PNC BANK 10-Q
Published on November 14, 1994
EXHIBIT 99
PNC BANK CORP.
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Consolidated Financial Highlights
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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 unaudited Consolidated
Financial Statements of PNC Bank Corp.
and subsidiaries ("Corporation")
included herein and with management's
discussion and analysis and the audited
Consolidated Financial Statements
included in the Corporation's 1993
Annual Report.
Overview
Net income for the first nine months of 1994 was $581.5 million, or $2.44 per
fully diluted share, compared with $554.4 million, or $2.33 per share, for the
first nine months of 1993. Income before accounting changes in the prior year
period was $573.8 million or $2.41 per fully diluted share. Return on assets and
return on common shareholders' equity were 1.29 percent and 18.04 percent,
respectively, in 1994, compared with 1.50 percent and 19.07 percent in 1993. The
corresponding 1993 returns before accounting changes were 1.55 percent and 19.74
percent.
The comparative results for the nine months reflect the impact of
acquisitions completed during the past twelve months. The acquisitions have
further diversified the Corporation's revenue sources and increased the
percentage of fee-based revenue from 28.4 percent to 32.6 percent of total
revenue. The pending acquisition of BlackRock Financial Management, L.P.
("BlackRock"), will further expand fee-based revenues.
The results for the first nine 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.
During the first nine months of 1994, the nation's real gross domestic
product grew at an annual rate of 3.6 percent, according to the United States
Commerce Department. Management expects economic growth to continue through the
remainder of 1994 and into 1995. Based on recent economic indicators, management
also expects interest rates will continue to increase in the fourth quarter of
1994 and throughout next year to higher levels than previously anticipated.
This interest rate environment is expected to adversely impact net interest
income and net interest margin. Management intends to continue to take actions
designed to reduce the interest rate risk of the Corporation and the adverse
impact of the higher interest rate environment.
Mergers and Acquisitions
On November 30, 1993, the Corporation completed its acquisition of PNC Mortgage
(formerly Sears Mortgage Banking Group). In the third quarter of 1994, the post-
closing purchase price adjustments were finalized with no material impact. 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 nine months of 1994, the Corporation completed the
acquisitions of United Federal Bancorp, Inc., State College, Pennsylvania and
First Eastern Corp. ("First Eastern"), Wilkes-Barre, Pennsylvania. The combined
assets and deposits totaled $2.8 billion and $2.4 billion, respectively. The
Corporation also purchased a $10-billion residential mortgage servicing
portfolio from the Associates Corporation of North America ("Associates").
In the second quarter of 1994, the Corporation entered into a definitive
agreement to acquire BlackRock, a New York-based, fixed-income investment
management firm with approximately $23 billion in assets under management. The
purchase price is approximately $240 million in cash and notes. This transaction
is expected to close in the first quarter of 1995, pending regulatory and other
approvals.
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Corporate Financial Review
In the third quarter of 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 $140 million, respectively, at September 30,
1994. These transactions are expected to close in the first quarter of 1995,
subject to regulatory and shareholder approvals.
Income Statement Review
INCOME STATEMENT HIGHLIGHTS
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NET INTEREST INCOME AND NET INTEREST MARGIN On a fully taxable-equivalent basis,
net interest income for the first nine months of 1994 increased $112.8 million,
or
8.1 percent, compared with the prior year. The increase
was due to higher levels of average earning assets.
The net interest margin for the first nine months of 1994 narrowed 44 basis
points, compared with the corresponding 1993 period. The narrower interest rate
spread was primarily due to liabilities repricing at a faster rate than assets
and to the maturity structure and nature of liabilities assumed relative to
assets acquired in the PNC Mortgage acquisition. In addition, the net interest
margin was negatively impacted by a lower proportion of noninterest-bearing
sources supporting earning assets and a reduced benefit from interest rate
swaps. Management expects net interest income and the net interest margin to
decline in the fourth quarter of 1994 and in 1995 compared with full year 1994.
VOLUME/RATE ANALYSIS
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PROVISION FOR CREDIT LOSSES The provision for credit losses was $60.1 million in
the first nine months of 1994, compared with $165.3 million a year ago. Stronger
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 further in the fourth quarter of 1994 and in 1995.
NONINTEREST INCOME Noninterest income excluding securities transactions
increased 31.9 percent to $731.8 million. As a percentage of total revenue,
noninterest income excluding securities transactions was 32.6 percent in the
first nine months of 1994, compared with 28.4 percent a year earlier. The
pending acquisition of BlackRock will further expand fee-based revenue.
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Corporate Financial Review
provision for credit losses is expected to decline further in the fourth quarter
of 1994 and in 1995.
NONINTEREST INCOME Noninterest income excluding securities transactions
increased 31.9 percent to $731.8 million. As a percentage of total revenue,
noninterest income excluding securities transactions was 32.6 percent in the
first nine months of 1994, compared with 28.4 percent a year earlier. The
pending acquisition of BlackRock will further expand fee-based revenue.
NM--Not meaningful
Investment management and trust revenue increased 7.5 percent to $218.8
million. Growth in revenue from new trust relationships 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 $23 billion in discretionary institutional trust
and mutual fund assets and 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 nine months ended
September 30, 1994 and 1993.
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Corporate Financial Review
During 1993, the Corporation sold its interest in an investment advisory
firm. Approximately $3.2 billion of discretionary institutional trust assets
managed by that firm were included in the 1993 amounts and are excluded from the
1994 amounts.
Service charges, fees and commissions increased $13.9 million, or 5.3
percent, to $275.1 million. Increased transaction volume related to acquisitions
and new business accounted for the growth in deposit account and corporate
services revenue. The decline in brokerage fees was attributable to lower
transaction volume. 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.
Mortgage banking income increased $134.7 million, to $159.3 million, as a
result of the PNC Mortgage acquisition and the purchase of the Associates
mortgage servicing portfolio. During the first nine months of 1994, the
Corporation originated $5.3 billion of residential mortgages, approximately 75
percent of which represented new financings. The rising interest rate
environment adversely impacted the volume of originations. However, the value of
the mortgage servicing portfolio increased as mortgage loan prepayments
declined. Gains from sales of mortgage servicing totaled $51.3 million during
the first nine months of 1994. At September 30, 1994, the Corporation's mortgage
servicing portfolio totaled $41.6 billion, with a weighted-average coupon of
7.78 percent, including $30.9 billion serviced for others.
Venture capital income, which is included in other noninterest income,
totaled $38.4 million in the first nine months of 1994, compared with $30.9
million a year ago. In addition, higher gains from sales of assets were
partially offset by lower trading account profits.
Net securities losses totaled $13.9 million during the first nine months of
1994. In the third quarter of 1994, approximately $2.7 billion of fixed-rate
securities were sold and replaced with variable-rate assets to reduce the
Corporation's interest rate sensitivity.
NONINTEREST EXPENSE Noninterest expense totaled $1.3 billion in the first nine
months of 1994, compared with $1.1 billion in the year-earlier period. Excluding
acquisitions, noninterest expense declined 1 percent. The overhead ratio
increased to 57.5 percent in the first nine months of 1994, compared with 50.5
percent in 1993. The comparison was adversely impacted by net securities losses
of $13.9 million in 1994, compared with net gains of $184.3 million in 1993, and
by the PNC Mortgage acquisition. Pending acquisitions are expected to increase
noninterest expense by approximately 3 percent.
Excluding the impact of acquisitions, staff expense increased 3.5 percent.
Average full-time equivalent employees increased to 21,100 for the first nine
months of 1994, compared with 17,800 in the year-earlier period, as a result of
acquisitions and staff additions in targeted businesses. Pension expense
increased $11.3 million in the comparison due to a reduction in the discount
rate used to calculate the pension obligation.
The increase in the remaining noninterest expense categories was primarily
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, as well as securities
transactions, are included in Portfolio Management.
Earnings contributed by the lines of business totaled $653 million in the
first nine months of 1994, compared with $676 million in the first nine months
of 1993. These results exceeded reported consolidated net income by $71 million
and $122 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 expense. Excluding
securities transactions, earnings from the lines of business were $662 million
and $556 million, respectively, and returns on assigned equity were 21 percent
in both periods.
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Corporate Financial Review
CORPORATE BANKING Corporate Banking provided 37 percent of line of business
earnings in the first nine months of 1994, compared with 31 percent in the first
nine months of 1993. Large Corporate benefited from a 38 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. 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 44
percent in the first nine months of 1994, from 33 percent a year ago. Within
Consumer Banking, average loans increased 17 percent and average deposits
increased 8 percent. Such increases were primarily due to acquisitions. Higher
net interest revenue and improved asset quality contributed to the increase in
earnings. The increase in Mortgage Banking earnings resulted from the
acquisition of PNC Mortgage. During the first nine months of 1994, the mortgage
servicing portfolio increased $6.1 billion to $41.6 billion at September 30,
1994, including $30.9 billion serviced for others. The net growth in servicing
resulted from the Associates transaction. Mortgage Banking originated $5.3
billion of residential mortgages during the first nine months of 1994, and $4.8
billion of servicing was sold which resulted in gains of $51.3 million.
INVESTMENT MANAGEMENT AND TRUST Investment Management and Trust contributed 8
percent to line of business earnings in both nine-month 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
increased $3.1 million in the first nine months of 1994, compared with the year-
earlier period. Increased revenue from growth of the PNC Family of Funds, to
assets totaling $4.8 billion, a gain on sale of certain transfer agent servicing
and expanded accounting and administrative services, was partially offset by
lower investment advisory fees and increased marketing costs.
INVESTMENT BANKING The earnings contribution from Investment Banking was 11
percent in the first nine months of 1994, compared with 28 percent in the first
nine months of 1993. Portfolio Management earnings declined in the comparison as
net securities losses of $13.9 million were recognized in 1994, compared with
net gains of $184.3 million in 1993. The net securities losses resulted from the
sale of certain fixed-rate securities in the third quarter of 1994 which were
replaced with variable-rate assets to reduce the Corporation's interest rate
sensitivity. Excluding securities transactions, Investment Banking's earnings
were $78 million and $70 million in the comparison. 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,
increased loan demand and asset/liability management activities. Average loans
for the first nine months of 1994 increased 30.5 percent to $33.0 billion,
compared with the first nine months of 1993. Average commercial and average
consumer loans increased 10.7 percent and 10.4 percent, respectively. Excluding
the impact of acquisitions, average loans increased 5.5 percent reflecting
higher loan demand.
The proportion of average loans to average earning assets
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increased to 58.4 percent in the first nine months of 1994, compared with 54.4
percent a year ago.
Average deposits increased $4.7 billion, compared with the first nine months
of 1993. The proportion of average noninterest-bearing sources supporting
average earning assets was 13.9 percent in the first nine months of 1994,
compared with 15.6 percent in the year-earlier period. The decline was primarily
due to the PNC Mortgage acquisition. Average notes and debentures increased $5.1
billion as bank notes and Federal Home Loan Bank advances were used as lower
cost alternatives to other funding sources.
LOANS The Corporation manages credit risk associated with its lending activities
through portfolio diversification, underwriting policies and procedures, and
loan monitoring practices. At September 30, 1994, commercial, real estate
project, real estate mortgage, consumer and other loans accounted for
approximately 37 percent, 4 percent, 28 percent, 26 percent and 5 percent,
respectively, of total loans. The portfolio composition remained substantially
unchanged from year-end 1993.
Total commercial loan outstandings increased $871 million, or 7.0 percent,
from December 31, 1993, due to increases in short-term commercial loans. Total
commercial unfunded commitments increased $4.1 billion, or 30.2 percent, in the
comparison. Should economic growth
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continue, management expects a portion of these commitments to be converted into
outstandings.
Total real estate project exposure increased $138 million since year end.
Retail and office projects accounted for 33 percent and 24 percent,
respectively, of total real estate project exposure at September 30, 1994.
Multi-family, hotel/motel, and residential projects accounted for 10 percent, 9
percent and 8 percent, respectively. No other project type accounted for more
than 4 percent. Projects in the Corporation's primary markets, which include
Delaware, Indiana, Kentucky, New Jersey, Ohio and Pennsylvania, accounted for 71
percent of total outstandings. The southeast region of the United States
accounted for 14 percent and no other geographic region accounted for more than
6 percent.
Real estate mortgage outstandings increased 12.2 percent primarily due
to acquisitions and portfolio management strategies. Residential and commercial
mortgages acquired in 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 $602 million due to acquisitions.
Excluding acquisitions, consumer loans increased approximately 6 percent,
primarily in the home equity lending portfolio.
RISK ELEMENTS During the first nine months of 1994, nonperforming assets
declined $39 million as a result of continued improvement in overall asset
quality. Excluding the impact of the First Eastern acquisition, total
nonperforming assets declined $113 million from year-end 1993. Management
anticipates the favorable trend will continue.
At September 30, 1994, $90 million of nonperforming loans were current as to
principal and interest, compared with $102 million at December 31, 1993.
NONPERFORMING ASSETS
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Office, retail and land projects accounted for 69 percent of total
nonperforming real estate project assets at September 30, 1994. The
Corporation's primary markets accounted for 61 percent of total nonperforming
real estate project assets. The southeast region of the United States and
metropolitan Washington D.C. area accounted for 27 percent and 8 percent,
respectively.
Accruing loans contractually past due 90 days or more as to the payment of
principal or interest totaled
$144 million at September 30, 1994, compared with $135 million at December 31,
1993. Residential mortgages and student loans of $60 million and $39 million,
respectively, were included in the total at September 30, 1994, compared with
$55 million and $41 million, respectively, at year-end 1993.
Annualized net charge-offs as a percentage of average loans were .27 percent
for the first nine months of 1994, compared with .69 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.
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PNC BANK CORP.
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Corporate Financial Review
CHARGE-OFFS AND RECOVERIES
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ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses totaled $1.0 billion
at September 30, 1994, compared with $972 million at December 31, 1993. The
allowance as a percentage of period-end loans and nonperforming loans was 2.89
percent and 281.4 percent, respectively, at September 30, 1994. The comparable
year-end amounts were 2.92 percent and 253.1 percent, respectively. Based on
current asset quality, the allowance for credit losses is expected to decline
during the remainder of 1994 and in 1995.
ASSET/LIABILITY MANAGEMENT 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 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. The model
reflects management's assumptions related to asset yields and rates paid on
liabilities, loan and deposit growth rates, mortgage-related asset prepayments,
maturity of the interest rate swap portfolio, and other rate-influenced
variables. The assumptions are developed based on what management believes at
the time to be the most likely interest rate environment, as well as other
interest rate environments that are believed to have a lesser probability of
occurrence. The assumptions used to project net interest income are applied to
the current on- and off-balance-sheet positions. The model reflects management's
assumption that the market would present investment alternatives with acceptable
maturities, credit risk, and interest rate characteristics relative to earning
assets and funding sources.
Actual results may differ from simulated results due to various factors
including changes in market conditions and asset/liability management
strategies. The assumptions are updated periodically to reflect changing
circumstances. The actual timing and magnitude of interest rate changes, as well
as the relationship or spread between various rates, could also affect net
interest income.
A number of factors have necessitated upward revisions to the
current most likely interest rate scenario, including interest rates rising in
1994 more than previously anticipated. Recently a number of economic measures
such as growth in the manufacturing sector, a lower unemployment rate, a decline
in the dollar's exchange rates and a rise in industrial commodities prices have
indicated continued inflationary pressures. Management expects the Federal
Reserve will respond aggressively by raising the Federal funds and discount
rates more rapidly and to higher levels than previously anticipated.
The following table sets forth average interest rates for the periods
indicated under management's current most likely interest rate scenario and the
industry consensus as reported in the Blue Chip Financial Forecasts.
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In the current most likely interest rate scenario, the Federal funds rate
exceeds the industry consensus by 40 basis points. Also, the spread between the
5-year U.S. Treasury Note and Federal funds rates narrows from 230 basis points
to 140 basis points by the end of 1995.
In the current most likely interest rate scenario, net interest income is
expected to decline by 7 percent in the fourth quarter of 1994 compared with the
prior quarter, and 15 percent in 1995 compared with full year 1994. In the
projection, net interest income is expected to decline in 1995 and increase
thereafter through 1996. If interest rates approximate the industry consensus,
net interest income would decline 13 percent in 1995.
If interest rates do not rise to the extent forecasted, net interest income
will exceed the projections discussed above. For example, if interest rates are
100 basis points less than the current most likely interest rate scenario, net
interest income for 1995 is projected to exceed the most likely projection by 10
percent.
If interest rates exceed the current most likely interest rate scenario by
100 basis points, net interest income for 1995 is projected to decline from the
most likely case by an additional 10 percent. Management intends to continue to
take actions designed to mitigate a substantial portion of this impact. Such
actions include the addition of variable-rate assets, the extension of
maturities of retail and wholesale fixed-rate liabilities, the reduction of
fixed-rate assets, and off-setting derivative transactions. In the third quarter
of 1994, fixed-rate investment securities totaling $2.7 billion were sold, and
the proceeds were reinvested in variable-rate assets.
Management also performs an interest rate sensitivity ("gap") analysis which
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 and two-year gap positions
was 17.4 percent and 10.9 percent, respectively, of total earning assets at
September 30, 1994.
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FINANCIAL DERIVATIVES 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 September 30, 1994, hedge
swaps and customer swaps accounted for 86 percent and 1 percent, respectively,
of the total notional amount of all interest rate swaps, futures, forward,
foreign currency exchange and option contracts. The notional amount of hedge and
customer swaps totaled $12.7 billion and $136 million, respectively, at
September 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 such
agreements by requiring segregated collateral.
The table below sets forth the interest rate swap portfolio and related fair
value at September 30, 1994 and December 31, 1993.
Substantially all 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 floating money market indices. Such swaps have an initial specified
term, at the end of which the maturity will be extended to a final maturity
date if the index exceeds a contractually specified rate. If the maturity has
extended and the index subsequently declines below the contractually specified
rate, the index swaps will amortize.
During the first nine months of 1994, hedge swaps benefited net interest
income by $119.9 million, compared with $145.1 million in the corresponding 1993
period. Further increases in interest rates would reduce the fair value of, and
negate or eliminate the benefit provided by, such swaps.
Net deferred gains on terminated interest rate swaps totaled $10 million and
$22 million, at September 30, 1994 and December 31, 1993, respectively. Such
deferred gains are being amortized over various remaining periods of up to
twenty-one months.
The following table sets forth the maturity distribution of the notional
value of hedge swaps and the associated weighted average interest rates at
September 30, 1994. In management's current most likely interest rate scenario,
the maturity of substantially all indexed amortizing swaps will extend and the
weighted average rate paid on hedge swaps will exceed the weighted average rate
received. In management's most current likely interest rate scenario, the
receive-fixed hedge swaps have a remaining expected maturity of 3 years. The
expected weighted average interest rate paid and the weighted average interest
rate received on such swaps are 6.40 percent and 5.69 percent, respectively.
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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
September 30, 1994, such assets totaled $7.7 billion. Liquidity is also provided
by securities that may be sold under agreements to repurchase, which totaled
$4.1 billion at September 30, 1994. In addition, several bank affiliates have
access to funds as issuers of unsecured notes and 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 September 30, 1994, the Corporation had 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 had a $300 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 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 September 30, 1994,
the model assumed rising interest rates and a resulting higher cost of
replacement funding.
FUNDING SOURCES
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Total deposits at September 30, 1994, increased slightly since year end as
increases from acquired deposits were partially offset by lower brokered and
other deposits. Brokered deposits, which are primarily included in time
deposits, totaled $2.6 billion at September 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
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employed. Retail brokered deposits are issued or participated-out by brokers in
denominations of $100,000 or less. Such deposits represented 69.7 percent of the
total at September 30, 1994, compared with 63.7 percent at year-end 1993.
Borrowed funds increased $713 million from year-end 1993. In addition,
during the first nine months of 1994, certain repurchase agreements and
treasury, tax and loan borrowings were replaced with short-term borrowings
primarily consisting of commercial paper and term Federal funds purchased.
Notes and debentures increased $2.3 billion since year-end 1993. During the
first nine months of 1994, the Corporation issued $5.2 billion of variable-rate,
unsecured bank notes with maturities of one year, $1.6 billion of fixed-rate,
unsecured bank notes with maturities ranging from four to six months, and $200
million of subordinated debentures due in 2004.
SECURITIES At September 30, 1994, securities totaled $23.0 billion and were
comprised of $18.0 billion of investment securities and $5.0 billion of
securities available for sale. The comparable amounts at year-end 1993 were
$11.7 billion and $11.4 billion, respectively. In the third quarter of 1994,
approximately $2.7 billion of fixed-rate securities, primarily U.S. Treasuries,
were sold and replaced with variable-rate assets to reduce the Corporation's
interest rate sensitivity.
At September 30, 1994 the investment securities and available for sale
portfolios included $12.9 billion and $4.5 billion, respectively, of
collateralized mortgage obligations and mortgage-backed securities. The
characteristics of these investments include principal guarantees, primarily by
U.S. Government agencies, marketability, and availability as collateral for
additional liquidity. The expected maturity of mortgage-related securities can
vary as a result of changes in interest rates. The expected weighted average
maturity of such assets was 3 years and 7 months in the investment securities
portfolio and 4 years and 8 months in the available for sale portfolio. The
Corporation manages the risks associated with these securities through the use
of the income simulation model.
Asset-backed private placements represent the Corporation's interest in
AAA-rated, variable-rate instruments. The interest rates on these instruments
float with various indices and are limited by periodic
and maximum caps.
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SECURITIES
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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 September 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 nine months of 1994, as a
result of completed purchase acquisitions. Capital ratios are expected to
decline further in 1995 as a result of the BlackRock transaction. The
Corporation maintains its capital position primarily through its dividend policy
and retained earnings. During the first nine months of 1994, the Corporation
retained capital of $356.3 million.
The board of directors has authorized the Corporation to repurchase
common stock provided that no more than 2.8 million common shares are held in
treasury at any one time. During the first nine months of 1994, the Corporation
purchased 1.8 million common shares and had 1.4 million in treasury at
September 30, 1994. As discussed previously, management intends to continue to
take actions designed to reduce interest rate sensitivity, including the
reduction of fixed-rate assets. Such actions may be accompanied by additional
stock repurchases.
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PNC BANK CORP.
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Corporate Financial Review
Third Quarter of 1994 versus
Third Quarter of 1993
Net income for the third quarter of 1994 was $188.0 million, or $.79 per fully
diluted common share, compared with $217.7 million, or $.91 per share, in the
third quarter of 1993. After-tax net securities losses of $28.7 million were
included in the results for the third quarter of 1994, compared with $47.1
million of after-tax net securities gains in the prior-year period. Excluding
securities transactions, earnings were $216.7 million in the third quarter of
1994 compared with $170.6 million a year ago.
Return on assets and return on common shareholders' equity were 1.20 percent
and 17.15 percent, respectively, in the third quarter of 1994. The corresponding
returns in 1993 were 1.72 percent and 21.59 percent.
On a fully taxable-equivalent basis, net interest income for the third
quarter of 1994 was $503.2 million, an increase of $35.4 million, or 7.6
percent, from the comparable year-earlier period. The growth in net interest
income was due to higher average earning assets. The net interest margin
narrowed 48 basis points in the comparison, due to liabilities repricing at a
faster rate than assets, the maturity structure and nature of liabilities
assumed relative to assets acquired in the PNC Mortgage acquisition, and a
reduced benefit of noninterest-bearing sources and interest rate swaps.
The provision for credit losses was $10.1 million in the third quarter of
1994, compared with $50.0 million in the third quarter of 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 $83.6 million, or 43.6 percent, to $275.3 million during the third
quarter of 1994. Investment management and trust revenue totaled $72.4 million,
an increase of 6.1 percent. Revenue growth from new trust relationships 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 $95.1 million, an increase of 3.5 percent from the
third quarter of 1993. The increase was primarily from growth in deposit and
corporate services revenue. Mortgage banking income increased to $78.9 million,
compared with $7.6 million in 1993 due to the acquisition of PNC Mortgage and
the purchase of the Associates mortgage servicing portfolio.
Noninterest expense increased to $435.9 million, compared with $345.9
million a year ago, primarily due to acquisitions. Excluding acquisitions,
noninterest expense increased 2.5 percent, compared with the third quarter of
1993.
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PNC BANK CORP.
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Consolidated Balance Sheet
See accompanying Notes to Consolidated Financial Statements.
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PNC BANK CORP.
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Consolidated Statement of Income
See accompanying Notes to Consolidated Financial Statements.
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PNC BANK CORP.
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Consolidated Statement of Cash Flows
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
investment securities 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 accounted for at the
lower of amortized cost or the
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PNC BANK CORP.
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Notes to Consolidated Financial Statements
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 completed its acquisition of PNC Mortgage
(formerly Sears Mortgage Banking Group). During the third quarter of 1994, the
post-closing purchase price adjustments were finalized with no material impact.
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 nine months of 1994, the Corporation completed the
acquisitions of United Federal Bancorp, Inc., State College, Pennsylvania, and
First Eastern Corp., Wilkes-Barre, Pennsylvania. 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.
In 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 is approximately $240 million in cash and
notes. This transaction is expected to close in the first quarter 1995, pending
regulatory and other approvals.
In the third quarter of 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 $140 million, respectively, at September 30,
1994. These transactions are expected to close in the first quarter of 1995,
subject to regulatory and shareholder approvals.
Cash Flows
During the first nine months of 1994 and 1993, interest paid on deposits and
other contractual debt obligations totaled $1.3 billion and $954.8 million,
respectively, and income taxes paid were $305.1 million and $300.5 million,
respectively.
Noncash investing activities consisted of transfers of securities available
for sale to investment securities totaling $2.7 billion during the first nine
months of 1994 and transfers of loans to foreclosed assets aggregating $46.4
million in 1994 and $20.3 million in 1993. Additionally, 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 nine 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.
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Average Consolidated Balance Sheet and Net Interest Analysis
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 and real estate mortgage loans, U.S. Government
agencies and corporations securities, demand, savings, money market, 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
Corporate Headquarters
PNC Bank Corp.
One PNC Plaza
Fifth Avenue and Wood Street
Pittsburgh, Pennsylvania 15265
Stock Listing
PNC Bank Corp. 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:
The 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.
Common Stock Prices/Dividends Declared
The table below sets forth by quarter the range of high and low sale prices for
PNC Bank Corp. common stock and the cash dividends declared per common share.
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On October 6, 1994, the board of directors of PNC Bank Corp. approved an
increase in the quarterly cash dividend on common stock to a new rate of $.35
per common share. The increased dividend was paid on October 24, 1994, to
shareholders of record at the close of business on October 17, 1994.
Dividend Reinvestment and
Stock Purchase Plan
The PNC Bank Corp. 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.
24