PNC BANK 10-Q
Published on August 15, 1994
Exhibit 99.1
PNC BANK CORP.
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PNC BANK CORP.
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Corporate Financial Review
The following Corporate Financial
Review should be read in conjunction
with the Consolidated Financial
Statements of PNC Bank Corp. and
subsidiaries ("Corporation") included
herein and with management's discussion
and analysis included in the
Corporation's 1993 Annual Report.
Overview
During the first six months of 1994, the nation's real gross domestic product
grew at a preliminary annual rate of 3.5 percent, according to the United States
Commerce Department. Management expects economic growth to continue throughout
the remainder of 1994, although at a more moderate pace, accompanied by further
increases in short-term interest rates.
Net income for the first six months of 1994 was $393.5 million, or $1.65 per
fully diluted share, compared with $336.8 million, or $1.41 per share, for the
first six months of 1993. Income before accounting changes in the prior-year
period was $356.2 million or $1.49 per fully diluted share. Return on assets and
return on common shareholders' equity were 1.34 percent and 18.51 percent,
respectively, in 1994, compared with 1.39 percent and 17.73 percent,
respectively, in 1993. The corresponding 1993 returns before accounting changes
were 1.47 percent and 18.76 percent.
The results for the first six months of 1993 included the cumulative effect
of adopting Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," and a change in the method of accounting for certain intangible
assets, primarily purchased mortgage servicing rights. The cumulative effect of
these changes reduced net income by $9.0 million and $10.4 million,
respectively.
Mergers and Acquisitions
On November 30, 1993, the Corporation completed its acquisition of PNC Mortgage
(formerly Sears Mortgage Banking Group) for $328 million in cash. The purchase
price is subject to certain post-closing adjustments. With this acquisition, the
Corporation added 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.
During the first six months of 1994, the Corporation completed the purchase
of United Federal Bancorp, Inc. ("United"), State College, Pennsylvania, and
First Eastern Corp. ("First Eastern"), Wilkes-Barre, Pennsylvania, for a total
of $486 million in cash. The combined assets and deposits totaled $2.8 billion
and $2.4 billion, respectively. The Corporation also completed the acquisition
of a $10-billion residential mortgage servicing portfolio from the Associates
Corporation of North America ("Associates") for $117 million in cash.
During the second quarter of 1994, the Corporation entered into a definitive
agreement to acquire BlackRock Financial Management, L.P. ("BlackRock"), a New
York-based fixed-income investment management firm with approximately $23
billion in assets under management. The purchase price will approximate
$240 million in cash and notes. This transaction is expected to close in the
fourth quarter of 1994, pending regulatory and other approvals.
Subsequent to June 30, 1994, the Corporation announced agreements to acquire
Brentwood Financial Corporation, Cincinnati, Ohio, and Indian River Federal
Savings Bank, Vero Beach, Florida. The aggregate purchase price approximates $33
million in cash. The combined assets and deposits totaled approximately $175
million and $141 million, respectively, at June 30, 1994. These transactions are
expected to close in the fourth quarter of 1994, subject to regulatory and
shareholder approvals.
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PNC BANK CORP.
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Corporate Financial Review
Income Statement Review
NET INTEREST INCOME AND NET INTEREST MARGIN On a fully taxable-equivalent basis,
net interest income for the first six months of 1994 increased $77.5 million, or
8.3 percent, compared with the first six months of 1993. The increase was due to
higher levels of average earning assets.
The net interest margin for the first six months of 1994 narrowed 41 basis
points when compared with the corresponding 1993 period. The maturity structure
and nature of liabilities assumed relative to assets acquired in the PNC
Mortgage acquisition contributed to the narrower interest rate spread. This
impact was mitigated by the benefit of lower prepayments on mortgage-related
assets in the rising interest rate environment in 1994. In addition, the net
interest margin was negatively impacted by a lower proportion of
noninterest-bearing sources supporting earning assets. The benefit of interest
rate swaps also declined in the rising interest rate environment.
PROVISION FOR CREDIT LOSSES The provision for credit losses was $50.0 million in
the first six months of 1994, compared with $115.2 million a year ago.
Continuing improvement in economic conditions combined with management's ongoing
efforts to improve asset quality resulted in lower nonperforming assets and
charge-offs, and a higher reserve coverage of nonperforming loans. The quarterly
provision for credit losses is expected to decline during the remainder of 1994.
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Corporate Financial Review
NONINTEREST INCOME Noninterest income totaled $486.8 million in the first six
months of 1994, compared with $474.7 million in the corresponding 1993 period.
Net securities gains totaled $30.3 million, compared with $111.8 million in the
year-earlier period. Excluding net securities gains, noninterest income as a
percentage of total revenue was 31.2 percent in the first six months of 1994,
compared with 28.1 percent a year earlier.
Investment management and trust increased 8.2 percent to $146.5 million.
Growth in revenue from new trust business and mutual fund accounting and
administrative services was partially offset by a decline in fees resulting from
lower levels of managed assets. The BlackRock acquisition is expected to add
approximately 20 percent to investment management and trust revenue on an annual
basis. The table below sets forth trust and mutual fund assets, and the related
revenue, as of and for the six months ended June 30, 1994 and 1993.
Service charges, fees and commissions increased $10.7 million, or 6.3
percent, to $180.0 million in the first six months of 1994. Increased
transaction volume related to new business and acquisitions accounted for the
growth in deposit account and corporate services revenue. Increased syndication
and advisory activity accounted for the growth in corporate finance fees. Other
service fees increased as a result of revised consumer loan fee schedules.
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Mortgage banking income increased $63.4 million to $80.4 million, primarily
as a result of the PNC Mortgage acquisition. During the first six months of
1994, the Corporation originated $3.9 billion of residential mortgages,
approximately 65 percent of which represented new financings, and realized gains
of $16.6 million from sales of mortgage servicing. During the first half of
1994, the rising interest rate environment adversely impacted the volume of
originations. However, the value of the mortgage servicing portfolio increased
as the rate of mortgage loan prepayments declined. Conversely, should interest
rates decline, the volume of originations and prepayment rates would likely
increase and the value of the existing servicing portfolio could decrease.
At June 30, 1994, the Corporation's mortgage servicing portfolio totaled
$43.8 billion with a weighted-average coupon of 7.72 percent, including
$34.3 billion serviced for others.
The increase in other noninterest income is attributable to higher gains
from sales of assets and venture capital activity. These increases were
partially offset by lower trading account profits.
NONINTEREST EXPENSE Noninterest expense totaled $845.1 million in the first six
months of 1994, compared with $732.2 million in the year-earlier period. The
overhead ratio increased to 56.6 percent in the first six months of 1994,
compared with 52.1 percent in 1993, due to lower net securities gains in 1994
and higher operating expenses relative to revenue associated with PNC Mortgage.
Excluding acquisitions, noninterest expense declined 2.2 percent. Pending
acquisitions are expected to increase noninterest expense by approximately 3
percent on a combined basis.
Staff expense increased 18.6 percent to $410.9 million, primarily due to
acquisitions completed subsequent to June 30, 1993. Average full-time equivalent
employees were 20,900 for the first six months of 1994, compared with 17,700 in
the year-earlier period. Approximately 3,600 average full-time equivalent
employees were added from acquisitions. Excluding the impact of acquisitions,
staff expense increased 2.8 percent. Pension expense increased $4.8 million in
the comparison due to acquisitions and a reduction in the discount rate used to
calculate the pension obligation.
Net occupancy and equipment expense increased $8.4 million and $10.7
million, respectively, primarily due to acquisitions, occupancy of an office
building purchased in 1993 and an upgrade of computer equipment. Amortization of
intangible assets increased $22.5 million primarily due to higher levels of
purchased mortgage servicing rights associated with PNC Mortgage. The increase
in federal deposit insurance resulted from acquired deposits. Taxes other than
income also increased due to acquisitions.
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Corporate Financial Review
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 the
management accounting system is enhanced and business or product lines change.
During 1994, certain methodologies were changed and, accordingly, results for
1993 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. The financial results presented in
this section reflect each line of business as if it operated on a stand-alone
basis. Securities or borrowings have been assigned to each line of business
based on its net asset or liability position. The remaining securities and
borrowings, and related interest rate spread, emanating from management of the
Corporation's overall asset/liability position, and net securities gains, are
included in Portfolio Management.
Earnings contributed by the lines of business totaled $440 million in the
first six months of 1994, compared with $438 million in the first six months of
1993. These results exceeded reported consolidated net income by $46 million and
$101 million, respectively, due to the cumulative effect of changes in
accounting principles in 1993, provision for credit losses in excess of specific
reserve allocations and certain unallocated revenue and expenses. Excluding net
securities gains, earnings from the lines of business were $420 million and $365
million, respectively, and returns on assigned equity were 21 percent and 20
percent, respectively.
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PNC BANK CORP.
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Corporate Financial Review
CORPORATE BANKING Corporate Banking provided 38 percent of line of business
earnings in the first six months of 1994, compared with 32 percent in the first
half of 1993. Large Corporate benefited from a 25 percent increase in average
loans and improved asset quality, which more than offset the impact of narrower
interest rate spreads on loans. The majority of the loan growth was in
short-term commercial and money market loans that are typically repaid shortly
after period end. Middle Market revenue declined in 1994 due to the impact of
narrower interest rate spreads on loans and a reduction in the real estate
project portfolio. The increase in earnings resulted from a lower provision for
credit losses as asset quality improved in both the commercial and real estate
project portfolios. Revenue from treasury management services accounted for 16
percent of total Corporate Banking revenue in 1994, compared with 15 percent a
year ago.
RETAIL BANKING The earnings contribution from Retail Banking increased to 38
percent in the first six months of 1994, from 33 percent a year ago. Consumer
Banking average loans and deposits increased 16 percent and 6 percent,
respectively, when compared with the first six months of 1993, primarily due to
acquisitions. Higher net interest revenue and improved asset quality contributed
to the increase in earnings. The increase in Mortgage Banking earnings reflected
the contribution of the acquired assets and mortgage banking operations of PNC
Mortgage. Average mortgage-related assets increased $6.6 billion to $9.8
billion. During the first six months of 1994, the mortgage servicing portfolio
increased $8.2 billion to $43.8 billion at June 30, 1994, including $34.3
billion serviced for others. The net growth in servicing resulted from the
Associates transaction. Mortgage Banking originated $3.9 billion of residential
mortgages during the first half of 1994, and $1.9 billion of servicing was sold
which resulted in gains of $16.6 million.
INVESTMENT MANAGEMENT AND TRUST Investment Management and Trust contributed 8
percent to line of business earnings in both periods. Trust earnings declined in
the comparison as increased revenue from new business was more than offset by
higher marketing and incentive expenses. Mutual Funds earnings were unchanged in
the first six months of 1994 when compared with the year-earlier period.
Increased revenue from growth of the PNC Family of Funds, as well as expanded
accounting and administrative services, was offset by lower investment advisory
fees and increased marketing costs.
INVESTMENT BANKING The earnings contribution from Investment Banking was 16
percent in the first half of 1994, compared with 27 percent in the first six
months of 1993. Portfolio Management earnings declined in the comparison as net
securities gains were $30.3 million in the first six months of 1994, compared
with $111.8 million in 1993. These gains were significantly higher in the first
half of last year as certain mortgage-backed securities were sold in a higher
prepayment environment to provide more stability to net interest income.
Excluding net securities gains, Investment Banking's earnings were $52 million
and $46 million in the first six months of 1994 and 1993, respectively. Higher
venture capital income accounted for the increase in Brokerage and Underwriting
earnings.
The changes in the average balance sheet reflect the impact of acquisitions,
stronger loan demand and asset/liability management activities. Average earning
assets increased $9.6 billion when compared with the first six months of 1993.
The proportion of average loans to average earning assets was 58.0 percent
in the first six months of 1994, compared with 54.7 percent in the first half of
1993.
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PNC BANK CORP.
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Corporate Financial Review
Average loans for the first six months of 1994 increased 28.1 percent to $32.3
billion when compared with the first six months of 1993. Excluding the impact of
acquisitions, average loans increased 4.7 percent in the comparison due to
increased loan demand and higher levels of short-term commercial, money market
and consumer loans.
Average deposits increased $3.9 billion when compared with the first six
months of 1993. The proportion of average noninterest-bearing sources supporting
average earning assets was 14.1 percent in the first six months of 1994,
compared with 15.6 percent in the first half of 1993. Average notes and
debentures increased $5.4 billion as bank notes and Federal Home Loan Bank
advances were used as lower cost alternatives to other funding sources.
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PNC BANK CORP.
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Corporate Financial Review
LOANS The Corporation manages credit risk associated with its lending
activities through portfolio diversification, underwriting policies and
procedures and loan monitoring practices. At June 30, 1994, commercial, real
estate project, real estate mortgage, consumer and other loans accounted for
36.7 percent, 4.7 percent, 27.5 percent, 25.6 percent and 5.5 percent of
total loans, respectively.
At June 30, 1994, total commercial loan outstandings increased $410 million,
or 3.3 percent, from December 31, 1993, primarily attributable to short-term
commercial loans. Total commercial unfunded commitments increased $3.6 billion,
or 26.5 percent, in the comparison. The growth in commitments was attributable
to increased economic activity. Should economic growth continue, management
expects a portion of these commitments to be converted into outstandings.
Total real estate project exposure remained relatively flat since year end.
Retail and office projects accounted for 29 percent and 25 percent,
respectively, of total real estate project exposure at June 30, 1994.
Multi-family and hotel/motel projects accounted for 12 percent and 8 percent,
respectively. 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 71 percent of the total
outstandings. The southeast region of the United States accounted for 15 percent
and no other geographic region accounted for more than 5 percent.
Real estate mortgage outstandings increased 8.1 percent primarily due to
acquisitions. Residential and commercial mortgages acquired in the first half of
1994 totaled $568 million and $288 million, respectively. As part of its overall
asset/liability management strategy, the Corporation retains certain originated
residential mortgage products in the loan portfolio. Generally, these products
are limited to adjustable-rate loans or those with balloon payment features. The
remainder of its fixed-rate production is securitized and retained for the
securities portfolio or sold.
Consumer loan outstandings increased $450 million due to acquisitions and
loan growth. Other loans increased $66 million and consisted of money market,
lease financing and foreign loans.
Highly leveraged transactions ("HLT") are included in various commercial
loan categories. At June 30, 1994, the loan portfolio included $942 million of
HLT outstandings and $239 million of HLT unfunded commitments. The comparable
amounts at December 31, 1993, were $953 million and $186 million, respectively.
The communications, manufacturing and retail/wholesale industries accounted for
70 percent, 19 percent and 4 percent, respectively, of total HLT exposure at
June 30, 1994. HLT outstandings represented 2.7 percent of total loans at June
30, 1994, compared with 2.9 percent at December 31, 1993. During the first six
months of 1994, $145 million of loans and $26 million of unfunded commitments
were no longer classified as HLT.
At June 30, 1994, the Corporation had 61 customers with loans designated as
HLT. The ten largest HLT outstandings and unfunded commitments totaled $472
million and $63 million, respectively. During the first six months of 1994, the
Corporation originated and/or participated in $219 million of commitments to new
HLT customers, compared with $43 million in the corresponding 1993 period. HLT
loan fees recognized in income during the first six months of 1994 totaled $3.2
million and deferred HLT loan fees totaled $4.4 million at June 30, 1994. The
yield on the HLT portfolio, including loans classified as nonperforming, was 6.4
percent during the first six months of 1994, compared with 6.1 percent a year
ago.
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Corporate Financial Review
RISK ELEMENTS During the first six months of 1994, nonperforming assets declined
$10 million as a result of continued improvement in overall asset quality.
Excluding the impact of the First Eastern acquisition, total nonperforming
assets declined $84 million when compared with year-end 1995. Assuming further
economic growth, management anticipates the favorable trend will continue during
the remainder of 1994.
At June 30, 1994, $81 million of nonperforming loans were current as to
principal and interest, compared with $102 million at December 31, 1993.
Nonperforming HLT loans totaled $17 million at June 30, 1994, compared with $25
million at December 31, 1993.
Office, retail and land projects accounted for 59 percent of total
nonperforming real estate project assets at June 30, 1994. The Corporation's
primary markets accounted for 58 percent of total nonperforming real estate
project assets. The southeast region of the United States and metropolitan
Washington D.C. area accounted for 29 percent and 8 percent, respectively.
Accruing loans contractually past due 90 days or more as to the payment of
principal or interest totaled $148 million at June 30, 1994, compared with $135
million at December 31, 1993. Residential mortgages and student loans in the
amount of $68 million and $34 million, respectively, were included in the total
at June 30, 1994, compared with $55 million and $41 million, respectively, at
year-end 1995.
Annualized net charge-offs as a percentage of average loans were .32 percent
for the first six months of 1994, compared with .76 percent in the corresponding
1993 period. The 1994 charge-off and recovery levels reflected the continued
improvement in overall asset quality and the Corporation's loan workout efforts.
During the first six months of 1994, $10 million of HLT were charged-off and no
recoveries were realized. The corresponding 1993 amounts were $7 million and $2
million, respectively.
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ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses totaled $1.0 billion
at June 30, 1994, compared with $972 million at December 31, 1993. The allowance
as a percentage of period-end loans and nonperforming loans was 2.97 percent and
267.1 percent, respectively, at June 30, 1994. The comparable year-end amounts
were 2.92 percent and 253.1 percent, respectively.
ASSET/LIABILITY MANAGEMENT The primary objectives of asset/liability management
are to provide maximum levels of net interest income while maintaining
acceptable levels of interest rate and liquidity risk, facilitating the
Corporation's funding needs and ensuring capital adequacy. To achieve these
objectives, 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. Asset/liability
management policies include limits on the amounts of various financial
instruments, the types of funding and the level of interest rate sensitivity,
and an assessment of overall liquidity.
Asset/liability management seeks to minimize the credit risk associated with
its activities. This is primarily accomplished by entering into transactions
with only a select number of high quality institutions, establishing credit
limits with counterparties and, where applicable, requiring segregated
collateral.
A dynamic income simulation model is the primary mechanism used in assessing
the impact on net interest income of changes in interest rates. Asset/liability
management projects net interest income in what it believes is a most likely
interest rate environment, as well as in higher and lower alternative interest
rate scenarios. The table below sets forth average interest rates for the month
of June 1994 and the respective rate assumptions for December 1994 and June
1995.
In addition to interest rate assumptions, loan and deposit growth rates,
mortgage-related asset prepayments, and interest rate swap amortization are
adjusted based on current expectations. The model reflects management's
assumption that the market would present investment alternatives with
acceptable maturities and interest rate characteristics relative to expected
funding sources. The model also reflects transactions initiated by management
to reduce its liability-sensitive position, including reducing fixed-rate
assets and adding variable-rate assets. Actual net interest income may differ
from simulated results due to changes in management's strategies or market
conditions. The actual timing and rate of changes in interest rates and other
assumptions also could affect net interest income. As the model is based on
current on- and off-balance-sheet positions, it does not reflect additional
actions management could take to mitigate the impact of changes in interest
rates.
In the most likely scenario, the model projects that net interest income
would be relatively stable for the remainder of 1994, and for 1995 when
compared with full-year 1994. If interest rates were 100 basis points higher
than the most likely scenario, net interest income would decrease 8.4 percent
over the 18-month period ended December 31, 1995. Conversely, net interest
income would increase 7.2 percent over the same period if interest rates were
100 basis points lower than the most likely scenario.
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. Gap analysis alone does not accurately
measure the magnitude of changes in net interest income since changes in
interest rates do not impact all categories of assets, liabilities and
off-balance-sheet positions equally or simultaneously. The liability sensitivity
of the cumulative one-year gap position was 18.4 percent of total earning assets
at June 30, 1994, which declined to 8.1 percent within 24 months. The cumulative
one-year gap position narrowed during the second quarter of 1994 as a result of
management actions to reduce exposure to rising interest
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rates, primarily by reducing fixed-rate assets and adding variable-rate assets.
These actions were partially offset by a slower rate of prepayments on
mortgage-related assets which had the effect of extending the maturity of these
instruments.
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 June 30, 1994, hedge swaps and customer
swaps accounted for 87 percent and 1 percent, respectively, of the total
notional amount of all interest rate swap, futures, forward, foreign currency
exchange and option contracts. The notional amount of hedge and customer swaps
totaled $14.1 billion and $120 million, respectively, at June 30, 1994. The
corresponding December 31, 1993 amounts were $11.8 billion and $490 million,
respectively. Credit risk with respect to interest rate swaps represents the
inability of the counterparty to perform under terms of the swap agreements. The
Corporation limits credit risk with respect to swap agreements by requiring,
where applicable, segregated collateral.
Substantially all hedge swaps are index amortizing, the majority of which
are designated as hedges on deposits and other interest-bearing liabilities. The
Corporation receives payments based on fixed interest rates and makes payments
based on a floating money market rate. During the first six months of 1994,
hedge swaps benefited net interest income by $96.1 million, compared with $90.5
million in the corresponding 1993 period. Net deferred gains on terminated
interest rate swaps totaled $14 million and $22 million at June 30, 1994 and
December 31, 1993, respectively. Such deferred gains are being amortized over
various remaining periods of up to two years.
The table below sets forth the maturity distribution of hedge swaps and the
weighted average interest rates at June 30, 1994.
Hedge swaps have remaining expected maturities that range from one and
one-half months to three years and four months in management's most likely
interest rate scenario. If interest rates rise further than assumed in the most
likely scenario, the maturities of certain index swaps would be extended;
however, the maturities would not extend beyond 1999. Because the Corporation
has an aggregate receive-fixed/pay-variable interest rate swap position, further
increases in interest rates would reduce
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the fair value of, and benefit provided by, such swaps. If such rate increases
are significant, the rate paid on interest rate swaps could exceed the rate
received.
In a rising interest rate environment, management would expect several
factors to 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 as well as noninterest-bearing sources of funds. Also, an
increase in interest rates would likely be associated with increased economic
activity providing opportunities for loan growth, increased yields on
variable-rate assets, increased value of the mortgage servicing portfolio 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 June 30,
1994, such assets totaled $9.9 billion. Liquidity is also provided by securities
that may be sold under agreements to repurchase, which totaled $7.7 billion at
June 30, 1994. In addition, several bank affiliates have access to funds as
members of the Federal Home Loan Bank system.
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 June 30, 1994, the Corporation has available $140 million of debt, $300
million of preferred stock and $350 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 or potential acquisitions may include the
issuance of instruments that qualify as regulatory capital, such as preferred
stock or subordinated debt. Management believes that the Corporation has
sufficient liquidity to meet its obligations to customers, debtholders and
others. The impact of replacing maturing liabilities is reflected in the income
simulation model used in the Corporation's overall asset/liability management
process. At June 30, 1994, the model assumes rising interest rates and a
resulting higher cost of replacement funding.
As part of the overall asset/liability management process, management seeks
to obtain funding through various sources to maximize net interest income within
acceptable risk parameters. The following table sets forth funding sources at
June 30, 1994 and December 31, 1993.
Total deposits at June 30, 1994 declined slightly since year-end as
decreases in brokered and other deposits more than offset the impact of acquired
deposits. Brokered deposits are primarily included in time deposits. Such
deposits totaled $2.9 billion at June 30, 1994, compared with $4.1 billion at
December 31, 1993. These deposits are expected to decline further in future
periods as they mature and alternative funding sources are employed. Retail
brokered deposits are issued or participated-out by brokers in denominations of
$100,000 or less and are fully insured. Such deposits represented 66.0 percent
of the
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total at June 30, 1994, compared with 63.7 percent at year-end 1993.
At June 30, 1994, treasury, tax and loan borrowings increased $2.0 billion
from year-end 1993 due to relatively lower costs associated with such funds.
Notes and debentures increased $1.8 billion since year-end 1993. During the
first six months of 1994, the Corporation issued $2.9 billion of variable-rate,
unsecured bank notes with maturities of one year and $200 million of 7.75
percent subordinated debentures due in 2004.
SECURITIES At June 30, 1994, securities totaled $23.2 billion and were comprised
of $16.0 billion of investment securities and $7.2 billion of securities
available for sale. The comparable amounts at year-end 1993 were $11.7 billion
and $11.4 billion, respectively. At June 30, 1994, the securities portfolio
included $16.7 billion of collateralized mortgage obligations and
mortgage-backed securities with an aggregate weighted-average expected maturity
of 3 years and 7 months. As part of the overall asset/liability management
strategy, the Corporation invests in collateralized mortgage obligations and
mortgage-backed securities, primarily government agency-backed instruments. The
characteristics of these investments include attractive yields, principal
guarantees, marketability and availability as collateral for additional
liquidity. A risk associated with fixed-rate mortgage-related securities is the
rate of prepayment inherent in the underlying mortgages. The Corporation manages
this risk through the use of the income simulation model. The following table
sets forth the securities portfolio at June 30, 1994 and December 31, 1993.
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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 large part on a banking institution's capital
classification. At June 30, 1994, the capital position of each bank affiliate
was classified as well capitalized.
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.
The leverage ratio declined during the first six months of 1994, as a result
of completed purchase acquisitions. Capital ratios are expected to decline
further by year-end 1994 as a result of the BlackRock transaction. The
Corporation maintains its capital position primarily through its dividend policy
and retained earnings. During the first six months of 1994, the Corporation
retained capital of $243.6 million.
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PNC BANK CORP.
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Corporate Financial Review
Second Quarter 1994 versus
Second Quarter 1993
Net income for the second quarter of 1994 was $187.8 million, or $.79 per fully
diluted common share, compared with $169.1 million, or $.71 per share, in the
comparable quarter of 1993. Return on assets and return on common shareholders'
equity were 1.26 percent and 17.70 percent, respectively, in the second quarter
of 1994. The corresponding returns in 1993 were 1.35 percent and 17.59 percent.
On a fully taxable-equivalent basis, net interest income for the second
quarter of 1994 was $501.4 million, an increase of $35.2 million, or 7.6
percent, from the comparable year-earlier period. The growth in net interest
income was due to higher levels of average earning assets. The net interest
margin narrowed 38 basis points in the comparison, primarily due to the PNC
Mortgage acquisition, a reduced benefit of noninterest-bearing sources and a
lower benefit of interest rate swaps.
The provision for credit losses was $25.0 million in the second quarter of
1994, compared with $53.8 million in the second quarter 1993. Continuing
improvement in economic conditions combined with management's ongoing efforts to
improve asset quality resulted in lower nonperforming assets and charge-offs,
and a higher reserve coverage of nonperforming loans.
Excluding the results of securities transactions, noninterest income
increased $40.5 million, or 21.6 percent, to $228.3 million during the second
quarter of 1994. Investment management and trust totaled $73.5 million, an
increase of 6.4 percent. Revenue growth from new trust business and mutual fund
accounting and administrative services was partially offset by a decline in
fees resulting from lower levels of managed assets. Service charges, fees and
commissions totaled $92.2 million, an increase of 4.9 percent from the second
quarter of 1993. The increase was primarily from growth in deposit and
corporate services revenue. Mortgage banking income increased to $42.7 million,
compared with $9.1 million in 1993 due to the PNC Mortgage acquisition.
Noninterest expense increased to $418.3 million, compared with $345.1
million a year ago, primarily due to acquisitions. Excluding acquisitions,
noninterest expense increased less than one percent when compared with the
second quarter of 1993.
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PNC BANK CORP.
See accompanying Notes to Consolidated Financial Statements.
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PNC BANK CORP.
See accompanying Notes to Consolidated Financial Statements.
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PNC BANK CORP.
See accompanying Notes to Consolidated Financial Statements.
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PNC BANK CORP.
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Notes to Consolidated Financial Statements
Basis of Financial Statement Presentation
The unaudited consolidated interim financial statements have been prepared in
accordance with generally accepted accounting principles and include the
accounts of PNC Bank Corp. and its subsidiaries ("Corporation"), substantially
all of which are wholly owned. In the opinion of management, the financial
statements reflect all adjustments, which are of a normal recurring nature,
necessary for a fair statement of the results for the interim periods presented.
In preparing the unaudited consolidated interim financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Actual results could differ from such
estimates.
The notes included herein should be read in conjunction with the audited
consolidated financial statements included in the 1993 Annual Report.
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.
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 and the number of shares of common stock which
would be issued assuming the exercise of stock options. 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.
Changes in Accounting Principles
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 investments or
trading are designated as 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.
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. 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.
The cumulative effect of the change decreased net income in 1993 by $9.0
million or $.04 per fully diluted share.
INTANGIBLE ASSETS Effective January 1, 1993, the Corporation changed its method
of accounting for certain identifiable intangible assets, consisting primarily
of purchased mortgage servicing rights. Such assets are
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PNC BANK CORP.
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Notes to Consolidated Financial Statements
accounted for at the lower of amortized cost or the estimated value of future
net revenues on a disaggregated basis. The estimated value of these assets is
determined by discounting the related expected future net cash flows at a rate
no less than the original discount rate. Previously, cash flows were not
discounted for this purpose.
The cumulative effect of the change decreased net income in 1993 by $10.4
million or $.04 per fully diluted share.
Mergers and Acquisitions
On November 30, 1993, the Corporation consummated its acquisition of PNC
Mortgage (formerly Sears Mortgage Banking Group) for $328 million in cash. The
purchase price is subject to certain post-closing adjustments. The transaction
was recorded under the purchase method of accounting and the total assets of PNC
Mortgage were $7.6 billion at closing.
During the first six months of 1994, the Corporation completed the purchase
of United Federal Bancorp, Inc., State College, Pennsylvania, and First Eastern
Corp., Wilkes-Barre, Pennsylvania, for a total of $486 million in cash. The
combined assets and deposits totaled $2.8 billion and $2.4 billion,
respectively, at closing. The Corporation also completed the acquisition of a
$10-billion residential mortgage servicing portfolio from the Associates
Corporation of North America for $117 million in cash.
During the second quarter of 1994, the Corporation entered into a definitive
agreement to acquire BlackRock Financial Management, L.P., a New York-based
fixed-income investment management firm with approximately $23 billion in assets
under management. The purchase price will approximate $240 million in cash and
notes. This transaction is expected to close in the fourth quarter of 1994,
pending regulatory and other approvals.
Subsequent to June 30, 1994, the Corporation announced agreements to acquire
Brentwood Financial Corporation, Cincinnati, Ohio, and Indian River Federal
Savings Bank, Vero Beach, Florida. The aggregate purchase price approximates $33
million in cash. The combined assets and deposits totaled approximately $175
million and $141 million, respectively, at June 30, 1994. These transactions are
expected to close in the fourth quarter of 1994, subject to regulatory and
shareholder approvals.
Cash Flows
During the first six months of 1994 and 1993, interest paid on deposits and
other contractual debt obligations totaled $816.5 million and $558.4 million,
respectively, and income taxes paid were $258.8 million and $199.6 million,
respectively.
Noncash investing activities consisted of transfers of securities available
for sale to investment securities totaling $2.7 billion during the first six
months of 1994 and transfers of loans to foreclosed assets aggregating $18.2
million in both 1994 and 1993. In connection with acquisitions completed during
1994, the Corporation acquired assets of $2.8 billion and assumed liabilities of
$2.7 billion. The cash paid totaled $580 million and the Corporation received
$128 million in cash and due from banks in connection with these acquisitions.
Allowance for Credit Losses
The following table presents changes in the allowance for credit losses:
Notes and Debentures
During the first six months of 1994, the Corporation issued $200 million of 7.75
percent, unsecured subordinated debentures due in 2004.
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PNC BANK CORP.
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, real estate mortgages, U.S. Government
agencies and corporations securities, demand, savings, money market,
certificates of deposit of $100,000 or more, and other time deposits, and other
borrowed funds.
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PNC BANK CORP.
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PNC BANK CORP.
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Corporate Information
Stock Listing
PNC Bank Corp.'s common stock is traded on the New York Stock Exchange (NYSE)
under the symbol PNC.
Registrar and Transfer Agent
Chemical Bank
J.A.F. Building P.O. Box 3068
New York, New York 10116-3068
800-982-7652
Inquiries
Individual shareholders should contact:
The PNC Bank Hotline at 800-982-7652 or
Shareholder Relations at 800-843-2206.
Analysts and institutional investors should contact:
William H. Callihan, Vice President,
Investor Relations at 412-762-8257.
News media representatives and others seeking
general information should contact:
Jonathan Williams, Vice President,
Media Relations at 412-762-4550.
Form 10-Q:
PNC Bank Corp.'s Quarterly Report on Form 10-Q is filed with the Securities and
Exchange Commission. This report, excluding exhibits, may be obtained without
charge by writing to Samuel R. Patterson, Senior Vice President, Financial
Reporting, at corporate headquarters.
Corporate Headquarters
PNC Bank Corp.
One PNC Plaza
Fifth Avenue and Wood Street
Pittsburgh, Pennsylvania 15265
Stock Prices/Dividends Declared
The table below sets forth by quarter the range of high and low sale prices for
PNC Bank Corp.'s common stock and cash dividends declared per common share.
Dividend Reinvestment and
Stock Purchase Plan
PNC Bank Corp.'s dividend reinvestment and stock purchase plan enables holders
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 Shareholder
Relations at corporate headquarters.
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