PNC BANK CORP. Quarterly Report on Form 10-Q For the quarterly period ended March 31, 1997 Page 1 represents a portion of the first quarter 1997 Financial Review which is not required by the Form 10-Q report and is not "filed" as part of the Form 10-Q. The Quarterly Report on Form 10-Q and cross reference index is on page 28. Financial HIGHLIGHTS
As of or for the three months ended March 31 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ FINANCIAL PERFORMANCE (dollars in thousands, except per share data) Revenue Net interest income (taxable-equivalent basis) $637,283 $616,108 Noninterest income 425,116 321,562 Total revenue 1,062,399 937,670 Net income 266,309 238,320 Per common share Fully diluted earnings .80 .69 Book value 16.45 16.88 Cash dividends declared .37 .35 SELECTED RATIOS Performance Return on Average common shareholders' equity 19.48% 16.65% Average assets 1.54 1.34 Net interest margin 3.98 3.73 After-tax profit margin 25.07 25.42 Efficiency ratio 59.88 60.32 Capital Leverage 7.17 6.90 Risk-based Tier I 7.66 8.18 Total 10.95 11.70 Common shareholders' equity to assets 7.25 7.94 Asset quality Net charge-offs to average loans .47 .28 Nonperforming assets to loans and foreclosed assets .82 1.10 Allowance for credit losses to loans 2.13 2.51 Allowance for credit losses to nonperforming loans 346.11 328.88 AVERAGE BALANCES (in millions) Assets $70,301 $71,733 Earning assets 63,825 65,705 Loans, net of unearned income 51,922 48,625 Securities 10,089 14,818 Deposits 44,133 45,553 Borrowed funds 18,594 18,891 Shareholders' equity 5,758 5,764 Common shareholders' equity 5,442 5,747 PERIOD-END BALANCES (in millions) Assets 71,166 72,668 Earning assets 64,255 66,041 Loans, net of unearned income 52,575 48,800 Securities 9,593 14,692 Deposits 44,902 45,621 Borrowed funds 18,547 19,452 Shareholders' equity 5,478 5,786 Common shareholders' equity 5,162 5,769 - ------------------------------------------------------------------------------------------------------------------------------------
PNC BANK CORP. 1 Financial REVIEW This Financial Review should be read in conjunction with the PNC Bank Corp. and subsidiaries ("Corporation" or "PNC Bank") unaudited Consolidated Financial Statements included herein and the Corporate Financial Review and audited Consolidated Financial Statements included in the Corporation's 1996 Annual Report.
TABLE OF CONTENTS Page - --------------------------------------------------------------- FINANCIAL REVIEW Overview 2 Line of Business Review 5 Consolidated Income Statement Review 10 Balance Sheet Review 12 Risk Management 15 Financial Derivatives 18 CONSOLIDATED FINANCIAL STATEMENTS 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 23 AVERAGE CONSOLIDATED BALANCE SHEET AND NET INTEREST ANALYSIS 26 QUARTERLY REPORT ON FORM 10-Q 28 CORPORATE INFORMATION 29 - ---------------------------------------------------------------
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. PNC Bank also has the exclusive right to offer financial products and services to the American Automobile Association's ("AAA") 34 million members. Through AAA Financial Services, the Corporation markets these products and services to AAA members throughout the United States utilizing alternative distribution channels. SUMMARY FINANCIAL RESULTS Net income for the first three months of 1997 was $266 million or $0.80 per fully diluted share compared with $238 million and $0.69 per fully diluted share, respectively, a year ago. Returns on average common shareholders' equity and average assets were 19.48% and 1.54%, respectively, compared with 16.65% and 1.34% a year ago. Total revenue for the first quarter of 1997 increased 13.3% compared with the first quarter of 1996. Taxable-equivalent net interest income increased 3.4% to $637 million as the net interest margin widened 25 basis points in the comparison to 3.98%. These increases primarily result from a higher-yielding earning asset mix and a lower cost of funds. Noninterest income increased 32% in the quarter-to-quarter comparison to $425 million for the first three months of 1997. The increase was broad-based, led by strong growth in asset management, mutual fund servicing, treasury management and capital markets fees. The quarter also benefited from securitization income, securities gains and higher venture capital income. Operating expenses increased $70 million in the first three months of 1997 compared with the same period of 1996. The increase was primarily due to marketing and servicing costs associated with AAA-related businesses. The efficiency ratio improved to 59.9% for the first three months of 1997 compared with 60.3% a year ago. At March 31, 1997, total assets were $71.2 billion. Compared with the first quarter of 1996, average earning assets declined $1.9 billion to $63.8 billion. The decline was primarily due to reductions in the securities portfolio partially offset by loan growth and the purchase of AAA credit card portfolios. Average loans increased $3.3 billion to $51.9 billion, representing 81.4% of average earning assets compared with 74.0% a year ago. Excluding the credit card portfolio purchases, average loans grew at an annual rate of 3.8%. PNC BANK CORP. 2 Asset quality and coverage ratios remained strong. The ratio of nonperforming assets to loans and foreclosed assets was .82% at the end of the first quarter of 1997 compared with 1.10% a year ago. As a percent of nonperforming loans and total loans, the allowance for credit losses was 346% and 2.13%, respectively, at March 31, 1997. Annualized net charge-offs for the first quarter of 1997 were .47% of average loans compared with .28% for the first quarter of 1996. During the first quarter of 1997, PNC Bank continued to aggressively pursue capital management initiatives. The Corporation repurchased 12.4 million shares of common stock and, in April, the board of directors authorized the repurchase of up to 15 million additional common shares through March 31, 1998. 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 additional investments associated with the nationwide rollout of products and services to AAA members. Management expects modest loan loss provisions throughout 1997 and anticipates earnings per share will continue to benefit from common share repurchases. BUSINESS STRATEGIES Financial services providers are challenged by intense competition, pricing pressures and deregulation. 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 banks and other financial services companies compete for consumer investment dollars. PNC Bank's strategies are focused on altering the traditional business mix by investing in businesses with more attractive growth characteristics. Traditional businesses, such as branch banking and corporate lending have moderate revenue growth expectations, higher distribution costs and require significant amounts of capital to support balance sheet leverage. Conversely, businesses such as Asset Management, Mutual Fund Servicing, Private Banking, Treasury Management and Capital Markets, have more attractive growth characteristics, are less capital intensive and generate revenues that are primarily fee based. In CONSUMER BANKING, which contributed 50% of total line of business earnings in the first quarter of 1997, 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. AAA Financial Services offers financial products and services to AAA's 34 million members nationwide. This initiative represents a unique opportunity to market consumer products and services to a significant customer base with attractive demographic characteristics. CORPORATE BANKING, which accounted for 30% of total line of business earnings in the first quarter, traditionally relied on balance sheet leverage. 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 net interest 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. Corporate Banking is also focused on expanding fee-based revenue by developing products and services as alternatives to spread-based business. These include syndication, treasury management, interest rate risk management and capital markets. Corporate Banking also provides a full range of leasing and commercial finance products as alternatives to traditional financings. PNC BANK CORP. 3 Financial REVIEW The ASSET MANAGEMENT business, with $115 billion in managed assets, 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 for investment products and leveraging mutual fund servicing capabilities. PFPC Inc., the mutual fund servicing 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 $12 billion in assets, provides 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. Barron's/Lipper Analytical Services ranked Compass sixth best for its overall performance in 1996 among the 63 mutual fund families ranked. 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. FORWARD-LOOKING STATEMENTS PNC Bank has made, and may continue to make, various forward-looking statements with respect to earnings per share, AAA Financial Services, 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 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 in this Financial Review, 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 AAA and other 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. PNC BANK CORP. 4 LINE OF BUSINESS REVIEW
Return on Average Assets Revenue Earnings Assigned Capital Three months ended March 31 - ---------------------------------------------------------------------------------------- dollars in millions 1997 1996 1997 1996 1997 1996 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- Consumer Banking $38,686 $39,586 $652 $562 $136 $130 24% 23% Corporate Banking 17,334 17,122 207 183 81 62 15 12 Real Estate Banking 4,072 4,188 43 39 20 16 14 11 Mortgage Banking 14,219 13,305 93 91 17 15 11 10 Asset Management 653 581 95 81 18 14 36 32 -------------------------------------------------------------------- Total line of business 74,964 74,782 1,090 956 272 237 19 17 Asset/liability management activities (8,015) (6,266) (12) (10) (15) (10) Unallocated Provision for credit losses 24 15 Other 3,352 3,217 (16) (8) (15) (4) -------------------------------------------------------------------- Total consolidated $70,301 $71,733 $1,062 $938 $266 $238 19% 17% ================================================================================================================================
The Corporation operates five lines of business: Consumer Banking, Corporate Banking, Real Estate Banking, Mortgage Banking and Asset Management. Financial results for these lines of business are derived from the Corporation's management accounting system. 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. Line of business 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 financial 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 financial results differ from consolidated financial results primarily due to asset/liability management activities, unallocated provision for credit losses and certain other unallocated items. Asset/liability management activities reflect the residual of the assignment of wholesale assets and liabilities to the lines of business. This category also includes securities transactions and the impact of financial derivatives used for interest rate risk management. The line of business provisions for credit losses are a charge or credit to earnings to reflect current loss experience. The difference between these provisions and the consolidated provision is unallocated. PNC BANK CORP. 5 Financial REVIEW
CONSUMER BANKING Community Banking Private Banking Total Three months ended March 31 - ------------------------------------------------------------------------------- dollars in millions 1997 1996 1997 1996 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT Net interest income $414 $388 $27 $21 $441 $409 Noninterest income 142 90 69 63 211 153 ------------------------------------------------------------------------------- Total revenue 556 478 96 84 652 562 Provision for credit losses 57 23 2 59 23 Noninterest expense 314 270 60 59 374 329 ------------------------------------------------------------------------------- Pretax earnings 185 185 34 25 219 210 Income taxes 70 70 13 10 83 80 ------------------------------------------------------------------------------- Earnings $115 $115 $21 $15 $136 $130 ------------------------------------------------------------------------------- AVERAGE BALANCE SHEET Loans $17,065 $15,014 $2,397 $2,185 $19,462 $17,199 Assigned assets and other 19,161 22,331 63 56 19,224 22,387 ------------------------------------------------------------------------------- Total assets $36,226 $37,345 $2,460 $2,241 $38,686 $39,586 ------------------------------------------------------------------------------- Net deposits $33,915 $35,108 $1,610 $1,445 $35,525 $36,553 Assigned funds and other 266 226 578 540 844 766 Assigned capital 2,045 2,011 272 256 2,317 2,267 ------------------------------------------------------------------------------- Total funds $36,226 $37,345 $2,460 $2,241 $38,686 $39,586 ------------------------------------------------------------------------------- PERFORMANCE RATIOS After-tax profit margin 21% 24% 22% 18% 21% 23% Efficiency 56 56 63 71 57 59 Return on assigned capital 23 23 32 24 24 23 ===================================================================================================================================
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 financial services. Consumer Banking earnings accounted for 50% of total line of business earnings in the first quarter of 1997 compared with 55% in the year-earlier period. Earnings for the first quarter of 1997 increased $6 million or 5% due to improved results in Private Banking. An increase in loans, higher brokerage revenue and new trust business contributed to the increase in Private Banking earnings to $21 million for the quarter. Community Banking's earnings were flat in the comparison as increased marketing, servicing and other costs associated with investments in AAA-related initiatives offset the benefit of higher consumer service fees and securitization income. Throughout 1997, the Corporation expects to continue aggressively marketing products and services to AAA members, primarily credit card related. Due to these upfront costs and incentives offered to new customers, management expects costs associated with these initiatives will exceed related revenues in 1997 by approximately $30 million to $40 million. PNC BANK CORP. 6
CORPORATE BANKING Commercial Banking Large Corporate Equity Management Total Three months ended March 31 - --------------------------------------------------------------------------------------------- dollars in millions 1997 1996 1997 1996 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT Net interest income $108 $106 $27 $27 $(1) $(1) $134 $132 Noninterest income 45 27 13 12 15 12 73 51 ---------------------------------------------------------------------------------------------- Total revenue 153 133 40 39 14 11 207 183 Provision for credit losses (14) (2) 3 2 (11) Noninterest expense 64 63 22 20 2 1 88 84 ---------------------------------------------------------------------------------------------- Pretax earnings 103 72 15 17 12 10 130 99 Income taxes 39 27 6 6 4 4 49 37 ---------------------------------------------------------------------------------------------- Earnings $64 $45 $9 $11 $8 $6 $81 $62 ---------------------------------------------------------------------------------------------- AVERAGE BALANCE SHEET Loans $12,276 $11,607 $4,047 $4,784 $64 $34 $16,387 $16,425 Other assets 676 416 58 108 213 173 947 697 ---------------------------------------------------------------------------------------------- Total assets $12,952 $12,023 $4,105 $4,892 $277 $207 $17,334 $17,122 ---------------------------------------------------------------------------------------------- Net deposits $1,548 $1,589 $590 $436 $2,138 $2,025 Assigned funds and other 9,816 8,989 3,029 3,926 $194 $146 13,039 13,061 Assigned capital 1,588 1,445 486 530 83 61 2,157 2,036 ---------------------------------------------------------------------------------------------- Total funds $12,952 $12,023 $4,105 $4,892 $277 $207 $17,334 $17,122 ---------------------------------------------------------------------------------------------- PERFORMANCE RATIOS After-tax profit margin 42% 34% 24% 27% 55% 58% 39% 34% Efficiency 42 47 55 53 11 7 42 46 Return on assigned capital 16 12 8 8 40 41 15 12 ===============================================================================================================================
The Corporate Banking line of business includes: Commercial Banking which serves commercial and middle market customers with annual sales of $5 million to $250 million and customers in certain specialized industries regardless of size; Large Corporate which serves customers with annual sales of more than $250 million; and Equity Management which makes venture capital investments. The results for the first quarter of 1997 reflect the transfer of certain specialized industry loans and deposits from Large Corporate to Commercial Banking. Information for 1996 has not been restated for this transfer. Corporate Banking contributed 30% of total line of business earnings in the first quarter of 1997 compared with 26% in the same period of 1996. Earnings increased $19 million or 31% primarily due to higher revenue from treasury management, capital markets and corporate finance activities. Earnings also benefited from a credit to the allocated provision for credit losses as problem loans declined. Commercial Banking earnings increased 42% in the comparison primarily due to growth in treasury management fees and a higher credit to the allocated provision for credit losses. Large Corporate earnings declined partially due to the transfer of certain specialized industry loans and deposits and an increase in operating expenses associated with treasury management and capital markets initiatives. Management expects revenue in this line of business to be generated increasingly from fee-based sources such as treasury management, capital markets and corporate finance. 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. PNC BANK CORP. 7 Financial REVIEW
REAL ESTATE BANKING Three months ended March 31 - dollars in millions 1997 1996 - ------------------------------------------------------------------------- INCOME STATEMENT Net interest income $38 $36 Noninterest income 5 3 ------------------- Total revenue 43 39 Provision for credit losses (1) 1 Noninterest expense 12 12 ------------------- Pretax earnings 32 26 Income taxes 12 10 ------------------- Earnings $20 $16 ------------------- AVERAGE BALANCE SHEET Loans $3,962 $3,899 Other assets 110 289 ------------------- Total assets $4,072 $4,188 ------------------- Net deposits $179 $133 Assigned funds and other 3,301 3,469 Assigned capital 592 586 ------------------- Total funds $4,072 $4,188 ------------------- PERFORMANCE RATIOS After-tax profit margin 46% 41% Efficiency 28 32 Return on assigned capital 14 11 =========================================================================
Real Estate Banking serves national, regional and local real estate developers, owners, property managers and mortgage bankers by providing credit and non-credit services, commercial mortgage securitization, private debt placements and treasury management services. Real Estate Banking contributed 7% of total line of business earnings in the first three months of 1997 and 1996. Earnings increased $4 million or 25% in the comparison due to a 10% increase in revenue, driven by higher commercial mortgage securitization and debt placement fees, and a lower provision for credit losses. 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.
MORTGAGE BANKING Three months ended March 31 - dollars in millions 1997 1996 - ------------------------------------------------------------------------ INCOME STATEMENT Net interest income $58 $51 Noninterest income 35 40 ------------------- Total revenue 93 91 Provision for credit losses 1 1 Noninterest expense 64 66 ------------------- Pretax earnings 28 24 Income taxes 11 9 ------------------- Earnings $17 $15 ------------------- AVERAGE BALANCE SHEET Loans $12,012 $11,186 Other assets 2,207 2,119 ------------------- Total assets $14,219 $13,305 ------------------- Net deposits $2,032 $2,423 Assigned funds and other 11,554 10,305 Assigned capital 633 577 ------------------- Total funds $14,219 $13,305 ------------------- PERFORMANCE RATIOS After-tax profit margin 19% 17% Efficiency 68 72 Return on assigned capital 11 10 ========================================================================
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 6% of total line of business earnings in the first three months of 1997 and 1996. A reduction in expenses more than offset the decline in fee income associated with lower origination volumes. During the first three months of 1997, the Corporation funded $1.1 billion of residential mortgages with 68% representing new financings. The comparable amounts were $1.4 billion and 54%, respectively, in the first three months of 1996. The decline in noninterest expenses reflects the benefits of technology-related efficiencies in the loan origination and servicing functions 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. PNC BANK CORP. 8
MORTGAGE SERVICING PORTFOLIO In millions 1997 1996 - --------------------------------------------------------------- January 1 $39,543 $37,299 Originations 1,090 1,378 Purchases 1,312 3,516 Repayments (1,212) (1,638) Sales (39) (25) -------------------- March 31 $40,694 $40,530 ===============================================================
At March 31, 1997, PNC Bank's mortgage servicing portfolio totaled $40.7 billion, had a weighted-average coupon of 7.91% and an estimated fair value of $517 million. The servicing portfolio included $30.4 billion of loans serviced for others. Capitalized MSR totaled $344 million at March 31, 1997. 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 value would also decline. 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 Management Mutual Fund Servicing Total Three months ended March 31 - ---------------------------------------------------------------------- dollars in millions 1997 1996 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT Advisory, processing and other fee income $60 $52 $33 $28 $93 $80 Net interest income 1 1 1 2 1 ------------------------------------------------------------------- Total revenue 61 52 34 29 95 81 Operating expenses 44 40 22 19 66 59 ------------------------------------------------------------------- Pretax earnings 17 12 12 10 29 22 Income taxes 6 4 5 4 11 8 ------------------------------------------------------------------- Earnings $11 $8 $7 $6 $18 $14 ------------------------------------------------------------------- PERFORMANCE RATIOS After-tax profit margin 17% 14% 22% 22% 19% 17% Efficiency 72 77 65 65 69 73 Return on assigned capital 31 27 45 42 36 32 =========================================================================================================================
The Asset Management line of business includes: Investment Management and Mutual Fund Servicing. Investment Management provides liquidity, fixed income, and equity advisory services to institutional, family wealth and retail clients. Mutual Fund Servicing provides accounting, administration, transfer and custody services to financial institutions and integrated banking services to the brokerage community. Asset Management contributed 7% of total line of business earnings in the first three months of 1997 compared with 6% in the year-earlier period. Earnings increased $4 million or 29% in the comparison. Fee income increased 16% due to an increase in assets under administration driven by new business and market appreciation. Noninterest expense increased primarily due to incremental costs associated with servicing new business. Assets under administration increased $42 billion in the quarter-to-quarter comparison to $346 billion at March 31, 1997. Managed assets totaled $115 billion at March 31, 1997 compared with $103 billion a year ago. At March 31, 1997, the composition of managed assets was 46% fixed income, 29% liquidity management and 25% equity. PNC BANK CORP. 9 Financial REVIEW PFPC Inc., the Corporation's mutual fund servicing operation, specializes in providing institutional customers with custom designed products and custody, transfer agent, accounting and administrative services. Information with respect to assets and accounts serviced follows.
March 31 1997 1996 - --------------------------------------------------------------- Assets (billions) Custody $203 $179 Accounting/administration 138 116 Accounts (millions) Shareholder 4.5 4.0 Checking and credit/debit card 1.7 1.5 ===============================================================
Revenue from investment management and mutual fund servicing 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
Three months ended March 31 - in millions Revenue Earnings - ---------------------------------------------------------------- 1997 Asset Management $95 $18 Consumer Banking 54 13 ------------------- Total $149 $31 - ---------------------------------------------------------------- 1996 Asset Management $81 $14 Consumer Banking 50 10 ------------------- Total $131 $24 ================================================================
Asset Management revenue is primarily affected by the volume of new business, the value of assets managed and 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 have an adverse effect on revenue. CONSOLIDATED INCOME STATEMENT REVIEW Highlights of the consolidated results of operations for the first quarter of 1997 and 1996 were as follows: INCOME STATEMENT HIGHLIGHTS
Three months ended March 31 - in millions 1997 1996 Change - -------------------------------------------------------------------------- Net interest income $637 $616 $21 (taxable-equivalent basis) Provision for credit losses 10 10 Noninterest income before net securities gains 409 319 90 Net securities gains 16 3 13 Noninterest expense 636 566 70 Income taxes 143 125 18 Net income 266 238 28 ==========================================================================
Taxable-equivalent net interest income increased $21 million or 3.4% for the first three months of 1997 and the net interest margin widened 25 basis points to 3.98% compared with 3.73% in the prior-year period. Net interest income increased due to a $2.1 billion increase in average credit card loans and lower funding costs attributable to a decline in interest rates. These benefits were partially offset by a reduction in the securities portfolio. The net interest margin improvement reflects a higher-yielding earning asset mix combined with lower rates paid. PNC BANK CORP. 10
NET INTEREST INCOME ANALYSIS Taxable-equivalent basis Average Balances Interest Income/Expense Average Yields/Rates Three months ended March 31 - dollars ------------------------------------------------------------------------------------ in millions 1997 1996 Change 1997 1996 Change 1997 1996 Change - ------------------------------------------------------------------------------------------------------------------------------ Interest-earning assets Securities $10,089 $14,818 $(4,729) $158 $240 $(82) 6.27% 6.48% (21) bp Loans, net of unearned income 51,922 48,625 3,297 1,061 987 74 8.20 8.10 10 Other interest-earning assets 1,814 2,262 (448) 30 37 (7) 6.68 6.58 10 -------------------------------------------------------- Total interest-earning assets/ interest income 63,825 65,705 (1,880) 1,249 1,264 (15) 7.86 7.69 17 Noninterest-earning assets 6,476 6,028 448 ----------------------------- Total assets $70,301 $71,733 $(1,432) ============================= Interest-bearing liabilities Deposits $34,533 $35,872 $(1,339) 346 371 (25) 4.06 4.16 (10) Borrowed funds 18,594 18,891 (297) 266 277 (11) 5.76 5.88 (12) -------------------------------------------------------- Total interest-bearing liabilities/interest expense 53,127 54,763 (1,636) 612 648 (36) 4.66 4.75 (9) ------------------------------------------------------- Noninterest-bearing liabilities, capital securities and shareholders' equity 17,174 16,970 204 ----------------------------- Total liabilities and shareholders' equity $70,301 $71,733 $(1,432) ============================= Interest rate spread 3.20 2.94 26 Impact of noninterest-bearing sources .78 .79 (1) ----------------------------- Net interest income $637 $616 $21 3.98% 3.73% 25 bp ==============================================================================================================================
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 the first three months of 1997, loans comprised 81.4% of average earning assets. Accordingly, loan growth and the related yields earned have a significant impact on net interest income. During the first quarter of 1997, overall loan growth was modest and pricing pressure within the Corporation's traditional banking activities continued. Funding cost is affected by the composition of and rates paid on various funding sources. Average deposits comprised 62.8% of PNC Bank'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. PROVISION FOR CREDIT LOSSES The provision for credit losses was $10 million in the first quarter of 1997 compared with no provision a year ago. Asset quality remained strong. However, PNC Bank's loan portfolio is comprised of an increasingly larger proportion of consumer loans, primarily credit cards, which have inherently higher charge-offs. Accordingly, the Corporation anticipates it will continue to record provisions for credit losses throughout 1997. PNC BANK CORP. 11 Financial REVIEW
NONINTEREST INCOME Change Three months ended March 31 - -------------------- dollars in millions 1997 1996 Amount Percent - ---------------------------------------------------------------------- Asset management Asset management and trust $107 $93 $14 15.1% Mutual fund servicing 33 28 5 17.9 ----------------------- Total asset management 140 121 19 15.7 Service fees Deposit 81 65 16 24.6 Credit card and merchant services 19 9 10 111.1 Corporate finance and capital markets 17 13 4 30.8 Consumer services 17 13 4 30.8 Brokerage 13 14 (1) (7.1) Insurance 9 7 2 28.6 Other 11 9 2 22.2 ----------------------- Total service fees 167 130 37 28.5 Mortgage banking Servicing 28 29 (1) (3.4) Marketing 3 7 (4) (57.1) Sale of servicing 1 1 NM ----------------------- Total mortgage banking 32 36 (4) (11.1) Other 70 32 38 118.8 ----------------------- Total noninterest income before net securities 409 319 90 28.2 gains Net securities gains 16 3 13 NM ----------------------- Total $425 $322 $103 32.0% ======================================================================
NM - not meaningful Noninterest income before net securities transactions totaled $409 million in the first three months of 1997, an increase of 28.2% compared with the prior year. The increases in asset management and service fees reflect continuing emphasis on expanding fee-based revenue. Asset management benefited from new business and market appreciation. Service fees exhibited strong growth in nearly all categories. Deposit fees increased $16 million due to a revised fee structure and higher treasury management revenue. The $10 million increase in credit card and merchant services fees reflects increases in the credit card portfolio and the July 1996 termination of a third party alliance. Mortgage banking revenue declined primarily due to lower origination volumes as mortgage originations declined from $1.4 billion in the first quarter of 1996 to $1.1 billion in the first quarter of 1997. Other noninterest income increased in the comparison primarily due to $23 million of asset securitization income.
NONINTEREST EXPENSE Change Three months ended March 31 - -------------------- dollars in millions 1997 1996 Amount Percent - ---------------------------------------------------------------------- Staff expense Compensation $245 $228 $17 7.5% Employee benefits 58 51 7 13.7 ------------------------- Total staff expense 303 279 24 8.6 Net occupancy 47 51 (4) (7.8) Equipment 42 43 (1) (2.3) Goodwill amortization 13 12 1 8.3 Other amortization 17 11 6 54.5 Taxes other than income 15 15 Distributions on mandatorily redeemable capital securities of subsidiary trust 7 7 NM Other 192 155 37 23.9 ------------------------- Total $636 $566 $70 12.4% ======================================================================
NM - not meaningful Noninterest expense increased $70 million to $636 million in the first quarter of 1997 primarily due to $45 million of marketing, servicing and other costs associated with AAA-related businesses. The remaining increase was due to higher incentive compensation commensurate with revenue growth, a special employee appreciation award and the cost of capital securities issued in the fourth quarter of 1996. Average full-time equivalent employees were 24,545 for the first three months of 1997, a decline of 625 in the comparison primarily reflecting the integration of Midlantic. The efficiency ratio was 59.9% for the first quarter of 1997. BALANCE SHEET REVIEW
AVERAGE BALANCE SHEET HIGHLIGHTS Change Three months ended March 31 - -------------------- dollars in millions 1997 1996 Amount Percent - ------------------------------------------------------------------------- Assets $70,301 $71,733 $(1,432) (2.0)% Earning assets 63,825 65,705 (1,880) (2.9) Loans, net of unearned income 51,922 48,625 3,297 6.8 Securities 10,089 14,818 (4,729) (31.9) Deposits 44,133 45,553 (1,420) (3.1) Borrowed funds 18,594 18,891 (297) (1.6) Shareholders' equity 5,758 5,764 (6) (.1) =========================================================================
Average assets and earning assets were $70.3 billion and $63.8 billion, respectively, for the three months ended March 31, 1997 compared with $71.7 billion and $65.7 billion, respectively, in the year-earlier period. The declines reflect continued reduction of the securities portfolio partially offset by loan growth. Securities to earning assets declined to 15.8% from 22.6% in the prior year. PNC BANK CORP. 12
AVERAGE LOANS Three months ended March 31 - dollars in millions 1997 1996 Change - --------------------------------------------------------------------- Consumer Credit card $3,043 $986 $2,057 Other consumer 11,827 12,384 (557) ------------------------------- Total consumer 14,870 13,370 1,500 Residential mortgage 12,781 11,619 1,162 Commercial 17,916 16,806 1,110 Commercial real estate 4,591 4,885 (294) Other 1,764 1,945 (181) ------------------------------- Total, net of unearned income $51,922 $48,625 $3,297 =====================================================================
Average loans increased $3.3 billion or 6.8% to $51.9 billion for the three months ended March 31, 1997 and represented 81.4% of earning assets compared with 74.0% in the year-earlier period. Average credit card loans increased $2.1 billion reflecting the purchase of AAA-affinity portfolios and expanded marketing. Other consumer loans declined $557 million or 4.5% primarily due to reduced indirect lending exposure. Excluding purchased credit card portfolios, loans grew at an annual rate of 3.8%. Average deposits declined $1.4 billion to $44.1 billion in the first three months of 1997 compared with a year ago. The decline primarily reflects the migration of consumer deposits as customers sought higher-yielding investment alternatives. The ratio of deposits to total sources of funds was 62.8% for the first quarter of 1997 compared with 63.5% a year ago. Wholesale funding represented 27.9% of total sources of funds compared with 28.4% a year ago.
PERIOD-END BALANCE SHEET HIGHLIGHTS March 31 December 31 Dollars in millions 1997 1996 Change - ------------------------------------------------------------------ Assets $71,166 $73,260 $(2,094) Loans, net of unearned income 52,575 51,798 777 Securities 9,593 11,917 (2,324) Deposits 44,902 45,676 (774) Borrowed funds 18,547 19,604 (1,057) Shareholders' equity 5,478 5,869 (391) ==================================================================
The decline in total assets and securities reflects the continued reduction in the securities portfolio and related wholesale funding. Shareholders' equity declined $391 million primarily reflecting the impact of share repurchases. LOANS Loans outstanding increased $777 million from year-end 1996 to $52.6 billion at March 31, 1997. Loan portfolio composition remained relatively consistent in the comparison and continues to be geographically diversified among numerous industries and types of businesses. The credit card portfolio increased 20% primarily reflecting marketing initiatives in the Corporation's geographic footprint and to AAA customers. The decline in student loans primarily reflects the securitization of $537 million of those loans. LOANS
March 31 December 31 In millions 1997 1996 - ---------------------------------------------------------------- Consumer Home equity $4,601 $4,569 Automobile 3,566 3,731 Credit card 3,345 2,776 Student 1,303 1,725 Other 1,886 2,067 ---------------------- Total consumer 14,701 14,868 Residential mortgage 13,056 12,703 Commercial Manufacturing 3,903 3,718 Retail/Wholesale 3,397 3,243 Service providers 2,441 2,359 Real estate related 1,529 1,452 Communications 1,210 1,239 Financial services 598 708 Health care 1,251 1,207 Other 4,188 4,136 ---------------------- Total commercial 18,517 18,062 Commercial real estate Mortgage 2,397 2,467 Medium-term financing 1,288 1,312 Construction and development 849 845 ---------------------- Total commercial real estate 4,534 4,624 Lease financing and other 2,154 1,926 Unearned income (387) (385) ---------------------- Total, net of unearned income $52,575 $51,798 ================================================================
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 $4.5 billion and $4.4 billion at March 31, 1997 and December 31, 1996, respectively. Net outstanding letters of credit totaled $4.7 billion and $4.5 billion at March 31, 1997 and December 31, 1996, 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.
NET UNFUNDED COMMITMENTS March 31 December 31 In millions 1997 1996 - ---------------------------------------------------------------- Consumer $23,203 $22,045 Residential mortgage 784 511 Commercial 28,272 27,087 Commercial real estate 847 764 Other 775 849 ---------------------- Total $53,881 $51,256 ================================================================
PNC BANK CORP. 13 Financial REVIEW SECURITIES
March 31, 1997 December 31, 1996 --------------------------------------- Amortized Fair Amortized Fair In millions Cost Value Cost Value - --------------------------------------------------------------- Debt securities U.S. Treasury and government agencies $1,518 $1,497 $3,238 $3,237 Mortgage backed 5,975 5,778 6,301 6,176 Asset backed 1,594 1,589 1,609 1,615 State and municipal 206 213 218 227 Other debt 31 30 100 105 Corporate stocks and other 480 486 554 557 ----------------------------------- Total $9,804 $9,593 $12,020 $11,917 ===============================================================
The securities portfolio declined $2.3 billion from year-end 1996 to $9.6 billion at March 31, 1997. The expected weighted-average life of the securities portfolio was 3 years and 2 months at March 31, 1997 compared with 2 years and 11 months at year-end 1996. 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 the first quarter of 1997, $3.7 billion of securities were sold at a $16 million net gain. At March 31, 1997 and December 31, 1996, $5.2 billion and $5.5 billion, respectively, notional value of financial derivatives were designated to securities available for sale. The net fair values of such financial derivatives, which are reflected in the Securities table, were less than $1 million in both periods. FUNDING SOURCES
March 31 December 31 In millions 1997 1996 - --------------------------------------------------------------- Deposits Demand, savings and money market $26,187 $27,027 Time 17,591 17,803 Foreign 1,124 846 --------------------- Total deposits 44,902 45,676 Borrowed funds Bank notes and senior debt 8,813 8,093 Federal funds purchased 2,937 3,933 Repurchase agreements 531 645 Other borrowed funds 4,915 5,576 Subordinated debt 1,351 1,357 --------------------- Total borrowed funds 18,547 19,604 --------------------- Total $63,449 $65,280 ===============================================================
Deposits decreased 1.7% to $44.9 billion at March 31, 1997 compared with $45.7 billion at year-end 1996. Borrowed funds declined $1.1 billion in the comparison reflecting reduced use of wholesale funding related to the downsized securities portfolio. The change in composition of borrowed funds reflects actions to utilize the most cost-effective alternatives. CAPITAL Tier I and total risk-based capital components and ratios were as follows:
March 31 December 31 Dollars in millions 1997 1996 - --------------------------------------------------------------- Capital components Shareholders' equity Common $5,162 $5,553 Preferred 316 316 Trust preferred securities 350 350 Goodwill and other (988) (1,003) Net unrealized securities losses 137 67 ---------------------- Tier I risk-based capital 4,977 5,283 Subordinated debt 1,319 1,343 Eligible allowance for credit losses 815 801 ---------------------- Total risk-based capital $7,111 $7,427 ====================== Assets Risk-weighted assets and off-balance-sheet instruments $64,946 $63,761 Average tangible assets 69,397 68,597 ====================== Capital ratios Tier I risk-based 7.66% 8.29% Total risk-based 10.95 11.65 Leverage 7.17 7.70 ===============================================================
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 March 31, 1997, the Corporation and each bank subsidiary were classified as well capitalized. The capital position is managed through balance sheet size and composition, issuance of debt and equity instruments, treasury stock activities, dividend policies and retention of earnings. During the first quarter of 1997, PNC Bank repurchased 12.4 million shares of common stock. Subsequent to quarter end, the Corporation's board of directors authorized the repurchase of up to 15 million additional shares of common stock through March 31, 1998. The repurchases may be made in open-market or privately-negotiated transactions. PNC BANK CORP. 14 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 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 and, requiring collateral or selling participations to third parties. NONPERFORMING ASSETS
March 31 December 31 Dollars in millions 1997 1996 - --------------------------------------------------------------- Nonaccrual loans Commercial $135 $156 Commercial real estate Mortgage 113 109 Project 24 25 Consumer 5 6 Residential mortgage 45 51 -------------------- Total nonaccrual loans 322 347 Restructured loans 1 2 -------------------- Total nonperforming loans 323 349 Foreclosed assets Commercial real estate 66 71 Residential mortgage 24 22 Other 16 17 -------------------- Total foreclosed assets 106 110 -------------------- Total nonperforming assets $429 $459 -------------------- Nonperforming loans to loans .61% .67% Nonperforming assets to loans and foreclosed assets .82 .88 Nonperforming assets to assets .60 .63 ================================================================
Nonperforming assets declined $30 million since year-end 1996 primarily due to a $21 million decline in commercial nonaccrual loans. At March 31, 1997, $72 million of nonperforming loans were current as to principal and interest compared with $80 million at December 31, 1996.
CHANGE IN NONPERFORMING ASSETS In millions 1997 1996 - --------------------------------------------------------------- January 1 $459 $536 Transferred from accrual 70 111 Returned to performing (14) (10) Principal reductions (56) (59) Sales (16) (22) Charge-offs and valuation adjustments (14) (16) --------------------- March 31 $429 $540 ===============================================================
ACCRUING LOANS PAST DUE 90 DAYS OR MORE
Amount Percent of Loans ------------------ --------------------- March 31 December 31 March 31 December 31 Dollars in millions 1997 1996 1997 1996 - ----------------------------------------------------------------------- Consumer Guaranteed student $54 $51 4.13% 2.95% Credit cards 48 43 1.43 1.56 Other 37 46 .38 .45 ----------------- Total consumer 139 140 .97 .96 Residential mortgage 62 58 .48 .46 Commercial 32 34 .17 .19 Commercial real estate 18 12 .39 .26 ----------------- Total $251 $244 .48 .47 =======================================================================
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 1997 1996 - --------------------------------------------------------------- January 1 $1,166 $1,259 Charge-offs (89) (55) Recoveries 29 21 --------------------- Net charge-offs (60) (34) Provision for credit losses 10 Acquisitions 3 --------------------- March 31 $1,119 $1,225 ===============================================================
The allowance as a percent of nonperforming loans and period-end loans was 346% and 2.13%, respectively, at March 31, 1997. The comparable year-end 1996 amounts were 334% and 2.25%, respectively. PNC BANK CORP. 15 Financial REVIEW
CHARGE-OFFS AND RECOVERIES Net Percent of Three months ended Charge- Charge- Average March 31 - dollars in millions offs Recoveries offs Loans - ------------------------------------------------------------------------------ 1997 Consumer Credit card $46 $7 $39 5.20% Other 30 9 21 .72 ------------------------------- Total consumer 76 16 60 1.64 Residential mortgage 2 1 1 .03 Commercial 10 9 1 .02 Commercial real estate 1 3 (2) (.18) ------------------------------- Total $89 $29 $60 .47 - ------------------------------------------------------------------------------ 1996 Consumer Credit card $13 $1 $12 4.90% Other 26 8 18 .58 ------------------------------- Total consumer 39 9 30 .90 Residential mortgage 2 1 1 .03 Commercial 10 9 1 .02 Commercial real estate 4 2 2 .16 ------------------------------- Total $55 $21 $34 .28 ==============================================================================
Consumer net charge-offs increased $30 million in the comparison primarily due to charge-offs associated with purchased credit card portfolios. 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 such obligations. Liquidity risk 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, among other factors, on market conditions, capital considerations, credit ratings and investor demand. Liquid assets consist of cash and due from banks, short-term investments, loans held for sale and securities available for sale. At March 31, 1997, such assets totaled $14.8 billion, with $5.6 billion pledged as collateral for borrowing, trust and other commitments. 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 March 31, 1997, approximately $5.0 billion of residential mortgages were available as collateral for borrowings from the FHLB. During the first three months of 1997, cash and due from banks decreased $920 million to $3.1 billion compared with a decrease of $428 million during the year-earlier period. Net cash provided by operating activities increased $305 million in the comparison. Cash provided by investing activities increased to $1.4 billion primarily due to sales of securities. Net cash used by financing activities totaled $2.4 billion in the first three months of 1997 compared with $1.5 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 $146 million at March 31, 1997. Dividends may also be impacted by capital needs, regulatory requirements, corporate policies, contractual restrictions 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. At March 31, 1997 unused capacity under effective shelf registration statements consisted of $140 million of debt and $350 million that may be issued as either debt or preferred stock. 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. PNC BANK CORP. 16 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 results 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. 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 March 31, 1997. 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 March 31, 1997, the cumulative liability sensitivity of the one-year gap position was 3.0%. PNC BANK CORP. 17 Financial REVIEW 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 the first three months of 1997. Weighted-average maturity is based on contractual terms.
FINANCIAL DERIVATIVES ACTIVITY Weighted- Average 1997 - dollars in millions January 1 Additions Maturities Terminations March 31 Maturity - --------------------------------------------------------------------------------------------------------------------------- Interest rate risk management Interest rate swaps Receive fixed $6,947 $980 $(15) $7,912 1 yr. 4 mo. Receive-fixed index amortizing 56 (20) 36 1 yr. 7 mo. Pay fixed 602 (17) 585 2 yr. 9 mo. Basis swaps 335 130 465 1 yr. 7 mo. Interest rate caps 5,813 175 (326) 5,662 10 mo. Interest rate floors 2,500 39 2,539 1 yr. 9 mo. --------------------------------------------------------------- Total interest rate risk management 16,253 1,324 (378) 17,199 Mortgage banking activities Forward contracts Commitments to purchase loans 395 1,279 (1,017) 657 2 mo. Commitments to sell loans 894 1,079 (1,146) 827 2 mo. Interest rate floors - MSR 1,050 350 $(250) 1,150 4 yr. 9 mo. --------------------------------------------------------------- Total mortgage banking activities 2,339 2,708 (2,163) (250) 2,634 --------------------------------------------------------------- Total $18,592 $4,032 $(2,541) $(250) $19,833 ===========================================================================================================================
During the first quarter of 1997, the financial derivatives used in interest rate risk management increased net interest income by $3 million compared with a decrease of $7 million in the year-earlier period. At March 31, 1997, $14 million of net deferred losses on terminated derivative contracts are being amortized over a weighted-average remaining period of 13 months. PNC BANK CORP. 18 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 those expected to be in effect based on the implied forward yield curve.
FINANCIAL DERIVATIVES Forward Yield Curve Notional Estimated --------------------- March 31, 1997 - dollars in millions Value Fair Value Paid Received - ------------------------------------------------------------------------------------------------------- Interest rate risk management Asset rate conversion Interest rate swaps (1) Receive fixed designated to loans $6,295 $(2) 6.42% 5.93% Pay fixed designated to loans 535 (3) 7.07 6.78 Interest rate caps designated to (2) Securities 5,200 NM NM Loans 462 6 NM NM Interest rate floors designated to loans (3) 2,539 1 NM NM -------------------- Total asset rate conversion 15,031 2 Liability rate conversion Interest rate swaps (1) Receive fixed designated to interest-bearing liabilities 1,653 9 6.20 6.05 Pay fixed designated to borrowed funds 50 (1) 5.63 6.08 Basis swaps designated to borrowed funds 465 3 6.29 6.24 -------------------- Total liability rate conversion 2,168 11 -------------------- Total interest rate risk management 17,199 13 Mortgage banking activities Forward contracts Commitments to purchase loans 657 (1) NM NM Commitments to sell loans 827 5 NM NM Interest rate floors - MSR (3) 1,150 6 NM NM -------------------- Total mortgage banking activities 2,634 10 -------------------- Total financial derivatives $19,833 $23 =======================================================================================================
(1) The floating rate portion of interest rate contracts is based on money-market indices. As a percent of notional value, 46% were based on 3-month LIBOR, 50% on 1-month LIBOR and the remainder on other short-term indices. (2) Interest rate caps with notional values of $5.6 billion and $68 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 6.31%, respectively. At March 31, 1997, 3-month LIBOR was 5.77% and 1-month LIBOR was 5.69%. (3) Interest rate floors with notional values of $2.5 billion and $1.2 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 5.96% over 10-year CMT. At March 31, 1997, 3-month LIBOR was 5.77% and 10-year CMT was 6.92%. NM - not meaningful CUSTOMER-RELATED DERIVATIVES PNC Bank also enters into financial derivative transactions to facilitate customer needs primarily consisting of interest rate swaps, caps, floors and foreign exchange contracts. The Corporation manages the risk exposure from customer positions through transactions with other dealers. These positions with third parties are recorded at their estimated fair values and adjustments to such amounts are included in the results of operations. The following schedule sets forth information relating to positions associated with customer derivatives.
Positive Negative Notional Net Asset Fair Fair March 31, 1997 - in millions Value (Liability) Value Value - ----------------------------------------------------------------------- Interest rate Swaps $2,946 $2 $17 $(15) Caps/floors Sold 1,137 (6) (6) Purchased 1,085 5 5 Foreign exchange 1,134 13 (13) Other 354 -------------------------------------- Total $6,656 $1 $35 $(34) =======================================================================
PNC BANK CORP. 19 Consolidated STATEMENT OF INCOME
Three months ended March 31 - in thousands, except per share data 1997 1996 - ------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans and fees on loans $1,055,908 $980,836 Securities 156,205 237,442 Other 30,043 37,060 ---------------------- Total interest income 1,242,156 1,255,338 INTEREST EXPENSE Deposits 346,155 370,983 Borrowed funds 266,076 277,498 ---------------------- Total interest expense 612,231 648,481 ---------------------- Net interest income 629,925 606,857 Provision for credit losses 10,000 ---------------------- Net interest income less provision for credit losses 619,925 606,857 NONINTEREST INCOME Asset management 139,572 120,877 Service fees 167,421 130,269 Mortgage banking 32,045 35,982 Net securities gains 16,426 2,943 Other 69,652 31,491 ---------------------- Total noninterest income 425,116 321,562 NONINTEREST EXPENSE Staff expense 302,701 278,657 Net occupancy and equipment 89,284 93,283 Amortization 29,831 23,664 Other 207,432 170,042 Distributions on mandatorily redeemable capital securities of subsidiary trust 6,956 ---------------------- Total noninterest expense 636,204 565,646 ---------------------- Income before income taxes 408,837 362,773 Applicable income taxes 142,528 124,453 ---------------------- Net income $266,309 $238,320 ---------------------- EARNINGS PER COMMON SHARE Primary $.81 $.69 Fully diluted .80 .69 CASH DIVIDENDS DECLARED PER COMMON SHARE .37 .35 AVERAGE COMMON SHARES OUTSTANDING Primary 323,972 342,872 Fully diluted 327,917 347,367 =============================================================================================================
See accompanying Notes to Consolidated Financial Statements. PNC BANK CORP. 20 Consolidated BALANCE SHEET
March 31 December 31 Dollars in millions, except share data 1997 1996 - ---------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $3,096 $4,016 Short-term investments 702 774 Loans held for sale 1,375 941 Securities available for sale 9,593 11,917 Loans, net of unearned income of $387 and $385 52,575 51,798 Allowance for credit losses (1,119) (1,166) ---------------------- Net loans 51,456 50,632 Other 4,944 4,980 ---------------------- Total assets $71,166 $73,260 ---------------------- LIABILITIES Deposits Noninterest-bearing $9,971 $10,937 Interest-bearing 34,931 34,739 ---------------------- Total deposits 44,902 45,676 Borrowed funds Bank notes and senior debt 8,813 8,093 Federal funds purchased 2,937 3,933 Repurchase agreements 531 645 Other borrowed funds 4,915 5,576 Subordinated debt 1,351 1,357 ---------------------- Total borrowed funds 18,547 19,604 Other 1,889 1,761 ---------------------- Total liabilities 65,338 67,041 Mandatorily redeemable capital securities of subsidiary trust 350 350 SHAREHOLDERS' EQUITY Preferred stock 7 7 Common stock - $5 par value Authorized: 450,000,000 shares Issued: 347,037,481 and 345,154,238 shares 1,735 1,726 Capital surplus 984 939 Retained earnings 4,218 4,075 Deferred benefit expense (60) (60) Net unrealized securities losses (137) (67) Common stock held in treasury at cost: 33,162,947 and 21,036,195 shares (1,269) (751) ---------------------- Total shareholders' equity 5,478 5,869 ---------------------- Total liabilities and shareholders' equity $71,166 $73,260 ==========================================================================================================
See accompanying Notes to Consolidated Financial Statements. PNC BANK CORP. 21 Consolidated STATEMENT OF CASH FLOWS
Three months ended March 31 - in millions 1997 1996 - ------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income $266 $238 Adjustments to reconcile net income to net cash provided (used) by operating activities Provision for credit losses 10 Depreciation, amortization and accretion 73 61 Deferred income taxes 52 37 Net securities gains (16) (3) Net gain on sales of assets (48) (14) Valuation adjustments (3) (1) Changes in Loans held for sale (434) (316) Other 173 (234) --------------------- Net cash provided (used) by operating activities 73 (232) INVESTING ACTIVITIES Net change in loans (1,450) (334) Repayment of securities available for sale 650 1,081 Sales Securities available for sale 3,691 1,496 Loans 692 7 Foreclosed assets 21 24 Purchases Securities available for sale (2,112) (1,601) Loans (105) (286) Net cash received in acquisitions 460 Other 28 438 --------------------- Net cash provided by investing activities 1,415 1,285 FINANCING ACTIVITIES Net change in Noninterest-bearing deposits (966) (817) Interest-bearing deposits 197 (952) Federal funds purchased (996) (255) Sale/issuance Repurchase agreements 17,541 17,601 Bank notes and senior debt 2,480 2,607 Other borrowed funds 24,823 20,878 Common stock 52 20 Repayment/maturity Repurchase agreements (17,655) (17,699) Bank notes and senior debt (1,760) (982) Other borrowed funds (25,483) (21,757) Acquisition of treasury stock (516) (5) Cash dividends paid (125) (120) --------------------- Net cash used by financing activities (2,408) (1,481) --------------------- INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (920) (428) Cash and due from banks at beginning of year 4,016 3,679 --------------------- Cash and due from banks at end of period $3,096 $3,251 ================================================================================================================== CASH ITEMS Interest paid $629 $690 Income taxes paid (refunded) 2 (81) NONCASH ITEMS Transfers from loans to foreclosed assets 17 12 ==================================================================================================================
See accompanying Notes to Consolidated Financial Statements. PNC BANK CORP. 22 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. ACCOUNTING POLICIES BASIS OF FINANCIAL STATEMENT PRESENTATION The unaudited consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles and include the accounts of PNC Bank Corp. and its subsidiaries ("Corporation" or "PNC Bank"), substantially all of which are wholly owned. In the opinion of management, the financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the interim periods presented. Certain prior period amounts have been reclassified to conform to reporting classifications utilized for the current reporting period. These reclassifications did not impact the Corporation's financial condition or results of operations. In preparing the unaudited consolidated interim financial statements, management is required to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results will differ from such estimates and such differences may be material to the financial statements. The notes included herein should be read in conjunction with the audited consolidated financial statements included in PNC Bank's 1996 Annual Report. 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 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. 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. PNC Bank also enters into financial derivative transactions to facilitate customer needs primarily consisting of interest rate swaps, caps, floors and foreign exchange contracts. The Corporation manages the risk exposure from customer positions through transactions with other dealers. These positions with third parties are recorded at their estimated fair values and adjustments to such amounts are included in the results of operations. EARNINGS PER COMMON SHARE Primary earnings per common share is calculated by dividing net income adjusted for preferred stock dividends declared by the sum of the weighted average number of shares of common stock outstanding and the number of shares of common stock which would be issued assuming the exercise of stock options during each period. Fully diluted earnings per common share is based on net income adjusted for interest expense, net of tax, on outstanding convertible debentures and dividends declared on nonconvertible preferred stock. The weighted average number of shares of common stock outstanding is increased by the assumed conversion of outstanding convertible preferred stock and convertible debentures from the beginning of the year 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. PNC BANK CORP. 23 Notes to CONSOLIDATED FINANCIAL STATEMENTS RECENT ACCOUNTING PRONOUNCEMENT In February 1997, SFAS No. 128, "Earnings per Share," was issued, effective for periods ending after December 15, 1997, with retroactive restatement required for all periods presented. SFAS No. 128 specifies revised computation, presentation and disclosure requirements for earnings per share. Under the provisions of SFAS No. 128, primary and fully diluted earnings per share will be replaced with basic and diluted amounts. This standard would not have impacted reported earnings per share amounts for the first quarter of 1997 and management does not expect it to have a material impact on the Corporation's historical earnings per share amounts. CASH FLOWS For the statement of cash flows, PNC Bank defines cash and cash equivalents as cash and due from banks. During the first quarter of 1996, acquisition activity which affected cash flows consisted of $538 million in assets, $501 million in liabilities, cash payments totaling $37 million and receipt of $497 million in cash and due from banks. The Corporation did not have any acquisition activity in the first quarter of 1997. SECURITIES
March 31, 1997 December 31, 1996 ----------------------------------------------------------------------------------------- Unrealized Unrealized Amortized --------------- Fair Amortized ---------------- Fair In millions Cost Gains Losses Value Cost Gains Losses Value - -------------------------------------------------------------------------------------------------------------------------------- Securities available for sale Debt securities U.S. Treasury, government agencies and corporations $1,518 $4 $25 $1,497 $3,238 $20 $21 $3,237 Mortgage backed 5,975 11 208 5,778 6,301 13 138 6,176 Asset backed 1,594 2 7 1,589 1,609 7 1 1,615 State and municipal 206 7 213 218 9 227 Other debt 31 1 30 100 7 2 105 ---------------------------------------------------------------------------------------- Total debt securities 9,324 24 241 9,107 11,466 56 162 11,360 Corporate stocks and other 480 6 486 554 3 557 ---------------------------------------------------------------------------------------- Total securities available for sale $9,804 $30 $241 $9,593 $12,020 $59 $162 $11,917 ================================================================================================================================
The preceding table sets forth the amortized cost and fair value of the Corporation's securities portfolio, all of which is available for sale. At March 31, 1997 and December 31, 1996, $5.2 billion and $5.5 billion, respectively, notional value of financial derivatives were associated with securities available for sale. The carrying value of securities pledged to secure public and trust deposits, repurchase agreements and for other purposes at March 31, 1997 was $5.6 billion. LOANS At March 31, 1997, $2.4 billion of loans were pledged to secure borrowings and for other purposes. NONPERFORMING ASSETS Nonperforming assets were as follows:
March 31 December 31 In millions 1997 1996 - --------------------------------------------------------------- Nonaccrual loans $322 $347 Restructured loans 1 2 ------------------- Total nonperforming loans 323 349 Foreclosed assets 106 110 ------------------- Total nonperforming assets $429 $459 ===============================================================
PNC BANK CORP. 24 ALLOWANCE FOR CREDIT LOSSES Changes in the allowance for credit losses were as follows:
In millions 1997 1996 - --------------------------------------------------------------- January 1 $1,166 $1,259 Charge-offs (89) (55) Recoveries 29 21 -------------------- Net charge-offs (60) (34) Provision for credit losses 10 Acquisitions 3 -------------------- March 31 $1,119 $1,225 ===============================================================
FINANCIAL DERIVATIVES The notional and fair values of financial derivatives used for interest rate risk management and for mortgage banking activities were as follows:
Positive Negative Notional Fair Notional Fair In millions Value Value Value Value - --------------------------------------------------------------- MARCH 31, 1997 Interest rate swaps $4,738 $45 $4,260 $(39) Interest rate caps 5,662 6 Interest rate floors 2,500 1 39 Mortgage banking activities 1,977 11 657 (1) ------------------------------------------ Total $14,877 $63 $4,956 $(40) =============================================================== DECEMBER 31, 1996 Interest rate swaps $7,290 $112 $650 $(15) Interest rate caps 5,813 2 Interest rate floors 2,500 3 Mortgage banking activities 1,853 10 486 (1) ------------------------------------------ Total $17,456 $127 $1,136 $(16) ===============================================================
The notional and fair values of customer-related derivatives were as follows:
Positive Negative March 31, 1997 - Notional Net Asset Fair Fair in millions Value (Liability) Value Value - ----------------------------------------------------------------- Interest rate Swaps $2,946 $2 $17 $(15) Caps/floors 2,222 (1) 5 (6) Foreign exchange 1,134 13 (13) Other 354 ---------------------------------------- Total $6,656 $1 $35 $(34) =================================================================
OTHER FINANCIAL INFORMATION In connection with the Midlantic merger, subordinated notes and senior debt of Midlantic with a remaining aggregate principal amount of $356 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
March 31 December 31 In millions 1997 1996 - --------------------------------------------------------------- ASSETS Cash and due from banks $3,100 $4,022 Securities 9,207 11,210 Loans, net of unearned income 52,559 51,736 Allowance for credit losses (1,119) (1,166) ------------------------ Net loans 51,440 50,570 Other assets 6,207 5,988 ------------------------ Total assets $69,954 $71,790 ------------------------ LIABILITIES Deposits $45,079 $46,290 Borrowed funds 17,476 18,077 Other liabilities 1,073 1,014 ------------------------ Total liabilities 63,628 65,381 Mandatorily redeemable capital securities of subsidiary trust 350 350 SHAREHOLDER'S EQUITY 5,976 6,059 ------------------------ Total liabilities and shareholder's equity $69,954 $71,790 ===============================================================
PNC BANCORP, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME
Three months ended March 31 - in millions 1997 1996 - --------------------------------------------------------------- Interest income $1,233 $1,248 Interest expense 592 625 --------------------- Net interest income 641 623 Provision for credit losses 10 --------------------- Net interest income less provision for credit losses 631 623 Noninterest income 392 296 Noninterest expense 614 549 --------------------- Income before income taxes 409 370 Applicable income taxes 145 129 --------------------- Net income $264 $241 ===============================================================
The amount of dividends that may be paid by bank subsidiaries to PNC Bancorp, Inc., a first-tier holding company, and in turn to the parent company, are subject to certain legal limitations. Without regulatory approval, the amount available for payment of dividends by all subsidiary banks to PNC Bancorp, Inc. was $146 million at March 31, 1997. Dividends may also be impacted by capital needs, regulatory requirements, corporate policies, contractual restrictions and other factors. PNC BANK CORP. 25 Statistical INFORMATION AVERAGE CONSOLIDATED BALANCE SHEET AND NET INTEREST ANALYSIS
------------------------------------------------------------------------------- First Quarter 1997 Fourth Quarter 1996 Average balance in millions, ------------------------------------------------------------------------------- interest in thousands Average Average Average Average Taxable-equivalent basis Balances Interest Yields/Rates Balances Interest Yields/Rates - --------------------------------------------------------------------------------------------------------------------------- ASSETS Interest-earning assets Loans held for sale $1,019 $17,970 7.05% $1,011 $18,750 7.42% Securities U.S. Treasury, government agencies and corporations 6,982 105,363 6.05 8,585 131,471 6.12 Other debt 2,530 41,841 6.62 2,419 40,660 6.71 Other 577 10,666 7.45 565 10,882 7.68 -------------------------- ------------------------- Total securities 10,089 157,870 6.27 11,569 183,013 6.32 Loans, net of unearned income Consumer Credit card 3,043 100,593 13.22 1,683 60,086 14.28 Other consumer 11,827 245,169 8.41 12,084 257,481 8.48 -------------------------- ------------------------- Total consumer 14,870 345,762 9.39 13,767 317,567 9.19 Residential mortgage 12,781 238,072 7.45 12,361 229,300 7.42 Commercial 17,916 349,666 7.81 17,584 343,609 7.65 Commercial real estate 4,591 98,671 8.60 4,630 100,485 8.59 Other 1,764 29,364 6.67 1,631 27,021 6.62 -------------------------- ------------------------- Total loans, net of unearned income 51,922 1,061,535 8.20 49,973 1,017,982 8.07 Other interest-earning assets 795 12,139 6.20 769 11,783 6.09 -------------------------- ------------------------- Total interest-earning assets/interest income 63,825 1,249,514 7.86 63,322 1,231,528 7.71 Noninterest-earning assets Allowance for credit losses (1,148) (1,141) Cash and due from banks 2,935 3,145 Other assets 4,689 4,210 ------------ ------------ Total assets $70,301 $69,536 ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities Interest-bearing deposits Demand and money market $12,962 87,409 2.74 $12,716 85,324 2.67 Savings 3,063 14,804 1.96 3,214 15,803 1.96 Other time 17,721 233,547 5.34 17,998 241,714 5.35 Deposits in foreign offices 787 10,395 5.28 901 12,144 5.27 -------------------------- ------------------------- Total interest-bearing deposits 34,533 346,155 4.06 34,829 354,985 4.05 -------------------------- Borrowed funds Bank notes and senior debt 8,566 117,172 5.47 8,020 110,996 5.54 Federal funds purchased 3,068 40,908 5.38 2,614 35,978 5.48 Repurchase agreements 735 9,756 5.31 786 10,917 5.44 Other borrowed funds 4,874 71,272 5.86 4,334 65,926 6.05 Subordinated debt 1,351 26,968 7.98 1,356 27,089 7.99 -------------------------- ------------------------- Total borrowed funds 18,594 266,076 5.76 17,110 250,906 5.79 -------------------------- ------------------------- Total interest-bearing liabilities/interest expense 53,127 612,231 4.66 51,939 605,891 4.62 -------------------------- ------------------------- Noninterest-bearing liabilities, capital securities and shareholders' equity Demand and other noninterest-bearing deposits 9,600 10,003 Accrued expenses and other liabilities 1,466 1,501 Mandatorily redeemable capital securities of subsidiary trust 350 76 Shareholders' equity 5,758 6,017 ------------ ------------ Total liabilities and shareholders' equity $70,301 $69,536 ------------------------------------------------------------------------------- Interest rate spread 3.20 3.09 Impact of noninterest-bearing liabilities .78 .83 -------------------------- -------------------------- Net interest income/margin $637,283 3.98% $625,637 3.92% ===========================================================================================================================
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). PNC BANK CORP. 26
- -------------------------------------------------------------------------------------------------------------------------- Third Quarter 1996 Second Quarter 1996 First Quarter 1996 - -------------------------------------------------------------------------------------------------------------------------- Average Average Average Average Average Average Balances Interest Yields/Rates Balances Interest YIelds/Rates Balances Interest Yields/Rates - -------------------------------------------------------------------------------------------------------------------------- $918 $17,442 7.60% $1,260 $21,725 6.90% $1,150 $19,728 6.86% 10,302 161,077 6.24 11,206 172,885 6.18 10,822 169,403 6.27 2,249 37,681 6.67 2,906 48,960 6.71 3,311 57,169 6.87 546 10,768 7.87 628 12,773 8.15 685 13,480 7.89 - -------------------------- -------------------------- --------------------------- 13,097 209,526 6.39 14,740 234,618 6.37 14,818 240,052 6.48 1,007 35,408 14.06 979 33,845 13.83 986 33,049 13.41 12,047 255,048 8.42 12,264 255,227 8.37 12,384 260,575 8.46 - -------------------------- -------------------------- --------------------------- 13,054 290,456 8.85 13,243 289,072 8.78 13,370 293,624 8.83 12,325 231,271 7.51 11,883 219,395 7.40 11,619 218,118 7.51 17,049 332,167 7.62 17,190 331,768 7.64 16,806 330,938 7.79 4,712 105,338 8.85 4,831 104,582 8.62 4,885 112,409 9.16 1,573 26,003 6.60 2,044 33,711 6.48 1,945 32,325 6.66 - -------------------------- -------------------------- --------------------------- 48,713 985,235 8.01 49,191 978,528 7.94 48,625 987,414 8.10 817 12,435 6.06 1,165 17,417 6.01 1,112 17,395 6.29 - -------------------------- -------------------------- --------------------------- 63,545 1,224,638 7.64 66,356 1,252,288 7.53 65,705 1,264,589 7.69 (1,179) (1,216) (1,253) 3,216 3,196 3,095 3,964 4,104 4,186 - ------------- ------------ ------------ $69,546 $72,440 $71,733 - ------------- ------------ ------------ $12,520 81,321 2.58 $12,635 80,422 2.56 $12,625 $84,919 2.71 3,407 16,931 1.98 3,582 17,796 2.00 3,579 19,125 2.15 18,172 243,340 5.33 18,407 243,554 5.32 18,638 252,534 5.45 695 9,320 5.25 759 10,119 5.27 1,030 14,405 5.53 - -------------------------- -------------------------- --------------------------- 34,794 350,912 4.01 35,383 351,891 4.00 35,872 370,983 4.16 8,829 123,006 5.57 8,298 114,483 5.52 7,198 105,269 5.85 2,239 30,325 5.39 3,550 46,423 5.26 4,242 58,006 5.50 1,551 21,461 5.41 3,063 40,465 5.23 2,739 36,959 5.34 3,582 54,895 6.10 3,451 51,980 6.06 3,352 50,153 6.02 1,357 27,101 7.99 1,358 27,120 7.99 1,360 27,111 7.99 - -------------------------- -------------------------- --------------------------- 17,558 256,788 5.83 19,720 280,471 5.69 18,891 277,498 5.88 - -------------------------- -------------------------- --------------------------- 52,352 607,700 4.60 55,103 632,362 4.59 54,763 648,481 4.75 - -------------------------- -------------------------- --------------------------- 9,922 9,996 9,681 1,506 1,574 1,525 5,766 5,767 5,764 - ------------- ------------ ------------ $69,546 $72,440 $71,733 - -------------------------------------------------------------------------------------------------------------------------- 3.04 2.94 2.94 .81 .78 .79 --------------------------- -------------------------- --------------------------- $616,938 3.85% $619,926 3.72% $616,108 3.73% - --------------------------------------------------------------------------------------------------------------------------
PNC BANK CORP. 27 Quarterly Report on FORM 10-Q Securities and Exchange Commission Washington, D.C. 20549 Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 1997. Commission File Number 1-9718 PNC BANK CORP. Incorporated in the Commonwealth of Pennsylvania IRS Employer Identification No. 25-1435979 Address: One PNC Plaza 249 Fifth Avenue Pittsburgh, Pennsylvania 15222-2707 Telephone: (412) 762-1553 As of April 30, 1997, PNC Bank Corp. had 314,026,018 shares of common stock ($5 par value) outstanding. PNC Bank Corp. (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. The following sections of the Financial Review set forth in the cross-reference index are incorporated in the Quarterly Report on Form 10-Q.
Cross-Reference Page(s) ----------------------------------------------------- PART I FINANCIAL INFORMATION Item 1 Consolidated Statement of Income for the three months ended March 31, 1997 and 1996 20 Consolidated Balance Sheet as of March 31, 1997 and December 31, 1996 21 Consolidated Statement of Cash Flows for the three months ended March 31, 1997 and 1996 22 Notes to Consolidated Financial Statements 23-25 Average Consolidated Balance Sheet and Net Interest Analysis 26-27 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 2-19 - ---------------------------------------------------------------
PART II OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K The following exhibit index lists Exhibits to this Quarterly Report on Form 10-Q: 10 PNC Bank Corp. 1997 Long-Term Incentive Award Plan incorporated by reference to Exhibit 4.3 to Post-Effective Amendment No. 1 to Registration Statement on Form S-8 (No. 33-54960) * 11 Calculation of Primary and Fully Diluted Earnings Per Common Share 12.1 Computation of Ratio of Earnings to Fixed Charges 12.2 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 27 Financial Data Schedule - -------------------------------------------------------- * Denotes management contract or compensatory plan. Copies of these Exhibits will be furnished without charge upon written request to Glenn Davies, Vice President, Financial Reporting, at corporate headquarters. Requests may also be directed to (412) 762-1553 or to gdavies@usaor.net on the Internet. Since December 31, 1996, the Corporation filed the following current reports on Form 8-K: Form 8-K dated as of January 15, 1997, reporting the Corporation's consolidated financial results for the three months and year ended December 31, 1996, filed pursuant to Item 5. Form 8-K dated as of April 15, 1997, reporting the Corporation's consolidated financial results for the three months ended March 31, 1997, filed pursuant to Item 5. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on May 15, 1997, on its behalf by the undersigned thereunto duly authorized. PNC Bank Corp. Robert L. Haunschild Senior Vice President and Chief Financial Officer PNC BANK CORP. 28 Corporate INFORMATION CORPORATE HEADQUARTERS PNC Bank Corp. One PNC Plaza 249 Fifth Avenue Pittsburgh, Pennsylvania 15222-2707 WORLD WIDE WEB SITE www.pncbank.com STOCK LISTING PNC Bank Corp. common stock is traded on the New York Stock Exchange ("NYSE") under the symbol PNC. FINANCIAL INFORMATION Copies of the Corporation's filings with the Securities and Exchange Commission, including Exhibits thereto, may be obtained without charge by writing to Glenn Davies, Vice President, Financial Reporting, at corporate headquarters. Requests may also be directed to (412) 762-1553 or to gdavies@usaor.net on the Internet. INQUIRIES Individual shareholders should contact: Shareholder Relations at 800-843-2206. Analysts and institutional investors should contact: William H. Callihan, Vice President, Investor Relations, at 412-762-8257 or invrela@pncmail.com on the Internet. News media representatives and others seeking general information should contact: Jonathan Williams, Vice President, Media Relations, at 412-762-4550 or pubrela@pncmail.com on the Internet. 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 1997 Quarter High Low Close Declared - -------------------------------------------------------------- First $45.000 $36.5000 $40.000 $.37 ============================================================== 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 ------- Total $1.42 ==============================================================
REGISTRAR AND TRANSFER AGENT The Chase Manhattan Bank P.O. Box 590 Ridgefield Park, New Jersey 07660 800-982-7652 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. PNC BANK CORP. 29