Item 1 - Business
CoreStates Financial Corp ("CoreStates") is a bank holding company registered under the Federal Bank Holding Company Act of 1956, as amended (the "Act") and incorporated under the laws of Pennsylvania. At December 31, 1996, CoreStates had total consolidated assets of approximately $45.5 billion and shareholders' equity of approximately $3.7 billion. Based on December 31, 1996 rankings of bank holding companies by total consolidated assets, CoreStates was believed to be the 21st largest bank holding company in the United States at such date.
Effective April 9, 1996, Meridian Bancorp, Inc. ("Meridian"), a regional bank holding company headquartered in Reading, Pennsylvania, was merged with and into CoreStates. Approximately 81.1 million shares of CoreStates' common stock were issued in connection with the merger, which was accounted for as a pooling of interests. Accordingly, all financial information has been restated as if the entities were combined for all periods presented. On February 23, 1996, United Counties Bancorporation ("United Counties"), a $1.6 billion asset New Jersey bank holding company, was merged with and into Meridian in a transaction also accounted for as a pooling of interests.
The in-market acquisition of Meridian has combined two solidly performing banking organizations, and has strengthened CoreStates' market positions in consumer, small business and middle market banking in eastern Pennsylvania, northern Delaware, and central and southern New Jersey. Operating efficiencies achieved in 1996 as a result of the merger were approximately $47 million on a pre-tax basis.
Banking Subsidiaries
The lead banking subsidiary of CoreStates is CoreStates Bank, N.A. ("CoreStates Bank"), a national banking association with executive offices located in Philadelphia, Pennsylvania. In its continuing effort to streamline and eliminate duplicate services, and to further the goal of effectively consolidating all acquisitions under the CoreStates name, CoreStates proceeded throughout 1996 on a course of merger activity related to the
acquired entities. Accordingly, on February 23, 1996, United Counties Trust Company merged with and into Meridian Bank, New Jersey. On June 14, l996, Meridian Bank, New Jersey, merged with and into New Jersey National Bank ("NJNB"), a national bank with executive offices located in Ewing Township, New Jersey. On June 27, 1996, Meridian Bank merged with and into CoreStates Bank. Finally, on December 6, 1996, NJNB merged with and into CoreStates Bank. Related to this merger process, the former Meridian Pennsylvania and Delaware banking branches were consolidated into CoreStates' branch system in the third quarter of 1996 and the former Meridian and United Counties New Jersey branches were consolidated into CoreStates' system in the fourth quarter of 1996.
CoreStates Bank of Delaware, N.A. ("CBD"), a national banking association with its executive office located in New Castle County, Delaware, remains as a principal banking subsidiary of CoreStates. CoreStates Bank and CBD are sometimes referred to herein as the "Banking Subsidiaries". Through CoreStates Bank and CBD, CoreStates engages in the business of providing wholesale banking services, consumer financial services which includes retail banking, and trust & investment management services.
As of December 31, 1996, the Banking Subsidiaries operated from 571 full service offices located in eastern and central Pennsylvania and New Jersey and one office located in Delaware. CoreStates Delaware, N.A. operated from one office located in Delaware. CoreStates Bank also operates from 5 foreign branch offices and 23 foreign representative offices.
Other Significant Subsidiaries and Affiliated Companies
Congress Financial Corporation ("Congress"), a majority-owned subsidiary of ------------------------------ CoreStates, and its subsidiaries are engaged in commercial financing and factoring with headquarters in New York City and offices in Atlanta, Boston, Chicago, Columbia, Dallas, Los Angeles, Miami, Milwaukee, Portland, Toronto and San Juan. As of December 31, 1996, factored receivables of Congress and its subsidiaries totaled $411 million while outstanding commercial finance obligations and other receivables totaled $2,270 million.
CoreStates Capital Corp ("Capital") is CoreStates' designated financing ----------------------- entity to obtain both short-term and long-term financing
for CoreStates and its subsidiaries. At December 31, 1996, Capital had outstanding commercial paper in the aggregate principal amount of $625 million and debt securities in the aggregate outstanding principal amount of $2,329 million, with maturities ranging from 1 month to 10 years.
CoreStates Delaware, N.A. ("CS Delaware") is a national bank subsidiary of ------------------------- CoreStates which in 1995 opened a specialized consumer credit and education financing business at one location in Delaware under the registered trade name of The LearningCurve. As of December 31, 1996, CS Delaware had outstanding accounts receivable of approximately $3.0 million.
Electronic Payment Services, Inc. ("EPS") is a joint venture formed in late --------------------------------- 1992 that combined the separate consumer electronic transaction processing businesses of CoreStates, Banc One Corporation, PNC Financial Corp. and KeyCorp (formerly Society Corporation) into the nation's leading provider of automated teller machine and point of sale processing services to individuals, financial institutions and retail stores. On March 27, 1995, National City Corporation was admitted as an additional partner.
Other Subsidiaries. CoreStates also has several other direct and indirect ------------------- subsidiaries including companies engaged in discount brokerage services, processing services, investment advisory services, lease financing activities, holding real property facilities used by CoreStates' Banking Subsidiaries and companies created solely to facilitate the business of other subsidiaries.
Core Business Sectors. For analytical purposes, management has focused ---------------------- CoreStates into five core business sectors: Global and Specialized Banking; Regional Banking; Retail Credit Services; Trust and Asset Management; and Third Party Processing. Further information regarding CoreStates' five core business sectors is presented in Management's Discussion and Analysis of Financial Condition and Results of Operations at pages 13 through 15 of the CoreStates Annual Report to Shareholders for the fiscal year ended December 31, 1996 (Exhibit 13 pages 9 through 13), which pages of the Annual Report are incorporated herein by reference. A brief discussion of the five core businesses is presented below. There is considerable inter-relationship among these businesses.
Global and Specialized Banking. Global and Specialized -------------------------------
banking services are provided through the Banking Subsidiaries and Congress and include the following business lines: Specialized Banking, Secured Lending, Real Estate, Large Corporate Banking, Congress, International Banking, Investment Banking and Cash Management. Domestic financing services include commercial, industrial and real estate loans; the financing of receivables, inventory and equipment; derivative market activities to provide risk management services for customers; and the provision of financial services for correspondent banks. Foreign and international financial services include the making of loans; banker's acceptance financing; the issuance and confirmation of letters of credit; check and funds clearings, and related financial services. Also provided are transaction processing services, including cash management, lock box, funds transfer and collection and disbursement management on both a domestic and an international basis.
International activities are conducted directly by CoreStates Bank through its head office in Philadelphia and 28 foreign offices. In addition, international banking and financing activities are conducted through two wholly- owned Edge Act subsidiaries with five offices.
Advisory services are also provided which relate to loan syndications, private placements, mergers and acquisitions, company valuations and other similar matters. The Global and Specialized banking business also deals in and underwrites obligations of the United States Government and Federal agencies and general obligations of states, municipalities and political sub-divisions and assists individual corporate customers as well as other institutions with the purchase and sale of all types of marketable securities.
Regional Banking This core business is provided by the Banking ---------------- Subsidiaries and includes the following business lines: Retail Banking and Delivery, Small Business Lending and Middle Market Lending. Retail Banking services are offered through the branch network of the Banking Subsidiaries in Pennsylvania, New Jersey, and Delaware. This branch banking network provides a full range of products including deposit, loan and related financial products, primarily on a full relationship basis.
Trust & Asset Management This core business provides products ------------------------
through four business lines: Institutional Trust; Personal Trust; Private Banking; and Investment Management. Meridian's corporate trust business was sold in the fourth quarter of 1996. The products of the four business lines are offered through the Banking Subsidiaries and include fiduciary administration and transaction processing services. CoreStates Investment Advisers, Inc. provides investment management services.
Retail Credit Services This core business includes the following major ---------------------- business lines: Credit Card, Dealer Services, Educational Lending, Mortgage Services and Card Linx (CoreStates' merchant credit card processing business).
Third Party Processing This core business includes the QuestPoint ---------------------- processing companies, all wholly-owned entities, and earnings from CoreStates' investment in Electronic Payment Services, Inc. ("EPS"). The QuestPoint companies include: QuestPoint Check Services, L.P. (formerly known as Transys)-- a provider of check processing and payment services to CoreStates and other financial institutions; QuestPoint Remittance Services, L.P. (formerly CashFlex, L.P.)--a leading supplier of remittance processing services nationwide to corporations, CoreStates, and other financial institutions; and SynapQuest--a provider of retail credit card processing services to CoreStates and other financial institutions. On November 7, 1996, QuestPoint acquired five check processing centers from the Bisys Group, Inc. The acquisition enhances QuestPoint's position as a national check processing company and provides an expanded customer base for other QuestPoint products.
Government Supervision and Regulation
General CoreStates is a bank holding company within the meaning of the Act ------- and is registered as such with the Federal Reserve Board. As a bank holding company, CoreStates is also subject to regulation by applicable state regulatory authorities. The Banking Subsidiaries are national banks and are subject to regulation, supervision and regular examination by the OCC, as well as regulation by the Federal Deposit Insurance Corporation ("FDIC").
Bank holding companies and banks are extensively regulated under both federal and state law. The regulation and supervision
of CoreStates and the Banking Subsidiaries are designed primarily for the protection of depositors and not the respective institutions or their stockholders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. A change in applicable law or regulation may have a material effect on the business of CoreStates.
CoreStates is required to file an annual report with the Federal Reserve Board containing such information as the Federal Reserve Board may require pursuant to the Act. Copies of annual and other periodic reports are also required to be filed with the applicable state regulatory authorities. The Act requires each bank holding company to obtain the prior approval of the Federal Reserve Board before it may acquire substantially all of the assets of any bank, or before it may acquire ownership or control of any voting shares of any bank, if, after such acquisition, it would own or control, directly or indirectly, more than 5% of the voting shares of such bank. The Act also restricts the types of businesses and operations in which a bank holding company and its non- bank subsidiaries may engage. Generally, permissible activities are limited to banking and activities found by the Federal Reserve Board to be so closely related to banking as to be a proper incident thereto.
The operations of the Banking Subsidiaries are subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be made and limits upon the types of services which may be offered. Various consumer laws and regulations also affect the operations of the Banking Subsidiaries. Regulatory approvals are required for branching and for bank mergers.
Capital Guidelines A discussion of capital guidelines and capital strength ------------------ is included in Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 15 and 16 of the CoreStates Annual Report to Shareholders for the fiscal year ended December 31, 1996 (Exhibit 13 pages 14 and 15) and in Footnote 6 "Regulatory and Capital Matters" on page 46 of the CoreStates Annual Report to Shareholders (Exhibit 13 pages 62 and 63), which pages of the Annual Report are incorporated herein
by reference.
Potential Enforcement Actions Bank holding companies and national banks ----------------------------- and their institution-affiliated parties may be subject to potential enforcement actions by the Federal Reserve Board, the OCC or the FDIC for unsafe or unsound practices in conducting their businesses, or for violations of any law, rule or regulation or provision, any consent order with any agency, any condition imposed in writing by the agency or any written agreement with the agency. Non- bank holding companies may also be subject to enforcement actions by state regulatory authorities. Enforcement actions may include the imposition of a conservator or receiver, additional cease-and-desist orders and written agreements, the termination of insurance of deposits, the imposition of civil money penalties, and removal and prohibition orders against institution- affiliated parties and the suspension or revocation of state-mandated lending or other licenses.
Dividends CoreStates is a legal entity separate and distinct from its --------- Banking Subsidiaries and other subsidiaries. CoreStates' principal source of revenue consists of dividends from its bank and non-bank subsidiaries.
Provisions of Federal banking law restrict the amount of dividends that can be paid to CoreStates by the Banking Subsidiaries. Under applicable Federal law, no dividends may be paid in an amount greater than "undivided profits then on hand," after deduction therefrom of certain loan losses. In addition, for each of the Banking Subsidiaries, prior approval of the Comptroller is required if the total of all dividends declared by a subsidiary bank in any calendar year will exceed its net profits (as defined) for that year, combined with its retained net profits for the preceding two calendar years. Based on these regulations, CoreStates Bank and CBD can declare dividends without approval of the Comptroller of the Currency of approximately $112,000,000 and $18,000,000, respectively, plus an additional amount equal to CoreStates Bank's and CBD's retained net profits for 1997 up to the date of any such dividend declaration. See Footnote 6 "Regulatory and Capital Matters" on page 46 of the CoreStates Annual Report to Shareholders (Exhibit 13 pages 62 and 63) which pages of the Annual Report are incorporated herein by reference.
The payment of dividends by each of CoreStates and the Banking Subsidiaries may also be affected by other factors, such as the maintenance of adequate capital. For example, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") generally prohibits an undercapitalized institution from paying dividends. In addition, if, in the opinion of the applicable regulatory authority, a bank holding company or a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), such authority may require, after notice and hearing, that such organization cease and desist from such practice. The Federal Reserve Board, the OCC and the FDIC have issued policy statements which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings.
Support of Bank Subsidiaries A depository institution insured by the FDIC ---------------------------- can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC after August 9, 1989 in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default. "Default" is defined generally as the appointment of a conservator or receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that a "default" is likely to occur in the absence of regulatory assistance.
Under Federal Reserve Board regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve Board's policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board regulations or both. This
doctrine is commonly known as the "source of strength" doctrine.
Federal law provides for the enforcement of any pro rata assessment of shareholders of a national bank to cover impairment of capital stock by sale, to the extent necessary, of the stock of any assessed shareholder failing to pay the assessment.
Borrowings by Holding Companies Federal law prevents CoreStates and ------------------------------- certain of its affiliates from borrowing from its banking subsidiaries unless such borrowings are secured by specified amounts and types of collateral. Additionally, each such secured loan to an affiliate is generally limited to an amount not exceeding 10% of the bank's capital and surplus, and all such loans between the lending bank and its affiliates are limited to an amount not to exceed 20% of the lending bank's capital and surplus. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services.
FDICIA ------
Insurance Premiums Deposits of the Banking Subsidiaries are insured by the ------------------ FDIC and are subject to FDIC insurance assessments. The Deposits Insurance Fund Act of 1996 ("Funds Act") became effective on September 30, 1996. A special one- time assessment was made on institutions carrying Savings Association Insurance Fund ("SAIF") insured deposits. Pursuant to this assessment, CoreStates in the third quarter of 1996 expensed $14.2 million pre-tax, or $8.9 million after-tax, for this special assessment on its SAIF insured deposits. In general, effective SAIF rates range from 0 to 27 basis points as of October 1, 1996. In general, effective Bank Insurance Fund ("BIF") rates range from 0 to 27 basis points as of October 1, 1996. Limited adjustments in the base assessment rates for both the SAIF and for the BIF may be done by rulemaking without notice and comment. In general, the range of assessment is dependent upon capitalization and other risk factors related to the institution. Each of the Banking Subsidiaries has been notified by the FDIC that, for the semiannual assessment period beginning January 1, 1997, each is subject to a BIF semi-annual assessment rate of .00648% and a SAIF semi-annual assessment rate of .0324%. Deposits in the Banking Subsidiaries subject to the SAIF assessment were approximately $3 billion at December 31, 1996; and deposits in the Banking Subsidiaries subject to the BIF assessment were approximately $28 billion at December 31, 1996.
Prompt Corrective Action FDICIA requires Federal banking agencies to ------------------------ broaden the scope of regulatory corrective action taken with respect to depository institutions that do not meet minimum capital requirements and to take such actions promptly in order to minimize losses to the FDIC. In connection with FDICIA, Federal banking agencies are required to establish capital measures (including both a leverage measure and a risk-based capital measure) and to specify for each capital measure the levels at which depository institutions will be considered "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" or "critically undercapitalized".
Under FDICIA, the Federal banking regulators have adopted regulations establishing relevant capital measures and relevant capital levels. The relevant capital measures are the Total Capital to risk adjusted assets ratio, Tier 1 Capital to risk
adjusted assets ratio and the leverage ratio. Under these regulations, a bank will be (i) "well capitalized" if it has a Total Capital to risk adjusted assets ratio of 10% or greater, a Tier 1 Capital to risk adjusted assets ratio of 6% or greater and a leverage ratio of 5% or greater and is not subject to any order or written directive by its primary Federal regulator to meet and maintain a specific capital level for any capital measure; (ii) "adequately capitalized" if it has a Total Capital to risk adjusted assets ratio of 8% or greater, a Tier 1 Capital to risk adjusted assets ratio of 4% or greater and a leverage ratio of 4% or greater (3% in certain circumstances) and is not well capitalized; (iii) "undercapitalized" if it has a Total Capital to risk adjusted assets ratio of less than 8%, a Tier 1 Capital to risk adjusted assets ratio of less than 4% or a leverage ratio of less than 4% (3% in certain circumstances); (iv) "significantly undercapitalized" if it has a Total Capital to risk adjusted assets ratio of less than 6%, a Tier 1 Capital to risk adjusted assets ratio of less than 3% or a leverage ratio of less than 3%; and (v) "critically undercapitalized" if its tangible equity is equal to or less than 2% of average quarterly tangible assets. Each of the Banking Subsidiaries is considered well capitalized.
FDICIA authorizes the appropriate Federal banking agency, after notice and an opportunity for a hearing, to treat a well capitalized, adequately capitalized or undercapitalized insured depository institution as if it had a lower capital-based classification if it is in an unsafe or unsound condition or engaging in an unsafe or unsound practice. Thus, an adequately capitalized institution can be subjected to the restrictions on undercapitalized institutions described below (except that a capital restoration plan cannot be required of the institution) and an undercapitalized institution can be subjected to the restrictions applicable to significantly undercapitalized institutions described below.
FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to growth limitations and are required to submit a capital restoration plan. The Federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on
realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, for a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to five percent of the depository institution's total assets at the time it became undercapitalized, and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a Federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized institutions are subject to the appointment of a receiver or conservator.
Brokered Deposits Under FDICIA, a bank cannot accept brokered deposits ----------------- (which term is defined to include payment of an interest rate more than 75 basis points above prevailing rates) unless (i) it is well capitalized or (ii) it is adequately capitalized and receives a waiver from the FDIC. A bank that cannot receive brokered deposits also cannot offer "pass-through" insurance on certain employee benefit accounts. In addition, a bank that is adequately capitalized may not pay an interest rate on any deposits in excess of 75 basis points over certain prevailing market rates. There are no such restrictions on a bank that is well capitalized. Each of the CoreStates Banking Subsidiaries is well capitalized for purposes of the foregoing.
Safety and Soundness Standards Pursuant to FDICIA each of the Federal bank ------------------------------ regulatory agencies has adopted the Interagency Guidelines Establishing Standards for Safety and Soundness (the
"Guidelines"). The Guidelines contain standards relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and employee compensation, fees and benefits and standards specifying minimum earnings sufficient to absorb losses without impairing capital, to the extent feasible a minimum ratio of market value to book value for publicly traded shares and such other standards relating to the foregoing as it deems appropriate. An institution that fails to comply with such standards will be required to submit a plan designed to achieve such compliance. If no such plan is submitted or a failure to implement such a plan exists, the depository institution would become subject to additional regulatory action or enforcement proceedings.
Other FDICIA also contains a variety of other provisions that may affect ----- the operations of bank holding companies and banks, including various reporting requirements, revised regulatory standards for real estate lending, "truth in savings" provisions and the requirement that a depository institution give 90 days' prior notice to customers and regulatory authorities before closing any branch.
Interstate Banking and Branching Legislation
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Riegle-Neal") eliminated many restrictions on interstate banking and branching. Riegle-Neal authorized, as of September 29, 1995, interstate acquisitions of banks by bank holding companies without geographic limitations. Beginning June 1, 1997, the legislation will allow interstate branching in states that have not passed legislation prohibiting interstate branching, except that de novo branching or acquisition of a branch in another state without acquisition of the entire bank will only be permitted if expressly permitted by the law of the state in which such branch would be located. Interstate branching prior to June 1, 1997 is possible in states that pass laws affirmatively authorizing such interstate branching. As of December 31, 1996 Pennsylvania, New Jersey and Delaware have enacted such legislation. Although, under certain circumstances, national banks located in different states have been permitted to merge under authority of the National Bank Act, prior to the Riegle-Neal legislation other types of interstate acquisitions of banks had required affirmative authorization in state law, and interstate branching had been
possible only to a very limited degree.
Securities and Related Regulation
The Corporation's subsidiaries engaged in securities-related activities are regulated by the Securities and Exchange Commission ("SEC"). The activities of the Corporation's two subsidiaries which are registered broker dealers are also monitored by the Federal Reserve Board. Each such company is also subject to rules and regulations promulgated by the National Association of Securities Dealers, Inc., the Securities Investors Protection Corporation and various state securities commissions and with respect to public finance activities the Municipal Securities Rulemaking Board.
Non-bank subsidiaries of CoreStates that are registered as investment advisers are subject to the regulations of the SEC and may be subject to regulations of one or more state securities commissions. Additionally, an investment adviser which is a subsidiary of a national bank is subject to supervision by the OCC. Investment Companies (as defined in the Investment Company Act of 1940, as amended) advised by an investment adviser subsidiary of CoreStates are registered with the SEC.
Legislative and Regulatory Proposals and Reforms
The banking industry is a frequent subject of legislative and regulatory proposals and reforms. In 1996, some of these reform measures included the possibility for non-bank subsidiaries to engage in activities not permissible for the parent national bank to conduct directly. Early in 1997, the Federal Reserve Board issued proposals which would expand the ability of bank holding companies to engage in securities underwriting and dealing. It is premature to predict what effect, if any, measures such as these may have on CoreStates and its subsidiaries.
Competition
The activities in which CoreStates and the Banking Subsidiaries engage are highly competitive. Generally, the lines of activity and markets served involve competition with other banks and non-bank financial institutions, as well as other entities which offer financial services, located both within and without the
United States. The methods of competition center around various factors, such as customer services, interest rates on loans and deposits, lending limits and location of offices.
The five core business segments in the markets served by the Banking Subsidiaries and EPS are highly competitive and the Banking Subsidiaries and EPS compete with other commercial banks, savings and loan associations and other businesses which provide services similar to those offered by the Banking Subsidiaries and EPS. The Banking Subsidiaries actively compete in Global and Specialized Banking with local, regional and international banks and non-bank financial organizations, some of which are significantly larger than the Banking Subsidiaries. In providing consumer financial services (Regional Banking and Retail Credit Services), the Banking Subsidiaries' competitors include other banks, savings and loan associations, credit unions, regulated small loan companies and other non-bank organizations offering financial services. In providing Trust and Asset Management services, the Banking Subsidiaries compete with other banks, investment counselors and insurance companies in national markets for institutional funds and corporate pension and profit sharing accounts. The Banking Subsidiaries also compete with other banks, insurance agents, financial counselors and other fiduciaries for personal trust business.
The Banking Subsidiaries also actively compete for funding. A primary source of funds is deposits, and competition for deposits includes other deposit taking organizations, such as commercial banks, savings and loan associations and credit unions, and so-called "money market" mutual funds. The Banking Subsidiaries also actively compete for funds with U.S. Government securities and in the open money market.
Employees
As of February 28, 1997, CoreStates and its subsidiaries employed 15,835 persons on a full time basis and 3,505 part-time persons on a full-time equivalent basis. CoreStates provides a variety of employment benefits and considers its relations with its employees to be satisfactory.
Selected Statistical Information
Tables and selected statistical information concerning CoreStates and its subsidiaries as described below and set forth on pages of the CoreStates 1996 Annual Report to Shareholders (and Exhibit 13 page numbers) set forth below are incorporated herein by reference:
RISK ELEMENTS
The following is a description of the risk elements related to foreign outstandings in addition to the risk elements described under the Loan Portfolio references to the Annual Report noted above:
Foreign Outstandings
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, 1996, 1995 and 1994, there were no aggregate foreign outstandings (defined as loans, investments, acceptances and time deposits) to borrowers in a foreign country that exceeded 1% of total assets. Outstandings below 1%, but over .75% of total assets were $389 million in Japan at December 31, 1996. There were no outstandings below 1%, but over .75% at December 31, 1995 and 1994.
INTEREST SENSITIVITY ANALYSIS
Information illustrating the interest sensitivity of CoreStates' interest earning assets and interest bearing liabilities is contained on page 69 of the Annual Report to Shareholders (Exhibit 13 page 94) and on page 18 of this Form 10-K. The interest sensitivity table on page 18 of this Form 10-K is different from the table contained in the Annual Report because managerial assumptions related to the appropriate investment maturities for non-interest bearing funding sources and the repricing behavior of non-contractual deposit products which are included in the Annual Report have been eliminated from the table on page 18.
Notes to Interest Sensitivity Analysis: - ---------------------------------------
a) Non-performing loans are included in 1-90 days. b) Deposit volumes exclude time deposits not at interest. c) Net non-interest bearing funds is the sum of non-interest bearing liabilities, shareholders' equity minus non-interest earning assets.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table shows the name and age of the current executive officers of CoreStates Financial Corp (the "Corporation") and their present and previous positions held by them for at least the past five years.
NAME AGE PRESENT & PREVIOUS POSITIONS - ---- --- ----------------------------
Terrence A. Larsen 50 Chairman, Chief Executive Officer, (January 1, 1988 to present) and Director (June 1, 1986 to present), President (January 1, 1992 to August 2, 1994, May 6, 1986 to March 5, 1990), Chief Operating Officer (May 6, 1986 to January 1, 1988) of the Corporation; Chairman and Director (October 1, 1990 to present) and President (January 1, 1992 to August 2, 1994) of CoreStates Bank; Chairman, Director (April 1, 1989 to October 1, 1990), Senior Executive Officer (1987 to 1988), and Executive Vice President, (1983 to 1986) of The Philadelphia National Bank ("PNB"); Director (January 1, 1986 to December 6, 1996, CoreStates New Jersey National Bank.
Christopher J. Carey 42 Chief Financial Officer of CoreStates Bank (February 18, 1997 to present); Corporate Controller (July 21, 1992 to present) of the Corporation and CoreStates Bank; Senior Vice President, (November 1, 1991 to present) of the Corporation and CoreStates Bank; Vice President
(November 12, 1985 to November 1, 1991) of CoreStates Bank.
Charles L. Coltman III 54 President and Chief Operating Officer (August 2, 1994 to April 9, 1996), Assistant to the Chairman, Corporate Quality (February 16, 1993 to August 2, 1994), Chief Credit Policy Officer (September 18, 1990 to February 1993), Executive Vice President and Credit Policy Officer (November 21, 1989 to September 18, 1990) of the Corporation; Vice Chairman and Director (May 21, 1996 to present) and Senior Executive Officer (August 2, 1994 to April 9, 1996) of CoreStates Bank; Director (April 22, 1992 to December 6, 1996) CoreStates New Jersey National Bank.
Charles P. Connolly 48 Senior Executive Vice President and Chief Risk Policy Officer (August 2, 1994 to October 15, 1996), Chief Credit Policy Officer (February 16, 1993 to August 2, 1994) of the Corporation; Vice Chairman (October 15, 1996 to present), Senior Executive Officer (August 2, 1994 to October 15, 1996), Executive Vice President (1987 to February 1993) of CoreStates Bank.
Rosemarie B. Greco 50 President (June 30, 1996 to present), Chief Banking Officer (August 2, 1994 to June 30, 1996), Chief Retail Services Officer (October 1, 1993 to August 2, 1994) of the Corporation; President, Director and Chief Executive Officer (August 2, 1994 to present) of CoreStates Bank; President and Chief Executive Officer of CoreStates First Pennsylvania Bank Division of CoreStates Bank (March 1991 to August 2, 1994) and Director (April 1, 1992 to August 2, 1994).
Carol A. Leisenring 46 Chief Economist and Executive Vice President (1987 to present), Director, Financial Services and Planning (June 1, 1996 to present) of the Corporation and CoreStates Bank.
Albert W. Mandia 49 Chief Financial Officer (February 18, 1997 to present) and Executive Vice President (1989 to present) of the Corporation; President and Chief Operating Officer of CashFlex (January 2, 1996 to February 18, 1997) a subsidiary of the Corporation; Executive Vice President (April 1992 to present) of CoreStates Bank.
Paul W. McGloin 49 Chief Risk Policy Officer (October 15, 1996 to present), Executive Vice President (April 9, 1996 to present) of the Corporation and CoreStates Bank. President, Meridian's Delaware Valley division (1995 to 1996) and Executive Vice President, Credit Policy (1991 to 1995) of Meridian Bank.
Item 2
Item 2 - Properties
The principal offices of CoreStates and CoreStates Bank are located in Philadelphia, Pennsylvania in leased space located at Centre Square West (547,600 square feet), 15th and Market Streets, and the Philadelphia National Bank Building (308,358 square feet) located at Broad and Chestnut Streets. In addition, office space is leased for use by CoreStates and CoreStates Bank in the following Philadelphia locations: the Penn Mutual Building (289,800 square feet) at 5th and Walnut Streets, the Curtis Building (111,600 square feet) at 6th and Walnut Streets, the Widener Building (217,400 square feet) adjacent to the PNB Building, and 801 Arch Street Building (57,500 square feet).
CoreStates Bank owns several major buildings which support operational activities. They are as follows: the CoreStates Plaza Building (464,802 square feet) located at 5th and Market Streets in Philadelphia, Pennsylvania; the Spring Ridge Building (395,000 square feet) located at One Meridian Boulevard in Wyomissing, Pennsylvania; the CoreStates Bank of Delaware Building (275,000 square feet) located at 3 Beaver Valley Road in Wilmington, Delaware; and the CoreStates Building at One Hillendale Drive (33,000 square feet) in Perkasie, Pennsylvania. CoreStates' operational units occupy all the space at each of these buildings.
CoreStates Bank also owns or leases approximately 20 other regional area headquarters in Pennsylvania, New Jersey and Delaware to support its banking activities. At each of its Regional Headquarters various units support retail banking, commercial lending, trust, and other banking functions.
As of December 31, 1996, CoreStates Bank had 572 operating retail banking branches located in Pennsylvania, New Jersey and Delaware, of which 284 branches were owned and 288 were leased. Aggregate leased properties in 1996 required approximately $90,982,000 in rental payments net of sublease income. Closed branch locations resulting from merger consolidations are either being sold, or the leases are being terminated.
On May 13, 1977, CoreStates borrowed $25 million from two institutional lenders at an interest rate of 8 5/8% per annum. The loan is secured by a first lien mortgage on 25 CoreStates Bank owned properties.
Item 3
Item 3 - Legal Proceedings
In the normal course of business, CoreStates and its subsidiaries are subject to numerous pending and threatened legal actions and proceedings, in some of which the relief or damages sought are substantial. Management does not believe the outcome of these actions and proceedings will have a materially adverse effect on the consolidated financial position of CoreStates.
Item 4
Item 4 - Submission of Matters to a Vote of Security Holders
No matters were submitted to security holders for vote during the fourth quarter of 1996.
PART II
Item 5
Item 5 - Market for the Registrant's Common Stock and Related Stockholder Matters
CoreStates Common Shares are traded on the New York Stock Exchange under the symbol "CFL". The table below sets forth, for the periods indicated, the high and low prices for CoreStates Common Shares as reported on the New York Stock Exchange, and cash dividends declared per share. On February 28, 1997, there were approximately 63,700 registered holders of Common Stock of CoreStates.
CoreStates currently expects to continue its policy of paying regular cash dividends, although there can be no assurance as to further dividends because they are dependent upon future operating results, capital requirements and financial condition.
The approval of the Comptroller of the Currency is required for national banks to pay dividends in certain circumstances. See the discussion under Government Supervision and Regulation--Dividends, supra., and the discussion in Footnote 6 "Regulatory and Capital Matters" on page 46 of the CoreStates Annual Report to Shareholders (Exhibit 13 pages 62 and 63), which pages are incorporated herein by reference.
Item 6
Item 6 - Selected Financial Data
Pursuant to General Instructions G(2), information required by this Item is incorporated by reference from pages 62 to 63 of the CoreStates Annual Report to Shareholders for the fiscal year ended December 31, 1996 (Exhibit 13 pages 87 and 88).
Item 7
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operation
Pursuant to General Instructions G(2), information required by this Item is incorporated by reference from pages 10 through 33 of the CoreStates Annual Report to Shareholders for the fiscal year ended December 31, 1996 (Exhibit 13 pages 4 through 42).
Item 8
Item 8 - Financial Statements and Supplementary Data
Pursuant to General Instructions G(2), information required by this Item is incorporated by reference from pages 36 through 70 of the CoreStates Annual Report to Shareholders for the fiscal year ended December 31, 1996 (Exhibit 13 pages 46 through 95).
Item 9
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10
Item 10 - Directors and Executive Officers of the Registrant
Information relating to the principal occupations of the directors of the Corporation, their ages, directorships in other companies, and respective terms of office is contained under the heading "Election of Directors" in the 1997 Proxy Statement and is incorporated herein by reference.
Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is set forth under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" in the 1997 Proxy Statement is incorporated herein by reference.
Information regarding executive officers of the Corporation is included in Part I of this Form 10-K under the caption "Executive Officers of the Registrant".
Item 11
Item 11 - Executive Compensation
The information required by this Item is included in the 1997 Proxy Statement in the Directors' Compensation section on pages 9 to 11; in the Five- Year Shareholder Return Comparison appearing on page 19, and in the compensation sections presented on pages 11 through 18, and is incorporated herein by reference.
Item 12
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is included in the 1997 Proxy Statement on pages 2 to 6 under the heading "Election of Directors", and on pages 6 and 7 under the headings "Beneficial Ownership of Common Stock" and "Security Ownership of Certain Beneficial Owners", and is incorporated herein by reference.
Item 13
Item 13 - Certain Relationships and Related Transactions
The information required by this Item is included in the 1997 Proxy Statement on page 11 under the heading "Certain Relationships and Related Transactions" and is incorporated herein by reference.
PART IV
Item 14
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements:
The following report of independent auditors of the Corporation and consolidated financial statements, included in the Annual Report to Shareholders, are incorporated herein by reference.
(a) 2. Financial Statement Schedules
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
(b) Current Reports on Form 8-K during the fourth quarter of 1996:
A report dated October 16, l996, which included the Corporation's press release regarding third quarter and year-to-date financial results; and information regarding a common stock repurchase program and dividend increase.
(c) Exhibits
The exhibits listed on the Index to Exhibits on pages __ to __ hereof are incorporated by reference or filed herewith in response to this item.
* Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
NOTE: CoreStates Financial Corp will furnish, at cost, any exhibit not accompanying this document upon request. Cost for each document is determined by the number of pages in the document.
Independent Auditors' Report
The Board of Directors Meridian Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Meridian Bancorp, Inc. and subsidiaries as December 31, 1995 and 1994, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the two year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the accounts and discloures in the financial statements. An audit also includes asserting the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Meridian Bancorp, Inc. and subsidiaries as of December 31, 1995 and 1994 and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1995, in conformity with generally accepted accounting principles.
As described in Notes 1 and 8, respectively, to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities and Statement of Financial Accounting Standards No. 112, Employers' Accounting for Postemployment Benefits, in 1994.
Philadelphia, Pa. January 17, 1996, Except as to note 2, which is as of February 23, 1996
/s/ KPMG Peat Marwick LLP
Independent Auditors' Report ----------------------------
The Board of Directors and Stockholders United Counties Bancorporation:
We have audited the accompanying consolidated balance sheets of United Counties Bancorporation and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in stockholders' equity, and cash flow for each of the years in the two-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Bancorporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our 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 United Counties Bancorporation and subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flow for each of the years in the two-year period ended December 31, 1995 in conformity with generally accepted accounting principles.
As discussed in notes 1 and 3 to the consolidated financial statements, the Bancorporation adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," in 1994.
/s/ KPMG Peat Marwick LLP
Short Hills, New Jersey January 16, 1996, except for note 20, which is as of February 23, 1996
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CoreStates Financial Corp
Date: March 21, 1997 By: /s/ Terrence A. Larsen ----------------------- Terrence A. Larsen Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
SIGNATURES (Continued)
EXHIBIT INDEX -------------