EXHIBIT 13
Index to Financial Information 23
CORPORATE FINANCIAL REVIEW
1993 VERSUS 1992
24 Overview
24 Mergers and Acquisitions
25 Income Statement Review
27 Line of Business Results
30 Balance Sheet Review
31 Risk Management
37 Capital
38 Management's Report on the Financial Reporting Internal Control Structure
38 Report of Ernst & Young, Independent Auditors
CONSOLIDATED FINANCIAL STATEMENTS
39 Consolidated Balance Sheet
40 Consolidated Statement of Income
41 Consolidated Statement of Changes in Shareholders' Equity
42 Consolidated Statement of Cash Flows
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
43 Accounting Policies
45 Merger Agreement
45 Sears Mortgage Acquisition
46 Other Acquisitions and Divestitures
46 Cash Flows
47 Securities
48 Loans
48 Nonperforming Assets
49 Allowance for Credit Losses
49 Financial Instruments with Off-Balance-Sheet Risk and Concentrations of
Credit Risk
51 Premises, Equipment and Leasehold Improvements
51 Mortgage Banking
51 Repurchase Agreements
52 Notes and Debentures
52 Shareholders' Equity
53 Employee Benefit Plans
55 Stock Option Plans
55 Income Taxes
56 Regulatory Matters
57 Litigation
57 Parent Company Financial Statements
59 Unused Lines of Credit
59 Fair Value of Financial Instruments
STATISTICAL INFORMATION
61 Selected Consolidated Financial Data
62 Selected Quarterly Financial Data
63 Analysis of Year-to-Year Changes in Net Interest Income
64 Average Consolidated Balance Sheet and Net Interest Analysis
66 Securities
68 Loan Portfolio
69 Nonperforming Assets
69 Past Due Loans
70 Allowance for Credit Losses
71 Maturity of Time Deposits of $100,000 or more
72 Borrowed Funds
72 Taxable-Equivalent Adjustment
MANAGEMENT'S DISCUSSION AND ANALYSIS
1992 VERSUS 1991
73 Mergers and Acquisitions
73 Common Stock Split
73 Income Statement Review
74 Balance Sheet Review
24 CORPORATE FINANCIAL REVIEW 1993 VERSUS 1992
The Corporate Financial Review should be read in conjunction with the PNC Bank
Corp. and subsidiaries ("Corporation") Consolidated Financial Statements
beginning on page 39, the Statistical Information beginning on page 61 and
Management's Discussion and Analysis beginning on page 73.
OVERVIEW
In 1993, the Corporation's strategic focus was on refining the line-of-business
organizational structure; strategic growth through acquisitions and continued
investment in targeted businesses; managing the revenue and expense
relationship associated with the Corporation's mature businesses; and marketing
the Corporation under a new unified identity with an emphasis on customer
satisfaction.
The economy experienced strong growth during the fourth quarter of 1993,
following moderate growth for the first nine months. One of the lowest
inflation levels in nearly two decades was experienced in 1993 and contributed
to continued low short-term interest rates and a decline in long-term interest
rates.
Even though the economy did not gain significant momentum until the fourth
quarter, the Corporation's financial performance continued to improve. Net
interest income and noninterest income were higher, favorable asset quality
trends continued and noninterest expenses remained relatively flat.
Net income for 1993 was $725.9 million or $3.04 per fully diluted common
share, compared with $426.9 million or $1.89 per share in 1992. Return on
assets and return on common shareholders' equity were 1.44 percent and 18.40
percent, respectively, in 1993. The corresponding 1992 returns were .95 percent
and 12.47 percent, respectively.
Effective January 1, 1993, the Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," and
changed its accounting method for certain intangible assets. Such assets are
comprised primarily of purchased mortgage servicing rights. The cumulative
effect of these changes reduced net income by $9.0 million and $10.4 million,
respectively.
The results for 1992 include the cumulative effect of adopting SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions,"
which reduced net income by $102.5 million.
Income before the cumulative effect of the changes in accounting principles
was $745.3 million, or $3.13 per share in 1993 compared with $529.4 million, or
$2.34 per share in 1992. Return on assets and return on common shareholders'
equity before the accounting changes were 1.48 percent and 18.89 percent,
respectively, in 1993 compared with 1.18 percent and 15.03 percent in 1992.
Management expects improved economic conditions in 1994 characterized by a
modest increase in short- term interest rates and loan demand. Should economic
conditions deteriorate or differ from management's expectations, the
Corporation's financial performance may be adversely impacted.
MERGERS AND ACQUISITIONS
The Corporation continues to evaluate acquisition opportunities where
management believes strategic growth potential exists. Key elements of the
Corporation's acquisition process include a dedicated staff for evaluating and
directing acquisitions, special management teams comprised of line-of-business
managers to plan and execute due diligence activities and approval by a
committee of senior executive officers, as well as the board of directors.
Various valuation and financial models are used to assess the impact of
potential acquisitions. These models are utilized in structuring the
transactions and in planning for post-merger market, operational and financial
integration. The post-merger plan includes actions to preserve or enhance the
underlying economics of the transaction and is refined as new information
becomes available. Subsequent to consummation, post-merger integration is
monitored to determine if objectives, both qualitative and quantitative, are
being achieved.
On November 30, 1993, the Corporation consummated its acquisition of the
Sears Mortgage Banking Group
CORPORATE FINANCIAL REVIEW 1993 VERSUS 1992 25
("Sears Mortgage"), which consisted of Sears Mortgage Corporation, Sears
Mortgage Securities Corporation and Sears Savings Bank. The purchase price was
$328 million in cash and is subject to certain post-closing adjustments. Upon
consummation, Sears Savings Bank was converted to a national banking
association and renamed PNC Mortgage Bank, National Association ("PNC
Mortgage"), and the other acquired entities became wholly-owned subsidiaries of
PNC Mortgage.
With this acquisition, the Corporation added consumer assets of $7.6
billion; a mortgage servicing portfolio approximating $27 billion, including
$21 billion serviced for others; and a national residential mortgage production
network consisting of 117 locations in 33 states. This acquisition will
increase net interest income, noninterest income and the ratio of fee income to
total revenue in 1994. The overhead ratio will increase due to higher relative
operating expenses in the mortgage banking business. The net interest margin
will narrow further in 1994 due to the full period impact of the acquisition
and the maturity structure of the liabilities assumed relative to the assets
acquired.
During 1993, the Corporation also acquired The Massachusetts Company,
Boston, Massachusetts and Gateway Fed Corporation, Cincinnati, Ohio for cash.
The aggregate purchase price was $107 million and the combined assets of these
companies totaled $1.4 billion at closing.
On January 21, 1994, the Corporation consummated the acquisition of United
Federal Bancorp, Inc. ("United"), State College, Pennsylvania for $156 million
in cash. United's assets totaled $900 million at closing.
In addition, the Corporation has a pending agreement to acquire First
Eastern Corp. ("First Eastern"), Wilkes-Barre, Pennsylvania, which had total
assets of $2.0 billion at December 31, 1993. The transaction has an indicated
value of approximately $330 million and is subject to the approval of certain
regulatory agencies and First Eastern's shareholders. Closing is currently
anticipated in the second quarter of 1994.
INCOME STATEMENT REVIEW
INCOME STATEMENT HIGHLIGHTS
- -------------------------------------------------------------------------------------------------
Change
Year ended December 31 -----------------------------
In millions 1993 1992 Amount Percent
- -------------------------------------------------------------------------------------------------
Net interest income-
taxable-equivalent
basis $1,869 $1,700 $ 169 9.9%
Provision for
credit losses 204 324 (120) (37.0)
Noninterest income 945 887 58 6.5
Noninterest expenses 1,454 1,442 12 .8
Income before cumulative
effect of changes in
accounting principles 745 529 216 40.8
Net income 726 427 299 70.0
- -------------------------------------------------------------------------------------------------
NET INTEREST INCOME AND NET INTEREST MARGIN Net interest income is interest
income, dividends and fees on earning assets, less interest expense incurred
for funding sources used to support such assets. Earning assets primarily
include loans and securities. Sources used to fund such assets include
deposits, borrowed funds and capital. Net interest margin is net interest
income on a fully taxable-equivalent basis as a percentage of average earning
assets.
On a fully taxable-equivalent basis, net interest income for 1993 increased
$168.5 million, or 9.9 percent due to an increase in average earning assets.
VOLUME/RATE ANALYSIS
- -------------------------------------------------------------------------------
1993 versus 1992 Increase/(Decrease)
Due To Changes In:
-------------------------------
In millions Volume Rate Rate/Volume Total
- -------------------------------------------------------------------------------
Interest income $398 $(371) $(48) $ (21)
Interest expense 184 (332) (41) (189)
Net interest income 207 (34) (4) 169
- -------------------------------------------------------------------------------
The net interest margin narrowed during the year due to the reduced benefit
of noninterest-bearing funds in the lower interest rate environment; the sale
of higher coupon mortgage-backed securities to reduce prepayment risk; the
issuance of longer-term liabilities to provide stability to funding costs; and
the impact of the Sears Mortgage acquisition. Partially offsetting these
factors was the impact of interest rate swaps, which were used to reduce
exposure to changes in interest rates.
26 CORPORATE FINANCIAL REVIEW 1993 VERSUS 1992
NET INTEREST MARGIN COMPARISON
- ---------------------------------------------------------------------------
Year ended December 31
Taxable-equivalent basis 1993 1992
- ---------------------------------------------------------------------------
Book-basis yield on earning assets 6.51% 7.46%
Effect of loan fees .14 .16
Taxable-equivalent adjustment .08 .10
- ---------------------------------------------------------------------------
Taxable-equivalent yield on earning assets 6.73 7.72
Rate on interest-bearing liabilities 3.81 4.63
- ---------------------------------------------------------------------------
Interest rate spread 2.92 3.09
Net benefit of interest rate swaps .43 .23
Net benefit of noninterest-bearing funds .60 .71
- ---------------------------------------------------------------------------
Net interest margin 3.95% 4.03%
- ---------------------------------------------------------------------------
PROVISION FOR CREDIT LOSSES The provision for credit losses for 1993 was $203.9
million compared with $323.5 million in 1992. Continued improvement in
economic conditions combined with management's ongoing efforts to improve asset
quality resulted in lower nonperforming asset and charge-off levels, and a
higher reserve coverage of nonperforming loans. The continued improvement in
asset quality experienced over the past several years is expected to result in
a lower provision in 1994.
NONINTEREST INCOME Excluding net securities gains, total noninterest income
increased $64.3 million or 9.3 percent to $757.6 million in 1993. Net
securities gains totaled $187.7 million in 1993 compared with $193.5 million in
1992.
New business derived from strong investment performance and new product
initiatives accounted for the increase in trust revenue. In 1992, gross revenue
from an index-oriented investment advisory company was reported as trust
income. In 1993, a portion of that company was sold and the Corporation's
remaining share of the entity's net income is included in the other noninterest
income category. Excluding the impact of this sale, trust revenue increased 7.9
percent. Trust assets totaled $114 billion at December 31, 1993 compared with
$101 billion a year ago. The Corporation exercised discretionary investment
authority over $33 billion of trust assets at December 31, 1993 compared with
$31 billion a year ago.
Mutual fund accounting and administrative services fees increased $12.6
million or 26.6 percent to $60.0 million in 1993 as a result of new business.
This increase was partially offset by a decline in advisory fees derived from
the level of managed money market mutual fund assets. Various administrative
services are provided for mutual funds which totaled $79 billion at December
31, 1993, including $24 billion over which the Corporation exercised
discretionary investment authority. The comparable December 31, 1992 amounts
were $69 billion and $27 billion, respectively.
Acquisitions, increased transaction volume related to new business and a
change in fee structures accounted for the growth in deposit account and
corporate services revenue. The Sears Mortgage acquisition accounted for the
increase in loan servicing revenue.
Within other services revenue, mortgage origination, brokerage and loan
syndication fees increased $8.6 million, $7.3 million and $6.0 million,
respectively. The Sears Mortgage acquisition accounted for 55 percent of the
increase in mortgage origination fees.
NONINTEREST EXPENSES Staff expense increased 2.5 percent to $685.4 million.
Higher compensation expense resulted from adding employees in targeted
businesses, completing acquisitions, and merit pay increases. Despite the
significant employee additions related to acquisitions and targeted businesses,
average full-time equivalent employees only increased 4.8 percent in the
comparison to 18,000. This amount includes the one-month impact of the Sears
Mortgage acquisition, which was consummated on November 30, 1993 and added
approximately 3,300 employees.
The decline in employee benefits expense was primarily due to lower
postretirement costs resulting from plan amendments. Pension and incentive
savings plan costs were also lower. Pension expense is expected to
significantly increase in 1994 due to a change in the discount rate used to
compute the benefit obligation.
CORPORATE FINANCIAL REVIEW 1993 VERSUS 1992 27
NONINTEREST INCOME
- ---------------------------------------------------------------------------------------------------------------------------
Year ended December 31 Change
---------------------
In thousands 1993 1992 Amount Percent
- ---------------------------------------------------------------------------------------------------------------------------
Investment management and trust
Trust $ 184,286 $ 174,161 $ 10,125 5.8%
Mutual funds 89,563 85,952 3,611 4.2
- ------------------------------------------------------------------------------------------------------------
Total investment management and trust 273,849 260,113 13,736 5.3
- ------------------------------------------------------------------------------------------------------------
Service charges, fees and commissions
Deposit account and corporate services 156,468 145,601 10,867 7.5
Credit card and merchant services 55,529 54,887 642 1.2
Letters of credit and acceptances 29,477 29,686 (209) (.7)
Loan servicing 41,284 30,409 10,875 35.8
Other services 120,255 99,976 20,279 20.3
- ------------------------------------------------------------------------------------------------------------
Total service charges, fees and commissions 403,013 360,559 42,454 11.8
- ------------------------------------------------------------------------------------------------------------
Trading account profits 6,785 1,717 5,068 NM
Net securities gains 187,694 193,503 (5,809) (3.0)
Other 73,908 70,884 3,024 4.3
- ------------------------------------------------------------------------------------------------------------
Total $ 945,249 $ 886,776 $ 58,473 6.6%
- ---------------------------------------------------------------------------------------------------------------------------
NM-Not meaningful
Acquisitions accounted for half of the increase in net occupancy and
equipment expenses. The remainder of the increase was attributable to the full
year impact of the consolidation of three data centers into a newly-constructed
data processing and telecommunications center and the opening of full-service
regional banking centers.
Other noninterest expense declined 5.6 percent in the comparison to $473.5
million. A decline of $76.6 million in net foreclosed asset expense was
partially offset by an increase in expenses related to acquisitions and the
amortization of purchased mortgage servicing rights resulting from higher
prepayment experience.
NONINTEREST EXPENSES
- ------------------------------------------------------------------------------
Year ended December 31 Change
----------------
In thousands 1993 1992 Amount Percent
- ------------------------------------------------------------------------------
Compensation $ 582,181 $ 541,304 $ 40,877 7.6%
Employee benefits 103,207 127,099 (23,892) (18.8)
- --------------------------------------------------------------------
Total staff expense 685,388 668,403 16,985 2.5
Net occupancy 115,354 104,407 10,947 10.5
Equipment 113,954 102,153 11,801 11.6
Federal deposit insurance 65,488 65,629 (141) (.2)
Other 473,542 501,823 (28,281) (5.6)
- --------------------------------------------------------------------
Total $1,453,726 $1,442,415 $ 11,311 .8%
- ----------------------------------------------------------------------------
Line of Business Results
The management accounting process uses various methods of balance sheet and
income statement allocations, transfers and assignments to evaluate the
performance of various business units. Unlike financial accounting, there is no
comprehensive, authoritative body of guidance for management accounting
equivalent to generally accepted accounting principles. The following
information is based on management accounting practices which conform to and
support the management structure of the Corporation and is not necessarily
comparable with similar information for any other financial institution.
Designations, assignments, and allocations may change from time to time as
management accounting systems are enhanced or product lines change. During
1993, certain methodologies were changed and, accordingly, results for 1992 are
presented on a consistent basis.
For management reporting purposes, the Corporation has designated four
distinct lines of business: Corporate Banking, Retail Banking, Investment
Management and Trust, and Investment Banking. Within these lines of business,
management categorizes its businesses based on their mature or growth nature.
The growth or targeted businesses include Cash Management, Mortgage Banking,
Mutual
28 CORPORATE FINANCIAL REVIEW 1993 VERSUS 1992
LINE OF BUSINESS RESULTS
- ------------------------------------------------------------------------------------------------------------------------------
Year ended December 31 Return on
Earnings Average Assets Profit Margin Overhead Assigned Equity
-------------- -------------- ------------- -------------- ----------------
Dollars in millions 1993 1992 1993 1992 1993 1992 1993 1992 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
Corporate Banking $290 $162 $12,886 $12,646 42% 23% 34% 43% 17% 9%
Retail Banking 311 262 27,489 24,959 22 21 63 62 21 20
Investment Management and Trust 69 69 480 389 23 24 64 63 53 58
Investment Banking 208 190 8,880 6,201 55 56 16 16 64 82
- -----------------------------------------------
Total Lines of Business 878 683
Cumulative effect of
accounting changes (19) (102)
Unallocated provision (96) (55)
Unallocated expenses (37) (99)
- -----------------------------------------------
Total $726 $427
- ------------------------------------------------------------------------------------------------------------------------------
Funds and Securities Brokerage and Underwriting. Management believes these
targeted businesses have attractive growth potential and continues to make
significant investments in them. For the more mature business units, such as
Corporate Banking and Consumer Banking, the emphasis is on managing the revenue
and expense relationship to enhance profitability.
The financial results presented in this section reflect each of these
lines of business as if they operated on a stand-alone basis. Securities and
borrowings have been assigned to the lines of business based on their net asset
or liability position. The remaining securities and borrowings emanating from
management of the Corporation's overall asset/liability position are included
in Portfolio Management.
Net income contributed by the lines of business totaled $878.0 million in
1993 compared with $683.1 million in 1992. These results exceeded reported
consolidated net income by $152.2 million and $256.1 million, respectively, due
to the cumulative effect of changes in accounting principles, the provision for
credit losses in excess of specific reserve allocations and certain unassigned
corporate expenses.
Profit margin represents after-tax earnings expressed as a percentage of
revenues. Revenues include net interest income on a fully-taxable equivalent
basis and noninterest income. The overhead ratio is the percentage of
noninterest expenses to revenues.
Capital is assigned to each business unit based on management's assessment
of inherent risk. Equity levels at independent companies that provide products
and services similar to those provided by the respective business unit are also
considered. Capital assignments are not equivalent to risk-based capital
guidelines.
CORPORATE BANKING Corporate Banking provides financing, liquidity and cash
management, and financial services to businesses and government entities.
Corporate Banking includes: Large Corporate--customers having annual sales of
more than $250 million; and Middle Market--annual sales of $5 to $250 million,
including customers in certain specialized industries such as real estate,
communications, healthcare, natural resources and leasing.
Average loan growth during 1993 was modest. However, lending activity
increased substantially during the fourth
CORPORATE BANKING
- ---------------------------------------------------------------------------------------------------------------------------
Year ended December 31 Return on
Earnings Profit Margin Overhead Assigned Equity
--------------- --------------- ---------------- ----------------
Dollars in millions 1993 1992 1993 1992 1993 1992 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
Large Corporate $ 67 $ 61 47% 44% 38% 33% 19% 19%
Middle Market 223 101 40 18 33 46 16 7
- -------------------------------------------------------
Total $ 290 $162 42 23 34 43 17 9
- ---------------------------------------------------------------------------------------------------------------------------
CORPORATE FINANCIAL REVIEW 1993 VERSUS 1992 29
RETAIL BANKING
- ----------------------------------------------------------------------------------------------------------------------------
Year ended December 31 Return on
Earnings Profit Margin Overhead Assigned Equity
--------------- --------------- ---------------- ----------------
Dollars in millions 1993 1992 1993 1992 1993 1992 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------
Consumer Banking $ 277 $215 22% 19% 62% 64% 22% 18%
Mortgage Banking 34 47 20 34 70 46 18 33
- -------------------------------------------------------
Total $ 311 $262 22 21 63 62 21 20
- ----------------------------------------------------------------------------------------------------------------------------
quarter as a result of stronger economic growth. The increase in year-end
outstandings was primarily in money market and short-term working capital loans
that are typically repaid shortly after year end.
During 1993, Corporate Banking benefited from a reduced provision for
credit losses, lower collection costs related to problem assets and increased
revenue from non-credit activities. Operating expenses did not increase from
the prior year.
Approximately 50 percent of the increase in Middle Market earnings was
derived from real estate. This increase resulted from a reduction in the
provision for credit losses, lower net foreclosed asset costs and higher gains
on the disposition of real estate assets. Further reductions of nonperforming
real estate assets are expected in 1994 which may require a reduction in
overall reserve levels associated with problem real estate assets.
The cash management business continued to grow as investments in technology
provided for expanded electronic processing capabilities and enhanced customer
service.
RETAIL BANKING Retail Banking provides lending, deposit, investment, payment
systems access, and other financial services to consumers and small businesses.
Retail Banking includes: Consumer Banking--all lending and deposit gathering
services provided to individuals and small businesses; and Mortgage
Banking--residential mortgage loans held in portfolio, and loan origination,
acquisition and servicing activities.
Increased loans and deposits contributed to higher earnings in 1993. The
benefit provided to Consumer Banking for relatively low cost deposits also
increased in the comparison. Consumer Banking's average loans increased by 6
percent during 1993, primarily due to acquisitions completed in the second half
of 1992.
Asset quality improvement led to a decline in the provision for credit
losses. Operating expenses increased in 1993 due to acquisitions and system
conversion costs related to enhancing and standardizing the retail distribution
systems throughout the Corporation's markets.
The decline in Mortgage Banking's earnings resulted from lower yields on
loans and higher amortization of purchased mortgage servicing rights resulting
from loan prepayments. Nonrecurring gains realized from sales of mortgages in
1992 also negatively impacted the comparison. These adverse impacts were
partially offset by an increase in average loan outstandings.
The acquisition of Sears Mortgage significantly changes the magnitude
and characteristics of this business unit. Mortgage originations were $2.5
billion in 1993. On a combined basis, mortgage originations for 1993 would have
been $13 billion. At December 31, 1993, the mortgage servicing portfolio
totaled $36 billion, including $27 billion serviced for others.
INVESTMENT MANAGEMENT & TRUST
- ----------------------------------------------------------------------------------------------------------------------------
Year ended December 31 Return on
Earnings Profit Margin Overhead Assigned Equity
--------------- --------------- ---------------- ----------------
Dollars in millions 1993 1992 1993 1992 1993 1992 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------
Trust $ 45 $ 41 22% 22% 66% 67% 52% 52%
Mutual Funds 24 28 25 30 61 54 54 71
- -------------------------------------------------------
Total $ 69 $ 69 23 24 64 63 53 58
- ----------------------------------------------------------------------------------------------------------------------------
30 CORPORATE FINANCIAL REVIEW 1993 VERSUS 1992
INVESTMENT BANKING
- ---------------------------------------------------------------------------------------------------------------------------
Year ended December 31 Return on
Earnings Profit Margin Overhead Assigned Equity
--------------- --------------- ---------------- ----------------
Dollars in Millions 1993 1992 1993 1992 1993 1992 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio Management $ 176 $169 60% 60% 7% 10% 69% 96%
Brokerage and Underwriting 32 21 37 35 43 47 48 37
- -------------------------------------------------------
TOTAL $ 208 $190 55 56 16 16 64 82
- ---------------------------------------------------------------------------------------------------------------------------
INVESTMENT MANAGEMENT AND TRUST INVESTMENT Management and Trust ("IM&T")
provides investment advice, asset management, and administrative and custodial
services to individuals, institutions and mutual funds. IM&T includes:
Trust--investment management and fiduciary services provided to individuals and
non-profit institutions, pension and employee benefit plans, and corporations
and Mutual Funds--products and services in support of mutual funds for other
banks, brokerage houses, insurance companies and mutual fund complexes,
including the PNC Family of Funds.
Trust earnings increased 9.8 percent in the year-to-year comparison as a
result of new business driven by strong investment performance and new product
initiatives.
Mutual Funds earnings declined by $4 million in 1993. Increased revenues
from higher levels of accounting and administrative services were offset by a
decline in advisory fees as the level of managed money market mutual fund
assets declined year to year. Management also continued to invest heavily in
this targeted business.
INVESTMENT BANKING Investment Banking includes the asset/liability management
function, as well as underwriting, brokerage and direct investment services.
Investment Banking includes: Portfolio Management--management of on- and
off-balance sheet positions; and Brokerage and Underwriting--equity
investments, corporate and public finance and brokerage services.
Portfolio Management's earnings include the impact of securities gains and
the interest rate spread on the securities portfolio not assigned to other lines
of business. Net securities gains were $188 million in 1993 and $194 million in
1992. During the last two years, gains have been significantly higher than
historical averages as certain mortgage-backed securities were sold in the
higher prepayment environment. The year-to-year comparison benefited from
higher asset levels resulting from leveraging the Corporation's capital position
and a 24 percent reduction in operating expenses due to the continued
centralization of the asset/liability management function.
Fees from Brokerage and Underwriting increased 27 percent over the prior
year. This increase was offset by additional expenses for personnel and
marketing costs related to product distribution initiatives, as management
continued to aggressively invest in this targeted business.
Earnings for 1993 from the Corporation's private equity investment
activities increased to $21 million compared with $9 million in 1992. At
December 31, 1993, the private equity investment portfolio totaled $160
million.
BALANCE SHEET REVIEW
Total assets increased approximately $10.7 billion in the year-to-year
comparison primarily as a result of acquisitions.
During 1993, proceeds from sales, maturities and prepayments of securities
were reinvested in shorter-term securities which management believes are less
susceptible to prepayment risk. As a result, the weighted-average expected
maturity of all securities was reduced to two years and 10 months at December
31, 1993 compared with three years and three months at December 31, 1992. In a
rising interest rate environment, management currently does not anticipate that
the expected maturity will increase significantly.
CORPORATE FINANCIAL REVIEW 1993 VERSUS 1992 31
BALANCE SHEET HIGHLIGHTS
- -----------------------------------------------------------------------------
December 31 Change
------------------
In millions 1993 1992 Amount Percent
- -----------------------------------------------------------------------------
Assets
Loans held for sale $ 1,392 $ 220 $ 1,172 532.7%
Securities
available for sale 11,388 7,414 3,974 53.6
Investment securities 11,672 13,327 (1,655) (12.4)
Loans, net of
unearned income 33,308 25,817 7,491 29.0
Other 4,320 4,602 (282) (6.1)
- --------------------------------------------------------------------
Total Assets $62,080 $51,380 $ 10,700 20.8%
Liabilities
Deposits $33,115 $29,470 $ 3,645 12.4%
Borrowed funds 11,662 11,811 (149) (1.3)
Notes and debentures 9,585 4,297 5,288 123.1
Other 3,393 2,056 1,337 65.0
- -------------------------------------------------------------------
Total liabilities 57,755 47,634 10,121 21.2
Shareholders' Equity 4,325 3,746 579 15.5
- -------------------------------------------------------------------
Total liabilities and
shareholders' equity $62,080 $51,380 $ 10,700 20.8%
- -----------------------------------------------------------------------------
Effective December 31, 1993, the Corporation adopted SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." As a
result, $7.2 billion of investment securities were reclassified as available
for sale. SFAS No. 115 requires that the after-tax net unrealized gain or loss
on securities available for sale be reflected in shareholders' equity. At
December 31, 1993, such net unrealized gains totaled $88 million.
Deposits increased primarily as a result of acquisitions. Notes and
debentures were higher in the comparison reflecting the Corporation's increased
use of bank notes.
RISK MANAGEMENT
In the normal course of business, the Corporation is subject to credit,
interest rate and liquidity risk. The Corporation's objective is to maximize
profitability while maintaining acceptable levels of risk.
Credit risk represents the possibility that a customer may not perform in
accordance with contractual terms. Credit risk results from extending credit to
customers as well as entering into certain financial instrument transactions.
Interest rate risk represents the impact of repricing frequencies for
assets, liabilities and off-balance-sheet positions. This risk includes
prepayment risk associated with certain assets (e.g., mortgage-backed
securities and consumer loans) and withdrawal characteristics of certain
funding sources (e.g., demand, money market and savings deposits). Prepayment
risk is defined as the receipt of assets in advance of expected repayments.
Liquidity risk represents the inability to generate cash or otherwise obtain
funds at reasonable rates to satisfy commitments to borrowers, as well as the
demands of depositors and debtholders.
CREDIT RISK MANAGEMENT AND ADMINISTRATION CREDIT risk is inherent in the
lending business. The Corporation seeks to manage credit risk through
diversification, utilizing exposure limits to any single industry or customer,
requiring collateral and selling participations to third parties. A certain
amount of diversification occurs as a result of the distinct customer segments
served by the Corporate Banking and Retail Banking lines of business.
Credit Administration, which includes credit policy, loan review and loan
workout, manages and monitors credit risk by promulgating and enforcing uniform
credit polices and exercising centralized oversight, review and approval
procedures. Credit Policy, at the direction of the board of directors,
establishes uniform underwriting standards that set forth the criteria that
must be met in extending credit.
To assist in the consistent application of underwriting standards, credit
officers work with lending officers in
32 CORPORATE FINANCIAL REVIEW 1993 VERSUS 1992
LOANS
- -------------------------------------------------------------------------------------------------------------
December 31 1993 1992
--------------------------- ---------------------------------
Unfunded Unfunded
In millions Outstandings Commitments Outstandings Commitments
- -------------------------------------------------------------------------------------------------------------
Commercial
Manufacturing $ 2,765 $ 4,351 $ 2,757 $ 3,784
Retail/Wholesale 1,789 1,570 1,668 1,362
Services 1,586 1,599 1,406 877
Financial services 872 1,666 523 1,270
Communications 1,337 732 1,274 771
Real estate related 557 177 538 125
Investment/Holding Co. 454 264 671 635
Other 3,103 3,089 2,148 2,272
- -------------------------------------------------------------------------------------------------------------
Total commercial 12,463 13,448 10,985 11,096
- -------------------------------------------------------------------------------------------------------------
Consumer
Automobile 2,428 2,282
Home equity 2,238 1,360 1,926 1,044
Student 1,103 27 990 18
Credit card 725 3,065 727 2,763
Other 2,031 214 2,025 242
- -------------------------------------------------------------------------------------------------------------
Total consumer 8,525 4,666 7,950 4,067
- -------------------------------------------------------------------------------------------------------------
Real estate mortgage
Residential 8,036 1,521 3,235 150
Commercial 905 6 879 5
- -------------------------------------------------------------------------------------------------------------
Total real estate mortgage 8,941 1,527 4,114 155
- -------------------------------------------------------------------------------------------------------------
Real estate project
Residential construction and development 70 72 68 57
Commercial construction and development 280 221 277 195
Medium-term financings
Standing 875 142 883 124
Other 505 68 727 106
- -------------------------------------------------------------------------------------------------------------
Total real estate project 1,730 503 1,955 482
- -------------------------------------------------------------------------------------------------------------
Other 1,871 400 1,105 556
Unearned income (222) (292)
- -------------------------------------------------------------------------------------------------------------
Total, net of unearned income $33,308 $ 20,544 $25,817 $ 16,356
- -------------------------------------------------------------------------------------------------------------
evaluating the creditworthiness of borrowers and structuring transactions.
Credit decisions are made at the specific affiliate or market level. However,
credit requests that are above certain limits or that involve exceptions to
credit policies require additional corporate approvals.
The Corporation uses a lender-initiated system of rating credits to provide
timely credit quality information to management. Lenders assign risk ratings at
inception with periodic updates thereafter. Loan review performs periodic
reviews to determine adherence with credit policies, the propriety of risk
ratings assigned to individual credits and the effectiveness of the credit
management process. Adversely rated credits are included on a watchlist and
reviewed monthly.
Total commercial outstandings and unfunded commitments increased $3.8
billion to $25.9 billion at December 31, 1993, reflecting the higher level of
lending activity during the fourth quarter which resulted primarily from
stronger economic growth. The increase in year-end outstandings was primarily
in money market and short-term working capital loans that are typically repaid
shortly after year-end.
CORPORATE FINANCIAL REVIEW 1993 VERSUS 1992 33
Total consumer outstandings increased $575 million and residential
mortgages increased $4.8 billion as a result of the Sears Mortgage acquisition.
Residential construction and development loans rely upon unit sales of
residential properties as the primary source of repayment. Medium-term
financings have remaining terms up to five years. This category includes
completed construction projects which are in the leasing phase, and
tenant-occupied commercial and residential real estate which are dependent upon
sale or permanent take-out for ultimate repayment of the loan. Medium-term
financings collateralized by projects where rental income exceeds debt service
and operating costs are classified as standing loans.
Retail and office projects accounted for 32 percent and 25 percent,
respectively, of total real estate project exposure at December 31, 1993.
Multi-family and hotel/motel projects each accounted for 9 percent. No other
project type accounted for more than 7 percent. Projects in the Corporation's
primary markets, which include Delaware, Indiana, Kentucky, New Jersey, Ohio
and Pennsylvania, accounted for 68 percent of the total outstandings. The
southeast region of the United States accounted for 17 percent and no other
geographic region accounted for more than 5 percent.
Highly leveraged transactions (HLTs) are included in various commercial
loan categories. Consistent with the federal bank regulators' uniform
definition, HLTs include financing transactions involving the buyout,
acquisition or recapitalization of an existing business and credits extended to
highly leveraged industries.
At December 31, 1993, HLT outstandings and unfunded commitments totaled
$953 million and $186 million, respectively. The comparable December 31, 1992
amounts were $1.1 billion and $202 million, respectively. The communications,
manufacturing and retail/wholesale industries accounted for 73 percent, 13
percent and 12 percent, respectively, of total HLT exposure at December 31,
1993. HLT outstandings represented 2.9 percent of total loans at December 31,
1993 compared with 4.3 percent at December 31, 1992. During 1993, $117 million
of loans and $35 million of unfunded commitments were no longer classified as
HLTs.
At December 31, 1993, the Corporation had 60 customers with loans
designated as HLT. The ten largest HLT outstandings and unfunded commitments
totaled $485 million and $56 million, respectively, none of which were
classified as nonperforming. During 1993, the Corporation originated and/or
participated in $166 million of commitments to new HLT customers compared with
$155 million in 1992. HLT loan fees recognized in income during 1993 totaled
$4.4 million and deferred HLT loan fees totaled $4.9 million at December 31,
1993. The yield on the HLT portfolio, including loans classified as
nonperforming, was 6.1 percent during 1993.
RISK ELEMENTS During 1993, asset quality continued to improve. Assuming modest
economic growth and excluding the impact of acquisitions, management
anticipates the favorable trends will continue during 1994.
At December 31, 1993, $102 million of nonperforming loans were current as
to principal and interest compared with $144 million at December 31, 1992.
Nonperforming HLT loans totaled $25 million at December 31, 1993, compared with
$41 million a year ago.
CHANGE IN NONPERFORMING ASSETS
In millions 1993 1992
- -----------------------------------------------------------------------
Balance at January 1 $ 820 $ 1,084
- -----------------------------------------------------------------------
Transferred from accrual 296 529
Acquisitions 104 57
Returned to performing (59) (45)
Principal reductions (306) (370)
Sales (131) (124)
Charge-offs and valuation adjustments (170) (311)
- -----------------------------------------------------------------------
Balance at December 31 $ 554 $ 820
- -----------------------------------------------------------------------
34 CORPORATE FINANCIAL REVIEW 1993 VERSUS 1992
NONPERFORMING ASSETS
- -----------------------------------------------------------------------
December 31
In millions 1993 1992
- -----------------------------------------------------------------------
Nonaccrual loans
Commercial $ 181 $ 316
Real estate project 91 185
Real estate mortgage 84 28
- -----------------------------------------------------------------------
Total nonaccrual loans 356 529
- -----------------------------------------------------------------------
Restructured loans
Commercial 6 11
Real estate project 17 13
Real estate mortgage 5 1
- -----------------------------------------------------------------------
Total restructured loans 28 25
- -----------------------------------------------------------------------
Total nonperforming loans 384 554
- -----------------------------------------------------------------------
Foreclosed assets
Real estate project 108 223
Other 62 43
- -----------------------------------------------------------------------
Total foreclosed assets 170 266
- -----------------------------------------------------------------------
Total nonperforming assets $ 554 $ 820
- -----------------------------------------------------------------------
Nonperforming loans to total loans 1.15% 2.14%
Nonperforming assets to total
loans and foreclosed assets 1.65 3.14
Nonperforming assets to total assets .89 1.60
- -----------------------------------------------------------------------
At December 31, 1993, office, retail, land and multi-family projects
accounted for 70 percent of total nonperforming real estate project assets. The
Corporation's primary markets accounted for 57 percent and the southeast region
of the United States 31 percent of the total.
Accruing loans contractually past due 90 days or more as to the payment of
principal or interest totaled $135 million at December 31, 1993, compared with
$192 million at December 31, 1992. Residential mortgage and other consumer
loans of $116 million were included in the total at December 31, 1993, compared
with $123 million at the prior year end.
Loans not included in the past due, nonaccrual or restructured categories,
but where known information about possible credit problems causes management to
be uncertain as to the ability of the borrowers to comply with the present loan
repayment terms over the next six months totaled $121 million at December 31,
1993, all of which were current as to principal and interest payments.
ALLOWANCE FOR CREDIT LOSSES In determining the adequacy of the allowance for
credit losses, the Corporation allocates reserves to specific problem loans
based on a collectibility review and pools of watchlist and non-watchlist loans
for various credit risk factors. The allocations to pools of loans are
developed by risk rating and industry classification and are based on
management's judgment concerning historical loss trends and other relevant
factors. These factors may include, among others, local, regional, and national
economic conditions; portfolio concentrations; the level of industry
competition and consolidation; the impact of government regulation; and the
possibility of technological obsolescence.
Residential mortgage and consumer loan allocations are based on historical
loss experience adjusted for portfolio activity and current trends.
The allowance for credit losses was $972 million at December 31, 1993,
representing 2.92 percent of total loans compared with $897 million and 3.47
percent a year ago. As a percentage of period-end nonperforming loans, the
allowance for credit losses was 253 percent at December 31, 1993 compared with
162 percent at December 31, 1992.
CHARGE-OFFS AND RECOVERIES
- -----------------------------------------------------------------------------------------------------------------------------
Year ended December 31 1993 1992
------------------------------------ --------------------------------------
Net Net
In millions Charge-offs Recoveries Charge-offs Charge-offs Recoveries Charge-offs
- -----------------------------------------------------------------------------------------------------------------------------
Commercial $ 101 $ 41 $ 60 $ 213 $ 37 $ 176
Real estate project 60 4 56 39 1 38
Real estate mortgage 2 2 2 2
Consumer 82 29 53 82 22 60
Other 1 1 7 2 5
- -----------------------------------------------------------------------------------------------------------------------------
Total $ 246 $ 74 $ 172 $ 343 $ 62 $ 281
- -----------------------------------------------------------------------------------------------------------------------------
Net charge-offs as a percentage of average loans .66% 1.15%
- -----------------------------------------------------------------------------------------------------------------------------
CORPORATE FINANCIAL REVIEW 1993 VERSUS 1992 35
During 1993, $7 million of HLT credits were charged-off and $3 million
of previously charged-off HLT loans were recovered. The comparable 1992
amounts were $46 million and $9 million, respectively.
ASSET/LIABILITY MANAGEMENT The primary objective of asset/liability management
is to provide maximum levels of net interest income while maintaining
acceptable levels of interest rate and liquidity risk and facilitating the
Corporation's funding needs. To achieve this objective, asset/liability
management uses a variety of investment alternatives, funding sources and
off-balance-sheet instruments in managing the overall interest rate risk
profile of the Corporation. ALCO policies include limits on the amounts of
various financial instruments and types of funding, and the level of interest
rate sensitivity. Asset/Liability management seeks to minimize the credit risk
associated with its activities. This is primarily accomplished by entering
into transactions with only a selected number of high quality institutions,
establishing credit limits with counterparties and, where applicable, requiring
segregated collateral.
Interest rate sensitivity refers to the impact of changes in interest
rates on net interest income. A dynamic income simulation model is used as the
primary mechanism in assessing that impact. Various assumptions related to
interest rates, mortgage prepayments, and loan and deposit growth are used in
the model.
The simulation model projects an increase in net interest income in
management's most likely interest rate scenario over the next twelve months. At
December 31, 1993, this scenario assumes a gradual increase in interest rates
accompanied by a modest narrowing of the spread between the prime and federal
funds rates. In addition, management develops interest rate scenarios with
rates higher and lower than the most likely case based on rate movements that
could occur given current and projected economic conditions. As of December 31,
1993, the model projected net interest income would decrease 2.0 percent if the
Federal Funds rate and longer-term rates fell gradually by 100 and 150 basis
points, respectively, over the next year. Similarly, it projected a 1.8 percent
decrease if the Federal Funds rate and longer-term rates rose gradually by 250
and 230 basis points, respectively. These net interest income fluctuations from
the most likely scenario are well within management's policy limits. These
projections are based on current on- and off-balance-sheet positions and do not
reflect actions management could take to mitigate the impact of changes in
interest rates.
INTEREST RATE SENSITIVITY
- --------------------------------------------------------------------------------------------------------------------------------
December 31, 1993 Rate Sensitive
------------------------------------------------------------------
1 to 91 to 181 to 1 to 5 Beyond
In millions 90 Days 180 Days 365 Days Years 5 Years Total
- --------------------------------------------------------------------------------------------------------------------------------
Loans $ 17,956 $ 2,439 $ 3,049 $ 6,406 $ 3,456 $ 33,308
Securities 3,642 1,815 3,232 11,325 3,046 23,060
Other earning assets 2,250 2,250
Other assets 234 3,228 3,462
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $ 24,082 $ 4,254 $ 6,281 $ 17,733 $ 9,730 $ 62,080
- ---------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits $ 547 $ 6,510 $ 7,057
Interest-bearing deposits 6,599 2,037 2,411 5,894 9,117 26,058
Borrowings 9,390 3,004 7,150 637 1,066 21,247
Other liabilities 2,062 1,331 3,393
Shareholders' equity 4,325 4,325
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 18,598 $ 5,041 $ 9,561 $ 6,531 $ 22,349 $ 62,080
- ---------------------------------------------------------------------------------------------------------------------------------
Off-balance sheet items $ (8,221) $ 18 $ 1,791 $ 6,555 $ (143)
- ---------------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity $ (2,737) $ (769) $ (1,489) $ 17,757 $ (12,762)
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative gap $ (2,737) $ (3,506) $ (4,995) $ 12,762
- ---------------------------------------------------------------------------------------------------------------------------------
36 CORPORATE FINANCIAL REVIEW 1993 VERSUS 1992
An interest rate sensitivity ("gap") analysis represents a point-in-time net
position of assets, liabilities and off-balance-sheet instruments subject to
repricing in specified time periods. The liability sensitivity of the
cumulative one-year gap position was 8.6 percent of total earning assets at
December 31, 1993. Gap analysis alone does not accurately measure the magnitude
of changes in net interest income since changes in interest rates do not affect
all categories of assets, liabilities, and off-balance-sheet positions
equally or simultaneously.
The distribution in the Interest Rate Sensitivity table is based on a
combination of maturities, call provisions, repricing frequencies, prepayment
patterns and historical experience. Variable rate assets and liabilities are
distributed based on the repricing frequency of the instrument.
The Corporation enters into interest rate swaps to alter the maturity
and repricing structure of the balance sheet ("hedge swaps") and as an
intermediary for customers ("customer swaps"). At December 31, 1993 hedge swaps
and customer swaps accounted for 83 percent and 3 percent, respectively, of the
total notional amount of all interest rate swap, futures, forward and written
option contracts.
The notional amount of hedge and customer swaps totaled $11.8 billion
and $490 million, respectively, at December 31, 1993. The corresponding
December 31, 1992 amounts were $7.7 billion and $520 million, respectively. At
December 31, 1993, credit risk related to all swaps totaled approximately $109
million with 92 percent collateralized by U.S. Government and agency
securities.
The majority of hedge swaps are indexed amortizing interest rate swaps
where the Corporation receives payments based on fixed interest rates and makes
payments based on a floating money market rate. Index swaps have remaining
expected maturities that range from six months to two and one half years. If
interest rates rise above a contractually specified level, the maturities of
the index swaps will be extended. However, in management's current most likely
interest rate scenario, these maturities will not extend significantly.
During 1993, hedge swaps benefited net interest income by $203.3 million
compared with $98.6 million in the corresponding 1992 period. At December 31,
1993, net deferred gains on terminated interest rate swaps totaled $22 million,
which is being amortized over various remaining periods up to two years.
Because the Corporation has an aggregate receive-fixed/pay-variable
interest rate swap position, an increase in interest rates would reduce the
benefit provided by such swaps. However, management would expect several
factors to partially or entirely mitigate a decline in the benefit provided by
such swaps. As interest rates increase, the Corporation will derive a greater
benefit from existing long-term liabilities and noninterest-bearing sources of
funds. Also, an increase in interest rates would likely be associated with
higher levels of economic activity, providing opportunities for loan growth and
higher fee income.
LIQUIDITY MANAGEMENT Liquidity represents an institution's ability to generate
cash or otherwise obtain funds at reasonable rates to satisfy commitments to
borrowers as well as the demands of depositors and debtholders. Liquidity is
managed through the coordination of the relative maturities of assets,
liabilities and off-balance-sheet positions and is enhanced by the ability to
raise funds in capital markets.
Liquid assets consist of cash and due from banks, federal funds sold and
resale agreements, interest-earning deposits with banks, trading account
securities and securities available for sale. At December 31, 1993, such assets
totaled $14.1 billion. Liquidity is also provided by securities that may be
sold under agreements to repurchase, which totaled $8.2 billion at December 31,
1993. In addition, certain bank affiliates joined the Federal Home Loan Bank
System in 1993.
CORPORATE FINANCIAL REVIEW 1993 VERSUS 1992 37
FUNDING SOURCES
- ------------------------------------------------------------------------------------------------------------------------------------
December 31
In millions 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits
Demand, savings and money market $ 18,621 $ 17,157
Time 14,494 12,313
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 33,115 29,470
Borrowed funds
Repurchase agreements 4,995 6,452
Treasury, tax and loan 3,414 1,661
Federal funds purchased 2,066 2,037
Commercial paper 514 980
Other 673 681
- ------------------------------------------------------------------------------------------------------------------------------------
Total borrowed funds 11,662 11,811
Notes and debentures 9,585 4,297
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 54,362 $ 45,578
- ------------------------------------------------------------------------------------------------------------------------------------
Brokered deposits are included in the certificates of deposit of
$100,000 or more and other time categories. Such amounts totaled $4.1 billion
at December 31, 1993 compared with $2.3 billion at December 31, 1992. Retail
brokered deposits are issued or participated-out by brokers in denominations of
$100,000 or less and are fully insured. Such deposits represented 63.7 percent
of the total at December 31, 1993 and 13.1 percent a year ago. The increase
relates entirely to retail brokered deposits assumed in the Sears Mortgage
acquisition. These deposits are expected to decline in future periods as they
mature and alternative funding sources are employed.
Liquidity for the parent company and its nonbank affiliates is
generated through the issuance of securities in public or private markets,
lines of credit and dividends from subsidiaries. Under effective shelf
registration statements at December 31, 1993, the Corporation has available
$250 million of debt, $300 million of preferred stock and $550 million of
securities that may be issued as either debt or preferred stock. Additionally,
the Corporation has a $150 million unused committed line of credit. Funds
obtained from any of these sources can be used for both bank and nonbank
activities. In addition to current parent company funds, the funding for
pending acquisitions may include the issuance of instruments that qualify as
regulatory capital such as preferred stock or subordinated debt.
CAPITAL
The current economic and regulatory environment has placed an increased
emphasis on capital strength. Acquisition capability, funding alternatives, new
business activities, deposit insurance costs and the level and nature of
expanded regulatory oversight depend in part on capital adequacy.
RISK-BASED CAPITAL AND LEVERAGE RATIOS
- ---------------------------------------------------------------------------------------------------------------------------------
December 31
Dollar amounts in millions 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
CAPITAL COMPONENTS
Shareholders' equity $ 4,325 $ 3,746
Goodwill (85) (62)
Net unrealized securities gains (88)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Tier I risk-based capital 4,152 3,684
Subordinated debt 554 235
Eligible allowance for credit losses 547 458
- ---------------------------------------------------------------------------------------------------------------------------------
Total risk-based capital $ 5,253 $ 4,377
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Risk-weighted assets and off-
balance-sheet instruments $ 43,380 $36,210
Average tangible assets 52,923 48,374
- ---------------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS
Tier I risk-based capital 9.57% 10.17%
Total risk-based capital 12.11 12.09
Leverage 7.85 7.62
- ---------------------------------------------------------------------------------------------------------------------------------
The minimum regulatory capital ratios are 4.00 percent for Tier I,
8.00 percent for total risk-based and 3.00 percent for leverage. However,
regulators may require higher capital levels when a bank's particular
circumstances warrant.
Capital ratios are expected to decline somewhat in 1994 as a result of
including the Sears Mortgage assets for a full reporting period and
consummating pending acquisitions.
38
MANAGEMENT'S REPORT ON THE FINANCIAL
REPORTING INTERNAL CONTROL STRUCTURE
PNC Bank Corp. is responsible for the preparation, integrity and fair
presentation of its published financial statements. The consolidated financial
statements included in this annual report have been prepared in accordance with
generally accepted accounting principles and, as such, include judgments and
estimates of management. PNC Bank Corp. also prepared the other information
included in the annual report and is responsible for its accuracy and
consistency with the consolidated financial statements.
Management is responsible for establishing and maintaining an
effective internal control structure over financial reporting. The internal
control system is augmented by written policies and procedures and by audits
performed by an internal audit staff which reports to the Audit Committee of
the Board of Directors. Internal auditors monitor the operation of the internal
control system and report findings to management and the Audit Committee, and
corrective actions are taken to address identified control deficiencies and
other opportunities for improving the system. The Audit Committee, composed
solely of outside directors, provides oversight to the financial reporting
process.
There are inherent limitations in the effectiveness of any system of
internal control, including the possibility of human error and the
circumvention or overriding of controls. Accordingly, even an effective
internal control system can provide only reasonable assurance with respect to
financial statement preparation. Further, because of changes in conditions, the
effectiveness of an internal control system may vary over time.
Management assessed PNC Bank Corp.'s internal control structure over
financial reporting as of December 31, 1993. This assessment was based on
criteria for effective internal control over financial reporting described in
"Internal Control- Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes that PNC Bank Corp. maintained an effective internal control system
over financial reporting as of December 31, 1993.
/s/ THOMAS H. O'BRIEN /s/ WALTER E. GREGG, JR.
Thomas H. O'Brien Walter E. Gregg, Jr.
Chairman and Executive Vice President
Chief Executive Officer
REPORT OF ERNST & YOUNG,
INDEPENDENT AUDITORS
Shareholders and Board of Directors
PNC Bank Corp.
We have audited the accompanying consolidated balance sheet of PNC Bank Corp.
and subsidiaries as of December 31, 1993 and 1992, 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, 1993. These financial
statements are the responsibility of PNC Bank Corp.'s management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PNC
Bank Corp. and subsidiaries at December 31, 1993 and 1992, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1993, in conformity with generally accepted
accounting principles.
As discussed in the Notes to Consolidated Financial Statements, in
1993 PNC Bank Corp. changed its method of accounting for certain investments in
debt and equity securities, income taxes, and intangible assets, and in 1992
changed its method of accounting for postretirement benefits.
/s/ ERNST & YOUNG
Pittsburgh, Pennsylvania
February 11, 1994
CONSOLIDATED BALANCE SHEET 39
- ----------------------------------------------------------------------------------------------
December 31
Dollars in millions, except par values 1993 1992
- ----------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 1,817 $ 2,117
Short-term investments 856 1,165
Loans held for sale 1,392 220
Securities available for sale, fair value of $7,552 in 1992 11,388 7,414
Investment securities, fair value of $11,716 and $13,430 11,672 13,327
Loans, net of unearned income of $222 and $292 33,308 25,817
Allowance for credit losses (972) (897)
- ----------------------------------------------------------------------------------------------
Net loans 32,336 24,920
Other 2,619 2,217
- ----------------------------------------------------------------------------------------------
Total assets $ 62,080 $ 51,380
- ----------------------------------------------------------------------------------------------
LIABILITIES
Deposits
Noninterest-bearing $ 7,057 $ 5,890
Interest-bearing 26,058 23,580
- ----------------------------------------------------------------------------------------------
Total deposits 33,115 29,470
- ----------------------------------------------------------------------------------------------
Borrowed funds
Federal funds purchased 2,066 2,037
Repurchase agreements 4,995 6,452
Commercial paper 514 980
Other 4,087 2,342
- ----------------------------------------------------------------------------------------------
Total borrowed funds 11,662 11,811
- ----------------------------------------------------------------------------------------------
Notes and debentures 9,585 4,297
Accrued expenses and other liabilities 3,393 2,056
- ----------------------------------------------------------------------------------------------
Total liabilities 57,755 47,634
- ----------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock--$1 par value
Authorized: 17,663,791 and 17,854,291 shares
Issued and outstanding: 983,233 and 1,498,041 shares 1 1
Aggregate liquidation value: $20 and $33
Common stock--$5 par value
Authorized: 450,000,000 shares
Issued: 234,994,196 and 232,574,794 shares 1,175 1,163
Capital surplus 450 425
Retained earnings 2,715 2,263
Deferred ESOP benefit expense (95) (106)
Net unrealized securities gains 88
Common stock held in treasury at cost: 288,959 and 1,541 shares (9)
- -----------------------------------------------------------------------------------------------
Total shareholders' equity 4,325 3,746
- -----------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 62,080 $ 51,380
- -----------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
40 CONSOLIDATED STATEMENT OF INCOME
- --------------------------------------------------------------------------------------------------------------------------------
Year ended December 31
In thousands, except per share data 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans and fees on loans $ 1,950,937 $ 1,964,248 $ 2,537,128
Short-term investments 22,379 31,960 58,087
Securities 1,203,151 1,203,643 1,038,899
Other 24,653 19,120 23,419
- --------------------------------------------------------------------------------------------------------------------------------
Total interest income 3,201,120 3,218,971 3,657,533
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 742,772 1,063,422 1,727,765
Borrowed funds 362,995 352,162 398,779
Notes and debentures 266,320 146,095 95,791
- --------------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,372,087 1,561,679 2,222,335
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income 1,829,033 1,657,292 1,435,198
Provision for credit losses 203,944 323,531 428,038
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income less provision for credit losses 1,625,089 1,333,761 1,007,160
- --------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Investment management and trust 273,849 260,113 237,794
Service charges, fees and commissions 403,013 360,559 359,578
Trading account profits 6,785 1,717 9,172
Net securities gains 187,694 193,503 63,454
Gains on sale of certain operations 92,666
Other 73,908 70,884 49,361
- --------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 945,249 886,776 812,025
- --------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES
Compensation 582,181 541,304 494,837
Employee benefits 103,207 127,099 103,870
Net occupancy 115,354 104,407 100,067
Equipment 113,954 102,153 91,525
Federal deposit insurance 65,488 65,629 64,825
Other 473,542 501,823 415,860
- --------------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 1,453,726 1,442,415 1,270,984
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of changes in accounting principles 1,116,612 778,122 548,201
Applicable income taxes 371,349 248,682 158,415
- --------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of changes in accounting principles 745,263 529,440 389,786
Cumulative effect of changes in accounting principles,
net of tax benefit of $5,343 and $52,804 (19,393) (102,501)
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 725,870 $ 426,939 $ 389,786
- --------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE
Primary before cumulative effect of changes in accounting principles $ 3.14 $ 2.36 $ 1.97
Cumulative effect of changes in accounting principles (.08) (.46)
- --------------------------------------------------------------------------------------------------------------------------------
Primary $ 3.06 $ 1.90 $ 1.97
- --------------------------------------------------------------------------------------------------------------------------------
Fully diluted before cumulative effect of changes in accounting principles $ 3.13 $ 2.34 $ 1.94
Cumulative effect of changes in accounting principles (.09) (.45)
- --------------------------------------------------------------------------------------------------------------------------------
Fully diluted $ 3.04 $ 1.89 $ 1.94
- --------------------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 1.175 $ 1.08 $ .795
AVERAGE COMMON SHARES OUTSTANDING
Primary 236,386 224,023 196,872
Fully diluted 238,421 227,125 201,324
- --------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY 41
- ------------------------------------------------------------------------------------------
Preferred Common Capital Retained
Dollars in millions, except per share data Stock Stock Surplus Earnings
- ------------------------------------------------------------------------------------------
Balance at January 1, 1991 $ 1 $ 478 $ 473 $ 1,778
- ------------------------------------------------------------------------------------------
Net income 390
Cash dividends declared
Preferred stock (3)
Common stock (153)
Deferred ESOP benefit expense
Purchase of stock (common 181,407)
Stock issued (common 11,861,295)
Common stock 52 377
Dividend reinvestment and employee benefit plans 7 29
Conversion of preferred stock and debentures 2
Marketable equity securities valuation adjustment 5
ESOP dividends tax benefit 2
Net foreign currency translation adjustment (3)
- ------------------------------------------------------------------------------------------
Balance at December 31, 1991 1 537 881 2,016
- ------------------------------------------------------------------------------------------
Net income 427
Cash dividends declared
Preferred stock (3)
Common stock (235)
Deferred ESOP benefit expense
Purchase of stock (common 515,152)
Stock issued (common 9,479,414)
Dividend reinvestment and employee benefit plans 12 49
Conversion of preferred stock and debentures 2 2
Acquisitions 33 72 55
Transfer to reflect two-for-one stock split 579 (579)
ESOP dividends tax benefit 3
- ------------------------------------------------------------------------------------------
Balance at December 31, 1992 1 1,163 425 2,263
- ------------------------------------------------------------------------------------------
Net income 726
Cash dividends declared
Preferred stock (2)
Common stock (275)
Deferred ESOP benefit expense
Purchase of stock (common 810,416)
Stock issued (common 2,419,402)
Dividend reinvestment and employee benefit plans 10 36
Conversion of preferred stock and debentures 2 (2)
Redemption of preferred stock (9)
ESOP dividends tax benefit 3
Net unrealized securities gains
- ------------------------------------------------------------------------------------------
Balance at December 31, 1993 $ 1 $1,175 $ 450 $ 2,715
- ------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------------------
Deferred ESOP Net Unrealized Treasury
Dollars in millions, except per share data Benefit Expense Securities Gains Stock
- --------------------------------------------------------------------------------------------
Balance at January 1, 1991 $ (130)
- --------------------------------------------------------------------------------------------
Net income
Cash dividends declared
Preferred stock
Common stock
Deferred ESOP benefit expense 11
Purchase of stock (common 181,407) $ (7)
Stock issued (common 11,861,295)
Common stock
Dividend reinvestment and employee benefit plans 7
Conversion of preferred stock and debentures
Marketable equity securities valuation adjustment
ESOP dividends tax benefit
Net foreign currency translation adjustment
- --------------------------------------------------------------------------------------------
Balance at December 31, 1991 (119)
- --------------------------------------------------------------------------------------------
Net income
Cash dividends declared
Preferred stock
Common stock
Deferred ESOP benefit expense 13
Purchase of stock (common 515,152) (13)
Stock issued (common 9,479,414)
Dividend reinvestment and employee benefit plans 13
Conversion of preferred stock and debentures
Acquisitions
Transfer to reflect two-for-one stock split
ESOP dividends tax benefit
- --------------------------------------------------------------------------------------------
Balance at December 31, 1992 (106)
- --------------------------------------------------------------------------------------------
Net income
Cash dividends declared
Preferred stock
Common stock
Deferred ESOP benefit expense 11
Purchase of stock (common 810,416) (19)
Stock issued (common 2,419,402)
Dividend reinvestment and employee benefit plans 10
Conversion of preferred stock and debentures
Redemption of preferred stock
ESOP dividends tax benefit
Net unrealized securities gains $88
- --------------------------------------------------------------------------------------------
Balance at December 31, 1993 $ (95) $88 $ (9)
- --------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
42 CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------------------------
Year ended December 31
In millions 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 726 $ 427 $ 390
Adjustments to reconcile net income to net cash provided by operating activities
Cumulative effect of changes in accounting principles 19 103
Provision for credit losses 204 324 428
Depreciation, amortization and accretion 148 137 72
Deferred income taxes (61) (36) 21
Net securities gains (188) (214) (70)
Net gain on sales of assets (16) (23) (118)
Valuation adjustments on foreclosed assets, net of gains on sales (22) 50 40
Changes in
Loans held for sale (42) 117 (204)
Trading account securities 20 202 (224)
Interest receivable (3) 12 77
Interest payable 108 (114)
Other 68 (189) 575
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 961 910 873
- --------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net change in
Interest-earning deposits with banks 283 (447) 350
Federal funds sold and resale agreements 241 951 (164)
Loans (3,081) 945 1,670
Repayment
Securities available for sale 1,196 575
Investment securities 7,773 5,712 2,117
Sales
Securities available for sale 16,659 7,976
Investment securities 11 278 5,345
Loans 81 191 606
Foreclosed assets 144 96 69
Purchases
Securities available for sale (13,620) (5,868)
Investment securities (11,839) (13,101) (9,447)
Loans (433) (213) (19)
Net cash acquired (paid) in acquisitions/divestitures (190) (26) 181
Other (255) (328) (181)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (3,030) (3,259) 527
- --------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net change in
Noninterest-bearing deposits 1,137 529 (284)
Interest-bearing deposits (1,536) (3,324) (2,748)
Federal funds purchased (2,082) 457 (384)
Sale/issuance
Repurchase agreements 163,675 165,563 175,353
Commercial paper 5,221 10,253 12,697
Other borrowed funds 48,310 35,391 34,925
Notes and debentures 9,015 424 782
Common stock 53 74 471
Redemption/maturity
Repurchase agreements (165,133) (162,994) (176,468)
Commercial paper (5,687) (9,831) (12,569)
Other borrowed funds (46,565) (33,588) (33,107)
Notes and debentures (4,344) (337) (314)
Acquisition of treasury stock (19) (13) (7)
Cash dividends paid to shareholders (276) (239) (207)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 1,769 2,365 (1,860)
- --------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (300) 16 (460)
Cash and due from banks at beginning of year 2,117 2,101 2,561
- --------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of year $ 1,817 $ 2,117 $ 2,101
- --------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 43
ACCOUNTING POLICIES
BUSINESS PNC Bank Corp. provides a full range of banking and related services
through its subsidiaries to individual and corporate customers and is subject
to intense competition from other financial services companies with respect to
these services and customers. PNC Bank Corp. is also subject to the regulations
of certain federal and state agencies and undergoes periodic examinations by
such regulatory authorities.
BASIS OF FINANCIAL STATEMENT PRESENTATION The consolidated financial statements
include the accounts of PNC Bank Corp. and its subsidiaries ("Corporation"),
substantially all of which are wholly-owned. Such statements have been prepared
in accordance with generally accepted accounting principles. All significant
intercompany accounts and transactions have been eliminated in the consolidated
financial statements.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect amounts reported in the financial
statements. Actual results could differ from such estimates.
RECLASSIFICATIONS Certain prior period amounts have been reclassified to
conform to reporting classifications utilized for the current reporting period.
These reclassifications did not impact the Corporation's financial condition or
results of operations.
SECURITIES Effective December 31, 1993, the Corporation adopted Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Securities are classified as
investments and carried at amortized cost if management has the positive intent
and ability to hold the securities to maturity. Securities purchased with the
intention of recognizing short-term profits are placed in the trading account
and are carried at market value. Securities not classified as investment or
trading are designated securities available for sale and carried at fair value
with unrealized gains and losses reflected in shareholders' equity. Prior to
the adoption of SFAS No. 115, securities available for sale were carried at the
lower of cost or fair value.
Gains and losses on sales of securities are generally computed on a
specific security basis.
LOANS HELD FOR SALE Loans held for sale primarily consist of residential
mortgages and are carried at the lower of cost or aggregate market value. Gains
and losses on these loans are included in other noninterest income.
INTEREST RATE SWAPS, FINANCIAL FUTURES, FORWARDS AND OPTIONS Interest rate
swaps, financial futures, forwards and options, except those designated as
hedges, are valued at market, with realized and unrealized gains and losses
included in trading account profits. Fees related to interest rate swap
agreements entered into for customers are recognized in income over the term of
the swap.
To qualify for hedge accounting treatment, the hedging instrument must be
associated with specific interest-bearing assets or liabilities, be designated
and effective as a hedge and reduce exposure to interest rate risk. Interest
accruals on interest rate swaps designated as hedges are recognized as
adjustments to interest income or interest expense related to the hedged asset
or liability. Gains and losses on financial futures, forwards and options
designated as hedges are deferred and amortized over the remaining life of the
hedged transaction.
LOANS Interest income with respect to loans is accrued on the principal amount
outstanding, except for lease financing income and interest on certain consumer
loans which are recognized over their respective terms using methods which
approximate level yields. Significant loan fees are deferred and accreted to
income over the respective lives of the loans.
44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NONPERFORMING ASSETS Nonperforming assets are comprised of nonaccrual and
restructured loans and foreclosed assets. Generally, a loan is classified as
nonaccrual and the accrual of interest on such loan is discontinued when it is
determined that the collection of interest or principal is doubtful, or when a
default of interest or principal has existed for 90 days or more, unless such
loan is well secured and in the process of collection. When the accrual of
interest is discontinued, unpaid interest credited to income in the current
year is reversed and unpaid interest accrued in prior years is charged against
the allowance for credit losses. A loan is categorized as restructured if the
original interest rate on such loan, repayment terms, or both, are restructured
due to a deterioration in the financial condition of the borrower and it was
not previously classified as nonaccrual. Nonperforming loans are generally not
returned to performing status until the obligation is brought current, has
performed in accordance with the contractual terms for a reasonable period of
time and the ultimate collectibility of the total contractual principal and
interest is no longer in doubt.
Foreclosed assets are comprised of property acquired through a
foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure and loans
classified as in-substance foreclosure. A loan is classified as in-substance
foreclosure when the borrower is perceived to have little or no equity in the
collateral and the Corporation can reasonably anticipate proceeds for repayment
only from the operation or sale of the collateral. Foreclosed assets are
recorded at the lower of the related loan balance or market value of the
collateral less estimated disposition costs at the date acquired. Subsequently,
foreclosed assets are valued at the lower of the amount recorded at the date
acquired or the then current market value less estimated disposition costs. Any
gains or losses realized upon disposition of the property are reflected in
income. Market values are estimated primarily based upon appraisals.
ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses is established
through provisions for credit losses charged against income. Loans deemed to be
uncollectible are charged against the allowance account. Subsequent recoveries,
if any, are credited to the allowance account.
The allowance is maintained at a level believed adequate by management
to absorb estimated potential credit losses. Management's determination of the
adequacy of the allowance is based on periodic evaluations of the credit
portfolio considering past experience, current economic conditions, composition
of the credit portfolio and other relevant factors. This evaluation is
inherently subjective as it requires material estimates that may be susceptible
to significant change.
DEPRECIATION AND AMORTIZATION Depreciation and amortization of premises and
equipment are principally computed by the straight-line method over their
estimated useful lives for financial reporting purposes and by accelerated
methods for federal income tax purposes. Leasehold improvements are amortized
over their estimated useful lives or their respective lease terms, whichever is
shorter.
INTANGIBLE ASSETS Effective January 1, 1993, the Corporation changed its method
of accounting for certain intangible assets, consisting primarily of purchased
mortgage servicing rights. Such assets are accounted for at the lower of
amortized cost or the estimated value of the discounted future net revenues on
a disaggregated basis. Previously, future net revenues were not discounted for
this purpose. The cumulative effect of the change decreased net income by $10.4
million.
Intangible assets, which are included in other assets, are amortized
using accelerated and straight-line methods over their respective estimated
useful lives. Goodwill is amortized on a straight-line basis over periods
ranging from 15 to 25 years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 45
INCOME TAXES Effective January 1, 1993, the Corporation adopted SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires the use of the liability
method to account for deferred income taxes. Under this method, deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. Previously, deferred income taxes were accounted for using
the deferred method.
As permitted by SFAS No. 109, the Corporation elected not to restate the
financial statements of any prior periods. The cumulative effect of the change
decreased net income by $9.0 million.
TREASURY STOCK The purchase of the Corporation's common stock is recorded at
cost. At the date of subsequent reissue, the treasury stock account is reduced
by the cost of such stock on the first-in-first-out basis.
EARNINGS PER COMMON SHARE Primary earnings per common share is calculated by
dividing net income adjusted for preferred stock dividends declared by the sum
of the weighted average number of shares of common stock outstanding and the
number of shares of common stock which would be issued assuming the exercise of
stock options during each period.
Fully diluted earnings per common share is based on net income adjusted for
interest expense, net of tax, on outstanding convertible debentures and
dividends declared on nonconvertible preferred stock. The weighted average
number of shares of common stock outstanding is increased by the assumed
conversion of outstanding convertible preferred stock and convertible
debentures from the beginning of the year or date of issuance, if later, and
the number of shares of common stock which would be issued assuming the
exercise of stock options. Such adjustments to net income and the weighted
average number of shares of common stock outstanding are made only when such
adjustments dilute earnings per common share.
MERGER AGREEMENT
During 1993, the Corporation entered into an agreement to acquire for cash
First Eastern Corp. ("First Eastern"), Wilkes-Barre, Pennsylvania, which
reported total assets of $2.0 billion at December 31, 1993. The transaction has
an indicated value of $330 million and is subject to the approval of certain
regulatory agencies and First Eastern's shareholders. Closing is currently
anticipated in the second quarter of 1994.
SEARS MORTGAGE ACQUISITION
On November 30, 1993, the Corporation consummated its acquisition of the Sears
Mortgage Banking Group ("Sears Mortgage"), which consisted of Sears Mortgage
Corporation, Sears Mortgage Securities Corporation and Sears Savings Bank. The
transaction was recorded under the purchase method of accounting and the total
assets of Sears Mortgage were $7.6 billion at closing. The purchase price was
$328 million in cash and is subject to certain post-closing adjustments. Upon
consummation, Sears Savings Bank was converted to a national banking
association and renamed PNCMortgage Bank, National Association ("PNC
Mortgage"), and the other acquired entities became wholly-owned subsidiaries of
PNC Mortgage.
The following table presents unaudited pro forma financial information
for the Corporation and Sears Mortgage for the years ended December 31, 1993
and 1992, as if the acquisition had been effective on January 1, 1993, and
January 1, 1992, respectively.
- -----------------------------------------------------------------------------------------------------------------------
Year ended December 31 (Unaudited)
(In millions, except per share data) 1993 1992
- -----------------------------------------------------------------------------------------------------------------------
Net interest income $1,935 $ 1,823
Provision for credit losses 204 338
Noninterest income 1,143 1,075
Noninterest expenses 1,710 1,694
Income before cumulative effect of
changes in accounting principles 774 590
- -----------------------------------------------------------------------------------------------------------------------
Earnings per common share before cumulative
effect of changes in accounting principles
Primary $ 3.26 $ 2.63
Fully diluted 3.25 2.61
- -----------------------------------------------------------------------------------------------------------------------
46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 1993 information includes the Corporation's historical amounts for the
year ended December 31, 1993, and Sears Mortgage's unaudited historical amounts
for the eleven-months ended November 30, 1993. The 1992 information includes
both entities' historical amounts for the year ended December 31, 1992. These
historical amounts have been adjusted for the amortization of purchase
accounting adjustments. The pro forma financial information may not be
indicative of the results of operations that actually would have occurred, or
that may be attained in the future, had the Corporation completed its
acquisition of Sears Mortgage on the dates indicated. The purchase price paid
at closing is subject to certain post-closing adjustments, which are not
expected to have a material impact on the pro forma financial information.
OTHER ACQUISITIONS AND DIVESTITURES
During 1993, the Corporation acquired for cash the Massachusetts Company,
Boston, Massachusetts and Gateway Fed Corporation, Cincinnati, Ohio. The
aggregate purchase price was $107 million and the combined assets of these
companies totaled $1.4 billion at closing. These transactions were recorded
under the purchase method of accounting.
On January 21, 1994, the Corporation consummated the acquisition of United
Federal Bancorp, Inc. ("United"), State College, Pennsylvania, for $156 million
in cash. The transaction was recorded under the purchase method of accounting
and United's assets totaled $900 million at closing.
During 1992, the Corporation completed the acquisitions of Pro Group, Inc.,
Bradford, Pennsylvania, The First National Pennsylvania Corporation ("FNP") in
Erie, Pennsylvania, Sunrise Bancorp, Inc. ("Sunrise"), Fort Mitchell, Kentucky,
CCNB Corporation ("CCNB"), Camp Hill, Pennsylvania, and Flagship Financial
Corp. ("Flagship"), Jenkintown, Pennsylvania. These institutions contributed
approximately $2.6 billion in assets on a net basis. Under the terms of the
various agreements, the Corporation issued approximately 13.3 million shares of
common stock and paid cash of approximately $45 million. The Sunrise and
Flagship acquisitions were recorded under the purchase method of accounting.
The Pro Group, Inc., FNP and CCNB acquisitions were accounted for on a
pooling-of-interests basis, however, due to immateriality, prior period
financial information has not been restated.
During 1991, the Corporation acquired approximately $2.7 billion of selected
assets and deposit liabilities of First Federal Savings and Loan Association of
Pittsburgh and Future Federal Savings Bank of Louisville, Kentucky from the
Resolution Trust Corporation. Additionally, the Corporation entered into a
credit card processing agreement in which a substantial portion of the merchant
processing portfolio and servicing rights were sold. This transaction resulted
in a pre-tax gain of $13.3 million. During 1991, the Corporation completed the
sale of four Ohio bank affiliates which resulted in a pre-tax gain of $79.3
million. The banks had total assets and deposits of $2.0 billion and $1.6
billion, respectively.
CASH FLOWS
For purposes of the statement of cash flows, the Corporation defines cash and
due from banks as cash and cash equivalents. During 1993, 1992 and 1991,
interest paid on deposits and other contractual debt obligations was $1.3
billion, $1.6 billion and $2.3 billion, respectively, and income taxes paid
were $396.0 million, $257.3 million and $113.4 million, respectively. During
both 1993 and 1992, $7.2 billion, of investment securities were transferred to
available for sale. Loans transferred to foreclosed assets aggregated $24.5
million in 1993, $89.2 million in 1992 and $207.3 million in 1991.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 47
SECURITIES
Effective December 31, 1993, the Corporation adopted SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Under the new standard,
investment securities are carried at amortized cost and securities available
for sale are carried at fair value with the after-tax net unrealized gain or
loss recorded in shareholders' equity. As a result of adopting SFAS No. 115,
$7.2 billion of investment securities were reclassified as available for sale.
At December 31, 1993, after-tax net unrealized gains totaled $88 million.
- -------------------------------------------------------------------------------------------------------------------------
Unrealized
December 31, 1993 Amortized ------------------------ Fair
In millions Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------------
Investment securities
Debt securities
U.S. Treasury $ 1 $ 1
U.S. Government
agencies and
corporations 10,227 $ 39 $ 32 10,234
State and municipal 389 38 427
Other 810 3 4 809
Corporate stocks 245 245
- -------------------------------------------------------------------------------------------------------------------------
Total $ 11,672 $ 80 $ 36 $ 11,716
- -------------------------------------------------------------------------------------------------------------------------
Securities available for sale
Debt securities
U.S. Treasury $ 2,402 $ 2 $ 2 $ 2,402
U.S. Government
agencies and
corporations 8,023 114 16 8,121
State and municipal 2 2
Other 788 18 4 802
Corporate stocks 36 25 61
- -------------------------------------------------------------------------------------------------------------------------
Total $ 11,251 $ 159 $ 22 $ 11,388
- -------------------------------------------------------------------------------------------------------------------------
The carrying value of securities pledged to secure public and trust
deposits, repurchase agreements and for other purposes was $12.2 billion.
The following tables present the amortized cost and fair value of debt
securities at December 31, 1993, by remaining contractual maturities. Based on
the Corporation's current rate projections and historical experience, the
weighted-average expected maturity of all collateralized mortgage obligations
and mortgage-backed and asset-backed securities was two years and 11 months at
December 31, 1993.
December 31, 1993 Amortized Fair
In millions Cost Value
- -------------------------------------------------------------------------------------------------------------------------------
Investment securities
One year or less $ 54 $ 54
After one year through five years 117 125
After five years through ten years 64 69
After ten years 195 219
Collateralized mortgage obligations 10,738 10,741
Asset-backed securities 259 263
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 11,427 $11,471
- -------------------------------------------------------------------------------------------------------------------------------
Securities available for sale
One year or less $ 538 $ 538
After one year through five years 1,872 1,871
After five years through ten years 17 18
After ten years 53 61
Collateralized mortgage obligations 2,949 2,935
Mortgage-backed securities 5,739 5,857
Asset-backed securities 47 47
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 11,215 $11,327
- -------------------------------------------------------------------------------------------------------------------------------
Proceeds from the sale of securities available for sale were $16.7
billion in 1993 resulting in gross gains of $186.6 million and gross losses of
$4.5 million.
Proceeds from the sale of debt securities during 1992 and 1991 were
$8.2 billion and $5.2 billion, respectively. As a result of such sales, gross
gains of $198.1 million and $83.2 million, respectively, and gross losses of
$.7 million and $4.9 million, respectively, were realized.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
December 31, 1992 Amortized Unrealized Fair
In millions Cost Gains Losses Value
- -----------------------------------------------------------------------------
Investment securities
Debt securities
U.S. Treasury $ 37 $ 1 $ 38
U.S. Government
agencies and
corporations 11,413 101 $ 47 11,467
State and municipal 558 26 1 583
Other 1,246 7 6 1,247
Corporate stocks 73 22 95
- -----------------------------------------------------------------------------
Total $ 13,327 $ 157 $ 54 $ 13,430
- -----------------------------------------------------------------------------
Securities available for sale
U.S. Treasury $ 2,768 $ 18 $ 1 $ 2,785
U.S. Government
agencies and
corporations 4,011 120 4,131
Other 635 1 636
- -----------------------------------------------------------------------------
Total $ 7,414 $ 139 $ 1 $ 7,552
- -----------------------------------------------------------------------------
Loans
Loans are comprised of the following categories:
- -----------------------------------------------------------------
December 31
In millions 1993 1992
- -----------------------------------------------------------------
Commercial $ 12,463 $ 10,985
Real estate project 1,730 1,955
Real estate mortgage
Residential 8,036 3,235
Commercial 905 879
Consumer 8,525 7,950
Other 1,871 1,105
Unearned income (222) (292)
- -----------------------------------------------------------------
Total, net of unearned income $ 33,308 $ 25,817
- -----------------------------------------------------------------
At December 31, 1993, $1.5 billion of loans were pledged to secure
borrowings and for other purposes.
Certain directors and executive officers of the Corporation and its
significant subsidiaries as well as certain affiliates of these directors and
officers were customers of and had loans with subsidiary banks in the ordinary
course of business. All such loans were on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other customers and did not involve more than a
normal risk of collectibility. The aggregate dollar amount of these loans was
$313 million at December 31, 1993, and $216 million at December 31, 1992.
During 1993, new loans of $262 million were funded and repayments totaled $165
million.
NONPERFORMING ASSETS
Nonaccrual loans, restructured loans and foreclosed assets were as follows:
- -----------------------------------------------------------------
December 31
In millions 1993 1992
- -----------------------------------------------------------------
Nonaccrual loans $ 356 $ 529
Restructured loans 28 25
- -----------------------------------------------------------------
Total nonperforming loans 384 554
Foreclosed assets 170 266
- -----------------------------------------------------------------
Total nonperforming assets $ 554 $ 820
- -----------------------------------------------------------------
At December 31, 1993 and 1992, unfunded commitments to lend additional
funds with respect to nonperforming assets totaled $41 million and $99 million,
respectively. At December 31, 1993 and 1992, foreclosed assets are reported net
of valuation allowances of $69 million and $99 million, respectively.
In-substance foreclosures totaled $36 million at December 31, 1993 and $149
million at December 31, 1992. Gains on sales of foreclosed assets resulted in
net foreclosed asset income of $27 million in 1993, which is included in other
noninterest expenses. Net foreclosed asset expense totaled $50 million in 1992
and $39 million in 1991.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 49
Related interest on nonperforming loans was as follows:
- -----------------------------------------------------------------
December 31
In thousands 1993 1992 1991
- -----------------------------------------------------------------
Interest computed
on original terms $ 33,891 $ 53,362 $ 85,563
Interest recognized 6,296 6,136 20,663
- -----------------------------------------------------------------
ALLOWANCE FOR CREDIT LOSSES
The following table presents changes in the allowance for credit losses:
- ------------------------------------------------------------------
December 31
In millions 1993 1992 1991
- -----------------------------------------------------------------
Balance at January 1 $ 897 $ 797 $ 784
- -----------------------------------------------------------------
Charge-offs (246) (343) (446)
Recoveries 74 62 48
- -----------------------------------------------------------------
Net charge-offs (172) (281) (398)
- -----------------------------------------------------------------
Provision for credit losses 204 324 428
Acquisitions/divestitures 43 57 (17)
- -----------------------------------------------------------------
Balance at December 31 $ 972 $ 897 $ 797
- -----------------------------------------------------------------
In May 1993, SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan," was issued with adoption required in 1995. Management does not expect
the adoption of this standard to have a material impact on the Corporation's
financial position or results of operations.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET
RISK AND CONCENTRATIONS OF CREDIT RISK
In the normal course of business the Corporation is party to financial
instrument transactions with off-balance-sheet risk. These transactions enable
customers to meet their financing needs and enable the Corporation to reduce
exposure to market risk. Financial instruments with off-balance-sheet risk
involve, to varying degrees, credit and market risk in excess of the amount
recognized in the balance sheet. Such instruments are subject to the
Corporation's credit policies and procedures. The Corporation attempts to limit
the potential exposure of off-balance-sheet transactions through
diversification, utilizing exposure limits to any single industry or customer
and selling participations to third parties. Collateral requirements and
covenants, if necessary, are established based on management's credit
assessment of the customer.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
- -----------------------------------------------------------------
December 31
In millions 1993 1992
- -----------------------------------------------------------------
Contract amount represents credit risk
Commitments to extend credit $ 22,334 $ 17,445
Standby letters of credit 3,808 3,760
Commercial letters of credit 97 146
Contract or notional amount exceeds
the amount of credit risk
Interest rate swaps 12,302 8,206
Foreign currency exchange contracts
Commitments to purchase 387 235
Commitments to sell 392 255
Futures and forward contracts
Commitments to purchase 50
Option contracts
Written 555 227
Purchased 605 167
- -----------------------------------------------------------------
COMMITMENTS TO EXTEND CREDIT AND LOANS Commitments to extend credit represent
contractual obligations to lend funds. Funding of approximately 34 percent of
such commitments at December 31, 1993 is subject to the financial condition of
the customer. Commitments to extend credit generally require payment of a fee
by the customer and contain fixed expiration dates or other termination clauses
and specified interest rates. At December 31, 1993 and 1992, commitments to
extend credit included $1.8 billion and $1.9 billion, respectively, of
participations and syndications which are primarily to financial institutions.
The Corporation has purchased participations and originated loans in
connection with highly leveraged transactions ("HLT") which are included in the
commercial portfolio. HLT loans and unfunded commitments at December 31, 1993
and 1992, totaled $1.1 billion and
50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$1.3 billion, respectively. Communications was the largest category within
total HLT credit facilities at both year ends.
Loan outstandings and related unfunded commitments are primarily
concentrated within affiliate markets which encompass Delaware, Indiana,
Kentucky, New Jersey, Ohio and Pennsylvania. No specific industry concentration
exceeded 10 percent of total outstandings and unfunded commitments.
LETTERS OF CREDIT STANDBY letters of credit commit the Corporation to make
payments on behalf of customers when certain specified future events occur.
Such instruments are typically issued to support obligations such as industrial
revenue bonds, commercial paper, and bid or performance related contracts.
Commercial letters of credit are used to facilitate customer trade
transactions. At year-end 1993, the largest industry concentration within
standby letters of credit was healthcare, which accounted for approximately 18
percent of the total. At December 31, 1993, maturities for standby letters of
credit ranged from 1994 to 2003. At December 31, 1993 and 1992, standby letters
of credit included $758 million and $748 million, respectively, of
participations and syndications to others, and $3.2 billion and $2.9 billion,
respectively, were issued to support medium- and long-term debt.
INTEREST RATE SWAPS Interest rate swaps are agreements between two parties to
exchange periodic interest payments that are calculated on a notional principal
amount. The Corporation enters into interest rate swaps to alter the maturity
and repricing structure of the balance sheet ("hedge swaps") and as an
intermediary for customers ("customer swaps"). Only the interest payments are
exchanged, therefore, cash requirements and exposure to credit risk are
significantly less than the notional principal amount.
The Corporation seeks to minimize the credit risk associated with its
interest rate swap activities. This is primarily accomplished by entering into
transactions with only a selected number of high quality institutions,
establishing credit limits with counterparties and, where applicable, requiring
segregated collateral in the form of U.S. Government and agency securities. At
December 31, 1993, credit exposure related to all swaps totaled $109 million
and was 92 percent collateralized.
INTEREST RATE SWAPS
- ------------------------------------------------------------------------------------------------------------
Gain Position Loss Position Total
------------------------------------------------------
December 31, 1993 Notional Fair Notional Fair Notional
In millions Value Value Value Value Value
- ------------------------------------------------------------------------------------------------------------
Hedge swaps
Receive fixed $ 7,904 $ 153 $ 2,715 $ (26) $ 10,619
Pay fixed 1,193 (86) 1,193
- ------------------------------------------------------------------------------------------------------------
7,904 153 3,908 (112) 11,812
Customer swaps 245 3 245 (3) 490
- ------------------------------------------------------------------------------------------------------------
Total $ 8,149 $ 156 $ 4,153 $ (115) $ 12,302
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Gain Position Loss Position Total
---------------------------------------------
December 31, 1992 Notional Fair Notional Fair Notional
In millions Value Value Value Value Value
- ------------------------------------------------------------------------------------------------------------
Hedge swaps
Receive fixed $ 4,066 $ 154 $ 2,150 $ (35) $ 6,216
Pay fixed 589 881 (13) 1,470
- ------------------------------------------------------------------------------------------------------------
4,655 154 3,031 (48) 7,686
Customer swaps 260 7 260 (7) 520
- ------------------------------------------------------------------------------------------------------------
Total $ 4,915 $ 161 $ 3,291 $ (55) $ 8,206
- ------------------------------------------------------------------------------------------------------------
The majority of hedge swaps are indexed amortizing interest rate swaps
where the Corporation receives payments based on fixed interest rates and makes
payments based on a floating money market rate. Index swaps have remaining
expected maturities that range from six months to two and one half years. If
interest rates rise above a contractually specified level, the maturities of
the index swaps will be extended.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOREIGN CURRENCY EXCHANGE CONTRACTS Foreign currency exchange contracts involve
the trading of one currency for another at specified rates and dates and are
used to facilitate the management of fluctuations in foreign exchange rates.
Such contracts are entered into on behalf of customers and are utilized by the
Corporation to hedge against risk positions associated with asset/liability
management and trading activities.
FUTURES AND FORWARDS CONTRACTS Futures contracts represent commitments to
purchase or sell securities and other money market instruments at a specified
date and price. Futures contract terms are standardized and are traded on
organized exchanges. The exchange assumes the risk that a counterparty will not
honor the contract and, therefore, generally requires margin payments to
minimize such risk. Forward contracts are traded in over-the-counter markets
and do not have standardized terms. Futures and forward contracts are utilized
by the Corporation to hedge against risk positions associated with
asset/liability management and trading activities. Counterparties to the
Corporation's futures and forward contracts are primarily U.S. Government
agencies and brokers and dealers in securities.
OPTION CONTRACTS Option contracts represent rights to purchase or sell
securities or other money market instruments at a specified date and price at
the option of the holder. The writer of the option contract receives a fee that
conveys to the holder the right to put or call the underlying financial
instrument. Option contracts are traded on organized exchanges or customized to
meet the specialized needs of the counterparty.
PREMISES, EQUIPMENT AND
LEASEHOLD IMPROVEMENTS
Premises, equipment and leasehold improvements, stated at cost less accumulated
depreciation and amortization, were as follows:
- ---------------------------------------------------------------------------
December 31
In millions 1993 1992
- ---------------------------------------------------------------------------
Land $ 62 $ 51
Buildings 364 291
Equipment 662 563
Leasehold improvements 127 117
- ---------------------------------------------------------------------------
1,215 1,022
Accumulated depreciation and amortization (561) (476)
- ---------------------------------------------------------------------------
Net book value $ 654 $ 546
- ---------------------------------------------------------------------------
Depreciation and amortization expense on premises, equipment and
leasehold improvements totaled $91.8 million in 1993, $76.9 million in 1992 and
$69.7 million in 1991.
Certain facilities and equipment are leased under agreements expiring at
various dates until the year 2022. Substantially all such leases are accounted
for as operating leases. Rental expense on such leases amounted to $61.8
million in 1993, $57.5 million in 1992 and $56.4 million in 1991.
At December 31, 1993, required minimum annual rentals due on
noncancelable leases having terms in excess of one year aggregated $307.1
million. Minimum annual rentals for each of the years 1994 through 1998 are
$56.3 million, $46.6 million, $39.8 million, $30.8 million and $21.1 million,
respectively.
MORTGAGE BANKING
At December 31, 1993, purchased mortgage servicing rights totaled $268 million
compared with $44 million at December 31, 1992. Amortization expense during
1993 and 1992 totaled $17.1 million and $9.0 million, respectively.
REPURCHASE AGREEMENTS
Certain securities are sold under agreements to repurchase and are treated as
financings. The obligation to repurchase such securities is reflected as a
liability on the consolidated
52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
balance sheet. The dollar amounts of securities underlying the agreements
remain in the respective asset accounts.
Repurchase agreement data, including accrued interest for securities
sold, are presented below. All collateral is in the form of U.S. Treasury or
U.S. Government agency securities.
- ---------------------------------------------------------------------------------------------------
December 31, 1993
Remaining Maturity Securities Sold Repurchase Liability
------------------------ ---------------------
Type of Security Carrying Market Interest
In millions Amount Value Amount Rate
- ---------------------------------------------------------------------------------------------------
Next business day
Treasury $ 144 $ 144 $ 143 2.63%
Agency 353 355 220 2.44
4 to 30 days
Treasury 47 47 47 2.76
Agency 442 447 368 3.48
31 to 90 days
Agency 1,042 1,053 972 3.52
Over 91 days to one year
Agency 2,821 2,838 2,763 3.72
Over one year
Treasury 67 67 57 7.82
Agency 443 446 425 3.89
- ------------------------------------------------------------------------------------
Total $ 5,359 $ 5,397 $ 4,995 3.63%
- --------------------------------------------------------------------------------------------------
NOTES AND DEBENTURES
- ------------------------------------------------------------------------
December 31
In millions 1993 1992
- ------------------------------------------------------------------------
BANKING SUBSIDIARIES
Bank notes $ 7,000 $ 2,925
Federal Home Loan Bank 1,045
Student Loan Marketing Association 520 615
- ------------------------------------------------------------------------
Total Banking Subsidiaries 8,565 3,540
OTHER SUBSIDIARIES
Senior notes 150 150
Subordinated notes 550 100
ESOP borrowing 110 131
Other 210 376
- ------------------------------------------------------------------------
Total Other Subsidiaries 1,020 757
- ------------------------------------------------------------------------
Total $ 9,585 $ 4,297
- ------------------------------------------------------------------------
During 1993, $200 million of 8.25% Notes Due 1996 were redeemed.
Bank notes mature in 1994 and have various interest rates that range from
3.20 percent to 3.90 percent. The Federal Home Loan Bank advances have various
maturities ranging from 1994 to 2002 and interest rates that range from 3.37
percent to 8.76 percent. The Student Loan Marketing Association obligations
mature in 1994 and have various interest rates that range from 3.25 percent to
3.55 percent.
The senior and subordinated notes were issued by PNC Funding Corp. and are
not redeemable prior to maturity. Interest on the notes is payable
semiannually, and the payment of principal and interest is unconditionally
guaranteed by the parent company. The senior and subordinated notes have
various maturities ranging from 1995 to 2003 and interest rates that range from
4.875 percent to 9.875 percent.
The ESOP borrowing is unconditionally guaranteed by the parent company.
During 1993, the ESOP borrowing was refinanced with a series of medium-term,
fixed-rate notes with maturities that range from 1994 to 1999 and interest
rates ranging from 4.76 percent to 5.48 percent. Interest expense on the
borrowing was $4.9 million in 1993, $5.8 million in 1992 and $9.7 million in
1991.
The other category includes convertible subordinated debentures, floating
rate notes, capital notes, mortgage notes and various other borrowings, with
rates ranging from 3.50 percent to 11.09 percent and various maturities
extending through 2004.
Notes and debentures have scheduled repayments for the years 1994 through
1998 of $7.7 billion, $716 million, $39 million, $22 million and $51 million,
respectively.
SHAREHOLDERS' EQUITY
The Corporation has four outstanding series of preferred stock. During 1993,
the Series E preferred stock was redeemed. The redemption/liquidation value and
number of shares outstanding by series are as follows:
- ------------------------------------------------------------------------------------------------------
Redemption/
Liquidation Shares Outstanding
--------------------------
December 31 Value Per Share 1993 1992
- -------------------------------------------------------------------------------------------------------
$ 1.80 Series A $ 40 21,495 23,666
1.80 Series B 40 9,297 10,457
1.60 Series C 20 425,813 478,448
1.80 Series D 20 526,628 647,370
2.60 Series E 27.75 338,100
- -------------------------------------------------------------------------------------------------------
Total 983,233 1,498,041
- -------------------------------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 53
Series A through D are cumulative and except for Series B, are redeemable
at the option of the Corporation.
Holders of preferred stock are entitled to a number of votes equal to the
number of full shares of common stock into which such preferred stock is
convertible. Preferred stockholders are entitled to the following conversion
privileges: (i) one share of Series A or Series B is convertible into eight
shares of common stock; and (ii) 2.4 shares of Series C or Series D are
convertible into four shares of common stock.
The Corporation has a dividend reinvestment and stock purchase plan.
Shareholders of preferred stock and common stock may participate in the plan
which provides that additional shares of common stock may be purchased with
reinvested dividends and voluntary cash payments at market value. The following
number of shares of common stock were purchased pursuant to such plan: 591,785
shares in 1993, 670,309 shares in 1992 and 565,127 shares in 1991.
The Corporation had reserved approximately 19.0 million shares of common
stock to be issued in connection with employee stock options and the conversion
of certain debt and equity securities.
EMPLOYEE BENEFIT PLANS
The Corporation has an incentive savings plan ("ISP") in which employee
contributions of up to 6 percent of base pay are matched. Additionally, the
Corporation has an ESOP which covers all eligible participants of the ISP. The
aggregate benefit expense of these plans was $4.9 million for 1993, $9.7
million for 1992 and $12.7 million for 1991.
The shares purchased by the ESOP are used to match a portion of employee
contributions to the ISP. Dividends received on shares held by the ESOP are
used to service a portion of the principal and interest payments of the ESOP
borrowing. During 1993, 1992 and 1991, dividends used for debt service totaled
$8.5 million, $7.9 million and $5.8 million, respectively. The Corporation
contributed $8.8 million in 1993, $9.5 million in 1992 and $9.4 million in 1991
to satisfy the additional debt service cost. Benefit expense is recognized
based on a percentage of total debt service for the current year to total debt
service over the life of the borrowing. This percentage is applied to the
original principal balance to calculate the benefit expense, which totaled $2.5
million in 1993, $8.0 million in 1992 and $11.4 million in 1991.
The Corporation sponsors a funded defined benefit pension plan covering
substantially all employees. The plan provides pension benefits that are based
on the average base salary for specified years of service prior to retirement.
Pension contributions are made to the extent deductible under existing federal
tax regulations. The Corporation also has an unfunded non-qualified
supplemental defined benefit retirement plan covering certain employees, as
defined in the plan.
The following table sets forth the estimated funded status of defined
benefit plans:
- ---------------------------------------------------------------------------
December 31
In millions 1993 1992
- ---------------------------------------------------------------------------
Actuarial present value of accumulated
benefit obligation, including vested
benefits of $280 and $203 $ 298 $ 218
- ---------------------------------------------------------------------------
Actuarial present value of projected
benefit obligation for service
rendered to date $ 402 $ 338
Less plan assets at fair value--primarily
listed common stocks, U.S.
Government and agency
securities, and collective funds (289) (288)
- ---------------------------------------------------------------------------
Unfunded projected benefit obligation
in excess of projected plan assets 113 50
Unrecognized net loss from past
experience different from that
assumed and effects of changes
in assumptions (108) (52)
Unrecognized net asset 15 18
Unrecognized prior service cost (6) (7)
- ---------------------------------------------------------------------------
Accrued pension cost included
in other liabilities $ 14 $ 9
- ---------------------------------------------------------------------------
54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net defined benefit plan costs include the following components:
- -------------------------------------------------------------------------------------------------
Year ended December 31
In thousands 1993 1992 1991
- -------------------------------------------------------------------------------------------------
Service cost--benefits earned
during the period $ 16,887 $ 16,883 $ 14,567
Interest cost on projected
benefit obligation 19,611 24,577 19,338
Actual return on plan assets (34,837) (18,204) (54,487)
Net amortization and deferral 6,000 (8,823) 30,728
- -------------------------------------------------------------------------------------------------
Net periodic pension costs $ 7,661 $ 14,433 $ 10,146
- -------------------------------------------------------------------------------------------------
Assumptions used in accounting for the plans were:
December 31 1993 1992 1991
- -------------------------------------------------------------------------------------------------
Discount rate 7.25% 6.00%-8.50% 8.50%
Rate of increase in
compensation levels 5.18 5.68 5.68
Expected long-term
rate of return on assets 10.00 10.00 10.00
- -------------------------------------------------------------------------------------------------
The Corporation has an employee stock purchase plan which covers a maximum
of five million shares of common stock of which 1,871,697 were available to be
issued. Persons who have been continuously employed for at least one year are
eligible to participate. Offering periods cover six months beginning June 1 and
December 1 of each year. Common stock is purchased by participants at 85
percent of the lesser of fair market value on the first or last day of each
offering period. During 1993, 276,517 shares were issued to participants at
prices of $24.12 and $25.18 per share; 291,580 shares were issued in 1992 at
prices of $17.80 and $21.68 per share; and 416,548 shares were issued in 1991
at prices of $9.41 and $15.62 per share. No charge to earnings is required with
respect to such plan.
In addition to providing pension benefits, the Corporation provides
certain health care and life insurance benefits for retired employees.
Effective January 1, 1992, the Corporation adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," which requires the
accrual of the expected cost of providing postretirement benefits to employees
during the years that employees render service. The adoption of SFAS No. 106
resulted in a charge of $102.5 million.
A reconciliation of the accrued postretirement benefit obligation is as
follows:
- ---------------------------------------------------------------------------------
December 31
In millions 1993 1992
- ---------------------------------------------------------------------------------
Accumulated postretirement benefit
Retirees $ 75 $ 75
Active employees 3 29
Other active plan participants 39 65
- ---------------------------------------------------------------------------------
Total accumulated postretirement obligation 117 169
- ---------------------------------------------------------------------------------
Unrecognized prior service cost 66
Unrecognized net loss (14)
- ---------------------------------------------------------------------------------
Accrued postretirement benefit obligation $ 169 $ 169
- ---------------------------------------------------------------------------------
Net periodic postretirement benefit costs include the following components:
- ---------------------------------------------------------------------------------
Year ended December 31
In thousands 1993 1992
- ---------------------------------------------------------------------------------
Service cost-benefits earned during the period $ 1,467 $ 5,483
Interest cost on accrued benefit obligation 6,330 13,440
Amortization of prior service cost (4,306)
- ---------------------------------------------------------------------------------
Net periodic postretirement benefit costs $ 3,491 $ 18,923
- ---------------------------------------------------------------------------------
Assumptions used in accounting for the plans were:
December 31 1993 1992
- ---------------------------------------------------------------------------------
Discount rate 7.25% 6.00-8.50%
Expected health care cost trend rate:
Medical 10.70 13.30
Dental 7.80 9.20
- ---------------------------------------------------------------------------------
The health care cost trend rate declines until it stabilizes at 5.0
percent beginning 2001. A 1 percent increase in the health care trend rate
would result in an increase of $113,000 and $470,000 in the service cost and
interest cost components, respectively, and a $7.7 million increase in the
accumulated postretirement benefit obligation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 55
Prior to the adoption of SFAS No. 106, the Corporation recognized benefit
expense related to postretirement benefits on a cash basis. The expense of
providing such benefits was $4.1 million in 1991.
Effective January 1, 1993, the Corporation's postretirement benefit plan
was amended to provide benefits limited to a fixed amount based on the
employee's age and years of service. The plan amendments resulted in a $63.8
million reduction to the accrued postretirement benefit obligation. In
accordance with SFAS No. 106, this reduction is amortized over the average
service life of covered employees, which is currently 15 years.
In November 1992, SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," was issued with adoption required in 1994. The impact of this
standard is not material to the Corporation's financial position or results of
operations.
In November 1993, Statement of Position No. 93-6, "Employers' Accounting
for Employee Stock Option Plans," was issued with adoption required in 1994.
Management does not expect the adoption of this statement to have a material
impact on the Corporation's financial position or results of operations.
STOCK OPTION PLANS
The Corporation has a senior executive long-term incentive award plan
("Incentive Plan") that provides for the granting of incentive stock options,
nonqualified options, stock appreciation rights ("SARs"), performance units,
and incentive shares. In any given year the number of shares of common stock
available for grants under the Incentive Plan may range from 1.5 percent to 3
percent of total issued shares of common stock, determined at the end of the
preceding calendar year.
Options are granted at exercise prices not less than the fair market value
of common stock on the date of grant. Such options may not be exercised for
twelve months after the date of grant. Payment of the option price may be in
cash or shares of common stock valued at fair market value on the exercise
date.
The following table presents share data related to the Incentive Plan, a
similar predecessor plan and other plans assumed in certain mergers. In
accordance with the terms of plans assumed in certain mergers, option holders
receive upon exercise, common stock in accordance with the relevant exchange
ratio.
- ---------------------------------------------------------------------------------
Option Price
Per Common Share Shares
- ---------------------------------------------------------------------------------
January 1, 1991 $6.47-$23.00 8,605,276
Granted 11.38- 21.63 2,266,800
SARs exercised (9,400)
Options exercised 6.47- 21.11 (752,714)
Terminated (206,260)
- ---------------------------------------------------------------------------------
December 31, 1991 6.47- 23.00 9,903,702
Granted 12.31- 27.56 2,177,640
SARs exercised (52,800)
Options exercised 6.47- 21.63 (3,095,230)
Terminated (48,300)
- ---------------------------------------------------------------------------------
December 31, 1992 6.47- 27.56 8,885,012
Granted 29.50- 30.13 1,924,350
SARs exercised (10,000)
Options exercised 6.47- 27.56 (1,384,022)
Terminated (68,609)
- ---------------------------------------------------------------------------------
December 31, 1993 $6.47-$30.13 9,346,731
- ---------------------------------------------------------------------------------
At December 31, 1993, options for 7,411,803 shares of common stock were
exercisable. Shares of common stock available for the granting of options under
the Incentive Plan and the predecessor plan were as follows: 6,259,203 at
December 31, 1993, 4,658,641 at December 31, 1992, and 703,500 at December 31,
1991.
INCOME TAXES
Effective January 1, 1993, the Corporation adopted SFAS No. 109, "Accounting
for Income Taxes," which requires the use of the liability method to account
for deferred income taxes.
56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income taxes related to operations, the tax effect of securities
transactions, and the current and deferred portions of income taxes were as
follows:
- -------------------------------------------------------------------------------------------------
Year ended December 31
In thousands 1993 1992 1991
- -------------------------------------------------------------------------------------------------
Operations $ 305,656 $ 175,887 $ 134,602
Securities transactions
Equity and other (133) 5,680 (2,826)
Debt 65,826 67,115 26,639
- -------------------------------------------------------------------------------------------------
Total $ 371,349 $ 248,682 $ 158,415
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Year ended December 31
In thousands 1993 1992 1991
- -------------------------------------------------------------------------------------------------
Current
Federal $ 419,986 $ 276,156 $ 131,418
State 11,914 8,433 6,388
- -------------------------------------------------------------------------------------------------
Total current 431,900 284,589 137,806
- -------------------------------------------------------------------------------------------------
Deferred
Federal (58,044) (36,777) 16,388
State (2,507) 870 4,221
- -------------------------------------------------------------------------------------------------
Total deferred (60,551) (35,907) 20,609
- -------------------------------------------------------------------------------------------------
Total $ 371,349 $ 248,682 $ 158,415
- -------------------------------------------------------------------------------------------------
Significant components of the Corporation's deferred tax assets and
liabilities are as follows:
- -------------------------------------------------------------------------------------------------
December 31, January 1,
In millions 1993 1993
- -------------------------------------------------------------------------------------------------
Deferred tax assets
Allowance for credit losses $ 321 $ 300
Compensation and benefits 81 73
Foreclosed assets 21 21
Purchase accounting--deposits
and other borrowings 72
Purchase accounting--other 35
Other 63 53
- -------------------------------------------------------------------------------------------------
Total deferred tax assets 593 447
- -------------------------------------------------------------------------------------------------
Deferred tax liabilities
Leasing operations 179 205
Depreciation 18 23
Net unrealized securities gains 48
Purchase accountingloans 97
Other 24 13
- -------------------------------------------------------------------------------------------------
Total deferred tax liabilities 366 241
- -------------------------------------------------------------------------------------------------
Net deferred tax asset $ 227 $ 206
- -------------------------------------------------------------------------------------------------
The components of deferred income taxes that result from timing differences
in the recognition of revenues and expenses for tax and financial reporting
purposes were as follows:
- -------------------------------------------------------------------------------------------------
Year ended December 31
In thousands 1992 1991
- -------------------------------------------------------------------------------------------------
Lease financing $ 5,145 $ 13,729
Provision for credit losses (17,294) (10,896)
Investment tax credit (106) (167)
Alternative minimum tax 6,040 36,918
Other--net (29,692) (18,975)
- -------------------------------------------------------------------------------------------------
Total deferred taxes (benefits) $(35,907) $ 20,609
- -------------------------------------------------------------------------------------------------
A reconciliation between the statutory and effective tax rates follows:
- -------------------------------------------------------------------------------------------------
Year ended December 31 1993 1992 1991
- -------------------------------------------------------------------------------------------------
Statutory tax rate 35.0% 34.0% 34.0%
Tax-exempt interest (2.4) (3.8) (7.3)
State tax .5 .8 1.3
Other--net .2 1.0 .9
- -------------------------------------------------------------------------------------------------
Effective tax rate 33.3% 32.0% 28.9%
- -------------------------------------------------------------------------------------------------
REGULATORY MATTERS
The Corporation is subject to the regulations of certain federal and state
agencies and undergoes periodic examinations by such regulatory authorities. At
any time, various bank and nonbank examinations are ongoing. Management
promptly responds to all findings of regulators. None of the Corporation's bank
and nonbank subsidiaries are subject to written regulatory agreements.
The dividends that may be paid by subsidiary banks to the parent company
are subject to certain legal limitations. Without regulatory approval, the
amount available for payment of dividends by all subsidiary banks was $943
million at December 31, 1993. Dividends also may be impacted by capital needs,
regulatory requirements and policies, and other factors as management deems
relevant.
Under federal law, generally no bank subsidiary may extend credit to the
parent company or its nonbank subsidiaries on terms and under circumstances
which are not substantially the same as comparable extensions of credit to
nonaffiliates. No extension of credit may be made to the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 57
parent company or a nonbank subsidiary which is in excess of 10 percent of the
capital stock and surplus of such bank subsidiary or in excess of 20 percent of
the capital and surplus of such bank subsidiary as to aggregate extensions of
credit to the parent company and its subsidiaries. In certain circumstances,
federal regulatory authorities may impose more restrictive limitations. Such
extensions of credit, with limited exceptions, must be fully collateralized.
The maximum amount available under statutory limitations for transfer from
subsidiary banks to the parent company in the form of loans and dividends
approximated 32 percent of consolidated net assets at December 31, 1993.
Federal Reserve Board regulations require depository institutions to
maintain cash reserves with the Federal Reserve Bank. During 1993, subsidiary
banks maintained reserves which averaged $814 million.
LITIGATION
During 1993, the parties reached an agreement to settle a consolidated class
action against the Corporation and certain present and former
officer-directors, alleging purported violations of federal securities laws,
and a shareholders' derivative suit against such officer-directors, alleging
breach of fiduciary duty and waste of corporate assets. The settlement was
approved by the court and both actions were dismissed with prejudice. The cost
of settlement was covered by insurance and existing litigation reserves.
In January 1992, a purported class action lawsuit was filed against
PNC National Bank ("PNCNB"), a national bank subsidiary of the Corporation
located in Wilmington, Delaware, alleging that PNCNB violated Pennsylvania
statues in connection with certain fees charged on credit cards issued by PNCNB
and seeking, among other things, unquantified compensatory and triple damages
and injunctive relief. PNCNB has filed a motion for judgment on the pleadings,
seeking dismissal of the suit. This case is one of several brought against a
number of banks, challenging whether a credit card issuing bank can impose
various types of fees allowed by the state where the issuer is located on
cardholders residing in other states that allegedly limit or prohibit those
fees.
PNCNB is vigorously defending the lawsuit. The impact of the final
disposition of this case cannot be assessed at the present time.
The Corporation, in the normal course of business, is subject to
various other pending and threatened lawsuits in which claims for monetary
damages are asserted. Management, after consultation with legal counsel, does
not anticipate that the ultimate aggregate liability, if any, arising out of
such other lawsuits will have a material adverse effect on the Corporation's
financial position.
At the present time, management is not in a position to determine
whether any pending or threatened litigation will have a material adverse
effect on the Corporation's results of operations in any future reporting
period.
PARENT COMPANY FINANCIAL STATEMENTS
BALANCE SHEET
- -------------------------------------------------------------------
December 31
In millions 1993 1992
- -------------------------------------------------------------------
ASSETS
Cash and due from banks $ 1 $ 3
Securities available for sale 261 165
Investments in
Bank subsidiaries 4,268 3,543
Nonbank subsidiaries 320 293
Advances to subsidiary banks 4 1
Goodwill 19 24
Other assets 103 34
- -------------------------------------------------------------------
Total assets $ 4,976 $ 4,063
- -------------------------------------------------------------------
LIABILITIES
Dividends payable $ 1
Notes and debentures $ 1 1
Nonbank affiliate borrowings 360 130
Accrued expenses and other liabilities 290 185
- -------------------------------------------------------------------
Total liabilities 651 317
- -------------------------------------------------------------------
SHAREHOLDERS' EQUITY 4,325 3,746
- -------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 4,976 $ 4,063
- -------------------------------------------------------------------
58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENT OF INCOME
- -----------------------------------------------------------------------------------------
Year ended December 31
In thousands 1993 1992 1991
- -----------------------------------------------------------------------------------------
OPERATING REVENUE
Dividends from
Bank subsidiaries $ 335,125 $ 265,875 $ 351,264
Nonbank subsidiaries 10,750 6,050 96,364
Interest income 10,436 15,409 11,001
Other income 781 240 1,434
- -----------------------------------------------------------------------------------------
Total operating revenue 357,092 287,574 460,063
- -----------------------------------------------------------------------------------------
OPERATING EXPENSES
Interest expense 4,924 4,135 7,802
Other expenses 55,989 84,006 22,096
- -----------------------------------------------------------------------------------------
Total operating expenses 60,913 88,141 29,898
- -----------------------------------------------------------------------------------------
Income before income taxes
and equity in undistributed
net income of subsidiaries 296,179 199,433 430,165
Applicable income taxes
(benefits) 1,895 (18,818) (2,924)
- -----------------------------------------------------------------------------------------
Income before equity in
undistributed net income
of subsidiaries 294,284 218,251 433,089
Net equity in undistributed
net income (excess dividends)*
Bank subsidiaries 400,877 335,638 62,512
Nonbank subsidiaries 33,174 (24,449) (105,815)
- -----------------------------------------------------------------------------------------
Income before cumulative
effect of changes in
accounting principles 728,335 529,440 389,786
Cumulative effect of changes
in accounting principles,
net of tax benefit
of $52,804 in 1992 (2,465) (102,501)
- -----------------------------------------------------------------------------------------
Net income $ 725,870 $ 426,939 $ 389,786
- -----------------------------------------------------------------------------------------
* Amounts for 1993 include the cumulative effect of changes in accounting
principles at the respective subsidiaries.
STATEMENT OF CASH FLOWS
- -----------------------------------------------------------------------------------------
Year ended December 31
In millions 1993 1992 1991
- -----------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 726 $ 427 $ 390
Adjustments to reconcile
net income to net cash
provided by operating
activities
Cumulative effect of
changes in accounting
principles 2 103
Equity in undistributed
net earnings of
subsidiaries (434) (311) 43
Other 110 47 (29)
- -----------------------------------------------------------------------------------------
Net cash provided by
operating activities 404 266 404
- -----------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net change in interest-
earning deposits
with subsidiary bank (4) 4 (5)
Net capital returned/
(contributed) to subsidiaries 173 1 (535)
Sales of securities
available for sale 2,674 2,956
Purchases of securities
available for sale (2,770) (2,874)
Cash paid in acquisitions (383) (45)
Other (87) (22) (107)
- -----------------------------------------------------------------------------------------
Net cash provided (used)
by investing activities (397) 20 (647)
- -----------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Borrowings from
nonbank subsidiary 250 72
Matured borrowings from
nonbank subsidiary (9) (5) (86)
Acquisition of treasury stock (19) (14) (7)
Cash dividends paid to
shareholders (277) (239) (207)
Issuance of stock 46 74 471
Redemption of
notes and debentures (100)
- -----------------------------------------------------------------------------------------
Net cash provided (used)
by financing activities (9) (284) 243
- -----------------------------------------------------------------------------------------
Increase (decrease) in cash
and due from banks (2) 2
Cash and due from banks at
beginning of year 3 1 1
- -----------------------------------------------------------------------------------------
Cash and due from banks
at end of year $ 1 $ 3 $ 1
- -----------------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 59
Commercial paper issued by PNC Funding Corp. is guaranteed by the
parent company. During 1993, 1992 and 1991, the parent company received income
tax refunds of $2.7 million, $16.8 million and $7.1 million, respectively. Such
refunds represent the parent company's portion of consolidated income taxes.
During 1993, 1992 and 1991, the parent company paid interest on contractual
debt obligations of $4.9 million, $4.4 million and $7.9 million, respectively.
UNUSED LINES OF CREDIT
At December 31, 1993, the Corporation maintained a line of credit in the amount
of $150 million, none of which was drawn. This line is available for general
corporate purposes. The annual fee paid for the unused line is .25 percent.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of fair value information for financial instruments. SFAS No. 107
excludes certain assets such as real and personal property, leases, loan
customer relationships, deposit customer intangibles, retail branch networks,
fee-based businesses, trademarks and brand names. Accordingly, the aggregate of
fair value amounts presented does not attempt to capture and does not represent
the underlying value of the Corporation.
SFAS No. 107 defines fair value as the estimated amount at which the
financial instrument could be exchanged in a current transaction between
willing parties, other than in a forced or liquidation sale. However, it is not
management's intention to immediately dispose of a significant portion of such
financial instruments, and the unrealized gains or losses should not be
interpreted as a forecast of future earnings and cash flows.
The fair value of securities is based primarily on quoted market
prices. For substantially all other financial instruments, fair values have
been estimated using discounted cash flow analyses, pricing models and other
valuation techniques. These derived fair values are subjective in nature,
involve uncertainties and matters of significant judgment and, therefore,
cannot be determined with precision. Changes in assumptions could significantly
impact the derived fair value estimates.
The following table represents the estimates of fair value of financial
instruments:
FAIR VALUE OF FINANCIAL INSTRUMENTS
- -----------------------------------------------------------------------------------------------------------
December 31 1993 1992
------------------------ -----------------------
Carrying Fair Carrying Fair
In millions Amount Value Amount Value
- -----------------------------------------------------------------------------------------------------------
ASSETS
Cash and short-term assets $ 3,119 $ 3,119 $ 3,745 $ 3,745
Loans held for sale 1,392 1,392 220 220
Securities 23,060 23,104 20,741 20,982
Net loans (excludes leases) 31,679 32,185 24,290 25,067
LIABILITIES
Demand deposits 18,621 18,621 17,156 17,156
Time deposits 14,494 14,790 12,314 12,646
Short-term borrowings 12,212 12,211 12,274 12,263
Notes and debentures 9,585 9,598 4,297 4,330
OFF-BALANCE-SHEET
Commitments to extend credit (23) (23) (13) (13)
Letters of credit (30) (30) (49) (49)
Interest rate swaps 31 41 44 106
- -----------------------------------------------------------------------------------------------------------
The following methods and assumptions were used in estimating fair
value amounts for financial instruments:
GENERAL For short-term financial instruments realizable in three months or
less, the carrying amount reported in the balance sheet approximates fair
value. Unless otherwise stated, the rates used to discount cash flows are based
on market yield curves.
60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH AND SHORT-TERM ASSETS The carrying amounts reported in the consolidated
balance sheet for cash and short-term assets approximate those assets' fair
values primarily due to their short-term nature. For purposes of this
disclosure only, short-term assets include due from banks, interest-earning
deposits with banks, federal funds sold and resale agreements, trading account
securities, customers' acceptance liability and accrued interest receivable.
Trading account securities are recorded at market value, therefore, the
carrying amount is equal to fair value.
SECURITIES The fair value of investment securities and securities available for
sale are based on quoted market prices, where available. If quoted market
prices are not available, fair value is estimated using the quoted market
prices of comparable instruments.
NET LOANS AND LOANS HELD FOR SALE For demand and variable rate commercial and
certain consumer loans that reprice quarterly, fair values are estimated by
reducing carrying amounts by estimated credit loss factors. For other
commercial loans, including nonaccrual loans, fair values are estimated using
discounted cash flow analyses, with cash flows reduced by estimated credit loss
factors and discount rates equal to rates currently charged by the Corporation
for similar loans. In the case of nonaccrual loans, scheduled cash flows do not
include interest payments.
For automobile, home equity, student and credit card loans, fair values
are determined by using internal pricing models. The models derive fair value
by incorporating assumptions about prepayments, credit losses and servicing
fees and costs and discounting the future net revenues at an appropriate risk
rate of return. For credit cards and revolving home equity loans, this fair
value does not include any amount for new loans or the related fees that will
be generated from the existing customer relationships. The fair value of
residential mortgages is estimated based on quoted market prices of similar
loans sold in conjunction with securitization transactions, adjusted for
differences in loan characteristics. Due to their short-term nature, the
carrying amount of loans held for sale approximates fair value.
DEPOSITS The carrying amounts for noninterest-bearing demand and
interest-bearing, money market and savings deposits approximate fair values.
For time deposits, fair values are based on the discounted value of scheduled
cash flows. The discount rates used vary by instrument and are based on dealer
quotes or rates currently offered for deposits with similar maturities.
SHORT-TERM BORROWINGS The carrying amounts of federal funds purchased,
commercial paper, acceptances outstanding and accrued interest payable are
considered fair value because of their short-term nature. Repurchase agreements
and term federal funds purchased are valued using discounted cash flow
analyses.
NOTES AND DEBENTURES The fair value of variable-rate notes and debentures is
equivalent to carrying value. For fixed-rate notes and debentures, scheduled
cash flows are discounted using rates for similar debt with the same
maturities.
UNFUNDED LOAN COMMITMENTS AND LETTERS OF CREDIT Fair values for commitments to
extend credit and letters of credit are estimated based upon the amount of
deferred fees and the creditworthiness of the counterparties.
FOREIGN CURRENCY EXCHANGE, FINANCIAL FUTURES, FORWARDS AND OPTION CONTRACTS
These off-balance-sheet financial instruments are marked to market, therefore,
the carrying amount approximates fair value. Such amounts are immaterial at
December 31, 1993.
INTEREST RATE SWAPS The fair value of index interest rate swaps is based on
dealer quotes. The fair value of all other swaps is the discounted value of the
expected net cash flows. These fair values represent the estimated amounts that
the Corporation would receive or pay to terminate the contracts, taking into
account current interest rates
STATISTICAL INFORMATION 61
SELECTED CONSOLIDATED FINANCIAL DATA
- ----------------------------------------------------------------------------------------------------------------------------
Year ended December 31 1993 1992 1991 1990 1989
- ----------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS (In thousands)
Interest income $3,201,120 $3,218,971 $3,657,533 $4,223,375 $4,064,440
Interest expense 1,372,087 1,561,679 2,222,335 2,874,118 2,758,385
Net interest income 1,829,033 1,657,292 1,435,198 1,349,257 1,306,055
Provision for credit losses 203,944 323,531 428,038 760,507 331,724
Noninterest income excluding net securities gains 757,555 693,273 748,571 634,108 547,093
Net securities gains 187,694 193,503 63,454 22,425 33,545
Noninterest expenses 1,453,726 1,442,415 1,270,984 1,215,858 1,069,705
Applicable income taxes (benefits) 371,349 248,682 158,415 (41,487) 107,824
Income before cumulative effect
of changes in accounting principles 745,263 529,440 389,786 70,912 377,440
Cumulative effect of changes in accounting
principles, net of tax benefit of $5,343 and $52,804 (19,393) (102,501)
Net income 725,870 426,939 389,786 70,912 377,440
PER COMMON SHARE DATA
Book value at year end $18.34 $15.96 $15.27 $13.40 $14.83
Cash dividends declared 1.175 1.080 .795 1.060 1.030
Earnings
Primary before cumulative effect
of changes in accounting principles $ 3.14 $ 2.36 $ 1.97 $ .37 $ 1.99
Cumulative effect of changes in accounting principles (.08) (.46)
- ----------------------------------------------------------------------------------------------------------------------------
Primary $ 3.06 $ 1.90 $ 1.97 $ .37 $ 1.99
- ----------------------------------------------------------------------------------------------------------------------------
Fully diluted before cumulative effect
of changes in accounting principles $ 3.13 $ 2.34 $ 1.94 $ .37 $ 1.96
Cumulative effect of changes in accounting principles (.09) (.45)
- ----------------------------------------------------------------------------------------------------------------------------
Fully diluted $ 3.04 $ 1.89 $ 1.94 $ .37 $ 1.96
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET HIGHLIGHTS
At December 31 (In millions)
Total assets $ 62,080 $ 51,380 $ 44,892 $ 45,533 $ 45,661
Securities 23,060 20,741 14,173 12,189 12,867
Loans, net of unearned income 33,308 25,817 25,443 27,633 28,107
Deposits 33,115 29,470 30,019 32,043 30,120
Borrowed funds 11,662 11,811 9,486 8,735 10,728
Notes and debentures 9,585 4,297 1,287 1,319 715
Shareholders equity 4,325 3,745 3,317 2,601 2,830
SELECTED RATIOS
Return on average total assets 1.44% .95% .91% .16% .90%
Return on average common shareholders equity 18.40 12.47 14.02 2.46 13.60
Average shareholders equity to average total assets 7.86 7.68 6.53 6.08 6.65
Dividend payout 37.98 55.54 39.60 298.03 51.42
Overhead 51.66 55.76 55.11 57.84 53.63
- ----------------------------------------------------------------------------------------------------------------------------
62 STATISTICAL INFORMATION
SELECTED QUARTERLY FINANCIAL DATA
- ------------------------------------------------------------------------------------------------
1993
----------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS (In thousands)
Interest income $ 815,201 $ 791,890 $ 800,476 $ 793,553
Interest expense 353,487 333,908 344,830 339,862
Net interest income 461,714 457,982 455,646 453,691
Provision for credit losses 38,692 50,021 53,814 61,417
Noninterest income
excluding net securities gains 202,926 191,691 187,818 175,120
Net securities gains 3,404 72,513 6,616 105,161
Noninterest expenses 375,649 345,914 345,148 387,015
Income before cumulative effect
of changes in accounting principles 171,434 217,676 169,142 187,011
Cumulative effect of changes
in accounting principles,
net of tax benefit of $5,343 and $52,804 (19,393)
Net income 171,434 217,676 169,142 167,618
PER COMMON SHARE DATA
Book value at quarter end $ 18.34 $ 17.50 $ 16.84 $ 16.42
Earnings
Primary before cumulative effect
of changes in accounting principles $ .72 $ .92 $ .71 $ .79
Cumulative effect of changes
in accounting principles (.08)
- ------------------------------------------------------------------------------------------------
Primary $ .72 $ .92 $ .71 $ .71
- ------------------------------------------------------------------------------------------------
Fully diluted before cumulative effect
of changes in accounting principles $ .72 $ .91 $ .71 $ .78
Cumulative effect of changes
in accounting principles (.08)
- ------------------------------------------------------------------------------------------------
Fully diluted $ .72 $ .91 $ .71 $ .70
- ------------------------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
HIGHLIGHTS (In millions)
Total assets $ 53,010 $ 50,270 $ 50,152 $ 47,794
Securities 20,430 21,011 21,184 18,980
Loans, net of unearned income 27,883 25,528 25,184 25,214
Deposits 29,762 27,813 28,091 28,090
Borrowed funds 9,453 10,437 11,485 10,149
Notes and debentures 8,548 7,000 5,578 4,744
Shareholders equity 4,128 4,013 3,869 3,814
- ------------------------------------------------------------------------------------------------
SELECTED QUARTERLY FINANCIAL DATA
- ------------------------------------------------------------------------------------------------
1992
----------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS (In thousands)
Interest income $ 821,900 $ 796,441 $ 780,757 $ 819,873
Interest expense 367,735 374,700 385,659 433,585
Net interest income 454,165 421,741 395,098 386,288
Provision for credit losses 63,060 69,865 100,186 90,420
Noninterest income
excluding net securities gains 173,769 184,704 175,157 159,643
Net securities gains 49,187 18,515 46,580 79,221
Noninterest expenses 402,685 362,300 330,875 346,555
Income before cumulative effect
of changes in accounting principles 143,542 132,845 127,578 125,475
Cumulative effect of changes
in accounting principles,
net of tax benefit of $5,343 and $52,804 (102,501)
Net income 143,542 132,845 127,578 22,974
PER COMMON SHARE DATA
Book value at quarter end $ 15.96 $ 15.76 $ 15.45 $ 15.12
Earnings
Primary before cumulative effect
of changes in accounting principles $ .61 $ .59 $ .58 $ .57
Cumulative effect of changes
in accounting principles (.47)
- ------------------------------------------------------------------------------------------------
Primary $ .61 $ .59 $ .58 $ .10
- ------------------------------------------------------------------------------------------------
Fully diluted before cumulative effect
of changes in accounting principles $ .61 $ .59 $ .58 $ .57
Cumulative effect of changes
in accounting principles (.47)
- ------------------------------------------------------------------------------------------------
Fully diluted $ .61 $ .59 $ .58 $ .10
- ------------------------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
HIGHLIGHTS (In millions)
Total assets $ 48,436 $ 45,087 $ 42,683 $ 42,727
Securities 19,595 17,533 15,062 14,381
Loans, net of unearned income 25,048 24,158 24,234 24,636
Deposits 28,556 27,753 28,332 29,269
Borrowed funds 10,648 9,232 8,248 8,122
Notes and debentures 4,630 3,862 1,960 1,313
Shareholders' equity 3,644 3,472 3,343 3,282
- ------------------------------------------------------------------------------------------------
STATISTICAL INFORMATION 63
ANALYSIS OF YEAR-TO-YEAR CHANGES IN NET INTEREST INCOME
- ------------------------------------------------------------------------------------------------
In thousands 1993/1992
Increase/(Decrease) In Income/Expense
Due To Changes In:
-----------------------------------------------------
Rate/
Taxable-equivalent basis Volume Rate Volume Total
- ------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS
Loans, net of unearned income
Commercial $ 30,928 $ (20,864) $ (1,149) $ 8,915
Real estate project (10,904) (800) 40 (11,664)
Real estate mortgage 73,363 (50,332) (10,554) 12,477
Consumer 41,908 (54,223) (2,498) (14,813)
Other (4,427) (6,358) 406 (10,379)
- ------------------------------------------------------------------------------------------------
Total loans 116,703 (125,052) (7,115) (15,464)
- ------------------------------------------------------------------------------------------------
Short-term investments (7,801) (2,428) 629 (9,600)
Securities
U.S. Treasury 60,982 (15,011) (12,596) 33,375
U.S. Government agencies
and corporations 212,412 (175,861) (35,590) 961
State and municipal (8,998) 1,188 (164) (7,974)
Corporate stocks 2,912 328 267 3,507
Other (7,106) (27,691) 3,337 (31,460)
- ------------------------------------------------------------------------------------------------
Total securities 274,875 (224,815) (51,651) (1,591)
- ------------------------------------------------------------------------------------------------
Other interest-earning assets 10,511 (3,205) (1,773) 5,533
- ------------------------------------------------------------------------------------------------
Total interest-earning assets $ 397,940 $ (371,290) $ (47,773) $ (21,122)
- ------------------------------------------------------------------------------------------------
INTEREST-BEARING SOURCES OF FUNDS
Interest-bearing deposits
Demand $ 9,064 $ (29,969) $ (5,653) $ (26,558)
Savings 6,412 (27,536) (3,483) (24,607)
Money market deposit accounts 19,268 (69,551) (8,322) (58,605)
Certificates of deposit
of $100,000 or more (93,425) (6,098) 2,633 (96,890)
Other time 2,881 (94,597) (1,092) (92,808)
In foreign offices (18,758) (7,492) 5,068 (21,182)
- ------------------------------------------------------------------------------------------------
Total interest-bearing deposits (28,018) (300,939) 8,307 (320,650)
- ------------------------------------------------------------------------------------------------
Borrowed funds
Federal funds purchased
and repurchase agreements (7,568) (9,810) 1,140 (16,264)
Repurchase agreements 66,211 (15,071) (5,012) 46,128
Commercial paper 4,163 (1,843) (338) 1,982
Other (16,306) (6,205) 1,498 (21,013)
- ------------------------------------------------------------------------------------------------
Total borrowed funds 50,673 (34,455) (5,385) 10,833
- ------------------------------------------------------------------------------------------------
Notes and debentures 175,485 (25,058) (30,202) 120,225
- ------------------------------------------------------------------------------------------------
Total sources on
which interest is paid $ 184,414 $ (332,112) $ (41,894) $(189,592)
- ------------------------------------------------------------------------------------------------
Change in net interest income $ 207,464 $ (33,754) $ (5,240) $ 168,470
- ------------------------------------------------------------------------------------------------
ANALYSIS OF YEAR-TO-YEAR CHANGES IN NET INTEREST INCOME
- ------------------------------------------------------------------------------------------------
In thousands 1992/1991
Increase/(Decrease) In Income/Expense
Due To Changes In:
-----------------------------------------------------
Rate/
Taxable-equivalent basis Volume Rate Volume Total
- ------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS
Loans, net of unearned income
Commercial $ (185,085) $ (239,151) $ 39,817 $ (384,419)
Real estate project 812 (22,498) (25) (21,711)
Real estate mortgage (76,071) (18,851) 3,448 (91,474)
Consumer 50,596 (117,462) (7,759) (74,625)
Other (3,816) (9,624) 442 (12,998)
- ------------------------------------------------------------------------------------------------
Total loans (232,447) (388,138) 35,358 (585,227)
- ------------------------------------------------------------------------------------------------
Short-term investments (9,452) (19,841) 3,210 (26,083)
Securities
U.S. Treasury 11,006 (19,413) (2,561) (10,968)
U.S. Government agencies
and corporations 405,810 (145,985) (70,745) 189,080
State and municipal (8,105) (3,096) 292 (10,909)
Corporate stocks (1,141) 639 (113) (615)
Other 12,966 (15,587) (3,131) (5,752)
- ------------------------------------------------------------------------------------------------
Total securities 417,715 (185,210) (71,669) 160,836
- ------------------------------------------------------------------------------------------------
Other interest-earning assets (2,203) (2,325) 230 (4,298)
- ------------------------------------------------------------------------------------------------
Total interest-earning assets $ 194,299 $ (617,478) $ (31,593) $ (454,772)
- ------------------------------------------------------------------------------------------------
INTEREST-BEARING SOURCES OF FUNDS
Interest-bearing deposits
Demand $ 14,663 $ (58,390) $ (8,493) $ (52,220)
Savings (7,361) (52,094) 3,585 (55,870)
Money market deposit accounts 58,944 (79,928) (22,250) (43,234)
Certificates of deposit
of $100,000 or more (230,922) (99,857) 45,476 (285,303)
Other time (106,416) (143,141) 19,991 (229,566)
In foreign offices 13,850 (7,844) (4,156) 1,850
- ------------------------------------------------------------------------------------------------
Total interest-bearing deposits (199,241) (524,986) 59,884 (664,343)
- ------------------------------------------------------------------------------------------------
Borrowed funds
Federal funds purchased
and repurchase agreements (6,418) (41,440) 2,022 (45,836)
Repurchase agreements 122,067 (67,553) (44,407) 10,107
Commercial paper 11,860 (8,822) (4,682) (1,644)
Other 3,660 (12,264) (640) (9,244)
- ------------------------------------------------------------------------------------------------
Total borrowed funds 128,169 (132,417) (42,369) (46,617)
- ------------------------------------------------------------------------------------------------
Notes and debentures 115,885 (29,615) (35,966) 50,304
- ------------------------------------------------------------------------------------------------
Total sources on
which interest is paid $ 46,419 $ (692,604) $ (14,471) $ (660,656)
- ------------------------------------------------------------------------------------------------
Change in net interest income $ 78,181 $ 120,288 $ 7,415 $ 205,884
- ------------------------------------------------------------------------------------------------
64 STATISTICAL INFORMATION
AVERAGE CONSOLIDATED BALANCE SHEET AND NET INTEREST ANALYSIS
- -----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31 1993 1992
---------------------------------------- ----------------------------------
Taxable-equivalent basis Average Average Average Average
Average balance in millions, interest in thousands Balances Interest Yields/Rates Balances Interest Yields/Rates
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets
Loans, net of unearned income
Commercial $ 10,877 $ 733,727 6.75% $ 10,432 $ 724,812 6.95%
Real estate project 1,845 128,252 6.95 2,001 139,916 6.99
Real estate mortgage 4,390 357,911 8.15 3,621 345,434 9.54
Consumer 7,974 697,261 8.74 7,531 712,074 9.46
Other 873 56,355 6.46 935 66,734 7.14
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans 25,959 1,973,506 7.60 24,520 1,988,970 8.11
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term investments 575 22,551 3.92 759 32,151 4.24
Securities
U.S. Treasury 2,294 106,147 4.63 1,248 72,772 5.83
U.S. Government agencies and corporations 16,722 1,032,049 6.17 13,867 1,031,088 7.44
State and municipal 474 47,352 9.99 566 55,326 9.78
Corporate stocks 118 7,332 6.20 67 3,825 5.71
Other 795 27,032 3.40 905 58,492 6.46
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities 20,403 1,219,912 5.98 16,653 1,221,503 7.33
- -----------------------------------------------------------------------------------------------------------------------------------
Other interest-earning assets 403 24,653 6.12 260 19,120 7.35
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets/interest income 47,340 $ 3,240,622 6.85% 42,192 $ 3,261,744 7.73%
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets
Allowance for credit losses (932) (852)
Cash and due from banks 1,967 1,748
Other assets 1,946 1,656
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 50,321 $ 44,744
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS EQUITY
Interest-bearing sources
Interest-bearing deposits
Demand $ 3,104 $ 20,853 .67% $ 2,606 $ 47,411 1.82%
Savings 2,255 21,691 .95 1,981 46,298 2.34
Money market deposit accounts 5,873 109,669 1.87 5,269 168,274 3.19
Certificates of deposit of $100,000 or more 2,214 125,877 5.69 3,811 222,767 5.85
Other time 9,415 458,320 4.87 9,366 551,128 5.88
In foreign offices 211 6,362 3.02 663 27,544 4.15
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 23,072 742,772 3.22 23,696 1,063,422 4.49
- -----------------------------------------------------------------------------------------------------------------------------------
Borrowed funds
Federal funds purchased 1,639 49,890 3.04 1,851 66,154 3.57
Repurchase agreements 6,944 242,916 3.50 5,197 196,788 3.79
Commercial paper 691 22,830 3.30 576 20,848 3.62
Other 1,099 47,359 4.31 1,443 68,372 4.74
- -----------------------------------------------------------------------------------------------------------------------------------
Total borrowed funds 10,373 362,995 3.50 9,067 352,162 3.88
- -----------------------------------------------------------------------------------------------------------------------------------
Notes and debentures 6,486 266,320 4.11 2,948 146,095 4.96
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
sources/interest expense 39,931 $ 1,372,087 3.44% 35,711 $ 1,561,679 4.37%
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing sources
Demand and other noninterest-bearing deposits 5,370 4,780
Accrued expenses and other liabilities 1,063 817
Shareholders' equity 3,957 3,436
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders equity $ 50,321 $ 44,744
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest rate spread 3.41% 3.36%
Impact of noninterest-bearing sources .54 .67
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income/margin on earning assets $ 1,868,535 3.95% $ 1,700,065 4.03%
- -----------------------------------------------------------------------------------------------------------------------------------
Nonaccrual loans are included in loans, net of unearned income. The impact of
interest rate swaps is included in the interest income/expense and average
yields/rates for commercial loans, U.S. Government agencies and corporation
securities, all interest-bearing deposits, other borrowed funds and notes and
debentures.
STATISTICAL INFORMATION 65
- -----------------------------------------------------------------------------------------
1991 1990
----------------------------------------- ----------------------------------------
Average Average Average Average
Balances Interest Yields/Rates Balances Interest Yields/Rates
- -----------------------------------------------------------------------------------------
$ 12,521 $1,109,231 8.86% $ 14,327 $1,488,192 10.39%
1,991 161,627 8.12 2,620 263,046 10.04
4,384 436,908 9.97 2,824 294,813 10.44
7,076 786,699 11.12 6,612 782,387 11.83
982 79,732 8.12 1,484 142,578 9.61
- -----------------------------------------------------------------------------------------
26,954 2,574,197 9.55 27,867 2,971,016 10.66
- -----------------------------------------------------------------------------------------
906 58,234 6.43 1,145 97,353 8.50
1,103 83,740 7.59 1,024 84,428 8.25
9,358 842,008 9.00 9,894 919,990 9.30
645 66,235 10.26 933 95,276 10.21
90 4,440 4.96 181 15,057 8.30
753 64,244 8.53 1,400 125,654 8.97
- -----------------------------------------------------------------------------------------
11,949 1,060,667 8.88 13,432 1,240,405 9.23
- -----------------------------------------------------------------------------------------
287 23,418 8.16 100 10,753 10.65
- -----------------------------------------------------------------------------------------
40,096 $3,716,516 9.27% 42,544 $4,319,527 10.15%
- -----------------------------------------------------------------------------------------
(823) (584)
1,822 1,965
1,698 1,791
- -----------------------------------------------------------------------------------------
$ 42,793 $ 45,716
- -----------------------------------------------------------------------------------------
$ 2,272 $ 99,631 4.39% $ 1,983 $92,890 4.68%
2,135 102,168 4.78 1,753 89,574 5.11
4,120 211,508 5.13 3,558 209,440 5.89
6,983 508,070 7.28 9,863 815,102 8.26
10,844 780,694 7.20 8,947 728,811 8.15
431 25,694 5.97 317 37,270 11.77
- -----------------------------------------------------------------------------------------
26,785 1,727,765 6.45 26,421 1,973,087 7.47
- -----------------------------------------------------------------------------------------
1,964 111,990 5.68 2,343 194,227 8.29
3,142 186,681 5.94 4,930 389,598 7.90
377 22,492 5.96 1,101 89,165 8.10
1,378 77,616 5.63 1,743 143,458 8.23
- -----------------------------------------------------------------------------------------
6,861 398,779 5.81 10,117 816,448 8.07
- -----------------------------------------------------------------------------------------
1,334 95,791 7.18 991 84,583 8.52
- -----------------------------------------------------------------------------------------
34,980 $2,222,335 6.35% 37,529 $2,874,118 7.66%
- -----------------------------------------------------------------------------------------
4,417 4,370
601 1,037
2,795 2,780
- -----------------------------------------------------------------------------------------
$ 42,793 $ 45,716
- -----------------------------------------------------------------------------------------
2.92% 2.49%
.81 .91
- -----------------------------------------------------------------------------------------
$1,494,181 3.73% $1,445,409 3.40%
- -----------------------------------------------------------------------------------------
--------------------------------------------
1989
--------------------------------------------
Average Average
Balances Interest Yields/Rates
- ---------------------------------------------
13,928 $1,578,864 11.34%
2,922 340,262 11.65
2,163 230,278 10.65
5,786 698,961 12.08
1,740 175,642 10.09
- ---------------------------------------------
26,539 3,024,007 11.39
- ---------------------------------------------
1,622 169,618 10.46
2,165 177,781 8.21
5,438 501,789 9.23
1,108 111,375 10.05
164 13,745 8.37
1,722 167,421 9.72
- ---------------------------------------------
10,597 972,111 9.17
- ---------------------------------------------
64 6,740 10.53
- ---------------------------------------------
38,822 $4,172,476 10.75%
- ---------------------------------------------
(528)
1,991
1,798
- ---------------------------------------------
42,083
- ---------------------------------------------
1,893 $ 90,624 4.79%
1,664 83,375 5.01
3,688 219,740 5.96
8,641 758,382 8.78
7,700 648,763 8.43
862 106,885 12.41
- ---------------------------------------------
24,448 1,907,769 7.80
- ---------------------------------------------
2,891 271,398 9.39
3,840 344,659 8.98
1,161 104,169 8.97
740 68,294 9.23
- ---------------------------------------------
8,632 788,520 9.14
- ---------------------------------------------
654 62,096 9.50
- ---------------------------------------------
33,734 $2,758,385 8.18%
- ---------------------------------------------
4,353
1,198
2,798
- ---------------------------------------------
42,083
- ---------------------------------------------
2.57%
1.07
- ---------------------------------------------
$1,414,091 3.64%
- ---------------------------------------------
66 STATISTICAL INFORMATION
SECURITIES
CARRYING VALUE OF SECURITIES
- ----------------------------------------------------------------------------------------------------------------------------
December 31
In millions 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------
Investment securities
Debt securities
U.S. Treasury $ 1 $ 37 $ 304
U.S. Government agencies and corporations 10,227 11,413 10,958
State and municipal 389 558 581
Other 810 1,246 717
Corporate stocks 245 73 57
- ---------------------------------------------------------------------------------------------------------------------------
Total investment securities $ 11,672 $ 13,327 $ 12,617
- ---------------------------------------------------------------------------------------------------------------------------
Securities available for sale
Debt securities
U.S. Treasury $ 2,402 $ 2,768 $ 1,462
U.S. Government agencies and corporations 8,121 4,011 79
State and municipal 2 13
Other 802 635
Corporate stocks 61 1
- ---------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 11,388 $ 7,414 $ 1,555
- ---------------------------------------------------------------------------------------------------------------------------
At December 31, 1993, securities available for sale are carried at fair value.
STATISTICAL INFORMATION 67
MATURITY DISTRIBUTION OF SECURITIES
- ------------------------------------------------------------------------------------------------------------------------
December 31,1993 After After
In millions One Year Five Years
One Year Through Through After No Fixed
or Less Five Years Ten Years Ten Years Maturity Total
- ------------------------------------------------------------------------------------------------------------------------
Investment securities (Amortized Cost)
Debt securities
U.S. Treasury $ 1 $ 1
U.S. Government agencies and corporations $ 1 $10,226 10,227
State and municipal 22 110 $ 62 $ 195 389
Other 31 6 2 771 810
Corporate stocks 245 245
- ------------------------------------------------------------------------------------------------------------------------
Total investment securities $ 54 $ 117 $ 64 $ 195 $11,242 $ 11,672
- ------------------------------------------------------------------------------------------------------------------------
Percent of total investment securities .46% 1.00% .55% 1.68% 96.31% 100.00%
Weighted average yield 6.57 10.23 10.31 11.01 5.97 6.12
- ------------------------------------------------------------------------------------------------------------------------
Securities available for sale (Fair Value)
Debt securities
U.S. Treasury $ 537 $1,845 $ 16 $ 4 $ 2,402
U.S. Government agencies and corporations 24 1 $ 8,095 8,120
State and municipal 1 1 1 3
Other 1 1 56 744 802
Corporate stock 61 61
- ------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 538 $1,871 $ 18 $ 61 $ 8,900 $ 11,388
- ------------------------------------------------------------------------------------------------------------------------
Percent of total securities available for sale 4.72% 16.43% .16% .54% 78.15% 100.00%
Weighted average yield 3.19 4.33 6.41 18.29 6.23 5.82
- ------------------------------------------------------------------------------------------------------------------------
Collateralized mortgage obligations and mortgage-backed and asset-backed
securities are included in the No Fixed Maturity Category. Based on the
Corporation's current rate projections and historical experience, the
weighted-average expected maturity of all collateralized mortgage obligations
and mortgage-backed and asset-backed securities was two years and 11 months at
December 31, 1993. Weighted average yields are based on book value with
effective yields weighted for the contractual maturity of each security.
Tax-exempt securities have been adjusted to a taxable-equivalent basis using a
federal income tax rate of 35 percent.
68 STATISTICAL INFORMATION
LOAN PORTFOLIO
At December 31, 1990, approximately $1.2 billion of loans to individuals were
reclassified from commercial loans to the consumer category. Balances at
December 31, 1989, were not restated.
LOAN OUTSTANDINGS
- ---------------------------------------------------------------------------------------------------------------------------
December 31
In millions 1993 1992 1991 1990 1989
- ---------------------------------------------------------------------------------------------------------------------------
Commercial $ 12,463 $10,985 $11,245 $12,713 $14,877
Real estate project 1,730 1,955 2,047 2,194 2,893
Real estate mortgage 8,941 4,114 3,763 3,041 2,562
Consumer 8,525 7,950 7,458 8,933 6,686
Other 1,871 1,105 1,349 1,476 1,799
- ---------------------------------------------------------------------------------------------------------------------------
Total loans 33,530 26,109 25,862 28,357 28,817
Less unearned income 222 292 419 724 710
- ---------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned income $ 33,308 $25,817 $25,443 $27,633 $28,107
- ---------------------------------------------------------------------------------------------------------------------------
The following table presents the maturity distribution and interest
sensitivity of selected loan categories based on contractual terms.
LOAN MATURITIES AND INTEREST SENSITIVITY
- ---------------------------------------------------------------------------------------------------------------------------
December 31, 1993 One Year One Through After
In millions or Less Five Years Five Years Gross Loans
- ---------------------------------------------------------------------------------------------------------------------------
Commercial $5,035 $4,664 $2,764 $12,463
Real estate project 751 754 225 1,730
- ---------------------------------------------------------------------------------------------------------------------------
Total $5,786 $5,418 $2,989 $14,193
- ---------------------------------------------------------------------------------------------------------------------------
Loans with predetermined rate $1,052 $1,054 $ 561 $ 2,667
Loans with floating rate 4,734 4,364 2,428 11,526
- ---------------------------------------------------------------------------------------------------------------------------
Total $5,786 $5,418 $2,989 $14,193
- ---------------------------------------------------------------------------------------------------------------------------
STATISTICAL INFORMATION 69
NONPERFORMING ASSETS
Generally, a loan is classified as "nonaccrual" when it is determined that the
collection of interest or principal is doubtful, or when a default of interest
or principal has existed for 90 days or more, unless such loan is well secured
and in the process of collection. When interest accrual is discontinued, unpaid
interest credited to income in the current year is reversed, and unpaid
interest accrued in prior years is charged to the allowance for credit losses.
A loan is categorized as "restructured" if the original interest rate on
such loan, repayment terms, or both were restructured due to a deterioration
in the financial condition of the borrower.
- ---------------------------------------------------------------------------------------------------------------------------
December 31
Assets in millions, interest in thousands 1993 1992 1991 1990 1989
- ---------------------------------------------------------------------------------------------------------------------------
Nonaccrual loans $ 356 $ 529 $ 740 $ 986 $ 466
Restructured loans 28 25 21 33 23
- ---------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 384 554 761 1,019 489
- ---------------------------------------------------------------------------------------------------------------------------
Foreclosed assets 170 266 322 286 92
- ---------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 554 $ 820 $1,083 $1,305 $ 581
- ---------------------------------------------------------------------------------------------------------------------------
Nonperforming loans to period-end loans 1.15% 2.14% 2.99% 3.69% 1.74%
Nonperforming assets to period-end loans and foreclosed assets 1.65 3.14 4.21 4.67 2.06
Nonperforming assets to total assets .89 1.60 2.41 2.87 1.27
Interest computed on original terms $ 33,891 $ 53,362 $ 85,563 $ 111,074 $ 70,947
Interest recognized 6,296 6,136 20,663 52,908 18,223
- ---------------------------------------------------------------------------------------------------------------------------
PAST DUE LOANS
The following table presents information concerning accruing loans which are
contractually past due 90 days or more as to principal or interest payments and
excludes loans reported as either nonaccrual or restructured.
- ---------------------------------------------------------------------------------------------------------------------------
December 31
In millions 1993 1992 1991 1990 1989
- ---------------------------------------------------------------------------------------------------------------------------
Past due loans $ 135 $ 192 $ 139 $ 111 $ 115
- ---------------------------------------------------------------------------------------------------------------------------
Past due loans as a percentage of total loans .41% .74% .55% .40% .41%
- ----------------------------------------------------------------------------------------------------------------------------
70 STATISTICAL INFORMATION
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is based on periodic evaluations of the loan
portfolio by management. These evaluations consider, among other factors,
historic losses within specific industries, current economic conditions, loan
portfolio trends, specific credit reviews and estimates based on subjective
factors.
During 1993 and 1992, economic conditions improved, resulting in lower
charge-offs and provision for credit losses. During 1991 and 1990, weaker
economic conditions adversely impacted collateral valuations and affected some
borrowers ability to repay loans. These adverse conditions resulted in higher
provisions for credit losses. During 1989, additional provisions for credit
losses were taken LDC loans.
SUMMARY OF LOAN LOSS EXPERIENCE
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
In Millions 1993 1992 1991 1990 1989
- ---------------------------------------------------------------------------------------------------------------------------
Balance at beginning of year $ 897 $ 797 $ 784 $ 616 $ 543
- ---------------------------------------------------------------------------------------------------------------------------
Acquisitions/divestitures 43 57 (17)
- ---------------------------------------------------------------------------------------------------------------------------
Amounts charged off
Commercial 101 213 243 216 104
Real estate project 60 39 90 177 45
Real estate mortgage 2 2 4 5 3
Consumer 82 82 99 79 60
Other 1 7 10 151 75
- ---------------------------------------------------------------------------------------------------------------------------
Total loans charged off 246 343 446 628 287
- ---------------------------------------------------------------------------------------------------------------------------
Recoveries on amounts previously charged off
Commercial 41 37 20 11 10
Real estate project 4 1 8 8 1
Consumer 29 22 18 14 12
Other 2 2 3 5
- ---------------------------------------------------------------------------------------------------------------------------
Total recoveries 74 62 48 36 28
- ---------------------------------------------------------------------------------------------------------------------------
Net charge-offs 172 281 398 592 259
- ---------------------------------------------------------------------------------------------------------------------------
Provision for credit losses 204 324 428 760 332
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 972 $ 897 $ 797 $ 784 $ 616
- ---------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned income
Average $ 25,959 $ 24,520 $ 26,954 $ 27,867 $ 26,539
At December 31 33,308 25,817 25,443 27,633 28,107
As a percent of average loans
Net charge-offs .66% 1.15% 1.48% 2.12% .98%
Provision for credit losses .79 1.32 1.59 2.73 1.25
Allowance for credit losses 3.74 3.66 2.96 2.82 2.32
Allowance as a percent of period-end
Loans 2.92 3.47 3.13 2.84 2.19
Nonperforming loans 253.12 162.08 104.71 76.99 125.96
Allowance as a multiple of net charge-offs 5.65x 3.19x 2.00x 1.32x 2.38x
- ---------------------------------------------------------------------------------------------------------------------------
STATISTICAL INFORMATION 71
During 1993, management revised its methodology for allocating the allowance
for credit losses. The revisions had the effect of reclassifying certain
previously unallocated reserves to loan categories. For purposes of this
presentation, remaining unallocated reserves have been assigned to loan
categories based on the relative specific allocation amounts. Prior year
unallocated reserve amounts have been similarly assigned to loan categories.
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
- ---------------------------------------------------------------------------------------------------------------------------
December 31
In millions 1993 1992 1991 1990 1989
- ---------------------------------------------------------------------------------------------------------------------------
Commercial $ 467 $ 448 $432 $477 $164
Real estate project 216 285 230 171 58
Real estate mortgage 103 17 13 14 4
Consumer 175 134 106 103 79
Other 11 13 16 19 311
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 972 $ 897 $797 $784 $616
- ---------------------------------------------------------------------------------------------------------------------------
PERCENTAGE DISTRIBUTION OF ALLOWANCE ALLOCATION AND CATEGORIES OF LOANS AS A PERCENTAGE OF GROSS LOANS
- ---------------------------------------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989
------------------ ----------------- ----------------- ---------------- -----------------
December 31 Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
- ---------------------------------------------------------------------------------------------------------------------------
Commercial 48.1% 37.2% 50.0% 42.1% 54.2% 43.5% 60.8% 44.8% 26.6% 51.6%
Real estate project 22.2 5.2 31.8 7.5 28.9 7.9 21.8 7.7 9.4 10.0
Real estate mortgage 10.6 26.7 1.9 15.8 1.6 14.6 1.8 10.7 .7 8.9
Consumer 18.0 25.4 14.9 30.5 13.3 28.8 13.1 31.5 12.8 23.2
Other 1.1 5.5 1.4 4.1 2.0 5.2 2.5 5.3 50.5 6.3
- ---------------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
- ---------------------------------------------------------------------------------------------------------------------------
MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
A majority of foreign deposits were in denominations of $100,000 or more. The
table below provides maturities of domestic time deposits of $100,000 or more.
- ---------------------------------------------------------------------------------------------------------------------------
December 31, 1993 Certificates Other Time
In millions of Deposit Deposits Total
- ---------------------------------------------------------------------------------------------------------------------------
Three months or less $ 663,097 $ 43,041 $ 706,138
Over three through six months 577,294 27,592 604,886
Over six through twelve months 574,136 38,577 612,713
Over twelve months 2,412,170 279,789 2,691,959
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 4,226,697 $ 388,999 $4,615,696
- ---------------------------------------------------------------------------------------------------------------------------
72 STATISTICAL INFORMATION
BORROWED FUNDS
Federal funds purchased represent overnight borrowings. Repurchase agreements
generally have maturities of 18 months or less. At December 31, 1993, 1992 and
1991, $2.7 billion, $3.4 billion and $495 million, respectively, of repurchase
agreements had original maturities which exceeded one year. Commercial paper is
issued in maturities not to exceed nine months and is stated net of discount.
Other borrowed funds consist primarily of term federal funds purchased and U.S.
Treasury, tax and loan borrowings which are payable on demand.
- ---------------------------------------------------------------------------------------------------------------------------
1993 1992 1991
---------------- ---------------- ----------------
Dollars in millions Amount Rate Amount Rate Amount Rate
- ---------------------------------------------------------------------------------------------------------------------------
Federal funds purchased
Year-end balance $2,066 3.06% $2,037 3.12% $1,580 4.03%
Average during year 1,639 3.04 1,851 3.57 1,964 5.68
Maximum month-end balance during year 3,662 2,833 2,592
Repurchase agreements
Year-end balance 4,995 3.61 6,452 3.46 3,884 4.20
Average during year 6,944 3.50 5,197 3.79 3,142 5.94
Maximum month-end balance during year 8,917 7,356 4,520
Commercial paper
Year-end balance 514 3.24 980 3.57 558 4.68
Average during year 691 3.30 576 3.62 377 5.96
Maximum month-end balance during year 1,117 980 567
Other
Year-end balance 4,087 3.11 2,342 3.49 3,465 4.61
Average during year 1,099 4.31 1,443 4.74 1,378 5.63
Maximum month-end balance during year 4,088 3,377 3,465
- -------------------------------------------------------------------------------------------------------------------------
TAXABLE-EQUIVALENT ADJUSTMENT
Interest income earned on certain loans, and obligations of states,
municipalities and other public entities is not subject to federal income tax.
In addition, certain interest expense incurred to fund these assets is not
deductible for federal income tax purposes.
In order to make pre-tax income and resultant yields comparable to taxable
loans and investments, a taxable-equivalent adjustment, less the effect of
disallowed interest expense, is added equally to interest income and to income
tax expense, with no effect on after-tax income.
The taxable-equivalent adjustment is shown in the table below based on a
federal income tax rate of 35 percent for 1993 and 34 percent for all other
years.
- ---------------------------------------------------------------------------------------------------------------------------
Year ended December 31
In thousands 1993 1992 1991 1990 1989
- ---------------------------------------------------------------------------------------------------------------------------
Interest income book basis $ 3,201,120 $ 3,218,971 $ 3,657,533 $ 4,223,375 $4,064,440
Taxable-equivalent adjustment 39,502 42,773 58,983 96,152 108,036
- ---------------------------------------------------------------------------------------------------------------------------
Interest income taxable-equivalent basis 3,240,622 3,261,744 3,716,516 4,319,527 4,172,476
Interest expense 1,372,087 1,561,679 2,222,335 2,874,118 2,758,385
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income taxable-equivalent basis $ 1,868,535 $ 1,700,065 $ 1,494,181 $ 1,445,409 $1,414,091
- ----------------------------------------------------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS 1992 VERSUS 1991 73
MERGERS AND ACQUISITIONS
During 1992, PNC Bank Corp. completed the acquisitions of Pro Group, Inc.,
Bradford, Pennsylvania; The First National Pennsylvania Corporation, Erie,
Pennsylvania; Sunrise Bancorp, Inc., Fort Mitchell, Kentucky; CCNB Corporation,
Camp Hill, Pennsylvania; and Flagship Financial Corp., Jenkintown,
Pennsylvania. These institutions added approximately $2.6 billion in assets.
Under the terms of the various agreements, PNC Bank issued approximately 13.3
million shares of common stock and paid cash of approximately $45 million.
In December of 1992, PNC Bank Corp. entered into a joint venture in
automated teller machine ("ATM") and point-of-sale ("POS") transaction
processing services with three other financial institutions. The new company,
Electronic Payment Services, Inc. ("EPS"), is one of the largest processors of
ATM and POS transactions in the United States. PNC Bank contributed its ATM and
POS processing businesses and invested approximately $49 million in cash for 31
percent of EPS common stock.
COMMON STOCK SPLIT
On October 1, 1992, the Board of Directors approved a two-for-one split of the
common stock which was effected in the form of a 100 percent stock dividend.
Financial data has been restated for the impact of the two-for-one split of the
common stock.
INCOME STATEMENT REVIEW
Net income for 1992 was $426.9 million or $1.89 per common share on a fully
diluted basis, compared with $389.8 million or $1.94 in 1991. Return on assets
and return on common shareholders' equity were .95 percent and 12.47 percent,
respectively. This compares with .91 percent and 14.02 percent in 1991.
The Corporation adopted SFAS No. 106 related to postretirement benefits in
1992. The adoption of SFAS No. 106 resulted in additional after-tax expense of
$111.3 million or $.49 per common share on a fully diluted basis, consisting of
a first quarter one-time charge of $102.5 million or $.45 per share and $2.2
million of additional operating expense in each quarter. Income before the
cumulative effect of the change in accounting principle was $529.4 million, or
$2.34 per common share on a fully diluted basis. On this basis, return on
assets and return on common shareholders' equity were 1.18 percent and 15.03
percent, respectively.
NET INTEREST INCOME AND NET INTEREST MARGIN On a fully taxable-equivalent
basis, net interest income for 1992 was $1.7 billion, an increase of $205.9
million, or 13.8 percent, from 1991. Total average earning assets increased
$2.1 billion to $42.2 billion. A $4.7 billion increase in average securities
was partially offset by a $2.4 billion decline in loans. In the declining rate
environment, net interest income benefited from liabilities repricing more
rapidly than earning assets. Additionally, funding costs were favorably
impacted by interest rate swap hedging activity. The yield on interest- earning
assets declined 154 basis points to 7.73 percent and the rate paid on
interest-bearing sources of funds decreased 198 basis points to 4.37 percent.
The net interest margin increased 30 basis points to 4.03 percent in 1992.
Net average noninterest-bearing sources increased $1.4 billion in the
comparison, in part as a result of the issuance of common stock and retention
of earnings. Although these sources increased, lower average rates in 1992
reduced the favorable impact on net interest income provided by such funds.
PROVISION FOR CREDIT LOSSES The provision for credit losses was $323.5 million
compared with $428.0 million in 1991. Consistent with the national trend,
economic conditions in the markets served by the Corporation improved modestly
in 1992. This factor combined with management's efforts to improve asset
quality resulted in lower nonperforming asset and charge-off levels, and higher
reserve coverage of nonperforming loans.
NONINTEREST INCOME Total noninterest income increased $74.8 million to $886.8
million in 1992. Noninterest
74 MANAGEMENT'S DISCUSSION AND ANALYSIS 1992 VERSUS 1991
income for 1992 included net security gains of $214.1 million. Noninterest
income for 1991 included $70.0 million in net security gains and $92.7 million
in gains on the sale of four Ohio banks ("Ohio Banks") and a substantial
portion of the merchant services processing portfolio.
Investment management and trust income increased 9.4 percent to $260.1
million in 1992. The most significant growth occurred in mutual fund income,
which increased 18.5 percent to $86.0 million and resulted from growth in asset
volume. Trust revenue increased 5.3 percent to $174.2 million primarily from
new business.
Service charges, fees and commissions revenue totaled $360.6 million in
1992 and remained relatively level compared with 1991. An increase in deposit
account and corporate service and loan servicing income was offset by a decline
in credit card and merchant services revenue. The decline resulted from the
sale of the merchant services processing portfolio. In addition, the comparison
was negatively impacted by the sale of the Ohio Banks.
NONINTEREST EXPENSES Noninterest expenses increased $171.4 million to $1.4
billion. Despite the significant employee additions related to acquisitions and
targeted businesses, overall staff levels were reduced through various cost
savings initiatives, which involved consolidating, centralizing and outsourcing
certain operational and support functions. Average full-time equivalent
employees declined 3.3 percent in 1992. Compensation expense totaled $541.3
million in 1992, an increase of 9.4 percent, which resulted from accruals for
displaced employees related to consolidations and acquisitions, staff additions
in growth businesses and merit pay and incentive compensation.
Employee benefit expense increased $23.2 million to $127.1 million in
1992. The change in accounting for postretirement benefits increased employee
benefits expense by $14.8 million compared with the cash basis method of
accounting used in 1991. Additionally, pension expense increased $6.5 million
primarily due to a change in the discount rate reflecting the current interest
rate environment.
Net occupancy and equipment expenses increased 7.8 percent to $206.6
million in 1992 as a result of the consolidation of three data centers into a
newly-constructed data processing and telecommunications center. Equipment and
software purchased for this new facility resulted in higher levels of
depreciation and software expenses. These increases were partially offset by a
decline in equipment rentals and maintenance costs that resulted from closing
the old data centers.
The other category of noninterest expenses increased $86.0 million to
$501.8 million. Significant components of this increase include a $20.0 million
accrual for developing and implementing a common corporate identity and
consolidating the Corporation's six Pennsylvania banks; $15.1 million of
valuation adjustments and legal fees related to foreclosed asset and problem
loan workout activities; and $14.7 million for outside services related to
consolidation or outsourcing of certain operational and support functions. In
addition, contributions and donations increased $10.4 million. The remainder of
the increase reflects the net impact of acquisition and divestiture activities
as well as various cost increases.
BALANCE SHEET REVIEW
Total assets at December 31, 1992, were $51.4 billion, a $6.5 billion increase
from December 31, 1991. Total assets averaged $44.7 billion in 1992, compared
with $42.8 billion in 1991.
In part, the changes in the composition of the Corporation's balance sheet
during 1992 reflected continued weakness in overall loan demand and the
shifting of funding sources to longer-term liabilities with attractive rates.
LOANS Total loans were $25.8 billion at December 31, 1992, compared with $25.4
billion at December 31, 1991. Total loans averaged $24.5 billion in 1992, a
decline of $2.4 billion from 1991. During 1992, the Corporation added
approximately $1.7 billion in loans as a result of bank acquisitions, of which
$1.2 billion were acquired in the fourth quarter. The increase in loan
outstandings related to bank
MANAGEMENT'S DISCUSSION AND ANALYSIS 1992 VERSUS 1991 75
acquisitions was mitigated by paydowns of loans resulting from the continuing
reduction of debt throughout most sectors of the economy.
Commercial loans declined 2.3 percent to $11.0 billion at December 31,
1992, as a result of weak demand in the current economic environment and from
the Corporation's efforts to reduce exposure in certain segments of the
portfolio. The addition of approximately $290 million of commercial loans
obtained in acquisitions partially offset these declines.
HLTs are included in various commercial loan categories. During 1992, the
federal bank regulators revised their HLT delisting criteria and the December
31, 1992, amounts reflect such revisions. HLT outstandings represented 4.3
percent of total loans at December 31, 1992, compared with 6.6 percent at
December 31, 1991. During 1992, $328 million of loans and $189 million of
unfunded commitments were no longer classified as HLTs. Of such amounts, the
revised HLT delisting criteria resulted in $131 million of loans and $89
million of commitments no longer being classified as HLTs.
At December 31, 1992, the Corporation had 76 customers with loans
designated as HLT. The 10 largest HLT outstandings and unfunded commitments
totaled $417 million and $73 million, respectively, none of which were
classified as nonperforming. During 1992, the Corporation originated and/or
participated in $155 million of commitments to new HLT customers compared with
$10 million in 1991. HLT loan fees recognized in income during 1992 totaled
$10.9 million and deferred HLT loan fees totaled $3.7 million at December 31,
1992. The yield on the HLT portfolio, including loans classified as
nonperforming, was 7.19 percent in 1992.
At December 31, 1992, real estate project outstandings and unfunded
commitments totaled $2.0 billion and $482 million, respectively. The comparable
December 31, 1991, amounts were $2.0 billion and $477 million, respectively.
Commercial mortgages totaled $879 million at December 31, 1992, compared
with $783 million at December 31, 1991. Acquisitions added approximately $170
million to this category.
Residential mortgages totaled $3.2 billion at December 31, 1992, compared
with $2.9 billion at December 31, 1991. During 1992, the Corporation originated
approximately $1.9 billion of residential mortgages, of which $1.4 billion were
securitized and sold with servicing retained. Additionally, approximately $800
million of residential mortgages were obtained in acquisitions. These increases
were partially offset by prepayment and refinancing activity.
Consumer loans totaled $7.8 billion at December 31, 1992, an increase of
7.2 percent from December 31, 1991. The purchase of approximately $190 million
of home equity loans primarily accounted for the increase.
RISK ELEMENTS Nonperforming assets totaled $820 million at December 31, 1992,
compared with $1.1 billion at December 31, 1991. At December 31, 1992,
nonperforming assets were comprised of $554 million of loans and $266 million
of foreclosed assets. The comparable December 31, 1991, amounts were $761
million and $322 million, respectively.
At December 31, 1992, $144 million of nonperforming loans were current as
to principal and interest compared with $149 million at December 31, 1991.
Nonperforming HLT loans totaled $41 million at December 31, 1992, compared with
$82 million at December 31, 1991.
Nonperforming real estate project assets totaled $421 million at December
31, 1992, and were comprised of $198 million of loans and $223 million of
foreclosed real estate. The comparable December 31, 1991, amounts were $555
million, $270 million and $285 million, respectively.
Accruing loans contractually past due 90 days or more as to the payment of
principal or interest totaled $192 million at December 31, 1992, compared with
$139 million at December 31, 1991. Residential mortgage and other consumer
loans in the amount of $123 million were included in the total at December 31,
1992, compared with $83 million at December 31, 1991. Acquisitions completed in
1992 primarily contributed to the increase. Within the consumer category,
student loans totaled $61 million at December 31, 1992, and $58 million at
December 31, 1991.
76 MANAGEMENT'S DISCUSSION AND ANALYSIS 1992 VERSUS 1991
ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses totaled $897
million at December 31, 1992, compared with $797 million a year ago. The
allowance as a percentage of period-end loans was 3.47 percent at December 31,
1992, compared with 3.13 percent at December 31, 1991. The allowance as a
percentage of nonperforming loans was 162.1 percent and 104.7 percent at
December 31, 1992 and 1991, respectively.
Net charge-offs were $281 million in 1992 compared with $398 million in
1991. As a percentage of average loans, net charge-offs were 1.15 percent and
1.48 percent in 1992 and 1991, respectively.
During 1992 and 1991, HLT credits in the amount of $46 million and $49
million, respectively, were charged-off. Such charge-offs primarily related to
credits in the communications and retail/wholesale categories. Recoveries in
1992 of previously charged-off HLT credits totaled $9 million compared with $8
million in 1991.
ASSET/LIABILITY MANAGEMENT In response to the declining interest rate
environment in 1992, the Corporation reduced the overall interest rate and
prepayment risk profile of the securities portfolio by selling high coupon
fixed-rate mortgage-backed securities ("MBS") and reinvesting the proceeds
primarily in shorter-term U.S. Treasury and adjustable rate MBS. The MBS
acquired were primarily U.S. Government agency securities. As a result of this
repositioning, the average expected life of the MBS portfolio was reduced to
three years and one month at December 31, 1992 from five years and one month at
the prior year end. Although yields on U.S. Treasury and shorter-term
adjustable rate MBS are generally lower than longer-term fixed-rate MBS,
prepayment risk is reduced.
During 1992, the Corporation increased its use of interest rate swaps to
manage overall interest rate sensitivity. The total notional amount of interest
rate swaps increased to $7.7 billion at December 31, 1992, from $2.7 billion at
December 31, 1991. The increase was primarily in index interest rate swaps in
which the Corporation receives payments based on fixed interest rates. During
1992, swaps benefited net interest income by $98.6 million.
SECURITIES At December 31, 1992, securities totaled $20.7 billion and were
comprised of $7.4 billion of securities available for sale and $13.3 billion of
investment securities. The comparable December 31, 1991, amounts were $14.2
billion, $1.6 billion and $12.6 billion, respectively.
DEPOSITS Average deposits declined $2.7 billion in 1992 to $28.5 billion.
Certificates of deposit of $100,000 or more declined $3.2 billion to $3.8
billion during 1992. This decline reflects management's use of lower cost
funding sources such as unsecured bank notes and repurchase agreements.
Brokered deposits are included in certificates of deposit of $100,000 or
more and other time categories. Such amounts totaled $2.3 billion compared with
$3.7 billion at December 31, 1991. Retail brokered deposits represented 13.1
percent of the total at December 31, 1992, and 8.9 percent at year-end 1991.
Retail brokered deposits are issued or participated-out by brokers in
denominations of $100,000 or less and are fully insured.
BORROWINGS Borrowed funds totaled $11.8 billion at December 31, 1992, an
increase of $2.3 billion. Repurchase agreements increased $2.6 billion during
1992.
Notes and debentures increased $3.0 million to $4.3 billion at December
31, 1992, primarily as a result of the issuance of bank notes.
CAPITAL Shareholders' equity totaled $3.7 billion at December 31, 1992,
compared with $3.3 billion at December 31, 1991. Tier I and total risk-based
capital ratios were 10.17 percent and 12.09 percent, respectively at December
31, 1992. The comparable December 31, 1991, amounts were 9.69 percent and 12.13
percent, respectively.
BANKS AND COMPANIES 77
FULL-SERVICE BANKS
PNC Bank, N.A. (Pittsburgh, Philadelphia, Central PA, Northeast PA,
Northwest PA, Southcentral PA)
PNC Bank, Indiana, Inc.
PNC Bank, Kentucky, Inc.
PNC Bank, Northern Kentucky, N.A.
PNC Bank, Ohio, N.A.
The Massachusetts Company, Inc.
The following bank will adopt the PNC Bank name during early 1994:
Bank of Delaware, Wilmington, DE
SPECIALIZED COMPANIES
BROKERAGE SERVICES AND SECURITIES UNDERWRITING
For Securities Underwriting,
Full-Service and Low-Cost Brokerage Services, Investment Banking and
Advisory Services:
PNC Securities Corp
Pittsburgh, PA
CREDIT CARD SERVICES
PNC National Bank
Wilmington, DE
DIRECT INVESTMENT SERVICE
For Private Equity Investments:
PNC Equity Management Corp
Pittsburgh, PA
INTERNATIONAL BANKING SERVICES
PNC Bank International, New York
New York, NY
INVESTMENT MANAGEMENT SERVICES
For Investment Management:
PNC Investment Management & Research
Philadelphia, PA
For Value Oriented Institutional Investment Management:
PCM
Philadelphia, PA
For Institutional
Liquidity Management:
PIMC
Wilmington, DE
For Mutual Fund, Administration, Accounting and Shareholder Services:
PFPC Inc.
Wilmington, DE
For Investment Research for Financial Institutions:
PNC IIS
Philadelphia, PA
LEASING
PNC Leasing Corp
Pittsburgh, PA
PNC Leasing Corp., Kentucky
Louisville, KY
MORTGAGE SERVICES
PNC Mortgage Bank, N.A.
Pittsburgh, PA
PNC Mortgage Corp. of America
Vernon Hills, IL
PNC Mortgage Securities Corp.
Vernon Hills, IL
PNC Mortgage Company
Louisville, KY
TRUST SERVICES
In Florida:
PNC Trust Company of Florida, N.A.
Vero Beach and Tampa, FL
In New Jersey:
PNC Bank, New Jersey, N.A.
Cherry Hill, NJ
For Securities Clearing:
PNC Trust Company of New York
New York, NY
78 BOARD OF DIRECTORS
ROBERT N. CLAY, 47 (1,2,5)
President, Clay Holding Company
(thoroughbred breeding)
Director since 1987
PATRICIA J. CLIFFORD,* 70 (1,4)
Volunteer Civic Leader
Director since 1979
WILLIAM G. COPELAND, 68 (1,4,5)
Chairman of the Board
Providentmutual Holding Company
(life insurance and financial services)
Director since 1989
GEORGE A. DAVIDSON, JR., 55 (1,4)
Chairman and Chief Executive Officer,
Consolidated Natural Gas Company
(public utility holding company)
Chairman, Nominating Committee
Director since 1988
C.G. GREFENSTETTE, 66 (1,2)
Chairman and Chief Executive Officer,
The Hillman Company
(diversified operations and investments)
Chairman, Audit Committee
Director since 1989
W. CRAIG McCLELLAND, 59 (2,3,4)
President and Chief Operating Officer,
Union Camp Corporation
(pulp and paper manufacturing)
Chairman, Loan and Investment Committee
Director since 1985
THOMAS MARSHALL, 65 (2,3,5)
Chairman and Chief Executive Officer,
Aristech Chemical Corporation
(chemicals)
Chairman, Personnel and
Compensation Committee
Director since 1989
DONALD I. MORITZ, 66 (1,2,5)
Chairman and Chief Executive Officer,
Equitable Resources, Inc.
(energy company - gas utility)
Director since 1985
THOMAS H. O'BRIEN, 57 (2)
Chairman and Chief Executive Officer
Director since 1983
JACKSON H. RANDOLPH, 63 (2,3,4)
Chairman, President and Chief Executive Officer,
The Cincinnati Gas & Electric Company
(public utility - gas and electric)
Director since 1988
JAMES E. ROHR, 45 (3)
President
Director since 1989
RODERIC H. ROSS, 63 (2,5)
Chairman, President and Chief Executive Officer,
Keystone State Life Insurance Company
(insurance company)
Director since 1979
VINCENT A. SARNI, 65 (3,4)
Chairman of the Executive Committee
Pittsburgh Baseball Associates
(professional baseball team)
Director since 1989
RICHARD P. SIMMONS, 62 (2,3,4)
Chairman and Chairman of the Executive Committee,
Allegheny Ludlum Corporation
(specialty metals)
Chairman, Executive Committee
Director since 1976
THOMAS J. USHER, 51 (1,5)
President, U.S. Steel Group
(steel industry)
Director since 1992
HELGE H. WEHMEIER, 51 (1,4)
President and Chief Executive Officer,
Miles Inc.
(healthcare, chemicals and imaging technologies)
Director since 1992
1 Audit Committee
2 Executive Committee
3 Loan & Investment Committee
4 Nominating Committee
5 Personnel & Compensation Committee
* not standing for re-election in 1994
EXECUTIVE MANAGEMENT 79
THOMAS H. O'BRIEN, 57 (1,2)
Chairman and Chief Executive Officer
31 years of service
JAMES E. ROHR, 45 (1,2)
President
21 years of service
JOHN E. ALDEN, 52 (2)
Senior Vice President,
Marketing
10 years of service
SUSAN B. BOHN, 49 (2)
Senior Vice President,
Public Relations
8 years of service
RICHARD C. CALDWELL, 49 (1,2)
Executive Vice President,
Investment Management and Trust
3 years of service
DANIEL F. GILLIS, 53 (2)
Senior Vice President,
Human Resources
26 years of service
WALTER E. GREGG, JR., 52 (1,2)
Executive Vice President,
Finance and Administration
19 years of service
FREDERICK J. GRONBACHER, 51 (2)
Executive Vice President and Deputy Manager
Retail Banking
17 years of service
MICHAEL N. HARRELD, 49 (2)
President and Chief Executive Officer,
PNC Bank, Kentucky, Inc.
25 years of service
ROBERT L. HAUNSCHILD, 44 (1)
Senior Vice President,
Planning/Finance
3 years of service
JOE R. IRWIN, 58 (1,2)
Executive Vice President and
Chief Investment Officer
30 years of service
WILLIAM J. JOHNS, 46 (1)
Senior Vice President and Controller
19 years of service
EDWARD P. JUNKER III, 57 (1,2)
Vice Chairman
29 years of service
WALTER C. KLEIN, JR., 50 (2)
Executive Vice President,
PNC Mortgage Bank, N.A.
1 year of service
RALPH S. MICHAEL III, 39 (2)
President and Chief Executive Officer,
PNC Bank, Ohio, N.A.
14 years of service
CALVERT A. MORGAN, JR., 46 (2)
Chairman, President and Chief
Executive Officer, Bank of Delaware
23 years of service
LOUIS J. MYERS, 41 (2)
President and Chief Executive Officer,
PNC Bank, N.A., Northeast PA
11 years of service
THOMAS E. PAISLEY III, 46 (1,2)
Senior Vice President and Chairman,
Corporate Credit Policy Committee
22 years of service
CHARLES C. PEARSON, JR., 54 (2)
President and Chief Executive Officer,
PNC Bank, N.A., Central PA
1 year of service
JOHN V. PETRYCKI, 53 (2)
President and Chief Executive Officer,
PNC Bank, N.A., Southcentral PA
2 years of service
HELEN P. PUDLIN, 44 (1,2)
Senior Vice President,
General Counsel
4 years of service
BRUCE E. ROBBINS, 49 (1,2)
President and Chief Executive Officer,
PNC Bank, N.A., Pittsburgh
20 years of service
A. WILLIAM SCHENCK III, 50 (1,2)
Executive Vice President,
Retail Banking
24 years of service
TIMOTHY G. SHACK, 43 (2)
Senior Vice President
Operations and Data Processing
17 years of service
RICHARD L. SMOOT, 53 (1,2)
President and Chief Executive Officer,
PNC Bank, N.A., Philadelphia
7 years of service
HERBERT G. SUMMERFIELD, JR., 53 (1,2)
Executive Vice President,
Real Estate
23 years of service
WALTER L. WEST, 51 (1)
Treasurer
27 years of service
DAVID E. ZUERN, 44 (2)
President and Chief Executive Officer,
PNC Bank, N.A., Northwest PA
22 years of service
1 Executive Officer
2 Management Committee
80
SHAREHOLDER INFORMATION
STOCK PRICES/DIVIDENDS DECLARED The table below sets forth the range of high
and low daily last sale prices for PNC Bank Corp. common stock and the
respective dividends declared per common share by quarter.
- ----------------------------------------------------------------
Daily Sale Prices Cash Dividends
High Low Declared
- ----------------------------------------------------------------
1993 Quarter
- ----------------------------------------------------------------
First $35.000 $27.000 $ .285
Second 36.125 29.750 .285
Third 32.750 28.500 .285
Fourth 31.125 27.625 .320
- ----------------------------------------------------------------
Total $ 1.175
- ----------------------------------------------------------------
1992 Quarter
- ----------------------------------------------------------------
First $25.750 $23.375 $ .265
Second 27.687 23.812 .265
Third 27.250 23.937 .265
Fourth 29.125 25.875 .285
- ----------------------------------------------------------------
Total $ 1.080
- ----------------------------------------------------------------
DIVIDEND POLICY Holders of PNC Bank Corp. common stock are entitled to receive
dividends when declared by the board of directors out of funds legally
available. The board presently intends to continue the policy of paying
quarterly cash dividends. However, future dividends will depend upon earnings,
the financial condition of PNC Bank Corp. and other factors including
applicable government regulations and policies.
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN PNC Bank Corp.'s dividend
reinvestment and stock purchase plan enables shareholders of common and
preferred stock to purchase additional shares of common stock conveniently and
without paying brokerage commissions or service charges. A prospectus and
enrollment card may be obtained by writing to PNC Bank Corp.'s Shareholder
Relations Department at corporate headquarters.
[GRAPH]
81
CORPORATE INFORMATION
STOCK LISTING
PNC Bank Corp.'s common stock is traded on the New York Stock Exchange (NYSE)
under the symbol PNC. At the close of business on February 8, 1994, there were
43,384 common shareholders of record.
REGISTRAR AND TRANSFER AGENT
Chemical Bank
Securityholder Relations Department
P.O. Box 24935, Church Street Station
New York, New York 10249
800-982-7652
ANNUAL SHAREHOLDERS' MEETING
All shareholders are invited to attend PNC Bank Corp.'s annual meeting on
Tuesday, April 26, 1994, at 11 a.m., Eastern Standard Time on the 15th floor of
One PNC Plaza, Fifth Avenue and Wood Street, Pittsburgh, Pennsylvania.
INQUIRIES
Inquiries, comments or suggestions concerning PNC Bank Corp. are welcome.
Individual shareholders should contact:
Shareholder Relations at 800-843-2206.
Analysts and institutional investors should contact:
William H. Callihan, Vice President, Investor Relations at 412-762-8257.
CORPORATE HEADQUARTERS
PNC Bank Corp.
One PNC Plaza
Fifth Avenue and Wood Street
Pittsburgh, Pennsylvania 15265
FORM 10-K
The Annual Report on Form 10-K is filed with the Securities and Exchange
Commission. Copies of this document, excluding exhibits, may be obtained
without charge by writing to:
Walter E. Gregg, Jr., Executive Vice President, at corporate headquarters.
TRUST PROXY VOTING
Reports of 1993 non-routine proxy voting by PNC Bank Corp.'s trust divisions
are available by writing to: William F. Strome, Senior Vice President, Deputy
General Counsel, at corporate headquarters.
INQUIRIES
News media representatives and others seeking general information should
contact: Jonathan Williams, Vice President, Media Relations, at 412-762-4550.
82 GLOSSARY OF TERMS
BOOK VALUE PER COMMON SHARE The value of a share of common stock based on the
values at which the assets are recorded on the balance sheet determined by
dividing shareholders' equity excluding the liquidation value of preferred
stock by the total number of common shares outstanding.
EARNING PER SHARE (EPS) The most common method of
expressing a company's profitability. Its purpose is to indicate how effective
an enterprise has been in using the resources provided by common shareholders.
EPS is usually presented in two ways: primary EPS and fully diluted EPS. The
computation of primary EPS includes other instruments which are equivalent to
common stock. Fully diluted EPS includes all instruments which have the
potential of causing additional shares of common stock to be issued.
FEE INCOME Income from fee-based services including investment management and
trust fees, service charges on deposit accounts, loan servicing fees,
transaction processing fees, credit card fees and other fees.
FORECLOSED ASSETS Property acquired through a foreclosure proceeding or
acceptance of a deed-in-lieu of foreclosure and loans classified as
in-substance foreclosure.
HIGHLY LEVERAGED TRANSACTIONS (HLT) Financing transactions which involve the
buyout, acquisition or recapitalization of an existing business which causes
the company's liabilities to increase significantly. HLTs also include credits
to highly leveraged companies.
LEVERAGE RATIO A measure of the relationship between capital and total assets
determined by dividing shareholders' equity less goodwill and unrealized
securities gains by average tangible assets.
MARKET CAPITALIZATION The value assigned by the market to a company's worth
determined by multiplying the number of outstanding shares by the current
market price per share.
NET CHARGE-OFFS The amount charged to the allowance for credit losses less
amounts recovered on loans and leases previously charged off.
NET INTEREST INCOME Interest income, loan fees and dividends on earning assets
less the interest expense incurred for all sources of funds.
NONPERFORMING ASSETS Assets which are not currently accruing interest, interest
is not being paid, or interest is being paid but the rate or terms were altered
due to the deteriorated financial condition of the borrower. Nonperforming
assets include nonaccrual loans, restructured loans and foreclosed assets.
OVERHEAD RATIO Noninterest expenses divided by the sum of net interest income,
adjusted to a taxable-equivalent basis, and noninterest income. A measure of
the relationship between operating expenses and revenues.
PROFIT MARGIN After-tax earnings expressed as a percentage of revenues.
Revenues include net interest income on a fully taxable equivalent basis and
noninterest income.
PROVISION FOR CREDIT LOSSES A charge to earnings to recognize that all loans
will not be fully paid. The amount is determined based on such factors as the
Corporation's actual loss experience, management's expectations of probable
credit losses, as well as current economic trends.
RETURN ON AVERAGE ASSETS Net income as a percentage of average total assets.
The basic yardstick of bank profitability, indicating how effectively assets
are employed.
RETURN ON COMMON EQUITY Net income as a percentage of average common
shareholders' equity. This ratio indicates how effectively common shareholders'
equity capital is invested.
RISK-BASED CAPITAL RATIOS Regulatory measurements of capital adequacy.
Guidelines set forth how capital is to be measured and how total assets,
including certain off-balance-sheet items, are to be risk adjusted to reflect
levels of credit risk.
SHAREHOLDERS' EQUITY The amount which represents the total investment in the
Corporation by holders of common and preferred stock plus retained earnings.