A)(II) 2 AMENDED AND RESTATED LONG-TERM INCENTIVE PLAN EXHIBIT 10.3(A)(II) CORESTATES FINANCIAL CORP AMENDED AND RESTATED LONG-TERM INCENTIVE PLAN (1997) 1. PURPOSE. The purpose of the CoreStates Financial Corp Long-Term Incentive Plan (1997), as amended and restated, (the "Plan") is to support the business goals of CoreStates Financial Corp ("CoreStates")and its subsidiaries (together, the "Corporation") by providing incentives and rewards to associate more closely the interests of certain officers and key executives with the interests of CoreStates' stockholders. 2. EFFECTIVE DATE AND DURATION OF THE PLAN. The effective date of the Plan is February 18, 1997, subject to its approval by the stockholders of CoreStates at the annual meeting to be held on April 15, 1997, or any adjournment thereof. The Plan shall remain in effect until all awards under the Plan have been satisfied by the issuance of shares or the payment of cash, but no award shall be granted more than ten years after the effective date of the Plan or the date the Plan is approved by the stockholders of CoreStates, whichever is earlier. 3. ADMINISTRATION. The Plan shall be administered by a committee (the "Committee") of not less than two directors of CoreStates, each of whom qualifies as both a "non-employee director" under Rule 16b-3 of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), and also as an "outside director" as that term is defined under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code") and the rules and regulations thereunder. Without limiting the foregoing, the Committee shall have full and final authority in its discretion to conclusively interpret the provisions of the Plan and to decide all questions of fact arising in its application; to determine the employees to whom awards shall be made under the Plan; to determine the type of award to be made and the amount, size and terms of each such award; to determine the time when awards will be granted; and to make all other determinations necessary or advisable for the administration of the Plan. The Committee may designate persons other than its members to carry out its responsibilities under such conditions or limitations as it may set, other than its authority with regard to benefits granted to employees who are officers or directors of CoreStates for purposes of Section 16 of the Exchange Act. A majority of the Committee shall constitute a quorum, and the action of a majority of members of the Committee present at any meeting at which a quorum is present, or acts unanimously adopted in writing without the holding of a meeting, shall be the acts of the Committee. All actions of the Committee shall be final, conclusive and binding upon any participant. No member of the Committee shall be liable for any action taken or decision made in good faith relating to the Plan or any award thereunder. 4. SHARES SUBJECT TO PLAN. The number of shares for which options or awards may be issued under the Plan during any calendar year shall not exceed in the aggregate 1.5 percent of the issued shares of common stock of CoreStates including treasury shares, determined as of the first day of such calendar year. Any unused portion of this percentage limit in any calendar year shall be carried forward and available for awards in succeeding calendar years. Such shares may be authorized and unissued shares or treasury shares. Except as otherwise provided herein, any shares subject to an option or right which for any reason expires or is terminated unexercised as to such shares shall again be available under the Plan. Furthermore, shares of stock subject to an award under the Plan that is cancelled, expired, forfeited, settled in cash or otherwise terminated without a delivery of shares to the participant, including (i) the number of shares withheld in payment of any exercise or purchase price of an award or taxes relating to awards, and (ii) the number of shares surrendered in payment of any exercise or purchase price of an award or taxes relating to any award, will again be available for awards under the Plan, except that if any such shares could not again be available for awards to a 1 particular participant under any applicable law or regulation, such shares shall be available exclusively for awards to participants who are not subject to such limitation. 5. PARTICIPANTS. Persons eligible to participate shall be limited to those officers and other key employees of the Corporation and its subsidiaries who are in positions in which their decisions, actions and counsel significantly contribute to the success of the Corporation. Directors of the Corporation who are not otherwise officers or employees of the Corporation or its subsidiaries shall not be eligible to participate in the Plan. 6. AWARDS UNDER THE PLAN. Awards under the Plan may be in the form of non-qualified stock options, incentive stock options under Section 422 of the Code, stock appreciation rights, restricted stock, or such other forms as the Committee may in its discretion deem appropriate, including any combination of the above. In each calendar year during any part of which the Plan is in effect, a participant may not be granted awards relating to more than 1,000,000 shares of common stock of CoreStates, subject to adjustment as provided in paragraph 16, under each of paragraphs 7, 8, and 9. Total awards to all participants under paragraph 10 shall not exceed 500,000 shares of common stock of CoreStates during the term of the Plan, subject to adjustment as provided in paragraph 16. 7. STOCK OPTIONS. Options shall be evidenced by stock option agreements in such form and not inconsistent with the Plan as the Committee shall approve from time to time, which agreements shall contain in substance the following terms and conditions: (a) Option Price. The purchase price per share of stock deliverable upon the exercise of an option shall not be less than 100% of the fair market value of the stock on the day the option is granted, as determined by the Committee, but in no event less than the par value of such stock. (b) Exercise of Option. Each stock option agreement shall state the period or periods of time within which the option may be exercised by the optionee, in whole or in part, which shall be such period or periods of time as may be determined by the Committee, provided that the exercise period shall not end later than ten years after the date of the grant of the option. (c) Payment for Shares. Stock purchased pursuant to an option agreement shall be paid for in full in cash, common stock of CoreStates at fair market value, or a combination thereof, in an amount or having a combined value equal to the aggregate purchase price for the shares subject to the option or portion thereof being exercised. (d) Rights Upon Termination of Employment. In the event that an optionee ceases to be an employee of the Corporation for any cause other than death, disability, retirement or involuntary separation without cause, all options granted to such optionee shall lapse forthwith. In the event employment ceases because an optionee dies, retires, or becomes disabled prior to expiration of his option without having fully exercised his option, the optionee (or his successor if he has died) shall have the right to exercise the option during its term within a period of twelve months after the date employment so ceased, to the extent that the option was exercisable on the date employment ceased due to death, disability or retirement, or during such other period and subject to such terms as may be determined by the Committee. In the event employment ceases because an optionee is involuntarily separated without cause prior to expiration of his option without having fully exercised his option, the optionee (or his successor if he dies in the interim) shall have the right to exercise the option during its term within a period of three months after the date employment so ceased, to the extent that the option was exercisable on the date employment ceased due to involuntary separation without cause, or during such other period and subject to such terms as may be determined by the Committee. As used in the Plan, the phrase "involuntary separation without cause" means a termination of employment by the Corporation at will for reasons other than substantial failure to perform duties, material violation of Corporation policies, unethical activities, misconduct, fraud, or illegal act; provided that, an "involuntary separation without 2 cause" does not include a resignation or a voluntary separation from employment, in either case initiated by the optionee. 8. INCENTIVE STOCK OPTIONS. Incentive stock options are options to purchase shares of common stock of CoreStates which are intended to satisfy requirements for tax qualified status under the Code. The shares that may be issued pursuant to incentive stock options under the Plan shall not exceed in the aggregate four million (4,000,000) shares of the common stock of CoreStates, subject to adjustment as provided in paragraph 16. Incentive stock options shall be evidenced by incentive stock option agreements in such form and not inconsistent with the Plan as the Committee shall approve from time to time, which agreements shall contain in substance the following terms and conditions: (a) Option Price. The purchase price per share of stock deliverable upon the exercise of an incentive stock option shall not be less than 100% of the fair market value of the stock on the day the option is granted, as determined by the Committee, but in no event less than the par value of such stock. (b) Exercise of Option. Each incentive stock option agreement shall state the period or periods of time within which the option may be exercised by the optionee, in whole or in part, which shall be such period or periods of time as may be determined by the Committee, provided that the exercise period shall not end later than ten years after the date of the grant of the option. The Committee shall have the power to permit in its discretion an acceleration of the previously determined exercise terms, subject to the terms set forth herein, under such circumstances and upon such terms and conditions as it deems appropriate. (c) Nontransferability. Each incentive stock option agreement shall state that the option is not transferable other than by will or the laws of descent and distribution, and during the lifetime of the optionee is exercisable only by him. (d) Payment for Shares. Stock purchased pursuant to an incentive stock option shall be paid for in full in cash, common stock of CoreStates at fair market value, or a combination thereof, in an amount or having a combined value equal to the aggregate purchase price for the shares subject to the option or portion thereof being exercised. (e) Rights Upon Termination of Employment. In the event that an optionee ceases to be an employee of the Corporation for any cause other than death, disability, retirement or involuntary separation without cause, all options granted to such optionee shall lapse forthwith. In the event employment ceases because an optionee dies, retires, or becomes disabled prior to termination of his option without having fully exercised his option, the optionee (or his successor if he has died) shall have the right to exercise the option during its term within a period of twelve months after the date employment so ceased, to the extent that the option was exercisable on the date employment ceased due to death, disability or retirement, or during such other period and subject to such terms as may be determined by the Committee. In the event employment ceases because an optionee is involuntarily separated without cause prior to expiration of his option, the optionee (or his successor if he dies in the interim) shall have the right to exercise the option during its term within a period of three months after the date employment so ceased, to the extent that the option was exercisable on the date employment ceased due to involuntary separation without cause, or during such other period and subject to such other terms as may be determined by the Committee. (f) Individual Limitations. (i) Notwithstanding anything herein to the contrary, to the extent that the aggregate fair market value (determined as of the time the option is granted) of stock for which any employee is granted incentive stock options first exercisable during any calendar year (under all such plans of the Corporation) shall exceed $100,000 (such excess to be determined by taking options into account in the order in which granted), such 3 options shall be treated as options which are not incentive stock options. (ii) Notwithstanding anything herein to the contrary, no incentive stock option shall be granted to any individual if at the time the option is to be granted the individual owns stock possessing more than ten percent of the total combined voting power of all classes of stock of the employer corporation or of its parent or subsidiary corporation unless at the time such option is granted the option price is at least 110 percent of the fair market value of the stock subject to option and such option by its terms is not exercisable after the expiration of five years from the date such option is granted. (g) Other terms. Each incentive stock option agreement shall contain such other terms, conditions and provisions as the Committee may determine to be necessary or desirable in order to qualify such option as a tax-favored option within the meaning of Section 422 of the Code, or regulation thereunder. Subject to the limitations of paragraph 17, and without limiting any other provisions hereof, the Committee shall have the power without further approval to amend the terms of the Plan or any awards or agreements thereunder for such purpose. 9. STOCK APPRECIATION RIGHTS. Awards may be made from time to time in the form of stock appreciation rights. Stock appreciation rights shall be evidenced by stock appreciation rights agreements in such form and not inconsistent with the Plan as the Committee shall approve from time to time, which agreements shall contain in substance the following terms and conditions: (a) Award. A stock appreciation right shall entitle the grantee, subject to such terms and conditions determined by the Committee, to receive upon exercise thereof all or a portion of the excess of (i) the fair market value of a specified number of shares of common stock of CoreStates at the time of exercise, as determined by the Committee, over (ii) a specified price which shall not be less than 100 percent of the fair market value of the stock at the time the appreciation right was granted, or, if connected with a previously issued stock option, not less than 100 percent of the fair market value of the stock at the time such option was granted. A stock appreciation right may be granted in connection with all or any portion of a previously or contemporaneously granted stock option or not in connection with a stock option. (b) Term. Stock appreciation rights shall be granted for a period of not more than ten years, and shall be exercisable in whole or in part, at such time or times and subject to such other terms and conditions as shall be prescribed by the Committee, subject to the following: (i) In the event that a grantee ceases to be an employee of the Corporation for any cause other than death, disability, retirement or involuntary separation without cause, all stock appreciation rights granted to such grantee shall lapse forthwith. In the event employment ceases because a grantee dies, becomes disabled or retires without having fully exercised his stock appreciation rights, the grantee (or his successor if he has died) shall have the right to exercise the stock appreciation rights during their term within a period of twelve months after the date employment ceased due to death, disability or retirement to the extent that the right was exercisable on the date employment so ceased, or during such other period and subject to such terms as may be determined by the Committee. In the event employment ceases because a grantee is involuntarily separated without cause prior to expiration of his award, the grantee (or his successor if he dies in the interim) shall have the right to exercise the stock appreciation rights during their term within a period of three months after the date employment so ceased, to the extent that the stock appreciation rights were exercisable on the date employment ceased due to involuntary separation without cause, or during such other period and subject to such other terms as may be determined by the Committee. The Committee in its sole discretion may reserve the right to accelerate previously determined exercise terms, within the terms of the Plan, under such circumstances and upon such terms and conditions 4 as it deems appropriate; and (ii) The Committee shall establish such additional terms and conditions without limiting the foregoing, as it determines to be necessary or desirable to avoid "insider-trading" liability in connection with a stock appreciation right under Section 16(b) of the Exchange Act. (c) Payment. Upon exercise of a stock appreciation right, payment shall be made in cash or common stock of CoreStates, as determined by the Committee. (d) Incentive Stock Options. Stock appreciation rights may be granted in connection with an incentive stock option, but shall not be granted in a manner or form which will result in the failure of such option to qualify as an incentive stock option under Section 422 of the Code, or regulation thereunder. Stock appreciation rights may not be granted, in connection with a grant of incentive stock options, during the term of the incentive stock option. 10. RESTRICTED STOCK AWARDS. Restricted stock awards under the Plan shall be in the form of shares of common stock of CoreStates, restricted as to transfer and subject to forfeiture, and shall be evidenced by restricted stock agreements in such form and not inconsistent with the Plan as the Committee shall approve from time to time, which agreements shall contain in substance the following terms and conditions: (a) Restriction Period. Shares awarded pursuant to the Plan shall be subject to such terms, conditions, and restrictions, including without limitation prohibitions against transfer, substantial risks of forfeiture and attainment of performance objectives, and for such period or periods of time as shall be determined by the Committee. The Committee shall have the power, in its discretion, to permit an acceleration of the expiration of the applicable restriction period with respect to any part or all of the shares awarded to a participant. (b) Restriction Upon Transfer. Shares awarded, and the right to vote such shares and to receive dividends thereon, may not be sold, assigned, transferred, exchanged, pledged, hypothecated, or otherwise encumbered, except as herein provided, during the restriction period applicable to such shares. Notwithstanding the foregoing, and except as otherwise provided in the Plan, the participant shall have all the other rights of a stockholder including but not limited to, the right to receive dividends and the right to vote such shares. (c) Certificates. Each certificate issued in respect of shares awarded to a participant shall be deposited with CoreStates Bank, N.A., or its designee, and shall bear the following legend: "This certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture and restrictions against transfer) contained in the CoreStates Financial Corp Long-Term Incentive Plan and an Agreement entered into between the registered owner and CoreStates Financial Corp. Release from such terms and conditions shall obtain only in accordance with the provisions of the Plan and Agreement, a copy of each of which is on file in the office of the Secretary of CoreStates Financial Corp." (d) Lapse of Restrictions. Each restricted stock agreement shall specify the terms and conditions upon which any restrictions upon shares awarded under the Plan shall lapse, as determined by the Committee. Upon the lapse of such restrictions, certificate(s) free of any restrictive legend shall be issued to the participant or his legal representative. (e) Termination Prior to Lapse of Restrictions. In the event of a particpant's termination of employment prior to the lapse of restrictions applicable to any shares awarded to such participant, all shares as to which there still remains unlapsed 5 restrictions shall be forfeited by such participant to CoreStates Financial Corp without payment of any consideration by CoreStates Financial Corp, and neither the participant nor any successors, heirs, assigns or personal representatives of such participant shall thereafter have any further rights or interest in such shares or certificates. 11. GENERAL RESTRICTIONS. Each award under the Plan shall be subject to the requirement that, if at any time the Committee shall determine that (i) the listing, registration or qualification of the shares of common stock subject or related thereto upon any securities exchange or under any state or federal law, or (ii) the consent or approval of any government regulatory body, or (iii) an agreement by the recipient of an award with respect to the disposition of shares of common stock, is necessary or desirable as a condition thereunder, such award may not be consummated in whole or in part unless such listing registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Committee. 12. RIGHTS TO TERMINATE EMPLOYMENT. Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any participant the right to continue in the employment of the Corporation or affect any right which the Corporation may have to terminate the employment of such participant. 13. WITHHOLDING. Whenever the Corporation proposes or is required to issue or transfer shares of common stock under the Plan, the Corporation shall have the right to require the recipient to remit to the Corporation an amount sufficient to satisfy any federal, state and/or local withholding tax requirements prior to the delivery of any certificate for such shares or the Corporation may withhold from the shares to be delivered shares sufficient to satisfy all or a portion of such withholding tax requirements. Whenever under the Plan payments are to be made in cash, such payments shall be net of an amount sufficient to satisfy any federal, state and/or local withholding tax requirements. 14. NON-ASSIGNABILITY. No benefit under the Plan shall be assignable or transferable by the participant other than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code, or Title I of the Employee Retirement Income Security Act, or the rules thereunder. During the life of the participant, such award shall be exercisable only by such person or by such person's guardian or legal representative. 15. NON-UNIFORM DETERMINATION. The Committee's determinations under the Plan (including without limitation determinations of the person to receive awards, the form, amount and timing of such awards, the terms and provisions of such awards, the agreements evidencing same, and the establishment of values and performance targets) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, awards under the Plan, whether or not such persons are similarly situated. 16. ADJUSTMENTS. In the event that any dividend or other distribution (whether in the form of cash, stock, or other property), recapitalization, forward or reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, share exchange, liquidation, dissolution or other similar corporate transaction or event affects the stock such that an adjustment is determined by the Committee to be appropriate under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and kind of shares of stock which may be delivered in connection with awards granted thereafter, (ii) the number and kind of shares of stock by which annual per- person award limitations are measured under paragraph 6 hereof, (iii) the number and kind of shares of stock subject to or deliverable in respect of outstanding awards and (iv) the exercise price, grant price or purchase price relating to any award and/or make any provision for payment of cash or other property in respect of any outstanding award. 17. AMENDMENT OR TERMINATION OF THE PLAN. The Committee or the board of directors of CoreStates (the "Board") may at any time terminate the Plan or any part thereof and may 6 from time to time amend the Plan as it may deem advisable. Any such action of the Board or the Committee may be taken without the approval of CoreStates' shareholders, but only to the extent that such shareholder approval is not required by applicable law or regulation, including specifically Rule 16b-3, or the Rules of any stock exchange on which the Common Stock is listed. However, the Board or the Committee may not increase the maximum number of shares which may be issued pursuant to paragraph 8 of the Plan without shareholder approval. The termination or amendment of the Plan shall not, without the consent of the participant, adversely affect such participant's rights under an award previously granted. 18. CHANGE OF CONTROL. (a) If there is a Change of Control, as defined below, of CoreStates, all outstanding options and stock appreciation rights shall become exercisable immediately prior to the consummation of the Change of Control. (b) "Change of Control" of CoreStates shall be deemed to have occurred upon the happening of any of the following events: (i) the acquisition, other than from CoreStates, by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either the then outstanding shares of common stock of CoreStates or the combined voting power of the then outstanding voting securities of CoreStates entitled to vote generally in the election of directors, but excluding, for this purpose, any such acquisition by CoreStates or any of its subsidiaries, or any employee benefit plan (or related trust) of the Corporation, or any corporation with respect to which, following such acquisition, more than 50% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the common stock and voting securities of CoreStates immediately prior to such acquisition in substantially the same proportion as their ownership, immediately prior to such acquisition, of the then outstanding shares of common stock of CoreStates or the combined voting power of the then outstanding voting securities of CoreStates entitled to vote generally in the election of directors, as the case may be; (ii) individuals who, as of February 18, 1997, constitute the board of directors of CoreStates (as of such date the "Incumbent Board") cease for any reason to constitute at least a majority of the board, provided that any individual becoming a director subsequent to such date whose election, or nomination for election by CoreStates' shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of CoreStates (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act); or (iii) approval by the stockholders of CoreStates of a reorganization, merger or consolidation of CoreStates, in each case, with respect to which all or substantially all of the individuals and entities who were the respective beneficial owners of the common stock and voting securities of CoreStates immediately prior to such reorganization, merger or consolidation do not, following such reorganization, merger or consolidation, beneficially own, directly or indirectly, more then 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such reorganization, merger or consolidation, or of a complete liquidation or dissolution of CoreStates or of the sale or other disposition of all or substantially all of the assets of CoreStates. 7 19. EFFECT ON OTHER PLANS. Participation in the Plan shall not affect an employee's eligibility to participate in any other benefit or incentive plan of the Corporation and any awards made pursuant to the Plan shall not be used in determining the benefits provided under any other plan of the Corporation unless specifically provided. 20. GOVERNING LAW. To the extent that federal laws do not otherwise control, the Plan shall be governed by the law of the Commonwealth of Pennsylvania. 21. AMENDMENT RELATED TO FIRST UNION TRANSACTION. With regard to stock option grants made during the period of the pendency of the merger with First Union Corporation ("First Union Merger") (i.e., from November 17, 1997 through the Effective Date of the Merger), the Plan is amended to delete section 18, being that section of the Plan which would otherwise provide for the acceleration of vesting upon a change in control; provided, however, that this amendment shall be effective only to the extent that the First Union Merger remains pending or is consummated. 8 EX-10.21 3 SCHEDULE OF NAMED EXECUTIVE OFFICERS EXHIBIT 10.21 Schedule of Named Executive Officers and Executive Officers who are Parties to a - -------------------------------------------------------------------------------- Termination Agreement - --------------------- Charles A. Coltman, III Vice Chairman Charles P. Connolly Chief Risk Policy Officer Terrence A. Larsen Chairman, Chief Executive Officer & President Carol A. Leisenring Executive Vice President Albert W. Mandia Chief Financial Officer Paul W. McGloin Executive Vice President & Chief Risk Officer P. Sue Perotty Executive Vice President EX-12.1 4 COMPUTATION RATIO OF EARNINGS FROM CONT OPERATIONS CORESTATES FINANCIAL CORP AND SUBSIDIARIES EXHIBIT 12.1 COMPUTATION OF RATIO OF EARNINGS FROM CONTINUING OPERATIONS TO FIXED CHARGES OF CONTINUING OPERATIONS CONSOLIDATED Twelve Months Ended December 31, 1997 ------------------------------------- 1. Income from continuing operations before extraordinary items and income taxes...................................... $1,082,861 ========== 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............ $ 458,977 B. Interest on deposits..................................... 884,364 ---------- C. Total fixed charges (line 2A + line 2B).................. $1,343,341 ========== 3. Income from continuing operations before extraordinary items and income taxes, plus total fixed charges of continuing operations: A. Excluding interest on deposits (line 1 + line 2A)........ $1,541,838 ========== B. Including interest on deposits (line 1 + line 2C)........ $2,426,202 ========== 4. Ratio of earnings (as defined) to fixed charges: A. Excluding interest on deposits (line 3A/line 2A)......... 3.36% ==== B. Including interest on deposits (line 3B/line 2C)......... 1.81% ==== EX-12.2 5 COMPUTATION RATIO OF EARNINGS FROM CONT OPERATIONS CORESTATES FINANCIAL CORP AND SUBSIDIARIES EXHIBIT 12.2 COMPUTATION OF RATIO OF EARNINGS FROM CONTINUING OPERATIONS TO FIXED CHARGES OF CONTINUING OPERATIONS COMBINED CORESTATES (PARENT ONLY) AND CORESTATES CAPITAL CORPORATION Twelve Months Ended December 31, 1997 ------------------------------------- 1. Income before income taxes and equity in undistributed income of subsidiaries...................................... $ 691,924 2. Fixed charges - interest expense, amortization of debt issuance costs and one-third of rental expenses, net of income from subleases....................................... 218,404 --------- 3. Income before taxes, equity in undistributed income of subsidiaries, plus fixed charges............................ $ 910,328 ========= 4. Ratio of earnings (as defined) to fixed charges (line 3/line2).............................................. 4.17% ==== EX-21 6 LIST OF SUBSIDIARIES Exhibit 21 List of Subsidiaries of CoreStates Financial Corp as of December 31, 1997
* Bancorps' International Trading Company New Jersey 23.33% Congress Financial Corporation California 97% Burdale Financial Limited England 80% Congress Credit Corporation New York 100% Congress Financial Corporation (Canada) Ontario 100% Congress Financial Corporation (Central) Illinois 100% Congress Financial Corporation (Florida) Florida 100% Congress Financial Corporation (New England) Massachusetts 100% Congress Financial Corporation (Northwest) Oregon 100% Congress Financial Corporation (Southern) Georgia 100% Congress Financial Corporation (Southwest) Texas 100% Congress Financial Corporation (Western) California 100% Laundry, Inc. California 100% Congress Financial Investment Corporation Delaware 100% Congress Talcott Corporation Pennsylvania 100% Congress Talcott Corporation (Western) California 100% CoreStates Bank of Delaware, N.A. U.S.A. 100% CoreStates Bank, N.A. U.S.A. 100% Badeal, Inc. New Jersey 100% North Towne Village, Inc. Pennsylvania 100% Barnegat Hills Corp. New Jersey 50% Berks Title Company Pennsylvania 100% BHCC Holdings, Inc. Pennsylvania 100% Blazing Star Realty Corporation New Jersey 100% BOMAST Corporation New Jersey 100% Callowhill Consumer Discount Company Pennsylvania 100% Camac Street Properties, Inc. Pennsylvania 100% *voting control
1 Exhibit 21 List of Subsidiaries of CoreStates Financial Corp as of December 31, 1997 C.F. Holdings, Inc. Pennsylvania 100% C.H.N.B., Inc. New Jersey 100% Charlestown Road Properties, Inc. Pennsylvania 100% Citizens Investments of Delaware, Inc. Delaware 100% CoreStates Bank International U.S.A. 100% Philadelphia International Finance Co - Hong Kong Limited Hong Kong 100% Philadelphia National LTDA Brazil 100% CoreStates Capital I Delaware 100% CoreStates Capital II Delaware 100% CoreStates Capital III Delaware 100% CoreStates Dealer Services Corp Pennsylvania 100% CoreStates Enterprise Capital, Inc. Pennsylvania 100% CoreStates Investment Advisers, Inc. Delaware 100% CoreStates Leasing, Inc. Pennsylvania 100% CoreStates Mortgage Services Corporation Pennsylvania 100% Delaware Trust Capital Management, Inc. Delaware 100% Griffin Corporate Services, Inc. Delaware 100% Dickinson Street, Inc. Pennsylvania 100% DMR Realty Corp Pennsylvania 100% Eagle 1851, Inc. New Jersey 50% 1808 Corp. Pennsylvania 100% Fairview Properties, Inc. Pennsylvania 100% F.C. Properties, Inc. Delaware 100% Fifth and Market Corporation Pennsylvania 100% First Leasing Company New Jersey 100% First Penco Realty, Inc. Pennsylvania 100% First Pennsylvania Financial Services, Inc. Delaware 100% Five Hundred Ridgecreek Properties, Inc. Georgia 50% 4639 Umbria Street, Inc. Pennsylvania 100% 441 North 5th Street Properties, Inc. Pennsylvania 100% Four Hundred Ridgefield Properties, Inc. Georgia 50% Hopewell Holdings, Inc. New Jersey 100% J.V. Del Ran, Inc. New Jersey 100% KKM, Inc. Pennsylvania 100%
2 Exhibit 21 List of Subsidiaries of CoreStates Financial Corp as of December 31, 1997 Locust Holdings, Inc. Pennsylvania 100% WCC Holdings, Inc. Pennsylvania 100% Lin Park Properties, Inc. New Jersey 100% Mercer Development Co., Inc. New Jersey 100% Meridian Campus Developer, Inc. Pennsylvania 100% Meridian Capital Markets, Inc. Pennsylvania 100% Meridian Community Partnership Development Corporation Pennsylvania 100% Limited Holdings Corporation Pennsylvania 100% Meridian Mortgage Corporation Pennsylvania 100% Devon Square Holdings, Inc. Pennsylvania 100% Garden State Assets, Inc. New Jersey 100% Meridian Properties, Inc. Pennsylvania 100% Morris Avenue Corporation New Jersey 50% NAZ Market, Inc. Pennsylvania 100% Ocean Pointe Properties, Inc. New Jersey 100% One Hundred Avondale Estates Properties, Inc. Georgia 50% Philadelphia International Investment Corporation U.S.A. 100% Corporacion Financiera del Norte, S.A. Colombia less than 1% CVCC Remnaco Inc. Canada 25M non-voting preferred shs Internationale Bank fur Aussenhandel, A.G. Austria 10% Joh. Berenberg, Gossler & Co. Germany 15% New World Development Corp., Ltd. Bahamas 100% New World Group Holdings Ltd. Canada 42.6% Philadelphia National Limited England 100% Philadelphia International Equities, Inc. Delaware 100% Aberdeen Asset Management PLC United Kingdom 10.26% Accel Group LLC Czech Republic 17.25% Banco Internacional de Panama, S.A. Panama 20% Banco Mello, S.A. Portugal 1.00%
3 Exhibit 21 List of Subsidiaries of CoreStates Financial Corp as of December 31, 1997 CashFlex, Inc. Canada 100% CoreStates Funding Limited Grand Cayman 100% CoreStates Fund Management (Ireland) Ltd. Ireland 100% CoreFund Umbrella Cash Fund, plc Ireland 100% Crosby Financial Holdings, Limited British Virgin Islands 8.83% CSB Information Services (Pte) Ltd. Singapore 100% Empresa Minera De Mantos Blancos Chile 1.1% Established Holdings Limited United Kingdom 100% Hana Bank Korea 0.5% The Heritable and General Investment Bank Limited United Kingdom 69.51% Beeson Gregory Holdings Limited United Kingdom 10.2% Medical Equipment Credit (Pte) Ltd. Singapore 20.0% Multi-Credit Corporation of Thailand, PCL Thailand 7.5% Multi-Risk Consultants (Thailand) Ltd. Thailand 10% SCM China Growth Fund LDC Cayman Islands 8.88% Sentinel/PIIC Realty Advisors LLC Delaware 15% Surinvest International Limited Grand Cayman 13.76% TI Remnaco, Inc. Canada 39.8% Vectodivisas Casa de Cambio S.A. de C.V. Mexico 20% Philadelphia National Corporation Pennsylvania 100% Pinnhahn, Inc. Pennsylvania 100% PNB Leasing Corporation Delaware 100% Property Holdings of N.J., Inc. New Jersey 100% QuestPoint Holdings, Inc. Delaware 100% Centillion Holdings, Inc. Delaware 100% Nationwide Remittance Centers, Inc. Delaware 100%
4 Exhibit 21 List of Subsidiaries of CoreStates Financial Corp as of December 31, 1997 QuestPoint Document Processing, Inc. Delaware 100% QuestPoint G. P., Inc. Delaware 100% QuestPoint L. P., Inc. Pennsylvania 100% QuestPoint, L.P. Delaware 100% Centillion, L.P. Delaware 100% QuestPoint Check Services, L.P. Delaware 100% QuestPoint Remittance Services, L.P. Delaware 100% SynapQuest, L.P. Delaware 100% Ridingbrook, Inc. Pennsylvania 100% Seven Hundred Town Lake Properties, Inc Georgia 54% 721 Sansom Street Corp. Pennsylvania 100% South Fourth Street, Inc. Pennsylvania 100% Sungate Boulevard Corp. New Jersey 50% Swedesboro Properties, Inc. Pennsylvania 100% Tall Oaks Corp. New Jersey 100% TBC Corporation, Inc. Pennsylvania 100% TGTG Corporation New York 100% Three Hundred Paces Mill Properties, Inc. Georgia 37% 2009 Chestnut Corp. Pennsylvania 100% 2021 Properties, Inc. New Jersey 100% Two Hundred Henderson Place Properties, Inc. Georgia 37% Two APM Plaza, Inc. Delaware 89% United Armored Service, Inc. New York 100% Viking Terrace Corp. New Jersey 100% Washington Street Properties, Inc. Pennsylvania 100% Westpark Walk, Inc. Georgia 50% CoreStates Capital Corp Pennsylvania 100% CoreStates Community Development Corporation, Inc. Pennsylvania 51% Bd maj Partnership Homes Pennsylvania 1/2 Bd
5 Exhibit 21 List of Subsidiaries of CoreStates Financial Corp as of December 31, 1997 CoreStates Delaware, N.A. U.S.A. 100% CoreStates Export Trading Company Pennsylvania 100% CoreStates Financial Corp (DE) Delaware 100% CoreStates Holdings, Inc. Delaware 100% Electronic Payment Services, Inc. Delaware 20% First Commercial Bank of Philadelphia Pennsylvania 24.9% MAS Inco Corporation Delaware 100% Money Access Service, Delaware 100% Inc. BUYPASS Corporation Georgia 100% BUYPASS Inco Corporation Delaware 100% United Bancshares, Inc. Pennsylvania 6.23% United Bank of Philadelphia Pennsylvania 100% CoreStates Services Corp. Pennsylvania 100% CoreStates Securities Corp Pennsylvania 100% First Pennsylvania Insurance Services, Inc. Virginia 100% First Pennsylvania International Capital Corporation Delaware 100% Home Investors Mortgage Co. New Jersey 100% IBI Capital Corp. Pennsylvania 100% Independence Resources, Inc. Pennsylvania 100% McGlinn Capital Management, Inc. Pennsylvania 100% Meridian Acceptance Corporation New Jersey 100% Meridian Asset Acceptance Corporation Delaware 100% Meridian Asset Management, Inc. Pennsylvania 100% Meridian Investment Company Pennsylvania 100% Meridian Trust Company Pennsylvania 100% Meridian Trust Company of California California 100%
6 Exhibit 21 List of Subsidiaries of CoreStates Financial Corp as of December 31, 1997 Meridian Capital Corp. Pennsylvania 100% Meridian Commercial Finance Corporation Pennsylvania 100% Meridian Funding Corp. Pennsylvania 100% Meridian Securities, Inc. Pennsylvania 100% PENNAMCO, Inc. Delaware 100% Pennco Life Insurance Company Arizona 100% Princeton Life Insurance Company Pennsylvania 100% Signal Financial Corporation Pennsylvania 100% Grabuck Agency, Inc. Pennsylvania 100% Signal Finance Corporation Pennsylvania 100% Signal Finance of Maryland, Inc. Maryland 100% Signal Management Corporation Delaware 100% Spring Ridge Holdings, Inc. Pennsylvania 100%
7 EX-23.(A) 7 CONSENT OF ERNST & YOUNG LLP Exhibit 23(a) Consent of Independent Auditors We consent to the incorporation by reference in the following registration statements of our report dated January 20, 1998, with respect to the consolidated financial statements of CoreStates Financial Corp for the year ended December 31, 1997 incorporated by reference in this 1997 Annual Report (Form 10-K): (a) The Registration Statement (Form S-8, No. 33-5874), in Post-Effective Amendment No. 1 to the Registration Statement (Form S-8, No. 2-91176), the Registration Statement (Form S-8, 33-28808) and in the related prospectuses, each pertaining to the CoreStates Financial Corp Long-Term Incentive Plan, (b) The Registration Statement (Form S-8, No. 33-32934) and prospectus relating to shares of the Corporation's Common Stock issuable under the CoreStates Employee Stock Ownership and Savings Plan, (c) The Registration Statement (Form S-3, No. 33-50324) pertaining to the CoreStates Financial Corp. 1992 Long-Term Incentive Plan, (d) The Registration Statement (Form S-3, No. 33-57034) and prospectus and prospectus supplement pertaining to $1,000,000,000 in aggregate amount of Debt Securities issuable by CoreStates Capital Corp and the related guarantees of the Corporation, and Preferred Stock, Depository Shares, Common Stock and Capital Securities, issuable by the Corporation, (e) The Registration Statement (Form S-3, No. 33-54049) and prospectus and prospectus supplement pertaining to $1,000,000,000 in aggregate amount of Debt Securities and warrants issuable by CoreStates Capital Corp and the related guarantees of the Corporation and Preferred Stock, Depository Shares and Common Stock issuable by the Corporation, (f) The Registration Statement (Form S-4, as amended by Form S-8, No. 33-48422) and prospectus relating to shares of the Corporation's Common Stock issuable upon the exercise of stock options, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of First Peoples Corporation, 1 (g) The Registration Statement (Form S-4, as amended by Form S-8, No. 33-51429) and prospectus relating to shares of the Corporation's Common Stock issuable upon the exercise of stock options, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of Constellation Bancorp, (h) The Registration Statement (Form S-4, as amended by Form S-8, No. 33-53539) and prospectus relating to shares of the Corporation's Common Stock issuable upon the exercise of stock options, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of Independence Bancorp, Inc., (i) The Registration Statement (Form S-4, as amended by Form S-8, No. 33-55505) and prospectus relating to shares of the Corporation's Common Stock issuable upon the exercise of stock options, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of Germantown Savings Bank, (j) The Registration Statement (Form S-4, as amended by Form S-8, No. 33-300067) and prospectus relating to shares of the Corporation's Common Stock issuable upon the exercise of stock options, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of Meridian Bancorp, Inc., (k) The Registration Statements (Form S-3, Nos. 33-54049 and 333-2297) and prospectus and prospectus supplement pertaining to $1,750,000,000 in aggregate amount of Debt Securities issuable by CoreStates Capital Corp and the related guarantees of the Corporation and Preferred Stock, Depository Shares and Common Stock issuable by the Corporation, (l) The Registration Statement (Form S-3, No. 033-40717) and prospectus relating to shares of the Corporation's Common Stock issuable under the Dividend Reinvestment Plan, (m) The Registration Statement (Form S-8, No. 333-16569) and prospectus relating to shares of the Corporation's Common Stock issuable under the QuestPoint Savings Plan, (n) The Registration Statement (Form S-8, No. 333-41083) and prospectus relating to shares of the Corporation's Amended and Restated Long-Term Incentive Plan (1997), (o) The Registration Statement (Form S-8, No. 33-27725) and prospectus relating to shares of the Corporation's Amended and Restated Stock Compensation Plan for Non-Employee Directors (1997). /s/ Ernst & Young LLP Philadelphia, Pennsylvania March 27, 1998 2 EX-23.(B) 8 CONSENT OF KPMG PEAT MARWICK LLP Exhibit 23(b) Consent of Certified Public Accountants Board of Directors CoreStates Financial Corp We consent to the inclusion of those reports described below under the caption Reports, in the December 31, 1997 Form 10-K in the following registration statements of CoreStates Financial Corp: (a) The Registration Statement (Form S-8, No. 33-5874), in Post-Effective Amendment No. 1 to the Registration Statement (Form S-8, No. 2-91176), the Registration Statement (Form S-8, No. 33-28808) and in the related prospectuses, each pertaining to the CoreStates Financial Corp Long-Term Incentive Plan, (b) The Registration Statement (Form S-8, No. 33-32934) and prospectus relating to shares of the Corporation's Common Stock issuable under the CoreStates Employee Stock Ownership and Savings Plan, (c) The Registration Statement (Form S-3, No. 33-50324) pertaining to the CoreStates Financial Corp 1992 Long-Term Incentive Plan, (d) The Registration Statement (Form S-3, No. 33-57034) and prospectus and prospectus supplement pertaining to $1,000,000,000 in aggregate amount of Debt Securities issuable by CoreStates Capital Corp and the related guarantees of the Corporation, and Preferred Stock, Depository Shares, Common Stock, and Capital Securities, issuable by the Corporation, (e) The Registration Statement (Form S-3, No. 33-54049) and prospectus and prospectus supplement pertaining to $1,000,000,000 in aggregate amount of Debt Securities and warrants issuable by CoreStates Capital Corp and the related guarantees of the Corporation and Preferred Stock, Depository Shares and Common Stock issuable by the Corporation, (f) The Registration Statement (Form S-4, as amended by Form S-8, No. 33-48422) and prospectus relating to shares of the Corporation's Common Stock issuable upon the exercise of stock options, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of First Peoples Corporation, (g) The Registration Statement (Form S-4, as amended by Form S-8, No. 33-51429) and prospectus relating to shares of the Corporation's Common Stock issuable upon the exercise of stock options, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of Constellation Bancorp, (h) The Registration Statement (Form S-4, as amended by Form S-8, No. 33- 53539) and prospectus relating to shares of the Corporation's Common Stock issuable upon the exercise of stock options, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of Independence Bancorp, Inc., 1 (i) The Registration Statement (Form S-4, as amended by Form S-8, No. 33-55505) and prospectus relating to shares of the Corporation's Common Stock issuable upon the exercise of stock options, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of Germantown Savings Bank, (j) The Registration Statement (Form S-4, as amended by Form S-8, No. 33- 300067) and prospectus relating to shares of the Corporation's Common Stock issuable upon the exercise of stock options, the obligations in respect to which were assumed by the Corporation in connection with the acquisition of Meridian Bancorp, Inc., (k) The Registration Statements (Form S-3, Nos. 33-54049 and 333-2297) and prospectus and prospectus supplement pertaining to $1,750,000,000 in aggregate amount of Debt Securities issuable by CoreStates Capital Corp and the related guarantees of the Corporation and Preferred Stock, Depository Shares and Common Stock issuable by the Corporation, (l) The Registration Statement (Form S-3, No. 033-40717) and prospectus relating to shares of the Corporation's Common Stock issuable under the Dividend Reinvestment Plan, (m) The Registration Statement (Form S-8, No. 333-16569) and prospectus relating to shares of the Corporation's Common Stock issuable under the QuestPoint Savings Plan, (n) The Registration Statement (Form S-8, No. 333-41083) and prospectus relating to shares of the Corporation's Amended and Restated Long-Term Incentive Plan (1997), (o) The Registration Statement (Form S-8, No. 33-27725) and prospectus relating to shares of the Corporation's Amended and Restated Stock Compensation Plan for Non-Employee Directors (1997). Reports ------- Our report dated January 17, 1996, except as to Note 2, which is as of February 23, 1996, with respect to the consolidated balance sheet of Meridian Bancorp, Inc. and subsidiaries as of December 31, 1995, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the year ended December 31, 1995. Our report dated January 16, 1996, except as to Note 20, which is as of February 23, 1996, with respect to the consolidated balance sheet of United Counties Bancorporation and subsidiaries as of December 31, 1995, and the related consolidated statements of income, changes in stockholders' equity and cash flows, for the year ended December 31, 1995. /s/ KPMG Peat Marwick LLP Philadelphia, Pennsylvania March 27, 1998 2 EX-27.1 9 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from the CoreStates Financial Corp consolidated balance sheet as of December 31, 1997, December 31, 1996 (restated), and December 31, 1995 (restated), 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 twelve months ended December 31, 1997, December 31, 1996 (restated), and December 31, 1995 (restated) and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS 12-MOS 12-MOS DEC-31-1997 DEC-31-1996 DEC-31-1995 JAN-01-1997 JAN-01-1996 JAN-01-1995 DEC-31-1997 DEC-31-1996 DEC-31-1995 3,829,893 3,462,287 3,662,143 3,122,444 2,443,154 1,909,260 41,207 509,694 719,937 495,472 122,317 147,218 2,109,254 2,394,166 2,572,315 1,351,137 1,689,058 3,059,917 1,347,819 1,692,243 3,075,964 34,813,886 32,331,297 31,175,378 634,432 710,327 670,265 48,460,965 45,494,194 45,997,242 34,187,890 33,727,156 33,963,820 4,323,319 2,633,157 3,677,013 1,616,624 1,661,162 1,719,697 4,454,236 3,049,297 2,212,099 0 0 0 0 0 0 223,599 223,599 230,231 3,013,833 3,472,095 3,645,334 48,460,965 45,494,194 45,997,242 3,015,914 2,871,233 2,932,655 220,880 277,766 380,156 192,521 149,205 162,269 3,429,315 3,298,204 3,475,080 884,364 841,780 941,047 1,313,447 1,156,720 1,308,155 2,115,868 2,141,484 2,166,925 263,000 228,767 144,002 21,111 59,512 31,475 1,695,777 1,776,828 1,885,528 1,082,861 1,034,964 1,019,617 813,279 649,144 655,176 0 0 0 0 0 0 813,279 649,144 655,176 4.00 2.97 2.95 3.96 2.94 2.92 5.22 5.53 5.47 253,909 220,770 223,602 94,302 113,268 88,671 10 18 7,202 0 0 0 710,327 670,265 681,124 321,196 281,690 240,087 84,301 92,985 85,226 634,432 710,327 670,265 590,432 675,327 645,265 44,000 35,000 25,000 0 0 0
EX-27.2 10 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from the CoreStates Financial Corp consolidated balance sheet as of September 30, 1997 (restated), June 30, 1997 (restated), and March 31, 1997 (restated) 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 year-to-date ended September 30, 1997 (restated), June 30, 1997 (restated), and March 31, 1997 (restated) and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS 6-MOS 3-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 SEP-30-1997 JUN-30-1997 MAR-31-1997 3,166,454 3,121,012 2,664,641 3,043,723 2,767,001 2,236,950 138,699 333,896 550,098 326,717 301,851 201,324 2,211,382 2,113,698 2,219,564 1,413,351 1,606,059 1,616,147 1,417,351 1,608,859 1,615,926 34,514,233 33,893,494 33,091,816 679,415 691,380 704,060 47,590,609 46,846,692 45,064,613 33,740,682 34,212,681 33,070,611 4,239,227 3,348,031 2,848,999 1,924,257 1,627,033 1,477,506 3,784,179 3,695,230 3,506,971 0 0 0 0 0 0 223,599 223,599 223,599 2,889,496 2,954,003 3,219,074 47,590,609 46,846,692 45,064,613 2,237,313 1,471,522 721,081 170,070 114,230 57,054 133,338 81,935 39,194 2,540,721 1,667,687 817,329 646,273 416,982 203,879 949,771 607,231 291,225 1,590,950 1,060,456 526,104 143,000 93,000 43,000 14,857 9,834 4,819 1,204,700 794,878 391,904 920,102 613,953 306,211 596,653 397,839 198,113 0 0 0 0 0 0 596,653 397,839 198,113 2.91 1.91 0.94 2.88 1.90 0.93 5.32 5.42 5.47 245,300 263,900 233,900 110,000 110,000 99,000 0 0 0 0 0 0 710,300 710,300 710,300 235,300 156,400 71,000 61,400 44,500 21,600 679,400 691,400 704,000 644,400 656,400 669,000 35,000 35,000 35,000 0 0 0
EX-27.3 11 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from the CoreStates Financial Corp consolidated balance sheet as of September 30, 1996 (restated), June 30, 1996 (restated), and March 31, 1996 (restated) 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 year-to-date ended December 31, 1996 (restated), September 30, 1996 (restated), June 30, 1996 (restated), and March 31, 1996 (restated) and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS 6-MOS 3-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 SEP-30-1996 JUN-30-1996 MAR-31-1996 2,984,768 2,943,791 2,919,080 2,594,473 2,073,097 1,759,257 168,702 204,775 168,500 56,800 87,234 75,335 2,740,040 2,377,510 2,548,813 1,964,254 2,218,930 2,589,373 1,967,407 2,216,784 2,600,359 32,238,379 31,542,846 31,489,954 708,239 705,178 665,875 45,198,101 43,667,737 43,861,106 32,303,255 32,520,860 32,552,003 4,002,220 2,642,020 3,013,866 1,673,852 1,711,208 1,458,303 2,518,080 2,477,773 2,463,267 0 0 0 0 0 0 223,197 222,029 436,109 3,808,694 3,677,004 3,489,941 45,198,101 43,667,737 43,861,106 2,138,180 1,416,096 710,383 216,904 152,686 78,240 107,472 70,691 35,095 2,462,556 1,639,473 823,718 629,811 422,420 214,458 858,159 575,424 293,064 1,604,397 1,064,049 530,654 188,767 148,767 38,767 55,476 24,341 6,948 1,359,540 927,687 416,182 730,788 425,662 285,145 453,598 256,741 177,144 0 0 0 0 0 0 453,598 256,741 177,144 2.06 1.17 0.81 2.04 1.16 0.80 5.55 5.54 5.51 234,800 216,200 245,300 109,000 104,700 100,600 1,500 1,600 2,300 0 0 0 670,300 670,300 670,300 217,600 159,800 64,500 66,800 45,900 21,300 708,200 705,200 665,900 683,200 680,200 640,900 25,000 25,000 25,000 0 0 0
EX-99.1 12 UNDERTAKING - FORM S-8 REGISTRATION STATEMENT EXHIBIT 99.1 The undertaking set forth below is filed for purposes of incorporation by reference into Part II of the Registration Statements on Form S-8, File Nos. 33- 28808, 33-5874, 33-32934, 33-50324, 333-16569, 333-41083 and 33-27725. Item 9. UNDERTAKINGS ------------ (a)The undersigned Registrant hereby undertakes: Insofar as indemnification for liabilities rising under the Securities Act of 1933 (the "Securities Act") may be permitted to directors, officers or persons controlling the registrant pursuant to the provisions described in this registration statement, or otherwise, CoreStates Financial Corp (the "Company") has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. EX-99.2 13 CORESTATES FINANCIAL CORP FINANCIAL SECTIONS EXHIBIT 99.2 CORESTATES FINANCIAL CORP December 31, 1997 FORM 10-K FINANCIAL SECTIONS Page ------- Contents of Financial Sections 2 MD&A 3 - 42 Management's and Auditor's Report 43 - 44 Audited Financial Statements 45 - 84 Supplemental Data 85 - 97 1 CoreStates Financial Corp and Subsidiaries
CONTENTS OF FINANCIAL SECTION PAGE ----- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................................................ 3-42 FINANCIAL STATEMENTS Management's Report Regarding the Effectiveness of Internal Control Over Financial Reporting........ 43 Report of Independent Auditors....................................................................... 44 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995............... 45 Consolidated Balance Sheets as of December 31, 1997 and 1996......................................... 46 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995................................................................ 47-48 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995........... 49-50 Notes to the Consolidated Financial Statements....................................................... 51-84 SUPPLEMENTAL FINANCIAL DATA Five Year Average Balance Sheet, Statement of Income and Balance Sheet............................... 85-90 Rate/Volume Analysis Taxable Equivalent Basis........................................................ 91 Loan Portfolio, Risk Elements and Allowance for Loan Losses Data..................................... 92-95 Selected Maturity and Interest Sensitivity Data...................................................... 95-97
2 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statement Certain statements contained herein are not based on historical fact and are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements which are based on various assumptions (some of which are beyond CoreStates' control), may be identified by reference to a future period, or periods, or by the use of forward-looking terminology such as "may", "will", "believe", "expect", "estimate", "anticipate", "continue", or similar terms or variations on those terms, or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to: the global, national and regional economies where CoreStates conducts operations; economic growth; governmental monetary policy including interest rate policies of the Federal Reserve Board; sources and costs of funds; levels of interest rates; inflation rates; market capital spending; technological change; the state of the securities and capital markets; acquisitions; consumer spending and savings; expense levels; and tax, securities, and banking laws and prospective legislation. OVERVIEW (Unless otherwise noted, all "per share" amounts are on a diluted basis.) CoreStates Financial Corp ("CoreStates") reported record financial performance in 1997 driven by broad based increases in fee revenues, loan growth, and the favorable impact of the common stock repurchase program on earnings per share. CoreStates recorded net income of $813.3 million, or $4.00 per average common share, in 1997 compared to $649.2 million, or $2.97 per average common share, in 1996. Diluted net income per share was $3.96 in 1997 compared to $2.94 in 1996. Key performance measures such as returns on average equity and assets and the net interest margin were among the highest in the banking industry. Pending Merger with First Union Corporation - On November 18, 1997, ------------------------------------------- CoreStates entered into an Agreement and Plan of Mergers (the "Merger Agreement"), which provides for the merger (the "Merger") of CoreStates into First Union Corporation ("First Union"). Pursuant to the Merger Agreement, each outstanding share of CoreStates common stock would be converted into 1.62 shares of First Union's common stock, subject to possible adjustment under certain circumstances. Based on the December 31, 1997 closing price of First Union's common stock, the transaction would have a value of approximately $16.5 billion. The Merger is expected to be accounted for as a pooling of interests, and pending receipt of regulatory approval and other customary conditions of closing, is expected to close in the second quarter of 1998. The Merger will create a $205 billion financial services company having a leading banking presence on the eastern seaboard. The combined company will be the sixth largest banking company in the United States. First Union reported net income of $1.9 billion, or $2.99 per share, for 1997 compared to net income of $1.6 billion, or $2.58 per share, in 1996. Earnings - Basic "operating earnings" per share increased 9.5% for 1997. -------- Operating earnings, which has been defined for purposes of this discussion as net income excluding a special tax benefit, a special provision for losses on loans, and other significant charges in 1997 (all as discussed on pages 5 and 6) were $795.3 million, or $3.91 per average common share. Operating earnings for 1996 were $780.8 million, or $3.57 per average common share. Diluted operating earnings per share were $3.87 in 1997 compared to $3.54 in 1996. The increase in operating earnings per share primarily resulted from strong growth in non- interest income before certain net investment gains in 1996 and from the decline in shares outstanding due to the common stock repurchase program. The common stock repurchase program added $0.14 to 1997 earnings per share after considering the unfavorable impact of $58.8 million of 1997 funding costs incurred associated with the repurchase program. Returns on average equity and assets based on operating earnings were 23.64% and 1.74%, respectively, in 1997, compared to 20.07% and 1.78%, respectively, in 1996. The 1997 Keefe, Bruyette & Woods (KBW) Peer Group 1 composite for returns on average equity and assets were 17.55% and 1.26%, respectively. The KBW Peer Group 1 composite includes CoreStates and is comprised of 32 U.S. banking companies having assets in excess of $25 billion. 3 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued OVERVIEW - continued Operating earnings, key performance ratios and per share information are summarized in the following table (in millions, except per share):
Percentage increase (decrease) ----------------------- 1997 1996 1995 `97/'96 `96/'95 -------- -------- -------- ------- ------- Net interest income (taxable equivalent basis). $2,139.5 $2,167.7 $2,200.2 (1.3)% (1.5)% ======== ======== ======== Net income..................................... $ 813.3 $ 649.2 $ 655.2 25.3 (0.9) Exclude after-tax effects of: Special tax benefit........................ (109.0) - - Special provision for losses on loans...... 44.9 - - Net restructuring and merger-related charges 9.6 150.8 92.2 Certain net investment gains............... - (28.1) (8.6) Other...................................... 36.5 8.9 - Gain on affiliate joint venture............ - - (11.8) -------- ------- ------- Operating earnings............................. $ 795.3 $ 780.8 $ 727.0 1.9 7.4 ======== ======= ======= Operating earnings per share: Basic...................................... $ 3.91 $ 3.57 $ 3.28 9.5 8.8 ======== ======= ======= Diluted.................................... $ 3.87 $ 3.54 $ 3.24 9.3 9.3 ======== ======= ======= Return on average assets (a)................... 1.74% 1.78% 1.63% Return on average equity (a)................... 23.64 20.07 19.43 Net interest margin............................ 5.22 5.53 5.47 Expense/revenue ratio (a)...................... 52.98 53.71 57.07 Average common shares outstanding: Basic...................................... 203.452 218.812 222.268 Diluted.................................... 205.568 220.698 224.666
- -------------- (a) Calculated based on "Operating earnings." The $14.5 million improvement in operating earnings for 1997 was primarily due to a $70.0 million, or 8.2%, increase in non-interest income before certain 1996 net investment gains. The increase in non-interest income was mainly due to growth in revenues from fee-based services particularly trust income, third party processing fees, international service fees, income from trading activities, and investment banking fees. This improvement was partially offset by a $25.6 million, or 1.2%, decline in net interest income and a $34.2 million, or 21.6%, increase in the provision for losses on loans, excluding the special provision described on page 5. The decline in net interest income was solely due to $58.8 million of funding costs associated with the common stock repurchase program. The increase in the provision for losses on loans was due to higher charge-offs in the credit card, installment loan and commercial loan portfolios. For detailed discussions of non-interest income, net interest income and the provision for losses on loans, see pages 38, 37 and 20, respectively. 1997 Business Line Highlights - Three business line segments contributed ----------------------------- strong growth to net income in 1997. The Global and Specialized Banking segment contributed net income growth of $28.1 million, or 11.7%, primarily due to increases in net interest income and non-interest income. The growth in net interest income was principally due to an increase in loans; the growth in non-interest income was principally due to increases in international service fees, service charges on deposits and income from trading activities. Regional Banking's net income increased $29.7 million, or 8.7%, as a result of a decline in non-financial expenses due to branch consolidations and merger efficiencies and an increase in non-interest income primarily due to increases in delivery channel income. Trust and Asset Management contributed net income growth of $21.8 million, or 52.4%, reflecting increases in net interest income due to loan growth and trust fees primarily due to increased asset values, and reduced non-financial expenses due to merger-related efficiencies. For a more detailed analysis of the performance of CoreStates' business lines, refer to the "Business Line Results" section beginning on page 8. 4 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued OVERVIEW - continued Common Stock Repurchase Program - On October 15, 1996, the Board of ------------------------------- Directors authorized the management of CoreStates to repurchase up to 22 million shares of common stock, or approximately 10% of outstanding shares, and on July 15, 1997, the Board of Directors authorized an extension of the common stock repurchase program permitting management to repurchase up to an additional 6 million shares, or approximately 3% of outstanding shares. Acting under these authorizations, CoreStates repurchased 15.3 million and 8.8 million shares of common stock in 1997 and 1996, respectively. Management was also authorized to repurchase additional shares to fulfill requirements of employee benefit and dividend reinvestment plans. As of March 15, 1998, it is anticipated that CoreStates will issue approximately 1.0 million shares of common stock prior to the consummation of the Merger in order for the Merger to qualify for pooling of interests accounting treatment. Special Tax Benefit - CoreStates liquidated an affiliate in the fourth ------------------- quarter of 1997 that resulted in a tax benefit of $109.0 million, or $0.54 per share. The transaction will have no significant effect on ongoing operations or earnings. Special Provision for Losses on Loans - In the fourth quarter of 1997, ------------------------------------- CoreStates recorded a $70.0 million ($44.9 million after-tax, or $0.22 per share) special provision for losses on loans primarily related to management's decision to sell approximately $450 million of credit card outstandings. As a result, CoreStates wrote down the credit card balance by $102 million, and reclassified the net $348 million of loans to loans held for sale. Restructuring and Merger-Related Charges - In 1997, CoreStates recorded ---------------------------------------- pre-tax restructuring and merger-related charges of $15.0 million, $9.6 million or $0.05 per share after-tax, primarily related to costs incurred in the pending First Union Merger and costs incurred in the creation of a strategic technology alliance with Andersen Consulting (see "Technology Initiatives" on page 6). In 1996, CoreStates recorded pre-tax net restructuring and merger-related charges of $209.7 million, $150.8 million or $0.68 per share after-tax, primarily in connection with the April 1996 acquisition of Meridian Bancorp, Inc. ("Meridian"). Included in that amount were: a $161.6 million merger-related restructuring charge, a $70.0 million provision for loan losses recorded in connection with a change in strategic direction related to Meridian's problem assets and to conform Meridian's consumer lending charge-off policies to those of CoreStates (See "Provision for Losses on Loans" on page 20), $29.0 million of implementation costs that were incurred in the process of consolidating Meridian businesses and operations, and $50.9 million of credits for gains on the curtailment of pension benefits and sales of branches resulting from the merger and completion of previous process redesigns. The credits on the sales of branches resulted primarily from the sale of eleven former Meridian Bank PA branches in Berks and Lebanon counties in Southeastern Pennsylvania. The sale was necessary to satisfy a condition of regulatory approval of the Acquisition contained in an agreement between CoreStates, the U.S. Department of Justice and the Attorney General for the Commonwealth of Pennsylvania. Approximately $380 million of deposits and $120 million of loans were included in the sale, which generated a pre-tax gain of $40.1 million. Additional gains of $3.0 million were recorded as restructuring credits in 1996 on the sale of branches which were sold as a result of the 1995 process redesigns. In 1995, CoreStates and Meridian completed intensive reviews of their operations and businesses and announced corporate-wide process redesign plans. As a result of these process redesigns, CoreStates recorded net pre-tax restructuring charges of $128.6 million, $82.2 million after-tax or $0.37 per share in 1995. In the fourth quarter of 1995, Meridian paid $10.0 million, or $0.04 per share, of non-deductible costs associated with the CoreStates' acquisition of Meridian. 5 CORESTATES FINANCIAL CORP AN D SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued OVERVIEW - continued A summary of 1997, 1996 and 1995 pre-tax restructuring and merger-related charges (credits), excluding the $70.0 million provision for loan losses in 1996, was as follows (in millions):
1997 1996 1995 ------ ------ ------ Merger-related restructuring charges......................... $6.2 $161.6 $10.0 Strategic technology alliance charges........................ 8.8 - - Process redesign restructuring charges....................... - - 142.0 Meridian merger-related implementation costs................. - 29.0 - Gains on sales of branches................................... - (43.1) (4.0) Pension curtailment gains.................................... - (7.8) (9.4) ------ ------ ------ Total.................................................... $15.0 $139.7 $138.6 ====== ====== ======
Other Significant and Unusual Charges - In the fourth quarter of 1997, ------------------------------------- CoreStates recorded other significant and unusual charges including a $25.0 million pre-tax charitable contribution, $20.0 million pre-tax for certain legal matters and a special $12.0 million employee bonus (in total, $36.5 million after-tax or $0.18 per share). On September 30, 1996, the Deposits Insurance Fund Act of 1996 ("Funds Act") became law. A key element of the Funds Act was to fully capitalize the Savings Association Insurance Fund ("SAIF") by mandating a special one-time assessment on institutions carrying SAIF insured deposits. In the third quarter of 1996, CoreStates expensed $14.2 million pre-tax, $8.9 million after-tax or $0.04 per share, for the special assessment on its SAIF insured deposits. Certain Net Investment Gains - Excluded from operating earnings in 1996 are ---------------------------- net pre-tax gains of $43.3 million, $28.1 million after-tax or $0.12 per share, which consist of a $28.7 million pre-tax gain on the exchange of domestic equity securities and a net $14.6 million pre-tax gain on the sale of foreign equity securities. In 1995, CoreStates recorded pre-tax gains which are also excluded from operating earnings of $13.6 million, $8.6 million after-tax or $0.04 per share, on the exchange of domestic equity securities. Gain on Affiliate Joint Venture - In March 1995, Electronic Payment ------------------------------- Services, Inc. ("EPS"), an affiliate joint venture formed in 1992 to combine the consumer electronic transaction processing businesses of CoreStates and three other partners, admitted a fifth partner and increased the ownership interest of an existing partner. As a result of the change in its ownership interest, CoreStates recognized a pre-tax gain of $19.0 million, $11.8 million after-tax or $0.05 per share, in the first quarter of 1995. Technology Initiatives - Prior to the announcement of the Merger, ---------------------- CoreStates announced the creation of a 10-year strategic technology alliance with Andersen Consulting designed to help CoreStates expand its access to improved technology skills and capabilities, strengthen CoreStates' competitive position by improving responsiveness and flexibility of the technologies that underlie CoreStates products and services, and increase the return on CoreStates' investments in those technologies. The alliance is comprised of three major components: a program to develop new strategic technology applications; a business process management contract for applications development and maintenance; and a Year 2000 Initiative, already under way at CoreStates, as more fully described below. CoreStates and Andersen Consulting will terminate their alliance upon consummation of the Merger. Andersen Consulting will continue to make certain project staff available to CoreStates through the systems conversion period. The cost of terminating the alliance will be paid by First Union. 6 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued OVERVIEW - continued Year 2000 Initiative - It is anticipated that the majority of -------------------- CoreStates' computer systems and applications (collectively the "systems") will be converted to those of First Union and that costs to convert those systems to be Year 2000 compliant will not be directly incurred by CoreStates. Prior to the announcement of the Merger, CoreStates had undertaken a corporate-wide program to prepare and convert its systems to enable them to function properly with respect to dates in the year 2000 and thereafter ("the Year 2000 Initiative"). CoreStates also initiated formal communications with all of its third party service providers to determine the extent to which CoreStates' interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 issues. CoreStates is currently focusing its efforts on converting only the systems that will be retained by First Union subsequent to the Merger. Although there is no guarantee that other companies will be successful in addressing their Year 2000 issues, CoreStates believes that modifications to systems that are going to be retained can be made such that the Year 2000 issue will not pose significant operational problems. In the event that the Merger is not consummated, CoreStates will need to make all remaining CoreStates systems Year 2000 compliant. If such modifications are not made, or are not completed timely, the Year 2000 issue could have a material impact on the operations of CoreStates. CoreStates is utilizing both Andersen Consulting personnel and internal resources to make its systems compliant. CoreStates anticipates completing the Year 2000 Initiative by September 30, 1998 for those systems to be retained after the Merger. Should the Merger not be consummated, CoreStates anticipates that it would need twelve months to make all remaining systems Year 2000 compliant. The total cost of the Year 2000 Initiative is estimated to be between $40 million and $60 million. The cost to convert both the systems that will be retained by First Union, and to the extent necessary the remaining CoreStates systems, will be funded through operating cash flows and is not expected to have a material effect on the results of operations. Should the Merger not be consummated by April 30, 1998, First Union has agreed to indemnify CoreStates for any costs incurred to complete the Year 2000 Initiative in excess of $60 million and to use its best efforts to secure qualified resources to complete the Year 2000 Initiative in a timely manner. The costs of the project and the date on which CoreStates believes it will complete the Year 2000 Initiative are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the anticipated merger consumation date, the continued availability of certain resources, representations received from third party service providers and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. Comparison of Operating Earnings: 1996 to 1995 - "Operating earnings" for ---------------------------------------------- 1996 were $780.8 million, or $3.57 per average common share, an increase of 8.8% on a per share basis over 1995. Operating earnings for 1995 were $727.0 million, or $3.28 per average common share. The growth in operating earnings for 1996 was primarily driven by expense reductions resulting from process redesigns and Meridian merger-related efficiencies ("merger-related efficiencies"). Diluted operating earnings per share were $3.54 in 1996, compared to $3.24 in 1995. Non-financial expenses declined $124.0 million, or 7.1% in 1996 (see the detailed discussion of "Non-Financial Expenses" on page 40). CoreStates' expense/revenue ratio (total operating expenses, excluding other real estate owned expenses, as a percentage of total operating revenues) was 53.7% in 1996 compared to an expense/revenue ratio of 57.1% in 1995. Merger-related efficiencies achieved in 1996 were approximately $47 million pre-tax, $30 million after-tax, or $0.14 per share. Merger efficiencies were impacted by approximately $9 million in revenue losses. A slight decline in net interest income, an increase in the provision for losses on loans, and modest growth in non-interest income tempered the impact of reduced non-financial expenses in 1996. For detailed discussions of net interest income, the provision for losses on loans and non-interest income, see pages 37, 20 and 38, respectively. 7 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued BUSINESS LINE RESULTS CoreStates utilizes a value-based reporting methodology to facilitate management's analysis of performance by defined business lines. This process supports CoreStates' strategic objective of creating superior growth in shareholder value by focusing on the performance and value creation potential of CoreStates' component businesses. This section of management's discussion and analysis presents the performance results of CoreStates' five core businesses: Global and Specialized Banking; Regional Banking; Retail Credit Services; Trust and Asset Management; and Third Party Processing. Each core business is comprised of well-defined business lines with market or product specific missions. Corporate overhead, processing and support costs, and the loan loss provision are allocated along with the impact of balance sheet management and hedging activities of CoreStates. A matched maturity transfer pricing system is used to allocate interest income and interest expense. All business lines in the five 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. The development of these allocation methodologies is a continuous process at CoreStates, and as a result, certain amounts in prior years have been reclassified for comparative purposes. The Corporate Center 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 five major business areas, eliminations of intercompany business transactions, and miscellaneous items. 8 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued BUSINESS LINE RESULTS - continued The earnings contribution of these core businesses is reflected in the table below (in millions):
Retail Trust and (taxable equivalent basis) Global and Regional Credit Asset Specialized Banking Banking Services Management ---------------------- ------------------ ----------------- ------------------- 1997 1996 1997 1996 1997 1996 1997 1996 ------- ------- -------- -------- ------ ------ ------ -------- Net interest income.................. $ 603.7 $ 561.7 $1,116.9 $1,118.2 $306.1 $295.0 $ 55.8 $ 50.9 Provision for losses on loans........ 40.1 31.5 21.4 28.4 197.8(a) 98.5 2.2 2.2 Non-interest income.................. 278.5 232.3 253.7 244.9 87.8 85.9 188.1 167.6 Non-financial expenses............... 405.5 366.0 759.5 795.6 170.1 192.1 142.4 151.4 ------- ------- ------- ------- ------ ------ ------ ----- Income before income taxes........... 436.6 396.5 589.7 539.1 26.0 90.3 99.3 64.9 Income tax expense................... 167.7 155.7 216.7 195.8 9.2 33.6 35.9 23.3 ------- ------- ------- ------- ------ ------ ------ ----- Net income........................... $ 268.9 $ 240.8 $ 373.0 $343.3 $16.8 $56.7 $ 63.4 $ 41.6 ======= ======= ======= ======= ====== ====== ====== ===== Return on average assets............. 1.47% 1.67% 2.89% 2.42% 0.22% 0.72% 4.97% 3.03% Return on average equity ............ 23.55% 25.98% 55.92% 47.81% 4.84% 15.45% 89.30% 60.29% Average assets....................... $18,308 $14,460 $12,900 $14,159 $7,501 $7,884 $1,275 $1,372 Average equity ...................... $1,142 $927 $667 $718 $347 $367 $71 $69
Third Party Processing Corporate Center Total ----------------- -------------------- ----------------- 1997 1996 1997 1996 1997 1996 ------ ------ ------- ------ ------- ------- Net interest income.................. $20.7 $ 18.0 $ 36.3 $123.9 $2,139.5 $2,167.7 Provision for losses on loans........ 0.1 0.2 1.4 68.0 (e) 263.0 228.8 Non-interest income.................. 225.4 209.3 (107.7)(b) (40.9)(b,f) 925.8 899.1 Non-financial expenses............... 225.4 198.4 (7.1)(b,d) 73.3 (b,e) 1,695.8 1,776.8 ------ ------ ------- ------ ------- ------- Income (loss) before income taxes.... 20.6 28.7 (65.7) (58.3) 1,106.5 1,061.2 Income tax expense................... 7.3 10.1 (143.6)(c) (6.5) 293.2 412.0 ------ ------ ------- ------ ------- ------- Net income (loss).................... $13.3 $ 18.6 $ 77.9 $(51.8) $ 813.3 $ 649.2 ====== ====== ======= ====== ======= ======= Return on average assets............. 4.62% 6.84% 1.43% (0.92)% 1.78% 1.48% Return on average equity ............ 44.33% 58.13% 7.04% (2.92)% 24.18% 16.69% Average assets....................... $288 $272 $5,446 $5,647 $45,718 $43,794 Average equity ...................... $30 $32 $1,107 $1,777 $3,364 $3,890
- ------------- (a) Includes a special provision of $70.0 million primarily related to management's decision to sell approximately $450 million of credit card outstandings. (b) Includes eliminations for intercompany processing fees of $108.4 million and $105.9 million in 1997 and 1996, respectively. (c) Includes a $109.0 million tax benefit related to the liquidation of an affiliate. (d) Includes restructuring and merger-related charges and other significant and unusual charges of $72.0 million. (e) Includes net restructuring and merger-related charges of $70.0 million in the provision for losses on loans and $139.7 million in non-financial expenses, and a SAIF special assessment of $14.2 million. (f) Includes certain net investment gains of $43.3 million. 9 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued BUSINESS LINE RESULTS - continued Global and Specialized Banking includes the following business lines: ------------------------------ Specialized Banking, Secured Lending, Real Estate, Large Corporate Banking, Congress Financial Corporation ("Congress Financial"), International Banking, Investment Banking and Cash Management. Net income for 1997 increased $28.1 million, or 11.7%, above 1996. The favorable variance was due to increases in net interest income and non-interest income, partially offset by increases in non-financial expenses and the provision for losses on loans. Net interest income for 1997 increased $42.0 million, or 7.5%, above 1996 due to increases in average loans, average demand deposits, and fees on loans. Average loan volume increased $2.7 billion, or 22.8%, above 1996, due largely to growth in Specialized Banking, International Banking, and the Large Corporate and Healthcare Groups within Large Corporate Banking. Average demand balances increased $98 million, or 5.4%, over 1996 primarily due to higher balances maintained by customers to pay for services particularly within the Financial Services Group of Large Corporate Banking. Amortized fees on loans increased $6.4 million, or 18.6%, due to fees collected on new loans and several significant termination fees. Non-interest income for 1997 increased $46.2 million, or 19.9%, primarily due to increases in international service fees, service charges on deposits and income from trading activities. International service fees increased $11.4 million, or 11.4%, in 1997 principally due to increased trade payment activity in the offshore branches. Service charges on deposits increased $8.2 million, or 12.5%, for 1997 primarily reflecting increases in cash management activities. Non-financial expenses for 1997 increased $39.5 million, or 10.8%, over 1996 due to increases in personnel expenses, Congress Financial expenses and processing costs. Regional Banking includes Retail Banking and Delivery, Small Business ---------------- Lending, Commercial Business Lending and Middle Market Lending. Net income was $373.0 million, up $29.7 million, or 8.7%, from 1996. The increase for 1997 was principally due to declines in non-financial expenses resulting from merger synergies and branch closings/sales, an increase in non-interest income related to delivery channel income pricing and volume (delivery channel income includes ATM, PC and telephone banking fees), and price increases in service charges on deposits. Net interest income for 1997 declined $1.3 million, or 0.1%, below 1996. The decrease was mainly attributable to a $1.3 billion, or 5.3%, decline in average deposit volumes. Also contributing to the decrease was a decline in average loan outstandings of $358 million, or 3.1%. The deposit decline resulted from a combination of runoff resulting from the Meridian acquisition and competitive pressures in the market. The decline in loans mainly resulted from the securitization of $382 million in home equity loans and runoff in revolving credit loans. Partially offsetting the impact of volume declines was an increase in deposit interest rate spreads driven by pricing strategies implemented in the second quarter of 1997. Non-interest income increased $8.8 million, or 3.6%, over 1996. Delivery channel income rose $7.7 million influenced by ATM surcharges levied on all non-CoreStates Bank customer ATM transactions, a policy initiated in the fourth quarter of 1996. In addition, service charges on deposits increased $3.8 million, or 2.5%, mainly due to 1997 price increases implemented on deposit accounts. Non-financial expenses for 1997 declined $36.1 million, or 4.5%, from 1996. Personnel expenses declined $16.1 million, or 5.4%, while non-personnel expenses declined $20.0 million, or 4.0%. These savings were achieved through branch closings/sales, operational efficiencies related to the Meridian merger and new contracts with many of the suppliers of goods and services to CoreStates. 10 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued BUSINESS LINE RESULTS - continued Retail Credit Services includes the following major business lines: Credit ---------------------- Card, Dealer Services, Educational Lending, Mortgage Services, Card Linx (CoreStates' merchant credit card processing business) and SynapQuest (CoreStates' consumer and commercial card processing company). Net income for Retail Credit Services was $16.8 million for 1997, which was $39.9 million, or 70.4%, below 1996. The decrease in net income for 1997 was primarily attributable to a higher provision for losses on loans. Prior year results have been restated for the reclassification of SynapQuest into Retail Credit Services. Net interest income for 1997 increased $11.1 million, or 3.8%, above 1996. This increase was attributable to the impact of a change in mix of Dealer Services loan products which contributed $1.9 million to net interest income, and to higher average credit card outstandings of $119 million which contributed $8.6 million to net interest income. The provision for loan losses for 1997 increased by $99.3 million, or 100.8% over 1996. This increase includes a $70 million special provision for losses on loans primarily related to management's decision to sell approximately $450 million of credit card outstandings. The remainder of the increase over 1996 was attributable to higher credit card charge-offs. Higher credit card charge-offs are an industry-wide trend also being experienced by CoreStates. Non-interest income for 1997 was $1.9 million, or 2.2%, above 1996. This increase was primarily due to higher credit card fees of $3.2 million, and higher mortgage fee income of $3.4 million, partially offset by a $2.4 million decrease in merchant fee income and lower credit life insurance fee income of $2.3 million. Non-financial expenses for 1997 decreased by $22.0 million, or 11.5%, from 1996. The decline in expenses was primarily due to merger-related efficiencies that impacted personnel, occupancy and outside services hired expenses. A reduction in marketing expense also contributed to the decline. The expense savings were partially offset by volume related expense growth. Trust and Asset Management is organized into four business lines: Personal -------------------------- Trust (including Private Banking), Institutional Trust, Retirement Plan Services, and Investment Management. CoreStates' remaining Corporate Trust Business, previously included in Institutional Trust, was sold in the fourth quarter of 1996. Full year net income for 1997 of $63.4 million increased $21.8 million, or 52.4%, over 1996. Increases in net interest income and trust fee income as well as reduced non-financial expenses all contributed to the improvement in net income. Net interest income for 1997 increased $4.9 million, or 9.6%, over 1996. This increase is primarily due to higher investment income, commercial loan growth in Private Banking, increased money market account deposits related to additional customer sweep balances, and higher demand deposit balances. These favorable variances were partially offset by funding costs for increased overdraft balances. Non-interest income for 1997 increased $20.5 million, or 12.2%, over 1996. Excluding 1996 Corporate Trust fees, non-interest income increased $22.2 million, or 13.4%, in 1997. This improvement resulted primarily from increases in Personal and Institutional fee income primarily due to increases in the market value of assets under management. Non-financial expenses for 1997 decreased $9.0 million, or 5.9%, from 1996. Excluding Corporate Trust expenses in 1996, non-financial expenses would have decreased $8.0 million, or 5.3%, in 1997, primarily due to merger-related efficiencies. 11 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued BUSINESS LINE RESULTS - continued Third Party Processing consists of the QuestPoint specialty transaction ---------------------- processing units, earnings from CoreStates' investment in Electronic Payment Services, Inc. ("EPS"), and earnings from CoreStates Bank's Financial Institutions Division ("FID"). The QuestPoint processing units include: QuestPoint Check Services ("Check Services"), a provider of check processing and payment services to CoreStates and other financial institutions; and QuestPoint Remittance Services ("Remittance Services"), a leading supplier of remittance processing services nationwide with processing sites in key markets within the United States and Canada. EPS is a leading provider of ATM and POS processing services. FID is a provider of correspondent bank services to financial institutions in the United States. FID cash letter volumes are processed by contract with Check Services. Third Party Processing ("TPP") 1997 net income of $13.3 million decreased $5.3 million, or 28.5%, from 1996. Prior year results have been restated for the reclassification of SynapQuest into Retail Credit Services and for the inclusion of FID in TPP. The decline in 1997 net income is primarily due to a price reduction on CoreStates intercompany processing activity, costs associated with investments in technology and lower earnings on the Remittance Services processing business in Canada. TPP net interest income for 1997 increased $2.7 million, or 15%, over 1996. The increase over 1996 is due primarily to higher average demand balances within FID. TPP non-interest income for 1997 totaled $225.4, million including $108.4 million for the CoreStates intercompany business, $29.5 million for EPS, and $87.5 million of other external QuestPoint/FID revenue. This compares to 1996 non-interest income of $209.3 million, including $105.9 million for the CoreStates intercompany business, $29.9 million for EPS, and $73.5 million of other QuestPoint/FID revenue. Total revenue growth for 1997 was $16.1 million, or 7.7%, above 1996. The CoreStates intercompany business, which contributes 48% of the TPP revenue base, increased $2.5 million, or 2.4%. External QuestPoint/FID, which accounts for 39% of the TPP revenue base increased $14.0 million, or 19.0%. Revenues for EPS decreased modestly. The increase in revenue from the CoreStates intercompany business was primarily the result of the addition of Meridian processing, offset slightly by a decline in fees due to the repricing of services on January 1, 1997. The acquisition of five check processing centers in October 1996 contributed $10.2 million to the external revenue growth. The remaining increase is primarily the result of new business within Check Services and Remittance Services. Income from the investment in EPS reflects CoreStates' share in EPS net income, interest income on a 6.45% note and income from the amortization of a deferred gain. Year-to-year, the lower interest income on the note, which is being paid down at a rate of $6.25 million per quarter by EPS, is offset by higher EPS equity related income. TPP non-financial expenses for 1997 were $225.4 million, an increase of $27.0 million, or 13.6%, over 1996. Most of the increase supports the addition of new business, including the acquisition of five check processing centers in October 1996 and overall Remittance Services volume growth. Higher staff costs within Remittance Services also contributed to the increase. 12 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued CAPITAL STRENGTH Capital strength must be evaluated in the context of business risk exposures, including asset quality, interest sensitivity, liquidity and earnings diversification. CoreStates places a significant emphasis on the maintenance of strong capital which promotes investor confidence, helps provide access to the credit markets under favorable terms and enhances the flexibility to capitalize on business growth and acquisition opportunities. Capital is managed for each CoreStates subsidiary based on its respective risks and growth opportunities, as well as regulatory requirements. CoreStates is positioned to take advantage of market opportunities to strengthen capital. A shelf registration provides for the issuance of a wide-range of securities including: senior and subordinated debt, straight and convertible preferred securities and equity. At December 31, 1997, CoreStates had $579 million of registered but unissued securities under the shelf. In addition, CoreStates Bank, N.A. (CoreStates' principal bank subsidiary) has the ability to issue subordinated debt under its Senior and Subordinated Bank Note program (See the "Liquidity" discussion on page 33 for further detail). Through the implementation of its capital policies, CoreStates has achieved a strong capital position. The relative strength of CoreStates' capital is reflected in the chart "Average Common Equity/Assets."
Average Common Equity/Assets Average Common Five Year Comparison Equity/Assets ---------------------------- ------------------------------------------- (in percent) KBW Peer Group 1 CoreStates Composite * ---------- ---------------- 1997 7.36% 7.77% 1996 8.88 8.06 1995 8.37 7.48 1994 8.27 7.47 1993 7.93 7.52
* The KBW Peer Group 1 Composite includes CoreStates and is comprised of U.S. banking companies having assets in excess of $25 billion. At December 31, 1997, common shareholders' equity totaled $3,237 million or 6.7% of total assets, compared with $3,696 million or 8.1% at year-end 1996. The primary reasons for the declines in common shareholders' equity and the equity to assets ratio were the common stock repurchase program and asset growth of 6.5%. CoreStates has achieved steady internal capital generation throughout the past five years. Excluding the cost of the common stock repurchase program in 1997, common shareholders' equity increased over the five years ended December 31, 1997 at a compound annual growth rate of 5.3%, while dividends paid increased at a compound annual growth rate of 13.5%. During 1997, CoreStates increased its quarterly dividend amount by 6.4% to $0.50 per share beginning with the fourth quarter declaration. This follows increases of 11.9% in 1996 and 23.5% in 1995. CoreStates declared dividends on its common stock of $1.91 per share in 1997, $1.73 per share in 1996 and $1.44 per share in 1995. The common dividend payout ratio based on operating earnings per average common share was 48.8% for 1997, compared to 48.5% for 1996, and 43.9% for 1995. 13 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued CAPITAL STRENGTH - continued Common Stock Repurchase Program - On October 15, 1996, the Board of ------------------------------- Directors authorized the management of CoreStates to repurchase up to 22 million shares of common stock, or approximately 10% of outstanding shares, and on July 15, 1997, the Board of Directors authorized an extension of the common stock repurchase program permitting management to repurchase up to an additional 6 million shares, or approximately 3% of outstanding shares. Acting under these authorizations, CoreStates repurchased 15.3 million shares and 8.8 million shares in 1997 and 1996, respectively. Management is also authorized to repurchase additional shares to fulfill requirements of employee benefit and dividend reinvestment plans. As of March 15, 1998, it is anticipated that CoreStates will issue approximately 1.0 million shares of common stock prior to the consummation of the Merger in order for the Merger to qualify for pooling of interests accounting treatment. Capital Ratios - CoreStates and its bank subsidiaries are subject to -------------- minimum risk-based and leverage capital guidelines issued by the Federal Reserve Board and Comptroller of the Currency. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on CoreStates. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, CoreStates must meet specific capital guidelines that involve quantitative measures of CoreStates' assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. CoreStates' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. In 1996, the Federal Reserve Board approved the limited use of certain cumulative preferred instruments ("Trust Capital Securities") as Tier 1 capital. While these Trust Capital Securities are classified as long-term debt on the Consolidated Balance Sheet (see Note 12 to the Financial Statements for further description of these securities), CoreStates utilizes these Trust Capital Securities in managing its total capital mix. CoreStates' principal bank subsidiary issued $300 million of these securities in 1996 and $450 million in 1997. This type of security issuance provides CoreStates more flexibility in managing its capital. At December 31, 1997, management believes that CoreStates exceeds all capital adequacy requirements to which it is subject. The following table illustrates CoreStates' risk-based and leverage capital ratios compared to regulatory guidelines at December 31, 1997 and 1996: Risk-based and Leverage Capital Ratios - -------------------------------------- At December 31, - --------------
Regulatory Guidelines ------------------------ Well- 1997 1996 Minimum Capitalized ---- ---- ------- ----------- Tier 1 capital ratio....... 8.5% 9.4% 4.0% 6.0% Total capital ratio........ 12.0 13.2 8.0 10.0 Tier 1 leverage ratio...... 8.0 8.5 3.0 5.0
14 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued RISK MANAGEMENT Risk management at CoreStates encompasses the oversight of a broad range of risks undertaken by CoreStates including credit, market (including interest rate, trading and liquidity risks), product, human capital, compliance, operations, systems, technology and general business risk. CoreStates' ongoing refinement of its risk management practices takes place within the framework of a corporate risk management program. The objective of the program is a continued strengthening of CoreStates' risk management culture and its policies, processes and controls for managing risk on an integrated basis throughout the company. The following sections, "CREDIT QUALITY" and "MARKET RISK", discuss two components of risk management. CREDIT QUALITY Credit Risk Management The management of credit risk at CoreStates relies on maintaining a diversified loan portfolio, limiting exposures to any given borrower, industry or market segment, and on upholding a well-established credit culture. Early identification and communication of deterioration/problems in the portfolio, early recognition of non-performing assets and charge-offs, maintaining reserves that are strong, and a credit advisory team process that provides all lenders in both wholesale and consumer businesses access to the most senior and experienced credit officers in the organization, are key components of this credit culture. In addition, CoreStates has established a wide range of specialized lending areas staffed with industry experts and experienced lending resources. Underlying this credit culture is a tradition of extensive and ongoing credit training and comprehensive and well-communicated policies and procedures. Further, while CoreStates maintains a successful process of managing individual credits, it continues to place a greater emphasis on portfolio management issues. The maintenance of CoreStates' credit quality standards is supported by a comprehensive and independent assessment of credit quality and portfolio management by a Credit Review department, which reports to the Audit Committee of the Board of Directors. Loan Portfolio CoreStates' loan portfolio totaled $34.8 billion at December 31, 1997, a 7.7% increase from $32.3 billion at December 31, 1996. At year-end 1997, the portfolio is comprised of $26.1 billion or 75% wholesale loans and $8.7 billion or 25% consumer loans, compared to $23.0 billion or 71% wholesale loans and $9.3 billion or 29% consumer loans at December 31, 1996. The $34.8 billion in total loans at December 31, 1997 was subsequent to loan sales of approximately $890 million in 1997 and $450 million of credit card outstandings transferred to loans held for sale. These loan sales included $550 million of residential mortgages, $190 million of home equity loan securitizations and $150 million of student loans. The loan sales are discussed in the Consumer Lending Portfolio sections which follow. Wholesale Loan Portfolio CoreStates has traditionally maintained limits on industry, country and borrower concentrations as a way to diversify and manage credit risk. CoreStates manages industry concentrations by applying limits to a family of industries that have common risk characteristics. CoreStates' top industry concentrations are reflected in the following chart, "Wholesale Loans by Industry". The chart reflects favorable performance as measured by the percentage of outstandings which are non-performing, with the exception of Healthcare which was impacted by the addition of one significant loan to non-performing status. 15 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued CREDIT QUALITY - continued Wholesale Loans by Industry At December 31, 1997 (in millions)
% of Loans Outstandings Outstanding non-performing ----------- -------------- Completed Real Estate Projects (a)............. $1,779.7 1.3% Depository Institutions........................ 1,568.3 - Communications................................. 1,459.0 0.1 Non-bank Finance (b)........................... 1,311.2 0.6 Retail Trade................................... 1,176.1 0.5 Healthcare..................................... 1,005.5 7.5 Automobile Dealers............................. 875.3 0.1 Agri-Finance................................... 681.2 1.2 Real Estate Construction....................... 651.1 0.5 Chemicals and Allied Products.................. 636.0 0.2 Trucking and Auto Leasing...................... 620.4 - Apparel Manufacturing.......................... 418.8 0.2 Paper Manufacturing............................ 364.6 -
- ------------ (a) Consists of loans on commercial real estate to investors on completed properties. (b) Includes insurance, mortgage, mutual funds and finance companies. The following highlights two portfolios: the Congress Financial Corporation ("Congress Financial") portfolio, due to its growth opportunities and significant contribution to CoreStates' performance; and the international financial institutions portfolio, as this is a significantly expanded business. Congress Financial - Congress Financial's loan portfolio is comprised of ------------------ factoring and asset-based lending relationships generated through its offices in major cities in the United States and its growth in business in Canada. Despite considerable competitive pressure with regard to pricing and structure, the asset-based loan portfolio at December 31, 1997 grew 5% over 1996. With a look toward globalizing the asset-based lending function, Congress launched an asset-based operation in the United Kingdom with the purchase of Burdale Financial LTD in February 1997. Congress Financial's expertise with the syndication of large, multifaceted transactions also contributed significantly to loan growth. In spite of extreme competition, the volume in the factoring portfolio at December 31, 1997 grew 11% over 1996. Credit quality for both the factoring and asset-based lending portfolios, as reflected in the strong historical trends noted in the following table, continued to be consistent with Congress Financial's lending philosophy. Congress Financial Portfolio - ---------------------------- At December 31, - -------------- (in millions)
1997 1996 -------- -------- Asset-based lending portfolio: Loans............................. $2,373.1 $2,269.8 Non-performing.................... 3.8 12.2 % of loans ...................... 0.2% 0.5% Net charge-offs $ 9.8 $ 5.5 % of average loans 0.3% 0.2% Factoring receivables (a)............ $ 454.9 $ 411.3
- ------------ (a) There were no non-performing factoring receivables at December 31, 1997 and 1996. 16 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued CREDIT QUALITY - continued International Financial Institutions - CoreStates' International Financial ------------------------------------ Institutions business serves a portfolio of over 1,300 international relationships in 78 countries. In the correspondent banking business, CoreStates continues to focus on global multi-currency payment flows and on global trade collections and disbursements. In addition to facilitating the short term, trade related businesses of correspondents, CoreStates also provides treasury support, foreign exchange and, in selected cases, medium-term financing. CoreStates is one of the most active banks in the United States in working with correspondents to facilitate their access to Eximbank financing, particularly for small and medium-sized transactions. The portfolio's growth in 1997 in various geographic areas, as well as in certain product categories, is primarily attributable to generally improved political and economic conditions worldwide, which have encouraged international financial institutions to expand their activities and portfolios. However, following the start of the Asian turmoil, CoreStates has prudently shortened maturities, changed its product mix from non-trade to trade, and reduced outstandings where appropriate. Apart from limits on exposures to individual banks and countries, which are extended after thorough analysis and on-site visits, CoreStates manages its international portfolio through concentration limits for certain industries, tenors, and risk-rated assets which are determined through a stringent credit approval and monitoring process. International Financial Institutions' exposure consists of deposit placements, bankers' acceptances, letters of credit and loans outstanding. Total exposure at December 31, 1997 of $5.7 billion represented a $1.1 billion or 21% increase above $4.6 billion at year-end 1996. For both 1997 and 1996, approximately 50% of the total exposures were deposit placements. Non-trade exposures in 1997 approximated 13% of total exposure. Exposure in the International Financial Institutions portfolio at December 31, 1997 and 1996 was distributed geographically as follows: International Financial Institutions Portfolio - ---------------------------------------------- At December 31, - -------------- (in millions)
1997 1996 -------------------- ------------------- Total % of Total % of Exposure Total Exposure Total -------- ----- -------- ----- Europe/Africa........... $ 2,165 38% $ 1,751 38% Asia.................... 1,923 34 1,801 39 Americas................ 1,610 28 1,030 23 ----- -- ----- -- Total exposure...... $5,698 100% $ 4,582 100% ====== === ======= ===
17 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued CREDIT QUALITY - continued Real Estate Loans - Real estate loans of $8,851.0 at December 31, 1997 ----------------- includes both wholesale and consumer loans. An analysis of CoreStates' real estate portfolios is provided below. The regional market in which CoreStates operates has remained stable for both the residential and commercial segments, with active competition in all markets. Total real estate loans outstanding of $8,851.0 million at December 31, 1997, compared to $9,169.9 million at December 31, 1996. The decline from year-end 1996 was the result of loan repayments and the impact of $740 million in residential mortgage loan sales and home equity loan securitizations. The construction and development loan portfolio was $651.1 million or 1.9% of total loans at December 31, 1997. At December 31, 1997, 0.5% of CoreStates' construction and development loan portfolio was non-performing, compared to 1.0% at December 31, 1996. Within real estate loans are residential mortgages, which include home equity loans of $1,772.4 million, one-to-four family mortgages of $1,842.5 million, and multi-family residential mortgages of $300.8 million. Total residential mortgages were $3,915.7 million or 11.2% of total loans at December 31, 1997. Residential mortgage loan quality remained consistent as measured against 1996's performance. CoreStates' commercial real estate portfolio includes both completed property investor loans and loans collateralized by owner-occupied real estate. The commercial real estate portfolio totaled $4,284.2 million or 12.3% of total loans at December 31, 1997. The percentage of non-performing commercial real estate loans to year-end commercial real estate loans declined from 1.7% at December 31, 1996 to 1.3% at December 31, 1997. Net charge-offs for the commercial real estate portfolio totaled only $3.3 million for 1997. CoreStates continues to place an emphasis on loan quality in the commercial real estate portfolio. The non-performing loans and net charge-offs did not include any significant individual borrower exposure. The commercial real estate portfolio continues to exhibit diversity by product type. Real Estate Loans - ----------------- At December 31, - -------------- (in millions)
Construction/ Development Residential Commercial (a) Total ------------ ----------- ------------- ----------- 1997 - --- Year-end outstandings................ $651.1 $3,915.7 $4,284.2 $8,851.0 Average loans outstanding............ 600.2 4,325.5 4,362.7 9,288.4 Non-performing loans................. 3.2 47.2 55.8 106.2 % of year-end loans................ 0.5% 1.2% 1.3% 1.2% Net charge-offs...................... $ 1.3 $ 8.9 $ 3.3 $ 13.5 % of average loans................. 0.2% 0.2% 0.1% 0.1% 1996 - ---- Year-end outstandings................ $554.9 $4,073.3 $4,541.7 $ 9,169.9 Average loans outstanding............ 589.0 5,203.8 4,300.9 10,093.7 Non-performing loans................. 5.6 41.2 77.3 124.1 % of year-end loans................ 1.0% 1.0% 1.7% 1.4% Net charge-offs...................... $ (0.1) $ 21.1 $ 15.6 $ 36.6 % of average loans................. - 0.4% 0.4% 0.4%
- ------------ (a) Includes loans on completed properties to investors and commercial loans secured by owner-occupied real estate. 18 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued CREDIT QUALITY - continued Consumer Lending Portfolio Consumer Lending Portfolio (excluding credit card) - This portfolio ------------------------------------------------- declined $202 million or 2.6% from year-end 1996. Excluding sales of $890 million of consumer loans, principally residential mortgages, home equity loans and student loans, this portfolio experienced modest growth in 1997. Residential mortgages and home equity loans are sold on a recurring basis primarily for asset and liability management purposes. Net loan charge-offs as a percentage of the average portfolio outstandings increased from 63 basis points in 1996 to 76 basis points in 1997. While loan charge-offs in this portfolio have increased, CoreStates continues to operate within a framework of strong credit policies and maintains the ability to identify and mitigate risk factors in these retail loan products. Consumer Lending Portfolio (Excluding Credit Card) - ------------------------------------------------- At December 31, - --------------- (in millions)
1997 1996 -------- --------- Year-end outstandings: Home equity (a).............................. $1,772.4 $1,760.0 Indirect installment......................... 1,994.0 2,088.4 Residential first mortgages (a)............ 1,842.5 1,994.8 Direct installment........................... 979.7 939.5 Auto leasing................................. 880.3 888.4 -------- -------- Total....................................... $7,468.9 $7,671.1 ======== ======== Average loans outstanding........................ $7,958.1 $8,773.7 Net charge-offs.................................. $60.2 $55.1 % of average loans........................... 0.76% 0.63%
(a) These loans have also been included in the "Real Estate Loans" discussion. Credit Card Portfolio - Credit card outstandings decreased $469 million, or --------------------- 28% from $1,674.9 million at 1996 year end to $1,205.9 million at 1997 year end. In the fourth quarter of 1997, management decided to sell approximately $450 million of credit card outstandings. As a result, a $102 million writedown to net realizable value was recorded, and the loans were reclassified to loans held for sale. The credit card portfolio was also impacted in 1997 and 1996 by the significant amount of personal bankruptcies experienced nationwide and industry-wide. Net charge-offs have increased, which is consistent with industry averages, to 6.4% of average loans. In the second quarter of 1996, $5.8 million of credit card loans were charged off as the result of a change in policy to charge off delinquent credit card loans at 150 days past due, instead of at 180 days past due. Credit card outstandings past due 90 days or more as to payment of principal or interest were $13 million and $22 million at December 31, 1997 and 1996, respectively. Credit Card Portfolio - --------------------- At December 31, - -------------- (in millions)
1997 1996 -------- -------- Year-end outstandings................... $1,205.9 $1,674.9 Average loans outstanding............... 1,675.0 1,556.0 Net charge-offs......................... 107.7(a) 82.9 % of average loans.................. 6.4% 5.3%
(a) Excludes the $102 million writedown on credit cards held for sale. 19 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued CREDIT QUALITY - continued Allowance for Loan Losses In CoreStates' methodology for determining appropriate levels of allowance for loan losses ("the Allowance"), each subsidiary which extends credit maintains an allowance sufficient to absorb the anticipated loss inherent in its credit portfolio. Factors included in management's determination of an adequate level of Allowance are a statistical analysis of historical loss levels throughout an economic cycle and one year of projected charge-offs, establishing a minimum level below which the Allowance is considered inadequate and a maximum level above which is considered inappropriate. A quarterly evaluation of loss potential on specific credits, products, industries, and portfolios, as well as indicators for loan growth, the economic environment and concentrations, assist in validating the position of the Allowance within those boundaries. Management's evaluation of the adequacy of the Allowance is independently tested by Credit Review. Prompt recognition of problem situations and prompt write-downs of these assets to net realizable value is an important source of protection against problems in the portfolio. At year-end 1997 the Allowance totaled $634.4 million and represented 1.82% of loans. This compares with an Allowance at year-end 1996 of $710.3 million, or 2.20% of loans. The Allowance at year-end 1997 was 249.9% of non-performing loans, a decline from the year-end 1996 coverage ratio of 321.7% and a reflection of the lower balance in the Allowance at December 31, 1997 resulting from loan charge-offs, the $102 million writedown of credit card loans held for sale and the increase in non-performing loans at December 31, 1997. Provision for Losses on Loans - CoreStates' provision for loan losses in ----------------------------- 1997 was $263.0 million, an increase of $34.2 million over 1996. The increase in the 1997 provision for losses on loans was made in response to loan growth and higher charge-offs on credit card outstandings, installment loans and commercial loans. Net charge-offs on credit cards increased to $107.7 million, excluding the $102 million writedown of credit card loans held for sale, or 6.43% of average outstandings in 1997, from $82.9 million or 5.33% of average outstandings in 1996. Net charge-offs on installment loans increased to $49.1 million, or 1.54% of average outstandings in 1997, from $33.8 million, or 1.13% in 1996. Net charge-offs on commercial loans increased to $56.0 million, or 0.36% of average outstandings in 1997, from $27.4 million or 0.20% in 1996. Total net loan charge-offs in 1997 were $236.9 million or 0.69% of average loans. Net charge-offs in 1996 were $188.7 million or 0.59% of average loans. In the fourth quarter of 1997, CoreStates recorded a $70.0 million ($44.9 million after-tax, or $0.22 per share) special provision for losses on loans primarily related to management's decision to sell approximately $450 million of credit card outstandings. As a result, CoreStates wrote down the credit card balance by $102 million, and reclassified the net $348 million of loans to loans held for sale. As a result of the acquisition of Meridian in 1996, CoreStates recorded a $70.0 million provision for losses on loans in connection with a change in strategy related to Meridian's problem assets, and to conform Meridian's consumer lending charge-off policies to those of CoreStates. Historically for CoreStates, a strategy that involves the accelerated resolution of problem assets has been more economical than a long-term work out approach. It has been CoreStates' general experience that the costs of working out assets as well as other carrying costs typically outweigh any improvement in those assets' realized value. It is CoreStates' judgment that such a change in strategy maximizes the total value of an acquisition and allows CoreStates to concentrate upon new franchise initiatives and revenue generation. Furthermore, the process of working out problem assets diverts resources and management time and attention from building the business and creating long-term franchise value. 20 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued CREDIT QUALITY - continued The following table reflects the distribution of 1997 and 1996 net charge-offs by loan type: Distribution of Net Charge-Offs - ------------------------------- For the Years Ended December 31, - ------------------------------- (in millions)
1997 1996 ------------------------------------ ---------------------------------- % of % of Total Total Net % of net Net % of net charge- Average charge- charge- Average charge- Loan type offs loan type offs offs loan type offs - --------- ---------- --------- --------- -------- --------- -------- Domestic: Commercial and industrial.................... $ 57.3 0.38% 24.2% $27.4 0.20% 14.5% Real estate: Construction...................... 1.3 0.22 0.5 (0.1) - - Other............................. 12.3 0.14 5.2 36.7 0.39 19.4 Consumer: Credit card....................... 107.7(b) 6.43 45.5 82.9 5.33 43.9 Installment....................... 49.1 1.54 20.7 33.8 1.13 17.9 Other (a)........................... 9.2 0.43 3.9 10.1 0.50 5.4 ------ ----- ----- ----- Total domestic.................. 236.9 0.74 100.0 190.8 0.62 101.1 Foreign.............................. - - - (2.1) (0.15) (1.1) ------ ----- ----- ----- Total net charge-offs............ $236.9 0.69 100.0% $188.7 0.59 100.0% ====== ===== ===== =====
- ----------- (a) Includes loans to financial institutions and lease financing. (b) Excludes the $102 million writedown of credit card loans held for sale. Non-Performing Assets Non-performing assets at year-end 1997 were $268.3 million, or 0.77% of total loans plus other real estate owned ("OREO") and 0.55% of total assets. These levels compared to total non-performing assets at year-end 1996 of $245.0 million, or 0.76% of total loans plus OREO and 0.54% of total assets. The $23.3 million, or 9.5%, increase in total non-performing assets as compared to year-end 1996 was principally due to an increase of $37.3 million, or 40.3%, in non-performing commercial loans. The increase in commercial non-performing loans was primarily due to the addition of a single large credit to non-accrual status during 1997. Non-performing real estate assets at December 31, 1997 decreased $27.8 million, or 18.7% from the prior year end. At year-end 1997, total non-performing assets were comprised of $254.0 million of non-accrual loans and $14.3 million of OREO. Non-performing assets at year-end 1996 declined $23.3 million, or 8.7%, as compared to year-end 1995. The 1996 decline reflected decreases of $41.7 million, or 21.9%, in the real estate portfolio. Most of the decline in non-performing assets was attributable to collections, and bulk sales of non-performing residential mortgages. Non-performing loans in the commercial loan portfolio at year-end 1996 increased $19.9 million, or 27.4%, from year-end 1995, primarily due to the addition of two large credits to non-accrual loans during 1996. 21 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued CREDIT QUALITY - continued The following table illustrates the components of the changes in non-performing assets during 1997, 1996 and 1995: Changes in Non-Performing Assets - -------------------------------- For the Years Ended December 31, - -------------------------------- (in millions)
1997 1996 1995 ------ ------- ------ Balance at January 1,.......... $245 $268 $441 Additions...................... 335 287 274 Return to accrual.............. (8) (18) (30) Payments....................... (194) (184) (299) Charge-offs.................... (110) (108) (118) ---- ---- ---- Net change..................... 23 (23) (173) ---- ---- ---- Balance at December 31,........ $268 $245 $268 ==== ==== ====
The following table reflects the distribution of non-performing assets by loan type at December 31, 1997 and 1996: Distribution of Non-Performing Assets - ------------------------------------- At December 31, - --------------- (in millions)
1997 1996 ---------------------------------- ----------------------------------- % of % Total % of % Total Non- Loan non- Non- Loan non- Loan type performing type performing performing type performing - --------- ---------- ------- ---------- ---------- ------- ---------- Domestic: Commercial and industrial.............. $129.9 0.79% 48.4% $92.6 0.65% 37.8% Real estate: Construction.......................... 3.2 0.50 1.2 5.6 1.00 2.3 Other loans........................... 103.0 1.26 38.4 118.5 1.29 48.4 OREO.................................. 14.3 - 5.3 24.2 - 9.9 Other domestic loans (a)................ 17.8 0.61 6.7 4.1 0.17 1.6 ------ ----- ------ ----- Total domestic........................ 268.2 0.83 100.0 245.0 0.79 100.0 Foreign loans............................ 0.1 - - - - - ------ ----- ------ ----- Total non-performing assets (b) (c)... $268.3 0.77 100.0% $245.0 0.76 100.0% ====== ===== ====== ===== % of total assets..................... 0.55% 0.54% ==== ====
- ---------- (a) Includes loans to financial institutions and lease financing. (b) The table does not include assets of $94 million and $113 million at December 31, 1997 and 1996, respectively, that are past due 90 days or more as to principal or interest. (c) At December 31, 1997 and 1996, there were no non-performing consumer loans. Non-performing residential mortgage loans are included in other real estate loans in the above table. 22 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued MARKET RISK Market risk is a potential loss of earnings and/or equity due to a change in interest rates, prices or foreign exchange rates. It includes traditional asset/liability management issues of interest rate risk and liquidity as well as trading activities. CoreStates' policy is to manage its businesses in a manner that constrains market risk to modest levels and stresses appropriate returns for risks taken. Interest rate sensitivity management of the balance sheet focuses on stable spreads throughout rate cycles while trading businesses emphasize product origination and distribution over proprietary trading positions. Market risk is measured in terms of its impact on earnings over the short term as well as its long term effects. For non-trading positions, near term market risk includes potential income changes within the next twelve months while longer term measures include the change in present value for a given change in rates. Trading risks are included in both measures and represent the potential change in market value over a 7 day holding period based on historical rate and price changes for similar instruments. Near and long term consolidated market risk limits are 4% and 10%, respectively, of Tier I Capital. Those limits include both trading and non-trading activities. Within those consolidated policy limits, additional sublimits are used to control specific types of risk such as market sectors or optionality. The specifics of the risk measures applied to non-trading interest rate risks are described in the interest rate risk section below. At CoreStates, trading activities are customer driven and position taking is not material. Market risk from trading activities was $8 million on December 31, 1997. Asset and Liability Management Asset and liability management is the process of directing and coordinating activities that effectively control liquidity and interest rate risk. CoreStates' philosophy includes a disciplined approach to asset and liability management which calls for minimizing interest rate risk, maintaining a strong balance sheet and a focus on achieving appropriate product spreads. This disciplined approach contributes to the stability and strength of CoreStates' net interest margin. CoreStates' asset and liability management is centralized and individual subsidiaries are managed within the context of overall corporate policies. CoreStates' management emphasizes stable net interest income throughout rate cycles, with the result that intermediate and longer term considerations take precedence over short-term profitability. This commitment is evidenced by the consistency of CoreStates' net interest margin over time. During the past five years, a period of significant changes in economic conditions, competition and interest rates, CoreStates' net interest margin has remained consistently above industry averages as illustrated in the chart "Net Interest Margin". Net Interest Margin - ------------------- Five Year Comparison - -------------------- (in percent)
Net Interest Margin ---------------------------------- KBW Peer Group 1 CoreStates Composite * ---------- ---------------- 1997 5.22% 4.25% 1996 5.53 4.37 1995 5.47 4.42 1994 5.33 4.42 1993 5.27 4.61
* The KBW Peer Group 1 Composite is comprised of 32 U. S. banking companies having assets in excess of $25 billion. 23 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued MARKET RISK - continued CoreStates' net interest margin reflects relationship business activities rather than interest rate risk taking. The strength of CoreStates' net interest margin comes from the combination of healthy spreads on both loans and deposits and a balance sheet which has a relatively high portion of loans and a large base of non-interest bearing funds. Areas of business such as credit card, middle market lending, specialized lending and commercial finance at Congress Financial produce attractive lending spreads. CoreStates' cash management business provides a significant source of non-interest bearing funds, while the retail franchise includes a substantial base of low cost funding. Emphasis on profitable relationship business is supported by CoreStates' management practices. CoreStates uses a matched maturity funds transfer pricing system which focuses business managers on profitability, appropriate compensation for embedded risks and overall pricing discipline. In addition to providing a pricing tool, transfer pricing supports performance measurement and analysis of net interest margin components. Interest Rate Risk Management Non-trading interest rate risk refers to potential changes in current and future net interest income resulting from changes in interest rates, product spreads and mismatches in the repricing between interest rate sensitive assets and liabilities. At CoreStates, measurement of near term interest rate risk focuses on potential changes in net interest income identified through computer simulations against both rising and falling interest rates. Longer term repricing risks are measured using potential changes in the present value of future income streams inherent in current positions. While present value sensitivity is used to measure risk in longer time periods, gap analysis is used to manage strategy execution. All measurements of interest rate risk include the impact of off-balance sheet activities. Under CoreStates' policy, rate changes of at least 200 basis points in either direction over a six-month period are simulated with rate related negative net interest income volatility over a twelve-month horizon subject to the consolidated near term market risk limit of 4% of Tier 1 Capital. 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. Potential changes in the spread between the prime rate and financial market rates are monitored, and when changes are believed to be interest rate related, are subject to the interest rate risk policy guidelines. CoreStates believes that the prime spread is more a function of credit conditions than interest rate changes. Estimated changes in the present value of future income streams are based on a 200 basis point parallel shift of the yield curve and negative changes are measured against the aggregate market risk limit of 10% of Tier 1 Capital. As a matter of practice, positions are generally managed to produce significantly lower volatility than policy guidelines would permit. Current net interest income simulations using a 200 basis point change in short-term interest rates show that CoreStates' net interest income over the next twelve months would decline $35 million versus what income would have been had rates remained stable. That level is representative of simulations performed throughout the last twelve months. Recognizing that the simulation process is based on a variety of assumptions, management reviews results by category of risk as well as by product and tests the sensitivity of the results to key assumptions. Present value changes are also managed well within policy guidelines and represented $132 million, which is less than 5% of Tier 1 Capital, at year-end. There are two main elements to CoreStates' exposure to 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. Option risk, such as prepayment risk on consumer lending products, has increased in recent years. CoreStates' core wholesale and retail businesses generate a large portfolio of prime and other short-term rate related assets. Characteristic of a regional banking company, CoreStates also has a significant funding base of consumer deposits with indefinite maturities and non-contractual rates such as savings, NOW and money market accounts. The repricing characteristics of those deposits tend to be longer term; traditionally, pricing has been relatively stable for long periods and pricing changes lag changes in financial market rates. While this mix of relationship assets and liabilities provides excellent liquidity, it results in considerable interest rate risk. This inherent mismatch (the "relationship gap") of longer term fixed-rate liabilities funding short-term rate sensitive assets generates significant exposure to declining interest rates if not managed. 24 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued MARKET RISK - continued CoreStates manages this relationship gap through the use of both on and off-balance sheet discretionary assets and liabilities. The typical offsetting position is created by purchasing fixed-rate investment securities funded by short-term liabilities, or by entering into interest rate swaps in which CoreStates receives a fixed-rate and pays a variable rate. The following excerpts from the Interest Sensitivity Analysis shown on page 96 demonstrates the basic mismatch of the relationship portfolios and the offsetting discretionary position. In keeping with CoreStates' interest rate risk discipline, the combined position is relatively balanced so that there is minimal impact on earnings from an interest rate move in either direction. Selected Interest Sensitivity Balances - -------------------------------------- At December 31, 1997 - -------------------- (in millions)
Months Years ------------------------------ ------------------------------ 0-3 4-6 7-12 1-2 2-5 over 5 Total -------- -------- ------- -------- -------- ------ ------- Relationship Portfolios: Total loans.................... $23,481 $1,819 $ 2,037 $ 2,685 $ 3,807 $ 985 $34,814 Total consumer deposits, net non-interest funding........ 9,919 2,471 2,655 3,501 4,797 5,825 29,168 Adjustments.................... 652 (967) (693) (1,015) (2,951) 4,974 - -------- ------ ------- -------- -------- ------ ------- Relationship gap............. 14,214 (1,619) (1,311) (1,831) (3,941) 134 5,646 -------- ------ ------- -------- -------- ------ ------- Discretionary Portfolios: Assets......................... 5,341 1,825 1,638 2,291 4,612 1,102 16,809 Liabilities.................... 20,021 107 188 420 597 1,122 22,455 -------- ------ ------- -------- -------- ------ ------- Discretionary gap............ (14,680) 1,718 1,450 1,871 4,015 (20) (5,646) ------- ------ ------- -------- -------- ------ ------- Combined gap................. $ (466) $ 99 $ 139 $ 40 $ 74 $ 114 $ - ======= ====== ======= ======== ======== ====== ======= Cumulative gap............... $ (466) $ (367) $ (228) $ (188) $ (114) $ - $ - ======= ====== ======= ======== ======== ====== =======
The second major element of CoreStates' interest rate risk is the spread risk between product rates and financial market rates. These spreads are a function of competitive and other factors as well as interest rate levels. CoreStates simulates the behavior of individual products under various rate scenarios to determine an appropriate investment or funding strategy to provide a stable spread. Consumer deposit spreads are a key element of net interest income. There was significant shifting across bank deposit products in 1997 as well as deposit runoff. As consumer investment alternatives continue to grow in number and customers demonstrate greater willingness to use alternative products, it is increasingly difficult to model future balances and spreads. Simulations incorporate pricing and volume assumptions including runoff and shifting across products for various rate changes. Those assumptions are developed in conjunction with the business managers, and while management believes its simulation assumptions are realistic, it recognizes this as an area of potential volatility. It should be noted that these products are also influenced by the changing nature of the consumer product line and the positioning of these products within that line. The spread between the prime rate and short-term market rates, such as LIBOR, is also an important component of net interest income. CoreStates uses a blend of short-term maturities to fund prime related assets which should help preserve a stable spread provided that spread relationships in the financial market, such as Prime/LIBOR, remain stable. While the risk of a narrowing of the prime spread is not unique to CoreStates, a contraction in that spread would reduce net interest income. At December 31, 1997, CoreStates has approximately $9.1 billion in loans subject to changes in the prime rate. While it is not a significant exposure, option risk has increased in the last few years. The primary source of option risk in CoreStates' balance sheet is prepayment risk in residential mortgages, home equity and other consumer lending products and, to a lesser extent, loans to commercial customers and investment securities. CoreStates mitigates most of this risk through sales and securitizations. Risks that are retained are managed with a combination of caps, floors and other derivative instruments. The second type of option risk is from caps and floors embedded in loan and deposit products. CoreStates offsets those risks with purchases of similar caps and floors. 25 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued MARKET RISK - continued Off-balance Sheet Instruments and Derivative Activities - CoreStates uses off-balance sheet derivative instruments primarily to manage CoreStates' interest rate risk. CoreStates believes that interest rate risk management must be coordinated with the management of liquidity and capital. Therefore, CoreStates uses off-balance sheet instruments to modify its rate sensitivity and consequently, avoids the unnecessary leverage and liquidity impairment which would result from on-balance sheet alternatives. CoreStates also uses interest rate contracts to provide risk management services for its customers and to hedge the interest rate risk in its trading positions. Credit risk exists in a derivative transaction to the extent that there is a favorable move in interest rates and the counterparty fails to perform. The current credit exposure in a derivative transaction is the estimated cost to replace the transaction at current market rates, while potential exposure is the estimated cost to replace the transaction at future interest rates. CoreStates monitors both the current and potential risk. CoreStates evaluates the credit worthiness of all off-balance sheet counterparties using the same standards applied in any other loan or credit transaction. In addition, CoreStates uses collateral agreements to manage credit risk in its derivatives portfolio. Under those agreements, collateral is transferred between counterparties when exposure exceeds an agreed upon threshold. Collateral agreements and thresholds are determined based on the quality of individual counterparties. As of December 31, 1997, the current cost to replace CoreStates' derivatives portfolio was $253 million. This assumes that only counterparties for whom it would be favorable to default would do so. Interest Rate Risk Related Derivative Activities - CoreStates' use of derivatives for interest rate risk management falls into three categories: interest sensitivity adjustments, spread protection and the hedging of anticipated asset sales. The following schedule reflects by interest rate risk management category, the outstanding derivative positions as of December 31, 1997, the major balance sheet category to which they relate, and the associated unrealized gains/losses: 26 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued MARKET RISK - continued Outstanding Interest Rate Risk Related Derivatives - -------------------------------------------------- At December 31, 1997 - -------------------- (in millions)
Interest Interest Interest rate rate rate caps Other swaps futures and floors derivatives Total ------- ------- ---------- ----------- ------- Interest Sensitivity Adjustment: Assets (primarily loans): Notional amount............... $ 4,668 $1,089 $ 7 $ 5,764 Unrealized gains.............. 80 - - 80 Unrealized losses............. (6) - - (6) Deposits and other borrowings: Notional amount............... 2,829 824 $ 50 3,703 Unrealized gains.............. 24 6 - 30 Unrealized losses............. (6) - - (6) Long-term debt: Notional amount............... 1,381 150 1,531 Unrealized gains.............. 33 1 34 Unrealized losses............. (7) - (7) Spread Protection: Assets (primarily loans): Notional amount............... 76 492 568 Unrealized gains.............. 1 2 3 Unrealized losses............. - - - Deposits and other borrowings: Notional amount............... 86 86 Unrealized gains.............. - - Unrealized losses............. - - Anticipated Asset Sales: Notional amount............... 51 51 Unrealized gains.............. - - Unrealized losses............. - - Total: Notional amount............ $ 8,954 $ 1,089 $ 1,409 $ 251 $ 11,703 ======= ======= ====== ====== ======== Unrealized gains........... $ 138 $ - $ 8 $ 1 $ 147 ======= ======= ======= ====== ======== Unrealized losses.......... $ (19) $ - $ - $ - $ (19) ======= ======= ======= ====== ======== Net unrealized gains....... $ 119 $ - $ 8 $ 1 $ $128 ======= ======= ======= ====== ========
Although the value of the various derivative instruments will change with interest rates, CoreStates does not consider changes in individual portfolio values to be significant given that the portfolios are used to offset specific risks. As of December 31, 1997, CoreStates' use of off-balance sheet derivative instruments which carry a leveraged exposure to either rising or falling rates or have other complex features is not material. 27 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued MARKET RISK - continued Interest sensitivity adjustments account for the majority of CoreStates' derivative activities. CoreStates has a naturally asset sensitive balance sheet as a result of its basic loan and deposit businesses. Commercial and consumer loan activities tend to have short-term repricing characteristics versus the longer term repricing nature of CoreStates' funding sources. These relationship portfolios have a positive effect on earnings in a rising rate environment and a negative effect in a falling rate environment. Therefore, CoreStates uses fixed-rate assets or off-balance sheet instruments with characteristics similar to fixed rate assets to offset this risk. When off-balance sheet instruments are used, cash balances are invested in shorter time periods and interest rate swaps or other derivatives are used to "fix" the rate for longer terms similar to those of CoreStates' liabilities. The risks in certain products, particularly non-contractual deposits, are sometimes greater in one direction of rate change than the other. To the extent that marginal amounts of deposits need protection from falling rates but are likely to shift to higher rate instruments as interest rates rise, caps and/or floors are a more appropriate hedge. CoreStates has used interest rate floors in this manner to augment the risk protection provided by the swaps and futures portfolios. By using swaps, futures and options in this manner, leverage is reduced and liquidity is enhanced. If derivative instruments were not used, CoreStates would invest in longer term assets based on its disciplined interest rate risk management practice of strict matching of asset and liability terms. Therefore, the impact of derivatives on pre-tax income is confined to the spread between the derivative instrument and other instruments of similar terms. Management estimates that this spread is not material relative to pre-tax income. CoreStates also uses derivative instruments to protect spreads on certain balance sheet products. CoreStates' loan and securities portfolios include adjustable rate mortgages which carry interest rate caps limiting the amount of rate increase per year as well as over the life of the mortgage. As interest rates rise and funding costs increase, the spread on that portfolio will compress. At December 31, 1997, CoreStates holds $406 million of interest rate caps which offset that risk by limiting the potential increase in funding costs. CoreStates has issued retail certificates of deposits with floating rates which carry a guaranteed minimum rate. CoreStates has used caps and floors to offset that risk. For accounting purposes, the income effects of futures or swaps used to adjust interest sensitivity or to protect a product spread are associated with either the asset or the liability being managed. The amount recorded in net interest income related to derivative financial instruments was $63.2 million in 1997 and $75.5 million in 1996. The following table shows the impact of derivatives income on average interest rates: Impact of Derivatives Income on Yields and Costs - ------------------------------------------------ For the Year Ended - ------------------ December 31, - ------------ (in millions)
1997 1996 -------------------------------------------- ----------------------------------------- Reported Impact Reported Impact Average Yield/ Product of Average Yield/ Product of Balance Cost Rate Derivatives Balance Cost Rate Derivatives ------- -------- ------- ----------- ------- ------- ------- ----------- Earning Assets Time deposits................ $ 2,800 5.76% 5.76% $ 2,163 5.68% 5.68% Federal funds sold & trading account............ 419 7.59 7.59 444 5.98 5.98 Investment securities........ 3,692 6.25 6.19 0.06% 4,662 6.22 6.15 0.07% Loans........................ 34,088 8.89 8.78 0.11 31,939 9.03 8.92 0.11 ------- ------- Total Earning Assets......... $40,999 8.42 8.33 0.09 $39,208 8.48 8.38 0.10 ======= ======= Interest Bearing Funds Savings, NOW, regular MMA.... 7,951 1.07 1.27 (0.20) $10,072 1.61 1.85 (0.24) Premium MMA.................. 5,156 3.92 3.92 - 3,515 3.87 3.87 - Certificates................. 8,483 5.14 5.17 (0.03) 9,067 5.15 5.27 (0.12) ------- ------- Total retail.............. 21,590 3.35 3.44 (0.09) 22,654 3.39 3.54 (0.15) ------- ------- Commercial & foreign deposits 3,077 5.32 5.32 - 1,635 4.83 4.83 - Federal funds purchased & short-term borrowings..... 3,414 5.56 5.56 - 2,958 5.18 5.18 - Long-term debt............... 3,683 6.50 6.64 (0.14) 2,536 6.38 6.53 (0.15) ------- ------- Total wholesale........... 10,174 5.83 5.88 (0.05) 7,129 5.53 5.58 (0.05) ------- ------- Total Interest Bearing Funds. $31,764 4.14 4.21 (0.07) $29,783 3.88 4.01 (0.13) ======= =======
28 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued MARKET RISK - continued It is important to note that derivatives usage, its impact on individual balance sheet items and fluctuations in fair value should be viewed in the context of overall risk management. As previously stated, if CoreStates did not use derivatives, it would adjust cash positions to create the same interest sensitivity position with approximately the same income results. However, if cash transactions were used, the income of those activities would not be carried as an income adjustment to other balance sheet products. Fluctuations in the impact of derivatives shown on the above table are a function of market conditions and do not indicate changes in risk positions. The third category of derivative activity is the hedging of anticipated asset sales. As fixed-rate assets are accumulated for future sale, CoreStates is exposed to a decline in sale price due to rising interest rates. Therefore, CoreStates will enter into an interest rate swap or a forward rate agreement which will increase in value if rates rise. The increased value on the derivative is used to offset the decline in value of the cash asset. Gains/losses on the derivative are deferred until the asset sale and recognized as part of the sale transaction. CoreStates securitizes and sells its longer term fixed-rate home equity loans and fixed-rate mortgages on a recurring basis. Home equity loans are held for several months prior to sale while sufficient volume for securitization is accumulated. Forward rate locks are used to hedge rate changes during that warehouse period. Options on mortgage-backed securities as well as both mandatory and optional forward sale commitments are used to hedge the mortgage pipeline. Interest rate swaps are agreements between two parties to exchange interest cash flows. Generally, one party receives a fixed rate and pays a variable rate, while the counterparty pays the fixed rate and receives the variable rate. As of December 31, 1997, 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. CoreStates' use of interest rate futures is a function of the mix of maturities/resets on short-term lending portfolios, volumes and terms of short-term retail certificates and market funding sources and the availability and attractiveness of other short-term assets. These portfolios include significant volumes and the terms are subject to maturity shifts between one month and one year. The repricing schedule below summarizes the notional amount and associated interest rate of CoreStates' interest rate swaps categorized by whether CoreStates receives or pays the rate shown. The swaps are stratified by repricing date or maturity depending on whether the payments are floating or fixed, respectively. Floating rates included in the repricing schedule are based on the rates in effect on December 31, 1997. 29 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued MARKET RISK - continued Repricing Schedule of Interest Rate Swaps - ----------------------------------------- At December 31, 1997 - -------------------- (in millions)
Years -------------------------------------------------------------------- 0-1 1-2 2-3 3-4 4-5 over 5 Total ---------- ---------- --------- -------- ------- --------- ------- Receive Fixed/Pay Floating: Receive Notional................ $1,288 $1,527 $1,385 $1,630 $ 768 $ 894 $7,492 Rate.................... 6.34% 6.74% 6.42% 6.56% 6.38% 6.76% 6.54% Pay Notional................ $7,492 $7,492 Rate.................... 6.03% 6.03% Pay Fixed/Receive Floating: Pay Notional................ $ 14 $ 25 $ 39 Rate.................... 8.27% 9.26% 8.91% Receive Notional................ $ 39 $ 39 Rate.................... 6.00% 6.00% Receive Floating/Pay Floating: (Basis Swaps) Notional................ $ 963 $ 963 Receive Rate.................... 5.91% 5.91% Pay Rate.................... 6.04% 6.04% Receive Fixed/Pay Floating(a): (Forward Start) Receive Notional................ $ 150 $ 189 $ 75 $ 46 $ 460 Rate.................... 7.14% 6.52% 6.86% 7.00% 6.82% Start Date Notional................ $ 150 $ 310 $ 460
- ---------------------------------------- (a) Pay rate will be determined on forward start date. 30 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued MARKET RISK - continued The following schedule illustrates CoreStates' interest rate risk related derivative activity during 1997 and 1996: Activity in Derivatives Products - -------------------------------- Years Ended December 31, 1997 and 1996 - -------------------------------------- (in millions)
Interest Interest Interest rate caps rate rate and Other Notional Amounts swaps futures floors derivatives Total - ---------------- -------- --------- -------- ----------- --------- At December 31, 1995...................... $ 9,716 $ 619 $ 1,486 $ 106 $ 11,927 Additions................................. 3,712 14,260 341 761 19,074 Terminated contracts...................... (213) (10,428) - - (10,641) Maturities/amortization................... (4,072) - (287) (450) (4,809) -------- --------- -------- ----------- --------- At December 31, 1996...................... 9,143 4,451 1,540 417 15,551 Additions................................. 2,557 8,731 75 292 11,655 Terminated/restructured contracts(a)...... (441) (12,093) - - (12,534) Maturities/amortization................... (2,305) - (206) (458) (2,969) -------- --------- -------- ----------- --------- At December 31, 1997...................... $ 8,954 $ 1,089 $ 1,409 $ 251 $ 11,703 ======== ========= ======== =========== =========
- -------------------- (a) At December 31, 1997, CoreStates had $1.3 million deferred gains and $6.5 million deferred losses related to terminated derivative contracts. CoreStates' use of derivatives declined during 1997 primarily due to changes in the use of interest rate futures. A decrease in retail deposits, particularly savings certificates, along with increased placement and loan volumes reduced the need for short- term hedges. Activity in other categories generally represents routine rollovers. Trading and Customer Related Derivative Activities - CoreStates also engages in derivative market activities to provide risk management services for its customers and to manage securities trading positions in the securities unit. The securities unit underwrites, brokers, and distributes securities to municipalities, institutional investors and individual investors. In addition, the unit buys, sells and securitizes mortgage loans and brokers loan servicing portfolios. The following schedule details the outstanding notional amounts and related fair values of trading and customer related derivative transactions as of December 31, 1997 and 1996. 31 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued MARKET RISK - continued Trading and Customer Related Derivatives - ---------------------------------------- At December 31, - -------------- (in millions)
1997 -------------------------------------------------------- Positive Negative Notional Net assets Market Market Interest Rate Swaps: amount (liability)(a) Value Value ----------- -------------- --------- --------- CoreStates receives fixed........ $ 1,521 $ 17.7 $21.6 $ (3.9) CoreStates pays fixed............ 2,005 (39.1) 4.1 (43.2) Futures................................... 777 (1.9) 0.1 (2.0) Rate Locks: CoreStates receives fixed........ 130 (0.7) - (0.7) CoreStates pays fixed............ 130 0.8 0.8 - Interest Rate Caps/Floors: Sold............................. 1,491 (3.1) - (3.1) Purchased........................ 1,562 3.0 3.0 - Commitments to purchase/sell whole mortgage loans and securities (including when-issued securities): Sold............................. 145 (1.7) - (1.7) Purchased........................ 64 - - - Other Options: Sold............................. 881 39.8 39.8 - Purchased........................ 247 0.7 0.7 - Foreign exchange contracts (b)............ 2,241 4.0 35.2 (31.2) ------- ------- ------- ------- Total Trading and Customer Related Derivatives...................... $11,194 $ 19.5 $ 105.3 $ (85.8) ======= ======= ======= =======
1996 -------------------------------------------------------- Positive Negative Notional Net assets Market Market Interest Rate Swaps: amount (liability)(a) Value Value ----------- -------------- --------- --------- CoreStates receives fixed........ $ 355 $ 1.5 $ 2.7 $ (1.2) CoreStates pays fixed............ 353 (1.0) 1.3 (2.3) Futures................................... 39 0.4 0.4 - Rate Locks: CoreStates receives fixed........ 30 (0.1) - (0.1) CoreStates pays fixed............ 30 0.1 0.1 - Interest Rate Caps/Floors: Sold............................. 705 (2.7) - (2.7) Purchased........................ 704 2.7 2.7 - Commitments to purchase/sell whole mortgage loans and securities (including when-issued securities): Sold............................. 83 (0.2) 0.1 (0.3) Purchased........................ 19 - - - Other Options: Sold............................. 206 6.5 7.1 (0.6) Purchased........................ 334 0.8 0.8 - Foreign exchange contracts (b)............ 1,766 (0.5) 28.0 (28.5) ------- ------- ------- ------- Total Trading and Customer Related Derivatives...................... $ 4,624 $ 7.5 $ 43.2 $ (35.7) ======= ======= ======= =======
- ------------ (a) Average net assets (liabilities) during 1997 and 1996 were substantially the same as the net assets (liabilities) at December 31, 1997 and 1996, respectively. (b) Foreign exchange contracts purchased and sold at December 31, 1997 were $987 million and $1,254 million, respectively, and at December 31, 1996 were $836 million and $930 million, respectively. 32 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued MARKET RISK - continued Liquidity Liquidity management allows a financial institution to meet potential cash needs at a reasonable price under various operating conditions. Liquidity comes from a variety of sources: the maturing of short-term assets, readily marketable unpledged securities, and the ability to attract new funds. The ability to securitize or sell other assets, such as loans, also enhances liquidity, as does the structure and stability of existing funding sources. It is CoreStates' practice to maintain a high degree of liquidity through a strong funding base of core deposits combined with modest and diversified use of market sources and relatively short-term maturities of discretionary asset portfolios. CoreStates maintains sufficient liquidity to meet its obligations in a timely and cost-effective manner. Management monitors current and projected cash flows, and adjusts positions as necessary to maintain adequate levels of liquidity. CoreStates emphasizes diversification of funding sources. By using a variety of markets, limiting funds borrowed from a single investor, and staggering maturities, the risk of potential funding pressure is significantly reduced. Management also maintains a detailed liquidity contingency plan designed to adequately respond to situations such as a decline in asset quality or credit ratings, which could lead to liquidity concerns. Management analyzes potential changes in major funding sources during difficult times, the amount of runoff that may be expected, as well as available options to replace those funds. The plan includes specific action steps to be taken in the event of funding disturbances. The cornerstone of CoreStates' liquidity is a sizable and stable base of core deposits acquired through customer relationships. Core deposits are comprised of interest bearing consumer savings products and non-interest bearing deposits. Core deposits declined from 70.2% of average assets in 1996 to 65.4% of assets in 1997. The decline was attributable to consumer deposit disintermediation due to the relatively low interest rate environment in 1997 and alternative investment opportunities available to consumers. Core deposits are supplemented by discretionary funding sources from direct customer contacts as well as syndicated public debt issuance in both domestic and international markets. These sources include large denominated certificates of deposits, deposits in foreign branches, as well as Federal funds, repurchase agreements, commercial paper and long-term debt. To maintain its relative liquidity strength given the core deposit erosion, CoreStates established two new long-term funding initiatives in 1997. On October 3, 1997, CoreStates Capital Corp and CoreStates Bank, N.A. applied to list up to $4 billion of debt securities ("the Programme") on the Luxembourg Stock Exchange. Under the Programme, CoreStates Capital Corp and CoreStates Bank, N.A. may each issue up to $2 billion of debt securities ("the Notes") with maturities ranging from 30 days to 30 years. The Notes are direct, unconditional and unsecured, general obligations of the relevant issuer. On October 29, 1997, CoreStates Bank, N.A. issued $500 million, 5 year, floating rate notes under the Programme. On November 7, 1997, CoreStates Bank, N.A. and CoreStates Bank of Delaware, N.A. established a $3 billion Senior and Subordinated Bank Note program ("the Bank Note Program"). This program accommodates maturities up to thirty years and subordinated debt issuances. In the fourth quarter of 1997, CoreStates Bank, N.A. issued $232 million in senior notes with maturities ranging from one to two years and $286 million in senior notes with maturities less than 270 days. During 1997, CoreStates' ability to raise funds was further evidenced by the issuance of $450 million of Trust Capital Securities which were marketed to institutional investors, both domestically and internationally. 33 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued MARKET RISK - continued Under an existing shelf registration filed with the Securities Exchange Commission, CoreStates is able to issue a broad range of debt and capital securities. At December 31, 1997, CoreStates had securities of $579 million that were registered but unissued under this shelf. During 1997, approximately $506 million of debt having various terms and interest rates was issued under the shelf registration. Maturities and retirements of long-term debt during 1997 were approximately $374 million. The tables on pages 95 and 97 illustrate the maturity characteristics of CoreStates' domestic certificates of deposit over $100 thousand, loan portfolio and investment portfolio, respectively. For information regarding the maturity characteristics of CoreStates' short-term funds borrowed and long-term debt, see notes 11 and 12 to the financial statements. Investment Portfolio Within the context of the policies and practices previously outlined, CoreStates maintains a portfolio of marketable debt securities to contribute to a balanced interest rate risk position and to provide liquidity reserves. Interest rate risk management disciplines require strict matching of interest rate sensitivities and, therefore, CoreStates generally does not consider changes in the market value of individual portfolios as significant to the management of its interest sensitivity. The investment securities portfolio at December 31, 1997 consisted of investments held-to-maturity with a carrying value of $1,351 million and investments available-for-sale with a carrying value of $2,109 million, compared to $1,689 million and $2,394 million, respectively on December 31, 1996. In addition to debt securities, the available-for-sale portfolio also includes a bank stock portfolio and other marketable equity securities. The accumulated net unrealized gain on available-for-sale securities was $49 million at December 31, 1997, compared to $43 million at December 31, 1996. SOURCES AND USES OF FUNDS Total assets were $48.5 billion at year-end 1997, an increase of 6.5% from year-end 1996. The loan portfolio grew to $34.8 billion at year-end 1997, up $2,483 million, or 7.7%, from year-end 1996. The increase in loans was primarily in the commercial portfolio and the international portfolio. Loan growth at banking subsidiaries was funded primarily by a $623 million, or 15.3%, reduction in the investment portfolio and increased use of discretionary funding such as commercial time deposits and short-term borrowings. The book value of loans sold during 1997 was approximately $890 million and was primarily comprised of approximately $550 million of residential mortgages, $150 million of student loans and $190 million of fixed-rate home equity loans. The impact of loan sales on results of operations was not material. Total deposits increased $461 million, or 1.4%, from year-end 1996 principally as the result of a $1,825 million, or 242%, increase in commercial time deposits. Interest-bearing consumer deposits declined $1,321 million, or 5.9%, from year-end 1996, principally as a result of the relatively low interest rate environment in 1997 and alternative investment opportunities available to consumers. The decline in consumer deposits was offset by increases in various types of market sources of funds including euro-medium term notes, commercial time deposits, Federal funds purchased, Trust Capital Securities and commercial paper. Total assets averaged $45.7 billion in 1997, up $1,924 million, or 4.4%, from 1996. Average loans increased $2,149 million, or 6.7%. As reflected in the chart, "Earning Asset Mix", loans comprised 83.1% of CoreStates' average earning assets in 1997, compared to 81.5% in 1996. 34 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued SOURCES AND USES OF FUNDS - continued Earning Asset Mix - ----------------- 1993 to 1997 - ------------ (percentage of average earning assets)
Earning Asset Mix -------------------------------------------------- Short-term money market Investment investments Securities Loans -------------- ---------- ------ 1997 7.9% 9.0% 83.1% 1996 6.6 11.9 81.5 1995 6.3 16.0 77.7 1994 5.2 18.6 76.2 1993 4.9 20.5 74.6
The accompanying chart, "Funding Mix", illustrates that 57.2% of CoreStates' funds were derived from consumer deposits in 1997, compared with 61.9% in 1996. The decline in consumer deposits as a percentage of total CoreStates funding in 1997 primarily resulted from consumer deposit disintermediation due to the relatively low interest rate environment in 1997 and alternative investment opportunities available to consumers, and from an increased dependence on discretionary funding sources to fund loan growth. Funding to accommodate current business needs and future growth at non-bank subsidiaries is expected to continue to be supported by discretionary funding sources. Funding Mix - ----------- 1993 to 1997 - ------------ (percentage of average earning assets*)
Funding Mix ------------------------------------------------ Other Non- Retail Interest Interest Deposits Bearing Bearing -------- -------- -------- 1997 57.2% 18.4% 24.4% 1996 61.9 12.3 25.8 1995 62.5 13.9 23.6 1994 62.5 12.9 24.6 1993 64.0 12.1 23.9
* excluding short-term money market investments 35 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued REVIEW AND ANALYSIS OF EARNINGS Operating Revenue Operating revenue has two primary sources, net interest income and non-interest income. Net interest income comprised 70% of CoreStates' total revenue in 1997 compared to 71% in 1996. On the accompanying chart ("Operating Revenue"), net interest income is presented excluding the earnings benefit of balances maintained by commercial customers as compensation for transaction oriented non-credit products. Non-interest income and the previously mentioned earnings benefit of balances maintained are presented separately. Net interest income and non-interest income are discussed in further detail on the following pages. Operating Revenue - ----------------- (tax equivalent net interest income plus non-interest income - in millions)
Operating Revenue --------------------------------------------------- Derived Loan and from Non- Investment Non-credit Interest Interest Balances Income Total ---------- ---------- -------- -------- 1997 $1,900.7 $238.7 $925.8 $3,065.2 1996 1,941.0 226.7 899.1 3,066.8 1995 1,993.6 206.6 882.2 3,082.4 1994 1,921.0 186.5 788.5 2,896.0 1993 1,888.0 172.6 832.7 2,893.3
Operating revenue for 1997 was relatively flat compared to 1996. Excluding the impact of the common stock repurchase program, operating revenue would have increased 2%. Tax equivalent net interest income declined $28.2 million, or 1.3%, while non-interest income increased $26.7 million, or 3.0%, due to broad based fee growth. The decline in net interest income for 1997 was primarily due to the funding costs associated with the common stock repurchase program. Operating revenue for 1996, as adjusted for significant and unusual items was down $26.3 million, or 0.9% in comparison to 1995 due to a decline in tax equivalent net interest income of $32.5 million, or 1.5%. The decline in net interest income for 1996 was primarily due to the impact of a $1.0 billion reduction in average interest earning assets and the impact of reduced spreads on loans and deposits. 36 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued REVIEW AND ANALYSIS OF EARNINGS - continued Net Interest Income For analytical purposes, net interest income is adjusted to a taxable equivalent basis to recognize the income from tax exempt assets as if the interest were taxable. Net interest income on a taxable equivalent basis decreased $28.2 million, or 1.3% in 1997, and $32.5 million, or 1.5% in 1996. The decline in net interest income for 1997 was solely the result of the impacts of the $58.8 million cost of funding the common stock repurchase program; the higher replacement cost of funding due to a decline of $2.6 billion, or 16.9%, in average customer savings deposits, NOW accounts and customer certificates; and a narrowing of interest rate spreads earned on loans. These decreases were partially offset by the impacts of an increase in average loan volume of $2.1 billion, or 6.7% primarily in the commercial loan portfolio and relatively short-term international lending; and also by the favorable repricing of deposits. The net interest margin decreased 31 basis points to 5.22% for the same reasons as the decline in net interest income. The strength of CoreStates' net interest income and net interest margin stems from the combination of wide spreads on both loans and deposits and on a balance sheet which has a relatively high portion of loans and a large base of non-interest bearing funding. The following table compares taxable equivalent net interest income for the years ended December 31, 1997, 1996 and 1995. Taxable Equivalent Net Interest Income - -------------------------------------- For the Years Ended December 31, - -------------------------------- (in millions)
Percentage increase(decrease) ----------------- 1997 1996 1995 '97/'96 '96/'95 -------- -------- -------- ------- ------- Total interest income........... $3,429.3 $3,298.2 $3,475.1 4.0% (5.1)% Tax equivalent adjustment....... 23.6 26.2 33.3 (9.9) (21.3) -------- -------- -------- Tax equivalent interest income.. 3,452.9 3,324.4 3,508.4 3.9 (5.2) Total interest expense ......... 1,313.4 1,156.7 1,308.2 13.5 (11.6) -------- -------- -------- Taxable equivalent net interest income........................ $2,139.5 $2,167.7 $2,200.2 (1.3) (1.5) ======== ======== ======== Interest rate spread (a)........ 4.28% 4.60% 4.55% ==== ==== ==== Net interest margin (b)......... 5.22% 5.53% 5.47% ==== ==== ====
- ------------ (a) The interest rate spread represents the difference between the average yield on total interest earning assets and the average cost on total interest bearing liabilities. (b) The net interest margin is a key measure of net interest income performance. It represents the difference between tax equivalent interest income and interest expense (i.e., taxable equivalent net interest income) reflected as a percentage of average earning assets. The decline in net interest income for 1996 was primarily due to the impact of a $1.0 billion, or 2.5%, reduction in average interest earning assets and the impacts of reduced spreads on loans and deposits due to competitive pricing pressures. Compared to 1995, the relatively lower-yielding investment portfolio was reduced $1.8 billion, or 27.5%, on average during 1996, while the loan portfolio grew $0.7 billion, or 2.1%, on average. This adjustment in asset mix, combined with a $0.5 billion increase in interest free funding sources, resulted in a 6 basis point increase in the net interest margin for 1996. 37 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued REVIEW AND ANALYSIS OF EARNINGS - continued For further detailed information regarding average balances, yields and costs, see the consolidated average balance sheet on pages 85-88, and the rate/volume analysis on page 91. Non-Interest Income - ------------------- For the Years Ended December 31, - ------------------------------- (in millions)
Percentage increase(decrease) ------------------- 1997 1996 1995 '97/'96 '96/'95 -------- -------- ------- ------- ------- Service charges on deposits............. $242.3 $229.6 $233.6 5.5% (1.7)% Trust income (a)........................ 186.0 164.9 153.2 12.8 7.6 International services fees............. 113.8 101.8 94.3 11.8 8.0 Debit and credit card fees.............. 97.0 88.8 94.6 9.2 (6.1) Third party processing fees (b)......... 75.5 58.0 47.7 30.2 21.6 Income from investment in EPS, Inc...... 29.5 29.9 30.1 (1.3) (0.7) Income from trading activities.......... 34.4 25.2 35.4 36.5 (28.8) Investment banking fees................. 32.0 23.0 18.1 39.1 27.1 Mortgage banking income................. 8.8 11.3 16.1 (22.1) (29.8) Securities gains........................ 21.1 16.2 17.9 Corporate trust fees (a)................ - 2.3 9.7 Gains on sales of corporate trust....... 4.6 8.2 7.4 Other operating income.................. 80.8 96.6 91.5 (16.4) 5.6 ------ ------ ------ Non-interest income before significant and unusual items....... 925.8 855.8 849.6 8.2 0.7 ------ ------ ------ Certain net investment gains (c)........ - 43.3 13.6 Gain on sale of affiliate joint venture............................. - - 19.0 ------ ------ ------ Total non-interest income............ $925.8 $899.1 $882.2 3.0 1.9 ====== ====== ======
- --------------------- (a) For presentation purposes, fee income on the corporate trust business was presented on a separate line. CoreStates' and Meridian's corporate trust businesses were sold in the fourth quarters of 1995 and 1996, respectively. (b) Includes revenues for QuestPoint lockbox processing, document processing, check processing, and SynapQuest credit card and merchant processing. (c) See "Certain Net Investment Gains" on page 6 for more detail. Non-interest income for 1997 increased $70.0 million, or 8.2%, from the prior year before 1996 significant and unusual items. The increase primarily reflected growth in revenues from fee-based services. The largest contributors to that growth were trust income which increased $21.1 million, or 12.8%, third party processing fees which increased $17.5 million, or 30.2%, service charges on deposits which increased $12.7 million, or 5.5%, fees for international services which increased $12.0 million or 11.8%, income from trading activities which increased $9.2 million, or 36.5%, investment banking fees which increased $9.0 million, or 39.1%, and debit and credit card fees which increased $8.2 million, or 9.2%. Non-interest income for 1996, before the significant and unusual items noted in the above table, increased $6.2 million, or 0.7%. Increases in third party processing fees of 21.6%, international service charges of 8.0%, trust income of 7.6%, investment banking fees of 27.1%, and gains on the securitization of home equity loans were mostly offset by a 29.8% decrease in mortgage banking income, a 28.8% decline in income from trading activities, and a 1.7% decline in service charges on deposits. 38 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued REVIEW AND ANALYSIS OF EARNINGS - continued The following is a discussion of the more significant components of non-interest income: . Service charges on deposit accounts, paid in fees, increased $12.7 million, or 5.5%, in 1997, following a decrease of $4.0 million, or 1.7%, in 1996. After adding the value of service charges paid through the maintenance of deposit balances by commercial and correspondent customers, which is included in net interest income, total service charge compensation for 1997 was $480.9 million, up $24.6 million, or 5.4%, from 1996 mainly due to repricing on business deposit accounts. Total service charge compensation on this basis for 1996 was $456.3 million, an increase of $16.1 million or 3.7% over 1995 reflecting growth in transaction volume. . Trust income increased $21.1 million, or 12.8%, in 1997 and $11.7 million, or 7.6%, in 1996. The 1997 increase was primarily the result of increased asset values in Personal and Institutional Trust. Improvements in 1996 trust fees related to increased revenues from investment management generated from the implementation of the process redesigns and appreciation of asset market values, partially offset by a decline in fees from the employee benefit plan business. . Fees for international services increased $12.0 million, or 11.8%, in 1997, following an increase of $7.5 million, or 8.0%, in 1996. The growth in revenues for 1997 and 1996 reflects a continuing emphasis on non-credit products and international transaction processing services and resulting volume increases at overseas branches which were opened in recent years. For 1997, foreign exchange fees increased $2.7 million, or 11.8%, following a decrease of $0.7 million, or 2.0% for 1996. Fees for international transaction processing services increased $9.5 million, or 12.1%, in 1997 and $8.2 million, or 12.8%, in 1996. . Debit and credit card fees increased $8.2 million, or 9.2% in 1997, following a decrease of $5.8 million, or 6.1%, in 1996. Credit card fees were $40.1 million, $31.9 million, and $25.5 million for 1997, 1996 and 1995, respectively. Debit card fees for the same periods were $56.9 million, $56.9 million and $69.1 million, respectively. The improvement in credit card fees in 1997 and 1996 was due to increased volume on transaction-based fees, partially offset by pricing pressures on annual credit card fees in 1996. The decline in debit card fees for 1996 was attributable to a decrease in merchant fee income due to customer attrition from bank acquisitions, systems conversions, and repricing of unprofitable customers. . Third party processing fees increased $17.5 million, or 30.2%, in 1997 mostly as a result of the acquisition of five check processing centers in October, 1996. Third party processing fees increased $10.3 million, or 21.6% in 1996 primarily as a result of higher check processing and lockbox business in that year. . Investment banking fees increased $9.0 million, or 39.1 %, over 1996 primarily due to an increase in loan syndication fees. Excluding "certain net investment gains" in 1996, CoreStates recorded net securities gains of $21.1 million in 1997, compared to $16.2 million in 1996 and $17.9 million in 1995. Net investment securities gains for 1997 included gains of $22.7 million recorded on sales of bank stocks and losses of $4.8 million recorded on foreign equity securities. Investment securities gains for 1996 included $3.9 million recorded on sales of equity securities acquired in connection with prior loan arrangements, $4.6 million recorded on sales of bank stocks, and $1.4 million on the sale of foreign equity securities. Investment securities gains for 1995 included $7.8 million of gains recorded on sales of equity securities acquired in connection with prior loan arrangements. Other non-interest income for 1997 included gains on securitization of home equity loans of $4.9 million, compared to $8.9 million in 1996 and $0.5 million in 1995. Also included in other non-interest income are commissions on standby letters of credit which declined $3.2 million, or 18.6%, from 1996. 39 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued REVIEW AND ANALYSIS OF EARNINGS - continued
Non-Financial Expenses - ---------------------- Percentage For the Years Ended December 31, increase(decrease) - -------------------------------- -------------------- (in millions) 1997 1996 1995 '97/'96 '96/'95 --------- ---------- ---------- -------- -------- Salaries, wages and benefits........ $ 822.2 $ 826.4 $ 904.4 (0.5)% (8.6)% Net occupancy expense............... 143.1 157.4 159.5 (9.1) (1.3) Outside services hired.............. 157.7 155.0 146.3 1.7 5.9 Equipment expense................... 125.1 120.6 118.5 3.7 1.8 Amortization of intangible assets... 37.7 40.0 44.8 (5.8) (10.7) FDIC premiums....................... 5.3 4.3 42.0 23.3 (89.8) OREO expense (income)............... (0.2) (0.8) 6.4 Other operating expenses ........... 332.9 320.0 325.0 4.0 (1.5) --------- ---------- ---------- Non-financial expenses before significant and unusual items.... 1,623.8 1,622.9 1,746.9 0.1 (7.1) --------- ---------- ---------- Restructuring and merger-related charges.......................... 15.0(a) 139.7(c) 138.6(e) Other significant and unusual items............................ 57.0(b) 14.2(d) - --------- ---------- ---------- Total non-financial expenses..... $ 1,695.8 $ 1,776.8 $ 1,885.5 (4.6) (5.8) ========= ========== ==========
- ------------------------------- (a) Reflects restructuring and merger-related charges primarily related to costs incurred in the pending First Union merger and costs incurred in the creation of a strategic technology alliance with Andersen Consulting. See "Restructuring and Merger-Related charges" on page 5 for more detail. (b) Includes a $25.0 million charitable contribution, $20.0 million for certain legal matters and a special $12.0 million employee bonus. (c) Consists of net restructuring charges of $110.7 million primarily related to the Acquisition and charges of $29.0 million for merger implementation costs. See "Restructuring and Merger-Related Charges" on page 5 for more detail. (d) Reflects the SAIF special assessment. See "Other Significant and Unusual Charges" on page 6" for more detail. (e) Reflects net restructuring charges of $128.6 million related to the 1995 process redesigns and a $10.0 million charge related to the Meridian acquisition. See "Restructuring and Merger-Related Charges" on page 5 for more detail. Comparison of 1997 to 1996 - Total non-financial expenses for 1997, before -------------------------- the significant and unusual items noted in the above table, were $1,623.8 million. This represents an increase of only $0.9 million, or 0.1%, when compared to 1996. This year-to-year stability reflects merger-related efficiencies partially offset by costs for technology investments. Salaries, wages and benefits decreased $4.2 million, or 0.5%, in 1997 reflecting a decline of $25.0 million, or 14.7%, in benefits partially offset by an increase of $20.8 million, or 3.2%, in salaries and wages. The increase in salaries and wages reflects slightly higher staffing levels in early 1997 as well as normal pay increases. The decline in benefits resulted primarily from reduced costs for post-retirement benefits. The number of full-time equivalent employees at December 31, 1997, 1996 and 1995 was: 18,847; 19,114; and 19,957, respectively. Comparison of 1996 to 1995 - Total non-financial expenses for 1996, before -------------------------- the significant and unusual items as noted in the above table, were $1,622.9 million, a decrease of $124.0 million, or 7.1% from 1995. This decline reflects the impacts of the process redesigns, merger-related efficiencies and a reduction in Federal Deposit Insurance Corporation ("FDIC") premiums. For the 1996 full year, CoreStates was not assessed premiums on deposits insured under the Bank Insurance Fund. SAIF deposits were assessed premiums during the first three quarters of 1996 and a special assessment as of September 30, 1996. Partially offsetting these declines, was an increase in expense for outside services hired of $8.7 million, or 5.9%, primarily due to the impacts of outsourcing certain functions and costs for competitive and technology investments. 40 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued REVIEW AND ANALYSIS OF EARNINGS - continued Salaries, wages and benefits decreased $78.0 million, or 8.6%, in 1996 reflecting reduced staff levels from the process redesigns and merger consolidations. For 1996, salaries and wages declined by 6.8%, while benefits expense declined 15.1%. The larger percentage decline in benefits expense was primarily due to reduced retiree medical expense. Provision for Income Taxes The provision for income taxes was $269.6 million in 1997 compared to $385.8 million in 1996 and $364.4 million in 1995. The $116.2 million decrease in 1997 tax expense was primarily due to a $109.0 million benefit resulting from the liquidation of an affiliate. The $21.4 million increase in 1996 tax expense was principally due to higher pre-tax income and non-deductible expenses. The provision for income taxes for 1997, 1996 and 1995 were at effective rates of 24.9%, 37.3%, and 35.7%, respectively. Accounting Standards Effective in 1998 FAS 125 and FAS 127- Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("FAS 125"), was issued in June 1996. FAS 125 requires an entity to recognize the financial and servicing assets it controls and the liabilities it has incurred and to derecognize financial assets when control has been surrendered in accordance with the criteria provided in the Statement. FAS 125 is applicable to transactions occurring after December 31, 1996, except for provisions dealing with securities lending, repurchase and dollar repurchase agreements, which are deferred by FAS 127 and became effective January 1, 1998. The adoption of FAS 125 did not have and the adoption of FAS 127 is not expected to have a material impact on CoreStates' results of operations or financial condition. FAS 130 - Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130") establishes standards for the reporting and the presentation of comprehensive income, which is divided into net income and other comprehensive income. Other comprehensive income items are to be classified by their nature and by their related accumulated balances in the appropriate financial statements of a company. FAS 130 requires unrealized gains and losses on the Company's available-for-sale securities and the foreign currency translation adjustments, which currently are reported in shareholder's equity, to be included in other comprehensive income and the disclosure of total comprehensive income. This Standard requires that such items be presented with equal prominence on a comparative basis in the appropriate financial statements for fiscal years beginning after December 15, 1997. FAS 131 - Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS 131") establishes standards and disclosure requirements for the way companies report information about operating segments, including related product information, both in annual and interim reports issued to stockholders. Operating segments are components of a company about which separate financial information is available and which are used in determining resource allocations and performance results. FAS 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. Information such as segment net earnings, appropriate revenue and expense items and certain balance sheet items are required to be presented, and such amounts are required to be reconciled to the company's combined financial information. Certain information related to FAS 131 is included in the BUSINESS LINE RESULTS section. FAS 131 is effective for annual financial statements issued for periods ending after December 31, 1997, although earlier application is encouraged. CoreStates intends to adopt FAS 131 in the first quarter of 1998. 41 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations: continued Fourth Quarter Results In the fourth quarter of 1997, CoreStates recorded net income of $216.6 million, or $1.09 per average common share, compared to $195.5 million, or $0.91 per average common share, in the fourth quarter of 1996. Diluted net income per share was $1.08 in the fourth quarter of 1997, compared to $0.90 in the fourth quarter of 1996. "Operating earnings," defined as net income before special items, was $198.6 million, or $0.99 per share, for the fourth quarter of 1997, an increase of 6.5% on a per share basis over fourth quarter of 1996 operating income of $201.6 million, or $0.93 per share. The increase in fourth quarter of 1997 operating earnings was driven by strong growth in non-interest income and the decline in average common shares outstanding due to the common stock repurchase program, which added $0.04 to earnings per share after considering the unfavorable impact of $15.8 million in funding costs. Selected financial results for the three months ended December 31, 1997 and 1996 based on operating earnings, which exclude the significant items listed below, were as follows (in millions, except per share):
Three Months Ended December 31, --------------------------- 1997 1996 --------- -------- Net income............................................ $ 216.6 $ 195.5 Exclude the following after-tax items: Special tax benefit.............................. (109.0) - Special provision for loan losses................ 44.9 - Restructuring and merger-related charges......... 9.6 6.1 Other............................................ 36.5 - --------- -------- Operating earnings.................................... $ 198.6 $ 201.6 ========= ======== Operating earnings per common share: Basic............................................ $1.00 $0.93 Diluted.......................................... $0.99 $0.93 Return on average total assets........................ 1.66% 1.81% Return on average shareholders' equity................ 24.84% 21.03%
42 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Report on Internal Controls Over Financial Reporting Financial Statements CoreStates Financial Corp is responsible for the preparation, integrity, and fair presentation of its published financial statements as of December 31, 1997, and the year then ended. The consolidated financial statements of CoreStates Financial Corp have been prepared in accordance with generally accepted accounting principles and, as such, include some amounts that are based on judgments and estimates of management. Internal Control over Financial Reporting Management is responsible for establishing and maintaining effective internal control over financial reporting. The system contains monitoring mechanisms and actions are taken to correct deficiencies identified. There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time. Management assessed CoreStates Financial Corp's internal control over financial reporting as of December 31, 1997. This assessment was based on criteria for effective internal control over financial reporting described in "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that CoreStates Financial Corp maintained effective internal control over financial reporting as of December 31, 1997. Chief Financial Officer /s/ Albert W. Mandia Chairman and Chief Executive Officer /s/ Terrence A. Larsen 43 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders CoreStates Financial Corp We have audited the accompanying consolidated balance sheets of CoreStates Financial Corp as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the 1995 financial statements of Meridian Bancorp, Inc. and United Counties Bancorporation, which statements reflect combined net interest income constituting 31.3% of the related consolidated total for the year ended December 31, 1995. Those statements were audited by other auditors whose reports thereon have been furnished to us, and our opinion, insofar as it relates to data included for Meridian Bancorp, Inc. and United Counties Bancorporation, is based solely on the reports of other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CoreStates Financial Corp at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Philadelphia, Pennsylvania January 20, 1998 44 CoreStates Financial Corp and Subsidiaries CONSOLIDATED STATEMENT OF INCOME (in thousands, except per share amounts)
Year Ended December 31, ---------------------------------------------- 1997 1996 1995 ----------- ----------- ----------- INTEREST INCOME Interest and fees on loans: Taxable income..................................................... $2,995,604 $2,845,898 $2,902,265 Tax exempt income.................................................. 20,310 25,335 30,390 Interest on investment securities: Taxable income..................................................... 202,425 254,576 349,138 Tax exempt income.................................................. 18,455 23,190 31,018 Interest on time deposits in banks.................................... 163,454 122,752 121,993 Interest on Federal funds sold, securities purchased under agreements to resell and other............................... 29,067 26,453 40,276 ---------- --------- ---------- Total interest income.............................................. 3,429,315 3,298,204 3,475,080 ---------- --------- ---------- INTEREST EXPENSE Interest on deposits: Domestic savings................................................... 383,333 295,650 396,176 Domestic time...................................................... 436,135 497,956 492,610 Overseas branches and subsidiaries................................. 64,896 48,174 52,261 ---------- --------- ---------- Total interest on deposits...................................... 884,364 841,780 941,047 Interest on short-term funds borrowed................................. 189,835 153,129 214,119 Interest on long-term debt............................................ 239,248 161,811 152,989 ---------- --------- ---------- Total interest expense.......................................... 1,313,447 1,156,720 1,308,155 ---------- --------- ---------- Net interest income................................................ 2,115,868 2,141,484 2,166,925 Provision for losses on loans......................................... 263,000 228,767 144,002 ---------- --------- ---------- Net interest income after provision for losses on loans............ 1,852,868 1,912,717 2,022,923 ---------- --------- ---------- NON-INTEREST INCOME Service charges on deposit accounts................................... 242,285 229,592 233,592 Trust income.......................................................... 186,031 167,138 162,776 Fees for international services....................................... 113,767 101,761 94,396 Debit and credit card fees............................................ 96,983 88,811 94,659 Income from investment in EPS, Inc.................................... 29,486 29,902 30,114 Income from trading activities........................................ 34,445 25,216 35,403 Securities gains...................................................... 21,111 59,512 31,475 Other gains........................................................... - 8,200 26,400 Other operating income................................................ 201,662 188,943 173,407 ----------- --------- ---------- Total non-interest income.......................................... 925,770 899,075 882,222 ----------- --------- ---------- NON-FINANCIAL EXPENSES Salaries, wages and benefits.......................................... 834,184 826,442 904,377 Net occupancy......................................................... 143,112 157,358 159,530 Equipment expenses.................................................... 125,070 120,602 118,532 Restructuring and merger-related charges.............................. 15,000 139,702 138,600 Other operating expenses.............................................. 578,411 532,724 564,489 ----------- --------- ---------- Total non-financial expenses....................................... 1,695,777 1,776,828 1,885,528 ----------- --------- ---------- INCOME BEFORE INCOME TAXES............................................ 1,082,861 1,034,964 1,019,617 Provision for income taxes............................................ 269,582 385,820 364,441 ----------- --------- ---------- NET INCOME............................................................ $ 813,279 $ 649,144 $ 655,176 =========== ========= ========== PER COMMON SHARE DATA Net income: Basic.............................................................. $4.00 $2.97 $2.95 ===== ===== ===== Diluted............................................................ $3.96 $2.94 $2.92 ===== ===== ===== Cash dividends declared............................................... $1.91 $1.73 $1.44 ===== ===== =====
See accompanying notes to the financial statements. 45 CoreStates Financial Corp and Subsidiaries CONSOLIDATED BALANCE SHEET (in thousands)
December 31, -------------------------------- 1997 1996 ------------ ------------ ASSETS Cash and due from banks................................... $ 3,829,893 $ 3,462,287 Time deposits, principally Eurodollars.................... 3,122,444 2,443,154 Federal funds sold and securities purchased under agreements to resell.................................. 41,207 509,694 Trading account assets.................................... 495,472 122,317 Investment securities available-for-sale.................. 2,109,254 2,394,166 Investment securities held-to-maturity (market value: 1997-$1,347,819; 1996-$1,692,243)..................... 1,351,137 1,689,058 Total loans, net of unearned discounts of $249,702 in 1997 and $234,607 in 1996................. 34,813,886 32,331,297 Less: Allowance for loan losses....................... (634,432) (710,327) ------------ ------------ Net loans......................................... 34,179,454 31,620,970 ------------ ------------ Due from customers on acceptances......................... 641,859 738,077 Premises and equipment.................................... 629,965 625,876 Other assets.............................................. 2,060,280 1,888,595 ------------ ------------ Total assets...................................... $ 48,460,965 $ 45,494,194 ============ ============ LIABILITIES Deposits: Domestic: Non-interest bearing.............................. $ 9,252,376 $ 9,330,445 Interest bearing.................................. 23,490,992 22,986,955 Overseas branches and subsidiaries.................... 1,444,522 1,409,756 ------------ ------------ Total deposits.................................... 34,187,890 33,727,156 ------------ ------------ Short-term funds borrowed................................. 4,323,319 2,633,157 Bank acceptances outstanding.............................. 641,464 727,728 Other liabilities......................................... 1,616,624 1,661,162 Long-term debt............................................ 4,454,236 3,049,297 ------------ ------------ Total liabilities................................. 45,223,533 41,798,500 ------------ ------------ COMMITMENTS AND CONTINGENT LIABILITIES SHAREHOLDERS' EQUITY Preferred stock: authorized 10.0 million shares; no shares issued.............................. - - Common stock: $1 par value; authorized 350.0 million shares; issued 223.599 million shares in 1997 and 1996 (including treasury shares of 23.235 million in 1997 and 8.900 million in 1996, and unallocated shares held by Employee Stock Ownership Plan ("ESOP") of 2.148 million in 1997 and 2.267 million in 1996)............ 223,599 223,599 Other common shareholders' equity, net.................... 3,013,833 3,472,095 ------------ ------------ Total shareholders' equity........................ 3,237,432 3,695,694 ------------ ------------ Total liabilities and shareholders' equity........ $ 48,460,965 $ 45,494,194 ============ ============
See accompanying notes to the financial statements. 46 CoreStates Financial Corp and Subsidiaries Page 1 of 2 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (in thousands)
Common Capital Retained Treasury Unallocated stock surplus earnings stock ESOP shares Total -------- ---------- ---------- --------- ----------- ---------- Balances at December 31, 1994.......................... $229,827 $1,200,658 $2,360,312 $ (24,297) $ (35,568) $3,730,932 Net income............................................. 655,176 655,176 Net change in unrealized gain on investments available-for-sale, net of tax..................... 41,187 41,187 Treasury shares acquired (10,307 shares)............... (335,528) (335,528) Repurchase and retirement of common stock (595 shares)....................................... (595) (4,093) (12,446) (17,134) Common stock issued under employee benefit plans (1,002 new shares; 3,089 treasury shares).......... 999 26,825 (25,483) 96,670 99,011 Common stock issued under dividend reinvestment plan (417 treasury shares).............................. (9) (2) 12,690 12,679 Purchase of shares for Employee Stock Ownership Plan (876 shares) ...................................... (20,922) (20,922) Employee Stock Ownership Plan shares committed for release (123 shares)............................... 1,786 2,824 4,610 Cash paid for fractional shares........................ (24) (24) Foreign currency translation adjustments............... (29) (29) Common dividends declared.............................. (294,393) (294,393) -------- ---------- ---------- --------- --------- ---------- Balances at December 31, 1995.......................... 230,231 1,225,167 2,724,298 (250,465) (53,666) 3,875,565 Net income............................................. 649,144 649,144 Net change in unrealized gain on investments available-for-sale, net of tax..................... (25,070) (25,070) Treasury shares acquired (11,055 shares)............... (533,932) (533,932) Treasury shares issued in merger (7,300 shares)........ (7,300) (33,288) (192,042) 232,630 - Repurchase and retirement of common stock (1,340 shares)..................................... (1,340) (43,559) (12,804) (57,703) Common stock issued under employee benefit plans (1,824 new shares; 2,330 treasury shares).......... 1,824 75,618 (48,119) 100,826 130,149 Common stock issued under dividend reinvestment plan (184 new shares; 353 treasury shares)............. 184 8,225 (68) 13,361 21,702 Purchase of shares for Employee Stock Ownership Plan (65 shares).................................. (38) (3,509) (3,547) Employee stock ownership plan shares committed for release (126 shares)................. 2,397 3,018 5,415 Cash paid for fractional shares........................ (342) (342) Foreign currency translation adjustments............... 5,448 5,448 Common dividends declared.............................. (371,135) (371,135) -------- ---------- ---------- --------- -------- ---------- Balances at December 31, 1996.......................... 223,599 1,234,522 2,729,310 (437,580) (54,157) 3,695,694
(continued) 47 CoreStates Financial Corp and Subsidiaries Page 2 of 2 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY: continued (in thousands)
Common Capital Retained Treasury Unallocated stock surplus earnings stock ESOP shares Total -------- ---------- ---------- ---------- ----------- ---------- Net income............................................ 813,279 813,279 Net change in unrealized gain on investments available-for-sale, net of tax.................... 5,149 5,149 Treasury shares acquired (17,100 shares).............. (1,007,832) (1,007,832) Common stock issued under employee benefit plans (2,209 treasury shares)........................... 22,665 (70,325) 133,198 85,538 Common stock issued under dividend reinvestment plan (556 treasury shares)............................. 676 (1,058) 30,383 30,001 Employee stock ownership plan shares committed for release (119 shares)................ 4,423 2,846 7,269 Foreign currency translation adjustments.............. (748) (748) Common dividends declared............................. (390,918) (390,918) -------- ---------- ---------- ---------- ----------- ---------- Balances at December 31, 1997......................... $223,599 $1,262,286 $3,084,689 $(1,281,831) $(51,311) $3,237,432 ======== ========== ========== ========== =========== ==========
See accompanying notes to the financial statements. 48 CoreStates Financial Corp and Subsidiaries Page 1 of 2 CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
Year Ended December 31, ------------------------------------------------ OPERATING ACTIVITIES 1997 1996 1995 ------------ ------------ ------------ Net income........................................................... $ 813,279 $ 649,144 $ 655,176 Adjustments to reconcile net income to net cash provided by operating activities: Restructuring and merger-related charges.......................... 15,000 139,702 138,600 Provision for losses on loans..................................... 263,000 228,767 144,002 Provision for losses and writedowns on other real estate owned...................................... 5,500 3,387 15,971 Depreciation and amortization..................................... 126,749 110,512 122,996 Deferred income tax expense....................................... 100,751 9,156 28,420 Securities gains.................................................. (21,111) (59,512) (31,475) Gains on sale of mortgage servicing............................... - - (2,387) Other gains....................................................... - (8,200) (26,400) (Increase) decrease in loans held-for-sale........................ (395,583) 93,039 82,226 (Increase) decrease in trading account assets.................... (373,155) 24,901 200,833 Increase (decrease) in due to factored clients.................... 143,486 1,805 (86,921) (Increase) decrease in interest receivable........................ (34,460) 45,046 2,009 Increase in interest payable...................................... 23,014 10,163 45,044 Decrease in merger-related accrual ............................... (59,451) (100,258) (33,270) Other, net........................................................ (101,623) 216,135 ( 84,141) ------------ ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 505,396 1,363,787 1,170,683 ------------ ------------ ------------ INVESTING ACTIVITIES Net increase in loans................................................ (3,592,259) (2,989,441) (1,914,405) Proceeds from sales of loans......................................... 898,828 1,577,270 1,087,732 Loans originated or acquired--non-bank subsidiaries.................. (37,198,437) (39,054,032) (35,767,440) Principal collected on loans--non-bank subsidiaries.................. 37,056,155 39,039,627 35,407,667 Net increase in time deposits, principally Eurodollars............... (679,290) (533,894) (33,172) Purchases of investments held-to-maturity............................ (650,362) (490,995) (686,652) Purchases of investments available-for-sale.......................... (568,161) (2,062,012) (589,327) Proceeds from maturities of investments held-to-maturity............. 995,449 1,524,670 2,175,780 Proceeds from maturities of investments available-for-sale........... 807,037 854,898 161,477 Proceeds from sales of investments available-for-sale................ 122,037 1,500,504 546,728 Net decrease in Federal funds sold and securities purchased under agreements to resell................... 468,487 210,243 203,693 Purchases of premises and equipment.................................. (90,085) (101,469) (125,216) Proceeds from sales and paydowns on other real estate owned................................................. 12,896 31,465 66,834 Other, net........................................................... 33,493 141,063 11,303 ------------ ------------ ------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES....................................................... (2,384,212) (352,103) 545,002 ------------ ------------ ------------
(continued) 49 CoreStates Financial Corp and Subsidiaries Page 2 of 2 CONSOLIDATED STATEMENT OF CASH FLOWS: continued (in thousands)
Year Ended December 31, ----------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ FINANCING ACTIVITIES Net increase (decrease) in deposits........................... 460,734 172,155 (660,745) Payment for sales of deposits................................. - (368,110) (154,360) Proceeds from issuance of long-term debt...................... 2,033,056 1,340,099 582,251 Retirement of long-term debt.................................. (630,547) (501,165) (533,480) Net increase (decrease) in short-term funds borrowed.......... 1,690,162 (1,043,856) 215,764 Cash dividends paid........................................... (391,781) (328,114) (286,565) Purchases of treasury stock................................... (1,007,832) (533,932) (335,528) Repurchase and retirement of common stock..................... - (57,703) (17,134) Common stock issued under employee benefit plans.............. 62,873 87,726 99,011 Other, net.................................................... 29,757 21,360 12,655 ------------ ------------ ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES...................................... 2,246,422 (1,211,540) (1,078,131) ------------ ------------ ------------ INCREASE (DECREASE) IN CASH AND DUE FROM BANKS................................................ 367,606 (199,856) 637,554 Cash and due from banks at January 1,......................... 3,462,287 3,662,143 3,024,589 ------------ ------------ ------------ CASH AND DUE FROM BANKS AT DECEMBER 31,....................... $ 3,829,893 $ 3,462,287 $ 3,662,143 ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest.................................................. $ 1,290,433 $ 1,146,557 $ 1,263,681 ============ ============ ============ Income taxes.............................................. $ 193,532 $ 331,940 $ 284,987 ============ ============ ============ Net cash received on interest rate swaps...................... $ 54,230 $ 68,103 $ 7,493 ============ ============ ============
See accompanying notes to the financial statements. 50 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation The consolidated financial statements include the accounts of CoreStates Financial Corp ("the Corporation") and all of its subsidiaries, including: CoreStates Bank, N.A. ("CBNA"); CoreStates Bank of Delaware, N.A. ("CBD"); Congress Financial Corporation; and CoreStates Capital Corp ("CSCC"). All material intercompany transactions have been eliminated. Certain amounts in prior years have been reclassified for comparative purposes. The Corporation is a bank holding company incorporated under the laws of the Commonwealth of Pennsylvania, primarily operating in the eastern Pennsylvania, northern Delaware and the central and southern New Jersey markets. Through its subsidiaries, the Corporation is engaged in the business of providing global and specialized banking (including international banking services), regional banking, retail credit services, trust and asset management and third party processing services to a diversified customer base. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Changes in accounting principles Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("FAS 125"), was issued in June 1996. FAS 125 requires an entity to recognize the financial and servicing assets it controls and the liabilities it has incurred and to derecognize financial assets when control has been surrendered in accordance with the criteria provided in the Statement. FAS 125 is applicable to transactions occurring after December 31, 1996, except for provisions dealing with securities lending, repurchase and dollar repurchase agreements, which are deferred by FAS 127 and became effective January 1, 1998. The adoption of FAS 125 did not, and the adoption of FAS 127 is not expected to, have a material impact on the Corporation's results of operations or financial condition. Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128") was issued in February 1997. FAS 128, which was adopted on December 31, 1997, required entities to change the method used to compute earnings per share. Under FAS 128, basic earnings per share excludes the dilutive effect of stock options and diluted earnings per share includes the dilutive effect of stock options even if the dilutive effect is immaterial. All periods presented have been restated to comply with FAS 128. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123") was adopted by the Corporation in 1996 and establishes accounting and reporting standards for stock-based employee compensation plans such as stock option and restricted stock plans ("stock-based plans"). FAS 123 defines a fair value method of accounting for measuring compensation expense for stock-based plans and encourages all entities to adopt that method of accounting. However, FAS 123 also permits entities to continue to measure compensation expense for stock-based plans using the intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Under the fair value method, compensation expense would be measured as the value of an award under a stock-based plan on the date the award is granted, and would be recognized over the vesting period of the award. Under the intrinsic value method, compensation expense is measured as the excess, if any, of the market price of the stock underlying the award on the date the award is granted, over the exercise price. Under the Corporation's stock-based long-term incentive plan, awards have no intrinsic value on the date of grant as the exercise price equals the market price on that date. The Corporation did not adopt the fair value method of accounting for stock-based plans, and will continue to use the intrinsic value method to measure compensation expense. Effective January 1, 1995, the Corporation adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("FAS 114") and Statement No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures" ("FAS 118"). FAS 114 addresses accounting for impairment of certain loans and requires that impaired loans within the scope of FAS 114 be measured based on the present value of expected cash flows discounted at the loan's effective interest rate, or be measured at the loan's observable market price or the fair value of its collateral. FAS 118 amended the income recognition policies and clarified disclosure requirements of FAS 114. 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. 51 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Income taxes Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The Corporation and its subsidiaries file a consolidated Federal income tax return. Investments Held-to-maturity securities, consisting primarily of debt securities, are carried at cost adjusted for amortization of premiums and accretion of discounts, both computed on the interest method. The Corporation has both the ability and positive intent to hold these securities until maturity. Trading account assets are carried at market value. Gains on trading account assets include both realized and unrealized gains and losses on the portfolio. All other securities are classified as available-for-sale and are carried at fair value, with unrealized gains and losses, net of tax, reported as a component of shareholders' equity. The net unrealized gain on available-for-sale securities included in retained earnings was $31,704 at December 31, 1997 and $26,555 at December 31, 1996. Realized securities gains and losses are determined using the adjusted cost of a specific security sold. Interest and dividends on investment securities are recognized as income when earned. Loans Interest on commercial loans is recognized on the daily principal amounts outstanding. Loan fees are generally considered adjustments of interest rate yields and are amortized into interest income on loans over the terms of the related loans. Interest on installment loans is principally recognized on the interest method. Commercial loans are placed on a non-accrual status, generally recognizing interest as income when received, when, in the opinion of management, the collectability of principal or interest payments becomes doubtful or when such payments are 90 days or more past due, unless the loan is well secured and in the process of collection. The deferral or non-recognition of interest does not constitute forgiveness of the borrower's obligation. Consumer loans, excluding residential mortgage loans and credit card loans, are charged off after reaching 120 days past due. Residential mortgage loans are placed on non-accrual status after reaching 120 days past due and are written down to the fair value of underlying collateral at that time. Credit card loans are charged off after reaching 150 days past due. Prior to the second quarter of 1996, credit card loans were charged off after reaching 180 days past due. Loans classified as held for sale are included in other assets and are carried at their net realizable value. Other real estate owned When a property is acquired through foreclosure of a loan secured by real estate, that property is recorded at the lower of the cost basis in the loan or the estimated fair value of the property less estimated disposal costs. Writedowns at the time of foreclosure are charged against the allowance for loan losses. Subsequent writedowns for changes in the fair value of the property are charged to other non-financial expense. Allowance for loan losses The allowance for loan losses is maintained at a level believed adequate by management to absorb estimated probable credit losses. Factors included in management's determination of an adequate level of allowance for loan losses are a statistical analysis of historical loss levels throughout an economic cycle and one year of projected charge-offs, establishing a minimum level below which the allowance for loan losses is considered inadequate and a maximum level above which is considered inappropriate. A quarterly evaluation of loss potential on specific credits, products, industries, portfolios and markets, as well as indicators for loan growth, the economic environment and concentrations assist in validating the position of the allowance for loan losses within those boundaries. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change. 52 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued The Corporation adopted FAS 114 effective January 1, 1995. Under FAS 114, the allowance for loan losses related to "impaired loans" is based on discounted cash flows using the impaired loan's initial effective interest rate as the discount rate, or the fair value of the collateral for collateral dependent loans. A loan is impaired when it meets the criteria to be placed on non-accrual status or is a renegotiated loan. Loans which are evaluated for impairment pursuant to FAS 114 are assessed on a loan-by-loan basis, and include only commercial non-accrual and renegotiated loans. Large groups of smaller balance homogeneous loans, such as commercial loans less than $250 and credit cards, lease financing receivables, loans secured by first and second liens on residential properties, and other consumer loans are evaluated collectively for impairment. Additions to the allowance arise from the provision for loan losses charged to operations or from the recovery of amounts previously charged off. Loan charge-offs reduce the allowance. Loans are charged off when there has been permanent impairment of the related carrying values. Premises and equipment Premises and equipment are stated at cost, less accumulated depreciation and amortization. The provision for depreciation and amortization is computed, generally, on the straight-line method at rates based on the following range of lives: buildings - 10 to 45 years; equipment - 3 to 12 years; and leasehold improvements - 3 to 15 years. Intangible assets (included in other assets) Goodwill and other acquired intangibles, such as core deposits, are amortized over the estimated periods to be benefited generally ranging from 5 to 25 years. An impairment review is performed periodically on these assets. Retirement plans The Corporation maintains non-contributory defined benefit pension plans for substantially all employees. Benefits are primarily based on the employee's years of credited service, average annual salary and primary social security benefit, as defined in the plans. It is the Corporation's policy to fund the plans on a current basis to the extent deductible under existing tax regulations. The Corporation provides postretirement health care and life insurance benefits for substantially all retired employees. In order to participate in the health care plan, an employee must retire with at least 10 years of service. The postretirement health care plan is contributory, with retiree contributions based on years of service. It is the Corporation's policy to fund these plans on a current basis to the extent deductible under existing tax regulations. Employee Stock Ownership Plan ("ESOP") Compensation expense in 1996 and 1995 was recognized based on the average fair value of shares committed to be released to employees. Effective January 1, 1997, the ESOP was combined with the Corporation's 401(k) Savings Plan. The remaining shares in the ESOP will be released to substantially all employees of the Corporation and compensation expense will be recorded as a portion of the Corporation's match of employee contributions to the 401(k) Savings Plan. Shares are released based on the fair value of the shares at the date the compensation expense is recorded. Foreign exchange/currency Forward exchange contracts are valued at current rates of exchange. Gains or losses on forward exchange contracts intended to hedge an identifiable foreign currency commitment, if any, are deferred and included in the measurement of the related foreign currency transaction. All other gains or losses on forward exchange contracts are included in fees for international services. Currency gains and losses in connection with non-dollar denominated loans and deposits, which are included in interest income and expenses, are recognized pro rata over the contract terms. Foreign currency translation adjustments are recorded directly to retained earnings. The cumulative foreign currency translation gain (loss) was $3,100, $3,848 and $(1,600) at December 31, 1997, 1996 and 1995, respectively. 53 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Derivative interest rate contracts The Corporation uses various interest rate contracts such as, interest rate swaps, futures, forward rate agreements, caps and floors, tender option bonds, Treasury float agreements, and forward commitments to purchase and sell loans and securities, primarily to manage the interest rate risk of specific assets, liabilities or anticipated transactions, to manage interest rate risk in securities trading positions and to provide for the needs of its customers. For contracts held for purposes other than trading, gains or losses are deferred and recognized as adjustments to interest income or expense of the underlying assets or liabilities and the interest differentials are recognized as adjustments of the related interest income or expense. Gains or losses resulting from early terminations of these contracts are deferred and amortized over the remaining term of the underlying assets or liabilities. Any fees received or disbursed which represent adjustments to the yield on interest rate contracts are capitalized and amortized over the term of the interest rate contracts. If the underlying assets or liabilities related to a derivative matures, is sold, extinguished, or terminates, the amount of the previously unrecognized gain or loss is recognized at that time in the consolidated income statement. The Corporation's trading and customer-related derivative positions mostly include tender option bonds, Treasury float agreements, and forward commitments to purchase and sell loans and securities, and interest rate caps, floors, and swaps. Gains and losses and net interest spread earned on these products are generally included in non-interest income. Treasury float agreements represent purchased option contracts. Forward commitments to purchase and sell loans and securities consist primarily of forward commitments to sell mortgage-backed securities, which are used to hedge mortgage loans held in the trading account. These commitments are marked to fair value with unrealized gains and losses recorded in income from trading activities. Contracts held or issued for customers are valued at market with gains or losses included in income from trading activities. Earnings per common share Basic earnings per common share for all periods presented are calculated by dividing net income by weighted average common shares outstanding. Diluted earnings per share for all periods presented are calculated by dividing net income by the sum of weighted average common shares outstanding and potentially dilutive shares (primarily stock options). For purposes of computing earnings per share, only shares committed to be released and shares allocated in the ESOP are considered outstanding. Unless otherwise noted, all "per share" amounts are on a diluted basis. Treasury stock The purchase of the Corporation's common stock is recorded at cost. At the date of subsequent reissuance, the treasury stock account is reduced by the cost of shares reissued on a last-in-first-out basis. Cash dividends declared per share Cash dividends declared per share for the periods prior to the acquisition of Meridian Bancorp, Inc. ("Meridian") on April 9, 1996, assume that the Corporation would have declared cash dividends equal to the cash dividends per share actually declared by the Corporation. 2. MERGERS AND ACQUISITIONS Pending merger On November 18, 1997, the Corporation entered into an Agreement and Plan of Mergers (the "Merger Agreement"), which provides, among other things, for the merger (the "Merger") of the Corporation into First Union Corporation ("First Union"). Pursuant to the Merger Agreement, each outstanding share of the Corporation's common stock would be converted into 1.62 shares of First Union's common stock (the "Exchange Ratio"), subject to possible adjustment under certain circumstances. The Merger is intended to be accounted for as a pooling of interests. Consummation of the Merger is subject to various conditions, including: (i) receipt of the approval of the Merger Agreement by the Corporation's and First Union's stockholders, and approval by First Union's stockholders of an amendment to First Union's Articles of Incorporation to increase the number of authorized shares of First Union's common stock from 750,000,000 to 2,000,000,000, which such approvals were obtained on February 27, 1998; (ii) receipt of requisite regulatory approvals from the Board of Governors of the Federal Reserve System and other federal and state regulatory authorities; (iii) receipt of opinions as to the tax and accounting treatment of certain aspects of the Merger; (iv) listing, subject to notice of issuance, of First Union's common stock to be issued in the Merger; and (v) satisfaction of certain other conditions. 54 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 2. MERGERS AND ACQUISITIONS - continued The Merger Agreement may be terminated under certain circumstances, including by the Corporation's Board of Directors by giving notice to First Union if either (x) both (i) the average closing price of First Union's common stock for the ten full trading days ending on the date the Federal Reserve Board approves the Merger (the "Average Closing Price") is less than the product of the closing price of First Union's common stock (the "Starting Price") on the first full trading day after public announcement of execution of the Merger Agreement (the "Starting Date") and 0.85, and (ii) the number obtained by dividing the Average Closing Price by the Starting Price is less than the number obtained by (a) dividing the weighted average of the closing prices of a specified group index of bank stocks during the above-mentioned ten-day period by the weighted average closing prices of such bank stocks on the Starting Date and (b) subtracting 0.15, or (y) the Average Closing Price is less than the product of the Starting Price and 0.75. In the event CoreStates gives notice of its intent to terminate the Merger Agreement pursuant to the conditions set forth in the preceding sentence, First Union may determine, in its sole discretion, to increase the Exchange Ratio to eliminate the Corporation's right to terminate the Merger Agreement. A summary of selected unaudited historical financial information for First Union for the three years ended December 31, 1997 follows (in millions, except per share):
Year ended December 31, -------------------------------------- 1997 1996 1995 ---------- ---------- ---------- Net interest income.............................. $5,743 $ 5,465 $ 5,128 Provision for losses on loans.................... 840 449 258 Non-interest income.............................. 3,396 2,636 2,176 Non-financial expenses........................... 5,589 5,153 4,657 Provision for income taxes....................... 814 875 848 Net income....................................... 1,896 1,624 1,541 Per common share: Net income - basic............................ $3.03 $2.61 $2.44 Net income - diluted.......................... 2.99 2.58 2.38 Cash dividends declared....................... 1.22 1.10 0.98
Meridian acquisition On April 9, 1996, the Corporation acquired Meridian Bancorp, Inc. ("Meridian"), a Pennsylvania bank holding company with $15.2 billion in assets and $12.1 billion in deposits. The Corporation issued approximately 81.1 million shares of common stock to shareholders of Meridian based on an exchange ratio of 1.225 shares of the Corporation's common stock for each share of Meridian common stock. On February 23, 1996, Meridian acquired United Counties Bancorporation ("United Counties"), a New Jersey bank holding company with $1.6 billion in assets in a transaction accounted for as a pooling of interests. Accordingly, the consolidated accounts of Meridian include United Counties for all periods presented. 55 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands, except per share amounts) 2. MERGERS AND ACQUISITIONS - continued The Meridian acquisition was accounted for under the pooling of interests method of accounting; accordingly, the consolidated financial statements include the consolidated accounts of Meridian for all periods presented. Financial information on a separate company basis for the year ended December 31, 1995 for the Corporation and Meridian (including United Counties) was as follows (in millions, except per share):
1995 --------------------------- The (Unaudited) Corporation Meridian ------------ ---------- Net interest income............................... $ 1,488,534 $ 678,391 Provision for losses on loans..................... 105,000 38,877 Non-interest income............................... 605,666 276,556 Non-financial expenses............................ 1,274,398 612,695 Provision for income taxes........................ 262,565 101,372 Net income........................................ 452,237 202,003 Per common share: Net income - basic............................. 3.22 3.03 Net income - diluted........................... 3.19 2.98 Cash dividends declared........................ 1.44 1.45
The restated consolidated statement of income for 1995 reflects a conforming accounting adjustment for Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("FAS 106"). The Corporation elected to recognize immediately the January 1, 1992 transitional liability of $128,706 pre-tax, $84,946 after-tax, as the cumulative effect of a change in accounting principle in the first quarter of 1992. Meridian adopted FAS 106 on January 1, 1993, the date required under that statement. As permitted by FAS 106, Meridian elected to amortize its liability over 20 years. As permitted under pooling of interests accounting, the restated financial information is prepared as if Meridian adopted FAS 106 effective January 1, 1992 and immediately recognized the $28,827, $18,738 after-tax, transitional liability. Restated salaries, wages and benefits have been adjusted accordingly. 3. FAIR VALUES OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" ("FAS 107"), requires disclosure of fair value information about financial instruments, whether or not required to be recognized in the balance sheet, for which it is practicable to estimate that value. FAS 107 defines a financial instrument as cash, evidence of ownership interest in an entity, or a contractual obligation or right that will be settled with another financial instrument. In cases where quoted market prices are not available, fair values are based on estimates using discounted cash flow or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Fair value estimates derived through those techniques cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. FAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation. 56 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 3. FAIR VALUES OF FINANCIAL INSTRUMENTS - continued The following table summarizes the carrying amount and fair value estimates of financial instruments at December 31, 1997 and 1996.
1997 1996 ----------------------------- ----------------------------- Carrying Carrying or Notional Fair or Notional Fair Amount Value Amount Value ------------ ------------ ------------ ------------ Assets: Cash and short-term assets.................................... $ 6,993,544 $ 6,993,544 $ 6,415,135 $ 6,415,135 Investment securities......................................... 3,460,391 3,457,073 4,083,224 4,086,409 Trading account assets........................................ 495,472 495,472 122,317 122,317 Net loans, excluding leases................................... 32,822,537 33,136,437 30,388,757 30,391,968 Loans held for sale........................................... 841,318 841,318 445,735 445,735 Liabilities: Demand and savings deposits................................... 22,160,650 22,160,650 22,629,513 22,629,513 Time deposits, including overseas branches and subsidiaries... 12,027,240 12,226,204 11,097,643 11,321,471 Short-term borrowings......................................... 4,323,319 4,323,319 2,633,157 2,633,157 Long-term debt................................................ 4,454,236 4,480,927 3,049,297 3,059,173 Off-balance sheet asset (liability): Letters of credit............................................. 3,291,983 (32,920) 2,893,214 (28,931) Commitments to extend credit.................................. 23,875,236 (28,581) 19,569,566 (21,204) Mortgage loans sold and loan servicing acquired with recourse.................................... 299,322 (8,559) 361,410 (9,637) Derivative financial instruments.............................. 22,896,165 147,582 20,173,225 96,629
Fair value estimates, methods, and assumptions for the Corporation's financial instruments are set forth below: Cash and due from banks and short-term instruments The carrying amounts reported in the balance sheet for cash and due from banks and short-term instruments approximate their fair values. Short-term instruments include: time deposits; Federal funds sold; and securities purchased under agreements to resell, all of which generally have original maturities of less than 90 days. Investment securities Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Trading account assets Fair values for the Corporation's trading account assets, which also are the amounts recognized in the balance sheet, are based on quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or are derived from pricing models or formulas using discounted cash flows. Loans Fair values are estimated for loans in groups with similar financial and risk characteristics. Loans are segregated by type including: commercial and industrial; commercial real estate; residential real estate; credit card and other consumer; financial institutions; factoring receivables; and foreign. Each loan type is further segmented into fixed and variable rate interest terms and by performing and non-performing categories in order to estimate fair values. The fair value of fixed-rate performing loans is calculated by discounting scheduled principal and interest cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan type at December 31, 1997 and 1996. The estimate of maturity is based on the Corporation's historical experience with repayments for each loan type, modified by an estimate of the effect of current economic and lending conditions. For performing residential mortgage loans, fair value is estimated by referring to secondary market source pricing. 57 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 3. FAIR VALUES OF FINANCIAL INSTRUMENTS - continued For credit card loans, cash flows and maturities are estimated based on contractual interest rates and historical experience and are discounted using secondary market rates adjusted for differences in servicing and credit costs. This estimate does not include the benefit that relates to cash flows which could generate from new loans to existing cardholders over the remaining life of the portfolio. For variable rate loans that reprice frequently and which have experienced no significant change in credit risk, fair values are based on carrying amounts. Fair value for non-performing loans is based on discounting estimated cash flows using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding cash flows and discount rates are determined using available market information and specific borrower information. Deposit liabilities The fair values disclosed for demand deposits (non-interest bearing checking accounts, NOW accounts, savings accounts, and money market accounts) are, by FAS 107 definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for variable-rate, fixed-term certificates of deposit approximate their fair values. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates offered on certificates at December 31, 1997 and 1996, respectively, to an estimate of aggregate expected maturities for those certificates of deposit. The estimated fair values do not include the benefit that results from funding provided by core deposit liabilities as compared to the cost of borrowing funds in the financial markets. Short-term funds borrowed The carrying amounts of Federal funds purchased, securities sold under agreements to repurchase, commercial paper and other short-term borrowings approximate their fair values. Long-term debt The fair values for long-term debt are based on quoted market prices where available. If quoted market prices are not available, fair values are estimated using discounted cash flow analyses based on the Corporation's borrowing rates at December 31, 1997 and 1996 for comparable types of borrowing arrangements. Off-balance sheet derivative financial instruments and commitments Fair values for the Corporation's futures, forwards, interest rate swaps, options, interest rate caps and floors, foreign exchange contracts, tender option bonds and Treasury float contracts are based on quoted market prices (futures); current settlement values (forwards); quoted market prices of comparable instruments (foreign currency exchange contracts); or, if there are no directly comparable instruments, on pricing models or formulas using current assumptions (interest rate swaps, interest rate caps and floors, tender option bonds, Treasury float contracts and options). The fair value of commitments to extend credit, other than credit card lines, is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The value of commitments to extend credit under credit card lines is embodied in the benefit that relates to estimated cash flows from new loans expected to be generated from existing cardholders over the remaining life of the portfolio. The fair value of standby and commercial letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate the agreements or otherwise settle the obligations with the counterparties. 4. LOAN PORTFOLIO For a breakdown of the loan portfolio by type of loan and for information on non-performing loans, refer to Supplemental Financial Data under the captions Loan Portfolio and Non-Performing Assets (pages 92 and 93). The Corporation has traditionally maintained limits on industry, country and borrower concentrations as a way to diversify and manage credit risk. The Corporation manages industry concentrations by applying limits to a family of industries that have common risk characteristics. 58 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 4. LOAN PORTFOLIO - continued At December 31, 1997 and 1996, the Corporation had loans totaling $125,224 and $110,948, respectively, to its officers, directors and companies in which the directors had a 10% or more voting interest. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectability. The 1997 additions and reductions were $373,282 and $359,006, respectively. Included in other assets at December 31, 1997 and 1996 were $841,000 and $446,000, respectively, of loans held for sale and carried at lower of cost or market. The book value of real estate loans transferred to other real estate owned during 1997, 1996 and 1995 was $8,563, $19,536, and $29,337, respectively. The following presents information on derivative financial instruments used to manage interest rate risk associated with loans:
1997 1996 ------------ ------------ At December 31, Notional value......................... $6,283,000 $ 9,118,000 Unrealized gains....................... 71,000 64,000 Unrealized losses...................... 6,000 19,000 Effect on loan yield for the years ended December 31, From................................... 8.78% 8.92% To..................................... 8.89 9.03
59 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 5. INVESTMENT SECURITIES The carrying and fair values of investment securities at December 31, 1997 and 1996 were as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ----------- ----------- ----------- 1997 - ---- Held-to-Maturity - ---------------- U.S. Treasury and Government agencies........................ $ 379,968 $ 3,076 $ 793 $ 382,251 State and municipal............................ 292,119 8,247 194 300,172 Mortgage-backed................................ 156,047 175 499 155,723 Other: Domestic................................... 473,738 146 13,476 460,408 Foreign.................................... 49,265 - - 49,265 ----------- ------- -------- ----------- Total held-to-maturity.................. $ 1,351,137 $11,644 $ 14,962 $ 1,347,819 =========== ======= ======== =========== Available-for-Sale - ------------------ U.S. Treasury and Government agencies........................ $ 1,149,771 $ 5,286 $ 751 $ 1,154,306 State and municipal............................ 43,279 493 90 43,682 Mortgage-backed................................ 439,653 4,098 2,072 441,679 Other: Domestic................................... 347,556 10,024 394 357,186 Foreign.................................... 80,197 32,886 682 112,401 ----------- ------- -------- ----------- Total available-for-sale................ $ 2,060,456 $52,787 $ 3,989 $ 2,109,254 =========== ======= ======== =========== 1996 - ---- Held-to-Maturity - ---------------- U.S. Treasury and Government agencies........................ $ 362,736 $ 3,501 $ 815 $ 365,422 State and municipal............................ 366,012 8,548 95 374,465 Mortgage-backed................................ 463,796 52 1,023 462,825 Other: Domestic................................... 442,082 340 7,529 434,893 Foreign................................... 54,432 224 18 54,638 ----------- ------- -------- ----------- Total held-to-maturity.................. $ 1,689,058 $12,665 $ 9,480 $ 1,692,243 =========== ======= ======== =========== Available-for-Sale - ------------------ U.S. Treasury and Government agencies........................ $ 1,512,966 $ 9,207 $ 1,061 $ 1,521,112 State and municipal............................ 59,864 468 335 59,997 Mortgage-backed................................ 505,527 4,494 4,854 505,167 Other: Domestic................................... 186,029 14,096 939 199,186 Foreign.................................... 87,741 20,974 11 108,704 ----------- ------- -------- ----------- Total available-for-sale................ $ 2,352,127 $49,239 $ 7,200 $ 2,394,166 =========== ======= ======== ===========
On November 15, 1995, the FASB issued a Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities", which permitted an enterprise to reassess the appropriateness of the classification of all investment securities held between November 15, 1995 and December 31, 1995. Based on its reassessment, the Corporation reclassified $1,726,739 in investment securities previously classified as held-to-maturity to the available-for-sale category. Unrealized gains on transferred investments were $12,160, unrealized losses were $8,340, and the fair value was $1,730,559. Marketable equity securities are carried in the available-for-sale portfolio and have been written up by $42,052 at December 31, 1997 and $34,808 at December 31, 1996, the aggregate of their excess fair values over cost, through after-tax credits to retained earnings. The Corporation recorded pre-tax gains of $23,668 in 1997, $13,210 in 1996, and $ 7,654 in 1995 on sales of certain domestic equity securities. During 1997 and 1996, the Corporation recorded pre-tax gains of $4,939 and $28,656, on the exchange of certain domestic equity securities. During 1997, 1996 and 1995, the Corporation recorded pre-tax gains of $559, $18,924, and $939 on sales of foreign equity securities. 60 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 5. INVESTMENT SECURITIES - continued At December 31, 1997 and 1996, there were no investments in securities of any single, non-Federal issuer in excess of 10% of shareholders' equity. Securities with a carrying value of $1,998,066 were pledged at December 31, 1997 to secure public deposits, trust deposits, and for certain other purposes as required by law. The amortized cost and estimated fair value of debt securities at December 31, 1997, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations without prepayment penalties.
Amortized Fair Cost Value ----------- ----------- Held-to-Maturity - ---------------- Due in one year or less........................ $ 245,009 $ 245,032 Due after one year through five years.......... 315,218 318,726 Due after five years through ten years......... 170,726 174,986 Due after ten years............................ 167,196 169,758 Mortgage-backed securities..................... 156,047 155,723 ----------- ----------- $ 1,054,196 $ 1,064,225 =========== =========== Available-for-Sale - ------------------ Due in one year or less........................ $ 736,623 $ 737,858 Due after one year through five years.......... 565,386 569,185 Due after five years through ten years......... 63,362 63,653 Due after ten years............................ 97,075 97,321 Mortgage-backed securities..................... 439,653 441,679 ----------- ----------- $ 1,902,099 $ 1,909,696 =========== ===========
Proceeds from sales of investments in debt securities during 1997, 1996, and 1995 were $63,587, $1,411,398, and $560,022, respectively. Gross gains of $2,710 in 1997, $4,100 in 1996, and $11,180 in 1995, and gross losses of $422 in 1997, $5,378 in 1996, and $1,894 in 1995, were realized on those sales. 61 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 6. REGULATORY AND CAPITAL MATTERS The Corporation and its subsidiaries are subject to the regulations of certain Federal and state agencies including minimum risk-based and leverage capital guidelines issued by the Federal Reserve Board and Comptroller of the Currency. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Corporation's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. At December 31, 1997, management believes that the Corporation and its principal bank subsidiary, CBNA, meet all capital adequacy requirements to which they are subject. The following table illustrates the Corporation's and CBNA's risk-based and leverage capital ratios at December 31, 1997 and 1996:
Per Regulatory Guidelines ----------------------------------------------------- Actual Minimum "Well-Capitalized" --------------------- --------------------- ------------------------- Amount Ratio Amount Ratio Amount Ratio ---------- ------- ---------- ------- ---------- ------- December 31, 1997 Tier 1 capital (a): Consolidated.......................... $3,756,680 8.48% $1,771,948 4% $2,657,922 6% CBNA.................................. 2,901,577 6.82 1,700,741 4 2,551,111 6 Total capital (b): Consolidated.......................... 5,306,410 11.98 3,543,897 8 4,429,871 10 CBNA.................................. 4,617,721 10.86 3,401,481 8 4,251,852 10 Tier 1 leverage ratio: Consolidated.......................... 3,756,680 7.97 1,414,618 3 2,357,697 5 CBNA.................................. 2,901,577 6.50 1,340,100 3 2,233,499 5 December 31, 1996 Tier 1 capital (a): Consolidated.......................... $3,725,318 9.45% $1,576,914 4% $2,365,372 6% CBNA.................................. 3,270,045 8.90 1,471,992 4 2,207,987 6 Total capital (b): Consolidated.......................... 5,215,789 13.23 3,153,829 8 3,942,286 10 CBNA.................................. 4,206,434 11.43 2,943,983 8 3,679,979 10 Tier 1 leverage ratio: Consolidated.......................... 3,725,318 8.46 1,321,090 3 2,201,817 5 CBNA.................................. 3,270,045 7.80 1,257,745 3 2,096,241 5
- -------------------- (a) Consists primarily of common shareholders' equity and Trust Capital Securities, less goodwill and certain intangible assets. (b) Consists of Tier 1 capital plus qualifying subordinated debt and the allowance for loan losses, within permitted limits. The primary source of funds for cash dividend payments by the Corporation to its shareholders is dividends received from its banking subsidiaries. The approval of the Comptroller of the Currency is required for a nationally chartered bank to pay dividends if the total of all dividends declared in any calendar year exceeds the bank's net profits (as defined by national banking regulations) for that year combined with its retained net profits for the preceding two calendar years. Under this formula, CBNA can declare dividends without approval of the Comptroller of the Currency of approximately $32,000 plus an additional amount equal to CBNA's retained net profits for 1998 up to the date of any such dividend declaration. Due to the special provision for losses on credit card outstandings recorded in the fourth quarter of 1997, CBD is unable to pay dividends without prior approval of the Comptroller of the Currency. The Federal Reserve Act requires that extensions of credit by CBNA to certain affiliates, including the Corporation, be secured by specified amounts and types of collateral, that extensions of credit to any such affiliate generally be limited to 10% of capital and surplus (as defined in that Act) and that extensions of credit to all such affiliates be limited to 20% of capital and surplus. The Corporation's banking subsidiaries are required to maintain reserve balances with the Federal Reserve Bank. The average amount of those reserve balances for the years ended December 31, 1997 and 1996 were approximately $211,000 and $257,000, respectively. 62 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 7. ALLOWANCE FOR LOAN LOSSES The following represents an analysis of changes in the allowance for loan losses for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995 ---------- --------- ---------- Balance at beginning of period..................... $ 710,327 $ 670,265 $ 681,124 Provision charged to operating expense............. 263,000 228,767 144,002 Recoveries of loans previously charged off......... 84,301 92,985 85,226 Loan charge-offs................................... (321,196) (281,690) (240,087) Allowance for loans designated as held for sale.... (102,000) - - ---------- --------- ---------- Balance at end of period........................... $ 634,432 $ 710,327 $ 670,265 ========== ========= ==========
The following presents information on loans that are considered impaired under FAS 114:
At December 31, 1997 1996 1995 ---------- --------- ---------- Recorded investment in impaired loans.............. $183,978 $183,330 Impaired loans against which a portion of the allowance for loan losses is specifically allocated......................... 130,614 74,609 Amount of allowance for loan losses specifically allocated to impaired loans....... 46,436 15,105 For the years ended December 31, Average recorded investment in impaired loans.......................................... 173,375 197,854 $257,746 Interest income recognized on impaired loans.......................................... 15,075 8,977 14,354
8. PREMISES AND EQUIPMENT Premises and equipment on the consolidated balance sheet is presented net of accumulated depreciation and amortization of $536,137 and $667,412 at December 31, 1997 and 1996, respectively. Depreciation and amortization of premises and equipment for the years ended December 31, 1997, 1996, and 1995, was $87,606, $95,897, and $98,033, respectively. 9. OPERATING LEASES Rental expense, reduced by sublease rental income, charged to operations was $89,300, $90,982 and $85,419 for 1997, 1996 and 1995, respectively. 63 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 10. DEPOSITS The following presents a breakdown of deposits at December 31, 1997 and 1996:
1997 1996 ------------ ------------ Domestic: Non-interest bearing checking.............. $ 9,252,376 $ 9,330,445 Savings, NOW and money market accounts......................... 12,908,274 13,299,068 Time deposits.............................. 10,582,718 9,687,887 ------------ ------------ Total domestic deposits................. 32,743,368 32,317,400 Overseas branches and subsidiaries............. 1,444,522 1,409,756 ------------ ------------ Total deposits.......................... $34,187,890 $ 33,727,156 =========== ============
Domestic time deposits in denominations of $100 or more at December 31, 1997, 1996, and 1995 were:
1997 1996 1995 ----------- ----------- ----------- Commercial certificates of deposit............. $2,489,415 $ 754,437 $ 695,970 Other domestic time deposits, principally savings certificates........... 608,968 613,126 501,058 ----------- ----------- ----------- Total........................... $3,098,383 $ 1,367,563 $ 1,197,028 ========== =========== ===========
Interest expense on domestic time deposits in denominations of $100 or more for the years ended December 31, 1997, 1996, and 1995 was:
1997 1996 1995 --------- ------- -------- Interest expense: Commercial certificates of deposit......... $ 98,669 $30,857 $ 36,520 Other domestic time deposits, principally savings certificates................ 31,294 25,451 30,057 --------- ------- -------- Total........................... $129,963 $56,308 $ 66,577 ======== ======= ========
Substantially all of the deposits of overseas branches and subsidiaries were time deposits in denominations of $100 or more for each of the three years presented. The following presents information on derivative financial instruments used to manage interest rate risk associated with deposits:
1997 1996 ---------- ----------- At December 31, Notional value............................. $3,789,000 $ 5,314,000 Unrealized gains........................... 30,000 50,000 Unrealized losses.......................... 6,000 16,000 Effect on deposit interest expense for the year ended December 31, From....................................... 3.68% 3.62% To......................................... 3.60 3.49
64 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 11. SHORT-TERM FUNDS BORROWED Short-term funds borrowed at December 31, 1997, 1996 and 1995 include the following:
Weighted Maximum Average Average Balance outstanding outstanding interest at end of during during rate during year year(e) year year(f) ----------- ---------- ----------- ----------- 1997 - ---- Federal funds purchased (a).......................... $ 1,422,208 $1,550,412 $ 860,000 5.84% Securities sold under agreements to repurchase (b)... 571,804 767,480 627,000 4.86 Commercial paper (c)................................. 865,835 1,147,909 914,000 5.61 Other short-term funds borrowed (d).................. 1,463,472 1,507,363 1,013,000 5.71 ----------- ----------- Total short-term funds borrowed ................ $ 4,323,319 $ 3,414,000 5.56 =========== =========== 1996 - ---- Federal funds purchased (a).......................... $ 532,334 $1,977,950 $ 873,000 5.54% Securities sold under agreements to repurchase (b)... 656,397 836,722 749,000 4.52 Commercial paper (c)................................. 675,181 1,106,078 962,000 5.44 Other short-term funds borrowed (d).................. 769,245 842,410 374,000 4.96 ----------- ----------- Total short-term funds borrowed ................ $ 2,633,157 $ 2,958,000 5.18 =========== =========== 1995 - ---- Federal funds purchased (a).......................... $ 1,129,432 $2,060,375 $ 1,432,000 6.02% Securities sold under agreements to repurchase (b)... 812,281 863,937 771,000 5.03 Commercial paper (c)................................. 1,255,656 1,388,927 1,051,000 5.94 Other short-term funds borrowed (d).................. 479,644 1,005,699 498,000 5.33 ----------- ----------- Total short-term funds borrowed ................ $ 3,677,013 $ 3,752,000 5.71 =========== ===========
(a) Federal funds purchased generally represent the overnight Federal funds transactions of banking subsidiaries with correspondent banks. (b) Securities sold under agreements to repurchase usually mature within one to thirty days or are due on demand. (c) Commercial paper issued by CSCC is used to finance the short-term borrowing requirements of certain banking-related activities. Commercial paper is issued with maturities of not more than nine months and there are no provisions for extension, renewal or automatic rollover. At December 31, 1997, the Corporation had a $700,000 revolving credit facility from unaffiliated banks. The facility was established in support of commercial paper borrowings, Medium Term Note (see Note 12) issuance and general corporate purposes. Unless extended by the Corporation in accordance with the terms of the facility agreement, the facility expires February 2000. There were no borrowings under this facility at December 31, 1997. The interest rate charged for usage of these lines varies with money market conditions. (d) Other short-term funds borrowed include term Federal funds purchased, short-term Bank Notes and demand notes payable to the U.S. Treasury. (e) Represents the maximum amount outstanding at any month end during the year. (f) The weighted average interest rate is calculated primarily on a daily average of short-term funds borrowed. 65 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 12. LONG-TERM DEBT Long-term debt at December 31, 1997 and 1996 includes the following:
1997 1996 ----------- ----------- CoreStates Financial Corp: 6 5/8% Notes due 2000 (a).............................. $ 150,000 $ 150,000 7 7/8% Subordinated Notes due 2002 (b)................. 100,000 100,000 8 5/8% Mortgages due 2001.............................. 5,963 6,603 Unamortized Discounts.................................. (221) (271) ----------- ----------- 255,742 256,332 ----------- ----------- CSCC: 6 3/4% Guaranteed Subordinated Notes due 2006 (c)................................... 200,000 200,000 5 7/8% Guaranteed Subordinated Notes due 2003 (c)................................... 200,000 200,000 6 5/8% Guaranteed Subordinated Notes due 2005 (c)................................... 175,000 175,000 9 5/8% Guaranteed Subordinated Notes due 2001 (c)................................... 150,000 150,000 9 3/8% Guaranteed Subordinated Notes due 2003 (c)................................... 100,000 100,000 Medium Term Notes (d).................................. 1,641,000 1,509,000 Unamortized Discounts.................................. (4,003) (4,990) ----------- ----------- 2,461,997 2,329,010 ----------- ----------- Trust Capital Securities: 8% Trust Capital Securities due 2026 (e)............... 300,000 300,000 Libor + .57% Trust Capital Securities due 2027 (f)..... 300,000 - Libor + .65% Trust Capital Securities due 2027 (f)..... 150,000 - Unamortized Discounts.................................. (5,872) (6,491) ----------- ----------- 744,128 293,509 ----------- ----------- Other subsidiaries:` Libor + .05% Eurodollar Notes due 2002 (g)............. 500,000 - Bank Note Program (h).................................. 232,130 - 6 5/8% Subordinated Notes due 2003 (i)................. 150,000 150,000 Federal Home Loan Bank Borrowings (j).................. 100,000 2,888 Various other.......................................... 12,488 18,175 Unamortized Discounts.................................. (2,249) (617) ----------- ----------- 992,369 170,446 ----------- ----------- Total long-term debt (k)............................... $4,454,236 $3,049,297 =========== ===========
(a) The Notes are unsecured and senior in right of payment to all subordinated indebtedness of the Corporation. The Notes are not redeemable by the Corporation or the holders prior to the maturity date and are not entitled to the benefit of any sinking fund. (b) The Notes are unsecured and subordinate in right of payment to all present and future senior indebtedness of the Corporation. The Notes are not redeemable by the Corporation or the holders prior to the maturity date and are not entitled to the benefit of any sinking fund. (c) The Notes are not subject to redemption prior to maturity and are unconditionally guaranteed, on a subordinated basis, as to payment of principal and interest by the Corporation. The Notes are subordinated to all existing and future senior CSCC indebtedness and the guarantee is subordinated to all outstanding senior Corporation indebtedness. 66 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 12. LONG-TERM DEBT - continued (d) CSCC can issue Medium Term Notes (Senior and Subordinated) with maturities of nine months or greater from date of issue. The interest rate or interest rate formula on each Note is established by CSCC at the time of issuance. The Senior Notes are unconditionally guaranteed as to payment of principal and interest by the Corporation. The Subordinated Notes are unconditionally guaranteed, on a subordinated basis, as to payment of principal and interest by the Corporation. The Subordinated Notes are subordinated to all existing and future senior CSCC indebtedness and the guarantee is subordinated to all existing and future senior Corporation indebtedness. At December 31, 1997, $1,641,000 of debt is outstanding with maturities up to five years. Interest rates are predominately variable. Under an existing shelf registration statement filed with the Securities and Exchange Commission, the Corporation had debt and capital securities that were registered but unissued of approximately $579,000 at December 31, 1997. (e) The Trust Capital Securities evidence a preferred ownership interest in a trust, of which 100% of the common equity is owned by CBNA. The Trust Capital Securities are unconditionally guaranteed by CBNA. The proceeds from issuance of the Trust Capital Securities are invested in 8% Junior Subordinated Deferrable Interest Debentures of CBNA due 2026. These Subordinated Debt Securities have provisions enabling certain actions such as redemption or the deferment of the semiannual payments of interest, which will impact the Trust Capital Securities. CBNA may redeem the Subordinated Debt Securities in whole or in part, on or after December 15, 2006. In addition, Subordinated Debt Securities may be redeemed by CBNA at any time upon the occurrence of certain events. In the event of such a redemption of the Subordinated Debt Securities, the proceeds of such payment or repayment shall concurrently be applied to redeem the Trust Capital Securities. (f) The Trust Capital Securities evidence a preferred ownership interest in a trust, of which 100% of the common equity is owned by CBNA. The Trust Capital Securities are unconditionally guaranteed by CBNA. The proceeds from issuance of the Trust Capital Securities are invested in Floating Rate Junior Subordinated Deferrable Interest Debentures of CBNA due 2027. These Subordinated Debt Securities have provisions enabling certain actions such as redemption or the deferment of the semiannual payments of interest, which will impact the Trust Capital Securities. CBNA may redeem the Subordinated Debt Securities in whole or in part, on or after February 15, 2007 and January 15, 2007 for the $300,000 and $150,000 Trust Capital Securities, respectively. In addition, Subordinated Debt Securities may be redeemed by CBNA at any time upon the occurrence of certain events. In the event of such a redemption of the Subordinated Debt Securities, the proceeds of such payment or repayment shall concurrently be applied to redeem the Trust Capital Securities. (g) On October 3, 1997, CSCC and CBNA applied to list up to $4.0 billion of debt securities ("the Programme") on the Luxembourg Stock Exchange. Under this Programme, CSCC and CBNA may each issue up to $2.0 billion of debt securities ("the Notes") with maturities from 30 days to 30 years. The Notes are direct, unconditional and unsecured general obligations of the relevant issuer. On October 29, 1997, CBNA issued $500 million 5 year floating rate notes under the Programme. (h) On November 7, 1997, CBNA and CBD established a $3.0 billion Senior and Subordinated Bank Note program ("the Bank Note Program") which accommodates subordinated debt issuance with maturities up to 30 years. In the fourth quarter of 1997, CBNA issued $232 million in senior notes with maturities ranging from one to two years. 67 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 12. LONG-TERM DEBT - continued (i) The Notes were issued by CBNA and are unsecured and subordinate to the claims of depositors and other creditors. The Notes are not redeemable by CBNA or the holders prior to the maturity date and are not entitled to the benefit of any sinking fund. (j) The borrowing matured in January 1998 and carries a fixed interest rate of 5.63%. These borrowings require membership in the Federal Home Loan Bank of Pittsburgh and the maintenance of available collateral with a fair value which approximates the total amount of the outstanding debt. (k) The consolidated aggregate maturities for long-term debt for the years ending December 31, 1998 through 2002 are: $758,417; $831,982; $390,590; $298,477, and $599,782, respectively. The following presents information on derivative financial instruments used to manage interest rate risk associated with long-term debt:
1997 1996 ---------- ----------- At December 31, Notional value............................. $1,531,000 $ 1,019,000 Unrealized gains........................... 34,000 16,000 Unrealized losses.......................... 7,000 13,000 Effect on long-term debt cost for the years ended December 31, From....................................... 6.64% 6.53% To......................................... 6.50 6.38
68 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 13. RETIREMENT AND BENEFIT PLANS The fair value of the assets in the Corporation's defined benefit pension plans exceeded the projected benefit obligation by $126,512 at December 31, 1997, based on current and estimated future salary levels. The excess of the fair value of plan assets is reconciled to the accrued pension cost included in other liabilities as follows:
December 31, ---------------------------- 1997 1996 ---------- --------- Plan assets at fair value(a)................................. $1,046,610 $ 902,947 ---------- --------- Present value of benefit obligation: Accumulated benefits based on salaries to date, including vested benefits of $753,667 in 1997 and $667,536 in 1996................................................. 776,522 688,102 Additional benefits based on estimated future salary levels 143,576 157,687 ----------- --------- Projected benefit obligation................................. 920,098 845,789 ----------- --------- Amount the fair value of plan assets exceeds the projected benefit obligation at December 31,.......... 126,512 57,158 Reconciliation: Unrecognized prior service cost........................... 15,278 30,770 Unrecognized net asset from date of initial application... (13,685) (20,016) Net deferred actuarial gain............................... (156,939) (91,835) ---------- -------- Accrued pension expense included in other liabilities $ (28,834) $(23,923) ========== ========
- --------------- (a) Primarily U.S. Government securities, U.S. agency securities, fixed income securities, common stock, and commingled funds managed by subsidiary banks. Net pension cost for the years ended December 31, 1997, 1996 and 1995 included the following expense (income) components:
1997 1996 1995 ---------- ---------- --------- Service cost benefits earned during the period.............. $ 20,963 $ 29,020 $ 24,492 Interest cost on projected benefit obligation............... 63,290 60,793 54,497 Actual return on plan assets................................ (183,388) (121,868) (162,143) Net amortization and deferral............................... 105,847 53,887 96,484 ---------- ---------- --------- Net pension cost....................................... $ 6,712 $ 21,832 $ 13,330 ========== ========== =========
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation for the Corporation was 7.25% and 7.5%, respectively, at December 31, 1997 and 1996. The rate of increase on future compensation levels was 5.0% in both 1997 and 1996. The expected long-term rate of return on plan assets was 9.0% in 1997, 8.5% in 1996, and 7.5% - - 9.5% in 1995. The Corporation sponsors a 401(k) savings plan for substantially all its employees whereby the Corporation may make matching contributions equal to a percentage of the contribution made by participants. Contribution expense related to the savings plan for the employer's match was $20,964 in 1997, $18,955 in 1996, and $18,192 in 1995. The ESOP is a leveraged plan funded through a direct loan from the Corporation. The ESOP has acquired a total of 2,515,000 shares of common stock for distribution to eligible employees ratably over a 20 year period. Compensation cost has been recognized based on the fair market value of the shares committed to be released to employees. Total compensation cost recognized was $5,378 in 1996 and $3,600 in 1995. Dividends on allocated shares are paid to participants and are charged to retained earnings. Dividends on unallocated shares are used by the ESOP to reduce its loan. Effective January 1, 1997 the ESOP was combined with the Corporation's 401(k) savings plan and expense related to the ESOP of $7,269 for 1997 was included in the 401(k) savings plan employer's match. 69 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 13. RETIREMENT AND BENEFIT PLANS - continued The Corporation and its subsidiaries provide postretirement health care and life insurance benefits for substantially all retired employees. Postretirement benefits are provided through an insurance company whose premiums are based on the benefits paid during the year. The postretirement health care plan is contributory, with retiree contributions based on years of service. The liability for postretirement benefits included in other liabilities at December 31, 1997 and 1996 was as follows:
1997 1996 ---------- ---------- Accumulated postretirement benefit obligation: Retirees............................................................. $ (56,396) $ (68,702) Fully eligible active plan participants.............................. (2,597) (1,827) Other active plan participants....................................... (42,211) (29,748) --------- --------- Accumulated postretirement benefit obligation........................... (101,204) (100,277) Plan assets at fair value (a)........................................... 62,553 52,591 --------- --------- Unfunded obligation at December 31,..................................... (38,651) (47,686) Unrecognized prior service cost......................................... (43,433) (45,239) Unrecognized net gain................................................... (45,984) (51,157) --------- --------- Accrued postretirement benefit obligation included in other liabilities $(128,068) $(144,082) ========= =========
- ------------------ (a) Primarily municipal bonds and short-term investments. Net periodic postretirement benefit cost for the years ended December 31, 1997, 1996 and 1995 included the following expense (income) components:
1997 1996 1995 ------- ------- ------- Service cost benefits earned during the period............ $ 2,482 $ 2,769 $ 3,044 Interest cost on accumulated postretirement benefit obligation.................................... 7,103 7,947 11,932 Actual return on plan assets.............................. (1,770) (1,527) (1,107) Net amortization and deferral............................. (7,223) (6,069) (1,436) ------- ------- ------- Net periodic postretirement benefit cost.................. $ 592 $ 3,120 $12,433 ======= ======= =======
For measurement purposes, the rate of increase in the per capita cost of covered health care benefits was assumed to be 5.5% per year and remains at that level until a predetermined benefit cap is reached. This fixed dollar cap was established as the per capita projected cost level in 1997 associated with the Corporation's indemnity medical plan. The health care cost trend rate assumption has an effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by 1 percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1997 by $4,355 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $386. The expected long-term rate of return on plan assets was 6.0%. The weighted-average discount rate used in determining the Corporation's accumulated postretirement benefit obligation was 7.25% and 7.5%, respectively, at December 31, 1997 and 1996. 70 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 14. LONG-TERM INCENTIVE PLAN The Corporation has outstanding options granted under the Corporation's long-term incentive plan (the "Plan"). As provided in the Plan, a variety of incentives can be issued to eligible participants including restricted stock awards, incentive stock options, non-qualified stock options, or stock appreciation rights. Meridian and United Counties had maintained similar plans. Options granted under those plans were assumed by the Corporation upon consummation of their respective acquisitions. The Plan provides for a maximum number of options available to be granted each year equal to 1.5% of outstanding common shares as of January 1 of that year. Options under the Plan are granted to purchase the Corporation's common shares at market value on the date of grant and are exercisable one year from the date of grant for a period not exceeding ten years from the date of grant. Stock appreciation rights may be granted in conjunction with the granting of an option. Information on option activity for 1997 and 1996 follows:
1997 1996 --------------------------------------------------------------------------------- Shares under Weighted-Average Shares Under Weighted-Average Option Exercise Price Option Exercise Price ------------ ---------------- -------------- ------------------ Balance at beginning of year............. 5,789,064 $29.98 8,581,554 $23.86 Options granted.......................... 1,634,052(a) 51.50 1,968,001 (a) 41.49 Options exercised........................ (2,201,107) 28.32 (4,519,411) 23.27 Options canceled......................... (155,110) 50.04 (241,080) 31.84 ------------ -------------- Balance at end of year................... 5,066,899 37.00 5,789,064 29.98 ========= ========= Shares exercisable....................... 3,585,769 31.00 4,405,540 25.37 ========= =========
(a) The fair value of options granted during 1997 and 1996 was $14.5 million and $12.6 million, respectively. The following table summarizes information about options outstanding at December 31, 1997:
Options Outstanding Options Exercisable ------------------------------------------------------------ ---------------------------------- Weighted-Average Range of Number Remaining Weighted-Average Number Weighted-Average Exercise Prices Outstanding Contractual Life Price Exercise Exercisable Exercise Price --------------- ----------- ---------------- ---------------- ----------- ---------------- $ 8.20 to $19.50 195,977 2.8 years $15.30 195,977 $15.30 $20.53 to $29.95 2,306,766 6.2 27.10 2,306,766 27.10 $37.96 to $51.50 2,564,156 8.7 47.55 1,083,026 42.16 ---------- ---------- $ 8.20 to $51.50 5,066,899 7.3 37.00 3,585,769 31.00 ========== ==========
The Corporation uses the intrinsic value method of accounting to measure compensation expense. If the fair value method had been used to measure compensation expense, net income would have been reduced by $9.8 million, or $0.05 per share, $7.4 million, or $0.03 per share, and $7.2 million, or $0.03 per share, to $803.4 million, or $3.91 per share, $641.8 million, or $2.91 per share, and $647.9 million, or $2.88 per share, for the years ended December 31, 1997, 1996 and 1995, respectively. The fair value of options granted in 1997, 1996 and 1995 was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions, respectively: risk-free interest rates of 5.49% to 7.80%, dividend yield of 4.0%, volatility factors of the expected market price of the Corporation's common stock of .148 to .223, and a weighted-average expected life of the options of 6 years. 71 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 14. LONG-TERM INCENTIVE PLAN - continued The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Corporation's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS, COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business, there are outstanding commitments and contingent liabilities which are not reflected in the financial statements. These include various financial instruments with off-balance sheet risk used in connection with the Corporation's asset and liability management, the management of interest rate risk in securities trading positions and to provide for the needs of customers. These involve varying degrees of credit, interest rate and liquidity risk, but do not represent unusual risks for the Corporation and management does not anticipate any significant losses as a result of these transactions. Derivative Financial Instruments Held or Issued for Purposes Other Than Trading The Corporation uses off-balance sheet derivative financial instruments, such as interest rate swaps, futures and caps, to manage interest rate risk. The Corporation's exposure to interest rate risk stems from the mismatch between the sensitivity to movements in interest rates of the Corporation's assets and liabilities and from the spread risk between the rates on those assets and liabilities and financial market rates. The use of derivatives to manage interest rate risk falls into three categories: interest sensitivity adjustments, interest rate spread protection and hedging anticipated asset sales. Interest rate swaps and futures are generally used to lengthen the interest rate sensitivity of short-term assets and to shorten the repricing characteristics of longer term liabilities. Interest rate caps are used to manage spread risk. Interest rate caps are also used to offset the risk of upward interest rate movement on adjustable rate mortgages and other products with imbedded caps as well as to reduce the risk that interest rate spreads narrow on prime based products. Gains or losses are used to adjust the basis of the related asset or liability and interest differentials are adjustments of the related interest income or expense. In connection with anticipated sales of longer term assets acquired through merger or generated in the loan origination process, the Corporation uses interest rate swaps, rate locks and option agreements to reduce interest rate sensitivity as the assets are readied for sale. Hedge gains or losses are used to adjust the basis of the assets held for sale. Derivative financial instruments used in the management of interest rate risk at December 31, 1997 are summarized by category in the table on page 27. A summary of interest rate swap contracts categorized by whether the Corporation receives or pays fixed rates and stratified by repricing or maturity date is on page 30. Foreign currency derivatives used for hedging activities have not had a material impact on income or liquidity of the Corporation for any of the years presented. 72 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS, COMMITMENTS AND CONTINGENT LIABILITIES - continued Derivative Financial Instruments Held or Issued for Trading Purposes In its business of providing risk management services for its customers, the Corporation purchases and sells certain derivatives including interest rate swaps, caps and floors. In addition, as part of its international business, the Corporation enters into foreign exchange contracts on behalf of customers. These contracts are matched against forward sale or purchase contracts. Customer related derivative financial instrument transactions are generally marked to market and any gains or losses are recorded in the income statement. The Corporation also holds derivatives in connection with its securities trading activities and, at times, as a position taken in the expectation of profiting from favorable movements in interest rates. These products include tender option bonds and Treasury float contracts. Included in the income statement are trading revenues from derivatives of $33,901 of which $25,531 represents net foreign exchange gains included in fees for international services. Customer and trading related derivative financial instruments at December 31, 1997 and 1996 are summarized by type of instrument in the table on page 32. The following is a summary of off-balance sheet commitments and derivative financial instruments as of December 31, 1997 and 1996, including fair values. See Note 3 for a discussion of fair value.
1997 1996 ------------------------------ ------------------------------ Notional Fair Notional Fair or Value or Value Contractual of Asset Contractual of Asset Amount (Liability) Amount (Liability) ------------ ----------- ------------ ----------- Standby letters of credit, net of participations (a) $ 1,817,591 $ (18,176) $ 1,630,621 $ (16,306) Commercial letters of credit....................... 1,474,392 (14,744) 1,262,593 (12,625) Commitments to extend credit (b)................... 19,332,394 (28,581) 15,396,553 (21,204) Unused commitments under credit card lines......... 4,542,842 - 4,173,013 - When-issued securities (c): Commitments to purchase...................... 47,838 (5) 1,770 - Commitments to sell.......................... 106,310 (455) 75,120 (140) Commitments to purchase/sell whole mortgage loans and securities (c): Commitments to purchase..................... 15,782 30 17,280 30 Commitments to sell......................... 39,120 (1,254) 7,965 (70) Mortgage loans sold and loan servicing acquired with recourse (d).............................. 299,322 (8,559) 361,410 (9,637) Interest rate futures contracts (e): Commitments to purchase........................ 1,866,100 (1,764) 4,489,800 2,781 Commitments to purchase foreign and U.S. currencies (f)............................ 2,240,895 4,025 1,766,122 (488) Interest rate swaps, notional principal amounts (g).................................... 12,479,564 97,670 9,850,708 67,673 Interest rate caps and floors (h): Written........................................ 1,693,886 (3,091) 908,799 (2,842) Purchased...................................... 2,768,289 11,003 2,039,331 17,383 Tender option bonds (i)............................ 849,854 37,876 148,711 5,976 Treasury float contracts (j)....................... 246,781 646 270,358 682 Other derivatives.................................. 541,746 2,901 597,261 5,644
73 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS, COMMITMENTS AND CONTINGENT LIABILITIES - continued (a) Standby letters of credit ("SBLC") are used in various transactions to enhance the credit standing of the Corporation's customers and are subjected to the same risk, credit review and approval process as loans. SBLC's are irrevocable assurances that the Corporation will make payment in the event that a customer cannot perform its contractual obligations to third parties. (b) Commitments to extend credit represent the Corporation's obligation to fund various types of loans, including home equity lines, lines of credit, revolving lines of credit and other types of commitments. (c) The Corporation has commitments to purchase/sell mortgage-backed securities or loans with delivery at a future date but typically within 120 days. The fair value of these instruments is affected by interest rates. In a declining interest rate environment, commitments to sell mortgage-backed securities or loans will decline in value. In a rising interest rate environment, commitments to buy mortgage-backed securities or loans will decrease in value. Forward agreements to sell securities are used in transactions with municipalities that generally have a debt payment due in the future. Under these agreements, the Corporation agrees to deliver primarily United States Treasury securities that will mature on or before the required payment date. The type and associated interest rate of these securities is established when the agreement is entered. The primary risk associated with forward agreements is interest rate risk to the extent the required securities have not been purchased. If interest rates fall, securities yielding the higher agreed upon fixed rate will be more expensive for the Corporation to purchase. When-issued securities and commitments to purchase/sell whole mortgage loans and securities are entirely customer and trading-related products. (d) The Corporation originates and sells residential mortgage loans as part of various mortgage-backed security programs sponsored by the United States government agencies or government-sponsored agencies, such as the Government National Mortgage Association, Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association. Certain sales and other servicing acquired are subject to recourse provisions in the event of default by the borrower. The Corporation provides for potential losses under these recourse provisions by establishing reserves at the time of sale and evaluates the adequacy of these reserves on an ongoing basis. (e) Exchange traded futures contracts represent agreements to exchange dollar amounts at a specified future date for interest rate differentials between an agreed interest rate and a reference rate, computed on a notional amount. Credit and market risk exist with respect to these instruments. Exchange traded futures contracts entail daily cash settlement; therefore, the credit risk amount represents a one-day receivable. (f) Commitments to purchase foreign and U.S. currencies are primarily executed for the needs of customers. These foreign exchange contracts are structured similar to interest rate futures and forward contracts. The risk associated with a foreign exchange contract arises from the counterparty's ability to make payment at settlement and that the value of a foreign currency might change in relation to the U.S. dollar. The Corporation's exposure, if any, to counterparty failure equals the current market value of the contract, which at December 31, 1997 and 1996 was $35,257 and $27,962, respectively. Included in fees for international services are net foreign exchange gains of $25,531, $22,557, and $22,943 for the years ended December 31, 1997, 1996 and 1995, respectively. (g) Interest rate swaps generally represent the contractual exchange of fixed and variable rate interest payments based on a notional principal amount and an interest reference rate. Credit risk exists with respect to these instruments arising from the possible failure of the counterparty to make required payments on those contracts which are favorable to the Corporation. The Corporation's exposure to counterparty failure equals the current replacement cost of the contract. At December 31, 1997 and 1996, the replacement cost of the Corporation's interest rate swap contracts was $163,903 and $118,929, respectively. The risk of counterparty failure is controlled by limiting transactions to an approved list of counterparties and requiring collateral in certain instances. Net cash received on interest rate swaps during 1997 and 1996 totaled $54,230 and $68,103, respectively. 74 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS, COMMITMENTS AND CONTINGENT LIABILITIES - continued (h) Interest rate caps and floors are written by the Corporation to enable customers to transfer, modify or reduce their interest rate risk. Interest rate caps and floors are similar to interest rate swaps except that payments are made only if current interest rates move above or below a predetermined rate. The risk associated with interest rate caps and floors is an unfavorable change in interest rates. As a writer of interest rate caps and floors, the Corporation receives a premium in exchange for bearing the risk of an unfavorable change in interest rates. The Corporation generally reduces risk by entering into offsetting cap and floor positions that essentially counterbalance each other. The Corporation also enters interest rate caps to offset the risk of upward interest rate movement on assets with embedded caps as well as to limit spread risk. As a purchaser of interest rate caps, the Corporation pays a premium in exchange for the right to receive payments if interest rates rise above predetermined levels. The Corporation has also purchased interest rate floors in which the Corporation has paid a fee for the right to receive payments if rates fall below a predetermined level. Similar to interest rate swaps, credit risk exists with respect to the possible failure of the counterparty to make required payments on those contracts which are favorable to the Corporation. Exposure to counterparty failure equals the current replacement cost of the contract which totaled $11,003 and $17,383, respectively, at December 31, 1997 and 1996. (i) Tender option bonds are instruments associated with tax-free municipal bonds. The Corporation will transfer a tax-free, fixed rate, long-term security into a trust. The trust, in turn, issues short-term securities to third parties. The trust satisfies the short-term interest payments using the interest proceeds from the municipal bond. The Corporation receives the spread between the long-term fixed interest payment and the short-term security. (j) A Treasury float contract is created because a municipality, which has defeased a bond issue with government securities, has a mismatch in the timing of the maturity of the securities and the date the funds are needed to pay the debt service. The Corporation will pay an up-front fee for the right to sell government securities to the municipality, generally at par. The Corporation retains any profit between the sales price and the price at which the Corporation acquired the securities. Contingent Liabilities In the normal course of business, the Corporation and its subsidiaries are subject to numerous pending and threatened legal actions and proceedings, some for which the relief or damages sought are substantial. Management does not believe the outcome of these actions and proceedings will have a materially adverse effect on the consolidated financial position of the Corporation. 75 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 16. PROVISION FOR INCOME TAXES The provision for income taxes for the years ended December 31, 1997, 1996 and 1995 consists of the following:
1997 1996 1995 -------- -------- -------- Current: Federal....................................... $142,688 $344,142 $303,647 State......................................... 14,368 20,401 24,134 -------- -------- -------- Total domestic........................... 157,056 364,543 327,781 Foreign....................................... 11,775 12,121 8,240 -------- -------- -------- Total current............................ 168,831 376,664 336,021 Deferred Federal and state expense............... 100,751 9,156 28,420 -------- -------- -------- Total provision for income taxes......... $269,582 $385,820 $364,441 ======== ======== ========
The significant components of the Corporation's deferred tax assets and liabilities at December 31, 1997 and 1996 are as follows:
1997 1996 --------- --------- Deferred tax assets: Allowance for loan losses.................... $270,169 $ 261,180 Postretirement and postemployment benefits... 48,550 57,191 Reserves..................................... 50,186 56,489 Other 80,135 77,181 -------- --------- Total deferred tax assets............... 449,040 452,041 -------- --------- Deferred tax liabilities: Auto leasing portfolio....................... 136,253 142,196 FAS 115 fair value accounting................ 17,094 14,298 Partnership investments...................... 4,558 3,781 Tax over book depreciation................... 43,711 38,446 Affiliate income............................. 38,862 32,873 Other 70,584 71,802 -------- --------- Total deferred tax liabilities.......... 311,062 303,396 -------- --------- Net deferred tax assets.......................... $137,978 $ 148,645 ======== =========
At December 31, 1997, cumulative deductible temporary differences related to the deferred tax asset are approximately $1,283,000. Cumulative taxable temporary differences related to deferred tax liabilities at December 31, 1997 are estimated at $889,000. At December 31, 1997, the Corporation has determined that it is not required to establish a valuation allowance for the deferred tax asset since it is more likely than not that the deferred tax asset of $449,040 will be realized principally through carryback to taxable income in prior years, future reversals of existing taxable temporary differences, future taxable income and to a lesser extent, tax planning strategies. The Corporation's conclusion that it is "more likely than not" that the deferred tax asset will be realized is based on a history of growth in earnings and the prospects for continued growth, including an analysis of potential uncertainties that may affect future operating results. The Corporation will continue to review the tax criteria of "more likely than not" for the recognition of deferred tax assets on a quarterly basis. 76 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 16. PROVISION FOR INCOME TAXES - continued The consolidated effective tax rates are reconciled to the statutory rate as follows:
1997 1996 1995 ----- ----- ----- Statutory rate..................................... 35.0% 35.0% 35.0% Difference resulting from: Tax-exempt income.............................. (1.4) (1.6) (2.0) State, local and foreign income tax............ 1.0 1.6 1.5 Liquidation of affiliate....................... (10.1) - - Other, net..................................... 0.4 2.3 1.2 ----- ----- ----- Effective tax rate................................. 24.9% 37.3% 35.7% ===== ===== =====
Foreign earnings of certain subsidiaries would be taxed only upon their transfer to the United States. No transfers or dividends are contemplated at this time. Taxes payable upon remittance of such accumulated earnings of $21,323 at December 31, 1997 would approximate $7,065. Taxes, other than income taxes, included in other operating expenses for the years ended December 31, 1997, 1996 and 1995 are $107,553, $101,109 and $105,913, respectively. 77 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 17. QUARTERLY FINANCIAL DATA (UNAUDITED) The following represents summarized quarterly financial data of the Corporation, which, in the opinion of management, reflects all adjustments (comprising only normal recurring accruals) necessary for a fair presentation:
Three Months Ended ----------------------------------------------------------------------- Dec. 31 Sept. 30 June 30 March 31 -------- -------- -------- -------- 1997 Interest income............................... $888,593 $873,034 $850,359 $817,329 ======== ======== ======== ======== Interest expense.............................. $363,676 $342,540 $316,006 $291,225 ======== ======== ======== ======== Net interest income........................... $524,917 $530,494 $534,353 $526,104 ======== ======== ======== ======== Provision for losses on loans................. $120,000(a) $ 50,000 $ 50,000 $ 43,000 ======== ======== ======== ======== Securities gains.............................. $ 6,254 $ 5,023 $ 5,015 $ 4,819 ======== ======== ======== ======== Net income ................................... $216,626(b)(c) $198,814 $199,726 $198,113 ======== ======== ======== ======== Net income per common share: Basic...................................... $1.09 $1.00 $0.97 $0.94 ======== ======== ======== ======== Diluted.................................... 1.08 0.98 0.97 0.93 ======== ======== ======== ======== Average common shares outstanding: Basic...................................... 197,920 199,817 204,982 211,276 ======== ======== ======== ======== Diluted.................................... 200,416 202,704 206,712 213,162 ======== ======== ======== ======== Common stock price information: High....................................... $81 3/8 $68 13/16 $57 7/8 $55 Low........................................ 65 11/16 53 1/4 46 1/2 47 1/2 Quarter-end................................ 80 1/2 66 3/16 53 3/4 47 1/2 1996 Interest income............................... $835,649 $823,082 $815,755 $823,718 ======== ======== ======== ======== Interest expense.............................. $298,561 $282,735 $282,360 $293,064 ======== ======== ======== ======== Net interest income........................... $537,088 $540,347 $533,395 $530,654 ======== ======== ======== ======== Provision for losses on loans................. $ 40,000 $ 40,000 $110,000(d) $ 38,767 ======== ======== ======== ======== Securities gains.............................. $ 4,036 $ 31,135 $17,393 $ 6,948 ======== ======== ======== ======== Net income ................................... $195,546 $196,857 $79,597(d)(e) $177,144 ======== ======== ======== ======== Net income per common share: Basic...................................... $0.91 $0.89 $0.36(d)(e) $0.81 ======== ======== ======== ======== Diluted.................................... 0.90 0.88 0.36 0.80 ======== ======== ======== ======== Average common shares outstanding: Basic...................................... 215,866 220,409 219,478 219,512 ======== ======= ======== ======= Diluted.................................... 218,020 222,270 220,621 221,253 ======== ======= ======= ======= Common stock price information: High....................................... $55 3/8 $44 $43 1/8 $44 Low........................................ 42 3/4 35 1/2 35 3/4 36 1/8 Quarter-end................................ 51 7/8 43 1/4 38 1/2 42 3/8
(a) Includes a $70.0 million, $44.9 million after-tax or $0.22 per share, special provision for loan losses primarily related to management's decision to sell approximately $450 million of credit card outstandings. (b) Includes a tax benefit of $109.0 million, or $0.54 per share, related to the liquidation of an affiliate. (c) Includes restructuring and merger-related charges of $15.0 million, $9.6 million after-tax or $0.05 per share, and other significant one-time charges of $57.0 million, $36.5 million after-tax or $0.18 per share. (d) Includes a provision for loan losses of $70.0 million, $45.5 million after-tax or $0.20 per share, related to the Meridian acquisition. (e) Includes net restructuring and merger-related charges of $139.7 million, $105.3 million after-tax or $0.47 per share, primarily recorded in the second quarter and related to costs associated with the Meridian acquisition. 78 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 18. JOINT VENTURE In December 1992, the Corporation entered into a joint venture with three other banking companies creating Electronic Payment Services, Inc. ("EPS"). The joint venture combines the partners' separate consumer electronic transaction processing businesses and provides automated teller machine ("ATM") and electronic point-of-sale ("POS") processing services. The Corporation contributed to EPS its wholly-owned subsidiaries of Money Access Service Inc. ("MAC"), a regional ATM network, and BUYPASS Corporation, a third-party processor of electronic POS transactions. At the formation of EPS, the Corporation had equal ownership with two partners in the joint venture, each with 31%. The fourth partner owned 7%. As part of the 1992 transaction, the Corporation received a cash payment of $79,350 and $245,400 of EPS 5% cumulative redeemable preferred stock. The exchange of assets involved in the transaction resulted in a 1992 pre-tax gain to the Corporation of $41,072, $25,670 after-tax. The exchange also generated a deferred gain of approximately $138,000. In December 1993, the Corporation and EPS mutually agreed to enter into a recapitalization of EPS involving the EPS preferred stock held by the Corporation. In exchange for substantially all of the preferred stock, the Corporation received from EPS a ten-year 6.45% note providing for equal principal payments over the life of the note. The recapitalization did not affect the amount of deferred gain, but changed the timing of deferred gain income recognition from a five-year period beginning in 1996 to a ten-year period which began in 1994. On March 27, 1995, EPS added a new partner and increased the ownership interests of an existing partner to that of a full partner, resulting in a decrease in the Corporation's share of ownership from 31% to 20%. As a direct result of this change in ownership interests, the Corporation recognized a pre-tax gain of $19,000, $11,800 after-tax or $0.05 per share, in 1995. Included in the pre-tax gain amount was $4,000 related to the acceleration of deferred gain recognition. The Corporation's investment in EPS at December 31, 1997, net of $87,000 deferred gain, is $59,156 and is included in other assets. "Income from investment in EPS, Inc.", which is included in non-interest income, reflects the Corporation's share in EPS net income, interest income on the 6.45% note and amortization of the deferred gain. 79 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 19. RESTRUCTURING AND MERGER-RELATED CHARGES A summary of restructuring and merger-related charges for the years ended December 31, 1997, 1996 and 1995 were as follows:
1997 1996 1995 --------- --------- ---------- Merger-related restructuring charges............. $ 6,200 $ 161,598 $ 10,000 Strategic technology alliance charges............ 8,800 - - Meridian merger-related implementation costs..... - 29,019 - Process redesign restructuring charges........... - - 142,000 Gains on sales of branches....................... - (43,064) (3,988) Pension curtailment gains........................ - (7,851) (9,412) --------- --------- ---------- Total........................................ $15,000 $ 139,702 $ 138,600 ========= ========= ==========
In 1997, CoreStates recorded pre-tax restructuring and merger-related charges of $15,000, $9,612 after-tax or $0.05 per share, primarily related to costs incurred in the pending First Union merger and costs incurred in the creation of a strategic technology alliance with Andersen Consulting. Cash outflow related to these costs in 1997 was $11,700. In 1996, the Corporation recorded merger-related restructuring charges of $161,598, $120,150 after-tax or $0.54 per share, in connection with the acquisitions of Meridian and United Counties. The charges included direct and incremental costs associated with these acquisitions. The components of the merger-related restructuring charges were as follows:
Requiring Cash Cash Outflow Provision Outflow to Date --------- --------- -------- Severance costs......................... $ 70,469 $ 70,469 $ 65,941 Branch closing costs.................... 33,469 15,102 6,585 Office reconfiguration costs............ 19,059 2,792 (5,764) Merger transaction costs................ 14,624 14,624 13,461 System consolidation writedowns......... 6,391 - - Miscellaneous........................... 17,586 17,593 12,316 -------- -------- -------- Total............................. $161,598 $120,580 $ 92,539 ======== ======== ========
The severance costs relate to severance packages, which were or are expected to be paid to approximately 1,350 employees who have been displaced as a result of the Meridian consolidation. Restructuring and merger-related charges in 1996 also included $29,019, $18,263 after-tax or $0.07 per share, of implementation costs that were incurred in the process of consolidating Meridian and United Counties businesses and operations. The Corporation recorded restructuring credits of $50,915, $33,096 after-tax or $0.14 per share and $13,400, $8,549 after-tax or $0.03 per share in 1996 and 1995, respectively, related to gains on the curtailment of pension benefits associated with employees displaced during 1996 and 1995 and gains on the sale of branches which were sold as a result of consolidating the Meridian and United Counties branches and the process redesigns. Upon consummation of the Meridian merger, the Corporation recorded a $70 million provision for loan losses in connection with a change in strategic direction related to Meridian's problem assets and to conform its consumer lending charge-off policies to those of the Corporation. 80 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 19. RESTRUCTURING AND MERGER-RELATED CHARGES - continued In 1995, the Corporation recorded restructuring charges of $142,000, $90,800 after-tax or $0.40 per share, in connection with process redesigns commenced during that year. The objectives of the process redesigns were: (i) to enhance customer focus; (ii) to accelerate "cultural changes" which were already in progress; and (iii) to improve productivity. The charges included direct and incremental costs associated with the process redesigns. The components of the process redesign restructuring charges were as follows:
Requiring Cash Cash Outflow Provision Outflow to Date ---------- ---------- ---------- Severance costs........................ $ 87,900 $ 87,900 $ 87,328 Office reconfiguration and branch closing costs...................... 44,300 16,600 6,901 Outplacement costs..................... 2,500 2,500 2,358 Miscellaneous.......................... 7,300 5,300 4,653 ---------- ---------- ---------- Total............................. $ 142,000 $ 112,300 $ 101,240 ========== ========== ==========
The following table summarizes the activity in the restructuring and merger-related accrual for the year ended December 31, 1997: 1997 -------- Balance at beginning of year................ $108,205 Provision charged against income............ 15,000 Cash outflow................................ (59,451) Writedowns of assets........................ (30,269) -------- Balance at December 31,..................... $ 33,485 ========= 81 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 20. EARNINGS PER COMMON SHARE The following table sets forth the computation of basic and diluted earnings per share:
Year ended December 31, --------------------------------------------- 1997 1996 1995 -------- -------- -------- Earnings - -------- (a) Net income.............................. $813,279 $649,144 $655,176 ======== ======== ======== Average Common Shares - --------------------- (b) Average common shares outstanding....... 203,452 218,812 222,268 Average potentially dilutive shares..... 2,116 1,886 2,398 -------- ------- ------- (c) Average common and potentially dilutive shares....................... 205,568 220,698 224,666 ======= ======= ======= Net Income Per Common Share - --------------------------- Basic (a / b)............................... $4.00 $2.97 $2.95 ===== ===== ===== Diluted (a / c)............................. $3.96 $2.94 $2.92 ===== ===== =====
21. FINANCIAL STATEMENTS OF THE PARENT COMPANY
STATEMENT OF INCOME Year ended December 31, ---------------------------------------- 1997 1996 1995 --------- --------- --------- REVENUES - -------- Dividends from subsidiaries: Banks.................................................... $ 625,000 $ 657,744 $ 373,023 Other subsidiaries....................................... 90,940 27,217 91,917 --------- -------- --------- Total dividends from subsidiaries..................... 715,940 684,961 464,940 Management fees and other income from subsidiaries.......... 189,000 178,179 190,027 Securities gains (losses)................................... - (22) 16,343 Other income................................................ 444 3,054 3,241 --------- -------- --------- Total revenues........................................ 905,384 866,172 674,551 --------- -------- --------- EXPENSES - -------- Interest on: Funds borrowed........................................... 13,361 5,606 19,685 Long-term debt........................................... 18,436 22,843 21,578 --------- -------- --------- Total interest expense................................ 31,797 28,449 41,263 Other operating expenses.................................... 181,663 245,836 219,463 --------- -------- --------- Total expenses........................................ 213,460 274,285 260,726 --------- -------- --------- Income before income tax benefit and equity in undistributed income of subsidiaries................... 691,924 591,887 413,825 Income tax benefit.......................................... (6,953) (14,911) (11,977) --------- -------- --------- Income before equity in undistributed income of subsidiaries 698,877 606,798 425,802 --------- -------- --------- Equity in undistributed income (excess dividends) of subsidiaries: Banks.................................................. 62,503 (52,497) 203,909 Other subsidiaries..................................... 51,899 94,843 25,465 --------- -------- --------- 114,402 42,346 229,374 Total equity in undistributed income of subsidiaries.. --------- -------- --------- NET INCOME.................................................. $ 813,279 $649,144 $ 655,176 - ---------- ========= ======== =========
82 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 21. FINANCIAL STATEMENTS OF THE PARENT COMPANY - continued
BALANCE SHEET December 31, -------------------------- 1997 1996 ---------- ---------- ASSETS - ------ Cash ...................................................... $ 1,508 $ 1,374 Time deposits............................................... - 887 Investment-securities available-for-sale.................... 15,512 97,786 Investments and receivables - subsidiaries: Investments in subsidiaries at equity in underlying net assets: Banks.................................................... 3,220,941 3,389,148 Other subsidiaries....................................... 655,274 558,062 ---------- ---------- Total investments in subsidiaries..................... 3,876,215 3,947,210 Receivables - subsidiaries................................ 113,715 40,814 ---------- ---------- Total investments and receivables-subsidiaries........ 3,989,930 3,988,024 Other assets................................................ 42,258 80,039 ---------- ---------- Total assets.......................................... $4,049,208 $4,168,110 ========== ========== LIABILITIES - ----------- Funds borrowed - subsidiaries............................... $ 359,123 $ - Dividends payable and other liabilities..................... 196,911 214,925 Long-term debt.............................................. 255,742 257,491 ---------- ---------- Total liabilities..................................... 811,776 472,416 ---------- ---------- SHAREHOLDERS' EQUITY - -------------------- Total shareholders' equity............................ 3,237,432 3,695,694 ---------- ---------- Total liabilities and shareholders' equity............ $4,049,208 $4,168,110 ========== ==========
The Corporation has guaranteed certain borrowings of its subsidiaries at December 31, 1997 in the amount of $3,331,835 which includes $865,835 for commercial paper. The maturities for parent company long-term debt for the years ending December 31, 1998 through 2002 are: $1,607; $1,751; $151,855; $696 and $99,833, respectively. 83 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 21. FINANCIAL STATEMENTS OF THE PARENT COMPANY - continued
Statement of Cash Flows Year Ended December 31, ----------------------------------------- 1997 1996 1995 ---------- ----------- ---------- OPERATING ACTIVITIES Net income............................................................. $ 813,279 $ 649,144 $ 655,176 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed income of subsidiaries............................... (114,402) (42,346) (229,374) Securities losses (gains).......................................... - 22 (16,343) Deferred income tax expense (benefit).............................. 2,644 180 (785) Net decrease (increase) in other assets............................ 29,749 (6,969) 24,265 Net increase (decrease) in other liabilities....................... 2,577 8,454 (22,761) Other, net......................................................... 6,073 7,288 7,840 ---------- ----------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES............................ 739,920 615,773 418,018 ---------- ----------- ---------- INVESTING ACTIVITIES Net capital returned from subsidiaries................................. 190,000 270,226 190,900 (Increase) decrease in receivables from subsidiaries................... (72,901) 107,069 (3,593) Purchases of investment securities..................................... (53,493) (707,008) (170,988) Proceeds from maturities and sales of investment securities............ 135,767 717,536 118,483 Other, net............................................................. - - (1,380) ---------- ----------- ---------- NET CASH PROVIDED BY INVESTING ACTIVITIES.......................... 199,373 387,823 133,422 ---------- ----------- ---------- FINANCING ACTIVITIES Repayment of funds borrowed............................................ - - (75,000) Retirement of long-term debt........................................... (1,749) (77,401) (1,471) Proceeds from issuance of long-term debt............................... - - 149,877 Net increase (decrease) in financing from and due to subsidiaries...... 369,329 (115,498) (94,054) Cash dividends paid.................................................... (391,781) (328,114) (286,565) Purchases of treasury stock............................................ (1,007,832) (533,932) (335,528) Repurchase and retirement of common stock.............................. - (57,703) (17,134) Common stock issued under employee benefit plans....................... 62,873 87,726 99,011 Other, net............................................................. 30,001 21,360 6,777 ---------- ----------- ---------- NET CASH USED IN FINANCING ACTIVITIES.................................. (939,159) (1,003,562) (554,087) ----------- ----------- ---------- INCREASE (DECREASE) IN CASH AND DUE FROM BANKS....................... 134 34 (2,647) Cash and due from banks at January 1,................................ 1,374 1,340 3,987 ---------- ----------- ---------- CASH AND DUE FROM BANKS AT DECEMBER 31,.............................. $ 1,508 $ 1,374 $ 1,340 ========== =========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest............................................................. $ 28,187 $ 25,267 $ 40,745 ========== =========== ========== Income taxes......................................................... $ - $ - $ 43 ========== =========== ==========
84 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Page 1 of 2 SUPPLEMENTAL FINANCIAL DATA CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES
1997 1996 ---------------------------------- -------------------------------- Average Income/ Average Income/ balance Rate expense balance Rate expense -------- ------ ------------- ---------- ------- --------- INTEREST EARNING ASSETS (000,000) (000) (000,000) (000) Time deposits, principally Eurodollars (a)..... $ 2,800 5.76% $ 161,418 $ 2,163 5.68% $ 122,752 Investment securities (b): U.S. Government.............................. 2,257 6.09 137,487 3,262 6.02 196,511 State and municipal.......................... 391 7.86 30,744 497 8.05 40,008 Other........................................ 1,044 5.99 62,578 903 5.95 53,723 ------- --------- ------- --------- Total investment securities........... 3,692 6.25 230,809 4,662 6.23 290,242 ------- --------- ------- --------- Federal funds sold and securities purchased under agreements to resell.................. 137 6.08 8,323 332 5.71 18,966 Trading account securities..................... 282 8.32 23,473 112 6.77 7,581 Loans (b)(c)(d): Domestic: Commercial, industrial and other........... 15,193 8.79 1,335,058 13,398 9.03 1,209,870 Real estate................................ 9,288 8.21 762,769 10,094 8.49 857,105 Consumer................................... 4,862 12.02 584,347 4,536 11.67 529,503 Financial institutions..................... 911 7.06 64,332 847 6.45 54,648 Factoring receivables...................... 500 9.66 48,280 497 10.09 50,156 Lease financing............................ 1,213 7.94 96,331 1,180 8.05 95,018 Foreign...................................... 2,121 6.50 137,760 1,387 6.39 88,563 ------- --------- ------- --------- Total loans, net of discounts........ 34,088 8.89 3,028,877 31,939 9.03 2,884,863 ------- --------- ------- --------- Total interest earning assets (d).... $40,999 8.42 3,452,900 $39,208 8.48 3,324,404 ======= ---- --------- ======= ---- --------- FUNDING SOURCES Interest bearing liabilities (b): Deposits in domestic offices (e): Commercial................................. $ 1,770 5.57 98,669 $ 601 5.13 30,857 NOW accounts............................... 390 1.34 4,697 1,439 1.14 15,112 Money Market Accounts...................... 9,075 2.62 236,152 7,585 2.64 199,566 Consumer savings........................... 3,642 1.20 43,815 4,563 1.77 80,972 Consumer certificates...................... 8,483 5.14 436,135 9,067 5.15 467,099 Time deposits of overseas branches and subsidiaries......................... 1,307 4.97 64,896 1,034 4.66 48,174 ------- --------- ------- --------- Total interest bearing deposits...... 24,667 3.60 884,364 24,289 3.49 841,780 ------- --------- ------- --------- Short-term funds borrowed: Federal funds purchased and securities sold under agreements to repurchase...... 1,487 5.43 80,681 1,622 5.07 82,214 Commercial paper........................... 914 5.61 51,289 962 5.44 52,353 Other...................................... 1,013 5.71 57,865 374 4.96 18,562 ------- --------- ------- --------- Total short-term funds borrowed...... 3,414 5.56 189,835 2,958 5.18 153,129 ------- --------- ------- --------- Long-term debt............................... 3,683 6.50 239,248 2,536 6.38 161,811 ------- --------- ------- --------- Total interest bearing liabilities... 31,764 4.14 1,313,447 29,783 3.88 1,156,720 Portion of non-interest bearing funding sources...................................... 9,235 9,425 ------- --------- ------- --------- Total funding sources................ $40,999 3.20 1,313,447 $39,208 2.95 1,156,720 ======= ---- --------- ======= ---- --------- Net interest income and net interest margin.... 5.22% $2,139,453 5.53% $2,167,684 ==== ========== ==== =========
1995 --------------------------------- Average Income/ balance Rate expense --------- ------ ----------- INTEREST EARNING ASSETS (000,000) (000) Time deposits, principally Eurodollars (a)...... $ 1,929 6.32% $ 121,993 Investment securities (b): U.S. Government............................... 4,946 5.87 290,474 State and municipal........................... 665 8.42 56,018 Other......................................... 819 6.15 50,366 ------- --------- Total investment securities............ 6,430 6.17 396,858 ------- --------- Federal funds sold and securities purchased under agreements to resell................... 322 6.12 19,695 Trading account securities...................... 280 7.42 20,785 Loans (b)(c)(d): Domestic: Commercial, industrial and other............ 12,526 9.52 1,192,478 Real estate................................. 11,283 9.09 1,025,924 Consumer.................................... 4,238 11.11 470,771 Financial institutions...................... 715 7.04 50,307 Factoring receivables....................... 577 10.65 61,442 Lease financing............................. 1,094 8.16 89,290 Foreign....................................... 834 7.05 58,807 ------- --------- Total loans, net of discounts......... 31,267 9.43 2,949,019 ------- --------- Total interest earning assets (d)..... $40,228 8.72 3,508,350 ======= ---- --------- FUNDING SOURCES Interest bearing liabilities (b) Deposits in domestic offices (e): Commercial.................................. $ 669 5.58 37,321 NOW accounts................................ 3,377 1.51 46,724 Money Market Accounts....................... 6,023 3.29 197,431 Consumer savings............................ 5,040 2.28 114,700 Consumer certificates....................... 9,132 5.39 492,610 Time deposits of overseas branches and subsidiaries.......................... 1,089 4.80 52,261 ------- --------- Total interest bearing deposits....... 25,330 3.76 941,047 ------- --------- Short-term funds borrowed: Federal funds purchased and securities sold under agreements to repurchase....... 2,203 5.68 125,117 Commercial paper............................ 1,051 5.94 62,459 Other....................................... 498 5.33 26,543 ------- --------- Total short-term funds borrowed....... 3,752 5.71 214,119 ------- --------- Long-term debt................................ 2,262 6.76 152,989 ------- --------- Total interest bearing liabilities.... 31,344 4.17 1,308,155 Portion of non-interest bearing funding sources....................................... 8,884 ------- Total funding sources................. $40,228 3.25 1,308,155 ======= ---- --------- Net interest income and net interest margin..... 5.47% $2,200,195 ==== ==========
(a) Yields and income on time deposits include net Eurodollar trading profits. (b) The net impact of off-balance sheet derivatives used for managing interest rate risk 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 interest bearing demand deposits in domestic offices are reduced by specified reserve amounts for purposes of rate calculations. 85 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Page 2 of 2 SUPPLEMENTAL FINANCIAL DATA: continued CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES
1997 1996 1995 -------------------------- ------------------------ ----------------------- 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..................................... $ 2,824 $ 2,845 $ 2,779 Allowance for loan losses................ (694) (701) (685) Other assets............................. 2,589 2,442 2,383 ------- ------- ------- Total non-interest earning assets... $ 4,719 $ 4,586 $ 4,477 ======= ======= ======= Total average assets..................... $45,718 $43,794 $44,705 ======= ======= ======= NON-INTEREST BEARING FUNDING SOURCES Demand deposits: Domestic............................... $ 7,905 $ 7,699 $ 7,352 Foreign................................ 395 379 420 Other liabilities........................ 2,290 2,043 1,847 Shareholders' equity..................... 3,364 3,890 3,742 Non-interest bearing funding sources used to fund earning assets................. (9,235) (9,425) (8,884) ------- ------- ------- Total net non-interest bearing funding sources................. $ 4,719 $ 4,586 $ 4,477 ======= ======= ======= SUPPLEMENTARY AVERAGES Net Federal funds purchased and securities sold under agreements to repurchase...... $ 1,350 5.36% $ 72,358 $ 1,290 4.90% $63,248 $ 1,881 5.60% $105,422 Certificates of deposit in domestic offices over $100,000.................. 2,371 5.48 129,963 1,090 5.17 56,308 1,170 5.69 66,577 Average prime rate....................... 8.44 8.27 8.84
86 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Page 1 of 2 SUPPLEMENTAL FINANCIAL DATA: continued CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES
1994 1993 ----------------------------------- ------------------------------ Average Income/ Average Income/ balance Rate expense balance Rate expense ------- ----- ---------- ------- ----- ---------- INTEREST EARNING ASSETS (000,000) (000) (000,000) (000) Time deposits, principally Eurodollars (a)...... $ 1,623 4.37% $ 70,996 $ 1,423 3.39% $ 48,214 Investment securities (b): U.S. Government............................... 5,498 5.48 301,515 6,120 6.09 372,738 State and municipal........................... 778 7.97 62,027 890 8.26 73,500 Other......................................... 1,087 5.54 60,252 1,023 5.34 54,649 ------- ---------- ------- ---------- Total investment securities............ 7,363 5.76 423,794 8,033 6.24 500,887 ------- ---------- ------- ---------- Federal funds sold and securities purchased under agreements to resell................... 289 4.38 12,652 336 3.26 10,959 Trading account securities...................... 139 6.78 9,419 150 7.38 11,072 Loans (b)(c)(d): Domestic: Commercial, industrial and other............ 11,164 8.30 927,082 10,135 7.80 790,553 Real estate................................. 11,978 7.95 951,681 12,459 7.78 968,967 Consumer.................................... 4,117 10.44 429,832 3,851 10.79 415,390 Financial institutions...................... 626 8.00 50,106 716 6.15 44,058 Factoring receivables....................... 587 9.95 58,389 554 9.62 53,312 Lease financing............................. 1,041 8.45 87,982 897 9.31 83,466 Foreign....................................... 597 5.39 32,155 551 5.00 27,565 ------- ---------- ------- ---------- Total loans, net of discounts......... 30,110 8.43 2,537,227 29,163 8.17 2,383,311 ------- ---------- ------- ---------- Total interest earning assets (d)..... $39,524 7.73 3,054,088 $39,105 7.56 2,954,443 ======= ---- ---------- ======= ---- --------- FUNDING SOURCES Interest bearing liabilities (b): Deposits in domestic offices (e): Commercial.................................. $ 580 4.15 24,061 $ 752 3.97 29,842 NOW accounts................................ 3,540 1.15 37,384 3,343 1.43 43,308 Money Market Accounts....................... 6,386 2.27 144,475 6,672 2.01 134,091 Consumer savings............................ 5,509 1.87 103,142 5,269 1.93 101,471 Consumer certificates....................... 7,993 4.28 341,843 8,519 4.32 368,122 Time deposits of overseas branches and subsidiaries............................ 831 3.56 29,602 718 2.57 18,453 ------- ---------- ------- ---------- Total interest bearing deposits....... 24,839 2.77 680,507 25,273 2.79 695,287 ------- ---------- ------- ---------- Short-term funds borrowed: Federal funds purchased and securities sold under agreements to repurchase......... 2,092 4.17 87,276 1,951 2.99 58,291 Commercial paper............................ 757 4.24 32,089 606 3.14 19,051 Other....................................... 587 5.15 30,253 480 4.45 21,347 ------- ---------- ------- ---------- Total short-term funds borrowed....... 3,436 4.35 149,618 3,037 3.25 98,689 ------- ---------- ------- ---------- Long-term debt (b)............................ 2,040 5.71 116,419 1,894 5.27 99,837 ------- ---------- ------- ---------- Total interest bearing liabilities.... 30,315 3.12 946,544 30,204 2.96 893,813 Portion of non-interest bearing funding sources......................................... 9,209 8,901 ------- ---------- ------- Total funding sources................. $39,524 2.40 946,544 $39,105 2.29 893,813 ======= ---- ---------- ======= ---- ---------- Net interest income and net interest margin..... 5.33% $2,107,544 5.27% $2,060,630 ==== ========== ==== ==========
(a) Yields and income on time deposits include net Eurodollar trading profits. (b) The net impact of off-balance sheet derivatives used for managing interest interest rate risk 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 bearing demand deposits in domestic offices are reduced by specified reserve amounts for purposes of rate calculations. 87 CORESTATES FINANCIAL CORP AND SUBSIDIARIES Page 2 of 2 SUPPLEMENTAL FINANCIAL DATA: continued CONSOLIDATED AVERAGE BALANCE SHEET AND TAXABLE EQUIVALENT INCOME/EXPENSE AND RATES
1994 1993 ------------------------------- -------------------------------- Average Income/ Average Income/ balance Rate expense balance Rate expense ------- ---- ------- ---------- ---- ------- (000,000) (000) (000,000) (000) NON-INTEREST EARNING ASSETS Cash....................................... $ 2,982 $ 2,956 Allowance for loan losses.................. (692) (641) Other assets............................... 2,017 2,016 ------- ------- Total non-interest earning assets..... $ 4,307 $ 4,331 ======= ======= TOTAL AVERAGE ASSETS....................... $43,831 $43,436 ======= ======= NON-INTEREST BEARING FUNDING SOURCES Demand deposits: Domestic................................. $ 7,698 $ 7,646 Foreign.................................. 417 369 Other liabilities.......................... 1,775 1,771 Shareholders' equity....................... 3,626 3,446 Non-interest bearing funding sources used to fund earning assets................... (9,209) (8,901) ------- ------- Total net non-interest bearing funding sources................... $ 4,307 $ 4,331 ======= ======= Supplementary Averages Net Federal funds purchased and securities sold under agreements to repurchase.... $ 1,803 4.14% $74,624 $ 1,615 2.93% $47,332 Certificates of deposit in domestic offices over $100,000.................... 1,157 4.03 46,637 1,346 3.84 51,715 Average prime rate......................... 6.60 6.00
88 CoreStates Financial Corp and Subsidiaries Supplemental Financial Data: Continued CONDENSED CONSOLIDATED STATEMENT OF INCOME AND SELECTED FINANCIAL DATA (in thousands, except per share amounts) Condensed Consolidated Statement of Income
Year Ended December 31, ------------------------------------------------------------------------------ 1997 1996 1995 1994 1993 ----------- ---------- ---------- --------- ----------- Interest income and fees........................ $3,429,315 $3,298,204 $3,475,080 $3,014,559 $2,904,949 Interest expense................................ 1,313,447 1,156,720 1,308,155 946,544 893,813 ---------- ---------- ---------- ---------- ---------- Net interest income.......................... 2,115,868 2,141,484 2,166,925 2,068,015 2,011,136 Provision for losses on loans................... 263,000 228,767 144,002 279,195 189,372 ---------- ---------- ---------- ---------- ---------- Net interest income after provision for losses on loans.............. 1,852,868 1,912,717 2,022,923 1,788,820 1,821,764 Non-interest income............................. 925,770 899,075 882,222 788,487 832,720 Non-financial expenses.......................... 1,695,777 1,776,828 1,885,528 1,918,242 1,869,544 ---------- ---------- ---------- --------- ---------- Income before income taxes...................... 1,082,861 1,034,964 1,019,617 659,065 784,940 Provision for income taxes...................... 269,582 385,820 364,441 225,859 246,854 ---------- ---------- ---------- --------- ---------- Income before cumulative effect of a change in accounting principle............... 813,279 649,144 655,176 433,206 538,086 Cumulative effect of a change in accounting principle, net of tax............. - - - - (15,740)(f) ---------- ---------- ---------- ---------- ---------- Net income...................................... $ 813,279 $ 649,144 $ 655,176 $ 433,206 $ 522,346 ========== ========== ========== ========== ========== Per common share data: Income before cumulative effect of a change in accounting principle: Basic...................................... $4.00(a) $2.97(b) $2.95(c) $1.91(d) $2.35(f) Diluted.................................... 3.96(a) 2.94(b) 2.92(c) 1.90(d) 2.32(f) Net income: Basic...................................... 4.00(a) 2.97(b) 2.95(c) 1.91(d) 2.29(e) Diluted.................................... 3.96(a) 2.94(b) 2.92(c) 1.90(d) 2.26(e) Dividends paid............................... 1.88 1.68 1.36 1.20 1.11 Dividends declared (e)....................... 1.91 1.73 1.44 1.24 1.14 Average common shares outstanding............... 203,452 218,812 222,268 226,234 228,580 Average diluted common shares outstanding....... 205,568 220,698 224,666 227,938 231,437 Operating Ratios: Income before cumulative effect of a change in accounting principle as a percent of: Average common shareholders' equity........ 24.18%(a) 16.69%(b) 17.51%(c) 11.95%(d) 15.61% Average total assets....................... 1.78 (a) 1.48 (b) 1.47 (c) 0.99 (d) 1.24 Average total shareholders' equity as a percent of average total assets...................... 7.36 8.88 8.37 8.27 7.93 Dividends declared as a percent of income before cumulative effect of a change in accounting principle.................................... 47.75 58.25 48.81 64.92 48.51 Full Time Equivalent Staff...................... 18,847 19,114 19,957 22,621 23,569
(a) Includes the impact of the following significant items: a special tax benefit of $0.54 per share, a special provision for losses on loans of $0.22 per share, restructuring and merger-related charges of $0.05 per share, and other significant charges of $0.18 per share. Excluding the impact of these items, net income per share was $3.87, return on average common shareholders' equity was 23.64%, and return on average total assets was 1.74%. (b) Includes the impact of after-tax net restructuring and merger-related charges of $0.68 per share, after-tax gains of $0.12 per share on certain net investment gains, and an after-tax charge of $0.04 per share resulting from a special assessment on deposits insured under the SAIF. Excluding the impact of these items, net income per share was $3.54, return on average common shareholders' equity was 20.07%, and return on average total assets was 1.78%. (c) Includes the impact of after-tax net restructuring charges of $0.37 per share, merger-related charges of $0.04 per share, after-tax gains of $0.04 per share on the exchange of equity securities, and an after-tax gain of $0.05 per share related to a change in ownership interests in a joint venture. Excluding the impact of these items, net income per share was $3.24, return on average common shareholders' equity was 19.43%, and return on average total assets was 1.63%. (d) Includes the impact of after-tax merger-related charges of $0.73 per share recorded for the acquisitions of Constellation and Independence. Excluding the impact of these merger-related charges, net income per share was $2.63, return on average common shareholders' equity was 16.54%, and return on average total assets was 1.37%. (e) Cash dividends declared per share for the periods prior to the acquisitions of Meridian on April 9, 1996, Independence on June 27, 1994 and Constellation on March 16, 1994 assume that the Corporation would have declared cash dividends equal to the cash dividends per share actually declared by the Corporation. (f) In 1993, the Corporation changed its method of accounting for post-employment benefits. 89 CoreStates Financial Corp and Subsidiaries Supplemental Financial Data: Continued CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts) December 31, --------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------- ------------- ------------ ------------ ------------ ASSETS Cash and due from banks......................... $ 3,829,893 $ 3,462,287 $ 3,662,143 $ 3,024,589 $ 3,187,390 Time deposits, principally Eurodollars.......... 3,122,444 2,443,154 1,909,260 1,874,066 1,421,317 Federal funds sold.............................. 41,207 509,694 719,937 923,630 256,221 Trading account securities...................... 495,472 122,317 147,218 347,376 43,009 Investment securities........................... 3,460,391 4,083,224 5,632,232 7,261,905 7,768,755 Loans........................................... 34,813,886 32,331,297 31,175,378 30,134,394 29,111,809 Allowance for loan losses....................... (634,432) (710,327) (670,265) (681,124) (636,915) Due from customers on acceptances............... 641,859 738,077 560,707 352,347 342,065 Premises, equipment and other assets............ 2,690,245 2,514,471 2,860,632 2,810,890 2,714,941 ------------- ------------- ------------ ------------ ------------ Total assets............................ $48,460,965 $45,494,194 $45,997,242 $46,048,073 $44,208,592 ============= ============= ============ ============ ============ LIABILITIES Deposits: Domestic: Non-interest bearing........................ $ 9,252,376 $ 9,330,445 $ 8,937,147 $ 8,625,125 $ 8,767,602 Interest bearing............................ 23,490,992 22,986,955 23,883,726 25,023,283 24,298,434 Overseas branches and subsidiaries............ 1,444,522 1,409,756 1,142,947 1,125,997 797,987 ------------- ------------- ------------ ------------ ------------ Total deposits.......................... 34,187,890 33,727,156 33,963,820 34,774,405 33,864,023 ------------- ------------- ------------ ------------ ------------ Short-term funds borrowed....................... 4,323,319 2,633,157 3,677,013 3,461,249 2,766,750 Bank acceptances outstanding.................... 641,464 727,728 549,048 346,239 347,011 Other liabilities............................... 1,616,624 1,661,162 1,719,697 1,571,985 1,515,718 Long-term debt.................................. 4,454,236 3,049,297 2,212,099 2,163,263 2,010,581 ------------- ------------- ------------ ------------ ------------ Total liabilities....................... 45,223,533 41,798,500 42,121,677 42,317,141 40,504,083 ------------- ------------- ------------ ------------ ------------ SHAREHOLDERS' EQUITY Total shareholders' equity...................... 3,237,432 3,695,694 3,875,565 3,730,932 3,704,509 ------------- ------------- ------------ ------------ ------------ Total liabilities and shareholders' equity $48,460,965 $45,494,194 $45,997,242 $46,048,073 $44,208,592 ============= ============= ============ ============ ============ Book value per common share..................... $16.33 $17.40 $17.61 $16.23 $16.13 ====== ====== ====== ====== ======
90 CoreStates Financial Corp and Subsidiaries Supplemental Financial Data: continued Rate/Volume Analysis Taxable Equivalent Basis (in thousands)
1997 vs. 1996 1996 vs. 1995 ------------------------------------------------------------------------------------- Increase (decrease) in interest Increase (decrease) in interest Income/ Change attributable to Income/ Change attributable to --------- ------------------------ ---------- -------------------------- expense Volume Rate expense Volume Rate --------- --------- -------- ---------- ---------- ---------- Interest earning assets Time deposits, principally Eurodollars........................ $ 38,666 $ 36,182 $ 2,484 $ 759 $ 14,789 $ (14,030) Investment securities................. (59,433) (60,644) 1,211 (106,616) (107,831) 1,215 Federal funds sold.................... (10,643) (11,135) 492 (729) 612 (1,341) Trading account securities............ 15,892 11,509 4,383 (13,204) (12,466) (738) Loans: Domestic........................... 94,817 137,129 (42,312) (96,416) 35,955 (132,371) Foreign............................ 49,197 46,903 2,294 32,260 38,953 (6,693) --------- --------- -------- ---------- ---------- ---------- Total interest income........... 128,496 159,944 (31,448) (183,946) (29,988) (153,958) --------- --------- -------- ---------- ---------- ---------- Interest bearing funds Deposits: Domestic: Commercial...................... 67,812 59,970 7,842 (6,464) (3,794) (2,670) Other........................... (41,950) (19,032) (22,918) (88,716) (17,507) (71,209) Overseas............................ 16,722 12,722 4,000 (4,087) (2,640) (1,447) Short-term funds borrowed: Federal funds purchased............. (1,533) (6,845) 5,312 (42,903) (33,001) (9,902) Other............................... 38,239 29,083 9,156 (18,087) (11,896) (6,191) Long-term debt........................ 77,437 73,179 4,258 8,822 18,522 (9,700) --------- --------- -------- ---------- ---------- ---------- Total interest expense.......... 156,727 149,077 7,650 (151,435) (50,316) (101,119) --------- --------- -------- ---------- ---------- ---------- Net interest income................... $ (28,231) $ 10,867 $(39,098) $ (32,511) $ 20,328 $ (52,839) - ------------------- ========= ========= ======== ========== ========== ==========
Notes to Rate/Volume Analysis Changes in interest income or expense not arising solely as a result of volume or rate variances are allocated to rate variances due to the interest sensitivity of consolidated assets and liabilities. Included in interest income is $79.0 million, $70.7 million and $69.8 million of loan fees for the years 1997, 1996 and 1995, respectively. Non-performing loans are included in interest earning assets. The changes in interest expense on domestic deposits attributable to volume and rate are adjusted by specific reserves as average balances are reduced by such reserve amounts for purposes of rate calculations. The income effects of off-balance sheet derivatives used for managing interest rate risk are associated with the interest income or expense of the related hedged asset or liability. 91 CoreStates Financial Corp and Subsidiaries Supplemental Financial Data: Continued LOAN PORTFOLIO The following are summaries of certain loan categories, net of unearned discounts, for the five years ended December 31, 1997 (in thousands):
1997 1996 1995 1994 1993 ------------- ------------ ------------ ------------ ------------ Domestic loans: Commercial, industrial and other......... $15,949,264 $ 13,906,646 $12,597,470 $11,834,603 $10,707,727 Real estate loans: Construction and development........... 651,064 554,924 607,845 599,331 652,940 Residential............................ 3,915,702 4,073,272 5,288,476 5,552,775 5,655,726 Other, primarily commercial mortgages and commercial loans secured by owner-occupied real estate........... 4,284,281 4,541,697 4,712,473 5,059,676 5,165,790 ------------- ------------ ------------ ------------ ------------ Total real estate loans............ 8,851,047 9,169,893 10,608,794 11,211,782 11,474,456 ------------- ------------ ------------ ------------ ------------ Consumer loans: Installment............................ 2,973,719 3,027,943 2,734,081 2,660,718 2,674,121 Credit card............................ 1,205,932 1,674,921 1,527,447 1,492,004 1,269,980 ------------- ------------ ------------ ------------ ------------ Total consumer loans............... 4,179,651 4,702,864 4,261,528 4,152,722 3,944,101 ------------- ------------ ------------ ------------ ------------ Financial institutions................... 1,568,015 1,153,715 961,289 675,047 879,700 Factoring receivables.................... 454,850 411,280 557,272 622,380 555,211 Lease financing.......................... 1,356,917 1,232,213 1,167,356 1,043,932 999,311 ------------- ------------ ------------ ------------ ------------ Total domestic loans.............. 32,359,744 30,576,611 30,153,709 29,540,466 28,560,506 ------------- ------------ ------------ ------------ ------------ Foreign loans: Loans to or guaranteed by foreign banks.................................. 1,864,883 1,369,015 615,166 301,080 332,288 Commercial and industrial................ 587,071 385,426 406,503 283,535 218,655 Loans to other financial institutions.... 2,188 245 - 9,313 360 ------------- ------------ ------------ ------------ ------------ Total foreign loans................ 2,454,142 1,754,686 1,021,669 593,928 551,303 ------------- ------------ ------------ ------------ ------------ Total loans.................. $34,813,886 $ 32,331,297 $31,175,378 $30,134,394 $29,111,809 =========== ============ =========== =========== ===========
Risk Elements FOREIGN OUTSTANDINGS (in thousands) While the associated risks are clearly recognized, international lending is a part of the Corporation's wide range of international services. It is the Corporation's intent to remain involved in providing the international financial services needed for the increasingly global competition faced by customers. At December 31, 1997, 1996 and 1995, there were no aggregate foreign outstandings (defined as loans, investments, acceptances and time deposits) to borrowers in a foreign country that exceeded 1% of total assets. Outstandings below 1%, but over .75% of total assets were $389,000 in Japan at December 31, 1996. There were no outstandings below 1%, but over .75% of total assets at December 31, 1997 or December 31, 1995. 92 CoreStates Financial Corp and Subsidiaries Supplemental Financial Data: Continued Risk Elements NON-PERFORMING ASSETS The following represents the Corporation's non-accrual loans, renegotiated loans and other real estate owned for the five years ended December 31, 1997 (in thousands):
1997 1996 1995 1994 1993 ---------- --------- ---------- --------- --------- Non-accrual loans Domestic........................................ $253,909 $220,770 $223,602 $348,885 $449,340 Foreign......................................... - - - 158 171 ---------- --------- ---------- --------- --------- Total non-accrual loans.................... 253,909 220,770 223,602 349,043 449,511 ---------- --------- ---------- --------- --------- Renegotiated loans (a).......................... 10 18 7,202 8,067 66,399 ---------- --------- ---------- --------- --------- Total non-performing loans................. 253,919 220,788 230,804 357,110 515,910 ---------- --------- ---------- --------- --------- Other real estate owned (OREO).................. 14,342 24,175 37,502 83,546 109,871 ---------- --------- ---------- --------- --------- Total non-performing assets..................... $268,261 $244,963 $268,306 $440,656 $625,781 ========== ========= ========== ========= ========= Non-performing assets as a percentage of loans plus OREO................. 0.77% 0.76% 0.86% 1.46% 2.14% ==== ==== ==== ==== ==== Non-performing assets as a percentage of total assets.................... 0.55% 0.54% 0.58% 0.96% 1.42% ==== ==== ==== ==== ====
- ------------------- (a) There were no foreign renegotiated loans in any periods presented. The following reflects the effect of non-accrual and renegotiated loans on both interest income and net interest income for the three years ended December 31, 1997 (in thousands):
1997 1996 1995 --------- ----------- ----------- Interest income which would have been recorded in accordance with original terms: Domestic................................... $20,935 $20,244 $27,452 Foreign.................................... - - 8 ------- -------- -------- Total.................................... 20,935 20,244 27,460 ------- -------- -------- Interest income reflected in total operating income: Domestic................................... 15,075 8,977 14,354 ------- -------- -------- Total.................................... 15,075 8,977 14,354 ------- -------- -------- Net reduction in interest income and net interest income....................................... $ 5,860 $11,267 $13,106 ======= ======== =======
ACCRUING LOANS PAST DUE 90 DAYS OR MORE Accruing loans 90 days or more past due as to payment of interest or principal for the five years ended December 31, 1997 were as follows (in thousands):
1997 1996 1995 1994 1993 ------- --------- -------- -------- -------- Total (a)....................................... $94,302(b) $113,268 $88,671 $77,860 $80,718 ======= ========= ======== ======== ========
- ------------------- (a) There were no foreign loans past due 90 days or more in any periods presented. (b) Includes $9,463 of loans held for sale past due 90 days or more. 93 CoreStates Financial Corp and Subsidiaries Supplemental Financial Data: Continued CONSOLIDATED ALLOWANCE FOR LOAN LOSSES The following table summarizes the distribution of loan charge-offs and recoveries by type of loan for the five years ended December 31, 1997 (in thousands):
1997 1996 1995 1994 1993 ---------- ---------- --------- --------- --------- Balance at beginning of year: Domestic................................ $675,327 $645,265 $661,124 $626,915 $610,039 Foreign................................. 35,000 25,000 20,000 10,000 10,000 ---------- ---------- --------- --------- --------- 710,327 670,265 681,124 636,915 620,039 ---------- ---------- --------- --------- --------- Allowance for loans purchased at date of purchase: Domestic............................... - - - 24,931 5,797 ---------- ---------- --------- --------- --------- Allowance for loans designated as held for sale or sold at date of sale: Domestic............................... (102,000) - - (2,377) Foreign................................ - - - - (353) ---------- ---------- --------- --------- --------- (102,000) - - (2,377) (353) ---------- ---------- --------- --------- --------- Recoveries, by type of loan: Domestic: Commercial, industrial and other.. 31,725 39,726 35,535 29,845 48,659 Real estate.......................... 21,282 27,870 26,477 24,058 12,438 Consumer............................. 20,366 16,140 15,599 18,613 17,157 Financial institutions............... 361 837 231 654 2,246 Lease financing...................... 10,567 6,283 7,091 8,128 5,417 Foreign................................. - 2,129 293 2,616 12,645 ---------- ---------- --------- --------- --------- Total recoveries................. 84,301 92,985 85,226 83,914 98,562 ---------- ---------- --------- --------- --------- Charge-offs, by type of loan: Domestic: Commercial, industrial and other..... 89,078 67,181 71,199 124,610 123,661 Real estate.......................... 34,838 64,459 67,184 149,738 91,103 Consumer (b)......................... 177,143 132,798 89,472 57,208 53,222 Financial institutions............... - 5,776 2,052 41 816 Lease financing...................... 20,137 11,476 10,180 9,857 7,700 ---------- ---------- --------- --------- --------- Total loans charged off.......... 321,196 281,690 240,087 341,454 276,502 ---------- ---------- --------- --------- --------- Total net charge-offs.................... 236,895 188,705 154,861 257,540 177,940 ---------- ---------- --------- --------- --------- Provision charged to operating expense: Domestic................................ 254,000 220,896 139,295 271,811 201,664 Foreign................................. 9,000 7,871 4,707 7,384 (12,292)(a) ---------- ---------- --------- --------- --------- 263,000 228,767 144,002 279,195 189,372 ---------- ---------- --------- --------- --------- Balance at end of year: Domestic................................ 590,432 675,327 645,265 661,124 626,915 Foreign................................. 44,000 35,000 25,000 20,000 10,000 ---------- ---------- --------- --------- --------- $634,432 $710,327 $670,265 $681,124 $636,915 ---------- ---------- --------- --------- --------- Ratios Net charge-offs as a percentage of average loans outstanding............ 0.69% 0.59% 0.50% 0.86% 0.61% ==== ==== ==== ==== ==== Allowance for loan losses as a percentage of year-end loans............ 1.82% 2.20% 2.15% 2.26% 2.19% ==== ==== ==== ==== ====
- --------------------- (a) Reflects reallocation of the foreign allowance for loan losses to the domestic allowance for loan losses. (b) Excludes writedown of $102 million related to credit cards held for sale. 94 CoreStates Financial Corp and Subsidiaries Supplemental Financial Data: Continued DISTRIBUTION OF ALLOWANCE FOR LOAN LOSSES (a) The distribution of the allowance for loan losses and the percentage of each loan type to total loans for the five years ended December 31, 1997 is illustrated in the table below (in millions):
1997 1996 1995 1994 1993 ------------------ ----------------- ------------------ ------------------ ------------------ % % % % % of Loan of Loan of Loan of Loan of Loan category category category category category to to to to to total total total total total Allowance loans Allowance loans Allowance loans Allowance loans Allowance loans --------- -------- --------- -------- --------- -------- --------- -------- --------- -------- Loan type Domestic: Commercial and industrial.... $273.0 46% $300.2 44% $321.4 41% $314.5 41% $314.9 38% Real estate: Construction............... 40.0 2 48.7 2 33.7 2 60.9 2 74.0 2 Other.................... 104.3 23 125.4 28 118.6 33 127.8 36 105.1 39 Consumer..................... 133.1 12 161.0 14 151.1 14 125.1 13 113.4 13 Other domestic loans........ 40.0 10 40.0 7 20.5 7 32.8 6 19.5 6 Foreign......................... 44.0 7 35.0 5 25.0 3 20.0 2 10.0 2 ------- --- ----- --- ----- --- ------ --- ------ --- Total........................ $634.4 100% $710.3 100% $670.3 100% $681.1 100% $636.9 100% ======= === ====== === ====== === ====== === ====== ===
(a) This distribution is made for analytical purposes. It does not represent specific allocations of the allowance. The total allowance is available to absorb losses from any segment of the portfolio. COMMERCIAL CERTIFICATES OF DEPOSIT OVER $100,000 ISSUED BY DOMESTIC OFFICES (in thousands)
December 31, ------------------------------------------------------ 1997 1996 ------------------------ ------------------------ Amount Percent Amount Percent ----------- ------- --------- ------- Maturity Distribution 3 months or less................... $ 574,902 23.1% $ 654,313 86.7% 3 through 6 months................. 620,003 24.9 19,539 2.6 6 through 12 months................ 795,965 32.0 75,951 10.1 Over 12 months..................... 498,545 20.0 4,634 0.6 ----------- ----- --------- ----- Total.............................. $2,489,415 100.0% $ 754,437 100.0% =========== ===== ========= =====
95 CoreStates Financial Corp and Subsidiaries Supplemental Financial Data: Continued INTEREST SENSITIVITY ANALYSIS AT DECEMBER 31, 1997 (in millions)
Rate Maturity Period ------------------------------------------------------------------------------------ 1-90 91-181 182-365 1-2 2-5 > 5 Days Days Days Years Years Years Total -------- ------- ------- ------- -------- -------- ------- EARNING ASSETS Federal funds sold, resale agreements and trading account securities................ $ 537 $ 537 Time deposits................................ 2,052 $ 786 $ 284 3,122 Investment securities........................ 1,155 409 534 $ 722 $ 446 $ 194 3,460 Interest rate swaps.......................... 1,277 264 794 1,545 4,166 908 8,954 Asset financial futures...................... 320 366 26 24 - - 736 -------- ------- ------- ------- -------- -------- ------- Total discretionary assets.............. 5,341 1,825 1,638 2,291 4,612 1,102 16,809 Total loans(a)............................... 23,481 1,819 2,037 2,685 3,807 985 34,814 -------- ------- ------- ------- -------- -------- ------- Total earning assets......................... 28,822 3,644 3,675 4,976 8,419 2,087 51,623 -------- ------- ------- ------- -------- -------- ------- FUNDING SOURCES Federal funds purchased, repurchase agreements and other short-term funds borrowed.................................. 4,289 31 3 - - - 4,323 Domestic and foreign time deposits(b)........ 3,810 75 47 4 51 1 3,988 Long-term debt............................... 2,699 1 6 106 521 1,121 4,454 Interest rate swaps.......................... 8,487 - 132 310 25 - 8,954 Liability financial futures.................. 736 - - - - - 736 -------- ------- ------- ------- -------- -------- ------- Total discretionary liabilities......... 20,021 107 188 420 597 1,122 22,455 -------- ------- ------- ------- -------- -------- ------- Savings certificates......................... 1,838 1,930 1,574 1,569 835 161 7,907 Money market, savings and NOW accounts(c).... 5,247 541 1,081 1,932 3,962 - 12,763 Net non-interest bearing funds(d)(e)......... 2,834 - - - - 5,664 8,498 -------- ------- ------- ------- -------- -------- ------- Total savings certificates and indefinite maturity liabilities.................... 9,919 2,471 2,655 3,501 4,797 5,825 29,168 -------- ------- ------- ------- -------- -------- ------- Total net funding sources.................... 29,940 2,578 2,843 3,921 5,394 6,947 51,623 -------- ------- ------- ------- -------- -------- ------- Period gap................................... (1,118) 1,066 832 1,055 3,025 (4,860) - Cumulative gap............................... (1,118) (52) 780 1,835 4,860 - - Adjustments(f)............................... 652 (967) (693) (1,015) (2,951) 4,974 - -------- ------- ------- ------- -------- -------- ------- Adjusted period gap.......................... $ (466) $ 99 $ 139 $ 40 $ 74 $ 114 $ - ======== ======= ======= ======= ======== ======== ======= Cumulative gap............................ $ (466) $ (367) $ (228) $ (188) $ (114) $ - $ - ======== ======= ======= ======= ======== ======== =======
Notes to Interest Sensitivity Analysis: - --------------------------------------- (a) Non-performing loans are included in 1-90 days. (b) Deposit volumes exclude time deposits not at interest. (c) Adjustments to the interest sensitivity of savings, NOW and money market account balances reflect managerial assumptions based on historical experience, simulation results as to the behavior of both the balances and rates on these products in potential future rate environments, and CoreStates' intent for positioning the products. Certain items classified as savings certificates on the balance sheet are classified as money market, savings and NOW accounts on the Interest Sensitivity Analysis. (d) Net non-interest bearing funds is the sum of non-interest bearing liabilities, shareholders' equity minus non-interest earning assets. (e) The estimated volume of stable net non-interest bearing funds is allocated to the over 1 year interest sensitivity period. Allocations to the under 1 year periods include: estimated volumes that are expected to vary inversely with interest rates; and the temporary difference between the actual volume of total net non-interest bearing funds on December 31, 1997 and the trend volume at the current level of interest rates. (f) Adjustments reflect managerial assumptions as to the appropriate investment maturities for non-interest bearing funding sources, along with the funding of current investment and loan commitments. 96 CoreStates Financial Corp and Subsidiaries Supplemental Financial Data: Continued Loan Maturity and Interest Sensitivity, Net of Unearned Discounts The contractual maturity of commercial loans outstanding at December 31, 1997 was as follows (in thousands):
Due after one Due in one year through Due after year or less five years five years Total ------------- ----------- ----------- ------------ Commercial (includes Real Estate - Commercial Mortgages and Foreign Loans)...... $ 18,143,085 $ 5,427,596 $ 1,440,695 $ 25,011,376 Real Estate - Construction..................... 220,489 313,845 116,730 651,064 ------------- ----------- ----------- ------------ Total loans (excluding loans to individuals)(a).............................. $ 18,363,574 $ 5,741,441 $ 1,557,425 $ 25,662,440 ============= =========== =========== ============
- --------------------- (a) Loans due after one-year totaling $5,196,989 have fixed interest rates. The remaining 29% of such loans or $2,101,877 have floating or adjustable rates. INVESTMENT SECURITIES (a) (in thousands) Carrying Value at December 31,
1997 1996 1995 ------------ ----------- ----------- U.S. Treasury and government agencies............. $ 1,534,274 $ 1,883,848 $ 2,564,646 State and municipal............................... 335,801 426,009 549,035 Mortgage-backed................................... 597,726 968,963 1,758,883 Other............................................. 992,590 804,404 759,668 ------------ ----------- ----------- Total......................................... $ 3,460,391 $ 4,083,224 $ 5,632,232 ============ =========== ===========
(a) Held-to-maturity and available-for-sale portfolios combined. Maturity Distribution and Weighted Average Yield at December 31, 1997 (a)
U.S. Treasury Total and Government State and ------------------------ Agencies Municipal Other Amount Yield (b) -------------- --------- --------- ---------- --------- 1 year or less..................... $ 869,371 $ 49,128 $ 48,594 $ 967,093 6.06% 1 year through 5 years............. 623,630 136,529 189,460 949,619 6.50 5 years through 10 years........... 13,459 116,996 104,236 234,691 7.01 After 10 years..................... 27,814 33,148 650,300 711,262 6.36 -------- -------- --------- ----------- Subtotal...................... $ 1,534,274 $335,801 $ 992,590 2,862,665 ========= ======== ========= Mortgage-backed.................... 597,726 6.08 ----------- Total......................... $ 3,460,391 6.31 ===========
(a) Held-to-maturity and available-for-sale portfolios combined. (b) The weighted average yield has been computed on a tax equivalent basis using an effective tax rate of 35%. The amount of the tax equivalent adjustment by range of maturity is as follows: 1 year or less - $1,153; 1 year to 5 years - $3,393; 5 years to 10 years - $3,180 and after 10 years - $2,203. 97 EX-99.3 14 REGISTRANT'S 1/9/98 MERGER PROXY STATEMENT Exhibit 99.3 INTERESTS OF CERTAIN PERSONS Certain members of CFC's management and of the CFC Board have interests in the Merger in addition to any interests they may have as stockholders of CFC generally. These material interests include provisions in the Merger Agreement relating to indemnification, directors' and officers' liability insurance, the election or appointment of six members of the CFC Board to the FUNC Board, the election or appointment of certain members of the CFC Board as trustees of the Charitable Foundation and certain severance and other employee benefits. In connection with the execution of the Merger Agreement, FUNC entered into a five-year employment agreement with Terrence A. Larsen, Chairman and Chief Executive Officer of CFC, which will become effective as of the Effective Date (the "Employment Agreement"). The Employment Agreement provides, among other things, for Mr. Larsen to receive an annual salary of not less than $1,000,000 and a combined annual salary and bonus of net less than $2,500,000. In addition, Mr. Larsen would receive 100,000 shares of restricted FUNC Common Stock and options to purchase 200,000 shares of FUNC Common Stock upon consummation of the Merger and in the calendar year following the calendar year in which such consummation occurs. Upon expiration of the five-year employment period, Mr. Larsen (or his current spouse) would receive annual retirement income of $1,000,000. In addition, FUNC would provide a split-dollar life insurance policy with a total death benefit of $20,000,000, $15,000,000 of which would be payable to Mr. Larsen's designated beneficiary, and the remaining $5,000,000 of which would be payable to FUNC. The Employment Agreement also provides for certain payments, notwithstanding termination of employment, and associated gross-up payments for taxes. Mr. Larsen's Employment Agreement shall supersede his termination of employment agreement with CFC upon consummation of the Merger. FUNC has agreed that Mr. Larsen will be elected or appointed a director and a Vice Chairman of FUNC following the Effective Date. Following the Effective Date, the "Office of the Chairman" of FUNC, will consist of Edward E. Crutchfield, Chairman and Chief Executive Officer of "FUNC", John R. Georgius, President of FUNC, and Mr. Larsen, who will become a Vice Chairman of FUNC. In addition to the election or appointment of Mr. Larsen as a director of FUNC, following the Effective Date, five other directors of CFC will be elected or appointed directors of FUNC. The members of the CFC Board who are not so elected or appointed directors of FUNC will be appointed to a board of directors which will advise FUNC management on certain matters in the Pennsylvania, New Jersey, New York, Connecticut and Delaware geographic areas of FUNC's operations. In addition, certain of such members of the CFC Board will be appointed as trustees of the Charitable Foundation. In connection with the execution of the Merger Agreement, FUNC also agreed to certain employment arrangements with respect to the 32 officers of CFC other than Mr. Larsen (the "CFC Officers") who are covered by termination of employment agreements (the "CFC Executive Agreements"), including Charles L. Coltman III, Vice Chairman of CFC, Charles P. Connolly, Jr., Vice Chairman of CoreStates Bank and P. Susan Perrotty, Executive Vice President of CFC (collectively, including Mr. Larsen, the "Named Officers"). Pursuant to the terms of the CFC Executive Agreements, eligible CFC Officers whose employment is terminated (as defined in the applicable CFC Executive Agreement) would receive severance pay equal to two times their highest base salary and bonus during the preceding two calendar years. In addition, each CFC Officer would be provided with certain employee benefits equivalent to those benefits received immediately prior to termination for a two-year 9 period following such termination. Payments are limited by the provisions of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and are offset by amounts which may be paid under any other CFC severance policy. With respect to the CFC Officers, FUNC agreed that if the employment of such officer terminates on the Effective Date, FUNC will honor the officer's CFC Executive Agreement in accordance with its terms. If such officer continues his or her employment after the Effective Date such officer would be eligible to receive, as applicable, under certain conditions, payments computed as if the termination payments under the officer's CFC Executive Agreement had been triggered on the Effective Date. Such payments would be made in six semi-annual installments commencing as soon as practicable after the Effective Date. If such officer's employment were to subsequently terminate, such officer would receive any of such payments which had not been paid prior to such termination. Without application of any applicable cap imposed by Section 280G of the Code, such payments with respect to Mr. Coltman, Mr. Connolly and Ms. Perrotty are currently estimated to amount to $1,380,000, $1,062,000, and $804,000, respectively, and with respect to the other 29 CFC Oficers are currently estimated to amount to $18,192,290, in the aggregate. With respect to Mr. Coltman, Ms. Connolly and Ms. Perrotty, if they were to continue their employment with FUNC after the Effective Date, they would also receive a minimum annual base salary of $420,000, $300,000 and $261,000, respectively, and a minimum annual bonus of $580,000, $300,000, and $239,000, respectively for a three-year period commencing on the Effective Date. In addition, Mr. Coltman, Mr. Connolly and Ms. Perrotty would receive 10,000, 8,000 and 6,000 shares, respectively, of restricted FUNC Common Stock and options to purchase 15,000, 10,000 and 10,000 shares, respectively, of FUNC Common Stock in each of the three years following the Effective Date. Mr. Coltman would also receive an annual retirement benefit of no less than $400,000 per year. Based upon the last reported sale price per share of FUNC Common Stock on the NYSE Tape on January 8, 1998 ($49.25), such restricted stock awards to Messrs. Larsen, Coltman and Connolly and Ms. Perrotty would have values in the aggregate of $9,850,000, $1,477,500, $1,182,000 and $886,500, respectively. The foregoing employment arrangements following the Effective Date are subject to the CFC Officers and FUNC entering into such agreements with respect to such arrangements as FUNC may deem necessary or appropriate. See "The Merger -- Interests of Certain Persons". 10 INTERESTS OF CERTAIN PERSONS General Certain members of CFC's management and of the CFC Board have interests in the Merger that are in addition to any interests they may have as stockholders of CFC generally. The material interests include provisions in the Merger Agreement relating to indemnification of CFC directors and officers, directors' and officers' liability insurance, the election or appointment of six members of the CFC Board to the FUNC Board, the election or appointment of certain members of the CFC Board as trustees of the Charitable Foundation and certain severance and other employee benefits. Larsen Employment Agreement; FUNC Management Post-Merger In connection with the execution of the Merger Agreement, FUNC entered into a five-year Employment Agreement with Terrence A. Larsen, Chairman and Chief Executive Officer of CFC, which will become effective as of the Effective Date. The Employment Agreement provides, among other things, for Mr. Larsen to receive an annual salary of not less than $1,000,000 and a combined annual salary and bonus of not less than $2,500,000. The Employment Agreement provides for 46 an increase in Mr. Larsen's base salary over his current base salary with CFC and may result in the amount of his annual bonus. The Employment Agreement also provides that if Mr. Larsen's employment is terminated by FUNC before expiration of the term of the Employment Agreement or if Mr. Larsen voluntarily terminates his employment with FUNC at any time or if he dies, becomes disabled or retires before expiration of the term of the Employment Agreement, he (or his estate, if he were to die) will receive $2,500,000 per year until the expiration of the term of the Employment Agreement. Upon expiration of the term of the Employment Agreement, Mr. Larsen (or his current spouse, if he is not then living) is guaranteed an annual retirement income of $1,000,000 (which he may, under certain circumstances, elect to receive as a lump sum), offset by certain retirement benefits under plans of predecessor employers and social security benefits. Mr. Larsen will also receive 100,000 shares of restricted FUNC Common Stock and options to purchase 200,000 shares of FUNC Common Stock upon consummation of the Merger and in the calendar year following the calendar year in which such consummation occurs. In addition, FUNC would provide a split-dollar life insurance policy with a total death benefit of $20,000,000, $15,000,000 of which would be payable to Mr. Larsen's designated beneficiary, and the remaining $5,000,000 of which would be payable to FUNC. The Employment Agreement also provides for certain payments, notwithstanding termination of employment, and associated gross-up payments for taxes. Mr. Larsen's Employment Agreement shall supersede his termination of employment agreement with CFC upon consummation of the Merger. FUNC has agreed that Mr. Larsen will be elected or appointed a director and a Vice Chairman of FUNC following the Effective Date. Following the Effective Date, the "Office of the Chairman" of FUNC will consist of Edward E. Crutchfield, Chairman and Chief Executive Officer of FUNC, John R. Georgius, President of FUNC, and Mr. Larsen, who will become a Vice Chairman of FUNC. In addition to the election or appointment of Mr. Larsen as a director of FUNC, following the Effective Date, five other directors of CFC will be elected or appointed directors of FUNC. FUNC also agreed to cause two of the six CFC directors who are to be elected FUNC directors, including Mr. Larsen, to be elected or appointed as members of the Executive Committee of the FUNC Board. Indemnification; Directors' and Officers' Insurance The Merger Agreement provides that FUNC will indemnify the directors, officers and employees of CFC against certain liabilities (and will advance certain expenses) for six years following the Effective Date, to the fullest extent that such persons would have been entitled to indemnification (or to advancement of certain expenses) under the laws of the Commonwealth of Pennsylvania, the CFC Articles or the CFC Bylaws, as in effect on the date of the Merger Agreement. The Merger Agreement also provides that FUNC will maintain CFC's existing directors' and officers' liability insurance policy, or a policy (including FUNC's policy) providing comparable coverage, in an amount and on terms no less favorable, covering persons covered by such policy on the date of the Merger Agreement, for a period of three years after the Effective Date. Additional CFC Employment Agreements CFC has a termination of employment agreement with Mr. Larsen and also has the CFC Executive Agreements with the CFC Officers. In connection with the execution of the Merger Agreement, FUNC has agreed to honor each of the CFC Executive Agreements; provided that the Employment Agreement between Mr. Larsen and FUNC will supersede his termination of employment agreement with CFC upon consummation of the Merger. Pursuant to the terms of the CFC Executive Agreements, eligible CFC Officers terminated (as defined in the contract) would receive severance pay equal to two times their highest base salary and bonus during the preceding two calendar years. In addition, each eligible CFC Officer would be provided with certain employee benefits equivalent to those benefits received immediately prior to termination for a two-year period following such termination. Payments are limited by the provisions of Section 280G of the Code and are offset by amounts which may be paid under any CFC severance policy. With respect to such CFC Officers, FUNC agreed that if the employment of such officer terminates on the Effective Date, FUNC will honor the officer's CFC Executive Agreement in accordance with its terms. If such officer continues his or her employment after the Effective Date such officer would be eligible to receive, as applicable, under certain conditions, payments computed as if the termination payments under the officer's CFC Executive Agreement had been triggered on the Effective Date. Such payments would be made in six semi-annual installments commencing as soon as practicable after the Effective Date. If such officer's employment were to subsequently terminate, such officer would receive any of such payments which had not been paid prior to such termination. Without application of any applicable cap imposed by Section 280G of the Code, such payments with respect to Mr. Coltman, Mr. Connolly and Ms. Perrotty are currently estimated to amount to $1,380,000, $1,062,000, and $804,000, respectively, and with respect to the other 29 CFC Officers are currently estimated to amount to $18,192,290, in the aggregate. With respect to Messrs. Coltman and Connolly and Ms. Perrotty, if they were to continue their employment with FUNC after the Effective Date, they would also receive a minimum base salary of $420,000, $300,000 and $261,000, respectively, 47 and a minimum bonus of $580,000, $300,000, and $239,000, respectively, for a three-year period commencing on the Effective Date. In addition, Mr. Coltman, Mr. Connolly and Ms. Perrotty would receive 10,000, 8,000 and 6,000 shares, respectively, of restricted FUNC Common Stock and options to purchase 15,000, 10,000 and 10,000 shares, respectively, of FUNC Common Stock in each of the three years following the Effective Date. Mr. Coltman would also receive an annual retirement benefit of no less than $400,000 per year. Based upon the last reported sale price per share of FUNC Common Stock on the NYSE Tape on January 8, 1998 ($49.25), such restricted stock awards to Messrs. Larsen, Coltman and Connolly and Ms. Perrotty would have values in the aggregate of $9,850,000, $1,477,500, $1,182,000 and $886,500, respectively. The foregoing employment arrangements following the Effective Date are subject to the CFC Officers and FUNC entering into such agreements with respect to such arrangements as FUNC may deem necessary or appropriate. Employee Stock Options The CFC stock option plan provides that all outstanding options and stock appreciation rights shall become exercisable immediately prior to a change of control. Currently, no stock appreciation rights are outstanding. Under the terms of the stock option plan, a change of control includes, but is not limited to, approval by the CFC stockholders of a merger (such as the Merger) with respect to which all or substantially all of the individuals and entities who were the respective beneficial owners of the CFC Common Stock immediately prior to such merger do not, following such merger, beneficially own, directly or indirectly, more than 50 percent of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the corporation resulting from such merger. The following table sets forth with respect to each of the Named Officers and the CFC Officers as a group (excluding Messrs. Coltman and Connolly and Ms. Perrotty), as of the Record Date, (i) the number of shares covered by options held by such persons, (ii) the number of shares covered by such options that are exercisable, (iii) the number of shares covered by such options that will become exercisable upon approval of the Merger Agreement by CFC stockholders at the CFC Meeting, (iv) the weighted average exercise price for such exercisable options, and (v) the aggregate value of such exercisable options based upon the per share value (i.e., stock price less option exercise price) of CFC Common Stock on the Record Date ($81.25).
WEIGHTED AVERAGE OPTIONS EXERCISABLE EXERCISE AGGREGATE OPTIONS UPON APPROVAL PRICE VALUE OF OPTIONS CURRENTLY OF PER EXERCISABLE HELD EXERCISABLE MERGER AGREEMENT SHARE OPTIONS ------- ----------- ------------------- -------- ----------- Terrence A. Larsen...... 550,738 472,131 0 $33.84 $26,111,999 Charles L. Coltman III.. 261,131 220,738 0 34.62 12,175,922 Charles P. Connolly, Jr. ................... 140,992 112,430 0 35.07 6,510,593 P. Susan Perrotty....... 34,051 19,950 0 40.40 1,390,863 CFC Officers............ 951,691 721,695 0 36.00 43,062,753
Supplemental Retirement Benefits CFC maintains a supplemental retirement plan which provides benefits which cannot be paid from CFC's qualified retirement plan because of Code limitations. The CFC supplemental retirement plan provides that benefits may become payable if the beneficiary has terminated employment with CFC. Such benefits are not payable solely as a result of the Merger. CFC also maintains an excess 401(k) plan which permits contributions in excess of those permitted under ERISA. The plan provides that account balances will be distributed to participants in a lump sum after a participant's termination of employment. Such account balances are not payable solely as a result of the Merger. Certain Other Matters Relating to CFC Employee Benefit Plans The Merger Agreement provides for FUNC to assume all outstanding employee stock options to purchase shares of CFC Common Stock on the Effective Date in accordance with the terms of the CFC stock option plan and the individual stock option agreements, provided that such options shall thereafter be exercisable for a number of shares of FUNC Common Stock reflecting the Exchange Ratio. 48 The Merger Agreement also provides that after the Effective Date, employees of CFC shall be generally entitled to participate in the employee benefit plans of FUNC on substantially the same terms and conditions as employees of FUNC. Until such time, employees of CRFC would continue to participate in the employee benefit plans of CFC. CFC currently maintains a severance plan which is applicable to the general employee population. Under the terms of the severance plan, terminated CFC employees are entitled to severance benefits for periods ranging from a minimum of 12 weeks to a maximum of 78 weeks, generally depending upon length of service and job grade. Charitable Foundation; Regional Board The members of the CFC Board who are not elected or appointed directors of the FUNC Board will be appointed to a board of directors which will advise FUNC management on certain matters in the Pennsylvania, New Jersey, New York, Connecticut and Delaware geographic areas of FUNC's operations, for which they will receive annual fees of $32,000. In addition, certain of the members of the CFC Board will be appointed as trustees of the Charitable Foundation, for which they will receive annual fees of $32,000. 49 -----END PRIVACY-ENHANCED MESSAGE-----