10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 16, 1999
PNC BANK
Quarterly Report on Form 10-Q
For the quarterly period ended June 30, 1999
Page 1 represents a portion of the second 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 35.
Consolidated Financial Highlights
PNC BANK CORP.
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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 target the same customers. This business model also allows the
Corporation to enhance consolidated value by leveraging 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, on July 20, 1999, the Corporation announced an
agreement to acquire First Data Investor Services Group, Inc. ("ISG"), the
mutual fund servicing subsidiary of First Data Corporation for $1.1 billion in
cash. The transaction is expected to close in the fourth quarter of 1999,
subject to regulatory approvals and satisfaction of customary closing
conditions. Also, during the first quarter of 1999, the Corporation completed
the sale of its credit card business and made the decision to exit certain
out-of-footprint large corporate, national healthcare and other non-strategic
institutional lending businesses.
Additionally, on May 13, 1999, BlackRock, Inc., a subsidiary of PNC Bank, filed
a registration statement for an initial public offering of its common stock
with PNC Bank retaining a majority ownership position. The transaction is
expected to result in a gain for the Corporation.
SUMMARY FINANCIAL RESULTS Consolidated net income for the first six months of
1999 was $640 million or $2.08 per diluted share. Results for the first six
months of 1999 included $331 million of pretax gains on the sales of PNC Bank's
credit card business, and equity interests in Electronic Payment Services, Inc.
("EPS") and the Concord EFS, Inc. ("Concord") stock received in the EPS
transaction. The first six months of 1999 also included $142 million of
valuation adjustments associated with exiting certain institutional lending
businesses, $98 million of costs related to efficiency initiatives and a $30
million contribution to the PNC Bank Foundation. Excluding these items, earnings
for the first six months of 1999 were $592 million or $1.92 per diluted share,
return on average common shareholders' equity was 20.92% and the return on
average assets was 1.57%. Earnings for the first six months of 1998 were $549
million or $1.77 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 six months of 1999 increased 15%
compared with the prior-year period.
Taxable-equivalent net interest income was $1.276 billion in the first six
months of 1999, a $5 million decrease compared with the first six months of
1998. The net interest margin was 3.75% in the first six months of 1999 compared
with 3.88% in the prior-year period. These declines were primarily due to the
sale of the credit card business in the first quarter of 1999. Excluding the
credit card business, net interest income was $1.211 billion for the first six
months of 1999, an increase of $83 million or 7% compared with the first six
months of 1998, and the net interest margin was 3.63% in both periods.
Noninterest income was $1.395 billion for the first six months of 1999, a $320
million increase compared with the first six months of 1998. Excluding the
gains and valuation adjustments from 1999 and $56 million of branch gains from
1998, noninterest income increased $187 million or 18% in the period-to-period
comparison primarily due to growth in fee-based revenue.
PNC BANK CORP.
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Financial Review
The provision for credit losses was $103 million for the first six months of
1999 compared with $65 million a year ago. Net charge-offs were $102 million or
.38% of average loans for the first six months of 1999 compared with $179
million or .66%, respectively, for the first six months of 1998. The decreases
were due to the sale of the credit card business in the first quarter of 1999.
Noninterest expense was $1.590 billion for the first six months of 1999 compared
with $1.447 billion for the first six months of 1998. Excluding $98 million of
costs related to efficiency initiatives and a $30 million contribution to the
PNC Bank Foundation from 1999 and $55 million of costs primarily for consumer
delivery initiatives from 1998, noninterest expense increased $70 million or 5%
compared with the prior-year period commensurate with revenue growth in
fee-based businesses. The efficiency ratio improved to 54.01% for the first six
months of 1999 compared with 56.65% in the prior year due to a continued focus
on improving returns in traditional businesses.
Total assets were $75.6 billion at June 30, 1999, compared with $77.2 billion at
December 31, 1998. The decline was primarily due to the sale of the credit card
business in the first quarter of 1999. Shareholders' equity totaled $5.8 billion
at June 30, 1999, compared with $6.0 billion at December 31, 1998. The leverage
ratio was 7.47% and Tier I and total risk-based capital ratios were 8.16% and
11.72%, respectively, at June 30, 1999.
The ratio of nonperforming assets to total loans, loans held for sale and
foreclosed assets was .59% at June 30, 1999 and .55% at December 31, 1998. The
allowance for credit losses was 224% of nonaccrual loans and 1.29% of total
loans at June 30, 1999, compared with 255% and 1.31%, respectively, at December
31, 1998.
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements with respect to financial
performance and other financial and business matters. Forward-looking statements
are typically identified by words or phrases such as "believe," "expect,"
"anticipate," "intend," "estimate," "may increase," "may fluctuate," and
variations of such words and similar expressions, or future or conditional verbs
such as "will," "should," "would," and "could." 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 herein, 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 and adequate 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.
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.
PNC BANK CORP.
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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 enhancing PNC Bank's
consolidated value by leveraging technology, information, branding and
marketing resources. Total business earnings were $579 million for the first six
months of 1999, a 16% increase compared with the prior-year period. The
contribution from asset management businesses increased to 21% of total business
results while the regional bank and wholesale businesses accounted for 56% and
23% of total business results, respectively.
RESULTS OF BUSINESSES
* BlackRock's assets are presented as of period end.
PNC BANK CORP.
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Financial Review
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, services
and delivery channels 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 56% of total business earnings for the first six
months of 1999 compared with 59% in the first six months of 1998. Earnings of
$321 million for the first six months of 1999 increased $25 million or 8% in the
period-to-period comparison and the return on assigned capital and efficiency
ratios improved due to strategies designed to respond to changing customer
preferences while improving the effectiveness and efficiency of the delivery
system. Excluding the impact of $56 million of branch gains and $40 million
of costs related to consumer delivery initiatives from 1998, earnings
increased 12%.
Excluding the impact of the branch gains from 1998, revenue increased 4% to
$1.152 billion in the first six months of 1999 compared with the prior-year
period. The increase was primarily due to growth in loans, deposits and
fee-based services. The provision for credit losses decreased in the
period-to-period comparison due to improved credit quality primarily resulting
from downsizing the indirect auto loan portfolio.
Excluding the impact of the costs related to consumer delivery initiatives from
1998, noninterest expense increased 1% in the first six months of 1999 compared
with the prior-year period. The efficiency ratio improved to 51% for the first
six months of 1999 compared with 53% for the prior year due to ongoing
efficiency initiatives.
PNC Regional Bank engages in credit and deposit activities that are affected by
economic and financial market conditions. Accordingly, changes in the economy
could impact asset quality and results of operations.
PNC BANK CORP.
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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 firm primarily focused on delivering
brokerage services and investment advice to affluent clients. PNC Advisors is
expanding the Hilliard Lyons brand and organization throughout PNC Bank's
footprint, which includes several of the nation's wealthiest metropolitan areas.
PNC Advisors contributed 13% of total business earnings for the first six months
of 1999 compared with 12% in the prior-year period. Earnings of $75 million for
the first six months of 1999 increased $17 million or 29% compared with the
first six months of 1998 driven by strong revenue growth.
Revenue increased $137 million or 60% for the first six months of 1999 compared
with the prior-year period. The increase was due to higher brokerage revenue
primarily from the acquisition of 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 do not include brokerage assets administered.
At June 30, 1999, PNC Advisors managed $68 billion of assets, a 24% increase
compared with the prior-year period, due to market appreciation, new business
and Hilliard Lyons. Brokerage assets administered by PNC Advisors increased $25
billion in the period-to-period comparison to $30 billion at June 30, 1999,
primarily due to Hilliard Lyons.
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.
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Financial Review
BlackRock offers fixed income, domestic and international equity and liquidity
investment products and is focused on expanding marketing and delivery channels
for a wide range of institutional and retail customers.
During the second quarter of 1999, BlackRock formed a joint venture with Nomura
Asset Management Co., Ltd., the largest asset manager in Japan. The joint
venture, Nomura BlackRock Asset Management Co., Ltd., serves Japanese
institutional and investment trust investors and represents an expansion of
BlackRock's international presence.
On May 13, 1999, BlackRock, Inc. filed a registration statement for an initial
public offering of its common stock with PNC Bank retaining a majority ownership
position. Management anticipates that this offering will assist BlackRock in
attracting and retaining the highest quality professionals and support its
long-term growth objectives. BlackRock contributed 4% of total business earnings
for the first six months of 1999 compared with 3% a year ago. Earnings of $26
million for the first six months of 1999 increased 86% compared with the
prior-year period primarily driven by revenue growth related to new business and
market appreciation. Advisory and administration fees for the first six months
of 1999 increased $60 million or 55% compared with the prior-year period. The
increase was primarily due to a 21% increase in assets under management and
higher performance fees. The $11 million decrease in other income reflected
lower performance fees associated with the planned liquidation of a closed-end
fund by the end of the third quarter. The increase in operating expense in the
period-to-period comparison supported revenue growth.
At June 30, 1999, BlackRock managed $142 billion of assets for individual and
institutional investors, of which 89% were invested in fixed income and
liquidity funds that historically have been less volatile than equity funds.
BlackRock's proprietary mutual fund family, with approximately $47 billion in
assets, provides individual investors with a full range of equity, bond and
money market investment products.
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.
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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. Continued growth of its Dublin, Ireland operation has
expanded PFPC's international presence. PFPC will continue to leverage its
technology platform, providing customized services for clients and promoting its
full service capabilities to the global funds marketplace.
On July 20, 1999, the Corporation announced an agreement to acquire First Data
Investor Services Group ("ISG"), the mutual fund servicing subsidiary of First
Data Corp., for $1.1 billion in cash. ISG is one of the nation's leading
providers of processing services for pooled investment products, a high-growth
industry that includes mutual funds and retirement plans. The acquisition will
make PFPC one of the nation's leading full-service mutual fund transfer agents,
while significantly strengthening PFPC's position as a full-service provider of
mutual fund accounting services. The transaction will also add key related
businesses, including retirement plan servicing, to PFPC's growing operations.
The transaction is expected to close in the fourth quarter of 1999, subject to
regulatory approvals and satisfaction of customary closing conditions.
PFPC contributed 4% of total business earnings in the first six months of 1999
and 1998. Earnings of $22 million in the first six months of 1999 increased $4
million or 22% compared with the prior-year period. Revenue of $111 million in
the first six months of 1999 increased $20 million or 22% compared with a year
ago, driven by new business, existing client growth and market appreciation.
Operating expense increased in the period-to-period comparison to support
revenue and infrastructure growth associated with business expansion.
At June 30, 1999, PFPC provided custody and accounting/administration services
for $349 billion and $244 billion, respectively, of mutual fund and other pooled
assets. The comparable amounts were $281 billion and $226 billion, respectively,
a year ago.
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 provides specialized credit, capital markets and treasury
management products and services to corporations, institutions and government
entities nationwide.
PNC BANK CORP.
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Financial Review
The strategic focus for PNC Institutional Bank is to further enhance shareholder
value in a business that historically has been capital intensive as a result of
credit-related balance sheet activities. PNC Institutional Bank is emphasizing
relationships that utilize higher margin noncredit products and services,
especially treasury management and capital markets, and is exiting certain
businesses and relationships with limited opportunity for satisfactory 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
pbusinesses. The operating results for these activities are excluded from
business results in both periods.
PNC Institutional Bank contributed 9% of total business earnings in the first
six months of 1999 compared with 10% in the prior-year period. Earnings of $53
million in 1999 were unchanged from the prior-year period as an increase in
revenue was offset by a higher provision for credit losses and higher expenses
commensurate with revenue growth. The increase in the provision for credit
losses reflected loan growth and the comparative impact of no provision in the
first half of the prior year.
Total revenue of $202 million for the first six months of 1999 increased $21
million or 12% compared with the first six months of 1998. Credit-related
revenue primarily represents net interest income from loans and increased 13% in
the period-to-period comparison. This growth was driven by higher loan
outstandings to relationships that also utilize or have the potential to utilize
noncredit services. Noncredit revenue, which includes noninterest income and the
benefit of compensating balances in lieu of fees, increased $11 million or 11%
compared with the prior year primarily driven by growth in treasury management.
Treasury management and capital markets products offered through PNC
Institutional Bank are sold by several businesses across the Corporation and
accordingly related revenue is included in the results of those businesses.
Total consolidated revenue from treasury management was $124 million for the
first six months of 1999, an 11% increase compared with the first six months of
1998. Total consolidated revenue from capital markets was $51 million for the
first six months of 1999, a 26% increase compared with the prior-year period.
PNC Institutional Bank engages in credit and capital markets activities, which
are impacted by economic and financial market conditions. Accordingly, changes
in the capital markets or the economy could impact asset quality and results of
operations.
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 corporate clients nationwide.
PNC BANK CORP.
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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 Secured Finance contributed 10% of
total business earnings in the first six months of 1999 compared with 9% in the
prior-year period. Earnings of $58 million in the first six months of 1999
increased 32% compared with the first six months of 1998.
Net interest income increased $20 million or 26% to $98 million for the first
six months of 1999 compared with the prior-year period driven by higher average
loans resulting from the strategic expansion of asset-based and equipment lease
financing as well as an increase in outstandings to existing customers.
Noninterest income as a percentage of total revenue increased to 36% for the
first six months of 1999 compared with 25% in the first six months of 1998,
mainly due to $31 million of commercial mortgage banking revenue from Midland.
At June 30, 1999, the commercial mortgage servicing portfolio totaled $41
billion.
PNC Secured Finance engages in credit and capital markets activities, which are
impacted by economic and financial market conditions. Accordingly, changes in
the capital markets or the economy could impact asset quality and results of
operations.
PNC Mortgage originates, purchases and services residential mortgages and
related products. PNC Mortgage also acquires and securitizes residential
mortgages as private-label mortgage-backed securities and performs the master
servicing of those securities for investors. At June 30, 1999, PNC Mortgage was
the nation's twelfth largest servicer and originator of residential mortgages.
PNC BANK CORP.
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Financial Review
PNC Mortgage contributed 4% of total business earnings in the first six months
of 1999 compared with 3% in the first six months of 1998. Earnings of $24
million in the first six months of 1999 increased $9 million or 60% compared
with the prior-year period primarily due to higher origination and servicing
volumes. Net mortgage banking revenue and operating expense increased
accordingly in the 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 $12 billion of residential mortgages, with 38%
consisting of retail originations. The comparable amounts were $8 billion and
45%, respectively, in the first six months of 1998. Production volume in the
first six months of 1999 consisted of $5 billion of originated loans and $7
billion of mortgages acquired through correspondent and contractual flow
agreements. The corresponding amounts for the first six months of 1998 were $3
billion and $5 billion, respectively. The period-to-period increase reflected
the impact of initiatives to expand retail and correspondent origination
capabilities.
At June 30, 1999, the residential mortgage servicing portfolio totaled $71
billion, including $64 billion of loans serviced for others, and had a
weighted-average coupon of 7.50%. In addition, the master servicing portfolio
grew 88% in the comparison to $32 billion at June 30, 1999. Capitalized MSR
totaled $1.3 billion at June 30, 1999 and had an estimated fair value of $1.5
billion.
Securities available for sale increased $2 billion in the first six months of
1999 compared with the prior-year period and are utilized as part of PNC
Mortgage's risk management strategies.
PNC Mortgage securitized $8 billion of loans in the first six months of 1999, a
29% increase from the first six months of 1998.
The value of MSR and related amortization are affected by changes in interest
rates. If interest rates decline and the rate of prepayments increases, the
underlying servicing fees and related MSR value also would decline. In a period
of rising interest rates, a converse relationship would exist. PNC Mortgage
seeks to manage this risk by using financial instruments as hedges designed to
move in the opposite direction of MSR value changes. Changes in interest rates
also can affect the level of mortgage originations that generally decline as
interest rates increase and increase as interest rates decline.
PNC BANK CORP.
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CONSOLIDATED INCOME STATEMENT REVIEW
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 was $1.276 billion in the first six
months of 1999, a $5 million decrease compared with the first six months of
1998. The net interest margin was 3.75% in the first six months of 1999 compared
with 3.88% in the prior-year period. These declines were primarily due to the
sale of the credit card business in the first quarter of 1999. Excluding the
credit card business, net interest income was $1.211 billion for the first six
months of 1999, an increase of $83 million or 7% compared with the first six
months of 1998, and the net interest margin was 3.63% in both periods.
Average loans for the first six months of 1999 were relatively consistent with
the prior-year period as growth in commercial and other loans substantially
offset lower credit card and residential mortgage loans. Loans represented 80%
of average earning assets for the first six months of 1999 compared to 83% for
the prior-year period. Average loans held for sale increased $0.9 billion in the
period-to-period comparison, reflecting the decision in the first quarter of
1999 to exit certain institutional lending businesses. These exited portfolios
declined approximately 25% during the second quarter of 1999.
Average securities available for sale increased to $8.6 billion compared with
$7.6 billion in the prior-year period and represented 13% of average earning
assets in the first six months of 1999 compared with 11% 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 61% of total
sources of funds in the first six months of 1999 and 1998, respectively, with
the remainder primarily comprised of wholesale funding obtained at prevailing
market rates.
PNC BANK CORP.
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Financial Review
PROVISION FOR CREDIT LOSSES The provision for credit losses was $103 million in
the first six months of 1999 compared with $65 million in the prior-year period.
Net charge-offs were $102 million or .38% of average loans for the first six
months of 1999 compared with $179 million or .66%, respectively, for the first
six months of 1998. The decrease was due to the sale of the credit card business
in the first quarter of 1999.
NONINTEREST INCOME Noninterest income was $1.395 billion for the first six
months of 1999, a $320 million increase compared with the first six months of
1998. On a comparable basis, noninterest income increased $187 million or 18%;
excluding $331 million of gains on the sale of the credit card business, equity
interests in EPS and Concord, and $142 million of valuation adjustments
associated with exiting certain institutional lending businesses from 1999, and
$56 million of branch gains from 1998. The increase was primarily due to growth
in fee-based revenue. Consumer services, mutual fund servicing, mortgage banking
and asset management revenues each grew 19% or more compared with the first six
months of 1998.
Asset management fees grew 19%, primarily reflecting new business and market
appreciation. Assets under management increased to approximately $189 billion at
June 30, 1999, compared with $151 billion at June 30, 1998. Mutual fund
servicing fees grew 20% compared with the first six months of 1998 due to an
increase in assets serviced. At June 30, 1999, PFPC Worldwide provided custody
and accounting/administration services for $349 billion and $244 billion of
mutual fund and other pooled assets, respectively. The comparable amounts were
$281 billion and $226 billion, respectively, a year ago.
Consumer services revenue increased $60 million or 34% compared with the first
six months of 1998 primarily due to an increase in brokerage accounts associated
with the Hilliard Lyons acquisition. The decrease in corporate services revenue
primarily reflected the impact of the valuation adjustments associated with the
exited portfolios. Excluding these adjustments, corporate services revenue
increased 50% compared with the prior-year period primarily due to strong
commercial mortgage banking, capital markets and treasury management fees.
Net residential mortgage banking revenue grew $22 million or 20% compared with
the prior-year period primarily due to higher servicing income reflecting the
larger servicing portfolio. Residential mortgage production volume, including
both retail and correspondent activity, totaled $12 billion compared with $8
billion in the prior-year period. At June 30, 1999, approximately $71 billion of
residential mortgages were serviced, including $64 billion serviced for others.
Net securities gains were $42 million in the first six months of 1999,
substantially all relating to the gain from the sale of Concord stock.
Other noninterest income increased $222 million in the period-to-period
comparison primarily due to the credit card and EPS gains in the first six
months of 1999 partially offset by the impact of $56 million of branch gains
recorded in the first six months of 1998.
PNC BANK CORP.
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NONINTEREST EXPENSE Noninterest expense was $1.590 billion for the first six
months of 1999 compared with $1.447 billion for the first six months of 1998. On
a comparable basis, noninterest expense increased $70 million or 5%; excluding
$98 million of costs related to efficiency initiatives (compensation - $22
million, net occupancy - $35 million, equipment - $38 million and other - $3
million) and a $30 million contribution to the PNC Bank Foundation from 1999,
and $55 million of costs primarily for consumer delivery initiatives from 1998.
The increase was commensurate with revenue growth in fee-based businesses. The
efficiency ratio improved to 54.01% compared with 56.65% in the prior year due
to a continued focus on improving returns in traditional businesses. Average
full-time equivalent employees totaled approximately 26,200 in the first six
months of 1999 compared with 25,100 a year ago, an increase of 4% mainly due to
acquisitions.
CONSOLIDATED BALANCE SHEET REVIEW
LOANS Loans outstanding decreased $5.6 billion from year-end 1998 to $52.1
billion at June 30, 1999. Credit card loans decreased as a result of the sale of
the credit card business in the first quarter of 1999. The decrease in
commercial loans was the result of the decision in the first quarter of 1999 to
exit certain institutional lending businesses. Total exposure and outstandings
for these businesses were $4.8 billion and $1.4 billion, respectively, at June
30, 1999.
Loan portfolio composition continued to be geographically diversified among
numerous industries and types of businesses.
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 $5.9 billion at June 30, 1999 and
December 31, 1998.
Net outstanding letters of credit totaled $4.6 billion and $4.7 billion at June
30, 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 $1.8 billion
from December 31, 1998 to $8.9 billion at June 30, 1999 primarily due to an
increase in mortgage-backed securities and U.S. Treasury securities utilized as
part of residential mortgage banking risk management strategies. The expected
weighted-average life of the securities portfolio increased to 5 years and
7 months at June 30, 1999 compared with 5 years and 3 months at year-end 1998.
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. No
PNC BANK CORP.
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Financial Review
financial derivatives were designated to securities available for sale at June
30, 1999 or December 31, 1998.
FUNDING SOURCES Total funding sources were $66.1 billion at June 30, 1999, a
decrease of $2.3 billion compared with December 31, 1998, primarily resulting
from reduced funding related to the credit card business that was sold in the
first quarter of 1999. The decrease in the first six months of 1999 was
primarily in time deposits, bank notes and senior debt and other borrowed funds,
partially offset by an increase in short-term foreign deposits.
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 June 30, 1999, the Corporation and each bank
subsidiary were considered well capitalized based on regulatory capital ratio
requirements.
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 six months of 1999, PNC Bank repurchased 9.2 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 8.7 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, 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.
PNC BANK CORP.
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Nonperforming assets include nonaccrual loans and foreclosed and other assets
and totaled $333 million at June 30, 1999, compared with $332 million at
December 31, 1998.
The amount of nonperforming loans that were current as to principal and interest
was $91 million at June 30, 1999 and $28 million at December 31, 1998. There
were no troubled debt restructured loans outstanding as of either period end
presented.
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, commercial real estate 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 six months of 1999
and the evaluation of the allowance for credit losses as of June 30, 1999
reflected 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 21% of the total allowance and .27% of total loans at
June 30, 1999, compared with 22% and .29%, respectively, at December 31, 1998.
The allowance as a percent of nonaccrual loans and total loans was 224% and
1.29%, respectively, at June 30, 1999. The comparable year-end 1998 amounts were
255% and 1.31%, respectively.
PNC BANK CORP.
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Financial Review
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 expected maturities of
assets, liabilities and off-balance-sheet positions. Access to a variety of
funding markets and customers in the retail and wholesale sectors is vital both
to liquidity management and to cost minimization. A large retail customer
deposit base is one of the significant strengths of the Corporation's liquidity
position. Funding is obtained by raising deposits, issuing liabilities 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 June 30, 1999, such assets totaled $15
billion, with $7.1 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 June 30, 1999, approximately $4.1 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 June 30, 1999, the Corporation had
unused capacity under effective shelf registration statements of approximately
$1.0 billion of debt and equity securities and $400 million of trust preferred
capital securities. During the first six 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 $587 million at June 30, 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
traditional 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
PNC BANK CORP.
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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. An income simulation model is used to measure the
sensitivity of net interest income to changing interest rates over the next
twenty-four month period. 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. At June 30, 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 0.8%. 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 0.9%.
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 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 June 30, 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 0.9% 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 0.4% 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 $1 million
at June 30, 1999.
PNC BANK CORP.
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Financial Review
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 six months of 1999, financial derivatives used in interest rate
risk management increased net interest income by $32 million compared with a $6
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 six months of 1999.
PNC BANK CORP.
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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 June 30, 1999.
(1) The floating rate portion of interest rate contracts is based on
money-market indices. As a percent of notional value, 31% were based on
1-month LIBOR, 66% on 3-month LIBOR and the remainder on other short-term
indices.
(2) Interest rate caps with notional values of $188 million, $179 million and
$223 million require the counterparty to pay the excess, if any, of 3-month
LIBOR over a weighted-average strike of 6.19%, 1-month LIBOR over a
weighted-average strike of 5.80% and Prime over a weighted-average strike of
8.75%, respectively. At June 30, 1999, 3-month LIBOR was 5.37%, 1-month
LIBOR was 5.24% and Prime was 7.75%.
(3) Interest rate floors with notional values of $3.0 billion, $3.3 billion and
$3.2 billion require the counterparty to pay the Corporation the excess, if
any, of the weighted-average strike of 4.63% over 3-month LIBOR, the
weighted-average strike of 5.01% over 10-year CMT and the weighted-average
strike of 4.99% over 10-year CMS, respectively. At June 30, 1999, 3-month
LIBOR was 5.37%, 10-year CMT was 5.81% and 10-year CMS was 6.83%.
NM - Not meaningful
OTHER DERIVATIVES To accommodate customer needs, PNC Bank enters into
customer-related financial derivative 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.
PNC BANK CORP.
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Financial Review
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 June 30, 1999, virtually all of the Corporation's MIS-supported mainframe,
mid-range and PC client-server systems have been tested and returned to use as
year 2000 ready. In addition, virtually all of the Corporation's non-PC related
hardware and systems have been tested and determined to be year 2000 ready.
At June 30, 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 systems 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 has conducted 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. Such testing has not identified any
significant problem that would have a material adverse impact on the
Corporation.
The estimated total cumulative cost to become year 2000 ready, which is being
expensed as incurred, is approximately $30 million. Through June 30, 1999, on a
cumulative basis, the Corporation had expensed approximately $23 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 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.
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SECOND QUARTER 1999 VS. SECOND QUARTER 1998
Net income for the second quarter of 1999 totaled $315 million or $1.03 per
diluted share. Results included a $16 million net after-tax gain or $.05 per
diluted share resulting from the sale of Concord EFS, Inc. stock partially
offset by a $30 million pretax contribution to the PNC Bank Foundation.
Excluding these items, earnings for the quarter were $299 million or $0.98 per
diluted share and, on that basis, return on average common shareholders' equity
was 21.21% and return on average assets was 1.60%. Earnings for the second
quarter of 1998 were $280 million or $0.90 per diluted share. Return on average
common shareholders' equity was 21.42% and return on average assets was 1.53% in
the second quarter of 1998.
Taxable-equivalent net interest income was $612 million in the second quarter of
1999, a $25 million decrease compared with the prior-year quarter. The net
interest margin was 3.64% for the second quarter of 1999 compared with 3.81% in
the second quarter of 1998 and 3.86% in the first quarter of 1999. These
declines were primarily due to the sale of the credit card business in the first
quarter of 1999. Excluding the credit card business, second quarter 1998 net
interest income was $563 million and the net interest margin was 3.59%.
The provision for credit losses was $25 million in the second quarter of 1999
and net charge-offs were $24 million.
Noninterest income increased 17% compared with the second quarter of 1998 to
$664 million in the second quarter of 1999 and included a $41 million gain
related to the sale of PNC Bank's investment in Concord. Excluding this gain
from the current year and $56 million of branch gains recorded in the second
quarter of 1998, noninterest income increased $110 million or 21% compared with
the prior-year quarter driven by higher fee income. Asset management, mutual
fund servicing, consumer services, mortgage banking and corporate services
revenues all grew in excess of 13%.
Asset management and mutual fund servicing fees grew 23% and 15%, respectively,
compared with the second quarter of 1998 reflecting new business and market
appreciation.
Consumer services revenue increased $12 million or 13% compared with the second
quarter of 1998 primarily due to an increase in brokerage and other fees
associated with the Hilliard Lyons acquisition, partially offset by lower credit
card fees.
Corporate services revenue increased 42% compared with the prior-year quarter to
$88 million in the second quarter of 1999 primarily due to growth in commercial
mortgage, capital markets and treasury management fees.
Net residential mortgage banking revenue grew $14 million or 25% compared with
the prior-year quarter primarily due to growth in the servicing portfolio.
Residential mortgage originations, including both retail and correspondent
activity, totaled $6 billion compared with $5 billion in the prior-year period.
Net securities gains were $42 million in the second quarter of 1999
substantially all relating to the gain from the sale of Concord stock. Other
noninterest income decreased $39 million compared with the second quarter of
1998 primarily due to $56 million of gains on sales of branches in the
prior-year quarter.
Noninterest expense of $767 million increased 4% compared with the second
quarter of 1998 commensurate with revenue growth in fee-based businesses. The
efficiency ratio improved to 54.6% compared with 56.3% in the prior year quarter
due to a continued focus on improving returns in traditional businesses.
Total assets were $75.6 billion at June 30, 1999. Average earning assets were
relatively consistent with the prior-year quarter at $66.9 billion. Average
loans decreased $2.8 billion to $52.5 billion, primarily due to the impact of
the sale of the credit card business. Loans represented 78% of average earning
assets in the second quarter of 1999 compared with 83% a year ago. Average loans
held for sale increased to $3.7 billion in the second quarter of 1999 compared
with $2.9 billion in the prior-year quarter primarily as a result of the
decision in the first quarter of 1999 to exit certain institutional lending
businesses. Average securities available for sale increased $2.1 billion to $9.4
billion or 14% of average earning assets. This increase was attributable to
securities utilized as part of residential mortgage banking risk management
strategies.
Average deposits increased $1.3 billion to $45.5 billion in the second quarter
of 1999 representing 61% of total sources of funds. The increase in average
deposits was primarily in consumer deposits.
The ratio of nonperforming assets to total loans, loans held for sale and
foreclosed assets was .59% at June 30, 1999 compared with .55% at June 30, 1998.
Nonperforming assets were $333 million at June 30, 1999 compared with $323
million at June 30, 1998. The allowance for credit losses was $673 million at
June 30, 1999, and represented 224% of nonaccrual loans compared with 316% at
June 30, 1998. Net charge-offs were $24 million or .18% of average loans in the
second quarter of 1999 compared with $89 million or .64% in the second quarter
of 1998. The decrease was due to the sale of the credit card business in the
first quarter of 1999.
PNC BANK CORP.
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Consolidated Statement of Income
See accompanying Notes to Consolidated Financial Statements.
PNC BANK CORP.
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Consolidated Balance Sheet
See accompanying Notes to Consolidated Financial Statements.
PNC BANK CORP.
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Consolidated Statement of Cash Flows
See accompanying Notes to Consolidated Financial Statements.
PNC BANK CORP.
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Notes to Consolidated Financial Statements
BUSINESS PNC Bank Corp. ("Corporation" or "PNC Bank") is one of the largest
diversified financial services companies 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 No. 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 No.
134 did not have a material impact on the Corporation's financial position or
results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" (an amendment of SFAS No. 133), issued in June 1999, defers
the effective date of SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," until fiscal years beginning after June 15, 2000. The
Corporation expects to adopt SFAS No. 133, as amended by SFAS No. 137, effective
January 1, 2001. Management has not yet determined what effect this statement
will have on the financial position and results of operations of the
Corporation.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
was originally required to be adopted in years beginning after June 15, 1999,
although early adoption is permitted. 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.
CASH FLOWS During the first six months of 1999, divestiture activity which
affected cash flows consisted of $3.1 billion of divested assets and receipt of
$3.3 billion in cash and due from banks. Acquisition and divestiture activity
for the first six months of 1998 consisted of $670 million of acquired assets,
$299 million of divested liabilities, cash payments totaling $998 million and
receipt of $29 million in cash and due from banks.
PNC BANK CORP.
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Notes to Consolidated Financial Statements
SECURITIES AVAILABLE FOR SALE
Net securities gains were $42 million in the first six months of 1999,
substantially all relating to the gain from the sale of Concord EFS, Inc.
("Concord") stock. Gross securities losses related to residential mortgage
banking risk management strategies of $56 million were included in net
residential mortgage banking revenue.
During the first six months of 1998, net securities gains totaled $26 million,
of which $13 million were included in net residential mortgage banking revenue.
ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses were as follows:
NONPERFORMING ASSETS
Nonperforming assets were as follows:
PNC BANK CORP.
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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:
OTHER DERIVATIVES The following schedule sets forth information relating to
positions associated with customer-related and other derivatives.
PNC BANK CORP.
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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 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.
Additionally, Other for the first six months of 1999 included gains on the sales
of the credit card business and equity interests in EPS and Concord stock;
valuation adjustments associated with exiting certain institutional lending
businesses, costs related to efficiency initiatives and a contribution to the
PNC Bank Foundation.
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.
PNC Institutional Bank provides specialized credit, capital markets and treasury
management products and services to corporations, institutions and government
entities nationwide.
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 corporate clients nationwide.
PNC Mortgage originates, purchases and services residential mortgages and
related products. PNC Mortgage also acquires and securitizes residential
mortgages as private-label mortgage-backed securities and performs the master
servicing of those securities for investors.
PNC BANK CORP.
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RESULTS OF BUSINESSES
* Taxable-equivalent basis
** BlackRock's assets are presented as of period end.
PNC BANK CORP.
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Notes to Consolidated Financial Statements
EARNINGS PER SHARE
The following table sets forth basic and diluted earnings per share
calculations.
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 was $156 million in the second quarter and $435
million in the first six months of 1999 compared with $296 million and $557
million, respectively, in 1998.
PNC BANK CORP.
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OTHER FINANCIAL INFORMATION
In connection with the 1995 Midlantic Corporation ("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 June 30, 1999.
Summarized financial information for PNC Bancorp, Inc. and subsidiaries is as
follows:
SUBSEQUENT EVENT
On July 20, 1999, the Corporation announced an agreement to acquire First Data
Investor Services Group, Inc., the mutual fund servicing subsidiary of First
Data Corporation for $1.1 billion in cash. The transaction is expected to close
in the fourth quarter of 1999, subject to regulatory approvals and satisfaction
of customary closing conditions.
PNC BANK CORP.
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Statistical Information
CONSOLIDATED AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS
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.
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PNC BANK CORP.
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Quarterly Report on Form 10-Q
Securities and Exchange Commission
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended June 30, 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 July 30, 1999, PNC Bank Corp. had 295,337,200 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.
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
The following exhibit index lists Exhibits to this Quarterly Report on Form
10-Q:
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 obtained electronically at the Securities and
Exchange Commission's home page at www.sec.gov. Exhibits may also be obtained
without charge 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.
Since March 31, 1999, the Corporation filed the following Current Reports on
Form 8-K:
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.
Form 8-K dated as of July 15, 1999, reporting the Corporation's consolidated
financial results for the three and six months ended June 30, 1999 and
information on the Corporation's businesses for the six months ended June 30,
1999 and 1998, filed pursuant to Item 5.
Form 8-K dated as of July 20, 1999, with respect to the announcement of an
agreement to acquire First Data Investor Services Group, Inc., filed pursuant to
Item 5.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on August 16, 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.
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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 may also 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.
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.
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