PNC BANK CORP.
Quarterly Report on Form 10-Q
For the quarterly period ended June 30, 1997
Page 1 represents a portion of the second 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 30.
FINANCIAL HIGHLIGHTS
Three months ended June 30 Six months ended June 30
----------------------------------------------------------
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------
FINANCIAL PERFORMANCE (in thousands, except per share data)
Revenue
Net interest income (taxable-equivalent basis) $620,581 $619,926 $1,257,864 $1,236,034
Noninterest income 433,407 336,585 858,523 658,147
Total revenue 1,053,988 956,511 2,116,387 1,894,181
Net income 259,075 248,050 525,384 486,370
Per common share
Fully diluted earnings .81 .72 1.61 1.41
Cash dividends declared .37 .35 .74 .70
SELECTED RATIOS
Return on
Average common shareholders' equity 20.21% 17.33% 19.84% 16.99%
Average assets 1.47 1.38 1.50 1.36
Net interest margin 3.84 3.72 3.92 3.72
After-tax profit margin 24.58 25.93 24.82 25.68
Efficiency ratio 60.61 59.00 60.25 59.65
Net charge-offs to average loans .44 .29 .46 .29
June 30 March 31 December 31 June 30
1997 1997 1996 1996
- ---------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (in millions)
Assets $71,973 $71,166 $73,260 $71,961
Earning assets 64,297 64,255 65,439 65,234
Loans, net of unearned income 53,497 52,575 51,798 49,223
Securities 8,396 9,593 11,917 14,107
Deposits 45,216 44,902 45,676 44,852
Borrowed funds 19,066 18,547 19,604 19,325
Shareholders' equity 5,384 5,478 5,869 5,832
Common shareholders' equity 5,068 5,162 5,553 5,815
CAPITAL RATIOS
Leverage 7.35% 7.17% 7.70% 6.96%
Risk-based
Tier I 7.74 7.66 8.29 8.45
Total 10.98 10.95 11.65 11.99
Common shareholders' equity to assets 7.04 7.25 7.58 8.08
ASSET QUALITY RATIOS
Nonperforming assets to loans and foreclosed assets .83 .82 .88 1.03
Allowance for credit losses to loans 2.01 2.13 2.25 2.42
Allowance for credit losses to nonperforming loans 310.34 346.11 334.40 312.19
Book value per common share $16.51 $16.45 $17.13 $17.07
===============================================================================================================
PNC BANK CORP. 1
FINANCIAL REVIEW
This Financial Review should be read in conjunction with 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
Forward-Looking Statements 4
Line of Business Review 5
Consolidated Income Statement Review 10
Balance Sheet Review 13
Risk Management 15
Financial Derivatives 18
Second Quarter 1997 vs. Second Quarter 1996 20
CONSOLIDATED FINANCIAL STATEMENTS 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 24
AVERAGE CONSOLIDATED BALANCE SHEET AND
NET INTEREST ANALYSIS 28
QUARTERLY REPORT ON FORM 10-Q 30
CORPORATE INFORMATION 32
==============================================================
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
markets in Pennsylvania, New Jersey, Delaware, Ohio and Kentucky and nationally
through retail distribution networks and alternative delivery channels.
SUMMARY FINANCIAL RESULTS Net income for the first six months of 1997 was $525
million or $1.61 per fully diluted share compared with $486 million and $1.41
per fully diluted share, respectively, a year ago. Returns on average common
shareholders' equity and average assets were 19.84% and 1.50%, respectively,
compared with 16.99% and 1.36% a year ago.
Total revenue for the first six months of 1997 increased 11.7% compared with the
same period in 1996 primarily due to growth in fee-based revenue. Noninterest
income increased to $859 million for the first six months of 1997 representing a
30.5% increase over the same period in 1996. The increase was broad-based led by
strong growth in asset management, mutual fund servicing, credit card services,
treasury management and capital markets fees. Noninterest income represented 41%
of total revenue compared with 35% in the first half of 1996. Taxable-equivalent
net interest income increased $22 million to $1.3 billion and net interest
margin widened 20 basis points in the comparison to 3.92%. These increases
resulted primarily from a higher-yielding earning asset mix.
Operating expenses increased $145 million to $1.3 billion largely due to $94
million of incremental costs associated with AAA Financial Services and credit
card-related initiatives. The efficiency ratio was 60.3% for the first six
months of 1997 compared with 59.7% a year ago.
Total assets were $72.0 billion at June 30, 1997. Average earning assets
declined $2.0 billion to $64.0 billion, reflecting continued securities
portfolio reduction partially offset by loan growth. Average securities
declined $5.2 billion to $9.6 billion and represented 14.9% of average earning
assets compared with 22.4% a year ago. Average loans increased $3.5 billion to
$52.4 billion primarily due to significant growth in credit cards partially
offset by reduced indirect automobile lending and loan securitizations.
Excluding purchased credit card portfolios and loan securitizations, loans grew
5.0% and represented 81.8% of average earning assets compared with 74.1% a year
ago.
PNC BANK CORP. 2
Asset quality and coverage ratios remained strong. The ratio of nonperforming
assets to loans and foreclosed assets was .83% at June 30, 1997 compared with
.88% at December 31, 1996 and 1.03% a year ago. The allowance for credit losses
was 310% of nonperforming loans and 2.01% of total loans at June 30, 1997.
Annualized net charge-offs for the first six months of 1997 were .46% of
average loans compared with .29% for the first six months of 1996. The increase
was in line with expectations and was primarily due to charge-offs associated
with purchased credit card portfolios.
Shareholders' equity totaled $5.4 billion at June 30, 1997. The leverage ratio
was 7.35% and Tier I and total risk-based capital ratios were 7.74% and 10.98%,
respectively. During the first six months of 1997, capital management
initiatives continued, including the repurchase of 20.5 million shares of common
stock.
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 enhancing shareholder value. The
Corporation continues to transition to a more valuable franchise by reducing
reliance on investment activities and related wholesale funding and increasing
the earnings contribution from the core banking franchise. This transition is
accomplished, in part, by altering the traditional business mix through
investments 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.
CONSUMER BANKING contributed 49% of total line of business earnings in the
first six months of 1997. Changes in consumer preferences and technological
advancements are transforming the way consumer products and services are
delivered. Retail branches are being managed in conjunction with more
technologically-advanced, cost-efficient distribution channels such as
telebanking, automated teller machines ("ATM") and on-line banking through
personal computers. Development of alternative delivery channels allows PNC
Bank to expand the geographic scope of the Corporation's markets without
incurring the infrastructure costs associated with traditional branch banking.
Through AAA Financial Services, the Corporation offers financial products and
services to AAA's 34 million members nationwide. This initiative represents a
unique opportunity to market and deliver consumer products and services largely
through more efficient alternative distribution channels.
CORPORATE BANKING contributed 28% of total line of business earnings in the
first six months of 1997. 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.
PNC BANK CORP. 3
FINANCIAL REVIEW
Corporate Banking is focused on expanding fee-based revenue by developing
products and services as alternatives to spread-based businesses. 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.
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
improving financial returns 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, private debt
placements and interest rate risk management services.
MORTGAGE BANKING remains a highly-fragmented, commodity-based business
requiring an efficient infrastructure and increasingly higher origination and
servicing volumes. To remain competitive and produce appropriate returns, the
Mortgage Banking line of business is focused on reducing costs by leveraging
technology to enhance efficiency and service. Mortgage Banking continues to
increase origination capacity by expanding the retail distribution network.
ASSET MANAGEMENT, with $122 billion in managed assets, is among the largest
asset managers in the country. It is the second largest U.S. bank manager of
mutual funds and the third largest mutual fund service provider. Asset
Management's initiatives focus on expanding marketing and delivery channels for
investment products and leveraging mutual fund servicing capabilities. PFPC
Inc., the Corporation's mutual fund servicing business, specializes in providing
institutional clients 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 $13 billion in
assets, provides institutional and individual investors with a full range of
equity, bond and money market investment options. The funds are offered to PNC
Bank's retail customers and marketed nationally through agreements with over 75
brokerage firms. Barron's/Lipper Analytical Services ranked Compass sixth best
among 63 mutual fund families based on overall performance in 1996.
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 those
identified elsewhere in this Financial Review, the following factors, among
others, could cause actual results to differ materially from forward-looking
statements: continued pricing pressures on loan and deposit products; success
and timing of AAA and other business strategies; the 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
Six months ended June 30 - --------------------------------------------------------------------------------
dollars in millions 1997 1996 1997 1996 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Consumer Banking $38,469 $39,183 $1,288 $1,127 $257 $269 23% 24%
Corporate Banking 17,566 17,361 406 375 146 130 14 13
Real Estate Banking 4,031 4,095 87 79 44 36 15 12
Mortgage Banking 14,680 13,458 203 185 37 25 11 9
Asset Management 653 566 193 161 37 31 36 36
-------------------------------------------------------------
Total line of business 75,399 74,663 2,177 1,927 521 491 18 18
Asset/liability management activities (8,536) (5,952) (27) (28) (32) (24)
Unallocated provision for credit losses 49 26
Other 3,699 3,376 (34) (5) (13) (7)
-------------------------------------------------------------
Total consolidated $70,562 $72,087 $2,116 $1,894 $525 $486 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 business unit
performance. 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 spreads, 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 differ 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. These activities also
include securities transactions and the impact of financial derivatives used for
interest rate risk management. Provisions for credit losses are reflected as
charges or credits to earnings to maintain line of business reserves at required
levels. The difference between these provisions and the consolidated provision
is unallocated.
PNC BANK CORP. 5
FINANCIAL REVIEW
CONSUMER BANKING Community Banking Private Banking Total
Six months ended June 30 - -------------------------------------------------------------------
dollars in millions 1997 1996 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT
Net interest income $813 $796 $54 $37 $867 $833
Noninterest income 281 166 140 128 421 294
-------------------------------------------------------------------
Total revenue 1,094 962 194 165 1,288 1,127
Provision for credit losses 122 44 2 124 44
Noninterest expense 628 532 122 118 750 650
-------------------------------------------------------------------
Pretax earnings 344 386 70 47 414 433
Income taxes 131 146 26 18 157 164
-------------------------------------------------------------------
Earnings $213 $240 $44 $29 $257 $269
-------------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans $17,048 $15,001 $2,401 $2,269 $19,449 $17,270
Assigned assets and other 18,959 21,857 61 56 19,020 21,913
-------------------------------------------------------------------
Total assets $36,007 $36,858 $2,462 $2,325 $38,469 $39,183
-------------------------------------------------------------------
Net deposits $33,727 $34,666 $1,629 $1,494 $35,356 $36,160
Assigned funds and other 261 221 576 571 837 792
Assigned capital 2,019 1,971 257 260 2,276 2,231
-------------------------------------------------------------------
Total funds $36,007 $36,858 $2,462 $2,325 $38,469 $39,183
-------------------------------------------------------------------
PERFORMANCE RATIOS
After-tax profit margin 19% 25% 22% 18% 20% 24%
Efficiency 57 55 63 71 58 58
Return on assigned capital 21 24 34 23 23 24
======================================================================================================================
The Consumer Banking line of business includes: Community Banking which serves
small business customers and 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 line of business management is focused on enhancing
longer-term returns on assigned capital. To accomplish this objective,
management expects to continue to expand more efficient alternative delivery
systems and aggressively pursue the AAA initiative.
Consumer Banking earnings contributed 49% of total line of business earnings in
the first six months of 1997 compared with 55% a year ago. Earnings for the
first half of 1997 decreased $12 million or 4%. These results reflect lower
Community Banking earnings, which declined $27 million or 11% to $213 million,
partially offset by a 52% increase in Private Banking earnings to $44 million
for the first half of 1997 due to an increase in loans and higher annuity and
trust income.
Virtually all of the variances in Community Banking results were due to the
effect of the AAA alliance. The start-up phase of this alliance requires
significant investments to market products and services and acquire portfolios.
In addition, credit card growth is accomplished, in part, by offering product
incentives such as "teaser-rates" which initially adversely impact net interest
income and margin until the teaser-rate period expires and yields earned reset
to market rates. The AAA alliance resulted in a net loss of $28 million for the
first six months of 1997.
With respect to the AAA initiative, provisions for credit losses in connection
with credit card growth as well as increased marketing and operating expenses
are expected to exceed revenue growth during the start-up period. Overall, the
AAA alliance is expected to result in a net loss in 1997 of between $50 million
and $60 million.
PNC BANK CORP. 6
CORPORATE BANKING Commercial Banking Equity Management Total
Six months ended June 30 - -----------------------------------------------------------------------------
dollars in millions 1997 1996 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------
INCOME STATEMENT
Net interest income $275 $255 $(1) $275 $254
Noninterest income 109 83 $22 38 131 121
-----------------------------------------------------------------------------
Total revenue 384 338 22 37 406 375
Provision for credit losses (15) (8) (15) (8)
Noninterest expense 181 169 5 4 186 173
-----------------------------------------------------------------------------
Pretax earnings 218 177 17 33 235 210
Income taxes 83 67 6 13 89 80
-----------------------------------------------------------------------------
Earnings $135 $110 $11 $20 $146 $130
-----------------------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans $16,539 $16,231 $66 $42 $16,605 $16,273
Other assets 745 913 216 175 961 1,088
-----------------------------------------------------------------------------
Total assets $17,284 $17,144 $282 $217 $17,566 $17,361
-----------------------------------------------------------------------------
Net deposits $2,149 $1,898 $2,149 $1,898
Assigned funds and other 13,038 13,257 $197 $152 13,235 13,409
Assigned capital 2,097 1,989 85 65 2,182 2,054
-----------------------------------------------------------------------------
Total funds $17,284 $17,144 $282 $217 $17,566 $17,361
-----------------------------------------------------------------------------
PERFORMANCE RATIOS
After-tax profit margin 35% 32% 48% 54% 36% 35%
Efficiency 47 50 23 12 46 46
Return on assigned capital 13 11 26 62 14 13
=================================================================================================================
The Corporate Banking line of business includes: Commercial Banking, which
serves large and middle market commercial customers with specific focus on
customers in certain specialized industries, and Equity Management, which makes
venture capital investments.
Corporate Banking contributed 28% of total line of business earnings in the
first six months of 1997 compared with 27% in the same period of 1996. Earnings
for the first six months of 1997 increased $16 million or 12%.
Commercial Banking earnings increased 23% in the comparison primarily due
to higher fee-based revenue driven by growth initiatives in treasury management
and capital markets. Lower venture capital income caused the decline in Equity
Management earnings.
Corporate Banking traditionally relies on balance sheet leverage to generate
returns. Traditional spread-based lending requires high capital levels and is
under intense competition from banks and nonbanks. In this environment, PNC
Bank aggressively manages capital to generate more appropriate returns. This
line of business is also focused on expanding fee-based revenue by developing
products and services as alternatives to spread-based lending.
Management expects Commercial Banking revenue to be generated increasingly from
fee-based sources such as treasury management, capital markets and corporate
finance. Capital markets capabilities continue to be expanded to meet the
changing needs of customers, including merger and acquisition advisory, private
placement, interest rate risk management and leasing products and services.
Through the first six months of 1997, 28% of total revenue was derived from
fee-based sources compared with 25% last year. In addition, deposit balances,
maintained as compensation for non-credit services, increased by 13% in the
comparison. The benefit of these balances is reflected in the 8% increase in
net interest income.
PNC BANK CORP. 7
FINANCIAL REVIEW
REAL ESTATE BANKING
Six months ended June 30-
dollars in millions 1997 1996
- ----------------------------------------------------------
INCOME STATEMENT
Net interest income $75 $72
Noninterest income 12 7
------------------
Total revenue 87 79
Provision for credit losses (8) 3
Noninterest expense 24 18
------------------
Pretax earnings 71 58
Income taxes 27 22
------------------
Earnings $44 $36
------------------
AVERAGE BALANCE SHEET
Loans $3,935 $3,919
Other assets 96 176
------------------
Total assets $4,031 $4,095
------------------
Net deposits $183 $170
Assigned funds and other 3,262 3,337
Assigned capital 586 588
------------------
Total funds $4,031 $4,095
------------------
PERFORMANCE RATIOS
After-tax profit margin 50% 45%
Efficiency 28 23
Return on assigned capital 15 12
==========================================================
Real Estate Banking serves national, regional and local real estate developers,
owners, property managers and mortgage bankers by providing credit and
noncredit services, commercial mortgage securitization, private debt placements
and treasury management services.
Real Estate Banking contributed 9% of total line of business earnings in the
first six months of 1997 compared with 7% in the year-earlier period. Earnings
increased $8 million or 22% in the comparison as a result of improved credit
quality and a 10% increase in revenue driven primarily by commercial mortgage
securitization fees.
Real Estate Banking has traditionally relied on balance sheet leverage and
required significant levels of assigned capital. Key strategies in this line of
business focus on improving returns by altering the business mix and expanding
fee-based services such as treasury management, loan syndication, commercial
mortgage-backed securitizations, private debt placements and interest rate risk
management.
MORTGAGE BANKING
Six months ended June 30 -
dollars in millions 1997 1996
- ----------------------------------------------------------
INCOME STATEMENT
Net interest income $116 $101
Noninterest income 87 84
------------------
Total revenue 203 185
Provision for credit losses 3 3
Noninterest expense 141 142
------------------
Pretax earnings 59 40
Income taxes 22 15
------------------
Earnings $37 $25
------------------
AVERAGE BALANCE SHEET
Loans $12,258 $11,263
Other assets 2,422 2,195
------------------
Total assets $14,680 $13,458
------------------
Net deposits $2,022 $2,377
Assigned funds and other 11,996 10,492
Assigned capital 662 589
------------------
Total funds $14,680 $13,458
------------------
PERFORMANCE RATIOS
After-tax profit margin 18% 14%
Efficiency 69 77
Return on assigned capital 11 9
==========================================================
Mortgage Banking activities include acquisition, origination, securitization
and servicing of residential mortgages, as well as retention of selected loans
in the portfolio.
Mortgage Banking contributed 7% of total line of business earnings in the first
six months of 1997 compared with 5% a year ago. Earnings increased $12 million
or 48% primarily due to increased net interest income from growth in the
residential mortgage portfolio.
The slight decline in noninterest expense reflects lower origination volumes,
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 2,398 2,984
Purchases 1,312 3,737
Repayments (2,750) (3,324)
Sales (81) (75)
-------------------
June 30 $40,422 $40,621
=======================================================
During the first six months of 1997, the Corporation funded $2.4 billion of
residential mortgages with 73% representing new financings. The comparable
amounts were $3.0 billion and 63%, respectively, in the first six months of
1996. At June 30, 1997, the mortgage servicing portfolio totaled $40.4 billion,
including $30.0 billion of loans serviced for others, had a weighted-average
coupon of 7.91% and an estimated fair value of $467 million. Capitalized MSR
totaled $339 million at June 30, 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 Mutual Fund
Management Servicing Total
Six months ended June 30 - -------------------------------------------------------
dollars in millions 1997 1996 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------
INCOME STATEMENT
Advisory, processing and other fee income $121 $100 $68 $58 $189 $158
Net interest income (1) 4 4 4 3
-------------------------------------------------------
Total revenue 121 99 72 62 193 161
Operating expenses 88 73 46 38 134 111
-------------------------------------------------------
Pretax earnings 33 26 26 24 59 50
Income taxes 12 10 10 9 22 19
-------------------------------------------------------
Earnings $21 $16 $16 $15 $37 $31
-------------------------------------------------------
PERFORMANCE RATIOS
After-tax profit margin 17% 16% 22% 24% 19% 19%
Efficiency 72 74 64 61 69 69
Return on assigned capital 30 29 46 50 36 36
==========================================================================================================
The Asset Management line of business includes: Investment Management which
provides liquidity, fixed income, and equity advisory services to institutional,
family wealth and retail clients; and Mutual Fund Servicing which 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
six months of 1997 compared with 6% in the year-earlier period. Earnings
increased $6 million or 19% in the comparison. Fee income increased 20% 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.
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, primarily
Private Banking. The following table sets forth revenue and earnings included in
each line of business.
ASSET MANAGEMENT REVENUE AND EARNINGS
Six months ended June 30 -
in millions Revenue Earnings
- ----------------------------------------------------------
1997
Asset Management $193 $37
Consumer Banking 110 27
------------------
Total $303 $64
- ----------------------------------------------------------
1996
Asset Management $161 $31
Consumer Banking 99 23
------------------
Total $260 $54
==========================================================
PNC BANK CORP. 9
FINANCIAL REVIEW
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.
Assets under administration increased $66 billion in the year-to-year
comparison to $371 billion at June 30, 1997. Managed assets totaled $122
billion at June 30, 1997 compared with $104 billion a year ago.
COMPOSITION OF MANAGED ASSETS
June 30 1997 1996
- -------------------------------------------------------------
Fixed income 45% 46%
Equity 28 26
Liquidity management 27 28
=============================================================
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.
June 30 1997 1996
- -------------------------------------------------------------
Assets (billions)
Custody $208 $181
Accounting/administration 148 117
- ------------------------------------------------------------
Accounts (millions)
Shareholder 4.0 4.2
Checking and credit/debit card 1.9 1.5
=============================================================
CONSOLIDATED INCOME STATEMENT REVIEW
Highlights of consolidated results of operations for the first six months of
1997 and 1996 were as follows:
INCOME STATEMENT HIGHLIGHTS
Six months ended June 30 -
in millions 1997 1996 Change
- ------------------------------------------------------------------
Net interest income
(taxable-equivalent basis) $1,258 $1,236 $22
Provision for credit losses 25 25
Noninterest income before
net securities gains 829 651 178
Net securities gains 30 7 23
Noninterest expense 1,275 1,130 145
Income taxes 276 259 17
Net income 525 486 39
===================================================================
Taxable-equivalent net interest income increased $22 million for the first six
months of 1997 and the net interest margin widened 20 basis points to 3.92%
compared with 3.72% in the prior-year period. Net interest income increased as
the impact of a $2.0 billion decline in average earning assets, attributable to
continued securities portfolio reduction, was offset by a $2.3 billion increase
in higher-yielding credit card loans and growth in residential and commercial
loans. The net interest margin improvement primarily reflects a higher-yielding
earning asset mix.
PNC BANK CORP. 10
Net Interest Income Analysis
Taxable-equivalent basis Average Balances Interest Income/Expense Average Yields/Rates
Six months ended June 30 - ----------------------------------------------------------------------------------
dollars in millions 1997 1996 Change 1997 1996 Change 1997 1996 Change
- --------------------------------------------------------------------------------------------------------------------------
Interest-earning assets
Securities $9,569 $14,779 $(5,210) $298 $475 $(177) 6.25% 6.42% (17) bp
Loans, net of unearned income
Consumer
Credit card 3,274 983 2,291 207 67 140 12.75 13.62 (87)
Other consumer 11,531 12,324 (793) 483 516 (33) 8.45 8.42 3
--------------------------- ------------------------
Total consumer 14,805 13,307 1,498 690 583 107 9.40 8.81 59
Residential mortgage 12,974 11,751 1,223 483 437 46 7.45 7.45
Commercial 18,204 16,998 1,206 713 663 50 7.79 7.71 8
Commercial real estate 4,562 4,858 (296) 197 217 (20) 8.62 8.89 (27)
Other 1,825 1,994 (169) 63 66 (3) 6.88 6.64 24
--------------------------- ------------------------
Total loans, net of unearned
income 52,370 48,908 3,462 2,146 1,966 180 8.20 8.02 18
Other interest-earning assets 2,075 2,343 (268) 70 76 (6) 6.72 6.52 20
--------------------------- ------------------------
Total interest-earning assets/
interest income 64,014 66,030 (2,016) 2,514 2,517 (3) 7.86 7.61 25
Noninterest-earning assets 6,548 6,057 491
---------------------------
Total assets $70,562 $72,087 $(1,525)
===========================
Interest-bearing liabilities
Deposits
Demand and money market $13,116 $12,630 $486 182 165 17 2.80 2.63 17
Savings 2,993 3,580 (587) 29 37 (8) 1.97 2.07 (10)
Other time 17,689 18,523 (834) 472 496 (24) 5.38 5.38
Deposits in foreign offices 1,127 894 233 31 25 6 5.42 5.42
--------------------------- ------------------------
Total interest-bearing deposits 34,925 35,627 (702) 714 723 (9) 4.12 4.08 4
Borrowed funds 18,635 19,306 (671) 542 558 (16) 5.82 5.78 4
--------------------------- ------------------------
Total interest-bearing
liabilities/ interest expense 53,560 54,933 (1,373) 1,256 1,281 (25) 4.71 4.67 4
------------------------ ---------------------------
Noninterest-bearing liabilities,
capital securities and 17,002 17,154 (152)
shareholders' equity ---------------------------
Total liabilities and
shareholders' equity $70,562 $72,087 $(1,525)
===========================
Interest rate spread 3.15 2.94 21
Impact of noninterest-bearing sources .77 .78 (1)
---------------------------
Net interest income/margin $1,258 $1,236 $22 3.92% 3.72% 20 bp
==========================================================================================================================
Net interest income and margin depend on a number of factors including the
volume and composition of earning assets, related yields and associated funding
costs. In the first six months of 1997, loans comprised 81.8% of average earning
assets. Accordingly, loan portfolio size, composition and related yields earned
have a significant impact on net interest income and margin. Funding cost is
affected by the composition of and rates paid on various funding sources.
Average deposits comprised 63.0% of PNC Bank's total sources of funding with the
remainder comprised of wholesale funding obtained at prevailing market rates.
PROVISION FOR CREDIT LOSSES The provision for credit losses was $25 million in
the first six months of 1997 compared with no provision a year ago. 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 higher
provisions for credit losses throughout 1997.
PNC BANK CORP. 11
FINANCIAL REVIEW
NONINTEREST INCOME
Change
Six months ended June 30 - -------------------
dollars in millions 1997 1996 Amount Percent
- ---------------------------------------------------------------
Asset management
Asset management and
trust $218 $188 $30 16.0%
Mutual fund servicing 68 57 11 19.3
------------------------
Total asset
management 286 245 41 16.7
Service fees
Deposit 161 138 23 16.7
Credit card and
merchant services 41 9 32 355.6
Corporate finance and
capital markets 38 29 9 31.0
Consumer services 35 28 7 25.0
Brokerage 26 29 (3) (10.3)
Insurance 19 14 5 35.7
Other 25 17 8 47.1
------------------------
Total service fees 345 264 81 30.7
Mortgage banking
Servicing 55 60 (5) (8.3)
Marketing 7 11 (4) (36.4)
Sale of servicing 2 1 1 100.0
------------------------
Total mortgage banking 64 72 (8) (11.1)
Other 134 70 64 91.4
------------------------
Total noninterest income
before net
securities gains 829 651 178 27.3
Net securities gains 30 7 23 328.6
-----------------------
Total $859 $658 $201 30.5%
===============================================================
Noninterest income before net securities gains totaled $829 million in the
first six months of 1997, a 27.3% increase compared with the same period a
year ago.
Asset management and service fees increased, reflecting a 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 $23 million due to a revised fee structure
and higher treasury management revenue. Credit card and merchant services fees
increased $32 million, reflecting credit card portfolio growth and the July 1996
termination of a third party alliance.
Mortgage banking revenue declined primarily due to lower origination volumes.
Mortgage originations declined to $2.4 billion in the first half of 1997 from
$3.0 billion in the first half of 1996 reflecting higher refinance activity in
the prior-period.
Other noninterest income increased in the comparison primarily due to asset
securitization income of $45 million and other income, partially offset by
lower venture capital income.
NONINTEREST EXPENSE
Change
Six months ended June 30 - -------------------
dollars in millions 1997 1996 Amount Percent
- ----------------------------------------------------------------
Staff expense
Compensation $488 $463 $25 5.4%
Employee benefits 109 100 9 9.0
-------------------------
Total staff expense 597 563 34 6.0
Net occupancy 93 100 (7) (7.0)
Equipment 88 86 2 2.3
Goodwill amortization 26 26
Other amortization 43 26 17 65.4
Taxes other than income 29 28 1 3.6
Distributions on
capital securities 17 17 100.0
Other 382 301 81 26.9
-------------------------
Total $1,275 $1,130 $145 12.8%
================================================================
Noninterest expense increased $145 million to $1.3 billion in the first six
months of 1997 primarily due to $94 million of incremental costs associated
with AAA and credit card-related initiatives. The remaining increase was due to
higher incentive compensation commensurate with revenue growth and the cost of
trust preferred capital securities. Average full-time equivalent employees
totaled 24,570 in the first half of 1997. The efficiency ratio was 60.3%
compared with 59.7% a year ago.
PNC BANK CORP. 12
BALANCE SHEET REVIEW
AVERAGE BALANCE SHEET HIGHLIGHTS
Change
Six months ended June 30 - --------------------
dollars in millions 1997 1996 Amount Percent
- -------------------------------------------------------------------------
Assets $70,562 $72,087 $(1,525) (2.1)%
Earning assets 64,014 66,030 (2,016) (3.1)
Loans, net of
unearned income 52,370 48,908 3,462 7.1
Securities 9,569 14,779 (5,210) (35.3)
Deposits 44,475 45,465 (990) (2.2)
Borrowed funds 18,635 19,306 (671) (3.5)
Shareholders' equity 5,558 5,766 (208) (3.6)
=========================================================================
Average assets and earning assets were $70.6 billion and $64.0 billion,
respectively, for the six months ended June 30, 1997 compared with $72.1
billion and $66.0 billion, respectively, in the year-earlier period. The
declines reflect continued securities portfolio reduction partially offset by
loan growth. Securities to earning assets declined to 14.9% from 22.4% in the
prior year.
PERIOD-END BALANCE SHEET HIGHLIGHTS
June 30 December 31
In millions 1997 1996 Change
- --------------------------------------------------------------------
Assets $71,973 $73,260 $(1,287)
Loans, net of
unearned income 53,497 51,798 1,699
Securities 8,396 11,917 (3,521)
Deposits 45,216 45,676 (460)
Borrowed funds 19,066 19,604 (538)
Shareholders' equity 5,384 5,869 (485)
====================================================================
Total assets declined $1.3 billion since year-end 1996 primarily due to
continued securities portfolio reduction. Shareholders' equity declined $485
million reflecting the impact of common share repurchases.
LOANS
June 30 December 31
In millions 1997 1996
- ----------------------------------------------------------------
Consumer
Home equity $4,729 $4,569
Automobile 3,485 3,731
Credit card 3,693 2,776
Student 879 1,725
Other 1,890 2,067
----------------------
Total consumer 14,676 14,868
Residential mortgage 13,494 12,703
Commercial
Manufacturing 3,969 3,718
Retail/Wholesale 3,378 3,243
Service providers 2,526 2,359
Real estate related 1,591 1,452
Communications 1,151 1,239
Health care 1,216 1,207
Financial services 735 708
Other 4,223 4,136
----------------------
Total commercial 18,789 18,062
Commercial real estate
Mortgage 2,357 2,467
Medium-term financing 1,232 1,312
Construction and development 891 845
----------------------
Total commercial real estate 4,480 4,624
Lease financing and other 2,450 1,926
Unearned income (392) (385)
----------------------
Total, net of unearned income $53,497 $51,798
================================================================
Loans outstanding increased $1.7 billion from year-end 1996 to $53.5 billion at
June 30, 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 33.0%
due to AAA and other marketing initiatives. The decline in student loans
reflects a $1.0 billion securitization.
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.
NET UNFUNDED COMMITMENTS
June 30 December 31
In millions 1997 1996
- ---------------------------------------------------------------
Consumer $18,682 $17,246
Residential mortgage 1,268 511
Commercial 27,750 27,087
Commercial real estate 955 764
Other 585 849
----------------------
Total $49,240 $46,457
===============================================================
PNC BANK CORP. 13
FINANCIAL REVIEW
SECURITIES AVAILABLE FOR SALE
June 30, 1997 December 31, 1996
-------------------------------------------
Amortized Fair Amortized Fair
In millions Cost Value Cost Value
- --------------------------------------------------------------------------
Debt securities
U.S. Treasury and
government
agencies $1,316 $1,307 $3,238 $3,237
Mortgage backed 5,358 5,229 6,301 6,176
Asset backed 1,031 1,032 1,609 1,615
State and municipal 199 206 218 227
Other debt 31 30 100 105
Corporate stocks and other 589 592 554 557
-------------------------------------------
Total $8,524 $8,396 $12,020 $11,917
==========================================================================
The securities portfolio declined $3.5 billion from year-end 1996 to $8.4
billion at June 30, 1997. The expected weighted-average life of the securities
portfolio was 3 years at June 30, 1997 compared with 2 years and 11 months at
year-end 1996.
Securities available for sale may be sold as part of the overall
asset/liability management process. Realized gains and losses are reflected in
the results of operations and include gains or losses on associated financial
derivatives. During the first six months of 1997, $5.4 billion of securities
were sold at a $30 million net gain.
At June 30, 1997 and December 31, 1996, $4.1 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 table above, were less than $1 million
in both periods.
FUNDING SOURCES
June 30 December 31
In millions 1997 1996
- ---------------------------------------------------------------
Deposits
Demand, savings and money market $26,831 $27,027
Time 17,843 17,803
Foreign 542 846
----------------------
Total deposits 45,216 45,676
Borrowed funds
Bank notes and senior debt 9,192 8,093
Federal funds purchased 2,516 3,933
Repurchase agreements 757 645
Other borrowed funds 5,250 5,576
Subordinated debt 1,351 1,357
----------------------
Total borrowed funds 19,066 19,604
----------------------
Total $64,282 $65,280
===============================================================
Deposits decreased 1.0% to $45.2 billion at June 30, 1997 compared with $45.7
billion at year-end 1996. Borrowed funds declined $538 million in the
comparison reflecting reduced wholesale funding related to the downsized
securities portfolio.
CAPITAL 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 risk-based, 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
risk-based, 10% for total risk-based and 5% for leverage.
At June 30, 1997, the Corporation and each bank subsidiary were classified as
well capitalized.
June 30 December 31
Dollars in millions 1997 1996
- ---------------------------------------------------------------
Capital components
Shareholders' equity
Common $5,068 $5,553
Preferred 316 316
Trust preferred capital securities 650 350
Goodwill and other (978) (1,003)
Net unrealized securities losses 83 67
------------------------
Tier I risk-based capital 5,139 5,283
Subordinated debt 1,319 1,343
Eligible allowance for credit losses 832 801
------------------------
Total risk-based capital $7,290 $7,427
------------------------
Assets
Risk-weighted assets and
off-balance-sheet instruments $66,371 $63,761
Average tangible assets 69,957 68,597
------------------------
Capital ratios
Tier I risk-based 7.74% 8.29%
Total risk-based 10.98 11.65
Leverage 7.35 7.70
=================================================================
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.
In May 1997, the Corporation issued $300 million of 8.315% mandatorily
redeemable capital securities which qualify as Tier I capital. Subsequent to
quarter end, the Corporation issued $350 million of 6-7/8% subordinated notes
that qualify as Tier II capital.
PNC BANK CORP. 14
During the first six months of 1997, PNC Bank repurchased 20.5 million shares
of common stock. The Corporation's board of directors authorized in April 1997
the repurchase of up to 15 million additional shares of common stock through
March 31, 1998 and has approximately 9.1 million shares remaining under this
authorization.
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 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 June 30 December 31
Dollars in millions 1997 1996
- ----------------------------------------------------------------
Nonaccrual loans
Commercial $155 $156
Commercial real estate
Mortgage 106 109
Project 33 25
Consumer 5 6
Residential mortgage 46 51
--------------------
Total nonaccrual loans 345 347
Restructured loans 1 2
--------------------
Total nonperforming loans 346 349
Foreclosed assets
Commercial real estate 55 71
Residential mortgage 23 22
Other 18 17
--------------------
Total foreclosed assets 96 110
--------------------
Total nonperforming assets $442 $459
====================
Nonperforming loans to loans .65% .67%
Nonperforming assets to loans and
foreclosed assets .83 .88
Nonperforming assets to assets .61 .63
================================================================
Nonperforming assets declined $17 million since year-end 1996 primarily due to
lower foreclosed assets. At June 30, 1997, $95 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 169 240
Returned to performing (19) (30)
Principal reductions (94) (118)
Sales (41) (83)
Charge-offs and valuation adjustments (32) (36)
---------------------
June 30 $442 $509
===============================================================
ACCRUING LOANS
PAST DUE 90 DAYS OR MORE
Amount Percent of Loans
--------------------------------------------
Dollars in June 30 December 31 June 30 December 31
millions 1997 1996 1997 1996
- ----------------------------------------------------------------------
Consumer
Guaranteed
student $46 $51 5.25% 2.95%
Credit cards 51 43 1.37 1.56
Other 30 46 .31 .45
-----------------
Total consumer 127 140 .89 .96
Residential mortgage 58 58 .43 .46
Commercial 33 34 .18 .19
Commercial real
estate 12 12 .27 .26
-----------------
Total $230 $244 .43 .47
======================================================================
During the first six months of 1997, $1.0 billion of student loans were
securitized. As a result, past due guaranteed student loans increased as a
percent of total student loans.
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.
PNC BANK CORP. 15
FINANCIAL REVIEW
ALLOWANCE FOR CREDIT LOSSES
In millions 1997 1996
- ---------------------------------------------------------------
January 1 $1,166 $1,259
Charge-offs (185) (113)
Recoveries 66 43
---------------------
Net charge-offs (119) (70)
Provision for credit losses 25
Acquisitions 3
---------------------
June 30 $1,075 $1,189
===============================================================
The allowance as a percent of nonperforming loans and period-end loans was 310%
and 2.01%, respectively, at June 30, 1997. The comparable year-end 1996 amounts
were 334% and 2.25%, respectively.
CHARGE-OFFS AND RECOVERIES
Net Percent of
Six months ended - June 30 Charge- Charge- Average
dollars in millions offs Recoveries offs Loans
- ----------------------------------------------------------------------
1997
Consumer
Credit card $101 $16 $85 5.24%
Other 55 18 37 .65
-----------------------------
Total consumer 156 34 122 1.66
Residential mortgage 5 1 4 .06
Commercial 20 27 (7) (.08)
Commercial real estate 4 4
-----------------------------
Total $185 $66 $119 .46
- ----------------------------------------------------------------------
1996
Consumer
Credit card $27 $3 $24 4.91%
Other 50 18 32 .52
----------------------------
Total consumer 77 21 56 .85
Residential mortgage 4 1 3 .05
Commercial 27 15 12 .14
Commercial real estate 5 6 (1) (.04)
----------------------------
Total $113 $43 $70 .29
======================================================================
Consumer net charge-offs increased $66 million in the comparison primarily due
to higher outstandings 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
and demands of depositors and debtholders, and to 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 or investments in strategic initiatives. 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. 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 June 30, 1997, such assets
totaled $14.5 billion, with $5.4 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 June 30, 1997, approximately $5.1
billion of residential mortgages were available as collateral for borrowings
from the FHLB.
During the first six months of 1997, cash and due from banks decreased $340
million to $3.7 billion compared with a decrease of $447 million during the
year-earlier period. Net cash provided by operating activities increased $315
million in the comparison. Net cash provided by investing activities decreased
$850 million to $1.2 billion primarily due to funding loan originations. Net
cash used by financing activities totaled $1.9 billion in the first six months
of 1997 compared with $2.6 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 $261 million at June 30, 1997. Dividends may
also be impacted by capital needs, regulatory requirements, corporate policies,
contractual restrictions and other factors.
PNC BANK CORP. 16
Liquidity for the parent company and subsidiaries is also generated through the
issuance of securities in public or private markets and lines of credit. In
July 1997, PNC Bank issued $350 million of subordinated notes. Subsequent to
the issuance of the subordinated notes, the Corporation had unused capacity
under an effective shelf registration statement of $140 million of debt. In
addition, the Corporation had a $500 million unused line of credit.
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
June 30, 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.
PNC BANK CORP. 17
FINANCIAL REVIEW
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 June 30, 1997, the cumulative liability sensitivity of
the one-year gap position was 2.9%.
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
primarily 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 six months of 1997.
FINANCIAL DERIVATIVES ACTIVITY
Weighted
Average
1997 - dollars in millions January 1 Additions Maturities Terminations June 30 Maturity
- -------------------------------------------------------------------------------------------------------------------------
Interest rate risk management
Interest rate swaps
Receive fixed $7,003 $1,230 $(87) $(2,450) $5,696 1 yr. 3 mo.
Pay fixed 602 (51) 551 2 yr. 6 mo.
Basis swaps 335 466 801 3 yr. 11 mo.
Interest rate caps 5,813 246 (1,486) 4,573 8 mo.
Interest rate floors 2,500 1,049 (1) 3,548 1 yr. 10 mo.
---------------------------------------------------------------
Total interest rate risk management 16,253 2,991 (1,625) (2,450) 15,169 1 yr. 5 mo.
Mortgage banking activities
Forward contracts
Commitments to purchase loans 395 3,086 (2,849) 632 2 mo.
Commitments to sell loans 894 3,255 (3,037) 1,112 2 mo.
Interest rate floors - MSR 1,050 350 (250) 1,150 4 yr. 6 mo.
---------------------------------------------------------------
Total mortgage banking activities 2,339 6,691 (5,886) (250) 2,894
---------------------------------------------------------------
Total $18,592 $9,682 $(7,511) $(2,700) $18,063
=========================================================================================================================
During the first six months of 1997, financial derivatives used in interest rate
risk management reduced net interest income by $2 million compared with $9
million in the year-earlier period.
At June 30, 1997, $26 million of net deferred losses on terminated derivative
contracts are being amortized over a remaining period of approximately 9 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 --------------------------
June 30, 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 $3,835 $79 6.13% 6.44%
Pay fixed designated to loans 501 (5) 7.15 6.39
Basis swaps designated to other earning assets 336 6.75 6.64
Interest rate caps designated to (2)
Securities 4,100 NM NM
Loans 473 4 NM NM
Interest rate floors designated to loans (3) 3,548 4 NM NM
---------------------------------
Total asset rate conversion 12,793 82
Liability rate conversion
Interest rate swaps (1)
Receive fixed designated to interest-bearing
liabilities 1,861 22 5.94 6.07
Pay fixed designated to borrowed funds 50 5.63 5.84
Basis swaps designated to borrowed funds 465 1 6.02 6.01
---------------------------------
Total liability rate conversion 2,376 23
---------------------------------
Total interest rate risk management 15,169 105
Mortgage banking activities
Forward contracts
Commitments to purchase loans 632 NM NM
Commitments to sell loans 1,112 (6) NM NM
Interest rate floors - MSR (3) 1,150 8 NM NM
---------------------------------
Total mortgage banking activities 2,894 2
---------------------------------
Total financial derivatives $18,063 $107
===================================================================================================================
(1) The floating rate portion of interest rate contracts is based on
money-market indices. As a percent of notional value, 71% were based on
1-month LIBOR, 21% on 3-month LIBOR and the remainder on other short-term
indices.
(2) Substantially all interest rate caps require the counterparty to pay the
Corporation the excess, if any, of 3-month LIBOR over a weighted-average
strike of 6.48%. At June 30, 1997, 3-month LIBOR was 5.78%.
(3) Interest rate floors with notional values of $3.5 billion and $1.2 billion
require the counterparty to pay the Corporation the excess, if any, of the
weighted-average strike of 5.16% over 3-month LIBOR and the weighted-average
strike of 5.96% over 10-year CMT, respectively. At June 30, 1997, 3-month
LIBOR was 5.78% and 10-year CMT was 6.51%.
NM - not meaningful
CUSTOMER-RELATED DERIVATIVES To accommodate customer needs, PNC Bank enters
into financial derivatives transactions primarily consisting of interest rate
swaps, caps, floors and foreign exchange contracts. Risk exposure from customer
positions is managed through transactions with other dealers. These positions
are recorded at estimated fair value and changes in value are included in the
results of operations. The following schedule sets forth information relating
to positions associated with customer derivatives.
Positive Negative
June 30, 1997 - Notional Net Asset Fair Fair
in millions Value (Liability) Value Value
- ---------------------------------------------------------------
Interest rate
Swaps $3,107 $1 $11 $(10)
Caps/floors
Sold 1,329 (4) (4)
Purchased 1,276 3 3
Foreign exchange 1,283 15 (15)
Other 952 1 (1)
-------------------------------------
Total $7,947 $30 $(30)
===============================================================
PNC BANK CORP. 19
FINANCIAL REVIEW
SECOND QUARTER 1997 VS.
SECOND QUARTER 1996
Net income for the second quarter of 1997 totaled $259 million or $.81 per
fully diluted share compared with $248 million or $.72 per fully diluted share
a year ago. Returns on average common shareholders' equity and average assets
improved to 20.21% and 1.47%, respectively, in the second quarter of 1997
compared with 17.33% and 1.38% in the prior-year quarter.
Taxable-equivalent net interest income for the second quarter of 1997 was $621
million, substantially consistent with the prior-year quarter and the net
interest margin widened 12 basis points to 3.84%. The impact of a $2.2 billion
decline in average earning assets resulting from continued securities portfolio
reduction was offset by loan growth and the benefit of a higher-yielding
earning asset mix.
Noninterest income increased $96 million to $433 million in the second quarter
of 1997 compared with $337 million in the year-earlier period. Asset management
fees increased $22 million or 17% primarily due to higher investment advisory,
private banking and mutual fund servicing revenue. Managed assets totaled $122
billion at June 30, 1997 compared with $104 billion a year ago. Service fees
increased $43 million or 33% primarily from growth in credit card, deposit and
treasury management services and capital markets fee income.
Mortgage banking revenue declined $4 million due to lower origination volumes
and servicing sales. Mortgage originations totaled $1.3 billion in the second
quarter of 1997 compared with $1.6 billion in the year-earlier period. Other
noninterest income increased $26 million in the comparison primarily due to
asset securitization and other income, partially offset by lower venture
capital income.
Noninterest expense increased $75 million to $639 million in the second quarter
of 1997 largely due to $49 million of incremental costs associated with AAA and
credit card-related initiatives. The remaining increase was attributable to
higher incentive compensation commensurate with revenue growth and the cost of
trust preferred capital securities. The efficiency ratio was 60.6% for the
second quarter of 1997 compared with 59.0% a year ago.
Average earning assets declined $2.2 billion to $64.2 billion reflecting
continued securities portfolio reduction partially offset by loan growth.
Average securities declined $5.7 billion to $9.1 billion and represented 14.1%
of average earning assets compared with 22.2% a year ago. Average loans
increased $3.6 billion to $52.8 billion primarily due to significant growth in
credit cards partially offset by reduced indirect lending and loan
securitizations. Excluding purchased credit card portfolios and loan
securitizations, loans grew at an annual rate of 6.0%. Loans represented 82.3%
of average earning assets compared with 74.1% a year ago.
Average interest-bearing funding sources declined $1.1 billion to $54.0 billion
in the second quarter of 1997 primarily due to lower borrowed funds associated
with the securities portfolio reduction. Deposits represented 63.3% of total
sources of funds for the second quarter of 1997 compared with 62.6% a year ago.
PNC BANK CORP. 20
CONSOLIDATED STATEMENT OF INCOME
Three months ended Six months ended
June 30 June 30
-------------------------------------------------
In thousands, except per share data 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans and fees on loans $1,078,776 $971,829 $2,134,685 $1,952,665
Securities 139,036 232,251 295,240 469,693
Other 39,348 39,062 69,391 76,122
-------------------------------------------------
Total interest income 1,257,160 1,243,142 2,499,316 2,498,480
INTEREST EXPENSE
Deposits 368,000 351,891 714,155 722,874
Borrowed funds 275,985 280,471 542,061 557,969
-------------------------------------------------
Total interest expense 643,985 632,362 1,256,216 1,280,843
-------------------------------------------------
Net interest income 613,175 610,780 1,243,100 1,217,637
Provision for credit losses 15,000 25,000
-------------------------------------------------
Net interest income less provision for credit losses 598,175 610,780 1,218,100 1,217,637
NONINTEREST INCOME
Asset management 146,018 124,515 285,590 245,392
Service fees 177,097 133,598 344,518 263,867
Mortgage banking 32,149 35,758 64,194 71,740
Net securities gains 13,370 3,904 29,796 6,847
Other 64,773 38,810 134,425 70,301
-------------------------------------------------
Total noninterest income 433,407 336,585 858,523 658,147
NONINTEREST EXPENSE
Staff expense 294,161 284,281 596,862 562,938
Net occupancy and equipment 91,781 92,182 181,065 185,465
Amortization 39,527 28,062 69,358 51,726
Other 203,496 159,797 410,928 329,839
Distributions on capital securities 9,867 16,823
-------------------------------------------------
Total noninterest expense 638,832 564,322 1,275,036 1,129,968
-------------------------------------------------
Income before income taxes 392,750 383,043 801,587 745,816
Applicable income taxes 133,675 134,993 276,203 259,446
-------------------------------------------------
Net income $259,075 $248,050 $525,384 $486,370
=================================================
EARNINGS PER COMMON SHARE
Primary $.81 $.72 $1.62 $1.42
Fully diluted .81 .72 1.61 1.41
CASH DIVIDENDS DECLARED PER COMMON SHARE .37 .35 .74 .70
AVERAGE COMMON SHARES OUTSTANDING
Primary 311,968 343,022 317,938 342,949
Fully diluted 315,877 347,343 321,891 347,306
===========================================================================================================
See accompanying Notes to Consolidated Financial Statements.
PNC BANK CORP. 21
CONSOLIDATED BALANCE SHEET
June 30 December 31
Dollars in millions, except share data 1997 1996
- -------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $3,676 $4,016
Short-term investments 1,159 774
Loans held for sale 1,235 941
Securities available for sale 8,396 11,917
Loans, net of unearned income of $392 and $385 53,497 51,798
Allowance for credit losses (1,075) (1,166)
-----------------------
Net loans 52,422 50,632
Other 5,085 4,980
-----------------------
Total assets $71,973 $73,260
-----------------------
LIABILITIES
Deposits
Noninterest-bearing $10,662 $10,937
Interest-bearing 34,554 34,739
-----------------------
Total deposits 45,216 45,676
Borrowed funds
Bank notes and senior debt 9,192 8,093
Federal funds purchased 2,516 3,933
Repurchase agreements 757 645
Other borrowed funds 5,250 5,576
Subordinated debt 1,351 1,357
-----------------------
Total borrowed funds 19,066 19,604
Other 1,657 1,761
-----------------------
Total liabilities 65,939 67,041
Mandatorily redeemable capital securities of subsidiary trusts 650 350
SHAREHOLDERS' EQUITY
Preferred stock 7 7
Common stock - $5 par value
Authorized: 450,000,000 shares
Issued: 347,384,145 and 345,154,238 shares 1,737 1,726
Capital surplus 1,004 939
Retained earnings 4,356 4,075
Deferred benefit expense (62) (60)
Net unrealized securities losses (83) (67)
Common stock held in treasury at cost: 40,407,600 and 21,036,195 shares (1,575) (751)
-----------------------
Total shareholders' equity 5,384 5,869
-----------------------
Total liabilities, capital securities and shareholders' equity $71,973 $73,260
=======================================================================================================
See accompanying Notes to Consolidated Financial Statements.
PNC BANK CORP. 22
CONSOLIDATED STATEMENT OF CASH FLOWS
Six months ended June 30 - in millions 1997 1996
- ---------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $525 $486
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for credit losses 25
Depreciation, amortization and accretion 160 134
Deferred income taxes 76 64
Net securities gains (30) (7)
Net gain on sales of assets (81) (45)
Valuation adjustments (2) (9)
Changes in
Loans held for sale (294) (388)
Other 7 (164)
---------------------
Net cash provided by operating activities 386 71
INVESTING ACTIVITIES
Net change in loans (2,924) (428)
Repayment of securities available for sale 894 1,814
Sales
Securities available for sale 5,385 3,242
Loans 1,190 170
Foreclosed assets 49 86
Purchases
Securities available for sale (2,761) (3,584)
Loans (150) (479)
Net cash received in acquisitions 460
Other (484) 806
---------------------
Net cash provided by investing activities 1,199 2,087
FINANCING ACTIVITIES
Net change in
Noninterest-bearing deposits (275) (471)
Interest-bearing deposits (177) (2,061)
Federal funds purchased (1,417) (2,708)
Sale/issuance
Repurchase agreements 38,112 38,696
Bank notes and senior debt 4,710 4,537
Other borrowed funds 51,455 43,304
Capital securities 300
Common stock 88 33
Repayment/maturity
Repurchase agreements (38,000) (39,360)
Bank notes and senior debt (3,610) (2,109)
Other borrowed funds (51,778) (42,176)
Acquisition of treasury stock (1,087) (50)
Cash dividends paid (246) (240)
---------------------
Net cash used by financing activities (1,925) (2,605)
---------------------
DECREASE IN CASH AND DUE FROM BANKS (340) (447)
Cash and due from banks at beginning of year 4,016 3,679
---------------------
Cash and due from banks at end of period $3,676 $3,232
=================================================================================
CASH ITEMS
Interest paid $1,292 $1,382
Income taxes paid 206 90
NONCASH ITEMS
Transfers from loans to foreclosed assets 38 37
================================================================================
See accompanying Notes to Consolidated Financial Statements.
PNC BANK CORP. 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BUSINESS PNC Bank Corp. is one of the largest financial services organizations
in the United States operating 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.
To accommodate customer needs, PNC Bank also enters into financial derivatives
transactions primarily consisting of interest rate swaps, caps, floors and
foreign exchange contracts. Interest rate risk exposure from customer positions
is managed through transactions with other dealers. These positions are
recorded at estimated fair value and changes in value are included in the
results of operations.
PNC BANK CORP. 24
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.
RECENT ACCOUNTING PRONOUNCEMENTS During the first six months of 1997, the
Financial Accounting Standards Board issued several Statements of Financial
Accounting Standards ("SFAS").
SFAS No. 128, "Earnings per Share," is effective for periods ending after
December 15, 1997 with retroactive restatement required for all periods
presented. Under the provisions of SFAS No. 128, primary and fully diluted
earnings per share will be replaced with basic and diluted earnings per
share amounts.
SFAS No. 129, "Disclosure of Information About Capital Structure," is
effective for financial statements for periods ending after December 15,
1997. This Statement requires disclosure of rights and privileges of
various securities outstanding.
SFAS No. 130, "Reporting Comprehensive Income," is effective for fiscal
years beginning after December 15, 1997. This Statement establishes
standards for reporting and display of comprehensive income and its
components. Comprehensive income includes net income and all other changes
in shareholders' equity except those resulting from investments and
distributions to owners.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for financial statements for periods beginning
after December 15, 1997. This Statement requires financial and descriptive
information about an entity's operating segments to be included in the
annual financial statements.
None of these standards when implemented are expected to materially impact the
reported financial position or results of operations of the Corporation.
CASH FLOWS
For the statement of cash flows, cash and cash equivalents are defined as cash
and due from banks. During the first six months 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 six months of 1997.
PNC BANK CORP. 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SECURITIES AVAILABLE FOR SALE
June 30, 1997 December 31, 1996
--------------------------------------------------------------------------------
Unrealized Unrealized
Amortized ------------------ Fair Amortized ------------------ Fair
In millions Cost Gains Losses Value Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------------
Debt securities
U.S. Treasury, government agencies
and corporations $1,316 $4 $13 $1,307 $3,238 $20 $21 $3,237
Mortgage backed 5,358 5 134 5,229 6,301 13 138 6,176
Asset backed 1,031 2 1 1,032 1,609 7 1 1,615
State and municipal 199 7 206 218 9 227
Other debt 31 1 30 100 7 2 105
---------------------------------------------------------------------------------
Total debt securities 7,935 18 149 7,804 11,466 56 162 11,360
Corporate stocks and other 589 3 592 554 3 557
---------------------------------------------------------------------------------
Total securities available for sale $8,524 $21 $149 $8,396 $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 June
30, 1997 and December 31, 1996, $4.1 billion and $5.5 billion, respectively,
notional value of financial derivatives were designated to securities available
for sale.
NONPERFORMING ASSETS
Nonperforming assets were as follows:
June 30 December 31
In millions 1997 1996
- ---------------------------------------------------------------
Nonaccrual loans $345 $347
Restructured loans 1 2
--------------------
Total nonperforming loans 346 349
Foreclosed assets 96 110
--------------------
Total nonperforming assets $442 $459
===============================================================
ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses were as follows:
In millions 1997 1996
- ---------------------------------------------------------------
Allowance at January 1 $1,166 $1,259
Charge-offs
Consumer
Credit card 101 27
Other 55 50
Residential mortgage 5 4
Commercial 20 27
Commercial real estate 4 5
--------------------
Total charge-offs 185 113
Recoveries
Consumer
Credit card 16 3
Other 18 18
Residential mortgage 1 1
Commercial 27 15
Commercial real estate 4 6
--------------------
Total recoveries 66 43
--------------------
Net charge-offs 119 70
Provision for credit losses 25
Acquisitions 3
--------------------
Allowance at June 30 $1,075 $1,189
===============================================================
PNC BANK CORP. 26
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
- ---------------------------------------------------------------
JUNE 30, 1997
Interest rate swaps $5,813 $108 $1,235 $(11)
Interest rate caps 4,573 4
Interest rate floors 3,500 4 48
Mortgage banking
activities 1,782 8 1,112 (6)
------------------------------------------
Total $15,668 $124 $2,395 $(17)
===============================================================
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)
===============================================================
Customer-related derivatives were as follows:
Positive Negative
June 30, 1997 - Notional Net Asset Fair Fair
in millions Value (Liability) Value Value
- ---------------------------------------------------------------
Interest rate
Swaps $3,107 $1 $11 $(10)
Caps/floors 2,605 (1) 3 (4)
Foreign exchange 1,283 15 (15)
Other 952 1 (1)
----------------------------------------
Total $7,947 $30 $(30)
===============================================================
CAPITAL SECURITIES
Mandatorily Redeemable Capital Securities of Subsidiary Trust ("Capital
Securities") represent preferred beneficial interests in the assets of PNC
Institutional Capital Trust B ("Trust"). The Trust holds $300 million, par value
of certain 8.315% junior subordinated debentures due May 15, 2027 issued by the
Corporation. Distributions on the Capital Securities will be payable at an
annual rate of 8.315% of the stated liquidation amount of $1,000 per Capital
Security, payable semiannually. Cash distributions on the Capital Securities are
made to the extent interest on the debentures is received by the Trust. In the
event of certain changes or amendments to regulatory requirements or federal tax
rules, the Capital Securities are redeemable in whole. Otherwise, the Capital
Securities are generally redeemable in whole or in part on or after May 15,
2007, at a declining redemption price ranging from 104.1575% to 100% of par on
or after May 15, 2017.
OTHER FINANCIAL INFORMATION
PNC BANCORP, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30 December 31
In millions 1997 1996
- ---------------------------------------------------------------
ASSETS
Cash and due from banks $3,679 $4,022
Securities 8,206 11,210
Loans, net of unearned income 53,380 51,736
Allowance for credit losses (1,075) (1,166)
------------------------
Net loans 52,305 50,570
Other assets 6,551 5,988
------------------------
Total assets $70,741 $71,790
========================
LIABILITIES
Deposits $45,646 $46,290
Borrowed funds 17,661 18,077
Other liabilities 981 1,014
------------------------
Total liabilities 64,288 65,381
Mandatorily redeemable capital
securities of subsidiary trust 350 350
SHAREHOLDER'S EQUITY 6,103 6,059
------------------------
Total liabilities, capital
securities and shareholder's
equity $70,741 $71,790
===============================================================
PNC BANCORP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Six months ended June 30 - in millions 1997 1996
- ---------------------------------------------------------------
Interest income $2,476 $2,481
Interest expense 1,212 1,242
---------------------
Net interest income 1,264 1,239
Provision for credit losses 25
---------------------
Net interest income less provision
for credit losses 1,239 1,239
Noninterest income 785 590
Noninterest expense 1,235 1,085
---------------------
Income before income taxes 789 744
Applicable income taxes 276 263
---------------------
Net income $513 $481
===============================================================
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 $261 million at June 30, 1997. Dividends may also be impacted by capital
needs, regulatory requirements, corporate policies, contractual restrictions
and other factors.
PNC BANK CORP. 27
STATISTICAL INFORMATION
AVERAGE CONSOLIDATED BALANCE SHEET AND NET INTEREST ANALYSIS
Six months ended June 30
-------------------------------------------------------------------------------
1997 1996
Average balances 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 $1,215 $43,864 7.22% $1,205 $41,453 6.88%
Securities
U.S. Treasury, government
agencies and corporations 6,677 201,197 6.04 11,013 342,288 6.22
Other debt 2,305 75,892 6.58 3,110 106,129 6.79
Other 587 21,399 7.32 656 26,253 8.02
----------------------- -------------------------
Total securities 9,569 298,488 6.25 14,779 474,670 6.42
Loans, net of unearned income
Consumer
Credit card 3,274 206,941 12.75 983 66,894 13.62
Other consumer 11,531 482,953 8.45 12,324 515,802 8.42
----------------------- -------------------------
Total consumer 14,805 689,894 9.40 13,307 582,696 8.81
Residential mortgage 12,974 483,199 7.45 11,751 437,513 7.45
Commercial 18,204 713,054 7.79 16,998 662,706 7.71
Commercial real estate 4,562 197,229 8.62 4,858 216,991 8.89
Other 1,825 62,691 6.88 1,994 66,036 6.64
----------------------- -------------------------
Total loans, net of unearned income 52,370 2,146,067 8.20 48,908 1,965,942 8.02
Other interest-earning assets 860 25,661 6.02 1,138 34,812 6.15
----------------------- -------------------------
Total interest-earning assets/interest income 64,014 2,514,080 7.86 66,030 2,516,877 7.61
Noninterest-earning assets
Allowance for credit losses (1,121) (1,234)
Cash and due from banks 2,906 3,146
Other assets 4,763 4,145
--------- ------------
Total assets $70,562 $72,087
--------- ------------
LIABILITIES, CAPITAL SECURITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Interest-bearing deposits
Demand and money market $13,116 181,803 2.80 $12,630 165,341 2.63
Savings 2,993 29,181 1.97 3,580 36,921 2.07
Other time 17,689 472,475 5.38 18,523 496,088 5.38
Deposits in foreign offices 1,127 30,696 5.42 894 24,524 5.42
----------------------- -------------------------
Total interest-bearing deposits 34,925 714,155 4.12 35,627 722,874 4.08
Borrowed funds
Bank notes and senior debt 8,425 236,122 5.57 7,851 219,752 5.60
Federal funds purchased 3,272 89,601 5.52 3,896 104,429 5.39
Repurchase agreements 760 20,529 5.37 2,901 77,424 5.28
Other borrowed funds 4,827 141,887 5.88 3,299 102,133 6.23
Subordinated debt 1,351 53,922 7.98 1,359 54,231 7.99
----------------------- -------------------------
Total borrowed funds 18,635 542,061 5.82 19,306 557,969 5.78
----------------------- -------------------------
Total interest-bearing
liabilities/interest expense 53,560 1,256,216 4.71 54,933 1,280,843 4.67
----------------------- -------------------------
Noninterest-bearing liabilities, capital
securities and shareholders' equity
Demand and other noninterest-bearing deposits 9,550 9,838
Accrued expenses and other liabilities 1,473 1,550
Mandatorily redeemable capital
securities of subsidiary trust 421
Shareholders' equity 5,558 5,766
--------- ------------
Total liabilities, capital securities and
shareholders' equity $70,562 $72,087
----------------------------------------------------------------------------
Interest rate spread 3.15 2.94
Impact of noninterest-bearing liabilities .77 .78
-------------------------- --------------------------
Net interest income/margin $1,257,864 3.92% $1,236,034 3.72%
================================================================================================================================
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. 28
- -------------------------------------------------------------------------------------------------------------------------
Second Quarter 1997 First Quarter 1997 Second Quarter 1996
- -------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balances Interest Yields/Rates Balances Interest Yields/Rates Balances Interest Yields/Rates
- -------------------------------------------------------------------------------------------------------------------------
$1,408 $25,894 7.36% $1,019 $17,970 7.05% $1,260 $21,725 6.90%
6,375 95,834 6.02 6,982 105,363 6.05 11,206 172,885 6.18
2,083 34,051 6.54 2,530 41,841 6.62 2,906 48,960 6.71
597 10,733 7.20 577 10,666 7.45 628 12,773 8.15
- ---------------------------- -------------------------- ------------------------
9,055 140,618 6.21 10,089 157,870 6.27 14,740 234,618 6.37
3,502 106,348 12.18 3,043 100,593 13.22 979 33,845 13.83
11,239 237,784 8.49 11,827 245,169 8.41 12,264 255,227 8.37
- ---------------------------- -------------------------- ------------------------
14,741 344,132 9.36 14,870 345,762 9.39 13,243 289,072 8.78
13,164 245,127 7.45 12,781 238,072 7.45 11,883 219,395 7.40
18,494 363,388 7.77 17,916 349,666 7.81 17,190 331,768 7.64
4,530 98,558 8.66 4,591 98,671 8.60 4,831 104,582 8.62
1,884 33,327 7.08 1,764 29,364 6.67 2,044 33,711 6.48
- ---------------------------- -------------------------- ------------------------
52,813 1,084,532 8.19 51,922 1,061,535 8.20 49,191 978,528 7.94
925 13,522 5.86 795 12,139 6.20 1,165 17,417 6.01
- ---------------------------- -------------------------- ------------------------
64,201 1,264,566 7.85 63,825 1,249,514 7.86 66,356 1,252,288 7.53
(1,094) (1,148) (1,216)
2,877 2,935 3,196
4,837 4,689 4,104
- --------------- -------------- ------------
$70,821 $70,301 $72,440
- --------------- -------------- ------------
$13,270 94,394 2.85 $12,962 87,409 2.74 $12,635 80,422 2.56
2,924 14,377 1.97 3,063 14,804 1.96 3,582 17,796 2.00
17,656 238,928 5.43 17,721 233,547 5.34 18,407 243,554 5.32
1,463 20,301 5.49 787 10,395 5.28 759 10,119 5.27
- ---------------------------- -------------------------- ------------------------
35,313 368,000 4.18 34,533 346,155 4.06 35,383 351,891 4.00
8,284 118,950 5.68 8,566 117,172 5.47 8,298 114,483 5.52
3,474 48,693 5.62 3,068 40,908 5.38 3,550 46,423 5.26
786 10,773 5.43 735 9,756 5.31 3,063 40,465 5.23
4,780 70,615 5.91 4,874 71,272 5.86 3,451 51,980 6.06
1,351 26,954 7.98 1,351 26,968 7.98 1,358 27,120 7.99
- ---------------------------- -------------------------- ------------------------
18,675 275,985 5.88 18,594 266,076 5.76 19,720 280,471 5.69
- ---------------------------- -------------------------- ------------------------
53,988 643,985 4.77 53,127 612,231 4.66 55,103 632,362 4.59
- ---------------------------- -------------------------- ------------------------
9,501 9,600 9,996
1,480 1,466 1,574
492 350
5,360 5,758 5,767
- --------------- -------------- ------------
$70,821 $70,301 $72,440
- -------------------------------------------------------------------------------------------------------------------------
3.08 3.20 2.94
.76 .78 .78
-------------------------- ------------------------- ------------------------
$620,581 3.84% $637,283 3.98% $619,926 3.72%
=========================================================================================================================
PNC BANK CORP. 29
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 June 30, 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 July 31, 1997, PNC Bank Corp. had 307,029,630 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 and six months ended June
30, 1997 and 1996 21
Consolidated Balance Sheet as of June
30, 1997 and December 31, 1996 22
Consolidated Statement of Cash Flows for
the six months ended June 30, 1997
and 1996 23
Notes to Consolidated Financial
Statements 24-27
Average Consolidated Balance Sheet and
Net Interest Analysis 28-29
Item 2 Management's Discussion and Analysis of
Financial Condition and Results
of Operations 2-20
- ---------------------------------------------------------------
PART II OTHER INFORMATION
Item 4 Submission of Matters for a Vote of Security
Holders
An annual meeting of shareholders of the Corporation was held on April 22,
1997, for the purpose of (a) electing 19 directors, (b) approving the PNC Bank
Corp. 1997 Long-Term Incentive Award Plan, and (c) approving an amendment
to the PNC Bank Corp. Employee Stock Purchase Plan.
All 19 nominees were elected and the votes cast for and against/withheld were
as follows:
Aggregate Votes
-------------------------------
Nominee For Against/Withheld
- ---------------------------------------------------------------
Paul W. Chellgren 276,402,363 4,169,891
Robert N. Clay 276,330,770 4,241,484
George A. Davidson, Jr. 276,357,739 4,214,515
David F. Girard-diCarlo 274,163,908 6,408,346
Dianna L. Green 276,260,048 4,312,206
Carl G. Grefenstette 276,218,066 4,354,188
Bruce C. Lindsay 276,316,654 4,255,600
W. Craig McClelland 276,282,556 4,289,698
Thomas Marshall 276,199,969 4,372,285
Thomas H. O'Brien 276,185,331 4,386,923
Jackson H. Randolph 276,311,304 4,260,950
James E. Rohr 276,339,306 4,232,948
Roderic H. Ross 276,234,958 4,337,296
Vincent A. Sarni 276,145,342 4,426,912
Garry J. Scheuring 276,184,059 4,388,195
Richard P. Simmons 276,265,639 4,306,615
Thomas J. Usher 276,383,586 4,188,668
Milton A. Washington 276,321,909 4,250,345
Helge H. Wehmeier 276,342,817 4,229,437
===============================================================
The PNC Bank Corp. 1997 Long-Term Incentive Award Plan was approved, and the
votes cast for, against or abstained and the number of broker non-votes were
as follows:
- ---------------------------------------------------------------
Aggregate votes for: 194,306,952
Aggregate votes against: 51,532,000
Number of abstentions: 3,872,126
Number of broker non-votes: 30,861,176
===============================================================
PNC BANK CORP. 30
The amendment to the PNC Bank Corp. Employee Stock Purchase Plan was approved,
and the votes cast for, against or abstained and the number of broker non-votes
were as follows:
- ---------------------------------------------------------------
Aggregate votes for: 236,980,029
Aggregate votes against: 9,092,069
Number of abstentions: 3,638,980
Number of broker non-votes: 30,861,176
===============================================================
With respect to the above matters, holders of the Corporation's common and
preferred stock voted together as a single class. The following table sets
forth as of the February 24, 1997 record date the number of shares of each
class of stock that was issued and outstanding and entitled to vote, the voting
power per share and the aggregate voting power of each class:
Number of
Voting Shares
Rights Entitled Aggregate
Title of Class Per Share to Vote Voting Power
- ---------------------------------------------------------------
Common Stock 1 322,038,350 322,038,350
$1.80 Cumulative
Convertible
Preferred Stock
- Series A 8 16,258 130,064
$1.80 Cumulative
Convertible
Preferred Stock
- Series B 8 4,452 35,616
$1.60 Cumulative
Convertible
Preferred Stock
- Series C 4/2.4 325,610 542,683*
$1.80 Cumulative
Convertible
Preferred Stock
- Series D 4/2.4 439,896 733,160*
-------------
Total possible votes 323,479,873*
===============================================================
* Represents greatest number of votes possible. Actual aggregate voting power
was less since each holder of such preferred stock is entitled to a number of
votes equal to the number of full shares of common stock into which such
holder's preferred stock is convertible.
Holders of the Corporation's 6,000,000 issued and outstanding shares of
Fixed/Adjustable Rate Noncumulative Preferred Stock-Series F were not entitled
to vote with respect to the matters presented at the meeting.
Item 6 Exhibits and Reports on Form 8-K
The following exhibit index lists Exhibits to this Quarterly Report
on Form 10-Q:
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
- ----------------------------------------------------------------
Copies of these Exhibits may be accessed electronically at the Securities and
Exchange Commission's home page at www.sec.gov. Exhibits will also be furnished
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.
Since March 31, 1997, the Corporation filed the following current reports on
Form 8-K:
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.
Form 8-K dated as of July 9, 1997, reporting the public offering of $350
million of 67/8% subordinated notes due 2007, filed pursuant to Item 5.
Form 8-K dated as of July 16, 1997, reporting the Corporation's consolidated
financial results for the three months and six months ended June 30, 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 August 14, 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. 31
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
PNC Bank Corp.
One PNC Plaza
249 Fifth Avenue
Pittsburgh, Pennsylvania 15222-2707
INTERNET INFORMATION
World Wide Web at 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
("SEC"), including Exhibits thereto, may be obtained:
Electronically at the SEC's home page at www.sec.gov.
By writing to Glenn Davies, Vice President, Financial Reporting, at
corporate headquarters.
By calling (412) 762-1553 or via e-mail to gdavies@usaor.net.
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.
News media representatives and others seeking general information should
contact: Jonathan Williams, Vice President, Media Relations, at 412-762-4550 or
pubrela@pncmail.com.
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 $36.500 $40.000 $.37
Second 44.750 37.375 41.750 .37
---------
Total $.74
================================================================
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. 32