-----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, LeTES530yv2mT/zr4Xa3+IItH0/EIikasah94BdX7wlz7PSPCJwi46RK3Ap8Xp5y xGoRdn/KDXbYd27LejXIaw== 0000950109-95-005463.txt : 19960102 0000950109-95-005463.hdr.sgml : 19960102 ACCESSION NUMBER: 0000950109-95-005463 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951201 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19951229 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERIDIAN BANCORP INC CENTRAL INDEX KEY: 0000723916 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 232237529 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-12364 FILM NUMBER: 95606035 BUSINESS ADDRESS: STREET 1: 35 N SIXTH ST CITY: READING STATE: PA ZIP: 19603 BUSINESS PHONE: 2156552000 8-K 1 FORM 8-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 Date of Report (Date of earliest event report): December 28, 1995 MERIDIAN BANCORP, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 0-12364 23-2237529 - ------------------------------ ---------------- ----------------- (State of other jurisdiction (Commission (IRS Employee of incorporation) File Number) Ident. No.) 35 North Sixth Street Reading, Pennsylvania 19601 - -------------------------------------------------- ---------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (610) 655-2000 -------------- N/A ________________________________________________________________________________ (Former name or former address, if changed since last report.) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Item 5. Other Events. ------------ As previously reported in a Current Report on Form 8-K dated October 10, 1995, on October 10, 1995 Meridian Bancorp, Inc. ("Meridian") and CoreStates Financial Corp ("CoreStates") entered into an Agreement and Plan of Merger pursuant to which Meridian will be merged into CoreStates with CoreStates as the surviving corporation. In the merger, each share of Meridian common stock will, subject to certain adjustments, be exchanged for 1.225 shares of CoreStates common stock. The merger is expected to close during the second quarter of 1996, subject to the satisfaction of certain conditions, including among others, approval of the merger by the shareholders of both Meridian and CoreStates and receipt of required regulatory approvals. The transaction is expected to be accounted for as a pooling of interests. There is included at Item 7 of this Current Report on Form 8-K certain historical financial information regarding CoreStates. Item 7. Financial Statements and Exhibits. --------------------------------- (c) Exhibits. -------- 99.1 Agreement and Plan of Merger, dated as of October 10, 1995, by and between Meridian Bancorp, Inc, and CoreStates Financial Corp. (Incorporated herein by reference to Exhibit 99.2 to the Current Report on Form 8-K of Meridian Bancorp, Inc., filed on October 20, 1995). 99.2 Unaudited consolidated balance sheets of CoreStates Financial Corp as of September 30, 1995 and the related consolidated unaudited statements of income, changes in shareholders' equity and cash flows for the nine-month periods ended September 30, 1995 and 1994. 99.3 Consolidated balance sheets of CoreStates Financial Corp as of December 31, 1994 and 1993, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1994. SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. MERIDIAN BANCORP, INC. Dated: December 28, 1995 By /s/ Samuel A. McCullough --------------------------------- Samuel A. McCullough Chairman and Chief Executive Officer 2 CORESTATES FINANCIAL CORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (in thousands, except per share amounts)
Nine Months Ended September 30, -------------------------- 1995 1994 ---------- ---------- INTEREST INCOME - --------------- Interest and fees on loans: Taxable income................................... $1,472,978 $1,227,510 Tax exempt income................................ 15,019 17,225 Interest on investment securities: Taxable income................................... 99,178 104,539 Tax exempt income................................ 9,354 12,530 Interest on time deposits in banks................. 89,729 44,911 Other interest income.............................. 7,689 4,856 ---------- ---------- Total interest income......................... 1,693,947 1,411,571 ---------- ---------- INTEREST EXPENSE - ---------------- Interest on deposits............................... 400,622 258,540 Interest on funds borrowed......................... 87,284 62,768 Interest on long-term debt......................... 92,157 60,141 ---------- ---------- Total interest expense........................ 580,063 381,449 ---------- ---------- NET INTEREST INCOME........................... 1,113,884 1,030,122 Provision for losses on loans...................... 77,500 221,900 ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOSSES ON LOANS......................... 1,036,384 808,222 ---------- ---------- NON-INTEREST INCOME - ------------------- Service charges on deposit accounts................ 132,057 137,454 Trust income....................................... 72,154 72,379 Fees for international services.................... 69,048 59,321 Debit and credit card fees......................... 47,017 47,068 Income from investment in EPS, Inc................. 41,566 23,802 Gains on trading account securities................ 1,763 1,887 Securities gains................................... 8,457 14,143 Other operating income............................. 80,135 65,225 ---------- ---------- Total non-interest income..................... 452,197 421,279 ---------- ---------- NON-FINANCIAL EXPENSES - ---------------------- Salaries, wages and benefits....................... 457,013 477,883 Net occupancy...................................... 86,830 87,484 Equipment expenses................................. 58,051 57,081 Restructuring and merger-related charges........... 104,563 108,700 Other operating expenses........................... 283,726 279,710 ---------- ---------- Total non-financial expenses.................. 990,183 1,010,858 ---------- ---------- INCOME BEFORE INCOME TAXES......................... 498,398 218,643 - -------------------------- Provision for income taxes......................... 183,115 81,326 ---------- ---------- INCOME BEFORE CUMULATIVE EFFECT OF A - ------------------------------------ CHANGE IN ACCOUNTING PRINCIPLE................... 315,283 137,317 - ------------------------------- Cumulative effect of a change in accounting principle, net of income tax benefits of $1,846.................... - (3,430) ---------- ---------- NET INCOME......................................... $ 315,283 $ 133,887 - ---------- ========== ========== Average common shares outstanding.................. 141,427 142,581 ========== ========== PER COMMON SHARE DATA - --------------------- Income before cumulative effect of a change in accounting principle.................... $2.23 $0.97 ===== ===== Net income......................................... $2.23 $0.95 ===== ===== Cash dividends declared............................ $1.02 $0.90 ===== =====
See accompanying notes to the consolidated financial statements. 4 CORESTATES FINANCIAL CORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) (in thousands)
Common Capital Retained Treasury stock surplus earnings stock Total -------- -------- ---------- --------- ---------- Nine Months Ended September 30, 1994 - ---------------------------------------- Balances at beginning of year..................... $145,740 $778,498 $1,451,965 $ (7,819) $2,368,384 Net income........................................ 133,887 133,887 Net change in unrealized gain on investments available-for-sale, net of tax...... (37,394) (37,394) Treasury shares acquired (5,849 shares)........... (157,543) (157,543) Purchase and retirement of common stock........... (166) (994) (3,583) (4,743) Common stock issued under employee benefit plans (279 new shares; 559 treasury shares)........................... 279 4,159 (6,313) 15,069 13,194 Common stock issued under dividend reinvestment plan (338 treasury shares)......... 8 (474) 9,315 8,849 Conversion of subordinated debentures (30 new shares)................................. 30 684 714 Cash paid for fractional shares issued............ (83) (83) Foreign currency translation adjustments.......... 90 90 Common dividends declared......................... (125,170) (125,170) -------- -------- ---------- --------- ---------- Balances at end of period......................... $145,883 $782,355 $1,412,925 $(140,978) $2,200,185 ======== ======== ========== ========= ========== Nine Months Ended September 30, 1995 - ------------------------------------ Balances at beginning of year..................... $145,878 $781,766 $1,446,767 $ (24,297) $2,350,114 Net income........................................ 315,283 315,283 Net change in unrealized gain on investments available-for-sale, net of tax....... 14,926 14,926 Treasury shares acquired (8,987 shares)........... (287,760) (287,760) Common stock issued under employee benefit plans (2,714 treasury shares)............ (3) (61) (26,449) 83,685 57,172 Common stock issued under dividend reinvestment plan (330 treasury shares).......... 200 (2) 9,801 9,999 Cash paid for fractional shares issued............ (24) (24) Foreign currency translation adjustments.......... 27 27 Common dividends declared......................... (143,947) (143,947) -------- -------- ---------- --------- ---------- Balances at end of period......................... $145,875 $781,905 $1,606,581 $(218,571) $2,315,790 ======== ======== ========== ========= ==========
See accompanying notes to the consolidated financial statements. 5 CORESTATES FINANCIAL CORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
Nine Months Ended September 30, --------------------------- 1995 1994 ------------ ------------ Operating Activities - -------------------- Net income....................................... $ 315,283 $ 133,887 Adjustments to reconcile net income to net cash provided by operating activities: Restructuring and merger-related charges...................................... 104,563 108,700 Cumulative effect of a change in accounting principle......................... - 3,430 Provision for losses on loans.................. 77,500 221,900 Provision for losses and writedowns on OREO......................................... 6,464 33,181 Depreciation and amortization.................. 44,919 53,008 Securities gains, net.......................... (8,457) (14,143) Other gains.................................... (19,000) - Deferred income tax benefit.................... (38,028) (24,310) Increase in due to factored clients............ 43,039 146,480 (Increase) decrease in accrued interest receivable.......................... (2,176) 18,357 Increase in accrued interest payable........... 32,193 7,011 Other assets and liabilities, net.............. (127,178) (169,863) ------------ ------------ Net Cash Provided by Operating Activities................................ 429,122 517,638 ------------ ------------ Investing Activities - -------------------- Net increase in loans............................ (972,950) (250,613) Proceeds from sales of loans..................... 678,234 664,362 Loans originated or acquired -- non-bank subsidiary..................................... (26,573,505) (25,895,781) Principal collected on loans -- non-bank subsidiary..................................... 26,178,636 25,309,901 Net increase in time deposits, principally eurodollars........................ (3,049) (282,037) Purchases of investments held-to-maturity............................... (401,243) (798,748) Purchases of investments available-for-sale............................. (81,449) (350,166) Proceeds from maturities of investments available-for-sale............................. 12,738 306,083 Proceeds from maturities of investments held-to-maturity............................... 1,103,030 1,054,808 Proceeds from sales of investments available-for-sale............................. 144,674 465,641 Net decrease in Federal funds sold and securities purchased under agreements to resell...................................... 436,904 34,821 Purchases of premises and equipment.............. (79,398) (72,239) Proceeds from sales and paydowns on OREO......... 23,337 26,664 Other............................................ 4,784 17,096 ------------ ------------ Net Cash Provided by Investing Activities................................ 470,743 229,792 ------------ ------------ Financing Activities - -------------------- Net decrease in deposits......................... (1,349,949) (1,620,909) Proceeds from issuance of long-term debt......... 430,952 267,115 Retirement of long-term debt..................... (360,109) (130,634) Net increase in short-term funds borrowed....................................... 699,037 314,756 Cash dividends paid.............................. (146,762) (113,089) Purchases of treasury stock...................... (287,760) (157,543) Other............................................ 67,147 17,217 ------------ ------------ Net Cash Used in Financing Activities....... (947,444) (1,423,087) ------------ ------------ Decrease in Cash and Due from Banks......... (47,579) (675,657) ----------------------------------- Cash and due from banks at January 1,....... 2,262,512 2,521,676 ------------ ------------ Cash and due from banks at September 30,....................................... $ 2,214,933 $ 1,846,019 ============ ============ Supplemental Disclosure of Cash Flow - ------------------------------------ Information ----------- Cash paid during the period for: Interest....................................... $ 547,870 $ 374,438 ============ ============ Income taxes................................... $ 138,314 $ 104,776 ============ ============ Net cash received on interest rate swaps......... $ 17,768 $ 81,020 ============ ============
See accompanying notes to the consolidated financial statements. 6 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1995 NOTE A -- BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of CoreStates Financial Corp ("CoreStates") have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (comprising only normal recurring accruals) necessary for a fair presentation have been included. Certain amounts in prior periods have been reclassified for comparative purposes. Operating results for the nine-month period ended September 30, 1995 are not necessarily indicative of the results that may be expected for the year ending December 31, 1995. During the first quarter of 1994, CoreStates recognized a $3.4 million after-tax, or $0.02 per share, impairment loss on certain mortgage securities as a cumulative effect of a change in accounting principle. The loss was the result of a write-down to fair value of these securities, which were deemed to be impaired. This resulted from a Financial Accounting Standards Board ("FASB") 1994 interpretation of Statement of Financial Accounting Standards No. 115 ("FAS 115"). The interpretation, reached by a consensus of the FASB Emerging Issues Task Force in March 1994, provides more definitive criteria for recognition of impairment losses on these types of securities. NOTE B -- PENDING ACQUISITION On October 10, 1995, CoreStates announced a definitive agreement to acquire Meridian Bancorp, Inc. ("Meridian") in a transaction expected to be accounted for under the pooling of interests method of accounting (the "Merger"). For each Meridian common share outstanding, 1.225 shares of CoreStates' common stock will be issued. As a result of this transaction, approximately 81.6 million new shares will be issued. This agreement is subject to, among other conditions, approval by the shareholders of both CoreStates and Meridian and certain regulatory authorities. In May 1995, Meridian announced a definitive agreement to acquire United Counties Bancorporation ("United Counties"), a $1.6 billion asset New Jersey bank holding company. For each United Counties common share outstanding, 5.0 shares of Meridian's common stock will be issued. This agreement is also subject to, among other conditions, approval by shareholders and certain regulatory authorities. 7 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1995 NOTE B -- PROPOSED MERGER - CONTINUED
A summary of selected unaudited historical financial information for Meridian follows: Three Months Ended Nine Months Ended September 30, September 30, ----------------- ---------------- Operating results: 1995 1994 1995 1994 ---- ---- ---- ---- (in millions, except per share amounts) Net interest income......................... $ 156 $ 156 $ 459 $ 459 Non-interest income......................... 63 57 188 171 Income before cumulative effect of a change in accounting principle.................. 54 37 122(a) 118 Per common share data: Income before cumulative effect of a change in accounting principle........ 0.96 0.63 2.14(a) 2.03 Cash dividends declared.................. 0.37 0.34 1.08 1.00 Average common shares outstanding........... 55.848 57.804 55.928 57.798
September 30, 1995 ------------- Balance sheet (at period-end): (in millions, except per share amount) Assets............................... $ 14,581 Loans................................ 10,246 Deposits............................. 11,104 Common shareholders' equity.......... 1,266 Book value per common share.......... 22.65
- --------------------- (a) In June 1995, Meridian completed an internal review of its operations and businesses and announced a company-wide plan designed to improve its operating performance and competitive position. As a result of this review, Meridian recorded a restructuring charge in the second quarter of 1995 of $32.0 million ($20.8 million after-tax or $0.37 per share). A summary of selected unaudited historical financial information for United Counties follows:
Three Months Ended Nine Months Ended September 30, September 30, ----------------- ---------------- Operating results: 1995 1994 1995 1994 ---- ---- ---- ---- (in millions, except per share amounts) Net interest income......................... $ 16 $ 17 $ 47 $ 50 Non-interest income......................... 2 2 16(b) 4 Income before cumulative effect of a change in accounting principle.................. 6 6 26 18 Per common share data: Income before cumulative effect of a change in accounting principle........ 2.87 2.80 11.89(b) 8.30 Cash dividends declared.................. 1.85 0.80 3.45 2.20 Average common shares outstanding........... 2.146 2.138 2.145 2.136
September 30, 1995 ------------- Balance sheet (at period-end): (in millions, except per share amount) Assets............................... $ 1,630 Loans................................ 389 Deposits............................. 1,303 Common shareholders' equity.......... 199 Book value per common share.......... 92.68
- --------------------- (b) Includes a gain of $12.0 million ($7.6 million after-tax or $3.56 per share) on the exchange of investment securities. 8 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) September 30, 1995 NOTE C - LOAN PORTFOLIO Loans, net of unearned discounts, at September 30, 1995 consists of the following (in thousands):
September 30, 1995 ------------- Domestic: Commercial, industrial and other: Highly leveraged transactions ("HLTs"). $ 539,693 Other.................................. 9,141,537 ----------- Total commercial, industrial and 9,681,230 other................................ ----------- Real estate: Construction and development........... 330,619 Residential............................ 2,493,735 Other.................................. 2,739,302 ----------- Total real estate..................... 5,563,656 ----------- Consumer: Installment............................ 1,396,684 Credit card............................ 1,485,761 ----------- Total consumer........................ 2,882,445 ----------- Financial institutions................... 942,039 Factoring receivables.................... 555,169 Lease financing.......................... 742,251 ----------- Total domestic........................ 20,366,790 ----------- Foreign................................... 801,236 ----------- Total loans........................... $21,168,026 ===========
In May 1993, the FASB issued Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("FAS 114") and in October 1994, the FASB issued Statement No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures" ("FAS 118"). FAS 114 addresses accounting for impairment of certain loans and requires that impaired loans within the scope of FAS 114 be measured based on the present value of expected cash flows discounted at the loan's effective interest rate, or be measured at the loan's observable market price or the fair value of its collateral. FAS 118 amended FAS 114's income recognition policies and clarifies FAS 114's disclosure requirements. Both FAS 114 and 118 are effective beginning in 1995. As required, CoreStates adopted FAS 114 and 118 in the first quarter of 1995. The adoption of these standards did not have an impact on CoreStates' provision for loan losses or allowance for loan losses, nor change CoreStates' methodology for recognizing income on impaired loans. 9 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) -- continued September 30, 1995 NOTE D -- OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS AND COMMITMENTS In the normal course of business, there are outstanding commitments and contingent liabilities which are not reflected in the financial statements. These include various financial instruments with off-balance sheet risk used in connection with CoreStates' asset and liability management and to provide for the needs of customers. These involve varying degrees of credit, interest rate and liquidity risk, but do not represent unusual risks for the Corporation and management does not anticipate any significant losses as a result of these transactions. The following is a summary of contractual or notional amounts of off-balance sheet commitments and derivative financial instruments as of September 30, 1995 (in thousands):
September 30, 1995 ------------- Standby letters of credit, net of participations......................... $ 949,577 Commercial letters of credit............ 1,211,765 Commitments to extend credit............ 9,332,230 Unused commitments under credit card lines.................................. 3,865,837 Interest rate futures contracts: Commitments to purchase................ 659,000 Commitments to purchase foreign and U.S. currencies........................ 2,608,756 Interest rate swaps, notional principal amounts................................ 7,868,041 Interest rate caps and floors: Written................................ 583,986 Purchased.............................. 900,435 Other derivatives....................... 222,000
NOTE E -- PROCESS REDESIGN In order to build upon CoreStates' strong financial condition and sustain previous financial successes, and to accomplish this goal in the competitive financial services environment in which CoreStates operates, management had commenced an intensive review of all aspects of CoreStates' operations and businesses in September 1994. In March 1995, CoreStates completed its review and approved and announced a corporate-wide process redesign plan, which restructures its banking services around customers and enhances employees' authority to make decisions to benefit customers. The objectives of the process redesign are: (i) to enhance CoreStates' customer focus; (ii) to accelerate the culture change already in progress at CoreStates; and (iii) to improve productivity. As a result of the process redesign, CoreStates recorded a $110 million restructuring charge, $70 million after-tax or $0.49 per share, in March 1995. When complete, the process redesign will result in the elimination of 2,800 positions, or 2,600 full-time equivalent employees. The breakdown of the eliminated positions is as follows: (i) 450 positions resulting from a hiring freeze in place from September 1994 to April 1995; (ii) 530 positions resulting from expected attrition during implementation of the process redesign; (iii) 930 employees who have elected to accept an enhanced severance package; and (iv) 890 layoffs. At September 30, 1995, CoreStates had 13,700 full-time equivalent employees which includes reductions for the impact of the hiring freeze and 1,400 employee terminations during the second and third quarters. The components of the restructuring charge and related cash outflow were as follows (in millions):
Restructuring Charge -------------------- Requiring Cash Cash Outflow Total Outflow To-date(a) ----- ------- ---------- Severance costs................. $ 72 $72 $17 Office reconfiguration costs.... 16 7 - Branch closing costs............ 15 7 1 Outplacement costs.............. 3 3 2 Miscellaneous................... 4 2 2 ----- --- --- Total.................. $ 110 $91 $22 ===== === ===
- ------------------------------------------- (a) CoreStates' liquidity has not been significantly affected by these cash outflows. CoreStates believes that the restructuring charges recorded through September 30, 1995 will be sufficient to absorb the remaining restructuring related costs. The severance charge relates to the separation package which will be paid to those employees who have elected to accept that package and to those employees laid off. Cash payments under separation packages commenced in April 1995 and will continue for varying terms. No lump sum severance payments will be made. The office reconfiguration charge relates to the costs of asset writeoffs and lease buyouts that will be incurred principally in the process of streamlining and consolidating center city Philadelphia operations. This streamlining and consolidating process will occur over the 18-month period which began in April 1995. The branch closing charge relates to the costs of asset writeoffs and lease buyouts that will be incurred in the process of consolidating and closing 37 branch offices. CoreStates recorded restructuring credits of $3.0 million, $1.9 million after-tax or $0.01 per share in the second quarter of 1995 and $2.4 million, $1.5 million after-tax or $0.01 per share in the third quarter of 1995, related to gains on the curtailment of future pension benefits associated with the 1,400 employees terminated during the second and third quarters. CoreStates anticipates the recognition of an additional curtailment gain in the fourth quarter of 1995, as more employees reach their work-through dates. Future cash outflows to be incurred in implementing the process redesign plan, which were not included in the restructuring charge, will include approximately $25 million for capital expenditures and approximately $16 million in operating expenses. Since April 1995, the amount of incremental operating expenses that were incurred related to the process redesign were approximately $4 million. The principal themes of the process redesign plan are as follows: . Redefine the organizational structure around customers, customers segments and markets, not products; . Streamline and consolidate functions and processes; . Vacate 1.2 million square feet of occupied space in 45 buildings, including the 37 branches to be closed; . Use technology to automate services and processes; and . Employ tiered pricing strategies and streamline product pricing. Implementation of the process redesign plan will occur over the 18-month period which began in April 1995. By late 1996, the process design is expected to generate cost efficiencies which will reduce expenses by $180 million and revenue enhancements which will net an addition of $30 million, combining to improve CoreStates' net income at an annual rate of $0.90 per share. The process redesign was originally expected to have a positive impact on net income of approximately $0.16 per share in 1995 (excluding the restructuring charge and subsequent credits) and $0.72 per share in 1996. Due to timing, the impact of the process redesign on 1995 net income is expected to exceed $0.16 per share. For the third quarter of 1995, the impact of the process redesign on net income (excluding the restructuring credit) was approximately $0.10 per share. This impact principally related to expense savings and exceeded original projections for the third quarter by $0.05 per share. The impact on net income for the nine months ended September 30, 1995 (excluding the net restructuring charge) was approximately $0.13 per share, $0.06 per share above original projections. The favorable variances to original projections are principally due to personnel savings, and mostly due to timing. CoreStates does not anticipate exceeding the annual run rate of $0.90 per share. A breakdown of expected expense reductions is as follows: personnel related - $98 million; professional and outside services - $20 million; occupancy - $18 million; office supplies - $9 million; telecommunications - $5 million; travel and entertainment - $5 million; furnishings - $4 million; and all other - $21 million. As with any earnings estimates, there are factors beyond CoreStates' control that could influence the actual results for 1995-1996, such as changes in economic conditions. As a result, the actual results could differ materially from these estimates. 10 CORESTATES FINANCIAL CORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (in thousands)
December 31, ------------------------- 1994 1993 ----------- ----------- ASSETS Cash and due from banks (Note 4)....................... $ 2,262,512 $ 2,521,676 Time deposits, principally Eurodollars................. 1,750,458 1,319,457 Investment securities held-to-maturity (market value: 1994-$2,423,830; 1993-$2,257,513) (Note 5)........... 2,454,584 2,228,560 Investment securities available-for-sale (Note 5)...... 426,047 1,370,606 Total loans, net of unearned discounts of $146,305 in 1994 and $151,994 in 1993 (Note 6)....... 20,526,216 19,776,258 Less: Allowance for loan losses (Note 7)............. (500,631) (450,823) ----------- ----------- Net loans.................................... 20,025,585 19,325,435 Federal funds sold and securities purchased under agreements to resell................................. 731,820 161,527 Trading account securities............................. 1,206 6,393 Due from customers on acceptances...................... 342,211 332,234 Premises and equipment (Note 8)........................ 423,832 410,022 Other assets (Note 20)................................. 906,881 758,707 ----------- ----------- Total assets................................. $29,325,136 $28,434,617 =========== =========== LIABILITIES Deposits: Domestic: Non-interest bearing............................... $ 6,362,470 $ 6,649,367 Interest bearing (Note 9).......................... 14,565,051 13,686,027 Overseas branches and subsidiaries (Note 9).......... 1,113,365 796,902 ----------- ----------- Total deposits............................... 22,040,886 21,132,296 Short-term funds borrowed (Note 10).................... 1,546,201 1,884,125 Bank acceptances outstanding........................... 336,103 337,180 Other liabilities (Note 12)............................ 1,260,722 1,123,342 Long-term debt (Note 11)............................... 1,791,110 1,589,290 ----------- ----------- Total liabilities............................ 26,975,022 26,066,233 ----------- ----------- COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 15) SHAREHOLDERS' EQUITY (NOTES 11, 13 AND 19) Preferred stock: authorized 10.0 million shares; no shares issued................................ - - Common stock: $1 par value; authorized 200.0 million shares; issued 145.9 million shares in 1994 and 145.8 million shares in 1993 (including treasury shares of 1.0 million in 1994 and .4 million in 1993). 2,350,114 2,368,384 ----------- ----------- Total shareholders' equity...................... 2,350,114 2,368,384 ----------- ----------- Total liabilities and shareholders' equity...... $29,325,136 $28,434,617 =========== ===========
See accompanying notes to the financial statements. 12 CORESTATES FINANCIAL CORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (IN THOUSANDS)
COMMON CAPITAL RETAINED TREASURY STOCK SURPLUS EARNINGS STOCK TOTAL -------- -------- ---------- --------- ---------- Balances at December 31, 1991............................ $ 77,017 $713,283 $1,144,822 $ (7,711) $1,927,411 Net income............................................... 183,188 183,188 Net change in unrealized gain in marketable equity securities, net of tax (Note 5)................. 1,331 1,331 Treasury shares acquired (30 shares)..................... (1,480) (1,480) Stock issued in public offering (7,842 shares)........... 7,842 59,739 67,581 Common stock issued under employee benefit plans (1,230 new shares; 52 treasury shares)........... 1,190 30,286 131 777 32,384 Common stock issued under dividend reinvestment plan (449 new shares; 220 treasury shares)............. 338 14,083 4,288 18,709 Conversion of subordinated debt (16 treasury shares)..... (45) 245 200 Foreign currency translation adjustments................. (4,384) (4,384) Common dividends declared................................ (130,381) (130,381) -------- -------- ---------- --------- ---------- Balances at December 31, 1992............................ 86,387 817,391 1,194,662 (3,881) 2,094,559 Net income............................................... 349,419 349,419 Issuance of shares in connection with a 100% common stock dividend......................................... 58,929 (58,929) Net unrealized gain on investments available-for-sale, net of tax (Note 5).................................... 64,305 64,305 Acquisition of Inter Community Bancorp (640 treasury shares)................................................ (213) 17,459 17,246 Treasury shares acquired (1,060 shares).................. (29,449) (29,449) Repurchase and retirement of common stock................ (382) (2,255) (5,808) (8,445) Common stock issued under employee benefit plans (857 new shares; 175 treasury shares)............ 586 13,701 (1,510) 4,871 17,648 Common stock issued under dividend reinvestment plan (358 new shares; 111 treasury shares)............. 220 8,590 (101) 3,181 11,890 Foreign currency translation adjustments................. (1,758) (1,758) Common dividends declared................................ (147,031) (147,031) -------- -------- ---------- --------- ---------- Balances at December 31, 1993............................ 145,740 778,498 1,451,965 (7,819) 2,368,384 Net income............................................... 245,362 245,362 Net change in unrealized gain on investments avaliable- for-sale, net of tax (Note 5).......................... (52,951) (52,951) Acquisition of Germantown Savings Bank (5,880 treasury shares) (Note 2)....................................... (8,605) 156,361 147,756 Treasury shares acquired (8,598 shares).................. (228,963) (228,963) Repurchase and retirement of common stock................ (177) (981) (3,583) (2) (4,743) Common stock issued under employee benefit plans (279 new shares; 688 treasury shares)............ 279 4,172 (7,803) 18,456 15,104 Common stock issued under dividend reinvestment and stock purchase plans (450 treasury shares)............. 77 (483) 12,306 11,900 Conversion of subordinated debt (36 new shares; 909 treasury shares)................................... 36 (2,001) 25,364 23,399 Cash paid for fractional shares.......................... (83) (83) Foreign currency translation adjustments................. 52 52 Common dividends declared................................ (175,103) (175,103) -------- -------- ---------- --------- ---------- Balances at December 31, 1994............................ $145,878 $781,766 $1,446,767 $ (24,297) $2,350,114 ======== ======== ========== ========= ==========
See accompanying notes to the financial statements. 13 CoreStates Financial Corp and Subsidiaries CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
Year Ended December 31, --------------------------------------------- 1994 1993 1992 ------------ ------------- ------------ OPERATING ACTIVITIES Net income.................................. $ 245,362 $ 349,419 $ 183,188 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of a change in accounting principle (Note 12)........ 3,430 13,010 84,946 Provision for losses on loans............. 246,900 121,201 160,250 Provision for losses and writedowns on other real estate owned............... 44,538 26,614 34,253 Depreciation and amortization............. 76,277 84,998 106,111 Deferred income tax expense (benefit)..... 16,393 (10,656) 26,864 Securities gains (Note 5)................. (18,753) (16,110) (13,805) Other gains (Notes 6 and 20).............. (1,900) (11,000) (41,072) Increase in due to factored clients....... 41,262 147,072 1,923 Proceeds from contribution of assets to EPS joint venture (Note 20)........... - - 79,350 (Increase) decrease in interest receivable (25,625) 3,646 44,398 Increase (decrease) in interest payable... 23,551 (7,738) (62,667) Other, net................................ 54,881 43,789 80,004 ----------- ------------ ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 706,316 744,245 683,743 ----------- ------------ ----------- INVESTING ACTIVITIES Purchase of Germantown Saving Bank, net of cash acquired (Note 2).................... (74,053) - - Net (increase) decrease in loans (Note 6)... (633,013) (1,483,539) (191,780) Proceeds from sales of loans (Note 6)....... 897,528 790,193 568,698 Loans originated or acquired--non-bank subsidiaries.............................. (33,760,035) (24,712,336) (16,561,468) Principal collected on loans--non-bank subsidiaries.............................. 33,399,764 24,411,312 16,364,389 Net (increase) decrease in time deposits, principally Eurodollars................... (431,001) 495,615 (131,596) Purchases of investments held-to-maturity... (1,030,404) - - Purchases of investments available-for-sale. (422,894) Proceeds from maturities of investments held- to-maturity............................... 1,655,885 - - Proceeds from maturities of investments available-for-sale........................ 308,598 - - Proceeds from sales of investments available-for-sale........................ 690,343 - - Purchases of investment securities.......... - (2,252,933) (2,169,341) Proceeds from sales of investment securities................................ - 581,101 408,341 Proceeds from maturities of investment securities................................ - 1,819,500 1,440,311 Net (increase) decrease in Federal funds sold and securities purchased under agreements to resell...................... (549,293) 105,363 109,410 Purchases of premises and equipment......... (92,232) (107,275) (47,221) Proceeds from sales and paydowns on other real estate owned......................... 59,947 84,389 79,073 Other, net.................................. 19,617 6,689 49,505 ----------- ------------ ----------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.............................. 38,757 (261,921) (81,679) ----------- ------------ ----------- FINANCING ACTIVITIES Net decrease in deposits.................... (536,836) (540,605) (244,987) Long-term debt issued (Note 11)............. 478,048 916,519 332,775 Retirement of long-term debt................ (242,432) (683,399) (215,756) Net proceeds from issuance of common stock in public offering.................. - - 67,581 Net decrease in short-term funds borrowed.................................. (337,924) (19,919) (165,407) Cash dividends paid......................... (160,122) (143,334) (126,265) Purchase of treasury stock.................. (228,963) (29,449) (1,480) Other, net.................................. 23,992 29,538 51,093 ----------- ------------ ----------- NET CASH USED IN FINANCING ACTIVITIES..... (1,004,237) (470,649) (302,446) ----------- ------------ ----------- INCREASE (DECREASE) IN CASH AND DUE FROM BANKS............................... (259,164) 11,675 299,618 Cash and due from banks at January 1,..... 2,521,676 2,510,001 2,210,383 ----------- ------------ ----------- CASH AND DUE FROM BANKS AT DECEMBER 31,..... $ 2,262,512 $ 2,521,676 $ 2,510,001 =========== ============ =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest.................................. $ 513,773 $ 524,565 $ 771,780 ============ ============ ============ Income taxes.............................. $ 130,904 $ 167,216 $ 124,952 ============ ============ ============
See accompanying notes to the financial statements. 14 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of CoreStates Financial Corp ("the Corporation") and all of its subsidiaries, including: CoreStates Bank, N.A. ("CBNA"); New Jersey National Bank ("NJNB"); CoreStates Bank of Delaware, N.A. ("CBD"); Congress Financial Corporation; and CoreStates Capital Corp. All material intercompany transactions have been eliminated. The financial statements include the consolidated accounts of Independence Bancorp, Inc. ("Independence"), which was acquired on June 27, 1994, and Constellation Bancorp ("Constellation"), which was acquired on March 16, 1994 for all periods presented. Both transactions were accounted for under the pooling of interests method of accounting. Certain amounts in prior years have been reclassified for comparative purposes. CHANGES IN ACCOUNTING PRINCIPLES. During the first quarter of 1994, Independence recognized a $3,430 after-tax, or $.02 per share, impairment loss on certain mortgage securities as a cumulative effect of a change in accounting principle. The loss was the result of a write- down to fair value of these securities, which were deemed to be impaired. This resulted from a Financial Accounting Standards Board ("FASB") 1994 interpretation of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("FAS 115"). The interpretation, reached by consensus of the FASB Emerging Issues Task Force in March 1994, provides more definitive criteria for recognition of impairment losses on these types of securities. Effective December 31, 1993, the Corporation adopted FAS 115. FAS 115 established the accounting and reporting requirements for investments in equity securities that have readily determinable fair values and for all investments in debt securities. All affected investment securities must be classified as either held-to-maturity, trading, or available-for-sale. Held-to-maturity securities are carried at amortized cost. Trading securities are carried at fair value with unrealized holding gains and losses reported in the income statement. Available-for-sale securities are carried at fair value with unrealized holding gains and losses reported as a component of shareholders' equity. As a result of adopting FAS 115, securities with an original carrying value of $1,272,138 were classified as available-for-sale at December 31, 1993 and were written up to their aggregate fair value of $1,370,606. After the related tax effects, shareholders' equity at December 31, 1993 was increased by $64,305 to reflect the write-up of these securities to fair value. Effective January 1, 1993, the Corporation adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("FAS 112"). FAS 112 established the accounting requirements for benefits provided to former or inactive employees after employment but before retirement. FAS 112 requires that employers accrue the costs associated with providing benefits, such as salary and benefit continuation under disability plans, when payment of the benefits is probable and the amount of the obligation can be reasonably estimated. The Corporation recognized the January 1, 1993 FAS 112 transitional liability of $20,015, $13,010 after-tax or $.09 per share, as the cumulative effect of a change in accounting principle. Effective January 1, 1992, the Corporation adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("FAS 106"). FAS 106 requires that employers accrue the costs associated with providing postretirement benefits during the active service periods of employees. As permitted under FAS 106, the Corporation elected to immediately recognize the January 1, 1992 transitional liability of $128,706, $84,946 after-tax or $.62 per share, as the cumulative effect of a change in accounting principle. 15 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) INCOME TAXES In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). In the first quarter of 1992 the Corporation retroactively adopted FAS 109 as of January 1, 1987. Under the asset and liability method provided for by FAS 109, deferred tax assets and liabilities are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The Corporation and its subsidiaries file a consolidated Federal income tax return. INVESTMENT SECURITIES Held-to-maturity securities are carried at cost adjusted for amortization of premiums and accretion of discounts, both computed on the interest method. Held-to-maturity securities primarily consist of debt securities. The Corporation has both the ability and positive intent to hold these securities until maturity. Trading account securities are carried at market values. Gains on trading account securities include both realized and unrealized gains and losses on the portfolio. Debt securities not classified as held-to-maturity or trading and marketable equity securities are classified as available-for-sale. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax, reported as a component of shareholders' equity. The accumulated net unrealized gain on available-for-sale securities included in retained earnings was $11,354 at December 31, 1994. The adjusted cost of a specific certificate sold is the basis for determining realized securities gains and losses as included in the consolidated statement of income in "non-interest income". Interest and dividends on investment securities are recognized as income when earned. LOANS Interest on commercial loans is recognized on the daily principal amounts outstanding. Loan fees are generally considered as adjustments of interest rate yields and are amortized into interest income on loans over the terms of the related loans. Interest on installment loans is principally recognized on the interest method. Commercial loans are placed on a non-accrual status, generally recognizing interest as income when received, when, in the opinion of management, the collectability of principal or interest becomes doubtful. The deferral or non- recognition of interest does not constitute forgiveness of the borrower's obligation. In those cases where collection of principal is in doubt, additions are made to the allowance for loan losses. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is based on management's evaluation of the effects on the loan portfolio of current economic and political conditions and other pertinent indicators. Activities in foreign countries may involve special risks not normally a part of domestic operations. Credit review personnel and senior officers evaluate the loan portfolio by determining the net realizable value of collateral and the financial strength of borrowers. Installment and credit card loans are evaluated largely on the basis of delinquency data because of the number of such loans and the relatively small size of each individual loan. Additions to the allowance arise from the provision for loan losses charged to operations or from the recovery of amounts previously charged off. Loan charge- offs reduce the allowance. Loans are charged off when there has been permanent impairment of the related carrying values. 16 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) PREMISES AND EQUIPMENT Premises and equipment are stated at cost, less accumulated depreciation and amortization. The provision for depreciation and amortization is computed, generally, on the straight-line method at rates based on the following range of lives: buildings - 10 to 45 years; equipment - 3 to 12 years; and leasehold improvements - 3 to 15 years. RETIREMENT PLANS The Corporation maintains a non-contributory defined benefit pension plan for substantially all employees. Benefits are primarily based on the employee's years of credited service, average annual salary and primary social security benefit, as defined in the plan. It is the Corporation's policy to fund the plan on a current basis to the extent deductible under existing tax regulations. The Corporation provides certain postretirement health care and life insurance benefits for retired employees. In order to participate in the health care plan, an employee must retire with at least 10 years of service. The postretirement health care plan is contributory, with retiree contributions based on years of service. It is the Corporation's policy to fund the health care plan on a current basis to the extent deductible under existing tax regulations. INTERNATIONAL OPERATIONS Forward exchange contracts are valued at current rates of exchange. Gains or losses on forward exchange contracts intended to hedge an identifiable foreign currency commitment, if any, are deferred and included in the measurement of the related foreign currency transaction. All other gains or losses on forward exchange contracts are included in the consolidated statement of income. Currency gains and losses in connection with foreign loans and deposit contract transactions, which are included in interest income and expenses, are recognized pro rata over the contract terms. Foreign currency translation adjustments are recorded directly to retained earnings. The cumulative foreign currency translation gain (loss) was $(1,571), $(1,623) and $135 at December 31, 1994, 1993 and 1992, respectively. DERIVATIVE INTEREST RATE CONTRACTS The Corporation uses various interest rate contracts such as, interest rate swaps, futures, forward rate agreements, caps and floors, primarily to manage the interest rate risk of specific assets, liabilities or anticipated transactions and to provide for the needs of its customers. For contracts held for purposes other than trading, gains or losses are deferred and recognized as adjustments to interest income or expense of the underlying assets or liabilities and the interest differentials are recognized as adjustments of the related interest income or expense. Gains or losses resulting from early terminations of these contracts are deferred and amortized over the remaining term of the underlying assets or liabilities. Any fees received or disbursed which represent adjustments to the yield on interest rate contracts are capitalized and amortized over the term of the interest rate contracts. Contracts held or issued for customers are valued at market with gains or losses included in the consolidated income statement. CASH DIVIDENDS DECLARED PER SHARE Cash dividends declared per share for the periods prior to the acquisitions of Independence on June 27, 1994, Constellation on March 16, 1994 and First Peoples Financial Corporation on September 3, 1992 assume that the Corporation would have declared cash dividends equal to the cash dividends per share actually declared by the Corporation. STOCK DIVIDEND All common shares outstanding and per common share data reflect the impact of the Corporation's 100% stock dividend declared on August 17, 1993, and paid on October 15, 1993 to shareholders of record on September 15, 1993 ("the Stock Dividend"). An amount equal to the par value of the shares issued in connection with the Stock Dividend was transferred from capital surplus to common stock. 17 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 2. ACQUISITIONS On December 2, 1994, the Corporation purchased Germantown Savings Bank ("Germantown") a Pennsylvania chartered stock savings bank with $1.6 billion in assets and $1.4 billion in deposits at the time of the acquisition. Under the terms of the transaction, each of Germantown's 4.15 million shares of common stock was exchanged for a combination of the Corporation's common stock, equal to approximately 55% of the $62 per Germantown share purchase price, and cash, equal to approximately 45% of the purchase price. As a result of this acquisition, 5.9 million shares of the Corporation's common stock were issued out of treasury stock. The transaction had a total value of approximately $260 million and was accounted for under the purchase method of accounting. Accordingly, the results of operations of Germantown have been included with the Corporation since the date of acquisition. Under this method of accounting, the purchase price is allocated to the respective assets acquired and liabilities assumed based on their estimated fair values, net of applicable income tax effects. Intangible assets of $191 million, including $148 million of goodwill, were created in this transaction. Goodwill will be amortized to other operating expense on a straight-line basis over 15 years. A summary of unaudited pro forma combined financial information for the Corporation and Germantown combined follows:
Year Ended December 31, ----------------------- 1994 1993 ---------- --------- Operating results (in thousands, except per share): Net interest income............... $1,457,323 $1,395,883 Non-interest income............... 571,738 580,445 Income before cumulative effect of a change in accounting principle....................... 263,219 374,178 Per common share.................. 1.77 2.47 Average common shares outstanding..................... 148,444 151,261
On March 16, 1994, the Corporation acquired Constellation Bancorp ("Constellation"), a New Jersey bank holding company with $2.3 billion in assets and $2.1 billion in deposits. The Corporation issued approximately 11.3 million shares of common stock to shareholders of Constellation based on an exchange ratio of .4137 of a share of the Corporation's common stock for each share of Constellation common stock. On June 27, 1994, the Corporation acquired Independence Bancorp, Inc. ("Independence"), a Pennsylvania bank holding company with $2.6 billion in assets and $2.1 billion in deposits. The Corporation issued approximately 16.6 million shares of common stock to shareholders of Independence based on an exchange ratio of 1.5 shares of the Corporation's common stock for each share of Independence common stock. 18 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 2. ACQUISITIONS - (continued) The Constellation and Independence acquisitions were both accounted for under the pooling of interests method of accounting; accordingly, the consolidated financial statements have been restated to include the consolidated accounts of Constellation and Independence for all periods presented. Previously reported information was as follows:
1993 CORPORATION CONSTELLATION INDEPENDENCE - ---- ----------- ------------- ------------ Net interest income........................... $1,117,901 $100,753 $106,617 Provision for losses on loans................. 100,000 10,000 11,201 Non-interest income........................... 503,055 41,599 29,376 Non-financial expenses........................ 1,033,375 115,186 93,601 Provision for income taxes.................... 159,654 662 (a) 8,312 Income before cumulative effect of a change in accounting principle..................... 327,927 16,504 22,879 Cumulative effect of a change in accounting principle, net of tax....................... (13,010) - Net income.................................... 314,917 16,504 22,879 Income per share before cumulative effect of a change in accounting principle.............. 2.80 .61 1.98 Net income per share.......................... 2.69 .61 1.98 Cash dividends declared....................... 1.14 - 1.16 1992 - ---- Net interest income........................... $1,057,046 $ 86,304 $109,128 Provision for losses on loans................. 119,300 10,000 30,950 Non-interest income........................... 546,509 40,585 23,941 Non-financial expenses........................ 1,094,591 118,527 93,250 Provision for income taxes.................... 127,260 53 (a) 1,757 Income (loss) before cumulative effect of a change in accounting principle.............. 262,404 (1,691) 7,112 Cumulative effect of a change in accounting principle, net of tax....................... (80,986) - (c) 4,378 (b) Net income (loss)............................. 181,418 (1,691) 11,490 Income (loss) per share before cumulative effect of a change in accounting principle 2.27 (.19) .63 Net income (loss) per share................... 1.57 (.19) 1.02 Cash dividends declared....................... 1.02 - 1.16
_____________________________ (a) In 1993, Constellation prospectively adopted FAS 109. However, restated financial information is prepared as if Constellation retroactively adopted FAS 109 as of January 1, 1987. The impact of applying pooling of interests accounting rules and retroactively applying FAS 109 to Constellation had the following effects on restated net income and period-end common shareholders' equity:
Increase (decrease) in net income Cumulative increase --------------------- in common Amount Per Share shareholders' equity ------ --------- -------------------- Year ended: December 31, 1993........................................... $(5,076) $(.03) $39,924 December 31, 1992........................................... 702 .01 45,000
19 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 2. ACQUISITIONS - (continued) (b) Independence prospectively adopted FAS 109 on January 1, 1992, recognizing a cumulative benefit of $4.4 million as the cumulative effect of a change in accounting principle. However, restated financial information is prepared as if Independence retroactively adopted FAS 109 as of January 1, 1987. The impact of applying pooling of interests accounting rules and retroactively applying FAS 109 to Independence had the following effects on restated net income and period- end common shareholders' equity:
Increase (decrease) in net income Cumulative increase ------------------- in common Amount Per Share shareholders' equity ------ --------- -------------------- Year ended: December 31, 1993............................... - - - December 31, 1992............................... $(4,378) $(.03) -
(c) Constellation adopted FAS 106 on January 1, 1993, the date required under that statement. Constellation elected not to recognize immediately is $6.0 million transitional liability, but to amortize that liability over 20 years. As permitted under FAS 106 and pooling accounting, the restated financial information is prepared as if Constellation adopted FAS 106 effective January 1, 1992 and immediately recognized the $6.0 million, $4.0 million after-tax, transitional liability. Salaries, wages and benefits have been adjusted accordingly. Subsequent to the March 16, 1994 consummation of the Constellation acquisition, Constellation recorded merger-related charges in the first quarter of 1994 in connection with a change in strategic direction related to problem assets and to conform its consumer lending charge-off policies to those of the Corporation, and charges for expenses attributable to the acquisition. These merger-related charges totalled $127.8 million after-tax, or $.89 per share. On a pre-tax basis, the merger-related charges consisted of a $120.0 million provision for loan losses, a $28.0 million addition to the OREO reserve, $13.0 million for the writedown of purchased mortgage servicing rights and related assets, and $34.0 million for expenses directly attributable to the acquisition including severance costs of $8.0 million related to approximately 370 employees. Subsequent to the June 27, 1994 consummation of the Independence acquisition, Independence recorded merger-related charges in the second quarter of 1994 in connection with a change in strategic direction related to problem assets and to conform its consumer lending charge-off policies to those of the Corporation, and charges for expenses attributable to the acquisition. These merger-related charges totalled $39.6 million after-tax, or $.28 per share. On a pre-tax basis, the merger-related charges consisted of a $25.0 million provision for loan losses, a $4.0 million addition to the OREO reserve, and $29.7 million for expenses directly attributable to the acquisition including severance costs of $5.0 million related to approximately 345 employees. 20 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 3. FAIR VALUES OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" ("FAS 107"), requires disclosure of fair value information about financial instruments, whether or not required to be recognized in the balance sheet, for which it is practicable to estimate that value. FAS 107 defines a financial instrument as cash, evidence of ownership interest in an entity, or a contractual obligation or right that will be settled with another financial instrument. In cases where quoted market prices are not available, fair values are based on estimates using discounted cash flow or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Fair value estimates derived through those techniques cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. FAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation. The following table summarizes the carrying amount and fair value estimates of financial instruments at December 31, 1994 and 1993.
1994 1993 ------------------------------ ------------------------- Carrying Carrying or Notional Fair or Notional Fair Amount Value Amount Value ----------- ------------ ----------- ----------- ASSETS: Cash and short-term assets..................... $ 4,744,790 $ 4,744,790 $ 4,002,660 $ 4,002,660 Investment securities.......................... 2,880,631 2,849,877 3,599,166 3,628,119 Trading account securities..................... 1,206 1,206 6,393 6,393 Net loans, excluding leases.................... 19,315,247 19,856,330 18,596,671 19,190,044 LIABILITIES: Demand deposits................................ 15,213,517 15,213,517 15,788,786 15,788,786 Time deposits.................................. 6,827,369 6,898,093 5,343,510 5,505,362 Short-term borrowings.......................... 1,546,201 1,546,201 1,884,125 1,884,125 Long-term debt................................. 1,791,110 1,741,345 1,589,290 1,637,098 OFF-BALANCE SHEET ASSET (LIABILITY): Letters of credit.............................. 2,369,426 (5,923) 2,015,753 (4,111) Commitments to extend credit................... 11,802,714 (13,310) 9,993,922 (13,000) Derivative financial instruments.................................. 13,289,463 (204,183) 8,142,583 135,709
Fair value estimates, methods, and assumptions are set forth below for the Corporation's financial instruments. CASH AND DUE FROM BANKS AND SHORT-TERM INSTRUMENTS The carrying amounts reported in the balance sheet for cash and due from banks and short-term instruments approximate their fair values. Short-term instruments include: time deposits; Federal funds sold; and securities purchased under agreements to resell, all of which generally have original maturities of less than 90 days. INVESTMENT SECURITIES Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. See Note 5 for the carrying value and estimated fair value of investment securities. TRADING ACCOUNT SECURITIES Fair values for the Corporation's trading account securities, which also are the amounts recognized in the balance sheet, are based on quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. LOANS Fair values are estimated for loans in groups with similar financial and risk characteristics. Loans are segregated by type including: commercial and industrial; commercial real estate; residential real estate; credit card and other consumer; financial institutions; factoring receivables; and foreign. Each loan type is further segmented into fixed and variable rate interest terms and by performing and non-performing categories in order to estimate fair values. 21 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 3. FAIR VALUES OF FINANCIAL INSTRUMENTS - (continued) The fair value of fixed-rate performing loans is calculated by discounting scheduled principal and interest cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan type at December 31, 1994 and 1993. The estimate of maturity is based on the Corporation's historical experience with repayments for each loan type, modified by an estimate of the effect of current economic and lending conditions. For performing residential mortgage loans, fair value is estimated by referring to secondary market source pricing. For credit card loans, cash flows and maturities are estimated based on contractual interest rates and historical experience and are discounted using secondary market rates adjusted for differences in servicing and credit costs. For variable rate loans that reprice frequently and which have experienced no significant change in credit risk, fair values are based on carrying amounts. Fair value for non-performing loans is based on discounting estimated cash flows using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding cash flows, and discount rates are determined using available market information and specific borrower information. The following table presents carrying amounts and estimated fair values for loans at December 31, 1994 and 1993. Disclosures about fair value of lease financing receivables, which totaled $710,338 and $728,764 at December 31, 1994 and 1993, respectively, are not required by FAS 107, accordingly, the following table excludes lease financing receivables.
1994 1993 -------------------------- ------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------ ----------- ------------ ----------- Domestic loans: Commercial, industrial and other.................. $ 8,688,733 $8,678,995 $ 7,879,451 $ 7,869,217 Real estate loans 6,490,649 6,426,174 6,663,656 6,695,595 Consumer: Installment..................................... 1,386,776 1,396,125 1,356,633 1,380,210 Credit card..................................... 1,374,598 1,481,430 1,178,972 1,274,288 Financial institutions............................ 668,119 666,554 870,489 872,396 Factoring receivables............................. 622,380 622,380 555,211 555,211 Foreign............................................. 584,623 584,672 543,082 543,127 ----------- ----------- ----------- ----------- Total loans, excluding lease financing......................................... 19,815,878 19,856,330 19,047,494 19,190,044 Allowance for loan losses........................... (500,631) - (450,823) - ----------- ----------- ----------- ----------- Net loans, excluding lease financing........................................... $19,315,247 $19,856,330 $18,596,671 $19,190,044 =========== =========== =========== ===========
The fair value estimate for credit card loans is based on the value of existing loans at December 31, 1994 and 1993. This estimate does not include the benefit that relates to estimated cash flows from new loans expected to be generated from existing cardholders over the remaining life of the portfolio. That benefit is estimated to be approximately $59 million at December 31, 1994 and $64 million at December 31, 1993 and is neither included in the fair value estimate for credit card loans, nor recorded as an intangible asset in the consolidated balance sheet. CoreStates has traditionally maintained limits on industry, market and borrower concentrations as a way to diversify and manage credit risk. Management's current policy is to limit industry concentrations to 50% of total equity and to limit market segment concentrations to 10% of total assets. CoreStates manages industry concentrations by applying these dollar limits to industries that have common risk characteristics. DEPOSIT LIABILITIES The fair values disclosed for demand deposits (non-interest bearing checking accounts, NOW accounts, savings accounts, and money market accounts) are, by FAS 107 definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amounts). The carrying amounts for variable-rate, fixed-term certificates of deposit approximate their fair values. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates offered on certificates at December 31, 1994 and 1993, respectively, to an estimate of aggregate expected maturities for those certificates of deposit. 22 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 3. FAIR VALUES OF FINANCIAL INSTRUMENTS - (continued) The following table presents carrying amounts and estimated fair values of deposits at December 31, 1994 and 1993:
1994 1993 ------------------------------ ------------------------------ Carrying Fair Carrying Fair Amount Value Amount Value ----------- ----------- ----------- ----------- Domestic: Non-interest bearing checking......................... $ 6,362,470 $ 6,362,470 $ 6,649,367 $ 6,649,367 NOW accounts.......................................... 1,875,391 1,875,391 1,907,537 1,907,537 Savings accounts...................................... 4,354,829 4,354,829 4,188,103 4,188,103 Money market accounts................................. 2,620,827 2,620,827 3,043,779 3,043,779 Time deposits......................................... 5,714,004 5,784,728 4,546,608 4,708,460 ----------- ----------- ----------- ----------- Total domestic deposits......................... 20,927,521 20,998,245 20,335,394 20,497,246 Overseas branches and subsidiaries......................................... 1,113,365 1,113,365 796,902 796,902 ----------- ----------- ----------- ----------- Total deposits.................................. $22,040,886 $22,111,610 $21,132,296 $21,294,148 =========== =========== =========== ===========
The estimated fair values above do not include the benefit that results from funding provided by core deposit liabilities as compared to the cost of borrowing funds in the financial markets. That benefit, commonly referred to as a deposit base intangible, is estimated to be approximately $600,000 at December 31, 1994 and $570,000 at December 31, 1993 and is neither considered in the above estimated fair value amounts nor recorded as an intangible asset in the consolidated balance sheet. The core deposit base intangible was determined by using a discounted cash flow approach to value the spread between the cost of core deposit liabilities and the cost of alternative borrowing sources over the estimated lives of the core deposit liabilities. SHORT-TERM FUNDS BORROWED The carrying amounts of Federal funds purchased, securities sold under agreements to repurchase, commercial paper and other short-term borrowings approximate their fair values. LONG-TERM DEBT The fair values for long-term debt are based on quoted market prices where available. If quoted market prices are not available, fair values are estimated using discounted cash flow analyses based on the Corporation's borrowing rates at December 31, 1994 and 1993 for comparable types of borrowing arrangements. See Note 11 for additional information regarding the carrying value and estimated fair value of long-term debt. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS AND COMMITMENTS Fair values for the Corporation's futures, forwards, interest rate swaps, options, interest rate caps and floors, and foreign exchange contracts are based on quoted market prices (futures); current settlement values (forwards); quoted market prices of comparable instruments (foreign currency exchange contracts); or, if there are no relevant comparable instruments, on pricing models or formulas using current assumptions (interest rate swaps, interest rate caps and floors, and options). The fair value of commitments to extend credit other than credit card is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The value of commitments to extend credit under credit card lines is embodied in the benefit that relates to estimated cash flows from new loans expected to be generated from existing cardholders over the remaining life of the portfolio. The fair value of standby and commercial letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate the agreements or otherwise settle the obligations with the counterparties. See Note 15 for the notional value and estimated fair value of the Corporation's off-balance sheet derivative financial instruments and commitments. 4. CASH AND DUE FROM BANKS The Corporation's banking subsidiaries are required to maintain reserve balances with the Federal Reserve Bank. The average amount of those reserve balances for the years ended December 31, 1994 and 1993 were approximately $326,000, and $462,000, respectively. 23 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 5. INVESTMENT SECURITIES The carrying and fair values of investment securities at December 31, 1994 and 1993 were as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- 1994 - ---- Held-to-Maturity - ---------------- U.S. Treasury................ $ 736,613 $ 202 $13,545 $ 723,270 U.S. Government agencies..... 1,107,550 923 16,572 1,091,901 State and municipal.......... 297,890 6,602 5,562 298,930 Other: Domestic.................... 284,466 331 3,133 281,664 Foreign..................... 28,065 - - 28,065 ---------- -------- ------- ---------- Total held-to-maturity..... $2,454,584 $ 8,058 $38,812 $2,423,830 ========== ======== ======= ========== Available-for-Sale - ------------------ U.S. Treasury................ $ 185,411 $ 8,015 $ 177,396 U.S. Government agencies..... 147,996 $ 89 8,855 139,230 State and municipal.......... 8,218 99 90 8,227 Other: Domestic.................... 35,914 17,041 2,067 50,888 Foreign..................... 23,229 27,109 32 50,306 ---------- -------- ------- ---------- Total available-for-sale.. $ 400,768 $ 44,338 $19,059 $ 426,047 ========== ======== ======= ========== 1993 - ---- Held-to-Maturity - ---------------- U.S. Treasury................ $ 522,537 $ 6,203 $ 169 $ 528,571 U.S. Government agencies..... 1,318,522 5,481 2,758 1,321,245 State and municipal.......... 277,377 16,753 247 293,883 Other: Domestic.................... 88,423 1,193 154 89,462 Foreign..................... 21,701 2,655 4 24,352 ---------- -------- ------- ---------- Total held-to-maturity..... $2,228,560 $ 32,285 $ 3,332 $2,257,513 ========== ======== ======= ========== Available-for-Sale - ------------------ U.S. Treasury................ $ 435,721 $ 14,320 $ 502 $ 449,539 U.S. Government agencies..... 439,496 9,815 621 448,690 State and municipal.......... 77,050 2,185 174 79,061 Other: Domestic.................... 308,488 26,988 5,919 329,557 Foreign..................... 11,383 52,376 - 63,759 ---------- -------- ------- ---------- Total available-for-sale.. $1,272,138 $105,684 $ 7,216 $1,370,606 ========== ======== ======= ==========
At December 31, 1992, marketable equity securities of $37,204 were carried at the aggregate of their lower of cost or market. During 1992, the Corporation recorded pre-tax gains of $2,636 on sales of certain domestic marketable equity securities. At December 31, 1992, the market value of the marketable equity securities portfolio exceeded its carrying value by $20,592. These marketable equity securities are carried in the available-for-sale portfolio and have been written up by $43,989 at December 31, 1994 the aggregate of their excess fair values over cost, through an after-tax credit to retained earnings. The Corporation recorded pre-tax gains of $11,926 in 1994 and $13,594 in 1993 on sales of certain domestic equity securities. During 1994, 1993 and 1992, the Corporation recorded pre-tax gains of $2,567, $8,617 and $5,325 on sales of foreign equity securities. Included in other domestic securities available-for-sale at December 31, 1993 were mortgage residual securities with an amortized cost and fair value of $13,251 and $8,339, respectively. Pre-tax write-downs of $3,961 were recognized in 1993 on these investments and were included in securities gains and losses. During the first quarter of 1994, a $3,430 after-tax impairment loss was recognized on these mortgage residual securities as the cumulative effect of a change in accounting principle. The loss was the result of a write-down to fair value of these securities which were deemed to be impaired. This write-down resulted from a FASB interpretation of FAS 115 reached by a consensus of the FASB Emerging Issues Task Force in March 1994, which provided more definitive criteria for recognition of impairment losses on these types of securities. 24 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 5. INVESTMENT SECURITIES - (continued) At December 31, 1994 and 1993, there were no investments in securities of any single, non-Federal issuer in excess of 10% of shareholders' equity. Securities with a carrying value of $1,579,588 were pledged at December 31, 1994 to secure public deposits, trust deposits, and for certain other purposes as required by law. The amortized cost and estimated fair value of debt securities at December 31, 1994, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations without prepayment penalties.
Amortized Fair Cost Value ---------- ---------- Held-to-Maturity - ---------------- Due in one year or less................. $ 721,604 $ 717,867 Due after one year through five years... 617,953 606,435 Due after five years through ten years.. 147,964 146,205 Due after ten years..................... 105,699 107,466 Mortgage-backed securities.............. 789,479 773,952 ---------- ---------- $2,382,699 $2,351,925 ========== ========== Available-for-Sale - ------------------ Due in one year or less................. $ 76,069 $ 76,079 Due after one year through five years... 96,703 90,907 Due after five years through ten years.. 27,967 25,157 Due after ten years..................... 6,446 6,327 Mortgage-backed securities.............. 158,408 148,413 ---------- ---------- $ 365,593 $ 346,883 ========== ==========
Proceeds from sales of investments in debt securities available-for-sale during 1994, 1993, and 1992 were $657,361, $535,267 and $344,605, respectively. Gross gains of $9,625 in 1994, $6,069 in 1993 and $8,475 in 1992, and gross losses of $4,739 in 1994, $200 in 1993 and $808 in 1992 were realized on those sales. 6. LOAN PORTFOLIO For a breakdown of the loan portfolio by type of loan see footnote 3 on page 22. Real estate loans at December 31, 1994 and 1993 were comprised of the following:
1994 1993 ----------- ----------- Construction and development............... $ 331,369 $ 367,364 Residential................................ 3,180,227 3,121,008 Other, primarily commercial mortgages and commercial loans secured by owner- occupied real estate.................... 2,979,053 3,175,284 ----------- ----------- $6,490,649 $6,663,656 =========== ===========
The following represents the Corporation's non-accrual loans, renegotiated loans and other real estate owned for December 31, 1994 and 1993 (in thousands):
1994 1993 -------- -------- NON-ACCRUAL LOANS Domestic.......................... $244,406 $246,512 Foreign........................... 158 171 -------- -------- Total non-accrual loans...... 244,564 246,683 -------- -------- RENEGOTIATED LOANS Domestic.......................... 1,657 56,457 -------- -------- Total renegotiated loans..... 1,657 56,457 -------- -------- Total non-performing loans... 246,221 303,140 -------- -------- OTHER REAL ESTATE OWNED (OREO) Acquired through foreclosure or exchange..................... 53,900 72,907 In-substance foreclosure.......... 6,687 56,419 Property formerly used in banking operations.............. 4,076 6,202 -------- -------- Total OREO................... 64,663 135,528 -------- -------- Total non-performing assets.. $310,884 $438,668 ======== ========
The following reflects the effect of non-accrual and renegotiated loans on both interest income and net interest income for the years ending December 31, 1994, 1993, and 1992 (in thousands):
1994 1993 1992 ------- ------- ------- Interest income which would have been recorded in accordance with original terms: Domestic......................... $25,347 $30,838 $38,375 Foreign.......................... 9 38 324 ------- ------- ------- Total....................... 25,356 30,876 38,699 ------- ------- ------- Interest income reflected in total operating income: Domestic......................... 12,003 17,300 20,479 Foreign.......................... - - - ------- ------- ------- Total....................... 12,003 17,300 20,479 ------- ------- ------- Net reduction in interest income and net interest income.............. $13,353 $13,576 $18,220 ======= ======= =======
ACCRUING LOANS PAST DUE 90 DAYS OR MORE Accruing loans 90 days or more past due as to payment of interest or principal at December 31, 1994 and 1993 were as follows (in thousands):
1994 1993 ------- ------- Domestic........................... $53,104 $53,524 ------- ------- Total............................ $53,104 $53,524 ======= =======
While the associated risks are clearly recognized, international lending is a part of the Corporation's wide range of international services. It is the Corporation's intent to remain involved in providing the international financial services needed for the increasingly global competition faced by customers. At December 31, 1994 and 1993, aggregate foreign outstandings (defined as loans, investments, acceptances and time deposits) to borrowers in a foreign country that exceeded 1% of total assets were as follows:
Banks and other Governments Commercial financial and and institutions agencies industrial Total ------------ ------------ ------------ ------------ DECEMBER 31, 1994 United Kingdom......... $ 262,891 -- $ 48,209 $ 311,100 DECEMBER 31, 1993 United Kingdom......... 269,109 -- 43,798 312,907
Outstandings below 1%, but over .75% of total assets were $267,816 in the Cayman Islands at December 31, 1994, and $286,417 in the United Kingdom at December 31, 1992. Other real estate owned includes both formally foreclosed and in-substance foreclosed property. When a property is acquired through foreclosure or in- substance foreclosure, it is reported at the lower of its cost basis or estimated fair market value less estimated liquidation costs. The book value of real estate loans transferred to other real estate owned during 1994, 1993, and 1992 was $32,215, $48,124 and $126,184, respectively. At December 31, 1994 and 1993, the Corporation had loans totalling $149,996 and $119,099, respectively, to its directors, officers and companies in which the directors had a 10% or more voting interest. These loans were made on substantially the same terms, including interest rates and collateral as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectibility. The 1994 additions and reductions were $2,081,641 and $2,050,744, respectively. In May 1992, the Corporation sold the assets of Signal Financial Corp, a consumer finance subsidiary, including approximately $300,000 of consumer installment loans. The loans were sold net of $14,700 of the allowance for loan losses. This transaction had an immaterial impact on the earnings of the Corporation. In September 1993, the Corporation sold five of its seven branches from the Virgin Islands operations. The five branches had loans of $131,200 and deposits of $228,800 at the time of sale. The Corporation recorded a pre-tax gain of $11,000 on the sale. In December 1994, the remaining two branches were sold at a pre-tax gain of $1,900. In 1994 and 1993, the Corporation sold $317,000 and $207,000, respectively, of fixed-rate home equity loans in securitization transactions. Included in the loan portfolio are $530 million of residential mortgage loans which will be sold in the second quarter of 1995. These loans are being accounted for as assets held for sale and are carried at lower of cost or market at December 31, 1994. 25 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 7. ALLOWANCE FOR LOAN LOSSES The following represents an analysis of changes in the allowance for loan losses for the years ended December 31, 1994, 1993 and 1992:
1994 1993 1992 --------- --------- --------- Balance at beginning of period............... $ 450,823 $ 442,267 $ 473,301 Allowance for loans sold at date of sale..... - (353) (14,700) Allowance for loans purchased at date of purchase............................... 24 - 1,028 Allowance for loans of bank acquired under purchase method of accounting............. 23,739 2,703 - Provision for losses on loans................ 246,900 121,201 160,250 Recoveries of loans previously charged off. 63,059 86,738 70,069 Loan charge-offs............................. (283,914) ( 201,733) (247,681) --------- --------- ------- Balance at end of period..................... $ 500,631 $ 450,823 $442,267 ========= ========= =======
Included in the provision for losses on loans are additions of $120,000 and $25,000, respectively, related to Constellation and Independence, recorded in connection with changes in strategic direction related to problem assets acquired with Constellation and Independence and to conform their consumer lending charge-off policies to those of the Corporation. In May 1993, the Financial Accounting Standards Board issued statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("FAS 114"). FAS 114 addresses accounting for impairment of certain loans and requires that impaired loans within the scope of FAS 114 be measured based on the present value of expected cash flows discounted at the loan's effective interest rate, or be measured at the loan's observable market price or the fair value of its collateral. FAS 114 is effective beginning in 1995. The adoption of FAS 114 is not expected to have a material impact on CoreStates' level of allowance for loan losses. 8. PREMISES AND EQUIPMENT The consolidated balance sheet includes premises and equipment, net of accumulated depreciation and amortization of $535,126 and $525,889 at December 31, 1994 and 1993, respectively. Depreciation and amortization of premises and equipment for the years ended December 31, 1994, 1993, and 1992, was $56,919, $59,792, and $67,384, respectively. 9. TIME DEPOSITS Domestic time deposits in denominations of $100 or more at December 31, 1994, 1993, and 1992 were:
1994 1993 1992 -------- -------- -------- Commercial certificates of deposit......... $268,402 $295,835 $638,258 Other domestic time deposits, principally savings certificates....... 371,771 145,195 209,637 -------- -------- -------- Total....................... $640,173 $441,030 $847,895 ======== ======== ========
Interest expense on domestic time deposits in denominations of $100 or more for the years ended December 31, 1994, 1993, and 1992 was:
1994 1993 1992 -------- ------- ------- Interest expense: Commercial certificates of deposit................. $ 9,547 $13,908 $30,739 Other domestic time deposits, principally savings certificates........................ 13,231 9,434 17,956 ------- ------- ------- Total................................... $22,778 $23,342 $48,695 ======= ======= =======
Substantially all of the deposits of overseas branches and subsidiaries were time deposits in denominations of $100 or more for each of the three years. 26 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 10. SHORT-TERM FUNDS BORROWED Short-term funds borrowed at December 31, 1994 and 1993 include the following:
1994 1993 ---------- ---------- Federal funds purchased (a)......................... $ 252,340 $ 606,617 Securities sold under agreements to repurchase (b).. 139,923 249,731 Commercial paper (c)................................ 853,947 501,838 Other short-term funds borrowed (d)................. 299,991 525,939 ---------- ---------- Total short-term funds borrowed (e)....... $1,546,201 $1,884,125 ========== ==========
(a) Federal funds purchased generally represent the overnight Federal funds transactions of banking subsidiaries with correspondent banks. The weighted average interest rate paid was 4.58% in 1994, 3.15% in 1993 and 3.39% in 1992. The maximum amount outstanding at any month-end was $961,634 during 1994, $1,160,951 during 1993, and $848,953 during 1992. (b) Securities sold under agreements to repurchase usually mature within one to thirty days or are due on demand. The weighted average interest rate paid was 2.61% in 1994, 2.73% in 1993 and 3.57% in 1992. The maximum amount outstanding at any month-end was $281,327 during 1994, $386,368 during 1993 and $427,349 during 1992. (c) Commercial paper issued by CoreStates Capital Corp is used to finance the short-term borrowing requirements of certain banking-related activities. Commercial paper is issued with maturities of not more than nine months and there are no provisions for extension, renewal or automatic rollover. The weighted average interest rate on commercial paper borrowings was 4.24% in 1994, 3.14% in 1993 and 3.72% in 1992. The maximum amount outstanding at any month-end was $919,292 during 1994, $714,439 during 1993 and $578,364 during 1992. At December 31, 1994, the Corporation had fee-based lines of credit facilities from unaffiliated banks totalling $645,000. The lines of credit were established in support of commercial paper borrowings, Medium Term Note issuance and general corporate purposes. In January 1995, the Corporation replaced these bi-lateral lines of credit with a $650,000 revolving credit facility. Unless extended by the Corporation in accordance with the terms of the facility agreement, the facility expires January 1999. There were no borrowings under these lines at December 31, 1994. The interest rate charged for usage of these lines varies with money market conditions. (d) Other short-term funds borrowed include term Federal funds purchased and demand notes payable to the U.S. Treasury. (e) The aggregate average short-term funds borrowed were $1,928,000 in 1994, $1,962,000 in 1993 and $1,657,000 in 1992. The weighted average interest rate was 4.42% in 1994, 3.42% in 1993 and 3.65% in 1992. The average interest rate is calculated primarily on a daily average of short-term funds borrowed. 27 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 11. LONG-TERM DEBT Long-term debt at December 31, 1994 and 1993 includes the following:
1994 1993 ----------------------------- ----------------------- Carrying Fair Carrying Fair CoreStates Financial Corp: Amount Value Amount Value ------------ ---------- ---------- ---------- 8 5/8% Mortgages due 2001........... $ 9,997 $ 10,068 $ 10,803 $ 12,505 7% Convertible Subordinated Debentures due 2011 (a)........... -- -- 42,147 44,813 Subordinated Debentures due 2000 (b).......................... -- -- 25,000 25,000 ---------- --------- -------- ------ 9,997 10,068 77,950 82,318 ---------- --------- -------- -------- CoreStates Capital Corp ("CSCC"): 5 7/8% Guaranteed Subordinated Notes due 2003 (c)................ 200,000 165,900 200,000 192,480 6 6/8% Guaranteed Subordinated Notes due 2005 (c)................ 175,000 150,535 175,000 172,358 9 6/8% Guaranteed Subordinated Notes due 2001 (d)................ 150,000 157,230 150,000 178,395 9 1/8% Guaranteed Subordinated Notes due 2003 (e)................ 100,000 104,130 100,000 118,830 Medium Term Notes (f)............... 1,099,585 1,097,998 808,085 812,299 ---------- ---------- ---------- ---------- 1,724,585 1,675,793 1,433,085 1,474,362 ---------- ---------- ---------- ---------- Other subsidiaries: Federal Home Loan Bank Borrowings (g).................... 55,000 53,956 65,000 66,801 9.35% Subordinated Note due July 2003 (h)............ -- -- 10,000 10,250 Various other....................... 1,528 1,528 3,255 3,367 ---------- ---------- ---------- ---------- 56,528 55,484 78,255 80,418 ---------- ---------- ---------- ---------- Total long-term debt (i)............ $1,791,110 $1,741,345 $1,589,290 $1,637,098 ========== ========== ========== ==========
(a) The Debentures were called for redemption at 101.4% plus accrued interest in November 1994. As a result of this call, 945,000 common shares were issued on conversion of $23,000 of the debentures. (b) The debentures were retired at par plus accrued interest in January 1994. (c) The Notes are not subject to redemption prior to maturity and are unconditionally guaranteed, on a subordinated basis, as to payment of principal and interest by the Corporation. The Notes are subordinated to all existing and future senior CSCC indebtedness and the guarantee is subordinated to all outstanding senior Corporation indebtedness. (d) The Notes are unconditionally guaranteed, on a subordinated basis, as to payment of principal and interest by the Corporation. The Notes are subordinated to all existing and future senior CSCC indebtedness and the guarantee is subordinated to all existing and future senior indebtedness of the Corporation. (e) The Notes are not subject to redemption prior to maturity and are unconditionally guaranteed, on a subordinated basis, as to payment of principal and interest by the Corporation. The Notes are subordinated to all existing and future senior CSCC indebtedness and the guarantee is subordinated to all existing and future senior Corporation indebtedness. (f) CSCC can issue Medium Term Notes (Senior and Subordinated) ranging in maturity of more than nine months from date of issue. The interest rate or interest rate formula on each Note is established by CSCC at the time of issuance. The Senior Notes are unconditionally guaranteed as to payment of principal and interest by the Corporation. The Subordinated Notes are unconditionally guaranteed, on a subordinated basis, as to payment of principal and interest by the Corporation. The Subordinated Notes are subordinated to all existing and future senior CSCC indebtedness and the guarantee is subordinated to all existing and future senior Corporation indebtedness. At December 31, 1994, $1.1 billion of debt was outstanding with terms up to five years at fixed interest rates ranging from 4.90% to 6.51% and various floating interest rates. 28 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 11. LONG-TERM DEBT - continued Under an existing shelf registration statement filed with the Securities and Exchange Commission, the Corporation had debt and capital securities that were registered but unissued of approximately $674.0 million at December 31, 1994. (g) The borrowings range in maturity from May 1995 to June 1996 at floating interest rates of three month LIBOR less .10% and fixed interest rates from 4.58% to 5.89%. (h) On December 16, 1994, the Note was called. The redemption price was 102%. (i) The consolidated aggregate maturities and sinking fund requirements for long-term debt for the years ending December 31, 1995 through 1999 are: $470,375; $305,965; $137,616; $111,743; and $137,222, respectively. 12. RETIREMENT AND BENEFIT PLANS Pension expense under the Corporation's defined benefit pension plans was $20,390 in 1994, $12,007 in 1993 and $10,926 in 1992. The projected benefit obligation exceeded plan assets at fair value by $44,346 at December 31, 1994, based on current and estimated future salary levels. The excess of the projected benefit obligation is reconciled to the accrued pension cost included in other liabilities as follows:
December 31, ---------------------- 1994 1993 -------- -------- Plan assets at fair value(a)........................... $456,293 $484,273 -------- -------- Present value of benefit obligation: Accumulated benefits based on salaries to date, including vested benefits of $371,570 in 1994 and $384,469 in 1993................................... 402,772 419,943 Additional benefits based on estimated future salary levels...................................... 97,867 110,675 -------- -------- Projected benefit obligation........................... 500,639 530,618 -------- -------- Amount projected benefit obligation exceeds plan assets at fair value at December 31,............ (44,346) (46,345) Reconciliation: Unrecognized prior service cost...................... 5,879 5,736 Unrecognized net asset from date of initial application........................................ (27,538) (31,551) Net deferred actuarial loss.......................... 19,299 44,172 -------- -------- Accrued pension expense included in other liabilities.. $(46,706) $(27,988) ======== ========
_____________________________________ (a) Primarily U.S. Government securities, U.S. agency securities, fixed income securities and commingled funds managed by subsidiary banks. Net pension cost for the years ended December 31, 1994, 1993 and 1992 included the following expense (income) components:
1994 1993 1992 --------- --------- --------- Service cost benefits earned during the period.. $ 21,260 $ 16,117 $ 15,384 Interest cost on projected benefit obligation... 38,773 35,186 32,933 Actual (return) loss on plan assets............. 17,746 (49,401) (16,426) Net amortization and deferral................... (57,389) 10,105 (20,965) -------- -------- -------- Net pension cost.............................. $ 20,390 $ 12,007 $ 10,926 ======== ======== ========
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation for the Corporation was 8.0% and 7.0%, respectively, at December 31, 1994 and 1993. The rate of increase on future compensation levels was 5.0%. The expected long-term rate of return on plan assets was 8.5% to 9.5%. The Corporation sponsors a savings plan for its employees. Contributions to the savings plan for the employers' match were $13,133 in 1994, $13,576 in 1993, and $13,117 in 1992. Prior to its acquisition by the Corporation, Independence maintained a defined contribution plan which covered all employees who meet age and service requirements. Expense related to this plan was $2,407 in 1994, $2,636 in 1993, and $2,861 in 1992. Vested contributions were rolled into the Corporation's savings plan. 29 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 12. RETIREMENT AND BENEFIT PLANS - (continued) The Corporation and its subsidiaries provide certain postretirement health care and life insurance benefits for retired employees. Postretirement benefits are provided through an insurance company whose premiums are based on the benefits paid during the year. The postretirement health care plan is contributory, with retiree contributions based on years of service. Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("FAS 106") requires that employers accrue the costs associated with providing postretirement benefits during the active service periods of employees, rather than the previously accepted accounting practice of recognizing these costs on a pay-as-you-go basis. Effective January 1, 1992, the Corporation adopted FAS 106. As permitted under FAS 106, the Corporation elected to recognize immediately the transitional postretirement benefit liability of $128,706, $84,946 after-tax or $.62 per share, as the cumulative effect of a change in accounting principle. The liability for postretirement benefits included in other liabilities at December 31, 1994 and 1993 was as follows:
1994 1993 ---------- ---------- Accumulated postretirement benefit obligation: Retirees..................................... $ (93,547) $(102,143) Fully eligible active plan participants...... (2,979) (3,662) Other active plan participants............... (32,420) (41,056) --------- --------- Accumulated postretirement benefit obligation (128,946) (146,861) Plan assets at fair value (a)................... 24,467 20,006 --------- --------- Unfunded obligation at December 31,............. (104,479) (126,855) Unrecognized net (gain) loss.................... (27,247) 3,795 --------- -------- Accrued postretirement benefit obligation....... $(131,726) $(123,060) ========= =========
- ------------------------------------ (a) Primarily municipal bonds and short-term investments. Net periodic postretirement benefit cost for the years ended December 31, 1994 and 1993 included the following expense (income) components:
1994 1993 -------- -------- Service cost-benefits earned during the period.. $ 2,323 $ 2,160 Interest cost on accumulated postretirement benefit obligation........................... 9,261 10,108 Actual return on plan assets.................... (461) (6) Net amortization and deferral................... (736) 6 ------- ------- Net periodic postretirement benefit cost........ $10,387 $12,268 ======= =======
For measurement purposes, an 11% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1994; the rate was assumed to decrease gradually to 9.5% for 1997 and remains at that level thereafter. For measurement purposes, a fixed dollar amount was determined as the Corporation's maximum cost per employee. This fixed dollar amount was established at the projected cost level for medical expenses in 1997. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by 1 percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1994 by $9,217 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $730. The expected long-term rate of return on plan assets was 6.0%. The weighted- average discount rate used in determining the accumulated postretirement benefit obligation was 8.0% and 7.0%, respectively, at December 31, 1994 and 1993. 30 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 12. RETIREMENT AND BENEFIT PLANS - (continued) Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("FAS 112") was issued in November 1992 to establish accounting for benefits provided to former or inactive employees after employment but before retirement. FAS 112 requires that employers accrue the costs associated with providing benefits, such as salary and benefit continuation under disability plans, when payment of the benefits is probable and the amount of the obligation can be reasonably estimated. Effective January 1, 1993, the Corporation adopted FAS 112. The Corporation recognized the January 1, 1993 FAS 112 transitional liability of $20,015, $13,010 after-tax or $.09 per share, as the cumulative effect of a change in accounting principle. The impact of FAS 112 on salaries, wages and benefits expense for the year ended December 31, 1994 and 1993 was not material. 13. LONG-TERM INCENTIVE PLAN The Corporation has outstanding options granted under the Corporation's long- term incentive plan (the "Plan"). As provided in the Plan, a variety of incentives can be issued to eligible participants including restricted stock awards, incentive stock options, non-qualified stock options, stock appreciation rights, performance units and cash awards. Constellation, Independence and Germantown had maintained similar plans. Options granted under those plans were assumed by the Corporation upon consummation of their respective acquisitions. The Plan provides for a maximum number of options available to be granted each year equal to 2% of outstanding common shares as of January 1 of that year. Information on options for 1994 follows:
Shares under Option price option per share ---------- --------------- Balance at January 1, 1994.......... 6,419,579 $ 3.21 - $54.70 Options granted..................... 1,896,925 26.38 - 28.00 Options exercised................... (936,294) 3.21 - 27.50 Options cancelled................... (144,511) 7.64 - 54.70 --------- Balance at December 31, 1994........ 7,235,699 3.99 - 54.70 =========
Options under the Plan are granted to purchase the Corporation's common shares at market value on the date of grant and are exercisable one year from the date of grant for a period not exceeding ten years. Stock appreciation rights may be granted in conjunction with the granting of an option. Upon the exercise of stock appreciation rights and the surrender of the related option, an employee may receive in cash or common stock of the Corporation a value equal to the difference between the market price at the date of exercise and the option price of shares. The assumed exercise of the options and other awards under the Plan did not have a materially dilutive effect on the earnings per share in years 1992 through 1994. The preceding option table does not reflect 214,062 performance unit awards outstanding at December 31, 1994, 280,190 at December 31, 1993 and 371,514 at December 31, 1992. Performance unit awards are earned subject to specific performance of the Corporation over specified performance periods as defined in the Plan. The payment value of each performance unit earned for the applicable performance period is the fair market value of one share of common stock of the Corporation based on the formula contained in the Plan. During 1994, 1993 and 1992, respectively, $867, $1,051 and $1,557 was expensed in connection with performance unit awards. 14. OPERATING LEASES Rental expense, reduced by sublease rental income, charged to operations was $59,820, $63,055 and $62,042 for 1994, 1993 and 1992, respectively. 15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS AND COMMITMENTS In the normal course of business, there are outstanding commitments and contingent liabilities which are not reflected in the financial statements. These include various financial instruments with off-balance sheet risk used in connection with the Corporation's asset and liability management and to provide for the needs of customers. These involve varying degrees of credit, interest rate and liquidity risk, but do not represent unusual risks for the Corporation and management does not anticipate any significant losses as a result of these transactions. 31 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS AND COMMITMENTS - continued DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING The Corporation uses off-balance sheet derivative financial instruments, such as interest rate swaps, futures and caps, to manage interest rate risk. The Corporation's exposure to interest rate risk stems from the mismatch between the sensitivity to movements in interest rates of the Corporation's assets and liabilities and from the spread risk between the rates on those assets and liabilities and financial market rates. The use of derivatives to manage interest rate risk falls into three categories: interest sensitivity adjustments, interest rate spread protection and hedging anticipated asset sales. Interest rate swaps and futures are generally used to lengthen the interest rate sensitivity of short-term assets and to shorten the repricing characteristics of longer term liabilities. Interest rate caps are used to manage spread risk. Interest rate caps are also used to offset the risk of upward interest rate movement on adjustable rate mortgages and other products with imbedded caps as well as to reduce the risk that interest rate spreads narrow on prime based products. Gains or losses are used to adjust the basis of the related asset or liability and interest differentials are adjustments of the related interest income or expense. In connection with anticipated sales of longer term assets acquired through merger or generated in the loan origination process, the Corporation uses interest rate swaps and option agreements to reduce interest rate sensitivity as the assets are readied for sale. Hedge gains or losses are used to adjust the basis of the assets held for sale. Derivative financial instruments used in the management of interest rate risk at December 31, 1994 are summarized by category in the table below.
Interest Interest Interest rate rate rate Other swaps futures caps derivatives Total ----------- -------- -------- ----------- ------- Interest Sensitivity Adjustment: Assets: Notional amount.................... $2,920 $1,043 $ 51 $125 $ 4,139 Unrealized gains................... 5 1 6 Unrealized losses.................. (70) (1) (71) Deposits and other borrowings: Notional amount..................... 3,714 3,714 Unrealized gains.................... 4 4 Unrealized losses................... (96) (96) Long-term debt: Notional amount..................... 788 25 813 Unrealized gains.................... 3 3 Unrealized losses................... (57) (1) (58) Spread Protection: Assets: Notional amount.................... 677 677 Unrealized gains................... 4 4 Unrealized losses.................. (9) (9) Deposits and other borrowings: Notional amount..................... 300 300 Unrealized gains.................... 10 10 Unrealized losses................... Anticipated Asset Sales: Notional amount..................... 428 170 598 Unrealized gains 1 1 2 Unrealized losses................... Total: Notional amount..................... $7,850 $1,043 $1,053 $295 $10,241 ====== ====== ====== ==== ======= Unrealized gains.................... $ 13 $ - $ 15 $ 1 $ 29 ====== ====== ====== ==== ======= Unrealized losses................... $ (223) $ (1) $ (10) $ - $ (234) ====== ====== ====== ==== ======= Net unrealized gains (losses) $ (210) $ (1) $ 5 $ 1 $ (205) ====== ====== ====== ==== =======
The following table summarizes interest rate risk related derivative activity during 1994:
Interest Interest Interest rate rate rate Other Notional Amounts swaps futures caps derivatives Total - ---------------- -------- -------- -------- ----------- ------- As of December 31, 1993........... $4,125 $ 926 $ 701 $ 39 $ 5,791 Additions......................... 4,477 8,420 476 976 14,349 Terminated contracts(a)........... (8,303) (8,303) Maturities/ amortization.................... (752) (124) (720) (1,596) ------- ------ ------ ------ ------- As of December 31, 1994........... $7,850 $1,043 $1,053 $ 295 $10,241 ======= ====== ====== ====== =======
- --------------------------------------- (a) As of December 31, 1994, CoreStates had no material deferred gains or losses related to terminated derivative contracts. 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 as follows:
Years ----------------------------------------------------------- 0-1 1-2 2-3 3-4 4-5 over 5 Total --- --- --- --- --- ------ ------ Receive Fixed/Pay Floating Receive Notional........... $1,411 $2,153 $ 767 $ 672 $ 979 $ 975 $6,957 Rate............... 6.30% 6.95% 6.58% 6.57% 7.04% 6.92% 6.75% Pay Notional........... $6,957 $6,957 Rate............... 6.16% 6.16% Pay Fixed/Receive Floating(a) Pay Notional........... $ 346 $ 30 $ 40 $ 37 $ 90 $ 543 Rate............... 7.79% 8.78% 8.33% 8.09% 8.42% 8.01% Receive Notional........... $ 543 $ 543 Rate............... 5.49% 5.49% Receive Floating/Pay Floating (Basis Swaps) Notional........... $ 90 $ 90 Receive Rate............... 4.96% 4.96% Pay Rate............... 6.23% 6.23% Receive Fixed/Pay Floating(b) (Forward Start) Receive Notional........... $ 205 $ 30 $ 25 $ 260 Rate............... 6.32% 6.38% 6.37% 6.33% Start Date Notional........... $ 260 $ 260
_________________________________________ (a) Includes $306 million swaps which CoreStates has agreed with counterparty to terminate in 1995. (b) Pay rate will be determined on forward start date. Foreign currency derivatives used for hedging activities have not had a material impact on income or liquidity of the Corporation for any of the years presented. DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR TRADING PURPOSES In its business of providing risk management services for its customers, the Corporation engages in derivative activities including interest rate swaps, caps and floors. In addition, as part of its international business, the Corporation enters into foreign exchange contracts on behalf of customers. These contracts are matched against forward sale or purchase contracts. All customer related derivative financial instrument transactions are marked to market and any gains or losses are recorded in the income statement. The Corporation does not maintain a regular trading business where unbalanced positions are taken in any financial derivative instrument. Customer related derivative financial instruments accounted for as held for trading at December 31, 1994 are summarized by type of instrument in the table below:
Notional Net gain amount (loss)(a) -------- --------- Interest Rate Swaps: CoreStates receives fixed............. $ 192 $ (4) CoreStates pays fixed................. 192 4 Interest Rate Caps/Floors: Sold.................................. 424 (5) Purchased............................. 424 5 Foreign exchange contracts.............. 1,817 2 ------ ---- Total Customer Related Derivatives...... $3,049 $ 2 ====== ====
- ----------------- (a) Average net gain (loss) during 1994 was substantially the same as the net gain (loss) at December 31, 1994. The current replacement cost for the customer related derivatives portfolio was $11.2 million at December 31, 1994. This assumes that only counterparties for whom it would be favorable to default would do so. The following is a summary of off-balance sheet commitments and derivative financial instruments as of December 31, 1994 and 1993, including fair values:
1994 1993 -------------------------- ------------------------- Notional Fair Notional Fair or Value or Value Contractual of Asset Contractual of Asset Amount (Liability)(1) Amount (Liability)(1) ----------- -------------- ----------- -------------- Standby letters of credit, net of participations (a)........... $1,125,262 $ (2,813) $1,123,303 $ (1,884) Commercial letters of credit................................... 1,244,164 (3,110) 892,450 (2,227) Commitments to extend credit (b)............................... 8,223,261 (13,310) 7,000,689 (13,000) Unused commitments under credit card lines..................... 3,579,453 2,993,233 Interest rate futures and forward contracts (c): Commitments to purchase..................................... 1,043,000 (1,185) 925,500 365 Commitments to purchase foreign and U.S. currencies (d)......................................... 1,816,549 1,702 1,336,646 1,148 Interest rate swaps, notional principal amounts (e)................................................. 8,234,400 (210,300) 4,597,119 133,163 Interest rate caps and floors (f): Written..................................................... 749,857 (15,000) 622,920 (4,196) Purchased................................................... 1,150,657 20,200 621,398 5,004 Other derivatives.............................................. 295,000 400 39,000 225
- ------------------------------------ (1) See Note 3 for discussion of fair value. 32 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS AND COMMITMENTS - continued (a) Standby letters of credit ("SBLC") are used in various transactions to enhance the credit standing of the Corporation's customers and are subjected to the same risk, credit review and approval process as loans. SBLC's are irrevocable assurances that the Corporation will make payment in the event that a customer cannot perform its contractual obligations to third parties. (b) Commitments to extend credit represent the Corporation's obligation to fund commercial and real estate loans, including home equity lines, lines of credit, revolving lines of credit and other types of commitments. (c) Exchange traded futures contracts and forward rate agreements represent agreements to exchange dollar amounts at a specified future date for interest rate differentials between an agreed interest rate and a reference rate, computed on a notional amount. Credit and market risk exist with respect to these instruments. Exchange traded futures contracts entail daily cash settlement; therefore, the credit risk amount represents a one-day receivable. (d) Commitments to purchase foreign and U.S. currencies are primarily executed for the needs of customers. These foreign exchange contracts are structured similar to interest rate futures and forward contracts. The risk associated with a foreign exchange contract arises from the counterparty's ability to make payment at settlement and that the value of a foreign currency might change in relation to the U.S. dollar. The Corporation's exposure, if any, to counterparty failure equals the current market value of the contract, which at December 31, 1994 and 1993 was $2,275 and $1,160, respectively. Included in fees for international services are net foreign exchange gains of $18,863, $15,979 and $16,887 for the years ended December 31, 1994, 1993 and 1992, respectively. (e) Interest rate swaps generally represent the contractual exchange of fixed and variable rate interest payments based on a notional principal amount and an interest reference rate. Credit risk exists with respect to these instruments arising from the possible failure of the counterparty to make required payments on those contracts which are favorable to the Corporation. The Corporation's exposure to counterparty failure equals the current replacement cost of the contract. At December 31, 1994 and 1993, the replacement cost of the Corporation's interest rate swap contracts was $17,093 and $160,598, respectively. The risk of counterparty failure is controlled by limiting transactions to an approved list of counterparties. In addition, Corestates requires collateral from counter parties when the risk exceeds an acceptable threshold. Net cash received on interest rate swaps during 1994 totaled $99,928. (f) Interest rate caps and floors are written by the Corporation to enable customers to transfer, modify or reduce their interest rate risk. Interest rate caps and floors are similar to interest rate swaps except that payments are made only if current interest rates move above or below a predetermined rate. The risk associated with interest rate caps and floors is an unfavorable change in interest rates. As a writer of interest rate caps and floors, the Corporation receives a premium in exchange for bearing the risk of an unfavorable change in interest rates. The Corporation generally minimizes this risk by entering into offsetting cap and floor positions that essentially counterbalance each other. The Corporation also enters interest rate caps to offset the risk of upward interest rate movement on assets with embedded caps as well as to limit spread risk. As a purchaser of interest rate caps, the Corporation pays a premium in exchange for the right to receive payments if interest rates rise above predetermined levels. Similar to interest rate swaps, credit risk exists with respect to the possible failure of the counterparty to make required payments on those contracts which are favorable to the Corporation. Exposure to counterparty failure equals the current replacement cost of the contract which totalled $20,200 and $5,004, respectively, at December 31, 1994 and 1993. In the normal course of business, the Corporation and its subsidiaries are subject to numerous pending and threatened legal actions and proceedings, some for which the relief or damages sought are substantial. Management does not believe the outcome of these actions and proceedings will have a materially adverse effect on the consolidated financial position of the Corporation. 33 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 16. PROVISION FOR INCOME TAXES The provision for income taxes in the consolidated statement of income consists of the following:
1994 1993 1992 -------- -------- -------- Current: Federal..................................... $106,053 $155,972 $ 85,838 State....................................... 15,652 18,209 11,095 -------- -------- -------- Total domestic........................ 121,705 174,181 96,933 Foreign..................................... 5,558 10,284 4,368 -------- -------- -------- Total current......................... 127,263 184,465 101,301 Deferred Federal and state expense (benefit).. 16,393 (10,656) 26,864 -------- -------- -------- Total provision for income taxes...... $143,656 $173,809 $128,165 ======== ======== ========
The significant components of the Corporation's deferred tax assets and liabilities at December 31, 1994 and 1993 are as follows:
1994 1993 --------- --------- Deferred tax assets: Allowance for loan losses.................... $171,176 $149,097 Postretirement and postemployment benefits... 65,743 56,346 Reserves..................................... 26,616 30,931 Other........................................ 61,108 71,388 -------- -------- Gross deferred tax asset..................... 324,643 307,762 Valuation allowance.......................... (9,102) (9,102) -------- -------- Total deferred tax assets............. 315,541 298,660 -------- -------- Deferred tax liabilities: Auto leasing portfolio....................... 88,570 69,721 FAS 115 fair value accounting................ 5,981 34,916 Partnership investments...................... 744 19,660 Tax over book depreciation................... 18,040 16,689 Affiliate income............................. 17,716 14,924 Other........................................ 9,984 15,692 -------- -------- Total deferred tax liabilities......... 141,035 171,602 -------- -------- Net deferred tax assets........................ $174,506 $127,058 ======== ========
At December 31, 1994 cumulative deductible temporary differences are approximately $928 million and the related deferred tax asset is $325 million. The major components of the temporary differences include $489 million related to the allowance for loan losses and $188 million related to pension, FAS 106 and FAS 112. Cumulative taxable temporary differences related to deferred tax credits at December 31, 1994 are estimated at $403 million and are primarily related to leasing, FAS 115 fair value accounting, affiliate income and depreciation. The related deferred tax liability is $141 million. 34 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) 16. PROVISION FOR INCOME TAXES - (continued) The Corporation has determined that it is not required to establish a valuation reserve for the Federal deferred tax asset since it is more likely than not that the deferred tax asset of $315 million will be principally realized through carryback to taxable income in prior years, and future reversals of existing taxable temporary differences, and to a lesser extent, future taxable income and tax planning strategies. Management believes that future taxable income will be sufficient to realize the benefits of temporary deductible differences that cannot be realized through carryback to prior years or through the reversal of future temporary taxable differences. The Corporation's conclusion that it is "more likely than not" that the deferred tax asset will be realized is based on a history of growth in earnings and the prospects for continued growth including an analysis of potential uncertainties that may affect future operating results. The Corporation will continue to review the tax criteria of "more likely than not", for the recognition of deferred tax assets on a quarterly basis. As required by FAS 109, the Corporation has determined that it is required to establish a $9 million valuation reserve for the deferred tax asset related to pre-affiliation state income taxes. The consolidated effective tax rates are reconciled to the statutory rate as follows:
1994 1993 1992 ----- ----- ----- Statutory rate......................... 35.0% 35.0% 34.0% Difference resulting from: Tax-exempt income.................... (3.4) (3.1) (5.0) State, local and foreign income tax.. 2.6 2.4 2.2 Other, net........................... 2.4 (1.9) 1.1 ---- ---- ---- Effective tax rate..................... 36.6% 32.4% 32.3% ==== ==== ====
Foreign earnings of certain subsidiaries would be taxed only upon their transfer to the United States. Accumulated earnings of insurance subsidiaries would be taxed only to the extent they are distributed as dividends, or exceed limits prescribed by tax laws. No transfers or dividends are contemplated at this time. Taxes payable upon remittance of such accumulated earnings of $22,014 at December 31, 1994 would approximate $7,306. Taxes, other than income taxes, included in other operating expenses for the years ended December 31, 1994, 1993 and 1992 are $70,505, $76,608 and $75,382, respectively. 35 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS: Continued (DOLLAR AMOUNTS IN THOUSANDS) 17. QUARTERLY FINANCIAL DATA (UNAUDITED) The following represents summarized quarterly financial data of the Corporation, which, in the opinion of management, reflects all adjustments (comprising only normal recurring accruals) necessary for a fair presentation:
THREE MONTHS ENDED ------------------------------------------------------------ DEC.31 SEPT.30 JUNE 30 MARCH 31 ------ ------- ------- -------- 1994 - ----- Interest income...................... $517,956 $488,406 $473,956 $449,209 ======== ======== ======== ======== Interest expense..................... $158,709 $136,287 $124,291 $120,871 ======== ======== ======== ======== Net interest income.................. $359,247 $352,119 $349,665 $328,338 ======== ======== ======== ======== Provision for losses on loans........ $ 25,000 $ 25,000 $ 49,995 $146,905 ======== ======== ======== ======== Securities gains..................... $ 4,610 $ 4,223 $ 3,023 $ 6,897 ======== ======== ======== ======== Income (loss) before cumulative effect of a change in accounting principle.......................... $111,475 $104,221 $ 63,091 $(29,995) ======== ======== ======== ======== Cumulative effect of a change in accounting principle............ $ (3,430) ======== Net income (loss).................... $111,475 $104,221 $ 63,091 $(33,425) ======== ======== ======== ======== Net income (loss) per common share... $.78 $.74 $.44(b) $(.21)(a)(b) ==== ==== ==== ===== Average common shares outstanding.... 142,252 141,033 142,139 144,612 ======== ======== ======== ======== 1993 - ---- Interest income...................... $457,021 $464,164 $461,521 $459,158 ======== ======== ======== ======== Interest expense..................... $123,601 $125,930 $129,844 $137,218 ======== ======== ======== ======== Net interest income.................. $333,420 $338,234 $331,677 $321,940 ======== ======== ======== ======== Provision for losses on loans........ $ 29,646 $ 30,005 $ 30,825 $ 30,725 ======== ======== ======== ======== Securities gains (losses)............ $ 10,649 $ 3,306 $ (694) $ 2,849 ======== ======== ======== ======== Income before cumulative effect of a change in accounting principle......................... $ 94,676 $ 96,081 $ 91,391 $ 80,281 ======== ======== ======== ======== Cumulative effect of a change in accounting principle........... $(13,010) ======== Net income........................... $ 94,676 $ 96,081 $ 91,391 $ 67,271 ======== ======== ======== ======== Net income per common share.......... $.65 $.66 $.63 $.55(a) ==== ==== ==== ==== Average common shares outstanding.... 145,372 145,702 145,476 145,109 ======== ======== ======== ========
____________________________________ (a) Based on income before cumulative effect of a change in accounting principle. (b) Reflects after-tax merger-related charges of $.89 per share recorded in the first quarter of 1994 for the Constellation acquisition and $.28 per share recorded in the second quarter for the Independence acquisition. 18. INTERNATIONAL OPERATIONS International operations include the international activities of CBNA and its six overseas branches and two Edge Act subsidiaries. The International Banking group engages in foreign banking and international financing activities including loans, acceptances, time deposits, letter of credit financing and related financial services. Due to the complex nature of the Corporation's businesses and because its revenue from customers domiciled outside the U.S. is recorded in both domestic and foreign offices, it is impossible to segregate with precision the respective contributions to income from the domestic and international operations. As these operations are highly integrated, estimates and subjective assumptions have been made to apportion revenue and expenses between domestic and international operations. Charges for funds used by one segment provided by another segment are based on a pooled cost of purchased funds. Geographic distributions of earnings are based upon average interest earning assets. Expenses are charged to international operations as directly incurred by such activities plus allocated charges consistent with internal allocation policies. Subject to the above limitations, estimates and assumptions, the following tables present information attributable to international operations: 36 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS: CONTINUED (DOLLAR AMOUNTS IN THOUSANDS) 18. INTERNATIONAL OPERATIONS - (continued)
Domestic International Operations Operations Total ----------- -------------- ----------- DECEMBER 31, 1994 Assets(a)................. $27,581,360 $ 1,743,776(b) $29,325,136 =========== =========== =========== Total operating income.................. $ 2,297,773 $ 194,269 $ 2,492,042 =========== =========== =========== Income before income taxes............ $ 349,473 $ 42,975 $ 392,448 =========== =========== =========== Income before cumulative effect of a change in accounting principle.... $ 220,859 $ 27,933 $ 248,792 =========== =========== =========== DECEMBER 31, 1993 Assets(a)................. $26,784,458 $1,650,159 $28,434,617 =========== =========== =========== Total operating income.................. $ 2,258,689 $ 157,205 $ 2,415,894 =========== =========== =========== Income before income taxes............ $ 492,450 $ 43,788 $ 536,238 =========== =========== =========== Income before cumulative effect of a change in accounting principle.... $ 333,967 $ 28,462 $ 362,429 =========== =========== =========== DECEMBER 31, 1992 Assets(a)................. $26,786,725 $1,945,992 $28,732,717 =========== =========== =========== Total operating income.................. $ 2,411,954 $ 160,548 $ 2,572,502 =========== =========== =========== Income before income taxes............ $ 351,224 $ 45,075 $ 396,299 =========== =========== =========== Income before cumulative effect of a change in accounting principle.... $ 238,835 $ 29,299 $ 268,134 =========== =========== ===========
____________________ (a) The Corporation had no material foreign currency position at December 31, 1994, 1993 and 1992. Assets primarily consist of Eurodollar time deposit placements, loans and acceptances with maturities of one year or less. (b) At December 31, 1994, $227,772 of these assets represent LDC risk related to short-term trade finance. 37 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS: Continued (DOLLAR AMOUNTS IN THOUSANDS) 19. FINANCIAL STATEMENTS OF THE PARENT COMPANY Statement of Income
Year Ended December 31, ------------------------------- 1994 1993 1992 --------- --------- --------- REVENUES - -------- Dividends from subsidiaries: Banks........................................... $240,370 $204,393 $151,016 Other subsidiaries.............................. 20,375 14,648 20,527 -------- -------- -------- Total dividends from subsidiaries......... 260,745 219,041 171,543 Interest income from subsidiaries................. 1,702 6,238 6,724 Processing and management fees from subsidiaries 140,558 133,114 128,917 Rental income from subsidiaries................... 2,059 2,059 2,059 Securities gains (losses)......................... (2) (380) 806 Other income...................................... 119 721 828 -------- -------- -------- Total revenues............................... 405,181 360,793 310,877 -------- -------- -------- EXPENSES - -------- Interest on: Funds borrowed.................................. 5,142 2,738 2,311 Long-term debt.................................. 5,323 8,827 18,348 -------- -------- -------- Total interest expense.......................... 10,465 11,565 20,659 Salaries, wages and benefits...................... 79,055 75,031 71,327 Net occupancy..................................... 29,230 29,827 25,995 Equipment expenses................................ 7,520 6,493 3,697 Other operating expenses.......................... 57,352 26,117 29,210 -------- -------- -------- Total expenses............................... 183,622 149,033 150,888 -------- -------- -------- Income before income tax benefit and equity in undistributed income of subsidiaries............ 221,559 211,760 159,989 Income tax benefit................................ (13,715) (2,882) (3,840) -------- -------- -------- Income before equity in undistributed income of subsidiaries................................. 235,274 214,642 163,829 Equity in undistributed income (loss) of subsidiaries: Banks........................................ (52,590) 89,743 3,767 Other subsidiaries........................... 62,678 45,034 17,061 -------- -------- -------- 10,088 134,777 20,828 -------- -------- -------- INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE............................ 245,362 349,419 184,657 Cumulative effect of a change in accounting principle....................................... - - (1,469) -------- -------- -------- NET INCOME........................................ $245,362 $349,419 $183,188 ======== ======== ========
38 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS: Continued (DOLLAR AMOUNTS IN THOUSANDS) 19. FINANCIAL STATEMENTS OF THE PARENT COMPANY - (continued)
Balance Sheet December 31, ------------------------- 1994 1993 ---------- ----------- ASSETS - ------ Cash.............................................. $ 3,893 $ 8,754 Time deposit...................................... 300 300 Investments and receivables-subsidiaries: Investments in subsidiaries at equity in underlying net assets: Banks......................................... 2,279,541 2,116,076 Other subsidiaries............................ 308,130 228,630 ---------- ---------- Total investments in subsidiaries........... 2,587,671 2,344,706 Other........................................... 9,165 69,427 ---------- ---------- Total investments and receivables- subsidiaries.............................. 2,596,836 2,414,133 Investments: securities available-for-sale....... 69,566 55,317 Premises, net of accumulated depreciation......... 6,457 7,187 Other assets...................................... 9,282 5,823 ---------- ---------- Total assets................................ $2,686,334 $2,491,514 ========== ========== LIABILITIES - ----------- Funds borrowed - subsidiaries..................... $ 246,609 Dividends payable................................. 50,152 $ 35,171 Other liabilities................................. 28,208 7,821 Long-term debt.................................... 11,251 80,138 ---------- ---------- Total liabilities............................ 336,220 123,130 SHAREHOLDERS' EQUITY - -------------------- Total shareholders' equity................... 2,350,114 2,368,384 ---------- ---------- Total liabilities and shareholders' equity... $2,686,334 $2,491,514 ========== ==========
The approval of the Comptroller of the Currency is required for a nationally chartered bank to pay dividends if the total of all dividends declared in any calendar year exceeds the bank's net profits (as defined) for that year combined with its retained net profits for the preceding two calendar years. Under this formula, CBNA and CBD can declare dividends without approval of the Comptroller of the Currency of approximately $139 million and $18 million, respectively, plus an additional amount equal to CBNA's and CBD's retained net profits for 1995 up to the date of any such dividend declaration. Due to merger-related charges recorded in 1994 by Constellation, which was merged into NJNB,NJNB is unable to pay dividends without the prior approval of the Comptroller of the Currency. The Federal Reserve Act requires that extensions of credit by CBNA and NJNB to certain affiliates, including the Corporation, be secured by specified amounts and types of collateral, that extensions of credit to any such affiliate generally be limited to 10% of capital and surplus (as defined) and that extensions of credit to all such affiliates be limited to 20% of capital and surplus. The Corporation has guaranteed certain borrowings of its subsidiaries at December 31, 1994 in the amount of $2,577,507, which includes $852,922 for commercial paper. The maturities for parent company long-term debt for the years ending December 31, 1995 through 1999 are: $1,133; $1,234; $1,345; $1,465; and $1,596, respectively. 39 CORESTATES FINANCIAL CORP AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS: CONTINUED (DOLLAR AMOUNTS IN THOUSANDS) 19. FINANCIAL STATEMENTS OF THE PARENT COMPANY - (continued)
Statement of Cash Flows Year Ended December 31, ------------------------------------------------ 1994 1993 1992 ---------- ---------- ---------- OPERATING ACTIVITIES Net income........................................ $ 245,362 $ 349,419 $ 183,188 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed income of subsidiaries............ (10,088) (143,393) (32,823) Cumulative effect of a change in accounting principle.......................... - - 1,469 Securities (gains) losses....................... 2 380 (806) Depreciation and amortization................... 1,524 938 1,328 Deferred income tax expense (benefit)........... (5,428) 1,692 (1,563) Decrease in interest receivable................. - 96 291 Increase (decrease) in interest payable......... (419) 1,082 60 Increase (decrease) in due to subsidiaries...... 23,978 (6,875) (47,695) Other........................................... (9,666) (4,085) 14,223 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES...... 245,265 199,254 117,672 --------- --------- --------- INVESTING ACTIVITIES Purchase of Germantown Savings Bank............... (108,061) - - Investment in subsidiaries........................ (96,860) (5,460) (72,240) (Increase) decrease in receivables from subsidiaries..................................... 53,862 (16,962) 11,142 Purchases of investment securities................ (202,309) (483,551) (232,313) Proceeds from maturities and sales of investment securities...................................... 188,028 453,002 292,956 Premises and equipment expenditures............... - (188) (271) Return of capital from subsidiaries............... 81,000 42,579 42,165 --------- --------- --------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES................................... (84,340) (10,580) 41,439 --------- --------- --------- FINANCING ACTIVITIES Retirement of long-term debt...................... (45,488) (20,940) (18,407) Net increase (decrease) in financing from subsidiaries..................................... 246,609 (69,092) (80,849) Proceeds from public issuance of common stock..... - - 67,581 Cash dividends paid............................... (160,122) (143,334) (126,265) Purchase of treasury stock........................ (228,963) (29,449) (1,480) Other............................................. 22,178 29,538 51,093 --------- --------- --------- NET CASH USED IN FINANCING ACTIVITIES........ (165,786) (233,277) (108,327) --------- --------- --------- INCREASE (DECREASE) IN CASH AND DUE FROM BANKS................................. (4,861) (44,603) 50,784 Cash and due from banks at January 1,........ 8,754 53,357 2,573 --------- --------- --------- CASH AND DUE FROM BANKS AT DECEMBER 31....... $ 3,893 $ 8,754 $ 53,357 ========= ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest........................................ $ 10,884 $ 10,712 $ 15,965 ========= ========= ========= Income taxes.................................... - - - ========= ========= =========
20. JOINT VENTURE On December 4, 1992, the Corporation entered into a joint venture with three other banking companies creating Electronic Payment Services, Inc. ("EPS"). The joint venture combines the partners' separate consumer electronic transaction processing businesses and provides automated teller machine ("ATM") and electronic point-of-sale ("POS") processing services. The Corporation contributed to EPS its wholly-owned subsidiaries Money Access Service Inc. ("MAC"), a regional ATM network, and BUYPASS Corporation, a third- party processor of electronic POS transactions. The Corporation has equal ownership with two partners in the joint venture, each with 31%. The fourth partner owns 7%. As part of the transaction, the Corporation received a cash payment of $79,350 and $245,400 of EPS 5% cumulative redeemable preferred stock. The exchange of assets involved in the transaction resulted in a pre-tax gain to the Corporation of $41,072, $25,670 after-tax, which was recorded in other operating income for the year ended December 31, 1992. The exchange also generated a deferred gain of approximately $138,000. 40 CORESTATES FINANCIAL CORP AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 20. JOINT VENTURE - continued In December 1993, the Corporation and EPS mutually agreed to enter into a recapitalization of EPS involving the EPS preferred stock held by the Corporation. In exchange for substantially all of the preferred stock, the Corporation received from EPS a ten-year 6.45% note providing for equal principal payments over the life of the note. The recapitalization does not affect the amount of deferred gain, but changes the timing of deferred gain income recognition from a five-year period beginning in 1996 to a ten-year period beginning in 1994. The Corporation's net investment in EPS, $60,610 at December 31, 1994, is included in other assets. "Income from investment in EPS, Inc.", which is included in Non-interest Income, reflects the Corporation's 31% share in EPS net income, interest income on the $250,000 note and $13,666 for recognition of the deferred gain in 1994. 41 REPORT OF INDEPENDENT AUDITORS THE BOARD OF DIRECTORS AND SHAREHOLDERS CORESTATES FINANCIAL CORP We have audited the accompanying consolidated balance sheets of CoreStates Financial Corp as of December 31, 1994 and 1993, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the 1993 and 1992 financial statements of Constellation Bancorp and Independence Bancorp, Inc., which statements reflect total assets constituting 17.2% of the related consolidated totals as of December 31, 1993, and net interest income constituting 15.6% of the related consolidated totals for each of the years ended December 31, 1993 and 1992. Those statements were audited by other auditors whose reports thereon have been furnished to us, and our opinion, insofar as it relates to data included for Constellation Bancorp and Independence Bancorp, Inc., is based solely on the reports of other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CoreStates Financial Corp at December 31, 1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in Note 1 to the financial statements, in 1994 and 1993 the Company changed its method of accounting for certain investments in debt and equity securities, in 1993 the Company changed its method of accounting for post- employment benefits, and in 1992 the Company changed its methods of accounting for income taxes and for post-retirement benefits other than pensions. /s/Ernst & Young LLP Philadelphia, Pennsylvania February 7, 1995 42 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders of Constellation Bancorp: We have audited the consolidated statement of condition of Constellation Bancorp and subsidiaries as of December 31, 1993 and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the years in the two-year period ended December 31, 1993 (not presented separately herein). These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Constellation Bancorp and subsidiaries at December 31, 1993 and 1992 and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1993, in conformity with generally accepted accounting principles. As explained in Note 1 to the consolidated financial statements, Constellation Bancorp adopted the provisions of the Financial Accounting Standards Board's Statements of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions," No. 109, "Accounting for Income Taxes," and No. 115, "Accounting for Certain Investments in Debt and Equity Securities," in 1993. As discussed in Note 1, the accompanying 1993 Consolidated Financial Statements have been restated to remove certain merger related charges. /s/ KPMG Peat Marwick LLP Short Hills, New Jersey March 16, 1994, except as to the third paragraph of Note 1 and the last paragraph of Note 16, which are as of July 19, 1994 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Independence Bancorp, Inc. We have audited the consolidated balance sheet of Independence Bancorp. Inc. and Subsidiaries as of December 31, 1993 and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the two years in the period ended December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Independence Bancorp, Inc. and Subsidiaries at December 31, 1993 and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. As discussed in the notes to the Consolidated Financial Statements, the Company changed its method of accounting for investments in 1993 and method of accounting for income taxes in 1992. /s/ Coopers & Lybrand L.L.P. January 19, 1994 2400 Eleven Penn Center Philadelphia, Pennsylvania EX-99.2 2 CONSOLIDATED BALANCE SHEET Exhibit 99.2 CORESTATES FINANCIAL CORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
September 30, 1995 ------------- (Unaudited) ASSETS - ------ Cash and due from banks........................... $ 2,214,933 Time deposits, principally Eurodollars............ 1,755,526 Investments held-to-maturity (fair value: $1,756,417)...................................... 1,745,784 Investments available-for-sale, at fair value........................................... 390,828 Loans, net of unearned discounts of $129,728 (Note C)............................... 21,168,026 Less: Allowance for loan losses................ (501,392) ------------- Net loans.................................... 20,666,634 ------------- Federal funds sold and securities purchased under agreements to resell............ 294,916 Trading account securities, at fair value........................................... 349 Due from customers on acceptance.................. 493,212 Premises and equipment............................ 427,003 Other assets...................................... 856,547 ------------- Total assets................................. $28,845,732 ============= LIABILITIES - ----------- Deposits: Domestic: Non-interest bearing......................... $ 6,051,497 Interest bearing............................. 13,718,685 Overseas branches and subsidiaries.............. 923,930 ------------- Total deposits............................... 20,694,112 Funds borrowed.................................... 2,245,238 Bank acceptances outstanding...................... 490,520 Other liabilities................................. 1,238,126 Long-term debt.................................... 1,861,946 ------------- Total liabilities............................ 26,529,942 ------------- COMMITMENTS AND CONTINGENT LIABILITIES (Note D) - -------------------------------------- SHAREHOLDERS' EQUITY - -------------------- Preferred stock: authorized 10.0 million shares; no shares issued................................ - Common stock: $1 par value; authorized 200.0 million shares; issued 145.875 million shares (including treasury shares of 6.966 million)........................ 2,315,790 ------------- Total shareholders' equity................... 2,315,790 ------------- Total liabilities and shareholders' equity..................................... $28,845,732 =============
See accompanying notes to the consolidated financial statements. 3 EX-99.3 3 CONSOLIDATED STATEMENT OF INCOME Exhibit 99.3 CORESTATES FINANCIAL CORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (in thousands, except per share amounts)
Year Ended December 31, ----------------------------------- INTEREST INCOME 1994 1993 1992 ----------- ---------- ---------- Interest and fees on loans: Taxable income..................................... $1,675,532 $1,553,865 $1,609,209 Tax exempt income.................................. 22,818 31,150 38,554 Interest on investment securities: Taxable income..................................... 140,379 185,866 216,074 Tax exempt income.................................. 16,552 19,304 22,777 Interest on time deposits in banks................... 66,389 44,340 58,613 Interest on Federal funds sold, securities purchased under agreements to resell and other............... 7,857 7,339 16,611 ----------- ---------- ---------- Total interest income............................ 1,929,527 1,841,864 1,961,838 ----------- ---------- ---------- INTEREST EXPENSE Interest on deposits: Domestic savings................................... 139,703 149,094 230,166 Domestic time (Note 9)............................. 196,869 212,471 311,970 Overseas branches and subsidiaries................. 28,286 18,248 28,319 ----------- ---------- ---------- Total interest on deposits....................... 364,858 379,813 570,455 Interest on short-term funds borrowed (Note 10)...... 85,123 67,001 60,480 Interest on long-term debt (Note 11)................. 90,177 69,779 78,425 ----------- ---------- ---------- Total interest expense........................... 540,158 516,593 709,360 ----------- ---------- ---------- Net interest income.............................. 1,389,369 1,325,271 1,252,478 Provision for losses on loans (Note 7)............... 246,900 121,201 160,250 ----------- ---------- ---------- Net interest income after provision for losses on loans................................. 1,142,469 1,204,070 1,092,228 ----------- ---------- ---------- NON-INTEREST INCOME Service charges on deposit accounts.................. 180,676 179,428 163,132 Trust income......................................... 97,362 101,793 96,731 Fees for international services...................... 79,682 69,432 60,247 Debit and credit card fees........................... 64,585 61,717 152,078 Income from investment in EPS, Inc. (Note 20)........ 31,800 13,159 - Gains on trading account securities.................. 2,347 2,254 1,836 Securities gains (Note 5)............................ 18,753 16,110 13,805 Other gains (Notes 6 and 20)......................... 1,900 11,000 41,072 Other operating income............................... 90,435 119,137 81,763 ----------- ---------- ---------- Total non-interest income........................ 567,540 574,030 610,664 ----------- ---------- ---------- NON-FINANCIAL EXPENSES Salaries, wages and benefits (Notes 12 and 13)....... 631,134 622,969 627,904 Net occupancy (Notes 8 and 14)....................... 117,516 114,951 112,765 Equipment expenses (Note 8).......................... 77,098 74,844 85,589 Other operating expenses (Note 16)................... 491,813 429,098 480,335 ----------- ---------- ---------- Total non-financial expenses..................... 1,317,561 1,241,862 1,306,593 ----------- ---------- ---------- INCOME BEFORE INCOME TAXES....................... 392,448 536,238 396,299 Provision for income taxes (Note 16)................. 143,656 173,809 128,165 ----------- ---------- ---------- INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE.............................. 248,792 362,429 268,134 Cumulative effect of a change in accounting principle, net of income tax benefits of $1,846 in 1994, $7,005 in 1993 and $43,760 in 1992........ (3,430) (13,010) (84,946) ----------- ---------- ---------- NET INCOME..................................... $ 245,362 $ 349,419 $ 183,188 =========== ========== ========== PER COMMON SHARE DATA (Based on weighted average shares outstanding of 142.498 million in 1994, 145.398 million in 1993, and 135.813 million in 1992).......................................... Income before cumulative effect of a change in accounting principle.............................. $1.75 $2.49 $1.97 ===== ===== ===== Net Income.......................................... $1.73 $2.40 $1.35 ===== ===== ===== Cash dividends declared............................. $1.24 $1.14 $1.02 ===== ===== =====
See accompanying notes to the financial statements. 11 -----END PRIVACY-ENHANCED MESSAGE-----