PNC BANK Quarterly Report on Form 10-Q For the quarterly period ended March 31, 1999 Page 1 represents a portion of the first quarter 1999 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 33. CONSOLIDATED FINANCIAL HIGHLIGHTS
Three months ended March 31 - dollars in millions, except per share data 1999 1998 - -------------------------------------------------------------------------------------------------------------- FINANCIAL PERFORMANCE Revenue Net interest income (taxable-equivalent basis) $ 664 $ 644 Noninterest income 731 506 Total revenue 1,395 1,150 Net income 325 269 Per common share Basic earnings 1.06 .88 Diluted earnings 1.05 .87 Book value 18.78 17.20 Cash dividends declared .41 .39 - -------------------------------------------------------------------------------------------------------------- SELECTED RATIOS Return on Average common shareholders' equity 22.94% 21.10% Average assets 1.71 1.51 Net interest margin 3.86 3.96 Noninterest income to total revenue 52.40 44.00 Efficiency * 53.45 57.05 * Excluding amortization, distributions on capital securities and residential mortgage banking hedging activities - --------------------------------------------------------------------------------------------------------------
March 31 December 31 September 30 June 30 March 31 1999 1998 1998 1998 1998 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE SHEET DATA (in millions) Assets $74,868 $77,207 $76,238 $75,873 $72,355 Earning assets 66,710 69,027 68,638 68,353 65,210 Loans, net of unearned income 52,800 57,650 56,752 56,237 54,511 Securities available for sale 9,170 7,074 7,152 7,540 7,511 Deposits 45,799 47,496 46,875 47,096 46,068 Borrowed funds 19,935 20,946 19,972 20,488 18,375 Shareholders' equity 5,931 6,043 5,793 5,633 5,487 Common shareholders' equity 5,617 5,729 5,479 5,318 5,173 CAPITAL RATIOS Leverage 7.28% 7.22% 7.18% 7.18% 7.36% Common shareholders' equity to total assets 7.50 7.42 7.19 7.01 7.15 ASSET QUALITY RATIOS Nonperforming assets to total loans and foreclosed assets .62% .58% .58% .57% .61% Allowance for credit losses to total loans 1.27 1.31 1.44 1.53 1.67 Allowance for credit losses to nonaccrual loans 230.93 255.25 289.36 315.81 321.13 Net charge-offs to average loans .56 1.24 .62 .64 .67 - ------------------------------------------------------------------------------------------------------------------------------------
PNC BANK CORP. ---- 1 Financial Review This Financial Review should be read in conjunction with the PNC Bank Corp. and subsidiaries' ("Corporation" or "PNC Bank") unaudited Consolidated Financial Statements included herein and the Financial Review and audited Consolidated Financial Statements included in the Corporation's 1998 Annual Report. OVERVIEW PNC BANK CORP. The Corporation is one of the largest diversified financial services companies in the United States operating retail banking, asset management and wholesale businesses that provide products and services nationally and in PNC Bank's primary geographic markets in Pennsylvania, New Jersey, Delaware, Ohio and Kentucky. 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. PNC Bank has responded to these challenges by transitioning to an organization managed as separate businesses with highly focused customer segments. This style of management provides the basis for differentiated businesses capable of competing in today's environment where banks and other financial service providers seek the same customers. This business model will also enable the Corporation to optimize its consolidated value by effectively leveraging its technology, information, branding and marketing resources. The Corporation has altered its business mix by investing in specialized financial services businesses, including asset management, mutual fund servicing, investment advisory, mortgage banking and corporate services. These businesses are largely fee-based, less capital intensive and provide growth opportunities on a national scale. More meaningful contributions from these businesses, coupled with disciplined management of traditional banking activities have allowed PNC Bank to significantly improve the composition of its revenue stream. Pursuant to this strategy, the Corporation completed the sale of its credit card business in the first quarter of 1999 and made the decision to exit certain out-of-footprint large corporate, national healthcare and other non-strategic institutional lending businesses. SUMMARY FINANCIAL RESULTS Consolidated net income for the first three months of 1999 was $325 million or $1.05 per diluted share. First quarter 1999 results included $290 million of pretax gains on the sales of PNC Bank's credit card business and an equity interest in Electronic Payment Services, Inc. ("EPS"). The current quarter also included $142 million of valuation adjustments associated with exiting certain institutional lending businesses and $98 million of costs related to efficiency initiatives. Excluding these items, core earnings for the quarter were $293 million or $.94 per diluted share, return on average common shareholders' equity was 20.63% and the return on average assets was 1.54%. Earnings for the first quarter of 1998 were $269 million or $.87 per diluted share. Excluding the credit card business and assuming the provision for credit losses was equal to net charge-offs in 1998, diluted earnings per share for the first quarter of 1999 increased 15% compared with the prior-year quarter. Taxable-equivalent net interest income for the first quarter of 1999 increased $20 million compared with the first quarter of 1998 primarily due to a $3.6 billion increase in average earning assets. The net interest margin narrowed to 3.86% in the first quarter of 1999 compared with 3.96% in the prior-year quarter. The decline in the net interest margin was primarily associated with a change in balance sheet composition. Total noninterest income, excluding the first quarter 1999 gains and valuation adjustments, increased $77 million or 15% in the quarter-to-quarter comparison primarily due to growth in fee-based revenue. Noninterest income represented 52% of total revenue in the first quarter of 1999 compared with 44% in the prior-year quarter. The provision for credit losses was equal to net charge-offs at $78 million for the first quarter of 1999, compared with a provision of $30 million a year ago. Net charge-offs were .56% of average loans for the first quarter of 1999 compared with .67% for the first quarter of 1998. Excluding credit cards, net charge-offs were $20 million or .15% of average loans in the first quarter of 1999 compared with $21 million or .17% of average loans in the first quarter of 1998. Noninterest expense of $823 million for the first quarter of 1999 included $98 million of costs related to efficiency initiatives. Excluding these costs, noninterest expense increased $17 million or 2% compared with the first quarter of 1998. Excluding the impact of gains, valuation adjustments and costs associated with efficiency initiatives, the efficiency ratio improved to 52.0% for the first quarter of 1999 compared with 57.1% in the prior-year quarter. Total assets were $74.9 billion at March 31, 1999, compared with $77.2 billion at December 31, 1998. Shareholders' equity totaled $5.9 billion at March 31, 1999, compared with $6.0 billion at December 31, 1998. The leverage ratio was 7.28% and Tier I and total risk-based capital ratios were 8.22% and 11.88%, respectively, at March 31, 1999. The ratio of nonperforming assets to total loans and foreclosed assets was .62% at March 31, 1999 and .58% at December 31, 1998. The allowance for credit losses was 231% of nonaccrual loans and 1.27% of total loans at March 31, 1999, compared with 255% and 1.31%, respectively, at December 31, 1998. PNC BANK CORP. ---- 2 Financial Review REVIEW OF BUSINESSES PNC Bank operates seven major businesses engaged in retail banking, asset management and wholesale banking activities: PNC Regional Bank, PNC Advisors, BlackRock, PFPC Worldwide, PNC Institutional Bank, PNC Secured Finance and PNC Mortgage. Business results are based on PNC Bank's management accounting practices. There is no comprehensive, authoritative body of guidance for management accounting equivalent to generally accepted accounting principles; therefore, PNC Bank's results are not necessarily comparable with similar information for any other financial services institution. Financial results are presented as if each business operated on a stand-alone basis. The presentation of business results was changed during the first quarter of 1999 to reflect the Corporation's operating strategy. PNC Regional Bank reflects the combination of PNC Regional Community Bank and PNC National Consumer Bank. Branch-based brokerage activities (previously included in PNC Advisors), the middle market customer segment (previously included in PNC Corporate Bank) and regional real estate lending and leasing activities in PNC Bank's geographic footprint (previously included in PNC Secured Finance) were also combined with PNC Regional Bank. Additionally, residential mortgages (that were previously included in PNC Mortgage) were realigned with PNC Regional Bank. Certain out-of-footprint large corporate, national healthcare and other non-strategic institutional lending businesses as well as venture capital activities (previously in PNC Corporate Bank) are included in Other. The remaining activities that were previously in PNC Corporate Bank, comprise PNC Institutional Bank. BlackRock reflects total legal entity results for BlackRock, Inc. Financial results for 1999 and 1998 are presented consistent with this structure. The management accounting process uses various balance sheet and income statement assignments and transfers to measure performance of the businesses. Methodologies change from time-to-time as management accounting practices are enhanced and businesses change. Securities or borrowings and related net interest income are assigned based on the net asset or liability position of each business. Capital is assigned based on management's assessment of inherent risks and equity levels at independent companies providing similar products and services. Support areas not directly aligned with the businesses are allocated primarily based on the utilization of these services. Total business financial results differ from consolidated financial results primarily due to differences between management accounting practices and generally accepted accounting principles, divested and exited businesses, venture capital activities, sales of equity interests in subsidiaries, eliminations and unassigned items, the impact of which is reflected in Other. The Corporation is managed as a portfolio of distinct businesses that are positioned to compete as stand-alone companies while effectively leveraging PNC Bank's technology information, branding and marketing resources. Total business earnings were $275 million for the first quarter of 1999, a 19% increase compared with the prior-year quarter. The contribution from asset management businesses increased to 21% of total business results while the regional bank declined to 55% and the contribution from wholesale businesses remained relatively stable at 24%.
RESULTS OF BUSINESSES Return on Earnings Revenue Assigned Capital Average Assets Three months ended March 31 - ------------------------------------------------------------------------------------------- dollars in millions 1999 1998 1999 1998 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ PNC Regional Bank $150 $135 $558 $543 21% 19% $39,383 $38,800 Asset Management PNC Advisors 36 25 182 109 26 27 3,249 2,655 BlackRock 12 8 88 70 43 44 400 293 PFPC Worldwide 11 9 54 43 44 43 268 218 - -------------------------------------------------------------------------------------- --------------------- Total asset management 59 42 324 222 31 33 3,917 3,166 Wholesale PNC Institutional Bank 28 23 101 87 17 16 9,638 8,334 PNC Secured Finance 27 25 71 50 19 27 8,202 5,294 PNC Mortgage 11 6 101 74 10 10 7,084 3,826 - -------------------------------------------------------------------------------------- --------------------- Total wholesale 66 54 273 211 16 18 24,924 17,454 - -------------------------------------------------------------------------------------- --------------------- Total businesses 275 231 1,155 976 21 20 68,224 59,420 Other 18 38 92 174 8,734 12,721 - -------------------------------------------------------------------------------------- --------------------- 293 269 1,247 1,150 21 21 76,958 72,141 Gain on sale of credit card business 125 193 Gain on sale of equity interest in EPS 63 97 Valuation adjustments (92) (142) Costs related to efficiency initiatives (64) - -------------------------------------------------------------------------------------- --------------------- Total consolidated $325 $269 $1,395 $1,150 23 21 $76,958 $72,141 - ------------------------------------------------------------------------------------------------------------------------------------
PNC BANK CORP. ---- 3 PNC REGIONAL BANK Three months ended March 31 - dollars in 1999 1998 millions - ----------------------------------------------------------------- INCOME STATEMENT Net interest income $432 $420 Noninterest income 126 123 - ----------------------------------------------------------------- Total revenue 558 543 Provision for credit losses 11 15 Noninterest expense 302 305 - ----------------------------------------------------------------- Pretax earnings 245 223 Income taxes 95 88 - ----------------------------------------------------------------- Earnings $150 $135 - ----------------------------------------------------------------- AVERAGE BALANCE SHEET Loans Consumer $9,426 $9,974 Commercial 9,577 8,412 Residential mortgage 9,847 9,699 Other 2,965 2,998 - ----------------------------------------------------------------- Total loans 31,815 31,083 Assigned assets and other assets 7,568 7,717 - ----------------------------------------------------------------- Total assets $39,383 $38,800 - ----------------------------------------------------------------- Deposits Noninterest-bearing demand $6,633 $6,429 Interest-bearing demand 4,679 4,118 Money market 8,531 7,020 Savings 2,461 2,615 Certificates 13,752 15,347 - ----------------------------------------------------------------- Total net deposits 36,056 35,529 Other liabilities 373 360 Assigned capital 2,954 2,911 - ----------------------------------------------------------------- Total funds $39,383 $38,800 - ----------------------------------------------------------------- PERFORMANCE RATIOS Return on assigned capital 21% 19% Noninterest income to total revenue 23 23 Efficiency 52 54 - ----------------------------------------------------------------- PNC Regional Bank provides credit, deposit, branch-based brokerage and electronic banking products and services to retail customers as well as credit, leasing, treasury management and capital markets products and services to mid-sized and small businesses primarily within PNC Bank's geographic footprint. PNC Regional Bank utilizes experienced relationship managers and sophisticated information technology to identify consumer preferences for products and services and the delivery channel of choice. Consumers are increasingly demanding the convenience of multiple delivery channels and choice among high value products and services. As consumer preferences have changed, PNC Regional Bank has focused on offering desired products and balancing resources between traditional branches and technologically advanced delivery channels. PNC Regional Bank contributed 55% of total business earnings for the first quarter of 1999 compared with 58% in the first quarter of 1998. Earnings of $150 million for the first quarter of 1999 increased $15 million or 11% in the period-to-period comparison and performance ratios improved due to strategies designed to respond to changing customer preferences while improving the effectiveness and efficiency of the delivery system. Total revenue increased 3% to $558 million in the first quarter of 1999 compared with the prior-year quarter primarily due to loan and deposit growth resulting from leveraging investments made in customer information technology and targeted marketing initiatives. Noninterest expense in the first quarter of 1999 declined 1% compared with the prior-year quarter primarily due to ongoing efficiency initiatives that resulted in an improvement in the efficiency ratio to 52% for the first quarter of 1999 compared with 54% a year ago. PNC Regional Bank engages in lending and deposit activities that are affected by economic and financial market conditions. An economic slowdown could have an adverse impact on its results of operations. PNC BANK CORP. ---- 4 Financial Review PNC ADVISORS Three months ended March 31 - dollars in millions 1999 1998 - ---------------------------------------------------------------- INCOME STATEMENT Net interest income $34 $29 Noninterest income Investment management and trust 94 74 Brokerage 38 5 Other 16 1 - ---------------------------------------------------------------- Total noninterest income 148 80 - ---------------------------------------------------------------- Total revenue 182 109 Provision for credit losses 1 Noninterest expense 123 69 - ---------------------------------------------------------------- Pretax earnings 58 40 Income taxes 22 15 - ---------------------------------------------------------------- Earnings $36 $25 - ---------------------------------------------------------------- AVERAGE BALANCE SHEET Loans Residential mortgage $1,004 $987 Consumer 952 920 Commercial 621 582 Other 255 32 - ---------------------------------------------------------------- Total loans 2,832 2,521 Other assets 417 134 - ---------------------------------------------------------------- Total assets $3,249 $2,655 - ---------------------------------------------------------------- Deposits $2,431 $2,230 Assigned funds and other liabilities 262 56 Assigned capital 556 369 - ---------------------------------------------------------------- Total funds $3,249 $2,655 - ---------------------------------------------------------------- PERFORMANCE RATIOS Return on assigned capital 26% 27% Noninterest income to total revenue 81 73 Efficiency 66 63 - ---------------------------------------------------------------- PNC Advisors, the nation's fourth-largest manager of trust and high net worth assets, offers personalized investment management, high-end brokerage, personal trust, estate planning and traditional banking services to affluent and wealthy individuals; and investment management, trust and administrative services to pensions, 401(k) plans and charitable organizations. PNC Advisors strives to be the financial "advisor of choice" in the growing affluent market, providing a full range of high quality, customized and predominantly fee-based investment products and services. Consistent with this objective, in the fourth quarter of 1998, the Corporation acquired Hilliard-Lyons, Inc. ("Hilliard Lyons") a retail brokerage and investment management firm focused on delivering brokerage services and investment management expertise to affluent clients. PNC Advisors anticipates expanding the Hilliard Lyons brand and organization throughout PNC Bank's footprint, which includes five of the nation's ten wealthiest metropolitan areas. PNC Advisors contributed 13% of total business earnings for the first quarter of 1999 compared with 11% in the prior-year period. Earnings of $36 million for the first quarter of 1999 increased $11 million or 44% compared with the first quarter of 1998 driven by revenue growth and efficiencies generated through the consolidation of operations. Revenue increased $73 million or 67% for the first quarter of 1999 compared with the prior-year period. The increase was due to higher brokerage revenue primarily from Hilliard Lyons as well as higher assets under management resulting from market appreciation and new business. The period-to-period increase in noninterest expense and the efficiency ratio was attributable to Hilliard Lyons. ASSETS UNDER MANAGEMENT* March 31 - in billions 1999 1998 - ---------------------------------------------------------------- Personal investment management and trust $52 $48 Institutional trust 9 7 Hilliard Lyons 5 - ---------------------------------------------------------------- Total $66 $55 - ---------------------------------------------------------------- * Assets under management do not include brokerage assets administered. Assets under management increased 20% compared with the prior-year quarter to $66 billion at March 31, 1999, due to market appreciation, new business and the acquisition of Hilliard Lyons. Brokerage assets administered by PNC Advisors increased $26 billion in the quarter-to-quarter comparison to $35 billion at March 31, 1999. PNC Advisors' revenue is primarily affected by the volume of new business, the value of assets managed, 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 results of operations. PNC BANK CORP. ---- 5 BLACKROCK Three months ended March 31 - dollars in millions 1999 1998 - ---------------------------------------------------------------- INCOME STATEMENT Advisory and administrative fees $84 $51 Other income 4 19 - ---------------------------------------------------------------- Total revenue 88 70 Operating expense 62 49 Goodwill amortization 2 2 - ---------------------------------------------------------------- Operating income 24 19 Interest expense 4 4 - ---------------------------------------------------------------- Pretax earnings 20 15 Income taxes 8 7 - ---------------------------------------------------------------- Earnings $12 $8 - ---------------------------------------------------------------- PERIOD-END BALANCE SHEET Goodwill $201 $211 Other assets 199 82 - ---------------------------------------------------------------- Total assets $400 $293 - ---------------------------------------------------------------- Borrowings $179 $174 Other liabilities 103 49 Shareholders' equity 118 70 - ---------------------------------------------------------------- Total funds $400 $293 - ---------------------------------------------------------------- PERFORMANCE RATIOS Return on average equity 43% 44% Operating margin 27 27 Efficiency 70 70 - ---------------------------------------------------------------- BlackRock offers fixed income, domestic and international equity and liquidity investment products. BlackRock manages assets for over 50% of the Fortune 100 companies and is focused on expanding marketing and delivery channels for a wide range of institutional and retail customers. BlackRock contributed 4% of total business earnings for the first quarter of 1999 compared with 3% a year ago. Earnings of $12 million for the first quarter of 1999 increased 50% compared with the prior-year quarter primarily driven by revenue growth related to significant new business and market appreciation. Advisory and administration fees for the first quarter of 1999 increased $33 million or 65% compared with the prior-year quarter due to a 24% increase in assets under management and the conversion of $8.2 billion in PNC Common Trust funds into the BlackRock Funds. The $15 million decrease in other income reflects lower performance fees associated with a closed-end fund that is currently in liquidation. The increase in operating expense in the quarter-to-quarter comparison supported revenue growth. At March 31, 1999, BlackRock managed $140 billion of assets for individual and institutional investors, of which 90% were invested in fixed income and liquidity funds that historically have been less volatile than equity funds. BlackRock was awarded $17 billion of new investment mandates during the first quarter of 1999. ASSETS UNDER MANAGEMENT March 31 - in billions 1999 1998 - ---------------------------------------------------------------- Fixed income $78 $57 Liquidity 48 42 Equity and other 14 14 - ---------------------------------------------------------------- Total assets under management $140 $113 - ---------------------------------------------------------------- Proprietary mutual funds BlackRock Funds $25 $24 Provident Institutional Funds 23 20 - ---------------------------------------------------------------- Total proprietary mutual funds $48 $44 - ---------------------------------------------------------------- BlackRock's proprietary mutual fund family, with approximately $48 billion in assets, provides individual investors with a full range of equity, bond and money market investment products. In May 1998, PNC converted $8.2 billion of Common Trust funds into the BlackRock Funds. For comparative purposes, BlackRock Fund assets under management at March 31, 1998 have been restated to include PNC's Common Trust fund assets. During the first quarter of 1999, BlackRock announced plans to form a joint venture with Nomura Asset Management Co., Ltd., the largest asset manager in Japan. The joint venture, Nomura BlackRock Asset Management Co., Ltd., will serve Japanese institutional and investment trust investors and is an important strategic step in expanding BlackRock's international presence. On May 13, 1999, BlackRock, Inc. filed a registration statement for an initial public offering of its common stock. PNC Bank will retain a majority ownership position in the publicly traded firm. Management anticipates that this offering will help BlackRock to continue to pursue its goal to be one of the largest and best investment managers in the nation. BlackRock's revenue is primarily affected by the volume of new business, the value of assets managed, 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 results of operations. PNC BANK CORP. ---- 6 Financial Review PFPC WORLDWIDE Three months ended March 31 - dollars in millions 1999 1998 - ---------------------------------------------------------------- INCOME STATEMENT Revenue $54 $43 Operating expense 36 29 - ---------------------------------------------------------------- Pretax earnings 18 14 Income taxes 7 5 - ---------------------------------------------------------------- Earnings $11 $9 - ---------------------------------------------------------------- AVERAGE BALANCE SHEET Total assets $268 $218 - ---------------------------------------------------------------- Deposits $149 $114 Other liabilities 18 20 Assigned capital 101 84 - ---------------------------------------------------------------- Total funds $268 $218 - ---------------------------------------------------------------- PERFORMANCE RATIOS Return on assigned capital 44% 43% Efficiency 65 67 - ---------------------------------------------------------------- PFPC Worldwide ("PFPC"), the Corporation's global fund servicing operation, provides a wide range of accounting, administration, transfer agency, custody, securities lending and integrated banking transaction services to mutual funds, pension and money fund managers, partnerships, brokerage firms, insurance companies and banks, both domestically and globally. PFPC is the second-largest full service accounting agent and the third-largest full service transfer agent of mutual funds in the United States. Continued growth of its Dublin, Ireland operation has expanded PFPC's global presence. PFPC will continue to leverage its technology platform, allowing customized services for individual clients and to promote its full service capabilities to both the domestic and global marketplace. PFPC contributed 4% of total business earnings in the first quarter of 1999 and 1998. Earnings of $11 million in the first quarter of 1999 increased $2 million or 22% compared with the prior-year quarter. Revenue of $54 million in the first quarter of 1999 increased $11 million or 26% compared with the prior-year quarter driven by new business, existing client growth and favorable market conditions. Operating expense increased in the quarter-to-quarter comparison to support revenue and infrastructure growth associated with business expansion. ASSETS SERVICED March 31 - in billions 1999 1998 - ---------------------------------------------------------------- Custody $338 $265 Accounting/administration 266 218 - ---------------------------------------------------------------- PFPC's revenue is primarily affected by the number and value of customer accounts serviced and financial market conditions. Revenue may be positively affected by increasing customer account values or improving financial markets. Conversely, declining customer account values or deteriorating financial markets may have an adverse effect on results of operations. PNC INSTITUTIONAL BANK Three months ended March 31 - dollars in millions 1999 1998 - ----------------------------------------------------------------- INCOME STATEMENT Credit-related revenue $45 $39 Noncredit revenue Treasury management 39 34 Capital markets 16 11 Other 1 3 - ----------------------------------------------------------------- Total noncredit revenue 56 48 - ----------------------------------------------------------------- Total revenue 101 87 Provision for credit losses 4 Noninterest expense 54 52 - ----------------------------------------------------------------- Pretax earnings 43 35 Income taxes 15 12 - ----------------------------------------------------------------- Earnings $28 $23 - ----------------------------------------------------------------- AVERAGE BALANCE SHEET Loans Specialized industries $4,293 $3,348 Large corporate 3,336 3,045 Other 425 308 - ----------------------------------------------------------------- Total loans 8,054 6,701 Other assets 1,584 1,633 - ----------------------------------------------------------------- Total assets $9,638 $8,334 - ----------------------------------------------------------------- Net deposits $2,648 $2,596 Assigned funds and other liabilities 6,315 5,155 Assigned capital 675 583 - ----------------------------------------------------------------- Total funds $9,638 $8,334 - ----------------------------------------------------------------- PERFORMANCE RATIOS Return on assigned capital 17% 16% Noncredit revenue to total revenue 55 55 Efficiency 52 59 - ----------------------------------------------------------------- PNC Institutional Bank provides credit, treasury management and capital markets products and services to corporations, institutions and government entities. PNC BANK CORP. ---- 7 The strategic focus for PNC Institutional Bank is on growing revenue from higher margin fee-based products and services, devoting capital and resources on higher-return businesses and relationships, and to exit those businesses and relationships with lower returns. Consistent with this strategy, during the first quarter of 1999 PNC Institutional Bank made the decision to exit certain out-of-footprint large corporate, national healthcare and other non-strategic institutional lending businesses. The operating results for these exited activities are excluded from business results. PNC Institutional Bank contributed 10% of total business earnings in the first quarter of both 1999 and 1998. Earnings of $28 million in 1999 increased $5 million or 22% compared with the prior-year quarter due to growth in revenue. Total revenue of $101 million for the first quarter of 1999 increased $14 million or 16% compared with the first quarter of 1998. Credit-related revenue primarily represents net interest income from loans and increased 15% in the quarter-to-quarter comparison. This growth was driven by higher loan outstandings to relationships that also utilize noncredit services. Noncredit revenue, which includes noninterest income and the benefit of compensating balances in lieu of fees, increased $8 million or 17% compared with the prior-year quarter driven by growth in treasury management and capital markets. PNC Institutional Bank engages in credit, treasury management and capital markets activities, all of which are impacted by economic and financial market conditions. Accordingly, a decline in the capital markets or an economic slowdown could adversely impact asset quality and results of operations. PNC SECURED FINANCE Three months ended March 31 - dollars in millions 1999 1998 - ---------------------------------------------------------------- INCOME STATEMENT Net interest income $50 $41 Noninterest income Net commercial mortgage banking 9 Corporate finance 5 3 Other 7 6 - ---------------------------------------------------------------- Total noninterest income 21 9 - ---------------------------------------------------------------- Total revenue 71 50 Provision for credit losses (2) (3) Noninterest expense 35 18 - ---------------------------------------------------------------- Pretax earnings 38 35 Income taxes 11 10 - ---------------------------------------------------------------- Earnings $27 $25 - ---------------------------------------------------------------- AVERAGE BALANCE SHEET Loans Commercial - real estate related $3,001 $1,666 Commercial real estate 1,036 1,290 Business credit 1,565 1,046 Leasing 1,073 801 Midland 607 154 Affordable housing 139 187 - ---------------------------------------------------------------- Total loans 7,421 5,144 Commercial mortgages held for sale 84 Other assets 697 150 - ---------------------------------------------------------------- Total assets $8,202 $5,294 - ---------------------------------------------------------------- Deposits $1,153 $1,024 Assigned funds and other liabilities 6,475 3,899 Assigned capital 574 371 - ---------------------------------------------------------------- Total funds $8,202 $5,294 - ---------------------------------------------------------------- PERFORMANCE RATIOS Return on assigned capital 19% 27% Noninterest income to total revenue 30 18 Efficiency 40 36 - ---------------------------------------------------------------- PNC Secured Finance is engaged in commercial real estate finance, including loan origination, securitization and servicing; asset-based financing, including lending, syndication and treasury management services; and equipment lease financing to a wide range of customers nationally. During the second quarter of 1998, PNC Secured Finance acquired Midland Loan Services, L.P. ("Midland") one of the nation's largest servicers of commercial mortgages. This acquisition, along with several other investments made by PNC Secured Finance in 1998, reflects its continuing strategy to increase noninterest income and expand nationally. PNC BANK CORP. ---- 8 Financial Review PNC Secured Finance contributed 10% of total business earnings in the first quarter of 1999 compared with 11% in the prior-year period. Earnings of $27 million in the first quarter of 1999 increased 8% compared with the first quarter of 1998 primarily due to growth in business credit, leasing and traditional real estate activities. This growth was partially offset by the continued integration of Midland, which is expected to provide contributions through commercial mortgage-backed securitizations and growth in commercial loan servicing in future periods. Net interest income increased $9 million or 22% to $50 million for the first quarter of 1999 compared with the prior-year period due to growth in short-term loan outstandings to existing customers. Noninterest income as a percentage of total revenue increased to 30% for the first quarter of 1999 compared with 18% in the first quarter of 1998, mainly due to $9 million of commercial mortgage servicing revenue from Midland, reflecting the strategy to invest in fee-based businesses. COMMERCIAL MORTGAGE SERVICING PORTFOLIO In billions 1999 - ---------------------------------------------------------------- January 1 $39 Acquisitions/additions 4 Repayments/transfers (3) - ---------------------------------------------------------------- March 31 $40 - ---------------------------------------------------------------- At March 31, 1999, the commercial mortgage servicing portfolio totaled $40 billion, substantially all of which is serviced for others. PNC Secured Finance engages in credit, asset servicing and securitization activities, all of which are impacted by economic and financial market conditions. Accordingly, a decline in the commercial mortgage-backed securities market or an economic slowdown could adversely impact asset quality and results of operations. PNC MORTGAGE Three months ended March 31 - dollars in millions 1999 1998 - ---------------------------------------------------------------- INCOME STATEMENT Net mortgage banking revenue Residential mortgage servicing $74 $41 Origination and securitization 58 33 Sales of servicing and other 1 7 MSR amortization (12) (33) Hedging activities (45) 7 - ---------------------------------------------------------------- Net mortgage banking revenue 76 55 Net interest income 25 19 - ---------------------------------------------------------------- Total revenue 101 74 Operating expense 83 64 - ---------------------------------------------------------------- Pretax earnings 18 10 Income taxes 7 4 - ---------------------------------------------------------------- Earnings $11 $6 - ---------------------------------------------------------------- AVERAGE BALANCE SHEET Residential mortgages held for sale $2,948 $2,321 Securities available for sale 2,669 651 Mortgage servicing rights and other assets 1,467 854 - ---------------------------------------------------------------- Total assets $7,084 $3,826 - ---------------------------------------------------------------- Escrow deposits $1,220 $786 Assigned funds and other liabilities 5,404 2,791 Assigned capital 460 249 - ---------------------------------------------------------------- Total funds $7,084 $3,826 - ---------------------------------------------------------------- PERFORMANCE RATIOS Return on assigned capital 10% 10% Net mortgage banking revenue to total revenue 75 74 Efficiency 53 64 - ---------------------------------------------------------------- PNC Mortgage originates, purchases and services residential mortgages and related products, and securitizes and sells residential mortgages as private-label mortgage-backed securities and performs master servicing of those securities for investors through PNC Mortgage Securities Corp. At March 31, 1999, PNC Mortgage was the nation's eleventh-largest servicer and the twelfth largest originator of residential mortgages. PNC Mortgage contributed 4% of total business earnings in the first quarter of 1999 compared with 3% in the first quarter of 1998. Earnings of $11 million in the first quarter of 1999 increased $5 million or 83% compared with the prior-year quarter primarily due to higher business volumes. PNC BANK CORP. ---- 9 Net mortgage banking revenue and operating expense increased in the quarter-to-quarter comparison as a result of the larger servicing portfolio and higher loan origination volume. The efficiency ratio improved significantly as PNC Mortgage continued to leverage its technology platform and servicing capabilities. During 1999, PNC Mortgage funded $6 billion of residential mortgages, with 40% representing retail originations. The comparable amounts were $3 billion and 46%, respectively, in the first quarter of 1998. Production volume in the first quarter of 1999 included $2 billion of originations and $4 billion of contractual flow purchases. The corresponding amounts for the first quarter of 1998 were $1 billion and $2 billion, respectively. The quarter-to-quarter increase reflected the initiative to expand retail and correspondent origination capabilities. RESIDENTIAL MORTGAGE SERVICING PORTFOLIO In billions 1999 1998 - ---------------------------------------------------------------- January 1 $62 $41 Production volume 6 3 Acquisitions 2 3 Repayments (4) (4) Sales (1) - ---------------------------------------------------------------- March 31 $66 $42 - ---------------------------------------------------------------- At March 31, 1999, the residential mortgage servicing portfolio totaled $66 billion, including $58 billion of loans serviced for others, with a weighted-average coupon of 7.57%. In addition, the master servicing portfolio grew 98% in the quarter-to-quarter comparison to $30 billion at March 31, 1999. Capitalized MSR totaled $972 million at March 31, 1999 and had an estimated fair value of $1.062 billion. Securities available for sale increased $2 billion in the first quarter of 1999 compared with the prior-year quarter and are part of PNC Mortgage's hedging strategies. PNC Mortgage securitized $6 billion of loans in the first quarter of 1999 compared with $4 billion in the prior-year quarter. The increase in securitization activity resulted in an increase in residential mortgage loans held for sale. 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 also would decline. In a period of rising interest rates, a converse relationship would exist. The Corporation seeks to manage this risk by using financial instruments as hedges designed to move in the opposite direction of MSR value changes. FORWARD-LOOKING STATEMENTS PNC Bank has made, and may continue to make, various written and oral forward-looking statements with respect to financial performance 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 those anticipated in these 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: the inability of the Corporation or others to remediate year 2000 concerns in a timely fashion; continued pricing pressures on loan and deposit products; increased credit risk; the introduction, withdrawal, success and timing of business initiatives and strategies, several of which are in early stages and therefore susceptible to greater uncertainty than more mature businesses; competition; the ability to realize cost savings or revenues and implement integration plans associated with acquisitions and divestitures; changes in global and domestic economic conditions generally and in local markets in which the Corporation conducts business; changes in interest rates and financial and capital markets; inflation; customer borrowing, repayment, investment and deposit practices; continued customer disintermediation; customers' acceptance of PNC Bank's products and services; and the impact, extent and timing of technological changes, capital management activities, actions of the Federal Reserve Board and legislative and regulatory actions and reforms. PNC BANK CORP. ---- 10 Financial Review CONSOLIDATED INCOME STATEMENT REVIEW NET INTEREST INCOME ANALYSIS
Taxable-equivalent basis Average Balances Interest Income/Expense Average Yields/Rates ------------------------------ --------------------------- -------------------------- Three months ended March 31 - dollars 1999 1998 Change 1999 1998 Change 1999 1998 Change in millions - ------------------------------------------------------------------------------------------------------------------------------------ Interest-earning assets Loans held for sale $3,383 $2,363 $1,020 $56 $42 $14 6.68% 7.16% (48)bp Securities available for sale 7,755 7,784 (29) 107 117 (10) 5.55 6.01 (46) Loans, net of unearned income Consumer (excluding credit card) 10,955 11,186 (231) 222 236 (14) 8.21 8.56 (35) Credit card 2,724 3,748 (1,024) 100 133 (33) 14.91 14.38 53 Residential mortgage 12,184 12,784 (600) 216 233 (17) 7.09 7.31 (22) Commercial 24,574 20,665 3,909 462 407 55 7.52 7.87 (35) Commercial real estate 3,398 3,624 (226) 65 79 (14) 7.70 8.68 (98) Other 2,860 2,076 784 52 36 16 7.24 6.99 25 - ------------------------------------------------------------------------ --------------------------- Total loans, net of unearned income 56,695 54,083 2,612 1,117 1,124 (7) 7.91 8.36 (45) Other 1,005 959 46 16 15 1 6.19 6.48 (29) - ------------------------------------------------------------------------ --------------------------- Total interest-earning assets/ interest income 68,838 65,189 3,649 1,296 1,298 (2) 7.56 8.00 (44) Noninterest-earning assets 8,120 6,952 1,168 - ------------------------------------------------------------------------ Total assets $76,958 $72,141 $4,817 - ------------------------------------------------------------------------ Interest-bearing liabilities Deposits Demand and money market $16,825 $14,153 $2,672 113 103 10 2.73 2.97 (24) Savings 2,535 2,646 (111) 10 13 (3) 1.63 1.99 (36) Other time 17,262 17,346 (84) 219 234 (15) 5.12 5.46 (34) Deposits in foreign offices 759 800 (41) 9 11 (2) 4.78 5.68 (90) - ------------------------------------------------------------------------ --------------------------- Total interest-bearing deposits 37,381 34,945 2,436 351 361 (10) 3.80 4.19 (39) Borrowed funds 21,584 19,989 1,595 281 293 (12) 5.21 5.85 (64) - ------------------------------------------------------------------------ --------------------------- Total interest-bearing liabilities/ interest expense 58,965 54,934 4,031 632 654 (22) 4.31 4.79 (48) --------------------------- --------------------------- Noninterest-bearing liabilities, capital securities and shareholders' equity 17,993 17,207 786 - ------------------------------------------------------------------------ Total liabilities, capital securities and shareholders' equity $76,958 $72,141 $4,817 - ------------------------------------------------------------------------ Interest rate spread 3.25 3.21 4 Impact of noninterest-bearing sources .61 .75 (14) --------------------------- Net interest income/margin $664 $644 $20 3.86% 3.96% (10)bp - ------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 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 funding costs can have a significant impact on net interest income and margin. Taxable-equivalent net interest income increased $20 million to $664 million in the first quarter of 1999 compared with $644 million in the first quarter of 1998. The net interest margin was 3.86% in the first quarter of 1999 compared with 3.96% in the first quarter of 1998. The increase in net interest income in the first quarter of 1999 was due to a $3.6 billion increase in average earning assets, which more than offset a narrower net interest margin resulting from a change in balance sheet composition. Average loans grew 4.8% to $56.7 billion in the first quarter of 1999, a $2.6 billion increase from the prior-year period. Growth in commercial loans more than offset lower credit card and residential mortgage loans. Loans represented 82% of average earning assets in the first quarter of 1999 compared to 83% for the prior-year period. Average loans held for sale increased $1.0 billion in the quarter-to-quarter comparison, reflecting higher residential mortgage originations. Average securities available for sale of $7.8 billion were consistent with the prior year and represented 11% of average earning assets in the first quarter of 1999 compared with 12% a year ago. Funding cost is affected by the composition of funding sources as well as related rates paid thereon. Average deposits comprised 60% and 62% of total sources of funds in the first quarter of 1999 and 1998, respectively, with the remainder primarily comprised of wholesale funding obtained at prevailing market rates. Management expects net interest income and margin to decrease in the second quarter of 1999 due to the sale of the credit card business. PNC BANK CORP. ---- 11 PROVISION FOR CREDIT LOSSES The provision for credit losses was $78 million in the first quarter of 1999 compared with $30 million in the prior-year quarter and was equal to net charge-offs. Management anticipates that the Corporation will cover net charge-offs for full-year 1999. DETAILS OF NONINTEREST INCOME Three months ended March 31 - dollars in millions 1999 1998 Change - ----------------------------------------------------------------- Asset management $161 $141 $20 Mutual fund servicing 51 41 10 Service charges on deposits 50 48 2 Consumer services Credit card 27 26 1 Brokerage 46 15 31 Insurance 19 10 9 Other 38 31 7 - ----------------------------------------------------------------- Total 130 82 48 Corporate services Capital markets 19 9 10 Net commercial mortgage banking 10 10 Other (89) 42 (131) - ----------------------------------------------------------------- Total (60) 51 (111) Net residential mortgage banking Mortgage servicing 60 29 31 Origination and securitization 58 42 16 Sales of servicing and other 7 (7) MSR amortization (12) (33) 21 Hedging activities (46) 7 (53) - ----------------------------------------------------------------- Total 60 52 8 Net securities gains 13 (13) Other 339 78 261 - ----------------------------------------------------------------- Total $731 $506 $225 - ----------------------------------------------------------------- NONINTEREST INCOME Noninterest income was $731 million in the first quarter of 1999 and included $290 million of gains on the sales of the Corporation's credit card business and an equity interest in EPS. Noninterest income also included $142 million of valuation adjustments primarily related to the decision to exit out-of-footprint large corporate, national healthcare and other non-strategic institutional lending businesses. Excluding the gains and valuation adjustments, noninterest income was $583 million in the first quarter of 1999, a $77 million or 15% increase compared with the prior-year quarter driven by higher fee income. Consumer services, mutual fund servicing, net residential mortgage banking and asset management revenues each grew 14% or more compared with the first quarter of 1998. Asset management fees grew 14%, primarily reflecting significant new business and market appreciation. Assets under management increased to approximately $182 billion at March 31, 1999 compared with $149 billion at March 31, 1998. Mutual fund servicing fees grew 24% compared with the first quarter of 1998 due to an increase in assets serviced. At March 31, 1999, PFPC Worldwide provided custody and accounting/administration services for $338 billion and $266 billion of mutual fund assets, respectively. The comparable amounts were $265 billion and $218 billion, respectively, a year ago. Consumer services revenue increased $48 million or 59% compared with the first quarter of 1998 primarily due to an increase in brokerage accounts associated with the Hilliard Lyons acquisition. Corporate services revenue decreased $111 million, reflecting the valuation adjustments. Excluding the valuation adjustments, corporate services revenue increased 47% compared with the prior-year quarter primarily due to the acquisition of Midland. Net residential mortgage banking revenue grew $8 million or 15% compared with the prior-year quarter primarily due to higher servicing income reflecting growth in the servicing portfolio. Residential mortgage production volume, including both retail and correspondent activity, totaled $6 billion compared with $3 billion in the prior-year period. At March 31, 1999, approximately $66 billion of residential mortgages were serviced, including $58 billion serviced for others. Other noninterest income increased $261 million in the quarter-to-quarter comparison primarily due to the gains on the sales of the credit card business and an equity interest in EPS. DETAILS OF NONINTEREST EXPENSE Three months ended March 31- dollars in millions 1999 1998 Change - ----------------------------------------------------------------- Staff expense Compensation $351 $291 $60 Employee benefits 61 63 (2) - ----------------------------------------------------------------- Total 412 354 58 Net occupancy and equipment Net occupancy 87 49 38 Equipment 88 47 41 - ----------------------------------------------------------------- Total 175 96 79 Amortization Goodwill 19 13 6 Other 9 11 (2) - ----------------------------------------------------------------- Total 28 24 4 Marketing 15 37 (22) Distributions on capital securities 16 13 3 Other 177 184 (7) - ----------------------------------------------------------------- Total $823 $708 $115 - ----------------------------------------------------------------- NONINTEREST EXPENSE Noninterest expense of $823 million for the first quarter of 1999 included $98 million of costs related to efficiency initiatives classified as follows: compensation - $22 million, net occupancy - $35 million, equipment - $38 million and other - $3 million. Excluding these costs, noninterest expense increased $17 million or 2% compared with the first quarter of 1998. Excluding the impact of gains, valuation adjustments and costs associated with efficiency initiatives, the efficiency ratio improved to 52.0% for the first quarter of 1999 compared with 57.1% in the prior-year quarter. Average full-time equivalent employees totaled approximately 26,800 in the first quarter of 1999 compared with 25,000 in the prior-year quarter, an increase of 7% mainly due to acquisitions. PNC BANK CORP. ---- 12 Financial Review CONSOLIDATED BALANCE SHEET REVIEW LOANS Loans outstanding decreased $4.9 billion from year-end 1998 to $52.8 billion at March 31, 1999. Credit card loans decreased as a result of the sale of the credit card business. The decrease in commercial loans was the result of the decision to exit out-of-footprint large corporate, national healthcare and other non-strategic institutional lending businesses. Total exposure and outstandings for these businesses were $6.5 billion and $2.0 billion, respectively, at March 31, 1999. DETAILS OF LOANS March 31 December 31 In millions 1999 1998 - ---------------------------------------------------------------- Consumer (excluding credit card) Home equity $5,785 $5,731 Automobile 2,217 2,444 Education 1,384 1,196 Other 1,507 1,609 - ---------------------------------------------------------------- Total consumer 10,893 10,980 Credit card 2,958 Residential mortgage 12,579 12,265 Commercial Manufacturing 4,844 5,336 Retail/wholesale 4,569 4,452 Service providers 3,261 3,263 Real estate related 2,987 3,093 Communications 1,429 1,529 Health care 766 1,136 Financial services 2,405 2,928 Other 2,821 3,445 - ---------------------------------------------------------------- Total commercial 23,082 25,182 Commercial real estate Mortgage 1,432 1,398 Real estate project 1,985 2,051 - ---------------------------------------------------------------- Total commercial real estate 3,417 3,449 Lease financing and other 3,360 3,370 Unearned income (531) (554) - ---------------------------------------------------------------- Total, net of unearned income $52,800 $57,650 - ---------------------------------------------------------------- Loan portfolio composition continued to be geographically diversified among numerous industries and types of businesses. NET UNFUNDED COMMITMENTS March 31 December 31 In millions 1999 1998 - ----------------------------------------------------------------- Consumer (excluding credit card) $3,683 $3,695 Credit card 14,794 Residential mortgage 3,345 2,756 Commercial 29,372 32,923 Commercial real estate 941 1,078 Other 637 652 - ----------------------------------------------------------------- Total $37,978 $55,898 - ----------------------------------------------------------------- Commitments to extend credit represent arrangements to lend funds provided there is no violation of specified contractual conditions. The decrease in commitments to extend credit was the result of the sale of the credit card business and the decision to exit certain institutional lending businesses. Commercial commitments are reported net of participations, assignments and syndications, primarily to financial institutions, totaling $5.3 billion and $5.9 billion at March 31, 1999 and December 31, 1998, respectively. Net outstanding letters of credit totaled $4.6 billion and $4.7 billion at March 31, 1999 and December 31, 1998, respectively, and consisted primarily of standby letters of credit that commit the Corporation to make payments on behalf of customers when certain specified future events occur. SECURITIES AVAILABLE FOR SALE The securities portfolio increased $2.1 billion from December 31, 1998 to $9.2 billion at March 31, 1999 primarily due to an increase in mortgage-backed securities and securities used to economically hedge MSR. The expected weighted-average life of the securities portfolio increased to 5 years and 5 months at March 31, 1999 compared with 5 years and 3 months at year-end 1998. DETAILS OF SECURITIES AVAILABLE FOR SALE March 31, 1999 December 31, 1998 ----------------- -------------------- Amortized Fair Amortized Fair In millions Cost Value Cost Value - ---------------------------------------------------------------- Debt securities U.S. Treasury and government agencies $3,306 $3,193 $2,781 $2,754 Mortgage-backed 4,120 4,109 2,942 2,936 Asset-backed 825 824 709 708 State and municipal 137 141 122 128 Other debt 37 35 33 31 Corporate stocks and other 869 868 542 517 - ---------------------------------------------------------------- Total $9,294 $9,170 $7,129 $7,074 - ---------------------------------------------------------------- Securities available for sale may be sold as part of the overall asset and liability management process. Realized gains and losses are reflected in results of operations. Unrealized gains and losses are reflected in other comprehensive income. The notional value of financial derivatives designated to securities available for sale was $131 million at March 31, 1999. The fair value of such derivatives was $2 million at March 31, 1999. There were no derivatives designated to securities available for sale at December 31, 1998. PNC BANK CORP. ---- 13 FUNDING SOURCES Total funding sources were $65.7 billion at March 31, 1999, a decrease of $2.7 billion compared with December 31, 1998, resulting primarily from the sale of the credit card business. The decrease in the first quarter of 1999 was primarily in time deposits and other borrowed funds. This change in funding composition resulted in a strengthening of liquidity as 50% of wholesale liabilities had a maturity beyond one year at March 31, 1999, compared with 48% at December 31, 1998. DETAILS OF FUNDING SOURCES March 31 December 31 In millions 1999 1998 - ---------------------------------------------------------------- Deposits Demand, savings and money market $28,925 $29,359 Time 16,499 17,774 Foreign 375 363 - ---------------------------------------------------------------- Total deposits 45,799 47,496 Borrowed funds Federal funds purchased 245 390 Repurchase agreements 2,316 1,669 Bank notes and senior debt 9,899 10,384 Other borrowed funds 5,445 6,722 Subordinated debt 2,030 1,781 - ---------------------------------------------------------------- Total borrowed funds 19,935 20,946 - ---------------------------------------------------------------- Total $65,734 $68,442 - ---------------------------------------------------------------- CAPITAL The access to and cost of funding new business initiatives including acquisitions, ability to pay dividends, deposit insurance costs, and the level and nature of regulatory oversight depend, in large part, on a financial institution's capital strength. At March 31, 1999, the Corporation and each bank subsidiary were considered well capitalized based on regulatory capital ratio requirements. RISK-BASED CAPITAL March 31 December 31 Dollars in millions 1999 1998 - ---------------------------------------------------------------- Capital components Shareholders' equity Common $5,617 $5,729 Preferred 314 314 Trust preferred capital securities 848 848 Goodwill and other (1,348) (1,381) Net unrealized securities losses 82 36 - ---------------------------------------------------------------- Tier I risk-based capital 5,513 5,546 Subordinated debt 1,780 1,641 Eligible allowance for credit losses 672 753 - ---------------------------------------------------------------- Total risk-based capital $7,965 $7,940 - ---------------------------------------------------------------- Assets Risk-weighted assets and off-balance-sheet instruments $67,056 $71,146 Average tangible assets 75,770 76,135 - ---------------------------------------------------------------- Capital ratios Tier I risk-based 8.22% 7.80% Total risk-based 11.88 11.16 Leverage 7.28 7.28 - ---------------------------------------------------------------- The capital position is managed through balance sheet size and composition, issuance of debt and equity instruments, treasury stock activities, dividend policies and retention of earnings. In February 1999, the Corporation issued $250 million of 6 1/8% subordinated notes due 2009 that qualify as Tier II risk-based capital. During the first quarter of 1999, PNC Bank repurchased 5.3 million shares of common stock. On February 18, 1999, the Board of Directors authorized the Corporation to purchase up to 15 million shares of common stock through February 29, 2000. Approximately 11.7 million shares remain under this authorization. RISK MANAGEMENT In the normal course of business, the Corporation assumes various types of risk; the most significant of which are credit, liquidity, and interest rate and market risk. To manage these risks, PNC Bank has risk management processes designed to provide for risk identification, measurement, monitoring and control. CREDIT RISK Credit risk represents the possibility that a borrower or counter party 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, among other things, diversification, limiting exposure to any single industry or customer, requiring collateral or selling participations to third parties and purchasing credit-related derivatives. NONPERFORMING ASSETS March 31 December 31 Dollars in millions 1999 1998 - ---------------------------------------------------------------- Nonaccrual loans Commercial $184 $188 Residential mortgage 58 51 Commercial real estate Mortgage 17 22 Real estate project 28 28 Consumer 4 6 - ---------------------------------------------------------------- Total nonaccrual loans 291 295 Foreclosed and other assets Residential mortgage 15 17 Commercial real estate 13 15 Other 9 5 - ---------------------------------------------------------------- Total foreclosed and other assets 37 37 - ---------------------------------------------------------------- Total nonperforming assets $328 $332 - ---------------------------------------------------------------- Nonperforming loans to total loans .55% .51% Nonperforming assets to total loans and foreclosed assets .62 .58 Nonperforming assets to total assets .44 .43 - ---------------------------------------------------------------- PNC BANK CORP. ---- 14 Financial Review Nonperforming assets include nonaccrual loans and foreclosed and other assets and totaled $328 million at March 31, 1999, compared with $332 million at December 31, 1998. CHANGE IN NONPERFORMING ASSETS In millions 1999 1998 - ---------------------------------------------------------------- January 1 $332 $333 Transferred from accrual 74 78 Returned to performing (1) (1) Principal reductions (53) (50) Sales (10) (16) Charge-offs and other (14) (9) - ---------------------------------------------------------------- March 31 $328 $335 - ---------------------------------------------------------------- The amount of nonperforming loans that were current as to principal and interest was $35 million at March 31, 1999 and $28 million at December 31, 1998. There were no troubled debt restructured loans outstanding as of either period end presented. ACCRUING LOANS PAST DUE 90 DAYS OR MORE Amount Percent of Loans ------------------------------------------- March 31 December 31 March 31 December 31 Dollars in millions 1999 1998 1999 1998 - ---------------------------------------------------------------- Consumer (excluding credit card) Guaranteed education $21 $23 1.52% 1.92% Other 28 38 .30 .39 - ---------------------------------------- Total consumer 49 61 .45 .56 Credit card 63 2.13 Residential mortgage 47 55 .37 .45 Commercial 48 56 .21 .22 Commercial real estate 16 32 .47 .93 Other 1 1 .04 .04 - ---------------------------------------- Total $161 $268 .30 .46 - ---------------------------------------------------------------- ALLOWANCE FOR CREDIT LOSSES In determining the adequacy of the allowance for credit losses, the Corporation makes allocations to specific problem commercial, commercial real estate and other 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 business segment and risk rating and are based on historical loss trends and management's judgment concerning those trends and other relevant factors. These factors may include, among others; actual versus estimated losses, current regional and national economic conditions, business segment and portfolio concentrations, industry competition and consolidation, and the impact of government regulations. Consumer and residential mortgage loan allocations are made at a total portfolio level based on historical loss experience adjusted for portfolio activity and current economic conditions. While PNC Bank's commercial and consumer pool reserve methodologies strive to reflect all risk factors, there continues to be a certain element of risk associated with, but not limited to, potential estimation or judgmental errors. Unallocated reserves provide coverage for such risks. While allocations are made to specific loans and pools of loans, the total reserve is available for all credit losses. Senior management's Reserve Adequacy Committee provides oversight for the allowance evaluation process including quarterly evaluations, and methodology and estimation changes. The results of the evaluations are reported to the Credit Committee of the Board of Directors. The increase in the provision for credit losses in the first quarter of 1999 and the evaluation of the allowance for credit losses as of March 31, 1999 reflect changes in loan portfolio composition, changes in asset quality, the impact of selling the credit card business and the decision to exit certain institutional lending businesses. The unallocated portion of the allowance for credit losses represented 37% of the total allowance and .47% of total loans at March 31, 1999, compared with 22% and .29%, respectively, at December 31, 1998. ROLLFORWARD OF ALLOWANCE FOR CREDIT LOSSES In millions 1999 1998 - ---------------------------------------------------------------- January 1 $753 $972 Charge-offs (97) (107) Recoveries 19 17 - ---------------------------------------------------------------- Net charge-offs (78) (90) Provision for credit losses 78 30 Sale of credit card business (81) - ---------------------------------------------------------------- March 31 $672 $912 - ---------------------------------------------------------------- The allowance as a percent of nonperforming loans and total loans was 231% and 1.27%, respectively, at March 31, 1999. The comparable year-end 1998 amounts were 255% and 1.31%, respectively. PNC BANK CORP. ---- 15 CHARGE-OFFS AND RECOVERIES Three months ended Percent of March 31 - Net Average dollars in millions Charge-offs Recoveries Charge-offs Loans - ----------------------------------------------------------------------- 1999 Consumer (excluding credit card) $18 $7 $11 .41% Credit card 60 2 58 8.64 Residential mortgage 4 1 3 .10 Commercial 12 7 5 .08 Commercial real estate 1 1 Other 2 1 1 .14 - ------------------------------------------------------------- Total $97 $19 $78 .56 - --------------------------------------------------------------------- 1998 Consumer (excluding credit card) $24 $10 $14 .51% Credit card 72 3 69 7.47 Residential mortgage 2 2 .06 Commercial 6 3 3 .06 Commercial real estate 2 1 1 .11 Other 1 1 .20 - ------------------------------------------------------------- Total $107 $17 $90 .67 - ---------------------------------------------------------------------- The actual level of net charge-offs and the provision for credit losses in future periods can be affected by many business and economic factors and may differ from current or historical experience. LIQUIDITY RISK Liquidity represents an institution's ability to obtain funds at reasonable rates to satisfy commitments to borrowers, demands of depositors and debt holders and to invest in strategic initiatives. Liquidity risk is centrally managed by Asset and Liability Management. Key factors affecting the Corporation's liquidity include the availability and distribution of funding by type and maturity, asset quality, current and future earnings expectations, market factors, and management and business outlooks and strategies. Liquidity risk management includes consideration of the Corporation's ability to raise funds in the capital markets through asset securitizations or sales. The ability to raise funds in the capital markets depends on credit ratings, market conditions, capital considerations, investor demand and other factors. Liquid assets consist of short-term investments, loans held for sale and securities available for sale. At March 31, 1999, such assets totaled $14 billion, with $6.3 billion pledged as collateral for borrowing, trust and other commitments. Liquidity is also provided by residential mortgages that may be used as collateral for funds obtained through the Federal Home Loan Bank ("FHLB") system. At March 31, 1999, approximately $4.7 billion of residential mortgages were available as collateral for borrowings from the FHLB. Liquidity for the parent company and subsidiaries is also generated through the issuance of securities in public or private markets and lines of credit and through asset securitizations and sales. At March 31, 1999, the Corporation had unused capacity under effective shelf registration statements of approximately $1.1 billion of debt and equity securities and $400 million of trust preferred capital securities. During the first three months of 1999, the Corporation issued $250 million of subordinated debt. In addition, the Corporation has an unused line of credit of $500 million. 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 $549 million at March 31, 1999. Dividends may also be impacted by capital needs, regulatory requirements, corporate policies, contractual restrictions and other factors. Management believes the Corporation has sufficient liquidity to meet current obligations to borrowers, depositors, debt holders and others. The impact of replacing maturing liabilities is reflected in the income simulation model in the overall asset and liability management process. 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, financial derivatives and other capital markets instruments. Interest rate risk is centrally managed by Asset and Liability Management. The Corporation actively measures and monitors 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 and Liability Committee provides strategic direction to Asset and Liability 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 PNC BANK CORP. ---- 16 Financial Review 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, business plans and published industry experience. 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 the timing, magnitude and frequency of interest rate changes, the difference between actual experience and the assumed volume and characteristics of new business and 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. During the first three months of 1999, the Corporation's interest rate risk exposures were within policy limits. At March 31, 1999, if interest rates were to gradually increase by 100 basis points over the next twelve months, the model indicates that net interest income would decrease by 0.7%. If interest rates were to gradually decrease by 100 basis points over the next twelve months, the model indicates that net interest income would increase by 0.6%. 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 net interest 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 on-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 net interest income simulation modeling process. The Corporation's risk management policies provide that the change in economic value of equity should not decline by more than 1.5% of the book value of assets for a 200 basis point instantaneous increase or decrease in interest rates. Based on the results of the economic value of equity model at March 31, 1999, if interest rates were to instantaneously increase by 200 basis points, the economic value of existing on-balance-sheet and off-balance-sheet positions would decline by 0.42% of assets. If interest rates were to instantaneously decrease by 200 basis points, the economic value of existing on-balance-sheet and off-balance-sheet positions would increase by 0.09% of assets. MARKET RISK Most of PNC Bank's trading activities are designed to provide capital markets services for customers of PNC Institutional Bank, PNC Secured Finance, and PNC Advisors. 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. 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 potential loss due to a two standard deviation, one-day move. The combined period-end value-at-risk of all trading operations was less than $600 thousand at March 31, 1999. PNC BANK CORP. ---- 17 FINANCIAL DERIVATIVES A variety of off-balance-sheet financial derivatives are used as part of the overall risk management process to manage interest rate, market and credit risk inherent in the Corporation's business activities. Interest rate swaps and purchased interest rate caps and floors are the primary instruments used for interest rate risk management. 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. Credit-related derivatives provide, for a fee, an assumption of a portion of the credit risk associated with the underlying financial instruments. Such contracts are primarily used to manage credit risk and regulatory capital associated with commercial lending activities. Financial derivatives involve, to varying degrees, interest rate, market and credit risk in excess of the amount on 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. During the first three months of 1999, financial derivatives used in interest rate risk management increased net interest income by $16 million compared with a $2 million increase in the prior-year period. The following table sets forth changes in the notional value of off-balance-sheet financial derivatives used for risk management during the first three months of 1999.
FINANCIAL DERIVATIVES ACTIVITY Weighted- Average 1999 - dollars in millions January 1 Additions Maturities Terminations March 31 Maturity - -------------------------------------------------------------------------------------------------------------------------------- Interest rate risk management Interest rate swaps Receive fixed $7,163 $750 $(600) $7,313 2 yr. 9 mo. Pay fixed 13 4 (4) 13 11 mo. Basis swaps 2,274 (47) 2,227 3 yr. 4 mo. Interest rate caps 722 (82) 640 4 yr. 3 mo. Interest rate floors 1,939 2,750 (41) 4,648 2 yr. 3 mo. - ----------------------------------------------------------------------------------------------------------------- Total interest rate risk management 12,111 3,504 (774) 14,841 Mortgage banking activities Residential Forward contracts Commitments to purchase loans 1,286 8,263 (7,305) 2,244 2 mo. Commitments to sell loans 3,248 10,777 (9,928) 4,097 2 mo. Options 207 383 (260) 330 2 mo. Interest rate floors - MSR 4,875 800 (425) $(700) 4,550 4 yr. 5 mo. - ----------------------------------------------------------------------------------------------------------------- Total residential 9,616 20,223 (17,918) (700) 11,221 Commercial 657 291 (194) 754 7 yr. 4 mo. - ----------------------------------------------------------------------------------------------------------------- Total mortgage banking activities 10,273 20,514 (17,918) (894) 11,975 Credit-related activities Credit default swaps 4,255 4,255 2 yr. 5 mo. - ----------------------------------------------------------------------------------------------------------------- Total $26,639 $24,018 $(18,692) $(894) $31,071 - --------------------------------------------------------------------------------------------------------------------------------
PNC BANK CORP. ---- 18 Financial Review The following table sets forth by designated assets and liabilities the notional value and the estimated fair value of financial derivatives used for risk management. Weighted-average interest rates presented are those expected to be in effect based on the implied forward yield curve at March 31, 1999.
FINANCIAL DERIVATIVES Weighted-Average Interest Rates Notional Estimated --------------------------- March 31, 1999 - dollars in millions Value Fair Value Paid Received - ------------------------------------------------------------------------------------------------------------------------------- Interest rate risk management Asset rate conversion Interest rate swaps (1) Receive fixed designated to loans $5,550 $35 5.39% 5.49% Pay fixed designated to loans 3 6.23 5.08 Basis swaps designated to other earning assets 283 3 5.30 5.63 Interest rate caps designated to loans (2) 640 7 NM NM Interest rate floors designated to loans (3) 4,648 2 NM NM - --------------------------------------------------------------------------------------------------- Total asset rate conversion 11,124 47 Liability rate conversion Interest rate swaps (1) Receive fixed designated to: Interest-bearing deposits 150 7 5.69 6.65 Borrowed funds 1,613 28 5.53 5.83 Pay fixed designated to borrowed funds 10 2 6.85 5.80 Basis swaps designated to borrowed funds 1,944 8 5.41 5.44 - --------------------------------------------------------------------------------------------------- Total liability rate conversion 3,717 45 - --------------------------------------------------------------------------------------------------- Total interest rate risk management 14,841 92 Mortgage banking activities Residential Forward contracts Commitments to purchase loans 2,244 14 NM NM Commitments to sell loans 4,097 (6) NM NM Options 330 6 NM NM Interest rate floors - MSR (3) 4,550 17 NM NM - --------------------------------------------------------------------------------------------------- Total residential 11,221 31 Commercial Pay fixed interest rate swaps designated to: Securities 131 2 6.56 5.10 Loans 623 15 5.45 5.91 - --------------------------------------------------------------------------------------------------- Total mortgage banking activities 11,975 48 Credit-related activities Credit default swaps 4,255 (7) NM NM - --------------------------------------------------------------------------------------------------- Total financial derivatives $31,071 $133 - -------------------------------------------------------------------------------------------------------------------------------
(1) The floating rate portion of interest rate contracts is based on money-market indices. As a percent of notional value, 34% were based on 1-month LIBOR, 63% on 3-month LIBOR and the remainder on other short-term indices. (2) Interest rate caps with notional values of $210 million, $192 million and $233 million require the counterparty to pay the excess, if any, of 3-month LIBOR over a weighted-average strike of 6.20%, 1-month LIBOR over a weighted-average strike of 5.83% and Prime over a weighted-average strike of 8.76%, respectively. At March 31, 1999, 3-month LIBOR was 5.00%, 1-month LIBOR was 4.94% and Prime was 7.75%. (3) Interest rate floors with notional values of $4.3 billion, $1.4 billion and $3.2 billion require the counterparty to pay the Corporation the excess, if any, of the weighted-average strike of 4.75% over 3-month LIBOR, the weighted-average strike of 4.73% over 10-year CMT and the weighted-average strike of 4.99% over 10-year CMS, respectively. At March 31, 1999, 3-month LIBOR was 5.00%, 10-year CMT was 5.25% and 10-year CMS was 6.05%. NM - Not meaningful OTHER DERIVATIVES To accommodate customer needs, PNC Bank enters into customer-related 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. Additionally, the Corporation enters into other derivative transactions for risk management purposes. These positions are recorded at estimated fair value and changes in value are included in results of operations. OTHER DERIVATIVES Positive Negative March 31, 1999 - in Notional Fair Fair Net Asset millions Value Value Value (Liability) - ---------------------------------------------------------------------- Customer-related Interest rate Swaps $11,202 $45 $(65) $(20) Caps/floors Sold 2,476 (16) (16) Purchased 2,289 16 16 Foreign exchange 2,133 34 (29) 5 Other 1,364 4 (5) (1) - ---------------------------------------------------------------------- Total customer-related 19,464 99 (115) (16) Other 2,221 2 (3) (1) - ---------------------------------------------------------------------- Total other derivatives $21,685 $101 $(118) $(17) - ---------------------------------------------------------------------- PNC BANK CORP. ---- 19 YEAR 2000 READINESS The Corporation has been working since 1995 to prepare its computer systems and applications to meet the year 2000 challenge. This process involves reviewing, modifying and replacing existing hardware, software and embedded chip technology systems, as necessary. The Corporation is also assessing the year 2000 preparedness of third parties such as vendors, customers, governmental entities and others. As of March 31, 1999, approximately 98% of the Corporation's MIS-supported mainframe, mid-range and PC client-server systems had been tested and returned to production as year 2000 ready. Approximately 98% of the Corporation's non-PC related hardware and systems software had also been tested and determined to be year 2000 ready. At March 31, 1999, the Corporation had completed its organization-wide assessment of year 2000 issues relating to its identified mission critical embedded chip systems and continues to review and monitor these issues as necessary. No significant problems have been identified to date with respect to these systems. The Corporation has substantially completed its assessment of the year 2000 preparedness of its identified mission critical service providers. The Corporation has not to date identified any material problems associated with its mission critical service providers. However, the Corporation can make no guarantee as to the year 2000 readiness of any such service provider or other third party. The year 2000 issue may have an adverse impact on the operations and financial condition of the Corporation's borrowers. PNC Bank periodically compiles and updates year 2000 profiles for certain of its largest lending relationships for the purpose of assessing their overall risks. Determination of these risks is based on an assessment of the borrowers' vulnerability to year 2000 issues, resources and capacity, adequacy of year 2000 readiness plans, remediation costs and state of remediation. This information is compiled and analyzed periodically to determine the possible year 2000 impact on the loan portfolio and allowance for credit losses. Based on the Corporation's current assessment of the information it has received to date, management believes the year 2000 issue will not have a material adverse impact on the quality of the loan portfolio. The Corporation will continue to review and assess the year 2000 preparedness of its borrowers during 1999. PNC Bank is conducting fully integrated testing to determine whether its mission critical application systems will perform in coordination with one another. The Corporation is also conducting testing with certain mission critical vendors that provide systems-related services. The estimated total cost to become year 2000 ready, which is being expensed as incurred, is approximately $30 million. Through March 31, 1999, the Corporation had expensed approximately $22 million related to the year 2000 effort. Expenses incurred for year 2000 readiness efforts are not expected to exceed 2% of technology-related expenses in 1999. No significant outlays have been made to replace existing systems solely for year 2000 reasons. The costs and the timetable in which the Corporation plans to complete its year 2000 readiness activities are based on management's best estimates, which were derived using numerous assumptions of future events including the continued availability of certain resources, third party preparedness and other factors. The Corporation can make no guarantee that these estimates will be achieved, and actual results could differ from such plans. Contingency plans for year 2000 issues have been and will continue to be developed and the Corporation will continue to review all contingency plans during 1999 and modify them when necessary or appropriate. Certain critical service provider and systems contingency plans will be tested during 1999. The Corporation's business continuity plans continue to be reviewed and strengthened to address year 2000 implications. PNC Bank's year 2000 remediation efforts and contingency plans are also subject to oversight and regulation by certain federal bank regulatory authorities. It is not possible to predict with certainty all of the adverse effects that could result from a failure of the Corporation or of third parties to become fully year 2000 ready or whether such effects could have a material adverse impact on the Corporation. However, if the Corporation were to fail to correct internal year 2000 problems, if one or more third parties are unable due to year 2000 issues to provide services required by the Corporation, or if the Corporation's contingency plans fail to mitigate any such problems, a disruption of operations could occur, resulting in increased operating costs, loss of revenues and other material adverse effects. Such disruptions could include a temporary inability to process transactions and delays in providing services. The Corporation could also be subject to liquidity risk in the event of deposit withdrawals due to year 2000 concerns, or if its lenders cannot provide funds due to year 2000 issues. In addition, to the extent that customers' financial positions are weakened due to year 2000 issues, credit quality could be adversely affected. PNC BANK CORP. ---- 20 Consolidated Statement of Income
Three months ended March 31- in millions, except per share data 1999 1998 --------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans and fees on loans $1,112 $1,119 Securities available for sale 106 115 Other 72 57 --------------------------------------------------------------------------------------------------------------------------- Total interest income 1,290 1,291 --------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Deposits 351 361 Borrowed funds 281 293 --------------------------------------------------------------------------------------------------------------------------- Total interest expense 632 654 --------------------------------------------------------------------------------------------------------------------------- Net interest income 658 637 Provision for credit losses 78 30 --------------------------------------------------------------------------------------------------------------------------- Net interest income less provision for credit losses 580 607 --------------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME Asset management 161 141 Mutual fund servicing 51 41 Service charges on deposits 50 48 Consumer services 130 82 Corporate services (60) 51 Net residential mortgage banking 60 52 Net securities gains 13 Other 339 78 --------------------------------------------------------------------------------------------------------------------------- Total noninterest income 731 506 --------------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE Staff expense 412 354 Net occupancy and equipment 175 96 Amortization 28 24 Marketing 15 37 Distributions on capital securities 16 13 Other 177 184 --------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 823 708 --------------------------------------------------------------------------------------------------------------------------- Income before income taxes 488 405 Income taxes 163 136 --------------------------------------------------------------------------------------------------------------------------- Net income $325 $269 --------------------------------------------------------------------------------------------------------------------------- Net income applicable to common shareholders $320 $265 EARNINGS PER COMMON SHARE Basic $1.06 $.88 Diluted 1.05 .87 CASH DIVIDENDS DECLARED PER COMMON SHARE .41 .39 AVERAGE COMMON SHARES OUTSTANDING Basic 302.3 300.6 Diluted 305.5 306.1 ---------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. PNC BANK CORP. ---- 21 Consolidate Balance Sheet
March 31 December 31 In millions, except par value 1999 1998 ------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $2,322 $2,534 Short-term investments 984 1,014 Loans held for sale 3,599 3,226 Securities available for sale 9,170 7,074 Loans, net of unearned income of $531 and $554 52,800 57,650 Allowance for credit losses (672) (753) ------------------------------------------------------------------------------------------------------------------- Net loans 52,128 56,897 Goodwill and other amortizable assets 2,457 2,548 Other 4,208 3,914 ------------------------------------------------------------------------------------------------------------------- Total assets $74,868 $77,207 ------------------------------------------------------------------------------------------------------------------- LIABILITIES Deposits Noninterest-bearing $9,070 $9,943 Interest-bearing 36,729 37,553 ------------------------------------------------------------------------------------------------------------------- Total deposits 45,799 47,496 Borrowed funds Federal funds purchased 245 390 Repurchase agreements 2,316 1,669 Bank notes and senior debt 9,899 10,384 Other borrowed funds 5,445 6,722 Subordinated debt 2,030 1,781 ------------------------------------------------------------------------------------------------------------------- Total borrowed funds 19,935 20,946 Other 2,355 1,874 ------------------------------------------------------------------------------------------------------------------- Total liabilities 68,089 70,316 ------------------------------------------------------------------------------------------------------------------- Mandatorily redeemable capital securities of subsidiary trusts 848 848 SHAREHOLDERS' EQUITY Preferred stock 7 7 Common stock - $5 par value Authorized 450.0 shares Issued 352.8 and 352.8 shares 1,764 1,764 Capital surplus 1,251 1,250 Retained earnings 5,458 5,262 Deferred benefit expense (36) (36) Accumulated other comprehensive loss (89) (43) Common stock held in treasury at cost: 53.7 and 49.1 shares (2,424) (2,161) ------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 5,931 6,043 ------------------------------------------------------------------------------------------------------------------- Total liabilities, capital securities and shareholders' equity $74,868 $77,207 -------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. PNC BANK CORP. ---- 22 Consolidated Statement of Cash Flows
Three months ended March 31- in millions 1999 1998 - -------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $325 $269 Adjustments to reconcile net income to net cash provided (used) by operating activities Provision for credit losses 78 30 Depreciation, amortization and accretion 130 94 Deferred income taxes 43 10 Net securities losses (gains) 17 (23) Net gain on sales of businesses and assets (304) (55) Valuation adjustments 142 Change in Loans held for sale 521 (75) Other (151) (333) - -------------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities 801 (83) - -------------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Net change in loans 218 (1,305) Repayment of securities available for sale 403 412 Sales Securities available for sale 1,659 3,832 Loans 38 979 Foreclosed assets 10 17 Purchases Securities available for sale (3,504) (3,225) Loans (51) Net cash received for acquisitions/divestitures 3,261 29 Other 17 635 - -------------------------------------------------------------------------------------------------------------------------------- Net cash provided by investing activities 2,102 1,323 - -------------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net change in Noninterest-bearing deposits (873) (41) Interest-bearing deposits (824) (1,536) Federal funds purchased (145) (2,859) Sale/issuance Repurchase agreements 33,667 28,553 Bank notes and senior debt 820 1,949 Other borrowed funds 8,036 25,664 Subordinated debt 254 Common stock 16 43 Repayment/maturity Repurchase agreements (33,020) (27,440) Bank notes and senior debt (1,305) (2,272) Other borrowed funds (9,310) (24,799) Subordinated debt (5) (6) Acquisition of treasury stock (297) (96) Cash dividends paid (129) (122) - -------------------------------------------------------------------------------------------------------------------------------- Net cash (used) by financing activities (3,115) (2,962) - -------------------------------------------------------------------------------------------------------------------------------- (DECREASE) IN CASH AND DUE FROM BANKS (212) (1,722) Cash and due from banks at beginning of year 2,534 4,303 - -------------------------------------------------------------------------------------------------------------------------------- Cash and due from banks at end of period $2,322 $2,581 - -------------------------------------------------------------------------------------------------------------------------------- CASH PAID FOR Interest $667 $659 Income taxes 8 5 NONCASH ITEMS Transfer from loans to loans held for sale 1,018 Transfers from loans to other assets 11 13 Conversion of debt to equity 16 - --------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. PNC BANK CORP. ---- 23 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 operating retail banking, asset management and wholesale businesses that provide financial products and services nationally and in PNC Bank's primary geographic markets in Pennsylvania, New Jersey, Delaware, Ohio and Kentucky. 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 those authorities. ACCOUNTING POLICIES BASIS OF FINANCIAL STATEMENT PRESENTATION The unaudited consolidated interim financial statements include the accounts of PNC Bank and its subsidiaries, most of which are wholly owned. Such statements have been prepared in accordance with generally accepted accounting principles. All significant intercompany accounts and transactions have been eliminated. In the opinion of management, the financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair statement of 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 classifications did not impact the Corporation's financial condition or results of operations. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the amounts reported. Actual results will differ from such estimates and the differences may be material to the consolidated financial statements. The notes included herein should be read in conjunction with the audited consolidated financial statements included in PNC Bank's 1998 Annual Report. MORTGAGE-BACKED SECURITIES RETAINED DURING THE SECURITIZATION PROCESS Effective January 1, 1999, the Corporation adopted Statement of Financial Accounting Standards ("SFAS") No. 134, "Accounting for Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" (an amendment of SFAS No. 65). SFAS 134 requires the Corporation to classify all mortgage-backed securities or other interests in the form of a security retained after a securitization of mortgage loans held for sale based on its ability and intent to sell or hold those investments. Any retained mortgage-backed securities that the Corporation commits to sell before or during the securitization process must be classified as trading securities. Restatement of prior year financial statements was not required. The adoption of SFAS 134 did not have a material impact on the Corporation's financial position or results of operations. RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," is required to be adopted in years beginning after June 15, 1999, although early adoption is permitted. The Corporation expects to adopt the new statement effective January 1, 2000. This statement requires the Corporation to recognize all financial derivatives on the balance sheet at fair value. Derivatives that do not qualify as hedges must be adjusted to fair value through results of operations. If the derivative is a hedge as defined by the statement, changes in the fair value of derivatives will be either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through results of operations or recognized in other comprehensive income until the hedged item is recognized in results of operations based on the nature of the hedge. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. Management has not yet determined what effect this statement will have on the financial position and results of operations of the Corporation. CASH FLOWS During the first three months of 1999, divestiture activity which affected cash flows consisted of $3.1 billion of divested assets and cash receipts of $3.3 billion in cash and due from banks. PNC BANK CORP. ---- 24 SECURITIES AVAILABLE FOR SALE
March 31, 1999 December 31, 1998 ---------------------------------------------------------------------------------------------- Unrealized Unrealized Amortized -------------------- Fair Amortized ------------------------- Fair In millions Cost Gains Losses Value Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------------------------------ Debt securities U.S. Treasury and government agencies $3,306 $3 $(116) $3,193 $2,781 $10 $(37) $2,754 Mortgage-backed 4,120 8 (19) 4,109 2,942 5 (11) 2,936 Asset-backed 825 1 (2) 824 709 1 (2) 708 State and municipal 137 5 (1) 141 122 6 128 Other debt 37 (2) 35 33 (2) 31 - ------------------------------------------------------------------------------------------------------------------------------------ Total debt securities 8,425 17 (140) 8,302 6,587 22 (52) 6,557 Corporate stocks and other 869 34 (35) 868 542 10 (35) 517 - ------------------------------------------------------------------------------------------------------------------------------------ Total securities available for sale $9,294 $51 $(175) $9,170 $7,129 $32 $(87) $7,074 - ------------------------------------------------------------------------------------------------------------------------------------
During the first quarter of 1999, net securities losses totaled $17 million and were included in net residential mortgage banking hedging activities. During the first quarter of 1998, net securities gains totaled $23 million, of which $10 million were included in net residential mortgage banking hedging activities. ALLOWANCE FOR CREDIT LOSSES Changes in the allowance for credit losses were as follows: In millions 1999 1998 - ------------------------------------------------------------- Allowance at January 1 $753 $972 Charge-offs Consumer (excluding credit card) (18) (24) Credit card (60) (72) Residential mortgage (4) (2) Commercial (12) (6) Commercial real estate (1) (2) Other (2) (1) ----------------- Total charge-offs (97) (107) Recoveries Consumer (excluding credit card) 7 10 Credit card 2 3 Residential mortgage 1 Commercial 7 3 Commercial real estate 1 1 Other 1 ----------------- Total recoveries 19 17 ----------------- Net charge-offs Consumer (excluding credit card) (11) (14) Credit card (58) (69) Residential mortgage (3) (2) Commercial (5) (3) Commercial real estate (1) Other (1) (1) ----------------- Total net charge-offs (78) (90) Provision for credit losses 78 30 Sale of Credit Card Business (81) ----------------- Allowance at March 31 $672 $912 - ------------------------------------------------------------- NONPERFORMING ASSETS Nonperforming assets were as follows: March 31 December 31 In millions 1999 1998 - ------------------------------------------------------------------- Nonaccrual loans $291 $295 Foreclosed and other assets 37 37 ------------------------ Total nonperforming assets $328 $332 - ------------------------------------------------------------------- PNC BANK CORP. ---- 25 FINANCIAL DERIVATIVES FAIR VALUE OF FINANCIAL DERIVATIVES The notional and fair values of financial derivatives used for risk management and mortgage banking activities were as follows: Positive Negative Notional Fair Notional Fair In millions Value Value Value Value - ---------------------------------------------------------------- MARCH 31, 1999 Interest rate Swaps $7,786 $90 $1,767 $(7) Caps 640 7 Floors 4,250 7 398 (5) - ---------------------------------------------------------------- Total interest rate risk management 12,676 104 2,165 (12) Mortgage banking activities 6,381 55 5,594 (7) Credit default swaps 4,255 (7) - ---------------------------------------------------------------- Total $19,057 $159 $12,014 $(26) - ---------------------------------------------------------------- DECEMBER 31, 1998 Interest rate Swaps $6,915 $177 $2,535 $(10) Caps 722 6 Floors 1,500 439 (9) - ---------------------------------------------------------------- Total interest rate risk management 9,137 183 2,974 (19) Mortgage banking activities 9,367 74 906 (10) Credit default swaps 4,255 (2) - ---------------------------------------------------------------- Total $18,504 $257 $8,135 $(31) - ---------------------------------------------------------------- OTHER DERIVATIVES The following schedule sets forth information relating to positions associated with customer-related and other derivatives. Positive Negative Notional Fair Fair Net Asset In millions Value Value Value (Liability) - ---------------------------------------------------------------------- MARCH 31, 1999 Customer-related Interest rate Swaps $11,202 $45 $(65) $(20) Caps/floors Sold 2,476 (16) (16) Purchased 2,289 16 16 Foreign exchange 2,133 34 (29) 5 Other 1,364 4 (5) (1) - ---------------------------------------------------------------------- Total customer- related 19,464 99 (115) (16) Other 2,221 2 (3) (1) - ---------------------------------------------------------------------- Total $21,685 $101 $(118) $(17) - ---------------------------------------------------------------------- Positive Negative Notional Fair Fair Net Asset In millions Value Value Value (Liability) - ------------------------------------------------------------------------ DECEMBER 31, 1998 Customer-related Interest rate Swaps $11,040 $69 $(89) $(20) Caps/floors Sold 2,844 (19) (19) Purchased 2,589 20 20 Foreign exchange 2,108 33 (27) 6 Other 457 7 (8) (1) - ------------------------------------------------------------------------ Total customer- related 19,038 129 (143) (14) Other 709 1 1 - ------------------------------------------------------------------------ Total $19,747 $130 $(143) $(13) - ------------------------------------------------------------------------ PNC BANK CORP. ---- 26 Notes to Consolidated Financial Statements SEGMENT REPORTING PNC Bank operates seven major businesses engaged in retail banking, asset management and wholesale banking activities: PNC Regional Bank, PNC Advisors, BlackRock, PFPC Worldwide, PNC Institutional Bank, PNC Secured Finance and PNC Mortgage. Business results presented are based on PNC Bank's management accounting practices and the Corporation's current management structure. The presentation of business results was changed during the first quarter of 1999 as part of the Corporation's operating strategy. PNC Regional Bank reflects the combination of PNC Regional Community Bank and PNC National Consumer Bank. Branch-based brokerage activities (previously included in PNC Advisors), the middle market customer segment (previously part of PNC Corporate Bank) and regional real estate lending and leasing activities in PNC Bank's geographic footprint (previously included in PNC Secured Finance) were also combined with PNC Regional Bank. Additionally, residential mortgages (previously included in PNC Mortgage) were realigned with PNC Regional Bank. Certain out-of-footprint large corporate, national healthcare and other non-strategic institutional lending businesses as well as venture capital activities (previously in PNC Corporate Bank) are included in Other. The remaining activities, which were previously in PNC Corporate Bank, comprise PNC Institutional Bank. BlackRock reflects total legal entity results for BlackRock, Inc. Financial results for 1999, 1998 and 1997 are presented consistent with this structure. The management accounting process uses various balance sheet and income statement assignments and transfers to measure performance of the businesses. Methodologies change from time-to-time as management accounting practices are enhanced and businesses change. Securities or borrowings and related net interest income are assigned based on the net asset or liability position of each business. Capital is assigned based on management's assessment of inherent risks and equity levels at independent companies providing similar products and services. Support areas not directly aligned with the businesses are allocated primarily based on the utilization of these services. Total business financial results differ from consolidated financial results primarily due to differences between management accounting practices and generally accepted accounting principles, divested and exited businesses, venture capital activities, sales of equity interests in subsidiaries, eliminations and unassigned items; the impact of which is reflected in Other. Additionally, the first quarter of 1999 includes the impact of the sales of the credit card business and an equity interest in EPS; valuation adjustments associated with exiting certain institutional lending businesses; and costs related to efficiency initiatives. BUSINESS SEGMENT PRODUCTS AND SERVICES PNC Regional Bank provides credit, deposit, branch-based brokerage and electronic banking products and services to retail customers as well as credit, leasing, treasury management and capital markets products and services to mid-sized and small businesses primarily within PNC Bank's geographic footprint. PNC Advisors offers personalized investment management, high-end brokerage services, personal trust, estate planning and traditional banking services to affluent and wealthy individuals; and investment management, trust and administrative services to pensions, 401(k) plans and charitable organizations. BlackRock offers fixed income, domestic and international equity and liquidity investment products, and utilizes technology-based risk management capabilities to provide investment advisory and asset management capabilities for a wide range of institutional and retail customers. PFPC Worldwide provides a wide range of accounting, administration, transfer agency, custody, securities lending and integrated banking transaction services to mutual funds, pension and money fund managers, partnerships, brokerage firms, insurance companies and banks, both domestically and globally. PNC Institutional Bank provides credit, treasury management and capital markets products and services to corporations, institutions and government agencies. PNC Secured Finance is engaged in commercial real estate finance, including loan origination, securitization, and servicing; asset-based financing, including lending syndications and treasury management services; and equipment lease financing to a wide range of customers nationally. PNC Mortgage originates, purchases and services residential mortgages and related products, and securitizes and sells residential mortgages as private-label mortgage-backed securities and performs master servicing of those securities for investors. PNC BANK CORP. ---- 27 RESULTS OF BUSINESSES
PNC PNC PNC Three months ended March 31 Regional PNC PFPC Institution Secured PNC Total in millions Bank Advisors BlackRock Worldwide Bank Finance Mortgage Other Consolidated - ----------------------------------------------------------------------------------------------------------------------------------- 1999 INCOME STATEMENT Net interest income* $432 $34 $(4) $3 $58 $50 $25 $66 $664 Noninterest income 126 148 88 51 43 21 76 178 731 - ----------------------------------------------------------------------------------------------------------------------------------- Total revenue 558 182 84 54 101 71 101 244 1,395 Provision for credit losses 11 1 4 (2) 64 78 Noninterest expense 302 123 64 36 54 35 83 126 823 - ----------------------------------------------------------------------------------------------------------------------------------- Pretax earnings 245 58 20 18 43 38 18 54 494 Income taxes 95 22 8 7 15 11 7 4 169 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings $150 $36 $12 $11 $28 $27 $11 $50 $325 - ----------------------------------------------------------------------------------------------------------------------------------- Inter-segment revenue $8 $19 $(9) $2 $9 $(29) - ----------------------------------------------------------------------------------------------------------------------------------- Average assets $39,383 $3,249 $400 $268 $9,638 $8,202 $7,084 $8,734 $76,958 - ----------------------------------------------------------------------------------------------------------------------------------- 1998 INCOME STATEMENT Net interest income* $420 $29 $(4) $2 $53 $41 $19 $84 $644 Noninterest income 123 80 70 41 34 9 55 94 506 - ----------------------------------------------------------------------------------------------------------------------------------- Total revenue 543 109 66 43 87 50 74 178 1,150 Provision for credit losses 15 (3) 18 30 Noninterest expense 305 69 51 29 52 18 64 120 708 - ----------------------------------------------------------------------------------------------------------------------------------- Pretax earnings 223 40 15 14 35 35 10 40 412 Income taxes 88 15 7 5 12 10 4 2 143 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings $135 $25 $8 $9 $23 $25 $6 $38 $269 - ----------------------------------------------------------------------------------------------------------------------------------- Inter-segment revenue $4 $1 $(6) $2 $9 $(10) - ----------------------------------------------------------------------------------------------------------------------------------- Average assets $38,800 $2,655 $293 $218 $8,334 $5,294 $3,826 $12,721 $72,141 - ----------------------------------------------------------------------------------------------------------------------------------- 1997 INCOME STATEMENT Net interest income* $421 $26 $(4) $2 $48 $33 $9 $102 $637 Noninterest income 145 72 46 33 32 18 36 44 426 - ----------------------------------------------------------------------------------------------------------------------------------- Total revenue 566 98 42 35 80 51 45 146 1,063 Provision for credit losses 12 1 1 8 (12) 10 Noninterest expense 309 65 34 23 55 10 50 91 637 - ----------------------------------------------------------------------------------------------------------------------------------- Pretax earnings 245 32 8 12 24 33 (5) 67 416 Income taxes 103 12 3 5 8 12 (2) 9 150 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings $142 $20 $5 $7 $16 $21 $(3) $58 $266 - ----------------------------------------------------------------------------------------------------------------------------------- Inter-segment revenue $1 $1 $(2) $1 $8 $(9) - ----------------------------------------------------------------------------------------------------------------------------------- Average assets $39,106 $2,478 $260 $191 $8,174 $4,206 $2,070 $13,816 $70,301 - -----------------------------------------------------------------------------------------------------------------------------------
*Taxable-equivalent basis PNC BANK CORP. ---- 28 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 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------- CALCULATION OF BASIC EARNINGS PER COMMON SHARE Net income $325,240 $269,260 Less: Preferred dividends declared 4,827 4,849 - ----------------------------------------------------------------------------------------------------------------------------- Net income applicable to basic earnings per common share $320,413 $264,411 - ----------------------------------------------------------------------------------------------------------------------------- Basic weighted-average common shares outstanding 302,303 300,567 - ----------------------------------------------------------------------------------------------------------------------------- BASIC EARNINGS PER COMMON SHARE $1.06 $.88 - ----------------------------------------------------------------------------------------------------------------------------- CALCULATION OF DILUTED EARNINGS PER COMMON SHARE Net income $325,240 $269,260 Add: Interest expense on convertible debentures (net of tax) 4 526 Less: Dividends declared on nonconvertible preferred stock 4,538 4,537 - ----------------------------------------------------------------------------------------------------------------------------- Net income applicable to diluted earnings per common share $320,706 $265,249 - ----------------------------------------------------------------------------------------------------------------------------- Basic weighted-average common shares outstanding 302,303 300,567 Weighted-average common shares to be issued using average market price and assuming: Conversion of preferred stock Series A and B 138 156 Conversion of preferred stock Series C and D 1,099 1,175 Conversion of debentures 25 1,721 Exercise of stock options 1,558 2,214 Incentive share awards 373 315 - ----------------------------------------------------------------------------------------------------------------------------- Diluted weighted-average common shares outstanding 305,496 306,148 - ----------------------------------------------------------------------------------------------------------------------------- DILUTED EARNINGS PER COMMON SHARE $1.05 $.87 - -----------------------------------------------------------------------------------------------------------------------------
PNC BANK CORP. ---- 29 LITIGATION The Corporation and persons to whom the Corporation may have indemnification obligations, in the normal course of business, are subject to various pending and threatened lawsuits in which claims for monetary damages are asserted. Management, after consultation with legal counsel, does not at the present time anticipate the ultimate aggregate liability, if any, arising out of such lawsuits will have a material adverse effect on the Corporation's financial position. At the present time, management is not in a position to determine whether any such pending or threatened litigation will have a material adverse effect on the Corporation's results of operations in any future reporting period. COMPREHENSIVE INCOME Total comprehensive income amounted to $279 million and $261 million during the first quarter of 1999 and 1998, respectively. OTHER FINANCIAL INFORMATION In connection with the 1995 Midlantic merger, the parent company and its wholly-owned subsidiary, PNC Bancorp, Inc, jointly and severally assumed borrowed funds of Midlantic in the aggregate principal amount of $300 million at March 31, 1999. 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 1999 1998 - ---------------------------------------------------------------- ASSETS Cash and due from banks $2,317 $2,527 Securities available for sale 8,594 6,868 Loans, net of unearned income 52,603 57,282 Allowance for credit losses (672) (753) - ---------------------------------------------------------------- Net loans 51,931 56,529 Other assets 9,536 9,261 - ---------------------------------------------------------------- Total assets $72,378 $75,185 - ---------------------------------------------------------------- LIABILITIES Deposits $45,902 $47,578 Borrowed funds 18,246 19,402 Other liabilities 1,338 1,130 - ---------------------------------------------------------------- Total liabilities 65,486 68,110 Mandatorily redeemable capital securities of subsidiary trust 350 350 SHAREHOLDERS' EQUITY 6,542 6,725 - ---------------------------------------------------------------- Total liabilities, capital securities and shareholders' equity $72,378 $75,185 - ---------------------------------------------------------------- PNC BANCORP, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME Three months ended March 31 - in millions 1999 1998 - ---------------------------------------------------------------- Interest income $1,273 $1,279 Interest expense 602 629 - ---------------------------------------------------------------- Net interest income 671 650 Provision for credit losses 78 30 - ---------------------------------------------------------------- Net interest income less provision for credit losses 593 620 Noninterest income 505 478 Noninterest expense 693 688 - ---------------------------------------------------------------- Income before income taxes 405 410 Income taxes 146 142 - ---------------------------------------------------------------- Net income $259 $268 SUBSEQUENT EVENT On May 13, 1999, the Corporation announced that BlackRock, Inc. filed a registration statement with the Securities and Exchange Commission relating to an initial public offering of its common stock. A registration statement relating to BlackRock, Inc. common stock has been filed with the Securities and Exchange Commission but has not yet become effective. BlackRock, Inc. common stock may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. PNC BANK CORP. ---- 30 Statistical Information CONSOLIDATED AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS
-------------------------------------- ----------------------------------- First Quarter 1999 Fourth Quarter 1998 -------------------------------------- ----------------------------------- Dollars in millions Average Average Average Average Taxable-equivalent basis Balances Interest Yields/Rates Balances Interest Yields/Rates - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Interest-earning assets Loans held for sale $3,383 $56 6.68% $4,295 $71 6.64% Securities available for sale U.S. Treasury and government agencies and corporations 4,248 54 5.10 4,110 52 5.06 Other debt 2,848 43 6.11 2,631 40 6.12 Other 659 10 5.98 582 10 6.77 - --------------------------------------------------------------------------------- ------------------------- Total securities available for sale 7,755 107 5.55 7,323 102 5.58 Loans, net of unearned income Consumer (excluding credit card) 10,955 222 8.21 11,075 234 8.38 Credit card 2,724 100 14.91 3,570 131 14.58 Residential mortgage 12,184 216 7.09 12,193 218 7.16 Commercial 24,574 462 7.52 24,593 474 7.55 Commercial real estate 3,398 65 7.70 3,442 69 7.81 Other 2,860 52 7.24 2,493 45 7.12 - --------------------------------------------------------------------------------- ------------------------- Total loans, net of unearned income 56,695 1,117 7.91 57,366 1,171 8.06 Other 1,005 16 6.19 881 16 6.97 - --------------------------------------------------------------------------------- ------------------------- Total interest-earning assets/interest income 68,838 1,296 7.56 69,865 1,360 7.70 Noninterest-earning assets Allowance for credit losses (744) (792) Cash and due from banks 2,066 2,088 Other assets 6,798 6,216 - ---------------------------------------------------------------------- -------------- Total assets $76,958 $77,377 - ---------------------------------------------------------------------- -------------- LIABILITIES, CAPITAL SECURITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities Interest-bearing deposits Demand and money market $16,825 113 2.73 $15,974 117 2.90 Savings 2,535 10 1.63 2,552 12 1.84 Other time 17,262 219 5.12 17,830 238 5.31 Deposits in foreign offices 759 9 4.78 692 9 4.86 - --------------------------------------------------------------------------------- ------------------------- Total interest-bearing deposits 37,381 351 3.80 37,048 376 4.03 Borrowed funds Bank notes and senior debt 9,814 125 5.10 10,153 139 5.35 Federal funds purchased 1,663 20 4.81 2,117 27 4.97 Repurchase agreements 1,841 16 3.57 1,498 15 4.04 Other borrowed funds 6,380 84 5.24 7,113 101 5.54 Subordinated debt 1,886 36 7.58 1,842 37 8.03 - --------------------------------------------------------------------------------- ------------------------- Total borrowed funds 21,584 281 5.21 22,723 319 5.51 - --------------------------------------------------------------------------------- ------------------------- Total interest-bearing liabilities/interest expense 58,965 632 4.31 59,771 695 4.59 Noninterest-bearing liabilities and shareholders' equity Demand and other noninterest-bearing deposits 9,035 9,202 Accrued expenses and other liabilities 2,135 1,756 Mandatorily redeemable capital securities of subsidiary trusts 848 848 Shareholders' equity 5,975 5,800 - ---------------------------------------------------------------------- -------------- Total liabilities, capital securities and shareholders' equity $76,958 $77,377 - ------------------------------------------------------------------------------------------------------------------------------------ Interest rate spread 3.25 3.11 Impact of noninterest-bearing sources .61 .66 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income/margin $664 3.86% $665 3.77% - ------------------------------------------------------------------------------------------------------------------------------------
Nonaccrual loans are included in loans, net of unearned income. The impact of financial derivatives used in interest rate risk management is included in the interest income/expense and average yields/rates of the related assets and liabilities. Average balances of securities available for sale are based on amortized historical cost (excluding SFAS No. 115 adjustments to fair value). PNC BANK CORP. ---- 31
- ------------------------------------------------------------------------------------------------------------------------------------ Third Quarter 1998 Second Quarter 1998 First Quarter 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Average Average Average Average Average Average Balances Interest Yields/Rates Balances Interest Yields/Rates Balances Interest Yields/Rates - ------------------------------------------------------------------------------------------------------------------------------------ $3,850 $67 7.00% $2,948 $52 7.02% $2,363 $42 7.16% 4,714 66 5.58 5,252 74 5.62 5,580 81 5.78 1,842 29 6.35 1,531 25 6.46 1,639 27 6.59 517 9 6.43 540 8 6.44 565 9 6.57 - ------------------------------ ---------------------------- ----------------------------- 7,073 104 5.85 7,323 107 5.86 7,784 117 6.01 11,038 235 8.47 10,995 235 8.56 11,186 236 8.56 4,029 142 13.94 4,048 133 13.17 3,748 133 14.38 12,455 225 7.21 12,560 228 7.26 12,784 233 7.31 23,359 468 7.84 22,425 445 7.85 20,665 407 7.87 2,850 63 8.65 3,206 66 8.22 3,624 79 8.68 2,207 39 7.06 2,114 37 7.01 2,076 36 6.99 - ------------------------------ ---------------------------- ----------------------------- 55,938 1,172 8.28 55,348 1,144 8.23 54,083 1,124 8.36 1,097 18 6.41 1,069 17 6.18 959 15 6.48 - ------------------------------ ---------------------------- ----------------------------- 67,958 1,361 7.92 66,688 1,320 7.89 65,189 1,298 8.00 (830) (885) (947) 2,022 2,020 2,787 6,140 5,809 5,112 - --------------- ------------- -------------- $75,290 $73,632 $72,141 - --------------- ------------- -------------- $14,787 113 3.04 $14,344 106 2.95 $14,153 103 2.97 2,610 13 1.97 2,675 13 1.98 2,646 13 1.99 16,896 230 5.41 16,749 227 5.43 17,346 234 5.46 1,060 15 5.54 1,188 17 5.53 800 11 5.68 - ------------------------------ ---------------------------- ----------------------------- 35,353 371 4.17 34,956 363 4.15 34,945 361 4.19 11,845 172 5.67 10,643 153 5.68 9,972 142 5.69 2,496 36 5.60 3,089 43 5.51 2,404 33 5.55 1,587 19 4.79 1,762 21 4.75 1,523 19 4.89 4,871 75 6.01 4,524 68 5.97 4,408 66 5.99 1,843 35 7.63 1,826 35 7.64 1,682 33 7.77 - ------------------------------ ---------------------------- ----------------------------- 22,642 337 5.83 21,844 320 5.81 19,989 293 5.85 - ------------------------------ ---------------------------- ----------------------------- 57,995 708 4.82 56,800 683 4.79 54,934 654 4.79 9,169 9,213 9,685 1,632 1,445 1,474 848 698 650 5,646 5,476 5,398 - --------------- ------------- -------------- $75,290 $73,632 $72,141 - ------------------------------------------------------------------------------------------------------------------------------------ 3.10 3.10 3.21 .71 .71 .75 - ------------------------------------------------------------------------------------------------------------------------------------ $653 3.81% $637 3.81% $644 3.96% - ------------------------------------------------------------------------------------------------------------------------------------
PNC BANK CORP. ---- 32 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, 1999. 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, 1999, PNC Bank Corp. had 298,983,094 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, 1999 and 1998 21 Consolidated Balance Sheet as of March 31, 1999 and December 31, 1998 22 Consolidated Statement of Cash Flows for the three months ended March 31, 1999 and 1998 23 Notes to Consolidated Financial Statements 24 - 30 Consolidated Average Balance Sheet and Net Interest Analysis 31 - 32 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 2 - 20 Item 3 Quantitative and Qualitative Disclosures About Market Risk 16 - 17 ----------------------------------------------------- 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 27, 1999, 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 261,470,021 3,397,378 Robert N. Clay 261,462,452 3,404,947 George A. Davidson, Jr. 261,476,034 3,391,365 David F. Girard-diCarlo 259,686,868 5,180,531 Walter E. Gregg, Jr. 261,391,606 3,475,793 William R. Johnson 261,335,115 3,532,284 Bruce C. Lindsay 261,411,673 3,455,726 W. Craig McClelland 261,385,149 3,482,250 Thomas H. O'Brien 261,187,128 3,680,271 Jane G. Pepper 261,120,848 3,746,551 Jackson H. Randolph 261,446,867 3,420,532 James E. Rohr 261,384,220 3,483,179 Roderic H. Ross 261,395,057 3,472,342 Richard P. Simmons 261,413,830 3,453,569 Thomas J. Usher 261,444,075 3,423,324 Milton A. Washington 261,389,964 3,477,435 Helge H. Wehmeier 261,439,901 3,427,498 - ------------------------------------------------------------------- PNC BANK CORP. ---- 33 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, 1999 record date the number of shares of each class of stock that were issued and outstanding and entitled to vote, the voting power per share and the aggregate voting power of each class: Number of Voting Shares Rights Entitled Aggregate Title of Class Per Share to Vote Voting Power - ---------------------------------------------------------------- Common Stock 1 302,103,797 302,103,797 $1.80 Cumulative Convertible Preferred Stock - Series A 8 12,862 102,896 $1.80 Cumulative Convertible Preferred Stock - Series B 8 4,384 35,072 $1.60 Cumulative Convertible Preferred Stock - Series C 4/2.4 270,546 450,910* $1.80 Cumulative Convertible Preferred Stock - Series D 4/2.4 385,730 642,883* -------------- Total possible votes 303,335,558* - ---------------------------------------------------------------- * 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 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 Lynn F. Evans, Director, Financial Reporting, at corporate headquarters. Requests may also be directed to (412) 762-1553 or via e-mail to financial.reporting@pncbank.com. Since December 31, 1998, the Corporation filed the following Current Reports on Form 8-K: Form 8-K dated as of December 23, 1998, reporting developments regarding the Corporation's credit card business, filed pursuant to Item 5. Form 8-K dated as of January 19, 1999, reporting the Corporation's consolidated financial results for the three months and year ended December 31, 1998, filed pursuant to Item 5. Form 8-K dated as of February 16, 1999, reporting the public offering of $250,000,000 of 6 1/8% subordinated notes due 2009, filed pursuant to Item 5. Form 8-K dated as of March 29, 1999, reporting developments regarding the Corporation's credit card business, filed pursuant to Item 5. Form 8-K dated as of April 22, 1999, reporting the Corporation's consolidated financial results for the three months ended March 31, 1999 and information on the Corporation's businesses for the three months ended March 31, 1999 and 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 17, 1999, 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. ---- 34 Corporate Information CORPORATE HEADQUARTERS PNC Bank Corp. One PNC Plaza 249 Fifth Avenue Pittsburgh, Pennsylvania 15222-2707 STOCK LISTING PNC Bank Corp. common stock is traded on the New York Stock Exchange ("NYSE") under the symbol PNC. INTERNET INFORMATION Information on PNC Bank Corp.'s financial results and its products and services is available on the Internet at www.pncbank.com. FINANCIAL INFORMATION The Annual Report on Form 10-K is filed with the Securities and Exchange Commission ("SEC"). Copies of this document and other filings, including Exhibits thereto, may be obtained electronically at the SEC's home page at www.sec.gov. Copies also may be obtained by writing to Lynn F. Evans, Director of Financial Reporting, at corporate headquarters, or by calling (412) 762-1553 or via e-mail at financial.reporting@pncbank.com. INQUIRIES For financial services call 1-800-4-BANKER. Individual shareholders should contact Shareholder Relations at (800) 843-2206 or the PNC Bank Hotline at (800) 982-7652. Analysts and institutional investors should contact William H. Callihan, Vice President, Investor Relations, at (412) 762-8257 or via e-mail at invrela@pncmail.com. News media representatives and others seeking general information should contact Brian E. Goerke, Director of Public Relations, at (412) 762-4304 or via e-mail at brian.goerke@pncbank.com. COMMON STOCK PRICES/DIVIDENDS DECLARED The table below sets forth by quarter the range of high and low sale and quarter-end closing prices for PNC Bank Corp. common stock and the cash dividends declared per common share. Cash Dividends 1999 QUARTER High Low Close Declared - --------------------------------------------------------------------- First $59.750 $47.000 $55.563 $.41 - --------------------------------------------------------------------- Cash Dividends 1998 QUARTER High Low Close Declared - --------------------------------------------------------------------- First $61.625 $49.500 $59.938 $.39 Second 66.750 53.813 53.875 .39 Third 60.000 41.625 45.000 .39 Fourth 54.625 38.750 54.000 .41 - --------------------------------------------------------------------- Total $1.58 - --------------------------------------------------------------------- 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. REGISTRAR AND TRANSFER AGENT The Chase Manhattan Bank P.O. Box 590 Ridgefield Park, New Jersey 07660 800-982-7652 PNC BANK CORP. ---- 35