EXHIBIT 13
Excerpts From 1996 Annual Report to Shareholders
Corporate
FINANCIAL REVIEW 1996 versus 1995
This Corporate Financial Review should be read in conjunction with the PNC Bank
Corp. and subsidiaries ("Corporation" or "PNC Bank") Consolidated Financial
Statements and Statistical Information included herein.
OVERVIEW
PNC BANK CORP. The Corporation is one of the largest diversified financial
services companies in the United States and operates five lines of business:
Consumer Banking, Corporate Banking, Real Estate Banking, Mortgage Banking and
Asset Management. Each line of business focuses on specific customer segments
and offers financial products and services in PNC Bank's primary geographic
locations in Pennsylvania, New Jersey, Delaware, Ohio and Kentucky and
nationally through retail distribution networks and alternative delivery
channels.
On December 31, 1995, Midlantic Corporation ("Midlantic"), a bank holding
company with $13.6 billion in assets, merged with the Corporation. Each
outstanding share of Midlantic common stock was converted into 2.05 shares of
PNC Bank's common stock. Approximately 112 million shares were issued in
connection with the merger. The transaction was accounted for as a pooling of
interests and accordingly all financial data prior to January 1, 1996 has
been restated as if the entities were combined for all such prior periods.
SUMMARY FINANCIAL RESULTS Net income for 1996 was $992 million or $2.87 per
fully diluted share compared with $408 million and $1.19 per fully diluted
share in 1995. These results reflect continued progress in implementing
strategic initiatives including: completion of the balance sheet repositioning
to reduce wholesale leverage; solid growth from fee-based businesses;
successful integration of the Midlantic acquisition; and the initiation of
share repurchases in the second half of 1996.
The 1996 results include a $22 million after-tax charge for a special one-time
deposit insurance assessment mandated by Congress to recapitalize the Savings
Association Insurance Fund ("SAIF"). In 1995, $380 million of after-tax charges
were recorded in connection with the Midlantic merger and actions taken to
reposition the balance sheet. The following table sets forth a summary of
financial results for 1996 and 1995 showing the impact of these charges.
--------------------
Year ended December 31 1996 1995
- ---------------------------------------------------------------
AS REPORTED
Net income (in millions) $992 $408
Fully diluted earnings per common share 2.87 1.19
Return on
Average common shareholders' equity 17.18% 7.05%
Average assets 1.40 .54
EXCLUDING NONRECURRING CHARGES
Earnings (in millions) $1,015 $788
Fully diluted earnings per common share 2.94 2.29
Return on
Average common shareholders' equity 17.58% 13.67%
Average assets 1.43 1.05
- ---------------------------------------------------------------
Taxable-equivalent net interest income increased 13.2% to $2.5 billion and net
interest margin widened 68 basis points to 3.83% for 1996. These increases were
primarily due to loan growth, the October 1995 Chemical Bank, New Jersey
("Chemical") acquisition and changes in balance sheet composition.
Noninterest income before securities transactions increased 10.7% to $1.4
billion for 1996. The increase was broad-based, led by strong growth in asset
management, mutual fund processing, deposit services, treasury management,
brokerage and corporate finance.
Operating expenses totaled $2.3 billion in 1996 compared with $2.5 billion in
1995. Excluding the SAIF assessment in 1996 and one-time charges taken in 1995,
the efficiency ratio improved to 58.8% for 1996 compared with 64.3% a year ago.
This improvement reflects cost savings associated with the Midlantic
integration, cost control strategies and lower Bank Insurance Fund premiums.
26
At December 31, 1996, total assets were $73.3 billion. Average earning assets
declined $4.8 billion during 1996 to $64.7 billion primarily due to reductions
in securities partially offset by the Chemical acquisition, loan growth and
credit card portfolio purchases. Average loans increased $3.5 billion in 1996
to $49.1 billion, representing 75.9% of average earning assets compared with
65.6% a year ago. Excluding the Chemical acquisition and purchased credit card
portfolios, average loans increased 3.7%.
Asset quality and coverage ratios remained strong. Net charge-offs for 1996
were .33% of average loans compared with .29% for 1995. The allowance for
credit losses as a percent of nonperforming loans and total loans was 334% and
2.25%, respectively, at December 31, 1996 compared with 352% and 2.59% a year
ago.
PNC Bank aggressively pursued capital management initiatives in the second half
of 1996. The Corporation repurchased 22.7 million shares of common stock and
the common stock dividend was increased 5.7%. The Corporation also issued $300
million of preferred stock and $350 million of trust preferred capital
securities to reduce the overall cost of equity. The proceeds from these
issuances are being used for share repurchases.
The Midlantic acquisition was the largest merger transaction executed by PNC
Bank and, at the time of the merger announcement, was the sixth largest in
banking history. This transaction, along with the Chemical acquisition, created
a unique opportunity to accelerate the balance sheet realignment, increase the
base of stable core deposits and significantly expand PNC Bank's position in
the strategically important Philadelphia and New Jersey markets. The major goal
for 1996 was to successfully integrate these acquisitions and achieve the
financial objectives stated at the time of the Midlantic merger announcement.
These objectives included increasing earnings per share to $2.87 in 1996,
improving net interest margin and balance sheet composition, and generating
cost savings through merger integration of $81 million in 1996. These
objectives were all accomplished. Earnings per share were $2.87 in 1996, and
$2.94, excluding the SAIF charge. Net interest margin widened 68 basis points to
3.83% and cost savings of approximately $110 million were generated through
aggressive execution of the integration plan. These accomplishments positioned
PNC Bank to accelerate AAA-related initiatives as cost savings and excess
capital are available for reinvestment in this growth opportunity.
Management believes the Corporation is well positioned to achieve continued
increases in earnings per share in 1997. Revenue growth is anticipated from
consumer initiatives, primarily AAA-related, and continued expansion of
fee-based businesses. Expenses are expected to increase primarily due to
investments associated with the nationwide rollout of services to AAA members.
Management expects modest loan loss provisions for 1997 and anticipates
earnings per share will continue to benefit from additional common share
repurchases.
BUSINESS STRATEGIES Financial services providers are challenged by intense
competition. Loan pricing and credit standards are under competitive pressure
as lenders seek to deploy capital and a broader range of borrowers have access
to capital markets. Traditional deposit activities are subject to pricing
pressures and customer migration as the competition for consumer investment
dollars intensifies among banks and other financial services companies. In this
environment, PNC Bank's strategies are focused on investing in businesses with
growth opportunities, aggressively managing capital and generating appropriate
returns from traditional spread businesses by managing leverage and reducing
delivery costs.
In Consumer Banking, which contributed 49% of total line of business earnings
in 1996, changes in consumer preferences and technological advancements are
transforming the way consumer products and services are delivered. Traditional
delivery channels, such as retail branches, are being reduced and replaced with
more technologically-advanced, cost-efficient means such as telebanking,
automated teller machines ("ATM") and on-line banking through personal
computers. Investments in alternative delivery channels allow PNC Bank to
reduce costs and expand the geographic scope of the Corporation's markets.
27
Corporate
FINANCIAL REVIEW 1996 versus 1995
The AAA agreement gives PNC Bank the exclusive right to offer a wide range of
financial products and services to the organization's 34 million members
nationwide. Substantially all of the products will be offered through
alternative delivery channels thereby leveraging the existing technology
infrastructure.
In Corporate Banking, PNC Bank is focused on developing fee-based products and
services as alternatives to traditional balance sheet leverage. These include
syndication, treasury management, interest rate risk management and capital
markets. Fee-based products and services are targeted to industries such as
health care, communications, energy, metals and mining and financial
institutions. Total fee-based revenues in Corporate Banking increased 27.9% in
1996 reflecting these targeted initiatives. Corporate Banking also provides a
full range of leasing and commercial finance products as alternatives to
traditional financings.
PNC Bank is a recognized industry leader in treasury management providing
collection, disbursement, information management and investment management
services. Treasury management emphasizes the use of technology to facilitate
electronic commerce and improve productivity and customer service.
PNC Bank's Asset Management business, with $109 billion in assets under
management, is among the largest in the country. It is the second largest U.S.
bank manager of mutual funds and one of the largest mutual fund service
providers. Asset Management's initiatives focus on expanding product marketing
and distribution channels and leveraging mutual fund processing capabilities.
The mutual fund processing business specializes in providing institutional
customers with custom designed products and custody, transfer agent, accounting
and administrative services.
Compass Capital Funds(SM) ("Compass"), PNC Bank's proprietary mutual fund
family, with approximately $11 billion in assets, provide institutional and
individual investors with a full range of equity, bond and money market
investment options. The funds are offered throughout the Corporation's retail
branch network and marketed nationally through agreements with over 70 brokerage
firms. Growth in Compass assets benefited from strong performance relative to
respective benchmarks. Of the sixteen funds currently ranked by Morningstar,
nine have received a four or five star rating.
Real Estate Banking has consistently been a leading provider of credit services
to the real estate industry. This line of business is challenged by competitive
lending pressures and disintermediation as nonbank competitors increasingly
enter the market. In this environment, Real Estate Banking is focused on
enhancing financial performance through business cycles by reducing reliance on
balance sheet leverage, expanding fee-based revenue and enhancing distribution
capabilities. Targeted growth areas include treasury management, loan
syndication, commercial mortgage-backed securitizations and private debt
placements.
Mortgage banking remains a highly-fragmented, commodity-based business
requiring an efficient infrastructure and increasingly higher volumes. To
remain competitive and produce appropriate returns, the Mortgage Banking line
of business is focused on reducing costs by consolidating back office
operations and utilizing technology to enhance origination and operating
platform efficiencies. Mortgage Banking continues to expand origination
capabilities by leveraging the Corporation's distribution network and private
banking capabilities and by expanding the retail distribution network in
certain geographic regions.
FORWARD-LOOKING STATEMENTS PNC Bank has made, and may continue to make, various
forward-looking statements with respect to earnings per share, costs savings
related to the Midlantic acquisition, the AAA agreement, credit quality,
corporate objectives and other financial and business matters. The Corporation
cautions that these forward-looking statements are subject to numerous
assumptions, risks and uncertainties, all of which may change over time. Actual
results could differ materially from forward-looking statements.
In addition to factors previously disclosed by the Corporation and factors
identified elsewhere herein, the following factors, among others, could cause
actual results to differ materially from such forward-looking statements:
continued pricing pressures on loan and deposit products; success and timing of
business strategies; extent and timing of capital management actions;
competition; changes in economic conditions; the extent and timing of actions
of the Federal Reserve Board; continued customer disintermediation; customers'
acceptance of PNC Bank's products and services; and the extent and timing of
legislative and regulatory actions and reforms.
28
LINE OF BUSINESS REVIEW
The management accounting process uses various methods of balance sheet and
income statement allocations and transfers 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 PNC Bank's
management structure and is not necessarily comparable with similar information
for any other financial services institution. Allocations and transfers may
change from time to time as the management accounting system is enhanced and
business or product lines change.
The Corporation operates five lines of business: Consumer Banking, Corporate
Banking, Real Estate Banking, Mortgage Banking and Asset Management. Line of
business results presented herein reflect each line of business as if it
operated on a stand-alone basis. Securities or borrowings, and related interest
rate spread, have been assigned to each line of business based on the net asset
or liability position. Consumer Banking was a net generator of funds and,
accordingly, was assigned securities, while the other lines of business
received an assignment of borrowings as net asset generators.
Capital is assigned to each business unit based on management's assessment of
inherent risks and equity levels at independent companies that provide similar
products and services. Capital assignments are not equivalent to regulatory
capital guidelines and the total amount assigned will vary from consolidated
shareholders' equity.
Total line of business results differ from consolidated results primarily due
to asset/liability management activities, the provision for credit losses and
certain nonrecurring and unallocated items.
Asset/liability management activities reflect the residual of the assignment of
wholesale assets and liabilities to the lines of business. In addition,
securities transactions and the impact of financial derivatives used for
interest rate risk management are included in this adjustment. The line of
business provision for credit losses is a charge or credit to earnings to
reflect current loss experience. Nonrecurring and other items primarily consist
of the one-time SAIF assessment in 1996 and merger related special charges in
1995.
LINE OF BUSINESS
-----------------------------------------------------------------------------------------
Return on
Average Assets Revenue Earnings Assigned Capital
-----------------------------------------------------------------------------------------
Year ended December 31- dollars in 1996 1995 1996 1995 1996 1995 1996 1995
millions
- ----------------------------------------------------------------------------------------------------------------------------------
Consumer Banking $39,197 $37,213 $2,217 $2,021 $462 $431 21% 21%
Corporate Banking 16,930 16,182 769 731 266 237 13 13
Real Estate Banking 3,802 3,886 181 192 89 88 15 14
Mortgage Banking 13,387 12,385 401 401 63 48 10 9
Asset Management 587 449 314 255 58 43 34 33
- -------------------------------------------------------------------------------------------------------------
Total line of business 73,903 70,115 3,882 3,600 938 847 17 16
Asset/liability management activities (3,492) 4,213 (41) (464) (35) (341)
Unallocated provision 89 64
Nonrecurring and other items 396 803 33 13 (162)
- -------------------------------------------------------------------------------------------------------------
Total consolidated $70,807 $75,131 $3,874 $3,149 $992 $408 17 7
- -----------------------------------------------------------------------------------------------------------------------------------
29
Corporate
FINANCIAL REVIEW 1996 versus 1995
CONSUMER BANKING
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Community Banking Private Banking Total
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Year ended December 31- dollars in millions 1996 1995 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT
Net interest income $1,503 $1,403 $93 $78 $1,596 $1,481
Noninterest income 365 322 256 218 621 540
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Total revenue 1,868 1,725 349 296 2,217 2,021
Provision for credit losses 121 65 1 1 122 66
Noninterest expense 1,145 1,069 242 212 1,387 1,281
------------------------------------------------------------------------------
Pretax earnings 602 591 106 83 708 674
Income taxes 207 213 39 30 246 243
------------------------------------------------------------------------------
Earnings $395 $378 $67 $53 $462 $431
- ------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans $15,214 $13,479 $2,340 $1,903 $17,554 $15,382
Assigned assets 20,324 20,742 20,324 20,742
Other assets 912 664 407 425 1,319 1,089
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Total assets $36,450 $34,885 $2,747 $2,328 $39,197 $37,213
------------------------------------------------------------------------------
Net deposits $34,299 $32,783 $1,621 $1,456 $35,920 $34,239
Assigned funds 175 143 175 143
Other funds 231 326 678 495 909 821
Assigned capital 1,920 1,776 273 234 2,193 2,010
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Total funds $36,450 $34,885 $2,747 $2,328 $39,197 $37,213
- ------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
After-tax profit margin 21% 22% 19% 18% 21% 21%
Efficiency 62 62 69 72 63 63
Return on assigned capital 21 21 24 22 21 21
- ------------------------------------------------------------------------------------------------------------------------------
The Consumer Banking line of business includes: Community Banking which serves
small business customers and all other consumers who use traditional branch and
direct banking services; and Private Banking which provides affluent customers
with personal and charitable trust, brokerage and specialized retail banking
financial services.
Consumer Banking earnings accounted for 49% of total line of business earnings
in 1996 compared with 51% a year ago. Earnings increased $31 million or 7%
reflecting 10% growth in revenue offset by a higher allocated provision for
credit losses and an 8% increase in expenses. The provision for credit losses
increased $56 million primarily due to credit card portfolio growth and the
impact of the Chemical acquisition. Noninterest expense increased primarily due
to the Chemical acquisition and investments in AAA-related initiatives. Average
loans in the Consumer Bank increased 14% in the comparison. Excluding the
Chemical acquisition average loans increased 6%. Consumer loan growth primarily
consisted of credit cards including purchased AAA-affinity portfolios, higher
education lending and mortgages in the Private Bank.
Earnings from Community Banking increased 4% in the comparison to $395 million
in 1996 due to revenue growth driven by an increase in average earning assets
and growth in deposit service fees. Higher revenue levels offset higher
expenses associated with the Chemical acquisition and AAA-related initiatives.
Private Banking earnings increased 26% primarily due to new trust business and
higher brokerage revenue. Return on assigned capital increased to 24% compared
with 22% a year ago.
In January 1996, an agreement was reached with AAA to exclusively offer
financial products and services to the organization's 34 million members
nationwide. The agreement provides for an initial term of ten years, with two
five-year renewal options. A full range of consumer products and services will
be offered including credit card, automobile, student, home equity and
residential mortgage loans, as well as deposit accounts and money market mutual
funds. These products and services will be marketed in conjunction with AAA and
will be delivered primarily through the Corporation's direct banking channels.
In connection with this agreement, the Corporation acquired five AAA-affinity
credit card portfolios totaling $1.6 billion at a premium of $249 million and
assumed the operation of an affinity card service center. In 1997, the
Corporation expects to aggressively market products and services to AAA
members, primarily credit card related. Due to the incentives and costs
associated with these initiatives, expenses are expected to exceed related
revenues in 1997.
30
CORPORATE BANKING
- --------------------------------------------------------------------------------------------------------------------------
Middle Market Large Corporate Equity Management Total
- --------------------------------------------------------------------------------------------------------------------------
Year ended December 31- 1996 1995 1996 1995 1996 1995 1996 1995
dollars in millions
- --------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT
Net interest income $416 $438 $113 $107 $(3) $(4) $526 $541
Noninterest income 119 105 52 51 72 34 243 190
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Total revenue 535 543 165 158 69 30 769 731
Provision for credit loses (4) 35 4 (2) 33
Noninterest expense 251 255 91 76 7 4 349 335
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Pretax earnings 288 253 70 84 62 26 420 363
Income taxes 113 91 19 26 22 9 154 126
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Earnings $175 $162 $51 $58 $40 $17 $266 $237
- --------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans $11,571 $11,336 $4,401 $4,202 $49 $31 $16,021 $15,569
Other assets 557 361 168 95 184 157 909 613
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Total assets $12,128 $11,697 $4,569 $4,297 $233 $188 $16,930 $16,182
---------------------------------------------------------------------------------------------
Net deposits $1,555 $1,557 $490 $453 $2,045 $2,010
Assigned funds 8,568 8,332 3,565 3,360 $139 $115 12,272 11,807
Other funds 566 444 20 26 17 592 481
Assigned capital 1,439 1,364 514 464 68 56 2,021 1,884
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Total funds $12,128 $11,697 $4,569 $4,297 $233 $188 $16,930 $16,182
---------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
After-tax profit margin 33% 30% 31% 37% 58% 57% 35% 32%
Efficiency 47 47 55 48 11 12 45 46
Return on assigned capital 12 12 10 13 59 30 13 13
- --------------------------------------------------------------------------------------------------------------------------
The Corporate Banking line of business includes: Middle Market which serves
customers with annual sales of $5 million to $250 million and those in certain
specialized industries; Large Corporate which serves customers with annual
sales of more than $250 million; and Equity Management which makes venture
capital investments.
Corporate Banking contributed 28% of total line of business earnings in both
1996 and 1995. Earnings increased $29 million or 12% primarily due to higher
venture capital gains and a lower allocated provision. Net interest income
declined in the comparison as narrower lending spreads more than offset the
impact from a $452 million increase in average loans. Excluding venture capital
gains, Corporate Banking fee-based revenue increased 10% due to expanded
treasury management and corporate finance activities. Treasury management
continues to produce revenue growth exceeding national averages. Revenues
increased 18% over 1995.
Middle Market earnings increased 8% in the comparison as a lower allocated
provision resulting from improved asset quality more than offset a decline in
revenue driven by narrower lending spreads. Fee-based revenue increased
primarily due to treasury management services. Large Corporate earnings
declined primarily due to operating expenses reflecting investments in
expanded treasury management and capital markets initiatives. Equity Management
earnings increased $23 million due to higher venture capital gains.
Corporate Banking traditionally relies on balance sheet leverage to generate
returns. Traditional spread-based lending requires high capital levels and is
under intense competition from banks and nonbanks seeking opportunities to
extend credit in a market with narrowing spreads. In this environment, PNC Bank
aggressively manages capital to generate more appropriate returns employing
various techniques such as measuring risk-adjusted customer profitability and
using off-balance-sheet financing alternatives. This line of business is also
focused on expanding fee-based revenue by developing products and services as
alternatives to spread-based lending.
Management expects revenue in this line of business to be generated
increasingly from fee-based sources such as treasury management, corporate
finance and capital markets. Corporate Banking's capital markets capabilities
continue to be expanded to meet the changing needs of customers. The
Corporation has also expanded product capabilities in the merger and
acquisition advisory, private placement, interest rate risk management and
leasing product areas. Investments in syndication capabilities contributed to a
28% increase in the number, nearly doubling the par value, of agented
transactions underwritten. This resulted in a 56% increase in related fee
revenue.
31
Corporate
FINANCIAL REVIEW 1996 versus 1995
REAL ESTATE BANKING
--------------------
Year ended December 31-
dollars in millions 1996 1995
- -------------------------------------------------------------
INCOME STATEMENT
Net interest income $167 $174
Noninterest income 14 18
--------------------
Total revenue 181 192
Provision for credit losses 2
Noninterest expense 39 60
--------------------
Pretax earnings 140 132
Income taxes 51 44
--------------------
Earnings $89 $88
--------------------
AVERAGE BALANCE SHEET
Loans $3,901 $3,957
Other assets (99) (71)
--------------------
Total assets $3,802 $3,886
--------------------
Net deposits $167 $159
Assigned funds 3,013 3,122
Other funds 18 (6)
Assigned capital 604 611
--------------------
Total funds $3,802 $3,886
- -------------------------------------------------------------
PERFORMANCE RATIOS
After-tax profit margin 49% 46%
Efficiency 22 31
Return on assigned capital 15 14
- -------------------------------------------------------------
Real Estate Banking serves national, regional and local real estate developers,
owners, property managers and mortgage bankers by providing credit and
non-credit services, mortgage securitization, private debt placements and
treasury management services.
Real Estate Banking contributed 10% of total line of business earnings in 1996
and 1995. Earnings were consistent in the comparison as a decline in revenue,
attributable to narrower lending spreads, was mitigated by gains from
disposition of foreclosed assets and a decline in workout expenses related to
lower levels of nonperforming assets.
Real Estate Banking has traditionally been driven by balance sheet leverage and
required significant levels of assigned capital. A key initiative in this line
of business is to alter the business mix to reduce leverage and improve returns
by expanding fee-based services such as treasury management, interest rate risk
management and debt placement activities. PNC Bank is one of the largest real
estate loan syndicators in the U.S., having a leading role in over $1.5 billion
of syndication volume in 1996.
MORTGAGE BANKING
----------------------
Year ended December 31-
dollars in millions 1996 1995
- -------------------------------------------------------------
INCOME STATEMENT
Net interest income $211 $161
Noninterest income 190 240
----------------------
Total revenue 401 401
Provision for credit losses 12 6
Noninterest expense 288 319
----------------------
Pretax earnings 101 76
Income taxes 38 28
----------------------
Earnings $63 $48
- -------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans $11,169 $10,632
Other assets 2,218 1,753
-----------------------
Total assets $13,387 $12,385
-----------------------
Net deposits $2,277 $2,637
Assigned funds 8,898 8,135
Other funds 1,563 1,053
Assigned capital 649 560
-----------------------
Total funds $13,387 $12,385
- -------------------------------------------------------------
PERFORMANCE RATIOS
After-tax profit margin 16% 12%
Efficiency 72 80
Return on assigned capital 10 9
- -------------------------------------------------------------
Mortgage Banking activities include acquisition, origination, securitization
and servicing of residential mortgages, as well as retention of selected loans
in the portfolio.
Mortgage Banking contributed 7% of total line of business earnings in 1996
compared with 6% in 1995. Earnings increased $15 million or 31% due to a
reduction in operating expenses. Net interest income increased 31% to $211
million in 1996 primarily due to a $537 million increase in portfolio loans and
wider spreads. Noninterest income from mortgage origination and servicing
activities declined $50 million primarily due to lower sales of servicing
rights. Noninterest expense declined $31 million or 10% reflecting benefits
from consolidating back office operations, and utilizing technology to enhance
loan origination and servicing and lower amortization of mortgage servicing
rights ("MSR"). Mortgage Banking results reflect the impact of significant
noncash expense items such as MSR amortization. Excluding the effect of these
items, cash returns currently exceed the Corporation's required return for this
line of business.
32
The Mortgage Banking business continues to be affected by intense competition.
In this environment, PNC Bank continues to pursue several strategic objectives
including the use of advanced, cost-effective technologies, leveraging
processing, underwriting and servicing capabilities and entering into
alliances with third parties to expand the reach of the distribution network.
MORTGAGE SERVICING PORTFOLIO
-----------------------
In millions 1996 1995
- -------------------------------------------------------------
January 1 $37,299 $40,389
Originations 5,614 5,423
Purchases 3,737 364
Repayments (6,075) (4,751)
Sales (1,032) (4,126)
-----------------------
December 31 $39,543 $37,299
- -------------------------------------------------------------
During 1996, the Corporation funded $5.6 billion of residential mortgages with
70% representing new financings. The comparable amounts were $5.4 billion and
81%, respectively, in 1995.
At December 31, 1996, PNC Bank's mortgage servicing portfolio totaled $39.5
billion, had a weighted-average coupon of 7.93% and an estimated fair value of
$449 million. The servicing portfolio included $27.3 billion of loans serviced
for others. Capitalized MSR totaled $313 million at December 31, 1996.
The value of MSR is affected, in part, by changes in interest rates. If
interest rates decline and the rate of prepayment increases, the underlying
servicing fees and related MSR fair value would be reduced. In a period of
rising interest rates, a converse relationship would exist. The Corporation
seeks to manage this risk by using financial instruments whose values move in
the opposite direction of MSR value changes.
ASSET MANAGEMENT
-----------------------------------------------------------
Investment Mutual Fund
Management Processing Total
-----------------------------------------------------------
Year ended December 31- dollars in millions 1996 1995 1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT
Advisory and processing fee income $188 $156 $119 $94 $307 $250
Net interest income (1) (2) 8 7 7 5
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Total revenue 187 154 127 101 314 255
Operating expenses 141 122 80 64 221 186
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Pretax earnings 46 32 47 37 93 69
Income taxes 17 12 18 14 35 26
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Earnings $29 $20 $29 $23 $58 $43
- --------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
After-tax profit margin 16% 13% 23% 22% 19% 17%
Efficiency 75 79 63 64 70 73
Return on assigned capital 26 24 50 47 34 33
- --------------------------------------------------------------------------------------------------------------------
The Asset Management line of business includes: Investment Management and
Mutual Fund Processing. Investment Management provides liquidity, fixed income,
and equity advisory services to institutional, family wealth and retail
clients. It also performs wholesale marketing activities for Compas Capital
Funds(SM), PNC Bank's proprietary mutual funds. Mutual Fund Processing provides
accounting, administration, transfer and custody services to financial
institutions and integrated banking services to the brokerage community.
Asset Management contributed 6% of total line of business earnings in 1996
compared with 5% in 1995. Earnings increased $15 million or 35% due to
significant fee income growth. Advisory and processing fee income increased 23%
due to an increase in assets under administration driven by new business,
appreciation in value and the acquisition of BlackRock Financial Management,
L.P. ("BlackRock"). Noninterest expense increased primarily due to the
BlackRock acquisition and incremental costs associated with servicing new
business.
Assets under administration increased $48 billion in the comparison to $330
billion at December 31, 1996. Managed assets totaled $109 billion at December
31, 1996 compared with $96 billion a year ago. At December 31, 1996, the
composition of managed assets under administration was 45% fixed income, 28%
liquidity management and 27% equity.
33
Corporate
FINANCIAL REVIEW 1996 versus 1995
At December 31, 1996, PFPC, Inc., the Corporation's mutual fund processing
operation, provided third party services for $130 billion in
accounting/administration assets, $200 billion in custody assets, 4.3 million
shareholder accounts and 1.6 million checking and credit/debit card accounts.
The comparable amounts a year ago were $96 billion, $162 billion, 3.6 million
and 1.2 million, respectively. Mutual fund services revenue increased 26%
despite a consolidating market reflecting responsiveness to the existing client
base, product innovation, and a new business development.
The generation of new managed asset business resulted, in part, from the strong
performance of investment products relative to respective benchmarks. During
1996, BlackRock's marketing of institutional management capabilities resulted
in the addition of over $11 billion in new business. CastleInternational, the
Corporation's recently created international equity manager in Edinburgh,
Scotland, manages over $1.6 billion of assets.
Revenue from investment management and mutual fund processing is included in
Asset Management. Revenue from marketing asset management products and services
to consumers is included in the Consumer Banking line of business. The
following table sets forth revenue and earnings included in each line of
business.
ASSET MANAGEMENT REVENUE AND EARNINGS
-------------------------
Year ended December 31 - Revenue
-------------------------
in millions Fees Other Total Earnings
- ----------------------------------------------------------------
1996
Asset Management $302 $12 $314 $58
Consumer Banking 195 11 206 42
---------------------------------
Total $497 $23 $520 $100
- ----------------------------------------------------------------
1995
Asset Management $245 $10 $255 $43
Consumer Banking 175 12 187 38
---------------------------------
Total $420 $22 $442 $81
- ----------------------------------------------------------------
Asset Management revenue is primarily affected by the volume of new business,
the value of assets managed or serviced, investment performance and financial
market conditions. Revenue may be positively affected by strong investment
performance or improving financial markets. Conversely, declining performance
or deteriorating financial markets may adversely affect revenue.
CONSOLIDATED INCOME STATEMENT REVIEW
INCOME STATEMENT HIGHLIGHTS
---------------------------------
Year ended December 31 - in 1996 1995 Change
millions
- ---------------------------------------------------------------
Net interest income
(taxable-equivalent basis) $2,479 $2,189 $290
Provision for credit losses 6 (6)
Noninterest income before
net securities gains/losses 1,373 1,240 133
Net securities gains (losses) 22 (280) 302
Noninterest expense before
special charges 2,312 2,209 103
Special charges 260 (260)
Income taxes 535 219 316
Net income 992 408 584
- ---------------------------------------------------------------
NET INTEREST INCOME Net interest income is the difference between interest
income and interest expense. The level and volatility of interest rates affect
interest received or paid on assets, liabilities and off-balance-sheet
financial instruments and, as a result, impact net interest income.
34
NET INTEREST INCOME ANALYSIS
----------------------------------------------------------------------------------------
Taxable-equivalent basis Average Balances Interest Income/Expense Average Yields/Rates
----------------------------------------------------------------------------------------
Year ended December 31 -
dollars in millions 1996 1995 Change 1996 1995 Change 1996 1995 Change
- ----------------------------------------------------------------------------------------------------------------------------
Interest-earning assets
Securities $13,550 $22,140 $(8,590) $864 $1,409 $(545) 6.38% 6.36% 2 bp
Loans, net of unearned income 49,116 45,624 3,492 3,985 3,822 163 8.11 8.38 (27)
Other interest-earning assets 2,059 1,771 288 135 122 13 6.54 6.89 (35)
------------------------------------------------------------
Total interest-earning assets/
interest income 64,725 69,535 (4,810) 4,984 5,353 (369) 7.69 7.70 (1)
Noninterest-earning assets 6,082 5,596 486
-------------------------------
Total assets $70,807 $75,131 $(4,324)
- -------------------------------------------------------------------
Interest-bearing liabilities
Interest-bearing deposits $35,217 $35,718 $(501) 1,428 1,528 (100) 4.05 4.28 (23)
Borrowed funds 6,654 13,386 (6,732) 381 834 (453) 5.73 6.23 (50)
Notes and debentures 11,660 9,790 1,870 685 617 68 5.88 6.31 (43)
------------------------------------------------------------
Total interest-bearing
liabilities/ interest expense 53,531 58,894 (5,363) 2,494 2,979 (485) 4.66 5.06 (40)
---------------------------------------------------------
Noninterest-bearing liabilities and
shareholders' equity 17,276 16,237 1,039
------------------------------
Total liabilities and
shareholders' equity $70,807 $75,131 $(4,324)
- ------------------------------------------------------------------
Interest rate spread 2,490 2,374 116 3.03 2.64 39
Impact of noninterest-bearing sources .81 .78 3
----------------------------
Net interest margin before
financial derivatives 3.84 3.42 42
Effect of financial derivatives on
Interest income (11) (157) 146 (.01) (.23) 22
Interest expense 28 (28) .04 (4)
---------------------------------------------------------
Total effect of financial derivatives (11) (185) 174 (.01) (.27) 26
---------------------------------------------------------
Net interest income $2,479 $2,189 $290 3.83% 3.15% 68 bp
- ----------------------------------------------------------------------------------------------------------------------------
Taxable-equivalent net interest income increased $290 million or 13.2%. The net
interest margin widened 68 basis points to 3.83% for 1996 compared with 3.15%
in the prior year. Net interest income and margin increases reflect the
benefits of the Chemical acquisition and changes in balance sheet composition
including a lower cost of financial derivatives used for interest rate risk
management. Total interest income declined $369 million primarily due to the
decline in securities and lower yields on loans, partially offset by a $3.5
billion increase in average loans. The cost of interest-bearing liabilities
declined $485 million due to a reduction in higher-cost wholesale funds, an
increase in the proportion of retail deposits to total sources of funds and
lower rates in the comparison. The cost of financial derivatives used in
interest rate risk management declined $174 million.
Net interest income and margin depend on a number of factors including the
volume and composition of earning assets and related yields as well as
associated funding costs. In 1996, loans comprised 75.9% of average earning
assets. Accordingly, loan growth and the related yields earned have a
significant impact on net interest income. During 1996, loan growth was modest
and yields declined reflecting competitive pricing pressure. Management expects
these conditions to continue. Funding cost is affected by the composition of
and rates paid on various funding sources. During 1996, average deposits
comprised 63.7% of the Corporation's total sources of funding with the
remainder comprised of wholesale funding obtained at prevailing market rates.
The ability to attract and retain deposits will continue to be affected by
competition and customer preferences for higher yielding products, such as
mutual funds.
35
Corporate
FINANCIAL REVIEW 1996 versus 1995
NONINTEREST INCOME
Change
---------------------------------
Year ended December 31 -
dollars in millions 1996 1995 Amount Percent
- --------------------------------------------------------------
Asset management and trust
Asset management $104 $73 $31 42.5%
Mutual fund 179 154 25 16.2
Trust 214 193 21 10.9
------------------------
Total asset
management and
trust 497 420 77 18.3
Service fees
Deposit 289 240 49 20.4
Corporate finance 65 53 12 22.6
Consumer services 64 52 12 23.1
Brokerage 54 42 12 28.6
Credit card and
merchant services 30 47 (17) (36.2)
Insurance 30 25 5 20.0
Other 34 36 (2) (5.6)
------------------------
Total service fees 566 495 71 14.3
Mortgage banking
Servicing 119 120 (1) (.8)
Marketing 24 33 (9) (27.3)
Sale of servicing 11 34 (23) (67.6)
------------------------
Total mortgage banking 154 187 (33) (17.6)
Other 156 138 18 13.0
------------------------
Total noninterest income
before securities
gains/losses 1,373 1,240 133 10.7
Net securities gains (losses) 22 (280) 302 NM
------------------------
Total $1,395 $960 $435 45.3%
- --------------------------------------------------------------
NM - not meaningful
Noninterest income before securities transactions totaled $1.4 billion in 1996,
an increase of 10.7% compared with the prior year. This growth reflects the
Corporation's continuing emphasis on expanding fee-based revenue led by
significant increases in asset management, mutual fund processing, deposit
services, treasury management, brokerage and corporate finance.
The decline in credit card and merchant services reflects the impact of
alliances entered in 1995 with third parties to provide certain administrative,
marketing, data processing and customer support services for these businesses.
Generally, the third parties receive fee-based revenues and incur operating
costs associated with offering such services. In July 1996, the Corporation
canceled one such agreement and paid a termination fee of $4 million. The costs
and fee income associated with services provided under that agreement are
reflected in the results of operations after the termination date.
NONINTEREST EXPENSE
Change
----------------------------------
Year ended December 31 -
dollars in millions 1996 1995 Amount Percent
- --------------------------------------------------------------
Compensation $930 $863 $67 7.8%
Employee benefits 180 202 (22) (10.9)
----------------------------------
Total staff expense 1,110 1,065 45 4.2
Net occupancy 197 180 17 9.4
Equipment 172 166 6 3.6
Intangible asset and
MSR amortization 117 115 2 1.7
Taxes other than income 53 53
Federal deposit
insurance 41 58 (17) (29.3)
SAIF assessment 35 35 NM
Other 587 572 15 2.6
----------------------------------
Total noninterest expense
before special charges 2,312 2,209 103 4.7
Special charges 260 (260) NM
----------------------------------
Total $2,312 $2,469 $(157) (6.4)%
- --------------------------------------------------------------
NM - not meaningful
Noninterest expense before special charges increased $103 million or 4.7%
primarily due to the Chemical acquisition, incentive compensation and the
one-time SAIF assessment. Excluding the SAIF assessment and one-time charges,
the efficiency ratio improved to 58.8% compared with 64.3% a year ago.
Compensation expense increased primarily due to acquisitions and incentive
compensation in fee-based businesses including asset management and brokerage.
Average FTEs totaled 25,020 in 1996 compared with 25,450 a year ago. Lower
staff levels from the integration of Midlantic and Chemical and from reductions
in the branch network were partially offset by additions to support initiatives
in telebanking and Asset Management.
Conversion of Midlantic's products and systems were completed in 1996 with cost
savings ahead of expectations. Management continues to believe annual cost
savings from the consolidation or elimination of overlapping facilities and
operations will exceed the original estimate of $150 million beginning in 1997.
However, these savings are expected to be offset by investments in AAA and
related credit card initiatives.
The Corporation recorded a pre-tax charge in 1996 of $35.1 million for a
special one-time assessment mandated by Congress to recapitalize the SAIF. The
legislation also included provisions that will result in a modest reduction in
future annual deposit insurance costs.
36
BALANCE SHEET REVIEW
AVERAGE BALANCE SHEET HIGHLIGHTS
Change
-------------------------------------
Year ended December 31 -
dollars in millions 1996 1995 Amount Percent
- --------------------------------------------------------------
Assets $70,807 $75,131 $(4,324) (5.8)%
Earning assets 64,725 69,535 (4,810) (6.9)
Loans, net of
unearned income 49,116 45,624 3,492 7.7
Securities 13,550 22,140 (8,590) (38.8)
Deposits 45,117 44,830 287 .6
Borrowed funds 6,654 13,386 (6,732) (50.3)
Notes and debentures 11,660 9,790 1,870 19.1
Shareholders' equity 5,828 5,784 44 .8
- --------------------------------------------------------------
Average assets and earning assets were $70.8 billion and $64.7 billion,
respectively, in 1996 compared with $75.1 billion and $69.5 billion,
respectively, a year ago. The decline was due to the planned securities
portfolio reduction partially offset by loan growth and the Chemical
acquisition. Securities to earning assets declined to 20.9% from 31.8% in the
prior year.
Average loans increased $3.5 billion or 7.7% to $49.1 billion for the year
ended December 31, 1996 and represented 75.9% of earning assets in 1996
compared with 65.6% a year ago. Excluding the Chemical acquisition, loans
increased 4.0% in the comparison.
AVERAGE LOANS
ended December 31 -
dollars in millions 1996 1995 Change
-------------------------------------
Consumer $13,357 $12,013 11.2%
Residential mortgage 12,049 10,812 11.4
Commercial 17,150 15,852 8.2
Commercial real estate 4,763 5,014 (5.0)
Other 1,797 1,933 (7.0)
-------------------------------------
Total, net of unearned
income $49,116 $45,624 7.7
- --------------------------------------------------------------
Average deposits increased slightly to $45.1 billion in 1996 compared with a
year ago. The Chemical acquisition added $2.7 billion of retail core deposits.
The ratio of deposits to sources of funds increased to 63.7% compared with
59.7% a year ago. During 1996, the ratio of wholesale funding to total sources
of funds decreased to 27.5% compared with 34.1% a year ago.
YEAR-END BALANCE SHEET HIGHLIGHTS
Change
-------------------------------------
December 31 -
dollars in millions 1996 1995 Amount Percent
- --------------------------------------------------------------
Assets $73,260 $73,404 $(144) (.2)%
Loans, net of
unearned income 51,798 48,653 3,145 6.5
Securities 11,917 15,839 (3,922) (24.8)
Deposits 45,676 46,899 (1,223) (2.6)
Borrowed funds 7,860 8,665 (805) (9.3)
Notes and debentures 11,744 10,398 1,346 12.9
Shareholders' equity 5,869 5,768 101 1.8
- --------------------------------------------------------------
Total assets were $73.3 billion at December 31, 1996 compared with $73.4
billion at year-end 1995. The decline was primarily due to a reduced securities
portfolio offset by loan growth.
LOANS
-----------------------
December 31 - in millions 1996 1995
- -------------------------------------------------------------
Consumer
Home equity $4,569 $4,541
Automobile 3,731 4,236
Credit card 2,776 1,004
Student 1,725 1,512
Other 2,067 2,246
-----------------------
Total consumer 14,868 13,539
Residential mortgage 12,703 11,689
Commercial
Manufacturing 3,718 3,363
Retail/Wholesale 3,243 3,148
Service providers 2,359 2,402
Real estate related 1,452 1,291
Communications 1,239 1,083
Financial services 708 1,082
Health care 1,207 1,028
Other 4,136 3,415
-----------------------
Total commercial 18,062 16,812
Commercial real estate
Mortgage 2,467 2,775
Medium-term financing 1,312 1,250
Construction and development 845 889
-----------------------
Total commercial real estate 4,624 4,914
Lease financing and other 1,926 2,102
Unearned income (385) (403)
-----------------------
Total, net of unearned income $51,798 $48,653
- -------------------------------------------------------------
Loans outstanding increased $3.1 billion from year-end 1995 to $51.8 billion at
December 31, 1996. Loan portfolio composition remained relatively consistent in
the comparison except for an increase in the credit card portfolio attributable
to AAA-related initiatives. The portfolio is geographically diversified among
numerous industries and types of businesses.
37
Corporate
FINANCIAL REVIEW 1996 versus 1995
Unfunded commercial commitments, net of participations and syndications,
totaled $27.1 billion and $24.3 billion at December 31, 1996 and 1995. Unfunded
consumer commitments increased $14.7 billion to $22.0 billion primarily due to
home equity and credit card lines. Commercial commitments generally have fixed
expiration dates, may require payment of a fee, and contain termination clauses
in the event the customer's credit quality deteriorates. Based on the
Corporation's historical experience, approximately 50% to 75% of consumer and
most commercial commitments expire unfunded, and therefore cash requirements
are substantially less than the total commitment.
SECURITIES
--------------------------------------
1996 1995
--------------------------------------
December 31 - in Amortized Fair Amortized Fair
millions Cost Value Cost Value
- --------------------------------------------------------------
Debt securities
U.S. Treasury and
government agencies $3,238 $3,237 $4,241 $4,314
Mortgage-backed 6,301 6,176 8,631 8,566
Asset-backed 1,609 1,615 2,023 2,032
State and municipal 218 227 343 367
Other debt 100 105 99 97
Corporate stocks and other 554 557 455 457
Associated derivatives 6
- --------------------------------------------------------------
Total $12,020 $11,917 $15,792 $15,839
- --------------------------------------------------------------
The securities portfolio declined $3.9 billion from year-end 1995 to $11.9
billion at December 31, 1996, reflecting the impact of management's actions to
reduce reliance on investment activities and related wholesale funding. The
expected weighted-average life of the securities portfolio was 2 years and 11
months at December 31, 1996 compared with 2 years and 8 months at year-end
1995.
Securities classified as available for sale may be sold as part of the overall
asset/liability management process. Realized gains and losses resulting from
such sales would be reflected in the results of operations and would include
gains or losses on associated financial derivatives. During 1996, $6.8 billion
of securities were sold, primarily U.S. Treasury, mortgage-backed and
asset-backed private placement securities. Including the effect of terminated
associated financial derivatives, the transactions resulted in a net gain of
$22 million. In 1995, $8.0 billion of securities were sold and associated
financial derivatives were terminated at a combined net loss of $280 million.
The securities portfolio included collateralized mortgage obligations and
mortgage-backed securities with a fair value of $5.0 billion and $1.2 billion,
respectively, at December 31, 1996. The characteristics of these securities
include principal guarantees, primarily by U.S. Government agencies, and
marketability. Expected lives of such securities can vary as interest rates
change. In a rising interest rate environment, prepayments on the underlying
mortgage securities may slow and lengthen the expected lives. Conversely,
expected lives would shorten in a declining interest rate environment. The
Corporation monitors the impact of this risk through the use of an income
simulation model as part of the asset/liability management process.
At December 31, 1996 and 1995, $5.5 billion and $6.1 billion, respectively,
notional value of financial derivatives were associated with securities
available for sale.
FUNDING SOURCES
-----------------------
December 31 - in millions 1996 1995
- ---------------------------------------------------------------
Deposits
Demand, savings and money market $27,027 $27,145
Time 17,803 18,661
Foreign 846 1,093
-----------------------
Total deposits 45,676 46,899
Borrowed funds
Federal funds purchased 2,797 3,817
Treasury, tax and loan 2,288 567
Commercial paper 976 753
Repurchase agreements 645 2,851
Other 1,154 677
-----------------------
Total borrowed funds 7,860 8,665
Notes and debentures
Bank notes 7,905 6,256
Federal Home Loan Bank 2,192 2,393
Other 1,647 1,749
-----------------------
Total notes and debentures 11,744 10,398
-----------------------
Total $65,280 $65,962
- ---------------------------------------------------------------
Total deposits decreased 2.6% to $45.7 billion at December 31, 1996 compared
with $46.9 billion at year-end 1995. Time deposits declined $858 million as
consumers sought more attractive yields from alternative investments.
Total borrowed funds declined $805 million while notes and debentures increased
$1.3 billion in the comparison reflecting initiatives to reposition the balance
sheet. The change in composition of these categories reflects actions to
utilize the most cost-effective alternatives.
38
CAPITAL
RISK-BASED CAPITAL
-----------------------
December 31 - dollars in millions 1996 1995
- -------------------------------------------------------------
Capital components
Shareholders' equity
Common $5,553 $5,751
Preferred 316 17
Trust preferred securities 350
Goodwill and other (1,003) (980)
Net unrealized securities (gains)
losses 67 (26)
-----------------------
Tier I risk-based capital 5,283 4,762
Subordinated debt 1,343 1,370
Eligible allowance for credit losses 801 750
-----------------------
Total risk-based capital $7,427 $6,882
-----------------------
Assets
Risk-weighted assets and
off-balance-sheet instruments $63,761 $59,539
Average tangible assets 68,597 74,756
-----------------------
Capital ratios
Tier I risk-based 8.29% 8.00%
Total risk-based 11.65 11.56
Leverage 7.70 6.37
- -------------------------------------------------------------
The access to and cost of funding new business initiatives including
acquisitions, deposit insurance costs, and the level and nature of expanded
regulatory oversight depend, in large part, on a financial institution's
capital strength. The minimum regulatory capital ratios are 4% for Tier I, 8%
for total risk-based and 3% for leverage. However, regulators may require
higher capital levels when a bank's particular circumstances warrant. To be
classified as well capitalized, regulators require capital ratios of at least
6% for Tier I, 10% for total risk-based and 5% for leverage. At December 31,
1996, the Corporation and each bank subsidiary were classified as well
capitalized.
The Corporation manages the capital position through balance sheet size and
composition, issuance of debt and equity instruments, treasury stock
activities, dividend policies and retained earnings. During 1996, the capital
position of the Corporation was aggressively managed to redeploy excess capital
generated from business operations and reduce the cost of regulatory capital.
PNC Bank repurchased 22.7 million shares of common stock during 1996. In August
1996, the board of directors authorized the purchase of up to 10 million common
shares before the end of 1996. That program was completed. In October 1996 and
December 1996, the Corporation issued $300 million of nonconvertible preferred
stock and $350 million of 7.95% mandatorily redeemable capital securities,
respectively. These issuances qualify as Tier I capital and reduce the overall
cost of equity. The proceeds of these issuances are being used for additional
common stock purchases.
All purchases under the January 1995 board authorized 24 million share
repurchase program were discontinued with the initiation of the Midlantic
merger in July 1995. During the second quarter of 1996, the board of directors
formally rescinded that plan.
RISK MANAGEMENT
The Corporation's ordinary course of business involves varying degrees of risk
taking, the most significant of which are credit, liquidity and interest rate
risk. To manage these risks, PNC Bank has risk management processes designed to
provide for risk identification, measurement, monitoring and control.
CREDIT RISK MANAGEMENT Credit risk represents the possibility a customer or
counterparty may not perform in accordance with contractual terms. Credit risk
is inherent in the financial services business and results from extending
credit to customers, purchasing securities and entering into certain
off-balance-sheet financial derivative transactions. The Corporation seeks to
manage credit risk through diversification, limiting exposure to any single
industry or customer, requiring collateral and selling participations to
third parties.
Credit Administration, which includes credit policy, loan review and loan
workout, manages and monitors credit risk by establishing and enforcing uniform
credit policies and exercising centralized oversight, review and approval
procedures. Credit Policy, at the direction of the board of directors,
establishes uniform underwriting standards that set forth the criteria used in
extending credit.
To support consistent application of underwriting standards, credit officers
work with lending officers in evaluating the creditworthiness of borrowers and
structuring transactions. Credit decisions are made at the specific affiliate
or market level. However, credit requests above certain limits or that involve
exceptions to credit policies require additional corporate approvals.
NONPERFORMING ASSETS
-------------------
December 31 - dollars in millions 1996 1995
- -------------------------------------------------------------
Nonaccrual loans
Commercial $156 $118
Commercial real estate
Mortgage 109 108
Project 25 45
Consumer 6 10
Residential mortgage 51 54
-------------------
Total nonaccrual loans 347 335
Restructured loans 2 23
-------------------
Total nonperforming loans 349 358
Foreclosed assets
Commercial real estate 71 105
Residential mortgage 22 24
Other 17 49
-------------------
Total foreclosed assets 110 178
-------------------
Total nonperforming assets $459 $536
-------------------
Nonperforming loans to loans .67% .74%
Nonperforming assets to loans and
foreclosed assets .88 1.10
Nonperforming assets to assets .63 .73
- -------------------------------------------------------------
39
Corporate
FINANCIAL REVIEW 1996 versus 1995
Nonperforming assets declined $77 million since year-end 1995 to $459 million
at December 31, 1996. Lower foreclosed assets and restructured loans were
partially offset by an increase in nonaccrual loans. At December 31, 1996,
$80 million of nonperforming loans were current as to principal and interest
compared with $89 million at December 31, 1995.
CHANGE IN NONPERFORMING ASSETS
--------------------
In millions 1996 1995
- -------------------------------------------------------------
January 1 $536 $757
Transferred from accrual 447 399
Acquisitions 14
Returned to performing (40) (97)
Principal reductions (277) (315)
Sales (134) (111)
Charge-offs and valuation adjustments (73) (111)
--------------------
December 31 $459 $536
- -------------------------------------------------------------
ACCRUING LOANS PAST DUE 90 DAYS OR MORE
---------------------------------------
Amount Percent of Loans
December 31 - ---------------------------------------
dollars in millions 1996 1995 1996 1995
- -------------------------------------------------------------
Consumer
Guaranteed
student $51 $44 2.95% 2.90%
Credit cards 43 8 1.56 .83
Other 46 43 .45 .40
---------------------
Total consumer 140 95 .96 .72
Residential mortgage 58 63 .46 .54
Commercial 34 22 .19 .13
Commercial real estate 12 45 .26 .92
---------------------
Total $244 $225 .47 .46
- -------------------------------------------------------------
Loans not included in past due, nonaccrual or restructured categories, but
where known information about possible credit problems causes management to be
uncertain of the borrower's ability to comply with existing repayment terms
over the next six months totaled $151 million at December 31, 1996.
ALLOWANCE FOR CREDIT LOSSES In determining the adequacy of the allowance for
credit losses, the Corporation makes allocations to specific problem loans
based on discounted cash flow analyses or collateral valuations for impaired
loans and to pools of watchlist and nonwatchlist loans for various credit risk
factors. Allocations to loan pools are developed by risk rating and industry
classifications and based on management's judgment concerning historical loss
trends and other relevant factors. These factors may include, among others,
local, regional and national economic conditions, portfolio concentrations,
industry competition and consolidation, and the impact of government
regulation. Consumer and residential mortgage loan allocations are based on
historical loss experience adjusted for portfolio activity and current economic
conditions.
ALLOWANCE FOR CREDIT LOSSES
------------------
In millions 1996 1995
- -------------------------------------------------------------
January 1 $1,259 $1,352
Charge-offs (247) (240)
Recoveries 83 107
------------------
Net charge-offs (164) (133)
Provision for credit losses 6
Acquisitions 71 34
------------------
December 31 $1,166 $1,259
- -------------------------------------------------------------
The 1996 allowance added from acquisitions relates to AAA-affinity credit card
portfolio purchases. The allowance as a percent of nonperforming loans and
period-end loans was 334% and 2.25%, respectively, at December 31, 1996. The
comparable 1995 amounts were 352% and 2.59%, respectively.
CHARGE-OFFS AND RECOVERIES
----------------------------------------
Net Percent of
Year ended December 31- Charge- Charge- Average
dollars in millions offs Recoveries offs Loans
- -----------------------------------------------------------------
1996
Consumer
Credit card $66 $7 $59 5.06%
Other 101 35 66 .54
------------------------------
Total consumer 167 42 125 .94
Residential mortgage 9 2 7 .06
Commercial 53 29 24 .14
Commercial real estate 18 10 8 .17
------------------------------
Total $247 $83 $164 .33
- -----------------------------------------------------------------
1995
Consumer
Credit card $31 $6 $25 2.87%
Other 78 35 43 .39
------------------------------
Total consumer 109 41 68 .57
Residential mortgage 10 2 8 .07
Commercial 84 49 35 .22
Commercial real estate 37 15 22 .44
------------------------------
Total $240 $107 $133 .29
- -----------------------------------------------------------------
Consumer net charge-offs increased $57 million in the comparison primarily due
to an increase in credit card charge-offs and the Chemical acquisition. The
credit card portfolio increased $1.8 billion during the year to $2.8 billion at
December 31, 1996 in connection with AAA-related and other Consumer Banking
initiatives.
40
PROVISION FOR CREDIT LOSSES Favorable economic conditions during 1996 and 1995,
combined with management's ongoing attention to asset quality, resulted in
lower nonperforming assets and strong coverage ratios. The Corporation did not
record a provision for credit losses in 1996. Credit card growth and portfolio
acquisitions are expected to increase consumer charge-offs and are likely to
result in provisions for credit losses in 1997.
LIQUIDITY Liquidity represents an institution's ability to generate cash or
otherwise obtain funds at reasonable rates to satisfy commitments to borrowers,
demands of depositors and debtholders, and invest in strategic initiatives.
Liquidity risk represents the likelihood the Corporation would be unable to
generate cash or otherwise obtain funds at reasonable rates to satisfy
commitments to borrowers or obligations to 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 through direct borrowing or
securitization of assets such as mortgage, automobile and credit card loans.
The ability to raise funds in the capital markets depends on market conditions,
capital considerations, credit ratings and investor demand, among other
factors.
Liquid assets consist of cash and due from banks, short-term investments, loans
held for sale and securities available for sale. At December 31, 1996, such
assets totaled $17.6 billion, of which $7.5 billion was pledged as collateral.
Liquidity is also provided by residential mortgages which may be used as
collateral for funds obtained through the Federal Home Loan Bank ("FHLB")
system. At December 31, 1996, approximately $6.5 billion of residential
mortgages were available as collateral for borrowings from the FHLB.
During 1996, cash and due from banks increased $337 million to $4.0 billion
compared with an increase of $267 million during 1995. Net cash provided by
operating activities decreased $910 million in the comparison. Cash provided by
investing activities decreased to $1.6 billion compared with $7.0 billion
provided a year ago. Net cash used by financing activities totaled $1.4 billion
in 1996 compared with $7.9 billion used a year earlier.
The principal source of parent company revenue and cash flow is dividends from
subsidiary banks. PNC Bancorp, Inc. is a wholly-owned subsidiary of the parent
company and is the holding company for all bank subsidiaries. There are legal
limitations on the ability of bank subsidiaries to pay dividends and make other
distributions to PNC Bancorp, Inc. and in turn the parent company. Without
regulatory approval, the amount available for dividend payments to PNC Bancorp,
Inc. by all bank subsidiaries was $512 million at December 31, 1996. Dividends
may also be impacted by capital needs, regulatory requirements and policies,
and other factors.
Liquidity for the parent company and subsidiaries is also generated through the
issuance of securities in public or private markets and lines of credit. The
Corporation had available $140 million of debt and $350 million that may be
issued as either debt or preferred stock under effective shelf registration
statements at December 31, 1996. In addition, the Corporation had a $500
million unused committed line of credit. Funds obtained from any of these
sources can be used for both bank and nonbank activities.
Management believes the Corporation has sufficient liquidity to meet current
obligations to borrowers, depositors, 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.
INTEREST RATE RISK Interest rate risk arises primarily through the
Corporation's normal business activities of extending loans and taking
deposits. Many factors, including economic and financial conditions, general
movements in market interest rates, and consumer preferences, affect the spread
between interest earned on assets and interest paid on liabilities. Financial
derivatives, primarily interest rate swaps and purchased interest rate caps and
floors, are used to alter the interest rate characteristics of assets and
liabilities. For example, receive-fixed interest rate swaps effectively convert
variable-rate assets to fixed-rate assets.
In managing interest rate risk, the Corporation seeks to minimize the reliance
on a particular interest rate scenario as a source of earnings. Accordingly,
wholesale activities including securities, funding, financial derivatives and
capital markets activities are used in managing core business exposures within
specified guidelines. Interest rate risk is centrally managed by asset and
liability ("A&L") management. Senior management and Board of Directors'
committees oversee A&L management and periodically review interest rate risk
exposures.
41
Corporate
FINANCIAL REVIEW 1996 versus 1995
A number of measures are used to monitor and manage interest rate risk,
including income simulation and interest sensitivity (gap) analyses. In
addition, the Corporation supplements these models with longer-term measures of
interest rate sensitivity including duration of equity and equity at risk. Such
models are designed to estimate the impact on the value of equity resulting
from changes in interest rates and supplement the simulation model and gap
analyses.
An income simulation model is the primary tool used to assess the direction and
magnitude of changes in net interest income resulting from changes in interest
rates. Key assumptions employed in the model include prepayment speeds on
mortgage-related assets, cash flows and maturities of financial instruments,
changes in market conditions, loan volumes and pricing, deposit sensitivity,
customer preferences, and management's financial and capital plans. These
assumptions are inherently uncertain and, as a result, the model cannot
precisely estimate net interest income or precisely predict the impact of
higher or lower interest rates on net interest income. Actual results will
differ from simulated results due to timing, magnitude and frequency of
interest rate changes and changes in market conditions and management
strategies, among other factors.
The Corporation's guidelines provide that net interest income should not
decrease by more than 3% if interest rates gradually increase or decrease from
current rates by 100 basis points over a twelve-month period. Based on the
results of the simulation model, the Corporation was within these guidelines at
December 31, 1996.
Additional interest rate scenarios are modeled to address a wider range of rate
movement, yield curve, term structure and basis risk exposures. Depending on
market conditions and other inherent risks, these scenarios may be modeled more
or less frequently. Such analyses are used as supplemental measurements only
and limits have not been established.
A gap analysis represents a point-in-time net position of assets, liabilities
and off-balance-sheet financial derivatives used for interest rate risk
management subject to repricing in specified time periods. Gap analysis does
not accurately measure the magnitude of changes in net interest income since
changes in interest rates over time do not impact all categories of assets,
liabilities and off-balance-sheet instruments equally or simultaneously. A
cumulative asset-sensitive gap position indicates assets are expected to
reprice more quickly than liabilities. Alternatively, a cumulative
liability-sensitive gap position indicates liabilities are expected to reprice
more quickly than assets. The Corporation's limit for the cumulative one-year
gap position is 10%. At December 31, 1996, the cumulative liability sensitivity
of the one-year gap position was 2.1%.
INTEREST RATE SENSITIVITY (GAP) ANALYSIS
--------------------------------------------
December 31, 1996 - 3 Months 4 to 12 1 to 2 2 to 5 After 5
in millions or Less Months Years Years Years
- ----------------------------------------------------------------
Loans $25,083 $6,968 $5,188 $8,628 $5,931
Securities 1,862 1,921 2,780 3,656 1,698
Other earning assets 1,714 3 2 4 1
Other assets 1,719 100 132 395 5,475
--------------------------------------------
Total assets $30,378 $8,992 $8,102 $12,683 $13,105
- ----------------------------------------------------------------
Noninterest-bearing
deposits $1,752 $9,185
Interest-bearing
deposits 11,924 $7,567 $2,378 $1,939 10,931
Borrowings 17,058 518 93 658 1,277
Other liabilities 469 1,292
Trust preferred
securities 350
Equity 5,869
--------------------------------------------
Total liabilities
and equity $31,203 $8,085 $2,471 $2,597 $28,904
Off-balance-sheet
items (978) (467) (1,011) 2,331 125
--------------------------------------------
Interest rate
sensitivity $(1,803) $440 $4,620 $12,417 $(15,674)
- ----------------------------------------------------------------
Cumulative gap $(1,803) $(1,363) $3,257 $15,674
- ----------------------------------------------------------------
FINANCIAL DERIVATIVES
A variety of off-balance-sheet financial derivatives are used as part of the
overall interest rate risk management process to manage interest rate risk
inherent in the Corporation's line of business activities. Interest rate swaps
and purchased interest rate caps and floors are the primary instruments used
for these purposes. Interest rate swaps are agreements to exchange fixed and
floating interest rate payments calculated on a notional principal amount. The
floating rate is based on a money market index, primarily short-term LIBOR
indices. Purchased interest rate caps and floors are agreements where, for a
fee, the counterparty agrees to pay the Corporation the amount, if any, by
which a specified market interest rate exceeds or is less than a defined rate
applied to a notional amount, respectively. Forward contracts provide for the
delivery of financial instruments at a specified future date and at a specified
price or yield. Such contracts are used to manage risk positions associated
with certain mortgage banking activities.
Financial derivatives involve, to varying degrees, interest rate and credit
risk in excess of the amount recognized in the balance sheet, but less than the
notional amount of the contract. For interest rate swaps, caps and floors, only
periodic cash payments and, with respect to caps and floors, premiums, are
exchanged. Therefore, cash requirements and exposure to credit risk are
significantly less than the notional value.
The following table sets forth changes in off-balance-sheet financial
derivatives used for interest rate risk management and mortgage banking
activities during 1996. Weighted-average maturity is based on contractual terms.
42
FINANCIAL DERIVATIVES ACTIVITY
-----------------------------------------------------------------------------------
Weighted-
Avg.
1996-dollars in millions January 1 Additions Maturities Terminations December 31 Maturity
- ----------------------------------------------------------------------------------------------------------------------------
Interest rate risk management
Interest rate swaps
Receive fixed $2,785 $7,802 $(1,890) $(1,750) $6,947 1 yr., 7 mo.
Receive-fixed index amortizing 3,211 (1,038) (2,117) 56 1 yr., 10 mo.
Pay fixed 2,629 409 (1,288) (1,148) 602 2 yr., 11 mo.
Basis swaps 765 335 (765) 335 10 mo.
Interest rate caps 5,510 315 (12) 5,813 11 mo.
Interest rate floors 2,500 2,500 1 yr., 11 mo.
-----------------------------------------------------------------------------------
Total interest rate risk management 14,900 11,361 (4,993) (5,015) 16,253 1 yr., 5 mo.
Mortgage banking activities
Forward contracts
Commitments to purchase loans 431 3,944 (3,980) 395 2 mo.
Commitments to sell loans 751 5,959 (5,816) 894 2 mo.
Interest rate floors - MSR 500 1,350 (800) 1,050 4 yr., 9 mo.
Receive-fixed interest rate swaps - MSR 125 (125)
-----------------------------------------------------------------------------------
Total mortgage banking activities 1,807 11,253 (9,796) (925) 2,339
-----------------------------------------------------------------------------------
Total $16,707 $22,614 $(14,789) $(5,940) $18,592
- ----------------------------------------------------------------------------------------------------------------------------
The following table sets forth by designated assets and liabilities the
notional value and the estimated fair value of financial derivatives used for
interest rate risk management and mortgage banking activities. Weighted-average
interest rates presented are based on contractual rates at year-end 1996 and
rates expected to be in effect based on the implied forward yield curve.
FINANCIAL DERIVATIVES
-------------------------------------------------------------------------
Notional Estimated Contractual Rate Forward Yield Curve
-------------------------------------------------------------------------
December 31, 1996 - dollars in millions Value Fair Value Paid Received Paid Received
- ----------------------------------------------------------------------------------------------------------------------------
Interest rate risk management
Asset rate conversion
Interest rate swaps (1)
Receive fixed designated to loans $6,020 $100 5.56% 5.94% 5.88% 5.94%
Pay fixed designated to loans 552 (15) 7.36 5.54 7.36 6.17
Interest rate caps designated to (2)
Securities 5,500 NM NM NM NM
Loans 313 2 NM NM NM NM
Interest rate floors designated to loans (3) 2,500 3 NM NM NM NM
--------------------------
Total asset rate conversion 14,885 90
Liability rate conversion
Interest rate swaps (1)
Receive fixed designated to interest-bearing
liabilities 983 9 5.56 6.12 5.88 6.12
Pay fixed designated to notes and debentures 50 5.63 5.67 5.63 5.68
Basis swaps designated to notes and debentures 335 3 5.56 5.49 5.67 5.66
--------------------------
Total liability rate conversion 1,368 12
--------------------------
Total interest rate risk management 16,253 102
Mortgage banking activities
Forward contracts
Commitments to purchase loans 395 (1) NM NM NM NM
Commitments to sell loans 894 NM NM NM NM
Interest rate floors - MSR 1,050 10 NM NM NM NM
--------------------------
Total mortgage banking activities 2,339 9
--------------------------
Total financial derivatives $18,592 $111
- ----------------------------------------------------------------------------------------------------------------------------
(1) The floating rate portion of interest rate contracts is based on
money-market indices. As a percent of notional value, 51% were based on
3-month LIBOR, 45% on 1-month LIBOR and the remainder on other short-term
indices.
(2) Interest rate caps with notional values of $5.783 billion and $30 million
require the counterparty to pay the Corporation the excess, if any, of
3-month LIBOR over a weighted-average strike of 6.49% and 1-month LIBOR
over 6.75% , respectively. At December 31, 1996, 3-month LIBOR was 5.56%
and 1-month LIBOR was 5.50%.
(3) Interest rate floors with notional values of $2.5 billion and $1.1 billion
require the counterparty to pay the Corporation the excess, if any,
weighted-average strike of 4.92% over 3-month LIBOR and weighted-average
strike of 5.88% over 10-year CMT. At December 31, 1996, 3-month LIBOR was
5.56% and 10-year CMT was 6.43%.
NM - not meaningful
43
Corporate
FINANCIAL REVIEW 1995 versus 1994
OVERVIEW
Net income for 1995 totaled $408 million, or $1.19 per fully diluted share,
compared with $884 million, or $2.52 per fully diluted share for 1994. Returns
on average common shareholders' equity and average assets for 1995 were 7.05%
and .54%, respectively, compared with 1.19% and 16.09%, respectively, in 1994.
The 1995 results include $380 million of after-tax charges recorded in
connection with the Midlantic merger and actions taken to reposition the
Corporation's balance sheet. Excluding these charges, 1995 earnings were $788
million, or $2.29 per fully diluted share. On this basis, returns on average
common shareholders' equity and average assets were 13.67% and 1.05%,
respectively.
On October 6, 1995, the Corporation acquired Chemical's franchise in southern
and central New Jersey with total assets of $3.2 billion and retail core
deposits of $2.7 billion. The Corporation paid $492 million in cash and the
transaction was accounted for under the purchase method.
In February 1995, the Corporation acquired BlackRock, a New York-based,
fixed-income investment management firm with approximately $25 billion in
assets under management at closing. The Corporation paid $71 million in cash
and issued $169 million of unsecured notes. The transaction was accounted for
under the purchase method.
INCOME STATEMENT REVIEW
INCOME STATEMENT HIGHLIGHTS
- -------------------------------------------------------------
Year ended December 31 - in millions 1995 1994 Change
- -------------------------------------------------------------
Net interest income $2,189 $2,530 $(341)
(taxable-equivalent basis)
Provision for credit losses 6 84 (78)
Noninterest income before net
securities losses 1,240 1,181 59
Net securities losses (280) (142) (138)
Noninterest expense before special
charges 2,209 2,190 19
Special charges 260 48 212
Income taxes 219 318 (99)
Net income 408 884 (476)
- -------------------------------------------------------------
NET INTEREST INCOME Taxable-equivalent net interest income totaled $2.2 billion
in 1995 compared with $2.5 billion for 1994. The net interest margin narrowed
to 3.15% in 1995 compared with 3.64% in 1994. Interest income increased due to
higher loan volume and yields, partially offset by a reduction in the
securities portfolio. The growth in interest income was offset by higher
expense on deposits and borrowings in the comparison, which was primarily due
to higher interest rates. During 1995, net interest income and margin were
adversely impacted by interest rate swaps and caps.
PROVISION FOR CREDIT LOSSES The provision for credit losses was $6 million and
$84 million in 1995 and 1994, respectively. Continued improvement in economic
conditions, combined with management's ongoing efforts to improve asset
quality, resulted in lower nonperforming asset and charge-off levels, and a
higher reserve coverage of nonperforming loans in the year-to-year comparison.
NONINTEREST INCOME Noninterest income before securities transactions increased
$59 million to $1.2 billion in 1995. Asset management and trust revenue
increased $85 million or 25.4% due to the BlackRock acquisition, new business
and an increase in the value of administered assets.
Service fees increased $5 million in 1995 to $495 million, primarily reflecting
higher corporate finance fees and consumer fees partially offset by a decline
in credit card and merchant service fees. During 1995, mortgage banking revenue
decreased $12 million to $187 million primarily due to lower gains from
servicing sales.
Other noninterest income decreased $19 million to $138 million in 1995.
Nonrecurring gains in 1994 from Midlantic's sale of assets held for accelerated
disposition were partially offset in the comparison by a gain from instruments
used to hedge the economic value of MSR in 1995.
Net securities losses totaled $280 million in 1995 compared with $142 million
in 1994. Securities were sold and related financial derivatives were terminated
in connection with initiatives to downsize the securities portfolio and to
reduce interest rate sensitivity.
44
NONINTEREST EXPENSE Noninterest expense before special charges increased less
than 1% in 1995 reflecting lower deposit insurance premiums, successful
acquisition integration and emphasis on developing alternative lower-cost
delivery systems and continued rationalization of the traditional branch
delivery system. Staff expense totaled $1.1 billion in 1995 compared with $1.0
billion in 1994. Amortization of intangible assets and MSR increased $29
million due to the BlackRock and Chemical acquisitions and MSR impairment. The
decline in federal deposit insurance reflects a reduction in the Bank Insurance
Fund premium.
In connection with the Midlantic merger, the Corporation recorded special
charges of $260 million in 1995 for elimination of duplicate operations and
facilities, employee severance, professional services, termination of an
interest rate cap position and various other costs. In 1994, the Corporation
recorded special charges totaling $48 million in connection with the
consolidation of seven telebanking centers and rationalization of retail
delivery systems.
INCOME TAX EXPENSE Income tax expense totaled $219 million in 1995 compared
with $318 million in 1994. The effective tax rates were 34.9% and 26.3% in 1995
and 1994, respectively. The lower effective tax rate in 1994 was primarily due
to a $107 million benefit from the realization of Midlantic's previously
unrecognized deferred tax assets. Income tax expense for 1995 included a $15
million write-down of state deferred tax assets related to the Midlantic
merger.
BALANCE SHEET REVIEW
Total assets and earning assets were $73.4 billion and $66.8 billion,
respectively, at December 31, 1995 compared with $77.5 billion and $69.8
billion at year-end 1994. In 1995, the Corporation substantially reduced the
securities portfolio and reliance on related wholesale funding and, with the
Midlantic and Chemical acquisitions, significantly increased retail core
deposit liabilities.
LOANS During 1995, loans increased $4.6 billion or 10.5% and the ratio of loans
to earning assets increased to 72.9% at year-end 1995 compared with 63.1% at
December 31, 1994. Excluding purchase acquisitions, average loans increased
4.8% primarily due to consumer and residential mortgage loan growth. Consumer
loan outstandings increased 14.2% due to initiatives to increase the
Corporation's credit card business and the impact of acquisitions. Residential
mortgages increased 19.9% during 1995 as the Corporation retained for portfolio
certain originated mortgages, generally adjustable rate mortgages with fixed
initial terms of three, five, seven or ten years. Commercial loans outstanding
were $16.8 billion at December 31, 1995 and $15.5 billion at December 31, 1994.
Total commercial real estate loans were $4.9 billion and $5.1 billion at
December 31, 1995 and 1994, respectively.
SECURITIES During 1995, the Corporation reduced the size of the securities
portfolio relative to earning assets. The securities portfolio was reduced by
$7.8 billion to $15.8 billion at December 31, 1995 and represented 23.7% of
earning assets compared with 33.9% at the prior year-end.
The following table presents carrying values of securities at year-end 1995 and
1994. Securities available for sale are presented at fair value and investment
securities are reported at amortized cost.
SECURITIES
---------------------------------
Available Investment
December 31 - in millions for Sale Securities Total
- -------------------------------------------------------------
1995
U.S. Treasury and
government agencies $4,314 $4,314
Mortgage-backed securities 8,566 8,566
Asset-backed securities 2,032 2,032
State and municipal 367 367
Other debt 97 97
Corporate stocks and other 457 457
Associated derivatives 6 6
---------------------------------
Total $15,839 $15,839
---------------------------------
1994
U.S. Treasury and
government agencies $684 $4,317 $5,001
Mortgage-backed securities 2,824 12,521 15,345
Asset-backed securities 1,597 1,597
State and municipal 7 360 367
Other debt 146 775 921
Corporate stocks and other 129 310 439
---------------------------------
Total $3,790 $19,880 $23,670
- -------------------------------------------------------------
45
Corporate
FINANCIAL REVIEW 1995 versus 1994
The following table sets forth by designated assets and liabilities the notional
value and the estimated fair value of financial derivatives used for interest
rate risk management and mortgage banking activities. Weighted-average interest
rates presented are based on contractual rates at year-end 1995.
FINANCIAL DERIVATIVES
----------------------------------------------
Notional Estimated Contractual Rates
----------------------------------------------
December 31, 1995 - dollars in millions Value Fair Value Paid Received
- ----------------------------------------------------------------------------------------------------------------------------
Interest rate risk management
Asset rate conversion
Interest rate swaps
Receive-fixed index amortizing designated to commercial loans $2,471 $(14) 5.90% 5.23%
Receive fixed designated to commercial loans and short-term investments 1,175 28 5.88 6.47
Pay fixed designated to securities and commercial loans 889 (18) 5.77 5.87
Basis swaps designated to commercial loans 300 5.96 5.85
Interest rate caps designated to securities and mortgage loans 5,510 6 NM NM
---------------------------
Total asset rate conversion 10,345 2
Liability rate conversion
Interest rate swaps
Pay fixed designated to interest-bearing liabilities 1,740 (5) 5.58 5.67
Receive fixed designated to interest-bearing liabilities 1,610 34 5.88 5.95
Receive-fixed index amortizing designated to deposits 740 (4) 5.93 5.32
Basis swaps designated to bank notes 465 8 5.76 5.49
---------------------------
Total liability rate conversion 4,555 33
---------------------------
Total interest rate risk management 14,900 35
Mortgage banking activities
Forward contracts
Commitments to purchase loans 431 NM NM
Commitments to sell loans 751 (4) NM NM
Interest rate floors - MSR 500 9 NM NM
Receive-fixed interest rate swaps - MSR 125 7 NM NM
---------------------------
Total mortgage banking 1,807 12
---------------------------
Total financial derivatives $16,707 $47
- ----------------------------------------------------------------------------------------------------------------------------
NM - not meaningful
FUNDING SOURCES Deposits increased $1.1 billion to $46.9 billion in the
year-to-year comparison as an increase in time deposits was partially offset by
a decrease in foreign deposits. Borrowed funds totaled $8.7 billion at December
31, 1995 compared with $12.2 billion at the end of 1994 reflecting the balance
sheet repositioning.
ASSET QUALITY During 1995, asset quality continued to improve. Nonperforming
assets totaled $536 million at December 31, 1995 compared with $767 million at
year-end 1994. Accruing loans contractually past due 90 days or more as to the
payment of principal or interest totaled $225 million at December 31, 1995
compared with $175 million at December 31, 1994. Other consumer loans,
residential mortgage and commercial real estate of $51 million, $63 million and
$45 million, respectively, were included in the total at December 31, 1995
compared with $31 million, $52 million and $34 million, respectively, at
year-end 1994.
The allowance for credit losses totaled $1.3 billion at December 31, 1995
compared with $1.4 billion at December 31, 1994. The allowance as a percentage
of period-end loans and nonperforming loans was 2.59% and 352%, respectively,
at the end of 1995. The comparable year-end 1994 amounts were 3.07% and 239%,
respectively.
CAPITAL Shareholders' equity totaled $5.8 billion and $5.7 billion at December
31, 1995 and 1994, respectively, and the leverage ratio was 6.37% and 7.10% in
the comparison. Tier I and total risk-based capital ratios were 8.00% and
11.56%, respectively, at December 31, 1995. The comparable December 31, 1994
ratios were 9.36% and 12.41%.
46
Reports on
CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT'S REPORT ON THE FINANCIAL
REPORTING INTERNAL CONTROL STRUCTURE
PNC Bank Corp. is responsible for the preparation, integrity and fair
presentation of its published financial statements. The accompanying
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and, as such, include judgments and
estimates of management. PNC Bank Corp. also prepared the other information
included in the annual report and is responsible for its accuracy and
consistency with the consolidated financial statements.
Management is responsible for establishing and maintaining an effective
internal control structure over financial reporting. The internal control
system is augmented by written policies and procedures and by audits performed
by an internal audit staff which reports to the Audit Committee of the Board of
Directors. Internal auditors monitor the operation of the internal control
system and report findings to management and the Audit Committee, and
corrective actions are taken to address identified control deficiencies and
other opportunities for improving the system. The Audit Committee, composed
solely of outside directors, provides oversight to the financial reporting
process.
There are inherent limitations in the effectiveness of any system of internal
control, including the possibility of human error and circumvention or
overriding of controls. Accordingly, even an effective internal control system
can provide only reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions, the effectiveness of an
internal control system may vary over time.
Management assessed PNC Bank Corp.'s internal control structure over financial
reporting as of December 31, 1996. This assessment was based on criteria for
effective internal control over financial reporting described in "Internal
Control-Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes that PNC Bank Corp. maintained an effective internal control system
over financial reporting as of December 31, 1996.
/s/ THOMAS H. O'BRIEN /s/ ROBERT L. HAUNSCHILD
- ------------------------- ---------------------------
Thomas H. O'Brien Robert L. Haunschild
Chairman and Senior Vice President and
Chief Executive Officer Chief Financial Officer
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
Shareholders and Board of Directors
PNC Bank Corp.
We have audited the accompanying consolidated balance sheet of PNC Bank Corp.
and subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of PNC Bank Corp.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of PNC Bank Corp.
and subsidiaries at December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Notes to Consolidated Financial Statements, PNC Bank Corp.
changed its method of accounting for mortgage servicing rights in 1995 and
postemployment benefits in 1994.
/s/ ERNST & YOUNG LLP
- -------------------------
Pittsburgh, Pennsylvania
January 24, 1997
47
Consolidated
STATEMENT OF INCOME
-------------------------------------------------------
Year ended December 31- dollars in millions, except per share data 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans and fees on loans $3,943 $3,743 $3,189
Securities 859 1,283 1,407
Other 136 123 128
-------------------------------------------------------
Total interest income 4,938 5,149 4,724
INTEREST EXPENSE
Deposits 1,428 1,552 1,160
Borrowed funds 381 834 514
Notes and debentures 685 621 558
-------------------------------------------------------
Total interest expense 2,494 3,007 2,232
-------------------------------------------------------
Net interest income 2,444 2,142 2,492
Provision for credit losses 6 84
-------------------------------------------------------
Net interest income less provision for credit losses 2,444 2,136 2,408
NONINTEREST INCOME
Asset management and trust 497 420 335
Service fees 566 495 490
Mortgage banking 154 187 199
Net securities gains (losses) 22 (280) (142)
Other 156 138 157
-------------------------------------------------------
Total noninterest income 1,395 960 1,039
NONINTEREST EXPENSE
Staff expense 1,110 1,065 1,041
Net occupancy and equipment 369 346 334
Intangible asset and MSR amortization 117 115 86
Federal deposit insurance 41 58 102
Other 675 625 627
Special charges 260 48
-------------------------------------------------------
Total noninterest expense 2,312 2,469 2,238
-------------------------------------------------------
Income before income taxes and cumulative effect of change in
accounting principle 1,527 627 1,209
Applicable income taxes 535 219 318
-------------------------------------------------------
Income before cumulative effect of change in accounting
principle 992 408 891
Cumulative effect of change in accounting principle, net of
tax benefits of $5 (7)
-------------------------------------------------------
Net income $992 $408 $884
- ----------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE
Primary before cumulative effect of change in accounting principle $2.90 $1.19 $2.56
Cumulative effect of change in accounting principle (.02)
-------------------------------------------------------
Primary $2.90 $1.19 $2.54
-------------------------------------------------------
Fully diluted before cumulative effect of change in accounting principle $2.87 $1.19 $2.54
Cumulative effect of change in accounting principle (.02)
-------------------------------------------------------
Fully diluted $2.87 $1.19 $2.52
- ----------------------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS DECLARED PER COMMON SHARE $1.42 $1.40 $1.31
- ----------------------------------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING
Primary 340,245,928 339,134,028 345,214,539
Fully diluted 345,354,469 344,921,810 350,218,169
- ----------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
48
Consolidated
BALANCE SHEET
-------------------------
December 31 - dollars in millions, except par values 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $4,016 $3,679
Short-term investments 774 1,611
Loans held for sale 941 659
Securities available for sale 11,917 15,839
Loans, net of unearned income of $385 and $403 51,798 48,653
Allowance for credit losses (1,166) (1,259)
-------------------------
Net loans 50,632 47,394
Other 4,980 4,222
-------------------------
Total assets $73,260 $73,404
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits
Noninterest-bearing $10,937 $10,707
Interest-bearing 34,739 36,192
-------------------------
Total deposits 45,676 46,899
Borrowed funds
Federal funds purchased 2,797 3,817
Repurchase agreements 645 2,851
Commercial paper 976 753
Other 3,442 1,244
-------------------------
Total borrowed funds 7,860 8,665
Notes and debentures 11,744 10,398
Other 1,761 1,674
-------------------------
Total liabilities 67,041 67,636
-------------------------
Mandatorily redeemable capital securities of subsidiary trust 350
SHAREHOLDERS' EQUITY
Preferred stock 7 1
Common stock - $5 par value
Authorized: 450,000,000 shares
Issued: 345,154,238 and 340,863,348 shares 1,726 1,704
Capital surplus 939 545
Retained earnings 4,075 3,571
Deferred benefit expense (60) (79)
Net unrealized securities gains (losses) (67) 26
Common stock held in treasury at cost: 21,036,195 shares (751)
-------------------------
Total shareholders' equity 5,869 5,768
-------------------------
Total liabilities and shareholders' equity $73,260 $73,404
- ---------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
49
Consolidated
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
---------------------------------------------------------------------------------
Preferred Common Capital Retained
Dollars in million, except per share data Stock Stock Surplus Earnings Other Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1994 $51 $1,710 $676 $2,983 $(16) $5,404
Net income 884 884
Cash dividends declared
Common (PNC-$1.31, Midlantic-$.62 per share) (327) (327)
Preferred (6) (6)
Common stock issued (1,796,092 shares) 9 12 21
Common stock issued for preferred stock dividends
(73,341 shares) 1 (1)
Tax benefit of ESOP and stock option plans 3 2 5
Deferred benefit expense 12 12
Treasury stock activity (56) (56)
Net unrealized securities losses (210) (210)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 51 1,719 692 3,535 (270) 5,727
Net income 408 408
Cash dividends declared
Common (PNC-$1.40, Midlantic-$.96 per share) (383) (383)
Preferred (3) (3)
Common stock issued (4,532,108 shares) 23 (8) 15
Preferred stock redeemed (50) (50)
Treasury stock activity 5 (119) (114)
Midlantic merger - treasury stock issued (38) (146) 184
Tax benefit of ESOP and stock option plans 2 14 16
Deferred benefit expense 4 4
Net unrealized securities gains 148 148
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 1 1,704 545 3,571 (53) 5,768
Net income 992 992
Cash dividends declared
Common ($1.42 per share) (482) (482)
Preferred (6) (6)
Common stock issued (4,290,890 shares) 22 74 96
Preferred stock issued (6,000,000 shares) 6 290 296
Treasury stock activity 1 (1) (751) (751)
Tax benefit of ESOP and stock option plans 29 1 30
Deferred benefit expense 19 19
Net unrealized securities losses (93) (93)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $7 $1,726 $939 $4,075 $(878) $5,869
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
50
Consolidated
STATEMENT OF CASH FLOWS
----------------------------------------------
Year ended December 31- in millions 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $992 $408 $884
Adjustments to reconcile net income to net cash provided by operating activities
Provision for credit losses 6 84
Net securities (gains) losses (22) 280 142
Depreciation, amortization and accretion 290 296 252
Net gain on sales of assets (89) (77) (104)
Valuation adjustments (9) (15) (13)
Deferred income taxes 190 128 6
Cumulative effect of change in accounting principle 7
Change in
Loans held for sale (282) (172) 957
Other (860) 266 (377)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 210 1,120 1,838
INVESTING ACTIVITIES
Purchases of securities available for sale (9,063) (3,409) (11,116)
Sales of securities available for sale 6,789 7,983 12,318
Repayment of securities available for sale 6,045 1,791 2,746
Purchases of investment securities (161) (8,754)
Repayment of investment securities 1,944 3,478
Net change in loans (1,657) (2,021) (1,279)
Purchases of
Credit card portfolios (1,822)
Other loans (683) (702) (29)
Sales of
Loans 671 160 575
Foreclosed assets 151 125 178
Bulk sales of loans and OREO 6 235
Net cash received (paid) for acquisitions/divestitures 460 49 (475)
Other 664 1,270 856
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 1,555 7,035 (1,267)
FINANCING ACTIVITIES
Net change in
Noninterest-bearing deposits 221 272 (385)
Interest-bearing deposits (1,919) (2,134) (851)
Federal funds purchased (1,020) 1,595 114
Issuance (repayment) of
Repurchase agreements 70,626 74,102 125,322
Repurchase agreements (72,832) (75,553) (126,624)
Commercial paper 3,439 4,376 5,621
Commercial paper (3,216) (4,849) (4,909)
Other borrowed funds 88,842 99,245 110,292
Other borrowed funds (86,644) (102,446) (109,957)
Notes and debentures 12,180 11,990 9,627
Notes and debentures (10,814) (13,901) (7,569)
Issuance of
Capital securities 350
Preferred stock 296
Common stock 120 88 53
Redemption of preferred stock (50)
Acquisition of treasury stock (569) (236) (90)
Cash dividends paid (488) (387) (333)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (1,428) (7,888) 311
----------------------------------------------
INCREASE IN CASH AND DUE FROM BANKS 337 267 882
Cash and due from banks at beginning of year 3,679 3,412 2,530
----------------------------------------------
Cash and due from banks at end of year $4,016 $3,679 $3,412
- ------------------------------------------------------------------------------------------------------------------------------------
CASH PAID FOR
Interest $2,636 $3,102 $2,201
Income taxes 193 122 403
NONCASH ITEMS
Increase (decrease) in securities available for sale 18,078 (2,745)
Increase (decrease) in investment securities (18,078) 2,745
Transfers from loans to other assets 76 99 151
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
51
Notes to
CONSOLIDATED FINANCIAL STATEMENTS
BUSINESS PNC Bank Corp. is one of the largest financial services organizations
in the United States with banking subsidiaries in Pennsylvania, New Jersey,
Delaware, Ohio, Kentucky, Indiana, Massachusetts and Florida. The Corporation's
major businesses include consumer banking, corporate banking, mortgage banking,
real estate banking and asset management. PNC Bank Corp. is subject to intense
competition from other financial services companies with respect to these
businesses and is subject to the regulations of certain federal and state
agencies and undergoes periodic examinations by certain regulatory authorities.
NOTE 1 ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION The consolidated financial statements
include the accounts of PNC Bank Corp. and its subsidiaries ("Corporation" or
"PNC Bank"), substantially all of which are wholly owned. Such statements have
been prepared in accordance with generally accepted accounting principles. All
significant intercompany accounts and transactions have been eliminated.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the amounts reported. Actual results
will differ from such estimates and such differences may be material to the
financial statements.
LOANS HELD FOR SALE Loans held for sale primarily consist of residential
mortgages and are carried at the lower of cost or aggregate market value. Gains
and losses on sales of loans held for sale are included in the results of
operations.
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, carried at market value and
classified as short-term investments. Gains and losses on trading securities
are included in other income. Securities not classified as investments or
trading are designated as securities available for sale and carried at fair
value with unrealized gains and losses, net of income taxes, reflected in
shareholders' equity. Gains and losses on sales of securities available for
sale are computed on a specific security basis and recognized in the results of
operations.
LOANS Loans are stated at the principal amounts outstanding, net of unearned
income. Interest income with respect to loans is accrued on the principal
amount outstanding, except for lease financing income and interest on certain
consumer loans which are recognized over their respective terms using methods
which approximate the level yield method. Significant loan fees are deferred
and accreted to interest income over the respective lives of the loans.
NONPERFORMING ASSETS Nonperforming assets are comprised of nonaccrual and
restructured loans and foreclosed assets. Generally, loans other than consumer
are classified as nonaccrual and the accrual of interest is discontinued when
it is determined the collection of interest or principal is doubtful or when a
default of interest or principal has existed for 90 days or more, unless the
loan is well secured and in the process of collection. When interest accrual is
discontinued, accrued but uncollected interest credited to income in the
current year is reversed and unpaid interest accrued in the prior year, if any,
is charged against the allowance for credit losses. Consumer loans are
generally charged off when payments are past due 180 days.
A loan is categorized as restructured if the original interest rate, repayment
terms, or both, are restructured due to a deterioration in the financial
condition of the borrower and the loan was not previously classified as
nonaccrual. Nonperforming loans are generally not returned to performing status
until the obligation is brought current, has performed in accordance with the
contractual terms for a reasonable period of time and ultimate collection of
the total contractual principal and interest is no longer in doubt.
Foreclosed assets are comprised of property acquired through a foreclosure
proceeding or acceptance of a deed-in-lieu of foreclosure. These assets are
recorded at the lower of the related loan balance or market value of the
collateral less estimated disposition costs at the date acquired. Market values
are estimated primarily based upon appraisals. Subsequently, foreclosed assets
are valued at the lower of the amount recorded at acquisition date or the then
current market value less estimated disposition costs. Gains or losses realized
upon disposition of such property are reflected in the results of operations.
Interest collected on impaired loans is recognized on the cash basis or cost
recovery method.
ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses is a reserve for
estimated credit losses established through provisions charged against income.
Loans deemed to be uncollectible are charged against the allowance account.
The allowance is maintained at a level believed by management to be sufficient
to absorb estimated potential credit losses. Management's determination of the
adequacy of the allowance is based on periodic evaluations of the credit
portfolio and other relevant factors. This evaluation is inherently subjective
as it requires material estimates, including, among others, the amounts and
timing
52
of expected future cash flows on impaired loans, estimated losses on consumer
loans and residential mortgages, and general amounts for historical loss
experience, economic conditions, uncertainties in estimating losses and inherent
risks in the various credit portfolios, all of which may be susceptible to
significant change. Pursuant to Statement of Financial Accounting Standard
("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," as
amended, impaired loans, consisting of nonaccrual and restructured commercial
and commercial real estate loans, are considered in the methodology for
determining the allowance for credit losses. Impaired loans are generally
evaluated based on the present value of expected future cash flows or the fair
value of the underlying collateral if principal repayment is expected to come
from the sale or operation of such collateral.
ASSET TRANSFERS AND SERVICING OF FINANCIAL ASSETS In 1995, the Corporation
adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights," on a
prospective basis as required by the Standard. SFAS No. 122 provides for the
recognition of originated mortgage servicing rights ("OMSR") for loans sold by
allocating total costs incurred between the loan and the servicing rights based
on their relative fair values. Previously, the value of OMSR was not recognized
as an asset when the related loan was sold. Mortgage servicing rights ("MSR")
are amortized in proportion to estimated net servicing income. To determine the
fair value of MSR, the Corporation estimates the present value of future cash
flows incorporating numerous assumptions including servicing income, cost of
servicing, discount rates, prepayment speeds and default rates.
A valuation allowance is maintained for the excess, if any, of the carrying
amount of capitalized MSR over estimated fair value. For purposes of measuring
impairment, MSR are disaggregated and stratified on predominant risk
characteristics, primarily loan type, interest rate and investor type.
In June 1996, SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities," was issued, effective for
transactions entered into after December 31, 1996. This Standard establishes
rules distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. SFAS No. 125 expands the treatment of
MSR to all servicing assets. Management does not expect this Standard to have a
material impact on the Corporation's financial position or results of
operations.
GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill is amortized on a straight-line
basis over periods ranging from 15 to 25 years. Other intangible assets are
amortized using accelerated and straight-line methods over their respective
estimated useful lives. On a periodic basis, management reviews goodwill and
other intangible assets and evaluates events or changes in circumstances that
may indicate impairment in the carrying amount of such assets. In such
instances, the Corporation measures impairment on a discounted future cash flow
basis.
DEPRECIATION AND AMORTIZATION For financial reporting purposes, premises and
equipment are depreciated principally using the straight-line method over the
estimated useful lives of the assets ranging from 5 to 40 years. Accelerated
methods are used for federal income tax purposes. Leasehold improvements are
amortized over their estimated useful lives or their respective lease terms,
whichever is shorter.
FINANCIAL DERIVATIVES The Corporation uses off-balance-sheet financial
derivatives as part of the overall asset/liability management process and in
mortgage banking activities. Substantially all such instruments are used to
manage risk related to changes in interest rates. Financial derivatives
primarily consist of interest rate swaps, purchased interest rate caps and
floors, and forward contracts.
Interest rate swaps are agreements with a counterparty to exchange periodic
interest payments calculated on a notional principal amount. Purchased interest
rate caps and floors are agreements where, for a fee, the counterparty agrees
to pay the Corporation the amount, if any, by which a specified market interest
rate is higher or lower than a defined rate applied to a notional amount,
respectively.
Interest rate swaps, caps and floors that modify the interest rate
characteristics (such as from fixed to variable, variable to fixed, or one
variable index to another) of designated interest-bearing assets or liabilities
are accounted for under the accrual method. Under this method, the net amount
payable or receivable from the derivative contract is accrued as an adjustment
to interest income or expense of the designated instrument. Premiums on
contracts are deferred and amortized over the life of the agreement as an
adjustment to interest income or interest expense of the designated
instruments. Unamortized premiums are included in other assets.
Changes in fair value of financial derivatives accounted for under the accrual
method are not reflected in the financial results. Realized gains and losses,
except losses on terminated interest rate caps and floors, are deferred as an
adjustment to the carrying amount of the designated instruments and amortized
over the shorter of the remaining original life of the agreements or the
designated instruments. Losses on terminated interest rate caps and floors are
recognized immediately in the results of operations. If the designated
instruments are disposed of, the fair value of the associated derivative
contract and any unamortized deferred gains or losses are
53
Notes to
CONSOLIDATED FINANCIAL STATEMENTS
included in the determination of gain or loss on the disposition of such
instruments. Contracts not qualifying for accrual accounting are marked to
market in the financial statements.
Forward contracts provide for the delivery of financial instruments at a
specified future date and at a specified price or yield. The Corporation uses
forward contracts primarily to manage risk associated with its mortgage banking
activities. Realized gains and losses on mandatory and optional delivery
forward commitments are recorded in mortgage banking income in the period
settlement occurs. Unrealized gains or losses are considered in the lower of
cost or market valuation of loans held for sale.
PNC Bank also enters into financial derivative transactions to facilitate
customer needs primarily consisting of interest rate swaps, caps and foreign
exchange contracts. The Corporation mitigates the interest rate risk of
customer derivatives by entering into offsetting positions with third parties.
Customer derivative positions and offsetting positions with third parties are
recorded at their estimated fair values, and adjustments to fair values are
included in the results of operations.
INCOME TAXES Income taxes are accounted for under the liability 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.
POSTEMPLOYMENT BENEFITS Effective January 1, 1994, the Corporation adopted SFAS
No. 112, "Employers' Accounting for Postemployment Benefits," which requires
accrual of a liability for benefits to be paid to former or inactive employees
after employment, but before retirement. The cumulative effect of the change in
accounting decreased net income by $7 million, or $.02 per fully diluted share.
Prior to 1994, the Corporation accounted for postemployment benefits on a cash
basis.
STOCK-BASED COMPENSATION SFAS No. 123 "Accounting for Stock Based
Compensation," effective January 1, 1996, requires the Corporation to either
record compensation expense or provide additional disclosures with respect to
stock awards and stock option grants made after December 31, 1994. The
accompanying Notes to Consolidated Financial Statements include the disclosures
required by SFAS No. 123. No compensation expense is recognized pursuant to the
Corporation's stock option plans under SFAS No. 123 which is consistent with
prior treatment under APB No. 25.
TREASURY STOCK The Corporation records common stock purchased for treasury at
cost. At the date of subsequent reissue, the treasury stock account is reduced
by the cost of such stock on the first-in, first-out basis.
EARNINGS PER COMMON SHARE Primary earnings per common share is calculated by
dividing net income adjusted for preferred stock dividends declared by the sum
of the weighted-average number of shares of common stock outstanding and the
number of shares of common stock which would be issued assuming the exercise of
stock options during each period.
Fully diluted earnings per common share is based on net income adjusted for
interest expense, net of tax, on outstanding convertible debentures and
dividends declared on nonconvertible preferred stock. The weighted-average
number of shares of common stock outstanding is increased by the assumed
conversion of outstanding convertible preferred stock and convertible
debentures from the beginning of the year or date of issuance, if later, and
the number of shares of common stock which would be issued assuming the
exercise of stock options. Such adjustments to net income and the
weighted-average number of shares of common stock outstanding are made only
when such adjustments dilute earnings per common share.
NOTE 2 MERGERS AND ACQUISITIONS
On December 31, 1995, Midlantic Corporation ("Midlantic") merged with the
Corporation. Each share of Midlantic common stock outstanding was converted
into 2.05 shares of the Corporation's common stock. The Corporation issued
approximately 112 million shares of common stock and cash in lieu of fractional
shares in connection with the merger. The transaction was accounted for as a
pooling of interests and, accordingly, all financial data prior to January 1,
1996 has been restated as if the entities were combined for all such prior
periods.
On October 6, 1995, the Corporation acquired Chemical New Jersey Holdings,
Inc., and its wholly-owned subsidiary, Chemical Bank New Jersey, N.A.
("Chemical") consisting of 81 branches in southern and central New Jersey with
total assets of $3.2 billion and retail core deposits of $2.7 billion. The
Corporation paid $492 million in cash and the transaction was accounted for
under the purchase method.
In February 1995, the Corporation acquired BlackRock Financial Management L.P.,
a New York-based, fixed-income investment management firm with approximately
$25 billion in assets under management at closing. The Corporation paid $71
million in cash and issued $169 million of unsecured notes. The transaction was
accounted for under the purchase method.
54
NOTE 3 CASH FLOWS
For the statement of cash flows, the Corporation defines cash and due from
banks as cash and cash equivalents.
The following table sets forth information pertaining to acquisitions and
divestitures which affect cash flows.
-----------------------------
Year ended December 31 - in millions 1996 1995 1994
- --------------------------------------------------------------------
Assets acquired $538 $3,932 $3,197
Liabilities assumed 501 3,230 2,594
Cash paid 37 661 603
Cash and due from banks received 497 710 128
- --------------------------------------------------------------------
NOTE 4 SECURITIES
The following table sets forth information pertaining to the securities
portfolio:
----------------------------------------------------------------------------------------------
1996 1995
----------------------------------------------------------------------------------------------
Unrealized Unrealized
Amortized -------------------- Fair Amortized ---------------------- Fair
December 31 - in millions Cost Gains Losses Value Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------------
Securities available for sale
Debt securities
U.S. Treasury, government
agencies and corporations $3,238 $20 $21 $3,237 $4,241 $74 $1 $4,314
Mortgage-backed 6,301 13 138 6,176 8,631 20 85 8,566
Asset-backed 1,609 7 1 1,615 2,023 9 2,032
State and municipal 218 9 227 343 25 1 367
Other debt 100 7 2 105 99 1 3 97
Associated derivatives 6 6
----------------------------------------------------------------------------------------------
Total debt securities 11,466 56 162 11,360 15,337 135 90 15,382
Corporate stocks and other 554 3 557 455 4 2 457
----------------------------------------------------------------------------------------------
Total securities available for
sale $12,020 $59 $162 $11,917 $15,792 $139 $92 $15,839
- -----------------------------------------------------------------------------------------------------------------------------------
At December 31, 1996 and 1995, $5.5 billion and $6.1 billion, respectively,
notional value of interest rate swaps and caps were associated with securities
available for sale. In connection with implementing accounting guidance issued
in November 1995, the Corporation reassessed its investment securities'
classifications. All securities previously classified as held to maturity were
reclassified to the available-for-sale portfolio. The reclassifications were
accounted for at fair value and included the fair value of associated financial
derivatives. Subsequently, the Corporation sold $1.9 billion of U.S. Treasury
securities and $4.1 billion of collateralized mortgage obligations and
terminated associated pay-fixed interest rate swaps totaling $5.1 billion
notional value at a $289 million loss.
The following table presents the amortized cost, fair value and
weighted-average yield of debt securities at December 31, 1996 by remaining
contractual maturity.
CONTRACTUAL MATURITY OF DEBT SECURITIES
------------------------------------------------------
December 31, 1996 - Within 1 to 5 to After 10
dollars in millions 1 Year 5 Years 10 Years Years Total
- -----------------------------------------------------------------------------
U.S. Treasury and
government agencies $835 $2,214 $186 $3 $3,238
Mortgage-backed 6 1 119 6,175 6,301
Asset-backed 78 293 1,238 1,609
State and municipal 25 44 74 75 218
Other debt 1 7 7 85 100
------------------------------------------------------
Total $867 $2,344 $679 $7,576 $11,466
- -----------------------------------------------------------------------------
Fair value $865 $2,355 $675 $7,465 $11,360
Weighted-average yield 5.14% 5.70% 7.00% 6.63% 6.35%
- -----------------------------------------------------------------------------
55
Notes to
CONSOLIDATED FINANCIAL STATEMENTS
Based on current interest rates and expected prepayment speeds, the
weighted-average expected maturity of mortgage-backed and asset-backed
securities was approximately 3 years and 3 months at December 31, 1996.
Weighted-average yields are based on historical cost with effective yields
weighted for the contractual maturity of each security. At December 31, 1996,
$5.5 billion notional value of interest rate caps designated to the securities
portfolio altered the contractual weighted-average yield from 6.35% to 6.32%.
The carrying value of securities pledged to secure public and trust deposits,
repurchase agreements and for other purposes at December 31, 1996 was $7.5
billion.
Information relating to security sales, including the effects of related
financial derivatives, is set forth in the following table:
------------------------------------
Year ended December 31 - Gross Gross
in millions Proceeds Gains Losses
- ---------------------------------------------------------------
1996 $6,789 $39 $17
1995 8,125 12 292
1994 14,147 65 207
- ---------------------------------------------------------------
NOTE 5 LOANS AND COMMITMENTS TO EXTEND CREDIT
Loans outstanding were as follows:
-------------------------------------------------------------
December 31 - in millions 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
Consumer $14,868 $13,539 $11,851 $10,940 $9,585
Residential mortgage 12,703 11,689 9,746 8,611 3,577
Commercial 18,062 16,812 15,545 15,521 14,766
Commercial real estate 4,624 4,914 5,063 5,169 6,503
Other 1,926 2,102 2,223 2,231 1,900
-------------------------------------------------------------
Total loans 52,183 49,056 44,428 42,472 36,331
Unearned income (385) (403) (385) (359) (388)
-------------------------------------------------------------
Total loans, net of unearned income $51,798 $48,653 $44,043 $42,113 $35,943
- ------------------------------------------------------------------------------------------------------------------------------------
During the fourth quarter of 1996, the Corporation acquired AAA-affinity credit
card portfolios totaling $1.6 billion for a premium of $249 million. Loan
outstandings and unfunded commitments are concentrated in PNC Bank's primary
geographic markets, which include Pennsylvania, New Jersey, Delaware, Ohio,
Kentucky, Indiana, Massachusetts and Florida. At December 31, 1996, no specific
industry concentration exceeded 3% of total outstandings and unfunded
commitments.
NET UNFUNDED COMMITMENTS
---------------------
December 31 - in millions 1996 1995
- ----------------------------------------------------------------
Consumer $22,045 $7,335
Residential mortgage 511 554
Commercial 27,087 24,282
Commercial real estate
Commercial mortgage 11 9
Real estate project 753 742
Other 849 892
---------------------
Total $51,256 $33,814
- ----------------------------------------------------------------
Commitments to extend credit represent arrangements to lend funds provided
there is no violation of specified contractual conditions. Commitments are
reported net of participations, assignments and syndications, primarily to
financial institutions, totaling $4.4 billion and $4.2 billion at December 31,
1996 and 1995, respectively. Consumer commitments are primarily for home equity
and credit card lines. Commercial commitments generally have fixed expiration
dates, may require payment of a fee, and contain termination clauses in the
event the customer's credit quality deteriorates. Based on the Corporation's
historical experience, approximately 50% to 75% of consumer and most commercial
commitments expire unfunded, and therefore cash requirements are substantially
less than the total commitment.
Net outstanding letters of credit totaled $4.5 billion and $4.0 billion at
December 31, 1996 and 1995, respectively, and consist primarily of standby
letters of credit which commit the Corporation to make payments on behalf of
customers when certain specified future events occur. Such instruments are
typically issued to support industrial revenue bonds, commercial paper, and bid
or performance related contracts. At year-end 1996, the largest industry
concentration within standby letters of credit was health care, which accounted
for approximately 15% of the total. Maturities for standby letters of credit
ranged from 1997 to 2011.
At December 31, 1996, $421 million of loans were pledged to secure borrowings
and for other purposes.
56
Certain directors and executive officers of the Corporation and its significant
subsidiaries, as well as certain affiliated companies of these directors and
officers, were customers of and had loans with subsidiary banks in the ordinary
course of business. All such loans were on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other customers and did not involve more than a
normal risk of collectibility. The aggregate dollar amounts of these loans were
$265 million and $379 million at December 31, 1996 and 1995, respectively.
During 1996, new loans of $144 million were funded, and repayments totaled $258
million.
NOTE 6 NONPERFORMING ASSETS
The following table sets forth nonperforming assets and related information:
-------------------------------------------------
December 31 - dollars in millions 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
Nonaccrual loans $347 $335 $496 $656 $1,620
Restructured loans 2 23 69 200 185
-------------------------------------------------
Total nonperforming loans 349 358 565 856 1,805
-------------------------------------------------
Foreclosed assets 110 178 192 268 436
Assets held for accelerated disposition 10 158
-------------------------------------------------
Total nonperforming assets $459 $536 $767 $1,282 $2,241
-------------------------------------------------
Nonperforming loans to period-end loans .67% .74% 1.28% 2.03% 5.02%
Nonperforming assets to period-end loans, foreclosed assets and
assets held for accelerated disposition .88 1.10 1.73 3.01 6.16
Nonperforming assets to total assets .63 .73 .99 1.69 3.41
-------------------------------------------------
Interest on nonperforming loans
Computed on original terms $35 $36 $54 $74 $150
Recognized 10 10 14 19 19
-------------------------------------------------
Past due loans
Accruing loans past due 90 days and more $244 $225 $175 $171 $237
As a percentage of total loans, net of unearned income .47% .46% .40% .41% .66%
- -----------------------------------------------------------------------------------------------------------------------------------
The Corporation has no material commitments as of December 31, 1996 to extend
credit to customers whose outstanding loans are nonperforming.
At December 31, 1996 and 1995, foreclosed assets are reported net of valuation
allowances of $19 million and $37 million, respectively. Gains on sales of
foreclosed assets resulted in net foreclosed asset income of $9 million, $11
million and $15 million in 1996, 1995 and 1994, respectively. Net foreclosed
asset income or expense is included in other noninterest expense.
NOTE 7 ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses were as follows:
-------------------------------
In millions 1996 1995 1994
- -----------------------------------------------------------------
January 1 $1,259 $1,352 $1,372
Charge-offs (247) (240) (289)
Recoveries 83 107 120
-------------------------------
Net charge-offs (164) (133) (169)
Provision for credit losses 6 84
Acquisitions 71 34 65
-------------------------------
December 31 $1,166 $1,259 $1,352
- -----------------------------------------------------------------
Impaired loans totaled $292 million and $297 million at December 31, 1996 and
1995, respectively. Impaired loans totaling $190 million and $154 million at
the end of 1996 and 1995, respectively, had a corresponding specific allowance
for credit losses of $53 million and $29 million. The average balance of
impaired loans was $313 million in 1996 and $365 million in 1995. Interest
income recognized on impaired loans totaled $5 million and $6 million in 1996
and 1995, respectively.
NOTE 8 PREMISES, EQUIPMENT AND
LEASEHOLD IMPROVEMENTS
Premises, equipment and leasehold improvements, stated at cost less accumulated
depreciation and amortization, were as follows:
--------------------
December 31 - in millions 1996 1995
- ----------------------------------------------------------------
Land $95 $101
Buildings 518 553
Equipment 996 1,069
Leasehold improvements 172 186
--------------------
1,781 1,909
Accumulated depreciation and amortization (916) (1,002)
--------------------
Net book value $865 $907
- ----------------------------------------------------------------
57
Notes to
CONSOLIDATED FINANCIAL STATEMENTS
Depreciation and amortization expense on premises, equipment and leasehold
improvements totaled $143 million in 1996, $135 million in 1995 and $124
million in 1994.
Certain facilities and equipment are leased under agreements expiring at
various dates until the year 2025. Substantially all such leases are accounted
for as operating leases. Rental expense on such leases amounted to $90 million
in 1996, $95 million in 1995 and $97 million in 1994.
At December 31, 1996 and 1995, required minimum annual rentals due on
noncancelable leases having terms in excess of one year aggregated $436 million
and $478 million, respectively. Minimum annual rentals for each of the years
1997 through 2001 are $69 million, $57 million, $49 million, $39 million and
$35 million, respectively.
NOTE 9 GOODWILL AND OTHER
Goodwill and other amortizable assets consisted of the following:
-----------------
December 31 - in millions 1996 1995
- -------------------------------------------------------------
Goodwill $953 $960
Mortgage servicing rights 313 268
Purchased credit cards 322
Other 34 37
-----------------
Total $1,622 $1,265
- -------------------------------------------------------------
At December 31, 1996, the fair value of capitalized MSR was $398 million.
Amortization of goodwill and other assets was as follows:
-----------------------
Year ended December 31 - in millions 1996 1995 1994
- --------------------------------------------------------------
Goodwill $54 $39 $21
Mortgage servicing rights 56 71 63
Purchased credit cards 3
Other 4 5 2
-----------------------
Total $117 $115 $86
- --------------------------------------------------------------
NOTE 10 DEPOSITS
The aggregate amount of time deposits with a denomination greater than $100,000
was $4.9 billion and $3.9 billion at December 31, 1996 and 1995, respectively.
Remaining contractual maturities of time deposits are $13.3 billion, $2.3
billion, $1.0 billion, $1.0 billion and $1.0 billion for the years 1997 through
2001 and thereafter, respectively.
NOTE 11 NOTES AND DEBENTURES
Notes and debentures consisted of the following:
-------------------
December 31 - in millions 1996 1995
- ---------------------------------------------------------------
Bank notes $7,905 $6,256
Federal Home Loan Bank 2,192 2,393
Senior notes 100 100
Subordinated notes 1,357 1,361
ESOP 88 101
Other 102 187
-------------------
Total $11,744 $10,398
- ---------------------------------------------------------------
Substantially all bank notes mature in 1997 and have various interest rates
that range from 4.88% to 5.90%. Obligations to the Federal Home Loan Bank have
various maturities ranging from 1997 to 2002 and interest rates that range from
1.25% to 8.76%. Senior and subordinated notes consisted of the following:
December 31, 1996 -
dollars in millions Stated Rate Maturity Outstanding
- -----------------------------------------------------------------------
Senior 9.25% to 10.50% 1997 to 1999 $100
Subordinated
Nonconvertible 6.125% to 10.55% 1998 to 2005 1,294
Convertible 8.25% to 8.50% 2005 to 2010 63
---------
Total $1,357
- -----------------------------------------------------------------------
Notes and debentures have scheduled repayments for the years 1997 through 2001
and thereafter of $8.0 billion, $1.7 billion, $292 million, $59 million and
$1.7 billion, respectively.
NOTE 12 CAPITAL SECURITIES OF SUBSIDIARY TRUST
Mandatorily Redeemable Capital Securities of Subsidiary Trust ("Capital
Securities") represent preferred beneficial interests in the assets of PNC
Institutional Capital Trust A ("Trust"). The Trust holds certain 7.95% junior
subordinated debentures due December 15, 2026 issued by a bank subsidiary of
the Corporation. Distributions on the Capital Securities will be payable at an
annual rate of 7.95% of the stated liquidation amount of $1,000 per Capital
Security, payable semiannually. Cash distributions on the Capital Securities
are made to the extent interest on the debentures is received by the Trust. In
the event of certain changes or amendments to regulatory requirements or
federal tax rules, the Capital Securities are redeemable in whole. Otherwise,
the Capital Securities are generally redeemable in whole or in part on or after
December 15, 2006, at a declining redemption price ranging from 103.975% to
100% of the liquidation amount. On or after December 15, 2016, the Capital
Securities may be redeemed at 100% of the liquidation amount.
58
NOTE 13 SHAREHOLDERS' EQUITY
Information related to preferred stock is as follows:
Liquidation
Value per Share Shares Outstanding
- -----------------------------------------------------------------
December 31 1996 1995
- -----------------------------------------------------------------
Authorized
$1 par value 17,452,764 17,529,342
Issued and outstanding
Series A $40 16,479 17,846
Series B 40 4,667 4,752
Series C 20 327,013 356,347
Series D 20 441,805 469,839
Series F 50 6,000,000
--------------------------
Total 6,789,964 848,784
- -----------------------------------------------------------------
Series A through D are cumulative and, except for Series B, are redeemable at
the option of the Corporation. Annual dividends on Series A, B and D preferred
stock total $1.80 per share and Series C total $1.60 per share. Holders of
Series A through D preferred stock are entitled to a number of votes equal to
the number of full shares of common stock into which such preferred stock is
convertible. Series A through D preferred stock have the following conversion
privileges: (i) one share of Series A or Series B is convertible into eight
shares of common stock; and (ii) 2.4 shares of Series C or Series D are
convertible into four shares of common stock.
On October 9, 1996, the Corporation issued 6 million shares of nonconvertible,
nonvoting Series F preferred stock totaling $300 million. Noncumulative
dividends are payable quarterly commencing December 31, 1996 through September
30, 2001 at 6.05%. Thereafter, the dividend rate will be indexed to certain
market indices; however, the rate paid will not be less than 6.55% or greater
than 12.55%. The Series F preferred stock is redeemable in whole until
September 29, 2001 in the event of certain amendments to the Internal Revenue
Code relating to the dividend received deduction at a declining redemption
price from $52.50 to $50.50 per share. After September 29, 2001, the Series F
preferred stock may be redeemed, in whole or in part, at $50 per share.
The Corporation has a dividend reinvestment and stock purchase plan. Holders of
preferred stock and common stock may participate in the plan which provides
that additional shares of common stock may be purchased at market value with
reinvested dividends and voluntary cash payments. Common stock purchased
pursuant to such plan were: 1,097,597 shares in 1996; 1,177,481 shares in 1995;
and 877,639 shares in 1994.
The Corporation had reserved approximately 28.7 million common shares to be
issued in connection with certain stock plans and the conversion of certain
debt and equity securities.
The following table sets forth purchases and issuances of common stock held in
treasury.
TREASURY STOCK ACTIVITY
---------------------
Shares in thousands, dollars in millions Shares Amount
- -----------------------------------------------------------------
January 1, 1994 289 $9
Shares purchased 3,684 89
Shares issued (1,158) (33)
---------------------
December 31, 1994 2,815 65
Shares purchased 10,252 236
Shares issued (5,578) (117)
Midlantic merger (7,489) (184)
---------------------
December 31, 1995 --- ---
Shares purchased 22,731 802
Shares issued (1,695) (51)
---------------------
December 31, 1996 21,036 $751
- -----------------------------------------------------------------
NOTE 14 FINANCIAL DERIVATIVES
FAIR VALUE OF FINANCIAL DERIVATIVES
---------------------------------------------------------------
Positive Negative Total
Notional Fair Notional Fair Notional
December 31 - in millions Value Value Value Value Value
- -----------------------------------------------------------------------------------------------------------------------------------
1996
Interest rate swaps $7,290 $112 $650 $(15) $7,940
Interest rate caps 5,813 2 5,813
Interest rate floors 2,500 3 2,500
Mortgage banking activities 1,853 10 486 (1) 2,339
---------------------------------------------------------------
Total $17,456 $127 $1,136 $(16) $18,592
- -----------------------------------------------------------------------------------------------------------------------------------
1995
Interest rate swaps $4,249 $77 $5,141 $(48) $9,390
Interest rate caps 5,510 6 5,510
Mortgage banking activities 769 16 1,038 (4) 1,807
---------------------------------------------------------------
Total $10,528 $99 $6,179 $(52) $16,707
- -----------------------------------------------------------------------------------------------------------------------------------
59
Notes to
CONSOLIDATED FINANCIAL STATEMENTS
The Corporation uses a variety of off-balance-sheet financial derivatives as
part of its overall interest rate risk management process and to manage risk
associated with mortgage banking activities. Financial derivatives involve, to
varying degrees, interest rate and credit risk in excess of the amount
recognized in the balance sheet but less than the notional amount of the
contract. For interest rate swaps and purchased interest rate caps and floors,
only periodic cash payments and, with respect to such caps and floors,
premiums, are exchanged. Therefore, cash requirements and exposure to credit
risk are significantly less than the notional value. The Corporation manages
these risks as part of its asset/liability management process and through
credit policies and procedures. The Corporation seeks to minimize the credit
risk by entering into transactions with only a select number of high-quality
institutions, establishing credit limits, requiring bilateral-netting
agreements, and, in certain instances, segregated collateral.
The Corporation uses interest rate swaps and purchased caps and floors to
modify the interest rate characteristics of designated interest-bearing assets
or liabilities from fixed to variable, variable to fixed, or one variable index
to another. At December 31, 1996, $9.4 billion of interest rate swaps, caps and
floors were designated to loans and $5.5 billion of interest rate caps were
designated to securities. During 1996, derivative contracts modified the
average effective yield on interest-earning assets from 7.69% to 7.68%. At
December 31, 1996, $1.4 billion of interest rate swaps were designated to
interest-bearing liabilities. The average rate on interest-bearing liabilities
was not effected by financial derivative contracts during 1996.
PNC Bank uses a combination of on-balance-sheet instruments and financial
derivatives to manage risk associated with its mortgage banking activities. The
inherent risk affecting the value of MSR is the potential for the related
mortgages to prepay, thereby eliminating the underlying servicing fee income
stream.
Forward contracts are used to manage risk positions associated with mortgage
origination activities. Substantially all forward contracts mature within 90
days of origination. Forward contracts are traded in over-the-counter markets
and do not have standardized terms. Counterparties to the Corporation's forward
contracts are primarily U.S. Government agencies and brokers and dealers in
mortgage-backed securities. In the event the counterparty is unable to meet its
contractual obligations, the Corporation may be exposed to selling or
purchasing mortgage loans at prevailing market prices.
At December 31, 1996, $19 million of net deferred losses on terminated
derivative contracts are being amortized as an adjustment to net interest
income over a weighted-average remaining period of 17 months. During 1996,
gains on terminated derivative contracts of $7 million were recognized in
connection with the sale of securities.
In connection with the Midlantic merger, $5.5 billion notional value of
interest rate caps that reduced exposure to higher interest rates within a
specified range were terminated at a loss of $80 million. The termination was
part of the realignment of the combined asset and liability position of the
Corporation taking into account the interest rate risk profile of Midlantic.
The loss is included as a component of special charges. Concurrently, the
Corporation purchased $5.5 billion notional value interest rate caps that
require the counterparty to pay the Corporation the excess, if any, of 3-month
LIBOR over a specified cap rate without limitation, currently 6.50%, computed
quarterly based on the notional value of the contracts. At December 31, 1996,
3-month LIBOR was 5.56%. The contracts expire during the third and fourth
quarters of 1997.
At December 31, 1996 and 1995, the Corporation's exposure to credit losses with
respect to financial derivatives was not material.
NOTE 15 SPECIAL CHARGES
In connection with the Midlantic merger, the Corporation recorded special
charges totaling $260 million in 1995. These charges represented estimated
costs of integrating and consolidating branch networks, back office and
administrative facilities, professional services and the cost to terminate an
interest rate cap position as part of realigning the interest rate risk profile
of the combined companies.
---------------------------------------
Balance at Balance at
1996 - in millions January 1 Incurred December 31
- -----------------------------------------------------------------------
Staff related $42 $40 $2
Net occupancy 72 63 9
Equipment 17 17
Professional services 31 31
Other 18 18
Interest rate cap termination 80 80
-------------------------------------
Total $260 $249 $11
- -----------------------------------------------------------------------
Special charges in 1994 were for costs to consolidate the Corporation's
telebanking centers and rationalization of the retail branch networks.
60
NOTE 16 EMPLOYEE BENEFIT PLANS
INCENTIVE SAVINGS PLANS The Corporation sponsors incentive saving plans
covering substantially all employees. Under the plans, employee contributions
up to 3% or 6% of base pay, subject to Internal Revenue Code limitations, are
matched with cash or shares of PNC Bank common stock. Contributions for one of
the plans are matched primarily by shares of PNC Bank common stock held by the
Corporation's ESOP.
The Corporation makes annual contributions to the ESOP equal to the debt
service requirements on the ESOP borrowing less dividends received by the ESOP.
All dividends received by the ESOP are used to pay debt service. Dividends used
for debt service totaled $10 million in each of the years 1996, 1995 and 1994.
To satisfy additional debt service requirements, PNC Bank contributed $11
million in 1996, $9 million in 1995 and $8 million in 1994.
As the ESOP borrowing is repaid, shares are allocated to employees who made
contributions during the year based on the proportion of annual debt service to
total debt service. The Corporation includes all ESOP shares as common shares
outstanding in the earnings per share computation. Components of ESOP shares
are:
As of or for the year ended ---------------------
December 31 - in thousands 1996 1995
- -------------------------------------------------------------
Shares
Unallocated 3,184 3,825
Allocated shares 3,057 2,503
Shares released for allocation 851 792
Shares retired (495) (238)
---------------------
Total 6,597 6,882
- -------------------------------------------------------------
Compensation expense related to the portion of contributions matched with ESOP
shares is determined based on the number of ESOP shares allocated. Compensation
expense related to these plans was $9 million for 1996, $18 million for 1995
and $13 million for 1994.
PENSION PLANS The Corporation sponsors defined benefit pension plans covering
substantially all employees. The plans provide pension benefits that are based
on the average base salary for specified years of service prior to retirement.
Pension contributions are made to the extent deductible under existing federal
tax rules. The Corporation also has unfunded nonqualified supplemental defined
benefit retirement plans covering certain employees as defined in the plans.
The following table sets forth the estimated status of defined benefit plans:
------------------
December 31 - in millions 1996 1995
- --------------------------------------------------------------------
Benefit obligation
Vested $580 $550
Nonvested 25 35
------------------
Accumulated benefit obligation 605 585
Effect of future compensation levels 123 149
------------------
Projected benefit obligation for services
rendered to date 728 734
Plan assets at fair value, primarily
listed common stocks, U.S. Government
and agency securities, and collective funds 713 644
------------------
Plan assets less than projected benefit
obligation 15 90
Unrecognized net gain (loss) due to
experience different from assumptions
and the effects of changes in assumptions 10 (62)
Unrecognized net asset 20 26
Unrecognized prior service cost (12) (19)
------------------
Accrued pension cost $33 $35
- --------------------------------------------------------------------
The components of pension expense were as follows:
-----------------------------
Year ended December 31 - in millions 1996 1995 1994
- --------------------------------------------------------------------
Service cost for benefits earned
during the period $32 $24 $29
Interest cost on projected
benefit obligations 50 49 44
Actual return on plan assets (93) (112) (9)
Net amortization and deferral 29 60 (42)
-----------------------------
Net periodic pension costs $18 $21 $22
- --------------------------------------------------------------------
Assumptions used to measure the projected benefit obligation and the expected
return on assets included in net periodic pension costs are set forth in the
following table.
------------------------------
December 31 1996 1995 1994
- --------------------------------------------------------------------
Discount rate 7.70% 7.15% 8.75/8.50%
Increase in compensation levels 4.75 4.75 5.00/5.00
Expected long-term return on assets 9.50 9.50 10.00/8.50
- --------------------------------------------------------------------
61
Notes to
CONSOLIDATED FINANCIAL STATEMENTS
POSTRETIREMENT BENEFIT PLANS PNC Bank also provides certain health care and
life insurance benefits for retired employees ("postretirement benefits")
through various plans. A reconciliation of the accrued postretirement benefit
obligation is as follows:
-------------------
December 31 - in millions 1996 1995
- ----------------------------------------------------------------
Accumulated postretirement benefit
Retirees $160 $156
Active employees 6 8
Other active plan participants 45 59
-------------------
Total accumulated postretirement
obligation 211 223
Unrecognized prior service cost credit 56 56
Unrecognized net loss (16) (27)
-------------------
Accrued postretirement benefit
obligation $251 $252
- ----------------------------------------------------------------
The components of postretirement benefit expense are as follows:
---------------------------
Year ended December 31 - in millions 1996 1995 1994
- --------------------------------------------------------------------
Service cost for benefits earned
during the period $3 $3 $3
Interest cost on projected
benefit obligations 14 15 15
Amortization of prior service cost (4) (4) (3)
----------------------------
Net postretirement benefit expense $13 $14 $15
- --------------------------------------------------------------------
Assumptions used in accounting for the plans were:
----------------------------------
December 31 1996 1995 1994
- ----------------------------------------------------------------
Discount rate 7.70% 7.15% 8.75/8.00%
Expected health care cost
trend rate
Medical 7.00 7.50 9.10/5.00
Dental 6.60 7.00 7.40
- ----------------------------------------------------------------
The health care cost trend rate declines until it stabilizes at 5.2% beginning
in 2001. A one percent increase in the health care cost trend rate from that
assumed would not have a material impact on projected service and interest rate
costs or the accumulated postretirement obligation.
NOTE 17 STOCK-BASED COMPENSATION PLANS
The Corporation has a senior executive long-term incentive award plan
("Incentive Plan") that provides for the granting of incentive stock options,
nonqualified options, stock appreciation rights ("SAR"), performance units and
incentive shares. In any given year, the number of shares of common stock
available for grant under the Incentive Plan may range from 1.5% to 3% of total
issued shares of common stock determined at the end of the preceding calendar
year.
STOCK OPTIONS Options are granted at exercise prices not less than the market
value of common stock on the date of grant and are exercisable twelve months
after the grant date. Payment of the option price may be in cash or shares of
common stock at market value on the exercise date. The following table presents
stock option data related to the Incentive Plan, a similar predecessor plan and
other plans assumed in certain mergers.
-------------------------------
Per Option
-------------------------------------------
Weighted-Average
Shares in thousands Exercise Price Exercise Price Shares
- -------------------------------------------------------------------
January 1, 1994 $1.59 - $30.13 $17.96 13,504
Granted 13.81 - 29.75 17.79 4,454
SAR exercised 13.57 (73)
Options exercised 1.59 - 27.56 14.39 (1,127)
Terminated 8.70 - 24.24 21.60 (172)
--------
December 31, 1994 1.59 - 30.13 18.14 16,586
Granted 16.46 - 29.06 25.25 127
Options exercised 1.59 - 29.25 13.20 (2,996)
Terminated 6.10 - 30.13 20.97 (420)
Options exchanged
for PNC stock
in connection
with Midlantic
merger 8.33 (3,457)
---------
December 31, 1995 11.38 - 29.88 23.00 9,840
Granted 31.13 - 37.31 31.23 2,697
SAR exercised 19.13 (7)
Options exercised 11.38 - 29.25 21.05 (3,258)
Terminated 21.75 - 31.13 27.75 (242)
---------
December 31, 1996 $11.38 - $37.31 $26.03 9,030
- -------------------------------------------------------------------
At December 31, 1996, the weighted-average remaining contractual life of
outstanding options was 6 years, 11 months and options for 6,393,402 shares of
common stock were exercisable at a weighted-average price of $23.90 per share.
The grant-date fair value of options granted in 1996 was $7.32 per option.
Shares of common stock available for the granting of options under the
Incentive Plan and the predecessor plans were: 10,225,900 at December 31, 1996,
10,314,610 at December 31, 1995, and 13,094,887 at December 31, 1994.
INCENTIVE SHARE AWARDS In 1995, 323,000 incentive shares of common stock were
awarded to certain senior executives pursuant to the Incentive Plan. Issuance
of such incentive shares was subject to the market price of PNC Bank's common
stock equaling or exceeding specified levels for defined periods. These
requirements
62
were met on September 16, 1996 and November 1, 1996, and 151,350 shares of
restricted common stock were issued on both dates. The restricted period ends
two years after the issue date. During the restricted period the recipient
receives dividends and can vote the shares. If the recipient leaves the
Corporation's employ within the restricted period, the shares will be forfeited.
Net forfeitures totaled 20,300 shares. Compensation expense recognized for
incentive share awards was $3 million and $1 million in 1996 and 1995,
respectively.
EMPLOYEE STOCK PURCHASE PLAN The Corporation's employee stock purchase plan
("ESPP") covers a maximum of 5.2 million shares of common stock, of which 614
thousand shares were available to be issued. Persons who have been continuously
employed for at least one year are eligible to participate. Participants
purchase the Corporation's common stock at 85% of the lesser of fair market
value on the first or last day of each offering period. No charge to earnings
is recorded with respect to the ESPP. Shares issued pursuant to the ESPP were
as follows:
----------------------------------
Year ended December 31 Shares Price Per Share
- ------------------------------------------------------------------
1996 389,738 $25.29 and $25.82
1995 463,907 17.32 and 22.95
1994 403,692 17.64 and 24.76
- ------------------------------------------------------------------
The following table sets forth pro forma net income and earnings per share as
if compensation expense was recognized for stock options and the ESPP in
accordance with SFAS No. 123.
PRO FORMA NET INCOME AND EPS
-----------------------
Reported Pro forma
- ----------------------------------------------------------------
Net income (in millions)
1996 $992 $980
1995 408 407
Fully diluted earnings per share
1996 $2.87 $2.84
1995 1.19 1.19
- ----------------------------------------------------------------
For purposes of computing pro forma results PNC Bank estimated the fair value
of stock options and ESPP using the Black-Scholes option pricing model.
Black-Scholes is predominantly used to value traded options which differ from
PNC Bank's options. The model requires the use of numerous assumptions, many of
which are highly subjective in nature. Therefore, the pro forma results are, of
a necessity, estimates of results of operations as if compensation expense had
been recognized for all stock-based compensation plans and are not indicative of
the impact on future periods. The following assumptions were used in the option
pricing model for purposes of estimating pro forma results. The dividend yield
represents average yields over the previous three-year period.
-----------------------
Year ended December 31 1996 1995
- ---------------------------------------------------------------
Risk free interest rate 5.3% 6.4%
Dividend yield 4.7 4.3
Volatility 32.1 32.3
Expected life 6 yrs. 6 yrs.
- ---------------------------------------------------------------
NOTE 18 INCOME TAXES
The components of income taxes were as follows:
Year ended December 31 - ---------------------------------
in millions 1996 1995 1994
- ----------------------------------------------------------------
Current
Federal $297 $77 $293
State 48 14 19
---------------------------------
Total current 345 91 312
Deferred
Federal 172 84 44
State 18 44 (38)
---------------------------------
Total deferred 190 128 6
---------------------------------
Total $535 $219 $318
- ----------------------------------------------------------------
Significant components of deferred tax assets and liabilities are as follows:
-------------------
December 31 - in millions 1996 1995
- ---------------------------------------------------------------
Deferred tax assets
Allowance for credit losses $382 $413
Compensation and benefits 120 113
Net unrealized securities losses 38
Net operating loss and AMT
carryforwards 23
Purchase accounting - deposits and
other borrowings 27 32
Purchase accounting - other 27
Foreclosed assets 10 12
Other 51 120
-------------------
Total deferred tax assets 628 740
Deferred tax liabilities
Leasing 247 218
Depreciation 45 37
Purchase accounting - loans and leases 28 45
Net unrealized securities gains 19
Other 72 47
-------------------
Total deferred tax liabilities 392 366
-------------------
Net deferred tax asset $236 $374
- ---------------------------------------------------------------
63
Notes to
CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation between the statutory and effective tax rates follows:
-----------------------------
Year ended December 31 1996 1995 1994
- -------------------------------------------------------------------
Statutory tax rate 35.0% 35.0% 35.0%
Increases (decreases) resulting from
State taxes 2.8 6.0 2.2
Tax-exempt interest (1.7) (4.5) (2.2)
Goodwill .9 1.7 1.8
Valuation allowance reduction (8.8)
Other, net (2.0) (3.3) (1.7)
-----------------------------
Effective tax rate 35.0% 34.9% 26.3%
- -------------------------------------------------------------------
NOTE 19 REGULATORY MATTERS
The Corporation is subject to the regulations of certain federal and state
agencies and undergoes periodic examinations by such regulatory authorities.
Neither the Corporation nor any of its subsidiaries is subject to written
regulatory agreements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on PNC Bank's financial statements. The
Corporation's capital amounts and classification are also subject to
qualitative judgments by regulatory agencies about components, risk weightings,
and other factors.
The following table sets forth regulatory capital ratios for the Corporation
and PNC Bank, N.A., an indirect wholly-owned subsidiary.
REGULATORY CAPITAL
-------------------------------------
Amount Ratios
As of December 31 - -------------------------------------
dollars in millions 1996 1995 1996 1995
- ---------------------------------------------------------------
Risk-based capital
Tier I
PNC Bank Corp. $5,283 $4,762 8.29% 8.00%
PNC Bank, N.A. 3,848 3,899 7.52 8.60
Total
PNC Bank Corp. 7,427 6,882 11.65 11.56
PNC Bank, N.A. 5,343 4,966 10.44 10.94
Leverage
PNC Bank Corp. 5,283 4,762 7.70 6.37
PNC Bank, N.A. 3,848 3,899 7.09 6.88
- ---------------------------------------------------------------
Regulatory quantitative measures to ensure capital adequacy require the
Corporation to maintain minimum ratios of Tier I and total capital to
risk-weighted assets of 4% and 8%, respectively, and Tier I capital to average
assets (leverage) of 3%. To be classified as well capitalized, regulators
require capital ratios of 6% for Tier I, 10% for total risk-based and 5% for
leverage. As of the most recent notification from federal regulators, the
Corporation and each of its subsidiaries were categorized as well capitalized
under the regulatory framework for prompt corrective action. There are no
conditions or events since that notification that management believes would
change the Corporation's category.
Dividends that may be paid by subsidiary banks to the parent company are
subject to certain legal limitations and also may be impacted by capital needs,
regulatory requirements and policies, and other factors deemed relevant.
Without regulatory approval, the amount available for payment of dividends by
all subsidiary banks was $512 million at December 31, 1996.
Under federal law, generally no bank subsidiary may extend credit to the parent
company or its nonbank subsidiaries on terms and under circumstances which are
not substantially the same as comparable extensions of credit to nonaffiliates.
No extension of credit may be made to the parent company or a nonbank
subsidiary which is in excess of 10% of the capital stock and surplus of such
bank subsidiary or in excess of 20% of the capital and surplus of such bank
subsidiary as to aggregate extensions of credit to the parent company and its
subsidiaries. In certain circumstances, federal regulatory authorities may
impose more restrictive limitations. Such extensions of credit, with limited
exceptions, must be fully collateralized. The maximum amount available under
statutory limitations for transfer from subsidiary banks to the parent company
in the form of loans and dividends approximated 20% of consolidated net assets
at December 31, 1996.
Federal Reserve Board regulations require depository institutions to maintain
cash reserves with the Federal Reserve Bank. During 1996, subsidiary banks
maintained reserves which averaged $741 million.
64
NOTE 20 LITIGATION
A consolidated class action complaint is pending against the Corporation and
certain officers, alleging violations of federal securities laws and common law
relating to disclosures and seeking, among other things, unquantified damages
on behalf of purchasers of the Corporation's securities during specified
portions of 1994. Management believes that there are meritorious defenses to
this consolidated lawsuit and intends to defend it vigorously. Management
believes that the final disposition will not be material to the Corporation's
financial position.
The Corporation, in the normal course of business, is subject to various other
pending and threatened lawsuits in which claims for monetary damages are
asserted. Management, after consultation with legal counsel, does not
anticipate the ultimate aggregate liability, if any, arising out of such other
lawsuits will have a material adverse effect on the Corporation's financial
position.
At the present time, management is not in a position to determine whether any
pending or threatened litigation will have a material adverse effect on the
Corporation's results of operations in any future reporting period.
NOTE 21 OTHER FINANCIAL INFORMATION
Summarized financial information of the parent company is as follows:
PARENT COMPANY ONLY
BALANCE SHEET
---------------------
December 31 - in millions 1996 1995
- ---------------------------------------------------------------
ASSETS
Cash and due from banks $4 $2
Securities available for sale 602 48
Investments in
Bank subsidiaries 6,078 6,735
Nonbank subsidiaries 276 240
Advances to subsidiary banks 9 8
Other assets 118 115
----------------------
Total assets $7,087 $7,148
----------------------
LIABILITIES
Notes and debentures $363 $368
Nonbank affiliate borrowings 332 701
Accrued expenses and other liabilities 523 311
----------------------
Total liabilities 1,218 1,380
SHAREHOLDERS' EQUITY 5,869 5,768
----------------------
Total liabilities and
shareholders' equity $7,087 $7,148
- ---------------------------------------------------------------
Notes and debentures have scheduled repayments of $200 million in 1999, $100
million in 2001 and $63 million thereafter.
Commercial paper and all other debt issued by PNC Funding Corp., a wholly-owned
subsidiary, is guaranteed by the parent company. In addition, in connection
with certain affiliates' mortgage servicing operations, the parent company has
committed to maintain such affiliates' net worth above minimum requirements.
PARENT COMPANY ONLY
STATEMENT OF INCOME
-------------------------------
Year ended December 31 - in millions 1996 1995 1994
- ---------------------------------------------------------------------
OPERATING REVENUE
Dividends from
Bank subsidiaries $924 $447 $379
Nonbank subsidiaries 32 25 55
Interest income 7 4 9
Other income 1 1
-------------------------------
Total operating revenue 964 476 444
OPERATING EXPENSE
Interest expense 56 73 65
Other expense 38 33 28
-------------------------------
Total operating expense 94 106 93
Income before income taxes and
equity in undistributed net
income of subsidiaries 870 370 351
Applicable income tax benefits (30) (35) (48)
-------------------------------
Income before equity in
undistributed net income of
subsidiaries 900 405 399
Net equity in undistributed
net income (excess
dividends)*
Bank subsidiaries 63 (19) 479
Nonbank subsidiaries 29 22 6
-------------------------------
Net income $992 $408 $884
- ---------------------------------------------------------------------
* Amounts for 1994 include the cumulative effect of changes in accounting
principles at the respective subsidiaries.
65
Notes to
CONSOLIDATED FINANCIAL STATEMENTS
PARENT COMPANY ONLY
STATEMENT OF CASH FLOWS
Year ended December 31 - in millions 1996 1995 1994
- ------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $992 $408 $884
Adjustments to reconcile
net income to net cash
provided by operating
activities
Equity in
undistributed net
earnings of
subsidiaries (92) (3) (485)
Other (6) 10 (4)
------------------------------------
Net cash provided by
operating activities 894 415 395
INVESTING ACTIVITIES
Net change in
interest-earning deposits
with subsidiary bank (1) 4 (8)
Net capital returned from
subsidiaries 657 594 25
Securities available for sale
Sales 1,296 646 2,158
Purchases (1,850) (586) (2,005)
Cash paid in acquisitions (527) (503)
Other (2) (2)
-----------------------------------
Net cash provided (used)
by investing activities 102 129 (335)
FINANCING ACTIVITIES
Borrowings from nonbank
subsidiary 275 330
Repayments on borrowings
from nonbank subsidiary (353) (239)
Redemption of preferred stock (50)
Acquisition of treasury stock (569) (236) (90)
Cash dividends paid to
shareholders (488) (387) (333)
Issuance of stock 416 88 53
Repayment of notes and
debentures (14)
------------------------------------
Net cash used by
financing activities (994) (549) (54)
------------------------------------
Increase (decrease) in cash
and due from banks 2 (5) 6
Cash and due from banks at
beginning of year 2 7 1
------------------------------------
Cash and due from banks at
end of year $4 $2 $7
- ------------------------------------------------------------------------
During 1996, 1995 and 1994, the parent company received income tax refunds of
$3 million, $20 million and $23 million, respectively. Such refunds represent
the parent company's portion of consolidated income taxes. During 1996, 1995
and 1994, the parent company paid interest expense of $60 million, $68 million
and $63 million, respectively.
In connection with the Midlantic merger, notes and debentures of Midlantic in
the aggregate principal amount of $362 million have been jointly and severally
assumed by the parent company and its wholly-owned subsidiary, PNC Bancorp,
Inc.
Summarized financial information for PNC Bancorp, Inc. and subsidiaries is as
follows:
PNC BANCORP, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
----------------------
December 31 - in millions 1996 1995
- ----------------------------------------------------------------
ASSETS
Cash and due from banks $4,022 $3,678
Securities 11,210 15,683
Loans, net of unearned income 51,736 48,583
Allowance for credit losses (1,166) (1,259)
----------------------
Net loans 50,570 47,324
Other assets 5,988 6,053
----------------------
Total assets $71,790 $72,738
----------------------
LIABILITIES
Deposits $46,290 $47,024
Borrowed funds 6,951 8,093
Notes and debentures 11,126 9,726
Other liabilities 1,364 1,167
----------------------
Total liabilities 65,731 66,010
----------------------
SHAREHOLDER'S EQUITY 6,059 6,728
----------------------
Total liabilities and shareholder's
equity $71,790 $72,738
- ----------------------------------------------------------------
PNC BANCORP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
---------------------------------
Year ended December 31 - in millions 1996 1995 1994
- -------------------------------------------------------------------------
Interest income $4,903 $5,117 $4,687
Interest expense 2,404 2,941 2,173
---------------------------------
Net interest income 2,499 2,176 2,514
Provision for credit losses 20 84
---------------------------------
Net interest income less
provision for credit losses 2,499 2,156 2,430
Noninterest income 1,249 871 921
Noninterest expense 2,230 2,409 2,184
---------------------------------
Income before income taxes
and cumulative effect of
change in accounting
principle 1,518 618 1,167
Applicable income taxes 539 217 320
---------------------------------
Income before cumulative
effect of change in
accounting principle 979 401 847
Cumulative effect of change
in accounting principle (7)
---------------------------------
Net income $979 $401 $840
- -------------------------------------------------------------------------
66
NOTE 22 UNUSED LINE OF CREDIT
At December 31, 1996, the Corporation maintained a line of credit in the amount
of $500 million, none of which was drawn. This line is available for general
corporate purposes and expires in 2000.
NOTE 23 FAIR VALUE OF FINANCIAL INSTRUMENTS
----------------------------------------
1996 1995
----------------------------------------
Carrying Fair Carrying Fair
In millions Amount Value Amount Value
- -----------------------------------------------------------------------
ASSETS
Cash and short-term assets $5,412 $5,412 $5,826 $5,826
Securities 11,917 11,917 15,839 15,839
Loans held for sale 941 941 659 659
Net loans (excludes leases) 49,281 50,212 46,372 46,384
LIABILITIES
Demand deposits 27,030 27,030 27,145 27,145
Time deposits 18,646 18,654 19,754 20,025
Borrowed funds 8,168 8,168 9,125 9,133
Notes and debentures 11,744 11,802 10,398 10,574
OFF-BALANCE-SHEET
Commitments to extend
credit (14) (14) (32) (48)
Letters of credit (4) (4) (12) (14)
Financial derivatives used for
Interest rate risk
management 81 102 (6) 35
Mortgage banking
activities 11 9 16 12
- -----------------------------------------------------------------------
Real and personal property, lease financings, loan customer relationships,
deposit customer intangibles, retail branch networks, fee-based businesses,
such as asset management, mortgage banking and brokerage, trademarks and brand
names are excluded from the amounts set forth above. Accordingly, the aggregate
fair value amounts presented do not represent the underlying value of the
Corporation.
Fair value is defined as the estimated amount at which the financial instrument
could be exchanged in a current transaction between willing parties, or other
than in a forced or liquidation sale. However, it is not management's intention
to immediately dispose of a significant portion of such financial instruments,
and unrealized gains or losses should not be interpreted as a forecast of
future earnings and cash flows.
The fair value of securities is based primarily on quoted market prices. For
substantially all other financial instruments, fair values were estimated using
discounted cash flow analyses, pricing models and other valuation techniques.
These derived fair values are subjective in nature, involve uncertainties and
matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly impact the derived fair
value estimates.
The following methods and assumptions were used in estimating fair value
amounts for financial instruments.
GENERAL For short-term financial instruments realizable in three months or
less, the carrying amount reported in the consolidated balance sheet
approximates fair value. Unless otherwise stated, the rates used in discounted
cash flow analyses are based on market yield curves.
CASH AND SHORT-TERM ASSETS The carrying amounts reported in the consolidated
balance sheet for cash and short-term investments approximate those assets'
fair values primarily due to their short-term nature. For purposes of this
disclosure only, short-term assets include due from banks, interest-earning
deposits with banks, federal funds sold and resale agreements, trading
securities, customer's acceptance liability and accrued interest receivable.
SECURITIES The fair value of investment securities and securities available for
sale are based on quoted market prices, where available. If quoted market
prices are not available, fair value is estimated using the quoted market
prices of comparable instruments.
NET LOANS AND LOANS HELD FOR SALE For demand and variable-rate commercial and
certain consumer loans that reprice at least quarterly, fair values are
estimated by reducing carrying amounts by estimated credit loss factors. For
other commercial loans, including nonaccrual loans, fair values are estimated
using discounted cash flow analyses, with cash flows reduced by estimated
credit loss factors and discount rates equal to rates currently charged by the
Corporation for similar loans. In the case of nonaccrual loans, scheduled cash
flows exclude interest payments.
67
Notes to
CONSOLIDATED FINANCIAL STATEMENTS
For automobile, home equity, student and credit card loans, fair values are
determined by using internal pricing models incorporating assumptions about
prepayment rates, credit losses and servicing fees and costs and discounting
the future net revenues at an appropriate risk-weighted rate of return. For
credit cards and revolving home equity loans, this fair value does not include
any amount for new loans or the related fees that will be generated from the
existing customer relationships. The fair value of residential mortgages was
estimated based on quoted market prices of similar loans sold in conjunction
with securitization transactions, adjusted for differences in loan
characteristics. Loans held for sale are reported at the lower of cost or
market value in the consolidated balance sheet. For purposes of this disclosure
only, the carrying value approximates fair value.
DEPOSITS The carrying amounts of noninterest-bearing demand and
interest-bearing, money market and savings deposits approximate fair values.
For time deposits, fair values are based on the discounted value of scheduled
cash flows. The discount rates used vary by instrument and are based on dealer
quotes or rates currently offered for deposits with similar maturities.
BORROWED FUNDS The carrying amounts of federal funds purchased, commercial
paper, acceptances outstanding and accrued interest payable are considered fair
value because of their short-term nature. Repurchase agreements and term
federal funds purchased are valued using discounted cash flow analyses.
NOTES AND DEBENTURES The fair value of variable-rate notes and debentures is
equivalent to carrying value. For fixed-rate notes and debentures, scheduled
cash flows are discounted using rates for similar debt with the same
maturities.
UNFUNDED LOAN COMMITMENTS AND LETTERS OF CREDIT Fair values for commitments to
extend credit and letters of credit are estimated based upon the amount of
deferred fees and the creditworthiness of the counterparties.
FINANCIAL DERIVATIVES The fair value of interest rate swaps are estimated based
on the discounted value of the expected net cash flows. The fair value of other
derivative instruments is based on dealer quotes. These fair values represent
the estimated amounts the Corporation would receive or pay to terminate the
contracts, taking into account current interest rates.
68
Statistical
INFORMATION
SELECTED CONSOLIDATED FINANCIAL DATA
-----------------------------------------------------------------------
Year ended December 31 - dollars in millions, except
per share data 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Interest income $4,938 $5,149 $4,724 $4,023 $4,281
Interest expense 2,494 3,007 2,232 1,683 2,103
-----------------------------------------------------------------------
Net interest income 2,444 2,142 2,492 2,340 2,178
Provision for credit losses 6 84 350 494
Noninterest income before net securities gains/losses 1,373 1,240 1,181 941 931
Net securities gains (losses) 22 (280) (142) 195 246
Noninterest expense 2,312 2,469 2,238 1,985 2,073
-----------------------------------------------------------------------
Income before income taxes and cumulative effect of
changes in accounting principles 1,527 627 1,209 1,141 788
Applicable income taxes 535 219 318 262 252
-----------------------------------------------------------------------
Income before cumulative effect of changes in
accounting principles 992 408 891 879 536
Cumulative effect of changes in accounting principles,
net of tax benefits of $5, $5 and $77 (7) 20 (148)
-----------------------------------------------------------------------
Net income $992 $408 $884 $899 $388
- ------------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Book value
As reported $17.13 $16.87 $16.59 $15.61 $13.63
Excluding net unrealized securities gains/losses 17.34 16.79 16.95 15.35 13.63
Cash dividends declared 1.42 1.40 1.31 1.175 1.08
Earnings
Primary before cumulative effect of changes in
accounting principles $2.90 $1.19 $2.56 $2.56 $1.72
Cumulative effect of changes in accounting principles (.02) .06 (.48)
-----------------------------------------------------------------------
Primary $2.90 $1.19 $2.54 $2.62 $1.24
-----------------------------------------------------------------------
Fully diluted before cumulative effect of changes in
accounting principles $2.87 $1.19 $2.54 $2.54 $1.70
Cumulative effect of changes in accounting principles (.02) .06 (.47)
-----------------------------------------------------------------------
Fully diluted $2.87 $1.19 $2.52 $2.60 $1.23
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET HIGHLIGHTS (At December 31)
Total assets $73,260 $73,404 $77,461 $76,012 $65,802
Securities 11,917 15,839 23,670 25,496 22,849
Loans, net of unearned income 51,798 48,653 44,043 42,113 35,943
Deposits 45,676 46,899 45,818 44,703 42,030
Borrowed funds 7,860 8,665 12,193 12,336 12,182
Notes and debentures 11,744 10,398 12,127 9,972 4,734
Shareholders' equity 5,869 5,768 5,727 5,404 4,543
SELECTED RATIOS
Return on
Average common shareholders' equity 17.18% 7.05% 16.09% 18.55% 9.38%
Average assets 1.40 .54 1.19 1.40 .64
Average common shareholders' equity to average assets 8.11 7.64 7.34 7.52 6.67
Dividend payout 48.89 94.76 37.42 30.79 61.72
Efficiency 59.68 78.42 62.69 56.28 60.66
- ------------------------------------------------------------------------------------------------------------------------------------
69
Statistical
INFORMATION
SELECTED QUARTERLY FINANCIAL DATA
---------------------------------------------------------------------------------------------------
1996 1995
---------------------------------------------------------------------------------------------------
Quarter - dollars in millions, Fourth Third Second First Fourth Third Second First
except per share data
- ------------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Interest income $1,223 $1,217 $1,243 $1,255 $1,300 $1,293 $1,295 $1,261
Interest expense 605 608 633 648 747 766 772 722
---------------------------------------------------------------------------------------------------
Net interest income 618 609 610 607 553 527 523 539
Provision for credit losses 1 2 1 2
Noninterest income before net
securities gains/losses 381 341 333 318 312 338 305 285
Net securities gains (losses) 7 8 4 3 (289) 8 1
Noninterest expense 586 596 564 566 826 547 543 553
---------------------------------------------------------------------------------------------------
Income (loss) before income
taxes 420 362 383 362 (251) 316 292 270
Applicable income taxes 148 128 135 124 (75) 105 98 91
---------------------------------------------------------------------------------------------------
Net income (loss) $272 $234 $248 $238 $(176) $211 $194 $179
- ------------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Book value
As reported $17.13 $17.23 $17.07 $16.88 $16.87 $17.55 $17.24 $16.90
Excluding net unrealized
securities gains/losses 17.34 17.58 17.49 17.16 16.79 17.67 17.35 17.10
Earnings (losses)
Primary .80 .69 .72 .69 (.52) .62 .57 .52
Fully diluted .79 .68 .72 .69 (.52) .62 .56 .52
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
HIGHLIGHTS
Total assets $69,536 $69,546 $72,440 $71,733 $75,707 $75,266 $75,343 $74,841
Securities 11,569 13,097 14,740 14,818 19,450 22,045 23,137 23,984
Loans, net of unearned income 49,973 48,713 49,191 48,625 48,304 45,646 44,765 43,710
Deposits 44,832 44,716 45,379 45,553 46,216 45,077 44,365 43,667
Borrowed funds 5,493 5,510 7,816 7,823 11,511 14,016 14,140 13,902
Notes and debentures 11,617 12,048 11,904 11,068 10,637 8,829 9,586 10,109
Shareholders' equity 6,017 5,766 5,767 5,764 5,893 5,802 5,727 5,710
- ------------------------------------------------------------------------------------------------------------------------------------
70
ANALYSIS OF YEAR-TO-YEAR CHANGES IN NET INTEREST INCOME
---------------------------------------------------------------------------------
1996/1995 1995/1994
---------------------------------------------------------------------------------
Increase/(Decrease) in Income/Expense Increase/(Decrease) in Income/Expense
Due to Changes in: Due to Changes in:
----------------------------------------- ---------------------------------------
Taxable-equivalent basis - in millions Volume Rate Total Volume Rate Total
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS
Loans held for sale $27 $(3) $24 $(2) $4 $2
Securities
U.S. Treasury, government agencies and
corporations (453) 106 (347) (179) (39) (218)
Other debt (70) (5) (75) 67 29 96
Other (6) (4) (10) (1) 1
---------------------------------------------------------------------------------
Total securities (541) 109 (432) (131) 9 (122)
Loans, net of unearned income
Credit card 41 2 43 21 2 23
Other consumer 89 (19) 70 55 70 125
Total consumer 121 (8) 113 70 78 148
Residential mortgage 92 (2) 90 147 58 205
Commercial 103 (50) 53 51 109 160
Commercial real estate (23) (26) (49) (14) 55 41
Other (9) (2) (11) (18) 24 6
---------------------------------------------------------------------------------
Total loans, net of unearned income 284 (88) 196 237 323 560
Other interest-earning assets (6) (5) (11) (36) 30 (6)
---------------------------------------------------------------------------------
Total interest-earning assets $(366) $143 $(223) $7 $427 $434
---------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Interest-bearing deposits
Demand and money market $10 $(35) $(25) $(27) $103 $76
Savings (7) (14) (21) (6) 25 19
Other time 30 (33) (3) 69 158 227
Deposits in foreign offices (63) (12) (75) 51 19 70
---------------------------------------------------------------------------------
Total interest-bearing deposits (22) (102) (124) 24 368 392
Borrowed funds
Federal funds purchased (34) (18) (52) 14 50 64
Repurchase agreements (247) (41) (288) 43 127 170
Commercial paper (11) (3) (14) (17) 12 (5)
Other (98) (1) (99) 27 64 91
---------------------------------------------------------------------------------
Total borrowed funds (390) (63) (453) 67 253 320
Notes and debentures 112 (48) 64 (99) 162 63
---------------------------------------------------------------------------------
Total interest-bearing liabilities (263) (250) (513) 10 765 775
---------------------------------------------------------------------------------
Change in net interest income $(159) $449 $290 $4 $(345) $(341)
- ------------------------------------------------------------------------------------------------------------------------------------
Changes attributable to rate/volume are prorated into rate and volume
components.
71
Statistical
INFORMATION
AVERAGE CONSOLIDATED BALANCE SHEET AND NET INTEREST ANALYSIS
-------------------------------------------------------------------------------
Year ended December 31 - 1996 1995
-------------------------------------------------------------------------------
Taxable-equivalent basis Average Average Average Average
Dollars in millions Balances Interest Yields/Rates Balances Interest Yields/Rates
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets
Loans held for sale $1,095 $78 7.09% $725 $54 7.50%
Securities
U.S. Treasury, government agencies and
corporations 10,225 635 6.21 17,706 982 5.55
Other debt 2,719 184 6.78 3,757 259 6.90
Other 606 48 7.91 677 58 8.46
----------------------- ----------------------
Total securities 13,550 867 6.40 22,140 1,299 5.87
Loans, net of unearned income
Consumer
Credit card 1,165 163 13.94 871 120 13.76
Other consumer 12,192 1,028 8.43 11,142 958 8.60
----------------------- ----------------------
Total consumer 13,357 1,191 8.91 12,013 1,078 8.98
Residential mortgage 12,049 898 7.45 10,812 808 7.47
Commercial 17,150 1,338 7.80 15,852 1,285 8.11
Commercial real estate 4,763 423 8.88 5,014 472 9.42
Other 1,797 119 6.63 1,933 130 6.70
----------------------- ----------------------
Total loans, net of unearned income 49,116 3,969 8.08 45,624 3,773 8.27
Other interest-earning assets 964 59 6.12 1,046 70 6.64
----------------------- ----------------------
Total interest-earning assets/interest income 64,725 4,973 7.68 69,535 5,196 7.47
Noninterest-earning assets
Allowance for credit losses (1,197) (1,319)
Cash and due from banks 3,163 3,044
Other assets 4,116 3,871
---------- ---------
Total assets $70,807 $75,131
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Interest-bearing deposits
Demand and money market $12,619 332 2.63 $12,254 357 2.91
Savings 3,445 69 2.02 3,732 90 2.40
Other time 18,307 981 5.36 17,758 984 5.54
Deposits in foreign offices 846 46 5.44 1,974 121 6.13
----------------------- ----------------------
Total interest-bearing deposits 35,217 1,428 4.06 35,718 1,552 4.34
Borrowed funds
Federal funds purchased 2,530 136 5.40 3,142 188 5.99
Repurchase agreements 2,030 110 5.41 6,514 398 6.11
Commercial paper 550 30 5.49 737 44 5.94
Other 1,544 105 6.77 2,993 204 6.84
----------------------- -----------------------
Total borrowed funds 6,654 381 5.73 13,386 834 6.24
Notes and debentures 11,660 685 5.87 9,790 621 6.34
----------------------- -----------------------
Total interest-bearing liabilities/interest expense 53,531 2,494 4.66 58,894 3,007 5.10
Noninterest-bearing liabilities and shareholders'
equity
Demand and other noninterest-bearing deposits 9,900 9,112
Accrued expenses and other liabilities 1,529 1,341
Minority interest-capital securities of subsidiary 19
Shareholders' equity 5,828 5,784
---------- ----------
Total liabilities and shareholders' equity $70,807 $75,131
------------------------------------------------------------------------------
Interest rate spread 3.02 2.37
Impact of noninterest-bearing liabilities .81 .78
------------------------- --------------------------
Net interest income/margin on earning assets $2,479 3.83% $2,189 3.15%
- ------------------------------------------------------------------------------------------------------------------------------------
Nonaccrual loans are included in loans, net of unearned income. The impact of
financial derivatives used in interest rate risk management is included in the
interest income/expense and average yields/rates of the related assets and
liabilities. Average balances are based on amortized historical cost (excluding
SFAS No. 115 adjustments to fair value).
72
- ------------------------------------------------------------------------------------------------------------------------------------
1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balances Interest Yields/Rates Balances Interest Yields/Rates Balances Interest Yields/Rates
- ------------------------------------------------------------------------------------------------------------------------------------
$749 $52 6.84% $402 $25 6.10% $258 $19 7.33%
20,915 1,200 5.74 19,885 1,165 5.86 17,595 1,270 7.22
2,742 163 5.94 1,818 90 4.93 976 62 6.31
698 58 8.30 631 58 9.14 824 76 9.27
- -------------------------- -------------------------- --------------------------
24,355 1,421 5.83 22,334 1,313 5.88 19,395 1,408 7.26
720 97 13.50 682 94 13.74 670 115 17.21
10,472 833 7.95 9,242 765 8.28 8,916 792 8.88
- -------------------------- -------------------------- --------------------------
11,192 930 8.31 9,924 859 8.66 9,586 907 9.46
8,806 603 6.85 3,834 309 8.07 3,182 311 9.78
15,185 1,125 7.41 14,257 1,000 7.02 15,035 1,054 7.01
5,171 431 8.33 5,838 423 7.24 7,263 509 7.01
2,245 124 5.52 1,688 84 4.97 1,207 76 6.34
- -------------------------- -------------------------- --------------------------
42,599 3,213 7.54 35,541 2,675 7.53 36,273 2,857 7.88
1,724 76 4.42 1,710 61 3.59 1,500 59 3.94
- -------------------------- -------------------------- --------------------------
69,427 4,762 6.86 59,987 4,074 6.79 57,426 4,343 7.56
(1,391) (1,510) (1,663)
2,951 2,757 2,637
3,375 2,819 2,613
- ----------- ------------ ------------
$74,362 $64,053 $61,013
- ----------- ------------ ------------
$13,481 281 2.08 $12,685 213 1.68 $12,545 371 2.96
4,081 71 1.75 3,760 56 1.49 3,434 96 2.80
16,353 757 4.63 15,571 730 4.69 18,578 1,051 5.66
1,083 51 4.69 222 7 3.03 676 28 4.15
- -------------------------- -------------------------- ---------------------------
34,998 1,160 3.31 32,238 1,006 3.12 35,233 1,546 4.39
2,850 124 4.35 1,686 51 3.04 1,917 68 3.57
5,576 228 4.09 7,263 252 3.47 5,606 210 3.74
1,072 49 4.61 691 23 3.30 576 21 3.62
2,462 113 4.57 1,128 34 3.01 1,494 55 3.68
- -------------------------- -------------------------- ---------------------------
11,960 514 4.30 10,768 360 3.35 9,593 354 3.69
11,662 558 4.78 6,882 317 4.61 3,391 203 5.98
- -------------------------- -------------------------- ---------------------------
58,620 2,232 3.81 49,888 1,683 3.37 48,217 2,103 4.36
8,939 7,986 7,539
1,272 1,293 1,104
5,531 4,886 4,153
- ----------- ----------- ------------
$74,362 $64,053 $61,013
- -----------------------------------------------------------------------------------------------------------------------------------
3.05 3.42 3.20
.59 .57 .70
------------------------- -------------------------- ----------------------------
$2,530 3.64% $2,391 3.99% $2,240 3.90%
- ------------------------------------------------------------------------------------------------------------------------------------
73
Statistical
INFORMATION
LOANS
LOAN MATURITIES AND INTEREST SENSITIVITY
------------------------------------------
December 31, 1996 - 1 Year 1 Through After 5 Gross
in millions or Less 5 Years Years Loans
- -----------------------------------------------------------------
Commercial $7,216 $7,280 $3,566 $18,062
Real estate project 953 858 346 2,157
------------------------------------------
Total $8,169 $8,138 $3,912 $20,219
- -----------------------------------------------------------------
Loans with
predetermined rate $1,804 $1,922 $785 $4,511
Loans with floating
rate 6,365 6,216 3,127 15,708
------------------------------------------
Total $8,169 $8,138 $3,912 $20,219
- -----------------------------------------------------------------
At December 31, 1996, $9.4 billion of interest rate swaps, caps and floors
designated to commercial and commercial real estate loans altered the interest
rate characteristics of such loans. The impact of the interest rate swaps is
not reflected in the table above.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is based on periodic evaluations of the credit
portfolio by management. These evaluations consider, among other factors,
historic losses within specific industries, current economic conditions, loan
portfolio trends, specific credit reviews and estimates based on subjective
factors. During 1996, 1995 and 1994, stronger economic conditions combined with
management's ongoing efforts to improve asset quality resulted in lower
nonperforming assets and a higher reserve coverage of nonperforming loans.
SUMMARY OF LOAN LOSS EXPERIENCE
---------------------------------------------------------------------
Year ended December 31 - dollars in millions 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance at beginning of year $1,259 $1,352 $1,372 $1,568 $1,645
Charge-offs
Consumer 166 107 92 102 111
Residential mortgage 9 10 16 8 4
Commercial 52 84 116 168 339
Commercial real estate
Commercial mortgage 10 23 15 49 23
Real estate project 8 14 37 186 210
Other 2 2 1 1 8
---------------------------------------------------------------------
Total loans charged off 247 240 277 514 695
Recoveries
Consumer 41 39 40 36 31
Residential mortgage 2 2 1 1
Commercial 28 49 59 56 66
Commercial real estate
Commercial mortgage 6 9 5 4 1
Real estate project 4 6 10 8 7
Other 2 2 1 3 2
---------------------------------------------------------------------
Total recoveries 83 107 116 108 107
---------------------------------------------------------------------
Net charge-offs 164 133 161 406 588
Net charge-offs on bulk loan sales and assets held for
accelerated disposition (8) (182)
Provision for credit losses 6 84 350 495
Acquisitions/divestitures 71 34 65 42 16
---------------------------------------------------------------------
Allowance at end of year $1,166 $1,259 $1,352 $1,372 $1,568
---------------------------------------------------------------------
Allowance as a percent of period-end
Loans 2.25% 2.59% 3.07% 3.26% 4.36%
Nonperforming loans 334.40 351.68 239.29 160.28 86.87
As a percent of average loans
Net charge-offs including bulk loan sales and assets
held for accelerated disposition .33 .29 .40 1.65 1.62
Net charge-offs excluding bulk loan sales and assets
held for accelerated disposition .33 .29 .38 1.14 1.62
Provision for credit losses .01 .20 .99 1.36
Allowance for credit losses 2.37 2.76 3.17 3.86 4.32
Allowance as a multiple of net charge-offs including bulk
loan sales and assets held for accelerated disposition 7.11x 9.47x 8.00x 2.33x 2.67x
Allowance as a multiple of net charge-offs excluding bulk
loan sales and assets held for accelerated disposition 7.11 9.47 8.40 3.38 2.67
- ------------------------------------------------------------------------------------------------------------------------------------
74
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES *
------------------------------------------------------------------------------------------------------------
December 31 - 1996 1995 1994 1993 1992
------------------------------------------------------------------------------------------------------------
dollars in millions Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial $606 34.9% $585 34.3% $603 35.0% $572 36.5% $643 40.7%
Commercial real estate 173 8.9 332 10.0 419 11.4 498 12.2 746 17.9
Consumer 280 28.7 203 27.6 184 26.7 202 25.7 153 26.4
Residential mortgage 80 24.5 112 23.8 116 21.9 86 20.3 8 9.8
Other 27 3.0 27 4.3 30 5.0 14 5.3 18 5.2
------------------------------------------------------------------------------------------------------------
Total $1,166 100.0% $1,259 100.0% $1,352 100.0% $1,372 100.0% $1,568 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
* For purposes of this presentation, unallocated reserves have been assigned to
loan categories based on the relative specific allocation amounts.
TIME DEPOSITS OF $100,000 OR MORE
Time deposits in foreign offices totaled $843 million, substantially all of
which are in denominations of $100,000 or more. The following table sets forth
remaining maturities of domestic time deposits of $100,000 or more.
DOMESTIC TIME DEPOSITS OF $100,000 OR MORE
------------------------------------
Certificates Other Time
December 31, 1996 - in millions of Deposit Deposits Total
- ----------------------------------------------------------------------
Three months or less $1,473 $1 $1,474
Over three through six months 491 491
Over six through twelve months 617 1 618
Over twelve months 1,427 66 1,493
------------------------------------
Total $4,008 $68 $4,076
- ----------------------------------------------------------------------
BORROWED FUNDS
Federal funds purchased represent overnight borrowings. Repurchase agreements
generally have maturities of 18 months or less. At December 31, 1996, 1995, and
1994, $58 million, $361 million and $51 million, respectively, of repurchase
agreements had original maturities which exceeded one year. Commercial paper is
issued in maturities not to exceed nine months and is stated net of discount.
Other borrowed funds consist primarily of term federal funds purchased and U.S.
Treasury, tax and loan borrowings which are payable on demand. At December 31,
1996 and 1995, $11 million and $1.5 billion, respectively, notional value of
interest rate swaps were designated to borrowed funds. The effect of these
swaps is not included in the rates set forth in the table.
BORROWED FUNDS
---------------------------------------------------------------------
1996 1995 1994
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Dollars in millions Amount Rate Amount Rate Amount Rate
- ----------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased
Year-end balance $2,797 6.25% $3,817 5.29% $2,219 5.88%
Average during year 2,530 5.36 3,142 5.96 2,850 4.35
Maximum month-end balance during year 4,468 6,446 4,706
Repurchase agreements
Year-end balance 645 5.54 2,851 5.89 4,302 5.59
Average during year 2,030 5.44 6,514 6.12 5,576 4.09
Maximum month-end balance during year 3,363 7,981 6,971
Commercial paper
Year-end balance 976 5.34 753 5.74 1,226 5.71
Average during year 550 5.49 737 5.94 1,072 4.61
Maximum month-end balance during year 976 1,207 1,861
Other
Year-end balance 3,442 5.21 1,244 5.63 4,446 5.46
Average during year 1,544 6.77 2,993 6.83 2,462 4.57
Maximum month-end balance during year 3,558 4,134 5,601
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75
Corporate
INFORMATION
CORPORATE HEADQUARTERS
PNC Bank Corp.
One PNC Plaza
249 Fifth Avenue
Pittsburgh, Pennsylvania 15222-2707
STOCK LISTING
PNC Bank Corp. common stock is traded on the New York Stock Exchange ("NYSE")
under the symbol PNC. At the close of business on February 10, 1997, there were
65,857 common shareholders of record.
INQUIRIES
Individual shareholders should contact: Shareholder Relations at 800-843-2206
or the PNC Bank Hotline at 800-982-7652.
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-K
The Annual Report on Form 10-K is filed with the Securities and Exchange
Commission. Copies, excluding certain exhibits, may be obtained without charge
by writing to Glenn Davies, Vice President, Financial Reporting, at corporate
headquarters or to gdavies@usaor.net on the Internet. Requests may also be
directed to (412) 762-1553.
TRUST PROXY VOTING
Reports of 1996 nonroutine proxy voting by the trust divisions of PNC Bank
Corp. are available by writing to Thomas R. Moore, Vice President and
Assistant Corporate Secretary, at corporate headquarters.
ANNUAL SHAREHOLDERS MEETING
All shareholders are invited to attend the PNC Bank Corp. annual meeting on
Tuesday, April 22, 1997, at 11 a.m., Eastern Standard Time, on the 15th floor
of One PNC Plaza, 249 Fifth Avenue, Pittsburgh, Pennsylvania.
COMMON STOCK PRICES/DIVIDENDS DECLARED
The table below sets forth by quarter the range of high, low and quarter-end
closing sale prices for PNC Bank Corp. common stock and the cash dividends
declared per common share.
Cash
Dividends
1996 Quarter High Low Close Declared
- ---------------------------------------------------------------
First $32.625 $28.375 $30.750 $.35
Second 31.500 28.375 29.750 .35
Third 33.875 27.500 33.375 .35
Fourth 39.750 33.125 37.625 .37
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Total $1.42
- ---------------------------------------------------------------
1995 Quarter
- ---------------------------------------------------------------
First $25.750 $21.125 $24.375 $.35
Second 28.125 24.250 26.375 .35
Third 28.625 23.625 27.875 .35
Fourth 32.375 26.125 32.250 .35
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Total $1.40
- ---------------------------------------------------------------
REGISTRAR AND TRANSFER AGENT
The Chase Manhattan Bank
P.O. Box 590
Ridgefield Park, New Jersey 07660
800-982-7652
DIVIDEND POLICY
Holders of PNC Bank Corp. common stock are entitled to receive dividends when
declared by the board of directors out of funds legally available. The board
presently intends to continue the policy of paying quarterly cash dividends.
However, future dividends will depend upon earnings, the financial condition of
PNC Bank Corp. and other factors including applicable government regulations
and policies.
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
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.
76