PNC BANK CORP. Quarterly Report on Form 10-Q For the quarterly period ended March 31, 1998 Page 1 represents a portion of the first quarter 1998 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 March 31 1998 1997 - ------------------------------------------------------------------------------------------------------- FINANCIAL PERFORMANCE (in thousands, except per share data) Revenue Net interest income (taxable-equivalent basis) $644,230 $637,283 Noninterest income 538,915 433,303 Total revenue 1,183,145 1,070,586 Net income 269,260 266,309 Per common share Basic earnings $.88 $.81 Diluted earnings .87 .80 Cash dividends declared .39 .37 RATIOS Performance Return on Average common shareholders' equity 21.10% 19.48% Average assets 1.51 1.54 Net interest margin 3.96 3.98 Noninterest income to total revenue 45.55 40.47 After-tax profit margin 22.76 24.88 Efficiency 61.53 59.54 Capital Leverage 7.36% 7.17% Common shareholders' equity to assets 7.15 7.25 Asset Quality Net charge-offs to average loans .67% .47% Nonperforming assets to loans and foreclosed assets .61 .82 Allowance for credit losses to loans 1.67 2.13 Allowance for credit losses to nonperforming loans 320.96 346.11 PERIOD-END BALANCES (in millions, except per share data) Assets $72,355 $71,166 Earning assets 65,210 64,255 Loans, net of unearned income 54,511 52,575 Securities available for sale 7,511 9,593 Deposits 46,068 44,902 Borrowed funds 18,375 18,547 Shareholders' equity 5,487 5,478 Common shareholders' equity 5,173 5,162 Book value per common share $17.20 $16.45 =======================================================================================================
PNC BANK CORP. ----- 1 Financial Review This Financial Review should be read in conjunction with the PNC Bank Corp. and subsidiaries' ("Corporation" or "PNC Bank") unaudited Consolidated Financial Statements and the Financial Review and audited Consolidated Financial Statements included in the Corporation's 1997 Annual Report. OVERVIEW PNC BANK CORP. The Corporation is one of the largest diversified financial services companies in the United States and operates seven lines of business: Regional Community Banking, Corporate Banking, National Consumer Banking, Asset Management and Mutual Fund Servicing, Private Banking, Mortgage Banking, and Secured Lending. Financial products and services are customized for specific customer segments and offered nationally and in PNC Bank's primary geographic markets in Pennsylvania, New Jersey, Delaware, Ohio, Kentucky, Indiana, Massachusetts and Florida. SUMMARY FINANCIAL RESULTS Net income for the first three months of 1998 was $269 million or $.87 per diluted share compared with $266 million and $.80, respectively, a year ago. Earnings were impacted by noncash expenses associated with purchase acquisitions. Excluding the impact of goodwill and other amortization related to purchase transactions, diluted earnings per share for the first quarter of 1998 and 1997 were $.93 and $.86, respectively. Returns on average common shareholders' equity and average assets were 21.10% and 1.51% compared with 19.48% and 1.54%, respectively, in 1997. Total revenue increased $113 million in the quarter-to-quarter comparison driven by growth in noninterest income. Noninterest income increased to $539 million in the first quarter of 1998, a 24.5% increase over the same period in 1997 reflecting significant growth in asset management, mutual fund servicing and mortgage banking. Noninterest income represented 46% of total revenue in the first quarter of 1998 compared with 40% in the prior-year quarter. Taxable-equivalent net interest income was $644 million, an increase of $7 million from the first quarter of 1997. The net interest margin was 3.96% compared with 3.98% in the prior year. The provision for credit losses was $30 million for the first quarter of 1998 compared with $10 million in the prior year. Noninterest expense increased $97 million to $741 million primarily due to amortization of mortgage servicing rights ("MSR"), incentive compensation commensurate with growth in fee-based revenue and higher marketing costs associated with national consumer banking initiatives. The efficiency ratio, computed excluding distributions on capital securities, was 61.5% for the first quarter of 1998 compared with 59.5% a year ago. Average earning assets increased $1.4 billion from the prior-year quarter to $65.2 billion as higher loans and mortgages held for sale more than offset securities portfolio reductions. Average loans grew 4.2% to $54.1 billion, a $2.2 billion increase from the prior year. Growth in credit cards and middle market commercial loans more than offset the downsizing of the indirect automobile lending portfolio and the impact of loan securitizations. The increase in average mortgages held for sale was $1.4 billion reflecting higher production volume. Average securities decreased $2.3 billion to $7.8 billion or 11.9% of average earning assets. Loans represented 83.0% of average earning assets compared with 81.4% a year ago. Shareholders' equity totaled $5.5 billion at March 31, 1998. The leverage ratio was 7.36% and Tier I and total risk-based capital ratios were 7.67% and 11.24%, respectively. Asset quality and coverage ratios remained strong. The ratio of nonperforming assets to loans and foreclosed assets was .61% at March 31, 1998 and December 31, 1997. The allowance for credit losses was 321% of nonperforming loans and 1.67% of total loans at March 31, 1998 compared with 352% and 1.79%, respectively, at December 31, 1997. Net charge-offs were .67% of average loans for the first quarter of 1998 compared with .47% for the first quarter of 1997. The increase was primarily associated with consumer bankruptcies and an increase in credit card outstandings. BUSINESS STRATEGIES 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 that entails credit and interest rate risk. PNC BANK CORP. ----- 2 PNC Bank has responded to these challenges by transitioning to an organization comprised of distinct lines of business with highly focused customer segments. This approach provides the basis for differentiated businesses capable of competing in today's environment where banks and other financial service providers seek the same customers. The Corporation has focused on altering the business mix and investing in specialized financial services businesses including asset management, mutual fund servicing, private banking, mortgage banking, treasury management and capital markets. These businesses are largely fee-based and 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, expansion of national distribution capabilities and reduction of wholesale leverage activities have allowed PNC Bank to significantly improve the composition of the earnings stream. REGIONAL COMMUNITY BANKING provides financial products and services to small business and retail customers within PNC Bank's geographic footprint. Regional Community Banking's focus is on employing information and customer knowledge to identify and meet consumer preferences for traditional and automated products and services through retail branches and alternative distribution channels. CORPORATE BANKING provides credit, capital markets and treasury management products and services to large and mid-size businesses, institutions and government entities. Teams of specialists focus on specific industry segments, including communications, health care, public finance, large corporate, financial institutions, energy, metals and mining and emerging growth. NATIONAL CONSUMER BANKING provides consumer products and services through technologically advanced cost efficient channels. National Consumer Banking's focus is on delivering convenient financial services nationally by expanding direct marketing and through establishing affinity relationships. ASSET MANAGEMENT AND MUTUAL FUND SERVICING includes BlackRock, Inc. ("BlackRock") which offers fixed income, domestic and international equity and liquidity products; PFPC Inc. ("PFPC"), the Corporation's mutual fund servicing business; HAWTHORN, which serves the ultra-affluent market, and PNC Bank's institutional trust business. BlackRock represents the recent combination of PNC Bank's investment advisory and asset management capabilities under a single organization and brand. This integration created one of the largest asset managers in the country, leveraging the BlackRock Financial Management reputation as an established world-class fixed income manager. BlackRock is focused on expanding marketing and delivery channels for a wide range of institutional and retail investment products. PFPC specializes in providing institutional money managers, brokerage firms, pension managers and insurance companies with custom designed products including accounting and administration, transfer agent and custody services. PFPC is the second largest mutual fund accounting agent and the third largest mutual fund transfer agent in the United States and is focused on domestic and international expansion. PRIVATE BANKING offers personalized investment management, brokerage, personal trust, estate planning and traditional banking services to the affluent. Services are provided by teams of specialists working together to provide advice and creative financial solutions. MORTGAGE BANKING is focused on delivering mortgage originations and servicing, and expanding sales of products including second mortgages, home equity lines of credit, credit cards and insurance. SECURED LENDING is engaged in commercial real estate banking, business credit and equipment leasing activities within PNC Bank's primary geographic markets and nationally. Real estate banking provides comprehensive services to a broad base of clients including commercial and residential developers, investors, mortgage bankers and property management companies. Business credit is among the top ten firms in the United States in asset-based financing providing asset-based lending, syndication and treasury management services. Leasing provides equipment lease financing for a wide range of customers and is focused on growth from the existing PNC Bank corporate customer base and national markets. Subsequent to quarter end, PNC Bank completed the acquisitions of the assets and servicing portfolio of Midland Loan Services, L.P. ("Midland") and the asset-based finance business of BTM Capital Corp. ("BTM Capital"), a subsidiary of The Bank of Tokyo-Mitsubishi, Ltd. These transactions are consistent with Secured Lending's strategic plan to establish a national presence and expand fee-based revenue. PNC BANK CORP. ----- 3 Financial Review LINE OF BUSINESS REVIEW Financial results for PNC Bank's lines of business are derived from the Corporation's management accounting system. Line of business information is based on management accounting practices which conform to and support PNC Bank's current management structure and is not necessarily comparable with similar information for any other financial services institution. The management accounting process uses various balance sheet and income statement assignments and transfers to measure business unit performance. Assignments and transfers change from time to time as the management accounting system is enhanced and business or product lines change. There is no comprehensive, authoritative body of guidance for management accounting equivalent to generally accepted accounting principles. Financial statements for the lines of business do not necessarily use the same classifications as the consolidated financial statements. 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 the lines of business based on their net asset or liability position. Total line of business financial results differ from consolidated financial results primarily due to eliminations, different provision for credit loss methodologies and corporate administration and other unassigned items. Eliminations offset transactions between the lines of business which primarily relate to assigned securities or borrowings. Corporate administration and other unassigned includes net securities gains, certain holding company expenses and other items not assigned in the management accounting process. 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. As a result, total capital assigned will differ from consolidated shareholders' equity.
Return on Revenue Earnings (Loss) Assigned Capital Average Assets Three months ended March 31 - ---------------------------------------------------------------------------------------------- dollars in millions 1998 1997 1998 1997 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Regional Community Banking $402 $404 $103 $100 30% 29% $34,968 $35,422 Corporate Banking 179 155 56 50 20 19 14,832 14,636 National Consumer Banking 173 183 (13) 22 (8) 13 11,507 11,185 Asset Management and Mutual Fund Servicing 154 96 43 18 59 29 921 688 Private Banking 105 96 23 20 28 28 2,536 2,408 Mortgage Banking 104 66 16 3 18 4 11,569 9,650 Secured Lending 68 68 34 34 26 29 7,124 6,131 ----------------------------------------------- --------------------- Total lines of business 1,185 1,068 262 247 23 22 83,457 80,120 Eliminations (4) (32) (24) (20) (15,120) (13,776) Provision for credit losses 36 23 Corporate administration and other unassigned 2 35 (5) 16 3,804 3,957 ----------------------------------------------- --------------------- Total consolidated $1,183 $1,071 $269 $266 21% 19% $72,141 $70,301 ====================================================================================================================================
PNC BANK CORP. ----- 4 REGIONAL COMMUNITY BANKING Three months ended March 31 - dollars in millions 1998 1997 - ---------------------------------------------------------------- INCOME STATEMENT Net interest income $332 $336 Noninterest income 70 68 --------------------- Total revenue 402 404 Provision for credit losses 8 5 Noninterest expense 223 233 --------------------- Pretax earnings 171 166 Income taxes 68 66 --------------------- Earnings $103 $100 --------------------- AVERAGE BALANCE SHEET Loans Consumer $4,966 $4,893 Commercial 2,508 1,984 Residential mortgage 1,246 1,250 Other 202 410 --------------------- Total loans 8,922 8,537 Assigned assets and other assets 26,046 26,885 --------------------- Total assets $34,968 $35,422 --------------------- Net deposits Certificates $15,237 $15,879 Money market 6,895 6,009 Noninterest-bearing demand 4,769 4,837 Interest-bearing demand 3,944 4,090 Savings 2,583 3,001 --------------------- Total net deposits 33,428 33,816 Other liabilities 138 189 Assigned capital 1,402 1,417 --------------------- Total funds $34,968 $35,422 --------------------- PERFORMANCE RATIOS After-tax profit margin 26% 25% Efficiency 55 58 Noninterest income to total revenue 17 17 Return on assigned capital 30 29 ================================================================ Regional Community Banking contributed 39% of total line of business earnings in the first quarter of 1998 compared with 40% in the first quarter of 1997. Earnings increased $3 million or 3% primarily due to a reduction in noninterest expense. Total revenue was essentially unchanged in the first quarter of 1998 as higher transaction fees were offset by lower net interest income associated with lower deposits. The $3 million increase in the provision for credit losses resulted from recoveries in the first quarter of 1997. Noninterest expense declined $10 million or 4% reflecting the impact of continued strategies designed to respond to customer behavior while improving the effectiveness and efficiency of the delivery system. These initiatives are expected to continue to positively impact results, and will be enhanced by the sale of 16 branches in Pennsylvania which is anticipated to close during the second quarter of 1998. CORPORATE BANKING Three months ended March 31 - dollars in millions 1998 1997 - --------------------------------------------------------------- INCOME STATEMENT Credit-related revenue $79 $75 Noncredit revenue Treasury management 54 48 Equity management 23 15 Capital markets 15 13 Other 8 4 ------------------- Total noncredit revenue 100 80 ------------------- Total revenue 179 155 Provision for credit losses 2 (9) Noninterest expense 90 85 ------------------- Pretax earnings 87 79 Income taxes 31 29 ------------------- Earnings $56 $50 ------------------- AVERAGE BALANCE SHEET Loans $13,853 $13,756 Other assets 979 880 ------------------- Total assets $14,832 $14,636 ------------------- Net deposits $2,487 $2,074 Assigned funds and other liabilities 11,228 11,513 Assigned capital 1,117 1,049 ------------------- Total funds $14,832 $14,636 ------------------- PERFORMANCE RATIOS After-tax profit margin 31% 32% Efficiency 50 55 Noncredit revenue to total revenue 56 52 Return on assigned capital 20 19 =============================================================== Corporate Banking contributed 21% of total line of business earnings in the first quarter of 1998 compared with 20% in the same period last year. Earnings increased $6 million or 12% in 1998 driven by growth in noncredit revenue. Credit-related revenue primarily represents net interest income from loans. Noncredit revenue, which includes noninterest income and the benefit of compensating balances in lieu of fees, increased $20 million or 25%. This increase reflects the emphasis on expanding revenue from fee-based services as well as higher equity management gains. The ratio of noncredit revenue to total revenue increased from 52% a year ago to 56% in the first quarter of 1998. Noninterest expense increased $5 million or 6% reflecting higher operating costs associated with growth and investment in treasury management and capital markets services. PNC BANK CORP. ----- 5 NATIONAL CONSUMER BANKING Three months ended March 31 - dollars in millions 1998 1997 - --------------------------------------------------------------- INCOME STATEMENT Net interest income $120 $102 Noninterest income 53 81 -------------------- Total revenue 173 183 Provision for credit losses 78 52 Noninterest expense 116 95 -------------------- Pretax earnings (loss) (21) 36 Income taxes (benefit) (8) 14 -------------------- Earnings (loss) $(13) $22 -------------------- AVERAGE BALANCE SHEET Loans Dealer finance $5,018 $5,336 Credit card 3,748 3,043 Education 1,366 1,762 Other 638 396 -------------------- Total loans 10,770 10,537 Other assets 737 648 -------------------- Total assets $11,507 $11,185 -------------------- Net deposits $114 $80 Assigned funds and other liabilities 10,702 10,416 Assigned capital 691 689 -------------------- Total funds $11,507 $11,185 -------------------- PERFORMANCE RATIOS After-tax profit margin (8)% 12% Efficiency 67 52 Noninterest income to total revenue 31 44 Return on assigned capital (8) 13 =============================================================== National Consumer Banking's results are predominated by start-up investments primarily in AAA and other affinity businesses. As these investments mature and scale of the business increases, management expects returns will improve. During the first quarter of 1998 National Consumer Banking incurred a loss of $13 million in the first quarter of 1998 compared with earnings of $22 million in the prior-year quarter. Earnings in the first quarter of 1997 included pretax income of $24 million from securitization of education loans and $13 million from the establishment of the merchant services joint venture that was used to support investments and marketing costs associated with AAA. The loss in the first quarter of 1998 resulted from AAA and credit card initiatives which reduced earnings by $27 million. These initiatives were unfavorably impacted by intense industry competition, including aggressive teaser rates offered on credit cards, higher credit costs and increased marketing expense associated with national business expansion. Management currently expects that the AAA initiative will be profitable in mid 1999. The increase in the provision for credit losses of $26 million or 50% related to consumer bankruptcies and an increase in credit card outstandings. Management has undertaken enhanced collection efforts and a more focused marketing strategy directed at PNC Bank's geographic footprint and affinity relationships. As a result, the growth rate in credit card outstandings is expected to slow and net charge-offs are expected to remain relatively stable during the remainder of 1998. PNC BANK CORP. ----- 6 ASSET MANAGEMENT AND MUTUAL FUND SERVICING
Asset Mutual Fund Management Servicing Total ----------------------------------------------------------- Three months ended March 31 - dollars in millions 1998 1997 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------ INCOME STATEMENT Advisory, processing and other fees $88 $60 $41 $33 $129 $93 Other income 20 20 Net interest income 3 1 2 2 5 3 ----------------------------------------------------------- Total revenue 111 61 43 35 154 96 Operating expense 63 44 28 22 91 66 ----------------------------------------------------------- Pretax earnings 48 17 15 13 63 30 Income taxes 14 7 6 5 20 12 ----------------------------------------------------------- Earnings $34 $10 $9 $8 $43 $18 ----------------------------------------------------------- AVERAGE BALANCE SHEET Loans $55 $17 $89 $57 $144 $74 Assigned assets and other assets 664 495 113 119 777 614 ----------------------------------------------------------- Total assets $719 $512 $202 $176 $921 $688 ----------------------------------------------------------- Net deposits $455 $308 $103 $87 $558 $395 Other liabilities 47 24 19 17 66 41 Assigned capital 217 180 80 72 297 252 ----------------------------------------------------------- Total funds $719 $512 $202 $176 $921 $688 ----------------------------------------------------------- PERFORMANCE RATIOS After-tax profit margin 31% 16% 21% 23% 28% 19% Efficiency 57 72 65 63 59 69 Noninterest income to total revenue 97 98 95 94 97 97 Return on assigned capital 64 23 46 45 59 29 ==============================================================================================================================
Asset Management and Mutual Fund Servicing contributed 16% of total line of business earnings in the first quarter of 1998 compared with 7% in the first quarter of 1997. Earnings increased $25 million to $43 million in the first quarter of 1998 due to an increase in revenue. During the first quarter of 1998 PNC Bank's fixed income, equity and liquidity capabilities were consolidated under BlackRock. This combination created one of the largest asset managers in the United States with a focus on expanding marketing and delivery channels for a wide range of institutional and retail investment products. Asset Management earnings increased $24 million over the prior year, primarily due to after-tax gains of $16 million realized in the first quarter of 1998 from the sale of an equity stake to BlackRock management. Excluding these gains, earnings increased $8 million or 80% due to strong revenue growth resulting from new business and market appreciation. Operating expense increased $19 million commensurate with the growth in revenue. Fee income is driven by the level of assets under management which are summarized in the following table: ASSETS UNDER MANAGEMENT March 31 - in billions 1998 1997 - --------------------------------------------------------------- BlackRock Fixed income $59 $47 Liquidity 42 34 Equity and other 15 10 ------------------- Total BlackRock 116 91 Other Fixed income 7 5 Equity 26 20 ------------------- Total other 33 25 ------------------- Total assets under management $149 $116 ------------------- Proprietary mutual funds BlackRock Funds $16 $12 Other 20 18 ------------------- Total proprietary mutual funds $36 $30 =============================================================== PNC BANK CORP. ----- 7 Financial Review Assets under management totaled $149 billion at March 31, 1998, a 28% increase compared with a year ago. BlackRock had managed assets of $116 billion at March 31, 1998, an increase of 27% over the prior-year quarter. The remaining managed assets are comprised of personal and corporate trust assets. Total assets under administration were $456 million at March 31, 1998, an increase of $109 billion of 31% in the year-to-year comparison. Mutual Fund Servicing experienced double digit growth in assets and accounts serviced compared with the first quarter of 1997 leading to a 23% increase in total revenue. Operating expenses increased $6 million due to higher compensation expense commensurate with revenue growth and increased investments in technology and facilities associated with business expansion. PFPC's assets and accounts serviced were as follows: March 31 1998 1997 - --------------------------------------------------------------- Assets (billions) Custody $248 $203 Accounting/administration 218 138 - --------------------------------------------------------------- Accounts (millions) Shareholder 4.7 4.5 Checking and credit/debit card 2.1 1.7 =============================================================== Revenue from investment management and mutual fund servicing is included in the Asset Management and Mutual Fund Servicing line of business. Revenue from marketing asset management products and services to consumers is included primarily in Private Banking. The following table sets forth revenue and earnings from asset management products, services and activities included in each line of business. Three months ended March 31 - in millions Revenue Earnings - --------------------------------------------------------------- 1998 Asset Management and Mutual Fund Servicing $154 $43 Private Banking 60 18 ------------------- Total $214 $61 - --------------------------------------------------------------- 1997 Asset Management and Mutual Fund Servicing $96 $18 Private Banking 54 13 ------------------- Total $150 $31 =============================================================== Asset Management and Mutual Fund Servicing 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. PNC BANK CORP. ----- 8 PRIVATE BANKING Three months ended March 31 - dollars in millions 1998 1997 - --------------------------------------------------------------- INCOME STATEMENT Net interest income $29 $27 Noninterest income Investment management and trust 58 52 Brokerage 16 15 Other 2 2 ------------------- Total noninterest income 76 69 ------------------- Total revenue 105 96 Provision for credit losses 1 2 Noninterest expense 68 61 ------------------- Pretax earnings 36 33 Income taxes 13 13 ------------------- Earnings $23 $20 ------------------- AVERAGE BALANCE SHEET Loans Residential mortgage $987 $1,060 Consumer 920 803 Commercial 540 407 Other 32 72 ------------------- Total loans 2,479 2,342 Other assets 57 66 ------------------- Total assets $2,536 $2,408 ------------------- Net deposits $1,779 $1,609 Assigned funds and other liabilities 423 510 Assigned capital 334 289 ------------------- Total funds $2,536 $2,408 ------------------- PERFORMANCE RATIOS After-tax profit margin 22% 21% Efficiency 65 64 Noninterest income to total revenue 72 72 Return on assigned capital 28 28 =============================================================== Private Banking contributed 9% of total line of business earnings in the first quarter of 1998 compared with 8% a year ago. Earnings increased $3 million or 15% due to revenue growth. Noninterest income increased $7 million or 10% in the first quarter of 1998 due to higher assets under administration driven by new business and market value appreciation. This growth resulted from an enhanced sales management process focused on delivering investment management and brokerage products. Assets under administration were $62 billion at March 31, 1998, an increase of $13 billion from March 31, 1997. Net interest income increased $2 million or 7% due to loan and deposit growth. Noninterest expense increased $7 million due to additional sales and service personnel, higher incentive compensation commensurate with revenue growth, and investments in technology designed to improve customer service quality. Private Banking 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. MORTGAGE BANKING Three months ended March 31 - dollars in millions 1998 1997 - --------------------------------------------------------------- INCOME STATEMENT Servicing fees $41 $38 Origination and securitization 42 12 Sales of servicing and other 7 1 MSR amortization (33) (7) Hedging activities 7 (7) ------------------- Net mortgage banking revenue 64 37 Net interest income 40 29 ------------------- Total revenue 104 66 Operating expense 77 60 ------------------- Pretax earnings 27 6 Income taxes 11 3 ------------------- Earnings $16 $3 ------------------- AVERAGE BALANCE SHEET Residential mortgage loans $7,761 $7,573 Mortgages held for sale 2,321 958 Other assets 1,487 1,119 ------------------- Total assets $11,569 $9,650 ------------------- Escrow deposits $719 $564 Assigned funds and other liabilities 10,494 8,764 Assigned capital 356 322 ------------------- Total funds $11,569 $9,650 ------------------- PERFORMANCE RATIOS After-tax profit margin 15% 5% Efficiency 70 89 Net mortgage banking revenue to total 62 56 revenue Return on assigned capital 18 4 =============================================================== Mortgage Banking contributed 6% of total line of business earnings in the first quarter of 1998 compared with 1% in the first quarter of 1997. Earnings increased $13 million to $16 million in the first quarter of 1998 primarily due to an increase in revenue. Net mortgage banking revenue increased $27 million or 73% resulting from higher loan origination and securitization income, reflecting significant mortgage refinance activity, and gains on sales of MSR. Net interest income increased $11 million or 38% in the comparison due to a $1.4 billion increase in mortgages held for sale reflecting higher production volume. PNC BANK CORP. ----- 9 Financial Review Operating expense increased $17 million in the first quarter of 1998 reflecting a $9 million increase in origination expenses. PNC Bank's investments to build a superior technology platform contributed to an improvement in the efficiency ratio to 70% in the first quarter of 1998. During the first quarter of 1998 Mortgage Banking funded $2.3 billion of residential mortgages with 69% representing retail originations. The comparable amounts were $1.1 billion and 65%, respectively, in the first quarter of 1997. The year-to-year increase reflects the combination of higher refinance activity and initiatives to expand retail origination capabilities. At March 31, 1998 the mortgage servicing portfolio totaled $42.5 billion, including $33.6 billion of loans serviced for others, had a weighted-average coupon of 7.91% and an estimated fair value of $515 million. Capitalized MSR totaled $406 million at March 31, 1998 compared with $344 million a year ago. MORTGAGE SERVICING PORTFOLIO In millions 1998 1997 - --------------------------------------------------------------- January 1 $40,701 $39,543 Originations 2,260 1,090 Purchases 3,512 1,312 Repayments (2,962) (1,212) Sales (1,030) (39) -------------------- March 31 $42,481 $40,694 =============================================================== MSR value and amortization are affected 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. Higher prepayment activity resulted in higher amortization in 1998. In a period of rising interest rates, a converse relationship would exist. The Corporation seeks to manage this risk by using financial instruments with values that move in the opposite direction of MSR value changes. Accordingly, increased hedging activity mitigated the higher amortization expense. Net mortgage banking revenue includes servicing fees, MSR amortization and the impact from securities and interest rate floors used to hedge the value of MSR. SECURED LENDING Three months ended March 31 - dollars in millions 1998 1997 - --------------------------------------------------------------- INCOME STATEMENT Net interest income $57 $49 Noninterest income 11 19 ------------------- Total revenue 68 68 Provision for credit losses (6) (4) Noninterest expense 23 15 ------------------- Pretax earnings 51 57 Income taxes 17 23 ------------------- Earnings $34 $34 ------------------- AVERAGE BALANCE SHEET Loans Commercial $2,924 $2,019 Project and construction 1,968 1,971 Lease financing 1,069 811 Commercial mortgages 1,039 1,166 Other 18 47 ------------------- Total loans 7,018 6,014 Other assets 106 117 ------------------- Total assets $7,124 $6,131 ------------------- Net deposits $918 $629 Assigned funds and other liabilities 5,683 5,025 Assigned capital 523 477 ------------------- Total funds $7,124 $6,131 ------------------- PERFORMANCE RATIOS After-tax profit margin 50% 50% Efficiency 34 22 Noninterest income to total revenue 16 28 Return on assigned capital 26 29 =============================================================== Secured Lending contributed 13% of total line of business earnings in the first quarter of 1998 compared with 14% in the first quarter of last year. Earnings in the first quarter of 1998 and 1997 totaled $34 million. Higher net interest income was primarily due to a 17% increase in average loans. The decline in noninterest income resulted from nonrecurring gains of $12 million in the first quarter of 1997. The increase in noninterest expense in 1998 resulted from a decrease in expense recoveries from workout activities. PNC BANK CORP. ---- 10 On April 3, 1998, PNC Bank completed the acquisition of Midland, the nation's largest servicer of commercial mortgage-backed securities with a total servicing portfolio of approximately $25 billion. This transaction greatly expands PNC Bank's commercial real estate financial services capabilities including origination, securitization, servicing, investment advisory and risk management. Midland is expected to add approximately $100 million to noninterest income and approximately $70 million to noninterest expense on an annual basis and, net of financing cost, is expected to contribute positively to earnings in 1998 and provide significant revenue growth opportunities as more real estate customers demand sophisticated, technology-driven services and increased access to capital markets. On April 15, 1998, the Corporation completed the acquisition of the asset-based finance business of BTM Capital. The purchase included a $600 million portfolio of asset-based loans and loan commitments and regional sales offices. This transaction is expected to enhance the growth of this business on a national basis. FORWARD-LOOKING STATEMENTS PNC Bank has made, and may continue to make, various forward-looking statements with respect to earnings per share, credit quality, interest rate and market risk, corporate objectives, revenue composition and growth, Year 2000, AAA Financial Services, BlackRock, Midland, BTM Capital 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 and the Corporation assumes no duty to update forward-looking statements. 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; the success and timing of AAA and other business initiatives and strategies, several of which are in early stages and therefore susceptible to greater uncertainty than more mature businesses; competition; changes in economic conditions; customer borrowing, repayment, investment and deposit practices; continued customer disintermediation; customers' acceptance of PNC Bank's products and services; and the extent and timing of technological advancement, capital management actions, actions of the Federal Reserve Board and legislative and regulatory actions and reforms. CONSOLIDATED INCOME STATEMENT REVIEW INCOME STATEMENT HIGHLIGHTS Three months ended March 31 - in millions 1998 1997 Change - ------------------------------------------------------------------------ Net interest income (taxable-equivalent basis) $644 $637 $7 Provision for credit losses 30 10 20 Noninterest income before net securities gains 516 417 99 Net securities gains 23 16 7 Noninterest expense 741 644 97 Income taxes 136 143 (7) Net income 269 266 3 ======================================================================== Taxable-equivalent net interest income increased to $644 million for the first quarter of 1998, a $7 million increase over the same period a year ago. This increase resulted from a higher-yielding earning asset mix which offset the impact of spread compression and a change in deposit mix. Average loans increased $2.2 billion to $54.1 billion in the quarter-to-quarter comparison while average securities declined $2.3 billion to $7.8 billion. The net interest margin was 3.96% compared with 3.98% in the prior-year period. PNC BANK CORP. ---- 11 Financial Review
NET INTEREST INCOME ANALYSIS Taxable-equivalent basis Average Balances Interest Income/Expense Average Yields/Rates Three months ended March 31 - ------------------------------------------------------------------------------------------- dollars in millions 1998 1997 Change 1998 1997 Change 1998 1997 Change - ------------------------------------------------------------------------------------------------------------------------------------ Interest-earning assets Securities $7,784 $10,089 $(2,305) $117 $158 $(41) 6.01% 6.27% (26) bp Loans, net of unearned income Consumer (excluding credit card) 11,186 11,827 (641) 236 245 (9) 8.56 8.41 15 Credit card 3,748 3,043 705 133 101 32 14.38 13.22 116 Residential mortgage 12,784 12,781 3 233 237 (4) 7.31 7.44 (13) Commercial 20,665 18,406 2,259 407 360 47 7.87 7.82 5 Commercial real estate 3,624 4,101 (477) 79 89 (10) 8.68 8.67 1 Other 2,076 1,764 312 36 29 7 6.99 6.67 32 ----------------------------- -------------------------- Total loans, net of unearned 54,083 51,922 2,161 1,124 1,061 63 8.36 8.20 16 income Other 3,322 1,814 1,508 57 30 27 6.96 6.68 28 ----------------------------- -------------------------- Total interest-earning assets/ interest income 65,189 63,825 1,364 1,298 1,249 49 8.00 7.86 14 Noninterest-earning assets 6,952 6,476 476 ----------------------------- Total assets $72,141 $70,301 $1,840 ============================= Interest-bearing liabilities Deposits Demand and money market $14,153 $12,962 $1,191 103 87 16 2.97 2.74 23 Savings 2,646 3,063 (417) 13 15 (2) 1.99 1.96 3 Other time 17,346 17,721 (375) 234 234 5.46 5.34 12 Deposits in foreign offices 800 787 13 11 10 1 5.68 5.28 40 ----------------------------- -------------------------- Total interest-bearing deposits 34,945 34,533 412 361 346 15 4.19 4.06 13 Borrowed funds 19,989 18,594 1,395 293 266 27 5.85 5.76 9 ----------------------------- -------------------------- Total interest-bearing liabilities/ interest expense 54,934 53,127 1,807 654 612 42 4.79 4.66 13 -------------------------- ---------------------------- Noninterest-bearing liabilities, capital securities and 17,207 17,174 33 shareholders' equity ----------------------------- Total liabilities and shareholders' equity $72,141 $70,301 $1,840 ============================= Interest rate spread 3.21 3.20 1 Impact of noninterest-bearing sources .75 .78 (3) ---------------------------- Net interest income/margin $644 $637 $7 3.96% 3.98% (2) 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. Accordingly, portfolio size, composition and related yields earned and rates paid can have a significant impact on net interest income and margin. For the first three months of 1998, average loans comprised 83.0% of average earning assets compared to 81.4% for the prior-year period. A higher percentage of loans in the earning asset base coupled with growth in higher yielding asset categories, predominantly middle market commercial loans and credit card, contributed positively to net interest income and margin. These positive impacts were 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 61.9% and 62.8% of PNC Bank's total sources of funding for the three months ended March 31, 1998 and 1997, respectively, with the remainder primarily comprised of wholesale funding obtained at prevailing market rates. Management anticipates modest balance sheet growth and continuation of the challenging competitive environment throughout 1998. PROVISION FOR CREDIT LOSSES The provision for credit losses was $30 million in the first quarter of 1998 compared with $10 million in the prior-year period. Management anticipates the Corporation will record higher provisions for credit losses throughout the remainder of 1998. PNC BANK CORP. ---- 12 NONINTEREST INCOME Change Three months ended March 31 - ------------------- dollars in millions 1998 1997 Amount Percent - --------------------------------------------------------------- Asset management $141 $107 $34 31.8% Mutual fund servicing 40 33 7 21.2 Service charges on deposits 40 42 (2) (4.8) Consumer service fees Credit card 27 19 8 42.1 Brokerage 15 13 2 15.4 Insurance 10 9 1 11.1 Other 37 35 2 5.7 ------------------------ Total consumer service fees 89 76 13 17.1 Corporate finance and capital markets 52 49 3 6.1 Mortgage banking Servicing 29 28 1 3.6 Origination 17 8 9 NM Marketing 25 3 22 NM Sales of servicing 7 1 6 NM ------------------------ Total mortgage banking 78 40 38 95.0 Net securities gains 23 16 7 43.8 Other 76 70 6 8.6 ------------------------ Total $539 $433 $106 24.5% =============================================================== NM - not meaningful Noninterest income totaled $539 million in the first quarter of 1998, a $106 million or 24.5% increase compared with the prior-year period driven by strong asset management, mutual fund servicing and mortgage banking growth. Asset management and mutual fund servicing benefited from significant new business and strong financial markets. Mortgage banking revenue grew primarily due to higher marketing gains and origination volume reflecting significant mortgage refinance activity in the first quarter of 1998. Net securities gains were $23 million in the first quarter of 1998 including $9 million from sales of securities that hedged MSR. NONINTEREST EXPENSE Change Three months ended March 31 - ------------------- dollars in millions 1998 1997 Amount Percent - ---------------------------------------------------------------- Staff expense Compensation $291 $250 $41 16.4% Employee benefits 63 58 5 8.6 ------------------------- Total staff expense 354 308 46 14.9 Net occupancy and equipment Net occupancy 49 47 2 4.3 Equipment 47 42 5 11.9 ------------------------- Total net occupancy and equipment 96 89 7 7.9 Amortization Goodwill 13 13 Mortgage servicing rights 33 8 25 NM Other 11 9 2 22.2 ------------------------- Total amortization 57 30 27 90.0 Marketing 37 23 14 60.9 Distributions on capital securities 13 7 6 85.7 Other 184 187 (3) (1.6) ------------------------- Total $741 $644 $97 15.1% ================================================================ NM - not meaningful Noninterest expense increased $97 million to $741 million in the first quarter of 1998 primarily due to MSR amortization, incentive compensation commensurate with growth in fee-based revenue and higher marketing costs associated with national consumer banking initiatives. Average full-time equivalent employees totaled approximately 25,000 in the first three months of 1998 compared with approximately 24,500 in the prior-year period. YEAR 2000 The Corporation has been working since 1995 to prepare its computer systems and applications for the year 2000. This process involves reviewing, modifying and replacing existing hardware and software as necessary and communicating with external service providers and customers to determine whether they are addressing their year 2000 issues appropriately. The Corporation is also assessing the potential for computer systems of third parties such as vendors, customers, governmental entities and others to impact the Corporation's business operations. Given the Corporation's common technology infrastructure and the progress made to date, management estimates the review and modification of its computer systems and applications will be substantially completed by December 31, 1998. The estimated total cost to become year 2000 compliant, which is being expensed as incurred, is approximately $30 million substantially all of which will be incurred by the end of 1998. Failure of the Corporation or third parties to correct year 2000 issues could cause disruption of operations resulting in increased operating costs and other adverse effects. In addition, to the extent customers' financial positions are PNC BANK CORP. ---- 13 Financial Review weakened as a result of year 2000 issues, credit quality could be affected. It is not possible to predict with certainty all of the adverse effects which may result from a failure of the Corporation or third parties to become fully year 2000 compliant. BALANCE SHEET REVIEW PERIOD-END BALANCE SHEET HIGHLIGHTS March 31 December 31 In millions 1998 1997 Change - --------------------------------------------------------------- Assets $72,355 $75,120 $(2,765) Earning assets 65,210 66,688 (1,478) Loans, net of unearned income 54,511 54,245 266 Securities 7,511 8,522 (1,011) Deposits 46,068 47,649 (1,581) Borrowed funds 18,375 19,622 (1,247) Shareholders' equity 5,487 5,384 103 =============================================================== LOANS Loans outstanding increased $266 million from year-end 1997 to $54.5 billion at March 31, 1998. Loan portfolio composition continues to be geographically diversified among numerous industries and types of businesses and remained relatively consistent in the comparison. As the Corporation's businesses evolve, the loan portfolio is expected to remain diversified. Management anticipates modest loan portfolio growth in 1998. Certain reclassifications of loan balances were made for the current reporting period; however, prior period amounts were not restated. LOANS March 31 December 31 In millions 1998 1997 - --------------------------------------------------------------- Consumer Home equity $5,004 $4,848 Credit card 3,729 3,830 Automobile 3,099 3,221 Education 1,197 1,223 Other 1,806 1,913 --------------------- Total consumer 14,835 15,035 Residential mortgage 12,351 12,785 Commercial Manufacturing 4,242 3,838 Retail/wholesale 3,900 3,575 Service providers 2,671 2,497 Real estate related 2,343 2,047 Communications 1,273 1,154 Health care 1,415 1,504 Financial services 1,516 1,027 Other 4,463 4,347 --------------------- Total commercial 21,823 19,989 Commercial real estate Mortgage 1,351 1,848 Real estate project 2,116 2,126 --------------------- Total commercial real estate 3,467 3,974 Lease financing and other 2,428 2,874 Unearned income (393) (412) --------------------- Total, net of unearned income $54,511 $54,245 =============================================================== NET UNFUNDED COMMITMENTS March 31 December 31 In millions 1998 1997 - --------------------------------------------------------------- Consumer (excluding credit card) $3,485 $3,363 Credit card 16,981 16,385 Residential mortgage 2,234 2,144 Commercial 31,750 29,707 Commercial real estate 1,216 1,167 Other 842 1,082 ---------------------- Total $56,508 $53,848 =============================================================== Commitments to extend credit represent arrangements to lend funds provided there is no violation of specified contractual conditions. Commercial commitments are reported net of $4.9 billion and $5.9 billion of participations, assignments and syndications, primarily to financial institutions, at March 31, 1998 and December 31, 1997, respectively. Net outstanding letters of credit totaled $4.6 billion and $4.7 billion at March 31, 1998 and December 31, 1997, respectively, and consisted primarily of standby letters of credit which commit the Corporation to make payments on behalf of customers when certain specified future events occur. SECURITIES AVAILABLE FOR SALE The securities portfolio declined $1.0 billion from year-end 1997 to $7.5 billion at March 31, 1998. The expected weighted-average life of the securities portfolio was 3 years and 3 months at March 31, 1998 compared with 2 years and 9 months at year end 1997. SECURITIES AVAILABLE FOR SALE March 31, 1998 December 31, 1997 ---------------------------------------- Amortized Fair Amortized Fair In millions Cost Value Cost Value - --------------------------------------------------------------- Debt securities U.S. Treasury and government agencies $2,017 $2,001 $1,102 $1,105 Mortgage-backed 4,123 4,083 4,672 4,623 Asset-backed 793 794 2,079 2,083 State and municipal 147 153 170 177 Other debt 34 33 34 33 Corporate stocks and other 446 447 501 501 ------------------------------------- Total $7,560 $7,511 $8,558 $8,522 =============================================================== 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 quarter of 1998, $3.8 billion of securities were sold at a $23 million net gain of which $9 million was from sales of securities that hedged MSR. No financial derivatives were designated to securities available for sale at March 31, 1998 and December 31, 1997. PNC BANK CORP. ---- 14 FUNDING SOURCES Deposits were $46.1 billion at March 31, 1998, a decline of $1.6 billion from year end, primarily due to a decrease in short-term foreign deposits. A $1.2 billion decrease in borrowed funds from $19.6 billion at year-end 1997 was primarily the result of a decline in federal funds purchased partially offset by an increase in repurchase agreements and other borrowed funds. FUNDING SOURCES March 31 December 31 In millions 1998 1997 - --------------------------------------------------------------- Deposits Demand, savings and money market $27,171 $27,475 Time 17,110 17,125 Foreign 1,787 3,049 ---------------------- Total deposits 46,068 47,649 Borrowed funds Bank notes and senior debt 9,503 9,826 Federal funds purchased 773 3,632 Repurchase agreements 1,827 714 Other borrowed funds 4,591 3,753 Subordinated debt 1,681 1,697 ---------------------- Total borrowed funds 18,375 19,622 ---------------------- Total $64,443 $67,271 =============================================================== CAPITAL The access to and cost of funding new business initiatives including acquisitions, deposit insurance costs, ability to pay dividends 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, 10% for total risk-based and 5% for leverage. At March 31, 1998, the Corporation and each bank subsidiary met the well capitalized capital ratio requirements. RISK-BASED CAPITAL March 31 December 31 Dollars in millions 1998 1997 - --------------------------------------------------------------- Capital components Shareholders' equity Common $5,172 $5,069 Preferred 315 315 Trust preferred capital securities 650 650 Goodwill and other (925) (949) Net unrealized securities losses 32 23 ---------------------- Tier I risk-based capital 5,244 5,108 Subordinated debt 1,589 1,666 Eligible allowance for credit losses 856 861 ---------------------- Total risk-based capital $7,689 $7,635 ====================== Assets Risk-weighted assets and off-balance-sheet instruments $68,415 $68,756 Average tangible assets 71,227 69,948 ====================== Capital ratios Tier I risk-based 7.67% 7.43% Total risk-based 11.24 11.11 Leverage 7.36 7.30 =============================================================== The capital position is managed through balance sheet size and composition, issuance of debt and equity instruments, treasury stock activities, dividend policies and retention of earnings. During the first quarter of 1998, PNC Bank repurchased 1.7 million shares of common stock. Subsequent to quarter end, the Corporation's board of directors authorized the repurchase of up to 10 million shares of common stock through April 30, 1999. These purchases may be made in open market or privately negotiated transactions. PNC BANK CORP. ---- 15 Financial Review 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. Market risk is also inherent in the Corporation's business operations. Market risk is the risk of loss associated with adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices. 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 March 31 December 31 Dollars in millions 1998 1997 - --------------------------------------------------------------- Nonperforming loans Commercial $145 $128 Commercial real estate Mortgage 46 84 Real estate project 35 10 Residential mortgage 51 44 Consumer 7 10 --------------------- Total nonperforming loans 284 276 Foreclosed assets Commercial real estate 23 27 Residential mortgage 19 21 Other 9 9 ------------------- Total foreclosed assets 51 57 ------------------- Total nonperforming assets $335 $333 ------------------- Nonperforming loans to loans .52% .51% Nonperforming assets to loans and foreclosed assets .61 .61 Nonperforming assets to assets .46 .44 =============================================================== The amount of nonperforming loans that were current as to principal and interest was $34 million at March 31, 1998 and December 31, 1997. There were no restructured loans outstanding for either period presented. CHANGE IN NONPERFORMING ASSETS In millions 1998 1997 - --------------------------------------------------------------- January 1 $333 $459 Transferred from accrual 78 70 Returned to performing (1) (14) Principal reductions (50) (56) Sales (16) (16) Charge-offs and valuation adjustments (9) (14) --------------------- March 31 $335 $429 =============================================================== ACCRUING LOANS PAST DUE 90 DAYS OR MORE Amount Percent of Loans -------------------------------------------- March 31 December 31 March 31 December 31 Dollars in millions 1998 1997 1998 1997 - ------------------------------------------------------------------ Consumer Guaranteed education $18 $26 1.51% 2.32% Credit card 72 69 1.92 1.80 Other 32 32 .32 .33 ------------------ Total consumer 122 127 .82 .87 Residential mortgage 60 60 .49 .47 Commercial 43 78 .18 .39 Commercial real estate 9 23 .27 .59 ------------------ Total $234 $288 .43 .53 ================================================================== ALLOWANCE FOR CREDIT LOSSES In determining the adequacy of the allowance for credit losses, the Corporation makes allocations to specific problem loans based on discounted cash flow analyses or collateral valuations for impaired loans and to pools of watchlist and nonwatchlist loans for various credit risk factors. Allocations to loan pools are developed by risk rating and industry classifications and based on management's judgment concerning historical loss trends and other relevant factors. These factors may include, among others, local, regional and national economic conditions, portfolio concentrations, industry competition and consolidation and the impact of government regulation. Consumer and residential mortgage loan allocations are based on historical loss experience adjusted for portfolio activity and current economic conditions. PNC BANK CORP. ---- 16 ALLOWANCE FOR CREDIT LOSSES In millions 1998 1997 - --------------------------------------------------------------- January 1 $972 $1,166 Charge-offs (107) (89) Recoveries 17 29 --------------------- Net charge-offs (90) (60) Provision for credit losses 30 10 Acquisitions 3 --------------------- March 31 $912 $1,119 =============================================================== The allowance as a percent of nonperforming loans and period-end loans was 321% and 1.67%, respectively, at March 31, 1998. The comparable year-end 1997 amounts were 352% and 1.79%. CHARGE-OFFS AND RECOVERIES Net Percent of Three months ended March 31 - Charge- Charge- Average dollars in millions offs Recoveries offs Loans - ---------------------------------------------------------------------------- 1998 Consumer $25 $10 $15 .54% Credit card 72 3 69 7.47 Residential mortgage 2 2 .06 Commercial 6 3 3 .06 Commercial real estate 2 1 1 .11 ----------------------------- Total $107 $17 $90 .67 - ---------------------------------------------------------------------------- 1997 Consumer $30 $9 $21 .72% Credit card 46 7 39 5.20 Residential mortgage 2 1 1 .03 Commercial 10 9 1 .02 Commercial real estate 1 3 (2) (.20) ----------------------------- Total $89 $29 $60 .47 ============================================================================ Credit card net charge-offs increased $30 million in the quarter-to-quarter comparison. This increase was primarily due to a higher level of consumer bankruptcies and higher outstandings. 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. 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 March 31, 1998, such assets totaled $13.2 billion, with $5.4 billion pledged as collateral for borrowing, trust and other commitments. Liquidity is also provided by residential mortgages which may be used as collateral for funds obtained through the Federal Home Loan Bank ("FHLB") system. At March 31, 1998, approximately $3.9 billion of residential mortgages were available as collateral for borrowings from the FHLB. In addition, bank affiliates have access to funds as issuers of unsecured notes in domestic and foreign markets. During the first three months of 1998, cash and due from banks decreased $1.7 billion to $2.6 billion compared with a decrease of $920 million during the year-earlier period. Net cash used by operating activities totaled $83 million in the first three months of 1998 compared with $73 million provided a year earlier. Investing activities provided net cash of $1.3 billion and $1.4 billion in the first three months of 1998 and 1997, respectively. Net cash used by financing activities totaled $3.0 billion in the first three months of 1998 compared with $2.4 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 $732 million at March 31, 1998. 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. The Corporation has unused capacity under effective shelf registration statements of approximately $1.4 billion of debt and equity securities. After March 31, 1998, the Corporation issued $140 million of subordinated debt under a shelf registration statement and filed a shelf registration statement relating to $600 million of trust preferred capital 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 used in the overall asset/liability management process. PNC BANK CORP. ---- 17 Financial Review INTEREST RATE RISK Interest rate risk arises primarily through the Corporation's core business activities of extending loans and accepting deposits. Many factors, including economic and financial conditions, movements in market interest rates and consumer preferences affect the spread between interest earned on assets and interest paid on liabilities. In managing interest rate risk, the Corporation seeks to minimize its reliance on a particular interest rate scenario as a source of earnings, while maximizing net interest income and net interest margin. To achieve these objectives, the Corporation uses securities purchases and sales, long-term and short-term funding vehicles, financial derivatives and other capital markets instruments. Interest rate risk is centrally managed by Asset and Liability ("A&L") Management. The Corporation actively measures and monitors all components of interest rate risk including term structure or repricing risk, yield curve or nonparallel rate shift risk, basis risk and options risk. Senior management's Corporate Asset & Liability Committee ("ALCO") provides strategic direction to A&L Management and, in doing so, reviews capital markets activities and interest rate risk exposures. The Finance Committee of the Board of Directors is responsible for overseeing the Corporation's interest rate risk management process. The Corporation measures and manages both the short-term and long-term effects of changing interest rates. A net interest income simulation model is used to measure the sensitivity of net interest income to changing interest rates over the next twenty-four month period; and an economic value of equity model is used to measure the sensitivity of the value of existing on-balance-sheet and off-balance-sheet positions to changing interest rates. The income simulation model is the primary tool used to measure the direction and magnitude of changes in net interest income resulting from changes in interest rates. Forecasting net interest income and its sensitivity to changes in interest rates requires that the Corporation make assumptions about the volume and characteristics of new business and the behavior of existing positions. These business assumptions are based on the Corporation's experience, line of business plans and published industry experience with input by key line of business managers. Any significant changes in major assumptions are reviewed by ALCO. This review includes an assessment of the motivation for the change and its effect on the simulated results. Key assumptions employed in the model include prepayment speeds on mortgage-related assets and consumer loans, loan volumes and pricing, deposit volumes and pricing, the expected life and repricing characteristics of nonmaturity loans and deposits and management's financial and capital plans. Because these assumptions are inherently uncertain, the model cannot precisely estimate net interest income or precisely predict the effect 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, the difference between actual experience and the assumed volume and characteristics of new business and the behavior of existing positions, and changes in market conditions and management strategies, among other factors. The Corporation's interest rate risk management policies 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. Through the first three months of 1998, the Corporation's interest rate risk exposures were consistently within policy limits. At March 31, 1998, if interest rates were to increase by 100 basis points over the next twelve months, net interest income would decline by 0.8%. If interest rates were to decrease by 100 basis points over the next twelve months, net interest income would increase by 0.1%. PNC BANK CORP. ---- 18 The Corporation models additional interest rate scenarios covering a wider range of rate movements to identify yield curve, term structure and basis risk exposures. These scenarios are developed based on historical rate relationships or management's expectations regarding the future direction and level of interest rates. Depending on market conditions and other factors, these scenarios may be modeled more or less frequently. Such analyses are used in conjunction with the income simulation model and economic value of equity model to identify inherent risk and develop appropriate strategies. The Corporation measures the sensitivity of the value of its balance sheet and off-balance-sheet positions to movements in interest rates using an economic value of equity sensitivity model. The model computes the value of all current on-balance-sheet and off-balance-sheet positions under a range of instantaneous interest rate changes. The resulting change in the value of equity is the measure of overall long-term interest rate risk inherent in the Corporation's existing on-balance-sheet and off-balance-sheet positions. The Corporation uses the economic value of equity model to complement the income simulation modeling process. The Corporation's recently amended risk management policies provide that the change in economic value of equity should not decline by more than 1.5% as a percentage of the book value of assets for a 200 basis point instantaneous increase or decrease in interest rates. Economic value of equity sensitivities are periodically reported to ALCO and the Finance Committee of the Board of Directors. Based on the results of the economic value of equity model at March 31, 1998, if interest rates were to increase by 200 basis points, the economic value of existing on-balance-sheet and off-balance-sheet positions would decline by 0.48% of assets. If interest rates were to decrease by 200 basis points, the economic value of existing on-balance-sheet and off-balance-sheet positions would decline by 0.18% of assets. MARKET RISK Most of PNC Bank's trading activities are designed to provide capital markets services for Corporate Banking and Private Banking customers. While some market risk exposure is a necessary outgrowth of providing services to customers, the performance of PNC Bank's trading operations is predominantly based on providing services to customers and not on positioning the Corporation's portfolio for gains from market movements. PNC Bank's market risk is predominantly related to interest rate risk associated with normal loan and deposit taking. Market risk associated with trading, capital markets and foreign exchange activities is managed using a value-at-risk approach that combines interest rate risk, foreign exchange rate risk, spread risk and volatility risk. Exposure is measured as the maximum loss due to a two standard deviation one day move. The combined quarter-end value-at-risk of all trading operations was less than $300 thousand. PNC BANK CORP. ---- 19 Financial Review FINANCIAL DERIVATIVES A variety of off-balance-sheet financial derivatives are used as part of the overall interest rate risk management process to manage interest rate risk inherent in the Corporation's line of business activities. Interest rate swaps and purchased interest rate caps and floors are the primary instruments used for these purposes. Interest rate swaps are agreements to exchange fixed and floating interest rate payments calculated on a notional principal amount. The floating rate is based on a money market index, primarily short-term LIBOR indices. Purchased interest rate caps and floors are agreements where, for a fee, the counterparty agrees to pay the Corporation the amount, if any, by which a specified market interest rate exceeds or is less than a defined rate applied to a notional amount, respectively. Forward contracts provide for the delivery of financial instruments at a specified future date and at a specified price or yield. Such contracts are 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 three months of 1998.
FINANCIAL DERIVATIVES ACTIVITY Weighted- Average 1998 - dollars in millions January 1 Additions Maturities Terminations March 31 Maturity - ------------------------------------------------------------------------------------------------------------------------------------ Interest rate risk management Interest rate swaps Receive fixed $4,320 $1,815 $(477) $(40) $5,618 2 yr. 0 mo. Pay fixed 448 251 (42) (190) 467 6 yr. 4 mo. Basis swaps 1,011 100 1,111 4 yr. 9 mo. Interest rate caps 542 84 (35) 591 3 yr. 11 mo. Interest rate floors 3,645 3,181 (1,000) 5,826 1 yr. 9 mo. ----------------------------------------------------------------- Total interest rate risk management 9,966 5,431 (1,554) (230) 13,613 Mortgage banking activities Forward contracts Commitments to purchase loans 1,652 4,461 (4,378) 1,735 2 mo. Commitments to sell loans 1,335 6,150 (4,998) 2,487 2 mo. Interest rate floors - MSR 1,470 250 1,720 4 yr. 3 mo. ----------------------------------------------------------------- Total mortgage banking activities 4,457 10,861 (9,376) 5,942 ----------------------------------------------------------------- Total $14,423 $16,292 $(10,930) $(230) $19,555 ====================================================================================================================================
During the first quarter of 1998, financial derivatives used in interest rate risk management increased net interest income by $2 million compared with a $3 million increase in the prior-year period. PNC BANK CORP. ---- 20 The following table sets forth by designated assets and liabilities the notional value and the estimated fair value of financial derivatives used for interest rate risk management and mortgage banking activities. Weighted-average interest rates presented are those expected to be in effect based on the implied forward yield curve. FINANCIAL DERIVATIVES
Forward Yield Curve Notional Estimated ------------------------- March 31, 1998 - dollars in millions Value Fair Value Paid Received - ------------------------------------------------------------------------------------------------------------------------------------ Interest rate risk management Asset rate conversion Interest rate swaps (1) Receive fixed designated to loans $4,545 $50 5.75% 6.09% Pay fixed designated to loans 208 (1) 6.63 5.84 Basis swaps designated to other earning assets 337 3 5.63 5.93 Interest rate caps designated to loans (2) 591 5 NM NM Interest rate floors designated to loans (3) 5,826 1 NM NM --------------------------------- Total asset rate conversion 11,507 58 Liability rate conversion Interest rate swaps (1) Receive fixed designated to: Interest-bearing deposits 400 10 5.84 6.28 Borrowed funds 673 30 5.85 6.38 Pay fixed designated to borrowed funds 259 4 6.09 6.09 Basis swaps designated to borrowed funds 774 5 5.88 5.91 --------------------------------- Total liability rate conversion 2,106 49 --------------------------------- Total interest rate risk management 13,613 107 Mortgage banking activities Forward contracts Commitments to purchase loans 1,735 (2) NM NM Commitments to sell loans 2,487 (5) NM NM Interest rate floors - MSR (3) 1,720 26 NM NM --------------------------------- Total mortgage banking activities 5,942 19 --------------------------------- Total financial derivatives $19,555 $126 ====================================================================================================================================
(1) The floating rate portion of interest rate contracts is based on money-market indices. As a percent of notional value, 69% were based on 1-month LIBOR, 25% on 3-month LIBOR and the remainder on other short-term indices. (2) Interest rate caps with notional values of $313 million, $139 million and $135 million require the counterparty to pay the excess, if any, of 3-month LIBOR over a weighted-average strike of 6.32%, 1-month LIBOR over a weighted-average strike of 5.89% and Prime over a weighted-average strike of 8.84%, respectively. (3) Interest rate floors with notional values of $5.6 billion and $1.7 billion require the counterparty to pay the Corporation the excess, if any, of the weighted-average strike of 5.04% over 3-month LIBOR and the weighted-average strike of 5.82% over 10-year CMT, respectively. At March 31, 1998, 1-month LIBOR was 5.69%, 3-month LIBOR was 5.71%, Prime was 8.5% and 10-year CMT was 5.67%. 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 opposing schedule sets forth information relating to positions associated with customer derivatives. Positive Negative Notional Fair Fair Net Asset March 31, 1998 - in millions Value Value Value (Liability) - ----------------------------------------------------------------------------- Interest rate Swaps $4,394 $20 $(19) $1 Caps/floors Sold 1,978 (5) (5) Purchased 1,795 4 4 Foreign exchange 1,397 21 (21) Other 1,068 1 (1) ----------------------------------------- Total $10,632 $46 $(46) ============================================================================= PNC BANK CORP. ---- 21 Consolidated Statement of Income
Three months ended March 31 - in thousands, except per share data 1998 1997 - ------------------------------------------------------------------------------------------------------------------ INTEREST INCOME Loans and fees on loans $1,118,644 $1,055,908 Securities 115,253 156,205 Other 57,610 30,043 ---------------------------------- Total interest income 1,291,507 1,242,156 INTEREST EXPENSE Deposits 361,522 346,155 Borrowed funds 292,581 266,076 ---------------------------------- Total interest expense 654,103 612,231 ---------------------------------- Net interest income 637,404 629,925 Provision for credit losses 30,000 10,000 ---------------------------------- Net interest income less provision for credit losses 607,404 619,925 NONINTEREST INCOME Asset management 141,065 106,899 Mutual fund servicing 40,521 32,673 Service charges on deposits 39,964 41,754 Consumer service fees 88,943 76,311 Corporate finance and capital markets 51,712 49,356 Mortgage banking 77,694 40,232 Net securities gains 22,842 16,426 Other 76,174 69,652 ---------------------------------- Total noninterest income 538,915 433,303 NONINTEREST EXPENSE Staff expense 354,284 308,432 Net occupancy and equipment 95,809 89,284 Amortization 57,179 29,831 Marketing 37,396 22,841 Distributions on capital securities 13,193 6,956 Other 183,379 187,047 ---------------------------------- Total noninterest expense 741,240 644,391 ---------------------------------- Income before income taxes 405,079 408,837 Income taxes 135,819 142,528 ---------------------------------- Net income $269,260 $266,309 ================================== EARNINGS PER COMMON SHARE Basic $.88 $.81 Diluted .87 .80 CASH DIVIDENDS DECLARED PER COMMON SHARE .39 .37 AVERAGE COMMON SHARES OUTSTANDING Basic 300,567 321,752 Diluted 306,148 327,917 ==================================================================================================================
See accompanying Notes to Consolidated Financial Statements. PNC BANK CORP. ---- 22 Consolidated Balance Sheet
March 31 December 31 Dollars in millions, except par value 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $2,581 $4,303 Short-term investments 718 1,526 Loans held for sale 2,399 2,324 Securities available for sale 7,511 8,522 Loans, net of unearned income of $393 and $412 54,511 54,245 Allowance for credit losses (912) (972) ------------------------- Net loans 53,599 53,273 Other 5,547 5,172 ------------------------- Total assets $72,355 $75,120 ========================= LIABILITIES Deposits Noninterest-bearing $10,117 $10,158 Interest-bearing 35,951 37,491 ------------------------- Total deposits 46,068 47,649 Borrowed funds Bank notes and senior debt 9,503 9,826 Federal funds purchased 773 3,632 Repurchase agreements 1,827 714 Other borrowed funds 4,591 3,753 Subordinated debt 1,681 1,697 ------------------------- Total borrowed funds 18,375 19,622 Other 1,775 1,815 ------------------------- Total liabilities 66,218 69,086 ------------------------- Mandatorily redeemable capital securities of subsidiary trusts 650 650 SHAREHOLDERS' EQUITY Preferred stock 7 7 Common stock - $5 par value Authorized: 450,000,000 shares Issued: 350,353,116 and 348,447,600 shares 1,752 1,742 Capital surplus 1,088 1,042 Retained earnings 4,788 4,641 Deferred benefit expense (43) (41) Accumulated other comprehensive income (32) (23) Common stock held in treasury at cost: 49,543,007 and 48,017,641 shares (2,073) (1,984) ------------------------- Total shareholders' equity 5,487 5,384 ------------------------- Total liabilities, capital securities and shareholders' equity $72,355 $75,120 ==========================================================================================================================
See accompanying Notes to Consolidated Financial Statements. PNC BANK CORP. ---- 23 Consolidated Statement of Cash Flows
Three months ended March 31 - in millions 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $269 $266 Adjustments to reconcile net income to net cash provided (used) by operating activities Provision for credit losses 30 10 Depreciation, amortization and accretion 94 73 Deferred income taxes 10 52 Net securities gains (23) (16) Net gain on sales of assets (55) (48) Changes in Loans held for sale (75) (434) Other (333) 170 --------------------- Net cash provided (used) by operating activities (83) 73 INVESTING ACTIVITIES Net change in loans (1,305) (1,450) Repayment of securities available for sale 412 650 Sales Securities available for sale 3,832 3,691 Loans 979 692 Foreclosed assets 17 21 Purchases Securities available for sale (3,225) (2,112) Loans (51) (105) Net cash received for acquisitions/divestitures 29 Other 635 28 --------------------- Net cash provided by investing activities 1,323 1,415 FINANCING ACTIVITIES Net change in Noninterest-bearing deposits (41) (966) Interest-bearing deposits (1,536) 197 Federal funds purchased (2,859) (996) Sale/issuance Bank notes and senior debt 1,949 2,480 Repurchase agreements 28,553 17,541 Other borrowed funds 25,664 24,823 Common stock 43 52 Repayment/maturity Bank notes and senior debt (2,272) (1,760) Repurchase agreements (27,440) (17,655) Other borrowed funds (24,799) (25,483) Subordinated debt (6) Acquisition of treasury stock (96) (516) Cash dividends paid (122) (125) --------------------- Net cash provided (used) by financing activities (2,962) (2,408) --------------------- DECREASE IN CASH AND DUE FROM BANKS (1,722) (920) Cash and due from banks at beginning of year 4,303 4,016 --------------------- Cash and due from banks at end of period $2,581 $3,096 =================================================================================================================================== CASH PAID FOR Interest $659 $629 Income taxes 5 2 NONCASH ITEMS Transfers from loans to other assets 13 17 Conversion of debt to equity 16 6 ===================================================================================================================================
See accompanying Notes to Consolidated Financial Statements. PNC BANK CORP. ---- 24 Notes to Consolidated Financial Statements BUSINESS PNC Bank Corp. ("Corporation" or "PNC Bank") is one of the largest diversified financial services organizations in the United States. The Corporation's major businesses include Regional Community Banking, Corporate Banking, National Consumer Banking, Asset Management and Mutual Fund Servicing, Private Banking, Mortgage Banking, and Secured Lending. Financial products and services are customized for specific customer segments and offered nationally and in PNC Bank's primary geographic markets in Pennsylvania, New Jersey, Delaware, Ohio, Kentucky, Indiana, Massachusetts and Florida. PNC Bank 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 and its subsidiaries, most 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 1997 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 and recoveries of previously charged-off loans are credited to the allowance. 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 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. SOFTWARE COSTS Effective January 1, 1998, the Corporation adopted Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires the capitalization of certain costs incurred in connection with developing or obtaining software for internal use. Qualifying software costs are capitalized and amortized over the estimated useful life of the software. Prior to the adoption of SOP 98-1, software costs were expensed as incurred. Restatement of prior year financial statements was not required. The adoption of SOP 98-1 did not have a material impact on the Corporation's financial position or results of operations. FINANCIAL DERIVATIVES The Corporation uses off-balance-sheet financial derivatives as part of the overall asset/liability management process, in mortgage banking activities and in providing risk management services to customers. 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, forward contracts and foreign exchange contracts. To accommodate customer needs, PNC Bank also enters into financial derivative 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. FOREIGN CURRENCY TRANSLATION The Corporation has foreign currency exposures for loans and deposits denominated in foreign currencies. These exposures are managed by entering into currency swaps and currency forward contracts. COMPREHENSIVE INCOME Effective January 1, 1998, the Corporation adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 established new rules for the reporting and display of comprehensive income and its components. SFAS No. 130 requires unrealized gains or losses on securities available for sale to be included in other comprehensive income. Prior to the adoption of SFAS No. PNC BANK CORP. ---- 25 Notes to Consolidatd Financial Statements 130, unrealized gains or losses were reported separately in shareholders' equity. Prior year financial statements have been reclassified to conform to the requirements of SFAS No. 130. The adoption of SFAS No. 130 had no impact on net income or shareholders' equity. Total comprehensive income amounted to $261 million and $196 million during the first quarter of 1998 and 1997, respectively. EARNINGS PER COMMON SHARE Basic earnings per common share is calculated by dividing net income adjusted for preferred stock dividends declared by the weighted-average number of shares of common stock outstanding. 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 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. This standard, when implemented, is not expected to materially impact the reported financial position or results of operations of the Corporation. 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.
March 31, 1998 December 31, 1997 ----------------------------------------------------------------------------------- Unrealized Unrealized Amortized ------------------ Fair Amortized ------------------ Fair In millions Cost Gains Losses Value Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------------------------------- Debt securities U.S. Treasury and government agencies $2,017 $1 $17 $2,001 $1,102 $4 $1 $1,105 Mortgage backed 4,123 3 43 4,083 4,672 4 53 4,623 Asset backed 793 2 1 794 2,079 5 1 2,083 State and municipal 147 6 153 170 7 177 Other debt 34 1 33 34 1 33 ---------------------------------------------------------------------------------- Total debt securities 7,114 12 62 7,064 8,057 20 56 8,021 Corporate stocks and other 446 6 5 447 501 3 3 501 ---------------------------------------------------------------------------------- Total securities available for sale $7,560 $18 $67 $7,511 $8,558 $23 $59 $8,522 =============================================================================================================================
PNC BANK CORP. ---- 26 NONPERFORMING ASSETS Nonperforming assets were as follows: March 31 December 31 In millions 1998 1997 - --------------------------------------------------------------- Nonperforming loans $284 $276 Foreclosed assets 51 57 --------------------- Total nonperforming assets $335 $333 =============================================================== ALLOWANCE FOR CREDIT LOSSES Changes in the allowance for credit losses were as follows: In millions 1998 1997 - --------------------------------------------------------------- Allowance at January 1 $972 $1,166 Charge-offs Consumer (excluding credit card) (25) (30) Credit card (72) (46) Residential mortgage (2) (2) Commercial (6) (10) Commercial real estate (2) (1) -------------------- Total charge-offs (107) (89) Recoveries Consumer (excluding credit card) 10 9 Credit card 3 7 Residential mortgage 1 Commercial 3 9 Commercial real estate 1 3 -------------------- Total recoveries 17 29 -------------------- Net charge-offs (90) (60) Provision for credit losses 30 10 Acquisitions 3 -------------------- Allowance at March 31 $912 $1,119 =============================================================== FINANCIAL DERIVATIVES The notional and fair values of financial derivatives used for interest rate risk management and for mortgage banking activities were as follows: Positive Negative Notional Fair Notional Fair In millions Value Value Value Value - --------------------------------------------------------------- MARCH 31, 1998 Interest rate swaps $6,269 $106 $927 $(5) Interest rate caps 591 5 Interest rate floors 5,600 3 226 (2) Mortgage banking activities 1,720 26 4,222 (7) ------------------------------------------ Total $14,180 $140 $5,375 $(14) =============================================================== DECEMBER 31, 1997 Interest rate swaps $4,849 $106 $930 $(10) Interest rate caps 542 4 Interest rate floors 3,500 6 145 (1) Mortgage banking activities 1,470 26 2,987 (6) ------------------------------------------ Total $10,361 $142 $4,062 $(17) =============================================================== Customer-related derivatives were as follows: Positive Negative March 31, 1998 - Notional Fair Fair Net Asset in millions Value Value Value (Liability) - --------------------------------------------------------------- Interest rate Swaps $4,394 $20 $(19) $1 Caps/floors Sold 1,978 (5) (5) Purchased 1,795 4 4 Foreign exchange 1,397 21 (21) Other 1,068 1 (1) ---------------------------------------- Total $10,632 $46 $(46) =============================================================== PNC BANK CORP. ---- 27 Notes to Consolidated Financial Statements EARNINGS PER SHARE The following table sets forth basic and diluted earnings per share calculations.
Three months ended March 31 - in thousands, except per share data 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ CALCULATION OF BASIC EARNINGS PER COMMON SHARE Net income $269,260 $266,309 Less: Preferred dividends declared 4,849 4,875 ------------------------ Net income applicable to basic earnings per common share $264,411 $261,434 ------------------------ Basic weighted-average common shares outstanding 300,567 321,752 ------------------------ BASIC EARNINGS PER COMMON SHARE $.88 $.81 ======================== CALCULATION OF DILUTED EARNINGS PER COMMON SHARE Net income $269,260 $266,309 Add: Interest expense on convertible debentures (net of tax) 526 769 Less: Dividends declared on nonconvertible preferred stock 4,537 4,537 ------------------------ Net income applicable to diluted earnings per common share $265,249 $262,541 ------------------------ Basic weighted-average common shares outstanding 300,567 321,752 Weighted-average common shares to be issued using average market price and assuming: Conversion of preferred stock Series A and B 156 167 Conversion of preferred stock Series C and D 1,175 1,273 Conversion of debentures 1,721 2,505 Exercise of stock options 2,214 1,918 Incentive share awards 315 302 ------------------------ Diluted weighted-average common shares outstanding 306,148 327,917 ------------------------ DILUTED EARNINGS PER COMMON SHARE $.87 $.80 ====================================================================================================================================
PNC BANK CORP. ---- 28 OTHER FINANCIAL INFORMATION In connection with the Midlantic Corporation ("Midlantic") merger, borrowed funds of Midlantic in the aggregate principal amount of $339 million at March 31, 1998 were jointly and severally assumed by the parent company and its wholly-owned subsidiary, PNC Bancorp, Inc. Summarized financial information for PNC Bancorp, Inc. and subsidiaries is as follows: PNC BANCORP, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET March 31 December 31 In millions 1998 1997 - --------------------------------------------------------------- ASSETS Cash and due from banks $2,580 $4,302 Securities available for sale 7,277 8,276 Loans, net of unearned income 54,380 54,126 Allowance for credit losses (912) (971) ------------------------ Net loans 53,468 53,155 Other assets 7,832 8,144 ------------------------ Total assets $71,157 $73,877 ======================== LIABILITIES Deposits $46,553 $47,766 Borrowed funds 16,820 18,437 Other liabilities 1,164 1,145 ------------------------ Total liabilities $64,537 $67,348 ------------------------ MANDATORILY REDEEMABLE CAPITAL SECURITIES OF SUBSIDIARY TRUST 350 350 SHAREHOLDERS' EQUITY 6,270 6,179 ------------------------ Total liabilities, capital securities and shareholders' equity $71,157 $73,877 =============================================================== PNC BANCORP, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME Three months ended March 31 - in millions 1998 1997 - --------------------------------------------------------------- Interest income $1,279 $1,233 Interest expense 629 592 ---------------------- Net interest income 650 641 Provision for credit losses 30 10 ---------------------- Net interest income less provision for credit losses 620 631 Noninterest income 478 392 Noninterest expense 688 614 ---------------------- Income before income taxes 410 409 Income taxes 142 145 ---------------------- Net income $268 $264 =============================================================== 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 $732 million at March 31, 1998. Dividends may also be impacted by capital needs, regulatory requirements, corporate policies, contractual restrictions and other factors. PNC BANK CORP. ---- 29 Statiscal Information AVERAGE CONSOLIDATED BALANCE SHEET AND NET INTEREST ANALYSIS
---------------------------------------- First Quarter 1998 ---------------------------------------- Average balances in millions, interest in thousands Average Average Taxable-equivalent basis Balances Interest Yields/Rates - ------------------------------------------------------------------------------------------------ ASSETS Interest-earning assets Loans held for sale $2,363 $42,280 7.16% Securities U.S. Treasury and government agencies 5,580 80,283 5.78 Other debt 1,639 27,013 6.59 Other 565 9,211 6.57 ----------------------- Total securities 7,784 116,507 6.01 Loans, net of unearned income Consumer (excluding credit card) 11,186 236,026 8.56 Credit card 3,748 132,886 14.38 Residential mortgage 12,784 233,641 7.31 Commercial 20,665 406,645 7.87 Commercial real estate 3,624 78,678 8.68 Other 2,076 36,236 6.99 ----------------------- Total loans, net of unearned income 54,083 1,124,112 8.36 Other interest-earning assets 959 15,434 6.48 ----------------------- Total interest-earning assets/interest income 65,189 1,298,333 8.00 Noninterest-earning assets Allowance for credit losses (947) Cash and due from banks 2,787 Other assets 5,112 --------- Total assets $72,141 --------- LIABILITIES, CAPITAL SECURITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities Interest-bearing deposits Demand and money market $14,153 103,547 2.97 Savings 2,646 12,978 1.99 Other time 17,346 233,622 5.46 Deposits in foreign offices 800 11,375 5.68 ----------------------- Total interest-bearing deposits 34,945 361,522 4.19 Borrowed funds Bank notes and senior debt 9,972 141,928 5.69 Federal funds purchased 2,404 33,350 5.55 Repurchase agreements 1,523 18,603 4.89 Other borrowed funds 4,408 66,031 5.99 Subordinated debt 1,682 32,669 7.77 ----------------------- Total borrowed funds 19,989 292,581 5.85 ----------------------- Total interest-bearing liabilities/interest expense 54,934 654,103 4.79 ----------------------- Noninterest-bearing liabilities, capital securities and shareholders' equity Demand and other noninterest-bearing deposits 9,685 Accrued expenses and other liabilities 1,474 Mandatorily redeemable capital securities of subsidiary trusts 650 Shareholders' equity 5,398 --------- Total liabilities, capital securities and shareholders' equity $72,141 ------------------------------------ Interest rate spread 3.21 Impact of noninterest-bearing liabilities .75 -------------------------- Net interest income/margin $644,230 3.96% - -----------------------------------------------------------------------------------------------
---------------------------------------- Fourth Quarter 1997 ---------------------------------------- Average balances in millions, interest in thousands Average Average Taxable-equivalent basis Balances Interest Yields/Rates - ---------------------------------------------------------------------------------------------------- ASSETS Interest-earning assets Loans held for sale $1,680 $30,688 7.31% Securities U.S. Treasury and government agencies 5,248 77,508 5.90 Other debt 1,949 32,527 6.68 Other 572 10,360 7.21 ------------------------- Total securities 7,769 120,395 6.19 Loans, net of unearned income Consumer (excluding credit card) 11,108 239,261 8.55 Credit card 3,803 130,091 13.57 Residential mortgage 12,966 241,309 7.44 Commercial 19,838 387,243 7.64 Commercial real estate 4,067 91,975 8.85 Other 1,881 33,248 7.07 ------------------------- Total loans, net of unearned income 53,663 1,123,127 8.27 Other interest-earning assets 975 13,844 5.59 ------------------------- Total interest-earning assets/interest income 64,087 1,288,054 7.96 Noninterest-earning assets Allowance for credit losses (1,010) Cash and due from banks 2,991 Other assets 4,801 ------------ Total assets $70,869 ------------ LIABILITIES, CAPITAL SECURITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities Interest-bearing deposits Demand and money market $13,949 105,452 3.00 Savings 2,651 13,243 1.98 Other time 17,061 236,720 5.51 Deposits in foreign offices 994 14,157 5.58 ------------------------- Total interest-bearing deposits 34,655 369,572 4.23 Borrowed funds Bank notes and senior debt 10,314 150,457 5.71 Federal funds purchased 2,464 34,910 5.54 Repurchase agreements 790 10,358 5.13 Other borrowed funds 3,358 50,839 6.06 Subordinated debt 1,698 33,006 7.78 ------------------------- Total borrowed funds 18,624 279,570 5.91 ------------------------- Total interest-bearing liabilities/interest expense 53,279 649,142 4.82 ------------------------- Noninterest-bearing liabilities, capital securities and shareholders' equity Demand and other noninterest-bearing deposits 9,925 Accrued expenses and other liabilities 1,601 Mandatorily redeemable capital securities of subsidiary trusts 650 Shareholders' equity 5,414 ------------ Total liabilities, capital securities and shareholders' equity $70,869 --------------------------------------- Interest rate spread 3.14 Impact of noninterest-bearing liabilities .81 -------------------------- Net interest income/margin $638,912 3.95% - ----------------------------------------------------------------------------------------------------
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 - ----------------------------------------------------------------------------------------- Average Average Average Average Balances Interest Yields/Rates Balances Interest Yields/Rates - ----------------------------------------------------------------------------------------- $1,555 $29,046 7.47% $1,408 $25,894 7.36% 5,823 85,530 5.86 6,375 95,834 6.02 1,824 30,155 6.61 2,083 34,051 6.54 569 11,368 7.95 597 10,733 7.20 - ------------------------------ ----------------------------- 8,216 127,053 6.17 9,055 140,618 6.21 10,996 235,885 8.51 11,239 237,784 8.49 3,871 122,537 12.56 3,502 106,348 12.18 13,503 252,315 7.47 13,164 244,829 7.44 18,839 373,402 7.76 18,964 373,561 7.79 4,041 89,227 8.64 4,060 88,683 8.64 1,952 33,884 6.94 1,884 33,327 7.08 - ------------------------------ ----------------------------- 53,202 1,107,250 8.23 52,813 1,084,532 8.19 981 14,509 5.82 925 13,522 5.86 - ------------------------------ ----------------------------- 63,954 1,277,858 7.92 64,201 1,264,566 7.85 (1,059) (1,094) 2,878 2,877 4,808 4,837 - --------------- -------------- $70,581 $70,821 - --------------- -------------- $13,715 103,872 3.00 $13,270 94,394 2.85 2,773 13,850 1.98 2,924 14,377 1.97 17,336 238,948 5.47 17,656 238,928 5.43 1,128 16,190 5.62 1,463 20,301 5.49 - ------------------------------ ----------------------------- 34,952 372,860 4.23 35,313 368,000 4.18 9,337 135,910 5.70 8,284 118,950 5.68 2,342 33,220 5.55 3,474 48,693 5.62 935 12,600 5.27 786 10,773 5.43 4,221 63,686 6.03 4,780 70,615 5.91 1,649 32,151 7.80 1,351 26,954 7.98 - ------------------------------ ----------------------------- 18,484 277,567 5.92 18,675 275,985 5.88 - ------------------------------ ----------------------------- 53,436 650,427 4.82 53,988 643,985 4.77 - ------------------------------ ----------------------------- 9,654 9,501 1,460 1,480 650 492 5,381 5,360 - --------------- -------------- $70,581 $70,821 - ----------------------------------------------------------------------------------------- 3.10 3.08 .79 .76 ----------------------------- ---------------------------- $627,431 3.89% $620,581 3.84% - -----------------------------------------------------------------------------------------
- --------------------------------------------- First Quarter 1997 - --------------------------------------------- Average Average Balances Interest Yields/Rates - --------------------------------------------- $ 1,019 $17,970 7.05% 6,982 105,363 6.05 2,530 41,841 6.62 577 10,666 7.45 - ------------------------------ 10,089 157,870 6.27 11,827 245,169 8.41 3,043 100,593 13.22 12,781 237,685 7.44 18,406 359,785 7.82 4,101 88,939 8.67 1,764 29,364 6.67 - ------------------------------ 51,922 1,061,535 8.20 795 12,139 6.20 - ------------------------------ 63,825 1,249,514 7.86 (1,148) 2,935 4,689 - ------------ $70,301 - ------------ $12,962 87,409 2.74 3,063 14,804 1.96 17,721 233,547 5.34 787 10,395 5.28 - ------------------------------ 34,533 346,155 4.06 8,566 117,172 5.47 3,068 40,908 5.38 735 9,756 5.31 4,874 71,272 5.86 1,351 26,968 7.98 - ------------------------------ 18,594 266,076 5.76 - ------------------------------ 53,127 612,231 4.66 - ------------------------------ 9,600 1,466 350 5,758 - ------------ $70,301 - --------------------------------------------- 3.20 .78 ----------------------------- $637,283 3.98% - ---------------------------------------------
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 March 31, 1998. Commission File Number 1-9718 PNC BANK CORP. Incorporated in the Commonwealth of Pennsylvania IRS Employer Identification No. 25-1435979 Address: One PNC Plaza 249 Fifth Avenue Pittsburgh, Pennsylvania 15222-2707 Telephone: (412) 762-1553 As of April 30, 1998, PNC Bank Corp. had 300,841,082 shares of common stock ($5 par value) outstanding. PNC Bank Corp. (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. The following sections of the Financial Review set forth in the cross-reference index are incorporated in the Quarterly Report on Form 10-Q. Cross-Reference Page(s) ------------------------------------------ ---------- PART I FINANCIAL INFORMATION Item 1 Consolidated Statement of Income for the three months ended March 31, 1998 and 1997 22 Consolidated Balance Sheet as of March 31, 1998 and December 31, 1997 23 Consolidated Statement of Cash Flows for the three months ended March 31, 1998 and 1997 24 Notes to Consolidated Financial 25-29 Statements 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 Item 3 Quantitative and Qualitative Disclosures About Market Risk 18-19 - ---------------------------------------------------- ---------- PART II OTHER INFORMATION Item 4 Submission of Matters for a Vote of Security Holders An annual meeting of shareholders of the Corporation was held on April 28, 1998, for the purpose of electing 17 directors. All 17 nominees were elected and the votes cast for and against/withheld were as follows: Aggregate Votes ------------------------------- Nominee For Against/Withheld - --------------------------------------------------------------- Paul W. Chellgren 263,348,077 2,090,873 Robert N. Clay 263,326,873 2,112,077 George A. Davidson, Jr. 263,367,135 2,071,815 David F. Girard-diCarlo 261,388,419 4,050,531 Walter E. Gregg, Jr. 263,320,436 2,118,514 William R. Johnson 260,798,417 4,640,533 Bruce C. Lindsay 263,306,987 2,131,963 W. Craig McClelland 263,332,230 2,106,720 Thomas H. O'Brien 263,126,860 2,312,090 Jane G. Pepper 263,059,362 2,379,588 Jackson H. Randolph 263,298,238 2,140,712 James E. Rohr 263,296,601 2,142,349 Roderic H. Ross 263,273,945 2,165,005 Richard P. Simmons 263,293,439 2,145,511 Thomas J. Usher 263,350,110 2,088,840 Milton A. Washington 263,263,500 2,175,450 Helge H. Wehmeier 263,383,972 2,054,978 =============================================================== PNC BANK CORP. ---- 32 With respect to the above matter, holders of the Corporation's common and preferred stock voted together as a single class. The following table sets forth as of the February 26, 1998 record date the number of shares of each class of stock that was issued and outstanding and entitled to vote, the voting power per share and the aggregate voting power of each class: Number of Voting Rights Shares Entitled Aggregate Title of Class Per Share to Vote Voting Power - ---------------------------------------------------------------- Common Stock 1 300,807,555 300,807,555 $1.80 Cumulative Convertible Preferred Stock - Series A 8 15,108 120,864 $1.80 Cumulative Convertible Preferred Stock - Series B 8 4,384 35,072 $1.60 Cumulative Convertible Preferred Stock - Series C 4/2.4 302,617 504,361* $1.80 Cumulative Convertible Preferred Stock - Series D 4/2.4 404,955 674,924* ------------- Total possible votes 302,142,776* =============================================================== * Represents greatest number of votes possible. Actual aggregate voting power was less since each holder of such preferred stock is entitled to a number of votes equal to the number of full shares of common stock into which such holder's preferred stock is convertible. Holders of the Corporation's 6,000,000 issued and outstanding shares of Fixed/Adjustable Rate Noncumulative Preferred Stock-Series F were not entitled to vote with respect to the matters presented at the meeting. Item 6 Exhibits and Reports on Form 8-K The following exhibit index lists Exhibits to this Quarterly Report on Form 10-Q: 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 December 31, 1997, the Corporation filed the following Current Reports on Form 8-K: Form 8-K dated as of January 15, 1998, reporting the Corporation's consolidated financial results for the three months and year ended December 31, 1997, filed pursuant to Item 5. Form 8-K dated as of April 14, 1998, reporting the Corporation's consolidated financial results for the three months ended March 31, 1998, filed pursuant to Item 5. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on May 15, 1998, 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. ---- 33 Corporate Information CORPORATE HEADQUARTERS PNC Bank Corp. One PNC Plaza 249 Fifth Avenue Pittsburgh, Pennsylvania 15222-2707 INTERNET INFORMATION Information on PNC Bank Corp.'s financial results and its products and services is available on the Internet at http://www.pncbank.com. STOCK LISTING PNC Bank Corp. common stock is traded on the New York Stock Exchange ("NYSE") under the symbol PNC. FINANCIAL INFORMATION Copies of the Corporation's filings with the Securities and Exchange Commission ("SEC"), including Exhibits thereto, may be obtained: Electronically at the SEC's home page at www.sec.gov. By writing to Jeffrey A. Wilkins, Vice President, Financial Reporting, at corporate headquarters. By calling (412) 762-1553 or via e-mail to financial.reporting@pncbank.com. INQUIRIES Individual shareholders should contact: Shareholder Relations at 800-843-2206. Analysts and institutional investors should contact: William H. Callihan, Vice President, Investor Relations, at 412-762-8257 or invrela@pncmail.com. News media representatives and others seeking general information should contact: Jonathan Williams, Vice President, Media Relations, at 412-762-4550 or pubrela@pncmail.com. COMMON STOCK PRICES/DIVIDENDS DECLARED The table below sets forth by quarter the range of high, low and quarter-end closing sale prices for PNC Bank Corp. common stock and the cash dividends declared per common share. Cash Dividends 1998 Quarter High Low Close Declared - ---------------------------------------------------------------- First $61.625 $49.500 $59.938 $.39 ================================================================ Cash Dividends 1997 Quarter High Low Close Declared - ---------------------------------------------------------------- First $45.000 $36.500 $40.000 $.37 Second 44.750 37.375 41.750 .37 Third 49.750 41.125 48.813 .37 Fourth 58.750 42.875 56.938 .39 --------- Total $1.50 ================================================================ REGISTRAR AND TRANSFER AGENT The Chase Manhattan Bank P.O. Box 590 Ridgefield Park, New Jersey 07660 800-982-7652 DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN The PNC Bank Corp. dividend reinvestment and stock purchase plan enables holders of common and preferred stock to purchase additional shares of common stock conveniently and without paying brokerage commissions or service charges. A prospectus and enrollment card may be obtained by writing to Shareholder Relations at corporate headquarters. PNC BANK CORP. ---- 34