PNC BANK CORP.
Quarterly Report on Form 10-Q
For the quarterly period ended September 30, 1997
Page 1 represents a portion of the third 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 32.
Financial
HIGHLIGHTS
Three months ended Nine months ended
September 30 September 30
-------------------------------------------------------------
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL PERFORMANCE (in thousands, except per share data)
Revenue
Net interest income (taxable-equivalent basis) $627,431 $616,938 $1,885,295 $1,852,972
Noninterest income 445,650 348,374 1,304,173 1,006,521
Total revenue 1,073,081 965,312 3,189,468 2,859,493
Net income 261,595 233,953 786,979 720,323
Per common share
Fully diluted earnings .83 .68 2.43 2.08
Cash dividends declared .37 .35 1.11 1.05
SELECTED RATIOS
Return on
Average common shareholders' equity 20.11% 16.16% 19.93% 16.71%
Average assets 1.47 1.34 1.49 1.35
Net interest margin 3.89 3.85 3.91 3.77
After-tax profit margin 24.38 24.24 24.67 25.19
Efficiency ratio 59.51 61.68 60.00 60.34
Net charge-offs to average loans .54 .30 .49 .29
September 30 June 30 December 31 September 30
1997 1997 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (in millions)
Assets $71,828 $71,973 $73,260 $69,662
Earning assets 64,208 64,297 65,439 62,533
Loans, net of unearned income 53,651 53,497 51,798 49,443
Securities 8,000 8,396 11,917 11,243
Deposits 44,788 45,216 45,676 45,430
Borrowed funds 19,052 19,066 19,604 16,650
Shareholders' equity 5,476 5,384 5,869 5,798
Common shareholders' equity 5,161 5,068 5,553 5,781
CAPITAL RATIOS
Leverage 7.43% 7.35% 7.70% 7.18%
Risk-based
Tier I 7.72 7.74 8.29 8.29
Total 11.46 10.98 11.65 11.79
Common shareholders' equity to assets 7.18 7.04 7.58 8.30
ASSET QUALITY RATIOS
Nonperforming assets to loans and foreclosed assets .73 .83 .88 1.01
Allowance for credit losses to loans 1.91 2.01 2.25 2.33
Allowance for credit losses to nonperforming loans 324.25 310.34 334.40 306.11
Book value per common share $16.92 $16.51 $17.13 $17.23
====================================================================================================================================
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 19
Third Quarter 1997 vs. Third Quarter 1996 21
CONSOLIDATED FINANCIAL STATEMENTS 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 25
AVERAGE CONSOLIDATED BALANCE SHEET AND
NET INTEREST ANALYSIS 30
QUARTERLY REPORT ON FORM 10-Q 32
CORPORATE INFORMATION 33
==============================================================
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 nine months of 1997 was $787
million or $2.43 per fully diluted share compared with $720 million and $2.08,
respectively, a year ago. Returns on average common shareholders' equity and
average assets were 19.93% and 1.49% compared with 16.71% and 1.35%,
respectively, a year ago.
Results for 1996 include a one-time special assessment to recapitalize the
Savings Association Insurance Fund ("SAIF"). Excluding the SAIF assessment,
earnings totaled $743 million or $2.15 per fully diluted share for the first
nine months of 1996. On this basis, returns on average common shareholders'
equity and average assets were 17.23% and 1.39%, respectively.
Total revenue for the first nine months of 1997 increased 11.5% compared with
the same period in 1996 primarily due to noninterest income growth. Noninterest
income increased to $1.3 billion for the first nine months of 1997, a 29.6%
increase over the same period in 1996. The increase reflects growth in credit
card, asset management, mutual fund servicing, corporate and consumer service
fees and securitization income. Noninterest income represented 41% of total
revenue compared with 35% in the first nine months of 1996. Taxable-equivalent
net interest income increased $32 million for the first nine months of 1997 and
the net interest margin widened 14 basis points to 3.91% compared with 3.77% in
the prior-year period. These increases resulted from a higher-yielding earning
asset mix which offset the impact of spread compression and lower deposit
levels.
The provision for credit losses was $45 million for the first nine months of
1997. No provision was recorded in the prior-year period.
Operating expenses increased $189 million to $1.9 billion largely due to $123
million of incremental costs associated with AAA Financial Services and credit
card-related initiatives. The efficiency ratio was 60.0% for the first nine
months of 1997 compared with 60.3% a year ago.
Total assets were $71.8 billion at September 30, 1997. Average earning assets
declined $1.2 billion in the period-to-period comparison to $64.0 billion,
reflecting securities portfolio reduction partially offset by loan growth.
Average securities declined $5.1 billion to $9.1 billion and represented 14.2%
of average earning assets compared with 21.8% a year ago. Average loans
increased $3.8 billion to $52.7 billion primarily due to higher credit card,
residential mortgage and commercial loan outstandings. Loans represented 82.3%
of average earning assets compared with 74.9% 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 .73% at September 30, 1997 compared
with .88% at December 31, 1996 and 1.01% a year ago. The allowance for credit
losses was 324% of nonperforming loans and 1.91% of total loans at September
30, 1997. Annualized net charge-offs for the first nine months of 1997 were
.49% of average loans compared with .29% for the first nine months of 1996. The
increase was primarily associated with higher credit card outstandings.
Shareholders' equity totaled $5.5 billion at September 30, 1997. The leverage
ratio was 7.43% and Tier I and total risk-based capital ratios were 7.72% and
11.46%, respectively. As part of the Corporation's capital management
initiatives, 23.8 million shares of common stock were repurchased during the
first nine months of 1997.
BUSINESS STRATEGIES PNC Bank's strategies are focused on creating a more
valuable earnings stream by reducing the reliance on wholesale investment
activities and increasing earnings from banking activities with national
distribution capability and more attractive growth characteristics.
Financial services providers today are challenged by intense competition,
changing customer demands, increased pricing pressures and the ongoing impact
of deregulation. Traditional loan and deposit activities face particularly
challenging competitive pressures as both banks and nonbanks compete for
customers with access to a broad array of banking, investment and capital
markets products. Many of these traditional businesses have moderate growth
expectations and require significant capital to support balance sheet leverage,
which entails credit and interest rate risk.
PNC Bank is responding to these challenges by altering the business mix and
investing in non-traditional businesses including Asset Management, Mutual Fund
Servicing, Private Banking, Treasury Management and Capital Markets. These
businesses are largely fee-based, less capital intensive and have superior
growth outlooks on a national scale. More meaningful contributions from these
businesses, coupled with disciplined management of traditional banking
activities, have allowed PNC Bank to significantly alter the nature of the
earnings stream.
CONSUMER BANKING contributed 47% of total line of business earnings in the
first nine months of 1997. Consumer Banking is focused on expanding product
distribution through cost efficient non-traditional delivery channels.
Narrowing spreads on traditional products dictate employing cost efficient
alternatives to deliver products to customers. Consumer preferences are
changing as technological advances are transforming the delivery of products.
Deposit activities are subject to pricing pressures and customer migration as
banks and other financial services companies compete for consumer investment
dollars. Through this transition, traditional retail branches are managed in
conjunction with more automated distribution channels such as telebanking,
automated teller machines and on-line banking through personal computers.
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 29% of total line of business earnings in the
first nine 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, the focus is on aggressively managing capital to generate
more appropriate returns and on expanding fee-based revenue by developing
products and services as alternatives to spread-based businesses. These
alternatives include syndication, treasury management, interest rate risk
management and capital markets. Corporate Banking also offers a full range of
leasing and commercial finance products.
PNC BANK CORP. | 3
Financial
REVIEW
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 key national consumer business, with commodity-based
pricing requiring an efficient infrastructure and increasingly higher
origination and servicing volumes. A substantial portion of PNC Bank's
origination activity is generated through the retail distribution network.
Ongoing servicing and customer contact provide the opportunity to cross-sell
other consumer products. The Mortgage Banking line of business is focused on
geographically expanding the origination network and reducing costs by
leveraging technology to enhance efficiency and service.
ASSET MANAGEMENT, with $127 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 $14 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.
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
Nine months ended September 30 - -------------------------------------------------------------------------------------------
dollars in millions 1997 1996 1997 1996 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Consumer Banking $38,437 $39,108 $1,904 $1,727 $361 $403 21% 24%
Corporate Banking 17,502 17,041 630 563 222 193 14 13
Real Estate Banking 4,032 4,074 127 119 71 59 16 13
Mortgage Banking 15,057 13,596 340 277 65 35 13 8
Asset Management 687 568 299 242 56 45 37 36
--------------------------------------------------------------------
Total lines of business 75,715 74,387 3,300 2,928 775 735 18 18
Asset/liability management
activities (8,581) (6,468) (52) (37) (59) (32)
Provision for credit losses 83 40
SAIF assessment (22)
Other 3,434 3,315 (59) (32) (12) (1)
--------------------------------------------------------------------
Total consolidated $70,568 $71,234 $3,189 $2,859 $787 $720 19% 17%
===================================================================================================================================
Financial results for PNC Bank's lines of business are derived from the
Corporation's management accounting system.
The management accounting process uses various balance sheet and income
statement allocations and transfers to evaluate business unit performance.
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 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
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 providing similar
products and services. Capital assignments are not equivalent to regulatory
capital guidelines and the total capital 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, different
provision for credit loss methodologies 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 gains and losses on 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.
PNC BANK CORP. | 5
Financial
REVIEW
CONSUMER BANKING
Community Banking Private Banking Total
Nine months ended September 30 - -------------------------------------------------------------------------------
dollars in millions 1997 1996 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT
Net interest income $1,213 $1,226 $81 $57 $1,294 $1,283
Noninterest income 398 254 212 190 610 444
-------------------------------------------------------------------------------
Total revenue 1,611 1,480 293 247 1,904 1,727
Provision for credit losses 188 70 3 191 70
Noninterest expense 945 826 184 175 1,129 1,001
-------------------------------------------------------------------------------
Pretax earnings 478 584 106 72 584 656
Income taxes 182 222 41 31 223 253
-------------------------------------------------------------------------------
Earnings $296 $362 $65 $41 $361 $403
-------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans $17,111 $15,011 $2,437 $2,305 $19,548 $17,316
Assigned assets and other 18,831 21,736 58 56 18,889 21,792
-------------------------------------------------------------------------------
Total assets $35,942 $36,747 $2,495 $2,361 $38,437 $39,108
-------------------------------------------------------------------------------
Net deposits $33,655 $34,557 $1,646 $1,495 $35,301 $36,052
Assigned funds and other 257 221 593 608 850 829
Assigned capital 2,030 1,969 256 258 2,286 2,227
-------------------------------------------------------------------------------
Total funds $35,942 $36,747 $2,495 $2,361 $38,437 $39,108
-------------------------------------------------------------------------------
PERFORMANCE RATIOS
After-tax profit margin 18% 24% 22% 17% 19% 23%
Efficiency 59 56 63 71 59 58
Return on assigned capital 20 25 34 21 21 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
competitive investment products as well as traditional trust, brokerage and
retail financial services.
Consumer Banking management is focused on enhancing longer-term returns on
assigned capital by employing more efficient alternative delivery systems
across a broader geographic marketplace. These efforts are reflected in the
aggressive pursuit of the AAA initiative.
Consumer Banking earnings contributed 47% of total line of business earnings in
the first nine months of 1997 compared with 55% a year ago. Earnings for the
first nine months of 1997 decreased $42 million or 10% due to lower Community
Banking earnings, which declined $66 million or 18% to $296 million. The
decline in Community Banking earnings was primarily due to costs associated
with the AAA and credit card initiatives and lower deposit levels. Private
Banking earnings increased 59% to $65 million for the first nine months of 1997
due to higher annuity and trust income and an increase in loans.
The initial phase of the AAA 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 lower
introductory interest rates. Net interest income and margin are adversely
affected until the introductory period expires and the yields earned are reset
to market rates. The AAA alliance resulted in a net loss of $44 million for the
first nine 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 between $50 million
and $60 million and current projections indicate the initiative will become
profitable in the fourth quarter of 1998.
PNC BANK CORP. | 6
CORPORATE BANKING
Commercial Banking Equity Management Total
Nine months ended September 30 - --------------------------------------------------------------------------------
dollars in millions 1997 1996 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT
Net interest income $414 $378 $(2) $414 $376
Noninterest income 158 127 $58 60 216 187
--------------------------------------------------------------------------------
Total revenue 572 505 58 58 630 563
Provision for credit losses 2 (11) 2 (11)
Noninterest expense 272 256 6 6 278 262
--------------------------------------------------------------------------------
Pretax earnings 298 260 52 52 350 312
Income taxes 109 99 19 20 128 119
--------------------------------------------------------------------------------
Earnings $189 $161 $33 $32 $222 $193
--------------------------------------------------------------------------------
AVERAGE BALANCE SHEET
Loans $16,511 $16,154 $65 $46 $16,576 $16,200
Other assets 707 663 219 178 926 841
--------------------------------------------------------------------------------
Total assets $17,218 $16,817 $284 $224 $17,502 $17,041
--------------------------------------------------------------------------------
Net deposits $2,155 $1,908 $2,155 $1,908
Assigned funds and other 12,976 12,938 $199 $157 13,175 13,095
Assigned capital 2,087 1,971 85 67 2,172 2,038
--------------------------------------------------------------------------------
Total funds $17,218 $16,817 $284 $224 $17,502 $17,041
--------------------------------------------------------------------------------
PERFORMANCE RATIOS
After-tax profit margin 33% 32% 56% 56% 35% 34%
Efficiency 48 51 10 10 44 47
Return on assigned capital 12 11 52 64 14 13
===================================================================================================================================
The Corporate Banking line of business includes Commercial Banking, which
serves large and middle market commercial customers with a specific focus on
customers in certain specialized industries, and Equity Management, which makes
venture capital investments.
Corporate Banking contributed 29% of total line of business earnings in the
first nine months of 1997 compared with 26% in the same period of 1996.
Earnings for the first nine months of 1997 increased $29 million or 15%.
The challenge in Corporate Banking is to improve returns on investment capital.
This business 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
is focused on generating appropriate returns for the level of balance sheet
leverage employed and expanding fee-based revenue by developing products and
services as alternatives to spread-based lending.
Commercial Banking earnings increased in the comparison primarily due to higher
fee-based revenue driven by growth initiatives in treasury management and
capital markets. Through the first nine 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 coupled with higher yielding
loan growth contributed to the 10% increase in net interest income.
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. To
enhance its product capability PNC Bank entered into a strategic alliance with
Friedman, Billings, Ramsey Group, Inc., an institutional investment banking
firm.
PNC BANK CORP. | 7
Financial
REVIEW
REAL ESTATE BANKING
Nine months ended September 30 - dollars in millions 1997 1996
- ----------------------------------------------------------------------------
INCOME STATEMENT
Net interest income $112 $110
Noninterest income 15 9
-------------------
Total revenue 127 119
Provision for credit losses (23) (5)
Noninterest expense 35 29
-------------------
Pretax earnings 115 95
Income taxes 44 36
-------------------
Earnings $71 $59
-------------------
AVERAGE BALANCE SHEET
Loans $3,941 $3,906
Other assets 91 168
-------------------
Total assets $4,032 $4,074
-------------------
Net deposits $182 $167
Assigned funds and other 3,264 3,321
Assigned capital 586 586
-------------------
Total funds $4,032 $4,074
-------------------
PERFORMANCE RATIOS
After-tax profit margin 56% 49%
Efficiency 27 25
Return on assigned capital 16 13
============================================================================
Real Estate Banking serves national, regional and local real estate developers,
owners, property managers and mortgage bankers by providing credit products,
capital markets financing and treasury management and other operational
services.
Real Estate Banking contributed 9% of total line of business earnings in the
first nine months of 1997 compared with 8% in the year-earlier period. Earnings
increased $12 million or 20% in the comparison as a result of improved credit
quality and a 7% increase in revenue driven primarily by commercial mortgage
securitization fees.
Real Estate Banking traditionally relies on balance sheet leverage and requires
significant levels of assigned capital. Key strategies in this line of business
focus on expanding fee-based services such as treasury management, loan
syndication, commercial mortgage-backed securitizations, private debt
placements and interest rate risk management.
MORTGAGE BANKING
Nine months ended September 30 - dollars in millions 1997 1996
- ---------------------------------------------------------------------------
INCOME STATEMENT
Net interest income $174 $147
Noninterest income 166 130
-------------------
Total revenue 340 277
Provision for credit losses 8 11
Noninterest expense 226 210
-------------------
Pretax earnings 106 56
Income taxes 41 21
-------------------
Earnings $65 $35
-------------------
AVERAGE BALANCE SHEET
Loans $12,497 $11,411
Other assets 2,560 2,185
-------------------
Total assets $15,057 $13,596
-------------------
Net deposits $2,080 $2,327
Assigned funds and other 12,294 10,670
Assigned capital 683 599
-------------------
Total funds $15,057 $13,596
-------------------
PERFORMANCE RATIOS
After-tax profit margin 19% 13%
Efficiency 67 76
Return on assigned capital 13 8
===========================================================================
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 8% of total line of business earnings in the first
nine months of 1997 compared with 5% a year ago. Earnings increased $30 million
or 86% primarily due to higher income from securitization activities and
increased net interest income from growth in the residential mortgage portfolio.
The increase in noninterest expense reflects higher mortgage servicing rights
("MSR") amortization partially offset by benefits of technology-related
efficiencies in the loan origination and servicing functions. Excluding the
effect of significant noncash expense items, particularly MSR amortization, 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 4,068 4,245
Purchases 1,917 3,737
Repayments (4,437) (4,717)
Sales (122) (133)
--------------------
September 30 $40,969 $40,431
===============================================================
During the first nine months of 1997, the Corporation funded $4.1 billion of
residential mortgages with 69% representing new financings. The comparable
amounts were $4.2 billion and 69%, respectively, in the first nine months of
1996. At September 30, 1997, the mortgage servicing portfolio totaled $41.0
billion, including $31.3 billion of loans serviced for others, had a
weighted-average coupon of 7.96% and an estimated fair value of $455 million.
Capitalized MSR totaled $359 million at September 30, 1997 compared with $322
million a year ago.
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
Nine months ended September 30 - ------------------------------------------------------------
dollars in millions 1997 1996 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT
Advisory, processing and other fee income $187 $150 $104 $88 $291 $238
Net interest income 3 (2) 5 6 8 4
------------------------------------------------------------
Total revenue 190 148 109 94 299 242
Operating expenses 136 111 70 58 206 169
------------------------------------------------------------
Pretax earnings 54 37 39 36 93 73
Income taxes 22 14 15 14 37 28
------------------------------------------------------------
Earnings $32 $23 $24 $22 $56 $45
------------------------------------------------------------
PERFORMANCE RATIOS
After-tax profit margin 17% 16% 22% 24% 19% 19%
Efficiency 71 75 64 61 69 69
Return on assigned capital 32 28 47 54 37 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
nine months of 1997 compared with 6% in the year-earlier period. Earnings
increased $11 million or 24% in the comparison. Fee income increased 22% due to
an increase in assets under administration driven by new business and market
appreciation. Operating expenses increased primarily due to incremental costs
associated with servicing new business and higher compensation commensurate
with revenue growth.
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
Nine months ended September 30 -
in millions Revenue Earnings
- ---------------------------------------------------------------
1997
Asset Management $299 $56
Consumer Banking 166 41
-------------------
Total $465 $97
- ---------------------------------------------------------------
1996
Asset Management $242 $45
Consumer Banking 149 37
-------------------
Total $391 $82
===============================================================
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 $75 billion in the year-to-year
comparison to $386 billion at September 30, 1997. Managed assets totaled $127
billion at September 30, 1997 compared with $105 billion a year ago.
COMPOSITION OF MANAGED ASSETS
September 30 1997 1996
- ---------------------------------------------------------------
Fixed income 44% 46%
Equity 29 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.
September 30 1997 1996
- ---------------------------------------------------------------
Assets (billions)
Custody $212 $187
Accounting/administration 175 121
- ---------------------------------------------------------------
Accounts (millions)
Shareholder 4.2 4.2
Checking and credit/debit card 2.0 1.6
===============================================================
CONSOLIDATED INCOME STATEMENT REVIEW
Highlights of the consolidated results of operations for the first nine months
of 1997 and 1996 were as follows:
INCOME STATEMENT HIGHLIGHTS
Nine months ended September 30 - in millions 1997 1996 Change
- ------------------------------------------------------------------------------
Net interest income
(taxable-equivalent basis) $1,885 $1,853 $32
Provision for credit losses 45 45
Noninterest income before
net securities gains 1,277 992 285
Net securities gains 27 15 12
Noninterest expense 1,914 1,725 189
Income taxes 422 387 35
Net income 787 720 67
==============================================================================
Taxable-equivalent net interest income increased $32 million for the first nine
months of 1997 and the net interest margin widened 14 basis points to 3.91%
compared with 3.77% in the prior-year period. These increases resulted from a
higher-yielding earning asset mix which offset the impact of spread compression
and lower deposit levels. Average securities declined $5.1 billion to $9.1
billion for the first nine months of 1997 while average loans increased $3.8
billion to $52.7 billion.
PNC BANK CORP. | 10
NET INTEREST INCOME ANALYSIS
Taxable-equivalent basis Average Balances Interest Income/Expense Average Yields/Rates
Nine months ended September 30 - ------------------------------------------------------------------------------------------
dollars in millions 1997 1996 Change 1997 1996 Change 1997 1996 Change
- -----------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets
Securities $9,113 $14,214 $(5,101) $426 $684 $(258) 6.23% 6.41% (18) bp
Loans, net of unearned income
Consumer
Credit card 3,475 991 2,484 329 102 227 12.68 13.79 (111)
Other consumer 11,352 12,231 (879) 719 771 (52) 8.47 8.42 5
----------------------------- --------------------------
Total consumer 14,827 13,222 1,605 1,048 873 175 9.45 8.82 63
Residential mortgage 13,152 11,944 1,208 735 669 66 7.45 7.47 (2)
Commercial 18,268 16,997 1,271 1,077 995 82 7.77 7.69 8
Commercial real estate 4,536 4,809 (273) 297 322 (25) 8.63 8.88 (25)
Other 1,868 1,853 15 96 92 4 6.90 6.63 27
----------------------------- --------------------------
Total loans, net of unearned
income 52,651 48,825 3,826 3,253 2,951 302 8.21 8.02 19
Other interest-earning assets 2,229 2,157 72 113 106 7 6.75 6.54 21
----------------------------- --------------------------
Total interest-earning assets/
interest income 63,993 65,196 (1,203) 3,792 3,741 51 7.87 7.62 25
Noninterest-earning assets 6,575 6,038 537
-----------------------------
Total assets $70,568 $71,234 $(666)
=============================
Interest-bearing liabilities
Deposits
Demand and money market $13,318 $12,588 $730 286 247 39 2.87 2.62 25
Savings 2,919 3,522 (603) 43 54 (11) 1.97 2.04 (7)
Other time 17,570 18,410 (840) 711 739 (28) 5.41 5.36 5
Deposits in foreign offices 1,127 828 299 47 34 13 5.49 5.37 12
----------------------------- --------------------------
Total interest-bearing deposits 34,934 35,348 (414) 1,087 1,074 13 4.16 4.06 10
Borrowed funds 18,584 18,719 (135) 820 814 6 5.84 5.74 10
----------------------------- --------------------------
Total interest-bearing
liabilities/ interest expense 53,518 54,067 (549) 1,907 1,888 19 4.74 4.64 10
-------------------------- ---------------------------
Noninterest-bearing liabilities,
capital securities and 17,050 17,167 (117)
shareholders' equity -----------------------------
Total liabilities and
shareholders' equity $70,568 $71,234 $(666)
=============================
Interest rate spread 3.13 2.98 15
Impact of noninterest-bearing sources .78 .79 (1)
---------------------------
Net interest income/margin $1,885 $1,853 $32 3.91% 3.77% 14 bp
===================================================================================================================================
Changes in net interest income and margin result from the interaction between
the volume and composition of earning assets, related yields and associated
funding costs. Portfolio size, composition and related yields earned have a
significant impact on net interest income and margin. In the first nine months
of 1997, average loans comprised 82.3% of average earning assets compared to
74.9% for the same period last year. A higher percentage of loans in the earning
asset base coupled with growth in higher yielding asset categories,
predominantly credit card, positively impacted net interest income and margin.
These positive impacts were partially offset by declining spreads primarily
attributable to competitive pressures on certain loan and deposit products.
Funding cost is affected by the composition of and rates paid on various funding
sources. Average deposits comprised 63.1% and 63.5% of PNC Bank's total sources
of funding for the nine months ended September 30, 1997 and 1996, respectively,
with the remainder primarily comprised of wholesale funding obtained at
prevailing market rates.
PROVISION FOR CREDIT LOSSES The provision for credit losses was $45 million in
the first nine months of 1997. No provision was recorded in the prior-year
period. 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.
PNC BANK CORP. | 11
Financial
REVIEW
NONINTEREST INCOME
Change
Nine months ended September 30 - -------------------
dollars in millions 1997 1996 Amount Percent
- --------------------------------------------------------------
Asset management
Asset management and
trust $332 $280 $52 18.6%
Mutual fund servicing 104 88 16 18.2
------------------------
Total asset
management 436 368 68 18.5
Service fees
Deposit 239 212 27 12.7
Credit card and
merchant services 65 15 50 NM
Corporate finance and
capital markets 56 49 7 14.3
Consumer services 55 45 10 22.2
Brokerage 40 41 (1) (2.4)
Insurance 29 21 8 38.1
Other 36 25 11 44.0
------------------------
Total service fees 520 408 112 27.5
Mortgage banking
Servicing 86 89 (3) (3.4)
Marketing 23 15 8 53.3
Sale of servicing 2 2
------------------------
Total mortgage banking 111 106 5 4.7
Other 210 110 100 90.9
------------------------
Total noninterest income
before net
securities gains 1,277 992 285 28.7
Net securities gains 27 15 12 80.0
-----------------------
Total $1,304 $1,007 $297 29.5%
==============================================================
Noninterest income before net securities gains totaled $1.3 billion in the
first nine months of 1997, a 28.7% increase compared with the same period a
year ago.
Strong asset management and service fee growth reflects the strategic 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 $27 million due to a revised fee structure
and higher treasury management revenue. Credit card and merchant services fees
increased $50 million, reflecting credit card portfolio growth and the July
1996 termination of a third party alliance.
Mortgage banking revenue grew primarily due to higher income from
securitization activities. Mortgage originations were $4.1 billion in the first
nine months of 1997 compared with $4.2 billion in the same period of 1996.
Other noninterest income increased in the comparison primarily due to asset
securitization income of $55 million.
NONINTEREST EXPENSE
Change
Nine months ended September 30 - -------------------
dollars in millions 1997 1996 Amount Percent
- ----------------------------------------------------------------
Staff expense
Compensation $739 $695 $44 6.3%
Employee benefits 157 146 11 7.5
-------------------------
Total staff expense 896 841 55 6.5
Net occupancy 140 147 (7) (4.8)
Equipment 132 128 4 3.1
Goodwill amortization 40 39 1 2.6
Other amortization 78 42 36 85.7
Taxes other than income 43 41 2 4.9
Distributions on
capital securities 30 30 100.0
Other 555 487 68 14.0
-------------------------
Total $1,914 $1,725 $189 11.0%
================================================================
Noninterest expense increased $189 million to $1.9 billion in the first nine
months of 1997 primarily due to $123 million of incremental costs associated
with AAA and credit card-related initiatives. Higher incentive compensation
commensurate with revenue growth and the cost of trust preferred capital
securities also contributed to the increase. Average full-time equivalent
employees totaled 24,640 in the first nine months of 1997 compared with 25,200
in the year-earlier period. The efficiency ratio was 60.0% compared with 60.3%
a year ago.
The Corporation has been working to ensure its computer systems will function
properly in the year 2000. Given the Corporation's common technology
infrastructure, the total cost expected from 1997 through 1999 to become year
2000 compliant is approximately $30 million.
PNC BANK CORP. | 12
BALANCE SHEET REVIEW
AVERAGE BALANCE SHEET Average assets and average earning assets were $70.6
billion and $64.0 billion, respectively, for the nine months ended September 30,
1997 compared with $71.2 billion and $65.2 billion, respectively, in the
year-earlier period. Average securities declined to 14.2% of average earning
assets from 21.8% in the prior-year period. Average loans increased to 82.3% of
average earning assets from 74.9% in the year-earlier period. Average deposits
declined 1.5% reflecting continued customer migration to higher-yielding
investment products. The decline in shareholders' equity is due to common share
repurchases.
AVERAGE BALANCE SHEET HIGHLIGHTS
Change
Nine months ended September 30 - --------------------
dollars in millions 1997 1996 Amount Percent
- ---------------------------------------------------------------
Assets $70,568 $71,234 $(666) (0.9)%
Earning assets 63,993 65,196 (1,203) (1.8)
Loans, net of
unearned income 52,651 48,825 3,826 7.8
Securities 9,113 14,214 (5,101) (35.9)
Deposits 44,519 45,214 (695) (1.5)
Borrowed funds 18,584 18,719 (135) (0.7)
Shareholders' equity 5,498 5,766 (268) (4.6)
===============================================================
PERIOD-END BALANCE SHEET Total assets declined $1.4 billion since year-end 1996
primarily due to securities portfolio reduction that was partially offset by
loan growth.
PERIOD-END BALANCE SHEET HIGHLIGHTS
September 30 December 31
In millions 1997 1996 Change
- -----------------------------------------------------------------
Assets $71,828 $73,260 $(1,432)
Loans, net of
unearned income 53,651 51,798 1,853
Securities 8,000 11,917 (3,917)
Deposits 44,788 45,676 (888)
Borrowed funds 19,052 19,604 (552)
Shareholders' equity 5,476 5,869 (393)
=================================================================
LOANS Loans outstanding increased $1.9 billion from year-end 1996 to $53.7
billion at September 30, 1997. Loan portfolio composition continues to be
geographically diversified among numerous industries and types of businesses.
The credit card portfolio increased 39.1% due to AAA and other marketing
initiatives. Growth in residential mortgages and commercial loans were
partially offset by reductions in indirect automobile lending and $1.0
billion of student loan securitizations.
LOANS
September 30 December 31
In millions 1997 1996
- --------------------------------------------------------------------
Consumer
Home equity $4,805 $4,569
Automobile 3,400 3,731
Credit card 3,861 2,776
Student 1,088 1,725
Other 1,913 2,067
--------------------------
Total consumer 15,067 14,868
Residential mortgage 13,064 12,703
Commercial
Manufacturing 4,228 3,718
Retail/Wholesale 3,290 3,243
Service providers 2,417 2,359
Real estate related 1,614 1,452
Communications 1,156 1,239
Health care 1,385 1,207
Financial services 904 708
Other 4,094 4,136
--------------------------
Total commercial 19,088 18,062
Commercial real estate
Mortgage 2,374 2,467
Medium-term financing 1,027 1,312
Construction and development 1,132 845
--------------------------
Total commercial real estate 4,533 4,624
Lease financing and other 2,281 1,926
Unearned income (382) (385)
--------------------------
Total, net of unearned income $53,651 $51,798
====================================================================
Commitments to extend credit represent arrangements to lend funds provided
there is no violation of specified contractual conditions. Commitments are
reported net of participations, assignments and syndications, primarily to
financial institutions, totaling $4.2 billion and $4.4 billion at September 30,
1997 and December 31, 1996, respectively.
PNC BANK CORP. | 13
Financial
REVIEW
NET UNFUNDED COMMITMENTS
September 30 December 31
In millions 1997 1996
- -------------------------------------------------------------
Credit card $15,793 $13,505
Other consumer 3,330 3,741
Residential mortgage 1,774 511
Commercial 29,448 27,087
Commercial real estate 1,098 764
Other 722 849
----------------------
Total $52,165 $46,457
===============================================================
Net outstanding letters of credit totaled $4.9 billion and $4.5 billion at
September 30, 1997 and December 31, 1996, respectively, and consist primarily
of standby letters of credit which commit the Corporation to make payments on
behalf of customers when certain specified future events occur.
SECURITIES The securities portfolio declined $3.9 billion from year-end 1996 to
$8.0 billion at September 30, 1997. The expected weighted-average life of the
securities portfolio was 2 years and 9 months at September 30, 1997 compared
with 2 years and 11 months at year-end 1996.
SECURITIES AVAILABLE FOR SALE
September 30, 1997 December 31, 1996
-----------------------------------------
Amortized Fair Amortized Fair
In millions Cost Value Cost Value
- ---------------------------------------------------------------
Debt securities
U.S. Treasury and
government
agencies $1,658 $1,662 $3,238 $3,237
Mortgage backed 4,744 4,673 6,301 6,176
Asset backed 1,002 1,006 1,609 1,615
State and municipal 180 187 218 227
Other debt 32 32 100 105
Corporate stocks and
other 436 440 554 557
-------------------------------------
Total $8,052 $8,000 $12,020 $11,917
===============================================================
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 nine months of 1997, $7.3 billion of securities
were sold at a $27 million net gain.
The notional values of financial derivatives designated to securities available
for sale were $2.4 billion and $5.5 billion at September 30, 1997 and December
31, 1996, respectively. The net fair values of such financial derivatives,
which are reflected in the preceding table, were less than $1 million in both
periods.
FUNDING SOURCES Deposits decreased 1.9% to $44.8 billion at September 30, 1997
compared with $45.7 billion at year-end 1996. Borrowed funds declined $552
million in the comparison reflecting reduced wholesale funding related to the
downsized securities portfolio. During the third quarter of 1997, the
Corporation diversified its funding base by initiating a $2.5 billion Euro
medium-term bank note program. The Corporation issued approximately $514
million of bank notes under this program subsequent to quarter end.
FUNDING SOURCES
September 30 December 31
In millions 1997 1996
- ------------------------------------------------------------------
Deposits
Demand, savings and money market $26,321 $27,027
Time 17,098 17,803
Foreign 1,369 846
-------------------------
Total deposits 44,788 45,676
Borrowed funds
Bank notes and senior debt 10,469 8,093
Federal funds purchased 1,739 3,933
Repurchase agreements 889 645
Other borrowed funds 4,257 5,576
Subordinated debt 1,698 1,357
-------------------------
Total borrowed funds 19,052 19,604
-------------------------
Total $63,840 $65,280
==================================================================
CAPITAL The access to and cost of funding new business initiatives including
acquisitions, deposit insurance costs, and the level and nature of 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 particular circumstances warrant. To qualify as well
capitalized, regulators require banks to maintain capital ratios of at least 6%
for Tier I risk-based, 10% for total risk-based and 5% for leverage.
PNC BANK CORP. | 14
At September 30, 1997, the capital ratios of the Corporation and each bank
subsidiary met the well capitalized capital ratio requirements.
RISK-BASED CAPITAL
September 30 December 31
Dollars in millions 1997 1996
- ------------------------------------------------------------------
Capital components
Shareholders' equity
Common $5,161 $5,553
Preferred 315 316
Trust preferred capital securities 650 350
Goodwill and other (984) (1,003)
Net unrealized securities losses 35 67
-------------------------
Tier I risk-based capital 5,177 5,283
Subordinated debt 1,668 1,343
Eligible allowance for credit losses 840 801
-------------------------
Total risk-based capital $7,685 $7,427
=========================
Assets
Risk-weighted assets and
off-balance-sheet instruments $67,087 $63,761
Average tangible assets 69,656 68,597
=========================
Capital ratios
Tier I risk-based 7.72% 8.29%
Total risk-based 11.46 11.65
Leverage 7.43 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. During the third
quarter of 1997, the Corporation issued $350 million of 6 7/8% subordinated
notes that qualify as Tier II capital.
During the first nine months of 1997, PNC Bank repurchased 23.8 million shares
of common stock. In April 1997, the Corporation's board of directors authorized
the repurchase of up to 15 million shares of common stock through March 31,
1998. Approximately 7.5 million shares remain under this authorization.
RISK MANAGEMENT
In the normal course of business, the Corporation assumes various types of
risk, 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 that 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
September 30 December 31
Dollars in millions 1997 1996
- ------------------------------------------------------------------
Nonaccrual loans
Commercial $142 $156
Commercial real estate
Mortgage 94 109
Project 28 25
Consumer 6 6
Residential mortgage 45 51
----------------------
Total nonaccrual loans 315 347
Restructured loans 2 2
----------------------
Total nonperforming loans 317 349
Foreclosed assets
Commercial real estate 37 71
Residential mortgage 23 22
Other 17 17
----------------------
Total foreclosed assets 77 110
----------------------
Total nonperforming assets $394 $459
======================
Nonperforming loans to loans .59% .67%
Nonperforming assets to loans and
foreclosed assets .73 .88
Nonperforming assets to assets .55 .63
==================================================================
At September 30, 1997, $78 million of nonperforming loans were current as to
principal and interest compared with $80 million at December 31, 1996.
PNC BANK CORP. | 15
Financial
REVIEW
CHANGE IN NONPERFORMING ASSETS
In millions 1997 1996
- ---------------------------------------------------------------
January 1 $459 $536
Transferred from accrual 232 346
Returned to performing (20) (36)
Principal reductions (154) (192)
Sales (73) (101)
Charge-offs and valuation adjustments (50) (52)
---------------------
September 30 $394 $501
===============================================================
ACCRUING LOANS
PAST DUE 90 DAYS OR MORE
Amount Percent of Loans
----------------------------------------------
September 30 December 31 September 30 December 31
Dollars in millions 1997 1996 1997 1996
- ----------------------------------------------------------------------------
Consumer
Guaranteed
student $30 $51 2.73% 2.95%
Credit cards 57 43 1.46 1.56
Other 33 46 .34 .45
-----------------
Total consumer 120 140 .81 .96
Residential mortgage 62 58 .47 .46
Commercial 69 34 .36 .19
Commercial real
estate 38 12 .85 .26
-----------------
Total $289 $244 .54 .47
============================================================================
ALLOWANCE FOR CREDIT LOSSES In determining the adequacy of the allowance for
credit losses, the Corporation makes allocations to specific problem loans
based on discounted cash flow analyses or collateral valuations for impaired
loans and to pools of watchlist and nonwatchlist loans for various credit risk
factors. Allocations to loan pools are developed by risk rating and industry
classifications and based on management's judgment concerning historical loss
trends and other relevant factors. These factors may include, among others,
local, regional and national economic conditions, portfolio concentrations,
industry competition and consolidation, and the impact of government
regulation. Consumer and residential mortgage loan allocations are based on
historical loss experience adjusted for portfolio activity and current economic
conditions.
ALLOWANCE FOR CREDIT LOSSES
In millions 1997 1996
- ---------------------------------------------------------------
January 1 $1,166 $1,259
Charge-offs (280) (168)
Recoveries 88 61
---------------------
Net charge-offs (192) (107)
Provision for credit losses 45
Acquisitions 8
---------------------
September 30 $1,027 $1,152
===============================================================
The allowance as a percent of nonperforming loans and period-end loans was 324%
and 1.91%, respectively, at September 30, 1997. The comparable year-end 1996
amounts were 334% and 2.25%, respectively.
CHARGE-OFFS AND RECOVERIES
Nine months ended Net Percent of
September 30 - Charge- Charge- Average
dollars in millions offs Recoveries offs Loans
- ---------------------------------------------------------------
1997
Consumer
Credit card $154 $20 $134 5.16%
Other 80 27 53 .62
--------------------------
Total consumer 234 47 187 1.69
Residential mortgage 8 1 7 .07
Commercial 31 34 (3) (.02)
Commercial real estate 7 6 1 .03
--------------------------
Total $280 $88 $192 .49
- ---------------------------------------------------------------
1996
Consumer
Credit card $43 $5 $38 5.12%
Other 73 26 47 .52
--------------------------
Total consumer 116 31 85 .86
Residential mortgage 7 1 6 .07
Commercial 36 22 14 .11
Commercial real estate 9 7 2 .06
--------------------------
Total $168 $61 $107 .29
===============================================================
Consumer net charge-offs increased $102 million in the comparison primarily due
to higher outstandings associated with purchased credit card portfolios.
LIQUIDITY RISK 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 possibility the Corporation would be
unable to generate cash or otherwise obtain funds at reasonable rates to
satisfy such obligations or investments in strategic initiatives.
PNC BANK CORP. | 16
Liquidity risk is managed through the coordination of the expected 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 asset
securitizations. The ability to raise funds in the capital markets depends,
among other factors, on credit ratings, market conditions, capital
considerations, 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 September 30, 1997, such
assets totaled $13.9 billion, with $5.2 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 September 30, 1997,
approximately $5.4 billion of residential mortgages were available as
collateral for borrowings from the FHLB.
During the first nine months of 1997, cash and due from banks decreased $556
million to $3.5 billion compared with a decrease of $68 million during the
year-earlier period. Net cash provided by operating activities increased $419
million in the comparison. Net cash provided by investing activities decreased
$3.2 billion to $1.5 billion primarily due to funding loan originations. Net
cash used by financing activities totaled $2.7 billion in the first nine months
of 1997 compared with $4.9 billion used a year earlier.
The principal source of parent company revenue and cash flow is dividends from
subsidiary banks. PNC Bancorp, Inc. is a wholly-owned subsidiary of the parent
company and is the holding company for all bank subsidiaries. There are legal
limitations on the ability of bank subsidiaries to pay dividends and make other
distributions to PNC Bancorp, Inc. and in turn the parent company. Without
regulatory approval, the amount available for dividend payments to PNC Bancorp,
Inc. by all bank subsidiaries was $268 million at September 30, 1997. Dividends
may also be impacted by capital needs, regulatory requirements, corporate
policies, contractual restrictions and other factors.
Liquidity for the parent company and subsidiaries is also generated through the
issuance of securities in public or private markets and lines of credit. In
July 1997, PNC Bank issued $350 million of subordinated notes. The Corporation
also has unused capacity under effective shelf registration statements of
approximately $1.4 billion of debt and equity securities. 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 interest rate movements, economic and
financial conditions, 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.
PNC BANK CORP. | 17
Financial
REVIEW
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
September 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.
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% of earning assets. At September 30, 1997, the cumulative
liability sensitivity of the one-year gap position was 1.0%.
PNC BANK CORP. | 18
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 nine months of 1997.
FINANCIAL DERIVATIVES ACTIVITY
Weighted
Average
1997 - dollars in millions January 1 Additions Maturities Terminations September 30 Maturity
- ----------------------------------------------------------------------------------------------------------------------------
Interest rate risk management
Interest rate swaps
Receive fixed $7,003 $1,578 $(373) $(3,630) $4,578 1 yr. 9 mo.
Pay fixed 602 (79) 523 2 yr. 3 mo.
Basis swaps 335 466 801 3 yr. 8 mo.
Interest rate caps 5,813 299 (3,221) 2,891 8 mo.
Interest rate floors 2,500 1,084 (1) 3,583 1 yr. 8 mo.
---------------------------------------------------------------
Total interest rate risk management 16,253 3,427 (3,674) (3,630) 12,376 1 yr. 8 mo.
Mortgage banking activities
Forward contracts
Commitments to purchase loans 395 6,657 (5,237) 1,815 2 mo.
Commitments to sell loans 894 6,775 (5,874) 1,795 2 mo.
Interest rate floors - MSR 1,050 670 (250) 1,470 4 yr. 5 mo.
---------------------------------------------------------------
Total mortgage banking activities 2,339 14,102 (11,111) (250) 5,080
---------------------------------------------------------------
Total $18,592 $17,529 $(14,785) $(3,880) $17,456
============================================================================================================================
During the first nine months of 1997, financial derivatives used in interest
rate risk management reduced net interest income by $8 million compared with
$11 million in the year-earlier period.
At September 30, 1997, $12 million of net deferred losses on terminated
derivative contracts are being amortized over a remaining period of
approximately 7 months.
PNC BANK CORP. | 19
Financial
REVIEW
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 ---------------------------
September 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 $2,720 $38 5.76% 6.52%
Pay fixed designated to loans 473 (4) 7.15 5.93
Basis swaps designated to other earning assets 336 3 5.87 6.10
Interest rate caps designated to (2)
Securities 2,400 NM NM
Loans 491 4 NM NM
Interest rate floors designated to loans (3) 3,583 4 NM NM
---------------------------------
Total asset rate conversion 10,003 45
Liability rate conversion
Interest rate swaps (1)
Receive fixed designated to interest-bearing
liabilities 1,858 25 5.80 6.23
Pay fixed designated to borrowed funds 50 (1) 5.63 5.65
Basis swaps designated to borrowed funds 465 1 5.75 5.83
---------------------------------
Total liability rate conversion 2,373 25
---------------------------------
Total interest rate risk management 12,376 70
Mortgage banking activities
Forward contracts
Commitments to purchase loans 1,815 NM NM
Commitments to sell loans 1,795 (7) NM NM
Interest rate floors - MSR (3) 1,470 16 NM NM
---------------------------------
Total mortgage banking activities 5,080 9
---------------------------------
Total financial derivatives $17,456 $79
============================================================================================================================
(1) The floating rate portion of interest rate contracts is based on
money-market indices. As a percent of notional value, 66% were based on
1-month LIBOR, 24% 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 September 30, 1997, 3-month LIBOR was 5.77%.
(3) Interest rate floors with notional values of $3.5 billion and $1.5 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 5.91% over 10-year CMT, respectively. At
September 30, 1997, 3-month LIBOR was 5.77% and 10-year CMT was 6.10%.
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
Notional Fair Fair Net Asset
September 30, 1997 - in millions Value Value Value (Liability)
- -----------------------------------------------------------------------------------
Interest rate
Swaps $3,102 $10 $(9) $1
Caps/floors
Sold 1,615 (4) (4)
Purchased 1,404 3 3
Foreign exchange 1,634 18 (18)
Other 1,517 8 (8)
------------------------------------------------
Total $9,272 $39 $(39)
===================================================================================
PNC BANK CORP. | 20
THIRD QUARTER 1997 VS.
THIRD QUARTER 1996
Net income for the third quarter of 1997 totaled $262 million or $.83 per fully
diluted share compared with $234 million or $.68 per fully diluted share a year
ago. Returns on average common shareholders' equity and average assets improved
to 20.11% and 1.47%, respectively, in the third quarter of 1997 compared with
16.16% and 1.34% in the prior-year quarter. Excluding the one-time SAIF
assessment, earnings totaled $256 million or $.75 per fully diluted share for
the third quarter of 1996.
Taxable-equivalent net interest income increased $10 million to $627 million
for the third quarter of 1997 and the net interest margin widened to 3.89%
compared with 3.85% in the year-earlier period. These increases primarily
resulted from a higher-yielding earning asset mix that more than offset the
cost of common share repurchases.
The provision for credit losses was $20 million for the third quarter of 1997.
No provision was recorded in the prior-year quarter.
Noninterest income increased $97 million to $446 million in the third quarter
of 1997 compared with $348 million in the year-earlier period. Growth in
investment advisory, private banking and mutual fund servicing contributed to a
$29 million or 23% increase in asset management fees. Managed assets totaled
$127 billion at September 30, 1997 compared with $105 billion a year ago.
Service fees increased $31 million or 21% primarily from growth in credit card,
treasury management and consumer services.
Mortgage banking revenue grew $12 million primarily due to higher income from
securitization activities. Mortgage originations totaled $1.7 billion in the
third quarter of 1997 compared with $1.3 billion in the year-earlier period.
Other noninterest income increased $36 million in the comparison primarily due
to higher venture capital and asset securitization income.
Noninterest expense increased $43 million to $639 million in the third quarter
of 1997 largely due to $28 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 improved to 59.5% for
the third quarter of 1997 compared with 61.7% a year ago.
Average earning assets were substantially unchanged at $64.0 billion as loan
growth was offset by securities portfolio reduction. Average securities
declined $4.9 billion to $8.2 billion and represented 12.8% of average earning
assets compared with 20.6% a year ago. Average loans grew to $53.2 billion, a
$4.5 billion increase from the prior-year quarter. Growth in credit cards,
residential mortgages and commercial loans were partially offset by reductions
in indirect lending and the impact of loan securitizations. Loans represented
83.2% of average earning assets compared with 76.7% a year ago.
Average interest-bearing funding increased $1.1 billion to $53.4 billion in the
third quarter of 1997. Deposits represented 63.2% of total sources of funds for
the third quarter of 1997 compared with 64.3% a year ago.
PNC BANK CORP. | 21
Consolidated
STATEMENT OF INCOME
Three months ended Nine months ended
September 30 September 30
-------------------------------------------------
In thousands, except per share data 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans and fees on loans $1,101,508 $979,050 $3,236,193 $2,931,715
Securities 125,347 207,729 420,587 677,422
Other 43,489 29,851 112,880 105,973
-------------------------------------------------
Total interest income 1,270,344 1,216,630 3,769,660 3,715,110
INTEREST EXPENSE
Deposits 372,860 350,912 1,087,015 1,073,786
Borrowed funds 277,567 256,788 819,628 814,757
-------------------------------------------------
Total interest expense 650,427 607,700 1,906,643 1,888,543
-------------------------------------------------
Net interest income 619,917 608,930 1,863,017 1,826,567
Provision for credit losses 20,000 45,000
-------------------------------------------------
Net interest income less provision for credit losses 599,917 608,930 1,818,017 1,826,567
NONINTEREST INCOME
Asset management 150,805 122,299 436,395 367,691
Service fees 175,146 144,446 519,664 408,313
Mortgage banking 46,551 34,400 110,745 106,140
Net securities gains (losses) (2,657) 7,722 27,139 14,569
Other 75,805 39,507 210,230 109,808
-------------------------------------------------
Total noninterest income 445,650 348,374 1,304,173 1,006,521
NONINTEREST EXPENSE
Staff expense 298,974 277,761 895,836 840,699
Net occupancy and equipment 90,704 90,229 271,769 275,694
Amortization 48,459 29,012 117,817 80,738
Other 187,229 198,390 598,157 528,229
Distributions on capital securities 13,192 30,015
-------------------------------------------------
Total noninterest expense 638,558 595,392 1,913,594 1,725,360
-------------------------------------------------
Income before income taxes 407,009 361,912 1,208,596 1,107,728
Applicable income taxes 145,414 127,959 421,617 387,405
-------------------------------------------------
Net income $261,595 $233,953 $786,979 $720,323
=================================================
EARNINGS PER COMMON SHARE
Primary $.83 $.69 $2.46 $2.10
Fully diluted .83 .68 2.43 2.08
CASH DIVIDENDS DECLARED PER COMMON SHARE .37 .35 1.11 1.05
AVERAGE COMMON SHARES OUTSTANDING
Primary 308,049 340,535 314,603 342,143
Fully diluted 312,253 345,173 319,040 346,958
================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
PNC BANK CORP. | 22
Consolidated
BALANCE SHEET
September 30 December 31
Dollars in millions, except share data 1997 1996
- -----------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $3,460 $4,016
Short-term investments 1,084 774
Loans held for sale 1,398 941
Securities available for sale 8,000 11,917
Loans, net of unearned income of $382 and $385 53,651 51,798
Allowance for credit losses (1,027) (1,166)
-----------------------
Net loans 52,624 50,632
Other 5,262 4,980
-----------------------
Total assets $71,828 $73,260
=======================
LIABILITIES
Deposits
Noninterest-bearing $9,914 $10,937
Interest-bearing 34,874 34,739
-----------------------
Total deposits 44,788 45,676
Borrowed funds
Bank notes and senior debt 10,469 8,093
Federal funds purchased 1,739 3,933
Repurchase agreements 889 645
Other borrowed funds 4,257 5,576
Subordinated debt 1,698 1,357
-----------------------
Total borrowed funds 19,052 19,604
Other 1,862 1,761
-----------------------
Total liabilities 65,702 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: 347,914,081 and 345,154,238 shares 1,740 1,726
Capital surplus 1,024 939
Retained earnings 4,499 4,075
Deferred benefit expense (61) (60)
Net unrealized securities losses (35) (67)
Common stock held in treasury at cost: 42,887,837 and 21,036,195 shares (1,698) (751)
-----------------------
Total shareholders' equity 5,476 5,869
-----------------------
Total liabilities, capital securities and shareholders' equity $71,828 $73,260
=====================================================================================================
See accompanying Notes to Consolidated Financial Statements.
PNC BANK CORP. | 23
Consolidated
STATEMENT OF CASH FLOWS
Nine months ended September 30 - in millions 1997 1996
- ---------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $787 $720
Adjustments to reconcile net income to net cash provided by operating activities
Provision for credit losses 45
Depreciation, amortization and accretion 256 211
Deferred income taxes 93 92
Net securities gains (27) (15)
Net gain on sales of assets (136) (71)
Valuation adjustments (5) (12)
Changes in
Loans held for sale (457) (256)
Other 82 (450)
---------------------
Net cash provided by operating activities 638 219
INVESTING ACTIVITIES
Net change in loans (3,862) (526)
Repayment of securities available for sale 1,344 3,676
Sales
Securities available for sale 7,307 5,326
Loans 2,144 218
Foreclosed assets 85 116
Purchases
Securities available for sale (4,698) (4,630)
Loans (421) (722)
Net cash received in acquisitions 460
Other (408) 744
---------------------
Net cash provided by investing activities 1,491 4,662
FINANCING ACTIVITIES
Net change in
Noninterest-bearing deposits (1,023) 184
Interest-bearing deposits 147 (2,133)
Federal funds purchased (2,194) (2,681)
Sale/issuance
Repurchase agreements 60,301 54,438
Bank notes and senior debt 7,288 6,317
Other borrowed funds 74,026 64,510
Capital securities 300
Subordinated debt 350
Common stock 131 58
Repayment/maturity
Repurchase agreements (60,057) (56,380)
Bank notes and senior debt (4,910) (4,871)
Other borrowed funds (75,451) (63,782)
Acquisition of treasury stock (1,228) (249)
Cash dividends paid (365) (360)
---------------------
Net cash used by financing activities (2,685) (4,949)
---------------------
DECREASE IN CASH AND DUE FROM BANKS (556) (68)
Cash and due from banks at beginning of year 4,016 3,679
---------------------
Cash and due from banks at end of period $3,460 $3,611
===============================================================================================================
CASH ITEMS
Interest paid $1,929 $2,009
Income taxes paid 303 147
NONCASH ITEMS
Transfers from loans to foreclosed assets 57 54
===============================================================================================================
See accompanying Notes to Consolidated Financial Statements.
PNC BANK CORP. | 24
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. | 25
Notes to
CONSOLIDATED FINANCIAL STATEMENTS
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 nine 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 nine 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
which affected cash flows in the first nine months of 1997.
PNC BANK CORP. | 26
SECURITIES AVAILABLE FOR SALE
The following table sets forth the amortized cost and fair value of the
Corporation's securities portfolio, all of which is available for sale. The
notional values of financial derivatives designated to securities available for
sale were $2.4 billion and $5.5 billion at September 30, 1997 and December 31,
1996, respectively.
September 30, 1997 December 31, 1996
----------------------------------------------------------------------------------
Amortized Unrealized Fair Amortized Unrealized Fair
------------------ ------------------
In millions Cost Gains Losses Value Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------------------
Debt securities
U.S. Treasury, government agencies
and corporations $1,658 $9 $5 $1,662 $3,238 $20 $21 $3,237
Mortgage backed 4,744 5 76 4,673 6,301 13 138 6,176
Asset backed 1,002 4 1,006 1,609 7 1 1,615
State and municipal 180 7 187 218 9 227
Other debt 32 32 100 7 2 105
-----------------------------------------------------------------------------------
Total debt securities 7,616 25 81 7,560 11,466 56 162 11,360
Corporate stocks and other 436 4 440 554 3 557
-----------------------------------------------------------------------------------
Total securities available for sale $8,052 $29 $81 $8,000 $12,020 $59 $162 $11,917
================================================================================================================================
LOANS
At September 30, 1997, $2.1 billion of loans were pledged to secure borrowings
and for other purposes.
NONPERFORMING ASSETS
Nonperforming assets were as follows:
September 30 December 31
In millions 1997 1996
- ---------------------------------------------------------------
Nonaccrual loans $315 $347
Restructured loans 2 2
---------------------
Total nonperforming loans 317 349
Foreclosed assets 77 110
---------------------
Total nonperforming assets $394 $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 (154) (43)
Other (80) (73)
Residential mortgage (8) (7)
Commercial (31) (36)
Commercial real estate (7) (9)
--------------------
Total charge-offs (280) (168)
Recoveries
Consumer
Credit card 20 5
Other 27 26
Residential mortgage 1 1
Commercial 34 22
Commercial real estate 6 7
--------------------
Total recoveries 88 61
--------------------
Net charge-offs (192) (107)
Provision for credit losses 45
Acquisitions 8
--------------------
Allowance at September 30 $1,027 $1,152
===============================================================
PNC BANK CORP. | 27
Notes to
CONSOLIDATED FINANCIAL STATEMENTS
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
- ---------------------------------------------------------------
SEPTEMBER 30, 1997
Interest rate swaps $5,381 $72 $521 $(11)
Interest rate caps 2,891 4
Interest rate floors 3,500 5 83 (1)
Mortgage banking
activities 1,470 16 3,610 (8)
------------------------------------------
Total $13,242 $97 $4,214 $(20)
===============================================================
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
September 30, 1997 - Notional Fair Fair Net Asset
in millions Value Value Value (Liability)
- ---------------------------------------------------------------
Interest rate
Swaps $3,102 $10 $(9) $1
Caps/floors
Sold 1,615 (4) (4)
Purchased 1,404 3 3
Foreign exchange 1,634 18 (18)
Other 1,517 8 (8)
----------------------------------------
Total $9,272 $39 $(39)
===============================================================
CAPITAL SECURITIES
Mandatorily Redeemable Capital Securities of Subsidiary Trust ("Capital
Securities") include preferred beneficial interests in the assets of PNC
Institutional Capital Trust B ("Trust B"), which was formed in May, 1997. Trust
B holds $300 million aggregate principal amount 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 Trust B. 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.
PNC BANK CORP. | 28
OTHER FINANCIAL INFORMATION
PNC Bancorp, Inc. has assumed joint and several liability with the parent
company for certain long-term debt instruments. Accordingly, the following
provides summary financial information for PNC Bancorp, Inc.
PNC BANCORP, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30 December 31
In millions 1997 1996
- ---------------------------------------------------------------
ASSETS
Cash and due from banks $3,466 $4,022
Securities 7,585 11,210
Loans, net of unearned income 53,510 51,736
Allowance for credit losses (1,027) (1,166)
------------------------
Net loans 52,483 50,570
Other assets 6,660 5,988
------------------------
Total assets $70,194 $71,790
========================
LIABILITIES
Deposits $45,039 $46,290
Borrowed funds 17,669 18,077
Other liabilities 975 1,014
------------------------
Total liabilities 63,683 65,381
Mandatorily redeemable capital
securities of subsidiary trust 350 350
SHAREHOLDER'S EQUITY 6,161 6,059
------------------------
Total liabilities, capital
securities and shareholder's
equity $70,194 $71,790
===============================================================
PNC BANCORP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Nine months ended September 30 - in millions 1997 1996
- ----------------------------------------------------------------------
Interest income $3,735 $3,688
Interest expense 1,840 1,827
---------------------
Net interest income 1,895 1,861
Provision for credit losses 45
---------------------
Net interest income less provision
for credit losses 1,850 1,861
Noninterest income 1,174 895
Noninterest expense 1,851 1,657
---------------------
Income before income taxes 1,173 1,099
Applicable income taxes 416 390
---------------------
Net income $757 $709
=======================================================================
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 $268 million at September 30, 1997. Dividends may also be impacted by
capital needs, regulatory requirements, corporate policies, contractual
restrictions and other factors.
PNC BANK CORP. | 29
Statistical
INFORMATION
AVERAGE CONSOLIDATED BALANCE SHEET AND NET INTEREST ANALYSIS
Nine months ended September 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 $1,329 $72,910 7.32% $1,127 $58,895 6.97%
Securities
U.S. Treasury, government agencies and corporations 6,389 286,726 5.99 10,775 503,365 6.23
Other debt 2,143 106,048 6.60 2,820 143,810 6.76
Other 581 32,767 7.53 619 37,021 7.98
--------------------- -------------------------
Total securities 9,113 425,541 6.23 14,214 684,196 6.41
Loans, net of unearned income
Consumer
Credit card 3,475 329,478 12.68 991 102,302 13.79
Other consumer 11,352 718,838 8.47 12,231 770,850 8.42
--------------------- -------------------------
Total consumer 14,827 1,048,316 9.45 13,222 873,152 8.82
Residential mortgage 13,152 734,829 7.45 11,944 668,784 7.47
Commercial 18,268 1,076,867 7.77 16,997 994,873 7.69
Commercial real estate 4,536 296,730 8.63 4,809 322,329 8.88
Other 1,868 96,575 6.90 1,853 92,039 6.63
--------------------- -------------------------
Total loans, net of unearned income 52,651 3,253,317 8.21 48,825 2,951,177 8.02
Other interest-earning assets 900 40,170 5.92 1,030 47,247 6.06
--------------------- -------------------------
Total interest-earning assets/interest income 63,993 3,791,938 7.87 65,196 3,741,515 7.62
Noninterest-earning assets
Allowance for credit losses (1,100) (1,216)
Cash and due from banks 2,896 3,169
Other assets 4,779 4,085
--------- ------------
Total assets $70,568 $71,234
--------- ------------
LIABILITIES, CAPITAL SECURITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Interest-bearing deposits
Demand and money market $13,318 285,676 2.87 $12,588 246,662 2.62
Savings 2,919 43,030 1.97 3,522 53,852 2.04
Other time 17,570 711,423 5.41 18,410 739,428 5.36
Deposits in foreign offices 1,127 46,886 5.49 828 33,844 5.37
--------------------- -------------------------
Total interest-bearing deposits 34,934 1,087,015 4.16 35,348 1,073,786 4.06
Borrowed funds
Bank notes and senior debt 8,732 372,032 5.62 8,179 342,757 5.51
Federal funds purchased 2,959 122,821 5.47 3,340 134,755 5.30
Repurchase agreements 819 33,129 5.33 2,448 98,885 5.31
Other borrowed funds 4,622 205,573 5.93 3,394 157,028 6.17
Subordinated debt 1,452 86,073 7.91 1,358 81,332 7.99
--------------------- -------------------------
Total borrowed funds 18,584 819,628 5.84 18,719 814,757 5.74
--------------------- -------------------------
Total interest-bearing liabilities/interest expense 53,518 1,906,643 4.74 54,067 1,888,543 4.64
--------------------- -------------------------
Noninterest-bearing liabilities, capital securities and
shareholders' equity
Demand and other noninterest-bearing deposits 9,585 9,866
Accrued expenses and other liabilities 1,469 1,535
Mandatorily redeemable capital
securities of subsidiary trusts 498
Shareholders' equity 5,498 5,766
--------- ------------
Total liabilities, capital securities and
shareholders' equity $70,568 $71,234
------------------------------------------------------------------------
Interest rate spread 3.13 2.98
Impact of noninterest-bearing liabilities .78 .79
----------------------- --------------------------
Net interest income/margin $1,885,295 3.91% $1,852,972 3.77%
- ------------------------------------------------------------------------------------------------------------------------------------
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 of securities are based on amortized historical
cost (excluding SFAS No. 115 adjustments to fair value).
PNC BANK CORP. | 30
- -----------------------------------------------------------------------------------------------------------------------------------
Third Quarter 1997 Second Quarter 1997 Third Quarter 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balances Interest Yields/Rates Balances Interest Yields/Rates Balances Interest Yields/Rates
- -----------------------------------------------------------------------------------------------------------------------------------
$1,555 $29,046 7.47% $1,408 $25,894 7.36% $918 $17,442 7.60%
5,823 85,530 5.86 6,375 95,834 6.02 10,302 161,077 6.24
1,824 30,155 6.61 2,083 34,051 6.54 2,249 37,681 6.67
569 11,368 7.95 597 10,733 7.20 546 10,768 7.87
- ------------------------------ ----------------------------- ------------------------------
8,216 127,053 6.17 9,055 140,618 6.21 13,097 209,526 6.39
3,871 122,537 12.56 3,502 106,348 12.18 1,007 35,408 14.06
10,996 235,885 8.51 11,239 237,784 8.49 12,047 255,048 8.42
- ------------------------------ ----------------------------- ------------------------------
14,867 358,422 9.56 14,741 344,132 9.36 13,054 290,456 8.85
13,503 252,315 7.47 13,164 245,127 7.45 12,325 231,271 7.51
18,394 363,812 7.74 18,494 363,388 7.77 17,049 332,167 7.62
4,486 98,817 8.62 4,530 98,558 8.66 4,712 105,338 8.85
1,952 33,884 6.94 1,884 33,327 7.08 1,573 26,003 6.60
- ------------------------------ ----------------------------- ------------------------------
53,202 1,107,250 8.23 52,813 1,084,532 8.19 48,713 985,235 8.01
981 14,509 5.82 925 13,522 5.86 817 12,435 6.06
- ------------------------------ ----------------------------- ------------------------------
63,954 1,277,858 7.92 64,201 1,264,566 7.85 63,545 1,224,638 7.64
(1,059) (1,094) (1,179)
2,878 2,877 3,216
4,808 4,837 3,964
- --------------- -------------- ---------------
$70,581 $70,821 $69,546
- --------------- -------------- ---------------
$13,715 103,872 3.00 $13,270 94,394 2.85 $12,520 81,321 2.58
2,773 13,850 1.98 2,924 14,377 1.97 3,407 16,931 1.98
17,336 238,948 5.47 17,656 238,928 5.43 18,172 243,340 5.33
1,128 16,190 5.62 1,463 20,301 5.49 695 9,320 5.25
- ------------------------------ ----------------------------- ------------------------------
34,952 372,860 4.23 35,313 368,000 4.18 34,794 350,912 4.01
9,337 135,910 5.70 8,284 118,950 5.68 8,829 123,006 5.57
2,342 33,220 5.55 3,474 48,693 5.62 2,239 30,325 5.39
935 12,600 5.27 786 10,773 5.43 1,551 21,461 5.41
4,221 63,686 6.03 4,780 70,615 5.91 3,582 54,895 6.10
1,649 32,151 7.80 1,351 26,954 7.98 1,357 27,101 7.99
- ------------------------------ ----------------------------- ------------------------------
18,484 277,567 5.92 18,675 275,985 5.88 17,558 256,788 5.83
- ------------------------------ ----------------------------- ------------------------------
53,436 650,427 4.82 53,988 643,985 4.77 52,352 607,700 4.60
- ------------------------------ ----------------------------- ------------------------------
9,654 9,501 9,922
1,460 1,480 1,506
650 492
5,381 5,360 5,766
- --------------- -------------- ---------------
$70,581 $70,821 $69,546
- -----------------------------------------------------------------------------------------------------------------------------------
3.10 3.08 3.04
.79 .76 .81
----------------------------- ---------------------------- -------------------------
$627,431 3.89% $620,581 3.84% $616,938 3.85%
- -----------------------------------------------------------------------------------------------------------------------------------
PNC BANK CORP. | 31
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 September 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 October 31, 1997, PNC Bank Corp. had 304,691,310 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 nine months
ended September 30, 1997 and 1996 22
Consolidated Balance Sheet as of
September 30, 1997 and December 31,
1996 23
Consolidated Statement of Cash Flows
for the nine months ended
September 30, 1997 and 1996 24
Notes to Consolidated Financial
Statements 25-29
Average Consolidated Balance Sheet and
Net Interest Analysis 30-31
Item 2 Management's Discussion and Analysis
of Financial Condition and
Results of Operations 2-21
- --------------------------------------------------------------
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
The following exhibit index lists Exhibits to this Quarterly Report on Form
10-Q:
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 Michelle Sentner, Assistant Vice President,
Financial Reporting, at corporate headquarters. Requests may also be directed
to (412) 762-1553 or to financial.reporting@pncbank.com.
Since June 30, 1997, the Corporation filed the following Current Reports on
Form 8-K:
Form 8-K dated as of July 9, 1997, reporting the public offering of $350
million of 6 7/8% 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.
Form 8-K dated as of October 15, 1997, reporting the Corporation's consolidated
financial results for the three months and nine months ended September 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 November 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. | 32